<PAGE>
V A N K A M P E N A M E R I C A N C A P I T A L
LIFE INVESTMENT TRUST
ANNUAL REPORT
DECEMBER 31, 1997
[PHOTO APPEARS HERE]
___________ A Wealth of Knowledge . A Knowledge of Wealth/TM/___________
VAN KAMPEN AMERICAN CAPITAL
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Policyholders................................ 1
Performance Results.................................... 3
Performance in Perspective............................. 5
Portfolio Management Review............................ 9
Asset Allocation Portfolio
Portfolio of Investments.............................. 30
Statement of Assets and Liabilities................... 36
Statement of Operations............................... 37
Statement of Changes in Net Assets.................... 38
Financial Highlights.................................. 39
Domestic Income Portfolio
Portfolio of Investments.............................. 40
Statement of Assets and Liabilities................... 42
Statement of Operations............................... 43
Statement of Changes in Net Assets.................... 44
Financial Highlights.................................. 45
Emerging Growth Portfolio
Portfolio of Investments.............................. 46
Statement of Assets and Liabilities................... 53
Statement of Operations............................... 54
Statement of Changes in Net Assets.................... 55
Financial Highlights.................................. 56
Enterprise Portfolio
Portfolio of Investments.............................. 57
Statement of Assets and Liabilities................... 61
Statement of Operations............................... 62
Statement of Changes in Net Assets.................... 63
Financial Highlights.................................. 64
Global Equity Portfolio
Portfolio of Investments.............................. 65
Statement of Assets and Liabilities................... 71
Statement of Operations............................... 72
Statement of Changes in Net Assets.................... 73
Financial Highlights.................................. 74
Government Portfolio
Portfolio of Investments.............................. 75
Statement of Assets and Liabilities................... 77
Statement of Operations............................... 78
Statement of Changes in Net Assets.................... 79
Financial Highlights.................................. 80
Growth and Income Portfolio
Portfolio of Investments.............................. 81
Statement of Assets and Liabilities................... 85
Statement of Operations............................... 86
Statement of Changes in Net Assets.................... 87
Financial Highlights.................................. 88
Money Market Portfolio
Portfolio of Investments.............................. 89
Statement of Assets and Liabilities................... 90
Statement of Operations............................... 91
Statement of Changes in Net Assets.................... 92
Financial Highlights.................................. 93
Morgan Stanley Real Estate Securities Portfolio
Portfolio of Investments.............................. 94
Statement of Assets and Liabilities................... 97
Statement of Operations............................... 98
Statement of Changes in Net Assets.................... 99
Financial Highlights.................................. 100
Strategic Stock Portfolio
Portfolio of Investments.............................. 101
Statement of Assets and Liabilities................... 103
Statement of Operations............................... 104
Statement of Changes in Net Assets.................... 105
Financial Highlights.................................. 106
Notes to Financial Statements.......................... 107
Report of Independent Accountants...................... 117
</TABLE>
<PAGE>
LETTER TO POLICYHOLDERS
February 3, 1998
Dear Policyholder,
The new year ushers in what promises to be an exciting and challenging time
for investors. The Taxpayer Relief Act of 1997 signed into law by President
Clinton in August creates many new opportunities for you and your family to take
a more active role in achieving your long-term financial goals.
Most Americans will benefit from the bill's $95 billion in tax cuts over
five years. The so-called "Kiddie Credit" gives parents $400 in immediate tax
relief for every child under age 17, and families will find it easier to save
for their children's college expenses with the new Education IRA. The bill also
cuts capital gains tax rates for the first time in over a decade and loosens
restrictions on tax-deductible IRA contributions. Perhaps the most exciting
feature of all is the new Roth IRA, which allows investment earnings to grow
tax-free, not just tax-deferred.
This year more than ever, it might be important for you to talk with your
financial adviser about how to make the tax code work to your advantage. At Van
Kampen American Capital, we have prepared a variety of publications to help you
understand your choices under the new tax legislation. And with the help of your
adviser, we'll help you locate the many benefits hidden among the changing tax
landscape.
ECONOMIC OVERVIEW
These continue to be the best of times for the U.S. economy. Growth is
strong, consumers are optimistic, unemployment is low, the budget is heading for
a surplus, and our nation's currency is rising against currencies around the
world .
Despite the strength in the economy, there is no indication of troublesome
inflation. In fact, the producer price index fell by 1.2 percent during the
year, the largest annual decline in wholesale prices since 1986. Inflation at
the consumer level was also virtually nonexistent, with the consumer price index
rising by only 1.7 percent during 1997. A strong dollar and significant
productivity gains helped offset inflationary pressures caused by rising wages.
After increasing short-term interest rates by 0.25 percent in March, the
Federal Reserve Board left monetary policy unchanged for the remainder of the
year. In addition to signs that the economy was slowing modestly from its
breakneck pace of early 1997, Fed policy-makers were concerned about the impact
that higher U.S. interest rates might have on the struggling economies of
Southeast Asia. Generally, higher U.S. interest rates cause the dollar to rise
relative to other currencies. With nearly all Asian currencies already down
significantly, a hike in U.S. rates would force monetary authorities in Asia to
choose between letting their currencies decline further or matching the rate
increase, thereby slowing their already-sluggish economies.
MARKET OVERVIEW
Bolstered by solid economic growth and low inflation, stock prices
continued their advance during the reporting period. With its 22.64 percent
advance in 1997, the Dow Jones Industrial Average completed its third
consecutive year of 20 percent-plus gains for the first time in the history of
the index. However, volatility also increased as U.S. stocks rose.
Stronger-than-expected economic growth and a subsequent hike in short-term
interest rates caused stock prices to fall by
[PHOTO OF DENNIS J. MCDONNELL AND DON G. POWELL APPEARS HERE]
1 Continued on page two
<PAGE>
10 percent in the spring. Later in the year, investors were unnerved by the
spreading economic crisis in Asia. Between early August and late October, the
DJIA fell by 16 percent before rebounding sharply to close the reporting period
near record highs.
Within the equity market, large stocks continued to outperform their small-
cap cousins. For the year, the Russell 1000 Index of large-cap companies
returned 30.49 percent, compared to 20.52 percent for the Russell 2000 Index of
small stocks. A wave of consolidations helped make financial services the top-
performing industry group. The Dow Jones Financial Index soared 48.44 percent
during 1997.
Fixed-income investments enjoyed solid gains, supported by low inflation
and steady Federal Reserve policy. The yield on the Treasury's benchmark 30-year
bond began the year at 6.64 percent and climbed to 7.17 percent in April amid
fears that strong economic growth would reignite inflation. As subsequent data
showed the economy to be slowing, Treasury bond yields drifted lower, reaching
the lowest level in more than four years by the end of the year. Bond prices,
which move in the opposite direction of bond yields, rose significantly.
OUTLOOK
We expect that the recent upheavals in Southeast Asia will have a mixed
impact on the U.S. economy and financial markets. Overall, we believe that lower
currency values in Asia will likely result in less inflation in the U.S. and a
greater likelihood of stable or falling interest rates. Such a scenario usually
benefits stock prices, and we believe that a portfolio of high-quality domestic
stocks should continue to perform well. We also anticipate that stock selection
will play a larger role in generating investment performance due to the uneven
impact of the Asian crisis on individual companies.
Over the longer term, however, the difficulties in Asia have done nothing
to shake our belief that the American economy remains on fundamentally solid
ground. And in recent years, each significant decline in long-term interest
rates has ignited economic growth by making housing, autos, and other big-ticket
consumer goods more affordable. Falling budget deficits, solid growth, low
inflation, and stable interest rates should continue to foster a favorable
environment for saving and investing.
As we noted earlier, the Taxpayer Relief Act of 1997 provides attractive
new vehicles through which investors can save for a variety of goals, including
higher education and retirement. We encourage you to work with your financial
adviser to consider how the tax changes can work to your benefit.
Additional details about your Portfolios, including question-and-answer
sections with your portfolio management teams, are provided in this report. As
always, we are pleased to have the opportunity to serve you and your family
through our diverse menu of quality investments.
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 Management, Inc.
2
<PAGE>
PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1997
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
ASSET ALLOCATION PORTFOLIO
TOTAL RETURNS
One-year total return based on NAV/1/................................ 21.81%
Five-year average annual total return based on NAV/1/................ 13.59%
Ten-year average annual total return based on NAV/1/................. 12.78%
Life-of-Portfolio average annual total return based on NAV/1/........ 11.84%
Commencement date.................................................... 06/30/87
DOMESTIC INCOME PORTFOLIO
TOTAL RETURNS
One-year total return based on NAV/1/................................ 11.90%
Five-year average annual total return based on NAV/1/................ 10.02%
Ten-year average annual total return based on NAV/1/................. 8.29%
Life-of-Portfolio average annual total return based on NAV/1/........ 8.31%
Commencement date.................................................... 11/04/87
DISTRIBUTION RATE AND YIELD
Distribution rate/2/................................................. 8.64%
SEC Yield/3/......................................................... 7.18%
EMERGING GROWTH PORTFOLIO
TOTAL RETURNS
One-year total return based on NAV/1/................................ 20.42%
Life-of-Portfolio average annual total return based on NAV/1/........ 22.03%
Commencement date.................................................... 07/03/95
ENTERPRISE PORTFOLIO
TOTAL RETURNS
One-year total return based on NAV/1/................................ 30.66%
Five-year average annual total return based on NAV/1/................ 18.65%
Ten-year average annual total return based on NAV/1/................. 17.23%
Life-of-Portfolio average annual total return based on NAV/1/........ 12.69%
Commencement date.................................................... 04/07/86
GLOBAL EQUITY PORTFOLIO
TOTAL RETURNS
One-year total return based on NAV/1/................................ 15.85%
Life-of-Portfolio average annual total return based on NAV/1/........ 14.21%
Commencement date.................................................... 07/03/95
3
<PAGE>
PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
GOVERNMENT PORTFOLIO
TOTAL RETURNS
One-year total return based on NAV/1/................................ 9.61%
Five-year average annual total return based on NAV/1/................ 6.17%
Ten-year average annual total return based on NAV/1/................. 8.17%
Life-of-Portfolio average annual total return based on NAV/1/........ 7.10%
Commencement date.................................................... 04/07/86
DISTRIBUTION RATE AND YIELD
Distribution rate/2/................................................. 6.05%
SEC Yield/3/......................................................... 6.12%
GROWTH AND INCOME PORTFOLIO
TOTAL RETURNS
One-year total return based on NAV/1/................................ 23.90%
Life-of-Portfolio cumulative total return based on NAV/1/............ 23.02%
Commencement date.................................................... 12/23/96
MORGAN STANLEY REAL ESTATE SECURITIES PORTFOLIO
TOTAL RETURNS
One-year total return based on NAV/1/................................ 21.47%
Life-of-Portfolio average annual total return based on NAV/1/........ 27.89%
Commencement date.................................................... 07/03/95
STRATEGIC STOCK PORTFOLIO
TOTAL RETURNS
Life-of-Portfolio cumulative total return based on NAV/1/............ 2.45%
Commencement date.................................................... 11/03/97
/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 December 31,
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. This performance was
achieved during generally rising stock prices. Portfolio shares, when
redeemed, may be worth more or less than their original cost.
4
<PAGE>
PUTTING YOUR PORTFOLIO'S PERFORMANCE IN PERSPECTIVE
Each of the following charts shows the total return performance of a
different Life Investment Trust Portfolio compared to a benchmark index,
excluding the Life Investment Trust--Strategic Stock Portfolio. Due to the short
period of time since LIT--Strategic Stock Portfolio's inception (November 3,
1997) and the length of time required to become adequately invested, a
comparison to a benchmark index is not appropriate at this time. It is important
to track your investment portfolio's performance at regular intervals. The
indexes do not reflect any commissions or fees that would be paid by an investor
purchasing the securities they represent. Similarly, their performances do not
reflect any sales charges or other costs which would be applicable to an
actively managed portfolio, such as that of the Portfolio. For details on market
conditions and each Portfolio's performance during the reporting period, please
see pages nine through twenty-nine of this report.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen American Capital Life Investment Trust--Asset Allocation
Portfolio vs. Standard & Poor's 500-Stock Index (December 31, 1987 through
December 31, 1997)
Portfolio's Total Return
1 Year Avg. Annual = 21.81%
5 Year Avg. Annual = 13.59%
10 Year Avg. Annual = 12.78%
Inception Avg. Annual = 11.84%
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
LABEL A B
LABEL VKAC LIT ASSET ALLOCATION STANDARD & POOR'S 500 STOCK INDEX
<S> <C> <C>
1 Dec 1987 $10,000 $10,000
2 $10,366 $10,404
3 $10,586 $10,839
4 $10,356 $10,569
5 $10,282 $10,669
6 $10,209 $10,703
7 $10,533 $11,269
8 $10,387 $11,208
9 $10,241 $10,776
10 $10,578 $11,305
11 $10,840 $11,599
12 $10,683 $11,379
13 Dec 1988 $10,761 $11,650
14 $11,173 $12,478
15 $11,084 $12,117
16 $11,151 $12,474
17 $11,521 $13,099
18 $11,722 $13,559
19 $11,889 $13,573
20 $12,379 $14,772
21 $12,390 $15,001
22 $12,379 $15,024
23 $12,368 $14,646
24 $12,557 $14,888
25 Dec 1989 $12,679 $15,330
26 $12,149 $14,275
27 $12,279 $14,397
28 $12,444 $14,866
29 $12,102 $14,466
30 $12,950 $15,797
31 $12,962 $15,797
32 $13,103 $15,715
33 $12,314 $14,232
34 $11,996 $13,636
35 $11,972 $13,545
36 $12,538 $14,357
37 Dec 1990 $12,919 $14,852
38 $13,117 $15,469
39 $13,724 $16,510
40 $14,021 $17,002
41 $13,971 $17,008
42 $14,443 $17,664
43 $13,971 $16,965
44 $14,430 $17,726
45 $14,852 $18,074
46 $14,926 $17,871
47 $15,174 $18,083
48 $14,839 $17,289
49 Dec 1991 $16,413 $19,358
50 $16,101 $18,973
51 $16,345 $19,154
52 $15,951 $18,871
53 $15,927 $19,397
54 $16,172 $19,416
55 $15,941 $19,230
56 $16,526 $19,988
57 $16,268 $19,508
58 $16,621 $19,836
59 $16,825 $19,878
60 $17,356 $20,480
61 Dec 1992 $17,609 $20,831
62 $17,801 $20,977
63 $17,964 $21,197
64 $18,303 $21,738
65 $17,831 $21,185
66 $18,263 $21,666
67 $18,367 $21,841
68 $18,367 $21,724
69 $18,902 $22,472
70 $19,081 $22,403
71 $19,006 $22,837
72 $18,426 $22,542
73 Dec 1993 $18,966 $22,921
74 $19,576 $23,666
75 $19,046 $22,955
76 $18,258 $22,059
77 $18,403 $22,313
78 $18,275 $22,590
79 $17,969 $22,153
80 $18,436 $22,851
81 $18,806 $23,710
82 $18,259 $23,236
83 $18,307 $23,721
84 $18,017 $22,784
85 Dec 1994 $18,272 $23,232
86 $18,784 $23,796
87 $19,406 $24,654
88 $19,808 $25,487
89 $20,197 $26,200
90 $21,113 $27,151
91 $21,479 $27,912
92 $22,028 $28,799
93 $22,212 $28,790
94 $22,816 $30,123
95 $22,669 $29,973
96 $23,530 $31,204
97 Dec 1995 $24,002 $31,931
98 $24,600 $32,973
99 $24,435 $33,201
100 $24,723 $33,643
101 $24,987 $34,095
102 $25,050 $34,874
103 $25,219 $35,149
104 $24,630 $33,541
105 $24,924 $34,172
106 $25,681 $36,228
107 $26,165 $37,174
108 $27,469 $39,902
109 Dec 1996 $27,331 $39,243
110 $27,717 $41,650
111 $27,813 $41,896
112 $27,109 $40,302
113 $27,650 $42,656
114 $28,856 $45,155
115 $29,520 $47,323
116 $31,316 $51,020
117 $30,848 $48,089
118 $32,201 $50,862
119 $31,808 $49,109
120 $32,546 $51,298
121 Dec 1997 $33,293 $52,317
</TABLE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen American Capital Life Investment Trust--Domestic Income
Portfolio vs. Lehman Brothers Corporate Bond Index (December 31, 1987
through December 31, 1997)
Portfolio's Total Return
1 Year Avg. Annual = 11.90%
5 Year Avg. Annual = 10.02%
10 Year Avg. Annual = 8.29%
Inception Avg. Annual = 8.31%
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
LABEL A B
LABEL VKAC LIT Domestic Income Lehman Brothers Corporate Bond Index
<S> <C> <C>
1 Dec 1987 $10,000 $10,000
2 $10,325 $10,392
3 $10,493 $10,534
4 $10,512 $10,443
5 $10,542 $10,369
6 $10,542 $10,313
7 $10,946 $10,560
8 $11,034 $10,536
9 $11,064 $10,581
10 $11,212 $10,809
11 $11,369 $10,998
12 $11,340 $10,893
13 12/31/88 $11,497 $10,922
14 $11,749 $11,084
15 $11,822 $11,022
16 $11,738 $11,055
17 $11,701 $11,279
18 $11,933 $11,587
19 $12,290 $11,930
20 $12,290 $12,162
21 $12,248 $12,030
22 $11,859 $12,086
23 $11,228 $12,364
24 $11,018 $12,449
25 12/31/89 $10,871 $12,463
26 $10,406 $12,307
27 $10,117 $12,343
28 $10,268 $12,354
29 $10,347 $12,225
30 $10,536 $12,620
31 $10,763 $12,836
32 $10,901 $12,981
33 $10,548 $12,775
34 $10,120 $12,833
35 $ 9,969 $12,891
36 $10,044 $13,157
37 12/31/90 $10,085 $13,342
38 $10,216 $13,512
39 $10,505 $13,743
40 $10,650 $13,912
41 $10,780 $14,093
42 $10,896 $14,190
43 $10,968 $14,188
44 $11,113 $14,393
45 $11,418 $14,718
46 $11,571 $15,021
47 $11,801 $15,164
48 $11,909 $15,312
49 12/31/91 $12,226 $15,813
50 $12,337 $15,616
51 $12,526 $15,765
52 $12,700 $15,698
53 $12,645 $15,776
54 $12,945 $16,128
55 $13,040 $16,380
56 $13,340 $16,817
57 $13,498 $16,948
58 $13,640 $17,153
59 $13,372 $16,848
60 $13,498 $16,875
61 12/31/92 $13,754 $17,187
62 $14,081 $17,587
63 $14,424 $17,992
64 $14,614 $18,055
65 $14,726 $18,194
66 $14,863 $18,216
67 $15,311 $18,658
68 $15,449 $18,793
69 $15,845 $19,261
70 $15,862 $19,307
71 $16,052 $19,404
72 $15,897 $19,165
73 12/31/93 $15,999 $19,278
74 $16,353 $19,652
75 $16,055 $19,188
76 $15,551 $18,599
77 $15,304 $18,420
78 $15,229 $18,352
79 $15,229 $18,306
80 $15,472 $18,770
81 $15,528 $18,790
82 $15,323 $18,441
83 $15,211 $18,398
84 $15,173 $18,369
85 12/31/94 $15,306 $18,521
86 $15,555 $18,914
87 $16,014 $19,459
88 $16,222 $19,618
89 $16,550 $19,950
90 $17,300 $20,890
91 $17,384 $21,078
92 $17,384 $20,985
93 $17,655 $21,323
94 $17,863 $21,574
95 $18,072 $21,855
96 $18,343 $22,272
97 12/31/95 $18,576 $22,640
98 $18,779 $22,787
99 $18,440 $22,245
100 $18,282 $22,055
101 $18,174 $21,872
102 $18,219 $21,833
103 $18,446 $22,154
104 $18,536 $22,196
105 $18,536 $22,127
106 $18,944 $22,596
107 $19,443 $21,213
108 $19,851 $23,710
109 12/31/96 $19,816 $23,383
110 $19,940 $23,416
111 $20,113 $23,514
112 $19,803 $23,147
113 $20,101 $23,499
114 $20,349 $23,764
115 $20,722 $24,102
116 $21,590 $24,984
117 $21,218 $24,614
118 $21,640 $25,045
119 $21,789 $25,363
120 $22,012 $25,505
121 12/31/97 $22,175 $25,776
</TABLE>
The above chart reflects the performance of the Portfolios. The Portfolio's
performance assumes reinvestment of all distributions and is shown at
net asset value.
While past performance is not indicative of future performance, the above
information provides a broader vantage point from which to evaluate the
discussion of the Portfolio's performance found in the following pages.
<PAGE>
PUTTING YOUR PORTFOLIO'S PERFORMANCE IN PERSPECTIVE
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen American Capital Life Investment Trust--Emerging Growth
Portfolio vs. Russell 2000 Stock Index (July 3, 1995 through December 31,
1997)
Portfolio's Total Return
1 Year Avg. Annual = 20.42%
Inception Avg. Annual = 22.03%
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
LABEL A B
LABEL VKAC LIT-Emerging Growth Russell 2000 STOCK INDEX
<S> <C> <C>
July 1995 $10,000 $10,000
$10,860 $10,576
$11,000 $10,795
$11,270 $10,988
$11,110 $10,496
$11,460 $10,937
Dec 1995 $11,710 $11,226
$11,550 $11,214
$12,140 $11,563
$12,540 $11,799
$13,500 $12,429
$14,040 $12,919
June 1996 $13,690 $12,389
$12,350 $11,307
$13,000 $11,963
$14,180 $12,431
$13,700 $12,239
$13,950 $12,743
Dec 1996 $13,660 $13,077
$14,480 $13,339
$13,250 $13,015
$12,550 $12,401
$13,040 $12,436
$14,250 $13,819
June 1997 $14,850 $14,411
$16,360 $15,082
$16,160 $15,427
$17,450 $16,556
$16,330 $15,829
$16,110 $15,727
Dec 1997 $16,450 $16,002
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
VAN Kampen American Capital Life Investment Trust-Enterprise Portfolio vs.
the Standard & Poor's 500-Stock Index (December 31, 1987 through December
31, 1997)
[GRAPH APPEARS HERE]
Portfolio's Total Return
1 Year Avg. Annual = 30.66%
5 Year Avg. Annual = 18.65%
10 Year Avg. Annual = 17.23%
Inception Avg. Annual = 12.69%
VKAC LIT Enterprise Standard & Poor's 500-Stock Index
12/31/87 $10,000 $10,000
$10,326 $10,404
$10,678 $10,839
$10,301 $10,569
$10,577 $10,669
$10,514 $10,703
$10,853 $11,269
$10,828 $11,208
$10,540 $10,776
$10,929 $11,305
$11,245 $11,599
$11,081 $11,379
12/31/88 $11,369 $11,650
$12,166 $12,478
$12,088 $12,117
$12,506 $12,474
$13,133 $13,099
$13,682 $13,559
$13,512 $13,573
$14,649 $14,772
$14,780 $15,001
$14,806 $15,024
$14,309 $14,646
$14,793 $14,888
12/31/89 $15,261 $15,330
$14,059 $14,275
$14,423 $14,397
$14,734 $14,866
$14,293 $14,466
$15,650 $15,797
$15,610 $15,797
$15,230 $15,715
$13,764 $14,232
$13,031 $13,636
$12,909 $13,545
$13,764 $14,357
12/31/90 $14,217 $14,852
$14,753 $15,469
$15,697 $16,510
$16,162 $17,002
$16,106 $17,008
$16,968 $17,664
$16,077 $16,965
$16,841 $17,726
$17,407 $18,074
$17,259 $17,871
$17,705 $18,083
$17,130 $17,289
12/31/91 $19,393 $19,358
$19,076 $18,973
$19,379 $19,154
$18,859 $18,871
$18,885 $19,397
$19,058 $19,416
$18,581 $19,230
$19,289 $19,988
$18,913 $19,508
$19,390 $19,836
$19,809 $19,878
$20,590 $20,480
12/31/92 $20,843 $20,831
$20,990 $20,977
$21,122 $21,197
$21,606 $21,738
$20,938 $21,185
$21,481 $21,666
$21,408 $21,841
$21,349 $21,724
$21,981 $22,472
$22,421 $22,403
$22,289 $22,837
$21,702 $22,542
12/31/93 $22,715 $22,921
$23,479 $23,666
$23,198 $22,955
$22,014 $22,059
$22,325 $22,313
$22,294 $22,590
$21,714 $22,153
$22,356 $22,851
$23,140 $23,710
$22,356 $23,236
$22,607 $23,721
$21,729 $22,784
12/31/94 $21,946 $23,232
$22,672 $23,796
$23,593 $24,654
$24,284 $25,487
$24,875 $26,200
$25,861 $27,151
$26,398 $27,912
$27,491 $28,799
$27,599 $28,790
$28,585 $30,123
$28,029 $29,973
$29,445 $31,204
12/31/95 $30,062 $31,931
$31,208 $32,973
$32,252 $33,201
$32,518 $33,643
$33,703 $34,095
$34,803 $34,874
$33,936 $35,149
$31,946 $33,541
$33,152 $34,172
$35,756 $36,227
$36,243 $37,174
$38,593 $39,902
12/31/96 $37,515 $39,243
$40,284 $41,650
$40,030 $41,896
$37,629 $40,302
$39,453 $42,656
$42,283 $45,155
$44,013 $47,323
$48,270 $51,020
$47,054 $48,089
$50,094 $50,862
$47,732 $49,109
$48,667 $51,298
12/31/97 $49,016 $52,317
</TABLE>
The above charts reflect the performance of the Portfolios. The Portfolio's
performance assumes reinvestment of all distributions and is shown at
net asset value.
While past performance is not indicative of future performance, the above
information provides a broader vantage point from which to evaluate the
discussion of the Portfolio's performance found in the following pages.
6
<PAGE>
PUTTING YOUR PORTFOLIO'S PERFORMANCE IN PERSPECTIVE
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen American Capital Life Investment Trust--Global Equity Portfolio
vs. Morgan Stanley Capital International (MSCI) World Index + Dividends
(July 3, 1995 through December 31, 1997)
Portfolio's Total Return
1 Year Avg. Annual = 15.85%
Inception Avg. Annual = 14.21%
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
VKAC Global Equity MSCI World Index & Dividends
<S> <C> <C>
Jul 3, 95 10000 10000
10230 10502
10140 10270
Sep 30, 95 10280 10571
9950 10407
10160 10770
Dec 31, 95 10310 11087
10470 11290
10720 11360
Mar 31, 96 10930 11552
11420 11825
11560 11838
Jun 30, 96 11520 11900
11030 11481
11350 11615
Sep 30, 96 11610 12072
11590 12159
12060 12842
Dec 31, 96 12034 12639
12488 12793
12674 12943
Mar 31, 97 12501 12689
12741 13106
13492 13917
Jun 30, 97 14129 14614
14724 15289
13555 14268
Sep 30, 97 14244 15046
13419 14256
13691 14511
Dec 31, 97 13941 14690
</TABLE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen American Capital Life Investment Trust--Government Portfolio vs.
Lehman Brothers Mutual Fund Government/Mortgage Index (December 31, 1987
through December 31, 1997)
Portfolio's Total Return
1 Year Avg. Annual = 9.61%
5 Year Avg. Annual = 6.17%
10 Year Avg. Annual = 8.17%
Inception Avg. Annual = 7.10%
<TABLE>
<CAPTION>
VKAC LIT Government Fund Lehman Brothers Mutual Fund Government/Mortgage Index
<S> <C> <C>
1 Dec 1987 10,000 10,000.00
2 10,340 10,342.00
3 10,462 10,459.90
4 10,339 10,361.58
5 10,286 10,309.77
6 10,197 10,236.57
7 10,454 10,484.29
8 10,376 10,424.53
9 10,370 10,446.42
10 10,584 10,684.60
11 10,750 10,887.61
12 10,669 10,749.34
13 10,688 10,757.94
14 10,820 10,910.70
15 10,738 10,828.87
16 10,808 10,878.68
17 11,034 11,107.13
18 11,313 11,395.92
19 11,686 11,743.50
20 11,983 11,997.16
21 11,711 11,811.20
22 11,758 11,872.62
23 12,088 12,168.25
24 12,203 12,291.15
25 Dec 1989 12,217 12,329.25
26 11,988 12,185.00
27 12,009 12,225.21
28 12,016 12,233.78
29 11,895 12,124.88
30 12,232 12,476.50
31 12,398 12,673.63
32 12,579 12,856.13
33 12,469 12,692.86
34 12,565 12,808.37
35 12,722 12,994.09
36 13,014 13,277.36
37 13,233 13,488.47
38 13,423 13,654.00
39 13,522 13,744.73
40 13,592 13,823.14
41 13,724 13,966.44
42 13,826 14,045.17
43 13,814 14,037.04
44 14,025 14,229.01
45 14,313 14,533.62
46 14,603 14,826.92
47 14,818 14,998.86
48 14,900 15,133.66
49 Dec 1991 15,381 15,574.05
50 15,120 15,352.90
51 15,245 15,443.48
52 15,174 15,350.82
53 15,241 15,467.49
54 15,521 15,750.55
55 15,692 15,961.80
56 15,886 16,269.66
57 16,063 16,442.99
58 16,172 16,637.91
59 16,006 16,431.78
60 16,050 16,431.92
61 16,262 16,685.49
62 16,512 16,991.12
63 16,763 17,271.48
64 16,826 17,345.74
65 16,971 17,463.70
66 16,989 17,486.40
67 17,259 17,781.92
68 17,314 17,877.94
69 17,518 18,165.78
70 17,508 18,216.64
71 17,583 18,280.40
72 17,452 18,137.91
73 Dec 1993 17,541 18,233.94
74 17,773 18,460.04
75 17,416 18,159.14
76 16,843 17,728.77
77 16,675 17,592.26
78 16,650 17,602.82
79 16,602 17,562.33
80 16,890 17,895.30
81 16,900 17,916.77
82 16,668 17,664.14
83 16,623 17,652.10
84 16,563 17,611.50
85 16,729 17,731.26
86 17,072 18,078.79
87 17,514 18,492.80
88 17,560 18,598.20
89 17,807 18,849.28
90 18,366 19,552.36
91 18,428 19,689.08
92 18,402 19,652.89
93 18,602 19,874.96
94 18,766 20,059.80
95 19,005 20,320.58
96 19,321 20,609.13
97 Dec 1995 19,600 20,889.41
98 19,714 21,027.28
99 19,339 20,686.64
100 19,164 20,548.04
101 19,004 20,443.25
102 18,938 20,400.32
103 19,177 20,669.60
104 19,205 20,729.54
105 19,154 20,700.52
106 19,465 21,046.22
107 19,892 21,490.29
108 20,275 21,840.59
109 20,016 21,657.12
110 20,056 21,730.76
111 20,091 21,776.39
112 19,846 21,554.27
113 20,140 21,877.59
114 20,340 22,076.67
115 20,613 22,328.35
116 21,198 22,882.09
117 20,970 22,719.83
118 21,295 23,042.25
119 21,622 23,387.88
120 21,708 23,490.79
121 Dec 1997 21,940 23,723.35
</TABLE>
[GRAPH APPEARS HERE]
The above charts reflect the performance of the Portfolios. The Portfolio's
performance assumes reinvestment of all distributions and is shown at net asset
value.
While past performance is not indicative of future performance, the above
information provides a broader vantage point from which to evaluate the
discussion of the Portfolio's performance found in the following pages.
7
<PAGE>
Putting Your Portfolio's Performance in Perspective
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen American Capital Life Investment Trust--Growth and Income Portfolio
vs. Standard & Poor's 500-Stock Index and the Lipper Growth and Income Fund
Index (December 23, 1996 through December 31, 1997)
Portfolio's Total Return
1 Year Avg. Annual = 23.90%
Inception Avg. Annual = 23.02%
<TABLE>
<CAPTION>
VKAC LIT-Growth Standard & Poor's 500 Lipper Growth & Income Index
<S> <C> <C> <C>
Dec 1996 10,000 10,000 10,000
10,390 10,579 10,445
10,480 10,642 10,535
Mar 1997 10,124 10,237 10,168
10,474 10,835 10,542
11,155 11,470 11,156
Jun 1997 11,565 12,020 11,593
12,467 12,959 12,425
11,856 12,215 11,959
Sep 1997 12,477 12,919 12,563
11,976 12,474 12,146
12,216 13,030 12,485
Dec 1997 12,353 13,289 12,696
</TABLE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen American Capital Life Investment Trust--Morgan Stanley Real Estate
Securities Portfolio vs. the Standard & Poor's 500-Stock Index and the NAREIT
Equity REIT Index (July 3, 1995 through December 31, 1997)
Portfolio's Total Return
1 Year Avg. Annual = 21.47%
Inception Avg. Annual = 27.89%
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
VKAC LIT-Real Standard & Poor's 500 NAREIT Equity REIT Index
<S> <C> <C> <C>
July 1995 10,000 10,000 10,000
10,200 10,274 10,078
10,290 10,270 10,127
10,490 10,746 10,266
10,190 10,693 9,960
10,310 11,132 9,980
Dec 1995 10,835 11,391 10,484
11,006 11,763 10,620
11,168 11,844 10,686
11,117 12,002 10,602
11,135 12,163 10,559
11,489 12,441 10,756
Jun 1996 11,751 12,539 10,864
11,822 11,965 10,849
12,337 12,190 11,195
12,700 12,924 11,364
13,053 13,261 11,618
13,710 14,234 12,049
Dec 1996 15,226 13,999 13,522
15,278 14,858 13,312
15,494 14,946 13,204
15,296 14,377 13,139
14,758 15,217 12,635
15,306 16,108 12,991
Jun 1997 16,217 16,882 13,573
16,900 18,201 13,908
16,807 17,155 13,798
18,194 18,144 14,988
17,718 17,519 14,490
17,997 18,300 14,721
Dec 1997 18,496 18,663 15,007
</TABLE>
[GRAPH APPEARS HERE]
The above charts reflect the performance of the Portfolios. The Portfolio's
performance assumes reinvestment of all distributions and is shown at net asset
value.
While past performance is not indicative of future performance, the above
information provides a broader vantage point from which to evaluate the
discussion of the Portfolio's performance found in the following pages.
8
<PAGE>
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 comanagers, and
Alan T. Sachtleben, chief investment officer for equity investments.
[Q] How did the stock and bond markets perform during the past year?
[A] Moderate economic growth and low inflation provided a very favorable
environment for equity investments and drove the stock market to record levels.
However, the year was marked by several periods of notable volatility.
In March, the economy was growing so rapidly that investors feared inflation
might start to rise--a concern that sparked a month-long drop in the stock
market and erased its year-to-date gains. This setback was brief, and the market
had recouped its losses by early May. In October, the stock market became very
sensitive to economic turmoil in Southeast Asia, causing the Dow Jones
Industrial Average (DJIA) to drop a record number of points in a single day. The
DJIA rose back up to hover slightly below its all-time high by the end of the
reporting period.
Market leadership took several twists and turns as well. Investors favored
blue-chip stocks early in the year, but by mid-year momentum had switched to
small-capitalization stocks, which outperformed large caps in almost every major
economic sector in the third quarter. In October, uncertainty surrounding the
situation in Asia prompted investors to seek out large, well-established
companies--as a result, small stocks began to struggle again and large stocks
regained their dominant position.
The continuation of controlled economic growth and benign inflation
contributed to a significant bond market rally during the reporting period. In
addition, indications that the Federal Reserve Board would not raise rates
fueled bond prices in the second half of the year. Despite a few periods of
volatility, yields on the 30-year Treasury bond fell steadily and bond prices
rose accordingly. By year-end, the yield had dipped below six percent, reaching
a four-year low.
[Q] Given this environment, what was your equity strategy in seeking to meet
the Portfolio's objective?
[A] Generally, the Portfolio seeks to provide a high total return through
investments in stocks, bonds, and money market securities. In the equity portion
of the Portfolio, we seek to identify undervalued stocks that have the potential
for future price appreciation. To do this, we look for companies that are
temporarily out of favor in the marketplace--their stock prices are usually
lower than what we believe these companies are truly worth. Then, we look for
factors that might move the stock from being undervalued to being fairly valued.
This catalyst could come from within the company in the form of new management,
operational enhancements, restructuring, or reorganization. Or, it could be an
external factor, such as an improvement in industry conditions or a regulatory
change. When we find a company that is undervalued and has an identifiable
catalyst, we consider adding the security to the portfolio.
In terms of asset allocation, the Portfolio was comprised of approximately
52 percent stocks, 38 percent bonds, and 9 percent short-term investments at
year-end. The Portfolio's slight reduction in stocks and substantial weighting
in bonds during the reporting period was a result of our belief that stocks were
generally overvalued.
[Q] What factors contributed to the performance of the Portfolio's stock
holdings?
[A] The Portfolio is heavily weighted in electric utility stocks, and some of
our strongest performers were in this sector. When we reported to you in
June, investor opinion for these stocks was very negative--many investors
were concerned about the impact of industry deregulation and competition,
and stocks were undervalued. However, we increased our holdings in electric
utilities because we believed they were positioned to appreciate, and that
is exactly what happened in the
9
<PAGE>
second half of 1997. Declining interest rates, as well as diminishing
competitive and regulatory concerns, led to strong performance in the second
half of the year. Electric utilities have outperformed the stock market since
mid-year, and we still believe they offer favorable value opportunities in
today's market. Key holdings in this sector were Texas Utilities and Houston
Industries, which appreciated 20 percent and 17 percent, respectively, during
the past six months.
Dial Corp., a manufacturer of soap and other personal care products, is
currently one of the Portfolio's largest holdings. The company is relatively
inexpensive compared to other stocks in the consumer nondurables sector, and we
believe it has been undervalued because of poor management and high costs. Dial
recently appointed an experienced CEO who is restructuring the company and
cutting expenses, and we think the market will eventually look more favorably
upon the company. In fact, its stock price rose nearly 34 percent in the second
half of the year.
Other contributors to performance included personal computer companies such
as Dell Computer Corp. and Compaq Computer Corp. These stocks appeared to be
extraordinarily undervalued in the second quarter and did not reflect what we
thought were very exciting business prospects and outstanding execution by
management. We purchased Compaq in May at $35 per share, and the stock closed
the year at $551U8 per share--a gain of nearly 58 percent. However, we trimmed
our positions in these stocks toward the end of the year as valuations became
extended. Of course, there is no guarantee that these stocks will perform as
favorably in the future.
[Q] How did you manage the bond portion of the Portfolio?
[A] We continued to focus on investment-grade securities rated A or better with
10-to 20-year maturities, and we maintained the duration at approximately eight
years. Duration is a measurement used to quantify the sensitivity of a bond's
price to changes in interest rates. Each year of duration represents an expected
one-percent change in the price of a bond for every one-percent change in
interest rates. Typically, funds with short durations perform better when
interest rates are rising, while funds with long durations perform better when
rates are declining. Currently, the Portfolio's duration is slightly longer than
our benchmark, reflecting our belief that interest rates could decline.
[Q] What factors worked against the Portfolio?
[A] One area that performed poorly was raw materials--a sector that includes
paper and steel. Asia is a large consumer of U.S. raw materials, but demand in
that region has tapered off lately. In addition, many Asian countries are
desperate for cash, so they're selling reserves of paper products very cheaply,
forcing U.S. producers to lower their prices. We had a small weighting in raw
materials during the reporting period, which modestly hindered the Portfolio's
performance.
Also, we recently established a significant position in gold stocks, which
were among the market's worst performers in 1997. Economic problems in Asia
slowed the demand for gold, and worldwide central banks are questioning the need
for large gold reserves to support their currency, prompting the announcement of
a sell-off of central bank reserves. These events have caused the price of gold
to drop sharply, and some mines have been forced to close because the price of
gold is less than the cost to produce it. In short, negative sentiment for gold
stocks is at an all-time high. As value investors, we have a strong contrarian
element to our equity management style, and we see these extreme valuations as a
buying opportunity.
10
<PAGE>
[Q] How did the Portfolio perform over the past year?
[A] The Portfolio's sizable bond component will usually cause its 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 12-month total return of 21.81 percent1 at net asset value, as of
December 31, 1997. By comparison, the S&P 500-Stock Index returned 33.31
percent, and the Lipper Balanced Fund Index, which more closely resembles the
Portfolio, returned 20.05 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 30
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 performance results.
[Q] What is your outlook for the Portfolio for the remainder of the year?
[A] We believe the economic situation in Asia will have little impact on the
Asset Allocation Portfolio and our investment strategy. Many stocks that are
likely to be affected by Asia's problems--those with significant international
exposure--are relatively overvalued and therefore not the kind of securities we
currently hold in the Portfolio. Although corporate profits might slow down
because of lower foreign sales and intense competition from imports, this could
keep U.S. economic growth at a moderate and sustainable level. Also, we expect
that lower currency values in Asia will result in low price inflation in the
U.S. and stable or declining interest rates--a favorable scenario for stocks and
bonds.
Overall, we expect stock selection to play a growing role in investment
performance, as the stock market may offer more limited opportunities for strong
returns than the broad market advances of recent years. In our opinion, the
stock market is still highly valued, and rising stock prices can mean more risk
for investors--expensive securities have farther to fall in a market downturn
than undervalued stocks. We believe investments such as the Asset Allocation
Portfolio, which seeks out undervalued securities and maintains a percentage of
assets in bonds, may be suited for this environment.
/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 Comanager Portfolio Comanager
Equity Investments Asset Allocation Portfolio Asset Allocation Portfolio
11 Please see footnotes on page four.
<PAGE>
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 12 months?
[A] The bond market advanced in 1997, but its ascension was not a smooth ride.
Bond prices fell early in the period as economic growth soared, fueling concerns
about rising inflation and a potential interest rate hike by the Federal Reserve
Board. When the Fed did raise interest rates by a modest 0.25 percent in late
March, bond prices fell further, sending the yield of the 30-year U.S. Treasury
bond above 7.00 percent for the first time in six months. By late April,
however, the market's mood had changed. With few signs of inflation despite the
economy's strength, a bond rally took the yield on the benchmark 30-year
Treasury down to 5.92 percent by year-end, which is the lowest level in four
years and close to the historical low of 5.79 percent reached in October 1993.
In the lingering eight-month rally that ended the Portfolio's fiscal year,
Treasuries have outperformed stocks for the past six months. The shift in
momentum from stocks to bonds was due to a combination of extraordinary factors,
including a steadily growing economy, expanding corporate profits, increasing
hourly wages, a historically low unemployment rate, and rising productivity
levels. Incredibly, these factors played before a background of profoundly
subdued inflation.
Treasuries also benefited from a positive supply-and-demand dynamic. The
shrinking U.S. budget deficit has reduced the government's need to borrow,
creating a diminishing supply of Treasuries. As a result, prices are pushed
upward. The "flight to quality" due to the currency and stock market turmoil in
Southeast Asia during the last several months has increased the level of new
money flowing into bond funds. Consequently, October marked the first time in
four years that investors put more money into bond funds than they withdrew.
[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 sectors within the fixed-income
market. As of December 31, 1997, approximately 67 percent of the Portfolio's
assets were invested in investment-grade corporate bonds, with 16 percent
invested in high-yield corporate bonds, 13 percent in securities of governments
or government agencies, and 4 percent in common and preferred stock. We
increased the Portfolio's high-yield component, comprised primarily of high-
quality, or "crossover" BB-rated bonds to bolster the Portfolio's income return.
With interest rates relatively low and investment-grade and high-yield
corporate yield spreads at historical lows, managing the duration continued to
be an important tactic during the reporting period. Duration, which is expressed
in years, is a measurement of a bond's price sensitivity to changes in interest
rates. The longer the fund'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 the first few months of the
year, 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 7.03 years, approximately nine months
longer than that of the benchmark index.
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,
12
<PAGE>
and to high-yield corporate securities. During the reporting period, the
Domestic Income Portfolio was recognized by Lipper Analytical Services, Inc.
with its ninth Lipper award for performance in the last seven years in the
Corporate Debt Funds BBB-Rated Group. For the trailing 12-month period ended
December 31, 1997, the Domestic Income Portfolio was ranked fourth of 35 like
funds. Additionally, the Portfolio ranked first of 32 funds for the two-year
period, third of 31 funds for the three-year period, second of 26 funds for the
five-year period, and fifteenth of 21 funds for the ten-year period. Lipper
Analytical Services, Inc. calculations are based upon changes in the net asset
value with dividends reinvested. Lipper calculations do not include sales
charges and, if they had, results may have been less favorable.
[Q] How did the Portfolio perform during the reporting period?
[A] For the fiscal year ended December 31, 1997, the Portfolio achieved a total
return of 11.90 percent.1 By comparison, the Lehman Brothers Index of BBB
Corporate Bonds produced a total return of 11.10 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. This return does not
reflect any commissions or fees that would be paid by an investor purchasing the
securities it represents, unlike the Portfolio's return.
Dividends paid and reinvested by the Portfolio during the period totaled
$0.7125 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] During the past year, we have been challenged by unprecedented events in
the economy and the markets. In this volatile environment, it's difficult to
find a consensus on the market's future short-term reactions or direction.
Currently, there are equally contrary arguments that interest rates will be
raised in order to head off any appearance of inflation, or that the Fed will
cut rates if Asia's problems curb economic growth. Technological advances,
global competition, and productivity improvements should continue to keep
inflation at a minimum. We believe that if inflation remains in check, the yield
on the 30-year Treasury will hit historic lows, and that bonds should continue
to benefit from the new paradigm of improved productivity and meager inflation.
In this scenario, bonds will become increasingly attractive to institutional
buyers, driving prices higher .
The difference between short-term and long-term interest rates, or yield
curve, is extraordinarily flat, as evidenced by the comparison of the current
spread (30 basis points) to the average for the past decade (120 basis points).
If historical indications are to be believed, this would suggest slower growth
and low inflation with the possibility of a severe economic downturn. Although a
recession would be positive for bonds, it is continued economic strength that is
preventing the short end of the yield curve from participating equally in the
market's rally.
/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
13 Please see footnotes on page four.
<PAGE>
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--merging Growth Portfolio. The
team is led by Gary M. Lewis, portfolio manager, and Alan T. Sachtleben, chief
investment officer for equity investments.
[Q] What factors influenced the market during the past year?
[A] Moderate economic growth and low inflation provided a very favorable
environment for equity investments and drove the stock market to record levels.
However, the year was marked by several periods of notable volatility. In March,
the economy was growing so rapidly that investors feared inflation might start
to rise--a concern that sparked a month-long drop in the stock market and erased
its year-to-date gains. This setback was brief, and the market had recouped its
losses by early May. In October, the stock market became very sensitive to
economic turmoil in Southeast Asia, causing the Dow Jones Industrial Average
(DJIA) to drop a record number of points in a single day. The DJIA rose back up
to hover slightly below its all-time high by the end of the reporting period.
Market leadership took several twists and turns as well. Investors favored
blue-chip stocks early in the year, but by mid-year momentum had switched to
small-capitalization stocks, which outperformed large caps in almost every major
economic sector in the third quarter. In October, uncertainty surrounding the
situation in Asia prompted investors to seek out large, well-established
companies--as a result, small stocks began to struggle again and large stocks
regained their dominant position.
[Q] Given these events, what was your strategy in managing the Portfolio to
meet its objective?
[A] Our fundamental investment strategy for the Portfolio remains consistent:
we look for stocks with rising earnings expectations and rising valuations. We
select stocks based on a company's potential to outperform earnings expectations
- --to produce a positive earnings surprise. Conversely, we sell stocks if their
earnings estimates or valuations are declining. Using a "bottom-up" selection
process, we evaluate securities one by one and make purchases wherever we find a
good opportunity, rather than maintaining defined sector allocations. In other
words, we don't mandate what percentage of the PortfolioOs assets should be in
any given industry--we simply pick the stocks that best meet our criteria.
Finally, we keep the Portfolio fully invested in equity investments, rather than
holding a large percentage of assets in cash.
[Q] What sectors had the most significant impact on the Portfolio?
[A] Technology and energy both drove up and pulled down the performance of the
Portfolio at various times during the reporting period. The situation in Asia
took a toll on the technology sector for several reasons. First, many technology
companies either sell their products overseas, manufacture products for
companies that do business overseas, or compete directly with Asian
companies--all of which would have hindered performance during the reporting
period. And second, U.S. corporate profits are expected to slow down in the wake
of the Asian crisis. When corporate profits are reduced, budgets for items such
as new technology are often reduced as well, and this bodes ill for the future
earnings of many technology companies. The Fund is moderately weighted in this
sector, given these concerns. Although we eliminated several battered
semiconductor stocks, including Applied Materials, other areas of the technology
sector recorded favorable returns. Compuware, Peoplesoft, and Dell Computer
continue to be large positions for the Portfolio.
We have a substantial weighting in the energy sector, primarily due to our
focus on oil industry service providers. Currently, supply and demand in the oil
industry are in balance, but the United States is starting to deplete its
reserves. Drillers and manufacturers of land rig equipment seem to be especially
well positioned to take advantage of this environment, and most exploration
companies are in a growth cycle. A bout of profit-taking at year-end caused a
dip in stock prices, so we
14
<PAGE>
sold some of our holdings, including Diamond Offshore. Despite this decline, oil
industry service providers still have the strong fundamentals that propelled
their stocks throughout most of the year, and earnings estimates are favorable.
We believe that conditions are in place for a long up-cycle for this sector.
[Q] What specific holdings supported the Portfolio's performance?
Many of the assets we took out of the technology sector went into retail.
Our holdings here included Best Buy,
[A] which cut operating costs and recently enjoyed an earnings surprise. Stage
Stores is an attractive holding--they are an upscale department store chain that
targets rural markets, where competition is low and demand is high. It's been a
profitable niche for Stage Stores, and its stock price has risen over 50 percent
in the past six months. Finally, we've been impressed by the fast growth of
smaller grocery store chains, and Whole Foods fits into this category.
Health care has offered some impressive opportunities as well. Guidant and
Arterial Vascular Engineering are two of the world's leading manufacturers of
stents, which are devices used in heart bypass surgery. These stocks advanced
steadily during the reporting period. Also, we've seen solid growth from
Safeskin, a manufacturer of latex gloves used throughout the health-care
industry--its stock price has appreciated more than 90 percent in the past six
months. Finally, we increased our position in HBO & Co., a company that
specializes in information systems and technology for the health-care field.
There is no guarantee that these stocks will perform as favorably in the future.
[Q] How did the Portfolio perform over the past year?
[A] The Portfolio achieved a 12-month total return of 20.42 percent1 at net
asset value, as of December 31, 1997. By comparison, the Standard & Poor's 500-
Stock Index returned 33.31 percent, and the Russell 2000 Index, which more
closely resembles the Portfolio, returned 22.36 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 performance results.
[Q] What is your outlook for the Portfolio for the next six months?
[A] We believe the economic uncertainty in Southeast Asia will be a double-
edged sword for the domestic economy and stock market. On the downside, we
anticipate that U.S. corporate profits could be negatively impacted by lower
foreign sales and increased competition from imports. On the upside, a slowdown
in corporate profits could keep economic growth at a moderate and sustainable
level. Also, we expect that lower currency values in Asia will result in low
price inflation in the U.S. and stable or declining interest rates--a favorable
scenario for stocks.
Although small-cap stocks have outperformed large caps over the long term,
the entire small-cap universe has been challenged in the past six months.
However, we believe that small caps are positioned for a rebound, albeit a
gradual and perhaps volatile one. Small caps typically are more expensive than
large-cap stocks on a relative basis, but currently their valuations are at the
low end of their historical range. In the past, such an environment has preceded
a bounce-back in small-company stock prices. We anticipate that stock selection
will play a growing role in investment performance, as the stock market may
offer more limited opportunities for strong returns than the broad market
advances of recent years.
/s/ Alan T. Sachtleben /s/ Gary Lewis
- ------------------------ -------------------------
Alan T. Sachtleben Gary Lewis
Chief Investment Officer Portfolio Manager
Equity Investments Emerging Growth Portfolio
15 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 was the stock market environment for the Portfolio during the
past 12 months?
[A] Moderate economic growth and low inflation provided a very favorable
environment for equity investments and drove the stock market to record levels.
However, the year was marked by several periods of notable volatility. In March,
the economy was growing so rapidly that investors feared inflation might start
to rise--a concern that sparked a month-long drop in the stock market and erased
its year-to-date gains. This setback was brief, and the market had recouped its
losses by early May. In October, the stock market became very sensitive to
economic turmoil in Southeast Asia, causing the Dow Jones Industrial Average
(DJIA) to drop a record number of points in a single day. The DJIA rose back up
to hover slightly below its all-time high by the end of the reporting period.
Market leadership took several twists and turns as well. Investors favored
blue-chip stocks early in the year, but by mid-year momentum had switched to
small-and mid-capitalization stocks, which outperformed large caps in almost
every major economic sector in the third quarter. In October, uncertainty
surrounding the situation in Asia prompted investors to seek out large, well-
established companies--as a result, small stocks began to struggle again and
large stocks regained their dominant position.
[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, identifying companies
with positive future fundamentals at attractive prices. In terms of fundamental
criteria, we look for stocks that have one or more of the following traits:
consistent earnings growth, accelerating earnings growth, better-than-expected
fundamentals, or an underlying change in a company, industry, or regulatory
environment. By using a "bottom-up" selection process, we evaluate stocks one by
one and make purchases wherever we find good opportunities. This strategy of
owning companies with positive fundamentals at attractive valuations, regardless
of their industry sector, was successful for the Portfolio during the reporting
period.
[Q] How did the situation in Asia affect your management of the
Enterprise Portfolio?
[A] The currency collapse in Asia has raised some questions about its impact on
U.S. companies. We believe there most likely will be some negative effects on
U.S. corporate earnings over the next year. In fact, many economists have
reduced their estimates of 1998 corporate profit growth from about eight percent
to approximately 4 percent. However, positive economic growth is expected, and
no recession is anticipated for the U.S. economy in 1998.
As often happens in times of economic uncertainty, many investors have
shifted their assets to high-quality stocks with proven track records--many of
which are large-company stocks. Our management philosophy for the Enterprise
Portfolio is to concentrate on medium and large growth stocks with strong future
fundamentals and attractive valuations. As such, the Portfolio's larger stocks
have generally benefited from the market's current preference for larger, high-
quality firms, while our medium- to smaller-company stocks have been adversely
affected. Over the long term, we believe strongly that buying stocks with solid
fundamentals and reasonable valuations leads to solid performance. Therefore, we
will maintain this discipline rather than significantly shifting the Portfolio's
assets to large companies.
16
<PAGE>
A key element of our stock selection process is to focus on companies with
positive earnings outlooks, and this is leading us to areas of the market that
are less sensitive to the economy and have lower foreign exposure. These sectors
include consumer nondurables, consumer distribution, consumer services, finance,
health care, and utilities.
[Q] What significant changes did you make to the Portfolio during the
reporting period?
[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's allocation in consumer services increased from 6.7 percent to 13.4
percent during the past 12 months. Most of the companies in this sector are
domestically oriented, which has helped to insulate them from recent volatility
in the global markets. Consumer services include newspaper publishers such as
New York Times Co., Gannett, and Tribune, which enjoyed cheap newsprint prices
and increased advertising revenue this year. Also, continued consolidation in
the radio and television broadcasting industry aided the performance of CBS
(television), Chancellor Media (radio), and Time Warner (movies/entertainment).
Restaurants were another attractive component of consumer services. Our
holdings in Cracker Barrel, Chili's, Landry's, and Foodmaker have not yet begun
to outperform, partly because they are among the small- to medium-sized
companies that have been out of favor lately in the stock market. Recently,
these holdings have shown signs that their earnings are on the rise.
The Portfolio's weighting in consumer distribution increased from 9.1
percent to 13.6 percent. In general, retail companies are operating their
businesses more efficiently and are more disciplined about store expansion.
Plus, consumer spending and confidence have been fairly strong this year due to
the favorable U.S. economy. Some positive performers for the Portfolio this year
included CVS Corp., Dayton Hudson, Kroger Co., and Safeway Inc.
We reduced the Portfolio's allocation to the technology sector from 21.8
percent at the beginning of the reporting period to 16.1 percent at year-end.
This change was primarily due to a potential earnings slowdown related to the
Asian crisis and overall increased competition in the technology sector. These
factors and their effect on the Portfolio's technology holdings are explained
further in the next question.
Throughout the reporting period, the Portfolio maintained a sizable
exposure to finance stocks. The moderate growth, low inflation, and benign
interest rates the U.S. economy has enjoyed lately have benefited this sector.
Conseco, an operator of life insurance firms, continues to be a large holding.
In addition, we've seen solid performance from Bank of Boston, a corporate and
consumer lending franchise in the northeastern United States, and Travelers
Group, a diversified financial services company.
Finally, the Portfolio sustained its sizable allocation to the healthcare
sector. We often find sound opportunities in this area during periods of
economic volatility, because the demand for health-care goods and services is
not dependent upon the economy. We were successful with several large drug
companies, including Bristol-Myers Squibb and Schering-Plough, and hospital
systems such as Tenet Healthcare and Universal Health Services.
[Q] What factors worked against the Portfolio?
[A] Technology holdings were the largest drag on the Portfolio, and as we
mentioned, we have reduced technology to approximately 16 percent of long-term
investments. In the second half of the year, the situation in Asia took a toll
on these stocks for several reasons. First, many technology companies either
sell their products overseas, manufacture products for companies that do
business overseas, or compete directly with Asian companies. And second, U.S.
corporate profits are expected to slow down in the wake of the Asian crisis.
When corporate profits are reduced, budgets for items such as new technology are
often reduced as well, and this could potentially hurt future earnings of many
technology companies.
Along with our concerns about the Asian impact, we feel the technology
sector is generally becoming more competitive. In the June semi-annual report,
we reported that increased competition within the technology sector could
produce
17
<PAGE>
fewer winners in the future, and we still believe that is the case. Technology
is increasingly critical to running corporations and central to our daily lives,
and as a result we believe this sector will continue to offer significant
investment potential, but stock selection is more important than ever.
Within the technology sector, semiconductor stocks declined significantly
in the second half of the year, because much of their revenues are dependent
upon Asia. In response, we eliminated several semiconductor names from the
Portfolio, including Motorola and Intel. Other areas of technology weathered the
past few months much better. For example, BMC Software (business software), EMC
Corp. (data storage), and Compaq Computer Corp. (personal computers) provided
positive returns for the Portfolio during the year.
[Q] How did the Portfolio perform during the past year?
[A] The Portfolio achieved a 12-month total return of 30.66 percent1 at net
asset value, as of December 31, 1997. By comparison, the Standard & Poor's 500-
Stock Index returned 33.31 percent, and the Lipper Growth Fund Index, which more
closely resembles the Portfolio, returned 28.08 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 30 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 performance
results.
[Q] What is your outlook for the next six months?
[A] We believe the economic uncertainty in Southeast Asia will be a double-
edged sword for the domestic economy and stock market. On the downside, we
anticipate that U.S. corporate profits could be negatively impacted by lower
foreign sales and increased competition from imports. On the upside, a slowdown
in corporate profits could keep economic growth at a moderate and sustainable
level. Also, we expect that lower currency values in Asia, combined with
controlled U.S. economic growth, will result in low price inflation in the U.S.
and stable or declining interest rates--a favorable scenario for stocks. In
managing the Enterprise Portfolio, we will continue our discipline of focusing
on companies with strong fundamentals selling at reasonable prices.
/s/ Alan T. Sachtleben /s/ Jeff D. New
- ---------------------- ---------------
Alan T. Sachtleben Jeff D. New
Chief Investment Officer Portfolio Manager
Equity Investments Enterprise Portfolio
18 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. As of April 1,
1997, the Portfolio is managed by portfolio managers Barton M. Biggs and Ann D.
Thivierge, with support from Madhav Dhar and Francine J. Bovich, Morgan Stanley
Asset Management Inc.
[Q] How would you characterize the market conditions in which the Portfolio
operated during the year ended December 31, 1997?
[A] During the period, there were several prevailing trends in the global
marketplace:
. A severe and high-profile currency crisis in Southeast Asia led to
drastic declines in nearly all the region's equity markets.
. Despite changing global economic conditions, U.S. equities continued to
perform solidly. Stocks in the U.S. were supported by a nearly perfect
economic environment of sustainable growth, negligible inflation, and
declining budget deficits. However, fears that a recession in Asia would
slow imports and pinch profit margins led to a correction in U.S. stock
prices between August and late October.
. European stocks benefited from a continuation of the region's economic
expansion and from widespread investor optimism regarding interest rates.
Inflation remained stable as governments followed generally restrictive
fiscal policies and consumer demand was subdued.
[Q] What significant investment techniques and strategies were used to pursue
the Portfolio's investment objective?
[A] Early in 1997, we believed that growing current-account deficits in Asia
would eventually threaten currency stability and economic growth in the region.
Accordingly, the Portfolio reduced its weighting in the Far East as the
reporting period began. We also reduced the Portfolio's weighting in the United
States due to record-high equity valuations. Additionally, disparate regional
returns played a major role in the changing allocations. The following table
displays changes in regional allocations over the reporting period:
<TABLE>
<CAPTION>
CHANGE IN
DECEMBER 31, 1997* JUNE 30, 1997* PERCENTAGE
------------------ -------------- ----------
<S> <C> <C> <C>
North America........... 47.36% ........... 47.66% .......... -0.30%
Europe.................. 33.19% ........... 27.89% .......... 5.30%
Far East................ 13.19% ........... 18.34% .......... -5.15%
Other................... 6.26% ........... 6.11% .......... 0.15%
</TABLE>
*As a percentage of long-term investments.
[Q] How has the Portfolio performed during the reporting period?
[A] The Portfolio's total return during the 12-month period ended December 31,
1997 was 15.85 percent1 at net asset value. During the same period, the Morgan
Stanley Capital International (MSCI) World Index + dividends gained 16.23
percent. Please keep in mind that this 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 Fund
performance results.
19
<PAGE>
TOP FIVE COUNTRIES REPRESENTED
IN THE PORTFOLIO
AS OF DECEMBER 31, 1997
UNITED STATES
JAPAN
UNITED KINGDOM
GERMANY
FRANCE
[Q] What is the outlook for the months ahead?
[A] Prospects for economic growth in Asia continue to deteriorate as
governments struggle with weakness in the region's financial sector. In this
environment, we believe that further instability is likely in Asian equity and
currency markets. We find the most compelling investment opportunities in
Europe, where solid growth and stable interest rates provide a sound
underpinning for equity prices. Also, the underfunded position of many European
pension funds could provide additional demand for that region's stocks.
Closer to home, we are less optimistic about U.S. equities. While we feel
the American economy remains fundamentally sound, we believe that investors are
overly optimistic regarding growth in corporate profits. With extended
valuations and increasing volatility, U.S. stocks could become vulnerable to the
effects of widespread earnings disappointments next year.
/s/ Barton M. Biggs /s/ Ann D. Thivierge
- ------------------- --------------------
Barton M. Biggs Ann D. Thivierge
Portfolio Manager Portfolio Manager
Morgan Stanley Asset Management Inc. Morgan Stanley Asset Management Inc.
/s/ Francine J. Bovich /s/ Madhav Dhar
- ---------------------- ---------------
Francine J. Bovich Madhav Dhar
Portfolio Manager Portfolio Manager
Morgan Stanley Asset Management Inc. Morgan Stanley Asset Management Inc.
20 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] How would you describe the market in which the Portfolio operated during
its past fiscal year?
[A] Over the last 12 months, the domestic interest rates continued to fluctuate
in a relatively narrow range. As measured by the five-year Treasury note, this
range reached a low of 5.68 percent and a high of 6.86 percent. This environment
of reduced volatility against a backdrop of strong economic growth, low
inflation rates, and a strong dollar benefited the mortgage securities sector.
Investors were willing to pay higher prices for mortgage-backed securities,
which were favored by a boom in homeowner refinancing.
In the first part of 1997, investors kept watch for a second-quarter
economic slowdown in the wake of a robust first quarter. This perspective
preceded a bond market rally that was cut short toward the end of February by
mounting concerns of an interest rate increase. After the Federal Reserve Board
took action at the end of March with a 25 basis point increase, the rate for
two-year Treasury securities rose from 6.1 percent to 6.5 percent. With
expectations of a constructive period for the market, shareholders watched rates
fall from 6.54 percent at the end of April to 5.73 percent at the end of July.
The third quarter of 1997 was marked by several shocks from overseas
sectors, upsetting complacent market attitudes. Turmoil in the Asian markets
caused currencies to depreciate and roiled stock markets abroad, creating
negative ripple effects in the U.S. stock markets. The ensuing "flight to
quality" offset investor concerns of a potential tightening in Fed monetary
policy, thus boosting prices for Treasury securities.
The calendar year ended with questions lingering about the length and
severity of Asia's crisis, and the potential impact on the U.S. economy. As
economic experts pondered if domestic growth would slow to the point of
precluding further Fed intervention into early 1998, the yield on the five-year
Treasury ended the period near its lows for the year, at 5.92 percent.
[Q] How did you position the Portfolio in reaction to market conditions?
[A] For the first nine months of 1997, we overweighted mortgage security
holdings relative to Treasury holdings. While the mortgage sector benefited from
low volatility levels during this time, prices in September had been bid up to
levels we thought to be expensive. As a result, mortgage holdings in the
portfolio were pared back to 45 percent of assets in the early fall, down from
their high of 64 percent for the year. Those mortgage securities held tended to
be either low coupon issues or issues that tended to be older, more "seasoned"
securities. In both cases, it was thought that such holdings would be somewhat
immune from increased rates of homeowner refinancings.
Among our Treasury holdings, we sought to capitalize on a flattening yield
curve in the falling interest rate environment by overweighting longer duration
Treasuries within the portfolio. We shifted holdings from two- and five-year
Treasuries to 30-year Treasury securities throughout the second and third
quarters. We have recently moved toward a more neutral position as we question
how much further the yield curve can flatten.
Over the course of the fiscal year, we adjusted the Portfolio's duration in
prudent increments, seeking to capitalize on the movement of interest rates.
Under normal conditions, we make adjustments when we feel there is value to be
captured;
21
<PAGE>
however, our objective of a consistent risk profile and a competitive dividend
stream is always paramount. The Portfolio's duration as of December 31, 1997 is
4.8 years, which we feel provides an appropriate level of exposure to changes in
interest rates.
[Q] How did the Portfolio perform during the reporting period?
[A] For the 12-month period ended December 31, 1997, the Government Portfolio
generated a total return of 9.61 percent1 at net asset value. By comparison, the
Lehman Brothers Mutual Fund U.S. Government/Mortgage Index posted a total return
of 10.60 percent for the same period. This broad-based, unmanaged index reflects
the general performance of U.S. government and mortgage-backed securities.
Please keep in mind that this index does not reflect any commissions or fees
that would be paid by an investor purchasing the securities it represents. For
additional performance results, please refer to the chart on page four.
[Q] What is your outlook for the months ahead?
[A] Our expectations for the next several months will be guided largely by the
health of our economy and the impact of global events. Domestically, the current
combination of positive economic growth, job growth, and wage gains provides a
supportive environment for the consumer. Furthermore, continuing low interest
rates may stimulate increased automobile and housing demand. Globally, there is
little doubt that economies in Asia will slow in the new year. The extent to
which this diminishes U.S. exports and floods our markets with cheap imports is
unclear. We will continue to monitor these trends and adjust accordingly.
Our expectations for the Portfolio include positive price performance. As
yields trickle downward, we believe mortgage-backed investments will have
difficulty maintaining their competitive edge. As a result, we are moving the
Portfolio toward a slightly longer duration and a neutral position in the
mortgage-backed sector. Within this sector, we will focus on securities that we
believe will perform well in a falling rate environment.
/s/ Peter W. Hegel /s/ John R. Reynoldson
- ------------------ ----------------------
Peter W. Hegel John R. Reynoldson
Chief Investment Officer Portfolio Manager
Fixed Income Investments Government Portfolio
22 Please see footnotes on page four.
<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, and Alan T. Sachtleben, chief
investment officer for equity investments.
[Q] What were the key market conditions in which the Portfolio operated during
its fiscal year?
[A] During the past 12 months, moderate economic growth and historically low
inflation provided a very favorable environment for equity investments and drove
the U.S. stock market to new heights. After a strong finish in 1996, the market
resumed its climb through the first half of 1997. As the economy continued to
flourish, investors worriedly scanned the horizon for signs of inflation. This
concern increased volatility in stock prices and sparked a month-long market
correction in March that eroded most year-to-date gains. Stocks rebounded
quickly, however, and the Dow Jones Industrial Average (DJIA) rallied through
May and June.
After peaking at 8259 in early August, heightened volatility in the DJIA in
the last few months of the Portfolio's fiscal year overshadowed what was a very
positive period for the U.S. stock market. October was marked by turbulence, as
economic weakness in Asia created a worldwide ripple effect. The widespread
collapse of currencies and stock prices in the Far East led to weakening
economies and widening trade deficits in many Southeast Asian nations. In
response, U.S. markets initially suffered significant drops, but had largely
recovered by the end of the reporting period.
Market leadership took several twists and turns as well. Although investors
favored blue-chip stocks early in the period, small-capitalization stocks had
captured momentum by mid-year, outperforming large caps in almost every major
economic sector in the third quarter. In October, uncertainty surrounding the
Asian currency crisis prompted investors to seek out large, well-established
companies. As a result, small stocks began to struggle again and large stocks
regained their dominant position.
[Q] What effects did market conditions have on the Portfolio?
[A] In the shadow of steep valuations and a continued narrow universe of
attractive stocks, our focus on the Portfolio's value-oriented strategy has
proven to be increasingly important. In managing the portfolio, we seek
securities with fair valuations relative to the market and their peers, as well
as strong fundamentals and positive earnings growth. Consequently, we have
shifted assets among different market sectors when we have seen opportunities to
benefit the Portfolio.
[Q] What were the largest sectors represented in the portfolio over the
reporting period?
[A] The PortfolioOs largest sector position was the financial sector. This
industry boasted strong performance during the period, with broad-based growth
of more than 40 percent. Banks in particular were star performers, but the
effects of merger and acquisition activity forced prices higher. Valuations have
been much more compelling in the insurance industry, and we continue to search
for those companies that are operating efficiently. Stand-out stocks with
attractive valuations in the Fund's portfolio include Allstate Corp., Chase
Manhattan Corp., and BankAmerica Corp.
In sharp contrast to the first six months of 1997, the PortfolioOs recent
performance has been supported by its holdings in the utility sector, as utility
stocks have bounced back with 20 percent-plus returns. Lingering questions about
the effects of deregulation on the electric utility industry have been partially
answered, with more states ushering in allowances for competition. We also have
taken advantage of buying opportunities in the telecommunications industry,
favoring regional telephone companies such as BellSouth Corp.
23
<PAGE>
During the period, we eliminated some of the portfolio's higher-priced
stocks in the pharmaceutical sector, while adding new names with strong
fundamentals and attractive valuations. As a group, pharmaceutical stocks have
been fairly overpriced in the past year, but the sector enjoys continued high-
volume growth and support from the managed-care industry. As a result, we added
growth companies with attractive prices, such as American Home Products and
Rhone-Poulenc, and reinforced our positions in Pharmacia & Upjohn and SmithKline
Beecham. We plan to remain slightly overweighted in this sector, because it
continues to show the potential for appreciation.
The technology sector struggled in the second half of 1997, as technology
stocks were roiled by the Asian currency crisis that dominated the last several
months of the year. We searched for companies with growth opportunities, which
included Nokia, a mobile telecommunications company. Although cellular phone
usage is strong in the United States, penetration in overseas markets is still
shallow, revealing a high potential for growth.
[Q] How did the Portfolio perform during the reporting period?
[A] The Portfolio achieved a total return of 23.90 percent1 for the fiscal year
ending December 31, 1997. By comparison, the Standard & Poor's 500-Stock Index
returned 33.31 percent, and the Lipper Growth and Income Fund Index produced a
total return of 26.96 percent for the same period. The S&P 500 Stock Index is a
broad-based, unmanaged index reflecting general stock market performance, and
the Lipper Growth and Income Fund Index reflects the average performance of all
growth and income funds. Keep in mind that these indices 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.
[Q] What is your economic outlook for the months ahead?
[A] We believe that the economic uncertainty in Southeast Asia will be a
double-edged sword for the domestic economy and stock market. On the downside,
we anticipate that U.S. corporate profits could be negatively impacted by lower
foreign sales and increased competition from imports. On the upside, a slowdown
in corporate profits could keep economic growth at a moderate and sustainable
level. Also, we expect that lower currency values in Asia will result in low
price inflation in the U.S. and stable or declining interest rates--a favorable
scenario for stocks.
Although U.S. investors have enjoyed a low level of market volatility
during the past few years, market movements in both directions are normal.
Investors who have long-term goals such as retirement or college tuition must
realize that short-term market fluctuations have historically posed little
threat to those goals. We encourage you to focus on your long-term goals instead
of short-term distractions that ultimately may have little impact on your plans.
Remember that the U.S. stock market is still enjoying the best of all
possible environments: low inflation, moderate economic growth, and solid
corporate earnings. The economy continues to grow fast enough to produce further
earnings growth, and the absence of inflation suggests stable interest rates,
which in turn would provide support for high stock valuations.
/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
24 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] What were some of the market factors affecting the Portfolio in 1997?
[A] How did you respond to those factors?
Overall, the year was marked by friendly economic numbers--moderate growth,
coupled with low inflation--that were favorable to fixed-income investments. We
did see the Federal Reserve Board raise interest rates from 5.25 percent to 5.50
percent in late March, and for a while, the market held its breath in
anticipation of a second Fed action that never materialized. Since then, we've
seen surprisingly benign inflation numbers that have belied the strength of the
job market and kept the Fed on the sidelines through the remainder of the year.
Our response to these conditions was twofold. First, we lengthened the
Portfolio's average maturity from 33 days at the beginning of the period to 38
days, giving us a slightly higher yield. Second, we shifted much of the
Portfolio's assets from U.S. government securities* to high-grade, short-term
corporate issues, which offered higher yields in 1997. More specifically, we
began the year with about 20 percent of our holdings in corporate securities and
the balance in U.S. government obligations and repurchase agreements. By the end
of 1997, approximately 66 percent of our assets were invested in corporate
issues.
[Q] How did the Portfolio perform over the year?
[A] Through the 12-month period ended December 31, 1997, the Portfolio achieved
a total return of 5.06 percent at net asset value. As of December 31, the
Portfolio generated a seven-day average yield of 5.09 percent and a 30-day
effective yield of 5.09 percent. Most importantly, we continued to maintain a
stable net asset value of $1.00 per share throughout the year.
[Q] What does the future hold for the Portfolio?
[A] Going forward, we will further extend the average maturity from 45 to 50
days in anticipation that the Fed will not adjust interest rates until after the
first quarter of 1998, if at all. As we move toward the end of this long-running
business cycle, we may start to see a slowdown in economic growth that could
ease any lingering fears over rising inflation and interest rates. If, however,
the economy grows unexpectedly strong, we are well positioned to reduce the
maturity and make the Portfolio less sensitive to interest rate pressures.
With its conservative holdings and principal stability, the Portfolio
continues to be an appropriate vehicle for investors to use in balancing their
portfolios, especially in light of the increased volatility we've been seeing
lately in the other financial markets.
/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.
25
<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 12 months?
[A] A strong U.S. economy and a cooperative bond market in the past year were
beneficial to the real estate industry, which continues on the path of recovery
that began in 1993. While the total return for the period was not as great as
the one generated a year earlier, it was solid and more in line with the type of
returns that we believe investors can expect at this point in the real estate
cycle. Real estate investments generally tracked the Standard & Poor's 500-Stock
Index, but displayed defensive characteristics during the more volatile periods
in the broader market, particularly in the latter part of the year.
The past 12 months were characterized by numerous mergers and acquisitions
in the real estate market. An impressive total of 15 public transactions
occurred, most notably Equity Office Prospectus' surprising merger with rival
Beacon Office Properties, and Starwood Lodging's successful bid for ITT Corp.
Public mergers in 1997 totaled $26.7 billion, representing a significant
increase from the year before, in which six public REIT mergers accounted for
only $5.0 billion. Companies were able to finance these transactions through an
active issuance market, with an estimated $39 billion in debt and equity capital
raised by the end of the year.
[Q] How did you position the portfolio during the reporting period?
[A] We continued to support the thesis that efficient markets will, over time,
drive values in the public and private markets into equilibrium; in that
environment, understanding asset value is critical. As a result, our security-
selection process is based on finding those stocks that we believe offer the
best value relative to their underlying net property assets. While real estate
cycles in the physical property market can last for long periods of time,
valuations in the public markets can fluctuate quite rapidly. This caused us to
over- and underweight property sectors throughout the year despite conditions in
the physical market. Our investment style led us to overweight positions in the
office and high-end hotel sectors, which contributed handsomely to the
PortfolioOs returns for the year. In addition, our value style of investing
allowed the Portfolio to perform particularly well during times of greatest
market volatility.
[Q] What was the PortfolioOs performance over the reporting period?
[A] The Portfolio achieved a total return of 21.47 percent/1/ for the 12-month
period ended December 31, 1997. This performance compares favorably to the total
return of the NAREIT (National Association of Real Estate Investment Trusts)
Equity REIT Index of 10.98 percent over the same period. 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 33.31 percent in the 12 months ended December 31,
1997. 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.
26
<PAGE>
[Q] What factors or sectors contributed to the PortfolioOs success over its
fiscal 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 35.5 percent in 1996, of which 18.9 percent
occurred in the fourth quarter (with a full 10.4 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 this
year. Our value focus allowed us to avoid a number of companies in which the
retrenchment was often significant.
Our sector weightings 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 during the past six months, and our overweighted
positions in these sectors positively contributed to the 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 for the real estate market and for the Portfolio?
[A] As we continue to advance in this current real estate recovery cycle, we
see more property sectors approaching equilibrium, or a balanced supply-and-
demand equation. We are also beginning to see greater amounts of development in
many property sectors due to the fact that rental rates have recovered greatly.
In many cases, the new development is justified. We do not yet feel that we are
at a level of development that will bring about the demise of this cycle;
nonetheless, it is incumbent upon us to be alert and increasingly careful in our
company analysis and stock selection. For example, in calculating the net asset
value for some of the Southeastern multi-family companies, we have computed a
greater vacancy rate, because certain markets in this region have excess supply.
In addition, we are attempting to focus our investments in companies that have a
Northeastern or West Coast focus when possible; these are markets in which is it
very difficult to develop, so we believe the supply-and-demand balance will
remain in check.
In conclusion, we believe that, as the real estate cycle ages,
understanding the underlying real estate value of these securities will become
increasingly important. In this environment, we feel strongly that our value
style of investing will prevail.
/s/ Russell C. Platt /s/ Theodore R. Bigman
- -------------------- ----------------------
Russell C. Platt Theodore R. Bigman
Portfolio Manager Portfolio Manager
Morgan Stanley Real Estate Securities Portfolio Morgan Stanley Real Estate
Securities Portfolio
27 Please see footnotes on page four.
<PAGE>
PORTFOLIO MANAGEMENT REVIEW
STRATEGIC STOCK PORTFOLIO
The following is an interview with the portfolio management team of the Van
Kampen American Capital Life Investment Trust--Strategic Stock Portfolio. The
team is led by John Cunniff, portfolio manager, and Alan T. Sachtleben, chief
investment officer for equity investments.
[Q] What was the stock market environment for the Portfolio since its inception
in November?
[A] Just before the Portfolio's inception, the U.S. stock market was rocked by
a bout of severe volatility. The stock market became very sensitive to economic
turmoil in Southeast Asia, and the Dow Jones Industrial Average (DJIA) dropped a
record number of points in a single day. However, the market rose back up to
hover slightly below its all-time high by year-end. The situation in Asia
prompted investors to seek out large, well-established companies, and blue chips
outperformed their smaller competitors in the final months of the year.
[Q] What was your strategy in seeking to meet the PortfolioOs objective?
[A] We utilize a set strategy to select undervalued stocks of high-quality
companies. First, we analyze the DJIA, which consists of 30 actively traded
stocks of well-established, blue-chip companies. Each month, we invest half of
the Portfolio's new assets into equal amounts of the 10 stocks with the highest
dividend yields.
Next, we review nearly 370 large-company, domestic stocks that comprise the
Morgan Stanley Capital International (MSCI)-USA Index. We exclude the 30 stocks
of the DJIA and all utility and financial stocks, and the remaining stocks are
screened for factors such as sales growth, earnings growth, dividend
performance, and trading volume. Of the securities that pass our screen, we
select the 10 stocks with the highest dividend yields, and the other half of the
Portfolio's new assets go into these stocks.
By limiting our investments to these two indexes, we're selecting from a
pool of high-quality U.S. companies. And because stocks with high dividend
yields tend to be undervalued, our strategy pinpoints those companies that are
positioned to potentially bounce back in price.
[Q] How does this strategy work over time?
[A] Every month, we purchase 20 new stocks--10 from each index--until there are
12 separate "basket" of stocks. Each basket is sold after 12 months, and a new
basket is purchased to replace it. As a result, we rotate the Portfolio every
month to purchase stocks that may be undervalued in the market place and to sell
stocks that have had a full 12 months to potentially rebound to their fair
value. It has been our experience that solid, well-established companies don't
often languish at reduced valuations--their true worth is usually recognized
quickly by the market. Our strategy gives each stock a 12-month window to
achieve its appreciation potential. It is important to understand that
shareholders of the Portfolio don't just own one basket of stocks, they own
shares of the whole Portfolio, which contains multiple baskets.
[Q] What stocks are currently held in the Portfolio ?
[A] The Portfolio opened in November, so it currently holds just two baskets of
stocks for a total of 24 individual securities. If you look at the holdings in
the Portfolio, you'll recognize many of the stocks as large, well-known firms
with broad product offerings and widespread market presence. They include
telephone companies (BellSouth, Bell Atlantic, AT&T), automotive manufacturers
(Chrysler, General Motors) and oil companies (Exxon, Mobil).
28
<PAGE>
The Portfolio's largest holding at the end of the reporting period was
AT&T, and this stock provides a good example of our value strategy in action.
AT&T's stock price lagged the market for the past several years, so they hired a
new CEO, Michael Armstrong, in late October of 1997. Mr. Armstrong outlined his
strategy to get the company back on track: reduce AT&T's cost structure to
competitive levels in the next two years, and sell off non-strategic assets to
better focus the company's efforts. To reduce costs, Mr. Armstrong initiated a
hiring freeze and cut back on other expenses, and he plans to invest the savings
into new networks and telecommunication services to improve the company's
revenue growth. Regarding non-strategic assets, he announced that AT&T will sell
off its Universal Card unit, a credit card business. AT&T has shown up on the
Portfolio's "buy" list from the DJIA screen in both November and December. The
stock traded at $49 5/16 on the first business day of November and closed the
year at $61 1/4, which represents almost 25-percent stock price appreciation in
two months. Of course, there is no guarantee that this stock will perform as
favorably in the future.
[Q] How has the Portfolio performed since inception?
[A] The Portfolio achieved a total return of 2.45 percent1 at net asset value
for the period from November 3 to December 31, 1997. By comparison, the Standard
& Poor's 500-Stock Index returned 3.77 percent, the DJIA returned 3.51 percent,
and the MSCI-USA Index produced a return of 6.14 percent for the same period.
The S&P 500-Stock Index is a broad-based, unmanaged index that reflects the
general performance of the stock market. The DJIA consists of 30 actively traded
stocks of well-established, blue-chip companies, and the MSCI-USA Index achieves
a 60 percent representation of the United States market capitalization, as well
as 60 percent of the capitalization of each industry group. 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 four for
additional performance results.
[Q] What is your outlook for the next six months?
[A] We believe the economic uncertainty in Southeast Asia will be a double-
edged sword for the domestic economy and stock market. On the downside, we
anticipate that U.S. corporate profits could be negatively impacted by lower
foreign sales and increased competition from imports. On the upside, a slowdown
in corporate profits could keep economic growth at a moderate and sustainable
level. Also, we expect that lower currency values in Asia, will result in low
price inflation in the U.S. and stable or declining interest rates--a favorable
scenario for stocks.
As often happens in times of economic uncertainty, many investors have
shifted their assets to high-quality stocks with proven track records. Because
the Portfolio invests in these kinds of securities, we believe this trend will
be beneficial to the Portfolio. In our opinion, the stock market is still highly
valued, and rising stock prices can mean more risk for investors--expensive
securities have farther to fall in a market downturn than undervalued stocks. We
believe that investments such as the Strategic Stock Portfolio, which owns
undervalued securities, may be well suited for this environment.
/s/ Alan T. Sachtleben /s/ John Cunniff
- ---------------------- ----------------
Alan T. Sachtleben John Cunniff
Chief Investment Officer Portfolio Manager
Equity Investments Strategic Stock Portfolio
29 Please see footnotes on page four.
<PAGE>
ASSET ALLOCATION PORTFOLIO PORTFOLIO OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 51.7%
CONSUMER DISTRIBUTION 1.5%
Federated Department Stores, Inc. (a).......... 10,700 $ 460,769
Office Depot, Inc. (a)......................... 6,100 146,019
Sears Roebuck & Co............................. 7,600 343,900
-----------
950,688
-----------
CONSUMER DURABLES 0.3%
Cooper Tire & Rubber Co........................ 4,200 102,375
Maytag Corp.................................... 3,100 115,669
-----------
218,044
-----------
CONSUMER NON-DURABLES 5.3%
Dial Corp...................................... 41,800 869,962
First Brands Corp.............................. 14,800 398,675
Kimberly Clark Corp............................ 9,500 468,469
Philip Morris Cos., Inc........................ 12,200 552,812
RJR Nabisco Holdings Corp...................... 14,600 547,500
Tommy Hilfiger Corp. (a)....................... 15,300 537,413
-----------
3,374,831
-----------
CONSUMER SERVICES 1.1%
International Game Technology.................. 9,800 247,450
Outback Steakhouse, Inc. (a)................... 4,200 120,750
Time Warner, Inc............................... 5,500 341,000
-----------
709,200
-----------
ENERGY 3.2%
Amoco Corp..................................... 1,800 153,225
Atlantic Richfield Co.......................... 2,000 160,250
Chevron Corp................................... 3,200 246,400
Coastal Corp................................... 2,800 173,425
ENI, SpA---ADR (Italy)......................... 4,800 273,900
Equitable Resources, Inc....................... 3,300 116,737
Texaco, Inc.................................... 3,200 174,000
Total, SA--ADR (France)........................ 3,956 219,558
USX--Marathon Group............................ 4,500 151,875
YPF Sociedad Anonima, Class DNADR (Argentina).. 10,900 372,644
-----------
2,042,014
-----------
FINANCE 8.3%
Aetna, Inc..................................... 2,600 183,463
Ambac Financial Group, Inc..................... 11,200 515,200
American Bankers Insurance Group, Inc.......... 12,300 565,031
</TABLE>
30 See Notes to Financial Statements
<PAGE>
ASSET ALLOCATION PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
FINANCE (CONTINUED)
BancOne Corp................................... 8,600 $ 467,087
BankAmerica Corp............................... 3,700 270,100
Bear Stearns Cos., Inc......................... 5,738 272,555
Chase Manhattan Corp........................... 2,400 262,800
CIGNA Corp..................................... 1,600 276,900
CMAC Investment Corp........................... 7,400 446,775
Conseco, Inc................................... 8,200 372,587
Everest Reinsurance Holdings, Inc.............. 5,800 239,250
First Union Corp............................... 10,300 527,875
Liberty Financial Cos., Inc.................... 3,150 118,913
MBIA, Inc...................................... 3,400 227,162
Nationwide Financial Services, Inc., Class A... 400 14,450
Norwest Corp................................... 4,300 166,088
Travelers Group, Inc........................... 3,199 172,346
United Asset Management Corp................... 5,800 141,738
------------
5,240,320
------------
HEALTHCARE 3.7%
American Home Products Corp.................... 7,300 558,450
Bausch & Lomb, Inc............................. 9,300 368,512
Lincare Holdings, Inc. (a)..................... 6,400 364,800
Mylan Laboratories, Inc........................ 8,100 169,594
PacifiCare Health Systems, Class B (a)......... 10,500 549,937
Pharmacia & Upjohn, Inc........................ 8,900 325,963
------------
2,337,256
------------
PRODUCER MANUFACTURING 3.2%
Bouygues Offshore, SA--ADR (France)............ 10,200 221,850
Cognex Corp. (a)............................... 4,100 111,725
Ingersoll-Rand Co.............................. 2,400 97,200
ITT Corp. (a).................................. 3,100 256,913
LucasVarity PLC--ADR (United Kingdom).......... 9,900 345,262
Tubos De Acero De Mexico, SA--ADR (Mexico) (a). 3,400 73,525
Waste Management, Inc.......................... 32,200 885,500
------------
1,991,975
------------
RAW MATERIALS/PROCESSING INDUSTRIES 5.3%
Barrick Gold Corp.............................. 23,100 430,237
Bethlehem Steel Corp. (a)...................... 16,000 138,000
Boise Cascade Corp............................. 14,900 450,725
British Steel PLC--ADR (United Kingdom)........ 23,100 495,206
</TABLE>
31 See Notes to Financial Statements
<PAGE>
ASSET ALLOCATION PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Description Shares Market Value
- ---------------------------------------------------------------------------------------
<S> <C> <C>
RAW MATERIALS/PROCESSING INDUSTRIES (CONTINUED)
Georgia Pacific Corp................................... 1,900 $ 115,425
Georgia Pacific Corp.--Timber Group (a)................ 1,900 43,106
Homestake Mining Co.................................... 38,200 339,025
Imperial Chemical Industries PLC--ADR (United Kingdom). 2,100 136,369
International Paper Co................................. 5,900 254,438
Louisiana-Pacific Corp................................. 9,500 180,500
Newmont Mining Corp.................................... 9,300 273,187
Placer Dome, Inc....................................... 23,200 294,350
Temple Inland, Inc..................................... 1,600 83,700
Union Camp Corp........................................ 1,800 96,638
-----------
3,330,906
-----------
TECHNOLOGY 4.6%
3Com Corp. (a)......................................... 7,400 258,538
Avnet, Inc............................................. 2,800 184,800
Compaq Computer Corp. (a).............................. 9,500 536,156
Dell Computer Corp. (a)................................ 2,000 168,000
Gateway 2000, Inc. (a)................................. 3,800 123,975
Intel Corp............................................. 1,400 98,350
LSI Logic Corp. (a).................................... 3,000 59,250
Micron Technology, Inc. (a)............................ 7,900 205,400
Nokia Corp.--ADR (Finland)............................. 1,600 112,000
Quantum Corp. (a)...................................... 18,100 363,131
SunGard Data Systems, Inc. (a)......................... 20,400 632,400
VLSI Technology, Inc. (a).............................. 7,000 165,375
-----------
2,907,375
-----------
TRANSPORTATION 0.5%
Canadian National Railway Co........................... 7,100 335,475
-----------
UTILITIES 14.7%
Ameritech Corp......................................... 6,600 531,300
Baltimore Gas & Electric Co............................ 5,600 190,750
Bell Atlantic Corp..................................... 3,000 273,000
BellSouth Corp......................................... 4,300 242,144
Boston Edison Co....................................... 8,600 325,725
CMS Energy Corp........................................ 7,200 317,250
DTE Energy Co.......................................... 7,700 267,094
Duke Power Co.......................................... 3,037 168,174
Edison International................................... 2,500 67,969
Endesa, SA--ADR (Spain)................................ 7,600 138,225
</TABLE>
32 See Notes to Financial Statements
<PAGE>
ASSET ALLOCATION PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES (CONTINUED)
FPL Group, Inc............................ 3,300 $ 195,319
GPU, Inc.................................. 11,100 467,588
Houston Industries, Inc................... 35,000 934,062
Idaho Power Co............................ 12,600 474,075
Illinova Corp............................. 8,000 215,500
New Century Energies, Inc................. 3,705 177,608
Nipsco Industries, Inc.................... 3,200 158,200
Northeast Utilities....................... 10,300 121,669
Northern States Power Co.--Minnesota...... 4,600 267,950
OGE Energy Corp........................... 11,200 612,500
PacifiCorp................................ 10,600 289,513
Pinnacle West Capital Corp................ 13,500 572,062
Public Service Co. of New Mexico.......... 19,800 469,012
SBC Communications, Inc................... 4,500 329,625
Sierra Pacific Resources.................. 2,400 90,000
Texas Utilities Co........................ 23,000 955,937
U.S. WEST Communications Group............ 9,300 419,663
----------
9,271,914
----------
TOTAL COMMON STOCKS 51.7%............ 32,709,998
----------
</TABLE>
33 See Notes to Financial Statements
<PAGE>
ASSET ALLOCATION PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORPORATE DEBT 23.1%
CONSUMER DISTRIBUTION 1.6%
$ 1,000 Sears Roebuck Acceptance Corp.......................... 6.750% 09/15/05 $ 1,017,890
-----------
CONSUMER NON-DURABLES 1.6%
1,000 Anheuser Busch Co., Inc................................ 7.000 09/01/05 1,023,660
-----------
CONSUMER SERVICES 1.6%
1,000 Cox Communications, Inc................................ 6.875 06/15/05 1,030,700
-----------
ENERGY 3.6%
1,000 Burlington Resources, Inc.............................. 9.125 10/01/21 1,266,200
1,000 Enron Corp............................................. 6.875 10/15/07 1,015,400
-----------
2,281,600
-----------
FINANCE 1.7%
1,000 American General Corp.................................. 9.625 02/01/18 1,048,300
-----------
PRODUCER MANUFACTURING 1.9%
1,000 Caterpillar, Inc....................................... 9.000 04/15/06 1,169,800
-----------
TECHNOLOGY 5.1%
1,000 Boeing, Inc............................................ 8.100 11/15/06 1,123,300
1,000 Philips Electronics NV (Netherlands)................... 8.375 09/15/06 1,102,700
1,000 Raytheon Co............................................ 6.750 08/15/07 1,019,270
-----------
3,245,270
-----------
TRANSPORTATION 2.6%
1,000 Norfolk Southern Corp.................................. 7.700 05/15/17 1,110,400
500 Southwest Airlines Co.................................. 7.375 03/01/27 537,475
-----------
1,647,875
-----------
UTILITIES 3.4%
1,000 Baltimore Gas & Electric Co............................ 7.500 01/15/07 1,078,500
1,000 Texas Utilities Electric Co............................ 8.250 04/01/04 1,095,050
-----------
2,173,550
-----------
TOTAL CORPORATE DEBT 23.1%................................................ 14,638,645
-----------
GOVERNMENT AND AGENCY OBLIGATIONS 1.7%
1,000,000 Province of Nova Scotia (Canada)....................... 7.250 07/27/13 1,075,700
-----------
UNITED STATES GOVERNMENT OBLIGATIONS 13.1%
3,800,000 United States Treasury Bond............................ 7.125 02/15/23 4,336,750
500,000 United States Treasury Note............................ 7.250 08/15/04 540,470
3,000,000 United States Treasury Bond............................ 7.250 05/15/16 3,416,250
-----------
TOTAL UNITED STATES GOVERNMENT OBLIGATIONS 13.1%.......................... 8,293,470
-----------
TOTAL LONG-TERM INVESTMENTS 89.6%E(COST $49,103,971)...................... 56,717,813
</TABLE>
34 See Notes to Financial Statements
<PAGE>
ASSET ALLOCATION PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Description Market Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
REPURCHASE AGREEMENT 9.3%
SBC Warburg ($5,895,000 par collateralized by U.S. Government obligations in a pooled
cash account, dated 12/31/97, to be sold on 01/02/98 at $5,896,998)
(Cost $5,895,000).............................................................................. $ 5,895,000
-----------
TOTAL INVESTMENTS 98.9%
(Cost $54,998,971)............................................................................. 62,612,813
OTHER ASSETS IN EXCESS OF LIABILITIES 1.1%....................................................... 684,899
-----------
NET ASSETS 100.0%................................................................................ $63,297,712
===========
</TABLE>
(a) Non-income producing security as this stock currently does not declare
dividends.
35 See Notes to Financial Statements
<PAGE>
ASSET ALLOCATION PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Total Investments (Cost $54,998,971)......................................................... $62,612,813
Cash......................................................................................... 1,362
Receivables:
Interest................................................................................ 458,848
Investments Sold........................................................................ 308,594
Dividends............................................................................... 81,127
Other........................................................................................ 42,954
-----------
Total Assets............................................................................ 63,505,698
-----------
LIABILITIES:
Payables:
Investments Purchased................................................................... 69,740
Investment Advisory Fee................................................................. 15,037
Distributor and Affiliates.............................................................. 4,221
Portfolio Shares Repurchased............................................................ 3,507
Trustees' Deferred Compensation and Retirement Plans......................................... 92,111
Accrued Expenses............................................................................. 23,370
-----------
Total Liabilities....................................................................... 207,986
-----------
NET ASSETS................................................................................... $63,297,712
===========
NET ASSETS CONSIST OF:
Capital...................................................................................... $53,888,909
Net Unrealized Appreciation.................................................................. 7,613,842
Accumulated Net Realized Gain................................................................ 1,777,211
Accumulated Undistributed Net Investment Income.............................................. 17,750
-----------
NET ASSETS................................................................................... $63,297,712
===========
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Based on net assets of $63,297,712 and 5,314,563 shares of beneficial interest
issued and outstanding)................................................................. $ 11.91
===========
</TABLE>
36 See Notes to Financial Statements
<PAGE>
ASSET ALLOCATION PORTFOLIO STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
================================================================================
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest..................................................... $ 2,015,818
Dividends.................................................... 764,885
-----------
Total Income............................................ 2,780,703
===========
EXPENSES:
Investment Advisory Fee...................................... 311,514
Audit........................................................ 23,008
Custody...................................................... 21,787
Shareholder Reports.......................................... 19,494
Shareholder Services......................................... 15,613
Accounting................................................... 14,290
Trustees' Fees and Expenses.................................. 11,359
Legal........................................................ 7,971
Other........................................................ 17,514
-----------
Total Expenses.......................................... 442,550
Less Fees Waived........................................ 68,780
-----------
Net Expenses............................................ 373,770
-----------
NET INVESTMENT INCOME........................................ $ 2,406,933
===========
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Gain............................................ $ 7,064,899
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................. 4,916,467
End of the Period:
Investments............................................. 7,613,842
-----------
Net Unrealized Appreciation During the Period................ 2,697,375
-----------
NET REALIZED AND UNREALIZED GAIN............................. $ 9,762,274
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS................... $12,169,207
===========
</TABLE>
37 See Notes to Financial Statements
<PAGE>
ASSET ALLOCATION PORTFOLIO STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
========================================================================================================
Year Ended Year Ended
December 31, 1997 December 31, 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income........................................... $ 2,406,933 $ 2,389,714
Net Realized Gain............................................... 7,064,899 6,901,393
Net Unrealized Appreciation/Depreciation During the Period...... 2,697,375 (1,116,505)
------------ ------------
Change in Net Assets from Operations............................ 12,169,207 8,174,602
------------ ------------
Distributions from Net Investment Income........................ (2,436,414) (2,362,025)
Distributions from Net Realized Gain............................ (6,406,916) (6,874,314)
------------ ------------
Total Distributions............................................. (8,843,330) (9,236,339)
------------ ------------
Net Change in Net Assets from Investment Activities............. 3,325,877 (1,061,737)
------------ ------------
From Capital Transactions:
Proceeds from Shares Sold....................................... 2,681,711 4,725,803
Net Asset Value of Shares Issued Through Dividend Reinvestment.. 8,843,330 9,236,339
Cost of Shares Repurchased...................................... (15,502,271) (11,932,457)
------------ ------------
Net Change in Net Assets from Capital Transactions.............. (3,977,230) 2,029,685
------------ ------------
Total Increase/Decrease in Net Assets........................... (651,353) 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 $17,750 and $47,231, respectively)......... $ 63,297,712 $ 63,949,065
============ ============
</TABLE>
38 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.
<TABLE>
<CAPTION>
===================================================================================================================
Year Ended December 31,
-----------------------------------------------
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....................................... .513 .482 .48 .45 .29
Net Realized and Unrealized Gain/Loss....................... 1.897 1.083 2.6425 (.89) .6025
------- ------- ------- ------ -------
Total from Investment Operations................................. 2.410 1.565 3.1225 (.44) .8925
------- ------- ------- ------ -------
Less:
Distributions from Net Investment Income.................... .518 .478 .4775 .45 .2925
Distributions from Net Realized Gain........................ 1.334 1.375 .995 .90 .63
Distributions in Excess of Net Realized Gain................ -0- -0- -0- .02 .09
------- ------- ------- ------ -------
Total Distributions.............................................. 1.852 1.853 1.4725 1.37 1.0125
------- ------- ------- ------ -------
Net Asset Value, End of the Period............................... $11.910 $11.352 $ 11.64 $ 9.99 $ 11.80
======= ======= ======= ====== =======
Total Return*.................................................... 21.81% 13.87% 31.36% (3.66%) 7.71%
Net Assets at End of the Period (In millions).................... $ 63.3 $ 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*............ 3.86% 3.78% 3.85% 3.70% 2.34%
Portfolio Turnover............................................... 58% 118% 124% 163% 150%
Average Commission Paid Per Equity Share Traded (a).............. $ .0602 $ .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.......................... .71% .81% .74% .72% .74%
Ratio of Net Investment Income to Average Net Assets............. 3.75% 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.
39 See Notes to Financial Statements
<PAGE>
DOMESTIC INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
===================================================================================================
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORPORATE DEBT 80.2%
CONSUMER DISTRIBUTION 8.9%
$500 Borden, Inc............................................ 7.875% 02/15/23 $500,200
500 Gruma SA De CV, 144A - Private Placement (Mexico) (b).. 7.625 10/15/07 493,000
500 Nabisco, Inc........................................... 7.550 06/15/15 536,550
---------
1,529,750
---------
CONSUMER DURABLES 5.1%
500 Brunswick Corp......................................... 7.125 08/01/27 513,600
375 Oriole Homes Corp...................................... 12.500 01/15/03 358,125
---------
871,725
---------
CONSUMER SERVICES 21.7%
500 Cablevision Systems Corp............................... 7.875 12/15/07 511,250
500 Circus Circus Enterprises, Inc......................... 6.450 02/01/06 488,350
500 News America Holdings, Inc............................. 10.125 10/15/12 586,550
500 Royal Caribbean Cruises Limited........................ 7.500 10/15/27 510,750
500 TCI Communications, Inc................................ 8.750 08/01/15 582,050
500 Valassis Communications, Inc........................... 9.550 12/01/03 560,000
500 Viacom, Inc............................................ 7.625 01/15/16 498,750
---------
3,737,700
---------
ENERGY 9.3%
500 Occidental Petroleum Corp.............................. 10.125 11/15/01 565,250
500 PDV America, Inc....................................... 7.875 08/01/03 516,850
500 Seagull Energy Corp.................................... 7.500 09/15/27 517,500
---------
1,599,600
---------
FINANCE 5.1%
395 First PV Funding Corp., Series 1986 A.................. 10.300 01/15/14 428,034
500 Macsaver Financial Services, Inc....................... 7.600 08/01/07 456,250
---------
884,284
---------
HEALTHCARE 3.0%
500 Manor Care, Inc........................................ 7.500 06/15/06 517,950
---------
PRODUCER MANUFACTURING 1.5%
250 American Builders & Contractors........................ 10.625 05/15/07 259,375
---------
RAW MATERIALS/PROCESSING INDUSTRIES 6.4%
500 Georgia-Pacific Corp................................... 9.950 06/15/02 567,250
500 Viacap SA De CV, 144A - Private Placement (Mexico) (b). 11.375 05/15/07 535,000
---------
1,102,250
---------
</TABLE>
40 See Notes to Financial Statements
<PAGE>
DOMESTIC INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
===================================================================================================
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TECHNOLOGY 3.1%
$500 Raytheon Co............................................ 7.200% 08/15/27 $524,650
-----------
TRANSPORTATION 8.5%
500 Delta Airlines, Inc.................................... 9.750 05/15/21 647,200
500 Norfolk Southern Corp.................................. 7.700 05/15/17 555,200
200 United Airlines, Inc................................... 10.020 03/22/14 251,460
-----------
1,453,860
-----------
UTILITIES 7.6%
500 360 Communication Co................................... 7.600 04/01/09 524,810
350 Monongahela Power Co................................... 8.375 07/01/22 384,643
350 Public Service Co. of Colorado......................... 8.750 03/01/22 390,512
-----------
1,299,965
-----------
TOTAL CORPORATE DEBT 80.2%.................................................. 13,781,109
-----------
GOVERNMENT OBLIGATIONS 13.0%
597 Federal National Mortgage Association Pool (U.S.)...... 10.000 04/01/21 647,378
500 Republic of Argentina (Argentina)...................... 11.000 10/09/06 536,700
500 Republic of South Africa (South Africa)................ 8.500 06/23/17 483,375
500 United Mexican States (Mexico)......................... 11.375 09/15/16 575,000
-----------
TOTAL GOVERNMENT OBLIGATIONS................................................ 2,242,453
-----------
COMMON AND PREFERRED STOCK 3.9%
FF Holdings Corp., 2,500 common shares, 144A - Private Placement (a) (b)......... 25
Time Warner, Inc., 594 Series M preferred shares, dividend rate of $ 10.25,
144A - Private Placement (b)................................................ 666,765
-----------
TOTAL COMMON AND PREFERRED STOCK............................................ 666,790
-----------
TOTAL LONG-TERM INVESTMENTS 97.1% (COST $15,840,299).............................. 16,690,352
REPURCHASE AGREEMENT 1.7%
DLJ ($300,000 par collateralized by U.S. Government obligations in a pooled
cash account, dated 12/31/97, to be sold on 01/02/98 at $300,108) (Cost
$300,000)................................................................... 300,000
-----------
TOTAL INVESTMENTS 98.8% (COST $16,140,299)........................................ 16,990,352
OTHER ASSETS IN EXCESS OF LIABILITIES 1.2%........................................ 208,441
-----------
NET ASSETS 100.0%................................................................. $17,198,793
-----------
</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 be resold only in
transactions exempt from registration which are normally transactions with
qualified institutional buyers.
41 See Notes to Financial Statements
<PAGE>
DOMESTIC INCOME PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<CAPTION>
=================================================================================
<S> <C>
ASSETS:
Total Investments (Cost $16,140,299)................................. $16,990,352
Cash................................................................. 4,433
Receivables:
Interest........................................................... 320,086
Investments Sold................................................... 14,000
Expense Reimbursement by Adviser................................... 440
Other................................................................ 43,520
----------
Total Assets..................................................... 17,372,831
----------
LIABILITIES:
Payables:
Portfolio Shares Repurchased....................................... 53,466
Distributor and Affiliates......................................... 3,224
Trustees' Deferred Compensation and Retirement Plans................. 89,376
Accrued Expenses..................................................... 27,972
==========
Total Liabilities................................................ 174,038
----------
NET ASSETS........................................................... $17,198,793
==========
NET ASSETS CONSIST OF:
Capital.............................................................. $17,644,290
Net Unrealized Appreciation.......................................... 850,053
Accumulated Undistributed Net Investment Income...................... 11,345
Accumulated Net Realized Loss........................................ (1,306,895)
==========
NET ASSETS........................................................... $17,198,793
==========
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Based on net assets of $17,198,793 and 2,084,276 shares of
beneficial interest issued and outstanding)......................... $8.25
==========
</TABLE>
42 See Notes to Financial Statements
<PAGE>
DOMESTIC INCOME PORTFOLIO STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
================================================================================
<S> <C>
INVESTMENT INCOME:
Interest........................................................ $1,373,451
Dividends....................................................... 62,730
Other........................................................... 10,295
----------
Total Income............................................... 1,446,476
----------
EXPENSES:
Investment Advisory Fee......................................... 86,700
Audit........................................................... 22,323
Shareholder Reports............................................. 18,545
Shareholder Services............................................ 15,859
Trustees' Fees and Expenses..................................... 11,996
Accounting...................................................... 8,861
Custody......................................................... 7,233
Legal........................................................... 5,777
Other........................................................... 5,267
----------
Total Expenses............................................. 182,561
Less Fees Waived........................................... 78,538
----------
Net Expenses............................................... 104,023
----------
NET INVESTMENT INCOME........................................... $1,342,453
==========
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Gain............................................... $ 366,896
----------
Unrealized Appreciation/Depreciation:
Beginning of the Period....................................... 663,799
End of the Period:
Investments................................................ 850,053
----------
Net Unrealized Appreciation During the Period................... 186,254
----------
NET REALIZED AND UNREALIZED GAIN................................ $ 553,150
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS...................... $1,895,603
==========
</TABLE>
43 See Notes to Financial Statements
<PAGE>
DOMESTIC INCOME PORTFOLIO STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
===================================================================================================
Year Ended Year Ended
December 31, 1997 December 31, 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income............................................ $ 1,342,453 $ 1,757,056
Net Realized Gain................................................ 366,896 350,915
Net Unrealized Appreciation/Depreciation During the Period....... 186,254 (844,721)
------------ ------------
Change in Net Assets from Operations............................. 1,895,603 1,263,250
Distributions from Net Investment Income......................... (1,365,434) (1,735,294)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES.............. 530,169 (472,044)
------------ ------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold........................................ 5,508,385 6,174,993
Net Asset Value of Shares Issued Through Dividend Reinvestment... 1,365,434 1,735,294
Cost of Shares Repurchased....................................... (10,002,492) (14,203,241)
------------ ------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS............... (3,128,673) (6,292,954)
------------ ------------
TOTAL DECREASE IN NET ASSETS..................................... (2,598,504) (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 $11,345 and $34,326, respectively)......... $ 17,198,793 $ 19,797,297
============ ============
</TABLE>
44 See Notes to Financial Statements
<PAGE>
DOMESTIC INCOME PORTFOLIO FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the
Portfolio See Notes to Financial Statements
<TABLE>
<CAPTION>
===================================================================================================================
Year Ended December 31,
-----------------------------------------------
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........................................ .704 .755 .71 .85 .72
Net Realized and Unrealized Gain/Loss........................ .252 (.212) .8525 (1.2275) .5825
------ ------ ------- -------- -------
Total from Investment Operations.................................. .956 .543 1.5625 (.3775) 1.3025
Less Distributions from Net Investment Income..................... .712 .745 .7025 .8525 .7225
------ ------ ------- -------- -------
Net Asset Value, End of the Period................................ $8.252 $8.008 $ 8.21 $ 7.35 $ 8.58
====== ====== ======= ======== =======
Total Return*..................................................... 11.90% 6.68% 21.37% (4.33%) 16.32%
Net Assets at End of the Period (In millions)..................... $ 17.2 $ 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*............. 7.74% 7.97% 8.11% 8.35% 7.80%
Portfolio Turnover................................................ 78% 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........................... 1.05% 1.29% .93% .95% .95%
Ratio of Net Investment Income to Average Net Assets.............. 7.29% 7.28% 7.78% 8.00% 7.40%
</TABLE>
45 See Notes to Financial Statements
<PAGE>
EMERGING GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
================================================================================
Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 92.1%
CONSUMER DISTRIBUTION 14.5%
Americredit Corp. (a).................................... 300 $ 8,306
Barnes & Noble, Inc. (a)................................. 1,600 53,400
Bed Bath & Beyond, Inc. (a).............................. 1,150 44,275
Best Buy Co., Inc. (a)................................... 1,500 55,312
Brightpoint, Inc. (a).................................... 1,800 24,975
CompUSA, Inc. (a)........................................ 3,300 102,300
Consolidated Stores Corp. (a)............................ 1,600 70,300
Costco Cos., Inc. (a).................................... 1,500 66,937
CVS Corp................................................. 800 51,250
Dollar General Corp...................................... 1,200 43,500
Dollar Tree Stores, Inc. (a)............................. 500 20,688
Family Dollar Stores, Inc................................ 1,750 51,297
Fred Meyer, Inc. (a)..................................... 1,600 58,200
General Nutrition Cos., Inc. (a)......................... 3,200 108,800
Interstate Bakeries Corp................................. 1,700 63,537
Jacor Communications, Inc., Class A (a).................. 600 31,875
Kohls Corp. (a).......................................... 600 40,875
McKesson Corp............................................ 400 43,275
Miller Herman, Inc....................................... 1,500 81,844
Pacific Sunwear of California (a)........................ 887 26,222
Pier 1 Imports, Inc...................................... 1,800 40,725
Proffitt's, Inc. (a)..................................... 1,800 51,188
Ross Stores, Inc......................................... 2,200 80,025
Safeway, Inc. (a)........................................ 650 41,113
Stage Stores, Inc. (a)................................... 750 28,031
Tech Data Corp. (a)...................................... 850 33,044
TJX Cos., Inc............................................ 2,500 85,937
U.S. Office Products Co. (a)............................. 1,125 22,078
Whole Foods Market, Inc. (a)............................. 1,150 58,794
Williams Sonoma, Inc. (a)................................ 700 29,313
-----------
1,517,416
-----------
CONSUMER NON-DURABLES 2.9%
Abercrombie & Fitch Co., Class A (a)..................... 300 9,375
Action Performance Cos., Inc. (a)........................ 500 18,937
Borders Group, Inc. (a).................................. 1,650 51,666
Canandaigua Brands, Inc., Class A (a).................... 650 35,994
Jones Apparel Group, Inc. (a)............................ 500 21,500
Linens N Things, Inc. (a)................................ 750 32,719
</TABLE>
46 See Notes to Financial Statements
<PAGE>
EMERGING GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
==============================================================================
Description Shares Market Value
- ------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER NON-DURABLES (CONTINUED)
Nautica Enterprises, Inc. (a)..................... 700 $ 16,275
Smithfield Foods, Inc. (a)........................ 850 28,050
Suiza Foods Corp. (a)............................. 600 35,737
Westpoint Stevens, Inc. (a)....................... 700 33,075
Wolverine World Wide, Inc......................... 1,050 23,756
--------
307,084
--------
CONSUMER SERVICES 8.0%
AccuStaff, Inc. (a)............................... 600 13,800
Apollo Group, Inc., Class A (a)................... 1,000 47,250
Capstar Hotel Co. (a)............................. 500 17,156
Caribiner International, Inc. (a)................. 700 31,150
Chancellor Media Corp. (a)........................ 2,100 156,712
CKE Restaurants, Inc.............................. 750 31,594
Clear Channel Communications, Inc. (a)............ 1,025 81,423
Consolidated Graphics, Inc. (a)................... 800 37,300
COREstaff, Inc. (a)............................... 600 15,900
Foodmaker, Inc. (a)............................... 1,000 15,063
Interpublic Group of Cos., Inc.................... 1,037 51,656
Laundry's Seafood Restaurants, Inc. (a)........... 700 16,800
Meredith Corp..................................... 1,600 57,100
Omnicom Group, Inc................................ 1,700 72,037
Outdoor Systems, Inc. (a)......................... 700 26,863
Promus Hotel Corp. (a)............................ 1,255 52,710
Rainforest Cafe, Inc. (a)......................... 600 19,800
Robert Half International, Inc. (a)............... 1,137 45,480
Signature Resorts, Inc. (a)....................... 1,125 24,609
Staffmark, Inc. (a)............................... 300 9,488
Valassis Communications, Inc. (a)................. 550 20,350
--------
844,241
--------
ENERGY 9.2%
BJ Services Co. (a)............................... 600 43,163
Cliffs Drilling Co. (a)........................... 750 37,406
Coflexip SA - ADR (France) (a).................... 550 30,525
Comstock Resources, Inc. (a)...................... 1,000 11,938
Cooper Cameron Corp. (a).......................... 1,200 73,200
ENSCO International, Inc.......................... 3,450 115,575
EVI, Inc. (a)..................................... 1,750 90,562
Falcon Drilling, Inc. (a)......................... 2,350 82,397
Key Energy Group, Inc. (a)........................ 450 9,759
</TABLE>
47 See Notes to Financial Statements
<PAGE>
EMERGING GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
=============================================================================
Description Shares Market Value
- -----------------------------------------------------------------------------
<S> <C> <C>
ENERGY (CONTINUED)
Marine Drilling Cos., Inc. (a)........................ 2,400 $ 49,800
Nabors Industries, Inc. (a)........................... 2,700 84,881
National Oilwell, Inc. (a)............................ 900 30,769
Parker Drilling Co. (a)............................... 800 9,750
Patterson Energy, Inc. (a)............................ 500 19,344
Rowan Cos., Inc. (a).................................. 2,750 83,875
Santa Fe International Corp........................... 700 28,481
Smith International, Inc. (a)......................... 1,250 76,719
Stolt Comex Seaway S.A. (a)........................... 250 12,500
Varco International, Inc. (a)......................... 3,500 75,031
--------
965,675
--------
FINANCE 8.9%
Ahmanson H.F. & Co.................................... 300 20,081
Associates First Capital Corp., Class A............... 100 7,113
Astoria Financial Corp................................ 500 27,875
Avis Rental A Car, Inc. (a)........................... 400 12,775
Bank United Corp...................................... 200 9,788
Capital One Financial Corp............................ 400 21,675
CMAC Investment Corp.................................. 1,000 60,375
Comdisco, Inc......................................... 900 30,094
Concentra Managed Care, Inc. (a)...................... 600 20,250
Conseco, Inc.......................................... 3,400 154,487
Cullen Frost Bankers, Inc............................. 500 30,344
Dime Bancorp, Inc..................................... 600 18,150
Everest Reinsurance Holdings, Inc..................... 400 16,500
Finova Group, Inc..................................... 1,750 86,953
Golden State Bancorp, Inc. (a)........................ 700 26,162
GreenPoint Financial Corp............................. 550 39,909
Lehman Brothers Holdings, Inc......................... 400 20,400
Mercury General Corp.................................. 250 13,813
National Commerce Bancorp............................. 375 13,219
North Fork Bancorp, Inc............................... 850 28,528
Peoples Heritage Financial Group, Inc................. 550 25,300
Protective Life Corp.................................. 400 23,900
Providian Financial Corp.............................. 1,100 49,706
Silicon Valley Bancshares (a)......................... 175 9,844
Sovereign Bancorp, Inc................................ 1,000 20,750
St. Paul Bancorp, Inc................................. 900 23,625
Star Banc Corp........................................ 650 37,294
</TABLE>
48 See Notes to Financial Statements
<PAGE>
EMERGING GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
==============================================================================
Description Shares Market Value
- ------------------------------------------------------------------------------
<S> <C> <C>
FINANCE (CONTINUED)
Starwood Lodging Trust............................ 300 $ 17,363
State Street Corp................................. 600 34,912
SunAmerica, Inc................................... 450 19,237
Transatlantic Holdings, Inc....................... 100 7,150
Vesta Insurance Group, Inc........................ 125 7,422
---------
934,994
---------
HEALTHCARE 12.4%
Arterial Vascular Engineering, Inc. (a)........... 1,150 74,750
Curative Health Services, Inc. (a)................ 300 9,113
Dura Pharmaceuticals, Inc. (a).................... 2,000 91,750
ESC Medical Systems Ltd. (a)...................... 1,400 54,250
FPA Medical Management, Inc. (a).................. 1,000 18,625
Guidant Corp...................................... 2,400 149,400
Gulf South Medical Supply, Inc. (a)............... 300 11,175
HBO & Co.......................................... 5,600 268,800
Health Care & Retirement Corp. (a)................ 650 26,162
Health Management Assn., Inc., Class A (a)........ 2,462 62,165
Healthsouth Corp. (a)............................. 3,600 99,900
Medicis Pharmaceutical Corp., Class A (a)......... 625 31,953
MiniMed, Inc. (a)................................. 500 19,437
Omnicare, Inc..................................... 1,975 61,225
Parexel International Corp. (a)................... 750 27,750
Quintiles Transnational Corp. (a)................. 1,300 49,725
Renal Treatment Centers, Inc. (a)................. 600 21,675
Rexall Sundown, Inc. (a).......................... 2,150 64,903
Steris Corp. (a).................................. 500 24,125
Sunrise Assisted Living, Inc. (a)................. 300 12,938
Sybron International Corp. (a).................... 500 23,469
Theragenics Corp. (a)............................. 600 21,600
Total Renal Care Holdings, Inc. (a)............... 916 25,190
Universal Health Services, Inc., Class B (a)...... 450 22,669
Watson Pharmaceuticals, Inc. (a).................. 800 25,950
---------
1,298,699
---------
PRODUCER MANUFACTURING 4.6%
Allied Waste Industries, Inc. (a)................. 2,050 47,791
ASM Lithography Holding NV (Netherlands) (a)...... 600 40,500
Danaher Corp...................................... 650 41,031
Federal Mogul Corp................................ 600 24,300
Global Industries, Inc. (a)....................... 2,250 38,250
</TABLE>
49 See Notes to Financial Statements
<PAGE>
EMERGING GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
PRODUCER MANUFACTURING (CONTINUED)
Mueller Industries, Inc. (a).......................... 400 $ 23,600
Newpark Resources, Inc. (a)........................... 1,600 28,000
Precision Castparts Corp.............................. 500 30,156
Sipex Corp. (a)....................................... 700 21,175
Tyco International Ltd................................ 2,200 99,137
USA Waste Services, Inc. (a).......................... 2,210 86,743
------------
480,683
------------
RAW MATERIALS/PROCESSING INDUSTRIES 1.4%
Maverick Tube Corp. (a)............................... 850 21,516
Safeskin Corp. (a).................................... 1,550 87,962
Sealed Air Corp. (a).................................. 400 24,700
Witco Corp............................................ 200 8,163
------------
142,341
------------
TECHNOLOGY 24.7%
Advanced Fibre Communications, Inc. (a)............... 2,000 58,250
America Online, Inc. (a).............................. 1,300 115,944
Apex PC Solutions, Inc. (a)........................... 500 11,063
Applied Graphics Technologies, Inc. (a)............... 450 23,963
Aspect Development, Inc. (a).......................... 400 20,800
Baan's Co. NV (Netherlands) (a)....................... 800 26,400
BMC Software, Inc. (a)................................ 2,300 150,937
Cambridge Technology Partners, Inc. (a)............... 900 37,462
CBT Group PLC - ADR (Ireland) (a)..................... 625 51,328
Check Point Software Tech Ltd. (a).................... 100 4,075
CHS Electronics, Inc. (a)............................. 1,300 22,263
Ciber, Inc. (a)....................................... 700 40,600
CIENA Corp. (a)....................................... 700 42,787
Citrix Systems, Inc. (a).............................. 1,350 102,600
Compaq Computer Corp.................................. 700 39,506
Computer Horizons Corp. (a)........................... 500 22,500
Computer Learning Centers, Inc. (a)................... 400 24,500
Compuware Corp. (a)................................... 5,500 176,000
Dell Computer Corp. (a)............................... 4,550 382,200
Digital Microwave Corp. (a)........................... 1,200 17,400
DII Group, Inc. (a)................................... 300 8,175
EMC Corp. (a)......................................... 4,000 109,750
Engineering Animation, Inc. (a)....................... 100 4,600
HNC Software, Inc. (a)................................ 700 30,100
Hyperion Software Corp. (a)........................... 1,200 42,900
</TABLE>
50 See Notes to Financial Statements
<PAGE>
EMERGING GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY (CONTINUED)
Information Management Resources, Inc. (a)............. 550 $ 20,625
Input/Output, Inc. (a)................................. 500 14,844
Jabil Circuit, Inc. (a)................................ 900 35,775
Keane, Inc. (a)........................................ 1,500 60,937
Legato Systems, Inc. (a)............................... 700 30,800
Level One Communications, Inc. (a)..................... 750 21,188
Manugistics Group, Inc. (a)............................ 500 22,313
Micrel, Inc. (a)....................................... 700 19,600
Network Appliance, Inc. (a)............................ 350 12,425
Nice Systems Ltd. (a).................................. 400 16,800
Paychex, Inc........................................... 600 30,375
Peoplesoft, Inc. (a)................................... 3,800 148,200
Saville Systems PLC - ADR (Ireland) (a)................ 800 33,200
Siebel Systems, Inc. (a)............................... 1,200 50,175
Smart Modular Technologies, Inc. (a)................... 1,250 28,750
SunGard Data Systems, Inc. (a)......................... 2,000 62,000
Tekelec, Inc. (a)...................................... 500 15,250
Teradyne, Inc. (a)..................................... 1,250 40,000
Uniphase Corp. (a)..................................... 1,600 66,200
Veritas Software Co. (a)............................... 1,200 61,200
Visio Corp. (a)........................................ 900 34,537
Vitesse Semiconductor Corp. (a)........................ 1,100 41,525
Wind River Systems, Inc. (a)........................... 650 25,797
World Access, Inc. (a)................................. 700 16,713
Yahoo!, Inc. (a)....................................... 1,450 100,412
Yurie Systems, Inc. (a)................................ 700 14,131
------------
2,589,875
------------
TRANSPORTATION 3.5%
Airborne Freight Corp.................................. 800 49,700
CNF Transportation, Inc................................ 1,100 42,212
Comair Holdings, Inc................................... 900 21,713
Continental Airlines, Inc., Class B (a)................ 1,250 60,156
Expeditores International Washington, Inc.............. 200 7,700
Halter Marine Group, Inc. (a).......................... 1,225 35,372
Hvide Marine, Inc., Class A (a)........................ 500 12,875
Southwest Airlines Co.................................. 2,350 57,869
U.S. Airways Group, Inc. (a)........................... 1,350 84,375
------------
371,972
------------
</TABLE>
51 See Notes to Financial Statements
<PAGE>
EMERGING GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Description Shares Market Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES 2.0%
AES Corp. (a)........................................................................ 1,200 $ 55,950
AirTouch Communications, Inc. (a).................................................... 3,800 157,937
------------
213,887
------------
TOTAL LONG-TERM INVESTMENTS 92.1%
(Cost $7,725,771)....................................................................... 9,666,867
REPURCHASE AGREEMENT 8.2%
Swiss Bank Corp., ($855,000 par collateralized by U.S. Government obligations
in a pooled cash account, dated 12/31/97, to be sold on 01/02/98 at $855,290)
(Cost $855,000)......................................................................... 855,000
------------
TOTAL INVESTMENTS 100.3%
(Cost $8,580,771)....................................................................... 10,521,867
LIABILITIES IN EXCESS OF OTHER ASSETS (0.3%)................................................. (30,013)
------------
NET ASSETS 100.0%............................................................................ $ 10,491,854
============
</TABLE>
(a) Non-income producing security as this stock currently does not declare
dividends.
52 See Notes to Financial Statements
<PAGE>
EMERGING GROWTH PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $8,580,771)....................................................... $ 10,521,867
Cash...................................................................................... 5,539
Receivables:
Investments Sold..................................................................... 33,070
Portfolio Shares Sold................................................................ 5,622
Dividends............................................................................ 1,968
Expense Reimbursement by Adviser..................................................... 967
Unamortized Organizational Expenses....................................................... 3,411
------------
Total Assets......................................................................... 10,572,444
------------
LIABILITIES:
Payables:
Investments Purchased................................................................ 24,577
Distributor and Affiliates........................................................... 2,442
Portfolio Shares Repurchased......................................................... 169
Accrued Expenses.......................................................................... 35,901
Trustees' Deferred Compensation and Retirement Plans....................................... 17,501
------------
Total Liabilities.................................................................... 80,590
------------
NET ASSETS................................................................................ $ 10,491,854
============
NET ASSETS CONSIST OF:
Capital................................................................................... $ 8,818,482
Net Unrealized Appreciation............................................................... 1,941,096
Accumulated Net Investment Loss........................................................... (12,701)
Accumulated Net Realized Loss............................................................. (255,023)
------------
NET ASSETS................................................................................ $ 10,491,854
============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Based on net assets of $10,491,854 and 637,815 shares of beneficial interest
issued and outstanding)................................................................. $ 16.45
============
</TABLE>
53 See Notes to Financial Statements
<PAGE>
EMERGING GROWTH PORTFOLIO STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
<TABLE>
- -----------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest......................................................................... $ 35,862
Dividends........................................................................ 15,652
----------
Total Income................................................................ 51,514
----------
EXPENSES:
Investment Advisory Fee.......................................................... 48,713
Audit............................................................................ 24,728
Shareholder Reports.............................................................. 22,156
Shareholder Services............................................................. 15,942
Trustees' Fees and Expenses...................................................... 10,626
Accounting....................................................................... 9,145
Legal............................................................................ 5,281
Trustees' Retirement Plan........................................................ 4,329
Amortization of Organizational Costs............................................. 1,368
Custody.......................................................................... 117
Other............................................................................ 6,567
----------
Total Expenses.............................................................. 148,972
Less Fees Waived and Expenses Reimbursed ($48,713 and $40,970, respectively) 89,683
----------
Net Expenses................................................................ 59,289
----------
NET INVESTMENT LOSS.............................................................. $ (7,775)
==========
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Gain................................................................ $ 156,164
----------
Unrealized Appreciation/Depreciation:
Beginning of the Period..................................................... 944,059
End of the Period:
Investments................................................................. 1,941,096
----------
Net Unrealized Appreciation During the Period.................................... 997,037
----------
NET REALIZED AND UNREALIZED GAIN................................................. $1,153,201
==========
NET INCREASE IN NET ASSETS FROM OPERATIONS....................................... $1,145,426
==========
</TABLE>
54 See Notes to Financial Statements
<PAGE>
EMERGING GROWTH PORTFOLIO STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
=========================================================================================================
Year Ended Year Ended
December 31, 1997 December 31, 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Loss............................................ $ (7,775) $ (6,964)
Net Realized Gain/Loss......................................... 156,164 (353,684)
Net Unrealized Appreciation During the Period.................. 997,037 699,394
----------- -----------
Change in Net Assets from Operations........................... 1,145,426 338,746
----------- -----------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold...................................... 8,526,700 4,967,397
Cost of Shares Repurchased..................................... (4,358,459) (2,417,613)
----------- -----------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS............. 4,168,241 2,549,784
----------- -----------
TOTAL INCREASE IN NET ASSETS................................... 5,313,667 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 $12,701 and $4,926, respectively)......................... $10,491,854 $ 5,178,187
=========== ===========
</TABLE>
55 See Notes to Financial Statements
<PAGE>
EMERGING GROWTH PORTFOLIO FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the
Portfolio outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
July 3, 1995
(Commencement
of Investment
Year Ended Year Ended Operations) to
December 31, December 31, December 31,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of the Period.................... $ 13.660 $ 11.72 $ 10.00
----------- ---------- ----------
Net Investment Loss.................................... (.007) (.016) (.08)
Net Realized and Unrealized Gain....................... 2.797 1.956 1.80
----------- ---------- ----------
Total from Investment Operations............................ 2.790 1.940 1.72
----------- ---------- ----------
Net Asset Value, End of the Period.......................... $ 16.450 $ 13.660 $ 11.72
=========== ========== ==========
Total Return*............................................... 20.42% 16.55% 17.20%**
Net Assets at End of the Period (In millions)............... $ 10.5 $ 5.2 $ 2.3
Ratio of Expenses to Average Net Assets*.................... .85% .85% 2.50%
Ratio of Net Investment Loss to Average Net Assets*......... (.11%) (.17%) (1.45%)
Portfolio Turnover.......................................... 116% 102% 41%**
Average Commission Per Equity Share Traded (a).............. $ .0502 $ .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..................... 2.14% 3.28% 5.40%
Ratio of Net Investment Loss to Average Net Assets.......... (1.40%) (2.60%) (4.35%)
</TABLE>
**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.
56 See Notes to Financial Statements
<PAGE>
ENTERPRISE PORTFOLIO PORTFOLIO OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
====================================================================================
Description Shares Market Value
- ------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK 100.3%
CONSUMER DISTRIBUTION 13.6%
Bed Bath & Beyond, Inc. (a)......................... 8,200 $ 315,700
Brightpoint, Inc. (a)............................... 20,100 278,888
Consolidated Stores Corp. (a)....................... 6,275 275,708
Costco Cos., Inc. (a)............................... 14,500 647,062
CVS Corp............................................ 6,500 416,406
Dayton Hudson Corp.................................. 15,800 1,066,500
Family Dollar Stores, Inc........................... 17,300 507,106
General Nutrition Cos., Inc. (a).................... 14,800 503,200
Home Depot, Inc..................................... 7,350 432,731
Ingram Micro, Inc., Class A (a)..................... 16,100 468,913
Jacor Communications, Inc., Class A (a)............. 8,600 456,875
Kroger Co. (a)...................................... 27,600 1,019,475
Lear Corp. (a)...................................... 8,000 380,000
McKesson Corp....................................... 5,800 627,488
Profitt's, Inc. (a)................................. 13,500 383,906
Rite Aid Corp....................................... 10,200 598,613
Ross Stores, Inc.................................... 23,200 843,900
Safeway, Inc. (a)................................... 25,662 1,623,121
Sysco Corp.......................................... 11,800 537,638
Tech Data Corp. (a)................................. 7,200 279,900
TJX Cos., Inc....................................... 33,100 1,137,812
U.S. Office Products Co. (a)........................ 34,850 683,931
-----------
13,484,873
-----------
CONSUMER DURABLES 2.7%
Dana Corp........................................... 13,500 641,250
Eaton Corp.......................................... 10,000 892,500
Ford Motor Co....................................... 23,800 1,158,763
-----------
2,692,513
-----------
CONSUMER NON-DURABLES 6.6%
Borders Group, Inc. (a)............................. 15,900 497,869
Dial Corp........................................... 36,600 761,737
Liz Claiborne, Inc.................................. 9,000 376,313
Nautica Enterprises, Inc. (a)....................... 8,200 190,650
Philip Morris Cos., Inc............................. 95,300 4,318,281
Tommy Hilfiger Corp. (a)............................ 10,000 351,250
-----------
6,496,100
-----------
CONSUMER SERVICES 13.4%
Accustaff, Inc. (a)................................. 28,724 660,652
AMR Corp............................................ 2,700 346,950
Apple South, Inc.................................... 15,500 203,438
Brinker International, Inc. (a)..................... 33,900 542,400
</TABLE>
57 See Notes to Financial Statements
<PAGE>
ENTERPRISE PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
============================================================================
Description Shares Market Value
- ----------------------------------------------------------------------------
<S> <C> <C>
CONSUMER SERVICES (CONTINUED)
CBS Corp............................................. 36,000 $ 1,059,750
Cendant Corp. (a).................................... 35,325 1,214,297
Chancellor Media Corp. (a)........................... 17,500 1,305,937
CORESTAFF, Inc. (a).................................. 18,000 477,000
Cracker Barrel Old Country Store, Inc................ 12,700 423,862
FIRSTPLUS Financial Group, Inc. (a).................. 19,800 759,825
Foodmaker, Inc. (a).................................. 25,400 382,588
Gannett Co., Inc..................................... 11,200 692,300
Landry's Seafood Restaurants, Inc. (a)............... 12,800 307,200
Marriot International, Inc........................... 7,200 498,600
New York Times Co., Class A.......................... 12,600 833,175
Omnicom Group, Inc.................................. 26,600 1,127,175
Promus Hotel Corp. (a)............................... 9,500 399,000
Time Warner, Inc..................................... 12,500 775,000
Tribune Co........................................... 15,400 958,650
Universal Outdoor Holdings Inc. (a).................. 5,000 260,000
----------
13,227,799
----------
ENERGY 5.3%
British Petroleum Co. PLC - ADR (United Kingdom)..... 10,000 796,875
El Paso Natural Gas Co............................... 15,000 997,500
Schlumberger, Ltd.................................... 8,100 652,050
Smith International, Inc. (a)........................ 10,200 626,025
Texaco, Inc.......................................... 16,500 897,187
Tidewater, Inc....................................... 6,400 352,800
Weatherford Enterra, Inc. (a)........................ 7,400 323,750
YPF Sociedad Anonima, Class D - ADR (Argentina)...... 17,600 601,700
----------
5,247,887
----------
FINANCE 16.4%
Allstate Corp........................................ 9,000 817,875
Ambac Financial Group, Inc........................... 12,100 556,600
BankAmerica Corp..................................... 8,700 635,100
BankBoston Corp...................................... 10,100 948,769
Bear Stearns Cos., Inc............................... 12,300 584,250
Chase Manhattan Corp................................. 10,000 1,095,000
CMAC Investment Corp................................. 14,900 899,587
Conseco, Inc......................................... 66,400 3,017,050
Federal National Mortgage Assn....................... 16,400 935,825
Green Tree Financial Corp............................ 9,600 251,400
Household International, Inc......................... 3,300 420,956
Merrill Lynch & Co., Inc............................. 10,590 772,408
MGIC Investment Corp................................. 5,600 372,400
Money Store, Inc..................................... 15,200 319,200
SLM Holding Corp..................................... 4,300 598,238
</TABLE>
58 See Notes to Financial Statements
<PAGE>
ENTERPRISE PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
==============================================================================
Description Shares Market Value
- ------------------------------------------------------------------------------
<S> <C> <C>
FINANCE (CONTINUED)
SunAmerica, Inc..................................... 21,150 $ 904,162
Torchmark, Inc...................................... 18,200 765,538
Travelers Group, Inc................................ 30,200 1,627,025
U.S. Bancorp........................................ 6,300 705,206
----------
16,226,589
----------
HEALTHCARE 13.4%
Bristol Myers Squibb Co............................. 22,000 2,081,750
ESC Medical Systems Ltd. (a)........................ 19,500 755,625
Guidant Corp........................................ 5,400 336,150
Health Care & Retirement Corp. (a).................. 17,900 720,475
Health Management Assn., Inc., Class A (a).......... 24,300 613,575
Healthsouth Corp. (a)............................... 35,300 979,575
Lincare Holdings, Inc. (a).......................... 14,900 849,300
Merck & Co., Inc.................................... 4,200 446,250
Mylan Labs., Inc.................................... 21,500 450,156
Pfizer, Inc......................................... 8,500 633,781
Renal Treatment Centers, Inc. (a)................... 14,800 534,650
Schering-Plough Corp................................ 20,700 1,285,987
Tenet Healthcare Corp. (a).......................... 17,300 573,063
Total Renal Care Holdings, Inc. (a)................. 12,033 330,908
Universal Health Services, Inc., Class B (a)........ 16,500 831,187
Watson Pharmaceuticals, Inc. (a).................... 24,000 778,500
Wellpoint Health Networks, Inc., Class A (a)........ 23,600 997,100
----------
13,198,032
----------
PRODUCER MANUFACTURING 5.5%
Aeroquip Vickers, Inc............................... 5,900 289,469
Illinois Tool Works, Inc............................ 5,900 354,737
Philips Electronics N.V. (Netherlands).............. 4,000 242,000
Textron, Inc........................................ 15,700 981,250
Tyco International Ltd.............................. 26,100 1,176,131
United Technologies Corp............................ 13,100 953,844
USA Waste Services, Inc. (a)........................ 36,557 1,434,862
----------
5,432,293
----------
RAW MATERIALS/PROCESSING INDUSTRIES 2.4%
Bowater, Inc........................................ 10,900 484,369
Crompton & Knowles Corp............................. 20,900 553,850
Cytec Industries, Inc. (a).......................... 10,500 492,844
Fort James Corp..................................... 11,000 420,750
Praxair, Inc........................................ 9,600 432,000
----------
2,383,813
----------
TECHNOLOGY 16.1%
Adaptec, Inc. (a)................................... 14,600 542,025
Analog Devices, Inc. (a)............................ 11,200 310,100
</TABLE>
59 See Notes to Financial Statements
<PAGE>
ENTERPRISE PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
==========================================================================================================
Description Shares Market Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY (CONTINUED)
BMC Software, Inc. (a)........................................................ 29,500 $ 1,935,937
Cadence Design Systems, Inc. (a).............................................. 26,700 654,150
CIENA Corp. (a)............................................................... 7,600 464,550
Cisco Systems, Inc. (a)....................................................... 9,750 543,563
Citrix Systems, Inc. (a)...................................................... 6,900 524,400
Compaq Computer Corp.......................................................... 26,400 1,489,950
Computer Associates International, Inc........................................ 11,950 631,856
Compuware Corp. (a)........................................................... 22,000 704,000
Dell Computer Corp. (a)....................................................... 5,200 436,800
EMC Corp. (a)................................................................. 20,800 570,700
International Business Machines Corp.......................................... 17,000 1,777,562
Linear Technology Corp........................................................ 7,800 449,475
Lucent Technologies, Inc...................................................... 3,600 287,550
Microsoft Corp. (a)........................................................... 4,300 555,775
National Semiconductor Corp. (a).............................................. 16,300 422,781
Networks Associates, Inc. (a)................................................. 12,400 655,650
Nokia Corp. - ADR (Finland)................................................... 5,100 357,000
Sanmina Corp. (a)............................................................. 7,500 508,125
SCI Systems, Inc. (a)......................................................... 20,400 888,675
Tellabs, Inc. (a)............................................................. 11,100 586,913
VLSI Technology, Inc. (a)..................................................... 15,500 366,188
Xerox Corp.................................................................... 2,700 199,294
-----------
15,863,019
-----------
TRANSPORTATION 1.2%
Continental Airlines, Inc., Class B (a)....................................... 9,000 433,125
Delta Air Lines, Inc.......................................................... 3,000 357,000
Federal Express Corp. (a)..................................................... 5,900 360,269
-----------
1,150,394
-----------
UTILITIES 3.7%
Ameritech Corp................................................................ 8,700 700,350
Bell Atlantic Corp............................................................ 9,200 837,200
Cincinnati Bell, Inc.......................................................... 11,900 368,900
CMS Energy Corp............................................................... 8,200 361,313
GPU, Inc...................................................................... 7,000 294,875
SBC Communications, Inc....................................................... 7,000 512,750
U.S. West Communications Group................................................ 12,300 555,037
-----------
3,630,425
-----------
TOTAL LONG TERM INVESTMENTS 100.3% (COST $69,715,702)......................... 99,033,737
REPURCHASE AGREEMENT 0.6%
DLJ ($525,000 par collateralized by U.S. Government obligations in a pooled
cash account, dated 12/31/97, to be sold on 01/02/98 at $525,190) (Cost
$525,000).................................................................... 525,000
-----------
TOTAL INVESTMENTS 100.9% (COST $70,240,702)................................... 99,558,737
LIABILITIES IN EXCESS OF OTHER ASSETS (0.9%).................................. (844,661)
-----------
NET ASSETS 100.0%............................................................. $98,714,076
===========
</TABLE>
(a) Non-income producing security as this stock currently does not declare
dividends.
60 See Notes to Financial Statements
<PAGE>
ENTERPRISE PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $70,240,702)................................... $99,558,737
Cash................................................................... 1,447
Receivables:
Dividends......................................................... 102,353
Portfolio Shares Sold............................................. 25,226
Other.................................................................. 46,687
------------
Total Assets...................................................... 99,734,450
------------
LIABILITIES:
Payables:
Investments Purchased............................................. 756,452
Portfolio Shares Repurchased...................................... 97,165
Investment Advisory Fee........................................... 33,278
Distributor and Affiliates........................................ 12,053
Trustees' Deferred Compensation and Retirement Plans................... 99,283
Accrued Expenses....................................................... 22,143
------------
Total Liabilities................................................. 1,020,374
------------
NET ASSETS............................................................. $98,714,076
------------
NET ASSETS CONSIST OF:
Capital................................................................ $68,610,247
Net Unrealized Appreciation............................................ 29,318,035
Accumulated Net Realized Gain.......................................... 748,449
Accumulated Undistributed Net Investment Income........................ 37,345
------------
NET ASSETS............................................................. $98,714,076
------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Based on net assets of $98,714,076 and 5,452,063 shares of beneficial
interest issued and outstanding)................................... $ 18.11
------------
</TABLE>
61 See Notes to Financial Statements
<PAGE>
ENTERPRISE PORTFOLIO STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends.......................................................... $ 864,258
Interest........................................................... 131,879
-----------
Total Income.................................................. 996,137
-----------
EXPENSES:
Investment Advisory Fee............................................ 467,494
Custody............................................................ 19,783
Legal.............................................................. 15,923
Trustees' Fees and Expenses........................................ 12,281
Other.............................................................. 100,570
-----------
Total Expenses................................................ 616,051
Less Fees Waived.............................................. 55,090
-----------
Net Expenses.................................................. 560,961
-----------
NET INVESTMENT INCOME.............................................. $ 435,176
-----------
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Gain.................................................. $13,400,141
Unrealized Appreciation/Depreciation:
Beginning of the Period............................................ 19,056,982
End of the Period:
Investments................................................... 29,318,035
-----------
Net Unrealized Appreciation During the Period...................... 10,261,053
-----------
NET REALIZED AND UNREALIZED GAIN................................... $23,661,194
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS......................... $24,096,370
===========
</TABLE>
62 See Notes to Financial Statements
<PAGE>
ENTERPRISE PORTFOLIO STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Year Ended Year Ended
December 31,1997 December 31,1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.......................................... $ 435,176 $ 556,672
Net Realized Gain.............................................. 13,400,141 7,574,164
Net Unrealized Appreciation During the Period.................. 10,261,053 9,782,538
------------ ------------
Change in Net Assets from Operations........................... 24,096,370 17,913,374
------------ ------------
Distributions from Net Investment Income....................... (457,271) (530,417)
Distributions from Net Realized Gain........................... (13,668,548) (9,089,491)
------------ ------------
Total Distributions............................................ (14,125,819) (9,619,908)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES............ 9,970,551 8,293,466
------------ ------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold...................................... 16,421,893 7,883,906
Net Asset Value of Shares Issued Through Dividend Reinvestment. 14,125,818 9,619,909
Cost of Shares Repurchased..................................... (26,609,356) (17,001,971)
------------ ------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS............. 3,938,355 501,844
------------ ------------
TOTAL INCREASE IN NET ASSETS................................... 13,908,906 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 $37,345 and $59,440, respectively)...... $ 98,714,076 $ 84,805,170
============= ============
</TABLE>
63 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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------
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................................................ .091 .113 .32 .25 .21
Net Realized and Unrealized Gain/Loss................................ 4.734 3.417 4.22 (.7625) 1.0325
------- ------- ------- ------- -------
Total from Investment Operations.......................................... 4.825 3.530 4.54 (.5125) 1.2425
------- ------- ------- ------- -------
Less:
Distributions from Net Investment Income............................. .096 .109 .3175 .25 .215
Distributions from Net Realized Gain................................. 2.885 1.849 1.9225 1.4175 .6675
------- ------- ------- ------- -------
Total Distributions....................................................... 2.981 1.958 2.24 1.6675 .8825
------- ------- ------- ------- -------
Net Asset Value, End of the Period........................................ $18.106 $16.262 $ 14.69 $ 12.39 $ 14.57
======= ======= ======= ======= =======
Total Return*............................................................. 30.66% 24.80% 36.98% (3.39)% 8.98%
Net Assets at End of the Period (In millions)............................. $ 98.7 $ 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*..................... .47% .68% 2.06% 1.72% 1.41%
Portfolio Turnover........................................................ 82% 152% 145% 153% 139%
Average Commission Paid per Equity Share Traded (a)....................... $ .0566 $ .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................................... .66% .75% .68% .68% .72%
Ratio of Net Investment Income to Average Net Assets...................... .41% .53% 1.98% 1.64% 1.29%
</TABLE>
(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.
64 See Notes to Financial Statements
<PAGE>
GLOBAL EQUITY PORTFOLIO PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 96.9%
AUSTRALIA 2.1%
ICI Australia Ltd...................................... 1,900 $13,312
Pacific Dunlop Ltd..................................... 8,200 17,369
Rio Tinto Ltd.......................................... 2,600 30,338
------------
61,019
------------
AUSTRIA 0.9%
OMV, AG................................................ 200 27,709
------------
Belgium 2.4%
Almanij................................................ 1,400 70,659
------------
BRAZIL 0.7%
Centrais Eletricas Brasileiras SA Electrobras - ADR.... 340 7,947
Telecomunicacoes Brasileiras - ADR..................... 100 11,644
------------
19,591
------------
CANADA 3.0%
Barrick Gold Corp. (a)................................. 100 1,865
IPL Energy, Inc. (a)................................... 1,500 68,647
Northern Telecom Ltd. (a).............................. 200 17,795
Placer Dome, Inc. (a).................................. 100 1,260
------------
89,567
------------
DENMARK 0.5%
Novo Nordisk A/S, Ser B................................ 100 14,303
------------
FRANCE 3.4%
Alcatel Alsthom (Cie Gen El)........................... 165 20,973
Axa-UAP................................................ 230 17,797
Compagnie de Saint Gobain.............................. 148 21,025
Elf Aquitaine.......................................... 150 17,446
LVMH (Moet Hennessy Louis Vuitton)..................... 55 9,130
Total, Class B......................................... 135 14,692
------------
101,063
------------
GERMANY 4.3%
Allianz, AG............................................ 100 25,904
BASF, AG............................................... 250 8,859
Bayer, AG.............................................. 200 7,471
Daimler-Benz, AG....................................... 250 17,538
Degussa, AG............................................ 50 2,502
Deutsche Telekom, AG................................... 550 10,349
Linde.................................................. 50 30,518
Siemens, AG............................................ 200 11,840
</TABLE>
65 See Notes to Financial Statements
<PAGE>
GLOBAL EQUITY PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
=================================================================================================
Description Shares Market Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
GERMANY (CONTINUED)
VEBA, AG...................................................... 200 $ 13,619
----------
128,600
----------
ITALY 2.0%
Ente Nazionale Idrocarburi, SpA............................... 2,000 11,340
Fiat, SpA..................................................... 4,000 11,633
Instituto Nazionale delle Assicurazioni (INA)................. 12,000 24,319
Telecom Italia................................................ 2,500 11,539
Telecom Italia SpA (a)........................................ 2 13
----------
58,844
----------
JAPAN 10.9%
Acom Co., Ltd................................................. 300 16,543
Asahi Glass Co................................................ 1,000 4,748
Bank of Tokyo................................................. 600 8,271
Daiwa Securities.............................................. 1,000 3,446
East Japan Railway............................................ 1 4,511
Fujitsu....................................................... 1,000 10,722
Hitachi....................................................... 2,000 14,245
Honda Motor Co................................................ 1,000 36,685
Japan Air Lines Co............................................ 1,000 2,719
Japan Energy Corp............................................. 4,000 3,768
Kao Corp...................................................... 1,000 14,398
Kawasaki Heavy Industries..................................... 2,000 3,094
Kawasaki Steel Corp........................................... 3,000 4,090
Komatsu....................................................... 1,000 5,017
Kyocera Corp.................................................. 100 4,534
Matsushita Electric Industries................................ 1,000 14,628
Mitsubishi Electric Corp...................................... 3,000 7,674
Mitsubishi Estate............................................. 1,000 10,875
Nagoya Railroad Co............................................ 4,000 13,724
NEC Corp...................................................... 1,000 10,646
Nippon Steel Corp............................................. 2,000 2,956
Nippon Telegraph & Telephone Corp............................. 4 34,311
Nippon Yusen Kabushiki Kaisha................................. 3,000 8,226
Nissan Motor Co............................................... 2,000 8,271
NSK Ltd....................................................... 1,000 2,489
Oji Paper Co.................................................. 2,000 7,950
Sekisui House................................................. 1,000 6,426
Sharp Corp.................................................... 1,000 6,878
Teijin........................................................ 2,000 4,182
</TABLE>
66 See Notes to Financial Statements
<PAGE>
GLOBAL EQUITY PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
===============================================================================
Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
JAPAN (CONTINUED)
Tobu Railway Co................................ 2,000 $ 6,250
Toppan Printing Co............................. 1,000 13,020
Toyobo Co...................................... 1,000 1,210
Toyota Motor Corp.............................. 1,000 28,644
-----------
325,151
-----------
MALAYSIA 0.1%
DCB Holdings Berhard........................... 9,000 4,350
-----------
MEXICO 1.7%
Telefonos De Mexico SA, Ser L.................. 18,000 50,740
-----------
NETHERLANDS 2.3%
ABN Amro Holdings.............................. 627 12,214
Akzo Nobel..................................... 100 17,242
Elsevier....................................... 700 11,323
Koninklijke Ahold.............................. 517 13,488
Wolters Kluwer................................. 101 13,046
-----------
67,313
-----------
NEW ZEALAND 1.0%
Deutsche Bank, AG.............................. 400 28,239
-----------
REPUBLIC OF KOREA 0.3%
Korea Electric Power Corp. - ADR (a)........... 307 3,089
Pohang Iron & Steel Co., Ltd. - ADR (a)........ 317 5,528
-----------
8,617
-----------
SINGAPORE 1.5%
Singapore Telecommunications................... 24,000 44,711
-----------
SOUTH AFRICA 0.7%
De Beers Cons Mines Ltd. - ADR................. 500 10,219
Sasol Ltd. - ADR............................... 1,126 11,893
-----------
22,112
-----------
SPAIN 1.5%
EMP Nac Electricid............................. 300 5,327
Repsol, SA..................................... 400 17,066
Telefonica De Espana........................... 800 22,842
-----------
45,235
-----------
SWEDEN 0.6%
Astra, AB, Ser A............................... 200 3,463
Ericsson Telefon LM, Ser B..................... 400 15,038
-----------
18,501
-----------
</TABLE>
67 See Notes to Financial Statements
<PAGE>
GLOBAL EQUITY PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
====================================================================================
Description Shares Market Value
- ------------------------------------------------------------------------------------
<S> <C> <C>
SWITZERLAND 3.3%
Credit Suisse Group.................................. 200 $ 30,933
Nestle, AG........................................... 10 14,981
Novartis, AG......................................... 20 32,439
Roche Holdings Genusscheine, AG...................... 2 19,854
----------
98,207
----------
UNITED KINGDOM 10.5%
B.A.T. Industries.................................... 1,700 15,503
Barclays............................................. 1,000 26,622
Bass................................................. 1,300 20,222
British Petroleum.................................... 1,116 14,763
British Telecommunications........................... 2,400 18,911
BTR.................................................. 2,900 8,764
Burmah Castrol....................................... 700 12,210
Carlton Communications............................... 2,500 19,299
Glaxo Wellcome....................................... 1,000 23,841
HSBC Holdings........................................ 400 10,381
HSBC Holdings - ADR.................................. 700 17,269
Lloyds TSB Group..................................... 2,100 27,320
Marks & Spencer...................................... 1,200 11,867
Rank Group........................................... 2,400 13,363
Scot & Newcastle..................................... 2,100 25,714
Smithkline Beecham................................... 2,000 20,613
Smiths Industries.................................... 1,000 13,929
Zeneca Group......................................... 300 10,626
----------
311,217
----------
UNITED STATES 43.2%
Abbott Laboratories, Inc. (b)........................ 400 26,225
Aluminum Co. of America.............................. 200 14,075
American Express Co.................................. 300 26,775
American Home Products Corp.......................... 300 22,950
American International Group, Inc.................... 200 21,750
Amoco Corp........................................... 200 17,025
AT&T Corp. (b)....................................... 600 36,750
BellSouth Corp....................................... 500 28,156
Boeing Co............................................ 100 4,894
Bristol-Myers Squibb Co. (b)......................... 400 37,850
Chevron Corp......................................... 300 23,100
Cisco Systems, Inc. (a).............................. 300 16,725
</TABLE>
68 See Notes to Financial Statements
<PAGE>
GLOBAL EQUITY PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
====================================================================================
Description Shares Market Value
- ------------------------------------------------------------------------------------
<S> <C> <C>
UNITED STATES (CONTINUED)
Citicorp.............................................. 200 $ 25,287
Coca Cola Co. (b)..................................... 800 53,300
Columbia / HCA Healthcare Corp........................ 300 8,888
Dominion Resources, Inc............................... 800 34,050
Dow Chemical Co....................................... 200 20,300
Du Pont (E. I.) de Nemours & Co....................... 200 12,013
Eastman Kodak Co...................................... 200 12,162
Federal National Mortgage Assn........................ 400 22,825
First Data Corp....................................... 500 14,625
FPL Group, Inc........................................ 500 29,594
General Electric Co................................... 400 29,350
General Motors Corp................................... 400 24,250
Gillette Co........................................... 200 20,087
Hewlett Packard Co.................................... 300 18,750
Home Depot, Inc....................................... 250 14,719
Illinois Tool Works, Inc.............................. 200 12,025
Intel Corp............................................ 200 14,050
International Business Machines Corp.................. 200 20,912
International Paper Co................................ 400 17,250
J.C. Penney, Inc...................................... 400 24,125
Johnson & Johnson, Inc................................ 400 26,350
JP Morgan & Co., Inc. (b)............................. 300 33,862
Kimberly Clark Corp................................... 300 14,794
Lilly Eli & Co........................................ 400 27,850
Lucent Technologies, Inc. (b)......................... 400 31,950
McDonald's Corp. (b).................................. 500 23,875
Meritor Automotive Inc................................ 100 2,106
Microsoft Corp. (a)(b)................................ 300 38,775
Minnesota Mining & Manufacturing Co................... 300 24,619
Mobil Corp............................................ 200 14,437
Motorola, Inc......................................... 200 11,413
NationsBank Corp...................................... 400 24,325
Oracle Systems Corp. (a).............................. 250 5,578
PacifiCorp............................................ 1,100 30,044
Pfizer, Inc........................................... 200 14,912
Procter & Gamble Co................................... 400 31,925
Raytheon Co., Class A................................. 25 1,233
Rockwell International Corp........................... 300 15,675
</TABLE>
69 See Notes to Financial Statements
<PAGE>
GLOBAL EQUITY PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Description Shares Market Value
- ------------------------------------------------------------------------------
<S> <C> <C>
UNITED STATES (CONTINUED)
SBC Communications, Inc......................... 500 $ 36,625
Schering-Plough Corp............................ 200 12,425
Sears Roebuck & Co.............................. 300 13,575
Time Warner, Inc................................ 300 18,600
Warner-Lambert Co............................... 200 24,800
Wells Fargo & Co................................ 100 33,944
Weyerhaeuser Co................................. 400 19,625
Worldcom, Inc................................... 800 24,200
Xerox Corp...................................... 300 22,144
---------
1,284,498
---------
TOTAL COMMON STOCKS 96.9%...................................... 2,880,246
PREFERRED STOCK 0.7%
FINLAND 0.7%
Nokia (Ab) Oy, Ser A - ADR...................... 300 21,299
---------
TOTAL LONG-TERM INVESTMENTS 97.6%
(Cost $2,616,902).......................................... 2,901,545
OTHER ASSETS IN EXCESS OF LIABILITIES 2.4%..................... 72,464
---------
NET ASSETS 100.0%.............................................. $ 2,974,009
---------
</TABLE>
(a) Non-income producing security as this stock currently does not declare
dividends.
(b) Assets segregated as collateral for open forward and open futures
transactions.
70 See Notes to Financial Statements
<PAGE>
GLOBAL EQUITY PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Total Investments (Cost $2,616,902)............................................................... $ 2,901,545
Cash.............................................................................................. 56,999
Foreign Currency (Cost $23,087)................................................................... 22,360
Receivables:
Expense Reimbursement by Adviser............................................................. 15,850
Dividends.................................................................................... 5,474
Forward Currency Contracts........................................................................ 24,182
Unamortized Organizational Costs.................................................................. 3,405
---------
Total Assets................................................................................. 3,029,815
---------
LIABILITIES:
Payables:
Distributor and Affiliates................................................................... 3,143
Portfolio Shares Repurchased................................................................. 171
Accrued Expenses.................................................................................. 35,969
Trustees' Deferred Compensation and Retirement Plans.............................................. 16,523
---------
Total Liabilities............................................................................ 55,806
---------
NET ASSETS........................................................................................ $ 2,974,009
---------
NET ASSETS CONSIST OF:
Capital........................................................................................... $ 2,701,945
Net Unrealized Appreciation....................................................................... 307,950
Accumulated Distributions in Excess of Net Investment Income...................................... (14,504)
Accumulated Distributions in Excess of Net Realized Gain.......................................... (21,382)
---------
NET ASSETS........................................................................................ $ 2,974,009
---------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Based on net assets of $2,974,009 and 270,266 shares of beneficial interest
issued and outstanding)......................................................................... $ 11.00
---------
</TABLE>
71
See Notes to Financial Statements
<PAGE>
GLOBAL EQUITY PORTFOLIO STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
===================================================================================================
<S> <C>
INVESTMENT INCOME:
Dividends (Net of foreign withholding taxes of $5,109)................................ $ 53,293
Interest.............................................................................. 7,646
Other................................................................................. 541
---------
Total Income..................................................................... 61,480
---------
EXPENSES:
Custody............................................................................... 74,070
Investment Advisory Fee............................................................... 31,290
Audit................................................................................. 24,832
Accounting............................................................................ 21,596
Shareholder Reports................................................................... 18,284
Shareholder Services.................................................................. 15,965
Trustees' Fees and Expenses........................................................... 9,857
Legal................................................................................. 4,984
Amortization of Organizational Costs.................................................. 1,365
Other................................................................................. 9,936
---------
Total Expenses................................................................... 212,179
Less Fees Waived and Expenses Reimbursed ($31,290 and $143,342, respectively).... 174,632
---------
Net Expenses..................................................................... 37,547
---------
NET INVESTMENT INCOME................................................................. $ 23,933
---------
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments...................................................................... $ 510,380
Forward Currency Contracts....................................................... (1,690)
---------
Net Realized Gain..................................................................... 508,690
---------
Unrealized Appreciation/Depreciation:
Beginning of the Period.......................................................... 396,734
---------
End of the Period:
Investments................................................................... 284,643
Forward Currency Contracts.................................................... 24,182
Foreign Currency Translation.................................................. (875)
---------
307,950
---------
Net Unrealized Depreciation During the Period......................................... (88,784)
---------
NET REALIZED AND UNREALIZED GAIN...................................................... $ 419,906
---------
NET INCREASE IN NET ASSETS FROM OPERATIONS............................................ $ 443,839
---------
</TABLE>
72 See Notes to Financial Statements
<PAGE>
GLOBAL EQUITY PORTFOLIO STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
===============================================================================================================
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.............................................. $ 23,933 $ 7,708
Net Realized Gain.................................................. 508,690 107,660
Net Unrealized Appreciation/Depreciation During the Period......... (88,784) 294,056
--------- ---------
Change in Net Assets from Operations............................... 443,839 409,424
--------- ---------
Distributions from Net Investment Income........................... (23,933) (7,708)
Distributions in Excess of Net Investment Income................... (1,351) (32,197)
--------- ---------
Distributions from and in Excess of Net Investment Income.......... (25,284) (39,905)
--------- ---------
Distributions from Net Realized Gain............................... (536,409) (37,458)
Distributions in Excess of Net Realized Gain....................... (24,805) -0-
--------- ---------
Distributions from and in Excess of Net Realized Gain.............. (561,214) (37,458)
--------- ---------
Total Distributions................................................ (586,498) (77,363)
--------- ---------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES................ (142,659) 332,061
--------- ---------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold.......................................... 1,501,991 1,241,023
Net Asset Value of Shares Issued through Dividend Reinvestment..... 352,262 42,743
Cost of Shares Repurchased......................................... (1,254,609) (1,473,972)
--------- ---------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS................. 599,644 (190,206)
--------- ---------
TOTAL INCREASE IN NET ASSETS....................................... 456,985 141,855
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 $14,504 and $9,730, respectively)........ $ 2,974,009 $ 2,517,024
--------- ---------
</TABLE>
73 See Notes to Financial Statements
<PAGE>
GLOBAL EQUITY PORTFOLIO FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the
Portfolio outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
================================================================================================================
JULY 3, 1995
(COMMENCEMENT
OF INVESTMENT
YEAR ENDED YEAR ENDED OPERATIONS) TO
DECEMBER 31, 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................................. .110 .035 (.16)
Net Realized and Unrealized Gain........................... 1.696 1.687 .46
-------- -------- --------
Total from Investment Operations................................ 1.806 1.722 .30
-------- -------- --------
Less:
Distributions from and in Excess of
Net Investment Income...................................... .106 .188 -0-
Distributions from and in Excess of
Net Realized Gain.......................................... 2.354 .176 -0-
-------- -------- --------
Total Distributions............................................. 2.460 .364 -0-
-------- -------- --------
Net Asset Value, End of the Period.............................. $ 11.004 $11.658 $ 10.30
-------- -------- --------
Total Return*................................................... 15.85% 16.72% 3.00%**
Net Assets at End of the Period (In millions)................... $ 3.0 $ 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*........................................ .76% .27% (2.76%)
Portfolio Turnover.............................................. 132% 94% 42%**
Average Commission Rate per Equity Share Traded (a)........... $ .0574 $ .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......................... 6.78% 7.43% 8.27%
Ratio of Net Investment Loss to Average Net Assets.............. (4.82%) (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.
74 See Notes to Financial Statements
<PAGE>
GOVERNMENT PORTFOLIO PORTFOLIO OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
=======================================================================================================================
Par
Amount
(000) Description Coupon Market Market Value
=======================================================================================================================
<S> <C> <C> <C> <C>
UNITED STATES GOVERNMENT AGENCY OBLIGATIONS 53.1%
$2,000 Federal Farm Credit Bank Medium Term Note.......................... 6.520% 09/24/07 $2,067,260
1,688 Federal Home Loan Mortgage Corp. CMO Var Rate Cpn.................. 6.150 11/15/18 1,690,062
1,425 Federal Home Loan Mortgage Corp. Gold 30 Year Pools................ 7.000 05/01/24 to 07/01/24 1,439,015
402 Federal Home Loan Mortgage Corp. Gold 30 Year Pools................ 7.500 10/01/24 411,961
407 Federal Home Loan Mortgage Corp. Gold 30 Year Pools................ 8.000 09/01/24 to 10/01/24 420,814
1,733 Federal National Mortgage Association 15 Year Dwarf Pools.......... 6.500 06/01/09 to 04/01/11 1,741,226
1,805 Federal National Mortgage Association 15 Year Dwarf Pools.......... 7.000 07/01/10 to 12/01/11 1,834,416
961 Federal National Mortgage Association Pools........................ 6.500 03/01/26 to 05/01/26 949,046
1,612 Federal National Mortgage Association Pools........................ 7.000 12/01/23 to 06/01/24 1,625,830
1,450 Federal National Mortgage Association Pools........................ 7.500 05/01/24 to 10/01/24 1,484,315
622 Federal National Mortgage Association Pools........................ 8.000 06/01/24 to 10/01/24 644,442
1,618 Federal National Mortgage Association Pools........................ 9.000 02/01/17 1,745,755
876 Federal National Mortgage Association Pools........................ 11.000 11/01/20 970,122
2,899 Government National Mortgage Association Pools..................... 7.000 04/15/23 to 10/15/24 2,922,883
1,859 Government National Mortgage Association Pools..................... 7.500 04/15/22 to 06/15/24 1,904,081
2,493 Government National Mortgage Association Pools..................... 8.000 05/15/17 to 11/15/24 2,586,045
2,249 Government National Mortgage Association Pools..................... 8.500 03/15/17 to 07/15/17 2,403,957
855 Government National Mortgage Association Pools..................... 9.500 06/15/09 to 10/15/09 923,342
108 Government National Mortgage Association Pools..................... 11.000 09/15/10 to 08/15/20 120,066
----------
TOTAL UNITED STATES GOVERNMENT AGENCY OBLIGATIONS................................................... 27,884,638
----------
UNITED STATES TREASURY OBLIGATIONS 44.3%
1,000 United States Treasury Bonds (a)................................... 6.000 02/15/26 999,060
1,500 United States Treasury Notes....................................... 5.000 02/15/99 1,488,990
5,000 United States Treasury Notes....................................... 5.250 01/31/01 4,936,700
6,500 United States Treasury Notes (a)................................... 5.625 02/15/06 6,427,915
3,000 United States Treasury Notes (a)................................... 5.875 02/15/04 3,025,320
6,000 United States Treasury Notes (a)................................... 7.500 05/15/02 6,404,040
----------
TOTAL UNITED STATES TREASURY OBLIGATIONS............................................................ 23,282,025
----------
</TABLE>
75 See Notes to Financial Statements
<PAGE>
GOVERNMENT PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
====================================================================================================================
Par
Amount
(000) Description Coupon Maturity Market Value
====================================================================================================================
<S> <C> <C> <C>
FORWARD PURCHASE COMMITMENT 3.7%
$2,000 Federal National Mortgage Association 30 Year, January Forward 6.500% TBA $ 1,975,000
-----------
TOTAL LONG-TERM INVESTMENTS 101.1%
(Cost $51,722,491)................................................................................ 53,141,663
REPURCHASE AGREEMENT 1.4%
DLJ ($715,000 par collateralized by U.S. Government obligations in a pooled
cash account, dated 12/31/97, to be sold on 01/02/98 at $715,258)
(Cost $715,000)................................................................................... 715,000
-----------
TOTAL INVESTMENTS 102.5%
(Cost $52,437,491)................................................................................ 53,856,663
LIABILITIES IN EXCESS OF OTHER ASSETS (2.5%)......................................................... (1,298,324)
-----------
NET ASSETS 100.0%.................................................................................... $52,558,339
===========
</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.
76 See Notes to Financial Statements
<PAGE>
GOVERNMENT PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
===============================================================================
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $52,437,491)............................................................ $ 53,856,663
Cash............................................................................................ 3,667
Receivables:
Interest................................................................................... 625,264
Portfolio Shares Sold...................................................................... 90,685
Variation Margin on Futures................................................................ 41,468
Other........................................................................................... 46,402
------------
Total Assets............................................................................... 54,664,149
------------
LIABILITIES:
Payables:
Investments Purchased...................................................................... 1,954,375
Investment Advisory Fee.................................................................... 16,572
Distributor and Affiliates................................................................. 3,650
Portfolio Shares Repurchased............................................................... 181
Forward Commitments............................................................................. 7,815
Trustees' Deferred Compensation and Retirement Plans............................................ 97,081
Accrued Expenses................................................................................ 26,136
------------
Total Liabilities.......................................................................... 2,105,810
------------
NET ASSETS...................................................................................... $ 52,558,339
============
NET ASSETS CONSIST OF:
Capital......................................................................................... $ 61,104,562
Net Unrealized Appreciation..................................................................... 1,515,218
Accumulated Undistributed Net Investment Income................................................. 105,149
Accumulated Net Realized Loss................................................................... (10,166,590)
------------
NET ASSETS...................................................................................... $ 52,558,339
============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Based on net assets of $52,558,339 and 5,892,077 shares of beneficial interest
issued and outstanding).................................................................... $8.92
============
</TABLE>
77 See Notes to Financial Statements
<PAGE>
GOVERNMENT PORTFOLIO STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
================================================================================
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................................... $3,804,789
----------
EXPENSES:
Investment Advisory Fee..................................................... 267,568
Audit....................................................................... 22,414
Custody..................................................................... 19,427
Shareholder Reports......................................................... 18,385
Trustees' Fees and Expenses................................................. 13,525
Legal....................................................................... 6,050
Other....................................................................... 46,497
----------
Total Expenses......................................................... 393,866
Less Fees Waived....................................................... 72,820
----------
Net Expenses........................................................... 321,046
----------
NET INVESTMENT INCOME....................................................... $3,483,743
==========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................................ $ 152,940
Futures................................................................ 81,948
Forward Commitments.................................................... 22,462
----------
Net Realized Gain........................................................... 257,350
----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................................ 446,722
----------
End of the Period:
Investments............................................................ 1,419,172
Futures................................................................ 103,861
Forward Commitments.................................................... (7,815)
----------
1,515,218
----------
Net Unrealized Appreciation During the Period............................... 1,068,496
==========
NET REALIZED AND UNREALIZED GAIN............................................ $1,325,846
==========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................................. $4,809,589
==========
</TABLE>
78 See Notes to Financial Statements
<PAGE>
GOVERNMENT PORTFOLIO STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
=============================================================================================================
Year Ended Year Ended
December 31, 1997 December 31, 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income............................................... $ 3,483,743 $ 3,982,843
Net Realized Gain/Loss.............................................. 257,350 (893,970)
Net Unrealized Appreciation/Depreciation During the Period.......... 1,068,496 (1,950,846)
------------ ------------
Change in Net Assets from Operations................................ 4,809,589 1,138,027
------------ ------------
Distributions from Net Investment Income............................ (3,344,474) (3,998,258)
Distributions in Excess of Net Investment Income.................... -0- (25,823)
------------ ------------
Distributions from and in Excess of Net Investment Income........... (3,344,474) (4,024,081)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES................. 1,465,115 (2,886,054)
------------ ------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold........................................... 2,642,182 1,607,635
Net Asset Value of Shares Issued Through Dividend Reinvestment...... 3,344,475 4,024,080
Cost of Shares Repurchased.......................................... (12,147,815) (12,510,487)
------------ ------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS.................. (6,161,158) (6,878,772)
------------ ------------
TOTAL DECREASE IN NET ASSETS........................................ (4,696,043) (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 $105,149 and $(11,355), respectively)......... $ 52,558,339 $ 57,254,382
============ ============
</TABLE>
79 See Notes to Financial Statements
<PAGE>
GOVERNMENT PORTFOLIO FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of
the Portfolio outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
===============================================================================================================
Year Ended December 31,
------------------------------------------
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..................................... .566 .569 .60 .56 .57
Net Realized and Unrealized Gain/Loss..................... .231 (.388) .78 (.985) .135
------ ------ ------ ------ ------
Total from Investment Operations............................... .797 .181 1.38 (.425) .705
Less Distributions from and in Excess of Net
Investment Income......................................... .543 .575 .60 .555 .575
------ ------ ------ ------ ------
Net Asset Value, End of the Period............................. $8.920 $8.666 $ 9.06 $ 8.28 $ 9.26
====== ====== ====== ====== ======
Total Return*.................................................. 9.61% 2.12% 17.17% (4.63%) 7.86%
Net Assets at End of the Period (In millions).................. $ 52.6 $ 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*.......... 6.51% 6.56% 6.89% 6.71% 6.45%
Portfolio Turnover............................................. 119% 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........................ .74% .80% .72% .70% .70%
Ratio of Net Investment Income to Average Net Assets........... 6.37% 6.36% 6.77% 6.61% 6.35%
</TABLE>
80 See Notes to Financial Statements
<PAGE>
GROWTH AND INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
=========================================================================================
Description Shares Market Value
- -----------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK 93.7%
CONSUMER DISTRIBUTION 2.5%
Federated Department Stores, Inc. (a)........................... 2,480 $ 106,795
Gap, Inc........................................................ 2,490 88,239
Gymboree Corp. (a).............................................. 3,400 93,075
----------
288,109
----------
CONSUMER DURABLES 0.7%
Black & Decker Corp............................................. 2,130 83,203
----------
CONSUMER NON-DURABLES 7.9%
Adidas - ADR (Germany).......................................... 900 58,050
Avon Products, Inc.............................................. 150 9,206
Benckiser NV, Class B (a)....................................... 1,370 56,341
Colgate - Palmolive Co.......................................... 1,900 139,650
Nabisco Holdings Corp., Class A................................. 3,150 152,578
Philip Morris Cos., Inc......................................... 6,340 287,281
Ralston Purina Group............................................ 1,480 137,548
Tommy Hilfiger Corp. (a)........................................ 2,420 85,003
----------
925,657
----------
CONSUMER SERVICES 4.2%
Bell & Howell Co. (a)........................................... 1,240 29,993
Cognizant Corp.................................................. 3,390 151,067
H & R Block, Inc................................................ 3,260 146,089
Lone Star Steakhouse & Saloon (a)............................... 2,250 39,375
Readers Digest Association, Inc., Class A....................... 1,490 35,201
Walt Disney Co.................................................. 950 94,109
----------
495,834
----------
ENERGY 9.3%
Coastal Corp.................................................... 2,720 168,470
El Paso Natural Gas Co.......................................... 1,870 124,355
Exxon Corp...................................................... 950 58,128
McDermott International, Inc.................................... 1,670 61,164
Royal Dutch Petroleum Co. - ADR (Netherlands)................... 2,330 126,257
Texaco, Inc..................................................... 3,820 207,712
USX - Marathon Group............................................ 4,640 156,600
Valero Energy Corp.............................................. 360 11,318
YPF Sociedad Anonima, Class D - ADR (Argentina)................. 5,250 179,484
----------
1,093,488
----------
</TABLE>
81 See Notes to Financial Statements
<PAGE>
GROWTH AND INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
================================================================================================
Description Shares Market Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCE 16.2%
Aetna, Inc........................................................... 245 $ 17,288
Allstate Corp........................................................ 2,200 199,925
American General Corp................................................ 2,120 114,612
BankAmerica Corp..................................................... 3,760 274,480
BankBoston Corp...................................................... 1,730 162,512
Bankers Trust New York Corp.......................................... 180 20,239
Chase Manhattan Corp................................................. 2,450 268,275
Conseco, Inc......................................................... 2,180 99,054
Equitable Cos., Inc.................................................. 1,990 99,002
Everest Reinsurance Holdings, Inc.................................... 1,190 49,088
First Union Corp..................................................... 2,010 103,012
Golden West Financial Corp........................................... 940 91,944
NationsBank Corp..................................................... 860 52,299
Provident Cos., Inc.................................................. 2,450 94,631
Travelers Group, Inc................................................. 2,270 122,296
Washington Mutual, Inc............................................... 1,371 87,487
Wells Fargo & Co..................................................... 130 44,127
------------
1,900,271
------------
HEALTHCARE 11.9%
Alza Corp. (a)....................................................... 3,410 108,481
American Home Products Corp.......................................... 2,320 177,480
Beckman Instruments, Inc............................................. 1,200 48,000
Merck & Co., Inc..................................................... 1,190 126,437
Mylan Labs., Inc..................................................... 3,840 80,400
PacifiCare Health Systems, Inc., Class B (a)......................... 3,150 164,981
Pfizer, Inc.......................................................... 540 40,264
Pharmacia & Upjohn, Inc.............................................. 4,930 180,561
Rhne-Poulenc, SA - ADR (France), Class A............................. 2,639 117,106
Rhne-Poulenc, SA - ADR (France) Warrants (expiring 11/05/01)......... 2,079 6,757
SmithKline Beecham PLC - ADR (United Kingdom)........................ 4,960 255,130
Watson Pharmaceuticals, Inc. (a)..................................... 2,800 90,825
------------
1,396,422
------------
PRODUCER MANUFACTURING 9.8%
AGCO Corp............................................................ 3,550 103,837
AlliedSignal, Inc.................................................... 2,800 109,025
Canadian Pacific, Ltd................................................ 6,680 182,030
Flowserve Corp....................................................... 2,660 74,314
Fluor Corp........................................................... 750 28,031
Ingersoll-Rand Co.................................................... 4,240 171,720
</TABLE>
82 See Notes to Financial Statements
<PAGE>
GROWTH AND INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Description Shares Market Value
- ----------------------------------------------------------------------------------
<S> <C> <C>
PRODUCER MANUFACTURING (CONTINUED)
ITT Corp. (a)............................................ 820 $ 67,957
Johnson Controls, Inc.................................... 3,020 144,205
Philips Electronics N.V. - ADR (Netherlands)............ 2,100 127,050
Rockwell International Corp.............................. 1,250 65,313
Waste Management, Inc.................................... 2,660 73,150
------------
1,146,632
------------
RAW MATERIALS/PROCESSING INDUSTRIES 4.8%
BetzDearborn, Inc........................................ 1,700 103,806
Boise Cascade Corp....................................... 2,820 85,305
Crown Cork & Seal Co., Inc............................... 2,640 132,330
Fort James Corp.......................................... 1,800 68,850
Reynolds Metals Co....................................... 480 28,800
Union Camp Corp.......................................... 1,300 69,794
W.R. Grace & Co.......................................... 850 68,372
------------
557,257
------------
TECHNOLOGY 12.0%
3Com Corp. (a)........................................... 2,010 70,224
Alcatel Alsthom CGE - ADR (France)....................... 5,550 140,485
BMC Software, Inc. (a)................................... 1,810 118,781
Cabletron System, Inc. (a)............................... 4,640 69,600
Computer Associates International, Inc................... 1,065 56,312
Creative Technology Ltd. (a)............................. 3,380 74,360
Ericsson (L M) Telephone Co., Class B - ADR (Sweden)..... 2,260 84,326
International Business Machines Corp..................... 3,500 365,969
Motorola, Inc............................................ 1,830 104,424
Newbridge Networks Corp. (a)............................. 1,860 64,868
Nokia Corp - ADR (Finland)............................... 1,760 123,200
VLSI Technology, Inc. (a)................................ 2,670 63,079
Xerox Corp............................................... 990 73,074
------------
1,408,702
------------
TRANSPORTATION 1.2%
Canadian National Railway Co............................. 3,020 142,695
------------
UTILITIES 13.2%
AirTouch Communications, Inc. (a)........................ 1,480 61,513
AT&T Corp................................................ 1,320 80,850
BellSouth Corp........................................... 2,990 168,374
Boston Edison Co......................................... 2,660 100,748
Cincinnati Bell, Inc..................................... 4,170 129,270
</TABLE>
83 See Notes to Financial Statements
<PAGE>
GROWTH AND INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Description Shares Market Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES (CONTINUED)
Consolidated Edison Co....................................................... 2,770 $ 113,570
Edison International......................................................... 3,280 89,175
FPL Group, Inc............................................................... 1,310 77,536
GPU, Inc..................................................................... 3,060 128,902
GTE Corp..................................................................... 2,560 133,760
Houston Industries, Inc...................................................... 300 8,006
Northeast Utilities.......................................................... 9,690 114,463
PG&E Corp.................................................................... 3,740 113,836
SBC Communications, Inc...................................................... 1,550 113,538
U.S. West Communications Group............................................... 2,450 110,556
------------
1,544,097
------------
TOTAL COMMON STOCKS 93.7%................................................................... 10,982,367
CORPORATE DEBT 0.6%
Hewlett Packard Co., LYON, 144A - Private Placement ($125,000 par, yielding 3.125%,
10/14/17 maturity) (b)..................................................................... 65,313
------------
TOTAL LONG-TERM INVESTMENTS 94.3%
(Cost $10,508,144)..................................................................... 11,047,680
REPURCHASE AGREEMENT 7.5%
SBC Warburg ($880,000 par, collateralized by U.S. Government obligations in a pooled cash
account, dated 12/31/97, to be sold on 01/02/98 at $880,298)
(Cost $880,000)............................................................................ 880,000
------------
TOTAL INVESTMENTS 101.8%
(Cost $11,388,144).......................................................................... 11,927,680
LIABILITIES IN EXCESS OF OTHER ASSETS (1.8%)................................................ (214,090)
------------
NET ASSETS 100.0%........................................................................... $11,713,590
------------
</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.
84 See Notes to Financial Statements
<PAGE>
GROWTH AND INCOME PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $11,388,144)................................................... $11,927,680
Cash................................................................................... 3,507
Receivables:
Investments Sold..................................................................... 23,454
Dividends............................................................................ 13,206
-----------
Total Assets......................................................................... 11,967,847
-----------
LIABILITIES:
Payables:
Investments Purchased................................................................ 225,821
Distributor and Affiliates........................................................... 3,419
Porfolio Shares Repurchased.......................................................... 1,268
Investment Advisory Fee.............................................................. 938
Accrued Expenses....................................................................... 18,886
Trustees' Deferred Compensation and Retirement Plans.................................. 3,925
-----------
Total Liabilities................................................................. 254,257
-----------
NET ASSETS............................................................................. $11,713,590
-----------
NET ASSETS CONSIST OF:
Capital................................................................................ $11,202,241
Net Unrealized Appreciation............................................................ 539,536
Accumulated Undistributed Net Investment Income........................................ 14,691
Accumulated Distributions in Excess of Net Realized Gain............................... (42,878)
-----------
NET ASSETS............................................................................. $11,713,590
-----------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Based on net assets of $11,713,590 and 966,202 shares of beneficial interest
issued and outstanding)............................................................... $ 12.12
-----------
</TABLE>
85 See Notes to Financial Statements
<PAGE>
GROWTH AND INCOME PORTFOLIO STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends.......................................................................... $ 76,803
Interest........................................................................... 23,134
--------
Total Income..................................................................... 99,937
--------
EXPENSES:
Investment Advisory Fee............................................................ 30,777
Audit.............................................................................. 19,513
Shareholder Reports................................................................ 10,114
Shareholder Services............................................................... 6,867
Trustees' Fees and Expenses........................................................ 4,843
Accounting......................................................................... 4,410
Legal.............................................................................. 3,269
Custody............................................................................ 87
Other.............................................................................. 4,079
--------
Total Expenses................................................................. 83,959
Less Fees Waived and Expenses Reimbursed ($30,777 and $14,592, respectively)... 45,369
--------
Net Expenses................................................................... 38,590
--------
NET INVESTMENT INCOME.............................................................. $ 61,347
--------
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Gain.................................................................. $105,366
--------
Unrealized Appreciation/Depreciation:
Beginning of the Period.......................................................... (1,970)
End of the Period:
Investments.................................................................... 539,536
--------
Net Unrealized Appreciation During the Period...................................... 541,506
--------
NET REALIZED AND UNREALIZED GAIN................................................... $646,872
--------
NET INCREASE IN NET ASSETS FROM OPERATIONS......................................... $708,219
--------
</TABLE>
86 See Notes to Financial Statements
<PAGE>
GROWTH AND INCOME PORTFOLIO STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended December 31, 1997 and the Period December 23, 1996
(Commencement of Investment Operations) to December 31, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Year Ended Period Ended
December 31, 1997 December 31, 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income..................................................... $ 61,347 $ 553
Net Realized Gain/Loss.................................................... 105,366 (81)
Net Unrealized Appreciation/Depreciation During the Period................ 541,506 (1,970)
----------- --------
Change in Net Assets from Operations...................................... 708,219 (1,498)
----------- --------
Distributions from Net Investment Income.................................. (44,226) -0-
----------- --------
Distrbutions from Net Realized Gain....................................... (105,285) -0-
Distrbutions in Excess of Net Realized Gain............................... (45,861) -0-
----------- --------
Distributions from and in Excess of Net Realized Gain..................... (151,146) -0-
----------- --------
Total Distributions....................................................... (195,372) -0-
----------- --------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES....................... 512,847 (1,498)
----------- --------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold................................................. 10,524,876 -0-
Net Asset Value of Shares Issued Through Dividend Reinvestment............ 195,372 -0-
Cost of Shares Repurchased................................................ (18,007) -0-
----------- --------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS........................ 10,702,241 -0-
----------- --------
TOTAL INCREASE/DECREASE IN NET ASSETS..................................... 11,215,088 (1,498)
NET ASSETS:
Beginning of the Period................................................... 498,502 500,000
----------- --------
End of the Period (including accumulated undistributed net
investment income of $14,691 and $553, respectively).................... $11,713,590 $498,502
----------- --------
</TABLE>
87 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.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
December 23, 1996
(Commencement
Of Investment
Year Ended Operations) To
December 31, 1997 December 31, 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of the Period......................................... $ 9.970 $ 10.000
------------ -----------
Net Investment Income....................................................... .072 .011
Net Realized and Unrealized Gain/Loss....................................... 2.309 (.041)
------------ -----------
Total from Investment Operations................................................. 2.381 (.030)
------------ -----------
Less:
Distributions from Net Investment Income......................................... .065 -0-
Distributions from and in Excess of Net Realized Gain............................ .163 -0-
------------ -----------
Total Distributions.............................................................. .228 -0-
------------ -----------
Net Asset Value, End of the Period............................................... $12.123 $ 9.970
------------ -----------
Total Return*.................................................................... 23.90% (.30%)**
Net Assets at End of the Period (In millions).................................... $ 11.7 $ 0.5
Ratio of Expenses to Average Net Assets*......................................... .75% .75%
Ratio of Net Investment Income to Average Net Assets*............................ 1.19% 4.47%
Portfolio Turnover............................................................... 96% 0%**
Average Commission Paid Per Equity Share Traded (a).............................. $ .0398 $ .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.......................................... 1.63% 45.97%
Ratio of Net Investment Income/Loss to Average Net Assets........................ .31% (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.
88 See Notes to Financial Statements
<PAGE>
MONEY MARKET PORTFOLIO PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Discount
Par Yield on
Amount Maturity Date of Amortized
(000) Description Date Purchase Cost
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS 33.1%
$ 750 Federal Farm Credit Bank Discount Note................. 05/08/98 5.527% $ 735,547
1,000 Federal Home Loan Bank Discount Note................... 01/09/98 5.525 998,655
1,830 Federal Home Loan Bank Discount Note................... 01/15/98 5.482 1,825,928
1,000 Federal Home Loan Mortgage Corp. Discount Note......... 02/13/98 5.712 993,082
1,000 Federal National Mortgage Association Discount Note.... 03/03/98 5.550 990,683
1,000 Federal National Mortgage Association Discount Note.... 03/20/98 5.578 987,997
-----------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS.................................. 6,531,892
-----------
COMMERCIAL PAPER 65.9%
1,000 American Express Credit Corp........................... 02/09/98 5.620 993,867
1,000 Associates Corp. of North America...................... 03/19/98 5.793 987,628
995 Chevron Oil Finance Corp............................... 01/02/98 6.602 994,635
1,000 Commercial Credit Corp................................. 01/16/98 5.596 997,556
1,100 Ford Motor Credit Co................................... 01/13/98 5.707 1,097,799
1,000 General Electric Capital Corp.......................... 01/05/98 5.622 999,226
1,000 General Electric Corp.................................. 03/18/98 5.768 987,894
1,000 John Deere Capital Corp................................ 02/09/98 5.605 993,889
1,000 IBM Credit Corp........................................ 02/09/98 5.776 993,644
1,000 Merrill Lynch & Co., Inc............................... 01/26/98 5.648 995,999
1,000 Metlife Funding, Inc................................... 02/03/98 5.794 994,569
1,000 Prudential Funding Corp................................ 01/13/98 5.628 997,996
1,000 Toronto Dominion Holdings.............................. 06/01/98 5.753 976,398
-----------
TOTAL COMMERCIAL PAPER........................................................ 13,011,100
REPURCHASE AGREEMENT 1.3%
DLJ ($265,000 par collateralized by U.S. Government obligations in a
pooled cash account, dated 12/31/97, to be sold on 01/02/98 at $265,096) 265,000
-----------
TOTAL INVESTMENTS 100.3%.............................................................. 19,807,992
LIABILITIES IN EXCESS OF OTHER ASSETS (0.3%).......................................... (67,220)
-----------
NET ASSETS 100.0%..................................................................... $19,740,772
-----------
</TABLE>
89 See Notes to Financial Statements
<PAGE>
MONEY MARKET PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
- ------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at Amortized Cost which Approximates Market...................... $19,807,992
Cash.......................................................................... 5,764
Other......................................................................... 46,039
-----------
Total Assets............................................................. 19,859,795
-----------
LIABILITIES:
Payables:
Distributor and Affiliates................................................. 2,550
Investment Advisory Fee.................................................... 2,500
Portfolio Shares Repurchased............................................... 362
Trustees' Deferred Compensation and Retirement Plans.......................... 95,154
Accrued Expenses.............................................................. 18,457
-----------
Total Liabilities........................................................ 119,023
-----------
NET ASSETS.................................................................... $19,740,772
-----------
NET ASSETS CONSIST OF:
Capital....................................................................... $19,740,568
Accumulated Undistributed Net Investment Income............................... 204
-----------
NET ASSETS (Equivalent to $1.00 per share for 19,740,568 shares outstanding).. $19,740,772
-----------
</TABLE>
90 See Notes to Financial Statements
<PAGE>
MONEY MARKET PROTFOLIO STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest....................................................... $ 1,185,800
-------------
EXPENSES:
Investment Advisory Fee........................................ 106,891
Trustees' Fees and Expenses.................................... 17,090
Audit.......................................................... 16,475
Shareholder Services........................................... 16,133
Shareholder Reports............................................ 14,946
Custody........................................................ 13,396
Accounting..................................................... 10,155
Legal.......................................................... 6,140
Other.......................................................... 7,927
-------------
Total Expenses.............................................. 209,153
Less Fees Waived............................................ 80,938
-------------
Net Expenses................................................ 128,215
-------------
NET INVESTMENT INCOME.......................................... $ 1,057,585
-------------
NET INCREASE IN NET ASSETS FROM OPERATIONS..................... $ 1,057,585
-------------
</TABLE>
91 See Notes to Financial Statements
<PAGE>
MONEY MARKET PORTFOLIO STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
===================================================================================================================
Year Ended Year Ended
December 31, 1997 December 31, 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................................................... $ 1,057,585 $ 1,002,363
Net Realized Gain....................................................... 0 415
------------ ------------
Change in Net Assets from Operations.................................... 1,057,585 1,002,778
------------ ------------
Distributions from Net Investment Income................................ (1,057,591) (1,001,453)
Distributions in Excess of Net Investment Income........................ 0 (415)
------------ ------------
Total Distributions..................................................... (1,057,591) (1,001,868)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES..................... (6) 910
------------ ------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold............................................... 22,688,459 15,915,843
Net Asset Value of Shares Issued Through Dividend Reinvestment.......... 1,057,591 1,001,868
Cost of Shares Repurchased.............................................. (23,571,207) (18,927,603)
------------ ------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS...................... 174,843 (2,009,892)
------------ ------------
TOTAL INCREASE/DECREASE IN NET ASSETS................................... 174,837 (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 $204 and $210, respectively)...................... $ 19,740,772 $ 19,565,935
============ ============
</TABLE>
92 See Notes to Financial Statements
<PAGE>
MONEY MARKET PORTFOLIO FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the
Portfolio outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
=========================================================================================================================
Year Ended December 31,
----------------------------------------------
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.................................................. .049 .048 .0533 .0365 .0262
Less Distributions from Net Investment Income.......................... .049 .048 .0533 .0365 .0262
------ ------ ------ ------ ------
Net Asset Value, End of the Period..................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ====== ======
Total Return*.......................................................... 5.06% 4.89% 5.46% 3.71% 2.66%
Net Assets at End of the Period (In millions).......................... $ 19.7 $ 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*.................. 4.95% 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................................ .98% 1.29% .93% .87% .95%
Ratio of Net Investment Income to Average Net Assets................... 4.57% 4.10% 5.00% 3.37% 2.28%
</TABLE>
93 See Notes to Financial Statements
<PAGE>
MORGAN STANLEY REAL ESTATE SECURITIES PORTFOLIO PORTFOLIO OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
=================================================================================================================================
Description Shares Market Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON AND PREFERRED STOCK 92.7%
APARTMENTS 18.4%
AMLI Residential Properties Trust................................................................ 26,400 $ 587,400
Avalon Properties, Inc........................................................................... 243,400 7,530,187
Bay Apartment Communities, Inc................................................................... 315,800 12,316,200
Essex Property Trust, Inc........................................................................ 320,100 11,203,500
Irvine Apartment Communities, Inc................................................................ 46,400 1,476,100
Oasis Residential, Inc........................................................................... 269,300 6,008,756
Pennsylvania Real Estate Investment.............................................................. 85,400 2,097,638
Security Capital Atlantic, Inc................................................................... 402,546 8,503,784
Walden Residential Properties, Inc............................................................... 208,500 5,316,750
------------
55,040,315
------------
DEVELOPMENT 4.4%
Atlantic Gulf Communities Corp. (a).............................................................. 433,224 1,949,508
Atlantic Gulf Communities Corp. - Preferred Ser B
(Convertible into 96,770 common shares) (a)...................................................... 55,647 556,464
Atlantic Gulf Communities Corp. - Preferred Shares, 144A - Private Placement (a) (b)............. 79,420 794,200
Atlantic Gulf Communities Corp. Warrants, 37,098 shares
Class A, B and C, expiring 06/23/04 (a).......................................................... 111,294 163,626
Atlantic Gulf Communities Corp. Warrants, 74,352 shares Class A, B and C,
expiring 06/24/01, 144A - Private Placement (a) (b).............................................. 223,056 0
Brookfield Properties Corp....................................................................... 370,600 6,177,902
Brookfield Properties Corp. - Common Share Installment Receipts (a).............................. 195,400 2,321,352
Catellus Development Corp. (a)................................................................... 56,300 1,126,000
------------
13,089,052
------------
HEALTHCARE FACILITIES 6.2%
Nationwide Health Properties, Inc................................................................ 530,900 13,537,950
Omega Healthcare Investors, Inc.................................................................. 127,000 4,905,375
------------
18,443,325
------------
HOTEL & LODGING 10.3%
American General Hospitality Corp................................................................ 134,800 3,605,900
Capstar Hotel Co. (a)............................................................................ 278,300 9,549,169
Extended Stay America, Inc. (a).................................................................. 264,000 3,283,500
Host Marriott Corp. (a).......................................................................... 612,100 12,012,462
Suburban Lodges America, Inc. (a)................................................................ 70,300 935,869
Vail Resorts, Inc. (a)........................................................................... 53,200 1,379,875
------------
30,766,775
------------
MANUFACTURED HOME COMMUNITIES 6.5%
Chateau Properties, Inc.......................................................................... 425,417 13,400,636
Manufactured Home Communities, Inc............................................................... 223,700 6,039,900
------------
19,440,536
------------
</TABLE>
94 See Notes to Financial Statements
<PAGE>
MORGAN STANLEY REAL ESTATE SECURITIES PORTFOLIO OF INVESTMENTS (CONTINUED)
PORTFOLIO
December 31, 1997
<TABLE>
<CAPTION>
=================================================================================================================================
Description Shares Market Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OFFICE/INDUSTRIAL 26.4%
Arden Realty Group, Inc......................................................................... 448,000 $ 13,776,000
Bedford Property Investors, Inc................................................................. 323,600 7,078,750
Brandywine Realty Trust......................................................................... 409,900 10,298,737
CarrAmerica Realty Corp......................................................................... 300,900 9,534,769
Equity Office Properties Trust (a).............................................................. 136,411 4,305,472
Great Lakes REIT, Inc........................................................................... 268,000 5,209,250
Pacific Gulf Properties, Inc.................................................................... 463,600 11,010,500
Prime Group Realty Trust........................................................................ 283,500 5,740,875
Reckson Associates Realty Corp.................................................................. 61,400 1,558,025
Trizec Hahn Corp................................................................................ 158,900 3,684,494
Wellsford Real Properties, Inc., 144A - Private Placement (a) (b)............................... 447,242 6,988,156
------------
79,185,028
------------
PRODUCER MANUFACTURING 0.0%
ITT Corp. (a)................................................................................... 1,400 116,025
------------
SELF-STORAGE 3.2%
Public Storage, Inc............................................................................. 69,800 2,050,375
Shurgard Storage Centers, Inc., Class A......................................................... 255,800 7,418,200
------------
9,468,575
------------
SHOPPING CENTERS 7.4%
Burnham Pacific Properties, Inc................................................................. 336,800 5,157,250
Federal Realty Investment Trust................................................................. 379,000 9,759,250
First Washington Realty Trust, Inc. - Preferred Ser A
(Convertible into 74,484 common shares)......................................................... 58,100 1,946,350
Pan Pacific Retail Properties, Inc.............................................................. 145,300 3,105,788
Ramco-Gershenson Properties Trust............................................................... 1,900 37,406
Western Investment Real Estate Trust............................................................ 147,600 2,029,500
------------
22,035,544
------------
SHOPPING MALLS 9.9%
CBL & Associates Properties, Inc................................................................ 271,600 6,705,125
First Union Real Estate Investments............................................................. 142,400 2,314,000
Taubman Centers, Inc............................................................................ 1,227,200 15,953,600
Urban Shopping Centers, Inc..................................................................... 138,400 4,826,700
------------
29,799,425
------------
TOTAL COMMON AND PREFERRED STOCK 92.7%.......................................................... 277,384,600
</TABLE>
95 See Notes to Financial Statements
<PAGE>
MORGAN STANLEY REAL ESTATE SECURITIES PORTFOLIO PORTFOLIO OF INVESTMENTS
(CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
====================================================================================================================
Description Market Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
CONVERTIBLE CORPORATE OBLIGATIONS 0.6%
Brookfield Properties Corp. - Installment Receipts Representing Subordinated
Debenture ($2,262,000 par, 6.00% coupon, 02/14/07 maturity)..................................... $ 1,818,422
-------------
TOTAL LONG-TERM INVESTMENTS 93.3%
(Cost $248,129,758)............................................................................. 279,203,022
REPURCHASE AGREEMENT 8.1%
Swiss Bank Corp. ($24,270,000 par collateralized by U.S. Government obligations in a
pooled cash account, dated 12/31/97, to be sold on 01/02/98 at $24,278,225)
(Cost $24,270,000).............................................................................. 24,270,000
-------------
TOTAL INVESTMENTS 101.4%
(Cost $272,399,758)............................................................................. 303,473,022
LIABILITIES IN EXCESS OF OTHER ASSETS (1.4%)...................................................... (4,065,994)
-------------
NET ASSETS 100.0%................................................................................. $ 299,407,028
-------------
</TABLE>
(a) Non-income producing security as this stock 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.
96 See Notes to Financial Statements
<PAGE>
MORGAN STANLEY REAL ESTATE SECURITIES STATEMENT OF ASSETS AND LIABILITIES
PORTFOLIO
December 31, 1997
<TABLE>
<CAPTION>
=================================================================================================================
<S> <C>
ASSETS:
Total Investments (Cost $272,399,758)........................................................... $ 303,473,022
Receivables:
Dividends..................................................................................... 1,861,526
Investments Sold.............................................................................. 886,181
Interest...................................................................................... 45,364
Unamortized Organizational Costs................................................................ 3,415
Other........................................................................................... 27
-------------
Total Assets................................................................................ 306,269,535
=============
LIABILITIES:
Payables:
Portfolio Shares Repurchased.................................................................. 5,037,170
Investments Purchased......................................................................... 1,513,577
Investment Advisory Fee....................................................................... 244,073
Custodian Bank................................................................................ 15,938
Distributor and Affiliates.................................................................... 6,426
Accrued Expenses................................................................................ 29,652
Trustees' Deferred Compensation and Retirement Plans............................................ 15,671
-------------
Total Liabilities........................................................................... 6,862,507
-------------
NET ASSETS...................................................................................... $ 299,407,028
=============
NET ASSETS CONSIST OF:
Capital......................................................................................... $ 263,842,945
Net Unrealized Appreciation..................................................................... 31,073,264
Accumulated Net Realized Gain................................................................... 4,055,438
Accumulated Undistributed Net Investment Income................................................. 435,381
-------------
NET ASSETS...................................................................................... $ 299,407,028
=============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Based on net assets of $299,407,028 and 18,894,267 shares of beneficial interest
issued and outstanding)....................................................................... $ 15.85
=============
</TABLE>
97 See Notes to Financial Statements
<PAGE>
MORGAN STANLEY REAL ESTATE SECURITIES PORTFOLIO STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
================================================================================
<S> <C>
INVESTMENT INCOME:
Dividends........................................................ $ 9,416,241
Interest......................................................... 789,383
------------
Total Income................................................. 10,205,624
------------
EXPENSES:
Investment Advisory Fee.......................................... 2,269,511
Accounting....................................................... 32,983
Shareholder Services............................................. 16,833
Legal............................................................ 12,860
Trustees' Fees and Expenses...................................... 10,241
Amortization of Organizational Costs............................. 1,592
Other............................................................ 94,656
------------
Total Expenses............................................... 2,438,676
------------
NET INVESTMENT INCOME............................................ $ 7,766,948
============
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Gain................................................ $ 28,792,309
------------
Unrealized Appreciation/Depreciation:
Beginning of the Period........................................ 22,046,065
End of the Period:
Investments.................................................. 31,073,264
------------
Net Unrealized Appreciation During the Period.................... 9,027,199
------------
NET REALIZED AND UNREALIZED GAIN................................. $ 37,819,508
============
NET INCREASE IN NET ASSETS FROM OPERATION........................ $ 45,586,456
============
</TABLE>
98 See Notes to Financial Statements
<PAGE>
MORGAN STANLEY REAL ESTATE SECURITIES PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Year Ended Year Ended
December 31, 1997 December 31, 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.................................................. $ 7,766,948 $ 2,164,983
Net Realized Gain...................................................... 28,792,309 1,465,073
Net Unrealized Appreciation During the Period.......................... 9,027,199 21,713,960
------------- ------------
Change in Net Assets from Operations................................... 45,586,456 25,344,016
------------- ------------
Distributions from Net Investment Income............................... (7,660,430) (1,844,832)
Distributions from Net Realized Gain................................... (25,295,317) (874,097)
------------- ------------
Total Distributions.................................................... (32,955,747) (2,718,929)
------------- ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES.................... 12,630,709 22,625,087
------------- ------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold.............................................. 275,023,739 178,078,191
Net Asset Value of Shares Issued Through Dividend Reinvestment......... 32,953,898 2,718,725
Cost of Shares Repurchased............................................. (188,685,072) (44,523,570)
------------- ------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS..................... 119,292,565 136,273,346
------------- ------------
TOTAL INCREASE IN NET ASSETS........................................... 131,923,274 158,898,433
NET ASSETS:
Beginning of the Period................................................ 167,483,754 8,585,321
------------- ------------
End of the Period (Including accumulated undistributed net investment
income of $435,381 and $328,863, respectively)....................... $ 299,407,028 $167,483,754
------------- ------------
</TABLE>
99 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.
<TABLE>
<CAPTION>
================================================================================================================================
July 3, 1995
(Commencement of
Year Ended Year Ended Investment Operations)
December 31, 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.................................... .464 .217 .20
Net Realized and Unrealized Gain......................... 2.617 4.117 .6325
--------- -------- --------
Total from Investment Operations............................ 3.081 4.334 .8325
========= ======== ========
Less:
Distributions from Net Investment Income................. .470 .199 .0925
Distributions from Net Realized Gain..................... 1.549 .091 -0-
--------- -------- --------
Total Distributions......................................... 2.019 .290 .0925
--------- -------- --------
Net Asset Value, End of the Period.......................... $ 15.846 $ 14.784 $ 10.74
========= ======== ========
Total Return*............................................... 21.47% 40.53% 8.35%**
Net Assets at End of the Period (In millions)............... $299.4 $ 167.5 $ 8.6
Ratio of Expenses to Average Net Assets*.................... 1.07% 1.10% 2.50%
Ratio of Net Investment Income to Average Net Assets*....... 3.42% 5.06% 3.75%
Portfolio Turnover.......................................... 177% 84% 85%**
Average Commission Paid Per Equity Share Traded (a)......... $ .0597 $ .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
100 See Notes to Financial Statements
<PAGE>
STRATEGIC STOCK PORTFOLIO PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
December 31, 1997
================================================================================
Description Shares Market Value
================================================================================
<S> <C> <C>
COMMON STOCK 92.4%
CONSUMER DURABLES 13.7%
Chrysler Corp........................................ 3,320 $ 116,823
General Motors Corp.................................. 1,860 112,762
Eastman Kodak Co..................................... 1,940 117,976
----------
347,561
----------
CONSUMER NON-DURABLES 14.2%
Anheuser Busch Cos., Inc............................. 2,730 120,120
H.J. Heinz Co........................................ 2,290 116,361
Philip Morris Cos., Inc.............................. 2,690 121,891
----------
358,372
----------
ENERGY 18.0%
Amoco Corp........................................... 1,320 112,365
Chevron Corp......................................... 1,450 111,650
Exxon Corp........................................... 1,890 115,644
Mobil Corp........................................... 1,600 115,500
----------
455,159
----------
FINANCE 4.5%
J.P. Morgan and Co., Inc............................. 1,000 112,875
----------
HEALTH CARE 2.9%
American Home Products Corp.......................... 960 73,440
----------
PRODUCER MANUFACTURING 6.8%
Caterpillar, Inc..................................... 1,400 67,987
Minnesota Mining & Manufacturing Co.................. 1,250 102,578
----------
170,565
----------
RAW MATERIALS/PROCESSING INDUSTRIES 8.0%
E.I. du Pont de Nemours & Co......................... 770 46,248
International Paper Co............................... 2,530 109,106
PPG Industries, Inc.................................. 830 47,414
----------
202,768
----------
TECHNOLOGY 0.2%
Raytheon Co., Class A................................ 103 5,079
----------
TRANSPORTATION 4.5%
Norfolk Southern Corp................................ 3,720 114,623
----------
UTILITIES 19.6%
AT&T Corp............................................ 2,130 130,462
Bell Atlantic Corp................................... 1,330 121,030
</TABLE>
101 See Notes to Financial Statements
<PAGE>
STRATEGIC STOCK PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
December 31, 1997
=======================================================================================================
Description Shares Market Value
=======================================================================================================
<S> <C> <C>
UTILITIES (CONTINUED)
BellSouth Corp.................................................................. 2,160 $ 121,635
SBC Communication, Inc.......................................................... 1,650 120,863
----------
493,990
----------
TOTAL LONG-TERM INVESTMENTS 92.4% (Cost $2,327,597)............................. 2,334,432
REPURCHASE AGREEMENT 12.3%
DLJ ($310,000 par collateralized by U.S. Government obligations in a pooled cash
account, dated 12/31/97, to be sold on 01/02/98 at $310,112) ( Cost $310,000). 310,000
----------
TOTAL INVESTMENTS 104.7% (Cost $2,637,597)...................................... 2,644,432
LIABILITIES IN EXCESS OF OTHER ASSETS (4.7%).................................... (118,230)
----------
Net Assets 100.0%.............................................................. $2,526,202
==========
</TABLE>
102 See Notes to Financial Statements
<PAGE>
STRATEGIC STOCK PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<CAPTION>
=================================================================================================
<S> <C>
ASSETS:
Total Investments, including repurchase agreement of $310,000 (Cost $2,637,597)....... $2,644,432
Cash.................................................................................. 2,867
Receivables:
Portfolio Shares Sold............................................................... 27,739
Dividends........................................................................... 4,050
Expense Reimbursement by Adviser.................................................... 3,809
----------
Total Assets...................................................................... 2,682,897
==========
LIABILITIES:
Payables:
Investments Purchased............................................................... 151,395
Distributor and Affiliates.......................................................... 300
Accrued Expenses...................................................................... 5,000
----------
Total Liabilities................................................................ 156,695
----------
NET ASSETS............................................................................ $2,526,202
==========
NET ASSETS CONSIST OF:
Capital............................................................................... $2,512,791
Net Unrealized Appreciation........................................................... 6,835
Accumulated Undistributed Net Investment Income....................................... 6,576
----------
NET ASSETS............................................................................ $2,526,202
==========
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Based on net assets of $2,526,202 and 246,576 shares of beneficial interest
issued and outstanding)............................................................. $ 10.25
==========
</TABLE>
103 See Notes to Financial Statements
<PAGE>
Strategic Stock Portfolio Statement of Operations
For Period November 3, 1997 (Commencement of Investment Operations) to December
31, 1997
================================================================================
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends................................................................................... $ 5,805
Interest.................................................................................... 2,262
-------
Total Income........................................................................... 8,067
-------
EXPENSES:
Audit....................................................................................... 5,000
Investment Advisory Fee..................................................................... 1,083
Legal....................................................................................... 300
-------
Total Expenses......................................................................... 6,383
Less Fees Waived and Expenses Reimbursed ($1,083 and $3,809, respectively)............. 4,892
-------
Net Expenses........................................................................... 1,491
NET INVESTMENT INCOME....................................................................... $ 6,576
-------
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Gain........................................................................... $ -0-
-------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................................................ -0-
End of the Period:
Investments............................................................................ 6,835
-------
Net Unrealized Appreciation During the Period............................................... 6,835
-------
NET REALIZED AND UNREALIZED GAIN............................................................ $ 6,835
=======
NET INCREASE IN NET ASSETS FROM OPERATIONS.................................................. $13,411
=======
</TABLE>
104 See Notes to Financial Statements
<PAGE>
Strategic Stock Portfolio Statement of Changes in Net Assets
For Period November 3, 1997 (Commencement of Investment Operations) to December
31, 1997
================================================================================
<TABLE>
<CAPTION>
========================================================================================================
Period Ended
December 31, 1997
========================================================================================================
<S> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.................................................................. $ 6,576
Net Unrealized Appreciation During the Period.......................................... 6,835
----------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES.................................... 13,411
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold.............................................................. 2,312,791
----------
TOTAL INCREASE IN NET ASSETS........................................................... 2,326,202
NET ASSETS:
Beginning of the Period................................................................ 200,000
----------
End of Period (Including accumulated undistributed net investment income of $6,576).... $2,526,202
==========
</TABLE>
105 See Notes to Financial Statements
<PAGE>
Strategic Stock Portfolio Financial Highlights
The following schedule presents financial highlights for one share of the
Portfolio outstanding throughout the period indicated.
<TABLE>
<CAPTION>
======================================================================================================
November 3, 1997
(Commencement of
Investment Operations)
to December 31, 1997
======================================================================================================
<S> <C>
Net Asset Value, Beginning of the Period........................................ $ 10.000
--------
Net Investment Income...................................................... .027
Net Realized and Unrealized Gain........................................... .218
--------
Total from Investment Operations................................................ .245
--------
Net Asset Value, End of the Period.............................................. $ 10.245
========
Total Return*................................................................... 2.45%**
Net Assets at End of the Period (In millions)................................... $ 2.5
Ratio of Expenses to Average Net Assets*........................................ .61%
Ratio of Net Investment Income to Average Net Assets*........................... 2.67%
Portfolio Turnover.............................................................. 0%**
Average Commission Paid per Equity Share Traded (a)............................. $ .0282
* 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......................................... 2.59%
Ratio of Net Investment Income to Average Net Assets............................ .68%
</TABLE>
** Non-Annualized
(a) Represents the average brokerage commission per equity share traded during
the period for trades where commissions were applicable.
106 See Notes to Financial Statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- --------------------------------------------------------------------------------
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 ten 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"), Morgan Stanley Real Estate Securities Portfolio ("Real
Estate") and Strategic Stock Portfolio ("Strategic Stock") (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; Real Estate seeks long-term growth of
capital by investing principally in securities of companies operating in the
real estate industry; and Strategic Stock seeks an above average total return
consistent with the preservation of invested capital, by investing primarily in
a portfolio of dividend paying equity securities included in the Dow Jones
Industrial Average or the Morgan Stanley Capital International USA Index.
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 28% of Domestic's net assets at December 31, 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.
107
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
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 "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.
C. INVESTMENT INCOME--Dividend income is recorded on the ex-dividend date and
interest income is recorded on an accrual basis. Original issue discounts on
debt securities purchased are amortized over the expected life of each
applicable security. Premiums on debt securities are not amortized.
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.
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, 1997 along with its expiration dates. The table
also presents the identified cost of investments, including foreign currencies,
at December 31, 1997 for federal income tax purposes with the associated gross
unrealized appreciation, gross unrealized depreciation and net unrealized
appreciation/depreciation on investments, and foreign currency.
<TABLE>
<CAPTION>
ASSET EMERGING GLOBAL
ALLOCATION DOMESTIC GROWTH ENTERPRISE EQUITY
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Realized capital loss carryforward............. -- $ 1,289,534 $ 81,975 -- --
Expiration dates of capital loss carryforward.. -- 1998-- 2002 2004 -- --
Amount expiring on 12/31/98.................... -- 160,765 -- -- --
Identified cost................................ $55,048,430 $ 16,143,269 $8,597,981 $70,618,370 $2,649,384
Gross unrealized appreciation.................. 8,689,126 976,801 2,392,203 30,450,369 451,372
Gross unrealized depreciation.................. 1,124,743 129,718 468,317 1,510,002 176,851
Net unrealized appreciation/depreciation....... 7,564,383 847,083 1,923,886 28,940,367 274,521
</TABLE>
108
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH
AND MONEY REAL STRATEGIC
GOVERNMENT INCOME MARKET ESTATE STOCK
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Realized capital loss carryforward.............. $10,001,012 $ -- $ 1,707 -- --
Expiration dates of capital loss carryforward... 1998--2004 -- 2003--2005 -- --
Amount expiring on 12/31/98..................... $ 2,677,688 -- -- -- --
Identified cost................................. $52,437,491 $11,409,515 $19,807,992 $272,797,131 $2,637,597
Gross unrealized appreciation................... 1,450,922 914,357 -- 32,726,388 56,985
Gross unrealized depreciation................... 31,750 396,192 -- 2,050,497 50,150
Net unrealized appreciation/depreciation........ 1,419,172 518,165 -- 30,675,891 6,835
</TABLE>
Net realized gains or losses may differ for financial reporting and tax
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, Real
Estate and Strategic Stock declare dividends from net investment income
annually. Government declares distributions from short-term capital gains, if
any, monthly and from long-term capital gains, if any, annually. Asset
Allocation, Domestic, Emerging Growth, Enterprise, Global Equity, Growth and
Income, Money Market, Real Estate and Strategic Stock 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.
For Federal income tax purposes, the following information is furnished
with respect to the distributions paid by the Fund during its taxable year ended
December 31, 1997.
<TABLE>
<CAPTION>
CAPITAL GAIN DISTRIBUTION
------------------------------
PORTFOLIO 28% RATE 20% RATE
- ------------------------------------------------------------------------------
<S> <C> <C>
Asset Allocation............................... 2,138,293 850,328
Enterprise..................................... 3,729,664 5,035,925
Global Equity.................................. 256,445 -0-
Growth and Income.............................. -0- -0-
Real Estate.................................... 1,784,184 422,004
</TABLE>
Shareholders were sent a 1997 Form 1099-DIV in January 1998 representing their
proportionate share of capital gain distribution to be reported on their income
tax returns.
109
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
________________________________________________________________________________
The following table presents the percentage of the distributions that
qualifies for the dividend received deduction for corporate shareholders:
<TABLE>
<CAPTION>
PORTFOLIO
- ------------------------------------------------------------------------------
<S> <C>
Asset Allocation....................................................... 11.53%
Domestic............................................................... 4.53%
Enterprise............................................................. 17.65%
Global Equity.......................................................... 6.88%
Growth and Income...................................................... 32.09%
</TABLE>
Due to inherent differences in the recognition of income, expenses and
realized gains/losses under generally accepted accounting principles and for
federal income tax purposes, the amount of distributable net investment income
may differ between book and federal income tax purposes for a particular period.
These differences are temporary in nature, but may result in book basis
distribution in excess of net investment income for certain periods. The
following permanent differences between book and tax basis reporting for the
1997 fiscal year have been identified and appropriately reclassified.
<TABLE>
<CAPTION>
GROWTH
GLOBAL AND
DOMESTIC EQUITY GOVERNMENT INCOME
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accumulated Undistributed Net
Investment Income.................... $(14,391)(b) $ (3,423)(a,d) $ (22,765)(b) $(2,983)(d)
Accumulated Net Realized Gain/Loss... 14,391 (b) 3,423 (a,d) 2,864,440(b,c) 2,983 (d)
Capital.............................. -- -- (2,841,675) (c) --
</TABLE>
(a) For federal income tax purposes, realized gains and losses on transactions
in foreign currencies are included as ordinary income. These realized gains
and losses are included in net realized gain/loss for financial reporting
purposes and have been reclassified from accumulated net realized gain/loss
to accumulated undistributed net investment income.
(b) Accretion of market discounts on bonds and paydowns of mortgage pool
obligations are recognized as ordinary income/loss for federal income tax
purposes but as realized gains or losses for book purposes. These permanent
differences have been reclassified from accumulated net realized gain/loss
to accumulated undistributed net investment income.
(c) At December 31, 1997, all or a portion of capital loss carryforward expired
creating a permanent difference between book and tax basis reporting. These
items have been reclassified from accumulated net realized loss to capital.
(d) Miscellaneous permanent differences were reclassified from accumulated
undistributed net investment income to accumulated net realized gain/loss.
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.
110
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
________________________________________________________________________________
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:
<TABLE>
<CAPTION>
AVERAGE NET ASSETS % PER ANNUM
- -------------------------------------------------------------------------------
<S> <C>
First $500 million................................................... .50 of 1%
Next $500 million.................................................... .45 of 1%
Over $1 billion...................................................... .40 of 1%
</TABLE>
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 .95% of
average daily net assets, the Adviser will reimburse Asset Allocation, Domestic,
Enterprise, Government, and Money Market for the amount of the excess. For the
period, the Adviser has volunteered to reimburse all expenses in excess of .60%
of average daily net assets. The 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.
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 Strategic Stock, the Adviser will provide investment advice and
facilities to the Portfolio for an annual fee payable monthly of .50% of the
average daily net assets of the Portfolio.
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, 1.10% for Real Estate, and .65% for Strategic Stock of each of the
Portfolios' average daily net assets.
111
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
Other transactions with affiliates during the year ended December 31, 1997
were as follows:
<TABLE>
<CAPTION>
ASSET EMERGING GLOBAL
ALLOCATION DOMESTIC GROWTH ENTERPRISE EQUITY
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accounting and cash management....... $14,300 $ 8,900 $ 9,100 $19,600 $21,600
Shareholder servicing agent's fees... 15,000 15,000 15,000 15,000 15,000
Legal (Skadden)...................... 7,100 4,900 4,400 15,900 5,000
</TABLE>
<TABLE>
<CAPTION>
GROWTH
AND MONEY REAL STRATEGIC
GOVERNMENT INCOME MARKET ESTATE STOCK
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accounting and cash management......... $13,900 $ 4,400 $10,200 $33,000 $ -0-
Shareholder servicing agent's fees..... 15,000 6,300 15,000 15,000 -0-
Legal (Skadden)........................ 6,000 3,300 5,300 12,000 300
</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 per portfolio.
For the year ended December 31, 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 December 31, 1997, VKAC owned 10 shares of Emerging Growth, 95,241
shares of Global Equity, 50,961 shares of Growth and Income, 10 shares of Real
Estate, and 20,000 shares of Strategic Stock.
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.
For the year ended December 31, 1997, share transactions were as follows:
<TABLE>
<CAPTION>
ASSET EMERGING GLOBAL
ALLOCATION DOMESTIC GROWTH ENTERPRISE EQUITY
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning Shares............. 5,633,242 2,472,121 379,065 5,214,950 215,901
Sales........................ 223,088 659,893 559,402 869,947 116,532
Dividend Reinvestment........ 754,688 165,298 -0- 810,210 32,495
Repurchases.................. (1,296,455) (1,213,036) (300,652) (1,443,044) (94,662)
----------- ---------- --------- ----------- ---------
Ending Shares................ 5,314,563 2,084,276 637,815 5,452,063 270,266
=========== ========== ========= =========== =========
</TABLE>
112
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
=====================================================================================================
GROWTH AND MONEY REAL STRATEGIC
GOVERNMENT INCOME MARKET ESTATE STOCK
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning Shares............... 6,606,459 50,000 19,565,725 11,328,283 20,000<F1>
Sales.......................... 302,118 901,291 22,688,459 17,318,837 226,576
Dividend Reinvestment.......... 384,650 16,456 1,057,591 2,157,294 -0-
Repurchases.................... (1,401,150) (1,545) (23,571,207) (11,910,147) -0-
----------- -------- ----------- ------------ --------
Ending Shares.................. 5,892,077 966,202 19,740,568 18,894,267 246,576
=========== ======== =========== ============ ========
</TABLE>
<F1> Portfolio commenced investment operations during the period.
For the year ended December 31, 1996, share transactions were as follows:
<TABLE>
<CAPTION>
ASSET EMERGING GLOBAL
ALLOCATION DOMESTIC GROWTH ENTERPRISE EQUITY
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning Shares................... 5,409,616 3,235,694 195,420 5,173,759 230,530
Sales.............................. 387,499 755,420 366,538 489,441 110,151
Dividend Reinvestment.............. 821,862 217,401 -0- 611,154 3,772
Repurchases........................ (985,735) (1,736,394) (182,893) (1,059,404) (128,552)
---------- ---------- --------- ----------- --------
Ending Shares...................... 5,633,242 2,472,121 379,065 5,214,950 215,901
========== ========== ========= =========== ========
Capital at 12/31/96................ $57,866,139 $20,772,963 $ 4,650,241 $ 64,671,892 $2,102,301
=========== =========== =========== ============ ==========
</TABLE>
<TABLE>
<CAPTION>
GROWTH AND MONEY REAL
GOVERNMENT INCOME MARKET ESTATE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning Shares.............................. 7,399,648 50,000<F1> 21,575,617 799,347
Sales......................................... 184,739 -0- 15,915,843 13,855,117
Dividend Reinvestment......................... 464,018 -0- 1,001,868 197,332
Repurchases................................... (1,441,946) -0- (18,927,603) (3,523,513)
----------- ---------- ------------ ------------
Ending Shares................................. 6,606,459 50,000 19,565,725 11,328,283
----------- ---------- ------------ ------------
Capital at 12/31/96........................... $70,107,395 $ 500,000 $ 19,565,725 $144,550,380
=========== ========== ============ ============
</TABLE>
<F1> Portfolio commenced investment operations during the period.
At December 31, 1997, with the exception of VKAC's ownership of shares of
certain portfolios, two insurance companies or their separate accounts were
record owners of all but a de minimus number of the shares of each portfolio.
113
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
================================================================================
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 Strategic
Allocation Domestic Growth Enterprise Equity Government Income Estate Stock
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Purchases $ 32,898,983 $13,282,976 $11,014,645 $73,883,728 $3,947,336 $61,169,709 $14,551,531 $472,700,482 $2,327,597
Sales 43,334,706 16,075,670 7,368,880 80,758,859 3,875,492 65,665,559 4,642,919 378,072,839 -0-
</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). The risk of loss associated with a
futures contract is in excess of the variation margin reflected on the Statement
of Assets and Liabilities.
Transactions in futures contracts for the year ended December 31, 1997, for
Government, were as follows:
<TABLE>
<CAPTION>
CONTRACTS
- --------------------------------------------------------------------------------
<S> <C>
Outstanding at December 31, 1996..................................... 110
Futures Opened....................................................... 1,311
Futures Closed....................................................... (1,323)
------
Outstanding at December 31, 1997..................................... 98
======
</TABLE>
114
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
The futures contracts outstanding at December 31, 1997, and the
descriptions and unrealized appreciation/ depreciation for Government are as
follows:
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION/
CONTRACTS DEPRECIATION
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG CONTRACTS
U.S. Treasury Bonds - March 1998
(Current notional value of $120,469 per contract).......... 81 $ 124,418
SHORT CONTRACTS
10-year U.S. Treasury Notes - March 1998
(Current notional value of $112,156 per contract).......... 17 (20,557)
--------- ---------
98 $ 103,861
========= =========
</TABLE>
B. FORWARD COMMITMENTS--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
with changes in value reflected as a component of unrealized
appreciation/depreciation. Purchasing securities on a forward commitment
involves a risk that the market value at the time of delivery may be lower than
the agreed upon purchase price resulting in an unrealized loss. Selling
securities on a forward commitment involves different risks and can result in
losses more significant than those arising from the purchase of such securities.
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.
The forward commitments outstanding in Government as of December 31, 1997
for which settlement is not intended, and the descriptions and unrealized
depreciation are as follows:
<TABLE>
<CAPTION>
PAR AMOUNT CURRENT UNREALIZED
(000) DESCRIPTION EXPIRATION VALUE DEPRECIATION
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT CONTRACTS
$1,000 FNMA 30 Yr, 9.000%, 12/31/23 maturity......... 01-14-98 $1,063,130 $ 3,755
1,000 GNMA, 8.500%, 12/31/23 maturity............... 01-22-98 1,050,310 4,060
--------
$ 7,815
========
</TABLE>
115
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
C. 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 December 31, 1997:
<TABLE>
<CAPTION>
UNREALIZED
CURRENT APPRECIATION/
DESCRIPTION VALUE DEPRECIATION
- -------------------------------------------------------------------------------------------
<S> <C> <C>
LONG CONTRACTS
Deutsche Mark, 85,686 expiring 01/16/98....................... $ 47,676 $ (1,798)
Deutsche Mark, 25,835 expiring 02/12/98....................... 14,397 (727)
French Franc, 72,330 expiring 01/21/98........................ 12,033 (585)
Italian Lira, 26,816,828 expiring 01/21/98.................... 15,156 (578)
Italian Lira, 8,629,710 expiring 02/19/98..................... 4,877 (223)
Japanese Yen, 11,274,000 expiring 01/26/98.................... 86,670 (6,580)
Japanese Yen, 3,010,027 expiring 02/26/98..................... 23,247 (897)
Netherlands Guilder, 17,462 expiring 02/19/98................. 8,639 (426)
Singapore Dollar, 48,302 expiring 03/05/98.................... 28,435 (1,896)
Singapore Dollar, 14,846 expiring 03/23/98.................... 8,733 151
Spanish Peseta, 365,180, expiring 02/12/98.................... 2,400 (116)
-------- --------
$252,263 (13,675)
======== ========
SHORT CONTRACTS
Deutsche Mark, 85,686 expiring 01/16/98....................... $ 47,676 1,324
Deutsche Mark, 25,835 expiring 02/12/98....................... 14,397 603
Deutsche Mark, 26,249 expiring 03/16/98....................... 14,655 345
French Franc, 72,330 expiring 01/21/98........................ 12,033 408
French Franc, 58,572 expiring 03/16/98........................ 9,774 226
Italian Lira, 26,816,828 expiring 01/21/98.................... 15,156 536
Italian Lira, 8,629,710 expiring 02/19/98..................... 4,877 181
Japanese Yen, 11,274,000 expiring 01/26/98.................... 86,670 13,330
Japanese Yen, 12,895,723 expiring 01/29/98.................... 99,181 7,819
Japanese Yen, 11,215,260 expiring 02/05/98.................... 86,346 8,154
Japanese Yen, 8,190,980 expiring 02/26/98..................... 63,261 2,739
Netherlands Guilder, 17,462 expiring 02/19/98................. 8,639 361
Singapore Dollar, 48,302 expiring 03/05/98.................... 28,435 1,464
Singapore Dollar, 14,846 expiring 03/23/98.................... 8,733 267
Spanish Peseta, 365,180, expiring 02/12/98.................... 2,400 100
-------- --------
$502,233 37,857
======== ========
$ 24,182
========
</TABLE>
116
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees of
Van Kampen American Capital Life Investment Trust
In our opinion, the accompanying statements of assets and liabilities, including
the portfolios of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Asset Allocation Portfolio,
Domestic Income Portfolio, Emerging Growth Portfolio, Enterprise Portfolio,
Global Equity Portfolio, Government Portfolio, Growth and Income Portfolio,
Money Market Portfolio, Morgan Stanley Real Estate Securities Portfolio and
Strategic Stock Portfolio (constituting Van Kampen American Capital Life
Investment Trust, hereafter referred to as the "Trust") at December 31, 1997,
and the results of each of their operations, the changes in each of their net
assets and the financial highlights for each of the periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1997 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Chicago, Illinois
February 6, 1998
117
<PAGE>
FUNDS DISTRIBUTED BY VAN KAMPEN AMERICAN CAPITAL
EQUITY FUNDS
Domestic
MS Aggressive Equity
VKAC Aggressive Growth
MS American Value
VKAC Comstock
VKAC Emerging Growth
VKAC Enterprise
VKAC Equity Income
VKAC Growth
VKAC Growth and Income
VKAC Harbor
VKAC Pace
VKAC Real Estate Securities
MS U.S. Real Estate
VKAC Utility
MS Value
International /Global
MS Asian Growth
MS Emerging Markets
MS Global Equity
VKAC Global Equity
MS Global Equity Allocation
VKAC Global Managed Assets
MS International Magnum
MS Latin American
FIXED-INCOME FUNDS
Income
VKAC Corporate Bond
MS Global Fixed Income
VKAC Global Government Securities
VKAC Government Securities
VKAC High Income Corporate Bond
MS High Yield
VKAC High Yield
VKAC Short-Term Global Income
VKAC Strategic Income
VKAC U.S. Government
VKAC U.S. Government Trust for Income
MS Worldwide High Income
Tax Exempt Income
VKAC California Insured Tax Free
VKAC Florida Insured Tax Free Income
VKAC High Yield Municipal
VKAC Insured Tax Free Income
VKAC Intermediate Term Municipal Income
VKAC Municipal Income
VKAC New York Tax Free Income
VKAC Pennsylvania Tax Free Income
VKAC Tax Free High Income
Capital Preservation
VKAC Limited Maturity Government
VKAC Prime Rate Income Trust
VKAC Reserve
VKAC Senior Floating Rate
VKAC Tax Free Money
To find out more about any of these funds, ask your financial adviser for a
prospectus, which contains more complete information, including sales charges,
risks, and expenses. Please read it carefully before you invest or send money.
To view a current Van Kampen American Capital or Morgan Stanley fund prospectus
or to receive additional fund information, choose from one of the following:
. visit our web site at WWW.VKAC.COM--to view prospectuses, select Investors'
Place, then Download a Prospectus
. call us at 1-800-341-2911 weekdays from 7:00 a.m. to 7:00 p.m. Central time
(Telecommunications Device for the Deaf users, call 1-800-421-2833)
. e-mail us by visiting WWW.VKAC.COM and selecting Investors' Place
118
<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
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
200 E. Randolph Drive
Chicago, IL 60601
* "Interested" persons of the Portfolio, as defined in the Investment Company
Act of 1940.
(C) Van Kampen American Capital Distributors, Inc., 1998 All rights reserved.
SM denotes a service mark of Van Kampen American Capital Distributors, Inc.
TAX NOTICE TO CORPORATE
SHAREHOLDERS
The following represents the percentage of 1997 income distributions paid by the
designated fund which qualify for the 70% dividends received deduction for
corporations:
- --------------------------------------------------------------------------------
Asset Allocation Portfolio..................... 11.53%
Domestic Income Portfolio...................... 4.53%
Enterprise Portfolio........................... 17.65%
Global Equity Portfolio........................ 6.88%
Growth and Income Portfolio.................... 32.09%
- --------------------------------------------------------------------------------
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. After June 30, the report, if used with prospective investors,
must be accompanied by a quarterly performance update.
119
<PAGE>
Van Kampen American Capital Distributors, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
- -----------------
Bulk Rate
U.S. Postage
PAID
VAN KAMPEN
AMERICAN CAPITAL
- -----------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 11
<NAME> LIT ENTP
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 70,240,702
<INVESTMENTS-AT-VALUE> 99,558,737
<RECEIVABLES> 127,579
<ASSETS-OTHER> 46,687
<OTHER-ITEMS-ASSETS> 1,447
<TOTAL-ASSETS> 99,734,450
<PAYABLE-FOR-SECURITIES> 756,452
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 263,922
<TOTAL-LIABILITIES> 1,020,374
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 68,610,247
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<DIVIDEND-INCOME> 864,258
<INTEREST-INCOME> 131,879
<OTHER-INCOME> 0
<EXPENSES-NET> (560,961)
<NET-INVESTMENT-INCOME> 435,176
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<NAME> LIT DOMESTIC INCOME
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<NET-INVESTMENT-INCOME> 1,342,453
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<TABLE> <S> <C>
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<NAME> LIT GOVERNMENT
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<S> <C>
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<PERIOD-START> JAN-01-1997
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<INVESTMENTS-AT-VALUE> 53,856,663
<RECEIVABLES> 757,417
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<OTHER-ITEMS-ASSETS> 3,667
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<OTHER-ITEMS-LIABILITIES> 151,435
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<SHARES-REINVESTED> 384,650
<NET-CHANGE-IN-ASSETS> (4,696,043)
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<ACCUMULATED-GAINS-PRIOR> (13,288,380)
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<OVERDIST-NET-GAINS-PRIOR> 0
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<GROSS-EXPENSE> 393,866
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<ASSETS-OTHER> 0
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<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 119,023
<TOTAL-LIABILITIES> 119,023
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 19,740,568
<SHARES-COMMON-STOCK> 19,740,568
<SHARES-COMMON-PRIOR> 19,565,725
<ACCUMULATED-NII-CURRENT> 204
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<NET-ASSETS> 19,740,772
<DIVIDEND-INCOME> 0
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<EXPENSES-NET> (128,215)
<NET-INVESTMENT-INCOME> 1,057,585
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<NET-CHANGE-FROM-OPS> 1,057,585
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<SHARES-REINVESTED> 1,057,591
<NET-CHANGE-IN-ASSETS> 174,837
<ACCUMULATED-NII-PRIOR> 210
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 106,891
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 209,153
<AVERAGE-NET-ASSETS> 21,369,068
<PER-SHARE-NAV-BEGIN> 1.000
<PER-SHARE-NII> 0.049
<PER-SHARE-GAIN-APPREC> 0.000
<PER-SHARE-DIVIDEND> (0.049)
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<PER-SHARE-NAV-END> 1.000
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
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<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 54,998,971
<INVESTMENTS-AT-VALUE> 62,612,813
<RECEIVABLES> 848,569
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 44,316
<TOTAL-ASSETS> 63,505,698
<PAYABLE-FOR-SECURITIES> 69,740
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 138,246
<TOTAL-LIABILITIES> 207,986
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 53,888,909
<SHARES-COMMON-STOCK> 5,314,563
<SHARES-COMMON-PRIOR> 5,633,242
<ACCUMULATED-NII-CURRENT> 17,750
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,777,211
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7,613,842
<NET-ASSETS> 63,297,712
<DIVIDEND-INCOME> 764,885
<INTEREST-INCOME> 2,015,818
<OTHER-INCOME> 0
<EXPENSES-NET> (373,770)
<NET-INVESTMENT-INCOME> 2,406,933
<REALIZED-GAINS-CURRENT> 7,064,899
<APPREC-INCREASE-CURRENT> 2,697,375
<NET-CHANGE-FROM-OPS> 12,169,207
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,436,414)
<DISTRIBUTIONS-OF-GAINS> (6,406,916)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 223,088
<NUMBER-OF-SHARES-REDEEMED> (1,296,455)
<SHARES-REINVESTED> 754,688
<NET-CHANGE-IN-ASSETS> (651,353)
<ACCUMULATED-NII-PRIOR> 47,231
<ACCUMULATED-GAINS-PRIOR> 1,119,228
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 311,514
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 442,550
<AVERAGE-NET-ASSETS> 62,295,068
<PER-SHARE-NAV-BEGIN> 11.352
<PER-SHARE-NII> 0.513
<PER-SHARE-GAIN-APPREC> 1.897
<PER-SHARE-DIVIDEND> (0.518)
<PER-SHARE-DISTRIBUTIONS> (1.334)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.910
<EXPENSE-RATIO> 0.60
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 61
<NAME> LIT EMG
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 8,580,771
<INVESTMENTS-AT-VALUE> 10,521,867
<RECEIVABLES> 40,660
<ASSETS-OTHER> 3,411
<OTHER-ITEMS-ASSETS> 5,539
<TOTAL-ASSETS> 10,571,477
<PAYABLE-FOR-SECURITIES> 24,577
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 55,046
<TOTAL-LIABILITIES> 79,623
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8,818,482
<SHARES-COMMON-STOCK> 637,815
<SHARES-COMMON-PRIOR> 379,065
<ACCUMULATED-NII-CURRENT> (12,701)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (255,023)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,941,096
<NET-ASSETS> 10,491,854
<DIVIDEND-INCOME> 15,652
<INTEREST-INCOME> 35,862
<OTHER-INCOME> 0
<EXPENSES-NET> (59,289)
<NET-INVESTMENT-INCOME> (7,775)
<REALIZED-GAINS-CURRENT> 156,164
<APPREC-INCREASE-CURRENT> 997,037
<NET-CHANGE-FROM-OPS> 1,145,426
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 559,402
<NUMBER-OF-SHARES-REDEEMED> (300,652)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 5,313,667
<ACCUMULATED-NII-PRIOR> (4,926)
<ACCUMULATED-GAINS-PRIOR> (411,187)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 48,713
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 148,972
<AVERAGE-NET-ASSETS> 6,975,143
<PER-SHARE-NAV-BEGIN> 13.660
<PER-SHARE-NII> (0.007)
<PER-SHARE-GAIN-APPREC> 2.797
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 16.450
<EXPENSE-RATIO> 0.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 71
<NAME> LIT GLOBAL EQUITY
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 2,639,989
<INVESTMENTS-AT-VALUE> 2,923,905
<RECEIVABLES> 21,324
<ASSETS-OTHER> 3,405
<OTHER-ITEMS-ASSETS> 81,181
<TOTAL-ASSETS> 3,029,815
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 55,806
<TOTAL-LIABILITIES> 55,806
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,701,945
<SHARES-COMMON-STOCK> 270,266
<SHARES-COMMON-PRIOR> 215,901
<ACCUMULATED-NII-CURRENT> (14,504)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (21,382)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 307,950
<NET-ASSETS> 2,974,009
<DIVIDEND-INCOME> 53,293
<INTEREST-INCOME> 7,646
<OTHER-INCOME> 541
<EXPENSES-NET> (37,547)
<NET-INVESTMENT-INCOME> 23,933
<REALIZED-GAINS-CURRENT> 508,690
<APPREC-INCREASE-CURRENT> (88,784)
<NET-CHANGE-FROM-OPS> 443,839
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (25,284)
<DISTRIBUTIONS-OF-GAINS> (561,214)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 116,532
<NUMBER-OF-SHARES-REDEEMED> (94,662)
<SHARES-REINVESTED> 32,495
<NET-CHANGE-IN-ASSETS> 456,985
<ACCUMULATED-NII-PRIOR> (9,730)
<ACCUMULATED-GAINS-PRIOR> 27,719
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 31,290
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 212,179
<AVERAGE-NET-ASSETS> 3,128,965
<PER-SHARE-NAV-BEGIN> 11.658
<PER-SHARE-NII> 0.110
<PER-SHARE-GAIN-APPREC> 1.696
<PER-SHARE-DIVIDEND> (0.106)
<PER-SHARE-DISTRIBUTIONS> (2.354)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.004
<EXPENSE-RATIO> 1.20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 81
<NAME> LIT REAL ESTATE
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 272,399,758
<INVESTMENTS-AT-VALUE> 303,473,022
<RECEIVABLES> 2,793,071
<ASSETS-OTHER> 3,415
<OTHER-ITEMS-ASSETS> 27
<TOTAL-ASSETS> 306,269,535
<PAYABLE-FOR-SECURITIES> 1,513,577
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,348,930
<TOTAL-LIABILITIES> 6,862,507
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 263,842,945
<SHARES-COMMON-STOCK> 18,894,267
<SHARES-COMMON-PRIOR> 11,328,283
<ACCUMULATED-NII-CURRENT> 435,381
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 4,055,438
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 31,073,264
<NET-ASSETS> 299,407,028
<DIVIDEND-INCOME> 9,416,241
<INTEREST-INCOME> 789,383
<OTHER-INCOME> 0
<EXPENSES-NET> (2,438,676)
<NET-INVESTMENT-INCOME> 7,766,948
<REALIZED-GAINS-CURRENT> 28,792,309
<APPREC-INCREASE-CURRENT> 9,027,199
<NET-CHANGE-FROM-OPS> 45,586,456
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (7,660,430)
<DISTRIBUTIONS-OF-GAINS> (25,295,317)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 17,318,837
<NUMBER-OF-SHARES-REDEEMED> (11,910,147)
<SHARES-REINVESTED> 2,157,294
<NET-CHANGE-IN-ASSETS> 131,923,274
<ACCUMULATED-NII-PRIOR> 328,863
<ACCUMULATED-GAINS-PRIOR> 558,446
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,269,511
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,438,676
<AVERAGE-NET-ASSETS> 227,266,587
<PER-SHARE-NAV-BEGIN> 14.784
<PER-SHARE-NII> 0.464
<PER-SHARE-GAIN-APPREC> 2.617
<PER-SHARE-DIVIDEND> (0.470)
<PER-SHARE-DISTRIBUTIONS> (1.549)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.846
<EXPENSE-RATIO> 1.07
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 91
<NAME> LIT GROWTH & INC
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 11,388,144
<INVESTMENTS-AT-VALUE> 11,927,680
<RECEIVABLES> 36,660
<ASSETS-OTHER> 3,507
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 11,967,847
<PAYABLE-FOR-SECURITIES> 225,821
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 28,436
<TOTAL-LIABILITIES> 254,257
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11,202,241
<SHARES-COMMON-STOCK> 966,202
<SHARES-COMMON-PRIOR> 50,000
<ACCUMULATED-NII-CURRENT> 14,691
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (42,878)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 539,536
<NET-ASSETS> 11,713,590
<DIVIDEND-INCOME> 76,803
<INTEREST-INCOME> 23,134
<OTHER-INCOME> 0
<EXPENSES-NET> (38,590)
<NET-INVESTMENT-INCOME> 61,347
<REALIZED-GAINS-CURRENT> 105,366
<APPREC-INCREASE-CURRENT> 541,506
<NET-CHANGE-FROM-OPS> 708,219
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (44,226)
<DISTRIBUTIONS-OF-GAINS> (151,146)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 901,291
<NUMBER-OF-SHARES-REDEEMED> (1,545)
<SHARES-REINVESTED> 16,456
<NET-CHANGE-IN-ASSETS> 11,215,088
<ACCUMULATED-NII-PRIOR> 553
<ACCUMULATED-GAINS-PRIOR> (81)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 30,777
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 83,959
<AVERAGE-NET-ASSETS> 5,145,317
<PER-SHARE-NAV-BEGIN> 9.970
<PER-SHARE-NII> 0.072
<PER-SHARE-GAIN-APPREC> 2.309
<PER-SHARE-DIVIDEND> (0.065)
<PER-SHARE-DISTRIBUTIONS> (0.163)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 12.123
<EXPENSE-RATIO> 0.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<RESTATED>
<SERIES>
<NUMBER> 101
<NAME> LIT STRATEGIC STOCK
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 2,637,597
<INVESTMENTS-AT-VALUE> 2,644,432
<RECEIVABLES> 35,598
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 2,867
<TOTAL-ASSETS> 2,682,897
<PAYABLE-FOR-SECURITIES> 151,395
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,300
<TOTAL-LIABILITIES> 156,695
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,512,791
<SHARES-COMMON-STOCK> 246,576
<SHARES-COMMON-PRIOR> 20,000
<ACCUMULATED-NII-CURRENT> 6,576
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,835
<NET-ASSETS> 2,526,202
<DIVIDEND-INCOME> 5,805
<INTEREST-INCOME> 2,262
<OTHER-INCOME> 0
<EXPENSES-NET> (1,491)
<NET-INVESTMENT-INCOME> 6,576
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 6,835
<NET-CHANGE-FROM-OPS> 13,411
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 226,576
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 2,326,202
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,083
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6,383
<AVERAGE-NET-ASSETS> 1,524,599
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> 0.027
<PER-SHARE-GAIN-APPREC> 0.218
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.245
<EXPENSE-RATIO> 0.61
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
