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Van Kampen American Capital
LIFE INVESTMENT TRUST
Semi-Annual Report
June 30, 1997
[INSERT GRAPHIC HERE]
--- Wealth of Knowledge . A Knowledge of Wealth/sm/ ---
VAN KAMPEN AMERICAN CAPITAL
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Table of Contents
Letter to Policyholders..................................................... 1
Performance Results......................................................... 3
Portfolio Management Review................................................. 5
Asset Allocation Portfolio
Portfolio of Investments.................................................. 23
Statement of Assets and Liabilities....................................... 29
Statement of Operations................................................... 30
Changes in Net Assets..................................................... 31
Financial Highlights...................................................... 32
Domestic Income Portfolio
Portfolio of Investments.................................................. 33
Statement of Assets and Liabilities....................................... 35
Statement of Operations................................................... 36
Statement of Changes in Net Assets........................................ 37
Financial Highlights...................................................... 38
Emerging Growth Portfolio
Portfolio of Investments................................................. 39
Statement of Assets and Liabilities...................................... 45
Statement of Operations.................................................. 46
Statement of Changes in Net Assets....................................... 47
Financial Highlights..................................................... 48
Enterprise Portfolio
Portfolio of Investments................................................. 49
Statement of Assets and Liabilities...................................... 53
Statement of Operations.................................................. 54
Statement of Changes in Net Assets....................................... 55
Financial Highlights..................................................... 56
Global Equity Portfolio
Portfolio of Investments.................................................. 57
Statement of Assets and Liabilities....................................... 63
Statement of Operations................................................... 64
Statement of Changes in Net Assets........................................ 65
Financial Highlights...................................................... 66
Government Portfolio
Portfolio of Investments.................................................. 67
Statement of Assets and Liabilities....................................... 69
Statement of Operations................................................... 70
Statement of Changes in Net Assets........................................ 71
Financial Highlights...................................................... 72
Growth and Income Portfolio
Portfolio of Investments.................................................. 73
Statement of Assets and Liabilities....................................... 77
Statement of Operations................................................... 78
Statement of Changes in Net Assets........................................ 79
Financial Highlights...................................................... 80
Money Market Portfolio
Portfolio of Investments.................................................. 81
Statement of Assets and Liabilities....................................... 82
Statement of Operations................................................... 83
Statement of Changes in Net Assets........................................ 84
Financial Highlights...................................................... 85
Morgan Stanley Real Estate Securities Portfolio
Portfolio of Investments.................................................. 86
Statement of Assets and Liabilities....................................... 89
Statement of Operations................................................... 90
Statement of Changes in Net Assets........................................ 91
Financial Highlights...................................................... 92
Notes to Financial Statements............................................... 93
Results of Shareholder Votes................................................ 102
LIT SAR 8/97
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Letter to Policyholders
[PICTURE APPEARS HERE]
Dennis J. McDonnell and Don G. Powell
July 10, 1997
Dear Policyholder,
As you know, Van Kampen American Capital was acquired by Morgan Stanley
Group Inc., a world leader in asset management. Earlier this year, Morgan
Stanley Group Inc. and Dean Witter, Discover & Co. agreed to merge. The merger
was completed on May 31, creating the combined company of Morgan Stanley, Dean
Witter, Discover & Co. Additionally, we are very pleased to announce that Philip
N. Duff, formerly the chief financial officer of Morgan Stanley Group Inc., has
joined Van Kampen American Capital as president and chief executive officer. I
will continue as chairman of the firm. We are confident that these changes will
continue to work to the benefit of our fund shareholders as we move into the
next century.
In our view, the rapid appreciation of U.S. stock prices in recent years
has created a need for investors to examine their portfolios carefully to ensure
proper diversification among domestic and foreign investments. We also urge
investors to consider how their fund holdings are currently allocated among the
three major asset classes of stocks, bonds, and cash reserves. Uneven movements
in the various markets can distort a carefully planned investment program. And,
with stock prices near record highs, it is likely that some rebalancing of your
portfolio allocations may be necessary.
Economic Review
Growth, stability, and confidence continued to characterize the U.S.
economic environment during the past six months. In the first quarter, the
economy grew at its fastest pace since 1987. Meanwhile, consumer confidence
soared to its highest reading in 27 years, while unemployment fell as low as
4.8 percent, the lowest level since 1973.
Despite the robust pace of economic activity, there was little evidence of
troublesome inflation. Wholesale prices actually fell during each of the first
five months of 1997, the longest stretch of consecutive monthly declines in 45
years. At the consumer level, prices rose by a mere 2.2 percent during the 12
months through May. A strong rally in the U.S. dollar helped dampen inflationary
pressures resulting from the vigorous domestic economy by making imported goods
less expensive. At the same time, continued moderation in the cost of employee
benefit packages offset mild upward pressure on wages.
In March, the inflationary implications of a tight labor market caused the
Federal Reserve Board to raise its target for a key lending rate by one-quarter
of a percentage point, the first hike in short-term interest rates in two years.
Signs that economic growth slowed markedly in the second quarter, however, led
Fed policymakers to leave rates unchanged at subsequent meetings.
Market Overview
With a solid underpinning of record profits, strong economic growth, and
low inflation, the U.S. equity market continued its torrid performance during
the first half of 1997. For a brief time this spring, it appeared that economic
growth was too robust and that inflation could reemerge. The Fed's increase in
short-term rates, as well as worries about inflation, pushed stock and bond
prices significantly lower during a one-month period beginning in mid-March.
1 Continued on page two
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By mid-April, signs that the economy was cooling began to emerge, and
stocks skyrocketed to a series of record highs. The Wilshire 5000 Index of all
publicly traded domestic companies gained 16.65 during the first six months of
the year. Low inflation allowed the market's price/earnings multiple to remain
high, while strong growth in corporate profits provided solid support for stock
prices. At the same time, the Merrill Lynch Domestic Master Bond Index gained
about 3.0 percent. High Yield corporate bonds were the best-performing sector of
the fixed-income market, as the healthy economic environment increased investor
confidence in the creditworthiness of lower-rated debt.
Within the equity market, most of the gains were generated by large-
capitalization stocks. The Russell 1000 Index of large companies gained 17.57
percent over the six months through June 30, almost double the return of the
Russell 2000 Index of small-capitalization companies. Consumer non-cyclicals
such as beverages and pharmaceuticals were among the top-performing industry
groups, although the rally broadened by the end of June to include sectors that
had previously been laggards, including cyclicals and small-company stocks.
Outlook
We expect the pace of economic activity during the remainder of 1997 to
accelerate modestly from the relatively sluggish rate that prevailed during the
second quarter. While we do not believe that economic growth will be rapid
enough to reignite inflation, some warning signs are present, including a tight
labor market and high consumer confidence. In this environment, at least one
additional Federal Reserve interest rate hike remains a possibility. We
anticipate that long-term interest rates will remain within a relatively narrow
range for the remainder of the year.
We believe that equities should continue to do well given the likely
continuation of the moderate-growth, low-inflation environment. However, we are
concerned that the lengthy series of record highs in the U.S. stock market is
creating unreasonable expectations among some investors. Valuations are
extended and investment sentiment is exceptionally optimistic. Under such
circumstances, a mild correction would not be unusual.
We are fortunate to be experiencing a rare combination of sustained
economic growth, low inflation, and highly favorable performance in the
financial market. Along with our fund shareholders, we celebrate the seemingly
best of economic times. Once again, we encourage you to review your portfolio
with an eye toward correcting allocation imbalances.
Additional details about your Fund, including a question-and-answer section
with your portfolio management team, are provided in this report. We appreciate
your continued confidence in your investment with Van Kampen American Capital.
Sincerely,
/s/ Don G. Powell /s/ Dennis J. McDonnell
Don G. Powell Dennis J. McDonnell
Chairman President
Van Kampen American Capital Van Kampen American Capital
Asset Management, Inc. Asset Allocation Portfolio
2
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Performance Results for the Period Ended June 30, 1997
Asset Allocation Portfolio
Total Returns
Six-month total return based on NAV/1/............................. 8.01%
One-year total return based on NAV/1/.............................. 17.06%
Five-year average annual total return based on NAV/1/.............. 13.11%
Life-of-Portfolio average annual total return based on NAV/1/...... 11.13%
Commencement date.................................................. 06/30/87
Domestic Income Portfolio
Total Returns
Six-month total return based on NAV/1/............................. 4.57%
One-year total return based on NAV/1/.............................. 12.34%
Five-year average annual total return based on NAV/1/.............. 9.71%
Life-of-Portfolio average annual total return based on NAV/1/...... 8.00%
Commencement date.................................................. 11/04/87
Distribution Rate and Yield
Distribution rate/2/............................................... 9.14%
SEC Yield/3/....................................................... 7.02%
Emerging Growth Portfolio
Total Returns
Six-month total return based on NAV/1/............................. 8.71%
One-year total return based on NAV/1/.............................. 8.47%
Life-of-Portfolio average annual total return based on NAV/1/...... 21.86%
Commencement date.................................................. 07/03/95
Enterprise Portfolio
Total Returns
Six-month total return based on NAV/1/............................. 17.32%
One-year total return based on NAV/1/.............................. 29.70%
Five-year average annual total return based on NAV/1/.............. 18.82%
Ten-year average annual total return based on NAV/1/............... 12.25%
Life-of-Portfolio average annual total return based on NAV/1/...... 12.22%
Commencement date.................................................. 04/07/86
Global Equity Portfolio
Total Returns
Six-month total return based on NAV/1/............................. 17.41%
One-year total return based on NAV/1/.............................. 22.65%
Life-of-Portfolio average annual total return based on NAV/1/...... 18.87%
Commencement date.................................................. 07/03/95
3
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Performance Results for the Period Ended June 30, 1997 (Continued)
Government Portfolio
Total Returns
Six-month total return based on NAV/1/................................ 2.98%
One-year total return based on NAV/1/................................. 7.49%
Five-year average annual total return based on NAV/1/................. 5.61%
Ten-year average annual total return based on NAV/1/.................. 7.51%
Life-of-Portfolio average annual total return based on NAV/1/......... 6.84%
Commencement date..................................................... 04/07/86
Distribution Rate and Yield
Distribution rate/2/.................................................. 6.25%
SEC Yield/3/.......................................................... 6.49%
Growth and Income Portfolio
Total Returns
Six-month total return based on NAV/1/................................ 16.00%
Life-of-Portfolio cumulative total return based on NAV/1/............. 15.65%
Commencement date..................................................... 12/23/96
Morgan Stanley Real Estate Securities Portfolio
Total Returns
Six-month total return based on NAV/1/................................ 6.51%
One-year total return based on NAV/1/................................. 38.01%
Life-of-Portfolio average annual total return based on NAV/1/......... 27.35%
Commencement date..................................................... 07/03/95
/1/ Total return based on net asset value (NAV) assumes an investment at the
beginning of the period indicated, reinvestment of all distributions for
the period, and sale of all shares at the end of the period, all at NAV.
/2/ Distribution rate (based on net asset value) represents the annualized
distributions of the Portfolio at the end of the period and not the earnings
of the Portfolio.
/3/ SEC Yield is a standardized calculation prescribed by the Securities and
Exchange Commission for determining the amount of net income a portfolio
should theoretically generate for the 30-day period ending June 30, 1997.
See the Prior Performance section of the current prospectus. Past performance
does not guarantee future results. Investment return and net asset value will
fluctuate with market conditions. Portfolio shares, when redeemed, may be worth
more or less than their original cost.
4
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Portfolio Management Review
Asset Allocation Portfolio
The following is an interview with the portfolio management team of the Van
Kampen American Capital Life Investment Trust--Asset Allocation Portfolio. The
team is led by B. Robert Baker, Jr. and Thomas Copper, portfolio co-managers,
and Alan T. Sachtleben, chief investment officer for equity investments.
Q What economic factors influenced the stock and bond markets during the
past six months?
A The rare combination of moderate economic growth and historically low
inflation provided a nearly ideal environment for equity investments and
drove the stock market to new heights. In general, large, well-established
companies performed better than their smaller competitors during the past six
months. The economy grew at a remarkably strong pace in the first quarter of
the year, which caused investors to worry that inflation might become a problem.
This concern increased volatility in stock prices and precipitated a month-long
market correction in mid-March that wiped out all year-to-date gains. Stocks
rebounded quickly after economic data was released in April showing negligible
inflation and hints of a slowdown in growth. In May, the Dow Jones Industrial
Average rallied to record-breaking heights and recouped its losses. The
reporting period ended on a positive note, as stocks continued to surge ahead
through the end of June.
Conditions in the bond market were not quite as favorable. The strength of
the economy and concerns about inflation put mild downward pressure on bond
prices during the period. In March, inflationary concerns peaked in conjunction
with a rate increase by the Federal Reserve Board and ignited a period of
volatility in the bond market. However, subsequent indications of benign
inflation and a slow down in economic growth caused the bond market to rally
through the end of June.
Q How did you manage the Portfolio in response to these events?
A We believed the stock market was overvalued, so the Portfolio was slightly
underweighted in stocks and overweighted in bonds during the reporting
period. As of June 30, 1997, the portfolio was comprised of approximately 51
percent stocks, 41 percent bonds, and 8 percent short-term investments.
In the equity portion of the portfolio of the Asset Allocation Portfolio,
we concentrate on undervalued stocks that have the potential for future
appreciation. To do this, we look for companies with stock prices that we
believe are low compared to their intrinsic worth or future potential--companies
that are temporarily out of favor. Then, we try to identify a catalyst that
might move the stock from being undervalued to being fairly valued, such as new
management, restructuring, reorganization, or a regulatory change in the
company's industry. When we find a company that is undervalued and has an
identifiable catalyst, we consider purchasing the security. In addition, we use
what is known as a "bottom up" stock selection process. This means we evaluate
stocks one by one and make purchases wherever we find a good opportunity, rather
than maintaining defined sector allocations.
Q What factors contributed to the Portfolio's performance?
A As always, stock selection was critical. We were relatively underweighted
in technology, but our holdings in this sector performed very well
including, Compaq Computer Corp. and Dell Computer Corp. In addition, health
care (Schering Plough Corp., Aetna, Inc.), consumer distribution (Pier 1
Imports, Inc., Dayton Hudson Corp.), and producer manufacturing companies
(Caterpillar, Inc., Ingersoll Rand Co.) produced winners. We underweighted the
financial sector because we believe that it is generally overvalued. And, we
sold our holding in AT&T Corp., which disappointed us during the reporting
period. MCI Communications Corp. was sold after it achieved what we thought was
its fair value, following an agreement to merge with British Telecom. Also, we
decreased our position in WMX Technologies, Inc., whose stock price has been
5
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flat this year. We continue to hold onto the stock, however, because we believe
it is relatively undervalued and could appreciate when certain management issues
are resolved.
In the bond portion of the portfolio, we focused on investment grade
securities rated A or better with 10- to 20-year maturities and maintained the
duration at a relatively long 8 years. Duration is a measurement of the
portfolio's sensitivity to interest rate fluctuations--the longer the
Portfolio's duration, the greater the effect of interest rate movements on the
Portfolio's net asset value. Typically, funds with short durations have tended
to perform better when interest rates are rising, while funds with long
durations have outperformed when rates are declining.
[INSERT PIE CHART HERE]
Holdings by Sector as of June 30, 1997*
Other 10.0%
U.S. Government Obligations 17.7%
Utilities 17.1%
Finance 10.2%
Energy 9.2%
Technology 7.0%
Consumer Non-Durables 6.8%
Producer Manufacturing 6.8%
Consumer Services 5.8%
Health Care 4.9%
Consumer Distribution 4.5%
*As a percentage of long-term investments.
Q How did the Portfolio perform over the past six months?
A Typically, the Portfolio's large bond component will cause the Portfolio's
returns to trail the Standard & Poor's 500-Stock Index whenever the bond
market lags the stock market, and this was the case during the reporting period.
The Portfolio achieved a six-month total return of 8.01 percent/1/ at net asset
value, as of June 30, 1997. By comparison, the S&P 500-Stock Index returned
20.59 percent, and the Lipper Balanced Fund Index, which more closely resembles
the Portfolio, returned 11.19 percent. The S&P 500-Stock Index is a broad-
based, unmanaged index that reflects the general performance of the stock
market, and the Lipper Balanced Fund Index reflects the average performance of
the largest balanced funds.
Keep in mind that these indices are unmanaged statistical composites that
do not include any commissions, fees, or sales charges that would be paid by an
investor purchasing the securities or investments they represent. Please refer
to the chart on page three for additional Portfolio performance results.
6
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Q What is your outlook for the Portfolio for the remainder of the year?
A Currently, the markets are basking in the best of all possible
environments: low inflation, moderate economic growth, and solid
corporate earnings. While we don't believe inflation is a serious concern, some
warning signs are present, including strong job growth, high consumer
confidence, and a mild upturn in wages. The recent rally in stock and bond
prices suggests that investors believe the Fed will successfully engineer a
slowdown in growth without tipping the economy into a recession. However,
volatility could remain high until then.
As the stock market continues to climb, it becomes increasingly sensitive
to changes in the economic environment--even minor events can trigger declines.
And high stock prices often translate into high risk for investors, because
expensive securities have farther to fall in a market downturn than low-priced
stocks. In this environment, investments such as the Asset Allocation
Portfolio--which seeks out undervalued securities and maintains a bond
component--may potentially reduce the impact of a stock market decline while
participating in its advances.
/s/ Alan T. Sachtleben /s/ B. Robert Baker, Jr. /s/ Thomas Copper
Alan T. Sachtleben B. Robert Baker, Jr. Thomas Copper
Chief Investment Officer Portfolio Co-Manager Portfolio Co-Manager
Equity Investments Asset Allocation Portfolio Asset Allocation Portfolio
7 Please see footnotes on page four
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Portfolio Management Review
Domestic Income Portfolio
The following is an interview with the management team of the Van Kampen
American Capital Life Investment Trust--Domestic Income Portfolio. The team is
led by Walter W. Stabell, portfolio manager, and Peter W. Hegel, chief
investment officer for fixed-income investments.
Q What were the market conditions in which the Portfolio operated during the
past six months?
A In January, the yield on the benchmark 30-year Treasury rose from 6.65
percent to 6.95 percent, sending bond prices lower. Bond yields fell to a
low of 6.53 percent during a very sharp three-week rally, lifting bond prices
higher. However, the market was soon pummeled by fears of an upsurge in
inflation, climbing interest rates, and expectations that rates would keep
climbing.
Towards the latter part of the first quarter, the spread in corporate bond
yields generally widened (with a corresponding decrease in bond prices),
reversing their long-running narrowing trend. In many sectors, spreads retreated
to near their year-end levels. Several factors contributed to this move; most
notably, concerns that the one-quarter percentage point increase in the federal
funds rate in March would be the first of several such moves, and that longer-
term Treasury yields would rise as a result. By mid-April, 30-year Treasury
yields reached 7.17 percent, their high for the six-month period ended June 30.
During the second quarter, a rally in bonds took the yield on the benchmark
30-year Treasury to 6.65 percent, the lowest level since late February.
Q How did you position the Portfolio in response to these conditions?
A To maintain diversification and seek to reduce risk, we continued to
allocate the Portfolio's assets across a variety of sectors within the
fixed-income market. At June 30, 1997, approximately 62 percent of the
Portfolio's assets were invested in investment-grade corporate bonds, with 18
percent invested in high-yield corporate bonds, 15 percent in securities of
government agencies, and 5 percent in common and preferred stock.
Over the long term and during periods of declining interest rates, the
Portfolio has performed quite well in comparison to its peer group, due in
large part to its overweighting of long-term, non-callable, investment-grade
corporate bonds, and to high-yield corporate components. During the reporting
period, the Portfolio was recognized by Lipper Analytical as the top-performing
variable annuity portfolio relative to the BBB Bond Fund Group. This is the
eighth Lipper award earned by the Portfolio in the last six years. For the
trailing 12-month period ended June 30, 1997, the Portfolio was ranked first of
86 like funds, for the three-year period, the Portfolio was ranked second of 62
funds, and for the five-year period, the Portfolio was ranked first of 46 funds.
With interest rates relatively low and investment-grade and high-yield
corporate yield spreads at historical lows, managing the duration became a more
important tactic during the first half of 1997. Duration, which is expressed in
years, is a measurement of a bond's price sensitivity to changes in interest
rates. The longer the Portfolio's duration, the greater the effect of interest
rate movements on net asset value. Typically, funds with shorter durations have
performed better in a rising rate environment, while funds with longer
durations have performed better when rates are declining. For most of the
period, the Portfolio's duration was kept equivalent to or slightly longer than
that of its benchmark, the Lehman Brothers Index of BBB Corporate Bonds. At
present, the Portfolio's duration is 6.6 years, approximately six months longer
than that of the benchmark index.
Q How did the Portfolio perform during the first half of 1997?
A For the six months ended June 30, 1997, the Portfolio achieved a total
return of 4.57 percent/1/ at net asset value. By comparison, the Lehman
Brothers Index of BBB Corporate Bonds produced a total return of 3.49 percent
for the same period. Keep in mind that this index is a broad-based, unmanaged
index that reflects the general performance of investment-grade corporate bonds.
It does not reflect any commissions or fees that would be paid by an investor
purchasing the securities it represents.
8
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Dividends paid and reinvested by the Portfolio during the period totaled
$0.025 per share. Recall that the majority of dividends paid by the Portfolio
have been distributed annually in December. Please refer to the chart on page
three for additional Portfolio performance results.
Q What is your outlook for the fixed-income market and the Portfolio in the
months ahead?
A The long-term interest rate outlook is as cloudy as the near-term view is
clear. For now, it is difficult to imagine a better environment for bonds.
Astonishingly low inflation, slowing economic growth, coupled with a shrinking
supply of municipal bonds and a slowdown in new Treasury and corporate bond
issuance, add to the market's exuberance.
At the same time, the stock market's remarkable climb has encouraged asset
allocators and market timers to shift from stocks to bonds. Other money managers
may be dedicating additional money to bonds in order to obtain a prudent asset
mix in their portfolios.
As long as the economy continues to grow at a moderate pace and inflation
remains non-existent, we look for 30-year Treasuries to trade in a range
between 6.250 and 6.625 percent. As time goes on, we'll get a better idea of
which direction the economy is taking. Until then, we will maintain our
somewhat neutral stance, with a duration within six months of our index.
/s/ Peter W. Hegel /s/ Walter W. Stabell
- ------------------------ -------------------------
Peter W. Hegel Walter W. Stabell
Chief Investment Officer Portfolio Manager
Fixed Income Investments Domestic Income Portfolio
9
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Portfolio Management Review
Emerging Growth Portfolio
The following is an interview with the portfolio management team of the Van
Kampen American Capital Life Investment Trust--Emerging Growth Portfolio. The
team is led by Gary M. Lewis, portfolio manager, David Walker and Janet Willis,
associate portfolio managers, and Alan T. Sachtleben, chief investment officer
for equity investments.
Q What economic factors influenced the market during the reporting period?
A The rare combination of moderate economic growth and historically low
inflation provided a nearly ideal environment for equity investments and
drove the stock market to new highs. In general, large, well-established
companies performed better than their smaller competitors during the past six
months. The economy grew at a remarkably strong pace in the first quarter of the
year, which caused investors to worry that inflation might become a problem.
This concern increased volatility in stock prices and precipitated a month-long
market correction in mid-March that wiped out all year-to-date gains.
Stocks rebounded quickly after economic data was released in April showing
negligible inflation and hints of a slowdown in growth. In May, the Dow Jones
Industrial Average rallied to record-breaking heights and recouped its losses.
The reporting period ended on a positive note, as stocks continued to surge
ahead through the end of June.
Q Given these events, what was your strategy in managing the Portfolio to
meet its objective?
A Our fundamental investment strategy for the Portfolio never varies: we look
for stocks with rising earnings expectations and rising valuations. This
involves selecting stocks on the basis of a company's potential to outperform
earnings expectations--to produce a positive earnings surprise. Conversely, we
sell stocks quickly if their earnings estimates are declining, although we are
more patient with stocks with declining valuations. Our stock selection process
is referred to as "bottom-up," which means we evaluate stocks one by one and
make purchases wherever we find a good opportunity, rather than maintaining
defined sector allocations.
In addition, we maintain two general principles in managing the Portfolio.
First, we remain fully invested in equity investments, rather than holding a
large percentage of the Portfolio's assets in cash. And second, we place a
priority on meeting with the management teams behind the companies whose stock
we invest in. These meetings help us determine if a company has an effective
business philosophy and if management is disciplined in implementing it. Also,
we learn about a company's opportunities within its particular industry and
decide if we have confidence in its ability to maximize its growth potential.
Q What changes did you make to the portfolio during the reporting period?
A No single sector stood out as a top performer during the entire reporting
period, so our portfolio changes are a reflection of where we found good
opportunities on a stock-by-stock basis. Going into 1997, the Portfolio was
overweighted in technology and energy, which helped the Portfolio in the second
half of 1996. However, a January correction in these sectors was detrimental to
the Portfolio, and we subsequently reduced our exposure, moving the assets
primarily into health care, finance, and retail. Lately, we have reduced our
position in specialty finance companies such as Money Store and First Plus
Financial, due to default and credit quality concerns, and we've put some assets
back into technology and energy stocks. At June 30, 1997, the Portfolio was
overweighted in technology (35 percent), energy (8 percent), and consumer
distribution (11 percent), and it is underweighted in health care (11 percent).
The stock market's bias toward large companies during the reporting period
worked against the Portfolio, which focuses on small and medium-sized growth
companies. However, we took advantage of the Portfolio's flexibility to invest
in
10
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some large-capitalization holdings and picked up big names such as Intel, Dell
Computer, and Microsoft in order to participate in their gains. Lately, we have
seen renewed potential in the small-cap market, so we trimmed or sold some of
our large-cap stocks, such as Intel.
[Chart appears here]
Holdings by Sector as of June 30, 1997*
Other 10.1%
Technology 35.4%
Consumer Distribution 11.4%
Health Care 11.4%
Finance 10.2%
Energy 8.3%
Consumer Services 8.0%
Producer Manufacturing 5.2%
*As a Percentage of Long-Term Investments
Q How did the Portfolio perform over the past six months?
A The underperformance of small-cap stocks hindered the performance of the
Portfolio and the Russell 2000 Stock Index, while the strong returns of the
Standard & Poor's 500-Stock Index are indicative of the recent success of large-
company stocks. The Portfolio achieved a six-month total return of 8.71
percent/1/ at net asset value, as of June 30, 1997. By comparison, the S&P 500-
Stock Index returned 20.59 percent, and the Russell 2000 Stock Index, which more
closely resembles the Portfolio, returned 10.20 percent. The S&P 500-Stock Index
is a broad-based, unmanaged index that reflects the general performance of the
stock market, and the Russell 2000 Index reflects the general performance of
smaller-cap stocks.
Keep in mind that these indices are unmanaged statistical composites that
do not include any commissions, fees, or sales charges that would be paid by an
investor purchasing the securities or investments they represent. Please refer
to the chart on page three for additional Portfolio performance results.
Q What is your outlook for the Portfolio for the remainder of the year?
A Currently, the stock market is basking in the best of all possible
environments: low inflation, moderate economic growth, and solid corporate
earnings. While we don't believe inflation is a serious concern, some warning
signs are present, including strong job growth, high consumer confidence, and a
mild upturn in wages. The rally in stock prices suggests that investors believe
the Federal Reserve Board will successfully engineer a slowdown in growth
without tipping the economy into a recession. However, volatility could remain
high until then.
On a relative basis, small-cap stocks generally trade at a premium to the
larger stocks of the S&P 500-Stock Index. However, the spread in relative
prices between small-cap and large-cap stocks has narrowed over the past three
or four years, and it appears to be close to bottoming out. Historically, such
an event has been followed by a rebound in small-company stock prices. As such,
we anticipate a gradual--and probably volatile--small-cap rally that could last
several years. Stock selection will be very important in such an environment,
and we'll continue to implement our disciplined process.
/s/ Alan T. Sachtleben /s/ Gary Lewis
Alan T. Sachtleben Gary Lewis
Chief Investment Officer Portfolio Manager
Equity Investments Emerging Growth Portfolio
11 Please see footnotes on page four
<PAGE>
Portfolio Management Review
Enterprise Portfolio
The following is an interview with the portfolio management team of the Van
Kampen American Capital Life Investment Trust--Enterprise Portfolio. The team is
led by Jeff D. New, portfolio manager, and Alan T. Sachtleben, chief investment
officer for equity investments.
Q What factors influenced the market during the past six months?
A The rare combination of moderate economic growth and historically low
inflation provided a nearly ideal environment for equity investments and
drove the stock market to new highs. The economy grew at a remarkably strong
pace in the first quarter of the year, which caused investors to worry that
inflation might become a problem. This concern increased volatility in stock
prices and precipitated a month-long market correction that began in early
March, wiping out all year-to-date gains.
Stocks rebounded quickly after economic data was released in April showing
negligible inflation and hints of a slowdown in growth. In May, the Dow Jones
Industrial Average rallied to record-breaking heights and recouped its losses.
Overall, large well-established companies weathered the past six months better
than their smaller competitors. The reporting period ended on a positive note,
as stocks continued to surge ahead through the end of June.
Q Given this environment, what was your strategy in seeking to meet the
Portfolio's objective?
A We maintain a consistent strategy of stock selection, seeking to identify
companies with positive future fundamentals at attractive prices. We look
for stocks that have one or more of the following traits: consistently above-
average earnings growth, accelerating earnings growth, better-than-expected
fundamentals, or an underlying change in a company, industry, or regulatory
environment. Our selection process is referred to as "bottom up," which means we
evaluate stocks one by one and make purchases wherever we find a good
opportunity, rather than maintaining defined sector allocations. This strategy
of purchasing attractively valued, high-quality companies regardless of sector
was successful for the Portfolio during the reporting period.
Q What changes did you make to the portfolio?
A Because we use a bottom-up selection process, our sector weightings are a
reflection of where we found good opportunities on a stock-by-stock basis.
The portfolio was slightly overweighted in the health-care sector, because we
increased our holdings in several pharmaceutical firms, including Merck,
Bristol-Myers Squibb, and Pfizer. Also, we are optimistic about HMOs such as
Aetna and Wellpoint Health Network. Generally, we believe the outlook for HMOs
is growing more positive, as they continue to gain market share and show greater
profitability. In particular, Wellpoint Health Network has been acquiring
smaller firms, which has allowed them to add new members while cutting redundant
costs. Their stock price has appreciated almost 34 percent so far this year.
In the financial sector, we reduced our overall weighting but added
substantially to our holdings in Conseco, a financial services holding company
that operates life insurance firms. Recently, we visited with representatives
from Conseco, and they gave us a first-hand account of their positive
fundamentals, earnings growth, and quality of management. Meetings like this one
are key to a bottom-up selection strategy--we think it is the single most
valuable way for us to spend our time. We try to meet or have discussions with
300 to 400 management teams each year in an effort to gain insight into the
companies whose securities we are evaluating.
12
<PAGE>
Technology was the Portfolio's largest sector, with about 22 percent of the
Portfolio's long-term investments allocated here. Our holdings in BMC Software,
International Business Machines, and Compaq Computer Corp. served the portfolio
well during the reporting period. Compaq is especially attractive to us now,
since we visited the company this spring. In the past year, they appointed a new
chief financial officer who has focused on increasing profitability and reducing
inventory, which should lower the company's risks and operating costs. Compaq's
stock price has returned almost 34 percent this calendar year. They are a good
example of our stock selection strategy at work--we believe Compaq is reasonably
priced and has positive future fundamentals.
Q How did the Portfolio perform over the past six months?
A The Portfolio achieved a six-month total return of 17.32 percent/1/ at net
asset value, as of June 30, 1997. By comparison, the Standard & Poor's
500-Stock Index returned 20.59 percent, and the Lipper Growth Fund Index
returned 15.40 percent.
The S&P 500-Stock Index is a broad-based, unmanaged index that reflects the
general performance of the stock market, and the Lipper Growth Fund Index
reflects the average performance of the largest growth funds. Keep in mind that
these indices are unmanaged statistical composites that do not include any
commissions, fees, or sales charges that would be paid by an investor purchasing
the securities they represent. Please refer to the chart on page three for
additional Portfolio performance results.
Q What is your outlook for the remainder of the year?
A Currently, the stock market is experiencing a nearly perfect environment:
low inflation, moderate economic growth, and solid corporate earnings.
While we don't believe inflation is a serious concern, some warning signs are
present, including strong job growth, high consumer confidence, and a mild
upturn in wages. The recent rally in stock prices suggests that investors
believe the Federal Reserve Board will successfully engineer a slowdown in
growth without tipping the economy into a recession. However, volatility could
remain high until then.
Because the stock market has flourished lately, we are finding it harder to
identify promising securities that we believe are attractively priced. Inflated
stock prices often carry high risk: the more expensive a security, the farther
its price can fall in a downturn. Our strategy for the Enterprise Portfolio
emphasizes securities with strong fundamentals at reasonable prices, so we
believe the Portfolio will be in good standing in the months ahead.
/s/ Alan T. Sachtleben /s/ Jeff D. New
Alan T. Sachtleben Jeff D. New
Chief Investment Officer Portfolio Manager
Equity Investments Enterprise Portfolio
13 Please see footnotes on page four
<PAGE>
Portfolio Management Review
Global Equity Portfolio
The following is an interview with the management team of the Van Kampen
American Capital Life Investment Trust-Global Equity Portfolio. Through March
31, 1997, the Fund was co-managed by portfolio manager Jeff D. New, Van Kampen
American Capital (U.S. holdings), and portfolio manager Peter Kysel, John
Govett & Co. Limited (international holdings). As of April 1, 1997, the Fund is
co-managed by portfolio managers Barton M. Biggs, Madhav Dhar, Francine J.
Bovich, and Ann D. Thivierge, Morgan Stanley Asset Management Inc.
Q How would you characterize the market conditions in which the Portfolio
operated during the six-month period ended June 30, 1997?
A During the period, there were several prevailing trends in the global
marketplace:
. Interest rates fell across Europe as countries worked to meet inflation and
budget deficit criteria required for inclusion into European Monetary Union,
scheduled for January 1, 1999. The tight fiscal policies allowed long-term
interest rates to decline, especially in peripheral European countries whose
bond yields had previously included a larger inflation risk factor. Lower
interest rates, in turn, provided a healthy environment for equity prices.
The following table displays changes in 10-year government bond yields over
the fiscal year:
Percentage
June 30, 1997 June 30, 1996 Change
------------- ------------- ------
Italy.......... 6.86% ......... 9.42% ........... -27.18%
Spain.......... 6.35% ......... 8.86% ........... -28.33%
Germany........ 5.68% ......... 6.50% ........... -12.62%
France......... 5.58% ......... 6.50% ........... -14.15%
U.K............ 7.09% ......... 7.89% ........... -10.14%
Netherlands.... 5.60% ......... 6.44% ........... -13.04%
. Many Pacific Rim economies experienced a mild slowdown in growth rates,
primarily because of weak demand and pricing for electronic exports. Also,
Thailand and South Korea struggled with the loss of economic competitiveness
to lower-wager nations such as China, Vietnam, and Indonesia. Thailand's
massive trade deficit created fears that its currency would be devalued.
. Economic growth in the United States spurted in the first quarter, leading to
concerns that the Federal Reserve would raise interest rates aggressively
to head off possible inflation. Continued robust growth in corporate profits
supported higher U.S. equity prices despite a mild increase in short-term
interest rates. As the reporting period ended, signs that economic activity
was slowing allowed long-term interest rates to fall and monetary policy to
remain steady.
Q What significant investment techniques and strategies were used to pursue the
Portfolio's investment objective?
A As a result of our top-down analysis of global markets, we took the following
approach to regional allocations at the end of the fiscal year, relative to
the Morgan Stanley Capital International World Index:
. A neutral position in Europe, with a slight overweighting in Germany,
France, and Spain
. A mild overweighting in developed Asia
. A moderate underweighting in the United States and Japan
14
<PAGE>
Top Five Countries Represented
in the Portfolio
as of June 30, 1997
United States
Japan
United Kingdom
Switzerland
France
Q How has the Portfolio performed during the reporting period?
A We are pleased to report that the Portfolio achieved a six-month total return
of 17.41 percent/1/ at net asset value. During the same period, the Morgan
Stanley Capital International (MSCI) World Index + Dividends generated a total
return of 15.62 percent. Please keep in mind that the MSCI World Index is an
unmanaged index used as a benchmark for general global equity funds. It does not
reflect any commissions or fees that would be paid by an investor purchasing the
securities it represents. Please refer to the chart on page three for additional
Portfolio performance results.
Q What is the outlook for the months ahead?
A We expect the rate of global economic activity to accelerate, with only a
moderate pick-up in inflation from current levels. We also anticipate that
consumer spending will increase, especially in Europe and Japan, giving
corporations a small amount of relief from the intense pricing pressures of
recent years. Overall, the pattern of moderate but accelerating growth with only
mild increases in inflation and interest rates will create a favorable backdrop
for global equity prices. In Europe, we anticipate that progress towards
monetary union will continue, although the election of leftist-leaning political
elements in France increases the risk of delay in implementation. We also
believe that growth in the Pacific Basin should rebound modestly from its
current cyclically depressed level. In the United States, we find stock prices
to be generously valued, in part because of extreme optimism over the future
growth rate of corporate profits. Accordingly, we prefer to take a defensive
approach to the domestic equity market.
/s/ Barton M. Biggs /s/ Madhav Dhar
Barton M. Biggs Madhav Dhar
Portfolio Manager Portfolio Manager
Morgan Stanley Asset Management Inc. Morgan Stanley Asset Management Inc.
/s/ Francine J. Bovich /s/ Ann D. Thivierge
Francine J. Bovich Ann D. Thivierge
Portfolio Manager Portfolio Manager
Morgan Stanley Asset Management Inc. Morgan Stanley Asset Management Inc.
15 Please see footnotes on page four
<PAGE>
Portfolio Management Review
Government Portfolio
The following is an interview with the management team of the Van Kampen
American Capital Life Investment Trust--Government Portfolio. The team is led by
John R. Reynoldson, portfolio manager, and Peter W. Hegel, chief investment
officer for fixed-income investments.
Q What economic factors influenced the fixed-income market over the
past six months?
A The bond market entered 1997 on a weak note, as bond prices moved lower
amid concerns that an accelerating economy would lead to rising
inflation and interest rates. During the early stages of 1997, we continued to
see strong evidence of an economy on the upswing. Consumer spending was rising,
business inventories were up, and first quarter gross domestic product (GDP)
growth--combined with fourth quarter, 1996 GDP figures--showed the economy
surging at its fastest pace in years. All of these factors contributed to the
Federal Reserve Board's decision to boost the federal funds rate by one-quarter
of one percent in late March.
Beginning in April, however, economic reports started to show a rather
significant slowdown in growth. This eased fears of further Fed action and
spurred a recovery in bond prices that continued well into June.
Q How did the Portfolio perform during the six-month period ended June 30,
1997?
A Like most fixed-income funds, the Government Portfolio was impacted by
the early sell-off in bonds, but was able to rebound from this
setback and achieve a six-month total return of 2.98 percent/1/ at net asset
value. By comparison, the Lehman Brothers Mutual Fund U.S. Government/Mortgage
Index produced a total return of 3.10 percent. Keep in mind that this index is a
broad-based, unmanaged index that reflects the general performance of U.S.
government and mortgage-backed securities and does not reflect any commissions
or fees that would be paid by an investor purchasing the securities it
represents.
During the period, the dividend continued to provide shareholders
with solid current income. As of June 30, 1997, the distribution rate was 6.25
percent/2/, based on a monthly dividend of $0.045 per share and a public
offering price of $8.64 per share. Please refer to the chart on page four for
additional Portfolio performance results.
Q What factors have contributed to the Portfolio's success?
A We adjusted the Portfolio's duration to seek to take advantage of
ongoing interest rate trends. Early in the period, the duration was
around 4.3 years, one-half year shorter than normal. Duration, which is
expressed in years, is a measurement of a bond's price sensitivity to changes in
interest rates. The longer the Portfolio's duration, the greater the effect of
interest rate movements on net asset value. Typically, funds with shorter
durations have performed better in rising rate environments, while funds with
longer durations have performed better when rates are declining. This short
duration made the Portfolio less susceptible to rising interest rates, which
helped to cushion the impact of the Fed's increase. As the economy revealed
signs of weakness, we lengthened duration to 5.1 years, which is where it
currently stands.
Another key contributing factor has been the portfolio allocation. As of
June 30, 1997, 64.0 percent of the Portfolio's long-term investments were
allocated to mortgage-backed securities and 36.0 percent were invested in U.S.
Treasuries. Normally, we strive for a 50/50 split between Treasuries and
mortgages, but our decision to overweight mortgage-backed issues helped us
manage the duration and pursue the most attractive investments within the
fixed-income market.
16
<PAGE>
[Graph]
Q. What is your outlook for the future of the Portfolio?
A. Because inflation appears to be well under control and global interest rates
remain low, U.S. interest rates have the potential to move lower. If that
happens, we'll keep a close eye on the mortgage market, which tends to
experience a great deal of refinancing when rates drop. In addition, we'll
continue to monitor various economic reports and determine whether to make any
adjustments to the Portffolio's duration or portfolio allocation.
/s/ Peter W. Hegel /s/ John R. Reynoldson
- ------------------------------ --------------------------
Peter W. Hegel John R. Reynoldson
Chief Investment Officer Portfolio Manager
Fixed Income Investments Government Portfolio
17
<PAGE>
Portfolio Management Review
Growth and Income Portfolio
The following is an interview with the portfolio management team of Van Kampen
American Capital Life Investment Trust--Growth and Income Portfolio. The team is
led by James A. Gilligan, portfolio manager, Scott Carroll and Bret Stanley,
assistant portfolio managers, and Alan T. Sachtleben, chief investment officer
for equity investments.
Q What were the key market conditions in which the Portfolio operated over the
past six months?
A The combination of moderate economic growth and historically low inflation
provided a near-ideal environment for equity investments during the period.
In addition, a weak bond market has been unable to siphon investment money away
from the stock market. Stocks continued to soar to record highs, but not without
occasional flashes of volatility. We saw a correction of around 10 percent (as
measured by the Dow Jones Industrial Average) that lingered from mid-March
through mid-April. Since then, however, market averages have roared back, amply
recovering from earlier losses.
Throughout the period, concerns over rising interest rates set the tone, as
investors worried that the Federal Reserve Board's commitment to controlling
inflation by raising short-term interest rates might slow the economy and cut
into corporate earnings. The Fed raised the federal funds rate in mid-March by
a quarter percentage point, its first rate hike in two years.
Q How did you manage the Portfolio in response to these market conditions?
A We maintained our disciplined stock-selection process by attempting to
identify signals that a company's market valuation will improve. A positive
fundamental change, such as new management, extraordinary growth, or positive
dynamics within its industry, signifies a company's potential for accelerating
earnings. However, the universe of available and attractive stocks has been
fairly narrow over the past year, with the bulk of the market's performance
coming from a small number of large issues. Within this environment it has been
increasingly important for us to select individual stocks with valuations we can
justify, as opposed to buying trendy stocks with inflated prices.
In an effort to further diversify the portfolio and search for new stocks, we
broadened our exposure overseas a bit, to approximately 14 percent at the end of
the reporting period. Companies that have underperformed, but have signaled a
possible turnaround with new management or another significant change, seem to
be increasingly available outside the U.S. market.
Q What were some of the sectors represented in the portfolio over the reporting
period?
A Health care, one of the best-performing sectors of the first quarter, and
financial services were two of the portfolio's largest sector holdings during
the six months. Technology, producer manufacturing, and energy rounded out the
top five sector holdings.
In the financial services sector, companies are consolidating and buying back
stock, which has enhanced the prospects of strong future earnings growth in
this sector. Compared to 1996, the portfolio is more evenly distributed among
the different areas of the financial industry, including an increased weighting
in the insurance industry.
In the health-care sector, we focused our holdings on large pharmaceutical
companies, which have benefited from the high-volume growth spurred by trends
in managed care. We are slightly overweighted in this sector, as it continues to
show the potential for appreciation.
18
<PAGE>
The Portfolio's performance was hindered somewhat by its weighting in the
utility sector due to lingering questions about the ability of companies to
perform in a deregulated environment. The deregulation process, while
progressing, is moving slowly and sporadically. We continue to maintain
exposure to utility stocks due to their excellent valuations, and rely on our
stock-selection fundamentals to search out investment opportunities.
Q How did the Portfolio perform during the reporting period?
A The Portfolio achieved a total return of 16.00 percent/1/ at net asset value
for the six-month period ended June 30, 1997. By comparison, the Standard &
Poor's 500-Stock Index returned 20.59 percent for the same period. Keep in mind
that the S&P 500-Stock Index is a broad-based, unmanaged index reflecting
general stock market performance and does not reflect any commissions or fees
that would be incurred by an investor purchasing the securities it represents.
Please refer to the chart on page four for additional Portfolio performance
results.
Q How will you position the Portfolio in preparation for the months ahead?
A Our intent is to maintain a disciplined stock-selection process, remain true
to our strategy, avoid weighting the portfolio too heavily in any one sector,
and keep the portfolio as close to fully invested as possible. At some point,
the stock market will broaden to include a wider universe of value-oriented
growth stocks, which should benefit the Portfolio. We believe that our portfolio
management philosophy will potentially temper the effects of market volatility
on the Portfolio on a relative basis. Of course, we are not immune to market
declines, but our portfolio characteristics may provide a buffer that more
aggressive funds may lack.
In keeping with the expectations of the Portfolio's shareholders, we
continue to refrain from taking extreme positions that we believe will expose
the portfolio to unwarranted risk. As always, we will search for the best
companies at the best price, diversify broadly, and maintain a long-term
investment horizon.
/s/ Alan T. Sachtleben /s/ James A. Gilligan
- ----------------------------- ------------------------------
Alan T. Sachtleben James A. Gilligan
Chief Investment Officer Portfolio Manager
Equity Investments Growth and Income Portfolio
19 Please see footnotes on page four
<PAGE>
Portfolio Management Review
Money Market Portfolio
The following is an interview with the management team of the Van Kampen
American Capital Life Investment Trust--Money Market Portfolio. The team is led
by David R. Troth, portfolio manager, and Peter W. Hegel, chief investment
officer for fixed-income investments.
Q How would you describe the market conditions under which the Portfolio
operated in 1997? How did you manage the portfolio?
A Economic growth has slowed since the year's first quarter, quelling the
market's fears that the Federal Reserve Board would be forced to increase
short-term interest rates. The Fed did raise the federal funds rate in late
March from 5.25 percent to 5.50 percent, but has left this key lending rate
unchanged since then. As a result, the yields available on short-term, fixed-
income securities have generally trended lower over the six-month reporting
period.
All eyes will be on the economy as we head through the summer, watching for
signs of accelerating growth that might spur inflation and, therefore, compel
the Fed to pursue a tighter monetary policy. To maintain flexibility to react to
any such changes, we have kept the portfolio's average maturity near the short
end of its normal range. While we do not anticipate a sharp upturn in interest
rates, we would like to be positioned to take advantage of any potential
increases.
The Portfolio continues to hold a conservative mix of federal agency
securities, repurchase agreement collateralized by U.S. government securities,*
and high-grade, short-term corporate securities. Our goal is to maintain a
portfolio of high-quality, short-term securities, while preserving the
Portfolio's ability to provide a competitive level of current income.
Q How did the Portfolio perform during the first six months of the year?
A Through the six-month period ended June 30, 1997, the Portfolio produced a
total return of 2.43 percent at net asset value. As of June 30, the Portfolio
generated a seven-day average yield of 4.97 percent and a 30-day effective yield
of 4.99 percent. The Portfolio's net asset value remained unchanged at $1.00 per
share throughout the reporting period.
While the current economic environment--characterized by low inflation, high
employment, and moderate gross domestic product growth--is highly favorable for
fixed-income investments, we will remain watchful for developments that might
signal the need for greater caution. As always, we appreciate your confidence
and look forward to a successful close to the fiscal year.
/s/ Peter W. Hegel /s/ David R. Troth
- ----------------------------- ------------------------------
Peter W. Hegel David R. Troth
Chief Investment Officer Portfolio Manager
Fixed Income Investments Money Market Portfolio
*An investment in the portfolio is neither insured nor guaranteed by the U.S.
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.
20
<PAGE>
Portfolio Management Review
Morgan Stanley Real Estate Securities Portfolio
The following is an interview with the portfolio management team of Van Kampen
American Capital Life Investment Trust--Morgan Stanley Real Estate Securities
Portfolio. The team is led by portfolio managers Russell C. Platt and Theodore
R. Bigman.
Q What were the market conditions in which the Portfolio operated over the past
six months?
A The combination of moderate economic growth and historically low inflation
provided a near-ideal environment for equity investments during the period. A
weak bond market was unable to siphon investment money away from the stock
market, as stocks continued to soar to record highs, although not without
occasional flashes of volatility. We saw a correction of around 10 percent (as
measured by the Dow Jones Industrial Average) that lingered from mid-March
through mid-April. Since then, however, market averages have roared back, amply
recovering from earlier losses.
Throughout the period, concerns over rising interest rates set the tone, as
investors worried that the Federal Reserve Board's commitment to controlling
inflation by raising short-term interest rates might slow the economy too much
and cut into corporate earnings. On March 25, the Fed increased the federal
funds rate by one-quarter percentage point, reacting to strong consumer demand
and the inflationary implications of a tight labor market. This marked the first
hike in short-term interest rates in two years.
Q What strategies did you utilize to manage the portfolio during the reporting
period?
A As is the case with many other sectors in the securities market, REIT
investors can be divided into two camps--growth investors, who focus
primarily on momentum in earnings, and value investors, who focus primarily on
underlying property values or cash flow. While we do not overlook growth
companies that are able to create incremental share value through superior
property management skills, we are strong proponents of value investing. We
select securities that offer the best value relative to their underlying net
property assets. We feel that this is an appropriate strategy, adhering to the
thesis that efficient markets will, over time, drive values in the public and
private markets into equilibrium. In such an environment, we believe that the
value style of investing will prevail.
Q What was the Portfolio's performance over the six-month period ended June 30,
1997?
A The Portfolio achieved a six-month total return at net asset value of 6.51
percent/1/. This performance compares favorably to the total return of the
NAREIT (National Association of Real Estate Investment Trusts) Equity REIT Index
of 5.70 percent. The NAREIT Index is an unmanaged index that reflects the
performance of a broad range of equity REITs of all property types. By
comparison, the Standard & Poor's 500-Stock Index registered a total return of
20.62 percent in the first six months of the year. The S&P 500-Stock Index is a
broad-based, unmanaged index that reflects the general performance of the stock
market. Keep in mind that these indices are unmanaged statistical composites
that do not reflect any commissions, fees, or sales charges that would be
incurred by an investor purchasing the securities they represent. Please refer
to the chart on page four for additional Portfolio performance results.
21
<PAGE>
Q What factors or sectors contributed to the Portfolio's success in the first
six months of the year?
A With respect to the overall portfolio, our value style of investing was
beneficial during the period. Recall that the NAREIT Equity REIT Index
registered a total return of 35.27 percent in 1996, of which 18.85 percent
occurred in the fourth quarter (with a full 10.39 percent return in the final
month alone). Given that level of performance, many growth and "momentum"
companies sold at significant premiums to underlying real estate values, and
thus experienced a retracement of stock prices in the first six months of the
year. Our value focus allowed us to avoid a number of companies in which the
retrenchment was often significant.
Our sector weighting and stock selection within sectors also contributed to
the Portfolio's total return in the first half of the year. After last year's
outstanding performance, office and hotel property sectors continued to show
above-average performance over the past six months, and our overweighted
positions in these sectors positively contributed to total return. Limited new
supply in both sectors has allowed for better returns. We were somewhat
surprised by the above-average performance in the retail sector in the first
half of the year, and our holdings in regional malls added significantly to
returns. Our stock selection in the manufactured-home sector and the industrial
sector also contributed to the Portfolio's success.
Q What is your outlook going forward?
A Despite the fact that an increasing number of property sectors are
approaching equilibrium, we do not believe that the end of the current real
estate cycle is near. Capital flows into this industry, while improved from
several years ago, are not at the unprecedented levels that brought about the
demise of the prior cycle. Thus, demand for space is being met with a
controlled and economically prudent level of new supply. We believe that
continued external growth via acquisitions and new development, in combination
with the internal growth that results from rising rental rates and increasing
occupancy, should lead to further real estate value creation. Consequently, we
expect to see continued attractive total returns in this sector, as value
creation is ultimately reflected in the price of shares.
/s/ Russell C. Platt /s/ Theodore R. Bigman
Russell C. Platt Theodore R. Bigman
Portfolio Manager Portfolio Manager
Morgan Stanley Real Estate Morgan Stanley Real Estate
Securities Portfolio Securities Portfolio
22 Please see footnotes on page four
<PAGE>
Asset Allocation Portfolio Portfolio of Investments
<TABLE>
<CAPTION>
June 30, 1997 (Unaudited)
=========================================================================================
Description Shares Market Value
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock 51.5%
Consumer Distribution 2.5%
Dayton Hudson Corp............................................ 10,900 $ 579,744
Federated Department Stores, Inc. (a)......................... 13,800 479,550
Kroger Co. (a)................................................ 6,200 179,800
Pier 1 Imports, Inc........................................... 11,900 315,350
----------
1,554,444
----------
Consumer Durables 1.3%
Cooper Tire & Rubber.......................................... 5,000 110,000
Ford Motor Co................................................. 3,300 124,575
Masco Corp.................................................... 3,500 146,125
Maytag Corp................................................... 8,900 232,512
Newell Co..................................................... 5,300 210,013
----------
823,225
----------
Consumer Non-Durables 4.6%
Dial Corp..................................................... 26,900 420,313
First Brands Corp............................................. 12,100 277,544
Fortune Brands, Inc........................................... 8,800 328,350
Philip Morris Cos., Inc....................................... 13,700 607,937
RJR Nabisco Holdings Corp..................................... 14,600 481,800
Tambrands, Inc................................................ 6,000 299,250
Tommy Hilfiger Corp. (a)...................................... 10,600 425,987
----------
2,841,181
----------
Consumer Services 3.7%
Cox Communications, Inc., Class A (a)......................... 4,600 110,400
International Game Technology................................. 14,700 260,925
Outback Steakhouse, Inc. (a).................................. 4,200 101,587
Tele-Communications International, Inc., Class A (a).......... 73,600 1,094,800
Time Warner, Inc.............................................. 15,100 728,575
----------
2,296,287
----------
Energy 5.1%
Amerada Hess Corp............................................. 4,200 233,362
Amoco Corp.................................................... 3,600 312,975
Atlantic Richfield Co......................................... 2,200 155,100
British Petroleum PLC - ADR (United Kingdom).................. 4,800 359,400
Chevron Corp.................................................. 4,000 295,750
Coastal Corp.................................................. 2,800 148,925
Coflexip SA- ADR (France) (a)................................. 4,700 141,588
</TABLE>
23 See Notes to Financial Statements
<PAGE>
Asset Allocation Portfolio Portfolio of Investments (Continued)
<TABLE>
<CAPTION>
June 30, 1997 (Unaudited)
=========================================================================================
Description Shares Market Value
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Energy (Continued)
ENI SPA - ADR (Italy).......................................... 3,800 $ 218,025
Equitable Resources, Inc....................................... 3,300 93,638
J. Ray McDermott SA (a)........................................ 4,800 129,600
Pogo Producing Co.............................................. 2,000 77,375
Santa Fe International Corp. (a)............................... 2,400 81,600
Total SA -ADR (France)......................................... 3,956 192,375
Unocal Corp.................................................... 4,900 190,181
USX - Marathon Group........................................... 6,200 179,025
YPF Sociedad Anonima - ADR (Argentina), Class D................ 9,400 289,050
----------
3,097,969
----------
Finance 7.7%
Aetna, Inc..................................................... 6,100 624,488
AMBAC, Inc..................................................... 5,000 381,875
American Bankers Insurance Group, Inc.......................... 9,100 575,575
BankAmerica Corp............................................... 5,200 335,725
Bear Stearns Cos., Inc......................................... 5,738 196,168
Chase Manhattan Corp........................................... 2,400 232,950
CIGNA Corp..................................................... 1,600 284,000
CMAC Investment Corp........................................... 9,000 429,750
Conseco, Inc................................................... 8,000 296,000
Everest Reinsurance Holdings, Inc.............................. 6,400 253,600
First Union Corp............................................... 2,900 268,250
Hartford Life, Inc., Class A (a)............................... 1,800 67,500
Hertz Corp., Class A (a)....................................... 900 32,400
MBIA, Inc...................................................... 1,700 191,781
Norwest Corp................................................... 3,300 185,625
PNC Bank Corp.................................................. 5,800 241,425
Travelers Group, Inc........................................... 2,133 134,512
----------
4,731,624
----------
Healthcare 2.9%
American Home Products Corp.................................... 5,100 390,150
Lincare Holdings, Inc. (a)..................................... 5,200 223,600
PacifiCare Health Systems, Class B (a)......................... 9,300 594,038
Pharmacia & Upjohn, Inc........................................ 4,700 163,325
Schering Plough Corp........................................... 8,200 392,575
----------
1,763,688
----------
</TABLE>
24 See Notes to Financial Statements
<PAGE>
Asset Allocation Portfolio Portfolio of Investments (Continued)
<TABLE>
<CAPTION>
June 30, 1997 (Unaudited)
=========================================================================================
Description Shares Market Value
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Producer Manufacturing 4.4%
Bouygues Offshore SA - ADR (France)........................... 15,600 $ 195,000
Caterpillar, Inc.............................................. 2,400 257,700
Cognex Corp. (a).............................................. 4,100 108,650
Ingersoll-Rand Co............................................. 7,400 456,950
ITT Corp. (a)................................................. 4,100 250,356
LucasVarity PLC - ADR (United Kingdom)........................ 9,400 325,475
Stewart & Stevenson Services, Inc............................. 4,300 111,800
WMX Technologies, Inc......................................... 31,000 995,875
----------
2,701,806
----------
Raw Materials/Processing Industries 3.4%
Bethlehem Steel Corp. (a)..................................... 12,600 131,513
Boise Cascade Corp............................................ 11,700 413,156
Bowater, Inc.................................................. 2,100 97,125
British Steel PLC - ADR (United Kingdom)...................... 12,600 318,150
Dow Chemical Co............................................... 1,500 130,688
Georgia Pacific Corp.......................................... 1,900 162,212
Imperial Chemical Industries PLC - ADR (United Kingdom)....... 4,200 238,875
Lyondell Petrochemical Co..................................... 2,800 61,075
USX U.S. Steel, Inc........................................... 4,500 157,781
Weyerhaeuser Co............................................... 4,600 239,200
Willamette Industries, Inc.................................... 1,600 112,000
----------
2,061,775
----------
Technology 3.0%
Avnet, Inc.................................................... 2,800 161,000
BMC Software, Inc. (a)........................................ 2,300 127,363
Compaq Computer Corp. (a)..................................... 5,000 496,250
Dell Computer Corp. (a)....................................... 1,400 164,412
Gateway 2000, Inc. (a)........................................ 3,800 123,263
Intel Corp.................................................... 700 99,269
Nokia Corp. - ADR (Finland)................................... 1,600 118,000
Pitney Bowes, Inc............................................. 1,500 104,250
Quantum Corp. (a)............................................. 4,500 91,406
SunGard Data Systems, Inc. (a)................................ 7,700 358,050
----------
1,843,263
----------
Transportation 0.5%
Canadian National Railway Co.................................. 7,100 310,625
----------
</TABLE>
25 See Notes to Financial Statements
<PAGE>
Asset Allocation Portfolio Portfolio of Investments (Continued)
<TABLE>
<CAPTION>
June 30, 1997 (Unaudited)
=========================================================================================
Description Shares Market Value
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Utilities 12.4%
Ameritech Corp................................................ 5,000 $ 339,687
Baltimore Gas & Electric Co................................... 5,600 149,450
Bell Atlantic Corp............................................ 5,400 409,725
BellSouth Corp................................................ 7,300 338,537
Boston Edison Co.............................................. 5,000 131,875
Carolina Power & Light Co..................................... 2,300 82,513
Cincinnati Bell, Inc.......................................... 3,200 100,800
CMS Energy Corp............................................... 7,200 253,800
DPL, Inc...................................................... 3,700 91,113
DQE, Inc...................................................... 2,100 59,325
DTE Energy Co................................................. 4,500 124,312
Duke Power Co................................................. 12,637 605,786
Edison International.......................................... 4,500 111,938
Entergy Corp.................................................. 5,100 139,612
FPL Group, Inc................................................ 3,000 138,187
GPU, Inc...................................................... 5,000 179,375
Houston Industries, Inc....................................... 30,500 653,844
Idaho Power Co................................................ 8,800 276,100
Illinova Corp................................................. 16,800 369,600
KU Energy Corp................................................ 2,300 78,488
Nipsco Industries, Inc........................................ 2,600 107,413
OGE Energy Corp............................................... 12,300 559,650
PacifiCorp.................................................... 9,800 215,600
Pinnacle West Capital Corp.................................... 13,000 390,812
Public Service Co. of New Mexico.............................. 19,800 353,925
SBC Communications, Inc....................................... 6,200 383,625
Sierra Pacific Resources...................................... 2,400 76,800
Southwestern Public Service Co................................ 3,900 153,319
Texas Utilities Co............................................ 20,400 702,525
-----------
7,577,736
-----------
Total Common Stock 51.5%......................................... 31,603,623
-----------
</TABLE>
26 See Notes to Financial Statements
<PAGE>
<TABLE>
<CAPTION>
Asset Allocation Portfolio Portfolio of Investments (Continued)
June 30, 1997 (Unaudited)
====================================================================================================================================
Par
Amount
(000) Description Coupon Maturity Market Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Debt 22.9%
Consumer Distribution 1.6%
$1,000 Sears Roebuck Acceptance Corp............................................ 6.750% 09/15/05 $ 980,350
-----------
Consumer Non-Durables 1.6%
1,000 Anheuser Busch Co., Inc.................................................. 7.000 09/01/05 995,600
-----------
Consumer Services 1.6%
1,000 Cox Communications, Inc.................................................. 6.875 06/15/05 985,300
-----------
Energy 3.5%
1,000 Burlington Resources, Inc................................................ 9.125 10/01/21 1,166,200
1,000 Enron Corp............................................................... 6.875 10/15/07 982,200
-----------
2,148,400
-----------
Finance 1.7%
1,000 American General Corp.................................................... 9.625 02/01/18 1,059,500
-----------
Healthcare 1.6%
1,000 Aetna Services, Inc...................................................... 7.125 08/15/06 1,000,800
-----------
Producer Manufacturing 1.9%
1,000 Caterpillar, Inc......................................................... 9.000 04/15/06 1,128,700
-----------
Technology 3.5%
1,000 Boeing, Inc.............................................................. 8.100 11/15/06 1,081,100
1,000 Philips Electronics NV................................................... 8.375 09/15/06 1,071,200
-----------
2,152,300
-----------
Transportation 2.5%
1,000 Norfolk Southern Corp................................................... 7.700 05/15/17 1,027,300
500 Southwest Airlines Co................................................... 7.375 03/01/27 492,000
-----------
1,519,300
Utilities 3.4%
1,000 Baltimore Gas & Electric Co............................................. 7.500 01/15/07 1,029,600
1,000 Texas Utilities Electric Co............................................. 8.250 04/01/04 1,067,980
-----------
2,097,580
-----------
Total Corporate Debt.............................................................................. 14,067,830
-----------
U.S. Government Obligations 16.4%
3,000 U.S. Treasury Bond...................................................... 7.250 05/15/16 3,129,840
4,200 U.S. Treasury Bond...................................................... 7.125 02/15/23 4,329,276
2,500 U.S. Treasury Note...................................................... 7.250 08/15/04 2,607,025
-----------
Total U.S. Government Obligations................................................................. 10,066,141
-----------
</TABLE>
27 See Notes to Financial Statements
<PAGE>
Asset Allocation Portfolio Portfolio of Investments (Continued)
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Government and Agency Fixed - Income Obligations 1.7%
$ 1,000 Province of Nova Scotia (Canada)....................7.250% 7/27/13 $ 997,100
------------
Total Long-Term Investments 92.5%
(Cost $51,137,533).................................................................. 56,734,694
Repurchase Agreement 7.6%
BA Securities ($4,665,000 par collateralized by U.S. Government
obligations in a pooled cash account, dated 06/30/97, to be sold
on 07/01/97 at $4,665,788).......................................................... 4,665,000
------------
Total Investments 100.1%
(Cost $55,802,533).................................................................. 61,399,694
Liabilities in Excess of Other Assets (0.1%).......................................... (57,278)
------------
Net Assets 100.0%..................................................................... $ 61,342,416
============
</TABLE>
(a) Non-income producing security as this stock currently does not declare
dividends.
28 See Notes to Financial Statements
<PAGE>
Asset Allocation Portfolio Statement of Assets and Liabilities
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
Assets:
Total Investments (Cost $55,802,533).......................... $ 61,399,694
Cash.......................................................... 4,960
Receivables:
Interest.................................................... 519,460
Dividends................................................... 80,927
Investments Sold............................................ 31,781
Portfolio Shares Sold....................................... 29,732
Other......................................................... 1,821
------------
Total Assets.............................................. 62,068,375
------------
Liabilities:
Payables:
Investments Purchased....................................... 531,402
Portfolio Shares Repurchased................................ 111,968
Investment Advisory Fee..................................... 18,383
Distributor and Affiliates.................................. 2,575
Deferred Compensation and Retirement Plans.................... 47,188
Accrued Expenses.............................................. 14,443
------------
Total Liabilities......................................... 725,959
------------
Net Assets.................................................... $ 61,342,416
============
Net Assets Consist of:
Capital....................................................... $ 51,920,011
Net Unrealized Appreciation................................... 5,597,161
Accumulated Net Realized Gain................................. 2,630,086
Accumulated Undistributed Net Investment Income............... 1,195,158
------------
Net Assets.................................................... $ 61,342,416
============
Net Asset Value, Offering Price and Redemption Price Per Share
(Based on net assets of $61,342,416 and 5,111,493 shares of
beneficial interest issued and outstanding)................. $ 12.00
============
29 See Notes to Financial Statements
<PAGE>
Asset Allocation Portfolio Statement of Operations
For the Six Months Ended June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
Investment Income:
Interest......................................................... $ 1,006,718
Dividends........................................................ 399,020
-----------
Total Income................................................. 1,405,738
-----------
Expenses:
Investment Advisory Fee.......................................... 153,200
Audit............................................................ 12,211
Custody.......................................................... 10,391
Accounting....................................................... 8,369
Shareholder Services............................................. 7,637
Trustees Fees and Expenses....................................... 6,617
Legal............................................................ 5,566
Other............................................................ 19,711
-----------
Total Expenses............................................... 223,702
Less Fees Deferred........................................... 38,370
-----------
Net Expenses................................................. 185,332
-----------
Net Investment Income............................................ $ 1,220,406
===========
Realized and Unrealized Gain/Loss:
Net Realized Gain................................................ $ 2,749,449
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period........................................ 4,916,467
End of the Period:
Investments.................................................. 5,597,161
-----------
Net Unrealized Appreciation During the Period.................... 680,694
-----------
Net Realized and Unrealized Gain................................. $ 3,430,143
===========
Net Increase in Net Assets From Operations....................... $ 4,650,549
===========
30 See Notes to Financial Statements
<PAGE>
Asset Allocation Portfolio Statement of Changes in Net Assets
For the Six Months Ended June 30, 1997 and the Year Ended
December 31, 1996 (Unaudited)
===============================================================================
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1997 December 31, 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income..................... $ 1,220,406 $ 2,389,714
Net Realized Gain......................... 2,749,449 6,901,393
Net Unrealized Appreciation/
Depreciation During the Period.......... 680,694 (1,116,505)
------------ ------------
Change in Net Assets from Operations...... 4,650,549 8,174,602
------------ ------------
Distributions from Net Investment Income.. (72,479) (2,362,025)
Distributions from Net Realized Gain...... (1,238,591) (6,874,314)
------------ ------------
Total Distributions....................... (1,311,070) (9,236,339)
------------ ------------
Net Change in Net Assets from
Investment Activities................... 3,339,479 (1,061,737)
------------ ------------
From Capital Transactions:
Proceeds from Shares Sold................. 1,606,693 4,725,803
Net Asset Value of Shares Issued
Through Dividend Reinvestment........... 1,311,070 9,236,339
Cost of Shares Repurchased................ (8,863,891) (11,932,457)
------------ ------------
Net Change in Net Assets from
Capital Transactions.................... (5,946,128) 2,029,685
------------ ------------
Total Increase/Decrease in Net Assets..... (2,606,649) 967,948
Net Assets:
Beginning of the Period................... 63,949,065 62,981,117
------------ ------------
End of the Period (Including accumulated
undistributed net investment income of
$1,195,158 and $47,231, respectively)... $ 61,342,416 $ 63,949,065
============ ============
</TABLE>
31 See Notes to Financial Statements
<PAGE>
Asset Allocation Portfolio Financial Highlights
The following presents financial highlights for one share of the Portfolio
outstanding throughout the periods indicated. (Unaudited)
<TABLE>
<CAPTION>
===============================================================================================================
Year Ended December 31,
Six Months Ended ---------------------------------------
June 30, 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.................. $11.352 $ 11.64 $ 9.99 $ 11.80 $ 11.92
------- ------- ------- ------- -------
Net Investment Income................................... .240 .482 .48 .45 .29
Net Realized and Unrealized Gain/Loss................... .654 1.083 2.6425 (.89) .6025
------- ------- ------- ------- -------
Total from Investment Operations.......................... .894 1.565 3.1225 (.44) .8925
------- ------- ------- ------- -------
Less:
Distributions from Net Investment Income................ .014 .478 .4775 .45 .2925
Distributions from Net Realized Gain.................... .231 1.375 .995 .90 .63
Distributions in Excess of Net Realized Gain............ -0- -0- -0- .02 .09
------- ------- ------- ------- -------
Total Distributions....................................... .245 1.853 1.4725 1.37 1.0125
------- ------- ------- ------- -------
Net Asset Value, End of the Period........................ $12.001 $11.352 $ 11.64 $ 9.99 $ 11.80
======= ======= ======= ======= =======
Total Returns*............................................ 8.01%** 13.87% 31.36% (3.66%) 7.71%
Net Assets at End of the Period (In millions)............. $ 61.3 $ 63.9 $ 63.0 $ 56.6 $ 64.9
Ratio of Expenses to Average Net Assets*.................. .60% .60% .60% .60% .60%
Ratio of Net Investment Income to Average Net Assets*..... 3.98% 3.78% 3.85% 3.70% 2.34%
Portfolio Turnover........................................ 33%** 118% 124% 163% 150%
Average Commission Paid Per Equity Share Traded(a)........ $ .0600 $ .0561 - - -
* If certain expenses had not been assumed by VKAC,
Total Return would have been lower and the ratios
would have been as follows:
Ratio of Expenses to Average Net Assets................... .73% .81% .74% .72% .74%
Ratio of Net Investment Income to
Average Net Assets........................................ 3.86% 3.57% 3.71% 3.58% 2.20%
</TABLE>
(a) Represents the average brokerage commissions paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal periods prior to 1996.
** Non-Annualized
32 See Notes to Financial Statements
<PAGE>
Domestic Income Portfolio Portfolio of Investments
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -----------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Corporate Debt 77.8%
Consumer Distribution 5.8%
$500 Borden, Inc. ........................................... 7.875% 02/15/23 $ 469,500
500 Nabisco, Inc. .......................................... 7.550 06/15/15 494,650
----------
964,150
----------
Consumer Durables 4.5%
500 Chrysler Corp. ......................................... 7.450 03/01/27 493,090
250 Oriole Homes Corp. ..................................... 12.500 01/15/03 261,250
----------
754,340
----------
Consumer Services 18.3%
500 Belo A H Corp. ......................................... 7.125 06/01/07 498,750
500 Circus Circus Enterprises, Inc. ........................ 6.450 02/01/06 472,000
500 News America Holdings, Inc. ............................ 10.125 10/15/12 572,500
500 TCI Communications, Inc. ............................... 8.750 08/01/15 524,950
500 Valassis Communications, Inc. .......................... 9.550 12/01/03 539,800
500 Viacom, Inc. ........................................... 7.625 01/15/16 465,650
----------
3,073,650
----------
Energy 8.4%
300 Noram Energy Corp. ..................................... 10.000 11/15/19 333,375
500 Occidental Petroleum Corp. ............................. 10.125 11/15/01 560,450
500 PDV America, Inc. ...................................... 7.875 08/01/03 507,250
----------
1,401,075
----------
Finance 5.4%
365 First PV Funding Corp., Series 1986 A................... 10.300 01/15/14 388,725
500 PXRE Capital Trust I.................................... 8.850 02/01/27 510,210
----------
898,935
----------
Healthcare 6.0%
500 Allegiance Corp. ....................................... 7.800 10/15/16 506,400
500 Manor Care, Inc. ....................................... 7.500 06/15/06 507,600
----------
1,014,000
----------
Producer Manufacturing 1.5%
250 American Builders, 144A - Private Placement (b)......... 10.625 05/15/07 257,500
----------
Raw Materials/Processing Industries 9.4%
500 Aktiebolaget SKF Note................................... 7.125 07/01/07 495,600
500 Georgia-Pacific Corp. .................................. 9.950 06/15/02 561,890
500 Vicap SA, 144A - Private Placement (b).................. 10.250 05/15/02 513,750
----------
1,571,240
----------
</TABLE>
33 See notes to Financial Statements
<PAGE>
Domestic Income Portfolio Portfolio of Investments (Continued)
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Transportation 11.0%
$500 Delta Airlines, Inc............................................ 9.750% 05/15/21 $ 601,650
500 Norfolk Southern Corp.......................................... 7.700 05/15/17 513,650
500 Southwest Airlines Co.......................................... 7.375 03/01/27 492,000
200 United Airlines, Inc........................................... 10.020 03/22/14 239,760
-----------
1,847,060
-----------
Utilities 7.5%
500 360 Communications Co.......................................... 7.600 04/01/09 500,700
350 Monongahela Power Co........................................... 8.375 07/01/22 375,620
350 Public Service Co. of Colorado................................. 8.750 03/01/22 377,615
-----------
1,253,935
-----------
Total Corporate Debt 77.8%.............................................................. 13,035,885
-----------
Government Obligations 14.6%
752 Federal National Mortgage Association Pool (U.S.).............. 10.000 04/01/21 819,291
500 Republic of Argentina (Argentina).............................. 11.000 10/09/06 558,125
500 Republic of South Africa (South Africa)........................ 8.500 06/23/17 498,835
500 United Mexican States (Mexico)................................. 11.375 09/15/16 563,900
-----------
Total Government Obligations............................................................ 2,440,151
-----------
Common and Preferred Stock 4.6%
FF Holdings Corp., 2,500 common shares, 144A - Private Placement (a) (b)......................... 25
Supermarkets General Holdings Corp., 6,889 preferred shares, dividends of $ 3.52 per share (c)... 144,669
Time Warner, Inc., 566 Series M preferred shares, dividend rate of $ 10.25, 144A -
Private Placement (b).......................................................................... 625,347
-----------
Total Common and Preferred Stock......................................................... 770,041
-----------
Total Long-Term Investments 97.0% (Cost $15,766,466)............................................. 16,246,077
Repurchase Agreement 6.2%
BA Securities ($1,035,000 par collateralized by U.S. Government obligations in a
pooled cash account, dated 06/30/97, to be sold on 07/01/97 at $1,035,175)..................... 1,035,000
-----------
Total Investments 103.2% (Cost $16,801,466)...................................................... 17,281,077
Liabilities in Excess of Other Assets (3.2%)..................................................... (538,423)
-----------
Net Assets 100.0%................................................................................ $16,742,654
===========
</TABLE>
(a) Non-income producing security as this stock currently does not declare
dividends.
(b) 144A securities are those which are exempt from registration under Rule 144A
of the Securities Act of 1933. These securities may only be resold in
transactions exempt from registration which are normally transactions with
qualified institutional buyers.
(c) Payment-in-kind security.
34 See notes to Financial Statements
<PAGE>
Domestic Income Portfolio Statement of Assets and Liabilities
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Assets:
Total Investments (Cost $16,801,466)............................... $17,281,077
Receivables:
Interest......................................................... 291,146
Portfolio Shares Sold............................................ 7,731
Other.............................................................. 1,132
-----------
Total Assets................................................... 17,581,086
-----------
Liabilities:
Payables:
Investments Purchased............................................ 772,420
Distributor and Affiliates....................................... 4,418
Portfolio Shares Repurchased..................................... 1,313
Deferred Compensation and Retirement Plans......................... 49,901
Accrued Expenses................................................... 8,720
Custodian Bank..................................................... 1,660
-----------
Total Liabilities.............................................. 838,432
-----------
Net Assets......................................................... $16,742,654
===========
Net Assets Consist of:
Capital............................................................ $17,015,560
Accumulated Undistributed Net Investment Income.................... 672,308
Net Unrealized Appreciation........................................ 479,611
Accumulated Net Realized Loss...................................... (1,424,825)
-----------
Net Assets......................................................... $16,742,654
===========
Net Asset Value, Offering Price and Redemption Price Per Share
(Based on net assets of $16,742,654 and 2,005,232 shares of
beneficial interest issued and outstanding)...................... $ 8.35
===========
</TABLE>
35 See notes to Financial Statements
<PAGE>
Domestic Income Portfolio Statement of Operations
For the Six Months Ended June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Investment Income:
Interest................................................. $ 710,751
Dividends................................................ 30,475
Other.................................................... 5,200
---------
Total Income......................................... 746,426
---------
Expenses:
Investment Advisory Fee.................................. 44,015
Audit.................................................... 12,210
Trustees Fees and Expenses............................... 9,410
Shareholder Services..................................... 7,699
Shareholder Reports...................................... 7,625
Legal.................................................... 5,723
Accounting............................................... 5,134
Custody.................................................. 1,517
Other.................................................... 3,736
---------
Total Expenses....................................... 97,069
Less Fees Deferred................................... 43,853
---------
Net Expenses......................................... 53,216
---------
Net Investment Income.................................... $ 693,210
=========
Realized and Unrealized Gain/Loss:
Net Realized Gain........................................ $ 248,966
---------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................ 663,799
End of the Period:
Investments.......................................... 479,611
---------
Net Unrealized Depreciation During the Period............ (184,188)
---------
Net Realized and Unrealized Gain......................... $ 64,778
=========
Net Increase in Net Assets From Operations............... $ 757,988
=========
</TABLE>
36 See notes to Financial Statements
<PAGE>
Domestic Income Portfolio Statement of Changes in Net Assets
For the Six Months Ended June 30, 1997 and the Year
Ended December 31, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1997 December 31, 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income................................................ $ 693,210 $ 1,757,056
Net Realized Gain.................................................... 248,966 350,915
Net Unrealized Depreciation During the Period........................ (184,188) (844,721)
----------- ------------
Change in Net Assets from Operations................................. 757,988 1,263,250
Distributions from Net Investment Income............................. (55,228) (1,735,294)
----------- ------------
Net Change in Net Assets from Investment Activities.................. 702,760 (472,044)
----------- ------------
From Capital Transactions:
Proceeds from Shares Sold............................................ 2,725,297 6,174,993
Net Asset Value of Shares Issued Through Dividend Reinvestment....... 55,228 1,735,294
Cost of Shares Repurchased........................................... (6,537,928) (14,203,241)
----------- ------------
Net Change in Net Assets from Capital Transactions................... (3,757,403) (6,292,954)
----------- ------------
Total Decrease in Net Assets......................................... (3,054,643) (6,764,998)
Net Assets:
Beginning of the Period.............................................. 19,797,297 26,562,295
----------- ------------
End of the Period (Including accumulated undistributed net
investment income of $672,308 and $34,326, respectively)............. $16,742,654 $ 19,797,297
=========== ============
</TABLE>
37 See notes to Financial Statements
<PAGE>
Domestic Income Portfolio Financial Highlights
The following schedule presents financial highlights for one share of the
Portfolio outstanding throughout the periods indicated (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
Six Months Ended ---------------------------------------
June 30, 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period............................. $8.008 $ 8.21 $ 7.35 $ 8.58 $ 8.00
------ ------ ------- -------- -------
Net Investment Income.............................................. .346 .755 .71 .85 .72
Net Realized and Unrealized Gain/Loss.............................. .020 (.212) .8525 (1.2275) .5825
------ ------ ------- -------- -------
Total from Investment Operations..................................... .366 .543 1.5625 (.3775) 1.3025
Less Distributions from Net Investment Income........................ .025 .745 .7025 .8525 .7225
------ ------ ------- -------- -------
Net Asset Value, End of the Period................................... $8.349 $8.008 $ 8.21 $ 7.35 $ 8.58
====== ====== ======= ======== =======
Total Return*........................................................ 4.57%** 6.68% 21.37% (4.33%) 16.32%
Net Assets at End of the Period (In millions)........................ $ 16.7 $ 19.8 $ 26.6 $ 21.3 $ 27.4
Ratio of Expenses to Average Net Assets*............................. .60% .60% .60% .60% .60%
Ratio of Net Investment Income to Average Net Assets*................ 7.88% 7.97% 8.11% 8.35% 7.80%
Portfolio Turnover................................................... 43%** 77% 54% 94% 130%
* If certain expenses had not been assumed by VKAC, Total Return
would have been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets.............................. 1.10% 1.29% .93% .95% .95%
Ratio of Net Investment Income to Average Net Assets................. 7.38% 7.28% 7.78% 8.00% 7.40%
</TABLE>
** Non-Annualized
38 See notes to Financial Statements
<PAGE>
Emerging Growth Portfolio Portfolio of Investments
June 30, 1997 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Common Stocks 91.2%
Consumer Distribution 10.4%
Barnes & Noble, Inc. (a)............................ 450 $ 19,350
Bed Bath & Beyond, Inc. (a)......................... 750 22,781
Brightpoint, Inc. (a)............................... 525 17,095
CompUSA, Inc. (a)................................... 500 10,750
Consolidated Stores Corp. (a)....................... 1,031 35,827
Costco Cos., Inc. (a)............................... 2,050 67,394
CVS Corp............................................ 500 25,625
Dollar General Corp................................. 650 24,375
Eagle Hardware & Garden, Inc. (a)................... 350 8,006
Family DLR Stores, Inc.............................. 600 16,350
Fred Meyer, Inc. (a)................................ 450 23,260
General Nutrition Cos., Inc. (a).................... 700 19,600
Inacom Corp. (a).................................... 225 7,003
Ingram Micro, Inc., Class A (a)..................... 400 9,650
Interstate Bakeries Corp............................ 550 32,622
Jacor Communications, Inc. (a)...................... 325 12,431
Miller Herman, Inc.................................. 875 31,500
Pacific Sunwear of California(a).................... 525 16,931
Pier 1 Imports, Inc................................. 650 17,225
Proffitts, Inc. (a)................................. 250 10,969
Ross Stores, Inc.................................... 1,500 49,031
Safeway, Inc. (a)................................... 500 23,063
Stein Mart, Inc. (a)................................ 450 13,500
Tiffany & Co........................................ 550 25,403
TJX Cos., Inc....................................... 1,650 43,519
Wet Seal, Inc. (a).................................. 400 12,625
Williams Sonoma, Inc. (a)........................... 600 25,650
----------
621,535
----------
Consumer Durables 0.6%
Ethan Allen Interiors, Inc.......................... 425 24,225
SPX Corp............................................ 175 11,342
----------
35,567
----------
Consumer Non-Durables 4.6%
Action Performance Cos., Inc. (a)................... 250 6,063
Borders Group, Inc. (a)............................. 1,150 27,744
Consolidated Cigar Holdings, Inc. (a)............... 300 8,325
Gucci Group NV...................................... 475 30,578
Jones Apparel Group, Inc. (a)....................... 725 34,619
</TABLE>
39 See Notes to Financial Statements
<PAGE>
Emerging Growth Portfolio Portfolio of Investments (Continued)
June 30, 1997 (Unaudited)
===============================================================================
<TABLE>
<CAPTION>
Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
Consumer Non-Durables (Continued)
Liz Claiborne, Inc.................................. 450 $ 20,981
Morningstar Group, Inc. (a)......................... 350 10,281
Nautica Enterprises, Inc. (a)....................... 500 13,219
Smithfield Foods, Inc. (a).......................... 675 41,512
St. John Knits, Inc................................. 525 28,350
Tommy Hilfiger Corp. (a)............................ 250 10,047
Westpoint Stevens, Inc. (a)......................... 400 15,650
Wolverine World Wide, Inc........................... 901 27,337
-----------
274,706
-----------
Consumer Services 7.3%
AccuStaff, Inc. (a)................................. 400 9,475
Apollo Group, Inc., Class A (a)..................... 475 16,744
Capstar Hotel Co. (a)............................... 350 11,200
Caribiner International, Inc. (a)................... 550 17,944
Clear Channel Communications, Inc. (a).............. 425 26,164
Consolidated Graphics, Inc. (a)..................... 525 21,919
Corrections Corp. of America (a).................... 1,025 40,744
Doubletree Corp. (a)................................ 500 20,562
Evergreen Media Corp., Class A (a).................. 800 35,700
Foodmaker, Inc. (a)................................. 450 7,369
HFS, Inc. (a)....................................... 400 23,200
Interpublic Group of Cos., Inc...................... 525 32,189
Meredith Corp....................................... 1,100 31,900
National Data Corp.................................. 500 21,656
Omnicom Group, Inc.................................. 450 27,731
Prime Hospitality Corp. (a)......................... 525 10,369
Promus Hotel Corp. (a).............................. 400 15,500
Regal Cinemas, Inc. (a)............................. 800 26,400
Robert Half International, Inc. (a)................. 475 22,355
Sitel Corp. (a)..................................... 450 9,281
Valassis Communications, Inc. (a)................... 250 6,000
Whittman-Hart, Inc. (a)............................. 100 2,812
-----------
437,214
-----------
Energy 7.5%
BJ Services Co. (a)................................. 400 21,450
Cliffs Drilling Co. (a)............................. 500 18,250
Cooper Cameron Corp. (a)............................ 1,000 46,750
Diamond Offshore Drilling, Inc. (a)................. 725 56,459
ENSCO International, Inc. (a)....................... 750 39,562
</TABLE>
40 See Notes to Financial Statements
<PAGE>
Emerging Growth Portfolio Portfolio of Investments (Continued)
<TABLE>
<CAPTION>
June 30, 1997 (Unaudited)
================================================================================
Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Energy (Continued)
EVI, Inc. (a)........................................... 650 $ 27,300
Falcon Drilling, Inc. (a)............................... 750 43,219
Forcenergy, Inc. (a).................................... 500 15,188
Global Marine, Inc. (a)................................. 1,725 40,106
Marine Drilling Cos., Inc. (a).......................... 1,200 23,550
National Oilwell, Inc. (a).............................. 225 12,938
Ocean Energy, Inc. (a).................................. 300 13,875
Rowan Cos., Inc. (a).................................... 300 8,456
Smith International, Inc. (a)........................... 850 51,637
Tidewater, Inc.......................................... 550 24,200
Varco International, Inc. (a)........................... 250 8,063
--------
451,003
--------
Finance 9.3%
American Bankers Insurance Group, Inc................... 250 15,812
Astoria Financial Corp.................................. 350 16,625
CMAC Investment Corp.................................... 700 33,425
Coast Savings Financial, Inc. (a)....................... 250 11,359
Comdisco, Inc........................................... 750 19,500
Conseco, Inc............................................ 2,650 98,050
Cullen Frost Bankers, Inc............................... 300 12,713
Everest Reinsurance Holdings, Inc....................... 300 11,888
Finova Group, Inc....................................... 625 47,812
Glendale Federal Bank FSB (a)........................... 500 13,062
Greenpoint Financial Corp............................... 350 23,297
Mercury General Corp.................................... 125 9,094
MGIC Investment Corp.................................... 300 14,381
National Commerce Bancorp............................... 225 4,950
North Fork Bancorp, Inc................................. 575 12,291
Penncorp Financial Group, Inc........................... 225 8,663
Peoples Heritage Financial Group, Inc................... 275 10,416
Silicon Valley Bancshares (a)........................... 75 3,394
Sovereign Bancorp, Inc.................................. 700 10,675
St. Paul Bancorp, Inc................................... 450 14,906
Star Banc Corp.......................................... 425 17,956
State Street Corp....................................... 725 33,531
SunAmerica, Inc......................................... 600 29,250
Transatlantic Holdings, Inc............................. 50 4,963
Vesta Insurance Group, Inc.............................. 125 5,406
Washington Mutual, Inc.................................. 1,200 71,700
--------
555,119
--------
</TABLE>
41 See Notes to Financial Statements
<PAGE>
Emerging Growth Portfolio Portfolio of Investments (Continued)
<TABLE>
<CAPTION>
June 30, 1997 (Unaudited)
================================================================================
Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Healthcare 10.4%
Curative Health Services, Inc. (a)...................... 300 $ 8,625
Dura Pharmaceuticals, Inc. (a).......................... 1,350 53,831
ESC Medical Systems Ltd. (a)............................ 175 4,463
FPA Medical Management, Inc. (a)........................ 550 13,028
Guidant Corp............................................ 825 70,125
HBO & Co................................................ 1,300 89,537
Health Management Assn., Inc., Class A (a).............. 975 27,787
Healthsouth Corp. (a)................................... 2,550 63,591
Jones Medical Industries, Inc........................... 650 30,875
Medicis Pharmaceutical Corp., Class A (a)............... 600 29,925
MiniMed, Inc. (a)....................................... 300 7,988
Omnicare, Inc........................................... 1,425 44,709
Oxford Health Plans, Inc. (a)........................... 925 66,369
Parexel International Corp. (a)......................... 375 11,906
Quintiles Transnational Corp. (a)....................... 425 29,591
Renal Treatment Centers, Inc. (a)....................... 425 11,422
Rexall Sundown, Inc. (a)................................ 425 16,575
Teva Pharmaceutical Industries Ltd. - ADR (Israel)...... 200 12,950
Total Renal Care Holdings, Inc. (a)..................... 275 11,052
Universal Health Services, Inc., Class B (a)............ 450 17,325
--------
621,674
--------
Producer Manufacturing 4.8%
Allied Waste Industries, Inc. (a)....................... 400 6,950
ASM Lithography Holding NV (Netherlands) (a)............ 325 19,012
Danaher Corp............................................ 400 20,325
Hartford Financial Services Group, Inc.................. 325 26,894
Kulicke and Sofa Industries, Inc. (a)................... 300 9,741
Mastec, Inc. (a)........................................ 325 15,377
Mueller Industries, Inc. (a)............................ 225 9,844
Newpark Resources, Inc. (a)............................. 500 16,875
Precision Castparts Corp................................ 400 23,850
Tyco International, Ltd................................. 500 34,781
United States Filter Corp. (a).......................... 500 13,625
United Waste Systems, Inc. (a).......................... 900 36,900
USA Waste Services, Inc. (a)............................ 1,300 50,212
--------
284,386
--------
Raw Materials/Processing Industries 1.0%
Cytec Industries, Inc. (a).............................. 175 6,541
Maverick Tube Corp. (a)................................. 350 13,125
</TABLE>
See Notes to Financial Statements
42
<PAGE>
Emerging Growth Portfolio Portfolio of Investments (Continued)
<TABLE>
<CAPTION>
June 30, 1997 (Unaudited)
================================================================================
Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Raw Materials/Processing Industries (Continued)
Praxair, Inc............................................ 600 $ 33,600
Sealed Air Corp. (a).................................... 175 8,312
--------
61,578
--------
Technology 32.3%
ADC Telecommunications, Inc. (a)........................ 750 25,031
Advanced Fibre Communications, Inc. (a)................. 300 18,113
Altera Corp. (a)........................................ 1,750 88,375
Applied Materials, Inc. (a)............................. 1,225 86,745
Aspen Technology, Inc. (a).............................. 600 22,575
Baan Co. NV (a)......................................... 500 34,437
BMC Industries, Inc..................................... 300 10,275
BMC Software, Inc. (a).................................. 1,450 80,294
Cambridge Technology Partners, Inc. (a)................. 600 19,200
Cellstar Corp. (a)...................................... 750 22,969
Ciber, Inc. (a)......................................... 425 14,530
Ciena Corp. (a)......................................... 500 23,562
Citrix Systems, Inc. (a)................................ 400 17,550
Computer Horizons Corp. (a)............................. 401 13,700
Compuware Corp. (a)..................................... 2,250 107,437
Comverse Technology, Inc. (a)........................... 600 31,200
Cymer, Inc. (a)......................................... 400 19,500
Dallas Semiconductor Corp............................... 575 22,569
Dell Computer Corp. (a)................................. 2,375 278,914
Discreet Logic, Inc. (a)................................ 400 6,600
Dynatech Corp. (a)...................................... 350 12,513
Engineering Animation, Inc. (a)......................... 100 3,375
Gulfstream Aerospace Corp. (a).......................... 300 8,850
HNC Software, Inc. (a).................................. 350 13,344
Jabil Circuit, Inc. (a)................................. 375 31,453
Keane, Inc. (a)......................................... 225 11,700
KLA - Tencor Corp. (a).................................. 400 19,500
McAfee Associates, Inc. (a)............................. 1,700 107,312
Micrel, Inc. (a)........................................ 200 10,200
Micro Linear Corp. (a).................................. 250 2,625
Microsoft Corp. (a)..................................... 1,725 217,997
National TechTeam, Inc. (a)............................. 175 3,741
Paychex, Inc............................................ 675 25,650
Peoplesoft, Inc. (a).................................... 1,850 97,587
Sanmina Corp. (a)....................................... 525 33,337
</TABLE>
See Notes to Financial Statements
43
<PAGE>
Emerging Growth Portfolio Portfolio of Investments (Continued)
<TABLE>
<CAPTION>
June 30, 1997 (Unaudited)
============================================================================================================
Description Shares Market Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Technology (Continued)
Saville Systems PLC - ADR (Ireland) (a)......................................... 225 $ 11,700
Siebel Systems, Inc. (a)........................................................ 250 8,063
Stratus Computer, Inc. (a)...................................................... 425 21,250
Sun Microsystems, Inc. (a)...................................................... 500 18,609
Sundstrand Corp................................................................. 300 16,200
SunGard Data Systems, Inc. (a).................................................. 650 30,225
Technology Solutions Co. (a).................................................... 175 6,913
Tellabs, Inc. (a)............................................................... 1,400 78,225
Teradyne Inc. (a)............................................................... 1,025 40,231
Texas Instruments, Inc.......................................................... 375 31,523
Uniphase Corp. (a).............................................................. 300 17,475
Viasoft, Inc. (a)............................................................... 850 43,137
Visio Corp. (a)................................................................. 75 5,288
Vitesse Semiconductor Corp. (a)................................................. 1,075 35,139
Wind River Systems, Inc. (a).................................................... 450 17,213
Wyman Gordon Co. (a)............................................................ 250 6,750
----------
1,930,701
----------
Transportation 1.6%
Airborne Freight Corp........................................................... 400 16,750
Continental Airlines, Inc., Class B (a)......................................... 650 22,710
Halter Marine Group, Inc. (a)................................................... 350 8,400
Tower Automotive, Inc. (a)...................................................... 300 12,900
U.S. Airways Group, Inc. (a).................................................... 950 33,250
----------
94,010
----------
Utilities 1.4%
AES Corp. (a)................................................................... 475 33,606
Cincinnati Bell, Inc............................................................ 1,450 45,675
U.S. Long Distance Corp. (a).................................................... 400 6,900
----------
86,181
----------
Total Long-Term Investments 91.2%
(Cost $4,077,273)........................................................................... 5,453,674
----------
Repurchase Agreement 7.1%
Lehman Bros., Inc. ($425,000 par collateralized by U.S. Government obligations
in a pooled cash account, dated 06/30/97, to be sold on 07/01/97 at $425,070)............... 425,000
----------
Total Investments 98.3%
(Cost $4,502,273)........................................................................... 5,878,674
Other Assets in Excess of Liabilities 1.7%.................................................... 103,950
----------
Net Assets 100.0%............................................................................. $5,982,624
==========
(a) Non-income producing security as this stock currently does not declare dividends.
</TABLE>
See Notes to Financial Statements
44
<PAGE>
Emerging Growth Portfolio Statement of Assets and Liabilities
June 30, 1997 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
<S> <C>
Assets:
Total Investments (Cost $4,502,273)........................................................ $5,878,674
Cash....................................................................................... 3,389
Receivables:
Portfolio Shares Sold.................................................................... 97,593
Investments Sold......................................................................... 16,910
Dividends................................................................................ 1,243
Unamortized Organizational Costs........................................................... 4,097
----------
Total Assets........................................................................... 6,001,906
----------
Liabilities:
Payables:
Distributor and Affiliates............................................................... 3,250
Portfolio Shares Repurchased............................................................. 177
Deferred Compensation and Retirement Plans................................................. 9,570
Accrued Expenses........................................................................... 6,285
----------
Total Liabilities...................................................................... 19,282
----------
Net Assets................................................................................. $5,982,624
==========
Net Assets Consist of:
Capital.................................................................................... $4,974,949
Net Unrealized Appreciation................................................................ 1,376,401
Accumulated Net Investment Loss............................................................ (7,493)
Accumulated Net Realized Loss.............................................................. (361,233)
----------
Net Assets................................................................................. $5,982,624
==========
Net Asset Value, Offering Price and Redemption Price Per Share
(Based on net assets of $5,982,624 and 402,939 shares of beneficial interest
issued and outstanding).................................................................. $ 14.85
==========
</TABLE>
See Notes to Financial Statements
45
<PAGE>
Emerging Growth Portfolio Statement of Operations
For the Six Months Ended June 30, 1997 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
<S> <C>
Investment Income:
Interest..................................................................................... $ 12,373
Dividends.................................................................................... 7,089
----------
Total Income............................................................................. 19,462
----------
Expenses:
Investment Advisory Fee...................................................................... 17,937
Audit........................................................................................ 13,160
Shareholder Services......................................................................... 7,840
Shareholder Reports.......................................................................... 7,680
Trustees Fees and Expenses................................................................... 5,130
Legal........................................................................................ 4,755
Accounting................................................................................... 4,175
Amortization of Organizational Costs......................................................... 683
Custody...................................................................................... 375
Other........................................................................................ 2,803
----------
Total Expenses........................................................................... 64,538
Less Fees Deferred and Expenses Reimbursed ($17,973 and $24,536, respectively)........... 42,509
----------
Net Expenses............................................................................. 22,029
----------
Net Investment Loss.......................................................................... $ (2,567)
==========
Realized and Unrealized Gain/Loss:
Net Realized Gain............................................................................ $ 49,954
----------
Unrealized Appreciation/Depreciation:
Beginning of the Period.................................................................... 944,059
End of the Period:
Investments.............................................................................. 1,376,401
----------
Net Unrealized Appreciation During the Period................................................ 432,342
----------
Net Realized and Unrealized Gain............................................................. $ 482,296
==========
Net Increase in Net Assets From Operations................................................... $ 479,729
==========
</TABLE>
See Notes to Financial Statements
46
<PAGE>
Emerging Growth Portfolio Statement of Changes in Net Assets
For the Six Months Ended June 30, 1997 and the Year Ended December 31, 1996
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1997 December 31, 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Loss................................................... $ (2,567) $ (6,964)
Net Realized Gain/Loss................................................ 49,954 (353,684)
Net Unrealized Appreciation During the Period......................... 432,342 699,394
----------- -----------
Change in Net Assets from Operations.................................. 479,729 338,746
----------- -----------
From Capital Transactions:
Proceeds from Shares Sold............................................. 3,260,005 4,967,397
Cost of Shares Repurchased............................................ (2,935,297) (2,417,613)
----------- -----------
Net Change in Net Assets from Capital Transactions.................... 324,708 2,549,784
----------- -----------
Total Increase in Net Assets.......................................... 804,437 2,888,530
Net Assets:
Beginning of the Period............................................... 5,178,187 2,289,657
----------- -----------
End of the Period (Including accumulated net investment loss
of $7,493 and $4,926, respectively)................................. $ 5,982,624 $ 5,178,187
=========== ===========
</TABLE>
See Notes to Financial Statements
47
<PAGE>
Emerging Growth Portfolio Financial Highlights
The following schedule presents financial highlights for one share of the
Portfolio outstanding throughout the periods indicated. (Unaudited)
================================================================================
<TABLE>
<CAPTION>
July 3, 1995
(Commencement
Six Months of Investment
Ended Year Ended Operations) to
June 30, December 31, December 31,
1997 1996 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of the Period.......................... $13.660 $ 11.72 $ 10.00
------- ------- -------
Net Investment Loss............................................... (.006) (.016) (.08)
Net Realized and Unrealized Gain.................................. 1.193 1.956 1.80
------- ------- -------
Total from Investment Operations.................................. 1.187 1.940 1.72
------- ------- -------
Net Asset Value, End of the Period................................ $14.847 $13.660 $ 11.72
======= ======= =======
Total Return*..................................................... 8.71%** 16.55% 17.20%**
Net Assets at End of the Period (In millions)..................... $ 6.0 $ 5.2 $ 2.3
Ratio of Expenses to Average Net Assets*.......................... .85% .85% 2.50%
Ratio of Net Investment Loss to Average Net Assets*............... (.10%) (.17%) (1.45%)
Portfolio Turnover................................................ 80%** 102% 41%**
Average Commission Per Equity Share Traded (a).................... $ .0449 $ .0470 --
* If certain expenses had not been assumed by VKAC, Total Return
would have been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets........................... 2.51% 3.28% 5.40%
Ratio of Net Investment Loss to Average Net Assets................ (1.75%) (2.60%) (4.35%)
**Non-Annualized
(a) Represents the average brokerage commission per equity share traded during the period for trades where
commissions were applicable. This disclosure was not required in fiscal periods prior to 1996.
</TABLE>
See Notes to Financial Statements
48
<PAGE>
Enterprise Portfolio Portfolio of Investments
June 30, 1997 (Unaudited)
===============================================================================
<TABLE>
<CAPTION>
Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
Common Stock 98.7%
Consumer Distribution 10.8%
American Stores Co. .................................. 16,400 $ 809,750
Bed Bath & Beyond, Inc. (a) .......................... 10,600 321,975
Consolidated Stores Corp. (a) ........................ 15,375 534,281
CVS Corp. ............................................ 13,700 702,125
Dayton Hudson Corp. .................................. 14,900 792,494
General Nutrition Cos., Inc. (a) ..................... 17,000 476,000
Home Depot, Inc. ..................................... 9,500 654,906
Kroger Co. (a) ....................................... 35,000 1,015,000
Lear Corp. (a) ....................................... 7,500 332,813
Lowe's Cos., Inc. .................................... 10,600 393,525
Ross Stores, Inc. .................................... 24,400 797,575
Safeway, Inc. (a) .................................... 25,662 1,183,660
Tiffany & Co. ........................................ 13,800 637,387
TJX Cos., Inc. ....................................... 31,200 822,900
U.S. Office Products Co. (a) ......................... 18,300 559,294
-----------
10,033,685
-----------
Consumer Non-Durables 8.1%
Borders Group, Inc. (a) .............................. 15,000 361,875
Liz Claiborne, Inc. .................................. 13,600 634,100
Nautica Enterprises, Inc. (a) ........................ 16,700 441,506
Philip Morris Cos., Inc. ............................. 104,700 4,646,062
Procter & Gamble Co. ................................. 4,800 678,000
Ralston Purina Group ................................. 4,800 394,500
Tommy Hilfiger Corp. (a) ............................. 7,400 297,388
-----------
7,453,431
-----------
Consumer Services 9.0%
AccuStaff, Inc. (a) .................................. 25,224 597,494
Evergreen Media Corp., Class A (a) ................... 17,500 780,937
Firstplus Financial Group, Inc. (a) .................. 18,400 625,600
Gannett, Inc. ........................................ 5,300 523,375
HFS, Inc. (a) ........................................ 10,200 591,600
Hilton Hotels Corp. .................................. 14,800 393,125
La Quinta Inns, Inc. ................................. 25,400 555,625
Marriot International, Inc. .......................... 6,800 417,350
New York Times Co. ................................... 13,800 683,100
Omnicom Group, Inc. .................................. 20,100 1,238,662
Scripps Co. (EW), Class A ............................ 5,300 220,613
Service Corp. International .......................... 31,800 1,045,425
Tribune Co. .......................................... 14,500 696,906
-----------
8,369,812
-----------
</TABLE>
49 See Notes to Financial Statements
<PAGE>
<TABLE>
<CAPTION>
Enterprise Portfolio Portfolio of Investments (Continued)
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Energy 4.6%
Baker Hughes, Inc.................................. 10,400 $ 402,350
British Petroleum PLC - ADR (United Kingdom)...... 10,000 748,750
Exxon Corp......................................... 8,200 504,300
Schlumberger Ltd.................................. 4,500 562,500
Smith International, Inc. (a)...................... 10,800 656,100
Texaco, Inc........................................ 7,800 848,250
YPF Sociedad Anonima - ADR (Argentina), Class D.... 16,600 510,450
-----------
4,232,700
-----------
Finance 16.0%
Allstate Corp...................................... 8,500 620,500
AMBAC, Inc......................................... 6,600 504,075
BankAmerica Corp................................... 21,400 1,381,637
BankBoston Corp.................................... 10,700 771,069
Chase Manhattan Corp............................... 9,400 912,387
Citicorp........................................... 5,400 651,038
CMAC Investment Corp............................... 17,600 840,400
Conseco, Inc....................................... 48,800 1,805,600
Federal National Mortgage Assn..................... 35,800 1,561,775
First Bank System, Inc............................. 6,900 589,088
Green Tree Financial Corp.......................... 26,000 926,250
Merrill Lynch & Co., Inc........................... 9,290 553,916
MGIC Investment Corp............................... 15,200 728,650
Money Store, Inc................................... 6,300 180,731
Student Loan Marketing Assn........................ 4,100 520,700
SunAmerica, Inc.................................... 16,700 814,125
Travelers Group, Inc............................... 23,600 1,488,275
-----------
14,850,216
-----------
Healthcare 16.6%
Aetna, Inc......................................... 3,500 358,313
American Home Products Corp........................ 7,600 581,400
Amgen, Inc. (a).................................... 10,500 610,312
Bristol Myers Squibb Co............................ 23,200 1,879,200
ESC Medical Systems Ltd. (a)....................... 11,700 298,350
Health Management Assn., Inc., Class A (a)......... 19,600 558,600
Healthsouth Corp. (a).............................. 37,900 945,131
Johnson & Johnson, Inc............................. 14,500 933,437
Lincare Holdings, Inc. (a)......................... 15,700 675,100
Merck & Co., Inc................................... 16,600 1,718,100
PacifiCare Health Systems, Class B (a)............. 6,100 389,638
</TABLE>
50 See Notes to Financial Statements
<PAGE>
Enterprise Portfolio Portfolio of Investments (Continued)
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
Description Shares Market Value
- --------------------------------------------------------------------------------
Healthcare (Continued)
Pfizer, Inc. .......................................... 13,100 $ 1,565,450
Renal Treatment Centers, Inc. (a)...................... 16,700 448,813
Schering-Plough Corp. ................................. 26,400 1,263,900
Tenet Healthcare Corp. (a)............................. 16,300 481,869
Universal Health Services, Inc., Class B (a)........... 14,500 558,250
Vencor, Inc. (a)....................................... 12,700 536,575
Watson Pharmaceuticals, Inc. (a)....................... 13,800 583,050
Wellpoint Health Networks, Inc., Class A (a)........... 21,200 972,550
-----------
15,358,038
-----------
Producer Manufacturing 7.3%
AlliedSignal, Inc. .................................... 8,100 680,400
Cummins Engine, Inc. .................................. 8,500 599,781
Illinois Tool Works, Inc. ........................... 5,600 279,650
Philips Electronics N.V. (Netherlands)................. 4,000 287,500
Textron, Inc. ......................................... 16,400 1,088,550
Tyco International Ltd. ............................... 12,300 855,619
United Technologies Corp. ............................. 12,300 1,020,900
United Waste Systems, Inc. (a)......................... 30,000 1,230,000
USA Waste Services, Inc. (a)........................... 17,400 672,075
-----------
6,714,475
-----------
Raw Materials/Processing Industries 2.8%
Bowater, Inc. ......................................... 10,300 476,375
Cytec Industries, Inc. (a)............................. 17,300 646,587
Praxair, Inc. ......................................... 25,500 1,428,000
-----------
2,550,962
-----------
Technology 21.5%
Adaptec, Inc (a)....................................... 13,800 479,550
Altera Corp. (a)....................................... 10,600 535,300
Analog Devices, Inc. (a)............................... 10,600 281,563
Aspect Telecommunications Corp. (a).................... 20,600 458,350
BMC Industries, Inc. .................................. 9,600 328,800
BMC Software, Inc. (a)................................. 36,800 2,037,800
Boeing Co. ............................................ 9,000 477,562
Cadence Design Systems, Inc. (a)....................... 10,800 361,800
Cisco Systems, Inc. (a)................................ 6,000 402,750
Compaq Computer Corp. (a).............................. 17,400 1,726,950
Compuware Corp. (a).................................... 18,700 892,925
51 See Notes to Financial Statements
<PAGE>
Enterprise Portfolio Portfolio of Investments (Continued)
June 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
================================================================================================================================
Description Shares Market Value
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Technology (Continued)
Data General Corp. (a)........................................................................... 14,000 $ 364,000
Dell Computer Corp. (a).......................................................................... 5,300 622,419
Intel Corp....................................................................................... 1,500 212,719
International Business Machines Corp............................................................. 11,400 1,028,137
KLA-Tencor Corp. (a)............................................................................. 4,500 219,375
Linear Technology Corp........................................................................... 8,200 424,350
LSI Logic Corp. (a).............................................................................. 16,400 524,800
Lucent Technologies, Inc......................................................................... 8,000 576,500
Microsoft Corp. (a).............................................................................. 5,200 657,150
Motorola, Inc.................................................................................... 5,900 448,400
National Semiconductor Corp. (a)................................................................. 15,400 471,625
Oracle Systems Corp. (a)......................................................................... 9,600 483,600
Sanmina Corp. (a)................................................................................ 10,600 673,100
SCI Systems, Inc. (a)............................................................................ 10,800 688,500
Scientific Atlanta, Inc.......................................................................... 31,800 695,625
Stratus Computer, Inc. (a)....................................................................... 5,800 290,000
Sun Microsystems, Inc. (a)....................................................................... 28,600 1,064,456
Telecomunicacoes Brasileiras - ADR (Brazil)...................................................... 4,200 637,350
Tellabs, Inc. (a)................................................................................ 16,000 894,000
Texas Instruments, Inc........................................................................... 3,800 319,438
Xerox Corp....................................................................................... 8,000 631,000
-----------
19,909,894
-----------
Transportation 0.6%
Continental Airlines, Inc., Class B (a).......................................................... 15,000 524,063
-----------
Utilities 1.4%
Bell Atlantic Corp............................................................................... 10,500 796,687
Cincinnati Bell, Inc............................................................................. 17,400 548,100
-----------
1,344,787
-----------
Total Long-Term Investments 98.7% (Cost $64,615,036)............................................. 91,342,063
Repurchase Agreement 1.4%
Prudential Securities ($1,260,000 par collateralized by U.S. Government obligations
in a pooled cash account, dated 06/30/97, to be sold on 07/01/97 at $1,260,205)................ 1,260,000
-----------
Total Investments 100.1% (Cost $65,875,036)...................................................... 92,602,063
Liabilities in Excess of Other Assets (0.1%)..................................................... (104,814)
-----------
Net Assets 100.0%................................................................................ $92,497,249
===========
</TABLE>
(a) Non-income producing security as this stock currently does not declare
dividends.
52 See Notes to Financial Statements
<PAGE>
Enterprise Portfolio Statement of Assets and Liabilities
June 30, 1997 (Unaudited)
===============================================================================
<TABLE>
<CAPTION>
<S> <C>
Assets:
Total Investments (Cost $65,875,036)............................. $ 92,602,063
Cash............................................................. 1,067
Receivables:
Investments Sold............................................... 398,716
Dividends...................................................... 85,793
Portfolio Shares Sold.......................................... 38,887
Other............................................................ 1,856
------------
Total Assets................................................... 93,128,382
------------
Liabilities:
Payables:
Investments Purchased.......................................... 405,829
Portfolio Shares Repurchased................................... 120,978
Investment Advisory Fee........................................ 32,568
Distributor and Affiliates..................................... 8,615
Deferred Compensation and Retirement Plans....................... 53,307
Accrued Expenses................................................. 9,836
------------
Total Liabilities.............................................. 631,133
------------
Net Assets....................................................... $ 92,497,249
============
Net Assets Consist of:
Capital.......................................................... $ 59,725,364
Net Unrealized Appreciation...................................... 26,727,027
Accumulated Net Realized Gain.................................... 5,821,319
Accumulated Undistributed Net Investment Income.................. 223,539
------------
Net Assets....................................................... $ 92,497,249
============
Net Asset Value, Offering Price and Redemption Price Per Share
(Based on net assets of $92,497,249 and 4,914,454 shares of
beneficial interest issued and outstanding).................... $ 18.82
============
</TABLE>
53 See Notes to Financial Statements
<PAGE>
Enterprise Portfolio Statement of Operations
For the Six Months Ended June 30, 1997 (Unaudited)
===============================================================================
<TABLE>
<CAPTION>
<S> <C>
Investment Income:
Dividends...................................................... $ 429,094
Interest....................................................... 90,284
------------
Total Income................................................ 519,378
------------
Expenses:
Investment Advisory Fee........................................ 218,676
Accounting..................................................... 11,131
Legal.......................................................... 9,636
Shareholder Services........................................... 7,796
Trustees Fees and Expenses..................................... 6,973
Custody........................................................ 5,171
Other.......................................................... 32,113
------------
Total Expenses.............................................. 291,496
Less Fees Deferred.......................................... 26,749
------------
Net Expenses................................................ 264,747
------------
Net Investment Income.......................................... $ 254,631
============
Realized and Unrealized Gain/Loss:
Net Realized Gain.............................................. $ 5,923,947
------------
Unrealized Appreciation/Depreciation:
Beginning of the Period..................................... 19,056,982
End of the Period:
Investments............................................. 26,727,027
------------
Net Unrealized Appreciation During the Period.................. 7,670,045
------------
Net Realized and Unrealized Gain............................... $ 13,593,992
============
Net Increase in Net Assets From Operations..................... $ 13,848,623
============
</TABLE>
54 See Notes to Financial Statements
<PAGE>
Enterprise Portfolio Statement of Changes in Net Assets
For the Six Months Ended June 30, 1997 and the Year Ended December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Six Months Ended Year Ended
June 30, 1997 December 31, 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income.............................................. $ 254,631 $ 556,672
Net Realized Gain.................................................. 5,923,947 7,574,164
Net Unrealized Appreciation During the Period...................... 7,670,045 9,782,538
------------ ------------
Change in Net Assets from Operations............................... 13,848,623 17,913,374
------------ ------------
Distributions from Net Investment Income........................... (90,532) (530,417)
Distributions from Net Realized Gain............................... (1,119,484) (9,089,491)
------------ ------------
Total Distributions................................................ (1,210,016) (9,619,908)
------------ ------------
Net Change in Net Assets from Investment Activities................ 12,638,607 8,293,466
------------ ------------
From Capital Transactions:
Proceeds from Shares Sold.......................................... 7,412,611 7,883,906
Net Asset Value of Shares Issued Through Dividend
Reinvestment..................................................... 1,210,016 9,619,909
Cost of Shares Repurchased......................................... (13,569,155) (17,001,971)
------------ ------------
Net Change in Net Assets from Capital Transactions................. (4,946,528) 501,844
------------ ------------
Total Increase in Net Assets....................................... 7,692,079 8,795,310
Net Assets:
Beginning of the Period............................................ 84,805,170 76,009,860
------------ ------------
End of the Period (Including accumulated undistributed
net investment income of $223,539 and $59,440,
respectively).................................................... $ 92,497,249 $ 84,805,170
============ ============
</TABLE>
55 See Notes to Financial Statements
<PAGE>
Enterprise Portfolio Financial Highlights
The following schedule presents financial highlights for one share of the
Portfolio outstanding throughout the periods indicated. (Unaudited)
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31,
Six Months Ended -----------------------------------------
June 30, 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period....................... $16.262 $ 14.69 $ 12.39 $ 14.57 $ 14.21
------- ------- ------- ------- -------
Net Investment Income........................................ .052 .113 .32 .25 .21
Net Realized and Unrealized Gain/Loss........................ 2.741 3.417 4.22 (.7625) 1.0325
------- ------- ------- ------- -------
Total from Investment Operations............................... 2.793 3.530 4.54 (.5125) 1.2425
------- ------- ------- ------- -------
Less:
Distributions from Net Investment Income..................... .018 .109 .3175 .25 .215
Distributions from Net Realized Gain......................... .216 1.849 1.9225 1.4175 .6675
------- ------- ------- ------- -------
Total Distributions............................................ .234 1.958 2.24 1.6675 .8825
------- ------- ------- ------- -------
Net Asset Value, End of the Period............................. $18.821 $16.262 $ 14.69 $ 12.39 $ 14.57
------- ------- ------- ------- -------
Total Return*.................................................. 17.32%** 24.80% 36.98% (3.39%) 8.98%
Net Assets at End of the Period (In millions).................. $ 92.5 $ 84.8 $ 76.0 $ 67.5 $ 72.3
Ratio of Expenses to Average Net Assets*....................... .60% .60% .60% .60% .60%
Ratio of Net Investment Income to Average Net Assets*.......... .58% .68% 2.06% 1.72% 1.41%
Portfolio Turnover............................................. 41%** 152% 145% 153% 139%
Average Commission Paid per Equity Share Traded (a)............ $ .0575 $ .0435 -- -- --
* If certain expenses had not been assumed by VKAC, Total Return
would have been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets........................ .67% .75% .68% .68% .72%
Ratio of Net Investment Income to Average Net Assets........... .52% .53% 1.98% 1.64% 1.29%
</TABLE>
** Non-Annualized
(a) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.
56 See Notes to Financial Statements
<PAGE>
Global Equity Portfolio Portfolio of Investments
June 30, 1997 (Unaudited)
===============================================================================
<TABLE>
<CAPTION>
Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
Common Stocks and Equivalents 84.4%
Australia 2.2%
ICI Australia Ltd. .................................... 1,800 $ 17,752
Pacific Dunlop Ltd. ................................... 7,800 23,108
Rio Tinto Ltd. ........................................ 2,400 40,956
--------
81,816
--------
Austria 0.7%
OMV AG ................................................ 200 25,619
--------
Belgium 1.5%
Gevaert NV ............................................ 600 56,365
--------
Brazil 0.6%
Centrais Eletricas Brasileiras SA Electrobras - ADR (a) 350 10,063
Telecomunicacoes Brasileiras - ADR (a) ................ 90 13,657
--------
23,720
--------
Canada 1.6%
IPL Energy, Inc. ...................................... 1,300 43,444
Northern Telecom ...................................... 200 18,024
--------
61,468
--------
Denmark 0.3%
Novo Nordisk A/S ...................................... 100 10,904
--------
France 3.0%
Alcatel Alsthom (Cie Gen El) .......................... 160 20,039
AXA-UAP ............................................... 220 13,683
Carrefour ............................................. 25 18,156
Cie De St Gobain ...................................... 140 20,416
Elf Aquitaine ......................................... 140 15,104
LVMH (Moet Hennessy Louis Vuitton) (a) ................ 50 13,443
Total, Class B ........................................ 130 13,140
--------
113,981
--------
Germany 2.2%
BASF .................................................. 250 9,238
Bayer ................................................. 150 5,764
Daimler Benz .......................................... 200 16,226
Deutsche Telekom (a) .................................. 500 12,041
Linde ................................................. 50 38,272
--------
81,541
--------
Hong Kong 2.5%
Cathay Pacific Air .................................... 11,000 22,789
Hang Seng Bank ........................................ 1,400 19,968
</TABLE>
57 See Notes to Financial Statements
<PAGE>
Global Equity Portfolio Portfolio of Investments (Continued)
June 30, 1997 (Unaudited)
===============================================================================
Description Shares Market Value
- -------------------------------------------------------------------------------
Hong Kong (Continued)
Hong Kong Telecommunications.......................... 9,200 $ 21,969
Hutchison Whampoa..................................... 2,000 17,296
Sun Hung Kai Properties............................... 1,000 12,037
------------
94,059
------------
Italy 1.6%
ENI................................................... 1,000 5,663
Fiat.................................................. 4,000 14,404
Instituto Nazionale delle Assicurazioni............... 12,000 18,287
Telecom Italia Mob.................................... 2,500 8,090
Telecom Italia Ord.................................... 5,000 16,048
------------
62,492
------------
Japan 11.1%
Acom Co., Ltd......................................... 300 14,448
Asahi Glass Co........................................ 1,000 9,946
Bank of Tokyo......................................... 600 12,040
Dai Nippon Printing................................... 1,000 22,596
Daiwa Securities...................................... 1,000 7,887
East Japan Railway.................................... 1 5,130
Fujitsu............................................... 1,000 13,872
Hitachi............................................... 2,000 22,335
Honda Motor Co........................................ 1,000 30,099
Japan Air Lines Co. (a)............................... 1,000 4,545
Japan Energy Corp..................................... 4,000 10,469
Kao Corp.............................................. 1,000 13,872
Kawasaki Heavy Industries............................. 2,000 9,300
Kawasaki Steel Corp................................... 3,000 9,763
Komatsu............................................... 1,000 8,114
Kyocera Corp.......................................... 100 7,939
Matsushita Electric Industries........................ 1,000 20,154
Mitsubishi Electric Corp.............................. 3,000 16,777
Mitsubishi Estate..................................... 1,000 14,483
Nagoya Railroad Co.................................... 3,000 12,354
NEC Corp.............................................. 1,000 13,959
Nippon Steel Corp..................................... 2,000 6,386
Nippon Yusen Kabushiki Kaisha......................... 3,000 11,647
Nissan Motor Co....................................... 2,000 15,512
NSK Ltd............................................... 1,000 6,430
Oji Paper Co.......................................... 2,000 12,371
58 See Notes to Financial Statements
<PAGE>
Global Equity Portfolio Portfolio of Investments (Continued)
June 30, 1997 (Unaudited)
===============================================================================
<TABLE>
<CAPTION>
Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
Japan (Continued)
Sekisui House ......................................... 1,000 $ 10,120
Sharp Corp. ........................................... 1,000 13,785
Teijin ................................................ 2,000 9,422
Tobu Railway Co. ...................................... 2,000 9,231
Toppan Printing Co. ................................... 1,000 15,704
Toyobo Co. ............................................ 1,000 2,644
Toyota Motor Corp. .................................... 1,000 29,489
---------
422,823
---------
Malaysia 0.7%
DCB Holdings (a) ...................................... 8,000 25,357
---------
Mexico 1.1%
Telefonos De Mexico SA Ser L .......................... 17,000 40,684
---------
Netherlands 2.0%
ABN Amro Holdings ..................................... 1,200 22,375
Ahold Koninklijke ..................................... 200 16,873
Akzo Nobel ............................................ 100 13,704
Elsevier .............................................. 700 11,697
Wolters Kluwer ........................................ 101 12,298
---------
76,947
---------
New Zealand 0.5%
Deutsche Bank AG ...................................... 350 20,449
---------
Republic of Korea 0.3%
Korea Electric Power Corp. - ADR ...................... 277 5,176
Pohang Iron & Steel Co., Ltd. - ADR ................... 197 6,304
---------
11,480
---------
Singapore 1.0%
Fraser & Neave ........................................ 5,400 38,525
---------
South Africa 0.8%
De Beers Cons Mines Ltd. - ADR ........................ 500 18,469
Sasol Ltd. - ADR ...................................... 926 12,038
---------
30,507
---------
Spain 1.2%
Emp Nac Electricid (a) ................................ 100 8,395
Repsol ................................................ 400 16,912
Telefonica De Espana .................................. 700 20,238
---------
45,545
---------
</TABLE>
59 See Notes to Financial Statements
<PAGE>
Global Equity Portfolio Portfolio of Investments (Continued)
June 30, 1997 (Unaudited)
===============================================================================
<TABLE>
<CAPTION>
Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
Sweden 0.4%
Ericsson Telephonaktiebolaget LM, Class B (a) ......... 400 $ 15,746
---------
Switzerland 3.1%
Credit Suisse Group ................................... 100 12,842
Holderbank Financiere Glarus AG ....................... 20 18,890
Nestle ................................................ 10 13,192
Novartis AG (a) ....................................... 20 31,973
Roche Holdings Genusscheine ........................... 2 18,089
Schw Bankgesellsch .................................... 20 22,877
---------
117,863
---------
United Kingdom 7.1%
B.A.T. Industries ..................................... 1,600 14,322
Barclays .............................................. 1,000 19,850
Bass .................................................. 1,200 14,648
British Petroleum ..................................... 1,000 12,440
British Telecommunications ............................ 2,200 16,340
BTR ................................................... 2,800 9,582
Burmah Castrol ........................................ 600 10,152
Carlton Communications ................................ 2,400 20,323
Glaxo Wellcome ........................................ 1,000 20,691
HSBC Holdings (a) ..................................... 400 12,313
HSBC Holdings (ADR) ................................... 600 17,783
Lloyds TSB Group ...................................... 2,000 20,550
Marks & Spencer ....................................... 1,200 9,952
Rank Group ............................................ 2,200 13,940
Scot & Newcastle ...................................... 1,900 20,440
Smithkline Beecham .................................... 900 16,569
Smiths Industries ..................................... 900 11,510
Zeneca Group .......................................... 300 9,922
---------
271,327
---------
United States 38.9%
Abbott Laboratories, Inc. ............................. 400 26,700
Aluminum Company of America ........................... 300 22,613
American Express Co. .................................. 300 22,350
American Home Products Corp. .......................... 300 22,950
American International Group, Inc. (b) ................ 200 29,875
Amoco Corp. ........................................... 200 17,388
AT&T Corp. ............................................ 700 24,544
</TABLE>
60 See Notes to Financial Statements
<PAGE>
Global Equity Portfolio Portfolio of Investments (Continued)
June 30, 1997 (Unaudited)
===============================================================================
<TABLE>
<CAPTION>
Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
United States (Continued)
BellSouth Corp. (b) ................................... 500 $ 23,188
Boeing Co. ............................................ 200 10,613
Bristol-Myers Squibb Co. (b) .......................... 400 32,400
Campbell Soup Co. ..................................... 300 15,000
Chevron Corp. ......................................... 300 22,181
Cisco Systems, Inc. (a) ............................... 200 13,425
Citicorp .............................................. 200 24,112
Coca Cola Co. ......................................... 800 54,000
Columbia / HCA Healthcare Corp. ....................... 300 11,794
Dominion Resources Inc. ............................... 900 32,962
Dow Chemical Co. ...................................... 200 17,425
Du Pont (E. I.) de Nemours & Co. ...................... 400 25,150
Duke Energy Corp. ..................................... 600 28,762
Eastman Kodak Co. ..................................... 200 15,350
Federal National Mortgage Assn. (a) ................... 500 21,813
First Data Corp. ...................................... 500 21,969
FPL Group, Inc. ....................................... 500 23,031
General Electric Co. .................................. 800 52,300
General Motors Corp. .................................. 400 22,275
Gillette Co. .......................................... 300 28,425
Hewlett Packard Co. ................................... 300 16,800
Home Depot, Inc. ...................................... 300 20,681
Illinois Tool Workers, Inc. ........................... 400 19,975
Intel Corp. ........................................... 200 28,362
International Business Machines Corp. ................. 400 36,075
International Paper Co. ............................... 400 19,425
J.C. Penney, Inc. ..................................... 400 20,875
Johnson & Johnson, Inc. ............................... 400 25,750
JP Morgan & Co., Inc. ................................. 300 31,312
Kimberly Clark Corp. .................................. 400 19,900
Lilly Eli & Co. ....................................... 200 21,863
Lucent Technologies, Inc. ............................. 400 28,825
McDonalds Corp. ....................................... 500 24,156
Microsoft Corp. (a) ................................... 300 37,912
Minnesota Mining & Manufacturing Co. .................. 300 30,600
Mobil Corp. ........................................... 400 27,950
Monsanto Co. .......................................... 400 17,225
Motorola, Inc. ........................................ 200 15,200
</TABLE>
61 See Notes to Financial Statements
<PAGE>
<TABLE>
<CAPTION>
Global Equity Portfolio Portfolio of Investments (Continued)
June 30, 1997 (Unaudited)
=======================================================================================================================
Description Shares Market Value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
United States (Continued)
NationsBank Corp.......................................................................... 400 $ 25,800
Oracle Systems Corp. (a).................................................................. 300 15,113
PacifiCorp................................................................................ 1,200 26,400
PepsiCo, Inc.............................................................................. 700 26,294
Pfizer, Inc............................................................................... 200 23,900
Procter & Gamble Co....................................................................... 200 28,250
Rockwell International Corp............................................................... 300 17,700
SBC Communications, Inc................................................................... 600 37,125
Schering-Plough Corp...................................................................... 400 19,150
Sears Roebuck & Co........................................................................ 300 16,125
Time Warner, Inc.......................................................................... 300 14,475
Warner-Lambert Co......................................................................... 200 24,850
Wells Fargo & Co.......................................................................... 100 26,950
Weyerhaeuser Co........................................................................... 400 20,800
Worldcom, Inc. (a)........................................................................ 800 25,600
Xerox Corp................................................................................ 300 23,662
------------
1,477,675
------------
Total Common Stocks and Equivalents 84.4%................................................. 3,206,893
------------
Preferred Stock 0.6%
Finland 0.6%
Nokia (Ab) Oy-ADR......................................................................... 300 22,410
------------
Total Long-Term Investments 85.0%
(Cost $2,786,746)................................................................................... 3,229,303
Repurchase Agreement 12.5%
State Street Bank & Trust Co. ($473,000 par collateralized by U.S. Government
obligations in a pooled cash account, dated 06/30/97, to be sold on 07/01/97 at $473,066).......... 473,000
------------
Total Investments 97.5%
(Cost $3,259,746).................................................................................. 3,702,303
Foreign Currency 1.4%
(Various Denominations, Cost $54,958).............................................................. 54,449
Other Assets in Excess of Liabilities 1.1%............................................................ 41,597
------------
Net Assets 100.0%..................................................................................... $ 3,798,349
============
(a) Non-income producing security as this stock currently does not declare dividends.
(b) Assets segregated as collateral for open forward currency contracts.
See Notes to Financial Statements
62
</TABLE>
<PAGE>
Global Equity Portfolio Statement of Assets and Liabilities
June 30, 1997 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
<S> <C>
Assets:
Total Investments, including repurchase agreements of $473,000 (Cost $3,259,746)............ $3,702,303
Foreign Currency (Cost $54,958)............................................................. 54,449
Cash........................................................................................ 373
Receivables:
Portfolio Shares Sold..................................................................... 45,014
Expense Reimbursement by Adviser.......................................................... 11,964
Dividends................................................................................. 7,326
Interest.................................................................................. 66
Unamortized Organizational Costs............................................................ 4,093
Forward Currency Contracts.................................................................. 1,507
----------
Total Assets.............................................................................. 3,827,095
----------
Liabilities:
Accrued Expenses............................................................................ 15,288
Deferred Compensation and Retirement Plans.................................................. 9,585
Payable to Distributor and Affiliates....................................................... 3,873
----------
Total Liabilities......................................................................... 28,746
----------
Net Assets.................................................................................. $3,798,349
==========
Net Assets Consist of:
Capital..................................................................................... $2,925,151
Net Unrealized Appreciation................................................................. 443,315
Accumulated Net Realized Gain............................................................... 430,444
Accumulated Distributions in Excess of Net Investment Income................................ (561)
----------
Net Assets.................................................................................. $3,798,349
==========
Net Asset Value, Offering Price and Redemption Price Per Share
(Based on net assets of $3,798,349 and 280,624 shares of beneficial interest
issued and outstanding)................................................................... $ 13.54
==========
</TABLE>
See Notes to Financial Statements
63
<PAGE>
Global Equity Portfolio Statement of Operations
For the Six Months Ended June 30, 1997 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
<S> <C>
Investment Income:
Dividends (Net of foreign withholding taxes of $2,661)......................................... $ 23,317
Interest....................................................................................... 3,436
--------
Total Income............................................................................... 26,753
--------
Expenses:
Custody........................................................................................ 34,846
Investment Advisory Fee........................................................................ 14,523
Audit.......................................................................................... 11,032
Accounting..................................................................................... 10,784
Shareholder Reports............................................................................ 9,636
Shareholder Services........................................................................... 7,777
Trustees Fees and Expenses..................................................................... 5,511
Legal.......................................................................................... 3,969
Amortization of Organizational Costs........................................................... 677
Other.......................................................................................... 2,064
--------
Total Expenses............................................................................. 100,819
Less Fees Deferred and Expenses Reimbursed ($14,523 and $68,869, respectively)............. 83,392
--------
Net Expenses............................................................................... 17,427
--------
Net Investment Income.......................................................................... $ 9,326
========
Realized and Unrealized Gain/Loss:
Realized Gain/Loss:
Investments.................................................................................. $428,770
Forward Currency Contracts................................................................... 3,914
--------
Net Realized Gain.............................................................................. 432,684
--------
Unrealized Appreciation/Depreciation:
Beginning of the Period...................................................................... 396,734
--------
End of the Period:
Investments................................................................................ 442,557
Forward Currency Contracts................................................................. 1,507
Foreign Currency Translation............................................................... (749)
--------
443,315
--------
Net Unrealized Appreciation During the Period.................................................. 46,581
--------
Net Realized and Unrealized Gain............................................................... $479,265
========
Net Increase in Net Assets From Operations..................................................... $488,591
========
</TABLE>
See Notes to Financial Statements
64
<PAGE>
Global Equity Portfolio Statement of Changes in Net Assets
For the Six Months Ended June 30, 1997 and the Year Ended December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
============================================================================================================
Six Months Ended Year Ended
June 30, 1997 December 31, 1996
============================================================================================================
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income............................................ $ 9,326 $ 7,708
Net Realized Gain................................................ 432,684 107,660
Net Unrealized Appreciation During the Period.................... 46,581 294,056
---------- -----------
Change in Net Assets from Operations............................. 488,591 409,424
---------- -----------
Distributions from Net Investment Income......................... (157) (7,708)
Distributions in Excess of Net Investment Income................. -0- (32,197)
---------- -----------
Distributions from and in Excess of Net Investment Income........ (157) (39,905)
Distributions from Net Realized Gain............................. (29,959) (37,458)
---------- -----------
Total Distributions.............................................. (30,116) (77,363)
---------- -----------
Net Change in Net Assets from Investment Activities.............. 458,475 332,061
---------- -----------
From Capital Transactions:
Proceeds from Shares Sold........................................ 1,098,919 1,241,023
Net Asset Value of Shares Issued through Dividend Reinvestment... 17,316 42,743
Cost of Shares Repurchased....................................... (293,385) (1,473,972)
---------- -----------
Net Change in Net Assets from Capital Transactions............... 822,850 (190,206)
---------- -----------
Total Increase in Net Assets..................................... 1,281,325 141,855
Net Assets:
Beginning of the Period.......................................... 2,517,024 2,375,169
---------- -----------
End of the Period (Including accumulated distributions in excess
of net investment income of $561 and $9,730, respectively)..... $3,798,349 $ 2,517,024
========== ===========
</TABLE>
See Notes to Financial Statements
65
<PAGE>
Global Equity Portfolio Financial Highlights
The following schedule presents financial highlights for one share of the
Portfolio outstanding thoughout the periods indicated (Unaudited)
================================================================================
<TABLE>
<CAPTION>
July 3, 1995
(Commencement
Six Months Year of Investment
Ended Ended Operations) to
June 30, December 31, December 31,
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of the Period............................ $ 11.658 $ 10.30 $ 10.00
-------- -------- --------
Net Investment Income/Loss.................................. .044 .035 (.16)
Net Realized and Unrealized Gain............................ 1.968 1.687 .46
-------- -------- --------
Total from Investment Operations.................................... 2.012 1.722 .30
-------- -------- --------
Less:
Distributions from and in Excess of Net Investment Income... .001 .188 -0-
Distributions from Net Realized Gain........................ .134 .176 -0-
-------- -------- --------
Total Distributions................................................. .135 .364 -0-
-------- -------- --------
Net Asset Value, End of the Period.................................. $ 13.535 $ 11.658 $ 10.30
======== ======== ========
Total Return*....................................................... 17.41%** 16.72% 3.00%**
Net Assets at End of the Period (In millions)....................... $ 3.8 $ 2.5 $ 2.4
Ratio of Expenses to Average Net Assets*............................ 1.20% 1.20% 4.35%
Ratio of Net Investment Income/Loss to Average Net Assets*.......... .65% .27% (2.76%)
Portfolio Turnover.................................................. 103%** 94% 42%**
Average Commission Rate per Equity Share Traded (a)................. $ .0254 $ .0245 $ -
* If certain expenses had not been assumed by VKAC, Total Return
would have been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets............................. 7.00% 7.43% 8.27%
Ratio of Net Investment Loss to Average Net Assets.................. (5.14%) (5.96%) (6.68%)
</TABLE>
**Non-Annualized
(a) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This disclosure
was not required in fiscal periods prior to 1996.
66 See Notes to Financial Statements
<PAGE>
Government Portfolio Portfolio of Investments
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
United States Government Agency Obligations 65.0%
$2,041 Federal Home Loan Mortgage Corp. CMO Var Rate Cpn (a)........... 6.150% 11/15/18 $ 2,042,992
2,491 Federal Home Loan Mortgage Corp. Gold 30 Year Pools (a)......... 7.000 05/01/24 to 07/01/24 2,446,732
1,436 Federal Home Loan Mortgage Corp. Gold 30 Year Pools............. 7.500 06/01/24 to 10/01/24 1,441,201
455 Federal Home Loan Mortgage Corp. Gold 30 Year Pools............. 8.000 09/01/24 to 10/01/24 465,179
2,835 Federal National Mortgage Association 15 Year Dwarf Pools....... 6.500 06/01/09 to 05/01/26 2,755,219
1,883 Federal National Mortgage Association 15 Year Dwarf Pools....... 7.000 07/01/10 to 12/01/11 1,878,711
1,907 Federal National Mortgage Association CMO Var Rate Cpn (a)...... 6.169 03/25/09 1,911,931
3,000 Federal National Mortgage Association Medium Term Note.......... 6.375 08/14/01 2,988,750
1,725 Federal National Mortgage Association Pools..................... 7.000 12/01/23 to 06/01/24 1,693,252
1,575 Federal National Mortgage Association Pools..................... 7.500 05/01/24 to 10/01/24 1,578,921
701 Federal National Mortgage Association Pools..................... 8.000 06/01/24 to 10/01/24 715,963
1,807 Federal National Mortgage Association Pools (a)................. 9.000 02/01/17 1,921,971
990 Federal National Mortgage Association Pools..................... 11.000 11/01/20 1,101,868
3,033 Government National Mortgage Association Pools.................. 7.000 04/15/23 to 10/15/24 2,978,457
2,043 Government National Mortgage Association Pools.................. 7.500 04/15/22 to 06/15/24 2,048,477
2,718 Government National Mortgage Association Pools.................. 8.000 05/15/17 to 11/15/24 2,782,852
2,492 Government National Mortgage Association Pools (a).............. 8.500 03/15/17 to 07/15/17 2,629,412
936 Government National Mortgage Association Pools.................. 9.500 06/15/09 to 10/15/09 1,008,956
142 Government National Mortgage Association Pools.................. 11.000 09/15/10 to 08/15/20 157,766
-----------
Total United States Government Agency Obligations......................................................... 34,548,610
-----------
United States Treasury Obligations 26.4%
2,000 United States Treasury Bonds.................................... 7.250 05/15/16 2,086,560
4,000 United States Treasury Notes (a)................................ 5.625 02/15/06 3,758,120
2,000 United States Treasury Notes (a)................................ 6.375 08/15/02 2,000,000
1,000 United States Treasury Notes (a)................................ 6.750 05/31/99 1,011,720
2,000 United States Treasury Notes (a)................................ 7.750 11/30/99 2,069,380
1,000 United States Treasury Notes (a)................................ 7.875 04/15/98 1,016,090
2,000 United States Treasury Notes (a)................................ 8.000 05/15/01 2,113,440
-----------
Total United States Treasury Obligations.................................................................. 14,055,310
-----------
</TABLE>
See Notes to Financial Statements
67
<PAGE>
Government Portfolio Portfolio of Investments (Continued)
June 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Forward Purchase Commitments 16.4%
$2,000 Government National Mortgage Association, July Forward........... 9.000% TBA $ 2,148,120
3,000 United States Treasury Notes, July Forward....................... 5.875 02/15/04 2,907,780
3,500 United States Treasury Notes, July Forward....................... 7.500 11/15/01 3,646,755
-----------
Total Forward Purchase Commitments............................................................. 8,702,655
-----------
Total Long-Term Investments 107.8%
(Cost $56,754,920).................................................................................... 57,306,575
Repurchase Agreement 8.1%
Lehman Brothers, Inc. ($4,285,000 par collateralized by U.S. Government obligations
in a pooled cash account, dated 06/30/97, to be sold on 07/01/97 at $4,285,708)....................... 4,285,000
-----------
Total Investments 115.9%
(Cost $61,039,920).................................................................................... 61,591,575
Liabilities in Excess of Other Assets (15.9%)........................................................... (8,455,180)
-----------
Net Assets 100.0%....................................................................................... $53,136,395
===========
</TABLE>
(a) Assets segregated as collateral for open forward and open futures
transactions.
TBA -- To be announced, maturity date has not yet been established. Upon
settlement and delivery of the mortgage pools, maturity dates will be
assigned.
See Notes to Financial Statements
68
<PAGE>
Government Portfolio Statement of Assets and Liabilities
June 30, 1997 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
<S> <C>
Assets:
Total Investments (Cost $61,039,920)........................................................... $61,591,575
Receivables:
Interest..................................................................................... 591,683
Investments Sold............................................................................. 46,107
Forward Commitments.......................................................................... 2,336
Other.......................................................................................... 1,571
-----------
Total Assets............................................................................... 62,233,272
-----------
Liabilities:
Payables:
Investments Purchased........................................................................ 8,925,916
Portfolio Shares Repurchased................................................................. 53,558
Variation Margin on Futures.................................................................. 33,259
Investment Advisory Fee...................................................................... 18,256
Distributor and Affiliates................................................................... 4,180
Custodian Bank............................................................................... 387
Deferred Compensation and Retirement Plans..................................................... 51,703
Accrued Expenses............................................................................... 9,618
-----------
Total Liabilities.......................................................................... 9,096,877
-----------
Net Assets..................................................................................... $53,136,395
===========
Net Assets Consist of:
Capital........................................................................................ $66,229,237
Net Unrealized Appreciation.................................................................... 662,643
Accumulated Undistributed Net Investment Income................................................ 57,482
Accumulated Net Realized Loss.................................................................. (13,812,967)
-----------
Net Assets..................................................................................... $53,136,395
===========
Net Asset Value, Offering Price and Redemption Price Per Share
(Based on net assets of $53,136,395 and 6,153,333 shares of beneficial interest
issued and outstanding)...................................................................... $ 8.64
===========
</TABLE>
See Notes to Financial Statements
69
<PAGE>
Government Portfolio Statement of Operations
For the Six Months Ended June 30, 1997 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
<S> <C>
Investment Income:
Interest.......................................................... $1,968,653
----------
Expenses:
Investment Advisory Fee........................................... 134,733
Audit............................................................. 10,260
Trustees Fees and Expenses........................................ 9,084
Custody........................................................... 9,076
Shareholder Services.............................................. 7,644
Legal............................................................. 4,883
Other............................................................. 25,841
----------
Total Expenses................................................ 201,521
Less Fees Deferred............................................ 38,516
----------
Net Expenses.................................................. 163,005
----------
Net Investment Income............................................. $1,805,648
==========
Realized and Unrealized Gain/Loss:
Realized Gain/Loss:
Investments..................................................... $ (21,552)
Futures......................................................... (430,619)
Forward Commitments............................................. (82,245)
----------
Net Realized Loss................................................. (534,416)
----------
Unrealized Appreciation/Depreciation:
Beginning of the Period......................................... 446,722
----------
End of the Period:
Investments................................................... 551,655
Futures....................................................... 108,652
Forward Commitments........................................... 2,336
----------
662,643
----------
Net Unrealized Appreciation During the Period..................... 215,921
----------
Net Realized and Unrealized Loss.................................. $ (318,495)
==========
Net Increase in Net Assets From Operations........................ $1,487,153
==========
</TABLE>
See Notes to Financial Statements
70
<PAGE>
Government Portfolio Statement of Changes in Net Assets
For the Six Months Ended June 30, 1997 and the Year Ended December 31, 1996
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1997 December 31, 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income.................................................... $ 1,805,648 $ 3,982,843
Net Realized Loss........................................................ (534,416) (893,970)
Net Unrealized Appreciation/Depreciation During the Period............... 215,921 (1,950,846)
----------- ------------
Change in Net Assets from Operations..................................... 1,487,153 1,138,027
----------- ------------
Distributions from Net Investment Income................................. (1,726,982) (3,998,258)
Distributions in Excess of Net Investment Income......................... -0- (25,823)
----------- ------------
Distributions from and in Excess of Net Investment Income................ (1,726,982) (4,024,081)
----------- ------------
Net Change in Net Assets from Investment Activities...................... (239,829) (2,886,054)
----------- ------------
From Capital Transactions:
Proceeds from Shares Sold................................................ 1,308,139 1,607,635
Net Asset Value of Shares Issued Through Dividend Reinvestment........... 1,726,982 4,024,080
Cost of Shares Repurchased............................................... (6,913,279) (12,510,487)
----------- ------------
Net Change in Net Assets from Capital Transactions....................... (3,878,158) (6,878,772)
----------- ------------
Total Decrease in Net Assets............................................. (4,117,987) (9,764,826)
Net Assets:
Beginning of the Period.................................................. 57,254,382 67,019,208
----------- ------------
End of the Period (Including accumulated undistributed net
investment income of $57,482 and $(11,355), respectively).............. $53,136,395 $ 57,254,382
=========== ============
</TABLE>
See Notes to Financial Statements
71
<PAGE>
Government Portfolio Financial Highlights
The following schedule presents financial highlights for one share of the
Portfolio outstanding throughout the periods indicated. (Unaudited)
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31,
Six Months Ended ----------------------------------------
June 30, 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.................. $8.666 $ 9.06 $ 8.28 $ 9.26 $ 9.13
------ ------- ------- ------- -------
Net Investment Income................................... .285 .569 .60 .56 .57
Net Realized and Unrealized Gain/Loss................... (.043) (.388) .78 (.985) .135
------ ------- ------- ------- -------
Total from Investment Operations.......................... .242 .181 1.38 (.425) .705
Less Distributions from and in Excess of Net Investment
Income.................................................. .273 .575 .60 .555 .575
------ ------- ------- ------- -------
Net Asset Value, End of the Period........................ $8.635 $ 8.666 $ 9.06 $ 8.28 $ 9.26
====== ======= ======= ======= =======
Total Return*............................................. 2.98%** 2.12% 17.17% (4.63%) 7.86%
Net Assets at End of the Period (In millions)............. $ 53.1 $ 57.3 $ 67.0 $ 65.5 $ 80.6
Ratio of Expenses to Average Net Assets*.................. .60% .60% .60% .60% .60%
Ratio of Net Investment Income to Average Net Assets*..... 6.70% 6.56% 6.89% 6.71% 6.45%
Portfolio Turnover........................................ 46%** 143% 164% 192% 91%
* If certain expenses had not been assumed by VKAC,
Total Return would have been lower and the ratios would
have been as follows:
Ratio of Expenses to Average Net Assets................... .75% .80% .72% .70% .70%
Ratio of Net Investment Income to Average Net Assets...... 6.56% 6.36% 6.77% 6.61% 6.35%
</TABLE>
** Non-Annualized
See Notes to Financial Statements
72
<PAGE>
Growth and Income Portfolio Portfolio of Investments
June 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
Common Stock 93.7%
Consumer Distribution 3.7%
CVS Corp................................................ 288 $ 14,760
Federated Department Stores, Inc. (a)................... 1,500 52,125
Gap, Inc................................................ 1,420 55,203
Gymboree Corp. (a)...................................... 1,240 29,760
--------
151,848
--------
Consumer Durables 2.1%
Black & Decker Corp..................................... 100 3,719
Eastman Kodak Co........................................ 290 22,258
Masco Corp.............................................. 800 33,400
Newell Co............................................... 650 25,756
--------
85,133
--------
Consumer Non-Durables 7.0%
Adidas - ADR (Germany) (a).............................. 300 16,350
Campbell Soup Co........................................ 510 25,500
Colgate - Palmolive Co.................................. 650 42,413
Nabisco Holdings Corp., Class A......................... 1,020 40,673
Philip Morris Cos., Inc................................. 1,940 86,085
Procter & Gamble Co..................................... 260 36,725
Quaker Oats Co.......................................... 140 6,283
Ralston Purina Group.................................... 340 27,944
--------
281,973
--------
Consumer Services 3.5%
Bell & Howell Co. (a)................................... 300 9,244
Cognizant Corp.......................................... 1,100 44,550
H & R Block, Inc........................................ 1,140 36,765
Lone Star Steakhouse & Saloon (a)....................... 940 24,440
Walt Disney Co.......................................... 310 24,878
--------
139,877
--------
Energy 8.1%
Coastal Corp............................................ 660 35,104
El Paso Natural Gas Co.................................. 510 28,050
Exxon Corp.............................................. 920 56,580
McDermott International, Inc............................ 1,240 36,192
Royal Dutch Petroleum Co. - ADR (Netherlands)........... 1,340 72,860
Texaco, Inc............................................. 580 63,072
USX - Marathon Group.................................... 1,240 35,805
--------
327,663
--------
</TABLE>
See Notes to Financial Statements
73
<PAGE>
Growth and Income Portfolio Portfolio of Investments (Continued)
June 30, 1997 (Unaudited)
===============================================================================
<TABLE>
<CAPTION>
Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
Finance 15.6%
Allstate Corp. ........................................ 800 $ 58,400
American General Corp. ................................ 680 32,470
BankAmerica Corp. ..................................... 1,510 97,486
BankBoston Corp. ...................................... 400 28,825
Chase Manhattan Corp. ................................. 190 18,442
CIGNA Corp. ........................................... 340 60,350
Conseco, Inc. ......................................... 1,130 41,810
Everest Reinsurance Holdings, Inc. .................... 1,050 41,606
First Union Corp. ..................................... 340 31,450
Great Western Financial Corp. ......................... 190 10,213
Hartford Life, Inc., Class A ......................... 130 4,875
NationsBank Corp. ..................................... 300 19,350
PMI Group, Inc. ....................................... 410 25,574
PNC Bank Corp. ........................................ 1,290 53,696
Provident Cos., Inc. .................................. 400 21,400
Transamerica Corp. .................................... 300 28,069
Travelers Group, Inc. ................................. 580 36,576
Washington Mutual, Inc. ............................... 350 20,913
---------
631,505
---------
Healthcare 15.6%
Abbott Laboratories, Inc. ............................. 800 53,400
Aetna, Inc. ........................................... 735 75,243
Alza Corp. (a) ........................................ 1,120 32,410
Amgen, Inc. (a) ....................................... 10 581
Bristol Myers Squibb Co. .............................. 580 46,980
Glaxo Wellcome, PLC - ADR (United Kingdom) ............ 1,310 54,774
Merck & Co., Inc. ..................................... 560 57,960
Mylan Labs., Inc. ..................................... 540 7,965
Nellcor Puritan Bennett, Inc. (a) ..................... 1,400 25,375
Novartis - ADR (Switzerland) .......................... 130 10,351
Pacificare Health Systems, Inc., Class B (a) .......... 780 49,823
Pharmacia & Upjohn, Inc. .............................. 500 17,375
SmithKline Beecham PLC - ADR (United Kingdom) ......... 750 68,719
Teva Pharmaceutical Industries Ltd. - ADR (Israel) .... 540 34,965
Warner Lambert Co. .................................... 480 59,640
Watsons Pharmaceuticals, Inc. (a) ..................... 900 38,025
---------
633,586
---------
</TABLE>
74 See Notes to Financial Statements
<PAGE>
Growth and Income Portfolio Portfolio of Investments (Continued)
June 30, 1997 (Unaudited)
===============================================================================
<TABLE>
<CAPTION>
Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
Producer Manufacturing 9.0%
Allied Signal, Inc. .................................... 670 $ 56,280
Canadian Pacific, Ltd ................................. 2,220 63,131
Fluor Corp. ........................................... 170 9,382
Honeywell, Inc. ....................................... 560 42,490
Ingersoll-Rand Co. .................................... 830 51,253
Johnson Controls, Inc. ................................ 1,020 41,884
Keystone International, Inc. .......................... 320 11,100
Philips Electronics N.V. - ADR (Netherlands) ......... 420 30,188
Stewart & Stevenson Services, Inc. .................... 620 16,120
Waste Management, Inc. (a) ............................ 1,390 44,654
---------
366,482
---------
Raw Materials/Processing Industries 5.6%
BetzDearborn, Inc. .................................... 560 36,960
Crown Cork & Seal Inc. ................................ 1,100 58,781
Du Pont (E. I.) de Nemours & Co. ...................... 470 29,551
James River Corp. of Virginia ......................... 650 24,050
Morton International, Inc. ............................ 265 8,000
Praxair, Inc. ......................................... 840 47,040
W.R. Grace & Co. ...................................... 420 23,153
---------
227,535
---------
Technology 14.3%
3Com Corp. (a) ........................................ 50 2,250
Alcatel Alsthom CGE - ADR (France) .................... 930 23,483
America Online, Inc. (a) .............................. 470 26,144
Ascend Communications, Inc. (a) ....................... 80 3,150
BMC Software, Inc. (a) ................................ 870 48,176
Boeing Co. ............................................ 180 9,551
Cabletron System, Inc. (a) ............................ 470 13,307
Computer Associates International, Inc. ............... 230 12,808
Ericsson (L M) Telephone Co., Class B - ADR (Sweden) .. 1,010 39,769
General Instrument Corp. (a) .......................... 1,180 29,500
General Signal Corp. .................................. 230 10,034
International Business Machines Corp. ................. 290 26,154
Intuit, Inc. (a) ...................................... 160 3,670
LSI Logic Corp. (a) ................................... 700 22,400
Lucent Technologies, Inc. ............................. 640 46,120
Microsoft Corp. (a) ................................... 350 44,231
Motorola, Inc. ........................................ 650 49,400
Newbridge Networks Corp. (a) .......................... 1,270 55,245
</TABLE>
75 See Notes to Financial Statements
<PAGE>
Growth and Income Portfolio Portfolio of Investments (Continued)
June 30, 1997 (Unaudited)
===============================================================================
<TABLE>
<CAPTION>
Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
Technology (Continued)
Nokia Corp - ADR (Finland) ............................ 580 $ 42,775
Tellabs, Inc. (a) ..................................... 560 31,290
Xerox Corp. ........................................... 480 37,860
----------
577,317
----------
Transportation 1.1%
Canadian National Railway Co. ......................... 980 42,875
----------
Utilities 8.1%
Airtouch Communications, Inc. (a) ..................... 530 14,509
Allegheny Power System, Inc. .......................... 30 801
AT&T Corp. ............................................ 250 8,766
Bellsouth Corp. ....................................... 740 34,318
Boston Edison Co. ..................................... 870 22,946
Cable & Wireless, PLC - ADR (United Kingdom) .......... 1,520 42,465
Cincinnati Bell, Inc. ................................. 1,020 32,130
CMS Energy Corp. ...................................... 710 25,028
Edison International .................................. 1,070 26,616
Florida Progress Corp. ................................ 630 19,727
FPL Group, Inc. ....................................... 430 19,807
Houston Industries, Inc. .............................. 1,240 26,582
Ohio Edison Co. ....................................... 170 3,708
SBC Communications, Inc. .............................. 310 19,181
SCANA Corp. ........................................... 1,220 30,271
----------
326,855
----------
Total Long-Term Investments 93.7%
(Cost $3,472,184) .......................................... 3,792,649
Repurchase Agreement 8.9%
Lehman Brothers, Inc. ($360,000 par collateralized by
U.S. Government obligations in a pooled cash account,
dated 06/30/97, to be sold on 07/01/97 at $360,060) ........ 360,000
----------
Total Investments 102.6%
(Cost $3,832,184) .......................................... 4,152,649
Liabilities in Excess of Other Assets (2.6%) .................. (104,081)
----------
Net Assets 100.0% ............................................. $4,048,568
==========
</TABLE>
(a) Non-income producing security as this stock currently does not declare
dividends.
76 See Notes to Financial Statements
<PAGE>
Growth and Income Portfolio Statement of Assets and Liabilities
June 30, 1997 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
<S> <C>
Assets:
Total Investments (Cost $3,832,184)............................................................ $4,152,649
Cash........................................................................................... 1,549
Receivables:
Portfolio Shares Sold........................................................................ 46,042
Investments Sold............................................................................. 16,262
Dividends.................................................................................... 3,979
Expense Reimbursement from Adviser........................................................... 401
----------
Total Assets............................................................................. 4,220,882
----------
Liabilities:
Payables:
Investments Purchased........................................................................ 164,534
Affiliates................................................................................... 600
Accrued Expenses............................................................................... 7,180
----------
Total Liabilities........................................................................ 172,314
----------
Net Assets..................................................................................... $4,048,568
==========
Net Assets Consist of:
Capital........................................................................................ $3,729,211
Net Unrealized Appreciation.................................................................... 320,465
Accumulated Undistributed Net Investment Income................................................ 5,939
Accumulated Net Realized Loss.................................................................. (7,047)
----------
Net Assets..................................................................................... $4,048,568
==========
Net Asset Value, Offering Price and Redemption Price Per Share
(Based on net assets of $4,048,568 and 350,879 shares of beneficial interest
issued and outstanding)...................................................................... $ 11.54
==========
</TABLE>
See Notes to Financial Statements
77
<PAGE>
Growth and Income Portfolio Statement of Operations
For the Six Months Ended June 30, 1997 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
<S> <C>
Investment Income:
Dividends...................................................................................... $ 14,282
Interest....................................................................................... 4,485
--------
Total Income............................................................................... 18,767
--------
Expenses:
Audit.......................................................................................... 6,853
Shareholder Reports............................................................................ 5,854
Investment Advisory Fee........................................................................ 4,991
Legal.......................................................................................... 1,073
Shareholder Services........................................................................... 232
Trustees Fees and Expenses..................................................................... 63
Other.......................................................................................... 995
--------
Total Expenses............................................................................. 20,061
Less Fees Deferred and Expenses Reimbursed ($4,991 and $8,710, respectively)............... 13,701
--------
Net Expenses............................................................................... 6,360
--------
Net Investment Income.......................................................................... $ 12,407
========
Realized and Unrealized Gain/Loss:
Net Realized Loss.............................................................................. $ (6,966)
--------
Unrealized Appreciation/Depreciation:
Beginning of the Period...................................................................... (1,970)
End of the Period:
Investments................................................................................ 320,465
--------
Net Unrealized Appreciation During the Period.................................................. 322,435
--------
Net Realized and Unrealized Gain............................................................... $315,469
========
Net Increase in Net Assets From Operations..................................................... $327,876
========
</TABLE>
See Notes to Financial Statements
78
<PAGE>
Growth and Income Portfolio Statement of Changes in Net Assets
For the Six Months Ended June 30, 1997 and the Period December 23, 1996
(Commencement of Investment Operations) to December 31, 1996 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
Six Months Ended Period Ended
June 30, 1997 December 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income.......................................................... $ 12,407 $ 553
Net Realized Loss.............................................................. (6,966) (81)
Net Unrealized Appreciation/Depreciation During the Period..................... 322,435 (1,970)
---------- --------
Change in Net Assets from Operations........................................... 327,876 (1,498)
Distributions from Net Investment Income....................................... (7,021) -0-
---------- --------
Net Change in Net Assets from Investment Activities............................ 320,855 (1,498)
---------- --------
From Capital Transactions:
Proceeds from Shares Sold...................................................... 3,236,552 -0-
Net Asset Value of Shares Issued Through Dividend Reinvestment................. 7,021 -0-
Cost of Shares Repurchased..................................................... (14,362) -0-
---------- --------
Net Change in Net Assets from Capital Transactions............................. 3,229,211 -0-
---------- --------
Total Increase/Decrease in Net Assets.......................................... 3,550,066 (1,498)
Net Assets:
Beginning of the Period........................................................ 498,502 500,000
---------- --------
End of the Period (including accumulated undistributed net
investment income of $5,939 and $553, respectively)......................... $4,048,568 $498,502
========== ========
</TABLE>
79 See Notes to Financial Statements
<PAGE>
Growth and Income Portfolio Financial Highlights
The following schedule presents financial highlights for one share of the
Portfolio outstanding throughout the periods indicated. (Unaudited)
================================================================================
<TABLE>
<CAPTION>
December 23, 1996
(Commencement
of Investment
Six Months Ended Operations) to
June 30, 1997 December 31, 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of the Period................................... $ 9.970 $10.000
------- -------
Net Investment Income.................................................... .030 .011
Net Realized and Unrealized Gain/Loss.................................... 1.563 (.041)
------- -------
Total from Investment Operations........................................... 1.593 (.030)
Less Distributions from Net Investment Income.............................. .025 -0-
------- -------
Net Asset Value, End of the Period......................................... $11.538 $ 9.970
======= =======
Total Return*.............................................................. 16.00%** (.30%)**
Net Assets at End of the Period (In millions).............................. $ 4.0 $ 0.5
Ratio of Expenses to Average Net Assets*................................... .75% .75%
Ratio of Net Investment Income to Average Net Assets*...................... 1.48% 4.47%
Portfolio Turnover......................................................... 36%** 0%**
Average Commission Paid Per Equity Share Traded (a)........................ $ .0316 $ .0203
* If certain expenses had not been assumed by VKAC, Total Return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets.................................... 2.39% 45.97%
Ratio of Net Investment Loss to Average Net Assets......................... (.15%) (40.74%)
</TABLE>
**Non-Annualized
(a) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable.
80 See Notes to Financial Statements
<PAGE>
Money Market Portfolio Portfolio of Investments
June 30, 1997 (Unaudited)
===============================================================================
<TABLE>
<CAPTION>
Discount
Par Yield on
Amount Maturity Date of Amortized
(000) Description Date Purchase Cost
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government Agency Obligations 43.1%
$1,000 Federal Farm Credit Bank Discount Note.................. 07/10/97 5.458% $ 998,486
2,000 Federal Home Loan Bank Discount Note.................... 07/03/97 5.577 1,999,083
1,000 Federal Home Loan Mortgage Corp. Discount Note.......... 07/02/97 5.589 999,694
1,000 Federal Home Loan Mortgage Corp. Discount Note.......... 08/15/97 5.614 992,928
1,000 Federal National Mortgage Association Discount Note..... 07/08/97 5.373 998,838
1,005 Federal National Mortgage Association Discount Note..... 07/18/97 5.565 1,002,231
1,000 Federal National Mortgage Association Discount Note..... 08/26/97 5.535 991,355
2,000 Tennessee Valley Authority Discount Note................ 09/11/97 5.489 1,978,019
-----------
Total U.S. Government Agency Obligations................................................. 9,960,634
-----------
Commercial Paper 34.9%
1,000 Associates Corp. of North America....................... 07/02/97 5.544 999,693
1,000 Chevron Oil Finance Corp................................ 07/09/97 5.464 998,640
1,000 Ford Motor Credit Co.................................... 07/07/97 5.654 998,911
1,000 General Electric Capital Corp........................... 07/28/97 5.600 995,676
1,200 General Electric Corp................................... 07/22/97 5.700 1,195,879
900 Metlife Funding Inc..................................... 07/18/97 5.589 897,507
1,000 Prudential Funding Corp................................. 09/08/97 5.649 989,169
1,000 Toronto Dominion Holdings............................... 08/25/97 5.553 991,444
-----------
Total Commercial Paper................................................................... 8,066,919
-----------
Repurchase Agreements 23.1%
DLJ ($1,775,000 par collateralized by U.S. Government obligations in
a pooled cash account, dated 06/30/97, to be sold on 07/01/97 at $1,775,291)............. 1,775,000
SBC Warburg ($1,770,000 par collateralized by U.S. Government obligations
in a pooled cash account, dated 06/30/97, to be sold on 07/01/97 at $1,770,275).......... 1,770,000
Shearson Lehman ($1,785,000 par collateralized by U.S. Government obligations
in a pooled cash account, dated 06/30/97, to be sold on 07/01/97 at $1,785,295).......... 1,785,000
-----------
Total Repurchase Agreements.............................................................. 5,330,000
-----------
Total Investments 101.1%......................................................................... 23,357,553
Liabilities in Excess of Other Assets (1.1%)..................................................... (261,312)
-----------
Net Assets 100.0%................................................................................ $23,096,241
===========
</TABLE>
81 See Notes to Financial Statements
<PAGE>
Money Market Portfolio Statement of Assets and Liabilities
June 30, 1997 (Unaudited)
<TABLE>
<CAPTION>
====================================================================================================================
<S> <C>
Assets:
Investments, at Amortized Cost which Approximates Market,
including repurchase agreements of $5,330,000..................................................... $23,357,553
Cash................................................................................................... 2,453
Other.................................................................................................. 1,120
-----------
Total Assets........................................................................... 23,361,126
-----------
Liabilities:
Payables:
Portfolio Shares Repurchased...................................................................... 198,270
Distributor and Affiliates........................................................................ 4,737
Deferred Compensation and Retirement Plans............................................................. 47,519
Accrued Expenses....................................................................................... 14,359
-----------
Total Liabilities...................................................................... 264,885
-----------
Net Assets............................................................................................. $23,096,241
===========
Net Assets Consist of:
Capital................................................................................................ $23,096,384
Accumulated Net Realized Loss.......................................................................... (63)
Accumulated Distributions in Excess of Net Investment Income........................................... (80)
-----------
Net Assets (Equivalent to $1.00 per share for 23,096,384 shares outstanding)........................... $23,096,241
===========
</TABLE>
82 See Notes to Financial Statements
<PAGE>
Money Market Portfolio Statement of Operations
For the Six Months Ended June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
Investment Income:
Interest........................................................... $ 578,925
---------
Expenses:
Investment Advisory Fee............................................ 52,932
Shareholder Reports................................................ 11,253
Audit.............................................................. 9,310
Shareholder Services............................................... 7,840
Custody............................................................ 6,887
Legal.............................................................. 6,244
Trustees Fees and Expenses......................................... 5,915
Accounting......................................................... 5,427
Other.............................................................. 10,121
---------
Total Expenses................................................. 115,929
Less Fees Deferred............................................. 51,869
---------
Net Expenses................................................... 64,060
---------
Net Investment Income.............................................. $ 514,865
=========
Net Realized Loss.................................................. $ (63)
=========
Net Increase in Net Assets From Operations......................... $ 514,802
=========
83 See Notes to Financial Statements
<PAGE>
<TABLE>
<CAPTION>
Money Market Portfolio Statement of Changes in Net Assets
For the Six Months Ended June 30, 1997 and the Year Ended
December 31, 1996 (Unaudited)
================================================================================
<S> <C> <C>
Six Months Ended Year Ended
June 30, 1997 December 31, 1996
- --------------------------------------------------------------------------------
From Investment Activities:
Operations:
Net Investment Income........................ $ 514,865 $ 1,002,363
Net Realized Gain/Loss....................... (63) 415
----------- -----------
Change in Net Assets from Operations......... 514,802 1,002,778
----------- -----------
Distributions from Net Investment Income..... (515,075) (1,001,453)
Distributions in Excess of Net Investment
Income..................................... (80) (415)
----------- -----------
Total Distributions.......................... (515,155) (1,001,868)
----------- -----------
Net Change in Net Assets from Investment
Activities................................. (353) 910
----------- -----------
From Capital Transactions:
Proceeds from Shares Sold.................... 14,734,602 15,915,843
Net Asset Value of Shares Issued Through
Dividend Reinvestment...................... 515,155 1,001,868
Cost of Shares Repurchased................... (11,719,098) (18,927,603)
----------- -----------
Net Change in Net Assets from
Capital Transactions....................... 3,530,659 (2,009,892)
----------- -----------
Total Increase/Decrease in Net Assets........ 3,530,306 (2,008,982)
Net Assets:
Beginning of the Period...................... 19,565,935 21,574,917
----------- -----------
End of the Period (Including accumulated
undistributed net investment income of
$(80) and $210, respectively).............. $23,096,241 $19,565,935
=========== ===========
</TABLE>
See Notes to Financial Statements
84
<PAGE>
Money Market Portfolio Financial Highlights
The following schedule presents financial highlights for one share of
the Portfolio outstanding throughout the periods indicated. (Unaudited)
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31,
Six Months Ended -------------------------------
June 30, 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period................. $1.00 $1.00 $ 1.00 $ 1.00 $ 1.00
----- ----- ------ ------ ------
Net Investment Income.................................... .024 .048 .0533 .0365 .0262
Less Distributions from Net Investment Income............ .024 .048 .0533 .0365 .0262
----- ----- ------ ------ ------
Net Asset Value, End of the Period....................... $1.00 $1.00 $ 1.00 $ 1.00 $ 1.00
===== ===== ====== ====== ======
Total Return*............................................ 2.43%** 4.89% 5.46% 3.71% 2.66%
Net Assets at End of the Period (In millions)............ $23.1 $19.6 $ 21.6 $ 28.5 $ 30.0
Ratio of Expenses to Average Net Assets*................. .60% .60% .60% .60% .60%
Ratio of Net Investment Income to Average Net Assets*.... 4.86% 4.78% 5.33% 3.63% 2.63%
* If certain expenses had not been assumed by VKAC, Total Return
would have been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets.................. 1.09% 1.29% .93% .87% .95%
Ratio of Net Investment Income to Average Net Assets..... 4.37% 4.10% 5.00% 3.37% 2.28%
** Non-Annualized.
</TABLE>
See Notes to Financial Statements
85
<PAGE>
<TABLE>
<CAPTION>
Morgan Stanley Real Estate Securities Portfolio Portfolio of Investments
June 30, 1997 (Unaudited)
================================================================================
<S> <C> <C>
Description Shares Market Value
- --------------------------------------------------------------------------------
Common and Preferred Stocks 89.1%
Apartments 17.5%
Amli Residential Properties Trust...................... 23,400 $ 549,897
Associated Estates Realty Corp......................... 128,300 3,015,050
Avalon Properties, Inc................................. 203,100 5,813,738
Bay Apartment Communities, Inc......................... 192,400 7,118,800
Columbus Realty Trust.................................. 9,900 225,225
Essex Property Trust, Inc.............................. 250,600 8,050,525
Gables Residential Trust............................... 114,700 2,896,175
Merry Land & Investment Co............................. 176,000 3,817,000
Oasis Residential, Inc................................. 139,400 3,275,900
Security Capital Atlantic, Inc......................... 181,000 4,332,688
Summit Properties, Inc................................. 25,800 532,125
-----------
39,627,123
-----------
Development 2.9%
Atlantic Gulf Communities Corp. (Including 74,352
Class A, B and C common stock warrants which are
144A - Private Placement securities) (a) (b)......... 433,224 2,761,803
Atlantic Gulf Communities Corp. - Convertible
Preferred, 144A - Private Placement (b).............. 79,420 794,200
Brookfield Properties Corp. (a)........................ 6,400 74,624
Brookfield Properties Corp. - Common Share
Installment Receipts (a)............................. 192,600 1,353,978
Catellus Development Corp. (a)......................... 85,700 1,553,313
-----------
6,537,918
-----------
Healthcare Facilities 9.4%
Alexandria Real Estate Equities, Inc................... 67,000 1,469,813
Healthcare Property Investors, Inc..................... 71,000 2,502,750
Nationwide Health Properties, Inc...................... 445,700 9,805,400
Omega Healthcare Investors, Inc........................ 230,700 7,541,006
-----------
21,318,969
-----------
Hotels 12.4%
American General Hospitality Corp...................... 422,200 10,449,450
Bristol Hotel Co. (a).................................. 51,200 1,971,200
Extended Stay America, Inc. (a)........................ 246,100 3,876,075
Host Marriott Corp. (a)................................ 234,100 4,169,906
Servico, Inc. (a)...................................... 150,100 2,232,737
Starwood Lodging Trust................................. 127,950 5,461,866
-----------
28,161,234
-----------
Manufactured Home Communities 6.6%
Chateau Properties, Inc................................ 386,417 11,061,187
Manufactured Home Communities, Inc..................... 170,500 3,932,156
-----------
14,993,343
-----------
</TABLE>
See Notes to Financial Statements
86
<PAGE>
<TABLE>
<CAPTION>
Morgan Stanley Real Estate Securities Portfolio
Portfolio of Investments (Continued)
June 30, 1997 (Unaudited)
================================================================================
<S> <C> <C>
Description Shares Market Value
- --------------------------------------------------------------------------------
Office/Industrial 22.7%
Arden Realty Group, Inc............................... 182,300 $ 4,739,800
Beacon Properties Corp................................ 138,400 4,619,100
Boston Properties, Inc. (a)........................... 60,700 1,669,250
Brandywine Realty Trust............................... 376,300 7,620,075
CarrAmerica Realty Corp............................... 146,400 4,209,000
Cornerstone Properties, Inc........................... 100,600 1,546,725
EastGroup Properties, Inc............................. 27,100 545,388
Great Lakes REIT, Inc................................. 237,800 3,908,838
Kilroy Realty Corp.................................... 57,700 1,456,925
Koger Equity, Inc..................................... 102,000 1,861,500
Meridan Industrial Trust, Inc......................... 84,700 1,990,450
Pacific Gulf Properties, Inc.......................... 241,200 5,306,400
Prentiss Properties Trust............................. 57,900 1,483,688
Trizec Hahn Corp...................................... 255,800 5,467,725
Wellsford Real Properties, Inc.,
144A - Private Placement (a) (b).................... 454,842 5,003,262
-----------
51,428,126
-----------
Retirement/Aged Care 0.7%
ARV Assisted Living, Inc. (a)......................... 153,400 1,687,400
-----------
Self-Storage 1.5%
Shurgard Storage Centers, Inc., Class A............... 123,800 3,466,400
-----------
Shopping Centers 5.5%
Alexander Haagen Properties, Inc...................... 106,900 1,737,125
Burnham Pacific Properties, Inc....................... 384,500 5,286,875
Federal Realty Investment Trust....................... 59,200 1,598,400
First Washington Realty Trust, Inc.
- Convertible Preferred Ser A....................... 58,600 1,787,300
IRT Property Co....................................... 26,500 311,375
Price REIT, Inc....................................... 7,700 280,087
Ramco-Gershenson Properties Trust..................... 1,900 33,488
Western Investment Real Estate Trust.................. 110,900 1,531,806
-----------
12,566,456
-----------
Shopping Malls 9.9%
First Union Real Estate Investments................... 413,200 5,836,450
Taubman Centers, Inc.................................. 289,800 3,839,850
Urban Shopping Centers, Inc........................... 242,700 7,736,063
Westfield America, Inc................................ 305,200 5,150,250
-----------
22,562,613
-----------
Total Common and Preferred Stocks 89.1%....................... 202,349,582
-----------
</TABLE>
See Notes to Financial Statements
87
<PAGE>
<TABLE>
<CAPTION>
Morgan Stanley Real Estate Securities Portfolio
Portfolio of Investments (Continued)
June 30, 1997 (Unaudited)
================================================================================
<S> <C>
Description Market Value
- --------------------------------------------------------------------------------
Convertible Corporate Obligations 0.6%
Development 0.6%
Brookfield Properties Corp. - Installment Receipts
Representing Subordinated Debentures ($2,262,000 par,
6.000% coupon, 02/14/07 maturity, S&P rating NR).............. $ 1,278,256
------------
Total Long-Term Investments 89.7%
(Cost $188,435,952)........................................... 203,627,838
Repurchase Agreement 3.5%
SBC Warburg ($8,065,000 par collateralized by U.S.
Government obligations in a pooled cash account,
dated 06/30/97, to be sold on 07/01/97 at $8,066,255)......... 8,065,000
------------
Total Investments 93.2%
(Cost $196,500,952)........................................... 211,692,838
Other Assets in Excess of Liabilities 6.8%...................... 15,367,109
------------
Net Assets 100.0%............................................... $227,059,947
============
</TABLE>
(a) Non-income producing security as this stock currently does not declare
dividends.
(b) 144A securities are those which are exempt from registration under Rule
144A of the Securities Act of 1933. These securities may only be resold in
transactions exempt from registration which are normally transactions with
qualified institutional buyers.
See Notes to Financial Statements
88
<PAGE>
<TABLE>
<CAPTION>
Morgan Stanley Real Estate Securities Portfolio Statement of Assets and Liabilities
June 30, 1997 (Unaudited)
====================================================================================================
<S> <C>
Assets:
Total Investments (Cost $196,500,952)................................................. $ 211,692,838
Receivables:
Investments Sold.................................................................... 9,187,292
Portfolio Shares Sold............................................................... 6,209,817
Dividends........................................................................... 1,015,422
Interest............................................................................ 50,709
Unamortized Organizational Costs...................................................... 4,211
-------------
Total Assets...................................................................... 228,160,289
-------------
Liabilities:
Payables:
Investments Purchased............................................................... 895,085
Investment Advisory Fee............................................................. 174,877
Custodian Bank...................................................................... 5,876
Distributor and Affiliates.......................................................... 3,146
Accrued Expenses...................................................................... 11,526
Deferred Compensation and Retirement Plans............................................ 9,832
-------------
Total Liabilities................................................................. 1,100,342
-------------
Net Assets............................................................................ $ 227,059,947
=============
Net Assets Consist of:
Capital............................................................................... $ 193,151,872
Accumulated Net Realized Gain......................................................... 15,510,627
Net Unrealized Appreciation........................................................... 15,191,886
Accumulated Undistributed Net Investment Income....................................... 3,205,562
-------------
Net Assets............................................................................ $ 227,059,947
=============
Net Asset Value, Offering Price and Redemption Price Per Share
(Based on net assets of $227,059,947 and 14,491,549 shares of
beneficial interest issued and outstanding)......................................... $ 15.67
============
89 See Notes to Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Morgan Stanley Real Estate Securities Portfolio Statement of Operations
For the Six Months Ended June 30, 1997 (Unaudited)
================================================================================
<S> <C>
Investment Income:
Dividends....................................................... $ 3,803,786
Interest........................................................ 449,921
------------
Total Income................................................. 4,253,707
------------
Expenses:
Investment Advisory Fee.......................................... 970,203
Accounting....................................................... 16,185
Shareholder Services............................................. 7,948
Legal............................................................ 5,647
Trustees Fees and Expenses....................................... 5,347
Amortization of Organizational Costs............................. 797
Other............................................................ 28,897
------------
Total Expenses............................................... 1,035,024
------------
Net Investment Income............................................ $ 3,218,683
============
Realized and Unrealized Gain/Loss:
Net Realized Gain................................................ $ 15,643,425
------------
Unrealized Appreciation/Depreciation:
Beginning of the Period...................................... 22,046,065
End of the Period:
Investments................................................ 15,191,886
------------
Net Unrealized Depreciation During the Period.................... (6,854,179)
------------
Net Realized and Unrealized Gain................................. $ 8,789,246
============
Net Increase in Net Assets From Operation........................ $ 12,007,929
============
90 See Notes to Financial Statements
</TABLE>
<PAGE>
Morgan Stanley Real Estate Securities Portfolio
Statement of Changes in Net Assets
For the Six Months Ended June 30, 1997 and the Year Ended December 31, 1996
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1997 December 31, 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income................................................. $ 3,218,683 $ 2,164,983
Net Realized Gain..................................................... 15,643,425 1,465,073
Net Unrealized Appreciation/Depreciation During the Period............ (6,854,179) 21,713,960
------------ ------------
Change in Net Assets from Operations.................................. 12,007,929 25,344,016
------------ ------------
Distributions from Net Investment Income.............................. (341,984) (1,844,832)
Distributions from Net Realized Gain.................................. (691,244 (874,097)
------------ ------------
Total Distributions................................................... (1,033,228) (2,718,929)
------------ ------------
Net Change in Net Assets from Investment Activities................... 10,974,701 22,625,087
------------ ------------
From Capital Transactions:
Proceeds from Shares Sold............................................. 131,467,424 178,078,191
Net Asset Value of Shares Issued Through Dividend Reinvestment........ 1,031,398 2,718,725
Cost of Shares Repurchased............................................ (83,897,330) (44,523,570)
------------ ------------
Net Change in Net Assets from Capital Transactions.................... 48,601,492 136,273,346
------------ ------------
Total Increase in Net Assets.......................................... 59,576,193 158,898,433
Net Assets:
Beginning of the Period............................................... 167,483,754 8,585,321
------------ ------------
End of the Period (Including accumulated undistributed net investment
income of $3,205,562 and $328,863, respectively).................... $227,059,947 $167,483,754
============ ============
</TABLE>
91 See Notes to Financial Statements
<PAGE>
Morgan Stanley Real Estate Securities Portfolio Financial Highlights
The following schedule presents financial highlights for one share of the
Portfolio outstanding throughout the periods indicated. (Unaudited)
================================================================================
<TABLE>
<CAPTION>
July 3, 1995
(Commencement of
Six Months Ended Year Ended Investment Operations)
June 30, 1997 December 31, 1996 to December 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of the Period......................... $14.784 $ 10.74 $ 10.00
------- ------- -------
Net Investment Income.......................................... .216 .217 .20
Net Realized and Unrealized Gain............................... .740 4.117 .6325
------- ------- -------
Total from Investment Operations................................. .956 4.334 .8325
------- ------- -------
Less:
Distributions from Net Investment Income....................... .024 .199 .0925
Distributions from Net Realized Gain........................... .048 .091 -0-
------- ------- -------
Total Distributions.............................................. .072 .290 .0925
------- ------- -------
Net Asset Value, End of the Period............................... $15.668 $14.784 $ 10.74
======= ======= =======
Total Return*.................................................... 6.51%** 40.53% 8.35%**
Net Assets at End of the Period (In millions).................... $ 227.1 $ 167.5 $ 8.6
Ratio of Expenses to Average Net Assets*......................... 1.06% 1.10% 2.50%
Ratio of Net Investment Income to Average Net Assets*............ 3.31% 5.06% 3.75%
Portfolio Turnover............................................... 117%** 84% 85%**
Average Commission Paid Per Equity Share Traded (a).............. $ .0292 $ .0313 --
*If certain expenses had not been assumed by VKAC, Total Return
would have been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets.......................... N/A 1.27% 2.90%
Ratio of Net Investment Income to Average Net Assets............. N/A 4.89% 3.36%
</TABLE>
**Non-Annualized
(a) Represents the average brokerage commissions paid per equity share traded
during the period where commissions were applicable. This disclosure was
not required in fiscal periods prior to 1996.
N/A = Not Applicable
See Notes to Financial Statements
92
<PAGE>
Notes to Financial Statements
June 30, 1997 (Unaudited)
===============================================================================
1. Significant Accounting Policies
Van Kampen American Capital Life Investment Trust (the "Trust") is registered
under the Investment Company Act of 1940, as amended, as a diversified open-end
management investment company comprised of nine Portfolios: Asset Allocation
Portfolio ("Asset Allocation"), Domestic Income Portfolio ("Domestic"), Emerging
Growth Portfolio ("Emerging Growth"), Enterprise Portfolio ("Enterprise"),
Global Equity Portfolio ("Global Equity"), Government Portfolio ("Government"),
Growth and Income Portfolio ("Growth and Income"), Money Market Portfolio
("Money Market") and Morgan Stanley Real Estate Securities Portfolio ("Real
Estate") (collectively the "Portfolios"). Each Portfolio is accounted for as a
separate entity.
The goals of the Portfolios are as follows: Asset Allocation seeks a high
total investment return consistent with prudent risk; Domestic seeks income as
its primary objective and capital appreciation as a secondary objective;
Emerging Growth seeks capital appreciation by investing principally in common
stocks of small and medium sized companies; Enterprise seeks capital
appreciation by investing principally in common stocks; Global Equity seeks
long-term growth of capital through an internationally diversified portfolio of
equity securities of any nation, including the United States; Government seeks
high current return consistent with preservation of capital; Growth and Income
seeks long-term growth of capital and income by investing primarily in income-
producing equity securities including common stocks and convertible securities;
Money Market seeks protection of capital and high current income by investing in
short-term money market instruments; and Real Estate seeks long-term growth of
capital by investing principally in securities of companies operating in the
real estate industry.
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
A. Security Valuation--Investments in securities listed on a securities
exchange are valued at their sales price as of the close of such securities
exchange. Fixed income investments are stated at value using market quotations.
Unlisted securities and listed securities for which the last sales price is not
available are valued at the last bid price. For those securities where prices or
quotations are not available, valuations are determined in accordance with
procedures established in good faith by the Board of Trustees. Short-term
securities with remaining maturities of 60 days or less are valued at amortized
cost. For Money Market, all investments are valued at amortized cost.
Domestic's investments include lower rated and unrated debt securities
which may be more susceptible to a decline in value due to adverse economic
conditions than other investment grade holdings. These securities are often
subordinated to the prior claims of other senior lenders and uncertainties exist
as to an issuer's ability to meet principal and interest payments. Debt
securities rated below investment grade and comparable unrated securities
represented approximately 24% of Domestic's net assets at June 30, 1997.
B. Security Transactions--Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Portfolios may purchase and sell securities on a "when issued" or "delayed
delivery" basis, with settlement to occur at a later date. The value of the
security so purchased is subject to market fluctuations during this period. The
Portfolios will maintain, in a segregated account with its custodian, assets
having an aggregate value at least equal to the amount of the when issued or
delayed delivery purchase commitments until payment is made.
The Portfolios may invest in repurchase agreements which are short-term
investments in which the Portfolios acquire ownership of a debt security and the
seller agrees to repurchase the security at a future time and specified price.
The Portfolios may invest independently in repurchase agreements, or transfer
uninvested cash balances into a pooled cash account along with other investment
companies advised by Van Kampen American Capital Asset Management, Inc. (the
93
<PAGE>
Notes to Financial Statements (Continued)
June 30, 1997 (Unaudited)
================================================================================
"Adviser") or its affiliates, the daily aggregate of which is invested in
repurchase agreements. Repurchase agreements are fully collateralized by the
underlying debt security. The Portfolios will make payment for such securities
only upon physical delivery or evidence of book entry transfer to the account of
the custodian bank. The seller is required to maintain the value of the
underlying security at not less than the repurchase proceeds due the Portfolios.
Domestic, Global Equity, Government and Real Estate may trade certain
securities under the terms of forward commitments, whereby the settlement for
payment and delivery occurs at a specified future date. Forward commitments are
privately negotiated transactions between the Portfolio and dealers. Upon
executing a forward commitment and during the period of obligation, the
Portfolio maintains collateral of cash or securities in a segregated account
with its custodian in an amount sufficient to relieve the obligation. If the
intent of the Portfolio is to accept delivery of a security traded under a
forward purchase commitment, the commitment is recorded as a long-term purchase.
For forward purchase commitments for which security settlement is not intended
by the Portfolio, changes in the value of the commitment are recognized by
marking the commitment to market on a daily basis. During the term of the
commitment, the Portfolio may sell the forward commitment and enter into a new
forward commitment, the effect of which is to extend the settlement date. In
addition, the Portfolio may occasionally close such forward commitments prior to
delivery.
C. Investment Income--Dividend income is recorded on the ex-dividend date and
interest income is recorded on an accrual basis. Issuers of Payment-in-Kind
securities may make dividend or interest payments by issuing additional stocks
or bonds in lieu of cash payments. Original issue discounts on debt securities
purchased are amortized over the expected life of each applicable security.
Premiums on debt securities are not amortized. Market discounts are recognized
at the time of sale as realized gains for book purposes and ordinary income for
tax purposes.
D. Organizational Costs--Emerging Growth, Global Equity and Real Estate have
reimbursed Van Kampen American Capital Distributors, Inc. or its affiliates
(collectively "VKAC") for costs incurred in connection with each Portfolio's
organization in the amount of $6,828 per Portfolio. These costs are being
amortized on a straight line basis over the 60 month period ending July 2,
2000. The Adviser has agreed that in the event any of the initial shares of the
Portfolios originally purchased by VKAC are redeemed during the amortization
period, the Portfolios will be reimbursed for any unamortized organizational
costs in the same proportion as the number of shares redeemed bears to the
number of initial shares held at the time of redemption.
E. Federal Income Taxes--It is each Portfolio's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no provision for federal income taxes is required.
94
<PAGE>
Notes to Financial Statements (Continued)
June 30, 1997 (Unaudited)
================================================================================
Each Portfolio intends to utilize provisions of the federal income tax laws
which allow each Portfolio to carry a realized capital loss forward for eight
years following the year of the loss and offset such losses against any future
realized capital gains. The following table presents the capital loss
carryforward at December 31, 1996 along with its expiration dates. The table
also presents the identified cost of investments, including foreign currencies,
at June 30, 1997 for federal income tax purposes with the associated gross
unrealized appreciation, gross unrealized depreciation and net unrealized
appreciation/depreciation on investments, futures, forward currency contracts,
forward commitments and foreign currency.
<TABLE>
<CAPTION>
Asset Emerging Global
Allocation Domestic Growth Enterprise Equity
=============================================================================================================================
<S> <C> <C> <C> <C> <C>
Realized capital loss carryforward................ -- $ 1,670,821 $ 318,252 -- --
Expiration dates of capital loss carryforward..... -- 1998-2002 2003-2004 -- --
Amount expiring on 12/31/97....................... -- -- -- -- --
Identified cost...................................$55,849,341 $16,804,436 $4,502,474 $65,909,828 $ 3,315,066
Gross unrealized appreciation..................... 6,154,683 616,557 1,405,033 27,187,004 475,580
Gross unrealized depreciation..................... 604,330 139,916 28,833 494,769 32,265
Net unrealized appreciation/depreciation.......... 5,550,353 476,641 1,376,200 26,692,235 443,315
Growth
and Money Real
Government Income Market Estate
=============================================================================================================================
Realized capital loss carryforward................ $13,378,887 $ 81 $ 1,644 --
Expiration dates of capital loss carryforward..... 1997-2004 2004 2003 --
Amount expiring on 12/31/97....................... $ 3,377,875 -- -- --
Identified cost................................... $61,039,920 $3,832,184 $23,357,553 $196,514,499
Gross unrealized appreciation..................... 899,386 368,694 -- 16,974,691
Gross unrealized depreciation..................... 236,743 48,229 -- 1,796,352
Net unrealized appreciation/depreciation.......... 662,643 320,465 -- 15,178,339
</TABLE>
Net realized gains or losses may differ for financial and tax reporting
purposes primarily as a result of post October 31 losses which are not
recognized for tax purposes until the first day of the following fiscal year and
the deferral of losses for tax purposes resulting from wash sales.
F. Distribution of Income and Gains--Government and Money Market declare
dividends from net investment income on each business day. Asset Allocation,
Domestic, Emerging Growth, Enterprise, Global Equity, Growth and Income and Real
Estate declare dividends annually. Government declares distributions from short-
term capital gains, if any, monthly. Asset Allocation, Domestic, Emerging
Growth, Enterprise, Global Equity, Growth and Income, Money Market and Real
Estate distribute net realized gains, if any, annually. Distributions from net
realized gains for book purposes may include short-term capital gains and gains
on option and futures transactions. All short-term capital gains and a portion
of option and futures gains are included in ordinary income for tax purposes.
95
<PAGE>
Notes to Financial Statements (Continued)
June 30, 1997 (Unaudited)
================================================================================
Due to inherent differences in the recognition of income, expenses and
realized gains/losses under generally accepted accounting principles and
federal income tax purposes, permanent differences between book and tax basis
reporting have been identified and appropriately reclassified. For Government,
permanent book and tax basis differences relating to the recognition of net
realized losses on paydowns of mortgage pool obligations totaling $9,829 were
reclassified from accumulated net realized loss to accumulated undistributed net
investment income.
G. Foreign Currency Translation--The market values of foreign securities,
forward currency exchange contracts and other assets and liabilities denominated
in a foreign currency are translated into U.S. dollars based on quoted exchange
rates as of noon Eastern Standard Time. The cost of securities is determined
using historical exchange rates. Income and expenses are translated at
prevailing exchange rates when accrued or incurred. Gains and losses on the sale
of securities are not segregated for financial reporting purposes between
amounts arising from changes in exchange rates and amounts arising from changes
in the market prices of securities. Realized gain and loss on foreign currency
includes the net realized amount from the sale of currency and the amount
realized between trade date and settlement date on security transactions.
H. Private Placements--A Portfolio may own securities purchased in private
placement transactions, which have not been registered under the Securities Act
of 1933. Such securities generally may only be resold in a privately negotiated
transaction with a limited number of purchasers or in a public offering after
they have been registered under the Securities Act of 1933. The issuers of
privately placed debt securities held by a Portfolio generally have agreed to
register the securities within specified time periods or increase the interest
paid on such securities.
2. Investment Advisory Agreement and Other Transactions with Affiliates
Under the terms of the Trust's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Trust for an annual fee payable
monthly based on the combined average daily net assets of Asset Allocation,
Domestic, Enterprise, Government and Money Market as follows:
Average Net Assets % Per Annum
===============================================================================
First $500 million................................................. .50 of 1%
Next $500 million.................................................. .45 of 1%
Over $1 billion.................................................... .40 of 1%
The resulting fee is prorated to Asset Allocation, Domestic, Enterprise,
Government and Money Market based on their respective average daily net assets.
Under the terms of the advisory agreement, if the total ordinary business
expenses, exclusive of taxes, distribution fees and interest, exceed .60% of
average daily net assets, the Adviser will reimburse Asset Allocation, Domestic,
Enterprise, Government, and Money Market for the amount of the excess. The
contractual expense reimbursement shall be made monthly.
For Emerging Growth, the Adviser will provide investment advice and
facilities to the Portfolio for an annual fee payable monthly of .70% of the
average daily net assets of the Portfolio.
For Global Equity, on April 1, 1997, the Adviser entered into a subadvisory
agreement with Morgan Stanley Asset Management Inc. (the "Subadviser") to
provide advisory services to the Portfolio and the Adviser with respect to the
Portfolio's investments. Prior to April 1, 1997, the Fund's Subadviser was John
Govett & Co., Ltd. Advisory fees are calculated monthly, based on the average
daily net assets of Global Equity at the annual rate of 1.00%. The Adviser pays
50% of its advisory fee to the Subadviser.
For Growth and Income, the Adviser will provide investment advice and
facilities to the Portfolio for an annual fee payable monthly, based on the
average daily net assets of the Portfolio, of .60% for the first $500 million
and .55% for the amount in excess of $500 million.
96
<PAGE>
Notes to Financial Statements (Continued)
June 30, 1997 (Unaudited)
================================================================================
For Real Estate, the Adviser will provide investment advice and facilities
to the Portfolio for an annual fee equal to 1.00% of the average net assets of
the Portfolio. This fee is payable monthly.
For the period, the Adviser has volunteered to reimburse all expenses in
excess of .85% for Emerging Growth, 1.20% for Global Equity, .75% for Growth and
Income and 1.10% for Real Estate, of each of the Portfolios' average daily net
assets.
Other transactions with affiliates during the six months ended June 30,
1997 were as follows:
<TABLE>
<CAPTION>
Growth
Asset Emerging Global and Money Real
Allocation Domestic Growth Enterprise Equity Government Income Market Estate
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accounting and
cash mgmt $8,400 $5,100 $4,200 $11,100 $10,800 $7,500 $-0- $5,400 $16,200
Shareholder
servicing
agent's fees 7,500 7,500 7,500 7,500 7,500 7,500 -0- 7,500 7,500
Legal
(Skadden) 5,600 5,700 4,800 9,600 4,000 4,900 1,100 6,200 5,600
</TABLE>
Accounting and cash management services are provided by VKAC at cost.
ACCESS Investor Services, Inc. ("ACCESS"), an affiliate of the Adviser, serves
as the shareholder servicing agent for the Portfolios. ACCESS provides these
services at cost plus a profit. Legal services are provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Portfolios, of which a trustee
of the Portfolios is an affiliated person.
Certain officers and trustees of the Portfolios are also officers and
directors of VKAC. The Portfolios do not compensate their officers or trustees
who are officers of VKAC.
The Portfolios provide deferred compensation and retirement plans for their
trustees who are not officers of VKAC. Under the deferred compensation plan,
trustees may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each trustee's years of service to the Trust. The maximum annual
benefit per trustee under the plan is equal to $2,500.
For the six months ended June 30, 1997, Real Estate paid brokerage
commissions to Morgan Stanley Group Inc. and Dean Witter, both of which are
affiliates of VKAC, totaling $20,148.
At June 30, 1997, VKAC owned 10 shares of Emerging Growth, 95,241 shares of
Global Equity, 50,000 shares of Growth and Income and 10 shares of Real Estate.
3. Capital Transactions
The Portfolios have outstanding shares of beneficial interest with a par value
of $.01 per share. There are an unlimited number of shares authorized.
97
<PAGE>
Notes to Financial Statements (Continued)
June 30, 1997 (Unaudited)
================================================================================
For the six months ended June 30, 1997, share transactions were as follows:
<TABLE>
<CAPTION>
Asset Emerging
Allocation Domestic Growth Enterprise
=================================================================================================
<S> <C> <C> <C> <C> <C>
Beginning Shares....................... 5,633,242 2,472,121 379,065 5,214,950
Sales.................................. 139,786 337,318 238,451 429,796
Dividend Reinvestment.................. 115,819 6,869 -0- 70,473
Repurchases............................ (777,354) (811,076) (214,577) (800,765)
----------- ----------- ----------- ------------
Ending Shares.......................... 5,111,493 2,005,232 402,939 4,914,454
=========== =========== =========== ============
Global Growth and Money Real
Equity Government Income Market Estate
=================================================================================================
Beginning Shares............ 215,901 6,606,459 50,000 19,565,725 11,328,283
Sales....................... 87,395 151,313 301,506 14,734,602 8,754,639
Dividend Reinvestment....... 1,424 201,513 615 515,155 66,758
Repurchases................. (24,096) (805,952) (1,242) (11,719,098) (5,658,131)
---------- ----------- ----------- ----------- ------------
Ending Shares............... 280,624 6,153,333 350,879 23,096,384 14,491,549
========== =========== =========== =========== ============
For the year ended December 31, 1996, share transactions were as follows:
Asset Emerging
Allocation Domestic Growth Enterprise
=================================================================================================
Beginning Shares....................... 5,409,616 3,235,694 195,420 5,173,759
Sales.................................. 387,499 755,420 366,538 489,441
Dividend Reinvestment.................. 821,862 217,401 -0- 611,154
Repurchases............................ (985,735) (1,736,394) (182,893) (1,059,404)
----------- ----------- ----------- ------------
Ending Shares.......................... 5,633,242 2,472,121 379,065 5,214,950
=========== =========== =========== ============
Capital at 12/31/96.................... $57,866,139 $20,772,963 $4,650,241 $64,671,892
=========== =========== =========== ============
Global Growth and Money Real
Equity Government Income Market Estate
=================================================================================================
Beginning Shares............ 230,530 7,399,648 50,000/1/ 21,575,617 799,347
Sales....................... 110,151 184,739 -0- 15,915,843 13,855,117
Dividend Reinvestment....... 3,772 464,018 -0- 1,001,868 197,332
Repurchases................. (128,552) (1,441,946) -0- (18,927,603) (3,523,513)
---------- ----------- ----------- ----------- ------------
Ending Shares............... 215,901 6,606,459 50,000 19,565,725 11,328,283
========== =========== =========== =========== ============
Capital at 12/31/96......... $2,102,301 $70,107,395 $500,000 $19,565,725 $144,550,380
========== =========== =========== =========== ============
</TABLE>
/1/ Portfolio commenced investment operations during the period.
98
<PAGE>
Notes to Financial Statements (Continued)
June 30, 1997 (Unaudited)
================================================================================
4. Investment Transactions
During the period, the cost of purchases and proceeds from sales of investments,
including principal paydowns and excluding forward commitment transactions and
short-term investments, were:
<TABLE>
<CAPTION>
Growth
Asset Emerging Global and Real
Allocation Domestic Growth Enterprise Equity Government Income Estate
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Purchases $18,924,873 $ 7,536,263 $ 3,907,391 $34,234,946 $3,129,942 $24,395,298 $3,559,033 $260,093,043
Sales 23,011,585 10,284,860 3,803,893 38,784,550 2,806,645 30,435,996 573,600 211,900,743
</TABLE>
5. Derivative Financial Instruments
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Portfolios have a variety of reasons to use derivative instruments,
such as to attempt to protect the Portfolios against possible changes in the
market value of its portfolio, manage the Portfolio's effective yield, foreign
currency exposure, maturity and duration or generate potential gain. All of the
Portfolios' holdings, including derivative instruments, are marked to market
each day with the change in value reflected in unrealized appreciation/
depreciation. Upon disposition, a realized gain or loss is recognized
accordingly, except when taking delivery of a security underlying a futures or
forward contract. In these instances, the recognition of gain or loss is
postponed until the disposal of the security underlying the futures or forward
contract.
Summarized below are the specific types of derivative financial
instruments used by the Portfolios.
A. Futures Contracts--A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Portfolios generally invest in futures on U.S. Treasury Bonds and Notes. Upon
entering into futures contracts, the Portfolios maintain, in a segregated
account with its custodian, securities with a value equal to its obligation
under the futures contracts. During the period the futures contract is open,
payments are received from or made to the broker based upon changes in the value
of the contract (the variation margin).
Transactions in futures contracts for the six months ended June 30, 1997,
for Government, were as follows:
<TABLE>
<CAPTION>
Contracts
===============================================================================
<S> <C>
Outstanding at December 31, 1996...................................... 110
Futures Opened........................................................ 626
Futures Closed........................................................ (681)
----
Outstanding at June 30, 1997.......................................... 55
====
</TABLE>
99
<PAGE>
Notes to Financial Statements (Continued)
June 30, 1997 (Unaudited)
================================================================================
The futures contracts outstanding at June 30, 1997, and the descriptions
and unrealized appreciation/depreciation for Government are as follows:
Unrealized
Appreciation/
Contracts Depreciation
================================================================================
Long Contracts
U.S. Treasury Bonds - Sep 1997 (Current notional
value of $111,063 per contract) 45 $ 109,122
Short Contracts
5-year U.S. Treasury Notes - Sep 1997
(Current notional value of $105,891 per contract) 3 (132)
10-year U.S. Treasury Notes - Sep 1997
(Current notional value of $107,875 per contract) 7 (338)
-- ---------
55 $ 108,652
== =========
B. Forward Currency Contracts--A forward currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. Upon the settlement of the contract, a realized gain or loss is recognized
and is included as a component of realized gain/loss on forwards.
The following forward currency contracts were outstanding in Global Equity
as of June 30, 1997:
Unrealized
Current Appreciation/
Description Value Depreciation
================================================================================
Long Contracts
French Franc, 127,358 expiring 09/15/97 $21,781 $ (219)
Netherlands Guilder, 27,625 expiring 08/18/97 14,122 (178)
------- --------
$35,903 (397)
======= --------
Short Contracts
French Franc, 289,385 expiring 09/15/97 $49,492 1,575
Netherlands Guilder, 65,732 expiring 08/18/97 33,603 1,035
Spanish Peseta, 2,094,768 expiring 09/26/97 14,230 170
------- -----
$97,325 2,780
======= --------
$ 2,383
========
At June 30, 1997, Global Equity had net realized losses on closed but
unsettled forward currency contracts of $876.
100
<PAGE>
Notes to Financial Statements (Continued)
June 30, 1997 (Unaudited)
================================================================================
6. Forward Commitments
Government trades certain securities under the terms of forward commitments, as
described in Note 1. The change in value of these items is reflected as a
component of unrealized appreciation/depreciation on forward commitments.
The following forward commitments were outstanding in Government as of June 30,
1997:
<TABLE>
<CAPTION>
Par Amount Current Unrealized
(000) Description Expiration Value Appreciation
==================================================================================================
<S> <C> <C> <C> <C>
Short Contracts
$1,000 FNMA, 9.000%, 12/31/23 maturity.... 07/14/97 $1,053,440 $ 310
1,000 GNMA, 8.500%, 12/31/23 maturity.... 07/21/97 1,039,380 2,026
------
$2,336
======
</TABLE>
101
<PAGE>
Results of Shareholder Votes
A Special Meeting of Shareholders of the Trust was held on May 28, 1997 where
shareholders voted on the following proposals:
<TABLE>
<CAPTION>
Growth
Asset Emerging Global and Money Real
# of Shares Allocation Domestic Growth Enterprise Equity Government Income Market Estate
============================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1) With Respect to the approval of a new investment advisory agreement between Van Kampen American Capital Asset Management,
Inc. and the Trust:
In Favor.......... 4,791,660 1,977,222 294,334 4,700,829 225,951 5,840,350 156,976 21,956,258 12,141,773
Against........... 70,371 2,654 29,104 52,877 90 54,815 0 428,768 230,547
Abstaining........ 462,266 36,833 45,437 276,513 9,398 359,379 0 1,339,808 813,189
2) With respect to the ratification of the selection of Price Waterhouse LLP as independent accountants for the current
fiscal year:
In Favor.......... 4,835,594 1,971,887 286,532 4,713,366 196,218 5,822,529 156,976 22,465,075 12,369,793
Against........... 23,755 853 36,906 18,292 0 29,091 0 77,503 94,153
Abstaining........ 464,948 43,969 45,437 298,562 39,221 402,924 0 1,182,256 721,253
3) With respect to the election of the following trustees:
J. Miles Branagan
In Favor.......... 4,942,558 1,987,354 279,892 4,937,295 227,347 5,981,967 156,976 23,248,646 12,741,990
Withheld.......... 381,739 29,356 88,984 92,925 8,092 272,576 0 476,189 443,519
Richard M. DeMartini
In Favor.......... 4,947,104 1,985,953 279,892 4,936,625 227,347 5,991,400 156,976 23,248,646 12,748,139
Withheld.......... 377,193 30,757 88,984 93,594 8,092 236,143 0 476,189 437,370
Linda Hutton Heagy
In Favor.......... 4,947,104 1,987,354 279,892 4,911,968 227,347 5,982,570 156,976 23,203,618 12,749,723
Withheld.......... 377,193 29,356 88,984 118,251 8,092 271,974 0 521,216 435,786
R. Craig Kennedy
In Favor.......... 4,947,104 1,977,463 279,892 4,935,274 227,347 5,992,486 156,976 23,248,646 12,753,159
Withheld.......... 377,193 39,246 88,984 94,945 8,092 262,058 0 476,189 432,350
Jack E. Nelson
In Favor.......... 4,947,104 1,987,354 279,892 4,937,295 227,347 5,981,967 156,976 23,248,646 12,755,166
Withheld.......... 377,193 29,356 88,984 92,925 8,092 272,576 0 476,189 430,342
Jerome L. Robinson
In Favor.......... 4,942,558 1,987,354 279,892 4,928,383 227,347 5,980,981 156,976 23,248,646 12,725,754
Withheld.......... 381,739 29,356 88,984 101,837 8,092 273,562 0 476,189 459,754
Phillip B. Rooney
In Favor.......... 4,947,104 1,987,354 279,892 4,938,105 227,347 5,992,486 156,976 23,248,646 12,754,915
Withheld.......... 377,193 29,356 88,984 92,115 8,092 262,058 0 476,189 430,593
Fernando Sisto
In Favor.......... 4,942,558 1,987,354 279,892 4,927,439 227,347 5,980,981 156,976 23,248,646 12,735,417
Withheld.......... 381,739 29,356 88,984 102,780 8,092 273,562 0 476,189 450,092
Wayne W. Whalen
In Favor.......... 4,947,104 1,987,354 279,892 4,928,031 227,347 5,982,570 156,976 23,248,646 12,753,275
Withheld.......... 377,193 29,356 88,984 102,189 8,092 271,974 0 476,189 432,233
</TABLE>
102
<PAGE>
Van Kampen American Capital Life Investment Trust
Board of Trustees
J. Miles Branagan
Richard M. DeMartini*
Linda Hutton Heagy
R. Craig Kennedy
Jack E. Nelson
Jerome L. Robinson
Phillip B. Rooney
Fernando Sisto
Wayne W. Whalen*-Chairman
Officers
Dennis J. McDonnell*
President
Ronald A. Nyberg*
Vice President and Secretary
Edward C. Wood, III*
Vice President and Chief Financial Officer
Curtis W. Morell*
Vice President and Chief Accounting Officer
John L. Sullivan*
Treasurer
Tanya M. Loden*
Controller
Peter W. Hegel*
Alan T. Sachtleben*
Paul R. Wolkenberg*
Vice Presidents
Investment Adviser
Van Kampen American Capital
Asset Management, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Investment Subadviser
(Global Equity Portfolio)
Morgan Stanley Asset
Management Inc.
1585 Broadway
New York, NY 10036
Distributor
Van Kampen American Capital Distributors, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Shareholder Servicing Agent
ACCESS Investor Services, Inc.
P.O. Box 418256
Kansas City, Missouri 64141-9256
Custodian
State Street Bank and Trust Company
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02105
Legal Counsel
Skadden, Arps, Slate, Meagher & Flom (Illinois)
333 West Wacker Drive
Chicago, Illinois 60606
Independent Accountants
Price Waterhouse LLP
1201 Louisiana
Houston, Texas 77002
* "Interested" persons of the Portfolio, as defined in the Investment
Company Act of 1940.
/C/ Van Kampen American Capital Distributors, Inc., 1997 All rights reserved.
/SM/ denotes a service mark of Van Kampen American Capital Distributors, Inc.
This report is submitted for the general information of the shareholders of the
Trust. It is not authorized for distribution to prospective investors unless it
has been preceded or is accompanied by an effective prospectus of the Trust
which contains additional information on how to purchase shares and other
pertinent data.
103
<PAGE>
Van Kampen American Capital Life Investment Trust
This Page Intentionally Left Blank
104
<PAGE>
Van Kampen American Capital Distributors, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Bulk Rate
U.S. Postage
PAID
VAN KAMPEN
AMERICAN CAPITAL
