<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.
- SCUDDER KEMPER VALUE PORTFOLIO seeks primarily long-term capital
appreciation with a secondary objective of current income. It
invests primarily in equity securities considered by its
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, 1998 (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. THE COMMISSION
MAINTAINS A WEB SITE (http://www.sec.gov) THAT CONTAINS THE STATEMENT OF
ADDITIONAL INFORMATION, MATERIAL INCORPORATED BY REFERENCE AND OTHER
INFORMATION REGARDING THE FUND.
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, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . iii
THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . . 1
DESCRIPTION OF VARIOUS SECURITIES AND INVESTMENT TECHNIQUES. . . . . . . 5
DIVIDENDS, DISTRIBUTIONS AND FEDERAL INCOME TAXES. . . . . . . . . . . . 12
VALUATION OF SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . 12
PURCHASES AND REDEMPTIONS. . . . . . . . . . . . . . . . . . . . . . . . 12
MANAGEMENT OF THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . 13
PORTFOLIO TRANSACTIONS AND BROKERAGE . . . . . . . . . . . . . . . . . . 16
OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
DESCRIPTION OF COMMERCIAL PAPER AND BOND RATINGS . . . . . . . . . . . . A-1
</TABLE>
ii
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights presented for the five years ended June 30, 1998, 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,
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $17.53 14.49 $ 12.85 $ 9.36 $ 9.71 $ 10.00
Income from investment operations:
Net investment income (loss) -- (d) 0.02 -- (d) 0.01 (0.02)(c) --
Net realized and unrealized gain
(loss) on investments 4.90 4.13 1.74 3.48 (0.33) (0.29)
--------- -------- ------- ------- ------- -------
Total from investment operations 4.90 4.15 1.74 3.49 (0.35) (0.29)
Less distributions:
From net investment income (0.02) --(d) (0.01) -- -- --
From net realized gain (1.30) (1.11) (0.09) -- -- --
--------- -------- ------- ------- ------- -------
Total distributions (1.32) (1.11) (0.10) -- -- --
--------- -------- ------- ------- ------- -------
Net asset value, end of period $ 21.11 $ 17.53 $ 14.49 $ 12.85 $ 9.36 $ 9.71
--------- ------- ------- ------- ------- -------
--------- ------- ------- ------- ------- -------
TOTAL RETURN (a) 29.11% 30.23% 13.59% 37.29% (3.60%) (5.16%)
RATIOS AND SUPPLEMENTAL DATA (b) $37,662 $28,815 $23,810 $16,393 $10,693 $5,143
Ratio of expenses to average net
assets 0.95% 1.03% 1.04% 1.05% 1.29% 1.34%
Ratio of net investment income
(loss) to average net assets (0.01%) 0.14% 0.03% 0.13% (0.17%) (0.06%)
Ratio of expenses to average net
assets before voluntary expense
reimbursement 0.95% 1.03% 1.04% 1.05% 1.29% 3.52%
Ratio of net investment income (loss)
to average net assets before
voluntary expense reimbursement (0.01%) 0.14% 0.03% 0.13% (0.17%) (1.94%)
Portfolio turnover rate 57% 46% 58% 31% 38% 6%
Average commission paid per
equity share traded (e) $0.0600 $0.0600 -- -- -- --
</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) 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.
Amount provided for the fiscal year ended June 30, 1998 is not audited.
iv
<PAGE>
Scudder Kemper Value Portfolio
Financial Highlights
<TABLE>
<CAPTION>
December 14,
1992
(commencement
Year Ended June 30, of operations)
---------------------------------------------------------- through June 30,
1998 1997 1996 1995 1994 1993
------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 20.63 $ 16.17 $ 12.59 $ 10.66 $10.45 $10.00
Income from investment operations:
Net investment income 0.26 0.26 0.18 0.26 0.12 0.11
Net realized and unrealized gain
on investments 4.08 5.04 3.70 1.85 0.17 0.34
------- ------- ------- ------- ------ ------
Total from investment operations 4.34 5.30 3.88 2.11 0.29 0.45
Less distributions:
From net investment income (0.26) (0.19) (0.19) (0.14) (0.08) --
From net realized gain (3.69) (0.65) (0.11) (0.04) -- --
------- ------- ------- ------- ------ ------
Total distributions (3.95) (0.84) (0.30) (0.18) (0.08) --
------- ------- ------- ------- ------ ------
Net asset value, end of period $ 21.02 $ 20.63 $ 16.17 $ 12.59 $10.66 $10.45
------- ------- ------- ------- ------ ------
------- ------- ------- ------- ------ ------
TOTAL RETURN (a) 23.36% 33.78% 31.22% 19.98% 2.80% 8.25%
RATIOS AND SUPPLEMENTAL DATA (b)
Net assets, end of period (in
thousands) $46,436 $30,930 $19,705 $10,877 $8,952 $1,671
Ratio of expenses to average net
assets 0.94% 1.05% 1.06% 1.13% 1.40% 1.24%
Ratio of net investment income
to average net assets 1.58% 1.62% 1.65% 1.98% 1.98% 2.00%
Ratio of expenses to average net
assets before voluntary expense
reimbursement 0.94% 1.05% 1.07% 1.13% 1.61% 8.43%
Ratio of net investment income (loss)
to average net assets before
voluntary expense reimbursement 1.58% 1.62% 1.64% 1.98% 1.76% (1.49%)
Portfolio turnover rate 57% 88% 18% 29% 9% 5%
Average commission paid per
equity share traded (c) $0.0501 $0.0512 -- -- -- --
</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. Amount provided for the fiscal year ended June 30, 1998 is not
audited.
v
<PAGE>
Zweig Asset Allocation Portfolio
Financial Highlights
<TABLE>
<CAPTION>
December 14,
1992
(commencement
Year Ended June 30, of operations)
---------------------------------------------------------- through June 30,
1998 1997 1996 1995 1994 1993
------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of
period $ 14.63 $ 14.11 $ 13.02 $ 11.44 $ 10.81 $10.00
Income from investment operations:
Net investment income 0.14 0.19 0.21 0.33 0.10 0.08
Net realized and unrealized gain
on investments 2.97 2.20 1.21 1.33 0.58 0.73
------- ------- ------- ------- ------- ------
Total from investment operations 3.11 2.39 1.42 1.66 0.68 0.81
Less distributions:
From net investment income (0.18) (0.22) (0.33) (0.08) (0.05) --
From net realized gain -- (1.65) -- -- -- --
------- ------- ------- ------- ------- ------
Total distributions (0.18) (1.87) (0.33) (0.08) (0.05) --
------- ------- ------- ------- ------- ------
Net asset value, end of period $ 17.56 $ 14.63 $ 14.11 $ 13.02 $ 11.44 $10.81
------- ------- ------- ------- ------- ------
------- ------- ------- ------- ------- ------
TOTAL RETURN (a) 21.38% 18.63% 11.06% 14.57% 6.27% 14.86%
RATIOS AND SUPPLEMENTAL DATA (b) $47,450 $42,848 $40,222 $36,736 $31,563 $3,856
Net assets, end of period
(in thousands)
Ratio of expenses to average net
assets 1.18% 1.28% 1.25% 1.20% 1.39% 1.51%
Ratio of net investment income to
average net assets 0.80% 1.29% 1.55% 2.73% 1.67% 1.40%
Ratio of expenses to average net
assets before voluntary expense
reimbursement 1.18% 1.28% 1.25% 1.20% 1.39% 4.87%
Ratio of net investment income
(loss) to average net assets before
voluntary expense reimbursement 0.80% 1.29% 1.55% 2.73% 1.67% (1.17%)
Portfolio turnover rate 65% 89% 105% 45% 101% 12%
Average commission paid per
equity share traded (c) $0.0284 $0.0262 -- -- -- --
</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. Amount provided for the fiscal year ended June 30, 1998 is not
audited.
vi
<PAGE>
Zweig Equity (Small Cap) Portfolio
Financial Highlights
<TABLE>
<CAPTION>
December 14,
1992
(commencement
Year Ended June 30, of operations)
---------------------------------------------------------- through June 30,
1998 1997 1996 1995 1994 1993
------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net Asset value, beginning of period $14.85 $13.61 $11.62 $ 10.65 $10.11 $10.00
Income from investment operations:
Net investment income 0.04 0.16 0.11 0.17 0.15 0.05
Net realized and unrealized gain
on investments 3.48 2.41 2.04 0.93 0.50 0.06
------- ------- ------- ------- ------ ------
Total from investment operations 3.52 2.57 2.15 1.10 0.65 0.11
Less distributions:
From net investment income (0.14) (0.14) (0.16) (0.06) (0.11) --
From net realized gain (0.65) (1.19) -- (0.07) -- --
------- ------- ------- ------- ------ ------
Total distributions (0.79) (1.33) (0.16) (0.13) (0.11) --
------- ------- ------- ------- ------ ------
Net asset value, end of period $17.58 $14.85 $13.61 $11.62 $10.65 $10.11
------- ------- ------- ------- ------ ------
------- ------- ------- ------- ------ ------
TOTAL RETURN (a) 23.72% 20.37% 18.69% 10.39% 6.53% 2.02%
RATIOS AND SUPPLEMENTAL DATA (b)
Net assets, end of period
(in thousands) $14,688 $11,161 $11,698 $8,034 $7,591 $2,116
Ratio of expenses to average net
assets 1.52% 1.55% 1.55% 1.55% 1.72% 1.61%
Ratio of net investment income to
average net assets 0.26% 0.97% 1.06% 1.54% 1.75% 0.84%
Ratio of expenses to average net
assets before voluntary expense
reimbursement 1.56% 1.82% 1.83% 1.59% 2.14% 7.29%
Ratio of net investment income
to average net assets before
voluntary expense reimbursement 0.22% 0.70% .78% 1.50% 1.32% (1.80%)
Portfolio turnover rate 113% 59% 101% 67% 249% 15%
Average commission paid per equity
share traded (c) $0.0291 $0.0276 -- -- -- --
</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.
Amount provided for the fiscal year ended June 30, 1998 is not audited.
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.
Integrity Capital Advisors, Inc. (formerly known as 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, LLC
(HARRIS BRETALL SULLIVAN & SMITH), the Sub-Adviser, see "Management of the
Fund."
The Sub-Adviser utilizes a combination of top down economic analysis and
bottom up security selection. Under a team approach, the STRATEGY TEAM makes
all investment strategy decisions for the firm. The Sub-Adviser employs a
number of quantitative and qualitative tools specifically designed to examine
relative portfolio volatility. A key component of this work is translating
the Sub-Adviser's economic framework into specific industry sector
weightings. This data is then compared to the actual weightings of the
market, as represented by various
1
<PAGE>
indices, and the weightings derived from the firm's stock selection process.
This discipline allows the Strategy Team to control specific industry sector
weightings of the Portfolio relative to the market, thus reducing volatility
associated with large sector concentrations.
In addition to this focus on sector weightings, Harris Bretall Sullivan & Smith
reduces the specific risk of the Portfolio by equally weighting all individual
equity security positions at the time of purchase. The utilization of these
volatility management tools reduces the trading turnover and increases the
Portfolio's tax efficiency.
Once the economic framework is in place, the Strategy Team begins the stock
selection process. This process starts with the development of a pre-selected
equity universe. Approximately 5,000 publicly held companies are screened for
fundamental characteristics, such as revenue growth, financial strength, market
leadership and quality management. Specifically, the Strategy Team looks at
qualitative and quantitative screens which include: Industry Dynamism,
Organizational Depth, Profit Margins, Return on Equity, Debt to Equity, Capital
Structure, Price-to-Earnings History, and Market Capitalization.
This qualitative and quantitative screening process results in a universe
identified as the SUCCESSFUL COMPANY UNIVERSE. The Successful Company Universe
is comprised of approximately 300 high quality, growth oriented companies with
attractive fundamental characteristics and a minimum market capitalization of $1
billion. Within the Successful Company Universe, the Strategy Team ranks each
of the securities based on earnings growth, market risk, price strength,
valuations, and analysts' expectations. By reviewing these characteristics, the
Strategy Team can ascertain which stocks are potential buy candidates. The
Portfolio is developed from these candidates.
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.
SCUDDER KEMPER 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 Scudder Kemper
Investments, Inc. (SCUDDER 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 Scudder 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
2
<PAGE>
the Sub-Adviser seeks solid assets and value rather than paying a high price
for a concept or fad. Another characteristic sought by the Sub-Adviser is low
or sharply declining institutional ownership. The Sub-Adviser believes that
this is a sign of a stock that is falling out of favor from Wall Street's
point of view and becoming relatively cheap.
The Sub-Adviser also analyzes debt-to-equity ratios to confirm that there is a
manageable amount of debt on a company's balance sheet, usually no more than
40%. The Sub-Adviser devotes attention to reviewing cash and current ratios to
be certain that the Portfolio's potential investments have strong staying power
and can self-finance should the need arise.
Generally, the Sub-Adviser seeks companies with better than average growth rates
in the last five and ten-year periods for both earnings and dividends. Most
investments will be in securities of domestic companies; however, the Portfolio
may also invest in securities of foreign companies through the acquisition of
ADRs.
In order to conserve assets during periods when the Sub-Adviser believes that
the market for equity securities is unduly speculative or when interest rates
are abnormally high, the Portfolio may invest in U.S. Government securities and
other high-grade, short-term money market instruments, including repurchase
agreements with respect to such instruments. The Portfolio may also purchase
and sell stock index futures contracts and index options. The Portfolio will
invest in stock index futures contracts and index options solely for the purpose
of hedging against changes resulting from market conditions in the values of the
securities held by the Portfolio or securities which it intends to purchase or
sell where such transactions are economically appropriate for the reduction of
risks inherent in the ongoing management of the Portfolio. See "Description of
Various Securities and Investment Techniques."
ZWEIG 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 and 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
3
<PAGE>
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 2,000 stocks positioned immediately
after the 1,000 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 2,000 stocks ranges between $5.5
billion and $200 million. Trading volume is determined by multiplying a
stock's average daily shares traded over the last year by the average price
of the stock for that same period. Currently, Small Company Stocks have an
average daily trading volume of approximately $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.
Under normal circumstances, the Portfolio will invest primarily in Small Company
Stocks and may have some of its assets invested in larger company stocks. 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.
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:
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- - GINNIE MAES -- Ginnie Maes are debt securities issued by a mortgage banker or
other mortgagee and represent an interest in a pool of mortgages insured by
the Federal Housing Administration or the Farmers Home Administration or
guaranteed by the Veterans Administration. The Government National Mortgage
Association (GNMA) guarantees the timely payment of principal and interest.
The GNMA guarantee is backed by the full faith and credit of the U.S.
Government.
- - FANNIE MAES -- The Federal National Mortgage Association (FNMA) is a
government-sponsored corporation owned entirely by private stockholders that
purchases residential mortgages from a list of approved seller/servicers.
Pass-through securities issued by FNMA are guaranteed as to timely payment of
principal and interest by FNMA but are not backed by the full faith and
credit of the U.S. Government.
- - FREDDIE MACS -- The Federal Home Loan Mortgage Corporation (FHLMC), a
corporate instrumentality of the U.S. Government, issues participation
certificates (PCs) which represent an interest in residential mortgages from
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
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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.
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
Scudder 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, Scudder
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
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a Portfolio (i) owns the optioned securities, (ii) has an immediate right to
acquire such securities, without additional consideration, upon conversion or
exchange of securities currently held in the Portfolio or (iii) in the case
of options on certain U.S. Government securities or which are settled in
cash, the Portfolio maintains, in a segregated account with the custodian,
cash or U.S. Government securities or other appropriate high-grade debt
obligations with a value sufficient to meet its obligations under the call.
When a Portfolio writes a call on a security, it receives a premium and gives
the purchaser the right to buy the underlying security at any time during the
call period at a fixed exercise price regardless of market price changes
during the call period. If the call is exercised, the Portfolio loses the
opportunity for any gain from an increase in the market price of the
underlying security over the exercise price.
Zweig Asset Allocation Portfolio and Scudder 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, Scudder 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,
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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 Portfolio's investment
restrictions. Each of Zweig Asset Allocation Portfolio, Scudder 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 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,
Scudder 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, Scudder 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
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event that a Portfolio could not close a futures position and the value of
the position declined, the Portfolio would be required to continue to make
daily cash payments of maintenance margin. There can be no assurance that
hedging transactions will be successful, as there may be an imperfect
correlation (or no correlation) between movements in the prices of the
futures contracts and of the securities being hedged, or price distortions
due to conditions in the futures markets because futures markets may have
daily market price movement limits for futures contracts. Where futures
contracts are purchased to hedge against an increase in the price of
long-term securities, but the long-term market declines and a Portfolio does
not invest in long-term securities, the Portfolio would realize a loss on the
futures contracts, which would not be offset by a reduction in the price of
securities purchased. Where futures contracts are sold to hedge against a
decline in the price of long-term securities in a Portfolio, but the
long-term market advances, the Portfolio would lose part or all of the
benefit of the advance due to offsetting losses in its futures positions.
Successful use of futures contracts by a Portfolio is subject to the
Sub-Adviser's ability to predict correctly movements in the direction of
interest rates, currency exchange rates, market prices and other factors
affecting markets for debt securities.
A Portfolio may not enter into futures contracts or purchase or write related
options unless it complies with rules and interpretations of the Commodity
Futures Trading Commission (CFTC) which require, among other things, that
futures and related options be used solely for BONA FIDE HEDGING purposes, as
defined in CFTC regulations or, alternatively, that the Portfolio will not enter
into futures and related options transactions if the sum of the aggregate
initial margin deposits on futures contracts and premiums paid for related
options exceeds 5% of the market value of the Portfolio's total assets
(calculated in accordance with CFTC regulations).
ILLIQUID SECURITIES: Each Portfolio may invest up to 10% (15% in the case of
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, and 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 Scudder 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
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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, income derived with respect to foreign securities may be
subject to foreign taxes withheld prior to distribution. Foreign securities
often trade with less frequency and volume than domestic securities and
therefore may exhibit greater price volatility. Changes in foreign exchange
rates will affect the value of those securities which are denominated or
quoted in currencies other than the U.S. dollar.
Investing in securities of issuers in emerging countries, including certain
Asian countries, involves certain considerations not typically associated with
investing in securities of U.S. companies, including (1) restrictions on foreign
investment and on repatriation of capital, (2) currency fluctuations, (3) the
cost of converting foreign currency into U.S. dollars, (4) potential price
volatility and lesser liquidity of shares traded on emerging country securities
markets and (5) political and economic risks, including the risk of
nationalization or expropriation of assets and the risk of war. In addition,
accounting, auditing, financial and other reporting standards in emerging
countries may not be equivalent to U.S. standards, and therefore disclosure of
certain material information may not be made and less information may be
available to investors investing in emerging countries than in the United
States. There is also generally less governmental regulation of the securities
industry in emerging countries than in the United States. Many of these
countries may have less stable political environments than western democracies.
Moreover, it may be more difficult to obtain a judgment in a court outside the
United States. For further information concerning emerging country securities,
see "Foreign Government Securities" and "Asian and Emerging Country Debt
Securities" below and "Investment Policies and Limitations -- Brady Bonds" in
the SAI.
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
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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 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 has qualified and intends to continue 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 is generally 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
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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.
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.
INTEGRITY CAPITAL ADVISORS, INC., 515 West Market Street, Louisville,
Kentucky 40202, serves as investment manager to all the Portfolios of the
Fund. The Manager was formerly known as ARM Capital Advisors, Inc. ARM, the
parent of the Manager, is a publicly-owned financial services company
providing retail and institutional products and services to the long-term
savings and retirement market. At June 30, 1998, ARM had $8.4 billion in
assets under management. At June 30, 1998, the Manager had investments
totaling approximately $148 million under management and fiduciary control.
ARM (together with its subsidiaries, including the Manager) is currently
evaluating, on an ongoing basis, its computer systems and the systems of other
companies on which ARM's operations rely to determine if they will function
properly with respect to dates in the year 2000 and beyond. These activities
are designed to ensure that there is no adverse effect on the core business
operations of ARM or the Fund. While ARM believes its planning efforts are
adequate to address its year 2000 concerns, there can be no guarantee that the
systems of other companies on which ARM's operations rely will be converted on a
timely basis and will not have a material effect on ARM or the Fund.
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 27 years and is currently affiliated with
investment advisers, which, as of June 30, 1998 managed over $8 billion in
assets. Dr. Zweig is also President and Director of The Zweig Fund, Inc. and
the Zweig Total Return Fund, Inc., closed-end funds traded on the NYSE with
combined assets of over $1 billion. He is also author of various investment
advisory newsletters, including THE ZWEIG FORECAST, a regular panelist on PBS'
television program WALL STREET WEEK with Louis Rukeyser for over 25 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, 1998
of $2.6 billion (consisting of Zweig Strategy Fund, Zweig Appreciation Fund,
Zweig Managed Assets, Zweig Growth & Income Fund, Zweig Government Fund, Zweig
Foreign Equity Fund and Zweig Cash Fund, Inc.). In addition, a wholly-owed
subsidiary of Zweig/Glaser, Euclid Advisers LLC, managed as of June 30, 1998,
$103 million in the Euclid Market Neutral Fund.
12
<PAGE>
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, LLC, 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 by individual partners of the firm and Value Asset
Management of Westport, CT. The firm provides investment management services to
institutions and high-net worth individuals, and at June 30, 1998, had assets
under management of approximately $3.2 billion.
Joseph N. Calderazzo, Senior 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. W.
Graeme Bretall, CFA, President of Harris Bretall Sullivan & Smith, served as
portfolio manager from 1992 to 1994.
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. Mr. Calderazzo will make the final investment buy and sell decisions
for the Portfolio. Harris Bretall Sullivan & Smith employs a team approach to
the investment process so that decisions implemented for the Portfolio are made
together with all tax-exempt, fully discretionary portfolios.
SCUDDER KEMPER INVESTMENTS, INC., 345 Park Avenue, 24th Floor, New York, New
York 10154, serves as the Sub-Adviser to the Scudder Kemper Value Portfolio.
Clients of Scudder Kemper include public funds, corporate benefit funds, college
endowments and foundations, Taft-Hartley funds, and other institutional
accounts. In addition, Scudder Kemper serves as investment adviser to the
Kemper Mutual Group, Inc., which consists of three portfolios, Kemper Contrarian
Fund, Kemper-Dreman High Return Fund, and Kemper Small Cap Fund.
All investment decisions by Scudder Kemper for the Scudder Kemper Value
Portfolio are made by an investment committee, which includes a group of senior
investment professionals.
Scudder Kemper, which resulted from the combination of the businesses of
Scudder, Stevens & Clark, Inc. (SCUDDER) and Zurich Kemper Investments, Inc.
(KEMPER), an indirect subsidiary of Zurich Insurance Company (ZURICH), in 1997,
is one of the largest and most experienced investment counsel firms in the
United States. Scudder was established in 1919 as a partnership and was
restructured as a Delaware corporation in 1985. Scudder launched its first fund
in 1928. Kemper launched its first fund in 1948. Since December 31, 1997,
Scudder Kemper has served as investment adviser to both Scudder and Kemper
funds. As of June 30, 1998, Scudder Kemper has more than $200 billion in assets
under management. The principal source of Scudder Kemper's income is
professional fees received from providing continuing investment advice. Scudder
Kemper provides investment counsel for many individuals and institutions,
including insurance companies, endowments, industrial corporations and financial
and banking organizations.
Founded in 1872, Zurich is a multinational, public corporation organized under
the laws of Switzerland. Its home office is located at Mythenquai 2, 8002
Zurich, Switzerland. Historically, Zurich's earnings have resulted from its
operations as an insurer as well as from its ownership of its subsidiaries and
affiliated companies (ZURICH INSURANCE GROUP). Zurich and the Zurich Insurance
Group provide an extensive range of insurance products and services and
13
<PAGE>
have branch offices and subsidiaries in more than 40 countries throughout the
world. Zurich owns approximately 70% of the Manager, with the balance owned
by the Manager's officers and employees.
Each Portfolio pays the Manager a fee based on an annual percentage of the
average daily net assets of such Portfolio. The management fees are deducted
from the assets of each Portfolio and paid monthly, but are accrued daily for
purposes of determining the value of a share of each Portfolio on each day
the NYSE is open for trading. (See "Valuation of Shares".) For the services
provided to each of the Portfolios, the Manager (and not the Fund) pays each
Sub-Adviser a monthly fee based on an annual percentage of the average daily
net assets of the respective Portfolio. The annual percentage of average
daily net assets payable by each Portfolio to the Manger and by the Manager
to each Sub-Adviser is set forth below. The fees paid by certain of the
Portfolios may be higher than those paid by other investment companies.
<TABLE>
<CAPTION>
Annual Percentage of Annual Percentage
Average Net Assets of Average Net
Paid Assets Paid By
By Portfolio to the the Manager to Sub-
Manager Adviser
-------------------- -------------------
<S> <C> <C>
Harris Bretall Sullivan & Smith Equity
Growth Portfolio .65% .40%
Scudder Kemper Value Portfolio .65% .40%
Zweig Asset Allocation Portfolio .90% .65%
Zweig Equity (Small Cap) Portfolio 1.05% .80%
</TABLE>
ARM Securities Corporation (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.
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.
14
<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 period from commencement of
operations through June 30, 1993 and the fiscal years ended June 30, 1994, 1995,
1996, 1997 and 1998.
OTHER INFORMATION
CUSTODIAN: Investors Fiduciary Trust Company ("IFTC"), 801 Pennsylvania, Kansas
City, Missouri 64105, acts as custodian of the assets of all of the Portfolios.
IFTC has indicated that, as of July 31, 1998, it was on target to achieve its
goal of a Year-2000 compliant production system environment by December 31,
1998.
TRANSFER AGENT, DIVIDEND AGENT AND RECORDKEEPING AGENT: IFTC 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
quality of the portfolios, and the market conditions during the given time
period,
15
<PAGE>
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
A-2
<PAGE>
neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present, but certain
protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative
characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
to a high degree. Such issues are often in default or have other
marked shortcomings.
C -- Bonds which are rated C are the lowest class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies modifiers to each rating classification from Aa through B to
indicate relative ranking within its rating categories. The modifier "1"
indicates that a security ranks in the higher end of its rating category; the
modifier "2" indicates a mid-range ranking; and the modifier "3" indicates that
the issue ranks in the lower end of its rating category.
A-3
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
THE LEGENDS FUND, INC. 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.
- SCUDDER KEMPER VALUE PORTFOLIO seeks primarily long-term capital
appreciation with a secondary objective of current income. It invests
primarily in equity securities considered by its 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,
1998. 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, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT POLICIES AND LIMITATIONS. . . . . . . . . . . . . . . . . . . . . . . .B-3
OPTIONS, FUTURES AND OTHER HEDGING STRATEGIES. . . . . . . . . . . . . . . . . . .B-7
DIRECTORS AND OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-12
INVESTMENT MANAGEMENT SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . B-14
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-17
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION . . . . . . . . . . . . . . . . . B-19
VALUATION OF SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-20
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-20
YIELD AND PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . B-21
OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-24
FINANCIAL STATEMENTS OF THE FUND . . . . . . . . . . . . . . . . . . . . . . . . B-25
OPTIONS AND FUTURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .A-1
</TABLE>
B-2
<PAGE>
INVESTMENT POLICIES AND LIMITATIONS
The following supplements the information contained in the Fund's Prospectus
concerning the investment policies and limitations of its four Portfolios.
For information relating to Integrity Capital Advisors, Inc. (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 Scudder 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 instruments to the general public, but instead will often depend either on
an efficient institutional
B-3
<PAGE>
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
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to a Portfolio if the other party to a repurchase agreement becomes bankrupt.
Each Portfolio intends to enter into repurchase agreements only with banks
and dealers in transactions believed by the Sub-Adviser to present minimum
credit risks in accordance with guidelines established by the Fund's Board of
Directors. The Sub-Adviser will review and monitor the creditworthiness of
those institutions under the Board's general supervision.
LENDING OF PORTFOLIO SECURITIES. Each Portfolio 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
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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;
(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 Scudder 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.
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OPTIONS, FUTURES AND OTHER HEDGING STRATEGIES
As discussed in the Prospectus, each of Zweig Asset Allocation Portfolio,
Scudder 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.
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 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
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utilize these techniques are experienced in the use of Hedging
Instruments, there can be no assurance that any particular
hedging strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation,
between price movements of a Hedging Instrument and price
movements of the investments being hedged. For example, if
the value of a Hedging Instrument used in a short hedge
increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a
lack of correlation might occur due to factors unrelated to
the value of the investments being hedged, such as speculative
or other pressures on the markets in which Hedging Instruments
are traded. The effectiveness of hedges using Hedging
Instruments on indices will depend on the degree of
correlation between price movements in the index and price
movements in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by
wholly or partially offsetting the negative effect of
unfavorable price movements in the investments being hedged.
However, hedging strategies can also reduce opportunity for
gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a
Portfolio entered into a short hedge because the Sub-Adviser
projected a decline in the price of a security held by a
Portfolio, and the price of that security increased instead,
the gain from that increase might be wholly or partially
offset by a decline in the price of the Hedging Instrument.
Moreover, if the price of the Hedging Instrument declined by
more than the increase in the price of the security, the
Portfolio could suffer a loss. In either such case, the
Portfolio would have been in a better position had it not
hedged at all.
(4) As described below, a Portfolio might be required to maintain
assets as COVER, maintain segregated accounts or make margin
payments when it takes positions in Hedging Instruments
involving obligations to third parties (I.E., Hedging
Instruments other than purchased options). If a Portfolio
were unable to close out its positions in such Hedging
Instruments, it might be required to continue to maintain such
assets or accounts or make such payments until the position
expired or matured. These requirements might impair a
Portfolio's ability to sell a portfolio security or make an
investment at a time when it would otherwise be favorable to
do so, or require that a Portfolio sell a portfolio security
at a disadvantageous time. A Portfolio's ability to close out
a position in a Hedging Instrument prior to expiration or
maturity depends on the existence of a liquid secondary market
or, in the absence of such a market, the ability and
willingness of a contra party to enter into a transaction
closing out the position. Therefore, there is no assurance
that any hedging position can be closed out at a time and
price that is favorable to the Portfolio.
COVER FOR HEDGING STRATEGIES. Transactions using Hedging Instruments, other
than purchased options, expose a Portfolio to an obligation to another party.
A Portfolio will not enter into any such transactions unless it owns either
(1) an offsetting COVERED position in securities, currencies or other options
or futures contracts or (2) cash, receivables and short-term debt securities,
with a value sufficient at all times to cover its potential obligations to
the extent not covered as provided in (1) above. Each Portfolio will comply
with SEC guidelines regarding cover for hedging transactions and will, if the
guidelines so require, set aside cash, 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
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declines in the value of the hedged investment would be offset to the extent
of the premium received for writing the option. However, if the security
appreciates to a price higher than the exercise price of the call option, it
can be expected that the option will be exercised and the Portfolio will be
obligated to sell the security at less than its market value. If the covered
call option is an OTC option, the securities or other assets used as cover
would be considered illiquid to the extent described under "Investment
Policies and Restrictions--Illiquid Securities."
The value of an option position will reflect, among other things, the current
market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration
dates of up to nine months. Options that expire unexercised have no value.
A Portfolio may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, a Portfolio may
terminate its obligation under a call option that it had written by
purchasing an identical call option; this is known as a closing purchase
transaction. Conversely, a Portfolio may terminate a position in a put or
call option it had purchased by writing an identical put or call option;
this is known as a closing sale transaction.
The Portfolios identified in the Prospectus may purchase or write
exchange-traded and/or OTC options. Currently, many options on equity
securities are exchange-traded. Exchange markets for options on debt
securities and foreign currencies exist but are relatively new, and these
instruments are primarily traded on the OTC market. Exchange-traded options
in the United States are issued by a clearing organization affiliated with
the exchange on which the option is listed which, in effect, guarantees
completion of every exchange-traded option transaction. In contrast, OTC
options are contracts between the Portfolio and its contra party (usually a
securities dealer or a bank) with no clearing organization guarantee. Thus,
when the Portfolio purchases or writes an OTC option, it relies on the party
from whom it purchased the option or to whom it has written the option (the
CONTRA PARTY) to make or take delivery of the underlying investment upon
exercise of the option. Failure by the contra party to do so would result in
the loss of any premium paid by the Portfolio as well as the loss of any
expected benefits of the transaction.
Generally, the OTC debt and foreign currency options used by the Portfolios
are European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of
the option.
A Portfolio's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. Each Portfolio intends
to purchase or write only those exchange-traded options for which there
appears to be a liquid secondary market. However, there can be no assurance
that such a market will exist at any particular time. Closing transactions
can be made for OTC options only by negotiating directly with the contra
party, or by a transaction in the secondary market if any such market exists.
Although a Portfolio will enter into OTC options only with contra parties
that are expected to be capable of entering into closing transactions with
the Portfolio, there is no assurance that the Portfolio will in fact be able
to close 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, Scudder 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
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(2) Zweig Asset Allocation Portfolio and Zweig Equity (Small Cap)
Portfolio will attempt to limit losses from all options
transactions to 5% of its average net assets per year, or
cease options transactions until in compliance with the 5%
limitation, but there can be no absolute assurance of
adherence to these limits.
FUTURES. The purchase of futures or call options thereon can serve as a long
hedge, and the sale of futures or the purchase of put options thereon can
serve as a short hedge. Writing covered call options on futures contracts
can serve as a limited short hedge, using a strategy similar to that used for
writing covered call options on securities and indices.
Futures strategies also can be used to manage the average duration of a
Portfolio. If the Sub-Adviser wishes to shorten the average duration of a
Portfolio, the Portfolio may sell a futures contract or a call option
thereon, or purchase a put option on that futures contract. If the
Sub-Adviser wishes to lengthen the average duration of a Portfolio, the
Portfolio may buy a futures contract or a call option thereon.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a Portfolio is required to deposit in a
segregated account with its custodian, in the name of the futures broker
through whom the transaction was effected, INITIAL MARGIN consisting of cash,
U.S. Government securities or other liquid, high-grade debt securities, in an
amount generally equal to 10% or less of the contract value. Margin must
also be deposited when writing a call option on a futures contract, in
accordance with applicable exchange rules. Unlike margin in securities
transactions, initial margin on futures contracts does not represent a
borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the Portfolio at the termination of the
transaction if all contractual obligations have been satisfied. Under
certain circumstances, such as periods of high volatility, a Portfolio may be
required by an exchange to increase the level of its initial margin payment,
and initial margin requirements might be increased generally in the future by
regulatory action.
Subsequent VARIATION MARGIN payments are made to and from the futures broker
daily as the value of the futures position varies, a process known as MARKING
TO MARKET. Variation margin does not involve borrowing, but rather
represents a daily settlement of the Portfolio's obligations to or from a
futures broker. When a Portfolio purchases an option on a future, the premium
paid plus transaction costs is all that is at risk. In contrast, when a
Portfolio purchases or sells a futures contract or writes a call option
thereon, it is subject to daily variation margin calls that could be
substantial in the event of adverse price movements. If the Portfolio has
insufficient cash to meet daily variation margin requirements, it might need
to sell securities at a time when such sales are disadvantageous.
Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to
the instrument held or written. Positions in futures and options on futures
may be closed only on an exchange or board of trade that provides a secondary
market. Each Portfolio intends to enter into futures 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
B-11
<PAGE>
required to maintain the position being hedged by the future or option or to
maintain cash or securities in a segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options
markets are subject to daily variation margin calls and might be compelled to
liquidate futures or related options positions whose prices are moving
unfavorably to avoid being subject to further calls. These liquidations
could increase price volatility of the instruments and distort the normal
price relationship between the futures or options and the investments being
hedged. Also, because initial margin deposit requirements in the futures
market are less onerous than margin requirements in the securities markets,
there might be increased participation by speculators in the futures markets.
This participation also might cause temporary price distortions. In
addition, activities of large traders in both the futures and securities
markets involving arbitrage, PROGRAM TRADING and other investment strategies
might result in temporary price distortions.
LIMITATIONS ON THE USE OF FUTURES. A Portfolio will not purchase or sell
futures contracts or related options if, immediately thereafter, the sum of
the amount of initial margin deposits on the Portfolio's existing futures
positions and margin and premiums paid for related options would exceed 5% of
the market value of the Portfolio's total assets. This guideline can be
changed by the Fund's Board of Directors without shareholder vote. This
guideline does not limit to 5% the percentage of the Portfolio's assets that
are at risk in futures and related options transactions. For purposes of
this guideline, options on futures contracts and foreign currency options
traded on a commodities exchange will be considered RELATED OPTIONS.
In addition, the Fund has represented to the CFTC that it: (1) will use
future contracts, options thereon and foreign currency options traded on a
commodities exchange solely in BONA FIDE hedging transactions or,
alternatively (2) will not enter into futures contracts, options thereon or
foreign currency options traded on a commodities exchange for which the
aggregate initial margin and premiums exceed 5% of a Portfolio's total assets
(calculated in accordance with CFTC regulations).
FOREIGN CURRENCY HEDGING STRATEGIES -- SPECIAL CONSIDERATIONS. The
Portfolios noted in the Prospectus may use options and futures on foreign
currencies, and foreign currency forward contracts as described below to
hedge against movements in the values of the foreign currencies in which the
Portfolios' securities are denominated. Such currency hedges can protect
against price movements in a security that a Portfolio owns or intends to
acquire that are attributable to changes in the value of the currency in
which it is denominated. Such hedges do not, however, protect against price
movements in the securities that are attributable to other causes.
The Portfolios might seek to hedge against changes in the value of a
particular currency when no Hedging Instruments on that currency are
available or such Hedging Instruments are more expensive than certain other
Hedging Instruments. In such cases, a Portfolio may hedge against price
movements in that currency by entering into transactions using Hedging
Instruments on other currencies, the values of which the Sub-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
B-12
<PAGE>
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.
<TABLE>
<CAPTION>
Name, Age and Address Position with the Fund Other Business Activities in Past 5 Years
- --------------------- ---------------------- -----------------------------------------
<S> <C> <C>
John R. Lindholm (49)* 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 (59) Director Investment banker since January 1991; Chairman and Chief Executive
10 Hemlock Road Officer, Sam's Restaurant Group, Inc. (a restaurant holding
Hartsdale, NY 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 owned and managed its
investment operations). Director of the mutual funds in the State
Bond Group of mutual funds from June 1995 to December 1996.
William B. Faulkner (70) Director Director since November 1996. President, William Faulkner &
240 East Plato Blvd. Associates (business and institutional adviser), since 1986;
St. Paul, Minnesota 55107 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.
Chris L. Mahai (43) Director President, clavm, inc., (a firm that provides consulting, project
620 Keller Parkway management and infomediary services to organizations interested in
Little Canada, creating and implementing innovative business, community and
Minnesota 55117-1234 marketplace strategies and initiatives) ; Poynter Fellow, the
Poynter Institute for Media Studies; Board Member (Cowles Media)
Star Tribune Foundation, from September, 1992 to June, 1998; Senior
Vice President and General Manager of Markets and Products, Cowles
Media Company/Star Tribune, from November, 1996 to June,
</TABLE>
B-13
<PAGE>
<TABLE>
<CAPTION>
Name, Age and Address Position with the Fund Other Business Activities in Past 5 Years
- --------------------- ---------------------- -----------------------------------------
<S> <C> <C>
1998; Senior Vice President and General Manager of the Consumer
Business Unit, Cowles Media Company/Star Tribune, from December 1995
to October, 1996; Senior Vice President and Strategic Integration
Leader, Cowles Media Company/Star Tribune, from August, 1993 to
November, 1995.
Edward J. Haines (51) 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 (37) 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.
Peter S. Resnik (37) 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 (34) 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, 1998 the Fund
payed the Directors who are not interested persons of the Fund $49,000
exclusive of expenses. Because the Manager and the Sub-Advisers perform
substantially all of the services necessary for the operation of the Fund,
the Fund requires no employees. No officer, director or employee of the
Manager, Integrity, National Integrity or a Sub-Adviser receives any
compensation from the Fund for acting as a Director or officer.
The following table sets forth for the fiscal year ended June 30, 1998,
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.
B-14
<PAGE>
<TABLE>
<CAPTION>
Pension or
Retirement Estimated Total
Benefits Annual Compensation
Aggregate Accrued as Benefits From Fund
Compensation Part of Fund Upon Paid to
Name of Director From Fund Expenses Retirement Directors
---------------- ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
William B. Faulkner $14,000 NONE N/A $14,000
John Katz $14,000 NONE N/A $14,000
Theodore S. Rosky* $14,000 NONE N/A $14,000
Chris L. Mahai $ 7,000 NONE N/A $ 7,000
</TABLE>
- ---------------
* Mr. Rosky resigned from the Board as of May 24, 1998.
As of June 30,1998, the Directors and officers of the Fund as a group, owned
less than 1% of the outstanding shares of the Fund.
INVESTMENT MANAGEMENT SERVICES
The Manager acts as the investment manager of each Portfolio pursuant to a
management agreement with the Fund dated as of July 10, 1998 (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, 1996, 1997 and 1998, each
Portfolio paid the Manager* management fees in the amounts set forth below:
<TABLE>
<CAPTION>
Management Fee for Fiscal Year Ended
------------------------------------
June 30,
Portfolio 1996 June 30, 1997 June 30, 1998
- --------- -------- ------------- -------------
<S> <C> <C> <C>
Harris Bretall Sullivan & Smith Equity Growth
Portfolio $143,566 $160,836 $199,561
Scudder Kemper Value Portfolio $ 85,287 $164,290 $228,476
Zweig Asset Allocation Portfolio $355,357 $369,657 $394,520
Zweig Equity (Small Cap) Portfolio $102,926 $112,524 $135,678
</TABLE>
- ---------------
* The Manager assumed the duties and responsibilities of Integrity as the
Fund's manager on February 1, 1996.
In May 1998, certain investment funds sponsored by Morgan Stanley Dean Witter
(the "MSDW Funds") sold the approximately 12.4 million shares of ARM
Financial Group, Inc. ("ARM"), the parent of the Manager, that were owned by
the MSDW Funds in a secondary offering (the "Secondary Offering"). Prior to
the Secondary Offering, the MSDW Funds owned approximately 53% of the
outstanding shares of common stock; following the Secondary Offering, the
MSDW Funds owned no shares of ARM. As a result of the Secondary Offering,
which may be deemed to constitute an indirect change of control of the
Manager and therefore an assignment under the 1940 Act, the then effective
Management Agreement terminated. The Manager provided the services specified
in the Management Agreement to the Fund without charge for the period from
May 8, 1998 through July 10, 1998, when the new Management Agreement was
approved by Fund shareholders.
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
B-15
<PAGE>
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, 1996, 1997 and 1998, the
Subadvisors received subadvisory fees in respect of each Portfolio in the
amounts set forth below:
<TABLE>
<CAPTION>
Amount Reimbursed for Fiscal Year Ended
---------------------------------------
Portfolio June 30, 1996 June 30, 1997 June 30, 1998
--------- ------------- ------------- -------------
<S> <C> <C> <C>
Harris Bretall Sullivan &
Smith Equity Growth
Portfolio -- -- --
Scudder Kemper Value
Portfolio $ 902 -- --
Zweig Asset Allocation
Portfolio -- -- --
Zweig Equity (Small Cap)
Portfolio $26,989 $29,273 $5,527
</TABLE>
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 after its initial
two-year term 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
B-16
<PAGE>
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,
1996, 1997 and 1998, the Manager or its predecessor paid the Sub-Advisers
sub-advisory fees in respect of each Portfolio in the amounts set forth below:
<TABLE>
<CAPTION>
Amount of Sub-Advisory Fee for Fiscal Year Ended
------------------------------------------------
Portfolio June 30, 1996 June 30, 1997 JUNE 30, 1998
--------- ------------- ------------- -------------
<S> <C> <C> <C>
Harris Bretall Sullivan &
Smith Equity Growth
Portfolio $110,436 $123,720 $141,321
Scudder Kemper Value
Portfolio $ 62,332 $126,377 $161,781
Zweig Asset Allocation
Portfolio $296,131 $308,047 $312,874
Zweig Equity (Small Cap)
Portfolio $ 88,222 $ 96,449 $111,641
</TABLE>
In anticipation of the termination of the Management Agreement on May 8, 1998
as a result of the Secondary Offering and of the Sub-Advisory Agreements upon
termination of the Management Agreement, to ensure the continued provision of
investment advisory services to the Fund, the Fund's Board of Directors
approved interim investment advisory agreements between the Fund, on behalf
of each Portfolio, and the respective Sub-Adviser. The annual fee rates
payable under the interim agreements were the same as were in effect under
the old Sub-Advisory Agreements. Accordingly, the fees reflected in the
foregoing table as having been paid to the Sub-Advisers for the period from
May 8, 1998 through July 10, 1998 were paid directly by the Fund pursuant to
the interim agreements and not by the Manager. New Sub-Advisory Agreements
were approved and the interim agreements were ratified by shareholders on
July 10, 1998.
Each Sub-Advisory Agreement may be renewed from year to year after its initial
two-year term so long as such continuance is specifically approved at least
annually in accordance with the requirements of the 1940 Act. Each Sub-Advisory
Agreement provides that it will terminate in the event of its assignment (as
defined in the 1940 Act) or upon the termination of the Management Agreement.
Each Sub-Advisory Agreement may be terminated by the Fund, the Manager or the
respective Sub-Adviser upon 60 days' prior written notice.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Fund's Board of Directors, each
Sub-Adviser is responsible for the execution of portfolio transactions and
the allocation of brokerage transactions for the respective Portfolio. As a
general matter in executing portfolio transactions, each Sub-Adviser may
employ or deal with such brokers or dealers as may, in the Sub-Adviser's best
judgment, provide prompt and reliable execution of the transaction at
favorable security prices and reasonable commission rates. In selecting
brokers or dealers, the Sub-Adviser will consider all relevant factors,
including the price (including the applicable brokerage commission or dealer
spread), size of the order, nature of the market for the security, timing of
the transaction, the reputation, experience and financial stability of the
broker-dealer, the quality of service, difficulty of execution and
operational facilities of the firm involved and in the case of securities,
the firm's risk in positioning a block of securities. Prices paid to dealers
in principal transactions through which most debt securities and some equity
securities are traded generally include a SPREAD, which is the difference
between the prices at which the dealer is willing to purchase and sell a
specific security at that time. Each Portfolio that invests in securities
traded in the OTC markets will engage primarily in transactions with the
dealers who make markets in such securities, unless a better price or
execution could be obtained by using a broker. The Fund has no obligation to
deal with any broker or group of brokers in the execution of portfolio
transactions. Brokerage arrangements may take into account the distribution
of certificates by broker-dealers, subject to best price and execution.
B-17
<PAGE>
The Manager and certain of the Sub-Advisers are affiliated with registered
broker-dealers, including Zweig Securities Corp. Until May 8, 1998, the
Manager was affiliated with Morgan Stanley & Co. Incorporated. 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, 1996, 1997 and 1998 the Fund paid the
following brokerage commissions with respect to each of the Portfolios:
<TABLE>
<CAPTION>
Brokerage Commissions Paid During the Fiscal Year Ended
-------------------------------------------------------
Portfolio June 30, 1996 June 30, 1997 June 30, 1998
--------- ------------- ------------- -------------
<C> <C> <C> <C>
Harris Bretall Sullivan
& Smith Equity Growth
Portfolio $31,182 $22,892 $30,772
Scudder Kemper Value
Portfolio $15,056 $61,962 $51,642
Zweig Asset Allocation
Portfolio $73,378 $74,292 $48,874
Zweig Equity (Small Cap)
Portfolio $21,869 $15,722 $25,868
</TABLE>
For the fiscal years ended June 30, 1996, 1997 and 1998, the Fund paid the
following brokerage commissions with respect to each of the Portfolios to
broker-dealers who are (or were) affiliated persons of such Portfolios. Also
presented below for the fiscal years ended June 30, 1997 and 1998 are the
brokerage commissions paid to such broker-dealers as a percentage of the
aggregate brokerage commissions paid by each Portfolio and as a percentage of
the aggregate dollar amount of portfolio transactions involving the payment
of commissions engaged in by such Portfolio.
<TABLE>
<CAPTION>
Fiscal Year Ended June 30, 1997 Fiscal Year Ended June 30, 1998
------------------------------- -------------------------------
Brokerage Commissions Brokerage Commissions
--------------------- ---------------------
Brokerage
Commissions As a As a
Paid During Percentage of Percentage of
the Fiscal As a Portfolio As a Portfolio
Year Ended Percentage of Transactions Percentage of Transactions
Affiliated June Aggregate Involving Aggregate Involving
Broker-Dealer Portfolio 30, 1996 ($) Paid ($) Commissions Commissions Paid ($) Commissions Commissions
------------- --------- ------------ -------- ------------- ------------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paine Harris
Webber(b) Bretall
Sullivan &
Smith
Equity
Growth
Portfolio 5,952
Scudder
Kemper
Value
Portfolio 4,174
B-18
<PAGE>
<CAPTION>
Fiscal Year Ended June 30, 1997 Fiscal Year Ended June 30, 1998
------------------------------- -------------------------------
Brokerage Commissions Brokerage Commissions
--------------------- ---------------------
Brokerage
Commissions As a As a
Paid During Percentage of Percentage of
the Fiscal As a Portfolio As a Portfolio
Year Ended Percentage of Transactions Percentage of Transactions
Affiliated June Aggregate Involving Aggregate Involving
Broker-Dealer Portfolio 30, 1996 ($) Paid ($) Commissions Commissions Paid ($) Commissions Commissions
------------- --------- ------------ -------- ------------- ------------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Morgan Zweig Asset
Stanley(a) Allocation
Portfolio 51,370 50,774 68% 84% 38,099 78% 89%
Zweig
Equity
(Small Cap)
Portfolio 13,825 8,051 51% 69% 15,700 61% 69%
Scudder
Kemper
Value
Portfolio -- 2,060 3% 4% 600 1% --(c)
Zweig Zweig Asset
Securities Allocation
Corporation Portfolio 1,199 -- -- -- 583 1% --(c)
Zweig
Equity
(Small Cap)
Portfolio 403 -- -- -- 17 --(c) --(c)
</TABLE>
- ---------------------------
(a) Morgan Stanley was no longer an affiliated person of the Fund after May 8,
1998.
(b) Paine Webber was no longer an affiliated person of the Fund after April 1,
1996.
(c) Less than 1%.
Transactions in futures contracts are executed through futures commission
merchants (FCMS) who receive brokerage commissions for their services. The
procedures in selecting FCMs to execute the Portfolios' transactions in
futures contracts, including procedures permitting the use of certain
broker-dealers that are affiliated with the Sub-Advisers, are similar to
those in effect with respect to brokerage transactions in securities.
The Sub-Advisers may select broker-dealers which provide them with research
services [(including statistical and economic data and market reports)] 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.
B-19
<PAGE>
Investment decisions for each Portfolio and for other investment accounts
managed by each Sub-Adviser are made independently of each other in light of
differing considerations for the various accounts. However, the same
investment decision may be made for a Portfolio and one or more of such
accounts. In such cases, simultaneous transactions are inevitable.
Purchases or sales are then allocated between the Portfolio and such other
account(s) as to amount according to a formula deemed equitable to the
Portfolio and such account(s). While in some cases this practice could have
a detrimental effect upon the price or value of the security as far as a
Portfolio is concerned, or upon its ability to complete its entire order, in
other cases it is believed that coordination and the ability to participate
in volume transactions will be beneficial to the Portfolio.
PORTFOLIO TURNOVER. For reporting purposes, a Portfolio's portfolio
turnover rate is calculated by dividing the lesser of purchases or sales of
portfolio securities for the fiscal year by the monthly average of the value
of the portfolio securities owned by the Portfolio during the fiscal year.
In determining such portfolio turnover, securities with maturities at the
time of acquisition of one year or less are excluded. Each Sub-Adviser will
adjust the Portfolio's assets as it deems advisable in view of current or
anticipated market conditions, and portfolio turnover will not be a limiting
factor should the Sub-Adviser deem it advisable for a Portfolio to purchase
or sell securities.
The options activities of a Portfolio may affect its turnover rate, the
amount of brokerage commissions paid by a Portfolio and the realization of
net short-term capital gains. High portfolio turnover involves
correspondingly greater brokerage commissions, other transaction costs, and a
possible increase in short-term capital gains or losses. See "Valuation of
Shares" and "Taxes."
The exercise of calls written by a Portfolio may cause the Portfolio to sell
portfolio securities, thus increasing its turnover rate. The exercise of
puts also may cause a sale of securities and increase turnover; although such
exercise is within the Portfolio's control, holding a protective put might
cause the Portfolio to sell the underlying securities for reasons which would
not exist in the absence of the put. A Portfolio will pay a brokerage
commission each time it buys or sells a security in connection with the
exercise of a put or call. Some commissions may be higher than those which
would apply to direct purchases or sales of portfolio securities.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The separate accounts of Integrity and National Integrity purchase and
redeem shares of each Portfolio on each day on which the New York Stock
Exchange, Inc. (NYSE) is open for trading (BUSINESS DAY) based on, among
other things, the amount of premium payments to be invested and surrendered
and transfer requests to be effected on that day pursuant to the contracts.
Currently, the NYSE is closed on New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Such purchases and redemptions of the shares of each
Portfolio are effected at their respective net asset values per share
determined as of the close of trading (generally 4:00 p.m., New York City
time) on that Business Day. Payment for redemptions is made by the Fund
within seven days thereafter. No fee is charged the separate accounts when
they purchase or redeem Portfolio shares.
The Fund may suspend redemption privileges of shares of any Portfolio or
postpone the date of payment during any period (1) when the NYSE is closed or
trading on the NYSE is restricted as determined by the SEC, (2) when an
emergency exists, as defined by the SEC, that makes it not reasonably
practicable for the Fund to dispose of securities owned by it or fairly to
determine the value of its assets or (3) as the SEC may otherwise permit.
The redemption price may be more or less than the shareholder's cost,
depending on the market value of the Portfolio's securities at the time.
B-20
<PAGE>
VALUATION OF SHARES
The net asset value for the shares of each Portfolio will be determined on
each day the NYSE is open for trading. The net assets of each Portfolio are
valued as of the close of the NYSE, which generally 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.
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) 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.
B-21
<PAGE>
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; (3) 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 (4) 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.
Dividends, interest and other income derived 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.
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.
B-22
<PAGE>
Each Portfolio may from time to time also include the ranking of its
performance figures relative to such figures for groups of mutual funds
categorized by Lipper Analytical Services (LIPPER) as having the same or
similar investment objectives or by similar services that monitor the
performance of mutual funds. Each Portfolio may also from time to time
compare its performance to average mutual fund performance figures compiled
by Lipper in LIPPER PERFORMANCE ANALYSIS. Advertisements or information
furnished to present shareholders or prospective investors may also include
evaluations of a Portfolio published by nationally recognized ranking
services and by financial publications that are nationally recognized such as
BARRON'S, BUSINESS WEEK, CDA TECHNOLOGIES, INC., CHANGING TIMES, CONSUMER'S
DIGEST, DOW JONES INDUSTRIAL AVERAGE, FINANCIAL PLANNING, FINANCIAL TIMES,
FINANCIAL WORLD, FORBES, FORTUNE, GLOBAL INVESTOR, HULBERT'S FINANCIAL
DIGEST, INSTITUTIONAL INVESTOR, INVESTORS DAILY, MONEY, MORNINGSTAR MUTUAL
FUNDS, THE NEW YORK TIMES, PERSONAL INVESTOR, STANGER'S INVESTMENT ADVISER,
VALUE LINE, THE WALL STREET JOURNAL, WIESENBERGER INVESTMENT COMPANY SERVICE
and USA TODAY.
The performance figures described above may also be used to compare the
performance of a Portfolio's shares against certain widely recognized
standards or indices for stock and bond market performance. The following
are the indices against which the Portfolios may compare performance:
The Standard & Poor's Composite Index of 500 Stocks (the S&P 500 Index) is a
market value-weighted and unmanaged index showing the changes in the
aggregate market value of 500 stocks relative to the base period 1941-43.
The S&P 500 Index is composed almost entirely of common stocks of companies
listed on the NYSE, although the common stocks of a few companies listed on
the American Stock Exchange or traded OTC are included. The 500 companies
represented include 400 industrial, 60 transportation and 50 financial
services concerns. The S&P 500 Index represents about 80% of the market
value of all issues traded on the NYSE.
The Dow Jones Composite Average (or its component averages) is an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks and 20 transportation
stocks. Comparisons of performance assume reinvestment of dividends.
The New York Stock Exchange composite or component indices are unmanaged
indices of all industrial, utilities, transportation and finance company
stocks listed on the New York Stock Exchange.
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
B-23
<PAGE>
million, which have at least one year to maturity and are rated "Baa" or
higher (INVESTMENT GRADE) by a nationally recognized statistical rating
agency.
The Lehman Brothers Government/Corporate Intermediate Bond Index (the LEHMAN
GOVERNMENT/CORPORATE INTERMEDIATE INDEX) is composed of all bonds covered by
the Lehman Brothers Government/Corporate Bond Index with maturities between
one and 9.99 years. Total return comprises price appreciation/depreciation
and income as a percentage of the original investment. Indexes are
rebalanced monthly by market capitalization.
The Lehman Brothers Intermediate Treasury Bond Index includes bonds with
maturities between one and ten years with a face value currently in excess of
$1 million, that are rated investment grade or higher by a nationally
recognized statistical rating agency.
The Shearson Lehman Long-Term Treasury Bond Index is composed of all bonds
covered by the Shearson Lehman Hutton Treasury Bond Index with maturities of
10 years or greater.
The National Association of Securities Dealers Automated Quotation System
(NASDAQ) Composite Index covers 4,500 stocks traded over the counter. It
represents many small company stocks but is heavily influenced by about 100
of the largest NASDAQ stocks. It is a value-weighted index calculated on
price change only and does not include income.
The NASDAQ Industrial Index is composed of more than 3,000 industrial issues.
It is a value-weighted index calculated on price change only and does not
include income.
The Value Line (Geometric) Index is an unweighted index of the approximately
1,700 stocks followed by the VALUE LINE INVESTMENT SURVEY.
The Salomon Brothers GNMA Index includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government
National Mortgage Association.
The Salomon Brothers' World Market Index is a measure of the return of an
equally weighted basket of short-term (three month U.S. Government securities
and bank deposits) investments in eight major currencies: the U.S. dollar,
British pound, Canadian dollar, Japanese yen, Swiss franc, French franc,
Deutsche mark and Dutch guilder.
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.
B-24
<PAGE>
Other Composite Indices: 70% S&P 500 Index and 30% NASDAQ Industrial Index;
35% S&P 500 Index and 65% Salomon Brothers High Grade Bond Index; 65% S&P
Index and 35% Salomon Brothers High Grade Bond Index; 60% of the S&P 500, 30%
of Lehman Brothers Government/Corporate Bond Index, and 10% of 90-Day
Treasury Bill Yield; 60% of the S&P 500 and 40% of Lehman Brothers
Intermediate Treasury Bond Index; and 50% J.P. Morgan Emerging Market Bond
Index and 50% of Lehman Brothers Aggregate Bond Index.
The SEI Median Balanced Fund Universe measures a group of funds with an
average annual equity commitment and an average annual bond - plus - private
- - placement commitment greater than 5% each year. SEI must have at least two
years of data for a fund to be considered for the population.
The Russell 2000/Small Stock Index comprises the smallest 2000 stocks in the
Russell 3000 Index, and represents approximately 11% of the total U.S. equity
market capitalization. The Russell 3000 Index comprises the 3,000 largest
U.S. companies by market capitalization. The smallest company has a market
value of roughly $20 million.
The Russell 2500 Index is comprised of the bottom 500 stocks in the Russell
1000 Index which represents the universe of stocks from which most active
money managers typically select; and all the stocks in the Russell 2000
Index. The largest security in the index has a market capitalization of
approximately 1.3 billion.
The Consumer Price Index (or Cost of Living Index), published by the United
States Bureau of Labor Statistics is a statistical measure of change, over
time, in the price of goods and services in major expenditure groups.
J.P. Morgan Emerging Markets Bond Index is a market weighted index composed
of all Brady bonds outstanding and includes Argentina, Brazil, Bulgaria,
Mexico, Nigeria, the Philippines, Poland and Venezuela.
STOCKS, BONDS, BILLS AND INFLATION, published by Hobson Associates, presents
a historical measure of yield, price and total return for common and small
company stocks, long-term government bonds, Treasury bills and inflation.
Savings and Loan Historical Interest Rates as published in the United States
Savings & Loan League Fact Book.
Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch,
Pierce, Fenner & Smith, Shearson Lehman Hutton and Bloomberg L.P.
The MSCI Combined Far East Free ex Japan Index is a market-capitalization
weighted index comprising stocks in Hong Kong, Indonesia, Korea, Malaysia,
Philippines, Singapore and Thailand. Korea is included in the MSCI Combined
Far East Free ex Japan Index at 20% of its market capitalization.
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.
B-25
<PAGE>
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 Swidler Berlin Shereff Friedman, 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.
CUSTODIAN. Investors Fiduciary Trust Company, 801 Pennsylvania, Kansas City,
Missouri 64105, acts as custodian of the assets of all of the Portfolios.
AUDITORS. Ernst & Young LLP, One Kansas City Place, 1200 Main Street, Kansas
City, Missouri 64105, serves as independent auditors for the Fund.
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, 1998 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-26
<PAGE>
Report of Independent Auditors
The Shareholders and Board of Directors
The Legends Fund, Inc.
We have audited the accompanying statements of assets and liabilities of The
Legends Fund, Inc. (the Fund) (comprised of the Harris Bretall Sullivan & Smith
Equity Growth, Scudder Kemper Value (formally known as Dreman Value and Zurich
Kemper Value), Zweig Asset Allocation and Zweig Equity (Small Cap) portfolios),
including the schedules of investments, as of June 30, 1998, the related
statements of operations for the year then ended and statements of changes in
net assets for each of the two years in the period then ended and financial
highlights for each of the five years in the period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at June
30, 1998 by correspondence with the custodian. As to securities relating to
uncompleted transactions, we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the portfolios of the Fund at June 30, 1998 and the results of their
operations for the year then ended, changes in their net assets for each of the
two years in the period then ended, and financial highlights for each of the
five years in the period then ended in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Kansas City, Missouri
August 5, 1998
B-27
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Statement of Assets and Liabilities
June 30, 1998
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments in securities, at value (cost $24,988,958)--See accompanying schedule $38,079,627
Dividends and interest receivable 16,566
-----------
Total assets 38,096,193
LIABILITIES
Payable for investment securities purchased 394,966
Cash overdraft 6,796
Accounts payable and accrued expenses 32,543
-----------
Total liabilities 434,305
-----------
NET ASSETS $37,661,888
-----------
-----------
Net Assets consist of:
Paid-in capital $20,704,213
Accumulated undistributed net realized gain on investments 3,867,006
Net unrealized appreciation on investment securities 13,090,669
-----------
NET ASSETS, for 1,783,993 shares outstanding $37,661,888
-----------
-----------
NET ASSET VALUE, offering and redemption price per share $ 21.11
-----------
-----------
</TABLE>
Statement of Operations
Year Ended June 30, 1998
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME
Dividends $ 256,173
Interest 51,005
-----------
Total investment income 307,178
EXPENSES
Investment advisory and management fees 199,561
Custody and accounting fees 88,849
Professional fees 8,150
Directors' fees and expenses 4,898
Other expenses 8,745
-----------
Total expenses 310,203
-----------
Net investment loss (3,025)
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 3,870,031
Change in unrealized appreciation on investment securities 4,234,149
-----------
-----------
Net gain on investments 8,104,180
-----------
Net increase in net assets resulting from operations $ 8,101,155
-----------
-----------
</TABLE>
SEE ACCOMPANYING NOTES.
B-28
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1998 1997
<S> <C> <C>
-------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $ (3,025) $ 35,592
Net realized gain on investments 3,870,031 2,143,586
Change in net unrealized appreciation 4,234,149 4,406,962
-------------------------------
Net increase in net assets resulting from operations 8,101,155 6,586,140
Distributions to shareholders from:
Net investment income (35,592) (5,649)
Net realized gain (2,143,586) (1,737,610)
-------------------------------
Total distributions to shareholders (2,179,178) (1,743,259)
Capital share transactions:
Proceeds from sales of shares 12,618,333 5,927,647
Proceeds from reinvested distributions 2,179,178 1,743,259
Cost of shares redeemed (11,872,273) (7,509,523)
-------------------------------
Net increase in net assets resulting from share transactions 2,925,238 161,383
-------------------------------
Total increase in net assets 8,847,215 5,004,264
NET ASSETS
Beginning of period 28,814,673 23,810,409
-------------------------------
End of period (including undistributed net investment
income of $35,592 at June 30, 1997) $37,661,888 $28,814,673
-------------------------------
-------------------------------
OTHER INFORMATION
Shares:
Sold 650,111 394,049
Issued through reinvestment of distributions 118,950 119,672
Redeemed (629,133) (512,893)
-------------------------------
Net increase 139,928 828
-------------------------------
-------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
B-29
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of
period $ 17.53 $ 14.49 $ 12.85 $ 9.36 $ 9.71
Income from investment
operations:
Net investment income (loss) - (a) 0.02 -(a) 0.01 (0.02)(b)
Net realized and unrealized
gain (loss) on investments 4.90 4.13 1.74 3.48 (0.33)
------------------------------------------------------------------------------
Total from investment
Operations 4.90 4.15 1.74 3.49 (0.35)
Less distributions:
From net investment income (0.02) - (a) (0.01) - -
From net realized gain (1.30) (1.11) (0.09) - -
------------------------------------------------------------------------------
Total distributions (1.32) (1.11) (0.10) - -
------------------------------------------------------------------------------
Net asset value, end of period $ 21.11 $ 17.53 $ 14.49 $ 12.85 $ 9.36
------------------------------------------------------------------------------
------------------------------------------------------------------------------
TOTAL RETURN 29.11% 30.23% 13.59% 37.29% (3.60%)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in
thousands) $37,662 28,815 $23,810 $16,393 $10,693
Ratio of expenses to average net
assets 0.95% 1.03% 1.04% 1.05% 1.29%
Ratio of net investment income
(loss) to average net assets (0.01%) 0.14% 0.03% 0.13% (0.17%)
Portfolio turnover rate 57% 46% 58% 31% 38%
</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
B-30
<PAGE>
Harris Bretall Sullivan & Smith
Schedule of Investments
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -----
<S> <C> <C>
COMMON STOCKS (97.7%)
BUILDING MATERIALS & GARDEN SUPPLIES (2.4%)
Home Depot, Inc. 11,000 $ 913,688
BUSINESS SERVICES (11.9%)
Autodesk, Inc. 19,000 732,214
Automatic Data Processing, Inc. 11,500 838,063
Cendant Corporation (a) 24,000 501,000
Microsoft Corporation (a) 9,000 975,656
Oracle Corporation (a) 29,000 711,406
The Interpublic Group of Companies, Inc. 13,000 788,938
-----------
4,547,277
CHEMICAL & ALLIED PRODUCTS (17.2%)
Abbott Laboratories 20,400 833,850
Bristol-Meyers Squibb Company 7,300 839,044
Colgate-Palmolive Company 9,300 818,400
Gillette Company 12,600 714,263
Merck & Company, Inc. 5,900 789,125
Pfizer, Inc. 7,800 847,763
Schering-Plough 9,700 888,763
The Procter & Gamble Company 8,900 810,455
-----------
6,541,663
DEPOSITORY INSTITUTIONS (6.2%)
Bankamerica Corporation 8,900 769,293
Citicorp 5,500 820,875
Norwest Corporation 21,000 784,875
-----------
2,375,043
ELECTRONIC & OTHER ELECTRICAL EQUIPMENT (8.1%)
General Electric Company 8,900 809,900
Intel Corporation 11,300 837,259
Linear Technology Corporation 9,900 597,094
Tellabs, Inc. (a) 11,900 851,966
-----------
3,096,219
FABRICATED METAL PRODUCTS (2.1%)
Illinois Tool Works, Inc. 12,000 800,250
FOOD & KINDRED PRODUCTS (4.1%)
Coca-Cola Company 10,000 855,000
Pepsico, Inc. 17,500 720,781
-----------
1,575,781
FOOD STORES (4.4%)
Starbucks Corporation (a) 17,800 950,631
The Kroger Company 16,600 711,725
-----------
1,662,356
GENERAL MERCHANDISE STORES (5.1%)
Dayton Hudson Corporation 19,700 955,450
Wal-Mart Stores, Inc. 16,100 978,075
-----------
1,933,525
INDUSTRIAL MACHINERY & EQUIPMENT (10.7%)
Applied Materials, Inc.(a) 26,700 788,484
Cisco Systems, Inc. (a) 10,500 966,984
Compaq Computer Corporation 29,900 848,413
Dover Corporation 20,500 702,125
Hewlett-Packard Company 12,600 754,425
-----------
4,060,431
INSTRUMENTS & RELATED PRODUCTS (2.3%)
Medtronic, Inc. 13,600 867,000
INSURANCE CARRIERS (2.3%)
American International Group, Inc. 6,125 894,250
<CAPTION>
NUMBER
OF SHARES VALUE
--------- ----------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
MISCELLANEOUS MANUFACTURING INDUSTRIES (4.5%)
Mattel, Inc. 19,200 $ 812,400
Tyco International, Ltd. 14,500 913,500
-----------
1,725,900
MOTION PICTURES (1.7%)
Walt Disney 6,300 661,894
PAPER & ALLIED PRODUCTS (2.0%)
Willamette Industries, Inc. 23,300 745,600
PRIMARY METAL INDUSTRIES (2.0%)
Aluminum Company of America (Alcoa) 11,500 758,281
SECURITY & COMMODITY BROKERS (4.1%)
Merrill Lynch & Company, Inc. 9,100 839,475
The Charles Schwab Corporation 22,000 715,000
-----------
1,554,475
TRANSPORTATION BY AIR (2.3%)
AMR Corporation (a) 10,300 857,475
WHOLESALE TRADE - DURABLE GOODS (2.2%)
Johnson & Johnson 11,100 818,625
WHOLESALE TRADE - NONDURABLE GOODS (2.1%)
Safeway, Inc. (a) 19,600 797,475
-----------
TOTAL COMMON STOCK (COST $24,096,539) $37,187,208
<CAPTION>
PRINCIPAL
AMOUNT VALUE
--------- ------
<S> <C> <C>
SHORT-TERM SECURITIES (2.3%)
REPURCHASE AGREEMENT (2.3%)
State Street Bank, 4.25%, due 7/01/98
(Dated 6/30/1998, collaterized by U.S.
Treasury Note, 7.875%, due 11/15/2007,
Value $904,700) $892,419 $ 892,419
-----------
TOTAL SHORT-TERM SECURITIES (Cost $892,419) 892,419
-----------
TOTAL INVESTMENTS (100.0%) (Cost $24,988,958) $38,079,627
-----------
-----------
</TABLE>
(a) non-income producing
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the
year ended June 30, 1998, aggregated $19,529,725 and $17,905,872,
respectively. At June 30, 1998 net unrealized appreciation for tax purposes
aggregated $12,849,354 of which $13,453,104 related to appreciated
investment securities and $603,750 related to depreciated investment
securities. The aggregate cost of securities is $25,230,273 for tax
purposes.
SEE ACCOMPANYING NOTES.
B-31
<PAGE>
Scudder Kemper Value Portfolio
Statement of Assets and Liabilities
June 30, 1998
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $38,374,694)--See accompanying schedule $46,392,148
Cash 36,798
Dividends and interest receivable 47,691
-----------
Total assets 46,476,637
LIABILITIES
Accounts payable and accrued expenses 40,755
-----------
Total liabilities 40,755
-----------
NET ASSETS $46,435,882
-----------
-----------
Net Assets consist of:
Paid-in capital $33,120,436
Undistributed net investment income 591,315
Accumulated undistributed net realized gain on investments 4,706,677
Net unrealized appreciation on investment securities 8,017,454
-----------
NET ASSETS, for 2,209,349 shares outstanding $46,435,882
-----------
-----------
NET ASSET VALUE, offering and redemption price per share $21.02
-----------
-----------
Statement of Operations
Year Ended June 30, 1998
INVESTMENT INCOME
Dividends (net foreign taxes withheld of $1,750) $ 674,269
Interest 268,556
-----------
Total investment income 942,825
EXPENSES
Investment advisory and management fees 228,476
Custody and accounting fees 101,991
Professional fees 7,399
Directors' fees and expenses 4,898
Other expenses 8,746
-----------
Total expenses 351,510
-----------
Net investment income 591,315
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 4,706,677
Change in unrealized appreciation on investment securities 2,439,355
-----------
Net gain on investments 7,146,032
-----------
Net increase in net assets resulting from operations $ 7,737,347
-----------
-----------
</TABLE>
SEE ACCOMPANYING NOTES.
B-32
<PAGE>
Scudder Kemper Value Portfolio
Statement of Change in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1998 1997
-------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 591,315 $ 408,549
Net realized gain on investments 4,706,677 5,724,307
Change in net unrealized appreciation 2,439,355 1,320,029
-------------------------------
Net increase in net assets resulting from operations 7,737,347 7,452,885
Distributions to shareholders from:
Net investment income (408,549) (252,188)
Net realized gain (5,723,007) (862,820)
-------------------------------
Total distributions to shareholders (6,131,556) (1,115,008)
Capital share transactions:
Proceeds from sales of shares 16,280,118 12,411,821
Proceeds from reinvested distributions 6,131,556 1,115,008
Cost of shares redeemed (8,512,037) (8,638,962)
-------------------------------
Net increase in net assets resulting from share transactions 13,899,637 4,887,867
-------------------------------
Total increase in net assets 15,505,428 11,225,744
NET ASSETS
Beginning of period 30,930,454 19,704,710
-------------------------------
End of period (including undistributed net investment income of $591,315 and
$408,549, respectively) $46,435,882 $30,930,454
-------------------------------
-------------------------------
OTHER INFORMATION
Shares:
Sold 798,312 689,365
Issued through reinvestment of distributions 327,252 64,391
Redeemed (415,791) (472,506)
-------------------------------
Net increase 709,773 281,250
-------------------------------
-------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
B-33
<PAGE>
Scudder Kemper Value Portfolio
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of
period $ 20.63 $ 16.17 $ 12.59 $ 10.66 $ 10.45
Income from investment
operations:
Net investment income 0.26 0.26 0.18 0.26 0.12
Net realized and unrealized gain
on investments 4.08 5.04 3.70 1.85 0.17
----------------------------------------------------------------------------------
Total from investment operations 4.34 5.30 3.88 2.11 0.29
Less distributions:
From net investment income (0.26) (0.19) (0.19) (0.14) (0.08)
From net realized gain (3.69) (0.65) (0.11) (0.04) -
----------------------------------------------------------------------------------
Total distributions (3.95) (0.84) (0.30) (0.18) (0.08)
----------------------------------------------------------------------------------
Net asset value, end of period $ 21.02 $ 20.63 $ 16.17 $ 12.59 $ 10.66
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
TOTAL RETURN 23.36% 33.78% 31.22% 19.98% 2.80%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in $ 46,436 $ 30,930 $19,705 $ 10,877 $ 8,952
thousands)
Ratio of expenses to average net
assets 0.94% 1.05% 1.06% 1.13% 1.40%
Ratio of net investment income to
average net assets 1.58% 1.62% 1.65% 1.98% 1.98%
Ratio of expenses to average net
assets before voluntary expense
reimbursement 0.94% 1.05% 1.07% 1.13% 1.61%
Ratio of net investment income to
average net assets before
voluntary expense reimbursement 1.58% 1.62% 1.64% 1.98% 1.76%
Portfolio turnover rate 57% 88% 18% 29% 9%
</TABLE>
B-34
<PAGE>
Scudder Kemper Value Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -----
<S> <C> <C>
COMMON STOCKS (89.5%)
CHEMICAL & ALLIED PRODUCTS (4.9%)
Dow Chemical Company 5,500 $ 531,781
Eastman Chemical Company 5,600 348,600
Praxair, Inc. 30,000 1,404,375
-----------
2,284,756
COMMUNICATIONS (1.2%)
GTE Corporation 10,000 556,250
DEPOSITORY INSTITUTIONS (17.4%)
Bankamerica Corporation 13,800 1,192,838
Bankers Trust Corporation 5,300 615,131
First Union Corporation 20,300 1,182,475
H. F. Ahmanson & Company 16,600 1,178,600
J.P. Morgan & Company 3,500 409,938
Nationsbank Corporation 10,000 765,000
Norwest Corporation 24,300 908,213
PNC Bank Corporation 19,210 1,033,733
Washington Mutual, Inc. 7,500 325,547
Wells Fargo & Company 1,200 442,800
-----------
8,054,275
EATING & DRINKING PLACES (4.5%)
McDonald's Corporation 10,000 690,000
Wendy's International, Inc. 60,000 1,410,000
-----------
2,100,000
ELECTRONIC & OTHER ELECTRICAL EQUIPMENT (1.9%)
AMP, Inc. 25,500 876,563
FABRICATED METAL PRODUCTS (1.6%)
Crown Cork & Seal Company, Inc. 16,000 760,000
FOOD & KINDRED PRODUCT (1.4%)
Nestle S.A. 6,000 636,000
FORESTRY (3.5%)
Georgia Pacific (Timber GRP.) 60,000 1,383,750
Georgia-Pacific Corporation 4,000 235,750
-----------
1,619,500
INDUSTRIAL MACHINERY & EQUIPMENT (6.6%)
Diebold, Inc. 29,600 854,700
Hewlett-Packard Company 5,300 317,338
Hussmann International, Inc. 40,000 742,500
Minnesota Mining and Manufacturing Company 10,900 895,844
Pitney Bowes, Inc. 5,700 274,313
-----------
3,084,695
INSTRUMENTS & RELATED PRODUCTS (4.2%)
Baxter International, Inc. 8,600 462,788
BARD, (C. R.) INC. 15,800 601,388
Raytheon Company 15,000 886,875
-----------
1,951,051
INSURANCE CARRIERS (3.1%)
American General Corporation 13,200 939,675
American International Group 3,375 492,750
-----------
1,432,425
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -----
<S> <C> <C>
COMMON STOCKS (CONTINUED)
LUMBER & WOOD PRODUCTS (1.7%)
Louisiana-Pacific Corporation 43,300 $ 790,225
NONDEPOSITORY INSTITUTIONS (9.3%)
Associates First Capital Corporation 6,552 503,685
Federal National Mortgage Association 31,000 1,883,250
Federal Home Loan Corporation 41,500 1,953,094
-----------
4,340,029
OIL & GAS EXTRACTION (6.8%)
Atlantic Richfield Company 15,800 1,234,375
Burlington Resources, inc. 20,000 861,250
Enron Corporation 20,000 1,081,250
-----------
3,176,875
PAPER & ALLIED PRODUCTS (3.2%)
Sonoco Products Company 38,500 1,164,625
Union Camp Corporation 6,200 307,675
-----------
1,472,300
PETROLEUM & COAL PRODUCTS (6.6%)
Amoco Corporation 40,000 1,665,000
Chevron Corporation 6,000 498,375
Exxon Corporation 12,700 905,669
-----------
3,069,044
PRIMARY METAL INDUSTRIES (2.7%)
Nucor Corporation 27,000 1,242,000
RAILROAD TRANSPORTATION (0.9%)
Burlington Northern Santa Fe 4,200 412,388
TOBACCO PRODUCTS (3.8%)
Philip Morris Company, INC. 44,500 1,752,188
TRANSPORTATION BY AIR (1.0%)
FOX Corporation (a) 7,200 451,800
TRANSPORTATION EQUIPMENT (3.2%)
Ford Motor Company 25,000 1,475,000
-----------
TOTAL COMMON STOCK (Cost $33,519,910) $41,537,364
<CAPTION>
PRINCIPAL
AMOUNT VALUE
------ -----
<S> <C> <C>
SHORT-TERM SECURITIES (10.5%)
REPURCHASE AGREEMENT (10.5%)
State Street Bank, 4.25%, due 7/1/1998
(Dated 6/30/1998, collaterized by U.S.
Treasury Note, 8.375%, due 8/15/2008,
Value $4,939,000) $4,854,784 $ 4,854,784
-----------
TOTAL SHORT-TERM SECURITIES (Cost $4,854,784) 4,854,784
-----------
TOTAL INVESTMENTS (100.0%) (Cost $38,374,694) $46,392,148
-----------
-----------
</TABLE>
B-35
<PAGE>
Schudder Kemper Value Portfolio
Schedule of Investments (continued)
(a) Non-income producing
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the
year ended June 30, 1998, aggregated $27,071,060 and $17,137,956,
respectively. At June 30, 1998 net unrealized appreciation for tax purposes
aggregated $8,017,454 of which $8,722,827 related to appreciated investment
securities and $705,373 related to depreciated investment securities. The
aggregate cost of securities is the same for book and tax purposes.
SEE ACCOMPANYING NOTES.
B-36
<PAGE>
Zweig Asset Allocation Portfolio
Statement of Assets and Liabilities
June 30, 1998
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $35,815,307)--See
accompanying schedule $ 47,458,322
Dividends and interest receivable 63,470
------------
Total assets 47,521,792
LIABILITIES
Cash overdraft 5,792
Accounts payable and accrued expenses 65,790
------------
Total liabilities 71,582
------------
NET ASSETS $ 47,450,210
------------
------------
Net Assets consist of:
Paid-in capital $ 29,393,557
Undistributed net investment income 365,323
Accumulated undistributed net realized gain on investments 6,092,615
Net unrealized appreciation on investment securities 11,598,715
------------
NET ASSETS, for 2,702,833 shares outstanding $ 47,450,210
------------
NET ASSET VALUE, offering and redemption price per share $ 17.56
------------
------------
Statement of Operations
Year Ended June 30, 1998
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $13,974) $ 705,010
Interest 201,666
------------
Total investment income 906,676
EXPENSES
Investment advisory and management fees 394,520
Custody and accounting fees 123,995
Professional fees 9,194
Directors' fees and expenses 4,898
Other expenses 8,746
------------
Total expenses 541,353
------------
Net investment income 365,323
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain (loss) on:
Investment securities 7,829,774
Futures contracts (1,475,297)
------------
Net realized gain 6,354,477
Change in unrealized appreciation on:
Investment securities 1,942,571
Futures contracts 57,098
------------
Net unrealized appreciation 1,999,669
------------
Net gain on investments 8,354,146
------------
Net increase in net assets resulting from operations $ 8,719,469
------------
------------
SEE ACCOMPANYING NOTES.
</TABLE>
B-37
<PAGE>
Zweig Asset Allocation Portfolio
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1997 1998
---------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 365,323 $ 529,058
Net realized gain (loss) on investments 6,354,477 (173,455)
Change in net unrealized appreciation 1,999,669 6,699,583
---------------------------------
Net increase in net assets resulting from operations 8,719,469 7,055,186
Distributions to shareholders from:
Net investment income (529,058) (610,426)
Net realized gain -- (4,529,338)
---------------------------------
Total distributions to shareholders (529,058) (5,139,764)
Capital share transactions:
Proceeds from sales of shares 4,280,221 2,859,514
Proceeds from reinvested distributions 529,058 5,139,764
Cost of shares redeemed (8,397,497) (7,288,581)
---------------------------------
Net increase (decrease) in net assets resulting from share transactions (3,588,218) 710,697
---------------------------------
Total increase in net assets 4,602,193 2,626,119
NET ASSETS
Beginning of period 42,848,017 40,221,898
---------------------------------
End of period (including undistributed net investment income of
$365,323 and $529,058, respectively) $ 47,450,210 $ 42,848,017
---------------------------------
OTHER INFORMATION
Shares:
Sold 258,491 206,859
Issued through reinvestment of distributions 32,534 396,248
Redeemed (517,480) (523,827)
---------------------------------
Net increase (decrease) (226,455) 79,280
---------------------------------
---------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
B-38
<PAGE>
Zweig Asset Allocation Portfolio
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 14.63 $ 14.11 $ 13.02 $ 11.44 $ 10.81
Income from investment operations:
Net investment income 0.14 0.19 0.21 0.33 0.10
Net realized and unrealized gain on
investments 2.97 2.20 1.21 1.33 0.58
-----------------------------------------------------------------------------
Total from investment operations 3.11 2.39 1.42 1.66 0.68
Less distributions:
From net investment income (0.18) (0.22) (0.33) (0.08) (0.05)
From net realized gain -- (1.65) -- -- --
-----------------------------------------------------------------------------
Total distributions (0.18) (1.87) (0.33) (0.08) (0.05)
-----------------------------------------------------------------------------
Net asset value, end of period $ 17.56 $ 14.63 $14.11 $13.02 $11.44
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
TOTAL RETURN 21.38% 18.63% 11.06% 14.57% 6.27%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in
thousands) $ 47,450 $ 42,848 $ 40,222 $ 36,736 $ 31,563
Ratio of expenses to average net
assets 1.18% 1.28% 1.25% 1.20% 1.39%
Ratio of net investment income to
average net assets 0.80% 1.29% 1.55% 2.73% 1.67%
Portfolio turnover rate 65% 89% 105% 45% 101%
</TABLE>
B-39
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -----
<S> <C> <C>
COMMON STOCKS (86.6%)
AGRICULTURAL PRODUCTION - CROPs (0.5%)
RJR Nabisco Holdings Corporation 10,400 $ 247,000
APPAREL & ACCESSORIES STORES (2.3%)
Footstar, Inc. (a) 2,600 124,800
Ross Stores, Inc. 22,400 966,000
-----------
1,090,800
APPAREL & OTHER TEXTILE PRODUCTS (0.4%)
VF Corporation 3,500 180,250
AUTO REPAIR SERVICES, & PARKING (0.3%)
Ryder System, Inc. 4,900 154,656
BUSINESS SERVICES (0.7%)
Comdisco, Inc. 3,300 62,700
Sterling Software, Inc.(a) 5,900 174,419
Stratus Computer, Inc. (a) 3,800 96,188
-----------
333,307
CHEMICALS & ALLIED PRODUCTS (3.2%)
Albemarle Corporation 8,700 191,944
B.F. Goodrich Company 4,000 198,500
Desc S.A. de C.V. 15 298
International Specialty Products, Inc. (a) 7400 137,825
Lyondell Petrochemical Company 8,400 255,675
Methanex Corporation (a) 4,500 39,375
Millenium Chemicals, Inc. 10,200 345,525
NOVA Corporation 2,800 32,375
The Dexter Corporation 5,300 168,606
W.R. Grace & Company (a) 8,700 148,444
-----------
1,518,567
DEPOSITORY INSTITUTIONS (3.3%)
Banco Frances del Rio de la Plata S.A. 400 9,175
Coast Federal (a) 1,000 15,188
Golden State Bancorp (a) 5,500 29,391
Golden State Bancorp, Inc. 5,500 163,625
Golden West Financial Corporation 1,900 201,994
H. F. Ahmanson & Company 8 568
Imperial Bancorp (a) 17,800 534,000
T R Financial Corporation 12,200 510,494
Webster Financial Corporation 3,200 106,400
-----------
1,570,835
EATING AND DRINKING PLACES (1.6%)
Brinker International, Inc. (a) 9,800 188,650
Darden Restaurants, Inc. 12,300 195,263
Foodmaker, Inc. (a) 23,100 389,813
-----------
773,726
ELECTRIC GAS & SANITARY SERVICES (12.0%)
Baltimore Gas and Electric 7,600 236,075
BEC Energy 4,400 182,600
Central & South West Corporation 7,600 204,250
Conectiv, Inc. 150 5,438
Consolidated Edison, Inc. 2,300 105,944
DTE Energy Company 7,100 286,663
Edison International 15,700 464,131
Endesa S.A. 6,400 138,400
Energy East Corporation 7,900 328,838
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -----
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ELECTRIC GAS & SANITARY SERVICES (12.0%) (CONTINUED)
FirstEnergy Corporation 8,032 $ 246,984
FPL Group, Inc. 4,300 270,900
Gener S.A. 8,000 146,000
GPU, Inc. 10,700 404,594
Houston Industries, Inc. 6,600 203,775
Ipalco Enterprises, Inc. 4,800 213,300
Laidlaw Environmental Services, Inc. 18,480 66,990
MidAmerican Energy Holdings Company 3,200 69,200
Minnesota Power & Light Company 6,300 250,425
New England Electric System 2,200 95,150
Pinnacle West Capital Corporation 19,500 877,500
PP&L Resources, Inc. 8,300 188,306
Public Service Enterprise Group, Inc. 3,000 103,313
Questar Corporation 3,000 58,875
Sempra Energy (a) 7,500 208,125
UtiliCorp United, Inc. 4,900 184,669
Westcoast Energy, Inc. 8,200 182,963
-----------
5,723,408
ELECTRONIC & OTHER ELECTRICAL EQUIPMENT (1.3%)
Aeroquip-Vickers, Inc. 5,300 309,388
Portugal Telecom S.A. 1,900 100,581
Whirlpool Corporation 3,100 213,125
-----------
623,094
FABRICATED METAL PRODUCTS (0.3%)
Ball Corporation (b) 2,000 80,375
Mark IV Industries, Inc. 3,200 69,200
-----------
149,575
FOOD & KINDRED PRODUCTS (1.5%)
Adolph Coors Companys 5,500 187,688
Pepsi-Gemex S.A. 1,600 19,300
The Earthgrains Company 5,400 301,725
-----------
508,713
FOOD STORES (0.1%)
The Great Atlantic & Pacific Tea Company 1,200 39,675
FURNITURE & FIXTURES (1.7%)
Ethan Allen Interiors, Inc. 4,200 209,738
Furniture Brands International, Inc. (a) 10,700 300,269
Knoll, Inc. (a) 2,700 79,650
Lear Corporation (a) 4,500 230,906
-----------
820,563
GENERAL BUILDING CONTRACTORS (1.5%)
Centex Corporation 8,100 305,775
Kaufman & Broad Home Corporation 3,100 98,425
Lennar Corporation 2,700 79,650
Pulte Corporation 3,800 113,525
U.S. Home Corporation (a) 3,300 136,125
-----------
733,500
GENERAL MERCHANDISE STORES (3.1%)
Dayton Hudson Corporation 13,200 640,200
Dillard's, Inc. 5,100 211,331
Federated Department Stores (a) 7,200 387,450
Kmart Corporation (a) 10,900 209,825
Shopko Stores, Inc 800 27,200
-----------
1,476,006
</TABLE>
B-40
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -----
<S> <C> <C>
COMMON STOCKS (CONTINUED)
HEALTH SERVICES (0.8%)
Integrated Health Services, Inc. 6,800 $ 255,000
Sun Healthcare Group, Inc. (a) 10,000 146,250
-----------
401,250
HEAVY CONSTRUCTION, EXCEPT BUILDINGS (0.4%)
McDermott International, Inc. 5,100 175,631
HOLDING & OTHER INVESTMENT OFFICES (1.0%)
CarrAmerica Realty Corporation 3,800 107,825
Duke Realty Investments, Inc. 3,500 82,906
Felcor Suite Hotels, Inc. 2,600 81,575
Liberty Property Trust 7,300 186,606
-----------
458,912
HOTELS & OTHER LODGING PLACES (0.6%)
Prime Hospitality Corporation (a) 9,700 169,144
Sun International Hotels, Ltd. (a) 2,300 104,650
-----------
273,794
INDUSTRIAL MACHINERY & EQUIPMENT (5.7%)
AGCO Corporation 3,100 63,731
Case Corporation 1,600 77,200
Caterpillar, Inc. 4,400 232,650
Cincinnati Milacron, Inc. 2,500 60,781
Compaq Computer Corporation 3,780 107,258
Cummins Engine Company, Inc. 2,400 123,000
Deere & Company 2,300 121,613
Harris Corporation 1,700 75,969
Ingersoll-Rand Company 2,700 118,969
Kaydon Corporation 5,400 190,688
Kennametal, Inc. 3,500 146,125
Lexmark International Group, Inc. (a) 4,600 280,600
Modine Manufacturing Company 2,700 93,572
Parker-Hannifin Corporation 4,700 179,188
Storage Technology Corporation (a) 14,800 641,950
Tecumseh Products Company 600 31,669
Timken Company 6,400 197,200
-----------
2,742,163
INSTRUMENTS & RELATED PRODUCTS (0.2%)
Input/Output, Inc. (a) 4,600 81,938
INSURANCE CARRIERS (8.3%)
Allmerica Financial Corporation 2,400 156,000
Allstate Corporation 2,800 256,375
Ambac Financial Group, Inc. 3,700 216,450
Capital Re Corporation 500 35,813
Conseco, Inc. 2,100 98,175
Delphi Financial Group, Inc. (a) 7,240 407,703
Everest Reinsurance Holdings, Inc. 6,100 234,469
Equitable Companies, Inc. (b) 11,800 884,263
Financial Security Assurance Holding, Ltd. 1,600 94,000
Fremont General Corporation 7,000 379,313
Liberty Financial Companies, Inc. 5,400 186,300
Lincoln National Corporation 2,200 201,025
Loews Corporation 1,700 148,113
NAC Re Corporation 1,700 90,738
Nationwide Financial Services, Inc. 3,400 173,400
Old Republic International Corporation 8,850 259,416
Presidential Life Corporation 6,700 143,631
Reliance Group Holdings, Inc. 900 15,750
-----------
3,980,934
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -----
<S> <C> <C>
COMMON STOCKS (CONTINUED)
LOCAL & INTERURBAN PASSENGER TRANSIT (0.6%)
Canadian National Railway Company 3,300 $ 175,313
Laidlaw, Inc. 8,400 102,375
-----------
277,688
MISCELLANEOUS RETAIL (1.0%)
Fingerhut Companies, Inc. 10,900 359,700
Zale Corporation 4,100 130,431
-----------
490,131
MISCELLANEOUS MANUFACTUING INDUSTRIES (0.1%)
Hexcel Corporation (a) 2,900 65,613
NONDEPOSITORY INSTITUITIONS (0.2%)
Associates First Capital Corporation 41 3,152
Indymac Mortgage Holdings, Inc. 3,700 84,175
-----------
87,327
OIL & GAS EXTRACTION (1.3%)
BJ Services Company (a) 3,000 87,188
Equitable Resources, Inc. 2,900 88,450
Helmerich & Payne, Inc. 7,900 175,775
Rowan Companies, Inc. (a) 3,400 66,088
Seacor Smith, Inc. (a) 2,100 128,756
Vintage Petroleum, Inc. 3,300 62,288
-----------
608,545
PETROLEUM & COAL PRODUCTS (3.0%)
Ashland, Inc. 4,100 211,663
Elf Aquitaine 5,200 369,200
Sun Company, Inc. 5,000 194,063
The Costal Corporation 9,100 635,294
-----------
1,410,220
PRIMARY METAL INDUSTRIES (3.1%)
AK Steel Holding Corporation 5,000 89,375
Alumax, Inc. (a) 2,305 106,894
Bethlehem Steel Corporation (a) 19,700 245,019
Inland Steel Industries, Inc. 6,400 180,400
Mueller Industries, Inc. (a) 1,600 59,400
Pohang Iron & Steel, Ltd. 8,500 102,000
Precision Castparts Corporation 3,700 197,488
Texas Industries, Inc. 4,200 222,600
The LTV Corporation 3,300 31,556
USX-U.S. Steel Group, Inc. 7,200 237,600
-----------
1,472,332
PRINTING & PUBLISHING (0.2%)
World Color Press, Inc. (a) 2,200 77,000
RAILROAD TRANSPORTATION (1.2%)
Burlington Northern Santa Fe Corporation 2,000 196,375
Canadian Pacific, Ltd. 12,900 366,038
-----------
562,413
RUBBER & MISCELLANEOUS PLASTIC PRODUCTS (0.4%)
EVI Weatherford, Inc.(a) 5 186
Premark International, Inc. 6,100 196,725
-----------
196,911
SECURITY & COMMODITY BROKERS (6.7%)
A.G. Edwards, Inc. 8,250 352,172
Donaldson, Lufkin & Jenrette, Inc. (a) 3,000 152,438
Legg Mason, Inc. 300 17,269
</TABLE>
B-41
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -----
<S> <C> <C>
COMMON STOCKS (CONTINUED)
SECURITY & COMMODITY BROKERS (6.7%) (CONTINUED)
Lehman Brothers Holdings 13,100 $ 1,016,062
Merril Lynch & Company, Inc. 1,400 129,150
Paine Webber Group, Inc. 16,500 707,438
Raymond James Financial, Inc. 1,700 50,894
The Bear Stearns Companies, Inc. (b) 13,925 791,984
-----------
3,217,407
STONE, CLAY & GLASS PRODUCTS (2.0%)
Hanson Plc 3,700 112,155
Lafarge Corporation 2,300 90,419
Lone Star Industries 3,000 231,188
Southdown, Inc. 3,300 235,538
USG Corporation 4,200 227,325
Vitro SA 1,800 11,475
-----------
908,100
TEXTILE MILL PRODUCTS (0.5%)
Burlington Industries, Inc. 6,800 95,625
Mohawk Industries, Inc. (a) 4,850 153,684
-----------
249,309
TRANSPORTATION BY AIR (5.8%)
Airborne Freight Corporation (b) 9,000 314,438
America West Holdings Corporation (a) 4,300 122,819
AMR Corporation (a) 6,400 532,800
Continental Airlines (a) 4,800 292,200
Delta Air Lines, Inc. 1,200 155,100
KLM Royal Dutch 6,206 254,058
Southwest Airlines 9,400 278,475
UAL Corporation (a) 6,100 475,800
US Air Group, Inc. (a) 4,200 332,850
-----------
2,758,540
TRANSPORTATION EQUIPMENT (6.5%)
Arvin Industries, Inc. 2,900 105,306
Brunswick Corporation 6,700 165,825
Chrysler Corporation 9,702 546,950
Cordant Technologies, Inc. 4,700 216,788
Dana Corporation 3,900 208,650
Fleetwood Enterprises, Inc. 4,700 188,000
Ford Motor Company 6,000 354,000
Honda Motor Company, Ltd. 1,000 71,438
Navistar International 10,600 306,075
Northrop Grumman Corporation 2,000 206,250
PACCAR, Inc. 8,200 427,681
Trinity Industries 8,400 348,600
-----------
3,145,563
TRANSPORTATION SERVICES (0.4%)
GATX Corporation 4,600 201,825
TRUCKING & WAREHOUSING (1.1%)
CNF Transportation, Inc. 3,500 148,750
USFreightways Corporation 6,200 203,631
Werner Enterprises, Inc. 9,500 181,094
-----------
533,475
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -----
<S> <C> <C>
COMMON STOCKS (CONTINUED)
WATER TRANSPORTATION (0.5%)
Royal Caribbean Cruises, Ltd. 2,700 $ 214,650
WHOLESALE TRADE - DURABLE GOODS (0.2%)
Borg-Warner Automotive, Inc. 2,400 115,350
WHOLESALE TRADE - NONDURABLE GOODS (1.0%)
Burlington Coat Factory Warehouse 6,120 137,700
SUPERVALU, Inc. 2,800 124,250
Universal Corporation 5,200 194,350
------------
456,300
------------
TOTAL COMMON STOCK (Cost $29,464,000) $ 41,106,996
<CAPTION>
PRINCIPAL
SHORT-TERM SECURITIES (13.4%) AMOUNT VALUE
------ -----
<S> <C> <C>
U.S. Government Agency (12.4%)
Federal Home Loan Mortgage
Corporation Discount Note,
5.44%, due 7/10/1998 $ 2,300,000 $ 2,296,872
Federal Home Loan Mortgage
Corporation Discount Note,
5.44%, due 7/10/1998 900,000 898,776
Federal Home Loan Mortgage
Corporation Discount Note,
5.49%, due 7/27/1998 500,000 498,018
Federal Home Loan Mortgage
Corporation Discount Note,
5.44%, due 7/17/1998 2,200,000 2,194,681
------------
5,888,347
U.S. GOVERNMENT OBLIGATIONS (0.3%)
U.S. Treasury Bills, 4.85%,
Due 7/23/1998 (b) 100,000 99,704
U.S. Treasury Bills, 4.87%,
Due 7/23/1998 (b) 50,000 49,851
------------
149,555
REPURCHASE AGREEMENT (0.7%)
State Street Bank, 4.25%, due
7/1/1998 (Dated 6/30/1998, collaterized
by U.S. Treasury Note, 7.25%, due
5/15/2016 value $321,750) 313,424 313,424
------------
TOTAL SHORT-TERM SECURITIES (Cost $6,351,307) 6,351,326
------------
TOTAL INVESTMENTS (100.0%) (Cost $35,815,307) $ 47,458,322
------------
------------
</TABLE>
(a) Non-income producing
(b) A portion of the security was pledged to cover margin requirements for
futures contracts. At the period end, the value of the securities
pledged amounted to $934,804.
B-42
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
FUTURES CONTRACTS
<TABLE>
<CAPTION>
Expiration Contract Unrealized
Date Amount Loss
---------- -------- ----------
<S> <C> <C> <C>
4 S&P 500
Futures Contracts - Short Sept. 1998 $1,143,000 $ (44,300)
</TABLE>
Other Information:
Purchases and sales of securities, excluding short-term securities, for the
year ended June 30, 1998, aggregated $25,256,225 and $34,367,169,
respectively. At June 30, 1998 net unrealized appreciation for tax purposes
aggregated $11,643,015 of which $12,628,365 related to appreciated
investment securities and $985,350 related to depreciated investment
securities. The aggregate cost of securities is the same for book and tax
purposes.
SEE ACCOMPANYING NOTES.
B-43
<PAGE>
Zweig Equity (Small Cap) Portfolio
Statement of Assets and Liabilities
June 30, 1998
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $12,332,056)--See $ 14,678,911
accompanying schedule
Cash 17,393
Dividends, interest and other receivable 10,794
------------
Total assets 14,707,098
LIABILITIES
Accounts payable and accrued expenses 18,648
------------
Total liabilities 18,648
------------
NET ASSETS $ 14,688,450
------------
------------
Net Assets consist of:
Paid-in capital $ 9,260,692
Undistributed net investment income 34,791
Accumulated undistributed net realized gain on investments 3,046,112
Net unrealized appreciation on investment securities 2,346,855
------------
NET ASSETS, for 835,756 shares outstanding $ 14,688,450
------------
------------
NET ASSET VALUE, offering and redemption price per share $ 17.58
------------
------------
Statement of Operations
Year Ended June 30, 1998
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $3,747) $ 165,602
Interest 73,140
------------
Total investment income 238,742
EXPENSES
Investment advisory and management fees 135,678
Custody and accounting fees 50,565
Professional fees 9,592
Directors' fees and expenses 4,898
Other expenses 8,745
------------
Total expenses before reimbursement 209,478
Less: expense reimbursement (5,527)
------------
Net expenses 203,951
------------
Net investment income 34,791
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain (loss) on:
Investment securities 3,382,005
Futures contracts (360,955)
------------
Net realized gain 3,021,050
Change in unrealized appreciation (depreciation) on:
Investment securities (342,015)
Futures contracts 25,610
------------
Net unrealized depreciation (316,405)
------------
Net gain on investments 2,704,645
------------
Net increase in net assets resulting from operations $ 2,739,436
------------
------------
</TABLE>
SEE ACCOMPANYING NOTES.
B-44
<PAGE>
Zweig Equity (Small Cap) Portfolio
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1998 1997
---------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 34,791 $ 103,886
Net realized gain on investments 3,021,050 476,697
Change in net unrealized appreciation (depreciation) (316,405) 1,353,861
---------------------------
Net increase in net assets resulting from operations 2,739,436 1,934,444
Distributions to shareholders from:
Net investment income (103,886) (103,880)
Net realized gain (473,364) (861,194)
---------------------------
Total distributions to shareholders (577,250) (965,074)
Capital share transactions:
Proceeds from sales of shares 4,519,161 2,797,773
Proceeds from reinvested distributions 577,250 965,074
Cost of shares redeemed (3,731,320) (5,269,163)
---------------------------
Net increase (decrease) in net assets resulting from share transactions 1,365,091 (1,506,316)
---------------------------
Total increase (decrease) in net assets 3,527,277 (536,946)
NET ASSETS
Beginning of period 11,161,173 11,698,119
---------------------------
End of period (including undistributed net investment income of $34,791 and
$103,886, respectively) $ 14,688,450 $ 11,161,173
---------------------------
---------------------------
OTHER INFORMATION
SHARES:
Sold 281,798 205,116
Issued through reinvestment of distributions 35,368 74,878
Redeemed (233,008) (387,804)
---------------------------
Net increase (decrease) 84,158 (107,810)
---------------------------
---------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
B-45
<PAGE>
Zweig Equity (Small Cap) Portfolio
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of
period $ 14.85 $ 13.61 $ 11.62 $ 10.65 $ 10.11
Income from investment
operations:
Net investment income 0.04 0.16 0.11 0.17 0.15
Net realized and unrealized gain
on investments 3.48 2.41 2.04 0.93 0.50
--------------------------------------------------------------------------------
Total from investment operations 3.52 2.57 2.15 1.10 0.65
Less distributions:
From net investment income (0.14) (0.14) (0.16) (0.06) (0.11)
From net realized gain (0.65) (1.19) -- (0.07) --
--------------------------------------------------------------------------------
Total distributions (0.79) (1.33) (0.16) (0.13) (0.11)
--------------------------------------------------------------------------------
Net asset value, end of period $ 17.58 $ 14.85 $ 13.61 $ 11.62 $ 10.65
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TOTAL RETURN 23.72% 20.37% 18.69% 10.39% 6.53%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in
thousands) $ 14,688 $ 11,161 $ 11,698 $ 8,034 $ 7,591
Ratio of expenses to average net
assets 1.52% 1.55% 1.55% 1.55% 1.72%
Ratio of net investment income
to average net assets 0.26% 0.97% 1.06% 1.54% 1.75%
Ratio of expenses to average net
assets before voluntary expense
reimbursement 1.56% 1.82% 1.83% 1.59% 2.14%
Ratio of net investment income
to average net assets before
voluntary expense reimbursement 0.22% 0.70% 0.78% 1.50% 1.32%
Portfolio turnover rate 113% 59% 101% 67% 249%
</TABLE>
B-46
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -----
<S> <C> <C>
COMMON STOCKS (84.1%)
AGRICULTURAL PRODUCTION-LIVESTOCK (0.7%)
Michael Foods, Inc. 1,700 $ 50,097
Pilgrim's Pride Corporation 2,200 44,000
---------
94,097
AGRICULTURAL SERVICES (0.1%)
Veterinary Centers of America, Inc (a) 400 7,538
AMUSEMENT & RECREATION SERVICES (0.5%)
Anchor Gaming Corporation (a) 500 38,906
Rio Hotel & Casino, Inc. (a) 1,500 28,313
---------
67,219
APPAREL & ACCESSORIES STORES (2.0%)
American Eagle Outfitters, Inc. (a) 400 15,413
Footstar, Inc. (a) 500 24,000
Goody's Family Clothing, Inc. (a) 1,600 87,500
The Buckle, Inc. (a) 1,350 39,825
The Cato Corporation 2,500 43,516
The Dress Barn, Inc. (a) 2,000 49,875
The Finish Line, Inc. (a) 1,200 33,750
---------
293,879
APPAREL & OTHER TEXTILE PRODUCTS (0.4%)
Kellwood Company 500 17,875
OshKosh B'Gosh, Inc. 300 13,425
Pillowtex Corporation 800 32,100
---------
63,400
AUTO REPAIR SERVICES & PARKING (0.2%)
Rollins Truck Leasing Corporation 2,700 33,413
BUILDING MATERIALS & GARDEN SUPPLIES (0.2%)
Central Garden and Pet Company (a) 200 6,213
Eagle Hardware & Garden, Inc. (a) 1,000 23,156
---------
29,369
BUSINESS SERVICES (2.1%)
ADVO, Inc. (a) 900 25,369
Boole & Babbage, Inc.(a) 900 21,544
Electro Rent Corporation (a) 3,000 67,125
Hummingbird Communications, Ltd. (a) 400 10,725
MAPICS, Inc. (a) 1,200 23,663
New Dimension Software, Ltd. (a) 200 6,694
Orbotech, Ltd. (a) 600 21,769
Platinum Software Corporation (a) 2,000 48,813
Renters Choice, Inc. (a) 700 19,950
Sterling Software, Inc. (a) 1,000 29,563
Stratus Computer, Inc. (a) 400 10,125
Symantec Corporation (a) 1,000 26,063
---------
311,403
CHEMICALS & ALLIED PRODUCTS (1.1%)
Albemarle Corporation 2,000 44,125
Gensia Sicor, Inc. (a) 900 3,572
International Specialty Products, Inc. (a) 4,100 76,363
LeaRonal, Inc. 200 4,775
Methanex Corporation (a) 900 7,875
The Dexter Corporation 200 6,363
W.R. Grace & Company (a) 1,400 23,888
---------
166,961
COMMUNICATIONS (0.1%)
Atlantic Tele-Network, Inc. (a) 400 4,975
Grupo Radio Centro S.A. de C.V. 500 5,563
---------
10,538
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -----
<S> <C> <C>
COMMON STOCKS (CONTINUED)
DEPOSITORY INSTITUTIONS (3.9%)
Anchor Bancorp Wisconsin, Inc. 200 $ 7,856
Coast Federal (a) 300 4,556
CVB Financial Corporation 3 73
Downey Financial 1,535 50,175
First Republic Bank (a) 200 7,225
First Union Corporation 410 23,857
FirstFed Financial Corporation (a) 1,200 62,400
Flagstar Bancorp, Inc. 800 19,550
GBC Bancorp 1,200 31,875
MAF Bancorp, Inc. 850 31,131
NBT Bancorp, Inc. 300 7,631
PFF Bancorp, Inc. (a) 800 14,925
Republic Bancorp, Inc. 1,700 32,194
Riggs National Corporation 1,800 52,594
Sterling Bancorp 1,400 36,400
T R Financial Corporation 3,100 129,716
The Trust Company of New Jersey 400 10,813
Webster Financial Corporation 2,000 66,500
---------
589,471
EATING & DRINKING PLACES (1.3%)
Bob Evans Farms, Inc. 300 6,338
Brinker International, Inc. (a) 500 9,625
Foodmaker, Inc.(a) 3,500 59,063
Ruby Tuesday, Inc. 1,800 27,900
Showbiz Pizza Time, Inc. (a) 2,000 80,625
---------
183,551
ELECTRIC GAS & SANITARY SERVICES (3.9%)
BEC Energy 1,300 53,950
El Paso Electric Company (a) 6,400 58,800
Energen Corporation 1,700 34,212
Hawaiian Electric Industries, Inc. 600 23,813
Laidlaw Environmental Services, Inc. 6,800 24,650
MDU Resources Group, Inc. 1,000 35,688
MidAmerican Energy Holdings Company 2,400 51,900
Minnesota Power & Light Company 1,400 55,650
NICOR, Inc. 500 20,063
ONEOK, Inc. 600 23,925
Orange and Rockland Utilities, Inc. 500 26,844
Public Service Company of New Mexico 300 6,806
Rochester Gas and Electric Corporation 1,800 57,488
Sierra Pacific Resources 900 32,681
Southwest Gas Corporation 1,600 39,100
TNP Enterprises, Inc. 500 15,438
UtiliCorp United, Inc. 600 22,613
---------
583,621
ELECTRICAL & ELECTRONIC EQUIPMENT (3.6%)
Aeroquip-Vickers, Inc. 700 40,863
Bairnco Corporation 1,000 9,000
Bel Fuse, Inc. (a) 600 13,538
C&D Technologies, Inc. 400 23,200
CTS Corporation 1,500 44,250
Genlyte Group, Inc. (a) 2,700 71,972
</TABLE>
B-47
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -----
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ELECTRICAL & ELECTRONIC EQUIP. (3.6%) (CONTINUED)
Kuhlman Corporation 1,400 $ 55,388
Moog, Inc. 500 19,093
Powell Industries, Inc. (a) 300 3,675
QLogic Corporation (a) 300 10,697
Tadiran, Ltd. 800 26,500
Technitrol, Inc. 2,800 111,825
Thomas Industries, Inc. 2,150 52,541
Triumph Group, Inc. (a) 700 29,400
Windemere-Durable Holdings, Inc. 300 10,744
---------
522,686
ENGINEERING & MANAGEMENT SERVICES (0.0%)
Jacobs Engineering Groups, Inc. (a) 200 6,425
FABRICATED METAL PRODUCTS (1.2%)
AptarGroup, Inc. 400 24,875
Ball Corporation 1,100 44,206
Mark IV Industries, Inc. 700 15,138
MascoTech, Inc. 700 16,800
NCI Building Systems, Inc. (a) 400 23,075
Tower Automotive, Inc. (a) 600 25,725
United Dominion Industries Ltd. 800 26,700
---------
176,519
FOOD & KINDRED PRODUCTS (1.0%)
Adolph Coors Company 1,100 37,538
Canandaigua Brands, Inc. (a) 1,100 54,106
Imperial Holly Corporation 1 6
Smithfield Foods, Inc. (a) 200 6,063
The Earthgrains Company 1,000 55,875
---------
153,588
FURNITURE & FIXTURES (1.1%)
Ethan Allen Interiors, Inc. 1,000 49,938
Furniture Brands International, Inc. (a) 2,400 67,350
Knoll, Inc. (a) 800 23,600
La-Z-Boy, Inc. 400 22,600
---------
163,488
FURNITURE & HOMEFURNISHINGS STORES (1.1%)
Inacom Corporation (a) 600 19,050
Musicland Stores Corporation (a) 2,700 37,800
The Maxim Group, Inc. (a) 400 7,950
Trans World Entertainment Corporation (a) 2,400 103,050
---------
167,850
GENERAL BUILDING CONTRATORS (3.4%)
American Homestar Corporation (a) 1,600 38,350
Centex Corporation 2,200 83,050
Crossmann Communities, Inc. (a) 500 15,203
D.R. Horton, Inc. 1,700 35,488
Del Webb Corporation 600 15,563
Kaufman & Broad Home Corporation 1,300 41,275
Lennar Corporation 1,879 55,431
M.D.C. Holdings, Inc. 400 7,900
McGrath Rentcorp 1,100 23,719
Pulte Corporation 1,200 35,850
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -----
<S> <C> <C>
COMMON STOCKS (CONTINUED)
GENERAL BUILDING CONTRATORS (3.4%) (CONTINUED)
Standard-Pacific Corporation 2,700 $ 55,688
The Ryland Group, Inc. 500 13,125
Toll Brothers, Inc. (a) 1,500 43,031
U.S. Home Corporation (a) 900 37,125
---------
500,798
GENERAL MERCHANDISE STORES (0.8%)
Ames Department Stores, Inc. (a) 3,500 92,203
ShopKo Stores, Inc. (a) 300 10,200
The Neiman Marcus Group, Inc. (a) 300 13,032
---------
115,435
HEALTH SERVICES (1.2%)
Beverly Enterprises, Inc. (a) 900 12,431
Hooper Holmes, Inc. 1,000 21,000
Integrated Health Services, Inc. 1,422 53,325
NovaCare, Inc. (a) 2,300 27,025
Sun Healthcare Group, Inc. 1,800 26,325
Universal Health Services, Inc. 500 29,188
---------
169,294
HEAVY CONSTRUCTON, EXCEPT BUILDINGS (0.1%)
Morrison Knudsen Corporation (a) 1,500 21,094
HOLDING & OTHER INVESTMENT OFFICES (3.5%)
American General Hospitality Corporation 1,100 23,375
Apartment Investment & Management Company 800 31,600
Bradley Real Estate, Inc. 1,200 25,350
CBL & Associates Properties, Inc. 1,100 26,675
Criimi Mae, Inc. 2,700 37,463
Elron Electronic Industies, Ltd. 2,100 36,816
Equity Inns, Inc. 3,400 44,838
Essex Property Trust, Inc. 900 27,900
Felcor Suite Hotels, Inc. 1,000 31,375
General Growth Properties 800 29,900
Highwoods Properties, Inc. 700 22,619
Impac Mortgage Holdings, Inc. 450 7,003
Innkeepers USA Trust 1,100 13,888
Kimco Realty Corporation 600 24,600
Liberty Property Trust 1,000 25,563
Manufactured Home Communities, Inc. 1,300 31,363
MGI Properties, Inc. 500 13,094
PEC Israel Economic Corporation (a) 800 19,100
Prentiss Properties Trust 300 7,294
RFS Hotel Investors, Inc. 1,900 36,100
San Juan Basin Royalty Trust 1,500 11,344
Sunstone Hotel Investors, Inc. 500 6,656
---------
533,916
HOTELS & OTHER LODGING PLACES (0.8%)
Bristol Hotel Company (A) 1,000 24,500
Capstar Hotel Company (A) 500 14,000
Prime Hospitality Corporation (A) 1,300 22,669
Servico, Inc. (A) 1,500 22,500
Sun International Hotels, Ltd. (A) 600 27,300
---------
110,969
</TABLE>
B-48
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -----
<S> <C> <C>
COMMON STOCKS (CONTINUED)
INDUSTRIAL MACHINERY & EQUIPMENT (4.7%)
AGCO Corporation 400 $ 8,225
Ampco, Inc. 1,200 18,450
Anixter International, Inc. (a) 400 7,625
Astec Industries, Inc. (a) 400 13,650
Chart Industries, Inc. 600 14,325
Cincinnati Milacron, Inc. 1,400 34,038
DT Industries, Inc. 200 4,863
Gardner Denver Machinery, Inc. (a) 3,250 89,781
Gleason Corporation 2,100 59,063
Graco, Inc. 200 6,975
Indigo N.V. (a) 1,000 5,969
International Comfort Products Corporation (a) 1,300 15,763
Kaydon Corporation 1,000 35,313
Kennametal, Inc. 500 20,875
Lincoln Electric Holdings 200 4,425
Lufkin Industries, Inc. 800 26,350
Mestek, Inc. (a) 700 14,963
Met-Pro Corporation 150 2,241
Modine Manufacturing Company 400 13,863
MTI Technology Corporation (a) 400 3,656
Pentair, Inc. 200 8,500
Robbins & Meyers, Inc. 600 17,438
Schawk, Inc. 1,700 25,500
SPS Technologies, Inc. (a) 1,800 105,253
Tecumseh Products Company 300 15,834
Terex Corporation (a) 2,100 59,850
The Manitowoc Company, Inc. 1,150 46,360
The Rauma Group 100 2,075
Twin Disc, Inc. 100 3,025
Woodward Governor Company 500 15,469
---------
699,717
INSTRUMENTS & RELATED PRODUCTS (2.3%)
Bacou USA, Inc. (a) 1,300 27,259
Canadian Marconi Company 1,000 12,938
Esterline Technologies Corporation (a) 2,800 57,575
Fossil, Inc. (a) 1,850 46,134
Mine Safety Appliances Company 600 44,025
MTS Systems Corporation 1,600 25,750
The Cooper Companies, Inc. (a) 1,400 51,013
The L.S. Starrett Company 200 7,900
VISX, Inc. (a) 1,100 65,725
---------
338,319
INSURANCE CARRIERS (7.8%)
Acceptance Insurance Companies, Inc. 1,100 27,019
Alfa Corporation 1,700 35,435
American Annuity Group, Inc. 2,920 70,263
AmerUs Life Holdings, Inc. 800 25,900
Capital Re Corporation 700 50,138
Chartwell Re Corporation 100 2,944
Citizens Corporation 1,000 31,313
Delphi Financial Group, Inc. (a) 1,024 57,664
Enhance Financial Services Group, Inc. 2,200 74,250
Everest Reinsurance Holdings, Inc. 1,100 42,281
FBL Financial Group, Inc. 1,700 43,563
Fidelity National Financial, Inc. 1,140 45,387
Financial Security Assurance Holding 600 35,250
Foremost Corp of America 1,100 26,538
Fremont General Corporation 1,300 70,444
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -----
<S> <C> <C>
COMMON STOCKS (CONTINUED)
INSURANCE CARRIERS (7.8%) (CONTINUED)
Land America Financial Group, Inc. 600 $ 34,350
Liberty Financial Companies, Inc. 2,300 79,350
Life Re Corporation 700 57,400
Medical Assurance, Inc. (a) 630 17,483
NAC Re Corporation 200 10,675
National Western Life Insurance Company (a) 200 24,463
Nationwide Financial Services, Inc. 700 35,700
Nymagic, Inc. 200 5,475
Orion Capital Corporation 600 33,525
Presidential Life Corporation 1,700 36,444
Reliance Group Holdings, Inc. 1,500 26,250
Renaissance Re Holdings, Ltd. 500 23,156
RLI Corporation 250 10,172
State Auto Financial Corporation 200 6,388
The First American Financial Corporation 600 54,000
Triad Guaranty, Inc. (a) 1,400 48,300
United Wisconsin Services, Inc. 400 11,350
Vesta Insurance Group, Inc. 600 12,788
---------
1,165,658
LEATHER & LEATHER PRODUCTS (0.8%)
Genesco, Inc. (a) 4,000 65,250
The Timberland Company (a) 400 28,775
Weyco Group, Inc. 600 16,313
---------
110,338
LOCAL & INTERURBAN PASSENGER TRANSIT (0.1%)
Greyhound Lines, Inc. (a) 1,500 9,094
LUMBER & WOOD PRODUCTS (0.4%)
MacMillan Bloedel, Ltd. 800 8,575
Premdor ,Inc. (a) 500 4,969
TJ International, Inc. 1,600 48,100
---------
61,644
METAL MINING (0.1%)
Anglogold Limited 480 9,739
MISCELLANEOUS MANUFACTURING INDUSTRIES (1.2%)
Hexcel Corporation (a) 1,000 22,625
NACCO Industries, Inc. 200 25,850
Oneida, Ltd. 1,650 50,531
Radica Games, Ltd. (a) 900 15,188
Russ Berrie and Company, Inc. 1,800 45,000
Valmet Oyj 100 3,488
Velcro Industries N.V. 100 13,975
---------
176,657
MISCELLANEOUS - RETAIL (0.9%)
Fingerhut Companies, Inc. 2,000 66,000
Garden Ridge Corporation (a) 400 7,788
Michaels Stores, Inc. (a) 400 14,113
Zale Corporation 1,200 38,175
---------
126,076
</TABLE>
B-49
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -----
<S> <C> <C>
COMMON STOCKS (CONTINUED)
MOTION PICTURES (0.1%)
Avid Technology, Inc. (a) 500 $ 16,766
NONDEPOSITORY INSTITUTIONS (1.9%)
AmeriCredit Corporation (a) 600 21,413
ContiFinancial Corporation (a) 500 11,563
Doral Financial Corporation 4,000 69,500
Fund American Enterprises Holdings, Inc. 300 44,400
IMC Mortgage Company (a) 1,200 12,638
Indymac Mortgage Holdings, Inc. 1,000 22,750
Resource Bancshares Mortgage Group, Inc. 3,600 66,825
Xtra Corporation 500 30,250
---------
279,339
NONMETALLIC MINERALS, EXCEPT FUELS (0.2%)
Florida Rock Industries, 1,200 35,025
OIL & GAS EXTRACTION (2.2%)
Atwood Oceanics, Inc. (a) 100 3,981
Cliffs Drilling Company (a) 2,000 65,625
Helmerich & Payne, Inc. 600 13,350
Pool Energy Services Company (a) 700 10,369
RPC Energy Services, Inc. 3,100 38,750
Seacor Smit, Inc. (a) 700 42,919
Tuboscope, Inc. (a) 600 11,850
UTI Energy Corporation (a) 900 11,588
Veritas DGC, Inc. (a) (b) 2,500 124,844
---------
323,276
PAPER & ALLIED PRODUCTS (0.4%)
Chesapeake Corporation 700 27,256
Domtar, Inc. 500 3,375
Wausau-Mosinee Paper Corporation 1,329 30,390
---------
61,021
PETROLEUM & COAL PRODUCTS (0.2%)
FINA, Inc. 500 32,500
PRIMARY METAL INDUSTRIES (4.8%)
AFC Cable Systems, Inc. (a) 1,200 42,750
AK Steel Holding Corporation 1,200 21,450
Alumax, Inc. (a) 261 12,104
Armco, Inc. (a) 4,200 26,775
Bethlehem Steel Corporation (a) 4,000 49,750
Carpenter Technology Corporation 400 20,100
Curtiss-Wright Corporation 800 31,350
Encore Wire Corporation (a) 3,075 49,777
Intermet Corporation 2,800 50,925
Maverick Tube Corporation (a) 500 5,781
Mueller Industries, Inc. (a) 3,500 129,938
NS Group, Inc. (a) 500 5,063
Precision Castparts Corporation 100 5,338
RMI Titanium Company (a) 1,400 31,850
Roanoke Electric Steel Corporation 1,350 25,228
Superior TeleCom, Inc. 500 20,813
Texas Industries, Inc. 1,100 58,300
The LTV Corporation 500 4,781
Tredegar Industries, Inc. (a) 1,550 131,556
---------
723,629
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -----
<S> <C> <C>
COMMON STOCKS (CONTINUED)
PRINTING & PUBLISHING (1.3%)
Banta Corporation 1,200 $ 36,825
Bowne & Company, Inc. 1,000 45,000
Merrill Corporation 2,000 44,313
Quebecor, Inc. 1,400 28,088
World Color Press, Inc. (a) 900 31,500
---------
185,726
RAILROAD TRANSPORTATION (0.1%)
Florida East Coast Inds. 400 11,700
REAL ESTATE (0.6%)
Parkway Properties, Inc. 100 2,950
Price Enterprises, Inc. 3,000 55,313
U.S. Restaurant Properties, Inc. 1,100 29,769
---------
88,032
RUBBER & MISCELLANEOUS PLASTIC PRODUCTS (1.1%)
Premark International, Inc. 1,500 48,375
Spartech Corporation 2,400 51,450
The Standard Products Company 1,600 45,000
The West Company, Inc. 500 14,157
---------
158,982
SECURITY & COMMODITY BROKERS (1.4%)
Everen Capital Corporation 400 11,200
Jefferies Group, Inc. (a) 2,600 106,600
McDoanld & Company Investments, Inc. 1,200 39,375
Morgan Keegan, Inc. 1,000 25,875
Raymond James Financial, Inc. 900 26,944
---------
209,994
SPECIAL TRADE CONTRACTORS (0.1%)
Dycom Industries, Inc. (a) 300 10,125
STONE, CLAY & GLASS PRODUCTS (2.3%)
Centex Construction Products, Inc. 2,600 100,100
Lone Star Industries 1,600 123,300
Southdown, Inc. 1,700 121,338
---------
344,738
TEXTILE MILL PRODUCTS (1.1%)
Burlington Industries, Inc. (a) 1,800 25,313
Chemfab Corporation (a) 900 18,731
Interface, Inc. 3,400 68,638
Mohawk Industries, Inc. (a) 950 30,103
Shaw Industries, Inc. 900 15,863
---------
158,648
TRANSPORTATION BY AIR (2.6%)
Airborne Freight Corporation 1,700 59,394
Alaska Airgroup, Inc. (a) 1,300 70,932
America West Holdings Corporation (a) 1,700 48,556
Comair Holdings, Inc. 2,100 64,772
Mesaba Holdings, Inc. 1,800 41,513
Midwest Express Holdings, Inc. (a) 150 5,428
SkyWest, Inc. 3,200 89,600
---------
380,195
</TABLE>
B-50
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -----
<S> <C> <C>
COMMON STOCKS (CONTINUED)
TRANSPORTATION EQUIPMENT (4.0%)
A.O. Smith Corporation 500 $ 25,844
AAR Corporation 600 17,738
Arvin Industries, Inc. 1,400 50,838
Avondale Industries, Inc. (a) 2,600 71,906
Coachmen Industries, Inc. 1,200 31,350
Cordant Technologies, Inc. 1,000 46,125
Fleetwood Enterprises, Inc. 900 36,000
MotivePower Industries, Inc. (a) 2,200 53,900
Navistar International (a) 1,600 46,200
Sequa Corporation (a) 1,300 86,775
SPX Corporation 400 25,750
Superior Industries International 1,000 28,188
The Fairchild Corporation (a) 1,100 22,206
Thor Industires, Inc. 400 11,075
TransTechnology Corporation 600 15,413
Varlen Corporation 1,000 34,625
---------
603,933
TRANSPORTATION SERVICES (0.1%)
GATX Corporation 300 13,163
TRUCKING & WAREHOUSING (1.6%)
B. Hunt Transport Services, Inc. 1,700 60,669
M.S. Carriers, Inc. (a) 2,000 54,125
Roadway Express, Inc. 400 7,525
U.S. Freightways Corporation 2,200 72,256
Werner Enterprises, Inc. 2,125 40,508
---------
235,083
WATER TRANSPORTATION (0.6%)
Alexander & Baldwin, Inc. 1,500 43,593
Sea Containers, Ltd. 1,100 42,075
Stolt-Nielsen S.A. 100 1,713
---------
87,381
WHOLESALE TRADE - DURABLE GOODS (2.6%)
Aviall, Inc. (a) 700 9,581
Barnes Group, Inc. 2,300 62,244
Borg-Warner Automotive, Inc. 300 14,419
CHS Electronics, Inc. (a) 800 14,250
Exide Corporation 1,300 21,856
Hughes Supply, Inc. 200 7,325
Insight Enterprises, Inc. (a) 1,500 59,906
Reliance Steel & Aluminum Company 1,750 67,594
Simpson Manufacturing Company (a) 400 15,450
Specialty Equipment Companies, Inc. (a) 500 11,344
Thermo Ecotek Corporation (a) 800 12,500
United Industrial Corporation 500 6,500
VWR Scientific Products Corporation (a) 300 7,397
Wynn's International, Inc. 3,543 68,203
---------
378,569
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -----
<S> <C> <C>
COMMON STOCKS (CONTINUED)
WHOLESALE TRADE - NONDURABLE GOODS (1.6%)
Burlington Coat Factory Warehouse 960 $ 21,600
Handleman Company (a) 1,200 13,800
Myers Industires, Inc. 1,500 36,000
United Stationers, Inc. (a) 1,600 103,700
Universal Corporation (a) 1,500 56,063
---------
231,163
---------
TOTAL COMMON STOCK (Cost $9,996,078) $ 12,342,752
PREFERRED STOCKS (0.0%)
UNITED STATES (0.0%)
Kimco Realty Corporation, 7.50%,
due, 12/31/2049 216 5,860
---------
TOTAL PREFERRED STOCKS (Cost $5,679) 5,860
<CAPTION>
PRINCIPAL
AMOUNT VALUE
------ -----
<S> <C> <C>
SHORT-TERM SECURITIES (15.9%)
U.S. GOVERNMENT AGENCY (12.2%)
Federal Home Loan Mortgage Corporation
Discount Note, 5.44%, due 7/10/1998 $ 1,800,000 $ 1,797,552
U.S. GOVERNMENT OBLIGATIONS (0.7%)
U.S. Treasury bill, 4.85%, 100,000 99,704
due 7/23/1998 (b)
REPURCHASE AGREEMENT (3.0%)
State Street Bank, 4.25% due 7/1/1998
(Dated 6/30/98, collateralized by U.S.
Treasury Note, 7.875%, 11/15/2007, value
$441,450) 433,043 433,043
----------
TOTAL SHORT-TERM SECURITIES (Cost $2,330,299) 2,330,299
----------
TOTAL INVESTMENTS (100.0%) (Cost $12,332,056) $ 14,678,911
----------
----------
</TABLE>
a. Non-income producing
Other Information:
Purchases and sales of securities, excluding short-term securities, for the
year ended June 30, 1998, aggregated $13,633,615 and $13,923,846,
respectively. At June 30, 1998 net unrealized appreciation for tax purposes
aggregated $2,346,785 of which $2,593,813 related to appreciated investment
securities and $247,028 related to depreciated investment securities. The
aggregate cost of securities is $12,332,126 for tax purposes.
SEE ACCOMPANYING NOTES.
B-51
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements
June 30, 1998
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 (the "1940 Act"), as an
open-end management investment company. As of June 30, 1998, the Fund has four
investment portfolios (the "Portfolios"): Harris Bretall Sullivan & Smith Equity
Growth, Scudder Kemper Value (formerly known as Dreman Value and Zurich Kemper
Value), Zweig Asset Allocation, and Zweig Equity (Small Cap). ARM Securities
Corporation ("ARM Securities"), 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").
Integrity Capital Advisors, Inc. ("Integrity Capital Advisors") (formerly known
as ARM Capital Advisors, Inc.), registered with the Securities and Exchange
Commission as an 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 Integrity 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, 1998, ARM had approximately $8.4 billion of
assets under management.
On July 23, 1997, Integrity and National Integrity (collectively, the
"Applicants") filed an application (amended on October 9, 1997) with the
Securities and Exchange Commission (the "SEC") pursuant to Section 26(b) of
the 1940 Act for an order to approve a substitution of certain portfolios of
the Fund (the "Substitution"). The Substitution involved 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).
B-52
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Substitution was approved by the SEC on November 14, 1997, and was effected
on that day. The former portfolios of the Fund affected by the Substitution and
the New Portfolios which received the assets are as follows:
<TABLE>
<CAPTION>
Former Portfolio of Fund New Portfolio
------------------------ -------------
<S> <C>
Renaissance Balanced Janus Aspen Series Balanced
Nicholas-Applegate Balanced Janus Aspen Series Balanced
Pinnacle Fixed Income J.P. Morgan (formerly JPM Bond)
ARM Capital Advisors Money Market Janus Aspen Series Money Market
Morgan Stanley Asian Growth Morgan Stanley Asian Equity
Morgan Stanley Worldwide High Income Morgan Stanley Emerging Markets Debt
</TABLE>
Shares of each former portfolio were redeemed in-kind and the redemption
proceeds were used to purchase shares of the New Portfolio. The costs of the
Substitution were borne by the Applicants, and no fees, transfer charges or
sales charges to effect the Substitution were 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 were the same. In addition, the Substitution did not
alter the tax or insurance benefits to contract holders or the contractual
obligation of the Applicants.
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.
B-53
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Bonds and other fixed-income securities (other than short-term
securities described above) are valued using market quotations provided by a
pricing service under procedures approved by the Fund's Board of Directors.
Futures contracts and options thereon and option contracts traded on a
commodities exchange or board of trade are valued at the closing settlement
price. Futures and option positions or any other securities or assets for which
reliable market quotations are not readily available or for which valuation
cannot be provided by a pricing service approved by the Board of Directors of
the Fund are valued at fair value as determined in good faith by the Board of
Directors.
SECURITY TRANSACTIONS
Securities transactions are accounted for as of trade date net of brokerage
fees, commissions and transfer fees. Interest income is accrued daily. Dividend
income is recorded on the ex-dividend date. Premiums and discounts on securities
purchased are amortized using the effective interest method. Realized gains and
losses on sales of investments are determined on the basis of nearest average
for all of the Portfolios except Zweig Asset Allocation, which uses the
first-in, first-out method.
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.
DIVIDEND DISTRIBUTIONS
Dividends from net investment income and distributions from net realized gains
are declared and distributed annually. Dividends and distributions are recorded
on the ex-dividend date. All dividends are reinvested in additional full and
fractional shares of the related Portfolios.
B-54
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 futures transactions, passive foreign
investment companies, capital losses, and losses deferred due to wash sales.
FUTURES CONTRACTS
Certain Portfolios may enter into futures contracts to protect against adverse
movement in the price of securities in the Portfolio or to enhance investment
performance. When entering into a futures contract, changes in the market price
of the contracts are recognized as unrealized gains or losses by marking each
contract to market at the end of each trading day through a variation margin
account. When a futures contract is closed, the Portfolios record a gain or loss
equal to the difference between the value of the 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, 1998.
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.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with institutions that the Fund's
investment manager, Integrity 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.
B-55
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements (continued)
2. Investment Advisory Agreements and Payments to Related Parties
Integrity Capital Advisors, the Fund's investment adviser, has entered into a
sub-advisory agreement with a registered investment adviser ("Sub-Adviser") for
each of the Portfolios. Integrity 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:
<TABLE>
<CAPTION>
SUB-ADVISORY
MANAGEMENT FEE FEE
--------------------------------------------------------------------------
<S> <C> <C>
Harris Bretall Sullivan & Smith Equity
Growth 0.65% 0.40%
Scudder Kemper Value 0.65 0.40
Zweig Asset Allocation 0.90 0.65
Zweig Equity (Small Cap) 1.05 0.80
</TABLE>
Amendments to the sub-advisory agreements were approved at a special meeting of
shareholders held on October 30, 1997. As a result of the amendments, the
management fees paid by the Fund to Integrity Capital Advisors remained
unchanged and the sub-advisory fees paid by Integrity Capital Advisors to each
of the Sub-Advisers of Harris Bretall Sullivan & Smith Equity Growth, Scudder
Kemper Value, Zweig Asset Allocation, and Zweig Equity (Small Cap), as a
percentage of average net assets, were reduced effective October 31, 1997, by
0.10% to the fees shown above.
Under the Management Agreement, Integrity Capital Advisors provides certain
management services to the Fund, and the Fund is responsible for certain of its
direct operating expenses. Integrity 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. Integrity Capital
Advisors has reserved the right to withdraw or modify its policy of expense
reimbursement for the Portfolios.
Zweig Asset Allocation, Scudder Kemper Value and Zweig Equity (Small Cap) placed
a portion of their transactions with brokerage firms which may be considered
affiliates of the Fund under the 1940 Act. The commissions paid to these firms
were approximately $55,000 in the aggregate during the year ended June 30, 1998.
B-56
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements (continued)
2. INVESTMENT ADVISORY AGREEMENTS AND PAYMENTS TO RELATED PARTIES (CONTINUED)
Certain officers and directors of the Fund are also officers of ARM, ARM
Securities, Integrity Capital Advisors, Integrity, and National Integrity. The
Fund does not pay any amounts to compensate these individuals.
3. CAPITAL SHARES
At June 30, 1998, 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, four classes of shares
authorized by the Board of Directors were being offered as follows: 55,000,000
shares each for Harris Bretall Sullivan & Smith Equity Growth, Scudder Kemper
Value, Zweig Asset Allocation, and Zweig Equity (Small Cap).
At June 30, 1998, 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 EVENT
On July 10, 1998, a Special Meeting of Shareholders of the Fund was held to
consider: (1) approval of a new investment management agreement between the
Fund and Integrity Capital Advisors; (2) approval of new subadvisory
agreements pertaining to (a) Harris Bretall Sullivan and Smith Equity
Growth Portfolio, (b) Scudder Kemper Value Portfolio, (c) Zweig Asset
Allocation Portfolio, and (d) Zweig Equity (Small Cap) Portfolio; and (3)
approval of interim investment advisory agreements pertaining to (a) Harris
Bretall Sullivan and Smith Equity Growth Portfolio, (b) Scudder Kemper Value
Portfolio, (c) Zweig Asset Allocation Portfolio, and (d) Zweig Equity (Small
Cap) Portfolio. With respect to item (1), 6,806,221.482 shares voted for
approval, 67,083.488 shares voted against approval, and 499,342.477 shares
abstained. With respect to item (2)(a), 1,602,908.025 shares voted for
approval, 9,942.933 shares voted against approval, and 171,452.143 shares
abstained. With respect to item (2)(b), 1,924,209.620 shares voted for
approval, 9,691.203 shares voted against approval, and 115,533.059 shares
abstained. With respect to (2)(c), 2,544,605.829 shares voted for approval,
59,241.330 shares voted against approval, and 110,011.792 shares abstained.
With respect to item (2)(d), 759,303.326 shares voted for approval, 3,356.386
shares voted against approval, and 62,391.800 shares abstained. With respect
to item (3)(a), 1,614,127.405 shares voted for approval, 10,437.963 shares
voted against approval, and 159,737.733 shares abstained. With respect to
item (3)(b), 1,923,871.399 shares voted for approval, 12,073.474 shares voted
against approval, and 113,489.009 shares abstained. With respect to item
(3)(c), 2,555,463.060 shares voted for approval, 40,690.083 shares voted
against approval, and 117,705.807 shares abstained. With respect to item
(3)(d), 758,422.630 shares voted for approval, 3,356.386 shares voted against
approval, and 63,272.496 shares abstained. Accordingly, all matters
considered were approved.
B-57
<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