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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.
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TABLE OF CONTENTS
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Section 1................................................... 1
RISK/RETURN SUMMARY......................................... 1
Investment Objectives and Strategies........................ 1
Principal Risks............................................. 1
Year 2000................................................... 5
Section 2................................................... 5
THE FUND.................................................... 5
Investment Objectives, Principal Investment Strategies and
Related Risks.............................................. 5
Harris Bretall Sullivan & Smith Equity Growth Portfolio..... 5
Scudder Kemper Value Portfolio.............................. 6
Zweig Asset Allocation Portfolio............................ 6
Zweig Equity (Small Cap) Portfolio.......................... 7
Principal Investment Risks.................................. 7
Other Investments........................................... 7
Section 3................................................... 8
PERFORMANCE................................................. 8
Section 4................................................... 8
MANAGEMENT OF THE FUND...................................... 8
The Manager, Sub-Advisers and Distributor................... 8
Management Fees............................................. 9
Section 5................................................... 10
SHAREHOLDER INFORMATION..................................... 10
Purchase and Redemption of Shares........................... 10
Valuation of Shares......................................... 10
Dividends and Distribution.................................. 10
Tax Consequences of Investing in the Fund................... 10
FINANCIAL HIGHLIGHTS........................................ 11
</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.
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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 mid-sized and large company stocks that the portfolio
manager considers to be comparable to the 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. 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.
The Harris Bretall Sullivan & Smith Equity Growth Portfolio is subject to
additional risks of investing in growth stocks, which are subject to greater
price volatility than value stocks and may take a long time to reach their
growth potential. The companies that issue these stocks usually lack the
dividend yield associated with value stocks that can cushion return in a
declining market. Also, since investors buy growth stocks based on their
anticipated earnings growth, earnings disappointments often result in sharp
price declines.
The Scudder Kemper Value Portfolio is subject to additional risks of using a
"value" strategy. The determination that a stock is undervalued is subjective
and price may not rise to the potential the investment manager believes it to
have.
The Zweig Portfolios are subject to additional risks of investing in foreign
securities. Foreign securities denominated in foreign currencies are subject to
adverse changes in the values of such currencies, which may have a significant
negative effect on any returns from these investments. Foreign securities pose
additional risks, such as political and economic uncertainty, limited
information, higher brokerage costs, different accounting standards and thinner
trading markets compared to U.S. markets. The Zweig Equity (Small Cap) Portfolio
is subject to additional risks of investing in small company stocks, which
historically have had greater price volatility, less liquidity and increased
competition than those of larger companies.
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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 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.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
HARRIS BRETALL 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 35.65 28.58
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EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
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<CAPTION>
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 18.41 28.58
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EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
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ZWEIG EQUITY VALUE LINE
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(SMALL CAP) GEOMETRIC INDEX
1993 8.64 10.72
1994 -0.61 -6.01
1995 21.11 19.29
1996 18.57 13.38
1997 25.09 21.06
1998 -0.58 -3.79
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EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
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<CAPTION>
ZWEIG ASSET S&P 500
ALLOCATION
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1993 14.95 7.06
1994 0.35 -1.54
1995 21.43 34.11
1996 14.83 20.26
1997 22.00 31.01
1998 -2.14 28.58
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For the calendar years shown in the bar charts, 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%). Total return for the period from 1/1/99 through 9/30/99 was 7.92% for
the Harris Bretall Sullivan & Smith Equity Growth Portfolio, (5.74)% for the
Scudder Kemper Value Portfolio, (0.92)% for the Zweig Asset Allocation
Portfolio, and (4.54)% for the Zweig Equity (Small Cap) Portfolio. Sales charges
and account fees are not reflected in the bar charts. If those charges or fees
were reflected, returns would be less than those shown.
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AVERAGE ANNUAL TOTAL RETURNS
For the period ending 12/31/98
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<CAPTION>
SINCE
PORTFOLIO 1 YEAR 5 YEAR INCEPTION*
- --------- -------- -------- ----------
<S> <C> <C> <C>
Harris Bretall Sullivan & Smith Equity Growth
Portfolio.............................................. 35.65% 27.07% 18.99%
Scudder Kemper Value Portfolio.......................... 18.41% 23.16% 19.95%
Zweig Asset Allocation Portfolio........................ (2.14)% 10.81% 11.21%
Zweig Equity (Small Cap) Portfolio...................... (0.58)% 12.16% 10.96%
S&P 500**............................................... 28.58% 25.31% 18.60%
Value Line Geometric Index***........................... (3.79)% 11.12% 8.90%
</TABLE>
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* Inception dates for Portfolios: 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, PRINCIPAL 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.
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 which have exhibited superior growth
in revenues and earnings, strong product lines and proven management ability
over a variety of business cycles.
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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 invests primarily 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:
- low price-to-earnings ratios
- low price-to-book ratios
- low price-to-cash flow ratios
- dividend yields above the market average
- sound finances
- perceived intrinsic value
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 believes 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 using 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 those
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 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
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call options on securities and indices. If a Portfolio couldn't liquidate a
futures or related options position because there was no liquid secondary market
or price limits were imposed, 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
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.
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 historically have had greater price volatility,
less liquidity and increased competitive threat than those of larger companies.
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)
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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 agreed-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 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.
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Frederick L. Gaskin, the portfolio manager for the Portfolio, has been
managing the Portfolio since 1997 and has been with Scudder Kemper since 1996.
For 10 years prior to joining Scudder Kemper, Mr. Gaskin was a portfolio manager
for a bank.
ZWEIG/GLASER ADVISERS, LLC, 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 wholly-owned subsidiary of
Phoenix Investment Partners, Ltd. 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.
Zweig Glaser has entered into a sub-advisory servicing agreement with Zweig
Consulting LLC (ZWEIG CONSULTING), a New York limited liability company,
pursuant to which Dr. Martin Zweig and his research associates provide
investment advice. 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 10 years experience with the Zweig organization.
Together, Dr. Zweig and Mr. Katzen have managed these Portfolios since their
inception.
Zweig Consulting is located at 900 Third Avenue, New York, NY 10022.
Dr. Martin E. Zweig serves as President of Zweig Consulting. Dr. Zweig and his
associates determine the asset allocation strategy for all of the Phoenix-Zweig
mutual funds, except the Government Cash Fund. Dr. Zweig does not select the
individual securities to implement the strategy, rather the portfolio managers
select the specific securities for each fund.
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.
<TABLE>
<CAPTION>
ANNUAL PERCENTAGE
ANNUAL PERCENTAGE OF OF AVERAGE NET
AVERAGE NET ASSETS PAID ASSETS PAID BY
BY PORTFOLIO TO THE THE MANAGER TO
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
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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.
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.
10
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights presented for each of the five years in the period
ended June 30, 1999 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.
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <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
Income from investment operations:
Net investment income (loss)................... (0.06) (a) 0.02 (a) 0.01
Net realized and unrealized gain (loss) on
investments................................... 7.17 4.90 4.13 1.74 3.48
Total from investment operations............... 7.11 4.90 4.15 1.74 3.49
Less distributions:
From net investment income................... -- (0.02) (a) (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
TOTAL RETURN................................... 35.19% 29.11% 30.23% 13.59% 37.29%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in thousands)....... $55,428 $37,662 $28,815 $23,810 $16,393
Ratio of expenses to average net assets........ 0.96% 0.95% 1.03% 1.04% 1.05%
Ratio of net investment income (loss) to
average net assets............................ (0.29)% (0.01)% 0.14% 0.03% 0.13%
Portfolio turnover rate........................ 27% 57% 46% 58% 31%
</TABLE>
- ------------------------
(a) Less than $0.01 per share.
11
<PAGE>
Scudder Kemper Value Portfolio
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <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
Income from investment operations:
Net investment income (loss)................... 0.33 0.26 0.26 0.18 0.26
Net realized and unrealized gain (loss) on
investments................................... 3.22 4.08 5.04 3.70 1.85
Total from investment operations............... 3.55 4.34 5.30 3.88 2.11
Less distributions:
From net investment income................... (0.28) (0.26) (0.19) (0.19) (0.14)
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)
Net asset value, end of period................. $ 22.06 $ 21.02 $ 20.63 $ 16.17 $ 12.59
TOTAL RETURN................................... 18.09% 23.36% 33.78% 31.22% 19.98%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in thousands)....... $50,169 $46,436 $30,930 $19,705 $10,877
Ratio of expenses to average net assets........ 0.96% 0.94% 1.05% 1.06% 1.13%
Ratio of net investment income (loss) to
average net assets............................ 1.56% 1.58% 1.62% 1.65% 1.98%
Ratio of expenses to average net assets before
voluntary expense reimbursement............... 0.96% 0.94% 1.05% 1.07% 1.13%
Ratio of net investment income (loss) to
average net assets before voluntary expense
reimbursement................................. 1.56% 1.58% 1.62% 1.64% 1.98%
Portfolio turnover rate........................ 50% 57% 88% 18% 29%
</TABLE>
12
<PAGE>
Zweig Asset Allocation Portfolio
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <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
Income from investment operations:
Net investment income (loss)................... 0.21 0.14 0.19 0.21 0.33
Net realized and unrealized gain (loss) on
investments................................... (1.04) 2.97 2.20 1.21 1.33
Total from investment operations............... (0.83) 3.11 2.39 1.42 1.66
Less distributions:
From net investment income................... (0.16) (0.18) (0.22) (0.33) (0.08)
From net realized gain....................... (2.58) -- (1.65) -- --
Total distributions........................ (2.74) (0.18) (1.87) (0.33) (0.08)
Net asset value, end of period................. $ 13.99 $ 17.56 $ 14.63 $ 14.11 $ 13.02
TOTAL RETURN................................... (3.73)% 21.38% 18.63% 11.06% 14.57%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in thousands)....... $31,010 $47,450 $42,848 $40,222 $36,736
Ratio of expenses to average net assets........ 1.23% 1.18% 1.28% 1.25% 1.20%
Ratio of net investment income (loss) to
average net assets............................ 1.13% 0.80% 1.29% 1.55% 2.73%
Portfolio turnover rate........................ 109% 65% 89% 105% 45%
</TABLE>
13
<PAGE>
Zweig Equity (Small Cap) Portfolio
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <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
Income from investment operations:
Net investment income (loss)................... 0.10 0.04 0.16 0.11 0.17
Net realized and unrealized gain (loss) on
investments................................... (1.80) 3.48 2.41 2.04 0.93
Total from investment operations............... (1.70) 3.52 2.57 2.15 1.10
Less distributions:
From net investment income................... (0.04) (0.14) (0.14) (0.16) (0.06)
From net realized gain....................... (3.67) (0.65) (1.19) -- (0.07)
Total distributions........................ (3.71) (0.79) (1.33) (0.16) (0.13)
Net asset value, end of period................. $ 12.17 $ 17.58 $ 14.85 $ 13.61 $ 11.62
TOTAL RETURN................................... (9.24)% 23.72% 20.37% 18.69% 10.39%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in thousands)....... $10,994 $14,688 $11,161 $11,698 $ 8,034
Ratio of expenses to average net assets........ 1.54% 1.52% 1.55% 1.55% 1.55%
Ratio of net investment income (loss) to
average net assets............................ 0.71% 0.26% 0.97% 1.06% 1.54%
Ratio of expenses to average net assets before
voluntary expense reimbursement............... 1.64% 1.56% 1.82% 1.83% 1.59%
Ratio of net investment income (loss) to
average net assets before voluntary expense
reimbursement................................. 0.61% 0.22% 0.70% 0.78% 1.50%
Portfolio turnover rate........................ 76% 113% 59% 101% 67%
</TABLE>
14
<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>
THE LEGENDS FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
November 1, 1999
TABLE OF CONTENTS
PAGE
Section 1 - Fund History................................................... 1
Section 2 - Additional Fund Investment Policies............................ 1
Section 3 - Management of the Fund......................................... 19
Section 4 - Principal Holders of Securities................................ 21
Section 5 - Investment Advisory and Other Services......................... 21
Section 6 - Portfolio Transactions and Brokerage........................... 25
Section 7 - Purchase, Redemption, and Pricing of Shares.................... 27
Section 8 - Taxation of the Fund........................................... 28
Section 9 - Calculation of Performance Data................................ 30
Section 10 - Financial Statements of the Fund.............................. 32
Appendix A - Options and Futures........................................... 62
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--The Manager, Sub-Advisers and
Distributor" in the Prospectus and "Investment Advisory and Other 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.
1
<PAGE>
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.
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
2
<PAGE>
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.
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
3
<PAGE>
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 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.
4
<PAGE>
GNMA guarantees the timely payment of principal and interest on securities
backed by a pool of mortgages insured by the Federal Housing Administration
(FHA) or the Farmers' Home Administration (FMHA), or guaranteed by the Veterans
Administration (VA). The GNMA guarantee is authorized by the National Housing
Act and is backed by the full faith and credit of the United States. The GNMA is
also empowered to borrow without limitation from the U.S. Treasury if necessary
to make any payments required under its guarantee.
The average life of a GNMA Certificate is likely to be substantially shorter
than the original maturity of the mortgages underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosure will usually
result in the return of the greater part of principal investment long before the
maturity of the mortgages in the pool. Foreclosures impose no risk to principal
investment because of the GNMA guarantee, except to the extent that the
Portfolio has purchased the certificates above par in the secondary market.
FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation (FHLMC) was created
in 1970 through enactment of Title III of the Emergency Home Finance Act of
1970. Its purpose is to promote development of a nationwide secondary market in
conventional residential mortgages.
The FHLMC issues two types of mortgage pass-through securities: mortgage
participation certificates (PCS) and guaranteed mortgage certificates (GMCs).
PCS resemble GNMA Certificates in that each PC represents a pro rata share of
all interest and principal payments made and owed on the underlying pool. The
FHMLC guarantees timely monthly payment of interest (and, under certain
circumstances, principal) of PCS and the ultimate payment of principal.
GMCs also represent a pro rata interest in a pool of mortgages. However, these
instruments pay interest semi-annually and return principal once a year in
guaranteed minimum payments. The expected average life of these securities is
approximately ten years.
FNMA SECURITIES. The Federal National Mortgage Association (FNMA) was
established in 1938 to create a secondary market in mortgages insured by the
FHA.
FNMA issues guaranteed mortgage pass-through certificates (FNMA CERTIFICATES).
FNMA Certificates represent a pro rata share of all interest and principal
payments made and owed on the underlying pool. FNMA guarantees timely payment of
interest and principal on FNMA Certificates.
COLLATERALIZED MORTGAGE OBLIGATIONS. A Collateralized Mortgage Obligation (CMO)
is a security issued by a private corporation or a U.S. Government
instrumentality that 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.
5
<PAGE>
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
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
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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 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.
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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--The Manager, Sub-Advisers and
Distributor" in the Prospectus and "Investment Advisory and Other 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 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 orrowings and then
not in excess of 5% of the Portfolio's total assets taken at cost (10%
in the
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case of Zweig Asset Allocation Portfolio and Zweig Equity (Small
Cap) Portfolio), provided that this does not prohibit escrow,
collateral or margin arrangements in connection with the use of
options, futures contracts and options on futures contracts by a
Portfolio that may use options or futures strategies;
(5) make short sales of securities or maintain a short position, except to
the extent described in the Prospectus;
(6) purchase or sell real estate, provided that a Portfolio may invest in
securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein;
(7) purchase or sell commodities or commodity contracts, except to the
extent described in the Prospectus and this Statement of Additional
Information with respect to futures and related options;
(8) invest in oil, gas or mineral-related programs or leases;
(9) make loans, except through loans of portfolio securities and
repurchase agreements, provided that for purposes of this restriction
the acquisition of bonds, debentures or other corporate debt
securities and investment in government obligations, short-term
commercial paper, certificates of deposit, bankers' acceptances and
other fixed income securities as described in the Prospectus and
Statement of Additional Information shall not be deemed to be the
making of a loan;
(10) purchase any securities issued by any other investment company except
(i) by purchase in the open market where no commission or profit,
other than a customary broker's commission, is earned by any sponsor
or dealer associated with the investment company whose shares are
acquired as a result of such purchase, (ii) in connection with the
merger, consolidation or acquisition of all the securities or assets
of another investment company and (iii) purchases of collateralized
mortgage obligations or asset-backed securities, the issuers of which
are investment companies; or
(11) borrow money or issue senior securities, except that each of Harris
Bretall Sullivan & Smith Equity Growth Portfolio and Scudder Kemper
Value Portfolio may borrow in an amount up to 10% of its respective
total assets from banks for extraordinary or emergency purposes such
as meeting anticipated redemptions, and may pledge its assets in
connection with such borrowing. Zweig Asset Allocation Portfolio and
Zweig Equity (Small Cap) Portfolio may borrow money from banks on an
unsecured basis and may pay interest thereon in order to raise
additional cash for investment or to meet redemption requests. Each of
these two Portfolios may not borrow amounts in excess of 20% of its
total assets taken at cost or at market value, whichever is lower, and
then only from banks as a temporary measure for extraordinary or
emergency purposes. If such borrowings exceed 5% of a Portfolio's
total assets, the Portfolio will make no further investments until
such borrowing is repaid. It is the current intention of each of these
two Portfolios not to borrow money in excess of 5% of its assets. A
Portfolio may pledge up to 5% (10% in the case of Zweig Asset
Allocation Portfolio and Zweig Equity (Small Cap) Portfolio) of its
total assets as security for such borrowing. For purposes of this
restriction, the deposit of initial or maintenance margin in
connection with futures contracts will not be deemed to be a pledge of
the assets of a Portfolio.
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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 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
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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 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.
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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 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
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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
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agreed that the Portfolio needs to treat as illiquid only that amount of the
cover assets equal to the formula price less the amount by which the market
value of the security subject to the option exceeds the exercise price of the
option (the amount by which the option is IN-THE-MONEY). Although the
Sub-Advisers do not believe that OTC options are generally illiquid, pending
resolution of this issue, the Portfolio will conduct its operations in
conformity with the views of the SEC staff.
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
14
<PAGE>
escrow, they cannot be sold by the Portfolio.
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
15
<PAGE>
Portfolio would be required to continue to make daily cash payments of
maintenance margin. There can be no assurance that hedging transactions will
be successful, as there may be an imperfect correlation (or no correlation)
between movements in the prices of the futures contracts and of the
securities being hedged, or price distortions due to conditions in the
futures markets because futures markets may have daily market price movement
limits for futures contracts. Where futures contracts are purchased to hedge
against an increase in the price of long-term securities, but the long-term
market declines and a Portfolio does not invest in long-term securities, the
Portfolio would realize a loss on the futures contracts, which would not be
offset by a reduction in the price of securities purchased. Where futures
contracts are sold to hedge against a decline in the price of long-term
securities in a Portfolio, but the long-term market advances, the Portfolio
would lose part or all of the benefit of the advance due to offsetting losses
in its futures positions. Successful use of futures contracts by a Portfolio
is subject to the Sub-Adviser's ability to predict correctly movements in the
direction of interest rates, currency exchange rates, market prices and other
factors affecting markets for debt securities.
A Portfolio may not enter into futures contracts or purchase or write related
options unless it complies with rules and interpretations of the Commodity
Futures Trading Commission (CFTC) which require, among other things, that
futures and related options be used solely for BONA FIDE HEDGING purposes, as
defined in CFTC regulations or, alternatively, that the Portfolio will not enter
into futures and related options transactions if the sum of the aggregate
initial margin deposits on futures contracts and premiums paid for related
options exceeds 5% of the market value of the Portfolio's total assets
(calculated in accordance with CFTC regulations).
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
16
<PAGE>
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 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.
17
<PAGE>
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 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.
18
<PAGE>
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.
<TABLE>
<CAPTION>
POSITION
NAME, AGE & ADDRESS WITH THE FUND PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
<S> <C> <C>
John R. Lindholm (50)* Chairman of President of Integrity Life Insurance Company; President of National
515 W. Market Street the 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
244 North First Avenue consulting and project management firm,; Fellow, the Poynter
Minneapolis, MN 55401 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
St. Paul, MN 55107 Group of mutual funds from June 1984 to December 1996.
19
<PAGE>
<CAPTION>
POSITION
NAME, AGE & ADDRESS WITH THE FUND PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
<S> <C> <C>
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
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.
20
<PAGE>
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.
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.
21
<PAGE>
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;
- - 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
22
<PAGE>
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--The Manager, Sub-Advisers and
Distributor." Each Sub-Advisory Agreement provides that the Sub-Adviser will
furnish investment advisory services in connection with the management of
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:
23
<PAGE>
<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>
Harris Bretall Sullivan & Smith Equity $123,720 $141,321 $173,912
Growth Portfolio
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, acts as counsel to the Fund.
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.
24
<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 $22,892 $30,772 $21,926
Growth Portfolio
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 $43,452
</TABLE>
For the fiscal years ended June 30, 1997, 1998 and 1999, the Fund paid the
following brokerage commissions with respect to each of the Portfolios to
broker-dealers who are (or were) affiliated persons of those Portfolios. Also
presented below for the fiscal years ended June 30, 1998 and 1999 are the
25
<PAGE>
brokerage commissions paid to those broker-dealers as a percentage of the
combined brokerage commissions paid by each Portfolio and as a percentage of the
combined dollar amount of portfolio transactions involving the payment of
commissions engaged in by that Portfolio.
<TABLE>
<CAPTION>
Fiscal Year Ended June 30, 1997 Fiscal Year Ended June 30, 1998
------------------------------- -------------------------------
Brokerage Commissions Brokerage Commissions
As a
Percentage of As a Percentage
As a Portfolio As a of Portfolio
Percentage of Transactions Percentage Transactions
Affiliated Aggregate Involving of Aggregate Involving
Broker-Dealer Portfolio Paid ($) Commission Commission Paid ($) Commission Commissions
------------- --------- -------- ---------- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Zweig Zweig Asset
Securities Allocation
Corporation Portfolio n/a n/a n/a 583 1% --(a)
Zweig Equity
(Small Cap)
Portfolio n/a n/a n/a 17 --(a) --(a)
<CAPTION>
Fiscal Year Ended June 30, 1999
-------------------------------
Brokerage Commissions
As a
Percentage of
As a Portfolio
Percentage of Transactions
Affiliated Aggregate Involving
Broker-Dealer Portfolio Paid ($) Commission Commission
------------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Zweig Zweig Asset
Securities Allocation
Corporation Portfolio n/a n/a n/a
Zweig Equity
(Small Cap)
Portfolio n/a n/a n/a
</TABLE>
- -----------------------------
(a) Less than 1%.
Transactions in futures contracts are executed through futures commission
merchants (FCMs) who receive brokerage commissions for their services. The
procedures in selecting FCMs to execute the Portfolios' transactions in futures
contracts, including procedures permitting the use of certain broker-dealers
that are affiliated with the Sub-Advisers, are similar to those in effect with
respect to brokerage transactions in securities.
The Sub-Advisers may select broker-dealers 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
26
<PAGE>
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 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.
27
<PAGE>
The redemption price may be more or less than the shareholder's cost, depending
on the market value of the Portfolio's securities at the time.
VALUATION OF SHARES
The net asset value for the shares of each Portfolio will be determined on each
day the NYSE is open for trading. The net assets of each Portfolio are valued as
of the close of the NYSE, which 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:
28
<PAGE>
- - 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 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.
29
<PAGE>
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:
- - 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
30
<PAGE>
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.
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
31
<PAGE>
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 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.
32
<PAGE>
Report of Independent Auditors
The Shareholders and Board of Directors
The Legends Fund, Inc.
We have audited the accompanying statements of assets and liabilities of The
Legends Fund, Inc. (the Fund) (comprised of the Harris Bretall Sullivan & Smith
Equity Growth, Scudder Kemper Value, Zweig Asset Allocation and Zweig Equity
(Small Cap) portfolios), including the schedules of investments, as of June 30,
1999, and the related statements of operations for the year then ended and
statements of changes in net assets for each of the two years in the period then
ended and financial highlights for each of the five years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned at June 30, 1999, by correspondence with the custodian. As to
securities relating to uncompleted transactions, we performed other auditing
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the portfolios of the Fund at June 30, 1999, and the results of their
operations for the year then ended, changes in their net assets each of the two
years in the period then ended, and financial highlights for each of the five
years in the period then ended in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Kansas City, Missouri
August 10, 1999,
except for Note 5, as to which the date is
August 20, 1999
33
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Statement of Assets and Liabilities
June 30, 1999
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments in securities, at value (cost $29,399,436)--See accompanying schedule $55,310,175
Dividends and interest receivable 16,565
Receivable for capital shares sold 132,322
-----------
Total assets 55,459,062
LIABILITIES
Accounts payable and accrued expenses 30,693
-----------
Total liabilities 30,693
-----------
NET ASSETS $55,428,369
-----------
-----------
Net Assets consist of:
Paid-in capital $28,676,226
Accumulated undistributed net realized gain on investments 841,404
Net unrealized appreciation on investments 25,910,739
-----------
NET ASSETS, for 2,132,236 shares outstanding $55,428,369
-----------
-----------
NET ASSET VALUE, offering and redemption price per share $ 26.00
-----------
-----------
Statement of Operations
Year Ended June 30, 1999
<CAPTION>
<S> <C>
INVESTMENT INCOME
Dividends $ 256,921
Interest 36,402
-----------
Total investment income 293,323
EXPENSES
Investment advisory and management fees 280,242
Custody and accounting fees 117,390
Professional fees 8,150
Directors' fees and expenses 4,898
Other expenses 8,746
-----------
Total expenses 419,426
-----------
Net investment loss (126,103)
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 1,150,781
Change in net unrealized appreciation on investments 12,820,070
-----------
Net realized and unrealized gain on investments 13,970,851
-----------
Net increase in net assets resulting from operations $13,844,748
-----------
-----------
</TABLE>
SEE ACCOMPANYING NOTES.
34
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1999 1998
------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment loss $ (126,103) $ (3,025)
Net realized gain on investments 1,150,781 3,870,031
Change in net unrealized appreciation on investments 12,820,070 4,234,149
------------- --------------
Net increase in net assets resulting from operations 13,844,748 8,101,155
Distributions to shareholders from:
Net investment income - (35,592)
Net realized gain (4,108,321) (2,143,586)
------------- --------------
Total distributions to shareholders (4,108,321) (2,179,178)
Capital share transactions:
Proceeds from sales of shares 13,015,410 12,618,333
Proceeds from reinvested distributions 4,108,321 2,179,178
Cost of shares redeemed (9,093,677) (11,872,273)
------------- --------------
Net increase in net assets resulting from share transactions 8,030,054 2,925,238
------------- --------------
Total increase in net assets 17,766,481 8,847,215
NET ASSETS
Beginning of period 37,661,888 28,814,673
------------- --------------
End of period $55,428,369 $ 37,661,888
------------- --------------
------------- --------------
OTHER INFORMATION
Shares:
Sold 575,275 650,111
Issued through reinvestment of distributions 180,671 118,950
Redeemed (407,703) (629,133)
------------- --------------
Net increase 348,243 139,928
------------- --------------
------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES.
35
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------------
<S> <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
Income from investment operations:
Net investment income (loss) (0.06) -(a) 0.02 -(a) 0.01
Net realized and unrealized
gain on investments 7.17 4.90 4.13 1.74 3.48
------------- -------------- ------------- ------------- -------------
Total from investment
operations 7.11 4.90 4.15 1.74 3.49
Less distributions:
From net investment income - (0.02) -(a) (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
------------- -------------- ------------- ------------- -------------
------------- -------------- ------------- ------------- -------------
TOTAL RETURN 35.19% 29.11% 30.23% 13.59% 37.29%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
(in thousands) $55,428 $ 37,662 $ 28,815 $ 23,810 $ 16,393
Ratio of expenses to average
net assets 0.96% 0.95% 1.03% 1.04% 1.05%
Ratio of net investment income
(loss) to average net assets (0.29%) (0.01%) 0.14% 0.03% 0.13%
Portfolio turnover rate 27% 57% 46% 58% 31%
</TABLE>
(a) Less than $0.01 per share.
36
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Schedule of Investments
June 30, 1999
<TABLE>
<CAPTION>
Number
COMMON STOCKS (98.0%) of Shares Value
--------- -----------
<S> <C> <C>
BASIC CHEMICAL PLASTICS & SYNTHETICS (15.1%)
Abbott Laboratories 23,100 $ 1,051,050
Bristol-Myers Squibb Company 14,600 1,028,388
Colgate-Palmolive Company 9,300 918,375
Merck & Company, Inc. 15,400 1,139,600
Pfizer, Inc. 9,600 1,053,600
Schering-Plough 22,000 1,166,000
The Proctor & Gamble Company 10,000 892,500
Warner-Lambert Company 15,500 1,075,313
-----------
8,324,826
BUSINESS SERVICES (14.7%)
America Online, Inc.* 15,600 1,723,800
Automatic Data Processing, Inc. 23,000 1,012,000
Microsoft Corporation* 22,000 1,982,750
Sun Microsystems, Inc.* 14,600 1,006,031
The Interpublic Group of Companies, Inc.* 13,800 1,195,425
Yahoo! Inc.* 6,900 1,188,309
-----------
8,108,315
COMMUNICATIONS (2.5%)
MCI WorldCom, Inc.* 16,000 1,376,500
DEPOSITORY INSTITUTIONS (5.2%)
BankAmerica Corporation 11,990 879,017
Citigroup, Inc. 23,000 1,092,500
Wells Fargo Company 21,000 897,750
-----------
2,869,267
ELECTRICAL & ELECTRONIC MACHINERY (7.7%)
General Electric Company 15,500 1,751,500
Intel Corporation 22,600 1,343,993
Lucent Technologies, Inc. 17,000 1,146,438
-----------
4,241,931
FABRICATED METAL PRODUCTS (2.1%)
Illinois Tool Works, Inc. 14,400 1,180,800
FOOD & KINDRED PRODUCTS (1.4%)
The Coca-Cola Company 12,500 781,250
GENERAL MERCHANDISE STORES (5.1%)
Dayton Hudson Corporation 19,700 1,280,500
Wal-Mart Stores, Inc. 32,200 1,553,650
-----------
2,834,150
INDUSTRIAL MACHINERY & EQUIPMENT (9.4%)
Applied Materials, Inc.* 17,700 1,307,033
Cisco Systems, Inc.* 31,500 2,028,797
Dell Computer Corporation* 24,000 887,250
EMC Corporation* 18,000 990,000
-----------
5,213,080
INSTRUMENTS & RELATED PRODUCTS (2.2%)
Medtronic, Inc. 15,800 1,230,425
INSURANCE CARRIERS (1.9%)
American International Group, Inc. 9,187 1,075,453
<CAPTION>
Number
COMMON STOCKS (CONTINUED) of Shares Value
--------- -----------
<S> <C> <C>
MISC. MANUFACTURING INDUSTRIES (2.5%)
Tyco International Ltd. 14,500 $ 1,373,875
MOTION PICTURES (1.2%)
The Walt Disney Company 22,000 677,875
PRINTING & PUBLISHING (2.3%)
Time Warner, Inc. 17,600 1,293,600
RETAIL-BUILDING MATERIAL HARDWARE (2.6%)
The Home Depot, Inc. 22,000 1,417,625
RETAIL-FOOD STORES (4.1%)
Starbucks Corporation* 35,600 1,333,888
The Kroger Co.* 33,200 927,525
-----------
2,261,413
RETAIL - MISCELLANEOUS (2.2%)
Walgreen Company 41,000 1,204,375
SECURITY & COMMODITY BROKERS (8.4%)
Morgan Stanley, Dean Witter,
Discover and Company 13,800 1,414,500
The Charles Schwab Corporation 18,000 1,977,750
The Goldman Sachs Group, Inc. 17,000 1,228,250
-----------
4,620,500
TRANSPORTATION BY AIR (1.3%)
AMR Corporation* 10,300 702,975
WATER TRANSPORTATION (2.3%)
Carnival Corporation 26,000 1,261,000
WHOLESALE TRADE-DURABLE GOODS (2.0%)
Johnson & Johnson 11,100 1,087,800
WHOLESALE TRADE-NONDURABLE GOODS (1.8%)
Safeway, Inc.* 19,600 970,200
-----------
TOTAL COMMON STOCKS (Cost $28,196,496) 54,107,235
<CAPTION>
Principal
SHORT-TERM SECURITIES (2.0%) Amount
---------
<S> <C> <C>
REPURCHASE AGREEMENT (2.0%)
State Street Bank, 3.50%, due 7/01/1999
(Dated 6/30/1999, collateralized by U.S.
Treasury Note, 6.375%, due 8/15/2027,
value $1,237,600) $1,202,940
1,202,940
-----------
TOTAL SHORT -TERM SECURITIES (Cost $1,202,940) 1,202,940
-----------
TOTAL INVESTMENTS (100.0%) (Cost $29,399,436) $55,310,175
-----------
-----------
</TABLE>
*Non-income producing
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the
year ended June 30, 1999, aggregated $14,467,358 and $10,367,401,
respectively. At June 30, 1999, net unrealized appreciation for tax purposes
aggregated $25,678,898, of which $25,836,810 related to appreciated
investments and $157,912 related to depreciated investments. The aggregate
cost of securities was $29,631,277 for tax purposes.
SEE ACCOMPANYING NOTES.
37
<PAGE>
Scudder Kemper Value Portfolio
Statement of Assets and Liabilities
June 30, 1999
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investment in securities, at value (cost $41,741,982)--See accompanying schedule $50,167,232
Dividends and interest receivable 60,751
Receivable for investments sold 141,706
Receivable for capital shares sold 1,520
-----------
Total assets 50,371,209
LIABILITIES
Payable for investments purchased 52,357
Accounts payable and accrued expenses 20,653
Redemptions payable 128,794
-----------
Total liabilities 201,804
-----------
NET ASSETS $50,169,405
------------
------------
Net Assets consist of:
Paid-in capital $34,393,967
Undistributed net investment income 723,270
Accumulated undistributed net realized gain on investments 6,626,918
Net unrealized appreciation on investments 8,425,250
-----------
NET ASSETS, for 2,274,720 shares outstanding $50,169,405
------------
------------
NET ASSET VALUE, offering and redemption price per share $ 22.06
------------
------------
Statement of Operations
Year Ended June 30, 1999
<CAPTION>
<S> <C>
INVESTMENT INCOME
Dividends (net of foreign tax withheld of $2,157) $ 1,019,161
Interest 147,779
------------
Total investment income 1,166,940
EXPENSES
Investment advisory and management fees 297,742
Custody and accounting fees 124,885
Professional fees 7,399
Directors' fees and expenses 4,898
Other expenses 8,746
------------
Total expenses 443,670
------------
Net investment income 723,270
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 6,626,918
Change in net unrealized appreciation on investments 407,796
------------
Net realized and unrealized gain on investments 7,034,714
------------
Net increase in net assets resulting from operations $ 7,757,984
------------
------------
</TABLE>
SEE ACCOMPANYING NOTES.
38
<PAGE>
Scudder Kemper Value Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1999 1998
------------------ -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 723,270 $ 591,315
Net realized gain on investments 6,626,918 4,706,677
Change in net unrealized appreciation on investments 407,796 2,439,355
------------------ -----------------
Net increase in net assets resulting from operations 7,757,984 7,737,347
Distributions to shareholders from:
Net investment income (591,315) (408,549)
Net realized gain (4,706,677) (5,723,007)
------------------ -----------------
Total distributions to shareholders (5,297,992) (6,131,556)
Capital share transactions:
Proceeds from sales of shares 13,300,551 16,280,118
Proceeds from reinvested distributions 5,297,991 6,131,556
Cost of shares redeemed (17,325,011) (8,512,037)
------------------ -----------------
Net increase in net assets resulting from share transactions 1,273,531 13,899,637
------------------ -----------------
Total increase in net assets 3,733,523 15,505,428
NET ASSETS
Beginning of period 46,435,882 30,930,454
------------------ -----------------
End of period (including undistributed net investment income of $723,270
and $591,315, respectively) $ 50,169,405 $ 46,435,882
------------------ -----------------
------------------ -----------------
OTHER INFORMATION
Shares:
Sold 641,261 798,312
Issued through reinvestment of distributions 264,302 327,252
Redeemed (840,192) (415,791)
------------------ -----------------
Net increase 65,371 709,773
------------------ -----------------
------------------ -----------------
</TABLE>
SEE ACCOMPANYING NOTES.
39
<PAGE>
Scudder Kemper Value Portfolio
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- --------------- ------------- ------------- ------------
<S> <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
Income from investment operations:
Net investment income 0.33 0.26 0.26 0.18 0.26
Net realized and unrealized
gain on investments 3.22 4.08 5.04 3.70 1.85
-------------- --------------- ------------- ------------- ------------
Total from investment
operations 3.55 4.34 5.30 3.88 2.11
Less distributions:
From net investment income (0.28) (0.26) (0.19) (0.19) (0.14)
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)
-------------- --------------- ------------- ------------- ------------
Net asset value, end of period $ 22.06 $ 21.02 $ 20.63 $ 16.17 $ 12.59
-------------- --------------- ------------- ------------- ------------
-------------- --------------- ------------- ------------- ------------
TOTAL RETURN 18.09% 23.36% 33.78% 31.22% 19.98%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
(in thousands) $50,169 $ 46,436 $ 30,930 $ 19,705 $ 10,877
Ratio of expenses to average
net assets 0.96% 0.94% 1.05% 1.06% 1.13%
Ratio of expenses to average net
assets before voluntary
expense reimbursement 0.96% 0.94% 1.05% 1.07% 1.13%
Ratio of net investment income
to average net assets 1.56% 1.58% 1.62% 1.65% 1.98%
Ratio of net investment income
to average net assets before
voluntary expense
reimbursement 1.56% 1.58% 1.62% 1.64% 1.98%
Portfolio turnover rate 50% 57% 88% 18% 29%
</TABLE>
40
<PAGE>
Scudder Kemper Value Portfolio
Schedule of Investments
June 30, 1999
<TABLE>
<CAPTION>
Number
COMMON STOCKS (92.0%) of Shares Value
---------- ------------
<S> <C> <C>
APPAREL & OTHER FINISHED PRODUCTS (3.2%)
Liz Claiborne, Inc. 14,400 $ 525,600
VF Corporation 25,600 1,094,400
------------
1,620,000
BASIC CHEMICAL PLASTICS & SYNTHETICS (5.3%)
Air Products and Chemicals, Inc. 21,800 877,450
Dow Chemical Company 2,900 367,938
International Flavors & Fragrances, Inc. 11,000 488,125
Praxair, Inc. 18,700 915,131
------------
2,648,644
DEPOSITORY INSTITUTIONS (15.0%)
Bank of America Corporation 22,616 1,658,035
First Union Corporation 29,400 1,381,800
KeyCorp 32,100 1,031,213
PNC Bank Corporation 19,210 1,106,975
Washington Mutual, Inc. 35,388 1,251,850
Wells Fargo Company 24,300 1,038,825
------------
7,468,698
ELECTRICAL & ELECTRONIC MACHINERY (1.1%)
Thomas & Belts Corporation 12,200 576,450
FABRICATED METAL PRODUCTS (0.9%)
Crown Cork & Seal Company, Inc. 16,000 456,000
FOOD AND KINDRED PRODUCTS (3.2%)
Campbell Soup Company 12,000 556,500
H.J. Heinz Company 10,600 531,325
Hershey Foods Corporation 9,000 534,375
------------
1,622,200
FORESTRY (3.0%)
Georgia Pacific Timber Group 60,000 1,515,000
FURNITURE AND FIXTURES (2.2%)
Newell Rubbermaid, Inc. 24,200 1,125,300
GENERAL MERCHANDISE STORES (6.3%)
J. C. Penney Company, Inc. 18,300 888,694
May Department Stores Company 30,000 1,226,250
Sears, Roebuck and Company 23,000 1,024,936
------------
3,139,880
INDUSTRIAL MACHINERY & EQUIPMENT (7.6%)
Diebold, Inc. 39,000 1,121,250
Minnesota Mining and Manufacturing Co. 23,100 2,008,256
Pitney Bowes, Inc. 10,500 674,625
------------
3,804,131
<CAPTION>
Number
COMMON STOCKS (CONTINUED) of Shares Value
---------- ------------
<S> <C> <C>
INSTRUMENTS & RELATED PRODUCTS (2.0%)
Raytheon Company 7,500 $ 527,813
Xerox Corporation 8,000 472,500
------------
1,000,313
INSURANCE CARRIERS (6.0%)
American General Corporation 16,500 925,575
The Allstate Corporation 25,800 1,243,688
The Chubb Corporation 12,300 854,850
------------
3,024,113
LUMBER &WOOD PRODUCTS (2.7%)
Louisiana-Pacific Corporation 56,700 1,346,625
MISC. MANUFACTURING INDUSTRIES (1.0%)
Tyco International Ltd. 5,542 525,105
NONDEPOSITORY INSTITUTIONS (8.7%)
Fannie Mae 31,600 2,160,650
Freddie Mac 37,800 2,192,400
------------
4,353,050
OIL & GAS EXTRACTION (2.5%)
Atlantic Richfield Company 15,000 1,253,438
PAPER & ALLIED PRODUCTS (3.3%)
Sonoco Products Company 55,700 1,667,519
PETROLEUM & COAL PRODUCTS (6.4%)
BP Amoco PLC 16,178 1,755,313
Chevron Corporation 5,000 475,938
Exxon Corporation 12,700 979,487
------------
3,210,738
RAILROAD TRANSPORTATION (1.8%)
Burlington Northern Santa Fe 12,600 390,600
CSX Corporation 11,300 512,031
------------
902,631
RETAIL-FOOD STORES (1.0%)
Albertson's Inc. 10,000 515,625
TEXTILE MILL PRODUCTS (1.0%)
Sara Lee Corporation 20,500 465,094
TOBACCO MANUFACTURERS OR CIGAR (4.0%)
Philip Morris Companies, Inc. 49,800 2,001,338
TRANSPORTATION EQUIPMENT (2.8%)
Ford Motor Company 25,000 1,410,938
WHOLESALE TRADE- NON DURABLE GOODS (1.0%)
Du Pont (E.I.) de Nemours and Company 7,200 491,850
------------
TOTAL COMMON STOCKS (COST $37,719,430) $46,144,680
</TABLE>
41
<PAGE>
Scudder Kemper Value Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
Principal
SHORT-TERM SECURITIES (8.0%) Amount Value
---------- ------------
<S> <C> <C>
REPURCHASE AGREEMENT (8.0%)
State Street Bank, 3.50%, due 7/1/1999
(Dated 6/30/1999, collateralized by U.S
Treasury Note, 6.375%, due 8/15/2027,
value $4,123,600) $4,022,552 $ 4,022,552
------------
TOTAL SHORT-TERM SECURITIES (Cost $4,022,552) 4,022,552
------------
TOTAL INVESTMENTS (100.0%) (Cost $41,741,982) $ 50,167,232
------------
------------
</TABLE>
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the
year ended June 30, 1999, aggregated $21,214,099 and $17,014,579 respectively.
At June 30, 1999, net unrealized appreciation for tax purposes aggregated
$8,425,250 of which $9,038,626 related to appreciated investments and $613,376
related to depreciated investments. The aggregate cost of securities was the
same for book and tax purposes.
SEE ACCOMPANYING NOTES.
42
<PAGE>
Zweig Asset Allocation Portfolio
Statement of Assets and Liabilities
June 30, 1999
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investment in securities, at value (cost $28,404,713)--See accompanying schedule $31,053,568
Dividends and interest receivable 37,176
---------------
Total assets 31,090,744
LIABILITIES
Cash overdraft 315
Accounts payable and accrued expenses 35,951
Redemptions payable 44,908
---------------
Total liabilities 81,174
---------------
NET ASSETS $31,009,570
---------------
---------------
Net Assets consist of:
Paid-in capital $21,938,751
Undistributed net investment income 411,239
Accumulated undistributed net realized gain on investments 5,999,328
Net unrealized appreciation on investments and futures contracts 2,660,252
---------------
NET ASSETS, for 2,216,983 shares outstanding $31,009,570
---------------
---------------
NET ASSET VALUE, offering and redemption price per share $ 13.99
---------------
---------------
Statement of Operations
Year Ended June 30, 1999
<CAPTION>
<S> <C>
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $7,314) $ 478,001
Interest 378,557
--------------
Total investment income 856,558
EXPENSES
Investment advisory and management fees 324,109
Custody and accounting fees 98,372
Professional fees 9,194
Directors' fees and expenses 4,898
Other expenses 8,746
--------------
Total expenses 445,319
--------------
Net investment income 411,239
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on:
Investments 5,325,269
Futures contracts 629,759
--------------
Net realized gain 5,955,028
Change in net unrealized appreciation (depreciation) on:
Investment securities (8,994,160)
Futures contracts 55,697
--------------
Change in net unrealized appreciation (depreciation) (8,938,463)
--------------
Net realized and unrealized loss on investments (2,983,435)
--------------
Net decrease in net assets resulting from operations $(2,572,196)
--------------
--------------
</TABLE>
SEE ACCOMPANYING NOTES.
43
<PAGE>
Zweig Asset Allocation Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1999 1998
------------------- ----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 411,239 $ 365,323
Net realized gain on investments 5,955,028 6,354,477
Change in net unrealized appreciation (depreciation) (8,938,463) 1,999,669
---------------- -------------
Net increase (decrease) in net assets resulting from operations (2,572,196) 8,719,469
Distributions to shareholders from:
Net investment income (365,323) (529,058)
Net realized gain (6,048,315) -
---------------- -------------
Total distributions to shareholders (6,413,638) (529,058)
Capital share transactions:
Proceeds from sales of shares 1,260,662 4,280,221
Proceeds from reinvested distributions 6,413,638 529,058
Cost of shares redeemed (15,129,106) (8,397,497)
---------------- -------------
Net decrease in net assets resulting from share transactions (7,454,806) (3,588,218)
---------------- -------------
Total increase (decrease) in net assets (16,440,640) 4,602,193
NET ASSETS
Beginning of period 47,450,210 42,848,017
---------------- -------------
End of period (including undistributed net investment income
of $411,239 and $365,323, respectively) $31,009,570 $ 47,450,210
---------------- -------------
---------------- -------------
OTHER INFORMATION
Shares:
Sold 84,700 258,491
Issued through reinvestment of distributions 488,856 32,534
Redeemed (1,059,406) (517,480)
---------------- -------------
---------------- -------------
Net decrease (485,850) (226,455)
---------------- -------------
---------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
44
<PAGE>
Zweig Asset Allocation Portfolio
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- ------------- ------------- ------------- ------------
<S> <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
Income (loss) from investment operations:
Net investment income 0.21 0.14 0.19 0.21 0.33
Net realized and unrealized
gain (loss) on investments (1.04) 2.97 2.20 1.21 1.33
-------------- ------------- ------------- ------------- ------------
Total from investment
operations (0.83) 3.11 2.39 1.42 1.66
Less distributions:
From net investment income (0.16) (0.18) (0.22) (0.33) (0.08)
From net realized gain (2.58) - (1.65)
- -
-------------- ------------- ------------- ------------- ------------
Total distributions (2.74) (0.18) (1.87) (0.33) (0.08)
-------------- ------------- ------------- ------------- ------------
Net asset value, end of period $13.99 $ 17.56 $ 14.63 $ 14.11 $ 13.02
-------------- ------------- ------------- ------------- ------------
-------------- ------------- ------------- ------------- ------------
TOTAL RETURN (3.73%) 21.38% 18.63% 11.06% 14.57%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
(in thousands) $31,010 $47,450 $42,848 $40,222 $36,736
Ratio of expenses to average
net assets 1.23% 1.18% 1.28% 1.25% 1.20%
Ratio of net investment income
to average net assets 1.13% 0.80% 1.29% 1.55% 2.73%
Portfolio turnover rate 109% 65% 89% 105% 45%
</TABLE>
45
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments
June 30, 1999
<TABLE>
<CAPTION>
Number
COMMON STOCKS (55.8%) of Shares Value
---------- -----------
<S> <C> <C>
APPAREL & OTHER FINISHED PRODUCTS (0.3%)
Tommy Hilfiger Corporation (a) 800 $ 58,800
Jones Apparel Group, Inc. (a) 1,200 41,175
-----------
99,975
BASIC CHEMICAL PLASTICS & SYNTHETIC (0.5%)
Occidental Petroleum Corporation 800 16,900
Dow Chemical Company 600 76,125
MedImmune, Inc. (a) 700 47,534
The Valspar Corporation 600 22,800
-----------
163,359
BUSINESS SERVICES (1.6%)
American Management Systems, Inc. (a) 2,900 92,891
BMC Software, Inc. (a) 300 16,191
Citrix Systems, Inc. (a) 800 45,075
Computer Associates International, Inc. 500 27,500
DST Systems, Inc. (a) 900 56,588
Electronic Arts, Inc. (a) 100 5,413
Modis Professional Services, Inc. (a) 500 6,875
Rational Software Corporation (a) 600 19,781
SEI Investments Company 100 8,828
Siebel Systems, Inc. (a) 800 53,025
Sterling Software, Inc. (a) 6,600 176,136
-----------
508,303
COMMUNICATIONS (1.3%)
Telefonos de Venezuela 2,000 54,500
PT Telekomunikasi Indonesia 2,268 28,208
Telefonos de Mexico SA 3,800 307,088
-----------
389,796
DEPOSITORY INSTITUTIONS (3.2%)
Astoria Financial Corporation 1,000 43,906
Bank United Corporation 600 24,094
Citigroup, Inc. 2,750 130,625
Coast Federal (a) 1,000 1,094
Firstar Corporation 900 25,200
Golden State Bancorp, Inc. (a) 2,300 50,600
Golden State Bancorp, Inc. (a) 5,500 7,305
Golden West Financial Corporation 2,800 274,400
Providian Financial Corporation 400 37,400
Republic New York Corporation 600 40,913
The Chase Manhattan Corporation 4,000 346,498
-----------
982,035
EATING & DRINKING PLACES (2.1%)
Brinker International, Inc. (a) 11,800 320,812
Darden Restaurants, Inc. (b) 7,400 161,413
Foodmaker, Inc. (a) 6,000 170,250
-----------
652,475
ELECTRIC GAS & SANITARY SERVICE (4.0%)
Allegheny Energy, Inc. 2,700 86,569
Cinergy Corporation 1,300 41,600
DTE Energy Company (b) 3,600 144,000
Edison International 8,000 214,000
Energy East Corporation 2,800 72,800
Florida Progress Corporation 800 33,050
GPU, Inc. 6,800 286,875
OGE Energy Corporation 600 14,250
PECO Energy Company 2,000 83,750
PG&E Corporation 1,100 35,750
PP&L Resources, Inc. 2,777 85,393
Public Service Enterprise Group
Corporation, Inc. 700 28,613
Unicom Corporation 900 34,706
UtiliCorp United, Inc. 3,300 80,231
Westcoast Energy, Inc. 800 15,800
-----------
1,257,387
<CAPTION>
Number
COMMON STOCKS (CONTINUED) of Shares Value
---------- -----------
<S> <C> <C>
ELECTRICAL & ELECTRONIC MACHINERY (1.1%)
Lattice Semiconductor Corporation (a) 100 $ 6,211
Maytag Corporation 1,000 69,688
Nokia Oyj-Sponsored ADR 600 54,938
Sony Corporation 500 55,188
Texas Instruments, Inc. 400 58,000
Whirlpool Corporation 1,400 103,600
----------
347,625
FABRICATED METAL PRODUCTS (0.5%)
Ball Corporation 1,400 59,150
Fortune Brands, Inc. 2,200 91,025
----------
150,175
FOOD & KINDRED PRODUCTS (0.9%)
Adolph Coors Company 2,500 123,750
Anheuser-Busch Companies, Inc. 1,800 127,687
Quaker Oats Company 500 33,188
----------
284,625
FORESTRY (0.5%)
Georgia Pacific Company 1,400 66,325
Weyerhaeuser Company 1,300 89,375
----------
155,700
FURNITURE & FIXTURES (1.4%)
Furniture Brands International, Inc. (a) 10,700 298,263
Johnson Controls, Inc. 900 62,381
Lear Corporation (a) 800 39,800
Leggett & Platt, Inc. 1,300 36,156
----------
436,600
GENERAL BUILDING CONTRACTORS (1.5%)
Centex Corporation 11,600 435,725
Clayton Homes, Inc. 1,800 20,588
Lennar Corporation 1,000 24,000
----------
480,313
GENERAL MERCHANDISE STORES (2.4%)
Kmart Corporation (a) 12,200 200,538
Dayton Hudson Corporation 900 58,500
Dillard's, Inc. 700 24,588
Federated Department Stores, Inc. (a) 1,900 100,581
J.C. Penny Company, Inc. 500 24,281
Wal-Mart Stores, Inc. 7,000 337,750
----------
746,238
HOLDING & OTHER INVESTMENT OFFICES (1.6%)
Apartment Investment & Management Co. 1,200 51,300
CarrAmerica Realty Corporation 800 20,000
Cornerstone Properties, Inc. 1,500 23,813
Crescent Real Estate Equities Company 2,300 54,620
Duke-Weeks Realty Corporation 1,000 22,563
Equity Office Properties Trust 1,700 43,563
General Growth Properties 1,100 39,050
Kimco Realty Corporation 1,100 43,038
Liberty Property Trust 7,300 181,588
Spieker Properties, Inc. 600 23,325
----------
502,860
INDUSTRIAL MACHINERY & EQUIPMENT (2.5%)
Adaptec, Inc. (a) 800 28,225
Apple Computer (a) 2,400 111,300
Black & Decker Corporation 800 50,500
Briggs & Stratton Corporation 900 51,975
Cummins Engine Company, Inc. 600 34,275
Electronics for Imaging, Inc. (a) 300 15,355
Hewlett-Packard Company 300 30,150
Ingersoll-Rand Company 1,200 77,550
</TABLE>
46
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
Number
COMMON STOCKS (CONTINUED) of Shares Value
---------- -----------
<S> <C> <C>
INDUSTRIAL MACHINERY & EQUIPMENT (CONTINUED)
International Business Machines Corp. 1,900 $ 245,575
Lexmark International Group, Inc. (a) 1,000 66,063
New Holland N.V. 1,600 27,400
Pall Corporation 900 19,969
YORK International Corporation 700 29,969
-----------
788,306
INSTRUMENTS & RELATED PRODUCTS (0.8%)
Mallinckrodt, Inc. 2,700 98,213
Northrop Grumman Corporation 1,400 92,838
Waters Corporation (a) 1,100 58,438
-----------
249,489
INSURANCE CARRIERS (2.9%)
Aetna, Inc. 400 35,775
Ambac Financial Group, Inc. 4,200 239,925
Conseco, Inc. 800 24,350
Equitable Companies, Inc. 400 26,800
Everest Reinsurance Holdings, Inc. 1,800 58,725
Financial Security Assurance Holding Ltd. 1,200 62,400
Hartford Life, Inc. 500 26,313
Liberty Financial Companies, Inc. 1,400 40,775
Lincoln National Corporation 1,000 52,310
Nationwide Financial Services, Inc. 600 27,150
PacifiCare Health Systems, Inc. (a) 1,200 86,363
The Hartford Financial Services Group, Inc. 900 52,481
The PMI Group, Inc. 1,000 62,813
Travelers Property Casualty Corporation 800 31,300
Trigon Healthcare, Inc. (a) 1,300 47,288
United HealthCare Corporation 300 18,788
-----------
893,556
LUMBER & WOOD PRODUCTS EXCEPT (0.2%)
Louisiana-Pacific Corporation 2,500 59,375
-----------
MISC. MANUFACTURING INDUSTRIES (1.6%)
Tiffany & Company 1,100 106,150
Tyco International Ltd. 4,000 379,000
-----------
485,150
NONDEPOSITORY INSTITUTIONS (1.2%)
Countrywide Credit Industries, Inc. 1,000 42,750
Freddie Mac 5,000 290,000
The CIT Group, Inc. 900 25,988
The FINOVA Group, Inc. 400 21,050
-----------
379,788
OIL AND GAS EXTRACTION (0.6%)
Amerada Hess Corporation 1,500 89,250
Apache Corporation 600 23,400
Atlantic Richfield Company 300 25,069
Kerr McGee Corporation 500 25,090
USX-Marathon Group, Inc. 600 19,538
-----------
182,347
PAPER & ALLIED PRODUCTS (1.0%)
Kimberly-Clark Corporation 1,500 85,500
Temple-Inland, Inc. 1,200 81,900
The Mead Corporation 600 25,050
Westvaco Corporation 1,800 52,200
Willamette Industries, Inc. 1,700 78,306
-----------
322,956
PERSONAL SERVICES (0.2%)
H & R Block, Inc. 1,100 55,000
<CAPTION>
Number
COMMON STOCKS (CONTINUED) of Shares Value
---------- -----------
<S> <C> <C>
PETROLEUM & COAL PRODUCTS (0.5%)
ENI SpA 300 $ 18,000
Murphy Oil Corporation 500 24,406
Royal Dutch Petroleum Company 400 24,100
Shell Transport & Trading Company 1,200 55,650
The Coastal Corporation 500 20,000
-----------
142,156
PRIMARY METAL INDUSTRIES (0.1%)
CommScope, Inc. (a) 900 27,675
PRINTING & PUBLISHING (0.2%)
Knight Ridder, Inc. 1,100 60,431
RAILROAD TRANSPORTATION (0.1%)
Union Pacific Corporation 700 40,819
RETAIL-APPAREL & ACCESSORIES (2.9%)
American Eagle Outfitters, Inc. (a) 1,000 45,531
AnnTaylor Stores Corporation (a) 1,900 85,500
Claire's Stores, Inc. 2,100 53,813
Ross Stores, Inc. 9,200 462,588
The Gap, Inc. 3,450 173,794
The TJX Companies, Inc. 2,200 73,288
-----------
894,514
RETAIL-BUILDING MATERIALS (0.2%)
Lowe's Companies, Inc. 500 28,344
The Home Depot, Inc. 400 25,775
-----------
54,119
RETAIL-FURNITURE HOME FURNISH (0.2%)
Best Buy Co., Inc. (a) 400 27,000
Tandy Corporation 600 29,325
-----------
56,325
RETAIL-MISCELLANEOUS (0.6%)
CDW Computer Centers, Inc. (a) 300 13,219
Longs Drug Stores Corporation 1,600 55,300
Toys `R' Us, Inc. (a) 1,000 20,688
Zale Corporation (a) 2,500 100,000
-----------
189,207
RUBBER & MISC. PLASTICS PRODUCTS (1.1%)
Armstrong World Industries, Inc. 1,000 57,813
Cooper Tire & Rubber Company 2,200 51,975
Premark International, Inc. 6,000 225,000
-----------
334,788
SECURITY & COMMODITY (1.6%)
A.G. Edwards, Inc. 450 14,513
Legg Mason, Inc. 800 30,800
Lehman Brothers Holdings, Inc. 1,000 62,250
Merrill Lynch & Co., Inc. 1,000 79,938
Morgan Stanley, Dean Witter,
Discover and Company 1,600 164,000
Paine Webber Group, Inc. 1,100 51,425
T. Rowe Price Associates, Inc. 1,600 61,350
The Bear Stearns Companies, Inc. 1,000 46,750
-----------
511,026
SERVICES-AMUSEMENT EXCL MOTION PICTURES (0.2%)
Harrah's Entertainment, Inc. (a) 3,100 68,200
</TABLE>
47
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
Number
COMMON STOCKS (CONTINUED) of Shares Value
---------- -----------
<S> <C> <C>
SERVICES-HEALTH SERVICES (0.3%)
Columbia/HCA Healthcare Corporation 2,300 $ 52,469
Universal Health Services, Inc. (a) 700 33,425
-----------
85,894
STONE CLAY & GLASS PRODUCTS (3.3%)
Lafarge Corporation 4,000 141,750
Lone Star Industries, Inc. 1,900 71,369
Owens Corning 1,100 37,813
Southdown, Inc. 6,000 385,500
USG Corporation 7,200 403,200
-----------
1,039,632
TEXTILE MILL PRODUCTS (0.9%)
BJ's Wholesale Club, Inc. (a) 900 27,056
Mohawk Industries, Inc. (a) 7,950 241,481
-----------
268,537
TRANSIT & PASSENGER TRANSPORTATION (0.1%)
Canadian National Railway Company 400 26,800
TRANSPORTATION BY AIR (1.2%)
Delta Air Lines, Inc. (b) 3,400 195,925
KLM Royal Dutch Airlines N.V. 34 971
Southwest Airlines Company 5,200 161,850
-----------
358,746
TRANSPORTATION EQUIPMENT (7.0%)
Brunswick Corporation 13,200 367,950
Cordant Technologies, Inc. 6,800 307,275
DaimlerChrysler AG 1 44
FMC Corporation (a) 1,300 88,806
Ford Motor Company (b) 7,700 434,569
General Dynamics Corporation 1,000 68,500
Honda Motor Co., Ltd. 100 8,675
Navistar International Corporation (a) 8,000 400,000
PACCAR, Inc. 7,500 400,547
Rockwell International Corporation 900 54,675
TRW, Inc. 1,000 54,875
-----------
2,185,916
WHOLESALE TRADE-DURABLE GOODS (0.3%)
Borg-Warner Automotive, Inc. 1,600 88,000
WHOLESALE TRADE-NONDURABLE GOODS (1.1%)
Boise Cascade Corporation 5,200 222,950
Du Pont (E.I.) de Nemours & Co. 800 54,650
SUPERVALU, Inc. 2,300 59,081
-----------
336,681
TOTAL COMMON STOCKS (Cost $14,694,045) 17,342,899
<CAPTION>
Principal
SHORT-TERM SECURITIES (44.2%) Amount Value
---------- -----------
<S> <C> <C>
U.S. GOVERNMENT AGENCY (42.5%)
Federal Home Loan Bank Consolidation
Discount Note, 4.75%, due 7/7/1999 $1,220,000 $1,219,034
Federal Home Loan Mortgage
Discount Note, 4.75%, due 7/9/1999 790,000 789,166
Federal Home Loan Mortgage
Discount Note, 4.75%, due 7/14/1999 780,000 778,663
Federal Home Loan Mortgage
Discount Note, 5.03%, due 8/14/1999 2,120,000 2,107,263
Federal National Mortgage
Association Discount Note, 4.79%,
due 7/19/1999 2,850,000 2,843,174
Federal National Mortgage
Association Discount Note, 5.01%,
due 7/28/1999 5,460,000 5,439,484
-----------
13,176,784
U.S. GOVERNMENT OBLIGATIONS (0.3%)
U.S. Treasury Bills, 4.43%,
due 8/19/1999 (b) 100,000 99,397
REPURCHASE AGREEMENT (1.4%)
State Street Bank, 3.50%, due 7/1/199
(Dated 6/30/1999, collateralized by
U.S. Treasury Note, 8.750%, due
8/15/2020, value $445,400) 434,488 434,488
-----------
TOTAL SHORT-TERM SECURITIES (Cost $ 13,710,668) 13,710,669
-----------
TOTAL INVESTMENTS (100.0%) (Cost $28,404,713) $31,053,568
-----------
-----------
</TABLE>
(a) Non-income producing.
(b) Portion of the security was pledged to cover margin
requirements for futures contracts. At the period end,
the value of the securities pledged amounted
to $1,035,304.
FUTURES CONTRACTS
<TABLE>
Expiration Contract Unrealized
Date Amount Gain
------------- ------------- -------------
<S> <C> <C> <C>
2 S&P 500 Index
Futures Contracts-Long Sept. 1999 $690,850 $11,397
</TABLE>
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for
the year ended June 30, 1999, aggregated $31,117,136 and $45,887,091,
respectively. At June 30, 1999, net unrealized appreciation for tax
purposes aggregated $2,648,855, of which $2,866,642 related to appreciated
investments and $237,787 related to depreciated investments. The aggregate
cost of securities was the same for book and tax purposes.
SEE ACCOMPANYING NOTES.
48
<PAGE>
Zweig Equity (Small Cap) Portfolio
Statement of Assets and Liabilities
June 30, 1999
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $10,205,577)--See accompanying schedule, $10,991,519
Dividends, interest and other receivables 9,712
Receivable for investments sold 1,514
Receivable for capital shares sold 13,650
-------------------
Total assets 11,016,395
LIABILITIES
Redemptions payable 22,019
-------------------
Total liabilities 22,019
-------------------
NET ASSETS $10,994,376
-------------------
-------------------
Net Assets consist of:
Paid-in capital 10,364,895
Undistributed net investment income 87,679
Accumulated net realized loss on investments (244,280)
Net unrealized appreciation on investments and futures contracts 786,082
-------------------
NET ASSETS, for 903,196 shares outstanding $10,994,376
-------------------
-------------------
NET ASSET VALUE, offering and redemption price per share $ 12.17
-------------------
-------------------
</TABLE>
Statement of Operations
Year Ended June 30, 1999
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $345) $ 133,215
Interest 145,776
-------------------
Total investment income 278,991
EXPENSES
Investment advisory and management fees 129,719
Custody and accounting fees 50,365
Professional fees 9,592
Directors' fees and expenses 4,898
Other expenses 8,745
-------------------
Total expenses before reimbursement 203,319
Less: expense reimbursement (12,007)
-------------------
Net expenses 191,312
-------------------
Net investment income 87,679
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on:
Investments (205,488)
Futures contracts (38,722)
-------------------
Net realized loss (244,210)
Change in net unrealized appreciation (depreciation) on investment securities:
Investments (1,560,913)
Futures contracts 140
-------------------
Change in net unrealized depreciation (1,560,773)
-------------------
Net realized and unrealized loss on investments (1,804,983)
-------------------
Net decrease in net assets resulting from operations $ (1,717,304)
-------------------
-------------------
SEE ACCOMPANYING NOTES.
</TABLE>
49
<PAGE>
Zweig Equity (Small Cap) Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 87,679 $ 34,791
Net realized gain (loss) on investments (244,210) 3,021,050
Change in net unrealized appreciation (depreciation) (1,560,773) (316,405)
----------------- -----------------
Net increase (decrease) in net assets resulting from operations (1,717,304) 2,739,436
Distributions to shareholders from:
Net investment income (34,791) (103,886)
Net realized gain (3,046,182) (473,364)
----------------- -----------------
Total distributions to shareholders (3,080,973) (577,250)
Capital share transactions:
Proceeds from sales of shares 2,936,546 4,519,161
Proceeds from reinvested distributions 3,080,973 577,250
Cost of shares redeemed (4,913,316) (3,731,320)
----------------- -----------------
Net increase in net assets resulting from share transactions 1,104,203 1,365,091
----------------- -----------------
Total increase (decrease) in net assets (3,694,074) 3,527,277
NET ASSETS
Beginning of period 14,688,450 11,161,173
----------------- -----------------
End of period (including undistributed net investment income of $87,679
and $34,791, respectively) $10,994,376 $14,688,450
----------------- -----------------
----------------- -----------------
OTHER INFORMATION
Shares:
Sold 192,871 281,798
Issued through reinvestment of distributions 257,324 35,368
Redeemed (382,755) (233,008)
----------------- -----------------
Net increase 67,440 84,158
----------------- -----------------
----------------- -----------------
</TABLE>
SEE ACCOMPANYING NOTES.
50
<PAGE>
Zweig Equity (Small Cap) Portfolio
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning $ 17.58 $ 14.85 $ 13.61 $ 11.62 $10.65
of period
Income from investment operations:
Net investment income 0.10 0.04 0.16 0.11 0.17
Net realized and unrealized
gain (loss) on investments (1.80) 3.48 2.41 2.04 0.93
--------------- ------------- -------------- ------------- --------------
Total from investment operations (1.70) 3.52 2.57 2.15 1.10
Less distributions:
From net investment income (0.04) (0.14) (0.14) (0.16) (0.06)
From net realized gain (3.67) (0.65) (1.19) - (0.07)
--------------- ------------- -------------- ------------- --------------
Total distributions (3.71) (0.79) (1.33) (0.16) (0.13)
--------------- ------------- -------------- ------------- --------------
Net asset value, end of period $ 12.17 $ 17.58 $ 14.85 $ 13.61 $11.62
--------------- ------------- -------------- ------------- --------------
--------------- ------------- -------------- ------------- --------------
TOTAL RETURN (9.24%) 23.72% 20.37% 18.69% 10.39%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $10,994 $14,688 $11,161 $11,698 $8,034
Ratio of expenses to average net assets 1.54% 1.52% 1.55% 1.55% 1.55%
Ratio of expenses to average net assets
before voluntary expense
Reimbursement 1.64% 1.56% 1.82% 1.83% 1.59%
Ratio of net investment income
to average net assets 0.71% 0.26% 0.97% 1.06% 1.54%
Ratio of net investment income to
average net assets before voluntary
expense reimbursement 0.61% 0.22% 0.70% 0.78% 1.50%
Portfolio turnover rate 76% 113% 59% 101% 67%
</TABLE>
51
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments
June 30, 1999
<TABLE>
<CAPTION>
NUMBER
COMMON STOCKS (61.4%) OF SHARES VALUE
---------- -----------
<S> <C> <C>
AGRICULTURAL SERVICES (0.1%)
Veterinary Centers of America, Inc. (a)
500 $ 6,766
APPAREL & OTHER FINISHED PRODUCTS (0.1%)
Oshkosh B'Gosh, Inc. 700 14,634
BASIC CHEMICAL PLASTICS & SYNTHETICS (1.8%)
Albemarle Corporation 3,200 74,000
Alpharma, Inc. 100 3,556
Church & Dwight, Inc. 300 13,050
Cytec Industries, Inc. (a) 300 9,563
H. B. Fuller Company 400 27,338
Lubrizol Corporation 100 2,725
Medicis Pharmaceutical Corporation (a) 500 12,687
Roberts Pharmaceutical Corporation (a) 500 12,125
The Scotts Company (a) 100 4,762
The Valspar Corporation 300 11,400
W.R. Grace & Company (a) 200 3,675
-----------
174,881
BUSINESS SERVICES (2.8%)
ADVO, Inc. (a) 400 8,300
American Management Systems, Inc. (a) 800 25,625
Avant! Corporation (a) 400 5,037
IMRglobal Corporation (a) 300 5,794
Interim Services, Inc. (a) 700 14,438
Jack Henry & Associates, Inc. 100 3,913
Lason, Inc. (a) 600 29,850
Mercury Interactive Corporation (a) 100 3,544
NCO Group, Inc. (a) 700 26,512
Orbotech Ltd. (a) 600 30,937
Personnel Group of America, Inc. (a) 700 7,000
Progress Software Corporation (a) 1,200 34,124
Rent-A-Center, Inc. (a) 800 19,175
Sterling Software, Inc. (a) 400 10,675
Symantec Corporation (a) 1,900 48,509
-----------
273,433
COMMUNICATIONS (0.1%)
Telefonos de Venezuela 300 8,175
DEPOSITORY INSTITUTIONS (3.8%)
Bank United Corporation 700 28,109
City National Corporation 200 7,487
Coast Federal (a) 300 328
Dime Community Bancshares 400 9,250
First Republic Bank (a) 200 5,788
FirstFed Financial Corporation (a) 2,000 38,500
Flagstar Bancorp, Inc. 1,100 27,705
Harbor Florida Bancorp, Inc. 1,200 14,663
MAF Bancorp, Inc. 1,275 30,879
Mid-America Bancorp 6 148
Oriental Financial Group, Inc. 300 7,237
PFF Bancorp, Inc.(a) 700 13,191
Queens County Bancorp, Inc. 700 22,641
Republic Bancorp, Inc. 2,125 32,405
Roslyn Bancorp, Inc. 5,360 92,292
U.S. Trust Corporation 300 27,750
Washington Federal, Inc. 570 $12,772
Webster Financial Corporation 400 10,875
----------
382,020
EATING & DRINKING PLACES (2.8%)
Applebee's International, Inc. 100 3,025
Bob Evans Farms, Inc. 900 17,859
Brinker International, Inc. (a) 1,900 51,656
CEC Entertainment, Inc. (a) 1,200 50,700
Foodmaker, Inc. (a) 3,000 85,125
Ruby Tuesday, Inc. 2,700 51,300
Ryan's Family Steak Houses, Inc. 1,500 17,391
----------
277,056
ELECTRIC GAS & SANITARY SERVICES (1.0%)
Aqua Alliance, Inc. (a) 1,400 1,400
Calpine Corporation (a) 500 27,000
OGE Energy Corporation 100 2,375
Rochester Gas & Electric Corporation 2,500 66,406
Safety-Kleen Corporation (a) 200 3,625
----------
100,806
ELECTRICAL & ELECTRONICS MACHINERY (1.5%)
CTS Corporation 700 49,000
Genlyte Group, Inc. (a) 1,400 31,456
Imation Corporation (a) 200 4,963
Moog, Inc. (a) 300 10,312
SLI, Inc. (a) 100 2,700
Standard Motor Products 400 9,800
The DII Group, Inc. (a) 100 3,719
TranSwitch Corporation (a) 650 30,773
Triumph Group, Inc. (a) 400 10,200
----------
152,923
FABRICATED METAL PRODUCTS (2.0%)
Ball Corporation 1,700 71,825
Mark IV Industries, Inc. 300 6,337
NCI Building Systems, Inc. (a) 700 14,963
Nortek, Inc. (a) 400 12,525
Tower Automotive, Inc. (a) 2,100 53,419
United Dominion Industries Ltd. 1,100 26,675
----------
185,744
FOOD & KINDRED PRODUCTS (1.4%)
Canandaigua Brands, Inc. (a) 1,200 62,887
Corn Products International, Inc. 100 3,044
IBP, Inc. 1,400 33,250
Imperial Holly Corporation 1 4
Smithfield Foods, Inc. (a) 1,300 43,266
----------
142,451
FURNITURE & FIXTURES (1.2%)
BE Aerospace, Inc.(a) 800 14,975
Ethan Allen Interiors, Inc. 150 5,662
Furniture Brands International, Inc. (a) 2,900 80,838
La-Z-Boy, Inc. 700 16,100
----------
117,575
</TABLE>
52
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
Number
of
COMMON STOCKS (CONTINUED) Shares Value
------------ -----------
<S> <C> <C>
GENERAL BUILDING CONTRACTORS (2.5%)
Clayton Home, Inc. 1,600 $ 18,300
Crossman Communities, Inc. (a) 600 17,381
Del Webb Corporation 700 16,713
Fairfield Communities, Inc. (a) 500 8,063
Kaufman & Broad Home Corporation 1,200 29,850
Lennar Corporation 300 7,200
M.D.C. Holdings, Inc. 400 8,600
McGrath Rentcorp 200 3,925
NVR, Inc. (a) 300 15,656
Pulte Corporation 3,200 73,800
Standard Pacific Corporation 1,300 16,819
The Ryland Group, Inc. 600 17,812
Toll Brothers, Inc. (a) 600 12,862
U.S. Home Corporation (a) 400 14,200
-----------
261,181
GENERAL MERCHANDISE STORES (1.0%)
99 Cents Only Stores (a) 200 9,988
Ames Department Stores, Inc. (a) 1,100 50,119
Shopko Stores, Inc. (a) 800 29,000
The Neiman Marcus Group, Inc. (a) 300 7,706
-----------
96,813
HEAVY CONSTRUCTION CONTRACTORS (0.1%)
Morrison Knudsen Corporation (a) 900 9,281
HOLDING & OTHER INVESTMENTS OFFICES (4.5%)
Bradley Real Estate, Inc. 500 10,375
Brandywine Realty Trust 600 11,888
Camden Property Trust 300 8,325
CarrAmerica Realty Corporation 500 12,500
CBL & Associates Properties, Inc. 2,500 65,938
Cornerstone Properties, Inc. 800 12,700
Developers Diversified Realty Corporation 600 9,975
Essex Property Trust, Inc. 400 14,150
General Growth Properties 1,600 56,800
Glenbourough Realty Trust, Inc. 600 10,500
Health Care REIT, Inc. 400 9,300
Liberty Property Trust 2,900 72,137
Mack-Cali Realty Corporation 400 12,375
MGI Properties, Inc. 300 8,475
Pacific Gulf Properties, Inc. 400 9,050
Pan Pacific Retail Properties, Inc. 400 7,750
Prentiss Properties Trust 400 9,400
Reckson Associates Realty Corporation 700 16,450
RFS Hotel Investors, Inc. 1,200 15,075
Taubman Centers, Inc. 3,000 39,562
The Rouse Company 500 12,687
TriNet Corporate Realty Trust, Inc. 400 11,075
Urban Shopping Centers, Inc. 300 9,450
-----------
445,937
HOTELS & OTHER LODGING (0.1%)
Extended Stay America, Inc. (a) 300 3,600
INDUSTRIAL MACHINERY & EQUIPMENT (3.8%)
Astec Industries, Inc. (a) 800 32,900
Briggs & Stratton Corporation 1,100 63,525
Donaldson Company, Inc. 500 12,250
Lincoln Electric Holdings 200 4,150
SPS Technologies, Inc. (a) 1,300 48,750
Tecumseh Products Company 300 18,159
Terex Corporation (a) 1,200 36,525
The Manitowoc Company, Inc. 2,225 92,616
Xircom, Inc. (a) 1,400 42,131
YORK International Corporation 1,100 47,094
-----------
398,100
INSTRUMENTS & RELATED PRODUCTS (1.2%)
Fossil, Inc. (a) 2,250 108,563
ResMed, Inc. (a) 200 6,631
-----------
115,194
INSURANCE AGENTS BROKERS (0.2%)
E. W. Blanch Holdings, Inc. 300 20,456
INSURANCE CARRIERS (2.8%)
National Western Life Insurance Co. (a) 100 9,712
Everest Reinsurance Holdings, Inc. 400 13,050
FBL Financial Group, Inc. 700 13,650
Financial Security Assurance Holding Ltd. 1,300 67,600
Hartford Life, Inc. 100 5,263
HCC Insurance Holding, Inc. 400 9,075
Liberty Financial Companies, Inc. 1,200 34,950
Medical Assurance, Inc. (a) 293 8,277
Nationwide Financial Services, Inc. 400 18,100
Radian Group, Inc. 833 40,675
Stewart Information Services
Corporation 500 10,563
Triad Guaranty, Inc. (a) 1,200 21,525
Trigon Healthcare, Inc. (a) 600 21,825
UICI (a) 500 13,813
-----------
288,078
LEATHER & LEATHER PRODUCTS (0.2%)
The Timberland Company (a) 300 20,419
LIVESTOCK (0.5%)
Michael Foods, Inc. 1,300 30,388
Pilgrim's Pride Corporation 700 21,000
-----------
51,388
LUMBER & WOOD PRODUCTS (0.9%)
Champion Enteprises, Inc. (a) 1,200 22,350
MacMillan Bloedel Ltd. 1,200 21,713
TJ International, Inc. 1,400 43,225
-----------
87,288
MISC. MANUFACTURING INDUSTRIES (0.1%)
Callaway Golf Company 200 2,925
MOTION PICTURES (0.2%)
Hollywood Entertainment Corporation (a) 900 17,578
NONDEPOSITORY INSTITUTIONS (1.3%)
Doral Financial Corporation (b) 4,200 72,319
Healthcare Financial Partners, Inc. (a) 400 13,700
Metris Companies, Inc. 400 16,300
Resource Bancshares Mortgage Group, Inc. 3,100 31,581
-----------
133,900
OIL & GAS EXTRACTION (0.1%)
Equitable Resources, Inc. 100 3,775
PAPER & ALLIED PRODUCTS (0.3%)
Wausau-Mosinee Paper Corporation 1 11
Chesapeake Corporation 900 33,694
Domtar, Inc. 100 950
-----------
34,655
</TABLE>
53
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
Number
COMMON STOCKS (CONTINUED) of Shares Value
----------- -----------
<S> <C> <C>
PETROLEUM & COAL PRODUCTS (0.3%)
Elcor Corporation 300 $13,106
Murphy Oil Corporation 300 14,644
-----------
27,750
PRIMARY METAL PRODUCTS (1.5%)
AFC Cable Systems, Inc. (a) 1,200 42,375
CommScope, Inc. (a) 1,200 36,900
Curtiss-Wright Corporation 200 7,775
General Cable Corporation (a) 800 12,800
Internet Corporation 1,200 18,075
Mueller Industries, Inc. (a) 200 6,788
Roanoke Electric Steel Corporation 50 867
Tredegar Industries, Inc. 1,050 22,837
-----------
148,417
PRINTING & PUBLISHING (0.9%)
Merrill Corporation 1,500 21,282
Quebecor Printing, Inc. 300 6,506
World Color Press, Inc. (a) 2,200 60,500
-----------
88,288
RAILROAD TRANSPORTATION (0.1%)
Florida East Coast Industries, Inc. 300 13,275
REAL ESTATE (0.4%)
Castle & Cooke, Inc. (a) 400 7,050
Catellus Development Corporation (a) 1,700 26,350
U.S. Restaurant Properties, Inc. 400 8,500
-----------
41,900
RETAIL-APPAREL & ACCESSORIES (2.2%)
American Eagle Outfitters, Inc. (a) 1,400 63,744
Ann Taylor Stores Corporation (a) 1,600 72,000
The Buckle, Inc. (a) 650 18,688
The Cato Corporation 2,400 27,900
Claire's Stores, Inc. 1,300 33,313
Pacific Sunwear of California, Inc. (a) 1,200 29,287
The Talbot's, Inc. 100 3,812
-----------
248,744
RETAIL-MISCELLANEOUS (1.4%)
Micro Warehouse, Inc. (a) 200 3,550
Trans World Entertainment Corporation (a) (b) 3,800 42,513
Zale Corporation (a) (b) 2,300 92,000
-----------
138,063
RUBBER & MISC PLASTICS PRODUCTS (0.6%)
Cooper Tire & Rubber Company 1,700 40,162
Spartech Corporation 700 22,138
-----------
62,300
SECURITY & COMMODITY BROKERS (0.2%)
Legg Mason, Inc. 400 15,400
SERVICES AMUSEMENT EXCL MOTION (0.3%)
Bally Total Fitness Holding Corporation (a) 1,200 34,050
SERVICES-AUTO REPAIR GARAGES (0.7%)
Avis Rent A Car, Inc. (a) 1,800 52,425
Rollins Truck Leasing Corporation 1,600 17,800
-----------
70,225
SERVICES-ENGINEERING ACCOUNTING (0.4%)
Jacobs Engineering Group, Inc. (a) 400 15,200
URS Corporation (a) 700 20,519
-----------
35,719
SERVICES-HEALTH SERVICES (0.5%)
Hooper Holmes, Inc. 1,100 22,413
Universal Health Services, Inc. (a) 500 23,875
-----------
46,288
SPECIAL TRADE CONTRACTORS (0.8%)
Dycom Industries, Inc. (a)
1,450 $81,200
STONE CLAY & GLASS PRODUCTS (1.3%)
Centex Construction Products, Inc. 1,200 40,950
Cristalerias de Chile - ADR 300 4,631
Lone Star Industries, Inc. 2,300 86,394
-----------
131,975
TEXTILE MILL PRODUCTS (0.2%)
BJ's Wholsale Club, Inc. (a) 200 6,013
Mohawk Industries, Inc. (a) 400 12,150
Springs Industries, Inc. 100 4,362
-----------
22,525
TRANSPORTATION BY AIR (1.2%)
America West Holdings Corporation (a) 3,300 62,288
Midwest Express Holdings, Inc. (a) 250 8,500
Sky West, Inc. (b) 1,900 47,203
-----------
117,991
TRANSPORTATION EQUIPMENT (4.4%)
A.O. Smith Corporation 450 12,600
Arvin Industries, Inc. (b) 2,200 83,324
Avondale Industries, Inc. (a) 2,300 89,844
Cordant Technologies, Inc. 1,800 81,338
JLG Industries, Inc. 600 12,225
MotivePower Industries, Inc. (a) (b) 3,350 60,300
Newport News Shipbuilding Inc. 500 14,750
Thor Industires, Inc. 300 8,513
Varlen Corporation 1,450 58,453
Winnebago Industries 1,000 22,500
-----------
443,847
TRUCKING & WAREHOUSING (2.4%)
CNF Transportion, Inc. 100 3,838
M.S. Carriers, Inc. (a) 2,400 71,175
US Freightways Corporation 2,300 105,872
Werner Enterprises, Inc. 3,025 62,768
-----------
243,653
WATER TRANSPORTATION (0.3%)
Alexander & Baldwin, Inc. 500 11,094
Sea Containers, Ltd. 700 23,494
-----------
34,588
WHOLESALE TRADE - DURABLE GOOD (2.0%)
Action Performance Companies, Inc. (a) 400 13,188
Borg-Warner Automotive, Inc. 1,300 71,500
Crane Co. 200 6,288
Hughes Supply, Inc. 500 14,843
Insight Enterprises, Inc. (a) 3,075 76,010
Simpson Manufacturing Co., Inc. (a) 300 14,250
-----------
196,079
WHOLESALE TRADE - NONDURABLE GOOD (0.9%)
Fresh Del Monte Produce, Inc. (a) 700 9,888
Handleman Company (a) 1,200 14,175
Myers Industries, Inc. 700 14,000
The Men's Wearhouse, Inc. (a) 100 2,568
United Stationers, Inc. (a) 2,300 50,672
Valhi, Inc. 200 2,225
-----------
93,528
-----------
TOTAL COMMON STOCKS (Cost $5,376,895) 6,162,837
</TABLE>
54
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
Principal
Amount Value
----------- -----------
<S> <C> <C>
SHORT-TERM SECURITIES (38.6%)
U.S. GOVERNMENT OBLIGATIONS (34.5%)
U.S. Treasury Bill, 4.365%, due
7/29/1999 (b) $ 50,000 $ 49,830
Federal Home Loan Mortgage,
Discount Notes, 4.760% due 7/2/1999 500,000 499,934
Federal Home Loan Mortgage
Discount Notes, 5.030%, due 8/12/1999 1,330,000 1,322,195
Federal National Mortgage Association
Discount Notes, 4.790%, due 7/19/1999 1,560,000 1,556,264
Federal National Mortgage Association
Discount Notes, 5.010%, due 7/28/99 1,000,000 996,243
-----------
4,424,466
REPURCHASE AGREEMENT (4.1%)
State Street Bank, 3.50%, due 7/1/1999
(Dated 6/30/1999, collateralized by
U.S. Treasury Note, 7.875%,
due 2/15/2021, value $414,000) 404,216 404,216
-----------
TOTAL SHORT-TERM SECURITIES (Cost $4,828,682) 4,828,682
-----------
TOTAL INVESTMENTS (100.0%) (Cost $10,205,577) $10,991,519
===========
</TABLE>
(a) Non-income producing.
(b) A portion of the security was pledged to cover margin
requirements for futures contracts. At the period end,
the value of the securities pledged amounted to $413,943.
FUTURES CONTRACTS
<TABLE>
<CAPTION>
EXPIRATION CONTRACT UNREALIZED
DATE AMOUNT GAIN
----------- ----------- -----------
<S> <C> <C> <C>
1 S&P 500 Index
Futures Contract-Long Sept. 1999 $345,425 $140
</TABLE>
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the
year ended June 30, 1999, aggregated $7,148,996 and $11,773,858, respectively.
At June 30, 1999, net unrealized appreciation for tax purposes aggregated
$781,696, of which $1,010,231 related to appreciated investments and $228,535
related to depreciated investments. The aggregate cost of securities was
$10,209,823 for tax purposes.
SEE ACCOMPANYING NOTES.
55
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements
June 30, 1999
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The Legends Fund, Inc. (the "Fund") was formed on July 22, 1992. The Fund is
registered under the Investment Company Act of 1940 (the "1940 Act") as an
open-end management investment company. As of June 30, 1999, the Fund had four
investment portfolios (the "Portfolios"): Harris Bretall Sullivan & Smith Equity
Growth, Scudder Kemper Value, Zweig Asset Allocation, and Zweig Equity (Small
Cap). ARM Securities Corporation ("ARM Securities"), a registered broker-dealer
under the Securities Exchange Act of 1934 and a member of the National
Association of Securities Dealers, Inc., distributes shares of the Fund to a
variable annuity separate account of both Integrity Life Insurance Company
("Integrity") and its wholly owned subsidiary, National Integrity Life Insurance
Company ("National Integrity"). Integrity Capital Advisors, Inc. ("Integrity
Capital Advisors"), registered with the Securities and Exchange Commission as an
investment adviser, provides management services to the Fund pursuant to a
management agreement (the "Management Agreement") effective July 10, 1998.
ARM Financial Group, Inc. ("ARM") is the ultimate parent of Integrity Capital
Advisors, Integrity, National Integrity, and ARM Securities. ARM specializes in
the growing asset accumulation business with particular emphasis on retirement
savings and investment products. At June 30, 1999, ARM had approximately $10.4
billion of assets under management.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") for investment companies.
SECURITY VALUATION
Stocks that are traded on a national exchange are valued at the last sale price
on the exchange on which they are primarily traded, or, if there is no sale, at
the mean between the current bid and asked prices. Over-the-counter securities
for which market quotations are readily available are valued at the mean of the
current bid and asked prices.
56
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Short-term debt securities with remaining maturities of 61 days or more for
which reliable quotations are readily available are valued at current market
quotations. Short-term investments with remaining maturities of 60 days or less
are valued using the amortized cost method of valuation, which approximates
market value. Bonds and other fixed-income securities (other than short-term
securities described above) are valued using market quotations provided by a
pricing service under procedures approved by the Fund's Board of Directors.
Futures contracts and options thereon traded on a commodities exchange or board
of trade are valued at the closing settlement price. Futures and option
positions or any other securities or assets for which reliable market quotations
are not readily available or for which valuation cannot be provided by a pricing
service approved by the Board of Directors of the Fund are valued at fair value
as determined in good faith by the Board of Directors.
SECURITY TRANSACTIONS
Securities transactions are accounted for as of the trade date. Interest income
is accrued daily. Dividend income is recorded on the ex-dividend date. Premiums
and discounts on securities purchased are amortized using the effective interest
method. Realized gains and losses on sales of investments are determined on the
basis of nearest average for all of the Portfolios except Zweig Asset
Allocation, which uses the first-in, first-out method.
FEDERAL INCOME TAX MATTERS
The Fund complied with the requirements of the Internal Revenue Code applicable
to regulated investment companies and distributes its taxable net investment
income and net realized gains sufficient to relieve it from all, or
substantially all, federal income, excise and state income taxes. Therefore, no
provision for federal or state income tax is required. The Zweig Equity (Small
Cap) Portfolio has a capital loss carryforward of $239,894, which expires in
2007.
DIVIDEND DISTRIBUTIONS
Dividends from net investment income and distributions from net realized gains
are declared and distributed annually. Dividends and distributions are recorded
on the ex-dividend date. All dividends are reinvested in additional full and
fractional shares of the related Portfolios.
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principles.
These differences, which may result in distribution reclassifications, are
primarily due to differing treatments for futures transactions, passive foreign
investment companies, capital losses, and losses deferred due to wash sales.
57
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FUTURES CONTRACTS
Certain Portfolios may enter into futures contracts to protect against adverse
movement in the price of securities in the Portfolio or to enhance investment
performance. When entering into a futures contract, changes in the market price
of the contracts are recognized as unrealized gains or losses by marking each
contract to market at the end of each trading day through a variation margin
account. When a futures contract is closed, the Portfolios record a gain or loss
equal to the difference between the value of the contract at the time it was
opened and the value at the time it was closed. The face amount of the futures
contracts shown in the Schedule of Investments reflects each contract's value at
June 30, 1999.
The use of futures contracts involves, to varying degrees, elements of market
risk in excess of the amount recognized in the Statement of Assets and
Liabilities. The Portfolios bear the market risk that arises from any changes in
contract values.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with institutions that the Fund's
investment manager, Integrity Capital Advisors, has determined are creditworthy
pursuant to criteria adopted by the Board of Directors. Each repurchase
agreement is recorded at cost. The Fund requires that the securities purchased
in a repurchase transaction be transferred to the custodian in a manner
sufficient to enable the Fund to obtain those securities in the event of a
default under the repurchase agreement. The value of the securities transferred
is monitored daily to ensure that the value, including accrued interest, of the
securities under each repurchase agreement is equal to or greater than amounts
owed to the Fund under each repurchase agreement.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
58
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements (continued)
2. INVESTMENT ADVISORY AGREEMENTS AND PAYMENTS TO RELATED PARTIES
Integrity Capital Advisors, the Fund's investment adviser, has entered into a
sub-advisory agreement with a registered investment adviser ("Sub-Adviser") for
each of the Portfolios. Integrity Capital Advisors, not the Fund, pays the
sub-advisory fee to each of the Sub-Advisers.
Listed below are management and sub-advisory fees payable as a percentage of
average daily net assets:
<TABLE>
<CAPTION>
PORTFOLIO MANAGEMENT FEE SUB-ADVISORY FEE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Harris Bretall Sullivan & Smith Equity Growth 0.65% 0.40%
Scudder Kemper Value 0.65% 0.40%
Zweig Asset Allocation 0.90% 0.65%
Zweig Equity (Small Cap) 1.05% 0.80%
</TABLE>
Under the Management Agreement, Integrity Capital Advisors provides certain
management services to the Fund, and the Fund is responsible for certain of its
direct operating expenses. Integrity Capital Advisors has voluntarily agreed to
reimburse each of the Portfolios for operating expenses (excluding management
fees) above an annual rate of 0.5% of average daily net assets. Integrity
Capital Advisors has reserved the right to withdraw or modify its policy of
expense reimbursement for the Portfolios.
Certain officers and directors of the Fund are also officers of ARM, ARM
Securities, Integrity Capital Advisors, Integrity, and National Integrity. The
Fund does not pay any amounts to compensate these individuals.
3. CAPITAL SHARES
At June 30, 1999, the Fund had authority to issue one billion (1,000,000,000)
shares of common stock, $.001 par value each, in any class or classes as
determined by the Board of Directors. At such date, four classes of shares
authorized by the Board of Directors were being offered as follows: 55,000,000
shares each for Harris Bretall Sullivan & Smith Equity Growth, Scudder Kemper
Value, Zweig Asset Allocation, and Zweig Equity (Small Cap).
At June 30, 1999, Integrity, through its variable annuity Separate Account II,
and National Integrity, through its variable annuity Separate Account II, were
the record owners of all the outstanding shares of the Fund.
59
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements (continued)
4. SHAREHOLDER MEETINGS
A Special Meeting of Shareholders of the Zweig Asset Allocation Portfolio and
Zweig Equity (Small Cap) Portfolio was held on March 30, 1999. Each matter voted
upon at that meeting, as well as the number of votes cast for, against or
withheld, the number of abstentions, and the number of broker non-votes with
respect to such matters, are set forth below:
(1) The Zweig Asset Allocation Portfolio shareholders approved a new
sub-advisory agreement and a new sub-advisory servicing agreement
by and among Zweig/Glaser Advisors, certain of its affiliates and
Zweig Consulting LLC.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
------------------------ --------------------- --------------------- ----------------------
<S> <C> <C> <C>
2,628,798.08 191,438.169 - -
</TABLE>
(2) The Zweig Equity (Small Cap) Portfolio shareholders approved a new
sub-advisory agreement and a new sub-advisory servicing agreement
by and among Zweig/Glaser Advisors, certain of its affiliates and
Zweig Consulting LLC.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
------------------------ --------------------- --------------------- ----------------------
<S> <C> <C> <C>
923,814.47 124,537.706 - -
</TABLE>
5. SUBSEQUENT EVENTS RELATING TO ARM AND INTEGRITY
On July 29, 1999, ARM announced that it is restructuring its institutional
business and positioning its retail business and technology operations for the
sale of ARM. ARM's efforts to find a buyer have been unsuccessful. As a result,
ARM has sought protection with respect to its insurance subsidiary, Integrity,
from the Ohio Department of Insurance. Integrity is domiciled in Ohio. On August
20, 1999, Integrity consented to a Supervision Order issued by the Ohio
Department of Insurance. The Supervision Order will remain in effect for 60
days. Unless the Ohio Department of Insurance begins proceedings for the
appointment of a rehabilitator or liquidator, the Supervision Order may
automatically be extended for successive 60-day periods until written notice is
given to Integrity ending the supervision.
This regulatory action is intended to ensure an orderly process for addressing
the financial obligations of Integrity and to protect the interests of its
individual policyholders. ARM believes that Integrity has adequate assets to
meet its obligations to individual retail policyholders. Integrity will continue
payments of death benefits, previously scheduled systematic withdrawals,
previously scheduled immediate annuity payments, and agent commissions, but must
receive written consent from the Ohio Department of Insurance for other
payments. In particular, the Supervision Order suspends the processing of
surrenders of policies except in cases of approved
60
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements (continued)
5. SUBSEQUENT EVENTS RELATING TO ARM AND INTEGRITY (CONTINUED)
hardship. Integrity intends to seek appropriate relief to the extent necessary
from the Securities and Exchange Commission to effectuate the suspension of
surrenders.
The possibility exists that National Integrity could be placed under
rehabilitation by the New York Department of Insurance if the New York
Department believes that such action is necessary or appropriate to protect the
interests of policyholders. New York is the domiciliary state of National
Integrity.
The Board of Directors of ARM is continuing to explore all strategic
alternatives, including the sale of ARM's subsidiaries or its businesses. There
can be no assurance that a transaction for the sale of ARM's insurance
subsidiaries or its businesses will be developed or consummated or as to the
price or value that might be obtained.
If ARM is unable to find a suitable buyer for its subsidiaries or its businesses
or receive a significant infusion of capital from an investor or investors, then
ARM's ability to continue as a going concern is in substantial doubt. Without
the financial strength of a buyer or investor, ARM will likely not have adequate
levels of capital to service its obligations, including the $38 million debt and
$75 million of preferred stock. There can be no assurance that ARM will be able
to obtain sufficient capital to meet its liquidity needs. Accordingly, ARM is
considering all of the options available to it, including a possible bankruptcy
filing at the holding company level.
Integrity Capital is a wholly owned subsidiary of ARM. Integrity Capital is
dependent on ARM for its employees, overhead and services provided. The Board of
Directors is monitoring the situation involving ARM. Pursuant to an Investment
Management Agreement, Integrity Capital's operations are administered and
managed by ARM. Following the July 29, 1999 announcement, certain of ARM's
insurance subsidiaries' ratings were lowered by four significant rating
agencies. If ARM were to liquidate under federal or state bankruptcy laws, there
can be no assurance that Integrity Capital would be able to provide services
under the agreement mentioned above.
61
<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.
62
