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Registration Nos. 33-50434 and 811-7084
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.__
Post-Effective Amendment No. 12 X
-- --
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 13 X
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THE LEGENDS FUND, INC.
(Exact Name of Registrant as Specified in Charter)
515 West Market Street
Louisville, Kentucky 40202
(Address of Registrant's Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: 1-800-325-8583
Kevin L. Howard, Esq. Copies to:
515 West Market Street Joel H. Goldberg, Esq.
Louisville, KY 40202 Swidler Berlin Shereff Friedman, LLP
(Name and Address of Agent for Service) The Chrysler Building
405 Lexington Avenue
New York, New York 10174
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It is proposed that this filing will become effective (check appropriate box):
___ immediately upon filing pursuant to paragraph (b)
___ on (date) pursuant to paragraph (b)
___ 60 days after filing pursuant to paragraph (a)(1)
_X on November 1, 2000 pursuant to paragraph (a)(1)
___ 75 days after filing pursuant to paragraph (a)(2)
___ on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
__ this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
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PROSPECTUS
THE LEGENDS FUND, INC.
NOVEMBER 1, 2000
The Legends Fund, Inc. (the "Fund") is an open-end management investment company
with four portfolios 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
- Third Avenue Value Portfolio (formerly Scudder Kemper Value Portfolio)
- Gabelli Large Cap Value Portfolio (formerly Zweig Asset Allocation
Portfolio)
- Baron Small Cap Portfolio (formerly 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.
280929.6
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TABLE OF CONTENTS
<TABLE>
<S> <C>
SECTION 1. -RISK/RETURN SUMMARY..............................................3
Investment Objectives and Strategies...........................................3
Principal Risks................................................................3
Annual Returns.................................................................4
SECTION 2. -THE FUND.........................................................8
Investment Objectives, Principal Investment Strategies and Related Risks.......8
Harris Bretall Sullivan & Smith Equity Growth Portfolio........................8
Third Avenue Value Portfolio...................................................8
Gabelli Large Cap Value Portfolio..............................................8
Baron Small Cap Portfolio......................................................9
Principal Investment Risks....................................................10
Other Investments and Strategies..............................................10
SECTION 3. -PERFORMANCE.....................................................11
SECTION 4. - MANAGEMENT OF THE FUND.........................................11
The Manager, Sub-Advisers and Distributor.....................................11
Management Fees...............................................................12
SECTION 5. -SHAREHOLDER INFORMATION.........................................14
Purchase and Redemption of Shares.............................................14
Valuation Of Shares...........................................................14
Dividends and Distributions...................................................14
Tax Consequences of Investing in the Fund.....................................14
FINANCIAL HIGHLIGHTS..........................................................15
</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.
280929.6
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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.
THIRD AVENUE VALUE PORTFOLIO seeks long-term capital appreciation. It invests
mainly by acquiring common stocks of well-financed companies (meaning companies
without significant debt in comparison to their cash resources) at a substantial
discount to what the sub-adviser believes is their true value.
GABELLI LARGE CAP VALUE PORTFOLIO seeks long-term capital appreciation. It
invests primarily in common stocks of large, well-known, widely-held, high
quality companies that have a market capitalization of greater than $5 billion.
Companies of this type are often referred to as "Blue Chip" companies.
BARON SMALL CAP PORTFOLIO seeks long-term capital appreciation. It invests
primarily in common stocks of smaller companies with market values under $2
billion selected for their capital appreciation potential.
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 generally rank behind creditors and holders of preferred
stock for payment in the event of the bankruptcy of a stock issuer.
Securities held in the Portfolios, their share prices and returns are subject to
fluctuation. Investments in equity securities in general are subject to market
risks that may cause their prices to fluctuate over time. In addition, it may
take a substantial period of time before stocks in the Portfolios realize their
growth potential.
An investment in the stock of a company represents ownership in that company.
Therefore, the Portfolios participate in the successes and failures of the
companies in which they hold stock.
Some of the Portfolios may invest in certain industry sectors, for example, the
financial industries sector or the healthcare sector. Financial, economic,
business and other developments affecting issuers in those sectors may have a
greater effect on those portfolios than if they had not focused their assets in
a particular sector. Fundamental investment policies, however, prohibit
investing more than 25% of net assets in any one industry.
The Third Avenue Value Portfolio is non-diversified. This generally means that
the Portfolio will have fewer investments than diversified mutual funds of
comparable size. Non-diversified funds can be more volatile than diversified
funds. The Third Avenue Value Portfolio may also invest in companies with small
capitalizations, whose securities tend to more volatile than those of larger
companies.
The Third Avenue Value Portfolio and the Baron Small Cap Portfolio may invest in
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
investment 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
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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 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.
Effective November 1, 2000, the following changes were made in three of the
Fund's Portfolios:
- THIRD AVENUE VALUE PORTFOLIO -- EQSF Advisers, Inc. replaced Scudder Kemper
Investments, Inc. as Sub-Adviser and the name of the Portfolio was changed
from Scudder Kemper Value Portfolio to Third Avenue Value Portfolio.
- GABELLI LARGE CAP VALUE PORTFOLIO -- Gabelli Asset Management Company
replaced Phoenix/Zweig Advisers as Sub-Adviser and the name of the
Portfolio was changed from Zweig Asset Allocation Portfolio to Gabelli
Large Cap Value Portfolio.
- BARON SMALL CAP PORTFOLIO -- BAMCO, Inc. replaced Phoenix/Zweig Advisers as
Sub-Adviser and the name of the Portfolio was changed from Zweig Equity
(Small Cap) Portfolio to Baron Small Cap Portfolio.
THE PERFORMANCE INFORMATION BELOW REFLECTS THE PERFORMANCE OF EACH OF THE ABOVE
PORTFOLIO'S PREVIOUS SUB-ADVISERS PRIOR TO NOVEMBER 1, 2000. For the calendar
years shown in the bar chart, the highest and lowest returns for a quarter for
each Portfolio were: Harris Bretall Sullivan & Smith Equity Growth Portfolio:
highest quarter: 4th quarter 1998 34.54%; lowest quarter: 3rd quarter 1998
(13.12%); Third Avenue Value Portfolio: highest quarter: 4th quarter 1998
16.34%; lowest quarter: 3rd quarter 1999 (14.07%); Gabelli Large Cap Value
Portfolio : highest quarter: 4th quarter 1998 13.16%; lowest quarter: 3rd
quarter 1998 (19.31%); Baron Small Cap Portfolio: highest quarter: 4th quarter
1998 13.20%; lowest quarter: 3rd quarter 1998 (18.90%).
[NOTE: BAR CHARTS WILL BE UPDATED WHEN WE SEND THE PROSPECTUS TO THE PRINTER.]
[CHART]
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[CHART]
[CHART]
5
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[CHART]
Total return for the period from June 30, 1999 through June 30, 2000 was 18.89%
for the Harris Bretall Sullivan & Smith Equity Growth Portfolio, (23.88)% for
the Third Avenue Value Portfolio, (0.52)% for the Gabelli Large Cap Value
Portfolio, and (3.52)% for the Baron Small Cap Portfolio. THE PERFORMANCE
INFORMATION FOR THE THIRD AVENUE VALUE PORTFOLIO, GABELLI LARGE CAP VALUE
PORTFOLIO, AND THE BARON SMALL CAP PORTFOLIO REFLECTS THE PERFORMANCE OF EACH OF
THESE PORTFOLIOS' PREVIOUS SUB-ADVISERS, WHICH WERE CHANGED EFFECTIVE
NOVEMBER 1, 2000.
Sales charges and account fees are not reflected in the bar chart. If those
amounts were reflected, returns would be less than those shown.
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Average Annual Total Returns
For the period ending June 30, 2000
<TABLE>
<CAPTION>
PORTFOLIO 1YEAR 5 YEAR SINCE INCEPTION DATE OF
INCEPTION
<S> <C> <C> <C> <C>
Harris Bretall Sullivan & Smith
Equity Growth Portfolio 18.89% 22.00% 19.91% December 8, 1992
Third Avenue Value Portfolio*
-23.88% 14.05% 12.95% December 14, 1992
Gabelli Large Cap Value
Portfolio* -0.52% 7.81% 9.73% December 14, 1992
Baron Small Cap Portfolio* -3.52% 9.23% 8.40% December 14, 1992
S&P 500 -Registered Trademark- ** 7.25% 18.00% 31.26%
Russell 2000
-Registered Trademark- *** 14.32% 14.27% 13.60%
Value Line Geometric Index**** -12.43% 7.11% 13.76%
</TABLE>
*Performance shown reflects that of each of the Portfolio's prior sub-adviser.
** The S&P 500 -Registered Trademark- 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, Third Avenue Value Portfolio and Gabelli Large Cap Value Portfolio.
***The Russell 2000 -Registered Trademark- is a widely recognized unmanaged
index of smaller companies. The Russell 2000 -Registered Trademark- is the
benchmark for the Baron Small Cap Portfolio. "Since Inception" average annual
total return is from December 31, 1992 to June 30, 2000.
**** 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 was the benchmark for the Baron Small Cap
Portfolio until November 1, 2000.
--------------------------
The Portfolios' past performance does not necessarily indicate how they will
perform in the futur
7
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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.
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.
THIRD AVENUE VALUE PORTFOLIO seeks long-term capital appreciation. This
Portfolio seeks to achieve its objective mainly by acquiring common stocks of
well-financed companies (companies without significant debt in comparison to
their cash resources) at a substantial discount to what the Sub-Adviser believes
is their true value. The Portfolio also seeks to acquire senior securities, such
as preferred stocks and debt instruments, that it believes are undervalued.
Acquisitions of these senior securities will generally be limited to those
providing (1) protection against the issuer taking certain actions which could
reduce the value of the security and (2) above-average current yields, yields to
events (e.g., acquisitions and recapitalizations), or yields to maturity. The
Portfolio invests in companies regardless of market capitalization. It also
invests in both domestic and foreign securities. The mix of the Portfolio's
investments at any time will depend on the industries and types of securities
the Sub-Adviser believes hold the most value.
GABELLI LARGE CAP VALUE PORTFOLIO seeks long-term capital appreciation. Under
normal market conditions, the Portfolio invests at least 65% of its assets in
common stocks of Blue Chip companies which the Sub-Adviser believes are
undervalued and have the potential to achieve significant capital appreciation.
Undervaluation of the stock of an established company with good intermediate and
longer-term fundamentals can result from a variety of factors, such as a lack
of investor recognition of:
- the underlying value of a company's assets,
- the value of a consumer or commercial franchise,
- changes in the economic or financial environment affecting the company,
- new, improved or unique products or services,
- new or rapidly expanding markets,
- technological developments or advancements affecting the company or its
products, or
- changes in governmental regulation, political climate or competitive
conditions.
Additionally, undervaluation may result from:
- poor management decisions which result in a low return on the company's
assets,
- short-term earnings problems, or
- a difficult near-term operating or economic environment affecting the
company's business.
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The actual events that may lead to a significant increase in the value of a
company's securities include:
- earnings surprises relative to analysts' expectations,
- the company's development of new, improved or unique products and services,
- a change in the company's management or management policies,
- an investor's purchase of a large portion of the company's stock,
- a merger or reorganization or recapitalization of the company,
- a sale of a division of the company,
- a tender offer (an offer to purchase investors' shares),
- the spin-off to shareholders of a subsidiary, division or other substantial
assets, or
- the retirement or death of a senior officer or substantial shareholder of
the company.
In general, the Sub-Adviser seeks to take advantage of investors' tendency to
overemphasize near-term events by investing in companies which are temporarily
undervalued and which may return to a significantly higher valuation. In
selecting investments, the Sub-Adviser will consider factors such as the market
price of the issuer's securities, earnings expectations, earnings and price
histories, balance sheet characteristics and perceived management skills. The
Sub-Adviser will also consider changes in economic and political outlooks as
well as individual corporate developments. The Sub-Adviser will sell any
Portfolio investments which lose their perceived value relative to other
investments.
The Portfolio's assets will be invested primarily in a broad range of readily
marketable equity securities consisting primarily of common stocks. Many of the
common stocks the Portfolio will buy will be bought for the potential that their
prices will increase, providing capital appreciation for the Portfolio. The
value of common stocks will fluctuate due to many factors, including the past
and predicted earnings of the issuer, the quality of the issuer's management,
general market conditions, the forecasts for the issuer's industry and the value
of the issuer's assets. Holders of common stocks only have rights to value in
the company after all debts have been paid, and they could lose their entire
investment in a company that encounters financial difficulty.
The Portfolio may also use the following investment technique:
Defensive Investments. When adverse market or economic conditions occur, the
Portfolio may temporarily invest all or a portion of its assets in defensive
investments. Such investments include high grade debt securities, obligations of
the U.S. Government and its agencies or instrumentalities or high quality
short-term money market instruments. When following a defensive strategy, the
Portfolio will be less likely to achieve its investment goal.
BARON SMALL CAP PORTFOLIO seeks long-term capital appreciation. In making
investment decisions for the Portfolio, the Sub-Adviser seeks securities that it
believes have:
1. favorable price to value characteristics based on the Sub-Adviser's
assessment of their prospects for future growth and profitability.
2. the potential to increase in value at least 50% over two subsequent
years.
The Portfolio invests primarily in common stocks but may also invest in other
equity or equity-linked securities such as convertible bonds and debentures,
preferred stocks, warrants and convertible preferred stocks. Securities are
selected for their capital appreciation potential, and investment income is not
a consideration.
The Portfolio invests primarily in small sized companies with market values
under $2 billion. The Portfolio will not sell positions just because their
market values have increased. The Portfolio will add to positions in a company
even though its market capitalization has increased through appreciation beyond
the limits stated, if, in the Sub-Adviser's judgment, the company is still an
attractive investment.
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PRINCIPAL INVESTMENT RISKS
Growth stocks, such as those in the Harris Bretall Sullivan & Smith Equity
Growth Portfolio and the Baron Small Cap 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 Third Avenue Value Portfolio frequently finds value in industries that are
temporarily depressed. The prices of securities in these industries may tend to
go down more than those of companies in other industries. The Portfolio also
invests in companies with small capitalizations, whose securities tend to be
more volatile than those of larger companies. Since the Portfolio is not limited
to investing in stocks, the Portfolio may own significant non-equity instruments
in a rising stock market, thereby producing potentially smaller gains than a
portfolio invested solely in stocks.
The Third Avenue Value Portfolio is non-diversified. This generally means that
the Portfolio will have fewer investments than diversified mutual funds of
comparable size. Non-diversified funds can be more volatile than diversified
funds.
The Third Avenue Value Portfolio and the Baron Small Cap Portfolio may invest in
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
investment 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 Baron Small Cap Portfolio invests primarily in smaller company stocks.
Securities of smaller companies may not be well known to most investors and the
securities may be thinly traded. Smaller company securities may fluctuate in
price more widely than the stock market generally and they may be more difficult
to sell during market downturn. There is more reliance on the skills of a
company's management and on their continued tenure.
Even though the Baron Small Cap Portfolio is diversified, the Portfolio may
establish significant positions in companies in which the Sub-Adviser has the
greatest conviction. If the stock price of one or more of those companies should
decrease, it could cause the Portfolio's net asset value to drop.
The Gabelli Large Cap Value Portfolio invests in stocks issued by companies that
have a market capitalization of greater than $5 billion and which are believed
by the Sub-Adviser to be undervalued and have the potential to achieve
significant capital appreciation. The Portfolio's price may decline because the
market favors other stocks or small capitalization stocks over stocks of mid- to
large size companies. If the Sub-Adviser is incorrect in its assessment of the
values of the securities it holds or no event occurs which surfaces value, then
the value of the Portfolio's shares may decline.
Investing in each Portfolio involves equity risk, which is the risk that the
prices of the securities held by the Portfolio will change due to general market
and economic conditions, perceptions regarding the industries in which the
companies issuing the securities participate and an issuer company's particular
circumstances.
OTHER INVESTMENTS AND STRATEGIES
Each Portfolio may purchase U.S. Government securities, which are obligations
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;
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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 15% of its net assets or 10% in the case of
Harris Bretall Sullivan & Smith Equity Growth Portfolio), including securities
the disposition of which may be restricted and securities that are not readily
marketable. Each Portfolio may also lend securities, except Third Avenue Value
Portfolio (up to 10% of its total assets in the case of Harris Bretall Sullivan
& Smith Equity Growth Portfolio, 25% in the case of Baron Growth Fund and 33% in
the case of Gabelli Large Cap Value Portfolio); and borrow money (up to 10% of
its total assets or 20% in the case of Gabelli Large Cap Value Portfolio and
Baron Small Cap Portfolio); engage in short sales, which are the sales of
securities the Portfolio does not own in anticipation of a decline in the market
price; and purchase warrants (up to 5% of that Portfolio's net assets (other
than those attached to other securities)), which are options to purchase stock
at a mutually agree-upon price for a specific time period.
SECTION 3. - PERFORMANCE
The Fund may, from time to time, calculate the yield or the total return of the
Portfolios and may include that information in reports to shareholders.
Performance information should be considered in light of each Portfolio's
investment objectives and policies, characteristics and quality of the
investment portfolios, and the market conditions during the given time period,
and shouldn't be considered a representation of what may be achieved in the
future.
Performance information for the Portfolios is contained in the Fund's annual
report to shareholders, which may be obtained without charge by contacting The
Legends Fund, Inc. by telephone at 1-800-325-8583 or by mail at 515 West Market
Street, 8th Floor, Louisville, Kentucky 40202.
For a description of the methods used to determine yield and total return for
the Portfolios, see the Statement of Additional Information, which is also
available free of charge by contacting the Fund.
SECTION 4. - MANAGEMENT OF THE FUND
THE MANAGER, SUB-ADVISERS AND DISTRIBUTOR
Under Maryland law and the Fund's Articles of Incorporation and by-laws, the
business and affairs of the Fund are managed under the direction of the Fund's
Board of Directors.
TOUCHSTONE ADVISORS, INC., 311 Pike Street, Cincinnati, Ohio 45202
("Manager"), serves as investment manager to all the Portfolios of the Fund.
The Western and Southern Life Insurance Company ("Western & Southern"), the
parent of the Manager, is, together with the Manager, part of The
Western-Southern Enterprise -Registered Trademark- (Enterprise), a family of
companies that provides life insurance, annuities, mutual funds, asset
management and other related financial services for millions of customers
nationwide. As of June 30, 2000, the Enterprise owned and managed assets of
approximately $25 billion and the Manager managed assets of approximately
$1.5 billion (on a consolidated basis).
The day-to-day management of each Portfolio's investments is performed by its
respective Sub-Adviser, each of which provides these services under a separate
Sub-Advisory Agreement with the Manager.
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, 2000, Harris Bretall
Sullivan & Smith had assets under management of approximately $7.2 billion.
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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.
EQSF ADVISERS, INC. ("EQSF Advisers"), 767 Third Avenue, New York, NY
10017-2023, serves as the Sub-Adviser to the Third Avenue Value Portfolio.
EQSF Advisers has been an investment adviser for mutual funds since its
organization in 1986 and is controlled by Martin J. Whitman and his adult
children. At June 30, 2000, EQSF Advisers had assets under management of
approximately $2 billion.
Martin J. Whitman is the portfolio manager
of the Third Avenue Value Portfolio. He currently serves as the Chairman and
Chief Executive Officer of the Third Avenue Trust and EQSF Advisers. He also
serves as the portfolio manager of the Third Avenue Value Fund and co-manager
of Third Avenue Small Cap Value Fund and Third Avenue Real Estate Value Fund
since each Fund's inception. During the past five years, he has also served
in various executive capacities with M.J. Whitman, Inc., and several
affiliated companies engaged in various investment and financial businesses;
he has served as a Distinguished Management Fellow at the Yale School of
Management; and has been a director of various public and private companies,
currently including Danielson Holding Corporation, an insurance holding
company, Nabors Industries, Inc., an international oil drilling contractor,
and Tejon Ranch Company, an agricultural and land management company.
Gabelli Asset Management Company ("Gabelli"), One Corporate Center, Rye, New
York 10580-1434, serves as the Sub-Adviser for the Gabelli Large Cap Value
Portfolio. The Sub-Adviser also manages other investment companies in the
Gabelli family of funds. The Sub-Adviser is a New York corporation whose
origins date to 1977. The Sub-Adviser is a wholly owned subsidiary of Gabelli
Asset Management Inc ("GAMI"), a publicly held company listed on the New York
Stock Exchange ("NYSE"). At June 30, 2000, Gabelli had assets under
management of approximately $9.6 billion.
Ms. Barbara G. Marcin, the portfolio manager of the Portfolio,
has been a Vice President with the Sub-Adviser since June 1999.
She also currently serves as the portfolio manager of the Gabelli Blue
Chip Value Fund, which is managed by Gabelli's affiliate, Gabelli
Funds, LLC. Ms. Marcin served as the head of value investments at Citibank
Global Asset Management, managing mid- and large-cap equity securities in
value-style mutual funds and in separate
accounts from 1993 until June 1999.
BAMCO, INC. ("BAMCO"), 767 Fifth
Avenue, New York, New York 10153, serves as the Sub-Adviser to the Baron
Small Cap Portfolio. BAMCO is a subsidiary of Baron Capital Group, Inc.
("BCG"). At June 30, 2000, BAMCO had assets under management of approximately
$6.7 billion.
Ronald Baron, the portfolio manager of the Baron Small
Cap Portfolio, is the founder, chief executive officer and chairman of BAMCO
and BCG and is the principal owner of BCG. Baron Small Cap Portfolio is
managed by Ronald Baron. Mr. Baron has been the portfolio manager of Baron
Asset Fund and Baron Growth Fund since their inception. He has managed money
for others since 1975.
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-
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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 Assets Paid By
Paid By Portfolio to the the Manager to
Manager the Sub-Adviser
------- ---------------
<S> <C> <C>
Harris Bretall Sullivan & Smith Equity
Growth Portfolio .65% .40%
Third Avenue Value Portfolio .65% .40%
Gabelli Large Cap Value Portfolio .90% .65%
Baron 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.
Effective March 3, 2000, Touchstone Advisors, Inc. replaced Integrity Capital
Advisors, Inc. as the Fund's Manager. The fees paid to the Manager are identical
to the fees paid to Fund's previous investment manager.
Effective March 3, 2000, Touchstone Securities Corporation ("Touchstone
Securities") replaced ARM Securities Corporation as the Fund's distributor.
Touchstone Securities acts as distributor of the Portfolios' shares without
compensation from the Fund or the Portfolios. Touchstone Securities is located
at 311 Pike Street, Cincinnati, Ohio 45202.
13
<PAGE>
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.
14
<PAGE>
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.
FINANCIAL HIGHLIGHTS
The financial highlights presented for the five years ended June 30, 2000,
1999, 1998, 1997 and 1996 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.
15
<PAGE>
<TABLE>
<CAPTION>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Financial Highlights
Year Ended June 30,
-------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected per share data
Net asset value beginning of period
$26.00 $21.11 $17.53 $14.49 $12.85
Income from investment operations:
Net investment income (loss)
(0.05) (0.06) (a) 0.02 (a)
Net realized and unrealized gain
(loss) on investments 4.83 7.17 4.90 4.13 1.74
Total from investment operations 4.78 7.11 4.90 4.15 1.74
Less distributions:
From net investment income -- -- (0.02) (a) (0.01)
From net realized gain (0.53) (2.22) (1.30) (1.11) (0.09)
Total distributions (0.53) (2.22) (1.32) (1.11) (0.10)
Net asset value, end of period $30.25 $26.00 $21.11 $17.53 $14.49
Total Return 18.89% 35.19% 29.11% 30.23% 13.59%
Ratios and Supplemental Data
Net assets, end of period (in
thousands) $56,879 $55,428 $37,662 $28,815 $23,810
Ratio of expenses to average net
assets 1.01% 0.96% 0.95% 1.03% 1.04%
Ratio of net investment income (loss)
to average net assets (0.39%) (0.29%) (0.01%) 0.14% 0.03%
Ratio of expenses to average net
assets before voluntary expense
reimbursement 1.01% 0.96% 0.95% 1.03% 1.04%
Ratio of net investment income (loss)
to average net assets before
voluntary expense reimbursement (0.39%) (0.29%) (0.01%) 0.14% 0.03%
Portfolio turnover rate 40% 27% 57% 46% 58%
</TABLE>
16
<PAGE>
(a) Less than $0.01 per share.
17
<PAGE>
<TABLE>
<CAPTION>
Third Avenue Value Portfolio*
(formerly Scudder Kemper Value Portfolio)
Financial Highlights
Year Ended June 30,
-------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected per share data
Net asset value, beginning of period
$22.06 $21.02 $20.63 $16.17 $12.59
Income from investment operations:
Net investment income (loss)
0.39 0.33 0.26 0.26 0.18
Net realized and unrealized gain (loss)
on investments (5.12) 3.22 4.08 5.04 3.70
Total from investment operations (4.73) 3.55 4.34 5.30 3.88
Less distributions:
From net investment income (0.33) (0.28) (0.26) (0.19) (0.19)
From net realized gain (3.03) (2.23) (3.69) (0.65) (0.11)
Total distributions (3.36) (2.51) (3.95) (0.84) (0.30)
Net asset value, end of period $13.97 $22.06 $21.02 $20.63 $16.17
Total Return (23.88%) 18.09% 23.36% 33.78% 31.22%
Ratios and Supplemental Data
Net assets, end of period (in thousands)
$20,994 $50,169 $46,436 $30,930 $19,705
Ratio of expenses to average net assets
1.08% 0.96% 0.94% 1.05% 1.06%
Ratio of net investment income (loss) to
average net assets 1.80% 1.56% 1.58% 1.62% 1.65%
Ratio of expenses to average net assets
before voluntary expense reimbursement
1.08% 0.96% 0.94% 1.05% 1.07%
Ratio of net investment income (loss) to
average net assets before voluntary
expense reimbursement 1.80% 1.56% 1.58% 1.62% 1.64%
Portfolio turnover rate 42% 50% 57% 88% 18%
</TABLE>
18
<PAGE>
* Results prior to November 1, 2000 are attributable to the Portfolio's prior
sub-adviser.
19
<PAGE>
<TABLE>
<CAPTION>
Gabelli Blue Chip Value Portfolio*
(formerly Zweig Asset Allocation Portfolio)
Financial Highlights
Year Ended June 30,
-------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected per share data
Net asset value, beginning of period
$13.99 $17.56 $14.63 $14.11 $13.02
Income from investment operations:
Net investment income (loss)
0.28 0.21 0.14 0.19 0.21
Net realized and unrealized gain
(loss) on investments (0.49) (1.04) 2.97 2.20 1.21
Total from investment operations (0.21) (0.83) 3.11 2.39 1.42
Less distributions:
From net investment income (0.21) (0.16) (0.18) (0.22) (0.33)
From net realized gain (3.08) (2.58) -- (1.65) --
Total distributions (3.29) (2.74) (0.18) (1.87) (0.33)
Net asset value, end of period $10.49 $13.99 $17.56 $14.63 $14.11
Total Return (0.52%) (3.73%) 21.38% 18.63% 11.06%
Ratios and Supplemental Data
Net assets, end of period (in
thousands) $14,276 $31,010 $47,450 $42,848 $40,222
Ratio of expenses to average net
assets 1.41% 1.23% 1.18% 1.28% 1.25%
Ratio of net investment income (loss)
to average net assets 1.73% 1.13% 0.80% 1.29% 1.55%
Ratio of expenses to average net
assets before voluntary expense
reimbursement 1.41% 1.23% 1.18% 1.28% 1.25%
Ratio of net investment income (loss)
to average net assets before
voluntary expense reimbursement 1.73% 1.13% 0.80% 1.29% 1.55%
Portfolio turnover rate 207% 109% 65% 89% 105%
</TABLE>
20
<PAGE>
* Results before November 1, 2000 are attributable to the Portfolio's prior
sub-adviser.
21
<PAGE>
<TABLE>
<CAPTION>>
Baron Small Cap Portfolio*
(formerly Zweig Equity (Small Cap) Portfolio)
Financial Highlights
Year Ended June 30,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected per share data
Net asset value, beginning of period
$12.17 $17.58 $14.85 $13.61 $11.62
Income from investment operations:
Net investment income (loss)
0.21 0.10 0.04 0.16 0.11
Net realized and unrealized gain
(loss) on investments (0.64) (1.80) 3.48 2.41 2.04
Total from investment operations (0.43) (1.70) 3.52 2.57 2.15
Less distributions:
From net investment income (0.10) (0.04) (0.14) (0.14) (0.16)
From net realized gain -- (3.67) (0.65) (1.19) --
Total distributions (0.10) (3.71) (0.79) (1.33) (0.16)
Net asset value, end of period $11.64 $12.17 $17.58 $14.85 $13.61
Total Return (3.52%) (9.24%) 23.72% 20.37% 18.69%
Ratios and Supplemental Data
Net assets, end of period (in
thousands) $5,917 $10,994 $14,688 $11,161 $11,698
Ratio of expenses to average net
assets 1.55% 1.54% 1.52% 1.55% 1.55%
Ratio of net investment income (loss)
to average net assets 1.33% 0.71% 0.26% 0.97% 1.06%
Ratio of expenses to average net
assets before voluntary expense
reimbursement 2.25% 1.64% 1.56% 1.82% 1.83%
Ratio of net investment income (loss)
to average net assets before
voluntary expense reimbursement 0.63% 0.61% 0.22% 0.70% .78%
Portfolio turnover rate 224% 76% 113% 59% 101%
</TABLE>
22
<PAGE>
* Results before November 1, 2000 are attributable to the Portfoio's prior
sub-advisor.
23
<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 1-202-942-8090. You may also obtain information about the Fund on
the EDGAR Database on the SEC's Internet site at http://www.sec.gov, or upon
payment of a duplicating fee by electronic request at the following e-mail
address: [email protected], or by writing the SEC's Public Reference Section,
Washington, D.C. 20549-0102.
The Legends Fund, Inc. Investment Company Act File No. 811-07084
280929.6
24
<PAGE>
THE LEGENDS FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
===================================
November 1, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
SECTION 1. - FUND HISTORY.......................................................1
SECTION 2. - ADDITIONAL FUND INVESTMENT POLICIES................................1
SECTION 3. - INVESTMENT RESTRICTIONS AND POLICIES..............................16
SECTION 4. - MANAGEMENT OF THE FUND............................................27
SECTION 5. - PRINCIPAL HOLDERS OF SECURITIES...................................29
SECTION 6. - INVESTMENT ADVISORY AND OTHER SERVICES............................30
SECTION 7. - PORTFOLIO TRANSACTIONS AND BROKERAGE..............................33
SECTION 8. - PURCHASE, REDEMPTION, AND PRICING OF SHARES.......................35
SECTION 9. - TAXATION OF THE FUND..............................................37
SECTION 10.- CALCULATION OF PERFORMANCE DATA...................................38
SECTION 11.- FINANCIAL STATEMENTS OF THE FUND..................................40
APPENDIX A - OPTIONS AND FUTURES...............................................41
APPENDIX B - DESCRIPTION OF CORPORATE BOND RATINGS.............................42
</TABLE>
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, 2000. 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. served as the investment manager to all of
the Portfolios of the Fund until March 2, 2000. Effective March 3, 2000,
Touchstone Advisors, Inc. (the MANAGER) serves as investment manager to all
of 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. The
Manager and its parent company, The Western and Southern Life Insurance
Company (WESTERN & SOUTHERN), are part of The Western-Southern Enterprise
-Registered Trademark-, which is a family of companies that provides life
insurance, annuities, mutual funds, asset management and other related
financial services for millions of consumers nationwide.
The Fund has four Portfolios:
(1) Harris Bretall Sullivan & Smith Equity Growth Portfolio
(2) Third Avenue Value Portfolio
(3) Gabelli Large Cap Value Portfolio
(4) Baron Small Cap Portfolio
Effective November 1, 2000, the following changes were made in three of the
Fund's Portfolios:
- THIRD AVENUE VALUE PORTFOLIO -- EQSF Advisers, Inc. replaced Scudder Kemper
Investments, Inc. as Sub-Adviser and the name of the Portfolio was changed
from Scudder Kemper Value Portfolio to Third Avenue Value Portfolio.
- GABELLI LARGE CAP VALUE PORTFOLIO - Gabelli Asset Management Company
replaced Phoenix/Zweig Advisers as Sub-Adviser and the name of the
Portfolio was changed from Zweig Asset Allocation Portfolio to Gabelli
Large Cap Value Portfolio.
- BARON SMALL CAP PORTFOLIO -- BAMCO, Inc. replaced Phoenix/Zweig Advisers as
Sub-Adviser and the name of the Portfolio was changed from Zweig Equity
(Small Cap) Portfolio to Baron Small Cap Portfolio.
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.
Third Avenue Value Portfolio and Baron Small Cap Portfolio each may invest in
securities of foreign issuers (up to 25% in the case of Third Avenue Value
Portfolio and up to 10% in the case of Baron Small Cap Portfolio). Gabelli
280930.2
1
<PAGE>
Large Cap Value Portfolio does not expect to invest in foreign securities and
may reduce its holdings of such securities. Many of the foreign securities held
by these Portfolios are not registered with the Securities and Exchange
Commission (SEC), and their issuers are not subject to its reporting
requirements. Therefore, there may be less publicly available information
concerning foreign issuers of securities held by these Portfolios than is
available concerning U.S. companies. Foreign companies are not generally subject
to uniform accounting, auditing and financial reporting standards or to other
regulatory requirements comparable to those that apply to U.S. companies.
Foreign securities are also subject to generally higher commission rates of
foreign portfolio transactions, the possibility of expropriation or confiscatory
taxation, adverse changes in investment or exchange control regulations,
political instability that could affect U.S. investments in foreign countries,
and potential restrictions on the flow of international capital. There may also
be less government supervision and regulation of foreign securities exchanges,
brokers and listed companies than in the United States.
Investing in securities of issuers in emerging countries, including certain
Asian countries, involves certain considerations not typically associated with
investing in securities of U.S. companies, including (1) restrictions on foreign
investment and on repatriation of capital, (2) currency fluctuations, (3) the
cost of converting foreign currency into U.S. dollars, (4) potential price
volatility and lesser liquidity of shares traded on emerging country securities
markets and (5) political and economic risks, including the risk of
nationalization or expropriation of assets and the risk of war. In addition,
accounting, auditing, financial and other reporting standards in emerging
countries may not be equivalent to U.S. standards, and therefore disclosure of
certain material information may not be made and less information may be
available to investors investing in emerging countries than in the United
States. There is also generally less governmental regulation of the securities
industry in emerging countries than in the United States. Many of these
countries may have less stable political environments than western democracies.
It may also be more difficult to obtain a judgment in a court outside the United
States.
Investment income on certain foreign securities may be subject to foreign
withholding or other taxes that could reduce the return on these securities. Tax
treaties between the United States and foreign countries may, however, reduce or
eliminate the amount of foreign taxes to which a Portfolio would be subject.
Each of the Gabelli Large Cap Value Portfolio, Third Avenue Portfolio and
Baron Small Cap Portfolio may invest in American Depository Receipts (ADRs).
Baron Small Cap Portfolio may also invest in European Depository Receipts
(EDRS) and Global Depository Receipts (GDRS) or other securities convertible
into securities of foreign issuers. 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.
EDRs and GDRs are receipts issued in Europe generally by a non-U.S. bank or
trust company that evidence ownership of non-U.S. or domestic securities. There
are no fees imposed on the purchase or sale of ADRs, EDRs or GDRs although the
issuing bank or trust company may impose fees on the purchase of dividends and
the conversion of ADRs, EDRs and GDRs into the underlying securities. 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
280930.2
2
<PAGE>
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 15% (10% in the case of
Harris Bretall Sullivan & Smith Equity Growth Portfolio) of its net assets in
illiquid securities. The term ILLIQUID SECURITIES for this purpose means
securities that can't be disposed of within seven days in the ordinary course of
business at approximately the amount at which a Portfolio has valued the
securities. Illiquid securities include, among other things, purchased
over-the-counter (OTC) options, repurchase agreements maturing in more than
seven days and restricted securities other than Rule 144A securities (see below)
that a Sub-Adviser has determined are liquid under guidelines established by the
Fund's Board of Directors. The assets used as cover for OTC options written by a
Portfolio will be considered illiquid unless the OTC options are sold to
qualified dealers who agree that the Portfolio may repurchase any OTC option it
writes at a maximum price to be calculated by a formula described in the option
agreement. The cover for an OTC option written subject to this procedure will be
considered illiquid only to the extent that the maximum repurchase price under
the option formula exceeds the intrinsic value of the option. Restricted
securities may be sold only in privately negotiated transactions or in public
offerings with respect to which a registration statement is in effect under the
Securities Act of 1933 (1933 ACT). Restricted securities acquired by a Portfolio
include those that are subject to restrictions contained in the securities laws
of other countries. Securities that are freely marketable in the country where
they are principally traded, but that wouldn't be freely marketable in the
United States, aren't considered illiquid. Where registration is required, a
Portfolio may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Portfolio may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, the Portfolio might obtain a less favorable price than prevailed
when it decided to sell.
In recent years a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including securities that
are sold in private placements, repurchase agreements, commercial paper, foreign
securities and corporate bonds and notes. These instruments are often restricted
securities because they are sold in transactions not requiring registration.
Institutional investors generally will not seek to sell these instruments to the
general public, but instead will often depend either on an efficient
institutional market in which such unregistered securities can be readily resold
or on an issuer's ability to honor a demand for repayment. Therefore, the fact
that there are contractual or legal restrictions on resale to the general public
or certain institutions is not the sole determining factor of the liquidity of
these investments.
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
280930.2
3
<PAGE>
(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. The Portfolios may invest in Commercial paper issues which
include securities issued by major corporations without registration under the
1933 Act in reliance on the exemption from registration afforded by Section
3(a)(3) of the 1933 Act, and commercial paper issued in reliance on the private
placement exemption from registration which is afforded by Section 4(2) of the
1933 Act (SECTION 4(2) PAPER). Section 4(2) paper is restricted as to
disposition under the federal securities laws in that any resale must also be
made through an exempt transaction. Section 4(2) paper is normally resold to
other institutional investors through or with the assistance of investment
dealers who make a market in Section 4(2) paper, thus providing liquidity.
Section 4(2) paper that is issued by a company that files reports under the
Securities Exchange Act of 1934 is generally eligible to be sold in reliance on
the safe harbor of Rule 144A described under "Illiquid Securities" above. The
Portfolios' percentage limitations on investments in illiquid securities include
Section 4(2) paper other than Section 4(2) paper that the Sub-Adviser has
determined to be liquid pursuant to guidelines established by the Fund's Board
of Directors. The Board has delegated to the Sub-Advisers the function of making
day-to-day determinations of liquidity with respect to Section 4(2) paper,
pursuant to guidelines approved by the Board that require the Sub-Advisers to
take into account the same factors described under "Illiquid Securities" above
for other restricted securities and require the Sub-Advisers to perform the same
monitoring and reporting functions.
U.S. GOVERNMENT SECURITIES. Each Portfolio may purchase U.S. Government
securities, which are obligations of, or guaranteed by, the U.S. Government, its
agencies or instrumentalities. These include direct obligations of the U.S.
Treasury (such as Treasury bills, notes and bonds) and obligations issued by
U.S. Government agencies and instrumentalities, including securities that are
supported by the full faith and credit of the United States (such as Government
National Mortgage Association certificates) and securities supported primarily
or solely by the creditworthiness of the issuer (such as securities of the
Federal National Mortgage Association, the Federal Home Loan Mortgage
Corporation and the Tennessee Valley Authority). See "Mortgage-Backed
Securities" below.
MORTGAGE-BACKED SECURITIES. The Portfolios may invest in those mortgage-backed
securities that are also considered to be U.S. Government securities. Baron
Small Cap Portfolio has a policy limiting, to 5% of its assets, investments in
mortgage-backed 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.
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Prepayments on mortgages underlying mortgage-backed securities occur when a
mortgagor prepays the remaining principal before the mortgage's scheduled
maturity date. As a result of the pass-through of prepayments of principal on
the underlying mortgages, mortgage-backed securities are often subject to more
rapid prepayment of principal than their stated maturity would indicate. In
general, prepayments on mortgage-backed securities will be a function of the
relative coupon of the mortgages, the age of the mortgages, and the general
level of interest rates in the market. To a limited extent, prepayment rates
and, consequently, the average life of an anticipated yield to be realized from
a mortgage-backed security can be estimated using statistical models. However,
because the actual prepayments of the underlying mortgages vary, it is
impossible to predict exactly the yield and average life of a mortgage-backed
security.
During periods of declining interest rates, prepayment of mortgages underlying
mortgage-backed securities can be expected to accelerate. When a Portfolio
receives prepayments on mortgage-backed securities, it may reinvest the prepaid
amounts in securities the yields of which will reflect interest rates prevailing
at the time. Therefore, a Portfolio's ability to maintain a portfolio of
high-yielding mortgage-backed securities will be adversely affected to the
extent that prepayments of mortgages must be reinvested in securities which have
lower yields than the mortgage-backed security on which the prepayment is
received. In addition, because payments on the underlying mortgages are passed
through to the holders of the mortgage-backed securities, if a Portfolio
purchases mortgage-backed securities at a premium or a discount, unless it makes
certain elections, it will recognize a capital loss or gain when payments of
principal are passed through to the Portfolio as a result of regular payments or
prepayments on the mortgages in the underlying pool.
The following is a description of GNMA, FHLMC and FNMA certificates, the most
widely available mortgage-backed securities:
GNMA Certificates. Certificates of the Government National Mortgage Association
(GNMA CERTIFICATES) are mortgage-backed securities which evidence an undivided
interest in a pool or pools of mortgages. GNMA Certificates that the Portfolios
may purchase are the MODIFIED PASS-THROUGH type, which entitle the holder to
receive timely payment of all interest and principal payments due on the
mortgage pool, net of fees paid to the ISSUER and GNMA, regardless of whether or
not the mortgagor actually makes the payment.
GNMA guarantees the timely payment of principal and interest on securities
backed by a pool of mortgages insured by the Federal Housing Administration
(FHA) or the Farmers' Home Administration (FMHA), or guaranteed by the Veterans
Administration (VA). The GNMA guarantee is authorized by the National Housing
Act and is backed by the full faith and credit of the United States. The GNMA is
also empowered to borrow without limitation from the U.S. Treasury if necessary
to make any payments required under its guarantee.
The average life of a GNMA Certificate is likely to be substantially shorter
than the original maturity of the mortgages underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosure will usually
result in the return of the greater part of principal investment long before the
maturity of the mortgages in the pool. Foreclosures impose no risk to principal
investment because of the GNMA 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.
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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.
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 or securities broker-dealer, it may
simultaneously enter into a repurchase agreement, wherein the seller agrees to
repurchase the security at a mutually agreed-upon time (generally within seven
days) and price. The repurchase price is in excess of the purchase price by an
amount 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
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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.
As a form of borrowing, Baron Small Cap Portfolio may engage in reverse
repurchase agreements with certain banks or non-bank dealers, where the
Portfolio sells a security and simultaneously agrees to buy it back later at a
mutually agreed upon price. To the extent the Portfolio engages in reverse
repurchase agreements it will maintain a segregated account consisting of liquid
assets or highly marketable securities to cover its obligations. Reverse
repurchase agreements may expose the Portfolio to greater fluctuations in the
value of its assets.
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 Gabelli Large Cap Value Portfolio and 25% in
the case of Baron Small Cap Portfolio) of the total assets of the
Portfolio.
There may be risks of delay in recovery of the securities or even loss of rights
in the collateral should the borrower of the securities fail financially.
However, loans will only be made to borrowers deemed by the Sub-Adviser to be of
good standing and when, in the judgment of the Sub-Adviser, the consideration
that can be earned currently from such securities loans justifies the attendant
risk. All relevant facts and circumstances, including the creditworthiness of
the broker, dealer or institution, will be considered in making decisions with
respect to the lending of securities, subject to review by the Fund's Board of
Directors. During the period of the loan the Sub-Adviser will monitor all
relevant facts and circumstances, including the creditworthiness of the
borrower. The Portfolio will retain authority to terminate any loan at any time.
A Portfolio may pay reasonable administrative and custodial fees in connection
with a loan and may pay a negotiated portion of the interest earned on the cash
or money market instruments held as collateral to the borrower or placing
broker. A Portfolio will receive reasonable interest on the loan or a flat fee
from the borrower and amounts equivalent to any dividends, interest or other
distributions on the securities loaned. A Portfolio will regain record ownership
of loaned securities to exercise beneficial rights, such as voting and
subscription rights and rights to dividends, interest or other distributions,
when regaining such rights is considered to be in the Portfolio's interest.
BORROWING. Harris Bretall Sullivan & Smith Equity Growth Portfolio and Third
Avenue 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. Gabelli Large Cap Value Portfolio and Baron 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
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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. Third Avenue Value Portfolio, Gabelli Large Cap Value Portfolio and
Baron 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. Gabelli Large Cap Value Portfolio will not make short
sales or maintain a short position if it would cause more than 25% of its total
assets to be held as collateral.
The Portfolio's obligation to replace the security borrowed will be secured by
collateral deposited with the broker, consisting of cash or U.S. Government
securities or other securities acceptable to the broker. In addition, the
Portfolio will be required to deposit cash or U.S. Government securities as
collateral in a segregated account with its custodian in an amount such that the
value of both collateral deposits is at all times equal to at least 100% of the
current market value of the securities sold short. The Portfolio will receive
the interest accruing on any U.S. Government securities held as collateral in
the segregated account with the custodian. The deposits do not necessarily limit
the Portfolio's potential loss on a short sale, which may exceed the entire
amount of the collateral deposits.
If the price of a security sold short increases between the time of the short
sale and the time the Portfolio replaces the borrowed security, the Portfolio
will incur a loss, and if the price declines during this period, the Portfolio
will realize a capital gain. Any realized capital gain will be decreased, and
any incurred loss increased, by the amount of transaction costs and any premium,
dividend, or interest which the Portfolio may have to pay in connection with
such short sale.
The Portfolios may enter into short sales AGAINST THE BOX. A short sale is
against the box when, at all times during which a short position is open, the
Portfolio owns an equal amount of such securities, or owns securities giving it
the right, without payment of future consideration, to obtain an equal amount of
securities sold short.
WARRANTS. Gabelli Large Cap Value Portfolio and Baron 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. Other
than Gabelli Large Cap Value Portfolio, 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 IN EQUITY SECURITIES. In selecting common stocks, the Sub-Adviser of
Third Avenue Value Portfolio generally seeks issuing companies that exhibit the
following characteristics:
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(1) A strong financial position, as measured not only by balance sheet data
but also by off-balance sheet assets, liabilities and contingencies (as
disclosed in footnotes to financial statements and as determined
through research of public information), where debt service1 consumes a
small part of such companies' cash flow.
(2) Responsible management and control groups, as gauged by managerial
competence as operators and investors as well as by an apparent absence
of intent to profit at the expense of stockholders.
(3) Availability of comprehensive and meaningful financial and related
information. A key disclosure is audited financial statements and
information which the Sub-Adviser believes are reliable benchmarks to
aid in understanding the business, its values and its dynamics.
(4) Availability of the security at a market price which the Sub-Adviser
believes is at a substantial discount to the Sub-Adviser's estimate of
what the issuer is worth as a private company or as a takeover or
merger and acquisition candidate.
Investing in common stock has certain risks, including the risk that the
financial condition of the issuers of the Third Avenue Portfolio's securities
may become impaired or that the general condition of the stock market may worsen
(both of which may contribute directly to a decrease in the value of the
securities and thus in the value of the Portfolio's shares). Common stocks are
especially susceptible to general stock market movements and to increases and
decreases in value as market confidence in and perceptions of the issuers
change. These perceptions are based on unpredictable factors including
expectations regarding government, economic, monetary and fiscal policies,
inflation and interest rates, economic expansion or contraction, and global or
regional political, economic or banking crises. The value of the common stocks
owned by the Portfolio thus may be expected to fluctuate.
In selecting preferred stocks, the Sub-Adviser will use its selection criteria
for either common stocks or debt securities, depending on the Sub-Adviser's
determination as to how the particular issue should be viewed, based, among
other things, upon the terms of the preferred stock and where it fits in the
issuer's capital structure. Preferred stocks are usually entitled to rights on
liquidation which are senior to those of common stocks. For these reasons,
preferred stocks generally entail less risk than common stocks of the same
issuer. Such securities may pay cumulative dividends. Because the dividend rate
is pre-established, and as they are senior to common stocks, such securities
tend to have less possibility of capital appreciation.
Although the Sub-Adviser does not pay attention to market factors in making
investment decisions, the Portfolio is, of course, subject to the vagaries of
the markets. In particular, small-cap stocks have less market liquidity and tend
to have more price volatility than larger capitalization stocks.
INVESTMENT IN DEBT SECURITIES. Third Avenue Value Fund intends its investment in
debt securities to be, for the most part, in securities which the Sub-Adviser
believes will provide above-average current yields, yields to events, or yields
to maturity. In selecting debt instruments for Third Avenue Value Portfolio, the
Sub-Adviser requires the following characteristics:
1) Strong covenant protection, and
2) Yield to maturity at least 500 basis points above that of a comparable
credit.
--------------------------
1 "Debt Service" means the current annual required payment of interest and
principal to creditors.
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In acquiring debt securities for the Portfolio, the Sub-Adviser generally will
look for covenants which protect holders of the debt issue from possible adverse
future events such as, for example, the addition of new debt senior to the issue
under consideration. Also, the Sub-Adviser will seek to analyze the potential
impacts of possible extraordinary events such as corporate restructurings,
refinancings, or acquisitions. The Sub-Adviser will also use its best judgment
as to the most favorable range of maturities. In general, Third Avenue Value
Portfolio will acquire debt issues which have a senior position in an issuer's
capitalization and will avoid "mezzanine" issues such as non-convertible
subordinated debentures.
The market value of debt securities is affected by changes in prevailing
interest rates and the perceived credit quality of the issuer. When prevailing
interest rates fall or perceived credit quality is increased, the market values
of debt securities generally rise. Conversely, when interest rates rise or
perceived credit quality is lowered, the market values of debt securities
generally decline. The magnitude of these fluctuations will be greater when the
average maturity of the portfolio securities is longer.
ASSET-BACKED SECURITIES. Third Avenue Value Portfolio may also invest in
asset-backed securities that, through the use of trusts and special purpose
vehicles, are securitized with various types of assets, such as automobile
receivables, credit card receivables and home-equity loans in pass-through
structures similar to the mortgage-related securities described below. In
general, the collateral supporting asset-backed securities is of shorter
maturity than the collateral supporting mortgage loans and is less likely to
experience substantial prepayments. However, asset-backed securities are not
backed by any governmental agency.
FLOATING RATE, INVERSE FLOATING RATE AND INDEX OBLIGATIONS. Third Avenue Value
Portfolio may invest in debt securities with interest payments or maturity
values that are not fixed, but float in conjunction with (or inversely to) an
underlying index or price. These securities may be backed by U.S. Government or
corporate issuers, or by collateral such as mortgages. The indices and prices
upon which such securities can be based include interest rates, currency rates
and commodities prices. However, the Portfolio will not invest in any instrument
whose value is computed based on a multiple of the change in price or value of
an asset or an index of or relating to assets in which the Portfolio cannot or
will not invest.
Floating rate securities pay interest according to a coupon which is reset
periodically. The reset mechanism may be formula based, or reflect the passing
through of floating interest payments on an underlying collateral pool. Inverse
floating rate securities are similar to floating rate securities except that
their coupon payments vary inversely with an underlying index by use of a
formula. Inverse floating rate securities tend to exhibit greater price
volatility than other floating rate securities.
The Third Avenue Value Portfolio does not intend to invest more than 5% of its
total assets in inverse floating rate securities. Floating rate obligations
generally exhibit a low price volatility for a given stated maturity or average
life because their coupons adjust with changes in interest rates. Interest rate
risk and price volatility on inverse floating rate obligations can be high,
especially if leverage is used in the formula. Index securities pay a fixed rate
of interest, but have a maturity value that varies by formula, so that when the
obligation matures a gain or loss may be realized. The risk of index obligations
depends on the volatility of the underlying index, the coupon payment and the
maturity of the obligation.
INVESTMENT IN HIGH YIELD DEBT SECURITIES. Third Avenue Value Portfolio, Gabelli
Large Cap Value Portfolio and Baron Small Cap Portfolio may each invest its
assets in in high yield debt securities, including those rated below Baa by
Moody's Investors Service, Inc. (MOODY'S) and below BBB by Standard & Poor's
Ratings Group (STANDARD & POOR'S or S&P) and unrated debt securities, commonly
referred to as "junk bonds". Such securities are predominantly speculative with
respect to the issuer's
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capacity to pay interest and repay principal in accordance with the terms of the
obligation, and may in fact be in default.
The market price and yield of bonds rated below Baa by Moody's and below BBB by
Standard & Poor's are more volatile than those of higher rated bonds due to such
factors as interest rate sensitivity, market perception of the creditworthiness
of the issuer and general market liquidity and the risk of an issuer's inability
to meet principal and interest payments. In addition, the secondary market for
these bonds is generally less liquid than that for higher rated bonds.
Lower rated or unrated debt obligations also present reinvestment risks based on
payment expectations. If an issuer calls the obligation for redemption, a
Portfolio may have to replace the security with a lower yielding security,
resulting in a decreased return for investors.
The market values of these higher yielding debt securities tend to be more
sensitive to economic conditions and individual corporate developments than
those of higher rated securities. Companies that issue such bonds often are
highly leveraged and may not have available to them more traditional methods of
financing. Under adverse economic conditions, there is a risk that highly
leveraged issuers may be unable to service their debt obligations or to repay
their obligations upon maturity. Under deteriorating economic conditions or
rising interest rates, the capacity of issuers of lower-rated securities to pay
interest and repay principal is more likely to weaken significantly than that of
issuers of higher-rated securities. Investors should carefully consider the
relative risks of investing in high yield securities and understand that such
securities are generally not meant for short-term investing.
Third Avenue Value Portfolio may invest up to 35% of its total assets in such
securities. The ratings of Moody's and Standard & Poor's represent their
opinions as to the credit quality of the securities which they undertake to rate
(see Appendix B for a description of those ratings). It should be emphasized,
however, that ratings are relative and subjective and, although ratings may be
useful in evaluating the safety of interest and principal payments, they do not
evaluate the market price risk of these securities. In seeking to achieve its
investment objective, the Portfolio depends on the Sub-Adviser's credit analysis
to identify investment opportunities. For the Portfolio, credit analysis is not
a process of merely measuring the probability of whether a money default will
occur, but also measuring how the creditor would fare in a reorganization or
liquidation in the event of a money default.
Before investing in any high yield debt instruments, the Sub-Adviser will
evaluate the issuer's ability to pay interest and principal, as well as the
seniority position of such debt in the issuer's capital structure vis-a-vis any
other outstanding debt or potential debts. There appears to be a direct cause
and effect relationship between the weak financial conditions of issuers of high
yield bonds and the market valuation and prices of their credit instruments, as
well as a direct relationship between the weak financial conditions of such
issuers and the prospects that principal or interest may not be paid.
Third Avenue Value Portfolio may also purchase or retain debt obligations of
issuers not currently paying interest or in default (i.e., with a rating from
Moody's of C or lower or Standard & Poor's of C1 or lower). In addition, the
Portfolio may purchase securities of companies that have filed for protection
under Chapter 11 of the United States Bankruptcy Code. Defaulted securities will
be purchased or retained if, in the opinion of the Sub-Adviser, they may present
an opportunity for subsequent price recovery, the issuer may resume payments, or
other advantageous developments appear likely.
Gabelli Large Cap Value Portfolio may invest up to 25% of its assets in low
rated and unrated corporation debt securities, although the Portfolio does not
expect to invest more than 10% of its assets in such securities. The Sub-Adviser
believes that its research on the credit and balance sheet strength of certain
issuers may enable it to select a limited number of corporate debt securities
which, in certain markets,
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will better serve the objective of capital appreciation than alternative
investments in common stocks. Of course, there can be no assurance that the
Sub-Adviser will be successful. In its evaluation, the Sub-Adviser will not rely
exclusively on ratings and the receipt of income is only an incidental
consideration.
The ratings of Moody's and S&P generally represent the opinions of those
organizations as to the quality of the securities that they rate. Such ratings,
however, are relative and subjective, are not absolute standards of quality and
do not evaluate the market risk of the securities. Although the Gabelli Large
Cap Value Portfolio's Sub-Adviser uses these ratings as a criterion for the
selection of securities for the Portfolio, the Sub-Adviser also relies on its
independent analysis to evaluate potential investments for the Portfolio. The
Portfolio does not intend to purchase debt securities for which a liquid trading
market does not exist but there can be no assurance that such a market will
exist for the sale of such securities.
Baron Small Cap Portfolio may invest up to 35% of its total assets in debt
securities that are rated in the medium to lowest rating categories by S&P and
Moody's. The Portfolio will rely on the Sub-Adviser's judgment, analysis and
experience in evaluating debt securities. The Sub-Adviser believes that the
difference between perceived risk and actual risk creates the opportunity for
profit which can be realized through thorough analysis. Ratings by S&P and
Moody's evaluate only the safety of principal and interest payments, not market
value risk. Because the creditworthiness of an issuer may change more rapidly
than is able to be timely reflected in changes in credit ratings, the
Sub-Adviser monitors the issuers of corporate debt securities held in the
Portfolio's portfolio. The credit ratings assigned by a rating agency to a
security are not considered by the Sub-Adviser in selecting a security. The
Sub-Adviser examines the intrinsic value of a security in light of market
conditions and the underlying fundamental values. Because of the nature of
medium and lower rated corporate debt securities, achievement by the Portfolio
of its investment objective when investing in such securities is dependent on
the credit analysis of the Sub-Adviser. The Sub-Adviser could be wrong in its
analysis. If the Portfolio purchased primarily higher rated debt securities,
risks would be substantially reduced.
To the extent that there is no established market for some of the medium or low
grade corporate debt securities in which the Baron Small Cap Portfolio may
invest, there may be thin or no trading in such securities and the ability of
the Sub-Adviser to value accurately such securities may be adversely affected.
Further, it may be more difficult for the Portfolio to sell securities for which
no established retail market exists as compared with securities for which such a
market does exist. During periods of reduced market liquidity and in the absence
of readily available market quotations for medium and lower grade corporate debt
securities held in the Portfolio's portfolio, the responsibility of the
Sub-Adviser to value the Portfolio's securities becomes more difficult and the
Sub-Adviser's judgment may play a greater role in the valuation of the
Portfolio's securities due to a reduced availability of reliable objective data.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS. Third Avenue Value Portfolio may invest
in loans and other direct debt instruments owed by a borrower to another party.
These instruments represent amounts owed to lenders or lending syndicates (loans
and loan participations) or to other parties. Direct debt instruments may
involve a risk of loss in case of default or insolvency of the borrower and may
offer less legal protection to the Portfolio in the event of fraud or
misrepresentation. In addition, loan participations involve a risk of insolvency
of the lending bank or other financial intermediary. The markets in loans are
not regulated by federal securities laws or the SEC.
TRADE CLAIMS. Third Avenue Value Portfolio may invest in trade claims. Trade
claims are interests in amounts owed to suppliers of goods or services and are
purchased from creditors of companies in financial difficulty. For purchasers
such as the Portfolio, trade claims offer the potential for profits since they
are often purchased at a significant discount from face value and, consequently,
may generate capital appreciation in the event that the market value of the
claim increases as the debtor's financial position improves or the claim is
paid.
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An investment in trade claims is speculative and carries a high degree of risk.
Trade claims are illiquid instruments which generally do not pay interest and
there can be no guarantee that the debtor will ever be able to satisfy the
obligation on the trade claim. The markets in trade claims are not regulated by
federal securities laws or the SEC. Because trade claims are unsecured, holders
of trade claims may have a lower priority in terms of payment than certain other
creditors in a bankruptcy proceeding.
FOREIGN CURRENCY TRANSACTIONS. Third Avenue Value Portfolio may, from time to
time, engage in foreign currency transactions in order to hedge the value of its
portfolio holdings denominated in foreign currencies against fluctuations in
foreign currency prices versus the U.S. dollar. These transactions include
forward currency contracts, exchange listed and OTC options on currencies,
currency swaps and other swaps incorporating currency hedges.
The notional amount of a currency hedged by the Portfolio will be closely
related to the aggregate market value (at the time of making such hedge) of the
securities held and reasonably expected to be held in its portfolio denominated
or quoted in or currently convertible into that particular currency or a closely
related currency. If the Portfolio enters into a hedging transaction in which
the Portfolio is obligated to make further payments, its custodian will
segregate cash or readily marketable securities having a value at all times at
least equal to the Portfolio's total commitments.
The cost to the Portfolio of engaging in currency hedging transactions varies
with factors such as (depending upon the nature of the hedging transaction) the
currency involved, the length of the contract period, interest rates in foreign
countries for prime credits relative to U.S. interest rates for U.S. Treasury
obligations, the market conditions then prevailing and fluctuations in the value
of such currency in relation to the U.S. dollar. Transactions in currency
hedging contracts usually are conducted on a principal basis, in which case no
fees or commissions are involved. The use of currency hedging contracts does not
eliminate fluctuations in the prices in local currency of the securities being
hedged. The ability of the Portfolio to realize its objective in entering into
currency hedging transactions is dependent on the performance of its
counterparties on such contracts, which may in turn depend on the absence of
currency exchange interruptions or blockage by the governments involved, and any
failure on their part could result in losses to the Portfolio. The requirements
for qualification as a regulated investment company under the Internal Revenue
Code of 1986, as amended (the CODE) may cause the Portfolio to restrict the
degree to which it engages in currency hedging transactions.
INVESTMENT IN RELATIVELY NEW ISSUES. Third Avenue Value Portfolio intends to
invest occasionally in the common stock of selected new issuers. Investments in
relatively new issuers, i.e., those having continuous operating histories of
less than three years, may carry special risks and may be more speculative
because such companies are relatively unseasoned. Such companies may also lack
sufficient resources, may be unable to generate internally the funds necessary
for growth and may find external financing to be unavailable on favorable terms
or even totally unavailable. Those companies will often be involved in the
development or marketing of a new product with no established market, which
could lead to significant losses. The securities of such issuers may have a
limited trading market which may adversely affect their disposition and can
result in their being priced lower than might otherwise be the case. If other
investors who invest in such issuers trade the same securities when the
Portfolio attempts to dispose of its holdings, the Portfolio may receive lower
prices than might otherwise be the case.
TEMPORARY DEFENSIVE INVESTMENTS. When, in the judgment of the Sub-Adviser, a
temporary defensive posture is appropriate, the Third Avenue Value Portfolio may
hold all or a portion of its assets in short-term U.S. Government obligations,
cash or cash equivalents. The adoption of a temporary defensive posture does not
constitute a change in the Portfolio's investment objective.
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CONVERTIBLE SECURITIES. Third Avenue Value Portfolio and Gabelli Large Cap Value
Portfolio each may invest in convertible securities when it appears to its
Sub-Advisor that it may not be prudent to be fully invested in common stocks. In
evaluating a convertible security, the Sub-Adviser places primary emphasis on
the attractiveness of the underlying common stock and the potential for capital
appreciation through conversion. The Gabelli Large Cap Value Portfolio will
normally purchase only investment grade, convertible debt securities having a
rating of, or equivalent to, at least "BBB" (which securities may have
speculative characteristics) by S&P or, if unrated, judged by the Sub-Adviser to
be of comparable quality. However, the Gabelli Large Cap Value Portfolio may
also invest up to 25% of its assets in more speculative convertible debt
securities.
Convertible securities may include corporate notes or preferred stock but are
ordinarily a long-term debt obligation of the issuer convertible at a stated
exchange rate into common stock of the issuer. As with all debt securities, the
market value of convertible securities tends to decline as interest rates
increase and, conversely, to increase as interest rates decline. Convertible
securities generally offer lower interest or dividend yields than
non-convertible securities of similar quality. However, when the market price of
the common stock underlying a convertible security exceeds the conversion price,
the price of the convertible security tends to reflect the value of the
underlying common stock. As the market price of the underlying common stock
declines, the convertible security tends to trade increasingly on a yield basis,
and thus may not depreciate to the same extent as the underlying common stock.
Convertible securities rank senior to common stocks on an issuer's capital
structure and are consequently of higher quality and entail less risk than the
issuer's common stock, although the extent to which such risk is reduced depends
in large measure upon the degree to which the convertible security sells above
its value as a fixed income security.
In selecting convertible securities for the Gabelli Large Cap Value Portfolio,
its Sub-Adviser relies primarily on its own evaluation of the issuer and the
potential for capital appreciation through conversion. It does not rely on the
rating of the security or sell because of a change in rating absent a change in
its own evaluation of the underlying common stock and the ability of the issuer
to pay principal and interest or dividends when due without disrupting its
business goals. Interest or dividend yield is a factor only to the extent it is
reasonably consistent with prevailing rates for securities of similar quality
and thereby provides a support level for the market price of the security. The
Gabelli Large Cap Value Portfolio will purchase the convertible securities of
highly leveraged issuers only when, in the judgment of the Sub-Adviser, the risk
of default is outweighed by the potential for capital appreciation.
The issuers of debt obligations having speculative characteristics may
experience difficulty in paying principal and interest when due in the event of
a downturn in the economy or unanticipated corporate developments. The market
prices of such securities may become increasingly volatile in periods of
economic uncertainty. Moreover, adverse publicity or the perceptions of
investors over which the Sub-Adviser has no control, whether or not based on
fundamental analysis, may decrease the market price and liquidity of such
investments. Although each Sub-Adviser will attempt to avoid exposing the
Portfolio to such risks, there is no assurance that it will be successful or
that a liquid secondary market will continue to be available for the disposition
of such securities.
CORPORATE REORGANIZATIONS. In general, securities of companies engaged in
reorganization transactions sell at a premium to their historic market price
immediately prior to the announcement of the tender offer or reorganization
proposal. However, the increased market price of such securities may also
discount what the stated or appraised value of the security would be if the
contemplated transaction were approved or consummated. Such investments by the
Gabelli Large Cap Value Portfolio may be advantageous when the discount
significantly overstates the risk of the contingencies involved; significantly
undervalues the securities, assets or cash to be received by shareholders of the
prospective portfolio company as a result of the contemplated transaction; or
fails adequately to recognize the possibility that the offer or proposal
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may be replaced or superseded by an offer or proposal of greater value. The
evaluation of such contingencies requires unusually broad knowledge and
experience on the part of the Sub-Adviser which must appraise not only the value
of the issuer and its component businesses as well as the assets or securities
to be received as a result of the contemplated transaction, but also the
financial resources and business motivation of the offeror as well as the
dynamic of the business climate when the offer or proposal is in progress.
In making such investments, the Gabelli Large Cap Value Portfolio will not
violate any of its diversification requirements or investment restrictions
including the requirements that, except for the investment of up to 25% of its
assets in any one company or industry, not more than 5% of its assets may be
invested in the securities of any issuer. Since such investments are ordinarily
short term in nature, they will tend to increase the Portfolio's portfolio
turnover ratio thereby increasing its brokerage and other transaction expenses.
The Sub-Adviser intends to select investments of the type described which, in
its view, have a reasonable prospect of capital appreciation which is
significant in relation to both the risk involved and the potential of available
alternate investments.
WHEN ISSUED, DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. The Gabelli
Large Cap Value Portfolio and Baron Small Cap Portfolio may enter into forward
commitments for the purchase or sale of securities, including on a "when issued"
or "delayed delivery" basis in excess of customary settlement periods for the
type of securities involved (up to 5% of its assets in the case of Baron Small
Cap Portfolio). In some cases, a forward commitment may be conditioned upon the
occurrence of a subsequent event, such as approval and consummation of a merger,
corporate reorganization or debt restructuring, i.e., a when, as and if issued
security. When such transactions are negotiated, the price is fixed at the time
of the commitment, with payment and delivery taking place in the future,
generally a month or more after the date of the commitment. While the Portfolios
will only enter into a forward commitment with the intention of actually
acquiring the security, the Portfolios may sell the security before the
settlement date if it is deemed advisable.
Securities purchased under a forward commitment are subject to market
fluctuation, and no interest (or dividends) accrues to the Portfolio prior to
the settlement date. The Gabelli Large Cap Value Portfolio will segregate with
its custodian cash or liquid securities in an aggregate amount at least equal to
the amount of its outstanding forward commitments.
REITS. Third Avenue Value Portfolio and Baron Small Cap Portfolio may invest in
the equity securities of real estate investment trusts (REITS). A REIT is a
corporation or business trust that invests in real estate and derives its income
from rents from real property or interest on loans secured by mortgages on real
property. The market value of REITs may be affected by changes in the tax laws
or by their inability to qualify for the tax-free pass-through of their income.
The REIT portion of the portfolio may also be affected by general fluctuations
in real estate values and by defaults by borrowers or tenants.
OTHER DEBT SECURITIES. Third Avenue Value Portfolio and Baron Small Cap
Portfolio may invest in zero-coupon, step-coupon, and pay-in-kind securities.
These securities are debt securities that do not make regular interest payments.
Zero-coupon and step-coupon securities are sold at a deep discount to their face
value; pay-in-kind securities pay interest through the issuance of additional
securities. The market value of these debt securities generally fluctuates in
response to changes in interest rates to a greater degree than interest-paying
securities of comparable term and quality. The secondary market value of
corporate debt securities structured as zero coupon securities or
payment-in-kind securities may be more volatile in response to changes in
interest rates than debt securities which pay interest periodically in cash.
Because such securities do not pay current interest, but rather, income is
accrued, to the extent that the Portfolio does not have available cash to meet
distribution requirements with respect to such income, it could be required to
dispose of portfolio securities that it otherwise would not. Such
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disposition could be at a disadvantageous price. Investment in such securities
also involves certain tax considerations.
Baron Small Cap Portfolio from time to time may also purchase indebtedness and
participations therein, both secured and unsecured, of debtor companies in
reorganization or financial restructuring. Such indebtedness may be in the form
of loans, notes, bonds or debentures. When the Portfolio purchases a
participation interest it assumes the credit risk associated with the bank or
other financial intermediary as well as the credit risk associated with the
issuer of any underlying debt instrument. The Portfolio may also purchase trade
and other claims against, and other unsecured obligations of, such debtor
companies, which generally represent money due a supplier of goods or services
to such company. (Third Avenue Portfolio may also invest in trade claims.) Some
debt securities purchased by the Portfolio may have very long maturities. The
length of time remaining until maturity is one factor the Sub-Adviser considers
in purchasing a particular indebtedness. The purchase of indebtedness of a
troubled company always involves a risk as to the creditworthiness of the issuer
and the possibility that the investment may be lost. The Sub-Adviser believes
that the difference between perceived risk and actual risk creates the
opportunity for profit which can be realized through thorough analysis. There
are no established markets for some of this indebtedness and it is less liquid
than more heavily traded securities. Indebtedness of the debtor company to a
bank are not securities of the banks issuing or selling them. The Portfolio may
purchase loans from national and state chartered banks as well as foreign ones.
The Portfolio may invest in senior indebtedness of the debtor companies,
although on occasion subordinated indebtedness may also be acquired. The
Portfolio may also invest in distressed first mortgage obligations and other
debt secured by real property. The Portfolio does not currently anticipate
investing more than 5% of its assets in trade and other claims.
When the Sub-Adviser determines that opportunities for profitable investments
are limited or that adverse market conditions exist, all or a portion of the
Portfolio's assets may be invested in cash or cash equivalents such as money
market instruments, which include U.S. Government securities, certificates of
deposit, short-term investment grade corporate bonds and other short-term debt
instruments, and repurchase agreements. When the Portfolio's investments in cash
or similar investments increase, its investment objectives may not be achieved.
SECTION 3. - 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)
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67% or more of the Portfolio's voting securities present at a meeting of
shareholders, if the holders of more than 50% of the Portfolio's outstanding
shares are present in person or by proxy, or (2) more than 50% of the
outstanding shares. Unless otherwise indicated, all percentage limitations apply
to each Portfolio on an individual basis, and apply only at the time an
investment is made; a later increase or decrease in percentage resulting from
changes in values or net assets will not be deemed to be an investment that is
contrary to these restrictions. Pursuant to such restrictions and policies, no
Portfolio may:
(1) make an investment in any one industry if the investment would cause
the aggregate value of the Portfolio's investment in such industry to
exceed 25% of the Portfolio's total assets, except that this policy
does not apply to obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities (U.S. GOVERNMENT
SECURITIES), certificates of deposit and bankers' acceptances;
(2) purchase securities of any one issuer (except U.S. Government
securities), if as a result at the time of purchase more than 5% of
the Portfolio's total assets would be invested in such issuer, or the
Portfolio would own or hold 10% or more of the outstanding voting
securities of that issuer, except that 25% of the total assets of the
Portfolio may be invested without regard to this limitation;
(3) purchase securities on margin, except for short-term credit necessary
for clearance of portfolio transactions and except that a Portfolio
that may use options or futures strategies and may make margin
deposits in connection with its use of options, futures contracts and
options on futures contracts;
(4) mortgage, pledge, hypothecate or in any manner transfer, as security
for indebtedness, any securities owned or held by the Portfolio except
as may be necessary in connection with permitted borrowings and then
not in excess of 5% of the Portfolio's total assets taken at cost (10%
in the case of Gabelli Blue Chip Value Portfolio and Baron 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;
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(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 Third Avenue
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. Gabelli Large Cap Value Portfolio and
Baron 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 Gabelli Large Cap Value Portfolio
and Baron Small Cap Portfolio) of its total assets as security for
such borrowing. For purposes of this restriction, the deposit of
initial or maintenance margin in connection with futures contracts
will not be deemed to be a pledge of the assets of a Portfolio.
The following investment restriction may be changed by the vote of the Fund's
Board of Directors without shareholder approval:
No Portfolio will hold assets of any issuers, at the end of any
calendar quarter (or within 30 days thereafter), to the extent such
holdings would cause the Portfolio to fail to comply with the
diversification requirements imposed by Section 817(h) of the 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 Gabelli Large Cap Value Portfolio, Third Avenue Value Portfolio and
Baron 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
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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 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.
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- 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.
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. Gabelli Large Cap Value, Third Avenue Value
Portfolio and Baron 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).
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Gabelli Large Cap Value Portfolio and Baron 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. If a Portfolio writes
a call option that is not covered as described in (i) or (ii) above, it has not
limited its risk from a potential rise in the price of the underlying security.
Gabelli Large Cap Value and Baron Small Cap Portfolio also may write listed put
options. A Portfolio may write puts only if they are SECURED. Baron Small Cap
Portfolio also may write OTC put options. A put is secured if a Portfolio (i)
maintains in a segregated account with the custodian, cash or U.S. Government
securities or other appropriate high-grade debt obligations with a value equal
to the exercise price or (ii) holds a put on the same underlying security at an
equal or greater exercise price. When a Portfolio writes a put, it receives a
premium and gives the purchaser of the put the right to sell the underlying
security to the Portfolio at the exercise price at any time during the option
period. The Portfolio may purchase a put on the underlying security to effect a
CLOSING PURCHASE TRANSACTION, except in those circumstances, which are believed
by the Sub-Adviser to be rare, when it is unable to do so.
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
280930.2
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<PAGE>
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.
Gabelli Large Cap Value Portfolio, Third Avenue Value Portfolio and Baron 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.
Baron Small Cap Portfolio may purchase and write options on the OTC market (OTC
OPTIONS). The staff of the SEC has taken the position that OTC options that are
purchased and the assets used as cover for written OTC options should generally
be treated as illiquid securities. However, if a dealer recognized by the
Federal Reserve Bank as a PRIMARY DEALER in U.S. Government securities is the
other party to an option contract written by a Portfolio and that Portfolio has
the absolute right to repurchase the option from the dealer at a formula price
established in a contract with the dealer, the SEC staff has agreed that the
Portfolio needs to treat as illiquid only that amount of the cover assets equal
to the formula price less the amount by which the market value of the security
subject to the option exceeds the exercise price of the option (the amount by
which the option is IN-THE-MONEY). Although the Sub-Advisers do not believe that
OTC options are generally illiquid, pending resolution of this issue, the
Portfolio will conduct its operations in conformity with the views of the SEC
staff.
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
280930.2
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<PAGE>
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 Gabelli Large Cap Value Portfolio, Third Avenue Value
Portfolio and Baron 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. Gabelli Large Cap Value Portfolio
and Baron Small Cap Portfolio will each attempt to limit losses from all options
transactions to 5% of its average net assets per year, or cease options
transactions until in compliance with the 5% limitation, but there can be no
absolute assurance of adherence to these limits.
The Fund's custodian, or a securities depository acting for it, will act as
escrow agent as to the securities on which a Portfolio has written puts or
calls, or as to other securities acceptable for such escrow, so that no margin
deposit will be required of the Portfolio. Until the underlying securities are
released from escrow, they cannot be sold by the Portfolio.
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:
- Gabelli Large Cap Value Portfolio, Third Avenue Value Portfolio and Baron
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
- Gabelli Large Cap Value Portfolio and Baron 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. Gabelli Large Cap Value Portfolio, Third
Avenue Value Portfolio and Baron Small Cap Portfolio may purchase and sell
interest rate futures contracts as a hedge against changes in interest rates.
Gabelli Large Cap Value Portfolio, Third Avenue Value Portfolio and Baron Small
Cap Portfolio may purchase and sell stock index futures contracts and Gabelli
Large Cap Value Portfolio and Baron 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
280930.2
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<PAGE>
securities declined, the value of the Portfolio's futures contracts would
increase, thereby protecting the Portfolio by preventing the net asset value
from declining as much as it otherwise would have. Similarly, entering into
futures contracts for the purchase of securities has an effect similar to the
actual purchase of the underlying securities, but permits the continued holding
of securities other than the underlying securities. For example, if the
Sub-Adviser expects long-term interest rates to decline, the Sub-Adviser might
enter into futures contracts for the purchase of long-term securities so that it
could gain rapid market exposure that may offset anticipated increases in the
costs of securities it intends to purchase, while continuing to hold
higher-yielding short-term securities or waiting for the long-term market to
stabilize.
A stock index futures contract is an agreement in which one party agrees to
deliver to the other an amount of cash equal to a specific dollar amount
multiplied by the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of securities is made. The writing of a
put option on a futures contract is similar to the purchase of the futures
contract, except that, if the market price declines, the Portfolio would pay
more than the market price for the underlying securities. The net cost to the
Portfolio would be reduced, however, by the premium received on the sale of the
put, less any transaction costs.
There is no assurance that it will be possible, at any particular time, to close
a futures position. In the event that a Portfolio could not close a futures
position and the value of the position declined, the Portfolio would be required
to continue to make daily cash payments of maintenance margin. There can be no
assurance that hedging transactions will be successful, as there may be an
imperfect correlation (or no correlation) between movements in the prices of the
futures contracts and of the securities being hedged, or price distortions due
to conditions in the futures markets because futures markets may have daily
market price movement limits for futures contracts. Where futures contracts are
purchased to hedge against an increase in the price of long-term securities, but
the long-term market declines and a Portfolio does not invest in long-term
securities, the Portfolio would realize a loss on the futures contracts, which
would not be offset by a reduction in the price of securities purchased. Where
futures contracts are sold to hedge against a decline in the price of long-term
securities in a Portfolio, but the long-term market advances, the Portfolio
would lose part or all of the benefit of the advance due to offsetting losses in
its futures positions. Successful use of futures contracts by a Portfolio is
subject to the Sub-Adviser's ability to predict correctly movements in the
direction of interest rates, currency exchange rates, market prices and other
factors affecting markets for debt securities.
A Portfolio may not enter into futures contracts or purchase or write related
options unless it complies with rules and interpretations of the Commodity
Futures Trading Commission (CFTC) which require, among other things, that
futures and related options be used solely for BONA FIDE HEDGING purposes, as
defined in CFTC regulations or, alternatively, that the Portfolio will not enter
into futures and related options transactions if the sum of the aggregate
initial margin deposits on futures contracts and premiums paid for related
options exceeds 5% of the market value of the Portfolio's total assets
(calculated in accordance with CFTC regulations).
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
280930.2
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<PAGE>
to lengthen the average duration of a Portfolio, the Portfolio may buy a futures
contract or a call option on a futures contract.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a Portfolio is required to deposit in a
segregated account with its custodian, in the name of the futures broker through
whom the transaction was effected, initial margin consisting of cash, U.S.
Government securities or other liquid, high-grade debt securities, in an amount
generally equal to 10% or less of the contract value. Margin must also be
deposited when writing a call option on a futures contract, in accordance with
applicable exchange rules. Unlike margin in securities transactions, initial
margin on futures contracts does not represent a borrowing, but rather is in the
nature of a performance bond or good-faith deposit that is returned to the
Portfolio at the termination of the transaction if all contractual obligations
have been satisfied. Under certain circumstances, such as periods of high
volatility, a Portfolio may be required by an exchange to increase the level of
its initial margin payment, and initial margin requirements might be increased
generally in the future by regulatory action.
Subsequent variation margin payments are made to and from the futures broker
daily as the value of the futures position varies, a process known as marking to
market. Variation margin does not involve borrowing, but rather represents a
daily settlement of the Portfolio's obligations to or from a futures broker.
When a Portfolio purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when a Portfolio
purchases or sells a futures contract or writes a call option on a futures
contract, it is subject to daily variation margin calls that could be
substantial in the event of adverse price movements. If the Portfolio has
insufficient cash to meet daily variation margin requirements, it might need to
sell securities at a time when such sales are disadvantageous.
Holders and writers of futures positions and options on futures can enter into
offsetting closing transactions, similar to closing transactions on options, by
selling or purchasing, respectively, an instrument identical to the instrument
held or written. Positions in futures and options on futures may be closed only
on an exchange or board of trade that provides a secondary market. Each
Portfolio intends to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid 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
280930.2
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<PAGE>
subject to daily variation margin calls and might be compelled to liquidate
futures or related options positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, program trading and
other investment strategies might result in temporary price distortions.
LIMITATIONS ON THE USE OF FUTURES. A Portfolio will not purchase or sell futures
contracts or related options if, immediately thereafter, the sum of the amount
of initial margin deposits on the Portfolio's existing futures positions and
margin and premiums paid for related options would exceed 5% of the market value
of the Portfolio's total assets. This guideline can be changed by the Fund's
Board of Directors without shareholder vote. This guideline does not limit to 5%
the percentage of the Portfolio's assets that are at risk in futures and related
options transactions. For purposes of this guideline, options on futures
contracts and foreign currency options traded on a commodities exchange will be
considered related options.
In addition, the Fund has represented to the CFTC that it:
- will use future contracts, options on futures contracts and foreign currency
options traded on a commodities exchange solely in bona fide hedging
transactions or, alternatively
- will not enter into futures contracts, options on futures contracts or
foreign currency options traded on a commodities exchange for which the
aggregate initial margin and premiums exceed 5% of a Portfolio's total
assets (calculated in accordance with CFTC regulations).
FOREIGN CURRENCY HEDGING STRATEGIES -- SPECIAL CONSIDERATIONS. The Third Avenue
Value Portfolio, Gabelli Large Cap Value Portfolio and the Baron 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.
280930.2
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<PAGE>
There is no systematic reporting of last sale information for foreign currencies
or any regulatory requirement that quotations available through dealers or other
market sources be firm or revised on a timely basis. Quotation information
generally is representative of very large transactions in the interbank market
and thus might not reflect odd-lot transactions where rates might be less
favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the hedging instruments until they reopen.
Settlement of hedging transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
a Portfolio might be required to accept or make delivery of the underlying
foreign currency in accordance with any U.S. or foreign regulations regarding
the maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
SECTION 4. - 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>
NAME, AGE & ADDRESS POSITION WITH PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
THE FUND
<S> <C> <C>
John R. Lindholm (51)* Chairman of President of Integrity Life Insurance Company since 1993; President of
515 W. Market Street the Board of National Integrity Life Insurance Company since September 1997;
Louisville, KY 40202 Directors Executive Vice President - Chief Marketing Officer of ARM Financial
Group (ARM) from July 1993 to March 2000; Chairman and Director of the
mutual funds in the State Bond Group of mutual funds from June 1995 to
December 1996.
27
<PAGE>
<CAPTION>
NAME, AGE & ADDRESS POSITION WITH PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
THE FUND
<S> <C> <C>
Chris LaVictoire Mahai (45) Director CEO, Aveus, an interactive strategy and development firm firm, since
244 North First Avenue July 1999; President, clavm, inc., a management consulting group, since
Minneapolis, MN 55401 June 1998; Fellow, Poynter Institute for Media Studies, since June
1998; 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 (73) Director President, William Faulkner & Associates, LLC (international trade
240 East Plato Blvd. business) since 1986; Director of the mutual funds in the State Bond
St. Paul, MN 55107 Group of mutual funds from 1980 to December 1996; Manager, Carroll
Family, LLC (commercial land development business) since 1996.
Irvin W. Quesenberry, Jr. (51) Director Retired; Founder and Managing Director of National Asset Management
35 Brownsboro Hill Road Corporation (investment counseling firm) from 1979 to 1995; Member of
Louisville, KY 40207 Louisville Community Foundation Investment Committee; Board member of
Louisville Water Company since 1986.
John Katz (62) Director Managing partner, Associated Mezzanine Investors, LLC since March 2000;
10 Hemlock Road Director, Nations Flooring, Inc. since March 1998; Investment banker
Hartsdale, NY 10530 since January 1991; Director of the mutual funds in the State Bond
Group of mutual funds from June 1995 to December 1996.
Edward J. Haines (54) President Senior Vice President of Marketing for Integrity Life Insurance Company
515 W. Market Street since March 2000; Senior Vice President of Marketing for ARM from
Louisville, KY 40202 December 1993 to March 2000.
Kevin L. Howard (36) Secretary Senior Vice President and Counsel of Integrity Life Insurance Company
515 W. Market Street since March 2000; Senior Vice President and Counsel of ARM from October
Louisville, KY 40202 1998 to March 2000; Assistant General Counsel of ARM from January 1994
until October 1998.
Don W. Cummings (36) Controller Chief Financial Officer of Integrity Life Insurance Company since March
515 W. Market Street 2000; Chief Financial Officer-Retail Business Division of ARM from
Louisville, KY 40202 November 1996 to March 2000; Strategic Initiatives Officer of ARM from
April 1996 until November 1996; Controller of ARM from November 1993
until April 1996.
</TABLE>
280930.2
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<PAGE>
* 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, 2000 the Fund
paid the Directors who are not interested persons of the Fund a combined
total of $39,000 exclusive of expenses. Because the Manager and the
Sub-Advisers perform substantially all of the services necessary for the
operation of the Fund, the Fund requires no employees. No officer, director
or employee of the Manager, Integrity, National Integrity or a Sub-Adviser
receives any compensation from the Fund for acting as a Director or officer.
The following table sets forth for the fiscal year ended June 30, 2000,
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
Benefits Estimated Compensation
Aggregate Accrued as Annual From Fund
Compensation Part of Fund Benefits Upon Paid to
Name of Director From Fund Expenses Retirement Directors
---------------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
William B. Faulkner $12,000 None N/A $12,000
John Katz $12,000 None N/A $12,000
Irvin W. Quesenberry, Jr. $ 3,000 None N/A $ 3,000
Chris L. Mahai $12,000 None N/A $12,000
</TABLE>
* Directors Faulkner, Katz and Mahai also received $3,000 each for Special
Meetings of the Fund held in September and November 1999. This compensation
was paid by the Manager, not the Fund.
CODE OF ETHICS. The Fund, the Manager, each Sub-Adviser and the Distributor have
adopted a Code of Ethics under Rule 17j-1 of the 1940 Act (the CODE). Persons
subject to the Code may not purchase securities in which the Fund or the
Portfolios may invest unless their purchases have been precleared in accordance
with the Code and do not occur within certain black-out periods imposed under
the Code.
SECTION 5. - 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, 2000 , the Directors and officers of the Fund as a group owned
less than 1% of the outstanding shares of each Portfolio of the Fund.
280930.2
29
<PAGE>
SECTION 6. - INVESTMENT ADVISORY AND OTHER SERVICES
Touchstone Advisors, Inc., 311 Pike Street, Cincinnati, Ohio 45202 (MANAGER),
serves as investment manager to all the Portfolios of the Fund. Western &
Southern, the parent of the Manager, is, together with the Manager, part of
The Western-Southern Enterprise -Registered Trademark- (the ENTERPRISE),
which is a family of companies that provides life insurance, annuities,
mutual funds, asset management and other related financial services for
millions of customers nationwide. (The Manager is 100% owned by IFS Financial
Services, Inc., 311 Pike Street, Cincinnati, Ohio 45202, a direct subsidiary
of Western & Southern.) As of June 30, 2000, the Enterprise owned and managed
assets of approximately $25 billion and the Manager managed assets of
approximately $1.5 billion (on a consolidated basis).
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.
Until April 4, 2000, Integrity Capital Advisors, Inc. served as investment
manager to the Fund, when the management responsibilities were [assumed] by the
Manager on the same terms and conditions. For the fiscal years ended June 30,
1998, 1999 and 2000 each Portfolio paid the Manager management fees in the
amounts set forth below:
<TABLE>
<CAPTION>
Management Fee for Fiscal Year Ended
------------------------------------
Portfolio June 30, 1998 June 30, 1999 June 30, 2000
---------- ------------- ------------- -------------
<S> <C> <C> <C>
Harris Bretall Sullivan & Smith Equity Growth
Portfolio $ 199,561 $ 280,242 $ 348,422
Third Avenue Value Portfolio $ 228,476 $ 297,742 $ 207,748
Gabelli Large Cap Value Portfolio $ 394,520 $ 324,109 $ 177,505
Baron Small Cap Portfolio $ 135,678 $ 129,719 $ 84,455
</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
Touchstone Securities Corporation, 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
280930.2
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<PAGE>
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 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, 1998 and 1999 and 2000
the Portfolios received reimbursements in the amounts set forth below:
<TABLE>
<CAPTION>
Amount Reimbursed for Fiscal Year Ended
---------------------------------------
Portfolio June 30, 1998 June 30, 1999 June 30, 2000
--------- ------------- ------------- -------------
<S> <C> <C> <C>
Harris Bretall Sullivan & Smith Equity Growth -- -- --
Portfolio
Third Avenue Value Portfolio -- -- --
Gabelli Large Cap Value Portfolio -- -- --
Baron Small Cap Portfolio $5,527 $12,007 $56,672
</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
280930.2
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<PAGE>
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, 1998, 1999 and 2000 the Manager or its
predecessor paid the Sub-Advisers sub-advisory fees in respect of each Portfolio
in the amounts set forth below:
<TABLE>
<CAPTION>
Amount of Sub-Advisory Fee for Fiscal Year Ended
------------------------------------------------
Portfolio June 30, 1998 June 30, 1999 June 30, 2000
--------- ------------- ------------- -------------
<S> <C> <C> <C>
Harris Bretall Sullivan & Smith Equity Growth
Portfolio $ 141,321 $ 173,912 $ 214,414
Third Avenue Value Portfolio* $ 161,781 $ 185,015 $ 127,885
Gabelli Large Cap Value Portfolio* $ 312,874 $ 234,961 $ 128,198
Baron Small Cap Portfolio* $ 111,641 $ 99,442 $ 64,347
</TABLE>
*Until October 31, 2000, the Portfolio's previous sub-adviser furnished
investment advisory services.
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, The Chrysler
Building, 405 Lexington Avenue, New York, New York 10174, 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. Touchstone Securities Corporation, 311 Pike Street, Cincinnati,
Ohio 45202 serves as distributor for shares of the Fund. Touchstone Securities
Corporation receives no compensation for serving as distributor.
280930.2
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<PAGE>
SECTION 7. - 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, 1998, 1999 and 2000 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, 1998 June 30, 1999 June 30, 2000
--------- -------------- -------------- -------------
<S> <C> <C> <C>
Harris Bretall Sullivan & Smith Equity Growth
Portfolio $ 30,772 $ 21,926 $ 32,104
Third Avenue Value Portfolio* $ 51,642 $ 42,712 $ 47,204
Gabelli Large Cap Value Portfolio* $ 48,874 $ 33,966 $ 32,851
Baron Small Cap Portfolio* $ 25,868 $ 43,452 $ 24,142
</TABLE>
* Until October 31, 2000 the Portfolio's previous sub-adviser furnished
investment advisory services.
280930.2
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<PAGE>
For the fiscal years ended June 30, 1998, 1999, and 2000 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, 1999 and 2000 were the
brokerage commissions paid to those broker-dealers as a percentage of the
combined brokerage commissions paid by each Portfolio and as a percentage of the
combined dollar amount of portfolio transactions involving the payment of
commissions engaged in by that Portfolio.
<TABLE>
<CAPTION>
Fiscal Year Ended June 30, 1998 Fiscal Year Ended June 30, 1999 Fiscal Year Ended June 30, 2000
-------------------------------- ------------------------------- -------------------------------
Brokerage Commissions Brokerage Commissions Brokerage Commissions
As a As a
As a Percentage of Percentage
Percentage of As a Portfolio As a of Portfolio
Affiliated As a Portfolio Percentage of Transactions Percentage Transactions
Broker-Dealer Percentage of Transactions Aggregate Involving of Aggregate Involving
------------- Portfolio Paid Aggregate Involving Paid Commission Commissions Paid Commission Commission
--------- ----- Commission Commissions ----- ---------- ----------- ----- ----------- ----------
($) ---------- ----------- ($) ($)
--- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Zweig Gabelli Large
Securities Cap Value
Corporation Portfolio (b) 583 1% --(a) n/a n/a n/a n/a n/a n/a
Baron Small
Cap
Portfolio (b)
17 --(a) --(a) n/a n/a n/a n/a n/a n/a
</TABLE>
--------------------------
(a) Less than 1%.
(b) Until October 31, 2000, Phoenix/Zweig Advisers served as the
Portfolio's Sub-Adviser.
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.
280930.2
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<PAGE>
Investment decisions for each Portfolio and for other investment accounts
managed by each Sub-Adviser are made independently of each other in light of
differing considerations for the various accounts. However, the same investment
decision may be made for a Portfolio and one or more other accounts. In such
cases, simultaneous transactions are inevitable. Purchases or sales are then
allocated between the Portfolio and such other account(s) as to amount,
according to a formula deemed equitable to the Portfolio and the other
account(s). While in some cases this practice could have a detrimental effect on
the price or value of the security as far as a Portfolio is concerned, or on its
ability to complete its entire order, in other 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 8. - 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;
280930.2
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<PAGE>
- when an emergency exists, as defined by the SEC, that makes it not reasonably
practicable for the Fund to dispose of securities owned by it or fairly to
determine the value of its assets; or
- as the SEC may otherwise permit.
The redemption price may be more or less than the shareholder's cost, depending
on the market value of the Portfolio's securities at the time.
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.
280930.2
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<PAGE>
SECTION 9. - TAXATION OF THE FUND
Shares of the Portfolios are currently offered only to Integrity and National
Integrity separate accounts that fund variable annuity contracts. Each Portfolio
is treated as a separate corporation for federal income tax purposes. To qualify
(or to continue to qualify) for treatment as a regulated investment company
(RIC) under the Code, each Portfolio must distribute to its shareholders each
taxable year at least 90% of its investment company taxable income (consisting
generally of net investment income, net short term capital gain and net gains
from certain foreign currency transactions) for such taxable year and must meet
several additional requirements. With respect to each Portfolio, these
requirements include the following:
- the Portfolio must derive at least 90% of its gross income each taxable year
from dividends, interest, payments with respect to securities loans and gains
from the sale or other disposition of stock or securities or foreign
currencies, or other income (including gains from options, futures or forward
contracts) derived with respect to its business of investing in stock or
securities or those currencies (INCOME REQUIREMENT);
- at the close of each quarter of the Portfolio's taxable year, at least 50%
of the value of its total assets must be represented by cash and cash items,
U.S. Government securities, securities of other RICs and other securities,
with these other securities limited, in respect of any one issuer, to an
amount that does 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.
280930.2
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<PAGE>
The foregoing is only a general summary of some of the important federal income
tax considerations generally affecting the Portfolios and their shareholders. No
attempt is made to present a complete explanation of the federal tax treatment
of the Portfolios' activities.
SECTION 10. - 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:
280930.2
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<PAGE>
The Standard & Poor's Composite Index of 500 Stocks (S&P 500) is a market
value-weighted and unmanaged index showing the changes in the aggregate market
value of 500 stocks relative to the base period 1941-43. The S&P 500 is composed
almost entirely of common stocks of companies listed on the NYSE, although the
common stocks of a few companies listed on the American Stock Exchange or traded
OTC are included. The 500 companies represented include 381 industrial, 37
utility, 11 transportation and 71 financial services concerns. The S&P 500
represents about 80% of the market value of all issues traded on the NYSE.
The Dow Jones Composite Average (or its component averages) is an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
The NYSE composite or component indices are unmanaged indices of all industrial,
utilities, transportation and finance company stocks listed on the NYSE.
The Wilshire 5000 Equity Index (or its component indices) represents the return
of the market value of all common equity securities for which daily pricing is
available. Comparisons of performance assume reinvestment of dividends.
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.
280930.2
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<PAGE>
The Russell 2500 Index is comprised of the bottom 500 stocks in the Russell 1000
Index which represents the universe of stocks from which most active money
managers typically select; and all the stocks in the Russell 2000 Index. The
largest security in the index has a market capitalization of approximately 1.3
billion.
The Consumer Price Index (or Cost of Living Index), published by the United
States Bureau of Labor Statistics is a statistical measure of change, over time,
in the price of goods and services in major expenditure groups.
STOCKS, BONDS, BILLS AND INFLATION, published by Hobson Associates, presents an
historical measure of yield, price and total return for common and small company
stocks, long-term government bonds, Treasury bills and inflation.
Savings and Loan Historical Interest Rates as published in the United States
Savings & Loan League Fact Book.
Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch, Pierce,
Fenner & Smith, Shearson Lehman Hutton and Bloomberg L.P.
The MSCI Combined Far East Free ex Japan Index is a market-capitalization
weighted index comprising 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 11. - 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, 2000 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.
280930.2
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<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.
280930.2
41
<PAGE>
APPENDIX B
DESCRIPTION OF CORPORATE BOND RATINGS
STANDARD & POOR'S RATINGS GROUP
The ratings are based on current information furnished by the issuer or obtained
by Standard & Poor's from other sources it considers reliable. Standard & Poor's
does not perform any audit in connection with any rating and may, on occasion,
rely on unaudited financial information. The ratings may be changed, suspended
or withdrawn as a result of changes in, or unavailability of, such information
or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance
with the terms of the obligation.
II. Nature and provisions of the obligation.
III. Protection afforded by, and relative position of the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
AAA - Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A - Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher
rated categories.
BBB - Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
BB, B, CCC, CC, C - Debt rated "BB", "B", "CCC", "CC", and "C" is
regarded, on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with the terms
of the obligation. "BB" indicates the lowest degree of speculation and
"C" the highest degree of speculation. While such debt will likely have
some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
BB - Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties
or exposure to adverse business, financial or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payments. The "BB" rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied "BBB" rating.
280930.2
42
<PAGE>
B - Debt rated "B" has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions will likely impair
capacity or willingness to pay interest and repay principal. The "B"
rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied "BB" or "BB-" rating.
CCC - Debt rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal.
In the event of adverse business, financial or economic conditions, it is
not likely to have the capacity to pay interest and repay principal. The
"CCC" rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied "B" or "B-" rating.
CC - The rating "CC" is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
C - The rating "C" is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued.
C1 - The rating "C1" is reserved for income bonds on which no interest
is being paid.
D - Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace period.
The "D" rating also will be used upon the filing of a bankruptcy petition
if debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
MOODY'S INVESTORS SERVICE, INC.
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can
be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities,
fluctuation of protective elements may be of greater amplitude, or there
may be other elements present which make the long-term risk appear
somewhat greater than the Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment some
time in the future.
280930.2
43
<PAGE>
Baa - Bonds which are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present,
but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements:
their future cannot be considered as well-assured. Often the protection
of interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing. Moody's applies numerical
modifiers: 1, 2 and 3 in each generic rating classification from Aa
through B in its corporate bond rating system. The modifier 1 indicates
that the security ranks in the higher end of its generic rating category,
the modifier 2 indicates a mid-range ranking, and the modifier 3
indicates that the issue ranks in the lower end of its generic rating
category.
280930.2
44
<PAGE>
The Legends Fund, Inc.
Annual Report
June 30, 2000
Contents
<TABLE>
<S> <C>
Report of Independent Auditors................................................ 2
Financial Statements, Financial Highlights, and Schedules of
Investments:
Harris Bretall Sullivan & Smith Equity Growth Portfolio.................. 3
Scudder Kemper Value Portfolio........................................... 7
Zweig Asset Allocation Portfolio.........................................12
Zweig Equity (Small Cap) Portfolio.......................................17
Notes to Financial Statements.................................................25
Portfolio Performance.........................................................37
</TABLE>
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR THE
GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED
OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS. NEITHER THE FUND NOR TOUCHSTONE
SECURITIES, INC., THE PRINCIPAL UNDERWRITER FOR FUND SHARES, IS A BANK AND FUND
SHARES ARE NOT BACKED OR GUARANTEED BY ANY BANK OR INSURED BY THE FEDERAL
DEPOSITORY INSURANCE CORPORATION.
<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,
2000, 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 auditing standards generally accepted
in the United States. 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, 2000, by correspondence with the
custodian and brokers. As to certain 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, 2000, and the results of their
operations for the year then ended, changes in their net assets for each of the
two years in the period then ended, and financial highlights for each of the
five years in the period then ended in conformity with accounting principles
generally accepted in the United States.
/s/Ernst & Young LLP
Kansas City, Missouri
August 9, 2000
2
<PAGE>
HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO
Statement of Assets and Liabilities
June 30, 2000
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments in securities, at value (cost $32,210,052)--See accompanying schedule $ 57,187,855
Dividends and interest receivable 10,749
------------------
Total assets 57,198,604
LIABILITIES
Accounts payable and accrued expenses 45,254
Redemptions payable 273,874
------------------
Total liabilities 319,128
------------------
NET ASSETS $ 56,879,476
==================
Net Assets consist of:
Paid-in capital $ 22,929,994
Accumulated undistributed net realized gain on investments 8,971,679
Net unrealized appreciation on investments 24,977,803
------------------
NET ASSETS, for 1,880,597 shares outstanding $ 56,879,476
------------------
------------------
NET ASSET VALUE, offering and redemption price per share $ 30.25
------------------
------------------
</TABLE>
Statement of Operations
Year Ended June 30, 2000
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME
Dividends $ 266,021
Interest 63,058
------------------
Total investment income 329,079
EXPENSES
Investment advisory and management fees 348,422
Custody and accounting fees 144,729
Professional fees 21,911
Directors' fees and expenses 12,249
Other expenses 13,121
------------------
Total expenses 540,432
------------------
Net investment loss (211,353)
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments 9,414,873
Net unrealized depreciation for the year on investments (932,936)
------------------
Net realized and unrealized gain on investments 8,481,937
------------------
Net increase in net assets resulting from operations $ 8,270,584
------------------
------------------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
2000 1999
--------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment loss $ (211,353) $ (126,103)
Net realized gain on investments 9,414,873 1,150,781
Net unrealized appreciation (depreciation) for the year on investments (932,936) 12,820,070
--------------------------------------
Net increase in net assets resulting from operations 8,270,584 13,844,748
Distributions to shareholders from:
Net realized gain (1,073,245) (4,108,321)
--------------------------------------
Total distributions to shareholders (1,073,245) (4,108,321)
Capital share transactions:
Proceeds from sales of shares 15,302,142 13,015,410
Proceeds from reinvested distributions 1,073,245 4,108,321
Cost of shares redeemed (22,121,619) (9,093,677)
--------------------------------------
Net increase (decrease) in net assets resulting from share transactions (5,746,232) 8,030,054
--------------------------------------
Total increase in net assets 1,451,107 17,766,481
NET ASSETS
Beginning of period 55,428,369 37,661,888
--------------------------------------
End of period $ 56,879,476 $ 55,428,369
--------------------------------------
--------------------------------------
OTHER INFORMATION
Shares:
Sold 545,381 575,275
Issued through reinvestment of distributions 44,729 180,671
Redeemed (841,749) (407,703)
--------------------------------------
Net increase (decrease) (251,639) 348,243
--------------------------------------
--------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------------------------------------------
2000 (b) 1999 1998 1997 1996
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning
of period $ 26.00 $ 21.11 $ 17.53 $ 14.49 $ 12.85
Income from investment operations:
Net investment income (loss) (0.05) (0.06) - (a) 0.02 - (a)
Net realized and unrealized
gain on investments 4.83 7.17 4.90 4.13 1.74
-----------------------------------------------------------------------------------
Total from investment
operations 4.78 7.11 4.90 4.15 1.74
Less distributions:
From net investment income - - (0.02) - (a) (0.01)
From net realized gain (0.53) (2.22) (1.30) (1.11) (0.09)
-----------------------------------------------------------------------------------
Total distributions (0.53) (2.22) (1.32) (1.11) (0.10)
-----------------------------------------------------------------------------------
Net asset value, end of period $ 30.25 $ 26.00 $ 21.11 $ 17.53 $ 14.49
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
TOTAL RETURN 18.89% 35.19% 29.11% 30.23% 13.59%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
(in thousands) $56,879 $55,428 $ 37,662 $ 28,815 $ 23,810
Ratio of expenses to average
net assets 1.01% 0.96% 0.95% 1.03% 1.04%
Ratio of net investment income
(loss) to average net assets (0.39%) (0.29%) (0.01%) 0.14% 0.03%
Portfolio turnover rate 40% 27% 57% 46% 58%
</TABLE>
(a) Less than $0.01 per share.
(b) Effective March 3, 2000, Touchstone Advisors, Inc. replaced Integrity
Capital Advisors, Inc. as investment adviser for the Fund.
5
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Schedule of Investments
June 30, 2000
<TABLE>
<CAPTION>
COMMON STOCKS (97.5%) Number
of Shares Value
--------------- ---------------
<S> <C> <C>
BASIC CHEMICAL, PLASTICS & SYNTHETICS (10.5%)
Bristol-Myers Squibb Company 13,100 $ 763,075
Colgate-Palmolive Company 20,000 1,197,500
Genentech, Inc. (a) 8,100 1,393,200
Pfizer, Inc. 32,000 1,536,000
Schering-Plough Corporation 21,400 1,080,700
---------------
5,970,475
BUSINESS SERVICES (12.8%)
America Online, Inc. (a) 21,900 1,155,225
Broadvision, Inc. (a) 26,800 1,359,261
Interpublic Group Companies, Inc. 24,800 1,066,400
Microsoft Corporation (a) 19,000 1,519,406
Sun Microsystems, Inc. (a) 12,000 1,091,625
Yahoo, Inc. (a) 9,300 1,152,328
---------------
7,344,245
COMMUNICATIONS (4.8%)
Qwest Communications (a) 23,000 1,142,813
SBC Communications, Inc. 15,000 648,750
Worldcom, Inc. (a) 21,300 977,803
---------------
2,769,366
DEPOSITORY INSTITUTIONS (3.9%)
Citigroup, Inc. 22,900 1,379,725
Wells Fargo Company 21,600 837,000
---------------
2,216,725
ELECTRICAL & ELECTRONIC MACHINERY (14.3%)
General Electric Company 44,400 2,353,200
Intel Corporation 15,600 2,085,038
Lucent Technologies, Inc. 16,700 989,475
PMC Sierra, Inc. (a) 7,000 1,243,594
Texas Instruments, Inc. 21,800 1,497,388
---------------
8,168,695
FABRICATED METAL PRODUCTS (1.4%)
Illinois Tool Works, Inc. 14,400 820,800
FOOD AND KINDRED PRODUCTS (2.4%)
Coca-Cola Company 23,800 1,367,013
GENERAL MERCHANDISE STORES (3.5%)
Target Corporation 15,500 899,000
Wal-Mart Stores, Inc. 19,300 1,112,163
---------------
2,011,163
INDUSTRIAL MACHINERY & EQUIPMENT (17.0%)
Applied Materials, Inc. (a) 18,000 1,631,813
Cisco Systems, Inc. (a) 37,400 2,376,067
Dell Computer Corporation (a) 23,000 1,134,906
EMC Corporation (a) 28,600 2,200,411
International Business Machines Corporation 8,500 931,281
Network Appliance, Inc. (a) 18,000 1,448,438
---------------
9,722,916
INSTRUMENTS & RELATED PRODUCTS (3.4%)
JDS Uniphase Corporation (a) 16,000 1,917,500
<CAPTION>
COMMON STOCKS (continued) Number
of Shares Value
--------------- ---------------
<S> <C> <C>
INSURANCE CARRIERS (2.4%)
American International Group, Inc. 11,483 $ 1,349,253
MOTION PICTURES (2.0%)
Walt Disney Company 30,000 1,164,375
OIL & GAS EXTRACTION (2.0%)
Schlumberger Ltd. 15,000 1,119,375
RETAIL-BUILDING MATERIAL HARDWARE (2.1%)
The Home Depot, Inc. 24,000 1,198,500
RETAIL - MISCELLANEOUS (4.0%)
Costco Wholesale Corporation (a) 30,000 990,938
Walgreen Company 41,000 1,319,688
---------------
2,310,626
SECURITY & COMMODITY BROKERS (7.0%)
The Goldman Sachs Group, Inc. 12,600 1,195,425
Morgan Stanley, Dean Witter & Co. 16,600 1,381,950
The Charles Schwab Corporation 42,600 1,432,425
---------------
4,009,800
SERVICES-ENGINEERING, ACCOUNTING,
RESEARCH, MANAGEMENT (2.3%)
Halliburton Company 28,000 1,321,250
WHOLESALE TRADE-DURABLE GOODS (1.7%)
Johnson & Johnson, Inc. 9,500 967,813
---------------
TOTAL COMMON STOCKS (Cost $30,772,087) 55,749,890
<CAPTION>
Principal
SHORT-TERM SECURITIES (2.5%) Amount
REPURCHASE AGREEMENT (2.5%) -------------
State Street Bank, 3.50%, due 7/3/2000
(Collateralized by U.S. Treasury Note
5.125%, due 8/31/2000, value
$1,479,000) $1,437,965 1,437,965
---------------
TOTAL SHORT -TERM SECURITIES (Cost $1,437,965) 1,437,965
---------------
TOTAL INVESTMENTS (100.0%) (Cost $32,210,052) $ 57,187,855
---------------
---------------
</TABLE>
(a) Non-income producing.
OTHER INFORMATION:
Cost of purchases and proceeds from sales of securities, excluding short-term
securities, for the year ended June 30, 2000 aggregated $20,716,382 and
$27,320,639, respectively. At June 30, 2000, net unrealized appreciation for
tax purposes aggregated $24,940,218, of which $25,479,100 related to
appreciated investments and $538,882 related to depreciated investments. The
aggregate cost of securities was for $32,247,637 for tax purposes.
SEE ACCOMPANYING NOTES.
6
<PAGE>
Scudder Kemper Value Portfolio
Statement of Assets and Liabilities
June 30, 2000
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investment in securities, at value (cost $24,722,985)--See accompanying schedule $ 21,125,080
Dividends and interest receivable 43,458
Receivable for capital shares sold 18,535
---------------
Total assets 21,187,073
LIABILITIES
Payable for investments purchased 171,182
Accounts payable and accrued expenses 21,388
Redemptions payable 614
---------------
Total liabilities 193,184
---------------
NET ASSETS $ 20,993,889
---------------
---------------
Net Assets consist of:
Paid-in capital $ 23,382,568
Undistributed net investment income 575,556
Accumulated undistributed net realized gain on investments 633,670
Net unrealized depreciation on investments (3,597,905)
---------------
NET ASSETS, for 1,502,925 shares outstanding $ 20,993,889
---------------
---------------
NET ASSET VALUE, offering and redemption price per share $ 13.97
---------------
---------------
</TABLE>
Statement of Operations
Year Ended June 30, 2000
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME
Dividends $ 886,043
Interest 33,300
---------------
Total investment income 919,343
EXPENSES
Investment advisory and management fees 207,748
Custody and accounting fees 86,295
Professional fees 21,911
Directors' fees and expenses 12,249
Other expenses 15,584
---------------
Total expenses 343,787
---------------
Net investment income 575,556
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments 633,670
Net unrealized depreciation for the year on investments (12,023,155)
---------------
Net realized and unrealized loss on investments (11,389,485)
---------------
Net decrease in net assets resulting from operations $ (10,813,929)
===============
</TABLE>
SEE ACCOMPANYING NOTES.
7
<PAGE>
Scudder Kemper Value Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
2000 1999
---------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 575,556 $ 723,270
Net realized gain on investments 633,670 6,626,918
Net unrealized appreciation (depreciation) for the year on investments (12,023,155) 407,796
---------------------------------
Net increase (decrease) in net assets resulting from operations (10,813,929) 7,757,984
Distributions to shareholders from:
Net investment income (723,270) (591,315)
Net realized gain (6,626,918) (4,706,677)
---------------------------------
Total distributions to shareholders (7,350,188) (5,297,992)
Capital share transactions:
Proceeds from sales of shares 5,703,152 13,300,551
Proceeds from reinvested distributions 7,350,188 5,297,991
Cost of shares redeemed (24,064,739) (17,325,011)
---------------------------------
Net increase (decrease) in net assets resulting from share transactions (11,011,399) 1,273,531
---------------------------------
Total increase (decrease) in net assets (29,175,516) 3,733,523
NET ASSETS
Beginning of period 50,169,405 46,435,882
---------------------------------
End of period (including undistributed net investment income of $575,556
and $723,270, respectively) $ 20,993,889 $ 50,169,405
---------------------------------
---------------------------------
OTHER INFORMATION
Shares:
Sold 265,906 641,261
Issued through reinvestment of distributions 526,288 264,302
Redeemed (1,563,989) (840,192)
---------------------------------
Net increase (decrease) (771,795) 65,371
---------------------------------
---------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
8
<PAGE>
Scudder Kemper Value Portfolio
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------------------------------------------
2000 (a) 1999 1998 1997 1996
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning
of period $ 22.06 $ 21.02 $ 20.63 $ 16.17 $ 12.59
Income from investment operations:
Net investment income 0.39 0.33 0.26 0.26 0.18
Net realized and unrealized
gain (loss) on investments (5.12) 3.22 4.08 5.04 3.70
-----------------------------------------------------------------------------------
Total from investment
operations (4.73) 3.55 4.34 5.30 3.88
Less distributions:
From net investment income (0.33) (0.28) (0.26) (0.19) (0.19)
From net realized gain (3.03) (2.23) (3.69) (0.65) (0.11)
-----------------------------------------------------------------------------------
Total distributions (3.36) (2.51) (3.95) (0.84) (0.30)
-----------------------------------------------------------------------------------
Net asset value, end of period $ 13.97 $ 22.06 $ 21.02 $ 20.63 $ 16.17
===================================================================================
TOTAL RETURN (23.88%) 18.09% 23.36% 33.78% 31.22%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
(in thousands) $ 20,994 $ 50,169 $ 46,436 $ 30,930 $ 19,705
Ratio of expenses to average
net assets 1.08% 0.96% 0.94% 1.05% 1.06%
Ratio of expenses to average net
assets before voluntary
expense reimbursement 1.08% 0.96% 0.94% 1.05% 1.07%
Ratio of net investment income
to average net assets 1.80% 1.56% 1.58% 1.62% 1.65%
Ratio of net investment income
to average net assets before
voluntary expense
reimbursement 1.80% 1.56% 1.58% 1.62% 1.64%
Portfolio turnover rate 42% 50% 57% 88% 18%
</TABLE>
(a) Effective March 3, 2000, Touchstone Advisors, Inc. replaced Integrity
Capital Advisors, Inc. as investment adviser for the Fund.
9
<PAGE>
SCUDDER KEMPER VALUE PORTFOLIO
Schedule of Investments
June 30, 2000
<TABLE>
<CAPTION>
COMMON STOCKS (91.5%) Number
of Shares Value
------------ ----------
<S> <C> <C>
APPAREL & OTHER FINISHED PRODUCTS (1.8%)
VF Corporation 16,400 $ 390,525
BASIC CHEMICAL, PLASTICS & SYNTHETICS (10.6%)
Abbott Laboratories 17,200 766,475
Air Products and Chemicals, Inc 12,300 378,992
Bristol Myers Squibb Company 8,100 471,825
International Flavors & Fragrances, Inc. 7,500 226,406
Merck & Co., Inc. 3,400 260,525
Praxair, Inc. 3,700 138,519
------------
2,242,742
BUSINESS SERVICES (4.4%)
Computer Associates International, Inc. 6,200 317,363
Equifax, Inc. 23,100 606,375
------------
923,738
DEPOSITORY INSTITUTIONS (10.2%)
Bank of America Corporation 8,116 348,986
First Union Corporation 16,200 401,963
KeyCorp 22,900 403,613
PNC Bank Corporation 6,010 281,719
Wachovia Corporation 4,300 233,275
Washington Mutual, Inc. 17,088 493,414
------------
2,162,970
ELECTRICAL & ELECTRONIC MACHINERY (2.8%)
Emerson Electric Company 7,000 422,625
Thomas & Betts Corporation 9,300 177,863
------------
600,488
FOOD AND KINDRED PRODUCTS (5.2%)
H.J. Heinz Company 12,600 551,250
Sara Lee Corporation 28,600 552,338
------------
1,103,588
GENERAL MERCHANDISE STORES (5.4%)
May Department Stores Company 17,700 424,800
J. C. Penney Company, Inc. 17,200 317,125
Sears, Roebuck and Company 12,000 391,500
------------
1,133,425
INDUSTRIAL MACHINERY & EQUIPMENT (8.6%)
Diebold, Inc. 17,900 498,963
Minnesota Mining and Manufacturing Co. 3,700 305,250
Pitney Bowes, Inc. 13,700 548,000
United Technologies Corporation 7,900 465,113
------------
1,817,326
INSTRUMENTS & RELATED PRODUCTS (5.4%)
Becton Dickinson & Company 23,000 659,813
Raytheon Company 9,200 177,100
Xerox Corporation 14,400 298,800
------------
1,135,713
<CAPTION>
Number
of Shares Value
------------ ----------
COMMON STOCKS (CONTINUED)
<S> <C> <C>
INSURANCE CARRIERS (1.5%)
The Allstate Corporation 14,600 $ 324,850
LUMBER &WOOD PRODUCTS (1.4%)
Louisiana-Pacific Corporation 28,000 304,500
NONDEPOSITORY INSTITUTIONS (8.0%)
Federal Home Mortgage Corporation 21,000 850,500
Federal National Mortgage Corporation 16,000 835,000
------------
1,685,500
PAPER & ALLIED PRODUCTS (2.8%)
Sonoco Products Company 28,500 586,031
PETROLEUM & COAL PRODUCTS (6.0%)
BP Amoco PLC 5,256 297,293
Exxon Mobil Corporation 6,000 471,000
Texaco, Inc. 9,400 500,550
------------
1,268,843
RAILROAD TRANSPORTATION (2.5%)
Burlington Northern Santa Fe Corp. 12,900 295,894
CSX Corporation 10,600 224,588
------------
520,482
RETAIL-FOOD STORES (1.5%)
Albertson's, Inc. 9,700 322,525
RETAIL-MISCELLANEOUS (1.8%)
Newell Rubbermaid, Inc. 15,000 386,250
TOBACCO MANUFACTURERS OR CIGARETTES (3.7%)
Philip Morris Companies, Inc. 29,300 778,281
TRANSPORTATION BY AIR (1.2%)
Fedex Corporation (a) 6,600 250,800
TRANSPORTATION EQUIPMENT (2.2%)
Dana Corporation 7,300 154,669
Ford Motor Company 7,200 309,600
------------
464,269
WHOLESALE TRADE - DURABLE GOODS (4.5%)
Johnson & Johnson, Inc. 2,300 234,313
Du Pont E I DE Nemours & Company 6,600 288,750
Unilever N V 9,200 395,600
Visteon Corporation 942 11,428
------------
930,091
------------
TOTAL COMMON STOCKS (COST $22,930,842) $ 19,332,937
</TABLE>
10
<PAGE>
SCUDDER KEMPER VALUE PORTFOLIO
Schedule of Investments (continued)
<TABLE>
<CAPTION>
SHORT-TERM SECURITIES (8.5%) Principal
Amount Value
----------- -----------
REPURCHASE AGREEMENT (8.5%)
<S> <C> <C>
State Street Bank, 3.50%, due 7/3/2000
(Collateralized by U.S. Treasury Note
5.50%, due 3/31/2003, value $1,826,550) $ 1,792,143 $ 1,792,143
--------------
TOTAL SHORT-TERM SECURITIES (Cost $1,792,143) 1,792,143
--------------
TOTAL INVESTMENTS (100.0%) (Cost $ 24,722,985) $ 21,125,080
==============
</TABLE>
(a) Non-income producing.
OTHER INFORMATION:
Cost of purchases and proceeds from sales of securities, excluding
short-term securities, for the year ended June 30, 2000, aggregated
$13,176,777 and $30,829,444 respectively. At June 30, 2000, net unrealized
depreciation for tax purposes aggregated $4,890,302 of which $944,699
related to appreciated investments and $5,835,001 related to depreciated
investments. The aggregate cost of securities was $26,015,382 for tax
purposes.
SEE ACCOMPANYING NOTES.
11
<PAGE>
ZWEIG ASSET ALLOCATION PORTFOLIO
Statement of Assets and Liabilities
June 30, 2000
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investment in securities, at value (cost $13,909,803)--See accompanying schedule $ 14,286,162
Receivable for investments sold 13,665
Dividends and interest receivable 8,093
-----------------
Total assets 14,307,920
LIABILITIES
Cash overdraft 13,665
Accounts payable and accrued expenses 17,774
Redemptions payable 870
-----------------
Total liabilities 32,309
-----------------
NET ASSETS $ 14,275,611
=================
Net Assets consist of:
Paid-in capital $ 12,359,932
Undistributed net investment income 342,115
Accumulated undistributed net realized gain on investments 1,189,480
Net unrealized appreciation on investments and futures contracts 384,084
-----------------
NET ASSETS, for 1,360,383 shares outstanding $ 14,275,611
=================
NET ASSET VALUE, offering and redemption price per share $ 10.49
=================
</TABLE>
Statement of Operations
Year Ended June 30, 2000
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME
Dividends $ 153,491
Interest 466,661
-----------------
Total investment income 620,152
EXPENSES
Investment advisory and management fees 177,505
Custody and accounting fees 53,252
Professional fees 21,910
Directors' fees and expenses 12,249
Other expenses 13,121
-----------------
Total expenses 278,037
-----------------
Net investment income 342,115
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on:
Investments 1,072,376
Futures contracts 128,501
-----------------
Net realized gain 1,200,877
Net unrealized depreciation for the year on:
Investments (2,272,496)
Futures contracts (3,672)
-----------------
Net unrealized depreciation for the year (2,276,168)
-----------------
Net realized and unrealized loss on investments (1,075,291)
-----------------
Net decrease in net assets resulting from operations $ (733,176)
=================
</TABLE>
SEE ACCOMPANYING NOTES.
12
<PAGE>
ZWEIG ASSET ALLOCATION PORTFOLIO
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
2000 1999
-------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
<S> <C> <C>
Operations:
Net investment income $ 342,115 $ 411,239
Net realized gain on investments 1,200,877 5,955,028
Net unrealized depreciation for the year on investments (2,276,168) (8,938,463)
-------------------------------------------
Net decrease in net assets resulting from operations (733,176) (2,572,196)
Distributions to shareholders from:
Net investment income (411,239) (365,323)
Net realized gain (6,010,725) (6,048,315)
-------------------------------------------
Total distributions to shareholders (6,421,964) (6,413,638)
Capital share transactions:
Proceeds from sales of shares 2,825,128 1,260,662
Proceeds from reinvested distributions 6,421,964 6,413,638
Cost of shares redeemed (18,825,911) (15,129,106)
-------------------------------------------
Net decrease in net assets resulting from share transactions (9,578,819) (7,454,806)
-------------------------------------------
Total decrease in net assets (16,733,959) (16,440,640)
NET ASSETS
Beginning of period 31,009,570 47,450,210
-------------------------------------------
End of period (including undistributed net investment income
of $342,115 and $411,239, respectively) $ 14,275,611 $ 31,009,570
===========================================
OTHER INFORMATION
Shares:
Sold 287,813 84,700
Issued through reinvestment of distributions 611,977 488,856
Redeemed (1,756,390) (1,059,406)
-------------------------------------------
Net decrease (856,600) (485,850)
===========================================
</TABLE>
SEE ACCOMPANYING NOTES.
13
<PAGE>
ZWEIG ASSET ALLOCATION PORTFOLIO
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------------------------------
2000 (a) 1999 1998 1997 1996
----------------------------------------------------------------------------
SELECTED PER-SHARE DATA
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $ 13.99 $ 17.56 $ 14.63 $ 14.11 $ 13.02
Income (loss) from investment operations:
Net investment income 0.28 0.21 0.14 0.19 0.21
Net realized and unrealized
gain (loss) on investments (0.49) (1.04) 2.97 2.20 1.21
----------------------------------------------------------------------------
Total from investment
operations (0.21) (0.83) 3.11 2.39 1.42
Less distributions:
From net investment income (0.21) (0.16) (0.18) (0.22) (0.33)
From net realized gain (3.08) (2.58) -- (1.65) --
----------------------------------------------------------------------------
Total distributions (3.29) (2.74) (0.18) (1.87) (0.33)
----------------------------------------------------------------------------
Net asset value, end of period $ 10.49 $ 13.99 $ 17.56 $ 14.63 $ 14.11
============================================================================
TOTAL RETURN (0.52%) (3.73%) 21.38% 18.63% 11.06%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
(in thousands) $ 14,276 $ 31,010 $ 47,450 $ 42,848 $ 40,222
Ratio of expenses to average
net assets 1.41% 1.23% 1.18% 1.28% 1.25%
Ratio of net investment income
to average net assets 1.73% 1.13% 0.80% 1.29% 1.55%
Portfolio turnover rate 207% 109% 65% 89% 105%
</TABLE>
(a) Effective March 3, 2000, Touchstone Advisors, Inc. replaced Integrity
Capital Advisors, Inc. as investment adviser for the Fund.
14
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments
June 30, 2000
<TABLE>
<CAPTION>
Number
COMMON STOCKS (68.8%) of Shares Value
----------- ----------
<S> <C> <C>
BASIC CHEMICAL, PLASTICS & SYNTHETICS (7.5%)
Abbott Laboratories 1,600 $ 71,300
Amgen, Inc. (a) 700 49,197
Biogen, Inc. (a) 800 51,575
Chiron Corporation (a) 2,000 95,000
Clorox Company 1,600 71,700
Colgate Company 400 23,950
Merck & Company, Inc. 3,700 283,513
Occidental Petroleum Corporation 1,900 40,019
Pfizer, Inc. 2,200 105,600
Procter & Gamble Company 1,600 91,600
Schering-Plough Corporation 3,700 186,850
----------
1,070,304
BUSINESS SERVICES (7.1%)
Adobe Systems, Inc. 1,000 129,906
Citrix Systems, Inc. (a) 700 13,278
Ebay, Inc. (a) 1,200 65,138
Electronic Data Systems Corporation 100 4,125
First Data Corporation 1,000 49,625
Interpublic Group of Companies, Inc. 800 34,400
Microsoft Corporation (a) 2,300 183,928
Oracle Corporation (a) 1,500 126,047
Siebel Systems, Inc. (a) 300 49,078
Sun Microsystems, Inc. (a) 1,800 163,744
Yahoo, Inc. (a) 600 74,344
3Com Corporation (a) 2,000 115,188
----------
1,008,801
COMMUNICATIONS (6.2%)
AT & T Corporation (a) 2,600 82,225
AT & T Wireless Group 200 5,575
Bell Atlantic Corporation (a) 1,400 71,138
BellSouth Corporation 3,400 144,925
Comcast Corporation (a) 700 28,372
Infinity Broadcasting Corporation (a) 900 32,794
SBC Communications, Inc. 4,100 177,325
U S West, Inc. 1,800 154,350
United States Cellular Corporation (a) 900 56,700
Worldcom, Inc. (a) 2,900 133,128
----------
886,532
DEPOSITORY INSTITUTIONS (4.8%)
Chase Manhattan Corporation 1,350 62,184
Citigroup, Inc. 3,150 189,788
Firstar Corporation 3,700 77,931
FleetBoston Financial Corporation 2,600 88,400
J P Morgan & Co., Inc. 200 22,025
PNC Bank Corporation 2,600 121,875
Providian Financial Corporation 1,300 117,000
----------
679,203
EATING & DRINKING PLACES (0.3%)
Darden Restaurants, Inc. 700 11,375
Tricon Global Restaurants, Inc. (a) 1,000 28,250
----------
39,625
ELECTRIC GAS & SANITARY SERVICE (0.8%)
Edison International 1,900 38,950
Entergy Corporation 1,500 40,781
Public Service Enterprise Group Corporation Inc 1,000 34,625
----------
114,356
<CAPTION>
Number
COMMON STOCKS (CONTINUED) of Shares Value
----------- ----------
<S> <C> <C>
ELECTRICAL & ELECTRONIC MACHINERY (12.8%)
ADC Telecommunications, Inc. (a) 1,900 $ 159,303
Analog Devices, Inc. (a) 2,000 152,000
Cisco Systems, Inc. (a) 3,000 190,594
Compaq Computer Corporation 2,600 66,463
Dell Computer Corporation (a) 2,900 143,097
General Electric Company 4,900 259,700
Intel Corporation 1,200 160,388
International Business Machines 700 76,694
Lucent Technologies, Inc. 2,900 171,825
Motorola, Inc. 2,900 84,281
Qualcomm, Inc. (a) 1,300 77,959
Seagate Corporation (a) 2,100 115,500
Sycamore Networks, Inc. (a) 200 22,081
Tellabs, Inc. (a) 900 61,622
Texas Instruments, Inc. 1,200 82,425
----------
1,823,932
FABRICATED METAL PRODUCTS (0.3%)
Cooper Industries, Inc. 1,200 39,075
FOOD & KINDRED PRODUCTS (2.0%)
Adolph Coors Company 600 36,300
ConAgra 3,200 61,000
Pepsico, Inc. 4,400 195,525
----------
292,825
FORESTRY (0.4%)
Georgia Pacific Company 2,300 60,375
GENERAL MERCHANDISE STORES (1.0%)
Wal-Mart Stores, Inc. 2,400 138,300
INDUSTRIAL MACHINERY & EQUIPMENT (3.6%)
Applied Materials, Inc. (a) 1,800 163,181
Dover Corporation 200 8,113
EMC Corporation (a) 2,600 200,038
Ingersoll Rand Company 700 28,175
Network Appliance, Inc. (a) 700 56,328
Solectron Corporation (a) 1,500 62,813
----------
518,648
INSTRUMENTS & RELATED PRODUCTS (1.7%)
Baxter International, Inc. 600 42,188
KLA Tencor Corporation (a) 1,100 64,453
Northrop Grumman Corporation 800 53,000
Teradyne, Inc. (a) 1,200 88,200
----------
247,841
INSURANCE CARRIERS (2.1%)
Aetna, Inc. 1,000 64,188
AXA Financial, Inc. 1,600 54,400
Cigna Corporation 1,100 102,850
MGIC Investment Corporation 700 31,850
United Health Group, Inc. 500 42,875
----------
296,163
METAL MINING (0.3%)
Barrick Gold Corporation 2,700 49,106
MISC. MANUFACTURING INDUSTRIES (1.2%)
Tyco International LTD 3,600 170,550
</TABLE>
15
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
Number
COMMON STOCKS (CONTINUED) of Shares Value
----------- ----------
<S> <C> <C>
MOTION PICTURES (0.4%)
Walt Disney Company 1,300 $ 50,456
NONDEPOSITORY INSTITUTIONS (1.6%)
Federal National Mortgage Association 1,400 73,063
Household International, Inc. 1,600 66,500
MBNA Corporation 3,400 92,225
----------
231,788
OIL AND GAS EXTRACTION (2.6%)
Diamond Offshore Drilling, Inc. 3,000 105,375
Enron Corporation 1,000 64,500
Transocean Sedco Forex, Inc. 1,900 101,531
USX-Marathon Group, Inc. 4,100 102,756
----------
374,162
PAPER & ALLIED PRODUCTS (0.7%)
Kimberly-Clark Corporation 1,700 97,538
Temple-Inland, Inc. 100 4,200
----------
101,738
PETROLEUM & COAL PRODUCTS (2.2%)
Chevron Corporation 500 42,406
Coastal Corporation 2,300 140,013
Exxon Mobil Corporation 824 64,684
Texaco, Inc. 1,200 63,900
----------
311,003
PRIMARY METAL INDUSTRIES (0.4%)
ALCOA, Inc. 1,800 52,200
RAILROAD TRANSPORTATION (0.1%)
Burlington Northern Santa Fe 900 20,643
RETAIL-APPAREL & ACCESSORIES (0.2%)
The TJX Companies, Inc. 1,900 35,624
RETAIL-BUILDING MATERIALS (0.9%)
The Home Depot, Inc. 2,500 124,843
RETAIL-FURNITURE HOME FURNISHINGS (0.7%)
Best Buy Co., Inc. (a) 1,500 94,874
RUBBER & MISC. PLASTICS PRODUCTS (0.5%)
Nike, Inc. 1,000 39,813
Tupperware Corporation 1,500 33,000
----------
72,813
SECURITY & COMMODITY BROKERS (0.7%)
Lehman Brothers Holdings, Inc. 500 47,281
Merrill Lynch & Co., Inc. 400 46,000
----------
93,281
SERVICES-HEALTH SERVICES (0.2%)
Tenet Healthcare Corporation (a) 1,300 35,099
STONE CLAY & GLASS PRODUCTS (0.1%)
USG Corporation 400 12,149
TOBACCO MANUFACTURERS OR CIGARETTES (0.6%)
Philip Morris Companies, Inc. 3,300 87,655
<CAPTION>
Number
COMMON STOCKS (CONTINUED) of Shares Value
----------- ----------
<S> <C> <C>
TRANSPORTATION EQUIPMENT (2.9%)
Boeing Company 4,000 $ 167,250
Eaton Corporation 1,100 73,700
FMC Corporation (a) 1,800 104,400
Ford Motor Company 300 12,900
General Motors Corporation 1,000 58,063
----------
416,313
WHOLESALE TRADE-DURABLE GOODS (1.9%)
Cardinal Health, Inc. 2,200 162,800
Johnson & Johnson, Inc. 1,100 112,063
Visteon Corporation 39 476
----------
275,339
TOTAL COMMON STOCKS (Cost $9,449,257) 9,825,616
Principal
SHORT-TERM SECURITIES (31.2%) Amount
------------
U.S. GOVERNMENT AGENCY (27.2%)
Federal Home Loan Mortgage
Discount Note, 6.40%, due 7/11/2000 $ 800,000 798,578
Federal Home Loan Mortgage
Discount Note, 6.40%, due 7/18/2000 1,500,000 1,495,467
Federal National Mortgage
Discount Note, 6.40%, Due 7/26/2000 1,600,000 1,592,889
------------
3,886,934
U.S. GOVERNMENT OBLIGATIONS (0.7%)
U.S. Treasury Bills, 5.51%, due 8/17/2000 (b) 100,000 99,281
REPURCHASE AGREEMENT (3.3%)
State Street Bank, 3.50%, due 7/3/2000
(Collateralized by U.S. Treasury Note, 9.00%
due 11/15/2018, value $484,700) 474,331 474,331
------------
TOTAL SHORT-TERM SECURITIES (Cost $4,460,546) 4,460,546
------------
TOTAL INVESTMENTS (100.0%) (Cost $13,909,803) $14,286,162
============
</TABLE>
(a) Non-income producing.
(b) Security pledged to cover margin requirements for futures contracts. At
period end the value of the security pledged amounted to $99,281.
<TABLE>
<CAPTION>
FUTURES CONTRACTS
Expiration Contract Unrealized
Date Amount Gain
------------ ------------ ------------
<S> <C> <C> <C>
1 S & P 500
Futures Contract-Short Sept. 2000 $ 367,025 $ 7,725
</TABLE>
OTHER INFORMATION:
Cost of purchases and proceeds from sales of securities, excluding short-term
securities, for the year ended June 30, 2000, aggregated $23,368,098 and
$38,935,384, respectively. At June 30, 2000, net unrealized appreciation for tax
purposes aggregated $185,606, of which $728,601 related to appreciated
investments and $542,995 related to depreciated investments. The aggregate cost
of securities was $14,100,556 for book and tax purposes.
SEE ACCOMPANYING NOTES.
16
<PAGE>
Zweig Equity (Small Cap) Portfolio
Statement of Assets and Liabilities
June 30, 2000
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $5,561,934)--See accompanying schedule $ 5,756,449
Dividends, interest and other receivables 2,822
Receivable for investments sold 478,263
Due from investment advisor 21,211
--------------
Total assets 6,258,745
LIABILITIES
Payable for investments purchased 341,771
Redemptions payable 242
--------------
Total liabilities 342,013
NET ASSETS $ 5,916,732
==============
Net Assets consist of:
Paid-in capital $ 5,793,739
Undistributed net investment income 107,049
Accumulated net realized loss on investments (178,571)
Net unrealized appreciation on investments 194,515
--------------
NET ASSETS, for 508,224 shares outstanding $ 5,916,732
==============
NET ASSET VALUE, offering and redemption price per share $ 11.64
==============
Statement of Operations
Year Ended June 30, 2000
<CAPTION>
INVESTMENT INCOME
Dividends $ 45,335
Interest 186,387
--------------
Total investment income 231,722
EXPENSES
Investment advisory and management fees 84,455
Custody and accounting fees 49,610
Professional fees 21,910
Directors' fees and expenses 12,249
Other expenses 13,121
--------------
Total expenses before reimbursement 181,345
Less: expense reimbursement (56,672)
--------------
Net expenses 124,673
--------------
Net investment income 107,049
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investments 74,581
Futures contracts (8,872)
--------------
Net realized gain 65,709
Net unrealized depreciation for the year on:
Investments (591,427)
Futures contracts (140)
--------------
Net unrealized depreciation for the year (591,567)
--------------
Net realized and unrealized loss on investments (525,858)
--------------
Net decrease in net assets resulting from operations $ (418,809)
==============
</TABLE>
SEE ACCOMPANYING NOTES.
17
<PAGE>
Zweig Equity (Small Cap) Portfolio
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------
2000 1999
--------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 107,049 $ 87,679
Net realized gain (loss) on investments 65,709 (244,210)
Net unrealized depreciation on investments for the year (591,567) (1,560,773)
--------------------------------
Net decrease in net assets resulting from operations (418,809) (1,717,304)
Distributions to shareholders from:
Net investment income (87,679) (34,791)
Net realized gain -- (3,046,182)
--------------------------------
Total distributions to shareholders (87,679) (3,080,973)
Capital share transactions:
Proceeds from sales of shares 1,323,230 2,936,546
Proceeds from reinvested distributions 87,679 3,080,973
Cost of shares redeemed (5,982,065) (4,913,316)
--------------------------------
Net increase (decrease) in net assets resulting from share transactions (4,571,156) 1,104,203
--------------------------------
Total decrease in net assets (5,077,644) (3,694,074)
NET ASSETS
Beginning of period 10,994,376 14,688,450
--------------------------------
End of period (including undistributed net investment income of $107,049
and $87,679, respectively) $ 5,916,732 $ 10,994,376
================================
OTHER INFORMATION
Shares:
Sold 112,694 192,871
Issued through reinvestment of distributions 7,408 257,324
Redeemed (515,074) (382,755)
--------------------------------
Net increase (decrease) (394,972) 67,440
================================
</TABLE>
SEE ACCOMPANYING NOTES.
18
<PAGE>
Zweig Equity (Small Cap) Portfolio
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------------------
2000 (a) 1999 1998 1997 1996
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning
of period $ 12.17 $ 17.58 $ 14.85 $ 13.61 $ 11.62
Income from investment operations:
Net investment income 0.21 0.10 0.04 0.16 0.11
Net realized and unrealized
gain (loss) on investments (0.64) (1.80) 3.48 2.41 2.04
---------------------------------------------------------
Total from investment operations (0.43) (1.70) 3.52 2.57 2.15
Less distributions:
From net investment income (0.10) (0.04) (0.14) (0.14) (0.16)
From net realized gain -- (3.67) (0.65) (1.19) --
---------------------------------------------------------
Total distributions (0.10) (3.71) (0.79) (1.33) (0.16)
---------------------------------------------------------
Net asset value, end of period $ 11.64 $ 12.17 $ 17.58 $ 14.85 $ 13.61
=========================================================
TOTAL RETURN (3.52%) (9.24%) 23.72% 20.37% 18.69%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $5,917 $10,994 $14,688 $11,161 $11,698
Ratio of expenses to average net assets 1.55% 1.54% 1.52% 1.55% 1.55%
Ratio of expenses to average net assets
before voluntary expense
reimbursement 2.25% 1.64% 1.56% 1.82% 1.83%
Ratio of net investment income
to average net assets 1.33% 0.71% 0.26% 0.97% 1.06%
Ratio of net investment income to
average net assets before voluntary
expense reimbursement 0.63% 0.61% 0.22% 0.70% 0.78%
Portfolio turnover rate 224% 76% 113% 59% 101%
</TABLE>
(a) Effective March 3, 2000, Touchstone Advisors, Inc. replaced Integrity
Capital Advisors, Inc. as investment adviser for the Fund.
19
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments
June 30, 2000
<TABLE>
<CAPTION>
Number
COMMON STOCKS (67.0%) of Shares Value
------------ ----------
<S> <C> <C>
APPAREL & OTHER FINISHED PRODUCTS (0.1%)
Guess, Inc. (a) 100 $ 1,400
Oshkosh B'Gosh, Inc. (a) 300 4,950
----------
6,350
BASIC CHEMICAL, PLASTICS & SYNTHETICS (2.6%)
Accredo Health, Inc. (a) 400 13,813
Albany Molecular Research, Inc. (a) 100 5,441
Aphton Corporation (a) 100 2,578
Capital Automotive Reit 800 11,200
Church & Dwight, Inc. 500 9,000
Dura Pharmaceuticals, Inc. (a) 600 8,588
Elan Corporation, PLC (a) 500 266
Genta, Inc. (a) 100 644
Georgia Gulf Corporation 500 10,405
Ivax Corporation (a) 200 8,300
Jones Pharma, Inc. 200 7,980
Martek Biosciences Corporation (a) 100 1,859
NABI, Inc. (a) 400 2,919
NBTY, Inc. (a) 1,200 7,613
Noven Pharmaceuticals, Inc. (a) 600 18,038
Perrigo Company (a) 1,100 7,030
Sciclone Pharmaceuticals, Inc. (a) 400 5,188
Shire Pharmaceuticals Group (a) 442 22,956
Sicor, Inc. (a) 1,000 8,000
Techniclone International Corporation (a) 100 400
Texas Biotechnology Corporation (a) 100 1,810
Valentis, Inc. (a) 100 1,172
----------
155,200
BUSINESS SERVICES (9.7%)
Actuate Corporation (a) 300 16,003
Advent Software, Inc. (a) 200 12,955
Agency Com LTD (a) 500 8,891
APAC Teleservices, Inc. (a) 600 6,656
Avant Corporation (a) 600 11,213
Barra, Inc. (a) 200 9,919
Broadvision, Inc. (a) 600 30,431
B-Square Corporation (a) 400 8,963
Cerner Corporaton (a) 500 13,608
Cognex Corporation (a) 200 10,344
Dendrite International, Inc. (a) 550 18,338
e-Loyalty Corporation (a) 800 10,150
Entrust Technologies, Inc. (a) 100 8,294
Filenet Corporation (a) 400 7,338
I2 Technologies, Inc. (a) 110 11,471
Incorporatedyte Genomics, Inc. (a) 200 16,431
Informix Corporaton (a) 500 3,734
Interim Services, Inc. (a) 900 15,975
ISS Group, Inc. (a) 200 19,744
JDA Software Group, Inc. (a) 700 13,409
Keane, Inc. (a) 1,000 21,647
Lante Corporation (a) 100 2,041
Looksmart LTD (a) 400 7,413
Manhattan Associates, Inc. (a) 200 4,975
Mentor Graphics Corporation (a) 1,000 19,813
Micromuse, Inc. (a) 100 16,547
Microstrategy, Inc. (a) 400 11,938
NCO Group, Inc. (a) 300 6,947
<CAPTION>
Number
COMMON STOCKS (continued) of Shares Value
------------ ----------
<S> <C> <C>
Business Services (continued)
Netegrity, Inc. (a) 200 15,067
Onyx Software (a) 400 11,871
Orbotech Ltd. (a) 50 4,645
Peregrine Systems, Inc. (a) 75 2,611
Phoenix Technology LTD (a) 500 8,141
Pittston Brinks Group 400 5,475
Pivotal Corporation (a) 200 4,750
Predictive Systems, Inc. (a) 200 7,181
Progress Software Corporation (a) 600 10,988
Quantum Corporation (a) 600 6,638
Razorfish, Inc. (a) 200 3,206
Remedy Corporation (a) 300 16,734
Rent-A-Center, Inc. (a) 300 6,722
RSA Security, Inc. (a) 100 6,944
Sensormatic Electronics Corporation (a) 900 14,231
Serena Software, Inc. (a) 300 13,613
Sitel Corporation (a) 5,000 24,688
Superior Energy Services, Inc. (a) 100 1,041
Sybase, Inc. (a) 1,000 23,031
Sykes Enterprises, Inc. (a) 300 3,872
Teletech Holdings, Inc. (a) 200 6,206
Webtrends Corporation (a) 200 7,706
West Teleservices Corporation (a) 200 5,069
----------
555,618
COAL MINING (0.2%)
CONSOL Energy, Inc. 900 13,714
COMMUNICATIONS (0.9%)
Adtran, Inc. (a) 200 11,969
Audiovox Corporation (a) 100 2,203
Brightpoint, Inc. (a) 1,000 8,640
Globalstar LP LTD (a) 400 3,575
Intermedia Communications, Inc. (a) 300 8,906
Perusahaan Perseroan Indo Satellite Corp. 300 3,413
Primus Telecommunications Group, Inc. (a) 200 4,988
Voicestream Wireless Corporation (a) 91 10,584
----------
54,278
DEPOSITORY INSTITUTIONS (2.8%)
Banco de Galicia Y Buenos Aire (a) 400 5,938
Bancwest Corporation 400 6,096
Capitol Federal Financial 3,900 43,266
Cathay Bancorporation, Inc. 100 4,588
City National Corporation 600 20,850
Colonial Banc Group, Inc. 1,000 9,625
Downey Financial Corporation 500 14,500
Greater Bay Bancorporation 100 4,678
Investors Financial Services Corporation 400 15,888
Republic Bancorporation, Inc. 407 3,574
Silicon Valley Bancshares (a) 300 12,797
Southwest Bancorp (a) 400 8,325
Sovereign Bancorporation, Inc. 1,300 9,161
----------
159,286
</TABLE>
20
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
Number
COMMON STOCKS (CONTINUED) of Shares Value
------------ ----------
<S> <C> <C>
EATING & DRINKING PLACES (2.0%)
Brinker International, Inc. (a) 600 $ 17,550
Buffets, Inc. (a) 900 11,447
CBRL Group, Inc. 1,900 27,966
Cheesecake Factory (a) 350 9,614
Jack in the Box, Inc. (a) 600 14,775
Papa Johns International, Inc. (a) 400 9,813
Ruby Tuesday, Inc. 2,100 26,381
----------
117,546
ELECTRIC GAS & SANITARY SERVICES (0.9%)
AGL Resources, Inc. 100 1,594
Cleco Corporation 100 3,350
CMP Group, Inc. 300 8,794
Empire District Electric Company 300 6,619
Idacorp, Inc. 300 9,675
Independent Energy Holdings PLC (a) 500 4,172
Rare Medium Group, Inc. (a) 300 4,753
Western Gas Resources, Inc. 400 8,400
WPS Resources Corporation 100 3,006
----------
50,363
ELECTRICAL & ELECTRONICS MACHINERY (8.4%)
Actel Corporation (a) 400 18,238
Advanced Fibre Communications (a) 200 9,056
Amkor Technology, Inc. (a) 200 7,056
Amphenol Corporation (a) 200 13,238
Anadigics, Inc. (a) 250 8,523
Andrew Corporation (a) 200 6,719
Aspect Communications, Inc. (a) 100 3,928
ATMI, Inc. (a) 200 9,294
Burr-Brown Corporation (a) 50 4,333
C Cor Net Corporation (a) 200 5,393
C & D Technologies 400 22,600
Cable Design Technologies Corporation (a) 400 13,400
Carrier Access Corporation (a) 100 5,291
Cree, Inc. (a) 100 13,369
Cypress Semiconductor Corporation (a) 100 4,225
Dallas Semiconductor Corporation 100 4,075
Digital Lightwave, Inc. (a) 100 10,059
Digital Microwave Corporation (a) 100 3,809
ESS Technology, Inc. (a) 600 8,681
Excel Technology, Inc. (a) 500 25,104
General Semiconductor, Inc. (a) 600 8,850
Glenayre Technologies, Inc. (a) 500 5,266
Harmonic, Inc. (a) 208 5,168
Helix Technology Corporation 200 7,794
Integrated Silicon Solution (a) 300 11,391
International Rectifier Corporation (a) 300 16,800
Kemet Corporation (a) 400 10,020
Kopin Corporation (a) 100 6,922
Mercury Computer Systems, Inc. (a) 300 9,713
Methode Elctronics, Inc. (a) 200 7,731
Mitel Corporation 800 16,800
MRV Communications, Inc. (a) 300 20,184
Plexus Corporation (a) 100 11,303
Polycom, Inc. (a) 100 9,406
Power One, Inc. 150 17,086
Powerwave Technologies, Inc. 200 8,800
Semtech Corporation 200 15,150
Silicon Laboratories 100 5,344
Silicon Valley Group, Inc. 800 20,650
<CAPTION>
Number
COMMON STOCKS (CONTINUED) of Shares Value
------------ ----------
<S> <C> <C>
Electrical & Electronics Machinery (continued)
Tekelec, Inc. (a) 100 4,822
Terayon Communication Systems (a) 100 6,422
Titan Corporation (a) 200 8,950
Transwitch Corporation (a) 200 15,444
Triquint Semiconductor, Inc. (a) 100 9,566
Varian Semiconductor Equipment, Inc. (a) 300 18,853
Westell Technologies (a) 400 5,988
----------
480,814
FABRICATED METAL PRODUCTS (0.3%)
NCI Building Systems, Inc. (a) 500 10,125
Tower Automotive, Inc. (a) 600 7,500
----------
17,625
FOOD & KINDRED PRODUCTS (1.7%)
Canandaigua Brands, Inc. (a) 100 5,044
Cott Corporation (a) 2,100 12,567
Del Monte Foods Company (a) 300 2,044
Dreyers Grand Ice Cream, Inc. 600 12,560
International Home Foods, Inc. (a) 500 10,469
McCormick & Co., Inc. 800 26,000
Topps, Inc. (a) 2,600 29,656
----------
98,340
FURNITURE & FIXTURES (0.1%)
La-Z-Boy, Inc. 400 5,600
GENERAL BUILDING CONTRACTORS (0.7%)
D.R. Horton, Inc. 600 8,138
Lennar Corporation 800 16,200
Standard Pacific Corporation 800 8,000
Toll Brothers, Inc. (a) 300 6,150
----------
38,488
GENERAL MERCHANDISE STORES (0.1%)
Grupo Eledtras A De C V 400 4,100
HOLDING & OTHER INVESTMENTS OFFICES (3.9%)
Affiliated Managers Group, Inc. (a) 200 9,100
Bedford Property Investors, Inc. 500 9,281
Boston Properties, Inc. 400 15,450
Brandywine Realty Trust 100 1,913
CBL & Associates Properties, Inc. 300 7,481
Crescent Real Estate Equities 1,300 26,650
Essex Property Trust, Inc. 100 4,200
Glimcher Realty Trust 1,200 17,250
Hibernia Corporation 1,400 15,225
Home Properties N Y, Inc. 600 18,000
Koger Equity, Inc. 200 3,375
Mills Corporation 300 5,644
Pacific Gulf Properties, Inc. 200 5,013
Reckson Associates Realty Corporation 1,100 26,120
Taubman Centers, Inc. 200 2,200
United Dominion Realty Trust, Inc. 5,000 55,000
----------
221,902
HOTELS & OTHER LODGING (1.5%)
Aztar Corporation (a) 2,100 32,550
Boyd Gaming Corporation (a) 1,000 5,563
Extended Stay America, Inc. (a) 1,800 16,650
Isle Capri Casinos, Inc. (a) 600 8,156
Mandalay Resort Group (a) 300 6,000
Station Casinos, Inc. (a) 400 10,000
Trendwest Resorts, Inc. (a) 300 4,828
----------
83,747
</TABLE>
21
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
Number
COMMON STOCKS (CONTINUED) of Shares Value
------------ ----------
<S> <C> <C>
INDUSTRIAL MACHINERY & EQUIPMENT (3.5%)
Advanced Digital Information (a) 400 $ 6,363
Asystemst Technologies, Inc. (a) 200 6,813
Cirrus Logic, Inc. (a) 500 8,016
Cybex Computer Products Corporation (a) 300 12,647
Donaldson Company, Inc. 900 17,775
Electro Scientific Industries, Inc. (a) 300 13,209
Emulex Corporation (a) 100 6,566
Graco, Inc. 100 3,250
Infocus Corporation (a) 400 12,850
Iomega Corporation (a) 4,300 17,200
Lam Research Corporation (a) 500 18,766
Manitowoc Company, Inc. 425 11,369
Maxtor Corporation (a) 800 8,425
Micrel, Inc. (a) 200 8,694
Micron Electronics, Inc. (a) 1,600 20,050
Micros Systems, Inc. (a) 200 3,719
PRI Automation, Inc. (a) 100 6,556
Timken Company 800 14,900
Watsco, Inc. 300 3,849
----------
201,017
INSTRUMENTS & RELATED PRODUCTS (2.7%)
Adac Laboratories (a) 100 2,403
Coherent, Inc. (a) 200 16,756
Concord Camera Corporation (a) 200 4,163
Credence Systems Corporation (a) 100 5,516
Cymer, Inc. (a) 300 14,288
Fossil, Inc. (a) 375 7,102
LTX Corporation (a) 300 10,491
Mentor Corporation 300 8,147
Novoste Corporation (a) 100 6,100
Oakley, Inc. (a) 2,100 24,150
Pinnacle Systems, Inc. (a) 300 6,797
Robotic Vision Systems, Inc. (a) 400 7,313
Thermo Cardiosystems, Inc. (a) 100 1,000
Thermo Instruments Systems, Inc. (a) 300 5,625
Trimble Navigation LTD (a) 300 14,653
Varian, Inc. (a) 500 23,047
----------
157,551
INSURANCE CARRIERS (1.4%)
Advance Paradiam, Inc. (a) 300 6,084
Annuity and Life Re Holdings 100 2,422
Commerce Group, Inc. Mass 100 2,950
First American Financial Corporation 400 5,725
Mid Atlantic Medical Services, Inc. (a) 1,900 25,650
Nationwide Financial Services, Inc. 200 6,575
Old Republic International Corporation 600 9,900
Oxford Health Plans, Inc. (a) 400 9,525
Stancorporation Financial Group, Inc. 300 9,638
Triad Hospitals, Inc. (a) 200 4,856
----------
83,325
LEATHER & LEATHER PRODUCTS (0.3%)
Justin Industries, Inc. 400 8,738
Wolverine Worldwide, Inc. 700 6,913
----------
15,651
METAL MINING (0.2%)
Freeport McMoran Copper & Gold (a) 700 6,475
Still Water Mining Company (a) 200 5,575
----------
12,050
<CAPTION>
Number
Common Stocks (continued) of Shares Value
------------ ----------
<S> <C> <C>
MINING QUARRYING OF NONMETALLIC MINERAL (0.1%)
Amcol International Corporation 400 6,600
MISC. MANUFACTURING INDUSTRIES (0.7%)
Callaway Golf Company 800 13,050
Johns Manville Corporation 1,100 14,506
Polymer Group, Inc. 300 2,775
Zomax Optical Media, Inc. (a) 600 7,856
----------
38,187
NONDEPOSITORY INSTITUTIONS (0.8%)
AmeriCredit Corporation (a) 1,000 17,000
Doral Financial Corporation 1,400 15,969
Indy Mac Mortgage Holdings, Inc. (a) 400 5,425
Metris Companies, Inc. 350 8,794
----------
47,188
OIL & GAS EXTRACTION (2.6%)
Atwood Oceanics, Inc. (a) 200 8,875
Chesapeake Energy Corporation (a) 1,500 11,625
Cross Timbers Oil Company 600 13,275
Grey Wolf, Inc. (a) 1,400 7,000
Helmerich and Payne, Inc. 400 14,950
Mitchell Energy & Development Corporation 200 6,425
Ocean Energy, Inc. Tex (a) 800 11,350
Patterson Energy, Inc. (a) 200 5,694
Pioneer Natural Resources Company (a) 100 1,275
Pogo Producing Company 500 11,063
Ranger Oil LTD (a) 5,000 27,500
Santa Fe Snyder Corporation (a) 1,600 18,200
Vintage Petroleum, Inc. 600 13,538
----------
150,770
PAPER & ALLIED PRODUCTS (0.3%)
Buckeye Technologies, Inc. (a) 300 6,581
Longview Fibre Co. 800 8,850
----------
15,431
PETROLEUM & COAL PRODUCTS (0.9%)
Tesoro Petroleum Corporation (a) 300 3,038
Ultramar Diamond Shamrock 1,200 29,775
Valero Energy Corporation 600 19,050
----------
51,863
PRIMARY METAL PRODUCTS (0.9%)
CommScope, Inc. (a) 200 8,200
Mueller Industries, Inc. (a) 400 11,200
Texas Industries, Inc. 100 2,888
Tubos de Acero de Mexico S A 600 8,325
Worthington Industries, Inc. 1,900 19,950
----------
50,563
PRINTING & PUBLISHING (0.2%)
Mail-Well Holdings, Inc. (a) 900 7,763
Quebeccor World, Inc. 183 4,438
----------
12,201
REAL ESTATE (0.5%)
LNR Property Corporation 400 7,800
Stewart Enterprises, Inc. 5,300 18,467
----------
26,267
RETAIL-APPAREL & ACCESSORIES (1.0%)
Ann Taylor Stores Corporation (a) 300 9,938
Chicos Fas, Inc. (a) 100 1,988
Dress Barn, Inc. (a) 600 13,256
Stein Mart, Inc. (a) 800 8,075
Venator Group, Inc. (a) 2,200 25,046
----------
58,303
</TABLE>
22
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
Number
COMMON STOCKS (CONTINUED) of Shares Value
------------ ----------
<S> <C> <C>
RETAIL - AUTOMOTIVE DEALERS & GAS STATIONS (0.4%)
Copart, Inc. (a) 600 $ 9,544
O'Reilly Automotive, Inc. (a) 900 12,403
----------
21,947
RETAIL - BUILDING MATERIALS (0.2%)
Charming Shoppes, Inc. (a) 2,800 14,263
RETAIL - FOOD STORES (0.3%)
Casey's General Stores, Inc. 1,100 11,447
Delhaize America, Inc. 400 7,075
----------
18,522
RETAIL - FURNITURE, HOME FURNISHINGS (0.3%)
Pier 1 Imports, Inc. 1,800 17,550
Tuesday Morning Corporation (a) 200 2,056
----------
19,606
RETAIL-MISCELLANEOUS (0.7%)
Barnes & Noble, Inc. (a) 400 8,900
Buy.Com, Inc. (a) 400 2,006
Michaels Stores, Inc. (a) 300 13,753
PC Connection, Inc. (a) 100 5,697
Petsmart, Inc. (a) 1,900 6,353
Zale Corporation (a) 100 3,650
----------
40,359
RUBBER & MISC PLASTICS PRODUCTS (0.2%)
Spartech Corporation 500 13,500
SECURITY & COMMODITY BROKERS (1.6%)
Eaton Vance Corporation 200 9,250
Espeed, Inc. (a) 100 4,347
Federated Investors, Inc. 500 17,531
Investment Technology Group (a) 200 8,513
Morgan Keegan, Inc. 800 11,800
National Discount Brokers Group (a) 300 9,563
Raymond James Financial, Inc. 700 15,750
Waddell & Reed Financial, Inc. 400 13,125
----------
89,879
SERVICES AMUSEMENT EXCL MOTION PICTURES (0.3%)
Argosy Gaming Corporation (a) 600 8,625
Pinnacle Entertainment, Inc. (a) 300 5,831
----------
14,456
SERVICES-AUTO REPAIR GARAGES (0.3%)
Amerco (a) 500 9,906
Dollar Thrifty Automotive Group (a) 300 5,531
Rollins Truck Leasing Corporation 600 4,163
----------
19,600
SERVICES-EDUCATIONAL (0.3%)
ITT Educational Services, Inc. (a) 500 8,781
SERVICES-ENGINEERING ACCOUNTING (1.0%)
Celgene Corporation (a) 200 11,781
Cephalon, Inc. (a) 100 6,081
Digitas, Inc. (a) 400 6,550
Management Network Group, Inc. (a) 300 10,509
Perkinelmer, Inc. 100 6,613
Tetra Tech, Inc. (a) 300 6,872
US Oncology, Inc. (a) 2,200 10,863
----------
59,269
SERVICES-HEALTH SERVICES (1.6%)
Caremark RX, Inc, (a) 1,500 10,219
Covance, Inc. (a) 500 4,406
Enzon, Inc. (a) 200 8,494
Express Scripts, Inc. (a) 100 6,172
Hooper Holmes, Inc. 900 7,200
Laboratory Corporation American Holdings (a) 230 17,739
Orthodontic Centers of America, Inc. (a) 700 15,838
Quorum Health Group, Inc. (a) 1,000 10,344
Rehabcare Group, Inc. (a) 200 5,450
Total Renal Care Holdings, Inc. (a) 1,000 5,958
----------
91,820
SPECIAL TRADE CONTRACTORS (0.5%)
Dycom Industries, Inc. (a) 250 11,500
Insituform Technologies, Inc. (a) 400 10,938
Quanta Services, Inc. (a) 100 5,500
----------
27,938
STONE CLAY & GLASS PRODUCTS (0.2%)
Centex Construction Products, Inc. 400 9,075
TRANSPORTATION EQUIPMENT (0.9%)
Brunswick Corporation 500 8,281
Cheap Tickets, Inc. (a) 600 7,181
Expeditores International Wash, Inc. 300 14,184
Monaco Coach Corporation (a) 400 5,450
Thor Industires, Inc. 200 4,200
Winnebago Industries 600 7,838
Travelocity.com, Inc. (a) 400 6,488
----------
53,622
TRUCKING & WAREHOUSING (0.4%)
American Freightways Corporation (a) 500 7,328
Roadway Express, Inc. 200 4,650
Yellow Corporation (a) 700 10,303
----------
22,281
WATER TRANSPORTATION (0.1%)
Alexander & Baldwin, Inc. 300 6,628
WHOLESALE TRADE - DURABLE GOOD (3.5%)
Commercial Metals Company 300 8,250
Cytyc Corporation (a) 300 16,003
Emachines, Inc. (a) 303 819
Engelhard Corporation 1,000 17,063
Fisher Scientific International, Inc. (a) 100 2,475
Ikon Office Solutions, Inc. 900 3,488
Ingram Micro, Inc.(a) 700 12,206
Insight Enterprises, Inc.(a) 375 22,254
Kent Electronics Corporation (a) 600 17,888
Masisa S A 400 4,725
Owens & Minor, Inc. 2,100 36,092
Paxar Corporation (a) 800 9,550
Pioneer Std Electronics, Inc. 700 10,281
PSS World Med, Inc. (a) 800 5,350
Reliance Steel and Aluminum Company 700 13,388
Stewart & Stevenson Services, Inc. 1,400 21,175
----------
201,007
</TABLE>
23
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
Number
COMMON STOCKS (CONTINUED) of Shares Value
------------ ----------
<S> <C> <C>
WHOLESALE TRADE - NONDURABLE GOOD (2.3%)
Airgas, Inc. (a) 400 $ 2,275
Amerisource Health Corporation (a) 700 21,700
Bindley Western Industries, Inc. 700 18,506
Burlington Coat Factory Warehouse 200 2,163
Cambrex Corporation 200 9,000
Delta & Pine Land Company 300 7,519
Hain Celestial Group, Inc. (a) 300 11,016
Handleman Company (a) 500 6,250
The Men's Wearhouse, Inc. (a) 400 8,913
Nova Chemicals Corporation 300 6,450
Priority Healthcare Corporation (a) 200 14,831
Stride Rite Corporation 1,200 7,350
United Stationers, Inc. (a) 500 16,203
----------
132,176
TOTAL COMMON STOCKS (Cost $3,660,152) 3,854,667
Principal
Amount
--------------
SHORT-TERM SECURITIES (33.0%)
U.S. GOVERNMENT AGENCY (26.6%)
Federal Home Loan Mortgage,
Discount Note, 6.40%, due 7/18/2000 $ 1,000,000 996,978
Federal National Mortgage Association
Discount Note, 6.40%, due 7/26/2000 535,000 532,622
----------
1,529,600
U.S. GOVERNMENT OBLIGATION (0.9%)
U.S. Treasury Bills, 5.51%, due 8/17/2000 50,000 49,640
REPURCHASE AGREEMENT (5.6%)
State Street Bank, 3.50%, due 7/3/2000
(Collateralized by U.S. Treasury Note,
5.125%, due 8/31/2000, value $331,500) 322,542 322,542
----------
TOTAL SHORT-TERM SECURITIES (Cost $1,901,782) 1,901,782
----------
TOTAL INVESTMENTS (100.0%) (Cost $5,561,934) $ 5,756,449
----------
----------
</TABLE>
(a) Non-income producing.
OTHER INFORMATION:
Cost of purchases and proceeds from sales of securities, excluding short-term
securities, for the year ended June 30, 2000, aggregated $9,201,445 and
$13,919,669, respectively. At June 30, 2000, net unrealized appreciation for
tax purposes aggregated $149,404, of which $429,263 related to appreciated
investment securities and $279,859 related to depreciated investment
securities. The aggregate cost of securities was $5,607,045 for tax purposes.
24
<PAGE>
The Legends Fund, Inc.
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
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 of the series type. The Fund currently
consists of four investment portfolios (the "Portfolios"): Harris Bretall
Sullivan & Smith Equity Growth, Scudder Kemper Value, Zweig Asset Allocation,
and Zweig Equity (Small Cap). Each portfolio, in effect, represents a separate
fund. The Fund is required to account for the assets of each portfolio
separately and to allocate general liabilities of the Fund to each portfolio
based on the net asset value of each portfolio.
Effective March 3, 2000, Touchstone Securities, Inc. ("Touchstone Securities"),
a registered broker-dealer under the Securities Exchange Act of 1934 and a
member of the National Association of Securities Dealers, Inc., became the
principal underwriter of shares of the Fund which are distributed 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"). Touchstone Advisors, Inc. ("Touchstone Advisors"),
registered with the Securities and Exchange Commission as an investment adviser,
provides management services to the Fund. The Western and Southern Life
Insurance Company ("W&S") is the ultimate parent of Touchstone Securities,
Touchstone Advisors, Integrity and National Integrity. Prior to March 3, 2000,
ARM Financial Group, Inc. ("ARM") was the parent of Integrity and National
Integrity and ARM Securities Corporation and Integrity Capital Advisors, Inc.
were the principal underwriter and investment adviser to the Fund, respectively.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States.
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.
25
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements (Continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Short-term debt securities with maturities of 61 days or more for which reliable
quotations are readily available are valued at current market quotations.
Short-term investments with 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. 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 complies 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. As of June 30, 2000, the
Zweig Equity (Small Cap) Portfolio had a capital loss carryforward of $133,460,
which expires in 2007 and 2008.
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 accounting principles generally accepted
in the United States. These differences, which may result in distribution
reclassifications, are primarily due to differing treatments for futures
transactions, post-October capital losses, and losses deferred due to wash
sales.
26
<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 future
contracts shown in the Schedule of Investments reflects each contract's value at
June 30, 2000.
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, Touchstone 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 accounting principles
generally accepted in the United States 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.
27
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements (Continued)
2. INVESTMENT ADVISORY AGREEMENTS AND PAYMENTS TO RELATED PARTIES
Touchstone Advisors, the Fund's investment adviser since March 3, 2000, has
entered into a sub-advisory agreement with a registered investment adviser
("Sub-Adviser") for each of the Portfolios. Touchstone 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, Touchstone Advisors provides certain management
services to the Fund, and the Fund is responsible for certain of its direct
operating expenses. Touchstone Advisors has voluntarily agreed to reimburse each
of the Portfolios for operating expenses (excluding management fees) above an
annual rate of 0.50% of average daily net assets. Touchstone 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 Touchstone
Securities, Touchstone Advisors, Integrity, and National Integrity. The Fund
does not pay any amounts to compensate these individuals.
3. CAPITAL SHARES
At June 30, 2000, 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 June 30, 2000, 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, 2000, Integrity, through its variable annuity Separate Account II,
and National Integrity, through its variable annuity Separate Account II, were
the record owners of all the outstanding shares of the Fund.
4. EVENTS RELATING TO ARM, INTEGRITY AND NATIONAL INTEGRITY
On July 29, 1999, ARM announced that it was restructuring its institutional
business and positioning its retail business and technology operations for the
sale of ARM or its businesses or its assets.
28
<PAGE>
The Legend Funds, Inc.
Notes to Financial Statements (Continued)
4. EVENTS RELATING TO ARM, INTEGRITY AND NATIONAL INTEGRITY (CONTINUED)
On December 17, 1999 ARM announced that it had entered into a purchase agreement
whereby W&S would acquire ARM's insurance subsidiaries, Integrity and National
Integrity. The transaction was approved on March 2, 2000 and closed on March 3,
2000. ARM Securities Corporation and Integrity Capital Advisors ceased to be
affiliated with Integrity and National Integrity subsequent to March 3, 2000. In
conjunction with the acquisition, Touchstone Securities became the principal
underwriter of variable annuities for both Integrity and National Integrity and
Touchstone Advisors became the investment adviser for the Fund.
W&S is part of the Western-Southern Enterprise, a financial services group that
also includes Western-Southern Life Assurance Company, Columbus Life Insurance
Company, Touchstone Advisors, Inc., Touchstones Securities, Inc., Fort
Washington Investment Advisors, Inc., Todd Investment Advisors, Inc.,
Countrywide Financial Services, Capital Analysts Incorporated and Eagle Realty
Group, Inc. Assets owned or under management by the group is approximately $25
billion. W&S is rated A++ (Superior) by A.M. Best, AAA (Highest) by Duff and
Phelps, AAA (Extremely Strong) by Standard & Poor's, and Aa2 (Excellent) by
Moody's.
5. SHAREHOLDER MEETINGS (UNAUDITED)
A Special Meeting of Shareholders of the Harris Bretall Sullivan & Smith Equity
Growth Portfolio, Scudder Kemper Value Portfolio, Zweig Asset Allocation
Portfolio and Zweig Equity (Small Cap) Portfolio was held on April 4, 2000. 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. Abstentions have the effect of a
negative vote on a proposal. The results are set forth below:
1. (a) The Harris Bretall Sullivan & Smith Equity Growth Portfolio
Shareholders approved a new investment management agreement (the "New
Management Agreement") between the Fund and Touchstone Advisors.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C>
1,467,074.265 40,650.858 63,670.845 -
</TABLE>
(b) Scudder Kemper Value Portfolio approved the New Management Agreement
between the Fund and Touchstone Advisors.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C>
1,001,833.218 19,800.297 38,329.363 -
</TABLE>
29
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements (Continued)
5. SHAREHOLDER MEETINGS (UNAUDITED) (CONTINUED)
(c) The Zweig Asset Allocation Portfolio Shareholders approved the New
Management Agreement between the Fund and Touchstone Advisors.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
827,207.722 - 36,668.816 -
</TABLE>
(d) The Zweig Equity (Small Cap) Portfolio Shareholders approved the New
Management Agreement between the Fund and Touchstone Advisors.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
401,939.331 5,863.872 3,980.314 -
</TABLE>
2. (a) The Harris Bretall Sullivan & Smith Growth Portfolio Shareholders
approved a new sub-advisory agreement between Harris Bretall Sullivan &
Smith, LLC ("HBSS") and Touchstone Advisors.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
1,452,106.676 27,505.719 91,783.573 -
</TABLE>
(b) The Scudder Kemper Value Portfolio Shareholders approved a new
sub-advisory agreement between Scudder Kemper Investments, Inc.
("SKI") and Touchstone Advisors.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
1,001,841.441 20,433.446 37,687.992 -
</TABLE>
(c) The Zweig Asset Allocation Portfolio Shareholders approved a new
sub-advisory agreement between Zweig/Glaser Advisers, LLC
("Zweig/Glaser") and Touchstone Advisors.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
810,303.954 5,301.909 48,270.675 -
</TABLE>
30
<PAGE>
The Legend Funds, Inc.
Notes to Financial Statements (Continued)
5. SHAREHOLDER MEETINGS (UNAUDITED) (CONTINUED)
(d) The Zweig Equity (Small Cap) Portfolio Shareholders approved a new
sub-advisory agreement between Zweig/Glaser and Touchstone Advisors.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
396,915.453 6,288.720 8,579.344 -
</TABLE>
3. (a) The Zweig Asset Allocation Portfolio Shareholders approved a
sub-advisory servicing agreement by and among Zweig/Glaser, certain of
its affiliates and Zweig Consulting LLC.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
801,500.650 14,105.213 48,270.675 -
</TABLE>
(b) The Zweig Equity (Small Cap) Portfolio Shareholders approved a
sub-advisory servicing agreement by and among Zweig/Glaser, certain of
its affiliates and Zweig Consulting LLC.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
385,421.015 16,577.539 9,784.963 -
</TABLE>
4. (a) The Harris Bretall Sullivan & Smith Equity Growth Portfolio
Shareholders elected John R. Lindholm to the Fund's Board of Directors.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
1,544,972.368 26,423.600 - -
</TABLE>
(b) Scudder Kemper Value Portfolio Shareholders elected John R. Lindholm
to the Fund's Board of Directors.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
1,037,784.030 22,178.849 - -
</TABLE>
31
<PAGE>
The Legend Funds, Inc.
Notes to Financial Statements (Continued)
5. SHAREHOLDER MEETINGS (UNAUDITED) (CONTINUED)
(c) The Zweig Asset Allocation Portfolio Shareholders elected John R.
Lindholm to the Fund's Board of Directors.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
850,614.406 13,262.132 - -
</TABLE>
(d) The Zweig Equity (Small Cap) Portfolio Shareholders elected John R.
Lindholm to the Fund's Board of Directors.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
405,783.809 5,999.708 - -
</TABLE>
5. (a) The Harris Bretall Sullivan & Smith Equity Growth Portfolio
Shareholders elected Chris LaVictoire Mahai to the Fund's Board of
Directors.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
1,531,684.435 39,711.533 - -
</TABLE>
(b) Scudder Kemper Value Portfolio Shareholders elected Chris LaVictoire
Mahai to the Fund's Board of Directors.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
1,026,987.605 32,685.291 - -
</TABLE>
(c) The Zweig Asset Allocation Portfolio Shareholders elected Chris
LaVictoire Mahai to the Fund's Board of Directors.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
841,811.102 8,803.304 - -
</TABLE>
32
<PAGE>
The Legend Funds, Inc.
Notes to Financial Statements (Continued)
5. SHAREHOLDER MEETINGS (UNAUDITED) (CONTINUED)
(d) The Zweig Equity (Small Cap) Portfolio Shareholders elected Chris
LaVictoire Mahai to the Fund's Board of Directors.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
395,494.990 16,288.527 - -
</TABLE>
6. (a) The Harris Bretall Sullivan & Smith Equity Growth Portfolio
Shareholders elected William B. Faulkner to the Fund's Board of
Directors.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
1,545,500.526 25,895.442 - -
</TABLE>
(b) Scudder Kemper Value Portfolio Shareholders elected William B.
Faulkner to the Fund's Board of Directors.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
1,038,787.201 21,175.678 - -
</TABLE>
(c) The Zweig Asset Allocation Portfolio Shareholders elected William B.
Faulkner to the Fund's Board of Directors.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
850,614.406 13,262.132 - -
</TABLE>
(d) The Zweig Equity (Small Cap) Portfolio Shareholders elected William B.
Faulkner to the Fund's Board of Directors.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
403,443.779 8,339.738 - -
</TABLE>
33
<PAGE>
The Legend Funds, Inc.
Notes to Financial Statements (Continued)
5. SHAREHOLDER MEETINGS (UNAUDITED) (CONTINUED)
7. (a) The Harris Bretall Sullivan & Smith Equity Growth Portfolio
Shareholders elected John Katz to the Fund's Board of Directors.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
1,545,500.526 25,895.442 - -
</TABLE>
(b) Scudder Kemper Value Portfolio Shareholders elected John Katz to the
Fund's Board of Directors.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
1,038,787.201 21,175.678 - -
</TABLE>
(c) The Zweig Asset Allocation Portfolio Shareholders elected John Katz to
the Fund's Board of Directors.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
850,614.406 13,262.132 - -
</TABLE>
(d) The Zweig Equity (Small Cap) Portfolio Shareholders elected Katz to
the Fund's Board of Directors.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
405,783.809 5,999.708 - -
</TABLE>
8. (a) The Harris Bretall Sullivan & Smith Equity Growth Portfolio
Shareholders elected Irvin W. Quesenberry, Jr. to the Fund's Board of
Directors.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
1,544,642.720 26,753.248 - -
</TABLE>
34
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements(Continued)
5. SHAREHOLDER MEETINGS (UNAUDITED)(CONTINUED)
(b) Scudder Kemper Value Portfolio Shareholders elected Irvin W.
Quesenberry, Jr. to the Fund's Board of Directors.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
1,038,787.201 21,175.678 - -
</TABLE>
(c) The Zweig Asset Allocation Portfolio Shareholders elected
Irvin W. Quesenberry, Jr. to the Fund's Board of Directors.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
850,614.406 13,262.132 - -
</TABLE>
(d) The Zweig Equity (Small Cap) Portfolio Shareholders elected
Irvin W. Quesenberry, Jr. to the Fund's Board of Directors.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
405,783.809 5,999.708 - -
</TABLE>
9. (a) The Harris Bretall Sullivan & Smith Equity Growth Portfolio
Shareholders ratified the selection of Ernst & Young LLP as the
Fund's independent accountants for the fiscal year ending
June 30, 2000.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
1,478,191.016 29,040.181 64,164.771 -
</TABLE>
(b) Scudder Kemper Value Portfolio Shareholders ratified the selection of
Ernst & Young LLP as the Fund's independent accountants for the fiscal
year ending June 30, 2000.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
1,003,470.769 15,787.612 40,704.498 -
</TABLE>
35
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements(Continued)
5. SHAREHOLDER MEETINGS (UNAUDITED)(CONTINUED)
(c) The Zweig Asset Allocation Portfolio Shareholders ratified the
selection of Ernst & Young LLP as the Fund's independent accountants
for the fiscal year ending June 30, 2000.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
846,789.446 - 17,087.092 -
</TABLE>
(d) The Zweig Equity (Small Cap) Portfolio Shareholders ratified the
selection of Ernst & Young LLP as the Fund's independent accountants
for the fiscal year ending June 30, 2000.
<TABLE>
<CAPTION>
Shares Shares Broker
Voted "For" Voted "Against" Abstentions Non-Votes
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
386,574.824 18,546.194 6,662.499 -
</TABLE>
36
<PAGE>
The Legends Fund, Inc.
Portfolio Performance
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Comparison of the change in value of $10,000 invested in the
Harris Bretall Sullivan & Smith Equity Growth Portfolio and the S&P 500 Index
[CHART]
<TABLE>
<CAPTION>
Harris Bretall Sullivan & Smith
Date Equity Growth Portfolio S&P 500 Index
<S> <C> <C>
12/8/92 $10,000 $10,000
Dec 92 $10,050 $10,088
Jun 93 $9,710 $10,579
Dec 93 $10,050 $11,102
Jun 94 $9,360 $10,727
Dec 94 $10,460 $11,248
Jun 95 $12,850 $13,519
Dec 95 $13,771 $15,471
Jun 96 $14,597 $17,032
Dec 96 $15,692 $19,021
Jun 97 $19,010 $22,939
Dec 97 $21,149 $25,142
Jun 98 $24,544 $29,593
Dec 98 $28,690 $32,327
Jun 99 $33,182 $36,328
Dec 99 $38,877 $39,129
Jun 00 $39,450 $38,962
</TABLE>
- Average annual total return since inception: 19.91%
- Total return for the year ended June 30, 2000: 18.89%
- Average annual return for the five year period ended June 30, 2000: 22.00%
- Performance relates to the Portfolio and does not reflect separate
account charges applicable to variable annuity contracts.
- Portfolio commenced operations on December 8, 1992.
- Past performance is not predictive of future performance.
37
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO (CONTINUED)
SUB-ADVISER'S DISCUSSION
The Harris Bretall Sullivan & Smith Equity Growth Fund experienced another
favorable return for the last 12-month period, beating the bench mark S&P 500
index return of 7.25%.
While we feel the long-term outlook for U.S. financial assets remains positive,
history says it is hard for markets to fight the Federal Reserve. In the face
of a rising Fed Funds rate, the stock market has corrected from the higher
levels reached in mid-March. From those highs, the Dow Jones Industrial Average
sold off approximately 9%, the S&P 500 Index declined 10% and the NASDAQ
composite collapsed nearly 40%.
Fortunately, the lows reached in late May were followed by a strong rally in
June. During the last month of the quarter, the equity markets erased most of
the losses of the previous ten weeks. The Harris Bretall Model Equity Composite
was off for the quarter, but still positive on the fiscal year and calendar
year-to-date basis.
In the early 1990's, when technology holdings were less than 15% of the
typical investor's portfolio, the volatility of the Nasdaq was little more
than a statistical curiosity. Today, with technology stocks representing
one-third of the S&P 500 Index and over one-half of the Russell Growth Index,
the rapidly changing fortunes of the over-the-counter marketplace reach
everyone. Even though the Portfolio's holdings remained heavy in the technology
area, we chose not to correct this position, as we feared being left behind by
a surge of technology growth more than the temporary pain of a Nasdaq decline.
This strategy proved itself again this quarter, when in June technology stocks
led the market higher when most forecasted a continued sell-off in the sector.
Those who sold in March and April were left on the sideline as the market
rallied in June.
While technology stock investing has always been challenging, the volatility of
recent years has raised the stakes for investors. Technology stocks command
premium multiples due not only to their extraordinary revenue and earnings
growth potential, but also to extraordinary momentum. During the past few
months, investors saw the downside of momentum investing. Harris Bretall
believes that technology companies need to be judged utilizing a combination of
fundamental analysis, and an evaluation of catalysts that can move the stocks
near term.
38
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
SCUDDER KEMPER VALUE PORTFOLIO
Comparison of the change in value of $10,000 invested in
Scudder Kemper Value Portfolio and the S&P 500 Index
[CHART]
<TABLE>
<CAPTION>
Date Scudder Kemper Value Portfolio S&P 500 Index
<S> <C> <C>
12/14/92 $10,000 $10,000
Dec 92 $10,180 $10,088
Jun 93 $10,450 $10,579
Dec 93 $10,820 $11,102
Jun 94 $10,740 $10,727
Dec 94 $10,736 $11,248
Jun 95 $12,886 $13,519
Dec 95 $15,622 $15,471
Jun 96 $16,909 $17,032
Dec 96 $19,452 $19,021
Jun 97 $22,621 $22,939
Dec 97 $25,369 $25,142
Jun 98 $27,905 $29,593
Dec 98 $30,039 $32,327
Jun 99 $32,952 $36,328
Dec 99 $26,392 $39,129
Jun 00 $25,083 $38,962
</TABLE>
- Average annual total return since inception: 12.95%
- Total return for the year ended June 30, 2000: (23.88%)
- Average annual return for the five year period ended June 30, 1999: 14.05%
- Performance relates to the Portfolio and does not reflect separate
account charges applicable to variable annuity contracts.
- Portfolio commenced operations on December 14, 1992.
- Past performance is not predictive of future performance.
39
<PAGE>
The Legends Fund, Inc.
PORTFOLIO PERFORMANCE (CONTINUED)
SCUDDER KEMPER VALUE PORTFOLIO (CONTINUED)
SUB-ADVISER'S DISCUSSION
The second quarter of 2000 was volatile. All major market indices saw price
declines despite the June rally and an unusual markup of selected indices on the
last day of the quarter. In essence there were few havens in this period as
growth, value, "new" and "old" economy stocks faltered. Indeed, there has been
significant weakness in the "new economy" and IPO leaders of last year.
Reviewing the quarter, only four of the eleven S&P sectors experienced
positive rates of return.
The fourth quarter of 1999 experienced the extremes of the two tier market,
in effect a bear market for most stocks while the indices were making new
highs led by technology, telecommunications and large cap "index" leaders.
The money flow to these issues was so extreme that it blurred the broad
weakness in the breadth of the market. The designation "old economy"
justified buying glamour issues regardless of valuation. This has been a
watershed period not unlike the two tier market of 1972, the energy market of
1980, the technology (personal computer) market of 1983 and Japan of 1989.
In effect the leaders became too high priced in relation to a generally weak
market. As before, there is a reversion to the mean, which should bring prices
and valuations back in line with fundamental reality and reasonable
expectations regarding the future.
Despite record mutual fund cash flow to the aggressive growth and growth
mutual funds, it appears this area may have begun to falter. Conversely,
despite substantive outflows from traditional value mutual funds, this area
may be stabilizing as perhaps the valuation disparities in the market relative
to realistic fundamentals and expectations have begun to take hold. Value
indices have actually out performed growth indices in four of the last six
months and breadth of the market did improve modestly in the second quarter,
despite the weakness in the market average. this, along with the substantive
weakness in many of last year's leaders, may be a sign of a turn. The turn may
not be as much "growth" versus "value" as it may be in favor of securities
with rationale valuations in relation to their long-term fundamentals.
There is a volatile trading pattern for the indices with sharp and severe
group rotation underlying the market. The most extreme valuation disparities
appear to be in those "old economy" companies, which are deemed to be economy
sensitive or are early cycle stocks. These securities have traded materially
lower in the last twelve months. We will be looking to these areas in the
months ahead to perhaps emerge as market leaders.
We continued to follow our time tested discipline of buying companies with
earnings and dividend growth that is faster than the market, which sell at
discount price earnings ratios and have above market dividend yields. In
viewing the risk rewards of the Portfolio in the context of history, we find
the most compelling parameters seen in a decade. We are pleased that we began
to see some reflection of these facts in the relatively good investment
results of the second quarter.
40
<PAGE>
The Legends Fund, Inc.
Portfolio Performance
June 30, 2000
Zweig Asset Allocation Portfolio
Comparison of the change in value of $10,000 invested in the
Zweig Asset Allocation Portfolio and the S&P 500 Index
[GRAPH]
<TABLE>
<CAPTION>
Date Zweig Asset Allocation Portfolio S&P 500 Index
<S> <C> <C>
12/14/92 $10,000 $10,000
Dec 92 $10,000 $10,088
Jun 93 $10,810 $10,579
Dec 93 $11,495 $11,102
Jun 94 $11,485 $10,727
Dec 94 $11,536 $11,248
Jun 95 $13,164 $13,519
Dec 95 $14,009 $15,471
Jun 96 $14,620 $17,032
Dec 96 $16,087 $19,021
Jun 97 $17,343 $22,939
Dec 97 $19,625 $25,142
Jun 98 $21,052 $29,593
Dec 98 $19,223 $32,327
Jun 99 $20,266 $36,328
Dec 99 $20,315 $39,129
Jun 00 $20,161 $38,962
</TABLE>
- Average annual total return since inception: 9.73%
- Total return for the year ended June 30, 2000: (0.52)%
- Average annual return for the five year period ended June 30, 2000: 7.81%
- Performance relates to the Portfolio and does not reflect separate
account charges applicable to variable annuity contracts.
- Portfolio commenced operations on December 14, 1992.
- Past performance is not predictive of future performance.
41
<PAGE>
THE LEGENDS FUND, INC.
PORTFOLIO PERFORMANCE (CONTINUED)
JUNE 30, 2000
ZWEIG ASSET ALLOCATION PORTFOLIO(CONTINUED)
SUB-ADVISER'S DISCUSSION
The Zweig Asset Allocation Portfolio's -0.52% return for the twelve months
ended June 30, 2000 lagged the benchmark S&P 500's return of 7.25% for the
same period.
The continued rise in bond yields in December, coupled with three increases
in short-term rates by the Federal Reserve, led us to maintain a cautious
approach through the Fund's June 30, 2000 fiscal year end. These two factors,
which historically have been extremely bearish for the market, couldn't slow
down the public's enthusiasm for stocks - especially high-flying technology
stocks. After struggling for the three months ended September 30, 1999, the
S&P 500 surged for the three months ended December 31, 1999. It was during
these three months that virtually the entire Portfolio's underperformance for
the fiscal year ended June 30, 2000 occurred.
During 2000, we have remained cautiously positioned in response to three
further rate increases by the Federal Reserve. In addition, there were
increasing signs of investor optimism (which is viewed as a negative) in
March and April. A conservative approach has paid off so far in 2000. The S&P
500 reached its peak on March 24, 2000, only to decline in the following
three weeks. The Nasdaq Index, which is heavily weighted toward technology
stocks, gave back some of its phenomenal 1999 returns, declining more than
37% from March to May. Since this correction, the market has not advanced or
declined significantly.
Recently, the Fund's equity exposure was increased to a level considered to
be neutral. There are optimistic signs of an economic slowdown combined with
a downward move long-term interest rates. In addition, the second half of
Presidential election years tend to be strong, as incumbents vote for
increased spending to help their re-election campaigns. In spite of this, a
cautious approach must be maintained because the specter of more rate
increases by the Federal Reserve must be removed before the market can rally
significantly.
On January 3, 2000, a portfolio management team, led by Carlton Neel, assumed
the day to day running of the Portfolio. The new analysis team seeks to
highlight Dr. Zewig's asset allocation by creating a portfolio with
characteristics more similar to those of the S&P 5000. We feel this approach
may better allow the shareholders to benefit from our asset allocation
strategy without undue exposure to stock selection risk.
42
<PAGE>
THE LEGENDS FUND, INC.
PORTFOLIO PERFORMANCE
JUNE 30, 2000
ZWEIG EQUITY (SMALL CAP) PORTFOLIO
Comparison of the change in value of $10,000 invested in the
Zweig Equity (Small Cap) Portfolio and the Value Line Geometric Index
[GRAPH]
<TABLE>
<CAPTION>
Date Zweig Equity (Small Cap) Portfolio Value Line Geometric Index
<S> <C> <C>
12/14/92 $10,000 $10,000
Dec 92 $10,000 $10,106
Jun 93 $10,110 $10,611
Dec 93 $10,864 $11,260
Jun 94 $10,763 $10,482
Dec 94 $10,797 $10,582
Jun 95 $11,881 $11,862
Dec 95 $13,076 $12,624
Jun 96 $14,102 $13,509
Dec 96 $15,500 $14,311
Jun 97 $16,975 $16,010
Dec 97 $19,388 $17,326
Jun 98 $20,989 $18,778
Dec 98 $19,270 $16,670
Jun 99 $19,051 $17,761
Dec 99 $18,775 $20,177
Jun 00 $18,380 $19,049
</TABLE>
- Average annual total return since inception: 8.40%
- Total return for the year ended June 30, 2000: (3.52)%
- Average annual return for the five year period ended June 30, 2000: 9.23%
- Performance relates to the Portfolio and does not reflect separate
account charges applicable to variable annuity contracts.
- Portfolio commenced operations on December 14, 1992.
- Past performance is not predictive of future performance.
43
<PAGE>
THE LEGENDS FUND, INC.
PORTFOLIO PERFORMANCE (CONTINUED)
JUNE 30, 2000
ZWEIG EQUITY (SMALL CAP) PORTFOLIO(CONTINUED)
SUB-ADVISER'S DISCUSSION
For the twelve months ended June 30, 2000, the Zweig Equity (Small Cap)
Portfolio was down -3.52% while its benchmark, the Value Line Index fell as
well with a -12.43% return. The Russell 2000 Index rose 14.48% due primarily
to a large technology weighting. However, the annual numbers mask an
improvement in performance during the last six months as the benefits of good
asset allocation decisions and carefully researched industry and quantitative
equity analysis began to make a positive impact.
The goal of the Zweig Equity (Small Cap) Fund is to provide investors with
the growth potential of small capitalization stocks with less risk and
volatility than the market. With the benefit of the Zweig market analysis,
equity exposure is reduced as market risk rises and is gradually increased as
market risk declines. The objective is to participate solidly during rising
markets and substantially protect the bulk of those gains from major market
declines.
At the beginning of the fiscal year, July 1st, 1999, the Portfolio had an
equity exposure of 56% with the remaining 44% invested in cash. This date was
also the start of the first of six Fed Fund rate adjustments throughout the
year. The rates have increased by 1.75% during the year, as the Fed has
continued to be vigilant in containing inflation in the face of very robust
economic growth. With interest rates rising and inflation threatening, the
Portfolio's monetary model signaled caution for most of this period, which
proved to be warranted. Additionally, the Federal Reserve has been warning
investors of high equity valuations and their concerns of stocks purchased on
margin.
While our conservative stance hindered performance for the six months ending
December 31, 1999 it began to payoff in the most recent six months, as the
equity market started to absorb the impact of the Federal Reserve's actions.
Most recently our models became slightly more positive as the year ended.
Monitoring market conditions through evaluating model outputs and responding
to the changing macroeconomic environment by investing the funds
conservatively should help continue this positive trend.
44
<PAGE>
PART C
OTHER INFORMATION
<TABLE>
<CAPTION>
ITEM 23. FINANCIAL STATEMENTS AND EXHIBITS
<S> <C>
Exhibits:
a.(1). Articles of Incorporation of The Legends Fund, Inc. (formerly Integrity Series Fund, Inc.) (the
FUND), the Registrant. Incorporated by reference to the Fund's Registration Statement on Form
N-1A filed on August 4, 1992 (File Nos. 33-50434 and 811-7084).
(2). Articles of Amendment. Incorporated by reference to the Fund's Pre-Effective Amendment No. 1 to
the Registration Statement filed on November 12, 1992 (File Nos. 33-50434 and 811-7084).
(3). Articles Supplementary. Incorporated by reference to the Fund's Pre-Effective Amendment No. 1
to the Registration Statement filed on November 12, 1992 (File Nos. 33-50434 and 811-7084).
(4). Articles Supplementary filed as of June 14, 1994. Incorporated by reference to the Fund's
Post-Effective Amendment No. 4 to the Registration Statement on Form N-1A filed on October 12,
1994 (File Nos. 33-50434 and 811-7084).
(5). Articles of Amendment. Incorporated by reference to the Fund's Post-Effective Amendment No. 9
to the Registration Statement on Form N-1A filed on November 5, 1998 (File Nos. 33-50434 and
811-7084).
b. By-Laws of the Fund. Incorporated by reference to the Fund's Registration Statement on Form N-1A
filed on August 4, 1992 (File Nos. 33-50434 and 811-7084).
c. See generally Articles V, VII, VIII and IX of the Articles of Incorporation and Articles I, IV,
VII and VIII of the By-laws, incorporated herein by reference.
d.(1) Form of Management Agreement between the Fund and Touchstone Advisors, Inc. (TOUCHSTONE
Advisors). *
(2) Form of Sub-Advisory Agreement between Touchstone Advisors and each of EQSF Advisors, Inc. (Third
Avenue Value Portfolio), Harris Bretall Sullivan & Smith, LLC (Harris Bretall Sullivan & Smith
Equity Growth Portfolio), Gabelli Asset Management Company (Gabelli Large Cap Value Portfolio),
BAMCO, Inc. (Baron Small Cap Portfolio).*
e. Form of Distribution Agreement between the Fund and Touchstone Securities Corporation
(TOUCHSTONE SECURITIES).*
f. Not applicable
g.(1). Custody, Recordkeeping and Agency Agreement between the Fund and Investors Fiduciary Trust
Company, as amended. Incorporated by reference to the Fund's Post-Effective Amendment No. 4 to
the Registration Statement on Form N-1A filed on October 12, 1994 (File Nos. 33-50434 and
811-7084).
</TABLE>
--------
* Filed herewith.
<PAGE>
<TABLE>
<S> <C>
(2). Forms of Foreign Sub-Custody Agreement. Incorporated by reference to the Fund's Pre-Effective
Amendment No. 1 to the Registration Statement filed on November 12, 1992 (File Nos. 33-50434
and 811-7084).
h.(1). Fund Participation Agreement with Integrity. Incorporated by reference to the Fund's
Post-Effective Amendment No. 4 to the Registration Statement on Form N-1A filed on October 12,
1994 (File Nos. 33-50434 and 811-7084).
(2). Fund Participation Agreement with National Integrity Life Insurance Company (NATIONAL
INTEGRITY). Incorporated by reference to the Fund's Post-Effective Amendment No. 4 to the
Registration Statement on Form N-1A filed on October 12, 1994 (File Nos. 33-50434 and 811-7084).
i. Opinion and Consent of Kevin L. Howard.
j. Consent of Ernst & Young LLP, Independent Auditors*
k. Not applicable
l. Not applicable
m. Not applicable
n. Not applicable
o.(1). Power of Attorney for John Katz. Incorporated by reference to the Fund's Post-Effective
Amendment No. 4 to the Registration Statement on Form N-1A filed on October 12, 1994 (File Nos.
33-50434 and 811-7084).
(2). Powers of Attorney for Chris LaVictoire Mahai and William B. Faulkner. Incorporated by
reference to the Fund's Post-Effective Amendment No. 9 to the Registration Statement on Form
N-1A filed on November 5, 1998 (File Nos. 33-50434 and 811-7084).
p.(1) Legends Fund Code of Ethics*
(2) Touchstone Securities Code of Ethics*
(3) Touchstone Advisors Code of Ethics*
</TABLE>
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Separate Account II of Integrity and Separate Account II of National
Integrity Life Insurance Company (NATIONAL INTEGRITY) own all of the outstanding
shares of common stock of Registrant. Fund shares are voted by Integrity and
National Integrity in accordance with instructions received from their
respective variable annuity contractowners who allocate contributions to the
Fund.
Integrity, an Ohio stock life corporation, owns 100% of the voting
securities of National Integrity, a New York stock life corporation. The voting
securities of Integrity are 100% owned by The Western and Southern Life
Insurance Company (Western & Southern), a mutual life insurance company
domiciled in Ohio.
--------
* Filed herewith.
<PAGE>
ITEM 25. INDEMNIFICATION
ARTICLES OF INCORPORATION OF THE FUND. The Articles of Incorporation
of the Fund provide in substance that no director or officer of the Fund
shall be liable to the Fund or its shareholders for money damages, unless the
director or officer is subject to liability by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of duties in the conduct of
his or her office.
BY-LAWS OF THE FUND. The By-laws of the Fund provide for the
indemnification of present and former officers and directors of the Fund
against liability by reason of service to the Fund, unless the officer or
director is subject to liability by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct
of his or her office (DISABLING CONDUCT). No indemnification shall be made to
an officer or director unless there has been a final adjudication on the
merits, a dismissal of a proceeding for insufficiency of evidence of
Disabling Conduct, or a reasonable determination has been made that no
Disabling Conduct occurred. The Fund may advance payment of expenses only if
the officer or director to be indemnified undertakes to repay the advance
unless indemnification is made and if one of the following applies: the
officer or director provides a security for his or her undertaking, the Fund
is insured against losses from any lawful advances, or a reasonable
determination has been made that there is reason to believe the officer or
director ultimately will be entitled to indemnification.
INSURANCE. The directors and officers of the Fund, Touchstone Advisors,
as investment adviser, and Touchstone Securities, as distributor, are insured
under a policy issued by American International Specialty Lines Insurance
Company. The annual limit on such policy is $2 million.
AGREEMENTS. The Fund and distributor, including each director, officer
and controlling person of the Fund and distributor, are entitled to
indemnification against certain liabilities as described in Article VIII of the
Participation Agreement filed as Exhibit 9(b) to this Registration Statement,
except that the Fund may not indemnify directors, officers and controlling
persons who are its Affiliated persons, as defined in Section 2(a)(3) of the
1940 Act. Certain officers and directors of the Fund are officers and directors
of Integrity and National Integrity (see Item 28 of this Part C).
UNDERTAKING
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
TOUCHSTONE ADVISORS, INC. ("Touchstone") is a registered investment adviser that
provides investment advisory services to the Fund. Touchstone also serves as the
investment adviser to Touchstone Investment Trust, Touchstone Tax-Free Trust and
Touchstone Variable Series Trust, registered investment companies.
<PAGE>
The following list sets forth the business and other connections of the
directors and executive officers of Touchstone. Unless otherwise noted, the
address of the corporations listed below is 311 Pike Street, Cincinnati, Ohio
45202.
<TABLE>
<S> <C>
(1) Jill T. McGruder, President and a Director of Touchstone.
(a) President and a Director of Ft. Washington Brokerage
Services, Inc., a broker-dealer, Integrated Fund
Services, Inc., a transfer agent, IFS Fund
Distributors, Inc., a broker-dealer and Integrated
Holdings, Inc., a holding company, 312 Walnut Street,
Cincinnati, Ohio 45202
(b) A Director of Capital Analysts Incorporated, 3 Radnor
Corporate Center, Radnor, PA, an investment adviser and
broker-dealer.
(c) President, Chief Executive Officer and a Director of
IFS Financial Services, Inc., a holding company and
Touchstone Securities, Inc., a broker-dealer.
(d) President and a Director of IFS Agency Services, Inc.,
an insurance agency, IFS Insurance Agency, Inc., an
insurance agency and IFS Systems, Inc., an information
systems provider, 400 Broadway, Cincinnati, Ohio.
(e) Senior Vice President of The Western-Southern Life
Insurance Company, 400 Broadway, Cincinnati, Ohio, an
insurance company.
(f) President and Trustee of Touchstone Strategic Trust,
Touchstone Investment Trust and Touchstone Tax-Free
Trust.
(2) Edward S. Heenan, Vice President & Comptroller of Touchstone
(a) Director, Vice President & Comptroller of IFS Financial
Services, Inc., IFS Agency Services, Inc., IFS
Insurance Agency, Inc. and IFS Systems, Inc.
(b) Director and Controller of Touchstone Securities, Inc.
(3) Patricia J. Wilson, Chief Compliance Officer of Touchstone
(a) Chief Compliance Officer of Touchstone Securities, Inc.
(4) Donald J. Wuebbling, Secretary and Director of Touchstone
(a) Director of Touchstone Securities, Inc., IFS Agency
Services, Inc., IFS Insurance Agency, Inc. and IFS
Systems, Inc.
(b) Vice President and General Counsel of The Western and
Southern Life Insurance Company
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(c) Secretary of Ft. Washington Investment Advisors, Inc.
and IFS Financial Services, Inc.
(5) William F. Ledwin, a Director of Touchstone
(a) A Director of Ft. Washington Brokerage Services, Inc.,
Integrated Fund Services, Inc., IFS Fund Distributors,
Inc., Touchstone Advisors, Inc., IFS Agency Services,
Inc., Capital Analysts Incorporated, 3 Radnor Corporate
Center, Radnor, PA., IFS Insurance Agency, Inc.,
Touchstone Securities, Inc., IFS Financial Services,
Inc., IFS Systems, Inc. and Eagle Realty Group, Inc.,
421 East Fourth Street, a real estate brokerage and
management service provider.
(b) President and a Director of Fort Washington Investment
Advisors, Inc., 420 E. Fourth Street, Cincinnati, OH.,
an investment adviser.
(c) Vice President and Chief Investment Officer of Columbus
Life Insurance Company, 400 East Fourth Street,
Cincinnati, OH., a life insurance company.
(d) Senior Vice President and Chief Investment Officer of
The Western-Southern Life Insurance Company.
(6) James N. Clark, a Director of Touchstone
(a) A Director of IFS Financial Services, Inc., IFS
Insurance Agency, Inc. and IFS Systems, Inc.
(7) Richard K. Taulbee, Vice President of Touchstone
(a) Vice President of IFS Financial Services, Inc., IFS
Agency Services, Inc., IFS Insurance Agency, Inc., IFS
Systems, Inc. and Touchstone Securities, Inc.
(b) Assistant Treasurer of Fort Washington Investment
Advisors, Inc.
(8) James J. Vance, Vice President & Treasurer of Touchstone
(a) Vice President & Treasurer of The Western and Southern
Life Insurance Company, Fort Washington Investment
Advisors, Inc., IFS Financial Services, Inc., IFS
Agency Services, Inc., IFS Insurance Agency, Inc., IFS
Systems, Inc. and Touchstone Securities, Inc.
(b) Assistant Treasurer of Fort Washington Brokerage
Services, Inc., Integrated Fund Services, Inc. and IFS
Fund Distributors, Inc.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(9) Terrie A. Wiedenheft - Chief Financial Officer of Touchstone
(a) Senior Vice President, Chief Financial Officer and
Treasurer of Integrated Holdings, Inc., Integrated Fund
Services, Inc., IFS Fund Distributors, Inc. and Fort
Washington Brokerage Services, Inc.
(b) Chief Financial Officer of IFS Financial Services, Inc.
and Touchstone Securities, Inc.
(c) Assistant Treasurer of Fort Washington Investment
Advisors, Inc.
(d) Controller of Touchstone Investment Trust, Touchstone
Tax-Free Trust and Touchstone Strategic Trust
</TABLE>
OFFICERS AND PARTNERS OR DIRECTORS OF THE SUB-ADVISERS: The names of the
officers and partners or directors of the Sub-Advisers for the Portfolios of the
Fund, and their business activities during the past two fiscal years, are
incorporated herein by reference to their respective Form ADVs, as amended to
the date of their most recent filing with the Securities and Exchange Commission
(SEC), as set forth below:
Harris Bretall Sullivan & Smith, LLC: Form ADV dated March 16, 2000, SEC
File No. 801-55094
EQSF Advisers, Inc.: Form ADV dated March 23, 2000, SEC File No.801-27792
Gabelli Asset Management Company: Form ADV dated March 27, 2000, SEC File No.
801-14132
BAMCO, Inc.: Form ADV dated May 25, 2000, SEC File No. 801-29080
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Touchstone Securities, Inc., 311 Pike Street, Cincinnati, Ohio
45202, is the principal underwriter for Fund shares.
(b) The names of the principal officers and directors of Touchstone
Securities, and their positions with Touchstone Securities and the Fund, are as
follows:
<TABLE>
<CAPTION>
NAME POSITION WITH TOUCHSTONE SECURITIES POSITION WITH THE FUND
---- ----------------------------------- ----------------------
<S> <C> <C>
Jill T. McGruder President/Director None
William F. Ledwin Director None
Patricia J. Wilson Chief Compliance Officer None
Richard K. Taulbee Vice President None
James J. Vance Vice President/Treasurer None
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Edward S. Heenan Controller/Director None
Donald J. Wuebbling Director None
Robert F. Morand Secretary None
Terrie A. Wiedenheft Chief Financial Officer None
</TABLE>
The principal business address of each person listed above is 311 Pike
Street, Cincinnati, Ohio 45202.
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The records required to be maintained by Section 31 (a) of the
Investment Company Act of 1940 and Rules 31a-1 to 31a-3 promulgated thereunder,
will be maintained by the Fund at its offices at 515 West Market Street,
Louisville, Kentucky 40202, or with its custodian, State Street KC (formerly
known as Investors Fiduciary Trust Company), at its offices at 127 West Tenth
Street, Kansas City, Missouri 64105.
ITEM 29. MANAGEMENT SERVICES
Not applicable.
ITEM 30. UNDERTAKINGS
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this amendment to
its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the city of Louisville, and State of Kentucky, on
this 1st day of September, 2000.
THE LEGENDS FUND, INC.
(Registrant)
By: /S/ EDWARD HAINES
-------------------
Edward Haines
Title: President
Pursuant to the requirement of the Securities Act of 1933, this amendment to the
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
/S/ EDWARD HAINES
--------------------- President
Edward Haines (Principal Executive Officer)
/S/ DON W. CUMMINGS
----------------------- Controller
Don W. Cummings (Principal Financial Officer)
* Director
-------------------
William B. Faulkner
* Director
--------------
John Katz
/S/ JOHN R. LINDHOLM Director
--------------------
John R. Lindholm
* Director
----------------------
Chris LaVictoire Mahai
Director
Irvin W. Quesenberry
* This Amendment has been signed by each of the persons so indicated by me
the undersigned as Attorney-in-Fact
By: /S/ KEVIN L. HOWARD
----------------------
Attorney-in-Fact
