<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. 6 [X]
----
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
Amendment No. 7 [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
Kevin L. Howard, Esq.
239 S. Fifth Street, 12th floor
Louisville, KY 40202-3271
(Name and Address of Agent for Service)
Copies to:
Joel H. Goldberg, Esq.
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022
--------------------
It is proposed that this filing will become effective (check appropriate box):
[_] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[X} on May 1, 1996 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 Rule 24f-2 Notice of the Registrant for the
fiscal year ended June 30, 1995 was filed on August 24, 1995.
<PAGE>
<TABLE>
<CAPTION>
CROSS-REFERENCE SHEET PURSUANT TO RULE 481(a) UNDER THE SECURITIES ACT OF 1933
N-IA Item No.
- - -------------
<S> <C>
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
</TABLE>
Part C
Information required to be included is set forth under the appropriate
Item, so numbered, in Part C to this Registration Statement.
<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 common stocks, United States Government and high
quality corporate debt issues and high quality 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 May 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 May 1, 1996
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights presented for the two years ended June 30, 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. The information presented below for the six months ended December 31,
1995 is unaudited, and the unaudited financial statements for such period are
set forth in the SAI. 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,
1992
Six Months (commencement
Ended of operations)
December 31, Year Ended Year Ended through
1995 June 30, June 30, June 30,
(Unaudited) 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 0.18 0.42 0.20 0.13
Net realized and unrealized gain
(loss) on investments 0.98 0.99 (0.11) 0.29
Total from investment operations 1.16 1.41 0.09 0.42
Less distributions:
From net investment income (0.40) (0.17) (0.11) --
From net realized gain -- (0.03) -- --
----------- ----------- ----------- ----------
Total distributions (0.40) (0.20) (0.11) --
----------- ----------- ----------- ----------
Net asset value, end of period $ 12.37 $ 11.61 $ 10.40 $ 10.42
=========== =========== =========== ==========
TOTAL RETURN(A) 10.01% 13.71% 0.73% 7.70%
RATIOS AND SUPPLEMENTAL DATA (B)
Net assets, end of period $28,606,368 $27,032,195 $25,046,394 $7,798,672
Ratio of expenses to average net
assets (C) 0.97% 0.96% 1.06% 1.24%
Ratio of net investment income to
average net assets (C) 2.76% 3.53% 2.72% 2.36%
Portfolio turnover rate 33% 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.
iii
<PAGE>
Zweig Asset Allocation Portfolio
Financial Highlights
<TABLE>
<CAPTION>
December 14,
Six Months 1992
Ended (commencement
December 31, Year Ended Year Ended of operations)
1995 June 30, June 30, through June 30,
(Unaudited) 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 0.11 0.33 0.10 0.08
Net realized and unrealized gain
on investments 0.72 1.33 0.58 0.73
----------- ----------- ----------- ----------
Total from investment operations 0.83 1.66 0.68 0.81
Less distributions:
From net investment income (0.33) (0.08) (0.05) --
----------- ----------- ----------- ----------
Net asset value, end of period $ 13.52 $ 13.02 $ 11.44 $ 10.81
=========== =========== =========== ==========
TOTAL RETURN (A) 6.42% 14.57% 6.27% 14.86%
RATIOS AND SUPPLEMENTAL DATA (B)
Net assets, end of period $39,532,169 $36,736,161 $31,563,173 $3,855,544
Ratio of expenses to average net
assets (C) 1.20% 1.20% 1.39% 1.51%
Ratio of net investment income to average net
assets (C) 1.67% 2.73% 1.67% 1.40%
Portfolio turnover rate 32% 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.
iv
<PAGE>
<TABLE>
<CAPTION>
Nicholas-Applegate Balanced Portfolio
Financial Highlights
December 3,
Six Months 1992
Ended (commencement
December Year Ended Year Ended of operations)
31, 1995 June 30, June 30, through June 30,
(Unaudited) 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 0.15 0.27 0.09 0.11
Net realized and unrealized gain
(loss) on investments 0.60 1.74 (0.29) 1.39
----------- ----------- ---------- ----------
Total from investment operations 0.75 2.01 (0.20) 1.50
=========== =========== ========== ==========
Less distributions:
From net investment income (0.27) (0.11) (0.03) --
Net asset value, end of period $ 13.65 $ 13.17 $ 11.27 $ 11.50
=========== =========== =========== ==========
TOTAL RETURN(A) 5.71% 17.92% (1.70%) 26.07%
=========== =========== =========== ==========
RATIOS AND SUPPLEMENTAL DATA(B)
Net assets, end of period $48,039,717 $45,780,611 $39,357,996 $5,567,264
=========== =========== =========== ==========
Ratio of expenses to average net
assets (C) 0.95% 0.94% 1.03% 1.25%
Ratio of net investment income
to average net assets (C) 2.15% 2.20% 1.69% 1.70%
Portfolio turnover rate 63% 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.
(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 14, 1992 (commencement of operations) through June 30, 1993.
v
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Financial Highlights
<TABLE>
<CAPTION>
December 8,
Six Months 1992
Ended (commencement
December 31, Year Ended Year Ended of operations)
1995 June 30, June 30, through June 30,
(Unaudited) 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) (0.00)(E) 0.01 (0.02)(C) --
Net realized and unrealized gain
(loss) on investments 0.92 3.48 (0.33) (0.29)
----------- ----------- ----------- ----------
Total from investment operations 0.92 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 $ 13.67 $ 12.85 $ 9.36 $ 9.71
=========== =========== =========== ==========
TOTAL RETURN(A) 7.17% 37.29% (3.60%) (5.16%)
RATIOS AND SUPPLEMENTAL DATA(B)
Net assets, end of period $22,647,233 $16,393,276 $10,693,027 $5,143,365
Ratio of expenses to average net
assets(D) 1.02% 1.05% 1.29% 1.34%
Ratio of net investment income
(loss) to average net assets(D) (0.01%) 0.13% (0.17%) (0.06%)
Portfolio turnover rate 18% 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) 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 December 8, 1992 (commencement of operations) through June
30, 1993.
(E) Less than $0.01 per share.
vi
<PAGE>
Dreman Value Portfolio
Financial Highlights
<TABLE>
<CAPTION>
December 14,
Six Months 1992
Ended (commencement
December 31, Year Ended Year Ended of operations)
1995 June 30, June 30, through June 30,
(Unaudited) 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 0.10 0.26 0.12 0.11
Net realized and unrealized gain
on investments 2.55 1.85 0.17 0.34
----------- ----------- ---------- ----------
Total from investment operations 2.65 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 $ 14.94 $ 12.59 $ 10.66 $ 10.45
=========== =========== ========== ==========
TOTAL RETURN (A) 21.24% 19.98% 2.80% 8.25%
RATIOS AND SUPPLEMENTAL DATA (B)
Net assets, end of period $15,638,902 $10,876,910 $8,952,174 $1,671,220
Ratio of expenses to average net
assets (C) 0.89% 1.13% 1.40% 1.24%
Ratio of net investment income
to average net assets (C) 2.07% 1.98% 1.98% 2.00%
Portfolio turnover rate 8% 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.
(C) The ratios of expenses and net investment income to average net assets
before voluntary expense reimbursement were 1.61% and 1.76%, respectively,
for the year ended June 30, 1994 and were 8.43% and (1.49%), respectively,
for the period December 14, 1992 (commencement of operations) through June
30, 1993.
vii
<PAGE>
Zweig Equity (Small Cap) Portfolio
Financial Highlights
<TABLE>
<CAPTION>
Six Months
Ended December 14, 1992
December Year Ended (commencement of
31, 1995 June 30, Year Ended operations) through
(Unaudited) 1995 June 30, 1994 June 30, 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 0.03 0.17 0.15 0.05
Net realized and unrealized gain on
investments 1.13 0.93 0.50 0.06
----------- ---------- ---------- ----------
Total from investment operations 1.16 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 $ 12.62 $ 11.62 $ 10.65 $ 10.11
=========== ========== ========== ==========
TOTAL RETURN (A) 10.06% 10.39% 6.53% 2.02%
=========== ========== ========== ==========
RATIOS AND SUPPLEMENTAL DATA (B)
Net Assets, end of period $10,344,612 $8,033,792 $7,590,947 $2,115,634
=========== ========== ========== ==========
Ratio of expenses to average net assets 1.54% 1.55% 1.72% 1.61%
Ratio of net investment income to
average net assets .75% 1.54% 1.75% 0.84%
Ratio of expenses to average net
assets before voluntary expense
reimbursement 1.54% 1.59% 2.14% 7.29%
Ratio of net investment income
(loss) to average net assets before
voluntary expense reimbursement .75% 1.50% 1.32% (1.80%)
Portfolio turnover rate 29% 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
Six Months January 5, 1993
Ended (commencement
December 31, Year Ended Year Ended of operations)
1995 June 30, June 30, through June 30,
(Unaudited) 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 0.34 0.56 0.20 0.19
Net realized and unrealized gain
(loss) on investments 0.29 0.53 (0.52) 0.24
---------- ---------- ---------- --------
Total from investment operations 0.63 1.09 (0.32) 0.43
========== ========== ========== ========
Less distributions:
From net investment income (0.58) (0.21) (0.11) --
---------- ---------- ----------
Net asset value, end of period $ 10.93 $ 10.88 $ 10.00 $ 10.43
========== ========== ========== ========
TOTAL RETURN (A) 5.91% 11.08% (3.06%) 8.67%
========== ========== ========== ========
RATIOS AND SUPPLEMENTAL DATA (B)
Net assets, end of period $5,023,652 $5,415,497 $4,860,499 $905,836
Ratio of expenses to average net
assets 1.40% 1.40% 1.56% 1.56%
Ratio of net investment income to
average net assets 5.03% 5.41% 3.62% 3.86%
Ratio of expenses to average net assets
before voluntary expense
reimbursement 1.62% 1.59% 2.49% 15.72%
Ratio of net investment income (loss)
to average net assets before voluntary 4.81% 5.22% 2.68% (1.64%)
expense reimbursement
Portfolio turnover rate 167% 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 , 1996.
---------------
ix
<PAGE>
<TABLE>
<CAPTION>
ARM Capital Advisors Money Market Portfolio (formerly the Mitchell Hutchins Money Market Portfolio)*
Financial Highlights
Six Months January 12, 1993
Ended (commencement
December 31, Year Ended Year Ended of operations)
1995 June 30, June 30, through June 30,
(Unaudited) 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 0.02 0.04 0.02 0.01
Less distributions:
From net investment income (0.02) (0.04) (0.02) (0.01)
---------- ---------- ---------- --------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ========
TOTAL RETURN (A) 2.34% 4.30% 2.04% 1.66%
RATIOS AND SUPPLEMENTAL DATA (B)
Net assets, end of period $9,122,956 $6,753,095 $5,452,417 $753,585
Ratio of expenses to average net
assets 1.15% 1.15% 1.29% 1.34%
Ratio of net investment income to
average net assets 4.70% 4.31% 2.19% 1.67%
Ratio of expenses to average net
assets before voluntary expense
reimbursement 1.15% 1.27% 2.08% 22.41%
Ratio of net investment income (loss) to
average net assets before voluntary
expense reimbursement 4.70% 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 Advisers, Inc. began managing the investment operations of the
Portfolio on , 1996.
-----------
x
<PAGE>
<TABLE>
<CAPTION>
Morgan Stanley Asian Growth Portfolio
Financial Highlights
June 15,
Six Months 1994
Ended (commencement
December 31, Year Ended of operations)
1995 June 30, through June 30,
(Unaudited) 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 0.03 0.01 0.00(C)
Net realized and unrealized gain
on investments 0.06 0.17 --
----------- ----------- ----------
Total from investment operations 0.09 0.18 0.00
=========== =========== ==========
Less distributions:
From net investment income (0.04) 0.00(C) --
From net realized gain (0.01) -- --
----------- ----------- ----------
Total distributions (0.05) 0.00 --
=========== =========== ==========
Net asset value, end of period $ 10.22 $ 10.18 $ 10.00
=========== =========== ==========
TOTAL RETURN (A) 0.96% 1.80% 0.52%
RATIOS AND SUPPLEMENTAL DATA (B)
Net assets, end of period $11,932,318 $12,824,663 $1,905,357
Ratio of expenses to average net
assets (D) 1.61% 1.92% 0.75%
Ratio of net investment income (loss)
to average net assets (D) (0.05)% 0.76% 0.59%
Portfolio turnover rate 8% 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.
(D) The ratios of expenses and net investment income to average net assets
before voluntary expense reimbursement were 9.79% and (8.44%),
respectively, for the period June 15, 1994 (commencement of operations)
through June 30, 1994.
xi
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Financial Highlights
<TABLE>
<CAPTION>
June 15,
Six Months 1994
Ended (commencement
December 31, Year Ended of operations)
1995 June 30, through June 30,
(Unaudited) 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 0.57 0.89 0.00 (C)
Net realized and unrealized gain
(loss) on investments 0.39 (0.49) --
---------- ---------- --------
Total from investment operations 0.96 0.40 0.00
Less distributions:
From net investment income (0.89) 0.00 (C) --
From net realized gain on investments (0.01) -- --
---------- ---------- --------
Total distributions (0.90) -- --
Net asset value, end of period $ 10.46 $ 10.40 $ 10.00
========== ========== ========
TOTAL RETURN (A) 10.20% 4.00% 0.79%
RATIOS AND SUPPLEMENTAL DATA (B)
Net assets, end of period $6,236,743 $6,241,897 $687,484
Ratio of expenses to average net
assets (D) 1.57% 1.61% 0.85%
Ratio of net investment income to
average net assets (D) 10.60% 9.28% 0.80%
Portfolio turnover rate 36% 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.
(D) The ratios of expenses and net investment income to average net assets
before voluntary expense reimbursement were 24.78% and (23.13%),
respectively, for the period June 15, 1994 (commencement of operations)
through June 30, 1994.
xii
<PAGE>
TABLE OF CONTENTS
THE FUND
INVESTMENT OBJECTIVES AND POLICIES
Morgan Stanley Asian Growth Portfolio
Morgan Stanley Worldwide High Income Portfolio
Renaissance Balanced Portfolio
Zweig Asset Allocation Portfolio
Nicholas-Applegate Balanced Portfolio
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Dreman Value Portfolio
Zweig Equity (Small Cap) Portfolio
Pinnacle Fixed Income Portfolio
ARM Capital Advisors Money Market Portfolio
DESCRIPTION OF VARIOUS SECURITIES AND INVESTMENT TECHNIQUES
DIVIDENDS, DISTRIBUTIONS AND FEDERAL INCOME TAXES
VALUATION OF SHARES
PURCHASES AND REDEMPTIONS
MANAGEMENT OF THE FUND
Investment Manager, Sub-Advisers and Distributor
Expenses
PORTFOLIO TRANSACTIONS AND BROKERAGE
OTHER INFORMATION
Appendix A
DESCRIPTION OF COMMERCIAL PAPER AND BOND RATINGS
xiii
<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."
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
<PAGE>
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.
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
2
<PAGE>
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 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-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
3
<PAGE>
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 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:
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
4
<PAGE>
Costa Rica Jordan Poland Venezuela
Czech Republic Malaysia Portugal Zaire
Dominican Mexico Russia
Republic
Ecuador Morocco Singapore
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 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
5
<PAGE>
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.
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 high quality corporate debt securities, and high
quality 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 senior 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 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 class will consist of medium to long-term U.S. Treasury and/or
high quality corporate bonds, and the cash equivalents class will consist of
high quality money market instruments, 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
6
<PAGE>
invest up to 10% of its total assets in foreign government securities. The
Portfolio also may invest in mortgage-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 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
7
<PAGE>
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.
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 the S&P 500 over a market
cycle. There is, of course, no assurance that this goal will be realized.
8
<PAGE>
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 $7.5 billion and $50 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 $3.0
million. For more information about Zweig/Glaser, see "Management of the Fund."
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.
9
<PAGE>
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. (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 withdrawals. However, the Portfolio may also invest in money
market instruments without limitation as a temporary defensive measure taken in
the Sub-Advisor'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."
The Sub-Adviser's strategy is a systematic, disciplined approach that focuses
on three critical decisions: duration/yield curve positioning, sector
allocation and security selection.
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, 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
4.5 years. The maturities of the individual securities in the Portfolio may
vary widely, however.
10
<PAGE>
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 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.
.. 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
11
<PAGE>
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 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.
12
<PAGE>
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 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.
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.
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
13
<PAGE>
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.
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
14
<PAGE>
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 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.
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
15
<PAGE>
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 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
16
<PAGE>
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.
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
17
<PAGE>
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. 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.
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
18
<PAGE>
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. 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
19
<PAGE>
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.
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 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
20
<PAGE>
the contracts or 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.
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.
21
<PAGE>
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 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
22
<PAGE>
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 239 S. Fifth 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.
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 January 30, 1996, approximately 133,044
shares, having a fair value of approximately $1.59 million and constituting
approximately 22.7% 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, 1995, MSAM had
investments totaling approximately $52.2 billion under management and fiduciary
advisory control.
James Cheng, Ean Wah Chin and Seah Kiat Seng have primary responsibility for the
Morgan Stanley Asian Growth Portfolio. James Cheng joined MSAM in 1988 as a
portfolio manager for Asian markets and is a Vice President of MSAM, currently
responsible for investments in Hong Kong, China, Taiwan, and South Korea. Mr.
Cheng is also a Principal of Morgan Stanley & Co. Incorporated. Prior to joining
Morgan Stanley, he was affiliated with American Express and with Arthur
Andersen, where he spent three years as an auditor/consultant. Mr. Cheng holds
an M.B.A. from the University of Michigan, Ann Arbor. Ean Wah Chin is a Managing
Director of Morgan Stanley & Co. Incorporated, and is responsible for MSAM's
regional Asia 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. Seah Kiat Seng joined
MSAM's Singapore office in 1990 as a portfolio manager/analyst specializing in
the Southeast Asian markets. He is currently a Vice President, responsible for
investments in Thailand. Previously, Mr. Seng worked at Barclays de Zoete Wedd
(BZW), where he was a senior investment analyst who helped pioneer BZW's
research effort in Singapore. Mr. Seng is a Chartered Financial Analyst and a
qualified real estate valuer who has worked for the Singapore Ministry of
Finance. He was a Colombo Plan Scholar educated in New Zealand.
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
23
<PAGE>
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, 1995, 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.
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, 1995 managed over $9.5 billion in assets, including Avatar
Associates, manager of over $2.3 billion of institutional and pension accounts,
of which Dr. Zweig is Director of Research. 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 $1.1 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 20 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, 1995 of $2.3 billion (consisting of Zweig Strategy Fund,
Zweig Appreciation Fund, Zweig Managed Assets, Priority Selection List Series,
Government Securities Series 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 six 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,
1995, Nicholas-Applegate had assets under management of $26.1 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
24
<PAGE>
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.
HARRIS BRETALL SULLIVAN & SMITH, INC., One Sansone 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, 1995, had
assets under management of approximately $2.6 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., 10 Exchange Place, 20th Floor, Jersey City, New
Jersey 07302, serves as the Sub-Adviser to the Dreman Value Portfolio. As of
June 30, 1995, Dreman managed over $1.5 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. Morgan
is a wholly owned subsidiary of J.P. Morgan & Co. Incorporated, a bank holding
company organized under the laws of Delaware. Morgan offers a wide range of
investment management services and acts as investment adviser to corporate and
institutional clients. As of December 31, 1995, Morgan had assets under
management of over $139 billion.
The following persons are primarily responsible for the day-to-day management
and implementation of Morgan's process for Pinnacle Fixed Income Portfolio (the
inception date of each person's responsibility for the Portfolio and his
business experience for the past five years is indicated parenthetically: Ronald
Arons, Vice President (since [April ] 1996, employed by Morgan since _______
1994, previously _________ with _________) and Arun Lyng, Vice President (since
[April] 1996, employed by Morgan since ________ 1993, previously ________ with
_______).
[Prior to [April] 1996, Pinnacle Fixed Income Portfolio had as its Sub-Adviser
Mitchell Hutchins Institutional Investors, Inc.]
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.
25
<PAGE>
<TABLE>
<CAPTION>
Annual Percentage of Annual Percentage
Average Net Assets of Average Net
Paid Assets Paid By
By Portfolio to the the Manager to Sub-
Manager 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% N/A
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.
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.
26
<PAGE>
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 broke
r-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. 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 and
1995.
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.
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
27
<PAGE>
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.
28
<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.
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
A-1
<PAGE>
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.
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-2
<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 issues and
high-quality 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. 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 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 May 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 May 1, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT POLICIES AND LIMITATIONS................................. B-3
OPTIONS, FUTURES AND OTHER HEDGING STRATEGIES....................... B-9
DIRECTORS AND OFFICERS.............................................. B-15
INVESTMENT MANAGEMENT SERVICES...................................... B-17
PORTFOLIO TRANSACTIONS.............................................. B-20
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...................... B-23
VALUATION OF SHARES................................................. B-24
TAXES............................................................... B-25
YIELD AND PERFORMANCE INFORMATION................................... B-25
OTHER INFORMATION................................................... B-28
FINANCIAL STATEMENTS OF THE FUND.................................... B-30
OPTIONS AND FUTURES................................................. A-1
</TABLE>
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, Morgan Stanley Worldwide
High Income Portfolio and Pinnacle Fixed Income Portfolio each may invest
without limit, and Renaissance Balanced Portfolio may invest up to 10% of its
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 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
B-3
<PAGE>
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 its 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.
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.
B-4
<PAGE>
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 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
B-5
<PAGE>
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 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
B-6
<PAGE>
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 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;
B-7
<PAGE>
(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;
(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, 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.
B-8
<PAGE>
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 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
B-9
<PAGE>
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, 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.
B-10
<PAGE>
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 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.
B-11
<PAGE>
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 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
B-12
<PAGE>
Hedging Instruments on other currencies, the values of which the Sub-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
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
B-13
<PAGE>
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.
B-14
<PAGE>
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 239 S. Fifth 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(46)* 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 (56) 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.
Theodore S. Rosky (57) 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 and
St. Paul, Minnesota 55107 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.
</TABLE>
B-15
<PAGE>
<TABLE>
Name, Age and Address Position with the Fund Other Business Activities in Past 5 Years
- - --------------------- ---------------------- -----------------------------------------
<S> <C> <C>
Edward J. Haines (48) 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.
Don W. Cummings (32) Controller Controller of ARM Financial Group, Inc. since
July 15, 1993, and Integrity and National
Integrity since November 26, 1993. Prior to
November 26, 1993 he served as Controller of
ARM, Ltd., a position he held from July 1992.
From 1985 to June 1992, Mr. Cummings
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 (34) 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 (31) 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-16
<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, 1995, the Fund
payed the Directors who are not interested persons of the Fund $22,750 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, 1995,
compensation paid by the Fund to the Directors who are not interested persons of
the Fund.
<TABLE>
<CAPTION>
Aggregate Compensation from
Name of Director Fund*
---------------- ---------------------------
<S> <C>
John Katz $7,750
Theodore S. Rosky $7,750
</TABLE>
* Messrs.Katz and Rosky have also been directors of the mutual funds in the
State Bond Group since June 14, 1995. Those funds are advised by the Manager
and may be deemed to be a part of the same fund complex as the Fund. Such
directors were not compensated by the mutual funds in the State Bond Group
during the twelve-month period ended June 30, 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 January 30, 1996, approximately
133,044 shares, having a fair value of approximately $1.59 million and
constituting approximately 22.7% 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 period
from the commencement of operations through June 30, 1993 and the fiscal years
ended June 30, 1994 and 1995, each Portfolio paid Integrity (the former
investment manager of the Fund) the management fees in the amounts set forth
below:
<TABLE>
<CAPTION>
Management Fee for Management Management
Fiscal Period From Fee for Fee for
Commencement of Fiscal Fiscal
Operations Through Year Ended Year Ended
Portfolio June 30, 1993 June 30,1994 June 30, 1995
- - --------- ------------------- -------------- --------------
<S> <C> <C> <C>
Renaissance Balanced Portfolio $10,267 $114,543 $167,365
Zweig Asset Allocation Portfolio 8,900 161,251 312,227
Nicholas-Applegate Balanced Portfolio 8,620 166,007 276,766
Harris Bretall Sullivan & Smith Equity Growth 10,116 57,483 86,434
Portfolio
</TABLE>
B-17
<PAGE>
<TABLE>
<CAPTION>
Management Fee for Management Management
Fiscal Period From Fee for Fee for
Commencement of Fiscal Fiscal
Operations Through Year Ended Year Ended
Portfolio June 30, 1993 June 30,1994 June 30, 1995
- - --------- ------------------- -------------- --------------
<S> <C> <C> <C>
Dreman Value Portfolio 2,954 40,945 62,310
Zweig Equity (Small Cap) Portfolio 6,347 57,434 81,405
Pinnacle Fixed Income Portfolio* 2,147 27,836 45,180
ARM Capital Advisors Money Market Portfolio* 1,000 22,086 40,612
Morgan Stanley Asian Growth Portfolio* -- 295 97,281
Morgan Stanley Worldwide High Income -- 111 48,816
Portfolio*
</TABLE>
* On , 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. 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 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 period from the commencement of operations through June 30, 1993 and
the fiscal years ended June 30, 1994 and 1995, Integrity (the Fund's former
investment manager) reimbursed the Portfolios' expenses in the amounts
indicated:
B-18
<PAGE>
<TABLE>
<CAPTION>
Amount
Reimbursed for Amount Amount
Fiscal Period From Reimbursed Reimbursed
Commencement of for Fiscal for Fiscal Year
Operations Through Year Ended Ended
Portfolio June 30, 1993 June 30, 1994 June 30, 1995
- - --------- ------------------- ------------- ---------------
<S> <C> <C> <C>
Renaissance Balanced Portfolio $28,491 $ -- $ --
Zweig Asset Allocation Portfolio 33,402 -- --
Nicholas-Applegate Balanced Portfolio 35,950 -- --
Harris Bretall Sullivan & Smith Equity Growth 32,507 -- --
Portfolio
Dreman Value Portfolio 34,465 13,413 --
Zweig Equity (Small Cap) Portfolio 35,211 22,832 2,773
Pinnacle Fixed Income Portfolio* 33,404 28,698 9,482
ARM Capital Advisors Money Market Portfolio* 31,768 26,954 6,639
Morgan Stanley Asian Growth Portfolio* -- 7,074 --
Morgan Stanley Worldwide High Income Portfolio* -- 6,760 --
</TABLE>
- - ------------
* On ___________, 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. 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.
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
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 period from the commencement of operations through June 30, 1993
and the fiscal years ended June 30, 1994 and 1995, Integrity paid the Sub-
Advisers sub-advisory fees in respect of each Portfolio in the amounts set forth
below:
B-19
<PAGE>
<TABLE>
<CAPTION>
Amount of
Sub-Advisory Fee
for Amount of Amount of
Fiscal Period From Sub-Advisory Sub-Advisory
Commencement of Fee for Fiscal Fee for Fiscal
Operations Through Year Ended Year Ended
Portfolio June 30, 1993 June 30, 1994 June 30, 1995
- - --------- ------------------ --------------- --------------
<S> <C> <C> <C>
Renaissance Balanced Portfolio $7,898 $ 88,110 $128,742
Zweig Asset Allocation Portfolio 7,417 134,376 260,189
Nicholas-Applegate Balanced Portfolio 6,631 127,698 212,897
Harris Bretall Sullivan & Smith Equity Growth 7,782 44,218 66,488
Portfolio
Dreman Value Portfolio 2,272 31,496 47,931
Zweig Equity (Small Cap) Portfolio 5,440 49,323 69,776
Pinnacle Fixed Income Portfolio* 1,789 23,197 37,650
ARM Capital Advisors Money Market Portfolio* 769 16,989 31,240
Morgan Stanley Asian Growth Portfolio* -- 251 82,689
Morgan Stanley Worldwide High Income -- 20 40,201
Portfolio*
</TABLE>
- - -----------
* On ___________, 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. 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.
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.
B-20
<PAGE>
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 period from the commencement of operations through June 30, 1993
and the fiscal years ended June 30, 1994 and 1995, the Fund paid the following
brokerage commissions with respect to each of the Portfolios:
<TABLE>
<CAPTION>
Brokerage
Commissions Paid
During Brokerage Brokerage
the Fiscal Commissions Commissions
Period From Paid During Paid During
Commencement of the Fiscal the Fiscal
Operation Through Year Ended Year Ended
Portfolio June 30, 1993 June 30, 1994 June 30, 1995
- - --------- ----------------- ------------- -------------
<S> <C> <C> <C>
Renaissance Balanced Portfolio $ 6,762 $41,548 $ 37,905
Zweig Asset Allocation Portfolio 3,301 24,573 25,232
Nicholas-Applegate Balanced Portfolio 6,265 75,213 105,607
Harris Bretall Sullivan & Smith Equity Growth 17,256 21,448 13,202
Portfolio
Dreman Value Portfolio 4,430 13,413 8,300
Zweig Equity (Small Cap) Portfolio 6,970 18,081 14,849
Morgan Stanley Asian Growth Portfolio* -- -- 96,653
</TABLE>
- - -----------
* Morgan Stanley Asian Growth Portfolio commenced operations on June 15, 1994.
For the fiscal period from commencement of operations through June 30, 1993 and
the fiscal years ended June 30, 1994 and 1995, 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, 1995, 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.
B-21
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,1995
-----------------------------------------
Brokerage Commission
---------------------------------
-------------------------------------------------------
Brokerage Brokerage
Commissions Commissions Paid
Paid During the During the Fiscal
Fiscal Period Year Ended
from June 30, 1994 As a Percentage
Commencement ----------------- As a of Portfolio
of Operations Percentage of Transactions
Affiliated Portfolio Through Paid Aggregate Involving
Broker-Dealer ------------ June 30, 1993 ------- Commissions Commissions
- - --------------- ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Morgan Zweig Asset $ * $18,868 $16,394 65% 78%
Stanley Allocation
Portfolio
Zweig * 13,079 7,589 51% 69%
Equity
(Small Cap)
Portfolio
Morgan 8,453 9% 9%
Stanley
Asian
Growth
Portfolio
Zweig
Securities Zweig Assets 44 1,156 594 2% 2%
Corporation Allocation
Portfolio
Zweig
Equity 22 407 537 4% 1%
(Small Cap)
Portfolio
</TABLE>
* Morgan Stanley did not become an affiliated person of the Fund until November
1993.
B-22
<PAGE>
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."
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.
B-23
<PAGE>
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.
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 dollar weighted 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.
B-24
<PAGE>
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, 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)
B-25
<PAGE>
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 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.
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.
B-26
<PAGE>
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 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.
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.
B-27
<PAGE>
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% JP 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.
JP 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.
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.
B-28
<PAGE>
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-29
<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, 1995 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.
<TABLE>
<CAPTION>
<S> <C>
Report of Ernst & Young LLP, independent auditors............................................. B-___
Financial Statements, Financial Highlights, and Schedules of Investments:
Statements of Assets and Liabilities as of June 30, 1995
Statements of Operations for the fiscal year ended June 30, 1995
Statements of Changes in Net Assets for the fiscal periods ended June 30, 1995
and 1994
Financial Highlights for fiscal periods since 1993
Schedules of Investments as of June 30, 1995
Renaissance Balanced Portfolio..................................................... B-
Zweig Asset Allocation Portfolio................................................... B-
Nicholas-Applegate Balanced Portfolio.............................................. B-
Harris Bretall Sullivan & Smith Equity Growth Portfolio............................ B-
Dreman Value Portfolio............................................................. B-
Zweig Equity (Small Cap) Portfolio................................................. B-
Pinnacle (formerly Mitchell Hutchins) Fixed Income Portfolio....................... B-
ARM Capital Advisors (formerly Mitchell Hutchins) Money Market Portfolio........... B-
Morgan Stanley Asian Growth Portfolio.............................................. B-
Morgan Stanley Worldwide High Income Portfolio..................................... B-
Notes to Financial Statements................................................................... B-
Financial Statements, Financial Highlights, and Schedules of Investments:
Statements of Assets and Liabilities as of December 31, 1995
Statements of Operations for the six months ended December 31, 1995
Statements of Changes in Net Assets for the fiscal periods ended [June 30,
1995 and 1994]
Financial Highlights for fiscal periods since 1993
Schedules of Investments as of December 31, 1996
Renaissance Balanced Portfolio..................................................... B-
Zweig Asset Allocation Portfolio................................................... B-
Nicholas-Applegate Balanced Portfolio.............................................. B-
Harris Bretall Sullivan & Smith Equity Growth Portfolio............................ B-
Dreman Value Portfolio............................................................. B-
</TABLE>
B-30
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Zweig Equity (Small Cap) Portfolio................................................. B-
Pinnacle (formerly Mitchell Hutchins) Fixed Income Portfolio....................... B-
ARM Capital Advisors (formerly Mitchell Hutchins) Money Market Portfolio........... B-
Morgan Stanley Asian Growth Portfolio.............................................. B-
Morgan Stanley Worldwide High Income Portfolio..................................... B-
Notes to Financial Statements................................................................... B-
</TABLE>
B-31
<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
<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), Mitchell Hutchins Fixed
Income, Mitchell Hutchins Money Market, Morgan Stanley Asian Growth and Morgan
Stanley Worldwide High Income portfolios), including the schedules of
investments, as of June 30, 1995, the related statements of operations for the
year then ended and statements of changes in net assets and financial highlights
for the periods indicated therein and financial highlights for fiscal periods
since 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
audit. 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,
1995, by correspondence with the custodian. As to uncompleted 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 and financial highlights for the years
ended June 30, 1995 and 1994, referred to above present fairly, in all material
respects, the financial position of each of the portfolios constituting The
Legends Fund, Inc. at June 30, 1995, and the results of their operations,
changes in their net assets, 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 14, 1995
2
<PAGE>
Renaissance Balanced Portfolio
Statement of Assets and Liabilities
June 30, 1995
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value (cost $23,959,147)
(NOTE 1)-See accompanying schedule $ 25,651,072
Cash 5,235
Receivable for investment securities sold 1,167,555
Dividends, interest and other receivables 238,247
------------
TOTAL ASSETS 27,062,109
LIABILITIES
Accounts payable and accrued expenses 29,914
------------
TOTAL LIABILITIES 29,914
------------
NET ASSETS $ 27,032,195
============
Net Assets consist of:
Paid-in capital $ 24,724,767
Undistributed net investment income 914,654
Undistributed net realized loss on investments (299,151)
Net unrealized appreciation on investment securities 1,691,925
------------
NET ASSETS, for 2,327,611 shares outstanding $ 27,032,195
============
NET ASSET VALUE, offering and redemption price per share $ 11.61
============
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
Renaissance Balanced Portfolio
Statement of Operations
Year Ended June 30, 1995
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends $ 201,586
Interest 963,029
----------
Total investment income 1,164,615
EXPENSES (NOTE 2)
Investment advisory and management fees 167,365
Custody and accounting fees 57,934
Professional fees 14,202
Directors' fees and expenses 4,950
Other expenses 4,556
----------
Total expenses 249,007
----------
Net investment income 915,608
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 1)
Net realized loss on investments (299,151)
Change in unrealized appreciation on investment securities 2,638,834
----------
Net realized and unrealized gain on investments 2,339,683
----------
Net increase in net assets resulting from operations $3,255,291
==========
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
Renaissance Balanced Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1995 1994
--------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 915,608 $ 478,067
Net realized gain (loss) on investments (299,151) 150,527
Net unrealized appreciation (depreciation) 2,638,834 (1,119,019)
--------------------------------
Net increase (decrease) in net assets resulting from
operations 3,255,291 (490,425)
Distributions to shareholders from:
Net investment income (423,397) (164,000)
Net realized gain (82,603) -
--------------------------------
Total distributions to shareholders (506,000) (164,000)
Capital share transactions:
Proceeds from sales of shares 6,487,456 19,755,941
Proceeds from reinvested distributions 506,000 164,000
Cost of shares redeemed (7,756,946) (2,017,794)
--------------------------------
Net increase (decrease) in net assets resulting from
share transactions (763,490) 17,902,147
--------------------------------
Total increase in net assets 1,985,801 17,247,722
NET ASSETS
Beginning of year 25,046,394 7,798,672
--------------------------------
End of year (including undistributed net investment income of
$914,654 and $353,424, respectively) $27,032,195 $25,046,394
================================
OTHER INFORMATION
Shares:
Sold 603,427 1,835,792
Issued through reinvestment of distributions 47,019 14,925
Redeemed (731,529) (190,244)
--------------------------------
Net increase (decrease) (81,083) 1,660,473
================================
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
Renaissance Balanced Portfolio
Financial Highlights
<TABLE>
<CAPTION>
DECEMBER 14,
1992
(COMMENCEMENT OF
YEAR ENDED YEAR ENDED OPERATIONS)
JUNE 30, JUNE 30, THROUGH JUNE 30,
1995 1994 1993(B)
-----------------------------------------------------------
<S> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 10.40 $ 10.42 $ 10.00
Income from investment operations:
Net investment income 0.42 0.20 0.13
Net realized and unrealized gain
(loss) on investments .99 (0.11) 0.29
-----------------------------------------------------------
Total from investment operations 1.41 0.09 0.42
Less distributions:
From net investment income (.17) (0.11) -
From net realized gain (.03) - -
-----------------------------------------------------------
Total distributions (.20) (0.11) -
-----------------------------------------------------------
Net asset value, end of period $ 11.61 $ 10.40 $ 10.42
===========================================================
TOTAL RETURN(A) 13.71% 0.73% 7.70%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $27,032,195 $ 25,046,394 $ 7,798,672
Ratio of expenses to average net
assets(C) 0.96% 1.06% 1.24%
Ratio of net investment income to
average net assets(C) 3.53% 2.72% 2.36%
Portfolio turnover rate 71% 85% 29%
</TABLE>
(A) Total returns 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, 1995
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------------------------------
<S> <C> <C>
COMMON STOCKS (43.5%)
APPAREL AND OTHER TEXTILE PRODUCTS (2.4%)
Nike, Inc. 7,200 $ 604,800
CHEMICAL AND ALLIED PRODUCTS (4.2%)
Eastman Chemical Company 9,000 535,500
Praxair, Inc. 22,000 550,000
----------
1,085,500
DEPOSITORY INSTITUTIONS (2.1%)
NBD Bancorp, Inc. 16,500 528,000
ELECTRONIC AND OTHER ELECTRICAL EQUIPMENT (4.3%)
General Instrument Corporation* 18,200 698,425
Maytag Corporation 25,500 408,000
----------
1,106,425
FOOD AND KINDRED PRODUCTS (4.3%)
Archer Daniels Midland 28,900 538,261
Conagra, Inc. 15,900 554,512
----------
1,092,773
FURNITURE AND HOME FURNISHINGS STORES (2.7%)
Circuit City Stores, Inc. 21,600 683,100
HEALTH SERVICES (2.2%)
Columbia/HCA Healthcare Corporation 13,100 566,575
INDUSTRIAL MACHINERY AND EQUIPMENT (2.3%)
Dell Computer Corporation* 9,600 577,800
INSTRUMENTS AND RELATED PRODUCTS (2.4%)
Medtronic, Inc. 8,000 617,000
INSURANCE CARRIERS (3.8%)
Loews Corporation 5,350 647,350
US Healthcare, Inc. 11,000 338,250
----------
985,600
</TABLE>
7
<PAGE>
Renaissance Balanced Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES
OR PRINCIPAL
AMOUNT VALUE
---------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
MOTION PICTURES (2.0%)
Walt Disney Company 9,600 $ 534,000
NONDEPOSITORY INSTITUTION (2.2%)
First USA, Inc. 12,900 572,438
OIL AND GAS EXTRACTION (4.0%)
Exxon Corporation 7,700 543,813
Halliburton Company 13,700 489,775
-----------
1,033,588
RAILROAD TRANSPORTATION (2.1%)
Illinois Central Corporation 15,500 534,750
RUBBER AND MISCELLANEOUS PLASTICS PRODUCTS (2.5%)
Illinois Tool Works, Inc. 11,500 632,500
-----------
TOTAL COMMON STOCKS (Cost $9,701,192) 11,154,849
LONG-TERM DEBT SECURITIES (49.8%)
U.S. GOVERNMENT OBLIGATIONS (36.6%)
U.S. Treasury Notes, 7.875%, due 11/15/2004 $ 745,000 829,744
U.S. Treasury Notes, 7.25%, due 8/15/2004 2,475,000 2,644,760
U.S. Treasury Notes, 7.25%, due 5/15/2004 1,835,000 1,959,156
U.S. Treasury Notes, 5.875%, due 2/15/2004 1,035,000 1,009,611
U.S. Treasury Notes, 5.75%, due 8/15/2003 735,000 712,605
U.S. Treasury Notes, 6.25%, due 2/15/2003 2,227,042 2,236,086
-----------
9,391,962
U.S. GOVERNMENT AGENCY-COLLATERALIZED MORTGAGE OBLIGATIONS
(13.2%)
Fed. Home Loan Mort. Corp., Var. Rate 4.75% (effective
6/30/95), due 10/4/96 3,400,000 3,378,886
-----------
TOTAL LONG-TERM DEBT SECURITIES (Cost $12,532,580) 12,770,848
</TABLE>
8
<PAGE>
Renaissance Balanced Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
---------------------------------
<S> <C> <C>
SHORT-TERM SECURITIES (6.7%)
TIME DEPOSITS (6.7%)
State Street Bank, 4.90%, due 7/3/95 $ 1,725,375 $ 1,725,375
------------
TOTAL SHORT-TERM SECURITIES (Cost $1,725,375)
1,725,375
------------
TOTAL INVESTMENTS (100.0%) (Cost $23,959,147) $ 25,651,072
============
</TABLE>
* Non-income producing
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the
year ended June 30, 1995, aggregated $17,145,871 and $19,088,119,
respectively. Net unrealized appreciation for tax purposes aggregated
$1,691,925, of which $1,915,475 related to appreciated investment securities
and $223,550 related to depreciated investment securities. The aggregate cost
of securities is the same for book and tax purposes.
SEE ACCOMPANYING NOTES.
9
<PAGE>
Zweig Asset Allocation Portfolio
Statement of Assets and Liabilities
June 30, 1995
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value (cost $32,587,902)
(NOTE 1)-See accompanying schedule $ 36,764,428
Dividends, interest and other receivables 32,148
-------------
TOTAL ASSETS 36,796,576
LIABILITIES
Cash overdraft 16,812
Accounts payable and accrued expenses 43,603
-------------
TOTAL LIABILITIES 60,415
-------------
NET ASSETS $ 36,736,161
=============
Net Assets consist of:
Paid-in capital $ 31,852,476
Undistributed net investment income 946,985
Undistributed net realized loss on investments (244,106)
Net unrealized appreciation on investment securities and futures
contracts 4,180,806
-------------
NET ASSETS, for 2,820,443 shares outstanding $ 36,736,161
=============
NET ASSET VALUE, offering and redemption price per share $ 13.02
=============
</TABLE>
SEE ACCOMPANYING NOTES.
10
<PAGE>
Zweig Asset Allocation Portfolio
Statement of Operations
Year Ended June 30, 1995
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends $ 340,252
Interest 1,021,521
----------
Total investment income 1,361,773
EXPENSES (NOTE 2)
Investment advisory and management fees 312,227
Custody and accounting fees 78,057
Professional fees 14,202
Directors' fees and expenses 4,950
Other expenses 5,186
----------
Total expenses 414,622
----------
Net investment income 947,151
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 1)
Net realized gain (loss) on:
Investment securities 241,845
Futures and options contracts (322,322)
----------
Net realized loss (80,477)
Change in unrealized appreciation (depreciation) on:
Investment securities 3,988,636
Futures contracts (44,095)
----------
Change in unrealized appreciation (depreciation) 3,944,541
----------
Net realized and unrealized gain on investments 3,864,064
----------
Net increase in net assets resulting from operations $4,811,215
==========
</TABLE>
SEE ACCOMPANYING NOTES.
11
<PAGE>
Zweig Asset Allocation Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1995 1994
-----------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 947,151 $ 298,043
Net realized loss on investments (80,477) (161,851)
Net unrealized appreciation 3,944,541 85,735
-----------------------------
Net increase in net assets resulting from operations
4,811,215 221,927
Distributions to shareholders from:
Net investment income (248,100) (64,000)
Capital share transactions:
Proceeds from sales of shares 7,443,090 29,026,779
Proceeds from reinvested dividends 248,100 64,000
Cost of shares redeemed (7,081,317) (1,541,077)
-----------------------------
Net increase in net assets resulting from share
transactions 609,873 27,549,702
-----------------------------
Total increase in net assets 5,172,988 27,707,629
NET ASSETS
Beginning of year 31,563,173 3,855,544
-----------------------------
End of year (including undistributed net investment income of
$946,985 and $247,934, respectively) $36,736,161 $31,563,173
=============================
OTHER INFORMATION
Shares:
Sold 640,047 2,528,990
Issued through reinvestment of dividends 21,399 5,620
Redeemed (598,871) (133,338)
-----------------------------
Net increase 62,575 2,401,272
=============================
</TABLE>
SEE ACCOMPANYING NOTES.
12
<PAGE>
Zweig Asset Allocation Portfolio
Financial Highlights
<TABLE>
<CAPTION>
DECEMBER 14,
1992
(COMMENCEMENT OF
YEAR ENDED YEAR ENDED OPERATIONS)
JUNE 30, JUNE 30, THROUGH JUNE 30,
1995 1994 1993(B)
------------------------------------------------------------
<S> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 11.44 $ 10.81 $ 10.00
Income from investment operations:
Net investment income 0.33 0.10 0.08
Net realized and unrealized gain on
investments 1.33 0.58 0.73
------------------------------------------------------------
Total from investment operations 1.66 0.68 0.81
Less distributions:
From net investment income (0.08) (0.05) -
------------------------------------------------------------
Net asset value, end of period $ 13.02 $ 11.44 $ 10.81
============================================================
TOTAL RETURN(A) 14.57% 6.27% 14.86%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $36,736,161 $ 31,563,173 $ 3,855,544
Ratio of expenses to average net
assets(C) 1.20% 1.39% 1.51%
Ratio of net investment income to
average net assets(C) 2.73% 1.67% 1.40%
Portfolio turnover rate 45% 101% 12%
</TABLE>
(A) Total returns 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)
13
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments
June 30, 1995
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
----------------------------------
<S> <C> <C>
COMMON STOCKS (68.2%)
AMUSEMENT AND RECREATION SERVICES (0.7%)
Grand Casinos, Inc.* 3,800 $ 134,425
Players International* 5,750 115,719
----------
250,144
AUTO REPAIR, SERVICES, AND PARKING (0.3%)
Ryder System, Inc. 4,700 112,213
BUSINESS SERVICES (0.7%)
Filenet Corporation* 2,100 84,788
Pitson Services Group 2,800 67,200
Sun Microsystems, Inc.* 1,900 92,269
----------
244,257
CHEMICALS AND ALLIED PRODUCTS (3.4%)
Cabot Corporation 3,300 174,075
Cytec Industries, Inc.* 2,200 89,925
First Mississippi Corporation 2,800 95,550
Geon Company 4,800 138,000
Georgia Gulf Corporation 900 29,363
IMC Global Inc. 2,800 151,550
Methanex Corporation* 1,800 15,075
Monsanto Company 900 81,113
Norsk Hydro 4,400 183,700
Olin Corporation 2,000 103,000
Sterling Chemicals, Inc. 2,600 30,225
Union Carbide Corporation 5,000 166,875
----------
1,258,451
COMMUNICATIONS (0.03%)
Telefonica de Espana 300 11,625
DEPOSITORY INSTITUTIONS (10.9%)
Bank of Boston Corporation 8,000 299,500
Bank of New York Company, Inc. 9,000 363,350
Bankamerica Corporation 2,100 110,513
Baybanks, Inc. 2,500 198,438
</TABLE>
14
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
DEPOSITORY INSTITUTIONS (10.9%) (CONTINUED)
Boatmen's Bancshares, Inc. 2,400 $ 84,450
Chase Manhattan Corporation 2,300 108,100
Chemical Banking Corporation 5,104 241,164
Comerica, Inc. 4,500 144,563
Crestar Financial Corporation 1,800 88,200
Dime Bancorp, Inc.* 1,500 15,000
First American Corp-Tennessee* 3,300 118,594
First Bank System, Inc. 4,300 176,300
First Chicago Corporation 2,600 155,675
First Fidelity Bancorp 100 5,900
First Interstate Bancorp 3,000 240,750
First of America Bankcorp 1,900 70,538
First Tennessee National Corporation 700 32,419
First Union Corporation 4,600 208,150
Fleet Financial Group, Inc. 5,300 196,763
Hibernia Corporation 14,200 126,025
Michigan National Corporation 920 97,750
Midatlantic Corporation, Inc. 5,500 219,313
Nationsbank Corporation 1,000 53,625
NBD Bancorp, Inc. 3,400 108,800
Republic New York Corporation 2,600 145,600
Southtrust Corporation 2,000 46,500
Standard Federal Bancorp 5,400 181,575
UJB Financial Corporation 1,700 51,638
Wells Fargo & Company 500 90,125
West One Bankcorp 400 13,300
----------
3,992,618
ELECTRIC, GAS AND SANITARY SERVICE (5.8%)
American Electric Power 2,700 94,838
Baltimore Gas & Electric 3,000 75,000
Centerior Energy Corporation 11,100 106,838
Coastal Corporation 5,400 164,025
Columbia Gas System* 7,500 238,125
Illinova Corporation 5,700 144,638
New England Electric System 1,900 65,550
</TABLE>
15
<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 SERVICE (5.8%) (CONTINUED)
Niagra Mohawk Power Corporation 9,900 $ 146,025
Northeast Utilities 3,000 67,500
Pacific Enterprises 5,300 129,850
Pacific Gas & Electric 4,900 142,100
Pinnacle West Corporation 13,000 318,500
Portland General Corporation 3,100 68,588
Scecorp 7,900 135,288
Unicom Corporation 5,000 133,125
Western Resource 3,000 92,625
----------
2,122,615
ELECTRONIC AND OTHER ELECTRIC EQUIPMENT (8.6%)
Advanced Micro Devices* 6,100 221,888
Cypress Semiconductor Corporation* 2,500 101,250
Electro Scientific Industries, Inc.* 4,100 136,838
Integrated Device Tech, Inc.* 2,200 101,613
LSI Logic Corporation* 8,600 336,475
Maytag Corporation 5,700 91,200
Micron Technology, Inc. 11,900 653,013
National Semiconductor Corporation* 10,600 294,150
OPTI, Inc.* 8,100 185,288
Philips Electronics 11,200 478,800
Standard Microsystems Corporation* 5,700 87,281
Texas Instruments, Inc. 2,400 321,300
Vishay Intertechnology* 926 33,452
Zitel Corporation* 11,400 127,538
----------
3,170,086
FABRICATED METAL (1.0%)
Ball Corporation 3,000 104,625
Parker-Hannifin Corporation 2,850 103,313
Phelps Dodge 2,400 141,600
----------
349,538
FOOD AND KINDRED PRODUCTS (1.6%)
Archer Daniels Midland 6,850 127,581
IBP, Inc. 9,000 391,500
Smithfield Foods, Inc.* 3,700 78,856
----------
597,937
FOOD STORES (0.3%)
Kroger Company* 800 21,500
Safeway, Inc.* 2,200 82,225
----------
103,725
</TABLE>
16
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
HEALTH SERVICES (1.0%)
Maxicare Health Plans, Inc.* 7,600 $ 116,850
Ornda Healthcorp.* 7,600 130,625
Sun Healthcare Group, Inc.* 6,800 107,100
----------
354,575
HOLDING COMPANIES AND OTHER INVESTMENT OFFICES (1.3%)
Citicorp 8,500 491,938
INDUSTRIAL MACHINERY AND EQUIPMENT (7.7%)
AGCO Corporation 4,350 163,125
Amdahl Corporation 9,300 103,463
Apple Computer 700 32,550
BJ Services Company-WTS 340 1,445
Black & Decker Corporation 3,800 117,325
Briggs & Stratton 3,300 113,850
Compaq Computer Corporation* 3,700 167,888
Cummins Engine Company, Inc. 5,300 231,213
Deere & Company 1,000 85,625
Dell Computer Corporation* 2,200 132,413
Digital Equipment* 2,500 101,875
Dynatech Corporation* 5,900 112,100
Exabyte Corporation* 900 12,431
Harris Corporation 3,900 201,338
International Business Machines Corporation 3,000 288,000
Kulicke and Soffa Industries* 500 33,188
Novellus Systems, Inc.* 600 40,650
Printronix, Inc.* 3,400 94,350
Proxima Corporation* 4,200 100,800
Quantum Corporation* 4,200 96,600
Seagate Technology, Inc.* 5,300 208,025
Sequent Computer, Inc.* 1,700 30,281
Smith International, Inc.* 3,600 60,300
Tandem Computers, Inc.* 9,200 148,350
Tecumseh Products Company 800 35,000
Western Digital Corporation* 7,200 125,100
----------
2,837,285
</TABLE>
17
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
INSTRUMENTS AND RELATED PRODUCTS (2.4%)
General Motors 6,200 $ 244,900
Johnson Controls, Inc. 700 39,550
Loral Corporation 3,300 170,775
Sci Systems, Inc.* 5,400 134,663
Tektronix, Inc. 3,900 192,075
Teradyne, Inc.* 1,600 104,600
----------
886,563
INSURANCE CARRIERS (3.4%)
Aetna Life & Casualty Company 2,000 125,750
Allstate Corporation 4,400 130,350
AMBAC, Inc. 2,500 100,313
Cigna Corporation 1,800 139,725
Exel Limited 1,600 83,200
Loews Corporation 1,100 133,100
Old Republic International Corporation 400 10,450
Partnerre Holdings 5,700 148,556
Reliastar Financial Corporation 700 26,775
St. Paul Companies 2,700 132,975
United Companies Financial Corporation 990 44,426
USLife Corporation 1,900 76,475
USF&G Corporation 6,500 105,625
----------
1,257,720
LUMBER AND WOOD PRODUCTS (0.5%)
Georgia -Pacific Corporation 400 34,700
Willamette Industries 2,600 143,650
----------
178,350
METAL MINING (0.7%)
Asaro, Inc. 2,600 79,300
Cyprus Amax Minerals Company 2,400 68,400
Magma Copper Company* 7,400 120,250
----------
267,950
MISCELLANEOUS MANUFACTURING INDUSTRIES (0.7%)
Cobra Golf, Inc.* 4,200 132,825
First Team Sports* 4,700 108,981
----------
241,806
</TABLE>
18
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
----------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
MISCELLANEOUS RETAIL (1.1%)
Federated Department Stores* 4,600 $ 118,450
Good Guys, Inc.* 5,400 59,738
Sears Roebuck and Company 2,400 143,700
Waban, Inc.* 5,700 84,788
----------
406,676
NONDEPOSITORY INSTITUTIONS (2.5%)
American Express Company 1,100 38,638
Astoria Financial Corporation* 3,800 136,325
Bay Ridge Bancorp, Inc.* 7,200 149,850
Finova Group 300 10,500
Green Tree Financial Corporation 1,000 44,375
Greenpoint Financial Corporation 4,000 94,500
Household International, Inc. 4,200 207,900
Sunamerica, Inc. 1,000 51,000
Transamerica Corporation 2,000 116,500
Travelers, Inc. 1,600 70,000
----------
919,588
NONDURABLE GOODS WHOLESALE (0.4%)
Terra Industries, Inc. 11,500 139,438
NONMETALLIC MINERALS (0.4%)
Potash Corporation Sask, Inc. 2,500 139,688
OIL AND GAS EXTRACTION (0.1%)
Chesapeake Energy Corporation* 600 15,450
Petroleum Geo-Services* 1,300 37,375
----------
52,825
PAPER AND ALLIED PRODUCTS (3.2%)
Boise Cascade Corporation 3,300 133,650
Bowater, Inc. 3,100 139,113
Champion International Corporation 2,300 119,888
Chesapeake Corporation 3,300 102,713
Federal Paper Board Company 3,500 123,813
International Paper Company 1,700 145,775
James River Corporation of Virginia 3,700 102,213
</TABLE>
19
<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 (3.2%) (CONTINUED)
Mead Corporation 3,500 $ 207,813
Premark International, Inc. 2,000 103,750
----------
1,178,728
PETROLEUM AND COAL PRODUCTS (0.3%)
British Petroleum 1,100 94,188
PRIMARY METAL INDUSTRIES (1.4%)
Alcan Aluminum Ltd. 3,500 105,875
Alumax, Inc.* 4,800 149,400
Aluminum Company of America 800 40,100
LTV Corporation* 4,900 71,663
USX-U.S. Steel Company 2,500 85,938
WHX Corporation* 6,200 72,850
----------
525,826
PRINTING AND PUBLISHING (0.2%)
Reynolds & Reynolds 2,600 76,700
RAILROAD TRANSPORTATION (0.7%)
Burlington Northern, Inc. 700 44,363
Conrail, Inc. 2,500 139,063
Santa Fe Pacific Corporation 2,786 71,043
----------
254,469
RUBBER AND MISCELLANEOUS PLASTICS PRODUCTS (0.3%)
Goodyear Tire & Rubber Company 2,802 115,583
STONE, CLAY, GLASS, AND CONCRETE PRODUCTS (0.8%)
Lafarge Corporation 2,900 54,375
National Gypsum* 2,300 120,463
USG Corporation* 5,500 130,625
----------
305,463
</TABLE>
20
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
TEXTILE MILL PRODUCTS (0.1%)
Fieldcrest Cannon* 1,800 $ 38,925
TRANSPORTATION BY AIR (1.6%)
AMR Corporation* 1,600 119,400
British Airways 600 40,350
Delta Air Lines, Inc. 2,100 154,875
Federal Express Corporation* 4,300 261,225
-----------
575,850
TRANSPORTATION EQUIPMENT (4.1%)
Chrysler Corporation 2,500 119,688
Dana Corporation 1,400 40,075
Ford Motor Company 9,000 267,750
Magna International, Inc. 1,300 57,363
McDonnell Douglas Corporation 5,300 406,775
Navistar International* 7,900 119,488
Northrop Grumman Corporation 2,600 135,525
Paccar, Inc. 2,900 135,575
Teledyne, Inc. 5,000 122,500
Textron, Inc. 1,500 87,188
-----------
1,491,927
TOTAL COMMON STOCKS (Cost $20,869,300) 25,045,270
PREFERRED STOCKS (0.002%)
TRANSPORTATION EQUIPMENT (0.002%)
Teledyne, Inc. 38 556
-----------
TOTAL PREFERRED STOCKS (Cost $0) 556
</TABLE>
21
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------------------------------
<S> <C> <C>
SHORT-TERM SECURITIES (31.8%)
U.S. GOVERNMENT AGENCY DISCOUNT NOTES (29.6%)
Federal National Mortgage Assoc., 5.88%, due 7/3/95 $ 2,800,000 $ 2,799,085
Federal National Mortgage Assoc., 5.87%, due 7/10/95 2,500,000 2,496,344
Federal National Mortgage Assoc., 5.87%, due 7/14/95 2,000,000 1,995,761
Federal National Mortgage Assoc., 5.84%, due 7/19/95 2,000,000 1,994,160
Federal National Mortgage Assoc. 5.85%, due 7/28/95 1,000,000 995,612
Federal National Mortgage Assoc., 5.86%, due 7/31/95 600,000 597,070
------------
10,878,032
U.S. GOVERNMENT OBLIGATIONS (1.3%)
U.S. Treasury Bills, 5.37%, due 9/21/95 500,000 493,884
TIME DEPOSITS (0.9%)
State Street Bank, 4.90%, due 7/3/95 346,686 346,686
------------
TOTAL SHORT-TERM SECURITIES (Cost $11,718,602) 11,718,602
------------
TOTAL INVESTMENTS (100.0%) (Cost $32,587,902) $ 36,764,428
============
</TABLE>
FUTURES CONTRACTS
<TABLE>
<CAPTION>
CONTRACT
COLLATERAL EXPIRATION AMOUNT UNREALIZED
(PAR VALUE) DATE AT VALUE GAIN
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
3 S&P 500 Futures U.S. Treasury
Contracts-Long Bill: $500,000,
due 9/21/95 9/15/95 $ 820,725 $ 4,280
=============================
</TABLE>
* Non-income producing
22
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the
year ended June 30, 1995, aggregated $15,133,567 and $7,265,527,
respectively. Net unrealized appreciation for tax purposes aggregated
$4,176,526, of which $4,495,866 related to appreciated investment securities
and $319,340 related to depreciated investment securities. The aggregate cost
of securities is the same for book and tax purposes.
SEE ACCOMPANYING NOTES.
23
<PAGE>
Nicholas-Applegate Balanced Portfolio
Statement of Assets and Liabilities
June 30, 1995
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value (cost $39,943,879)
(NOTE 1)-See accompanying schedule $ 45,943,315
Receivable for investment securities sold 613,413
Dividends, interest and other receivables 246,412
-------------
TOTAL ASSETS 46,803,140
LIABILITIES
Payable for investment securities purchased 963,210
Cash overdraft 16,762
Accounts payable and accrued expenses 42,557
-------------
TOTAL LIABILITIES 1,022,529
-------------
NET ASSETS $ 45,780,611
=============
Net Assets consist of:
Paid-in capital $ 40,464,534
Undistributed net investment income 935,896
Undistributed net realized loss on investments (1,619,255)
Net unrealized appreciation on investment securities 5,999,436
-------------
NET ASSETS, for 3,475,691 shares outstanding $ 45,780,611
=============
NET ASSET VALUE, offering and redemption price per share $ 13.17
=============
</TABLE>
SEE ACCOMPANYING NOTES.
24
<PAGE>
Nicholas-Applegate Balanced Portfolio
Statement of Operations
Year Ended June 30, 1995
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends $ 337,189
Interest 998,730
----------
Total investment income 1,335,919
EXPENSES (NOTE 2)
Investment advisory and management fees 276,766
Custody and accounting fees 95,804
Professional fees 14,202
Directors' fees and expenses 4,950
Other expenses 7,631
----------
Total expenses 399,353
----------
Net investment income 936,566
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 1)
Net realized loss on investments (283,310)
Change in unrealized appreciation on investment securities 6,479,460
----------
Net realized and unrealized gain on investments 6,196,150
----------
Net increase in net assets resulting from operations $7,132,716
==========
</TABLE>
SEE ACCOMPANYING NOTES.
25
<PAGE>
Nicholas-Applegate Balanced Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1995 1994
-----------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 936,566 $ 428,990
Net realized loss on investments (283,310) (1,298,166)
Net unrealized appreciation (depreciation) 6,479,460 (848,815)
----------------------------
Net increase (decrease) in net assets resulting from
operations 7,132,716 (1,717,991)
Distributions to shareholders from:
Net investment income (386,000) (67,000)
Capital share transactions:
Proceeds from sales of shares 7,522,637 38,482,355
Proceeds from reinvested dividends 386,000 67,000
Cost of shares redeemed (8,232,738) (2,973,632)
----------------------------
Net increase (decrease) in net assets resulting from
share transactions (324,101) 35,575,723
----------------------------
Total increase in net assets 6,422,615 33,790,732
NET ASSETS
Beginning of year 39,357,996 5,567,264
----------------------------
End of year (including undistributed net investment income of
$935,896 and $385,330, respectively) $45,780,611 $39,357,996
============================
OTHER INFORMATION
Shares:
Sold 641,113 3,254,137
Issued through reinvestment of dividends 32,590 5,700
Redeemed (689,568) (252,432)
----------------------------
Net increase (decrease) (15,865) 3,007,405
============================
</TABLE>
SEE ACCOMPANYING NOTES.
26
<PAGE>
Nicholas-Applegate Balanced Portfolio
Financial Highlights
<TABLE>
<CAPTION>
DECEMBER 3,
1992
(COMMENCEMENT OF
YEAR ENDED YEAR ENDED OPERATIONS)
JUNE 30, JUNE 30, THROUGH JUNE 30,
1995 1994 1993(B)
--------------------------------------------------------------
<S> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 11.27 $ 11.50 $ 10.00
Income from investment operations:
Net investment income 0.27 0.09 0.11
Net realized and unrealized gain (loss)
on investments 1.74 (0.29) 1.39
--------------------------------------------------------------
Total from investment operations 2.01 (0.20) 1.50
Less distributions:
From net investment income (0.11) (0.03) -
--------------------------------------------------------------
Net asset value, end of period $ 13.17 $ 11.27 $ 11.50
==============================================================
TOTAL RETURN(A) 17.92% (1.70%) 26.07%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, end of period $45,780,611 $ 39,357,996 $ 5,567,264
Ratio of expenses to average net
assets(C) 0.94% 1.03% 1.25%
Ratio of net investment income to
average net assets (C) 2.20% 1.69% 1.70%
Portfolio turnover rate 108% 56% 21%
</TABLE>
(A) Total returns 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)
27
<PAGE>
Nicholas-Applegate Balanced Portfolio
Schedule of Investments
June 30, 1995
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
----------------------------------
<S> <C> <C>
COMMON STOCKS (62.5%)
APPAREL AND ACCESSORY STORES (0.5%)
Nike, Inc. 2,900 $ 243,600
BUSINESS SERVICES (8.2%)
3Com Corporation* 13,800 924,600
Adaptec Inc.* 7,200 265,500
BMC Software, Inc.* 4,700 361,900
Broderbund Software, Inc.* 4,200 267,225
Computer Associates International, Inc. 12,240 829,260
Gartner Group, Inc.* 10,800 311,850
Healthcare Compare Corporation* 6,900 207,000
Manpower, Inc. 16,900 430,950
Medaphis Corporation* 7,400 159,100
----------
3,757,385
CHEMICALS AND ALLIED PRODUCTS (6.1%)
Amgen, Inc.* 3,300 265,238
Eastman Chemical Company 7,200 428,400
FMC Corporation* 3,700 248,825
Geon Company 12,000 345,000
Lyondell Petrochemical 12,800 328,000
Mylan Laboratories 7,500 230,625
Olin Corporation 6,600 339,900
Sterling Chemicals, Inc. 15,800 183,675
Union Carbide Corporation 13,400 447,225
----------
2,816,888
COMMUNICATIONS (1.0%)
Infinity Broadcasting* 7,400 246,975
King World Productions, Inc.* 5,600 226,800
----------
473,775
DEPOSITORY INSTITUTIONS (0.7%)
Union Bank San Francisco 7,500 314,063
ELECTRIC, GAS AND SANITARY SERVICE (1.2%)
Boston Scientific Corporation* 17,100 545,063
Citizens Utility Company* 268 3,188
----------
548,251
</TABLE>
28
<PAGE>
Nicholas-Applegate Balanced Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ELECTRONICS, AND OTHER ELECTRICAL EQUIPMENT (7.9%)
Intel Corporation 4,800 $ 303,900
KLA Instruments Corporation* 10,500 812,438
Matsushita Electric Industrial 1,300 201,500
Micron Technology, Inc. 12,600 691,425
Tencor Instrument 5,700 239,400
Texas Instruments, Inc. 4,600 615,825
Varian Associates, Inc. 9,800 541,450
Xilinx 2,500 241,875
----------
3,647,813
FOOD AND KINDRED PRODUCTS (1.5%)
Archer Daniels Midland 10,300 191,838
Coca Cola Enterprises, Inc. 11,200 245,000
IBP, Inc. 6,000 261,000
----------
697,838
FOOD STORES (1.2%)
Safeway, Inc.* 15,300 571,838
GENERAL MERCHANDISE STORES (0.5%)
Sears Roebuck and Company 4,100 245,488
INDUSTRIAL MACHINERY AND EQUIPMENT (4.7%)
Altera Corporation* 6,600 286,275
Amdahl Corporation 8,400 93,450
Bay Networks, Inc.* 5,900 243,375
Cummins Engine Company, Inc. 4,600 200,675
Dell Computer Corporation* 5,200 312,975
Digital Equipment* 5,300 215,975
International Business Machines Corporation 2,800 268,800
Sun Microsystems, Inc.* 6,200 301,088
US Robotics Corporations 2,500 241,875
----------
2,164,488
</TABLE>
29
<PAGE>
Nicholas-Applegate Balanced Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
INSTRUMENTS AND RELATED PRODUCTS (1.3%)
Teradyne, Inc.* 4,900 $ 320,338
Vishay Intertechnology* 7,600 274,550
----------
594,888
INSURANCE CARRIERS (5.2%)
Ace Limited 8,900 258,100
American National Insurance 7,260 440,138
Cigna Corporation 3,000 232,875
Exel Limited 4,900 254,800
Loews Corporation 2,000 242,000
Old Republic International Corporation 9,000 235,125
Oxford Health Plans* 5,000 235,000
Pacificare Health Systems, Inc.* 5,300 266,988
St. Paul Companies 4,700 231,475
----------
2,396,501
LUMBER AND WOOD PRODUCTS (0.6%)
Weyenhaeuser Company 5,600 263,900
METAL MINING (0.9%)
Asarco, Inc. 14,300 436,150
NONDURABLE GOODS, WHOLESALE (0.9%)
Bergen Brunswig Corporation 9,000 205,875
Fleming Companies, Inc. 8,700 230,550
----------
436,425
NONMETALLIC MINERALS (1.5%)
Potash Corporation Sask, Inc. 12,000 670,500
OIL AND GAS EXTRACTION (4.0%)
Atlantic Richfield Company 2,000 219,500
Exxon Corporation 3,400 240,125
Louisiana Land & Exploration 5,800 231,275
Mobil Corporation 2,600 249,600
Occidental Petroleum Corporation 9,700 221,888
Oryx Energy Company 16,600 228,250
Sonat Offshore Drilling, Inc. 8,100 232,875
Union Texas Petro Holdings, Inc. 10,200 215,475
----------
1,838,988
</TABLE>
30
<PAGE>
Nicholas-Applegate Balanced Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
PAPER AND ALLIED PRODUCTS (6.3%)
Boise Cascade Corporation 13,000 $ 526,500
Bowater, Inc. 8,000 359,000
Champion International Corporation 6,100 317,963
Chesapeake Corporation 6,000 186,750
Jefferson Smurfit Corporation* 12,400 162,750
Potlatch Corporation 5,500 229,625
Scott Paper Company 12,000 594,000
Union Camp Corporation 4,500 260,438
Westvaco Corporation 6,000 265,500
-----------
2,902,526
PETROLEUM AND COAL INDUSTRIES (0.5%)
USX-Marathon Group 12,200 240,950
PRIMARY METAL INDUSTRIES (4.1%)
Alcan Aluminum Limited 8,000 242,000
Alumax, Inc.* 12,300 382,828
Aluminum Company of America 5,000 250,625
Crane Company 7,800 282,750
Phelps Dodge 6,200 365,800
Reynolds Metals Company 7,100 367,425
-----------
1,891,428
SECURITY AND COMMODITY BROKERS (1.1%)
Bear Stearns Companies, Inc. 11,500 245,813
Lehman Brothers Holdings 11,000 239,250
-----------
485,063
TOBACCO PRODUCTS (0.6%)
Philip Morris Company, Inc. 3,700 275,188
TRANSPORTATION EQUIPMENT (1.7%)
Breed Technologies 10,300 247,200
Harsco Corporation 4,600 242,650
McDonnell Douglas Corporation 3,900 299,325
-----------
789,175
-----------
TOTAL COMMON STOCKS (Cost $23,608,368) 28,703,109
</TABLE>
31
<PAGE>
Nicholas-Applegate Balanced Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------------------------------
<S> <C> <C>
LONG-TERM DEBT SECURITIES (29.6%)
U.S. GOVERNMENT OBLIGATIONS (29.6%)
U.S. Treasury Notes, 0%, due 11/15/2004 $ 2,300,000 $ 1,274,844
U.S. Treasury Notes, 6.5%, due 5/15/97 750,000 758,558
U.S. Treasury Notes, 7.5%, due 5/15/2002 750,000 807,420
U.S. Treasury Notes, 9.25%, due 1/15/96 1,850,000 1,882,949
U.S. Treasury Notes, 6.25%, due 2/15/2003 750,000 751,995
U.S. Treasury Notes, 7.25%, due 5/15/2004 3,850,000 4,110,491
U.S. Treasury Notes, 7.875%, due 11/15/2004 3,600,000 4,009,500
------------
TOTAL LONG-TERM DEBT SECURITIES
(Cost $12,696,648) 13,595,757
SHORT-TERM SECURITIES (7.9%)
U.S. GOVERNMENT OBLIGATIONS (7.9%)
U.S. Treasury Notes, 8.625%, due 10/15/95 1,850,000 1,864,449
TIME DEPOSITS
State Street Bank, 4.90%, due 7/3/95 1,780,000
------------
TOTAL SHORT-TERM SECURITIES
(Cost $3,638,863) 3,644,449
------------
TOTAL INVESTMENTS (100.0%) (Cost $39,943,879) $ 45,943,315
============
</TABLE>
* Non-income producing
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the
year ended June 30, 1995, aggregated $44,663,577 and $45,029,278,
respectively. Net unrealized appreciation for tax purposes aggregated
$5,999,436, of which $6,698,745 related to appreciated investment securities
and $699,309 related to depreciated investment securities. The aggregate cost
of securities is the same for book and tax purposes.
SEE ACCOMPANYING NOTES.
32
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Statement of Assets and Liabilities
June 30, 1995
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value (cost $12,423,742)
(NOTE 1)-See accompanying schedule $16,094,433
Cash 308,901
Dividends, interest and other receivables 12,026
-----------
TOTAL ASSETS 16,415,360
LIABILITIES
Accounts payable and accrued expenses 22,084
-----------
TOTAL LIABILITIES 22,084
-----------
NET ASSETS $16,393,276
===========
Net Assets consist of:
Paid-in capital $12,552,547
Undistributed net investment income 17,603
Undistributed net realized gain on investments 152,435
Net unrealized appreciation on investment securities 3,670,691
-----------
NET ASSETS, for 1,275,266 shares outstanding $16,393,276
===========
NET ASSET VALUE, offering and redemption price per share $ 12.85
===========
</TABLE>
SEE ACCOMPANYING NOTES.
33
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Statement of Operations
Year Ended June 30, 1995
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends $ 118,410
Interest 39,734
----------
Total investment income 158,144
EXPENSES (NOTE 2)
Investment advisory and management fees 86,434
Custody and accounting fees 29,920
Professional fees 14,202
Directors' fees and expenses 4,950
Other expenses 5,035
----------
Total expenses 140,541
----------
Net investment income 17,603
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 1)
Net realized gain on investments 311,876
Change in unrealized appreciation on investment securities 3,972,691
----------
Net realized and unrealized gain on investments 4,284,567
----------
Net increase in net assets resulting from operations $4,302,170
==========
</TABLE>
SEE ACCOMPANYING NOTES.
34
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1995 1994
-----------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income (loss) $ 17,603 $ (15,087)
Net realized gain (loss) on investments 311,876 (144,782)
Net unrealized appreciation (depreciation) 3,972,691 (261,470)
---------------------------
Net increase (decrease) in net assets resulting from
operations 4,302,170 (421,339)
Capital share transactions:
Proceeds from sales of shares 5,228,036 8,728,014
Cost of shares redeemed (3,829,957) (2,757,013)
---------------------------
Net increase in net assets resulting from share
transactions 1,398,079 5,971,001
---------------------------
Total increase in net assets 5,700,249 5,549,662
NET ASSETS
Beginning of year 10,693,027 5,143,365
---------------------------
End of year (including undistributed net investment income of
$17,603 in 1995) $16,393,276 $10,693,027
===========================
OTHER INFORMATION
Shares:
Sold 485,092 887,285
Redeemed (352,447) (274,544)
---------------------------
Net increase 132,645 612,741
===========================
</TABLE>
SEE ACCOMPANYING NOTES.
35
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Financial Highlights
<TABLE>
<CAPTION>
DECEMBER 8,
1992
(COMMENCEMENT OF
YEAR ENDED YEAR ENDED OPERATIONS)
JUNE 30, JUNE 30, THROUGH JUNE 30,
1995 1994 1993(B)
-------------------------------------------------------------
<S> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 9.36 $ 9.71 $ 10.00
Income from investment operations:
Net investment income (loss) 0.01 (0.02)(C) -
Net realized and unrealized gain (loss)
on investments 3.48 (0.33) (0.29)
-------------------------------------------------------------
Total from investment operations 3.49 (0.35) (0.29)
-------------------------------------------------------------
Net asset value, end of period $ 12.85 $ 9.36 $ 9.71
=============================================================
TOTAL RETURN(A) 37.29% (3.60%) (5.16%)
RATIOS AND SUPPLEMENTAL DATA
Net Assets, end of period $16,393,276 $ 10,693,027 $ 5,143,365
Ratio of expenses to average net
assets(D) 1.05% 1.29% 1.34%
Ratio of net investment income (loss)
to average net assets(D) 0.13% (0.17%) (0.06%)
Portfolio turnover rate 31% 38% 6%
</TABLE>
(A) Total returns 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)
36
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Schedule of Investments
June 30, 1995
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------------------------
<S> <C> <C>
COMMON STOCKS (99.6%)
APPAREL AND ACCESSORY STORES (2.2%)
Gap, Inc. 9,800 $ 341,775
BUILDING MATERIAL AND GARDEN SUPPLIES (2.1%)
Home Depot, Inc. 8,133 330,403
BUSINESS SERVICES (25.8%)
Adobe Systems, Inc. 6,400 372,800
Autodesk, Inc. 9,600 410,400
Automatic Data Processing 5,200 326,950
Cabletron Systems* 7,000 372,750
Cisco Systems, Inc.* 8,300 419,669
Electronic Arts, Inc.* 13,000 353,438
Equifax 9,800 327,075
First Financial Management Corporation 4,900 418,950
Microsoft Corporation* 4,700 425,056
Silicon Graphics, Inc.* 10,200 406,725
Sybase, Inc.* 11,100 322,594
----------
4,156,407
CHEMICALS AND ALLIED PRODUCTS (10.8%)
Amgen, Inc.* 4,700 377,763
Genzyme Corporation* 8,400 337,050
Great Lakes Chemical Corporation 5,800 349,450
Merck & Company, Inc. 7,300 357,700
Morton International, Inc. 10,800 315,900
----------
1,737,863
COMMUNICATIONS (2.4%)
Capital Cities/ABC, Inc. 3,550 383,400
DEPOSITORY INSTITUTIONS (4.5%)
Bankamerica Corporation 7,100 373,638
Nationsbank Corporation 6,500 348,563
----------
722,201
EATING AND DRINKING PLACES (2.0%)
Brinker International, Inc.* 19,000 327,750
</TABLE>
37
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ELECTRONIC AND OTHER ELECTRICAL EQUIPMENT (9.6%)
American Power Conversion* 16,950 $ 388,791
Intel Corporation 6,200 392,534
Motorola, Inc. 5,900 396,038
Sensormatic Electronics Corporation 10,500 372,750
-----------
1,550,113
FURNITURE AND HOME FURNISHINGS STORES (2.4%)
Circuit City Stores, Inc. 12,000 379,500
GENERAL MERCHANDISE STORES (2.0%)
Albertson's, Inc. 10,600 315,350
HOLDING COMPANIES AND OTHER INVESTMENT OFFICES (2.3%)
Norwest Corporation 12,800 368,000
INDUSTRIAL MACHINERY AND COMPUTER EQUIPMENT (9.7%)
Apple Computer 7,300 339,450
Applied Materials, Inc.* 4,950 428,175
Hewlett-Packard Company 6,200 461,900
Tyco International Limited 6,250 337,500
-----------
1,567,025
INSURANCE CARRIERS (4.5%)
American International Group 3,200 364,800
United Healthcare Corporation 8,800 364,100
-----------
728,900
MISCELLANEOUS RETAIL (4.1%)
Office Depot, Inc.* 13,500 379,688
Toys R Us, Inc.* 9,600 280,800
-----------
660,488
MOTION PICTURES (2.1%)
Walt Disney Company 6,200 344,875
NONDEPOSITORY INSTITUTION (2.2%)
Dean Witter Discover & Company 7,600 357,200
</TABLE>
38
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES
OR PRINCIPAL
AMOUNT VALUE
---------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
NONDURABLE GOODS, WHOLESALE (2.4%)
Staples, Inc.* 13,500 $ 390,656
PRINTING AND PUBLISHING (4.2%)
Gannett Company 6,300 341,775
Tribune Company 5,500 337,563
-----------
679,338
SECURITY AND COMMODITY BROKERS (2.3%)
Charles Schwab Corporation 8,350 362,181
TRANSPORTATION EQUIPMENT (2.0%)
General Electric Company 5,700 321,338
-----------
TOTAL COMMON STOCKS (Cost $12,354,072) 16,024,763
SHORT-TERM SECURITIES (0.4%)
TIME DEPOSITS (0.4%)
State Street Bank, 4.90%, due 7/3/95 $ 69,670 69,670
-----------
TOTAL SHORT-TERM SECURITIES (Cost $69,670) 69,670
-----------
TOTAL INVESTMENTS (100.0%) (Cost $12,423,742) $16,094,433
===========
</TABLE>
* Non-income producing
39
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Schedule of Investments (continued)
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the
year ended June 30, 1995, aggregated $5,726,616 and $3,896,340, respectively.
Net unrealized appreciation for tax purposes aggregated $3,670,691, of which
$3,851,706 related to appreciated investment securities and $181,015 related
to depreciated investment securities. The aggregate cost of securities is the
same for book and tax purposes.
SEE ACCOMPANYING NOTES.
40
<PAGE>
Dreman Value Portfolio
Statement of Assets and Liabilities
June 30, 1995
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value (cost $9,456,354)
(NOTE 1)-See accompanying schedule $ 10,857,283
Cash 16,062
Dividends, interest and other receivables 21,503
-------------
TOTAL ASSETS 10,894,848
LIABILITIES
Accounts payable and accrued expenses 17,938
-------------
TOTAL LIABILITIES 17,938
-------------
NET ASSETS $ 10,876,910
=============
Net Assets consist of:
Paid-in capital $ 9,174,881
Undistributed net investment income 190,236
Undistributed net realized gain on investments 110,864
Net unrealized appreciation on investment securities 1,400,929
-------------
NET ASSETS, for 863,732 shares outstanding $ 10,876,910
=============
NET ASSET VALUE, offering and redemption price per share $ 12.59
=============
</TABLE>
SEE ACCOMPANYING NOTES.
41
<PAGE>
Dreman Value Portfolio
Statement of Operations
Year Ended June 30, 1995
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends $ 288,949
Interest 10,105
----------
Total investment income 299,054
EXPENSES (NOTE 2)
Investment advisory and management fees 62,310
Custody and accounting fees 21,569
Professional fees 14,202
Directors' fees and expenses 4,950
Other expenses 5,505
----------
Total expenses 108,536
----------
Net investment income 190,518
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 1)
Net realized gain on investments 110,922
Change in unrealized appreciation on investment securities 1,497,538
----------
Net realized and unrealized gain on investments 1,608,460
----------
Net increase in net assets resulting from operations $1,798,978
==========
</TABLE>
SEE ACCOMPANYING NOTES.
42
<PAGE>
Dreman Value Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1995 1994
-----------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 190,518 $ 123,355
Net realized gain on investments 110,922 62,521
Net unrealized appreciation (depreciation) 1,497,538 (121,663)
----------------------------
Net increase in net assets resulting from operations 1,798,978 64,213
Distributions to shareholders from:
Net investment income (115,316) (45,000)
Net realized gain (33,184) -
----------------------------
Total distributions to shareholders (148,500) (45,000)
Capital share transactions:
Proceeds from sales of shares 2,443,372 8,184,724
Proceeds from reinvested distributions 148,500 45,000
Cost of shares redeemed (2,317,614) (967,983)
----------------------------
Net increase in net assets resulting from share
transactions 274,258 7,261,741
----------------------------
Total increase in net assets 1,924,736 7,280,954
NET ASSETS
Beginning of year 8,952,174 1,671,220
----------------------------
End of year (including undistributed net investment income
$190,236 and $87,937, respectively) $10,876,910 $8,952,174
============================
OTHER INFORMATION
Shares:
Sold 218,818 764,808
Issued through reinvestment of distributions 13,171 4,223
Redeemed (208,122) (89,144)
----------------------------
Net increase 23,867 679,887
============================
</TABLE>
SEE ACCOMPANYING NOTES.
43
<PAGE>
Dreman Value Portfolio
Financial Highlights
<TABLE>
<CAPTION>
DECEMBER 14,
1992
(COMMENCEMENT OF
YEAR ENDED YEAR ENDED OPERATIONS)
JUNE 30, JUNE 30, THROUGH JUNE 30,
1995 1994 1993(B)
-------------------------------------------------------------
<S> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 10.66 $ 10.45 $ 10.00
Income from investment operations:
Net investment income 0.26 0.12 0.11
Net realized and unrealized gain on
investments 1.85 0.17 0.34
-------------------------------------------------------------
Total from investment operations 2.11 0.29 0.45
Less distributions:
From net investment income (.14) (0.08) -
From net realized gain (.04) - -
-------------------------------------------------------------
Total distributions (0.18) (0.08) -
-------------------------------------------------------------
Net asset value, end of period $ 12.59 $ 10.66 $ 10.45
=============================================================
TOTAL RETURN(A) 19.98% 2.80% 8.25%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $10,876,910 $ 8,952,174 $ 1,671,220
Ratio of expenses to average net
assets(C) 1.13% 1.40% 1.24%
Ratio of net investment income to
average net assets(C) 1.98% 1.98% 2.00%
Portfolio turnover rate 29% 9% 5%
</TABLE>
(A) Total returns 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 1.61% and 1.76%, respectively,
for the year ended June 30, 1994 and were 8.43% and (1.49%), respectively,
for the period December 14, 1992 (commencement of operations) through June
30, 1993. (NOTE 2)
44
<PAGE>
Dreman Value Portfolio
Schedule of Investments
June 30, 1995
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
----------------------------------
<S> <C> <C>
COMMON STOCKS (99.4%)
APPAREL AND ACCESSORY STORES (0.8%)
Burlington Coat Factory Warehouse* 8,500 $ 88,184
APPAREL AND OTHER TEXTILE PRODUCTS (3.8%)
Liz Claiborne, Inc. 11,400 242,250
VF Corporation 3,100 166,625
----------
408,875
CHEMICALS AND ALLIED PRODUCTS (10.4%)
Bristol-Myers Squibb Company 2,200 149,875
Eli Lilly & Company 3,800 298,300
Glaxo Holdings PLC 5,200 126,750
Marion Merrell Dow, Inc. 5,300 135,150
Merck & Company Inc. 4,100 200,900
Upjohn Company 5,700 215,888
----------
1,126,863
DEPOSITORY INSTITUTIONS (19.9%)
Ahmanson (H.F.) & Company 10,000 220,000
Bankamerica Corporation 4,000 210,500
Barnett Banks, Inc. 4,800 246,000
First Chicago Corporation 4,600 275,425
First Union Corporation 3,800 171,950
Fleet Financial Group, Inc. 1,700 63,113
Great Western Financial 11,000 226,875
J.P. Morgan & Company 1,500 105,188
Midatlantic Corporation, Inc. 4,200 167,475
Nationsbank Corporation 2,500 134,063
PNC Bank Corporation 6,800 179,350
Wells Fargo & Company 900 162,225
----------
2,162,164
ELECTRIC, GAS AND SANITARY SERVICE (5.3%)
Columbia Gas System* 18,100 574,675
FOOD AND KINDRED PRODUCTS (2.3%)
Nestle SA 4,700 244,988
</TABLE>
45
<PAGE>
Dreman Value Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
FOOD STORES (1.6%)
Giant Food, Inc. 6,000 $ 170,250
GENERAL MERCHANDISE STORES (4.9%)
Dayton-Hudson Corporation 5,000 358,750
TJX Companies, Inc. 13,300 176,225
----------
534,975
HEALTH SERVICES (1.3%)
Tenet Health Care* 9,500 136,563
HOLDING COMPANIES AND OTHER INVESTMENT OFFICES (3.1%)
Bankers Trust New York Corporation 5,300 328,600
U.S. Industries, Inc.* 450 6,131
----------
334,731
INDUSTRIAL MACHINERY AND COMPUTER EQUIPMENT (6.2%)
Apple Computer 5,300 246,450
Compaq Computer Corporation* 4,200 190,575
Hewlett-Packard Company 3,200 238,400
----------
675,425
INSTRUMENTS AND RELATED PRODUCTS (3.3%)
Baxter International, Inc. 3,000 109,125
Becton Dickinson & Company 2,500 145,625
US Surgical Corporation 5,000 104,375
----------
359,125
INSURANCE CARRIERS (6.2%)
American General Corporation 6,800 229,500
American International Group 1,500 171,000
Kemper Corporation 4,000 186,500
Ohio Casualty Corporation 3,000 95,250
----------
682,250
</TABLE>
46
<PAGE>
Dreman Value Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES
OR PRINCIPAL
AMOUNT VALUE
--------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
LUMBER AND WOOD PRODUCTS (2.5%)
Louisiana-Pacific Corporation 10,200 $ 267,750
NONDEPOSITORY INSTITUTION (10.3%)
Federal National Mortgage Association 5,400 509,625
Federal Home Loan Mortgage Corporation 8,200 563,750
Travelers, Inc. 1,200 52,500
-----------
1,125,875
STONE, CLAY, GLASS, AND CONCRETE PRODUCTS (1.5%)
Hanson PLC 9,000 158,625
TEXTILE MILL PRODUCTS (1.5%)
Fruit of the Loom, Inc.* 7,500 158,438
TOBACCO PRODUCTS (4.9%)
Philip Morris Company, Inc. 7,200 535,500
TRANSPORTATION EQUIPMENT (9.6%)
Boeing Company 700 43,838
Ford Motor Company 19,900 592,025
General Electric Company 7,200 405,900
-----------
1,041,763
-----------
TOTAL COMMON STOCKS (Cost $9,386,090) 10,787,019
SHORT-TERM SECURITIES (0.6%)
TIME DEPOSITS (0.6%)
State Street Bank, 4.90%, due 7/3/95 $ 70,264 70,264
-----------
TOTAL SHORT-TERM SECURITIES (Cost $70,264) 70,264
-----------
TOTAL INVESTMENTS (100.0%) (Cost $9,456,354) $10,857,283
===========
</TABLE>
* Non-income producing
47
<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, 1995, aggregated $2,963,897 and $2,710,082, respectively.
Net unrealized appreciation for tax purposes aggregated $1,400,929, of which
$1,672,314 related to appreciated investment securities and $271,385 related
to depreciated investment securities. The aggregate cost of securities is the
same for book and tax purposes.
SEE ACCOMPANYING NOTES.
48
<PAGE>
Zweig Equity (Small Cap) Portfolio
Statement of Assets and Liabilities
June 30, 1995
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value (cost $6,888,020)
(NOTE 1)-See accompanying schedule $ 8,022,663
Cash 14,483
Dividends, interest and other receivables 14,935
------------
TOTAL ASSETS 8,052,081
LIABILITIES
Accounts payable and accrued expenses 18,289
------------
TOTAL LIABILITIES 18,289
------------
NET ASSETS $ 8,033,792
============
Net Assets consist of:
Paid-in capital $ 7,256,655
Undistributed net investment income 119,325
Undistributed net realized loss on investment securities, and futures and
options contracts (461,002)
Net unrealized appreciation on investment securities and futures
contracts 1,118,814
------------
NET ASSETS, for 691,384 shares outstanding $ 8,033,792
============
NET ASSET VALUE, offering and redemption price per share $ 11.62
============
</TABLE>
SEE ACCOMPANYING NOTES.
49
<PAGE>
Zweig Equity (Small Cap) Portfolio
Statement of Operations
Year Ended June 30, 1995
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends $ 105,415
Interest 134,610
-------------
Total investment income 240,025
EXPENSES (NOTE 2)
Investment advisory and management fees 81,405
Custody and accounting fees 17,444
Professional fees 14,202
Directors' fees and expenses 4,950
Other expenses 5,373
-------------
Total expenses before reimbursement 123,374
Less: expense reimbursement (Note 2) (2,773)
-------------
Net expenses 120,601
-------------
Net investment income 119,424
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 1)
Net realized loss on:
Investment securities (101,145)
Futures and options contracts (288,630)
-------------
Net realized loss (389,775)
Change in unrealized appreciation (depreciation) on:
Investment securities 1,130,943
Futures contracts (87,154)
-------------
Change in unrealized appreciation (depreciation) 1,043,789
-------------
Net realized and unrealized gain on investments 654,014
-------------
Net increase in net assets resulting from operations $ 773,438
=============
</TABLE>
SEE ACCOMPANYING NOTES.
50
<PAGE>
Zweig Equity (Small Cap) Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1995 1994
-----------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 119,424 $ 94,020
Net realized loss on investments (389,775) (33,622)
Net unrealized appreciation 1,043,789 75,374
----------------------------
Net increase in net assets resulting from operations 773,438 135,772
Distributions to shareholders from:
Net investment income (40,100) (55,000)
Net realized gains (50,400) -
----------------------------
Total distributions to shareholders (90,500) (55,000)
Capital share transactions:
Proceeds from sales of shares 1,913,641 6,145,556
Proceeds from reinvested distributions 90,500 55,000
Cost of shares redeemed (2,244,234) (806,015)
----------------------------
Net increase (decrease) in net assets resulting from
share transactions (240,093) 5,394,541
----------------------------
Total increase in net assets 442,845 5,475,313
NET ASSETS
Beginning of year 7,590,947 2,115,634
----------------------------
End of year (including undistributed net investment income of
$119,325 and $44,194, respectively) $ 8,033,792 $ 7,590,947
============================
OTHER INFORMATION
Shares:
Sold 178,821 572,867
Issued through reinvestment of distributions 8,378 5,123
Redeemed (208,320) (74,812)
----------------------------
Net increase (decrease) (21,121) 503,178
============================
</TABLE>
SEE ACCOMPANYING NOTES.
51
<PAGE>
Zweig Equity (Small Cap) Portfolio
Financial Highlights
<TABLE>
<CAPTION>
DECEMBER 14,
1992
(COMMENCEMENT
YEAR ENDED YEAR ENDED OF OPERATIONS)
JUNE 30, JUNE 30, THROUGH JUNE 30,
1995 1994 1993(B)
---------------------------------------------------------------
<S> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 10.65 $ 10.11 $ 10.00
Income from investment operations:
Net investment income 0.17 0.15 0.05
Net realized and unrealized gain on
investments 0.93 0.50 0.06
---------------------------------------------------------------
Total from investment operations 1.10 0.65 0.11
Less distributions:
From net investment income (0.06) (0.11) -
From net realized gain (0.07) - -
---------------------------------------------------------------
Total distributions (0.13) (0.11) -
---------------------------------------------------------------
Net asset value, end of period $ 11.62 $ 10.65 $ 10.11
===============================================================
TOTAL RETURN(A) 10.39% 6.53% 2.02%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 8,033,792 $ 7,590,947 $ 2,115,634
Ratio of expenses to average net assets 1.55% 1.72% 1.61%
Ratio of net investment income to
average net assets 1.54% 1.75% 0.84%
Ratio of expenses to average net assets
before voluntary expense
reimbursement (NOTE 2) 1.59% 2.14% 7.29%
Ratio of net investment income (loss)
to average net assets before
voluntary expense reimbursement
(NOTE 2) 1.50% 1.32% (1.80%)
Portfolio turnover rate 67% 249% 15%
</TABLE>
(A) Total returns are not annualized.
(B) Data expressed as a percentage are annualized as appropriate.
52
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments
June 30, 1995
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------------------------------
<S> <C> <C>
COMMON STOCKS (87.2%)
AMUSEMENT AND RECREATION SERVICES (0.4%)
Grand Casinos, Inc.* 200 $ 7,075
Players International* 1,350 27,169
--------
34,244
APPAREL AND ACCESSORY STORES (0.1%)
Weyco Group, Inc. 200 7,200
APPAREL AND OTHER TEXTILE PRODUCTS (0.3%)
Hartmarx Corporation* 1,000 5,000
Quiksilver, Inc.* 600 15,750
--------
20,750
BUSINESS SERVICES (4.1%)
ADT, Limited* 1,400 16,450
American List Corporation 660 19,470
Amplicon, Inc. 500 8,000
CDI Corporation* 200 4,100
Comdisco, Inc. 300 9,113
Computer Language Research 2,000 19,500
Computer Task Group, Inc. 200 2,800
Computervision Corporation 1,300 8,613
Electro Rent Corporation* 1,200 27,300
Heritage Media Corporation* 100 2,888
Innerdyne* 1,900 5,344
McGrath Rentcorp 1,000 17,125
Norstan, Inc.* 1,000 23,750
Orbotech Limited 700 8,619
Phoenix Technologies* 2,500 26,875
Pitson Services Group 500 12,000
Proteon, Inc.* 1,200 7,125
Regis Corporation* 400 7,550
Sterling Software, Inc.* 200 7,700
Sun Microsystems, Inc.* 900 43,706
</TABLE>
53
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
BUSINESS SERVICES (4.1%) (CONTINUED)
Triad Systems Corporation* 2,800 $ 20,125
Union Corporation* 300 4,763
Volt Info Sciences, Inc.* 300 9,000
Xtra Corporation 300 13,875
---------
325,791
CHEMICALS AND ALLIED PRODUCTS (3.3%)
Akzo Nobel NV 300 17,925
Cabot Corporation 200 10,550
Cambrex Corporation 200 6,750
Cytec Industries, Inc.* 200 8,175
Electrochemical Industries* 400 1,550
First Mississippi Corporation 800 27,300
Geon Company 300 8,625
Georgia Gulf Corporation 300 9,788
IMC Global, Inc. 200 10,825
Lilly Industries, Inc. 600 7,200
MacDermid, Inc. 300 13,650
Methanex Corporation* 700 5,863
Monsanto Company 100 9,013
Norsk Hydro 1,000 41,750
Nova Corporation 3,400 28,900
Olin Corporation 200 10,300
Rexene Corporation* 700 8,663
Sterling Chemicals, Inc. 800 9,300
Union Carbide Corporation 800 26,700
Virgoro Corporation 100 4,150
---------
266,977
COMMUNICATIONS (0.6%)
Komag, Inc.* 300 15,638
Telefonica de Espana 400 15,500
US Long Distance Corporation* 200 3,238
Vtel Corporation* 800 10,600
---------
44,976
</TABLE>
54
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
----------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
DEPOSITORY INSTITUTIONS (12.0%)
Bank of Boston Corporation 1,100 $ 41,181
Bank of New York Company, Inc. 900 36,338
Bankamerica Corporation 600 31,575
Barclays PLC 400 17,400
Barnett Banks, Inc. 700 35,875
Baybanks, Inc. 200 15,875
Boatmen's Bancshares, Inc. 900 31,669
Centura Banks, Inc. 300 8,363
Charter One Financial, Inc. 300 7,369
Chase Manhattan Corporation 600 28,200
Chemical Banking Corporation 900 42,525
City National Corporation 900 10,238
Comerica, Inc. 1,200 38,550
Commerce Bancshares, Inc. 600 18,750
Crestar Financial Corporation 300 14,700
Cullen/Frost Bankers, Inc. 100 4,063
CVB Financial Corporation 121 1,543
Deposit Guaranty Corporation 300 11,625
Dime Bancorp, Inc.* 500 5,000
Eagle Financial Corporation 210 4,568
First American Corporation-Tennessee* 200 7,188
First Bank System, Inc. 400 16,400
First Chicago Corporation 600 35,925
First Empire State Corporation 100 17,150
First Fidelity Bancorp 300 17,700
First Interstate Bancorp 400 32,100
First Tennessee National Corporation 100 4,631
First Union Corporation 300 13,575
Firstier Financial, Inc. 150 5,569
Fleet Financial Group, Inc. 500 18,563
Hibernia Corporation 1,200 10,650
Hubco, Inc. 450 8,016
Liberty Bankcorp., Inc. -Oklahoma 300 9,750
Magna Group, Inc. 500 11,063
Mercantile Bancorp 300 13,463
Michigan National Corporation 115 12,219
Mid-America Bancorp 212 3,578
</TABLE>
55
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
DEPOSITORY INSTITUTIONS (12.0%) (CONTINUED)
Midatlantic Corporation, Inc. 600 $ 23,925
National City Corporation 500 14,688
Nationsbank Corporation 400 21,450
National Westminster Bank 700 36,575
NBD Bancorp, Inc. 1,100 35,200
North Fork Bancorporation 746 13,521
Premier Bancorp* 300 5,400
Republic New York Corporation 700 39,200
Riggs National Corporation Washington, D.C.* 1,100 10,863
Southern National Corporation 300 7,200
Standard Federal Bancorp 400 13,450
Star Banc Corporation 200 9,200
TCF Financial Corporation 300 14,250
UJB Financial Corporation 600 18,225
Wells Fargo & Company 100 18,025
Westamerica Bancorporation 100 3,725
Westcorp 435 6,797
Westpac Banking 1,200 22,050
Zions Bancorporation 100 4,975
---------
961,666
DURABLE GOODS, WHOLESALE (1.6%)
Barnes Group, Inc. 100 4,025
Bearings, Inc.-Ohio 200 6,125
Bell Industries, Inc.* 553 11,820
Castle (A.M.) & Company 500 9,063
Commercial Metals Company 33 891
Envirosource, Inc.* 1,900 8,550
Hughes Supply, Inc. 400 8,800
Noland Company 400 8,150
Owens & Minor, Inc. Holding Company 500 6,250
Pioneer Standard Electronics 1,050 25,988
Rexel, Inc.* 1,500 14,250
Shelter Components Corporation 1,250 14,688
Software Spectrum, Inc.* 300 6,225
---------
124,825
</TABLE>
56
<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 SERVICE (4.7%)
AEP Industries, Inc. 900 $ 19,238
American Electric Power 400 14,050
Baltimore Gas & Electric 700 17,500
Boston Edison Company 200 5,225
Centerior Energy Corporation 900 8,663
Central Maine Power Company 700 8,313
CMS Energy Corporation 400 9,850
Coastal Corporation 1,000 30,375
Columbia Gas System* 200 6,350
DQE, Inc. 100 2,350
Illinova Corporation 300 7,613
Laidlaw, Inc. 1,500 14,438
New England Electric System 200 6,900
Niagra Mohawk Power Corporation 600 8,850
Northeast Utilities 700 15,750
Northern States Power 300 13,838
Northwest Natural Gas Company 101 3,137
Pacific Enterprises 1 25
Pacific Gas & Electric 900 26,100
Pacificorp 800 15,000
Pinnacle West Corporation 300 7,350
Portland General Corporation 200 4,425
Public Service Company of New Mexico* 600 8,550
Republic Waste Industries* 400 5,200
Rochester Gas & Electric 400 8,500
Scecorp 1,500 25,688
Sierra Pacific Resources 500 10,875
Southern Union Company* 100 1,813
St. Joseph Light & Power 300 8,475
Unicom Corporation 900 23,963
Upper Peninsula Energy Corporation 300 4,950
Westcoast Energy, Inc. 800 11,800
Western Waste Industries* 800 16,100
Williams Companies, Inc. 206 7,184
----------
378,438
</TABLE>
57
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ELECTRONIC AND OTHER ELECTRICAL EQUIPMENT (8.5%)
Acme Cleveland Corporation 600 $ 14,175
Advance Circuits, Inc.* 300 5,363
Advanced Micro Devices* 1,200 43,650
Altron, Inc.* 1,500 36,188
Applied Power, Inc. 200 5,775
Boston Acoustics, Inc. 400 7,550
Burr-Brown Corporation* 450 12,150
Charter Power Systems 600 14,400
Computer Products, Inc.* 2,400 14,850
CTS Corporation 100 3,050
Cypress Semiconductor Corporation* 300 12,150
Dynamics Corporation of America 100 2,288
Electro Scientific Industries, Inc.* 300 10,013
Electrolux AB 200 9,100
Electromagnetic Sciences, Inc.* 700 10,675
Franklin Electronic Publishers, Inc.* 200 5,125
Genlyte Group, Inc.* 1,300 7,638
Hadco Corporation* 700 17,325
Harmon International 300 12,150
Helen of Troy Limited* 500 10,313
Integrated Device Technology, Inc.* 400 18,475
Intel Corporation 600 37,988
International Jensen, Inc.* 700 4,988
International Rectifier Corporation* 700 22,750
Lamson & Sessions Company* 400 2,300
LSI Logic Corporation* 1,200 46,950
Maytag Corporation 900 14,400
Microcom, Inc.* 700 10,588
Micron Technology, Inc. 700 38,413
National Semiconductor Corporation* 800 22,200
Opti, Inc.* 500 11,438
Park Electrochemical Corporation 300 15,188
Philips Electronics 1,000 42,750
Recoton Corporation* 199 3,806
Rogers Corporation* 300 16,613
Siliconix, Inc.* 1,500 28,500
Standard Microsystems Corporation* 700 10,719
Standard Motor Products 400 8,100
</TABLE>
58
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
----------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ELECTRONIC AND OTHER ELECTRICAL EQUIPMENT (8.5%) (CONTINUED)
Technitrol, Inc. 500 $ 7,125
Texas Instruments, Inc. 300 40,163
Thomas Industries, Inc. 300 4,913
Windmere Corporation 1,100 9,075
Zitel Corporation* 700 7,831
--------
679,201
FABRICATED METAL (2.9%)
Alltrista Corporation* 700 13,563
Amcast Industrial Corporation 500 9,500
Armco, Inc.* 1,300 8,775
Ball Corporation 200 6,975
Blount, Inc. 400 17,850
BMC Industries, Inc. 600 15,075
Brenco, Inc. 700 8,444
Brush Wellman, Inc. 800 17,100
Central Sprinkler Corporation* 400 9,600
Cleveland-Cliffs, Inc. 200 7,700
Comico Limited 300 5,513
Continental Can, Inc.* 300 7,238
Douglas & Lomason Company 300 4,350
Elco Industries, Inc. 200 3,750
Griffon Corporation* 1,000 8,000
International Aluminum Company 100 3,175
Mueller Industries, Inc.* 200 9,850
Parker-Hannifin Corporation 300 10,875
Phelps Dodge 300 17,700
Pitt-Des Moines, Inc. 100 3,388
SPS Technologies, Inc.* 300 11,288
Synalloy Corporation 450 8,578
Timken Company 200 9,225
U.S. Can Corporation* 400 6,250
United Dominion Industries 100 2,250
Valmont Industries 300 6,356
--------
232,368
FOOD AND KINDRED PRODUCTS (2.2%)
American Maize-Products 300 10,163
Archer Daniels Midland 1,900 35,388
</TABLE>
59
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
FOOD AND KINDRED PRODUCTS (2.2%) (CONTINUED)
Chock Full O Nuts Corporation* 1,200 $ 8,250
Coca Cola Enterprises, Inc. 1,600 35,000
Goodmark Foods 1,300 20,475
Hudson Foods, Inc. 1,200 16,650
IBP, Inc. 400 17,400
International Multifoods Corporation 400 9,000
Morningstar Group, Inc.* 600 4,200
Orange Company, Inc.* 300 1,875
Seneca Foods Corporation* 200 7,150
Smithfield Foods, Inc.* 100 2,131
WLR Foods, Inc. 900 12,769
--------
180,451
FOOD STORES (0.9%)
Great Atlantic & Pacific Tea Company 300 7,913
Kroger Company* 600 16,125
Riser Foods, Inc.* 800 8,100
Safeway, Inc.* 1,000 37,375
Smith's Food and Drug Centers 300 5,925
--------
75,438
FURNITURE AND FIXTURES (0.6%)
Bush Industries 1,125 12,656
Chromcraft Revington, Inc.* 500 10,375
Falcon Products, Inc. 600 7,425
Kinetic Concepts 1,100 7,700
Lear Seating Corporation* 400 9,150
--------
47,306
GENERAL BUILDING CONTRACTORS (0.3%)
Del E. Webb Corporation 300 6,975
MDC Holdings, Inc. 1,800 11,250
US Home Corporation* 400 9,200
--------
27,425
GENERAL MERCHANDISE STORES (0.1%)
Waban, Inc.* 500 7,438
</TABLE>
60
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
HEALTH SERVICES (0.4%)
Maxicare Health Plans, Inc.* 500 $ 7,688
Ornda Healthcorp.* 400 6,875
Sun Healthcare Group, Inc.* 100 1,575
Universal Health Services* 500 14,500
--------
30,638
HEAVY CONSTRUCTION EXCEPT BUILDING CONSTRUCTION (0.1%)
Granite Construction, Inc. 500 11,188
HOLDING COMPANIES AND OTHER INVESTMENT OFFICES (1.6%)
Banponce Corporation 500 17,813
Citicorp 700 40,513
Comdata Holdings Corporation* 800 12,400
CV Reit, Inc. 400 3,600
CWM Mortgage Holdings, Inc. 800 10,200
HRE Properties 100 1,350
Mesa Royalty Trust 200 7,950
Norwest Corporation 600 17,250
Penn Virginia Corporation 200 5,675
Storage Equities, Inc. 500 8,188
--------
124,939
HOTELS AND OTHER LODGING PLACES (0.1%)
Club Med, Inc. 100 3,188
Prime Hospitality Corporation* 600 5,925
--------
9,113
INDUSTRIAL MACHINERY AND EQUIPMENT (8.5%)
AGCO Corporation 600 22,500
Amdahl Corporation 1,500 16,688
Ampco-Pittsburgh 400 3,650
Apertus Technologies, Inc.* 900 7,819
Apple Computer 700 32,550
</TABLE>
61
<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 (8.5%) (CONTINUED)
BHA Group, Inc. 600 $ 7,875
BJ Service Company 120 510
Black & Decker Corporation 300 9,263
Briggs & Stratton 400 13,800
Cascade Corporation 500 7,938
Case Corporation 100 2,975
Caterpillar, Inc. 200 12,850
Commercial Intertech Corporation 300 4,800
Compaq Computer Corporation* 400 18,150
Cummins Engine Company, Inc. 200 8,725
Deere and Company 200 17,125
Dell Computer Corporation* 100 6,019
Digital Equipment* 400 16,300
Dynatech Corporation* 400 7,600
Esterline Technologies Corporation* 1,000 22,625
Exabyte Corporation* 500 6,906
Fedders Corporation 2,750 15,194
Gardner Denver Machinery, Inc.* 500 8,750
Gleason Corporation 300 6,638
Graco, Inc. 300 8,063
Harris Corporation 100 5,163
Indresco* 1,000 15,500
International Business Machines Corporation 400 38,400
JLG Industries 1,000 26,125
Kulicke & Soffa Industries* 500 33,188
Kysor Industrial Corporation 400 8,300
Mestek, Inc.* 400 5,075
Nacco Industries 200 11,975
Nortek, Inc.* 500 4,313
Novellus Systems, Inc.* 200 13,550
Outboard Marine Corporation 900 17,663
Pacific Scientific Companies 100 1,788
Photronics, Inc.* 900 27,450
Printronix, Inc.* 500 13,875
Proxima Corporation* 300 7,200
Quantum Corporation* 400 9,200
</TABLE>
62
<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 (8.5%) (CONTINUED)
Regal Beloit 800 $ 12,400
Robbins & Meyers, Inc. 100 2,738
Seagate Technology, Inc.* 400 15,700
Sequent Computer, Inc.* 600 10,688
Smith International, Inc.* 1,100 18,425
Standex International Corporation 300 9,450
Tandem Computers, Inc.* 1,000 16,125
Tandy Corporation 300 15,563
Tecumseh Products Company 400 17,500
Toro Company 500 14,000
Twin Disc, Inc. 100 2,500
Western Digital Corporation* 1,000 17,375
Wynn's International, Inc. 350 8,138
---------
684,680
INSTRUMENTS AND RELATED PRODUCTS (2.5%)
Allied Healthcare Products 600 9,488
Bio-Rad Laboratories* 300 10,800
Coherent, Inc.* 400 11,800
General Motors Corporation 500 19,750
Loral Corporation 500 25,875
LTX Corporation* 300 2,681
Medrad, Inc.* 500 8,438
Mentor Corporation/Minnesota 1,000 27,750
Newport Corporation 900 8,269
Optical Coating Laboratories 2,700 24,638
Sci Systems, Inc.* 300 7,481
Tech-Sym Corporation* 300 8,213
Tektronix, Inc. 400 19,700
Watkins-Johnson Company 300 13,350
---------
198,233
INSURANCE AGENTS, BROKERS AND SERVICE (0.2%)
Poe & Brown, Inc. 600 14,325
</TABLE>
63
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
INSURANCE CARRIERS (5.2%)
Aegon NV 750 $ 26,156
Aetna Life & Casualty Co. 400 25,150
Allstate Corporation 800 23,700
Ambac, Inc. 200 8,025
American National Insurance 100 6,063
American Re Corporation 200 7,450
Avemco Corporation 100 1,738
Cigna Corporation 500 38,813
CNA Financial Corporation 200 17,275
Equitable Companies, Inc. 700 14,613
Exel Limited 200 10,400
Guaranty National Corporation 400 7,400
Loews Corporation 200 24,200
MBIA, Inc. 200 13,300
Meridian Insurance Group, Inc. 700 9,144
NAC Re Corporation 100 3,113
National Re Corporation 300 10,050
Old Republic International Corporation 400 10,450
Partnerre Holdings 300 7,819
Pioneer Financial Services, Inc. 700 10,325
Protective Life Corporation 200 5,450
Pxre Corporation 300 7,069
Reliastar Financial Corporation 414 15,836
RLI Corporation 375 8,531
Selective Insurance Group 300 9,825
St. Paul Companies 700 34,475
Transatlantic Holdings, Inc. 100 6,500
United Companies Financial Corporation 165 7,404
USF&G Corporation 1,100 17,875
USLife Corporation 200 8,050
Washington National Corporation 500 10,313
Western National Corporation 600 7,425
---------
413,937
LEATHER AND LEATHER PRODUCTS (0.2%)
Vista Resources, Inc.* 700 14,175
</TABLE>
64
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
LUMBER AND WOOD PRODUCTS (1.0%)
Butler Manufacturing Company 100 $ 4,188
Champion Enterprises, Inc.* 400 6,350
Georgia-Pacific Corporation 300 26,025
Macmillian Bloedel Limited 600 8,438
Rayonier, Inc. 200 7,100
Willamette Industries 500 27,625
--------
79,726
METAL MINING (0.7%)
Asarco, Inc. 300 9,150
Cyprus Amax Minerals Companies 1,100 31,350
Magma Copper Company* 1,000 16,250
--------
56,750
MISCELLANEOUS MANUFACTURING INDUSTRIES (0.4%)
Cobra Golf, Inc.* 300 9,488
First Team Sports* 400 9,275
Fuji Photo Film 200 9,463
Stephan Company 400 6,850
--------
35,076
MISCELLANEOUS RETAIL (1.6%)
Big B, Inc. 1,000 14,000
Bon-Ton Stores* 800 8,400
Fabri-Centers of America* 400 8,300
Fay's, Inc. 500 3,813
Federated Department Stores* 900 23,175
Good Guys, Inc.* 1,200 13,275
Intertan, Inc.* 500 3,750
Oneida Limited 600 8,850
Pier 1 Imports, Inc. 900 8,325
Proffitt's, Inc.* 100 2,950
Sears Roebuck & Company 400 23,950
Trak Auto Corporation* 400 6,750
--------
125,538
</TABLE>
65
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
NONDEPOSITORY INSTITUTION (2.8%)
American Annuity Group, Inc. 200 $ 1,975
American Express Company 1,000 35,125
Astoria Financial Corporation* 200 7,175
Bay Ridge Bancorp, Inc.* 400 8,325
Dean Witter Discover & Company 400 18,800
Finova Group 200 7,000
Foothill Group, Inc. 1,000 25,500
Greenpoint Financial Corporation 300 7,088
Household International, Inc. 700 34,650
Midland Company 200 8,750
The Money Store, Inc. 500 17,938
Transamerica Corporation 500 29,125
Travelers, Inc. 400 17,500
White River Corporation* 200 6,800
--------
225,751
NONDURABLE GOODS, WHOLESALE (0.9%)
Bindley Western Industries 500 7,938
Hawkins Chemical, Inc. 346 2,336
International Recovery Corporation 450 6,638
Super Food Services, Inc. 1,000 11,875
Super Rite Corporation* 1,200 26,175
Terra Industries, Inc. 1,600 19,400
--------
74,362
NONMETALLIC MINING (0.1%)
Potash Corporation Sask, Inc. 200 11,175
OIL AND GAS EXTRACTION (1.0%)
Atwood Oceanics* 1,500 24,188
Chesapeake Energy Corporation* 700 18,025
Crystal Oil Company* 200 6,150
International Petroleum Corporation* 4,600 15,094
Petroleum Geo-Services* 400 11,500
Pride Petroleum Services, Inc.* 900 6,694
--------
81,651
</TABLE>
66
<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 (3.0%)
ACX Technologies, Inc.* 100 $ 4,138
American Israeli Paper Mills 200 10,600
American Filtrona Corporation 300 9,000
Boise Cascade Corporation 300 12,150
Bowater, Inc. 500 22,438
Champion International Corporation 800 41,700
Chesapeake Corporation 300 9,338
Domtar, Inc.* 700 6,650
Federal Paper Board Company 300 10,613
International Paper Company 300 25,725
James River Corporation of Virginia 300 8,288
Manville Corporation* 900 12,375
Mead Corporation 400 23,750
Mercer International, Inc.* 700 14,744
Mosinee Paper Corporation 100 2,200
Premark International, Inc. 300 15,563
Republic Gypsum Company 500 5,000
Westavco Corporation 100 4,425
--------
238,697
PETROLEUM AND COAL INDUSTRIES (0.9%)
Ashland Oil, Inc. 300 8,025
Diamond Shamrock, Inc. 400 10,300
Fina, Inc. 200 9,325
British Petroleum 400 34,250
USX Marathon Group 700 13,825
--------
75,725
PRIMARY METAL INDUSTRIES (2.0%)
AK Steel Holding Corporation* 100 2,725
Alcan Aluminum, Limited 600 18,150
Alumax, Inc.* 300 9,338
Aluminum Company of America 700 35,088
Carpenter Technology 300 20,438
LTV Corporation* 900 13,163
</TABLE>
67
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
PRIMARY METAL INDUSTRIES (2.0%) (CONTINUED)
National Steel Corporation* 600 $ 9,300
Quanex Corporation 100 2,475
Roanoke Electric Corporation 900 10,350
Steel of West Virginia, Inc.* 400 4,600
Texas Industries, Inc. 300 11,663
USX-U.S.Steel Company 400 13,750
WHX Corporation* 600 7,050
--------
158,090
PRINTING AND PUBLISHING (0.6%)
Devon Group, Inc.* 200 5,850
Graphic Industries 1,400 14,088
Media General, Inc. 300 9,150
Plenum Publishing Corporation 200 7,075
Reynolds & Reynolds 400 11,800
--------
47,963
RAILROAD TRANSPORTATION (0.6%)
Conrail, Inc. 500 27,813
CSX Corporation 200 15,025
Santa Fe Pacific Corporation 305 7,778
--------
50,616
REAL ESTATE (0.2%)
Centerpoint Properties Corporation 400 8,250
Patten Corporation* 2,192 7,124
--------
15,374
RUBBER AND MISCELLANEOUS PLASTICS PRODUCTS (1.1%)
ESSEF Corporation* 700 11,200
Furon Company* 900 19,800
Goodyear Tire & Rubber Co. 800 33,000
O'Sullivan Corporation 300 3,450
Tredegar Industries, Inc. 400 9,950
Tuscarora, Inc. 400 9,425
--------
86,825
</TABLE>
68
<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 (0.6%)
Alex Brown, Inc. 100 $ 4,150
Eaton Vance Corporation 600 19,575
Jefferies Group 200 7,375
Quick & Reilly Group, Inc. 315 11,419
Sherwood Group, Inc.* 400 3,300
--------
45,819
SPECIAL TRADE CONTRACTORS (0.1%)
Anthony Industries, Inc. 225 4,134
STONE, CLAY, GLASS AND CONCRETE PRODUCTS (1.0%)
A.P. Green Industries, Inc. 400 7,800
Donnelly Corporation 100 1,613
Florida Rock Industries 200 5,675
Lafarge Corporation 400 7,500
Medusa Corporation 700 17,413
National Gypsum* 400 20,950
Puerto Rican Cement Company, Inc. 400 12,200
Southdown, Inc.* 100 1,913
USG Corporation* 300 7,125
--------
82,189
TEXTILE MILL PRODUCTS (0.5%)
Crown Crafts, Inc. 300 4,950
Culp, Inc. 1,187 9,644
Fieldcrest Cannon* 600 12,975
Guilford Mills, Inc. 300 7,313
Springs Industries, Inc. 200 7,450
--------
42,332
TRANSPORTATION BY AIR (1.9%)
AMR Corporation* 500 37,313
British Airways 400 26,900
Delta Air Lines, Inc. 600 44,250
Federal Express Corporation* 500 30,375
KLM Royal Dutch Air* 400 13,050
--------
151,888
</TABLE>
69
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
----------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
TRANSPORTATION EQUIPMENT (3.7%)
A.O. Smith Corporation 100 $ 2,350
Chrysler Corporation 400 19,150
Coachmen Industries, Inc. 500 7,625
Dana Corporation 500 14,313
Durakon Industries, Inc.* 800 12,300
Ford Motor Company 1,200 35,700
Gencorp., Inc. 600 6,450
Magna International, Inc.* 100 4,413
McDonnell Douglas Corporation 500 38,310
Navistar International* 300 4,538
Northrop Grumman Corporation 200 10,425
Oshkosh Truck Corporation 1,200 14,850
Paccar, Inc. 200 9,350
RPC Energy Services, Inc.* 400 3,625
Simpson Industries 1,900 21,138
Teledyne, Inc. 300 7,350
Textron, Inc. 200 11,625
Thor Industries, Inc. 300 5,925
United Technologies Corporation 200 15,625
Varlen Corporation 385 8,951
Volvo AB Sweden 1,700 32,300
Winnebago Industries 1,600 14,000
--------
300,313
TRANSPORTATION SERVICES (0.2%)
Ryder System, Inc. 700 16,713
TRUCKING AND WAREHOUSING (0.5%)
Builders Transport, Inc.* 400 4,550
Gatx Corporation 300 14,138
Matlack Systems, Inc.* 600 6,000
TNT Freightways Corporation 600 12,000
--------
36,688
</TABLE>
70
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER OF
SHARES
OR PRINCIPAL
AMOUNT VALUE
---------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
WATER TRANSPORTATION (0.4%)
International Shipholding Corporation 300 $ 6,263
Oglebay Norton Company 500 16,938
Stolt-Nielsen S.A. 300 8,569
----------
31,770
----------
TOTAL COMMON STOCKS (Cost $5,856,388) 6,990,887
PREFERRED STOCKS (0.05%)
PRINTING AND PUBLISHING (0.05%)
News Corporation Limited 200 4,000
----------
TOTAL PREFERRED STOCKS (Cost $3,856) 4,000
SHORT-TERM SECURITIES (12.8%)
U.S. GOVERNMENT AGENCY (7.5%)
Federal National Mortgage Assoc. Discount Note, 5.88%, due 7/6/95 $ 600,000 599,510
U.S. GOVERNMENT OBLIGATIONS (1.8%)
U.S. Treasury Bills, 5.37%, due 9/12/95 50,000 49,389
U.S. Treasury Bills, 5.57%, due 7/20/95 100,000 99,706
----------
149,095
TIME DEPOSITS (3.5%)
State Street Bank, 4.90%, due 7/3/95 279,171 279,171
----------
TOTAL SHORT-TERM SECURITIES
(Cost $1,027,776) 1,027,776
----------
TOTAL INVESTMENTS (100.0%) (Cost $6,888,020) $8,022,663
==========
</TABLE>
71
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
FUTURES CONTRACTS
<TABLE>
<CAPTION>
CONTRACT
EXPIRATION AMOUNT UNREALIZED
DATE AT VALUE LOSS
--------------------------------------------------
<S> <C> <C> <C>
4 Mid-Cap S&P 500
Futures Contracts-Short + 9/15/95 $ 399,100 $ (8,458)
4 S&P 500
Futures Contracts-Short + 9/15/95 1,094,300 (7,371)
----------------------------------
$1,493,400 $ (15,829)
==================================
</TABLE>
+ The above futures contracts are collateralized by a U.S. Treasury Bill at
$50,000 par value, due 9/21/95 and a U.S. Treasury Bill at $100,000 par
value, due 7/20/95.
* Non-income producing
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the
year ended June 30, 1995, aggregated $4,742,902 and $3,510,411, respectively.
Net unrealized appreciation for tax purposes aggregated $1,134,347, of which
$1,225,951 related to appreciated investment securities and $91,605 related
to depreciated investment securities. The aggregate cost of securities for
tax purposes is $6,888,316.
SEE ACCOMPANYING NOTES.
72
<PAGE>
Mitchell Hutchins Fixed Income Portfolio
Statement of Assets and Liabilities
June 30, 1995
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value (cost $5,735,468)
(NOTE 1)-See accompanying schedule $ 5,847,480
Receivable for investment securities sold 235,634
Dividends, interest and other receivables 309,737
------------
TOTAL ASSETS 6,392,851
LIABILITIES
Payable for investment securities purchased 955,582
Cash overdraft 6,282
Accounts payable and accrued expenses 15,490
------------
TOTAL LIABILITIES 977,354
------------
NET ASSETS $ 5,415,497
============
Net Assets consist of:
Paid-in capital $ 5,176,771
Undistributed net investment income 268,795
Undistributed net realized loss on investments (142,081)
Net unrealized appreciation on investment securities 112,012
------------
NET ASSETS, for 497,544 shares outstanding $ 5,415,497
============
NET ASSET VALUE, offering and redemption price per share $ 10.88
============
</TABLE>
SEE ACCOMPANYING NOTES.
73
<PAGE>
Mitchell Hutchins Fixed Income Portfolio
Statement of Operations
Year Ended June 30, 1995
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest $ 342,900
EXPENSES (NOTE 2)
Investment advisory and management fees 45,180
Custody and accounting fees 11,295
Professional fees 14,202
Directors' fees and expenses 4,950
Other expenses 4,586
----------
Total expenses before reimbursement 80,213
Less: expense reimbursement (NOTE 2) (9,482)
----------
Net expenses 70,731
----------
Net investment income 272,169
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 1)
Net realized gain on investments 32,319
Change in unrealized appreciation on investment securities 253,467
----------
Net realized and unrealized gain on investments 285,786
----------
Net increase in net assets resulting from operations $ 557,955
==========
</TABLE>
SEE ACCOMPANYING NOTES.
74
<PAGE>
Mitchell Hutchins Fixed Income Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1995 1994
-----------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 272,169 $ 111,168
Net realized gain (loss) on investments 32,319 (172,426)
Net unrealized appreciation (depreciation) 253,467 (150,618)
----------------------------
Net increase (decrease) in net assets resulting from
operations 557,955 (211,876)
Distributions to shareholders from:
Net investment income (98,000) (29,000)
Capital share transactions:
Proceeds from sales of shares 2,673,991 4,925,555
Proceeds from reinvested dividends 98,000 29,000
Cost of shares redeemed (2,676,948) (759,016)
----------------------------
Net increase in net assets resulting from share
transactions 95,043 4,195,539
----------------------------
Total increase in net assets 554,998 3,954,663
NET ASSETS
Beginning of year 4,860,499 905,836
----------------------------
End of year (including undistributed net investment income of
$268,795 and $91,264, respectively) $ 5,415,497 $4,860,499
============================
OTHER INFORMATION
Shares:
Sold 263,300 470,254
Issued through reinvestment of dividends 9,744 2,756
Redeemed (261,523) (73,851)
----------------------------
Net increase 11,521 399,159
============================
</TABLE>
SEE ACCOMPANYING NOTES.
75
<PAGE>
Mitchell Hutchins Fixed Income Portfolio
Financial Highlights
<TABLE>
<CAPTION>
JANUARY 5, 1993
(COMMENCEMENT
YEAR ENDED YEAR ENDED OF OPERATIONS)
JUNE 30, JUNE 30, THROUGH JUNE 30,
1995 1994 1993(B)
--------------------------------------------------------------
<S> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 10.00 $ 10.43 $ 10.00
Income from investment operations:
Net investment income 0.56 0.20 0.19
Net realized and unrealized gain (loss)
on investments 0.53 (0.52) 0.24
--------------------------------------------------------------
Total from investment operations 1.09 (0.32) 0.43
Less distributions:
From net investment income (0.21) (0.11) -
--------------------------------------------------------------
Net asset value, end of period $ 10.88 $ 10.00 $ 10.43
==============================================================
TOTAL RETURN(A) 11.08% (3.06%) 8.67%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 5,415,497 $ 4,860,499 $ 905,836
Ratio of expenses to average net assets 1.40% 1.56% 1.56%
Ratio of net investment income to
average net assets 5.41% 3.62% 3.86%
Ratio of expenses to average net assets
before voluntary expense
reimbursement (NOTE 2) 1.59% 2.49% 15.72%
Ratio of net investment income (loss)
to average net assets before
voluntary expense reimbursement
(NOTE 2) 5.22% 2.68% (1.64%)
Portfolio turnover rate 432% 527% 103%
</TABLE>
(A) Total returns are not annualized.
(B) Data expressed as a percentage are annualized as appropriate.
76
<PAGE>
Mitchell Hutchins Fixed Income Portfolio
Schedule of Investments
June 30, 1995
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------------------------------
<S> <C> <C>
CORPORATE BONDS (23.8%)
COMMUNICATIONS (1.2%)
Consolidated Edison Company, 6.625%, due 7/1/2005 $ 70,000 $ 69,131
DEPOSITORY INSTITUTIONS (7.3%)
Bankamerica Corporation, 7.5%, due 10/15/2002 100,000 102,936
Citicorp, 8%, due 02/01/2003 35,000 37,212
Great Western Bank, 9.875%, due 6/15/2001 70,000 79,087
Mellon Financial Bank, 6.875%, due 03/01/2003 40,000 39,862
Midland Bank PLC, 7.65%, due 5/01/2025 40,000 42,281
National Westminster Bank, 9.375%, due 11/15/2003 110,000 126,339
----------
427,717
DURABLE GOODS, WHOLESALE (2.1%)
News America Corporation, 8.625%, due 2/1/2003 115,000 124,030
ELECTRIC, GAS AND SANITARY SERVICE (1.8%)
Citizen Utility Company, 7.6%, due 6/1/2006 100,000 106,126
ELECTRONIC AND OTHER ELECTRICAL EQUIPMENT (4.2%)
AT&T Corporation M-T-N, 6.3%, due 7/25/96 140,000 140,493
Phillips Electric Nv, 7.125%, due 5/15/2025 100,000 102,669
----------
243,162
NONDEPOSITORY INSTITUTION (4.7%)
American General Finance, 7.25%, due 4/15/2000 125,000 128,738
Ford Motor Credit, 8%, due 12/1/97 140,000 145,081
----------
273,819
SECURITY AND COMMODITY BROKERS (2.3%)
Chase Manhattan, 7.5%, due 12/01/97 100,000 102,075
Salomon CMO Series 93-C1 Class A1, 6.4%, due 1/18/2023 32,983 32,818
----------
134,893
TRANSPORTATION BY AIR (0.2%)
Southwest Air, 9.4%, due 7/1/2001 10,000 11,224
----------
TOTAL CORPORATE BONDS (Cost $1,350,631) 1,390,102
</TABLE>
77
<PAGE>
Mitchell Hutchins Fixed Income Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------------------------------
<S> <C> <C>
GOVERNMENT DEBT SECURITIES (67.5%)
U.S. GOVERNMENT AGENCY-COLLATERALIZED MORTGAGE OBLIGATIONS (5.4%)
Fed. Home Loan Mort. Corp., 7.83%, due 8/11/2004 $ 100,000 $ 102,227
Fed. Home Loan Mort. Corp., 8%, due 5/1/2014 78,412 79,999
Fed. Home Loan Mort. Corp., 8.585%, due 10/15/2006 50,000 54,938
Resolution Trust Corp. Series 95-C1, Class A-2B, 6.55%, due
2/25/2027 50,000 49,375
Resolution Trust Corp. Series 95-C1, Class A-4B, 6.65%, due
2/25/2027 30,000 29,644
----------
316,183
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (21.7%)
Federal National Mortgage Assoc., 5.85%, due 2/2/1998 120,000 119,612
Federal National Mortgage Assoc., 7%, due 6/10/2002* 120,000 117,900
Federal National Mortgage Assoc., 7.5%, due 7/25/2025* 230,000 230,575
Federal National Mortgage Assoc., 8%, due 11/1/2023* 193,000 196,558
Federal National Mortgage Assoc., 8.4%, due 2/25/2009 40,000 43,375
Federal National Mortgage Assoc., 8.5%, due 5/01/2009 168,019 174,109
Gover. National Mortgage Assoc., 8%, due 4/15/2022 315,001 322,482
Gover. National Mortgage Assoc., 8%, due 11/15/2006 25,432 26,188
Gover. National Mortgage Assoc., 8%, due 11/15/2006 35,646 36,748
----------
1,267,547
U.S. GOVERNMENT OBLIGATIONS (40.4%)
FDIC Series 94 Class, 7.85%, due 9/25/2025 51,000 52,482
U.S. Treasury Notes, 4.75%, due 8/31/1998 200,000 193,124
U.S. Treasury Notes, 5.625%, due 1/31/1998 10,000 9,933
U.S. Treasury Notes, 6.375%, due 8/15/2002 160,000 161,899
U.S. Treasury Notes, 6.5%, due 11/30/1996 140,000 141,291
U.S. Treasury Notes, 6.5%, due 5/15/2005 110,000 112,372
U.S. Treasury Notes, 6.75%, due 5/31/1999 455,000 466,944
U.S. Treasury Notes, 7.125%, due 2/15/2023 490,000 516,259
U.S. Treasury Notes, 7.25%, due 5/15/2004 100,000 106,766
U.S. Treasury Notes, 7.5%, due 2/15/2005 102,000 111,069
U.S. Treasury Notes, 7.5%, due 5/15/2002 225,000 242,226
</TABLE>
78
<PAGE>
Mitchell Hutchins Fixed Income Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------------------------------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (40.4%) (CONTINUED)
U.S. Treasury Notes, 7.625%, due 2/15/2025 $ 80,000 $ 90,350
U.S. Treasury Notes, 12%, due 8/15/2013 110,000 162,250
----------
2,366,965
----------
TOTAL GOVERNMENT DEBT SECURITIES
(Cost $3,878,154) 3,950,695
SHORT-TERM SECURITIES (8.7%)
U.S. GOVERNMENT OBLIGATIONS (6.8%)
U.S. Treasury Bills, 5.11%, due 7/20/95 400,000 398,957
TIME DEPOSITS (1.9%)
State Street Bank, 4.90%, due 7/31/95 107,726 107,726
----------
TOTAL SHORT-TERM SECURITIES
(Cost $506,683) 506,683
----------
TOTAL INVESTMENTS (100.0%) (Cost $5,735,468) $5,847,480
==========
</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, 1995, aggregated $21,083,997 and $19,820,738,
respectively. Net unrealized appreciation for tax purposes aggregated
$74,149, of which $84,228 related to appreciated investment securities and
$10,079 related to depreciated investment securities. The aggregate cost of
securities for tax purposes is $5,773,331.
SEE ACCOMPANYING NOTES.
79
<PAGE>
Mitchell Hutchins Money Market Portfolio
Statement of Assets and Liabilities
June 30, 1995
<TABLE>
<S> <C>
ASSETS
Investment in securities, at amortized cost
(NOTE 1)-See accompanying schedule $ 6,768,830
Dividends, interest and other receivables 6,639
------------
TOTAL ASSETS 6,775,469
LIABILITIES
Cash overdraft 7,100
Accounts payable and accrued expenses 15,274
------------
TOTAL LIABILITIES 22,374
------------
NET ASSETS, for 6,753,095 shares outstanding $ 6,753,095
============
NET ASSET VALUE, offering and redemption price per share $ 1.00
============
</TABLE>
SEE ACCOMPANYING NOTES.
80
<PAGE>
Mitchell Hutchins Money Market Portfolio
Statement of Operations
Year Ended June 30, 1995
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest $ 339,821
EXPENSES (NOTE 2)
Investment advisory and management fees 40,612
Custody and accounting fees 14,058
Professional fees 14,202
Directors' fees and expenses 4,946
Other expenses 5,001
----------
Total expenses before reimbursement 78,819
Less: expense reimbursement (NOTE 2) (6,639)
----------
Net expenses 72,180
----------
Net investment income 267,641
----------
Net increase in net assets resulting from operations $ 267,641
==========
</TABLE>
SEE ACCOMPANYING NOTES.
81
<PAGE>
Mitchell Hutchins Money Market Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1995 1994
-----------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 267,641 $ 74,688
Distributions to shareholders from:
Net investment income (267,641) (74,688)
Capital share transactions:
Proceeds from sales of shares 11,346,439 8,424,833
Proceeds from reinvested dividends 267,641 74,688
Cost of shares redeemed (10,313,402) (3,800,689)
----------------------------
Net increase in net assets resulting from share
transactions 1,300,678 4,698,832
----------------------------
Total increase in net assets 1,300,678 4,698,832
NET ASSETS
Beginning of year 5,452,417 753,585
----------------------------
End of year $ 6,753,095 $ 5,452,417
============================
OTHER INFORMATION
Shares:
Sold 11,346,439 8,424,833
Issued through reinvestment of dividends 267,641 74,688
Redeemed (10,313,402) (3,800,689)
----------------------------
Net increase 1,300,678 4,698,832
============================
</TABLE>
SEE ACCOMPANYING NOTES.
82
<PAGE>
Mitchell Hutchins Money Market Portfolio
Financial Highlights
<TABLE>
<CAPTION>
JANUARY 12, 1993
(COMMENCEMENT
YEAR ENDED YEAR ENDED OF OPERATIONS)
JUNE 30, JUNE 30, THROUGH JUNE 30,
1995 1994 1993(B)
-------------------------------------------------------------
<S> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00
Income from investment operations:
Net investment income 0.04 0.02 0.01
Less distributions:
From net investment income (0.04) (0.02) (0.01)
-------------------------------------------------------------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00
=============================================================
TOTAL RETURN(A) 4.30% 2.04% 1.66%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, end of period $ 6,753,095 $ 5,452,417 $ 753,585
Ratio of expenses to average net assets 1.15% 1.29% 1.34%
Ratio of net investment income to
average net assets 4.31% 2.19% 1.67%
Ratio of expenses to average net assets
before voluntary expense
reimbursement (NOTE 2) 1.27% 2.08% 22.41%
Ratio of net investment income (loss)
to average net assets before
voluntary expense reimbursement
(NOTE 2) 4.20% 1.40% (2.05%)
</TABLE>
(A) Total returns are not annualized.
(B) Data expressed as a percentage are annualized.
83
<PAGE>
Mitchell Hutchins Money Market Portfolio
Schedule of Investments
June 30, 1995
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------------------------------
<S> <C> <C>
SHORT-TERM SECURITIES (100.0%)
CORPORATE BONDS (90.1%)
APPAREL AND ACCESSSORIES (2.2%)
Melville Corporation, 6.19%, due 12/7/95 $ 150,000 $ 145,899
AUTO REPAIR, SERVICES AND PARKING (3.0%)
PHH Corp., 5.90%, due 7/7/95 200,000 199,803
CHEMICALS AND ALLIED PRODUCTS (8.7%)
Eli Lilly Company, 5.93%, due 7/19/95 200,000 199,407
SmithKline Beechum Corporation, 5.90%, due 7/12/95 200,000 199,639
Warner Lambert, 6.15%, due7/3/95 192,000 191,934
------------
590,980
COMMUNICATIONS (5.9%)
Ameritech Corporation, 5.93%, due 7/6/95 200,000 199,835
Bellsouth Telecommunications, 5.90%, due 7/13/95 200,000 199,607
------------
399,442
DEPOSITORY INSTITUTIONS (5.9%)
Barclays U.S Funding, 5.90%, due 7/11/95 200,000 199,672
CS First Boston, 5.90%, due 7/17/95 200,000 199,476
------------
399,148
DURABLE GOODS, WHOLESALE (6.0%)
Daimler Benz N.A. Corporation, 6%, due 1/13/95 200,000 199,123
Siemens Corporation, 6.20%, due 7/28/95 210,000 209,928
------------
409,051
ELECTRONIC AND OTHER ELECTRICAL EQUIPMENT (5.9%)
Emerson Electronics, 6.00%, due 7/28/95 200,000 199,100
Rockwell International, 5.97%, due 1/9/95 200,000 199,570
------------
398,670
FOOD AND KINDRED PRODUCTS (6.7%)
Coca Cola Company, 5.94%, due 7/27/95 256,000 254,902
Unilever Capital Corporation, 5.92, due 7/6/95 200,000 199,836
------------
454,738
</TABLE>
84
<PAGE>
Mitchell Hutchins Money Market Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------------------------------
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
GENERAL MERCHANDISE STORES (2.9%)
WalMart Stores, Inc., 5.92%, due 8/1/95 $ 200,000 $ 198,980
HOLDING AND OTHER INVESTMENT OFFICES (4.9%)
BTR Dunlop, 6.16%, due 8/21/95 150,000 148,691
Preferred Receivables, 5.90%, due 7/5/95 180,000 179,882
-------------
328,573
INSURANCE CARRIERS (5.4%)
Metlife Funding, Inc., 5.92%, due 7/14/95 200,000 199,572
USAA Capital Corporation, 5.94%, due 7/27/95 165,000 164,292
-------------
363,864
MISCELLANEOUS RETAIL (2.9%)
Toys R Us, 5.94%, due 7/17/95 200,000 199,472
NONDEPOSITORY INSTITUTION (23.9%)
AT&T Capital Corp., 5.93%, due 7/27/95 200,000 199,143
Delaware Funding Corporation, 5.96%, due 7/25/95 200,000 199,205
JC Penney Funding Corporation, 5.85%, due 7/14/95 200,000 199,578
Merrill Lynch, 5.93%, due 7/14/95 200,000 199,572
Motorola Credit Corporation, 5.90%, due 7/12/95 200,000 199,639
MPS U.S. Commercial Paper, 5.98%, due 7/24/95 250,000 249,045
Pitney Bowes Credit Corporation, 6%, due 7/17/95 200,000 199,474
Toyota Motor Credit Corporation, 6.30%, due 11/13/95 175,000 170,866
-------------
1,616,522
NONDURABLE GOODS, WHOLESALE (2.9%)
Nestle Capital Corporation, 5.72, due 10/23/95 200,000 196,377
SECURITY AND COMMODITY BROKERS (2.9%)
Goldman Sachs Group, 5.90%, due 7/18/95 200,000 199,443
-------------
</TABLE>
85
<PAGE>
Mitchell Hutchins Money Market Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------------------------------
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
TOTAL CORPORATE BONDS (Cost $6,100,962) $ 6,100,962
GOVERNMENT DEBT SECURITIES (9.9%)
U.S. GOVERNMENT AND GOVERNMENT AGENCIES (9.9%)
Federal Farm Credit Bank Discount Note, 5.88%, due 8/7/95 $ 140,000 139,154
Federal National Mortgage Assoc., Discount Note, 5.87%,
due 7/21/95 200,000 199,348
Federal National Mortgage Assoc., Discount Note, 5.87%,
due 7/10/95 250,000 249,633
U.S. Treasury Bills, 6.325%, due 7/20/95 80,000 79,733
------------
TOTAL GOVERNMENT DEBT SECURITIES
(Cost $667,868) 667,868
------------
TOTAL SHORT-TERM SECURITIES
(Cost $6,768,830) 6,768,830
------------
TOTAL INVESTMENTS (100.0%) (Cost $6,768,830) $ 6,768,830
============
</TABLE>
SEE ACCOMPANYING NOTES.
86
<PAGE>
Morgan Stanley Asian Growth Portfolio
Statement of Assets and Liabilities
June 30, 1995
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value (cost $12,945,471)
(NOTE 1)-See accompanying schedule $ 13,163,401
Dividends, interest and other receivables 48,716
Deferred organization costs (NOTE 1) 9,032
-------------
TOTAL ASSETS 13,221,149
LIABILITIES
Cash overdraft 141,547
Payable for investment securities purchased 225,024
Accounts payable and accrued expenses 29,915
-------------
TOTAL LIABILITIES 396,486
-------------
NET ASSETS $ 12,824,663
=============
Net Assets consist of:
Paid-in capital $ 12,633,934
Undistributed net investment income 14,748
Undistributed net realized loss on investments and foreign currency
transactions (42,298)
Net unrealized appreciation (depreciation) on investments and assets and
liabilities in foreign currencies 218,279
-------------
NET ASSETS, for 1,259,429 shares outstanding $ 12,824,663
=============
NET ASSET VALUE, offering and redemption price per share $ 10.18
=============
</TABLE>
SEE ACCOMPANYING NOTES.
87
<PAGE>
Morgan Stanley Asian Growth Portfolio
Statement of Operations
Year Ended June 30, 1995
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $4,837) $ 163,806
Interest 93,141
---------------
Total investment income 256,947
EXPENSES (NOTE 2)
Investment advisory and management fees 97,281
Custody and accounting fees 54,890
Professional fees 16,703
Directors' fees and expenses 4,950
Regulatory fees 4,657
Amortization of deferred costs 2,279
Other expenses 3,650
---------------
Total expenses 184,410
---------------
Net investment income 72,537
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN
CURRENCY (NOTE 1)
Net realized loss on:
Investment securities (42,299)
Foreign currency transactions (57,753)
---------------
Net realized loss (100,052)
Change in unrealized appreciation on:
Investment securities 217,930
Translation of assets and liabilities in foreign currencies 349
---------------
Change in unrealized appreciation 218,279
---------------
Net realized and unrealized gain on investments 118,227
---------------
Net increase in net assets resulting from operations $ 190,764
===============
</TABLE>
SEE ACCOMPANYING NOTES.
88
<PAGE>
Morgan Stanley Asian Growth Portfolio
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
JUNE 15, 1994
(COMMENCEMENT
YEAR ENDED OF OPERATIONS)
JUNE 30, THROUGH JUNE 30,
1995 1994
--------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 72,537 $ 465
Net realized loss on investments and foreign currency
transactions (100,052) -
Net unrealized appreciation on investments and translation
of assets and liabilities in foreign currency 218,279 -
---------------------------------
Net increase in net assets resulting from operations 190,764 465
Distributions to shareholders from:
Net investment income (500) -
Capital share transactions:
Proceeds from sales of shares 12,547,902 1,904,892
Proceeds from reinvested dividends 500 -
Cost of shares redeemed (1,819,360) -
---------------------------------
Net increase in net assets resulting from share
transactions 10,729,042 1,904,892
---------------------------------
Total increase in net assets 10,919,306 1,905,357
NET ASSETS
Beginning of period 1,905,357 -
---------------------------------
End of period (including undistributed net investment income of
$14,748 and $465, respectively) $12,824,663 $1,905,357
=================================
OTHER INFORMATION
Shares:
Sold 1,262,727 190,495
Issued through reinvestment of dividends 49 -
Redeemed (193,842) -
---------------------------------
Net increase 1,068,934 190,495
=================================
</TABLE>
SEE ACCOMPANYING NOTES.
89
<PAGE>
Morgan Stanley Asian Growth Portfolio
Financial Highlights
<TABLE>
<CAPTION>
JUNE 15, 1994
(COMMENCEMENT
YEAR ENDED OF OPERATIONS)
JUNE 30, THROUGH JUNE 30,
1995 1994(B)
-----------------------------------
<S> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 10.00 $ 10.00
Income from investment operations:
Net investment income 0.01 0.00(C)
Net realized and unrealized gain on
investments 0.17 -
--------------------------------
Total from investment operations 0.18 0.00
Less distributions:
From net investment income 0.00(C) -
--------------------------------
Net asset value, end of period $ 10.18 $ 10.00
================================
TOTAL RETURN(A) 1.80% 0.52%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 12,824,663 $ 1,905,357
Ratio of expenses to average net
assets(D) 1.92% 0.75%
Ratio of net investment income to
average net assets(D) .76% 0.59%
Portfolio turnover rate 30% -
</TABLE>
(A) Total returns are not annualized.
(B) Data expressed as a percentage are annualized as appropriate.
(C) Less than $0.01 per share.
(D) The ratios of expenses and net investment income to average net assets
before voluntary expense reimbursement were 9.79% and (8.44%), respectively,
for the period June 15, 1994 (commencement of operations) through June 30,
1994. (NOTE 2)
90
<PAGE>
Morgan Stanley Asian Growth Portfolio
Schedule of Investments
June 30, 1995
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
----------------------------------
<S> <C> <C>
COMMON STOCKS (93.6%)
AUSTRALIA (0.1%)
Odin Mining & Investment 1,250 $ 382
HONG KONG (26.6%)
Cheung Kong Holdings, Ltd. 105,000 519,728
Citic Pacific Limited 71,000 178,470
CP Pokphand 168,000 59,165
Guangdong Investments 600,000 327,617
Harbin Power Equipment Company* 205,000 65,572
Hong Kong Telecom 257,000 508,174
Hopewell Holdings 200,000 169,301
HSBC Holdings 24,640 316,053
Hutchison Whampoa 89,000 430,180
Maanshan Iron & Steel 102,000 21,355
New World Development Company 91,000 302,835
Shenzhen North Jianshe 50,000 24,232
Sun Hung Kai Properties 25,000 184,971
Swire Pacific Limited 45,000 343,125
Yizheng Chemical Fibre Company 150,000 52,341
----------
3,503,119
INDONESIA (7.4%)
Asiana Imi Industry* 10,000 4,266
Bimantara Citra 230,000 129,097
Duta Pertiwi Realty 35,000 36,147
Keramika Indonesia Assos 32,500 43,781
Ometraco Finance -Rights 32,000 -
Ometraco Finance 80,000 57,476
Private Bank International Indo* 26,000 80,265
Private Charoen Pokphand Indo* 30,000 65,335
Private Indocement Tunggal Prakarsa 20,000 78,581
Private Indonesia Satellite 3,200 122,400
Private Indosat 25,000 95,420
Private Kalbe Farma* 20,000 91,603
Private Sorini Corp 20,000 95,644
Private United Tractors 35,000 74,652
----------
974,667
</TABLE>
91
<PAGE>
Morgan Stanley Asian Growth Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
MALAYSIA (20.6%)
Bandar Raya Developments 15,000 $ 32,609
Genting Berhad 37,000 365,751
Land & General Berhad 37,500 125,359
Magnum Corporation Berhad 18,000 42,084
Malayan Banking Berhad 59,000 467,063
Malaysian International Ship 34,000 99,713
Malaysian Resources Corporation 39,000 68,786
Mulpha International Berhad 20,000 24,282
Renong Berhad 100,000 186,216
Resorts World Berhad 54,000 316,735
Sime Darby Berhad 48,000 133,880
Tan & Tan Development 60,000 74,815
Technology Resources* 22,000 63,167
Telekom Malaysia Berhad 40,000 303,527
Tenaga Nasional Berhad 52,000 212,223
Time Engineering Berhad 13,000 43,724
United Engineers, Ltd 24,000 152,584
----------
2,712,518
PAKISTAN (0.2%)
Pakistan Telecom, Ltd.* 300 30,450
PHILIPPINES (6.1%)
Aboitiz Equity Ventures* 465,600 94,797
Ayala Land, Inc 55,000 63,528
Benpres Holding Corporation* 5,500 45,375
JG Summit Holdings 395,000 114,448
Manila Electric Company 15,000 120,399
Petron Corporation 197,500 129,527
Philipino Telephone Corporation 8,000 6,265
Philippine Long Distance 900 64,311
San Miguel Corporation 15,600 64,746
SM Prime Holdings, Ltd.* 241,800 66,273
Universal Robina Corporation 73,200 37,259
----------
806,928
</TABLE>
92
<PAGE>
Morgan Stanley Asian Growth Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
SINGAPORE (14.8%)
British American Tobacco 10,000 $ 45,634
City Developments, Ltd 32,000 195,848
DBS Land, Ltd. 56,000 175,576
Development of Bank Singapore 19,000 216,249
Fraser & Neave, Ltd. 10,000 115,247
Keppel Corporation, Ltd. 22,000 179,528
Overseas Chinese Banking 20,000 221,904
Overseas Union Bank 10,000 62,992
Sembawamg Corporation, Ltd. 18,000 109,520
Singapore Press Holdings 7,200 107,717
Singapore Technologies 110,000 166,929
Straits Steamship Land, Ltd. 22,000 76,220
Straits Trading Company 20,000 50,107
United Overseas Bank 24,000 226,772
----------
1,950,243
SOUTH KOREA (3.2%)
Pohang Iron & Steel 2,500 73,750
Samsung Electronics 2,794 148,781
Samsung Electronics New 2,000 192,500
----------
415,031
THAILAND (14.5%)
Advanced Information Service 4,600 67,458
Bangkok Bank Company, Ltd. 25,000 275,471
Charoen Pokphand Feedmill 9,000 53,595
Finance One Company, Ltd. 29,600 218,238
National Finance & Security 8,400 41,175
National Finance & Security Warrants 7,800 -
Phatra Thanakit Company, Ltd. 13,500 112,660
</TABLE>
93
<PAGE>
Morgan Stanley Asian Growth Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER OF
SHARES OR
PRINCIPAL
AMOUNT VALUE
---------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
THAILAND (14.5%) (CONTINUED)
Shinawatra Computer Co 5,700 $ 137,160
Siam Cement Company 2,700 172,380
Siam Commercial Bank Company 13,000 124,288
Telecomasia Corporation* 67,000 248,349
Thai Farmers Bank, Ltd. 27,000 258,132
Thai Telephone & Telecom* 17,000 140,490
United Communication 4,000 60,280
-----------
1,909,676
UNITED STATES (0.1%)
Jilin Chemical Industrial Company* 1,200 23,100
-----------
TOTAL COMMON STOCKS (Cost $12,108,184) 12,326,114
SHORT-TERM SECURITIES (6.4%)
TIME DEPOSITS (6.4%)
State Street Bank, 4.90%, due 7/3/95 $ 837,287 837,287
-----------
TOTAL SHORT-TERM SECURITIES (Cost $837,287) 837,287
-----------
TOTAL INVESTMENTS (100.0%) (Cost $12,945,471) $13,163,401
===========
</TABLE>
* Non-income producing
OTHER INFORMATION:
Purchases and sales of securities excluding short-term securities, for the
year ended June 30, 1995, aggregated $14,759,349 and $2,657,683,
respectively. Net unrealized appreciation for tax purposes aggregated
$217,930, of which $727,184 related to appreciated investment securities and
$509,254 related to depreciated investment securities. The aggregate cost of
securities is the same for book and tax purposes.
SEE ACCOMPANYING NOTES.
94
<PAGE>
Morgan Stanley Asian Growth Portfolio
Schedule of Investments (continued)
As of June 30, 1995, 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
Amusement and Recreation Services 5.5%
Business Services 3.8
Chemicals and Allied Products 1.3
Communications 13.5
Depository Institutions 16.5
Durable Goods, Wholesale 0.2
Electric, Gas and Sanitary Services 2.5
Electronic and Other Electric Equipment 3.1
Engineering and Management Services 2.4
Fabricated Metal Products 0.2
Food and Kindred Products 3.7
Forestry 1.0
Government 6.2
Holding and Other Investment Offices 19.0
Industrial Machinery and Equipment 1.6
Miscellaneous Holdings 0.2
Nondepository Institutions 1.3
Petroleum and Coal Products 1.0
Primary Metal Industries 1.0
Printing and Publishing 0.8
Real Estate 6.8
Securities Brokers and Dealers 0.3
Stone, Clay and Glass Products 2.2
Transportation by Air 2.6
Transportation Equipment 2.2
Tobacco Products 0.3
Water Transportation 0.8
-------
100.0%
=======
</TABLE>
SEE ACCOMPANYING NOTES.
95
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Statement of Assets and Liabilities
June 30, 1995
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value (cost $7,299,960)
(NOTE 1)-See accompanying schedule $ 7,032,585
Cash 3,768
Receivable for investment securities sold 404,905
Dividends, interest and other receivables 135,469
Deferred organization costs (NOTE 1) 9,125
------------
TOTAL ASSETS 7,585,852
LIABILITIES
Payable for investment securities purchased 1,322,888
Accounts payable and accrued expenses 21,067
------------
TOTAL LIABILITIES 1,343,955
------------
NET ASSETS $ 6,241,897
============
Net Assets consist of:
Paid-in capital $ 6,059,757
Undistributed net investment income 532,957
Undistributed net realized loss on investments (83,442)
Net unrealized depreciation on investment securities (267,375)
------------
NET ASSETS, for 600,165 shares outstanding $ 6,241,897
============
NET ASSET VALUE, offering and redemption price per share $ 10.40
============
</TABLE>
SEE ACCOMPANYING NOTES.
96
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Statement of Operations
Year Ended June 30, 1995
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest $ 624,658
EXPENSES (NOTE 2)
Investment advisory and management fees 48,816
Custody and accounting fees 13,202
Professional fees 16,703
Directors' fees and expenses 4,950
Amortization of deferred costs 2,185
Other expenses 5,770
------------
Total expenses 91,626
------------
Net investment income 533,032
REALIZED AND UNREALIZED LOSS ON INVESTMENTS (NOTE 1)
Net realized loss on investments (83,442)
Change in unrealized depreciation on investment securities (267,375)
------------
Net realized and unrealized loss on investments (350,817)
------------
Net increase in net assets resulting from operations $ 182,215
============
</TABLE>
SEE ACCOMPANYING NOTES.
97
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
JUNE 15, 1994
(COMMENCEMENT
YEAR ENDED OF OPERATIONS)
JUNE 30, THROUGH
1995 JUNE 30, 1994
--------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 533,032 $ 225
Net realized loss on investments (83,442) -
Net unrealized depreciation (267,375) -
--------------------------------
Net increase in net assets resulting from operations 182,215 225
Distributions to shareholders from:
Net investment income (300) -
Capital share transactions:
Proceeds from sales of shares 9,617,478 687,259
Proceeds from reinvested dividends 300 -
Cost of shares redeemed (4,245,280) -
--------------------------------
Net increase in net assets from share transactions 5,372,498 687,259
--------------------------------
Total increase in net assets 5,554,413 687,484
NET ASSETS
Beginning of period 687,484 -
--------------------------------
End of period (including undistributed net investment income
of $532,957 and $225, respectively) $ 6,241,897 $687,484
================================
OTHER INFORMATION
Shares:
Sold 966,462 68,726
Issued through reinvestment of dividends 30 -
Redeemed (435,053) -
--------------------------------
Net increase 531,439 68,726
================================
</TABLE>
SEE ACCOMPANYING NOTES.
98
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Financial Highlights
<TABLE>
<CAPTION>
JUNE 15, 1994
(COMMENCEMENT
YEAR ENDED OF OPERATIONS)
JUNE 30, THROUGH
1995 JUNE 30, 1994(B)
-------------------------------------
<S> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 10.00 $ 10.00
Income from investment operations:
Net investment income 0.89 0.00(C)
Net realized and unrealized loss on
investments (0.49) -
----------------------------------
Total from investment operations 0.40 0.00
Less distributions:
From net investment income 0.00(C) -
----------------------------------
Net asset value, end of period $ 10.40 $ 10.00
==================================
TOTAL RETURN(A) 4.00% 0.79%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 6,241,897 $ 687,484
Ratio of expenses to average net
assets(D) 1.61% 0.85%
Ratio of net investment income to
average net assets(D) 9.28% 0.80%
Portfolio turnover rate 142% -
</TABLE>
(A) Total returns are not annualized.
(B) Data expressed as a percentage are annualized as appropriate.
(C) Less than $0.01 per share.
(D) The ratios of expenses and net investment income to average net assets
before voluntary expense reimbursement were 24.78% and (23.13%),
respectively, for the period June 15, 1994 (commencement of operations)
through June 30, 1994. (NOTE 2)
99
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Schedule of Investments
June 30, 1995
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------------------------------
<S> <C> <C>
CORPORATE BONDS (61.3%)
ARGENTINA (6.8%)
Banco de Galicia, 9%, due 11/1/2003 $ 300,000 $ 211,500
Transport De Gas Del Sur,7.75%, due 12/23/98 (a) 300,000 264,750
----------
476,250
BRAZIL (19.5%)
Compania Brasil, 12.5%, due 12/22/97 (a) 330,000 320,925
Iochpe-Maxion 12.375%, due 11/8/2002 500,000 440,000
Iochpe-Maxion S.A., 12.375%, due 11/8/2002 (a) 250,000 220,000
Klabin Fabric, 11%, due 4/15/98 400,000 392,000
----------
1,372,925
CANADA (8.9%)
Algoma Steel, Inc., 12.375%, due 7/15/2005 250,000 225,385
Rogers Cablesystems, Inc., 10% due 3/15/2005 (a) 150,000 154,125
Sherritt, Inc., 10.5%, due 3/31/2014 250,000 244,375
----------
623,885
MEXICO (4.9%)
Banco Nacional Com Ext, 7.25%, due 2/2/2004 150,000 108,000
Cemex SA de C.V., 9.5%, due 9/20/2001 (a) 300,000 234,000
----------
342,000
NIGERIA (4.7%)
Central Bank of Nigeria, 6.25%, due 11/15/2020 750,000 331,875
Central Bank of Nigeria-Warrants 750 -
----------
331,875
UNITED STATES (16.5%)
AES Corporation, 9.75%, due 6/15/2000 250,000 253,125
Continental Cablevision, 8.875%, due 9/15/2005 200,000 204,000
Pronet, Inc., 11.875%, due 6/15/2005 (a) 150,000 150,750
Six Flags Theme Parks, 12.25%, due 6/15/2005 (a), (b) 100,000 72,000
Viacom International, 8%, due 7/7/2006 250,000 243,438
Westpoint Stevens, 9.375%, due 12/15/2005 250,000 240,625
----------
1,163,938
----------
</TABLE>
100
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------------------------------
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
TOTAL CORPORATE BONDS (Cost $4,370,176) $ 4,310,873
GOVERNMENT BONDS (29.0%)
BRAZIL (7.9%)
Brazil Federated Republic, 7.3125%, due 4/15/2009 $ 500,000 269,375
Minas Gerais XWB, 8.25%, due 2/10/2000 370,000 288,600
-----------
557,975
BULGARIA (1.5%)
Bulgaria Federated Republic, 7.5625%, due 7/28/2011 (c) 240,000 101,400
ECUADOR (3.5%)
Ecuador - Discount, 7.25%, due 2/28/2025 (c) 500,000 248,750
MEXICO (9.9%)
Mexico Government Par, 6.25%, due 12/31/2019 750,000 457,500
Mexico Bond Warrants 750,000 -
Petro Mexicanos, 8.625%, due 12/1/2023 (a) 350,000 238,000
-----------
695,500
PANAMA (2.7%)
Republic of Panama, 7.25%, due 5/10/2002 (c) 250,000 192,500
VENEZUELA (3.5%)
Venezuela Debt Convertible Bonds - Floating, 8.812%, due
12/18/2007 (c) 500,000 246,875
-----------
TOTAL GOVERNMENT BONDS (Cost $2,251,072) 2,043,000
SHORT-TERM SECURITIES (9.7%)
TIME DEPOSITS (9.7%)
State Street Bank, 4.90%, due 7/3/95 678,712 678,712
-----------
TOTAL SHORT-TERM SECURITIES (Cost $678,712) 678,712
-----------
TOTAL INVESTMENTS (100.0%) (Cost $7,299,960) $ 7,032,585
===========
</TABLE>
101
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Schedule of Investments (continued)
OTHER INFORMATION:
Purchases and sales of securities excluding short-term securities, for the
year ended June 30, 1995, aggregated $14,399,071 and $7,773,317,
respectively. Net unrealized depreciation for tax purposes aggregated
$269,706, of which $366,689 related to depreciated investment securities and
$96,983 related to appreciated investment securities. The aggregate cost of
securities for tax purposes is $7,302,291.
As of June 30, 1995, 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
Amusement and Recreation Services 1.0%
Apparel and Other Finished Products 3.4%
Chemicals and Allied Products 3.5%
Communications 8.5%
Depository Institutions 9.3%
Durable Goods, Wholesale 3.8%
Electric, Gas and Sanitary Services 3.6%
General Building Contractors 4.6%
Governments 35.3%
Industrial Machinery and Equipment 11.5%
Petroleum and Coal Products 3.4%
Primary Metal Industries 3.2%
Stone, Clay and Glass Products 3.3%
Textile Mill Products 5.6%
---------
100.0%
=========
</TABLE>
(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 the
initial offering.
(c) Variable rate note or floating rate note, rate shown effective at 6/30/95.
SEE ACCOMPANYING NOTES.
102
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements
June 30, 1995
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), Mitchell Hutchins Fixed Income,
Mitchell Hutchins Money Market, Morgan Stanley Asian Growth and Morgan Stanley
Worldwide High Income. Integrity Financial Services, Inc. ("IFS"), a registered
broker-dealer with the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc., distributes shares of the Fund
to the separate accounts of Integrity Life Insurance Company ("Integrity") and
its wholly owned subsidiary, National Integrity Life Insurance Company
("National Integrity").
ARM Financial Group, Inc. ("ARM") is the ultimate parent of Integrity, National
Integrity, and IFS. ARM is a financial services company providing retail and
institutional products and services to the long-term savings and retirement
market. At June 30, 1995, ARM had approximately $4.8 billion of policyholder
deposits and funds under management.
ARM was organized in July 1993 by the Morgan Stanley Leveraged Equity Fund II,
L.P. ("MSLEF II") and Analytical Risk Management, Ltd. (now known as Oldarm,
L.P.). MSLEF II, and investment fund sponsored by Morgan Stanley & Co.
Incorporated ("Morgan Stanley"), and, as a result of an additional investment,
certain other private equity funds managed by Morgan Stanley own approximately
91% of the outstanding shares of voting stock of ARM. Oldarm, L.P., New ARM, LLC
and certain employees, management and independent directors of ARM and its
subsidiaries own in the aggregate approximately 9% of the voting stock of ARM.
On June 14, ARM completed the acquisition of substantially all of the assets and
business operations of SBM Company ("SBM"), including all of the issued and
outstanding capital stock of SBM's subsidiaries, State Bond and Mortgage Life
Insurance Company ("SBM Life") and SBM Financial Services, Inc. ("SBM Financial
services"), and SBM's management contracts with the State Bond group of mutual
funds.
103
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for investment companies.
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, if 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 Mitchell Hutchins 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 Valuation
Committee of the Board of Directors.
SECURITY TRANSACTIONS
Securities transactions are recorded on the 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 interest method. Realized gains and losses on
the sale of investments are determined on the basis of nearest average.
104
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 1995, the Mitchell Hutchins Fixed Income
Portfolio had segregated specific assets to be utilized to settle its
outstanding commitments related to delayed-delivery.
INCOME TAX STATUS
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.
DIVIDEND DISTRIBUTIONS
Dividends from net investment income and distributions from net realized gains
are declared and distributed annually, except that the Mitchell Hutchins 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 provide 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
105
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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, 1995.
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 contract amounts of the futures contracts reflect the extent of
the Portfolios' exposure to off-balance sheet risk. 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 Mitchell Hutchins Fixed Income Portfolios may engage in 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.
106
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Morgan Stanley Asian Growth Portfolio has an open forward foreign exchange
contract at June 30, 1995 to hedge against changes in the foreign currency
exchange rates between the trade and settlement dates. The contract terms at
June 30, 1995, were as follows:
<TABLE>
<CAPTION>
CURRENCY TO BE U.S. DOLLAR VALUE AS CURRENCY TO BE UNREALIZED
SETTLEMENT DATE DELIVERED OF 6/30/95 RECEIVED LOSS
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
July 3, 1995 548,609 $ 225,024 225,098 $ (747)
Malaysian Ringget U.S. Dollars
</TABLE>
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 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, 1995, approximately 162,926 shares, having a fair value of $1.7 million
and constituting 27.2% of the outstanding shares of the Portfolio, were held by
Integrity for its own account.
107
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements (continued)
2. INVESTMENT ADVISORY AGREEMENTS AND PAYMENTS TO RELATED PARTIES
Integrity is the investment manager for the Fund pursuant to a Management
Agreement (the "Management Agreement") between the Fund and Integrity. Integrity
has entered into a sub-advisory agreement with a registered investment adviser
("Sub-Adviser") for each of the Portfolios. Integrity, not the Fund, pays the
sub-advisory fee to each of the Sub-Advisers. The fees payable to Integrity
under the Management Agreement, and by Integrity to each Sub-Adviser, as a
percentage of average net assets are as follows:
<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
Mitchell Hutchins Fixed Income 0.90 0.75
Mitchell Hutchins Money Market 0.65 0.50
Morgan Stanley Asian Growth 1.00 0.85
Morgan Stanley Worldwide High Income 0.85 0.70
</TABLE>
Under the Management Agreement, Integrity provides certain management services
to the Fund, and the Fund is responsible for certain of its direct operating
expenses. Integrity has voluntarily agreed to reimburse each of the Portfolios
for operating expenses (excluding management fees) above an annual rate of 0.5%
(0.7% prior to May 1, 1994) 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. Integrity has
reserved the right to withdraw or modify its policy of expense reimbursement for
the Portfolios.
108
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements (continued)
2. INVESTMENT ADVISORY AGREEMENTS AND PAYMENTS TO RELATED PARTIES (CONTINUED)
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 $71,000 in the aggregate during the fiscal year ended June
30, 1995.
Certain officers and directors of the Fund are also officers of ARM, IFS,
Integrity and National Integrity. The Fund does not pay any amounts to
compensate these individuals.
3. CAPITAL SHARES
At June 30, 1995, 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), Mitchell Hutchins Fixed Income, Morgan Stanley Asian Growth, and Morgan
Stanley Worldwide High Income Portfolios and 100,000,000 shares for the Mitchell
Hutchins Money Market Portfolio.
At June 30, 1995, Integrity, through its Separate Account II (previously named
Separate Account SF), and National Integrity, through its Separate Account II
(previously named Separate Account SFN), were the record owners of all the
outstanding shares of the Fund.
109
<PAGE>
The Legends Fund, Inc.
Portfolio Performance
June 30, 1995
The Fund has entered into sub-advisory agreements with a professional manager
for investment of the assets of each of the Portfolios. Set forth below is a
discussion of the factors, including relevant market conditions and the
investment strategies and techniques pursued by the respective Sub-Advisers,
that materially affected the performance of each Portfolio (other than Mitchell
Hutchins Money Market Portfolio) during the fiscal year ended June 30, 1995. The
discussion was, in each case, provided by the respective Portfolio's Sub-
Adviser. The performance information and graphs contained in such discussions do
not include the expenses and fees of the separate accounts of Integrity or
National Integrity, whichever is applicable, that invest in the Portfolios.
<TABLE>
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
[The following chart is presented to illustrate performance graph data which
appears in the paper copy of The Legends Fund, Inc. Annual Report. This chart
represents the performance history of the three indices indicated below.]
<CAPTION>
60% OF THE S&P 500, 30% OF
LEHMAN BROTHERS
RENAISSANCE GOVERNMENT/CORPORATE BOND INDEX,
BALANCED AND 10% OF 90-DAY TREASURY BILL
DATE PORTFOLIO YIELD S&P 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 $10,880 $11,058 $11,102
Jun 94 $10,400 $10,709 $10,727
Dec 94 $10,502 $11,076 $11,248
Jun 95 $11,826 $12,832 $13,519
</TABLE>
110
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1995
RENAISSANCE BALANCED PORTFOLIO (CONTINUED)
o Average annual total return since inception: 6.82%
o Total return for the fiscal year ended June 30, 1995: 13.71%
o Performance relates to the Portfolio and does not reflect separate account
charges applicable to variable annuity certificates.
o 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).
o Past performance is not predictive of future performance.
Returns from both stocks and bonds have been well above their average over the
past six months. After suffering through one of the worst years of performance
in history in 1994, the U.S. bond market has staged a robust rally thus far in
1995, with yields on longer-term U.S. Treasury bonds falling to 15 month lows by
late June. The stock market has staged an equally strong rally after a
disappointing 1994, as growth in corporate earnings and falling interest rates
combined to push stock prices higher.
Our analysis of relative values between stocks, bonds, and cash equivalents led
us last year to significantly increase our position in bonds in our Portfolio.
From a low of less than 30% at the beginning of 1994, we built our positions in
U.S. Treasury bonds to approximately 40% by the fall of 1994, and were well
positioned for the subsequent rally in bond prices. The strongest returns in the
bond market over the past twelve months have been in Treasury issues of ten
years or more in maturity (our bond positions are primarily ten year maturity
Treasuries).
As interest rates rose during the last half of 1994, the level of the stock
market risk increased, and we reduced our positions in stocks to approximately
40% by mid-year, while increasing our bond positions. Our stock position
participated in the general increase in stock prices over the past year, with
particularly strong results turned in by investment positions in the Basic
Materials, Industrials, and Finance areas. Within the stock market as a whole,
leadership over the past twelve months has primarily been provided by Technology
and Financial issues.
By late in the second quarter of 1995, the rally in the bond market had resulted
in very low bond yields relative to those available from cash equivalents. We
reduced our bond positions to roughly 35% of the Portfolio by the end of March
1995, and increased our cash equivalent positions further to approximately 23%.
Given further declines in interest rates or a pullback in stock prices, we would
anticipate increasing our position in stocks. However, given current levels of
interest rates and stock prices, the level of risk in the stock market remains
somewhat above average. At June 30, 1995 the Portfolio was invested
approximately 43% in stocks, 50% in bonds, and 7% in cash equivalents.
111
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1995
<TABLE>
ZWEIG ASSET ALLOCATION PORTFOLIO
Comparison of Change in Value of $10,000 Investment in
Zweig Asset Allocation Portfolio and the S&P 500
[The following chart is presented to illustrate performance graph data which
appears in the paper copy of The Legends Fund, Inc. Annual Report. This chart
represents the performance history of the two indices indicated below.]
<CAPTION>
ZWEIG ASSET ALLOCATION
DATE 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 $11,450 $11,102
Jun 94 $11,444 $10,727
Dec 94 $10,491 $11,248
Jun 95 $13,112 $13,519
</TABLE>
o Average annual total return since inception: 11.24%
o Total return for the fiscal year ended June 30, 1995: 14.57%
o Performance relates to the Portfolio and does not reflect separate account
charges applicable to variable annuity certificates.
o Portfolio commenced operations on December 14, 1992.
o Past performance is not predictive of future performance.
The Portfolio was up 14.57% during the twelve months ended June 30, 1995. This
compares to the Portfolio's benchmark, the S&P 500, which was up 26.03% during
the same period. The average effective investment exposure of the Portfolio
during the period was 45%.
Though the Portfolio participated in the market's advance during the twelve
months, it lagged its benchmark primarily due to significant cash levels held
during the year. During the last six months of 1994, investment exposure ranged
between 30% and 40% as all three components of our asset allocation model -
monetary, sentiment, and momentum - showed above-average risk levels in the
market. We gradually increased investment exposure to 70% during the first six
months of 1995
112
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1995
ZWEIG ASSET ALLOCATION PORTFOLIO (CONTINUED)
largely due to three factors. First, bonds rallied, improving our monetary
indicators. Second, an increase in corporate share buybacks and takeover
activity coupled with moderate levels of new offerings provided a favorable
supply/demand situation for stocks, improving our sentiment indicators. Third,
the market's strength caused our momentum indicators to uptick.
Stock selections added value during the fiscal year ended June 30, 1995,
principally during the final six months of the fiscal year. Emphasis on
semiconductor, aerospace, and bank issues were largely responsible.
<TABLE>
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
[The following chart is presented to illustrate performance graph data which
appears in the paper copy of The Legends Fund, Inc. Annual Report. This chart
represents the performance history of the three indices indicated below.]
<CAPTION>
60% OF THE S&P 500 AND 40%
OF LEHMAN BROTHERS
NICHOLAS-APPLEGATE BALANCED INTERMEDIATE TREASURY BOND
DATE PORTFOLIO INDEX S&P 500
----------------------------------------------------------------------------------
<S> <C> <C> <C>
12/3/92 $10,000 $10,000 $10,000
Dec 92 $10,300 $10,143 $10,157
Jun 93 $11,500 $10,676 $10,651
Dec 93 $11,740 $11,089 $11,178
Jun 94 $11,270 $10,723 $10,800
Dec 94 $11,706 $11,063 $11,325
Jun 95 $13,290 $12,795 $13,611
</TABLE>
113
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1995
NICHOLAS-APPLEGATE BALANCED PORTFOLIO (CONTINUED)
o Average annual total return since inception: 11.69%
o Total return for the fiscal year ended June 30, 1995: 17.92%
o Performance relates to the Portfolio and does not reflect separate account
charges applicable to variable annuity certificates.
o Portfolio commenced operations on December 3, 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).
o Past performance is not predictive of future performance.
In contrast to the difficult environment for equities and bonds in 1994, this
year has been one of solid growth. During 1994, interest rates placed a cloud
over future earnings growth and those companies with strong earnings growth were
not rewarded by equity markets. This year has witnessed a renewed focus by
investors on the strength of earnings growth.
U.S. stock and bond markets continued to rally in the second quarter of 1995 as
strength in corporate earnings pushed stock prices higher and a slowing national
economy spurred bond investors to bid up prices and drive down yields on fixed-
income securities. The strong demand for stocks and bonds was due in part to
foreign central banks investing their recently purchased U.S. dollars into U.S.
Treasury securities and by continued strong cash inflows into equity mutual
funds. Those funds topped $1 trillion in assets in May 1995, less than two and a
half years after topping the $500 billion mark, and signaled to many a newfound
seriousness on the part of aging baby-boom investors to make up for lost time.
Additionally, many long-time bears advised investors to add equities to their
portfolios.
Large-company stocks, as represented by the S&P 500 Index, returned 9.53% for
the quarter ended June 30 and 26.03% for the twelve months ended June 30, 1995.
Technology issues logged the best returns for the quarter on the strength of
gains by electronics components and microcomputer manufacturers.
Semiconductor manufacturers in particular continued to enjoy strong share-price
growth on the strength of expectations for a continuation of the industry's rise
in earnings. For example, the Portfolio benefited from holding Micron Technology
shares, which rose strongly from April through June on the strength of a 105%
improvement in earnings. The Portfolio performance was affected by declines in
several health care companies, particularly health maintenance organizations.
For example, the Portfolio sold positions in U.S. Healthcare due to declining
earnings caused by rising medical costs.
114
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1995
NICHOLAS-APPLEGATE BALANCED PORTFOLIO (CONTINUED)
The bond market continued its upward rise as domestic investors lined up with
foreign central bankers to buy U.S. Treasury Bonds amid signs of continued
economic slowing. We remain concerned, however, about a number of economic
factors that could dampen the return of bonds. Inflation, as measured by the
intermediate producer price index, continued to rise and mortgage applications
accelerated. Consumer confidence and personal income are high, suggesting
consumers have the resources to resume their spending habits at any time. These
factors could lift the economy from its recent slump and reverse the course of
declining interest rates. We remain positioned with a shorter than market
duration with our bond holdings.
This year's developments have been encouraging. Capital markets once again
provided the greatest rewards to companies with strong earnings growth and the
Portfolio recorded solid performance as a result. In any economic or market
environment, however, we will hold fast to the disciplined style that has
brought competitive returns to Nicholas-Applegate investors for more than a
decade. Identifying companies that are adapting positively to the environment
around them and as a result, are growing their earnings and their share prices.
<TABLE>
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
[The following chart is presented to illustrate performance graph data which
appears in the paper copy of The Legends Fund, Inc. Annual Report. This chart
represents the performance history of the two indices indicated below.]
<CAPTION>
HARRIS BRETALL SULLIVAN &
DATE SMITH EQUITY GROWTH PORTFOLIO S&P 500
-----------------------------------------------------------
<S> <C> <C>
12/8/92 $10,000 $10,000
Dec 92 $10,050 $9,992
Jun 93 $9,710 $10,478
Dec 93 $10,050 $10,997
Jun 94 $9,360 $10,625
Dec 94 $10,460 $11,141
Jun 95 $12,850 $13,391
</TABLE>
115
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1995
HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO (CONTINUED)
o Average annual total return since inception: 10.30%
o Total return for the fiscal year ended June 30, 1995: 37.29%
o Performance relates to the Portfolio and does not reflect separate account
charges applicable to variable annuity certificates.
o Portfolio commenced operations on December 8, 1992.
o Past performance is not predictive of future performance.
For the fiscal year ended June 30, 1995, the Portfolio finished up 37.29%. This
return is primarily the result of good fundamentals underlying our positions in
technology, information processing, and interest rate sensitive stocks. The
Portfolio finished the fiscal year significantly ahead of the S&P 500 index,
which was up 26.03%.
Not very many investment portfolios have been able to beat the S&P 500 index
this fiscal year. We believe that our superior performance was obtained by
sticking to our time-tested investment disciplines: selecting high-quality
growth companies, focusing on consistent earnings growth, and knowing that price
will follow earnings.
Back in late 1993 we introduced the concept of the "Virtuous Cycle," a period of
time when interest rates are stable or declining, earnings are rising, and
price/earnings ratios are expanding. In the past, when the stock market has been
blessed by such a "Virtuous Cycle," returns have been very compelling, exceeding
20% annualized. Our analysis leads us to believe that we could be at the
beginning of this same kind of multi-year bull market. The economic conditions
we see today of moderate economic growth, low inflation, and low interest rates
remind us of the 1950's and early 1960's, one of the best periods in history to
be an equity investor.
We remain bullish and fully invested in growth companies. Our work on valuation
indicates that the market, despite the strong advance over the last twelve
months, is still fairly valued. Last year, we predicted that "...growth stocks
are poised to outperform the market again." While that has certainly occurred
for investors in the Portfolio, historically these periods of good performance
run longer than just one year. Hence, we plan to use minor, technical
corrections as buying opportunities in this "Virtuous Cycle" for growth stocks.
116
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1995
DREMAN VALUE PORTFOLIO
Comparison of Change in Value of $10,000 Investment in
Dreman Value Portfolio and the S&P 500
[The following chart is presented to illustrate performance graph data which
appears in the paper copy of The Legends Fund, Inc. Annual Report. This chart
represents the performance history of the two indices indicated below.]
<TABLE>
<CAPTION>
DREMAN VALUE
DATE 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 $10,740 $11,102
Jun 94 $10,660 $10,727
Dec 94 $10,657 $11,248
Jun 95 $12,790 $13,519
</TABLE>
o Average annual total return since inception: 10.16%
o Total return for the fiscal year ended June 30, 1995: 19.98%
o Performance relates to the Portfolio and does not reflect separate account
charges applicable to variable annuity certificates.
o Portfolio commenced operations on December 14, 1992.
o Past performance is not predictive of future performance.
The Portfolio has shown excellent strength during the fiscal year ending June
30, 1995, increasing 19.98%. The past twelve months have been a tale of two
completely different markets. Throughout 1994 interest rates were on the rise,
there were numerous mishaps in the world financial markets and returns on
financial investments were among the worst in recent memory. Since January 1,
1995 the opposite has taken place, with both stocks and bonds yielding
exceptional six month returns.
117
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1995
DREMAN VALUE PORTFOLIO (CONTINUED)
Returns for the first half of 1995 were influenced by excellent corporate
profits and lower interest rates. With respect to the former, close to 80% of
U.S. corporations have reported earnings in excess of Wall Street estimates in
the first two quarters. While a majority of positive surprises is not unusual,
the extent of the plurality is astonishing in light of the gloom overhanging the
market just six months ago. While the Federal Reserve has only lowered the
Federal Funds target 1/4 of 1% during the first part of July 1995, the market,
the true determinant of rates, had already readjusted rates downward even
further, in anticipation of slower economic growth. The rapidity with which
rates have risen and fallen over the past three years has caught many investors
off-guard. We would not bet against another reversal of interest rates if
economic activity picks up later this year.
After being knocked down sharply in the fourth quarter of 1994, both by the
fears of higher interest rates and an overreaction to derivative write-offs, the
financial service stocks achieved solid results so far in 1995. Following the
steep rise of interest rates in 1994, the decline in recent months was embraced
by investors. In fact, the 30-year Treasury yield is now back to the levels of
second quarter 1994. Both the Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation posted solid earnings gains despite a
slowing new housing market and minimal refinancing. We view this to be extremely
positive for these firms as a "pick up" in either area would be a further
windfall to earnings.
Bank earnings were strong despite the contractions of net interest margins. We
are particularly bullish on the two California Savings and Loan holdings, Great
Western Financial and Ahmanson. Each has been hampered by the rough West Coast
economy but will benefit as their adjustable rate mortgages ("ARMs") begin to
earn at higher interest rates. During the rapid rise in rates last year the ARMs
yields did not advance as quickly as the cost of funds for these institutions. A
catch-up phase is now in place with the impact of improving the interest rate
spread and earnings per share.
The second quarter of 1995 returns in the Portfolio were led by the three
technology stocks, Apple Computer, Compaq and Hewlett-Packard, rising 30% on
average. All were swept along in Wall Street's clamoring into technology stocks
that has accelerated in the past two months. We think this new frenzy is a
dangerous area of the market and have been slowly selling into this 12-month
technology surge. Our holdings remain first-rate values selling at 11-16 times
earnings, in a sector replete with companies priced at outlandish multiples and
having very questionable market liquidity.
118
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1995
<TABLE>
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
[The following chart is presented to illustrate performance graph data which
appears in the paper copy of The Legends Fund, Inc. Annual Report. This chart
represents the performance history of the two indices indicated below.]
<CAPTION>
ZWEIG EQUITY (SMALL VALUE LINE GEOMETRIC
DATE CAP) 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 $10,750 $11,260
Jun 94 $10,650 $10,482
Dec 94 $10,684 $10,582
Jun 95 $11,757 $11,862
</TABLE>
o Average annual total return since inception: 6.57%
o Total return for the fiscal year ended June 30, 1995: 10.39%
o Performance relates to the Portfolio and does not reflect separate account
charges applicable to variable annuity certificates.
o Portfolio commenced operations on December 14, 1992. Index performance for
the month of December 1992 has been prorated to conform to the commencement
date of the Portfolio.
o Past performance is not predictive of future performance.
The Portfolio was up 10.39% during the year, while its benchmark, the Value Line
Geometric Index, was up 13.17%. The average effective investment exposure of the
Portfolio during the period was 45%.
119
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1995
ZWEIG EQUITY (SMALL CAP) PORTFOLIO (CONTINUED)
Though the Portfolio participated in the market's advance during the twelve
months, the Portfolio lagged its benchmark primarily due to significant cash
levels held during the year. During the last six months of 1994, investment
exposure ranged between 30% and 40% as all three components of our asset
allocation model - monetary, sentiment, and momentum - showed above-average risk
levels in the market. We gradually increased investment exposure to 70% during
the first six months of 1995 largely due to the three factors. First, bonds
rallied, improving our monetary indicators. Second, an increase in corporate
share buybacks and takeover activity coupled with moderate levels of new
offerings provided a favorable supply/demand situation for stocks, improving our
sentiment indicators. Third, the market's strength caused our momentum
indicators to uptick.
Stock selection added value during the fiscal year ended June 30, 1995,
principally during the final six months of the period. Emphasis on
semiconductor, aerospace, and bank issues were largely responsible.
MITCHELL HUTCHINS FIXED INCOME PORTFOLIO
Comparison of Change in Value of $10,000 Investment in
Mitchell Hutchins Fixed Income Portfolio and the Salomon
Brothers Broad Investment-Grade Bond Index
[The following chart is presented to illustrate performance graph data which
appears in the paper copy of The Legends Fund, Inc. Annual Report. This chart
represents the performance history of the two indices indicated below.]
<TABLE>
<CAPTION>
MITCHELL HUTCHINS SALOMON BROTHERS BROAD
FIXED INCOME INVESTMENT-GRADE
DATE PORTFOLIO BOND INDEX
----------------------------------------------------------------------
<S> <C> <C>
1/5/93 $10,000 $10,000
Jun 93 $10,430 $10,695
Dec 93 $10,450 $10,979
Jun 94 $10,000 $10,568
Dec 94 $10,047 $10,667
Jun 95 $11,108 $11,894
</TABLE>
120
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1995
MITCHELL HUTCHINS FIXED INCOME PORTFOLIO (CONTINUED)
o Average annual total return since inception: 4.33%
o Total return for the fiscal year ended June 30, 1995: 11.08%
o Performance relates to the Portfolio and does not reflect separate account
charges applicable to variable annuity certificates.
o Portfolio commenced operations on January 5, 1993. Index performance has
been prorated to conform to the commencement date of the Portfolio.
o Past performance is not predictive of future performance.
For the fiscal year ended June 30, 1995, the Portfolio, net of fees and
expenses, underperformed the Salomon Brothers Broad Investment-Grade Index by
147 basis points. The small size of the Portfolio still adversely affects
portfolio performance as trading in non-round-lot sizes incurs higher
transaction costs. The following is a discussion of market conditions and
investment strategies which materially affected the performance during this
period.
The six month period ended December 31, 1994 was characterized by strong
economic growth (4.0% and 5.1% GDP growth in the third and fourth quarters of
1994, respectively) and a restrictive Federal Reserve that raised the federal
funds rate by 300 basis points from February 1994 to February 1995. This
environment produced a significant decline in bond prices as interest rates
increased roughly 50 basis points as measured by the ten year U.S. Treasury
note. Relative Portfolio performance benefited from this backup in rates, as the
Portfolio duration averaged six months shorter than the benchmark during this
period. An overweighing in corporate securities, primarily in the short end of
the yield curve, added to performance as that sector outperformed the index as a
whole. The return of the Portfolio's mortgage-backed securities holdings kept
pace with the mortgage component of the index and a position in callable
government agencies vis-a-vis U.S. Treasuries added to total return.
Over the three months ended March 31, 1995, the bond market reversed course and
saw a 60 basis point decline in ten year maturity yields. In February 1995, the
Federal Reserve seemingly ended their tightening of monetary policy and economic
growth showed signs of slowing down from its brisk pace in 1994. As we entered
the year, our fundamental analysis produced a belief that economic growth would
remain above the "non-inflationary" potential growth rate of 2.5%, causing
inflation fears and further tightening from the Fed. This, combined with a
weakening dollar versus the German Deutschemark and Japanese Yen, convinced us
to leave the portfolio duration short relative to the benchmark to take
advantage of a further increase in rates. Unfortunately, we did not foresee
three positive technical aspects that produced higher bond prices. These factors
included (1) a "flight to quality" resulting from problems in emerging markets,
specifically Mexico, (2) heavy foreign investor and central bank buying, and (3)
a growing belief among market participants,
121
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1995
MITCHELL HUTCHINS FIXED INCOME PORTFOLIO (CONTINUED)
observing slower growth in the housing and retail sectors, that the Fed was
successfully engineering a "soft-landing" in the economy. Consequently, a short
relative portfolio duration in the rallying bond market resulted in relative
underperformance.
As we entered the final three months ended June 30, 1995, we rebalanced the
portfolio duration to index neutral and pared back the corporate sector
allocation in response to these technical factors and early signs that second
quarter growth might be slowing. We did not believe lengthening duration above
the benchmark was warranted, given the dramatic runup in the first quarter and
still no confirmation that economic growth was indeed slowing significantly with
a declining dollar. We soon saw with April and May employment figures that the
economy was looking at very low growth in the second quarter and market
sentiment turned to the likelihood of an easing in interest rates by the Fed.
With a duration and sector allocation roughly neutral to the index, portfolio
performance, before fees and expenses, was slightly higher than the benchmark
for the last three months of the year.
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
[The following chart is presented to illustrate performance graph data which
appears in the paper copy of The Legends Fund, Inc. Annual Report. This chart
represents the performance history of the two indices indicated below.]
<TABLE>
<CAPTION>
MORGAN STANLEY ASIAN MSCI COMBINED FAR EAST
DATE GROWTH PORTFOLIO FREE EX-JAPAN INDEX
----------------------------------------------------------------
<S> <C> <C>
6/15/94 $10,000 $10,000
Jun 94 $10,000 $9,754
Sep 94 $9,990 $11,106
Dec 94 $9,280 $9,772
Mar 95 $9,230 $9,599
Jun 95 $10,180 $10,456
</TABLE>
122
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1995
MORGAN STANLEY ASIAN GROWTH PORTFOLIO (CONTINUED)
o Average annual total return since inception: 1.73%
o Total return for the fiscal year ended June 30, 1995: 1.80%
o Performance relates to the Portfolio and does not reflect separate account
charges applicable to variable annuity certificates.
o Portfolio commenced operations on June 15, 1994.
o Past performance is not predictive of future performance.
The investment objective of the Portfolio is to achieve long-term capital
appreciation through investments in the stock markets of Asia, excluding Japan.
For the fiscal year ended June 30,1995 the total return of the Portfolio was
1.80%. By comparison, the benchmark index, the Morgan Stanley Capital
International ("MSCI") Combined Far East Free Ex-Japan Index, registered a gain
of 7.19% over the same period.
Underperformance for the fiscal year 1995 stems entirely from the first quarter
of the Portfolio's existence. After a spectacular rise in 1993, Asian markets
corrected sharply in 1994. Asian markets did stage one extended rally during
1994, however, and that was during the third quarter of the year, which
coincided with the Portfolio's launch. The Portfolio missed most of the rally.
Through the first three months of 1995, the Index returned 13.86%, whereas the
Portfolio lost 0.11%.
For the period from inception on June 15, 1994 through September 30, 1994, the
Portfolio was being invested, up to 76.6% at September 30. Over time, the
Portfolio became more fully invested to its present level of 96%. For much of
the year, the Portfolio maintained higher than normal cash balances, which
served the Portfolio well during volatile periods, such as the Asian aftermath
to the Mexican peso crisis.
The investment manager pursues a disciplined value oriented philosophy by which
the manager seeks to identify and invest in undervalued companies. Once
purchased, stocks are not sold unless they become expensive relative to what the
manager quantifies as their intrinsic value or another company becomes more
attractive. We have not deviated from this long-term value oriented strategy as
illustrated in the Portfolio's relatively low turnover rate.
123
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1995
MORGAN STANLEY ASIAN GROWTH PORTFOLIO (CONTINUED)
During 1995, Hong Kong garnered top honors as Asia's top performing market,
returning 10.9% despite uncertainty surrounding interest rates and the worsening
of relations between the U.S. and China over arms sales and the recent visit to
the U.S. by Taiwan's President. Tied to U.S. interest rates via the exchange
rate peg, Hong Kong benefitted from the dramatic drop in U.S. bond yields. At 11
times 1995 estimated earnings, we believe Hong Kong is still Asia's cheapest
market.
Malaysia rivaled Hong Kong as one of Asia's best performing markets, gaining
10.2% over the last six months. In January and February the market reeled as
investors feared that the ringgit would be devalued given the country's large
current account deficit. Eventually market sentiment improved as investors
recognized that because of Malaysia's strong external reserves position, low
debt service ratio and basic account surplus, the Central Bank was well armed to
defend the ringgit. The market snapped back to life in the last three months as
foreign investors returned in droves with the fall in U.S. bond yields and as
fears abated that tough anti-inflationary measures would be enacted. At 21 times
1995 estimated earnings, we believe Malaysia is fully valued.
The Thai market posted modest gains of 3.3% over the last two quarters of 1994.
The third quarter was particularly trying for the Thai market as it was viewed
by foreign institutional investors as a submerging market whose currency (the
baht), like the Mexican peso several months before, was overvalued and due for
an adjustment. Fearing the worst, foreign institutions reacted impulsively,
selling indiscriminately. The market's liquid bluechips were the hardest hit.
After the initial wave of panic selling, however, the market traded sideways on
thin volume for several months. With the dramatic drop in U.S. bond yields in
May and the extended rally in U.S. markets, however, foreign investors returned
to the market in force, buying aggressively in Thailand's most interest rate
sensitive sectors--banks, finance companies, and property developers--which
would benefit from the wider margins.
Looking ahead in Asia, excluding Japan, we are relatively neutral about the
Asian markets. We expect to aim for a market weighted in Malaysia, Singapore,
Thailand, and Indonesia, while being overweighted in the Philippines and
underweighted in Hong Kong and Korea.
124
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1995
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
[The following chart is presented to illustrate performance graph data which
appears in the paper copy of The Legends Fund, Inc. Annual Report. This chart
represents the performance history of the three indices indicated below.]
<TABLE>
<CAPTION>
50% JP MORGAN EMERGING
MORGAN STANLEY MARKET BOND INDEX AND
WORLDWIDE HIGH INCOME JP MORGAN EMERGING 50% OF LEHMAN BROTHERS
DATE PORTFOLIO MARKET BOND INDEX AGGREGATE BOND INDEX
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C>
6/15/94 $10,000 $10,000 $10,000
Jun 94 $10,000 $9,580 $9,784
Sep 94 $10,010 $10,620 $10,335
Dec 94 $9,503 $9,731 $9,909
Mar 95 $9,130 $8,653 $9,625
Jun 95 $10,400 $10,628 $10,935
</TABLE>
o Average annual total return since inception: 3.84%
o Total return for the fiscal year ended June 30, 1995: 4.00%
o Performance relates to the Portfolio and does not reflect separate account
charges applicable to variable annuity certificates.
o 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.
o Past performance is not predictive of future performance.
The last twelve months in the bond markets have been tumultuous. Both emerging
markets and the U.S. bond market witnessed inflection points during the period.
In the U.S., inflationary fears and high growth drove up nominal bond yields to
8.20%. Changes in the bond markets of G-7 countries had an effect in emerging
markets. In emerging markets, political turbulence, elections in Mexico,
euphoria and leverage proved to be unsettling. The Mexican devaluation led to
widespread re-
125
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1995
MORGAN STANLEY WORLDWIDE HIGH INCOME PORTFOLIO (CONTINUED)
thinking of the emerging market phenomenon. However, policy responses and
economic performances since the crash of 1994 should allay the most seasoned
skeptics.
The Portfolio benefited from the hybrid nature of its investments. Tactical
shifts out of and into emerging markets had a positive impact on performance. We
increased the allocation to emerging markets in the third quarter of calendar
1994, decreased it in the first quarter of calendar 1995 and increased it again
during the second quarter of calendar 1995.
During the first two quarters of calendar 1995 we increased our exposure to
emerging markets debt, as these markets returned to normalcy and offered higher
yields and prospective returns than the U.S. high yield market. Currently our
relative allocation stands at 65:35 in favor of emerging markets debt.
Historically the Portfolio has held a higher proportion of its holdings in the
larger Latin American countries, with smaller holdings in countries such as the
Philippines, Indonesia and Hungary for diversification. During 1995 we reduced
our holdings outside Latin America to capture much greater value and potential
for capital appreciation than in Mexico, Argentina and Brazil, countries which
had witnessed a larger increase in spreads in the wake of Mexico's devaluation.
Our country allocations have remained stable except for changes in Mexico,
Venezuela and Russia. We had relatively small exposure to Mexico in 1994 as
Mexican bonds seemed rich compared to others in Latin America, and concerns over
political stability and the conduct of monetary policy prompted us to be
relatively underweight in Mexico. Following the devaluation and the collapse in
prices of Eurobonds in the first quarter of 1995, we increased our exposure to
Mexico to 16% of the Portfolio.
The Zedillo administration's orthodox program of tight fiscal and monetary
policy proved effective at reversing the trade accounts from deficit to surplus
and at keeping the inflation bubble sparked by the devaluation from spiraling
out of control. The peso rose 8% from the first quarter of 1995 level as foreign
capital flows resumed; however, the peso is down 31% since January 1, 1995. The
peso stabilized as the funding from the U.S. and the International Monetary Fund
allowed it to manage through the potential liquidity crisis. Through the end of
June, due to the success of the stabilization effort, Mexico had drawn on
substantially less funding than originally committed from the U.S. Treasury
Emerging Stabilization Fund (approximately $12.5 billion out of $20 billion) and
had rebuilt international reserves to $10.8 billion.
126
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1995
MORGAN STANLEY WORLDWIDE HIGH INCOME PORTFOLIO (CONTINUED)
Venezuela's economic performance in 1995 has continued to deteriorate and, as a
result, we reduced our exposure to that country to approximately 3.5%, because
of continued inaction of the government to tackle the economy's problems of high
fiscal deficits and the liquidity overhang in the banking system. A continued
reliance on price and exchange controls has not resulted in bringing down
inflation and has negatively impacted growth prospects.
Argentine assets rallied strongly in anticipation of the first round victory for
President Menem, who had campaigned on a platform which stressed continuity of
economic policy by commitment to the Convertibility Plan. Asset prices
encountered profit taking in the post election euphoria as signs of a dramatic
slowdown in the economy emerged. The strait jacket of the Convertibility Plan
presents a policy dilemma as it leaves deflation as the only way out of a
slowdown in economic activity. We reduced our exposure to Argentina in June to
6.8% of the Portfolio from the 8% level we had maintained for some time.
Brazil remains our largest position at around 27% of the Portfolio. Brazil has
the strongest economy in the region and has embarked on a long and tortuous task
of amending the constitution in order to de-regulate the economy and stabilize
the economy in the long run. The reform agenda is ambitious and the legislative
sessions are likely to be noisy, with vested interest groups vying to make the
outcome more acceptable to their constituencies. We are confident that when all
is said and done Brazil will emerge as the strongest credit in the region.
Emerging markets debt continues to offer attractive yields. Positive total
returns should result from continued improvement in perceived credit quality.
Reaffirmed commitments to orthodox economic policies in the post devaluation
world should bolster confidence in this asset class.
The second half of the calendar year 1994 was weak for the domestic fixed income
market on the heels of rising interest rates and a slowing U.S. economy. The
U.S. High Yield market was strong in the first half of calendar 1995 reflecting
the 162 basis point decline in government bond yields and the strong rally in
the equity markets. Towards the end of the period, however, the market paused as
investors feared that the economy was slowing at a potentially dangerous pace
for high yield investors. The Fed shared this concern and lowered short term
interest rates 25 basis points near the end of the second calendar quarter. This
stabilized the high yield market somewhat, although government bonds began to
deteriorate shortly after the Fed easing.
127
<PAGE>
Portfolio Performance (continued)
June 30, 1995
MORGAN STANLEY WORLDWIDE HIGH INCOME PORTFOLIO (CONTINUED)
We were fairly active in the high yield portion of the Portfolio. We sold five
issues and added seven issues. Several issues were added when the market for new
issues turned soft and buyers were hesitant to add new names to their
Portfolios. During this period we believe we picked up a couple of very good
values for the Portfolio. Also, during the first half of calendar 1995, the
quality spreads within the high yield market widened. We sold a few holdings
where earnings disappointed us and we felt trouble may come in the future.
The high yield portion of the Portfolio is well balanced with a healthy portion
of high quality cable television issues that have the potential to be upgraded,
in some cases to investment grade, along with a few cyclical credits that have
good market positions that we feel we bought at very attractive prices. The high
yield portion of the Portfolio appears well positioned in the current market
environment.
128
<PAGE>
Renaissance Balanced Portfolio
Statement of Assets and Liabilities
December 31, 1995 (Unaudited)
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value (cost $25,702,181)
(Note 1)--See accompanying schedule $28,378,301
Cash 16,691
Dividends and interest receivable 234,086
-----------
TOTAL ASSETS 28,629,078
LIABILITIES
Accounts payable and accrued expenses 22,710
-----------
TOTAL LIABILITIES 22,710
-----------
NET ASSETS $28,606,368
===========
Net Assets consist of:
Paid-in capital $24,556,911
Undistributed net investment income 388,812
Undistributed net realized gain on investments 984,525
Net unrealized appreciation on investment securities 2,676,120
-----------
NET ASSETS, for 2,312,364 shares outstanding $28,606,368
===========
NET ASSET VALUE, offering and redemption price per share $ 12.37
===========
</TABLE>
See accompanying notes.
2
<PAGE>
Renaissance Balanced Portfolio
Statement of Operations
Six Months Ended December 31, 1995 (Unaudited)
INVESTMENT INCOME
Dividends $ 112,091
Interest 414,660
----------
Total investment income 526,751
EXPENSES (Note 2)
Investment advisory and management fees 92,362
Custody and accounting fees 31,972
Professional fees 7,558
Directors' fees and expenses 2,640
Other expenses 3,407
----------
Total expenses 137,939
----------
Net investment income 388,812
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (Note 1)
Net realized gain on investments 1,283,676
Change in unrealized appreciation on investment securities 984,195
----------
Net realized and unrealized gain on investments 2,267,871
----------
Net increase in net assets resulting from operations $2,656,683
==========
See accompanying notes.
3
<PAGE>
Renaissance Balanced Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31, YEAR ENDED
1995 JUNE 30
(UNAUDITED) 1995
--------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 388,812 $ 915,608
Net realized gain (loss) on investments 1,283,676 (299,151)
Change in net unrealized appreciation 984,195 2,638,834
--------------------------
Net increase in net assets resulting from
operations 2,656,683 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 1,266,146 6,487,456
Proceeds from reinvested distributions 914,654 506,000
Cost of shares redeemed (2,348,656) (7,756,946)
--------------------------
Net decrease in net assets resulting from
share transactions (167,856) (763,490)
--------------------------
Total increase in net assets 1,574,173 1,985,801
NET ASSETS
Beginning of period 27,032,195 25,046,394
--------------------------
End of period (including undistributed net
investment income of $388,812 and
$914,654, respectively) $28,606,368 $27,032,195
==========================
OTHER INFORMATION
Shares:
Sold 103,974 603,427
Issued through reinvestment of distributions 74,582 47,019
Redeemed (193,803) (731,529)
--------------------------
Net decrease (15,247) (81,083)
==========================
</TABLE>
See accompanying notes.
4
<PAGE>
Renaissance Balanced Portfolio
Financial Highlights
<TABLE>
<CAPTION>
DECEMBER 14,
SIX MONTHS 1992
ENDED YEAR YEAR (COMMENCEMENT OF
DECEMBER 31, ENDED ENDED OPERATIONS)
1995 JUNE 30, JUNE 30, THROUGH JUNE 30,
(UNAUDITED) 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 .18 0.42 0.20 0.13
Net realized and unrealized gain (loss)
on investments .98 .99 (0.11) 0.29
--------------------------------------------------------------
Total from investment operations 1.16 1.41 0.09 0.42
Less distributions:
From net investment income (.40) (.17) (0.11) --
From net realized gain -- (.03) -- --
--------------------------------------------------------------
Total distributions (.40) (.20) (0.11) --
--------------------------------------------------------------
Net asset value, end of period $ 12.37 $ 11.61 $ 10.40 $ 10.42
==============================================================
TOTAL RETURN (A) 10.01% 13.71% 0.73% 7.70%
RATIOS AND SUPPLEMENTAL DATA (B)
Net assets, end of period $28,606,368 $27,032,195 $25,046,394 $7,798,672
Ratio of expenses to average net
assets (C) 0.97% 0.96% 1.06% 1.24%
Ratio of net investment income to
average net assets (C) 2.76% 3.53% 2.72% 2.36%
Portfolio turnover rate 33% 71% 85% 29%
</TABLE>
(A) Total returns 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)
5
<PAGE>
Renaissance Balanced Portfolio
Schedule of Investments (Unaudited)
December 31, 1995
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-----------------------
<S> <C> <C>
COMMON STOCKS (51.2%)
APPAREL AND OTHER TEXTILE PRODUCTS (2.4%)
Nike, Inc. 9,600 $ 668,400
BUSINESS SERVICES (4.4%)
Manpower, Inc. 20,200 568,125
Medtronic, Inc. 12,200 681,675
----------
1,249,800
CHEMICAL AND ALLIED PRODUCTS (4.0%)
Eastman Chemical Company 9,000 563,625
Schering-Plough 10,200 558,450
----------
1,122,075
DEPOSITORY INSTITUTIONS (2.1%)
First Chicago NBD Bancorp, Inc. 15,385 607,708
ELECTRONIC, GAS AND SANITARY SERVICES (2.4%)
Williams Companies, Inc. 15,700 688,837
FOOD AND KINDRED PRODUCTS (4.4%)
Conagra, Inc. 15,900 655,875
IBP, Inc. 12,000 606,000
----------
1,261,875
FURNITURE AND FIXTURES (2.1%)
Leggett & Platt, Inc. 24,600 596,550
FURNITURE AND HOME FURNISHINGS STORES (1.5%)
Circuit City Stores, Inc. 15,800 436,475
INDUSTRIAL MACHINERY AND EQUIPMENT (5.1%)
Applied Materials, Inc.* 12,200 479,612
Dell Computer Corporation* 13,400 466,488
Eaton Corporation 9,200 493,350
----------
1,439,450
</TABLE>
6
<PAGE>
Renaissance Balanced Portfolio
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
INSURANCE CARRIERS (6.2%)
All State Corporation 12,500 $ 514,062
Loews Corporation 7,700 603,487
Travelers Group, Inc. 9,000 622,462
-----------
1,740,011
OIL AND GAS EXTRACTION (4.6%)
Exxon Corporation 7,700 616,963
Halliburton Company 13,700 693,563
-----------
1,310,526
PAPER AND ALLIED PRODUCTS (1.9%)
Williamette Industries 9,600 540,000
PRINTING AND PUBLISHING (1.9%)
Tribune Company 9,000 550,125
RAILROAD TRANSPORTATION (2.1%)
Illinois Central Corporation 15,500 594,813
RUBBER AND MISCELLANEOUS PLASTICS PRODUCTS (1.9%)
Illinois Tool Works, Inc. 9,300 548,700
WHOLESALE TRADE-DURABLE GOODS (1.6%)
Arrow Electronics, Inc.* 10,200 439,875
WHOLESALE TRADE-NONDURABLE GOODS (2.6%)
Safeway, Inc.* 14,200 731,300
-----------
TOTAL COMMON STOCKS (Cost $12,542,992) 14,526,520
</TABLE>
7
<PAGE>
Renaissance Balanced Portfolio
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
---------------------------
<S> <C> <C>
LONG-TERM DEBT SECURITIES (45.9%)
U.S. GOVERNMENT OBLIGATIONS (33.9%)
U.S. Treasury Notes, 6.25%, due 2/15/2003 $1,785,000 $ 1,862,255
U.S. Treasury Notes, 5.75%, due 8/15/2003 735,000 743,842
U.S. Treasury Notes, 5.875%, due 2/15/2004 1,035,000 1,056,828
U.S. Treasury Notes, 7.25%, due 5/15/2004 1,835,000 2,036,850
U.S. Treasury Notes, 7.25%, due 8/15/2004 2,475,000 2,752,274
U.S. Treasury Notes, 7.875%, due 11/15/2004 745,000 862,338
U.S. Treasury Notes, 6.5%, due 5/15/2005 300,000 319,173
-----------
9,633,560
U.S. GOVERNMENT AGENCY--COLLATERALIZED
MORTGAGE OBLIGATIONS (0.1%)
Fed. Home Loan Mort. Corp., Var. Rate 4.38%
(effective 6/30/95), due 10/4/96 3,400,000 3,393,880
-----------
TOTAL LONG-TERM DEBT SECURITIES (Cost
$12,334,848) 13,027,440
SHORT-TERM SECURITIES (2.9%)
REPURCHASE AGREEMENT (0.1%)
State Street Bank, 4.25%, due 1/2/96 (Dated
12/29/95 Collateralized by U.S. Treasury
Bond 8.75% due 5/15/2017, value $29,172) 29,093 29,093
U.S. GOVERNMENT OBLIGATIONS (1.0%)
U.S. Treasury Bill, 5.085%, due 3/14/96 300,000 296,787
U.S. GOVERNMENT AGENCY-COLLATERALIZED
MORTGAGE OBLIGATIONS (1.8%)
Fed. Home Loan Mort. Corp., due 1/19/96 500,000 498,461
-----------
TOTAL SHORT-TERM SECURITIES
(Cost $824,341) 824,341
-----------
TOTAL INVESTMENTS (100.0%)
(Cost $25,702,181) $28,378,301
===========
</TABLE>
* Non-income producing
8
<PAGE>
Renaissance Balanced Portfolio
Schedule of Investments (Unaudited) (continued)
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the six
months ended December 31, 1995, aggregated $10,364,101 and $9,000,762,
respectively. Net unrealized appreciation for tax purposes aggregated
$2,676,120, of which $3,174,284 related to appreciated investment securities
and $498,164 related to depreciated investment securities. The aggregate cost
of securities is the same for book and tax purposes.
See accompanying notes.
9
<PAGE>
Zweig Asset Allocation Portfolio
Statement of Assets and Liabilities
December 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investment in securities, at value (cost $34,046,302)
(Note 1)--See accompanying schedule $39,516,207
Dividends, interest and other receivables 57,827
-----------
TOTAL ASSETS 39,574,034
LIABILITIES
Cash overdraft 3,553
Accounts payable and accrued expenses 38,312
-----------
TOTAL LIABILITIES 41,865
-----------
NET ASSETS $39,532,169
===========
Net Assets consist of:
Paid-in capital $33,274,394
Undistributed net investment income 327,940
Undistributed net realized gain on investment securities
and futures contracts 466,200
Net unrealized appreciation on investment securities
and futures contracts 5,463,635
-----------
NET ASSETS, for 2,924,281 shares outstanding $39,532,169
===========
NET ASSET VALUE, offering and redemption price per share $ 13.52
===========
</TABLE>
See accompanying notes.
10
<PAGE>
Zweig Asset Allocation Portfolio
Statement of Operations
Six Months Ended December 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C>
Dividends $ 275,353
Interest 287,066
----------
Total investment income 562,419
EXPENSES (Note 2)
Investment advisory and management fees 176,311
Custody and accounting fees 44,078
Professional fees 7,558
Directors' fees and expenses 2,640
Other expenses 3,892
----------
Total expenses 234,479
----------
Net investment income 327,940
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (Note 1)
Net realized gain on:
Investment securities 647,700
Futures contracts 62,606
----------
Net realized gain 710,306
Change in unrealized appreciation (depreciation) on:
Investment securities 1,293,379
Futures contracts (10,550)
----------
Change in unrealized appreciation 1,282,829
----------
Net realized and unrealized gain on investments 1,993,135
----------
Net increase in net assets resulting from operations $2,321,075
==========
</TABLE>
See accompanying notes.
11
<PAGE>
Zweig Asset Allocation Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31, YEAR ENDED
1995 JUNE 30,
(UNAUDITED) 1995
--------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 327,940 $ 947,151
Net realized gain (loss) on investments 710,306 (80,477)
Change in net unrealized appreciation 1,282,829 3,944,541
--------------------------
Net increase in net assets resulting
from operations 2,321,075 4,811,215
Distributions to shareholders from:
Net investment income (946,985) (248,100)
Capital share transactions:
Proceeds from sales of shares 3,288,887 7,443,090
Proceeds from reinvested dividends 946,985 248,100
Cost of shares redeemed (2,813,954) (7,081,317)
--------------------------
Net increase in net assets resulting
from share transactions 1,421,918 609,873
--------------------------
Total increase in net assets 2,796,008 5,172,988
NET ASSETS
Beginning of period 36,736,161 31,563,173
--------------------------
End of period (including undistributed
net investment income of $327,940 and
$946,985, respectively) $39,532,169 $36,736,161
==========================
OTHER INFORMATION
Shares:
Sold 239,633 640,047
Issued through reinvestment of dividends 71,107 21,399
Redeemed (206,902) (598,871)
--------------------------
103,838 62,575
==========================
</TABLE>
See accompanying notes.
12
<PAGE>
Zweig Asset Allocation Portfolio
Financial Highlights
<TABLE>
<CAPTION>
DECEMBER 14,
SIX MONTHS 1992
ENDED (COMMENCEMENT
DECEMBER 31, YEAR ENDED YEAR ENDED OF OPERATIONS)
1995 JUNE 30, JUNE 30, THROUGH JUNE 30,
(UNAUDITED) 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 0.11 0.33 0.10 0.08
Net realized and unrealized
gain on investments 0.72 1.33 0.58 0.73
-----------------------------------------------------------
Total from investment operations 0.83 1.66 0.68 0.81
Less distributions:
From net investment income (0.33) (0.08) (0.05) --
----------------------------------------------------------
Net asset value, end of period $ 13.52 $ 13.02 $ 11.44 $ 10.81
============================================================
TOTAL RETURN (A) 6.42% 14.57% 6.27% 14.86%
RATIOS AND SUPPLEMENTAL DATA (B)
Net assets, end of period $39,532,169 $36,736,161 $31,563,173 $3,855,544
Ratio of expenses to average
net assets (C) 1.20% 1.20% 1.39% 1.51%
Ratio of net investment income to
average net assets (C) 1.67% 2.73% 1.67% 1.40%
Portfolio turnover rate 32% 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)
13
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (Unaudited)
December 31, 1995
NUMBER
OF SHARES VALUE
------------------------
COMMON STOCKS (78.7%)
AMUSEMENT AND RECREATION SERVICES (0.5%)
Grand Casinos, Inc.* 7,800 $181,350
APPAREL AND ACCESSORY STORES (0.4%)
Ross Stores, Inc. 8,500 164,156
APPAREL AND OTHER FINISHED PRODUCTS (0.5%)
Westpoint Stevens, Inc.* 9,800 195,388
AUTO REPAIR, SERVICES, AND PARKING (0.3%)
Ryder System, Inc. 4,700 116,325
BUSINESS SERVICES (1.1%)
Computervision Corporation 12,500 192,188
Sun Microsystems, Inc.* 2,800 127,925
Teradyne, Inc.* 4,200 105,000
--------
425,113
CHEMICAL AND ALLIED PRODUCTS (6.7%)
Cabot Corporation 4,100 220,888
Cytec Industries, Inc.* 2,200 137,225
Eastman Chemical Company 3,100 194,138
First Mississippi Corporation 3,900 103,350
Georgia Gulf Corporation 2,800 86,100
IMC Global, Inc. 8,200 335,175
Imperial Chemical Industries - ADR 2,700 126,225
Lyondell Petrochemical 600 13,725
Mississippi Chemical Corporation 7,100 166,406
Monsanto Company 900 110,250
Norsk Hydro - ADR 5,100 213,563
Occidental Petroleum Corporation 12,000 256,500
Olin Corporation 3,100 230,175
14
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (Unaudited)(continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
----------------------
<S> <C> <C>
COMMON STOCKS (continued)
CHEMICAL AND ALLIED PRODUCTS (6.7%)>(continued)
Terra Industries, Inc. 13,800 $ 194,925
Union Carbide Corporation 6,600 247,500
-----------
2,636,145
COMMUNICATIONS (0.2%)
Telefonica de Espana -ADR 1,700 71,188
DEPOSITORY INSTITUTIONS (13.5%)
Astoria Financial Corporation 4,400 201,300
Bank of Boston Corporation 8,000 369,500
Bank of New York Company, Inc. 9,000 438,750
Bay Ridge Bancorp, Inc.* 7,200 158,400
Baybanks, Inc. 2,600 254,800
Chemical Banking Corporation 4,704 276,360
Citicorp 8,500 571,625
Comerica, Inc. 4,500 180,563
Crestar Financial Corporation 1,800 106,425
Dime Bancorp, Inc.* 1,500 17,438
First American Corporation, Tennessee * 3,800 180,500
First Bank System, Inc. 4,300 213,388
First Chicago NBD Corporation 9,011 355,935
First Interstate Bancorp 2,400 327,600
First Tennessee National Corporation 700 42,263
Glendale Federal Bank FSB* 14,400 252,000
Greenpoint Financial Corporation 4,000 106,500
Hibernia Corporation 14,200 152,650
Long Island Bancorp, Inc. 6,800 179,775
Midatlantic Corporation, Inc. 6,300 413,831
Republic New York Corporation 2,600 161,525
Southtrust Corporation 2,000 51,500
UJB Financial Corporation 1,700 60,775
</TABLE>
15
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------------------------
COMMON STOCKS (CONTINUED)
<S> <C> <C>
DEPOSITORY INSTITUTIONS (13.5%) (CONTINUED)
Union Bank San Francisco 4,600 $ 248,400
US Bancorp 588 19,735
-----------
5,341,538
ELECTRIC GAS AND SANITARY SERVICES (7.7%)
American Electric Power 2,700 109,350
Baltimore Gas & Electric 5,700 162,450
Centerior Energy Corporation 11,100 98,513
Columbia Gas System* 9,200 403,650
Entergy Corporation 5,900 172,575
Illinova Corporation 7,700 231,000
New England Electric System 1,900 75,288
New York State Electric & Gas 5,400 139,725
Northeast Utilities 9,400 229,125
Northern States Power 3,300 162,113
Pacific Enterprises 5,300 149,725
Pacific Gas & Electric 6,300 178,763
Pinnacle West Corporation 15,000 431,250
Portland General Corporation 3,100 90,288
Scecorp 9,500 168,625
Unicom Corporation 7,200 235,800
-----------
3,038,240
ELECTRIC AND OTHER ELECTRONIC EQUIPMENT (7.6%)
Advanced Semiconductor Materials* 3,100 153,450
Black & Decker Corporation 3,800 133,950
Burr-Brown Corporation* 5,600 140,700
Cypress Semiconductor Corporation* 5,000 63,750
Electro Scientific Industries, Inc.* 4,100 118,388
Hadco Corporation* 8,200 232,163
Hutchinson Tech* 2,900 121,438
Integrated Device Tech, Inc.* 7,700 99,619
Micron Technology, Inc. 11,400 451,725
</TABLE>
16
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-----------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ELECTRICAL AND OTHER ELECTRONIC EQUIPMENT (7.6%)
(CONTINUED)
Microsemi Corporation* 22,400 $ 194,600
National Semiconductor Corporation* 13,300 295,925
Philips Electronics 13,500 484,313
Read-Rite Corporation* 6,900 159,994
Texas Instruments, Inc. 5,300 274,275
Trinova Corporation 2,400 68,700
-----------
2,992,990
FOOD AND KINDRED PRODUCTS (1.7%)
Archer Daniels Midland 7,792 140,256
IBP, Inc. 10,300 520,150
-----------
660,406
FOOD STORES (0.1%)
Kroger Company* 800 30,000
FORESTRY (0.7%)
Georgia-Pacific Corporation 1,500 102,938
Weyerhauser Company 4,300 185,975
-----------
288,913
FURNITURE AND FIXTURES (0.1%)
Johnson Controls, Inc. 700 48,125
GENERAL MERCHANDISE STORES (0.4%)
Waban, Inc.* 7,600 142,500
HEALTH SERVICES (1.1%)
Community Psychiatric Centers* 1,800 22,050
Maxicare Health Plans, Inc.* 7,600 205,675
Ornda Healthcorp* 9,700 225,525
-----------
453,250
</TABLE>
17
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
HOLDING COMPANIES AND OTHER INVESTMENT OFFICES (2.3%)
Bankamerica Corporation 2,100 $ 135,975
Chase Manhattan Corporation 2,300 139,438
First Union Corporation 4,600 255,875
Fleet Financial Group, Inc. 5,300 215,975
Nationsbank Corporation 1,000 69,625
Wells Fargo & Company 500 108,000
----------
924,888
INDUSTRIAL MACHINERY AND EQUIPMENT (7.1%)
AGCO Corporation 5,050 257,550
Case Corporation 5,300 242,475
Compaq Computer Corporation* 3,700 177,600
Dana Corporation 1,700 49,725
Deere & Company 3,000 105,750
Dell Computer Corporation* 3,400 118,363
Digital Equipment* 2,500 160,313
Harris Corporation 4,100 223,963
Innovex, Inc. 12,200 188,338
International Business Machines Corporation 4,000 367,000
Kennametal, Inc. 4,900 155,575
Kulicke & Soffa Industries* 1,900 43,938
Seagate Technology, Inc.* 7,400 351,500
Smith International, Inc.* 3,600 84,600
Tecumseh Products Company 800 41,700
Timken Company 2,800 107,100
Western Digital Corporation* 7,200 128,700
----------
2,804,190
INSTRUMENTS AND RELATED PRODUCTS (1.0%)
Loral Corporation 6,600 233,475
Sci Systems, Inc.* 5,400 166,725
----------
400,200
</TABLE>
18
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
INSURANCE CARRIERS (4.1%)
AMBAC, Inc. 2,500 $ 117,188
Exel Limited 2,400 146,400
Loews Corporation 3,500 274,313
Old Republic International Corporation 400 14,200
Partnerre Holdings 6,800 185,725
Reliastar Financial Corporation 700 31,063
St. Paul Companies 2,700 150,188
Sunamerica, Inc. 1,500 71,250
Tig Holdings, Inc. 5,500 156,750
Transamerica Corporation 2,000 145,750
Travelers Group, Inc. 1,600 100,600
United Companies Financial Corporation 1,980 52,470
USF&G Corporation 6,500 109,688
USLife Corporation 2,850 85,144
--------------
1,640,729
METAL MINING (0.6%)
Asarco, Inc. 3,600 115,200
Phelps Dodge 2,300 143,175
--------------
258,375
NONDEPOSITORY INSTITUTIONS (0.9%)
Finova Group 300 14,475
Household International, Inc. 4,200 248,325
Textron, Inc. 1,500 101,250
-------------
364,050
PAPER AND ALLIED PRODUCTS (5.4%)
Boise Cascade Corporation 4,900 169,663
Bowater, Inc. 4,500 159,750
Champion International Corporation 3,500 147,000
Chesapeake Corporation 3,300 97,763
Federal Paper Board Company 5,000 259,375
</TABLE>
19
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
PAPER AND ALLIED PRODUCTS (5.4%) (CONTINUED)
James River Corp of Virginia 3,700 $ 89,263
Mead Corporation 5,100 266,475
Mercer Internationals* 9,500 194,156
Temple - Inland, Inc. 4,500 198,563
Union Camp Corporation 3,500 166,688
Westvaco Corporation 6,400 177,600
Willamette Industries 3,600 202,500
----------
2,128,796
PETROLEUM AND COAL PRODUCTS (2.0%)
BJ Services Company - Warrants* 340 2,593
British Petroleum - ADR 1,200 122,550
Coastal Corporation 7,300 271,925
Mobil Corporation 1,700 190,400
Repsol SA 6,500 213,688
----------
801,156
PRIMARY METAL INDUSTRIES (3.2%)
AK Steel Holding Corporation 1,800 61,650
Alcan Aluminium Ltd. 5,400 168,075
Alumax, Inc.* 6,700 205,188
Aluminum Company of America 800 42,300
British Steel PLC - ADR 4,600 117,875
Kaiser Aluminum Corporation 18,500 240,500
LTV Corporation* 11,400 156,750
Reynolds Metals Company 3,800 215,175
WHX Corporation* 6,200 67,425
----------
1,274,938
RAILROAD TRANSPORTATION (0.4%)
Conrail, Inc. 2,000 140,000
</TABLE>
20
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
RUBBER AND MISCELLANEOUS PLASTIC PRODUCTS (1.0%)
Dow Chemical 2,500 $ 175,938
Goodyear Tire & Rubber Company 2,802 127,141
Premark International, Inc. 2,000 101,250
----------
404,329
SECURITY AND COMMODITY BROKERS (0.4%)
Lehman Brothers Holdings 7,300 155,125
STONE, CLAY AND GLASS PRODUCTS (1.0%)
Owens-Corning Fiberglass Corporation* 3,800 170,525
USG Corporation* 7,100 213,000
----------
383,525
TRANSPORTATION BY AIR (2.7%)
British Airways - ADR 1,000 72,750
Delta Air Lines, Inc. 2,800 206,850
Federal Express Corporation* 4,300 317,663
Northwest Airlines Corporation* 4,200 213,938
UAL Corporation* 1,400 249,900
----------
1,061,101
TRANSPORTATION EQUIPMENT (3.2%)
Burlington Northern Santa Fe 2,146 167,371
Chrysler Corporation 1,901 105,268
Magna International, Inc. 1,300 56,225
McDonnell Douglas Corporation 6,200 570,400
Northrop Grumman Corporation 3,800 243,200
Teledyne, Inc. 5,000 128,125
----------
1,270,589
WHOLESALE TRADE, DURABLE GOODS (0.4%)
General Motors Corporation 2,700 142,763
</TABLE>
21
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
WHOLESALE TRADE, NONDURABLE GOODS (0.4%)
Gaylord Container Corporation* 5,100 $ 41,113
Safeway, Inc.* 2,200 113,300
-----------
154,413
-----------
TOTAL COMMON STOCKS (Cost $25,624,889) 31,094,794
PRINCIPAL
AMOUNT VALUE
-------------------------
SHORT-TERM SECURITIES (21.3%)
U.S. GOVERNMENT AGENCY DISCOUNT NOTES (20.0%)
Federal National Mortgage Association, 5.48%, $ 1,415,000 1,409,587
due 01/2/96
Federal National Mortgage Association, 5.67%, 3,350,000 3,348,374
due 01/4/96
Federal National Mortgage Association, 5.64%, 1,440,000 1,438,397
due 01/8/96
Federal National Mortgage Association, 5.65%, 1,720,000 1,715,921
due 01/16/96 -----------
7,912,279
U.S. GOVERNMENT OBLIGATIONS (0.3%)
U.S. Treasury Bills, 4.93%, due 03/14/96 100,000 99,003
REPURCHASE AGREEMENT (1.0%)
State Street Bank, 4.25%, due 1/2/96 (Dated 12/29/95 410,131 410,131
Collateralized by U.S. Treasury Bond 8.75% -----------
due 5/15/2017, value $419,016)
TOTAL SHORT-TERM SECURITIES (Cost $8,421,413) 8,421,413
-----------
TOTAL INVESTMENTS (100.0%)(Cost $34,046,302) $39,516,207
===========
</TABLE>
22
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
FUTURES CONTRACTS
CONTRACT
COLLATERAL EXPIRATION AMOUNT AT UNREALIZED
(PAR VALUE) DATE VALUE LOSS
---------------------------------------------------
<S> <C> <C> <C> <C>
2 S&P 500 Futures U.S. Treasury
Contracts-Long Bill: $100,000
due 3/14/96 3/15/96 $618,450 $(6,270)
=====================
</TABLE>
*Non-income producing
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the six
months ended December 31, 1995, aggregated $13,215,391 and $9,107,500,
respectively. Net unrealized appreciation for tax purposes aggregated
$5,469,905, of which $6,071,366 related to appreciated investment securities
and $601,461 related to depreciated investment securities. Aggregate cost of
securities is $34,026,330 for tax purposes.
See accompanying notes.
23
<PAGE>
Nicholas-Applegate Balanced Portfolio
Statement of Assets and Liabilities
December 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investment in securities, at value (cost $42,631,104)
(Note 1)--See accompanying schedule $47,601,544
Receivable for investment securities sold 583,156
Dividends, interest and other receivables 221,817
-----------
TOTAL ASSETS 48,406,517
LIABILITIES
Payable for investment securities purchased 320,195
Cash overdraft 12,061
Accounts payable and accrued expenses 34,544
-----------
TOTAL LIABILITIES 366,800
-----------
NET ASSETS $48,039,717
===========
Net Assets consist of:
Paid-in capital $41,077,881
Undistributed net investment income 513,172
Undistributed net realized gain on investments 1,478,224
Net unrealized appreciation on investment securities 4,970,440
-----------
NET ASSETS, for 3,518,817 shares outstanding $48,039,717
===========
NET ASSET VALUE, offering and redemption price per share $ 13.65
===========
</TABLE>
See accompanying notes.
24
<PAGE>
Nicholas-Applegate Balanced Portfolio
Statement of Operations
Six Months Ended December 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C>
Dividends $ 167,556
Interest 572,238
-----------
Total investment income 739,794
EXPENSES (Note 2)
Investment advisory and management fees 155,398
Custody and accounting fees 53,792
Professional fees 7,558
Directors' fees and expenses 2,640
Other expenses 7,234
-----------
Total expenses 226,622
-----------
Net investment income 513,172
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (Note 1)
Net realized gain on investments 3,097,479
Change in unrealized appreciation on investment securities (1,028,996)
-----------
Net realized and unrealized gain on investments 2,068,483
-----------
Net increase in net assets resulting from operations $ 2,581,655
===========
</TABLE>
See accompanying notes.
25
<PAGE>
Nicholas-Applegate Balanced Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31, YEAR ENDED
1995 JUNE 30,
(UNAUDITED) 1995
----------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 513,172 $ 936,566
Net realized gain (loss) on investments 3,097,479 (283,310)
Change in net unrealized appreciation
(depreciation) (1,028,996) 6,479,460
----------------------------
Net increase in net assets resulting
from operations 2,581,655 7,132,716
Distributions to shareholders from:
Net investment income (935,896) (386,000)
Capital share transactions:
Proceeds from sales of shares 3,608,365 7,522,637
Proceeds from reinvested dividends 935,896 386,000
Cost of shares redeemed (3,930,914) (8,232,738)
----------------------------
Net increase (decrease) in net assets
resulting from share transactions 613,347 (324,101)
----------------------------
Total increase in net assets
NET ASSETS 2,259,106 6,422,615
Beginning of period 45,780,611 39,357,996
----------------------------
End of period (including undistributed
net investment income of $513,172 and
$935,896, respectively) $48,039,717 $45,780,611
============================
OTHER INFORMATION
Shares:
Sold 259,596 641,113
Issued through reinvestment of
dividends 68,284 32,590
Redeemed (284,754) (689,568)
----------------------------
Net increase (decrease) 43,126 (15,865)
============================
</TABLE>
See accompanying notes.
26
<PAGE>
Nicholas-Applegate Balanced Portfolio
Financial Highlights
<TABLE>
<CAPTION>
SIX MONTHS DECEMBER 3, 1992
ENDED (COMMENCEMENT OF
DECEMBER 31, YEAR ENDED YEAR ENDED OPERATIONS)
1995 JUNE 30, JUNE 30, THROUGH
(UNAUDITED) 1995 1994 JUNE 30, 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 0.15 0.27 0.09 0.11
Net realized and unrealized gain (loss) on investments 0.60 1.74 (0.29) 1.39
----------- ----------- ----------- ----------
Total from investment operations 0.75 2.01 (0.20) 1.50
Less distributions:
From net investment income (0.27) (0.11) (0.03) --
----------- ----------- ----------- ----------
Net asset value, end of period $ 13.65 $ 13.17 $ 11.27 $ 11.50
=========== =========== =========== ==========
TOTAL RETURN (A) 5.71% 17.92% (1.70%) 26.07%
RATIOS AND SUPPLEMENTAL DATA (B)
Net Assets, end of period $48,039,717 $45,780,611 $39,357,996 $5,567,264
Ratio of expenses to average net assets (C) 0.95% 0.94% 1.03% 1.25%
Ratio of net investment income to average net assets (C) 2.15% 2.20% 1.69% 1.70%
Portfolio turnover rate 63% 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)
27
<PAGE>
Nicholas-Applegate Balanced Portfolio
Schedule of Investments (Unaudited)
December 31, 1995
NUMBER
OF SHARES VALUE
------------------------
COMMON STOCKS (61.9%)
AGRICULTURAL PRODUCTION, CROPS (0.6%)
Castle & Cooke, Inc. 2,267 $ 37,967
Dole Food Company 6,800 238,000
----------
275,967
AMUSEMENT AND RECREATION SERVICES (1.1%)
Grand Casinos, Inc.* 12,150 282,488
King World Productions* 5,600 217,700
----------
500,188
BUSINESS SERVICES (7.1%)
Adaptec, Inc.* 7,200 295,200
Altera Corporation* 6,600 327,938
Cisco Systems, Inc.* 4,500 336,093
Cognex Corporation* 12,200 427,000
Computer Associates International 5,760 327,600
McAfee Associates, Inc.* 6,200 265,825
S3 Incorporated* 15,400 270,463
Structural Dynamics Research* 11,400 333,450
Sun Microsystems, Inc.* 12,400 566,525
Teradyne, Inc.* 9,800 245,000
----------
3,395,094
CHEMICALS AND ALLIED PRODUCTS (3.2%)
Albemarle Corporation 16,400 317,750
Amgen, Inc.* 6,100 361,806
Eastman Chemical Company 7,200 450,900
Watson Pharmaceuticals* 7,700 377,300
----------
1,507,756
COMMUNICATIONS (1.0%)
Infinity Broadcasting* 7,400 275,650
Mobile Telecommunication Corporation* 9,400 200,925
----------
476,575
28
<PAGE>
Nicholas-Applegate Balanced Portfolio
Schedule of Investments (Unaudited)(continued)
NUMBER
OF SHARES VALUE
----------------------
COMMON STOCKS (CONTINUED)
DEPOSITORY INSTITUTIONS (2.7%)
Nationsbank Corporation 4,500 $ 313,312
Standard Federal Bancorporation 8,400 330,750
Union Bank of San Francisco 6,200 334,800
Zions Bancorporation 4,100 330,050
-----------
1,308,912
ELECTRIC, GAS AND SANITARY SERVICE (1.4%)
Noram Energy Corporation 38,000 337,250
Williams Companies 7,800 342,225
-----------
679,475
ELECTRONICS, AND OTHER ELECTRICAL EQUIPMENT (6.8%)
Ascend Communications, Inc.* 7,700 625,144
Black & Decker Corporation 8,700 306,675
Cypress Semiconductor Corporation* 20,100 256,275
Integrated Device Technology* 13,900 179,831
Linear Technology Corporation 7,900 311,063
Maxim Integrated Products* 8,800 338,800
Micron Technology, Inc. 9,700 384,363
Tencor Instruments* 5,700 138,938
Texas Instruments, Inc. 9,200 476,100
Xilinx, Inc.* 7,500 227,813
-----------
3,245,002
FOOD AND KINDRED PRODUCTS (1.3%)
Coca Cola Enterprises, Inc. 11,200 299,600
IBP, Inc. 6,000 303,000
-----------
602,600
FOOD STORES (0.7%)
Vons Companies, Inc.* 11,700 330,525
FORESTRY (0.6%)
Rayonier, Inc. 7,900 263,663
29
<PAGE>
Nicholas-Applegate Balanced Portfolio
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
INDUSTRIAL MACHINERY AND EQUIPMENT (6.0%)
Applied Materials, Inc. 6,000 $ 235,875
Bay Networks* 8,850 363,403
Cirrus Logic, Inc.* 2,400 47,550
Conner Peripherals* 16,900 354,900
Dell Computer Corporation* 10,400 362,050
Iomega Corporation* 6,300 306,731
Komag, Inc.* 5,300 243,138
Lam Research Corporation* 5,200 237,250
Seagate Technology, Inc.* 6,600 313,500
U.S. Robotics Corporation* 4,400 386,650
----------
2,851,047
INSTRUMENTS AND RELATED PRODUCTS (4.6%)
Boston Scientific Corporation* 17,100 837,900
Credence Systems Corporation* 8,700 197,925
KLA Instruments Corporation* 21,000 548,625
Nellcor, Inc.* 5,700 332,738
Sci Systems, Inc.* 9,400 290,225
----------
2,207,413
INSURANCE CARRIERS (3.0%)
Ace Limited 3,000 119,250
American Financial Group 11,800 361,375
Conseco, Inc. 5,300 331,913
Foundation Health Corporation* 7,100 305,300
Loews Corporation 4,000 313,500
----------
1,431,338
METAL MINING (2.4%)
Asarco, Inc. 14,300 457,600
Cyprus Amax Minerals Company 11,300 295,213
Phelps Dodge 6,200 385,950
----------
1,138,763
</TABLE>
30
<PAGE>
Nicholas-Applegate Balanced Portfolio
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-------------------
COMMON STOCKS (CONTINUED)
<S> <C> <C>
MISCELLANEOUS RETAIL (0.7%)
Longs Drug Stores, Inc. 7,400 $ 354,275
OIL AND GAS EXTRACTION (2.3%)
Louisiana Land & Exploration 300 12,863
Reading & Bates Corporation* 24,700 370,500
Shell Transport & Trading 4,400 358,050
Sonat Offshore Drilling 8,100 362,475
----------
1,103,888
PAPER AND ALLIED PRODUCTS (5.0%)
Bowater, Inc. 8,000 284,000
Champion International Corporation 6,100 256,200
Chesapeake Corporation 6,000 177,750
Consolidated Papers, Inc. 5,300 297,463
Kimberly-Clark, Inc. 9,360 774,540
Temple-Inland, Inc. 6,500 286,812
Willamette Industries 5,000 281,250
---------
2,358,015
PETROLEUM AND COAL INDUSTRIES (0.7%)
Valero Energy Corporation 12,800 313,600
PRIMARY METAL INDUSTRIES (0.8%)
Reynolds Metals Company 6,800 385,050
RAILROAD TRANSPORTATION (0.7%)
Norfolk Southern Corporation 4,300 341,313
SECURITY AND COMMODITY BROKERS (3.5%)
Bear Stearns Companies 11,500 228,562
Lehman Brothers Holdings 1,000 233,750
Merrill Lynch and Company 5,600 285,600
Morgan Stanley Group, Inc. 3,500 282,183
PaineWebber Group, Inc. 14,100 282,000
Salomon, Inc. Companies 8,500 301,750
-----------
1,613,845
31
</TABLE>
<PAGE>
Nicholas-Applegate Balanced Portfolio
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
----------------------
COMMON STOCKS (CONTINUED)
<S> <C> <C>
TRANSPORTATION BY AIR (2.1%)
Comair Holdings, Inc. 11,500 $ 307,625
Continental Airlines* 7,900 343,650
UAL Corporation* 2,000 357,000
----------
1,008,275
TRANSPORTATION EQUIPMENT (1.8%)
FMC Corporation* 3,700 250,213
Harsco Corporation 4,600 267,375
McDonnell Douglas Corporation 3,900 358,800
----------
876,388
WATER TRANSPORTATION (0.6%)
Tidewater, Inc. 9,700 305,550
WHOLESALE TRADE, DURABLE GOODS (0.6%)
Avnet, Inc. 6,000 268,500
WHOLESALE TRADE, NONDURABLE GOODS (0.6%)
Philip Morris Companies, Inc. 3,400 307,700
----------
TOTAL COMMON STOCKS (Cost $25,650,852) 29,450,717
</TABLE>
32
<PAGE>
Nicholas-Applegate Balance Portfolio
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
LONG-TERM DEBT SECURITIES (34.1%) ------------------------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (34.1%)
U.S. Treasury Notes, 8.25%, due 7/15/1998 1,520,000 1,626,871
U.S. Treasury Notes, 7.50%, due 5/15/2002 2,210,000 2,450,337
U.S. Treasury Notes, 6.25%, due 2/15/2003 2,090,000 2,180,455
U.S. Treasury Notes, 7.25%, due 5/15/2004 3,800,000 4,218,000
U.S. Treasury Notes, 7.875%, due 11/15/2004 3,200,000 3,704,000
U.S. Treasury Notes, 0%, due 8/15/2005 3,570,000 2,074,205
------------
16,253,868
------------
TOTAL LONG-TERM DEBT SECURITIES (Cost $15,083,293) 16,253,868
SHORT-TERM SECURITIES (4.0%)
REPURCHASE AGREEMENT (4.0%)
State Street Bank, 4.25%, due 1/2/96 (Dated 12/29/95
Collateralized by U.S. Treasury Bond 8.75%
due 5/15/2017, value $1,935,960) 1,896,959 1,896,959
-----------
TOTAL SHORT-TERM SECURITIES (Cost $1,896,959) 1,896,959
------------
TOTAL INVESTMENTS (100.0%)(Cost $42,631,104) $ 47,601,544
============
</TABLE>
*Non-income producing
<PAGE>
Nicholas-Applegate Balanced Portfolio
Schedule of Investments (Unaudited) (continued)
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the six
months ended December 31, 1995, aggregated $28,573,800 and $29,113,046,
respectively. Net unrealized appreciation for tax purposes aggregated
$4,970,440, of which $6,264,335 related to appreciated investment securities
and $1,293,895 related to depreciated investment securities. Aggregate cost of
securities is the same for book and tax purposes.
See accompanying notes.
34
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Statement of Assets and Liabilities
December 31, 1995 (Unaudited)
ASSETS
Investment in securities, at value (cost $17,650,643) $22,631,373
(Note 1)--See accompanying schedule
Cash 14,826
Dividends and interest receivable 21,879
-----------
TOTAL ASSETS 22,668,078
LIABILITIES
Accounts payable and accrued expenses 20,845
-----------
TOTAL LIABILITIES 20,845
-----------
NET ASSETS $22,647,233
===========
Net Assets consist of:
Paid-in capital $17,830,462
Undistributed net realized loss on investments (163,959)
Net unrealized appreciation on investment securities 4,980,730
-----------
NET ASSETS, for 1,656,643 shares outstanding $22,647,233
===========
NET ASSET VALUE, offering and redemption price per share $ 13.67
===========
See accompanying notes.
35
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Statement of Operations
Six Months Ended December 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME
Dividends $ 82,569
Interest 23,792
----------
Total investment income 106,361
EXPENSES (Note 2)
Investment advisory and management fees 67,972
Custody and accounting fees 23,529
Professional fees 7,558
Directors' fees and expenses 2,640
Regulatory fees 2,033
Other expenses 3,208
----------
Total expenses 106,940
----------
Net investment loss (579)
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (Note 1)
Net realized loss on investments (163,959)
Change in unrealized appreciation on investment securities 1,310,039
----------
Net realized and unrealized gain on investments 1,146,080
----------
Net increase in net assets resulting from operations $1,145,501
==========
</TABLE>
See accompanying notes.
36
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31, YEAR ENDED
1995 JUNE 30,
(UNAUDITED) 1995
-------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income (loss) $ (579) $ 17,603
Net realized gain (loss) on investments (163,959) 311,876
Change in net unrealized appreciation 1,310,039 3,972,691
-------------------------
Net increase in net assets resulting from
operations 1,145,501 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 8,189,112 5,228,036
Proceeds from reinvested distributions 170,038 --
Cost of shares redeemed (3,080,656) (3,829,957)
-------------------------
Net increase in net assets resulting from
share transactions 5,278,494 1,398,079
-------------------------
Total increase in net assets 6,253,957 5,700,249
NET ASSETS
Beginning of period 16,393,276 10,693,027
-------------------------
End of period (including undistributed net
investment income of $17,603 at June 30, 1995) $22,647,233 $16,393,276
=========================
OTHER INFORMATION
Shares:
Sold 591,765 485,092
Issued through reinvestment of distributions 12,192 --
Redeemed (222,580) (352,447)
-------------------------
Net increase 381,377 132,645
=========================
</TABLE>
See accompanying notes.
37
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Financial Highlights
<TABLE>
<CAPTION>
DECEMBER 8,
SIX MONTHS 1992
ENDED (COMMENCEMENT
DECEMBER 31, YEAR ENDED YEAR ENDED OF OPERATIONS)
1995 JUNE 30, JUNE 30, THROUGH JUNE 30,
(UNAUDITED) 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) (0.00) (E) 0.01 (0.02)(C) --
Net realized and unrealized
gain (loss) on investments 0.92 3.48 (0.33) (0.29)
-----------------------------------------------------------------------------------
Total from investment operations 0.92 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 $ 13.67 $ 12.85 $ 9.36 $ 9.71
===================================================================================
TOTAL RETURN (A) 7.17% 37.29% (3.60)% (5.16%)
RATIOS AND SUPPLEMENTAL DATA (B)
Net Assets, end of period $22,647,233 $16,393,276 $10,693,027 $5,143,365
Ratio of expenses to average
net assets (D) 1.02% 1.05% 1.29% 1.34%
Ratio of net investment income (loss)
to average net assets (D) (0.01)% 0.13% (0.17)% (0.06)%
Portfolio turnover rate 18% 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) 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.
38
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Schedule of Investments (Unaudited)
December 31, 1995
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-----------------------
<S> <C> <C>
COMMON STOCKS (97.8%)
BUILDING MATERIAL AND GARDEN SUPPLIES
(2.8%)
Home Depot, Inc. 13,333 $ 638,316
BUSINESS SERVICES (25.0%)
Adobe Systems, Inc. 9,700 602,613
Autodesk, Inc. 14,900 510,325
Automatic Data Processing 6,900 512,325
Cabletron Systems* 8,700 704,700
Cisco Systems, Inc.* 8,300 619,906
Electronic Arts, Inc.* 13,800 361,388
First Data Corporation 7,770 519,619
Microsoft Corporation* 5,600 491,750
Oracle Corporation 9,900 419,513
Silicon Graphics, Inc.* 14,900 409,750
Sybase, Inc.* 14,300 513,013
------------
5,664,902
CHEMICALS AND ALLIED PRODUCTS (13.2%)
Amgen, Inc.* 10,900 646,506
Great Lakes Chemical Corporation 7,600 547,200
Merck & Company, Inc. 9,100 598,325
Morton International, Inc. 16,700 599,112
Mylan Laboratories 25,500 599,250
------------
2,990,393
COMMUNICATIONS (10.9%)
AT&T Corporation 8,000 518,000
Capital Cities/ABC, Inc. 4,250 524,344
General Instrument Corp. 18,400 430,100
Qualcomm, Inc. 12,600 541,013
Tellabs, Inc. 12,000 445,500
------------
2,458,957
DEPOSITORY INSTITUTIONS (6.9%)
Bankamerica Corporation 8,400 543,900
First Interstate Bancorp 3,500 477,750
Nationsbank Corporation 7,600 529,150
------------
1,550,800
</TABLE>
39
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ELECTRONIC AND OTHER ELECTRICAL
EQUIPMENT (5.4%)
Intel Corporation 8,300 $ 471,543
Motorola, Inc. 7,600 433,200
Sensormatic Electronics Corporation 17,800 309,275
------------
1,214,018
FURNITURE AND HOME FURNISHINGS STORES
(1.8%)
Circuit City Stores, Inc. 14,600 403,325
GENERAL MERCHANDISE STORES (1.9%)
Walmart Stores, Inc. 19,600 438,550
HOLDING COMPANIES AND OTHER INVESTMENT
OFFICES (2.5%)
Norwest Corporation 17,200 567,600
INDUSTRIAL MACHINERY AND
COMPUTER EQUIPMENT (6.8%)
Applied Materials, Inc.* 10,500 412,781
Hewlett-Packard Company 6,200 519,250
Tyco International Limited 16,900 602,063
------------
1,534,094
INSURANCE CARRIERS (8.0%)
American International Group 5,950 550,375
Chubb Corporation 5,700 551,475
United Healthcare Corporation 10,800 707,400
------------
1,809,250
MISCELLANEOUS RETAIL (3.7%)
Office Depot, Inc.* 17,700 349,575
Staples, Inc.* 20,250 496,125
------------
845,700
MOTION PICTURES (2.3%)
Walt Disney Company 8,900 525,100
NONDEPOSITORY INSTITUTION (2.1%)
Dean Witter Discover & Company 9,900 465,300
</TABLE>
40
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES
OR PRINCIPAL
AMOUNT VALUE
----------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
SECURITY AND COMMODITY BROKERS (2.0%)
Charles Schwab Corporation 22,000 $ 442,750
TRANSPORTATION EQUIPMENT (2.5%)
General Electric Company 8,000 576,000
--------------
TOTAL COMMON STOCKS (Cost $17,144,325) 22,125,055
SHORT-TERM SECURITIES (2.2%)
REPURCHASE AGREEMENT (2.2%)
State Street Bank, 4.25%, due 1/2/96
(Dated 12/29/95 Collateralized by
U.S. Treasury Bond 8.75% due
5/15/2017, value $517,140) $506,318 506,318
--------------
TOTAL SHORT-TERM SECURITIES (Cost
$506,318) 506,318
--------------
TOTAL INVESTMENTS (100.0%) (Cost
$17,650,643) $22,631,373
==============
</TABLE>
* Non-income producing
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the
six months ended December 31, 1995, aggregated $8,608,608 and $3,654,396,
respectively. Net unrealized appreciation for tax purposes aggregated
$4,980,730, of which $5,398,356 related to appreciated investment securities
and $417,626 related to depreciated investment securities. The aggregate cost
of securities is the same for book and tax purposes.
See accompanying notes.
41
<PAGE>
Dreman Value Portfolio
Statement of Assets and Liabilities
December 31, 1995 (Unaudited)
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value (cost $12,074,740) $15,591,581
(Note 1)--See accompanying schedule
Cash 26,109
Dividends, interest and other receivables 31,676
-----------
TOTAL ASSETS 15,649,366
LIABILITIES
Accounts payable and accrued expenses 10,464
-----------
TOTAL LIABILITIES 10,464
-----------
NET ASSETS $15,638,902
===========
Net Assets consist of:
Paid-in capital $11,662,016
Undistributed net investment income 136,027
Undistributed net realized gain on investments 324,018
Net unrealized appreciation on investment securities 3,516,841
-----------
NET ASSETS, for 1,046,489 shares outstanding $15,638,902
===========
NET ASSET VALUE, offering and redemption price per share $ 14.94
===========
</TABLE>
See accompanying notes.
42
<PAGE>
Dreman Value Portfolio
Statement of Operations
Six Months Ended December 31, 1995 (Unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends $ 181,255
Interest 13,102
----------
Total investment income 194,357
EXPENSES (Note 2)
Investment advisory and management fees 28,662
Custody and accounting fees 14,831
Professional fees 7,558
Directors' fees and expenses 2,640
SEC registration fees 626
Foreign tax expense 614
Taxes and filing fees 484
Other expenses 2,915
----------
Total expenses 58,330
----------
Net investment income 136,027
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (Note 1)
Net realized gain on investments 324,018
Change in unrealized appreciation on investment securities 2,115,912
----------
Net realized and unrealized gain on investments 2,439,930
----------
Net increase in net assets resulting from operations $2,575,957
==========
</TABLE>
See accompanying notes.
43
<PAGE>
Dreman Value Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, 1995 YEAR ENDED
(UNAUDITED) JUNE 30, 1995
----------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 136,027 $ 190,518
Net realized gain on investments 324,018 110,922
Change in net unrealized appreciation 2,115,912 1,497,538
----------- -----------
Net increase in net assets resulting from operations 2,575,957 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 3,463,021 2,443,372
Proceeds from reinvested distributions 301,100 148,500
Cost of shares redeemed (1,276,986) (2,317,614)
----------- -----------
Net increase in net assets resulting from share transactions 2,487,135 274,258
----------- -----------
Total increase in net assets 4,761,992 1,924,736
NET ASSETS
Beginning of period 10,876,910 8,952,174
----------- -----------
End of period (including undistributed net investment income
$136,027 and $190,236, respectively) $15,638,902 $10,876,910
=========== ===========
OTHER INFORMATION
Shares:
Sold 251,849 218,818
Issued through reinvestment of distributions 21,840 13,171
Redeemed (90,932) (208,122)
----------- -----------
Net increase 182,757 23,867
=========== ===========
</TABLE>
See accompanying notes.
44
<PAGE>
Dreman Value Portfolio
Financial Highlights
<TABLE>
<CAPTION>
DECEMBER 14,
SIX MONTHS 1992
ENDED YEAR YEAR (COMMENCEMENT
DECEMBER 31, ENDED ENDED OF OPERATIONS)
1995 JUNE 30, JUNE 30, THROUGH JUNE 30,
(UNAUDITED) 1995 1994 1993
-------------------------------------------------------
SELECTED PER-SHARE DATA
<S> <C> <C> <C> <C>
Net asset value, beginning of
period $ 12.59 $ 10.66 $ 10.45 $ 10.00
Income from investment operations:
Net investment income 0.10 0.26 0.12 0.11
Net realized and unrealized gain on
investments 2.55 1.85 0.17 0.34
-------------------------------------------------------
Total from investment operations 2.65 2.11 0.29 0.45
Less distributions:
From net investment income (0.19) (.14) (0.08) --
From net realized gain (0.11) (.04) -- --
-------------------------------------------------------
Total distributions (0.30) (0.18) (0.08) --
-------------------------------------------------------
Net asset value, end of period $ 14.94 $ 12.59 $ 10.66 $ 10.45
======================================================
TOTAL RETURN (A) 21.24% 19.98% 2.80% 8.25%
RATIOS AND SUPPLEMENTAL DATA (B)
Net assets, end of period $15,638,902 $10,876,910 $8,952,174 $1,671,220
Ratio of expenses to average
net assets (C) 0.89% 1.13% 1.40% 1.24%
Ratio of net investment income to
average net assets (C) 2.07% 1.98% 1.98% 2.00%
Portfolio turnover rate 8% 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.
(C) The ratios of expenses and net investment income to average net assets
before voluntary expense reimbursement were 1.61% and 1.76%, respectively,
for the year ended June 30, 1994 and were 8.43% and (1.49%), respectively,
for the period December 14, 1992 (commencement of operations) through June
30, 1993. (Note 2)
45
<PAGE>
Dreman Value Portfolio
Schedule of Investments (Unaudited)
December 31, 1995
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
----------------------
COMMON STOCKS (95.2%)
APPAREL AND OTHER FINISHED PRODUCTS (4.8%)
<S> <C> <C>
Liz Claiborne, Inc. 11,400 $ 316,350
VF Corporation 8,200 432,550
----------
748,900
BASIC CHEMIC PLASTICS AND SYNTHETICS (8.7%)
Bristol-Myers Squibb Company 2,200 188,925
Eli Lilly & Company 7,600 427,500
Glaxo Holdings PLC-ADR 5,200 146,900
Merck & Company Inc. 4,100 269,575
Upjohn Company 8,265 320,269
----------
1,353,169
DEPOSITORY INSTITUTIONS (13.2%)
Ahmanson (H.F.) & Company 10,000 265,000
Bankers Trust New York 5,300 352,450
Barnett Banks, Inc. 4,800 283,200
Fleet Financial Group, Inc. 1,700 69,275
Great Western Financial 11,000 280,500
J.P. Morgan & Company 1,500 120,375
Keycorp 6,000 217,500
Midatlantic Corporation, Inc. 4,200 275,888
Wells Fargo & Company 900 194,400
----------
2,058,588
ELECTRIC, GAS AND SANITARY SERVICE (5.1%)
Columbia Gas System* 18,100 794,137
ELECTRICAL & ELECTRONIC MACHINERY, EQUIP.
(3.3%)
General Electric Company 7,200 518,400
FOOD AND KINDRED PRODUCTS (1.7%)
Nestle SA-ADR 4,700 259,087
</TABLE>
46
<PAGE>
Dreman Value Portfolio
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-----------------------
COMMON STOCKS (CONTINUED)
GENERAL MERCHANDISE STORES (5.0%)
<S> <C> <C>
Dayton-Hudson Corporation 5,000 $ 375,000
May Department Stores Company 3,500 147,875
TJX Companies, Inc. 13,300 251,038
----------
773,912
HEALTH SERVICES (1.3%)
Tenet Health Care* 9,500 197,125
HOLDING COMPANIES AND OTHER INVESTMENT
OFFICES (9.9%)
Bankamerica Corporation 4,000 259,000
First Chicago Corporation 8,326 328,877
First Union Corporation 3,800 211,375
Nationsbank Corporation 2,500 174,062
PNC Bank Corporation 17,900 577,275
----------
1,550,589
INDUSTRIAL MACHINERY AND COMPUTER
EQUIPMENT (1.1%)
Apple Computer 5,300 168,606
INSTRUMENTS AND RELATED PRODUCTS (2.0%)
Baxter International, Inc. 3,000 125,625
Becton Dickinson & Company 2,500 187,500
----------
313,125
INSURANCE AGENTS, BROKERS AND SERVICE (2.4%)
Humana, Inc.* 13,500 369,563
INSURANCE CARRIERS (6.4%)
American General Corporation 6,800 237,150
American International Group 2,250 208,125
Ohio Casualty Corporation 3,000 115,500
Travelers Group, Inc. 1,200 75,450
U.S. Healthcare, Inc. 7,800 362,213
----------
998,438
</TABLE>
47
<PAGE>
Dreman Value Portfolio
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
LUMBER AND WOOD PRODUCTS (2.5%)
Louisiana-Pacific Corporation 15,800 $ 383,150
NONDEPOSITORY INSTITUTION (10.7%)
Federal National Mortgage Association 6,700 831,637
Federal Home Loan Mortgage Corporation 10,100 843,350
Transport Holdings, Inc.* 6 250
-----------
1,675,237
OIL & GAS EXTRACTION (1.1%)
Atlantic Richfield Company 1,500 166,125
PETROLEUM AND COAL PRODUCTS (1.6%)
Amoco Corporation 3,500 251,563
RETAIL FOOD STORES (1.2%)
Giant Food, Inc. 6,000 189,000
STONE, CLAY, GLASS, AND CONCRETE
PRODUCTS (0.9%)
Hanson PLC-ADR 9,000 137,250
U.S. Industries, Inc.* 450 8,269
-----------
145,519
TEXTILE MILL PRODUCTS (3.0%)
Fruit of the Loom, Inc.* 19,000 463,125
TOBACCO MANUFACTURERS OF CIGARETTES (0.9%)
UST, Inc. 4,400 146,850
TRANSPORTATION EQUIPMENT (3.7%)
Ford Motor Company 19,900 577,100
WHOLESALE TRADE-NONDURABLE GOODS (4.7%)
Burlington Coat Factory* 8,500 87,125
Phillip Morris 7,200 651,600
-----------
738,725
-----------
TOTAL COMMON STOCKS (Cost $11,323,766) 14,840,033
</TABLE>
48
<PAGE>
Dreman Value Portfolio
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES
OR PRINCIPAL
AMOUNT VALUE
----------------------------
<S> <C> <C>
PREFERRED STOCKS (0.0%)
INSURANCE CARRIERS (0.0%)
Everen Capital Corporation 132 $ 3,234
-----------
TOTAL PREFERRED STOCKS (COST $2,660) 3,234
SHORT-TERM SECURITIES (4.8%)
REPURCHASE AGREEMENT (4.8%)
State Street Bank, 4.25%, due 1/2/96
(Dated 12/29/95 Collateralized by U.S.
Treasury Bond due 5/15/2017,
value $762,450) $748,314 748,314
-----------
TOTAL SHORT-TERM SECURITIES (Cost $748,314) 748,314
-----------
TOTAL INVESTMENTS (100.0%) (Cost $12,074,740) $15,591,581
===========
</TABLE>
* Non-income producing
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the six
months ended December 31, 1995, aggregated $2,588,831 and $972,512,
respectively. Net unrealized appreciation for tax purposes aggregated
$3,516,841, of which $3,657,888 related to appreciated investment securities
and $141,047 related to depreciated investment securities. The aggregate cost
of securities is the same for book and tax purposes.
See accompanying notes.
49
<PAGE>
<TABLE>
<CAPTION>
Zweig Equity (Small Cap) Portfolio
Statement of Assets and Liabilities
December 31, 1995 (Unaudited)
<S> <C>
ASSETS
Investment in securities, at value (cost $8,359,003)
(Note 1)--See accompanying schedule $10,006,880
Cash 330,966
Dividends, interest and other receivables 14,232
-----------
TOTAL ASSETS 10,352,078
LIABILITIES
Accounts payable and accrued expenses 7,466
-----------
TOTAL LIABILITIES 7,466
-----------
NET ASSETS $10,344,612
===========
Net Assets consist of:
Paid-in capital $ 8,838,876
Undistributed net investment income 33,714
Undistributed net realized loss on investment securities
and futures contracts (175,855)
Net unrealized appreciation on investment securities
and futures contracts 1,647,877
-----------
NET ASSETS, for 819,555 shares outstanding $10,344,612
===========
NET ASSET VALUE, offering and redemption price per share $ 12.62
===========
</TABLE>
See accompanying notes.
50
<PAGE>
<TABLE>
<CAPTION>
Zweig Equity (Small Cap) Portfolio
Statement of Operations
Six Months Ended December 31, 1995 (Unaudited)
<S> <C>
INVESTMENT INCOME
Dividends $ 66,195
Interest 36,587
-----------
Total investment income 102,782
EXPENSES (Note 2)
Investment advisory and management fees 47,111
Custody and accounting fees 10,095
Professional fees 7,558
Directors' fees and expenses 2,640
Other expenses 1,764
-----------
Total expenses 69,168
-----------
Net investment income 33,614
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (Note 1)
Net realized gain (loss) on:
Investment securities 431,254
Futures contracts (146,107)
-----------
Net realized gain 285,147
Change in unrealized appreciation (depreciation) on:
Investment securities 513,234
Futures contracts 15,829
-----------
Change in unrealized appreciation 529,063
-----------
Net realized and unrealized gain on investments 814,210
-----------
Net increase in net assets resulting from operations $ 847,824
===========
</TABLE>
See accompanying notes.
51
<PAGE>
<TABLE>
<CAPTION>
Zweig Equity (Small Cap) Portfolio
Statements of Changes in Net Assets
SIX MONTHS
ENDED
DECEMBER 31, YEAR ENDED
1995 JUNE 30,
(UNAUDITED) 1995
----------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 33,614 $ 119,424
Net realized gain (loss) on investments 285,147 (389,775)
Change in net unrealized appreciation 529,063 1,043,789
---------------------------------
Net increase in net assets resulting from operations 847,824 773,438
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 2,407,069 1,913,641
Proceeds from reinvested distributions 119,225 90,500
Cost of shares redeemed (944,073) (2,244,234)
---------------------------------
Net increase (decrease) in net assets resulting from
share transactions 1,582,221 (240,093)
---------------------------------
Total increase in net assets 2,310,820 442,845
NET ASSETS
Beginning of period 8,033,792 7,590,947
---------------------------------
End of period (including undistributed net investment
income of $33,714 and $119,325, respectively) $10,344,612 $ 8,033,792
=================================
OTHER INFORMATION
Shares:
Sold 193,831 178,821
Issued through reinvestment of distributions 9,732 8,378
Redeemed (75,392) (208,320)
---------------------------------
Net increase (decrease) 128,171 (21,121)
=================================
</TABLE>
See accompanying notes.
52
<PAGE>
<TABLE>
<CAPTION>
Zweig Equity (Small Cap) Portfolio
Financial Highlights
DECEMBER 14,
SIX MONTHS 1992
ENDED YEAR YEAR (COMMENCEMENT
DECEMBER 31, ENDED ENDED OF OPERATIONS)
1995 JUNE 30, JUNE 30, THROUGH JUNE 30,
(UNAUDITED) 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 0.03 0.17 0.15 0.05
Net realized and unrealized gain on investments 1.13 0.93 0.50 0.06
-------------------------------------------------------------
Total from investment operations 1.16 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 $ 12.62 $ 11.62 $ 10.65 $ 10.11
=============================================================
TOTAL RETURN (A) 10.06% 10.39% 6.53% 2.02%
RATIOS AND SUPPLEMENTAL DATA (B)
Net assets, end of period $10,344,612 $8,033,792 $7,590,947 $2,115,634
Ratio of expenses to average net assets 1.54% 1.55% 1.72% 1.61%
Ratio of net investment income to average net assets .75% 1.54% 1.75% 0.84%
Ratio of expenses to average net assets before
voluntary expense reimbursement (Note 2) 1.54% 1.59% 2.14% 7.29%
Ratio of net investment income (loss) to average net
assets before voluntary expense reimbursement (Note 2) .75% 1.50% 1.32% (1.80%)
Portfolio turnover rate 29% 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.
53
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (Unaudited)
December 31, 1995
NUMBER
OF SHARES VALUE
--------------------------
COMMON STOCKS (80.5%)
AGRICULTURAL PRODUCTION - CROPS (0.1%)
Chiquita Brands International 700 $ 9,625
AGRICULTURAL PRODUCTION - LIVESTOCK (0.2%)
Hudson Foods, Inc. 1,200 20,700
AMUSEMENT AND RECREATION SERVICES (0.1%)
Grand Casinos, Inc.* 450 10,463
APPAREL AND ACCESSORY STORES (0.2%)
Claire's Stores, Inc. 500 8,813
Ross Stores, Inc. 500 9,656
--------
18,469
APPAREL AND OTHER FINISHED PRODUCTS (0.3%)
Quiksilver, Inc.* 600 20,513
Westpoint Stevens, Inc.* 500 9,969
--------
30,482
AUTO REPAIR, SERVICES, AND PARKING (0.05%)
PHH Corporation 100 4,675
AUTOMOTIVE DEALERS AND SERVICE STATIONS (0.01%)
Getty Petroleum Corporation 900 12,150
BUILDING MATERIALS AND GARDEN SUPPLIES (0.3%)
General Host Corporation* 1,400 5,600
Shelter Components Corporation 1,450 23,744
--------
29,344
BUSINESS SERVICES (3.1%)
Aaron Rents, Inc. 700 12,688
ADT, Limited* 1,400 21,000
American List Corporation 560 14,280
54
<PAGE>
<TABLE>
<CAPTION>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (Unaudited) (continued)
NUMBER
OF SHARES VALUE
-----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
BUSINESS SERVICES (3.1%) (CONTINUED)
Amplicon, Inc. 500 $ 7,563
Comdisco, Inc. 450 10,181
Computer Task Group, Inc. 200 3,950
Computervision Corporation 1,500 23,063
Electro Rent Corporation* 1,800 38,250
Heritage Media Corporation* 100 2,563
Hogan Systems, Inc.* 900 12,263
Microcom, Inc.* 700 18,244
Norstan, Inc.* 1,000 25,375
Orbotech Ltd.* 800 9,400
PCI Services, Inc.* 700 6,956
Proteon, Inc.* 1,200 7,800
Sequoia Systems, Inc.* 1,800 9,675
Software Spectrum, Inc.* 300 6,375
Sun Microsystems, Inc.* 1,200 54,825
Teradyne, Inc.* 400 10,000
Volt Info Sciences, Inc.* 700 18,638
--------
313,089
CHEMICAL AND OTHER ALLIED PRODUCTS (4.6%)
Akzo Nobel Nv - ADR 400 23,150
Albemarle Corporation 500 9,688
Arco Chemical Company 700 34,038
Cabot Corporation 200 10,775
Cambrex Corporation 300 12,413
Cytec Industries, Inc.* 200 12,475
Eastman Chemical Company 300 18,788
Electrochemical Industries Frutar* 600 1,744
First Mississippi Corporation 800 21,200
Georgia Gulf Corporation 400 12,300
Icn Pharmaceuticals, Inc. 500 9,625
IMC Global, Inc. 500 20,438
Imperial Chemical Ind. - ADR 300 14,025
Incstar Corporation* 800 3,300
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (Unaudited) (continued)
NUMBER
OF SHARES VALUE
-----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
CHEMICAL AND OTHER ALLIED PRODUCTS (4.6%) (CONTINUED)
Jean Philippe Fragrances* 1,000 $ 8,313
Lyondell Petrochemical 400 9,150
MacDermaid, Inc. 300 17,850
Mississippi Chemical Corporation 400 9,375
Monsanto Company 100 12,250
NL Industries* 600 7,425
Norsk Hydro - ADR 1,200 50,250
Nova Corporation 3,400 27,200
Occidental Petroleum Corporation 700 14,963
Olin Corporation 200 14,850
Rexene Corporation* 700 7,525
Terra Industries, Inc. 1,600 22,600
Union Carbide Corporation 1,100 41,250
Wellman, Inc. 400 9,100
--------
456,060
COAL MINING (0.1%)
Addington Resources, Inc.* 500 7,219
Ashland Coal 300 6,413
--------
13,632
COMMUNICATIONS (0.4%)
Telefonica de Espana - ADR 500 20,938
Vtel Corporation* 800 14,900
--------
35,838
DEPOSITORY INSTITUTIONS (12.7%)
Astoria Financial Corporation 300 13,725
Banco Latinoamericano - ADR 200 9,300
Bank of Boston Corporation 1,100 50,806
Bank of New York Company, Inc. 900 43,875
Bankamerica Corporation 600 38,850
Banponce Corporation 500 19,469
Barnett Banks, Inc. 700 41,300
</TABLE>
56
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
----------------------
COMMON STOCKS (CONTINUED)
<S> <C> <C>
DEPOSITORY INSTITUTIONS (12.7%)(CONTINUED)
Baybanks, Inc. 200 $ 19,600
Brooklyn Bancorp, Inc.* 300 12,188
California Federal Bank* 800 12,650
Centura Banks, Inc. 300 10,538
Charter One Financial, Inc. 300 9,150
Chase Manhattan Corporation 600 36,375
Chemical Banking Corporation 700 41,125
Citicorp 700 47,075
City National Corporation 900 12,600
Comerica, Inc. 1,200 48,150
Commerce Bancshares, Inc. 630 24,019
Commercial Federal Corporation 400 15,100
Cullen/Frost Bankers, Inc. 100 5,013
CVB Financial Corporation 21 318
Deposit Guaranty Corporation 300 13,463
Dime Bancorp, Inc.* 500 5,813
Eagle Financial Corporation 210 5,460
First American Corporation- Tennessee* 300 14,250
First Bank System, Inc. 400 19,850
First Chicago NBD Corporation 2,367 93,497
First Empire State Corporation 100 21,800
First Interstate Bancorp 300 40,950
First Union Corporation 300 16,688
Fleet Financial Group, Inc. 500 20,375
Glendale Federal Bank* 700 12,250
Greenpoint Financial Corporation 300 7,988
Hibernia Corporation 1,200 12,900
Hubco, Inc. 450 9,956
Investors Financial Services* 167 3,444
Long Island Bancorp, Inc. 400 10,575
Mercantile Bancorp 300 13,800
Metrobank 400 12,500
Midatlantic Corporation, Inc. 600 39,413
National Australia Bank - ADR 100 4,525
</TABLE>
57
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
DEPOSITORY INSTITUTIONS (12.7%) (CONTINUED)
National City Corporation 500 $ 16,563
National Westminster Bank PLC - ADR 700 42,525
North Fork Bancorporation 946 23,887
Norwest Corporation 1,520 50,160
Republic New York Corporation 700 43,488
Riggs National Corporation Washington DC* 1,300 16,900
Santa Monica Bank* 700 9,625
Standard Federal Bancorporation 400 15,750
Star Banc Corporation 200 11,900
Sterling Bancorp 1,100 13,750
TCF Financial Corporation 600 19,875
UJB Financial Corporation 600 21,450
Union Bank San Francisco 300 16,200
Westamerica Bancorporation 100 4,300
Westcorp 635 11,748
Westpac Banking - ADR 2,200 49,500
Zions Bancorporation 100 8,050
----------
1,266,394
ELECTRIC, GAS AND SANITARY SERVICES (4.6%)
American Electric Power 400 16,200
American Water Works, Inc. 200 7,775
Baltimore Gas & Electric 600 17,100
Boston Edison Company 200 5,900
Centerior Energy Corporation 1,200 10,650
Central Vermont Public Services 800 10,700
Cilcorp, Inc. 300 12,713
CMS Energy Corporation 400 11,950
Columbia Gas System* 300 13,163
DQE, Inc. 200 6,150
Entergy Corporation 600 17,550
Illinova Corporation 400 12,000
Interstate Power Company 400 13,300
New England Electric System 200 7,925
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (Unaudited) (continued)
NUMBER
OF SHARES VALUE
------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ELECTRIC, GAS AND SANITARY SERVICES (4.6%) (CONTINUED)
New York State Electric & Gas 400 $ 10,350
Northeast Utilities 800 19,500
Northern States Power 400 19,650
Pacific Enterprises 1 28
Pacific Gas & Electric 1,400 39,725
Pacificorp 800 17,000
Pinnacle West Corporation 400 11,500
Portland General Corporation 300 8,738
Public Service Company of New Mexico* 600 10,575
Rochester Gas & Electric 400 9,050
Scecorp 1,900 33,725
Sierra Pacific Resources 600 14,025
Southern Union Company* 105 2,651
St Joseph Light & Power 300 10,650
TNP Enterprises, Inc. 700 13,125
Unicom Corporation 1,500 49,125
Westcoast Energy, Inc. 500 7,313
Western Waste Industries* 800 21,900
--------
461,706
ELECTRONIC AND OTHER ELECTRIC EQUIPMENT (5.7%)+A192
Advanced Semiconductor Materials* 200 9,900
Altron Corporation* 1,500 44,813
Bel Fuse, Inc.* 600 6,375
Black & Decker Corporation 300 10,575
BMC Industries, Inc.-Minnesota 1,200 27,900
Burr-Brown Corporation* 550 13,819
Charter Power Systems 700 19,863
Computer Products, Inc.* 2,400 27,450
CTS Corporation 200 7,550
Cypress Semiconductor Corporation* 600 7,650
Electro Scientific Industries, Inc.* 300 8,663
Electrolux - ADR 200 8,250
Evans & Sutherland CMP Corporation* 400 9,050
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (Unaudited) (continued)
NUMBER
OF SHARES VALUE
------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ELECTRONIC AND OTHER ELECTRIC EQUIPMENT (5.7%)
(CONTINUED)
Exide Electrs Group, Inc.* 600 $ 8,700
Genlyte Group, Inc.* 1,800 12,150
Hadco Corporation* 800 22,650
Harmon International 315 12,639
Helen of Troy Ltd.* 700 14,481
Hutchinson Tech.* 200 8,375
Integrated Device Tech, Inc.* 1,000 12,938
Interdigital Communication Corporation* 1,200 8,850
International Rectifier Corporation* 1,400 35,000
Kollmorgen Corporation 900 9,900
Lamson & Sessions Company* 1,100 8,525
Micron Technology, Inc. 700 27,738
Microsemi Corporation* 1,000 8,688
Moog, Inc.* 300 5,175
National Semiconductor Corporation* 1,300 28,925
Park Electrochemical Corporation 600 19,800
Phillips Electronics 1,100 39,463
Read-Rite Corporation* 300 6,956
Technitrol, Inc. 500 11,375
Texas Instruments, Inc. 700 36,225
Thomas Industries, Inc. 400 9,400
Trinova Corporation 300 8,588
Watkins-Johnson Company 300 13,125
--------
571,524
ENGINEERING AND MANAGEMENT SERVICES (0.1%)
Bet PLC - ADR 1,000 7,625
Innerdyne* 1,900 5,225
--------
12,850
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (Unaudited) (continued)
NUMBER
OF SHARES VALUE
------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
FABRICATED METAL PRODUCTS (0.4%)
Ameron Inc 400 $ 15,050
Butler Manufacturing Company 150 5,906
Commercial Intertech Corporation 300 5,438
Great American Management and Investment* 200 9,400
International Aluminum Company 100 2,875
United Dominion Industries 100 2,163
--------
40,832
FOOD AND KINDRED PRODUCTS (1.5%)
Alpine Lace Brands, Inc.* 900 8,663
Archer Daniels Midland Group, Inc. 2,905 52,290
Coca Cola Enterprises, Inc. 1,600 42,800
IBP, Inc. 500 25,250
Montedison SPA 900 5,850
Morningstar Group, Inc.* 600 4,875
Orange-Co, Inc. 500 3,875
Seneca Foods Corporation* 400 7,525
--------
151,128
FOOD STORES (0.6%)
Great Atlantic & Pacific Tea Company 300 6,900
Kroger Company* 600 22,500
Riser Foods Inc 1,100 17,738
Schultz Sav O Stores, Inc. 700 10,588
--------
57,726
FORESTRY (0.4%)
Georgia-Pacific Corporation 400 27,450
Rayonier, Inc. 300 10,013
--------
37,463
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (Unaudited) (continued)
NUMBER
OF SHARES VALUE
------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
FURNITURE AND FIXTURES (0.5%)
Chromcraft Revington, Inc.* 500 $ 13,313
Falcon Products, Inc. 660 8,663
Kinetic Concepts 1,100 13,269
Lear Seating Corporation* 400 11,600
--------
46,845
FURNITURE AND HOME FURNISHING STORES (0.2%)
Inacom Corporation* 700 9,800
Pier 1 Imports, Inc. 900 10,238
--------
20,038
GENERAL BUILDING CONTRACTORS (0.6%)
Continental Homes Holding Corporation 600 14,775
MDC Holdings, Inc. 1,800 12,825
Toll Brothers, Inc.* 700 16,100
US Home Corporation* 400 11,650
Webb Corporation 400 8,050
--------
63,400
GENERAL MERCHANDISE STORES (0.1%)
Gottschalks, Inc.* 800 4,200
Waban, Inc.* 500 9,375
--------
13,575
HEAVY CONSTRUCTION (0.2%)
Granite Construction, Inc. 500 15,813
HEALTH SERVICES (0.5%)
Community Psychiatric Centers* 800 9,800
Maxicare Health Plans, Inc.* 500 13,531
Ornda Healthcorp* 400 9,300
Universal Health Services* 500 22,188
--------
54,819
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (Unaudited) (continued)
NUMBER
OF SHARES VALUE
------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
HOLDING AND OTHER INVESTMENT OFFICES (1.4%)
Asset Investors Corporation 2,600 $ 7,150
Brascan Ltd. 600 10,500
Centerpoint Properties Corporation 400 9,250
Crestar Financial Corporation 300 17,738
CV Reit, Inc. 400 4,500
CWM Mortgage Holdings, Inc. 1,100 18,700
HRE Properties 200 2,650
Nationsbank Corporation 400 27,850
Property Capital Trust 1,000 8,625
Public Storage, Inc. 500 9,500
Wells Fargo & Company 100 21,600
--------
138,063
HOTELS AND OTHER LODGING PLACES (0.1%)
Prime Hospitality Corporation* 600 6,000
INDUSTRIAL MACHINERY AND EQUIPMENT (6.6%)
Acme-Clevland Corporation 600 11,250
Advanced Logic Research, Inc.* 1,100 6,600
AGCO Corporation 600 30,600
Albany International Corporation 400 7,250
Amdahl Corporation 1,500 12,750
Ampco - Pittsburgh 600 6,450
Applied Power, Inc. 200 6,000
BHA Group, Inc. 600 8,175
Brenco, Inc. 700 7,263
Cascade Corporation 700 9,625
Case Corporation 200 9,150
Central Sprinkler Corporation* 500 17,375
Compaq Computer Corporation* 400 19,200
Dana Corporation 500 14,625
Deere & Company 600 21,150
Digital Equipment* 400 25,650
Gardner Denver Machinery, Inc.* 700 13,081
</TABLE>
63
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
----------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
INDUSTRIAL MACHINERY AND EQUIPMENT (6.6%) (CONTINUED)
Gleason Corporation 400 $ 13,000
Global Industrial Tech, Inc.* 1,300 24,538
Graco, Inc. 400 12,200
Harris Corporation 100 5,463
Innovex, Inc. 600 9,263
International Business Machines Corporation 500 45,875
Katy Industries 400 3,700
Kaydon Corporation 200 6,075
Kennametal, Inc. 300 9,525
Key Tronic Corporation* 700 5,775
Komag, Inc.* 300 13,763
Kulicke & Soffa Industries* 1,000 23,125
Kysor Industrial Corporation 500 12,125
Lufkin Industries, Inc. 500 11,094
Mestek, Inc.* 600 7,050
Met-Pro Corporation 100 1,463
Nam Tai Electronics, Inc. 900 10,800
Outboard Marine Corporation 1,000 20,375
Parker-Hannifin Corporation 300 10,275
Printronix, Inc.* 500 7,000
Robbins & Meyers, Inc. 100 2,925
Seagate Technology, Inc.* 800 38,000
Smith International, Inc.* 1,100 25,850
SPS Technologies, Inc.* 400 21,350
Tecumseh Products Company 400 20,850
Timken Company 300 11,475
Toro Company 500 16,438
Twin Disc, Inc. 100 2,275
United Technologies Corporation 200 18,975
Valmont Industries 300 7,350
Western Digital Corporation* 1,000 17,875
------------
662,041
</TABLE>
64
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
----------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
INSTRUMENTS AND RELATED PRODUCTS (2.3%)
Allied Healthcare Products 600 $ 9,600
Amcast Industrial Corporation 700 12,775
Bio-Rad Laboratories* 300 12,750
Block Drug Company 106 3,697
Coherent, Inc.* 400 16,350
Cooper Companies, Inc.* 1,100 8,250
Core Industries, Inc. 400 5,150
Esterline Technologies Corporation* 1,100 25,988
Fluke Corporation 200 7,550
Galileo Electro-Optics Corporation* 1,000 10,250
Genrad, Inc.* 900 8,663
Imo Industries, Inc.* 100 688
Integrated Circuit Systems* 200 2,488
Laser Industries, Ltd.* 1,000 10,875
Loral Corporation 1,000 35,375
LTX Corporation* 300 2,738
Optical Coating Laboratory 2,700 30,375
Sci Systems, Inc.* 300 9,263
Starrett Company 200 5,175
Tech-Sym Corporation* 300 9,563
------------
227,563
INSURANCE AGENTS, BROKERS, AND SERVICE (0.1%)
Poe & Brown, Inc. 600 14,775
INSURANCE CARRIERS (5.1%)
Ace Ltd. 300 11,925
Aegon N.V. 757 33,308
AMBAC, Inc. 200 9,375
American Financial Group, Inc. 300 9,188
American National Insurance 100 6,625
CNA Financial Corporation 300 34,050
Equitable Companies, Inc. 700 16,800
Exel Limited 200 12,200
</TABLE>
65
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (Unaudited)(continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------------------
<S> <C> <C>
COMMON STOCKS (continued)
Insurance Carriers (5.1%) (continued)
Independent Insurance Group 500 $ 13,625
Loews Corporation 600 47,025
Markel Corporation* 100 7,400
MBIA, Inc. 200 15,000
Meridian Ins Group, Inc. 100 1,488
NAC Re Corporation 100 3,600
National Re Corporation 300 11,400
Old Republic International Corporation 400 14,200
Orion Capital Corporation 200 8,675
Partnerre Holdings 300 8,194
Pioneer Financial Services, Inc. 1,000 18,500
Protective Life Corporation 200 6,250
Pxre Corporation 300 7,988
Reliastar Financial Corporation 414 18,371
RLI Corporation 575 14,375
Selective Insurance Group 400 14,250
St. Paul Companies 800 44,474
Tig Holdings, Inc. 200 5,700
Transamerica Corporation 500 36,411
Transatlantic Holdings, Inc. 100 7,338
Travelers Group, Inc. 400 25,150
United Companies Financial Corporation 330 8,745
USF&G Corporation 1,100 18,563
USLife Corporation 300 8,963
Western National Corporation 600 9,675
------------
508,831
Leather and Leather Products (0.1%)
Fuqua Enterprises, Inc.* 200 3,725
Weyco Group, Inc. 200 7,850
------------
11,575
</TABLE>
66
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (Unaudited)(continued)
<TABLE>
<CAPTION>
Number
of Shares Value
--------------------------
<S> <C> <C>
COMMON STOCKS (continued)
Lumber and Wood (0.5%)
Champion Enterprises, Inc.* 400 $ 12,350
Macmillan Bloedel Ltd 800 9,800
Weyerhaeuser Company 700 30,275
------------
52,425
Metal Mining (0.9%)
Asarco, Inc. 400 12,800
Brush Wellman, Inc. 800 13,800
Cleavland-Cliffs, Inc. 300 12,300
Cypress Amax Minerals Company 1,200 31,350
Phelps Dodge 300 18,675
------------
88,925
Miscellaneous Manufacturing Industries (0.6%)
First Team Sports 500 7,563
Mine Safety Appliances Company 100 4,913
Nacco Industries 300 16,650
Oneida Limited 900 15,863
Penn Engineering & Manufacturing Corporation 100 9,700
Repap Enterprises* 1,100 4,813
------------
59,502
Miscellaneous Retail (0.04%)
Fabri-Centers of America* 300 3,975
Non-depository Institutions (0.7%)
Aames Financial Corporation 300 8,363
American Annuity Group, Inc. 620 7,363
Dean Witter Discover & Company 400 18,800
Finova Group 200 9,650
First Financial Caribbean 700 12,994
Textron, Inc. 200 13,500
------------
70,670
</TABLE>
67
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (Unaudited)(continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-------------------------------
<S> <C> <C>
COMMON STOCKS (continued)
Nonmetallic Minerals (0.1%)
Florida Rock Industries 200 $ 5,850
Oil and Gas Extraction (0.3%)
American Exploration Company* 600 6,750
Atwood Oceanics* 1,500 38,156
Crystal Oil Company* 300 9,038
Digicon, Inc. 1,700 13,600
International Petroleum Corporation* 4,700 13,806
Pride Petroleum Services, Inc.* 1,200 12,600
RPC Energy Services, Inc.* 500 4,563
Tetra Technologies, Inc.* 500 8,750
USX-Marathon Group 700 13,650
Williams Companies, Inc. 206 9,038
-----------
129,951
Paper and Allied Products (3.5%)
Abitibi Price, Inc. 600 8,700
ACX Technologies, Inc.* 200 3,025
American Israeli Paper Mills 300 12,825
Boise Cascade Corporation 400 13,850
Bowater, Inc. 500 17,750
Champion International Corporation 900 37,800
Chesapeake Corporation 400 11,850
Consolidated Papers, Inc. 100 5,613
Domtar, Inc.* 1,100 8,388
Federal Paper Board Company 400 20,750
International Paper Company 800 30,300
James River Corporation of Virginia 300 7,238
Mead Corporation 600 31,350
Mercer International, Inc.-SBI* 800 16,350
Mosinee Paper Corporation 100 2,613
Potlatch Corporation 300 12,000
Republic Gypsum Company 600 8,400
Temple - Inland, Inc. 500 22,063
</TABLE>
68
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (Unaudited)(continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
------------------------------
<S> <C> <C>
COMMON STOCKS (continued)
Paper and Allied Products (3.5%) (continued)
Union Camp Corporation 500 $ 23,813
Westvaco Corporation 250 6,938
Willamette Industries 800 45,000
-------------
346,616
Petroleum and Coal Products (1.6%)
BJ Services Company 120 915
British Petroleum - ADR 500 51,063
Coastal Corporation 1,400 52,150
Fina, Inc. 300 15,150
Repsol SA 700 23,013
Tesoro Petroleum Corporation 1,500 12,938
-------------
155,229
Primary Metal Industries (4.0%)
AK Steel Holding Corporation 200 6,850
Alcan Aluminium Ltd. 1,200 37,350
Alumax, Inc.* 400 12,250
Aluminum Company of America 700 37,013
Bayou Steel Corporation* 800 3,100
British Steel PLC - ADR 1,000 25,625
Carpenter Technology 600 24,675
Chaparral Steel Company 500 8,375
Lone Star Technologies* 1,200 13,350
LTV Corporation* 1,200 16,500
Magma Copper Company* 1,000 27,875
Maxxam, Inc.* 200 7,050
Mueller Industries, Inc.* 500 14,625
National Steel Corporation* 700 9,013
Pitt-Des Moines, Inc. 100 3,875
Quanex Corporation 400 7,750
Reynolds Metals Company 600 33,975
RMI Titanium Company 900 7,200
Roanoke Electric Steel Corporation 1,200 20,475
</TABLE>
69
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (Unaudited)(continued)
<TABLE>
<CAPTION>
Number
of Shares Value
-------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
PRIMARY METAL INDUSTRIES (4.0%) (CONTINUED)
Steel of West Virginia, Inc.* 400 $ 3,650
Synalloy Corporation 550 11,481
Texas Industries, Inc. 400 21,200
Tredegar Industries, Inc. 500 16,250
Tubos De Acero De Mexico - ADR* 2,100 14,700
USX - U.S. Steel Company 400 12,300
WHX Corporation* 700 7,613
-------------
404,120
PRINTING AND PUBLISHING (0.4%)
Devon Group, Inc.* 200 5,875
Graphic Industries 1,700 20,400
Plenum Publishing Corporation 200 7,925
Quebecor, Inc. 500 7,625
-------------
41,825
RAILROAD TRANSPORTATION (0.4%)
Burlington Northern Santa Fe 125 9,750
Conrail, Inc. 500 35,000
-------------
44,750
REAL ESTATE (0.1%)
Patten Corporation* 2,292 10,887
RUBBER AND MISCELLANEOUS PLASTIC PRODUCTS (1.2%)
AEP Industries, Inc. 480 10,920
American Filtrona Corporation 300 10,350
Dow Chemical 200 14,075
Furon Company 900 18,000
Goodyear Tire & Rubber Company 800 36,300
Gundle/SLT Environmental, Inc.* 500 2,781
Premark International, Inc. 300 15,188
Tuscarora, Inc. 400 9,800
-------------
117,414
</TABLE>
70
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (Unaudited)(continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
------------------------------
<S> <C> <C>
COMMON STOCKS (continued)
Security and Commodity Brokers (1.2%)
Alex Brown, Inc. 200 $ 8,400
Atalanta Sosnoff Capital* 400 5,800
Fahnestock Viner Hldgs, Inc. 1,100 10,175
Inter-Regional Financial* 300 7,575
Investors Financial Services* 32 666
Jefferies Group, Inc. 300 13,988
Lehman Brothers Holdings 400 8,500
McDonald & Company Investments 600 10,800
Quick & Reilly Group, Inc. 572 11,726
Sherwood Group, Inc.* 900 7,763
Value Line, Inc. 400 15,050
Waterhouse Investor Services* 400 9,900
White River Corporation* 300 11,250
------------
121,593
Special Trade Contractors (0.1%)
Dycom Industries, Inc.* 1,200 6,750
Layne, Inc.* 400 4,250
------------
11,000
Stone, Clay, and Glass Products (0.9%)
Intermet Corporation* 800 8,200
Lafarge Corporation 500 9,375
Lone Star Industries* 500 12,500
Medusa Corporation 800 21,200
Puerto Rican Cement Company, Inc. 400 13,250
Southdown, Inc.* 400 7,800
Standex International Corporation 300 9,825
USG Corporation* 300 9,000
------------
91,150
</TABLE>
71
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (Unaudited)(continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-------------------------------
<S> <C> <C>
COMMON STOCKS (continued)
Textile Mill Products (0.9%)
Culp, Inc. 1,187 $ 13,057
Guilford Mills, Inc. 400 8,150
Siliconix* 1,500 54,000
Springs Industries, Inc. 300 12,413
------------
87,620
Transportation by Air (2.0%)
AMR Corporation* 600 44,550
British Airways 600 43,650
Delta Air Lines, Inc. 600 44,325
Federal Express Corporation* 500 36,938
KLM Royal Dutch Air 710 25,028
Worldcorp, Inc.* 800 8,000
-------------
202,491
Transportation Equipment (3.1%)
Coachmen Industries, Inc. 600 13,050
Ford Motor Company 1,200 34,800
JLG Industries 2,000 59,000
Magna International, Inc. 100 4,325
McDonnell Douglas Corporation 500 46,000
Navistar International* 300 3,150
Northrop Grumman Corporation 200 12,800
Oshkosh Truck Corp 1,200 18,225
Paccar, Inc. 200 8,425
Regal Beloit 1,000 21,750
Simpson Industries 2,100 18,638
Smith (A.O.) Corporation 100 2,075
Teledyne, Inc. 400 10,250
Transtechnology Corporation 400 5,400
Trinity Industries 100 3,150
Varity Corporation* 200 7,425
</TABLE>
72
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (Unaudited)(continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-----------------------------
<S> <C> <C>
COMMON STOCKS (continued)
Transportation Equipment (3.1%) (continued)
Varlen Corporation 485 $ 10,488
Volvo AB Sweden - ADR 1,600 32,900
-------------
311,851
Transportation Services (0.6%)
CSX Corporation 400 18,250
Gatx Corporation 300 14,588
PS Group, Inc. 500 5,375
Ryder System, Inc. 700 17,325
-------------
55,538
Water Transportation (0.4%)
International Shipholding Corporation 375 7,781
Oglebay Norton Company 500 19,000
Stolt-Nielsen S.A. 400 11,500
-------------
38,281
Wholesale Trade - Durable Goods (1.6%)
Aviall, Inc. 1,500 14,063
Barnes Group, Inc. 200 7,200
Bearings, Inc. - Ohio 400 11,700
Bell Industries, Inc.* 553 12,443
Castle (A.M.) & Company 700 19,688
Commercial Metals Company 33 817
General Motors Corporation 400 21,150
Hughes Supply, Inc. 600 16,950
Noland Company 400 7,400
Pioneer Standard Electronics 75 989
Rexel, Inc.* 1,700 22,950
Wyle Electronics 300 10,538
Wynn's International, Inc. 450 13,331
-------------
159,219
</TABLE>
73
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (Unaudited)(continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
----------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
WHOLESALE TRADE - NONDURABLE GOODS (1.0%)
Bindley Western Industries 500 $ 8,500
Chock Full-O-Nuts Corporation* 1,236 6,489
Culbro Corporation* 200 9,825
Foxmeyer Health Corporation* 400 10,700
Gaylord Container Corporation* 900 7,256
Richfood Holdings, Inc. 24 648
Safeway, Ind.* 1,000 51,500
World Fuel Services Corporation 7,144
-------------
102,062
-------------
TOTAL COMMON STOCKS (Cost $6,402,550) 8,050,432
PREFERRED STOCKS (0.0%)
PRINTING AND PUBLISHING (0.0%)
News Corporation Limited 200 3,850
-------------
TOTAL PREFERRED STOCKS (Cost $3,855) 3,850
</TABLE>
74
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (Unaudited) (continued)
PRINCIPAL VALUE
AMOUNT
------------------------
SHORT-TERM SECURITIES (19.5%)
U.S. GOVERNMENT AGENCY (17.3%)
Federal Farm Credit Bank Discount Note, 5.48%,
due 1/31/1996 $ 350,000 $ 348,392
Federal Home Loan Bank Discount Note, 5.48%,
due 1/12/1996 70,000 698,810
Federal Home Loan Bank Discount Note, 5.48%,
due 1/23/1996 685,000 682,687
-----------
1,729,889
U.S. GOVERNMENT OBLIGATIONS (0.5%)
U.S. Treasury Bills, 4.93%, due 3/14/1996 34,652 34,652
U.S. Treasury Bills, 5.27%, due 4/25/1996 19,662 19,662
-----------
54,314
REPURCHASE AGREEMENT (1.7%)
State Street Bank, 4.25%, due 1/2/1996
(Dated 12/29/95, Collateralized by U.S. Treasury
Bond 8.75%, due 5/15/2017, value $172,380) 168,395 168,395
-----------
TOTAL SHORT-TERM SECURITIES
(Cost $1,952,598) 1,952,598
-----------
TOTAL INVESTMENTS (100.0%) (Cost 8,359,003) $10,006,880
===========
*Non-income producing
75
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (Unaudited) (continued)
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the six
months ended December 31, 1995 aggregated $2,344,267 and $2,229,361,
respectively. Net unrealized appreciation for tax purposes aggregated
$1,647,877, of which $1,784,766 related to appreciated investment securities
and $146,889 related to depreciated investment securities. The aggregate cost
of securities is the same for book and tax purposes.
See accompanying notes.
76
<PAGE>
Mitchell Hutchins Fixed Income Portfolio
Statement of Assets and Liabilities
December 31, 1995 (Unaudited)
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value (cost $5,432,579)
(Note 1)--See accompanying schedule $5,595,379
Receivable for investment securities sold 1,922,246
Interest and other receivables 59,978
----------
TOTAL ASSETS 7,577,603
LIABILITIES
Payable for investment securities purchased 2,551,183
Cash overdraft 2,768
----------
TOTAL LIABILITIES 2,553,951
----------
NET ASSETS $5,023,652
==========
Net Assets consist of:
Paid-in capital $4,746,021
Undistributed net investment income 137,339
Undistributed net realized loss on investments (22,508)
Net unrealized appreciation on investment securities 162,800
----------
NET ASSETS, for 459,570 shares outstanding $5,023,652
==========
NET ASSET VALUE, offering and redemption price per share $ 10.93
==========
</TABLE>
See accompanying notes.
77
<PAGE>
Mitchell Hutchins Fixed Income Portfolio
Statement of Operations
Six Months Ended December 31, 1995 (Unaudited)
<TABLE>
INVESTMENT INCOME
<S> <C>
Interest $175,473
EXPENSES (Note 2)
Investment advisory and management fees 24,568
Custody and accounting fees 6,142
Professional fees 7,558
Directors' fees and expenses 2,640
Other expenses 3,209
--------
Total expenses before reimbursement 44,117
Less: expense reimbursement (Note 2) 5,983
--------
Net expenses 38,134
--------
Net investment income 137,339
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS (Note 1)
Net realized gain on investments 119,573
Change in unrealized appreciation on
investment securities 50,788
--------
Net realized and unrealized gain on
investments 170,361
--------
Net increase in net assets resulting
from operations $307,700
========
</TABLE>
See accompanying notes.
78
<PAGE>
Mitchell Hutchins Fixed Income Portfolio
Statements of Changes in Net Assets
SIX MONTHS
ENDED
DECEMBER 31, YEAR ENDED
1995 JUNE 30,
(UNAUDITED) 1995
-------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 137,339 $ 272,169
Net realized gain on investments 119,573 32,319
Change in net unrealized appreciation 50,788 253,467
-------------------------
Net increase in net assets resulting from
operations 307,700 557,955
Distributions to shareholders from:
Net investment income (268,795) (98,000)
Capital share transactions:
Proceeds from sales of shares 365,939 2,673,991
Proceeds from reinvested dividends 268,795 98,000
Cost of shares redeemed (1,065,484) (2,676,948)
-------------------------
Net increase (decrease) in net assets
resulting from share transactions (430,750) 95,043
-------------------------
Total increase (decrease) in net assets (391,845) 554,998
NET ASSETS
Beginning of period 5,415,497 4,860,499
-------------------------
End of period (including undistributed net
investment income of $137,339 and $268,795,
respectively) $ 5,023,652 $ 5,415,497
=========================
OTHER INFORMATION
Shares:
Sold 33,483 263,300
Issued through reinvestment of dividends 25,172 9,744
Redeemed (96,629) (261,523)
-------------------------
Net increase (decrease) (37,974) 11,521
=========================
See accompanying notes.
79
<PAGE>
Mitchell Hutchins Fixed Income Portfolio
Financial Highlights
<TABLE>
<CAPTION>
January 5,
SIX MONTHS 1993
ENDED (COMMENCEMENT
DECEMBER 31, YEAR ENDED YEAR ENDED OF OPERATIONS)
1995 JUNE 30, JUNE 30, THROUGH JUNE 30,
(UNAUDITED) 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 0.34 0.56 0.20 0.19
Net realized and unrealized
gain (loss) on investments 0.29 0.53 (0.52) 0.24
-------------------------------------------------------------
Total from investment operations 0.63 1.09 (0.32) 0.43
Less distributions:
From net investment income (0.58) (0.21) (0.11) --
-------------------------------------------------------------
Net asset value, end of period $ 10.93 $ 10.88 $ 10.00 $ 10.43
=============================================================
TOTAL RETURN (A) 5.91% 11.08% (3.06%) 8.67%
RATIOS AND SUPPLEMENTAL DATA (B)
Net assets, end of period $5,023,652 $5,415,497 $4,860,499 $905,836
Ratio of expenses to average net
assets 1.40% 1.40% 1.56% 1.56%
Ratio of net investment income to
average net assets 5.03% 5.41% 3.62% 3.86%
Ratio of expenses to average net
assets before voluntary expense
reimbursement (Note 2) 1.62% 1.59% 2.49% 15.72%
Ratio of net investment income
(loss) to average net assets
before voluntary expense
reimbursement (Note 2) 4.81% 5.22% 2.68% (1.64%)
Portfolio turnover rate 167% 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.
80
<PAGE>
Mitchell Hutchins Fixed Income Portfolio
Schedule of Investments (Unaudited)
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
--------------------
<S> <C> <C>
CORPORATE BONDS (16.4%)
COMMUNICATIONS (0.8%)
Alltel Corporation, 6.75%, due 9/15/2005 $ 20,000 $ 20,858
Consolidated Edison Company, 6.625%, due 7/1/2005 25,000 25,525
--------
46,383
DEPOSITORY INSTITUTIONS (5.0%)
Bankamerica Corporation, 7.50%, due 10/15/2002 45,000 48,443
Citicorp, 8.00%, due 02/01/2003 35,000 38,683
CS First Boston, 6.452%, due 12/1/2027 55,000 55,000
Mellon Financial Bank, 6.875%, due 03/01/2003 40,000 41,485
Midland Bank PLC, 7.65%, due 5/01/2025 40,000 44,339
National Westminster Bank, 9.375%, due 11/15/2003 45,000 53,860
--------
281,810
ELECTRIC, GAS AND SANITARY SERVICE (2.0%)
Citizen Utility Company, 7.60%, due 6/1/2006 100,000 111,479
ELECTRONIC AND OTHER ELECTRICAL EQUIPMENT (2.5%)
News Corp Notes, 7.75%, due 2/1/2024 55,000 56,480
Phillips Electric Nv, 7.125%, due 5/15/2025 75,000 83,502
--------
139,982
FOOD AND KINDRED PRODUCTS (0.9%)
Hershey Foods, 6.70%, due 10/1/2005 50,000 52,269
NONDEPOSITORY INSTITUTION (5.0%)
American General Finance, 7.25%, due 4/15/2000 125,000 131,384
Ford Motor Credit, 8.00%, due 12/1/97 140,000 145,813
--------
277,197
TRANSPORTATION BY AIR (0.2%)
Southwest Air, 9.40%, due 7/1/2001 10,000 11,571
--------
TOTAL CORPORATE BONDS (Cost $811,303) 920,691
</TABLE>
81
<PAGE>
Mitchell Hutchins Fixed Income Portfolio
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------------------
<S> <C> <C>
GOVERNMENT DEBT SECURITIES (71.7%)
U.S. GOVERNMENT AGENCY--COLLATERALIZED
MORTGAGE OBLIGATIONS (9.8%)
FDIC Series 94 Class, 7.85%, due
9/25/2025 $ 51,000 $ 52,442
Fed. Home Loan Mort. Corp.,
7.83%, due 8/11/2004 100,000 103,344
Fed. Home Loan Mort. Corp.,
8.00%, due 5/1/2014 70,969 73,690
Fed. Home Loan Mort, Corp.,
7.939%, due 2/1/2022 228,055 235,716
Resolution Trust Corp. Series
95-C1, Class A-2B, 6.55%,
due 2/25/2027 50,000 50,234
Resolution Trust Corp. Series 95-C1,
Class A-4B, 6.65%, due 2/25/2027 30,000 30,084
----------
545,510
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES (21.0%)
Federal National Mortgage Assoc.,
8.40%, due 2/25/2009 40,000 44,200
Federal National Mortgage
Assoc., 8.50%, due 5/01/2009 143,594 150,774
Federal National Mortgage
Assoc., 7.00%, due 12/1/2025* 485,000 489,396
Federal National Mortgage
Assoc., 8.00%, due 12/1/2025* 140,000 145,119
Gov't. National Mortgage
Assoc., 8.00%, due 7/15/2005 22,958 24,158
Gov't. National Mortgage
Assoc., 8.00%, due 11/15/2006 32,708 34,460
Gov't. National Mortgage
Assoc., 8.00%, due 4/15/2022 276,186 287,963
----------
1,176,070
U.S. GOVERNMENT OBLIGATIONS (40.9%)
U.S. Treasury Notes, 5.75,
due 9/30/1997 220,000 221,993
U.S. Treasury Notes, 5.625%,
due 1/31/1998 10,000 10,083
U.S. Treasury Notes, 5.375%,
due 5/31/1998 220,000 220,721
U.S. Treasury Notes, 6.75%,
due 5/31/1999 585,000 611,050
U.S. Treasury Notes, 7.25%,
due 5/15/2004 100,000 111,000
U.S. Treasury Notes, 6.50%,
due 5/15/2005 215,000 228,741
U.S. Treasury Notes, 6.50%,
due 8/15/2005 325,000 346,226
U.S. Treasury Notes, 7.125%,
due 2/15/2023 305,000 348,749
U.S. Treasury Notes, 6.25%,
due 8/15/2023 130,000 133,758
</TABLE>
82
<PAGE>
Mitchell Hutchins Fixed Income Portfolio
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------------------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (71.7%) (CONTINUED)
U.S. Treasury Notes, 7.625%, due 2/15/2025 $ 45,000 $ 55,026
----------
2,287,347
----------
TOTAL GOVERNMENT DEBT SECURITIES
(Cost $3,955,515) 4,008,927
SHORT-TERM SECURITIES (11.9%)
U.S. GOVERNMENT OBLIGATIONS (10.7%)
U.S. Treasury Bills, 4.85%, due 1/18/96 150,000 149,616
U.S. Treasury Bills, 5.19%, due 1/18/96 450,000 448,767
----------
598,383
REPURCHASE AGREEMENT (1.2%)
State Street Bank, 4.25%, due 1/2/96 (Dated 12/29/95
Collateralized by U.S. Treasury Bond 8.75% due
5/15/2017, value $68,952) 67,378 67,378
----------
TOTAL SHORT-TERM SECURITIES
(Cost $665,761) 665,761
----------
TOTAL INVESTMENTS (100.0%) (Cost $5,432,579) $5,595,379
==========
</TABLE>
* Security purchased on a delayed delivery basis. (Note 1)
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the six
months ended December 31, 1995, aggregated $9,224,174 and $9,699,028,
respectively. Net unrealized appreciation for tax purposes aggregated $162,800,
of which $163,367 related to appreciated investment securities and $567 related
to depreciated investment securities. The aggregate cost of securities for tax
purposes is $5,434,260.
See accompanying notes.
83
<PAGE>
<TABLE>
<CAPTION>
Mitchell Hutchins Money Market Portfolio
Statement of Assets and Liabilities
December 31, 1995 (Unaudited)
<S> <C>
ASSETS
Investment in securities, at amortized cost
(Note 1)--See accompanying schedule $ 9,433,957
Interest and other receivables 11,302
-----------
TOTAL ASSETS 9,445,259
LIABILITIES
Cash overdraft 318,790
Accounts payable and accrued expenses 3,513
-----------
TOTAL LIABILITIES 322,303
-----------
NET ASSETS, for 9,122,956 shares outstanding $ 9,122,956
===========
NET ASSET VALUE, offering and redemption price per share $ 1.00
===========
</TABLE>
See accompanying notes.
84
<PAGE>
<TABLE>
<CAPTION>
Mitchell Hutchins Money Market Portfolio
Statement of Operations
Six Months Ended December 31, 1995 (Unaudited)
<S> <C>
INVESTMENT INCOME
Interest $ 267,568
EXPENSES (Note 2)
Investment advisory and management fees 29,708
Custody and accounting fees 10,284
Professional fees 7,558
Directors' fees and expenses 2,640
Regulatory fees 977
Other expenses 1,463
-----------
Total expenses 52,630
-----------
Net investment income 214,938
-----------
Net increase in net assets resulting from operations $ 214,938
===========
</TABLE>
See accompanying notes.
85
<PAGE>
Mitchell Hutchins Money Market Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
SIX MONTHS
ENDED DECEMBER 31, YEAR ENDED
1995 JUNE 30,
(UNAUDITED) 1995
------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
<S> <C> <C>
Net investment income $ 214,938 $ 267,641
Distributions to shareholders from:
Net investment income (214,938) (267,641)
Capital share transactions:
Proceeds from sales of shares 14,061,408 11,346,439
Proceeds from reinvested dividends 214,938 267,641
Cost of shares redeemed (11,906,485) (10,313,402)
----------------------------------
Net increase in net assets resulting
from share transactions 2,369,861 1,300,678
----------------------------------
Total increase in net assets 2,369,861 1,300,678
NET ASSETS
Beginning of period 6,753,095 5,452,417
----------------------------------
End of period $ 9,122,956 $ 6,753,095
==================================
OTHER INFORMATION
Shares:
Sold 14,061,408 11,346,439
Issued through reinvestment of
dividends 214,938 267,641
Redeemed (11,906,485) (10,313,402)
----------------------------------
Net increase 2,369,861 1,300,678
==================================
</TABLE>
See accompanying notes.
86
<PAGE>
Mitchell Hutchins Money Market Portfolio
Financial Highlights
<TABLE>
<CAPTION>
SIX MONTHS ENDED JANUARY 12, 1993
DECEMBER 31, YEAR ENDED YEAR ENDED (COMMENCEMENT OF OPERATIONS)
1995 JUNE 30, JUNE 30, THROUGH JUNE 30,
(UNAUDITED) 1995 1994 1993
-----------------------------------------------------------------------------------
SELECTED PER-SHARE DATA
<S> <C> <C> <C> <C>
Net asset value, beginning of
period $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from investment
operations:
Net investment income 0.02 0.04 0.02 0.01
Less distributions:
From net investment income (0.02) (0.04) (0.02) (0.01)
-----------------------------------------------------------------------------------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
===================================================================================
TOTAL RETURN (A) 2.34% 4.30% 2.04% 1.66%
RATIOS AND SUPPLEMENTAL
DATA (B)
Net Assets, end of period $9,122,956 $6,753,095 $5,452,417 $753,585
Ratio of expenses to average
net assets 1.15% 1.15% 1.29% 1.34%
Ratio of net investment
income to average net assets 4.70% 4.31% 2.19% 1.67%
Ratio of expenses to average
net assets before voluntary
expense reimbursement (Note 2) 1.15% 1.27% 2.08% 22.41%
Ratio of net investment
income (loss) to average
net assets before voluntary
expense reimbursement (Note 2) 4.70% 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.
87
<PAGE>
Mitchell Hutchins Money Market Portfolio
Schedule of Investments (Unaudited)
December 31, 1995
<TABLE>
<CAPTION>
Principal
Amount Value
-----------------------
<S> <C> <C>
SHORT-TERM SECURITIES (100%)
CORPORATE BONDS (93.1%)
AGRICULTURAL PRODUCTION-CROPS (3.2%)
Cargill, Inc., 5.70%, due 1/8/96 $300,000 $ 299,667
AUTO REPAIR, SERVICES AND PARKING (2.1%)
PHH Corporation, 5.48%, due 9/16/96 200,000 199,932
CHEMICALS AND ALLIED PRODUCTS (3.7%)
Abbott Laboratories, 5.65%, due 1/16/96 350,000 349,176
COMMUNICATIONS (5.3%)
Bell Atlantic, 5.80%, due 1/18/96 250,000 249,719
Bellsouth Telecommunications, 5.75%, 250,000 249,321
due 1/18/96
----------
499,040
DEPOSITORY INSTITUTIONS (11.0%)
Commerzbank, U.S. Finance, 300,000 297,599
5.50%, due 2/21/96
First Chicago NBD 200,000 199,999
Corporation, 5.50%, due
6/5/96
Nationsbank Corporation, 100,000 99,383
4.75%, due 8/15/96
Seattle First National Bank, 200,000 200,000
5.50%, due 6/7/96
Svenska Handelsbank, Inc., 245,000 244,408
5.80%, due 1/16/96
----------
1,041,389
DURABLE GOODS, WHOLESALE (3.2%)
Daimler Benz N.A. 300,000 297,874
Corporation, 5.67%, due 2/15/96
ELECTRIC, GAS, AND SANITARY SERVICES (8.0%)
Consolidated Natural Gas, 5.67%, due 1/26/96 215,000 214,154
Southern Company, 5.70%, due 2/9/96 300,000 298,148
WMX Technologies, 5.37%, due 8/12/96 250,000 241,647
----------
753,949
</TABLE>
88
<PAGE>
Mitchell Hutchins Money Market Portfolio
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
Principal
Amount Value
-----------------------
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
HOLDING AND OTHER INVESTMENT OFFICES (6.9%)
BTR Dunlop, 5.64%, due 2/22/96 $300,000 $ 297,553
Preferred Receivables, 5.75%, due 1/10/96 355,000 354,489
----------
652,042
INSURANCE CARRIERS (5.2%)
Metlife Funding, Inc., 5.80%, due 1/23/96 195,000 194,309
USAA Capital Corporation, 5.72%, due 1/23/96 300,000 298,951
----------
493,260
METAL MINING (3.2%)
RTZ America, 5.70%, due 1/19/96 300,000 299,145
NONDEPOSITORY INSTITUTION (31.7%)
Asset Securitization Cooperative Corporation, 300,000 298,898
5.75%, due 1/24/96
AT&T Capital Corporation, 5.70%, due 1/12/96 300,000 299,478
CIT Group Holdings, 7.125%, due 11/15/96 200,000 202,662
Delaware Funding Corporation, 5.73%, 300,000 299,475
due 1/12/96
Ford Motor Credit Company, 5.76%, due 1/12/96 295,000 294,480
John Hancock Capital Corporation, 5.70%, 300,000 299,525
due 1/11/96
Merrill Lynch, 5.72%, due 1/26/96 300,000 298,808
Motorola Credit Corporation, 5.72%, due 1/26/96 300,000 298,808
New Center Asset Trust, 6.03%, due 1/2/96 400,000 399,920
Pitney Bowes Credit Corporation, 5.70%, 300,000 298,813
due 1/26/96 ----------
2,990,867
OIL AND GAS EXTRACTION (3.7%)
Koch Industries, 5.67%, due 1/18/96 350,000 349,062
PAPER AND ALLIED PRODUCTS(2.7%)
Kimberly Clark Corporation, 5.70%, due 1/26/96 255,000 253,991
SECURITY AND COMMODITY BROKERS (3.2%)
Goldman Sachs Group, 5.70%, due 1/12/96 300,000 299,478
----------
</TABLE>
89
<PAGE>
Mitchell Hutchins Money Market Portfolio
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------------------
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
TOTAL CORPORATE BONDS (Cost $8,778,872) $8,778,872
GOVERNMENT DEBT SECURITIES (6.9%)
U.S. GOVERNMENT AND GOVERNMENT AGENCIES (6.9%)
Federal National Mortgage Assoc., Discount Note,
5.68%, due 10/7/96 $200,000 200,214
Student Loan Mortgage Association, 5.65%, due 1/2/96 455,000 454,871
----------
TOTAL GOVERNMENT DEBT SECURITIES
(Cost $655,085) 655,085
----------
TOTAL SHORT-TERM SECURITIES
(Cost $9,433,957) 9,433,957
----------
TOTAL INVESTMENTS (100.0%) (Cost $9,433,957) $9,433,957
==========
</TABLE>
See accompanying notes.
90
<PAGE>
Morgan Stanley Asian Growth Portfolio
Statement of Assets and Liabilities
December 31, 1995 (Unaudited)
ASSETS
Investment in securities, at value (cost $11,320,413)
(Note 1)--See accompanying schedule $11,676,460
Cash 133,585
Receivable for investment securities sold 87,807
Dividends, interest and other receivables 52,801
Deferred organization costs (Note 1) 7,881
-----------
TOTAL ASSETS 11,958,534
LIABILITIES
Payable for investment securities purchased 14,278
Accounts payable and accrued expenses 11,938
-----------
TOTAL LIABILITIES 26,216
-----------
NET ASSETS $11,932,318
===========
Net Assets consist of:
Paid-in capital $11,678,905
Undistributed net realized loss on investments and
foreign currency transactions (102,672)
Net unrealized appreciation on investments and assets and
liabilities in foreign currencies 356,085
-----------
NET ASSETS, for 1,167,335 shares outstanding $11,932,318
===========
NET ASSET VALUE, offering and redemption price per share $ 10.22
===========
See accompanying notes.
91
<PAGE>
Morgan Stanley Asian Growth Portfolio
Statement of Operations
Six Months Ended December 31, 1995 (Unaudited)
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $3,317) $ 84,014
Interest 12,062
--------
Total investment income 96,076
EXPENSES (Note 2)
Investment advisory and management fees 61,559
Custody and accounting fees 22,335
Professional fees 8,688
Directors' fees and expenses 2,640
Amortization of deferred costs 1,150
Other expenses 2,918
--------
Total expenses 99,290
--------
Net investment loss (3,214)
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN
CURRENCY (Note 1)
Net realized loss on:
Investment securities (42,979)
Foreign currency transactions (2,859)
--------
Net realized loss (45,838)
Change in unrealized appreciation (depreciation) on:
Investment securities 138,117
Translation of assets and liabilities in foreign currencies (311)
--------
Change in unrealized appreciation (depreciation) 137,806
--------
Net realized and unrealized gain on investments 91,968
--------
Net increase in net assets resulting from operations $ 88,754
========
See accompanying notes.
92
<PAGE>
Morgan Stanley Asian Growth Portfolio
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31, YEAR ENDED
1995 JUNE 30,
(UNAUDITED) 1995
--------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $ (3,214) $ 72,537
Net realized loss on investments and
foreign currency transactions (45,838) (100,052)
Change in net unrealized appreciation
on investments and translation of
assets and liabilities in foreign
currency 137,806 218,279
--------------------------
Net increase in net assets resulting
from operations 88,754 190,764
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 1,851,922 12,547,902
Proceeds from reinvested dividends 60,912 500
Cost of shares redeemed (2,833,021) (1,819,360)
--------------------------
Net increase (decrease) in net assets
resulting from share transactions (920,187) 10,729,042
--------------------------
Total increase (decrease) in net assets (892,345) 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) $11,932,318 $12,824,663
==========================
OTHER INFORMATION
Shares:
Sold 183,865 1,262,727
Issued through reinvestment of dividends 6,543 49
Redeemed (282,502) (193,842)
--------------------------
Net increase (decrease) (92,094) 1,068,934
==========================
</TABLE>
See accompanying notes.
93
<PAGE>
Morgan Stanley Asian Growth Portfolio
Financial Highlights
<TABLE>
<CAPTION>
SIX MONTHS JUNE 15, 1994
ENDED (COMMENCEMENT
DECEMBER 31, YEAR ENDED OF OPERATIONS)
1995 JUNE 30, THROUGH
(UNAUDITED) 1995 JUNE 30, 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 0.03 0.01 0.00(C)
Net realized and unrealized gain on
investments 0.06 0.17 --
----------------------------------------------
Total from investment operations 0.09 0.18 0.00
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 $ 10.22 $ 10.18 $ 10.00
==============================================
TOTAL RETURN (A) 0.96% 1.80% 0.52%
RATIOS AND SUPPLEMENTAL DATA (B)
Net assets, end of period $11,932,318 $12,824,663 $1,905,357
Ratio of expenses to average
net assets (D) 1.61% 1.92% 0.75%
Ratio of net investment income to
average net assets (D) (0.05)% .76% 0.59%
Portfolio turnover rate 8% 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.
(D) The ratios of expenses and net investment income to average net assets
before voluntary expense reimbursement were 9.79% and (8.44%), respectively,
for the period June 15, 1994 (commencement of operations) through June 30,
1994. (Note 2)
94
<PAGE>
Morgan Stanley Asian Growth Portfolio
Schedule of Investments (Unaudited)
December 31, 1995
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-----------------------
<S> <C> <C>
COMMON STOCKS (91.1%)
CHINA (0.5%)
Shenzhen North Jianshe Motors* 68,600 $ 28,389
Yizheng Chemical Fibre Company 150,000 33,754
----------
62,143
HONG KONG (28.7%)
Cheung Kong Holdings, Ltd. 92,000 560,388
Citic Pacific Limited 57,000 194,976
CP Pokphand Company 175,000 70,158
Guangdong Investments 430,000 258,584
Harbin Power Equipment Company 205,000 30,223
Hong Kong Telecom 197,000 351,581
Hopewell Holdings 200,000 115,099
HSBC Holdings 27,355 413,907
Hutchison Whampoa 80,000 487,294
Maanshan Iron & Steel 102,000 14,246
New World Development Company 68,000 296,359
New World Infrastructure 138 264
Sun Hung Kai Properties 25,000 204,494
Swire Pacific Limited 45,000 349,176
----------
3,346,749
INDONESIA (6.2%)
Asiana Imi Industry 10,000 5,248
Barito Pacific Timber 31,000 22,709
Bimantara Citra* 31,000 25,760
Keramika Indonesia Association 32,500 15,635
Ometraco Corporation--Warrants* 12,000 656
Ometraco Corporation* 112,000 52,657
Private Bank Bali 20,000 39,361
Private Charoen Pokphand Indo 30,000 61,010
Private Indocement Tunggal Prakarsa 20,000 67,133
Private Indosat 25,000 90,750
Private Kalbe Farma 16,500 55,926
Private Sorini Corp 20,000 97,092
Private Telekomunikasi* 45,500 59,698
Private Semen Gresik 20,000 55,981
Private Suba Indah 10,000 6,670
Private United Tractors 35,000 65,821
----------
722,107
</TABLE>
95
<PAGE>
Morgan Stanley Asian Growth Portfolio
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
MALAYSIA (20.4%)
Ammb Holdings Berhad 2,000 $ 22,844
Bandar Raya Developments 32,000 45,624
Genting Berhad 44,000 367,389
Land & General Berhad 23,500 50,906
Magnum Corporation Berhad 32,000 60,496
Malayan Banking Berhad 47,000 396,140
Malaysian International Shipping 42,000 110,004
Petronas Gas Berhad 23,000 78,358
Renong Berhad 100,000 148,090
Resorts World Berhad 55,000 294,604
Sime Darby Berhad 24,000 63,805
Tan & Tan Development 60,000 51,280
Technology Resources* 24,000 70,894
Telekom Malaysia Berhad 30,000 233,950
Tenaga Nasional Berhad 53,000 208,744
Time Engineering Berhad 13,000 30,209
United Engineers, Ltd 24,000 153,131
----------
2,386,468
PHILIPPINES (6.1%)
Ayala Corp. Class B 36,000 43,919
Ayala Land, Inc. Class B 53,000 64,659
Benpres Holding Corporation* 5,500 27,500
C&P Homes Inc. 60,000 44,034
DCMI Holdings 70,000 25,086
JG Summit Holdings 395,000 108,425
Manila Electric Company-Berhad 15,000 122,379
Petron Corporation 197,500 101,649
Philippine Long Distance 1,200 65,193
San Miguel Corporation 15,600 53,229
SM Prime Holdings, Inc.* 201,800 57,701
----------
713,774
</TABLE>
96
<PAGE>
Morgan Stanley Asian Growth Portfolio
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
SINGAPORE (13.0%)
City Developments, Ltd 23,000 $ 167,503
DBS Land, Ltd. 35,000 118,292
Development of Bank Singapore 14,000 174,220
Fraser & Neave, Ltd. 6,000 76,363
Keppel Corporation, Ltd. 27,000 240,543
Marco Polo Developments, Ltd. 39,000 59,839
Overseas Chinese Banking 16,000 200,240
Sembawamg Corporation, Ltd. 11,000 61,055
Singapore Press Holdings 3,200 56,565
Singapore Technologies 57,000 128,968
Straits Steamship Land, Ltd. 17,000 57,456
Straits Trading Company 20,000 46,949
United Overseas Bank 13,000 125,009
----------
1,513,002
SOUTH KOREA (2.5%)
Jilin Chemical Industrial Co.* 1,200 25,800
Pohang Iron & Steel, Ltd.-ADR 2,500 54,688
Samsung Electronics* 39 3,744
Samsung Electronics New* 2,028 196,565
Shandong Huaneng Power 2,000 13,500
----------
294,297
THAILAND (13.7%)
Advanced Information Service 3,200 75,713
Bangkok Bank Company, Ltd. 22,300 270,893
Finance One Company, Ltd. 29,600 205,637
National Finance & Security 8,400 45,018
National Finance & Security Warrants 7,800 --
Phatra Thanakit Company, Ltd. 11,000 94,323
</TABLE>
97
<PAGE>
Morgan Stanley Asian Growth Portfolio
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
NUMBER OF
SHARES OR
PRINCIPAL
AMOUNT VALUE
-------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
THAILAND (13.7%) (CONTINUED)
Shinawatra Computer Co 3,500 $ 96,705
Siam Cement Company 1,020 56,527
Siam Commercial Bank Public Company, Ltd. 12,900 170,020
Telecomasia Corporation* 55,600 168,853
Thai Farmers Bank, Ltd. 26,600 268,218
Thai Telephone & Telecom* 17,000 92,457
United Communication 4,000 51,131
-----------
1,595,495
-----------
TOTAL COMMON STOCKS (Cost $10,277,988) 10,634,035
SHORT-TERM SECURITIES (8.9%)
REPURCHASE AGREEMENT (8.9%)
State Street Bank, 4.25%, due 1/2/96 (Dated
12/29/95 Collateralized by U.S. Treasury Bond
8.75% due 5/15/2017, value $1,064,778) $1,042,425 1,042,425
-----------
TOTAL SHORT-TERM SECURITIES (Cost
$1,042,425) 1,042,425
-----------
TOTAL INVESTMENTS (100.0%) (Cost
$11,320,413) $11,676,460
===========
</TABLE>
* Non-income producing
OTHER INFORMATION:
Purchases and sales of securities excluding short-term securities, for the six
months ended December 31, 1995, aggregated $946,858 and $2,736,958,
respectively. Net unrealized appreciation for tax purposes aggregated $356,047,
of which $1,195,448 related to appreciated investment securities and $839,401
related to depreciated investment securities. The aggregate cost of securities
is $11,320,588 for tax purposes.
See accompanying notes.
98
<PAGE>
Morgan Stanley Asian Growth Portfolio
Schedule of Investments (Unaudited) (continued)
As of December 31, 1995, 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
Amusement and Recreation Services 6.19%
Chemicals and Allied Products 0.99
Communications 9.90
Depository Institutions 19.58
Electric, Gas and Sanitary Services 3.82
Electronic and Other Electric Equipment 2.49
Food and Kindred Products 3.12
Forestry 0.63
Government 8.93
Holding and Other Investment Offices 23.51
Industrial Machinery and Equipment 1.39
Miscellaneous Holdings 0.05
Nondepository Institutions 1.26
Petroleum and Coal Products 0.67
Primary Metal Industries 0.99
Printing and Publishing 0.48
Real Estate 7.18
Securities Brokers and Dealers 0.39
Stone, Clay and Glass Products 1.67
Transportation by Air 2.99
Transportation Equipment 2.83
Water Transportation 0.94
------
100.00%
======
</TABLE>
See accompanying notes.
99
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Statement of Assets and Liabilities
December 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investment in securities, at value (cost $6,325,946)
(Note 1)--See accompanying schedule $6,338,004
Cash 9,111
Receivable for investment securities sold 984,001
Interest and other receivables 149,769
Deferred organization costs (Note 1) 7,888
----------
TOTAL ASSETS 7,488,773
LIABILITIES
Payable for investment securities purchased 1,249,449
Accounts payable and accrued expenses 2,581
----------
TOTAL LIABILITIES 1,252,030
----------
NET ASSETS $6,236,743
==========
Net Assets consist of:
Paid-in capital $5,986,146
Undistributed net investment income 336,221
Overdistributed net realized
gain on investments (97,682)
Net unrealized appreciation
on investment securities 12,058
----------
NET ASSETS, for 596,084 shares
outstanding $6,236,743
==========
NET ASSET VALUE, offering and
redemption price per share $ 10.46
==========
</TABLE>
See accompanying notes.
100
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Statement of Operations
Six Months Ended December 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C>
Interest $386,037
EXPENSES (Note 2)
Investment advisory and management fees 26,963
Custody and accounting fees 7,137
Professional fees 8,688
Directors' fees and expenses 2,640
Amortization of deferred costs 1,237
Other expenses 3,151
--------
Total expenses 49,816
--------
Net investment income 336,221
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (Note 1)
Net realized loss on investments (7,615)
Change in unrealized depreciation on
investment securities 279,433
--------
Net realized and unrealized gain on investments 271,818
--------
Net increase in net assets resulting
from operations $608,039
========
</TABLE>
See accompanying notes.
101
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months
Ended
December 31, Year Ended
1995 June 30,
(Unaudited) 1995
-------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 336,221 $ 533,032
Net realized loss on investments (7,615) (83,442)
Change in net unrealized depreciation 279,433 (267,375)
-------------------------
Net increase in net assets resulting
from operations 608,039 182,215
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 263,260 9,617,478
Proceeds from reinvested dividends 539,582 300
Cost of shares redeemed (876,453) (4,245,280)
-------------------------
Net increase (decrease) in net assets from
share transactions (73,611) 5,372,498
-------------------------
Total increase (decrease) in net assets (5,154) 5,554,413
NET ASSETS
Beginning of period 6,241,897 687,484
-------------------------
End of period (including undistributed net
investment income of $336,221 and $532,957,
respectively) $6,236,743 $ 6,241,897
=========================
OTHER INFORMATION
Shares:
Sold 24,539 966,462
Issued through reinvestment of dividends 54,452 30
Redeemed (83,072) (435,053)
-------------------------
Net increase (decrease) (4,081) 531,439
=========================
</TABLE>
See accompanying notes.
102
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Financial Highlights
<TABLE>
<CAPTION>
JUNE 15, 1994
(COMMENCEMENT
SIX MONTHS ENDED YEAR ENDED OF OPERATIONS
DECEMBER 31, 1995 JUNE 30, THROUGH
(UNAUDITED) 1995 JUNE 30, 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 0.57 0.89 0.00(C)
Net realized and unrealized gain (loss)
on investments 0.39 (0.49) --
----------------------------------------------------------
Total from investment operations 0.96 0.40 0.00
Less distributions:
From net investment income (0.89) 0.00(C) --
From net realized gain on
investments (0.01) -- --
----------------------------------------------------------
Total distributions (0.90) -- --
----------------------------------------------------------
Net asset value, end of period $ 10.46 $ 10.40 $ 10.00
==========================================================
TOTAL RETURN (A) 10.20% 4.00% 0.79%
RATIOS AND SUPPLEMENTAL DATA (B)
Net assets, end of period $6,236,743 $6,241,897 $687,484
Ratio of expenses to average
net assets (D) 1.57% 1.61% 0.85%
Ratio of net investment income to
average net assets (D) 10.60% 9.28% 0.80%
Portfolio turnover rate 36% 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.
(D) The ratios of expenses and net investment income to average net assets
before voluntary expense reimbursement were 24.78% and (23.13%),
respectively, for the period June 15, 1994 (commencement of operations)
through June 30, 1994. (Note 2)
103
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Schedule of Investments (Unaudited)
December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
--------- ----------
CORPORATE BONDS (65.8%)
<S> <C> <C>
ARGENTINA (13.1%)
Banco de Galicia, 9%, due 11/1/2003 $300,000 $ 262,898
Metrogas SA, 12%, due 8/15/2000 350,000 356,119
Telecom Argentina, 12% due 11/15/2002 (a) 200,000 213,000
----------
832,017
BRAZIL (10.1%)
Iochpe-Maxion 12.375%, due 11/8/2002 500,000 427,553
Iochpe-Maxion S.A., 12.375%, due 11/8/2002 (a) 250,000 213,750
----------
641,303
CANADA (7.9%)
Algoma Steel, Inc., 12.375%, due 7/15/2005 250,000 225,007
Sherritt, Inc., 10.5%, due 3/31/2014 250,000 273,750
----------
498,757
MEXICO (8.7%)
Banco Nacional, 7.25%, due 2/2/2004 350,000 274,345
Cemex SA de C.V., 9.5%, due 9/20/2001 300,000 278,254
----------
552,599
NIGERIA (2.0%)
Central Bank of Nigeria, 6.25%, due 11/15/2020 250,000 123,128
Central Bank of Nigeria--Warrants 250 --
----------
123,128
UNITED STATES (24.0%)
AES Corporation, 9.75%, due 6/15/2000 250,000 257,190
Owens-Illinois, Inc. 9.75%, due 8/15/2004 250,000 263,125
Petro Mexicanos, 8.625%, due 12/1/2023 (a) 350,000 262,065
Six Flags Theme Parks, 12.25%,
due 6/15/1998 (a), (b) 300,000 236,010
Stone Container, 10.75%, due 10/1/2002 100,000 103,247
Viacom International, 8%, due 7/7/2006 150,000 152,630
Westpoint Stevens, 9.375%, due 12/15/2005 250,000 246,882
----------
1,521,149
----------
TOTAL CORPORATE BONDS (Cost $4,139,102) $4,168,953
</TABLE>
104
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Schedule of Investments (Unaudited) (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
--------- ----------
<S> <C> <C>
GOVERNMENT BONDS (27.7%)
ARGENTINA (4.7%)
Republic of Argentina, 8.375%, due 12/20/2003 $350,000 $ 296,648
BRAZIL (4.8%)
Minas Gerais XWB, 8.25%, due 2/10/2000 370,000 307,168
BULGARIA (1.7%)
Bulgaria Federated Republic, 7.56%, due
7/28/2011 (c) 240,000 111,643
ECUADOR (4.0%)
Ecuador--Discount, 6.812%, due 2/28/2025 (c) 500,000 253,172
MEXICO (7.8%)
Mexico Government Par, 6.25%, due 12/31/2019 750,000 492,240
Mexico Bond Warrants 750,000 --
----------
492,240
PANAMA (4.7%)
Republic of Panama, 6.75%, due 5/10/2002 (c) 350,000 298,857
----------
TOTAL GOVERNMENT BONDS (Cost $1,777,521) 1,759,728
SHORT-TERM SECURITIES (6.5%)
REPURCHASE AGREEMENT (6.5%)
State Street Bank, 4.25%, due 1/2/96 (Dated
12/29/95 Collateralized by U.S. Treasury
Bond 8.75% due 5/15/2017, value $417,690) 409,323 409,323
----------
TOTAL SHORT-TERM SECURITIES (Cost $409,323) 409,323
----------
TOTAL INVESTMENTS (100.0%) (Cost $6,325,946) $6,338,004
==========
</TABLE>
105
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Schedule of Investments (Unaudited) (continued)
OTHER INFORMATION:
Purchases and sales of securities excluding short-term securities, for the six
months ended December 31, 1995, aggregated $2,134,757 and $2,878,438,
respectively. Net unrealized appreciation for tax purposes aggregated $12,058,
of which $145,584 related to appreciated investment securities and $133,526
related to depreciated investment securities. The aggregate cost of securities
is the same for book and tax purposes.
As of December 31, 1995, 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
Amusement and Recreation Services 3.72%
Apparel and Other Finished Products 3.90
Chemicals and Allied Products 4.32
Communications 3.36
Depository Institutions 16.88
Electric, Gas and Sanitary Services 9.68
Governments 27.76
Industrial Machinery and Equipment 10.12
Paper and Allied Products 1.63
Petroleum and Coal Products 4.13
Primary Metal Industries 3.55
Printing and Publishing 2.41
Stone, Clay and Glass Products 8.54
-------
100.00%
=======
</TABLE>
(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 the
initial offering.
(c) Variable rate note or floating rate note, rate shown effective at 12/31/95.
See accompanying notes.
106
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements
December 31, 1995 (Unaudited)
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), Mitchell Hutchins Fixed Income,
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 with the Securities Exchange Act of 1934 and a member
of the National Association of Securities Dealers, Inc., distributes shares of
the Fund to the separate accounts of Integrity Life Insurance Company
("Integrity") and its wholly owned subsidiary, National Integrity Life Insurance
Company ("National Integrity").
ARM Financial Group, Inc. ("ARM") is the ultimate parent of Integrity, National
Integrity, and SBM Financial Services. ARM is a financial services company
providing retail and institutional products and services to the long-term
savings and retirement market. At December 31, 1995, ARM had approximately $5.3
billion of policyholder deposits and funds under management.
On June 14, 1995, ARM completed the acquisition of substantially all of the
assets and business operations of SBM Company ("SBM"), including all of the
issued and outstanding capital stock of SBM's subsidiaries, State Bond and
Mortgage Life Insurance Company ("SBM Life") and SBM Financial Services, and
SBM's management contracts with the State Bond Group of mutual funds.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for investment companies.
107
<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, if 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 Mitchell Hutchins 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 Valuation
Committee of the Board of Directors.
SECURITY TRANSACTIONS
Securities transactions are recorded on the 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 the sale of investments are determined on the basis of nearest
average.
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 December 31, 1995, the Mitchell Hutchins Fixed Income
Portfolio had segregated specific assets to be utilized to settle its
outstanding commitments related to delayed-delivery.
108
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAX STATUS
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.
DIVIDEND DISTRIBUTIONS
Dividends from net investment income and distributions from net realized gains
are declared and distributed annually, except that the Mitchell Hutchins 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 provide 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 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
December 31, 1995.
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 contract amounts of the futures contracts reflect the extent of
the Portfolios' exposure to off-
109
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
balance sheet risk. 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 Mitchell Hutchins Fixed Income Portfolios may engage in 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.
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 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
December 31, 1995,
110
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
approximately 138,511 shares, having a fair value of $1.6 million and
constituting 16.1% of the outstanding shares of the Portfolio, were held by
Integrity for its own account.
2. INVESTMENT ADVISORY AGREEMENTS AND PAYMENTS TO RELATED PARTIES
Integrity is the investment manager for the Fund pursuant to a Management
Agreement (the "Management Agreement") between the Fund and Integrity. Integrity
has entered into a sub-advisory agreement with a registered investment adviser
("Sub-Adviser") for each of the Portfolios. Integrity, not the Fund, pays the
sub-advisory fee to each of the Sub-Advisers. The fees payable to Integrity
under the Management Agreement, and by Integrity to each Sub-Adviser, as a
percentage of average net assets are as follows:
<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
Mitchell Hutchins Fixed Income 0.90 0.75
Mitchell Hutchins Money Market 0.65 0.50
Morgan Stanley Asian Growth 1.00 0.85
Morgan Stanley Worldwide High Income 0.85 0.70
</TABLE>
Under the Management Agreement, Integrity provides certain management services
to the Fund, and the Fund is responsible for certain of its direct operating
expenses. Integrity 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. Integrity has reserved the right to withdraw or
modify its policy of expense reimbursement for the Portfolios.
On February 1, 1996 ARM Capital Advisors, Inc. ("ARM Capital Advisors") became
the investment manager for the Fund replacing Integrity. ARM Capital Advisors
assumes all
111
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements (continued)
2. INVESTMENT ADVISORY AGREEMENTS AND PAYMENTS TO RELATED PARTIES (CONTINUED)
of Integrity's responsibility pursuant to the Management Agreement and the sub-
advisory agreements for each of the Portfolios. ARM Capital Advisors is a wholly
owned subsidiary of ARM.
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 $43,000 in the aggregate during the six months ended December
31, 1995.
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 December 31, 1995, 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), Mitchell Hutchins Fixed Income, Morgan Stanley Asian Growth,
and Morgan Stanley Worldwide High Income Portfolios and 100,000,000 shares for
the Mitchell Hutchins Money Market Portfolio.
At December 31, 1995, 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.
4. SUBSEQUENT EVENT
On February 16, 1996, the Board of Directors of the Fund voted to terminate the
sub-advisory agreements with the Sub-Advisers of the Mitchell Hutchins Fixed
Income Portfolio ("Fixed Income Portfolio") and the Mitchell Hutchins Money
Market Portfolio ("Money Market Portfolio"). The two sub-advisory agreements
will terminate effective February 29, 1996. On March 1, 1996, J.P. Morgan
Investment Management, Inc. ("J.P.
112
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements (continued)
4. SUBSEQUENT EVENT (CONTINUED)
Morgan") will become the Sub-Adviser for the Fixed Income Portfolio. The new
name of the Fixed Income Portfolio will be the Pinnacle Fixed Income Portfolio.
The Fund's Board of Directors also voted to amend the Management Agreement
between the Fixed Income Portfolio and ARM Capital Advisors to reduce the annual
advisory fee relating to the Fixed Income Portfolio from .90% to .70% of average
net assets. ARM Capital Advisors will compensate J.P. Morgan for its services as
Sub-Adviser at the annual rate of .50% of average net assets. On March 1, 1996,
ARM Capital Advisors will manage the Money Market Portfolio directly without any
Sub-Adviser. The new name of the Money Market Portfolio will be ARM Capital
Advisors Money Market Portfolio. The Fund's Board of Directors also voted to
amend the fees payable under the Management Agreement for the Money Market
Portfolio from .65% to .50% of average net assets.
113
<PAGE>
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, 1995
Statements of Operations for the fiscal year ended June 30, 1995
Statements of Changes in Net Assets for the fiscal periods ended June
30, 1995 and 1994
Financial Highlights for fiscal periods since 1993*
Schedules of Investments as of June 30, 1995
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)
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)
(b)(ii) Sub-Advisory Agreement between Integrity and Harris Bretall
Sullivan & Smith, Inc. (Harris Bretall Sullivan & Smith Equity
Growth Portfolio) (3)
C-1
<PAGE>
(b)(iii) Sub-Advisory Agreement between Integrity and Mitchell Hutchins Asset
Management Inc. (Mitchell Hutchins Money Market Portfolio) (3)
(b)(iv) Sub-Advisory Agreement between Integrity and Mitchell Hutchins
Institutional Investors Inc. (Mitchell Hutchins Fixed Income
Portfolio) (3)
(b)(v) Sub-Advisory Agreement between Integrity and Morgan Stanley Asset
Management Inc. (Morgan Stanley Asian Growth Portfolio) (3)
(b)(vi) Sub-Advisory Agreement between Integrity and Morgan Stanley Asset
Management Inc. (Morgan Stanley Worldwide High Income Portfolio) (3)
(b)(vii) Sub-Advisory Agreement between Integrity and Nicholas-Applegate
Capital Management (Nicholas-Applegate Balanced Portfolio) (3)
(b)(viii) Sub-Advisory Agreement between Integrity and Renaissance Investment
Management (Renaissance Balanced Portfolio) (3)
(b)(ix) Sub-Advisory Agreement between Integrity and Zweig/Glaser Advisers
(Zweig Asset Allocation Portfolio) (3)
(b)(x) Sub-Advisory Agreement between Integrity and Zweig/Glaser Advisers
(Zweig Equity (Small Cap) Portfolio) (3)
(b)(xi) Form of Sub-Advisory Agreement between ARM Capital and J.P. Morgan
Investment Manangement Inc. (Pinnacle Fixed Income Portfolio)
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
C-2
<PAGE>
15. Not applicable
16. Not applicable
17. Financial Data Schedule
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).
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.
C-3
<PAGE>
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.
C-4
<PAGE>
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.
C-5
<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
C-6
<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 February 29, 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
C-7
<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
C-8
<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,
C-9
<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.
C-10
<PAGE>
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 239 South Fifth
Street, 12th 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.
<TABLE>
<CAPTION>
Name Business Activities in Past Two Fiscal Years
- - ------------------ ------------------------------------------------------------------------------
<S> <C>
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.
Kevin L. Howard Assistant Secretary of ARM Capital since October, 1994; Assistant General
Counsel of ARM Financial since January 1994.
John R. McGeeney Secretary of ARM Capital since October, 1994; Assistant General Counsel of
ARM Financial since October 1993; Assistant General Counsel of Capital
Holding Corporation from 1988 to October 1993.
</TABLE>
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 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
C-11
<PAGE>
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, None
Secretary,
General Counsel and Director
Don W. Cummings 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 239 South
Fifth Street, 12th 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.
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 239 South
Fifth Street, 12th 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.
C-12
<PAGE>
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 1st day of March, 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) March 1, 1996
/s/ Peter Resnik Treasurer
- - -----------------------
Peter Resnik (Principal Financial Officer) March 1, 1996
/s/ Don Cummings Controller
- - -----------------------
Don Cummings (Principal Accounting Officer) March 1, 1996
* Director March 1, 1996
- - -----------------------
John Katz
/s/ John R. Lindholm Director March 1, 1996
- - -----------------------
John R. Lindholm
* Director March 1, 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-13
<PAGE>
EXHIBIT 5(B)(I)
SUB-ADVISORY AGREEMENT
AGREEMENT, made this 7th day of November, 1995, between Integrity Life
Insurance Company (Integrity), an Ohio corporation, and Dreman Value Advisors,
Inc. (Sub-Adviser), a Delaware corporation.
WHEREAS, Integrity, an indirect wholly-owned subsidiary of ARM Financial
Group, Inc., is an investment adviser registered under the Investment Advisers
Act of 1940, as amended (the Advisers Act);
WHEREAS, the Sub-Adviser is an investment adviser registered under the
Advisers Act;
WHEREAS, pursuant to a Management Agreement dated November 26, 1993 (the
Management Agreement), Integrity acts as Investment Manager to The Legends Fund,
Inc. (the Fund), an open-end management investment company registered under the
Investment Company Act of 1940, as amended (the 1940 Act);
WHEREAS, the Fund is authorized to issue multiple series of shares, each
such series representing a separate portfolio of securities and investments; and
WHEREAS, Integrity desires to retain the Sub-Adviser to furnish investment
advisory services to the Dreman Value Portfolio of the Fund (the Portfolio),
and the Sub-Adviser is willing to accept such appointment on the terms and
conditions set forth herein.
NOW, THEREFORE, based on the premises and the consideration set forth
herein, Integrity and the Sub-Adviser agree as follows:
SECTION 1. INVESTMENT ADVISORY SERVICES.
Subject to the supervision of the Fund's Board of Directors and Integrity,
the Sub-Adviser will provide a continuous investment program for the Portfolio
and determine the composition of the assets of the Portfolio, including
determination of the purchase, retention or sale of the securities, cash, and
other investments contained in the Portfolio's holdings. The Sub-Adviser will
provide investment research and conduct a continuous program of evaluation,
investment, sales, and reinvestment of the Portfolio's assets by determining the
securities and other investments that shall be purchased, entered into, sold,
closed, or exchanged for the Portfolio, when these transactions should be
executed, and what portion of the assets of the Portfolio should be held in the
various securities and other investments in which it may invest, and the Sub-
Adviser is hereby authorized to execute and perform such services on behalf of
the Portfolio. To the extent, if any, permitted by the investment policies of
the Portfolio, the Sub-Adviser shall make determinations as to and execute and
perform futures contracts and options on behalf of the Portfolio. The Sub-
Adviser will provide the services under this Agreement in accordance with the
Portfolio's investment objective or objectives, policies, and restrictions as
stated in the Fund's Registration Statement filed with the Securities and
Exchange Commission (SEC). Integrity agrees to supply the Sub-Adviser with a
copy of the Registration Statement and each amendment thereto (the Registration
Statement as amended from time to time hereinafter referred to as the
Registration
<PAGE>
Statement) and any other documents that set forth investment policies,
procedures or restrictions governing the Portfolio and to notify the Sub-Adviser
in writing of any changes in the investment objectives, policies, procedures and
restrictions governing the Portfolio.
The Sub-Adviser further agrees as follows:
(a) The Sub-Adviser will manage the Portfolio (i) so that it will qualify
as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the Code), and (ii) so as to ensure
compliance by the Portfolio with the diversification requirements of
Section 817(h) of the Code and regulations issued thereunder. In
managing the Portfolio in accordance with these requirements, the Sub-
Adviser shall be entitled to receive and act upon advice of counsel to
the Fund, counsel to Integrity or counsel to the Sub-Adviser, provided
the Sub-Adviser's counsel is acceptable to Integrity.
(b) In undertaking its duties under this Agreement, the Sub-Adviser will
comply with the 1940 Act and all rules and regulations thereunder, all
other applicable federal and state laws and regulations, with any
applicable procedures adopted by the Fund's Board of Directors of which
it has notice and the provisions of the Registration Statement.
(c) On occasions when the Sub-Adviser deems the purchase or sale of a
security to be in the best interest of the Portfolio as well as of the
Sub-Adviser's or the Sub-Adviser's affiliates' other investment
advisory clients, the Sub-Adviser may, to the extent permitted by
applicable laws and regulations, but shall not be obligated to,
aggregate the securities to be so sold or purchased with those of its
other clients where such aggregation is not inconsistent with the
policies set forth in the Registration Statement. In such event, the
Sub-Adviser will allocate the securities so purchased or sold, as well
as the expenses incurred in the transaction, in a manner that is fair
and equitable in the Sub-Adviser's judgment in the exercise of the Sub-
Adviser's fiduciary obligations to the Fund and to such other clients.
(d) In connection with the purchase and sale of securities for the
Portfolio, the Sub-Adviser, together with Integrity, will arrange for
the transmission to the custodian, transfer agent, dividend disbursing
agent and recordkeeping agent for the Fund (such custodian and agent or
agents hereinafter referred to as the Agent), on a daily basis, such
confirmation, trade tickets (which shall state industry classifications
unless the Sub-Adviser has previously furnished a list of
classifications for portfolio securities), and other documents and
information, including (but not limited to) CUSIP or other numbers that
identify securities to be purchased or sold on behalf of the Portfolio
and, with respect to mortgage derivative and asset-backed securities
purchased by the Sub-Adviser for the Portfolio, 1066Q reports and
supplemental information as required to be available pursuant to IRS
Publication 938, as may be reasonably necessary to enable the Agent to
perform its administrative and recordkeeping responsibilities with
respect
2
<PAGE>
to the Portfolio. With respect to portfolio securities to be purchased
or sold through the Depositary Trust Company, the Sub-Adviser will
arrange for the automatic transmission of the confirmation of such
trades to the Fund's Agent, and if requested, Integrity.
(e) The Sub-Adviser will monitor on a daily basis, by review of daily
pricing reports provided by the Agent to the Sub-Adviser, the
determination by the Agent for the Fund of the valuation of portfolio
securities and other investments of the Portfolio. The Sub-Adviser
shall not be obligated to independently verify the Agent's pricing
determinations, and the Agent's responsibility for accurate pricing
determinations of the value of the Portfolio's securities shall not be
reduced by the Sub-Adviser's duty to monitor such determinations. The
Sub-Adviser will assist the Agent in determining or confirming,
consistent with the procedures and policies stated in the Registration
Statement, the value of any portfolio securities or other assets of the
Portfolio for which the Agent seeks assistance from or identifies for
review by the Sub-Adviser.
(f) The Sub-Adviser will make available to the Fund and Integrity, promptly
upon request, all of the Portfolio's investment records and ledgers
maintained by the Sub-Adviser as are necessary to assist the Fund and
Integrity to comply with requirements of the 1940 Act and the Advisers
Act, as well as other applicable laws. The Sub-Adviser will furnish to
regulatory authorities having the requisite authority any information
or reports in connection with its services which may be requested in
order to ascertain whether the operations of the Fund are being
conducted in a manner consistent with applicable laws and regulations.
(g) The Sub-Adviser will provide reports, which may be prepared by the
Agent, to the Fund's Board of Directors for consideration at meetings
of the Board on the investment program for the Portfolio and the
issuers and securities represented in the Portfolio's securities
holdings, including a schedule of the investments and other assets held
in the Portfolio and a statement of all purchases and sales for the
Portfolio since the last such statement, and will furnish the Funds'
Board of Directors with periodic and special reports with respect to
the Portfolio as the Directors and Integrity may reasonably request,
including statistical information with respect to the Portfolio's
securities. In addition, the Sub-Adviser will make available at each
meeting of the Board of Directors, either in person or by telephone
conference call as instructed by Integrity on behalf of the Board of
Directors of the Fund, an appropriate person to discuss the investment
performance of the Portfolio.
(h) The Sub-Adviser will provide information and reports to Integrity as
Integrity shall reasonably request to enable it to review the
performance of the Sub-Adviser under this Agreement.
3
<PAGE>
SECTION 2. BROKER-DEALER SELECTION.
The Sub-Adviser is responsible for decisions to buy and sell
securities and other investments for the Portfolio, broker-dealer and futures
commission merchant selection, and negotiation of brokerage commission and
futures commission merchants' rates. As a general matter, in executing
portfolio transactions the Sub-Adviser may employ or deal with such broker-
dealers or futures commission merchants as may, in the Sub-Adviser's best
judgment, provide prompt and reliable execution of the transactions at favorable
prices and reasonable commission rates. In selecting such broker-dealers or
futures commission merchants, the Sub-Adviser shall consider all relevant
factors, including price (including the applicable brokerage commission, dealer
spread or futures commission merchant rate), the size of the order, the nature
of the market for the security or other investment, the timing of the
transaction, the reputation, experience and financial stability of the broker-
dealer or futures commission merchant involved, the quality of the service, the
difficulty of execution, and the execution capabilities and operational
facilities of the firm involved, and, in the case of securities, the firm's risk
in positioning a block of securities. Subject to such policies as the Board of
Directors may determine and consistent with Section 28(e) of the Securities
Exchange Act of 1934, as amended (the 1934 Act), the Sub-Adviser shall not be
deemed to have acted unlawfully or to have breached any duty created by this
Agreement or otherwise solely by reason of the Sub-Adviser's having caused the
Portfolio to pay a member of an exchange, broker or dealer an amount of
commission for effecting a securities transaction in excess of the amount of
commission another member of an exchange, broker or dealer would have charged
for effecting that transaction, if the Sub-Adviser determines in good faith that
such amount of commission was reasonable in relation to the value of the
brokerage and research services provided by such member of an exchange, broker
or dealer, viewed in terms of either that particular transaction or the Sub-
Adviser's overall responsibilities with respect to the Portfolio and to the Sub-
Adviser's other clients as to which the Sub-Adviser exercises investment
discretion. In accordance with Section 11(a) of the 1934 Act and Rule 11a2-2(T)
thereunder, and subject to any other applicable laws and regulations including
Section 17(e) of the 1940 Act and Rule 17e-1 thereunder, the Sub-Adviser may
engage its affiliates, Integrity and its affiliates or any other sub-adviser to
the Fund and its respective affiliates as broker-dealers or futures commission
merchants to effect portfolio transactions in securities and other investments
for the Portfolio.
SECTION 3. RECORDS, REPORTS, ETC.
In compliance with the requirements of Rule 31a-3 under the 1940 Act,
the Sub-Adviser hereby agrees that all records which the Sub-Adviser maintains
for the Portfolio are the property of the Fund and further agrees to surrender
promptly to the Fund any of such records upon the Fund's or Integrity's request
or upon termination of this Agreement, although the Sub-Adviser may, at the Sub-
Adviser's own expense, make and retain a copy of such records. The Sub-Adviser
further agrees to preserve for the periods prescribed by Rule 31a-2 under the
1940 Act the records required to be maintained by Rule 31a-1 under the 1940 Act
and to preserve the records required by the Rule 204-2 under the Advisers Act
for the period specified in the Rule.
4
<PAGE>
SECTION 4. PAYMENT OF EXPENSES.
The Sub-Adviser shall assume and pay all of the costs and expenses of
performing its obligations under this Agreement.
SECTION 5. COMPENSATION FOR SERVICES.
Integrity will pay to the Sub-Adviser a monthly sub-advisory fee
(adjusted pro rata for any shorter applicable period) at an annual rate of .50%
of the average daily net assets of the Portfolio from the management fee
actually received by Integrity from the Fund; provided, however, that the sub-
advisory fee shall be reduced proportionately if the management fee actually
paid to Integrity by the Portfolio shall have been reduced as a result of
applicable state expense limitations or fee waivers agreed to in writing by the
Sub-Adviser. The sub-advisory fee shall be computed, accrue and be payable in
the same manner as the management fee which is payable by the Fund to Integrity
pursuant to the Management Agreement and as specified in the Fund's Registration
Statement.
SECTION 6. LIABILITY FOR SERVICES.
Except as may otherwise be required by the 1940 Act or the rules
thereunder or other applicable law, and except as set forth in the next
paragraph, the Fund and Integrity agree that the Sub-Adviser, any of its
affiliated persons, and each person, if any, who, within the meaning of Section
15 of the Securities Act of 1933, as amended, controls the Sub-Adviser, shall
not be liable for, or subject to any damages, expenses, or losses in connection
with, any act or omission connected with or arising out of any services rendered
under this Agreement, except by reason of willful misfeasance, bad faith, or
gross negligence in the performance of the Sub-Adviser's duties, or by reason of
reckless disregard of the Sub-Adviser's obligations and duties under this
Agreement.
SECTION 7. INDEMNIFICATION BY SUB-ADVISER.
The Sub-Adviser agrees to indemnify and hold harmless Integrity
against any losses, expenses, claims, damages or liabilities (or actions or
proceedings in respect thereof), to which Integrity may become subject arising
out of or based on the breach or alleged breach by the Sub-Adviser of any
provisions of this Agreement; provided, however, that the Sub-Adviser shall not
be liable under this paragraph in respect of any loss, expense, claim, damage or
liability to the extent that a court having jurisdiction shall have determined
by a final judgment, or independent counsel agreed upon by Integrity and the
Sub-Adviser shall have concluded in a written opinion, that such loss, expense,
claim, damage or liability resulted primarily from Integrity's willful
misfeasance, bad faith or gross negligence or by reason of the reckless
disregard by Integrity of its duties. The foregoing indemnification shall be in
addition to any rights that Integrity may have at common law or otherwise. The
Sub-Adviser's agreements in this paragraph shall, upon the same terms and
conditions, extend to and inure to the benefit of each person who may be deemed
to control Integrity, be controlled by Integrity or be under common control with
Integrity and its affiliates, directors, officers, employees and agents. The
Sub-Adviser's agreements in this
5
<PAGE>
paragraph shall also extend to any of Integrity's successors or the successors
of the aforementioned affiliates, directors, offices, employees or agents.
SECTION 8. INDEMNIFICATION BY INTEGRITY.
Integrity agrees to indemnify and hold harmless the Sub-Adviser
against any losses, expenses, claims, damages or liabilities (or actions or
proceedings in respect thereof), to which the Sub-Adviser may become subject
arising out of or based on the breach or alleged breach by Integrity of any
provisions of this Agreement or the Management Agreement, or any wrongful action
or alleged wrongful action by Integrity or its affiliates in the distribution of
the Fund's shares, or any wrongful action or alleged wrongful action by the Fund
other than wrongful action or alleged wrongful action that was caused by the
breach by the Sub-Adviser of the provisions of this Agreement; provided,
however, that Integrity shall not be liable under this paragraph in respect of
any loss, expense, claim, damage or liability to the extent that a court having
jurisdiction shall have determined by a final judgment, or independent counsel
agreed upon by Integrity and the Sub-Adviser shall have concluded in a written
opinion, that such loss, expense, claim, damage or liability resulted primarily
from the Sub-Adviser's willful misfeasance, bad faith or gross negligence or by
reason of the reckless disregard by the Sub-Adviser of its duties. The
foregoing indemnification shall be in addition to any rights that the Sub-
Adviser may have at common law or otherwise. Integrity's agreements in this
paragraph shall, upon the same terms and conditions, extend to and inure to the
benefit of each person who may be deemed to control the Sub-Adviser, be
controlled by the Sub-Adviser or be under common control with the Sub-Adviser
and to each of the Sub-Adviser's and each such person's respective affiliates,
directors, officers, employees and agents. Integrity's agreements in this
paragraph shall also extend to any of the Sub-Adviser's successors or the
successors of the aforementioned affiliates, directors, officers, employees or
agents.
SECTION 9. NOTICE AND DEFENSE OF PROCEEDINGS, ETC.
Promptly after receipt by a party indemnified under paragraph 7 or 8
above of notice of the commencement of any action, proceeding or investigation
for which indemnification will be sought, such indemnified party shall promptly
notify the indemnifying party in writing; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may
otherwise have to any indemnified party unless such omission results in actual
material prejudice to the indemnifying party. In case any action or proceeding
shall be brought against any indemnified party, and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate in and, individually or jointly with any other
indemnifying party, to assume the defense thereof with counsel reasonably
satisfactory to the indemnified party. After notice from the indemnifying party
to the indemnified party of its election to assume the defense of any action or
proceeding, the indemnifying party shall not be liable to the indemnified party
for any legal or other expenses subsequently incurred by the indemnified party
in connection with the defense thereof other than reasonable costs of
investigation. If the indemnifying party does not elect to assume the defense
of any action or proceeding the indemnifying party on a monthly basis shall
reimburse the indemnified party for the legal fees and expenses incurred by the
indemnified party for continuing its defense thereof.
6
<PAGE>
Regardless of whether or not the indemnifying party shall have assumed the
defense of any action or proceeding the indemnified party shall not settle or
compromise the action or proceeding without the prior written consent of the
indemnifying party.
SECTION 10. REPRESENTATIONS AND WARRANTIES; COVENANTS.
(a) The Sub-Adviser hereby represents and warrants as follows:
(i) The Sub-Adviser is registered with the SEC as an investment
adviser under the Advisers Act, and such registration is
current, complete and in full compliance with all material
applicable provisions of the Advisers Act and the rules and
regulations thereunder;
(ii) The Sub-Adviser has all requisite authority to enter into,
execute, deliver and perform the Sub-Adviser's obligations under
this Agreement;
(iii) The Sub-Adviser's performance of its obligations under this
Agreement does not conflict with any law, regulation or order to
which the Sub-Adviser is subject; and
(iv) The Sub-Adviser has reviewed the Registration Statement for the
Fund filed with the SEC, and with respect to the disclosure
about the Sub-Adviser and the Portfolio or information relating,
directly or indirectly, to the Sub-Adviser or the Portfolio
which was made in reliance upon and in conformity with written
information provided by the Sub-Adviser to the Fund specifically
for use therein or, if written information was not provided,
which the Sub-Adviser had the opportunity to review prior to
filing with the SEC, such Registration Statement contains, as of
its date, no untrue statement of any material fact and does not
omit any statement of a material fact which was required to be
stated therein or necessary to make the statements contained
therein not misleading.
(b) The Sub-Adviser hereby covenants and agrees that, so long as this
Agreement shall remain in effect:
(i) The Sub-Adviser shall maintain the Sub-Adviser's registration as
an investment adviser under the Advisers Act, and such
registration shall at all times remain current, complete and in
full compliance with all material applicable provisions of the
Advisers Act and the rules and regulations thereunder;
(ii) The Sub-Adviser's performance of its obligations under this
Agreement shall not conflict with any law, regulation or order
to which the Sub-Adviser is then subject;
7
<PAGE>
(iii) The Sub-Adviser shall at all times fully comply with the
Advisers Act, the 1940 Act, all applicable rules and regulations
under such Acts and all other applicable law; and
(iv) The Sub-Adviser shall promptly notify Integrity and the Fund
upon the occurrence of any event that might disqualify or
prevent the Sub-Adviser from performing its duties under this
Agreement. The Sub-Adviser further agrees to notify Integrity
and the Fund promptly with respect to written material that has
been provided to the Fund or Integrity by the Sub-Adviser for
inclusion in the Registration Statement or prospectus for the
Fund or any supplement or amendment thereto, or, if written
material has not been provided, with respect to the information
in the Registration Statement or Prospectus, or any amendment or
supplement thereto, reviewed by the Sub-Adviser, in either case
of any untrue statement of a material fact or of any omission of
any statement of a material fact which is required to be stated
therein or is necessary to make the statements contained therein
not misleading.
SECTION 11. EXCLUSIVITY OF SERVICES AND USE OF NAMES.
The Sub-Adviser acknowledges and agrees that the names The Legends
Fund and Pinnacle, and abbreviations or logos associated with those names, are
the valuable property of Integrity and its affiliates; that the Fund, Integrity
and its affiliates have the right to use such names, abbreviations and logos;
and that the Sub-Adviser shall use the names The Legends Fund and Pinnacle, and
associated abbreviations and logos, only in connection with the Sub-Adviser's
performance of its duties hereunder.
Integrity acknowledges that "Dreman" (the Sub-Adviser's name) is
distinctive in connection with investment advisory and related services provided
by the Sub-Adviser, the Sub-Adviser's name is a property right of the Sub-
Adviser, and the Sub-Adviser's name in the name of the Portfolio are understood
to be used by the Fund with the Sub-Adviser's consent. The Sub-Adviser hereby
grants to the Fund a non-exclusive license to use the Sub-Adviser's name in the
name of the Portfolio upon the conditions hereinafter set forth; provided that
the Fund may use such name only so long as the Sub-Adviser shall be retained as
the investment sub-adviser of the Portfolio pursuant to the terms of this
Agreement. Any such use by the Fund shall in no way prevent the Sub-Adviser or
any of its successors or assigns from using or permitting the use of the Sub-
Adviser's name along with any other word or words, for, by or in connection with
any other entity or business, other than the Fund or its business, whether or
not the same directly competes or conflicts with the Fund or its business.
Integrity acknowledges that the Fund shall use the Sub-Adviser's name
in the name of the Portfolio for the period set forth herein in a manner not
inconsistent with the interests of the Sub-Adviser and that the Fund's rights in
the Sub-Adviser's name are limited to their use as a component of the
Portfolio's name and in connection with accurately describing the activities of
8
<PAGE>
the Portfolio. In the event that the Sub-Adviser shall cease to be the
investment sub-adviser of the Portfolio, then the Fund at its own expense, upon
the Sub-Adviser's written request:
(i) shall cease to use the Sub-Adviser's name as part of the
Portfolio's name or for any other commercial purpose (other than
the right to refer to the Portfolio's former name in the Fund's
Registration Statement, proxy materials and other Fund documents
to the extent required under the 1940 Act);
(ii) shall on all letterheads and other materials designed to be read
or used by salespersons, distributors or investors, state in a
prominent position and prominent type that the Sub-Adviser has
ceased to be the investment sub-adviser of the Portfolio; and
(iii) shall use its best efforts to cause the Fund's officers and
directors to take any and all actions which may be necessary or
desirable to effect the foregoing and to reconvey to the Sub-
Adviser all rights which the Fund may have to such name.
Integrity agrees to take any and all actions as may be necessary
or desirable to effect the foregoing.
The Sub-Adviser hereby agrees and consents to the use of the Sub-
Adviser's name upon the foregoing terms and conditions.
SECTION 12. ENTIRE AGREEMENTS; AMENDMENT, WAIVER.
This Agreement supersedes all prior agreements between the parties and
constitutes the entire Agreement by the parties. No provision of this Agreement
may be changed, waived, discharged or terminated orally, but only by an
instrument in writing singed by the party against which enforcement of the
change, waiver, discharge or termination is sought, and no amendment of this
Agreement shall be effective with respect to the Portfolio until approved as
required by the 1940 Act.
SECTION 13. EFFECTIVENESS AND DURATION OF AGREEMENT.
Unless sooner terminated, this Agreement shall continue in effect for
one year and thereafter for successive one year periods, provided that
continuation of this Agreement and the terms thereof are specifically approved
annually in accordance with the requirements of the 1940 Act by a majority of
the Directors of the Fund, including a majority of the Directors who are not
interested persons of the Sub-Adviser, Integrity or the Fund, cast in person at
a meeting called for the purpose of voting on such approval.
SECTION 14. TERMINATION OF AGREEMENT, ASSIGNMENT.
This Agreement may be terminated at any time, without the payment of
any penalty, by the Sub-Adviser or by Integrity, upon sixty (60) days' written
notice from the terminating party to the
9
<PAGE>
other party and to the Fund, or by the Fund, upon sixty (60) days written notice
to the Sub-Adviser and Integrity, acting pursuant to a resolution adopted by a
majority of the members of the Board of Directors who are not interested persons
or by a vote of the holders of the lesser of (1) 67% of the Portfolio's voting
shares present if the holders of more than 50% of the outstanding shares are
present in person or by proxy, or (2) more than 50% of the outstanding shares of
the Portfolio.
This Agreement shall automatically terminate in the event of its
assignment or the termination of the Management Agreement pertaining to the
Portfolio. Termination of this Agreement shall not affect rights of the parties
which have accrued prior thereto.
The provisions of paragraphs 6, 7, 8, 9, and 11 shall survive the
termination of this Agreement.
SECTION 15. DEFINITIONS.
The terms assignment and interested person when used in this Agreement
shall have the meanings give such terms in the 1940 Act and the rules and
regulations thereunder.
SECTION 16. CONCERNING APPLICABLE PROVISIONS OF LAW.
This Agreement shall be subject to all applicable provisions of law,
including, without limitation, the applicable provisions of the 1940 Act, and to
the extent that any provisions herein contained conflict with any such
applicable provisions of law, the latter shall control.
This Agreement shall be governed by the laws of the State of New York,
without reference to principles of conflicts of law.
SECTION 17. COUNTERPARTS.
This Agreement may be executed in counterparts, and each counterpart
shall for all purposed be deemed an original, and all such counterparts shall
together constitute one and the same instrument.
10
<PAGE>
IN WITNESS WHEREOF, authorized officers of Integrity and the Sub-
Adviser have executed this Agreement as of the day and year first written above.
INTEGRITY LIFE INSURANCE DREMAN VALUE ADVISORS,
COMPANY INC.
By: /s/ John R. McGeeney By: /s/ James R. Neel
------------------------ ----------------------------
Attest: /s/ Kevin L. Howard Attest: /s/ David F. Dierenfeldt
--------------------- --------------------------
<PAGE>
EXHIBIT 5(B)(XI)
SUB-ADVISORY AGREEMENT
AGREEMENT, made this ___ day of __________, 1996, between ARM Capital Advisors,
Inc. (ARM Capital), a Delaware corporation, and J.P. Morgan Investment
Management Inc., a _____________ corporation.
WHEREAS, ARM Capital, a wholly-owned subsidiary of ARM Financial Group, Inc., is
an investment adviser registered under the Investment Advisers Act of 1940, as
amended (the Advisers Act);
WHEREAS, the Sub-Adviser is an investment adviser registered under the Advisers
Act;
WHEREAS, pursuant to a Management Agreement dated November 26, 1993 (the
Management Agreement), ARM Capital acts as Investment Manager to The Legends
Fund, Inc. (the Fund), an open-end management investment company registered
under the Investment Company Act of 1940, as amended (the 1940 Act);
WHEREAS, the Fund is authorized to issue multiple series of shares, each such
series representing a separate portfolio of securities and investments; and
WHEREAS, ARM Capital desires to retain the Sub-Adviser to furnish investment
advisory services to the Pinnacle Fixed Income Portfolio of the Fund (the
Portfolio), and the Sub-Adviser is willing to accept such appointment on the
terms and conditions set forth herein.
NOW, THEREFORE, based on the premises and the consideration set forth herein,
ARM Capital and the Sub-Adviser agree as follows:
SECTION 1. INVESTMENT ADVISORY SERVICES.
Subject to the supervision of the Fund's Board of Directors and ARM Capital, the
Sub-Adviser will provide a continuous investment program for the Portfolio and
determine the composition of the assets of the Portfolio, including
determination of the purchase, retention or sale of the securities, cash, and
other investments contained in the Portfolio's holdings. The Sub-Adviser will
provide investment research and conduct a continuous program of evaluation,
investment, sales, and reinvestment of the Portfolio's assets by determining the
securities and other investments that shall be purchased, entered into, sold,
closed, or exchanged for the Portfolio, when these transactions should be
executed, and what portion of the assets of the Portfolio should be held in the
various securities and other investments in which it may invest, and the Sub-
Adviser is hereby authorized to execute and perform such services on behalf of
the Portfolio. To the extent, if any, permitted by the investment policies of
the Portfolio, the Sub-Adviser shall make determinations as to and execute and
perform futures contracts and options on behalf of the Portfolio. The Sub-
Adviser will provide the services under this Agreement in accordance with the
Portfolio's investment objective or objectives, policies, and restrictions as
stated in the Fund's Registration Statement filed with the Securities and
Exchange Commission (SEC). ARM Capital agrees to supply the Sub-Adviser with a
copy of the Registration Statement and each amendment thereto (the Registration
Statement as amended from time to time hereinafter referred to as the
Registration Statement) and any other documents that set forth investment
policies, procedures or restrictions governing the Portfolio and to notify the
Sub-Adviser in writing of any changes in the investment objectives, policies,
procedures and restrictions governing the Portfolio.
The Sub-Adviser further agrees as follows:
(a) The Sub-Adviser will manage the Portfolio (i) so that it will qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the Code), and (ii) so as to ensure compliance by the
Portfolio with the diversification requirements of Section 817(h) of the Code
and regulations issued thereunder. In managing the Portfolio in accordance with
these requirements, the
<PAGE>
Sub-Adviser shall be entitled to receive and act upon advice of counsel to the
Fund, counsel to ARM Capital or counsel to the Sub-Adviser, provided the Sub-
Adviser's counsel is acceptable to ARM Capital.
(b) In undertaking its duties under this Agreement, the Sub-Adviser will comply
with the 1940 Act and all rules and regulations thereunder, all other applicable
federal and state laws and regulations, with any applicable procedures adopted
by the Fund's Board of Directors of which it has notice and the provisions of
the Registration Statement.
(c) On occasions when the Sub-Adviser deems the purchase or sale of a security
to be in the best interest of the Portfolio as well as of the Sub-Adviser's or
the Sub-Adviser's affiliates' other investment advisory clients, the Sub-Adviser
may, to the extent permitted by applicable laws and regulations, but shall not
be obligated to, aggregate the securities to be so sold or purchased with those
of its other clients where such aggregation is not inconsistent with the
policies set forth in the Registration Statement. In such event, the Sub-Adviser
will allocate the securities so purchased or sold, as well as the expenses
incurred in the transaction, in a manner that is fair and equitable in the Sub-
Adviser's judgment in the exercise of the Sub-Adviser's fiduciary obligations to
the Fund and to such other clients.
(d) In connection with the purchase and sale of securities for the Portfolio,
the Sub-Adviser, together with ARM Capital, will arrange for the transmission to
the custodian, transfer agent, dividend disbursing agent and recordkeeping agent
for the Fund (such custodian and agent or agents hereinafter referred to as the
Agent), on a daily basis, such confirmation, trade tickets (which shall state
industry classifications unless the Sub-Adviser has previously furnished a list
of classifications for portfolio securities), and other documents and
information, including (but not limited to) Cusip or other numbers that identify
securities to be purchased or sold on behalf of the Portfolio and, with respect
to mortgage derivative and asset-backed securities purchased by the Sub-Adviser
for the Portfolio, 1066Q reports and supplemental information as required to be
available pursuant to IRS Publication 938, as may be reasonably necessary to
enable the Agent to perform its administrative and recordkeeping
responsibilities with respect to the Portfolio. With respect to portfolio
securities to be purchased or sold through the Depository Trust Company, the
Sub-Adviser will arrange for the automatic transmission of the confirmation of
such trades to the Fund's Agent, and if requested, ARM Capital.
(e) The Sub-Adviser will be provided daily pricing reports by the Agent,
including the determination by the Agent for the Fund of the valuation of
portfolio securities and other investments of the Portfolio. The Sub-Adviser
shall not be obligated to independently verify the Agent's pricing
determinations, and the Agent's responsibility for accurate pricing
determinations of the value of the Portfolios's securities shall not be reduced
by the Sub-Adviser's duty to provide such assistance. The Sub-Adviser will
assist the Agent in determining or confirming, consistent with the procedures
and policies stated in the Registration Statement, the value of any portfolio
securities or other assets of the Portfolio for which the Agent seeks assistance
from or identifies for review by the Sub-Adviser.
(f) The Sub-Adviser will make available to the Fund and ARM Capital, promptly
upon request, all of the Portfolio's investment records and ledgers maintained
by the Sub-Adviser as are necessary to assist the Fund and ARM Capital to comply
with requirements of the 1940 Act and the Advisers Act, as well as other
applicable laws. The Sub-Adviser will furnish to regulatory authorities having
the requisite authority any information or reports in connection with its
services which may be requested in order to ascertain whether the operations of
the Fund are being conducted in a manner consistent with applicable laws and
regulations.
(g) The Sub-Adviser will provide reports, which may be prepared by the Agent, to
the Fund's Board of Directors for consideration at meetings of the Board on the
investment program for the Portfolio and the issuers and securities represented
in the Portfolio's securities holdings, including a schedule of the
2
<PAGE>
investments and other assets held in the Portfolio and a statement of all
purchases and sales for the Portfolio since the last such statement, and will
furnish the Fund's Board of Directors with periodic and special reports with
respect to the Portfolio as the Directors and ARM Capital may reasonably
request, including statistical information with respect to the Portfolio's
securities. In addition, the Sub-Adviser will make available at each meeting of
the Board of Directors, either in person or by telephone conference call as
instructed by ARM Capital on behalf of the Board of Directors of the Fund, an
appropriate person to discuss the investment performance of the Portfolio.
(h) The Sub-Adviser will provide information and reports to ARM Capital as ARM
Capital shall reasonably request to enable it to review the performance of the
Sub-Adviser under this Agreement.
SECTION 2. BROKER-DEALER SELECTION.
The Sub-Adviser is responsible for decisions to buy and sell securities and
other investments for the Portfolio, broker-dealer and futures commission
merchant selection, and negotiation of brokerage commission and futures
commission merchants' rates. As a general matter, in executing portfolio
transactions the Sub-Adviser may employ or deal with such broker-dealers or
futures commission merchants as may, in the Sub-Adviser's best judgment, provide
prompt and reliable execution of the transactions at favorable prices and
reasonable commission rates. In selecting such broker-dealers or futures
commission merchants, the Sub-Adviser shall consider all relevant factors,
including price (including the applicable brokerage commission, dealer spread or
futures commission merchant rate), the size of the order, the nature of the
market for the security or other investment, the timing of the transaction, the
reputation, experience and financial stability of the broker-dealer or futures
commission merchant involved, the quality of the service, the difficulty of
execution, and the execution capabilities and operational facilities of the firm
involved, and, in the case of securities, the firm's risk in positioning a block
of securities. Subject to such policies as the Board of Directors may determine
and consistent with Section 28(e) of the Securities Exchange Act of 1934, as
amended (the 1934 Act), the Sub-Adviser shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of the Sub-Adviser's having caused the Portfolio to pay a
member of an exchange, broker or dealer an amount of commission for effecting a
securities transaction in excess of the amount of commission another member of
an exchange, broker or dealer would have charged for effecting that transaction,
if the Sub-Adviser determines in good faith that such amount of commission was
reasonable in relation to the value of the brokerage and research services
provided by such member of an exchange, broker or dealer, viewed in terms of
either that particular transaction or the Sub-Adviser's overall responsibilities
with respect to the Portfolio and to the Sub-Adviser's other clients as to which
the Sub-Adviser exercises investment discretion. In accordance with Section
11(a) of the 1934 Act and Rule 11a2-2(T) thereunder, and subject to any other
applicable laws and regulations including Section 17(e) of the 1940 Act and Rule
17e-1 thereunder, the Sub-Adviser may engage its affiliates, ARM Capital and its
affiliates or any other sub-adviser to the Fund and its respective affiliates as
broker-dealers or futures commission merchants to effect portfolio transactions
in securities and other investments for the Portfolio.
SECTION 3. RECORDS, REPORTS, ETC.
In compliance with the requirements of Rule 31a-3 under the 1940 Act, the Sub-
Adviser hereby agrees that all records which the Sub-Adviser maintains for the
Portfolio are the property of the Fund and further agrees to surrender promptly
to the Fund any of such records upon the Fund's or ARM Capital's request or upon
termination of this Agreement, although the Sub-Adviser may, at the Sub-
Adviser's own expense, make and retain a copy of such records. The Sub-Adviser
further agrees to preserve for the periods prescribed by Rule 31a-2 under the
1940 Act the records required to be maintained by Rule 31a-1 under the 1940 Act
and to preserve the records required by the Rule 204-2 under the Advisers Act
for the period specified in the Rule.
3
<PAGE>
SECTION 4. PAYMENT OF EXPENSES.
The Sub-Adviser shall assume and pay all of the costs and expenses of performing
its obligations under this Agreement.
SECTION 5. COMPENSATION FOR SERVICES.
ARM Capital will pay to the Sub-Adviser a monthly sub-advisory fee (adjusted pro
rata for any shorter applicable period) at an annual rate of .50% of the average
daily net assets of the Portfolio. The sub-advisory fee shall be computed,
accrue and be payable in the same manner as the management fee which is payable
by the Fund to ARM Capital pursuant to the Management Agreement and as specified
in the Fund's Registration Statement.
SECTION 6. LIABILITY FOR SERVICES.
Except as may otherwise be required by the 1940 Act or the rules thereunder or
other applicable law, and except as set forth in the next paragraph, the Fund
and ARM Capital agree that the Sub-Adviser, any of its affiliated persons, and
each person, if any, who, within the meaning of Section 15 of the Securities Act
of 1933, as amended, controls the Sub-Adviser, shall not be liable for, or
subject to any damages, expenses, or losses in connection with, any act or
omission connected with or arising out of any services rendered under this
Agreement, except by reason of willful misfeasance, bad faith, or gross
negligence in the performance of the Sub-Adviser's duties, or by reason of
reckless disregard of the Sub-Adviser's obligations and duties under this
Agreement.
SECTION 7. INDEMNIFICATION BY SUB-ADVISER.
The Sub-Adviser agrees to indemnify and hold harmless ARM Capital against any
losses, expenses, claims, damages or liabilities (or actions or proceedings in
respect thereof), to which ARM Capital may become subject arising out of or
based on the material breach by the Sub-Adviser of any provisions of this
Agreement; provided, however, that the Sub-Adviser shall not be liable under
this paragraph in respect of any loss, expense, claim, damage or liability to
the extent that a court having jurisdiction shall have determined by a final
judgment, or independent counsel agreed upon by ARM Capital and the Sub-Adviser
shall have concluded in a written opinion, that such loss, expense, claim,
damage or liability resulted primarily from ARM Capital's willful misfeasance,
bad faith or gross negligence or by reason of the reckless disregard by ARM
Capital of its duties. The foregoing indemnification shall be in addition to any
rights that ARM Capital may have at common law or otherwise. Under no
circumstances whatsoever shall the Sub-Adviser be liable to ARM Capital for
punitive, consequential, or special damages. Each party agrees to pay its own
attorney's fees for any claims, actions or lawsuits brought pursuant to or
relating in any way to this Agreement. The Sub-Adviser's agreements in this
paragraph shall, upon the same terms and conditions, extend to and inure to the
benefit of each person who may be deemed to control ARM Capital, be controlled
by ARM Capital or be under common control with ARM Capital and its affiliates,
directors, officers, employees and agents. The Sub-Adviser's agreements in this
paragraph shall also extend to any of ARM Capital's successors or the successors
of the aforementioned affiliates, directors, officers, employees or agents.
SECTION 8. INDEMNIFICATION BY ARM CAPITAL.
ARM Capital agrees to indemnify and hold harmless the Sub-Adviser against any
losses, expenses, claims,
4
<PAGE>
damages or liabilities (or actions or proceedings in respect thereof), to which
the Sub-Adviser may become subject arising out of or based on the material
breach by ARM Capital of any provisions of this Agreement or the Management
Agreement, or any wrongful action or alleged wrongful action by ARM Capital or
its affiliates in the distribution of the Fund's shares, or any wrongful action
or alleged wrongful action by the Fund other than wrongful action or alleged
wrongful action that was caused by the breach by the Sub-Adviser of the
provisions of this Agreement; provided, however, that ARM Capital shall not be
liable under this paragraph in respect of any loss, expense, claim, damage or
liability to the extent that a court having jurisdiction shall have determined
by a final judgment, or independent counsel agreed upon by ARM Capital and the
Sub-Adviser shall have concluded in a written opinion, that such loss, expense,
claim, damage or liability resulted primarily from the Sub-Adviser's willful
misfeasance, bad faith or gross negligence or by reason of the reckless
disregard by the Sub-Adviser of its duties. The foregoing indemnification shall
be in addition to any rights that the Sub-Adviser may have at common law or
otherwise. Under no circumstances whatsoever shall ARM Capital be liable to the
Sub-Adviser for punitive, consequential, or special damages. Each party agrees
to pay its own attorney's fees for any claims, actions or lawsuits brought
pursuant to or relating in any way to this Agreement. ARM Capital's agreements
in this paragraph shall, upon the same terms and conditions, extend to and inure
to the benefit of each person who may be deemed to control the Sub-Adviser, be
controlled by the Sub-Adviser or be under common control with the Sub-Adviser
and to each of the Sub-Adviser's and each such person's respective affiliates,
directors, officers, employees and agents. ARM Capital's agreements in this
paragraph shall also extend to any of the Sub-Adviser's successors or the
successors of the aforementioned affiliates, directors, officers, employees or
agents.
SECTION 9. NOTICE AND DEFENSE OR PROCEEDINGS, ETC.
Promptly after receipt by a party indemnified under paragraph 7 or 8 above of
notice of the commencement of any action, proceeding or investigation for which
indemnification will be sought, such indemnified party shall promptly notify the
indemnifying party in writing; but the omission so to notify the indemnifying
party shall not relieve it from any liability which it may otherwise have to any
indemnified party unless such omission results in actual material prejudice to
the indemnifying party. In case any action or proceeding shall be brought
against any indemnified party, and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate in
and, individually or jointly with any other indemnifying party, to assume the
defense thereof with counsel reasonably satisfactory to the indemnified party.
After notice from the indemnifying party to the indemnified party of its
election to assume the defense of any action or proceeding, the indemnifying
party shall not be liable to the indemnified party for any legal or other
expenses subsequently incurred by the indemnified party in connection with the
defense thereof other than reasonable costs of investigation. If the
indemnifying party does not elect to assume the defense of any action or
proceeding, the indemnifying party on a monthly basis shall reimburse the
indemnified party for the legal fees and expenses incurred by the indemnified
party for continuing its defense thereof. Regardless of whether or not the
indemnifying party shall have assumed the defense of any action or proceeding,
the indemnified party shall not settle or compromise the action or proceeding
without the prior written consent of the indemnifying party.
SECTION 10. REPRESENTATIONS AND WARRANTIES; COVENANTS.
(a) The Sub-Adviser hereby represents and warrants as follows:
(i) The Sub-Adviser is registered with the SEC as an investment adviser under
the Advisers Act, and such registration is current, complete and in full
compliance with all material applicable provisions of the Advisers Act and the
rules and regulations thereunder;
5
<PAGE>
(ii) The Sub-Adviser has all requisite authority to enter into, execute, deliver
and perform the Sub-Adviser's obligations under this Agreement;
(iii) The Sub-Adviser's performance of its obligations under this Agreement does
not conflict with any law, regulation or order to which the Sub-Adviser is
subject; and
(iv) The Sub-Adviser has reviewed the Registration Statement for the Fund filed
with the SEC, and with respect to the disclosure about the Sub-Adviser and the
Portfolio or information relating, directly or indirectly, to the Sub-Adviser or
the Portfolio which was made in reliance upon and in conformity with written
information provided by the Sub-Adviser to the Fund specifically for use therein
or, if written information was not provided, which the Sub-Adviser had the
opportunity to review prior to filing with the SEC, such Registration Statement
contains, as of its date, no untrue statement of any material fact and does not
omit any statement of a material fact which was required to be stated therein or
necessary to make the statements contained therein not misleading; provided,
however, that the Sub-Adviser makes no representation or warranty as to any
historical information relating to the Portfolio prior to the date hereof.
(b) The Sub-Adviser hereby covenants and agrees that, so long as this Agreement
shall remain in effect:
(i) The Sub-Adviser shall maintain the Sub-Adviser's registration as an
investment adviser under the Advisers Act, and such registration shall at all
times remain current, complete and in full compliance with all material
applicable provisions of the Advisers Act and the rules and regulations
thereunder;
(ii) The Sub-Adviser's performance of its obligations under this Agreement shall
not conflict with any law, regulation or order to which the Sub-Adviser is then
subject;
(iii) The Sub-Adviser shall at all times fully comply with the Advisers Act, the
1940 Act, all applicable rules and regulations under such Acts and all other
applicable law;
(iv) The Sub-Adviser shall promptly notify ARM Capital and the Fund upon the
occurrence of any event that might disqualify or prevent the Sub-Adviser from
performing its duties under this Agreement. The Sub-Adviser further agrees to
notify ARM Capital and the Fund promptly with respect to written material that
has been provided to the Fund or ARM Capital by the Sub-Adviser for inclusion in
the Registration Statement or prospectus for the Fund or any supplement or
amendment thereto, or, if written material has not been provided, with respect
to the information in the Registration Statement or Prospectus, or any amendment
or supplement thereto, reviewed by the Sub-Adviser, in either case of any untrue
statement of a material fact or of any omission of any statement of a material
fact which is required to be stated therein or is necessary to make the
statements contained therein not misleading; and
(v) If the Sub-Adviser is a partnership, the Sub-Adviser shall notify the Fund
and ARM Capital of any change in membership within a reasonable time after such
change.
SECTION 11. EXCLUSIVITY OF SERVICES AND USE OF NAMES.
The Sub-Adviser acknowledges and agrees that the names The Legends Fund and
Pinnacle, and abbreviations or logos associated with those names, are the
valuable property of ARM Capital and its affiliates; that the Fund, ARM Capital
and its affiliates have the right to use such names, abbreviations and logos;
and that the Sub-Adviser shall use the names The Legends Fund and Pinnacle, and
associated abbreviations and logos, only in connection with the Sub-Adviser's
performance of its duties hereunder.
ARM Capital acknowledges that "J.P. Morgan Investment Management Inc." (the Sub-
Adviser's name) is
6
<PAGE>
distinctive in connection with investment advisory and related services provided
by the Sub-Adviser, the Sub-Adviser's name is a property right of the Sub-
Adviser, and the Sub-Adviser's name is to be used by the Fund only with the Sub-
Adviser's prior written consent. The Sub-Adviser hereby grants to the Fund a
non-exclusive license to use the Sub-Adviser's name in connection with the
Portfolio upon the conditions hereinafter set forth; provided that the Fund may
use such name only so long as the Sub-Adviser shall be retained as the
investment sub-adviser of the Portfolio pursuant to the terms of this Agreement.
Any such use by the Fund shall in no way prevent the Sub-Adviser or any of its
successors or assigns from using or permitting the use of the Sub-Adviser's name
along with any other word or words, for, by or in connection with any other
entity or business, other than the Fund or its business, whether or not the same
directly competes or conflicts with the Fund or its business in any manner.
In the event that the Sub-Adviser shall cease to be the investment sub-adviser
of the Portfolio, then Fund at its own expense, upon the Sub-Adviser's written
request:
(i) shall cease to use the Sub-Adviser's name for any commercial purpose (other
than the right to refer to the Sub-Adviser's name in the Fund's Registration
Statement, proxy materials and other Fund documents to the extent required under
the 1940 Act);
(ii) shall on all letterheads and other materials designed to be read or used by
salesmen, distributors or investors, state in a prominent position and prominent
type that the Sub-Adviser has ceased to be the investment sub-adviser of the
Portfolio; and
(ii) shall use its best efforts to cause the Fund's officers and directors to
take any and all actions which may be necessary or desirable to effect the
foregoing. ARM Capital agrees to take any all actions as may be necessary or
desirable to effect the foregoing.
The Sub-Adviser hereby agrees and consents to the use of the Sub-Adviser's name
upon the foregoing terms and conditions.
SECTION 12. ENTIRE AGREEMENT; AMENDMENT, WAIVER.
This Agreement supersedes all prior agreements between the parties and
constitutes the entire agreement by the parties. No provision of this Agreement
may be changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought, and no amendment of this
Agreement shall be effective with respect to the Portfolio until approved as
required by the 1940 Act.
SECTION 13. EFFECTIVENESS AND DURATION OF AGREEMENT.
Unless sooner terminated, this Agreement shall continue in effect until November
26, 1997 and thereafter for successive one year periods, provided that
continuation of this Agreement and the terms thereof are specifically approved
annually in accordance with the requirements of the 1940 Act by a majority of
the Directors of the Fund, including a majority of the Directors who are not
interested persons of the Sub-Adviser, ARM Capital or the Fund, cast in person
at a meeting called for the purpose of voting on such approval.
SECTION 14. TERMINATION OF AGREEMENT, ASSIGNMENT.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Sub-Adviser or by ARM Capital, upon sixty (60) days' written
notice from the terminating party to the other party and to the
7
<PAGE>
Fund, or by the Fund, upon sixty (60) days written notice to the Sub-Adviser and
ARM Capital, acting pursuant to a resolution adopted by a majority of the
members of the Board of Directors who are not interested persons or by a vote of
the holders of the lesser of (1) 67% of the Portfolio's voting shares present if
the holders of more than 50% of the outstanding shares are present in person or
by proxy, or (2) more than 50% of the outstanding shares of the Portfolio.
This Agreement shall automatically terminate in the event of its assignment or
the termination of the Management Agreement pertaining to the Portfolio.
Termination of this Agreement shall not affect rights of the parties which have
accrued prior thereto.
The provisions of paragraphs 6, 7, 8, 9 and 11 shall survive the termination of
this Agreement, except that if ARM Capital or the Fund terminates the Agreement,
the first paragraph of Section 11 shall not survive termination.
SECTION 15. DEFINITIONS.
The terms assignment and interested person when used in this Agreement shall
have the meanings given such terms in the 1940 Act and the rules and regulations
thereunder.
SECTION 16. CONCERNING APPLICABLE PROVISIONS OF LAW.
This Agreement shall be subject to all applicable provisions of law, including,
without limitation, the applicable provisions of the 1940 Act, and to the extent
that any provisions herein contained conflict with any such applicable
provisions of law, the latter shall control. This Agreement shall be governed
by the laws of the State of New York, without reference to principles of
conflicts of law.
SECTION 17. COUNTERPARTS.
This Agreement may be executed in counterparts, and each counterpart shall for
all purposes be deemed an original and all such counterparts shall together
constitute one and the same instrument.
IN WITNESS WHEREOF, authorized officers of ARM Capital and the Sub-Adviser have
executed this Agreement as of the day and year first written above.
ARM CAPITAL ADVISORS, INC. J.P. MORGAN INVESTMENT
MANAGEMENT INC.
By:_________________________________ By:_________________________________
Attest:_______________________________ Attest:_______________________________
8
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP]
Consent of Independent Auditors
We consent to the references to our firm under the captions "Financial
Highlights," "Other Information" and "Financial Statements of the Fund" and to
the use of our report dated August 14, 1995, in the Post-Effective Amendment No.
6 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
February 28, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEMI-ANNUAL REPORT TO SHAREHOLDERS FOR THE LEGENDS FUND, INC. AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 10
<NAME> MITCHELL HUTCHINS MONEY MARKET PORTFOLIO
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 9,433,957
<INVESTMENTS-AT-VALUE> 9,433,957
<RECEIVABLES> 11,302
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9,445,259
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 322,303
<TOTAL-LIABILITIES> 322,303
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9,122,956
<SHARES-COMMON-STOCK> 9,122,956
<SHARES-COMMON-PRIOR> 6,753,095
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 9,122,956
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 267,568
<OTHER-INCOME> 0
<EXPENSES-NET> 52,630
<NET-INVESTMENT-INCOME> 214,938
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 214,938
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 214,938
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 14,061,408
<NUMBER-OF-SHARES-REDEEMED> 11,906,485
<SHARES-REINVESTED> 214,938
<NET-CHANGE-IN-ASSETS> 2,369,861
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 29,708
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 52,630
<AVERAGE-NET-ASSETS> 9,140,923
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .02
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> .02
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 1.15
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM THE
SEMI-ANNUAL REPORT TO SHAREHOLDERS FOR THE LEGENDS FUND, INC. AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 12
<NAME> MORGAN STANLEY WORLDWIDE HIGH INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 6,325,946
<INVESTMENTS-AT-VALUE> 6,338,004
<RECEIVABLES> 1,133,770
<ASSETS-OTHER> 16,999
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7,488,773
<PAYABLE-FOR-SECURITIES> 1,249,449
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,581
<TOTAL-LIABILITIES> 1,252,030
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,986,146
<SHARES-COMMON-STOCK> 569,084
<SHARES-COMMON-PRIOR> 600,165
<ACCUMULATED-NII-CURRENT> 336,221
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (97,682)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 12,058
<NET-ASSETS> 6,236,743
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 386,037
<OTHER-INCOME> 0
<EXPENSES-NET> 49,816
<NET-INVESTMENT-INCOME> 336,221
<REALIZED-GAINS-CURRENT> (7,615)
<APPREC-INCREASE-CURRENT> 279,433
<NET-CHANGE-FROM-OPS> 608,039
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 532,957
<DISTRIBUTIONS-OF-GAINS> 6,625
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 24,539
<NUMBER-OF-SHARES-REDEEMED> 83,072
<SHARES-REINVESTED> 54,452
<NET-CHANGE-IN-ASSETS> (5,154)
<ACCUMULATED-NII-PRIOR> 532,957
<ACCUMULATED-GAINS-PRIOR> (83,442)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 26,963
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 49,816
<AVERAGE-NET-ASSETS> 6,344,235
<PER-SHARE-NAV-BEGIN> 10.40
<PER-SHARE-NII> .57
<PER-SHARE-GAIN-APPREC> .39
<PER-SHARE-DIVIDEND> .89
<PER-SHARE-DISTRIBUTIONS> .01
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.46
<EXPENSE-RATIO> 1.57
<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 SEMI-
ANNUAL REPORT TO SHAREHOLDERS FOR THE LEGENDS FUND, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<SERIES>
<NUMBER> 6
<NAME> ZWEIG EQUITY (SMALL CAP) PORTFOLIO
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 8,359,003
<INVESTMENTS-AT-VALUE> 10,006,880
<RECEIVABLES> 14,232
<ASSETS-OTHER> 330,966
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 10,352,078
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 7,466
<TOTAL-LIABILITIES> 7,466
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8,838,876
<SHARES-COMMON-STOCK> 819,555
<SHARES-COMMON-PRIOR> 691,384
<ACCUMULATED-NII-CURRENT> 33,714
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (175,855)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,647,877
<NET-ASSETS> 10,344,612
<DIVIDEND-INCOME> 66,195
<INTEREST-INCOME> 36,587
<OTHER-INCOME> 0
<EXPENSES-NET> 69,168
<NET-INVESTMENT-INCOME> 33,614
<REALIZED-GAINS-CURRENT> 285,147
<APPREC-INCREASE-CURRENT> 529,063
<NET-CHANGE-FROM-OPS> 847,824
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 119,225
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 193,831
<NUMBER-OF-SHARES-REDEEMED> 75,392
<SHARES-REINVESTED> 9,732
<NET-CHANGE-IN-ASSETS> 2,310,820
<ACCUMULATED-NII-PRIOR> 119,325
<ACCUMULATED-GAINS-PRIOR> (461,002)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 47,111
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 69,168
<AVERAGE-NET-ASSETS> 8,973,524
<PER-SHARE-NAV-BEGIN> 11.62
<PER-SHARE-NII> .03
<PER-SHARE-GAIN-APPREC> 1.13
<PER-SHARE-DIVIDEND> .16
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.62
<EXPENSE-RATIO> 1.54
<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
SEMI-ANNUAL REPORT TO SHAREHOLDERS FOR THE LEGENDS FUND, INC. AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 5
<NAME> DREMAN VALUE PORTFOLIO
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 12,074,740
<INVESTMENTS-AT-VALUE> 15,591,581
<RECEIVABLES> 31,676
<ASSETS-OTHER> 26,109
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 15,649,366
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 10,464
<TOTAL-LIABILITIES> 10,464
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11,662,016
<SHARES-COMMON-STOCK> 1,046,489
<SHARES-COMMON-PRIOR> 863,732
<ACCUMULATED-NII-CURRENT> 136,027
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 324,018
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,516,841
<NET-ASSETS> 15,638,902
<DIVIDEND-INCOME> 181,255
<INTEREST-INCOME> 13,102
<OTHER-INCOME> 0
<EXPENSES-NET> 58,330
<NET-INVESTMENT-INCOME> 136,027
<REALIZED-GAINS-CURRENT> 324,018
<APPREC-INCREASE-CURRENT> 2,115,912
<NET-CHANGE-FROM-OPS> 2,575,957
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 190,236
<DISTRIBUTIONS-OF-GAINS> 110,864
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 251,849
<NUMBER-OF-SHARES-REDEEMED> 90,932
<SHARES-REINVESTED> 21,840
<NET-CHANGE-IN-ASSETS> 4,761,992
<ACCUMULATED-NII-PRIOR> 190,236
<ACCUMULATED-GAINS-PRIOR> 110,864
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 28,662
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 58,330
<AVERAGE-NET-ASSETS> 13,113,935
<PER-SHARE-NAV-BEGIN> 12.59
<PER-SHARE-NII> .10
<PER-SHARE-GAIN-APPREC> 2.55
<PER-SHARE-DIVIDEND> .19
<PER-SHARE-DISTRIBUTIONS> .11
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.94
<EXPENSE-RATIO> .89
<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
SEMI-ANNUAL REPORT TO SHAREHOLDERS FOR THE LEGENDS FUND, INC. AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 4
<NAME> HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 17,650,643
<INVESTMENTS-AT-VALUE> 22,631,373
<RECEIVABLES> 21,879
<ASSETS-OTHER> 14,826
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 22,668,078
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 20,845
<TOTAL-LIABILITIES> 20,845
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 17,830,462
<SHARES-COMMON-STOCK> 1,656,643
<SHARES-COMMON-PRIOR> 1,275,266
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (163,959)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,980,730
<NET-ASSETS> 22,647,233
<DIVIDEND-INCOME> 82,569
<INTEREST-INCOME> 23,792
<OTHER-INCOME> 0
<EXPENSES-NET> 106,940
<NET-INVESTMENT-INCOME> (579)
<REALIZED-GAINS-CURRENT> (163,959)
<APPREC-INCREASE-CURRENT> 1,310,039
<NET-CHANGE-FROM-OPS> 1,145,501
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 17,603
<DISTRIBUTIONS-OF-GAINS> 152,435
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 591,765
<NUMBER-OF-SHARES-REDEEMED> 222,580
<SHARES-REINVESTED> 12,192
<NET-CHANGE-IN-ASSETS> 6,253,957
<ACCUMULATED-NII-PRIOR> 17,603
<ACCUMULATED-GAINS-PRIOR> 152,435
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 67,972
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 106,940
<AVERAGE-NET-ASSETS> 20,914,462
<PER-SHARE-NAV-BEGIN> 12.85
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> .92
<PER-SHARE-DIVIDEND> .01
<PER-SHARE-DISTRIBUTIONS> .09
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.67
<EXPENSE-RATIO> 1.02
<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
SEMI-ANNUAL REPORT TO SHAREHOLDERS FOR THE LEGENDS FUND, INC. AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 3
<NAME> NICHOLAS-APPLEGATE BALANCED PORTFOLIO
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 42,631,104
<INVESTMENTS-AT-VALUE> 47,601,544
<RECEIVABLES> 804,973
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 48,406,517
<PAYABLE-FOR-SECURITIES> 320,195
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 46,605
<TOTAL-LIABILITIES> 366,800
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 41,077,881
<SHARES-COMMON-STOCK> 3,518,817
<SHARES-COMMON-PRIOR> 3,475,691
<ACCUMULATED-NII-CURRENT> 513,172
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,478,224
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,970,440
<NET-ASSETS> 48,039,717
<DIVIDEND-INCOME> 167,556
<INTEREST-INCOME> 572,238
<OTHER-INCOME> 0
<EXPENSES-NET> 226,622
<NET-INVESTMENT-INCOME> 513,172
<REALIZED-GAINS-CURRENT> 3,097,479
<APPREC-INCREASE-CURRENT> (1,028,996)
<NET-CHANGE-FROM-OPS> 2,581,655
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 935,896
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 259,596
<NUMBER-OF-SHARES-REDEEMED> 284,754
<SHARES-REINVESTED> 68,284
<NET-CHANGE-IN-ASSETS> 2,259,106
<ACCUMULATED-NII-PRIOR> 935,896
<ACCUMULATED-GAINS-PRIOR> (1,619,255)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 155,398
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 226,622
<AVERAGE-NET-ASSETS> 47,814,769
<PER-SHARE-NAV-BEGIN> 13.17
<PER-SHARE-NII> .15
<PER-SHARE-GAIN-APPREC> .60
<PER-SHARE-DIVIDEND> .27
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.65
<EXPENSE-RATIO> .95
<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
SEMI-ANNUAL REPORT TO SHAREHOLDERS FOR THE LEGENDS FUND, INC. AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 2
<NAME> ZWEIG ASSET ALLOCATION PORTFOLIO
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 34,046,302
<INVESTMENTS-AT-VALUE> 39,516,207
<RECEIVABLES> 57,827
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 39,574,034
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 41,865
<TOTAL-LIABILITIES> 41,865
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 33,274,394
<SHARES-COMMON-STOCK> 2,924,281
<SHARES-COMMON-PRIOR> 2,820,443
<ACCUMULATED-NII-CURRENT> 327,940
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 466,200
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,463,635
<NET-ASSETS> 39,532,169
<DIVIDEND-INCOME> 275,353
<INTEREST-INCOME> 287,066
<OTHER-INCOME> 0
<EXPENSES-NET> 234,479
<NET-INVESTMENT-INCOME> 327,940
<REALIZED-GAINS-CURRENT> 710,306
<APPREC-INCREASE-CURRENT> 1,282,829
<NET-CHANGE-FROM-OPS> 2,321,075
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 946,985
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 239,633
<NUMBER-OF-SHARES-REDEEMED> 206,902
<SHARES-REINVESTED> 71,107
<NET-CHANGE-IN-ASSETS> 2,796,008
<ACCUMULATED-NII-PRIOR> 946,985
<ACCUMULATED-GAINS-PRIOR> (244,106)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 176,311
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 234,479
<AVERAGE-NET-ASSETS> 39,180,222
<PER-SHARE-NAV-BEGIN> 13.02
<PER-SHARE-NII> .11
<PER-SHARE-GAIN-APPREC> .72
<PER-SHARE-DIVIDEND> .33
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.52
<EXPENSE-RATIO> 1.20
<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
SEMI-ANNUAL REPORT TO SHAREHOLDERS FOR THE LEGENDS FUND, INC. AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 9
<NAME> MITCHELL HUTCHINS FIXED INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 5,432,579
<INVESTMENTS-AT-VALUE> 5,595,379
<RECEIVABLES> 1,982,224
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7,577,603
<PAYABLE-FOR-SECURITIES> 2,551,183
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,768
<TOTAL-LIABILITIES> 2,553,951
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,746,021
<SHARES-COMMON-STOCK> 459,570
<SHARES-COMMON-PRIOR> 497,544
<ACCUMULATED-NII-CURRENT> 137,339
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (22,508)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 162,800
<NET-ASSETS> 5,023,652
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 175,473
<OTHER-INCOME> 0
<EXPENSES-NET> 38,134
<NET-INVESTMENT-INCOME> 137,339
<REALIZED-GAINS-CURRENT> 119,573
<APPREC-INCREASE-CURRENT> 50,788
<NET-CHANGE-FROM-OPS> 307,700
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 268,795
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 33,483
<NUMBER-OF-SHARES-REDEEMED> 96,629
<SHARES-REINVESTED> 25,172
<NET-CHANGE-IN-ASSETS> (391,845)
<ACCUMULATED-NII-PRIOR> 268,795
<ACCUMULATED-GAINS-PRIOR> (142,081)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 24,568
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 44,117
<AVERAGE-NET-ASSETS> 5,459,556
<PER-SHARE-NAV-BEGIN> 10.88
<PER-SHARE-NII> .34
<PER-SHARE-GAIN-APPREC> .29
<PER-SHARE-DIVIDEND> .58
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.93
<EXPENSE-RATIO> 1.40
<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
SEMI-ANNUAL REPORT TO SHAREHOLDERS FOR THE LEGENDS FUND, INC. AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 1
<NAME> RENAISSANCE BALANCED PORTFOLIO
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 25,702,181
<INVESTMENTS-AT-VALUE> 28,378,301
<RECEIVABLES> 234,086
<ASSETS-OTHER> 16,691
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 28,629,078
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 22,710
<TOTAL-LIABILITIES> 22,710
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 24,556,911
<SHARES-COMMON-STOCK> 2,312,364
<SHARES-COMMON-PRIOR> 2,327,611
<ACCUMULATED-NII-CURRENT> 388,812
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 984,525
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,676,120
<NET-ASSETS> 28,606,368
<DIVIDEND-INCOME> 112,091
<INTEREST-INCOME> 414,660
<OTHER-INCOME> 0
<EXPENSES-NET> 137,939
<NET-INVESTMENT-INCOME> 388,812
<REALIZED-GAINS-CURRENT> 1,283,676
<APPREC-INCREASE-CURRENT> 984,195
<NET-CHANGE-FROM-OPS> 2,656,683
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 914,654
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 103,974
<NUMBER-OF-SHARES-REDEEMED> 193,803
<SHARES-REINVESTED> 74,582
<NET-CHANGE-IN-ASSETS> 1,574,173
<ACCUMULATED-NII-PRIOR> 914,654
<ACCUMULATED-GAINS-PRIOR> (299,151)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 92,362
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 137,939
<AVERAGE-NET-ASSETS> 28,419,077
<PER-SHARE-NAV-BEGIN> 11.61
<PER-SHARE-NII> .18
<PER-SHARE-GAIN-APPREC> .98
<PER-SHARE-DIVIDEND> .40
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.37
<EXPENSE-RATIO> .97
<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
SEMI-ANNUAL REPORT TO SHAREHOLDERS FOR THE LEGENDS FUND, INC. AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 11
<NAME> MORGAN STANLEY ASIAN GROWTH PORTFOLIO
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 11,320,413
<INVESTMENTS-AT-VALUE> 11,676,460
<RECEIVABLES> 140,608
<ASSETS-OTHER> 141,466
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 11,958,534
<PAYABLE-FOR-SECURITIES> 14,278
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 26,216
<TOTAL-LIABILITIES> 26,216
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11,678,905
<SHARES-COMMON-STOCK> 1,167,335
<SHARES-COMMON-PRIOR> 1,259,429
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (102,672)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 356,085
<NET-ASSETS> 11,932,318
<DIVIDEND-INCOME> 84,014
<INTEREST-INCOME> 12,062
<OTHER-INCOME> 0
<EXPENSES-NET> 99,290
<NET-INVESTMENT-INCOME> (3,214)
<REALIZED-GAINS-CURRENT> (45,838)
<APPREC-INCREASE-CURRENT> 137,806
<NET-CHANGE-FROM-OPS> 88,754
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 46,376
<DISTRIBUTIONS-OF-GAINS> 14,536
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 183,865
<NUMBER-OF-SHARES-REDEEMED> 282,502
<SHARES-REINVESTED> 6,543
<NET-CHANGE-IN-ASSETS> 892,345
<ACCUMULATED-NII-PRIOR> 14,748
<ACCUMULATED-GAINS-PRIOR> (42,298)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 61,559
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 99,290
<AVERAGE-NET-ASSETS> 12,311,800
<PER-SHARE-NAV-BEGIN> 10.18
<PER-SHARE-NII> .03
<PER-SHARE-GAIN-APPREC> .06
<PER-SHARE-DIVIDEND> .04
<PER-SHARE-DISTRIBUTIONS> .01
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.22
<EXPENSE-RATIO> 1.61
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
