<PAGE>
Table of Contents
1 Letter to Shareholders
2 Separate Account Six Statement of Assets and Liabilities
5 Separate Account Six Statement of Operations
7 Separate Account Six Statement of Changes in Net Assets
9 Separate Account Six Notes to Financial Statements
10 Report of Independent Public Accountants (Separate Account Six)
11 Management's Discussion and Analysis
22 Pegasus Statements of Assets and Liabilities
23 Pegasus Statements of Operations
24 Pegasus Statements of Changes in Net Assets
25 Pegasus Portfolio of Investments
41 Pegasus Notes to Financial Statements
46 Pegasus Financial Highlights
48 Report of Independent Public Accountants (Pegasus Variable Funds)
Variable annuity contracts are not bank deposits or obligations of, or endorsed
or guaranteed by, any bank, nor are they federally insured or otherwise
protected by the FDIC, the Federal Reserve Board, or any other agency; they are
subject to investment risks, including possible loss of the principal amount
invested.
ITT HARTFORD
LIFE AND ANNUITY INSURANCE
COMPANY--SEPARATE ACCOUNT SIX
P.O. BOX 5085
Hartford, Connecticut 06100-5085
Telephone: 1-800-862-6668 (Contract Owners)
1-800-862-7155 (Investment
Representatives)
INVESTMENT ADVISER--PEGASUS
VARIABLE FUNDS
First Chicago NBD Investment Management Company (FCNIMCO)
Three First National Plaza, MS 0334
Chicago, IL 60670-0344
The Pegasus Pathmaker is a flexible Premium Variable Annuity issued by Hartford
Life and Annuity Insurance Company, Simsbury, CT (countrywide except for NY:
ILAVA94NC). The Pegasus Pathmaker Variable Annuity is underwritten by Hartford
Securities Distribution Company, Inc.
THIS REPORT IS NOT AUTHORIZED FOR
DISTRIBUTION TO PROSPECTIVE
INVESTORS UNLESS PRECEDED
OR ACCOMPANIED BY A CURRENT
PROSPECTUS.
Pegasus Variable Funds I
<PAGE>
- --------------------------------------------------------------------------------
DEAR SHAREHOLDERS:
MARKET COMMENTARY
1997 may well be remembered as one of the best years for domestic investing in
recent times. Not only did equities perform well, over 33% total return for the
Standard & Poor's 500 Index (S&P 500), but bonds also provided above average
results with the Lehman Brothers Bond Index providing a 9.7% return.
Importantly, these results occurred in the lowest inflation environment that
the United States has seen since the 1960's, therefore real returns, after
adjusting for inflation, were about the same as actual returns and very
rewarding by historical experience. The S&P 500, dominated by larger companies,
provided the strongest results, but other indices representing mid-sized and
smaller companies also had good years. The Russell 2500 (mid-sized companies)
returned 24.4% and the Russell 2000 (smaller companies) returned 22.4%.
Municipal bonds provided results very similar to the taxable index noted above
with the Lehman Municipal Bond Index up 9.2%. International investing, which
has lagged domestic results for the last few years, continued that trend
including substantial weakening in the fourth quarter. Morgan Stanley's Europe,
Australia, and Far East (MSCI EAFE) Index returned just 1.8% for the year and
the Salomon Non-U.S. Government Bond Index declined 4.3%.
Pegasus Pathmaker Variable Annuity Highlights
In this annual report, you will find detailed information about the Pegasus
Variable Annuity. In summary, 1997 was a good year with all the investment
options in the Pegasus Pathmaker Variable Annuity portfolio providing overall
positive results, while selected options distinguished themselves. We are
pleased that our investors fully participated in the overall market's success.
During 1997, in an effort to provide investors with the most complete and
attractive investment choices, we opened the Intrinsic Value Fund and the Bond
Fund and closed the Managed Assets Balanced Fund and the Money Market Fund.
Economic Outlook
In 1998, we do not anticipate that the market will match 1997's exceptional
results, but we remain optimistic that the favorable economic trends will
provide the backdrop for continued advances. Similarly, we look forward to
another good year for the Pathmaker funds. We believe the Pegasus Pathmaker
Variable Annuity provides a solid foundation for meeting investor goals and we
thank you for your continued confidence in selecting us as your investment
advisor.
Sincerely,
/s/ George F. Abel
George F. Abel
Chief Investment Officer
First Chicago NBD Investment Management Company
<PAGE>
SEPARATE ACCOUNT SIX
ITT HARTFORD LIFE AND ANNUITY INSURANCE COMPANY
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<CAPTION>
PCM
U.S.
PCM GOVERNMENT
PCM PCM GLOBAL AND PCM PCM PCM PCM
GLOBAL GROWTH AND ASSET HIGH NEW MONEY DIVERSIFIED INTERNATIONAL
GROWTH INCOME ALLOCATION QUALITY OPPORTUNITIES MARKET INCOME GROWTH
FUND FUND FUND BOND FUND FUND FUND FUND FUND
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>
ASSETS:
Investments:
PUTNAM VT GLOBAL
GROWTH FUND
Shares 41,373
Cost $ 640,642
Market Value $758,775 -- -- -- -- -- -- --
PUTNAM VT GROWTH
AND INCOME FUND
Shares 44,933
Cost $ 1,202,096
Market Value -- $1,272,505 -- -- -- -- -- --
PUTNAM VT GLOBAL
ASSET ALLOCATION
FUND
Shares 96,160
Cost $ 1,386,777
Market Value -- -- $1,803,962 -- -- -- -- --
PUTNAM VT U. S.
GOVERNMENT &
HIGH QUALITY
BOND FUND
Shares 52,351
Cost $ 663,145
Market Value -- -- -- $ 702,547 -- -- -- --
PUTNAM VT NEW
OPPORTUNITIES
FUND
Shares 223,805
Cost $ 4,293,910
Market Value -- -- -- -- $ 4,751,380 -- -- --
PUTNAM VT MONEY
MARKET FUND
Shares 771,015
Cost $ 771,015
Market Value -- -- -- -- -- $ 771,015 -- --
PUTNAM VT DIVER-
SIFIED INCOME
FUND
Shares 72,234
Cost $ 750,874
Market Value -- -- -- -- -- -- $ 816,968 --
PUTNAM VT INTER-
NATIONAL GROWTH
FUND
Shares 1,145,137
Cost $13,319,201
Market Value -- -- -- -- -- -- $13,088,919
Due from ITT
Hartford Life
and Annuity In-
surance Company -- -- 1,185 -- 3,413 111,975 -- 8,878
Receivable from
fund shares sold 44 49 -- 27 -- -- 31 --
- ----------------------------------------------------------------------------------------------------------------------------------
Total Assets 758,819 1,272,554 1,805,147 702,574 4,754,793 882,990 816,999 13,097,797
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Due to ITT Hart-
ford Life and
Annuity Insur-
ance Company 44 49 -- 27 -- -- 31 --
Payable for fund
shares purchased -- -- 1,181 -- 3,413 111,975 -- 8,878
- ----------------------------------------------------------------------------------------------------------------------------------
Total Liabili-
ties 44 49 1,181 27 3,413 111,975 31 8,878
- ----------------------------------------------------------------------------------------------------------------------------------
Net Assets
(variable annu-
ity contract li-
abilities) $758,775 $1,272,505 $1,803,966 $ 702,547 $ 4,751,380 $ 771,015 $ 816,968 $13,088,919
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of this financial statement.
2 Pegasus Variable Funds
<PAGE>
SEPARATE ACCOUNT SIX
ITT HARTFORD LIFE AND ANNUITY INSURANCE COMPANY
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES -- (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
PEGASUS PEGASUS PEGASUS
GROWTH MID-CAP PEGASUS INTRINSIC PEGASUS
AND VALUE OPPORTUNITY GROWTH VALUE BOND
FUND FUND FUND FUND FUND
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments:
PEGASUS GROWTH AND
VALUE FUND
Shares 2,330,162
Cost $33,395,873
Market Value $37,795,235 -- -- -- --
PEGASUS MID-CAP OPPOR-
TUNITY FUND
Shares 750,797
Cost $ 9,285,103
Market Value -- $10,796,463 -- -- --
PEGASUS GROWTH FUND
Shares 974,295
Cost $12,118,000
Market Value -- -- $14,994,407 -- --
PEGASUS INTRINSIC VALUE
FUND
Shares 1,157,150
Cost $12,391,043
Market Value -- -- -- $13,341,943 --
PEGASUS BOND FUND
Shares 3,071,720
Cost $31,292,279
Market Value -- -- -- -- $32,068,759
Due from ITT Hartford
Life and Annuity Insur-
ance Company -- -- 10,507 -- 17,193
Receivable from fund
shares sold 21,971 2,857 -- 26,646 --
- -------------------------------------------------------------------------------------------------
Total Assets 37,817,206 10,799,320 15,004,914 13,368,589 32,085,952
- -------------------------------------------------------------------------------------------------
LIABILITIES:
Due to ITT Hartford
Life and Annuity Insur-
ance Company 12,228 2,790 -- 26,646 --
Payable for fund shares
purchased -- -- 7,260 -- 17,013
- -------------------------------------------------------------------------------------------------
Total Liabilities 12,228 2,790 7,260 26,646 17,013
- -------------------------------------------------------------------------------------------------
Net Assets (variable
annuity contract lia-
bilities) $37,804,978 $10,796,530 $14,997,654 $13,341,943 $32,068,939
- -------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of this financial statement.
Pegasus Variable Funds 3
<PAGE>
SEPARATE ACCOUNT SIX
ITT HARTFORD LIFE AND ANNUITY INSURANCE COMPANY
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES -- (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNITS
OWNED BY UNIT CONTRACT
PARTICIPANTS PRICE LIABILITY
----------------------------------------
<S> <C> <C> <C>
Deferred annuity contracts in the accumu-
lation period:
Group Sub-Accounts:
PCM Global Growth Fund Sub-Account 49,461 $15.340734 $ 758,775
PCM Growth and Income Fund Sub-Account 109,396 11.632089 1,272,505
PCM Global Asset Allocation Fund Sub-Ac-
count 114,678 15.730709 1,803,966
PCM U.S. Government and High Quality Bond
Fund Sub-Account 57,259 12.269672 702,547
PCM New Opportunities Fund Sub-Account 372,970 12.739327 4,751,380
PCM Money Market Fund Sub-Account 751,872 1.025460 771,015
PCM Diversified Income Sub-Account 64,296 12.706304 816,968
PCM International Growth Fund Sub-Account 1,191,211 10.987906 13,088,919
Pegasus Growth and Value Fund Sub-Account 2,207,236 17.127748 37,804,978
Pegasus Mid-Cap Opportunity Fund Sub-Ac-
count 641,084 16.841049 10,796,530
Pegasus Growth Fund Sub-Account 915,569 16.380691 14,997,654
Pegasus Intrinsic Value Fund Sub-Account 1,151,313 11.588457 13,341,943
Pegasus Bond Fund Sub-Account 2,990,021 10.725323 32,068,939
- -------------------------------------------------------------------------------
Total $132,976,119
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of this financial statement.
4 Pegasus Variable Funds
<PAGE>
SEPARATE ACCOUNT SIX
ITT HARTFORD LIFE AND ANNUITY INSURANCE COMPANY
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the year ended December 31, 1997
<TABLE>
<CAPTION>
PCM PCM PCM PCM PCM PCM PCM
PCM GROWTH GLOBAL ASSET U.S. GOVERNMENT NEW MONEY DIVERSIFIED INTERNATIONAL
GLOBAL GROWTH AND INCOME ALLOCATION & HIGH QUALITY OPPORTUNITIES MARKET INCOME GROWTH
FUND FUND FUND BOND FUND FUND FUND FUND FUND
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>
INVESTMENT IN-
COME:
Dividends $13,769 $ -- $ 271,409 $179,553 $ -- $18,893 $211,887 $ 188,828
EXPENSES:
Mortality and
expense under-
takings (9,645) (7,292) (68,580) (23,407) (29,035) (5,125) (30,687) (79,974)
- -----------------------------------------------------------------------------------------------------------------------------
Net investment
income (loss) 4,124 (7,292) 202,829 156,146 (29,035) 13,768 181,200 108,854
CAPITAL GAINS IN-
COME 14,810 -- 463,905 -- -- -- 33,403 -
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON INVEST-
MENTS:
Net realized
gain (loss) on
security trans-
actions 13,653 116 769,450 (52,503) 2,226 -- (6,775) (658)
Net unrealized
appreciation
(depreciation)
of
investments dur-
ing the year 52,462 70,409 (348,873) (4,804) 457,470 -- (85,983) (230,282)
- -----------------------------------------------------------------------------------------------------------------------------
Net gain (loss)
on investments 66,115 70,525 420,577 (57,307) 459,696 -- (92,758) (230,940)
- -----------------------------------------------------------------------------------------------------------------------------
Net increase
(decrease) in
net assets re-
sulting from op-
erations $85,049 $63,233 $1,087,311 $ 98,839 $430,661 $13,768 $121,845 $(122,086)
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of this financial statement.
Pegasus Variable Funds 5
<PAGE>
SEPARATE ACCOUNT SIX
ITT HARTFORD LIFE AND ANNUITY INSURANCE COMPANY
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PEGASUS PEGASUS
GROWTH PEGASUS PEGASUS PEGASUS INTRINSIC PEGASUS PEGASUS
AND VALUE MID-CAP GROWTH MONEY VALUE BOND MANAGED ASSETS
FUND OPPORTUNITY FUND MARKET FUND FUND BALANCED
SUB- FUND SUB- FUND SUB- SUB- FUND
ACCOUNT SUB-ACCOUNT ACCOUNT SUB-ACCOUNT(1) ACCOUNT(2) ACCOUNT(2) SUB-ACCOUNT(1)
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 188,107 $ 8,586 $ 25,424 $32,061 $ 106,648 $ 840,912 $ 151,729
EXPENSES:
Mortality and expense
undertakings (302,170) (130,827) (177,657) (9,047) (83,852) (198,135) (144,181)
- -------------------------------------------------------------------------------------------------------------------
Net investment income
(loss) (114,063) (122,241) (152,233) 23,014 22,796 642,777 7,548
CAPITAL GAINS INCOME 766,624 1,590,529 1,076,636 -- 45,262 19,484 180,913
NET REALIZED AND
UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain
(loss) on security
transactions (3,216) 501,302 623,125 -- (1,872) (2,027) 2,663,920
Net unrealized appreci-
ation (depreciation) of
investments during the
period 3,560,218 189,167 1,161,170 -- 950,900 776,480 (1,086,285)
- -------------------------------------------------------------------------------------------------------------------
Net gain (loss) on in-
vestments 3,557,002 690,469 1,784,295 -- 949,028 774,453 1,577,635
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets resulting
from operations $4,209,563 $2,158,757 $2,708,698 $23,014 $1,017,086 $1,436,714 $1,766,096
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from January 1, 1997 to June 26, 1997 (date of liquidation).
(2) For the period from May 1, 1997 (commencement of operations) to December
31, 1997.
The accompanying notes are an integral part of this financial statement.
6 Pegasus Variable Funds
<PAGE>
SEPARATE ACCOUNT SIX
ITT HARTFORD LIFE AND ANNUITY INSURANCE COMPANY
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
PCM PCM PCM PCM PCM
PCM GROWTH GLOBAL ASSET U.S. GOVERNMENT NEW PCM PCM INTERNATIONAL
GLOBAL GROWTH AND INCOME ALLOCATION & HIGH QUALITY OPPORTUNITIES MONEY DIVERSIFIED GROWTH
FUND FUND FUND BOND FUND FUND MARKET FUND INCOME FUND FUND
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>
FOR THE YEAR
ENDED DECEMBER
31, 1997
OPERATIONS:
Net investment
income (loss) $ 4,124 $ (7,292) $ 202,829 $ 156,146 $ (29,035) $ 13,768 $ 181,200 $ 108,854
Capital gains
income 14,810 -- 463,905 -- -- -- 33,403 --
Net realized
gain (loss) on
security trans-
actions 13,653 116 769,450 (52,503) 2,226 -- (6,775) (658)
Net unrealized
appreciation
(depreciation)
of investments
during the pe-
riod 52,462 70,409 (348,873) (4,804) 457,470 -- (85,983) (230,282)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase
(decrease) in
net assets re-
sulting from op-
erations 85,049 63,233 1,087,311 98,839 430,661 13,768 121,845 (122,086)
- -------------------------------------------------------------------------------------------------------------------------------
UNIT TRANSAC-
TIONS:
Purchases 285,116 884,913 1,097,790 652,973 1,636,610 217,499 1,212,370 4,400,400
Net transfers (90,194) 348,182 (7,521,042) (2,366,168) 2,761,489 616,768 (3,477,675) 9,006,077
Surrenders (29,493) (23,823) (245,162) (141,774) (77,380) (77,020) (105,409) (195,472)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase
(decrease) in
net assets re-
sulting from
unit transac-
tions 165,429 1,209,272 (6,668,414) (1,854,969) 4,320,719 757,247 (2,370,714) 13,211,005
- -------------------------------------------------------------------------------------------------------------------------------
Total increase
(decrease) in
net assets 250,478 1,272,505 (5,581,103) (1,756,130) 4,751,380 771,015 (2,248,869) 13,088,919
NET ASSETS:
Beginning of
Year 508,297 -- 7,385,069 2,458,677 -- -- 3,065,837 --
- -------------------------------------------------------------------------------------------------------------------------------
End of Year $758,775 $1,272,505 $ 1,803,966 $ 702,547 $4,751,380 $771,015 $ 816,968 $13,088,919
- -------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR
ENDED DECEMBER
31, 1996
OPERATIONS:
Net investment
income (loss) $ 1,230 -- $ 131,774 $ 74,783 -- -- $ 59,441 --
Capital gains
income 9,282 -- 133,995 -- -- -- -- --
Net realized
gain (loss) on
security trans-
actions 20 -- 478 (316) -- -- 32 --
Net unrealized
appreciation
(depreciation)
of investments
during the pe-
riod 44,333 -- 460,827 (43,356) -- -- 91,892 --
- -------------------------------------------------------------------------------------------------------------------------------
Net increase
(decrease) in
net assets re-
sulting from op-
erations 54,865 -- 727,074 31,111 -- -- 151,365 --
- -------------------------------------------------------------------------------------------------------------------------------
UNIT TRANSAC-
TIONS:
Purchases 66,395 -- 2,475,962 1,175,062 -- -- 1,646,339 --
Net transfers 138,183 -- 541,687 2,174 -- -- 346,797 --
Surrenders (2,343) -- (250,295) (64,629) -- -- (100,736) --
- -------------------------------------------------------------------------------------------------------------------------------
Net increase
(decrease) in
net assets re-
sulting from
unit transac-
tions 202,235 -- 2,767,354 1,112,607 -- -- 1,892,400 --
- -------------------------------------------------------------------------------------------------------------------------------
Total increase
(decrease) in
net assets 257,100 -- 3,494,428 1,143,718 -- -- 2,043,765 --
NET ASSETS:
Beginning of
Year 251,197 -- 3,890,641 1,314,959 -- -- 1,022,072 --
- -------------------------------------------------------------------------------------------------------------------------------
End of Year $508,297 -- $ 7,385,069 $ 2,458,677 -- -- $ 3,065,837 --
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
Pegasus Variable Funds 7
<PAGE>
SEPARATE ACCOUNT SIX
ITT HARTFORD LIFE AND ANNUITY INSURANCE COMPANY
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS -- (CONTINUED)
For the years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
PEGASUS
PEGASUS PEGASUS MONEY PEGASUS PEGASUS
GROWTH MID-CAP PEGASUS MARKET INTRINSIC BOND PEGASUS
AND VALUE OPPORTUNITY GROWTH FUND VALUE FUND MANAGED ASSETS
FUND FUND FUND SUB- FUND SUB- BALANCED FUND
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT ACCOUNT(1) SUB-ACCOUNT(2) ACCOUNT(2) SUB-ACCOUNT(1)
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR OR PERIOD
ENDED DECEMBER 31, 1997
OPERATIONS:
Net investment income
(loss) $ (114,063) $ (122,241) $ (152,233) $ 23,014 $ 22,796 $ 642,777 $ 7,548
Capital gains income 766,624 1,590,529 1,076,636 -- 45,262 19,484 180,913
Net realized gain
(loss) on security
transactions (3,216) 501,302 623,125 -- (1,872) (2,027) 2,663,920
Net unrealized appreci-
ation (depreciation) of
investments during the
period 3,560,218 189,167 1,161,170 -- 950,900 776,480 (1,086,285)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net as-
sets resulting from op-
erations 4,209,563 2,158,757 2,708,698 23,014 1,017,086 1,436,714 1,766,096
- ----------------------------------------------------------------------------------------------------------------------
UNIT TRANSACTIONS:
Purchases 13,843,170 4,429,654 6,126,101 126,745 4,633,265 12,346,781 4,616,463
Net transfers 12,589,078 (3,940,241) (4,245,608) (1,462,029) 7,904,486 18,871,440 (24,292,348)
Surrenders (736,816) (378,113) (464,118) (31,103) (212,894) (585,996) (486,478)
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets resulting
from unit transactions 25,695,432 111,300 1,416,375 (1,366,387) 12,324,857 30,632,225 (20,162,363)
- ----------------------------------------------------------------------------------------------------------------------
Total increase (de-
crease) in net assets 29,904,995 2,270,057 4,125,073 (1,343,373) 13,341,943 32,068,939 (18,396,267)
NET ASSETS:
Beginning of Year 7,899,983 8,526,473 10,872,581 1,343,373 -- -- 18,396,267
- ----------------------------------------------------------------------------------------------------------------------
End of Year $37,804,978 $10,796,530 $14,997,654 $ -- $13,341,943 $32,068,939 $ --
- ----------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1996
OPERATIONS:
Net investment income
(loss) $ 172,013 $ (40,150) $ (84,994) $ 29,129 -- -- $ 465,677
Capital gains income 58,564 95,175 21,919 -- -- -- 109,290
Net realized gain on
security transactions 2,671 2,433 1,567 -- -- -- (169)
Net unrealized appreci-
ation of investments
during the period 592,332 1,189,616 1,282,106 -- -- -- 676,435
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net as-
sets resulting from op-
erations 825,580 1,247,074 1,220,598 29,129 -- -- 1,251,233
- ----------------------------------------------------------------------------------------------------------------------
UNIT TRANSACTIONS:
Purchases 3,856,399 2,978,256 3,671,953 660,650 -- -- 8,868,728
Net transfers 281,626 147,979 452,544 29,045 -- -- 1,130,362
Surrenders (228,985) (265,422) (335,723) (31,505) -- -- (605,871)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net as-
sets resulting from
unit transactions 3,909,040 2,860,813 3,788,774 658,190 -- -- 9,393,219
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net
assets 4,734,620 4,107,887 5,009,372 687,319 -- -- 10,644,452
NET ASSETS:
Beginning of Year 3,165,363 4,418,586 5,863,209 656,054 -- -- 7,751,815
- ----------------------------------------------------------------------------------------------------------------------
End of Year $ 7,899,983 $ 8,526,473 $10,872,581 $1,343,373 -- -- $18,396,267
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from January 1, 1997 to June 26, 1997 (date of liquidation).
(2) For the period from May 1, 1997 (commencement of operations) to December
31, 1997.
The accompanying notes are an integral part of these financial statements.
8 Pegasus Variable Funds
<PAGE>
SEPARATE ACCOUNT SIX
ITT HARTFORD LIFE AND ANNUITY INSURANCE COMPANY
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- --------------------------------------------------------------------------------
1.ORGANIZATION:
Separate Account Six (Account) is a separate investment account within ITT
Hartford Life and Annuity Insurance Company (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 annuity contractholders of the Company in various mutual
funds (funds) as directed by the contractholders.
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). 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 tax regulations.
b) Security Valuation--
The investments in shares of the Putnam Variable Trust Funds (Putnam VT
Global Growth Fund, Putnam VT Growth and Income Fund, Putnam VT Global
Asset Allocation Fund, Putnam VT U.S. Government and High Quality Bond
Fund, Putnam VT New Opportunities Fund, Putnam VT Money Market Fund, Putnam
VT Diversified Income Fund, and Putnam VT International Growth Fund) and
the Pegasus Variable Funds (Pegasus Growth and Value Fund, Pegasus Mid-Cap
Opportunity Fund, Pegasus Growth Fund, Pegasus Intrinsic Value Fund, and
Pegasus Bond Fund) are valued at the closing net asset value per share as
determined by the appropriate Fund as of December 31, 1997.
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) Use of Estimates--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount 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 contract owner's accounts, in accordance with the
terms of the contracts.
Pegasus Variable Funds 9
<PAGE>
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, 1997, and the related statement of operations for the year
then ended and statements of changes in net assets for each of the two years in
the period then ended. 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, 1997, the results of
its operations for the year then ended and the changes in its net assets for
each of the two years in the period then ended, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
February 16, 1998
10 Pegasus Variable Funds
<PAGE>
PEGASUS VARIABLE FUNDS
MANAGEMENT'S DISCUSSION AND ANALYSIS
GROWTH AND VALUE FUND
- --------------------------------------------------------------------------------
An Interview with Gary Konsler and Jeffrey Beard
Portfolio Managers
- --------------------------------------------------------------------------------
Q. CAN YOU PUT THE STOCK MARKET'S RETURN FOR 1997 INTO PERSPECTIVE FOR ME?
The Dow Jones Industrial Average (Dow) posted another record year generating a
25% return. The S&P 500 Index did even better earning a 33% return. Both
indexes have now recorded annual returns in excess of 20% for three years
duration. The Dow has been in existence for over 100 years, the S&P 500 for 69
years. Successive 20% three-year returns have never been achieved by either.
The three-year cumulative returns for the Dow and the S&P 500 are over 100%,
the second best 36-month period. The historical longer term return for stocks
averages about 10% to 11% per year.
Q. HOW DID THE GROWTH AND VALUE FUND PERFORM DURING 1997?
The Fund returned over 26% in 1997. This compares favorably with the 23% return
reported by Morningstar's Growth and Income index of variable annuities as well
as the 19% return for Morningstar's U.S. Diversified Equity Average for
variable annuities.
Q. CONSIDERING THE SIZE OF THESE NUMBERS, IS THIS A NEW ERA OF INVESTING?
It is still too early to say with total conviction. But, we can say the markets
have benefited from a remarkable combination of economic events. Despite
monetary upheavals in Asia, the economy is expanding at a 3% rate with more
consistency than at any time in over a decade. At the same time, inflation is
at levels not seen in over three decades. Concurrently, bond yields are nearing
30-year lows. Consumer confidence is at a 28-year high. The federal budget
deficit is shrinking. Corporate profits advanced for a sixth year. (A seventh
year would be a record.) This environment has been described as the Goldilocks
economy, nirvana and the best of all possible worlds. As the economy approaches
the beginning of its eighth year of expansion (the third longest in U.S.
history), the question remains. How long will the stock-market-benefiting,
economic expansion continue?
Q. WHICH STOCKS PERFORMED PARTICULARLY WELL IN THE GROWTH AND VALUE FUND AND
WHICH DID NOT MEET YOUR EXPECTATIONS?
The best performing stocks were in the healthcare arena- Schering-Plough and
Bristol-Myers Squibb, each representing 3% to 4% of the Fund's portfolio.
Finance was also strong, led by Norwest (the 12th largest bank). Schlumberger,
the premier oil service firm, was additive. In the newspaper area, both Gannett
and the Washington Post boosted returns. These five stocks returned between 47%
and 94% for the year. During 1997, investors once again severely punished any
company that reported bad news or warned of potential problems on the horizon.
That was the common thread that tied together the disappointing holdings for
the year, e.g., York (heating and air conditioning), First Data (credit card
processing), The Pep Boys (auto parts sales and service), Russell (active
apparel) and Boeing (aerospace).
Q. IN ADDITION TO THE ECONOMIC UNDERPINNINGS MENTIONED ABOVE, ARE THERE ANY
OTHER ISSUES THAT COULD HAVE A MAJOR IMPACT ON THE STOCK MARKET?
During 1997, the stock market was unusually volatile. The S&P 500 rose or fell
more than 1% on nearly one-third of the trading days in 1997, double the
volatility of 1996, triple that of 1995. This was only the fourth time in two
decades the market was so volatile. In addition, at year end, the S&P 500 was
trading at 19 times 1998 consensus earnings estimates, a level not seen in over
20 years. Thus, the market does not appear to expect any disappointments.
Naturally, with expectations so high, volatility will likely continue in 1998.
Q. HOW DO YOU INVEST DURING SUCH TIMES?
Such an environment, we believe, calls for the core of an investor's equity
holdings to be invested in a diversified portfolio of high quality, financially
sound, blue chip stocks selling at attractive prices. That is how the Growth
and Value Fund is, and plans to remain, invested.
Pegasus Variable Funds 11
<PAGE>
PEGASUS VARIABLE FUNDS
MANAGEMENT'S DISCUSSION AND ANALYSIS
GROWTH AND VALUE FUND -- (CONTINUED)
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE
PEGASUS VARIABLE GROWTH AND VALUE FUND AND THE
S&P 500 INDEX*
LOGO
(1) Excludes expenses.
<TABLE>
<CAPTION>
TOTAL RETURN INCEPTION ONE SINCE
THROUGH 12/31/97 DATE YEAR INCEPTION
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
PEGASUS VARIABLE GROWTH AND VALUE FUND
I Shares 3/30/95 26.80% 23.08%
S&P 500 Index* 3/30/95 33.35% 29.89%
</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.
12 Pegasus Variable Funds
<PAGE>
PEGASUS VARIABLE FUNDS
MANAGEMENT'S DISCUSSION AND ANALYSIS
MID-CAP OPPORTUNITY FUND
- --------------------------------------------------------------------------------
An Interview with Ronald Doyle and Joseph Gatz
Portfolio Managers
- --------------------------------------------------------------------------------
Q: HOW DID THE MID-CAP OPPORTUNITY FUND PERFORM IN 1997?
The Fund had excellent performance, exceeding both the mid-cap market index and
the universe average of other mid-cap funds. The Fund returned 26.6% for the
twelve months ended December 31, 1997, compared to the 19.6% return for the
Lipper Mid-Cap Universe average and the 24.4% return of the Russell 2500 Index.
Q: TO WHAT DO YOU ATTRIBUTE THIS STRONG PERFORMANCE?
The Fund's favorable returns versus its benchmarks can be attributed to the
good fundamental performance of the holdings in the portfolio, with relatively
few negative "surprises" throughout the year. Our efforts to select attractive
stocks were successful in almost all industry sectors, with the strongest
contributions coming from financial services, technology, health care and
consumer cyclicals. In addition, the fund maintained an attractive valuation
profile versus many other small- and mid-cap funds.
Q: LARGE COMPANY STOCKS HAVE PERFORMED BETTER THAN SMALLER COMPANIES FOR THE
LAST FEW YEARS. HOW DID MID-SIZED AND SMALL COMPANY STOCKS COMPARE TO THE S&P
500 LAST YEAR?
Indeed, the 33.4% return of the S&P 500 once again exceeded almost all other
market indices, including the mid-cap and small-cap benchmarks. During the
first half of 1997, record cash flows into the equity market were absorbed by
the liquidity offered in larger company stocks and large-cap dominated index
funds. Although small and mid-cap stocks rallied in the third quarter of the
year, investors returned to the perceived safety and liquidity of large-cap
stocks in reaction to the uncertainty generated by economic turmoil in
Southeast Asia.
Q: WHAT IS THE OUTLOOK FOR 1998?
Although disruption in certain international economies lends uncertainty to the
overall outlook for U.S equities, we remain optimistic regarding prospects for
mid-cap and small-cap stocks. Relative to the large-cap multinational companies
represented in the S&P 500, small and mid-sized companies are more domestically
oriented and are generally less affected by international economies and
currency fluctuations. In addition, near term earnings growth for smaller
companies is expected to exceed that of larger companies. Finally, the
valuation of mid- and small-cap stocks appears somewhat more attractive after
the sector has underperformed larger company stocks for the last three years.
Q: GIVEN THIS OUTLOOK, HOW IS THE FUND POSITIONED?
The Fund seeks to invest in proven growth companies selling at reasonable
prices. We require the companies we invest in to have a distinct competitive
advantage that allows them to maintain above average growth and profitability.
We prefer companies that generate strong cash flow and have solid financial
structures. We also prefer companies whose managements have their financial
interests aligned with shareholders. In addition, we pay close attention to the
valuations of our holdings relative to their underlying fundamental prospects.
These strategies have served us well in the past, and we are committed to
maintaining them in the future.
Pegasus Variable Funds 13
<PAGE>
PEGASUS VARIABLE FUNDS
MANAGEMENT'S DISCUSSION AND ANALYSIS
MID-CAP OPPORTUNITY FUND -- (CONTINUED)
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE
PEGASUS VARIABLE MID-CAP OPPORTUNITY FUND
AND THE RUSSELL 2500 INDEX*
[GRAPH APPEARS HERE]
(1) Excludes expenses
<TABLE>
<CAPTION>
TOTAL RETURN INCEPTION ONE SINCE
THROUGH 12/31/97 DATE YEAR INCEPTION
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
PEGASUS VARIABLE MID-CAP OPPORTUNITY FUND
I Share 3/30/95 26.65% 22.42%
Russell 2500 Index* 3/30/95 24.36% 24.28%
</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 the 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.
14 Pegasus Variable Funds
<PAGE>
PEGASUS VARIABLE FUNDS
MANAGEMENT'S DISCUSSION AND ANALYSIS
GROWTH FUND
- --------------------------------------------------------------------------------
An Interview with Jeffrey C. Beard
Portfolio Manager
- --------------------------------------------------------------------------------
Q. WE HAVE READ ELSEWHERE HOW 1997 WAS ANOTHER BLOCKBUSTER YEAR IN THE EQUITY
MARKET, BUT WHAT HAPPENED IN THE FOURTH QUARTER?
Equity investors in the fourth quarter turned defensive in response to the
uncertainties growing out of the turmoil in the Asian markets. Although the
market experienced its first real correction in seven years, it did manage at
least a partial comeback as stocks which can demonstrate consistent results,
including those in the consumer staples, healthcare, and financial sectors,
were bid upward. But performing surprisingly well in this market environment
were stocks offering some type of fixed return such as former laggards in the
telecommunications and utilities sectors. Finishing up with a 2.9% return for
the quarter the S&P 500 Composite Index capped off a third blockbuster year in
a row with a 33.4% total return.
Q. THIS DOES NOT SOUND LIKE A POSITIVE BACKDROP FOR GROWTH INVESTORS. HOW DID
THE GROWTH FUND PERFORM?
This type of market backdrop is not particularly conducive to growth investing,
in general, as evidenced by the negative 1.1% average return for the Lipper
Growth Universe of managers during the final quarter, nor is it friendly toward
the general equity fund manager which averaged negative 1.6% during the same
period according to Lipper; yet the Fund was able to hold its own in this
market, turning in a positive 1.4% total return for the quarter. For the year
the Fund provided a healthy return of 25.5%. This compares favorably with the
Lipper Growth Universe average return of 25.3%, as well as the 24.4% return
generated by the average general equity fund.
Q. GRANTED, THE FUND PERFORMED WELL COMPARED TO OTHER GROWTH MANAGERS.
NONETHELESS, HELP US BETTER UNDERSTAND THE DYNAMICS WHICH CONTRIBUTED TOWARD
THE FUND LAGGING FOR THE QUARTER THE LARGE CAPITALIZATION BENCHMARK, THE
STANDARD AND POOR'S COMPOSITE 500 INDEX.
Sub-market performance for the quarter is largely attributable to two factors:
a large underexposure to the communication services sector, and the large
exposure to technology stocks. The former are traditionally underweighted in
growth funds due to unexciting growth prospects, and the latter bore the brunt
of the market's retreat in the correction, but did not rebound as much. In
keeping with the market theme for the quarter, the best performing stocks in
the Fund were largely domestic, highly consistent earners. Norwest was up 27%,
having benefited from declining interest rates, as well. Pfizer received
preliminary approval for a new potential blockbuster drug sooner than
anticipated and returned 24%. And rounding out the top five were Walt Disney
(+23%), Walgreen (+23%), and Illinois Tool Works (+21%). Technology stocks
dominated the worst performing stocks in the Fund. Preannounced earnings were
responsible for very disappointing returns from Silicon Graphics and Cabletron
Systems, both of which were down 53%, and Altera, down 35%. Management guidance
to reduce near-term expectations impacted Fluor, down 30%, and uncertainty
surrounding Asia's influence on demand for personal computers hurt Intel, down
24%.
Q. AND WHAT ABOUT FOR THE YEAR; WHAT WERE THE WINNERS AND LOSERS IN THE FUND?
The best performance came from the independent power producer AES Corp. which
doubled in value during 1997, in large part due to several contracts signed
throughout the year which have added to the visibility of earnings over the
next two to three years. Norwest Corp. returned 82% and benefited from solid
fundamental execution within the consistently strong financial sector. Pfizer,
which also advanced 82%, has consistently hit expectations and has one of the
richest pipelines of new products, contributing to clearly visible earnings
growth for the foreseeable future. State Street Corp., up 82% for the year,
exceeded expectations, driven by growth in assets and associated higher fee
income. And rounding out the top five was Home Depot, up 77%. Home Depot
benefited from the consolidation within the do-it-yourself retailing industry
coupled with very favorable consumer demand for its products and services. The
negative side of the ledger was dominated by technology stocks, all of which
paid the price for missing expectations and most of which suffered from
concerns originating from soft demand, perceived or real, from international
customers. Specifically, Cabletron Systems declined 57%, Silicon Graphics
declined 52%, Altera dropped 38%, and First Data Corp. dropped 20%. Fluor was
influenced by Asian dislocations disrupting the supply/demand relationship for
global engineering and construction services following a period of aggressive
expansion for the company. Its stock declined 40%.
Pegasus Variable Funds 15
<PAGE>
PEGASUS VARIABLE FUNDS
MANAGEMENT'S DISCUSSION AND ANALYSIS -- (CONTINUED)
GROWTH FUND
- --------------------------------------------------------------------------------
An Interview with Jeffrey C. Beard
Portfolio Manager
- --------------------------------------------------------------------------------
Q. WHAT IS YOUR OUTLOOK FOR THE NEXT 12 MONTHS, AND GIVEN THIS OUTLOOK, HOW IS
THE FUND POSITIONED?
We believe the economy will continue to grow, although the head winds created
by increased competition from cheap imports will pressure revenue growth and
increasing wage demands will squeeze margins, as well, pulling corporate
earnings growth expectations downward. As earnings growth does in fact slow,
stock selection becomes even more paramount, and we believe that investors will
focus on an increasingly narrow selection of large cap, consistent growth
equities, driving valuation of these successful stocks even higher. The
Variable Growth Fund's approach to investing is particularly well suited to
this environment, emphasizing consistent earnings growth supported by strong,
unit-driven revenue growth.
16 Pegasus Variable Funds
<PAGE>
PEGASUS VARIABLE FUNDS
MANAGEMENT'S DISCUSSION AND ANALYSIS
GROWTH FUND -- (CONTINUED)
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE
PEGASUS VARIABLE GROWTH FUND AND THE
S&P 500 INDEX*
[GRAPH APPEARS HERE]
(1) Excludes expenses.
<TABLE>
<CAPTION>
TOTAL RETURN INCEPTION ONE SINCE
THROUGH 12/31/97 DATE YEAR INCEPTION
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
PEGASUS VARIABLE GROWTH FUND
I Shares 3/30/95 25.48% 20.85%
S&P 500 Index* 3/30/95 33.35% 29.89%
</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.
Pegasus Variable Funds 17
<PAGE>
PEGASUS VARIABLE FUNDS
MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRINSIC VALUE FUND
- --------------------------------------------------------------------------------
An Interview with Chris Gassen and Richard Neumann
Portfolio Managers
- --------------------------------------------------------------------------------
Q. HOW DID THE FUND PERFORM?
We ended the period from May 1, 1997 to December 31, 1997 with a 16.96 percent
return, a very strong year for absolute performance. However, it was also a
good year for the general equity market with the S & P 500 Index up an
astounding 19.14 percent for the same period.
Q. DESPITE THE GOOD ABSOLUTE RETURN, YOU FELL SLIGHTLY BEHIND THE S & P 500
INDEX. WHY?
In exuberant market environments such as last year, more conservatively
invested funds such as the Intrinsic Value Fund typically lag. However, over
longer periods we are positioned to achieve more competitive returns.
Q. HOW DO YOU MEASURE RISK?
Many investors use volatility statistics (such as beta and standard deviation)
to measure risk; the more volatile the return, the riskier the asset. In
general, investors demand higher returns when they incur greater risk.
Q. YOU SAY THAT THE FUND HAS BEEN LESS RISKY THAN THE OVERALL MARKET. WHAT
ABOUT RISK ADJUSTED RETURNS?
A risk adjusted return takes a fund's risk into account when evaluating
performance. According to outside sources like Morningstar and Value Line, the
Intrinsic Value Fund's performance is above average when considering that our
risk has been very low relative to other funds in the same category.
Q. WHERE IS THE MARKET AND THE FUND HEADED IN 1998?
The market has looked expensive to us for some time, and 1997 did nothing to
change that outlook. We see a market environment driven by forces of momentum
and speculation, so the connection between current stock prices and the
business fundamentals of underlying companies is not often apparent to us.
Thus, its difficult to find attractively valued stocks. We believe that this
speculative environment will eventually cool off and prices will return to more
sensible valuations. We think the Fund is positioned to give investors a less
bumpy ride in the interim, although in such a volatile environment anything can
happen in the short run.
Q. A LESS BUMPY RIDE, BUT A BUMPY RIDE NONETHELESS?
Unfortunately, one cannot be invested in equities without expecting ups and
downs, no matter how conservative the portfolio. However, it is precisely for
this reason that equities have outperformed other asset classes over the longer
term. Remember that higher returns should accompany higher risk. The Intrinsic
Value Fund is positioned to earn attractive returns with less volatility than
the market in the years ahead.
18 Pegasus Variable Funds
<PAGE>
PEGASUS VARIABLE FUNDS
MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRINSIC VALUE FUND -- (CONTINUED)
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE
PEGASUS VARIABLE INTRINSIC VALUE FUND AND THE
S&P 500 INDEX*
[GRAPH APPEARS HERE]
(1) Excludes expenses.
<TABLE>
<CAPTION>
TOTAL RETURN INCEPTION SINCE
THROUGH 12/31/97 DATE INCEPTION
- --------------------------------------------------------------------------------------
<S> <C> <C>
PEGASUS VARIABLE INTRINSIC VALUE FUND
I Shares 5/1/97 16.96%
S&P 500 Index* 5/1/97 19.14%
</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.
Pegasus Variable Funds 19
<PAGE>
PEGASUS VARIABLE BOND FUND
MANAGEMENT'S DISCUSSION AND ANALYSIS
BOND FUND
- --------------------------------------------------------------------------------
An Interview with Doug Swanson
Portfolio Manager
- --------------------------------------------------------------------------------
Q. HOW DID THE BOND FUND PERFORM IN 1997?
With rates generally moving lower in 1997 the Bond Fund had a good year
relative to its benchmark and peers. For the period from May 1, 1997 to
December 31, 1997, the Fund provided an unannualized total return of 8.25%
versus 8.64% for its benchmark, the Lehman Brothers Aggregate Bond Index
(index).
Q. WHAT WERE THE PRIMARY REASONS FOR THE BOND FUND'S PERFORMANCE?
Our overweighting in mortgage backed securities was a positive as this sector
outperformed most of the year. Also, our security selection within this sector
was excellent as many of our individual collateralized mortgage obligations
(CMOs) outperformed generic securities.
Q. HOW DID THE CRISIS IN THE ASIAN FINANCIAL MARKETS AFFECT THE FUND?
The biggest effect was to create a "flight to quality" that extended the rally
in U.S. fixed income markets. This clearly had a positive impact on the Fund's
absolute returns. The Funds had no direct exposure to Asian creditors, many of
which had their ratings slide to below investment grade. The flight to quality
did cause returns on corporate bonds to significantly lag those of similar
duration U.S. Treasuries. The Fund's underweighting in this sector versus the
index had a positive impact on performance in the fourth quarter.
Q. WHAT IS THE FUND'S CURRENT DURATION AND WHY IS THAT IMPORTANT?
As of December 31, 1997 the Bond Fund had a duration of 4.4 versus 4.6 for its
index. It is important because duration is a measure of interest rate risk of a
portfolio or security. The higher the duration the higher the interest rate
risk.
Q. WHAT IS THE FUND'S SECTOR ALLOCATIONS?
At the end of 1997 the Fund held 58% in U.S. Treasuries, 24% in mortgage backed
securities, 13% in asset backed securities, 2% in corporates and 3% in money
market funds. Also, the Fund held 96% in AAA rated securities.*
Q. WHAT ARE SOME OF YOUR STRATEGIES FOR 1998?
We will continue to keep the duration of the Fund similar to that of its index.
Our long-term view on the bond market remains positive, although we think we
will remain within a trading range during most of 1998. We have increased our
holdings of short duration AAA rated asset-backed securities and believe these
will outperform similar duration Treasuries. Although the mortgage-backed
sector is not as undervalued as it was at the beginning of 1997, we think there
are still many opportunities in this area. Finally, we will continue to stress
higher quality securities.
The Lehman Brothers Aggregate Bond Index is not subject to the expenses of a
mutual fund.
*The Portfolio's Composition is subject to change.
20 Pegasus Variable Funds
<PAGE>
PEGASUS VARIABLE FUNDS
MANAGEMENT'S DISCUSSION AND ANALYSIS
BOND FUND -- (CONTINUED)
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE
PEGASUS VARIABLE BOND FUND AND THE
LEHMAN BROTHERS AGGREGATE BOND INDEX*
[GRAPH APPEARS HERE]
(1) Excludes expenses.
<TABLE>
<CAPTION>
TOTAL RETURN INCEPTION SINCE
THROUGH 12/31/97 DATE INCEPTION
- ----------------------------------------------------------------------------------------
<S> <C> <C>
PEGASUS VARIABLE BOND FUND
I Shares 5/1/97 8.25%
Lehman Brothers Aggregate Bond Index* 5/1/97 8.64%
</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 Lehman Brothers Aggregate Bond Index is an unmanaged index generally
representative of the bond market as a whole.
Pegasus Variable Funds 21
<PAGE>
PEGASUS VARIABLE FUNDS
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MID-CAP INTRINSIC
GROWTH AND OPPORTUNITY GROWTH VALUE BOND
VALUE FUND FUND FUND FUND FUND
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investment in securi-
ties:
At cost $34,157,763 $ 9,991,063 $12,095,108 $12,985,982 $32,985,201
- -------------------------------------------------------------------------------------
At value (Note 2) $38,683,321 $12,149,036 $15,818,753 $13,931,584 $33,838,484
Receivable for securi-
ties sold -- 207,255 -- -- --
Receivable for shares
purchased -- -- 10,505 -- 17,013
Income receivable 44,341 8,878 12,200 32,840 392,276
Deferred organization
costs, net (Note 2) 13,429 13,413 13,413 -- --
Prepaids and other as-
sets 3,449 5,544 3,306 898 --
- -------------------------------------------------------------------------------------
TOTAL ASSETS 38,744,540 12,384,126 15,858,177 13,965,322 34,247,773
- -------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities
purchased -- 702,441 -- 2,792 --
Payable for shares sold 12,228 2,872 -- 26,646 --
Accrued investment advi-
sory fees 19,327 5,569 7,629 6,938 11,527
Accrued administration
fees 4,832 1,392 1,907 1,735 4,322
Accrued custodial fees 2,956 1,011 439 1,653 155
Other payables and ac-
crued expenses -- 2,611 8,291 -- 1,899
- -------------------------------------------------------------------------------------
TOTAL LIABILITIES 39,343 715,896 18,266 39,764 17,903
- -------------------------------------------------------------------------------------
NET ASSETS $38,705,197 $11,668,230 $15,839,911 $13,925,558 $34,229,870
- -------------------------------------------------------------------------------------
Net assets consist of:
Capital shares (unlim-
ited number of shares
authorized, par value
$.10 per share) $ 238,561 $ 81,151 $ 102,935 $ 120,788 $ 327,912
Additional paid-in capi-
tal 33,732,577 9,352,073 11,966,323 12,780,383 33,042,502
Accumulated undistrib-
uted net investment in-
come 18,165 994 2,573 2,911 6,092
Accumulated undistrib-
uted net realized gains 190,336 76,039 44,435 75,874 81
Net unrealized apprecia-
tion on investments 4,525,558 2,157,973 3,723,645 945,602 853,283
- -------------------------------------------------------------------------------------
NET ASSETS $38,705,197 $11,668,230 $15,839,911 $13,925,558 $34,229,870
- -------------------------------------------------------------------------------------
Shares of capital stock
outstanding 2,385,610 811,512 1,029,351 1,207,876 3,279,117
- -------------------------------------------------------------------------------------
Net asset value and re-
demption price per share $ 16.22 $ 14.38 $ 15.39 $ 11.53 $ 10.44
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
22 Pegasus Variable Funds
<PAGE>
PEGASUS VARIABLE FUNDS
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
For the Period Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH AND MID-CAP GROWTH INTRINSIC BOND
VALUE FUND OPPORTUNITY FUND FUND VALUE FUND(1) FUND(1)
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 83,956 $ 23,157 $ 39,640 $ 53,829 $1,037,459
Dividends 329,762 72,964 111,549 121,865 --
- --------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 413,718 96,121 151,189 175,694 1,037,459
- --------------------------------------------------------------------------------------------
EXPENSES (NOTES 2, 3 AND
5):
Investment advisory fee 134,329 60,752 80,804 38,176 62,212
Administration fees 33,582 15,188 20,201 9,544 23,329
Professional fees 29,334 30,948 34,289 15,671 18,477
Custodial fee 31,764 25,139 14,516 11,510 12,122
Amortization of de-
ferred organization
costs 5,807 5,823 5,823 -- --
Insurance 1,564 1,886 2,473 -- --
Printing 7,497 9,392 10,321 1,225 1,225
Registration, filing
fees and other expenses 1,220 1,220 1,220 1,220 1,220
Less: Expense reim-
bursement (37,901) (58,356) (46,798) (17,342) (2,899)
- --------------------------------------------------------------------------------------------
NET EXPENSES 207,196 91,992 122,849 60,004 115,686
- --------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 206,522 4,129 28,340 115,690 921,773
- --------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAINS ON INVESTMENTS:
Net realized gains 837,720 1,743,002 1,211,616 123,169 20,905
Net change in
unrealized appreciation
on investments 3,665,139 725,115 1,819,220 945,602 853,283
- --------------------------------------------------------------------------------------------
NET REALIZED AND
UNREALIZED GAINS ON IN-
VESTMENTS 4,502,859 2,468,117 3,030,836 1,068,771 874,188
- --------------------------------------------------------------------------------------------
NET INCREASE IN NET AS-
SETS FROM OPERATIONS $4,709,381 $2,472,246 $3,059,176 $1,184,461 $1,795,961
- --------------------------------------------------------------------------------------------
</TABLE>
(1) For the period May 1, 1997 (commencement of operations) through December
31, 1997.
See Notes to Financial Statements.
Pegasus Variable Funds 23
<PAGE>
PEGASUS VARIABLE FUNDS
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTRINSIC
GROWTH AND VALUE FUND MID-CAP OPPORTUNITY FUND GROWTH FUND VALUE FUND BOND FUND
-------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Period Ended Period Ended
December 31, December 31, December 31, December 31, December 31, December 31, December 31, December 31,
1997 1996 1997 1996 1997 1996 1997(1) 1997(1)
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment
income $ 206,522 $ 76,816 $ 4,129 $ 17,007 $ 28,340 $ 41,801 $ 115,690 $ 921,773
Net realized
gains (losses) 837,720 383,386 1,743,002 250,859 1,211,616 (7,205) 123,169 20,905
Net change in
unrealized ap-
preciation on
investments 3,665,139 550,254 725,115 1,197,353 1,819,220 1,393,107 945,602 853,283
- -------------------------------------------------------------------------------------------------------------------------------
Net increase in
net assets from
operations 4,709,381 1,010,456 2,472,246 1,465,219 3,059,176 1,427,703 1,184,461 1,795,961
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS:
From net invest-
ment income (195,276) (69,919) (3,201) (16,984) (26,849) (40,769) (112,779) (915,681)
From realized
gains (785,704) (277,463) (1,732,223) (148,305) (1,140,567) (3,939) (47,295) (20,824)
In excess of re-
alized gains -- -- -- -- -- (19,409) -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total distribu-
tions (980,980) (347,382) (1,735,424) (165,289) (1,167,416) (64,117) (160,074) (936,505)
- -------------------------------------------------------------------------------------------------------------------------------
FROM CAPITAL
SHARE TRANSAC-
TIONS:
Proceeds from
shares sold 26,172,441 4,237,450 4,779,295 3,106,879 6,512,260 4,013,413 13,088,467 33,072,130
Net asset value
of shares issued
in reinvestment
of distributions
to shareholders 980,980 347,382 1,735,424 165,289 1,167,416 64,117 160,074 936,505
- -------------------------------------------------------------------------------------------------------------------------------
27,153,421 4,584,832 6,514,719 3,272,168 7,679,676 4,077,530 13,248,541 34,008,635
Less: payments
for shares re-
deemed (779,182) (399,040) (4,798,971) (328,803) (5,273,546) (334,031) (347,370) (638,221)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase in
net assets from
capital share
transactions 26,374,239 4,185,792 1,715,748 2,943,365 2,406,130 3,743,499 12,901,171 33,370,414
- -------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN
NET ASSETS 30,102,640 4,848,866 2,452,570 4,243,295 4,297,890 5,107,085 13,925,558 34,229,870
NET ASSETS:
Beginning of pe-
riod 8,602,557 3,753,691 9,215,660 4,972,365 11,542,021 6,434,936 -- --
- -------------------------------------------------------------------------------------------------------------------------------
End of period $38,705,197 $ 8,602,557 $11,668,230 $9,215,660 $15,839,911 $11,542,021 $13,925,558 $34,229,870
- -------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARES
TRANSACTIONS:
Shares sold 1,722,895 334,689 318,480 248,511 428,650 325,074 1,224,500 3,249,652
Shares issued in
reinvestment of
distributions to
shareholders 61,654 26,413 120,944 12,410 74,931 4,912 14,079 90,681
- -------------------------------------------------------------------------------------------------------------------------------
1,784,549 361,102 439,424 260,921 503,581 329,986 1,238,579 3,340,333
Less: shares re-
deemed (50,917) (31,926) (312,599) (27,359) (343,565) (26,488) (30,703) (61,216)
- -------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN
SHARES
OUTSTANDING 1,733,632 329,176 126,825 233,562 160,016 303,498 1,207,876 3,279,117
CAPITAL SHARES:
Beginning of pe-
riod 651,978 322,802 684,687 451,125 869,335 565,837 -- --
- -------------------------------------------------------------------------------------------------------------------------------
End of period 2,385,610 651,978 811,512 684,687 1,029,351 869,335 1,207,876 3,279,117
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)For the period May 1, 1997 (commencement of operations) through December 31,
1997.
See Notes to Financial Statements.
24 Pegasus Variable Funds
<PAGE>
PEGASUS VARIABLE GROWTH AND VALUE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1997
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<TABLE>
<CAPTION>
MARKET
DESCRIPTION SHARES VALUE
----------- ------ ------
<S> <C> <C>
TEMPORARY CASH INVESTMENT -- 2.41%
Pegasus Cash Management Fund Class I....................... 933,313 $ 933,313
-----------
(Cost $933,313)
COMMON STOCKS -- 97.59%
Aerospace -- 1.52%
Boeing Co................................................. 12,000 587,250
-----------
Apparel -- 1.51%
Russell Corp.............................................. 22,000 584,375
-----------
Banks -- 5.37%
Bankamerica Corp.......................................... 11,000 803,000
Norwest Corp.............................................. 33,000 1,274,625
-----------
2,077,625
-----------
Business Machines -- 2.61%
Electronic Data Systems Corp.............................. 23,000 1,010,563
-----------
Business Services -- 5.25%
Auto Data Processing, Inc................................. 19,000 1,166,125
Deluxe Corp............................................... 25,000 862,500
-----------
2,028,625
-----------
Chemicals -- 2.67%
Sigma-Aldrich Corp........................................ 26,000 1,033,500
-----------
Construction -- 4.21%
Masco Corp................................................ 18,000 915,750
York International Corp................................... 18,000 712,125
-----------
1,627,875
-----------
Consumer Durables -- 2.53%
Newell Co................................................. 23,000 977,500
-----------
Containers -- 1.81%
Crown Cork & Seal Co., Inc................................ 14,000 701,750
-----------
Drugs and Medicine -- 9.00%
Abbot Laboratories Corp................................... 13,000 852,313
Bristol-Myers Squibb Co................................... 14,000 1,324,750
Schering-Plough Corp...................................... 21,000 1,304,625
-----------
3,481,688
-----------
Electronics -- 9.65%
Amp, Inc.................................................. 21,000 882,000
Andrew Corp............................................... 15,000 360,000
First Data Corp........................................... 19,000 555,750
Hewlett Packard Co........................................ 12,000 750,000
Lucent Technology, Inc.................................... 7,000 559,125
Motorola, Inc............................................. 11,000 627,688
-----------
3,734,563
-----------
</TABLE>
Pegasus Variable Funds 25
<PAGE>
PEGASUS VARIABLE GROWTH AND VALUE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<TABLE>
<CAPTION>
MARKET
DESCRIPTION SHARES VALUE
----------- ------ ------
<S> <C> <C>
Energy and Utilities -- 10.56%
Enron Corp................................................. 16,000 $ 665,000
FPL Group, Inc............................................. 18,000 1,065,375
MCN Energy Group, Inc...................................... 31,000 1,251,625
Pinnacle West Capital Corp................................. 26,000 1,101,750
-----------
4,083,750
-----------
Energy Raw Materials -- 3.12%
Schlumberger Ltd........................................... 15,000 1,207,500
-----------
Food and Agriculture -- 7.78%
ConAgra, Inc............................................... 30,000 984,375
CPC International, Inc..................................... 10,000 1,077,500
PepsiCo, Inc............................................... 26,000 947,375
-----------
3,009,250
-----------
Insurance -- 3.84%
American International Group, Inc.......................... 6,000 652,500
Chubb Corp................................................. 11,000 831,875
-----------
1,484,375
-----------
International Oil -- 2.08%
British Petroleum PLC ADR.................................. 10,079 803,170
-----------
Liquor -- 2.39%
Anheuser-Busch Companies, Inc.............................. 21,000 924,000
-----------
Media -- 4.75%
Gannett Co., Inc........................................... 14,000 865,375
Washington Post Co., Class B............................... 2,000 973,000
-----------
1,838,375
-----------
Miscellaneous & Conglomerates -- 2.53%
Cognizant Corp............................................. 22,000 980,375
-----------
Miscellaneous Finance -- 1.87%
PMI Group, Inc............................................. 10,000 723,125
-----------
Non-Durables and Entertainment -- 2.30%
Kimberly-Clark Corp........................................ 18,000 887,625
-----------
Producer Goods -- 2.61%
Dover Corp................................................. 28,000 1,011,500
-----------
Retail -- 5.18%
PEP Boys Manny Moe & Jack.................................. 28,000 668,500
Toys R Us, Inc.*........................................... 17,000 534,436
Officemax, Inc.*........................................... 56,300 802,275
-----------
2,005,211
-----------
</TABLE>
26 Pegasus Variable Funds
<PAGE>
PEGASUS VARIABLE GROWTH AND VALUE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<TABLE>
<CAPTION>
MARKET
DESCRIPTION SHARES VALUE
----------- ------ ------
<S> <C> <C>
Telephone -- 2.45%
Century Telephone Enterprises, Inc........................ 19,000 $ 946,438
-----------
TOTAL COMMON STOCKS......................................... 37,750,008
-----------
(Cost $33,224,450)
TOTAL INVESTMENTS........................................... $38,683,321
===========
(Cost $34,157,763)
</TABLE>
* Non-income producing security.
Pegasus Variable Funds 27
<PAGE>
PEGASUS VARIABLE MID-CAP OPPORTUNITY FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1997
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<TABLE>
<CAPTION>
SHARES MARKET
DESCRIPTION VALUE
----------- ------ ------
<S> <C> <C>
TEMPORARY CASH INVESTMENT -- 5.54%
Pegasus Cash Management Fund Class I...................... 673,595 $ 673,595
-----------
(Cost $673,595)
COMMON STOCKS -- 94.46%
Air Transport -- 1.05%
Air Express International Corp........................... 4,200 128,100
-----------
Apparel -- 0.84%
Tommy Hilfiger Corp...................................... 2,900 101,862
-----------
Banks -- 8.17%
Charter One Financial, Inc............................... 5,200 328,250
First Tennessee National Corp............................ 2,000 133,500
Associated Banc Corp..................................... 3,838 211,570
TCF Financial Corp....................................... 9,400 319,012
-----------
992,332
-----------
Business Machines -- 4.25%
Comdisco, Inc............................................ 5,350 178,891
Diebold, Inc............................................. 2,300 116,438
Xilinx, Inc.............................................. 2,950 103,434
Stratus Computer, Inc.................................... 3,100 117,219
-----------
515,982
-----------
Business Services -- 8.32%
CDI Corp.*............................................... 4,400 201,300
DST Systems, Inc.*....................................... 5,300 226,244
Hon Industries, Inc...................................... 3,800 224,200
Omnicom Group, Inc....................................... 3,200 135,600
SunGard Data Systems, Inc.*.............................. 7,200 223,200
-----------
1,010,544
-----------
Chemicals -- 0.70%
RPM, Inc................................................. 5,556 84,729
-----------
Construction -- 4.03%
Applied Power, Inc....................................... 2,800 193,200
Crane Co................................................. 6,825 296,034
-----------
489,234
-----------
Consumer Durables -- 1.41%
Leggett & Platt, Inc..................................... 4,100 171,687
-----------
Containers -- 1.46%
AptarGroup, Inc.......................................... 3,200 177,600
-----------
Drugs and Medicine -- 4.51%
Health Care & Retirement Corp.*.......................... 4,000 161,000
Quorum Health Group, Inc.*............................... 6,350 165,894
Sybron International Corp.*.............................. 4,700 220,606
-----------
547,500
-----------
</TABLE>
28 Pegasus Variable Funds
<PAGE>
PEGASUS VARIABLE MID-CAP OPPORTUNITY FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<TABLE>
<CAPTION>
MARKET
DESCRIPTION SHARES VALUE
----------- ------ ------
<S> <C> <C>
Electronics -- 8.84%
Belden, Inc............................................... 6,700 $ 236,175
Dynatech Corp.*........................................... 4,450 208,594
KEMET Corp.*.............................................. 4,400 85,250
Microchip Technology, Inc.*............................... 3,400 102,000
Molex, Inc. Class A Non-Voting............................ 4,713 135,498
Lexmark International Group, Inc., Class A................ 5,300 201,400
Teradyne, Inc.*........................................... 3,300 105,600
-----------
1,074,517
-----------
Energy Raw Materials -- 3.35%
Apache Corp............................................... 5,700 199,856
Noble Affiliates, Inc..................................... 4,200 148,050
Southwestern Energy Co.................................... 4,600 59,225
-----------
407,131
-----------
Insurance -- 3.37%
Capital RE Corp........................................... 4,000 248,250
Transatlantic Holdings, Inc............................... 2,250 160,875
-----------
409,125
-----------
International Oil -- 1.57%
Camco International, Inc.................................. 3,000 191,063
-----------
Miscellaneous and Conglomerates -- 6.74%
Culligan Water Technologies, Inc.*........................ 2,000 100,500
DENTSPLY International, Inc............................... 4,800 146,400
Essex International, Inc.................................. 5,800 172,550
Health Management Associates, Inc. Class A*............... 2,862 72,266
Littlefuse, Inc.*......................................... 5,500 136,813
Water Corp................................................ 4,900 184,363
Wolverine Tube, Inc.*..................................... 200 6,200
-----------
819,092
-----------
Miscellaneous Finance -- 12.93%
CMAC Investment Corp...................................... 3,800 229,425
Edwards (A.G.), Inc....................................... 5,950 236,512
Everest Reinsurance Holdings, Inc......................... 6,300 259,875
Executive Risk, Inc....................................... 1,900 132,644
FINOVA Group, Inc......................................... 5,900 293,156
Idex Corp................................................. 5,075 176,990
PMI Group, Inc............................................ 3,350 242,247
-----------
1,570,849
-----------
Motor Vehicles -- 5.41%
Borg Warner Automotive, Inc............................... 4,100 213,200
Donaldson Co., Inc........................................ 2,400 108,150
Harley-Davidson, Inc...................................... 5,800 158,775
Tower Automotive, Inc..................................... 4,200 176,663
-----------
656,788
-----------
</TABLE>
Pegasus Variable Funds 29
<PAGE>
PEGASUS VARIABLE MID-CAP OPPORTUNITY FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<TABLE>
<CAPTION>
MARKET
DESCRIPTION SHARES VALUE
----------- ------ ------
<S> <C> <C>
Non-Durables and Entertainment -- 1.30%
Lancaster Colony Corp..................................... 2,800 $ 157,850
-----------
Non-Ferrous Metals -- 1.51%
DT Industries, Inc........................................ 5,400 183,600
-----------
Producer Goods -- 5.78%
Harsco Corp............................................... 4,200 181,125
Hubbell, Inc. Class B..................................... 4,100 202,181
Juno Lighting, Inc........................................ 7,600 133,000
Teleflex, Inc............................................. 4,100 154,775
TriMas Corp............................................... 900 30,938
-----------
702,019
-----------
Retail -- 6.24%
Kohls Corp.*.............................................. 2,000 136,250
Proffitts, Inc.*.......................................... 9,500 270,156
Mens Wearhouse, Inc....................................... 4,300 149,425
Zale Corp.*............................................... 8,800 202,400
-----------
758,231
-----------
Travel and Recreation -- 2.68%
Galileo International, Inc................................ 6,100 168,512
Callaway Golf Co.......................................... 5,500 157,094
-----------
325,606
-----------
TOTAL COMMON STOCKS......................................... 11,475,441
-----------
(Cost $9,317,468)
TOTAL INVESTMENTS........................................... $12,149,036
===========
(Cost $9,991,063)
</TABLE>
*Non-income producing security.
30 Pegasus Variable Funds
<PAGE>
PEGASUS VARIABLE GROWTH FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1997
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<TABLE>
<CAPTION>
MARKET
DESCRIPTION SHARES VALUE
----------- ------ ------
<S> <C> <C>
TEMPORARY CASH INVESTMENT -- 5.20%
Pegasus Cash Management Fund Class I...................... 882,003 $ 822,003
-----------
(Cost $822,003)
COMMON STOCKS -- 94.80%
Banks -- 5.64%
MBNA Corp................................................ 10,000 273,125
Norwest Corp............................................. 10,000 386,250
State Street Corp........................................ 4,000 232,750
-----------
892,125
-----------
Business Machines -- 9.22%
Cisco System, Inc........................................ 6,000 334,500
Microsoft Corp.*......................................... 4,500 581,625
Silicon Graphics*........................................ 11,500 143,031
Sun Microsystems, Inc.................................... 10,000 398,750
-----------
1,457,906
-----------
Business Services -- 6.13%
Cendant Corp............................................. 8,000 275,000
Computer Associates International, Inc................... 7,500 396,562
Interpublic Group of Companies, Inc...................... 6,000 298,875
-----------
970,437
-----------
Chemicals -- 1.85%
Praxair, Inc............................................. 6,500 292,500
-----------
Construction -- 1.06%
Fluor Corp............................................... 4,500 168,188
-----------
Consumer Durables--2.02%
Newell Co................................................ 7,500 318,750
-----------
Drugs and Medicine -- 16.71%
American Home Products Corp.............................. 3,500 267,750
Amgen, Inc.*............................................. 6,000 324,750
Guidant Corp............................................. 4,000 249,000
Johnson & Johnson........................................ 3,500 230,563
Mylan Laboratories, Inc.................................. 8,000 167,500
Pall Corp................................................ 6,500 134,469
Pfizer, Inc.............................................. 4,500 335,531
Smithkline Beecham PLC ADR............................... 8,000 411,500
Stryker Corp............................................. 6,000 223,500
United Healthcare Corp................................... 6,000 298,125
-----------
2,642,688
-----------
</TABLE>
Pegasus Variable Funds 31
<PAGE>
PEGASUS VARIABLE GROWTH FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<TABLE>
<CAPTION>
MARKET
DESCRIPTION SHARES VALUE
----------- ------ ------
<S> <C> <C>
Electronics -- 7.78%
Altera Corp................................................ 9,500 $ 314,688
First Data Corp............................................ 6,000 175,500
Intel Corp................................................. 6,000 421,500
Lucent Technologies, Inc................................... 4,000 319,500
-----------
1,231,188
-----------
Energy and Utilities -- 3.97%
AES Corp.*................................................. 9,000 419,625
Enron Corp................................................. 5,000 207,812
-----------
627,437
-----------
Energy Raw Materials -- 3.36%
Schlumberger Ltd........................................... 2,000 161,000
Unova, Inc................................................. 9,000 147,938
Western Atlas, Inc.*....................................... 3,000 222,000
-----------
530,938
-----------
Food and Agriculture -- 2.72%
Coca Cola Co............................................... 4,000 266,500
PepsiCo, Inc............................................... 4,500 163,969
-----------
430,469
-----------
Insurance -- 4.20%
AFLAC, Inc................................................. 4,500 230,062
UNUM Corp.................................................. 8,000 435,000
-----------
665,062
-----------
Media -- 1.42%
Cabletron System, Inc...................................... 15,000 225,000
-----------
Miscellaneous and Conglomerates -- 2.10%
Elan PLC ADR*.............................................. 6,500 332,719
-----------
Miscellaneous Finance -- 3.06%
Federal Home Loan Mortgage Corp............................ 6,000 251,625
MGIC Investment Corp....................................... 3,500 232,750
-----------
484,375
-----------
Non-Durables and Entertainment -- 2.57%
Service Corp. International................................ 11,000 406,312
-----------
Producer Goods -- 4.75%
General Electric Co........................................ 4,500 330,188
Illinois Tool Works, Inc................................... 7,000 420,875
-----------
751,063
-----------
</TABLE>
32 Pegasus Variable Funds
<PAGE>
PEGASUS VARIABLE GROWTH FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<TABLE>
<CAPTION>
MARKET
DESCRIPTION SHARES VALUE
----------- ------ ------
<S> <C> <C>
Retail -- 7.06%
Dollar General Corp....................................... 7,500 $ 271,875
Home Depot, Inc........................................... 6,750 397,406
Officemax, Inc............................................ 16,000 228,000
Walgreen Co............................................... 7,000 219,625
-----------
1,116,906
-----------
Soaps and Cosmetics -- 1.51%
Procter & Gamble Co....................................... 3,000 239,437
-----------
Telephone -- 2.36%
AirTouch Communications, Inc.*............................ 9,000 374,063
-----------
Tobacco -- 1.29%
Philip Morris Companies, Inc.............................. 4,500 203,906
-----------
Travel and Recreation -- 4.02%
Carnival Corp., Class A................................... 7,000 387,625
Disney (Walt) Co.......................................... 2,500 247,656
-----------
635,281
-----------
TOTAL COMMON STOCKS......................................... 14,996,750
-----------
(Cost $11,273,105)
TOTAL INVESTMENTS........................................... $15,818,753
===========
(Cost $12,095,108)
</TABLE>
*Non-income producing security
Pegasus Variable Funds 33
<PAGE>
PEGASUS VARIABLE INTRINSIC VALUE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1997
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<TABLE>
<CAPTION>
MARKET
DESCRIPTION SHARES VALUE
----------- ------ ------
<S> <C> <C>
TEMPORARY CASH INVESTMENT -- 3.74%
Pegasus Cash Management Fund Class I.................. 521,387 $ 521,387
-----------
(Cost $521,387)
<CAPTION>
FACE AMOUNT
-----------
<S> <C> <C>
CONVERTIBLE BONDS -- 9.87%
Nac Re Corp., 5.25%, 12/15/02......................... $ 360,000 407,700
Pep Boys, Zero Coupon, 9/20/11........................ 117,000 62,595
Potomac Electric Power Co., 5.00%, 9/1/02............. 336,000 329,700
Roche Holding Inc. Zero Coupon, 5/6/12................ 1,240,000 575,050
-----------
(Cost $1,301,403)
1,375,045
-----------
SHARES
------
NON-CONVERTIBLE PREFERRED STOCK -- 1.16%
Finance -- 1.16%
Salomon Inc., 7.625% Preferred....................... 4,000 161,000
-----------
(Cost $139,294)
COMMON STOCKS -- 85.23%
Aerospace -- 4.45%
Lockheed Martin Corp................................. 6,300 620,550
-----------
Apparel -- 5.43%
Payless Shoesource, Inc.*............................ 6,600 443,025
Unifi, Inc........................................... 7,700 313,294
-----------
756,319
-----------
Banks -- 1.99%
Pacific Century Financial Corp....................... 11,200 277,200
-----------
Business Services -- 1.18%
Grey Advertising, Inc................................ 500 164,000
-----------
Chemicals -- 2.21%
NCH Corp............................................. 4,700 307,850
-----------
Consumer Durables -- 0.80%
National Presto Industries, Inc...................... 2,800 110,775
-----------
Domestic Oil -- 0.86%
Atlantic Richfield Co................................ 1,500 120,188
-----------
Drugs and Medicine -- 4.23%
Arch Coal, Inc....................................... 12,400 339,450
Block Drug, Inc., Class A............................ 2,884 124,733
Mid Ocean Ltd........................................ 2,300 124,775
-----------
588,958
-----------
Energy and Utilities -- 6.81%
Sierra Pacific Resources............................. 8,000 300,000
Southwest Gas Corp................................... 10,900 203,694
St. Joeseph Light & Power Co......................... 7,900 140,719
Washington Water Power Co............................ 12,500 303,906
-----------
948,319
-----------
</TABLE>
34 Pegasus Variable Funds
<PAGE>
PEGASUS VARIABLE INTRINSIC VALUE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<TABLE>
<CAPTION>
MARKET
DESCRIPTION SHARES VALUE
----------- ------ ------
<S> <C> <C>
Food and Agriculture -- 4.28%
Farmer Brothers Co......................................... 1,600 $ 299,200
Tate & Lyle PLC Sponsored.................................. 9,000 297,355
-----------
596,555
-----------
Insurance -- 14.66%
Allmerica Financial Corp................................... 3,800 189,762
American National Insurance Co............................. 4,800 446,400
Citizens Corp.............................................. 10,500 301,875
Financial Security Assurance Holdings...................... 5,100 246,075
Ohio Casualty Corp......................................... 3,500 156,187
Old Republic International Corp............................ 12,700 472,281
Safeco Corp................................................ 4,700 229,125
-----------
2,041,705
-----------
International Oil -- 0.61%
Amoco Corp................................................. 1,000 85,125
-----------
Miscellaneous and Conglomerates -- 2.58%
Diageo PLC................................................. 9,500 359,813
-----------
Miscellaneous Finance -- 14.44%
Associated Estates Realty.................................. 3,200 75,800
Federal National Mortgage Association...................... 9,900 564,918
Fund American Enterprises Holdings, Inc.................... 5,500 665,500
Leucadia National Corp..................................... 16,600 572,700
PXRE Corp.................................................. 4,000 132,750
-----------
2,011,668
-----------
Motor Vehicles -- 0.73%
Ford Motor Co.............................................. 2,100 102,244
-----------
Non-Durables and Entertainment -- 4.87%
Hasbro, Inc................................................ 6,600 207,900
Lubys Cafeterias, Inc...................................... 10,900 191,431
Sbarro, Inc................................................ 10,600 278,913
-----------
678,244
-----------
Producer Goods -- 0.23%
Tennant Co................................................. 900 32,738
-----------
Railroads and Shipping -- 4.12%
Alexander & Baldwin, Inc................................... 10,000 273,125
Illinois Central Corp., Series A........................... 8,850 301,453
-----------
574,578
-----------
Retail -- 1.40%
Stanhome, Inc.............................................. 7,600 195,225
-----------
Tires and Rubber Goods -- 2.85%
Bandag, Inc., Class A...................................... 8,290 396,884
-----------
</TABLE>
Pegasus Variable Funds 35
<PAGE>
PEGASUS VARIABLE INTRINSIC VALUE FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<TABLE>
<CAPTION>
MARKET
DESCRIPTION SHARES VALUE
----------- ------ ------
<S> <C> <C>
Tobacco -- 6.50%
Loews Corp................................................. 6,685 $ 709,446
UST, Inc................................................... 5,300 195,768
-----------
905,214
-----------
TOTAL COMMON STOCKS.......................................... 11,874,152
-----------
(Cost $11,023,898)
TOTAL INVESTMENTS............................................ $13,931,584
===========
(Cost $12,985,982)
</TABLE>
* Non-income producing security.
36 Pegasus Variable Funds
<PAGE>
PEGASUS VARIABLE BOND FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1997
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<TABLE>
<CAPTION>
MARKET
DESCRIPTION SHARES VALUE
----------- ------ ------
<S> <C> <C>
TEMPORARY CASH INVESTMENT -- 3.41%
Pegasus Cash Management Fund Class I.................. 1,155,179 $ 1,155,179
-----------
(Cost $1,155,179)
<CAPTION>
FACE AMOUNT
-----------
<S> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS -- 82.16%
U.S. Treasury Securities -- 58.37%
U.S. Treasury Bonds:
8.75%, 05/15/17..................................... $2,400,000 3,146,616
12.75%, 11/15/10.................................... 7,060,000 10,077,020
U.S. Treasury Inflation Protection Security, 3.375%,
01/15/07............................................. 203,978 198,624
U.S. Treasury Note, 7.125%, 02/29/00.................. 6,150,000 6,327,796
-----------
(Cost $19,088,348) 19,750,056
-----------
Agency Obligations -- 23.79%
Federal Home Loan Mortgage Corp. Participation Ctfs.:
#555238, 12.00%, 07/01/19........................... 109,067 123,227
Federal Home Loan Mortgage Corp. Gtd. Multi-Class
Mortgage Participation Ctfs.:
Series 11 Class 11-D, 9.50%, 07/15/19............... 250,000 276,430
Series 22 Class C, 9.50%, 04/15/20.................. 151,920 168,636
Series 47 Class 47-F, 10.00%, 06/15/20.............. 100,000 109,217
Series 99 Class Z, 9.50%, 01/15/21.................. 67,101 71,803
Series 128 Class I, 6.50%, 02/15/21................. 200,000 199,224
Series 1051 Class D, 7.00%, 11/15/19................ 80,654 81,251
Series 1065 Class J, 9.00%, 04/15/21................ 100,000 107,686
Series 1295 Class JB, 4.50%, 03/15/07............... 300,000 281,160
Series 1297 Class H, 7.50%, 01/15/20................ 197,350 203,052
Series 1370 Class F, 6.75%, 03/15/19................ 260,000 261,797
Series 1389 Class SA, IF, 10/15/07.................. 40,303 33,364
Series 1465 Class SA, IO, IF, 02/15/08.............. 838,856 39,219
Series 1489 Class L, 5.50%, 04/15/08................ 93,467 92,197
Series 1491 Class MA, 6.75%, 11/15/22............... 100,945 98,927
Series 1586 Class A, 6.00%, 09/15/08................ 196,108 194,679
Series 1589 Class Z, 6.25%, 09/15/23................ 716,841 657,598
Series 1595 Class S, IO, IF, 10/15/13............... 1,121,754 51,434
Series 1606 Class LC, IF, 05/15/08.................. 187,878 193,801
Series 1647 Class SB, IF, 12/15/08.................. 88,522 87,537
Series 1686 Class SL, IF, 02/15/24.................. 138,673 128,642
Series 1689 Class SD, IF, 10/15/23.................. 100,000 92,566
Series 1700 Class GA, PO, 02/15/24.................. 286,574 166,342
Series 1796-A Class S, IF, 02/15/09................. 125,000 112,782
Series 1859 Class SB, IO, IF, 10/15/23.............. 180,000 44,304
Federal National Mortgage Assn. Pass Thru Securities:
Pool #116612, AR, 03/01/19.......................... 83,476 87,270
Pool #303532, AR, 03/01/29.......................... 143,153 143,132
Federal National Mortgage Assn. Pass Thru Securities
Gtd. Remic Trust:
1986 Class K-2, IO, 2.56%, 11/01/08................. 1,004,398 70,857
1990 Class 1-D, 8.80%, 01/25/20..................... 153,072 163,782
1990 Class 93-G, 5.50%, 08/25/20.................... 137,132 132,467
</TABLE>
Pegasus Variable Funds 37
<PAGE>
PEGASUS VARIABLE BOND FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<TABLE>
<CAPTION>
MARKET
DESCRIPTION FACE AMOUNT VALUE
----------- ----------- ------
<S> <C> <C>
1990 Class 143-J, 8.750%, 12/25/20.................. $ 187,342 $ 199,470
1990 Class 140-K, HB, 652.1454%, 12/25/20........... 1,225 37,185
1991 Class 161-H, 7.50%, 2/25/21.................... 73,917 74,587
1992-G Class 15-Z, 7.00%, 01/25/22.................. 270,454 273,259
1992-G Class 42-Z, 7.00%, 07/25/22.................. 145,946 146,328
1992-G Class 61-Z, 7.00%, 10/25/22.................. 42,983 41,900
1992-G Class 66-JB, 5.00%, 11/25/21................. 200,000 176,899
1992 Class 204-B, 6.00%, 10/25/20................... 250,000 246,880
1993-G Class 13-G, 6.00%, 06/25/20.................. 200,000 197,834
1993 Class 19-G, 5.00%, 05/25/19.................... 250,000 241,414
1993-G Class 19-K, 6.50%, 06/25/19.................. 84,933 85,083
1993 Class 38-S, IO, IF, 11/25/22................... 485,826 9,675
1993 Class 44-S, IO, IF, 04/25/23................... 329,554 14,544
1993 Class 58-J, 5.50%, 04/25/23.................... 80,066 78,508
1993 Class 94-K, 6.75%, 05/25/23.................... 91,900 91,118
1993 Class 155-SB, IO, IF, 09/25/23................. 638,098 37,161
1993 Class 175-S, IF, 05/25/07...................... 70,953 71,805
1993 Class 220-SD, IF, 11/25/13..................... 49,707 41,588
1993 Class X-225C-FP, IF, 10/25/22.................. 120,000 117,023
1993 Class 230-FA, IF, 12/25/23..................... 221,466 222,882
1994 Class 8-G, PO, 11/25/23........................ 86,531 62,933
1994-G Class 13-ZB, 7.00%, 11/17/24................. 186,018 185,247
1994 Class 30-LA, 6.50%, 2/25/09.................... 65,832 65,855
1994 Class 82-SA, IO, IF, 05/25/23.................. 1,503,016 49,741
1995 Class 13-B, 6.50%, 03/25/09.................... 129,877 129,663
1996 Class 7-C, 6.50%, 12/25/10..................... 200,000 195,704
1996 Class 20-L, PO, 09/25/08....................... 195,000 133,114
1996 Class 24-B, PO, 10/25/08....................... 200,000 122,590
Government National Mortgage Assn. Pass Thru
Securities:
Pool #297628, 8.00%, 09/15/22....................... 176,174 183,938
Government National Mortgage Assn. Pass Thru
Securities Gtd. Remic Trust:
1994 Class 4-SA, IF, IO, 10/16/22................... 694,464 42,115
-----------
(Cost $7,873,495) 8,050,426
-----------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS........... 27,800,482
-----------
(Cost $26,961,843)
ASSET BACKED SECURITIES -- 12.87%
Case Equipment Loan Trust Asset Backed Pass Thru.
Ctf.,
Series 1995-A, Class A, 7.30%, 03/15/02.............. 123,764 124,879
Series 1995-B, Class A3, 6.15%, 09/15/02............. 238,070 238,939
Series 1996-A, Class A2, 5.50%, 02/15/03............. 185,235 184,663
Chase Manhattan Grantor Trust, Series 1995-A, 6.00%,
09/17/01............................................. 258,829 258,829
CPS Auto Trust Asset Backed Pass Thru Ctf., Series
1997-4, Class A1, 6.07%, 03/15/03.................... 234,603 234,603
Ford Credit Auto Owner Trust Asset Backed Pass Thru
Ctf.,
Series 1997-B, Class A2, 5.95%, 01/15/00............. 300,000 300,243
Green Tree Financial Corp. Loan Trust Asset Backed
Ctf.,
Series 1994-5, Class A2, 7.30%, 11/15/19............. 232,331 233,918
</TABLE>
38 Pegasus Variable Funds
<PAGE>
PEGASUS VARIABLE BOND FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<TABLE>
<CAPTION>
MARKET
DESCRIPTION FACE AMOUNT VALUE
----------- ----------- ------
<S> <C> <C>
Merrill Lynch Home Equity Loan, 1992-1, Class A, AR,
07/15/22............................................. $ 93,839 $ 94,064
Nationsbank Auto Grantor Trust Asset Backed Ctf.,
Series 1995-A, Class A, 8.85%, 06/15/02.............. 42,175 42,167
Navistar Financial Corp. Owner Trust,
Series 1995-1, Class A2, 6.55%, 11/20/01............. 115,341 115,700
Olympic Automobile Rec. Trust Asset Backed Pass Thru
Ctf.,
Series 1995-C, Class A2, 6.20%, 01/15/02............. 252,020 252,718
Series 1996-C, Class A5, 7.00%, 03/15/04............. 300,000 307,467
ONYX Acceptance Grantor Trust Auto Loan Pass Thru
Ctf.,
Series 1996-1, Class A, 5.40%, 05/15/01.............. 184,076 182,982
Western Financial Asset Backed Pass Thru Ctf.,
Series 1996-C, Class A4, 6.80%, 12/20/03............. 150,000 152,201
WFS Financial Owner Trust Asset Backed Pass Thru Ctf.,
Series 1996-D, Class A-3, 6.05%, 07/20/01............ 250,000 250,454
Series 1997-B, Class A2, 6.05%, 07/20/00............. 399,809 400,173
Series 1997-C, Class A2, 5.95%, 06/20/00............. 250,000 249,808
Series 1997-D, Class A2, 6.20%, 09/20/00............. 350,000 350,165
World Omni Automobile Lease Sec Trust Asset Backed
Pass Thru Ctf.,
Series 1995-A, Class A, 6.05%, 11/25/01.............. 133,138 133,095
Series 1997-B, Class A1, 6.07%, 11/25/97............. 250,000 250,000
-----------
TOTAL ASSET BACKED SECURITIES.......................... 4,357,068
-----------
(Cost $4,348,565)
CORPORATE BONDS AND NOTES--1.56%
Finance -- 0.93%
Associates Corp. of North America:
9.125%, 04/01/00.................................... 85,000 90,200
8.15%, 08/01/09..................................... 200,000 223,528
-----------
(Cost $311,203) 313,728
-----------
Industry -- 0.39%
Boeing Co., 7.95%, 08/15/24.......................... 110,000 130,432
-----------
(Cost $126,771)
Public Utility -- 0.24%
Nippon Telegraph & Telephone Corp., 9.50%, 07/27/98.. 80,000 81,595
-----------
(Cost $81,640)
TOTAL CORPORATE BONDS AND NOTES........................ 525,755
-----------
(Cost $519,614)
TOTAL INVESTMENTS...................................... $33,838,484
===========
(Cost $32,985,201)
</TABLE>
Pegasus Variable Funds 39
<PAGE>
PEGASUS VARIABLE BOND FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
NOTES TO PORTFOLIO OF INVESTMENTS
The Pegasus Variable Bond 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. Descriptions of certain collateralized mortgage obligations
are as follows:
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) represent 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 of 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 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) represents 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.
40 Pegasus Variable Funds
<PAGE>
PEGASUS VARIABLE FUNDS
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) ORGANIZATION AND COMMENCEMENT OF OPERATIONS
The Pegasus Variable Funds (the "Trust" or the "Funds") 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, 1997, the Trust consisted of five separate series of which
there were four Equity Funds and one Bond Fund (the "Funds"), as described
below.
EQUITY FUNDS:
Pegasus Variable Growth and Value Fund
Pegasus Variable Mid-Cap Opportunity Fund
Pegasus Variable Growth Fund
Pegasus Variable Intrinsic Value Fund
BOND FUND:
Pegasus Variable Bond Fund
The Funds commenced operations on March 30, 1995, except for the Intrinsic
Value Fund and the Bond Fund, which commenced operations on May 1, 1997. 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 & Annuity Insurance Company. Orders for the Trust's shares are
executed in accordance with the investment instructions of the contract owners.
On June 26, 1997, the Pegasus Variable Annuity Managed Assets Balanced and
Money Market Funds liquidated their assets and discontinued operations.
Shareholder investments in these two portfolios were reallocated into other
existing mutual funds offered by Separate Account Six within ITT Hartford Life
and Annuity Insurance Company, such shares being equal in value to the net
assets so reallocated.
As of December 31, 1997 the Pegasus Variable Annuity Growth and Value Fund,
Pegasus Variable Annuity Mid-Cap Opportunity Fund, Pegasus Variable Annuity
Growth Fund, Pegasus Variable Annuity Intrinsic Value Fund, and Pegasus
Variable Annuity Bond Fund changed their names to the Pegasus Variable Growth
and Value Fund, Pegasus Variable Mid-Cap Opportunity Fund, Pegasus Variable
Growth Fund, Pegasus Variable Intrinsic Value Fund, and Pegasus Variable Bond
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 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.
Fixed income securities are valued at the mean of the closing bid and ask price
as estimated by an independent pricing service. Fixed income securities with
maturities less than 60 days are carried at amortized cost, which approximates
market value.
Investment security purchases and sales are accounted for on the trade date by
the Equity Funds and the Bond 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
Pegasus Variable Funds 41
<PAGE>
PEGASUS VARIABLE FUNDS
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
- --------------------------------------------------------------------------------
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 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 under the effective interest rate
method as required by the Internal Revenue Code and by generally accepted
accounting principles. For mortgage-backed securities, 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 investment income and realized gains (losses) 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 net investment 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 and monthly by the Bond Fund. 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.
Deferred Organization Costs
Organization costs are amortized on a straight-line basis over the five year
period beginning with the commencement of operations of each portfolio.
Expenses
Expenses are charged daily as a percentage of the respective Fund's 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.
When Issued/To Be Announced (TBA) Securities
The Bond Fund may purchase securities on a "when issued" basis. These
securities have been registered by a municipality or government agency, but
have not yet been issued to the public. These transactions involve a commitment
by the Fund to purchase particular securities, with payment and delivery taking
place at a future date, for which all specific information, such as the face
amount and maturity date of such investment security, is not known at the time
of the trade. These transactions are subject to market fluctuations and the
risk that the value at delivery may be more or less than the purchase price at
which the transactions were entered. The current value of these securities is
determined in the same manner as that of other portfolio securities. Although
the Bond Fund generally purchases these securities with the intention of
acquisition, such securities may be sold before the settlement.
42 Pegasus Variable Funds
<PAGE>
PEGASUS VARIABLE FUNDS
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
- --------------------------------------------------------------------------------
(3) INVESTMENT ADVISORY FEE, ADMINISTRATION FEE AND OTHER TRANSACTIONS WITH
AFFILIATES
FCNIMCO is the investment advisor pursuant to an Advisory Agreement with the
Trust. 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 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.
FCNIMCO has agreed that they may waive their 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 Trustees to qualify the shares in
other states having restrictive expense limitations. For the period ended
December 31, 1997, FCNIMCO reimbursed the Growth and Value Fund, Mid-Cap
Opportunity Fund, Growth Fund, Intrinsic Value Fund, and Bond Fund for certain
expenses in the amounts of $37,901, $58,356, $46,798, $17,342 and $2,899,
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>
MID-CAP
GROWTH AND OPPORTUNITY INTRINSIC
VALUE FUND FUND GROWTH FUND VALUE FUND BOND FUND
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross Unrealized Gains $ 5,522,086 $ 2,376,306 $ 4,374,306 $ 1,197,076 $ 913,607
Gross Unrealized Losses (1,000,740) (228,870) (650,661) (251,474) (60,324)
- -----------------------------------------------------------------------------------------
$ 4,521,346 $ 2,147,436 $ 3,723,645 $ 945,602 $ 853,283
- -----------------------------------------------------------------------------------------
Federal Income Tax Cost $34,161,975 $10,001,600 $12,095,108 $12,985,982 $32,985,201
Purchases $31,677,035 $ 7,979,207 $ 7,320,650 $14,067,809 $33,343,907
Sales $ 6,752,214 $ 7,752,004 $ 6,460,128 $ 1,729,233 $ 3,070,102
</TABLE>
(5) EXPENSES
For the period ended December 31, 1997, FCNIMCO voluntarily agreed to
reimburse a portion of the operating expenses of the Funds to the extent that
the Funds' expenses exceeded 0.95% for the Growth and Value, Mid-Cap
Opportunity, Growth, and Intrinsic Value Funds and 0.75% for the Bond Fund (as
a percentage of each Fund's average daily net assets).
(6) EQUITY OF AFFILIATES:
As of December 31, 1997, Hartford Life Insurance Company held direct interest
in shares as follows:
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
SHARES SHARES
----------------------------------------------
<S> <C> <C>
Pegasus Variable Growth and
Value Fund 55,448 2.32%
Pegasus Variable Mid-Cap Op-
portunity Fund 60,715 7.48%
Pegasus Variable Growth Fund 55,055 5.35%
Pegasus Variable Intrinsic
Value Fund 50,726 4.20%
Pegasus Variable Bond Fund 207,397 6.32%
</TABLE>
Pegasus Variable Funds 43
<PAGE>
PEGASUS VARIABLE FUNDS
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
The Financial Highlights present a per share analysis of how the Pegasus
Variable 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>
INVESTMENT OPERATIONS LESS DISTRIBUTIONS
------------------------------------------- ---------------------------------------------
NET
REALIZED
AND
NET ASSET UNREALIZED FROM
VALUE NET GAIN (LOSS) TOTAL FROM NET FROM IN EXCESS
BEGINNING INVESTMENT ON INVESTMENT INVESTMENT REALIZED OF REALIZED TOTAL
OF PERIOD INCOME INVESTMENTS OPERATIONS INCOME GAINS GAINS DISTRIBUTIONS
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GROWTH AND VALUE FUND
December 31, 1997 $13.19 0.13 3.38 3.51 (0.13) (0.35) -- (0.48)
December 31, 1996 11.63 0.15 2.02 2.17 (0.14) (0.47) -- (0.61)
December 31, 1995(/1/) 10.00 0.13 1.63 1.76 (0.13) -- -- (0.13)
- -------------------------------------------------------------------------------------------------------------------
MID-CAP OPPORTUNITY FUND
December 31, 1997 $13.46 0.01 3.55 3.56 (0.01) (2.63) -- (2.64)
December 31, 1996 11.02 0.03 2.67 2.70 (0.03) (0.23) -- (0.26)
December 31, 1995(/1/) 10.00 0.05 1.02 1.07 (0.05) -- -- (0.05)
- -------------------------------------------------------------------------------------------------------------------
GROWTH FUND
December 31, 1997 $13.28 0.03 3.36 3.39 (0.03) (1.25) -- (1.28)
December 31, 1996 11.37 0.05 1.94 1.99 (0.05) (0.01) (0.02) (0.08)
December 31, 1995(/1/) 10.00 0.05 1.38 1.43 (0.05) (0.01) -- (0.06)
- -------------------------------------------------------------------------------------------------------------------
INTRINSIC VALUE FUND
For the period ended
12/31/97(/2/) $10.00 0.12 1.57 1.69 (0.12) (0.04) -- (0.16)
- -------------------------------------------------------------------------------------------------------------------
BOND FUND
For the period ended
12/31/97(/2/) $10.00 0.37 0.45 0.82 (0.37) (0.01) -- (0.38)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Commenced operations on March 30, 1995.
(2) Commenced operations on May 1, 1997.
+ Annualized.
44 Pegasus Variable Funds
<PAGE>
PEGASUS VARIABLE FUNDS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA RATIOS TO AVERAGE NET ASSETS
---------------------------------------------------------------------------------
NET EXPENSES
ASSET NET WITHOUT
VALUE ASSETS NET FEE WAIVERS/ PORTFOLIO AVERAGE
END OF TOTAL END OF INVESTMENT REIMBURSED TURNOVER COMMISSION
PERIOD RETURN PERIOD EXPENSES INCOME EXPENSES RATE RATE
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
16.22 26.80% $38,705,197 0.93% 0.93% 1.10% 31.11% $0.06
13.19 18.75% $ 8,602,557 0.85% 1.35% 2.27% 46.82% 0.11
11.63 22.75%+ $ 3,753,691 0.85%+ 1.78%+ 4.93%+ 17.47% 0.14
- ----------------------------------------------------------------------------------
14.38 26.65% $11,668,230 0.91% 0.04% 1.49% 80.65% $0.06
13.46 24.53% $ 9,215,660 0.85% 0.28% 2.11% 37.44% 0.08
11.02 14.20%+ $ 4,972,365 0.85%+ 0.67%+ 4.64%+ 32.11% 0.11
- ----------------------------------------------------------------------------------
15.39 25.48% $15,839,911 0.91% 0.21% 1.26% 51.00% $0.06
13.28 17.52% $11,542,021 0.85% 0.49% 1.65% 23.11% 0.05
11.37 18.82%+ $ 6,434,936 0.85%+ 0.81%+ 3.15%+ 4.46% 0.11
- ----------------------------------------------------------------------------------
11.53 25.26%+ $13,925,558 0.95%+ 1.83%+ 1.22%+ 19.64% $0.06
- ----------------------------------------------------------------------------------
10.44 12.29%+ $34,229,870 0.75%+ 5.97%+ 0.77%+ 14.77% N/A
- ----------------------------------------------------------------------------------
</TABLE>
Pegasus Variable Funds 45
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Trustees and Shareholders of Pegasus Variable Funds:
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, of the PEGASUS VARIABLE FUNDS
(comprising as indicated in Note 1, the Growth and Value, Mid-Cap Opportunity,
Growth, Intrinsic Value and Bond Funds) as of December 31, 1997, and the
related statements of operations for the periods then ended, the statements of
changes in net assets and the financial highlights for each of the periods from
inception (as indicated in Note 1) through December 31, 1997. 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, 1997, 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 Funds as of December
31, 1997, and the results of their operations for the period then ended, the
changes in their net assets for each of the two years in the periods then ended
or since inception (as indicated in Note 1) and the financial highlights for
each of the periods from inception (as indicated in Note 1) through December
31, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Detroit, Michigan,
February 24, 1998.
46 Pegasus Variable Funds
