<PAGE>
[PEGASUS FUNDS LOGO APPEARS HERE]
Strength in Investing/TM/
ANNUAL REPORT
PEGASUS PATHMAKER
VARIABLE ANNUITY
December 31, 1998
<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
21 Pegasus Statements of Assets and Liabilities
22 Pegasus Statements of Operations
23 Pegasus Statements of Changes in Net Assets
24 Pegasus Portfolio of Investments
40 Pegasus Notes to Financial Statements
44 Pegasus Financial Highlights
46 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.
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>
VARIABLE ANNUITY
Dear Shareholders:
Market Commentary:
In many ways the market commentary for this year's annual report will sound
much like a year ago. Again, investing, particularly when looking at the
popular market averages has been exceedingly rewarding with the Standard &
Poor's Composite 500 Index ("S&P 500 Index") providing a total return of 28.6
percent. For the second year bonds provided above average returns with the
Lehman Brothers Bond Index providing an 8.7 percent total return. These very
positive numbers when linked with strong performances since 1996, particularly
for domestic equities, are quite impressive and in fact unprecedented. Not all
was positive in 1998. In the domestic equity market large divergences occurred
and at the end of the year signs of speculative excesses emerged. The
divergences can be best demonstrated by the fact that the Russell 2000, a
broad-based index of smaller companies, provided a total return of -2.5
percent. Signs of excess are occurring in a number of areas but nothing
illustrates it better than the trading swings and valuations afforded to
internet and internet related companies. Probably selected names will emerge as
good long term investments. Equally probable, most, at current prices, will
prove very risky and unrewarding.
Equity Highlights
The larger, emerging blue chip companies lead the market in 1998. Most names
fell within the technology arena with astounding performance from larger names
companies such as Microsoft, Dell, America Online, Intel and International
Business Machines. As the year progressed and earnings concerns emerged due to
a slowing economy and continued weak international economies, investors
migrated to growth oriented issues driving these securities to new highs.
Therefore, health care stocks did well as did selected retailers. Finance
stocks, which have been market leaders in the last two years, continued to do
well in the first half of 1998 but began to lag in the second half particularly
in the third quarter. Lagging groups included chemicals, steels and energy and
related stocks.. Evidence of the narrowing market can be shown by the spread
between growth oriented and value oriented stocks. The Barra Large Company
Growth Index outperformed the Barra Large Company Value Index by 28 percentage
points. The outlook for 1999 is challenging. Generally, the environment for
stocks remains positive, low inflation, low interest rates, positive economic
growth and stabilization in international economies. Offsetting this are
concerns regarding the high valuations placed on many issues, the many large
divergences noted and increasing concerns about earnings growth. Few signs of a
major bear market are occurring but reduced expectations for 1999 appear
prudent.
Fixed Highlights
The U.S. bond market had another strong year in 1998, as evidenced by the
return of 8.69% on the Lehman Aggregate Index. Treasuries were the best
performing sector as two to ten year Treasury yields declined over 100 basis
points (bps) for the year. Thirty year Treasury yields declined only 80 bps but
got as low as 4.72% in October. The market was affected by overseas events as
problems spread from Far East markets to other markets such as Russia and
Brazil. Concerns increased that these foreign problems would affect our
domestic economy. These problems led to greatly reduced liquidity in all other
markets, which resulted in yield spreads widening in Corporate, Mortgage-Backed
and Asset-Backed sectors. The Fed eased interest rates three times at the end
of the year to ease the liquidity problems, which resulted in these sectors
performing better in the fourth quarter although they still lagged Treasuries
considerably for the year.
We Appreciate Your Confidence
Thank you for the confidence you have shown and your on going support of the
Pegasus Variable Funds. I realize that you have a choice of mutual funds and
those of us associated with the Pegasus Variable Funds will continue to strive
to meet and exceed your investment needs and expectations.
Sincerely,
/s/ George F. Abel
George F. Abel
Chief Investment Officer
First Chicago NBD Investment Management Company
<PAGE>
Separate Account Six
Hartford Life and Annuity Insurance Company
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1998
<TABLE>
<CAPTION>
Putnam
U.S.
Putnam Government
Putnam Putnam Global and Putnam Putnam Putnam Putnam
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>
Assets:
Investments:
Putnam VT Global Growth Fund
Shares 53,098
Cost $ 855,718
Market Value $1,076,820 -- -- -- -- -- -- --
Putnam VT Growth and Income
Fund
Shares 93,145
Cost $ 2,543,075
Market Value -- $2,679,793 -- -- -- -- -- --
Putnam VT Global Asset Alloca-
tion Fund
Shares 108,086
Cost $ 1,606,053
Market Value -- -- $2,048,222 -- -- -- -- --
Putnam VT U. S. Government &
High Quality Bond Fund
Shares 88,391
Cost $ 1,148,959
Market Value -- -- -- $1,213,611 -- -- -- --
Putnam VT New Opportunities
Fund
Shares 318,933
Cost $ 6,454,038
Market Value -- -- -- -- $8,311,402 -- -- --
Putnam VT Money Market Fund
Shares 1,669,914
Cost $ 1,669,914
Market Value -- -- -- -- -- $1,669,914 -- --
Putnam VT Diversified Income
Fund
Shares 87,230
Cost $ 919,438
Market Value -- -- -- -- -- -- $915,046 --
Putnam VT International Growth
Fund
Shares 1,559,376
Cost $18,517,047
Market Value -- -- -- -- -- -- $21,082,761
Due from Hartford
Life and Annuity In-
surance Company 3,238 6,156 -- -- 6,997 -- -- 14,523
Receivable from fund
shares sold -- -- 78 47 -- 64 35 --
- -------------------------------------------------------------------------------------------------------------------------
Total Assets 1,080,058 2,685,949 2,048,300 1,213,658 8,318,399 1,669,978 915,081 21,097,284
- -------------------------------------------------------------------------------------------------------------------------
Liabilities:
Due to Hartford Life
and Annuity Insur-
ance Company -- -- 78 47 -- 65 35 --
Payable for fund
shares purchased 3,238 6,156 -- -- 6,999 -- -- 14,524
- -------------------------------------------------------------------------------------------------------------------------
Total Liabilities $ 3,238 $ 6,156 $ 78 $ 47 $ 6,999 $ 65 $ 35 $ 14,524
- -------------------------------------------------------------------------------------------------------------------------
Net Assets (variable
annuity contract li-
abilities) $1,076,820 $2,679,793 $2,048,222 $1,213,611 $8,311,400 $1,669,913 $915,046 $21,082,760
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
2 Pegasus Variable Funds
<PAGE>
Separate Account Six
Hartford Life and Annuity Insurance Company
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES -- (Continued)
December 31, 1998
<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>
Assets:
Investments:
Pegasus Growth and
Value Fund
Shares 3,289,879
Cost $49,713,788
Market Value $58,559,845 -- -- -- --
Pegasus Mid-Cap Oppor-
tunity Fund
Shares 1,168,401
Cost $15,269,704
Market Value -- $17,245,600 -- -- --
Pegasus Growth Fund
Shares 1,115,928
Cost $14,594,476
Market Value -- -- $23,992,453 -- --
Pegasus Intrinsic Value
Fund
Shares 2,050,722
Cost $22,461,628
Market Value -- -- -- $21,942,725 --
Pegasus Bond Fund
Shares 5,459,605
Cost $56,530,578
Market Value -- -- -- -- $58,581,557
Due from Hartford Life
and Annuity Insurance
Company 39,357 9,482 15,394 14,470 31,181
Receivable from fund
shares sold -- -- -- -- --
- -------------------------------------------------------------------------------------
Total Assets 58,599,202 17,255,082 24,007,847 21,957,195 58,612,738
- -------------------------------------------------------------------------------------
Liabilities:
Due to Hartford Life
and Annuity Insurance
Company -- -- -- -- --
Payable for fund shares
purchased 29,615 9,498 12,150 14,471 31,730
- -------------------------------------------------------------------------------------
Total Liabilities 29,615 9,498 12,150 14,471 31,730
- -------------------------------------------------------------------------------------
Net Assets (variable
annuity contract lia-
bilities) $58,569,587 $17,245,584 $23,995,697 $21,942,724 $58,581,008
- -------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
Pegasus Variable Funds 3
<PAGE>
Separate Account Six
Hartford Life and Annuity Insurance Company
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES -- (Continued)
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Units
Owned by Unit Contract
Participants Price Liability
----------------------------------------
<S> <C> <C> <C>
Group Deferred annuity contracts in the
accumulation period:
Putnam Global Growth Fund............... 54,877 $19.622520 $ 1,076,820
Putnam Growth and Income Fund........... 202,213 13.238990 2,677,090
Putnam Global Asset Allocation Fund..... 116,307 17.610500 2,048,222
Putnam U.S. Government and High Quality
Bond Fund.............................. 92,661 13.097365 1,213,611
Putnam New Opportunities Fund........... 531,614 15.625160 8,306,550
Putnam Money Market Fund................ 1,569,739 1.063816 1,669,913
Putnam Diversified Income Fund.......... 74,045 12.357920 915,046
Putnam International Growth Fund........ 1,637,732 12.860680 21,062,349
Pegasus Growth and Value Fund........... 3,062,656 19.107450 58,519,551
Pegasus Mid-Cap Opportunity Fund........ 989,272 17.420610 17,233,714
Pegasus Growth Fund..................... 1,059,919 22.615710 23,970,810
Pegasus Intrinsic Value Fund............ 1,984,567 11.048350 21,926,192
Pegasus Bond Fund....................... 5,094,803 11.490440 58,541,550
- ------------------------------------------------------------------------------
Sub-total................................ $219,161,418
- ------------------------------------------------------------------------------
Group Annuity contracts in the annuity
period:
Putnam Growth and Income Fund........... 204 13.238990 $ 2,703
Putnam New Opportunities Fund........... 310 15.625160 4,850
Putnam International Growth Fund........ 1,587 12.860680 20,411
Pegasus Growth and Value Fund........... 2,619 19.107450 50,036
Pegasus Mid-Cap Opportunity Fund........ 681 17.420610 11,870
Pegasus Growth Fund..................... 110 22.615710 24,887
Pegasus Intrinsic Value Fund............ 1,496 11.048350 16,532
Pegasus Bond Fund....................... 3,434 11.490440 39,458
- ------------------------------------------------------------------------------
Sub-total................................ 170,747
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Grand Total:............................. $219,332,165
- ------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4 Pegasus Variable Funds
<PAGE>
Separate Account Six
Hartford Life and Annuity Insurance Company
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Putnam Putnam Putnam Putnam Putnam Putnam Putnam
Putnam 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 $ 22,340 $ 28,411 $ 41,279 $ 39,895 $ -- $ 52,074 $ 39,335 $ 74,675
Expenses:
Mortality and
expense under-
takings (12,803) (28,193) (26,701) (12,000) (89,174) (14,451) (13,372) (246,605)
- -----------------------------------------------------------------------------------------------------------------------------
Net investment
income (loss) 9,537 218 14,578 27,895 (89,174) 37,623 25,963 (171,930)
Capital gains in-
come 111,701 185,466 177,309 1,038 75,909 -- 16,707 --
Net realized and
unrealized gain
(loss) on invest-
ments:
Net realized
gain (loss) on
security trans-
actions 291 (452) (2,963) 698 110,479 -- (3,176) 265,348
Net unrealized
appreciation
(depreciation)
of
investments dur-
ing the period 102,969 66,310 24,984 25,250 1,399,894 -- (70,486) 2,795,996
- -----------------------------------------------------------------------------------------------------------------------------
Net gain (loss)
on investments 103,260 65,858 22,021 25,948 1,510,373 -- (73,662) 3,061,344
- -----------------------------------------------------------------------------------------------------------------------------
Net increase
(decrease) in
net assets re-
sulting from op-
erations $224,498 $251,542 $213,908 $ 54,881 $1,497,108 $ 37,623 $(30,992) $2,889,414
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5 Pegasus Variable Funds
<PAGE>
Separate Account Six
Hartford Life and Annuity Insurance Company
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS -- (Continued)
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Pegasus
Growth Pegasus Pegasus Pegasus Pegasus
and Value Mid-Cap Growth Intrinsic Bond
Fund Opportunity Fund Value Fund
Sub- Fund Sub- Fund Sub-
Account Sub-Account Account Sub-Account Account
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income:
Dividends $ 349,157 $ -- $ -- $ 335,603 $2,483,029
Expenses:
Mortality and expense
undertakings (678,447) (193,150) (273,885) (244,584) (638,418)
- --------------------------------------------------------------------------------------
Net investment income
(loss) (329,290) (193,150) (273,885) 91,019 1,844,611
Capital gains income 1,305,090 336,801 42,400 433,762 54,563
Net realized and
unrealized gain (loss)
on investments:
Net realized gain
(loss) on security
transactions 13,890 5,967 476,908 (822) 75,140
Net unrealized appreci-
ation (depreciation) of
investments during the
period 4,446,694 464,536 6,521,570 (1,469,803) 1,274,499
- --------------------------------------------------------------------------------------
Net gain (loss) on in-
vestments 4,460,584 470,503 6,998,478 (1,470,625) 1,349,639
- --------------------------------------------------------------------------------------
Net increase (decrease)
in net assets resulting
from operations $5,436,384 $ 614,154 $6,766,993 $ (945,844) $3,248,813
- --------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6 Pegasus Variable Funds
<PAGE>
Separate Account Six
Hartford Life and Annuity Insurance Company
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Putnam Putnam Putnam Putnam Putnam Putnam
Putnam Growth Global Asset U.S. Government New Money Putnam International
Global Growth and Income Allocation & High Quality Opportunities Market Diversified Growth
Fund Fund Fund Bond Fund Fund 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, 1998
Operations:
Net investment
income (loss) $ 9,537 $ 218 $ 14,578 $ 27,895 $ (89,174) $ 37,623 $ 25,963 $ (171,930)
Capital gains
income 111,701 185,466 177,309 1,038 75,909 -- 16,707 --
Net realized
gain (loss) on
security trans-
actions 291 (452) (2,963) 698 110,479 -- (3,176) 265,348
Net unrealized
appreciation
(depreciation)
of investments
during the pe-
riod 102,969 66,310 24,984 25,250 1,399,894 -- (70,486) 2,795,996
- -------------------------------------------------------------------------------------------------------------------------------
Net increase
(decrease) in
net assets re-
sulting from op-
erations 224,498 251,542 213,908 54,881 1,497,108 37,623 (30,992) 2,889,414
- -------------------------------------------------------------------------------------------------------------------------------
Unit transac-
tions:
Purchases 46,437 793,410 32,458 190,099 2,065,296 31,059 104,583 4,248,398
Net transfers 78,461 442,997 67,284 375,196 294,750 1,049,744 80,334 1,667,912
Surrenders for
benefits payment
and fees (31,351) (83,110) (69,394) (109,112) (301,272) (219,528) (55,847) (829,696)
Net annuity
transactions -- 2,449 -- -- 4,138 -- -- 17,813
- -------------------------------------------------------------------------------------------------------------------------------
Net increase
(decrease) in
net assets re-
sulting from
unit transac-
tions 93,547 1,155,746 30,348 456,183 2,062,912 861,275 129,070 5,104,427
- -------------------------------------------------------------------------------------------------------------------------------
Total increase
(decrease) in
net assets 318,045 1,407,288 244,256 511,064 3,560,020 898,898 98,078 7,993,841
Net assets:
Beginning of
Year 758,775 1,272,505 1,803,966 702,547 4,751,380 771,015 816,968 13,088,919
- -------------------------------------------------------------------------------------------------------------------------------
End of Year $1,076,820 $2,679,793 $2,048,222 $1,213,611 $8,311,400 $1,669,913 $ 915,046 $21,082,760
- -------------------------------------------------------------------------------------------------------------------------------
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 for
benefits payment
and fees (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
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7 Pegasus Variable Funds
<PAGE>
Separate Account Six
Hartford Life and Annuity Insurance Company
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS -- (Continued)
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Pegasus Pegasus Pegasus Pegasus
Growth Mid-Cap Pegasus Intrinsic Pegasus Money Pegasus
and Value Opportunity Growth Value Bond Market Managed Assets
Fund Fund Fund Fund Fund Fund Balanced Fund
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 De-
cember 31, 1998
Operations:
Net investment income
(loss) $ (329,290) $ (193,150) $ (273,885) $ 91,019 $ 1,844,611 -- --
Capital gains income 1,305,090 336,801 42,400 433,762 54,563 -- --
Net realized gain
(loss) on security
transactions 13,890 5,967 476,908 (822) 75,140 -- --
Net unrealized appreci-
ation (depreciation) of
investments during the
period 4,446,694 464,536 6,521,570 (1,469,803) 1,274,499 -- --
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets resulting
from operations 5,436,384 614,154 6,766,993 (945,844) 3,248,813 -- --
- -------------------------------------------------------------------------------------------------------------------------
Unit transactions:
Purchases 11,774,494 3,563,145 4,753,176 4,542,105 13,411,848 -- --
Net transfers 5,997,435 2,904,407 (1,623,013) 5,818,595 12,556,284 -- --
Surrenders for benefit
payments and fees (2,489,809) (644,796) (918,207) (832,038) (2,742,073) -- --
Net annuity transac-
tions 46,105 12,144 19,094 17,963 37,197 -- --
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets resulting
from unit transactions 15,328,225 5,834,900 2,231,050 9,546,625 23,263,256 -- --
- -------------------------------------------------------------------------------------------------------------------------
Total increase (de-
crease) in net assets 20,764,609 6,449,054 8,998,043 8,600,781 26,512,069 -- --
Net assets:
Beginning of Year 37,804,978 10,796,530 14,997,654 13,341,943 32,068,939 -- --
- -------------------------------------------------------------------------------------------------------------------------
End of Year $58,569,587 $17,245,584 $23,995,697 $21,942,724 $58,581,008 $ 0 $ 0
- -------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1997
Operations:
Net investment income
(loss) $ (114,063) $ (122,241) $ (152,233) $ 22,796 $ 642,777 $ 23,014 $ 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 (decrease)
in net assets resulting
from operations 4,209,563 2,158,757 2,708,698 1,017,086 1,436,714 23,014 1,766,096
- -------------------------------------------------------------------------------------------------------------------------
Unit transactions:
Purchases 13,843,170 4,429,654 6,126,101 4,633,265 12,346,781 126,745 4,616,463
Net transfers 12,589,078 (3,940,241) (4,245,608) 7,904,486 18,871,440 (1,462,029) (24,292,348)
Surrenders for benefit
payments and fees (736,816) (378,113) (464,118) (212,894) (585,996) (31,103) (486,478)
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets resulting
from unit transactions 25,695,432 111,300 1,416,375 12,324,857 30,632,225 (1,366,387) (20,162,363)
- -------------------------------------------------------------------------------------------------------------------------
Total increase (de-
crease) in net assets 29,904,995 2,270,057 4,125,073 13,341,943 32,068,939 (1,343,373) (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 $ 0 $ 0
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
8 Pegasus Variable Funds
<PAGE>
Separate Account Six
Hartford Life and Annuity Insurance Company
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------------------------------------------------
1. Organization:
Separate Account Six (the Account) is a separate investment account within
Hartford Life & Annuity Insurance Company (the Company) and is registered
with the Securities and Exchange Commission (SEC) as a unit investment trust
under the Investment Company Act of 1940, as amended. Both the Company and
the Account are subject to supervision and regulation by the Department of
Insurance of the State of Connecticut and the SEC. The Account invests
deposits by variable annuity contractholders of the Company in various mutual
funds (The 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 those dividends from the Funds
which is 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 Global Asset Allocation Fund, Putnam VT U.S.
Government and High Quality Bond Fund, Putnam VT Diversified Income Fund,
Putnam VT Growth and Income Fund, Putnam VT New Opportunities Fund, Putnam VT
Money Market Fund and Putnam VT International Growth Fund) or the Pegasus
Variable Annuity Funds (Intrinsic Value Fund, Growth and Value Fund, Mid-Cap
Opportunity Fund, Growth Fund and Bond Fund) are valued at the closing net
asset value per share as determined by the appropriate Fund as of December
31, 1998.
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 amounts of assets and liabilities as of the date of
the financial statements and the reported amounts of income and expenses
during the period. Operating results in the future could vary from the
amounts derived from management's estimates.
3. Administration of the Account and Related Charges:
a) Mortality and Expense Undertakings--
The Company, as issuer of variable annuity contracts, provides the mortality
and expense undertakings and, with respect to the Account, receives a maximum
annual fee of up to 1.25% of the Account's average daily net assets. The
Company also provides administrative services and receives an annual fee of
0.15% of the Account's average daily net assets.
b) Deduction of Annual Maintenance Fee--
Annual maintenance fees are deducted through termination of units of interest
from applicable contract owners' accounts, in accordance with the terms of
the contracts.
9 Pegasus Variable Funds
<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 Annuity Funds
Management's Discussion and Analysis
Growth and Value Fund
- --------------------------------------------------------------------------------
An Interview with George Abel
Portfolio Manager
- --------------------------------------------------------------------------------
Q. How did the Fund perform?
The Pegasus Variable Annuity Growth and Value Fund posted a total return of
13.10% for the year ended December 31, 1998.
Q. To what do you attribute the Fund's performance?
The low interest rate environment in the U.S. served as a positive factor for
stocks in two ways: 1.) Stock multiples tend to expand when interest rates
decrease; and 2.) Lower interest rates decrease borrowing costs for companies,
thus boosting earnings. In addition, the continued strength in the U.S. economy
helped offset some of the earnings weakness that several companies in the Fund
experienced overseas.
Q. What were your primary strategies and tactics?
We targeted large cap companies with above-average growth rates selling at
reasonable valuations. Our capitalization focus served the Fund well during
1998, as large cap stocks were the year's performance leaders. However, growth
stocks outperformed value stocks, and the Fund's tilt toward value hurt
relative performance. We had emphasized value stocks throughout the year due to
concerns about the high valuations that the market was placing on certain
growth-oriented stocks.
In addition, market performance was narrow, with a handful of high-growth
stocks accounting for a disproportionate amount of the S&P 500 Index's strong
return. Due to valuation considerations, the Fund did not hold many of these
stocks, which was a major factor in the Fund's return lagging that of the S&P
500.
Q. Did events abroad have an impact on the Fund?
The weakness in Asia had a significant negative impact on the earnings of a few
companies in the Fund. Boeing (aerospace), Callaway Golf (travel and
recreation) and AMP (electronics) all reported major earnings shortfalls as a
result of lower sales to Asia. As a result, their stock prices all suffered.
(AMP later recovered when it became an acquisition target.)
As concerns grew during the year about Asia's impact on earnings, the Fund
benefited on a relative basis due to its overweighting in the utilities and
consumer staples sectors.
Q. Did the portfolio benefit from any particularly strong holdings?*
The Fund's health care holdings, particularly Schering Plough, made significant
contributions to the Fund's performance. Schering Plough's reputation for
earnings consistency and relatively small exposure to Asia made it a popular
choice for investors. The Fund also enjoyed strong results from Century
Telephone, Intel and Anheuser-Busch.
Q. What were the Fund's top 10 holdings?*
The Fund's top 10 holdings as of December 31, 1998, included Bristol-Myers
Squibb, American Home Products (health care), Anheuser-Busch, ConAgra, PepsiCo
(food & beverages), Bell Atlantic (communication), Automatic Data Processing,
IBM (computer product & services), Kimberly Clark (household products), and
Wells Fargo (banks).
Q. What is your outlook for the market?
We expect the market to continue to benefit from the low inflation, low
interest rate environment. However, we do have some strong concerns about high
valuations. In our view, many of these valuations are not based on the
fundamentals of the company. Instead, they result from investors being caught
up in the momentum of the moment. These valuations do not leave a lot of room
for any potential "bad news," and thus we believe the market could be volatile
in 1999. We also have some concerns about the growing weakness in Latin
America. Europe is also beginning to see a slow down, which could negatively
affect many large, multi-national companies.
* Holdings subject to change.
Please refer to the prospectus and the accompanying financial statements for
further information about your Fund.
The S&P 500 Index is an unmanaged index generally representative of the U.S.
stock market as a whole.
Pegasus Variable Funds 11
<PAGE>
Pegasus Variable Annuity 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*
Value of a $10,000 Investment
- ----------------------------------
- ----------------------------------
S&P Growth & Value
3/30/95 10000 10000
- ----------------------------------
6/95 10953 10477
- ----------------------------------
12/95 12535 11762
- ----------------------------------
6/95 13799 12735
- ----------------------------------
12/96 15411 13975
- ----------------------------------
6/97 18585 16206
- ----------------------------------
12/97 20551 17717
- ----------------------------------
6/98 24188 19209
- ----------------------------------
12/98 26423 20039
- ----------------------------------
(1) Excludes expenses.
<TABLE>
<CAPTION>
Total Return Inception One Since
Through 12/31/98 Date Year Inception
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Pegasus Variable Growth and Value Fund
I Shares 3/30/95 13.10% 20.31%
S&P 500 Index* 3/30/95 28.58% 29.55%
</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 Annuity Funds
Management's Discussion and Analysis
Mid-Cap Opportunity Fund
- --------------------------------------------------------------------------------
An interview with Ronald Doyle,
Portfolio Manager
- --------------------------------------------------------------------------------
Q. How did the Fund perform?
The Pegasus Variable Annuity Mid-Cap Opportunity Fund posted a total return of
4.91% for the year ended December 31, 1998.
Q. How did mid-cap stocks perform relative to other stocks?
During 1998, mid-cap stocks, as represented by the Russell 2500 Index,
dramatically lagged large-cap stocks, as represented by the S&P 500 Index, but
they outperformed small-cap stocks, as measured by the Russell 2000 Index. Once
again, investors gravitated toward the perceived safety and liquidity offered
by larger companies, despite the fact that many small- and mid-cap companies
produced solid earnings growth and offered attractive values.
Q. What were your primary strategies and tactics?
The Fund's long-time investment strategy has been to seek to invest in proven
growth companies selling at reasonable prices. We look for companies with a
distinct competitive advantage that may enable them to maintain above-average
growth and profitability for an extended period of time.
We continually monitor the fundamental developments of our holdings and add to
or reduce our positions based on our comfort level with how situations are
progressing relative to our expectations. This practice helped us avoid several
deteriorating stocks that could have hurt performance.
Given the tremendous economic upheaval in Southeast Asia and certain developing
countries, we tried to concentrate on companies with strong domestic
operations. While mid-cap companies have limited foreign operations, the
economic impact of the Asian financial crisis has rippled down to many smaller,
domestic-oriented companies.
Finally, we decreased the Fund's exposure to capital goods, as we believe that
there is over-capacity in the world economy, so overall capital expenditures
should weaken.
Q. Did the portfolio benefit from any particularly strong holdings?*
Specific stock selection was the key to the Fund's 1998 performance. The Fund
enjoyed success with technology service companies, including DST Systems, and
Sungard Data Systems. The Fund also benefited from companies showing
exceptional growth in niche markets, including Lexmark International, a
manufacturer of computer printers that consistently beat earnings estimates,
and Waters Corp., a leading provider of instruments used to identify and
monitor the chemical composition of food, drugs and water.
In the consumer area, we had success with companies that distinguish themselves
with tremendous brand-name appeal, including motorcycle-maker Harley-Davidson,
and casual-apparel-provider Tommy Hilfiger.
Poor performers included DT Industries, a producer of custom machinery for
various industries, which suffered from reduced orders; Global Industries, an
oil service company hard hit by declining energy prices; and Belden, a leading
producer of specialty wire and cable, hurt by slowing demand and competitive
pricing in computer networking.
Q. What were the Fund's top 10 holdings?*
The Fund's top 10 holdings included Charter One Financial (banks), Crane Co.
(construction), FINOVA Group (finance), Sungard Data Systems (computer products
& services), Lexmark International (electronics), Waters Corp. (miscellaneous),
Harley-Davidson, Tower Automotive (motor vehicles), Sybron International Corp.
(health care) and Zale Corp. (retail).
Q. What is your outlook for the mid-cap stock market?
We expect the domestic economy to continue to expand, albeit at a slower rate.
We continue to be cautious about Southeast Asia and other emerging markets.
Therefore, we will continue to concentrate on companies that are somewhat
insulated from foreign turmoil and have strong domestic growth prospects.
*Holdings subject to change.
The S&P 500 Index is an unmanaged index generally representative of the U.S.
stock market as a whole.
The Russell 2000 Index is an unmanaged index generally representative of the
small-cap equity market.
The Russell 2500 Index is an unmanaged index generally representative of the
small- to medium-cap equity market.
Please refer to the prospectus and the accompanying financial statements for
further information about your Fund.
Pegasus Variable Funds 13
<PAGE>
Pegasus Variable Annuity 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*
Value of a $10,000 Investment
- ------------------------------------------
- ------------------------------------------
Russell 2500 Mid-Cap Oppor
- ------------------------------------------
3/30/95 10000 10000
- ------------------------------------------
6/95 10892 10507
- ------------------------------------------
12/95 12264 11073
- ------------------------------------------
6/96 13522 12230
- ------------------------------------------
12/96 14596 13788
- ------------------------------------------
6/97 16239 15658
- ------------------------------------------
12/97 18153 17460
- ------------------------------------------
6/98 19181 18721
- ------------------------------------------
12/98 18222 18317
- ------------------------------------------
(1) Excludes expenses
<TABLE>
<CAPTION>
Total Return Inception One Since
Through 12/31/98 Date Year Inception
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Pegasus Variable Mid-Cap Opportunity Fund
I Shares 3/30/95 4.91% 17.47%
Russell 2500 Index* 3/30/95 .38% 17.34%
</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 Annuity Funds
Management's Discussion and Analysis
Growth Fund
- --------------------------------------------------------------------------------
An Interview with Jeffrey C. Beard
Portfolio Manager
- --------------------------------------------------------------------------------
Q. How did the Fund perform?
The Pegasus Variable Annuity Growth Fund posted a total return of 40.03% for
the year ended December 31, 1998.
Q. To what do you attribute such strong performance?
Large-company growth stocks continued to lead all other market sectors. The
market was driven by liquidity, as fundamental concerns regarding global
expansion and disinflation affected earnings growth. Given this backdrop,
investors were willing to pay a large premium for companies able to produce
consistent and predictable earnings growth. This benefited the Fund, which
emphasizes that type of company.
Q. What were your primary strategies and tactics?
Our primary strategy was to remain fully invested in the liquidity-driven
market, where declining interest rates coupled with benign inflation pushed
valuation levels to new heights for quality growth stocks. We remained true to
our growth-investing style even in the face of a strong third-quarter market
correction. After the market bottomed in late August, performance initially
broadened to include smaller cap stocks, but before long the market's attention
was refocused on large growth stocks.
We maintained overweighted positions in the technology, health care and
consumer cyclicals sectors, key contributors to the strong market performance.
The economy's ongoing thirst for advanced technology and its ability to support
income growth and consumer demand, along with declining oil prices and
favorable interest rates all contributed to solid earnings growth in the
technology and consumer cyclicals sectors. New products, a continued expansion
of managed care, and stepped-up consumer advertising by large drug companies
fueled growth in the health care sector.
At the same time, we maintained underweighted positions in the poor-performing
energy and basic materials sectors. This strategy aided the Fund's performance.
Q. Did events abroad have an impact on the Fund?
Events abroad affected the Fund by forcing a flight to quality, which, in turn,
contributed to lower interest rates and demand for high-quality growth stocks.
Potential disruptions in Asian demand for U.S. technology goods was more than
offset by strength in Europe.
Q. Did the portfolio benefit from any particularly strong holdings?*
The Fund enjoyed outstanding performance from several individual technology
holdings, including Lucent Technologies, Cisco Systems, Sun Microsystems, and
Microsoft. In addition, several retailers offered excellent returns, including
Staples, Home Depot and Walgreen. Each of these companies was able to continue
its record of consistent, predictable revenue and earnings growth throughout
the year.
The largest disappointments were in the oil service industry, which was
affected by the extreme weakness in oil prices caused by a slowdown in global
demand. Active management of these and other poor-performing stocks helped
minimize the damage to Fund returns.
Q. What were the Fund's top 10 holdings?*
The Fund's top 10 holdings included Microsoft, Sun Microsystems, Cisco Systems
(computer products & services), Intel Corp. (electronics), Home Depot, Staples
(retail), General Electric (multi-industry), MCI Worldcom, AirTouch
Communications (telecommunications services), and Elan Corp (health care).
Q. What is your outlook for the market?
Looking ahead, inflation fears should remain dormant for most of 1999, with
global interest rates flat to lower. This should help support continued stock
market growth. Those companies that have demonstrated the ability to grow their
revenue in difficult pricing environments and provide margin expansion at the
same time should continue to be the leaders in 1999.
* Holdings subject to change.
Please refer to the prospectus and the accompanying financial statements for
further information about your Fund.
Pegasus Variable Funds 15
<PAGE>
Pegasus Variable Annuity 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*
Value of a $10,000 Investment
- -----------------------------------------
- -----------------------------------------
S&P Variable Growth
- -----------------------------------------
3/30/95 10000 10000
- -----------------------------------------
6/95 10953 10364
- -----------------------------------------
12/95 12535 11431
- -----------------------------------------
6/96 13799 12243
- -----------------------------------------
12/96 15411 13428
- -----------------------------------------
6/97 18585 15470
- -----------------------------------------
12/97 20551 16847
- -----------------------------------------
6/98 24188 20177
- -----------------------------------------
12/98 26423 23591
- -----------------------------------------
(1) Excludes expenses.
<TABLE>
<CAPTION>
Total Return Inception One Since
Through 12/31/98 Date Year Inception
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pegasus Variable Growth Fund
I Shares 3/30/95 40.03% 25.64%
S&P 500 Index* 3/30/95 28.58% 29.55%
</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.
16 Pegasus Variable Funds
<PAGE>
Pegasus Variable Annuity Funds
Management's Discussion and Analysis
Intrinsic Value Fund
- --------------------------------------------------------------------------------
An Interview with Chris Gassen
Portfolio Manager
- --------------------------------------------------------------------------------
Q. How did the Fund perform?
The total return on the Pegasus Variable Annuity Intrinsic Value Fund was -
3.31% for the year ended December 31, 1998.
Q. How did value stocks perform relative to other stocks?
The market was extremely tiered in 1998, with large-capitalization indexes well
ahead of small-cap indexes, and growth stocks ahead of value. For example, the
total return on large-cap growth companies, as measured by the Russell 1000
Growth Index, was 38.71% for the year, while the total return on large-cap
value funds, as measured by the Russell 1000 Value Index, was 15.63%. The
return on small-cap stocks, as measured by the Russell 2000 Index, was -2.55%.
Q. What were your primary strategies and tactics?
Throughout the year, investors appeared to largely ignore sensible valuation
yardsticks in their effort to own the largest stocks. As more and more
investors chased these large, growth-oriented issues, the valuation gap versus
smaller, more sensibly priced stocks widened. As such, there was little in the
market environment that made sense to a value investor, and we made relatively
few changes to the Fund's holdings.
We did reduce the Fund's financial exposure somewhat by selling certain better-
performing holdings, including Fannie Mae (the government mortgage agency), Mid
Ocean (a pharmaceutical firm) and Allmerica Financial (an insurance company).
We used the proceeds to purchase additional shares of existing holdings that we
believe offer fundamental strengths for the long term.
One such issue is Unifi, a maker of spun cotton, nylon and polyester yarns. The
company has been adversely affected by the Asian economic crisis, which has
resulted in a rising level of inexpensive, imported yarn from the Far East. Our
continued purchase of Unifi typifies our approach of buying good-quality
companies at times when they are not "popular" with the investing public, but
which should earn attractive returns over time as they once again regain
investor favor.
Q. What were the Fund's top 10 holdings?*
The Fund's top 10 holdings on December 31, 1998, included Fund American
(finance), Loews Corp. (multi-industry), Sbarro (restaurants), Leucadia
National, American National Insurance, Old Republic International Corp.
(insurance), Payless Shoe Source (retail), Lockheed Martin (aerospace), Unifi
(apparel), and Canadian National Railway (transportation).
Q. What is your outlook for the market?
As long as stock investors continue to ignore traditional fundamental analysis,
it is likely that value-oriented funds will continue to underperform the
market. Prices on many growth stocks remain high based on historic valuation
parameters, but the lure of high returns attained over the past several years
continues to bring more money into the market. This drives up prices and
returns, and the cycle continues to spiral. At some point, we expect the cycle
to be broken, and the benefits of value investing should become clear.
* Holdings subject to change.
The Russell 1000 Growth Index is an unmanaged index generally representative of
the largest 1000 companies with a greater-than-average growth orientation.
The Russell 1000 Value Index is an unmanaged index generally representative of
the largest 1000 companies with a greater-than-average value orientation.
The Russell 2000 Index is an unmanaged index generally representative of the
small-cap equity market.
Please refer to the prospectus and the accompanying financial statements for
further information about your Fund.
Pegasus Variable Funds 17
<PAGE>
Pegasus Variable Annuity 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*
Value of a $10,000 Investment
- -----------------------------------------
- -----------------------------------------
S&P Intrinsic Value
- -----------------------------------------
5/1/97 10000 10000
- -----------------------------------------
6/97 11083 10642
- -----------------------------------------
12/97 12255 11698
- -----------------------------------------
6/98 14424 12230
- -----------------------------------------
12/98 15757 11309
- -----------------------------------------
(1) Excludes expenses.
<TABLE>
<CAPTION>
Total Return Inception Since
Through 12/31/98 Date One Year Inception
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Pegasus Variable Intrinsic Value Fund
I Shares 5/1/97 -3.31% 7.65%
S&P 500 Index* 5/1/97 28.58% 31.27%
</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.
18 Pegasus Variable Funds
<PAGE>
Pegasus Variable Annuity Funds
Management's Discussion and Analysis
Bond Fund
- --------------------------------------------------------------------------------
An Interview with Doug Swanson
Portfolio Manager
- --------------------------------------------------------------------------------
Q. How did the Funds perform?
The Pegasus Variable Annuity Bond Fund posted a total return of 8.66% for the
year ended December 31, 1998.
The Fund offered a favorable return due to its overweighting of mortgage-backed
securities. In addition, our specific security selection, particularly in the
mortgage sector, was a positive influence on performance.
Q. How did market developments influence performance?
The general decline in interest rates resulted in price appreciation for the
Fund. Treasuries generally were the best performers for the year, with declines
in yield that surpassed all other bond market sectors. Our avoidance of low-
quality securities was a positive influence, as these securities offered little
or no price appreciation. While they lagged Treasuries on a price basis,
mortgage- and asset-backed securities helped performance on a yield basis.
Q. What were your primary strategies and tactics?
In general, we kept the Fund's duration similar to the duration of its market
index, which enabled the Fund to realize market appreciation as interest rates
declined. (Duration is a measure of a fund's price sensitivity to interest rate
changes. A longer duration indicates greater sensitivity; a shorter duration
indicates less.) The Fund's duration as of December 31, 1998, was 4.7 years,
versus 4.4 years for the Lehman Brothers Aggregate Bond Index.
We also maintained a high credit-quality profile. The Fund was overweighted in
high-quality mortgage- and asset-backed securities, with a focus on undervalued
securities. But, this strategy hurt the Funds' relative performance somewhat
because even high-quality securities underperformed Treasuries due to liquidity
concerns.
Additionally, the Fund's high quality profile meant that the Fund was not
affected directly by the turmoil in foreign markets or the flight to quality
from lower-quality securities.
Q. How was the Fund structured in terms of quality and sectors?*
At year-end, 46% of the Bond Fund was invested in Treasury securities, 3% in
corporate bonds, 32% in mortgage-backed securities, and 8% in asset-backed
securities. Securities rated AAA comprised the majority of the Fund.
Q. What is your outlook for the bond market?
Our long-term view on the bond market remains positive. Inflation is likely to
remain at current levels, or rise only slightly, and economic growth is likely
to continue, but at a slower pace. We believe that the mortgage-backed security
market remains undervalued, presenting many attractive opportunities. We also
expect the asset-backed sector to perform well versus Treasuries.
* Holdings subject to change.
Please refer to the prospectus and the accompanying financial statements for
further information about your Fund.
Pegasus Variable Funds 19
<PAGE>
Pegasus Variable Annuity Funds
Management's Discussion and Analysis
Bond Fund -- (Continued)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in the
Pegasus Variable Growth Fund and the
Lehman Brothers Aggregate Bond Index*
Value of a $10,000 Investment
- -----------------------------------------
- -----------------------------------------
Lehman Brothers Bond
- -----------------------------------------
5/1/97 10000 10000
- -----------------------------------------
6/97 10215 10179
- -----------------------------------------
12/97 10867 10825
- -----------------------------------------
6/98 11292 11238
- -----------------------------------------
12/98 11809 11762
- -----------------------------------------
(1) Excludes expenses.
<TABLE>
<CAPTION>
Total Return Inception One Since
Through 12/31/98 Date Year Inception
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pegasus Variable Bond Fund
I Shares 5/1/97 8.66% 10.21%
Lehman Brothers Aggregate Bond Index* 5/1/97 8.69% 10.46%
</TABLE>
The performance data quoted represents past performance and is not an
indication of future results. The investment return and net ssset value will
fluctuate so that an investor's shares, when redeemed, may be worth more or
less than the original cost.
* The Lehman Brothers Aggregate Bond Index is an unmanaged index generally
representative of the bond market as a whole.
20 Pegasus Variable Funds
<PAGE>
Pegasus Variable Funds
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Mid-Cap Intrinsic
Growth and Opportunity Growth Value Bond
Value Fund Fund Fund Fund Fund
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in securi-
ties at value (Note 2) $57,585,080 $17,485,201 $25,147,781 $18,527,487 $53,487,003
Repurchase agreements at
cost (Note 2) 1,675,000 598,000 -- 3,981,000 6,963,000
- ---------------------------------------------------------------------------------------
Total Investments (cost
$50,283,752,
$15,373,376,
$15,841,827,
$22,909,793,
$58,145,667) 59,260,080 18,083,201 25,147,781 22,508,487 60,450,003
Cash 56,792 64,643 -- 8,391 958
Receivable for invest-
ment securities sold 249,984 32,130 1,488,727 -- 8,010
Interest and dividends
receivable 49,269 8,845 15,514 17,923 477,374
Receivable from invest-
ment advisor 5,158 11,115 7,447 9,296 5,097
Deferred organization
expenses (Note 2) 4,094 4,137 4,137 -- --
- ---------------------------------------------------------------------------------------
TOTAL ASSETS 59,625,377 18,204,071 26,663,606 22,544,097 60,941,442
- ---------------------------------------------------------------------------------------
LIABILITIES
Cash overdraft -- -- 1,125,400 -- --
Payable for investment
securities purchased -- -- 308,990 -- --
Accrued investment advi-
sory fees 29,679 8,724 13,071 10,549 19,023
Accrued administration
fees 7,420 2,181 3,268 2,637 7,134
Accrued custodial fees 3,861 3,267 5,323 3,173 2,448
Accrued professional
fees 18,988 21,902 21,618 18,933 16,995
Accrued printing fees 4,285 7,219 7,654 6,489 3,454
Other accrued expenses 785 911 1,362 960 832
- ---------------------------------------------------------------------------------------
TOTAL LIABILITIES 65,018 44,204 1,486,686 42,741 49,886
- ---------------------------------------------------------------------------------------
NET ASSETS $59,560,359 $18,159,867 $25,176,920 $22,501,356 $60,891,556
- ---------------------------------------------------------------------------------------
Net assets consist of:
Capital shares (unlim-
ited number of shares
authorized $.10 per
share) $ 334,541 $ 123,044 $ 117,095 $ 210,305 $ 567,692
Additional paid-in-capi-
tal 49,941,245 15,294,125 13,897,590 22,781,563 58,031,770
Accumulated undistrib-
uted net investment in-
come 1,427 994 2,573 -- --
Accumulated undistrib-
uted (distributions in
excess of) realized gain
(loss) 306,818 31,879 1,853,708 (89,206) (12,242)
Net unrealized apprecia-
tion (depreciation) on
investments 8,976,328 2,709,825 9,305,954 (401,306) 2,304,336
- ---------------------------------------------------------------------------------------
NET ASSETS $59,560,359 $18,159,867 $25,176,920 $22,501,356 $60,891,556
- ---------------------------------------------------------------------------------------
Shares of capital stock
outstanding 3,345,408 1,230,435 1,170,945 2,103,050 5,676,924
- ---------------------------------------------------------------------------------------
NET ASSET VALUE and re-
demption price per share $ 17.80 $ 14.76 $ 21.50 $ 10.70 $ 10.73
- ---------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
Pegasus Variable Funds 21
<PAGE>
Pegasus Variable Funds
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Growth and Mid-Cap Growth Intrinsic
Value Fund Opportunity Fund Fund Value Fund Bond Fund
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividend income $ 675,456 $ 96,578 $ 117,327 $ 428,435 $ --
Interest income 132,794 28,472 27,006 85,054 2,920,779
- -------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 808,250 125,050 144,333 513,489 2,920,779
- -------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory
fees 296,413 88,190 123,263 108,293 191,371
Administration fees 74,103 22,048 30,816 27,073 71,764
Professional fees 56,598 48,840 46,378 50,303 53,067
Custodial fees 32,222 25,699 17,569 19,005 30,024
Amortization of de-
ferred organization
cost 9,335 9,276 9,276 -- --
Printing expense 23,180 17,738 13,427 13,659 27,976
Other 10,566 10,565 11,007 10,595 11,178
- -------------------------------------------------------------------------------------------
TOTAL EXPENSES BEFORE
WAIVERS 502,417 222,356 251,736 228,928 385,380
Less waivers (33,240) (82,956) (56,564) (57,553) (26,975)
- -------------------------------------------------------------------------------------------
NET EXPENSES 469,177 139,400 195,172 171,375 358,405
- -------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
(LOSS) $ 339,073 $(14,350) $ (50,839) $ 342,114 $2,562,374
- -------------------------------------------------------------------------------------------
NET REALIZED AND
UNREALIZED GAIN (LOSS):
Net realized gain on
investments $1,444,929 $311,810 $1,853,797 $ 283,047 $ 44,671
Net change in
unrealized appreciation
(depreciation) on in-
vestments 4,450,770 551,852 5,582,309 (1,346,908) 1,451,053
- -------------------------------------------------------------------------------------------
NET REALIZED AND
UNREALIZED GAIN (LOSS) 5,895,699 863,662 7,436,106 (1,063,861) 1,375,352
- -------------------------------------------------------------------------------------------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS $6,234,772 $849,312 $7,385,267 $ (721,747) $4,058,098
- -------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
22 Pegasus Variable Funds
<PAGE>
Pegasus Variable Funds
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Growth and Value Fund Mid-Cap Opportunity Fund Growth Fund Intrinsic Value Fund
-------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31, December 31, December 31, December 31, December 31,
1998 1997 1998 1997 1998 1997 1998 1997(1)
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DE-
CREASE) IN NET
ASSETS:
FROM OPERATIONS:
Net investment
income (loss) $ 339,073 $ 206,522 $ (14,350) $ 4,129 $ (50,839) $ 28,340 $ 342,114 $ 115,690
Net realized
gains 1,444,929 837,720 311,810 1,743,002 1,853,797 1,211,616 283,047 123,169
Net change in
unrealized
appreciation
(depreciation)
of investments 4,450,770 3,665,139 551,852 725,115 5,582,309 1,819,220 (1,346,908) 945,602
- --------------------------------------------------------------------------------------------------------------------------------
Net increase
(decrease) in
net assets
resulting from
operations 6,234,772 4,709,381 849,312 2,472,246 7,385,267 3,059,176 (721,747) 1,184,461
- --------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS:
From net
investment
income (355,811) (195,276) -- (3,201) -- (26,849) (345,025) (112,779)
In excess of net
investment
income -- -- -- -- -- -- (1,651) --
From net
realized gains
from investment
transactions (1,328,447) (785,704) (355,970) (1,732,223) (44,524) (1,140,567) (358,921) (47,295)
In excess of net
realized gains -- -- -- -- -- -- (87,555) --
- --------------------------------------------------------------------------------------------------------------------------------
Decrease in net
assets from
distributions to
shareholders (1,684,258) (980,980) (355,970) (1,735,424) (44,524) (1,167,416) (793,152) (160,074)
- --------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE
TRANSACTIONS:
Proceeds from
sale of shares 16,305,399 26,172,441 6,254,470 4,779,295 6,423,743 6,512,260 9,477,532 13,088,467
Net asset value
of shares issued
to shareholders
from
reinvestment of
distributions 1,684,258 980,980 355,970 1,735,424 44,524 1,167,416 793,152 160,074
- --------------------------------------------------------------------------------------------------------------------------------
17,989,657 27,153,421 6,610,440 6,514,719 6,468,267 7,679,676 10,270,684 13,248,541
Less: payments
for shares
redeemed (1,685,009) (779,182) (612,145) (4,798,971) (4,472,001) (5,273,546) (179,987) (347,370)
- --------------------------------------------------------------------------------------------------------------------------------
Net increase in
net assets from
capital share
transactions 16,304,648 26,374,239 5,998,295 1,715,748 1,996,266 2,406,130 10,090,697 12,901,171
- --------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN
NET ASSETS 20,855,162 30,102,640 6,491,637 2,452,570 9,337,009 4,297,890 8,575,798 13,925,558
NET ASSETS:
Beginning of
period 38,705,197 8,602,557 11,668,230 9,215,660 15,839,911 11,542,021 13,925,558 --
- --------------------------------------------------------------------------------------------------------------------------------
End of period $59,560,359 $38,705,197 $18,159,867 $11,668,230 $25,176,920 $15,839,911 $22,501,356 $13,925,558
- --------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE
TRANSACTIONS:
Shares sold 955,005 1,722,895 435,554 318,480 367,989 428,650 834,191 1,224,500
Shares issued in
reinvestment of
distributions to
shareholders 102,324 61,654 25,066 120,944 2,611 74,931 77,627 14,079
- --------------------------------------------------------------------------------------------------------------------------------
1,057,329 1,784,549 460,620 439,424 370,600 503,581 911,818 1,238,579
Less: shares
redeemed (97,531) (50,917) (41,697) (312,599) (229,006) (343,565) (16,644) (30,703)
- --------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN
SHARES
OUTSTANDING 959,798 1,733,632 418,923 126,825 141,594 160,016 895,174 1,207,876
CAPITAL SHARES:
Beginning of
period 2,385,610 651,978 811,512 684,687 1,029,351 869,335 1,207,876 --
- --------------------------------------------------------------------------------------------------------------------------------
End of period 3,345,408 2,385,610 1,230,435 811,512 1,170,945 1,029,351 2,103,050 1,207,876
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Bond Fund
---------------------------
Year Ended Period Ended
December 31, December 31,
1998 1997(1)
---------------------------
<S> <C> <C>
INCREASE (DE-
CREASE) IN NET
ASSETS:
FROM OPERATIONS:
Net investment
income (loss) $ 2,562,374 $ 921,773
Net realized
gains 44,671 20,905
Net change in
unrealized
appreciation
(depreciation)
of investments 1,451,053 853,283
- ---------------------------------------------
Net increase
(decrease) in
net assets
resulting from
operations 4,058,098 1,795,961
- ---------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS:
From net
investment
income (2,606,134) (915,681)
In excess of net
investment
income -- --
From net
realized gains
from investment
transactions (44,752) (20,824)
In excess of net
realized gains (12,242) --
- ---------------------------------------------
Decrease in net
assets from
distributions to
shareholders (2,663,128) (936,505)
- ---------------------------------------------
CAPITAL SHARE
TRANSACTIONS:
Proceeds from
sale of shares 28,019,206 33,072,130
Net asset value
of shares issued
to shareholders
from
reinvestment of
distributions 2,663,128 936,505
- ---------------------------------------------
30,682,334 34,008,635
Less: payments
for shares
redeemed (5,415,618) (638,221)
- ---------------------------------------------
Net increase in
net assets from
capital share
transactions 25,266,716 33,370,414
- ---------------------------------------------
NET INCREASE IN
NET ASSETS 26,661,686 34,229,870
NET ASSETS:
Beginning of
period 34,229,870 --
- ---------------------------------------------
End of period $60,891,556 $34,229,870
- ---------------------------------------------
CAPITAL SHARE
TRANSACTIONS:
Shares sold 2,630,322 3,249,652
Shares issued in
reinvestment of
distributions to
shareholders 269,941 90,681
- ---------------------------------------------
2,900,263 3,340,333
Less: shares
redeemed (502,456) (61,216)
- ---------------------------------------------
NET INCREASE IN
SHARES
OUTSTANDING 2,397,807 3,279,117
CAPITAL SHARES:
Beginning of
period 3,279,117 --
- ---------------------------------------------
End of period 5,676,924 3,279,117
- ---------------------------------------------
</TABLE>
(1)For the period May 1, 1997 (commencement of operations) through December 31,
1997.
See accompanying notes to financial statements.
Pegasus Variable Funds 23
<PAGE>
Pegasus Variable Growth and Value Fund
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1998
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
Market
Description Shares Value
----------- ------ ------
<S> <C> <C>
COMMON STOCK -- 96.68%
Aerospace/Defense -- 2.04%
Boeing Co................................................ 24,300 $ 792,787
Lockheed Martin Corp..................................... 5,000 423,750
-----------
1,216,537
-----------
Banks -- 7.60%
BankAmerica Corp......................................... 18,900 1,136,362
First Union Corp......................................... 15,100 918,269
National City Corp....................................... 13,600 986,000
Wells Fargo Co........................................... 37,200 1,485,675
-----------
4,526,306
-----------
Building Materials -- 1.87%
Masco Corp............................................... 38,800 1,115,500
-----------
Chemicals -- 1.74%
Sigma-Aldrich Corp....................................... 35,300 1,036,937
-----------
Computer Products & Services -- 12.64%
Automatic Data Processing, Inc........................... 20,300 1,627,806
Compaq Computer Corp..................................... 17,000 712,937
Electronic Data Systems Corp............................. 25,600 1,286,400
Hewlett-Packard Co....................................... 16,900 1,154,481
IMS Health, Inc.......................................... 17,000 1,282,437
International Business Machines Corp..................... 7,900 1,459,525
-----------
7,523,586
-----------
Communication Services -- 6.53%
Bell Atlantic Co......................................... 28,100 1,489,300
Century Telephone Enterprises, Inc....................... 20,500 1,383,750
SBC Communications, Inc.................................. 19,000 1,018,875
-----------
3,891,925
-----------
Electronics -- 3.95%
AMP, Inc................................................. 18,204 947,746
Intel Corp............................................... 11,825 1,402,002
-----------
2,349,748
-----------
Finance -- 2.27%
Federal Home Loan Mortgage Co............................ 21,000 1,353,187
-----------
Food & Beverages -- 11.78%
Anheuser-Busch Cos., Inc................................. 24,800 1,627,500
BestFoods................................................ 23,800 1,267,350
ConAgra, Inc............................................. 45,000 1,417,500
PepsiCo, Inc............................................. 35,100 1,436,906
Sara Lee Corp............................................ 44,800 1,262,800
-----------
7,012,056
-----------
</TABLE>
24 Pegasus Variable Funds
<PAGE>
Pegasus Variable Growth and Value Fund
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- (Continued)
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Description Shares Value
----------- ------ ------
<S> <C> <C>
Health Care/Pharmaceutical -- 9.88%
Abbott Laboratories....................................... 19,800 $ 970,200
American Home Products Corp............................... 29,900 1,683,744
Bristol-Meyers Squibb Co.................................. 14,900 1,993,806
Schering-Plough Corp...................................... 22,400 1,237,600
-----------
5,885,350
-----------
Household Products -- 2.57%
Kimberly Clark Corp....................................... 28,100 1,531,450
-----------
Housewares -- 2.02%
Newell Co................................................. 29,200 1,204,500
-----------
Insurance -- 4.92%
American International Group, Inc......................... 12,300 1,188,487
Chubb Corp................................................ 15,600 1,012,050
MGIC Investment Corp...................................... 18,400 732,550
-----------
2,933,087
-----------
Manufacturing -- 4.59%
Dover Corp................................................ 32,900 1,204,963
Johnson Controls, Inc..................................... 15,700 926,300
York International Corp................................... 14,700 599,944
-----------
2,731,207
-----------
Multi-Industry -- 1.54%
General Electric Co....................................... 9,000 918,563
-----------
Oil & Gas -- 9.17%
British Petroleum PLC ADR................................. 14,406 1,368,570
Enron Corp................................................ 23,100 1,318,144
Mobil Corp................................................ 15,900 1,385,288
Schlumberger Ltd.......................................... 30,100 1,388,363
-----------
5,460,365
-----------
Publishing -- 3.66%
Gannett Co., Inc.......................................... 19,500 1,257,750
Washington Post Co. Class B............................... 1,600 924,700
-----------
2,182,450
-----------
Retail -- 3.83%
J. C. Penney Company, Inc................................. 22,900 1,073,438
Officemax, Inc.*.......................................... 98,700 1,209,075
-----------
2,282,513
-----------
Utilities -- 4.08%
FPL Group, Inc............................................ 17,700 1,090,763
Pinnacle West Capital Corp................................ 31,600 1,339,050
-----------
2,429,813
-----------
TOTAL COMMON STOCK.......................................... 57,585,080
-----------
(Cost $48,608,752)
</TABLE>
See accompanying notes to financial statements.
Pegasus Variable Funds 25
<PAGE>
Pegasus Variable Growth and Value Fund
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- (Continued)
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Face Amount Value
----------- -----------
<S> <C> <C>
REPURCHASE AGREEMENTS -- 2.81%
State Street Bank, 4.40%, dated 12/31/98, due
01/04/99, collateralized by $1,490,000 U.S. Treasury
Note, 7.25%, due 05/15/04, market value $1,684,390
(Cost $1,646,000)................................... $1,646,000 $ 1,646,000
State Street Bank, 4.40%, dated 12/31/98, due
01/04/99, collateralized by $25,000 U.S. Treasury
Bond, 10.75%, due 08/15/05, market value $34,375
(Cost $29,000)...................................... 29,000 29,000
-----------
TOTAL REPURCHASE AGREEMENTS............................ 1,675,000
-----------
(Cost $1,675,000)
TOTAL INVESTMENTS...................................... $59,260,080
===========
(Cost $50,283,752)
</TABLE>
Percentages indicated are based on net assets.
*Non-income producing security.
See accompanying notes to financial statements.
26 Pegasus Variable Funds
<PAGE>
Pegasus Variable Mid-Cap Opportunity Fund
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Description Shares Value
----------- ------ ------
<S> <C> <C>
COMMON STOCK -- 96.28%
Apparel -- 1.88%
Tommy Hilfiger Corp...................................... 5,700 $ 342,000
-----------
Banks -- 8.31%
Associated Banc Corp..................................... 6,847 234,082
Charter One Financial, Inc............................... 16,730 464,257
First Tennessee National Corp............................ 5,800 220,763
Peoples Heritage Financial Group, Inc.................... 12,100 242,000
TCF Financial Corp....................................... 14,400 348,300
-----------
1,509,402
-----------
Business Equipment & Services -- 7.24%
Comdisco, Inc............................................ 10,300 173,812
Convergys Corp........................................... 3,700 82,788
HON Industries, Inc...................................... 11,500 275,281
Omnicom Group............................................ 4,800 278,400
Sterling Commerce, Inc.*................................. 5,200 234,000
Young & Rubicam Inc...................................... 8,400 271,950
-----------
1,316,231
-----------
Chemicals -- 1.29%
OM Group, Inc............................................ 6,400 233,600
-----------
Computer Products & Services -- 8.83%
Affiliated Computer Services, Inc. -- Class A 7,800 351,000
Autodesk, Inc............................................ 4,700 200,631
DST Systems, Inc......................................... 5,600 319,550
National Data Corp....................................... 5,600 272,650
Sungard Data Systems, Inc................................ 11,600 460,375
-----------
1,604,206
-----------
Construction -- 4.14%
Applied Power, Inc. -- Class A........................... 8,100 305,775
Crane Co................................................. 14,787 446,383
-----------
752,158
-----------
Containers -- 1.59%
AptarGroup, Inc.......................................... 10,300 289,044
-----------
Electronics -- 10.71%
Ametek, Inc.............................................. 7,500 167,344
Lexmark International Group, Inc......................... 5,800 582,900
Littlefuse, Inc.......................................... 8,100 155,925
Microchip Technology, Inc.*.............................. 8,100 299,700
Molex, Inc. Class A...................................... 7,113 226,727
Teradyne, Inc.*.......................................... 5,100 216,112
Xilinx, Inc.*............................................ 4,550 296,319
-----------
1,945,027
-----------
Energy & Utilities -- .84%
Noble Affiliates, Inc.................................... 6,200 152,675
-----------
</TABLE>
See accompanying notes to financial statements.
Pegasus Variable Funds 27
<PAGE>
Pegasus Variable Mid-Cap Opportunity Fund
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- (Continued)
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Description Shares Value
----------- ------ ------
<S> <C> <C>
Finance -- 6.91%
A. G. Edwards, Inc....................................... 6,750 $ 251,438
FINOVA Group Inc......................................... 7,700 415,319
Heller Financial, Inc.................................... 12,500 367,188
Waddell & Reed Financial, Inc. Class A................... 9,300 220,294
-----------
1,254,239
-----------
Food Wholesalers -- 1.51%
U.S. Foodservice......................................... 5,600 274,400
-----------
Health Care/Pharmaceutical -- 6.58%
DENTSPLY International, Inc.............................. 7,200 185,400
HCR Manor Care, Inc.*.................................... 5,800 170,375
Health Management Associates, Inc. Class A............... 6,543 141,492
Sybron International Corp................................ 16,500 448,594
Universal Health Services, Inc. -- Class B............... 4,800 249,000
-----------
1,194,861
-----------
Home Furnishings -- 1.53%
Leggett & Platt, Inc..................................... 12,600 277,200
-----------
Industrial Automation -- 0.68%
DT Industries, Inc....................................... 7,800 122,850
-----------
Information Technology -- 1.05%
Galileo International, Inc............................... 4,400 191,400
-----------
Insurance -- 7.19%
Capital Re Corp.......................................... 9,000 180,562
CMAC Investment Corp..................................... 6,000 275,625
Everest Reinsurance Holdings, Inc........................ 9,100 354,331
Executive Risk, Inc...................................... 3,900 214,256
PMI Group, Inc........................................... 2,850 140,718
Transatlantic Holdings, Inc.............................. 1,850 139,791
-----------
1,305,283
-----------
Manufacturing -- 5.67%
Harsco Corp.............................................. 6,100 185,669
Hubbell Inc. Class B..................................... 4,000 152,000
Idex Corp................................................ 4,775 116,987
Juno Lighting, Inc....................................... 11,100 259,462
Teleflex, Inc............................................ 6,900 314,813
-----------
1,028,931
-----------
Miscellaneous -- 3.13%
Kemet Corp............................................... 6,300 70,875
Waters Corp.............................................. 5,700 497,325
-----------
568,200
-----------
</TABLE>
See accompanying notes to financial statements.
28 Pegasus Variable Funds
<PAGE>
Pegasus Variable Mid-Cap Opportunity Fund
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- (Continued)
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Description Shares Value
----------- ------ ------
<S> <C> <C>
Motor Vehicles -- 6.51%
Borg-Warner Automotive, Inc............................... 5,900 $ 329,294
Harley-Davidson, Inc...................................... 9,300 440,587
Tower Automotive, Inc..................................... 16,500 411,469
-----------
1,181,350
-----------
Multi-Industry -- 0.83%
Lancaster Colony Corp..................................... 4,700 150,988
-----------
Oil & Gas -- 2.32%
Apache Corp............................................... 8,300 210,094
Cooper Cameron Corp....................................... 5,900 144,550
Global Industries, Limited................................ 10,900 66,762
-----------
421,406
-----------
Retail -- 7.54%
Kohls Corp.*.............................................. 3,600 221,175
Saks Inc.................................................. 12,600 397,687
The Men's Wearhouse, Inc.................................. 10,750 341,313
Zale Corp................................................. 12,700 409,575
-----------
1,369,750
-----------
TOTAL COMMON STOCK.......................................... 17,485,201
-----------
(Cost $14,775,376)
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
--------
<S> <C> <C>
REPURCHASE AGREEMENTS -- 3.29%
State Street Bank, 4.40%, dated 12/31/98, due 01/04/99,
collateralized by $450,000 U.S. Treasury Bond, 8.00% due
11/15/21,
market value $607,364 (Cost $590,000).................... $590,000 $ 590,000
State Street Bank, 4.40%, dated 12/31/98, due 01/04/99,
collateralized by $10,000 U.S. Treasury Bond, 7.25% due
05/15/16,
market value $12,184 (Cost $8,000)....................... 8,000 8,000
-----------
TOTAL REPURCHASE AGREEMENTS............................... 598,000
-----------
(Cost $598,000)
TOTAL INVESTMENTS......................................... $18,083,201
===========
(Cost $15,373,376)
</TABLE>
Percentages indicated are based on net assets.
* Non-income producing security.
See accompanying notes to financial statements.
Pegasus Variable Funds 29
<PAGE>
Pegasus Growth Fund
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Description Shares Value
----------- ------ ------
<S> <C> <C>
COMMON STOCK -- 99.88%
Banks -- 2.26%
State Street Corp........................................ 3,000 $ 208,688
Wells Fargo Co........................................... 9,000 359,437
-----------
568,125
-----------
Beverages -- 3.75%
Coca Cola Co............................................. 8,000 535,000
PepsiCo, Inc............................................. 10,000 409,374
-----------
944,374
-----------
Business Services -- 2.78%
Interpublic Group Cos., Inc.............................. 4,000 319,000
Service Corp. International.............................. 10,000 380,625
-----------
699,625
-----------
Health Care/Pharmaceutical -- 22.98%
American Home Products Corp.............................. 5,000 281,563
Amgen, Inc.*............................................. 5,000 522,813
Elan Corp. PLC ADR*...................................... 10,000 695,624
Eli Lilly & Co........................................... 5,000 444,375
Guidant Corp............................................. 5,000 551,250
Merck & Co., Inc......................................... 4,000 590,750
Mylan Laboratories, Inc.................................. 14,000 441,000
Pfizer, Inc.............................................. 4,500 564,469
SmithKline Beecham PLC ADR............................... 8,000 556,000
Stryker Corp............................................. 7,000 385,438
United HeathCare Corp.................................... 7,000 301,438
Warner-Lambert Co........................................ 6,000 451,125
-----------
5,785,845
-----------
Computer Products & Services -- 17.59%
Dell Computer Corp.*..................................... 8,000 585,500
Cisco Systems, Inc.*..................................... 12,000 1,113,750
Compuware Corp.*......................................... 5,000 390,625
International Business Machines Corp..................... 2,000 369,500
Microsoft Corp.*......................................... 8,000 1,109,499
Sun Microsystems, Inc.*.................................. 10,000 856,249
-----------
4,425,123
-----------
Electronics -- 5.47%
Altera Corp.*............................................ 9,000 547,875
Intel Corp............................................... 7,000 829,937
-----------
1,377,812
-----------
Entertainment -- 0.83%
Walt Disney Co........................................... 7,000 210,000
-----------
</TABLE>
See accompanying notes to financial statements.
30 Pegasus Variable Funds
<PAGE>
Pegasus Growth Fund
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- (Continued)
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Description Shares Value
----------- ------ ------
<S> <C> <C>
Finance -- 5.22%
Associates First Capital Corp............................ 10,000 $ 423,750
Freddie Mac.............................................. 8,000 515,500
MBNA Corp................................................ 15,000 374,063
-----------
1,313,313
-----------
Household Products -- 1.09%
Procter & Gamble Co...................................... 3,000 273,938
-----------
Insurance -- 2.90%
AFLAC, Inc............................................... 6,000 264,000
UNUM Corp................................................ 8,000 467,000
-----------
731,000
-----------
Manufacturing -- 2.95%
Illinois Tool Works, Inc................................. 5,000 290,000
Tyco International Ltd................................... 6,000 452,625
-----------
742,625
-----------
Multi-Industry -- 4.05%
General Electric Co...................................... 10,000 1,020,625
-----------
Oil & Gas -- 0.91%
Baker Hughes, Inc........................................ 13,000 229,938
-----------
Retail -- 12.48%
Dollar General Corp...................................... 20,000 472,500
Home Depot, Inc.......................................... 13,000 795,438
Rite Aid Corp............................................ 9,000 446,062
Staples, Inc.*........................................... 14,000 611,625
Walgreen Co.............................................. 7,000 409,938
Wal-Mart Stores, Inc..................................... 5,000 407,188
-----------
3,142,751
-----------
Telecommunications -- 10.81%
AirTouch Communications, Inc.*........................... 11,000 793,375
Lucent Technologies, Inc................................. 4,000 440,000
MCI WorldCom, Inc.*...................................... 10,000 717,500
Telefonaktiebolaget LM Ericsson ADR...................... 15,000 359,063
Tellabs, Inc.*........................................... 6,000 411,374
-----------
2,721,312
-----------
Tobacco -- 2.12%
Philip Morris Cos., Inc.................................. 10,000 535,000
-----------
Utilities -- 1.69%
AES Corp.*............................................... 9,000 426,375
-----------
TOTAL INVESTMENTS.......................................... $25,147,781
===========
(Cost $15,841,827)
</TABLE>
Percentages indicated are based on net assets.
* Non-income producing security.
See accompanying notes to financial statements.
Pegasus Variable Funds 31
<PAGE>
Pegasus Variable Intrinsic Value Fund
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Description Face Amount Value
----------- ----------- ------
<S> <C> <C>
CONVERTIBLE BOND -- 0.70%
Pep Boys, Zero Coupon, 09/20/11........................ $300,000 $ 157,125
-----------
(Cost $169,945)
<CAPTION>
Shares
------
<S> <C> <C>
COMMON STOCK -- 81.64%
Aerospace -- 3.54%
Lockheed Martin Corp.................................. 9,400 796,650
-----------
Apparel -- 3.47%
Unifi, Inc............................................ 40,000 782,500
-----------
Auto Parts & Equipment -- 2.65%
Bandag, Inc. Class A.................................. 17,090 596,014
-----------
Banks -- 5.34%
Marshall & Ilsley Corp................................ 6,100 356,469
Pacific Century Financial Corp........................ 21,000 511,875
SouthTrust Corp....................................... 9,000 332,438
-----------
1,200,782
-----------
Business Services -- 1.91%
Grey Advertising, Inc................................. 1,180 429,520
-----------
Chemicals -- 1.90%
NCH Corp.............................................. 7,200 428,400
-----------
Communication Services -- 1.65%
Century Telephone Enterprises, Inc.................... 5,500 371,250
-----------
Consumer Cyclicals -- 1.26%
Enesco Group, Inc..................................... 12,200 283,650
-----------
Energy & Utilities -- 11.19%
Allegheny Energy, Inc................................. 9,400 324,300
Arch Coal, Inc........................................ 22,100 378,463
CMS Energy Corp....................................... 6,500 314,844
Energy East Corp...................................... 5,600 316,400
Pinnacle West Capital Corp............................ 7,000 296,625
SJW Corp.............................................. 3,500 205,625
Sierra Pacific Resources.............................. 10,300 391,399
St. Joseph Light & Power Co........................... 12,200 218,838
Tennant Co............................................ 1,800 72,225
-----------
2,518,719
-----------
Finance -- 6.54%
Financial Security Assurance Holdings Ltd............. 7,000 379,750
Fund American Enterprises Holdings, Inc............... 7,800 1,092,487
-----------
1,472,237
-----------
Food & Agriculture -- 2.19%
Farmer Brothers Co.................................... 2,300 492,200
-----------
Health Care -- 1.12%
Block Drug Co., Inc. Class A.......................... 5,799 251,527
-----------
Houseware -- 0.95%
National Presto Industries, Inc....................... 5,000 213,125
-----------
</TABLE>
See accompanying notes to financial statements.
32 Pegasus Variable Funds
<PAGE>
Pegasus Variable Intrinsic Value Fund
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- (Continued)
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Description Shares Value
----------- ------ ------
<S> <C> <C>
Insurance -- 14.20%
American National Insurance Co....................... 7,400 $ 612,350
Leucadia National Corp............................... 28,100 885,150
Ohio Casualty Corp................................... 6,250 257,031
Old Republic International Corp...................... 27,550 619,874
PXRE Corp............................................ 15,260 382,454
SAFECO Corp.......................................... 10,200 437,963
-----------
3,194,822
-----------
Multi-Industry -- 4.88%
Loews Corp........................................... 11,180 1,098,434
-----------
Oil & Gas -- 3.48%
Atlantic Richfield Co................................ 2,300 150,075
El Paso Energy Corp.................................. 9,300 323,756
Southwest Gas Corp................................... 11,500 309,063
-----------
782,894
-----------
REITS -- 0.33%
Associates Estates Realty Corp....................... 6,200 73,238
-----------
Restaurants -- 5.82%
Luby's Cafeterias, Inc............................... 19,200 296,400
Sbarro, Inc.......................................... 38,700 1,013,455
-----------
1,309,855
-----------
Retail -- 4.97%
Office Depot, Inc.*.................................. 9,600 354,600
Payless ShoeSource, Inc.*............................ 16,100 762,738
-----------
1,117,338
-----------
Tobacco -- 1.16%
UST, Inc............................................. 7,500 261,563
-----------
Transportation-Railroads -- 3.09%
Canadian National Railway Co. ADR.................... 13,410 695,644
-----------
TOTAL COMMON STOCK..................................... $18,370,362
-----------
(Cost $18,758,848)
<CAPTION>
Face Amount
REPURCHASE AGREEMENTS --17.69% -----------
<S> <C> <C>
State Street Bank, 4.40%, dated 12/31/98, due
01/04/99, collateralized by $10,000 U.S. Treasury
Bond, 7.50% due 11/15/16, market value $12,486 (Cost
$11,000)............................................. $ 11,000 $ 11,000
State Street Bank, 4.40%, dated 12/31/98, due
01/04/99, collateralized by $3,585,000 U.S. Treasury
Note, 7.25% due 05/15/04, market value $4,052,710
(Cost $3,970,000).................................... 3,970,000 3,970,000
-----------
TOTAL REPURCHASE AGREEMENTS............................ 3,981,000
-----------
(Cost $3,981,000)
TOTAL INVESTMENTS...................................... $22,508,487
===========
(Cost $22,909,793)
</TABLE>
Percentages indicated are based on net assets.
* Non-income producing security.
See accompanying notes to financial statements.
Pegasus Variable Funds 33
<PAGE>
Pegasus Variable Bond Fund
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Description Face Amount Value
----------- ----------- ------
<S> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS -- 77.21%
U.S. Treasury Securities -- 45.66%
U.S. Treasury Bonds:
10.375%, 11/15/09.................................... $ 400,000 $ 511,375
12.75%, 11/15/10..................................... 9,745,000 14,169,844
10.375%, 11/15/12.................................... 2,790,000 3,858,048
8.75%, 05/15/17...................................... 2,400,000 3,342,751
U.S. Treasury Inflation Protection Securities:
3.625%, 07/15/02..................................... 200,000 203,458
3.375%, 01/15/07..................................... 200,000 199,584
3.625%, 04/15/28..................................... 550,000 543,567
U.S. Treasury Note, 7.125%, 02/29/00.................. 4,000,000 4,110,000
U.S. Treasury Strips:
11/15/11............................................. 500,000 254,178
02/15/13............................................. 300,000 140,836
02/15/14............................................. 450,000 198,476
05/15/18............................................. 800,000 274,068
-----------
(Cost $26,016,836) 27,806,185
-----------
Agency Obligations -- 31.55%
Federal Home Loan Mortgage Corp. Participation Ctfs.:
#555238, 12.00%, 07/01/19............................ 77,175 85,333
#G10777, 9.00%, 06/01/10............................. 642,506 675,807
Federal Home Loan Mortgage Corp. Gtd. Multi-Class
Mortgage
Participation Ctfs.:
Series 11 Class D, 9.50%, 07/15/19................... 250,000 263,274
Series 22 Class C, 9.50%, 04/15/20................... 151,920 159,821
Series 47 Class F, 10.00%, 06/15/20.................. 80,546 84,783
Series 99 Class Z, 9.50%, 01/15/21................... 45,739 48,767
Series 128 Class I, 6.50%, 02/15/21.................. 161,630 162,088
Series 1051 Class D, 7.00%, 11/15/19................. 14,266 14,278
Series 1065 Class J, 9.00%, 04/15/21................. 75,419 79,688
Series 1250 Class J, 7.00%, 05/15/22................. 211,000 215,554
Series 1295 Class JB, 4.50%, 03/15/07................ 300,000 292,433
Series 1297 Class H, 7.50%, 01/15/20................. 212,671 215,995
Series 1370 Class F, 6.75%, 03/15/19................. 110,040 110,252
Series 1389 Class SA, IF, 10/15/07................... 25,024 24,273
Series 1465 Class SA, IO, IF, 02/15/08............... 501,442 17,748
Series 1489 Class L, 5.50%, 04/15/08................. 64,574 64,449
Series 1505 Class Q, 7.00%, 05/15/23................. 200,000 202,703
Series 1543 Class JC, IF, 07/15/23................... 95,000 85,894
Series 1586 Class A, 6.00%, 09/15/08................. 127,711 127,656
Series 1589 Class Z, 6.25%, 09/15/23................. 762,949 732,003
Series 1595 Class S, IO, IF, 10/15/13................ 689,513 18,407
Series 1603 Class JF, IF, 01/15/23................... 45,000 45,542
Series 1606 Class LC, IF, 05/15/08................... 167,150 170,201
Series 1609 Class LG, IF, 11/15/23................... 145,827 139,348
Series 1619 Class SD, IF, 11/15/23................... 144,098 144,548
</TABLE>
See accompanying notes to financial statements.
34 Pegasus Variable Funds
<PAGE>
Pegasus Variable Bond Fund
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- (Continued)
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Description Face Amount Value
----------- ----------- ------
<S> <C> <C>
Series 1625 Class SD, IF, 12/15/08................... $ 200,000 $ 204,693
Series 1646 Class MD, IF, 8.50%, 10/15/22............ 173,833 174,545
Series 1647 Class SB, IF, 12/15/08................... 66,281 66,361
Series 1679 Class O, 6.40%, 02/15/09................. 199,762 201,745
Series 1685 Class Z, 6.00%, 11/15/23................. 133,546 126,966
Series 1686 Class SL, IF, 02/15/24................... 88,814 88,642
Series 1689 Class SD, IF, 10/15/23................... 100,000 101,819
Series 1700 Class GA, PO, 02/15/24................... 286,574 225,167
Series 1709 Class C, 5.50%, 12/15/19................. 285,501 284,746
Series 1796-A Class S, IF, 02/15/09.................. 125,000 118,307
Series 1859 Class SB, IO, IF, 10/15/23............... 109,262 14,420
Series 1967 Class PC, PO, 10/15/08................... 217,029 190,712
Series 1981 Class Z, 6.00%, 05/15/27................. 324,921 315,039
Series 1987 Class W, PO, 02/15/22.................... 500,000 387,497
Series 2002 Class A, PO, 11/15/22.................... 144,000 112,061
Series 2025 Class PE, 6.30%, 01/15/13................ 300,000 303,337
Series 2038 Class PN, IO, 7.00%, 03/15/28............ 768,835 158,222
Series 2054 Class PV, 7.50%, 05/15/28................ 500,000 526,109
Federal National Mortgage Assn. Pass Thru Securities:
Pool #116612, AR, 03/01/19........................... 59,457 62,537
Pool #303532, AR, 03/01/29........................... 119,332 120,047
Federal National Mortgage Assn. Pass Thru Securities
Gtd. Remic Trust:
1989 Class 83-H, 8.50%, 11/25/19..................... 318,238 329,249
1990 Class 1-D, 8.80%, 01/25/20...................... 107,802 113,199
1990 Class 93-G, 5.50%, 08/25/20..................... 90,080 88,105
1990 Class 140-K, HB, 652.1454%, 12/25/20............ 1,047 16,111
1990 Class 143-J, 8.75%, 12/25/20.................... 118,963 123,696
1991 Class 161-H, 7.50%, 02/25/21.................... 5,301 5,289
1992-G Class 15-Z, 7.00%, 01/25/22................... 290,006 304,121
1992-G Class 42-Z, 7.00%, 07/25/22................... 156,335 158,228
1992-G Class 59-F, IF, 10/25/22...................... 105,346 102,877
1992-G Class 61-Z, 7.00%, 10/25/22................... 36,911 37,143
1992-G Class 66-JB, 5.00%, 11/25/21.................. 200,000 193,785
1992 Class 143-MA, 5.50%, 09/25/22................... 400,000 385,392
1992 Class 204-B, 6.00%, 10/25/20.................... 234,939 234,741
1993-G Class 1-KA, IF, 01/25/23...................... 169,000 184,170
1993-G Class 12-C, PO, 02/25/23...................... 218,610 207,466
1993-G Class 13-G, 6.00%, 06/25/20................... 138,209 138,110
1993 Class 19-G, 5.00%, 05/25/19..................... 208,938 207,740
1993-G Class 19-K, 6.50%, 06/25/19................... 20,275 20,333
1993 Class 38-S, IO, IF, 11/25/22.................... 3,733 20
1993 Class 44-S, IO, IF, 04/25/23.................... 92,482 3,414
1993 Class 58-J, 5.50%, 04/25/23..................... 29,929 29,525
1993 Class 94-K, 6.75%, 05/25/23..................... 28,139 28,117
1993 Class 134-SA, IF, 08/25/08...................... 200,000 205,096
1993 Class 139-SG, IF, 08/25/23...................... 135,828 130,045
1993 Class 155-SB, IO, IF, 09/25/23.................. 282,447 8,598
1993 Class 175-S, IF, 05/25/07....................... 70,953 70,945
</TABLE>
See accompanying notes to financial statements.
Pegasus Variable Funds 35
<PAGE>
Pegasus Variable Bond Fund
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- (Continued)
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Description Face Amount Value
----------- ----------- ------
<S> <C> <C>
1993 Class 193-B, 3.00%, 09/25/23.................... $ 226,154 $ 217,405
1993 Class 196-FA, IF, 10/25/08...................... 153,556 151,208
1993 Class 220-SD, IF, 11/25/13...................... 49,707 48,362
1993 Class X-225C-FP, IF, 10/25/22................... 120,000 112,504
1993 Class 230-FA, IF, 12/25/23...................... 179,385 178,814
1993 Class 257-C, PO, 06/25/23....................... 600,000 419,454
1994 Class 8-G, PO, 11/25/23......................... 86,531 80,331
1994-G Class 13-ZB, 7.00%, 11/17/24.................. 178,642 177,001
1994 Class 30-LA, 6.50%, 10/25/21.................... 24,464 24,588
1994 Class 82-SA, IO, IF, 06/25/23................... 818,911 20,594
1995 Class 13-B, 6.50%, 03/25/09..................... 107,087 107,378
1996 Class 7-C, 6.50%, 12/25/10...................... 199,989 199,546
1996 Class 20-L, PO, 09/25/08........................ 182,059 157,588
1996 Class 24-B, PO, 10/25/08........................ 200,000 158,738
1996 Class 24-K, PO, 02/25/08........................ 100,000 92,500
1996 Class 39-J, PO, 09/25/08........................ 150,000 118,038
1996 Class 59-J, 6.50%, 08/25/22..................... 268,000 268,646
1997 Class 39-PD, 7.50%, 05/20/27.................... 200,000 209,108
1997 Class 85-L, IO, 12/25/20........................ 386,108 40,780
Federal National Mortgage Assn. Strips:
Class K-2, IO, 11/01/08.............................. 7,706 44,087
Government National Mortgage Assn. Pass Thru
Securities:
Pool #297628, 8.00%, 09/15/22........................ 126,995 132,387
Pool #2006, 8.50%, 05/20/25.......................... 250,859 265,722
Pool #2324, 8.00%, 11/20/26.......................... 546,547 565,327
Pool #2362, 8.00%, 01/20/27.......................... 897,875 929,426
Pool #460372, 8.00%, 05/15/28........................ 257,674 268,010
Pool #468066, 8.00%, 07/15/28........................ 238,900 248,482
Pool #486537, 7.50%, 09/15/28........................ 474,497 489,818
Government National Mortgage Assn. Pass Thru
Securities Gtd. Remic Trust:
1994 Class 3-PQ, 7.4875%, 07/16/24................... 250,000 265,820
1994 Class 4-SA, IO, IF, 10/16/22.................... 546,060 22,426
1996 Class 16-E, 7.50%, 08/16/26..................... 713,000 750,081
1996 Class 22-VB, 7.00%, 08/16/13.................... 120,000 124,400
1997 Class 8-PN, 7.50%, 05/16/27..................... 500,000 521,176
1998 Class 26-K, 7.50%, 09/17/25..................... 491,000 510,244
-----------
(Cost $18,759,129) 19,209,321
-----------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS........... 47,015,506
-----------
(Cost $44,775,965)
</TABLE>
See accompanying notes to financial statements.
36 Pegasus Variable Funds
<PAGE>
Pegasus Variable Bond Fund
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- (Continued)
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Description Face Amount Value
----------- ----------- ------
<S> <C> <C>
ASSET BACKED SECURITIES -- 7.69%
Arcadia Automobiles Receivables Trust,
Series 1997-B, Class A3, 6.30%, 07/16/01............. $ 517,542 $ 520,106
Series 1998-B, Class A3, 5.95%, 11/15/02............. 250,000 253,186
Series 1998-A, Class A4, 6.00%, 11/17/03............. 200,000 201,291
Case Equipment Loan Trust Asset Backed Pass Thru.
Ctf.,
Series 1995-A, Class A, 7.30%, 03/15/02.............. 40,549 40,611
Series 1995-B, Class A-3, 6.15%, 09/15/02............ 80,917 81,057
Series 1996-A, Class A2, 5.50%, 02/15/03............. 72,237 72,373
Chase Manhattan Grantor Trust, Series 1995-A, Class A,
6.00%, 09/17/01...................................... 94,782 95,162
Chase Mortgage Finance Corp., Series 1994-E, Class
A6B, IF, 04/25/10.................................... 156,021 155,484
CPS Auto Trust Asset Backed Pass Thru Ctf.,
Series 1997-4, Class A1, 6.07%, 03/15/03............. 88,499 88,921
Series 1998-3, Class A4, 6.08%, 10/15/03............. 400,000 409,778
Ford Credit Auto Owner Trust Asset Backed Pass Thru
Ctf.,
Series 1997-B, Class A2, 5.59%, 01/15/00............. 87,493 87,638
Merrill Lynch Home Equity Loan, 1992-1, Class A, AR,
07/15/22............................................. 43,905 43,903
Nationsbank Auto Grantor Trust Asset Backed Ctf.,
Series 1995-A, Class A, 5.85%, 06/15/02.............. 17,640 17,714
Navistar Financial Corp. Owner Trust, Series 1995-A,
Class A2, 6.55%, 11/20/01............................ 36,824 36,877
Olympic Automobile Rec. Trust Asset Backed Pass Thru
Ctf.,
Series 1995-C, Class A2, 6.20%, 01/15/02............. 138,004 138,770
Series 1996-C, Class A5, 7.00%, 03/15/04............. 300,000 309,266
ONYX Acceptance Grantor Trust Auto Loan Pass Thru
Ctf.,
Series 1996-1, Class A, 5.40%, 05/15/01.............. 85,014 85,190
Series 1998-B, Class A2, 5.85%, 07/15/03............. 250,000 253,169
Premier Auto Trust, Series 1998-5, Class A3, 5.07%,
07/08/02............................................. 500,000 498,353
Sears Credit Account, Series 1998-1, Class A, 5.80%,
08/15/05............................................. 200,000 201,385
WFS Financial Owner Trust Asset Backed Pass Thru Ctf.,
Series 1996-C, Class A4, 6.80%, 12/20/03............. 150,000 152,287
Series 1996-D, Class A3, 6.05%, 07/20/01............. 121,538 121,783
Series 1997-A, Class A3, 6.50%, 09/20/01............. 115,405 116,701
Series 1997-B, Class A2, 6.05%, 07/20/00............. 65,992 66,218
Series 1997-C, Class A2, 5.95%, 06/20/00............. 104,647 104,976
World Omni Automobile Lease Sec Trust Asset Backed
Pass Thru Ctf.,
Series 1997-B, Class A1, 6.07%, 11/25/03............. 231,662 232,052
Series 1997-B, Class A3, 6.18%, 11/25/03............. 299,834 301,745
-----------
TOTAL ASSET BACKED SECURITIES.......................... 4,685,996
-----------
(Cost $4,651,043)
</TABLE>
See accompanying notes to financial statements.
Pegasus Variable Funds 37
<PAGE>
Pegasus Variable Bond Fund
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- (Continued)
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market
Description Face Amount Value
----------- ----------- ------
<S> <C> <C>
CORPORATE BONDS AND NOTES -- 2.93%
Automobile -- 1.02%
Ford Motor Credit, 8.20%, 02/15/02................... $ 300,000 $ 322,260
General Motors Acceptance Corp., 5.75%, 11/10/03..... 300,000 301,571
-----------
(Cost $615,547) 623,831
-----------
Finance -- 0.87%
Associates Corp. of North America:
9.125%, 04/01/00..................................... 85,000 88,734
8.15%, 08/01/09...................................... 200,000 235,350
5.96%, 05/15/37...................................... 200,000 206,141
-----------
(Cost $514,307) 530,225
-----------
Industry -- 1.04%
Boeing Co.:
6.36%, 07/15/05...................................... 500,000 501,997
7.95%, 08/15/24...................................... 110,000 129,448
-----------
(Cost $625,805) 631,445
-----------
TOTAL CORPORATE BONDS AND NOTES........................ 1,785,501
-----------
(Cost $1,755,659)
REPURCHASE AGREEMENTS -- 11.44%
State Street Bank, 4.40%, dated 12/31/98, due
01/04/99,
collateralized by $60,000 U.S. Treasury Note, 7.25%,
due 05/15/04,
market value $67,828 (cost $66,000).................. $ 66,000 $ 66,000
State Street Bank, 4.40%, dated 12/31/98, due
01/04/99,
collateralized by $6,225,000 U.S. Treasury Note,
7.25%, due 05/15/04,
market value $7,037,132 (cost $6,897,000)............ 6,897,000 6,897,000
-----------
TOTAL REPURCHASE AGREEMENTS............................ 6,963,000
-----------
(Cost $6,963,000)
TOTAL INVESTMENTS...................................... $60,450,003
===========
(Cost $58,145,667)
</TABLE>
Percentages indicated are based on net assets.
See accompanying notes to financial statements.
38 Pegasus Variable Funds
<PAGE>
Pegasus Variable Bond Fund
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS -- (Continued)
December 31, 1998
- --------------------------------------------------------------------------------
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) represents securities with an interest rate that changes
periodically based upon an index of market rates. The rate reflected on the
Portfolio of Investments is the rate in effect at December 31, 1998.
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) represents 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 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.
The abbreviations in the Portfolio of Investments stand for the following:
ADR -- American Depositary Receipt
Ltd. -- Limited
PLC -- (British) Public Limited Company
REITS -- Real Estate Investment Trust
See accompanying notes to financial statements.
Pegasus Variable Funds 39
<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, 1998, the Trust consisted of five separate series of which
there were four Equity Funds and one Bond Fund, 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 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.
On October 2, 1998, First Chicago NBD Investment Management Company's
(FCNIMCO) parent company, First Chicago NBD Corporation, merged with and into
BANC ONE CORPORATION at which time was renamed to BANK ONE CORPORATION. BANK
ONE CORPORATION has now begun the process of reorganizing their proprietary
mutual funds. ITT Hartford Life and Annuity Insurance Company has filed an
exemption application with the Securities and Exchange Commission (SEC)
requesting relief from certain rules in order to substitute One Group
Investment Trust Funds for the Pegasus Variable Funds in their Separate Account
Six. In turn, One Group Investment Trust has filed a post effective amendment
to its registration statement, creating four new funds with similar investment
objectives as the Funds. The Pegasus Variable Growth Fund will be substituted
with an existing fund in One Group Investment Trust. Assuming approval by the
SEC, it is anticipated this substitution will occur in March, 1999. The
substitution is intended to be effected on a tax-free basis, so that none of
the Funds' shareholders will recognize taxable gains or losses as a result of
the substitution.
(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.
40 Pegasus Variable Funds
<PAGE>
Pegasus Variable Funds
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (Continued)
- --------------------------------------------------------------------------------
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
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.
Investment security purchases and sales are accounted for on the trade date.
Realized gains and losses from security transactions are recorded on the
specific identified cost basis.
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. Under the supervision of the Board of Trustees, the
following additional policies and procedures relating to the Trust's
investments in securities subject to repurchase agreements are established: 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 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. 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 substantially all of its 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 sales
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 or as necessary to comply with Subchapter M of the
Internal Revenue Code. 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 a five year
period beginning with the commencement of operations of each portfolio.
Expenses
Direct expenses of a fund are allocated to that fund. General expenses of the
Trust are allocated to each Fund based upon each Fund's relative net assets.
Pegasus Variable Funds 41
<PAGE>
Pegasus Variable Funds
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (Continued)
- --------------------------------------------------------------------------------
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.
(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 earns an annual fee of
0.60% from the Equity Funds and 0.40% from the Bond Fund based on the average
daily net assets of each Fund.
FCNIMCO and BISYS Fund Services serve as the Trust's Co-Administrators
pursuant to an Administration Agreement. Under the Administration Agreement,
the Co-Administrators generally assist in aspects of the Trust's administration
and operations, other than providing investment advice, subject to the overall
authority of the Trust's Board of Trustees in accordance with Delaware law.
FCNIMCO and BISYS appointed Nationwide Advisory Services, Inc. ("NAS") to
provide the administrative services of the Trust. Under the terms of the
Administration Agreement, the Co-Administrators are entitled to a monthly
administration fee at the annual rate of 0.15% of each Fund's average daily net
assets which is then paid to NAS.
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 year ended
December 31, 1998, FCNIMCO voluntarily agreed to waive their advisory fees 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). For the year
ended December 31, 1998, FCNIMCO waived fees in the amounts of $33,240 in the
Variable Growth and Value Fund, $82,956 in the Variable Mid-Cap Opportunity
Fund, $56,564 in the Variable Growth Fund, $57,553 in the Variable Intrinsic
Value Fund, and $26,975 in the Variable Bond Fund.
42 Pegasus Variable Funds
<PAGE>
Pegasus Variable Funds
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- (Continued)
- --------------------------------------------------------------------------------
(4) Investment Securities Transactions
At December 31, 1998, the accumulated net unrealized appreciation
(depreciation) on investments for federal tax purposes and the federal tax cost
of investments was 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 Appre-
ciation (Federal tax
cost) $ 10,031,572 $ 3,582,525 $ 9,570,842 $ 992,072 $ 2,463,574
Gross Unrealized Depre-
ciation (Federal tax
cost) ( 1,055,791) (876,352) (264,888) (1,393,378) (159,238)
- ------------------------------------------------------------------------------------------
Net Unrealized Appreci-
ation (Depreciation) $ 8,975,781 $ 2,706,173 $ 9,305,954 $ (401,306) $ 2,304,336
- ------------------------------------------------------------------------------------------
Federal Tax Cost $ 48,609,299 $14,779,028 $15,841,827 $18,928,793 $51,182,667
</TABLE>
The following summarizes the securities transactions entered into by the
Funds, excluding short-term investments, for the year ended December 31, 1998:
<TABLE>
<CAPTION>
Mid-Cap
Growth and Opportunity Intrinsic
Value Fund Fund Growth Fund Value Fund Bond Fund
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Purchases $34,178,733 $8,870,717 $11,828,501 $12,755,820 $27,782,628
Sales $20,314,165 $3,727,831 $ 8,932,579 $ 6,595,389 $ 6,420,623
</TABLE>
(5) Equity of Affiliates:
As of December 31, 1998, Hartford Life Insurance Company held a direct
interest in shares as follows:
<TABLE>
<CAPTION>
Percentage of
Shares Total Shares
---------------------------------------------------------
<S> <C> <C>
Pegasus Variable Growth and Value Fund 57,163 1.71%
Pegasus Variable Mid-Cap Opportunity Fund 62,050 5.04%
Pegasus Variable Growth Fund 55,179 4.71%
Pegasus Variable Intrinsic Value Fund 52,847 2.51%
Pegasus Variable Bond Fund 219,235 3.86%
</TABLE>
Pegasus Variable Funds 43
<PAGE>
Pegasus Variable Funds
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period
<TABLE>
<CAPTION>
Growth and Value Fund Mid-Cap Opportunity
--------------------------------------------------- ---------------------------------------------------
Year Ended Year Ended Year Ended Period Ended Year Ended Year Ended Year Ended Period Ended
December 31, December 31, December 31, December 31, December 31, December 31, December 31, December 31,
1998 1997 1996 1995(1) 1998 1997 1996 1995(1)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE -
BEGINNING OF
PERIOD $ 16.22 $ 13.19 $11.63 $10.00 $ 14.38 $ 13.46 $11.02 $10.00
- ----------------------------------------------------------------------------------------------------------------------------
Net investment
income (loss) 0.11 0.13 0.15 0.13 (0.01) 0.01 0.03 0.05
Net realized and
unrealized
appreciation 2.00 3.38 2.02 1.63 0.70 3.55 2.67 1.02
- ----------------------------------------------------------------------------------------------------------------------------
Total from
investment
operations 2.11 3.51 2.17 1.76 0.69 3.56 2.70 1.07
- ----------------------------------------------------------------------------------------------------------------------------
Distributions:
From net
investment
income (0.12) (0.13) (0.14) (0.13) -- (0.01) (0.03) (0.05)
From net
realized gains
from investments (0.41) (0.35) (0.47) -- (0.31) (2.63) (0.23) --
- ----------------------------------------------------------------------------------------------------------------------------
Total
distributions (0.53) (0.48) (0.61) (0.13) (0.31) (2.64) (0.26) (0.05)
- ----------------------------------------------------------------------------------------------------------------------------
Net increase in
net asset value 1.58 3.03 1.56 1.63 0.38 0.92 2.44 1.02
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE-
END OF PERIOD $ 17.80 $ 16.22 $13.19 $11.63 $ 14.76 $ 14.38 $13.46 $11.02
- ----------------------------------------------------------------------------------------------------------------------------
Total return 13.10% 26.80% 18.75% 22.75%(2) 4.91% 26.65% 24.53% 14.20%(2)
Ratios and
supplemental
data:
Net assets end
of period (000) $59,560 $38,705 $8,603 $3,754 $18,160 $11,668 $9,216 $4,972
Ratio of net
expenses to
average net
assets 0.95% 0.93% 0.85% 0.85%(2) 0.95% 0.91% 0.85% 0.85%(2)
Ratio of
expenses to
average net
assets excluding
waivers 1.02% 1.10% 2.27% 4.93%(2) 1.52% 1.49% 2.11% 4.64%(2)
Ratio of net
investment
income (loss) to
average net
assets .69% .93% 1.35% 1.78%(2) (.10)% .04% .28% .67%(2)
Portfolio
turnover 43.2% 31.1% 46.8% 17.5%(2) 26.2% 80.7% 37.4% 32.1%(2)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Commenced operations on March 30, 1995.
(2) Annualized.
See accompanying notes to financial statements.
44 Pegasus Variable Funds
<PAGE>
Pegasus Variable Funds
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period
<TABLE>
<CAPTION>
Growth Fund Intrinsic Value Fund Bond Fund
--------------------------------------------------- ------------------------- -------------------------
Year Ended Year Ended Year Ended Period Ended Year Ended Period Ended Year Ended Period Ended
December 31, December 31, December 31, December 31, December 31, December 31, December 31, December 31,
1998 1997 1996 1995(1) 1998 1997(2) 1998 1997(2)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE -
BEGINNING OF
PERIOD $ 15.39 $ 13.28 $ 11.37 $10.00 $ 11.53 $ 10.00 $ 10.44 $ 10.00
- ------------------------------------------------------------------------------------------------------------------------------
Net investment
income (loss) (0.04) 0.03 0.05 0.05 0.21 0.12 0.57 0.37
Net realized and
unrealized
appreciation
(depreciation) 6.19 3.36 1.94 1.38 (0.58) 1.57 0.31 0.45
- ------------------------------------------------------------------------------------------------------------------------------
Total from
investment
operations 6.15 3.39 1.99 1.43 (0.37) 1.69 0.88 0.82
- ------------------------------------------------------------------------------------------------------------------------------
Distributions:
From net
investment
income -- (0.03) (0.05) (0.05) (0.21) (0.12) (0.58) (0.37)
From net
realized gains
from investments (0.04) (1.25) (0.01) (0.01) (0.20) (0.04) (0.01) (0.01)
In excess of
realized gains
from investment
transactions -- -- (0.02) -- (0.05) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total
distributions (0.04) (1.28) (0.08) (0.06) (0.46) (0.16) (0.59) (0.38)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase
(decrease) in
net asset value 6.11 2.11 1.91 1.37 (0.83) 1.53 0.29 0.44
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE-
END OF PERIOD $ 21.50 $ 15.39 $ 13.28 $11.37 $ 10.70 $ 11.53 $ 10.73 $ 10.44
- ------------------------------------------------------------------------------------------------------------------------------
Total return 40.03% 25.48% 17.52% 18.82%(3) -3.31% 25.26%(3) 8.66% 12.29%(3)
Ratios and
supplemental
data:
Net assets end
of period (000) $25,177 $15,840 $11,542 $6,435 $22,501 $13,926 $60,892 $34,230
Ratio of net
expenses to
average net
assets 0.95% 0.91% 0.85% 0.85%(3) 0.95% 0.95%(3) 0.75% 0.75%(3)
Ratio of
expenses to
average net
assets excluding
waivers 1.23% 1.26% 1.65% 3.15%(3) 1.27% 1.22%(3) 0.81% .77%(3)
Ratio of net
investment
income (loss) to
average net
assets (.25)% .21% .49% .81%(3) 1.90% 1.83%(3) 5.36% 5.97%(3)
Portfolio
turnover 44.8% 51.0% 23.1% 4.5%(3) 39.3% 19.6%(3) 14.5% 14.8%(3)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Commenced operations on March 30, 1995.
(2) Commenced operations on May 1, 1997.
(3) Annualized.
See accompanying notes to financial statements.
Pegasus Variable Funds 45
<PAGE>
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Trustees and Shareholders of the
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, 1998, and the
related statements of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended and
the financial highlights for each of the years from inception (as indicated in
Note 1) through December 31, 1998. 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, 1998, 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, 1998, and the results of their operations for the year then ended, the
changes in their net assets for each of the two years in the period then ended
and their financial highlights for each of the periods from inception (as
indicated in Note 1) through December 31, 1998, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Detroit, Michigan,
February 12, 1999.
46 Pegasus Variable Funds
<PAGE>
[PEGASUS FUNDS LOGO APPEARS HERE]
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Strength in Investing HARTFORD LIFE
