<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. / /
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Post-Effective Amendment No. 8 /X/
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AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / /
Amendment No. 9 /X/
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THE LEGENDS FUND, INC.
(Exact Name of Registrant as Specified in Charter)
515 West Market Street
Louisville, Kentucky 40202
(Address of Registrant's Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: 1-800-325-8583
Copies to:
Kevin L. Howard, Esq. Joel H. Goldberg, Esq.
515 West Market Street Shereff, Friedman, Hoffman & Goodman, LLP
Louisville, KY 40202 919 Third Avenue
(Name and Address of Agent for Service) New York, New York 10022
-----------------------
It is proposed that this filing will become effective (check appropriate box):
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/X/ on November 1, 1997 pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Pursuant to Rule 24f-2(a)(1) under the Investment Company Act of 1940, the
Registrant has registered an indefinite number or amount of its securities under
the Securities Act of 1933. The Registrant has filed a notice under such Rule
for its fiscal year ended June 30, 1997 within 60 days of such date.
<PAGE>
CROSS-REFERENCE SHEET PURSUANT TO RULE 481(a) UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
N-1A Item No.
- --------------
<S> <C> <C> <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
Part C
</TABLE>
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.
515 WEST MARKET STREET
LOUISVILLE, KENTUCKY 40202
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:
- 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.
- ZURICH KEMPER VALUE PORTFOLIO (FORMERLY 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 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").
- ZWEIG EQUITY (SMALL CAP) PORTFOLIO seeks long-term capital appreciation. It
invests primarily in Small Company Stocks (as defined in "Investment
Objectives and Policies").
This Prospectus sets forth information about the Fund that a prospective
investor should know before investing. Please read this Prospectus and retain
it for future reference. A Statement of Additional Information (SAI) dated
November 1, 1997 (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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Prospectus dated November 1, 1997
<PAGE>
TABLE OF CONTENTS
FINANCIAL HIGHLIGHTS.........................................................iii
THE FUND.......................................................................1
INVESTMENT OBJECTIVES AND POLICIES.............................................1
DESCRIPTION OF VARIOUS SECURITIES AND INVESTMENT TECHNIQUES....................4
DIVIDENDS, DISTRIBUTIONS AND FEDERAL INCOME TAXES.............................11
VALUATION OF SHARES...........................................................11
PURCHASES AND REDEMPTIONS.....................................................12
MANAGEMENT OF THE FUND........................................................12
PORTFOLIO TRANSACTIONS AND BROKERAGE..........................................14
OTHER INFORMATION.............................................................15
DESCRIPTION OF COMMERCIAL PAPER AND BOND RATINGS.............................A-1
ii
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights presented for the four years ended June 30, 1997, 1996,
1995 and 1994 have been audited by Ernst & Young LLP, independent auditors for
the Fund, and the financial statements of the Fund, along with the report of
Ernst & Young LLP thereon, are set forth in the SAI. The financial highlights
presented for the fiscal period from commencement of operations through
June 30, 1993 have been audited by other independent auditors. Per share
information is for a share of capital stock outstanding throughout the
respective fiscal period. Further performance information is contained in the
Fund's annual report which may be obtained without charge by calling or writing
to the Fund at the address listed on the first page of this prospectus.
The financial highlights information pertains to the Portfolios of the Fund and
does not reflect charges related to Integrity Life Insurance Company Separate
Account II or National Integrity Life Insurance Company Separate Account II.
You should refer to the appropriate Separate Account prospectus for additional
information regarding such charges.
iii
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Financial Highlights
<TABLE>
<CAPTION>
December 8,
1992
(commencement
Year Ended June 30, of operations)
------------------------------------------------------- through June 30,
1997 1996 1995 1994 1993
--------- ---------- ---------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 14.49 $ 12.85 $ 9.36 $ 9.71 $ 10.00
Income from investment operations:
Net investment income (loss) 0.02 -- (d) 0.01 (0.02)(c) --
Net realized and unrealized gain
(loss) on investments 4.13 1.74 3.48 (0.33) (0.29)
Total from investment operations 4.15 1.74 3.49 (0.35) (0.29)
Less distributions:
From net investment income --(d) (0.01) -- -- --
From net realized gain (1.11) (0.09) -- -- --
Total distributions (1.11) (0.10) -- -- --
Net asset value, end of period $ 17.53 $ 14.49 $ 12.85 $ 9.36 $ 9.71
TOTAL RETURN (a) 30.23% 13.59% 37.29% (3.60%) (5.16%)
RATIOS AND SUPPLEMENTAL DATA (b)
Net assets, end of period (in
thousands) $ 28,815 $ 23,810 $ 16,393 $ 10,693 $ 5,143
Ratio of expenses to average net
assets 1.03% 1.04% 1.05% 1.29% 1.34%
Ratio of net investment income
(loss) to average net assets 0.14% 0.03% 0.13% (0.17%) (0.06%)
Ratio of expenses to average net assets
before voluntary expense
reimbursement 1.03% 1.04% 1.05% 1.29% 3.52%
Ratio of net investment income (loss)
to average net assets
before voluntary expense reimbursement 0.14% 0.03% 0.13% (0.17%) (1.94%)
Portfolio turnover rate 46% 58% 31% 38% 6%
Average commission paid per
equity share traded (e) $ 0.600 -- -- -- --
</TABLE>
(a) Total returns for periods of less than one year are not annualized.
(b) Data expressed as a percentage are annualized as appropriate.
(c) Net investment income (loss) per share has been calculated using the
weighted monthly average number of shares outstanding.
(d) Less than $0.01 per share.
(e) Disclosure required for fiscal years beginning after September 1995.
iv
<PAGE>
Zurich Kemper Value Portfolio
(formerly Dreman Value Portfolio)
Financial Highlights
<TABLE>
<CAPTION>
December 14,
1992
(commencement
Year Ended June 30, of operations)
------------------------------------------------------- through June 30,
1997 1996 1995 1994 1993
--------- ---------- ---------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 16.17 $ 12.59 $ 10.66 $ 10.45 $ 10.00
Income from investment operations:
Net investment income 0.26 0.18 0.26 0.12 0.11
Net realized and unrealized gain
on investments 5.04 3.70 1.85 0.17 0.34
Total from investment operations 5.30 3.88 2.11 0.29 0.45
Less distributions:
From net investment income (0.19) (0.19) (0.14) (0.08) --
From net realized gain (0.65) (0.11) (0.04) -- --
Total distributions (0.84) (0.30) (0.18) (0.08) --
Net asset value, end of period $ 20.63 $ 16.17 $ 12.59 $ 10.66 $ 10.45
TOTAL RETURN (a) 33.78% 31.22% 19.98% 2.80% 8.25%
RATIOS AND SUPPLEMENTAL DATA (b)
Net assets, end of period (in
thousands) $ 30,930 $ 19,705 $ 10,877 $ 8,952 $ 1,671
Ratio of expenses to average net
assets 1.05% 1.06% 1.13% 1.40% 1.24%
Ratio of net investment income
to average net assets 1.62% 1.65% 1.98% 1.98% 2.00%
Ratio of expenses to average net
assets before voluntary expense
reimbursement 1.05% 1.07% 1.13% 1.61% 8.43%
Ratio of net investment income (loss)
to average net assets before
voluntary expense reimbursement 1.62% 1.64% 1.98% 1.76% (1.49%)
Portfolio turnover rate 88% 18% 29% 9% 5%
Average commission paid per
equity share traded (c) $ 0.512 -- -- -- --
</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) Disclosure required for fiscal years beginning after September 1, 1995.
v
<PAGE>
Zweig Asset Allocation Portfolio
Financial Highlights
<TABLE>
<CAPTION>
December 14,
1992
(commencement
Year Ended June 30, of operations)
------------------------------------------------------- through June 30,
1997 1996 1995 1994 1993
--------- ---------- ---------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of
period $ 14.11 $ 13.02 $ 11.44 $ 10.81 $ 10.00
Income from investment operations:
Net investment income 0.19 0.21 0.33 0.10 0.08
Net realized and unrealized gain
on investments 2.20 1.21 1.33 0.58 0.73
Total from investment operations 2.39 1.42 1.66 0.68 0.81
Less distributions:
From net investment income (0.22) (0.33) (0.08) (0.05) --
From net realized gain (1.65) -- -- -- --
Total distributions (1.87) (0.33) (0.08) (0.05) --
Net asset value, end of period $ 14.63 $ 14.11 $ 13.02 $ 11.44 $ 10.81
TOTAL RETURN (a) 18.63% 11.06% 14.57% 6.27% 14.86%
RATIOS AND SUPPLEMENTAL DATA (b)
Net assets, end of period (in thousands)$42,848 $40,222 $36,736 $31,563 $ 3,856
Ratio of expenses to average net
assets 1.28% 1.25% 1.20% 1.39% 1.51%
Ratio of net investment income to
average net assets 1.29% 1.55% 2.73% 1.67% 1.40%
Ratio of expenses to average net assets
before voluntary expense
reimbursement 1.28% 1.25% 1.20% 1.39% 4.87%
Ratio of net investment income (loss)
to average net assets before
voluntary expense reimbursement 1.29% 1.55% 2.73% 1.67% (1.17%)
Portfolio turnover rate 89% 105% 45% 101% 12%
Average commission paid per
equity share traded (c) $.0262
</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) Disclosure required for fiscal years beginning after September 1, 1995.
vi
<PAGE>
Zweig Equity (Small Cap) Portfolio
Financial Highlights
<TABLE>
<CAPTION>
December 14,
1992
(commencement
Year Ended June 30, of operations)
------------------------------------------------------- through June 30,
1997 1996 1995 1994 1993
--------- ---------- ---------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net Asset value, beginning of period $ 13.61 $ 11.62 $ 10.65 $ 10.11 $ 10.00
Income from investment operations:
Net investment income 0.16 0.11 0.17 0.15 0.05
Net realized and unrealized gain on
investments 2.41 2.04 0.93 0.50 0.06
Total from investment operations 2.57 2.15 1.10 0.65 0.11
Less distributions:
From net investment income (0.14) (0.16) (0.06) (0.11) --
From net realized gain (1.19) -- (0.07) -- --
Total distributions (1.33) (0.16) (0.13) (0.11) --
Net asset value, end of period $ 14.85 $ 13.61 $ 11.62 $ 10.65 $ 10.11
TOTAL RETURN (a) 20.37% 18.69% 10.39% 6.53% 2.02%
RATIOS AND SUPPLEMENTAL DATA (b)
Net assets, end of period
(in thousands) $ 11,161 $ 11,698 $ 8,034 $ 7,591 $ 2,116
Ratio of expenses to average net
assets 1.55% 1.55% 1.55% 1.72% 1.61%
Ratio of net investment income to
average net assets 0.97% 1.06% 1.54% 1.75% 0.84%
Ratio of expenses to average net
assets before voluntary expense
reimbursement 1.82% 1.83% 1.59% 2.14% 7.29%
Ratio of net investment income
(loss) to average net assets before
voluntary expense
reimbursement 0.70% .78% 1.50% 1.32% (1.80%)
Portfolio turnover rate 59% 101% 67% 249% 15%
Average commission paid per
equity share traded (c) $ .0276 -- -- -- --
</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) Disclosure required for fiscal years beginning after September 1, 1995.
vii
<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. Such advisers are individually called
a SUB-ADVISER, and collectively, the SUB-ADVISERS. 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
Portfolios 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.
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.
1
<PAGE>
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.
ZURICH KEMPER VALUE PORTFOLIO (FORMERLY 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 Zurich Kemper Value Advisors, Inc. (ZURICH KEMPER), 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
Zurich Kemper, 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.
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.
2
<PAGE>
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 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 Portfolio may have more than 300 securities
positions when taking into account certain other investment techniques, as
discussed under "Futures Contracts and Related Options" and "Short Sales."
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."
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 $4.8 billion and $300 million.
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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 $4.6 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.
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."
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: The Portfolios may invest in those mortgage-backed
securities which are also considered to be U.S. Government securities.
Mortgage-backed securities include:
- - GINNIE MAES -- Ginnie Maes are debt securities issued by a mortgage banker
or other mortgagee and represent an interest in a pool of mortgages insured
by the Federal Housing Administration or the Farmers Home Administration or
guaranteed by the Veterans Administration. The Government National
Mortgage Association (GNMA) guarantees the timely payment of principal and
interest. The GNMA guarantee is backed by the full faith and credit of the
U.S. Government.
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- - FANNIE MAES -- The Federal National Mortgage Association (FNMA) is a
government-sponsored corporation owned entirely by private stockholders
that purchases residential mortgages from a list of approved
seller/servicers. Pass-through securities issued by FNMA are guaranteed as
to timely payment of principal and interest by FNMA but are not backed by
the full faith and credit of the U.S. Government.
- - FREDDIE MACS -- The Federal Home Loan Mortgage Corporation (FHLMC), a
corporate instrumentality of the U.S. Government, issues participation
certificates (PCS) which represent an interest in residential mortgages
from FHLMC's National Portfolio. FHLMC guarantees the timely payment of
interest (and, under certain circumstances, principal) and ultimate
collection of principal, but PCs are not backed by the full faith and
credit of the U.S. Government.
- - Government Collateralized Mortgage Obligations -- These are securities
issued by a U.S. Government instrumentality or agency which are backed by a
portfolio of mortgages or mortgage-backed securities held under an
indenture. CMOs are described more fully below.
Interest and principal payments (including prepayments) on the mortgages
underlying mortgage-backed securities are passed through to the holders of the
mortgage-backed security. Prepayments occur when the mortgagor on an individual
mortgage prepays all or a portion of the remaining principal before the
mortgage's scheduled maturity date. As a result of the pass-through of
prepayments of principal on the underlying securities, mortgage-backed
securities are often subject to more rapid prepayments of principal than their
stated maturity would indicate. Because the prepayment characteristics of the
underlying mortgages vary, it is not possible to predict accurately the realized
yield or average life of a particular issue of pass-through certificates.
Prepayments are important because of their effect on the yield and price of the
securities. During periods of declining interest rates, such prepayments can be
expected to accelerate and a Portfolio might have to reinvest the proceeds at
the lower interest rates then available. In addition, prepayments of mortgages
which underlie securities purchased at a premium could result in capital losses
because the premium may not have been fully amortized at the time the obligation
is repaid. As a result of these principal payment features, mortgage-backed
securities are generally more volatile investments than other U.S. Government
securities.
A CMO is a security issued by a private corporation or a U.S. Government
instrumentality which is backed by a portfolio of mortgages or mortgage-backed
securities held under an indenture. The issuer's obligation to make interest
and principal payments is secured by the underlying portfolio of mortgages or
mortgage-backed securities. CMOs are issued with a number of classes or series
which have different maturities and which may represent interests in some or all
of the interest or principal on the underlying collateral or a combination
thereof. CMOs of different classes are generally retired in sequence as the
underlying mortgage loans in the mortgage pool are repaid. In the event of
sufficient early prepayments on such mortgages, the class or series of CMO first
to mature generally will be retired prior to its maturity. Thus, the early
retirement of a particular class or series of CMO held by a Portfolio would have
the same effect as the prepayment of mortgages underlying a mortgage-backed
pass-through security. 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.
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REPURCHASE AGREEMENTS: Each Portfolio may enter into repurchase agreements.
When a Portfolio acquires a security from a bank or securities broker-dealer, it
may simultaneously enter into a repurchase agreement, wherein the seller agrees
to repurchase the security at a mutually agreed-upon time (generally within
seven days) and price. The repurchase price is in excess of the purchase price
by an amount which reflects an agreed-upon market rate of return, which is not
tied to the coupon rate on the underlying security. Repurchase agreements will
be fully collateralized. If, however, the seller defaults on its obligation to
repurchase the underlying security, the Portfolio may experience delay or
difficulty in exercising its rights to realize upon the security and might incur
a loss if the value of the security has declined. The Portfolio might also
incur disposition costs in liquidating the security.
LOANS OF PORTFOLIO SECURITIES: Each Portfolio 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 Zweig Asset
Allocation Portfolio and Zweig Equity (Small Cap) Portfolio) of the total assets
of the Portfolio.
BORROWING: Harris Bretall Sullivan & Smith Equity Growth Portfolio and Zurich
Kemper Value Portfolio may borrow in an amount up to 10% 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. 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. The borrowing policy is a
fundamental policy.
PUT, CALL AND INDEX OPTIONS: Zweig Asset Allocation Portfolio, Zurich Kemper
Value Portfolio and Zweig Equity (Small Cap) 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).
Zweig Asset Allocation Portfolio and Zweig Equity (Small Cap) 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
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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.
Zweig Asset Allocation Portfolio and Zweig Equity (Small Cap) Portfolio also may
write listed put options. A Portfolio may write puts only if they are SECURED.
Zweig Equity (Small Cap) Portfolio also may write OTC put options. A put is
secured if a Portfolio (i) maintains in a segregated account with the custodian,
cash or U.S. Government securities or other appropriate high-grade debt
obligations with a value equal to the exercise price or (ii) holds a put on the
same underlying security at an equal or greater exercise price. When a
Portfolio writes a put, it receives a premium and gives the purchaser of the put
the right to sell the underlying security to the Portfolio at the exercise price
at any time during the option period. The Portfolio may purchase a put on the
underlying security to effect a CLOSING PURCHASE TRANSACTION, except in those
circumstances, which are believed by the Sub-Adviser to be rare, when it is
unable to do so.
A Portfolio will realize a gain (or loss) on a closing purchase transaction with
respect to a call or put previously written by the Portfolio if the premium,
plus commission costs, paid by it to purchase the call or put is less (or
greater) than the premium, less commission costs, received by it on the sale of
a call or put. A gain will be realized if a call or a put which the Portfolio
has written lapses unexercised, because the Portfolio would retain the premium.
Zweig Asset Allocation Portfolio, Zurich Kemper Value Portfolio and Zweig Equity
(Small Cap) 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.
Zweig Equity (Small Cap) 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 Portfolio will conduct its 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
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Portfolio's investment restrictions. Each of Zweig Asset Allocation Portfolio,
Zurich Kemper Value Portfolio and Zweig Equity (Small Cap) 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: Zweig Asset Allocation Portfolio, Zurich
Kemper Value Portfolio and Zweig Equity (Small Cap) Portfolio may purchase and
sell interest rate futures contracts as a hedge against changes in interest
rates. Zweig Asset Allocation Portfolio, Zurich Kemper Value Portfolio and
Zweig Equity (Small Cap) Portfolio may purchase and sell stock index futures
contracts and Zweig Asset Allocation Portfolio and Zweig Equity (Small Cap)
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
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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
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. 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: Zweig Asset Allocation Portfolio
and Zweig Equity (Small Cap) Portfolio may invest up to 15% of the value of
their net assets in securities of foreign issuers.
Each Portfolio named above and Zurich Kemper Value Portfolio may purchase
American Depositary Receipts ("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. ADRs include American Depositary Shares and New York Shares. ADRs
may be "sponsored" or "unsponsored." Sponsored ADRs are established jointly by
a depositary and the underlying issuer, whereas unsponsored ADRs may be
established by a depositary without participation by the underlying issuer.
Holders of unsponsored ADRs generally bear all the costs associated with
establishing the unsponsored ADRs. The depositary of an unsponsored ADR is
under no obligation to distribute shareholder communications received from the
underlying issuer or to pass through to the holders of the unsponsored ADR
voting rights with respect to the deposited securities or pool of securities.
The Portfolios may invest in sponsored and unsponsored ADRs.
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
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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.
SHORT SALES: Zweig Asset Allocation 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: Zweig Asset Allocation 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
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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.
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 when
results for the fiscal year are known. Net realized short-term capital gains
may be paid annually or more frequently.
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 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.
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.
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.
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<PAGE>
PURCHASES AND REDEMPTIONS
Shares of Portfolios of the Fund are offered to separate accounts of Integrity
and National Integrity in connection with certain certificates they issue. Some
Portfolios may not be available in certain states due to applicable state
insurance law and regulations, and not all Portfolios may be available for all
certificates issued by Integrity and National Integrity.
The separate accounts purchase shares of the Portfolios without a sales charge
at the net asset value per share next determined after receipt of the complete
purchase order. Shares of each Portfolio are redeemed at net asset value
without any redemption charge. Payment upon redemption of Fund shares is
normally made within seven days of receipt of such request (unless redemption is
suspended or payment is delayed as permitted in accordance with SEC
regulations).
MANAGEMENT OF THE FUND
THE MANAGER, SUB-ADVISERS AND DISTRIBUTOR
Under Maryland law and the Fund's Articles of Incorporation and By-Laws, the
business and affairs of the Fund are managed under the direction of the Fund's
Board of Directors.
ARM CAPITAL ADVISORS, INC., 200 Park Avenue, 20th Floor, New York, New York
10166, serves as investment manager to all the Portfolios of the Fund. ARM, the
parent of the Manager, is a financial services company providing retail and
institutional products and services to the long-term savings and retirement
market. In June 1997, ARM completed an initial public offering (the "Offering")
of its common stock. 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, Dean
Witter, Discover & Co. (MSDW), owned approximately 91% of ARM's outstanding
common stock prior to the Offering, and as of August 31, 1997 owned
approximately 49% of the outstanding shares of voting common stock of ARM.
There was no change in the management or personnel actually providing advisory
services to the Fund as a result of the Offering, and there was no change in the
terms of the Fund's management agreement. The address of ARM is 515 West Market
Street, Louisville, Kentucky 40202. The address of MSDW and the investment
funds sponsored by it is 1585 Broadway, New York, New York 10036. At June 30,
1997, the Manager had investments totaling approximately $4.1 billion under
management and fiduciary control. 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.
On May 21, 1997, ARM entered into a purchase agreement pursuant to which ARM has
agreed to transfer substantially all of the assets and operations of the Manager
to a newly formed subsidiary, ARM Capital Advisors, LLC, and to sell an 80%
interest in such company to ARM Capital Advisors Holdings, LLC, an entity
controlled by Emad A. Zikry, the current President of the Manager. After
consummation of the pending sale, the Manager will be renamed Integrity Capital
Advisors, Inc., and will continue to provide investment management services to
the Legends Fund. the transaction is expected to close during the third quarter
of 1997.
ZWEIG/GLASER ADVISERS, 900 Third Avenue, New York, New York 10022, 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 over 26 years and is currently affiliated with
investment advisers, which, as of June 30, 1997 managed over $10 billion in
assets, including Avatar Associates, manager of over $3.4 billion of
institutional and pension accounts, of which Dr. Zweig is Research Co-Chairman.
Dr. Zweig is also
12
<PAGE>
President and Director of The Zweig Fund, Inc. and the Zweig Total Return Fund,
Inc., closed-end funds traded on the NYSE with combined assets of over $1
billion. He is also author of various investment advisory newsletters, including
THE ZWEIG FORECAST, a regular panelist on PBS' television program WALL STREET
WEEK with Louis Rukeyser for over 24 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, 1997 of $2.4 billion (consisting of
Zweig Strategy Fund, Zweig Appreciation Fund, Zweig Managed Assets, Zweig Growth
& Income Fund, Zweig Government Fund and Zweig Cash Fund, Inc.).
Dr. Zweig, who determines the asset allocation strategy for each Portfolio, and
David Katzen, who serves as portfolio manager for each Portfolio, are primarily
responsible for the day-to-day management of the Zweig Asset Allocation
Portfolio and Zweig Equity (Small Cap) Portfolio. Dr. Zweig and Mr. Katzen have
managed the Portfolios since inception. Mr. Katzen is First Vice President of
Zweig/Glaser Advisers and has held various positions with the Zweig organization
during the past nine years.
HARRIS BRETALL SULLIVAN & SMITH, INC., One Sansome Street, Suite 3300, San
Francisco, California 94104, serves as the Sub-Adviser to the Harris Bretall
Sullivan & Smith Equity Growth Portfolio. Harris Bretall Sullivan & Smith was
founded in 1971 and is owned equally by W. Graeme Bretall, President, John J.
Sullivan, Treasurer, and Henry B. Dunlap Smith. The firm provides investment
management services to institutions and individuals, and at June 30, 1997, had
assets under management of approximately $2.7 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 member 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.
ZURICH KEMPER VALUE ADVISORS, INC. (FORMERLY DREMAN VALUE ADVISORS, INC.), 280
Park Avenue, 40th Floor, New York, New York 10017, serves as the Sub-Adviser to
the Zurich Kemper Value Portfolio. As of June 30, 1997, Zurich Kemper managed
over $6 billion. Clients include public funds, corporate benefit funds, college
endowments and foundations, Taft-Hartley funds, and other institutional
accounts. In addition, Zurich Kemper serves as investment adviser to the Kemper
Mutual Group, Inc., which consists of three portfolios, Zurich Kemper Contrarian
Fund, Zurich Kemper High Return Fund, and Zurich Kemper Small Cap Fund.
All investment decisions by Zurich Kemper for the Zurich Kemper Value Portfolio
are made by an investment committee, which includes a group of senior investment
professionals.
Zurich Kemper, 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 Zurich Kemper Value Management,
L.P., Zurich Kemper'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, Zurich Kemper has been in the investment management business
since 1977.
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<PAGE>
Each Portfolio pays the Manager a fee based on an annual percentage of the
average daily net assets of such Portfolio. The management fees are deducted
from the assets of each Portfolio and paid monthly, but are accrued daily for
purposes of determining the value of a share of each Portfolio on each day the
NYSE is open for trading. (See "Valuation of Shares".) For the services
provided to each of the Portfolios, the Manager (and not the Fund) pays each
Sub-Adviser a monthly fee based on an annual percentage of the average daily net
assets of the respective Portfolio. The annual percentage of average daily net
assets payable by each Portfolio to the Manger and by the Manager to each
Sub-Adviser is set forth below. The fees paid by certain of the Portfolios may
be higher than those paid by other investment companies.
Annual Percentage of Annual Percentage of
Average Net Assets Average Net Assets
Paid By Portfolio Paid By the Manager
to the Manager to Sub-Adviser
-------------------- --------------------
Zweig Asset Allocation Portfolio .90% .65%
Harris Bretall Sullivan & Smith Equity
Growth Portfolio .65% .40%
Zurich Kemper Value Portfolio .65% .40%
Zweig Equity (Small Cap) Portfolio 1.05% .80%
ARM Securities Corporation (formerly SBM Financial Services, Inc.) (ARM
SECURITIES), a wholly-owned subsidiary of ARM, acts as Distributor of the
Portfolios' shares without remuneration from the Fund or the Portfolios. ARM
Securities is registered with the SEC as a broker-dealer and is a member of the
National Association of Securities Dealers, Inc. ARM Securities' 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 ARM Securities 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. 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.
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<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
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.
Brokerage arrangements may take into account the distribution of certificates by
broker-dealers, subject to best price and execution.
Brokerage arrangements with affiliates of the Manager or the Sub-Advisers, if
any, will be in accordance with the 1940 Act and the rules and regulations
promulgated thereunder. No transactions may be effected by a Portfolio with an
affiliate of the Manager or a Sub-Adviser acting as principal for its own
account, except to the extent permitted by law.
Transactions in money market securities, other government securities and most
other fixed income securities are principal transactions, on which no brokerage
commission is paid. These transactions are normally effected with major dealers
in money market instruments, government securities or such fixed income
securities. Purchases from or sales to dealers serving as market-makers include
the spread between the bid and asked prices. OTC purchases and sales are
normally made with principal market-makers, except where, in the opinion of the
Sub-Adviser, the best executions are available elsewhere.
The Portfolios described in "Description of Various Securities and Investment
Techniques--Futures Contracts and Related Options" may incur transaction costs
in connection with the acquisition of futures contracts and options thereon.
For reporting purposes, a Portfolio's portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio securities for the fiscal
year by the monthly average of the value of the portfolio securities owned by
the Portfolio during the fiscal year. In determining such portfolio turnover,
securities whose maturities at the time of acquisition were one year or less are
excluded. Each Sub-Adviser will adjust the Portfolio's assets as it deems
advisable in view of current or anticipated market conditions, and portfolio
turnover will not be a limiting factor should the Sub-Adviser deem it advisable
for a Portfolio to purchase or sell securities. Options activities may increase
the turnover rate for a Portfolio, because the exercise of calls written by the
Portfolio and puts owned by the Portfolio would cause the Portfolio to sell the
underlying securities. Increased portfolio turnover may result in greater
brokerage commissions. See "Financial Highlights" for information as to the
Portfolios' portfolio turnover rates for the periods from commencement of
operations through June 30, 1993 and the fiscal years ended June 30, 1994, 1995,
1996 and 1997.
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
or the total return of the 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
15
<PAGE>
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.
Any quotations of yield will be based on all investment income per share earned
during a given 30-day period (including dividends and interest), less expenses
accrued during the period (NET INVESTMENT INCOME), and will be computed by
dividing net investment income by the maximum public offering price per share on
the last day of the period. Quotations of average annual TOTAL RETURN for a
Portfolio will be expressed in terms of the average annual compounded rate of
return on a hypothetical investment in the Portfolio over certain periods that
will include periods of 1, 5, and 10 years (up to the life of the Portfolio),
will reflect the deduction of a proportional share of Portfolio expenses (on an
annual basis), and will assume that all dividends and distributions are
reinvested when paid.
For a description of the methods used to determine yield and total return for
the Portfolios, see the Statement of Additional Information.
16
<PAGE>
Appendix A
DESCRIPTION OF COMMERCIAL PAPER AND BOND RATINGS
COMMERCIAL PAPER
Description of relevant commercial paper ratings of Standard & Poor's Ratings
Group ("S&P") are as follows:
A-1: This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus (+)
sign designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high
as for issues designated A-1.
A-3: Issues carrying this designation have an adequate capacity for
timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
Description of the relevant commercial paper ratings of Moody's Investors
Service, Inc. ("Moody's") are as follows:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited above
but to a lesser degree. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurement and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
A-1
<PAGE>
CORPORATE BONDS
Descriptions of the bond ratings of S&P are:
AAA -- Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small
degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt
in higher rated categories.
BB, B, CCC, CC or C--Debt rated BB, B, CCC, CC or C is regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse debt
conditions.
C1 -- The rating C1 is reserved for income bonds on which no interest is
being paid.
D -- Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
The ratings from AA to CC may be modified by the addition of a plus (+) or minus
(-) sign to show relative standing within the major rating categories.
Descriptions of the bond ratings of Moody's are as follows:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are more unlikely to impair the
fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the
long-term risks appear somewhat greater than the Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
some time in the future.
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.
A-2
<PAGE>
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
to a high degree. Such issues are often in default or have other
marked shortcomings.
C -- Bonds which are rated C are the lowest class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies modifiers to each rating classification from Aa through B to
indicate relative ranking within its rating categories. The modifier "1"
indicates that a security ranks in the higher end of its rating category; the
modifier "2" indicates a mid-range ranking; and the modifier "3" indicates that
the issue ranks in the lower end of its rating category.
A-3
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
THE LEGENDS FUND, INC. 515 West Market Street
Louisville, Kentucky 40202
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:
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.
ZURICH KEMPER VALUE PORTFOLIO (FORMERLY 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 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).
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).
This Statement of Additional Information (SAI) is not a prospectus and should be
read only in conjunction with the Fund's current Prospectus, dated November 1,
1997. A copy of the Prospectus may be obtained by calling or writing to the
Fund at the telephone number or address shown above. This SAI is incorporated
by reference into the Prospectus.
Statement of Additional Information dated November 1, 1997
B-1
<PAGE>
TABLE OF CONTENTS
INVESTMENT POLICIES AND LIMITATIONS..........................................B-3
OPTIONS, FUTURES AND OTHER HEDGING STRATEGIES................................B-8
DIRECTORS AND OFFICERS......................................................B-13
INVESTMENT MANAGEMENT SERVICES..............................................B-15
PORTFOLIO TRANSACTIONS......................................................B-17
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION..............................B-19
VALUATION OF SHARES.........................................................B-19
TAXES.......................................................................B-20
YIELD AND PERFORMANCE INFORMATION ..........................................B-21
OTHER INFORMATION...........................................................B-24
FINANCIAL STATEMENTS OF THE FUND............................................B-26
OPTIONS AND FUTURES..........................................................A-1
B-2
<PAGE>
INVESTMENT POLICIES AND LIMITATIONS
The following supplements the information contained in the Fund's Prospectus
concerning the investment policies and limitations of its four Portfolios. For
information relating to the Manager and the respective Sub-Advisers (each, a
SUB-ADVISER, and collectively, the SUB-ADVISERS) to each Portfolio. See
"Management of the Fund" in the Prospectus and "Investment Management Services"
in this Statement of Additional Information. 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, 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. 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 Zurich Kemper 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.
ILLIQUID SECURITIES. Each Portfolio may invest up to 10% (15% in the case of
Zweig Asset Allocation Portfolio and Zweig Equity (Small Cap) Portfolio) of its
net assets in illiquid securities. The term ILLIQUID SECURITIES for this
purpose means securities that cannot be disposed of within seven days in the
ordinary course of business at approximately the amount at which a Portfolio has
valued the securities and includes, among other things, purchased
over-the-counter (OTC) options, repurchase agreements maturing in more than
seven days and restricted securities other than Rule 144A securities (see below)
that the respective Sub-Adviser has determined are liquid pursuant to guidelines
established by the Fund's Board of Directors. The assets used as cover for OTC
options written by a Portfolio will be considered illiquid unless the OTC
options are sold to qualified dealers who agree that the Portfolio may
repurchase any OTC option it writes at a maximum price to be calculated by a
formula set forth in the option agreement. The cover for an OTC option written
subject to this procedure will be considered illiquid only to the extent that
the maximum repurchase price under the option formula exceeds the intrinsic
value of the option. Restricted securities may be sold only in privately
negotiated transactions or in public offerings with respect to which a
registration statement is in effect under the Securities Act of 1933 (1933 ACT).
Restricted securities acquired by a Portfolio include those that are subject to
restrictions contained in the securities laws of other countries. Securities
that are freely marketable in the country where they are principally traded, but
that would not be freely marketable in the United States, will not be considered
illiquid. Where registration is required, a Portfolio may be obligated to pay
all or part of the registration expenses and a considerable period may elapse
between the time of the decision to sell and the time the Portfolio may be
permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, the Portfolio
might obtain a less favorable price than prevailed when it decided to sell.
In recent years a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including securities sold
in private placements, repurchase agreements, commercial paper, foreign
securities and corporate bonds and notes. These instruments are often
restricted securities because the securities are sold in transactions not
requiring registration. Institutional investors generally will not seek to sell
these
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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.
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During periods of declining interest rates, prepayment of mortgages underlying
mortgage-backed securities can be expected to accelerate. When a Portfolio
receives prepayments on mortgage-backed securities, it may reinvest the prepaid
amounts in securities the yields of which will reflect interest rates prevailing
at the time. Therefore, a Portfolio's ability to maintain a portfolio of
high-yielding mortgage-backed securities will be adversely affected to the
extent that prepayments of mortgages must be reinvested in securities which have
lower yields than the mortgage-backed security on which the prepayment is
received. In addition, since payments on the underlying mortgages are passed
through to the holders of the mortgage-backed securities, if a Portfolio
purchases mortgage-backed securities at a premium or a discount, unless it makes
certain elections, it will recognize a capital loss or gain when payments of
principal are passed through to the Portfolio as a result of regular payments or
prepayments on the mortgages in the underlying pool.
The following is a description of GNMA, FHLMC and FNMA certificates, the most
widely available mortgage-backed securities:
GNMA CERTIFICATES. Certificates of the Government National Mortgage Association
(GNMA CERTIFICATES) are mortgage-backed securities which evidence an undivided
interest in a pool or pools of mortgages. GNMA Certificates that the Portfolios
may purchase are the MODIFIED PASS-THROUGH type, which entitle the holder to
receive timely payment of all interest and principal payments due on the
mortgage pool, net of fees paid to the ISSUER and GNMA, regardless of whether or
not the mortgagor actually makes the payment.
GNMA guarantees the timely payment of principal and interest on securities
backed by a pool of mortgages insured by the Federal Housing Administration
(FHA) or the Farmers' Home Administration (FMHA), or guaranteed by the Veterans
Administration (VA). The GNMA guarantee is authorized by the National Housing
Act and is backed by the full faith and credit of the United States. The GNMA
is also empowered to borrow without limitation from the U.S. Treasury if
necessary to make any payments required under its guarantee.
The average life of a GNMA Certificate is likely to be substantially shorter
than the original maturity of the mortgages underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosure will usually
result in the return of the greater part of principal investment long before the
maturity of the 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
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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 is authorized to lend up to 10%
(33-1/3% in the case of Zweig Asset Allocation Portfolio and Zweig Equity (Small
Cap) Portfolio) of the value of its total assets to broker-dealers or
institutional investors that the Sub-Adviser deems qualified, but only when the
borrower maintains with the Portfolio's custodian bank collateral either in cash
or money market instruments in an amount at least equal to the market value of
the securities loaned, plus accrued interest and dividends, determined on a
daily basis and adjusted accordingly. There may be risks of delay in recovery
of the securities or even loss of rights in the collateral should the borrower
of the securities fail financially. However, loans will only be made to
borrowers deemed by the Sub-Adviser to be of good standing and when, in the
judgment of the Sub-Adviser, the consideration which can be earned currently
from such securities loans justifies the attendant risk. All relevant facts and
circumstances, including the creditworthiness of the broker, dealer or
institution, will be considered in making decisions with respect to the lending
of securities, subject to review by the Fund's Board of Directors. During the
period of the loan the Sub-Adviser will monitor all relevant facts and
circumstances, including the creditworthiness of the borrower. The Portfolio
will retain authority to terminate any loan at any time. A Portfolio may pay
reasonable administrative and custodial fees in connection with a loan and may
pay a negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. A Portfolio
will receive reasonable interest on the loan or a flat fee from the borrower and
amounts equivalent to any dividends, interest or other distributions on the
securities loaned. A Portfolio will regain record ownership of loaned
securities to exercise beneficial rights, such as voting and subscription rights
and rights to dividends, interest or other distributions, when regaining such
rights is considered to be in the Portfolio's interest.
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;
(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 Zweig Asset Allocation Portfolio and Zweig Equity
(Small Cap) 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;
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(5) make short sales of securities or maintain a short position, except to
the extent described in the Prospectus;
(6) purchase or sell real estate, provided that a Portfolio may invest in
securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein;
(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 Harris
Bretall Sullivan & Smith Equity Growth Portfolio and Zurich Kemper
Value Portfolio may borrow in an amount up to 10% 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. 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 Zweig
Asset Allocation Portfolio and Zweig Equity (Small Cap) 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.
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.
OPTIONS, FUTURES AND OTHER HEDGING STRATEGIES
As discussed in the Prospectus, each of Zweig Asset Allocation Portfolio, Zurich
Kemper Value Portfolio and Zweig Equity (Small Cap) 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. The particular Hedging Instruments are described in
Appendix A to this Statement of Additional Information.
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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 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.
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(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.
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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) Zweig Asset Allocation Portfolio, Zurich Kemper Value Portfolio and
Zweig Equity (Small Cap) 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
B-10
<PAGE>
deposited when writing a call option on a futures contract, in accordance with
applicable exchange rules. Unlike margin in securities transactions, initial
margin on futures contracts does not represent a borrowing, but rather is in the
nature of a performance bond or good-faith deposit that is returned to the
Portfolio at the termination of the transaction if all contractual obligations
have been satisfied. Under certain circumstances, such as periods of high
volatility, a Portfolio may be required by an exchange to increase the level of
its initial margin payment, and initial margin requirements might be increased
generally in the future by regulatory action.
Subsequent VARIATION MARGIN payments are made to and from the futures broker
daily as the value of the futures position varies, a process known as MARKING TO
MARKET. Variation margin does not involve borrowing, but rather represents a
daily settlement of the Portfolio's obligations to or from a futures broker.
When a Portfolio purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when a Portfolio
purchases or sells a futures contract or writes a call option thereon, it is
subject to daily variation margin calls that could be substantial in the event
of adverse price movements. If the Portfolio has insufficient cash to meet
daily variation margin requirements, it might need to sell securities at a time
when such sales are disadvantageous.
Holders and writers of futures positions and options on futures can enter into
offsetting closing transactions, similar to closing transactions on options, by
selling or purchasing, respectively, an instrument identical to the instrument
held or written. Positions in futures and options on futures may be closed only
on an exchange or board of trade that provides a secondary market. Each
Portfolio intends to enter into futures 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.
B-11
<PAGE>
In addition, the Fund has represented to the CFTC that it: (1) will use future
contracts, options thereon and foreign currency options traded on a commodities
exchange solely in BONA FIDE hedging transactions or, alternatively (2) will not
enter into futures contracts, options thereon or foreign currency options traded
on a commodities exchange for which the aggregate initial margin and premiums
exceed 5% of a Portfolio's total assets (calculated in accordance with CFTC
regulations).
FOREIGN CURRENCY HEDGING STRATEGIES -- SPECIAL CONSIDERATIONS. The Portfolios
noted in the Prospectus may use options and futures on foreign currencies, and
foreign currency forward contracts as described below to hedge against movements
in the values of the foreign currencies in which the Portfolios' securities are
denominated. Such currency hedges can protect against price movements in a
security that a Portfolio owns or intends to acquire that are attributable to
changes in the value of the currency in which it is denominated. Such hedges do
not, however, protect against price movements in the securities that are
attributable to other causes.
The Portfolios might seek to hedge against changes in the value of a particular
currency when no Hedging Instruments on that currency are available or such
Hedging Instruments are more expensive than certain other Hedging Instruments.
In such cases, a Portfolio may hedge against price movements in that currency by
entering into transactions using Hedging Instruments on other currencies, the
values of which the Sub-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.
DIRECTORS AND OFFICERS
The Directors and officers of the Fund, their business addresses and principal
occupations during the past five years are listed below. Unless otherwise
indicated, each person's address is 515 West Market Street, Louisville, KY
40202.
B-12
<PAGE>
<TABLE>
<CAPTION>
Name, Age and Address Position with the Fund Other Business Activities in Past 5 Years
- --------------------- ---------------------- -----------------------------------------
<C> <C> <S>
John R. Lindholm(48)* 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
from June 1995 to December
1996.
John Katz (58) Director Investment banker since
10 Hemlock Road January 1991; Chairman and
Hartsdale, NY Chief Executive Officer, Sam's
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 from
June 1995 to December 1996.
Theodore S. Rosky (59) Director Retired since April 1992;
2304 Speed Avenue Executive Vice President,
Louisville, KY Capital Holding Corporation
(from 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 from June 1995 to
December 1996.
William B. Faulkner (69) Director Director since November 1996.
240 East Plato Blvd. President, William Faulkner &
St. Paul, Minnesota 55107 Associates, business and
institutional adviser since
1986; Consultant to American
Hoist & Derrick Company,
construction equipment
manufacturer, from 1986 to
1989; prior thereto, Vice
President and Assistant to the
President, American Hoist &
Derrick Company. Director of
the mutual funds in the State
Bond Group of mutual funds
from June 1995 to December
1996.
Edward J. Haines (50) President Vice President, Marketing of
ARM Financial Group, Inc.
since December 16, 1993;
Director of Retail Marketing
and Vice President of the
National Home Life Assurance
Company subsidiary of Capital
Holding Corporation from 1987
to December 1993.
Barry G. Ward (36) Controller Controller of ARM Financial
Group, Inc. since April 1996.
From October 1993 to April
1996, Mr. Ward was directly
responsible for the Company's
financial reporting function.
From January 1989 to October
1993, Mr. Ward served in
various positions within Ernst
& Young LLP's Insurance
Industry Accounting and
Auditing Practice, the last of
which was Manager. Controller
of the mutual funds in the
State Bond Group of mutual
funds from May 1996 to
December 1996.
</TABLE>
B-13
<PAGE>
<TABLE>
<CAPTION>
Name, Age and Address Position with the Fund Other Business Activities in Past 5 Years
- --------------------- ---------------------- -----------------------------------------
<C> <C> <S>
Peter S. Resnik (36) 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 from June 1995 to
December 1996.
Kevin L. Howard (33) 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 from June 1995 to
December 1996.
</TABLE>
- --------------------
* Mr. Lindholm is an INTERESTED PERSON, as defined in the 1940 Act, by virtue
of his positions with ARM Financial Group, Inc.
The Fund pays Directors who are not INTERESTED PERSONS of the Fund fees for
serving as Directors. During the fiscal year ended June 30, 1997 the Fund payed
the Directors who are not interested persons of the Fund $43,500 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 years ended June 30, 1996 and
1997, compensation paid by the Fund to the non-interested Directors. Directors
who are interested persons, as defined in the 1940 Act, receive no compensation
from the Fund.
Name of Director Aggregate Compensation from Fund
---------------- ---------------------------------
1996 1997
------- -------
William B. Faulkner $9,750 $14,500
John Katz $11,500 $14,500
Theodore S. Rosky $11,500 $14,500
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). Under the Management Agreement, the Fund pays
the Manager a fee for each Portfolio, computed daily and payable monthly,
according to the schedule set forth in the Prospectus. The Manager is then
responsible under the Management Agreement for paying each Sub-Adviser the
sub-advisory fees payable. For the fiscal years ended June 30, 1995, 1996 and
1997, each Portfolio paid the Manager* management fees in the amounts set forth
below:
B-14
<PAGE>
<TABLE>
<CAPTION>
Management Fee for Fiscal Year Ended
--------------------------------------
Portfolio June 30, 1995 June 30, 1996 June 30, 1997
- --------- ------------- ------------- -------------
<S> <C> <C> <C>
Harris Bretall Sullivan & Smith Equity Growth 86,434 143,566 $160,836
Portfolio
Zurich Kemper Value Portfolio 62,310 85,287 $164,290
Zweig Asset Allocation Portfolio $312,227 $355,357 $369,657
Zweig Equity (Small Cap) Portfolio 81,405 102,926 $112,524
</TABLE>
- -----------------
* The Manager assumed the duties and responsibilities of Integrity as the
Fund's manager on February 1, 1996.
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
ARM Securities, 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. The Manager's reimbursement of Portfolio expenses
results in an increase to each Portfolio's yield or total return. The Manager
has reserved the right to withdraw or modify its policy of expense reimbursement
for the Portfolios. For the fiscal years ended June 30, 1995, 1996 and 1997, the
Manager or its predecessor reimbursed the Portfolios' expenses in the amounts
indicated:
Amount Reimbursed for Fiscal Year Ended
------------------------------------------
Portfolio June 30, 1995 June 30, 1996 June 30, 1997
- --------- ------------ ------------- -------------
Harris Bretall Sullivan & -- -- --
Smith Equity Growth
Portfolio
B-15
<PAGE>
Zurich Kemper Value Portfolio -- 902 --
Zweig Asset Allocation -- -- --
Portfolio
Zweig Equity (Small Cap)
Portfolio 2,773 26,989 29,273
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
Portfolio. A description of each Sub-Adviser is included in the Prospectus.
See "Management of the Fund -- The Manager, Sub-Advisers and Distributor." Each
Sub-Advisory Agreement provides that the Sub-Adviser will furnish investment
advisory services in connection with the management of the Portfolio. In
connection therewith, the Sub-Adviser is obligated to keep certain books and
records of the Fund. The Manager supervises each Sub-Adviser's performance of
such services. Each Sub-Adviser is paid by the Manager and not the Fund in
accordance with the schedule set forth in the Prospectus. For the fiscal years
ended June 30, 1995, 1996 and 1997, the Manager or its predecessor paid the
Sub-Advisers sub-advisory fees in respect of each Portfolio in the amounts set
forth below:
Amount of Sub-Advisory Fee for Fiscal Year Ended
------------------------------------------------
Portfolio June 30, 1995 June 30, 1996 June 30, 1997
- --------- ------------- ------------- -------------
Harris Bretall Sullivan 66,488 110,436 123,720
& Smith Equity
GrowthPortfolio
Zurich Kemper Value 47,931 62,332 126,377
Portfolio
Zweig Asset Allocation $260,189 $296,131 308,047
Portfolio
Zweig Equity (Small Cap) 69,776 88,222 96,449
Portfolio
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
B-16
<PAGE>
generally include a SPREAD, which is the difference between the prices at which
the dealer is willing to purchase and sell a specific security at that time.
Each Portfolio that invests in securities traded in the OTC markets will engage
primarily in transactions with the dealers who make markets in such securities,
unless a better price or execution could be obtained by using a broker. The
Fund has no obligation to deal with any broker or group of brokers in the
execution of portfolio transactions. Brokerage arrangements may take into
account the distribution of certificates by broker-dealers, subject to best
price and execution.
The Manager and certain of the Sub-Advisers are affiliated with registered
broker-dealers, including Morgan Stanley & Co. Incorporated and Zweig Securities
Corp. From time to time, a portion of one or more Portfolios' brokerage
transactions may be conducted with such broker-dealers, subject to the criteria
for allocation of brokerage described above. The Fund's Board of Directors has
adopted procedures pursuant to Rule 17e-1 under the 1940 Act to ensure that all
brokerage commissions paid to such broker-dealers by any Portfolio with which
they are affiliated are fair and reasonable. Also, due to securities law
limitations, the Portfolios will limit purchases of securities in a public
offering if an affiliated broker-dealer is a member of the syndicate for that
offering. No transactions may be effected by a Portfolio with an affiliate of
the Manager, Integrity, National Integrity or a Sub-Adviser acting as principal
for its own account.
For the fiscal years ended June 30, 1995, 1996 and 1997, the Fund paid the
following brokerage commissions with respect to each of the Portfolios:
Brokerage Commissions Paid During the Fiscal Year Ended
--------------------------------------------------------
Portfolio June 30, 1995 June 30, 1996 June 30, 1997
- --------- ------------- ------------- -------------
Harris Bretall 13,202 31,182 22,892
Sullivan & Smith
Equity Growth
Portfolio
Zurich Kemper 8,300 15,056 61,962
Value
Portfolio
Zweig Asset Allocation 25,232 73,378 74,292
Portfolio
Zweig Equity
(Small Cap) 14,849 21,869 15,722
Portfolio
For the fiscal years ended June 30, 1995, 1996 and 1997, 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, 1997 are the brokerage commissions paid
to such broker-dealers as a percentage of the aggregate brokerage commissions
paid by each Portfolio and as a percentage of the aggregate dollar amount of
portfolio transactions involving the payment of commissions engaged in by such
Portfolio.
<TABLE>
<CAPTION>
Fiscal Year Ended June 30, 1997
--------------------------------------
Brokerage commissions
--------------------------------------
Brokerage
Brokerage Commissions
Commissions Paid During As a Percentage
Paid During the Fiscal As a of Portfolio
the Fiscal Year Year Ended Percentage of Transactions
Affiliated Ended June June Aggregate Involving
Broker-Dealer Portfolio 30,1997($) 30,1996($) Paid($) Commissions Commissions
- ------------- --------- ---------- ---------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Paine Harris Bretall
Webber(b) Sullivan &
Smith Equity 9,924 5,952
Growth
Portfolio
Zurich
Kemper 7,115 4,174
Value
Portfolio
</TABLE>
B-17
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended June 30, 1997
-------------------------------
Brokerage Commissions
-------------------------------
Brokerage
Brokerage Commissions
Commissions Paid During As a Percentage
Paid During the Fiscal As a of Portfolio
the Fiscal Year Year Ended Percentage of Transactions
Affiliated Ended June June Aggregate Involving
Broker-Dealer Portfolio 30,1997($) 30,1996($) Paid($) Commissions Commissions
- ------------- --------- --------- --------- ------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Morgan Zweig Asset
Stanley(a) Allocation 16,394 51,370 50,774 68% 84%
Portfolio
Zweig Equity 7,589 13,825 8,051 51% 69%
(Small Cap)
Portfolio
Zurich Kemper -- -- 2,060 3% 4%
Value
Portfolio
Zweig Zweig Asset
Securities Allocation 594 1,199 -- -- --
Corporation Portfolio
Zweig Equity
(Small Cap) 537 403 -- -- --
Portfolio
- -----------------------------
</TABLE>
(a) Morgan Stanley did not become an affiliated person of the Fund
until November 1993.
(b) Paine Webber was no longer an affiliated person of the Fund after April 1,
1996.
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
B-18
<PAGE>
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.
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, 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. 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.
B-19
<PAGE>
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.
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
B-20
<PAGE>
not qualify for this treatment, it may be forced to defer the closing out of
certain options and futures contracts beyond the time when it otherwise would be
advantageous to do so, in order for the Portfolio to qualify or continue to
qualify as a RIC.
Dividends and interest received by a Portfolio may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on that Portfolio's securities. Tax conventions
between certain countries and the United States may reduce or eliminate these
foreign taxes, however, and foreign countries generally do not impose taxes on
capital gains in respect of investments by foreign investors.
The foregoing is only a general summary of some of the important federal income
tax considerations generally affecting the Portfolios and their shareholders.
No attempt is made to present a complete explanation of the federal tax
treatment of the Portfolios' activities. See the Prospectus for the
certificates for further tax information.
YIELD AND PERFORMANCE INFORMATION
Performance information is computed separately for each Portfolio in accordance
with the formulas described below. At any time in the future, total return and
yields may be higher or lower than in the past and there can be no assurance
that any historical results will continue.
CALCULATION OF TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN. Total Return with
respect to the shares of a Portfolio is a measure of the change in value of an
investment in a Portfolio over the period covered, which assumes that any
dividends or capital gains distributions are reinvested in that Portfolio's
shares immediately rather than paid to the investor in cash. The formula for
Total Return with respect to a Portfolio's shares used herein includes four
steps: (1) adding to the total number of shares purchased by a hypothetical
$1,000 investment the number of shares which would have been purchased if all
dividends and distributions paid or distributed during the period had been
immediately reinvested; (2) calculating the value of the hypothetical initial
investment of $1,000 as of the end of the period by multiplying the total number
of shares on the last trading day of the period by the net asset value per share
on the last trading day of the period; (3) assuming redemption at the end of the
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.
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. 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
B-21
<PAGE>
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.
The Wilshire 5000 Equity Index (or its component indices) represents the return
on the market value of all common equity securities for which daily pricing is
available. Comparisons of performance assume reinvestment of dividends.
The Morgan Stanley Capital International EAFE Index is an arithmetic, market
value-weighted average of the performance of over 900 securities on the stock
exchanges of countries in Europe, Australia and the Far East.
The Morgan Stanley Capital International World Index - An arithmetic, market
value-weighted average of the performance of over 1,470 securities listed on the
stock exchanges of countries in Europe, Australia, the Far East, Canada and the
United States.
The Goldman Sachs 100 Convertible Bond Index currently includes 67 bonds and 33
preferred stocks. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
The Lehman Brothers Government Bond Index (the LEHMAN GOVERNMENT INDEX) is a
measure of the market value of all public obligations of the U.S. Treasury; all
publicly issued debt of all agencies of the U.S. Government and all quasi-
federal corporations; and all corporate debt guaranteed by the U.S. Government.
Mortgage-backed securities, flower bonds and foreign targeted issues are not
included in the Lehman Government Index.
The Lehman Brothers Government/Corporate Bond Index (the LEHMAN
GOVERNMENT/CORPORATE INDEX) is a measure of the market value of approximately
5,300 bonds with a face value currently in excess of $1 million, which have at
least one year to maturity and are rated "Baa" or higher (INVESTMENT GRADE) by a
nationally recognized statistical rating agency.
The Lehman Brothers Government/Corporate Intermediate Bond Index (the LEHMAN
GOVERNMENT/CORPORATE INTERMEDIATE INDEX) is composed of all bonds covered by the
Lehman Brothers Government/Corporate Bond Index with maturities between one and
9.99 years. Total return comprises price appreciation/depreciation and income
as a percentage of the original investment. Indexes are rebalanced monthly by
market capitalization.
The Lehman Brothers Intermediate Treasury Bond Index includes bonds with
maturities between one and ten years with a face value currently in excess of $1
million, that are rated investment grade or higher by a nationally recognized
statistical rating agency.
The Shearson Lehman Long-Term Treasury Bond Index is composed of all bonds
covered by the Shearson Lehman Hutton Treasury Bond Index with maturities of 10
years or greater.
The National Association of Securities Dealers Automated Quotation System
(NASDAQ) Composite Index covers 4,500 stocks traded over the counter. It
represents many small company stocks but is heavily influenced by about 100 of
the largest NASDAQ stocks. It is a value-weighted index calculated on price
change only and does not include income.
The NASDAQ Industrial Index is composed of more than 3,000 industrial issues.
It is a value-weighted index calculated on price change only and does not
include income.
The Value Line (Geometric) Index is an unweighted index of the approximately
1,700 stocks followed by the VALUE LINE INVESTMENT SURVEY.
B-22
<PAGE>
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.
The J.P. Morgan Global Government Bond Index is a total return, market
capitalization weighted index, rebalanced monthly consisting of the following
countries: Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan,
Netherlands, Spain, Sweden, United Kingdom and United States.
The 50/50 Index assumes a static mix of 50% of the S&P 500 Index and 50% of the
Lehman Government Corporate Index.
Other Composite Indices: 70% S&P 500 Index and 30% NASDAQ Industrial Index; 35%
S&P 500 Index and 65% Salomon Brothers High Grade Bond Index; 65% S&P Index and
35% Salomon Brothers High Grade Bond Index; 60% of the S&P 500, 30% of Lehman
Brothers Government/Corporate Bond Index, and 10% of 90-Day Treasury Bill Yield;
60% of the S&P 500 and 40% of Lehman Brothers Intermediate Treasury Bond Index;
and 50% J.P. Morgan Emerging Market Bond Index and 50% of Lehman Brothers
Aggregate Bond Index.
The SEI Median Balanced Fund Universe measures a group of funds with an average
annual equity commitment and an average annual bond - plus - private - placement
commitment greater than 5% each year. SEI must have at least two years of data
for a fund to be considered for the population.
The Russell 2000/Small Stock Index comprises the smallest 2000 stocks in the
Russell 3000 Index, and represents approximately 11% of the total U.S. equity
market capitalization. The Russell 3000 Index comprises the 3,000 largest U.S.
companies by market capitalization. The smallest company has a market value of
roughly $20 million.
The Russell 2500 Index is comprised of the bottom 500 stocks in the Russell
1000 Index which represents the universe of stocks from which most active money
managers typically select; and all the stocks in the Russell 2000 Index. The
largest security in the index has a market capitalization of approximately 1.3
billion.
The Consumer Price Index (or Cost of Living Index), published by the United
States Bureau of Labor Statistics is a statistical measure of change, over time,
in the price of goods and services in major expenditure groups.
J.P. Morgan Emerging Markets Bond Index is a market weighted index composed of
all Brady bonds outstanding and includes Argentina, Brazil, Bulgaria, Mexico,
Nigeria, the Philippines, Poland and Venezuela.
STOCKS, BONDS, BILLS AND INFLATION, published by Hobson Associates, presents a
historical measure of yield, price and total return for common and small company
stocks, long-term government bonds, Treasury bills and inflation.
Savings and Loan Historical Interest Rates as published in the United States
Savings & Loan League Fact Book.
B-23
<PAGE>
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.
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-24
<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, 1997 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.
B-25
<PAGE>
Renaissance Balanced Portfolio
Statement of Assets and Liabilities
June 30, 1997
ASSETS
Investment in securities, at value (cost $24,733,757)
-See accompanying schedule $ 26,877,961
Dividends and interest receivable 197,815
-------------
TOTAL ASSETS 27,075,776
LIABILITIES
Cash overdraft 5,676
Accounts payable and accrued expenses 35,163
-------------
TOTAL LIABILITIES 40,839
-------------
NET ASSETS $ 27,034,937
-------------
-------------
Net Assets consist of:
Paid-in capital $ 22,235,475
Undistributed net investment income 905,452
Accumulated undistributed net realized gain on investments 1,749,806
Net unrealized appreciation on investment securities 2,144,204
-------------
NET ASSETS, for 2,143,114 shares outstanding $ 27,034,937
-------------
-------------
NET ASSET VALUE, offering and redemption price per share $ 12.61
-------------
-------------
SEE ACCOMPANYING NOTES.
3
<PAGE>
Renaissance Balanced Portfolio
Statement of Operations
Year Ended June 30, 1997
INVESTMENT INCOME
Dividends $ 159,576
Interest 1,022,946
-------------
Total investment income 1,182,522
EXPENSES
Investment advisory and management fees 175,631
Custody and accounting fees 72,954
Professional fees 14,369
Directors' fees and expenses 4,893
Other expenses 9,223
-------------
Total expenses 277,070
-------------
Net investment income 905,452
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 1,749,806
Change in unrealized appreciation on investment securities 876,003
-------------
Net gain on investments 2,625,809
-------------
Net increase in net assets resulting from operations $ 3,531,261
-------------
-------------
SEE ACCOMPANYING NOTES.
4
<PAGE>
Renaissance Balanced Portfolio
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1997 1996
---------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 905,452 $ 758,801
Net realized gain on investments 1,749,806 2,972,263
Change in net unrealized appreciation 876,003 (423,724)
---------------------------
Net increase in net assets resulting from operations 3,531,261 3,307,340
Distributions to shareholders from:
Net investment income (758,801) (914,654)
Net realized gain (2,673,112) -
---------------------------
Total distributions to shareholders (3,431,913) (914,654)
Capital share transactions:
Proceeds from sales of shares 2,452,037 3,559,180
Proceeds from reinvested distributions 3,431,913 914,654
Cost of shares redeemed (6,051,714) (6,795,362)
---------------------------
Net decrease in net assets resulting
from share transactions (167,764) (2,321,528)
---------------------------
Total increase (decrease) in net assets (68,416) 71,158
NET ASSETS
Beginning of period 27,103,353 27,032,195
---------------------------
End of period (including undistributed net
investment income of $905,452 and
$758,801, respectively) $ 27,034,937 $ 27,103,353
---------------------------
---------------------------
OTHER INFORMATION
Shares:
Sold 199,141 286,131
Issued through reinvestment of distributions 291,594 74,583
Redeemed (487,221) (548,725)
---------------------------
Net increase (decrease) 3,514 (188,011)
---------------------------
---------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
Renaissance Balanced Portfolio
Financial Highlights
<TABLE>
<CAPTION>
DECEMBER 14,
1992
(COMMENCEMENT
YEAR ENDED JUNE 30, OF OPERATIONS)
------------------------------------------------------ THROUGH JUNE 30,
1997 1996 1995 1994 1993
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 12.67 $ 11.61 $ 10.40 $ 10.42 $ 10.00
Income from investment operations:
Net investment income 0.44 0.36 0.42 0.20 0.13
Net realized and unrealized gain
(loss) on investments 1.18 1.10 0.99 (0.11) 0.29
------------------------------------------------------------------------
Total from investment operations 1.62 1.46 1.41 0.09 0.42
Less distributions:
From net investment income (0.37) (0.40) (.17) (0.11) -
From net realized gain (1.31) - (.03) - -
------------------------------------------------------------------------
Total distributions (1.68) (0.40) (.20) (0.11) -
------------------------------------------------------------------------
Net asset value, end of period $ 12.61 $ 12.67 $ 11.61 $ 10.40 $ 10.42
------------------------------------------------------------------------
------------------------------------------------------------------------
TOTAL RETURN (a) 13.78% 12.68% 13.71% 0.73% 7.70%
RATIOS AND SUPPLEMENTAL DATA (b)
Net assets, end of period (in thousands) $ 27,035 $ 27,103 $ 27,032 $ 25,046 $ 7,799
Ratio of expenses to average net
assets (C) 1.03% 1.01% 0.96% 1.06% 1.24%
Ratio of net investment income to
average net assets (c) 3.35% 2.69% 3.53% 2.72% 2.36%
Portfolio turnover rate 90% 107% 71% 85% 29%
Average commission paid per equity
share traded (d) $ .0600
</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.
(d) Disclosure required for fiscal years beginning after September 1, 1995.
6
<PAGE>
Renaissance Balanced Portfolio
Schedule of Investments
June 30, 1997
NUMBER
OF SHARES VALUE
------------------------
COMMON STOCKS (34.9%)
AGRICULTURAL PRODUCTION CROPS (1.6%)
RJR Nabisco Holdings Corporation 13,400 $ 442,200
APPAREL & OTHER FINISHED PRODUCTS (1.5%)
Liz Claiborne, Inc. 8,600 400,975
CHEMICALS & ALLIED PRODUCTS (1.9%)
Bristol-Meyers Squibb Company 6,300 510,300
BUSINESS SERVICES (3.8%)
Computer Associates International, Inc. 8,400 467,775
HBO & Company 7,725 532,059
----------
999,834
DEPOSITORY INSTITUTIONS (1.7%)
First Chicago NBD Corporation 7,385 446,793
FOOD & KINDRED PRODUCTS (1.8%)
Archer Daniels Midland 21,100 495,850
INDUSTRIAL MACHINERY & EQUIPMENT (5.2%)
Gateway 2000, Inc.* 14,400 467,100
Ingersoll-Rand Company 8,100 500,175
Western Digital Corporation* 13,400 423,775
----------
1,391,050
INSURANCE CARRIERS (1.6%)
Loews Corporation 4,300 430,538
7
<PAGE>
Renaissance Balanced Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
------------------------
COMMON STOCKS (CONTINUED)
MISCELLANEOUS RETAIL (1.8%)
Staples, Inc.* 20,800 $ 482,300
OIL & GAS EXTRACTION (1.6%)
USX-Marathon Group 14,700 424,463
PETROLEUM & COAL PRODUCTS (1.6%)
Phillips Petroleum Company 10,000 437,500
PRIMARY METAL INDUSTRIES (1.7%)
USX-U.S. Steel Company 13,400 469,838
PRINTING & PUBLISHING (2.2%)
Gannett Company 6,000 592,498
RUBBER & MISCELLANEOUS PLASTICS PRODUCTS (1.5%)
Nike, Inc. 6,925 404,247
SECURITY & COMMODITY BROKERS, DEALERS (1.7%)
Morgan Stanley, Dean Witter, Discover and
Company 10,890 468,951
TRANSPORTATION EQUIPMENT (3.7%)
General Motors Corporation 7,100 395,381
Paccar, Inc. 12,800 594,400
----------
989,781
----------
TOTAL COMMON STOCKS (Cost $7,299,768) 9,387,118
8
<PAGE>
Renaissance Balanced Portfolio
Schedule of Investments (continued)
PRINCIPAL
AMOUNT VALUE
--------------------------
GOVERNMENT SECURITIES (53.0%)
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED
SECURITIES (11.6%)
Federal National Mortgage Association Medium
Term Notes, 6.41%, due 3/8/2006 $ 3,200,000 $ 3,112,512
U.S. GOVERNMENT OBLIGATIONS (41.4%)
U.S. Treasury Notes
5.875%, due 2/28/1999 2,760,000 2,753,542
6.125%, due 12/31/2001 2,690,000 2,663,530
6.375%, due 4/30/1999 1,980,000 1,990,514
6.50%, due 5/15/2005 700,000 698,684
6.875%, due 5/15/2006 700,000 714,546
7.00%, due 7/15/2006 525,000 540,094
7.25%, due 5/15/2004 1,700,000 1,771,978
-----------
11,132,888
-----------
TOTAL GOVERNMENT SECURITIES (Cost $14,188,546) 14,245,400
SHORT-TERM SECURITIES (12.1%)
U.S. GOVERNMENT OBLIGATIONS (10.0%)
Federal Home Loan Bank Discount Note,
5.7037%, due 11/21/1997 1,450,000 1,418,494
U.S. Treasury Bill, 5.16%, due 12/11/1997 1,300,000 1,269,481
-----------
2,687,975
9
<PAGE>
Renaissance Balanced Portfolio
Schedule of Investments (continued)
PRINCIPAL
AMOUNT VALUE
-------------------------
SHORT-TERM SECURITIES (CONTINUED)
REPURCHASE AGREEMENT (2.1%)
State Street Bank, 4.25%, due 7/1/1997
(Dated 6/30/1997, collateralized by
U.S. Treasury Note, 6.125%, due 5/15/1998,
value $570,650) $ 557,468 $ 557,468
------------
TOTAL SHORT-TERM SECURITIES (Cost $3,245,443) 3,245,443
------------
TOTAL INVESTMENTS (100.0%) (Cost $24,733,757) $ 26,877,961
------------
------------
*Non-income producing
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the
year ended June 30, 1997, aggregated $20,674,047 and $21,420,449
respectively. At June 30, 1997, net unrealized appreciation for tax purposes
aggregated $2,144,204, of which $2,255,987 related to appreciated investment
securities and $111,783 related to depreciated investment securities. The
aggregate cost of securities is the same for book and tax purposes.
SEE ACCOMPANYING NOTES.
10
<PAGE>
Zweig Asset Allocation Portfolio
Statement of Assets and Liabilities
June 30, 1997
ASSETS
Investment in securities, at value (cost $33,086,173)
-See accompanying schedule $ 42,786,617
Dividends, interest and other receivables 154,887
-------------
TOTAL ASSETS 42,941,504
LIABILITIES
Cash overdraft 34,397
Accounts payable and accrued expenses 59,090
-------------
TOTAL LIABILITIES 93,487
-------------
NET ASSETS $ 42,848,017
-------------
-------------
Net Assets consist of:
Paid-in capital $ 32,974,797
Undistributed net investment income 529,058
Accumulated undistributed net realized loss on investments (254,884)
Net unrealized appreciation on investment securities and
futures contracts 9,599,046
-------------
NET ASSETS, for 2,929,288 shares outstanding $ 42,848,017
-------------
-------------
NET ASSET VALUE, offering and redemption price per share $ 14.63
-------------
-------------
SEE ACCOMPANYING NOTES.
11
<PAGE>
Zweig Asset Allocation Portfolio
Statement of Operations
Year Ended June 30, 1997
INVESTMENT INCOME
Dividends $ 826,965
Interest 226,438
-------------
Total investment income 1,053,403
EXPENSES
Investment advisory and management fees 369,657
Custody and accounting fees 110,897
Professional fees 14,200
Directors' fees and expenses 4,893
Other expenses 24,698
-------------
Total expenses 524,345
-------------
Net investment income 529,058
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investment securities 3,397,934
Futures contracts (3,571,389)
-------------
Net realized gain (loss) (173,455)
Change in unrealized appreciation (depreciation) on:
Investment securities 6,719,553
Futures contracts (19,970)
-------------
Change in unrealized appreciation 6,699,583
-------------
Net gain on investments 6,526,128
-------------
Net increase in net assets resulting from operations $ 7,055,186
-------------
-------------
SEE ACCOMPANYING NOTES.
12
<PAGE>
Zweig Asset Allocation Portfolio
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1997 1996
---------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 529,058 $ 610,426
Net realized gain (loss) on investments (173,455) 4,692,015
Change in net unrealized appreciation 6,699,583 (1,281,343)
---------------------------
Net increase in net assets resulting from operations 7,055,186 4,021,098
Distributions to shareholders from:
Net investment income (610,426) (946,985)
Net realized gain (4,529,338) -
---------------------------
Total distributions to shareholders (5,139,764) (946,985)
Capital share transactions:
Proceeds from sales of shares 2,859,514 4,764,144
Proceeds from reinvested distributions 5,139,764 946,985
Cost of shares redeemed (7,288,581) (5,299,505)
---------------------------
Net increase in net assets resulting from share
transactions 710,697 411,624
---------------------------
Total increase in net assets 2,626,119 3,485,737
NET ASSETS
Beginning of period 40,221,898 36,736,161
---------------------------
End of period (including undistributed net investment
income of $529,058 and $610,426, respectively) $ 42,848,017 $ 40,221,898
---------------------------
---------------------------
OTHER INFORMATION
Shares:
Sold 206,859 345,159
Issued through reinvestment of distributions 396,248 71,107
Redeemed (523,827) (386,701)
---------------------------
Net increase 79,280 29,565
---------------------------
---------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
13
<PAGE>
Zweig Asset Allocation Portfolio
Financial Highlights
<TABLE>
<CAPTION>
DECEMBER 14,
1992
(COMMENCEMENT
YEAR ENDED JUNE 30, OF OPERATIONS)
----------------------------------------------------- THROUGH JUNE 30,
1997 1996 1995 1994 1993
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of
period $ 14.11 $ 13.02 $ 11.44 $ 10.81 $ 10.00
Income from investment operations:
Net investment income 0.19 0.21 0.33 0.10 0.08
Net realized and unrealized gain
on investments 2.20 1.21 1.33 0.58 0.73
------------------------------------------------------------------------
Total from investment operations 2.39 1.42 1.66 0.68 0.81
Less distributions:
From net investment income (0.22) (0.33) (0.08) (0.05) -
From net realized gain (1.65) - - - -
------------------------------------------------------------------------
Total distributions (1.87) (0.33) (0.08) (0.05) -
------------------------------------------------------------------------
Net asset value, end of period $ 14.63 $ 14.11 $ 13.02 $ 11.44 $ 10.81
------------------------------------------------------------------------
------------------------------------------------------------------------
TOTAL RETURN (a) 18.63% 11.06% 14.57% 6.27% 14.86%
RATIOS AND SUPPLEMENTAL DATA (b)
Net assets, end of period (in
thousands) $ 42,848 $ 40,222 $ 36,736 $ 31,563 $ 3,856
Ratio of expenses to average net
assets (c) 1.28% 1.25% 1.20% 1.39% 1.51%
Ratio of net investment income to
average net assets (c) 1.29% 1.55% 2.73% 1.67% 1.40%
Portfolio turnover rate 89% 105% 45% 101% 12%
Average commission paid per
equity share traded (d) $ .0262
</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.
(d) Disclosure required for fiscal years beginning after September 1, 1995.
14
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments
June 30, 1997
NUMBER
OF SHARES VALUE
---------------------
COMMON STOCKS (94.5%)
AGRICULTURAL PRODUCTION - CROPS (0.8%)
RJR Nabisco Holdings Corporation 10,400 $ 343,200
AMUSEMENT & RECREATION SERVICES (0.5%)
King World Productions, Inc. 6,000 210,000
APPAREL & ACCESSORY (2.0%)
Kmart Corporation (a) 9,500 116,375
Ross Stores, Inc. 22,400 731,500
----------
847,875
AUTO REPAIR, SERVICES & PARKING (0.3%)
Ryder System, Inc. 4,000 132,000
BUSINESS SERVICES (2.0%)
Comdisco, Inc. 14,250 370,500
Fiserv, Inc. (a) 7,083 316,964
Radius, Inc. (a) 45 13
Stratus Computer, Inc. (a) 3,100 155,000
----------
842,477
CHEMICALS & ALLIED PRODUCTS (1.0%)
Desc S.A. De C.V. 1,515 44,124
International Specialty Products, Inc. (a) 7,400 104,063
Methanex Corporation 9,000 82,406
Nova Corporation 2,800 23,800
Occidental Petroleum Corporation 7,000 175,438
----------
429,831
COAL MINING (0.1%)
Zeigler Coal Holding Company 2,600 60,775
15
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
---------------------
COMMON STOCKS (CONTINUED)
COMMUNICATIONS (1.8%)
British Telecommunications Plc 1,200 $ 89,100
Mastec, Inc. (a) 4,900 231,831
Tele Danmark 6,200 161,975
Telefonos De Mexico 6,400 305,600
----------
788,506
DEPOSITORY INSTITUTIONS (7.1%)
Ahmanson (H.F.) & Company 2,500 107,500
Astoria Financial Corporation 3,200 152,000
Bankamerica Corporation 7,600 490,675
Bankunited Financial Corporation (a) 2,000 20,125
City National Corporation 10,200 245,438
Coast Savings Financial (a) 2,600 118,138
Dime Bancorp, Inc. 11,200 196,000
Glendale Federal Bank FSB (a) 5,500 143,688
Golden West Financial Corporation 1,600 112,000
Imperial Bancorp (a) 13,200 381,150
North Fork Bancorporation 10,200 218,025
Popular, Inc. 4,000 160,750
RCSB Financial, Inc. 6,100 291,656
St. Paul Bancorp, Inc. 2,300 76,475
T R Financial Corporation 12,200 308,050
----------
3,021,670
EATING & DRINKING PLACES (1.2%)
CKE Restaurants, Inc. 4,200 132,825
Foodmaker, Inc. (a) 23,100 378,263
----------
511,088
16
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
---------------------
COMMON STOCKS (CONTINUED)
ELECTRIC, GAS & SANITARY SERVICES (15.4%)
Allegheny Power System, Inc. 4,900 $ 130,769
Baltimore Gas & Electric 5,900 157,456
Boston Edison Company 3,000 79,125
Centerior Energy Corporation 15,300 171,169
CMS Energy Corporation 9,100 320,775
Columbia Gas System 9,600 626,400
Delmarva Power and Light Company 4,500 85,781
Edison International 15,700 390,538
Enersis S.A. 4,200 149,363
Entergy Corporation 12,800 350,400
GPU, Inc. 10,100 362,338
Hawaiian Electric Industries, Inc. 2,500 96,563
Houston Industries, Inc. 4,100 87,894
Illinova Corporation 10,000 220,000
Ipalco Enterprises, Inc. 10,000 312,500
Long Island Lighting Company 3,600 82,800
MidAmerican Energy Company 1,900 32,894
Montana Power Company 5,800 134,488
National Fuel Gas Company 4,800 201,300
New York State Electric & Gas 7,900 164,913
Niagra Mohawk Power Corporation 10,300 88,194
Noram Energy Corporation 15,700 239,425
Northern States Power 1,800 93,150
OGE Energy Corporation 2,600 118,300
Pacific Enterprises 4,000 134,500
People's Energy Corporation 8,500 318,219
PG&E Corporation 3,700 89,725
Pinnacle West Corporation 19,500 586,219
17
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
---------------------
COMMON STOCKS (CONTINUED)
ELECTRIC, GAS & SANITARY SERVICES (15.4%) (CONTINUED)
PP&L Resources, Inc. 8,300 $ 165,481
Public Service Enterprises Group 7,100 177,500
Sierra Pacific Resources 4,000 128,000
TransCanada Pipelines Ltd 4,500 90,563
Utilicorp United, Inc. 4,900 142,713
Washington Gas Light Company 1,900 47,738
----------
6,577,193
ELECTRONIC & OTHER ELECTRIC EQUIPMENT (2.4%)
Aeroquip-Vickers, Inc. 4,500 212,625
Hadco Corporation (a) 7,500 489,375
Portugal Telecom S.A. 5,400 216,675
Sony Corporation 1,200 105,600
----------
1,024,275
FOOD & KINDRED PRODUCTS (0.3%)
Adolph Coors Company 4,900 129,850
FOOD STORES (0.3%)
Great Atlantic & Pacific Tea Company 4,900 133,219
FURNITURE & FIXTURES (0.9%)
Ethan Allen Interiors, Inc. 1,800 102,600
Furniture Brands International, Inc. (a) 8,400 162,750
Johnson Controls, Inc. 3,400 139,613
----------
404,963
18
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
---------------------
COMMON STOCKS (CONTINUED)
FURNITURE & HOME FURNISHINGS STORES (0.3%)
Pier 1 Imports, Inc. 4,500 $ 119,250
GENERAL BUILDING CONTRACTORS (1.1%)
Centex Corporation 3,300 134,063
Lennar Corporation 2,700 86,231
Pulte Corporation 2,600 89,863
Toll Brothers, Inc. (a) 4,400 80,850
U.S. Home Corporation (a) 3,300 87,656
----------
478,663
GENERAL MERCHANDISE STORES (3.1%)
Carson Pirie Scott & Company (a) 1,000 31,750
Dayton-Hudson Corporation 6,600 351,038
Federated Department Stores (a) 6,200 215,450
Fred Meyer, Inc. (a) 4,600 237,763
Proffitt's, Inc. (a) 1,300 56,956
Shopko Stores, Inc. 2,600 66,300
Waban, Inc. (a) 2,400 77,250
Woolworth Corporation (a) 12,700 304,800
----------
1,341,307
HEALTH SERVICES (0.8%)
Beverly Enterprises, Inc. (a) 9,400 152,750
Lincare Holdings, Inc. (a) 2,900 124,791
Universal Health Services (a) 1,800 69,300
----------
346,841
19
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
---------------------
COMMON STOCKS (CONTINUED)
HOLDING & OTHER INVESTMENT OFFICES (0.6%)
Merry Land and Investment Company, Inc. 4,400 $ 95,425
Thornburg Mortgage Asset Corporation 6,800 146,200
----------
241,625
INDUSTRIAL MACHINERY & EQUIPMENT (7.1%)
AGCO Corporation 3,100 111,406
Applied Magnetics Corporation (a) 3,000 67,875
Camco International, Inc. 1,800 98,550
Case Corporation 1,600 110,200
Caterpillar, Inc. 1,700 182,538
Data General Corporation (a) 11,100 288,600
Harris Corporation 3,700 310,800
Ingersoll-Rand Company 1,800 111,150
Innovex, Inc. (a) 24,400 706,051
Kaydon Corporation 2,700 133,988
Seagate Technology, Inc. 2,900 102,044
Storage Technology Corporation (a) 6,700 298,150
Tandem Computers, Inc. (a) 9,200 186,300
Tecumseh Products Company 600 35,963
Timken Company 5,000 177,813
Western Digital Corporation (a) 4,200 132,825
----------
3,054,253
INSURANCE CARRIERS (9.4%)
Ace Ltd 3,100 229,013
Aegon N.V. 1,738 121,745
Allmerica Financial Corporation 2,000 79,750
Ambac, Inc. 4,200 320,775
20
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
---------------------
COMMON STOCKS (CONTINUED)
INSURANCE CARRIERS (9.4%) (CONTINUED)
American Bankers Insurance Group, Inc. 3,800 $ 240,113
American General Corporation 1,881 89,818
Capital Re Corporation 500 26,750
Cigna Corporation 1,300 230,750
CMAC Investment Corporation 1,800 85,950
Delphi Financial Group, Inc. (a) 7,099 273,312
Equitable Companies, Inc. 11,200 372,400
Equitable of Iowa Companies 1,500 84,000
Fremont General Corporation 6,500 261,625
Horace Mann Educators Corporation 1,700 83,300
Loews Corporation 5,900 590,738
NAC Re Corporation 1,700 82,238
Old Republic International Corporation 4,700 142,469
Presidential Life Corporation (a) 6,700 130,022
Providian Financial Corporation (a) 4,000 128,500
Reliance Group Holdings, Inc. 21,000 249,375
Reliastar Financial Corporation 800 58,500
Tig Holdings, Inc. 2,300 71,875
W.R. Berkley Corporation 1,300 76,050
----------
4,029,068
LOCAL & INTERURBAN PASSENGER TRANSIT (0.2%)
Canadian National Railway Company 2,400 105,000
METAL MINING (0.5%)
Asarco, Inc. 4,300 131,688
Phelps Dodge 1,200 102,225
----------
233,913
21
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
---------------------
COMMON STOCKS (CONTINUED)
MISCELLANEOUS MANUFACTURING INDUSTRIES (0.7%)
Hexcel Corporation (a) 4,000 $ 69,000
Johns Manville Corporation 18,800 222,075
----------
291,075
MISCELLANEOUS RETAIL (0.2%)
Zale Corporation (a) 4,700 93,119
NONDEPOSITORY INSTITUTIONS (0.5%)
Countrywide Credit Industries, Inc. 6,900 215,194
NONMETALLIC MINERALS, EXCEPT FUELS (0.1%)
De Beers Consolidated Mines 400 14,763
OIL & GAS EXTRACTION (7.0%)
Amerada Hess Corporation 2,800 155,575
Apache Corporation 2,200 71,500
Enserch Exploration, Inc. (a) 4,000 43,750
Helmerich & Payne, Inc. 7,500 432,188
Kerr-McGee Corporation 3,400 215,475
Marine Drilling Companies, Inc. (a) 6,200 121,288
Newfield Exploration Company (a) 4,400 88,000
Nuevo Energy Company (a) 2,000 82,000
Oryx Energy Company 11,800 249,275
Parker & Parsley Petroleum Company 3,300 116,738
Royal Dutch Petroleum Company 2,800 152,250
Santa Fe Energy Resources, Inc. (a) 8,800 129,250
Seacor Smit, Inc. (a) 1,700 88,931
Tuboscope Vetco International Corporation (a) 9,200 183,425
22
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
---------------------
COMMON STOCKS (CONTINUED)
OIL & GAS EXTRACTION (7.0%) (CONTINUED)
Union Texas Petro Holdings, Inc. 4,500 $ 94,219
USX-Marathon Group 7,600 219,450
Vintage Petroleum, Inc. 3,000 92,250
Weatherford Enterra, Inc. (a) 3,900 150,150
YPE Sociedad Anonima 10,500 322,875
----------
3,008,589
PAPER & ALLIED PRODUCTS (0.4%)
James River Corporation of Virginia 4,800 177,600
PETROLEUM & COAL PRODUCTS (4.5%)
Coastal Corporation 8,300 441,456
Elf Aquitaine 5,200 283,075
Ente Nazionale Idrocarburi SPA 900 51,188
Murphy Oil Corporation 3,700 180,375
Phillips Petroleum Company 3,300 144,375
Sun Company, Inc. 4,400 136,400
Texaco, Inc. 1,800 195,750
Total S.A. 2,100 106,313
Unocal Corporation 5,100 197,944
Valero Energy Corporation 5,500 199,375
----------
1,936,251
PRIMARY METAL INDUSTRIES (3.0%)
AK Steel Holding Corporation 3,300 145,613
Alumax, Inc. (a) 4,600 174,513
British Steel Plc 9,000 227,250
Inland Steel Industries, Inc. 5,300 138,463
23
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
---------------------
COMMON STOCKS (CONTINUED)
PRIMARY METAL INDUSTRIES (3.0%) (CONTINUED)
LTV Corporation 9,200 $ 131,100
Mueller Industries, Inc. (a) 800 35,000
Pohang Iron & Steel Ltd 6,900 220,800
Quanex Corporation 300 9,206
USX-U.S. Steel Company 5,800 203,363
----------
1,285,308
RAILROAD TRANSPORTATION (1.4%)
Canadian Pacific Ltd 12,900 366,844
CSX Corporation 4,100 227,550
----------
594,394
RUBBER & MISCELLANEOUS PLASTICS PRODUCTS (0.3%)
Premark International, Inc. 5,200 139,100
SECURITY & COMMODITY BROKERS, DEALERS (5.1%)
A.G. Edwards, Inc. 5,500 235,125
Bear Stearns Companies, Inc. 12,825 438,455
Donaldson Lufkin & Jenrette, Inc. 900 53,775
Lehman Brothers Holdings 14,000 567,000
Paine Webber Group, Inc. 10,100 353,500
Raymond James Financial, Inc. 3,900 106,763
Salomon, Inc. 7,400 411,625
----------
2,166,243
STONE, CLAY, & GLASS PRODUCTS (1.3%)
LaFarge Corporation 800 19,600
Lone Star Industries 3,000 135,938
24
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
---------------------
COMMON STOCKS (CONTINUED)
STONE, CLAY, & GLASS PRODUCTS (1.3%) (CONTINUED)
Owens-Illinois, Inc. (a) 4,800 $ 148,800
Southdown, Inc. 2,500 109,063
USG Corporation (a) 3,200 116,800
Vitro S.A. (a) 3,600 40,500
----------
570,701
TEXTILE MILL PRODUCTS (0.1%)
Mohawk Industries, Inc. (a) 2,700 61,088
TRANSPORTATION BY AIR (4.6%)
Airborne Freight Corporation 3,700 154,938
America West Holdings Corporation (a) 8,800 127,600
AMR Corporation (a) 3,400 314,500
British Airways Plc 1,600 183,900
Continental Airlines (a) 3,800 132,763
Delta Air Lines, Inc. 1,000 82,000
Federal Express Corporation (a) 1,600 92,400
KLM Royal Dutch Air 5,439 167,929
Southwest Airlines 4,900 126,788
UAL Corporation (a) 6,100 436,531
USAir Group, Inc. (a) 3,700 129,500
----------
1,948,849
TRANSPORTATION EQUIPMENT (3.6%)
Chrysler Corporation 8,502 278,972
Ford Motor Company 5,000 188,750
General Motors Corporation 2,400 133,650
Honda Motor Company Ltd 1,500 90,281
25
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
---------------------
COMMON STOCKS (CONTINUED)
TRANSPORTATION EQUIPMENT (3.6%) (CONTINUED)
Mascotech, Inc. 4,400 $ 91,850
Navistar International (a) 9,700 167,325
Paccar, Inc. 7,200 334,350
Trinity Industries 7,300 231,775
Volvo AB (a) 600 16,088
----------
1,533,041
TRANSPORTATION SERVICES (0.3%)
Gatx Corporation 2,000 115,500
TRUCKING & WAREHOUSING (0.3%)
CNF Transportation, Inc. 3,500 112,875
WATER TRANSPORTATION (0.1%)
Alexander & Baldwin, Inc. 300 7,847
WHOLESALE TRADE - DURABLE GOODS (0.3%)
Borg-Warner Automotive, Inc. 2,400 129,750
WHOLESALE TRADE-NONDURABLE GOODS (1.5%)
Burlington Coat Factory Warehouse (a) 5,100 99,450
Pennzoil Company 3,600 276,300
Supervalu, Inc. 2,800 96,600
Universal Corporation 5,200 165,100
----------
637,450
----------
TOTAL COMMON STOCKS (Cost $30,745,135) 40,445,579
26
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
PRINCIPAL
AMOUNT VALUE
--------------------------
SHORT-TERM SECURITIES (5.5%)
U.S. GOVERNMENT AGENCY (3.5%)
Federal National Mortgage Association
Discount Note, 5.25%, due 7/2/1997 $ 1,500,000 $ 1,499,773
U.S. GOVERNMENT OBLIGATIONS (1.5%)
U.S. Treasury Bills
4.65%, due 7/31/1997 25,000 24,903
5.15%, due 7/17/1997 600,000 598,627
------------
623,530
REPURCHASE AGREEMENT (0.5%)
State Street Bank, 4.25%, due 7/1/1997
(Dated 6/30/1997, collateralized by U.S.
Treasury Notes, 6.125%, due 5/15/1998,
value $222,200) 217,735 217,735
------------
TOTAL SHORT-TERM SECURITIES (Cost $2,341,038) 2,341,038
------------
TOTAL INVESTMENTS (100.0%) (Cost $33,086,173) $ 42,786,617
------------
------------
27
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
FUTURES CONTRACTS
UNREALIZED
EXPIRATION CONTRACT GAIN
DATE AMOUNT (LOSS)
---------------------------------------------
53 Mid-Cap S&P 500
Futures Contracts-Short (b) 9/19/97 $ 7,674,400 $ (173,898)
15 S&P 500
Futures Contracts-Short (b) 9/19/97 6,676,875 72,500
-----------------------------
$14,351,275 $ (101,398)
-----------------------------
-----------------------------
(a) Non-income producing
(b) At June 30, 1997, the market value of assets pledged to cover margin
requirements for open futures contracts was $598,627.
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the
year ended June 30, 1997, aggregated $32,636,317 and $37,620,880
respectively. At June 30, 1997, net unrealized appreciation for tax
purposes aggregated $9,693,260 of which $10,020,026 related to appreciated
investment securities and $326,766 related to depreciated investment
securities. The aggregate cost of securities is $33,093,357 for tax
purposes.
SEE ACCOMPANYING NOTES.
28
<PAGE>
Nicholas-Applegate Balanced Portfolio
Statement of Assets and Liabilities
June 30, 1997
ASSETS
Investment in securities, at value (cost $42,385,345)
-See accompanying schedule $ 49,976,483
Dividends, interest and other receivables 296,029
-------------
TOTAL ASSETS 50,272,512
LIABILITIES
Cash overdraft 20,800
Accounts payable and accrued expenses 55,843
-------------
TOTAL LIABILITIES 76,643
-------------
NET ASSETS $ 50,195,869
-------------
-------------
Net Assets consist of:
Paid-in capital $ 38,904,356
Undistributed net investment income 796,624
Accumulated undistributed net realized gain on investments 2,903,751
Net unrealized appreciation on investment securities 7,591,138
-------------
NET ASSETS, for 3,347,602 shares outstanding $ 50,195,869
-------------
-------------
NET ASSET VALUE, offering and redemption price per share $ 14.99
-------------
-------------
SEE ACCOMPANYING NOTES.
29
<PAGE>
Nicholas-Applegate Balanced Portfolio
Statement of Operations
Year Ended June 30, 1997
INVESTMENT INCOME
Dividends $ 160,543
Interest 1,121,815
-------------
Total investment income 1,282,358
EXPENSES
Investment advisory and management fees 319,584
Custody and accounting fees 132,750
Professional fees 14,200
Directors' fees and expenses 4,893
Other expenses 12,446
-------------
Total expenses 483,873
-------------
Net investment income 798,485
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 2,901,890
Change in unrealized appreciation on investment securities 2,596,313
-------------
Net gain on investments 5,498,203
-------------
Net increase in net assets resulting from operations $ 6,296,688
-------------
-------------
SEE ACCOMPANYING NOTES.
30
<PAGE>
Nicholas-Applegate Balanced Portfolio
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1997 1996
---------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 798,485 $ 924,428
Net realized gain on investments 2,901,890 6,092,935
Change in net unrealized appreciation 2,596,313 (1,004,611)
---------------------------
Net increase in net assets resulting from operations 6,296,688 6,012,752
Distributions to shareholders from:
Net investment income (924,428) (935,896)
Net realized gain (4,473,680) -
---------------------------
Total distributions to shareholders (5,398,108) (935,896)
Capital share transactions:
Proceeds from sales of shares 4,494,468 5,298,577
Proceeds from reinvested distributions 5,398,108 935,896
Cost of shares redeemed (10,058,064) (7,629,163)
---------------------------
Net decrease in net assets resulting from
share transactions (165,488) (1,394,690)
---------------------------
Total increase in net assets 733,092 3,682,166
NET ASSETS
Beginning of period 49,462,777 45,780,611
---------------------------
End of period (including undistributed net investment
income of $796,624 and $924,428, respectively) $ 50,195,869 $ 49,462,777
---------------------------
---------------------------
OTHER INFORMATION
Shares:
Sold 303,463 380,150
Issued through reinvestment of distributions 380,650 68,284
Redeemed (710,525) (550,111)
---------------------------
Net decrease (26,412) (101,677)
---------------------------
---------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
31
<PAGE>
Nicholas-Applegate Balanced Portfolio
Financial Highlights
<TABLE>
<CAPTION>
DECEMBER 3,
1992
(COMMENCEMENT
YEAR ENDED JUNE 30, OF OPERATIONS)
----------------------------------------------------- THROUGH JUNE 30,
1997 1996 1995 1994 1993
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of
period $ 14.66 $ 13.17 $ 11.27 $ 11.50 $ 10.00
Income from investment operations:
Net investment income 0.24 0.27 0.27 0.09 0.11
Net realized and unrealized gain
(loss) on investments 1.73 1.49 1.74 (0.29) 1.39
------------------------------------------------------------------------
Total from investment operations 1.97 1.76 2.01 (0.20) 1.50
Less distributions:
From net investment income (0.28) (0.27) (0.11) (0.03) -
From net realized gains (1.36) - - - -
------------------------------------------------------------------------
Total distributions (1.64) (0.27) (0.11) (0.03) -
------------------------------------------------------------------------
Net asset value, end of period $ 14.99 $ 14.66 $ 13.17 $ 11.27 $ 11.50
------------------------------------------------------------------------
------------------------------------------------------------------------
TOTAL RETURN (a) 14.12% 13.53% 17.92% (1.70%) 26.07%
RATIOS AND SUPPLEMENTAL DATA (b)
Net Assets, end of period (in
thousands) $ 50,196 $ 49,463 $ 45,781 $ 39,358 $ 5,567
Ratio of expenses to average net
assets (c) 0.98% 0.98% 0.94% 1.03% 1.25%
Ratio of net investment income to
average net assets (c) 1.62% 1.92% 2.20% 1.69% 1.70%
Portfolio turnover rate 132% 127% 108% 56% 21%
Average commission paid per
equity share traded (d) $ .0600
</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.
(d) Disclosure required for fiscal years beginning after September 1, 1995.
32
<PAGE>
Nicholas-Applegate Balanced Portfolio
Schedule of Investments
June 30, 1997
NUMBER
OF SHARES VALUE
---------------------
COMMON STOCKS (66.4%)
APPAREL & ACCESSORY STORES (1.2%)
Ross Stores, Inc. 18,400 $ 600,875
APPAREL & OTHER FINISHED PRODUCTS (1.3%)
Jones Apparel Group, Inc.* 10,200 487,050
Liz Claiborne, Inc. 3,700 172,513
----------
659,563
CHEMICALS & ALLIED PRODUCTS (1.9%)
Cytec Industries, Inc.* 5,600 209,300
Dura Pharmaceuticals, Inc.* 2,700 107,494
Herbalife International, Inc. 13,900 225,006
Jones Medical Industries, Inc. 1,850 87,875
Medeva Plc 18,500 316,813
----------
946,488
BUSINESS SERVICES (10.4%)
Altera Corporation* 6,200 313,294
America Online, Inc.* 5,600 311,500
BMC Software, Inc.* 11,600 643,075
Cadence Design Systems, Inc.* 8,250 276,375
Compuware Corporation* 15,800 756,425
Equifax 3,600 133,875
HBO & Company 7,400 509,675
Keane, Inc.* 6,400 332,800
McAfee Associated, Inc.* 13,950 879,709
Microsoft Corporation* 3,400 429,994
33
<PAGE>
Nicholas-Applegate Balanced Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
---------------------
COMMON STOCKS (CONTINUED)
BUSINESS SERVICES (10.4%) (CONTINUED)
Parametric Technology Company* 2,100 $ 89,316
Peoplesoft, Inc.* 9,600 505,800
----------
5,181,838
COMMUNICATIONS (0.8%)
Mastec, Inc.* 8,400 397,425
DEPOSITORY INSTITUTIONS (3.6%)
Greenpoint Financial Corporation 5,500 366,094
MBNA Corporation 2,050 75,081
Security Capital Corporation 3,800 359,338
Star Banc Corporation 7,200 304,200
State Street Corporation 7,300 337,625
United States Trust Corporation 7,200 336,150
----------
1,778,488
ELECTRONIC & OTHER ELECTRIC EQUIPMENT (4.5%)
American Power Conversion* 12,500 236,328
Intel Corporation 3,300 467,259
LSI Logic Corporation* 8,400 268,800
PairGain Technologies, Inc.* 10,800 167,738
Sanmina Corporation* 6,300 394,538
Tellabs, Inc.* 7,600 424,175
Vitesse Semiconductor Corporation* 9,600 313,500
----------
2,272,338
FABRICATED METAL PRODUCTS (0.7%)
Crane Company 8,000 334,500
34
<PAGE>
Nicholas-Applegate Balanced Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
---------------------
COMMON STOCKS (CONTINUED)
FOOD & KINDRED PRODUCTS (1.7%)
Interstate Bakeries Corporation 7,600 $ 450,775
Smithfield Foods, Inc.* 6,800 418,625
----------
869,400
FOOD STORES (0.8%)
General Nutrition Companies, Inc.* 13,800 385,538
FURNITURE & FIXTURES (2.1%)
Ethan Allen Interiors, Inc. 6,200 353,400
Herman Miller, Inc. 18,800 674,450
----------
1,027,850
GENERAL BUILDING CONTRACTORS (0.7%)
Centex Corporation 9,100 369,688
GENERAL MERCHANDISE STORES (1.6%)
TJX Companies, Inc. 17,800 469,475
Woolworth Corporation* 14,500 348,000
----------
817,475
INDUSTRIAL MACHINERY & EQUIPMENT (12.9%)
Caterpillar, Inc. 3,300 354,338
Compaq Computer Corporation* 4,500 446,625
Comverse Technology, Inc.* 5,400 281,813
Cooper Cameron Corporation* 9,200 430,100
Creative Technology Ltd* 18,100 305,438
Dell Computer Corporation* 5,800 680,956
EVI, Inc.* 9,200 386,400
Gateway 2000, Inc.* 14,200 460,613
35
<PAGE>
Nicholas-Applegate Balanced Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
---------------------
COMMON STOCKS (CONTINUED)
INDUSTRIAL MACHINERY & EQUIPMENT (12.9%) (CONTINUED)
Jabil Circuit, Inc.* 7,400 $ 618,825
Kaydon Corporation 3,500 173,688
Quantum Corporation* 14,400 292,950
Seagate Technology, Inc.* 3,000 105,563
Smith International, Inc.* 9,300 564,975
Timken Company 11,000 391,188
Varco International, Inc.* 8,600 277,350
Western Digital Corporation* 21,600 683,100
----------
6,453,922
INSTRUMENTS & RELATED PRODUCTS (1.9%)
Guidant Corporation 5,600 476,000
Sci Systems, Inc.* 7,400 471,750
----------
947,750
INSURANCE CARRIERS (4.3%)
Aegon N.V. 4,300 301,269
Conseco, Inc. 4,500 166,500
Loews Corporation 1,400 140,175
Orion Capital Corporation 5,600 413,000
Oxford Health Plans* 6,700 480,934
Torchmark Corporation 4,900 349,125
Travelers Group, Inc. 4,866 306,862
----------
2,157,865
MISCELLANEOUS RETAIL (2.0%)
Amway Asia Pacific Ltd 9,300 405,713
Bed Bath & Beyond, Inc.* 1,900 57,772
36
<PAGE>
Nicholas-Applegate Balanced Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
---------------------
COMMON STOCKS (CONTINUED)
MISCELLANEOUS RETAIL (2.0%) (CONTINUED)
Borders Group, Inc.* 8,100 $ 195,413
Costco Companies, Inc.* 10,000 329,063
----------
987,961
NONDEPOSITORY INSTITUTIONS (0.5%)
Green Tree Financial Corporation 6,700 238,688
OIL & GAS EXTRACTION (2.4%)
Global Marine, Inc.* 17,900 416,175
Marine Drilling Companies, Inc.* 17,800 348,213
Rowan Companies, Inc.* 8,900 250,869
USX-Marathon Group 6,900 199,238
----------
1,214,495
PETROLEUM & COAL PRODUCTS (0.2%)
Phillips Petroleum Company 2,700 118,125
PRIMARY METAL INDUSTRIES (0.7%)
Bethlehem Steel Corporation* 33,300 347,569
PRINTING AND PUBLISHING (0.6%)
Valassis Communications, Inc.* 11,700 280,800
RAILROAD TRANSPORTATION (0.5%)
Canadian Pacific Ltd 8,200 233,188
RUBBER & MISC. PLASTICS PRODUCTS (0.7%)
Premark International, Inc. 13,700 366,475
37
<PAGE>
Nicholas-Applegate Balanced Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
---------------------
COMMON STOCKS (CONTINUED)
STONE, CLAY, & GLASS PRODUCTS (0.7%)
Corning, Inc. 6,100 $ 339,313
TEXTILE MILL PRODUCTS (1.2%)
Fruit of the Loom, Inc.* 8,900 275,900
Unifi, Inc. 9,200 343,850
----------
619,750
TRANSPORTATION BY AIR (2.7%)
British Airways Plc 3,500 402,281
Continental Airlines* 9,700 338,894
Delta Air Lines, Inc. 3,500 287,000
UAL Corporation* 4,200 300,563
----------
1,328,738
TRANSPORTATION EQUIPMENT (0.9%)
Chrysler Corporation 3,200 105,000
Coltec Industries, Inc.* 17,200 335,400
----------
440,400
WHOLESALE TRADE - DURABABLE GOODS (1.4%)
Federal-Mogul Corporation 11,000 385,000
Sybron International Corporation* 7,700 307,038
----------
692,038
WHOLESALE TRADE - NONDURABLE GOODS (1.5%)
Safeway, Inc.* 16,170 745,841
----------
TOTAL COMMON STOCKS (Cost $25,640,020) 33,154,384
38
<PAGE>
Nicholas-Applegate Balanced Portfolio
Schedule of Investments (continued)
PRINCIPAL
AMOUNT VALUE
-------------------------
CORPORATE BONDS (6.6%)
DEPOSITORY INSTITUTIONS (1.2%)
Citicorp Capital I, 7.933%, due 2/15/2027 $ 200,000 $ 200,264
Swiss Bank Corporation, 7.75%, due 9/1/2026 400,000 408,352
----------
608,616
NONDEPOSITORY INSTITUTIONS (5.4%)
AT&T Capital Corporation, 6.39%, due 1/22/1999 350,000 350,672
Case Equipment Loan Trust, 6.45%,
due 3/15/2004 320,000 320,350
Community Program Loan Trust, 4.50%,
due 4/1/2029 850,000 595,266
Countrywide Home Loan, 7.45%, due 9/16/2003 360,000 366,984
Discover Card Master Trust I, 5.40%,
due 11/16/2001 375,000 371,250
Lehman Brothers Holdings, Inc., 6.85%,
due 10/8/1999 300,000 301,617
Standard Credit Card Master Trust, 5.50%,
due 2/7/2000 385,000 380,907
----------
2,687,046
----------
TOTAL CORPORATE BONDS (Cost $3,298,531) 3,295,662
GOVERNMENT BONDS (0.3%)
GOVERNMENT AGENCY (0.3%)
Hydro-Quebec, 8.40%, due 1/15/2022 160,000 173,117
----------
TOTAL GOVERNMENT BONDS (Cost $174,018) 173,117
39
<PAGE>
Nicholas-Applegate Balanced Portfolio
Schedule of Investments (continued)
PRINCIPAL
AMOUNT VALUE
-------------------------
GOVERNMENT SECURITIES (26.1%)
U.S. GOVERNMENT AGENCY - COLLATERALIZED
MORTGAGE OBLIGATIONS (2.9%)
Federal Home Loan Mortgage Corporation
6.00%, due 6/15/2001 $ 400,000 $ 399,625
6.15%, due 2/15/2022 430,000 411,859
6.50%, due 12/17/2022 350,000 334,576
9.00%, due 6/01/2006 295,335 306,687
----------
1,452,747
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED
SECURITIES (1.5%)
Government National Mortgage
Association, 7.50%, due 8/15/2025 766,529 771,557
U.S. GOVERNMENT OBLIGATIONS (21.7%)
U.S. Treasury Bonds
8.50%, due 2/15/2020 80,000 94,775
9.25%, due 2/15/2016 1,400,000 1,751,526
12.00%, due 8/15/2013 70,000 98,536
U.S. Treasury Notes
5.50%, due 11/15/1998 300,000 298,218
5.875%, due 10/31/1998 950,000 948,965
5.875%, due 8/15/1998 80,000 79,975
6.25%, due 2/15/2003 1,890,000 1,875,239
7.25%, due 5/15/2004 1,800,000 1,876,212
7.50%, due 2/15/2005 1,225,000 1,296,197
8.25%, due 7/15/1998 830,000 849,713
40
<PAGE>
Nicholas-Applegate Balanced Portfolio
Schedule of Investments (continued)
PRINCIPAL
AMOUNT VALUE
--------------------------
GOVERNMENT SECURITIES (CONTINUED)
U.S. GOVERNMENT OBLIGATIONS (21.7%) (CONTINUED)
U.S. Treasury Strips, 0.0%, due 5/15/2006 $ 3,000,000 $ 1,678,290
-----------
10,847,646
-----------
TOTAL GOVERNMENT SECURITIES (Cost $12,991,406) 13,071,950
SHORT-TERM SECURITIES (0.6%)
REPURCHASE AGREEMENT (0.6%)
State Street Bank, 4.25%, due 7/1/1997
(Dated 6/30/1997, collateralized by U.S.
Treasury Note, 6.125%, due 5/15/1998,
value $287,850) 281,370 281,370
-----------
TOTAL SHORT-TERM SECURITIES (Cost $281,370) 281,370
-----------
TOTAL INVESTMENTS (100.0%) (Cost $42,385,345) $49,976,483
-----------
-----------
* Non-income producing
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the
year ended June 30, 1997, aggregated $63,003,192 and $66,396,138,
respectively. At June 30, 1997, net unrealized appreciation for tax purposes
aggregated $7,591,138, of which $8,191,035 related to appreciated investment
securities and $599,897 related to depreciated investment securities. The
aggregate cost of securities is the same for book and tax purposes.
SEE ACCOMPANYING NOTES.
41
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Statement of Assets and Liabilities
June 30, 1997
ASSETS
Investment in securities, at value (cost $20,588,655)
-See accompanying schedule $ 29,445,175
Cash 19,790
Dividends and interest receivable 14,637
-------------
TOTAL ASSETS 29,479,602
LIABILITIES
Payable for investment securities purchased 626,676
Accounts payable and accrued expenses 38,253
-------------
TOTAL LIABILITIES 664,929
-------------
NET ASSETS $ 28,814,673
-------------
-------------
Net Assets consist of:
Paid-in capital $ 17,778,975
Undistributed net investment income 35,592
Accumulated undistributed net realized gain on investments 2,143,586
Net unrealized appreciation on investment securities 8,856,520
-------------
NET ASSETS, for 1,644,065 shares outstanding $ 28,814,673
-------------
-------------
NET ASSET VALUE, offering and redemption price per share $ 17.53
-------------
-------------
SEE ACCOMPANYING NOTES.
42
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Statement of Operations
Year Ended June 30, 1997
INVESTMENT INCOME
Dividends $ 244,363
Interest 47,306
-------------
Total investment income 291,669
EXPENSES
Investment advisory and management fees 160,836
Custody and accounting fees 66,809
Professional fees 14,200
Directors' fees and expenses 4,893
Other expenses 9,339
-------------
Total expenses 256,077
-------------
Net investment income 35,592
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 2,143,586
Change in unrealized appreciation on investment securities 4,406,962
-------------
Net gain on investments 6,550,548
-------------
Net increase in net assets resulting from operations $ 6,586,140
-------------
-------------
SEE ACCOMPANYING NOTES.
43
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1997 1996
--------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 35,592 $ 5,649
Net realized gain on investments 2,143,586 1,737,610
Change in net unrealized appreciation 4,406,962 778,867
--------------------------------
Net increase in net assets resulting from operations 6,586,140 2,522,126
Distributions to shareholders from:
Net investment income (5,649) (17,603)
Net realized gain (1,737,610) (152,435)
--------------------------------
Total distributions to shareholders (1,743,259) (170,038)
Capital share transactions:
Proceeds from sales of shares 5,927,647 10,057,765
Proceeds from reinvested distributions 1,743,259 170,038
Cost of shares redeemed (7,509,523) (5,162,758)
--------------------------------
Net increase in net assets resulting from share
transactions 161,383 5,065,045
--------------------------------
Total increase in net assets 5,004,264 7,417,133
NET ASSETS
Beginning of period 23,810,409 16,393,276
--------------------------------
End of period (including undistributed net investment
income of $35,592 and $5,649, respectively)
$ 28,814,673 $ 23,810,409
--------------------------------
--------------------------------
OTHER INFORMATION
Shares:
Sold 394,049 726,912
Issued through reinvestment of distributions 119,672 12,192
Redeemed (512,893) (371,133)
--------------------------------
Net increase 828 367,971
--------------------------------
--------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
44
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Financial Highlights
<TABLE>
<CAPTION>
DECEMBER 8,
1992
(COMMENCEMENT
YEAR ENDED JUNE 30, OF OPERATIONS)
----------------------------------------------------------- THROUGH
1997 1996 1995 1994 JUNE 30, 1993
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 14.49 $ 12.85 $ 9.36 $ 9.71 $ 10.00
Income from investment operations:
Net investment income (loss) 0.02 - (a) 0.01 (0.02)(b) -
Net realized and unrealized gain
(loss) on investments 4.13 1.74 3.48 (0.33) (0.29)
----------------------------------------------------------------------------
Total from investment operations 4.15 1.74 3.49 (0.35) (0.29)
Less distributions:
From net investment income -(a) (0.01) - - -
From net realized gain (1.11) (0.09) - - -
----------------------------------------------------------------------------
Total distributions (1.11) (0.10) - - -
----------------------------------------------------------------------------
Net asset value, end of period $ 17.53 $ 14.49 $ 12.85 $ 9.36 $ 9.71
----------------------------------------------------------------------------
----------------------------------------------------------------------------
TOTAL RETURN (c) 30.23% 13.59% 37.29% (3.60%) (5.16%)
RATIOS AND SUPPLEMENTAL DATA (d)
Net assets, end of period
(in thousands) $ 28,815 $ 23,810 $ 16,393 $ 10,693 $ 5,143
Ratio of expenses to average net
assets (e) 1.03% 1.04% 1.05% 1.29% 1.34%
Ratio of net investment income
(loss) to average net assets (e) 0.14% 0.03% 0.13% (0.17%) (0.06%)
Portfolio turnover rate 46% 58% 31% 38% 6%
Average commission paid per equity
share traded (f) $ .0600
</TABLE>
(a) Less than $0.01 per share.
(b) Net investment loss per share has been calculated using the weighted
monthly average number of shares outstanding.
(c) Total returns for periods of less than one year are not annualized.
(d) Data expressed as a percentage are annualized as appropriate.
(e) 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.
(f) Disclosure required for fiscal years beginning after September 1, 1995.
45
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Schedule of Investments
June 30, 1997
NUMBER
OF SHARES VALUE
-------------------------
COMMON STOCKS (93.3%)
BUSINESS SERVICES (10.6%)
Autodesk, Inc. 17,000 $ 651,844
Automatic Data Processing 11,500 540,500
Interpublic Group of Companies, Inc. 10,000 613,125
Microsoft Corporation* 5,500 695,578
Oracle Corporation* 12,600 634,331
-------------
3,135,378
CHEMICALS & ALLIED PRODUCTS (17.9%)
Abbott Laboratories 10,000 667,500
American Home Products Corporation 7,500 573,750
Amgen, Inc.* 8,700 505,416
Bristol-Meyers Squibb Company 7,600 615,600
Colgate-Palmolive Company 11,800 769,950
Merck & Company, Inc. 7,500 776,248
Pfizer, Inc. 6,000 717,000
Schering-Plough 13,400 641,525
-------------
5,266,989
DEPOSITORY INSTITUTIONS (6.1%)
Bankamerica Corporation 10,000 645,625
Citicorp 4,500 542,531
Norwest Corporation* 10,800 607,500
-------------
1,795,656
EATING & DRINKING PLACES (1.8%)
McDonald's Corporation 11,000 531,438
46
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
-------------------------
COMMON STOCKS (CONTINUED)
ELECTRONIC & OTHER ELECTRIC EQUIPMENT (11.1%)
General Electric Company 10,000 $ 653,750
Intel Corporation 5,000 707,969
Linear Technology Corporation 10,000 516,563
Lucent Technologies, Inc. 10,500 756,656
Tellabs, Inc.* 11,500 641,844
-------------
3,276,782
FABRICATED METAL PRODUCTS (2.5%)
Illinois Tool Works, Inc. 15,000 749,063
FOOD & KINDRED PRODUCTS (6.5%)
Coca-Cola Company 8,650 583,875
Conagra, Inc. 9,200 589,950
Pepsico, Inc.* 20,000 751,250
-------------
1,925,075
GENERAL MERCHANDISE STORES (2.3%)
Wal-Mart Stores, Inc. 19,600 662,725
INDUSTRIAL MACHINERY & EQUIPMENT (6.6%)
Applied Materials, Inc.* 10,500 743,203
Cisco Systems, Inc.* 9,000 604,406
Compaq Computer Corporation* 6,150 610,388
-------------
1,957,997
INSTRUMENTS & RELATED PRODUCTS (2.0%)
Medtronic, Inc. 7,200 583,200
47
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
-------------------------
COMMON STOCKS (CONTINUED)
INSURANCE CARRIERS (6.5%)
American International Group 4,350 $ 649,781
Oxford Health Plans* 9,100 653,209
United Healthcare Corporation 11,500 598,000
-------------
1,900,990
MISCELLANEOUS MANUFACTURING INDUSTRIES (4.7%)
Mattel, Inc. 19,000 643,625
Tyco International Ltd 10,500 730,406
-------------
1,374,031
MOTION PICTURES (2.1%)
Walt Disney 7,800 625,950
RAILROAD TRANSPORTATION (2.1%)
Union Pacific Corporation 8,700 613,350
SECURITY & COMMODITY BROKERS(2.0%)
Merrill Lynch & Company 10,100 602,213
WHOLESALE TRADE - DURABLE GOODS (2.2%)
Johnson & Johnson 10,000 643,750
WHOLESALE TRADE - NONDURABLE GOODS (6.2%)
Gillette Company 7,000 663,250
Safeway, Inc. 12,300 567,338
Sysco Corporation 16,000 584,000
-------------
1,814,588
-------------
48
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
------------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
TOTAL COMMON STOCKS (Cost $18,602,655) $ 27,459,175
SHORT-TERM SECURITIES (6.7%)
REPURCHASE AGREEMENT (6.7%)
State Street Bank, 4.25%, due 7/1/1997
(Dated 6/30/1997, collateralized by U.S. Treasury
Note, 6.125%, due 5/15/1998, value $2,030,100) $ 1,986,000 1,986,000
--------------
TOTAL SHORT-TERM SECURITIES (Cost $1,986,000) 1,986,000
--------------
TOTAL INVESTMENTS (100.0%) (Cost $20,588,655) $ 29,445,175
--------------
--------------
</TABLE>
* Non-income producing
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the
year ended June 30, 1997, aggregated $10,887,252 and $13,401,361,
respectively. At June 30, 1997, net unrealized appreciation for tax
purposes aggregated $8,856,520, of which $8,914,571 related to appreciated
investment securities and $58,051 related to depreciated investment
securities. The aggregate cost of securities is the same for book and tax
purposes.
SEE ACCOMPANYING NOTES.
49
<PAGE>
Dreman Value Portfolio
Statement of Assets and Liabilities
June 30, 1997
ASSETS
Investment in securities, at value (cost $25,309,118)
-See accompanying schedule $ 30,887,217
Cash 19,382
Dividends, interest and other receivables 63,868
-------------
TOTAL ASSETS 30,970,467
LIABILITIES
Accounts payable and accrued expenses 40,013
-------------
TOTAL LIABILITIES 40,013
-------------
NET ASSETS $ 30,930,454
-------------
-------------
Net Assets consist of:
Paid-in capital $ 19,219,499
Undistributed net investment income 408,549
Accumulated undistributed net realized gain on investments 5,724,307
Net unrealized appreciation on investment securities 5,578,099
-------------
NET ASSETS, for 1,499,576 shares outstanding $ 30,930,454
-------------
-------------
NET ASSET VALUE, offering and redemption price per share $ 20.63
--------------
--------------
SEE ACCOMPANYING NOTES.
50
<PAGE>
Dreman Value Portfolio
Statement of Operations
Year Ended June 30, 1997
INVESTMENT INCOME
Dividends $ 559,690
Interest 115,425
-------------
Total investment income 675,115
EXPENSES
Investment advisory and management fees 164,290
Custody and accounting fees 68,244
Professional fees 14,200
Directors' fees and expenses 4,893
Foreign tax expense 4,891
Other expenses 10,048
-------------
Total expenses 266,566
-------------
Net investment income 408,549
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 5,724,307
Change in unrealized appreciation on investment securities 1,320,029
-------------
Net gain on investments 7,044,336
-------------
Net increase in net assets resulting from operations $ 7,452,885
-------------
-------------
SEE ACCOMPANYING NOTES.
51
<PAGE>
Dreman Value Portfolio
Statement of Changes in Net Assets
YEAR ENDED JUNE 30,
1997 1996
------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 408,549 $ 252,188
Net realized gain on investments 5,724,307 862,820
Change in net unrealized appreciation 1,320,029 2,857,141
------------------------------
Net increase in net assets
resulting from operations 7,452,885 3,972,149
Distributions to shareholders from:
Net investment income (252,188) (190,236)
Net realized gain (862,820) (110,864)
------------------------------
Total distributions to shareholders (1,115,008) (301,100)
Capital share transactions:
Proceeds from sales of shares 12,411,821 7,569,421
Proceeds from reinvested distributions 1,115,008 301,100
Cost of shares redeemed (8,638,962) (2,713,770)
-------------------------------
Net increase in net assets resulting
from share transactions 4,887,867 5,156,751
-------------------------------
Total increase in net assets 11,225,744 8,827,800
NET ASSETS
Beginning of period 19,704,710 10,876,910
-------------------------------
End of period (including undistributed
net investment income of $408,549
and $252,188, respectively) $ 30,930,454 $ 19,704,710
------------------------------
------------------------------
OTHER INFORMATION
Shares:
Sold 689,365 517,405
Issued through reinvestment of distributions 64,391 21,840
Redeemed (472,506) (184,651)
------------------------------
Net increase 281,250 354,594
------------------------------
------------------------------
SEE ACCOMPANYING NOTES.
52
<PAGE>
Dreman Value Portfolio
Financial Highlights
<TABLE>
<CAPTION>
DECEMBER 14,
1992
(COMMENCEMENT
YEAR ENDED JUNE 30, OF OPERATIONS)
------------------------------------------------------ THROUGH
1997 1996 1995 1994 JUNE 30, 1993
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 16.17 $ 12.59 $ 10.66 $ 10.45 $ 10.00
Income from investment operations:
Net investment income 0.26 0.18 0.26 0.12 0.11
Net realized and unrealized gain on investments 5.04 3.70 1.85 0.17 0.34
----------------------------------------------------------------------
Total from investment operations 5.30 3.88 2.11 0.29 0.45
Less distributions:
From net investment income (0.19) (0.19) (0.14) (0.08) -
From net realized gain (0.65) (0.11) (0.04) - -
----------------------------------------------------------------------
Total distributions (0.84) (0.30) (0.18) (0.08) -
----------------------------------------------------------------------
Net asset value, end of period $ 20.63 $ 16.17 $ 12.59 $ 10.66 $ 10.45
----------------------------------------------------------------------
----------------------------------------------------------------------
TOTAL RETURN (a) 33.78% 31.22% 19.98% 2.80% 8.25%
RATIOS AND SUPPLEMENTAL DATA (b)
Net assets, end of period (in thousands) $ 30,930 $ 19,705 $ 10,877 $ 8,952 $ 1,671
Ratio of expenses to average net assets 1.05% 1.06% 1.13% 1.40% 1.24%
Ratio of net investment income to
average net assets 1.62% 1.65% 1.98% 1.98% 2.00%
Ratio of expenses to average net
assets before voluntary expense reimbursement 1.05% 1.07% 1.13% 1.61% 8.43%
Ratio of net investment income to
average net assets before voluntary expense
reimbursement 1.62% 1.64% 1.98% 1.76% (1.49%)
Portfolio turnover rate 88% 18% 29% 9% 5%
Average commission paid per equity
share traded (c) $ .0512
</TABLE>
(a) Total returns for periods less than one year are not annualized.
(b) Data expressed as a percentage are annualized as appropriate.
(c) Disclosure required for fiscal years beginning after September 1, 1995.
53
<PAGE>
Dreman Value Portfolio
Schedule of Investments
June 30, 1997
NUMBER
OF SHARES VALUE
-----------------------
COMMON STOCKS (79.2%)
CHEMICALS & ALLIED PRODUCTS( 0.6%)
Glaxo Holdings 4,100 $ 171,431
COMMUNICATIONS (6.0%)
GTE Corporation 23,000 1,009,122
U.S. West Media Group* 42,000 850,500
-------------
1,859,622
DEPOSITORY INSTITUTIONS (14.0%)
Ahmanson (H.F.) & Company 10,000 430,000
Bankamerica Corporation 8,000 516,500
Bankers Trust New York Corporation 5,300 461,100
Citicorp 4,500 542,531
First Union Corporation 3,800 351,500
J.P. Morgan & Company 3,500 365,313
Keycorp 6,000 335,250
Nationsbank Corporation 5,000 322,500
PNC Bank Corporation 16,510 687,229
Wells Fargo & Company 1,200 323,400
-------------
4,335,323
EATING & DRINKING PLACES (4.2%)
Boston Chicken, Inc.* 40,000 558,750
Darden Restaurants, Inc. 83,000 752,188
-------------
1,310,938
ELECTRIC GAS & SANITARY SERVICES (5.2%)
Duke Power Company 20,000 958,750
Southern Company 30,000 656,250
-------------
1,615,000
54
<PAGE>
Dreman Value Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
-----------------------
COMMON STOCKS (CONTINUED)
FOOD & KINDRED PRODUCTS (6.5%)
Nestle SA 6,000 $ 396,337
Wendy's International, Inc. 30,000 778,125
Whitman Corporation 33,000 835,313
-------------
2,009,775
FORESTRY (0.7%)
Georgia-Pacific Corporation 2,700 230,513
GENERAL MERCHANDISE STORES (2.6%)
J C Penney, Inc. 12,000 626,250
May Department Stores Company 3,500 165,375
-------------
791,625
INSTRUMENTS & RELATED PRODUCTS (4.4%)
Bard (C.R.), Inc. 9,100 330,444
Raytheon Company 6,000 306,000
Xerox Corporation 9,300 733,538
-------------
1,369,982
INSURANCE CARRIERS (3.2%)
American General Corporation 6,800 324,700
American International Group 2,250 336,094
Travelers Group, Inc. 5,000 315,313
-------------
976,107
LUMBER & WOOD PRODUCTS (1.3%)
Louisiana-Pacific Corporation 18,800 397,150
55
<PAGE>
Dreman Value Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
-----------------------
COMMON STOCKS (CONTINUED)
NONDEPOSITORY INSTITUTIONS (6.3%)
Fannie Mae 21,800 $ 951,025
Federal Home Loan Mortgage Corporation 17,500 601,563
Student Loan Marketing Association 3,000 381,000
-------------
1,933,588
OIL & GAS EXTRACTION (0.7%)
Atlantic Richfield Company 3,000 211,500
PAPER & ALLIED PRODUCTS (4.1%)
Sonoco Products Company 32,000 974,000
Union Camp Corporation 6,100 305,000
-------------
1,279,000
PETROLEUM & COAL PRODUCTS (2.4%)
Amoco Corporation 5,000 434,688
Chevron Corporation 4,000 295,750
-------------
730,438
PRIMARY METAL INDUSTRIES (2.2%)
Nucor Corporation 12,000 678,000
PRINTING & PUBLISHING (2.8%)
News Corporation Ltd 45,000 866,250
RAILROAD TRANSPORTATION (0.6%)
Burlington Northern Santa Fe 1,900 170,763
56
<PAGE>
Dreman Value Portfolio
Schedule of Investments (continued)
NUMBER OF
SHARES
OR PRINCIPAL
AMOUNT VALUE
---------------------------
COMMON STOCKS (CONTINUED)
TOBACCO PRODUCTS (5.6%)
Philip Morris Company, Inc. 30,600 $ 1,357,874
UST, Inc. 13,200 366,300
-------------
1,724,174
TRANSPORTATION BY AIR (1.9%)
Federal Express Corporation* 10,200 589,050
TRANSPORTATION EQUIPMENT (3.9%)
Ford Motor Company 32,000 1,208,000
-------------
TOTAL COMMON STOCKS (Cost $18,880,130) 24,458,229
SHORT-TERM SECURITIES (20.8%)
REPURCHASE AGREEMENT (20.8%)
State Street Bank, 4.25%, due 7/1/1997
(Dated 6/30/1997, collateralized by
U.S. Treasury Note, 6.125%, due 5/15/1998,
value $6,559,950) $ 6,428,988 6,428,988
-------------
TOTAL SHORT-TERM SECURITIES (Cost $6,428,988) 6,428,988
-------------
TOTAL INVESTMENTS (100.0%) (Cost $25,309,118) $ 30,887,217
-------------
-------------
57
<PAGE>
Dreman Value Portfolio
Schedule of Investments (continued)
* Non-income producing
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the
year ended June 30, 1997, aggregated $19,710,671 and $21,880,553,
respectively. At June 30, 1997, net unrealized appreciation for tax purposes
aggregated $5,578,099, of which $5,776,695 related to appreciated investment
securities and $198,596 related to depreciated investment securities. The
aggregate cost of securities is the same for book and tax purposes.
SEE ACCOMPANYING NOTES.
58
<PAGE>
Zweig Equity (Small Cap) Portfolio
Statement of Assets and Liabilities
June 30, 1997
ASSETS
Investment in securities, at value (cost $8,460,923)
-See accompanying schedule $11,149,793
Cash 16,777
Dividends, interest and other receivables 19,341
-----------
TOTAL ASSETS 11,185,911
LIABILITIES
Accounts payable and accrued expenses 24,738
-----------
TOTAL LIABILITIES 24,738
-----------
NET ASSETS $11,161,173
-----------
-----------
Net Assets consist of:
Paid-in capital $ 7,894,272
Undistributed net investment income 103,886
Accumulated undistributed net realized gain on investment
securities and futures contracts 499,755
Net unrealized appreciation on investment securities and
futures contracts 2,663,260
-----------
NET ASSETS, for 751,598 shares outstanding $11,161,173
-----------
-----------
NET ASSET VALUE, offering and redemption price per share $ 14.85
-----------
-----------
SEE ACCOMPANYING NOTES.
59
<PAGE>
Zweig Equity (Small Cap) Portfolio
Statement of Operations
Year Ended June 30, 1997
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $4,788) $ 171,743
Interest 93,311
-----------
Total investment income 265,054
EXPENSES
Investment advisory and management fees 112,524
Custody and accounting fees 50,013
Professional fees 14,200
Directors' fees and expenses 4,893
Other expenses 8,811
-----------
Total expenses before reimbursement 190,441
Less: expense reimbursement (29,273)
-----------
Net expenses 161,168
-----------
Net investment income 103,886
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investment securities 1,142,748
Futures contracts (666,051)
-----------
Net realized gain 476,697
Change in unrealized appreciation (depreciation) on:
Investment securities 1,356,413
Futures contracts (2,552)
-----------
Change in unrealized appreciation 1,353,861
-----------
Net gain on investments 1,830,558
-----------
Net increase in net assets resulting from operations $ 1,934,444
-----------
-----------
SEE ACCOMPANYING NOTES.
60
<PAGE>
Zweig Equity (Small Cap) Portfolio
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1997 1996
--------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 103,886 $ 103,880
Net realized gain on investments 476,697 1,345,302
Change in net unrealized appreciation 1,353,861 190,585
--------------------------
Net increase in net assets resulting from operations 1,934,444 1,639,767
Distributions to shareholders from:
Net investment income (103,880) (119,225)
Net realized gains (861,194) -
--------------------------
Total distributions to shareholders (965,074) (119,225)
Capital share transactions:
Proceeds from sales of shares 2,797,773 4,407,015
Proceeds from reinvested distributions 965,074 119,225
Cost of shares redeemed (5,269,163) (2,382,455)
--------------------------
Net increase (decrease) in net assets resulting
from share transactions (1,506,316) 2,143,785
--------------------------
Total increase (decrease) in net assets (536,946) 3,664,327
NET ASSETS
Beginning of period 11,698,119 8,033,792
--------------------------
End of period (including undistributed net investment
income of $103,886 and $103,880, respectively) $11,161,173 $11,698,119
--------------------------
--------------------------
OTHER INFORMATION
Shares:
Sold 205,116 343,946
Issued through reinvestment of distributions 74,878 9,733
Redeemed (387,804) (185,655)
--------------------------
Net increase (decrease) (107,810) 168,024
--------------------------
--------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
61
<PAGE>
Zweig Equity (Small Cap) Portfolio
Financial Highlights
<TABLE>
<CAPTION>
DECEMBER 14,
1992
(COMMENCEMENT
YEAR ENDED JUNE 30, OF OPERATIONS)
------------------------------------------------------- THROUGH JUNE 30,
1997 1996 1995 1994 1993
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 13.61 $ 11.62 $ 10.65 $ 10.11 $ 10.00
Income from investment operations:
Net investment income 0.16 0.11 0.17 0.15 0.05
Net realized and unrealized gain
on investments 2.41 2.04 0.93 0.50 0.06
------------------------------------------------------------------------
Total from investment operations 2.57 2.15 1.10 0.65 0.11
Less distributions:
From net investment income (0.14) (0.16) (0.06) (0.11) -
From net realized gain (1.19) - (0.07) - -
------------------------------------------------------------------------
Total distributions (1.33) (0.16) (0.13) (0.11) -
------------------------------------------------------------------------
Net asset value, end of period $ 14.85 $ 13.61 $ 11.62 $ 10.65 $ 10.11
------------------------------------------------------------------------
------------------------------------------------------------------------
TOTAL RETURN (a) 20.37% 18.69% 10.39% 6.53% 2.02%
RATIOS AND SUPPLEMENTAL DATA (b)
Net assets, end of period (in thousands) $ 11,161 $ 11,698 $ 8,034 $ 7,591 $ 2,116
Ratio of expenses to average net assets 1.55% 1.55% 1.55% 1.72% 1.61%
Ratio of net investment income to
average net assets 0.97% 1.06% 1.54% 1.75% 0.84%
Ratio of expenses to average net
assets before voluntary expense
reimbursement 1.82% 1.83% 1.59% 2.14% 7.29%
Ratio of net investment income (loss) to
average net assets before voluntary
expense reimbursement 0.70% 0.78% 1.50% 1.32% (1.80%)
Portfolio turnover rate 59% 101% 67% 249% 15%
Average commission paid per
equity share traded (c) $ .0276
</TABLE>
(a) Total returns for periods less than one year are not annualized.
(b) Data expressed as a percentage are annualized as appropriate.
(c) Disclosure required for fiscal years beginning after September 1, 1995.
62
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments
June 30, 1997
NUMBER
OF SHARES VALUE
------------------------
COMMON STOCKS (86.1%)
AGRICULTURAL PRODUCTION - CROPS (0.5%)
Chiquita Brands International 400 $ 5,500
RJR Nabisco Holdings Corporation 1,500 49,500
---------
55,000
AGRICULTURAL PRODUCTION - LIVESTOCK (0.1%)
Golden Poultry Company, Inc. 600 8,325
AMUSEMENT & RECREATIONAL SERVICES (0.1%)
Hollywood Park, Inc. (a) 400 5,825
King World Productions, Inc. 300 10,500
---------
16,325
APPAREL & ACCESSORY STORES (1.0%)
Dress Barn, Inc. (a) 400 7,788
Genesco, Inc. (a) 2,100 29,794
Goody's Family Clothing, Inc. (a) 300 8,250
Kmart Corporation (a) 700 8,575
Ross Stores, Inc. 1,400 45,719
Wet Seal, Inc. (a) 400 12,613
---------
112,739
BUILDING MATERIALS & GARDEN SUPPLIES (0.1%)
Central Garden and Pet Company (a) 200 4,975
Shelter Components Corporation 87 1,033
---------
6,008
63
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
------------------------
COMMON STOCKS (CONTINUED)
BUSINESS SERVICES (1.4%)
Advanced Technology Labs, Inc. (a) 500 $ 21,438
Comdisco, Inc. 1,575 40,950
Electro Rent Corporation (a) 2,000 49,750
McGrath Rentcorp 800 16,000
Orbotech Ltd (a) 500 16,000
Stratus Computer, Inc. (a) 300 15,000
---------
159,138
CHEMICALS & ALLIED PRODUCTS (1.7%)
Cambrex Corporation 100 3,975
Church & Dwight Company, Inc. 200 5,350
Creative BioMolecules, Inc. (a) 1,500 10,734
Dexter Corporation 100 3,200
ICN Pharmaceuticals, Inc. 500 14,344
International Specialty Products, Inc. (a) 2,400 33,750
MacDermaid, Inc. 900 41,288
Methanex Corporation (a) 800 7,325
Montedison SPA 200 1,350
NBTY, Inc. (a) 400 11,150
Nova Corporation (a) 2,100 17,850
Occidental Petroleum Corporation 700 17,544
Terra Industries, Inc. 1,600 18,600
---------
186,460
COAL MINING (0.1%)
Zeigler Coal Holding Company 700 16,363
64
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
------------------------
COMMON STOCKS (CONTINUED)
COMMUNICATIONS (0.8%)
Atlantic Tele-Network, Inc. (a) 1,000 $ 12,500
Mastec, Inc. (a) 100 4,731
Tele Danmark 1,100 28,738
Telefonos de Mexico 800 38,200
----------
84,169
DEPOSITORY INSTITUTIONS (8.9%)
Ahmanson (H.F.) & Company 200 8,600
Albank Financial Corporation 200 7,950
Allied Irish Banks 700 32,681
Astoria Financial Corporation 500 23,750
Bank of Montreal 1,200 46,950
Bankamerica Corporation 600 38,738
Bankers Corporation 200 5,613
CitFed Bancorp, Inc. 200 7,700
Coast Savings Financial (a) 300 13,631
Colonial Bancgroup, Inc. 600 14,550
Corporation Bancaria de Espana S.A. 100 2,838
CVB Financial Corporation 2 48
Dime Bancorp, Inc. 200 3,500
Downey Financial Corporation 700 16,538
F.N.B. Corporation 105 3,373
First Citizens BancShares, Inc. 200 17,800
Firstbank Puerto Rico 800 20,700
FirstFed Financial Corporated (a) 500 15,531
Glendale Federal Bank FSB (a) 600 15,675
Imperial Bancorp (a) 712 20,559
Investors Financial Services Corporation 32 1,496
65
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
------------------------
COMMON STOCKS (CONTINUED)
DEPOSITORY INSTITUTIONS (8.9%) (CONTINUED)
MAF Bancorp, Inc. 500 $ 21,063
New York Bancorp, Inc. 1,300 45,175
North Fork Bancorporation 2,692 57,542
ONBANCorp, Inc. 200 10,188
Peoples Heritage Financial Group, Inc. 800 30,200
Popular, Inc. 1,600 64,300
Provident Bankshares Corporation 420 17,404
RCSB Financial, Inc. 800 38,250
Republic New York Corporation 500 53,750
Riggs National Corporation, Washington D.C. 300 6,131
Santa Monica Bank 900 19,013
Security Capital Corporation 100 9,456
Silicon Valley Bancshares (a) 800 36,200
Sovereign Bancorp, Inc. 1,440 22,005
St. Paul Bancorp, Inc. 300 9,975
Sterling Bancorp 1,400 26,075
Sumitomo Bank of California 300 8,756
TR Financial Corporation 1,600 40,400
Trans Financial, Inc. 400 11,175
Trust Company of New Jersey 300 5,756
UnionBanCal Corporation 200 14,438
USBANCORP, Inc. 200 10,838
UST Corporation 1,600 35,750
Washington Mutual, Inc. 600 35,869
Westpac Banking 1,300 38,919
----------
986,849
66
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
------------------------
COMMON STOCKS (CONTINUED)
EATING & DRINKING PLACES (0.9%)
CKE Restaurants, Inc. 900 $ 28,463
Foodmaker, Inc. (a) 3,300 54,038
Ryan's Family Steak Houses, Inc. (a) 1,500 12,797
Showbiz Pizza Time, Inc. (a) 400 10,575
----------
105,873
EDUCATIONAL SERVICES (0.1%)
Berlitz International, Inc. (a) 200 4,988
ELECTRIC, GAS & SANITARY SERVICES (7.0%)
Allegheny Power System, Inc. 300 8,006
Aquila Gas Pipeline Corporation 1,000 13,938
Atlantic Energy, Inc. 800 13,450
Baltimore Gas & Electric 500 13,344
Black Hills Corporation 200 5,700
Boston Edison Company 500 13,188
California Water Service Company 200 8,800
Centerior Energy Corporation 1,400 15,663
CMS Energy Corporation 500 17,625
Columbia Gas System 600 39,150
Delmarva Power and Light Company 200 3,813
DQE, Inc. 200 5,650
Edison International 1,600 39,800
Enersis S.A. 500 17,781
Entergy Corporation 1,400 38,325
GPU, Inc. 300 10,763
Hawaiian Electric Industries, Inc. 100 3,863
Houston Industries, Inc. 400 8,575
67
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
------------------------
COMMON STOCKS (CONTINUED)
ELECTRIC, GAS & SANITARY SERVICES (7.0%) (CONTINUED)
Huaneng Power International, Inc. (a) 400 $ 10,200
Illinova Corporation 800 17,600
Ipalco Enterprises, Inc. 900 28,125
KU Energy Corporation 400 13,650
Long Island Lighting Company 400 9,200
MidAmerican Energy Holdings Company 1,200 20,775
Montana Power Company 300 6,956
National Fuel Gas Company 700 29,356
New England Electric System 400 14,800
New York State Electric & Gas 700 14,613
Niagara Mohawk Power Corporation (a) 1,000 8,563
Noram Energy Corporation 1,300 19,825
Northern States Power 100 5,175
Northwest Natural Gas Company 300 7,856
Pacific Enterprises 400 13,450
People's Energy Corporation 600 22,463
PG&E Corporation 400 9,700
Pinnacle West Corporation 1,300 39,081
PP&L Resources, Inc. 400 7,975
Public Service Company of New Mexico 300 5,363
Public Service Enterprises Group 1,600 40,000
Shandong Huaneng Power 2,700 29,025
Sierra Pacific Resources 600 19,200
Texas Utilities Company 400 13,775
TNP Enterprises, Inc. 1,600 37,100
TransCanada Pipelines Ltd 100 2,013
Utilicorp United, Inc. 500 14,563
Washington Gas Light Company 600 15,075
68
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
------------------------
COMMON STOCKS (CONTINUED)
ELECTRIC, GAS & SANITARY SERVICES (7.0%) (CONTINUED)
Westcoast Energy, Inc. 800 $ 14,550
Western Gas Resources, Inc. 100 1,950
York Research Corporation (a) 1,100 8,456
----------
777,867
ELECTRONIC & OTHER ELECTRIC EQUIPMENT (4.7%)
Aeroquip-Vickers, Inc. 300 14,175
Bairnco Corporation 1,000 8,000
Bel Fuse, Inc. (a) 600 7,988
Chips & Technologies, Inc. (a) 1,000 10,344
CTS Corporation 500 34,469
Electrolux Ab 600 43,388
Genlyte Group, Inc. (a) 2,000 26,375
Hadco Corporation (a) 1,000 65,195
Hutchinson Technology, Inc. (a) 400 9,713
Kollmorgen Corporation 700 11,069
Kuhlman Corporation 800 25,800
Lamson & Sessions Company (a) 2,100 17,456
Moog, Inc. (a) 500 15,625
Plexus Corporation (a) 400 22,363
Portugal Telecom S.A. 1,300 52,163
Powell Industries, Inc. (a) 300 4,500
Siliconix, Inc. (a) 500 13,531
Sony Corporation 400 35,200
Tadiran Ltd 900 25,763
69
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
------------------------
COMMON STOCKS (CONTINUED)
ELECTRONIC & OTHER ELECTRIC EQUIPMENT (4.7%) (CONTINUED)
Technitrol, Inc. 2,000 $ 54,750
Thomas Industries, Inc. 600 17,250
Xicor, Inc. (a) 700 4,134
-----------
519,251
ENGINEERING & MANAGEMENT SERVICES (0.1%)
Stone & Webster, Inc. 200 8,538
FABRICATED METAL PRODUCTS (1.0%)
Alliant Techsystems, Inc. (a) 200 11,000
Ameron, Inc. 500 28,313
NCI Building Systems, Inc. (a) 400 12,925
Nortek, Inc. (a) 800 19,300
Shiloh Industries, Inc. (a) 700 13,913
Wyman-Gordon Company (a) 1,100 29,769
-----------
115,220
FOOD & KINDRED PRODUCTS (0.6%)
Adolph Coors Company 500 13,250
Morningstar Group, Inc. (a) 500 14,703
Orange-Company, Inc. 1,100 8,525
Pepsi-Gemex S.A. (a) 600 7,500
Pilgrim's Pride Corporation 700 8,269
Savannah Foods & Industries, Inc. 400 7,025
Triangle Pacific Corporation (a) 200 6,350
-----------
65,622
70
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
------------------------
COMMON STOCKS (CONTINUED)
FOOD STORES (0.2%)
Great Atlantic & Pacific Tea Company 700 $ 19,031
Ruddick Corporation 300 4,950
-----------
23,981
FURNITURE & HOME FURNISHINGS STORES (0.2%)
Inacom Corporation (a) 600 18,713
FURNITURE & FIXTURES (0.7%)
Ethan Allen Interiors, Inc. 500 28,500
Furniture Brands International, Inc. (a) 1,300 25,188
Johnson Controls, Inc. 400 16,425
Kimball International 100 4,019
La-Z-Boy, Inc. 200 7,200
-----------
81,332
GENERAL BUILDING CONTRACTORS (0.9%)
Centex Corporation 600 24,375
Contl Homes Holding Corporation 900 15,863
Lennar Corporation 300 9,581
Pulte Corporation 200 6,913
Southern Energy Homes, Inc. (a) 200 1,813
Standard-Pacific Corporation 900 9,225
Toll Brothers, Inc. (a) 300 5,513
US Home Corporation (a) 600 15,938
Webb (Del E.) Corporation 400 6,500
-----------
95,721
71
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
------------------------
COMMON STOCKS (CONTINUED)
GENERAL MERCHANDISE STORES (1.4%)
Carson Pirie Scott & Company (a) 600 $ 19,050
Dayton-Hudson Corporation 500 26,594
Federated Department Stores (a) 500 17,375
Fred Meyer, Inc. (a) 600 31,013
Proffitt's, Inc. (a) 100 4,381
Shopko Stores, Inc. 1,600 40,800
Waban, Inc. (a) 500 16,094
Woolworth Corporation (a) 500 12,000
-----------
167,307
HEALTH SERVICES (0.5%)
Beverly Enterprises, Inc. (a) 700 11,375
Integrated Health Services, Inc. 100 3,850
RoTech Medical Corporation (a) 900 18,084
Universal Health Services (a) 500 19,250
-----------
52,559
HEAVY CONSTRUCTION, EXCEPT BUILDING (0.1%)
Granite Construction, Inc. 50 988
HOLDING & OTHER INVESTMENT OFFICES (0.6%)
Dynex Capital, Inc. 600 8,363
Koger Equity, Inc. 400 7,300
MGI Properties, Inc. 500 11,031
RFS Hotel Investors, Inc. 400 7,200
Thornburg Mortgage Asset Corporation 1,500 32,250
-----------
66,144
72
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
------------------------
COMMON STOCKS (CONTINUED)
INDUSTRIAL MACHINERY & EQUIPMENT (6.5%)
Advanced Logic Research, Inc. (a) 1,600 $ 24,550
AGCO Corporation 300 10,781
Ampco-Pittsburgh 1,200 17,625
Applied Magnetics Corporation (a) 100 2,263
Applied Power, Inc. 400 20,650
B H A Group, Inc. 616 11,704
Case Corporation 100 6,888
Caterpillar, Inc. 500 53,688
Creative Technology Ltd (a) 800 13,500
Data General Corporation (a) 1,000 26,000
DT Industries, Inc. 200 7,125
Gardner Denver Machinery, Inc. (a) 1,400 40,950
Gleason Corporation 600 27,900
Global Industrial Technologies, Inc. (a) 700 14,350
Graco, Inc. 600 18,075
Harris Corporation 100 8,400
Innovex, Inc. 1,800 52,088
Jabil Circuit, Inc. (a) 400 33,450
Katy Industries 400 5,950
Kaydon Corporation 500 24,813
Lexmark International Group, Inc. (a) 100 3,038
Lincoln Electric Company 100 3,481
Lindsay Manufacturing Company 450 14,738
Lufkin Industries, Inc. 800 21,000
Manitowoc Company, Inc. 300 14,025
Mestek, Inc. (a) 700 14,438
Met-Pro Corporation 150 2,269
Raymond Corporation 500 16,344
73
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
------------------------
COMMON STOCKS (CONTINUED)
INDUSTRIAL MACHINERY & EQUIPMENT (6.5%) (CONTINUED)
Robbins & Meyers, Inc. 1,300 $ 43,388
Seagate Technology, Inc. (a) 100 3,519
SPS Technologies, Inc. (a) 700 49,525
Storage Technolgy Corporation (a) 500 22,250
Tandem Computers, Inc. (a) 1,300 26,325
Tecumseh Products Company 300 17,981
Timken Company 1,000 35,563
Twin Disc, Inc. 100 2,875
Valmont Industries 600 11,513
-----------
723,022
INSTRUMENTS & RELATED PRODUCTS (1.2%)
Coherent, Inc. (a) 400 17,863
Cooper Companies, Inc. (a) 1,400 32,550
Core Industries, Inc. 300 7,425
Esterline Technologies Corporation (a) 1,400 49,263
Fluke Corporation 300 17,775
Starrett (L.S.) Company 200 6,375
Zygo Corporation (a) 200 6,050
-----------
137,301
INSURANCE CARRIERS (8.6%)
Ace Ltd 500 36,938
Aegon N.V. 304 21,305
Allmerica Financial Corporation 400 15,950
Ambac, Inc. 600 45,825
American Annuity Group, Inc. 1,820 32,760
American Bankers Insurance Group, Inc. 400 25,275
74
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
------------------------
COMMON STOCKS (CONTINUED)
INSURANCE CARRIERS (8.6%) (CONTINUED)
American General Corporation 221 $ 10,553
Capital Re Corporation 600 32,100
Capitol Transamerica Corporation 200 5,475
Chartwell Re Corporation 100 3,000
Citizens Corporation 300 8,288
CMAC Investment Corporation 100 4,775
CNA Financial Corporation (a) 100 10,544
Conseco, Inc. 1,403 51,911
Delphi Financial Group, Inc. (a) 612 23,562
Enhance Financial Services Group, Inc. 700 30,713
Equitable Companies, Inc. 400 13,300
Equitable of Iowa Companies 700 39,200
Exel Ltd 1,000 52,750
Financial Security Assurance Holding 100 3,894
Fremont General Corporation 900 36,225
Liberty Financial Companies, Inc. 900 44,888
Life Re Corporation 700 32,638
Life USA Holdings, Inc. (a) 600 8,531
Loews Corporation 600 60,075
MAIC Holdings, Inc. (a) 200 8,125
MFC Bancorp Ltd 500 4,266
NAC Re Corporation 200 9,675
National Western Life Insurance Company (a) 200 17,500
Nymagic, Inc. 200 4,125
Old Republic International Corporation 1,900 57,594
Orion Capital Corporation 300 22,125
Presidential Life Corporation 900 17,466
Providian Financial Corporation (a) 700 22,488
75
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
------------------------
COMMON STOCKS (CONTINUED)
INSURANCE CARRIERS (8.6%) (CONTINUED)
Reliance Group Holdings, Inc. 4,700 $ 55,813
Reliastar Financial Corporation 314 22,961
RLI Corporation 200 7,288
Security-Connecticut Corporation 200 11,013
Selective Insurance Group (a) 200 9,688
Tig Holdings, Inc. 400 12,500
Transatlantic Holdings, Inc. 300 29,775
-----------
962,877
LEATHER & LEATHER PRODUCTS (0.1%)
Weyco Group, Inc. 200 13,475
LUMBER & WOOD PRODUCTS (0.4%)
Champion Enterprises, Inc. (a) 792 11,880
Fibreboard Corporation (a) 400 22,000
TJ International, Inc. 600 14,138
-----------
48,018
METAL MINING (0.7%)
Asarco, Inc. 500 15,313
Brush Wellman, Inc. 500 10,469
Cleveland-Cliffs, Inc. 600 24,450
Imperial Credit Mortgage Holdings 300 8,138
O'Sullivan Industries Holdings, Inc. (a) 500 8,281
Southern Peru Copper Corporation 800 15,600
-----------
82,251
76
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
------------------------
COMMON STOCKS (CONTINUED)
NONMETALLIC MINERALS, EXCEPT FUELS (0.6%)
De Beers Consolidated Mines 500 $ 18,453
Florida Rock Industries 500 20,313
Vulcan Materials Company 400 31,400
-----------
70,166
MISCELLANEOUS MANUFACTURING INDUSTRIES (0.6%)
Johns Manville Corporation 600 7,088
Mine Safety Appliances Company 200 12,350
Oneida Ltd 1,100 29,356
Russ Berrie & Company, Inc. 700 15,356
-----------
64,150
MISCELLANEOUS RETAIL (0.3%)
Cash America International, Inc. 800 8,400
World Fuel Services Corporation 350 7,656
Zale Corporation (a) 700 13,869
-----------
29,925
NONDEPOSITORY INSTITUTIONS (0.7%)
AmeriCredit Corporation (a) 900 18,900
First Financial Caribbean Corporation 400 12,825
Firstplus Financial Group, Inc. (a) 600 20,400
Imperial Credit Industries (a) 900 18,534
Mercury Finance Company 3,500 8,531
-----------
79,190
77
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
------------------------
COMMON STOCKS (CONTINUED)
OIL & GAS EXTRACTION (4.9%)
Apache Corporation 200 $ 6,500
Belden & Blake Corporation (a) 1,000 27,000
Benton Oil & Gas Company (a) 700 10,500
Berry Petroleum Company 600 11,400
Cabot Oil and Gas Corporation 100 1,763
Chieftain International, Inc. (a) 200 4,388
Cliffs Drilling Company (a) 2,000 73,000
Cross Timbers Oil Company 150 2,888
Devon Energy Corporation 400 14,700
Forest Oil Corporation (a) 100 1,469
Helmerich & Payne, Inc. 200 11,525
Kerr-McGee Corporation 300 19,013
Lomak Petroleum, Inc. 400 7,125
Louis Dreyfus Natural Gas (a) 400 6,500
Marine Drilling Companies, Inc. (a) 900 17,606
Mesa, Inc. (a) 300 1,725
Mitchell Energy & Development Corporation 1,200 24,600
Oryx Energy Company (a) 700 14,788
Parker & Parsley Petroleum Company 600 21,225
Plains Resources Inc. (a) 1,000 14,750
Pool Energy Services Company (a) 600 10,931
RPC Energy Services, Inc. (a) 700 10,325
Santa Fe Energy Resources, Inc. (a) 900 13,219
Seacor Smit, Inc. (a) 200 10,463
St. Mary Land & Exploration Company 200 6,988
Tuboscope Vetco International Corporation (a) 600 11,963
Union Texas Petro Holdings, Inc. 600 12,563
USX-Marathon Group 1,700 49,088
78
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
------------------------
COMMON STOCKS (CONTINUED)
OIL & GAS EXTRACTION (4.9%) (CONTINUED)
Veritas DGC, Inc. (a) 2,400 $ 54,600
Vintage Petroleum, Inc. 500 15,375
YPE Sociedad Anonima 1,800 55,350
-----------
543,330
PAPER & ALLIED PRODUCTS (1.1%)
Asia Pulp & Paper Company Ltd (a) 500 7,563
Grupo Indus Durango (a) 1,200 18,300
Interpool, Inc. 1,650 24,338
James River Corporation of Virigina 600 22,200
Mail-Well, Inc. (a) 450 12,825
Mosinee Paper Corporation 949 23,073
Republic Gypsum Company 880 17,710
-----------
126,009
PETROLEUM & COAL PRODUCTS (2.2%)
Coastal Corporation 1,100 58,506
Elf Aquitaine 700 38,106
Ente Nazionale Idrocarburi SPA 300 17,063
Fina, Inc. 500 31,875
Imperial Oil Ltd 100 5,138
Murphy Oil Corporation 300 14,625
Phillips Petroleum Company 700 30,625
Sun Company, Inc. 500 15,500
Texaco, Inc. 100 10,875
79
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
------------------------
COMMON STOCKS (CONTINUED)
PETROLEUM & COAL PRODUCTS (2.2%) (CONTINUED)
Total S.A. 200 $ 10,125
Unocal Corporation 100 3,881
Valero Energy Corporation 100 3,625
-----------
239,944
PRIMARY METAL INDUSTRIES (5.1%)
AK Steel Holding Corporation 500 22,063
Alumax, Inc. (a) 600 22,763
British Steel Plc 1,700 42,925
Chaparral Steel Company 500 7,469
Inland Steel Industries, Inc. 600 15,675
Lone Star Technologies (a) 1,700 48,663
LTV Corporation 500 7,125
Mueller Industries, Inc. (a) 1,200 52,500
Oregon Metallurgical Corporation (a) 400 11,250
Oregon Steel Mills, Inc. 800 15,950
Pohang Iron & Steel Ltd 2,100 67,200
Quanex Corporation 400 12,275
RMI Titanium Company (a) 1,300 35,425
Roanoke Electric Steel Corporation 1,200 19,875
Tredegar Industries, Inc. 1,550 86,025
Tremont Corporation (a) 700 30,713
Tubos De Acero De Mex (a) 3,600 66,375
USX-U.S. Steel Company 200 7,013
-----------
571,284
80
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
------------------------
COMMON STOCKS (CONTINUED)
PRINTING & PUBLISHING (0.6%)
Bowne & Company, Inc. 200 $ 6,975
CSS Industries, Inc. (a) 100 3,163
Gibson Greetings, Inc. (a) 1,000 22,563
Graphic Industries 1,500 19,875
Quebecor, Inc. 800 14,900
Standard Register Company 100 3,063
----------
70,539
RAILROAD TRANSPORTATION (0.4%)
Canadian Pacific Ltd 1,700 48,344
RUBBER & MISCELLANEOUS PLASTICS PRODUCTS (0.9%)
American Filtrona Corporation 300 12,413
Furon Company 800 25,100
Gundle/SLT Environmental, Inc. (a) 500 2,500
Petro-Canada 300 4,875
Premark International, Inc. 600 16,050
Spartech Corporation 2,400 31,200
Vans, Inc. (a) 200 3,019
----------
95,157
SECURITY & COMMODITY BROKERS (3.6%)
Bear Stearns Companies, Inc. 1,286 43,965
Donaldson Lufkin & Jenrette, Inc. 600 35,850
Edwards (A.G.), Inc. 900 38,475
Interra Financial, Inc. 700 29,356
Jefferies Group, Inc. 1,100 62,700
Lehman Brothers Holdings 1,400 56,700
81
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
------------------------
COMMON STOCKS (CONTINUED)
SECURITY & COMMODITY BROKERS (3.6%) (CONTINUED)
Paine Webber Group, Inc. 200 $ 7,000
Quick & Reilly Group, Inc. 908 21,111
Raymond James Financial, Inc. 1,650 45,169
Salomon, Inc. 1,000 55,625
Value Line, Inc. 200 8,775
----------
404,726
SPECIAL TRADE CONTRACTORS (0.4%)
Apogee Enterprises, Inc. 1,300 27,869
Layne, Inc. (a) 800 17,550
----------
45,419
STONE, CLAY, & GLASS PRODUCTS (2.8%)
Centex Construction Products, Inc. 1,800 35,100
Hanson Plc 100 2,500
Intermet Corporation 2,800 45,063
Lafarge Corporation 1,100 26,950
Lone Star Industries 1,400 63,438
Medusa Corporation 1,100 42,213
Owens-Illinois, Inc. (a) 600 18,600
Southdown, Inc. 1,200 52,350
USG Corporation (a) 600 21,900
Vitro S.A. (a) 400 4,500
----------
312,614
82
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
------------------------
COMMON STOCKS (CONTINUED)
TEXTILE MILL PRODUCTS (0.6%)
Chemfab Corporation (a) 900 $ 18,900
Culp, Inc. 987 17,889
Guilford Mills, Inc. 900 18,731
Interface, Inc. 300 6,694
Mohawk Industries, Inc. (a) 100 2,263
Russell Corporation 100 2,963
Tultex Corporation (a) 400 2,450
-----------
69,890
LOCAL & INTERURBAN PASSENGER TRANSIT (0.1%)
Canadian National Railway Company 200 8,750
Greyhound Lines, Inc. (a) 1,500 6,656
-----------
15,406
TRANSPORTATION BY AIR (2.6%)
Airborne Freight Corporation 400 16,750
Alaska Airgroup, Inc. (a) 600 15,375
AMR Corporation (a) 700 64,750
British Airways Plc 500 57,469
Continental Airlines (a) 400 13,975
Delta Air Lines, Inc. 700 57,400
Federal Express Corporation (a) 100 5,775
KLM Royal Dutch Air (a) 839 25,904
UAL Corporation (a) 300 21,469
USAir Group, Inc. (a) 400 14,000
-----------
292,867
83
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
------------------------
COMMON STOCKS (CONTINUED)
TRANSPORTATION EQUIPMENT (3.5%)
AAR Corporation 400 $ 12,925
Arvin Industries, Inc. 600 16,350
Avondale Industries, Inc. (a) 1,100 23,306
Chrysler Corporation 1,400 45,938
Coachmen Industries, Inc. 1,200 20,550
Dana Corporation 500 19,000
Ford Motor Company 1,000 37,750
General Motors Corporation 100 5,569
Honda Motor Company Ltd 100 6,019
Mascotech, Inc. 700 14,613
MotivePower Industries Inc. (a) 1,000 15,938
Paccar, Inc. 400 18,575
Sequa Corporation (a) 900 50,738
Standard Products Company 600 15,150
Transtechnology Corporation 600 13,650
Trinity Industries 500 15,875
UNC, Inc. 500 7,313
Volvo AB (a) 1,700 45,581
-----------
384,840
TRANSPORTATION SERVICES (0.5%)
Gatx Corporation 400 23,100
PS Group Holdings, Inc. 1,200 15,450
Yellow Corporation (a) 500 11,156
-----------
49,706
84
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
------------------------
COMMON STOCKS (CONTINUED)
TRUCKING & WAREHOUSING (0.1%)
CNF Transportation, Inc. 200 $ 6,450
Roadway Express, Inc. 300 6,938
----------
13,388
WATER TRANSPORTATION (0.2%)
Oglebay Norton Company 100 4,400
OMI Corporation (a) 1,300 12,431
Stolt-Nielsen S.A. 300 5,700
----------
22,531
WHOLESALE TRADE - DURABLE GOODS (2.3%)
Aviall, Inc. (a) 500 7,000
Barnes Group, Inc. 1,300 38,513
Borg-Warner Automotive, Inc. 200 10,813
Hughes Supply, Inc. 1,200 48,000
Minerals & Resources Corporation Ltd S.A. 100 2,316
Reliance Steel & Aluminum Company 1,050 27,300
Rexel, Inc. (a) 1,700 31,450
Simpson Manufacturing Company (a) 300 7,875
Specialty Equipment Companies, Inc. (a) 500 7,375
United Industrial Corporation 500 4,469
Universal Forest Products 500 7,281
Wynn's International, Inc. 2,362 67,022
----------
259,414
85
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES
OR PRINCIPAL
AMOUNT VALUE
------------------------
COMMON STOCKS (CONTINUED)
WHOLESALE TRADE - NONDURABLE GOODS (0.8%)
Burlington Coat Factory Warehouse (a) 600 $ 11,700
Howell Corporation 100 2,000
Insilco Corporation (a) 100 3,713
Pennzoil Company 400 30,700
SUPERVALU, Inc. 100 3,450
United Stationers, Inc. (a) 700 16,975
Universal Corporation 600 19,050
-----------
87,588
-----------
TOTAL COMMON STOCKS (Cost $6,909,981) 9,598,851
SHORT-TERM SECURITIES (13.9%)
U.S. GOVERNMENT AGENCY (7.6%)
Federal National Mortgage Association Discount
Note, 5.40%, due 7/21/1997 $ 850,000 847,450
U.S. GOVERNMENT OBLIGATIONS (1.3%)
U.S. Treasury Bills, 5.15%, due 7/17/1997 150,000 149,657
86
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
PRINCIPAL
AMOUNT VALUE
------------------------
SHORT-TERM SECURITIES (CONTINUED)
REPURCHASE AGREEMENT (5.0%)
State Street Bank, 4.25%, due 7/1/1997
(Dated 6/30/1997, collateralized by U.S. Treasury
Note, 6.125%, due 5/15/1998, value $565,600) $ 553,835 $ 553,835
------------
TOTAL SHORT-TERM SECURITIES (Cost $1,550,942) 1,550,942
------------
TOTAL INVESTMENTS (100.0%) (Cost $8,460,923) $ 11,149,793
--------------
--------------
87
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
FUTURES CONTRACTS
UNREALIZED
EXPIRATION CONTRACT GAIN
DATE AMOUNT (LOSS)
------------------------------------------
8 Mid-Cap S&P 500
Futures Contracts-Short (b) 9/19/97 $ 1,158,400 $ (26,225)
6 Russell 2000
Futures Contracts-Short (b) 9/19/97 1,196,700 (5,313)
1 S&P 500
Futures Contract-Short (b) 9/18/97 445,125 5,928
---------------------------
$ 2,800,225 $ (25,610)
---------------------------
---------------------------
(a) Non-income producing
(b) At June 30, 1997, the market value of assets pledged to cover margin
requirements for open futures contracts was $149,657.
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the
year ended June 30, 1997, aggregated $5,205,539 and $7,900,271, respectively.
At June 30, 1997, appreciation for tax purposes aggregated $2,688,323, of
which $2,758,963 related to net unrealized appreciated investment securities
and $70,640 related to depreciated investment securities. The aggregate cost
of securities is $8,461,470 for tax purposes.
SEE ACCOMPANYING NOTES.
88
<PAGE>
Pinnacle Fixed Income Portfolio
Statement of Assets and Liabilities
June 30, 1997
ASSETS
Investment in securities, at value (cost $9,209,624)
-See accompanying schedule $ 9,286,579
Cash 17,845
Receivable for investment securities sold 169,267
Interest and other receivables 88,040
------------
TOTAL ASSETS 9,561,731
LIABILITIES
Payable for investment securities purchased 170,558
Accounts payable and accrued expenses 17,926
------------
TOTAL LIABILITIES 188,484
------------
NET ASSETS $ 9,373,247
------------
------------
Net Assets consist of:
Paid-in capital $ 8,853,880
Undistributed net investment income 551,509
Accumulated undistributed net realized loss on investments (109,097)
Net unrealized appreciation on investment securities 76,955
------------
NET ASSETS, for 846,474 shares outstanding $ 9,373,247
------------
------------
NET ASSET VALUE, offering and redemption price per share $ 11.07
------------
------------
SEE ACCOMPANYING NOTES.
89
<PAGE>
Pinnacle Fixed Income Portfolio
Statement of Operations
Year Ended June 30, 1997
INVESTMENT INCOME
Interest $ 670,103
EXPENSES
Investment advisory and management fees 68,188
Custody and accounting fees 49,818
Professional fees 15,246
Directors' fees and expenses 4,893
Other expenses 7,972
----------
Total expenses before reimbursement 146,117
Less: expense reimbursement (29,379)
----------
Net expenses 116,738
----------
Net investment income 553,365
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investments (12,480)
Change in unrealized appreciation on investment securities 153,322
----------
Net gain on investments 140,842
----------
Net increase in net assets resulting from operations $ 694,207
----------
----------
SEE ACCOMPANYING NOTES.
90
<PAGE>
Pinnacle Fixed Income Portfolio
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1997 1996
---------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 553,365 $ 331,808
Net realized gain (loss) on investments (12,480) 39,828
Change in net unrealized appreciation (depreciation) 153,322 (188,379)
---------------------------
Net increase in net assets resulting from operations 694,207 183,257
Distributions to shareholders from:
Net investment income (328,028) (268,795)
Capital share transactions:
Proceeds from sales of shares 848,067 5,775,502
Proceeds from reinvested dividends 328,028 268,795
Cost of shares redeemed (2,197,149) (1,346,134)
---------------------------
Net increase (decrease) in net assets resulting from
share transactions (1,021,054) 4,698,163
---------------------------
Total increase (decrease) in net assets (654,875) 4,612,625
NET ASSETS
Beginning of period 10,028,122 5,415,497
---------------------------
End of period (including undistributed net investment
income of $551,509 and $328,028, respectively) $ 9,373,247 $ 10,028,122
---------------------------
---------------------------
OTHER INFORMATION
Shares:
Sold 78,342 541,094
Issued through reinvestment of dividends 30,407 25,172
Redeemed (203,042) (123,043)
---------------------------
Net increase (decrease) (94,293) 443,223
---------------------------
---------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
91
<PAGE>
Pinnacle Fixed Income Portfolio
Financial Highlights
<TABLE>
<CAPTION>
JANUARY 5, 1993
(COMMENCEMENT OF
YEAR ENDED JUNE 30, OPERATIONS)
------------------------------------------------------- THROUGH JUNE 30,
1997 1996 1995 1994 1993
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of
period $ 10.66 $ 10.88 $ 10.00 $ 10.43 $ 10.00
Income from investment operations:
Net investment income 0.67 0.39 0.56 0.20 0.19
Net realized and unrealized gain
(loss) on investments 0.10 (0.03) 0.53 (0.52) 0.24
--------------------------------------------------------------------------
Total from investment operations 0.77 0.36 1.09 (0.32) 0.43
Less distributions:
From net investment income (0.36) (0.58) (0.21) (0.11) -
--------------------------------------------------------------------------
Net asset value, end of period $ 11.07 $ 10.66 $ 10.88 $ 10.00 $ 10.43
--------------------------------------------------------------------------
--------------------------------------------------------------------------
TOTAL RETURN (a) 7.33% 3.29% 11.08% (3.06%) 8.67%
RATIOS AND SUPPLEMENTAL DATA (b)
Net assets, end of period
(in thousands) $ 9,373 $ 10,028 $ 5,415 $ 4,861 $ 906
Ratio of expenses to average
net assets 1.20% 1.32% 1.40% 1.56% 1.56%
Ratio of net investment income
to average net assets 5.68% 5.18% 5.41% 3.62% 3.86%
Ratio of expenses to average net
assets before voluntary expense
reimbursement 1.50% 1.94% 1.59% 2.49% 15.72%
Ratio of net investment income
(loss) to average net assets before
voluntary expense reimbursement 5.38% 4.56% 5.22% 2.68% (1.64%)
Portfolio turnover rate 99% 392% 432% 527% 103%
</TABLE>
(a) Total returns for periods less than one year are not annualized.
(b) Data expressed as a percentage are annualized as appropriate.
J.P. Morgan Investment Management, Inc. became the sub-adviser of the Portfolio
effective April 1, 1996. Mitchell Hutchins Asset Management, Inc. provided
sub-advisory services prior to April 1, 1996.
92
<PAGE>
Pinnacle Fixed Income Portfolio
Schedule of Investments
June 30, 1997
PRINCIPAL
AMOUNT VALUE
-------------------------
CORPORATE BONDS (45.2%)
AUTO REPAIR, SERVICES, & PARKING (3.2%)
World Omni Automobile Lease Securitization Trust
Series 96-A, Class 1A, 6.30%, due 6/25/2002 $ 194,085 $ 194,358
Series 96-B, Class A1, 5.95%, due11/15/2002 100,000 100,188
-----------
294,546
COMMUNICATIONS (2.7%)
TCI Communications Inc., 7.875%, due 2/15/2026 60,000 57,660
United States West Cap Funding Inc., 7.90%,
due 2/1/2027 90,000 90,918
Worldcom Inc., 7.75%, due 4/1/2027 100,000 102,253
-----------
250,831
DEPOSITORY INSTITUTIONS (10.2%)
ABN AMRO Bank NV (Chicago), 7.55%, due 6/28/2006 200,000 206,274
Banc One Corporation, 7.625%, due 10/15/2026 100,000 98,998
Midland Bank Plc, 7.625%, due 6/15/2006 200,000 205,970
Nationsbank Corporation Medium Term Note, 5.75%, 200,000 193,654
due 1/25/2001
Nationsbank Corporation, 7.25%, due 10/15/2025 100,000 95,823
Trans Financial Bank N.A., 6.32%, due 10/17/1997 150,000 150,221
-----------
950,940
ELECTRIC, GAS & SANITARY SERVICES (4.4%)
Columbia Gas System, 7.62%, due 11/28/2025 200,000 194,494
Hydro Quebec, 9.50%, due 11/15/2030 175,000 211,967
-----------
406,461
NONDEPOSITORY INSTITUTIONS (16.0%)
Caterpillar Financial Asset Trust, Series 96,
Class A3, 6.30%, due 5/25/2002 250,000 249,688
93
<PAGE>
Pinnacle Fixed Income Portfolio
Schedule of Investments
PRINCIPAL
AMOUNT VALUE
-------------------------
CORPORATE BONDS (CONTINUED)
NONDEPOSITORY INSTITUTIONS (16.0%) (CONTINUED)
First Omni Bank Credit Card Master Trust 96,
Class A, 6.65%, due 9/15/2003 $ 200,000 $ 200,500
Ford Motor Credit Corporation, 5.75%,
due 1/25/2001 135,000 130,972
Ford Motor Credit Corporation, 7.47%,
due 7/29/1999 300,000 305,898
General Motors Acceptance Corporation, 6.7%, 300,000 301,569
due 6/24/1999
Sears Credit Account Master Trust, Series 96,
Class A, 6.50%, due 10/15/2003 200,000 200,875
The Money Store, Class 97B A3, 6.52%,
due 5/15/2014 100,000 99,859
-----------
1,489,361
TRANSPORTATION EQUIPMENT (6.1%)
Nationsbank Auto Owner Trust, 6.125%,
due 7/15/1999 216,383 216,788
Premier Auto Trust 95, Class A5, 6.15%,
due 3/06/2000 350,000 350,917
-----------
567,705
WHOLESALE TRADE - DURABLE GOODS (2.6%)
Eastman Chemical Company, 7.25%, due 1/15/2024 100,000 95,479
Gulf Canada Resources Limited, 8.25%,
due 3/15/2017 50,000 51,188
NGC Corporation, 7.625%, due 10/15/2026 100,000 99,235
-----------
245,902
-----------
TOTAL CORPORATE BONDS ($4,175,479) 4,205,746
GOVERNMENT SECURITIES (54.4%)
U.S. GOVERNMENT AGENCY - COLLATERALIZED MORTGAGE
OBLIGATIONS (10.1%)
Federal Home Loan Mortgage Corporation,
Gold Series, 8.50%, due 8/1/2026 174,361 181,171
94
<PAGE>
Pinnacle Fixed Income Portfolio
Schedule of Investments
PRINCIPAL
AMOUNT VALUE
-------------------------
GOVERNMENT SECURITIES (CONTINUED)
U.S. GOVERNMENT AGENCY - COLLATERALIZED MORTGAGE
OBLIGATIONS (10.1%) (CONTINUED)
Federal Home Loan Mortgage Corporation,
(continued)
Gold Series, 6.00%, due 4/1/2011 $ 137,378 $ 132,570
Gold Series, 6.50%, due 3/1/2026 192,869 184,973
Gold Series, 7.00%, due 2/1/2026 142,421 139,974
REMIC Series 1694, 6.50%, due 9/15/2023 310,000 302,250
-----------
940,938
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED
SECURITIES (32.7%)
Federal National Mortgage Association,
6.00%, due 4/1/2026 198,685 185,088
6.50%, due 11/25/2007 300,000 294,843
7.00%, due 1/1/2026 334,516 328,244
7.00%, due 4/1/2026 136,005 133,455
7.00%, due 4/1/2026 381,295 374,146
7.50%, due 7/1/2026 165,136 165,704
7.50%, due 8/1/2027* 170,000 170,106
8.00%, due 3/1/2027 1,500 1,533
8.00%, due 4/1/2026 1,167 1,194
8.50%, due 5/1/2009 105,784 109,156
Government National Mortgage Association,
7.00%, due 3/15/2026 191,766 188,230
7.50%, due 1/15/2026 244,008 244,694
7.50%, due 2/15/2027 99,458 99,738
8.00%, due 4/15/2022 232,997 239,838
8.00%, due 7/15/2005 18,770 19,427
8.00%, due 8/15/2026 192,258 196,703
8.00%, due 11/15/2006 24,944 25,867
95
<PAGE>
Pinnacle Fixed Income Portfolio
Schedule of Investments
PRINCIPAL
AMOUNT VALUE
-------------------------
GOVERNMENT SECURITIES (CONTINUED)
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED
SECURITIES (32.7%) (CONTINUED)
Government National Mortgage Association,
(continued)
9.00%, due 11/15/2017 $ 147,856 $ 158,759
9.00%, due 9/15/2017 92,509 99,330
-----------
3,036,055
U.S. GOVERNMENT OBLIGATIONS (10.6%)
U.S. Treasury Bonds,
6.75%, due 8/15/2026 100,000 98,969
7.125%, due 2/15/2023 75,000 77,250
U.S. Treasury Notes,
5.875%, due 2/15/2000 100,000 99,203
5.875%, due 11/15/2005 100,000 95,672
6.25%, due 4/30/2001 170,000 169,522
6.375%, due 9/30/2001 195,000 195,031
6.625%, due 6/30/2001 94,000 94,881
6.875%, due 5/15/2006 35,000 35,727
7.5%, due 2/15/2005 100,000 105,812
-----------
972,067
FOREIGN GOVERNMENT OBLIGATIONS (1.0%)
Republic of Italy, 6.875%, due 9/27/2023 100,000 93,780
-----------
TOTAL GOVERNMENT SECURITIES (Cost $4,996,152) 5,042,840
96
<PAGE>
Pinnacle Fixed Income Portfolio
Schedule of Investments
PRINCIPAL
AMOUNT VALUE
-------------------------
SHORT-TERM SECURITIES (0.4%)
REPURCHASE AGREEMENT (0.4%)
State Street Bank, 4.25%, due 7/1/1997
(Dated 6/30/1997, collateralized by U.S. Treasury
Note, 6.125%, due 5/15/1998, value $40,400) $ 37,993 $ 37,993
-------------
TOTAL SHORT-TERM SECURITIES (Cost $37,993) 37,993
-------------
TOTAL INVESTMENTS (100.0%) (Cost $9,209,624) $ 9,286,579
-------------
-------------
* Security purchased on a delayed delivery basis
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the
year ended June 30, 1997, aggregated $9,509,763 and $9,936,708, respectively.
At June 30, 1997, net unrealized appreciation for tax purposes aggregated
$70,528, of which $84,697 related to appreciated investment securities and
$14,169 related to depreciated investment securities. The aggregate cost of
securities is $9,216,051 for tax purposes.
SEE ACCOMPANYING NOTES.
97
<PAGE>
ARM Capital Advisors Money Market Portfolio
Statement of Assets and Liabilities
June 30, 1997
ASSETS
Investment in securities, at amortized cost
-See accompanying schedule $ 8,377,535
Cash 12,091
Interest and other receivables 3,603
------------
TOTAL ASSETS 8,393,229
LIABILITIES
Accounts payable and accrued expenses 17,586
------------
TOTAL LIABILITIES 17,586
------------
NET ASSETS, paid-in capital for 8,375,643 shares outstanding $ 8,375,643
------------
------------
NET ASSET VALUE, offering and redemption price per share $ 1.00
------------
------------
SEE ACCOMPANYING NOTES.
98
<PAGE>
ARM Capital Advisors Money Market Portfolio
Statement of Operations
Year Ended June 30, 1997
INVESTMENT INCOME
Interest $ 462,722
EXPENSES
Investment advisory and management fees 43,053
Custody and accounting fees 49,592
Professional fees 17,254
Directors' fees and expenses 4,884
Other expenses 7,009
------------
Total expenses before reimbursement 121,792
Less: expense reimbursement (35,814)
------------
Net expenses 85,978
------------
Net investment income 376,744
------------
Net increase in net assets resulting from operations $ 376,744
------------
------------
SEE ACCOMPANYING NOTES.
99
<PAGE>
ARM Capital Advisors Money Market Portfolio
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1997 1996
---------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 376,744 $ 407,014
Distributions to shareholders from:
Net investment income (376,744) (407,014)
Capital share transactions at net asset value of $1.00
per share:
Proceeds from sales of shares 22,641,513 18,569,332
Proceeds from reinvested distributions 376,744 407,014
Cost of shares redeemed (23,498,461) (16,873,594)
---------------------------
Net increase (decrease) in net assets resulting
from share transactions (480,204) 2,102,752
---------------------------
Total increase (decrease) in net assets (480,204) 2,102,752
NET ASSETS
Beginning of period 8,855,847 6,753,095
---------------------------
End of period $ 8,375,643 $ 8,855,847
---------------------------
---------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
100
<PAGE>
ARM Capital Advisors Money Market Portfolio
Financial Highlights
<TABLE>
<CAPTION>
JANUARY 12, 1993
(COMMENCEMENT OF
YEAR ENDED JUNE 30, OPERATIONS)
---------------------------------------------------------- THROUGH JUNE 30,
1997 1996 1995 1994 1993
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of
period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from investment operations:
Net investment income 0.04 0.05 0.04 0.02 0.01
Less distributions:
From net investment income (0.04) (0.05) (0.04) (0.02) (0.01)
---------------------------------------------------------------------------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------------------------------------------------------------------------
---------------------------------------------------------------------------
TOTAL RETURN (a) 4.38% 4.55% 4.30% 2.04% 1.66%
RATIOS AND SUPPLEMENTAL DATA (b)
Net Assets, end of period (in
thousands) $ 8,376 $ 8,856 $ 6,753 $ 5,452 $ 754
Ratio of expenses to average
net assets 1.00% 1.12% 1.15% 1.29% 1.34%
Ratio of net investment income
to average net assets 4.38% 4.67% 4.31% 2.19% 1.67%
Ratio of expenses to average net
assets before voluntary expense
reimbursement 1.42% 1.46% 1.27% 2.08% 22.41%
Ratio of net investment income
(loss) to average net assets before
voluntary expense reimbursement 3.96% 4.33% 4.20% 1.40% (2.05%)
</TABLE>
(a) Total returns for periods less than one year are not annualized.
(b) Data expressed as a percentage are annualized as appropriate.
ARM Capital Advisors, Inc. began managing the Portfolio directly without a
sub-adviser effective April 1, 1996. Mitchell Hutchins Asset Management, Inc.
provided sub-advisory services prior to April 1, 1996.
101
<PAGE>
ARM Capital Advisors Money Market Portfolio
Schedule of Investments
June 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
-------------------------------------
<S> <C> <C>
SHORT-TERM SECURITIES (100.0%)
COMMERCIAL PAPER (97.3%)
NONDEPOSITORY INSTITUTIONS (91.3%)
American Express, 5.52%, due 7/1/1997 $ 423,000 $ 423,000
Associate Corporation, 5.54%, due 7/8/1997 500,000 499,458
Avco Financial Service, Inc., 5.58%, due 7/7/1997 500,000 499,535
Beneficial Corporation, 5.54%, due 7/3/1997 415,000 413,526
Chevron Corporation, 5.50%, due 7/9/1997 420,000 419,487
Cit Group Holdings, 5.53%, due 7/21/1997 419,000 417,713
Ford Motor Credit Corporation, 5.52%, due 7/15/1997 418,000 417,103
General Electric Capital Corporation, 5.55%, due 7/23/1997 403,000 401,633
General Motors, 5.50%, due 7/3/1997 415,000 414,873
Household Finance Corporation, 5.50%, due 7/14/1997 419,000 418,168
IBM Credit Corporation, 5.53%, due 7/18/1997 414,000 412,919
John Deere Capital Corportation, 5.50%, due 7/10/1997 419,000 418,424
New Center Asset Trust, 5.52%, due 7/25/1997 418,000 416,462
Norwest Financial, Inc., 5.53%, due 7/17/1997 416,000 414,978
Prudential Funding Corporation, 5.52%, due 7/16/1997 416,000 415,043
San Paolo U.S. Financing Company, 5.49%, due 7/2/1997 430,000 429,934
Sears, 5.55%, due 7/22/1997 406,000 404,686
Texaco, 5.55%, due 7/11/1997 414,000 413,362
-----------
7,650,304
</TABLE>
102
<PAGE>
ARM Capital Advisors Money Market Portfolio
Schedule of Investments (continued)
PRINCIPAL
AMOUNT VALUE
-------------------------
COMMERCIAL PAPER (CONTINUED)
INSURANCE CARRIERS (6.0%)
American General Finance Life, 5.55%, due
7/11/1997 $ 499,000 $ 498,231
-----------
TOTAL COMMERCIAL PAPER (Cost $8,148,535) 8,148,535
OTHER SHORT-TERM SECURITIES (2.7%)
REPURCHASE AGREEMENT (2.7%)
State Street Bank, 4.25%, due 7/1/1997
(Dated 6/30/1997, collateralized by U.S. Treasury
Note, 6.125%, due 5/15/1998, value $237,350) 229,000 229,000
-----------
TOTAL OTHER SHORT-TERM SECURITIES (Cost $229,000) 229,000
-----------
TOTAL SHORT-TERM SECURITIES (100.0%) (Cost $8,377,535) $ 8,377,535
-----------
-----------
OTHER INFORMATION:
The aggregate cost of securities is the same for book and tax purposes.
SEE ACCOMPANYING NOTES.
103
<PAGE>
Morgan Stanley Asian Growth Portfolio
Statement of Assets and Liabilities
June 30, 1997
ASSETS
Investment in securities, at value (cost $11,602,551)
-See accompanying schedule $ 12,799,601
Receivable for investment securities sold 271,084
Dividends, interest and other receivables 103,811
Deferred organization costs 4,455
-------------
TOTAL ASSETS 13,178,951
LIABILITIES
Cash overdraft 124,182
Payable for investment securities purchased 181,330
Accounts payable and accrued expenses 52,420
-------------
TOTAL LIABILITIES 357,932
-------------
NET ASSETS $ 12,821,019
-------------
-------------
Net Assets consist of:
Paid-in capital $ 12,017,446
Accumulated undistributed net realized loss on
investments and foreign currency transactions (380,424)
Net unrealized appreciation on investments and
assets and liabilities in foreign currencies 1,183,997
-------------
NET ASSETS, for 1,192,105 shares outstanding $ 12,821,019
-------------
-------------
NET ASSET VALUE, offering and redemption price per share $ 10.75
-------------
-------------
SEE ACCOMPANYING NOTES.
104
<PAGE>
Morgan Stanley Asian Growth Portfolio
Statement of Operations
Year Ended June 30, 1997
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $23,311) $ 183,184
Interest 38,560
-------------
Total Investment Income 221,744
EXPENSES
Investment advisory and management fees 135,034
Custody and accounting fees 211,247
Professional fees 17,240
Directors' fees and expenses 4,893
Other expenses 8,272
-------------
Total expenses before reimbursement 376,686
Less: expense reimbursement (129,929)
-------------
Net expenses 246,757
-------------
Net investment loss (25,013)
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY
Net realized loss on:
Investment securities (302,176)
Foreign currency transactions (8,418)
-------------
Net realized loss (310,594)
Change in unrealized appreciation (depreciation) on:
Investment securities 146,681
Foreign currency (13,077)
-------------
Net unrealized appreciation 133,604
Net loss on investments and foreign currencies (176,990)
-------------
Net decrease in net assets resulting from operations $ (202,003)
-------------
-------------
SEE ACCOMPANYING NOTES.
105
<PAGE>
Morgan Stanley Asian Growth Portfolio
Statement of Changes in Net Assets
YEAR ENDED JUNE 30,
1997 1996
-------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment loss $ (25,013) $ (16,890)
Net realized loss on investments and
foreign currency transactions (310,594) (28,598)
Change in net unrealized appreciation on
investments and translation of assets and
liabilities in foreign currency 133,604 832,114
-------------------------------
Net increase (decrease) in net
assets resulting from operations (202,003) 786,626
Distributions to shareholders from:
Net investment income - (46,376)
Net realized gain on investments - (14,536)
-------------------------------
Total distributions - (60,912)
Capital share transactions:
Proceeds from sales of shares 1,785,077 5,146,338
Proceeds from reinvested distributions - 60,912
Cost of shares redeemed (3,714,150) (3,805,532)
-------------------------------
Net increase (decrease) in net
assets resulting from share transactions (1,929,073) 1,401,718
-------------------------------
Total increase (decrease) in net assets (2,131,076) 2,127,432
NET ASSETS
Beginning of period 14,952,095 12,824,663
-------------------------------
End of period $ 12,821,019 $ 14,952,095
-------------------------------
-------------------------------
OTHER INFORMATION
Shares:
Sold 169,723 482,863
Issued through reinvestment of distributions - 6,543
Redeemed (354,863) (371,590)
-------------------------------
Net increase (decrease) (185,140) 117,816
-------------------------------
-------------------------------
SEE ACCOMPANYING NOTES.
106
<PAGE>
Morgan Stanley Asian Growth Portfolio
Financial Highlights
<TABLE>
<CAPTION>
JUNE 15, 1994
(COMMENCEMENT
YEAR ENDED JUNE 30, OF OPERATIONS)
----------------------------------------------------- THROUGH JUNE 30,
1997 1996 1995 1994
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 10.86 $ 10.18 $ 10.00 $ 10.00
Income from investment operations:
Net investment income (loss) (0.02) (0.01) 0.01 - (a)
Net realized and unrealized gain (loss) on investments (0.09) 0.74 0.17 -
-----------------------------------------------------------------------
Total from investment operations (0.11) 0.73 0.18 -
Less distributions:
From net investment income - (0.04) - (a) -
From net realized gain - (0.01) - -
-----------------------------------------------------------------------
Total distributions - (0.05) - -
-----------------------------------------------------------------------
Net asset value, end of period $ 10.75 $ 10.86 $ 10.18 $ 10.00
-----------------------------------------------------------------------
-----------------------------------------------------------------------
TOTAL RETURN (b) (1.01%) 7.19% 1.80% 0.52%
RATIOS AND SUPPLEMENTAL DATA (c)
Net assets, end of period (in thousands) $ 12,821 $ 14,952 $ 12,825 $ 1,905
Ratio of expenses to average net assets 2.00% 2.00% 1.92% 0.75%
Ratio of net investment income (loss) to
average net assets (0.19%) (0.13%) 0.76% 0.59%
Ratio of expenses to average net assets
before voluntary expense reimbursement 2.96% 2.21% 1.92% 9.79%
Ratio of net investment income (loss) to
average net assets before voluntary expense reimbursement (1.15%) (0.34%) 0.76% (8.44%)
Portfolio turnover rate 91% 51% 30% -
Average commission paid per equity
share traded (d) $ .0104
</TABLE>
(a) Less than $0.01 per share.
(b) Total returns for periods less than one year are not annualized.
(c) Data expressed as a percentage are annualized as appropriate.
(d) Disclosure required for fiscal years beginning after September 1, 1995.
107
<PAGE>
Morgan Stanley Asian Growth Portfolio
Schedule of Investments
June 30, 1997
NUMBER
OF SHARES VALUE
-------------------------
COMMON STOCKS (96.1%)
CHINA (1.1%)
First Tractor Company* 43,000 $ 28,308
Qingling Motors Company 117,000 60,410
Zhejiang Expressway Company* 196,000 47,564
------------
136,282
HONG KONG (35.9%)
Cheung Kong Holdings Ltd 83,000 819,609
China Merchants Hai Hong 16,000 49,774
China Resources Enterprise Ltd 110,000 539,564
Dao Heng Bank Group Ltd 25,000 136,827
Guangshen Railway Company Ltd 71,000 31,160
Hang Seng Bank 15,400 219,659
Henderson Land Development 53,000 470,343
HSBC Holdings Plc 23,855 717,467
Hutchison Whampoa 66,000 570,802
New World Development Company 40,000 238,544
Ng Fung Hong Ltd 40,000 59,894
Shanghai Industrial Holdings Ltd 70,000 435,523
Shenzhen Fangda Company Ltd-B Shares 23,000 33,400
Sun Hung Kai Properties 23,000 276,849
------------
4,599,415
INDONESIA (8.1%)
Bank International Indonesia Warrants 9,021 3,524
Bank Negara Indonesia 154,000 98,150
Bimantara Citra 28,500 49,805
Hanjaya Mandala Sampoern 16,000 61,020
108
<PAGE>
Morgan Stanley Asian Growth Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
-------------------------
COMMON STOCKS (CONTINUED)
INDONESIA (8.1%) (CONTINUED)
Matahari Putra Prima 42,000 $ 84,622
PT Astra International* 40,000 164,474
PT Bank International Indonesia* 101,503 87,647
PT Gudang Garam 15,000 62,911
PT Indofood Surkes 38,400 88,421
PT Mayora Indah 42,000 23,746
PT Putra Surya Multidana* 143,000 227,847
PT Telekomunikasi 48,500 79,271
------------
1,031,438
LUXEMBOURG (2.9%)
Korea Asia Fund* 41 374,125
MALAYSIA (15.2%)
Arab Malaysian Corporation 11,000 40,967
Berjaya Group Berhad, A Shares 122,000 149,842
Berjaya Sports Toto Berhad 13,000 61,292
Commerce Asset Holdings* 43,000 113,292
Commerce Asset Holdings Warrants 8,000 475
Commerce Asset Holdings Warrants 5,000 -
Dialog Group Berhad 8,000 115,689
Edaran Otomobil Nasional 12,000 102,219
Genting Berhad 24,000 115,055
IJM Corporation 29,000 60,895
Jaya Tiasa Holdings Berhad 23,000 115,729
Leader Universal Holding 27,000 48,566
Lityan Holdings Berhad 1,000 12,183
Malayan Banking Berhad 16,000 167,987
Malaysian Pacific Industries 9,000 39,223
109
<PAGE>
Morgan Stanley Asian Growth Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
-------------------------
COMMON STOCKS (CONTINUED)
MALAYSIA (15.2%) (CONTINUED)
Malaysian Resources Corporation 18,000 $ 49,564
Multi-Purpose Holdings 29,000 40,674
Rashid Hussain Berhad Warrants 2,714 -
Rashid Hussain Berhad* 19,000 120,444
Resorts World Berhad 48,000 144,532
Sime Darby Berhad 94,000 312,837
United Engineers Ltd 18,000 129,794
------------
1,941,259
PHILIPPINES (3.6%)
Ayala Land Inc., B Shares 181,625 166,985
Digital Telecom Phillipines, Inc.* 490,000 47,373
DMCI Holdings* 189,600 62,539
Fil-Estate Land, Inc* 90,000 26,274
Manila Electric Company, B Shares 17,485 86,179
SM Prime Holdings Ltd 237,760 70,311
------------
459,661
SINGAPORE (12.5%)
Development Bank Singapore 9,000 113,310
Electronic Resources Ltd 36,000 56,655
Electronic Resources Ltd Warrants 18,000 11,961
Jg Summit Holdings, B Shares 105,600 21,620
Jurong Shipyard Ltd 13,000 56,375
Natsteel Ltd 93,000 236,777
Noble Group Ltd* 167,000 130,260
Oversea Chinese Banking 11,160 115,526
Pacific Century Regional* 32,000 44,541
110
<PAGE>
Morgan Stanley Asian Growth Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
-------------------------
COMMON STOCKS (CONTINUED)
SINGAPORE (12.5%) (CONTINUED)
Parkway Holdings 20,000 $ 89,529
Singapore Press Holdings Ltd 12,200 245,758
Sm Summit Holdings Ltd 105,000 79,317
Super Coffeemix Manufacturing* 223,000 185,612
United Overseas Bank 9,000 92,537
Wing Tai 43,000 123,914
------------
1,603,692
SOUTH KOREA (4.8%)
Kookmin Bank* 6,145 129,813
Korea Electric Power 15,500 292,001
Samsung Electronics 3,328 197,183
Samsung Electronics-New 54 1,507
------------
620,504
TAIWAN (7.1%)
Acer, Inc.* 16,000 278,000
Asustek Computer, Inc.* 21,000 231,735
Siliconware Precision Industries* 14,000 238,000
Want Want Holdings* 48,000 159,360
------------
907,095
THAILAND (4.9%)
Bangkok Bank 16,700 119,622
Big C Supercenter Public 28,000 9,239
Eastern Water Resources 10,900 13,159
111
<PAGE>
Morgan Stanley Asian Growth Portfolio
Schedule of Investments (continued)
NUMBER
OF SHARES VALUE
-------------------------
COMMON STOCKS (CONTINUED)
THAILAND (4.9%) (CONTINUED)
I.C.C. International 3,000 $ 9,779
Matichon Public Company Ltd 6,000 14,487
Nation Multimedia Group 9,000 19,920
National Petrochemical Plc 78,600 83,819
Post Publishing Company 8,000 8,370
Quality House Plc 11,000 3,895
Robinson Dept Store 33,000 12,217
Siam Commercial Bank 20,900 89,151
Sino-Thai Engr* 7,000 20,282
Thai Farmers Bank 20,300 89,859
Thai Magnetic Public Company 37,000 65,513
Thai Rung Union Car 4,000 15,050
Thai Stanley Electric 5,000 10,865
Thai Storage Battery Plc 6,000 6,278
Thai Theparos Food 7,000 11,268
United Communication Industry 6,400 27,557
------------
630,330
------------
TOTAL COMMON STOCKS (Cost $11,099,122) 12,303,801
112
<PAGE>
Morgan Stanley Asian Growth Portfolio
Schedule of Investments (continued)
PRINCIPAL
AMOUNT VALUE
-------------------------
CORPORATE BONDS (3.9%)
TAIWAN (3.9%)
Far Eastern Textile, 4.00%, due 10/7/2006 $ 190,000 $ 252,700
Nan Ya Plastics, 1.75%, due 7/19/2001 170,000 243,100
------------
495,800
TOTAL CORPORATE BONDS (Cost $503,429) 495,800
------------
TOTAL INVESTMENTS (100.00%)(Cost $11,602,551) $ 12,799,601
------------
------------
* Non-income producing
FOREIGN EXCHANGE CONTRACTS
At June 30, 1997, Morgan Stanley Asian Growth Portfolio has the following
open forward foreign exchange contracts to sell currency (excluding foreign
currency contracts used for purchase and sale settlements):
Settlement Contract Contract Current Unrealized
Currency Date Amount Rate Rate Loss
- --------------------------------------------------------------------------------
Thai Bat 8/18/1997 12,797,100 26.55 25,897 $ (12,153)
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the
year ended June 30, 1997, aggregated $12,215,482 and $12,886,729,
respectively. At June 30, 1997, net unrealized appreciation for tax
purposes aggregated $1,197,050, of which $2,186,561 related to appreciated
investment securities and $989,511 related to depreciated investment
securities. The aggregate cost of securities is the same for book and tax
purposes.
SEE ACCOMPANYING NOTES.
113
<PAGE>
Morgan Stanley Asian Growth Portfolio
Schedule of Investments (continued)
As of June 30,1997, the Portfolio had investments in the following industries.
PERCENT OF
TOTAL
INVESTMENTS
-----------
INDUSTRY
Amusement & Recreation Services 0.9%
Automotive Dealers & Service Stations 1.3
Chemicals & Allied Products 0.1
Communications 1.0
Depository Institutions 16.8
Electric, Gas, & Sanitary Services 3.7
Electronic & Other Electric Equipment 6.2
Fabricated Metal Products 0.3
Food & Kindred Products 4.1
General Building Contractors 0.5
General Merchandise Stores 0.8
Heavy Construction, Excluding Buildings 4.0
Holding & Other Investment Offices 8.4
Hotels & Other Lodging Places 1.1
Industrial Machinery & Equipment 4.2
Instruments & Related Products 0.2
Miscellaneous Manufacturing Industries 3.4
Nondepository Institutions 3.1
Oil & Gas Extraction 0.9
Paper & Allied Products 2.2
Primary Metal Industries 2.9
Printing & Publishing 2.3
Railroad Transportation 0.2
Real Estate 25.3
Textile Mill Products 2.0
Tobacco Products 1.0
Transportation Equipment 0.5
Wholesale Trade - Durable Goods 1.4
Wholesale Trade - Nondurable Goods 1.2
-----------
100.0%
-----------
-----------
SEE ACCOMPANYING NOTES.
114
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Statement of Assets and Liabilities
June 30, 1997
ASSETS
Investment in securities, at value (cost $7,170,825)
-See accompanying schedule $ 7,593,075
Receivable for investment securities sold 128,217
Cash 8,121
Deferred organization costs 4,461
------------
TOTAL ASSETS 7,733,874
------------
LIABILITIES
Payable for investment securities purchased 165,735
Accounts payable and accrued expenses 22,788
------------
TOTAL LIABILITIES 188,523
------------
NET ASSETS $ 7,545,351
------------
------------
Net Assets consist of:
Paid-in capital $ 6,039,988
Undistributed net investment income 557,201
Accumulated undistributed net realized gain on investments
and foreign currency transactions 525,912
Net unrealized appreciation on investment securities 422,250
------------
NET ASSETS, for 589,274 shares outstanding $ 7,545,351
------------
------------
NET ASSET VALUE, offering and redemption price per share $ 12.80
------------
------------
SEE ACCOMPANYING NOTES.
115
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Statement of Operations
Year Ended June 30, 1997
INVESTMENT INCOME
Dividends $ 4,548
Interest 659,570
------------
Total investment income 664,118
EXPENSES
Investment advisory and management fees 55,370
Custody and accounting fees 50,955
Professional fees 17,240
Directors' fees and expenses 6,010
Other expenses 7,731
------------
Total expenses before reimbursement 137,306
Less: expense reimbursement (16,779)
------------
Net expense 120,527
------------
Net investment income 543,591
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY
Net realized gain (loss) on:
Investment securities 525,912
Foreign currency transactions (2,296)
------------
Net realized gain 523,616
Change in unrealized appreciation on investment securities 412,972
------------
Net gain on investments 936,588
------------
Net increase in net assets resulting from operations $ 1,480,179
------------
------------
SEE ACCOMPANYING NOTES.
116
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1997 1996
---------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 543,591 $ 616,219
Net realized gain on investments and foreign
currency transactions 523,616 142,020
Change in net unrealized appreciation 412,972 276,653
---------------------------
Net increase in net assets resulting from operations 1,480,179 1,034,892
Distributions to shareholders from:
Net investment income (599,736) (532,957)
Net realized gain on investments (52,530) (6,625)
---------------------------
Total distributions (652,266) (539,582)
Capital share transactions:
Proceeds from sales of shares 2,951,997 1,113,906
Proceeds from reinvested distributions 652,266 539,582
Cost of shares redeemed (2,676,293) (2,601,227)
---------------------------
Net increase (decrease) in net assets from share
transactions 927,970 (947,739)
---------------------------
Total increase (decrease) in net assets 1,755,883 (452,429)
NET ASSETS
Beginning of period 5,789,468 6,241,897
---------------------------
End of period (including undistributed net investment
income of $557,201 and $615,642, respectively) $ 7,545,351 $ 5,789,468
---------------------------
---------------------------
OTHER INFORMATION
Shares:
Sold 241,908 103,380
Issued through reinvestment of distributions 56,848 54,452
Redeemed (224,491) (242,988)
---------------------------
Net increase (decrease) 74,265 (85,156)
---------------------------
---------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
117
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Financial Highlights
<TABLE>
<CAPTION>
JUNE 15, 1994
(COMMENCEMENT OF
YEAR ENDED JUNE 30, OPERATIONS)
----------------------------------------- THROUGH JUNE 30,
1997 1996 1995 1994
-----------------------------------------------------------
<S> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 11.24 $ 10.40 $ 10.00 $ 10.00
Income from investment operations:
Net investment income 0.90 1.25 0.89 -(a)
Net realized and unrealized gain (loss)
on investments 1.91 0.54 (0.49) -
-----------------------------------------------------------
Total from investment operations 2.81 1.79 0.40 -
Less distributions:
From net investment income (1.15) (0.94) -(a) -
From net realized gain on investments (0.10) (0.01) - -
-----------------------------------------------------------
Total distributions (1.25) (0.95) - -
-----------------------------------------------------------
Net asset value, end of period $ 12.80 $ 11.24 $ 10.40 $ 10.00
-----------------------------------------------------------
-----------------------------------------------------------
TOTAL RETURN (b) 26.32% 18.41% 4.00% 0.79%
RATIOS AND SUPPLEMENTAL DATA (c)
Net assets, end of period
(in thousands) $ 7,545 $ 5,789 $ 6,242 $ 687
Ratio of expenses to average
net assets 1.85% 1.85% 1.61% 0.85%
Ratio of net investment income
to average net assets 8.35% 10.04% 9.28% 0.80%
Ratio of expenses to average net
assets before voluntary expense
reimbursement 2.11% 2.06% 1.61% 24.78%
Ratio of net investment income (loss)
to average net assets before voluntary
expense reimbursement 8.09% 9.83% 9.28% (23.13%)
Portfolio turnover rate 124% 122% 142% -
</TABLE>
(a) Less than $0.01 per share.
(b) Total returns for periods less than one year are not annualized.
(c) Data expressed as a percentage are annualized as appropriate.
118
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Schedule of Investments
June 30, 1997
PRINCIPAL
AMOUNT VALUE
------------------------
CORPORATE BONDS (88.7%)
ALGERIA (2.7%)
Algeria Loan Agreement, 6.625%, due 3/31/2005 $ 229,711 $ 201,428
ARGENTINA (9.1%)
Acindar Industrias Argentina, 11.30%,
due 11/12/1998 (c) 200,000 208,500
Industrias Metalurgicas Pescarmona S.A., 11.75%,
due 3/27/1998 (a) 250,000 259,844
Republic of Argentina, 6.75%, due 3/31/2005 (c) 242,500 228,405
-----------
696,749
BRAZIL (9.4%)
Banco Do Brasil S.A., 9.375%, due 6/15/2007 (a) 100,000 99,750
Brazil NMB L, 6.938%, due 4/15/2009 (c) 500,000 438,437
Republic of Brazil, 10.125%, due 5/15/2027 88,000 84,832
Republic of Brazil, 8.00%, due 4/15/2014 (c) 112,065 90,107
-----------
713,126
BULGARIA (4.8%)
Bulgaria, 6.563%, due 7/28/2011 (c) 500,000 361,562
CANADA (1.2%)
Rogers Cablesystems, 10.00%, due 3/15/2005 70,000 75,600
Rogers Communications, Inc., 9.125%, due 1/15/2006 15,000 15,075
-----------
90,675
119
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Schedule of Investments (continued)
PRINCIPAL
AMOUNT VALUE
------------------------
CORPORATE BONDS (CONTINUED)
COLUMBIA (0.8%)
Occidente Y Caribe Cellular, 0.0%,
due 3/15/2004 (b) $ 85,000 $ 63,750
Occidente Y Caribe Warrants 340 3
-----------
63,753
ECUADOR (1.4%)
Consorcio Ecuatoriano Te, 14.00%, due 5/1/2002 100,000 106,250
INDONESIA (3.3%)
APP International Finance BV, 8.297%,
due 6/28/1999 (c) 250,000 248,227
IVORY COAST (1.8%)
Ivory Coast, 2.00%, due 12/29/2049 (d) 400,000 133,500
MEXICO (4.1%)
Cemex SA de C.V., 9.50%, due 9/20/2001 (a) 300,000 310,500
NIGERIA (1.7%)
Nigeria Promissory Notes, 5.092%, due 1/5/2010 250,000 130,937
PANAMA (2.0%)
Republic of Panama, 7.875%, due 2/13/2002 150,000 149,250
PERU (5.9%)
Peru Republic, 3.25%, due 3/7/2017 (c)(d) 750,000 448,125
120
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Schedule of Investments (continued)
PRINCIPAL
AMOUNT VALUE
-------------------------
CORPORATE BONDS (CONTINUED)
RUSSIA (1.9%)
Ministry Finance Russia, 3.00%, due 5/14/2003 (a) $ 220,000 $ 147,620
UNITED STATES (32.8%)
Advanced Micro Devices, Inc., 11.00%, due 8/1/2003 55,000 61,256
Aircraft Lease Portfolio Securitization Ltd,
12.75%, due 6/15/2006 (a) 49,863 53,758
Amresco, Inc., 10.00%, due 3/15/2004 40,000 41,050
Anthem Insurance Company, Inc., 9.00%,
due 4/1/2027 (a) 75,000 77,200
Big Flower Press, 8.875%, due 7/1/2007 (a) 60,000 58,950
Brooks Fiber Properties, 0.0%, due 11/1/2006 (b) 120,000 78,150
Brooks Fiber Properties, 10.00%, due 6/1/2007 (a) 10,000 10,175
Cablevision Systems, 9.875%, due 5/15/2006 55,000 58,575
Cleveland Electric Illuminating Company, 8.375%,
due 12/1/2011 20,000 20,150
Comcast Cellular, 9.50%, due 5/01/2007 (a) 50,000 50,250
Courtyard By Marriott, 10.75%, due 2/01/2008 50,000 54,063
Digital Equipment, 8.625%, due 11/1/2012 15,000 15,248
Dr. Structured Finance, 7.60%, due 8/15/2007 86,935 82,845
Echostar Satellite Broadcasting, 0.0%,
due 3/15/2000 (b) 25,000 18,000
First Nationwide Holdings, 10.625%,
due 10/1/2003 (a) 50,000 54,750
Gaylord Container Corporation, 11.50%,
due 5/15/2001 75,000 78,844
Globalstar LP/Capital, 11.375%, due 2/15/2004 (a) 60,000 60,150
Grand Casinos, Inc., 10.125%, due 12/01/2003 60,000 62,400
HMC Acquisition Properties, 9.00%, due 12/15/2007 35,000 35,569
121
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Schedule of Investments (continued)
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED) -----------------------
UNITED STATES (32.8%) (CONTINUED)
Horseshoe Gaming, 9.375%, due 6/15/2007 (a) $ 35,000 $ 35,175
Host Marriott Travel Plaza, 9.50%, due 5/15/2005 50,000 52,375
ISP Holdings, Inc., 9.00%, due 10/15/2003 70,000 72,100
IXC Communications, Inc., 12.50%, due 10/1/2005 40,000 45,350
Kmart Corporation, 7.75%, due 10/1/2012 35,000 32,025
Midland Cogeneration Vent, 10.33%, due 7/23/2002 6,836 7,314
Midland Funding Corporation I, 10.33%,
due 7/23/2002 36,803 39,380
Midland Funding Corporation II, 11.75%,
due 7/23/2005 15,000 17,460
Navistar Financial Corporation, 9.00%,
due 6/1/2002 (a) 10,000 10,238
Nextel Communications, 0.00%, due 8/15/2004 (b) 200,000 153,000
Norcal Waste Systems, 13.00%, due 11/15/2005 (c) 85,000 95,200
Nuevo Energy Company, 9.50%, due 4/15/2006 35,000 36,400
Outdoor Systems, 8.875%, due 6/15/2007 (a) 65,000 63,050
Paramount Communications, 8.25%, due 8/1/2022 60,000 57,433
Qwest Communications International, 10.875%,
due 4/1/2007 (a) 40,000 43,450
Riggs Capital Trust, 8.875%, due 3/15/2027 (a) 50,000 50,875
SD Warren Company, 12.00%, due 12/15/2004 65,000 72,150
Sinclair Broadcasting, 9.00%, due 7/15/2007 (a) 25,000 24,281
Snyder Oil Corporation, 8.75%, due 6/15/2007 40,000 39,800
Southland Corporation, 5.00%, due 12/15/2003 80,000 67,300
Station Casinos, Inc., 9.75%, due 4/15/2007 (a) 50,000 50,500
TCI Satellite Entertainment, 0.0%,
due 2/15/2007 (a) (b) 105,000 62,993
Tele Communications, Inc., 9.25%, due 1/15/2023 65,000 67,679
Teleport Communications, 0.0%, due 7/1/2001 (b) 100,000 72,250
122
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Schedule of Investments (continued)
NUMBER OF
SHARES
OR PRINCIPAL
AMOUNT VALUE
-------------------------
CORPORATE BONDS (CONTINUED)
UNITED STATES (32.8%) (CONTINUED)
Tenet Health Care Corporation, 8.625%,
due 1/15/2007 $ 40,000 $ 40,800
TLC Beatrice International Holdings, 11.50%,
due 10/01/2005 85,000 96,050
Transamerican Energy, 0.0%, due 6/15/2002 (a) (b) 15,000 10,823
Viacom International, 8.00%, due 7/7/2006 65,000 63,050
Vintage Petroleum, 8.625%, due 2/1/2009 45,000 44,831
-----------
2,494,715
VENEZUELA (5.8%)
Venezuela, 6.75%, due 3/31/2007 (c)(d) 476,190 442,920
-----------
TOTAL CORPORATE BONDS (Cost $6,343,948) 6,739,337
PREFERRED STOCKS (2.9%)
UNITED STATES (2.9%)
Sinclair Capital, 11.625%, due 3/15/2009 (a) 400 42,400
TCI Pacific Communications, 5.00%, due 7/31/2006 440 45,540
Time Warner, Inc., 10.25%, due 7/1/2016 117 129,843
-----------
217,783
-----------
TOTAL PREFERRED STOCKS (Cost $190,922) 217,783
123
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Schedule of Investments (continued)
PRINCIPAL
AMOUNT VALUE
-------------------------
SHORT-TERM SECURITIES (8.4%)
REPURCHASE AGREEMENT (8.4%)
State Street Bank, 4.25%, due 7/1/1997
(Dated 6/30/1997, collateralized by U.S. Treasury
Note, 6.15%, due 5/15/1998, value $651,450) $ 635,955 $ 635,955
-------------
TOTAL SHORT-TERM SECURITIES (Cost $635,955) 635,955
-------------
TOTAL INVESTMENTS (100.0%) (Cost $7,170,825) $ 7,593,075
-------------
-------------
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the
year ended June 30, 1997, aggregated $8,054,505 and $7,190,115, respectively.
At June 30, 1997, net unrealized appreciation for tax purposes aggregated
$421,243, of which $425,791 related to appreciated investment securities and
$4,548 related to depreciated investment securities. The aggregate cost of
securities is $7,171,832 for tax purposes.
(a) Security exempt from registration under Rule 144a of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
(b) Deferred interest obligation; currently zero coupon under terms of initial
offering.
(c) Variable rate note or floating note; rate shown effective at 6/30/97.
(d) Front-loaded interest reduction bond; Brady Bond.
124
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Schedule of Investments (continued)
As of June 30, 1997, the Portfolio had investments in the following industries.
PERCENT OF
TOTAL
INVESTMENTS
-----------
INDUSTRY
Amusement & Recreation Services 0.9%
Business Services 0.9
Communications 12.6
Depository Institutions 2.2
Electric, Gas, & Sanitary Services 2.3
Electronic & Other Electric Equipment 2.5
Finance, Taxation, & Monetary Policy 3.6
Food Stores 1.0
Government 45.6
Health Services 0.6
Holding & Other Investment Offices 2.2
Hotels & Other Lodging Places 3.3
Industrial Machinery & Equipment 0.2
Insurance Carriers 1.1
Miscellaneous Manufacturing Industries 1.0
Motion Pictures 2.7
Nondepository Institutions 3.0
Oil & Gas Extraction 1.7
Paper & Allied Products 1.0
Printing & Publishing 0.8
Stone, Clay, & Glass Products 4.5
Wholesale Trade - Durable Goods 5.2
Wholesale Trade - Nondurable Goods 1.1
------
100.0%
------
------
125
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements
June 30, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The Legends Fund, Inc. (the "Fund") was formed on July 22, 1992. The Fund is
registered under the Investment Company Act of 1940, as amended (the "Investment
Company Act"), as an open-end management investment company. The Fund has ten
investment portfolios (the "Portfolios"): Renaissance Balanced, Zweig Asset
Allocation, Nicholas-Applegate Balanced, Harris Bretall Sullivan & Smith Equity
Growth, Dreman Value, Zweig Equity (Small Cap), Pinnacle Fixed Income, ARM
Capital Advisors Money Market, Morgan Stanley Asian Growth, and Morgan Stanley
Worldwide High Income. ARM Securities Corporation ("ARM Securities"), formerly
known as SBM Financial Services, Inc., a registered broker-dealer under the
Securities Exchange Act of 1934 and a member of the National Association of
Securities Dealers, Inc., distributes shares of the Fund to a variable annuity
separate account of Integrity Life Insurance Company ("Integrity") and its
wholly owned subsidiary, National Integrity Life Insurance Company ("National
Integrity"). ARM Capital Advisors, Inc. ("ARM Capital Advisors"), a SEC-
registered investment adviser, provides management services to the Fund pursuant
to a management agreement (the "Management Agreement") effective February 1,
1996.
ARM Financial Group, Inc. ("ARM") is the ultimate parent of ARM Capital
Advisors, Integrity, National Integrity, and ARM Securities. ARM specializes in
the asset accumulation business, providing retail and institutional customers
with products and services designed to serve the growing long-term savings and
retirement markets. At June 30, 1997, ARM had approximately $5.6 billion of
assets under management.
ARM has entered into a purchase agreement dated May 21, 1997, pursuant to which
ARM has agreed to transfer substantially all of the operations of ARM Capital
Advisors to a newly formed subsidiary, ARM Capital Advisors, LLC, and to sell an
80% interest in such company to ARM Capital Advisors Holdings, LLC, an entity
controlled by Emad A. Zikry, the current President of ARM Capital Advisors. The
pending sale will allow ARM Capital Advisors, LLC to better compete with other
independent asset managers that are not affiliated with insurance companies.
After consummation of the pending sale, ARM Capital Advisors will be renamed
Integrity Capital Advisors, Inc. and will act as investment adviser to the Fund.
126
<PAGE>
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. ARM Capital Advisors Money Market portfolio securities are valued
using the amortized cost method of valuation. Bonds and other fixed-income
securities (other than short-term securities described above) are valued using
market quotations provided by a pricing service under procedures approved by the
Fund's Board of Directors.
Futures contracts and options thereon and option contracts traded on a
commodities exchange or board of trade are valued at the closing settlement
price. Futures and option positions or any other securities or assets for which
reliable market quotations are not readily available or for which valuation
cannot be provided by a pricing service approved by the Board of Directors of
the Fund are valued at fair value as determined in good faith by the Board of
Directors.
SECURITY TRANSACTIONS
Securities transactions are accounted for as of trade date net of brokerage
fees, commissions and transfer fees. Interest income is accrued daily. Dividend
income is recorded on the ex-dividend date. Premiums and discounts on securities
purchased are amortized using the effective interest method. Realized gains and
losses on sales of
127
<PAGE>
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
investments are determined on the basis of nearest average for all of the
portfolios except Zweig Asset Allocation, which uses the first-in first-out
method.
Securities purchased on a when-issued or delayed-delivery basis may be settled a
month or more after the trade date. Securities purchased on a when-issued basis
are included in the portfolio and are subject to market value fluctuations
during the period. At June 30, 1997, Pinnacle Fixed Income had segregated
specific assets to be utilized to settle its outstanding commitments related to
securities purchased on a delayed-delivery basis.
FEDERAL INCOME TAX MATTERS
The Fund complied with the requirements of the Internal Revenue Code applicable
to regulated investment companies and distributed its taxable net investment
income and net realized gains. Therefore, no provision for federal or state
income tax is required.
At June 30, 1997, Pinnacle Fixed Income and Zweig Asset Allocation have
accumulated net realized capital loss carryovers of $99,915 (expiring in 2003,
2004 and 2005) and $356,076 (expiring in 2005), respectively.
DIVIDEND DISTRIBUTIONS
Dividends from net investment income and distributions from net realized gains
are declared and distributed annually, except that ARM Capital Advisors Money
Market 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.
128
<PAGE>
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FUTURES CONTRACTS
Certain Portfolios may enter into futures contracts to protect against adverse
movement in the price of securities in the Portfolio or to enhance investment
performance. When entering into a futures contract, changes in the market price
of the contracts are recognized as unrealized gains or losses by marking each
contract to market at the end of each trading day through a variation margin
account. When a futures contract is closed, the Portfolios record a gain or loss
equal to the difference between the value of the 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, 1997.
The use of futures contracts involves, to varying degrees, elements of market
risk in excess of the amount recognized in the statement of assets and
liabilities. The Portfolios bear the market risk which arises from any changes
in contract values.
FOREIGN CURRENCY TRANSLATION
Investment securities and other assets and liabilities denominated in a foreign
currency are translated into U.S. dollars based upon current exchange rates at
the end of the period. 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.
Morgan Stanley Asian Growth, Morgan Stanley Worldwide High Income and Pinnacle
Fixed Income may engage in forward foreign currency exchange transactions in
connection with the purchase and sale of portfolio securities, and to protect
the value of specific portfolio positions. Forward foreign currency exchange
contracts involve elements of market risk in excess of the amount reflected in
the Statement of Assets and Liabilities. The Portfolios bear the risk of an
unfavorable change in the foreign exchange rate underlying the forward contract.
Additionally, losses may arise if the counterparties do not perform under the
contracts' terms.
129
<PAGE>
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Morgan Stanley Asian Growth and Morgan Stanley Worldwide High Income 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.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with institutions that the Fund's
investment manager, ARM Capital Advisors, has determined are creditworthy
pursuant to criteria adopted by the Board of Directors. Each repurchase
agreement is recorded at cost. The Fund requires that the securities purchased
in a repurchase transaction be transferred to the custodian in a manner
sufficient to enable the Fund to obtain those securities in the event of a
default under the repurchase agreement. The value of the securities transferred
is monitored daily to ensure that the value, including accrued interest, of the
securities under each repurchase agreement is equal to or greater than amounts
owed to the Fund under each repurchase agreement.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of increases and decreases in net assets from operations
during the reporting period. Actual results could differ from those estimates.
OTHER
On April 2, 1996, Integrity purchased for its own account approximately 479,000
shares of Pinnacle Fixed Income, at the net asset value on such date, for an
aggregate purchase price of $5.1 million. As of June 30, 1997, approximately
415,000 shares having a fair value of approximately $4.6 million and
constituting 49.0% of the outstanding shares of the Portfolio were held by
Integrity for its own account.
130
<PAGE>
2. INVESTMENT ADVISORY AGREEMENTS AND PAYMENTS TO RELATED PARTIES
ARM Capital Advisors has entered into a sub-advisory agreement with a registered
investment adviser ("Sub-Adviser") for each of the Portfolios except ARM Capital
Advisors Money Market. ARM Capital Advisors, not the Fund, pays the sub-advisory
fee to each of the Sub-Advisers.
Listed below are management and sub-advisory fees payable as a percentage of
average net assets:
PORTFOLIO MANAGEMENT FEE SUB-ADVISORY FEE
-----------------------------------------------------------------------
Renaissance Balanced 0.65% 0.50%
Zweig Asset Allocation 0.90 0.75
Nicholas-Applegate Balanced 0.65 0.50
Harris Bretall Sullivan &
Smith Equity Growth 0.65 0.50
Dreman Value 0.65 0.50
Zweig Equity (Small Cap) 1.05 0.90
Pinnacle Fixed Income 0.70 0.50
ARM Capital Advisors Money Market 0.50 -
Morgan Stanley Asian Growth 1.00 0.85
Morgan Stanley Worldwide High Income 0.85 0.70
Under the Management Agreement, ARM Capital Advisors provides certain management
services to the Fund, and the Fund is responsible for certain of its direct
operating expenses. ARM Capital Advisors has voluntarily agreed to reimburse
each of the Portfolios for operating expenses (excluding management fees) above
an annual rate of 0.5% of average net assets, with the exception of the two
Morgan Stanley Portfolios, for which the annual voluntary expense limitation
(excluding management fees) is 1.0% of average net assets. ARM Capital Advisors
has reserved the right to withdraw or modify its policy of expense reimbursement
for the Portfolios.
Zweig Asset Allocation, Dreman Value, Morgan Stanley Asian Growth, and Zweig
Equity (Small Cap) placed a portion of their transactions with brokerage firms
which may be considered affiliates of the Fund under the Investment Company Act.
The commissions paid to these firms were approximately $67,000 in the aggregate
during the year ended June 30, 1997.
131
<PAGE>
2. INVESTMENT ADVISORY AGREEMENTS AND PAYMENTS TO RELATED PARTIES (CONTINUED)
Certain officers and directors of the Fund are also officers of ARM, ARM
Securities, ARM Capital Advisors, Integrity and National Integrity. The Fund
does not pay any amounts to compensate these individuals.
3. CAPITAL SHARES
At June 30, 1997, 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
Renaissance Balanced, Zweig Asset Allocation, Nicholas-Applegate Balanced,
Harris Bretall Sullivan & Smith Equity Growth, Dreman Value, Zweig Equity (Small
Cap), Pinnacle Fixed Income, Morgan Stanley Asian Growth, and Morgan Stanley
Worldwide High Income and 100,000,000 shares for ARM Capital Advisors Money
Market.
At June 30, 1997, Integrity, through its variable annuity Separate Account II,
and National Integrity, through its variable annuity Separate Account II, were
the record owners of all the outstanding shares of the Fund.
4. SUBSEQUENT EVENTS
On July 23, 1997, Integrity and National Integrity (collectively, the
"Applicants") filed an application with the Securities and Exchange Commission
pursuant to Section 26(b) of the Investment Company Act for an order to approve
a substitution of the current Portfolios of the Fund (the "Substitution"). The
Substitution would entail the transfer of assets from a Portfolio within the
Fund to a new portfolio of an insurance trust mutual fund ("New Portfolio")
deemed to have (i) substantially similar investment strategies and (ii)
historically stronger investment performance and/or lower expense ratios (after
waivers and reimbursements). Shares of the Fund would be exchanged at net asset
value for shares of equivalent value of the New Portfolio. The costs of the
Substitution will be borne by the Applicants, and no fees, transfer charges or
sales charges to effect the Substitution will be imposed on the Fund, its
shareholders, or ultimately, the variable annuity contract holders. Prior to and
immediately following the Substitution, the account values of the variable
annuity contract holders will be the same. In addition, the Substitution will
not alter the tax or insurance benefits to contract holders or the contractual
obligation of the Applicants.
132
<PAGE>
4. SUBSEQUENT EVENTS (CONTINUED)
The Portfolios of the Fund affected by the Substitution and the New Portfolios
which will receive the assets are as follows:
Current Portfolio of Fund New Portfolio
------------------------- -------------
Renaissance Balanced Janus Aspen Series Balanced
Nicholas-Applegate Balanced Janus Aspen Series Balanced
Pinnacle Fixed Income JPM Bond
ARM Capital Advisors Money Market Janus Aspen Series Money Market
Morgan Stanley Asian Growth Morgan Stanley Asian Equity
Morgan Stanley Worldwide High Morgan Stanley Emerging Markets
Income Debt
Assuming approval by the Securities and Exchange Commission of the Substitution,
the Applicants will schedule the Substitution to occur on or about October 6,
1997, or as soon as practicable following the issuance of the order for the
Substitution, if later. It is anticipated that once the transfer of assets
occurs, the Fund will include four Portfolios: Zweig Asset Allocation, Harris
Bretall Sullivan & Smith Equity Growth, Dreman Value, and Zweig Equity (Small
Cap).
On August 15, 1997, the Board of Directors of the Fund authorized a
shareholder meeting, including the filing of proxy materials, to consider for
approval amendments to the Management Agreement between the Fund and ARM
Capital Advisors and sub-advisory agreements between the Fund and certain
Sub-Advisers with respect to reductions in sub-advisory fees. Assuming
shareholder approval, the management fees paid by the Fund to ARM Capital
Advisors would remain unchanged and the sub-advisory fees paid by ARM Capital
Advisors to each of the Sub-Advisers of Zweig Asset Allocation, Harris
Bretall Sullivan & Smith Equity Growth, Dreman Value, and Zweig Equity (Small
Cap), as a percentage of average net assets, would be reduced by 0.10% to
0.65%, 0.40%, 0.40%, and 0.80%, respectively.
133
<PAGE>
The Legends Fund, Inc.
Portfolio Performance
June 30, 1997
RENAISSANCE BALANCED PORTFOLIO
Comparison of change in value of $10,000 investment in
Renaissance Balanced Portfolio, the S&P 500, and a composite index
consisting of 60% of the S&P 500, 30% of Lehman Brothers
Government/Corporate Bond Index, and 10% of 90-day Treasury Bill Yield
[GRAPH]
<TABLE>
<CAPTION>
60% of the S&P 500, 30% of
Lehman Brothers Government/Corporate
Bond Index, and 10% of 90-Day
Date Renaissance Balanced Portfolio Treasury Bill Yield S&P
<S> <C> <C> <C>
12/14/92 $10,000 $10,000 $10,000
Dec 92 $9,930 $10,085 $10,088
Jun 93 $10,420 $10,629 $10,579
Dec 93 $10,985 $11,058 $11,102
Jun 94 $10,501 $10,709 $10,727
Dec 94 $10,604 $11,076 $11,248
Jun 95 $11,941 $12,832 $13,519
Dec 95 $13,135 $14,230 $15,471
Jun 96 $13,454 $15,036 $17,032
Dec 96 $14,374 $16,344 $19,021
Jun 97 $15,309 $18,524 $22,939
</TABLE>
- - Average annual total return since inception: 9.82%.
- - Total return for the fiscal year ended June 30, 1997: 13.78%.
- - Performance relates to the Portfolio and does not reflect separate account
charges applicable to variable annuity certificates.
- - Portfolio commenced operations on December 14, 1992. Index performances for
the month of December 1992 have been prorated to conform to the commencement
date of the Portfolio (except for the S&P 500).
- - Past performance is not predictive of future performance.
134
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1997
RENAISSANCE BALANCED PORTFOLIO (CONTINUED)
The stock market has been the beneficiary of an exceptionally favorable
environment over the past year, with strong mutual fund inflows, rising
corporate earnings, and stable or declining interest rates resulting in a 35%+
gain in stock prices.
Throughout the past 12 months, Renaissance has maintained a defensive posture in
the Legends Fund Balanced portfolio, with stocks ranging from 30%-40% of the
total Portfolio. The current bull market in stocks has been the longest in 40
years without a "correction" in stock prices of 10% or more. Investors with only
recent experience in the financial markets should be forgiven if they believe
that stock prices never go down but only up. To put this in better perspective,
since 1900 there have been 65 years when the stock market has fallen 10% or more
from the prior year's high, working out to a correction of 10% or more every 18
months on average. The current bull market is already 80 months long.
By most measures, inflation is running well below 3% per year, a fact which
supports generally high valuations on financial assets such as stocks and bonds.
The S&P 500 is selling on a price/trailing earnings ("P/E") basis in the highest
10% of observations in the past 40 years. On a price/book value, price/sales, or
price/dividend basis, the S&P 500 is selling at its highest level ever.
What is noteworthy about the valuation of stocks is that these euphoric
valuations have not carried over into the bond market. While the P/E multiple on
stocks is slightly higher today than in periods of similar inflation in the
past, the yield on bonds is usually high when compared to historical experience.
For example, when inflation is less than 3%, the S&P 500 P/E has averaged about
18X and long-term government bond yields, 5.5%. By comparison, at quarter-end,
inflation was less than 3% and the S&P 500 P/E was about 22X while the long-term
government bond yields 6.8%. This indicates both potential risk in stocks and
potential opportunity in bonds.
We recognize that our conservative asset allocation posture these last 12 months
has detracted from investment returns. Nevertheless, our investment goal for the
Portfolio is to provide competitive rates of return while also incurring a low
level of volatility. This does not mean that we will produce exceptional returns
every year, and we have endured similar periods of temporarily disappointing
results in our 19-year history. However, we firmly believe that the Portfolio
will be exceptionally well served by our approach over the next several
quarters.
135
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1997
RENAISSANCE BALANCED PORTFOLIO (CONTINUED)
Since late April, declines in interest rates and advances in stock earnings have
slightly raised the attractiveness of stocks. However, current prices in the
stock market tend to already discount much good news regarding the economy.
Either continued gains in corporate earnings, a decline in stock prices, or
further declines in interest rates, would be necessary before the current
overvaluation of stocks relative to bonds becomes eliminated.
136
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1997
ZWEIG ASSET ALLOCATION PORTFOLIO
Comparison of change in value of $10,000 investment in
Zweig Asset Allocation Portfolio and the S&P 500
[GRAPH]
Date Zweig Asset
Allocation Portfolio S&P 500
12/14/92 $10,000 $10,000
Dec 92 $10,000 $10,088
Jun 93 $10,810 $10,579
Dec 93 $11,495 $11,102
Jun 94 $11,485 $10,727
Dec 94 $11,536 $11,248
Jun 95 $13,164 $13,519
Dec 95 $14,009 $15,471
Jun 96 $14,620 $17,032
Dec 96 $16,087 $19,021
Jun 97 $17,343 $22,939
- - Average annual total return since inception: 12.88%.
- - Total return for the fiscal year ended June 30, 1997: 18.63%.
- - Performance relates to the Portfolio and does not reflect separate account
charges applicable to variable annuity certificates.
- - Portfolio commenced operations on December 14, 1992.
- - Past performance is not predictive of future performance.
137
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1997
ZWEIG ASSET ALLOCATION PORTFOLIO (CONTINUED)
For the fiscal year ended June 30, 1997, the Portfolio returned 18.6% with an
average market exposure of 56%. Our benchmark S&P 500 Index returned 34.7%. The
performance shortfall was largely due to our significantly reduced market
exposure, which we maintained in deference to the readings of our research.
Our monetary research was neutral for the second half of 1996. In early 1997,
the Federal Reserve raised interest rates in a preemptive strike against
inflation. Partly for this reason, bond yields rose to over 7%, and the
combination of these factors caused our monetary work to downtick. In addition,
sector performance (cyclical stocks outperforming consumer stocks) suggested
continuing strength in the economy, causing our monetary indicators to fall well
below the neutral reading. This, in combination with our sentiment indicators,
which had been showing dangerous levels of optimism for several months, caused
us to reduce our exposure to approximately 50% in March. Bond prices began to
rally in late April, however, due to a number of factors. First, the economy
slowed marginally. Second, inflation data showed little threat. Third, budget
news out of Washington was extremely favorable. As bond yields dropped, we
systematically added to our exposure. As of June 30, 1997, we were 62% invested.
As of the date of this report we are 75% invested.
Our stock selection, which has worked well for us over the life of the
Portfolio, has lagged recently, contributing further to our underperformance. We
select stocks with above-average growth rates and below-average valuation. But
today's top-performing stocks are the very largest companies, which are selling
at high prices relative to their earnings. The Portfolio is more heavily
weighted to the mid-sized companies that are trading at what we consider more
reasonable prices.
Some industry groups did well for us during the twelve months. In the consumer
cyclical group, the stocks of retailing companies have benefited from strong
consumer spending and high levels of consumer confidence. In the financial
sector, brokerage stocks are doing well as the market continues to climb. The
Portfolio's airline stocks held us back in late 1996, but have earned strong
returns in 1997 because business travel, the most profitable area of the airline
business, has increased dramatically with the strong economy, and pricing is
firm.
Our holdings in utilities have held us back this year. We continue to hold them,
however, because their earnings are far more stable than that of most growth
stocks, while we believe their valuations make them good buys.
138
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1997
NICHOLAS-APPLEGATE BALANCED PORTFOLIO
Comparison of change in value of $10,000 investment in
Nicholas-Applegate Balanced Portfolio, the S&P 500, and a composite index
consisting of 60% of the S&P 500 and 40% of Lehman Brothers Intermediate
Treasury Bond Index.
[GRAPH]
60% of the S&P
500 and 40% of
Lehman Brothers
Intermediate
Nicholas-Applegate Treasury Bond
Date Balanced Portfolio Index S&P
12/3/92 $10,000 $10,000 $10,000
Dec 92 $10,300 $10,143 $10,088
Jun 93 $11,500 $10,676 $10,579
Dec 93 $11,772 $11,089 $11,102
Jun 94 $11,301 $10,723 $10,727
Dec 94 $11,738 $11,063 $11,248
Jun 95 $13,326 $12,795 $13,519
Dec 95 $14,087 $14,151 $15,471
Jun 96 $15,129 $14,997 $17,032
Dec 96 $16,264 $16,288 $19,021
Jun 97 $17,266 $18,462 $22,939
- - Average annual total return since inception: 12.68%.
- - Total return for the fiscal year ended June 30, 1997: 14.12%.
- - Performance relates to the Portfolio and does not reflect separate account
charges applicable to variable annuity certificates.
- - Portfolio commenced operations on December 3, 1992.
- - Past performance is not predictive of future performance.
139
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1997
NICHOLAS-APPLEGATE BALANCED PORTFOLIO (CONTINUED)
The Portfolio lagged a passive mix of S&P 500 stocks and bonds during the
period, due largely to unusual market conditions. Extreme market narrowness
during most of the term favored large capitalization "blue chip" stocks while
smaller and high earnings-growth companies were ignored at best.
Overall, the fiscal year ended June 30, 1997 was dominated by large cap stocks,
with a slight bias toward the "value" style. As one moves down the
capitalization spectrum, the market's favoritism of large cap stocks over
smaller cap, and value stocks over growth becomes more pronounced. For example,
the S&P 500 index returned 34.7% while the Russell 2000 Growth Index, a
benchmark of small capitalization growth stocks, returned only 4.5%. Divergence
of this magnitude is unprecedented.
The fourth quarter of 1996 and the first quarter of 1997 were particularly harsh
for high-growth stocks. Concerns about renewed inflation and the prospects of
higher interest rates scared investors away from high-growth and higher price-
to-earnings stocks while larger capitalization, value-oriented stocks remained
in positive territory.
The second quarter of 1997 saw a more evenly distributed market where no
investment style was particularly advantaged or disadvantaged. Small and "mid-
cap" stocks kept pace with large stocks, and growth stocks performed in line
with value stocks. This broadening of the market was encouraging after the
extremely narrow market we saw over the prior quarters. Continued broadening
into the higher growth segments should provide very favorable conditions for our
discipline.
Growth stock investing is founded on the fundamental relationship between a
company's earnings and its stock price. In seeking superior returns, Nicholas-
Applegate invests in companies that we feel have the best potential for positive
earnings acceleration. We are excited about and confident in the stocks in the
Portfolio and their potential to provide outstanding performance.
140
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1997
HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO
Comparison of change in value of $10,000 investment in
Harris Bretall Sullivan & Smith Equity Growth Portfolio and the S&P 500
[GRAPH]
Harris Bretall
Sullivan & Smith
Equity Growth
Date Portfolio S&P 500
12/8/92 $10,000 $10,000
Dec 92 $10,050 $10,088
Jun 93 $9,710 $10,579
Dec 93 $10,050 $11,102
Jun 94 $9,360 $10,727
Dec 94 $10,460 $11,248
Jun 95 $12,850 $13,519
Dec 95 $13,771 $15,471
Jun 96 $14,597 $17,032
Dec 96 $15,692 $19,021
Jun 97 $19,010 $22,939
- - Average annual total return since inception: 15.12%.
- - Total return for the fiscal year ended June 30, 1997: 30.23%.
- - Performance relates to the Portfolio and does not reflect separate account
charges applicable to variable annuity certificates.
- - Portfolio commenced operations on December 8, 1992.
- - Past performance is not predictive of future performance.
141
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1997
HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO (CONTINUED)
For the fiscal year ended June 30, 1997, the Portfolio returned 30.2%. The
Portfolio performed well again during the quarter ended June 30, 1997, earning
18.0%, a return greater than the S&P 500. In large part, the performance results
stem from the selection of high quality, large capitalization growth companies,
which have attracted capital in the current economic environment.
Most clients and investors have been wondering when the good times will end and
if the stock market is overvalued; our answer to this concern is that the market
seems poised for a major, long-term Bull Run. Our internal models show that the
market appears fairly valued, given the current level of interest rates,
inflation, and corporate earnings growth. The lack of inflationary pressure, the
strength of the U.S. Dollar, the productivity gains made through the increased
use of technology, and the shrinking federal budget deficit all have led to
lower interest rates, and higher stock prices.
The stock market advance will very likely continue as long as inflation remains
tame, and corporate earnings continue to grow. Federal Reserve Board Chairman
Alan Greenspan's recent Humphrey-Hawkins testimony was quite positive for
financial markets. He described the current economic environment as
"exceptional;" this marks a change from his caution to market investors of
"irrational exuberance" from last December. What prompted this change? We sense
that Chairman Greenspan has finally adopted a more modern view of the economic
system. He sees how productivity increases can extend the current economic
expansion without inflationary pressures.
Looking forward, the companies that have the ability to expand output because of
revenue opportunities will continue to command higher earnings multiples due to
their consistent earnings growth. One of the reasons we have a strong commitment
to technology stocks is that we see the cost reducing benefits of technology
hardware and software and the enhanced marginal revenue produced. Our technology
advantage in the U.S. should help our companies compete successfully in
international business.
The recent expansion of NATO to include Russia furthers the argument for the
large capitalization growth companies that is the focus of the Portfolio.
Companies such as Microsoft, Coca Cola, General Electric, McDonald's, Colgate-
Palmolive, Disney, Citicorp and Pfizer have all benefited from the increased
international trade opportunities established with the end of the Cold War. We
invest in world class economic powers that are already positioned well for the
increased international competition.
142
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1997
HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO (CONTINUED)
Our outlook for the future remains positive. With a group of high quality, large
cap stocks, our Portfolio has performed very well. Historically, however, when
the cycle changes and corporate earnings slow, it is our Portfolio of growth
stocks that enjoy the relative earnings advantage. Since we are still enjoying
an expanding economy, our best times still seem ahead of us.
We remain steadfast in our prediction of the Dow reaching the 10,000 level
approaching the year 2000, and we see the long-term economic conditions set for
that move forward.
143
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1997
DREMAN VALUE PORTFOLIO
Comparison of change in value of $10,000 investment in
Dreman Value Portfolio and the S&P 500
[GRAPH]
Dreman Value
Date Portfolio S&P 500
12/14/92 $10,000 $10,000
Dec 92 $10,180 $10,088
Jun 93 $10,450 $10,579
Dec 93 $10,820 $11,102
Jun 94 $10,740 $10,727
Dec 94 $10,736 $11,248
Jun 95 $12,886 $13,519
Dec 95 $15,622 $15,471
Jun 96 $16,909 $17,032
Dec 96 $19,452 $19,021
Jun 97 $22,621 $22,939
- - Average annual total return since inception: 19.67%.
- - Total return for the fiscal year ended June 30, 1997: 33.78%.
- - Performance relates to the Portfolio and does not reflect separate account
charges applicable to variable annuity certificates.
- - Portfolio commenced operations on December 14, 1992.
- - Past performance is not predictive of future performance.
144
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1997
DREMAN VALUE PORTFOLIO (CONTINUED)
Investment returns for the fiscal year ended June 30, 1997 have been excellent.
The market as measured by the S&P 500 appreciated 34.7%. This rate of return
exceeded the return forecast by even the most bullish of the Wall Street
prognosticators. Fundamentally, stock prices have been buoyed by continued
growth in the U.S. and global economies, relatively low inflation, a benign bond
market, moderately higher corporate profits and favorable actions in Washington
to deal with current and future fiscal affairs. In this context, continued
robust money flows to equity mutual funds from the public as well as continuing
investment from overseas investors to U.S. equities has provided a favorable
supply demand balance for equities. This fundamental and psychological backdrop
has proven more powerful than the Federal Reserve Board's interest rate hike and
the prior concerns of more increases to follow. The volatility in the market has
been extreme as investor perceptions and expectations have been far more
mercurial than warranted by the underlying fundamentals.
The reason for this large performance disparity between the funds and the S&P
500 relates to the two-tier performance within the market or what has become
known as the "Nifty Fifty" effect. Fifty large capitalization stocks which
comprise the Morgan Stanley Nifty Fifty Index, and incidentally about 40% of the
capitalization weighted S&P 500 Index, have performed materially better than the
S&P 500 and have overwhelmed the return of the average stock within the index.
These securities have benefited from the current fad toward indexation. For
perspective, the Morgan Stanley Nifty Fifty Index is up 41.7% for the last 12
months, well above the 34.7% return of the S&P 500 Index and the 27.5% return of
the average stock within the index. Narrow two-tier markets such as this have
appeared periodically in years past only to be followed by a reversion to the
mean and a more normal distribution of returns among securities.
With the market hovering around the 8,000 level for the Dow Jones Industrials,
the fact that most stocks have not faired as well suggests that some good values
are still available for patient investors. We have focused our research effort
on laggard stocks and groups currently down in price due to short term
fundamental or psychological problems. Securities of this ilk have found their
way onto our watch list and selectively into the Portfolio.
The Portfolio has performed well in a strong market setting in which relative
performance has been difficult to achieve. Results have been consistent with
continuing strong performance from our financial, consumer staple and consumer
cyclical sectors. The Portfolio continues to be well diversified in terms of
industry and security concentrations, while achieving P/E that is below market,
a dividend yield that is above market, earnings that are growing faster than
market, and financial qualities that are superior to market.
145
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1997
ZWEIG EQUITY (SMALL CAP) PORTFOLIO
Comparison of change in value of $10,000 investment in
Zweig Equity (Small Cap) Portfolio and the Value Line Geometric Index
[GRAPH]
Zweig Equity (Small Value Line
Date Cap) Portfolio Geometric Index
12/14/92 $10,000 $10,000
Dec 92 $10,000 $10,106
Jun 93 $10,110 $10,611
Dec 93 $10,864 $11,260
Jun 94 $10,763 $10,482
Dec 94 $10,797 $10,582
Jun 95 $11,881 $11,862
Dec 95 $13,076 $12,624
Jun 96 $14,102 $13,509
Dec 96 $15,500 $14,311
Jun 97 $16,975 $16,010
- - Average annual total return since inception: 12.35%.
- - Total return for the fiscal year ended June 30, 1997: 20.37%.
- - Performance relates to the Portfolio and does not reflect separate account
charges applicable to variable annuity certificates.
- - Portfolio commenced operations on December 14, 1992.
- - Past performance is not predictive of future performance.
146
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1997
ZWEIG EQUITY (SMALL CAP) PORTFOLIO (CONTINUED)
We are quite gratified by our performance over the twelve months ended June 30,
1997. During this period, the Portfolio returned 20.4%, surpassing the Value
Line Geometric Index, which returned 18.5% and the Russell 2000, which returned
16.3%. We were able to achieve this performance while keeping market exposure at
an average level of 57%. These results show that, although our Portfolio pursues
a risk-averse strategy, it can shine even in bull markets.
The Portfolio's superior performance is due to our strategy of participating
solidly on the upside, as our stock selection allowed us to do, and limited
losses during declines, which we did in the summer of 1996. Our reduced market
exposure at the time--under 65%--helped us avoid the pitfalls that beset our
fully invested peers. Our stock selection style, which focuses on stocks with
above-average earnings growth and below-average valuations, helped as well.
Funds that owned stocks with high price-earnings ratios were much harder hit
last summer than we were.
Our significant holdings in the financial services sector helped us during the
past twelve months. The extended bull market has meant rising stock prices for
brokerage firms. The favorable interest rate environment has benefited insurers.
Small regional banks have also benefited from the increased prosperity.
Basic materials stocks, another large holding in the Portfolio, are performing
well as a result of the strong economy. These companies prepare the materials
that are used in industry and building, such as cement and chemicals. Our
overweighting in capital goods stocks has added to the Portfolio's performance
as well. These companies make heavy machinery, which is in demand given the
growth in the economy.
147
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1997
PINNACLE FIXED INCOME PORTFOLIO
Comparison of change in value of $10,000 investment in
Pinnacle Fixed Income Portfolio and the Salomon
Brothers Broad Investment-Grade Bond Index
[GRAPH]
Salomon Brothers
Pinnacle Fixed Broad Investment-
Date Income Portfolio Grade Bond Index
1/5/93 $10,000 $10,000
Jun 93 $10,430 $10,695
Dec 93 $10,564 $10,979
Jun 94 $10,109 $10,568
Dec 94 $10,156 $10,667
Jun 95 $11,229 $11,894
Dec 95 $11,893 $12,571
Jun 96 $11,599 $12,413
Dec 96 $12,111 $13,027
Jun 97 $12,448 $13,426
- - Average annual total return since inception: 5.00%.
- - Total return for the fiscal year ended June 30, 1997: 7.33%.
- - Performance relates to the Portfolio and does not reflect separate account
charges applicable to variable annuity certificates.
- - Portfolio commenced operations on January 5, 1993. Index performance has
been prorated to conform to the commencement date of the Portfolio.
- - Past performance is not predictive of future performance.
148
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1997
PINNACLE FIXED INCOME PORTFOLIO (CONTINUED)
Amid signs of slowing growth, subdued inflation, and an active Fed during the
six months ending December 31, 1996, a longer-than-benchmark duration strategy
had a positive impact on the Portfolio's performance. The Portfolio's aggressive
investment in mortgage-backed securities also fueled relative returns as this
sector was one of the market's best performers of 1996.
Spurred on by a potential increase in inflation signaled by a strong U.S.
economy and a historically tight labor market during the first quarter of 1997,
the Fed finally obliged the market during the last week of the first quarter
with an as-expected 0.25% increase in the overnight rate from 5.25% to 5.50%.
However, during the second quarter of 1997, slower growth combined with benign
inflation allowed the Federal Reserve to refrain from additional tightening of
monetary policy.
Within that environment during the first half of 1997, we maintained the
Portfolio's main themes of overweighting mortgages and investment grade
corporates while underweighting U.S. Treasuries. During the second quarter of
1997, the Portfolio's overweighting to the investment grade corporate sector
contributed positively to performance. We look to maintain the Portfolio's
current sector allocations.
We maintain that the recent slowdown in growth is temporary, as the economy is
fundamentally strong and monetary conditions continue to ease. We also support
the consensus that there will be a third quarter bounce-back in growth which
might lead to Federal Reserve intervention before calendar year-end.
149
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1997
MORGAN STANLEY ASIAN GROWTH PORTFOLIO
Comparison of change in value of $10,000 investment in
Morgan Stanley Asian Growth Portfolio and the MSCI Combined
Far East Free Ex-Japan Index
[GRAPH]
Morgan Stanley MSCI Combined Far
Asian Growth East Free Ex-Japan
Date Portfolio Index
6/15/94 $10,000 $10,000
Jun 94 $10,000 $9,754
Dec 94 $9,280 $9,772
Jun 95 $10,180 $10,456
Dec 95 $10,279 $10,437
Jun 96 $10,912 $11,310
Dec 96 $10,852 $11,396
Jun 97 $10,812 $11,418
- - Average annual total return since inception: 2.60%.
- - Total return for the fiscal year ended June 30, 1997: (1.01)%.
- - Performance relates to the Portfolio and does not reflect separate account
charges applicable to variable annuity certificates.
- - Portfolio commenced operations on June 15, 1994.
- - Past performance is not predictive of future performance.
150
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1997
MORGAN STANLEY ASIAN GROWTH PORTFOLIO (CONTINUED)
The Portfolio underperformed the Morgan Stanley Capital International Combined
Free Ex-Japan Index during the fiscal year ended June 30, 1997 with a decline of
1.0% in its Net Asset Value ("NAV") versus a rise of 0.9% in the benchmark. The
bulk of the underperformance came in the six months ended December 31, 1996
during which the Portfolio trailed the index with a decrease of 0.5% in its NAV
compared with a gain of 2.1% in the benchmark. The differential was narrowed in
the subsequent six months ended June 30, 1997 with the Portfolio recording a
fall of 0.4% compared with an increase of 0.2% in the benchmark.
The performance of the Portfolio was adversely impacted mainly by the holdings
of Malaysia and Thailand equities. In Malaysia, two of the Portfolio's
significant positions in Genting Berhad and Resorts World Berhad were derated
due to the sharp drop in patronage at the highland casinos. Over in Thailand,
the Portfolio's holdings in the top three quality bank stocks, Bangkok Bank,
Thai Farmers Bank and Siam Commercial Bank were drawn down by the selloff in the
market as investors grew increasingly nervous over the deepening woes of the
economy.
The Portfolio, however, managed to claw back some of the underperformance in the
latter half of the fiscal year as a result of strong contributions from security
selections in Hong Kong, Indonesia, Taiwan, and South Korea. In Hong Kong, the
Portfolio's performance was boosted by its core holding in HSBC Holdings Plc,
which massively outperformed the market on the back of strong earnings growth
and favorable interest rate environment. The Portfolio's selective investments
in red chips such as Shanghai Industrial and China Resources also saw sterling
returns as investors swamped towards quality red chips which offer good proxies
to play on the evolving businesses owned by well connected mainland Chinese
shareholders.
The Portfolio was also well positioned to capture the turnaround in the
electronic sector by its holdings in Samsung Electronics in Korea, which is the
largest producer of dynamic random access memory chips in the world, as well as
Taiwanese electronics stocks such as Asustek which witnessed a strong surge in
order books and profits. Over in Indonesia, the Portfolio's major holding, Astra
International, was rerated following the announcement of strong motorcycle and
car sales despite threats of potential new competitors.
On asset allocation, the Portfolio saw positive contributions from its
overweight position in Hong Kong and its timely underweight position in
Malaysia. This was, however, partially offset by the Portfolio's underweight
position in Taiwan which significantly outperformed the region and its slightly
overweight position in the Thailand market which collapsed.
151
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1997
MORGAN STANLEY ASIAN GROWTH PORTFOLIO (CONTINUED)
At June 30, 1997, the Portfolio was overweighted in Hong Kong (35.9% versus
33.3%), Korea (4.8% versus 5.9%), Singapore (12.5% versus 11.1%) and China (1.1%
versus 0.8%). It was underweighted everywhere else, most notably in Malaysia
(15.2% versus 18.4%).
The Portfolio's increased weight in Hong Kong (to 35.9%) stood it in good stead
as the Hong Kong market staged a sharp rebound from the first quarter. Euphoria
over China concept plays and in particular red chips led the way. Sentiment and
liquidity further contributed, as asset injection stories propelled the red
chips ever higher while traditional blue chip stocks languished. The rally
culminated in an all time high of 15,197 on the Hang Seng Index on June 27,
1997, the last trading day before the Handover. With the Handover complete, red
chip fever has subsided and talk of increasing the supply of residential units
in Hong Kong has caused the property sector to weaken. The Portfolio will be
looking to take its Hong Kong weighting down while shifting towards better value
blue chips such as the major property developers if they weaken further.
The Portfolio has also increased its weight in Korea to 4.8% and will continue
to look for good values in that market. The Korean economy appears to have
bottomed as positive export growth generated its first monthly trade surplus in
30 months. Equally encouraging, there are also signs that the Korean corporate
culture is finally changing. The zealousness with which many Korean companies
pursued market share gains and top line growth is finally beginning to shift
towards interest in the bottom line which should bode well for equity investors.
By contrast, the Portfolio sharply cut its weighting in Malaysia over the last
quarter, to 15.2%. Bank Negara's curbs on property lending and stock market
margin loans finally forced the economy to confront its problems with the
impending oversupply in the property market and an infrastructure spending
binge. The subsequent severity of the market fallout indicated an overstretched
market. Although the long term fundamentals for Malaysia remain good, short term
prospects are not promising, especially in the aftermath of the fallout from the
depegging of the Thai baht. The Portfolio is looking to maintain its underweight
in Malaysia barring unforeseen positive developments.
The Portfolio's weighting in Thailand has been taken down to 4.9%, due to a
combination of Portfolio sales and a collapsing market. During the quarter ended
June 30, 1997, confidence plummeted as the government resorted to capital
controls and jacked up interest rates to fend off the currency speculators. The
gloom was further compounded by news of a slowing economy as the mounting
financial crisis resulted in the suspension of 16 finance companies. The
depegging of the
152
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1997
MORGAN STANLEY ASIAN GROWTH PORTFOLIO (CONTINUED)
Thai baht at the beginning of July is the first step towards addressing the Thai
financial crisis. Recovery, however, will be a slow and painful process, and the
first sharp rally when the Baht broke is proving hard to sustain. The Portfolio
will selectively continue to seek to acquire good companies at "bombed-out"
prices, but it is still too early to bet on the Thai market.
The Thai financial crisis and the final depegging of the Thai Baht have brought
into focus the common ills of the fast growing Southeast Asian nations. Thailand
is further along the economic cycle but the pain it is going through has
heightened investors' wariness about the region in general and is likely to
prove a dampener on the markets in the near term. The collapse in the Thai
market and the correction in Malaysia, Singapore and the Philippines have
brought market valuations back to attractive levels, but short term sentiment
remains poor.
In summary, the Portfolio will continue to selectively seek to move out of more
extended markets like Hong Kong into the more distressed situations in Southeast
Asia.
153
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1997
MORGAN STANLEY WORLDWIDE HIGH INCOME PORTFOLIO
Comparison of change in value of $10,000 investment in
Morgan Stanley Worldwide High Income Portfolio, the J.P. Morgan Emerging Market
Bond Index, and a composite index consisting of 50% of the J.P. Morgan Emerging
Market Bond Index and 50% of Lehman Brothers Aggregate Bond Index
[GRAPH]
50% JP Morgan
Emerging Market
Bond Index and
Morgan Stanley JP Morgan 50% of Lehman
Worldwide High Emerging Market Brothers Aggregate
Date Income Portfolio Bond Index Bond Index
6/15/94 $10,000 $10,000 $10,000
Jun 94 $10,000 $9,580 $9,784
Dec 94 $9,500 $9,731 $9,909
Jun 95 $10,400 $10,628 $10,935
Dec 95 $11,461 $12,319 $12,143
Jun 96 $12,315 $14,225 $12,987
Dec 96 $14,268 $17,162 $14,631
Jun 97 $15,557 $18,925 $15,606
- - Average annual total return since inception: 15.63%.
- - Total return for the fiscal year ended June 30, 1997: 26.32%.
- - Performance relates to the Portfolio and does not reflect separate account
charges applicable to variable annuity certificates.
- - Portfolio commenced operations on June 15, 1994. Index performances for the
month of June 1994 have been prorated to conform to the commencement date of
the Portfolio.
- - Past performance is not predictive of future performance.
154
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1997
MORGAN STANLEY WORLDWIDE HIGH INCOME PORTFOLIO (CONTINUED)
For the fiscal year ended June 30, 1997, The Worldwide High Income Portfolio
returned 26.3% versus the benchmark return of 20.2%. The Portfolio invests in
two primary markets, the emerging markets debt market and the U.S. high yield
bond market. Over the past year, our weighting in these two sectors has remained
relatively constant with about 60% of the Portfolio in emerging markets and 40%
in the U.S. high yield market. These two markets have been the best performing
fixed income markets in the world. In addition, our overweighting in the
emerging markets sector has been helpful since that sector has outpaced high
yield markedly.
Both sectors have benefited from strong economies both at home and abroad. The
strong economies have improved corporate and sovereign credit quality. In
addition, credit quality spreads narrowed across the board. As many market
commentators have stated, we seem to be in a financial sweet spot of good growth
and low inflation. These conditions tend to provide the greatest benefit to the
most junior securities (common stock) first and then subordinated or risky debt
(emerging markets and high yield). This is essentially what we have experienced
over the last year.
While our general allocation has remained the same, our allocation within
emerging markets has shifted meaningfully. We have diversified our emerging
markets position quite a bit. We now have investments in eight Latin countries
compared to four a year ago and have reduced our exposure to Brazil by three
percentage points. Our largest Latin positions are now in Argentina and Brazil
at about 9.5% each and Venezuela and Peru at about 6% each. Venezuela, spurred
by higher oil prices, performed very well after lagging the other markets for
several years.
We dramatically reduced our exposure to Russia. A year ago nearly 20% of the
Portfolio was in Russia. Today Russia accounts for about 2% of the Portfolio.
Russia had been one of the best performing markets in the world. We felt it was
prudent to take some profits and to spread our risk. Some of the proceeds of the
Russian sale funded positions in Africa, namely Algeria, Ivory Coast and
Nigeria.
Our positions in the U.S. high yield sector are similarly well diversified.
Approximately fifty different credits are represented in the Portfolio. Some of
our most profitable investments have been in the telecommunications and cable
television sectors. Rapid technological changes have frequently resulted in
alliances that have benefited bond holders. The most recent example is
Microsoft's announced intention to invest $1 billion into Comcast. This
announcement pushed up prices in virtually all cable television securities.
155
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1997
MORGAN STANLEY WORLDWIDE HIGH INCOME PORTFOLIO (CONTINUED)
The outlook continued to look good, probably too good for most people's comfort.
At this point, everyone seems to be looking for the first signs of inflation
pressures. So far none have managed to push the inflation statistics higher. The
other fear is that the Federal Reserve will make a preemptive strike and raise
short term interest rates. So far this has not happened. Longer term rates have
declined while shorter rates have remained firm resulting in a flatter yield
curve.
In nearly all of the financial markets, valuations are at levels that most
market participants have never seen. We believe the high interest income and the
move to freer markets and better credit quality will continue to make the
Worldwide High Income Portfolio a sound investment vehicle.
156
<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>
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, 1997
Statements of Operations for the fiscal year ended June 30, 1997
Statements of Changes in Net Assets for the fiscal periods ended June
30, 1997 and 1996
Financial Highlights for fiscal periods since 1993*
Schedules of Investments as of June 30, 1997
Notes to Financial Statements
- ----------------------------
* Also included in Part A of the Registration Statement
(b) Exhibits:
1.(a). Articles of Incorporation of The Legends Fund, Inc. (formerly
Integrity Series Fund, Inc.) (the FUND), the Registrant (1)
(b). Articles of Amendment (2)
(c). Articles Supplementary (2)
(d). Articles Supplementary filed as of June 14, 1994 (3)
(e). Articles of Amendment
2. By-Laws of the Fund (1)
3. Not applicable
4. See generally Articles V, VII, VIII and IX of the Articles of
Incorporation and Articles I, IV, VII and VIII of the Bylaws,
incorporated herein by reference.
5(a)(i) Management Agreement between the Fund and Integrity Life
Insurance Company (INTEGRITY), assumed by ARM Capital Advisors,
Inc. (ARM CAPITAL) on February 1, 1996. (3)
(a)(ii) Amendment to Management Agreement. (3)
C-1
<PAGE>
(b)(i) Sub-Advisory Agreement between Integrity and Dreman Value
Advisors, Inc. (Dreman Value Portfolio), incorporated by
reference to the Fund's Post-Effective Amendment No. 6 to the
Registration Statement on Form N-1A filed on March 4, 1996 (File
Nos. 33-50434 and 811-7084).
(b)(ii) Sub-Advisory Agreement between Integrity and Harris Bretall
Sullivan & Smith, Inc. (Harris Bretall Sullivan & Smith Equity
Growth Portfolio), 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).
(b)(iii) Sub-Advisory Agreement between Integrity and Zweig/Glaser
Advisers (Zweig Asset Allocation Portfolio), 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).
(b)(iv) Sub-Advisory Agreement between Integrity and Zweig/Glaser
Advisers (Zweig Equity (Small Cap) Portfolio), 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).
6. Distribution Agreement between the Fund and ARM Securities Corp,
formerly known as SBM Financial Services, Inc. (4)
C-2
<PAGE>
7. Not applicable
8. (a). Custody, Recordkeeping and Agency Agreement between the Fund and
Investors Fiduciary Trust Company, as amended (3)
(b). Forms of Foreign Sub-Custody Agreement (2)
9. (a). Fund Participation Agreement with Integrity (3)
(b). Fund Participation Agreement with National Integrity Life
Insurance Company (NATIONAL INTEGRITY) (3)
10. Opinion and Consent of Shereff, Friedman, Hoffman & Goodman (2)
11. Consent of Ernst & Young LLP, Independent Auditors
12. Not applicable
13. Not applicable
14. Not applicable
15. Not applicable
16. Not applicable
17. Financial Data Schedule
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
C-3
<PAGE>
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 ARM Securities Corp. (ARMSC), 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 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.
In June 1997, ARM Financial completed an initial public offering (the
"Offering") of 9.2 million shares of Class A common stock, par value of $0.1 per
share (the "New Class As Common Stock"), of which 5.75 million shares were sold
by ARM Financial and 3.45 million shares were sold by the Morgan Stanley
Stockholders (as defined below). Concurrent with the closing of the Offering,
ARM Financial amended and restated its Certificate of Incorporation to
effectuate a recapitalization such that (i) the common equity of ARM Financial
consists of New Class A Common Stock and Class B Non-Voting Common Stock, par
value of $0.1 per share (the "new Class B Common Stock" and, together with the
New Class A Common Stock,, the "New Common Stock"), (ii) authorized shares of
the New Class A Common Stock and New Class B common Stock were increased to 150
million shares and 50 million shares, respectively, (iii) each outstanding share
of common stock of ARM Financial was converted into one share of New Class A
Common Stock, (iv) certain shares of the New Class A Common Stock owned by
private equity funds sponsored by Morgan Stanley, Dean Witter, Discover & Co.
(the successor to Morgan Stanley Group Inc. in its merger with Dean Witter,
Discover & Co.) (the "Morgan Stanley Stockholders") were converted into New
Class B Common Stock such that, after giving effect to such conversion, but not
giving effect to the Offering, the Morgan Stanley Stockholders owned, in the
aggregate, 49% of the outstanding New Class A Common Stock, and (v) each share
of New Common Stock was split into 706 shares of New Common Stock. Holders of
New Class B Common Stock have not right to vote on matters submitted to a vote
of stockholders, except in certain circumstances. Shares of the New Class B
Common Stock have no preemptive or other subscription rights and are convertible
into an equal number of shares of New Class A Common Stock (1) at the option of
the holder thereof to the extent that, following such conversion, the Morgan
Stanley Stockholders will not, in the aggregate, own more than 49% of the
outstanding shares of New Class A Common Stock, and (2) automatically upon the
transfer of such shares by any Morgan Stanley Stockholder to a person that is
not a Morgan Stanley Stockholder or an affiliate of a Morgan Stanley
Stockholder. The Morgan Stanley Stockholders owned approximately 91% of the
outstanding shares of ARM Financial's common stock prior to the Offering and
approximately 53% following the Offering.
The following list shows the subsidiaries of Morgan Stanley Group, Dean
Witter, Discover & Co.
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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 ABS CAPITAL INC.
Morgan Stanley Advisory Partnership Inc.
MORGAN STANLEY ASSET MANAGEMENT (CPO) INC.
Morgan Stanley Asset Management Inc.
Morgan Stanley Asset Management Holdings Inc.
*Miller Anderson & Sherrerd, LLP (Pennsylvania)
Morgan Stanley Baseball, Inc.
Morgan Stanley Capital Group Inc.
Morgan Stanley Capital I Inc.
Morgan Stanley Capital Group Inc.
Morgan Stanley Capital (Jersey) Limited (Jersey, Channel Islands)
Morgan Stanley Capital Partners III, Inc.
Morgan Stanley Capital Services Inc.
Morgan Stanley Commercial Mortgage Capital, Inc.
Morgan Stanley Commodities Management, Inc.
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Morgan Stanley Derivative Products Inc.
Morgan Stanley Developing Country Debt II, Inc.
Morgan Stanley Emerging Markets Inc.
Morgan Stanley Equity (C.I.) Limited (Jersey, Channel Islands)
Morgan Stanley Equity Investors Inc.
Morgan Stanley Finance (Jersey) Limited (Jersey, Channel Islands)
Morgan Stanley Global Emerging Markets, Inc.
Morgan Stanley Insurance Agency Inc.
Morgan Stanley (Jersey) Limited (Jersey, Channel Islands)
Morgan Stanley LEF I, Inc.
Morgan Stanley Leveraged Capital Fund Inc.
Morgan Stanley Leveraged Equity Fund II, Inc.
Morgan Stanley Capital Partners Asia Limited (Hong Kong)
Morgan Stanley Leveraged Equity Holdings Inc.
Morgan Stanley Market Products Inc.
Morgan Stanley Mortgage Capital Inc. (New York)
Morgan Stanley Overseas Finance Ltd. (Caymen Islands)
Morgan Stanley Overseas Services (Jersey) Limited (Jersey, Channel Islands)
Morgan Stanley Real Estate Investment Management Inc.
Morgan Stanley Real Estate Fund, Inc.
MSREF I, L.L.C.
MSREF I-CO, L.L.C.
Morgan Stanley Real Estate Investment Management II, Inc.
MSREF II-CO, L.L.C.
Morgan Stanley Realty Incorporated
Brooks Harvey & Co., Inc.
Morgan Stanley Realty of California Inc. (California)
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<PAGE>
Morgan Stanley Realty of Illinois Inc.
Brooks Harvey of Florida, Inc. (Florida)
Brooks Harvey & Co. of Hawaii, Inc.
Morgan Stanley Realty Japan Ltd. (Japan)
BH-MS Realty Inc.
BH-MS Leasing Inc.
BH-Sartell Inc.
The Morgan Stanley Scholarship Fund, Inc. (Not-for-Profit)
Morgan Stanley Senior Funding, Inc.
Morgan Stanley Services Inc.
Morgan Stanley Technical Services Inc.
Morgan Stanley Technical Services MB/VC Inc.
Morgan Stanley Trust Company (New York)
Morgan Stanley Venture Capital Inc.
Morgan Stanley Venture Capital II, Inc.
Morgan Stanley Venture Capital III, Inc.
Morgan Stanley Ventures Inc.
Morstan Development Company, Inc.
Moranta, Inc. (Georgia)
Porstan Development Company, Inc. (Oregon)
MS 10020, Inc.
MS 10036, Inc.
MS Financing Inc.
Morgan Stanley 750 Building Corp.
MS Tokyo Properties Ltd. (Japan)
MS Holdings Incorporated
MS Venture Capital (Japan) Inc.
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MSAM Holdings II, Inc.
VK/AC Holding, Inc.
Van Kampen American Capital, Inc.
ACCESS Investor Services, Inc.
Advantage Capital Credit Services, Inc.
American Capital Contractual Services, Inc. (New York)
Van Kampen American Capital Advisors, Inc.
Van Kampen American Capital Asset Management, Inc.
Van Kampen American Capital Distributors, Inc.
Van Kampen American Capital Exchange Corp. (California)
Van Kampen American Capital Insurance Agency of Illinois, Inc.
(Illinois)
Van Kampen American Capital Investment Advisory Corp.
Van Kampen American Capital Management, Inc.
Van Kampen American Capital Recordkeeping Services, Inc.
Van Kampen American Capital Services, Inc.
Van Kampen American Capital Trust Company (Texas)
Van Kampen Merritt Equity Holdings Corp.
Van Kampen Merritt Equity Advisors Corp.
VKAC Cayman Limited (Cayman Islands)
VK/AC System, Inc.
MSBF Inc.
MSCP III Holdings, Inc.
MSIT Holdings, Inc.
MSPL Co. Inc.
MSREF II, Inc.
MSREF II, L.L.C.
MSUH Holdings I, Inc.
MSUH Holdings II, Inc.
MS SP Urban Horizons, Inc.
MS Urban Horizons, Inc.
PG Holdings, Inc.
PG Investors, Inc.
PG Investors II, Inc.
Pierpont Power, Inc. (New York)
Romley Computer Leasing Inc.
Strategic Investments I, 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
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Amerin Corporation
Amerin Guaranty Corporation
ARM Financial Group, Inc.
CIMIC Holdings Limited
Consolidated Hydro, Inc.
Fort Howard Corporation
Hamilton Services Limited
PageMart Nationwide, Inc.
PSF Finance L.P.
Premium Standard Forms, Inc.
Container Corporation of America
Risk Management Solutions
Silgan Holding Inc.
Silgan Corporation
Sullivan Holdings Inc.
Sullivan Communications, Inc.
Sullivan Graphics, Inc.
MORGAN STANLEY CAPITAL PARTNERS III, L.P.
(The general partner of the general partner which is Morgan Stanley Capital
Partners III, Inc.)
ARM Financial Group, Inc.
CSG Systems International, Inc.
The Compucare Company
Highlands Gas Corporation
ECO II Holdings
PSF Finance, L.P.
Premium Standard Forms, Inc.
Nokia Aluminum
SITA Telecommunications Holdings, N.V.
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MORGAN STANLEY & CO. INCORPORATED
(100% owned by Morgan Stanley Group Inc.)
Morgan Stanley Flexible Agreements Inc.
MS Securities Services Inc.
Prime Dealer Services Corp.
MORGAN STANLEY INTERNATIONAL INCORPORATED
(100% owned by Morgan Stanley Group Inc.)
Bank Morgan Stanley AG (Switzerland)
Morgan Stanley AOZT (Russia)
Morgan Stanley Asia (China) Limited (Hong Kong)
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 Holdings VI Inc.
Morgan Stanley Asia Pacific (Holdings) Limited (Cayman Islands)
Morgan Stanley Asia Regional (Holdings) I LLC (Cayman Islands)
Morgan Stanley Asia Limited (Hong Kong)
Morgan Stanley Futures (Hong Kong) Limited (Hong Kong)
Morgan Stanley Hong Kong Securities Limited (Hong Kong)
Morgan Stanley Pacific Limited (Hong Kong)
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Morgan Stanley Asia Regional (Holdings) II LLC (Cayman Islands)
Morgan Stanley Asia Regional (Holdings) III LLC (Cayman Islands)
Morgan Stanley Japan Limited (Hong Kong)
Morgan Stanley Asia Pacific (Holdings) I Limited (Cayman Islands)
Morgan Stanley Asia (Taiwan) Ltd. (Republic of China)
Morgan Stanley Asset & Investment Trust Management Co., Limited (Japan)
Morgan Stanley Australia Limited (Australia)
Morgan Stanley Bank Luxembourg S. (Luxembourg)
Morgan Stanley Canada Limited (Canada)
Morgan Stanley Capital SA (France)
Morgan Stanley Capital (Luxembourg) S.A. (Luxembourg)
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Morgan Stanley Financial Services Beteiligungs GmbH (Germany)
Morgan Stanley Financial Services GmbH & Co. KG (Germany)
Morgan Stanley Group (Europe) Plc (England)
Morgan Stanley Asset Management Limited (England)
Morgan Stanley Capital Group Limited (England)
Morgan Stanley (Europe) Limited (England)
Morgan Stanley Finance plc (England)
Morgan Stanley Properties Limited (England)
Morgan Stanley Property Management (UK) Limited (England)
Morgan Stanley Services (UK) Limited (England)
Morgan Stanley UK Group (England)
Morgan Stanley & Co. International Limited (England)
Morgan Stanley International Nominees Limited (England)
Morgan Stanley & Co. Limited (England)
Morgan Stanley Securities Limited (England)
Morstan Nominees Limited (England)
MS Leasing UK Limited (England)
Morgan Stanley Holding (Deutschland) GmbH (Germany)
Morgan Stanley Bank AG (Germany)
Morgan Stanley Hong Kong Nominees Limited (Hong Kong)
Morgan Stanley International Insurance Ltd. (Bermuda)
Morgan Stanley Latin America Incorporated
Morgan Stanley Administadora de Carteiras Ltda. (Brazil)
Morgan Stanley do Brasil Limitada (Brazil)
MS Carbocol Advisors Incorporated
Morgan Stanley Mauritius Company Limited (Mauritius)
***Morgan Stanley Asset Management India Private Limited (India)
***Morgan Stanley India Securities Private Limited (India)
Morgan Stanley India Private Limited (India)
Morgan Stanley Offshore Investment Company Ltd. (Cayman Islands)
Morgan Stanley S.A. (France)
Morgan Stanley SICAV Management S.A. (Luxembourg)
Morgan Stanley South Africa (Pty) Limited (South Africa)
Morgan Stanley SPV I (Cayman Islands) LLC (Cayman Islands)
Farlington Corporation (Ireland)
Morgan Stanley SPV II (Cayman Islands) LLC (Cayman Islands)
Morgan Stanley (Structured Products) Jersey Limited (Jersey, Channel Islands)
Morgan Stanley Wertpapiere GmbH (Germany)
MS Italy (Holdings) Inc.
Banca Morgan Stanley SpA (Italy)
MS LDC, Ltd.
MSAM/Kokusai (Cayman Islands), Inc. (Cayman Islands)
MSL Incorporated
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ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of August 29, 1997 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 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),
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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
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.
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(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, 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 ARMSC. The By-Laws of ARMSC, 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 ARMSC, including each director, officer and
controlling person of the Fund and ARMSC, 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 ARMSC are officers and directors of
Integrity and National Integrity (see Item 28 of this Part C).
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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.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
ARM Capital, the Fund's investment adviser, is a registered investment
adviser providing individual discretionary investment management services and
investment advisory services to various categories of institutional and
individual clients. The names of the officers and directors of ARM Capital, and
their business activities during the past two fiscal years, are set forth below.
The principal business address of ARM Financial, the parent of ARM Capital, is
515 W. Market Street, 8th Floor, Louisville, Kentucky 40202, the principal
business address of Morgan Stanley, Dean Witter, Discover & Co., ARM Financial's
ultimate parent, is 1585 Broadway, New York, New York 10036.
On May 21, 1997, ARM Financial entered into a purchase agreement pursuant
to which ARM Financial agreed to transfer substantially all of the assets and
operations of ARM Capital to a newly formed subsidiary, ARM Capital Advisors,
LLC, and to sell and 80% interest in such company to ARM Capital Advisors
Holdings, LLC, an entity controlled by Emad A. Zikry, the current President of
ARM Capital. The company expects to recognize an immaterial gain on the sale.
After consummation of the pending sale, ARM Capital Advisors will be renamed
Integrity Capital Advisors, Inc., and will continue to provide investment
advisory services to the Fund. The transaction is expected to close during the
third quarter of 1997.
Name Business Activities in Past Two Fiscal Years
- ---- --------------------------------------------
John Franco Co-Chairman of the Board and Co-Chief Executive Officer of
ARM Capital since October 31, 1994; Co-Chief Executive
Officer and a director of ARM Financial since July 15, 1993;
Chief Executive Officer of Franco Associates, Ltd., an
affiliate of ARM Ltd. from its inception in March 1992 to
its merger with ARM Ltd. on December 31, 1992; Chief
Executive Officer and a director of ICH Corporation,
Louisville, Kentucky from November 1989 to November 1991.
Martin H. Ruby Co-Chairman of the Board and Co-Chief Executive Officer of
ARM Capital since October 31, 1994; Co-Chief Executive
Officer and a director of ARM Financial since July 15, 1993;
President and Managing Director of the ICH Capital
Management Group, ICH Corporation, Louisville, Kentucky and
the President of Constitution Life Insurance Co., the
accumulation product subsidiary of ICH Corporation from May
1990 to January 1992.
Emad Zikry Director of ARM Capital since October 31, 1994; Executive
Vice President and Chief Investment Officer of ARM Financial
since December 1994; President of Kleinwort Benson
Investment Management from 1992 - 1994.
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Name Business Activities in Past Two Fiscal Years
- ---- --------------------------------------------
Peter S. Resnik Treasurer of ARM Capital since October, 1994; Treasurer of
ARM Financial since December 1993; worked in various
financial and operational capacities with ARM Ltd. from 1992
to December 1993.
Robert L. Maddox Chief Compliance Officer and Secretary of ARM Capital since
March 1996; Assistant General Counsel of ARM Financial since
October 1995; Legal Officer and Assistant Counsel of
Providian Corp. from 1994 - 1995.
Robert E. Mackey Chief Operating Officer of ARM Capital since March 1996; Sr.
Portfolio Manager and Client Services Manager of ARM Capital
since January 1995; Sr. Portfolio Manager, Client Services
Manager, and Managing Director of Kleinwort Benson
Investment Management from 1993 - 1994.
Rose M. Culbertson Tax Officer of ARM Capital since March 1996; Tax Officer of
ARM Financial since January 1993; Tax Manager of Coopers &
Lybrand from 1990 - 1993.
Barry G. Ward Chief Financial Officer and Controller of ARM Capital since
March 1996; Controller and Chief Financial Officer of ARM
Financial since October 1993; Audit Manager of Ernst & Young
LLP from 1989 - 1993.
OFFICERS AND PARTNERS OR DIRECTORS OF THE SUB-ADVISERS: The names of the
officers and partners or directors of the Sub-Advisers for the Portfolios of the
Fund, and their business activities during the past 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:
Zweig/Glaser Advisers: Form ADV dated March 31, 1997, SEC File No. 801-35094
Harris Bretall Sullivan & Smith, Inc.: Form ADV dated March 20, 1997, SEC File
No. 801-7369
Dreman Value Advisors, Inc.: Form ADV dated March 25, 1997, SEC File No.
801-47879
ARM Capital Advisors, Inc.: Form ADV dated March 26, 1997, SEC File No. 47942
ITEM 29. Principal Underwriters
(a) ARMSC is the principal underwriter for Fund shares.
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(b) The names of the principal officers and directors of ARMSC, and their
positions with ARMSC and the Fund, are as follows:
NAME POSITION WITH ARMSC POSITION WITH THE FUND
---- ------------------- ----------------------
Edward J. Haines President and Director President
William Guth Operations Officer None
David L. Anders Marketing Officer None
John R. McGeeney Compliance Officer, Secretary, None
General Counsel and Director
Barry G. Ward Controller Controller
Peter S. Resnik Treasurer Treasurer
Rose M. Culbertson Tax Officer Tax Officer
The principal business address of each person listed above is 515 W. Market
Street, 8th Floor, Louisville, Kentucky 40202.
(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 515 W.
Market Street, 8th Floor, Louisville, Kentucky 40202, or with its custodian,
Investors Fiduciary Trust Company, at its offices at 127 West 10th Street,
Kansas City, Missouri 64105.
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
Not applicable.
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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 3rd day of September, 1997.
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:
SIGNATURES TITLE DATE
- ---------- ----- -----
/s/ Edward Haines President
- -------------------------- (Principal Executive Officer) September 3, 1997
Edward Haines
/s/ Peter Resnik Treasurer
- -------------------------- (Principal Financial Officer) September 3, 1997
Peter Resnik
/s/ Barry G. Ward Controller
- -------------------------- (Principal Accounting Officer) September 3, 1997
Barry G. Ward
* Director September 3, 1997
- --------------------------
John Katz
/s/ John R. Lindholm Director September 3, 1997
- --------------------------
John R. Lindholm
* Director September 3, 1997
- --------------------------
Theodore S. Rosky
*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
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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 18, 1997, in the Post-Effective
Amendment No. 8 to the Registration Statement (Form N-1A) and related
Prospectus of The Legends Fund, Inc.
/s/ Ernst & Young LLP
Kansas City, Missouri
August 29, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT TO SHAREHOLDERS FOR THE LEGENDS FUND, INC. AND IS QUALIFIED IN ITS
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT TO SHAREHOLDERS FOR THE LEGENDS FUND, INC. AND IS QUALIFIED IN ITS
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT TO SHAREHOLDERS FOR THE LEGENDS FUND, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<NAME> HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT TO SHAREHOLDERS FOR THE LEGENDS FUND, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000890454
<NAME> THE LEGENDS FUND, INC.
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<NAME> DREMAN VALUE PORTFOLIO
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<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT TO SHAREHOLDERS FOR THE LEGENDS FUND, INC. AND IS QUALIFIED IN ITS
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</LEGEND>
<CIK> 0000890454
<NAME> THE LEGENDS FUND, INC.
<SERIES>
<NUMBER> 6
<NAME> ZWEIG EQUITY (SMALL CAP) PORTFOLIO
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<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT TO SHAREHOLDERS FOR THE LEGENDS FUND, INC. AND IS QUALIFIED IN ITS
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</LEGEND>
<CIK> 0000890454
<NAME> THE LEGENDS FUND, INC.
<SERIES>
<NUMBER> 9
<NAME> PINNACLE FIXED INCOME PORTFOLIO
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<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT T0 SHAREHOLDERS FOR THE LEGENDS FUND, INC. AND IS QUALIFIED IN ITS
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</LEGEND>
<CIK> 0000890454
<NAME> THE LEGENDS FUND, INC.
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<NUMBER> 10
<NAME> ARM CAPITAL ADVISORS MONEY MARKET PORTFOLIO
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT TO SHAREHOLDERS FOR THE LEGENDS FUND, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000890454
<NAME> THE LEGENDS FUND, INC.
<SERIES>
<NUMBER> 11
<NAME> MORGAN STANLEY ASIAN GROWTH PORTFOLIO
<S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT TO SHAREHOLDERS FOR THE LEGENDS FUND, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000890454
<NAME> THE LEGENDS FUND, INC.
<SERIES>
<NUMBER> 12
<NAME> MORGAN STANLEY WORLDWIDE HIGH INCOME PORTFOLIO
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