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PEGASUS FUNDS
Strength in Investing
ANNUAL REPORT
PEGASUS PATHMAKER
VARIABLE ANNUITY
December 31, 1996
<PAGE>
<TABLE>
<CAPTION>
Separate Account Six
ITT Hartford Life and Annuity Insurance Company
Statement of Assets and Liabilities
December 31, 1996
<S> <C>
Assets:
Investments:
Putman VT Global
Growth Fund
Shares 30,112
Cost $ 442,625
Market Value $ 508,298
Putman VT
Global Asset
Allocation Fund
Shares 428,120
Cost $ 6,619,011
Market Value $ 7,385,069
Putman VT U.S.
Government
and High
Quality
Bond Fund
Shares 186,123
Cost $ 2,414,473
Market Value $ 2,458,677
Putman VT
Diversified
Income Fund
Shares 272,035
Cost $ 2,913,759
Market Value $ 3,065,837
Pegasus Managed
Assets
Balanced
Fund
Shares 1,535,563
Cost $17,309,757
Market Value $18,396,043
Pegasus
Growth and
Value Fund
Shares 598,199
Cost $ 7,051,100
Market Value $ 7,890,240
<PAGE>
Pegasus
Mid-Cap
Opportunity
Fund
Shares 633,469
Cost $ 7,204,296
Market Value $ 8,526,488
Pegasus
Growth Fund
Shares 818,474
Cost $ 9,154,103
Market Value $10,869,336
Pegasus
Money
Market Fund
Shares 1,343,040
Cost $ 1,343,040
Market Value $ 1,343,040
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
PCM U.S. Pegasus
PCM Global Government Managed Pegasus Pegasus
Asset and High PCM Assets Pegasus Mid-Cap Pegasus Money
PCM Global Allocation Quality Diversified Balanced Growth/Value Opportunity Growth Market
Growth Fund Fund Bond Fund Income Fund Fund Fund Fund Fund Fund
Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account
----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Market Value $ 508,298 $7,385,069 $2,458,677 $3,065,837 $18,396,043 $7,890,240 $ 8,526,488 $10,869,336 $1,343,040
Dividends
receivable 0 0 0 0 0 0 0 0 201
Due from ITT
Hartford Life
and Annuity
Insurance Co. 0 12,586 3,086 0 36,208 3,510 12,434 9,345 1,222
Receivable
from ITT
fund shares
sold 19 0 0 117 0 6,233 0 0 0
--------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Total Assets 508,298 7,397,655 2,461,763 3,065,954 18,432,251 7,899,893 8,538,922 10,878,681 1,344,463
--------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Liabilities:
Due to ITT
Hartford
Life and Annuity
Insurance
Company 20 0 0 117 0 0 0 0 0
Payable for
fund shares
purchased 0 12,586 3,086 0 35,984 0 12,449 6,100 1,090
--------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Total
Liabilities 20 12,586 3,086 117 35,984 0 12,449 6,100 1,090
--------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Net Assets
(Variable
annuity
contract
liabilities) $ 508,297 $7,385,069 $2,458,677 $3,065,837 $18,396,267 $7,899,983 $8,526,473 $10,872,581 $ 1,343,373
========= ========== ========== ========== =========== ========== ========== =========== ===========
<FN>
The accompanying notes are an integral part of this financial statement.
</TABLE>
<PAGE>
Separate Account Six
ITT Hartford Life and Annuity Insurance Company
Statement of Assets and Liabilities-(Continued)
December 31, 1996
<TABLE>
<CAPTION>
Units
Owned by Unit Contract
Participants Price Liability
------------ ---------- -----------
<S> <C> <C> <C>
Deferred variable annuity contracts in the
accumulation period:
Group Sub-Accounts:
PCM Global Growth Fund Sub-Account 37,356 $13.606797 $ 508,297
PCM Global Asset Allocation Fund Sub-Account 554,009 13.330241 7,385,069
PCM U.S. Government and High Quality Bond Fund
Sub-Account 214,672 11.453183 2,458,677
PCM Diversified Income Fund Sub-Account 255,483 12.000177 3,065,837
Pegasus Managed Assets Balanced Fund Sub-Account 1,456,776 12.628072 18,396,267
Pegasus Growth and Value Fund Sub-Account 576,577 13.701521 7,899,983
Pegasus Mid-Cap Opportunity Fund Sub-Account 632,279 13.485304 8,526,473
Pegasus Growth Fund Sub-Account 821,023 13.242721 10,872,581
Pegasus Money Market Fund Sub-Account 1,260,731 1.065551 1,343,373
--------- ---------- -----------
Grand Total $60,456,557
========= ========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
2
<PAGE>
Separate Account Six
ITT Hartford Life and Annuity Insurance Company
STATEMENT OF OPERATIONS
For the year ended December 31, 1996
<TABLE>
<CAPTION>
PCM
PCM U.S. Pegasus
PCM Global Government PCM Managed
Global Asset and High Diversified Assets
Growth Allocation Quality Income Balanced
Fund Fund Bond Fund Fund Fund
Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Investment income:
Dividends $ 6,372 $204,195 $ 99,711 $ 84,920 $ 628,389
Expenses:
Mortality and expense undertakings (5,142) (72,421) (24,928) (25,479) (162,712)
------- -------- -------- -------- ----------
Net investment income (loss) 1,230 131,774 74,783 59,441 465,677
Capital gains income 9,282 133,995 -- -- 109,290
Net realized and unrealized gain (loss) on investments:
Net realized gain (loss) on security transactions 20 478 (316) 32 (169)
Net unrealized appreciation (depreciation) of
investments during the period 44,333 460,827 (43,356) 91,892 676,435
------- -------- -------- -------- ----------
Net gain (loss) on investments 44,353 461,305 (43,672) 91,924 676,266
------- -------- -------- -------- ----------
Net increase in net assets from operations $54,865 $727,074 $ 31,111 $151,365 $1,251,233
======= ======== ======== ======== ==========
<PAGE>
Pegasus Pegasus Pegasus
Growth Mid-Cap Pegasus Money
and Value Opportunity Growth Market
Fund Fund Fund Fund
Sub-Account Sub-Account Sub-Account Sub-Account
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Investment Income:
Dividends $242,813 $ 42,629 $ 24,380 $ 41,028
Expenses:
Mortality and expense undertakings (70,800) (82,779) (109,374) (11,899)
-------- ---------- ---------- --------
Net investment income (loss) 172,013 (40,150) (84,994) 29,129
Capital gains income 58,564 95,175 21,919 --
Net realized and unrealized gain (loss) on investments:
Net realized gain (loss) on security transactions 2,671 2,433 1,567 --
Net unrealized appreciation (depreciation) of
investments during the period 592,332 1,189,616 1,282,106 --
-------- ---------- ---------- --------
Net gain (loss) on investments 595,003 1,192,049 1,283,673 --
-------- ---------- ---------- --------
Net increase in net assets from operations $825,580 $1,247,074 $1,220,598 $ 29,129
======== ========== ========== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
3
<PAGE>
Separate Account Six
ITT Hartford Life and Annuity Insurance Company
STATEMENTS OF CHANGES IN NET ASSETS
For the year ended December 31, 1996
<TABLE>
<CAPTION>
PCM
PCM U.S. Pegasus
PCM Global Government PCM Managed
Global Asset and High Diversified Assets
Growth Allocation Quality Income Balanced
Fund Fund Bond Fund Fund Fund
Sub-Account Sub-Account Sub-Account Sub-Account Sub-Account
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss) $ 1,230 $ 131,774 $ 74,783 $ 59,441 $ 465,677
Capital gains income 9,282 133,995 -- -- 109,290
Net realized gain (loss) on security
transactions 20 478 (316) 32 (169)
Net unrealized appreciation (depreciation)
of investments during the period 44,333 460,827 (43,356) 91,892 676,435
--------- ----------- ----------- ----------- ------------
Net increase in net assets resulting from
operations 54,865 727,074 31,111 151,365 1,251,233
--------- ----------- ----------- ----------- ------------
Unit transactions:
Purchases 66,395 2,475,962 1,175,062 1,646,339 8,868,728
Net transfers 138,183 541,687 2,174 346,797 1,130,362
Surrenders (2,343) (250,295) (64,629) (100,736) (605,871)
--------- ----------- ----------- ----------- ------------
Net increase in net assets resulting from
unit transactions 202,235 2,767,354 1,112,607 1,892,400 9,393,219
--------- ----------- ----------- ----------- ------------
Total increase in net assets 257,100 3,494,428 1,143,718 2,043,765 10,644,452
Net assets:
Beginning of Year 251,197 3,890,641 1,314,959 1,022,072 7,751,815
--------- ----------- ----------- ----------- ------------
End of Year $ 508,297 $ 7,385,069 $ 2,458,677 $ 3,065,837 $ 18,396,267
========= =========== =========== =========== ============
For the period from inception, February 15,
1995, to December 31, 1995
Operations:
Net investment income (loss) $ (1,539) $ (21,635) $ (7,716) $ (5,681) $ 76,181
Net realized gain (loss) on security
transactions (83) 220 149 14 (38)
Net unrealized appreciation
of investments during the period 21,338 305,231 87,562 60,185 424,298
--------- ----------- ----------- ----------- ------------
Net increase in net assets
resulting from operations 19,716 283,816 79,995 54,518 500,441
--------- ----------- ----------- ----------- ------------
Unit transactions:
Purchases 153,142 3,409,768 1,236,786 913,625 6,886,652
Net transfers 78,454 232,158 13,399 81,213 427,840
Surrenders (115) (35,101) (15,221) (27,284) (63,118)
--------- ----------- ----------- ----------- ------------
Net increase in net assets
resulting from unit transactions 231,481 3,060,825 1,234,964 967,554 7,251,374
--------- ----------- ----------- ----------- ------------
Total increase in net assets 251,197 3,890,641 1,314,959 1,022,072 7,751,815
Net assets:
Beginning of Period -- -- -- -- --
--------- ----------- ----------- ----------- ------------
End of Period $ 251,197 $ 3,890,641 $ 1,314,959 $ 1,022,072 $ 7,751,815
========= =========== =========== =========== ============
<PAGE>
Pegasus Pegasus Pegasus
Growth Mid-Cap Pegasus Money
and Value Opportunity Growth Market
Fund Fund Fund Fund
Sub-Account Sub-Account Sub-Account Sub-Account
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operations:
Net investment income (loss) $ 172,013 $ (40,150) $ (84,994) $ 29,129
Capital gains income 58,564 95,175 21,919 --
Net realized gain (loss) on security
transactions 2,671 2,433 1,567 --
Net unrealized appreciation (depreciation)
of investments during the period 592,332 1,189,616 1,282,106 --
---------- ---------- ----------- ----------
Net increase in net assets resulting from
operations 825,580 1,247,074 1,220,598 29,129
---------- ---------- ----------- ----------
Unit transactions:
Purchases 3,856,399 2,978,256 3,671,953 660,650
Net transfers 281,626 147,979 452,544 29,045
Surrenders (228,985) (265,422) (335,723) (31,505)
---------- ---------- ----------- ----------
Net increase in net assets resulting from
unit transactions 3,909,040 2,860,813 3,788,774 658,190
---------- ---------- ----------- ----------
Total increase in net assets 4,734,620 4,107,887 5,009,372 687,319
Net Assets:
Beginning of Year 3,165,363 4,418,586 5,863,209 656,054
---------- ---------- ----------- ----------
End of Year $7,899,983 $8,526,473 $10,872,581 $1,343,373
========== ========== =========== ==========
For the period from inception, February 15,
1995, to December 31, 1995
Operations:
Net investment income (loss) $ 8,682 $ (11,731) $ (10,045) $ 8,439
Capital gains income -- -- -- --
Net realized gain (loss) on security
transactions (301) 22 (153) --
Net unrealized appreciation
of investments during the period 261,174 146,983 446,890 --
---------- ---------- ----------- ----------
Net increase in net assets
resulting from operations 269,555 135,274 436,692 8,439
---------- ---------- ----------- ----------
Unit transactions:
Purchases 2,785,446 3,995,211 5,237,946 607,825
Net transfers 142,382 322,557 243,179 44,272
Surrenders (32,020) (34,456) (54,608) (4,482)
---------- ---------- ----------- ----------
Net increase in net assets
resulting from unit transactions 2,895,808 4,283,312 5,426,517 647,615
---------- ---------- ----------- ----------
Total increase in net assets 3,165,363 4,418,586 5,863,209 656,054
Net assets:
Beginning of Period -- -- -- --
---------- ---------- ----------- ----------
End of Period $3,165,363 $4,418,586 $ 5,863,209 $ 656,054
========== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
Separate Account Six
ITT Hartford Life and Annuity Insurance Company
NOTES TO FINANCIAL STATEMENTS
1. Organization:
Separate Account Six (the Account) is a separate investment account within
ITT Hartford Life and Annuity Insurance Company (the Company) and is
registered with the Securities and Exchange Commission (SEC) as a unit
investment trust under the Investment Company Act of 1940, as amended.
Both the Company and the Account are subject to supervision and regulation
by the Department of Insurance of the State of Connecticut and the SEC.
The Account invests deposits by variable life contractholders of the
Company in various mutual funds (the Funds) as directed by the
contractholders. The account commenced operations on February 15, 1995.
2. Significant Accounting Policies:
The following is a summary of significant accounting policies of the
Account, which are in accordance with generally accepted accounting
principles in the investment company industry:
a) Security Transactions--
Security transactions are recorded on the trade date (date the order
to buy or sell is executed). The cost of investments sold is
determined on the basis of identified cost. Dividend and capital
gains income are accrued as of the ex-dividend date. Capital gains
income represents dividends from the Funds which are characterized
as capital gains under current tax regulations.
b) Security Valuation--
The investment in shares of the Putnam Variable Trust Funds (Putnam
VT Global Growth Fund, Putnam VT Global Asset Allocation Fund,
Putnam VT U.S. Government and High Quality Bond Fund and Putnam VT
Diversified Income Fund) or the Pegasus (formerly Woodward) Variable
Annuity Funds (Managed Assets Balanced Fund, Growth and Value Fund,
Mid-Cap Opportunity Fund, Growth Fund and Money Market Fund) are
valued at the closing net asset value per share as determined by
each Fund as of December 31, 1996.
c) Federal Income Taxes--
The operations of the Account form a part of, and are taxed with,
the total operations of the Company, which is taxed as an insurance
company under the Internal Revenue Code. Under current law, no
federal income taxes are payable with respect to the operations of
the Account.
d) Uses of Estimates--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities as of the date of the financial statements and the
reported amounts of income and expenses during the period. Operating
results in the future could vary from the amounts derived from
management's estimates.
3. Administration of the Account and Related Charges:
a) Mortality and Expense Undertakings--
The Company, as issuer of variable annuity contracts, provides the
mortality and expense undertakings and, with respect to the Account,
receives a maximum annual fee of up to 1.25% of the Account's
average daily net assets. The Company also provides administrative
services and receives an annual fee of 0.15% of the Account's
average daily net assets.
b) Deduction of Annual Maintenance Fee--
Annual maintenance fees are deducted through termination of units of
interest from applicable contractholder's accounts, in accordance
with the terms of the contracts.
5
<PAGE>
Separate Account Six
ITT Hartford Life and Annuity Insurance Company
Report of Independent Public Accountants
To ITT Hartford Life and Annuity Insurance Company Separate Account Six and
to the Owners of Units of Interest Therein:
We have audited the accompanying statement of assets and liabilities of ITT
Hartford Life and Annuity Insurance Company Separate Account Six (the
Account) as of December 31, 1996, and the related statement of operations for
the year then ended and the statements of changes in net assets for the year
ended December 31, 1996 and the period from inception, February 15, 1995, to
December 31, 1995. These financial statements are the responsibility of the
Account's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
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 referred to above present fairly, in
all material respects, the financial position of ITT Hartford Life and
Annuity Insurance Company Separate Account Six as of December 31, 1996, the
results of its operations for the year then ended and the changes in its net
assets for the year ended December 31, 1996 and the period from inception,
February 15, 1995, to December 31, 1995, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Hartford, Connecticut,
February 14, 1997.
6
<PAGE>
Pegasus Variable Annuity Fund
Management's Discussion and Analysis
Managed Assets Balanced Fund
An Interview with Claude Erb
Portfolio Manager
Q. Last year was a great year for the stock market. How did the fund do?
It was a good year for the fund. The total return was 12.15%, which slightly
trailed the 13.76% earned by the average fund in the Lipper balanced fund
universe. Because of the fund's significant weighting in bonds, the fund's
return was below the strong performance of the Standard & Poor's 500 Stock
Index, which returned 23.00% for the year.
Q. Why do you think U.S. stocks were so strong in comparison to other
markets in 1996?
Two factors were especially significant. A few factors contributed to this
performance. The first was that economic conditions in the U.S. were better
than expected. Moderate growth and inflation allowed company earnings to
exceed expectations and allowed valuations to drift up. Second, and more
importantly, we saw a flood of money into domestic stock mutual funds. This
money was put to work in the stock market. At the moment, these factors all
remain in place, but we are monitoring potential changes in the market
regime.
Q. What, in particular, drove the fund's performance?
There were two offsetting factors driving the fund's performance. The
positive factor was positive security selection within the portfolio, with
bonds, in particular showing gains well in excess of their benchmark.
However, this was offset by our underweighting of equities through much of
the year.
Q. How were the portfolios allocated throughout the year?
As just indicated, for a good portion of the year we were underweighted in
equities and overweighted in bonds. The U.S. bond market, as measured by the
Lehman Aggregate Bond Index, returned only 3.62% in 1996. Within the fund's
equity sector, we were overweighted in large capitalization value stocks,
and correspondingly underweighted in large capitalization growth stocks.
Q. What is your outlook for the year ahead?
We are unlikely to see a repeat of the strong performance for the U.S. equity
markets. Relatively high valuations and slowing profit growth could hold back
returns for the year. We are more enthusiastic about the prospects for the
overseas markets. In particular, we believe the emerging markets should
outperform domestic equities. On the interest rate front, we do not expect
much change in interest rates in 1997, which contrasts greatly with 1996,
when we saw the yield on the 30-year U.S. Treasury bond increase from 5.96%
to 6.64%.
Q. How have you positioned the fund to take advantage of your outlook?
In light of our cautious stance on the domestic stock market, we remain
underweighted in U.S. stocks. Within the domestic equity sector, we think
that relative valuations favor value stocks over growth stocks, and we have
positioned the portfolio accordingly. We have also overweighted international
stocks in the portfolio, and they could play catch-up to the U.S. equity
market in the coming year. Corresponding to our underweighting in equities is
an overweight in fixed income securities. Relatively stable interest rates
should allow the fund to earn returns on bonds in line with their current
yields.
7
<PAGE>
Pegasus Variable Annuity Fund
Management's Discussion and Analysis
Managed Assets Balanced Fund - (Continued)
Growth of $10,000 Invested in the
Pegasus Variable Annuity Managed Assets Balanced Fund, and
a 60% S&P 500 Index*; 40% Lehman Brothers Aggregate Bond Index Blend**
<TABLE>
<CAPTION>
Variable Annuity
Managed Assets Balanced Fund
I Share Index Blend(1)
<S> <C> <C>
3/95 10000 10000
6/95 10544 10890
9/95 11010 11935
12/95 11524 12261
3/96 11773 12564
6/96 11987 12930
9/96 12334 13271
12/96 12918 14095
</TABLE>
(1) Excludes expenses.
<TABLE>
<CAPTION>
Total Return Inception One Since
Through 12/31/96 Date Year Inception
---------------- --------- ---- ---------
<S> <C> <C> <C>
Pegasus Variable Annuity Managed Assets Balanced Fund
I Shares 3/30/95 12.15% 15.70%
60% S&P 500 Index*; 40% Lehman Brothers Aggregate 3/30/95 14.96% 40.95%
Bond Index** Blend
</TABLE>
The performance data quoted represents past performance and is not an
indication of future results. The investment return and Net Asset Value will
fluctuate so that an investor's shares, when redeemed, may be worth more or
less than the original cost.
The total return set forth may reflect the waiver of a portion of the fund's
advisory or administrative fees for certain periods since the inception date.
In such instances, and without waiver of fees, total return would have been
lower.
* The S&P 500 Index is an unmanaged index generally representative of the U.S.
stock market as a whole.
** The Lehman Brothers Aggregate Bond Index is an unmanaged index generally
representative of the bond market as a whole.
8
<PAGE>
Pegasus Variable Annuity Fund
Management's Discussion and Analysis
Growth and Value Fund
An Interview with Gary L. Konsler
Portfolio Manager
Q. How did the Variable Annuity Growth and Value Fund perform relative
to the market and other mutual funds during 1996?
The S&P 500 Index finished 1996 with another dramatically above-average
return of 23.0%. When added to the 37.5% return earned in 1995, the combined
two year return has not been equaled since the mid-1970's. In terms of the
Dow Jones Industrial Average, it is the best two year period in 40 years. The
DJIA hit a new high on average once per week over the past two years, a
record. The Fund participated in this bull market generating a 18.8% return
(I Shares), in 1996. Likewise, the Fund performed in line with the 20.8%
return for Lipper Growth and Income Universe Average of mutual funds as well
as the 19.5% return for all diversified U.S. stock funds in the Lipper
database.
Q. What were the factors driving these dramatically above-average
returns?
During 1996, stocks benefited from (1) a sixth year of economic expansion,
the third longest in history, with inflation at the lowest rate since World
War II, (2) growing corporate profits, resulting from investments in new
equipment and squeezing more efficiencies out of the labor force, but the
profit growth was at only half the growth rate of 1995, (3) record setting
cash flows into mutual funds, averaging 65 cent of every dollar saved, (4)
the Fed balancing monetary policy nearly perfectly plus Congress and the
Administration pledging fiscal reasonability, (5) a 71% increase in stock buy
backs and (6) record setting merger and acquisition activity.
Q. What stocks performed particularly well in the Fund and which did
not meet your expectations?
The best performing stocks were in the technology area, i.e., Intel and
Compaq. In the energy area Schlumberger and the natural gas stock MCN
performed especially well. Likewise, merger and acquisition activity
involving MCI, Duracell and Boeing provided major contributions. Finance was
additive with BankAmerica as was Toys "R" Us and Cracker Barrel. On the
negative side, the Fund was hurt by the sell-off in EDS following an EPS
announcement. In fact the common thread among our weaker investments were EPS
reports that were less than consensus expectations, e.g., Stewart &
Stevenson, Great Lakes Chemicals, AT&T, Rubbermaid.
Q. You mentioned merger and acquisition activity, how did the Growth
and Value Fund participate in this M&A activity?
During 1996, the Fund participated in five of the 15 largest deals announced
in the mergers and acquisition area through its holdings in MCI, Boeing, U.S.
Healthcare, Duracell and Dun & Bradstreet.
Q. What kind of turnover did you experience in 1996?
As a result of thelarge advance in stock prices, turnover was a bit
above-average at 47% for then year. Generally, buy and sale activity will
result in turnover of approximately 35% annually.
Q. There has been a lot of talk about cash in mutual funds. What is the
Fund's cash position and what is your philosophy regarding cash?
Cash equivalents were maintained in a 2% to 3% operational range. The Fund
will remain fully invested. Cash will not be used for market timing or asset
allocation purposes.
Q. The market appears high to many commentators, what do you think? How
do you invest in such an environment?
As the six year bull market accelerated at a dramatically above average rate
in 1996, corporate earnings disappointments in July and fears of potentially
higher rates were reversed within weeks to months. Each and every decline in
the market became an opportunity to buy. For example, during the fourth
quarter Fed Chairman Greenspan publicly wondered if investors were becoming
"irrationally exuberant." The market declined briefly but then accelerated to
new highs. As the year ended, investor psychology was extremely bullish. Many
investors had become convinced that rising stock prices are inevitable. The
danger in such an environment is to overly concentrate thereby incurring
above average risk on the assumption that above average returns are assured.
To secure good long term returns yet balance the risks associated with equity
investing, it is prudent to have the core of a common stock portfolio in a
fully invested, large cap, quality, broadly diversified fund which produces a
market rate of income, while exposing the investor to only approximately
average market risk. The Growth and Value Fund is such a fund.
9
<PAGE>
Pegasus Variable Annuity Fund
Management's Discussion and Analysis
Growth and Value Fund - (Continued)
Growth of $10,000 Invested in the
Pegasus Variable Annuity Growth and Value Fund and the
S&P 500 Index*
<TABLE>
<CAPTION>
Variable Annuity
Growth & Value
I-Share S&P 500(1)
<S> <C> <C>
3/95 10000 10000
6/95 10477 10953
9/95 11164 11823
12/95 11762 12534
3/96 12359 13207
6/96 12726 13799
9/96 13126 14225
12/96 13970 15410
<FN>
(1) Excludes expenses.
</TABLE>
<TABLE>
<CAPTION>
Total Return Inception One Since
Through 12/31/96 Date Year Inception
---------------- --------- ---- ---------
<S> <C> <C> <C>
Pegasus Variable Annuity Growth and Value Fund
I Shares 3/30/95 18.75% 20.93%
S&P 500 Index* 3/30/95 22.95% 28.03%
</TABLE>
The performance data quoted represents past performance and is not an
indication of future results. The investment return and Net Asset Value will
fluctuate so that an investor's shares, when redeemed, may be worth more or
less than the original cost.
* The S&P 500 Index is an unmanaged index generally representative of the U.S.
stock market as a whole.
10
<PAGE>
Pegasus Variable Annuity Fund
Management's Discussion and Analysis
Mid-Cap Opportunity Fund
An Interview with Ronald Doyle and Joseph Gatz
Portfoilo Managers
Q. 1996 was a good year for equities. How did the Variable Annuity
Mid-Cap Opportunity Fund perform in 1996?
The Variable Annuity Mid-Cap Opportunity Fund returned 24.6 percent (I
Shares), for the twelve months ended December 31, 1996, compared to the 17.9
percent return for the Lipper Mid-Cap Universe Average and the 19.1 percent
return for the Russell 2500 Index. Despite the fact most mid-cap managers
lagged the broader market during the year, the fund exceeded the 23.0 percent
return of the larger-cap oriented S&P 500 Index.
Q. Which sectors did you emphasize in 1996?
The fund is managed in a "bottom-up" style, emphasizing fundamental research
on companies and valuation as opposed to sector rotation or asset allocation.
However, our research efforts resulted in a modest overweight in financial
and capital goods stocks in the fund for most of the year.
Q. What's the outlook for 1997?
We remain optimistic about the prospects for the Variable Annuity Mid-Cap
Opportunity fund. Although the equity market seems to be well above its
historical valuation parameters, the fundamental outlook remains positive.
1996 marked the second consecutive year small and mid-sized company stocks
lagged the performance of larger companies. As a result, the valuation of
medium and small sized companies appears somewhat more attractive relative to
larger companies.
Q. Given this outlook, how is the fund positioned?
We believe our attention to company valuations was a key contributor to our
strong performance in 1996. Given the overall valuation of the equity market,
we feel attention to valuation will continue to be important in determining
successful investment styles in 1997. We intend to continue with our
long-standing approach of investing in fundamentally sound companies with
strong growth prospects but reasonable valuations.
11
<PAGE>
Pegasus Variable Annuity Fund
Management's Discussion and Analysis
Mid-Cap Opportunity Fund - (Continued)
Growth of $10,000 Invested in the
Pegasus Variable Annuity Mid-Cap Opportunity Fund
and the Russell 2500 Index*
<TABLE>
<CAPTION>
Variable Annuity
Mid-Cap Fund
I Share R2500(1)
<S> <C> <C>
3/95 10000 10000
6/95 10507 10890
9/95 11021 11935
12/95 11073 12261
3/96 11855 12979
6/96 12231 13519
9/96 12922 13825
12/96 13788 14594
</TABLE>
(1) Excludes expenses.
(2) Investment in the S&P 500 Index** (the 1995 benchmark) is currently
valued at $14,594.
<TABLE>
<CAPTION>
Total Return Inception One Since
Through 12/31/96 Date Year Inception
---------------- --------- ---- ---------
<S> <C> <C> <C>
Pegasus Variable Annuity Mid-Cap Opportunity Fund
I Shares 3/30/95 24.53% 20.04%
Russell 2500 Index* 3/30/95 19.03%(1) 24.11%
</TABLE>
(1) Return for the S&P 500 Index** (the 1995 benchmark) was 22.95%.
The performance data quoted represents past performance and is not an
indication of future results. The investment return and Net Asset Value will
fluctuate so that an investor's shares, when redeemed, may be worth more or
less than the original cost.
* The Russell 2500 Index is an unmanaged index generally representative of
the small-to-medium-small stock market.
** The S&P 500 Index is an unmanaged index generally representative of the
U.S. stock market as a whole.
12
<PAGE>
Pegasus Variable Annuity Fund
Management's Discussion and Analysis
Growth Fund
An Interview with Jeffrey Beard
Portfolio Manager
Q. 1996 was a good year for equity markets. How well did the Pegasus
Variable Annuity Growth Fund perform?
Although the Fund managed to perform reasonably well through the first nine
months of the year, the market's strong advance in the final quarter was
difficult to keep pace with. This is partially attributable to the market's
strong contribution in the quarter from the energy and utility sectors --
these are typically characterized as more defensive in nature and usually are
under represented in growth funds because of their lackluster growth
profiles.
Q. Given the environment, how did you approach the market?
The Fund continues to be managed with a long view belief in a slow growth,
contained inflation global economic backdrop. Within this framework, the Fund
has sought opportunities where fundamentals and earnings momentum are firmly
in place, expectations are rising, the company is in solid financial shape,
and, all else equal, where the valuations are still reasonable. At the same
time, the Fund remains diversified in its holdings.
Q. Which sectors did you emphasize?
Healthcare and capital goods were two areas of emphasis. These sectors have
traditionally demonstrated the most consistent and predictable growth at this
stage of the economic cycle, particularly important when visibility of
earnings is awarded a premium by investors. Technology was also emphasized,
in large part due to the superior growth in demand for new products and
services driving topline growth.
Q. What is your outlook for 1997, and given this outlook, how has the
Fund been positioned?
Not much has changed. Earnings expectations, although more reasonable,
continue to look somewhat swollen, and could result in disappointment and
poor stock performance. Similarly, inflation, which has remained benign over
the last several months, may be the cause of some nervousness over the next
several months, but should remain controlled. In anticipation of this, the
Fund has been reducing its exposure to the financial sector, and emphasizing
multinational growth and higher quality growth companies in portfolio
construction.
13
<PAGE>
Pegasus Variable Annuity Fund
Management's Discussion and Analysis
Growth Fund - (Continued)
Growth of $10,000 Invested in the
Pegasus Variable Annuity Growth Fund and the
S&P 500 Index*
<TABLE>
<CAPTION>
Variable Annuity
Growth Fund
I Shares S&P 500(1)
<S> <C> <C>
3/95 10000 10000
6/95 10364 10953
9/95 10818 11823
12/95 11431 12534
3/96 12160 13207
6/96 12243 13799
9/96 12652 14225
12/96 13431 15410
</TABLE>
(1) Excludes expenses.
<TABLE>
<CAPTION>
Total Return Inception One Since
Through 12/31/96 Date Year Inception
---------------- --------- ---- ---------
<S> <C> <C> <C>
Pegasus Variable Annuity Growth Fund
I Shares 3/30/95 17.50% 18.26%
S&P 500 Index* 3/30/95 22.95% 28.03%
</TABLE>
The performance data quoted represents past performance and is not an
indication of future results. The investment return and Net Asset Value will
fluctuate so that an investor's shares, when redeemed, may be worth more or
less than the original cost.
The total return set forth may reflect the waiver of a portion of the fund's
advisory or administrative fees for certain periods since the inception date.
In such instances, and without waiver of fees, total return would have been
lower.
* The S&P 500 Index is an unmanaged index generally representative of the U.S.
stock market as a whole.
14
<PAGE>
Pegasus Variable Annuity Fund
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
<CAPTION>
Managed
Assets Mid-Cap
Balanced Growth and Opportunity Growth Money Market
Fund Value Fund Fund Fund Fund
----------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investment in securities:
At cost $20,604,998 $7,706,964 $7,743,615 $ 9,612,786 $1,872,966
----------- ---------- ---------- ------------ ----------
At value (Note 2) $22,102,240 $8,567,383 $9,176,473 $ 11,517,211 $1,879,609
Cash -- -- -- -- 430
Receivable for securities sold 11,968 10,756 13,316 -- --
Receivable for shares purchased 36,208 3,510 12,434 9,345 1,222
Income receivable 117,797 18,176 10,437 11,597 7,470
Deferred organization costs, net (Note 2) 19,236 19,236 19,236 19,236 19,236
Prepaids and other assets 4,347 1,564 1,886 2,474 427
----------- ---------- ---------- ------------ ----------
TOTAL ASSETS 22,291,796 8,620,625 9,233,782 11,559,863 1,908,394
----------- ---------- ---------- ------------ ----------
LIABILITIES:
Accrued investment advisory fees 13,680 5,361 5,585 7,300 695
Accrued custodial fees 2,557 2,986 3,670 1,310 565
Other payables and accrued expenses 321 9,721 8,867 9,232 17,628
----------- ---------- ---------- ------------ ----------
TOTAL LIABILITIES 16,558 18,068 18,122 17,842 18,888
----------- ---------- ---------- ------------ ----------
NET ASSETS $22,275,238 $8,602,557 $9,215,660 $ 11,542,021 $1,889,506
----------- ---------- ---------- ------------ ----------
Net assets consist of:
Capital shares (unlimited number of shares
authorized, par value $.10 per share) $ 185,907 $ 65,198 $ 68,469 $ 86,934 $ 188,951
Additional paid-in capital 20,395,705 7,531,701 7,649,007 9,576,194 1,700,555
Accumulated undistributed net investment income 9,659 6,919 66 1,082 --
Accumulated undistributed net realized gains (losses) 186,725 138,320 65,260 (26,614) --
Net unrealized appreciation on investments 1,497,242 860,419 1,432,858 1,904,425 --
----------- ---------- ---------- ------------ ----------
NET ASSETS $22,275,238 $8,602,557 $9,215,660 $ 11,542,021 $1,889,506
=========== ========== ========== ============ ==========
Shares of capital stock outstanding 1,859,069 651,978 684,687 869,335 1,889,506
=========== ========== ========== ============ ==========
Net asset value and redemption price per share $ 11.98 $ 13.19 $ 13.46 $ 13.28 $ 1.00
=========== ========== ========== ============ ==========
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
Pegasus Variable Annuity Fund
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
Managed
Assets Mid-Cap Money
Balanced Growth and Opportunity Growth Market
Fund Value Fund Fund Fund Fund
---------- ----------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME (Note 2):
Interest $ 505,759 $ 15,495 $ 14,786 $ 22,773 $73,686
Dividends 144,239 109,594 57,637 90,590 --
---------- ---------- ---------- ---------- -------
TOTAL INVESTMENT INCOME 649,998 125,089 72,423 113,363 73,686
---------- ---------- ---------- ---------- -------
EXPENSES (Notes 2, 3 and 5):
Investment advisory and administration fee 114,254 42,701 48,992 63,261 6,212
Professional fees 36,929 24,594 25,286 27,744 18,383
Custodial fee 44,156 29,925 31,248 13,655 6,877
Transfer and dividend disbursing agent fees 2,958 2,942 2,961 2,958 2,930
Amortization of deferred organziation costs 5,919 5,919 5,919 5,919 5,919
Insurance 14,592 4,934 5,899 7,662 3,846
Printing 11,150 7,751 7,946 8,559 6,157
Registration, filing fees and other expenses 1,393 10,302 9,773 9,483 19,942
Less: Expense reimbursement (102,154) (80,795) (82,608) (67,679) 63,365)
---------- ---------- ---------- ---------- -------
NET EXPENSES 129,197 48,273 55,416 71,562 6,901
---------- ---------- ---------- ---------- -------
NET INVESTMENT INCOME 520,801 76,816 17,007 41,801 66,785
---------- ---------- ---------- ---------- -------
REALIZED AND UNREALIZED GAINS (LOSSES) ON
INVESTMENTS:
Net realized gains (losses) 569,160 383,386 250,859 (7,205) --
Net change in unrealized appreciation on
investments 743,922 550,254 1,197,353 1,393,107 --
========== ========== ========== ========== =======
NET REALIZED AND UNREALIZED GAINS ON INVESTMENTS 1,313,082 933,640 1,448,212 1,385,902 --
========== ========== ========== ========== =======
NET INCREASE IN NET ASSETS FROM OPERATIONS $1,833,883 $1,010,456 $1,465,219 $1,427,703 $66,785
========== ========== ========== ========== =======
See Notes to Financial Statements.
16
<PAGE>
Pegasus Variable Annuity Fund
STATEMENTS OF CHANGES IN NET ASSETS
</TABLE>
<TABLE>
<CAPTION>
Managed Assets Growth and Mid-Cap
Balanced Fund Value Fund Opportunity Fund
--------------------------- --------------------------- ---------------------------
Year Ended Period Ended Year Ended Period Ended Year Ended Period Ended
December 31, December 31, December 31, December 31, December 31, December 31,
1996 1995 1996 1995 1996 1995
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment income $ 520,801 $ 194,591 $ 76,816 $ 29,537 $ 17,007 $ 14,190
Net realized gains (losses) 569,160 52,016 383,386 35,828 250,859 (36,276)
Net change in unrealized
appreciation on investments 743,922 753,320 550,254 310,165 1,197,353 235,505
----------- ----------- ---------- ---------- ---------- ----------
Net increase in net assets from
operations 1,833,883 999,927 1,010,456 375,530 1,465,219 213,419
----------- ----------- ---------- ---------- ---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS
(Note 2):
From net investment income (512,770) (192,963) (69,919) (29,515) (16,984) (14,147)
From realized gains (434,451) -- (277,463) (3,431) (148,305) --
In excess of realized gains -- -- -- -- -- (1,018)
----------- ----------- ---------- ---------- ---------- ----------
Total distributions (947,221) (192,963) (347,382) (32,946) (165,289) (15,165)
----------- ----------- ---------- ---------- ---------- ----------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 10,058,098 10,294,774 4,514,913 3,508,134 3,254,384 4,792,328
Net asset value of shares issued
in reinvestment of
distributions to shareholders 512,770 192,963 69,919 32,946 17,784 15,165
----------- ----------- ---------- ---------- ---------- ----------
10,570,868 10,487,737 4,584,832 3,541,080 3,272,168 4,807,493
Less: payments for shares
redeemed (393,168) (83,825) (399,040) (129,973) (328,803) (33,382)
----------- ----------- ---------- ---------- ---------- ----------
Net increase in net assets from
capital share transactions 10,177,700 10,403,912 4,185,792 3,411,107 2,943,365 4,774,111
----------- ----------- ---------- ---------- ---------- ----------
NET INCREASE IN NET ASSETS 11,064,362 11,210,876 4,848,866 3,753,691 4,243,295 4,972,365
NET ASSETS:
Beginning of period 11,210,876 -- 3,753,691 -- 4,972,365 --
----------- ----------- ---------- ---------- ---------- ----------
End of period $22,275,238 $11,210,876 $8,602,557 $3,753,691 $9,215,660 $4,972,365
=========== =========== ========== ========== ========== ==========
CAPITAL SHARE TRANSACTIONS:
Shares sold 854,721 985,257 355,619 331,700 259,511 452,879
Shares issued in reinvestment of
distributions to shareholders 43,860 17,604 5,483 2,942 1,410 1,398
----------- ----------- ---------- ---------- ---------- ----------
898,581 1,002,861 361,102 334,642 260,921 454,277
Less: shares redeemed (34,648) (7,725) (31,926) (11,840) (27,359) (3,152)
----------- ----------- ---------- ---------- ---------- ----------
NET INCREASE IN SHARES OUTSTANDING 863,933 995,136 329,176 322,802 233,562 451,125
CAPITAL SHARES:
Beginning of period 995,136 -- 322,802 -- 451,125 --
----------- ----------- ---------- ---------- ---------- ----------
End of period 1,859,069 995,136 651,978 322,802 684,687 451,125
=========== =========== ========== ========== ========== ==========
</TABLE>
See Notes to Financial Statements.
17
<PAGE>
Pegasus Variable Annuity Fund
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Growth Money Market
Fund Fund
--------------------------- ---------------------------
Year Ended Period Ended Year Ended Period Ended
December 31, December 31, December 31, December 31,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment income $ 41,801 $ 2,283 $ 66,785 $ 32,000
Net realized gains (losses) (7,205) 8,122 -- --
Net change in unrealized appreciation on investments 1,393,107 511,318 -- --
----------- ---------- --------- ---------
Net increase in net assets from operations 1,427,703 541,723 66,785 32,000
----------- ---------- --------- --------- -
DISTRIBUTIONS TO SHAREHOLDERS (Note 2):
From net investment income (40,769) (22,233) (66,785) (32,000)
From realized gains (3,939) (4,183) -- --
In excess of realized gains (19,409) -- -- --
----------- ---------- ---------- ----------
Total distributions (64,117) (26,416) (66,785) (32,000)
----------- ---------- ---------- ----------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 4,036,761 6,001,443 794,587 1,168,068
Net asset value of shares issued in reinvestment of
distributions to shareholders 40,769 26,416 66,785 31,505
----------- --------- ---------- ----------
4,077,530 6,027,859 861,372 1,199,573
Less: payments for shares redeemed (334,031) (108,230) (147,758) (23,681)
----------- ---------- ---------- ----------
Net increase in net assets from capital share transactions 3,743,499 5,919,629 713,614 1,175,892
----------- ---------- ---------- ----------
NET INCREASE IN NET ASSETS 5,107,085 6,434,936 713,614 1,175,892
NET ASSETS:
Beginning of period 6,434,936 -- 1,175,892 --
----------- ---------- ---------- ----------
End of period $11,542,021 $6,434,936 $1,889,506 $1,175,892
=========== ========== ========== ==========
CAPITAL SHARE TRANSACTIONS:
Shares sold 326,834 573,282 794,587 1,168,068
Shares issued in reinvestment of distributions to
shareholders 3,152 2,411 66,785 31,505
----------- ---------- ---------- ------------
329,986 575,693 861,372 1,199,573
Less: shares redeemed (26,488) (9,856) (147,758) (23,681)
----------- ---------- ---------- ------------
NET INCREASE IN SHARES OUTSTANDING 303,498 565,837 713,614 1,175,892
CAPITAL SHARES:
Beginning of period 565,837 -- 1,175,892 --
----------- ---------- ---------- ------------
End of period 869,335 565,837 1,889,506 1,175,892
=========== ========== ========== ============
</TABLE>
See Notes to Financial Statements.
18
<PAGE>
Pegasus Variable Annuity Managed Assets Balanced Fund
PORTFOLIO OF INVESTMENTS
December 31, 1996
<TABLE>
<CAPTION>
Face Market
Description Amount Value
----------- ---------- ----------
<S> <C> <C>
TEMPORARY CASH INVESTMENT -- 17.50%
Salomon Brothers, Revolving Repurchase Agreement,
6.90%, 1/2/97 (secured by various U.S. Treasury
Strips with maturities ranging from 11/15/04
through 5/15/06, all held at Chase Bank) ........ $3,868,800 $ 3,868,800
-----------
(Cost $3,868,800)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS -- 32.27%
U.S. Treasury Securities -- 17.57%
Principal Strips from U.S. Treasury Securities
due:
5/15/17 ..................................... 90,000 22,516
8/15/17 ..................................... 320,000 78,618
Strips from U.S. Treasury Securities due:
8/15/99 ..................................... 200,000 171,242
5/15/13 ..................................... 250,000 82,952
2/15/14 ..................................... 450,000 141,350
11/15/18 .................................... 100,000 22,519
U.S. Treasury Bonds:
10.750%, 8/15/05 ............................ 200,000 256,594
12.750%, 11/15/10 ........................... 490,000 693,580
10.375%, 11/15/12 ........................... 150,000 193,172
8.750%, 5/15/17 ............................. 50,000 61,008
U.S. Treasury Notes:
7.875%, 1/15/98 ............................. 120,000 122,662
5.250%, 7/31/98 ............................. 350,000 347,102
7.000%, 4/15/99 ............................. 100,000 102,234
7.750%, 11/30/99 ............................ 200,000 208,968
7.125%, 2/29/00 ............................. 500,000 514,765
6.375%, 8/15/02 ............................. 100,000 100,656
6.250%, 2/15/03 ............................. 500,000 499,375
7.250%, 5/15/04 ............................. 250,000 263,048
----------
(Cost $3,814,898) 3,882,361
----------
Agency Obligations -- 14.70%
Federal Home Loan Mortgage Corp. Gtd. Multi-Class
Mortgage Participation Ctfs.:
Series 11 Class D, 9.500%, 7/15/19 .......... 50,000 54,570
Series 21 Class SD, IF, 8/25/22 ............. 50,000 44,687
Series 22 Class C, 9.500%, 4/15/20 .......... 13,811 15,210
Series 47 Class F, 10.000%, 6/15/20 ......... 100,000 110,105
Series 84 Class F, 9.200%, 10/15/20 ......... 50,000 53,319
Series 109 Class I, 9.100%, 1/15/21 ......... 132,000 142,660
Series 128 Class I, 6.500%, 2/15/21 ......... 200,000 193,058
Series 1084 Class F, IF, 5/15/21 ............ 100,000 102,188
Series 1084 Class S, IF, 5/15/21 ............ 70,000 87,461
Series 1297 Class H, 7.500%, 1/15/20 ........ 42,262 42,285
Series 1378 Class H, 10.000%, 1/15/21 ....... 50,000 56,318
Series 1378 Class JZ, 7.500%, 11/15/21 ...... 68,275 66,451
Series 1389 Class SA, IF, 10/15/07 .......... 40,303 30,570
Series 1483 Class E, 6.500%, 2/15/20 ........ 40,000 39,291
Series 1489 Class L, 5.500%, 4/15/08 ........ 60,576 59,100
Series 1491 Class MA, 6.750%, 11/15/22 ...... 112,828 106,797
19
<PAGE>
Series 1531 Class K, 6.000%, 4/15/08 ........ 86,704 82,808
Series 1554 Class KA, IF, 8/15/08 ........... 44,037 32,214
Series 1585 Class NB, IF, 9/15/23 ........... 24,166 20,058
Series 1586 Class A, 6.000%, 9/15/08 ........ 31,913 30,099
Series 1604 Class SE, IF, 11/15/08 .......... 46,758 37,207
Series 1606 Class LC, IF, 5/15/08 ........... 111,832 111,984
Series 1606 Class LD, IF, 5/15/08 ........... 30,763 22,952
Series 1647 Class SB, IF, 12/15/08 .......... 44,426 39,928
Series 1686 Class A, 5.000%, 2/15/24 ........ 46,224 39,132
Series 1686 Class SL, IF, 2/15/24 ........... 46,224 38,034
Series 1796 Class A, IF, 2/15/09 ............ 25,000 19,891
Series 1825 Class C, 5.799%, 12/15/23 ....... 50,000 44,684
Series 1854 Class C, IF, 4/15/08 ............ 75,000 46,875
Federal Housing Administration Greystone 1996-2
Putable Pool, 7.430%, 11/1/22 ................. 98,728 101,492
Federal National Mortgage Assn. Pass Thru
Securities:
Guaranteed Remic Trust:
1990 Class 1-D, 8.800%, 1/25/20 ............. 47,933 50,155
1990 Class 93-G, 5.500%, 8/25/20 ............ 30,000 28,161
1990 Class 120-H, 9.000%, 10/25/20 .......... 100,000 108,189
1990 Class 143-J, 8.750%, 12/25/20 .......... 75,000 78,326
1991 Class 144-PZ, 8.500%, 6/25/21 .......... 77,451 80,311
1993 Class 32-K, 6.000%, 3/25/23 ............ 34,518 32,290
1993 Class 139-S, IF, 8/25/23 ............... 86,582 55,835
1993 Class 155-LA, 6.500%, 5/25/23 .......... 38,769 37,929
1993 Class 214-L, 6.000%, 12/25/08 .......... 73,116 70,315
1993 Class 223-FB, IF, 12/25/23 ............. 37,914 36,729
1993 Class 223-SB, IF, 12/25/23 ............. 14,582 11,666
1994 Class 19-C, 5.000%, 1/25/24 ............ 41,644 38,815
1995 Class 13-B, 6.500%, 3/25/09 ............ 92,475 89,340
1996 Class 20-L, Zero Coupon, 9/25/08 ....... 30,000 17,413
1996 Class 24-K, Zero Coupon, 2/25/08 ....... 25,000 17,290
1996 Class 24-B, Zero Coupon, 10/25/08 ...... 50,000 26,240
1996 Class 46-A, 5.000%, 2/25/09 ............ 250,000 234,763
1992-G Class 42-Z, 7.000%, 7/25/22 .......... 68,053 64,925
1992-G Class 59-C, 6.000%, 12/25/21 ......... 50,000 47,695
1994-G Class 13-ZB, 7.000%, 11/17/24 ........ 57,826 53,552
Federal National Mortgage Assn. Pass Thru Pool:
#303532, Adjustable Rate, 3/01/29 ............. 79,189 78,995
Government National Mortgage Assn. Pass Thru Ctfs.
Guaranteed Remic Series 1994, Class SA,
IF, 10/16/22 .................................. 285,070 17,247
Government National Mortgage Assn. Pass Thru
Pool:
#297628, 8.000%, 9/15/22 .................... 33,200 34,161
#313110, 7.500%, 11/15/22 ................... 66,971 67,421
----------
(Cost $3,182,344) ................................. 3,249,192
----------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS ........ 7,131,553
(Cost $6,997,242) ----------
20
<PAGE>
CORPORATE BONDS AND NOTES -- 2.36%
Finance -- 2.36%
Ford Credit Grantor Trust Asset Backed Ctf.
Series 1994-A, Class A, 6.350%, 5/15/99 ....... 24,493 24,665
Merrill Lynch MBS Inc. Project Pass Thru Ctf.
Series 144-S FHA Insured, 7.430%, 7/25/24 ..... 90,781 90,781
NationsBank Auto Grantor Trust Asset Backed Ctf.
Series 1995-A, Class A, 5.850%, 6/15/02 ....... 27,848 27,920
Navistar Financial Corp. Owner Trust Series
1995-1,
Class A2, 6.550%, 11/20/01 .................... 29,774 29,960
Olympic Automobile Receivables Trust Asset Backed
Pass Thru Ctf.
Series 1996-C, Class A5, 7.000%, 12/15/01 ..... 100,000 102,002
Western Financial Asset Backed Pass Thru Ctfs.
Series 1996-C, Class A4, 6.800%, 12/20/03 ..... 150,000 152,232
World Omni Automobile Lease Trust Asset Backed
Pass Thru Ctf.,
Series 1995-A, Class A, 6.050%, 11/25/01 ...... 94,510 94,628
-------------
TOTAL CORPORATE BONDS AND NOTES ..................... 522,188
(Cost $513,915) -------------
Shares
------
COMMON STOCKS -- 47.87%
Aerospace -- 1.20%
Boeing Co. ...................................... 2,500 265,938
-------------
Air Transport -- 0.09%
Air Express International Corp. ................. 600 19,350
-------------
Apparel -- 0.94%
Nine West Group, Inc. * ......................... 450 20,869
Russell Corp. ................................... 6,300 187,425
-------------
208,294
-------------
Banks -- 3.67%
BankAmerica Corp. ............................... 2,200 219,450
Barnett Banks, Inc. ............................. 3,200 131,600
Charter One Financial, Inc. ..................... 637 26,754
First Tennessee National ........................ 700 26,250
Fleet Financial Group, Inc. ..................... 3,300 164,587
Norwest Corp. ................................... 4,800 208,800
TCF Financial Corp. ............................. 800 34,800
-------------
812,241
-------------
Business Machines -- 1.30%
Diebold, Inc. ................................... 450 28,294
Electronic Data Systems Corp. ................... 5500 237,875
Xilinx, Inc. * .................................. 550 20,247
-------------
286,416
-------------
21
<PAGE>
Business Services -- 2.70%
American Management System, Inc. * .............. 475 11,638
CDI Corp.* ...................................... 300 8,512
Deluxe Corp. .................................... 7,300 239,075
DST Systems, Inc. * ............................. 500 15,688
Dun & Bradstreet Corp. .......................... 3,200 76,000
G & K Services, Inc. Class A .................... 500 18,875
Omnicom Group, Inc. ............................. 500 22,875
SunGard Data Systems, Inc. * .................... 800 31,600
WMX Technologies, Inc. .......................... 5,300 172,912
-------------
597,175
-------------
Chemicals -- 1.66%
Great Lakes Chemical Corp. ...................... 2,200 102,850
RPM, Inc. ....................................... 800 13,600
Sigma-Aldrich Corp. ............................. 4,000 249,750
-------------
366,200
-------------
Construction -- 2.41%
Crane Co. ....................................... 1,350 39,150
Masco Corp. ..................................... 5,500 198,000
York International Corp. ........................ 5,300 296,137
-------------
533,287
-------------
Consumer Durables -- 0.92%
Durakon Industries, Inc. * ...................... 600 7,650
Leggett & Platt, Inc. ........................... 900 31,162
Rubbermaid, Inc. ................................ 7,200 163,800
-------------
202,612
-------------
Containers -- 1.14%
AptarGroup, Inc. ................................ 700 24,675
Crown Cork & Seal Co., Inc. ..................... 4,200 228,375
-------------
253,050
-------------
Drugs and Medicine -- 3.69%
Abbott Laboratories Corp. ....................... 3,800 192,850
Bristol-Myers Squibb Co. ........................ 2,400 261,000
Health Care & Retirement Corp. * ................ 400 11,450
Quorum Health Group, Inc. * ..................... 800 23,800
Schering-Plough Corp. ........................... 4,300 278,425
Sybron International Corp. * .................... 900 29,700
Vivra, Inc. * ................................... 650 17,956
-------------
815,181
-------------
Electronics -- 2.75%
Belden, Inc. .................................... 1,250 46,250
Dynatech Corp. * ................................ 500 22,125
Hewlwtt Packard Co. ............................. 3,400 170,850
KEMET Corp. ..................................... 700 16,275
Lucent Technologies, Inc. ....................... 1,900 87,875
Microchip Technology, Inc. * .................... 600 30,525
22
<PAGE>
Molex, Inc. Class A Non-Voting .................. 550 19,594
Motorola, Inc. .................................. 3,100 190,262
Teradyne, Inc. * ................................ 1,000 24,375
-------------
608,131
-------------
Energy and Utilities -- 3.82%
Enron Corp. ..................................... 4,500 194,062
FPL Group, Inc. ................................. 5,000 230,000
MCN Corp. ....................................... 6,400 184,800
Pinnacle West Capital Corp. ..................... 7,400 234,950
-------------
843,812
-------------
Energy Raw Materials -- 1.80%
Apache Corp. .................................... 1,100 38,913
Noble Affiliates, Inc. .......................... 600 28,725
Schlumberger Ltd. ............................... 3,100 309,612
Southwestern Energy Co. ......................... 1,300 19,663
-------------
396,913
-------------
Food and Agriculture -- 4.01%
ConAgra, Inc. ................................... 4,400 218,900
CPC International, Inc. ......................... 3,000 232,500
PepsiCo, Inc. ................................... 7,700 225,225
Sysco Corp. ..................................... 6,400 208,800
-------------
885,425
-------------
Insurance -- 2.18%
American International Group, Inc. .............. 1,200 129,900
Capital Re Corp. ................................ 600 27,975
Capmac Holdings Inc. ............................ 400 13,250
Chubb Corp. ..................................... 5,200 279,500
Transatlantic Holdings, Inc. .................... 400 32,200
-------------
482,825
-------------
International Oil -- 0.71%
British Petroleum PLC ADS ....................... 1,108 156,642
-------------
Liquor -- 1.03%
Anheuser Busch Companies, Inc. .................. 5,700 228,000
-------------
Media -- 2.14%
Banta Corp. ..................................... 950 21,731
Gannett Co., Inc. ............................... 2,900 217,137
Washington Post Co. Class B ..................... 700 234,588
-------------
473,456
-------------
23
<PAGE>
Miscellaneous and Conglomerates -- 1.10%
ABC Rail Products Corp. * ....................... 500 9,937
Cognizant Corp. ................................. 3,000 99,000
Culligan Water Technologies, Inc. * ............. 400 16,200
DENTSPLY International, Inc. .................... 550 26,125
Greenfield Industries, Inc. ..................... 950 29,094
Health Management Associates, Inc., Class A * ... 275 6,188
Littelfuse, Inc. * .............................. 600 29,100
Wolverine Tube, Inc. * .......................... 750 26,437
-------------
242,081
-------------
Miscellaneous Finance -- 1.05%
CMAC Investment Corp. ........................... 900 33,075
Edwards (A.G.), Inc. ............................ 1,000 33,625
Everest Reinsurance Holdings, Inc. .............. 1,100 31,625
Executive Risk, Inc. ............................ 500 18,500
FINOVA Group, Inc. .............................. 650 41,762
First Financial Corp. ........................... 500 12,250
Idex Corp. ...................................... 600 23,925
PMI Group, Inc. ................................. 450 24,919
Scotsman Industries, Inc. ....................... 550 12,994
-------------
232,675
-------------
Motor Vehicles -- 0.37%
Borg Warner Automotive, Inc. .................... 700 26,950
Excel Industries, Inc. .......................... 400 6,650
Harley-Davidson, Inc. ........................... 650 30,550
Myers Industries, Inc. .......................... 730 12,319
Superior Industries International ............... 250 5,781
-------------
82,250
-------------
Non-Durables and Entertainment -- 0.93%
Cracker Barrel Old Country Store, Inc. .......... 7,400 187,775
Lancaster Colony Corp. .......................... 400 18,400
-------------
206,175
-------------
Non-Ferrous Metals -- 0.13%
DT Industries, Inc. ............................. 800 28,000
-------------
Producer Goods -- 0.98%
Federal Signal Corp. ............................ 500 12,938
General Electric Co. ............................ 1,000 98,875
Hubbell, Inc., Class B .......................... 800 34,600
Juno Lighting, Inc. ............................. 1,400 22,400
Teleflex, Inc. .................................. 500 26,062
Trimas Corp. .................................... 900 21,488
-------------
216,363
-------------
24
<PAGE>
Retail -- 1.93%
Cato Corp. Class A .............................. 2,100 10,500
Kohls Corp. * ................................... 300 11,775
Nordstrom, Inc. ................................. 5,500 194,906
Proffitts, Inc. * ............................... 700 25,813
Talbots, Inc. ................................... 650 18,606
Toys R Us* ...................................... 4,900 147,000
Zale Corp. * .................................... 900 17,213
-------------
425,813
-------------
Telephone -- 3.11%
AT&T Corp. ...................................... 4,900 213,150
Century Telephone Enterprises, Inc. ............. 5,500 169,812
MCI Communications Corp. ........................ 9,300 303,994
-------------
686,956
-------------
Travel and Recreation -- 0.11%
Callaway Golf Co. ............................... 850 24,438
-------------
TOTAL COMMON STOCKS ................................. 10,579,699
(Cost $9,215,000) -------------
TOTAL INVESTMENTS ................................... $ 22,102,240
(Cost $20,604,998) =============
<FN>
* Non-income producing security
See Notes to Financial Statements,
</TABLE>
25
<PAGE>
Pegasus Variable Annuity Managed Assets Balanced Fund
PORTFOLIO OF INVESTMENTS - (Continued)
December 31, 1996
Notes to Portfolio of Investments
The Pegasus Managed Assets Balanced Fund invests in securities whose value is
derived from an underlying pool of mortgages or consumer loans. Some of these
securities are collateralized mortgage obligations (CMOs). CMOs are debt
securities issued by U.S. government agencies or by financial institutions
and other mortgage lenders which are collateralized by a pool of mortgages
held under an indenture.
Adjustable Rate (AR)
Inverse Floaters (IF) represent securities that pay interest at a rate that
increases (decreases) with a decline (increase) in a specified index.
Interest Only (IO) securities give the holder the right to receive the
monthly interest payments on an underlying pool of mortgage loans. The face
amount shown represents the par value on the underlying pool. The yields on
these securities are generally higher than prevailing market yields on other
mortgage-backed securities because their cash flow patterns are more volatile
and there is a greater risk that the initial investment will not be fully
recouped. These securities are subject to accelerated principal paydowns as a
result of prepayments or refinancing of the underlying pool of mortgage
instruments. As a result, interest income may be reduced considerably.
High Coupon Bonds (HB) (a.k.a. "IOettes") represent securities with the right
to receive interest payments on an underlying pool of mortgages with similar
risks as those associated with IO securities. Unlike IO's the owner also has
a right to receive a very small portion of principal. The high interest rate
results from taking interest payments from other classes in the REMIC Trust
and allocating them to the small principal of the HB class.
Principal Only (PO) securities give the holder the right to receive the
principal portion only on an underlying pool of mortgage loans. The market
value of these securities is extremely volatile in response to changes in
market interest rates. As prepayments on the underlying mortgages of these
securities increase, the yield on these securities increases.
See Notes to Financial Statements.
26
<PAGE>
Pegasus Variable Annuity Growth and Value Fund
PORTFOLIO OF INVESTMENTS
December 31, 1996
<TABLE>
<CAPTION>
Market
Description Face Amount Value
----------- ----------- --------
<S> <C> <C>
TEMPORARY CASH INVESTMENT -- 2.85%
Salomon Brothers, Revolving Repurchase Agreement,
6.90%, 1/2/97, (secured by various U.S. Treasury
Strips with maturities ranging from 11/15/04
through 5/15/06, all held at Chase Bank) ........ $244,453 $ 244,453
----------
(Cost $244,453)
Shares
-----------
COMMON STOCKS -- 97.15%
Aerospace -- 2.86%
Boeing Co. ...................................... 2,300 244,662
-----------
Apparel -- 2.01%
Russell Corp. ................................... 5,800 172,550
-----------
Banks -- 7.88%
BankAmerica Corp. ............................... 2,100 209,475
Barnett Banks, Inc. ............................. 2,900 119,263
Fleet Financial Group, Inc. ..................... 3,100 154,612
Norwest Corp. ................................... 4,400 191,400
-----------
674,750
-----------
Business Machines -- 2.58%
Electronic Data Systems Corp. ................... 5,100 220,575
-----------
Business Services -- 5.23%
Deluxe Corp. .................................... 6,700 219,425
Dun & Bradstreet Corp. .......................... 2,900 68,875
WMX Technologies, Inc. .......................... 4,900 159,863
-----------
448,163
-----------
Chemicals -- 3.79%
Great Lakes Chemical Corp. ...................... 2,000 93,500
Sigma-Aldrich Corp. ............................. 3,700 231,019
-----------
324,519
-----------
Construction -- 5.34%
Masco Corp. ..................................... 5,100 183,600
York International Corp. ........................ 4,900 273,787
-----------
457,387
-----------
Consumer Durables -- 1.75%
Rubbermaid, Inc. ................................ 6,600 150,150
-----------
Containers -- 2.41%
Crown Cork & Seal Co., Inc. ..................... 3,800 206,625
-----------
Drugs and Medicine -- 7.89%
Abbott Laboratories Corp. ....................... 3,500 177,625
Bristol-Myers Squibb Co. ........................ 2,200 239,250
Schering-Plough Corp. ........................... 4,000 259,000
-----------
675,875
-----------
27
<PAGE>
Electronics -- 4.81%
Hewlett Packard Co. ............................. 3,100 155,775
Lucent Technologies, Inc. ....................... 1,700 78,625
Motorola, Inc. .................................. 2,900 177,988
--------
412,388
--------
Energy and Utilities -- 9.01%
Enron Corp. ..................................... 4,100 176,813
FPL Group, Inc. ................................. 4,600 211,600
MCN Corp. ....................................... 5,800 167,475
Pinnacle West Capital Corp. ..................... 6,800 215,900
--------
771,788
--------
Energy Raw Materials -- 3.38%
Schlumberger Ltd. ............................... 2,900 289,637
--------
Food and Agriculture -- 9.53%
ConAgra, Inc. ................................... 4,000 199,000
CPC International, Inc. ......................... 2,800 217,000
PepsiCo, Inc. ................................... 7,100 207,675
Sysco Corp. ..................................... 5,900 192,488
--------
816,163
--------
Insurance -- 4.40%
American International Group, Inc. .............. 1,100 119,075
Chubb Corp. ..................................... 4,800 258,000
--------
377,075
--------
International Oil -- 1.65%
British Petroleum PLC ADR ....................... 1,000 141,405
--------
Liquor -- 2.47%
Anheuser-Busch Companies, Inc. .................. 5,300 212,000
--------
Media -- 5.28%
Donnelley R R & Sons Co. ........................ 500 15,688
Gannett Co., Inc. ............................... 2,700 202,163
Washington Post Co. Class B ..................... 700 234,587
--------
452,438
--------
Miscellaneous & Conglomerates -- 1.12%
Cognizant Corp. ................................. 2,900 95,700
--------
Non-Durables and Entertainment -- 2.01%
Cracker Barrel Old Country Store, Inc. .......... 6,800 172,550
--------
Producer Goods -- 1.04%
General Electric Co. ............................ 900 88,987
--------
Retail -- 3.61%
Nordstrom, Inc. ................................. 5,000 177,187
Toys R Us* ...................................... 4,400 132,000
--------
309,187
--------
28
<PAGE>
Telephone -- 7.10%
AT&T Corp. ...................................... 4,500 195,750
Century Telephone Enterprises, Inc. ............. 5,000 154,375
MCI Communications Corp. ........................ 7,900 258,231
-----------
608,356
-----------
TOTAL COMMON STOCKS ................................. 8,322,930
(Cost $7,462,511) -----------
TOTAL INVESTMENTS ................................... $8,567,383
(Cost $7,706,964) ===========
<FN>
* Non-income producing security.
See Notes to Financial Statements.
</TABLE>
29
<PAGE>
Variable Annuity Mid-Cap Opportunity Fund
PORTFOLIO OF INVESTMENTS
December 31, 1996
<TABLE>
<CAPTION>
Description Face Amount Market Value
----------- ------------ ------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT -- 4.32%
Salomon Brothers, Revolving Repurchase Agreement,
6.90%, 1/2/97 (secured by various U.S. Treasury
Strips with maturities ranging from 11/15/04
through 5/15/06, all held by Chase Bank) ........ $396,351 $396,351
------------
(Cost $396,351)
Shares
------------
COMMON STOCKS -- 95.68%
Air Transport -- 1.19%
Air Express International Corp. ................. 3,400 109,650
------------
Apparel -- 1.26%
Nine West Group, Inc. * ......................... 2,500 115,937
------------
Banks -- 5.38%
Charter One Financial, Inc. ..................... 3,677 154,434
First Tennessee National Corp. .................. 4,300 161,250
TCF Financial Corp. ............................. 4,100 178,350
------------
494,034
------------
Business Machines -- 2.61%
Diebold, Inc. ................................... 1,900 119,462
Xilinx, Inc. * .................................. 3,250 119,641
------------
239,103
------------
Business Services -- 6.35%
American Management Systems, Inc. * ............. 2,700 66,150
CDI Corp. * ..................................... 2,100 59,588
DST Systems, Inc. * ............................. 2,900 90,987
G & K Services, Inc. Class A .................... 3,100 117,025
Omnicom Group, Inc. ............................. 2,800 128,100
SunGard Data Systems, Inc. * .................... 3,050 120,475
------------
582,325
------------
Chemicals -- 0.84%
RPM, Inc. ....................................... 4,525 76,925
------------
Construction -- 2.57%
Crane Co. ....................................... 8,125 235,625
------------
Consumer Durables -- 2.67%
Durakon Industries, Inc. * ...................... 3,600 45,900
Invacare Corp. .................................. 700 19,250
Leggett & Platt, Inc. ........................... 5,200 180,050
------------
245,200
------------
Containers -- 1.42%
AptarGroup, Inc. ................................ 3,700 130,425
------------
Drugs and Medicine -- 5.31%
Health Care & Retirement Corp. * ................ 3,300 94,463
Quorum Health Group, Inc. * ..................... 4,200 124,950
Sybron International Corp.* ..................... 4,900 161,700
Vivra, Inc. * ................................... 3,850 106,356
------------
487,469
------------
30
<PAGE>
Electronics -- 9.35%
Belden, Inc. .................................... 6,800 251,600
Dynatech Corp. * ................................ 2,900 128,325
KEMET Corp. * ................................... 3,800 88,350
Microchip Technology, Inc. * .................... 3,000 152,625
Molex, Inc. Class A Non-Voting .................. 3,225 114,891
Teradyne, Inc. * ................................ 5,000 121,875
------------
857,666
------------
Energy Raw Materials -- 5.38%
Apache Corp. .................................... 5,700 201,638
Noble Affiliates, Inc. .......................... 3,700 177,137
Southwestern Energy Co. ......................... 7,600 114,950
------------
493,725
------------
Insurance -- 4.47%
Capital RE Corp. ................................ 3,600 167,850
CapMac Holdings, Inc. ........................... 2,100 69,563
Transatlantic Holdings, Inc. .................... 2,150 173,075
------------
410,488
------------
Media -- 1.35%
Banta Corp. ..................................... 5,400 123,525
------------
Miscellaneous and Conglomerates -- 9.09%
ABC Rail Products Corp. * ....................... 2,800 55,650
Culligan Water Technologies, Inc. * ............. 2,500 101,250
DENTSPLY International, Inc. .................... 3,250 154,375
Greenfield Industries, Inc. ..................... 5,550 169,969
Health Management Associates, Inc. Class A * .... 1,975 44,437
Littelfuse, Inc. * .............................. 3,300 160,050
Wolverine Tube, Inc. * .......................... 4,200 148,050
------------
833,781
------------
Miscellaneous Finance -- 15.18%
CMAC Investment Corp. ........................... 5,000 183,750
Edwards (A.G.), Inc. ............................ 5,500 184,938
Everest Reinsurance Holdings, Inc. .............. 6,300 181,125
Executive Risk, Inc. ............................ 2,900 107,300
FINOVA Group, Inc. .............................. 3,850 247,363
First Financial Corp. ........................... 3,650 89,425
Idex Corp. ...................................... 3,750 149,531
PMI Group, Inc. ................................. 3,150 174,431
Scotsman Industries, Inc. ....................... 3,200 75,600
------------
1,393,463
------------
31
<PAGE>
Motor Vehicles -- 4.77%
Borg Warner Automotive .......................... 4,100 157,850
Excel Industries, Inc. .......................... 2,500 41,562
Harley-Davidson, Inc. ........................... 2,800 131,600
Myers Industries, Inc. .......................... 4,130 69,694
Superior Industries International ............... 1,600 37,000
------------
437,706
------------
Non-Durables and Entertainment -- 0.95%
Lancaster Colony Corp. .......................... 1,900 87,400
------------
Non-Ferrous Metals -- 1.91%
DT Industries, Inc. ............................. 5,000 175,000
------------
Producer Goods -- 6.88%
Federal Signal Corp. ............................ 3,500 90,563
Hubbell, Inc. Class B ........................... 4,300 185,975
Juno Lighting, Inc. ............................. 7,700 123,200
Teleflex, Inc. .................................. 2,100 109,463
TriMas Corp. .................................... 5,100 121,762
------------
630,963
------------
Retail -- 5.28%
Cato Corp. Class A .............................. 11,900 59,500
Kohls Corp. * ................................... 1,600 62,800
Proffitts, Inc. * ............................... 4,100 151,187
Talbots, Inc. ................................... 3,700 105,912
Zale Corp. * .................................... 5,500 105,188
------------
484,587
------------
Travel and Recreation -- 1.47%
Callaway Golf Co. ............................... 4,700 135,125
------------
TOTAL COMMON STOCKS ................................. 8,780,122
(Cost $7,347,264) ------------
TOTAL INVESTMENTS ................................... $ 9,176,473
(Cost $7,743,615) ============
<FN>
* Non-income producing security.
See Notes to Financial Statements.
</TABLE>
32
<PAGE>
Pegasus Variable Annuity Growth Fund
PORTFOLIO OF INVESTMENTS
December 31, 1996
<TABLE>
<CAPTION>
Description Face Amount Market Value
----------- ----------- ------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT -- 3.58%
Salomon Brothers, Revolving Repurchase Agreement,
6.90%, 1/2/97, (secured by various U.S. Treasury
Strips with maturities ranging from 11/15/04
through 05/15/06, all held at Chase Bank) ....... $ 411,815 $ 411,815
------------
(Cost $411,815)
Shares
------
COMMON STOCKS -- 96.42%
Banks -- 5.09%
MBNA Corp ....................................... 5,000 207,500
Norwest Corp. ................................... 5,000 217,500
State Street Boston Corp ........................ 2,500 161,250
------------
586,250
------------
Business Machines -- 6.62%
Electronic Data Systems Corp. ................... 3,500 151,375
Microsoft Corp. * ............................... 4,000 330,500
Silicon Graphics * .............................. 11,000 280,500
------------
762,375
------------
Business Services -- 4.43%
Automatic Data Processing, Inc. ................. 4,000 171,500
Computer Associates International, Inc. ......... 3,000 149,250
Interpublic Group of Companies, Inc. ............ 4,000 190,000
------------
510,750
------------
Chemicals -- 1.40%
Praxair, Inc. ................................... 3,500 161,438
------------
Construction -- 4.88%
Fluor Corp. ..................................... 4,500 282,375
York International Corp. ........................ 5,000 279,375
------------
561,750
------------
Consumer Durables -- 1.37%
Newell Co. ...................................... 5,000 157,500
------------
Containers -- 1.42%
Crown Cork & Seal Co., Inc. ..................... 3,000 163,125
------------
Drugs and Medicine -- 18.15%
American Home Products Corp. .................... 2,000 117,250
Amgen, Inc. * ................................... 4,000 217,500
Columbia HCA Healthcare Corp. ................... 7,000 285,250
Johnson & Johnson ............................... 4,400 218,900
Medtronic, Inc. ................................. 2,000 136,000
Mylan Laboratories, Inc. ........................ 8,000 134,000
Pall Corp. ...................................... 7,000 178,500
Pfizer, Inc. .................................... 1,800 149,175
Smithkline Beecham PLC ADR ...................... 4,000 272,000
Stryker Corp. ................................... 6,000 179,250
United Healthcare Corp. ......................... 4,500 202,500
------------
2,090,325
------------
33
<PAGE>
Electronics -- 9.70%
AMP, Inc. ....................................... 2,000 76,750
First Data Corp. ................................ 6,000 219,000
Hewlett Packard Co. ............................. 5,000 251,250
Intel Corp. ..................................... 3,300 432,094
Lucent Technologies, Inc. ....................... 3,000 138,750
-----------
1,117,844
-----------
Energy and Utilities -- 3.10%
AES Corp. * ..................................... 3,500 162,750
Enron Corp. ..................................... 4,500 194,062
-----------
356,812
-----------
Energy Raw Materials -- 3.62%
Schlumberger Ltd. ............................... 1,900 189,762
Western Atlas, Inc. * ........................... 3,200 226,800
-----------
416,562
-----------
Food and Agriculture -- 1.65%
PepsiCo, Inc. ................................... 6,500 190,125
-----------
Insurance -- 7.64%
AFLAC, Inc. ..................................... 6,000 256,500
American International Group, Inc. .............. 2,300 248,975
Chubb Corp. ..................................... 2,000 107,500
UNUM Corp. ...................................... 3,700 267,325
-----------
880,300
-----------
Miscellaneous & Conglomerates -- 2.60%
Elan PLC ADR * .................................. 9,000 299,250
-----------
Non-Durables and Entertainment -- 5.47%
Kimberly-Clark Corp. ............................ 2,000 190,500
Oracle Systems Corp. * .......................... 4,500 187,875
Service Corp. International ..................... 9,000 252,000
-----------
630,375
-----------
Producer Goods -- 2.08%
Illinois Tool Works, Inc. ....................... 3,000 239,625
-----------
Retail -- 4.32%
Albertsons, Inc. ................................ 2,000 71,250
Home Depot, Inc. ................................ 5,000 250,625
Walgreen Co. .................................... 4,400 176,000
-----------
497,875
-----------
Soaps And Cosmetics -- 1.87%
Procter & Gamble Co. ............................ 2,000 215,000
-----------
Telephone -- 3.25%
AirTouch Communications, Inc. * ................. 9,000 227,250
MCI Communications Corp. ........................ 4,500 147,094
-----------
374,344
-----------
34
<PAGE>
Tobacco -- 2.59%
Philip Morris Companies, Inc. ................... 1,500 168,938
UST, Inc. ....................................... 4,000 129,500
-----------
298,438
-----------
Travel and Recreation -- 5.17%
Carnival Corp., Class A ......................... 7,000 231,000
Gaylord Entertainment Co., Class A .............. 6,796 155,458
Disney (Walt) Co. ............................... 3,000 208,875
-----------
595,333
-----------
TOTAL COMMON STOCKS ................................. 11,105,396
(Cost $9,200,971) -----------
TOTAL INVESTMENTS ................................... $11,517,211
(Cost $9,612,786) ===========
<FN>
* Non-income producing security
See Notes to Financial Statements.
</TABLE>
35
<PAGE>
Pegasus Variable Annuity Money Market Fund
PORTFOLIO OF INVESTMENTS
December 31, 1996
<TABLE>
<CAPTION>
Amortized
Cost
Description Face Amount (Note 2)
----------- ----------- ---------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS -- 32.24%
American General Finance, Inc. Master Note, 6.09%,
1/7/97 .......................................... $ 25,000 $ 25,000
Paccar Leasing Corp. Master Note, 6.09%, 1/7/97 ... 25,000 25,000
Pitney Bowes Credit Corp. Master Note, 6.04%,
1/7/97 .......................................... 25,000 25,000
Transamerica Finance Group, Inc., 6.09%, 1/7/97 ... 25,000 25,000
Daiwa Securities America, Inc. Revolving Repurchase
Agreement, 6.90%, 1/2/97 (secured by U.S.
Treasury Bills due 10/16/97, all held at The Bank
of New York) .................................... 200,000 200,000
NationsBank Capital Markets, Inc., Revolving
Repurchase Agreement, 6.90%, 1/2/97 (secured by
various U.S. Treasury Notes with maturities
ranging from 9/30/98 through 10/15/06 at various
interest rates ranging from 5.00% to 8.875%, all
held at Chase Bank) ............................. 306,000 306,000
---------
606,000
---------
U.S. TREASURY SECURITIES -- 1.07%
U.S. Treasury Notes, 7.50%, 1/31/97 ............. 20,000 20,038
---------
COMMERCIAL PAPER -- 52.33%
Aesop Funding Corp., 5.50%, 1/10/97 ............... 20,000 19,973
Akzo Nobel Inc.:
5.48%, 1/16/97 .................................. 25,000 24,943
5.37%, 3/4/97 ................................... 25,000 24,769
Alpine Securitization Corp., 5.35%, 3/3/97 ........ 40,000 39,637
American Trading & Production Corp., 5.32%, 2/27/97 25,000 24,789
Asset Securitization Cooperative Corp., 5.60%,
2/6/97 .......................................... 40,000 39,776
Banca Serafin S A, 5.32%, 5/6/97 .................. 40,000 39,261
Bank of New York Company Inc., 5.32%, 1/10/97 ..... 40,000 39,947
Clipper Receivable Corp., 5.80%, 1/28/97 .......... 40,000 39,826
Commercial Credit Company, 5.47%, 2/7/97 .......... 40,000 39,775
Enterprise Funding Corp., 5.33%, 1/22/97 .......... 40,000 39,876
General Electric Capital Corp., 5.50%, 1/17/97 .... 20,000 19,951
Great Lakes Chemical Corp., 5.45%, 4/9/97 ......... 40,000 39,407
Greenwich Funding Corp., 5.35%, 3/7/97 ............ 30,000 29,710
IBM Credit Corp., 5.31%, 1/27/97 .................. 25,000 24,904
Marsh & Mclennan companies Inc., 5.53%, 1/3/97 .... 20,000 19,994
MCI Communications Corp., 5.32%, 1/7/97 ........... 30,000 29,973
Mont Blanc Capital Corporation, 5.47%, 1/13/97 .... 40,000 39,927
National Cooperative Services Corp., 5.40%, 3/3/97 25,000 24,771
Pacific Dunlop Holdings Inc., 5.45%, 2/3/97 ....... 25,000 24,875
Receivables Capital Corp., 5.35%, 1/30/97 ......... 40,000 39,828
Royal Bank of Canada, 5.32%, 1/17/97 .............. 20,000 19,953
RTZ America Inc., 5.32%, 5/5/97 ................... 25,000 24,542
Rubbermaid Inc.:
5.55%, 3/3/97 ................................... 25,000 24,765
5.33%, 3/10/97 .................................. 40,000 39,597
Sheffield Receivables Corporation, 5.70%, 1/24/97 . 40,000 39,854
36
<PAGE>
Sigma Finance Inc.:
5.65%, 1/10/97 .................................. 40,000 39,944
5.31%, 5/19/97 .................................. 25,000 24,491
St. Michael Finance Limited, 5.33%, 1/7/97 ........ 30,000 29,973
Sun Belt Dix Inc.:
5.38%, 1/9/97 ................................... 25,000 24,970
5.35%, 1/30/97 .................................. 25,000 24,892
Twin Towers Inc., 5.40%, 3/11/97 .................. 25,000 24,741
-----------
983,634
-----------
NOTES -- 3.46%
Abbey National Treasury Services PLC, Medium Term
Note,
Tranche #SR00032, 5.50%, 11/21/97 ............... 25,000 24,978
General Electric Capital Corp. Medium Term Note,
Series A,
5.24%, 1/17/97 .................................. 20,000 19,999
IBM Credit Corp.,Medium Term Note, 5.78%, 8/20/97 . 20,000 19,984
-----------
64,961
-----------
CERTIFICATES OF DEPOSIT -- 10.90%
American Express Centurion Bank, 5.37%, 2/13/97 ... 25,000 25,000
BankOne Columbus N A, Bank Note, 5.69%, 10/28/97 .. 25,000 24,988
Canadian Imperial Bank of Commerce, 5.39%, 1/3/97 . 25,000 25,000
Deutsche Bank, 5.55%, 11/5/97 ..................... 20,000 19,990
Dresdner Bank A G, 5.60%, 7/3/97 .................. 20,000 20,000
LaSalle National Bank, Medium Term Bank Note
5.59%, 12/4/97 .................................. 25,000 25,000
National Australia Bank, Bank Note, 5.80%, 10/3/97 25,000 24,998
Rabobank Nederland NV Euro, 5.93%, 6/4/97 ......... 20,000 20,001
Societe Generale, 5.78%, 4/11/97 .................. 20,000 19,999
-----------
204,976
-----------
TOTAL INVESTMENTS ................................... $ 1,879,609
(Cost $1,872,966) ===========
<FN>
See Notes to Financial Statements.
</TABLE>
37
<PAGE>
Pegasus Variable Annuity Fund
NOTES TO FINANCIAL STATEMENTS
(1) Organization and Commencement of Operations
Pegasus Variable Annuity Fund (the "Trust") Formerly "The Woodward
Variable Annuity Fund," was organized as a Delaware business trust on
November 7, 1994, and registered under the Investment Company Act of 1940,
as amended, as an open-end investment company. As of December 31, 1996, the
Trust consisted of five separate series of which there were four Equity Funds
and one Money Market Fund, as described below.
Equity Funds:
Pegasus Variable Annuity Managed Assets Balanced Fund
Pegasus Variable Annuity Growth and Value Fund
Pegasus Variable Annuity Mid-Cap Opportunity Fund
Pegasus Variable Annuity Growth Fund
Money Market Funds:
Pegasus Variable Annuity Money Market Fund
The Equity Funds and the Money Market Fund commenced operations on
March 30, 1995. Shares of the Trust are made available to serve as the
underlying investment media of the variable annuity contracts issued by
Separate Account Six of the ITT Hartford Life and Annuity Insurance Company.
Orders for the Trust's shares are executed in accordance with the investment
instructions of the contract owners.
As of October 7, 1996, the Woodward Variable Annuity Balanced Fund,
Woodward Variable Annuity Growth/Value Fund, Woodward Variable Annuity
Opportunity Fund, Woodward Variable Annuity Capital Growth Fund and Woodward
Variable Annuity Money Market Fund changed their names to the Pegasus
Variable Annuity Managed Assets Balanced Fund, Pegasus Variable Annuity
Growth and Value Fund, Pegasus Variable Annuity Mid-Cap Opportunity Fund,
Pegasus Variable Annuity Growth Fund and Pegasus Variable Annuity Money
Market Fund, respectively.
(2) Significant Accounting Policies
The following is a summary of significant accounting policies followed
in the preparation of the financial statements. The policies are in
conformity with generally accepted accounting principles for investment
companies. Following generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
income and expenses during the reporting period. Actual results could
differ from those estimates.
Investments
The Equity Funds value investment securities at market value which is
determined by a pricing service based upon quoted market prices or dealer
quotes. Securities for which market prices or dealer quotes are not readily
available are valued by the investment advisor, First Chicago NBD Investment
Management Company (FCNIMCO) in accordance with procedures approved by the
Board of Trustees. Pursuant to Rule 2a-7 of the Investment Company Act of
1940, the Money Market Fund utilizes the amortized cost method to determine
the carrying value of investment securities. Under this method, investment
securities are valued for both financial reporting and federal tax purposes
at amortized cost and any discount or premium is amortized from the date of
acquisition to maturity. The use of this method results in a carrying value
which approximates market value, which is determined based upon quoted market
prices or dealer quotes.
Investment security purchases and sales are accounted for on the day
after trade date by the Equity Funds and on the trade date for the Money
Market Fund.
The Trust invests in securities subject to repurchase agreements. Such
transactions are entered into only with institutions included on the Federal
Reserve System's list of institutions with whom the Federal Reserve open
market desk will do business. FCNIMCO, acting under the supervision of the
Board of Trustees, has established the following additional policies and
procedures relating to the Trust's investments in securities subject to
repurchase agreements: 1) the value of the underlying collateral is required
to equal or exceed 102% of the funds advanced under the repurchase agreement
including accrued interest; 2) collateral is marked to market daily by
FCNIMCO to assure its value remains at least equal to 102% of the
38
<PAGE>
repurchase agreement amount: and 3) funds are not disbursed by the Trust or
its agent unless collateral is presented or acknowledged by the collateral
custodian.
Investment Income
Interest income is recorded daily on the accrual basis adjusted for
amortization of premium and accretion of discount on debt instruments. Bond
premiums and discounts are amortized/accreted as required by the Internal
Revenue Code. Premiums and discounts on mortgage-backed securities are
amortized/accreted using the effective interest rate method. As prepayments
on the underlying mortgages increase or decrease the expected life, the yield
is adjusted to amortize/accrete the security to its new expected life.
Dividends are recorded on the ex-dividend date.
Federal Income Taxes
It is the Trust's policy to comply with the requirements of Subchapter M of
the Internal Revenue Code, as amended, applicable to regulated investment
companies and to distribute net investment income and realized gains to its
shareholders. Therefore, no federal income tax provision is required in the
accompanying financial statements.
Net realized gains differ for financial statement and tax purposes primarily
because of the recognition of wash sale transactions and post-October 31
capital losses. Also, due to the timing of dividend distributions, the fiscal
year in which amounts are distributed may differ from the year that the
income or realized gains were recorded by the funds. Certain book-to-tax timing
differences for the funds are reflected as excess distributions in the
Statements of Changes in Net Assets. These distributions do not constitute a
tax return of capital.
Shareholder Dividends
Dividends from net investment income are declared and paid quarterly by the
Equity Funds. Net realized capital gains are distributed annually.
Distributions from net investment income and net realized gains are made
during each year to prevent the 4% excise tax imposed on regulated investment
companies by the Internal Revenue Code.
On each business day except those holidays the New York Stock Exchange
(Exchange), FCNIMCO or its bank affiliates observe, the Money Market Fund net
investment income is declared as a dividend, at the close of the Exchange, to
shareholders of record at such close. Such dividends are paid monthly.
Deferred Organization Costs
Organization costs are being amortized on a straight-line basis over the
five year period beginning with the commencement of operations of each
series.
Expenses
Expenses are charged daily as a percentage of the respective Fund's average
net assets. The Trust monitors the rate at which expenses are charged to
ensure that a proper amount of expense is charged to income each year. This
percentage is subject to revision if there is a change in the estimate of the
future net assets of Pegasus or a change in expectations as to the level of
actual expenses.
(3) Transactions with Affiliates
FCNIMCO is the investment advisor pursuant to the Advisory Agreement.
For its advisory services to the Trust, FCNIMCO is entitled to a fee,
computed daily and payable monthly.
FCNIMCO and BISYS serve as the Trust's Co-Administrators pursuant to an
Administration Agreement with the Trust. Under the Administration Agreement,
FCNIMCO and BISYS generally assist in all aspects of the Trust's operations,
other than providing investment advice, subject to the overall authority of
the Trust's Board of Trustees in accordance with Delaware law. Under the
terms of the Administration Agreement, FCNIMCO and BISYS are entitled jointly
to a monthly administration fee at the annual rate of 0.15% of each Fund's
average daily net assets.
Prior to October 7, 1996, the Funds incurred no separate
administration fee in addition to the advisory fee for administrative
services rendered by FCNIMCO under the prior investment advisory agreement.
39
<PAGE>
FCNIMCO has agreed that it may waive its fees in whole or in part; and,
if in part, may specify the particular fund to which such waiver relates as
may be required to satisfy any expense limitation imposed by state securities
laws or other applicable laws. At present, no restrictive expense limitation
is imposed on the Trust. Restrictive limitations could be imposed as a result
of changes in current state laws and regulations in those states where the
Trust has qualified its shares, or by a decision of the Board of Trustees to
qualify the shares in other states having restrictive expense limitations.
For the year ended December 31, 1996, FCNIMCO reimbursed the Managed Assets
Balanced Fund, Growth and Value Fund, Mid-Cap Opportunity Fund, Growth
Fund and the Money Market Fund for certain expenses in the amounts of
$102,154, $80,795, $82,608, $67,679 and $63,365, respectively.
See Note 5 for a summary of fee rates and expenses pursuant to these
agreements.
(4) Investment Securities Transactions
Information with respect to investment securities and security
transactions is as follows:
<TABLE>
<CAPTION>
Managed Mid-Cap
Assets Growth and Opportunity Growth Money Market
Balanced Fund Value Fund Fund Fund Fund
------------- ---------- ----------- ------ ------------
<S> <C> <C> <C> <C> <C>
Gross Unrealized Gains $ 1,727,774 $1,016,597 $1,561,682 $2,068,452 --
Gross Unrealized Losses (236,976) (160,390) (133,529) (164,027) --
=========== ========== ========== ========== ===========
$1,490,798 $ 856,207 $1,428,153 $1,904,425 --
=========== ========== ========== ========== ===========
Federal Income Tax Cost $20,611,442 $7,711,176 $7,748,320 $9,612,786 $ 1,872,966
Purchases $11,595,899 $6,539,778 $5,055,958 $5,409,010 $13,827,409
Sales $4,541,986 $2,553,363 $2,367,233 $1,865,890 $13,071,385
</TABLE>
(5) Expenses
Following is a summary of total expense rates charged, advisory fee
rates payable to FCNIMCO, and amounts paid to FCNIMCO, pursuant to the
agreements described in Note 3 for the year ended December 31, 1996. The
rates shown are stated as a percentage of each fund's average daily net assets.
<TABLE>
<CAPTION>
Managed
Assets Mid-Cap Money
Balanced Growth and Opportunity Growth Market
Effective Date Fund Value Fund Fund Fund Fund
--------------------------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Expense Rates:
January 1 0.85% 0.85% 0.85% 0.85% 0.50%
FCNIMCO Advisory Fee:
January 1 0.75% 0.75% 0.75% 0.75% 0.45%
October 7 0.65% 0.60% 0.60% 0.60% 0.30%
FCNIMCO/BISYS Administration Fee:
October 7 0.15% 0.15% 0.15% 0.15% 0.15%
Amounts Paid:
Advisory Fee to FCNIMCO $ 114,254 $ 42,701 $ 48,992 $ 63,261 $ 6,212
Other Fees & Out of Pocket
Expenses to FCNIMCO $ 47,114 $ 32,867 $ 34,209 $ 16,613 $ 9,807
Expense Reimbursements by FCNIMCO $(102,154) $(80,795) $(82,608) $(67,679) $(63,365)
</TABLE>
(6) Equity of Affiliates
As of December 31, 1996, Hartford Life Insurance Company held direct
interest in shares as follows:
<TABLE>
<CAPTION>
Percent
of
Total
Shares Shares
- ----------------------------------------------------- -------- --------
<S> <C> <C>
Pegasus Managed Assets Balanced Fund 323,506 17.40%
Pegasus Growth and Value Fund 53,779 8.25%
Pegasus Mid-Cap Opportunity Fund 51,218 7.48%
Pegasus Growth Fund 50,861 5.85%
Pegasus Money Market Fund 546,466 28.92%
</TABLE>
40<PAGE>
Pegasus Variable Annuity Fund
FINANCIAL HIGHLIGHTS
The Financial Highlights present a per share analysis of how the
Variable Annuity Funds' net asset values have changed during the periods
presented. Additional quantitative measures expressed in ratio form analyze
important relationships between certain items presented in the financial
statements of the Funds and other information for the periods presented.
<TABLE>
<CAPTION>
Managed Assets Growth and Mid-Cap
Balanced Fund Value Fund Opportunity Fund
--------------------------- --------------------------- ---------------------------
Year Ended Period Ended Year Ended Period Ended Year Ended Period Ended
December 31, December 31, December 31, December 31, December 31, December 31,
1996 1995(1) 1996 1995(1) 1996 1995(1)
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 11.27 $ 10.00 $ 11.63 $ 10.00 $ 11.02 $ 10.00
Income from investment
operations:
Net investment income 0.37 0.25 0.15 0.13 0.03 0.05
Net realized and unrealized
gains on investments 0.97 1.27 2.02 1.63 2.67 1.02
------------ ------------ ------------ ------------ ------------ -----------
Total from investment
operations 1.34 1.52 2.17 1.76 2.70 1.07
------------ ------------ ------------ ------------ ------------ -----------
Less distributions:
From net investment income (0.37) (0.25) (0.14) (0.13) (0.03) (0.05)
From realized gains (0.26) -- (0.47) -- (0.23) --
In excess of realized gains -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ -----------
Total distributions (0.63) (0.25) (0.61) (0.13) (0.26) (0.05)
------------ ------------ ------------ ------------ ------------ -----------
Net asset value, end of period $ 11.98 $ 11.27 $ 13.19 $ 11.63 $ 13.46 $ 11.02
------------ ------------ ------------ ------------ ------------ -----------
Total Return 12.05% 20.15%(a) 18.75% 22.75%(a) 24.53 14.20%(a)
Ratios/Supplemental Data
Net assets, end of period $22,275,238 $11,210,876 $8,602,557 $3,753,691 $9,215,660 $4,972,365
Ratios to average net assets
Expenses 0.85% 0.85%(a) 0.85% 0.85%(a) 0.85% 0.85%(a)
Net investment income 3.32% 3.61%(a) 1.35% 1.78%(a) 0.28% 0.67%(a)
Expenses without fee
waivers/reimbursed expenses 1.52% 2.34%(a) 2.27% 4.93%(a) 2.11% 4.64%(a)
Net investment income without
fee waivers/reimbursed
expenses 2.65% 2.12%(a) (0.07)% (2.30)%(a) (0.98)% (3.12)%(a)
Portfolio turnover rate 35.29% 14.05% 46.82% 17.47% 37.44% 32.11%
Average commission rate $ 0.04 $ 0.10 $ 0.11 $ 0.14 $ 0.08 $ 0.11
<FN>
(1) Commenced operations on March 30, 1995.
(a) Annualized for periods less than one year for comparability purposes.
Actual annual values may be less than or greater than those shown.
See Notes to Financial Statements.
</TABLE>
41
<PAGE>
Pegasus Variable Annuity Fund
FINANCIAL HIGHLIGHTS - (Continued)
<TABLE>
<CAPTION>
Growth Fund Money Market Fund
----------------------------- -----------------------------
Year Ended Period Ended Year Ended Period Ended
December 31, December 31, December 31, December 31,
1996 1995(1) 1996 1995(1)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 11.37 $ 10.00 $ 1.00 $ 1.00
Income from investment operations:
Net investment income 0.05 0.05 0.05 0.03
Net realized and unrealized gains on
investments 1.94 1.38 -- --
------------- ------------- ------------- -------------
Total from investment operations 1.99 1.43 0.05 0.03
------------- ------------- ------------- -------------
Less distributions:
From net investment income (0.05) (0.05) (0.05) (0.03)
From realized gains (0.01) (0.01) -- --
In excess of realized gains (0.02) -- -- --
------------- ------------- ------------- -------------
Total distributions (0.08) (0.06) (0.05) (0.03)
------------- ------------- ------------- -------------
Net asset value, end of period $ 13.28 $ 11.37 $ 1.00 $ 1.00
------------- ------------- ------------- -------------
Total Return 17.52% 18.82%(a) 5.12% 5.41%(a)
Ratios/Supplemental Data
Net assets, end of period $11,542,021 $6,434,936 $1,889,506 $1,175,892
Ratios to average net assets
Expenses 0.85% 0.85%(a) 0.50% 0.50%(a)
Net investment income 0.49% 0.81%(a) 4.91% 5.27%(a)
Expenses without fee
waivers/reimbursed expenses 1.65% 3.15%(a) 5.15% 10.48%(a)
Net investment income without fee
waivers/reimbursed expenses (0.31)% (1.49)%(a) 0.26% (4.71)%(a)
Portfolio turnover rate 23.11% 4.46% N/A N/A
Average commission rate $ 0.05 $ 0.11 N/A N/A
<FN>
(1) Commenced operations on March 30, 1995.
(a) Annualized for periods less than one year for comparability purposes.
Actual annual values may be less than or greater than those shown.
See Notes to Financial Statements.
</TABLE>
42
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Trustees and Shareholders of
Pegasus Variable Annuity Fund:
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, of the PEGASUS VARIABLE ANNUITY FUND
(comprising, as indicated in Note 1, the Managed Assets Balanced, Growth and
Value, Mid-Cap Opportunity, Growth and Money Market Funds) as of December 31,
1996, and the related statements of operations for the year then ended, the
statements of changes in net assets and the financial highlights for the
period from inception (as indicated in Note 1) through December 31, 1996.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included physical counts and
confirmation of securities owned as of December 31, 1996, by inspection and
correspondence with custodians, banks and brokers. 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 respective funds constituting the Pegasus Variable
Annuity Fund as of December 31, 1996, and the results of their operations for
the year then ended, the changes in their net assets and the financial
highlights for the period from inception (as indicated in Note 1) through
December 31, 1996 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Detroit, Michigan,
February 21, 1997.
43
<PAGE>
RESULTS OF SPECIAL SHAREHOLDER MEETING (Unaudited)
On July 10, 1996, a special meeting of the shareholders of Pegasus
Variable Annuity Funds was held to approve the following proposals.
The shareholders approved these proposals with respect to Pegasus
Variable Annuity Funds as follows:
1. To approve a new investment advisory agreement ("New Advisory Agreement")
between the Trust and FCNIMCO:
<TABLE>
<CAPTION>
Fund Affirmative Against Abstain
-------------------------- -------------- -------------- -------------
<S> <C> <C> <C>
VA Balanced 1,065,421.480 9,981.703 64,060.657
VA Growth/Value 363,264.691 9,935.437 9,079.132
VA Opportunity 430,828.155 2,537.301 41,784.705
VA Capital Growth 547,409.703 2,427.631 58,591.717
VA Money Market 1,246,991.502 .000 7,211.668
</TABLE>
2. To approve a change to the fundamental investment limitations of each Fund
of the Trust with regard to the following:
a) investment in commodities
<TABLE>
<CAPTION>
Fund Affirmative Against Abstain
-------------------------- -------------- -------------- -------------
<S> <C> <C> <C>
VA Balanced 1,033,755.781 26,093.721 79,614.338
VA Growth/Value 365,814.493 4,338.869 12,125.898
VA Opportunity 407,840.390 16,497.213 50,812.558
VA Capital Growth 528,664.004 11,432.381 68,332.666
VA Money Market 1,246,991.502 .000 7,211.668
</TABLE>
b) expanded power to borrow
<TABLE>
<CAPTION>
Fund Affirmative Against Abstain
-------------------------- -------------- -------------- -------------
<S> <C> <C> <C>
VA Balanced 1,003,138.388 57,827.789 78,497.663
VA Growth/Value 364,900.845 4,476.490 12,901.925
VA Opportunity 391,965.624 33,141.723 50,042.814
VA Capital Growth 511,311.607 28,620.502 68,496.942
VA Money Market 1,246,991.502 .000 7,211.668
</TABLE>
c) issuing senior securities
<TABLE>
<CAPTION>
Fund Affirmative Against Abstain
-------------------------- -------------- -------------- -------------
<S> <C> <C> <C>
VA Balanced 1,042,108.050 27,404.105 69,951.685
VA Growth/Value 365,814.493 4,338.869 12,125.898
VA Opportunity 416,364.584 12,045.056 46,740.521
VA Capital Growth 530,452.785 11,657.500 66,318.766
VA Money Market 1,230,799.740 16,191.762 7,211.668
</TABLE>
3. To approve a change to the fundamental investment policies and limitations
of each Fund of the Trust, as follows:
c) to approve a change to the fundamental investment limitation concerning
concentration of investments in a particular industry with respect to
the Funds
<TABLE>
<CAPTION>
Fund Affirmative Against Abstain
-------------------------- -------------- -------------- -------------
<S> <C> <C> <C>
VA Balanced 999,822.548 50,398.485 89,242.807
VA Growth/Value 367,274.800 5,925.328 9,079.132
VA Opportunity 394,959.069 20,740.304 59,450.788
VA Capital Growth 516,629.276 22,158.986 69,640.789
VA Money Market 1,230,799.740 16,191.762 7,211.668
</TABLE>
44<PAGE>
4. To approve a change of the following fundamental policies and limitations
to non-fundamental policies and limitations:
b) limitation on investment in other investment companies
<TABLE>
<CAPTION>
Fund Affirmative Against Abstain
-------------------------- -------------- ------------- ------------
<S> <C> <C> <C>
VA Balanced 1,042,996.833 14,653.504 81,813.503
VA Growth/Value 364,174.515 3,417.576 14,687.169
VA Opportunity 412,130.996 8,315.127 54,704.038
VA Capital Growth 530,008.632 9,838.297 68,582.122
VA Money Market 1,230,799.740 16,191.762 7,211.668
</TABLE>
c) limitation on illiquid securities
<TABLE>
<CAPTION>
Fund Affirmative Against Abstain
-------------------------- -------------- ------------- ------------
<S> <C> <C> <C>
VA Balanced 1,036,980.463 21,285.184 81,198.193
VA Growth/Value 350,852.083 16,740.008 14,687.169
VA Opportunity 412,287.796 7,735.444 55,126.921
VA Capital Growth 530,032.969 9,905.224 68,490.858
VA Money Market 1,230,799.740 16,191.762 7,211.668
</TABLE>
d) limitation on purchasing securities on margin
<TABLE>
<CAPTION>
Fund Affirmative Against Abstain
-------------------------- -------------- ------------- ------------
<S> <C> <C> <C>
VA Balanced 1,015,820.620 35,688.007 87,955.213
VA Growth/Value 354,575.483 9,189.993 18,513.784
VA Opportunity 402,585.229 16,616.001 55,948.931
VA Capital Growth 522,774.410 17,163.783 68,490.858
VA Money Market 1,230,799.740 16,191.762 7,211.668
</TABLE>
e) limitation on purchasing securities of companies for the purpose of
exercising control
<TABLE>
<CAPTION>
Fund Affirmative Against Abstain
-------------------------- -------------- ------------- ------------
<S> <C> <C> <C>
VA Balanced 1,020,173.371 38,092.276 81,198.193
VA Growth/Value 354,579.305 13,012.786 14,687.169
VA Opportunity 405,711.717 14,734.406 54,704.038
VA Capital Growth 524,916.080 15,338.496 68,174.475
VA Money Market 1,230,799.740 16,191.762 7,211.668
</TABLE>
f) limitation on writing or selling put options, call options, straddles,
spreads, or any combinations thereof
<TABLE>
<CAPTION>
Fund Affirmative Against Abstain
-------------------------- -------------- ------------- ------------
<S> <C> <C> <C>
VA Balanced 1,012,425.017 33,295.133 93,743.690
VA Growth/Value 357,465.514 8,673.916 16,139.830
VA Opportunity 400,798.664 12,306.389 62,045.108
VA Capital Growth 518,570.165 13,470.619 76,388.267
</TABLE>
5. To approve certain changes to fundamental investment objectives of VA
Growth/Value, VA Opportunity Funds, and VA Capital Growth Funds
<TABLE>
<CAPTION>
Fund Affirmative Against Abstain
-------------------------- ------------- ------------- ------------
<S> <C> <C> <C>
VA Growth/Value 365,959.759 3,417.576 12,901.925
VA Opportunity 403,103.143 17,076.896 54,970.122
VA Capital Growth 519,677.506 18,709.193 70,042.352
</TABLE>
45<PAGE>
6. To ratify the appointment of two Trustees to the Board of Trustees of the
Trust.
Elected Trustees Current Trustees
Ms. Marilyn McCoy Mr. Will M. Caldwell * Mr. Julius L. Pallone
Mr. John P. Gould Mr. Donald L. Tuttle * Dr. Nicholas J. DeGrazia
Mr. Donald B. Sutherland
<TABLE>
<CAPTION>
Fund Affirmative Against Abstain
-------------------------- -------------- -------------- -------------
<S> <C> <C> <C>
VA Balanced 1,054,904.229 5,195.955 79,363.656
VA Growth/Value 373,200.128 .000 9,079.132
VA Opportunity 420,203.797 5,136.373 49,809.991
VA Capital Growth 537,796.524 4,222.497 66,410.030
VA Money Market 1,230,799.740 16,191.762 7,211.668
</TABLE>
8. To transact such other business as may properly come before the Meeting or
any adjournment thereof.
<TABLE>
<CAPTION>
Fund Affirmative Against Abstain
-------------------------- -------------- -------------- -------------
<S> <C> <C> <C>
VA Balanced 1,050,437.531 4,523.671 84,502.638
VA Growth/Value 370,325.389 1,425.901 10,527.970
VA Opportunity 422,750.603 2,394.756 50,004.802
VA Capital 540,169.397 2,166.007 66,093.647
VA Money Market 1,246,991.502 .000 7,211.668
</TABLE>
46
<PAGE>
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Strength in Investing
