SCUDDER
[Scudder Logo]
Scudder Variable Life
Investment Fund
Annual Report
December 31, 1997
An open-end management investment company that offers shares of beneficial
interest in seven types of diversified portfolios.
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
Contents
Letter from the Fund's President .......................................... 2
Money Market Portfolio Management Discussion .............................. 3
Bond Portfolio Management Discussion ...................................... 4
Bond Portfolio Summary .................................................... 5
Balanced Portfolio Management Discussion .................................. 6
Balanced Portfolio Summary ................................................ 7
Growth and Income Portfolio Management Discussion ......................... 8
Growth and Income Performance Update ...................................... 9
Growth and Income Portfolio Summary ....................................... 10
Capital Growth Portfolio Management Discussion ............................ 11
Capital Growth Performance Update ......................................... 12
Capital Growth Portfolio Summary .......................................... 13
Global Discovery Portfolio Management Discussion .......................... 14
Global Discovery Performance Update ....................................... 15
Global Discovery Portfolio Summary ........................................ 16
International Portfolio Management Discussion ............................. 17
International Performance Update ......................................... 18
International Portfolio Summary ........................................... 19
Investment Portfolios, Financial Statements, and Financial Highlights
Money Market Portfolio .............................................. 20
Bond Portfolio ...................................................... 26
Balanced Portfolio .................................................. 33
Growth and Income Portfolio ......................................... 42
Capital Growth Portfolio ............................................ 52
Global Discovery Portfolio .......................................... 60
International Portfolio ............................................. 70
Notes to Financial Statements ............................................. 80
Report of Independent Accounts ............................................ 84
Tax Information ........................................................... 85
Shareholder Meeting Results ............................................... 86
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
LETTER FROM THE FUND'S PRESIDENT
[PHOTO OMITTED]
David B. Watts, President,
Scudder Variable Life
Investment Fund
Dear Shareholders,
We are pleased to present the results of Scudder Variable Life Investment
Fund for the 12-month period ended December 31, 1997.
Investors should be pleased with the Portfolios' performance as each
delivered another year of positive, and in many cases, above-average returns. In
fact, five of the seven portfolios outperformed the median fund in their
respective category for the 12-month period. This performance is gratifying, and
is consistent with many of the Portfolios' longer term track records and
Scudder's history of below-average expenses.
As you review your Fund's performance, now may be a good time to check
your investment allocations. The bull market of U.S. stocks over the last seven
years has increased the weighting of U.S. equities in many shareholders'
portfolios. For others, investment goals may have changed, reflecting the
nearing of retirement or planned withdrawals. Whatever your situation, the Fund
provides the flexibility to invest or reallocate assets among seven distinct
portfolios that meet a variety of investment objectives. Reallocating your
portfolio is easy and can help keep your investment on track.
As you may know, the Fund's investment adviser has changed its name to
Scudder Kemper Investments, Inc. from Scudder, Stevens & Clark, Inc., reflecting
the acquisition of a majority interest in Scudder by Zurich Insurance Company,
and the combining of Scudder's business with that of Zurich Kemper Investments,
Inc. We think these changes are positive and will broaden our resources in
managing the Portfolios.
Thank you for your continued investment in Scudder Variable Life
Investment Fund. On the following pages you will find summaries of each
Portfolio's performance and investment strategy. We hope you find it informative
reading.
Sincerely,
/s/ David B. Watts
David B. Watts
President,
Scudder Variable Life Investment Fund
2
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MONEY MARKET PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
The Money Market Portfolio maintained its $1.00 share price throughout the
period and provided a positive total return of 5.25% for the 12 months ended
December 31, 1997. The Portfolio's 30-day net annualized yield at the end of
December was 5.27%. Among its peers, the Portfolio ranked in the top third
(31st) of 102 funds in the Variable Life Money Market category according to
Lipper Analytical Services.
In a volatile market, a
money market fund can
provide a haven.
During the course of the year, we kept a watchful eye on the Federal
Reserve Board in anticipation of further hikes in short-term interest rates. The
Fed raised the federal funds rate -- a key short-term interest rate -- in March,
but left rates untouched for the remainder of the year. As inflation fears
cooled, short-term rates drifted lower during the second half of the year and it
became apparent that the Fed would maintain its hands-off policy on rates. As a
result, we gradually extended the Portfolio's average maturity, before trimming
back at year end. On December 31, 1997, the Portfolio's average maturity stood
at 33 days.
The Portfolio was invested in a diversified mix of high-quality money
market instruments, including commercial paper, certificates of deposit issued
by major banks, U.S. government securities, and short-term obligations from
highly-rated companies. We continued to overweight commercial paper in the
Portfolio because it tends to offer some of the highest money market yields
available. Commercial paper also tends to boost stability by providing the
opportunity to lock-in relatively attractive rates over a period of one to three
months.
In a changing investment climate such as this, a money market fund can
provide a haven from the volatile price movements of the stock and bond markets,
and a parking place as you consider your next investment. While we expect the
market's recent volatility to continue in the near term, we believe that the
Money Market Portfolio will provide a valuable and flexible component to your
investment portfolio.
In the months ahead, we will continue to monitor the economic and interest
rate environment, as we position the Portfolio for high current income, price
stability, and liquidity.
Sincerely,
Your Portfolio Management Team
/s/ David Wines /s/ Debra A. Hanson
David Wines Debra A. Hanson
Lead Portfolio Manager
/s/ Nicca B. Alcantara
Nicca B. Alcantara
3
<PAGE>
BOND PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
Overall, 1997 was a good period for bond investors. Interest rates
generally declined from May through the end of the year, and (due to the inverse
relationship of interest rates to bond prices) bond prices rose. In this
environment, the Bond Portfolio provided a total return of 9.10% for the 12
months ended December 31, 1997, nearly matching the 9.67% return of the
unmanaged Lehman Aggregate Bond Index for the same period. Among its peers, the
Portfolio ranked 15th of 28 funds in the Variable Life Corporate Debt A-Rated
category according to Lipper Analytical Services.
Bond holders generally received dividends and price appreciation, a combination
investors should not expect every year.
Economic growth was robust especially during the first half of the year,
but inflation remained practically nonexistent. This environment caused the
benchmark U.S. Treasury bond yield, which began the year at 6.64%, to peak at
7.20% in April, and to decline to 5.92% by the end of the period. Bond holders
generally received dividends and price appreciation, a combination investors
should not expect every year.
Given uncertainties surrounding the level of economic growth and inflation
over the first half of the year, we maintained a neutral portfolio duration and
focused on sector allocations. We de-emphasized mortgage securities, and
increased our "barbelled" maturity strategy by adding to holdings at the short
and long ends of the maturity spectrum. As the Asian crisis deepened and
inflation showed few signs of accelerating, we lengthened the Portfolio's
duration slightly to take advantage of declining interest rates and rising bond
prices. At the end of the period, the Portfolio's duration stood at 5.3 years.
From a sector standpoint, we maintained a significant weighting in
corporate bonds throughout the year. Corporates performed well during the first
nine months of the year. However, they underperformed during the fourth quarter,
especially as rates continued to decline and Treasuries shot up. We also
continued to underweight mortgages as individuals stepped up refinancings.
We expect interest rates to trend downward in the months ahead. Inflation
remains low, and slowing corporate profit growth and uncertainty in Asia provide
few reasons to expect rising interest rates. In this environment, we plan to
continue with our diversified approach, while emphasizing securities that can
add incremental value to the Portfolio's long-term performance.
Sincerely,
Your Portfolio Management Team
/s/ William M. Hutchinson /s/ Kelly D. Babson
William M. Hutchinson Kelly D. Babson
Lead Portfolio Manager
4
<PAGE>
BOND PORTFOLIO
PORTFOLIO SUMMARY as of December 31, 1997
- -----------------------------------------
Bond Portfolio
- -----------------------------------------
- -----------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- -----------------------------------------
1 Year $10,910 9.10% 9.10%
5 Year $14,183 41.83% 7.24%
10 Year $22,711 127.11% 8.55%
- -----------------------------------------
- -----------------------------------------
LB Aggregate Bond Index
- -----------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- -----------------------------------------
1 Year $10,967 9.67% 9.67%
5 Year $14,345 43.45% 7.48%
10 Year $24,057 140.57% 9.17%
- -----------------------------------------
GROWTH OF A $10,000 INVESTMENT
A chart in the form of a line graph appears here, illustrating the Growth of a
$10,000 Investment. The data points from the graph are as follows:
LB Aggregate Bond Index Bond Portfolio
----------------------- --------------
'87 100,000 '87 10,000
'88 10,789 '88 10,546
'89 12,357 '89 11,774
'90 13,461 '90 12,724
'91 15,614 '91 14,964
'92 16,771 '92 16,012
'93 18,406 '93 17,995
'94 17,869 '95 17,134
'95 21,170 '96 20,247
'96 21,935 '97 20,187
'97 24,057 '98 22,711
Yearly periods ended December 31
The Lehman Brothers (LB) Aggregate Bond Index is an unmanaged market
value-weighted measure of treasury issues, agency issues, corporate bond issues
and mortgage securities. Index returns assume reinvestment of dividends and,
unlike Fund returns, do not reflect any fees or expenses.
All performance is historical, assumes reinvestment of all dividends and capital
gains, and is not indicative of future results. Investment return and principal
value will fluctuate, so an investor's shares, when redeemed, may be worth more
or less than when purchased. Total returns in some periods were higher due to
maintenance of the Fund's expenses. See Financial Highlights for the Bond
Portfolio.
- -----------------------------------
ASSET QUALITY
- -----------------------------------
- -----------------------------------
U.S. Gov't & Agencies 37%
AAA* 15%
AA 3%
A 13%
BBB 18%
BB 8%
B 6%
----
100%
====
Average Quality: AA
*Category includes cash equivalents
A graph in the form of a pie chart appears here, illustrating the exact data
points in the above table.
For most of the year the Portfolio's maturity distribution was "barbelled"
(emphasizing short and long maturities) until the fourth quarter, when duration
was lengthened to take advantage of declining interest rates and the
corresponding rise in bond prices
- -----------------------------------
EFFECTIVE MATURITY
- -----------------------------------
- -----------------------------------
Less than 1 year 14%
1 < 3 years 8%
3 < 7 years 30%
7 < 12 years 21%
12 years or greater 27%
----
100%
====
- -----------------------------------
Weighted average effective maturity: 10 years
- -----------------------------------------
DIVERSIFICATION
- -----------------------------------------
- -----------------------------------------
Corporate Bonds 38%
U.S. Government & Agencies 16%
U.S. Government Agency Pass-Thrus 13%
Repurchase Agreement 10%
Short Term Investments 9%
Foreign Bonds - U.S.$ Denominated 7%
Gov't National Mortgage Association 4%
Asset-Backed Securities 3%
----
100%
====
- -----------------------------------------
5
<PAGE>
BALANCED PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
The U.S. stock and bond markets provided another year of strong returns,
driven by a continuation of healthy economic growth and benign inflation. In
this environment, the Balanced Portfolio provided a total return of 24.21% for
the 12 months ended December 31, 1997. The Portfolio also performed well
relative to its peers, ranking 3rd (in the top 8%) of 38 funds in the Variable
Life Balanced category according to Lipper Analytical Services. At the end of
the period, the Portfolio's assets were allocated 58% in equities and 42% in
fixed income securities (including cash), essentially unchanged from a year ago.
The Portfolio's balanced
approach is especially
well suited to weather
periods of volatility.
While the 12-month period was generally favorable for stocks and bonds, a
strong dollar and the currency crisis in Asia put pressure on earnings of large
multinational companies, particularly those in the consumer staples and
pharmaceutical areas. The Portfolio's equity holdings are heavily weighted in
these major global companies, and they were negatively affected by these
factors. In addition, profit warnings from Coca Cola, Gillette, and Avon
Products, and fears of slowing exports, exacerbated the decline. However, many
of the Portfolio's stocks which had been negatively impacted in the third
quarter recovered in the fourth quarter.
In managing the equity portion of the Portfolio, we pursue a
stock-by-stock selection approach. The Portfolio's sector weights typically are
in line with the Russell 1000 Growth Index. In keeping with the index, the
Portfolio's largest equity weightings were in the health care, consumer staples,
and technology sectors. Toward the end of the year, we made a decision to trim
exposure to semiconductor capital equipment stocks and swap other technology
holdings into computer services, reflecting our declining confidence in expected
growth rates as the crisis in Asia expanded.
Fixed-income investors benefited from declining interest rates and a
corresponding rise in bond prices from May through the end of the year. In
managing the Portfolio's fixed-income holdings, we maintained a neutral
portfolio duration and focused on sector allocations. We de-emphasized mortgage
securities, and increased our "barbelled" maturity strategy by adding to
holdings at the short and long ends of the maturity spectrum. As the Asian
crisis deepened and reports of accelerating inflation remained nonexistent, we
lengthened the portfolio's duration slightly to take advantage of declining
interest rates and rising bond prices.
We will continue to monitor developments in Asia closely, but we believe
the Portfolio is especially well suited to weather periods of uncertainty, given
its balanced approach to investing in quality growth companies and
investment-grade fixed-income securities.
Sincerely,
Your Portfolio Management Team
/s/ Valerie F. Malter /s/ William M. Hutchinson
Valerie F. Malter William M. Hutchinson
Lead Portfolio Manager
/s/ Kelly D. Babson
Kelly D. Babson
6
<PAGE>
BALANCED PORTFOLIO
PORTFOLIO SUMMARY as of December 31, 1997
- -----------------------------------------
Balanced Portfolio
- -----------------------------------------
- -----------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- -----------------------------------------
1 Year $12,421 24.21% 24.21%
5 Year $18,527 85.27% 13.13%
10 Year $33,669 236.69% 12.91%
- -----------------------------------------
- -----------------------------------------
S&P 500 Index (60%)
and LBAB Index (40%)
- -----------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- -----------------------------------------
1 Year $12,363 23.63% 23.63%
5 Year $20,202 102.02% 15.09%
10 Year $38,957 289.57% 14.55%
- -----------------------------------------
------------------------------
GROWTH OF A $10,000 INVESTMENT
------------------------------
A chart in the form of a line graph appears here, illustrating the Growth of a
$10,000 Investment. The data points from the graph are as follows:
LBAB Index S&P 500 Index Balanced Portfolio
------------- ------------- ------------------
'87 10,000 '87 10,000 '87 10,000
'88 10,789 '88 11,659 '88 11,421
'89 12,357 '89 15,352 '89 13,647
'90 13,461 '90 14,876 '90 13,385
'91 15,614 '91 19,407 '91 16,990
'92 16,771 '92 20,893 '92 18,173
'93 18,406 '93 22,996 '93 19,527
'94 17,869 '94 23,299 '94 19,126
'95 21,170 '95 32,054 '95 24,227
'96 21,935 '96 39,412 '96 27,761
'97 24,057 '97 52,566 '97 33,669
Yearly periods ended December 31
The Standard & Poor's (S&P) 500 Index is an unmanaged capitalization- weighted
measure of 500 widely held common stocks listed on the New York Stock Exchange,
American Stock Exchange, and Over-The-Counter market and The Lehman Brothers
Aggregate Bond (LBAB) Index is an unmanaged market value-weighted measure of
treasury issues, agency issues, corporate bond issues and mortgage securities.
Index returns assume reinvestment of dividends and, unlike Fund returns, do not
reflect any fees or expenses.
All performance is historical, assumes reinvestment of all dividends and capital
gains, and is not indicative of future results. Investment return and principal
value will fluctuate, so an investor's shares, when redeemed, may be worth more
or less than when purchased. Total returns in some periods were higher due to
maintenance of the Fund's expenses. See Financial Highlights for the Balanced
Portfolio. The Balanced Portfolio, with its current name and investment
objective, commenced operations on May 1, 1993. Performance figures include the
performance of its predecessor, the Managed Diversified Portfolio. Since
adopting its current objectives, the cumulative and average annual returns are
84.77% and 14.05%, respectively.
- -----------------------------
EQUITY HOLDINGS
- -----------------------------
- -----------------------------
Sector breakdown of the
Portfolio's equity holdings
- -----------------------------
Health 22%
Consumer Staples 22%
Technology 15%
Consumer Discretionary 11%
Manufacturing 8%
Media 7%
Financial 6%
Durables 4%
Service Industries 4%
Energy 1%
----
100%
====
- -----------------------------
Five Largest Equity Holdings
1. General Electric Co. Leading producer of electrical equipment
2. Proctor & Gamble Co. Diversified manufacturer of consumer products
3. Pfizer, Inc. Leading international pharmaceutical company
4. Coca-Cola Co., Inc. International soft drink company
5. Microsoft Corp. Computer operating systems software
- -----------------------------------------------------
FIXED INCOME HOLDINGS
- -----------------------------------------------------
By Asset Type
- -----------------------------------------------------
U.S. Government Agencies 34%
Corporate Bonds 32%
U.S. Gov't Agency Pass-Thrus 19%
GNMA 6%
Foreign Bonds - U.S. $ Denominated 5%
Asset-Backed Securities 4%
----
100%
====
- -----------------------------------------------------
By Quality
- ---------------------------------
U.S. Government & Agencies 54%
AAA* 12%
AA 5%
A 11%
BBB 18%
----
100%
====
- ---------------------------------
*Category includes cash equivalents
7
<PAGE>
GROWTH AND INCOME PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
While volatility increased in the second half of 1997, equity investors
witnessed generous, above-average returns for the year. The Growth and Income
Portfolio directly benefited from this favorable environment and from the
defensive nature of our relative dividend yield strategy as stocks gyrated in
the second half. For the 12 months ended December 31, 1997, the Portfolio's
Class A shares returned 30.47%, modestly trailing the 33.38% return of the S&P
500 Index, a significant achievement considering the Portfolio's defensive
characteristics. Among it peers, the Portfolio ranked 25th (in the top 26%) of
96 Variable Life Growth and Income funds as tracked by Lipper Analytical
Services.
Our strategy of investing
in companies with low
expectations provides a
degree of downside protection.
The first half of the year was essentially a continuation of 1996 --
investors enjoyed the bull market ride, but kept looking tentatively over their
shoulders for signs of inflation. These worries were replaced by concerns of a
global economic slowdown in the second half, as an economic collapse and ensuing
liquidity crunch threw the Asian markets into a tailspin. U.S. investors
overreacted to the news, resulting in market rotations in both directions on an
almost daily basis.
The majority of the Portfolio's largest holdings significantly
outperformed the S&P 500 for the year. Near the close of the period, three of
our top performers gave back some of their gains, most notably Philips
Electronics and Xerox. Although we had been taking profits in both names to
reduce our exposure, these holdings held back performance. We would stress,
however, that despite the recent weakness, both stocks still dramatically
outperformed the market for the 12-month period.
A lack of technology holdings (due to their characteristically low
dividend yields) cushioned the Portfolio from many of the profit warnings
stemming from the crisis in Asia. An increased weighting in the electric utility
sector proved timely as these companies, with largely domestically-generated
earnings, were less affected by the lower overseas growth forecasts.
While the near term may provide some challenges, we continue to believe
investment conditions remain healthy. In this environment, we think our strategy
of investing in companies with low expectations should provide a degree of
protection as well as the potential for opportunity.
Sincerely,
Your Portfolio Management Team
/s/ Robert T. Hoffman /s/ Kathleen T. Millard
Robert T. Hoffman Kathleen T. Millard
Lead Portfolio Manager
/s/ Benjamin W. Thorndike /s/ Lori J. Ensinger
Benjamin W. Thorndike Lori J. Ensinger
/s/ Deborah Chaplin
Deborah Chaplin
8
<PAGE>
GROWTH AND INCOME PORTFOLIO
PERFORMANCE UPDATE as of December 31, 1997
- --------------------
CLASS A
- --------------------
- -----------------------------------------
Growth and Income Portfolio
- -----------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- -----------------------------------------
1 Year $13,047 30.47% 30.47%
3 Year $20,998 109.98% 28.05%
Life of
Fund* $22,028 120.28% 24.02%
- -----------------------------------------
- -----------------------------------------
S&P 500 Index
- -----------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- -----------------------------------------
1 Year $13,338 33.38% 33.38%
3 Year $22,562 125.62% 31.12%
Life of
Fund* $23,458 134.58% 26.12%
- -----------------------------------------
* The Fund commenced operations on May 2, 1994. On May 1, 1997, existing shares
were designated as Class A shares.
------------------------------
GROWTH OF A $10,000 INVESTMENT
------------------------------
A chart in the form of a line graph appears here, illustrating the Growth of a
$10,000 Investment. The data points from the graph are as follows:
S&P 500 Index+ Growth and Income Portfolio
---------------- ---------------------------
5/94* 10,000 5/94* 10,000
6/94 9,915 6/94 10,100
12/94 10,397 12/94 10,491
6/95 12,498 6/95 12,113
12/95 14,304 12/95 13,820
6/96 15,747 6/96 15,011
12/96 17,588 12/96 16,834
6/97 21,214 6/97 20,016
12/97 23,458 12/97 22,028
- --------------------
CLASS B
- --------------------
- -----------------------------------------
Growth and Income Portfolio
- -----------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- -----------------------------------------
Life of
Fund* $12,289 22.89% --
- -----------------------------------------
- -----------------------------------------
S&P 500 Index
- -----------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- -----------------------------------------
Life of
Fund** $12,258 22.58% --
- -----------------------------------------
** The Fund commenced selling Class B shares on May 1, 1997.
------------------------------
GROWTH OF A $10,000 INVESTMENT
------------------------------
A chart in the form of a line graph appears here, illustrating the Growth of a
$10,000 Investment. The data points from the graph are as follows:
S&P 500 Index+ Growth and Income Portfolio
------------------ ---------------------------
5/1/97** 10,000 5/1/97** 10,000
5/97 10,609 5/97 10,593
6/97 11,085 6/97 11,165
7/97 11,967 7/97 11,903
8/97 11,296 8/97 11,466
9/97 11,916 9/97 12,180
10/97 11,518 10/97 11,796
11/97 12,051 11/97 12,139
12/97 12,258 12/97 12,289
+ The Standard & Poor's (S&P) 500 Index is an unmanaged capitalization-weighted
measure of 500 widely held common stocks listed on the New York Stock
Exchange, American Stock Exchange, and Over-The-Counter market. Index returns
assume reinvestment of dividends and, unlike Fund returns, do not reflect any
fees or expenses.
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results. Investment return and
principal value will fluctuate, so an investor's shares, when redeemed, may
be worth more or less than when purchased. Total returns in some periods were
higher due to maintenance of the Fund's expenses. See Financial Highlights
for the Growth and Income Portfolio.
9
<PAGE>
GROWTH AND INCOME PORTFOLIO
PORTFOLIO SUMMARY as of December 31, 1997
- ---------------------------------
DIVERSIFICATION
- ---------------------------------
- ---------------------------------
Equity Securities 97%
Cash Equivalents 3%
----
100%
====
- ---------------------------------
A graph in the form of a pie chart appears here, illustrating the exact data
points in the following table.
- ------------------------------
Sector breakdown of the
Portfolio's equity holdings
- ------------------------------
Financial 21%
Manufacturing 17%
Consumer Staples 12%
Communications 9%
Utilities 8%
Energy 8%
Durables 7%
Health 7%
Consumer Discretionary 5%
Other 6%
----
100%
====
- ------------------------------
The Portfolio's approach to selecting stocks with
above-average dividend yields provided downside
protection as volatility increased during
the second half of the year.
- --------------------------------------------------------------------------------
TEN LARGEST EQUITY HOLDINGS (22% of Portfolio)
- --------------------------------------------------------------------------------
1. Bell Atlantic Corp. Telecommunication services
2. Xerox Corp. Leading manufacturer of copiers and duplicators
3. Unilever NV Diversified conglomerate
4. Philip Morris Companies Inc. Tobacco, food products, and brewing
5. H.J. Heinz Co. Major manufacturer of processed foods
6. TRW Inc. Defense electronics, automotive parts and systems
7. Imperial Chemical Industries PLC Leading international chemical company
8. Ford Motor Co. Leading automobile manufacturer
9. GTE Corp. Nationwide telecommunications company
10. Chase Manhattan Corp. Commercial bank
10
<PAGE>
CAPITAL GROWTH PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
U.S. stocks were propelled higher by robust economic growth, solid
corporate earnings, and relatively benign inflation, despite increased
volatility in the second half of the year. In this environment the Capital
Growth Portfolio - Class A returned 35.76%, exceeding the 33.38% return of the
unmanaged S&P 500 for the 12-month period ended December 31, 1997. The Portfolio
also performed well relative to its peers, ranking 4th (in the top 3%) of 121
funds in the Variable Life Growth category according to Lipper Analytical
Services.
While those portfolio
holdings with perceived
Asian exposure suffered,
those deemed relatively
immune to global
goings-on surged ahead.
The dominant investment variable affecting equities can be summed up in
one word: Asia. What began as a small ripple in the world's financial markets in
early summer with devaluation of Thailand's currency roared into a truly global
financial event in October. The currency crisis was no longer an isolated
incident involving several smaller economies of Southeast Asia with little
implication for U. S. companies. It became a full-blown crisis in South Korea,
the world's 11th largest economy, and threatened to derail any potential
recovery in Japan.
Although we focus on seasoned companies with strong competitive positions,
many holdings were still affected by the Asian crisis. The stocks of those
companies and industries perceived to have significant Asian exposure suffered
the most. Many of the Portfolio's holdings that exhibited strong price
appreciation over the first nine months of the year declined sharply in the
fourth quarter, including Compaq and Applied Materials, which each declined in
excess of 20% in the fourth quarter alone.
The Portfolio's significant commitment to the energy sector in the form of
large multinational oil companies and oil field service providers, also crimped
performance, as oil prices weakened and investors worried about the
sustainability of strong global oil demand in light of a marked slowdown in
Asia.
Conversely, while those portfolio holdings with perceived Asian exposure
suffered, those deemed relatively immune to global goings-on surged ahead.
Walgreen, Fannie Mae, and Pfizer were significant positive contributors to
performance.
Our cautious outlook for U.S. profits in 1998 predated the unfolding Asian
crisis, so the crisis itself has not caused us to dramatically alter our
investment outlook. On the margin, however, our expectations for earnings growth
must necessarily trend somewhat lower. With current stock market valuations rich
and prospects for earnings slowing in 1998, we believe investors should expect
stocks to provide returns that are closer to their long-running average of about
10%.
Sincerely,
Your Portfolio Management Team
/s/ William F. Gadsden /s/ Bruce F. Beaty
William F. Gadsden Bruce F. Beaty
Lead Portfolio Manager
11
<PAGE>
CAPITAL GROWTH PORTFOLIO
PERFORMANCE UPDATE as of December 31, 1997
- --------------------
CLASS A
- --------------------
- -----------------------------------------
Capital Growth Portfolio
- -----------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- -----------------------------------------
1 Year $13,576 35.76% 35.76%
5 Year $22,909 129.09% 18.03%
10 Year $47,169 371.69% 16.78%
- -----------------------------------------
- -----------------------------------------
S&P 500 Index
- -----------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- -----------------------------------------
1 Year $13,338 33.38% 33.38%
5 Year $25,160 151.60% 20.25%
10 Year $52,566 425.66% 18.04%
- -----------------------------------------
* On May 12, 1997, existing shares were designated as Class A shares.
------------------------------
GROWTH OF A $10,000 INVESTMENT
------------------------------
A chart in the form of a line graph appears here, illustrating the Growth of a
$10,000 Investment. The data points from the graph are as follows:
S&P 500 Index+ Capital Growth Portfolio
------------------ ------------------------
'87 10,000 '87 10,000
'88 11,659 '88 12,206
'89 15,352 '89 14,983
'90 14,876 '90 13,863
'91 19,407 '91 19,347
'92 20,893 '92 20,589
'93 22,996 '93 24,889
'94 23,299 '94 22,482
'95 32,054 '95 28,923
'96 31,412 '96 34,745
'97* 52,566 '97* 47,169
Yearly periods ended December 31
- --------------------
CLASS B
- --------------------
- -----------------------------------------
Capital Growth Portfolio
- -----------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- -----------------------------------------
Life of
Fund** $11,800 18.00% --
- -----------------------------------------
- -----------------------------------------
S&P 500 Index
- -----------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- -----------------------------------------
Life of
Fund** $11,554 15.54% --
- -----------------------------------------
** The Fund commenced selling Class B shares on May 12, 1997. Index comparisons
began on May 31, 1997.
------------------------------
GROWTH OF A $10,000 INVESTMENT
------------------------------
A chart in the form of a line graph appears here, illustrating the Growth of a
$10,000 Investment. The data points from the graph are as follows:
S&P 500 Index+ Capital Growth Portfolio
--------------------- ------------------------
5/97** 10,000 5/97** 10,000
6/97 10,449 6/97 10,581
7/97 11,280 7/97 11,549
8/97 10,648 8/97 11,112
9/97 11,232 9/97 11,739
10/97 10,856 10/97 11,199
11/97 11,359 11/97 11,401
12/97 11,554 12/97 11,569
+ The Standard & Poor's (S&P) 500 Index is an unmanaged capitalization-weighted
measure of 500 widely held common stocks listed on the New York Stock
Exchange, American Stock Exchange, and Over-The-Counter market. Index returns
assume reinvestment of dividends and, unlike Fund returns, do not reflect any
fees or expenses.
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results. Investment return and
principal value will fluctuate, so an investor's shares, when redeemed, may
be worth more or less than when purchased. Total returns in some periods were
higher due to maintenance of the Fund's expenses. See Financial Highlights
for the Capital Growth Portfolio.
12
<PAGE>
CAPITAL GROWTH PORTFOLIO
PORTFOLIO SUMMARY as of December 31, 1997
- ---------------------------------
DIVERSIFICATION
- ---------------------------------
- ---------------------------------
Equity Securities 95%
Cash Equivalents 5%
----
100%
====
- ---------------------------------
A graph in the form of a pie chart appears here, illustrating the exact data
points in the following table.
- ------------------------------
Sector breakdown of the
Portfolio's equity holdings
- ------------------------------
Financial 21%
Energy 13%
Manufacturing 12%
Health 11%
Technology 10%
Consumer Discretionary 9%
Consumer Staples 7%
Service Industries 5%
Durables 5%
Other 7%
----
100%
====
- ------------------------------
The Portfolio's continuing emphasis on
selecting individual growth stocks with
good quality characteristics contributed
to its solid outperformance during the 12 months.
- --------------------------------------------------------------------------------
TEN LARGEST EQUITY HOLDINGS (24% of Portfolio)
- --------------------------------------------------------------------------------
1. American Express Credit Corp. Travel and investment services, insurance, and
banking
2. EXEL, Ltd. Provider of liability insurance
3. American International Group, Inc. Major international insurance holding
company
4. Home Depot, Inc. Building supply/home improvement stores
5. Procter & Gamble Co. Diversified manufacturer of consumer products
6. Intel Corp. Semiconductor memory circuits
7. Parker-Hannifin Group Fluid control components
8. Compaq Computer Corp. Leading manufacturer of personal computers
9. Royal Dutch Petroleum Co. International energy company
10. BankAmerica Corp. Commercial banking in California
13
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
U.S. small-cap stocks provided some of the best performance in the global
small company arena, as the negative sentiment surrounding the currency and
financial market crisis in Southeast Asia sapped the returns of many foreign
markets toward the end of the year. For the 12-month period ended December 31,
1997, the Global Discovery Portfolio -- Class A provided a total return of
12.38%, surpassing the 8.39% return of the unmanaged Salomon Brothers World
Extended Market Index.
While the Portfolio outperformed
its small-cap benchmark, large-cap
stocks dominated global stock
market performance.
The Portfolio's favorable performance was due primarily to an
insignificant exposure in Southeast Asia and careful stock selection. Although
the Portfolio invests principally in small-cap stocks, it is one of 38 funds
ranked in the Variable Life Global category, according to Lipper Analytical
Services. With large-cap stocks outperforming dramatically in 1997, the
Portfolio ranked 20th of 38 funds in this category as tracked by Lipper
Analytical Services for the 12 month period.
The collapse of the Southeast Asian markets affected almost every global
investor in some way in 1997. Stocks of large U.S. corporations, which derive
almost one-third of their profits from foreign sales, were not insulated from
the Asian contagion.
In the United States, a strong dollar, healthy economy, and relatively low
interest rates provided a favorable investment environment for most of the year.
In the Portfolio, we continued to increase our weighting of U.S. and Canadian
small-caps, which stood at the highest level since the Portfolio's inception
(48% of assets as of the end of the period).
Among our European holdings, we held major positions in the United Kingdom
and Ireland (the fastest growing country over the past 15 years). Both countries
have very competitive wage rates, and the United Kingdom is a particularly
fertile field for entrepreneurial service companies.
As for Japan, the well publicized banking and real estate problems have
been overhanging the market for years. However, we have begun to see some signs
of change that could lead to a more open market system. While our weighting in
Japan is relatively small, our holdings in specialty finance companies Nichei
and Shohkoh Fund were strong performers.
Overall, we focused the Portfolio on a limited number of holdings with
attractive fundamentals. This strategy yielded excellent returns from holdings
such as Marschollek Lautenschlaeger und Partner (Germany), Billing Concepts
(U.S.), Bank of Ireland (Ireland), Network Appliance (U.S.), and Provident
Financial (U.K.). Hedging selected currencies in the first half of the year
provided additional positive performance.
Clearly, policy makers' response to the Asian crisis will dictate the
world global stock market outlook for the immediate future. During this period
of re-evaluation we will attempt to focus the Portfolio on holdings that have
limited exposure to the events in Asia and on those companies that dominate
niche markets.
Sincerely,
Your Portfolio Management Team
/s/ Gerald J. Moran /s/ Sewall F. Hodges
Gerald J. Moran Sewall F. Hodges
Lead Portfolio Manager
14
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
PERFORMANCE UPDATE as of December 31, 1997
- --------------------
CLASS A
- --------------------
- -----------------------------------------
Global Discovery Portfolio
- -----------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- -----------------------------------------
1 Year $11,238 12.38% 12.38%
Life of
Fund* $11,857 18.57% 10.75%
- -----------------------------------------
- -----------------------------------------
Salomon Brothers World Equity EMI Index
- -----------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- -----------------------------------------
1 Year $10,839 8.39% 8.39%
Life of
Fund* $11,052 10.52% 6.17%
- -----------------------------------------
* The Fund commenced operations on May 1, 1996. On May 2, 1997, existing shares
were designated as Class A shares.
------------------------------
GROWTH OF A $10,000 INVESTMENT
------------------------------
A chart in the form of a line graph appears here, illustrating the Growth of a
$10,000 Investment. The data points from the graph are as follows:
Salomon Brothers World Equity EMI Index+ Global Discovery Portfolio
---------------------------------------- --------------------------
5/96* 10,000 5/96* 10,000
6/96 9,946 6/96 9,967
9/96 9,945 9/96 10,180
12/96 10,197 12/96 10,343
3/97 9,895 3/97 10,015
6/97 11,010 6/97 11,377
9/97 11,701 9/97 12,002
12/97 11,052 12/97 11,624
- --------------------
CLASS B
- --------------------
- -----------------------------------------
Global Discovery Portfolio
- -----------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- -----------------------------------------
Life of
Fund** $11,403 14.03% --
- -----------------------------------------
- -----------------------------------------
Salomon Brothers World Equity EMI Index
- -----------------------------------------
- -----------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- -----------------------------------------
Life of
Fund** $11,196 11.96% --
- -----------------------------------------
** The Fund commenced selling Class B shares on May 2, 1997.
------------------------------
GROWTH OF A $10,000 INVESTMENT
------------------------------
A chart in the form of a line graph appears here, illustrating the Growth of a
$10,000 Investment. The data points from the graph are as follows:
Salomon Brothers World Equity EMI Index+ Global Discovery Portfolio
---------------------------------------- --------------------------
5/2/97* 10,000 5/2/97* 10,000
5/97 10,797 5/97 10,694
6/97 11,153 6/97 11,177
7/97 11,469 7/97 11,387
8/97 11,342 8/97 11,258
9/97 11,853 9/97 11,790
10/97 11,368 10/97 11,258
11/97 11,177 11/97 11,113
12/97 11,196 12/97 11,403
+ The Salomon Brothers World Equity Extended Market Index is an unmanaged small
capitalization stock universe of 22 countries. Index returns assume
reinvestment of dividends and, unlike Fund Returns, do not reflect any fees
or expenses.
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results. Investment return and
principal value will fluctuate, so an investor's shares, when redeemed, may
be worth more or less than when purchased. Total returns were higher due to
maintenance of the Fund's expenses. See Financial Highlights for the Global
Discovery Portfolio.
15
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
PORTFOLIO SUMMARY as of December 31, 1997
- -------------------------
DIVERSIFICATION
- -------------------------
A chart in the form of a pie chart appears here, illustrating the exact data
points in the following table.
By Region
(Excluding 10% Cash Equivalents)
- --------------------------------
U.S. & Canada 48%
Europe 45%
Japan 5%
Latin America 2%
----
100%
====
- --------------------------------
The Portfolio's high U.S. weighting limited
its exposure to the volatility of the
Southeast Asian markets.
A chart in the form of a pie chart appears here, illustrating the exact data
points in the following table.
By Sector
(Equity Holdings)
- -------------------------------
Service Industries 17%
Financial 16%
Technology 16%
Health 10%
Consumer Staples 8%
Consumer Discretionary 7%
Communications 6%
Energy 5%
Media 5%
Other 2%
----
100%
====
- --------------------------------
- --------------------------------------------------
TEN LARGEST EQUITY HOLDINGS (29% of Portfolio)
- --------------------------------------------------
1. Network Appliance, Inc. Designer and manufacturer of network data storage
devices in the United States
2. Bank of Ireland PLC Bank in Ireland
3. Sterling Commerce, Inc. Producer of electronic data interchange products and
services in the United States
4. Billing Concepts Billing and information management services in the United
States
5. Serco Group PLC Facilities management company in the United Kingdom
6. Millicom International Cellular S.A. Developer and operator of cellular
telephone networks in Luxembourg
7. Shohkoh Fund & Co., Ltd. Finance company for small and medium-sized firms in
Japan
8. Sola International, Inc. Manufacturer of plastic eyeglass lenses in the
United States
9. Richter Gedeon Rt Pharmaceutical company in Hungary
10. Provident Financial PLC Personal finance group in the United Kingdom
16
<PAGE>
INTERNATIONAL PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
Dear Shareholders,
While international equity markets experienced increased volatility during
the latter half of 1997, the Portfolio's performance over the year benefited
primarily from generally favorable conditions in Europe. For the 12 months ended
December 31, 1997, the International Portfolio - Class A returned 9.07%,
exceeding the 2.26% performance of the unmanaged MSCI Europe, Australia, Far
East and Canada Index for the same period. Among its peers, the Portfolio ranked
in the top third (27th) of 81 funds in the Variable Life International category
as tracked by Lipper Analytical Services.
In the second half of 1997,
weightings in global
companies vulnerable
to the difficulties in the
emerging markets were
reduced.
The Portfolio was heavily weighted in Europe, where the investment climate
has been benefiting from ongoing economic deregulation, industry consolidation,
and corporate restructuring. During the 12 months, the best performing European
markets were the smaller ones, such as Italy, Spain, and Finland. We have been
focusing on companies which are restructuring and increasingly oriented toward
building value for shareholders, such as Elf Aquitaine in France or Bayerische
Vereinsbank in Germany. Because governments can no longer afford to coddle
inefficient businesses, many European companies are making the necessary changes
to compete globally. It is on these companies that we have been focusing our
investment efforts, as we believe these companies are most likely to succeed in
the wake of European Monetary Union ("EMU"), however it evolves.
The Portfolio remained underweighted in Japan, where the long-awaited
economic rebound is still in question. Further complicating matters, Japan has
deep economic ties to Southeast Asia. Japan has, however, begun to show signs of
reforming its own economy, and we have been selectively increasing exposure to
holdings that we believe will benefit from corporate restructurings, which will
be required to meet the challenges of a more deregulated environment.
We are maintaining a cautious stance toward most emerging markets. Nearly
all were impacted severely during the second half of 1997, as the spate of
Southeast Asian currency devaluations had a ripple effect on worldwide investor
sentiment. Structural difficulties in Asia remain, and there is a high
likelihood that a period of difficult economic retrenchment is in store for the
region before growth reaccelerates. Valuations in Latin America are not
compelling on a risk-adjusted basis, leading us to maintain a modest exposure to
that less-established investment venue.
Sincerely,
Your Portfolio Management Team
/s/ Irene T. Cheng /s/ Carol L. Franklin
Irene T. Cheng Carol L. Franklin
Lead Portfolio Manager
/s/ Nicholas Bratt /s/ Joan R. Gregory
Nicholas Bratt Joan R. Gregory
/s/ Marc Joseph /s/ Sheridan Reilly
Marc Joseph Sheridan Reilly
17
<PAGE>
INTERNATIONAL PORTFOLIO
PERFORMANCE UPDATE as of December 31, 1997
- ------------------
CLASS A
- ------------------
- ------------------------------------------
International Portfolio
- ------------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- ------------------------------------------
1 Year $10,907 9.07% 9.07%
5 Year $19,008 90.08% 13.71%
10 Year $30,494 204.94% 11.79%
- ------------------------------------------
- ------------------------------------------
MSCI EAFE & Canada Index
- ------------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- ------------------------------------------
1 Year $10,226 2.26% 2.26%
5 Year $17,249 72.49% 11.51%
10 Year $18,542 85.42% 6.36%
- ------------------------------------------
* On May 8, 1997, existing shares were designated as Class A shares.
-----------------------------------------
GROWTH OF A $10,000 INVESTMENT
-----------------------------------------
A chart in the form of a line graph appears here, illustrating the Growth of a
$10,000 Investment. The data points from the graph are as follows:
MSCI EAFE & Canada Index+ International Portfolio
------------------------- -----------------------
'87 10,000 '87 10,000
'88 12,785 '88 11,673
'89 14,191 '89 16,084
'90 10,921 '90 14,853
'91 12,240 '91 16,553
'92 10,749 '92 16,043
'93 14,182 '93 22,110
'94 15,224 '94 21,922
'95 16,968 '95 24,359
'96 18,132 '96 27,960
'97 18,542 '97 30,494
Yearly periods ended December 31
- ------------------
CLASS B
- ------------------
- ------------------------------------------
International Portfolio
- ------------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- ------------------------------------------
Life of
Fund** $10,233 2.33% --
- ------------------------------------------
- ------------------------------------------
MSCI EAFE & Canada Index
- ------------------------------------------
Total Return
Period Growth ----------------
Ended of Cumu- Average
12/31/97 $10,000 lative Annual
- ------------------------------------------
Life of
Fund** $ 9,686 -3.14% --
- ------------------------------------------
** The Fund commenced selling Class B shares on May 8, 1997. Index
comparisons began on May 31, 1997.
GROWTH OF A $10,000 INVESTMENT
A chart in the form of a line graph appears here, illustrating the Growth of a
$10,000 Investment. The data points from the graph are as follows:
MSCI EAFE & Canada Index+ International Portfolio
------------------------- -----------------------
5/97** 10,000 5/97** 10,000
6/97 10,534 6/97 10,513
7/97 10,728 7/97 10,919
8/97 9,937 8/97 9,979
9/97 10,495 9/97 10,649
10/97 9,703 10/97 9,914
11/97 9,595 11/97 9,950
12/97 9,686 12/97 10,036
+ The Morgan Stanley Capital International (MSCI) Europe, Australia, the Far
East (EAFE) & Canada Index is an unmanaged capitalization-weighted measure
of stock markets in Europe, Australia, the Far East and Canada. Index
returns assume reinvestment of dividends net of withholding tax and, unlike
Fund returns, do not reflect any fees or expenses.
All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results. Investment return
and principal value will fluctuate, so an investor's shares, when redeemed,
may be worth more or less than when purchased. Total returns in some periods
were higher due to maintenance of the Fund's expenses. See Financial
Highlights for the International Portfolio.
18
<PAGE>
INTERNATIONAL PORTFOLIO
PORTFOLIO SUMMARY as of December 31, 1997
- -------------------------
DIVERSIFICATION
- -------------------------
A graph in the form of a pie chart appears here, illustrating the exact data
points in the following table.
By Region
(Excluding 3% Cash Equivalents)
- -------------------------------
Europe 74%
Japan 16%
Pacific Basin 6%
Latin America 2%
U.S. & Canada 2%
----
100%
====
- -------------------------------
The Portfolio's significant emphasis in Europe and
underweighting in Japan and the emerging markets
limited its exposure to weak performance in Asia.
By Sector
(Equity Holdings)
- -------------------------------
Financial 26%
Manufacturing 20%
Health 8%
Durables 7%
Communications 5%
Energy 5%
Utilities 5%
Technology 4%
Service Industries 4%
Other 16%
----
100%
====
- -------------------------------
- ------------------------------------------------
TEN LARGEST EQUITY HOLDINGS (18% of Portfolio)
- ------------------------------------------------
1. Novartis AG Pharmaceutical company in Switzerland
2. Bayerische Vereinsbank AG Commercial bank in Germany
3. Skandia Foersaekrings AB Financial conglomerate in Sweden
4. Commerzbank AG Worldwide multi-service bank in Germany
5. Telecom Italia Mobile SPA Cellular telecommunication services in Italy
6. Portugal Telecom SA Telecommunication services
7. SmithKline Beecham PLC Manufacturer of drugs and healthcare products in the
United Kingdom
8. Credit Suisse Group Provider of bank services, management services and life
insurance in Switzerland
9. Muenchener Rueckversicherungs-Gesellschaft AG Insurance company in Germany
10. Societe Nationale Elf Aquitaine Pertroleum company in France
19
<PAGE>
MONEY MARKET PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1997
<TABLE>
<CAPTION>
% of Principal
Portfolio Amount ($) Value ($)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------
7.3% REPURCHASE AGREEMENT
---------------------------------------------------------------------------------
7,412,000 Repurchase Agreement with Donaldson, Lufkin &
Jenrette dated 12/31/97 at 6.5% to be repurchased at
$7,414,677 on 1/2/98, collateralized by a $7,163,000
U.S. Treasury Note, 6.5%, 8/31/01 (Cost $7,412,000).. 7,412,000
-----------
---------------------------------------------------------------------------------
75.0% COMMERCIAL PAPER
---------------------------------------------------------------------------------
Communications 9.8%
Telephone/
Communications 5,000,000 Ameritech Capital Funding Corp., 5.57%, 1/27/98* ..... 4,979,886
5,000,000 Bell South Telecommunications Corp., 5.63%, 1/27/98* . 4,979,669
-----------
9,959,555
-----------
Financial 65.2%
Banks 3.3% 3,400,000 Chase Manhattan Bank, 5.51%, 2/24/98* ................ 3,371,899
-----------
Business Finance 6.9%
4,000,000 New Center Asset Trust, 5.52%, 1/30/98* .............. 3,982,213
3,000,000 Prudential Funding Corp., 5.53%, 1/15/98* ............ 2,993,548
-----------
6,975,761
-----------
Consumer Finance 26.9%
5,000,000 A.I. Credit Corp., 5.98%, 1/6/98* .................... 4,995,847
4,500,000 American Express Credit Corp., 5.85%, 1/16/98* ....... 4,489,031
4,000,000 Ford Motor Credit Co., 5.70%, 1/6/98* ................ 3,996,922
4,000,000 Ford Motor Credit Co., 5.65%, 3/10/98* ............... 3,958,596
5,000,000 General Electric Capital Corp. 5.68%, 3/5/98* ........ 4,950,300
5,000,000 Household Finance Corp., 5.63%, 2/24/98* ............. 4,957,778
-----------
27,348,474
-----------
Other Financial
Companies 28.1%
4,000,000 Associates Corp. of North America, 5.57%, 1/5/98* .... 3,997,524
4,000,000 Ciesco L.P. 5.57%, 1/27/98* .......................... 3,983,909
4,000,000 CSW Credit Corp., 5.90%, 1/23/98* .................... 3,985,578
500,000 CSW Credit Corp., 5.70%, 2/24/98* .................... 495,725
4,000,000 Dresdner US Finance, 5.54%, 2/18/98* ................. 3,970,453
4,000,000 JP Morgan, 5.80%, 1/8/98* ............................ 3,995,489
3,000,000 John Deere Capital Corp., 5.52%, 2/11/98* ............ 2,981,140
5,000,000 Matterhorn Capital Corp., 5.73%, 1/15/98* ............ 4,988,858
-----------
28,398,676
-----------
Total Commercial Paper (Cost $76,054,365) ............ 76,054,365
-----------
---------------------------------------------------------------------------------
17.7% SHORT-TERM NOTES
---------------------------------------------------------------------------------
Financial
Banks 13.8% 3,000,000 Bank One, Columbus, N.A., Floating Rate Note,
5.51%, 6/10/98** .................................... 2,999,363
4,000,000 Bank of America NT&SA, 5.87%, 1/05/98 ................ 4,000,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Value ($)
Portfolio Amount ($) (Note A)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------
4,000,000 Canadian Imperial Bank, 5.685%, 3/2/98 ............... 3,999,001
3,000,000 Huntington National Bank, 5.8%, 9/22/98 .............. 2,998,363
-----------
13,996,727
-----------
Consumer Finance 3.9% 4,000,000 Abbey National North America, 5.65%, 4/15/98 ......... 3,999,448
-----------
Total Short Term Notes (Cost $17,996,175) ............ 17,996,175
-----------
- ------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $101,462,540) (a) ...... 101,462,540
===========
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Cost for federal income tax purposes is $101,462,540.
* Annualized yield at time of purchase; not a coupon rate. (Unaudited)
** Floating rate notes are securities whose interest rates vary with a
designated market index or market rate, such as the coupon-equivalent of
the U.S. Treasury Bill rate. These securities are shown at their rate as of
December 31, 1997.
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
MONEY MARKET PORTFOLIO
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments securities (cost $101,462,540) ........................ $101,462,540
Cash .............................................................. 175
Receivables:
Interest ....................................................... 440,287
Portfolio shares sold .......................................... 1,963,554
Other assets ...................................................... 35,159
------------
Total assets ................................................ 103,901,715
Liabilities
Payable for Portfolio shares redeemed ............................. $ 1,245,841
Accrued management fee ............................................ 32,495
Other payables and accrued expenses ............................... 47,002
------------
Total liabilities .............................................. 1,325,338
------------
Net assets, at value .............................................. $102,576,377
============
Net Assets
Net assets consist of:
Accumulated net realized loss .................................. (4,318)
Paid-in capital ................................................ 102,580,695
------------
Net assets, at value .............................................. $102,576,377
============
Net asset value, offering and redemption price per share
($102,576,377 / 102,576,377 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized).. $1.00
=====
</TABLE>
The accompanying notes are an integral part of the financial statements.
22
<PAGE>
MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Investment income
Interest ....................................................... $ 5,830,510
Expenses:
Management fee .............................................. $ 384,554
Custodian and accounting fees ............................... 47,313
Trustees' fees and expenses ................................. 17,024
Reports to shareholders ..................................... 2,699
Legal ....................................................... 7,320
Auditing .................................................... 6,488
Other ....................................................... 13,828 479,226
---------- -----------
Net investment income .......................................... 5,351,284
-----------
Net realized and unrealized gain (loss) on investment transactions
Net realized loss from investments ............................. (1,835)
-----------
Net increase in net assets resulting from operations .............. $ 5,349,449
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
23
<PAGE>
MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
Increase (Decrease) in Net Assets 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ............................................. $ 5,351,284 $ 4,385,955
Net realized gain (loss) from investment transactions ............. (1,835) (917)
------------- -------------
Net increase in net assets resulting from operations .............. 5,349,449 4,385,038
------------- -------------
Distributions to shareholders from net investment income .......... (5,351,284) (4,385,955)
------------- -------------
Portfolio share transactions at net asset value of $1.00 per share:
Proceeds from shares sold ...................................... 258,430,588 201,403,309
Net asset value of shares issued to shareholders in
reinvestment of distributions ............................... 5,348,533 4,385,955
Cost of shares redeemed ........................................ (258,986,535) (187,750,612)
------------- -------------
Net increase (decrease) in net assets from Portfolio share
transactions ................................................ 4,792,586 18,038,652
------------- -------------
Increase (decrease) in net assets ................................. 4,790,751 18,037,735
Net assets at beginning of period ................................. 97,785,626 79,747,891
------------- -------------
Net assets at end of period ....................................... $ 102,576,377 $ 97,785,626
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
24
<PAGE>
MONEY MARKET PORTFOLIO
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ...... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income from investment
operations:
Net investment income ...... .051 .050 .055 .037 .025 .033 .057 .076 .088 .068
Less distributions from
net investment income .... (.051) (.050) (.055) (.037) (.025) (.033) (.057) (.076) (.088) (.068)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period ................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Total Return (%) ........... 5.25 5.09 5.65 3.72 2.54 3.33 5.81 7.83 8.84 7.08
Ratios and
Supplemental Data
Net assets, end of period
($ millions) ............. 103 98 80 90 49 34 28 32 15 11
Ratio of operating expenses,
net to average daily net
assets (%) ............... .46 .46 .50 .56 .66 .64 .67 .69 .72 .75
Ratio of operating expenses
before expense reductions,
to average daily net
assets (%) ............... .46 .46 .50 .56 .66 .64 .67 .69 .81 1.04
Ratio of net investment
income to average daily
net assets (%) ........... 5.15 4.98 5.51 3.80 2.55 3.26 5.67 7.57 8.53 6.99
</TABLE>
25
<PAGE>
BOND PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1997
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
------------------------------------------------------------------------------------
9.8% REPURCHASE AGREEMENT
------------------------------------------------------------------------------------
7,892,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette
dated 12/31/97 at 6.5% to be repurchased at $7,894,850
on 1/2/98 collateralized by a $7,413,000 U.S. Treasury
Note, 6.88%, 5/15/06 (Cost $7,892,000) ................. 7,892,000
-----------
------------------------------------------------------------------------------------
8.7% SHORT TERM INVESTMENTS
------------------------------------------------------------------------------------
7,000,000 Federal Home Loan Mortgage Corp. Discount
Note, 1/2/98 (Cost $6,999,076) ......................... 6,999,076
-----------
------------------------------------------------------------------------------------
16.0% U. S. GOVERNMENT & AGENCIES
------------------------------------------------------------------------------------
2,000,000 U.S. Treasury Bond, 6.25%, 8/15/23 ....................... 2,060,000
1,000,000 U.S. Treasury Note, 6.125%, 7/31/00 ...................... 1,010,310
3,000,000 U.S. Treasury Note, 5.625%, 11/30/00 ..................... 2,994,360
5,000,000 U.S. Treasury Note, 6.25%, 1/31/02 ....................... 5,089,050
500,000 U.S. Treasury Note, 6.25%, 2/15/07 ....................... 515,935
4,000,000 U.S. Treasury STRIP, Principal Only, 11/15/98 ............ 1,140,400
-----------
Total U.S. Government & Agencies
(Cost $12,634,950) ..................................... 12,810,055
-----------
------------------------------------------------------------------------------------
4.7% GOV'T NATIONAL MORTGAGE ASSOCIATION
------------------------------------------------------------------------------------
1,115,540 Government National Mortgage Association Pass-thru
10%, 8/15/20 (a) ....................................... 1,242,678
2,461,871 Government National Mortgage Association Pass-thru
7.5%, 7/15/26 (a) ...................................... 2,522,630
-----------
Total Gov't National Mortgage Association
(Cost $3,714,016) ...................................... 3,765,308
-----------
------------------------------------------------------------------------------------
13.0% U. S. GOVERNMENT AGENCY PASS-THRUS
------------------------------------------------------------------------------------
527,129 Federal Home Loan Mortgage Corp., 8%, 4/1/08 (a) ......... 540,212
1,778,235 Federal Home Loan Mortgage Corp., 7.78%, 9/1/24 (a) ...... 1,858,807
1,367,417 Federal National Mortgage Association, 8%, 12/1/09 (a) ... 1,407,140
6,550,865 Federal National Mortgage Association, 7%, with various
maturities to 7/1/26 (a) ............................... 6,612,247
-----------
Total U.S. Government Agency Pass-thrus
(Cost $10,141,231) ..................................... 10,418,406
-----------
------------------------------------------------------------------------------------
7.3% FOREIGN BONDS - U. S. $ DENOMINATED
------------------------------------------------------------------------------------
1,625,000 Fage Dairy Industry SA, 9%, 2/1/07 ....................... 1,580,313
1,000,000 Hutchison Whampoa, Ltd., 7.5%, 8/1/27 .................... 957,030
200,000 ITT Publimedia BV, 9.375%, 8/15/07 ....................... 210,000
750,000 Rogers Cantel Inc., 8.8%, 10/1/07 ........................ 746,250
500,000 Petroleos Mexicanos S.A., 8.85%, 8/15/07 ................. 493,750
1,000,000 Korea Development Bank, 9.6%, 12/1/00 .................... 893,430
1,000,000 Nippon Telegraph & Telephone Corp., 9.5%, 7/27/98 ........ 1,019,930
-----------
Total Foreign Bonds - U.S.$ Denominated
(Cost $6,152,737) ...................................... 5,900,703
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
26
<PAGE>
BOND PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C>
------------------------------------------------------------------------------------
2.9% ASSET BACKED
------------------------------------------------------------------------------------
Automobile Receivables 1.3% 1,000,000 Premier Auto Trust Asset Backed Certificate, Series
1996-3 A4, 6.75%, 11/6/00 .............................. 1,010,620
-----------
Home Equity Loans 0.8% 443,497 Contimortgage Home Equity Loan Trust, Series 1996-1 A2,
5.58%, 1/15/11 ......................................... 442,109
200,267 United Companies Financial Corp., Home Equity Loan
Series 1993-B1, 6.075%, 7/25/14 ........................ 197,889
-----------
639,998
-----------
Manufactured Housing
Receivables 0.8% 650,000 Green Tree Financial Corp. Series 1997-1 B2, 7.76%,
3/15/28 ................................................ 657,008
-----------
Total Asset Backed (Cost $2,284,082) ..................... 2,307,626
-----------
------------------------------------------------------------------------------------
37.6% CORPORATE BONDS
------------------------------------------------------------------------------------
Consumer Staples 2.0% 1,000,000 J. Seagram & Sons Inc., 9%, 8/15/21 ...................... 1,219,100
400,000 Polymer Group, Inc., 9%, 7/1/07 .......................... 400,000
-----------
1,619,100
-----------
Financial 17.5% 2,000,000 Associates Corp. of North America, 6.625%, 5/15/01 ....... 2,024,436
1,000,000 BankAmerica Corp., 7.125%, 5/1/06 ........................ 1,039,970
1,000,000 First Industrial LP, 7.6%, 5/15/07 ....................... 1,044,500
1,750,000 First Union Institutional Capital II, 7.85%, 1/1/27 ...... 1,810,113
1,500,000 Highwoods/Forsyth L.P., 7%, 12/1/06 ...................... 1,510,350
750,000 People's Heritage Bank, 9.06%, 2/1/27 .................... 827,813
500,000 Security Capital Industrial Trust, 7.81%, 2/1/15 ......... 522,700
750,000 Spieker Properties, Inc., 7.875%, 12/1/16 ................ 806,033
200,000 Spieker Properties, Inc., 7.5%, 10/1/27 .................. 202,450
1,000,000 Susa Partnership L.P., 7.125%, 11/1/03 ................... 1,018,060
1,000,000 Susa Partnership L.P., 8.2%, 06/01/17 .................... 1,089,210
500,000 Taubman Realty Group LP Medium Term Note, 8%,
7/30/01 ................................................ 522,550
1,500,000 US West Capital Funding Inc., 7.9%, 2/1/27 ............... 1,641,510
-----------
14,059,695
-----------
Media 4.5% 250,000 Lamar Advertising Co., 8.625%, 9/15/07 ................... 255,938
1,000,000 Outdoor Systems, Inc., 8.875%, 6/15/07 ................... 1,045,000
1,000,000 Tele-Communications, Inc., 8.65%, 9/15/04 ................ 1,095,550
1,000,000 Time Warner Inc., 9.125%, 1/15/13 ........................ 1,190,770
-----------
3,587,258
-----------
Service Industries 1.3% 500,000 SC International Services, Inc., 9.25%, 9/1/07 ........... 515,000
500,000 ServiceMaster L.P., 7.45%, 8/15/27 ....................... 519,565
-----------
1,034,565
-----------
Durables 1.5% 1,000,000 Lockheed Corp., 9%, 1/15/22 .............................. 1,241,070
-----------
Manufacturing 1.0% 500,000 Argo-Tech Corp., 8.625%, 10/1/07 ......................... 500,000
300,000 GFSI Inc., 9.625%, 3/1/07 ................................ 309,000
-----------
809,000
-----------
Technology 3.4% 500,000 Amphenol Corp., 9.875%, 5/15/07 .......................... 525,000
1,000,000 International Business Machines Corp., 7%, 10/30/45 ...... 1,024,310
</TABLE>
The accompanying notes are an integral part of the financial statements.
27
<PAGE>
BOND PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C>
1,000,000 Loral Corp., 8.375%, 6/15/24 ............................. 1,174,560
-----------
2,723,870
-----------
Energy 2.6% 750,000 Barrett Resources Corp., 7.55%, 2/1/07 ................... 775,973
1,000,000 Chesapeake Energy Corp., 8.5%, 3/15/12 ................... 997,500
300,000 Dawson Production Services, Inc., 9.375%, 2/1/07 ......... 316,125
-----------
2,089,598
-----------
Construction 0.6% 500,000 Nortek, Inc., 9.125%, 9/1/07 ............................. 507,500
-----------
Transportation 2.5% 700,000 Allied Holdings Inc., 8.625%, 10/1/07 .................... 710,500
675,000 Atlantic Express, Inc., 10.75%, 2/1/04 ................... 717,188
500,000 Newport News Shipbuilding Co., 8.625%, 12/1/06 ........... 526,250
-----------
1,953,938
-----------
Utilities 0.7% 500,000 Houston Light & Power Capital Corp., 8.257%, 2/1/37 ...... 525,860
-----------
Total Corporate Bonds (Cost $28,176,416) ................. 30,151,454
- --------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0%
(Cost $77,994,508) (b) ................................. 80,244,628
===========
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Effective maturities will be shorter due to prepayments.
(b) At December 31, 1997, the net unrealized appreciation
on investments based on cost for federal income tax
purposes of $77,994,508 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of market value
over tax cost ............................................. $ 2,568,310
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over market value ....................................... 318,190
------------
Net unrealized appreciation ............................... $ 2,250,120
============
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments and U.S. Government and Government Agency securities), for the
year ended December 31, 1997, aggregated $23,601,711 and $16,205,618,
respectively. Purchases and sales of U.S. Government and Government Agency
securities for the year ended December 31, 1997, aggregated $13,261,511 and
$15,908,907, respectively.
- --------------------------------------------------------------------------------
The aggregate face value of futures contracts opened and closed during the
year ended December 31, 1997 was $231,817,897.
The accompanying notes are an integral part of the financial statements.
28
<PAGE>
BOND PORTFOLIO
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments, at market (cost $77,994,508) .......................... $ 80,244,628
Cash ............................................................... 1,354
Receivables:
Investments sold ................................................ 46,086
Interest ........................................................ 1,144,288
Portfolio shares sold ........................................... 10,902
Other assets ....................................................... 1,118
------------
Total assets ................................................. 81,448,376
Liabilities
Payables:
Accrued management fee .......................................... $ 31,170
Other payables and accrued expenses ............................. 30,174
----------
Total liabilities ............................................ 61,344
------------
Net assets, at market value ........................................ $ 81,387,032
============
Net Assets
Net assets consist of:
Undistributed net investment income ............................. 1,252,060
Net unrealized appreciation (depreciation) on investments ....... 2,250,120
Accumulated net realized gain (loss) ............................ 145,455
Paid-in capital ................................................. 77,739,397
------------
Net assets, at market value ........................................ $ 81,387,032
============
Net asset value, offering and redemption price per share
($81,387,032 / 11,852,430 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized)... $6.87
=====
</TABLE>
The accompanying notes are an integral part of the financial statements.
29
<PAGE>
BOND PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Investment income
Interest ........................................................ $ 4,859,346
Expenses:
Management fee ............................................... $ 321,323
Custodian fees ............................................... 17,460
Accounting fees .............................................. 38,269
Reports to shareholders ...................................... 2,066
Trustees' fees and expenses ................................. 17,168
Auditing ..................................................... 4,300
Legal ........................................................ 3,181
Other ........................................................ 13,999 417,766
--------- -----------
Net investment income ........................................... 4,441,580
-----------
Net realized and unrealized gain (loss) on investment transactions
Net realized gain (loss) from:
Investments .................................................. 215,300
Futures ...................................................... (21,111) 194,189
---------
Net unrealized appreciation (depreciation) during the period on:
Investments .................................................. 1,334,379
-----------
Net gain (loss) on investment transactions ...................... 1,528,568
-----------
Net increase (decrease) in net assets resulting from operations .... $ 5,970,148
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
30
<PAGE>
BOND PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
Increase (Decrease) in Net Assets 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income .......................................... $ 4,441,580 $ 3,806,734
Net realized gain (loss) from investment transactions .......... 194,189 598,986
Net unrealized appreciation (depreciation) on investment
transactions during the period .............................. 1,334,379 (2,514,348)
------------ ------------
Net increase (decrease) in net assets resulting from operations ... 5,970,148 1,891,372
------------ ------------
Distributions to shareholders from:
Net investment income .......................................... (4,208,036) (5,405,378)
------------ ------------
Net realized gains from investment transactions ................ (189,814) --
------------ ------------
Portfolio share transactions:
Proceeds from shares sold ...................................... 27,517,062 27,555,910
Net asset value of shares issued to shareholders in
reinvestment of distributions ............................... 4,397,850 5,405,378
Cost of shares redeemed ........................................ (17,869,599) (36,192,318)
------------ ------------
Net increase (decrease) in net assets from Portfolio share
transactions ................................................... 14,045,313 (3,231,030)
------------ ------------
Increase (decrease) in net assets ................................. 15,617,611 (6,745,036)
Net assets at beginning of period ................................. 65,769,421 72,514,457
------------ ------------
Net assets at end of period (including undistributed net investment
income of $1,252,060 and $1,075,196, respectively) ............. $ 81,387,032 $ 65,769,421
============ ============
Other Information
Increase (decrease) in Portfolio shares
Shares outstanding at beginning of period ......................... 9,775,320 10,126,562
------------ ------------
Shares sold .................................................... 4,073,136 4,122,227
Shares issued to shareholders in reinvestment of distributions . 661,744 806,843
Shares redeemed ................................................ (2,657,770) (5,280,312)
------------ ------------
Net increase (decrease) in Portfolio shares .................... 2,077,110 (351,242)
------------ ------------
Shares outstanding at end of period ............................... 11,852,430 9,775,320
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
31
<PAGE>
BOND PORTFOLIO
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding (a)
throughout each period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ....... $ 6.73 $ 7.16 $ 6.48 $ 7.42 $ 7.19 $ 7.37 $ 6.73 $ 6.72 $ 6.39 $ 6.47
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from investment
operations:
Net investment income ..... .44 .41 .44 .43 .48 .49 .52 .53 .54 .54
Net realized and
unrealized gain (loss) on
investment transactions... .15 (.22) .69 (.77) .38 (.02) .61 (.02) .18 (.19)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations ................ .59 .19 1.13 (.34) .86 .47 1.13 .51 .72 .35
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Less distributions from:
Net investment income ..... (.43) (.62) (.45) (.43) (.48) (.46) (.47) (.50) (.39) (.43)
Net realized gains on
investment transactions... (.02) -- -- (.17) (.15) (.19) (.02) -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions ......... (.45) (.62) (.45) (.60) (.63) (.65) (.49) (.50) (.39) (.43)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value,
end of period ............... $ 6.87 $ 6.73 $ 7.16 $ 6.48 $ 7.42 $ 7.19 $ 7.37 $ 6.73 $ 6.72 $ 6.39
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total Return (%) ............ 9.10 2.82 18.17 (4.79) 12.38 7.01 17.61 8.06 11.65 5.46
Ratios and
Supplemental Data
Net assets, end of
period ($ millions) ....... 81 66 73 142 129 113 74 42 22 3
Ratio of operating expenses,
net to average daily net
assets (%) ................ .62 .61 .56 .58 .61 .63 .69 .73 .75 .75
Ratio of operating expenses
before expense reductions,
to average daily net
assets (%) ................ .62 .61 .56 .58 .61 .63 .69 .73 .84 1.40
Ratio of net investment
income to average
daily net assets (%) ...... 6.55 6.20 6.29 6.43 6.59 6.89 7.51 8.05 8.04 7.86
Portfolio turnover rate (%).. 56.07 85.11 177.21 96.55 125.15 87.00 115.86 71.02 103.41 245.23
</TABLE>
(a) Based on monthly average shares outstanding during the period.
32
<PAGE>
BALANCED PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1997
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
------------------------------------------------------------------------------------
7.3% REPURCHASE AGREEMENT
------------------------------------------------------------------------------------
8,648,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette
dated 12/31/97 at 6.5% to be repurchased at $8,651,123
on 1/2/98, collateralized by a $5,417,000 U.S. Treasury
Bond, 13.25%, 5/15/14 (Cost $8,648,000) ............... 8,648,000
-----------
------------------------------------------------------------------------------------
11.7% U.S. GOVERNMENT & AGENCIES
------------------------------------------------------------------------------------
1,200,000 U.S. Treasury Bond, 7.25%, 5/15/16 ...................... 1,366,872
1,300,000 U.S. Treasury Bond, 6.25%, 8/15/23 ...................... 1,339,000
1,000,000 U.S. Treasury Note, 5.25%, 7/31/98 ...................... 998,280
2,000,000 U.S. Treasury Note, 5.75%, 12/31/98 ..................... 2,002,820
3,000,000 U.S. Treasury Note, 5.625%, 12/31/99 .................... 2,998,590
500,000 U.S. Treasury Note, 6.125%, 7/31/00 ..................... 505,155
1,150,000 U.S. Treasury Note, 5.625%, 11/30/00 .................... 1,147,838
1,000,000 U.S. Treasury Note, 6.25%, 1/31/02 ...................... 1,017,810
2,000,000 U.S. Treasury Note, 5.625%, 2/15/06 ..................... 1,977,500
1,500,000 U.S. Treasury STRIP, Principal only, 11/15/18 ........... 427,650
-----------
Total U.S. Government & Agencies (Cost $13,559,104) ..... 13,781,515
-----------
------------------------------------------------------------------------------------
2.0% GOVERNMENT NATIONAL MORTGAGE ASSOC.
------------------------------------------------------------------------------------
413,339 Government National Mortgage Association Pass-thru,
10%, 8/15/20 (a) ...................................... 460,447
523,852 Government National Mortgage Association Pass-thru,
8.75%, 12/15/24 (a) ................................... 547,588
1,270,400 Government National Mortgage Association Pass-thru,
8.5% with various maturities to 9/15/26 (a) ........... 1,334,969
-----------
Total Government National Mortgage Assoc.
(Cost $2,245,125) ..................................... 2,343,004
-----------
------------------------------------------------------------------------------------
6.7% U. S. GOVERNMENT AGENCY PASS-THRUS
------------------------------------------------------------------------------------
878,548 Federal Home Loan Mortgage Corp., 8%, 4/1/08 (a) ........ 900,353
2,426,276 Federal National Mortgage Association, 6.5% with various
maturities to 2/1/26 (a) .............................. 2,405,046
4,468,968 Federal National Mortgage Association, 7% with various
maturities to 9/1/26 (a) .............................. 4,510,842
-----------
Total U.S. Government Agency Pass-thrus
(Cost $7,557,953) ..................................... 7,816,241
-----------
------------------------------------------------------------------------------------
1.8% FOREIGN BONDS - U.S. $ DENOMINATED
------------------------------------------------------------------------------------
250,000 ABN-AMRO Bank NV, 7.75%, 5/15/23 ........................ 276,020
1,000,000 Deutsche Bank, 7.5%, 4/25/09 ............................ 1,077,080
500,000 Midland Bank PLC, 6.95%, 3/15/11 ........................ 506,675
250,000 Seagram Co., Ltd., 6.875%, 9/1/23 ....................... 246,678
-----------
Total Foreign Bonds - U.S. $ Denominated Total
(Cost $1,942,394) ..................................... 2,106,453
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
33
<PAGE>
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------
1.4% ASSET BACKED
------------------------------------------------------------------------------------
Automobile Receivables 0.5%
44,001 Premier Auto Trust Asset Backed Certificate,
Series 1994-3, 6.8%, 12/2/99 ........................... 44,042
500,000 Premier Auto Trust Asset Backed Certificate,
Series 1996-3, 6.5%, 3/6/00 ............................ 501,405
-----------
545,447
-----------
Credit Card Receivables 0.7%
850,000 Sears Credit Account Master Trust, Series 1995-A4,
6.25%, 1/15/03 ......................................... 850,791
-----------
Home Equity Loans 0.2%
147,832 Contimortgage Home Equity Loan Trust, Series 1996-1 A2,
5.58%, 1/15/11 ......................................... 147,370
50,067 United Companies Financial Corp., Home Equity Loan,
Series 1993-B1, 6.075%, 7/25/14 ........................ 49,472
-----------
196,842
-----------
Total Asset Backed (Cost $1,588,986) .................... 1,593,080
-----------
------------------------------------------------------------------------------------
10.9% CORPORATE BONDS
------------------------------------------------------------------------------------
Consumer Discretionary 0.2%
250,000 Price/Costco Inc., 7.125%, 6/15/05 ...................... 257,700
-----------
Consumer Staples 0.2%
270,000 J. Seagram & Sons Inc., 7%, 4/15/08 ..................... 278,465
-----------
Financial 4.9%
750,000 Associates Corp. of North America, 6.625%, 5/15/01 ...... 759,165
1,000,000 Highwoods/Forsyth L.P., 7%, 12/1/06 ..................... 1,006,900
250,000 NationsBank Corp., 7.25%, 10/15/25 ...................... 263,083
1,000,000 Southern National Corp., 7.05%, 5/23/03 ................. 1,029,630
750,000 Spieker Properties, Inc., 7.875%, 12/1/16 ............... 806,033
500,000 Susa Partnership L.P., 8.2%, 6/1/17 ..................... 544,605
800,000 US West Capital Funding Inc., 7.9%, 2/1/27 .............. 875,472
500,000 Wells Fargo & Co., 6.875%, 4/1/06 ....................... 510,675
-----------
5,795,563
-----------
Media 1.5%
500,000 TCI Communications, Inc., 8.65%, 9/15/04 ................ 547,775
1,000,000 Time Warner Inc., 9.125%, 1/15/13 ....................... 1,190,770
-----------
1,738,545
-----------
Service Industries 0.9%
1,000,000 ServiceMaster L.P., 7.45%, 8/15/27 ...................... 1,039,130
-----------
Durables 0.7%
250,000 Lockheed Corp., 9%, 1/15/22 ............................. 310,268
500,000 Northrop Grumman Corp., 7.875%, 3/1/26 .................. 556,345
-----------
866,613
-----------
Manufacturing 0.2%
250,000 Corning Inc., 8.75%, 7/15/99 ............................ 259,050
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
34
<PAGE>
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Technology 0.5%
500,000 Loral Corp., 8.375%, 6/15/24 ............................ 587,280
-----------
Energy 0.7%
500,000 Atlantic Richfield Co., 8.25%, 2/1/22 ................... 588,850
250,000 Enron Corp., 10%, 6/1/98 ................................ 253,960
-----------
842,810
-----------
Metals & Minerals 0.9%
1,000,000 Potash Corp., 7.125%, 6/15/07 ........................... 1,022,760
-----------
Utilities 0.2%
250,000 Commonwealth Edison Co., 9.05%, 10/15/99 ................ 260,875
-----------
Total Corporate Bonds (Cost $12,079,227) ................ 12,948,791
-----------
------------------------------------------------------------------------------------
58.2% COMMON STOCKS
------------------------------------------------------------------------------------
Shares
------------------------------------------------------------------------------------
Consumer Discretionary 6.3%
Department &
Chain Stores 4.5% 21,600 Costco Companies Inc.* .................................. 963,900
33,600 Home Depot, Inc. ........................................ 1,978,200
12,700 Nordstrom, Inc. ......................................... 766,763
39,700 Wal-Mart Stores Inc. .................................... 1,565,669
-----------
5,274,532
-----------
Hotels & Casinos 0.7% 41,400 Host Marriott Corp.* .................................... 812,475
-----------
Specialty Retail 1.1% 38,500 Corporate Express, Inc.* ................................ 495,688
36,700 Pier 1 Imports, Inc. .................................... 830,338
-----------
1,326,026
-----------
Consumer Staples 12.6%
Alcohol & Tobacco 1.6% 42,800 Philip Morris Companies Inc. ............................ 1,939,375
-----------
Consumer Specialties 0.5% 18,100 Samsonite Corp.* ........................................ 572,413
-----------
Food & Beverage 4.9% 36,700 Coca-Cola Co., Inc. ..................................... 2,445,138
30,300 H.J. Heinz Co. .......................................... 1,539,619
28,400 Interstate Bakers Corp. ................................. 1,061,450
13,100 Suiza Foods Corp.* ...................................... 780,269
-----------
5,826,476
-----------
Package Goods/
Cosmetics 5.6% 24,500 Colgate-Palmolive Co. ................................... 1,800,750
17,945 Gillette Co. ............................................ 1,802,351
38,000 Procter & Gamble Co. .................................... 3,032,864
-----------
6,635,965
-----------
Health 12.9%
Biotechnology 1.1% 20,200 Guidant Corp. ........................................... 1,257,450
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
35
<PAGE>
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Health Industry
Services 1.3% 17,000 HBO & Company, Inc. ..................................... 816,000
25,500 Total Renal Care Holdings, Inc.* ........................ 701,250
-----------
1,517,250
-----------
Hospital Management 0.6% 21,100 Tenet Healthcare Corp. .................................. 698,938
-----------
Pharmaceuticals 9.9% 14,600 Bristol-Myers Squibb Co. ................................ 1,381,525
30,116 Eli Lilly & Co. ......................................... 2,096,827
24,000 Johnson & Johnson ....................................... 1,581,000
14,700 Merck & Co. Inc. ........................................ 1,561,875
39,500 Pfizer, Inc. ............................................ 2,945,219
26,400 SmithKline Beecham PLC (ADR) ............................ 1,357,950
6,500 Warner-Lambert Co. ...................................... 806,000
-----------
11,730,396
-----------
Financial 3.6%
Banks 1.2% 13,200 First Union Corp. ....................................... 676,500
11,900 NationsBank Corp. ....................................... 723,669
-----------
1,400,169
-----------
Insurance 2.4% 18,375 American International Group, Inc. ...................... 1,998,281
18,300 Conseco Inc. ............................................ 831,506
-----------
2,829,787
-----------
Media 3.8%
Advertising 1.8% 21,450 Interpublic Group of Companies Inc. ..................... 1,068,478
29,100 Outdoor Systems, Inc.* .................................. 1,116,713
-----------
2,185,191
-----------
Broadcasting &
Entertainment 2.0% 19,000 Clear Channel Communications, Inc.* ..................... 1,509,313
8,000 Walt Disney Co. ......................................... 792,500
-----------
2,301,813
-----------
Service Industries 2.2%
Miscellaneous Consumer
Services 1.5% 24,100 Cendant Corporation* .................................... 828,438
25,600 Service Corp. International ............................. 945,600
-----------
1,774,038
-----------
Printing / Publishing 0.7% 11,800 Reuters Holdings PLC "B" (ADR) .......................... 781,750
-----------
Durables 2.4%
Aerospace 0.9% 26,000 AlliedSignal Inc. ....................................... 1,012,375
-----------
Telecommunications
Equipment 1.5% 13,800 CIENA Corp.* ............................................ 843,525
13,700 Nokia AB Oy "A" (ADR) ................................... 959,000
-----------
1,802,525
-----------
Manufacturing 4.9%
Chemicals 0.6% 17,700 Monsanto Co. ............................................ 743,400
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
36
<PAGE>
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Diversified
Manufacturing 4.3% 50,500 General Electric Co. .................................... 3,705,438
21,600 Textron, Inc. ........................................... 1,350,000
-----------
5,055,438
-----------
Technology 8.9%
Computer Software 3.7% 19,425 Computer Associates International, Inc. ................. 1,027,097
17,600 Microsoft Corp.* ........................................ 2,274,800
27,000 PeopleSoft Inc.* ........................................ 1,053,000
-----------
4,354,897
-----------
Diverse Electronic
Products 0.5% 19,600 Teradyne Inc.* .......................................... 627,200
-----------
Electronic Data
Processing 0.9% 19,300 Compaq Computer Corp. ................................... 1,089,244
-----------
Office / Plant
Automation 1.0% 12,600 3Com Corp.* ............................................. 440,213
12,900 Cisco Systems, Inc.* .................................... 719,175
-----------
1,159,388
-----------
Semiconductors 2.8% 21,600 Intel Corp. ............................................. 1,517,400
10,100 Linear Technology Corp. ................................. 582,013
28,800 National Semiconductor Corp. ............................ 747,000
25,100 Taiwan Semiconductor Manufacturing Co.* ................. 456,506
-----------
3,302,919
-----------
Energy 0.6%
Oilfield Services/
Equipment 8,100 Schlumberger Ltd. ....................................... 652,051
-----------
Total Common Stocks (Cost $46,660,771) .................. 68,663,481
-----------
- --------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0%
(Cost $94,281,560) (b) ................................. 117,900,565
===========
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non-income producing security.
(a) Effective maturities will be shorter due to prepayments.
(b) At December 31, 1997, the net unrealized appreciation
on investments based on cost for federal income tax
purposes of $94,304,684 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of market value
over tax cost ............................................ $ 24,563,231
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over market value ........................................ 967,350
------------
Net unrealized appreciation .............................. $ 23,595,881
============
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments and U.S. Government and Government Agency securities), for the
year ended December 31, 1997, aggregated $39,670,908 and $37,660,447,
respectively. Purchases and sales of U.S. Government and Government Agency
securities for the year ended December 31, 1997, aggregated $6,371,788 and
$3,062,630, respectively.
The accompanying notes are an integral part of the financial statements.
37
<PAGE>
BALANCED PORTFOLIO
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments, at market (identified cost $94,281,560) ............... $ 117,900,565
Cash ............................................................... 215
Receivables:
Dividends and interest .......................................... 543,376
Other assets ....................................................... 1,510
-------------
Total assets ................................................. 118,445,666
Liabilities
Payables:
Accrued management fee .......................................... $ 46,027
Other payables and accrued expenses ............................. 26,424
--------
Total liabilities ............................................ 72,451
-------------
Net assets, at market value ........................................ $ 118,373,215
=============
Net Assets Net assets consist of:
Undistributed net investment income ............................. 811,442
Net unrealized appreciation (depreciation) on:
Investments .................................................. 23,619,005
Foreign currency related transactions ........................ (9)
Accumulated net realized gain ................................... 5,933,762
Paid-in capital ................................................. 88,009,015
-------------
Net assets, at market value ........................................ $ 118,373,215
=============
Net asset value, offering and redemption price per share
($118,373,215 / 8,902,042 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized) .. $13.30
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
38
<PAGE>
BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment income
Income:
Dividends (net of foreign taxes withheld of $5,631) .............. $ 584,111
Interest ......................................................... 2,818,363
-----------
3,402,474
Expenses:
Management fee ................................................... $ 488,616
Custodian fees ................................................... 20,879
Accounting fees .................................................. 39,456
Trustees' fees and expenses ...................................... 17,294
Auditing ......................................................... 9,448
Legal ............................................................ 7,090
Reports to shareholders .......................................... 2,247
Other ............................................................ 134 585,164
----------- -----------
Net investment income ............................................... 2,817,310
-----------
Net realized and unrealized gain (loss) on investment transactions
Net realized gain (loss) from:
Investments ...................................................... 6,087,508
Net unrealized appreciation (depreciation) during the period on:
Investments ...................................................... 13,062,153
Foreign currency related transactions ............................ (9) 13,062,144
----------- -----------
Net gain (loss) on investment transactions .......................... 19,149,652
-----------
Net increase (decrease) in net assets resulting from operations ........ $21,966,962
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
39
<PAGE>
BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
Increase (Decrease) in Net Assets 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ................................................ $ 2,817,310 $ 2,208,747
Net realized gain (loss) from investment transactions ................ 6,087,508 4,899,761
Net unrealized appreciation (depreciation) on investment
transactions during the period .................................... 13,062,144 1,635,671
------------- -------------
Net increase in net assets resulting from operations .................... 21,966,962 8,744,179
------------- -------------
Distributions to shareholders from:
Net investment income ................................................ (2,678,045) (2,028,500)
------------- -------------
Net realized gains from investment transactions ...................... (4,951,322) (1,925,657)
------------- -------------
Portfolio share transactions:
Proceeds from shares sold ............................................ 24,546,671 25,991,787
Net asset value of shares issued to shareholders in
reinvestment of distributions ..................................... 7,629,367 3,954,157
Cost of shares redeemed .............................................. (16,483,255) (14,318,918)
------------- -------------
Net increase (decrease) in net assets from Portfolio share transactions . 15,692,783 15,627,026
------------- -------------
Increase (decrease) in net assets ....................................... 30,030,378 20,417,048
Net assets at beginning of period ....................................... 88,342,837 67,925,789
------------- -------------
Net assets at end of period (including undistributed net
investment income of $811,442 and $672,177, respectively) ............ $ 118,373,215 $ 88,342,837
============= =============
Other Information
Increase (decrease) in Portfolio shares
Shares outstanding at beginning of period ............................... 7,608,722 6,206,064
------------- -------------
Shares sold .......................................................... 2,001,001 2,336,334
Shares issued to shareholders in reinvestment of distributions ....... 651,149 360,527
Shares redeemed ...................................................... (1,358,830) (1,294,203)
------------- -------------
Net increase (decrease) in Portfolio shares .......................... 1,293,320 1,402,658
------------- -------------
Shares outstanding at end of period ..................................... 8,902,042 7,608,722
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
40
<PAGE>
BALANCED PORTFOLIO
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding (a)
throughout each period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ....... $ 11.61 $ 10.95 $ 8.97 $ 10.23 $ 10.02 $ 9.85 $ 8.10 $ 8.75 $ 7.62 $ 6.88
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from
investment operations:
Net investment income ..... .34 .31 .30 .29 .30 .29 .35 .42 .40 .33
Net realized and unrealized
gain (loss) on investment
transactions ............ 2.32 .95 2.04 (.48) .42 .36 1.77 (.59) 1.06 .64
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations ................ 2.66 1.26 2.34 (.19) .72 .65 2.12 (.17) 1.46 .97
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Less distributions from:
Net investment income ..... (.33) (.30) (.30) (.30) (.28) (.29) (.37) (.43) (.33) (.23)
Net realized gains on
investment transactions . (.64) (.30) (.06) (.77) (.23) (.19) -- (.05) -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions ......... (.97) (.60) (.36) (1.07) (.51) (.48) (.37) (.48) (.33) (.23)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value,
end of period ............. $ 13.30 $ 11.61 $ 10.95 $ 8.97 $ 10.23 $ 10.02 $ 9.85 $ 8.10 $ 8.75 $ 7.62
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total Return (%) ............ 24.21 11.89 26.67 (2.05) 7.45 6.96 26.93 (1.91) 19.50 14.21
Ratios and
Supplemental Data
Net assets, end of
period ($ millions) ....... 118 88 68 46 45 37 25 16 18 11
Ratio of operating
expenses, net to average
daily net assets (%) ...... .57 .60 .65 .75 .75 .75 .75 .75 .75 .75
Ratio of operating
expenses before expense
reductions, to average
daily net assets .......... .57 .60 .65 .75 .75 .75 .81 .75 .89 1.14
Ratio of net investment
income to average daily
net assets (%) ............ 2.73 2.82 3.01 3.19 3.01 3.01 4.00 5.15 4.74 4.48
Portfolio turnover rate (%) . 43.10 67.56 87.98 101.64 133.95(c) 51.66 62.03 49.03 77.98 109.95
Average commission
rate paid (b) ............. $ .0555 $ .0535 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred securities
is calculated for fiscal years beginning on or after December 31, 1995.
(c) On May 1, 1993, the Portfolio adopted its present name and investment
objective which is a balance of growth and income, as well as long-term
preservation of capital, from a diversified portfolio of equity and fixed
income securities. Prior to that date, the Portfolio was known as the
Managed Diversified Portfolio and its investment objective was to realize a
high level of long-term total rate of return consistent with prudent
investment risk. The portfolio turnover rate increased due to implementing
the present investment objective. Financial highlights for the six periods
ended December 31, 1993 should not be considered representative of the
present Portfolio.
41
<PAGE>
GROWTH AND INCOME PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1997
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------
2.9% REPURCHASE AGREEMENT
------------------------------------------------------------------------------------
4,728,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette
dated 12/31/97 at 6.5% to be repurchased at $4,729,707
on 1/2/98, collateralized by a $4,495,000 U.S. Treasury
Bond, 8.25%, 5/15/05 (Cost $4,728,000) ................ 4,728,000
---------
------------------------------------------------------------------------------------
1.0% CONVERTIBLE BONDS
------------------------------------------------------------------------------------
Health 0.1%
Pharmaceuticals 140,000 Sandoz Capital BVI Ltd., 2%, 10/6/02 .................... 213,850
---------
Manufacturing 0.9%
Diversified
Manufacturing 1,375,000 Loews Corp., 3.125%, 9/15/07 ............................ 1,385,296
---------
Total Convertible Bonds (Cost $1,497,844) ............... 1,599,146
---------
------------------------------------------------------------------------------------
0.7% CONVERTIBLE PREFERRED STOCKS
------------------------------------------------------------------------------------
Shares
------------------------------------------------------------------------------------
Consumer Discretionary 0.3%
Department &
Chain Stores 8,900 Kmart, 7.75% ............................................ 459,463
---------
Financial 0.3%
Consumer Finance 0.2% 10,400 Advanta Corp., 6.75% .................................... 279,500
---------
Real Estate 0.1% 6,300 Security Capital Industrial Trust "B", 7% ............... 200,813
---------
Manufacturing 0.1%
Industrial Specialty 10,000 Cooper Industries, Inc., 6% ............................. 182,500
---------
Total Convertible Preferred Stocks (Cost $1,157,069) .... 1,122,276
---------
------------------------------------------------------------------------------------
95.4% COMMON STOCKS
------------------------------------------------------------------------------------
Consumer Discretionary 4.6%
Department &
Chain Stores 4.6% 29,800 J.C. Penney Co., Inc. ................................... 1,797,313
21,800 May Department Stores ................................... 1,148,588
27,200 Mercantile Stores, Inc. ................................. 1,655,800
22,800 Rite Aid Corp. .......................................... 1,338,075
34,200 Sears, Roebuck & Co. .................................... 1,547,550
---------
7,487,326
---------
Hotels & Casinos 0.0% 3,562 Homestead Village, Inc. ................................. 53,653
3,562 Homestead Village, Inc. Rights (expire 1/15/98)* ........ 334
---------
53,987
---------
Consumer Staples 11.6%
Alcohol & Tobacco 2.8% 79,300 Philip Morris Companies, Inc. ........................... 3,593,281
24,780 RJR Nabisco Holdings Corp. .............................. 929,250
---------
4,522,531
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
42
<PAGE>
GROWTH AND INCOME PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consumer Electronic &
Photographic Products 0.9% 26,800 Whirlpool Corp. ......................................... 1,474,000
----------
Food & Beverage 5.4% 23,200 General Mills, Inc. ..................................... 1,661,700
68,900 H.J. Heinz Co. .......................................... 3,500,981
58,900 Unilever NV (New York shares) ........................... 3,677,569
----------
8,840,250
----------
Package Goods/
Cosmetics 2.5% 24,700 Avon Products Inc. ...................................... 1,515,963
52,800 Kimberly-Clark Corp. .................................... 2,603,700
----------
4,119,663
----------
Health 6.6%
Pharmaceuticals 24,300 American Home Products Corp. ............................ 1,858,950
30,000 Baxter International Inc. ............................... 1,513,125
28,900 Bristol-Myers Squibb Co. ................................ 2,734,663
23,700 Schering-Plough Corp. ................................... 1,472,363
30,200 SmithKline Beecham PLC (ADR) ............................ 1,553,413
18,200 Zeneca Group PLC ........................................ 644,609
9,500 Zeneca Group PLC (ADR) .................................. 1,026,000
----------
10,803,123
----------
Communications 8.9%
Telephone/
Communications 43,200 Alltel Corp. ............................................ 1,773,900
45,775 Bell Atlantic Corp. ..................................... 4,165,525
38,500 BellSouth Corp. ......................................... 2,168,031
49,200 Frontier Corp. .......................................... 1,183,875
59,400 GTE Corp. ............................................... 3,103,650
33,300 Sprint Corp. ............................................ 1,952,213
33,000 Telecom Corp. of New Zealand ............................ 159,998
----------
14,507,192
----------
Financial 20.3%
Banks 8.7% 30,000 Banc One Corp. .......................................... 1,629,375
13,400 Bankers Trust New York Corp. ............................ 1,506,663
27,900 Chase Manhattan Corp. ................................... 3,055,050
28,400 CoreStates Financial Corp. .............................. 2,273,775
31,400 First Union Corp. ....................................... 1,609,250
28,700 KeyCorp ................................................. 2,032,319
18,800 US Bancorp .............................................. 2,104,425
----------
14,210,857
----------
Insurance 4.8% 34,300 EXEL, Ltd. (ADR) ........................................ 2,173,763
32,500 Lincoln National Corp. .................................. 2,539,063
20,600 Mid Ocean Limited ....................................... 1,117,550
43,000 Safeco Corp. ............................................ 2,096,250
----------
7,926,626
----------
Other Financial
Companies 2.2% 14,500 Federal National Mortgage Association ................... 827,406
10,900 Fleet Financial Group, Inc. ............................. 816,819
18,300 J.P. Morgan & Co., Inc. ................................. 2,065,613
----------
3,709,838
----------
Real Estate 4.6% 10,200 General Growth Properties, Inc. (REIT) .................. 368,475
27,100 Health Care Property Investment Inc. (REIT) ............. 1,024,719
34,140 Meditrust Corp. (REIT) .................................. 1,250,378
</TABLE>
The accompanying notes are an integral part of the financial statements.
43
<PAGE>
GROWTH AND INCOME PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
50,900 Nationwide Health Properties Inc. (REIT) ................ 1,297,950
91,887 Security Capital Atlantic, Inc. ......................... 1,941,113
62,244 Security Capital Industrial Trust (REIT) ................ 1,548,320
8,307 Security Capital Industrial Trust Warrants
(expire 9/1/98)* ...................................... 43,612
----------
7,474,567
----------
Miscellaneous 0.0% 17,695 Jardine Strategic Holdings Ltd. ......................... 46,007
----------
Service Industries 0.2%
EDP Services 0.0% 1,838 First Data Corp. ........................................ 53,762
----------
Environmental Services 0.2% 8,600 Browning Ferris Industries .............................. 318,200
----------
Durables 7.2%
Aerospace 1.5% 9,788 Lockheed Corp. .......................................... 964,118
30,400 Rockwell International Corp. (New) ...................... 1,588,400
----------
2,552,518
----------
Automobiles 4.7% 42,900 Dana Corp. .............................................. 2,037,750
33,200 Echlin, Inc. ............................................ 1,201,425
68,200 Ford Motor Co. .......................................... 3,320,488
52,133 Meritor Automotive, Inc. ................................ 1,098,051
----------
7,657,714
----------
Construction/Agricultural
Equipment 1.0% 31,300 PACCAR, Inc.* ........................................... 1,643,250
----------
Manufacturing 15.7%
Chemicals 4.7% 17,700 Akzo-Nobel N.V. (ADR) ................................... 1,537,688
12,400 Dow Chemical Co. ........................................ 1,258,600
26,200 Eastman Chemical Co. .................................... 1,560,538
51,800 Imperial Chemical Industries PLC (ADR) (New) ............ 3,363,763
----------
7,720,589
----------
Containers & Paper 1.2% 27,731 Boise Cascade Corp. ..................................... 838,863
34,300 Westvaco Corp. .......................................... 1,078,306
----------
1,917,169
----------
Diversified
Manufacturing 3.1% 34,800 Olin Corp. .............................................. 1,631,250
65,300 TRW Inc. ................................................ 3,485,388
----------
5,116,638
----------
Electrical Products 2.5% 45,400 Philips Electronics NV (New York shares) ................ 2,746,700
27,500 Thomas & Betts Corp. .................................... 1,299,375
----------
4,046,075
----------
Office Equipment/
Supplies 2.4% 53,000 Xerox Corp. ............................................. 3,912,063
----------
Specialty Chemicals 1.8% 26,700 BetzDearborn, Inc. ...................................... 1,630,369
33,000 Witco Corp. ............................................. 1,346,813
----------
2,977,182
----------
Technology 0.4%
Electronic Components/
Distributors 15,700 AMP, Inc. ............................................... 659,400
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
44
<PAGE>
GROWTH AND INCOME PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Energy 7.4%
Oil Companies 6.7% 58,368 Lyondell Petrochemical Co. .............................. 1,546,752
21,000 Royal Dutch Petroleum Co. (New York shares) ............. 1,137,938
38,556 Societe Nationale Elf Aquitaine (ADR) ................... 2,260,346
40,200 Texaco Inc. ............................................. 2,185,875
31,966 Total SA (ADR) .......................................... 1,774,113
62,400 YPF S.A. "D" (ADR) ...................................... 2,133,300
-----------
11,038,324
-----------
Oil/Gas Transmission 0.7% 39,000 Williams Cos., Inc. ..................................... 1,106,625
-----------
Metals & Minerals 1.8%
Steel & Metals 58,252 Allegheny Teledyne, Inc. ................................ 1,507,271
37,100 Freeport McMoRan Copper & Gold, Inc. "A" ................ 568,094
13,500 Oregon Steel Mills, Inc. ................................ 287,719
8,200 Phelps Dodge Corp. ...................................... 510,450
-----------
2,873,534
-----------
Construction 2.3%
Forest Products 26,600 Georgia Pacific Timber Corp. ............................ 603,488
28,000 Georgia Pacific Corp. ................................... 1,701,000
28,400 Weyerhaeuser Co. ........................................ 1,393,375
-----------
3,697,863
-----------
Transportation 0.9%
Railroads 27,700 CSX Corp. ............................................... 1,495,800
-----------
Utilities 7.5%
Electric Utilities 6.9% 54,300 CINergy Corp. ........................................... 2,080,369
48,936 Duke Energy Corp. ....................................... 2,709,831
19,000 Entergy Corp. ........................................... 568,813
50,800 P G & E Corp. ........................................... 1,546,225
47,900 PacifiCorp .............................................. 1,308,269
11,000 PowerGen PLC (ADR) ...................................... 584,375
13,100 Southern Company ........................................ 338,963
43,000 Unicom Corp. ............................................ 1,322,250
27,900 Wisconsin Energy Corp. .................................. 802,125
-----------
11,261,220
-----------
Natural Gas
Distribution 0.6% 23,900 MCN Energy Group, Inc. 964,963
-----------
Total Common Stocks (Cost $123,687,457) ................. 156,188,856
-----------
- --------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0%
(Cost $131,070,370) (a) ................................ 163,638,278
===========
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
45
<PAGE>
GROWTH AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------
* Non-income producing security.
(a) At December 31, 1997, the net unrealized appreciation
on investments based on cost for federal income tax
purposes of $131,049,938 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of market value
over tax cost ........................................... $ 33,559,752
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over market value ....................................... 971,412
------------
Net unrealized appreciation ............................... $ 32,588,340
============
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding
short-term investments), for the year ended December 31, 1997,
aggregated $78,679,957 and $34,396,486, respectively.
The accompanying notes are an integral part of the financial statements.
46
<PAGE>
GROWTH AND INCOME PORTFOLIO
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments, at market (identified cost $131,070,370) ............ $ 163,638,278
Foreign currency, at market (cost $6,189) ........................ 6,792
Receivables:
Investments sold .............................................. 123,904
Dividends and interest ........................................ 393,048
Foreign taxes recoverable ..................................... 26,978
Other assets ..................................................... 1,172
-------------
Total assets ............................................... 164,190,172
Liabilities
Payables:
Investments purchased ......................................... $ 480,328
Accrued management fee ........................................ 62,393
Other payables and accrued expenses ........................... 43,845
----------
Total liabilities .......................................... 586,566
-------------
Net assets, at market value ...................................... $ 163,603,606
=============
Net Assets Net assets consist of:
Undistributed net investment income ........................... 927,946
Net unrealized appreciation (depreciation) on:
Investments ................................................ 32,567,908
Foreign currency ........................................... (147)
Accumulated net realized gain ................................. 11,421,161
Paid-in capital ............................................... 118,686,738
-------------
Net assets, at market value ...................................... $ 163,603,606
=============
Class A
Net asset value, offering and redemption price per share
($156,799,187 / 13,656,612 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized).. $11.48
======
Class B
Net asset value, offering and redemption price per share
($6,804,419 / 593,475 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized).. $11.47
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
47
<PAGE>
GROWTH AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment income
Income:
Dividends (net of foreign taxes withheld of $68,520) ............ $ 3,642,623
Interest ........................................................ 257,197
------------
3,899,820
Expenses:
Management fee .................................................. $ 592,383
Accounting fees ................................................. 62,698
Trustees' fees and expenses ..................................... 17,206
Distribution fees (Class B) ..................................... 5,163
Custodian fees .................................................. 31,916
Reports to shareholders ......................................... 2,474
Auditing ........................................................ 9,560
Legal ........................................................... 7,803
Other ........................................................... 1,892 731,095
----------- ------------
Net investment income .............................................. 3,168,725
------------
Net realized and unrealized gain (loss) on investment transactions
Net realized gain (loss) from:
Investments ..................................................... 11,498,829
Foreign currency related transactions ........................... 324 11,499,153
-----------
Net unrealized appreciation (depreciation) during the period on:
Investments ..................................................... 16,941,579
Foreign currency related transactions ........................... (158) 16,941,421
----------- ------------
Net gain (loss) on investment transactions ......................... 28,440,574
------------
Net increase (decrease) in net assets resulting from operations ....... $ 31,609,299
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
48
<PAGE>
GROWTH AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
Increase (Decrease) in Net Assets 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ............................................ $ 3,168,725 $ 2,155,282
Net realized gain (loss) from investment transactions ............ 11,499,153 3,798,567
Net unrealized appreciation (depreciation) on investment
transactions during the period ................................ 16,941,421 7,841,874
------------- -------------
Net increase (decrease) in net assets resulting from operations ..... 31,609,299 13,795,723
------------- -------------
Distributions to shareholders from:
Net investment income (Class A) .................................. (2,910,650) (1,781,057)
------------- -------------
Net investment income (Class B) .................................. (36,879) --
------------- -------------
Net realized gains from investment transactions (Class A) ........ (3,884,391) (729,093)
------------- -------------
Portfolio share transactions:
Class A
Proceeds from shares sold ........................................ 62,828,541 48,549,524
Net asset value of shares issued to shareholders
in reinvestment of distributions .............................. 6,795,041 2,510,150
Cost of shares redeemed .......................................... (28,405,112) (23,216,134)
------------- -------------
Net increase (decrease) in net assets from Class A share transactions 41,218,470 27,843,540
------------- -------------
Class B*
Proceeds from shares sold ........................................ 6,839,326 --
Net asset value of shares issued to shareholders
in reinvestment of distributions .............................. 36,879 --
------------- -------------
Cost of shares redeemed .......................................... (359,995) --
Net increase (decrease) in net assets from Class B share transactions 6,516,210 --
------------- -------------
Increase (decrease) in net assets ................................... 72,512,059 39,129,113
Net assets at beginning of period ................................... 91,091,547 51,962,434
------------- -------------
Net assets at end of period (including undistributed net
investment income of $927,946 and $713,479, respectively) ........ $ 163,603,606 $ 91,091,547
============= =============
Other Information
Increase (decrease) in Portfolio shares
Class A
Shares outstanding at beginning of period ........................... 9,724,734 6,510,714
------------- -------------
Shares sold ...................................................... 6,010,142 5,669,994
Shares issued to shareholders in reinvestment of distributions ... 689,859 301,924
Shares redeemed .................................................. (2,768,123) (2,757,898)
------------- -------------
Net increase (decrease) in Portfolio shares ...................... 3,931,878 3,214,020
------------- -------------
Shares outstanding at end of period ................................. 13,656,612 9,724,734
============= =============
Class B*
Shares outstanding at beginning of period ........................... -- --
------------- -------------
Shares sold ...................................................... 622,208 --
Shares issued to shareholders in reinvestment of distributions ... 3,342 --
Shares redeemed .................................................. (32,075) --
------------- -------------
Net increase (decrease) in Portfolio shares ...................... 593,475 --
------------- -------------
Shares outstanding at end of period ................................. 593,475 --
============= =============
</TABLE>
* For the period May 1, 1997 (commencement of sale of Class B shares) to
December 31, 1997.
The accompanying notes are an integral part of the financial statements.
49
<PAGE>
GROWTH AND INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding (a)
throughout each period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
For the Period
May 2, 1994
CLASS A (d) (commencement
- --------------------- Years Ended December 31, of operations)
------------------------------ to December 31,
1997 1996 1995 1994
------------------------------ ---------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ..................... $ 9.37 $ 7.98 $ 6.26 $ 6.00(b)
------- ------- ------- -------
Income from investment operations:
Net investment income .................................. .27 .27 .23 .13
Net realized and unrealized gain (loss) on investment
transactions .......................................... 2.47 1.46 1.72 .17
------- ------- ------- -------
Total from investment operations ......................... 2.74 1.73 1.95 .30
------- ------- ------- -------
Less distributions from:
Net investment income .................................. (.26) (.23) (.19) (.04)
Net realized gains on investment transactions .......... (.37) (.11) (.04) --
------- ------- ------- -------
Total distributions ...................................... (.63) (.34) (.23) (.04)
------- ------- ------- -------
Net asset value, end of period ........................... $ 11.48 $ 9.37 $ 7.98 $ 6.26
======= ======= ======= =======
Total Return (%) ......................................... 30.47 22.17 31.74 4.91**
Ratios and Supplemental Data
Net assets, end of period ($ millions) ................... 157 91 52 20
Ratio of operating expenses, net to average
daily net assets (%) ................................... .58 .66 .75 .75*
Ratio of operating expenses, before reductions, to average
daily net assets (%) ................................... .58 .66 .75 1.62*
Ratio of net investment income to average
daily net assets (%) ................................... 2.54 3.14 3.18 3.63*
Portfolio turnover rate (%) .............................. 28.41 32.18 24.33 28.41*
Average commission rate paid (c) ......................... $ .0481 $ .0502 $ -- $ --
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Original capital
(c) Average commission rate paid per share of common and preferred securities is
calculated for fiscal years beginning after December 31, 1995.
(d) On May 1, 1997 existing shares were designated as Class A shares.
* Annualized
** Not annualized
50
<PAGE>
GROWTH AND INCOME PORTFOLIO
The following table includes selected data for a share outstanding (a)
throughout the period and other performance information derived from the
financial statements.
For the Period
May 1, 1997
CLASS B (commencement of
- --------------------- sale of Class B
shares) to
December 31,
1997
---------------
Net asset value, beginning of period ............................ $ 9.44
------
Income from investment operations:
Net investment income ......................................... .14
Net realized and unrealized gain (loss) on investment
transactions ................................................ 2.02
------
Total from investment operations ................................ 2.16
------
Less distributions from net investment income ................... (.13)
------
Net asset value, end of period .................................. $11.47
======
Total Return (%) ................................................ 22.89**
Ratios and Supplemental Data
Net assets, end of period ($ millions) .......................... 7
Ratio of operating expenses to average daily net assets (%) ..... .80*
Ratio of net investment income to average daily net assets (%) .. 2.13*
Portfolio turnover rate (%) ..................................... 28.41
Average commission rate paid (b) ................................ $.0481
(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred securities.
* Annualized
** Not annualized
51
<PAGE>
CAPITAL GROWTH PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1997
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------
4.8% REPURCHASE AGREEMENT
------------------------------------------------------------------------------------
32,640,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette
dated 12/31/97 at 6.5% to be repurchased at
$32,651,787 on 1/2/98, collateralized by a
$31,837,000 U.S. Treasury Note, 6.375%,
9/30/01 (Cost $32,640,000) 32,640,000
-----------
------------------------------------------------------------------------------------
95.2% COMMON STOCKS
------------------------------------------------------------------------------------
Shares
------------------------------------------------------------------------------------
Consumer Discretionary 8.6%
Department &
Chain Stores 6.8% 236,000 Costco Companies, Inc.* ................................. 10,531,500
151,000 Dayton Hudson Corp. ..................................... 10,192,500
294,700 Home Depot, Inc. ........................................ 17,350,463
260,000 Walgreen Co. ............................................ 8,157,500
-----------
46,231,963
-----------
Hotels & Casinos 0.9% 255,000 Mirage Resorts Inc.* .................................... 5,801,250
-----------
Specialty Retail 0.9% 176,700 Tiffany & Co. ........................................... 6,372,244
-----------
Consumer Staples 6.5%
Food & Beverage 4.0% 159,000 H.J. Heinz Co. .......................................... 8,079,188
135,500 Sara Lee Corp. .......................................... 7,630,344
196,300 Suiza Foods Corp.* ...................................... 11,692,119
-----------
27,401,651
-----------
Package Goods /
Cosmetics 2.5% 212,600 Procter & Gamble Co. .................................... 16,968,138
-----------
Health 10.5%
Health Industry
Services 0.2% 41,600 Total Renal Care Holdings, Inc.* ........................ 1,144,000
-----------
Medical Supply &
Specialty 1.2% 165,000 Becton, Dickinson & Co. ................................. 8,250,000
-----------
Pharmaceuticals 9.1% 72,500 American Home Products Corp. ............................ 5,546,250
101,500 Bristol-Myers Squibb Co. ................................ 9,604,438
95,000 Johnson & Johnson ....................................... 6,258,125
56,600 Merck & Co. Inc. ........................................ 6,013,750
104,900 Novartis AG (ADR) ....................................... 8,496,900
147,200 Pfizer, Inc. ............................................ 10,975,600
134,000 Schering-Plough Corp. ................................... 8,324,750
58,200 Warner-Lambert Co. ...................................... 7,216,800
-----------
62,436,613
-----------
Financial 20.7%
Banks 3.6% 189,300 BankAmerica Corp. ....................................... 13,818,900
83,000 Citicorp ................................................ 10,494,313
-----------
24,313,213
-----------
Insurance 8.7% 80,000 Allstate Corp. .......................................... 7,270,000
160,450 American International Group, Inc. ...................... 17,448,938
206,400 Conseco Inc. ............................................ 9,378,300
</TABLE>
The accompanying notes are an integral part of the financial statements.
52
<PAGE>
CAPITAL GROWTH PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
283,700 EXEL, Ltd. (ADR) ........................................ 17,979,488
111,600 MBIA Inc. ............................................... 7,456,275
----------
59,533,001
----------
Consumer Finance 1.7% 160,000 Associates First Capital Corp. .......................... 11,380,000
----------
Other Financial
Companies 6.7% 218,500 American Express Credit Corp. ........................... 19,501,120
215,500 Federal National Mortgage Association ................... 12,296,969
252,750 Travelers Group, Inc. ................................... 13,616,906
----------
45,414,995
----------
Media 3.1%
Advertising 1.8% 294,200 Omnicom Group, Inc. ..................................... 12,466,725
----------
Cable Television 1.3% 236,300 Tele-Comm Liberty Media Group "A" * ..................... 8,565,875
----------
Service Industries 4.7%
Investment 3.5% 152,650 Franklin Resources Inc. ................................. 13,271,009
144,900 Merrill Lynch & Co., Inc. ............................... 10,568,644
----------
23,839,653
----------
Miscellaneous
Commercial Services 1.2% 346,300 AccuStaff, Inc.* ........................................ 7,964,900
----------
Durables 4.7%
Aerospace 3.7% 100,000 Lockheed Corp. .......................................... 9,850,000
124,000 Rockwell International Corp. (New) ...................... 6,479,000
124,000 United Technologies Corp. ............................... 9,028,750
----------
25,357,750
----------
Telecommunications
Equipment 1.0% 94,700 Nokia AB Oy "A" (ADR) ................................... 6,629,000
----------
Manufacturing 11.5%
Chemicals 3.2% 148,500 E.I. du Pont de Nemours & Co. ........................... 8,919,281
111,900 Praxair Inc. ............................................ 5,035,500
192,900 Sigma-Aldrich Corp. ..................................... 7,667,775
----------
21,622,556
----------
Diversified
Manufacturing 4.4% 187,500 Dresser Industries Inc. ................................. 7,863,281
97,000 General Electric Co. .................................... 7,117,375
125,500 TRW Inc. ................................................ 6,698,563
130,000 Textron, Inc. ........................................... 8,125,000
----------
29,804,219
----------
Electrical Products 0.7% 90,000 Emerson Electric Co. .................................... 5,079,375
----------
Machinery/Components/
Controls 3.2% 173,600 Ingersoll-Rand Co. ...................................... 7,030,800
329,050 Parker-Hannifin Group ................................... 15,095,169
----------
22,125,969
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
53
<PAGE>
CAPITAL GROWTH PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Technology 10.3%
Diverse Electronic
Products 1.3% 297,600 Applied Materials, Inc.* ................................ 8,965,200
-----------
Electronic Data
Processing 6.7% 262,050 Compaq Computer Corp. ................................... 14,789,447
150,500 Hewlett-Packard Co. ..................................... 9,406,250
109,100 International Business Machines Corp. ................... 11,407,769
259,200 Sun Microsystems, Inc.* ................................. 10,335,600
----------
45,939,066
-----------
Semiconductors 2.3% 222,200 Intel Corp. ............................................. 15,609,550
-----------
Energy 13.0%
Oil Companies 7.9% 74,600 Amoco Corp. ............................................. 6,350,325
109,300 Atlantic Richfield Co. .................................. 8,757,663
190,700 Exxon Corp. ............................................. 11,668,456
96,000 Mobil Corp. ............................................. 6,930,000
134,500 Repsol SA (ADR) ......................................... 5,724,656
272,500 Royal Dutch Petroleum Co. (New York shares) ............. 14,766,094
-----------
54,197,194
-----------
Oil / Gas Transmission 1.4% 326,000 Williams Cos., Inc. ..................................... 9,250,250
-----------
Oilfield Services/
Equipment 3.7% 125,000 Diamond Offshore Drilling, Inc. ......................... 6,015,625
153,900 Santa Fe International Corp. ............................ 6,261,806
165,000 Schlumberger Ltd. ....................................... 13,282,500
-----------
25,559,931
-----------
Transportation 1.6%
Airlines 1.0% 54,700 AMR Corp.* .............................................. 7,028,950
-----------
Railroads 0.6% 186,300 Wisconsin Central Transportation Co.* ................... 4,354,763
-----------
Total Common Stocks (Cost $458,850,377) ................. 649,607,994
-----------
- --------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0%
(Cost $491,490,377) (a) ................................ 682,247,994
===========
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non-income producing security.
(a) At December 31, 1997, the net unrealized appreciation on
investments based on cost for federal income tax
purposes of $491,518,304 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of market value
over tax cost ............................................ $194,611,508
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost over
market value ............................................. 3,881,818
------------
Net unrealized appreciation ................................ $190,729,690
============
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments), for the year ended December 31, 1997, aggregated $294,968,837
and $228,082,075, respectively.
The accompanying notes are an integral part of the financial statements.
54
<PAGE>
CAPITAL GROWTH PORTFOLIO
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments, at market (identified cost $491,490,377) .............. $ 682,247,994
Cash ............................................................... 429
Receivables:
Investments sold ................................................ 8,710,044
Dividends and interest .......................................... 558,430
Other assets ....................................................... 6,128
-------------
Total assets ................................................. 691,523,025
Liabilities
Payables:
Investments purchased ........................................... $ 14,862,981
Accrued management fee .......................................... 259,828
Other payables and accrued expenses ............................. 82,634
------------
Total liabilities ............................................ 15,205,443
-------------
Net assets, at market value ........................................ $ 676,317,582
=============
Net Assets
Net assets consist of:
Undistributed net investment income 1,414,095
Net unrealized appreciation (depreciation) on:
Investments .................................................. 190,757,617
Foreign currency related transactions ........................ (26)
Accumulated net realized gain ................................... 37,349,214
Paid-in capital ................................................. 446,796,682
-------------
Net assets, at market value ........................................ $ 676,317,582
=============
Class A
Net asset value, offering and redemption price per share
($675,770,416 / 32,750,652 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized) .. $20.63
======
Class B
Net asset value, offering and redemption price per share
($547,166 / 26,545 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized) .. $20.61
======
</TABLE>
The accompanying notes are an integral part of 9the financial statements.
55
<PAGE>
CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment income
Income:
Dividends (net of foreign taxes withheld of $105,670) ........ $ 7,312,793
Interest ..................................................... 1,114,169
-------------
8,426,962
Expenses:
Management fee ............................................... $ 2,691,980
Custodian fees ............................................... 57,898
Accounting fees .............................................. 96,410
Trustees' fees and expenses .................................. 17,392
Reports to shareholders ...................................... 10,147
Distribution fees (Class B) ................................. 526
Auditing ..................................................... 34,954
Legal ........................................................ 18,222
Other ........................................................ 8,273 2,935,802
----------- -------------
Net investment income ........................................... 5,491,160
-------------
Net realized and unrealized gain (loss) on investment transactions
Net realized gain (loss) from:
Investments .................................................. 37,541,221
Foreign currency related transactions ........................ (2,209) 37,539,012
-----------
Net unrealized appreciation (depreciation) during the period on:
Investments .................................................. 119,146,330
Foreign currency related transactions ........................... (73) 119,146,257
----------- -------------
Net gain (loss) on investment transactions ...................... 156,685,269
-------------
Net increase (decrease) in net assets resulting from operations .... $ 162,176,429
=============
</TABLE>
The accompanying notes are an integral part of the financial statements.
56
<PAGE>
CAPITAL GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
Increase (Decrease) in Net Assets 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ............................................ $ 5,491,160 $ 4,993,004
Net realized gain (loss) from investment transactions ............ 37,539,012 33,857,212
Net unrealized appreciation (depreciation) on investment
transactions during the period ................................ 119,146,257 33,028,817
------------- -------------
Net increase (decrease) in net assets resulting from operations ..... 162,176,429 71,879,033
------------- -------------
Distributions to shareholders from:
Net investment income (Class A) .................................. (5,641,454) (4,669,020)
------------- -------------
Net investment income (Class B) .................................. (1,600) --
------------- -------------
Net realized gain from investment transactions (Class A) ......... (33,950,004) (28,547,850)
------------- -------------
Portfolio share transactions:
Class A
Proceeds from shares sold ........................................ 214,983,317 176,019,020
Net asset value of shares issued to shareholders in
reinvestment of distributions ................................. 39,591,458 33,216,870
Cost of shares redeemed .......................................... (141,850,976) (145,085,225)
------------- -------------
Net increase (decrease) in net assets from Class A share transactions 112,723,799 64,150,665
------------- -------------
Class B*
Proceeds from shares sold ........................................ 530,116 --
Net asset value of shares issued to shareholders in
reinvestment of distributions ................................. 1,600
Cost of shares redeemed .......................................... (2,612) --
------------- -------------
Net increase (decrease) in net assets from Class B share transactions 529,104 --
------------- -------------
Increase (decrease) in net assets ................................... 235,836,274 102,812,828
Net assets at beginning of period ................................... 440,481,308 337,668,480
------------- -------------
Net assets at end of period (including undistributed net
investment income of $1,414,095 and $1,565,989, respectively) .... $ 676,317,582 $ 440,481,308
============= =============
Other Information
Increase (decrease) in Portfolio shares
Class A
Shares outstanding at beginning of period ........................... 26,691,077 22,392,030
------------- -------------
Shares sold ...................................................... 11,288,114 11,627,337
Shares issued to shareholders in reinvestment of distributions ... 2,340,808 2,233,815
Shares redeemed .................................................. (7,569,347) (9,562,105)
------------- -------------
Net increase (decrease) in Portfolio shares ...................... 6,059,575 4,299,047
------------- -------------
Shares outstanding at end of period ................................. 32,750,652 26,691,077
------------- -------------
Class B*
Shares outstanding at beginning of period ........................... -- --
------------- -------------
Shares sold ...................................................... 26,593 --
Shares issued to shareholders in reinvestment of distributions ... 80
Shares redeemed .................................................. (128) --
------------- -------------
Net increase (decrease) in Portfolio shares ...................... 26,545 --
------------- -------------
Shares outstanding at end of period ................................. 26,545 --
============= =============
</TABLE>
* For the period May 12, 1997 (commencement of sale of Class B shares) to
December 31, 1997.
The accompanying notes are an integral part of the financial statements.
57
<PAGE>
CAPITAL GROWTH PORTFOLIO
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding (a)
throughout each period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
Class A (c)
- ---------------------
Years Ended December 31,
-----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------ ------- ------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ............ $ 16.50 $ 15.08 $ 12.23 $14.95 $ 12.71 $ 12.28 $ 8.99 $10.21 $ 8.53 $ 7.06
------- ------- ------- ------ ------- ------- ------- ------ ------- -------
Income from investment operations:
Net investment income .......... .18 .19 .14 .06 .06 .11 .16 .25 .35 .16
Net realized and unrealized
gain (loss) on investment
transactions .................. 5.39 2.68 3.25 (1.42) 2.52 .66 3.35 (1.00) 1.58 1.40
------- ------- ------- ------ ------- ------- ------- ------ ------- -------
Total from investment
operations .................... 5.57 2.87 3.39 (1.36) 2.58 .77 3.51 (.75) 1.93 1.56
------- ------- ------- ------ ------- ------- ------- ------ ------- -------
Less distributions from:
Net investment income .......... (.19) (.19) (.11) (.05) (.07) (.11) (.22) (.24) (.25) (.09)
Net realized gains on
investment transactions ....... (1.25) (1.26) (.43) (1.31) (.27) (.23) -- (.23) -- --
------- ------- ------- ------ ------- ------- ------- ------ ------- -------
Total distributions .............. (1.44) (1.45) (.54) (1.36) (.34) (.34) (.22) (.47) (.25) (.09)
------- ------- ------- ------ ------- ------- ------- ------ ------- -------
Net asset value,
end of period .................. $ 20.63 $ 16.50 $ 15.08 $12.23 $ 14.95 $ 12.71 $ 12.28 $ 8.99 $ 10.21 $ 8.53
======= ======= ======= ====== ======= ======= ======= ====== ======= =======
Total Return (%) ................. 35.76 20.13 28.65 (9.67) 20.88 6.42 39.56 (7.45) 22.75 22.07
Ratios and
Supplemental Data
Net assets, end of
period ($ millions) ............ 676 440 338 257 257 167 108 45 45 17
Ratio of operating expenses,
net to average daily net
assets (%) ..................... .51 .53 .57 .58 .60 .63 .71 .72 .75 .75
Ratio of operating expenses
before expense reductions,
to average daily net
assets (%) ..................... .51 .53 .57 .58 .60 .63 .71 .72 .85 1.11
Ratio of net investment income
to average daily net assets (%). .96 1.27 1.06 .47 .46 .95 1.49 2.71 3.51 2.17
Portfolio turnover rate (%) ...... 41.77 65.56 119.41 66.44 95.31 56.29 58.88 61.39 63.96 129.75
Average commission
rate paid (b) .................. $ .0562 $ .0585 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
</TABLE>
(a) Based on average monthly shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred securities is
calculated for fiscal years beginning on or after December 31, 1995.
(c) On May 12, 1997 existing shares were designated as Class A shares.
58
<PAGE>
CAPITAL GROWTH PORTFOLIO
The following table includes selected data for a share outstanding (a)
throughout the period and other performance information derived from the
financial statements.
For the Period
May 12, 1997
CLASS B (commencement of
- -------------------- sale of Class B shares)
to December 31,
1997
-----------------------
Net asset value, beginning of period .......................... $17.54
------
Income from investment operations:
Net investment income ....................................... .08
Net realized and unrealized gain
(loss) on investment transactions ......................... 3.08
------
Total from investment operations .............................. 3.16
------
Less distributions from net investment income ................. (.09)
------
Net asset value, end of period ................................ $20.61
======
Total Return (%) .............................................. 18.00**
Ratios and Supplemental Data
Net assets, end of period ($ millions) ........................ .55
Ratio of operating expenses to average daily net assets (%) ... .75*
Ratio of net investment income to average daily net assets (%). .64*
Portfolio turnover rate (%) ................................... 41.77
Average commission rate paid (b) .............................. $.0562
(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred securities.
* Annualized
** Not annualized
59
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1997
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------
10.0% REPURCHASE AGREEMENT
------------------------------------------------------------------------------------
2,050,000 Repurchase Agreement with Donaldson, Lufkin & Jenrette
dated 12/31/97 at 6.5% to be repurchased at $2,050,740
on 1/2/98 collateralized by a $2,060,000 U.S. Treasury
Note, 5.5%, 11/15/98 (Cost $2,050,000) ................ 2,050,000
-----------
------------------------------------------------------------------------------------
90.0% COMMON STOCKS
------------------------------------------------------------------------------------
Shares
------------------------------------------------------------------------------------
Argentina 1.4%
6,000 Banco Rio de la Plata S.A.* (Private bank) .............. 84,000
69,522 Dalmine Siderca (Steel producer) ........................ 193,305
-----------
277,305
-----------
Austria 1.4%
1,800 Schoeller Bleckmann Oilfield Equipment AG (Manufacturer
of components for oil and gas drilling equipment) ..... 188,101
1,000 VAE Eisenbahnsysteme AG (Manufacturer of electronic
railroad control systems) ............................. 87,876
-----------
275,977
-----------
Bermuda 1.2%
6,200 Axogen Ltd. Units* (Future development of therapeutic
products for treatment of neurological disorders) ..... 246,450
-----------
Canada 0.4%
20,500 Canadian 88 Energy Corp.* (Oil and natural gas
exploration and production) ........................... 60,967
11,000 StressGen Biotechnologies Corp. "A" (Developer of
products for treatment of cancer and certain
infectious diseases) .................................. 23,862
-----------
84,829
-----------
Chile 0.4%
6,600 Linea Aerea Nacional de Chile-SP ADR* (Provider of
domestic and international passenger and cargo air
services) ............................................. 89,925
-----------
Croatia 0.1%
1,400 Pliva D.D. (GDR) (Pharmaceutical company) ............... 24,710
-----------
France 1.1%
101 Altran Technologies, S.A. (Engineering and consulting
services for aerospace, telecommunications and
electronics fields) ................................... 30,870
6,554 Dassault Systemes S.A. (Computer aided design,
manufacturing and engineering software products) ...... 199,777
-----------
230,647
-----------
Germany 1.7%
1,029 Beta Systems Software AG (Developer of processing
automation software) .................................. 82,652
810 Marschollek Lautenschlaeger und Partner AG (pfd)
(Leading independent life insurance company) .......... 204,864
2,400 Pfeifer Vacuum Technology AG* (Manufacturer of various
pumps and vacuum systems) ............................. 67,350
-----------
354,866
-----------
Hungary 2.2%
2,000 Richter Gedeon Rt (GDR) (Pharmaceutical company) ....... 232,500
2,000 Richter Gedeon Rt ....................................... 227,441
-----------
459,941
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
60
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ireland 8.0%
53,400 Bank of Ireland PLC (Bank) .............................. 822,365
6,500 ESAT Telecom Group PLC* (ADR) (Provider of
telecommunication services in the Republic of Ireland). 87,344
10,500 Irish Continental Group PLC (Transport of passengers,
freight and containers between Ireland, the U.K. and
the continent) ........................................ 128,524
46,800 Irish Life PLC (Provider of life and disability
insurance and pensions) ............................... 268,440
10,387 Irish Permanent PLC (Retail financial services group) ... 110,139
29,100 Jury's Hotel Group PLC (Hotel operator) (a) ............. 170,642
69,200 Ryan Hotels PLC (Owner and operator of hotel chain) ..... 58,603
-----------
1,646,057
-----------
Italy 3.1%
12,100 Aeroporti di Roma SpA* (Management of Fiumicino and
Ciampino airports) .................................... 125,514
30,000 Bulgari SpA (Manufacturer and retailer of fine jewelry,
luxury watches and perfumes) .......................... 152,629
11,900 Saes Getters SpA di Risparmio (Manufacturer of getters,
refined chemicals used in cathode ray tubes and other
monitors) ............................................. 113,349
44,500 Saipem SpA (International contractor in oil and gas
exploration and drilling, construction of refineries
and pipelines) ........................................ 233,946
-----------
625,438
-----------
Japan 4.2%
2,100 Nichiei Co., Ltd. (Finance company for small- and
medium-sized firms) ................................... 223,592
2,700 Riso Kagaku Corp. (Manufacturer of copying machines) .... 154,493
1,600 Shohkoh Fund & Co., Ltd. (Finance company for small- and
medium-sized firms) ................................... 487,782
-----------
865,867
-----------
Luxembourg 2.6%
14,000 Millicom International Cellular S.A.* (Developer and
operator of cellular telephone networks) .............. 526,750
-----------
Mexico 0.6%
5,300 TV Azteca, S.A. de C.V.* (ADR) (Owner and operator of
national television networks) ......................... 119,581
-----------
Netherlands 3.1%
4,000 De Telegraaf Holding NV (Leading publisher of
newspapers, magazines and books) ...................... 75,356
7,400 IHC Caland NV (Dredging and offshore services) .......... 383,923
7,800 Koninklijke Nedlloyd Groep NV (Container shipping and
transportation) ....................................... 176,949
-----------
636,228
-----------
Poland 0.5%
4,400 Debica S.A. "A" (Tire manufacturer) ..................... 109,844
-----------
Portugal 3.8%
9,673 Jeromino Martins S.A. (New) (Food producer and
retailer)(a) .......................................... 297,721
6,649 Jeronimo Martins S.A. ................................... 210,976
2,600 Telecel-Comunicacoes Pessoais, S.A. (Cellular
communication services) ............................... 277,023
-----------
785,720
-----------
Spain 0.7%
3,000 Aldeasa S.A.* (Operator of airport duty-free shops) ..... 63,604
1,100 Tele Pizza, S.A. (Operator of fast-food pizza
restaurants in Spain, Portugal, Poland, Mexico and
Chile) ................................................ 88,809
-----------
152,413
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
61
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sweden 1.1%
3,300 OM Gruppen AB (Free) (Operator of financial exchanges
and clearing organizations) ........................... 120,135
5,400 TV 4 AB (Broadcaster of news, sports, documentaries,
entertainment; program producer) ...................... 99,312
-----------
219,447
-----------
Switzerland 0.5%
206 Phoenix Mecano AG (Bearer) (Manufacturer of housings and
components for computers) ............................. 105,009
-----------
United Kingdom 10.5%
14,500 Avis Europe PLC (Car rental services) ................... 41,436
15,100 Central European Media Enterprises Ltd. "A" (Owner and
operator of national and regional private commercial
television stations in central Europe and Germany) .... 381,275
80,500 Corporate Services Group PLC (Employment services and
training) ............................................. 281,605
25,400 Expro International Group PLC (Provider of oilfield
services) ............................................. 224,847
9,400 Games Workshop Group PLC (Manufacturer of table top war
game systems and miniatures) .......................... 90,313
33,400 Provident Financial PLC (Personal finance group) ........ 438,836
7,800 RM PLC (Information technology solutions for educational
markets) .............................................. 102,162
40,600 Serco Group PLC (Facilities management company) ......... 580,111
-----------
2,140,585
-----------
United States 41.4%
3,600 Aptargroup, Inc. (Manufacturer of packaging equipment
components) ........................................... 199,800
4,800 BE Aerospace* (Airline audio/video control systems) ..... 128,400
4,300 Barrett Resources Corp.* (Oil and gas exploration and
production) ........................................... 130,075
11,300 Benton Oil & Gas Co.* (Oil and gas exploration,
development and production) ........................... 146,194
13,900 Billing Concepts* (Billing and information management
services) ............................................. 667,200
5,400 CapMAC Holdings Inc. (Provider of financial guaranty
insurance) ............................................ 187,650
3,600 Cintas Corp. (Uniform rentals) .......................... 140,400
7,900 Cognex Corp.* (Manufacturer of machine vision systems) .. 215,275
8,500 Concentra Managed Care, Inc. (Provider of integrated
nonrisk-bearing workers' compensation managed care) ... 286,875
13,500 Consolidated Freightways Corp. (Less-than-truckload
shipping services) .................................... 183,938
31,700 Corporate Express, Inc.* (Retailer of office supply
products through telephone ordering system, fax and
electronic data interchange) .......................... 408,138
200 CytoTherapeutics, Inc.* (Developer of therapeutic
products for treatment of certain chronic and
disabling diseases) ................................... 800
3,200 DuPont Photomasks, Inc.* (Manufacturer of photomasks
used in semiconductor production) ..................... 111,600
2,500 ESC Medical Systems Ltd.* (Producer of devices for
non-invasive treatment of benign vascular lesions) .... 96,875
6,900 Fiserv Inc.* (Data processing services) ................. 338,963
3,000 G & K Services Inc. "A" (Uniform rentals) ............... 126,000
19,100 General Communication, Inc. "A" * (Telecommunication
services) ............................................. 126,538
6,200 Hain Food Group, Inc.* (Provider of specialty food
products) ............................................. 56,963
500 Healthcare Recoveries, Inc. (Provider of recovery
services for private healthcare payors) ............... 11,125
</TABLE>
The accompanying notes are an integral part of the financial statements.
62
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
6,366 IDX Systems Corp.* (Provider of health care information
systems to physician groups and academic medical
centers) .............................................. 235,542
1,400 JLK Direct Distribution Inc. "A" (Manufacturer of
metalworking tools) ................................... 39,200
4,500 La Quinta Inns, Inc. (Owner and operator of motel chain). 86,906
24,200 Network Appliance, Inc. (Designer and manufacturer of
network data storage devices) ......................... 859,100
4,900 Samsonite Corp.* (Luggage manufacturer) ................. 154,963
1,400 Security Dynamics Technologies, Inc.* (Designer,
developer and supporter of a family of security
products used to manage access to computer-based
information resources) ................................ 50,050
3,700 Sepracor, Inc.* (Developer of enhanced forms of existing
pharmaceuticals) ...................................... 148,231
22,900 Sitel Corp.* (Nebraska based telemarketing company for
major credit card and insurance companies) ............ 208,963
14,500 Sola International, Inc.* (Manufacturer of plastic
eyeglass lenses) ...................................... 471,250
17,825 Sterling Commerce, Inc.* (Producer of electronic data
interchange products and services) .................... 685,148
4,100 Suiza Foods Corp. (Food distributor) .................... 244,206
2,600 Symbol Technologies Inc. (Manufacturer of bar code laser
scanners) ............................................. 98,150
32,800 TCI Satellite Entertainment, Inc. (Television
programming via digital satellite) .................... 225,500
5,700 Tech Data Corp.* (Distributor of microcomputers,
hardware and software) ................................ 221,588
7,300 Tiffany & Co. (Retailer of jewelry and gift items) ...... 263,256
7,466 Total Renal Care Holdings, Inc.* (Dialysis services for
treatment of chronic kidney failure) .................. 205,315
3,200 Tower Realty Trust, Inc. (REIT) (Developer and manager
of office properties) ................................. 78,800
1,650 Vincam Group Inc.* (Provider of solutions to
complexities and costs of employment and personnel) ... 43,931
9,250 Vitesse Semiconductor Corp.* (Manufacturer of digital
integrated circuits) .................................. 349,188
5,000 Wackenhut Corrections Corp.* (Manager of privatized
correctional and detention facilities) ................ 134,375
3,700 Wesley Jessen VisionCare, Inc.* (Manufacturer of soft
contact lenses) ....................................... 144,300
-----------
8,510,771
-----------
Total Common Stocks (Cost $16,023,416) .................. 18,488,360
-----------
- --------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0%
(Cost $18,073,416) (b) ................................ 20,538,360
===========
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non-income producing security.
(a) Security valued in good faith by the Valuation Committee of the Board of
Trustees at fair value amounted to $468,363 (2.33% of net assets). The value
has been estimated by the Board of Trustees in the absence of readily
ascertainable market values. However, because of the inherent uncertainty of
valuation, the estimated values may differ significantly from the values
that would have been used had a ready market for the securities existed, and
the difference could be material. The cost of these securities at December
31, 1997 aggregated $319,091. The security may also have certain
restrictions as to resale.
The accompanying notes are an integral part of the financial statements.
63
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
- --------------------------------------------------------------------------------
(b) At December 31, 1997, the net unrealized appreciation on
investments based on cost for federal income tax
purposes of $18,381,163 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of market value
over tax cost ............................................. $ 3,139,334
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost over
market value .............................................. 982,137
------------
Net unrealized appreciation ................................. $ 2,157,197
============
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments), for the year ended December 31, 1997, aggregated $14,948,190
and $14,200,205, respectively.
- --------------------------------------------------------------------------------
From November 1, 1997 through December 31, 1997, the Global Discovery
Portfolio incurred approximately $110,514 of net realized capital losses
which the Portfolio intends to elect to defer and treat as arising in the
fiscal year ended December 31, 1998.
Forward Currency Exchange Contracts:
At December 31, 1997, the Global Discovery Portfolio had the following
forward foreign currency exchange contract outstanding, resulting in net
unrealized appreciation of $1,760.
<TABLE>
<CAPTION>
Net Unrealized
Appreciation/
Settlement (Depreciation)
Contracts to Deliver In Exchange For Date (U.S.$)
---------------------------- ------------------------ ---------- --------------
<S> <C> <C> <C> <C> <C>
Japanese Yen 36,000,000 U.S. Dollars 284,248 6/15/98 1,760
=====
</TABLE>
The accompanying notes are an integral part of the financial statements.
64
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments, at market (including repurchase agreements of $2,050,000)
(identified cost $18,073,416) ..................................... $ 20,538,360
Foreign currency, at market (cost $98,122) ........................... 97,465
Unrealized appreciation on forward currency exchange contracts ....... 1,760
Receivables:
Investments sold .................................................. 15,476
Foreign taxes recoverable ......................................... 1,439
Dividends and interest ............................................ 9,471
Other assets ......................................................... 235
------------
Total assets ................................................... 20,664,206
Liabilities
Payables:
Accrued Management Fee ............................................ $ 11,636
Investments purchased ............................................. 504,281
Other payables and accrued expenses ............................... 33,148
---------
Total liabilities .............................................. 549,065
------------
Net assets, at market value .......................................... $ 20,115,141
============
Net Assets Net assets consist of:
Undistributed net investment income ............................... 348,103
Net unrealized appreciation (depreciation) on:
Investments .................................................... 2,464,944
Foreign currency related transactions .......................... 1,304
Accumulated net realized gain (loss) .............................. (235,671)
Paid-in capital ................................................... 17,536,461
------------
Net assets, at market value .......................................... $ 20,115,141
============
Class A
Netasset value, offering and redemption price per share
($17,892,612 / 2,526,754 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized) .... $ 7.08
======
Class B
Netasset value, offering and redemption price per share
($2,222,529 / 314,140 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized) .... $ 7.07
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
65
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Investment income
Income:
Dividends (net of foreign taxes withheld of $12,473) ........... $ 117,334
Interest ....................................................... 78,926
-----------
196,260
Expenses:
Management fee ................................................. $ 179,723
Trustees' fees and expenses .................................... 18,063
Accounting fees ................................................ 61,692
Distribution fees (Class B) ................................... 2,202
Custodian fees ................................................. 58,614
Reports to shareholders ........................................ 406
Auditing ....................................................... 5,106
Legal .......................................................... 5,329
Other .......................................................... 3,330
-----------
Total expenses before reductions ............................... 334,465
Expense reductions ............................................. (53,711)
-----------
Expenses, net ..................................................... 280,754
-----------
Net investment loss ............................................... (84,494)
-----------
Net realized and unrealized gain (loss) on investment transactions
Net realized gain (loss) from:
Investments .................................................... 62,305
Foreign currency related transactions .......................... 193,091 255,396
-----------
Net unrealized appreciation (depreciation) during the period on:
Investments .................................................... 1,804,823
Foreign currency related transactions .......................... (15,363) 1,789,460
----------- -----------
Net gain (loss) on investment transactions ........................ 2,044,856
-----------
Net increase (decrease) in net assets resulting from operations ...... $ 1,960,362
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
66
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
May 1, 1996
Year (commencement
Ended of operations)
December 31, to December 31,
Increase (Decrease) in Net Assets 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment loss .............................................. $ (84,494) $ (11,146)
Net realized gain (loss) from investment transactions ............ 255,396 36,987
Net unrealized appreciation (depreciation) on investment
transactions during the period ................................ 1,789,460 676,788
------------ ------------
Net increase (decrease) in net assets resulting from operations ..... 1,960,362 702,629
------------ ------------
Distributions to shareholders from:
Net investment income (Class A) .................................. (56,210) --
------------ ------------
Net realized gains from investment transactions (Class A) ........ (28,105) --
------------ ------------
Portfolio share transactions:
Class A
Proceeds from shares sold ........................................ 8,909,818 18,871,561
Net asset value of shares issued to shareholders
in reinvestment of distributions .............................. 84,315 --
Cost of shares redeemed .......................................... (9,691,134) (2,817,526)
------------ ------------
Net increase (decrease) in net assets from Class A share transactions (697,001) 16,054,035
------------ ------------
Class B*
Proceeds from shares sold ........................................ 2,500,974 --
Cost of shares redeemed .......................................... (322,143) --
------------ ------------
Net increase (decrease) in net assets from Class B share transactions 2,178,831 --
------------ ------------
Increase (decrease) in net assets ................................... 3,357,877 16,756,664
Net assets at beginning of period ................................... 16,757,264 600
------------ ------------
Net assets at end of period (including undistributed net investment
income of $348,103 and $44,728, respectively) .................... $ 20,115,141 $ 16,757,264
============ ============
Other Information
Increase (decrease) in Portfolio shares
Class A
Shares outstanding at beginning of period ........................ 2,647,089 100
------------ ------------
Shares sold ...................................................... 1,316,648 3,107,414
Shares issued to shareholders in reinvestment of distributions ... 13,469 --
Shares redeemed .................................................. (1,450,452) (460,425)
------------ ------------
Net increase (decrease) in Portfolio shares ...................... (120,335) 2,646,989
------------ ------------
Shares outstanding at end of period ................................. 2,526,754 2,647,089
============ ============
Class B*
Shares outstanding at beginning of period ........................ -- --
------------ ------------
Shares sold ...................................................... 358,842 --
Shares redeemed .................................................. (44,702) --
------------ ------------
Net increase (decrease) in Portfolio shares ...................... 314,140 --
------------ ------------
Shares outstanding at end of period ................................. 314,140 --
============ ============
</TABLE>
* For the period May 2, 1997 (commencement of sale of Class B shares) to
December 31, 1997.
The accompanying notes are an integral part of the financial statements.
67
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding (a)
throughout each period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
For the Period
May 1, 1996
CLASS A (c) Year (commencement of
- ----------------- Ended operations) to
December 31, December 31,
1997 1996
----------- ----------------
<S> <C> <C>
Net asset value, beginning of period ............................... $ 6.33 $ 6.00(b)
-------- --------
Income from investment operations:
Net investment loss .............................................. (.03) (.01)
Net realized and unrealized gain (loss) on investment transactions .81 .34
-------- --------
Total from investment operations ................................... .78 .33
-------- --------
Less distributions from:
Net investment income ............................................ (.02) --
Net realized gains on investment transactions .................... (.01) --
-------- --------
Total distributions ................................................ (.03) --
-------- --------
Net asset value, end of period ..................................... $ 7.08 $ 6.33
======== ========
Total Return (%) (d) ............................................... 12.38 5.50**
Ratios and Supplemental Data
Net assets, end of period ($ millions) ............................. 18 17
Ratio of operating expenses, net to average daily net assets (%) ... 1.50 1.50*
Ratio of operating expenses before expense reductions, to average
daily net assets (%) ............................................. 1.79 2.32*
Ratio of net investment loss to average daily net assets (%) ....... (.44) (.13)*
Portfolio turnover rate (%) ........................................ 83.16 50.31*
Average commission rate paid (e) ................................... $ .0032 $ .0029
</TABLE>
(a) Based on average shares outstanding during the period.
(b) Original capital
(c) On May 2, 1997 existing shares were designated as Class A shares.
(d) Total returns would have been lower had certain expenses not been reduced.
(e) Average commission rate paid per share of common and preferred securities.
* Annualized
** Not annualized
68
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
The following table includes selected data for a share outstanding (a)
throughout the period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
For the Period
May 2, 1997
CLASS B (commencement of
- -------------- sale of Class B shares)
to December 31,
1996
----------------------
<S> <C>
Net asset value, beginning of period ............................................. $ 6.20
------
Income from investment operations:
Net investment loss ............................................................ (.04)
Net realized and unrealized gain (loss) on investment transactions ............. .91
------
Total from investment operations ................................................. .87
------
Net asset value, end of period ................................................... $ 7.07
======
Total Return (%) (b) ............................................................. 14.03**
Ratios and Supplemental Data
Net assets, end of period ($ millions) ........................................... 2
Ratio of operating expenses, net to average daily net assets (%) ................. 1.75*
Ratio of operating expenses, before reductions, to average daily net assets (%) .. 2.00*
Ratio of net investment loss to average daily net assets (%) ..................... (.89)*
Portfolio turnover rate (%) ...................................................... 83.16
Average commission rate paid (c) ................................................. $.0032
</TABLE>
(a) Based on average shares outstanding during the period.
(b) Total return would have been lower had certain expenses not been reduced.
(c) Average commission rate paid per share of common and preferred securities.
* Annualized
** Not annualized
69
<PAGE>
INTERNATIONAL PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1997
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------
3.2% REPURCHASE AGREEMENT
------------------------------------------------------------------------------------
U.S.$13,500,000 Repurchase Agreement with Donaldson, Lufkin &
Jenrette dated 12/31/97 at 6.5%, to be repurchased
at $13,504,875 on 1/2/98, collateralized by a
$10,276,000 U.S. Treasury Bond, 8.5%, 2/15/20
(Cost $13,500,000) .................................... 13,500,000
-----------
------------------------------------------------------------------------------------
0.3% CONVERTIBLE BONDS
------------------------------------------------------------------------------------
Japan
JPY 212,000,000 Softbank Corp., 0.5%, 03/29/02 (Cost $2,136,453) ........ 1,266,641
-----------
------------------------------------------------------------------------------------
96.5% COMMON STOCKS
------------------------------------------------------------------------------------
Shares
------------------------------------------------------------------------------------
Argentina 0.7%
90,100 YPF S.A. "D" (ADR) (Petroleum company) .................. 3,080,294
-----------
Brazil 1.0%
140,180 Companhia Vale do Rio Doce (pfd.) (Diverse mining and
industrial complex) ................................... 2,782,122
252,474 Usinas Siderurgicas de Minas Gerais S.A. (pfd.) (Steel
manufacturer) ......................................... 1,493,059
-----------
4,275,181
-----------
Canada 1.2%
109,500 Canadian National Railway Co. (Major railroad operator).. 5,156,817
-----------
China 0.8%
3,340,900 Anhui Expressway Co., Ltd. "H" (Developer and manager of
toll highways in Anhui province) ...................... 577,727
124,500 China Telecommunications (Telecommunication services) ... 213,686
281,400 GZI Transport Ltd. (Developer and operator of toll
highways in Guangdong Province) ....................... 94,417
101,674 Guangshen Railway Co. Ltd. (ADR) (Operator of only
railroad in the Pearl River delta) .................... 1,366,244
2,452,300 Jiangsu Expressway Co., Ltd. "H" (Builder and manager of
the Shanghai-Nanjing expressway) ...................... 506,347
2,486,400 Shenzhen Expressway Co. "H" (Highway developer) ......... 481,301
-----------
3,239,722
-----------
Finland 1.9%
61,000 Nokia AB Oy "A" (Leading manufacturer of
telecommunications equipment and cellular telephones).. 4,332,196
102,000 Pohjola Insurance Co., Ltd. "B" (Insurance company) ..... 3,781,105
-----------
8,113,301
-----------
France 14.7%
41,794 AXA-UAP S.A. (Insurance group providing insurance,
finance and real estate services) ..................... 3,233,134
23,098 Accor S.A.* (Catering, hotels, travel services) ......... 4,293,465
44,733 Alcatel Alsthom (Manufacturer of transportation,
telecommunication and energy equipment) ............... 5,684,509
113,991 Assurances Generales de France* (Markets health, life,
and liability insurance) .............................. 6,038,493
7,393 Carrefour (Hypermarket operator and food retailer) ...... 3,856,150
14,151 Christian Dior (Leading fashion house) .................. 1,450,360
25,977 Compagnie Financiere de Paribas (Finance and investment
company) .............................................. 2,256,806
</TABLE>
The accompanying notes are an integral part of the financial statements.
70
<PAGE>
INTERNATIONAL PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
35,926 Credit Commercial de France (Bank) ...................... 2,461,707
85,966 France Telecom S.A.* (Telecommunication services) ....... 3,117,339
40,018 Lagardere S.C.A. (Holding company with interests in
publishing, defense, audiovisual production and
services, telecommunications and media) ............... 1,322,854
12,923 Renault S.A. (Manufacturer of automobiles, buses,
industrial and agricultural vehicles) ................. 3,842,553
102,212 Rhone-Poulenc S.A. "A" (Medical, agricultural and
consumer chemicals) ................................... 4,577,468
62,716 Schneider S.A. (Manufacturer of electronic components
and automated manufacturing systems) .................. 3,404,583
44,135 Societe Lyonnaise des Eaux SA (Water utility) ........... 4,882,709
53,869 Societe Nationale Elf Aquitaine (Petroleum company) ..... 6,263,837
101,824 Thomson CSF (Manufacturer of aerospace systems and
industrial electronics products) ...................... 3,208,640
24,496 Total S.A. "B" (International oil and gas exploration,
development and production) ........................... 2,665,262
-----------
62,559,869
-----------
Germany 17.6%
22,591 Allianz AG (Multi-line insurance company) ............... 5,851,810
96,488 BASF AG (Leading international chemical producer) ....... 3,419,183
147,800 Bayerische Vereinsbank AG (Commercial bank) ............. 9,669,850
208,500 Commerzbank AG (Worldwide multi-service bank) ........... 8,205,559
104,437 Dresdner Bank AG (Universal bank) ....................... 4,818,383
16,771 Heidelberger Druckmaschinen (Manufacturer of printing
machinery) ............................................ 922,918
81,450 Hoechst AG (Chemical producer) .......................... 2,852,335
10,760 Mannesmann AG (Bearer) (Diversified construction and
technology company) ................................... 5,436,820
16,740 Muenchener Rueckversicherungs-Gesellschaft AG
(Registered) (Insurance company) ...................... 6,308,905
146,700 RWE AG (pfd.) (Producer and marketer of petroleum and
chemical products) .................................... 6,197,443
11,900 SAP AG (pfd.) (Computer software manufacturer) .......... 3,892,802
36,600 Schering AG (Pharmaceutical and chemical producer) ...... 3,529,794
36,275 Siemens AG (Leading electrical engineering and
electronics company) .................................. 2,147,464
14,823 Thyssen AG (Manufacturer of capital goods and steel
products) ............................................. 3,172,237
90,700 VEBA AG (Electric utility, distributor of oil and
chemicals) ............................................ 6,176,070
4,175 VIAG AG (Provider of electrical power and natural gas
services, aluminum products, chemicals, ceramics and
glass) ................................................ 2,248,791
-----------
74,850,364
-----------
Hong Kong 3.7%
268,700 Cheung Kong Holdings Ltd. (Real estate company) ......... 1,759,779
162,200 Citic Pacific Ltd. (Diversified holding company) ........ 646,791
1,214,400 Cosco Pacific Ltd. (Investment holding company) ......... 987,317
634,400 Great Eagle Holdings Ltd. (Property development) ........ 888,275
126,900 Great Eagle Holdings Ltd. Warrants* (expire 11/30/98) ... 16,376
149,690 HSBC Holdings Ltd. (Bank) ............................... 3,689,610
538 Hong Kong & China Gas Co., Ltd. (Gas utility) ........... 1,045
313,200 Hutchison Whampoa, Ltd. (Container terminal and real
estate company) ....................................... 1,960,279
1,066,900 Kerry Properties, Ltd. (Real estate company) ............ 1,762,333
451,000 New World Development Co., Ltd. (Property investment and
development, construction and engineering, hotels and
restaurants, telecommunications) ...................... 1,559,788
113,200 New World Infrastructure Ltd.* (Investment and operation
of infrastructure projects) ........................... 256,376
</TABLE>
The accompanying notes are an integral part of the financial statements.
71
<PAGE>
INTERNATIONAL PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
584,600 Television Broadcasts, Ltd. (Television broadcasting) ... 1,667,268
2,668,700 Zhejiang Expressway Co., Ltd. (Road construction and
management) ........................................... 540,697
-----------
15,735,934
-----------
Indonesia 0.2%
19,570 Asia Pacific Resources International Holdings Ltd.
(Manufacturer of rayon fiber for Asian textile
markets, owner of world's leading paper pulp mill) .... 36,694
1,708,800 Indah Kiat Pulp & Paper (Foreign registered) (Producer
of pulp and paper) .................................... 302,924
400,000 Indocement Tunggal Prakarsa (Foreign Registered)
(Multi-business group with 3 major divisions namely
cement, food, and property) ........................... 130,909
924,570 Pabrik Kertas Tjiwi Kimia (Operator of a pulp and paper
factory) .............................................. 226,940
-----------
697,467
-----------
Italy 3.1%
2,506,600 Istituto Nazionale delle Assicurazione (Insurance
company) .............................................. 5,079,797
1,754,000 Telecom Italia Mobile SpA (Cellular telecommunication
services) ............................................. 8,095,766
-----------
13,175,563
-----------
Japan 15.4%
59,000 Advantest Corp. (Producer of measuring instruments and
semiconductor testing devices) ........................ 3,344,313
149,000 Bridgestone Corp. (Leading automobile tire manufacturer). 3,229,950
212,000 Canon Inc. (Leading producer of visual image and
information equipment) ................................ 4,936,653
537,000 Daiwa Securities Co., Ltd. (Brokerage and other
financial services) ................................... 1,851,015
392,000 Fujitsu Ltd. (Leading manufacturer of computers) ........ 4,203,753
101,000 Hitachi Construction Machinery Co., Ltd. (Leading maker
of hydraulic shovels) ................................. 317,970
30,500 Keyence Corp. (Specialized manufacturer of sensors) ..... 4,509,000
148,000 Matsushita Electric Works, Inc. (Leading maker of
building materials and lighting equipment) ............ 1,281,042
213,000 Minebea Co., Ltd. (Manufacturer of bearings, electronic
equipment, machinery parts) ........................... 2,284,182
48,200 Nichiei Co., Ltd. (Finance company for small and
medium-sized firms) ................................... 5,131,980
47,900 Nintendo Co., Ltd. (Game equipment manufacturer) ........ 4,696,438
327 Nippon Telegraph & Telephone Corp. (Leading
telecommunications company) ........................... 2,805,362
237,000 Nomura Securities Co., Ltd. (Financial advisor,
securities broker and underwriter) .................... 3,158,790
46,800 Orix Corp. (Major leasing company) ...................... 3,262,198
207,000 Ricoh Co., Ltd. (Leading maker of copiers and
information equipment) ................................ 2,568,671
46,500 SMC Corp. (Leading maker of pneumatic equipment) ........ 4,096,132
38,000 Secom Co., Ltd. (Electronic security system operator) ... 2,427,576
9,800 Shohkoh Fund & Co., Ltd. (Finance company for small and
medium-sized firms) ................................... 2,987,668
49,300 Sony Corp. (Consumer electronic products manufacturer) .. 4,380,544
906,000 Sumitomo Metal Industries, Ltd. (Leading integrated
crude steel producer) ................................. 1,158,958
87,000 Tokyo Electron Ltd. (Leading semiconductor production
equipment manufacturer) ............................... 2,785,599
-----------
65,417,794
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
72
<PAGE>
INTERNATIONAL PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Malaysia 0.4%
842,700 Arab Malaysian Finance Berhad (Foreign registered)
(Licensed finance company) ............................ 168,995
570,800 Arab-Malaysian Corp. (Investment holding company with
interests in financial services, infrastructure and
property) ............................................. 168,767
145,700 Malayan Banking Berhad (Leading banking and financial
services group) ....................................... 423,296
905,933 Malaysian Resources Corp. (Property development and
investment) ........................................... 209,626
1,045,700 Multi-Purpose Holdings Berhad (Investment holding
company) .............................................. 268,852
411,300 United Engineers (Malaysia) Berhad (Leading
comprehensive contractor) (a) ......................... 342,618
-----------
1,582,154
-----------
Netherlands 4.5%
64,100 AEGON Insurance Group NV (Insurance company) ............ 5,705,997
12,700 Akzo-Nobel NV (Chemical producer) ....................... 2,189,634
108,570 Elsevier NV (International publisher of scientific,
professional, business, and consumer information
books) ................................................ 1,756,224
23,150 Heineken Holdings NV "A" (Brewery) ...................... 3,562,065
60,700 Philips Electronics NV (Leading manufacturer of
electrical equipment) ................................. 3,640,144
41,500 Royal Dutch Petroleum Co. (Owner of 60% of Royal
Dutch/Shell Group) .................................... 2,277,926
-----------
19,131,990
-----------
Philippines 0.7%
358,000 Ayala Land, Inc. "B" (Real estate and land developer) ... 141,432
4,935,000 C & P Homes, Inc. (Home construction company) ........... 287,570
492,483 Manila Electric Co. "B" (Electric utility) .............. 1,629,450
154,856 Metropolitan Bank and Trust Company (Commercial bank and
trust company) ........................................ 1,041,932
-----------
3,100,384
-----------
Portugal 2.6%
90,576 Jeromino Martins S.A. (New) (Food producer and
retailer) (a) ......................................... 2,787,802
31,984 Jeronimo Martins S.A. ................................... 1,014,869
160,000 Portugal Telecom S.A. (Telecommunication services) ...... 7,424,070
-----------
11,226,741
-----------
Sweden 3.7%
135,000 AGA AB "B" (Free) (Producer and distributor of
industrial and medical gases) ......................... 1,785,579
135,892 L.M. Ericsson Telephone Co. "B" (ADR) (Leading
manufacturer of cellular telephone equipment) ......... 5,070,470
186,200 Skandia Foersaekrings AB (Free) (Financial conglomerate). 8,783,904
-----------
15,639,953
-----------
Switzerland 9.0%
41,999 Ciba Specialty Chemical (Registered) (Manufacturer of
chemical products for plastics, coatings, fibers and
fabrics) .............................................. 5,000,223
6,716 Clariant AG (Registered) (Manufacturer of color
chemicals) ............................................ 5,606,240
42,222 Credit Suisse Group (Registered) (Provider of bank
services, management services and life insurance) ..... 6,529,026
2,602 Nestle S.A. (Registered) (Food manufacturer) ............ 3,897,214
2,657 Novartis AG (Bearer) (Pharmaceutical company) ........... 4,317,739
3,339 Novartis AG (Registered) ................................ 5,414,595
</TABLE>
The accompanying notes are an integral part of the financial statements.
73
<PAGE>
INTERNATIONAL PORTFOLIO
<TABLE>
<CAPTION>
% of Principal Market
Portfolio Amount ($) Value ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
462 Roche Holdings AG (PC) (Producer of drugs and medicines) 4,585,228
2,086 Union Bank of Switzerland (Bearer) (Bank) ............... 3,014,459
-----------
38,364,724
-----------
United Kingdom 14.5%
190,850 Avis Europe PLC (Car rental services) ................... 545,390
270,448 BOC Group PLC (Producer of industrial gases) ............ 4,446,139
338,668 British Petroleum PLC (Major integrated world oil
company) .............................................. 4,479,668
471,700 Carlton Communications PLC (Television post production
products and services) ................................ 3,641,071
714,599 General Electric Co., PLC (Manufacturer of power,
communications and defense equipment and other various
electrical components) ................................ 4,629,935
199,088 Glaxo Wellcome PLC (Pharmaceutical company) ............. 4,745,933
246,450 Imperial Chemical Industries PLC (Leading international
chemical producer) .................................... 3,849,238
304,750 Pearson PLC (Diversified media and entertainment holding
company) .............................................. 3,959,001
1,003,979 Pilkington PLC (Manufacturer of glass for building and
transport markets) .................................... 2,102,327
460,297 PowerGen PLC (Electric utility) ......................... 5,987,269
166,557 Rio Tinto, PLC (Mining and finance company) ............. 2,052,953
341,002 Reuters Holdings PLC (International news agency) ........ 3,724,294
659,873 SmithKline Beecham PLC (Manufacturer of ethical drugs
and healthcare products) .............................. 6,800,479
1,165,205 WPP Group PLC (Advertising agency) ...................... 5,186,054
159,000 Zeneca Group PLC (Holding company: manufacturing and
marketing of pharmaceutical and agrochemical products
and specialty chemicals) .............................. 5,631,475
-----------
61,781,226
-----------
United States 0.8%
107,060 Autoliv Inc. (Manufacturer of automobile safety
components and systems) ............................... 3,506,215
-----------
Total Common Stocks (Cost $345,334,530) ................. 410,635,693
-----------
- --------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0%
(Cost $360,970,983) (b) ............................... 425,402,334
===========
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non-income producing security.
(a) Security valued in good faith by the Valuation Committee
of the Board of Trustees at fair value amounted to
$3,130,420 (.73% of net assets). The value has been
estimated by the Board of Trustees in the absence of
readily ascertainable market values. However, because of
the inherent uncertainty of valuation, the estimated
values may differ significantly from the values that
would have been used had a ready market for the
securities existed, and the difference could be
material. The cost of these securities at December 31,
1997 aggregated $2,950,931. The security may also have
certain restrictions as to resale.
(b) At December 31, 1997, the net unrealized appreciation on
investments based on cost for federal income tax
purposes of $361,635,038 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of market value
over tax cost ............................................. $ 95,710,112
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost over
market value .............................................. 31,942,816
------------
Net unrealized appreciation ................................. $ 63,767,296
============
- --------------------------------------------------------------------------------
Purchases and sales of investment securities (excluding short-term
investments), for the year ended December 31, 1997, aggregated $431,563,484
and $738,283,182, respectively. The sales of investment securities includes
the market value of securities relating to redemptions-in-kind during the
period, upon which the Portfolio recognized a net realized gain of
$75,442,315.
- --------------------------------------------------------------------------------
Currency Abbreviations
- ----------------------
JPY Japanese Yen
The accompanying notes are an integral part of the financial statements.
74
<PAGE>
INTERNATIONAL PORTFOLIO
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments, at market (identified cost $360,970,983) .............. $ 425,402,334
Cash ............................................................... 734
Receivables:
Investments sold ................................................ 2,826,190
Foreign taxes recoverable ....................................... 576,512
Dividends and interest .......................................... 1,229,667
Other assets ....................................................... 10,157
-------------
Total assets ................................................. 430,045,594
Liabilities
Payables:
Investments purchased ........................................... $ 2,265,345
Accrued management fee .......................................... 313,735
Other payables and accrued expenses ............................. 228,634
-----------
Total liabilities ............................................ 2,807,714
-------------
Net assets, at market value ........................................ $ 427,237,880
=============
Net Assets
Net assets consist of:
Undistributed net investment income ............................. 7,228,444
Net unrealized appreciation (depreciation) on:
Investments .................................................. 64,431,351
Foreign currency related transactions ........................ (23,243)
Accumulated net realized gain ................................... 49,739,061
Paid-in capital ................................................. 305,862,267
-------------
Net assets, at market value ........................................ $ 427,237,880
=============
Class A
Net asset value, offering and redemption price per share
($426,890,461 / 30,264,570 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized) .. $14.11
======
Class B
Net asset value, offering and redemption price per share
($347,419 / 24,670 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized) .. $14.08
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
75
<PAGE>
INTERNATIONAL PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment income
Income:
Dividends (net of foreign taxes withheld of $1,619,366) ....... $ 12,564,600
Interest (net of foreign taxes withheld of $5,841) ............ 2,685,205
------------
15,249,805
Expenses:
Management fee ................................................ $ 6,520,030
Services to shareholders ...................................... 9,365
Custodian fees ................................................ 718,509
Accounting fees ............................................... 466,669
Distribution fees (Class B) ................................... 327
Trustees' fees and expenses ................................... 16,531
Reports to shareholders ....................................... 14,417
Auditing ...................................................... 45,595
Legal ......................................................... 33,283
Other ......................................................... 64,499 7,889,225
------------ ------------
Net investment income ............................................ 7,360,580
------------
Net realized and unrealized gain (loss) on investment transactions
Net realized gain (loss) from:
Investments ................................................... 127,011,469
Foreign currency related transactions ......................... (1,396,204) 125,615,265
------------
Net unrealized appreciation (depreciation) during the period on:
Investments ................................................... (70,354,325)
Foreign currency related transactions ......................... (31,647) (70,385,972)
------------ ------------
Net gain on investment transactions .............................. 55,229,293
------------
Net increase (decrease) in net assets resulting from operations ..... $ 62,589,873
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
76
<PAGE>
INTERNATIONAL PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
Increase (Decrease) in Net Assets 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ............................................ $ 7,360,580 $ 6,138,762
Net realized gain (loss) from investment transactions ............ 125,615,265 28,242,210
Net unrealized appreciation (depreciation) on investment
transactions during the period ................................ (70,385,972) 55,234,650
------------- -------------
Net increase in net assets resulting from operations ................ 62,589,873 89,615,622
------------- -------------
Distributions to shareholders from:
Net investment income (Class A) .................................. (11,550,387) (13,901,339)
------------- -------------
Net realized gain from investment transactions (Class A) ......... (6,050,202) --
------------- -------------
Portfolio share transactions:
Class A
Proceeds from shares sold ........................................ 326,908,941 250,971,681
Net asset value of shares issued to shareholders in
reinvestment of distributions ................................. 17,600,589 13,901,339
Cost of shares redeemed .......................................... (688,657,725) (162,751,269)
------------- -------------
Net increase (decrease) in net assets from Class A share transactions (344,148,195) 102,121,751
------------- -------------
Class B*
Proceeds from shares sold ........................................ 365,304 --
Cost of shares redeemed .......................................... (7,040) --
------------- -------------
Net increase (decrease) in net assets from Class B share transactions 358,264 --
------------- -------------
Increase (decrease) in net assets ................................... (298,800,647) 177,836,034
Net assets at beginning of period ................................... 726,038,527 548,202,493
------------- -------------
Net assets at end of period (including undistributed net
investment income of $7,228,444 and $10,702,948, respectively) ... $ 427,237,880 $ 726,038,527
============= =============
Other Information
Increase (decrease) in Portfolio shares
Class A
Shares outstanding at beginning of period ........................... 54,809,210 46,398,169
------------- -------------
Shares sold ...................................................... 23,224,538 20,288,490
Shares issued to shareholders in reinvestment of distributions ... 1,330,354 1,166,953
Shares redeemed .................................................. (49,099,532) (13,044,402)
------------- -------------
Net increase (decrease) in Portfolio shares ...................... (24,544,640) 8,411,041
------------- -------------
Shares outstanding at end of period ................................. 30,264,570 54,809,210
============= =============
Class B*
Shares outstanding at beginning of period ........................... -- --
------------- -------------
Shares sold ...................................................... 25,146 --
Shares redeemed .................................................. (476) --
------------- -------------
Net increase (decrease) in Portfolio shares ...................... 24,670 --
------------- -------------
Shares outstanding at end of period ................................. 24,670 --
============= =============
</TABLE>
* For the period May 8, 1997 (commencement of sale of Class B shares) to
December 31, 1997.
The accompanying notes are an integral part of the financial statements.
77
<PAGE>
INTERNATIONAL PORTFOLIO
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding (a)
throughout each period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
Class A (d) Years Ended December 31,
- -------------------- ----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period ........................... $ 13.25 $ 11.82 $ 10.69 $ 10.85 $ 8.12 $ 8.47 $ 7.78 $ 8.46 $ 6.14 $ 5.26
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from investment operations:
Net investment income ............ .14 .12 .11 .06 .09 .10 .12 .25 .10 .09
Net realized and unrealized
gain (loss) on investment
transactions .................... 1.04 1.60 1.07 (.15) 2.90 (.36) .77 (.89) 2.22(c) .79
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations ....................... 1.18 1.72 1.18 (.09) 2.99 (.26) .89 (.64) 2.32 .88
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Less distributions:
From net investment income ....... (.21) (.29) (.01) (.07) (.14) (.09) (.20) (.04) -- --
In excess of net investment income -- -- -- -- (.12) -- -- -- -- --
From net realized gains on
investment transactions ......... (.11) -- (.04) -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions .............. (.32) (.29) (.05) (.07) (.26) (.09) (.20) (.04) -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end
of period ........................ $ 14.11 $ 13.25 $ 11.82 $ 10.69 $ 10.85 $ 8.12 $ 8.47 $ 7.78 $ 8.46 $ 6.14
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total Return (%) ................... 9.07 14.78 11.11 (.85) 37.82 (3.08) 11.45 (7.65) 37.79 16.73
Ratios and
Supplemental Data
Net assets, end of period
($ millions) ....................... 427 726 548 472 238 65 41 35 17 3
Ratio of operating expenses,
net to average daily net
assets (%) ....................... 1.00 1.05 1.08 1.08 1.20 1.31 1.39 1.38 1.50 1.50
Ratio of operating expenses before
expense reductions, to average
daily net assets (%) ............ 1.00 1.05 1.08 1.08 1.20 1.31 1.39 1.38 1.80 4.15
Ratio of net investment income to
average daily net assets (%) ..... .94 .95 .95 .57 .91 1.23 1.43 2.89 1.30 1.59
Portfolio turnover rate (%) ........ 61.35 32.63 45.76 33.52 20.36 34.42 45.01 26.67 57.69 110.42
Average commission rate paid (b) ... $ .0013 $ .0002 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred securities is
calculated for fiscal years beginning on or after December 31, 1995.
(c) Includes provision for federal income tax of $.03 per share.
(d) On May 8, 1997, existing shares were designated as Class A shares.
78
<PAGE>
INTERNATIONAL PORTFOLIO
The following table includes selected data for a share outstanding (a)
throughout the period and other performance information derived from the
financial statements.
<TABLE>
<CAPTION>
For the Period
May 8, 1997
Class B (commencement of
- --------------- sale of Class B shares)
to December 31,
1997
-----------------------
<S> <C>
Net asset value, beginning of period ....................................... $13.76
------
Income from investment operations:
Net investment income (loss) ............................................. (.00)
Net realized and unrealized gain (loss) on investment transactions ....... .32
------
Total from investment operations ........................................... .32
------
Net asset value, end of period ............................................. $14.08
======
Total Return (%) ........................................................... 2.33**
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..................................... .35
Ratio of operating expenses, net to average daily net assets (%) ........... 1.24*
Ratio of net investment income to average daily net assets (%) ............. (.00)*(c)
Portfolio turnover rate (%) ................................................ 61.35
Average commission rate paid (b) ........................................... $.0013
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred securities.
(c) Amount shown is less than one half of .01%.
* Annualized
** Not annualized
79
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
NOTES TO FINANCIAL STATEMENTS
A. Significant Accounting Policies
- --------------------------------------------------------------------------------
Scudder Variable Life Investment Fund (the "Fund") is organized as a
Massachusetts business trust and is registered under the Investment Company Act
of 1940, as amended, as an open-end, diversified management investment company.
Its shares are divided into seven separate diversified series, called
"Portfolios." The Portfolios are comprised of the Money Market Portfolio, Bond
Portfolio, Balanced Portfolio, Growth and Income Portfolio, Capital Growth
Portfolio, Global Discovery Portfolio, and International Portfolio. The Fund is
intended to be the funding vehicle for variable annuity contracts and variable
life insurance policies to be offered by the separate accounts of certain life
insurance companies ("Participating Insurance Companies").
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
The policies described below are followed consistently by the Fund in the
preparation of the financial statements for its Portfolios.
Multiple Classes Of Shares Of Beneficial Interest. The Fund offers one class of
shares for the Money Market Portfolio and two classes of shares (Class A shares
and Class B shares) for the other Portfolios. Class B shares are subject to a
12b-1 fee under the Investment Company Act of 1940, equal to an annual rate of
up to 0.25% of the average daily net asset value of the Class B shares of the
applicable Portfolio. Class A shares are not subject to such fees. Expenses are
borne pro-rata on the basis of relative net assets by the holders of all classes
of shares except that each class bears expenses unique to that class (including
the applicable 12b-1 fee). In accordance with the Master Distribution Plan, the
12b-1 fees are remitted to the Participating Insurance Companies for various
costs incurred or paid by the Participating Insurance Companies in connection
with the distribution of Class B shares.
Security Valuation. The Money Market Portfolio values all securities utilizing
the amortized cost method permitted in accordance with Rule 2a-7 under the
Investment Company Act of 1940, as amended, and pursuant to which the Portfolio
must adhere to certain conditions. Under this method, which does not take into
account unrealized gains or losses on securities, an instrument is initially
valued at its cost and thereafter assumes a constant accretion/amortization to
maturity of any discount/premium.
Securities in each of the remaining Portfolios are valued in the following
manner:
Portfolio securities which are traded on U.S. or foreign stock exchanges are
valued at the most recent sale price reported on the exchange on which the
security is traded most extensively. If no sale occurred, the security is then
valued at the calculated mean between the most recent bid and asked quotations.
If there are no such bid and asked quotations, the most recent bid quotation is
used. Securities quoted on the Nasdaq System, for which there have been sales,
are valued at the most recent sale price reported on such system. If there are
no such sales, the value is the most recent bid quotation. Securities which are
not quoted on the Nasdaq System but are traded in another over-the-counter
market are valued at the most recent sale price on such market. If no sale
occurred, the security is then valued at the calculated mean between the most
recent bid and asked quotations. If there are no such bid and asked quotations,
the most recent bid quotation shall be used.
Portfolio debt securities purchased with original maturities greater than sixty
days are valued by pricing agents approved by the officers of the Fund, which
quotations reflect broker/dealer-supplied valuations and electronic data
processing techniques. If the pricing agents are unable to provide such
quotations, the most recent bid quotation supplied by a bona fide market maker
shall be used. Money market instruments with an original maturity of sixty days
or less are valued at amortized cost.
All other securities are valued at their fair value as determined in good faith
by the Valuation Committee of the Board of Trustees. Their values have been
estimated by the Board of Trustees in the absence of readily ascertainable
market values. However, because of the inherent uncertainty of valuation, those
estimated values may differ significantly from the values that would have been
used had a ready market for the securities existed, and the difference could be
material.
Futures Contracts. The non-money market Portfolios may enter into futures
contracts. A futures contract is an agreement between a buyer or seller and an
established futures exchange or its clearinghouse in which the buyer or seller
agrees to take or make a delivery of a specific amount of an item at a specified
price on a specific date (settlement date). During the period, the Bond
Portfolio sold
80
<PAGE>
NOTES TO FINANCIAL STATEMENTS
interest rate futures to hedge against declines in the value of portfolio
securities. Also, during the period, the Bond Portfolio purchased interest rate
futures to manage the duration of the Portfolio.
Upon entering into a futures contract, the Portfolio is required to deposit with
a financial intermediary an amount ("initial margin") equal to a certain
percentage of the face value indicated in the futures contract. Subsequent
payments ("variation margin") are made or received by the Portfolio each day,
dependent on the daily fluctuations in the value of the underlying security, and
are recorded for financial reporting purposes as unrealized gains or losses by
the Portfolio. When entering into a closing transaction, the Portfolio will
realize a gain or loss equal to the difference between the value of the futures
contract to sell and the futures contract to buy. Futures contracts are valued
at the most recent settlement price.
Certain risks may arise upon entering into futures contracts including the risk
that an illiquid secondary market will limit the Portfolio's ability to close
out a futures contract prior to the settlement date and that a change in the
value of a futures contract may not correlate exactly with changes in the value
of the securities or currencies hedged. When utilizing futures contracts to
hedge, the Portfolio gives up the opportunity to profit from favorable price
movements in the hedged positions during the term of the contract.
Foreign Currency Translations. The books and records of the Portfolios are
maintained in U.S. dollars. Foreign currency transactions are translated into
U.S. dollars on the following basis:
(i) market value of investment securities, other assets and liabilities
at the daily rates of exchange, and
(ii) purchases and sales of investment securities, dividend and interest
income and certain expenses at the rates of exchange prevailing on
the respective dates of such transactions.
The Portfolios do not isolate that portion of gains and losses on investments
which is due to changes in foreign exchange rates from that which is due to
changes in market prices of the investments. Such fluctuations are included with
the net realized and unrealized gains and losses from investments.
Net realized and unrealized gain (loss) from foreign currency related
transactions includes gains and losses between trade and settlement dates on
securities transactions, gains and losses arising from the sales of foreign
currency, and gains and losses between the ex and payment dates on dividends,
interest, and foreign withholding taxes.
Forward Foreign Currency Exchange Contracts. A forward foreign currency exchange
contract (forward contract) is a commitment to purchase or sell a foreign
currency at the settlement date at a negotiated rate. During the period, the
Capital Growth Portfolio, the Growth and Income Portfolio, the Global Discovery
Portfolio and the International Portfolio utilized forward contracts as a hedge
in connection with portfolio purchases and sales of securities denominated in
foreign currencies and the Global Discovery Portfolio utilized forward contracts
as a hedge against changes in exchange rates relating to foreign currency
denominated assets.
Forward contracts are valued at the prevailing forward exchange rate of the
underlying currencies and unrealized gain/loss is recorded daily. Forward
contracts having the same settlement date and broker are offset and any gain
(loss) is realized on the date of offset; otherwise, gain (loss) is realized on
settlement date. Realized and unrealized gains and losses which represent the
difference between the value of the forward contract to buy and the forward
contract to sell are included in net realized and unrealized gain (loss) from
foreign currency related transactions.
Certain risks may arise upon entering into forward contracts from the potential
inability of counterparties to meet the terms of their contracts. Additionally,
when utilizing forward contracts to hedge, the Fund gives up the opportunity to
profit from favorable exchange rate movements during the term of the contract.
Repurchase Agreements. The Fund may enter into repurchase agreements with
certain banks and broker/dealers whereby the Fund, through its custodian,
receives delivery of the underlying securities, the amount of which at the time
of purchase and each subsequent business day is required to be maintained at
such a level that the market value, depending on the maturity of the repurchase
agreement, is equal to at least 100.5% of the repurchase price.
81
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Federal Income Taxes. Each Portfolio is treated as a single corporate taxpayer
as provided for in the Internal Revenue Code of 1986, as amended. It is each
Portfolio's policy to comply with the requirements of the Internal Revenue Code
which are applicable to regulated investment companies and to distribute all of
its investment company taxable income to the separate accounts of the
Participating Insurance Companies which hold its shares. Accordingly, the
Portfolios paid no federal income taxes and no provision for federal income
taxes was required.
Distribution of Income and Gains. All of the net investment income of the Money
Market Portfolio is declared as a dividend to shareholders of record as of the
close of business each day and is paid to shareholders monthly. Dividends from
the Bond Portfolio, Balanced Portfolio, Growth and Income Portfolio, and the
Capital Growth Portfolio are declared and paid quarterly in April, July, October
and January. All of the net investment income of the Global Discovery Portfolio
and the International Portfolio normally will be declared and distributed as a
dividend annually. During any particular year, net realized gains from
investment transactions for each Portfolio, in excess of available capital loss
carryforwards, would be taxable to the Portfolio if not distributed and,
therefore, will be distributed to the Participating Insurance Companies.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax regulations
which may differ from generally accepted accounting principles. The differences
primarily relate to investments in forward contracts, passive foreign investment
companies, post October loss deferral, non-taxable distributions, and certain
securities sold at a loss. As a result, net investment income (loss) and net
realized gain (loss) on investment transactions for a reporting period may
differ significantly from distributions during such period.
Accordingly, the Portfolios may periodically make reclassifications among
certain of its capital accounts without impacting the net asset value of each
Portfolio.
The Portfolios use the specific identification method for determining realized
gain or loss on investments for both financial and federal income tax reporting
purposes.
Expenses. Each Portfolio is charged for those expenses which are directly
attributable to it, such as management fees and custodian fees, while other
expenses (reports to shareholders, legal and audit fees) are allocated based on
relative net asset value among the Portfolios.
Other. Investment security transactions are accounted for on a trade date basis.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income is recorded on the accrual basis. All original
issue discounts are accreted for both tax and financial reporting purposes.
B. Ownership of the Portfolios
- --------------------------------------------------------------------------------
At the end of the period, the beneficial ownership in the Portfolios was as
follows:
Money Market Portfolio: Two Participating Insurance Companies were owners of
record of 10% or more of the total outstanding shares of the Portfolio, each
owning 51% and 40%, respectively.
Bond Portfolio: Three Participating Insurance Companies were owners of record of
10% or more of the total outstanding shares of the Portfolio, each owning 39%,
32%, and 11%, respectively.
Balanced Portfolio: Two Participating Insurance Companies were owners of record
of 10% or more of the total outstanding shares of the Portfolio, each owning 49%
and 27%, respectively.
Growth & Income Portfolio: Two Participating Insurance Companies were owners of
record of 10% or more of the total outstanding Class A shares of the Portfolio,
each owning 81% and 11%, respectively. One Participating Insurance Company was
owner of record of 100% of the total outstanding Class B shares of the
Portfolio.
Capital Growth Portfolio: Two Participating Insurance Companies were owners of
record of 10% or more of the total outstanding Class A shares of the Portfolio,
each owning 58% and 21%, respectively. One Participating Insurance Company was
owner of record of 100% of the total outstanding Class B shares of the
Portfolio.
Global Discovery Portfolio: Two Participating Insurance Companies were owners of
record of 10% or more of the total outstanding Class A shares of the Portfolio,
each owning 81% and 11%, respectively.
82
<PAGE>
NOTES TO FINANCIAL STATEMENTS
One Participating Insurance Company was owner of record of 100% of the total
outstanding Class B shares of the Portfolio.
International Portfolio: Three Participating Insurance Companies were owners of
record of 10% or more of the total outstanding Class A shares of the Portfolio,
each owning 40%, 20%, and 16%, respectively. One Participating Insurance Company
was owner of record of 100% of the total outstanding Class B shares of the
Portfolio. One Participating Insurance Company was owner of record of 100% of
the total outstanding Class B shares of the Portfolio.
C. Related Parties
- --------------------------------------------------------------------------------
Effective December 31, 1997, Scudder, Stevens & Clark, Inc. ("Scudder") and The
Zurich Insurance Company ("Zurich"), an international insurance and financial
services organization, formed a new global investment organization by combining
Scudder's business with that of Zurich's subsidiary, Zurich Kemper Investments,
Inc. As a result of the transaction, Scudder changed its name to Scudder Kemper
Investments, Inc. ("Scudder Kemper" or the "Adviser"). The transaction between
Scudder and Zurich resulted in the termination of the Fund's Investment
Management Agreement with Scudder. However, a new Investment Management
Agreement (the "Management Agreement") between the Fund and Scudder Kemper was
approved by the Fund's Board of Trustees and by the Fund's Shareholders. The
Management Agreement, which became effective December 31, 1997, is the same in
all material respects as the corresponding previous Investment Management
Agreement, except that Scudder Kemper is the new investment adviser to the Fund.
Under the Management Agreement with Scudder Kemper, the Fund agrees to pay the
Adviser a fee, based on average daily net assets, equal to an annual rate of
.370% for the Money Market Portfolio, .475% for the Bond Portfolio, .475% for
the Balanced Portfolio, .475% for the Growth and Income Portfolio, .975% for the
Global Discovery Portfolio, .475% for the first $500,000,000, .450% over
$500,000,000 for the Capital Growth Portfolio, and .875% for the first
$500,000,000, .725% over $500,000,000 for the International Portfolio, computed
and accrued daily and payable monthly. Until August 7, 1997, this fee was
calculated, based on average daily net assets, equal to an annual rate of .475%
for the Capital Growth Portfolio; and .875% for the first $500,000,000, .775%
over $500,000,000 for the International Portfolio. As manager of the assets of
each Portfolio, the Adviser directs the investments of the Portfolios in
accordance with their investment objectives, policies, and restrictions. The
Adviser determines the securities, instruments, and other contracts relating to
investments to be purchased, sold or entered into by the Portfolios. In addition
to portfolio management services, the Adviser provides certain administrative
services in accordance with the Management Agreement.
The Trustees authorized the Fund on behalf of each Portfolio to pay Scudder Fund
Accounting Corp., a subsidiary of the Adviser, for determining the daily net
asset value per share and maintaining the portfolio and general accounting
records of the Fund.
Related fees for such services are detailed in each Portfolio's statement of
operations.
Until April 30, 1998, the Adviser has agreed to waive all or part of its fees
for the Global Discovery Portfolio, excluding 12b-1 fees, to the extent that the
Portfolio's expenses will be maintained at 1.50% of average annual net assets.
The Fund pays each Trustee not affiliated with the Adviser an annual retainer
plus specified amounts for attended board and committee meetings. Allocated
Trustees' fees and expenses for each Portfolio for the year ended December 31,
1997 are detailed in each Portfolio's statement of operations.
D. Lines of Credit
- --------------------------------------------------------------------------------
The International Portfolio and several other Scudder Funds (the "Participants")
share in a $500 million revolving credit facility for temporary or emergency
purposes, including the meeting of redemption requests that otherwise might
require the untimely disposition of securities. The Participants are charged an
annual commitment fee which is allocated among each of the Participants.
Interest is calculated based on the market rates at the time of the borrowing.
The International Portfolio may borrow up to a maximum of 25 percent of its net
assets under the agreement. In addition, the International Portfolio also
maintains an uncommitted line of credit.
83
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of Scudder Variable Life Investment Fund:
We have audited the accompanying statements of assets and liabilities of Scudder
Variable Life Investment Fund (comprised of the seven Portfolios identified in
Note A), including the investment portfolios, as of December 31, 1997, and the
related statements of operations, the statements of changes in net assets, and
the financial highlights for each of the periods indicated herein. 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 an 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 confirmation of securities owned as of
December 31, 1997 by correspondence with the custodian 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
Scudder Variable Life Investment Fund (comprised of the seven Portfolios
identified in Note A) as of December 31, 1997, the results of their operations,
the changes in their net assets, and their financial highlights for each of the
periods indicated herein conformity with generally accepted accounting
principles.
Boston, Massachusetts COOPERS & LYBRAND L.L.P.
January 30, 1998
84
<PAGE>
SCUDDER VARIABLE LIFE INVESTMENT FUND
TAX INFORMATION
The Balanced Portfolio, Bond Portfolio, Capital Growth Portfolio, Growth and
Income Portfolio, and International Portfolio paid distributions of $.64, $.02,
$.74, $.35, and $.11 per share, respectively, from net long-term capital gains
during the year ended December 31, 1997.
Pursuant to section 852 of the Internal Revenue Code, the Balanced Portfolio,
Bond Portfolio, Capital Growth Portfolio, Growth and Income Portfolio, Global
Discovery, and International Portfolio designate $4,312,490, $193,958,
$31,520,629, $10,295,304, $166,032, and $42,459,797, respectively, as capital
gain dividends for the year ended December 31, 1997, of which 40%, 21%, 43%,
72%, 69%, and 100% represent 20% rate gains, respectively.
Pursuant to section 854 of the Internal Revenue Code, the percentages of income
dividends paid in calendar year 1996 which qualify for the dividends received
deduction for corporations are as follows: Balanced Portfolio 20%, Capital
Growth Portfolio 71%, and Growth and Income Portfolio 100%.
85
<PAGE>
MONEY MARKET PORTFOLIO
SHAREHOLDER MEETING RESULTS
A Special Meeting of Shareholders of Scudder Variable Life Investment Fund,
Money Market Portfolio, was held on October 24, 1997, at the offices of Scudder
Kemper Investments, Inc. (formerly Scudder, Stevens & Clark, Inc.), Two
International Place, Boston, Massachusetts 02110. The following matters were
voted upon by the shareholders and the resulting votes for each matter are
presented below.
1. To approve the new Investment Management Agreement between the Fund and
Scudder Kemper Investments, Inc.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
101,166,979 4,357,475 2,978,403 0
2. To elect Trustees.
Number of Votes:
Trustee For Withheld
------- --- --------
Dr. Kenneth Black, Jr. 105,734,949 2,767,908
Dr. Rosita P. Chang 105,945,445 2,557,412
Peter B. Freeman 106,034,417 2,468,440
Dr. J.D. Hammond 106,060,458 2,442,399
Daniel Pierce 106,060,458 2,442,399
3. To approve the Board's discretionary authority to convert the Fund to a
master/feeder fund structure through a sale or transfer of assets or
otherwise.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
97,002,639 7,020,135 4,480,083 0
4(A). To approve certain provisions of the Amended and Restated Declaration of
Trust.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
97,136,098 7,172,039 4,194,720 0
4(B). To approve certain other provisions of the Amended and Restated
Declaration of Trust.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
97,519,113 6,849,785 4,133,959 0
86
<PAGE>
MONEY MARKET PORTFOLIO
5. To approve the revision of certain fundamental investment policies.
<TABLE>
<CAPTION>
Number of Votes:
Broker
Fundamental Policies For Against Abstain Non-Votes*
-------------------- --- ------- ------- ----------
<C> <S> <C> <C> <C> <C>
5.1 Diversification 91,608,962 10,593,134 6,300,761 0
5.2 Borrowing 95,923,036 6,279,060 6,300,761 0
5.3 Senior securities 95,926,291 6,275,805 6,300,761 0
5.4 Concentration 95,926,291 6,275,805 6,300,761 0
5.5 Purchase of physical commodities 95,926,291 6,275,805 6,300,761 0
5.6 Underwriting of securities 95,926,291 6,275,805 6,300,761 0
5.7 Investment in real estate 95,926,291 6,275,805 6,300,761 0
5.8 Lending 95,926,291 6,275,805 6,300,761 0
5.9 Margin purchases and short sales 91,608,962 10,593,134 6,300,761 0
5.10 Joint trading accounts 95,926,291 6,275,805 6,300,761 0
5.11 Purchases of securities of related 91,607,877 10,594,219 6,300,761 0
issuers
5.12 Pledging of assets 91,595,942 10,606,154 6,300,761 0
5.13 Restricted and illiquid securities 91,595,942 10,606,154 6,300,761 0
5.14 Voting securities 91,607,877 10,594,219 6,300,761 0
5.15 Options 91,605,707 10,596,389 6,300,761 0
</TABLE>
6. To ratify the selection of Coopers & Lybrand L.L.P. as the Fund's
independent accountants.
Number of Votes:
For Against Abstain
--- ------- -------
103,867,615 1,916,160 2,719,082
* Broker non-votes are proxies received by the Fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary power
to vote on a particular matter.
87
<PAGE>
BOND PORTFOLIO
SHAREHOLDER MEETING RESULTS
A Special Meeting of Shareholders of Scudder Variable Life Investment Fund, Bond
Portfolio, was held on October 24, 1997, at the offices of Scudder Kemper
Investments, Inc. (formerly Scudder, Stevens & Clark, Inc.), Two International
Place, Boston, Massachusetts 02110. The following matters were voted upon by the
shareholders and the resulting votes for each matter are presented below.
1. To approve the new Investment Management Agreement between the Fund and
Scudder Kemper Investments, Inc.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
9,632,275 325,149 235,351 0
2. To elect Trustees.
Number of Votes:
Trustee For Withheld
------- --- --------
Dr. Kenneth Black, Jr. 9,982,091 210,684
Dr. Rosita P. Chang 9,997,074 195,701
Peter B. Freeman 10,010,019 182,756
Dr. J.D. Hammond 10,011,038 181,737
Daniel Pierce 10,006,146 186,629
3. To approve the Board's discretionary authority to convert the Fund to a
master/feeder fund structure through a sale or transfer of assets or
otherwise.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
9,095,218 600,660 496,897 0
4(A). To approve certain provisions of the Amended and Restated Declaration of
Trust.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
9,194,903 537,057 460,815 0
4(B). To approve certain other provisions of the Amended and Restated
Declaration of Trust.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
9,203,974 535,324 453,477 0
88
<PAGE>
BOND PORTFOLIO
5. To approve the revision of certain fundamental investment policies.
<TABLE>
<CAPTION>
Number of Votes:
Broker
Fundamental Policies For Against Abstain Non-Votes*
-------------------- --- ------- ------- ----------
<C> <S> <C> <C> <C> <C>
5.1 Diversification 9,118,457 575,382 498,936 0
5.2 Borrowing 9,108,264 585,575 498,936 0
5.3 Senior securities 9,122,228 571,611 498,936 0
5.4 Concentration 9,116,623 577,216 498,936 0
5.5 Purchase of physical commodities 9,118,253 575,586 498,936 0
5.6 Underwriting of securities 9,118,457 575,382 498,936 0
5.7 Investment in real estate 9,122,025 571,814 498,936 0
5.8 Lending 9,122,228 571,611 498,936 0
5.9 Margin purchases and short sales 9,113,972 579,867 498,936 0
5.10 Joint trading accounts 9,122,228 571,611 498,936 0
5.11 Purchases of securities of related 9,122,228 571,611 498,936 0
issuers
5.12 Pledging of assets 9,117,540 576,299 498,936 0
5.13 Restricted and illiquid securities 9,118,559 575,280 498,936 0
5.14 Voting securities 9,121,311 572,528 498,936 0
5.15 Options 9,102,658 591,181 498,936 0
</TABLE>
6. To ratify the selection of Coopers & Lybrand L.L.P. as the Fund's
independent accountants.
Number of Votes:
For Against Abstain
--- ------- -------
9,949,780 57,997 184,998
* Broker non-votes are proxies received by the Fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary
power to vote on a particular matter.
89
<PAGE>
BALANCED PORTFOLIO
SHAREHOLDER MEETING RESULTS
A Special Meeting of Shareholders of Scudder Variable Life Investment Fund,
Balanced Portfolio, was held on October 24, 1997, at the offices of Scudder
Kemper Investments, Inc. (formerly Scudder, Stevens & Clark, Inc.), Two
International Place, Boston, Massachusetts 02110. The following matters were
voted upon by the shareholders and the resulting votes for each matter are
presented below.
1. To approve the new Investment Management Agreement between the Fund and
Scudder Kemper Investments, Inc.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
7,970,417 339,973 188,940 0
2. To elect Trustees.
Number of Votes:
Trustee For Withheld
------- --- --------
Dr. Kenneth Black, Jr. 8,247,410 251,920
Dr. Rosita P. Chang 8,248,175 251,155
Peter B. Freeman 8,248,345 250,985
Dr. J.D. Hammond 8,251,745 247,585
Daniel Pierce 8,249,960 249,370
3. To approve the Board's discretionary authority to convert the Fund to a
master/feeder fund structure through a sale or transfer of assets or
otherwise.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
7,476,096 711,734 311,500 0
4(A) To approve certain provisions of the Amended and Restated Declaration of
Trust.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
7,553,100 515,994 430,236 0
4(B) To approve certain other provisions of the Amended and Restated
Declaration of Trust.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
7,563,044 502,140 434,146 0
90
<PAGE>
BALANCED PORTFOLIO
5. To approve the revision of certain fundamental investment policies.
<TABLE>
<CAPTION>
Number of Votes:
Broker
Fundamental Policies For Against Abstain Non-Votes*
-------------------- --- ------- ------- ----------
<C> <S> <C> <C> <C> <C>
5.1 Diversification 7,707,363 446,045 345,922 0
5.2 Borrowing 7,680,250 473,158 345,922 0
5.3 Senior securities 7,707,108 446,300 345,922 0
5.4 Concentration 7,704,049 449,359 345,922 0
5.5 Purchase of physical commodities 7,699,034 454,374 345,922 0
5.6 Underwriting of securities 7,704,473 448,935 345,922 0
5.7 Investment in real estate 7,708,468 444,940 345,922 0
5.8 Lending 7,705,493 447,915 345,922 0
5.9 Margin purchases and short sales 7,648,803 504,605 345,922 0
5.10 Joint trading accounts 7,706,853 446,555 345,922 0
5.11 Purchases of securities of related 7,704,304 449,104 345,922 0
issuers
5.12 Pledging of assets 7,696,144 457,264 345,922 0
5.13 Restricted and illiquid securities 7,699,119 454,289 345,922 0
5.14 Voting securities 7,703,624 449,784 345,922 0
5.15 Options 7,643,788 509,620 345,922 0
</TABLE>
6. To ratify the selection of Coopers & Lybrand L.L.P. as the Fund's
independent accountants.
Number of Votes:
For Against Abstain
--- ------- -------
8,208,144 69,779 221,407
* Broker non-votes are proxies received by the Fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary
power to vote on a particular matter.
91
<PAGE>
GROWTH AND INCOME PORTFOLIO
SHAREHOLDER MEETING RESULTS
A Special Meeting of Shareholders of Scudder Variable Life Investment Fund,
Growth and Income Portfolio, was held on October 24, 1997, at the offices of
Scudder Kemper Investments, Inc. (formerly Scudder, Stevens & Clark, Inc.), Two
International Place, Boston, Massachusetts 02110. The following matters were
voted upon by the shareholders and the resulting votes for each matter are
presented below.
1. To approve the new Investment Management Agreement between the Fund and
Scudder Kemper Investments, Inc.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
11,621,811 453,371 328,958 0
2. To elect Trustees.
Number of Votes:
Trustee For Withheld
------- --- --------
Dr. Kenneth Black, Jr. 11,878,205 525,935
Dr. Rosita P. Chang 11,926,953 477,187
Peter B. Freeman 11,871,135 533,005
Dr. J.D. Hammond 11,906,238 497,902
Daniel Pierce 11,916,286 487,854
3. To approve the Board's discretionary authority to convert the Fund to a
master/feeder fund structure through a sale or transfer of assets or
otherwise.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
11,052,834 879,825 471,481 0
4(A) To approve certain provisions of the Amended and Restated Declaration of
Trust.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
11,057,175 738,542 608,423 0
4(B) To approve certain other provisions of the Amended and Restated
Declaration of Trust.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
11,124,778 735,069 544,293 0
92
<PAGE>
GROWTH AND INCOME PORTFOLIO
5. To approve the revision of certain fundamental investment policies.
<TABLE>
<CAPTION>
Number of Votes:
Broker
Fundamental Policies For Against Abstain Non-Votes*
-------------------- --- ------- ------- ----------
<C> <S> <C> <C> <C> <C>
5.1 Diversification 10,996,271 800,067 607,802 0
5.2 Borrowing 10,924,327 872,011 607,802 0
5.3 Senior securities 10,958,190 838,148 607,802 0
5.4 Concentration 10,983,743 812,595 607,802 0
5.5 Purchase of physical commodities 10,960,671 835,667 607,802 0
5.6 Underwriting of securities 10,985,231 811,107 607,802 0
5.7 Investment in real estate 10,985,231 811,107 607,802 0
5.8 Lending 10,968,486 827,852 607,802 0
5.9 Margin purchases and short sales 10,954,593 841,745 607,802 0
5.10 Joint trading accounts 10,999,620 796,718 607,802 0
5.11 Purchases of securities of related 10,988,580 807,758 607,802 0
issuers
5.12 Pledging of assets 10,974,068 822,270 607,802 0
5.13 Restricted and illiquid securities 10,954,221 842,117 607,802 0
5.14 Voting securities 10,979,401 816,937 607,802 0
5.15 Options 10,931,645 864,693 607,802 0
</TABLE>
6. To ratify the selection of Coopers & Lybrand L.L.P. as the Fund's
independent accountants.
Number of Votes:
For Against Abstain
--- ------- -------
11,898,672 244,733 260,735
* Broker non-votes are proxies received by the Fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary
power to vote on a particular matter.
93
<PAGE>
CAPITAL GROWTH PORTFOLIO
SHAREHOLDER MEETING RESULTS
A Special Meeting of Shareholders of Scudder Variable Life Investment Fund,
Capital Growth Portfolio, was held on October 24, 1997, at the offices of
Scudder Kemper Investments, Inc. (formerly Scudder, Stevens & Clark, Inc.), Two
International Place, Boston, Massachusetts 02110. The following matters were
voted upon by the shareholders and the resulting votes for each matter are
presented below.
1. To approve the new Investment Management Agreement between the Fund and
Scudder Kemper Investments, Inc.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
29,595,099 854,059 1,007,883 0
2. To elect Trustees.
Number of Votes:
Trustee For Withheld
------- --- --------
Dr. Kenneth Black, Jr. 30,726,924 730,117
Dr. Rosita P. Chang 30,819,407 637,634
Peter B. Freeman 30,769,705 687,336
Dr. J.D. Hammond 30,824,126 632,915
Daniel Pierce 30,825,069 631,972
3. To approve the Board's discretionary authority to convert the Fund to a
master/feeder fund structure through a sale or transfer of assets or
otherwise.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
27,647,594 2,218,979 1,590,468 0
4(A) To approve certain provisions of the Amended and Restated Declaration of
Trust.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
28,130,774 1,667,223 1,659,044 0
4(B) To approve certain other provisions of the Amended and Restated
Declaration of Trust.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
28,084,847 1,744,293 1,627,901 0
94
<PAGE>
CAPITAL GROWTH PORTFOLIO
5. To approve the revision of certain fundamental investment policies.
<TABLE>
<CAPTION>
Number of Votes:
Broker
Fundamental Policies For Against Abstain Non-Votes*
-------------------- --- ------- ------- ----------
<C> <S> <C> <C> <C> <C>
5.1 Diversification 27,919,068 1,669,111 1,868,862 0
5.2 Borrowing 27,788,522 1,799,657 1,868,862 0
5.3 Senior securities 27,904,913 1,683,266 1,868,862 0
5.4 Concentration 27,902,081 1,686,098 1,868,862 0
5.5 Purchase of physical commodities 27,836,336 1,751,843 1,868,862 0
5.6 Underwriting of securities 27,918,439 1,669,740 1,868,862 0
5.7 Investment in real estate 27,829,416 1,758,763 1,868,862 0
5.8 Lending 27,894,846 1,693,333 1,868,862 0
5.9 Margin purchases and short sales 27,787,892 1,800,287 1,868,862 0
5.10 Joint trading accounts 27,904,598 1,683,581 1,868,862 0
5.11 Purchases of securities of related 27,873,141 1,715,038 1,868,862 0
issuers
5.12 Pledging of assets 27,866,220 1,721,959 1,868,862 0
5.13 Restricted and illiquid securities 27,857,413 1,730,766 1,868,862 0
5.14 Voting securities 27,899,565 1,688,614 1,868,862 0
5.15 Options 27,805,508 1,782,671 1,868,862 0
</TABLE>
6. To ratify the selection of Coopers & Lybrand L.L.P. as the Fund's
independent accountants.
Number of Votes:
For Against Abstain
--- ------- -------
29,953,395 549,869 953,777
* Broker non-votes are proxies received by the Fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary
power to vote on a particular matter.
95
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
SHAREHOLDER MEETING RESULTS
A Special Meeting of Shareholders of Scudder Variable Life Investment Fund,
Global Discovery Portfolio, was held on October 24, 1997, at the offices of
Scudder Kemper Investment, Inc. (formerly Scudder, Stevens & Clark, Inc.), Two
International Place, Boston, Massachusetts 02110. The following matters were
voted upon by the shareholders and the resulting votes for each matter are
presented below.
1. To approve the new Investment Management Agreement between the Fund and
Scudder Kemper Investments, Inc.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
2,589,185 108,595 87,427 0
2. To elect Trustees.
Number of Votes:
Trustee For Withheld
------- --- --------
Dr. Kenneth Black, Jr. 2,645,139 140,068
Dr. Rosita P. Chang 2,648,231 136,976
Peter B. Freeman 2,646,114 139,093
Dr. J.D. Hammond 2,648,593 136,614
Daniel Pierce 2,648,704 136,503
3. To approve the Board's discretionary authority to convert the Fund to a
master/feeder fund structure through a sale or transfer of assets or
otherwise.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
2,455,717 197,415 132,075 0
4(A) To approve certain provisions of the Amended and Restated Declaration of
Trust.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
2,445,691 185,383 154,133 0
4(B) To approve certain other provisions of the Amended and Restated
Declaration of Trust.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
2,471,676 159,704 153,827 0
96
<PAGE>
GLOBAL DISCOVERY PORTFOLIO
5. To approve the revision of certain fundamental investment policies.
<TABLE>
<CAPTION>
Number of Votes:
Broker
Fundamental Policies For Against Abstain Non-Votes*
-------------------- --- ------- ------- ----------
<C> <S> <C> <C> <C> <C>
5.1 Diversification 2,471,844 186,636 126,727 0
5.2 Borrowing N/A N/A N/A N/A
5.3 Senior securities 2,471,844 186,636 126,727 0
5.4 Concentration 2,459,533 198,948 126,727 0
5.5 Purchase of physical 2,470,646 187,834 126,727 0
commodities
5.6 Underwriting of securities 2,471,844 186,636 126,727 0
5.7 Investment in real estate 2,471,844 186,636 126,727 0
5.8 Lending 2,446,833 211,647 126,727 0
5.9 Margin purchases and short sales 2,448,281 210,199 126,727 0
5.10 Joint trading accounts 2,471,844 186,636 126,727 0
5.11 Purchases of securities of related 2,459,533 198,947 126,727 0
issuers
5.12 Pledging of assets N/A N/A N/A N/A
5.13 Restricted and illiquid securities N/A N/A N/A N/A
5.14 Voting securities N/A N/A N/A N/A
5.15 Options N/A N/A N/A N/A
</TABLE>
6. To ratify the selection of Coopers & Lybrand L.L.P. as the Fund's
independent accountants.
Number of Votes:
For Against Abstain
--- ------- -------
2,602,804 108,706 73,697
* Broker non-votes are proxies received by the Fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary
power to vote on a particular matter.
97
<PAGE>
INTERNATIONAL PORTFOLIO
SHAREHOLDER MEETING RESULTS
A Special Meeting of Shareholders of Scudder Variable Life Investment Fund,
International Portfolio, was held on October 24, 1997, at the offices of Scudder
Kemper Investments, Inc. (formerly Scudder, Stevens & Clark, Inc.), Two
International Place, Boston, Massachusetts 02110. The following matters were
voted upon by the shareholders and the resulting votes for each matter are
presented below.
1. To approve the new Investment Management Agreement between the Fund and
Scudder Kemper Investments, Inc.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
47,344,481 977,687 1,659,504 0
2. To elect Trustees.
Number of Votes:
Trustee For Withheld
------- --- --------
Dr. Kenneth Black, Jr. 48,459,502 1,522,170
Dr. Rosita P. Chang 48,532,618 1,449,054
Peter B. Freeman 48,494,550 1,487,122
Dr. J.D. Hammond 48,569,527 1,412,145
Daniel Pierce 48,556,613 1,425,059
3. To approve the Board's discretionary authority to convert the Fund to a
master/feeder fund structure through a sale or transfer of assets or
otherwise.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
45,860,939 1,841,230 2,279,503 0
4(A) To approve certain provisions of the Amended and Restated Declaration of
Trust.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
45,894,453 1,626,675 2,460,544 0
4(B) To approve certain other provisions of the Amended and Restated
Declaration of Trust.
Number of Votes:
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
45,930,280 1,594,367 2,457,025 0
98
<PAGE>
INTERNATIONAL PORTFOLIO
5. To approve the revision of certain fundamental investment policies.
<TABLE>
<CAPTION>
Number of Votes:
Broker
Fundamental Policies For Against Abstain Non-Votes*
-------------------- --- ------- ------- ----------
<C> <S> <C> <C> <C> <C>
5.1 Diversification 45,922,172 1,473,017 2,586,483 0
5.2 Borrowing 45,642,615 1,752,574 2,586,483 0
5.3 Senior securities 45,913,844 1,481,345 2,586,483 0
5.4 Concentration 45,897,828 1,497,361 2,586,483 0
5.5 Purchase of physical commodities 45,886,673 1,508,516 2,586,483 0
5.6 Underwriting of securities 45,917,367 1,477,822 2,586,483 0
5.7 Investment in real estate 45,887,899 1,507,290 2,586,483 0
5.8 Lending 45,908,078 1,487,111 2,586,483 0
5.9 Margin purchases and short sales 45,845,938 1,549,251 2,586,483 0
5.10 Joint trading accounts 45,913,844 1,481,345 2,586,483 0
5.11 Purchases of securities of related 45,887,578 1,507,611 2,586,483 0
issuers
5.12 Pledging of assets 45,867,078 1,528,111 2,586,483 0
5.13 Restricted and illiquid securities 45,816,149 1,579,040 2,586,483 0
5.14 Voting securities 45,902,633 1,492,556 2,586,483 0
5.15 Options 45,860,031 1,535,158 2,586,483 0
</TABLE>
6. To ratify the selection of Coopers & Lybrand L.L.P. as the Fund's
independent accountants.
Number of Votes:
For Against Abstain
--- ------- -------
47,901,561 754,149 1,325,962
* Broker non-votes are proxies received by the Fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary
power to vote on a particular matter.
99
<PAGE>
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100
<PAGE>
About the Fund's Adviser
- --------------------------------------------------------------------------------
Scudder Kemper Investments, Inc., is one of the
largest and most experienced investment management
organizations worldwide, managing more than $200 billion
in assets globally for mutual fund investors, retirement
and pension plans, institutional and corporate clients,
insurance companies, and private family and individual
accounts. It is one of the ten largest mutual fund
companies in the U.S.
Scudder Kemper Investments has a rich heritage of
innovation, integrity, and client-focused service. In
1997, Scudder, Stevens & Clark, Inc., founded 79 years
ago as one of the nation's first investment counsel
organizations, joined the Zurich Group. As a result,
Zurich's subsidiary, Zurich Kemper Investments, Inc.,
with 50 years of mutual fund and investment management
experience, was combined with Scudder. Headquartered in
New York, Scudder Kemper Investments offers a full range
of investment counsel and asset management capabilities,
based on a combination of proprietary research and
disciplined, long-term investment strategies. With its
global investment resources and perspective, the firm
seeks opportunities in markets throughout the world to
meet the needs of investors.
Scudder Kemper Investments, Inc., the global asset
management firm, is a member of the Zurich Group. The
Zurich Group is an internationally recognized leader in
financial services, including property/casualty and life
insurance, reinsurance, and asset management.
An investment in the Money Market Portfolio is
neither insured nor guaranteed by the United
States Government and there can be no assurance
that the Portfolio will be able to maintain a stable
net asset value of $1.00 per share.
This information must be preceded or
accompanied by a current prospectus.
Portfolio changes should not be considered
recommendations for action by individual
investors.
SCUDDER
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