<PAGE>
Registration Nos. 33-50434 and 811-7084
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 Pre-Effective
Amendment No. __
Post-Effective Amendment No. 10 X
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AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 11 X
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THE LEGENDS FUND, INC.
(Exact Name of Registrant as Specified in Charter)
515 West Market Street
Louisville, Kentucky 40202
(Address of Registrant's Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: 1-800-325-8583
Copies to:
Kevin L. Howard, Esq. Joel H. Goldberg, Esq.
515 West Market Street Swidler Berlin Shereff Friedman, LLP
Louisville, KY 40202 919 Third Avenue
(Name and Address of Agent for Service) New York, New York 10022
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It is proposed that this filing will become effective (check appropriate box):
___ immediately upon filing pursuant to paragraph (b)
___ on (date) pursuant to paragraph (b)
___ 60 days after filing pursuant to paragraph (a)(1)
X on November 1, 1999 pursuant to paragraph (a)(1)
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___ 75 days after filing pursuant to paragraph (a)(2)
___ on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
__ this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
<PAGE>
PROSPECTUS
THE LEGENDS FUND, INC.
NOVEMBER 1, 1999
The Legends Fund, Inc. (the FUND) is an open-end management investment company
with four portfolios (together "Portfolios," and individually "Portfolio")
available for investment. Shares of the Fund are currently sold only to separate
accounts of Integrity Life Insurance Company and National Integrity Life
Insurance Company as an investment option for variable annuity contracts. The
Fund's current Portfolios are:
- Harris Bretall Sullivan & Smith Equity Growth Portfolio
- Scudder Kemper Value Portfolio
- Zweig Asset Allocation Portfolio
- Zweig Equity (Small Cap) Portfolio
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S><C>
Section 1
RISK/RETURN SUMMARY.......................................................................
Investment Objective and Strategy.........................................................
Principal Risks...........................................................................
Year 2000.................................................................................
Section 2
THE FUND..................................................................................
Investment Objectives, Principal Investment Strategies and Related Risks..................
Harris Bretall Sullivan & Smith Equity Growth Portfolio...................................
Scudder Kemper Value Portfolio............................................................
Zweig Asset Allocation Portfolio..........................................................
Zweig Equity (Small Cap) Portfolio........................................................
Risks.....................................................................................
Section 3
PERFORMANCE...............................................................................
Section 4
MANAGEMENT OF THE FUND....................................................................
The Manager, Sub-Adivsers and Distributor.................................................
Management Fees...........................................................................
Expenses..................................................................................
Section 5
SHAREHOLDER INFORMATION...................................................................
Purchase and Redemption of Shares.........................................................
Valuation of Shares.......................................................................
Dividends and Distribution................................................................
Tax Consequences of Investing in the Fund.................................................
FINANCIAL HIGHLIGHTS......................................................................
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. WE HAVE NOT AUTHORIZED ANYONE TO MAKE
ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS.
<PAGE>
SECTION 1 - RISK/RETURN SUMMARY
INVESTMENT OBJECTIVES AND STRATEGIES
The four Portfolios of the Fund and a description of their objectives and
principal investment strategies are listed below. The Fund's Board of Directors
may add Portfolios at any time. We can't guarantee that a Portfolio will achieve
its investment objective.
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 earnings 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 blue chip stocks included in the S&P 500 that have a
minimum of $400 million market capitalization.
ZWEIG EQUITY (SMALL CAP) PORTFOLIO seeks long-term capital appreciation. It
invests primarily in small company stocks, which are stocks that have a market
capitalization between $250 million and $1.5 billion.
PRINCIPAL RISKS
An investment in each of the Portfolios carries with it certain risks, including
the risk that the value of your investment will decline and you could lose
money. This could happen if an issuer of a stock in a Portfolio becomes
financially impaired or if the stock market as a whole declines. Because most of
the investments are in common stocks, there is also the inherent risk that
holders of common stock are generally behind creditors and holders of preferred
stock for payment in the event of the bankruptcy of a stock issuer.
The Fund is intended for investors who are looking for long-term, steady growth
of assets.
ANNUAL RETURNS
The following bar charts and table illustrate some of the risks of investing in
each Portfolio by showing the changes in the returns experienced by the
Portfolios from calendar year to calendar year and by showing how each
Portfolio's average annual total returns compare with those of a broad measure
of market performance. Of course, past performance of any fund isn't an
indication of how it will perform in the future.
For the calendar years shown in the bar chart, the highest and lowest returns
for a quarter for each Portfolio were: Harris Bretall Sullivan & Smith Equity
Growth Portfolio: highest quarter: 4th quarter 1998 34.54%; lowest quarter: 3rd
quarter 1998 (13.12%); Scudder Kemper Value Portfolio: highest quarter: 4th
quarter 1998 16.34%; lowest quarter: 3rd quarter 1998 (7.47%); Zweig Asset
Allocation Portfolio: highest quarter: 4th quarter 1998 13.16%; lowest quarter,
3rd quarter 1998 (19.31%); Zweig Equity (Small Cap) Portfolio: highest quarter:
4th quarter 1998 13.20%; lowest quarter: 3rd quarter 1998 ( 18.90%).
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<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
HARRIS BRETAIL
EQUITY GROWTH S&P 500
------------- -------
<S> <C> <C>
1993 -1.38 7.06
1994 2.64 -1.54
1995 29.93 34.11
1996 12.41 20.26
1997 32.92 31.01
1998 33.83 26.67
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
SCUDDER KEMPER VALUE S&P 500
-------------------- -------
<S> <C> <C>
1993 4.86 7.06
1994 -2.07 -1.54
1995 43.65 34.11
1996 22.78 20.26
1997 28.71 31.01
1998 16.79 26.67
</TABLE>
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<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
ZWEIG EQUITY VALUE LINE
(SMALL CAP) GEOMETRIC INDEX
------------ ---------------
<S> <C> <C>
1993 0 10.72
1994 -1.97 -6.01
1995 19.54 19.29
1996 16.87 13.38
1997 23.42 21.06
1998 -1.94 -3.79
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
ZWEIG ASSET
ALLOCATION S&P 500
---------- -------
<S> <C> <C>
1993 0 7.06
1994 -0.92 -1.54
1995 19.75 34.11
1996 13.32 20.26
1997 20.3 31.01
1998 -3.39 26.67
</TABLE>
Total return for the period from 1/1/99 through 9/30/99 was __%, __%, __% and
__% for the Harris Bretall Sullivan & Smith Equity Growth Portfolio, Scudder
Kemper Value Portfolio, Zweig Asset Allocation Portfolio and Zweig Equity (Small
Cap) Portfolio, respectively.
AVERAGE ANNUAL TOTAL RETURNS
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For the period ending 12/31/98
<TABLE>
<CAPTION>
Portfolio 1Year 3 Year 5 Year Since
Inception*
<S> <C> <C> <C> <C>
Harris Bretall Sullivan & Smith
Equity Growth Portfolio 33.34% 29.70% 27.07% 18.99%
Scudder Kemper Value Portfolio 16.48% 23.21% 23.16% 19.95%
Zweig Asset Allocation Portfolio -5.02% 9.98% 10.50% 11.41%
Zweig Equity (Small Cap) Portfolio -10.47% 9.05% 10.60% 11.46%
S&P 500** 21.07% 26.97% 25.31% 18.6%
Value Line Geometric Index*** -2.29% 9.55% 11.12% 8.9%
</TABLE>
* Inception dates for funds: Harris Bretall Sullivan & Smith - December 8, 1992;
Scudder Kemper Value - December 14, 1992; Zweig Asset Allocation - December 14,
1992; Zweig Equity (Small Cap) - December 14, 1992.
** The S&P 500 is the Standard & Poor's Composite Stock Price Index, a
recognized unmanaged index of common stock prices, and is the benchmark for the
Harris Bretall Sullivan & Smith Equity Growth Portfolio, Scudder Kemper Value
Portfolio and Zweig Asset Allocation Portfolio.
*** The ValueLine Geometric Index is equally weighted and geometrically averaged
based on the price change of each of the index's 1650 component stocks from the
previous day's close, and is the benchmark for the Zweig Equity (Small Cap)
Portfolio.
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The Portfolios' past performance does not necessarily indicate how they will
perform in the future.
YEAR 2000
Many computer programs are written so that only the last two digits of the year
are read. Because of this, many computer systems will read the year 2000 as
1900, which could cause them to malfunction. We are evaluating, on an ongoing
basis, the computer systems upon which the Fund relies and the systems of other
companies on which we rely to determine if they'll function properly, and make
the transition from 1999 to 2000 smoothly. These activities are designed to
ensure that there is no adverse effect on the Fund's business operations. While
we feel confident that this process will be smooth, we can't guarantee that
there won't be some Year 2000 problems experienced by our systems, and we can't
make any representations or guarantees that the outside sources on which we rely
will be ready to make a smooth transition to Year 2000 with their systems. In
addition, we can't guarantee that the systems of the companies in which the
Portfolios invest won't experience Year 2000 problems, which could have a
negative impact on the Portfolios' returns.
SECTION 2 - THE FUND
INVESTMENT OBJECTIVES, INVESTMENT STRATEGIES AND RELATED RISKS
Set forth below is a description of each Portfolio's investment objective and a
discussion of how the Portfolio intends to achieve that objective.
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HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO seeks long-term capital
growth. This Portfolio invests primarily in stocks of established companies with
proven records of superior and consistent earnings growth. Its benchmark is the
S&P 500. In selecting equity securities for this Portfolio, the Sub-Adviser
looks for successful companies that have exhibited superior growth in revenues
and earnings, strong product lines and proven management ability over a variety
of business cycles.
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. When the Sub-Adviser believes unusual circumstances warrant a
defensive posture, the Portfolio may temporarily invest all of its assets in
cash, U.S. Government securities or money market instruments, including
repurchase agreements.
SCUDDER KEMPER VALUE PORTFOLIO seeks long-term capital appreciation, with
current income as its secondary objective. Its benchmark is the S&P 500. This
Portfolio primarily invests in a diversified portfolio of the stocks of large
U.S. companies that the Sub-Adviser believes to be undervalued, or have a low
price to earnings ratio. These companies usually have a minimum market
capitalization of $1 billion. The Sub-Adviser looks for investments with the
following attributes:
<TABLE>
<S><C>
- low price-to-earnings ratios - dividend yields above the market average
- low price-to-book ratios - sound finances
- low price-to-cash flow ratios - perceived intrinsic value
</TABLE>
The Portfolio may invest 25% or more of its total assets in one or more market
sectors, including the financial services and consumer products sectors.
During periods when the Sub-Adviser believe that the market for equity
securities warrants a defensive posture, the Portfolio may invest in U.S.
Government securities and other high-grade, short-term money market instruments,
including repurchase agreements. The Portfolio may also buy and sell stock index
futures contracts and index options. The Portfolio will invest in stock index
futures contracts and index options only 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 buy or sell where those
transactions are appropriate for the reduction of risks inherent in the ongoing
management of the Portfolio.
ZWEIG ASSET ALLOCATION PORTFOLIO seeks long-term capital appreciation and, to a
lesser extent, dividend income, while reducing portfolio exposure to market
risk. Its benchmark is the S&P 500. The Portfolio usually invests equally among
stocks selected for their growth characteristics and those chosen for their
income characteristics. The Sub-Adviser uses a computer-driven stock selection
model that ranks approximately 1,400 of the most liquid stocks as determined by
the Sub-Adviser by various measures, including earnings, relative valuation,
changes in analysts' earnings estimates, and based on those rankings, chooses up
to 300 stocks for the Portfolio. The stock selection model may change or be
replaced by a different model intended to achieve the Portfolio's investment
objective. In the event of a material change to the stock selection model,
shareholders will be notified.
This Portfolio may invest up to 15% of its net assets in foreign securities
publicly traded in the United States and in ADRs, which are U.S. dollar
denominated receipts generally issued by domestic banks and representing the
deposit of a foreign issuer.
This Portfolio may invest in options and futures contracts. 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. The purchase of futures
or call options on those futures can serve as a long hedge, and the sale of
futures or the
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purchase of put options on those futures 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. If a Portfolio were unable to liquidate a futures or
related options position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Portfolio
would continue to be subject to market risk with respect to the position. In
addition, except in the case of purchased options, the Portfolio would continue
to be required to make daily variation margin payments and might be required to
maintain the position being hedged by the future or option or to maintain cash
or securities in a segregated account.
ZWEIG EQUITY (SMALL CAP) PORTFOLIO seeks long-term capital appreciation while
striving to limit exposure to market risk. Its benchmark is the Value Line
Geometric Index. Under normal circumstances, the Portfolio will invest primarily
in small-company stocks with market capitalizations between $250 million and
$1.5 billion, but may have some of its assets invested in larger company stocks.
This Portfolio may use stock index futures or options to increase or decrease
market exposure, or to eliminate market exposure and will invest in high quality
money market securities, repurchase agreements, and U.S. Government securities
following the Sub-Adviser's risk management strategies.
This Portfolio may invest up to 15% of its net assets in foreign securities
publicly traded in the United States and in ADRs, which are U.S. dollar
denominated receipts generally issued by domestic banks and representing the
deposit of a foreign issuer.
PRINCIPAL INVESTMENT RISKS
Securities held in the Portfolios, their share price and returns are subject to
fluctuation. Investments in equity securities in general are subject to market
risks that may cause their prices to fluctuate over time. In addition, it may
take a substantial period of time before stocks in the Portfolio realize their
growth potential.
An investment in the stock of a company represents ownership in that company.
Therefore, the Portfolios participate in the successes and failures of the
companies in which they hold stock.
Some of the Portfolios may invest in certain industry sectors, for example, the
financial industries sector or the healthcare sector. Financial, economic,
business and other developments affecting issuers in those sectors may have a
greater effect on those portfolios than if they had not focused their assets in
a particular sector. Fundamental investment policies, however, prohibit
investing more than 25% of net assets in any one industry.
The Scudder Kemper Portfolio uses a "value investment" strategy. The
determination that a stock is undervalued is subjective and the price may not
rise to the potential the investment manager believes it to have. However, the
downside risk with value stocks may be less than with other stocks since those
stocks are already, in theory, underpriced.
The Zweig Portfolios may invest in a small number of foreign securities.
Investing in foreign securities involves risks in addition to those associated
with investing in securities in the U.S. To the extent that investments are
denominated in foreign currencies, adverse changes in the values of foreign
currencies may have a significant negative effect on any returns from these
investments. Investors should note foreign investments pose added risks, such as
currency fluctuation and political and economic uncertainty. Other risks of
investing in foreign securities include limited information, higher brokerage
costs, different accounting standards and thinner trading markets compared to
U.S. markets.
The Zweig Equity (Small Cap) Portfolio invests primarily in small company
stocks. Small company stocks
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historically have had greater price volatility, less liquidity and increased
competitive threat than those of larger companies.
Growth stocks, such as those in the Harris Bretall Sullivan & Smith Equity
Growth Portfolio, are subject to greater price volatility than value stocks and
may take a long time to reach their growth potential. They are more suitable for
long term investors.
OTHER INVESTMENTS
Each Portfolio may purchase U.S. Government securities, which are obligation of,
or guaranteed by, the U.S. Government, its agencies or instrumentalities;
mortgage-backed securities, which are instruments that pay investors a share of
interest and principal payments from an underlying pool of fixed or adjustable
rate mortgages; repurchase agreements, under which a bank or broker dealer
agrees to sell a security to the Portfolio and then repurchase it at a mutually
agreed-upon price and time; illiquid securities (up to 10% of its net assets or
15% in the case of Zweig Asset Allocation Portfolio and Zweig Equity (Small Cap)
Portfolio), including securities the disposition of which may be restricted and
securities that are not readily marketable. Each Portfolio may also lend
securities (up to 10% of its total assets or 33-1/3% in the case of Zweig Asset
Allocation Portfolio and Zweig Equity (Small Cap) Portfolio); and borrow money
(up to 10% of its total assets or 20% in the case of Zweig Asset Allocation
Portfolio and Zweig Equity (Small Cap) Portfolio. The Zweig Asset Allocation
Portfolio and Zweig Equity (Small Cap) Portfolio each may borrow for investment
purposes, which is the speculative technique known as leveraging, which
exaggerates the effect of any increase or decrease in the market value of the
Portfolio's investments; engage in short sales, which are the sales of
securities the Portfolio does not own in anticipation of a decline in the market
price; and purchase warrants (up to 5% of that Portfolio's net assets (other
than those attached to other securities)), which are options to purchase stock
at a mutually agree-upon price for a specific time period.
SECTION 3 - PERFORMANCE
The Fund may, from time to time, calculate the yield or the total return of the
Portfolios and may include that information in reports to shareholders.
Performance information should be considered in light of each Portfolio's
investment objectives and policies, characteristics and quality of the
investment portfolios, and the market conditions during the given time period,
and shouldn't be considered a representation of what may be achieved in the
future.
Performance information for the Portfolios is contained in the Fund's annual
report to shareholders, which may be obtained without charge by contacting The
Legends Fund, Inc. by telephone at 1-800-325-8583 or by mail at 515 West Market
Street, 8th Floor, Louisville, Kentucky 40202.
For a description of the methods used to determine yield and total return for
the Portfolios, see the Statement of Additional Information, which is also
available free of charge by contacting the Fund.
SECTION 4 - 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, 8th Floor, Louisville,
Kentucky 40202, (MANAGER) serves as investment manager to all the Portfolios of
the Fund. ARM Financial Group, Inc. (ARM), the parent of the Manager, is a
financial services company
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that provides retail products and services to the long-term savings and
retirement market. At June 30, 1999, ARM had $10.4 billion in assets under
management and the Manager had investments totaling approximately $192 million
under management and fiduciary control.
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. At June 30, 1999, Harris Bretall
Sullivan & Smith has assets under management of approximately $4 billion.
Joseph Calderazzo, the portfolio manager for the Harris Bretall Sullivan & Smith
Equity Growth Portfolio, is Senior Vice President, Portfolio Manager and a
member of the investment committee at Harris Bretall Sullivan & Smith. He joined
Harris Bretall Sullivan & Smith in 1990 and has been responsible for the
day-to-day management of the Portfolio since 1994. Mr. Calderazzo is also the
firm's analyst for Political and Governmental Affairs.
SCUDDER KEMPER INVESTMENTS, INC., 345 Park Avenue, New York, NY 10154, serves as
the Sub-Adviser to the Scudder Kemper Value Portfolio. Scudder Kemper
Investments is one of the largest investment management organizations worldwide.
As of June 30, 1999, it managed more than $230 billion in assets globally for
mutual fund investors, retirement and pension plans, institutional and corporate
clients and private family and individual accounts.
Frederick L. Gaskin, the portfolio manager for the Portfolio, has been managing
the Portfolio since 1997 and has been with Scudder Kemper since 1996. Prior to
joining Scudder Kemper, Mr. Gaskin was a portfolio manager for a bank for 10
years.
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. Zweig/Glaser is a subsidiary of Phoenix Investment Partners.
Phoenix is one of the largest publicly traded money management firms in the
United States. Headquartered in Hartford, Connecticut, Phoenix managed
approximately $50 billion in assets as of June 30, 1999.
Dr. Martin 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 and Zweig Equity (Small Cap) Portfolios. Dr. Zweig has provided
investment advisory and portfolio management services for over 27 years. Mr.
Katzen has over nine years experience with the Zweig organization. Together, Dr.
Zweig and Mr. Katzen have managed these Portfolios since their inception.
MANAGEMENT FEES
Each Portfolio pays the Manager a fee based on an annual percentage of the
average daily net assets of that Portfolio. The management fees are taken 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. For the services provided to each of the Portfolios,
the Manager (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 Manager and by the Manager to each Sub-Adviser is shown below. The fees paid
by some of the Portfolios may be higher than those paid by other investment
companies.
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<TABLE>
<CAPTION>
Annual Percentage
of Average Net
Annual Percentage of Assets Paid By
Average Net Assets Paid By the Manager to
Portfolio to the Manager The Sub-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>
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 can
withdraw or modify its policy of expense reimbursement for the Portfolios. The
Manager has also agreed to reimburse the Portfolios on a pro rata basis 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.
ARM Securities Corporation (ARM SECURITIES), a wholly owned subsidiary of ARM,
acts as distributor of the Portfolios' shares without compensation 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.
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SECTION 5 - SHAREHOLDER INFORMATION
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are sold only to Separate Account II of Integrity Life
Insurance Company and Separate Account II of National Integrity Life Insurance
Company in connection with certain variable annuity contracts they issue. Some
Portfolios may not be available in certain states due to applicable state
insurance laws and regulations, and not all Portfolios may be available for all
contracts issued by Integrity Life Insurance Company and National Integrity Life
Insurance Company. Purchases and sales will be 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. Shares will be purchased
or sold at their respective net asset values, determined as of the close of
trading (generally 4:00 p.m., Eastern Time) on any day the NYSE is open for
trading. Payment for redemptions is made by the Fund within seven days. 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 under certain circumstances.
VALUATION OF SHARES
The net asset value for the shares of each Portfolio is determined on each day
the NYSE is open for trading. The NYSE is closed and the Portfolios won't be
priced on national holidays. The net assets of each Portfolio are valued as of
the close of business on the NYSE, which is generally 4:00 p.m. Eastern 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 that 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 aren't readily available are valued at
fair market value under the direction of the Board of Directors. 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 those prices reflect the fair market value of those securities.
Money market instruments are valued at market value.
DIVIDENDS AND DISTRIBUTIONS
All dividend and capital gain distributions will automatically be reinvested in
additional shares at net asset value.
TAX CONSEQUENCES OF INVESTING IN THE FUND
Shares of the Fund are held under the terms of a variable annuity contract.
Under current tax law, interest income, dividend income and capital gains of the
Fund are not currently taxable when left to accumulate within a variable annuity
contract. Variable annuity contract holders should refer to the discussion
concerning tax matters in the prospectus of their variable annuity contract.
Because every investor's situation is unique, please consult a tax adviser about
federal, state and local tax consequences of your variable annuity contract's
investment in the Fund.
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11
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights presented for the five years ended June 30, 1999, 1998,
1997, 1996, and 1995 have been audited by Ernst & Young, LLP, independent
auditors for the Fund, and the financial statements of the Fund, along with the
corresponding reports of Ernst & Young, LLP, are set forth in the SAI. Per
share information is for a share of capital stock outstanding throughout the
respective fiscal period.
The financial highlights information pertains to the Portfolios of the Fund and
doesn't 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 those charges.
12
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Financial Highlights
<TABLE>
<CAPTION>
Inception *
YEAR ENDED JUNE 30, through
June 30,
1999 1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
Net asset value beginning of period
$21.11 $17.53 $14.49 $12.85 $9.36 $9.71 $10.00
Income from investment operations:
Net investment income (loss)
(0.06) (d) 0.02 (d) 0.01 (0.02)(c) --
Net realized and unrealized gain
(loss) on investments 7.17 4.90 4.13 1.74 3.48 (0.33) (0.29)
Total from investment operations 7.11 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 (2.22) (1.30) (1.11) (0.09) -- -- --
Total distributions (2.22) (1.32) (1.11) (0.10) -- -- --
Net asset value, end of period $26.00 $21.11 $17.53 $14.49 $12.85 $9.36 $9.71
TOTAL RETURN (a) 35.19% 29.11% 30.23% 13.59% 37.29% (3.60%) (5.16%)
RATIOS AND SUPPLEMENTAL DATA (b)
Net assets, end of period (in
thousands) $55,428 $37,662 $28,815 $23,810 $16,393 $10,693 $5,143
Ratio of expenses to average net
assets 0.96% 0.95% 1.03% 1.04% 1.05% 1.29% 1.34%
Ratio of net investment income (loss)
to average net assets (0.29%) (0.01%) 0.14% 0.03% 0.13% (0.17%) (0.06%)
Ratio of expenses to average net
assets before voluntary expense
reimbursement 0.96% 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 (0.29%) (0.01%) 0.14% 0.03% 0.13% (0.17%) (1.94%)
Portfolio turnover rate 27% 57% 46% 58% 31% 38% 6%
Average commission paid per equity
share traded (e) $0.04595 $0.0600 $0.0600 -- -- -- --
</TABLE>
* Inception Date was December 8, 1992
(a) Total returns for periods of less than one year are not annualized.
13
<PAGE>
(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.
14
<PAGE>
Scudder Kemper Value Portfolio
Financial Highlights
<TABLE>
<CAPTION>
Inception *
YEAR ENDED JUNE 30, through
June 30,
1999 1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
Net asset value, beginning of period
$21.02 $20.63 $16.17 $12.59 $10.66 $10.45 $10.00
Income from investment operations:
Net investment income (loss)
0.33 0.26 0.26 0.18 0.26 0.12 0.11
Net realized and unrealized gain
(loss) on investments 3.22 4.08 5.04 3.70 1.85 0.17 0.34
Total from investment operations 3.55 4.34 5.30 3.88 2.11 0.29 0.45
Less distributions:
From net investment income (0.28) (0.26) (0.19) (0.19) (0.14) (0.08) --
From net realized gain (2.23) (3.69) (0.65) (0.11) (0.04) -- --
Total distributions (2.51) (3.95) (0.84) (0.30) (0.18) (0.08) --
Net asset value, end of period $22.06 $21.02 $20.63 $16.17 $12.59 $10.66 $10.45
TOTAL RETURN (a) 18.09% 23.36% 33.78% 31.22% 19.98% 2.80% 8.25%
RATIOS AND SUPPLEMENTAL DATA (b)
Net assets, end of period (in
thousands) $50,169 $46,436 $30,930 $19,705 $10,877 8,952 $1,671
Ratio of expenses to average net
assets 0.96% 0.94% 1.05% 1.06% 1.13% 1.40% 1.24%
Ratio of net investment income (loss)
to average net assets 1.56% 1.58% 1.62% 1.65% 1.98% 1.98% 2.00%
Ratio of expenses to average net
assets before voluntary expense
reimbursement 0.96% 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 1.56% 1.58% 1.62% 1.64% 1.98% 1.76% (1.49%)
Portfolio turnover rate 50% 57% 88% 18% 29% 9% 5%
Average commission paid per equity
share traded (c) $0.04552 $0.0501 $0.0512 -- -- -- --
</TABLE>
* Inception date was December 14, 1992
(a) Total returns for periods of less than one year are not annualized.
15
<PAGE>
(b) Data expressed as a percentage are annualized as appropriate.
(c) Disclosure required for fiscal years beginning after September 1, 1995.
16
<PAGE>
Zweig Asset Allocation Portfolio
Financial Highlights
<TABLE>
<CAPTION>
Inception *
YEAR ENDED JUNE 30, through
June 30,
1999 1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
Net asset value, beginning of period
$17.56 $14.63 $14.11 $13.02 $11.44 $10.81 $10.00
Income from investment operations:
Net investment income (loss)
0.21 0.14 0.19 0.21 0.33 0.10 0.08
Net realized and unrealized gain
(loss) on investments (1.04) 2.97 2.20 1.21 1.33 0.58 0.73
Total from investment operations (0.83) 3.11 2.39 1.42 1.66 0.68 0.81
Less distributions:
From net investment income (0.16) (0.18) (0.22) (0.33) (0.08) (0.05) --
From net realized gain (2.58) -- (1.65) -- -- -- --
Total distributions (2.74) (0.18) (1.87) (0.33) (0.08) (0.05) --
Net asset value, end of period $13.99 $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)
Net assets, end of period (in
thousands) $31,010 $47,450 $42,848 $40,222 $36,736 $31,563 $3,856
Ratio of expenses to average net
assets 1.23% 1.18% 1.28% 1.25% 1.20% 1.39% 1.51%
Ratio of net investment income (loss)
to average net assets 1.13% 0.80% 1.29% 1.55% 2.73% 1.67% 1.40%
Ratio of expenses to average net
assets before voluntary expense
reimbursement 1.23% 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 1.13% 0.80% 1.29% 1.55% 2.73% 1.67% (1.17%)
Portfolio turnover rate 109% 65% 89% 105% 45% 101% 12%
Average commission paid per equity
share traded (c) $0.02274 $0.0284 $0.0262 -- -- -- --
</TABLE>
* Inception date was December 14, 1992
(a) Total returns for periods of less than one year are not annualized.
17
<PAGE>
(b) Data expressed as a percentage are annualized as appropriate.
(c) Disclosure required for fiscal years beginning after September 1, 1995.
18
<PAGE>
Zweig Equity (Small Cap) Portfolio
Financial Highlights
<TABLE>
<CAPTION>
Inception *
YEAR ENDED JUNE 30, through
June 30,
1999 1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
Net asset value, beginning of period
$17.58 $14.85 $13.61 $11.62 $10.65 $10.11 $10.00
Income from investment operations:
Net investment income (loss)
0.10 0.04 0.16 0.11 0.17 0.15 0.05
Net realized and unrealized gain
(loss) on investments (1.80) 3.48 2.41 2.04 0.93 0.50 0.06
Total from investment operations (1.70) 3.52 2.57 2.15 1.10 0.65 0.11
Less distributions:
From net investment income (0.04) (0.14) (0.14) (0.16) (0.06) (0.11) --
From net realized gain (3.67) (0.65) (1.19) -- (0.07) -- --
Total distributions (3.71) (0.79) (1.33) (0.16) (0.13) (0.11) --
Net asset value, end of period $12.17 $17.58 $14.85 $13.61 $11.62 $10.65 $10.11
TOTAL RETURN (a) (9.24%) 23.72% 20.37% 18.69% 10.39% 6.53% 2.02%
RATIOS AND SUPPLEMENTAL DATA (b)
Net assets, end of period (in
thousands) $10,994 $14,688 $11,161 $11,698 $8,034 $7,591 $2,116
Ratio of expenses to average net
assets 1.54% 1.52% 1.55% 1.55% 1.55% 1.72% 1.61%
Ratio of net investment income (loss)
to average net assets 0.71% 0.26% 0.97% 1.06% 1.54% 1.75% 0.84%
Ratio of expenses to average net
assets before voluntary expense
reimbursement 1.65% 1.56% 1.82% 1.83% 1.59% 2.14% 7.29%
Ratio of net investment income (loss)
to average net assets before
voluntary expense reimbursement 0.61% 0.22% 0.70% .78% 1.50% 1.32% (1.80%)
Portfolio turnover rate 76% 113% 59% 101% 67% 249% 15%
Average commission paid per equity
share traded (c) $0.0222 $0.0291 $0.0276 -- -- -- --
</TABLE>
* Inception date was December 14, 1992
(a) Total returns for periods of less than one year are not annualized.
19
<PAGE>
(b) Data expressed as a percentage are annualized as appropriate.
(c) Disclosure required for fiscal years beginning after September 1, 1995.
20
<PAGE>
The Fund's shares are sold only to separate accounts of Integrity Life Insurance
Company and National Integrity Life Insurance Company as an investment medium
for their variable annuity contracts.
More information about the Fund is available in its Statement of Additional
Information (SAI), which is incorporated by reference into this prospectus, and
its annual and semi-annual reports to shareholders. In the Fund's annual report,
you will find a discussion of the market conditions and investment strategies
that significantly affected the Fund's performance during its last fiscal year.
To obtain a copy of the SAI free of charge, or to request other information,
please contact the Fund by telephone at 1-800-325-8583 or by mail at 515 West
Market Street, 8th Floor, Louisville, Kentucky 40202.
You can review and copy information about the Fund at the SEC's Public Reference
Room in Washington, D.C. For hours of operation of the Public Reference Room,
please call 1-800-SEC-0330. You may also obtain information about the Fund at
the SEC's Internet site at http://www.sec.gov, or upon payment of a duplicating
fee, by writing the SEC's Public Reference Section, Washington, D.C. 20459-6009.
The Legends Fund, Inc. Investment Company Act File No. 811-07084
<PAGE>
<PAGE>
THE LEGENDS FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
November 1, 1999
TABLE OF CONTENTS
Page
Section 1 - Fund History....................................................
Section 2 - Additional Fund Investment Policies.............................
Section 3 - Management of the Fund..........................................
Section 4 - Principal Holders of Securities.................................
Section 5 - Investment Advisory and Other Services..........................
Section 6 - Portfolio Transactions and Brokerage............................
Section 7 - Purchase, Redemption, and Pricing of Shares.....................
Section 8 - Taxation of the Fund............................................
Section 9 - Calculation of Performance Data.................................
Section 10 - Financial Statements...........................................
Appendix A - Options and Futures............................................
This Statement of Additional Information (SAI) is not a prospectus. It should be
read in conjunction with the prospectus for The Legends Fund, Inc. dated
November 1, 1999. A copy of the prospectus is available at no charge by writing
to the Fund at 515 West Market Street, 8th Floor, Louisville, Kentucky 40202, or
by calling 1-800-325-8583.
<PAGE>
SECTION 1 - FUND HISTORY
The Legends Fund, Inc. (the FUND) was incorporated in Maryland on July 22, 1992
under the name "Integrity Series Fund, Inc." The name was changed to "The
Legends Fund, Inc." in November 1992. The Fund is a diversified, 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
currently made up of four different portfolios (together "Portfolios," and
individually, a "Portfolio"). The Board of Directors of the Fund may establish
additional Portfolios at any time.
Integrity Capital Advisors, Inc. (MANAGER), formerly known as ARM Capital
Advisors, Inc. 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. These 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.
SECTION 2 - ADDITIONAL FUND INVESTMENT POLICIES
The following supplements the information contained in the Fund's Prospectus
concerning the investment policies and limitations of its four Portfolios. For
information relating to the Manager and the respective Sub-Advisers to each
Portfolio, see "Management of the Fund" in the Prospectus and "Investment
Management Services" in this SAI.
SPECIAL CONSIDERATIONS RELATING TO FOREIGN SECURITIES AND DEPOSITORY RECEIPTS.
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), and their issuers are not subject to
its reporting requirements. Therefore, 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 that apply to U.S.
companies.
Foreign securities are also subject to generally higher commission rates of
foreign portfolio transactions, the possibility of expropriation or confiscatory
taxation, adverse changes in investment or exchange control regulations,
political instability that 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.
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.
It may also be more difficult to obtain a judgment in a court outside the United
States.
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 may, however, reduce or
eliminate the amount of foreign taxes to which a Portfolio would be subject.
<PAGE>
Each of the Zweig Asset Allocation Portfolio, Zweig Equity (Small Cap) Portfolio
and Scudder Kemper Value Portfolio may invest in American Depository Receipts
(ADRS). Generally, ADRs, in registered form, are in U.S. dollar denominations
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. For example, an ADR evidencing ownership of common stock will be
treated as common stock.
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.
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 can't be disposed of within seven days in the ordinary
course of business at approximately the amount at which a Portfolio has valued
the securities. Illiquid securities include, 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 a Sub-Adviser has determined are liquid under 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 described 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 wouldn't be freely marketable in the
United States, aren't 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 that
are sold in private placements, repurchase agreements, commercial paper, foreign
securities and corporate bonds and notes. These instruments are often restricted
securities because they are sold in transactions not requiring registration.
Institutional investors generally will not seek to sell these instruments to the
general public, but instead will often depend either on an efficient
institutional market in which such unregistered securities can be readily resold
or on an issuer's ability to honor a demand for repayment. Therefore, the fact
that there are contractual or legal restrictions on resale to the general public
or certain institutions is not the sole determining factor of the liquidity of
these investments.
<PAGE>
Rule 144A under the 1933 Act establishes a SAFE HARBOR from the registration
requirements of the 1933 Act for the resale 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 adversely affect the marketability of those portfolio
securities and a Portfolio might be unable to dispose of the 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 registration afforded by Section
3(a)(3) of the 1933 Act, and commercial paper issued in reliance on the 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 also be
made through 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.
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 that are also
<PAGE>
considered to be U.S. Government securities. Mortgage-backed securities
include:
GNMA, FNMA AND FHLMC CERTIFICATES. As described in the Prospectus, the
Portfolios may invest in U.S. Government securities, including mortgage-backed
securities, such as GNMA, FNMA and FHLMC certificates (as defined below), which
represent an undivided ownership interest in a pool of mortgages. The mortgages
backing these securities include conventional thirty-year fixed-rate mortgages,
fifteen-year fixed-rate mortgages, graduated payment mortgages and adjustable
rate mortgages. These certificates are in most cases PASS-THROUGH instruments,
through which the holder receives a share of all interest and principal
payments, including prepayments, on the mortgages underlying the certificate,
net of certain fees.
Prepayments on mortgages underlying mortgage-backed securities occur when a
mortgagor prepays the remaining principal before the mortgage's scheduled
maturity date. As a result of the pass-through of prepayments of principal on
the underlying mortgages, mortgage-backed securities are often subject to more
rapid prepayment of principal than their stated maturity would indicate. In
general, prepayments on mortgage-backed securities will be a function of the
relative coupon of the mortgages, the age of the mortgages, and the general
level of interest rates in the market. To a limited extent, prepayment rates
and, consequently, the average life of an anticipated yield to be realized from
a mortgage-backed security can be estimated using statistical models. However,
because the actual prepayments of the underlying mortgages vary, it is
impossible to predict exactly the yield and average life of a mortgage-backed
security.
During periods of declining interest rates, prepayment of mortgages underlying
mortgage-backed securities can be expected to accelerate. When a Portfolio
receives prepayments on mortgage-backed securities, it may reinvest the prepaid
amounts in securities the yields of which will reflect interest rates prevailing
at the time. Therefore, a Portfolio's ability to maintain a portfolio of
high-yielding mortgage-backed securities will be adversely affected to the
extent that prepayments of mortgages must be reinvested in securities which have
lower yields than the mortgage-backed security on which the prepayment is
received. In addition, because 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
<PAGE>
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.
COLLATERALIZED MORTGAGE OBLIGATIONS. A Collateralized Mortgage Obligation (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 that are collateralized by mortgage-backed securities issued by GNMA, FHLMC
or FNMA, and in CMOs issued by a U.S. Government agency or instrumentality.
Certain issuers of CMOs may be deemed to be investment companies under the 1940
Act. The Portfolios intend to conduct their operations in a manner consistent
with this view, and therefore generally may not invest more than 10% of their
respective total assets in such issuers without obtaining appropriate regulatory
relief. In reliance on recent Securities and Exchange Commission (SEC) staff
interpretations, the Portfolios may invest in those CMOs and other
mortgage-backed securities that are not by definition excluded from the
provisions of the 1940 Act, but have obtained exemptive orders from the SEC from
such provisions.
REPURCHASE AGREEMENTS. Each Portfolio may enter into repurchase agreements. When
a Portfolio acquires a security from a bank for 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 reflecting an agreed-upon market rate of return, which is not tied to the
coupon rate of 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
<PAGE>
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.
Repurchase agreements carry certain risks not associated with direct investments
in securities, including possible declines in the market value of the underlying
securities and delays and costs to a Portfolio if the other party to a
repurchase agreement becomes bankrupt. Each Portfolio intends to enter into
repurchase agreements only with banks and dealers in transactions believed by
the Sub-Adviser to present minimum credit risks in accordance with guidelines
established by the Fund's Board of Directors. The Sub-Adviser will review and
monitor the creditworthiness of those institutions under the Board's general
supervision.
LENDING OF PORTFOLIO SECURITIES Each Portfolio may lend its portfolio
securities, provided:
(1) the loans are secured continuously by collateral consisting of U.S.
Government securities or cash or cash equivalents maintained on a daily
market-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 the 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.
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
that 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.
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. This is the practice known as leveraging. 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
<PAGE>
borrowing policy is a fundamental policy.
SHORT SALES: Zweig Asset Allocation Portfolio and Zweig Equity (Small Cap)
Portfolio may engage in short sales. When a Portfolio makes a short sale, it
sells a security it does not own in anticipation of a decline in market price.
The proceeds from the sale are retained by the broker until the Portfolio
replaces the borrowed security. To deliver the security to the buyer, the
Portfolio must arrange through a broker to borrow the security and, in so doing,
the Portfolio will become obligated to replace the security borrowed at its
market price at the time of replacement, whatever that price may be. The
Portfolio may have to pay a premium to borrow the security. The Portfolio may,
but will not necessarily, receive interest on such proceeds. The Portfolio must
pay to the broker any dividends or interest payable on the security until it
replaces the security.
The Portfolio's obligation to replace the security borrowed will be secured by
collateral deposited with the broker, consisting of cash or U.S. Government
securities or other securities acceptable to the broker. In addition, the
Portfolio will be required to deposit cash or U.S. Government securities as
collateral in a segregated account with its custodian in an amount such that the
value of both collateral deposits is at all times equal to at least 100% of the
current market value of the securities sold short. The Portfolio will receive
the interest accruing on any U.S. Government securities held as collateral in
the segregated account with the custodian. The deposits do not necessarily limit
the Portfolio's potential loss on a short sale, which may exceed the entire
amount of the collateral deposits.
If the price of a security sold short increases between the time of the short
sale and the time the Portfolio replaces the borrowed security, the Portfolio
will incur a loss, and if the price declines during this period, the Portfolio
will realize a capital gain. Any realized capital gain will be decreased, and
any incurred loss increased, by the amount of transaction costs and any premium,
dividend, or interest which the Portfolio may have to pay in connection with
such short sale.
The Portfolios may enter into short sales AGAINST THE BOX. A short sale is
against the box when, at all times during which a short position is open, the
Portfolio owns an equal amount of such securities, or owns securities giving it
the right, without payment of future consideration, to obtain an equal amount of
securities sold short.
WARRANTS: Zweig Asset Allocation Portfolio and Zweig Equity (Small Cap)
Portfolio may invest in warrants, which are basically an option to purchase
securities at a specific price valid for a specific period of time. Warrants
have no voting rights, pay no dividends, and have no rights with respect to the
assets of the corporation issuing them. It should also be noted that the prices
of warrants do not necessarily move parallel to the prices of the underlying
securities. A Portfolio may not invest more than 5% of its net assets (at the
time of investment) in warrants (other than those attached to other securities).
It should be noted that if the market price of the underlying security never
exceeds the exercise price, the Portfolio 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.
INVESTMENT RESTRICTIONS AND POLICIES
The following supplements the information contained in the Fund's Prospectus
concerning the investment policies and limitations of its four Portfolios. For
information relating to the Manager and the Sub-Advisers to each Portfolio, see
"Management of the Fund" in the Prospectus and "Investment Management Services"
in this SAI.
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
<PAGE>
amended (the 1940 ACT), as the lesser of: (1) 67% or more of the Portfolio's
voting securities present at a meeting of shareholders, if the holders of more
than 50% of the Portfolio's outstanding shares are present in person or by
proxy, or (2) more than 50% of the outstanding shares. Unless otherwise
indicated, all percentage limitations apply to each Portfolio on an individual
basis, and apply only at the time an investment is made; a later increase or
decrease in percentage resulting from changes in values or net assets will not
be deemed to be an investment that is contrary to these restrictions. Pursuant
to such restrictions and policies, no Portfolio may:
(1) make an investment in any one industry if the investment would
cause the aggregate value of the Portfolio's investment in such
industry to exceed 25% of the Portfolio's total assets, except that
this policy does not apply to obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities (U.S.
GOVERNMENT SECURITIES), certificates of deposit and bankers'
acceptances;
(2) purchase securities of any one issuer (except U.S. Government
securities), if as a result at the time of purchase more than 5% of
the Portfolio's total assets would be invested in such issuer, or
the Portfolio would own or hold 10% or more of the outstanding
voting securities of that issuer, except that 25% of the total
assets of the Portfolio may be invested without regard to this
limitation;
(3) purchase securities on margin, except for short-term credit
necessary for clearance of portfolio transactions and except that a
Portfolio that may use options or futures strategies and may make
margin deposits in connection with its use of options, futures
contracts and options on futures contracts;
(4) mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by the
Portfolio except as may be necessary in connection with permitted
borrowings and then not in excess of 5% of the Portfolio's total
assets taken at cost (10% in the case of Zweig Asset Allocation
Portfolio and Zweig Equity (Small Cap) Portfolio), provided that
this does not prohibit escrow, collateral or margin arrangements in
connection with the use of options, futures contracts and options
on futures contracts by a Portfolio that may use options or futures
strategies;
(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
<PAGE>
anticipated redemptions, and may pledge its assets
in connection with such borrowing. Zweig Asset Allocation Portfolio
and Zweig Equity (Small Cap) Portfolio may borrow money from banks
on an unsecured basis and may pay interest thereon in order to
raise additional cash for investment or to meet redemption
requests. Each of these two Portfolios may not borrow amounts in
excess of 20% of its total assets taken at cost or at market value,
whichever is lower, and then only from banks as a temporary measure
for extraordinary or emergency purposes. If such borrowings exceed
5% of a Portfolio's total assets, the Portfolio will make no
further investments until such borrowing is repaid. It is the
current intention of each of these two Portfolios not to borrow
money in excess of 5% of its assets. A Portfolio may pledge up to
5% (10% in the case of Zweig Asset Allocation Portfolio and Zweig
Equity (Small Cap) Portfolio) of its total assets as security for
such borrowing. For purposes of this restriction, the deposit of
initial or maintenance margin in connection with futures contracts
will not be deemed to be a pledge of the assets of a Portfolio.
The following investment restriction may be changed by the vote of the Fund's
Board of Directors without shareholder approval:
No Portfolio will hold assets of any issuers, at the end of any
calendar quarter (or within 30 days thereafter), to the extent such
holdings would cause the Portfolio to fail to comply with the
diversification requirements imposed by Section 817(h) of the
Internal Revenue Code of 1986, as amended (the CODE), and the
Treasury regulations issued thereunder, on segregated asset
accounts used to fund variable annuity contracts.
OPTIONS, FUTURES AND OTHER HEDGING STRATEGIES
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 SAI.
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 that a Portfolio owns or intends
to acquire. Hedging instruments on stock indices, by contrast, generally are
used to hedge against price movements in broad equity market sectors in which
the
<PAGE>
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 certain regulations of the SEC, the
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 using these techniques expect to discover
additional opportunities in connection with options, futures 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.
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.
- - 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 using
these techniques are experienced in the use of hedging instruments, we
can't guarantee that any particular hedging strategy adopted will succeed.
- - 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. 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.
- - 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 case, the
Portfolio would have been in a better position had it not hedged at all.
- - 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
<PAGE>
at a disadvantageous time. A Portfolio's ability to close out a position in
a hedging instrument before it expires or matures depends on there being 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, we can't guarantee 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:
- - an offsetting covered position in securities, currencies or other options
or futures contracts; or
- - 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 above. Each Portfolio will comply with SEC guidelines regarding
cover for hedging transactions and will, if the guidelines 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 in segregated accounts could impede portfolio
management or the Portfolio's ability to meet redemption requests or other
current obligations.
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 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
<PAGE>
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.
OPTIONS. The purchase of call options serves as a long hedge, and the purchase
of put options serves as a short hedge. Writing covered put or call options can
enable a Portfolio to enhance income by reason of the premiums paid by the
purchasers of such options. However, if the market price of the security
underlying a covered put option declines to less than the exercise price of the
option, minus the premium received, the Portfolio would expect to suffer a loss.
Writing covered call options serves as a limited short hedge, because declines
in the value of the hedged investment would be offset to the extent of the
premium received for writing the option. However, if the security appreciates to
a price higher than the exercise price of the call option, it can be expected
that the option will be exercised and the Portfolio will be obligated to sell
the security at less than its market value. If the covered call option is an OTC
option, the securities or other assets used as cover would be considered
illiquid to the extent described under "The Fund, Illiquid 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.
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 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.
See "Special Risks of Hedging Strategies" above.
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
<PAGE>
that the Portfolio needs to treat as illiquid only that amount of the cover
assets equal to the formula price less the amount by which the market value of
the security subject to the option exceeds the exercise price of the option (the
amount by which the option is IN-THE-MONEY). Although the Sub-Advisers do not
believe that OTC options are generally illiquid, pending resolution of this
issue, the Portfolio will conduct its operations in conformity with the views of
the SEC staff.
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 a 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 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, we can't
guarantee 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.
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.
<PAGE>
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:
- - 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
- - 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 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 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
<PAGE>
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).
FUTURES. The purchase of futures or call options on those futures can serve as a
long hedge, and the sale of futures or the purchase of put options on those
futures 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 on a
futures contract, 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 on a futures contract.
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 on a futures
contract, 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
<PAGE>
secondary market. However, there can be no assurance that such a market will
exist for a particular contract at a particular time. Secondary markets for
options on futures are currently in the development stage, and no Portfolio will
trade options on futures on any exchange or board of trade unless, in the
Sub-Adviser's opinion, the markets for such options have developed sufficiently
that the liquidity risks for such options are not greater than the corresponding
risks for futures.
Under certain circumstances, futures exchanges may establish daily limits on the
amount that the price of a future or related option can vary from the previous
day's settlement price; once that limit is reached, no trades may be made that
day at a price beyond the limit. Daily price limits do not limit potential
losses because prices could move to the daily limit for several consecutive days
with little or no trading, thereby preventing liquidation of unfavorable
positions.
If a Portfolio were unable to liquidate a futures or related options position
due to the absence of a liquid secondary market or the imposition of price
limits, it could incur substantial losses. The Portfolio would continue to be
subject to market risk with respect to the position. In addition, except in the
case of purchased options, the Portfolio would continue to be required to make
daily variation margin payments and might be required to maintain the position
being hedged by the future or option or to maintain cash or securities in a
segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options markets
are subject to daily variation margin calls and might be compelled to liquidate
futures or related options positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, program trading and
other investment strategies might result in temporary price distortions.
LIMITATIONS ON THE USE OF FUTURES. A Portfolio will not purchase or sell futures
contracts or related options if, immediately thereafter, the sum of the amount
of initial margin deposits on the Portfolio's existing futures positions and
margin and premiums paid for related options would exceed 5% of the market value
of the Portfolio's total assets. This guideline can be changed by the Fund's
Board of Directors without shareholder vote. This guideline does not limit to 5%
the percentage of the Portfolio's assets that are at risk in futures and related
options transactions. For purposes of this guideline, options on futures
contracts and foreign currency options traded on a commodities exchange will be
considered related options.
In addition, the Fund has represented to the CFTC that it:
- - will use future contracts, options on futures contracts and foreign
currency options traded on a commodities exchange solely in bona fide
hedging transactions or, alternatively
- - will not enter into futures contracts, options on futures contracts 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 Zweig Asset
Allocation Portfolio and the Zweig Equity (Small Cap) Portfolio 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. These currency
hedges can protect against
<PAGE>
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. These 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 when
those hedging instruments are more expensive than certain other hedging
instruments. In such cases, a Portfolio may hedge against price movements in
that currency by entering into transactions using hedging instruments on other
currencies, the values of which the Sub-Adviser believes will have a high degree
of positive correlation to the value of the currency being hedged. The risk that
movements in the price of the hedging instrument will not correlate perfectly
with movements in the price of the currency being hedged is magnified when this
strategy is used.
The value of hedging instruments on foreign currencies depends on the value of
the underlying currency relative to the U.S. dollar. Because foreign currency
transactions occurring in the interbank market might involve substantially
larger amounts than those involved in the use of such hedging instruments, the
Portfolios could be disadvantaged by having to deal in the odd lot market
(generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign currencies
or any regulatory requirement that quotations available through dealers or other
market sources be firm or revised on a timely basis. Quotation information
generally is representative of very large transactions in the interbank market
and thus might not reflect odd-lot transactions where rates might be less
favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the hedging instruments until they reopen.
Settlement of hedging transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
a Portfolio might be required to accept or make delivery of the underlying
foreign currency in accordance with any U.S. or foreign regulations regarding
the maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
SECTION 3 - MANAGEMENT OF THE FUND
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.
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 they may be legally
entitled to vote, and on any other business that 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.
The Board of Directors is responsible for overseeing the management of the
Fund's business and affairs and plays a vital role in protecting the interests
of the shareholders. Among other things, the Directors approve and review the
Fund's contracts and other arrangements and monitor Fund operations. The names,
addresses, and ages of the Directors and officers of the Fund, together with
information as to their principal business occupations during the past five
years, are set forth below.
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH
NAME, AGE & ADDRESS THE FUND PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
- ------------------- --------------- -------------------------------------------
<S> <C> <C>
John R. Lindholm (50)* Chairman of the President of Integrity Life Insurance Company; President of National
515 W. Market Street Board of Integrity Life Insurance Company since November 1993; Executive Vice
Louisville, KY 40202 Directors President Chief Marketing Officer of ARM since July 1993, Chairman and
Director of the mutual funds in the State Bond Group of mutual funds from
June 1995 to December 1996.
Chris LaVictoire Mahai (44) Director CEO AisleFive, interactive marketing firm; President, clavm, inc. (a firm
425 Portland Avenue that provides consulting, project management and infomediary services to
Minneapolis, MN 55488 organizations interested in creating and implementing innovative business,
community and marketplace strategies and initiatives) from June 1998 to July
1999; Poynter Fellow, the Poynter Institute for Media Studies, Board Member
(Cowles Media) Star Tribune Foundation from September 1992 to June 1998;
Senior Vice President, Cowles Media Company/ Star Tribune from August 1993
to June 1998; Director of the mutual funds in the State Bond Group of mutual
funds from June 1984 to December 1996.
William B. Faulkner (72) Director President, William Faulkner & Associates (business and institutional
240 East Plato Blvd. adviser) since 1986. Director of the mutual funds in the State Bond Group
St. Paul, MN 55107 of mutual funds from June 1984 to December 1996.
John Katz (61) Director Investment banker since January 1991; Director of the mutual funds in the
10 Hemlock Road State Bond Group of mutual funds from June 1995 to December 1996.
Hartsdale, NY 10530
Edward J. Haines (51) President Senior Vice President of Marketing for ARM since December, 1993.
515 W. Market Street
Louisville, KY 40202
Kevin L. Howard (35) Secretary Senior Vice President and Counsel of ARM since October 1998; Assistant
515 W. Market Street General Counsel of ARM from January 1994 until October 1998.
Louisville, KY 40202
Barry G. Ward (37) Controller Controller of ARM since June 1996; Accounting Officer of ARM from October
515 W. Market Street 1993 until June 1996.
Louisville, KY 40202
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH
NAME, AGE & ADDRESS THE FUND PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
- ------------------- --------------- -------------------------------------------
<S> <C> <C>
Peter Resnik (38) Treasurer Treasurer of ARM since December 1992.
515 W. Market Street
Louisville, KY 40202
Michael A. Cochran (39) Tax Officer Tax Officer of ARM since October 1997; Tax Executive for Ernst & Young, LLP
515 W. Market Street from July 1984 until October 1997.
Louisville, KY 40202
</TABLE>
* Mr. Lindholm is an INTERESTED PERSON as defined in the 1940 Act by virtue
of his position with ARM.
The Fund pays Directors who are not INTERESTED PERSONS of the Fund fees for
serving as Directors. During the fiscal year ended June 30, 1999 the Fund paid
the Directors who are not interested persons of the Fund a combined total of
$42,000 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, 1999,
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.
<TABLE>
<CAPTION>
Pension or
Retirement Total
Aggregate Benefits Accrued Estimated Annual Compensation
Compensation as Part of Fund Benefits Upon From Fund Paid
Name of Director From Fund Expenses Retirement to 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
Chris L. Mahai $14,000 None N/A $14,000
</TABLE>
SECTION 4 - PRINCIPAL HOLDERS OF SECURITIES
All of the outstanding shares of common stock of each Portfolio are owned by
Integrity Life Insurance Company's Separate Account II and National Integrity
Life Insurance Company's Separate Account II.
The address of the Administrative Office of Integrity Life Insurance Company is
515 West Market Street, Louisville, Kentucky 40202. The address of the
Administrative Office of National Integrity Life Insurance Company is 15
Matthews Street, Suite 200, Goshen, NY 10924.
<PAGE>
As of June 30,1999, the Directors and officers of the Fund as a group owned less
than 1% of the outstanding shares of each Portfolio of the Fund.
SECTION 5 - INVESTMENT ADVISORY AND OTHER SERVICES
Integrity Capital Advisors, Inc., 515 West Market Street, 8th Floor, Louisville,
Kentucky 40202, serves as investment manager to all the Portfolios of the Fund.
ARM Financial Group, Inc. (ARM), the parent of the Manager, is a financial
services company that provides retail products and services to the long-term
savings and retirement market. At June 30, 1999, ARM had $10.4 billion in
assets under management and the Manager had investments totaling approximately
$192 million under management and fiduciary control.
The Manager acts as the investment manager of each Portfolio pursuant to a
management agreement with the Fund (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,
1997, 1998 and 1999, each Portfolio paid the Manager management fees in the
amounts set forth below:
<TABLE>
<CAPTION>
MANAGEMENT FEE FOR FISCAL YEAR ENDED
------------------------------------
PORTFOLIO JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1999
- --------- ------------- ------------- -------------
<S> <C> <C> <C>
Harris Bretall Sullivan & Smith Equity Growth Portfolio $160,836 $199,561 $280,242
Scudder Kemper Value Portfolio $164,290 $228,476 $297,742
Zweig Asset Allocation Portfolio $369,657 $394,520 $324,109
Zweig Equity (Small Cap) Portfolio $112,524 $135,678 $129,719
</TABLE>
- ---------------------------
Pursuant to the Management Agreement with the Fund, the Manager is responsible
for general supervision of the Sub-Advisers, subject to general oversight by the
Fund's Board of Directors. In addition, the Manager is obligated to keep certain
books and records of the Fund and administer the Fund's corporate affairs. In
connection therewith, the Manager furnishes the Fund with office facilities,
together with those ordinary clerical and bookkeeping services that 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 Corp., the Fund's distributor. General expenses of the Fund that
are 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. In addition to
the expenses listed in the Prospectus, expenses borne by each Portfolio include,
but are not limited to, the following (or the Portfolio's allocated share of the
following):
- - 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 those registrations and qualifications;
<PAGE>
- - taxes and governmental fees;
- - expenses of setting in type and providing a camera-ready copy of
prospectuses, statements of additional information and supplements, and
reports and proxy materials for existing shareholders; and
- - any extraordinary expenses (including fees and disbursements of counsel)
incurred by the Fund or a Portfolio.
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, 1997, 1998 and 1999, the
Portfolios received reimbursements in the amounts set forth below:
<TABLE>
<CAPTION>
AMOUNT REIMBURSED FOR FISCAL YEAR ENDED
---------------------------------------
PORTFOLIO JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1999
- --------- ------------- ------------- -------------
<S> <C> <C> <C>
Harris Bretall Sullivan & Smith Equity Growth
Portfolio -- -- --
Scudder Kemper Value Portfolio -- -- --
Zweig Asset Allocation Portfolio -- -- --
Zweig Equity (Small Cap) Portfolio -- $5,527 $12,007
</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 Manager, 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 under the Management Agreement.
The Management Agreement may be renewed from year to year after its initial
two-year term so long as its continuance is specifically approved at least
annually by the Fund's Board of Directors 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." Each Sub-Advisory Agreement provides that the
Sub-Adviser will furnish investment advisory services in connection with the
management of each respective Portfolio. In connection with the Sub-Advisory
Agreement, the Sub-Adviser is obligated to keep certain books and records of the
Fund and the Manager supervises each Sub-Adviser's performance. Each Sub-Adviser
is paid by the Manager, not the Fund, in accordance with the schedule set forth
in the Prospectus. For the fiscal years ended June 30, 1997, 1998 and 1999, 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, 1997 JUNE 30, 1998 JUNE 30, 1999
- --------- ------------- ------------- -------------
<S> <C> <C> <C>
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth
Portfolio $123,720 $141,321 $173,912
Scudder Kemper Value Portfolio $126,377 $161,781 $185,015
Zweig Asset Allocation Portfolio $308,047 $312,874 $234,961
Zweig Equity (Small Cap) Portfolio $ 96,449 $111,641 $ 99,442
</TABLE>
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.
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 ("IFTC"), 801 Pennsylvania, Kansas
City, Missouri 64105, acts as custodian of the assets of all of the Portfolios.
TRANSFER AGENT, DIVIDEND AGENT AND RECORDKEEPING AGENT. IFTC also acts as
transfer agent, dividend disbursing agent and recordkeeping agent.
AUDITORS. Ernst & Young LLP, One Kansas City Place, 1200 Main Street, Kansas
City, Missouri 64105, serves as independent auditors for the Fund.
DISTRIBUTOR. ARM Securities Corp., 515 West Market Street, Louisville, Kentucky
40202 serves as distributor for shares of the Fund. ARM Securities Corp.
receives no compensation for serving as distributor.
<PAGE>
SECTION 6 - PORTFOLIO TRANSACTIONS AND BROKERAGE
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 that particular Portfolio. As a general
matter in executing portfolio transactions, each Sub-Adviser may employ or deal
with the brokers or dealers who, 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.
Certain of the Sub-Advisers are affiliated with registered broker-dealers. From
time to time, a portion of one or more Portfolios' brokerage transactions may be
conducted with affiliated 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 any 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 Portfolio may enter into a transaction 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, 1997, 1998 and 1999 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, 1997 JUNE 30, 1998 JUNE 30, 1999
- --------- ------------- ------------- -------------
<S> <C> <C> <C>
Harris Bretall Sullivan & Smith Equity Growth
Portfolio $22,892 $30,772 $21,926
Scudder Kemper Value Portfolio $61,962 $51,642 $42,712
Zweig Asset Allocation Portfolio $74,292 $48,874 $38,966
Zweig Equity (Small Cap) Portfolio $15,722 $25,868 $43,452
</TABLE>
For the fiscal years ended June 30, 1997, 1998 and 1999, the Fund paid the
following brokerage commissions with respect to each of the Portfolios to
broker-dealers who are (or were) affiliated persons of those Portfolios. Also
presented below for the fiscal years ended June 30, 1998 and 1999 are the
brokerage commissions paid to those broker-dealers as a percentage of the
combined brokerage commissions paid by each Portfolio and as a percentage of the
combined dollar amount of portfolio transactions involving the payment of
commissions engaged in by that Portfolio.
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 1998 FISCAL YEAR ENDED JUNE 30, 1999
Brokerage Commissions Brokerage Commissions
Brokerage As a As a
Commissions Percentage of Percentage of
Paid During the As a Portfolio As a Portfolio
Fiscal Year Percentage of Transactions Percentage of Transactions
Affiliated Ended June 30, Aggregate Involving Aggregate Involving
Broker-dealer Portfolio 1997 ($) Paid ($) Commission Commissions Paid ($) Commission Commission
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Zweig Securities Zweig Asset
Corporation Allocation
Portfolio -- 583 1% --(a) n/a n/a n/a
Zweig Equity
(Small Cap)
Portfolio -- 17 --(a) --(a) n/a n/a n/a
- ---------------------------------
(a) Less than 1%.
</TABLE>
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 who provide them with research
services (including statistical and economic data and market reports). A
Portfolio may pay these broker-dealers commissions that are more than 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. 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 a Portfolio.
Information and research received from these brokers will be in addition to, and
not instead of, the services required to be performed by each Sub-Adviser under
the Sub-Advisory Agreements. The Portfolios may buy and sell portfolio
securities to and from dealers who provide the Portfolio with research services.
Portfolio transactions will not be directed to dealers solely on the basis of
research services provided.
Investment decisions for each Portfolio and for other investment accounts
managed by each Sub-Adviser are made independently of each other in light of
differing considerations for the various accounts. However, the same investment
decision may be made for a Portfolio and one or more other 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 the other
account(s). While in some cases this practice could have a detrimental effect on
the price or value of the security as far as a Portfolio is concerned, or on its
ability to complete its entire order, in other
<PAGE>
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 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 securities owned
by the Portfolio during the fiscal year. Securities that, at the time of
purchase, were scheduled to mature in 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 results in greater brokerage
commissions, other transaction costs, and a possible increase in short-term
capital gains or losses. See "Purchase, Redemption and Pricing of Shares" and
"Taxation of the Fund."
The exercise of calls written by a Portfolio may cause the Portfolio to sell
portfolio securities, thereby 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 that would apply to direct
purchases or sales of portfolio securities.
SECTION 7 - PURCHASE, REDEMPTION AND PRICING OF SHARES
The separate accounts of Integrity and National Integrity buy and sell shares of
each Portfolio on each day on which the New York Stock Exchange (NYSE) is open
for trading (a BUSINESS DAY). Purchases and sales will be 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, Martin Luther
King, Jr. Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. 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., Eastern 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:
- - when the NYSE is closed or trading on the NYSE is restricted as determined
by the SEC,
- - 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
- - 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.
<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., Eastern 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.
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.
SECTION 8 - TAXATION OF THE FUND
Shares of the Portfolios are currently offered only to Integrity and National
Integrity separate accounts that fund variable annuity contracts. Each Portfolio
is treated as a separate corporation for federal income tax purposes. 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:
- - 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);
- - at the close of each quarter of the Portfolio's taxable year, at least 50%
of the value of its total assets must be represented by cash and cash
items, U.S. Government securities, securities of other RICs and other
securities, with these other securities limited, in respect of any one
issuer, to an amount that does
<PAGE>
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;
- - 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
- - 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.
As long as the Portfolio is qualified as a registered investment company, it
won't be subject to federal income tax on the earnings that it distributes to
shareholders.
Each Portfolio intends to comply with the asset diversification regulations
prescribed by the U.S. Treasury Department under the Code. If a Portfolio fails
to comply with these regulations, the contracts invested in that Portfolio may
not be treated as annuity, endowment or life insurance contracts under the Code.
In general, these regulations effectively provide that, as of the end of each
calendar quarter or within 30 days thereafter, no more than 55% of the total
assets of the Portfolio may be represented by any one investment, no more than
70% by any two investments, no more than 80% by any three investments, and no
more than 90% by any four investments. For this purpose, all securities of the
same issuer are considered a single investment, but each U.S. agency or
instrumentality is treated as a separate issuer. There are also alternative
diversification tests that may be satisfied by the Portfolio under the
regulations.
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 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 return 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.
SECTION 9 - CALCULATION OF PERFORMANCE DATA
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:
<PAGE>
- - adding to the total number of shares purchased by a hypothetical $1,000
investment the number of shares which would have been purchased if all
dividends and distributions paid or distributed during the period had been
immediately reinvested;
- - 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;
- - assuming redemption at the end of the period; and
- - 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 contracts.
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, including, but not limited to BARRON'S, BUSINESS WEEK, CDA
TECHNOLOGIES, INC., CONSUMER'S DIGEST, DOW JONES INDUSTRIAL AVERAGE, FINANCIAL
PLANNING, FINANCIAL TIMES, FINANCIAL WORLD, FORBES, FORTUNE, GLOBAL INVESTOR,
INSTITUTIONAL INVESTOR, INVESTORS DAILY, MONEY, MORNINGSTAR MUTUAL FUNDS, THE
NEW YORK TIMES, PERSONAL INVESTOR, 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 (S&P 500) 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 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 381 industrial, 37
utility, 11 transportation and 71 financial services concerns. The S&P 500
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 NYSE composite or component indices are unmanaged indices of all industrial,
utilities, transportation and finance company stocks listed on the NYSE.
The Wilshire 5000 Equity Index (or its component indices) represents the return
of the market value of all common equity securities for which daily pricing is
available. Comparisons of performance assume reinvestment of dividends.
<PAGE>
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 is 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 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 50/50 Index assumes a static mix of 50% of the S&P 500 and 50% of the Lehman
Brothers Government/Corporate Bond Index.
Other Composite Indices: 70% S&P 500 and 30% NASDAQ Industrial Index; 35% S&P
500 and 65% Salomon Brothers High Grade Bond Index; and 65% S&P 500 and 35%
Salomon Brothers High Grade Bond Index.
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.
STOCKS, BONDS, BILLS AND INFLATION, published by Hobson Associates, presents an
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
<PAGE>
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.
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:
- - 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;
- - IBC/Donoghue's Money Fund Report;
- - other appropriate indices of investment securities and averages for peer
universe of funds which are described in this SAI; or
- - data developed by the Manager or any of the Sub-Advisers derived from such
indices or averages.
SECTION 10 - 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
audits the financial statements prepared by Fund management on an annual basis
and expresses an opinion on such financial statements based on their audits.
The financial statements for the fiscal year ended June 30, 1999 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.
<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 under 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 before the expiration 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 upon payment of the exercise price. A put option is a similar contract
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 under 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 under 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.
<PAGE>
PART C
OTHER INFORMATION
ITEM 23. FINANCIAL STATEMENTS AND EXHIBITS
Exhibits:
a.(1). Articles of Incorporation of The Legends Fund, Inc. (formerly
Integrity Series Fund, Inc.) (the FUND), the Registrant. Incorporated
by reference to the Fund's Registration Statement on Form N-1A filed
on August 4, 1992 (File Nos. 33-50434 and 811-7084).
(2). Articles of Amendment. Incorporated by reference to the Fund's
Pre-Effective Amendment No. 1 to the Registration Statement filed on
November 12, 1992 (File Nos. 33-50434 and 811-7084).
(3). Articles Supplementary. Incorporated by reference to the Fund's
Pre-Effective Amendment No. 1 to the Registration Statement filed on
November 12, 1992 (File Nos. 33-50434 and 811-7084).
(4). Articles Supplementary filed as of June 14, 1994. Incorporated by
reference to the Fund's Post-Effective Amendment No. 4 to the
Registration Statement on Form N-1A filed on October 12, 1994 (File
Nos. 33-50434 and 811-7084).
<PAGE>
(5). Articles of Amendment. Incorporated by reference to the Fund's
Post-Effective Amendment No. 9 to the Registration Statement on Form
N-1A filed on November 5, 1998 (File Nos. 33-50434 and 811-7084).
b. By-Laws of the Fund. Incorporated by reference to the Fund's
Registration Statement on Form N-1A filed on August 4, 1992
(File Nos. 33-50434 and 811-7084).
c. See generally Articles V, VII, VIII and IX of the Articles of
Incorporation and Articles I, IV, VII and VIII of the By-laws,
incorporated herein by reference.
d (1)(a) Management Agreement between the Fund and Integrity Capital Advisors,
Inc. (INTEGRITY CAPITAL). Incorporated by reference to the Fund's
Post-Effective Amendment No. 9 to the Registration Statement on Form
N-1A filed on November 5, 1998 (File Nos. 33-50434 and 811-7084).
(2)(a) Sub-Advisory Agreement between Integrity Capital and Scudder Kemper
Investments, Inc. (Scudder Kemper Value Portfolio). Incorporated by
reference to the Fund's Post-Effective Amendment No. 9 to the
Registration Statement on Form N-1A filed on November 5, 1998 (File
Nos. 33-50434 and 811-7084).
(2)(b) Sub-Advisory Agreement between Integrity Capital and Harris Bretall
Sullivan & Smith, LLC (Harris Bretall Sullivan & Smith Equity Growth
Portfolio). Incorporated by reference to the Fund's Post-Effective
Amendment No. 9 to the Registration Statement on Form N-1A filed on
November 5, 1998 (File Nos. 33-50434 and 811-7084).
(2)(c) Form of Sub-Advisory Agreement between Integrity Capital and
Zweig/Glaser Advisers (Zweig Asset Allocation Portfolio).
(2)(d) Form of Sub-Advisory Agreement between Integrity Capital and
Zweig/Glaser Advisers (Zweig Equity (Small Cap) Portfolio).
e. Distribution Agreement between the Fund and ARM Securities Corp. .
Incorporated by reference to the Fund's Post-Effective Amendment No.
9 to the Registration Statement on Form N-1A filed on November 5,
1998 (File Nos. 33-50434 and 811-7084).
<PAGE>
f. Not applicable
g. (1). Custody, Recordkeeping and Agency Agreement between the Fund and
Investors Fiduciary Trust Company, as amended Incorporated by
reference to the Fund's Post-Effective Amendment No. 4 to the
Registration Statement on Form N-1A filed on October 12, 1994 (File
Nos. 33-50434 and 811-7084).
(2). Forms of Foreign Sub-Custody Agreement Incorporated by reference to
the Fund's Pre-Effective Amendment No. 1 to the Registration
Statement filed on November 12, 1992 (File Nos. 33-50434 and
811-7084).
h. (1). Fund Participation Agreement with Integrity Incorporated by reference
to the Fund's Post-Effective Amendment No. 4 to the Registration
Statement on Form N-1A filed on October 12, 1994 (File Nos. 33-50434
and 811-7084).
(2). Fund Participation Agreement with National Integrity Life Insurance
Company (NATIONAL INTEGRITY) Incorporated by reference to the Fund's
Post-Effective Amendment No. 4 to the Registration Statement on Form
N-1A filed on October 12, 1994 (File Nos. 33-50434 and 811-7084).
<PAGE>
i. Opinion and Consent of Swidler Berlin Shereff Friedman, LLP*
Incorporated by reference to the Fund's Pre-Effective Amendment No. 1
to the Registration Statement filed on November 12, 1992 (File Nos.
33-50434 and 811-7084).
j. Consent of Ernst & Young LLP, Independent Auditors
k. Not applicable
l. Not applicable
m. Not applicable
n. Not applicable
o. (1). Power of Attorney for John Katz Incorporated by reference to the
Fund's Post-Effective Amendment No. 4 to the Registration Statement
on Form N-1A filed on October 12, 1994 (File Nos. 33-50434 and
811-7084).
(2). Powers of Attorney for Chris LaVictoire Mahai and William B.
Faulkner. Incorporated by reference to the Fund's Post-Effective
Amendment No. 9 to the Registration Statement on Form N-1A filed on
November 5, 1998 (File Nos. 33-50434 and 811-7084).
* to be filed by post-effective amendment.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Separate Account II of Integrity and Separate Account II of National
Integrity Life Insurance Company (NATIONAL INTEGRITY) own all of the outstanding
shares of common stock of Registrant. Fund shares are voted by Integrity and
National Integrity in accordance with instructions received from their
respective variable annuity contractowners who allocate contributions to the
Fund.
Integrity, an Ohio stock life corporation, owns 100% of the voting
securities of National Integrity, a New York stock life corporation. The voting
securities of Integrity are 100% owned by Integrity Holdings, Inc., a Delaware
corporation, which is a holding company engaged in no active business. The
voting securities of Integrity Holdings, Inc. are 100% owned by ARM Financial
Group, Inc. (ARM FINANCIAL), a Delaware corporation, which is a holding company.
ARM Financial also owns 100% of the voting stock of ARM Securities Corp.
(ARMSC), a Minnesota corporation, which is the Distributor of the Fund, is
registered with the SEC as a broker-dealer and is a member of the National
Association of Securities Dealers, Inc. In addition, ARM Financial owns 100% of
the stock of Integrity Capital (formerly known as ARM Capital Advisors, Inc.), a
New York corporation registered with the SEC as an investment adviser; 100% of
SBM Certificate Company, a Minnesota corporation registered with the SEC as a
face amount certificate company; and 100% of ARM Transfer Agency, Inc., a
Delaware corporation.
<PAGE>
ITEM 25. INDEMNIFICATION
ARTICLES OF INCORPORATION OF THE FUND. The Articles of Incorporation of
the Fund provide in substance that no director or officer of the Fund shall be
liable to the Fund or its shareholders for money damages, unless the director or
officer is subject to liability by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of duties in the conduct of his or her
office.
BY-LAWS OF THE FUND. The By-Laws of the Fund provide for the
indemnification of present and former officers and directors of the Fund against
liability by reason of service to the Fund, unless the officer or director is
subject to liability by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office (DISABLING CONDUCT). No indemnification shall be made to an officer
or director unless there has been a final adjudication on the merits, a
dismissal of a proceeding for insufficiency of evidence of Disabling Conduct, or
a reasonable determination has been made that no Disabling Conduct occurred. The
Fund may advance payment of expenses only if the officer or director to be
indemnified undertakes to repay the advance unless indemnification is made and
if one of the following applies: the officer or director provides a security for
his or her undertaking, the Fund is insured against losses from any lawful
advances, or a reasonable determination has been made that there is reason to
believe the officer or director ultimately will be entitled to indemnification.
INSURANCE. The directors and officers of the Fund, Integrity Capital,
as investment adviser, and ARMSC, as distributor, are insured under a policy
issued by American International Specialty Lines Insurance Company.
The annual limit on such policy is $2 million.
BY-LAWS OF INTEGRITY CAPITAL. The By-Laws of Integrity Capital provide
for the indemnification by Integrity Capital of directors and officers of
Integrity Capital and of any person serving at the request of Integrity Capital
as a director or officer of another corporation and permits the payment of
expenses for covered persons. Thus, the officers and directors of the Fund,
Integrity Capital and SBMFS are indemnified by Integrity Capital for their
services in connection with the Fund to the extent set forth in the By-Laws.
Integrity Capital's By-Laws provide, in Article IX, as follows:
Section 9.01 INDEMNIFICATION. (a) The Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action
by or in the right of the Corporation) by reason of the fact that he is
or was a director, officer, employee or agent of the Corporation, or is
or was serving at the request of the Corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action,
suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of
the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was
unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of NOLO
CONTENDERE or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner
which he reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action
or proceeding, he had reasonable cause to believe that his conduct was
unlawful.
<PAGE>
(b) The Corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Corporation to
procure a judgment in its favor by reason of the fact that he is or was
a director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense
or settlement of such action or suit if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best
interests of the Corporation and except that no indemnification shall
be made in respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable to the Corporation unless
and only to the extent that the Court of Chancery of the State of
Delaware or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability
but in view of all the circumstances of the case, such person is fairly
and reasonably entitled to indemnity for such expenses which Court of
Chancery or such other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of the
Corporation has been successful on the merits or otherwise in defense
of any action, suit or proceeding referred to in Section 9.01(a) and
(b) of these By-laws, or in defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith.
(d) Any indemnification under Section 9.01(a) and (b) of these By-laws
(unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper
in the circumstances because he has met the applicable standard of
conduct set forth in Section 9.01(a) and (b) of these By-laws. Such
determination shall be made (i) by the Board by a majority vote of a
quorum consisting of directors who were not parties to such action,
suit or proceeding, or (ii) if such a quorum is not obtainable, or,
even if obtainable, a quorum of disinterested directors so directs, by
independent legal counsel in a written opinion, or (iii) by the
stockholders of the Corporation.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or
investigative action, suit or proceeding may be paid by the Corporation
in advance of the final disposition of the action, suit or proceeding
upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that
he is not entitled to be indemnified by the Corporation pursuant to
this Article IX. Such expenses (including attorneys' fees) incurred by
other employees and agents may be so paid upon such terms and
conditions, if any, as the Board deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, other Sections of this Article IX shall not be
deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any
law, by-law, agreement, vote of stockholders or disinterested directors
or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office.
<PAGE>
(g) For purpose of this Article IX, references to "the Corporation"
shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent)
absorbed in a consolidation or merger which, if its separate existence
had continued, would have had power and authority to indemnify its
directors, officers, employees or agents so that any person who is or
was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under the provisions of this Article
IX with respect to the resulting or surviving corporation as he would
have with respect to such constituent corporation if its separate
existence had continued.
(h) For purposes of this Article IX, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to an
employee benefit plan; and references to "serving at the request of the
Corporation" shall include any service as a director, officer, employee
or agent of the Corporation which imposes duties on, or involves
service by, such director, officer, employee or agent with respect to
any employee benefit plan, its participants, or beneficiaries; and a
person who acted in good faith and in a manner he reasonably believed
to be in the interest of the participants and beneficiaries of an
employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in
this Article IX.
(i) In indemnification and advancement of expenses provided by, or
granted pursuant to, this Article IX shall, unless otherwise provided
when authorized or ratified, continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors, and administrators of such a person.
Section 9.02 INSURANCE FOR INDEMNIFICATION. The Corporation may
purchase and maintain insurance on behalf of or for any person who is
or was a director, officer, employee or agent of the Corporation, or is
or was serving at the request of the Corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against any liability asserted
against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the Corporation would have the power
to indemnify him against such liability under the provisions of Section
145 of the General Corporation Law.
BY-LAWS OF ARMSC. The By-Laws of ARMSC, the principal underwriter for
the Fund, provide in Section 4 as follows:
SECTION 4.01 INDEMNIFICATION. The corporation shall indemnify its
officers and directors for such expenses and liabilities, in such
manner, under such circumstances, and to such extent, as required
or permitted by Minnesota Statutes, Section 302A.521, as amended
from time to time, or as required or permitted by other
provisions of law.
AGREEMENTS. The Fund and ARMSC, including each director, officer and
controlling person of the Fund and ARMSC, are entitled to indemnification
against certain liabilities as described in Article VIII of the Participation
Agreement filed as Exhibit 9(b) to this Registration Statement, except that the
Fund may not indemnify directors, officers and controlling persons who are its
Affiliated persons, as
<PAGE>
defined in Section 2(a)(3) of the 1940 Act. Certain officers and directors of
the Fund and ARMSC are officers and directors of Integrity and National
Integrity (see Item 28 of this Part C).
UNDERTAKING
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Integrity Capital, the Fund's investment adviser, is a registered
investment adviser providing individual discretionary investment management
services and investment advisory services to various categories of institutional
and individual clients. The names of the officers and directors of Integrity
Capital (or its predecessor, ARM Capital Advisors, Inc.), and their business
activities during the past two fiscal years, are set forth below. The principal
business address of ARM Financial, the parent of Integrity Capital, is 515 W.
Market Street, 8th Floor, Louisville, Kentucky 40202.
NAME BUSINESS ACTIVITIES IN PAST TWO FISCAL YEARS
- ---- --------------------------------------------
Peter S. Resnik Treasurer of Integrity Capital since October 1994;
Treasurer of ARM Financial since December 1993.
Michael A. Cochran Tax Officer of Integrity Capital and ARM Financial since
October 1997; Senior Manager and Principal of Ernst &
Young LLP (and its predecessors) from 1984 - 1997.
Barry G. Ward Chief Financial Officer and Controller of Integrity
Capital since March 1996; Controller and Chief Financial
Officer of ARM Financial since October 1993.
OFFICERS AND PARTNERS OR DIRECTORS OF THE SUB-ADVISERS: The names of the
officers and partners or directors of the Sub-Advisers for the Portfolios of the
Fund, and their business activities during the past two fiscal years, are
incorporated herein by reference to their respective Form ADVs, as amended to
the date of their most recent filing with the Securities and Exchange Commission
(SEC), as set forth below:
Zweig/Glaser Advisers: Form ADV dated April 13, 1999, SEC File No. 801-35094
Harris Bretall Sullivan & Smith, LLC: Form ADV dated June 16, 1999, SEC File
No. 801-55094
<PAGE>
Scudder Kemper Investments, Inc.: Form ADV dated June 16, 1999, SEC File
No. 801-252
Integrity Capital Advisors, Inc.: Form ADV dated December 2, 1998, SEC File
No. 47942
<PAGE>
ITEM 27. PRINCIPAL UNDERWRITERS
(a) ARMSC is the principal underwriter for Fund shares.
(b) The names of the principal officers and directors of ARMSC, and
their positions with ARMSC and the Fund, are as follows:
<TABLE>
<CAPTION>
NAME POSITION WITH ARMSC POSITION WITH THE FUND
---- ------------------- ----------------------
<S> <C> <C>
Edward J. Haines President and Director President
Dale Bauman Vice President None
Robert Bryant Vice President None
Ronald Geiger Vice President None
William Guth Operations Officer None
David L. Anders Marketing Officer None
John R. McGeeney Compliance Officer, Secretary, None
General Counsel and Director
Barry G. Ward Controller Controller
Peter S. Resnik Treasurer Treasurer
Michael A. Cochran Tax Officer Tax Officer
</TABLE>
The principal business address of each person listed above is 515 W.
Market Street, 8th Floor, Louisville, Kentucky 40202.
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The records required to be maintained by Section 31 (a) of the
Investment Company Act of 1940 and Rules 31a-1 to 31a-3 promulgated thereunder,
will be maintained by ARM Financial, parent of Integrity Capital, at its offices
at 515 W. Market Street, 8th Floor, Louisville, Kentucky 40202, or with its
custodian, Investors Fiduciary Trust Company, at its offices at 127 West Tenth
Street, Kansas City, Missouri 64105.
ITEM 29. MANAGEMENT SERVICES
Not applicable.
ITEM 30. UNDERTAKINGS
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this amendment to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, on this 30th day of August, 1999.
THE LEGENDS FUND, INC.
(Registrant)
By: /s/ Edward Haines
----------------------------------
Edward Haines
Title: President
Pursuant to the requirement of the Securities Act of 1933, this
amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated:
SIGNATURES TITLE DATE
- ---------- ----- ----
/s/ Edward Haines President
- ------------------------ (Principal Executive Officer) 8/30/99
Edward Haines
/s/ Peter Resnik Treasurer
- ------------------------ (Principal Financial Officer) 8/30/99
Peter Resnik
/s/ Barry G. Ward Controller
- ------------------------ (Principal Accounting Officer) 8/30/99
Barry G. Ward
* Director 8/30/99
- ------------------------
William B. Faulkner
* Director 8/30/99
- ------------------------
John Katz
/s/ John R. Lindholm Director 8/30/99
- ------------------------
John R. Lindholm
* Director 8/30/99
- ------------------------
Chris LaVictoire Mahai
*This Amendment has been signed by each of the persons so indicated by
me the undersigned as Attorney-in-Fact.
By /s/ Kevin L. Howard 8/30/99
- ------------------------
Attorney-in-Fact
11
<PAGE>
EXHIBIT d(2)(c)
FORM OF
SUB-ADVISORY AGREEMENT
AGREEMENT, made this ___ day of __________, 1999, between Integrity Capital
Advisors, Inc. (MANAGER), a Delaware corporation, and Zweig/Glaser Advisers, a
New York partnership (the SUB-ADVISER).
WHEREAS, Manager, a wholly-owned subsidiary of ARM Financial Group, Inc., is an
investment adviser registered under the Investment Advisers Act of 1940, as
amended (the ADVISERS ACT);
WHEREAS, the Sub-Adviser is an investment adviser registered under the Advisers
Act;
WHEREAS, pursuant to a Management Agreement dated July 10, 1998 (the MANAGEMENT
AGREEMENT), Manager acts as Investment Manager to The Legends Fund, Inc. (the
FUND), an open-end management investment company registered under the Investment
Company Act of 1940, as amended (the 1940 ACT);
WHEREAS, the Fund is authorized to issue multiple series of shares, each such
series representing a separate portfolio of securities and investments; and
WHEREAS, Manager desires to retain the Sub-Adviser to furnish investment
advisory services to the Zweig Asset Allocation Portfolio of the Fund (the
PORTFOLIO), and the Sub-Adviser is willing to accept such appointment on the
terms and conditions set forth herein.
NOW, THEREFORE, based on the premises and the consideration set forth herein,
Manager and the Sub-Adviser agree as follows:
SECTION 1. INVESTMENT ADVISORY SERVICES.
Subject to the supervision of the Fund's Board of Directors and Manager, the
Sub-Adviser will provide a continuous investment program for the Portfolio and
determine the composition of the assets of the Portfolio, including
determination of the purchase, retention or sale of the securities, cash, and
other investments contained in the Portfolio's holdings. The Sub-Adviser will
provide investment research and conduct a continuous program of evaluation,
investment, sales, and reinvestment of the Portfolio's assets by determining the
securities and other investments that shall be purchased, entered into, sold,
closed, or exchanged for the Portfolio, when these transactions should be
executed, and what portion of the assets of the Portfolio should be held in the
various securities and other investments in which it may invest, and the
Sub-Adviser is hereby authorized to execute and perform such services on behalf
of the Portfolio. To the extent, if any, permitted by the investment policies of
the Portfolio, the Sub-Adviser shall make determinations as to and execute and
perform futures contracts and options on behalf of the Portfolio. The
Sub-Adviser will provide the services under this Agreement in accordance with
the Portfolio's investment objective or objectives, policies, and restrictions
as stated in the Fund's Registration Statement filed with the Securities and
Exchange Commission (SEC). Manager agrees to supply the Sub-Adviser with a copy
of the Registration Statement and each amendment thereto (the Registration
Statement as amended from time to time hereinafter referred to as the
REGISTRATION STATEMENT) and any other documents that set forth investment
policies, procedures or restrictions governing the Portfolio and to notify the
Sub-Adviser in writing of any changes in the investment objectives, policies,
procedures and
1
<PAGE>
restrictions governing the Portfolio.
Subject to the requirements of the 1940 Act, the Sub-Adviser is authorized to
employ, retain or otherwise avail itself of the services or facilities of other
persons or organizations, for the purpose of providing the Sub-Adviser or the
Portfolio with such statistical and other factual information, such advice
regarding economic factors and trends, such advice as to occasional transactions
in specific securities or such other information, advice or assistance as the
Sub-Adviser may deem necessary, appropriate or convenient for the discharge of
the Sub-Adviser's responsibilities hereunder or otherwise helpful to the
Portfolio or in the discharge of the Sub-Adviser's overall responsibilities with
respect to other accounts that the Sub-Adviser or its affiliates serve as
portfolio manager. To the extent the Sub-Adviser employs, retains or otherwise
avails itself of the services or facilities of other persons or organizations in
connection with the performance of the Sub-Adviser's responsibilities with
respect to the Portfolio, the Sub-Adviser shall remain fully liable hereunder as
though it had performed such services or provided such facilities itself, and
its responsibilities and obligations hereunder shall in no way be reduced.
The Sub-Adviser further agrees as follows:
(a) The Sub-Adviser will manage the Portfolio (i) so that it will qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the CODE), and (ii) so as to ensure compliance by the
Portfolio with the diversification requirements of Section 817(h) of the Code
and regulations issued thereunder. In managing the Portfolio in accordance with
these requirements, the Sub-Adviser shall be entitled to receive and act upon
advice of counsel to the Fund, counsel to Manager or counsel to the Sub-Adviser,
provided the Sub-Adviser's counsel is acceptable to Manager.
(b) In undertaking its duties under this Agreement, the Sub-Adviser will comply
with the 1940 Act and all rules and regulations thereunder, all other applicable
federal and state laws and regulations, with any applicable procedures adopted
by the Fund's Board of Directors of which it has notice and the provisions of
the Registration Statement.
(c) On occasions when the Sub-Adviser deems the purchase or sale of a security
to be in the best interest of the Portfolio as well as of the Sub-Adviser's or
the Sub-Adviser's affiliates' other investment advisory clients, the Sub-Adviser
may, to the extent permitted by applicable laws and regulations, but shall not
be obligated to, aggregate the securities to be so sold or purchased with those
of its other clients where such aggregation is not inconsistent with the
policies set forth in the Registration Statement. In such event, the Sub-Adviser
will allocate the securities so purchased or sold, as well as the expenses
incurred in the transaction, in a manner that is fair and equitable in the
Sub-Adviser's judgment in the exercise of the Sub-Adviser's fiduciary
obligations to the Fund and to such other clients.
(d) In connection with the purchase and sale of securities for the Portfolio,
the Sub-Adviser, together with Manager, will arrange for the transmission to the
custodian, transfer agent, dividend disbursing agent and recordkeeping agent for
the Fund (such custodian and agent or agents hereinafter referred to as the
AGENT), on a daily basis, such confirmation, trade tickets (which shall state
industry classifications unless the Sub-Adviser has previously furnished a list
of classifications for portfolio securities), and other documents and
information, including (but not limited to) Cusip or other numbers that identify
securities to be purchased or sold on behalf of the Portfolio and, with respect
to mortgage derivative and asset-backed securities purchased by the Sub-Adviser
for the Portfolio, 1066Q reports and supplemental information as required to be
available pursuant to IRS Publication 938, as may be reasonably necessary to
enable the Agent to perform its administrative and recordkeeping
responsibilities with respect to the Portfolio. With respect to portfolio
securities to be purchased or sold through the Depository Trust Company, the
Sub-Adviser will arrange for the automatic transmission of the confirmation of
such trades to the Fund's Agent, and if requested,
2
<PAGE>
Manager.
(e) The Sub-Adviser will monitor on a daily basis, by review of daily pricing
reports provided by the Agent to the Sub-Adviser, the determination by the Agent
for the Fund of the valuation of portfolio securities and other investments of
the Portfolio. The Sub-Adviser shall not be obligated to independently verify
the Agent's pricing determinations, and the Agent's responsibility for accurate
pricing determinations of the value of the Portfolios's securities shall not be
reduced by the Sub-Adviser's duty to monitor such determinations. The
Sub-Adviser will assist the Agent in determining or confirming, consistent with
the procedures and policies stated in the Registration Statement, the value of
any portfolio securities or other assets of the Portfolio for which the Agent
seeks assistance from or identifies for review by the Sub-Adviser.
(f) The Sub-Adviser will make available to the Fund and Manager, promptly upon
request, all of the Portfolio's investment records and ledgers maintained by the
Sub-Adviser as are necessary to assist the Fund and Manager to comply with
requirements of the 1940 Act and the Advisers Act, as well as other applicable
laws. The Sub-Adviser will furnish to regulatory authorities having the
requisite authority any information or reports in connection with its services
which may be requested in order to ascertain whether the operations of the Fund
are being conducted in a manner consistent with applicable laws and regulations.
(g) The Sub-Adviser will provide reports, which may be prepared by the Agent, to
the Fund's Board of Directors for consideration at meetings of the Board on the
investment program for the Portfolio and the issuers and securities represented
in the Portfolio's securities holdings, including a schedule of the investments
and other assets held in the Portfolio and a statement of all purchases and
sales for the Portfolio since the last such statement, and will furnish the
Fund's Board of Directors with periodic and special reports with respect to the
Portfolio as the Directors and Manager may reasonably request, including
statistical information with respect to the Portfolio's securities. In addition,
the Sub-Adviser will make available at each meeting of the Board of Directors,
either in person or by telephone conference call as instructed by Manager on
behalf of the Board of Directors of the Fund, an appropriate person to discuss
the investment performance of the Portfolio.
(h) The Sub-Adviser will provide information and reports to Manager as Manager
shall reasonably request to enable it to review the performance of the
Sub-Adviser under this Agreement.
SECTION 2. BROKER-DEALER SELECTION.
The Sub-Adviser is responsible for decisions to buy and sell securities and
other investments for the Portfolio, broker-dealer and futures commission
merchant selection, and negotiation of brokerage commission and futures
commission merchants' rates. As a general matter, in executing portfolio
transactions the Sub-Adviser may employ or deal with such broker-dealers or
futures commission merchants as may, in the Sub-Adviser's best judgment, provide
prompt and reliable execution of the transactions at favorable prices and
reasonable commission rates. In selecting such broker-dealers or futures
commission merchants, the Sub-Adviser shall consider all relevant factors,
including price (including the applicable brokerage commission, dealer spread or
futures commission merchant rate), the size of the order, the nature of the
market for the security or other investment, the timing of the transaction, the
reputation, experience and financial stability of the broker-dealer or futures
commission merchant involved, the quality of the service, the difficulty of
execution, and the execution capabilities and operational facilities of the firm
involved, and, in the case of securities, the firm's risk in positioning a block
of securities. Subject to such policies as the Board of Directors may determine
and consistent with Section 28(e) of the Securities Exchange Act of 1934, as
amended (the 1934 ACT), the Sub-Adviser shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of the Sub-Adviser's having caused the Portfolio to pay a
member of an exchange, broker or dealer an amount of commission for effecting a
securities transaction in excess of the amount of commission another member of
an exchange, broker or dealer would have charged for effecting that transaction,
if the Sub-Adviser determines in good faith that such amount of commission was
reasonable in
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relation to the value of the brokerage and research services provided by such
member of an exchange, broker or dealer, viewed in terms of either that
particular transaction or the Sub-Adviser's overall responsibilities with
respect to the Portfolio and to the Sub-Adviser's other clients as to which the
Sub-Adviser exercises investment discretion. In accordance with Section 11(a) of
the 1934 Act and Rule 11a2-2(T) thereunder, and subject to any other applicable
laws and regulations including Section 17(e) of the 1940 Act and Rule 17e-1
thereunder, the Sub-Adviser may engage its affiliates, Manager and its
affiliates or any other sub-adviser to the Fund and its respective affiliates as
broker-dealers or futures commission merchants to effect portfolio transactions
in securities and other investments for the Portfolio.
SECTION 3. RECORDS, REPORTS, ETC.
In compliance with the requirements of Rule 31a-3 under the 1940 Act, the
Sub-Adviser hereby agrees that all records which the Sub-Adviser maintains for
the Portfolio are the property of the Fund and further agrees to surrender
promptly to the Fund any of such records upon the Fund's or Manager's request or
upon termination of this Agreement, although the Sub-Adviser may, at the
Sub-Adviser's own expense, make and retain a copy of such records. The
Sub-Adviser further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records required to be maintained by Rule 31a-1 under the
1940 Act and to preserve the records required by the Rule 204-2 under the
Advisers Act for the period specified in the Rule.
SECTION 4. PAYMENT OF EXPENSES.
The Sub-Adviser shall assume and pay all of the costs and expenses of performing
its obligations under this Agreement.
SECTION 5. COMPENSATION FOR SERVICES.
Manager will pay to the Sub-Adviser a monthly sub-advisory fee (adjusted pro
rata for any shorter applicable period) at an annual rate of .65% of the average
daily net assets of the Portfolio from the management fee actually received by
Manager from the Fund; provided, however, that the sub-advisory fee shall be
reduced proportionately if the management fee actually paid to Manager by the
Portfolio shall have been reduced as a result of applicable state expense
limitations or fee waivers agreed to in writing by the Sub-Adviser. The
sub-advisory fee shall be computed, accrue and be payable in the same manner as
the management fee which is payable by the Fund to Manager pursuant to the
Management Agreement and as specified in the Fund's Registration Statement.
SECTION 6. LIABILITY FOR SERVICES.
Except as may otherwise be required by the 1940 Act or the rules thereunder or
other applicable law, and except as set forth in the next paragraph, the Fund
and Manager agree that the Sub-Adviser, any of its affiliated persons, and each
person, if any, who, within the meaning of Section 15 of the Securities Act of
1933, as amended, controls the Sub-Adviser, shall not be liable for, or subject
to any damages, expenses, or losses in connection with, any act or omission
connected with or arising out of any services rendered under this Agreement,
except by reason of willful misfeasance, bad faith, or gross negligence in the
performance of the Sub-Adviser's duties, or by reason of reckless disregard of
the Sub-Adviser's obligations and duties under this Agreement.
SECTION 7. INDEMNIFICATION BY SUB-ADVISER.
The Sub-Adviser agrees to indemnify and hold harmless Manager against any
losses, expenses, claims, damages or liabilities (or actions or proceedings in
respect thereof), to which Manager may become subject arising out of or based on
the breach or alleged breach by the Sub-Adviser of any provisions of this
Agreement; provided, however, that the Sub-Adviser shall not be liable under
this paragraph in respect of any
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loss, expense, claim, damage or liability to the extent that a court having
jurisdiction shall have determined by a final judgment, or independent counsel
agreed upon by Manager and the Sub-Adviser shall have concluded in a written
opinion, that such loss, expense, claim, damage or liability resulted primarily
from Manager's willful misfeasance, bad faith or gross negligence or by reason
of the reckless disregard by Manager of its duties. The foregoing
indemnification shall be in addition to any rights that Manager may have at
common law or otherwise. The Sub-Adviser's agreements in this paragraph shall,
upon the same terms and conditions, extend to and inure to the benefit of each
person who may be deemed to control Manager, be controlled by Manager or be
under common control with Manager and its affiliates, directors, officers,
employees and agents. The Sub-Adviser's agreements in this paragraph shall also
extend to any of Manager's successors or the successors of the aforementioned
affiliates, directors, officers, employees or agents.
SECTION 8. INDEMNIFICATION BY MANAGER.
Manager agrees to indemnify and hold harmless the Sub-Adviser against any
losses, expenses, claims, damages or liabilities (or actions or proceedings in
respect thereof), to which the Sub-Adviser may become subject arising out of or
based on the breach or alleged breach by Manager of any provisions of this
Agreement or the Management Agreement, or any wrongful action or alleged
wrongful action by Manager or its affiliates in the distribution of the Fund's
shares, or any wrongful action or alleged wrongful action by the Fund other than
wrongful action or alleged wrongful action that was caused by the breach by the
Sub-Adviser of the provisions of this Agreement; provided, however, that Manager
shall not be liable under this paragraph in respect of any loss, expense, claim,
damage or liability to the extent that a court having jurisdiction shall have
determined by a final judgment, or independent counsel agreed upon by Manager
and the Sub-Adviser shall have concluded in a written opinion, that such loss,
expense, claim, damage or liability resulted primarily from the Sub-Adviser's
willful misfeasance, bad faith or gross negligence or by reason of the reckless
disregard by the Sub-Adviser of its duties. The foregoing indemnification shall
be in addition to any rights that the Sub-Adviser may have at common law or
otherwise. Manager's agreements in this paragraph shall, upon the same terms and
conditions, extend to and inure to the benefit of each person who may be deemed
to control the Sub-Adviser, be controlled by the Sub-Adviser or be under common
control with the Sub-Adviser and to each of the Sub-Adviser's and each such
person's respective affiliates, directors, officers, employees and agents.
Manager's agreements in this paragraph shall also extend to any of the
Sub-Adviser's successors or the successors of the aforementioned affiliates,
directors, officers, employees or agents.
SECTION 9. NOTICE AND DEFENSE OR PROCEEDINGS, ETC.
Promptly after receipt by a party indemnified under paragraph 7 or 8 above of
notice of the commencement of any action, proceeding or investigation for which
indemnification will be sought, such indemnified party shall promptly notify the
indemnifying party in writing; but the omission so to notify the indemnifying
party shall not relieve it from any liability which it may otherwise have to any
indemnified party unless such omission results in actual material prejudice to
the indemnifying party. In case any action or proceeding shall be brought
against any indemnified party, and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate in
and, individually or jointly with any other indemnifying party, to assume the
defense thereof with counsel reasonably satisfactory to the indemnified party.
After notice from the indemnifying party to the indemnified party of its
election to assume the defense of any action or proceeding, the indemnifying
party shall not be liable to the indemnified party for any legal or other
expenses subsequently incurred by the indemnified party in connection with the
defense thereof other than reasonable costs of investigation. If the
indemnifying party does not elect to assume the defense of any action or
proceeding, the indemnifying party on a monthly basis shall reimburse the
indemnified party for the legal fees and expenses incurred by the indemnified
party for continuing its defense thereof. Regardless of whether or not the
indemnifying party shall have assumed the defense of any action or proceeding,
the indemnified party shall not settle or compromise the action or proceeding
without the prior written consent of the indemnifying party.
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SECTION 10. REPRESENTATIONS AND WARRANTIES; COVENANTS.
(a) The Sub-Adviser hereby represents and warrants as follows:
(i) The Sub-Adviser is registered with the SEC as an investment adviser under
the Advisers Act, and such registration is current, complete and in full
compliance with all material applicable provisions of the Advisers Act and the
rules and regulations thereunder;
(ii) The Sub-Adviser has all requisite authority to enter into, execute, deliver
and perform the Sub-Adviser's obligations under this Agreement;
(iii) The Sub-Adviser's performance of its obligations under this Agreement does
not conflict with any law, regulation or order to which the Sub-Adviser is
subject; and
(iv) The Sub-Adviser has reviewed the Registration Statement for the Fund filed
with the SEC, and with respect to the disclosure about the Sub-Adviser and the
Portfolio or information relating, directly or indirectly, to the Sub-Adviser or
the Portfolio which was made in reliance upon and in conformity with written
information provided by the Sub-Adviser to the Fund specifically for use therein
or, if written information was not provided, which the Sub-Adviser had the
opportunity to review prior to filing with the SEC, such Registration Statement
contains, as of its date, no untrue statement of any material fact and does not
omit any statement of a material fact which was required to be stated therein or
necessary to make the statements contained therein not misleading.
(b) The Sub-Adviser hereby covenants and agrees that, so long as this Agreement
shall remain in effect:
(i) The Sub-Adviser shall maintain the Sub-Adviser's registration as an
investment adviser under the Advisers Act, and such registration shall at all
times remain current, complete and in full compliance with all material
applicable provisions of the Advisers Act and the rules and regulations
thereunder;
(ii) The Sub-Adviser's performance of its obligations under this Agreement shall
not conflict with any law, regulation or order to which the Sub-Adviser is then
subject;
(iii) The Sub-Adviser shall at all times fully comply with the Advisers Act, the
1940 Act, all applicable rules and regulations under such Acts and all other
applicable law;
(iv) The Sub-Adviser shall promptly notify Manager and the Fund upon the
occurrence of any event that might disqualify or prevent the Sub-Adviser from
performing its duties under this Agreement. The Sub-Adviser further agrees to
notify Manager and the Fund promptly with respect to written material that has
been provided to the Fund or Manager by the Sub-Adviser for inclusion in the
Registration Statement or prospectus for the Fund or any supplement or amendment
thereto, or, if written material has not been provided, with respect to the
information in the Registration Statement or Prospectus, or any amendment or
supplement thereto, reviewed by the Sub-Adviser, in either case of any untrue
statement of a material fact or of any omission of any statement of a material
fact which is required to be stated therein or is necessary to make the
statements contained therein not misleading; and
(v) If the Sub-Adviser is a partnership, the Sub-Adviser shall notify the Fund
and Manager of any change in membership within a reasonable time after such
change.
SECTION 11. EXCLUSIVITY OF SERVICES AND USE OF NAMES.
The Sub-Adviser acknowledges that a fundamental marketing feature of the
variable annuity contracts and
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certificates offered through Integrity Life Insurance Company (INTEGRITY)and
National Integrity Life Insurance Company (NATIONAL INTEGRITY), a wholly-owned
subsidiary of Integrity, under which contributions may be allocated to separate
accounts of Integrity and National Integrity for the purchase of shares of the
Portfolio is the fact that the Sub-Adviser provides investment advisory services
to the Portfolio.
The Sub-Adviser further acknowledges and agrees that the names THE LEGENDS FUND
and PINNACLE, and abbreviations or logos associated with those names, are the
valuable property of Manager and its affiliates; that the Fund, Manager and its
affiliates have the right to use such names, abbreviations and logos; and that
the Sub-Adviser shall use the names THE LEGENDS FUND and PINNACLE, and
associated abbreviations and logos, only in connection with the Sub-Adviser's
performance of its duties hereunder.
Manager acknowledges that "Zweig" (the NAME) is distinctive in connection with
investment advisory and related services provided by the Sub-Adviser, the Name
is a property right of the Sub-Adviser, the individual whose name includes the
Name and/or an affiliate of the Sub-Adviser or such individual (collectively,
the OWNER), and the Sub-Adviser represents that the Name in the name of the
Portfolio is understood to be used by the Fund with the Owner's consent. The
Sub-Adviser hereby represents that the Fund is granted the non-exclusive license
to use the Name in the name of the Portfolio upon the conditions hereinafter set
forth; provided that the Fund may use such name only so long as the Sub-Adviser
shall be retained as the investment sub-adviser of the Portfolio pursuant to the
terms of this Agreement. Any such use by the Fund shall in no way prevent the
Owner or any of its successors or assigns from using or permitting the use of
the Name along with any other word or words, for, by or in connection with any
other entity or business, other than the Fund or its business, whether or not
the same directly competes or conflicts with the Fund or its business in any
manner.
Manager acknowledges that the Fund shall use the Name in the name of the
Portfolio for the period set forth herein in a manner not inconsistent with the
interests of the Sub-Adviser and Owner and that the Fund's rights in the Name
are limited to its use as a component of the Portfolio's name and in connection
with accurately describing the activities of the Portfolio. In the event that
the Sub-Adviser shall cease to be the investment sub-adviser of the Portfolio,
then Fund at its own expense, upon the Sub-Adviser's written request:
(i) shall cease to use the Name as part of the Portfolio's name or for any other
commercial purpose (other than the right to refer to the Portfolio's former name
in the Fund's Registration Statement, proxy materials and other Fund documents
to the extent required under the 1940 Act);
(ii) shall on all letterheads and other materials designed to be read or used by
salesmen, distributors or investors, state in a prominent position and prominent
type that the Sub-Adviser has ceased to be the investment sub-adviser of the
Portfolio, and
(iii) shall use its best efforts to cause the Fund's officers and directors to
take any and all actions which may be necessary or desirable to effect the
foregoing and to reconvey to the Sub-Adviser or the Owner all rights which the
Fund may have to the Name. Manager agrees to take any all actions as may be
necessary or desirable to effect the foregoing.
The Sub-Adviser hereby agrees and consents to the use of the Name upon the
foregoing terms and conditions.
SECTION 12. ENTIRE AGREEMENT; AMENDMENT, WAIVER.
This Agreement supersedes all prior agreements between the parties and
constitutes the entire agreement by the parties. No provision of this Agreement
may be changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought, and no amendment of this
Agreement shall be effective with respect to the Portfolio until approved as
required by the 1940 Act.
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SECTION 13. EFFECTIVENESS AND DURATION OF AGREEMENT.
Unless sooner terminated, this Agreement shall continue in effect for an initial
two-year period and thereafter for successive one year periods, provided that
continuation of this Agreement and the terms thereof are specifically approved
annually in accordance with the requirements of the 1940 Act by vote of a
majority of the Directors of the Fund or by vote of a majority of the
outstanding voting securities of the Portfolio (as defined in the 1940 Act), as
well as, in either case, by vote of a majority of the Directors who are not
interested persons of the Sub-Adviser, Manager or the Fund, cast in person at a
meeting called for the purpose of voting on such approval.
SECTION 14. TERMINATION OF AGREEMENT, ASSIGNMENT.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Sub-Adviser or by Manager, upon sixty (60) days' written notice
from the terminating party to the other party and to the Fund, or by the Fund,
upon sixty (60) days written notice to the Sub-Adviser and Manager, acting
pursuant to a resolution adopted by a majority of the members of the Board of
Directors who are not interested persons or by a vote of the holders of the
lesser of (1) 67% of the Portfolio's voting shares present if the holders of
more than 50% of the outstanding shares are present in person or by proxy, or
(2) more than 50% of the outstanding shares of the Portfolio.
This Agreement shall automatically terminate in the event of its assignment or
the termination of the Management Agreement pertaining to the Portfolio.
Termination of this Agreement shall not affect rights of the parties which have
accrued prior thereto.
The provisions of paragraphs 6, 7, 8, 9 and 11 shall survive the termination of
this Agreement, except that if Manager or the Fund terminates the Agreement, the
first paragraph of Section 11 shall not survive termination.
SECTION 15. DEFINITIONS.
The terms ASSIGNMENT and INTERESTED PERSON when used in this Agreement shall
have the meanings given such terms in the 1940 Act and the rules and regulations
thereunder.
SECTION 16. CONCERNING APPLICABLE PROVISIONS OF LAW.
This Agreement shall be subject to all applicable provisions of law, including,
without limitation, the applicable provisions of the 1940 Act, and to the extent
that any provisions herein contained conflict with any such applicable
provisions of law, the latter shall control. This Agreement shall be governed by
the laws of the State of New York, without reference to principles of conflicts
of law.
SECTION 17. COUNTERPARTS.
This Agreement may be executed in counterparts, and each counterpart shall for
all purposes be deemed an original and all such counterparts shall together
constitute one and the same instrument.
IN WITNESS WHEREOF, authorized officers of Manager and the Sub-Adviser have
executed this Agreement as of the day and year first written above.
INTEGRITY CAPITAL ADVISORS, INC.
By:_________________________________
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Attest:_______________________________
ZWEIG/GLASER ADVISERS
By:__________________________________
Attest:________________________________
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EXHIBIT d(2)(d)
SUB-ADVISORY AGREEMENT
AGREEMENT, made this ___ day of __________, 1999, between Integrity Capital
Advisors, Inc. (MANAGER), a Delaware corporation, and Zweig/Glaser Advisers, a
New York partnership (the SUB-ADVISER).
WHEREAS, Manager, a wholly-owned subsidiary of ARM Financial Group, Inc., is an
investment adviser registered under the Investment Advisers Act of 1940, as
amended (the ADVISERS ACT);
WHEREAS, the Sub-Adviser is an investment adviser registered under the Advisers
Act;
WHEREAS, pursuant to a Management Agreement dated July 10, 1998 (the MANAGEMENT
AGREEMENT), Manager acts as Investment Manager to The Legends Fund, Inc. (the
FUND), an open-end management investment company registered under the Investment
Company Act of 1940, as amended (the 1940 ACT);
WHEREAS, the Fund is authorized to issue multiple series of shares, each such
series representing a separate portfolio of securities and investments; and
WHEREAS, Manager desires to retain the Sub-Adviser to furnish investment
advisory services to the Zweig Equity (Small Cap) Portfolio of the Fund (the
PORTFOLIO), and the Sub-Adviser is willing to accept such appointment on the
terms and conditions set forth herein.
NOW, THEREFORE, based on the premises and the consideration set forth herein,
Manager and the Sub-Adviser agree as follows:
SECTION 1. INVESTMENT ADVISORY SERVICES.
Subject to the supervision of the Fund's Board of Directors and Manager, the
Sub-Adviser will provide a continuous investment program for the Portfolio and
determine the composition of the assets of the Portfolio, including
determination of the purchase, retention or sale of the securities, cash, and
other investments contained in the Portfolio's holdings. The Sub-Adviser will
provide investment research and conduct a continuous program of evaluation,
investment, sales, and reinvestment of the Portfolio's assets by determining the
securities and other investments that shall be purchased, entered into, sold,
closed, or exchanged for the Portfolio, when these transactions should be
executed, and what portion of the assets of the Portfolio should be held in the
various securities and other investments in which it may invest, and the
Sub-Adviser is hereby authorized to execute and perform such services on behalf
of the Portfolio. To the extent, if any, permitted by the investment policies of
the Portfolio, the Sub-Adviser shall make determinations as to and execute and
perform futures contracts and options on behalf of the Portfolio. The
Sub-Adviser will provide the services under this Agreement in accordance with
the Portfolio's investment objective or objectives, policies, and restrictions
as stated in the Fund's Registration Statement filed with the Securities and
Exchange Commission (SEC). Manager agrees to supply the Sub-Adviser with a copy
of the Registration Statement and each amendment thereto (the Registration
Statement as amended from time to time hereinafter referred to as the
REGISTRATION STATEMENT) and any other documents that set forth investment
policies, procedures or restrictions governing the Portfolio and to notify the
Sub-Adviser in writing of any changes in the investment objectives, policies,
procedures and restrictions governing the Portfolio. Subject to the requirements
of the 1940 Act, the Sub-Adviser is authorized to employ, retain or otherwise
avail itself
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of the services or facilities of other persons or organizations, for the purpose
of providing the Sub-Adviser or the Portfolio with such statistical and other
factual information, such advice regarding economic factors and trends, such
advice as to occasional transactions in specific securities or such other
information, advice or assistance as the Sub-Adviser may deem necessary,
appropriate or convenient for the discharge of the Sub-Adviser's
responsibilities hereunder or otherwise helpful to the Portfolio or in the
discharge of the Sub-Adviser's overall responsibilities with respect to other
accounts that the Sub-Adviser or its affiliates serve as portfolio manager. To
the extent the Sub-Adviser employs, retains or otherwise avails itself of the
services or facilities of other persons or organizations in connection with the
performance of the Sub-Adviser's responsibilities with respect to the Portfolio,
the Sub-Adviser shall remain fully liable hereunder as though it had performed
such services or provided such facilities itself, and its responsibilities and
obligations hereunder shall in no way be reduced.
The Sub-Adviser further agrees as follows:
(a) The Sub-Adviser will manage the Portfolio (i) so that it will qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the CODE), and (ii) so as to ensure compliance by the
Portfolio with the diversification requirements of Section 817(h) of the Code
and regulations issued thereunder. In managing the Portfolio in accordance with
these requirements, the Sub-Adviser shall be entitled to receive and act upon
advice of counsel to the Fund, counsel to Manager or counsel to the Sub-Adviser,
provided the Sub-Adviser's counsel is acceptable to Manager.
(b) In undertaking its duties under this Agreement, the Sub-Adviser will comply
with the 1940 Act and all rules and regulations thereunder, all other applicable
federal and state laws and regulations, with any applicable procedures adopted
by the Fund's Board of Directors of which it has notice and the provisions of
the Registration Statement.
(c) On occasions when the Sub-Adviser deems the purchase or sale of a security
to be in the best interest of the Portfolio as well as of the Sub-Adviser's or
the Sub-Adviser's affiliates' other investment advisory clients, the Sub-Adviser
may, to the extent permitted by applicable laws and regulations, but shall not
be obligated to, aggregate the securities to be so sold or purchased with those
of its other clients where such aggregation is not inconsistent with the
policies set forth in the Registration Statement. In such event, the Sub-Adviser
will allocate the securities so purchased or sold, as well as the expenses
incurred in the transaction, in a manner that is fair and equitable in the
Sub-Adviser's judgment in the exercise of the Sub-Adviser's fiduciary
obligations to the Fund and to such other clients.
(d) In connection with the purchase and sale of securities for the Portfolio,
the Sub-Adviser, together with Manager, will arrange for the transmission to the
custodian, transfer agent, dividend disbursing agent and recordkeeping agent for
the Fund (such custodian and agent or agents hereinafter referred to as the
AGENT), on a daily basis, such confirmation, trade tickets (which shall state
industry classifications unless the Sub-Adviser has previously furnished a list
of classifications for portfolio securities), and other documents and
information, including (but not limited to) Cusip or other numbers that identify
securities to be purchased or sold on behalf of the Portfolio and, with respect
to mortgage derivative and asset-backed securities purchased by the Sub-Adviser
for the Portfolio, 1066Q reports and supplemental information as required to be
available pursuant to IRS Publication 938, as may be reasonably necessary to
enable the Agent to perform its administrative and recordkeeping
responsibilities with respect to the Portfolio. With respect to portfolio
securities to be purchased or sold through the Depository Trust Company, the
Sub-Adviser will arrange for the automatic transmission of the confirmation of
such trades to the Fund's Agent, and if requested, Manager.
(e) The Sub-Adviser will monitor on a daily basis, by review of daily pricing
reports provided by the
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Agent to the Sub-Adviser, the determination by the Agent for the Fund of the
valuation of portfolio securities and other investments of the Portfolio. The
Sub-Adviser shall not be obligated to independently verify the Agent's pricing
determinations, and the Agent's responsibility for accurate pricing
determinations of the value of the Portfolios's securities shall not be reduced
by the Sub-Adviser's duty to monitor such determinations. The Sub-Adviser will
assist the Agent in determining or confirming, consistent with the procedures
and policies stated in the Registration Statement, the value of any portfolio
securities or other assets of the Portfolio for which the Agent seeks assistance
from or identifies for review by the Sub-Adviser.
(f) The Sub-Adviser will make available to the Fund and Manager, promptly upon
request, all of the Portfolio's investment records and ledgers maintained by the
Sub-Adviser as are necessary to assist the Fund and Manager to comply with
requirements of the 1940 Act and the Advisers Act, as well as other applicable
laws. The Sub-Adviser will furnish to regulatory authorities having the
requisite authority any information or reports in connection with its services
which may be requested in order to ascertain whether the operations of the Fund
are being conducted in a manner consistent with applicable laws and regulations.
(g) The Sub-Adviser will provide reports, which may be prepared by the Agent, to
the Fund's Board of Directors for consideration at meetings of the Board on the
investment program for the Portfolio and the issuers and securities represented
in the Portfolio's securities holdings, including a schedule of the investments
and other assets held in the Portfolio and a statement of all purchases and
sales for the Portfolio since the last such statement, and will furnish the
Fund's Board of Directors with periodic and special reports with respect to the
Portfolio as the Directors and Manager may reasonably request, including
statistical information with respect to the Portfolio's securities. In addition,
the Sub-Adviser will make available at each meeting of the Board of Directors,
either in person or by telephone conference call as instructed by Manager on
behalf of the Board of Directors of the Fund, an appropriate person to discuss
the investment performance of the Portfolio.
(h) The Sub-Adviser will provide information and reports to Manager as Manager
shall reasonably request to enable it to review the performance of the
Sub-Adviser under this Agreement.
SECTION 2. BROKER-DEALER SELECTION.
The Sub-Adviser is responsible for decisions to buy and sell securities and
other investments for the Portfolio, broker-dealer and futures commission
merchant selection, and negotiation of brokerage commission and futures
commission merchants' rates. As a general matter, in executing portfolio
transactions the Sub-Adviser may employ or deal with such broker-dealers or
futures commission merchants as may, in the Sub-Adviser's best judgment, provide
prompt and reliable execution of the transactions at favorable prices and
reasonable commission rates. In selecting such broker-dealers or futures
commission merchants, the Sub-Adviser shall consider all relevant factors,
including price (including the applicable brokerage commission, dealer spread or
futures commission merchant rate), the size of the order, the nature of the
market for the security or other investment, the timing of the transaction, the
reputation, experience and financial stability of the broker-dealer or futures
commission merchant involved, the quality of the service, the difficulty of
execution, and the execution capabilities and operational facilities of the firm
involved, and, in the case of securities, the firm's risk in positioning a block
of securities. Subject to such policies as the Board of Directors may determine
and consistent with Section 28(e) of the Securities Exchange Act of 1934, as
amended (the 1934 ACT), the Sub-Adviser shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of the Sub-Adviser's having caused the Portfolio to pay a
member of an exchange, broker or dealer an amount of commission for effecting a
securities transaction in excess of the amount of commission another member of
an exchange, broker or dealer would have charged for effecting that transaction,
if the Sub-Adviser determines in good faith that such amount of commission was
reasonable in relation to the value of the brokerage and research services
provided by such member of an exchange, broker or dealer, viewed in terms of
either that particular transaction or the Sub-Adviser's overall responsibilities
with respect to the Portfolio and to the Sub-Adviser's other clients as to which
the Sub-Adviser exercises investment
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discretion. In accordance with Section 11(a) of the 1934 Act and Rule 11a2-2(T)
thereunder, and subject to any other applicable laws and regulations including
Section 17(e) of the 1940 Act and Rule 17e-1 thereunder, the Sub-Adviser may
engage its affiliates, Manager and its affiliates or any other sub-adviser to
the Fund and its respective affiliates as broker-dealers or futures commission
merchants to effect portfolio transactions in securities and other investments
for the Portfolio.
SECTION 3. RECORDS, REPORTS, ETC.
In compliance with the requirements of Rule 31a-3 under the 1940 Act, the
Sub-Adviser hereby agrees that all records which the Sub-Adviser maintains for
the Portfolio are the property of the Fund and further agrees to surrender
promptly to the Fund any of such records upon the Fund's or Manager's request or
upon termination of this Agreement, although the Sub-Adviser may, at the
Sub-Adviser's own expense, make and retain a copy of such records. The
Sub-Adviser further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records required to be maintained by Rule 31a-1 under the
1940 Act and to preserve the records required by the Rule 204-2 under the
Advisers Act for the period specified in the Rule.
SECTION 4. PAYMENT OF EXPENSES.
The Sub-Adviser shall assume and pay all of the costs and expenses of performing
its obligations under this Agreement.
SECTION 5. COMPENSATION FOR SERVICES.
Manager will pay to the Sub-Adviser a monthly sub-advisory fee (adjusted pro
rata for any shorter applicable period) at an annual rate of .80% of the average
daily net assets of the Portfolio from the management fee actually received by
Manager from the Fund; provided, however, that the sub-advisory fee shall be
reduced proportionately if the management fee actually paid to Manager by the
Portfolio shall have been reduced as a result of applicable state expense
limitations or fee waivers agreed to in writing by the Sub-Adviser. The
sub-advisory fee shall be computed, accrue and be payable in the same manner as
the management fee which is payable by the Fund to Manager pursuant to the
Management Agreement and as specified in the Fund's Registration Statement.
SECTION 6. LIABILITY FOR SERVICES.
Except as may otherwise be required by the 1940 Act or the rules thereunder or
other applicable law, and except as set forth in the next paragraph, the Fund
and Manager agree that the Sub-Adviser, any of its affiliated persons, and each
person, if any, who, within the meaning of Section 15 of the Securities Act of
1933, as amended, controls the Sub-Adviser, shall not be liable for, or subject
to any damages, expenses, or losses in connection with, any act or omission
connected with or arising out of any services rendered under this Agreement,
except by reason of willful misfeasance, bad faith, or gross negligence in the
performance of the Sub-Adviser's duties, or by reason of reckless disregard of
the Sub-Adviser's obligations and duties under this Agreement.
SECTION 7. INDEMNIFICATION BY SUB-ADVISER.
The Sub-Adviser agrees to indemnify and hold harmless Manager against any
losses, expenses, claims, damages or liabilities (or actions or proceedings in
respect thereof), to which Manager may become subject arising out of or based on
the breach or alleged breach by the Sub-Adviser of any provisions of this
Agreement; provided, however, that the Sub-Adviser shall not be liable under
this paragraph in respect of any loss, expense, claim, damage or liability to
the extent that a court having jurisdiction shall have determined by a final
judgment, or independent counsel agreed upon by Manager and the Sub-Adviser
shall have concluded in a written opinion, that such loss, expense, claim,
damage or liability resulted primarily from Manager's
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willful misfeasance, bad faith or gross negligence or by reason of the reckless
disregard by Manager of its duties. The foregoing indemnification shall be in
addition to any rights that Manager may have at common law or otherwise. The
Sub-Adviser's agreements in this paragraph shall, upon the same terms and
conditions, extend to and inure to the benefit of each person who may be deemed
to control Manager, be controlled by Manager or be under common control with
Manager and its affiliates, directors, officers, employees and agents. The
Sub-Adviser's agreements in this paragraph shall also extend to any of Manager's
successors or the successors of the aforementioned affiliates, directors,
officers, employees or agents.
SECTION 8. INDEMNIFICATION BY MANAGER.
Manager agrees to indemnify and hold harmless the Sub-Adviser against any
losses, expenses, claims, damages or liabilities (or actions or proceedings in
respect thereof), to which the Sub-Adviser may become subject arising out of or
based on the breach or alleged breach by Manager of any provisions of this
Agreement or the Management Agreement, or any wrongful action or alleged
wrongful action by Manager or its affiliates in the distribution of the Fund's
shares, or any wrongful action or alleged wrongful action by the Fund other than
wrongful action or alleged wrongful action that was caused by the breach by the
Sub-Adviser of the provisions of this Agreement; provided, however, that Manager
shall not be liable under this paragraph in respect of any loss, expense, claim,
damage or liability to the extent that a court having jurisdiction shall have
determined by a final judgment, or independent counsel agreed upon by Manager
and the Sub-Adviser shall have concluded in a written opinion, that such loss,
expense, claim, damage or liability resulted primarily from the Sub-Adviser's
willful misfeasance, bad faith or gross negligence or by reason of the reckless
disregard by the Sub-Adviser of its duties. The foregoing indemnification shall
be in addition to any rights that the Sub-Adviser may have at common law or
otherwise. Manager's agreements in this paragraph shall, upon the same terms and
conditions, extend to and inure to the benefit of each person who may be deemed
to control the Sub-Adviser, be controlled by the Sub-Adviser or be under common
control with the Sub-Adviser and to each of the Sub-Adviser's and each such
person's respective affiliates, directors, officers, employees and agents.
Manager's agreements in this paragraph shall also extend to any of the
Sub-Adviser's successors or the successors of the aforementioned affiliates,
directors, officers, employees or agents.
SECTION 9. NOTICE AND DEFENSE OR PROCEEDINGS, ETC.
Promptly after receipt by a party indemnified under paragraph 7 or 8 above of
notice of the commencement of any action, proceeding or investigation for which
indemnification will be sought, such indemnified party shall promptly notify the
indemnifying party in writing; but the omission so to notify the indemnifying
party shall not relieve it from any liability which it may otherwise have to any
indemnified party unless such omission results in actual material prejudice to
the indemnifying party. In case any action or proceeding shall be brought
against any indemnified party, and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate in
and, individually or jointly with any other indemnifying party, to assume the
defense thereof with counsel reasonably satisfactory to the indemnified party.
After notice from the indemnifying party to the indemnified party of its
election to assume the defense of any action or proceeding, the indemnifying
party shall not be liable to the indemnified party for any legal or other
expenses subsequently incurred by the indemnified party in connection with the
defense thereof other than reasonable costs of investigation. If the
indemnifying party does not elect to assume the defense of any action or
proceeding, the indemnifying party on a monthly basis shall reimburse the
indemnified party for the legal fees and expenses incurred by the indemnified
party for continuing its defense thereof. Regardless of whether or not the
indemnifying party shall have assumed the defense of any action or proceeding,
the indemnified party shall not settle or compromise the action or proceeding
without the prior written consent of the indemnifying party.
SECTION 10. REPRESENTATIONS AND WARRANTIES; COVENANTS.
(a) The Sub-Adviser hereby represents and warrants as follows:
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(i) The Sub-Adviser is registered with the SEC as an investment adviser under
the Advisers Act, and such registration is current, complete and in full
compliance with all material applicable provisions of the Advisers Act and the
rules and regulations thereunder;
(ii) The Sub-Adviser has all requisite authority to enter into, execute, deliver
and perform the Sub-Adviser's obligations under this Agreement;
(iii) The Sub-Adviser's performance of its obligations under this Agreement does
not conflict with any law, regulation or order to which the Sub-Adviser is
subject; and
(iv) The Sub-Adviser has reviewed the Registration Statement for the Fund filed
with the SEC, and with respect to the disclosure about the Sub-Adviser and the
Portfolio or information relating, directly or indirectly, to the Sub-Adviser or
the Portfolio which was made in reliance upon and in conformity with written
information provided by the Sub-Adviser to the Fund specifically for use therein
or, if written information was not provided, which the Sub-Adviser had the
opportunity to review prior to filing with the SEC, such Registration Statement
contains, as of its date, no untrue statement of any material fact and does not
omit any statement of a material fact which was required to be stated therein or
necessary to make the statements contained therein not misleading.
(b) The Sub-Adviser hereby covenants and agrees that, so long as this Agreement
shall remain in effect:
(i) The Sub-Adviser shall maintain the Sub-Adviser's registration as an
investment adviser under the Advisers Act, and such registration shall at all
times remain current, complete and in full compliance with all material
applicable provisions of the Advisers Act and the rules and regulations
thereunder;
(ii) The Sub-Adviser's performance of its obligations under this Agreement shall
not conflict with any law, regulation or order to which the Sub-Adviser is then
subject;
(iii) The Sub-Adviser shall at all times fully comply with the Advisers Act, the
1940 Act, all applicable rules and regulations under such Acts and all other
applicable law;
(iv) The Sub-Adviser shall promptly notify Manager and the Fund upon the
occurrence of any event that might disqualify or prevent the Sub-Adviser from
performing its duties under this Agreement. The Sub-Adviser further agrees to
notify Manager and the Fund promptly with respect to written material that has
been provided to the Fund or Manager by the Sub-Adviser for inclusion in the
Registration Statement or prospectus for the Fund or any supplement or amendment
thereto, or, if written material has not been provided, with respect to the
information in the Registration Statement or Prospectus, or any amendment or
supplement thereto, reviewed by the Sub-Adviser, in either case of any untrue
statement of a material fact or of any omission of any statement of a material
fact which is required to be stated therein or is necessary to make the
statements contained therein not misleading; and
(v) If the Sub-Adviser is a partnership, the Sub-Adviser shall notify the Fund
and Manager of any change in membership within a reasonable time after such
change.
SECTION 11. EXCLUSIVITY OF SERVICES AND USE OF NAMES.
The Sub-Adviser acknowledges that a fundamental marketing feature of the
variable annuity contracts and certificates offered through Integrity Life
Insurance Company (INTEGRITY)and National Integrity Life Insurance Company
(NATIONAL INTEGRITY), a wholly-owned subsidiary of Integrity, under which
contributions may be allocated to separate accounts of Integrity and National
Integrity for the purchase of shares of the Portfolio is
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the fact that the Sub-Adviser provides investment advisory services to the
Portfolio.
The Sub-Adviser further acknowledges and agrees that the names THE LEGENDS FUND
and PINNACLE, and abbreviations or logos associated with those names, are the
valuable property of Manager and its affiliates; that the Fund, Manager and its
affiliates have the right to use such names, abbreviations and logos; and that
the Sub-Adviser shall use the names THE LEGENDS FUND and PINNACLE, and
associated abbreviations and logos, only in connection with the Sub-Adviser's
performance of its duties hereunder.
Manager acknowledges that "Zweig" (the NAME) is distinctive in connection with
investment advisory and related services provided by the Sub-Adviser, the Name
is a property right of the Sub-Adviser, the individual whose name includes the
Name and/or an affiliate of the Sub-Adviser or such individual (collectively,
the OWNER), and the Sub-Adviser represents that the Name in the name of the
Portfolio is understood to be used by the Fund with the Owner's consent. The
Sub-Adviser hereby represents that the Fund is granted the non-exclusive license
to use the Name in the name of the Portfolio upon the conditions hereinafter set
forth; provided that the Fund may use such name only so long as the Sub-Adviser
shall be retained as the investment sub-adviser of the Portfolio pursuant to the
terms of this Agreement. Any such use by the Fund shall in no way prevent the
Owner or any of its successors or assigns from using or permitting the use of
the Name along with any other word or words, for, by or in connection with any
other entity or business, other than the Fund or its business, whether or not
the same directly competes or conflicts with the Fund or its business in any
manner.
Manager acknowledges that the Fund shall use the Name in the name of the
Portfolio for the period set forth herein in a manner not inconsistent with the
interests of the Sub-Adviser and Owner and that the Fund's rights in the Name
are limited to its use as a component of the Portfolio's name and in connection
with accurately describing the activities of the Portfolio. In the event that
the Sub-Adviser shall cease to be the investment sub-adviser of the Portfolio,
then Fund at its own expense, upon the Sub-Adviser's written request:
(i) shall cease to use the Name as part of the Portfolio's name or for any other
commercial purpose (other than the right to refer to the Portfolio's former name
in the Fund's Registration Statement, proxy materials and other Fund documents
to the extent required under the 1940 Act);
(ii) shall on all letterheads and other materials designed to be read or used by
salesmen, distributors or investors, state in a prominent position and prominent
type that the Sub-Adviser has ceased to be the investment sub-adviser of the
Portfolio, and
(iii) shall use its best efforts to cause the Fund's officers and directors to
take any and all actions which may be necessary or desirable to effect the
foregoing and to reconvey to the Sub-Adviser or the Owner all rights which the
Fund may have to the Name. Manager agrees to take any all actions as may be
necessary or desirable to effect the foregoing.
The Sub-Adviser hereby agrees and consents to the use of the Name upon the
foregoing terms and conditions.
SECTION 12. ENTIRE AGREEMENT; AMENDMENT, WAIVER.
This Agreement supersedes all prior agreements between the parties and
constitutes the entire agreement by the parties. No provision of this Agreement
may be changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought, and no amendment of this
Agreement shall be effective with respect to the Portfolio until approved as
required by the 1940 Act.
SECTION 13. EFFECTIVENESS AND DURATION OF AGREEMENT.
Unless sooner terminated, this Agreement shall continue in effect for an initial
two-year period and thereafter
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for successive one year periods, provided that continuation of this Agreement
and the terms thereof are specifically approved annually in accordance with the
requirements of the 1940 Act by vote of a majority of the Directors of the Fund
or by vote of a majority of the outstanding voting securities of the Portfolio
(as defined in the 1940 Act), as well as, in either case, by vote of a majority
of the Directors who are not interested persons of the Sub-Adviser, Manager or
the Fund, cast in person at a meeting called for the purpose of voting on such
approval.
SECTION 14. TERMINATION OF AGREEMENT, ASSIGNMENT.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Sub-Adviser or by Manager, upon sixty (60) days' written notice
from the terminating party to the other party and to the Fund, or by the Fund,
upon sixty (60) days written notice to the Sub-Adviser and Manager, acting
pursuant to a resolution adopted by a majority of the members of the Board of
Directors who are not interested persons or by a vote of the holders of the
lesser of (1) 67% of the Portfolio's voting shares present if the holders of
more than 50% of the outstanding shares are present in person or by proxy, or
(2) more than 50% of the outstanding shares of the Portfolio.
This Agreement shall automatically terminate in the event of its assignment or
the termination of the Management Agreement pertaining to the Portfolio.
Termination of this Agreement shall not affect rights of the parties which have
accrued prior thereto.
The provisions of paragraphs 6, 7, 8, 9 and 11 shall survive the termination of
this Agreement, except that if Manager or the Fund terminates the Agreement, the
first paragraph of Section 11 shall not survive termination.
SECTION 15. DEFINITIONS.
The terms ASSIGNMENT and INTERESTED PERSON when used in this Agreement shall
have the meanings given such terms in the 1940 Act and the rules and regulations
thereunder.
SECTION 16. CONCERNING APPLICABLE PROVISIONS OF LAW.
This Agreement shall be subject to all applicable provisions of law, including,
without limitation, the applicable provisions of the 1940 Act, and to the extent
that any provisions herein contained conflict with any such applicable
provisions of law, the latter shall control. This Agreement shall be governed by
the laws of the State of New York, without reference to principles of conflicts
of law.
SECTION 17. COUNTERPARTS.
This Agreement may be executed in counterparts, and each counterpart shall for
all purposes be deemed an original and all such counterparts shall together
constitute one and the same instrument.
IN WITNESS WHEREOF, authorized officers of Manager and the Sub-Adviser have
executed this Agreement as of the day and year first written above.
INTEGRITY CAPITAL ADVISORS, INC.
By:
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Attest:
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ZWEIG/GLASER ADVISERS
By:
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Attest:
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18
