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[PHOTO]
VANGUARD
VARIABLE INSURANCE
FUND
Annual Report
September 30, 1996
THE VANGUARD GROUP: LINKING TRADITION AND INNOVATION
At Vanguard, we treasure our rich nautical heritage--even as we steer our course
toward the twenty-first century. Our Report cover reflects that blending of
tradition and innovation, of past, present, and future. The montage includes a
bronze medallion with a likeness of our namesake, HMS Vanguard (Lord Nelson's
flagship at The Battle of the Nile); a clock built circa 1816 in Scotland,
featuring a portrait of Nelson (who is also shown, accepting a surrender, in a
detail from a nineteenth-century engraving); and several views of our recently
completed campus, which is steeped in nautical imagery--from our buildings named
after Nelson's warships (Victory, Majestic, and Goliath are three shown), to our
artwork and ornamental compass rose.
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[PHOTO]
VANGUARD HAS ALWAYS STRIVED TO BE THE STANDARD-BEARER for mutual fund
disclosure, going well beyond the "letter of the law" in our shareholder
communications. During the past year, we raised the standard once again by
rewriting and reformatting our Fund prospectuses. They are designed to ensure
that prospective investors fully understand, before they make an investment,
each Fund's investment strategies, risks, and costs. In that spirit, we have
redesigned our Annual Reports to shareholders, which provide a comprehensive
discussion and analysis of the year's results in the context of each Fund's
investment objectives and policies. Since Vanguard has long been recognized for
the quality and content of these Fund Reports, our overriding objective was to
maintain the character of the previous Reports, while adding information to
assist shareholders in understanding the investment characteristics of their
Fund.
THE NEW FUND REPORTS INCLUDE A MESSAGE TO PLANHOLDERS from Chairman John C.
Bogle and President John J. Brennan. This Message continues to provide a candid
assessment of the Fund's performance relative to an appropriate unmanaged
market benchmark and a peer group of mutual funds with similar investment
policies. It also reviews the principal factors contributing to--and detracting
from--the returns earned by the Fund. To help you evaluate your Fund's
current-year performance, the Message includes a discussion of the Fund's
long-term investment results, as well as a look ahead to the prospects for the
coming year. A recap of the financial markets, which had been included as part
of the Chairman's letter, now appears in The Markets In Perspective. This
overview covers the world's financial markets, putting the results of the
Fund's strategy in a global perspective.
THE PORTFOLIO PROFILE REPRESENTS AN ADDITION TO OUR FUND REPORTS. In this day
and age, many investors use detailed statistical information to evaluate their
mutual fund holdings, and our new Portfolio Profile furnishes shareholders with
comprehensive data on key characteristics--sector diversification, volatility,
top-ten holdings, among others--that ultimately define how a Fund is likely to
perform in various market environments. For this information to be used
effectively, we include a brief description of the profiled characteristics.
The Report From The Adviser (for our traditionally managed Funds) now covers
specific topics that we have defined as being the important ones for the
adviser to address--and we do our best to ensure that this Report is written in
the same simple and candid manner that characterizes all Vanguard
communications. Finally, each Adviser's Report will include an inset reminder
of the adviser's basic investment philosophy.
WE TRUST THAT THIS REDESIGNED FUND REPORT will continue to meet your need for a
fair, candid, and clear presentation of your Fund's investment results and a
thorough portfolio review. We welcome any comments that you might have at any
time regarding these Reports.
CONTENTS
A Message To
Our Planholders
1
The Markets
In Perspective
5
Reports From
The Advisers
7
Performance
Summaries
15
Portfolio
Profiles
24
Financial
Statements
35
Trustees And
Officers
INSIDE BACK COVER
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[PHOTO]
John C. Bogle
[PHOTO]
John J. Brennan
DEAR PLANHOLDER,
During Vanguard Variable Insurance Fund's fiscal year ended September
30, 1996, stocks enjoyed a continuation of their long-running bull market, while
bonds provided subdued total returns. In this environment, the investment
results of each of our Portfolios were fully satisfactory and competitive with
comparable mutual funds.
The table at right provides our customary presentation of the total return
(capital change plus reinvested dividends) of each Portfolio, along with the
results of the comparative benchmarks we consider most appropriate. For our two
new Portfolios--the High Yield Bond and Small Company Growth Portfolios--the
period covered is for the four months since their inception in June 1996; for
the seven remaining Portfolios, the results shown are for the full fiscal year.
The total returns shown reflect the change in net asset value for each
Portfolio, adjusted for the reinvestment of any dividend or capital gains
distributions. We also provide, in the table on page 2, the actual returns to
investors in the Vanguard Variable Annuity Plan. As you may know, these returns
are somewhat lower because they take into account the administrative and
insurance expenses associated with the Plan, which total some 0.46% on an annual
basis.
FISCAL 1996 PERFORMANCE OVERVIEW
The stock market, buoyed by continued strong growth in corporate earnings,
proved remarkably resilient for most of fiscal year 1996, closing out the period
by surging to record highs. The bond market, on the other hand, rallied during
the first quarter of the fiscal year but subsequently slumped amid fears that
the economy was overheating and that inflation would rekindle. By the end of the
fiscal year,
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
TOTAL RETURN
FISCAL YEAR ENDED
SEPTEMBER 30, 1996
- -----------------------------------------------------------------------------
<S> <C>
Money Market Portfolio* + 5.5%
Average Money Market Fund* + 4.9
- -----------------------------------------------------------------------------
High-Grade Bond Portfolio + 4.8%
Average Intermediate-Term
U.S. Government Fund + 3.8
Lehman Aggregate Bond Index + 4.9
- -----------------------------------------------------------------------------
High Yield Bond Portfolio** + 4.6%
Average High Yield Bond Fund** + 4.3
Lehman High Yield Bond Index** + 3.7
- -----------------------------------------------------------------------------
Balanced Portfolio +15.3%
Average Balanced Fund +12.5
Composite Index+ +14.3
- -----------------------------------------------------------------------------
Equity Index Portfolio +20.2%
Average Growth & Income Fund +17.4
S&P 500 Index +20.3
- -----------------------------------------------------------------------------
Equity Income Portfolio +19.1%
Average Equity Income Fund +16.8
S&P 500 Index +20.3
- -----------------------------------------------------------------------------
Growth Portfolio +27.8%
Average Growth Fund +15.9
S&P 500 Index +20.3
- -----------------------------------------------------------------------------
Small Company Growth Portfolio** - 1.6%
Average Small Company Growth Fund** - 3.0
Russell 2000 Index** - 4.4
- -----------------------------------------------------------------------------
International Portfolio +13.4%
Average International Stock Fund + 9.4
MSCI-EAFE Index + 8.9
- -----------------------------------------------------------------------------
</TABLE>
*Money market funds do not assure a stable value of $1.00 per share, and,
unlike bank certificates of deposit, are not insured by the Federal Deposit
Insurance Corporation.
**Since Portfolio's inception on June 3, 1996.
+65% S&P 500 Index, 35% Lehman Long-Term Corporate AA or Better Bond Index.
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<TABLE>
<CAPTION>
- ---------------------------------------
PLAN TOTAL RETURNS
FISCAL YEAR ENDED
PORTFOLIO SEPTEMBER 30, 1996
- ---------------------------------------
<S> <C>
Money Market + 5.0%
High-Grade Bond + 4.3
High Yield Bond* + 4.4
Balanced +14.7
Equity Index +19.6
Equity Income +18.5
Growth +27.2
Small Company Growth* - 1.7
International +12.8
- ---------------------------------------
</TABLE>
*Since Portfolio's inception on June 3, 1996.
bond prices were just slightly below where they had been twelve months earlier.
All told, interest rates in general rose modestly, with the yield on short-term
U.S. Treasury bills rising from 5.4% to 5.7%, and the benchmark 30-year U.S.
Treasury yield rising from 6.5% to 6.9%.
During fiscal 1996, the return of each Portfolio varied according to the
asset classes in which it invests. Our returns were solid "across the board,"
both in absolute terms and relative to our competitors. A summary of the results
follows.
The MONEY MARKET PORTFOLIO benefited from relatively high yields on
short-term money market instruments, which fluctuated between 4.8% and 6.0%
during the year. We earned a return of +5.5%, nicely outpacing the +4.9% return
of the average money market fund. Over the years, we have enjoyed a consistent
advantage over comparable money market funds, due largely to our low expense
ratio (expenses as a percentage of average net assets). Currently, our Money
Market Portfolio's expense ratio is 0.2% versus 0.7% for the average money
market fund--an expense advantage that results in an annual tailwind of about
0.5% for our Portfolio.
Despite rising interest rates, the HIGH-GRADE BOND PORTFOLIO earned a
+4.8% return, a whisker below the +4.9% return of our unmanaged benchmark index,
but well ahead of the +3.8% return of the average intermediate-term U.S.
Government bond fund. Although the rate increases during the year pushed our net
asset value lower, the interest income earned by the Portfolio more than offset
this decline.
Since the HIGH YIELD BOND PORTFOLIO's inception on June 3, 1996,
interest rates have drifted lower. During this brief period, the Portfolio
provided a return of +4.6% versus +4.3% for the average high-yield bond mutual
fund. Of course, these small differences in total return over such a short time
period are hardly meaningful. We would remind investors that the Portfolio's
adviser seeks to provide a sustainable, high level of current income by
investing primarily in a mix of high-yielding, medium- and lower-quality
corporate bonds.
With a total return of +15.3%, the BALANCED PORTFOLIO outpaced both the
+14.3% return of its unmanaged composite index and the +12.5% return of the
average competitive balanced fund. The equity portion of the Portfolio performed
well primarily due to our emphasis on large, blue-chip companies, which led the
market advance during the past twelve months. Our strong showing in the
Portfolio's equity component offset to some degree the weaker returns of
high-quality, long-term bonds, which constitute about 35% of our Portfolio.
As expected, the +20.2% return of the EQUITY INDEX PORTFOLIO closely
tracked the +20.3% return of the Standard & Poor's 500 Composite Stock Price
Index. Given that the Index is a theoretical construct that incurs none of the
real-world operating expenses that must be borne by all mutual funds, we are
especially pleased with our ability to virtually match its return. We were able
to do so largely because of our minimal annual expense ratio of 0.2%. In
contrast, the typical growth and income fund incurs an expense ratio of 1.2%--a
difference of fully 1.0%--which gives us a significant "head start" in
performance.
Despite the EQUITY INCOME PORTFOLIO'S relatively conservative investment
strategy, which focuses on value-oriented, high-yielding stocks such as
telephone and electric utili-
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ties, the Portfolio enjoyed a strong annual return of +19.1%, compared to
returns of +16.8% for the average equity income fund and +20.3% for the S&P 500
Index. During the past twelve months, growth stocks had the upper hand over
value stocks; thus, it is not surprising that we lagged the Index, which
includes both growth and value stocks. In particular, our performance relative
to the Index was impeded by our underweighting in two sectors with especially
strong returns: consumer staples and capital goods & construction. Our shortfall
in this regard was partially offset by our adviser's good overall selection of
individual stocks.
The +27.8% return earned by the GROWTH PORTFOLIO trounced the +15.9%
return of the average growth mutual fund. With large, blue-chip stocks--our
specialty, as it were--leading the market advance during the past year, it is
hardly surprising that our Portfolio shone. That said, we should not diminish
our adviser's excellent stock selections across all market sectors--in
particular, our 19% position in health-care stocks, which achieved an aggregate
return of +45% compared to a +31% return for this market-leading sector.
The second of our new offerings, the SMALL COMPANY GROWTH PORTFOLIO, had
a -1.6% return during its first four months, a period marked by a number of
earnings disappointments. Nonetheless, we fared somewhat better than the average
small company stock fund, which declined -3.0% since the Portfolio's inception.
Although not as robust as the U.S. bull market, international stock
markets earned favorable returns over the past twelve months. In this positive
environment, the INTERNATIONAL PORTFOLIO provided a return of +13.4%, exceeding
the +9.4% return of the average international fund by a healthy margin. The
Portfolio's performance was earned against a backdrop of generally solid results
in international stock markets, although returns on foreign investments for
U.S.-based investors were diminished by the strong rise in the value of the U.S.
dollar. Relative to our peers, we benefited from a particularly good year for
established growth companies, which are our Portfolio's "stock in trade."
Although one year is far too short a period to judge any fund's
performance, we are pleased that our fiscal 1996 results have met our overriding
objective of earning better returns than our competitors with similar investment
policies.
LONGER-TERM PERFORMANCE OVERVIEW
The table at right presents the lifetime records of our seven Portfolios with
longer-run records, compared with those of their respective peer groups.
Clearly, our excellent performance relative to our competitors in fiscal 1996
was not an isolated occurrence.
We should emphasize that future results may be better or worse than the
past returns reflected in the table. In fact, we believe that investors should
expect that future absolute returns from stocks and bonds will be less generous
than those from the past few years, which have been quite high by historical
standards.
That said, we believe there are good reasons to anticipate that
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
SINCE INCEPTION THROUGH
SEPTEMBER 30, 1996
-------------------------------
AVERAGE
VANGUARD COMPETITIVE VANGUARD
PORTFOLIO (INCEPTION) FUND FUND ADVANTAGE
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market (5/2/91) + 4.5% + 4.1% +0.4%
High-Grade Bond (4/29/91) + 7.6 + 6.7 +0.9
Balanced (5/23/91) +12.6 +10.7 +1.9
Equity Index (4/29/91) +14.7 +13.6 +1.1
Equity Income (6/7/93) +14.6 +12.9 +1.7
Growth (6/7/93) +20.1 +14.8 +5.3
International (6/3/94) +11.9 + 6.7 +5.2
- -------------------------------------------------------------------------------
</TABLE>
Table on page 1 shows since-inception total returns for the High Yield Bond
Portfolio and the Small Company Growth Portfolio.
3
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the Portfolios will continue to provide strong relative returns. Specifically,
the historical performance advantage we have enjoyed over our peers comes, in
part, from the lower expense ratios of the Vanguard Funds. We have no reason to
believe that our "expense advantage" will diminish in the years ahead. In fact,
for variable annuity investors, the savings are more pronounced because of
Vanguard's low insurance and administration expenses (0.46% versus the insurance
industry average expenses of 1.27%). This Vanguard Variable Annuity Plan saving
of 0.81% per year adds to our mutual fund expense advantage--ranging from 0.6%
to 1.1% per portfolio--giving our planholders a combined advantage of 1.4% to
1.9% in annual return. Compounded over time, it should provide a truly
remarkable enhancement to your long-term returns.
IN SUMMARY
We established the Vanguard Variable Annuity Plan as a way for investors to
prepare for the future. So far, the Plan seems to have been well-received, as
assets have grown to more than $1.8 billion since its inception in 1991. Going
forward, we will continue to strive to provide a top-quality, tax-deferred
investment program at the lowest reasonable cost.
Our message to investors has consistently stressed the importance of
"staying the course" with a balanced investment portfolio--made up of stock
funds, bond funds, and money market funds--that will meet long-term financial
objectives. That said, after a rewarding period for financial markets such as
the past few years, it is not unreasonable to expect rougher seas ahead.
Investments in the financial markets are not without risk. As we said in last
year's Annual Report, "the important message is to be prepared for whatever
volatility may lie ahead." Whatever the course of the financial markets, then,
the Vanguard Variable Insurance Fund enables you to customize a diversified
investment portfolio that matches your personal risk/reward preferences.
The performance of our Portfolios in fiscal 1996 reinforced the good
sense of this investment approach. Despite the interim turbulence of the
markets, investors who remained steadfast for the entire fiscal year ended the
period in positive territory. Staying the course with a balanced mix of assets
appropriate to your financial objectives has proven a successful strategy in the
past, and we believe it will prove to be a sound investment approach for the
future.
/s/ JOHN C. BOGLE /s/ JOHN J BRENNAN
Chairman of the Board President
October 16, 1996
Effective the fiscal year starting October 1, 1996, Vanguard Variable Insurance
Fund's Balanced, Equity Index, and Equity Income Portfolios will change from a
quarterly dividend distribution cycle (January, April, July, and October) to an
annual distribution cycle (income and any capital gains distributed in October,
after the fiscal year end). The change will not affect the Portfolios' total
returns, but will reduce administrative and recordkeeping costs.
4
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THE MARKETS IN PERSPECTIVE: FISCAL YEAR ENDED SEPTEMBER 30, 1996
[PHOTO]
U.S. EQUITY AND BOND MARKETS
During the past twelve months, expectations about economic growth, inflation,
and Federal Reserve policy shifted markedly, generating some pronounced changes
in the U.S. equity and bond markets. In October 1995, for example, the U.S.
economy was widely considered to be slowing, after exhibiting fairly robust
growth earlier in the year. Reflecting this view, investors were attracted to
long-term U.S. Treasury bonds (the yield on the 30-year maturity fell from 6.5%
to just below 6.0%) and large- capitalization stocks (the Standard & Poor's 500
Composite Stock Price Index advanced 9.6%) from the beginning of October 1995
through the end of January. By contrast, shares of small-capitalization firms
increased only 2.1% in this period.
The view that slow but steady economic growth and minimal inflation
would continue was widely held. Even the Open Market Committee of the Federal
Reserve accepted this outlook, as evidenced by its decision in January to cut
both the discount and Fed funds rates by 0.25% in an effort to stimulate the
economy.
By mid-February, however, reports indicated increases in the demand for
technology goods, the number of new jobs, and consumer spending. As a result,
the outlook among investors changed. Common-stock investors began to look for
opportunities offered by a rapidly expanding economy (e.g., rapid earnings
growth among technology, cyclical, and smaller firms), while bond investors saw
the more rapid growth as an indication of future inflation. The result was a
1.2% rise in the 30-year U.S. Treasury yield and sharp jumps in the prices of
economically sensitive stocks during the next three months.
This outlook proved to be short-lived, too, with signs of a slowdown
appearing by late spring. As a result, blue-chip growth stocks became the
preferred segment of the stock market, while smaller-company issues,
particularly technology stocks, declined--often sharply. Bond investors
benefited from the revised outlook, as long-term yields fell -0.5% between early
July and mid-August. By the end of September, however, the long-term Treasury
yield had retraced half of the summer rally.
The markets moved in reaction to wide swings in consensus expectations
for the economy. Bond investors, in aggregate, suffered somewhat as the Lehman
Aggregate Bond Index posted a total return of 4.9% for the fiscal year, with
income of 6.9% and a -2.0% decline in capital.
<TABLE>
<CAPTION>
- --------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED SEPTEMBER 30, 1996
--------------------------------
1 YEAR 3 YEARS 5 YEARS
- --------------------------------------------------------------
<S> <C> <C> <C>
Equity
S&P 500 Index 20.3% 17.4% 15.2%
Russell 2000 Index 13.1 12.7 15.8
MSCI-EAFE Index 8.9 8.4 8.5
- --------------------------------------------------------------
Fixed-Income
Lehman Aggregate Bond Index 4.9% 5.0% 7.5%
Lehman 10-Year Municipal
Bond Index 4.8 4.9 7.6
Lipper Money Market 4.9 4.4 3.9
- --------------------------------------------------------------
Other
Consumer Price Index 3.0% 2.8% 2.8%
- --------------------------------------------------------------
</TABLE>
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Equity investors, on the other hand, saw the S&P 500 Index generate a
strong return of 20.3%, largely due to continued earnings growth; yet the S&P
500's performance trailed by 9.4% the exceptional 29.7% gain generated during
the twelve months ended September 30, 1995. The returns for the S&P 500 Index
for these periods represent approximately two and three times, respectively, the
long-term average returns of the Index.
The best performers among the S&P 500's holdings were often the large
"traditional" growth stocks in the health-care (31.4% over the last twelve
months) and consumer- staples (26.4%) sectors. Such issues have historically
performed especially well on a relative basis during periods of economic
uncertainty thanks to the dependability of their earnings. The utilities
(-0.4%), consumer-cyclical (13.8%), and basic-materials (14.6%) sectors, by
contrast, lagged in this year characterized by uncertain growth and rising
interest rates.
A number of the worst--and most volatile--performers among domestic
common stocks could be found among small-capitalization technology issues. While
small-company stocks (as measured by the Russell 2000 Small Stock Index) gained
13.1% in aggregate, stocks of small technology companies gained only 4.2% for
the year, dropping -12.6% in the last four months alone. The most likely cause
was a number of earnings disappointments within the group.
For bond investors, issues of shorter maturity and lower quality
generally performed better than other segments of the bond market.
Mortgage-backed securities also generated attractive relative returns as rising
interest rates reduced prepayment activity. Municipals, however, were strong
compared to their taxable siblings as concern over a "flat-tax" system eased.
INTERNATIONAL EQUITY MARKETS
Returns for international equity investors were solid, as reflected in the 8.9%
return of the Morgan Stanley Capital International-Europe, Australasia, Far East
(EAFE) Index. Performance in the European and Pacific Rim markets differed
widely, however, with returns of 14.6% and 3.2% (measured in U.S. dollars),
respectively. One reason for the disparity was the strength of the U.S. dollar
versus the Japanese yen. The dollar gained 12.9% against the yen, a move that
reduced the Japanese market's 13.5% increase in local terms to a mere 0.5% for
dollar-based investors. The dollar was modestly stronger (3.8%) against the
major European currencies.
The strength of the European markets stemmed, at least in part, from
governments' commitment to the Maastricht Treaty. The Treaty, which seeks to
achieve a common European currency, requires that a nation's budget deficit not
exceed 3% of its GDP. With the Maastricht deadlines approaching, governments are
reaffirming their commitment to the Treaty by reducing spending. These actions
have led to lower interest rates and strong gains for many stocks.
In Asian markets, Hong Kong (23.2%) and Malaysia (17.3%) stood out for
their gains. A number of the smaller markets (e.g., Singapore, Thailand)
suffered from slower growth and reduced competitiveness as a result of the
weakened Japanese yen. The Japanese market, despite the 13.5% gain (measured in
yen), proved disappointing to many investors due to slow sustained growth
despite government efforts to spur the economy.
6
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REPORT FROM VANGUARD FIXED INCOME GROUP
MONEY MARKET PORTFOLIO AND HIGH-GRADE BOND PORTFOLIO
[PHOTO]
The fiscal year ended September 30, 1996, will not be one for the record
books. In contrast to 1994 and 1995--which were among the worst and best years,
respectively, for bond returns in the post-World War II era--the year just ended
should fall comfortably within the middle of the pack. An increase of about half
a percentage point in intermediate- and long-term interest rates caused price
declines that resulted in total returns marginally below the interest income
generated by bonds. Money market interest rates fell somewhat, but remained well
above inflation, providing a real return of about 2%.
While Federal Reserve monetary policy is always an important factor in
the behavior of interest rates, the Fed's stance--and the bond market's
expectations of how it might change--figured more prominently than usual during
fiscal 1996. In December 1995 and January 1996, the Federal Reserve eased
monetary policy, causing a reduction in short-term interest rates. Typically,
when changing monetary policy, the Fed adds or removes reserves from the banking
system to exert some control over the cost of borrowing for businesses and
consumers. The changes it made this time, however, were so slight (a combined
total of 0.5% reduction in short-term rates) that they could be described as a
"fine tuning" of real (after inflation) short-term rates in response to a
favorable inflation outlook rather than an attempt to stimulate a substantial
increase in growth. Market rates declined even more as participants anticipated
further Fed easing, and long-term Treasury bond yields approached to within 0.2%
of the lows reached in 1993.
The bond market's complacency was broken by a series of monthly labor
statistics showing outsized employment growth and declining unemployment. Data
on housing demand and other statistics corroborated the job-growth indicators.
By mid-summer, the consensus view was that the economy was in danger of
overheating, with skilled workers in short supply and speculation about rising
wage inflation. Expectations of monetary policy changes by the Fed swung 180
degrees, propelling an interest rate rebound of more than a percentage point
from the late-winter lows. As the fiscal year drew to a close, however, the Fed
continued to confound the markets by its inaction on monetary policy, sticking
to Chairman Alan Greenspan's stated expectation that the economy would slow from
its unsustainably fast pace of the first half of 1996. This caused a minor bond
rally, retracing a portion of the earlier sell-off.
Tremendous intellectual effort has been expended in forecasting the
course of monetary policy this year, focusing ever more closely on the
statistical minutia of each economic statistic and deriving the hidden mean
INVESTMENT PHILOSOPHY
MONEY MARKET PORTFOLIO
The adviser believes a portfolio can provide the highest level of current income
consistent with capital preservation and liquidity by holding high-quality money
market instruments issued by financial institutions, non-financial corporations
and the U.S. Government.
HIGH-GRADE BOND PORTFOLIO
The adviser believes a portfolio can provide sustainable, high levels of current
income by holding an extremely well-diversified group of U.S. Government,
corporate, and mortgage-backed bonds that parallels the performance of the
Lehman Brothers Aggregate Bond Index.
7
<PAGE> 10
ings in every comment by Fed officials. Yet, time and again, the market has
overcompensated, like a tightrope walker losing his balance. In the process,
interest rates and bond prices have been quite volatile over short time periods,
yet another reminder of the value of sticking with a long-term investment
philosophy. We have kept the Portfolio's interest-rate sensitivity in the upper
end of our neutral policy band, garnering some benefit from the upward slope of
the yield curve while still maintaining a healthy liquidity cushion.
In overseeing the Money Market Portfolio, we have steered clear (as
usual) of interest-rate speculation, a particularly poor strategy in the fickle
markets of the past year. While staying within the band of maturities we
consider neutral, we have leaned toward the upper end so as to maximize yields
while maintaining healthy liquidity. Also, no surprise to our longer-term
shareholders, we have kept to our conservative policy on credit quality. As in
other sectors of the bond market, interest-rate differentials between money
market securities of high-credit-quality and low-credit-quality issuers are
exceptionally narrow. In such an environment, there is almost no cost, in terms
of foregone yield, to maintaining a very high quality portfolio. Add to this
equation the low expenses charged to our shareholders, and the result is
consistently competitive returns.
The High-Grade Bond Portfolio is designed to closely replicate the
performance of the Lehman Aggregate Bond Index. The Portfolio comprises
primarily government (35% weighting), corporate (29%), and mortgage-backed (30%)
securities. For the six months ended September 30, the Portfolio's return was
2.5%, compared to the Index's 2.4%; for the twelve months, the Portfolio's
return was 4.8%, compared to the Index's 4.9%. When these figures are adjusted
for expenses and transaction costs--neither of which affect the theoretical
Index--the difference was in the Portfolio's favor: 0.2% for the six months and
0.3% for the fiscal year.
We look forward to reporting to you on the progress of the Portfolios
six months hence.
Kenneth E. Volpert, Principal
John W. Hollyer, Principal
October 21, 1996
8
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REPORT FROM WELLINGTON MANAGEMENT COMPANY, LLP
HIGH YIELD BOND PORTFOLIO
Over the course of fiscal 1996, long-term interest rates rose more than
40 basis points (0.40%) as the economy emerged from its mid-cycle slowdown a
little sooner and stronger than expected. As a result, the prospect for lower
short-term rates has been virtually eliminated; however, there are good reasons
to think that we are in a period of stable monetary policy, as opposed to one of
prolonged tightening. These reasons include moderate gains in consumer spending
and a benign inflation outlook. We do not foresee any major upward or downward
movement in long-term interest rates. At its meeting in late September, the
Federal Reserve Board left interest rates unchanged, underscoring its view that
the economy was not producing an unsettling amount of inflation.
Although interest rates rose during fiscal 1996, the
below-investment-grade market had a relatively strong year. The reason is that
below-investment-grade bonds tend to outperform higher-quality bonds at times
when investors are anticipating strong economic growth and interest rates are
rising--both of which were the case over the fiscal year.
High-yield bonds should continue to perform relatively well in the
environment that we anticipate: moderate growth and low inflation, with interest
rates not expected to decline or rise dramatically. The yield premium available
in below-investment-grade corporate bonds has remained relatively small;
investors seem to have all but forgotten about credit risk. We believe that this
condition will persist as long as investors feel sure that liquidity will be
maintained in the capital markets.
We expect economic growth to be in the 2%-3% range during 1996 and 1997.
As a result, we have emphasized economically sensitive issues, particularly
paper and steel companies. We are also closely watching merger and acquisition
activity. In the current market environment, high-yield bond investors have
cheered the announcements of takeovers, especially when a stronger company is
buying a smaller or weaker one for strategic reasons. In these cases, high-yield
bond prices have improved on the news. We are wary, however, of companies that
announce stock buy-back programs, since buy-backs tend to increase these
companies' leverage and lower the prices of their bonds.
We continue to conduct in-depth credit research on companies and to
emphasize diversification in the Portfolio. It currently owns securities from
more than 100 issuers--typically rated B or better--across a broad range of
industries. We will continue to emphasize higher-quality issues of
below-investment-grade bonds.
This is the first opportunity we have had to write to the shareholders
of the High Yield Bond Portfolio since it began operations on June 3, 1996.
Since that time, it has returned 4.6%. We are gratified to have seen strong
asset growth in your Portfolio and look forward to serving you in the months to
come.
Earl E. McEvoy, Senior Vice President and
Portfolio Manager
October 10, 1996
INVESTMENT PHILOSOPHY
The adviser believes a diversified group of high-yielding, medium- and
low-quality corporate bonds--selected after rigorous credit assessment--can
provide sustainable, high current income as well as some potential for capital
growth.
9
<PAGE> 12
REPORT FROM WELLINGTON MANAGEMENT COMPANY, LLP
BALANCED PORTFOLIO
The Balanced Portfolio earned a return of 15.3% during the twelve months
ended September 30, 1996. The environment for equity investments, which
constituted 65% of the Portfolio at the end of September, remained favorable
during this period, as the expansion of the U.S. economy continued at a moderate
pace. The performance of fixed-income securities, which made up the other 35%,
was less favorable, as interest rates, after declining late in 1995, trended
upward in 1996. For the fiscal year, the equity portion provided a total return
of 22.3% and the fixed-income securities, 3.9%.
During the year, we moderately reduced our equity exposure in the
financial and health-care sectors--two areas that served us well in 1995. We
increased our holdings in the electric utility sector with companies such as
Carolina Power & Light and Texas Utilities, which provide attractive yields and
moderate growth potential. Even though the market continued its advance in 1996,
we had no difficulty finding attractively valued investments in other sectors as
well. New names in 1996 include Chrysler, Conrail, General Mills, and Phelps
Dodge.
We retain an above-average exposure in the financial and health-care
sectors, as well as in the energy, basic materials, and transportation sectors.
The energy sector improved in 1996, partially as a result of strong oil and gas
prices. Metals, paper, and chemical companies experienced a weaker pricing
environment, even though operating rates were at relatively high levels in many
areas. These sectors of the equity portfolio, in our view, are well positioned
to participate in continued growth in the economy, which we foresee.
The fixed-income portion of the portfolio continues to emphasize
high-quality securities with long-term maturities. Our corporate bond holdings
are well diversified. Given our belief that inflation does not pose an immediate
threat and that any Federal Reserve action in the next two quarters will be of
modest proportion, we are content to maintain average maturity at approximately
17 years. We will shorten the maturity structure, however, if yields fall
noticeably from current levels. We expect to retain our high-quality emphasis
since the yield advantage offered by lower-quality corporate bonds is meager by
historical standards.
Looking forward, we believe that the Portfolio, with its emphasis on
well-financed companies with good earnings and potential for dividend growth,
combined with the income generation of the bonds, provides an attractive way to
invest in today's markets.
Ernst H. von Metzsch, Senior Vice President and
Portfolio Manager
Paul D. Kaplan, Senior Vice President and
Portfolio Manager
October 10, 1996
INVESTMENT PHILOSOPHY
The adviser believes that a reasonable level of current income and long-term
growth in capital can be achieved without undue risk by holding 60% to 70% of
assets in common stocks and the balance in fixed-income securities. Consistent
with this approach, dividend-paying stocks dominate the equity segment of the
Portfolio, while long-term, high-quality corporate, U.S. Treasury, and
mortgage-backed securities make up the bond segment.
10
<PAGE> 13
REPORT FROM NEWELL ASSOCIATES
EQUITY INCOME PORTFOLIO
As the stock market powered its way into new high territory this past
fiscal year, the Equity Income Portfolio outperformed the average equity income
fund, but fell short of the Standard & Poor's 500 Composite Stock Price Index.
NOT THE SAME OLD INDEX
One aspect of the market's strength has received relatively little attention but
is significant when considering the Portfolio's performance. The influence of
traditional industrial, petroleum, and utilities companies has recently declined
and been supplanted by newer, faster-growing consumer-product, health-care, and
technology companies. These companies' rapidly rising market capitalizations
have greatly expanded their influence on the performance of the overall market
and the S&P 500 Index. In addition, Standard & Poor's recently added a
significant number of faster-growing companies to the Index.
During fiscal 1996, a great deal of the bull market's power has come
from these companies, which usually pay low or no dividends. A key element of
our Relative Yield Discipline is to produce a stock portfolio with a dividend
yield above that of the general market. This approach has many benefits,
including greater reliability of total return and reduced risk in declining
markets, but it often excludes popular stocks with low or non-existent dividend
yields. Electronic and computer-related stocks have long been excluded for this
reason, largely accounting for the Portfolio's small lag in performance during
the past year.
THE OTHER SIDE OF THE COIN
Not investing in popular stocks has its positive side. Many stocks that promise
high returns ultimately prove to be not only low-yielding but also overvalued.
In the end, they may provide high risk without high long-term returns. Our
Relative Yield Discipline can reduce exposure to this danger by keeping
seriously overvalued stocks out of the Portfolio.
Nonetheless, relative yield does not preclude participation in growth
opportunities. One of the Portfolio's largest industry positions recently has
been health care. That group also was one of the best performers and a major
reason the Portfolio nearly matched the performance of the S&P 500 Index during
the past year. Most of the position was established at a time when fears about
competition and government regulation gave us the opportunity to buy the stocks
at high relative yields and depressed prices--a case where relative yield
steered us into cheap growth stocks.
STILL THE SAME CONSERVATIVE PORTFOLIO
Most of our holdings are not in growth industries, but they are strong companies
that, when purchased at favorable valuation levels, can make a significant
contribution to our results. The Portfolio is firmly rooted in well-established
companies with conservative valuations, above-market yields, and below-market
volatility.
Roger D. Newell, Chairman October 16, 1996
INVESTMENT PHILOSOPHY
The adviser believes that a portfolio made up of undervalued stocks, most of
which offer high dividend yields compared to their past levels and to the
overall market, can provide a high level of current income, the potential for
capital appreciation, and below-average price volatility for a stock mutual
fund.
11
<PAGE> 14
REPORT FROM LINCOLN CAPITAL MANAGEMENT COMPANY
GROWTH PORTFOLIO
In our report to you six months ago, we stated that participants in the Growth
Portfolio had enjoyed a "barnburner" with a 14.1% return. It has happened again:
in the succeeding six months, the Portfolio provided a 12.0% return. Again, the
high absolute return constituted a good relative result that was 1% to 5% ahead
of the three standards of performance (the Standard & Poor's 500 Composite Stock
Price Index, the Standard & Poor's/BARRA Growth Index, and the average growth
fund). For the full fiscal year, the Portfolio's return was 27.8%--6% to 12%
above the competition. It almost doesn't get any better than this--except for
fiscal 1995's 32.0% return!
The Portfolio's focus is primarily on large (with some medium-size)
companies, many with more than half of their business in overseas markets. This
exposure provides a continuing source of strong underlying growth in revenues
and earnings. Among the winning industry segments were consumer, health care
(especially pharmaceuticals), and technology. As many of these stellar companies
performed well in the market, we shifted part of the Portfolio to companies with
more moderate earnings progress or more diversified product lines.
Sizable purchases during the year included Eastman Kodak, Unilever,
Bristol-Myers Squibb, W.R. Grace, and Boeing. Important sales included General
Electric, Wal-Mart, and Intel. As of this writing, our ten largest commitments
represent about one-third of our portfolio. New to the list--but not to the
Portfolio--are Cisco Systems, American Home Products, Procter & Gamble, Pfizer,
and SmithKline Beecham.
It would not surprise, nor disappoint, us if the stock market generated
less exhilarating returns in the coming fiscal year. There is some justification
for lower-than-usual cash dividend yields and higher-than-usual price/earnings
ratios, though perhaps not to the extent we see today. A policy of dollar-cost
averaging into the stock market generally and into this Portfolio specifically
seems like a prudent, long-term accumulation policy.
Dave Fowler, Portfolio Manager
Parker Hall, Portfolio Manager
October 8, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
COMPANY BUSINESS
- -------------------------------------------------------------------------------
<S> <C>
1. Coca-Cola #1 soft drinks
2. Cisco Systems #1 provider of computer-related
equipment
3. Automatic Data #1 payroll service
Processing*
4. American Home #1 manufacturer of medications
Products and hospital supplies
5. Procter & Gamble* #1 household-products company
6. Hewlett-Packard #1 maker of electronic instruments/
printers
7. Johnson & Johnson* #1 health-care/consumer products
company
8. Pfizer pharmaceutical company
9. SmithKline Beecham pharmaceutical company
10. PepsiCo* #1 snack food producer
- -------------------------------------------------------------------------------
</TABLE>
*In the top ten a year ago.
INVESTMENT PHILOSOPHY
The adviser believes that superior long-term investment results can be achieved
by emphasizing investments in high-quality, established growth companies whose
stocks sell at reasonable prices considering their expected earnings and
compared to values in the broad stock market.
12
<PAGE> 15
REPORT FROM GRANAHAN INVESTMENT MANAGEMENT, INC.
SMALL COMPANY GROWTH PORTFOLIO
This initial report to planholders in the Small Company Growth Portfolio covers
the four months from the Portfolio's inception on June 3, 1996, to its fiscal
year end on September 30, 1996. Many small-capitalization stocks had major
pullbacks in the market correction that occurred after our inception date. Our
decline of -1.6% reflects this downswing; however, our Portfolio had a stronger
showing than our benchmark, the Russell 2000 Small Stock Index, which was down
- -4.4% for the same period.
PORTFOLIO STRUCTURE
Our Portfolio focuses on small companies with superior earnings growth prospects
and can be viewed by industry sector or by company life cycle. The table on page
33 shows our breakdown by industry sector. Our company life-cycle categories
include Core Growth (50%-75% of the Portfolio's assets), Special Situations
(10%-25%), and Pioneers (10%-25%). Core Growth focuses on market leaders that,
according to our research, offer good secular growth potential. Special
Situation companies are those without a strong history of rising earnings but
are changing internally (e.g., manufactured-housing stocks during the past
several years). Our third category, the Pioneers, contains companies that are
creating new markets and may not yet be showing profit growth (e.g., E*Trade, an
internet stock trading company).
OUR HOLDINGS' PERFORMANCE
Our best-performing stocks for the period included Tuesday Morning
(deep-discount retailing), Remedy (tracking software), Target Therapeutics
(medical devices), Acres Gaming (gaming systems), and Encad (wide-format
printers). On the negative side, Pinnacle Systems (video editing) is
experiencing a product transition while its largest customer is restructuring.
Although Orcad (PC electronic design software) and Red Brick (data warehousing
software) continued to post strong earnings gains, their stock prices suffered
setbacks that we believe to be temporary. Accordingly, we have added to our
positions in these stocks.
LOOKING AHEAD
Our goal is to position the Portfolio in small companies with superior long-term
prospects for earnings growth. The universe of companies from which we choose
stocks for the Portfolio generated earnings growth of 30% in the past twelve
months. We are anticipating something similar, though perhaps not as robust, in
the coming year.
John J. Granahan, Portfolio Manager
Jane M. White, Assistant Portfolio Manager
Gary C. Hatton, Assistant Portfolio Manager
October 8, 1996
INVESTMENT PHILOSOPHY
The adviser believes that superior long-term investment results can be achieved
by emphasizing stocks of small and emerging companies (market capitalizations of
$100 million to $500 million) with favorable prospects for price appreciation.
While most of the companies have records of growth and strong market positions,
the Portfolio also invests in companies that are pioneering new technologies or
appear to be undervalued.
13
<PAGE> 16
REPORT FROM SCHRODER CAPITAL MANAGEMENT INTERNATIONAL
INTERNATIONAL PORTFOLIO
The International Portfolio earned a total return of 13.4% during fiscal 1996,
exceeding the returns of both the Morgan Stanley Capital International-Europe,
Australasia, Far East Index (8.9%) and the average international fund (9.4%).
Very few of the larger countries where we invest are showing signs of
excessive demand, the usual scourge of stock markets; in fact, the economies of
most countries are still struggling to recover. Markets with the potential for
improvement provide ideal backgrounds for equities. Ultimately, of course,
companies must deliver the improvement in profits that this mood anticipates,
and we have already begun to see this.
There were no stunning market performances this fiscal year. The dollar
was strong over the past twelve months, reducing the returns to U.S.-based
investors from international markets. Emerging markets in general underperformed
the developed markets.
Approximately 50% of the International Portfolio was invested in Europe
throughout the fiscal year, and this weighting delivered most of the increase in
your share price. We benefited particularly from the strength of stocks in
Switzerland, the Netherlands, and the United Kingdom. With the exception of the
latter two countries, European business conditions have been rough. We have
focused on companies where recent changes in management or corporate shape have
created opportunities for exceptional increases in profitability. The proposed
merger between Ciba-Geigy and Sandoz is a good example.
As of September 30, nearly 30% of the Portfolio was invested in Japan,
which was a disappointment again this year. The Japanese government aggressively
pursued stimulatory fiscal and monetary policies over the fiscal year, and local
banks have put the worst of the bad-debt crisis behind them. However, the
private sector of the economy has been slow to respond, and the Japanese stock
market has failed to follow through on its original enthusiasm of 15 months ago.
We have focused our selection of stocks on companies sensitive to local, as
opposed to export, business, and we believe that our patience will be rewarded.
The third major region where the Portfolio is focused (16% of assets) is
the faster-growing Asian markets. These are sensitive economies with trend
growth rates that are among the highest in the world, and conditions can change
rapidly. We have recently added to our exposure in these markets, taking
advantage of the cheap stock prices now available.
There is much to look forward to in the coming year, particularly in the
Pacific Basin. We believe the time is approaching when the Pacific area will
replace Europe as the region generating the best returns--the reason we have
retained our exposure in Japan.
Richard Foulkes
October 11, 1996
INVESTMENT PHILOSOPHY
The adviser believes that an international stock portfolio can achieve superior
long-term investment results by holding the stocks of non-U.S. companies with
the potential for above-average earnings growth. Particular emphasis is placed
on companies in countries with favorable business and market environments.
14
<PAGE> 17
PERFORMANCE SUMMARY: MONEY MARKET PORTFOLIO
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the Portfolio. Note, too, that
returns can fluctuate widely. An investment in a money market fund is neither
insured nor guaranteed by the U.S. Government, and there is no assurance that
the fund will be able to maintain a stable net asset value of $1.00 per share.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: 5/2/91-9/30/96
- -------------------------------------------
MONEY MARKET PORTFOLIO AVERAGE
FUND*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -------------------------------------------
<S> <C> <C> <C> <C>
1991 0.0% 2.3% 2.3% 2.3%
1992 0.0 4.1 4.1 3.8
1993 0.0 3.1 3.1 2.6
- -------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------
MONEY MARKET PORTFOLIO AVERAGE
FUND*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -------------------------------------------
<S> <C> <C> <C> <C>
1994 0.0% 3.6% 3.6% 3.1%
1995 0.0 5.8 5.8 5.3
1996 0.0 5.5 5.5 4.9
- -------------------------------------------
</TABLE>
*Average Money Market Fund.
See Financial Highlights table on page 43 for dividend information for the past
five years.
[FIGURE 1]
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 1996
--------------------------------
SINCE FINAL VALUE OF A
1 YEAR 5 YEARS INCEPTION $10,000 INVESTMENT
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MONEY MARKET PORTFOLIO 5.49% 4.41% 4.51% $12,697
AVERAGE MONEY MARKET FUND 4.89 3.94 4.06 12,402
SALOMON 90-DAY T-BILL 5.33 4.37 4.38 12,610
- ---------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 9/30/96
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Money Market Portfolio 5/2/91 5.49% 4.41% 0.00% 4.51% 4.51%
- ------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
PERFORMANCE SUMMARY: HIGH-GRADE BOND PORTFOLIO
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the Portfolio. Note, too, that
both share price and return can fluctuate widely so that an investment in the
Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: 4/29/91-9/30/96
- --------------------------------------------
HIGH-GRADE BOND PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------
<C> <C> <C> <C> <C>
1991 2.4% 3.1% 5.5% 6.2%
1992 4.2 7.3 11.5 12.6
1993 3.3 6.3 9.6 10.0
- --------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------
HIGH-GRADE BOND PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------
<S> <C> <C> <C> <C>
1994 -8.9% 5.6% -3.3% -3.2%
1995 6.6 7.2 13.8 14.1
1996 -1.7 6.5 4.8 4.9
- --------------------------------------------
</TABLE>
*Lehman Aggregate Bond Index.
See Financial Highlights table on page 44 for dividend and capital gains
information for the past five years.
[FIGURE 2]
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 1996
--------------------------------
SINCE FINAL VALUE OF A
1 YEAR 5 YEARS INCEPTION $10,000 INVESTMENT
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HIGH-GRADE BOND PORTFOLIO 4.80% 7.11% 7.59% $14,870
AVERAGE INTERMEDIATE-TERM
U.S. GOVERNMENT FUND 3.77 6.10 6.70 14,210
LEHMAN AGGREGATE BOND INDEX 4.90 7.47 8.07 15,229
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 9/30/96
- -----------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -----------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
High-Grade Bond Portfolio 4/29/91 4.80% 7.11% 0.93% 6.66% 7.59%
- -----------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 19
PERFORMANCE SUMMARY: HIGH YIELD BOND PORTFOLIO
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the Portfolio. Note, too, that
both share price and return can fluctuate widely so that an investment in the
Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: 6/3/96-9/30/96
- --------------------------------------------
HIGH YIELD BOND PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------
<C> <C> <C> <C> <C>
1996 1.5% 3.1% 4.6% 3.7%
- --------------------------------------------
</TABLE>
*Lehman High Yield Bond Index.
See Financial Highlights table on page 44 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
SINCE INCEPTION TOTAL RETURNS: PERIOD ENDED 9/30/96
- -----------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ------------------------
DATE CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
High Yield Bond Portfolio 6/3/96 1.50% 3.06% 4.56%
- -----------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 20
PERFORMANCE SUMMARY: BALANCED PORTFOLIO
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the Portfolio. Note, too, that
both share price and return can fluctuate widely so that an investment in the
Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: 5/23/91-9/30/96
- ---------------------------------------------
BALANCED PORTFOLIO COMPOSITE
INDEX*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ---------------------------------------------
<S> <C> <C> <C> <C>
1991 2.5% 0.0% 2.5% 2.8%
1992 5.7 4.6 10.3 12.3
1993 7.2 6.9 14.1 13.7
- ---------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------
BALANCED PORTFOLIO COMPOSITE
INDEX*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ---------------------------------------------
<S> <C> <C> <C> <C>
1994 -0.8% 3.5% 2.7% -0.4%
1995 18.5 5.2 23.7 26.6
1996 11.1 4.2 15.3 14.3
- ---------------------------------------------
</TABLE>
*65% S&P 500 Index, 35% Lehman Long-Term Corporate AA or Better Bond Index.
See Financial Highlights table on page 45 for dividend and capital gains
information for the past five years.
[FIGURE 3]
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 1996
--------------------------------
SINCE FINAL VALUE OF A
1 YEAR 5 YEARS INCEPTION $10,000 INVESTMENT
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCED PORTFOLIO 15.26% 12.99% 12.59% $18,874
AVERAGE BALANCED FUND 12.46 10.82 10.71 17,249
COMPOSITE INDEX* 14.25 12.96 12.63 18,912
- ------------------------------------------------------------------------
</TABLE>
*65% S&P 500 Index, 35% Lehman Long-Term Corporate AA or Better Bond Index.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 9/30/96
- -----------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -----------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balanced Portfolio 5/23/91 15.26% 12.99% 8.09% 4.50% 12.59%
- -----------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 21
PERFORMANCE SUMMARY: EQUITY INDEX PORTFOLIO
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the Portfolio. Note, too, that
both share price and return can fluctuate widely so that an investment in the
Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: 4/29/91-9/30/96
- --------------------------------------------
EQUITY INDEX PORTFOLIO S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------
<S> <C> <C> <C> <C>
1991 4.5% 0.0% 4.5% 5.4%
1992 8.3 2.4 10.7 11.1
1993 9.5 3.2 12.7 13.0
- --------------------------------------------
<CAPTION>
- --------------------------------------------
EQUITY INDEX PORTFOLIO S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------
<S> <C> <C> <C> <C>
1994 1.6% 1.9% 3.5% 3.7%
1995 26.6 2.9 29.5 29.7
1996 17.8 2.4 20.2 20.3
- --------------------------------------------
</TABLE>
See Financial Highlights table on page 45 for dividend and capital gains
information for the past five years.
[FIGURE 4]
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 1996
--------------------------------
SINCE FINAL VALUE OF A
1 YEAR 5 YEARS INCEPTION $10,000 INVESTMENT
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EQUITY INDEX PORTFOLIO 20.19% 15.00% 14.68% $21,015
AVERAGE GROWTH & INCOME FUND 17.44 13.64 13.59 19,951
S&P 500 INDEX 20.33 15.23 15.07 21,403
- ----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 9/30/96
- -----------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -----------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Equity Index Portfolio 4/29/91 20.19% 15.00% 12.33% 2.35% 14.68%
- -----------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 22
PERFORMANCE SUMMARY: EQUITY INCOME PORTFOLIO
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the Portfolio. Note, too, that
both share price and return can fluctuate widely so that an investment in the
Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: 6/7/93-9/30/96
- --------------------------------------------
EQUITY INCOME PORTFOLIO S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------
<S> <C> <C> <C> <C>
1993 5.7% 1.1% 6.8% 3.4%
1994 -4.8 3.2 -1.6 3.7
- --------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------
EQUITY INCOME PORTFOLIO S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------
<S> <C> <C> <C> <C>
1995 20.0% 5.7% 25.7% 29.7%
1996 14.8 4.3 19.1 20.3
- --------------------------------------------
</TABLE>
See Financial Highlights table on page 46 for dividend and capital gains
information since the Portfolio's inception.
[FIGURE 5]
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 1996
--------------------------------
FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY INCOME PORTFOLIO 19.07% 14.63% $15,722
AVERAGE EQUITY INCOME FUND 16.83 12.93 14,963
S&P 500 INDEX 20.33 16.80 16,735
- ----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 9/30/96
- -----------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -----------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Equity Income Portfolio 6/7/93 19.07% 10.36% 4.27% 14.63%
- -----------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 23
PERFORMANCE SUMMARY: GROWTH PORTFOLIO
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the Portfolio. Note, too, that
both share price and return can fluctuate widely so that an investment in the
Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: 6/7/93-9/30/96
- --------------------------------------------
GROWTH PORTFOLIO S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------
<S> <C> <C> <C> <C>
1993 2.6% 0.0% 2.6% 3.4%
1994 5.2 0.7 5.9 3.7
- --------------------------------------------
<CAPTION>
- --------------------------------------------
GROWTH PORTFOLIO S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------
<S> <C> <C> <C> <C>
1995 30.7% 1.3% 32.0% 29.7%
1996 26.4 1.4 27.8 20.3
- --------------------------------------------
</TABLE>
See Financial Highlights table on page 46 for dividend and capital gains
information since the Portfolio's inception.
[FIGURE 6]
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 1996
--------------------------------
FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- ------------------------------------------------------------------------
<S> <C> <C> <C>
GROWTH PORTFOLIO 27.79% 20.05% $18,327
AVERAGE GROWTH FUND 15.89 14.76 15,784
S&P 500 INDEX 20.33 16.80 16,735
- ------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 9/30/96
- -----------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -----------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Growth Portfolio 6/7/93 27.79% 19.04% 1.01% 20.05%
- -----------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 24
PERFORMANCE SUMMARY: SMALL COMPANY GROWTH PORTFOLIO
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the Portfolio. Note, too, that
both share price and return can fluctuate widely so that an investment in the
Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: 6/3/96-9/30/96
- ---------------------------------------------------
SMALL COMPANY GROWTH PORTFOLIO RUSSELL 2000
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ---------------------------------------------------
<S> <C> <C> <C> <C>
1996 -1.6% 0.0% -1.6% -4.4%
- ---------------------------------------------------
</TABLE>
See Financial Highlights table on page 47 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
SINCE INCEPTION TOTAL RETURNS: PERIOD ENDED 9/30/96
- -------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ----------------------
DATE CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small Company Growth Portfolio 6/3/96 -1.60% 0.00% -1.60%
- -------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 25
PERFORMANCE SUMMARY: INTERNATIONAL PORTFOLIO
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the Portfolio. Note, too, that
both share price and return can fluctuate widely so that an investment in the
Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: 6/3/94-9/30/96
- ---------------------------------------------
INTERNATIONAL PORTFOLIO MSCI-EAFE
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ---------------------------------------------
<S> <C> <C> <C> <C>
1994 3.1% 0.0% 3.1% 0.1%
1995 10.6 0.6 11.2 6.1
- ---------------------------------------------
<CAPTION>
- --------------------------------------------
INTERNATIONAL PORTFOLIO MSCI-EAFE
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------
<S> <C> <C> <C> <C>
1996 11.8% 1.6% 13.4% 8.9%
- --------------------------------------------
</TABLE>
See Financial Highlights table on page 47 for dividend and capital gains
information since the Portfolio's inception.
[FIGURE 7]
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 1996
--------------------------------
FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
INTERNATIONAL PORTFOLIO 13.36% 11.93% $12,998
AVERAGE INTERNATIONAL FUND 9.41 6.67 11,619
MSCI-EAFE INDEX 8.94 6.46 11,566
- ----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 9/30/96
- -----------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
International Portfolio 6/3/94 13.36% 10.97% 0.96% 11.93%
- -----------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 26
PORTFOLIO PROFILE: MONEY MARKET PORTFOLIO
SEPTEMBER 30, 1996
This Profile provides a snapshot of the Portfolio's characteristics. Key
elements of this Profile are defined below and on page 25.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- -------------------------------------------
<S> <C>
Number of Issues 103
7-Day Yield 5.3%
Average Maturity 47 days
Average Quality Aa1
Expense Ratio 0.19%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -----------------------------------------------
<S> <C>
A-1, P-1 100%
</TABLE>
[PHOTO]
AVERAGE COUPON. The average interest rate, expressed as a percentage of face
value, paid on the bonds held by a portfolio.
AVERAGE DURATION. An estimate of how much a bond portfolio's share price will
fluctuate in response to a change in interest rates. To estimate the price
sensitivity of a portfolio, multiply its duration by the change in rates. If
interest rates rise by one percentage point, the share price of a portfolio with
an average duration of five years will decline by about 5%. If rates decrease by
a percentage point, the portfolio's share price would rise by 5%.
AVERAGE MATURITY. The average length of time until bonds held by a portfolio
reach maturity and are repaid. In general, the longer the average maturity, the
more a bond portfolio's share price will fluctuate in response to changes in
market interest rates.
AVERAGE QUALITY. An indicator of credit risk, this figure is the average of the
credit ratings assigned to the portfolio's securities holdings by bond-rating
agencies. Agencies assign credit ratings after an appraisal of a bond issuer's
ability to meet its obligations. Quality is graded on a scale, with Aaa
indicating the most creditworthy bond issuers and A-1 or P-1 indicating the most
creditworthy issuers of money market securities.
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the fluctuations in the overall market (or appropriate market
index). The market, or index, has a beta of 1.00, so a portfolio with a beta of
1.20 would have seen its share price rise or fall by 12% when the overall market
rose or fell by 10%.
CASH RESERVES. The percentage of a portfolio's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing investments.
COUNTRY DIVERSIFICATION. The percentage of a global or international portfolio's
common stocks invested in securities of various countries.
DISTRIBUTION BY CREDIT QUALITY. An indicator of the risk of default or other
credit problems on bonds held by a portfolio.
DISTRIBUTION BY ISSUER. The percentage of a portfolio's bond holdings invested
in bonds of various types of issuers.
24
<PAGE> 27
DISTRIBUTION BY MATURITY. An indicator of interest-rate risk. In general, the
higher the concentration of longer-maturity issues, the more a bond portfolio's
share price will fluctuate in response to changes in interest rates.
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a portfolio.
EXPENSE RATIO. The percentage of a portfolio's average net assets used to pay
its annual administrative and advisory expenses. These expenses directly reduce
returns to investors. In 1995 the average expense ratio was 0.74% for money
market mutual funds and 1.21% for other kinds of mutual funds.
FOREIGN HOLDINGS. The percentage of a portfolio's equity holdings invested in
non-U.S. companies.
INVESTMENT FOCUS. Each grid indicates the focus of a portfolio in terms of two
attributes. For equity portfolios, the attributes are market capitalization
(large, medium, or small) and relative valuation (growth, value, or a blend).
For fixed-income portfolios, the attributes are average maturity (short, medium,
or long) and average credit quality (high, medium, or low).
MEDIAN MARKET CAP. The midpoint of market capitalization (market price x shares
outstanding) of the stocks in a portfolio. Half the stocks in the portfolio have
higher market capitalizations and half lower.
PORTFOLIO ALLOCATION. A breakdown of a portfolio's allocation to various asset
classes (stocks, bonds, or cash reserves) or to various geographic areas.
PRICE/BOOK RATIO. The share price of a stock / by its net worth, or book value,
per share. For a portfolio, the weighted average price/book ratio of the stocks
it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. P/E is an indicator of market expectations about
corporate prospects; the higher the P/E, the greater the expectations for a
company's future growth. For a portfolio, the weighted average P/E of the stocks
it holds.
RETURN ON EQUITY. The rate of return generated by a company during the past year
for each dollar of shareholder's equity (net income for the year / shareholder's
equity). For a portfolio, the weighted average return on equity for the
companies represented in the portfolio.
R-SQUARED. A measure of how much of a portfolio's past returns can be explained
by the returns from the overall market (or its benchmark index). If a
portfolio's total return were precisely synchronized with the overall market's
return, its R-squared would be 1.00. If a portfolio's returns bore no
relationship to the market's returns, its R-squared would be 0.
SECTOR DIVERSIFICATION. The percentage of a portfolio's common stocks invested
in each of the major industry classifications that compose the stock market.
TURNOVER RATE. Indicates trading activity during the past year. Portfolios with
high turnover rates incur higher transaction costs and are more likely to
realize and distribute capital gains (which are taxable to investors).
YIELD. A snapshot of a portfolio's income from interest and dividends. The
yield, expressed as a percentage of a portfolio's net asset value, is based on
income earned by the portfolio over the past 30 days (7 days for money market
portfolios) and is annualized, or projected forward for the coming year.
YIELD TO MATURITY. The rate of return an investor would receive if the bonds in
a portfolio were held to their maturity dates.
25
<PAGE> 28
PORTFOLIO PROFILE: HIGH-GRADE BOND PORTFOLIO
SEPTEMBER 30, 1996
This Profile provides a snapshot of the Portfolio's characteristics, where
appropriate, compared to an unmanaged index. Key elements of this Profile are
defined on pages 24 and 25.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- -------------------------------------------
<S> <C>
Number of Issues 498
30-Day Yield 6.7%
Yield to Maturity 6.8%
Average Coupon 7.9%
Average Maturity 8.7 years
Average Quality Aaa
Average Duration 4.7 years
Expense Ratio 0.25%
Cash Reserves 1.2%
</TABLE>
INVESTMENT FOCUS
- -------------------------------------------
[FIGURE 8]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- -------------------------------------------
HIGH-GRADE LEHMAN
BOND INDEX*
- -------------------------------------------
<S> <C> <C>
R-Squared 1.00 1.00
Beta 0.98 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -------------------------------------------
<S> <C>
Aaa 73.6%
Aa 3.2
A 16.4
Baa 6.8
Ba --
B --
Not Rated --
- -------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- -------------------------------------------
<S> <C>
Under 1 Year 1.0%
1-5 Years 38.4
5-10 Years 38.3
10-20 Years 6.6
20-30 Years 15.4
Over 30 Years 0.3
- -------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF PORTFOLIO)
- -------------------------------------------
<S> <C>
Treasury 31.9%
Mortgage 30.7
Finance 10.8
Industrial 8.7
Asset Backed 6.3
Foreign 4.7
Utilities 3.6
Agency 3.3
- -------------------------------------------
100.0%
</TABLE>
26
<PAGE> 29
PORTFOLIO PROFILE: HIGH YIELD BOND PORTFOLIO
SEPTEMBER 30, 1996
This Profile provides a snapshot of the Portfolio's characteristics, where
appropriate, compared to an unmanaged index. Key elements of this Profile are
defined on pages 24 and 25.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- -------------------------------------------
<S> <C>
Number of Issues 111
30-Day Yield 9.6%
Yield to Maturity 9.5%
Average Coupon 9.9%
Average Maturity 8.4 years
Average Quality Ba3
Average Duration 4.3 years
Expense Ratio* 0.32%
Cash Reserves 4.9%
</TABLE>
*Annualized.
INVESTMENT FOCUS
- -------------------------------------------
[FIGURE 9]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- -------------------------------------------
HIGH YIELD LEHMAN
BOND INDEX*
- -------------------------------------------
<S> <C> <C>
R-Squared 0.56 1.00
Beta 0.81 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -----------------------------------------------
<S> <C>
Aaa 4.9%
Aa --
A --
Baa --
Ba 25.9
B 69.2
Not Rated --
- -----------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- -------------------------------------------
<S> <C>
Under 1 Year 4.9%
1-5 Years 6.3
5-10 Years 79.5
10-20 Years 8.4
20-30 Years 0.9
Over 30 Years --
- -------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF PORTFOLIO)
- -------------------------------------------
<S> <C>
Industrial 96.8%
Utilities 2.6
Finance 0.6
Mortgage --
Treasury --
Asset Backed --
Foreign --
Agency --
- -------------------------------------------
100.0%
</TABLE>
27
<PAGE> 30
PORTFOLIO PROFILE: BALANCED PORTFOLIO
SEPTEMBER 30, 1996
This Profile provides a snapshot of the Portfolio's equity and fixed-income
characteristics, where appropriate, compared to an unmanaged index. Key elements
of this Profile are defined on pages 24 and 25.
<TABLE>
<CAPTION>
TOTAL FUND CHARACTERISTICS
- --------------------------------------------
<S> <C>
Turnover Rate 36%
Expense Ratio 0.31%
Cash Reserves 2.1%
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO ALLOCATION
- -------------------------------------------
<S> <C>
STOCKS 65.2%
BONDS 32.7%
CASH RESERVES 2.1%
</TABLE>
<TABLE>
<CAPTION>
TOTAL FUND VOLATILITY MEASURES
- --------------------------------------------
BALANCED S&P 500
- --------------------------------------------
<S> <C> <C>
R-Squared 0.84 1.00
Beta 0.79 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF COMMON STOCK)
- -------------------------------------------
<S> <C>
General Electric Co. 3.5%
Citicorp 3.3
First Bank System, Inc. 3.0
Allstate Corp. 3.0
Kimberly-Clark Corp. 2.5
Northrop Grumman Corp. 2.4
Dow Chemical Co. 2.4
Xerox Corp. 2.3
American Home Products Corp. 2.2
Union Pacific Corp. 2.2
- -------------------------------------------
Top Ten 26.8%
Top Ten as % of Total Net Assets 17.2%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- ---------------------------------------------------------------------------------------
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996
------------------------------------------
BALANCED BALANCED S&P 500
------------------------------------------
<S> <C> <C> <C>
Basic Materials ........................... 19.6% 19.8% 6.4%
Capital Goods & Construction .............. 8.1 9.0 8.7
Consumer Cyclical ......................... 8.7 9.3 13.0
Consumer Staples .......................... 0.8 2.2 12.5
Energy .................................... 13.0 12.7 9.2
Financial ................................. 23.7 18.4 14.1
Health Care ............................... 13.7 12.1 10.6
Technology ................................ 2.3 2.3 11.7
Transport & Services ...................... 4.1 5.4 1.5
Utilities ................................. 3.9 7.6 10.1
Miscellaneous ............................. 2.1 1.2 2.2
- ---------------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
EQUITY CHARACTERISTICS
- -------------------------------------------
BALANCED S&P 500
- -------------------------------------------
<S> <C> <C>
Number of Stocks 89 500
Median Market Cap $17.6B $21.8B
Price/Earnings Ratio 15.0x 18.4x
Price/Book Ratio 2.4x 3.2x
Dividend Yield 2.8% 2.2%
Return on Equity 14.9% 19.6%
Earnings Growth Rate 7.0% 13.2%
Foreign Holdings 6.8% 3.7%
</TABLE>
EQUITY INVESTMENT FOCUS
- -------------------------------------------
[FIGURE 10]
<TABLE>
<CAPTION>
FIXED-INCOME CHARACTERISTICS
- -------------------------------------------
<S> <C>
Number of Bonds 88
Average Coupon 7.3%
Average Maturity 16.5 years
Average Quality Aa2
Average Duration 8.0 years
</TABLE>
FIXED-INCOME INVESTMENT FOCUS
- -------------------------------------------
[FIGURE 11]
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF BONDS)
- -------------------------------------------
<S> <C>
Treasury/Agency 29.0%
Industrial 22.1
Utilities 21.9
Banks/Finance 18.8
Foreign 6.4
Other 1.8
- -------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF BONDS)
- -------------------------------------------
<S> <C>
Aaa 40.1%
Aa 14.9
A 39.8
Baa 5.2
Ba --
B --
Not Rated --
- -------------------------------------------
Total 100.0%
</TABLE>
29
<PAGE> 32
PORTFOLIO PROFILE: EQUITY INDEX PORTFOLIO
SEPTEMBER 30, 1996
This Profile provides a snapshot of the Portfolio's characteristics, where
appropriate, compared to an unmanaged index. Key elements of this Profile are
defined on pages 24 and 25.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- --------------------------------------------
EQUITY INDEX S&P 500
- --------------------------------------------
<S> <C> <C>
Number of Stocks 500 500
Median Market Cap $21.8B $21.8B
Price/Earnings Ratio 18.4x 18.4x
Price/Book Ratio 3.2x 3.2x
Dividend Yield 1.8% 2.2%
Return on Equity 19.6% 19.6%
Earnings Growth Rate 13.2% 13.2%
Foreign Holdings 3.7% 3.7%
Turnover Rate 2% --
Expense Ratio 0.22% --
Cash Reserves 0% --
</TABLE>
INVESTMENT FOCUS
- --------------------------------------------
[FIGURE 12]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- --------------------------------------------
EQUITY INDEX S&P 500
- --------------------------------------------
<S> <C> <C>
R-Squared 1.00 1.00
Beta 1.00 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- --------------------------------------------
<S> <C>
General Electric Co. 2.8%
The Coca-Cola Co. 2.4
Exxon Corp. 1.9
Merck & Co., Inc. 1.6
AT&T Corp. 1.6
Royal Dutch Petroleum Co. ADR 1.6
Microsoft Corp. 1.5
Intel Corp. 1.5
Philip Morris Cos., Inc. 1.4
Johnson & Johnson 1.3
- --------------------------------------------
Top Ten 17.6%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- ---------------------------------------------------------------------------------------
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996
------------------------------------------
EQUITY INDEX EQUITY INDEX S&P 500
------------------------------------------
<S> <C> <C> <C>
Basic Materials ........................... 7.0% 6.4% 6.4%
Capital Goods & Construction .............. 7.9 8.7 8.7
Consumer Cyclical ......................... 13.8 13.0 13.0
Consumer Staples .......................... 12.1 12.5 12.5
Energy .................................... 9.2 9.2 9.2
Financial ................................. 12.8 14.1 14.1
Health Care ............................... 9.7 10.6 10.6
Technology ................................ 10.9 11.7 11.7
Transport & Services ...................... 1.6 1.5 1.5
Utilities ................................. 12.6 10.1 10.1
Miscellaneous ............................. 2.4 2.2 2.2
- ---------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 33
PORTFOLIO PROFILE: EQUITY INCOME PORTFOLIO
SEPTEMBER 30, 1996
This Profile provides a snapshot of the Portfolio's characteristics, where
appropriate, compared to an unmanaged index. Key elements of this Profile are
defined on pages 24 and 25.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- -------------------------------------------
EQUITY INCOME S&P 500
- -------------------------------------------
<S> <C> <C>
Number of Stocks 103 500
Median Market Cap $14.3B $21.8B
Price/Earnings Ratio 15.9x 18.4x
Price/Book Ratio 2.5x 3.2x
Dividend Yield 3.2% 2.2%
Return on Equity 17.1% 19.6%
Earnings Growth Rate 3.9% 13.2%
Foreign Holdings 2.2% 3.7%
Turnover Rate 8% --
Expense Ratio 0.35% --
Cash Reserves 1.3% --
</TABLE>
INVESTMENT FOCUS
- ------------------------------------------------
[FIGURE 13]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- -------------------------------------------
EQUITY INCOME S&P 500
- -------------------------------------------
<S> <C> <C>
R-Squared 0.83 1.00
Beta 0.86 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- ------------------------------------------------
<S> <C>
Bristol-Myers Squibb Co. 3.3%
Eli Lilly & Co. 3.1
American Home Products Corp. 2.9
Mobil Corp. 2.6
Philip Morris Cos., Inc. 2.6
Exxon Corp. 2.6
Chevron Corp. 2.5
Texaco Inc. 2.5
GTE Corp. 2.2
Atlantic Richfield Co. 2.1
- ------------------------------------------------
Top Ten 26.4%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- ---------------------------------------------------------------------------------------
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996
------------------------------------------
EQUITY INCOME EQUITY INCOME S&P 500
------------------------------------------
<S> <C> <C> <C>
Basic Materials ............................ 5.4% 5.1% 6.4%
Capital Goods & Construction ............... 0.6 1.6 8.7
Consumer Cyclical ......................... 7.7 5.9 13.0
Consumer Staples ........................... 8.5 9.0 12.5
Energy ..................................... 15.4 16.7 9.2
Financial .................................. 16.9 17.6 14.1
Health Care ................................ 14.2 15.6 10.6
Technology ................................. 0.0 0.5 11.7
Transport & Services ....................... 0.0 0.4 1.5
Utilities .................................. 28.4 25.1 10.1
Miscellaneous .............................. 2.9 2.5 2.2
- ---------------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 34
PORTFOLIO PROFILE: GROWTH PORTFOLIO
SEPTEMBER 30, 1996
This Profile provides a snapshot of the Portfolio's characteristics, where
appropriate, compared to an unmanaged index. Key elements of this Profile are
defined on pages 24 and 25.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- --------------------------------------------
GROWTH S&P 500
- --------------------------------------------
<S> <C> <C>
Number of Stocks 58 500
Median Market Cap $33.0B $21.8B
Price/Earnings Ratio 24.9x 18.4x
Price/Book Ratio 5.2x 3.2x
Dividend Yield 1.3% 2.2%
Return on Equity 25.1% 19.6%
Earnings Growth Rate 17.5% 13.2%
Foreign Holdings 6.5% 3.7%
Turnover Rate 42% --
Expense Ratio 0.39% --
Cash Reserves 6.1% --
</TABLE>
INVESTMENT FOCUS
- --------------------------------------------
[FIGURE 14]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- --------------------------------------------
GROWTH S&P 500
- --------------------------------------------
<S> <C> <C>
R-Squared 0.86 1.00
Beta 0.93 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- --------------------------------------------
<S> <C>
The Coca-Cola Co. 4.0%
Cisco Systems, Inc. 3.6
AT&T Corp. 3.6
Automatic Data Processing, Inc. 3.5
American Home Products Corp. 3.3
Procter & Gamble Co. 3.0
Hewlett-Packard Co. 3.0
Johnson & Johnson 2.9
W.R. Grace & Co. 2.8
Pfizer, Inc. 2.8
- --------------------------------------------
Top Ten 32.5%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- ---------------------------------------------------------------------------------------
SEPTEMBER 30, 1995 SEPTEMBER 30, 1996
------------------------------------------
GROWTH GROWTH S&P 500
------------------------------------------
<S> <C> <C> <C>
Basic Materials ............................ 1.7% 5.7% 6.4%
Capital Goods & Construction ............... 7.3 3.8 8.7
Consumer Cyclical ......................... 15.1 13.9 13.0
Consumer Staples ........................... 21.8 18.5 12.5
Energy ..................................... 1.6 2.3 9.2
Financial .................................. 8.3 9.3 14.1
Health Care ................................ 14.8 19.2 10.6
Technology ................................. 22.0 22.4 11.7
Transport & Services ....................... 0.0 0.0 1.5
Utilities .................................. 6.3 4.2 10.1
Miscellaneous .............................. 1.1 0.7 2.2
- ---------------------------------------------------------------------------------------
</TABLE>
32
<PAGE> 35
PORTFOLIO PROFILE: SMALL COMPANY GROWTH PORTFOLIO
SEPTEMBER 30, 1996
This Profile provides a snapshot of the Portfolio's characteristics, where
appropriate, compared to an unmanaged index. Key elements of this Profile are
defined on pages 24 and 25.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- -------------------------------------------
SMALL COMPANY RUSSELL
GROWTH 2000
- -------------------------------------------
<S> <C> <C>
Number of Stocks 128 2,000
Median Market Cap $0.5B $0.5B
Price/Earnings Ratio 22.9x 18.2x
Price/Book Ratio 3.2x 2.4x
Dividend Yield 0.7% 1.5%
Return on Equity 16.0% 12.0%
Earnings Growth Rate 17.8% 11.6%
Foreign Holdings 1.2% --
Turnover Rate 18% --
Expense Ratio* 0.45% --
Cash Reserves 7.4% --
*Annualized.
</TABLE>
INVESTMENT FOCUS
- -------------------------------------------
[FIGURE 15]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------
SMALL COMPANY
GROWTH S&P 500
- ----------------------------------------------
<S> <C> <C>
R-Squared 0.50 1.00
Beta 0.96 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- --------------------------------------------
<S> <C>
Target Therapeutics, Inc. 1.7%
Tuesday Morning, Inc. 1.7
Remedy Corp. 1.6
Arbor Software Corp. 1.4
Arrow International, Inc. 1.4
Marcus Corp. 1.3
Aspect Telecommunications 1.3
Mechanical Dynamics, Inc. 1.3
Advent Software, Inc. 1.2
PRI Automation, Inc. 1.2
- --------------------------------------------
Top Ten 14.1%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- ------------------------------------------------------------------------------------------
SEPTEMBER 30, 1996
------------------------------------
SMALL COMPANY GROWTH RUSSELL 2000
------------------------------------
<S> <C> <C>
Basic Materials ............................ 1.1% 6.0%
Capital Goods & Construction ............... 10.1 8.3
Consumer Cyclical ......................... 15.4 17.0
Consumer Staples ........................... 1.1 3.9
Energy ..................................... 1.7 4.2
Financial .................................. 6.7 22.2
Health Care ................................ 13.4 9.7
Technology ................................. 41.9 17.7
Transport & Services ....................... 4.9 1.8
Utilities .................................. 0.3 4.7
Miscellaneous .............................. 3.4 4.5
- ---------------------------------------------------------------------------------------
</TABLE>
33
<PAGE> 36
PORTFOLIO PROFILE: INTERNATIONAL PORTFOLIO
SEPTEMBER 30, 1996
This Profile provides a snapshot of the Portfolio's characteristics, where
appropriate, compared to an unmanaged index. Key elements of this Profile are
defined on pages 24 and 25.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- -------------------------------------------
INTERNATIONAL MSCI-EAFE
- -------------------------------------------
<S> <C> <C>
Number of Stocks 149 1,102
Turnover Rate 19% --
Expense Ratio 0.49% --
Cash Reserves 1.6% --
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO ALLOCATION
- -------------------------------------------
<S> <C>
EUROPE 52%
JAPAN 29%
PACIFIC (MINUS JAPAN) 10%
EMERGING MARKETS 8%
OTHER 1%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- -------------------------------------------
INTERNATIONAL MSCI-EAFE
- -------------------------------------------
<S> <C> <C>
R-Squared 0.77 1.00
Beta 0.80 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- -------------------------------------------
<S> <C>
Ciba-Geigy AG (Registered) 3.8%
Takeda Chemical Industries 2.6
Veba AG 2.4
Internationale Nederlanden
Groep NV 2.4
British Petroleum PLC 2.4
ABB AG (Bearer) 2.3
Ito-Yokado Co. Ltd. 2.2
Fuji Photo Film Co., Ltd. 2.2
Murata Manufacturing Co., Ltd. 1.9
Elf Aquitaine SA 1.7
- -------------------------------------------
Top Ten 23.9%
</TABLE>
<TABLE>
<CAPTION>
COUNTRY DIVERSIFICATION (% OF COMMON STOCK)
- -------------------------------------------
INTERNATIONAL MSCI-EAFE
- -------------------------------------------
<S> <C> <C>
Australia 0.3% 2.9%
Belgium -- 1.2
Brazil 0.9 --
Canada 2.3 --
Chile 0.2 --
Denmark 0.6 0.8
Finland 0.3 0.6
France 5.7 6.4
Germany 7.7 7.2
Hong Kong 5.4 3.3
Indonesia 1.6 --
Italy 0.4 2.7
Japan 29.0 37.2
Korea 1.0 --
Malaysia 2.2 2.5
Netherlands 12.4 4.4
Philippines 2.1 --
Singapore 1.8 1.4
Spain -- 1.9
Sweden 2.7 2.3
Switzerland 9.3 6.2
Thailand 1.7 --
United Kingdom 12.4 17.4
Other -- 1.6
- -------------------------------------------
Total 100.0% 100.0%
</TABLE>
34
<PAGE> 37
[PHOTO]
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
The Statements of Net Assets, integral parts of the Financial Statements for
each of the Vanguard Variable Insurance Fund Portfolios, and the Report of
Independent Accountants are included as an insert to this Report.
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by each Portfolio
during the reporting period, and details the operating expenses charged to the
Portfolio. This Statement also shows any Net Gain (Loss) realized on the sale of
investments, and the increase or decrease in the Unrealized Appreciation
(Depreciation) on investments during the period. If a Portfolio invested in
futures contracts during the period, the results of these investments are also
shown separately. The International Portfolio's realized and unrealized gains
(losses) on investment securities include the effect of foreign currency
movements on security values. Currency gains (losses) on the translation of
other assets and liabilities, combined with the results of any investments in
forward currency contracts during the period, are shown separately.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
PERIODS ENDED SEPTEMBER 30, 1996*
---------------------------------------------------
MONEY HIGH-GRADE HIGH YIELD
MARKET BOND BOND BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000) (000)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends -- -- -- $ 6,005
Interest $13,378 $8,944 $443 7,385
--------------------------------------------------
Total Income 13,378 8,944 443 13,390
--------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 29 16 3 310
Performance Adjustment -- -- -- 1
The Vanguard Group--Note C
Management and Administrative 317 247 2 539
Marketing and Distribution 67 22 -- 49
Custodian Fees 25 33 -- 5
Auditing Fees 10 9 -- 10
Shareholders' Reports 9 9 -- 17
Annual Meeting and Proxy Costs 3 3 -- 5
Trustees' Fees and Expenses 1 -- -- 1
--------------------------------------------------
Total Expenses 461 339 5 937
- ----------------------------------------------------------------------------------------
NET INVESTMENT INCOME 12,917 8,605 438 12,453
- ----------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold (1) (160) 24 14,027
Futures Contracts -- -- -- --
Foreign Currencies and Forward
Currency Contracts -- -- -- --
- ----------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) (1) (160) 24 14,027
- ----------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities -- (2,543) 319 16,862
Futures Contracts -- -- -- --
Foreign Currencies and Forward
Currency Contracts -- -- -- --
- ----------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) -- (2,543) 319 16,862
- ----------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $12,916 $5,902 $781 $43,342
========================================================================================
</TABLE>
*Results for the High Yield Bond Portfolio are for the period from June 3, 1996
(commencement of operations), to September 30, 1996. Results for all other
Portfolios are for the year ended September 30, 1996.
35
<PAGE> 38
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS (CONTINUED)
- -----------------------------------------------------------------------------------------
PERIODS ENDED SEPTEMBER 30, 1996*
----------------------------------------------------
SMALL
EQUITY EQUITY COMPANY
INDEX INCOME GROWTH GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends $ 7,654 $ 4,771 $ 3,092 $ 49
Interest 362 84 553 184
----------------------------------------------------
Total Income 8,016 4,855 3,645 233
----------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 15 123 333 19
Performance Adjustment -- -- -- --
The Vanguard Group--Note C
Management and Administrative 635 239 440 32
Marketing and Distribution 53 19 35 --
Custodian Fees 9 14 12 7
Auditing Fees 10 9 9 --
Shareholders' Reports 16 9 13 --
Annual Meeting and Proxy Costs 5 3 4 1
Trustees' Fees and Expenses 1 -- 1 --
---------------------------------------------------
Total Expenses 744 416 847 59
- -----------------------------------------------------------------------------------------
NET INVESTMENT INCOME 7,272 4,439 2,798 174
- -----------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 1,436 1,805 11,233 (568)
Futures Contracts 566 -- -- --
Foreign Currencies and Forward
Currency Contracts -- -- -- --
- -----------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 2,002 1,805 11,233 (568)
- -----------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities 52,373 13,769 38,424 284
Futures Contracts (28) -- -- --
Foreign Currencies and Forward
Currency Contracts -- -- -- --
- -----------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) 52,345 13,769 38,424 284
- -----------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $61,619 $20,013 $52,455 $(110)
=========================================================================================
</TABLE>
*Results for the Small Company Growth Portfolio are for the period from June 3,
1996 (commencement of operations), to September 30, 1996. Results for all other
Portfolios are for the year ended September 30, 1996.
36
<PAGE> 39
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
YEAR ENDED
SEPTEMBER 30, 1996
------------------
INTERNATIONAL
PORTFOLIO
(000)
- ---------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends(1) $ 2,059
Interest 364
-----------------
Total Income 2,423
-----------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 162
Performance Adjustment 42
The Vanguard Group--Note C
Management and Administrative 277
Marketing and Distribution 21
Custodian Fees 93
Auditing Fees 9
Shareholders' Reports 9
Annual Meeting and Proxy Costs 3
Trustees' Fees and Expenses --
-----------------
Total Expenses 616
- ---------------------------------------------------------------------------------------
NET INVESTMENT INCOME 1,807
- ---------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 2,093
Futures Contracts --
Foreign Currencies and Forward Currency Contracts 1,551
- ---------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 3,644
- ---------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 9,415
Futures Contracts --
Foreign Currencies and Forward Currency Contracts 434
- ---------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 9,849
- ---------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $15,300
=======================================================================================
</TABLE>
(1)Dividends for the International Portfolio are net of foreign withholding
taxes of $ 296,000.
37
<PAGE> 40
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how each Portfolio's total net assets changed during the
two most recent reporting periods. The Operations section summarizes information
that is detailed in the Statement of Operations. Because the Money Market,
High-Grade Bond, and High Yield Bond Portfolios distribute their income to
shareholders each day, the amounts of Distributions--Net Investment Income
generally equal the net income earned as shown under the Operations section. The
other Portfolios' amounts of Distributions--Net Investment Income and all
Portfolios' amounts of Distributions--Realized Capital Gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period differ- ent from the one in which the
income was earned or the gains were realized on the Financial Statements. The
Capital Share Transactions section shows the amount shareholders invested in the
Portfolio, either by purchasing shares or by reinvesting distributions, as well
as the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed
are shown at the end of the Statement.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
MONEY MARKET HIGH-GRADE
PORTFOLIO BOND PORTFOLIO
------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------
1996 1995 1996 1995
(000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 12,917 $ 10,911 $ 8,605 $ 6,570
Realized Net Gain (Loss) (1) (1) (160) (13)
Change in Unrealized Appreciation
(Depreciation) -- -- (2,543) 6,687
------------------------------------------------------
Net Increase (Decrease) in Net
Assets Resulting from Operations 12,916 10,910 5,902 13,244
------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (12,917) (10,911) (8,605) (6,570)
Realized Net Gain -- -- -- --
------------------------------------------------------
Total Distributions (12,917) (10,911) (8,605) (6,570)
------------------------------------------------------
NET EQUALIZATION CREDITS--Note A -- -- -- --
------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 349,178 287,895 37,846 54,758
Issued in Lieu of Cash Distributions 12,917 10,877 8,605 6,548
Redeemed (295,480) (251,570) (24,717) (27,894)
------------------------------------------------------
Net Increase from Capital
Share Transactions 66,615 47,202 21,734 33,412
- ------------------------------------------------------------------------------------------------
Total Increase 66,614 47,201 19,031 40,086
- ------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 218,367 171,166 120,445 80,359
------------------------------------------------------
End of Period $284,981 $218,367 $139,476 $120,445
================================================================================================
(1)Shares Issued and Redeemed
Issued 349,178 287,895 3,612 5,444
Issued in Lieu of Cash Distributions 12,917 10,877 829 647
Redeemed (295,480) (251,570) (2,394) (2,763)
-----------------------------------------------------
Net Increase in Shares
Outstanding 66,615 47,202 2,047 3,328
================================================================================================
</TABLE>
38
<PAGE> 41
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
HIGH YIELD BALANCED
BOND PORTFOLIO PORTFOLIO
--------------------- ------------------------
YEAR ENDED SEPTEMBER 30,
JUN. 3* to -----------------------
SEP. 30, 1996 1996 1995
(000) (000) (000)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 438 $ 12,453 $ 10,361
Realized Net Gain (Loss) 24 14,027 (1,374)
Change in Unrealized Appreciation
(Depreciation) 319 16,862 44,095
-----------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 781 43,342 53,082
-----------------------------------------------
DISTRIBUTIONS
Net Investment Income (438) (10,994) (10,052)
Realized Net Gain -- -- (1,616)
-----------------------------------------------
Total Distributions (438) (10,994) (11,668)
-----------------------------------------------
NET EQUALIZATION CREDITS--Note A -- 68 2
-----------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 21,643 41,663 45,578
Issued in Lieu of Cash Distributions 438 10,957 11,640
Redeemed (179) (34,733) (48,471)
----------------------------------------------
Net Increase from Capital Share Transactions 21,902 17,887 8,747
- ------------------------------------------------------------------------------------------------
Total Increase 22,245 50,303 50,163
- ------------------------------------------------------------------------------------------------
Net Assets
Beginning of Period -- 279,771 229,608
----------------------------------------------
End of Period $22,245 $330,074 $279,771
================================================================================================
(1)Shares Issued and Redeemed
Issued 2,166 2,993 3,877
Issued in Lieu of Cash Distributions 44 803 1,015
Redeemed (18) (2,490) (4,180)
----------------------------------------------
Net Increase in Shares Outstanding 2,192 1,306 712
================================================================================================
</TABLE>
*Commencement of operations.
39
<PAGE> 42
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSESTS (Continued)
- -------------------------------------------------------------------------------------------------------------------
EQUITY INDEX EQUITY INCOME
PORTFOLIO PORTFOLIO
--------------------------- -------------------------
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------
1996 1995 1995 1996
(000) (000) (000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 7,272 $ 5,521 $ 4,439 $ 3,249
Realized Net Gain (Loss) 2,002 2,179 1,805 499
Change in Unrealized Appreciation (Depreciation) 52,345 50,710 13,769 14,100
------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 61,619 58,410 20,013 17,848
------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (6,270) (4,508) (4,148) (3,350)
Realized Net Gain (2,318) (1,196) (469) (338)
------------------------------------------------------------
Total Distributions (8,588) (5,704) (4,617) (3,688)
------------------------------------------------------------
NET EQUALIZATION CREDITS--Note A -- -- 267 65
------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 95,701 69,694 44,342 24,993
Issued in Lieu of Cash Distributions 8,588 5,704 4,602 3,670
Redeemed (27,507) (37,968) (13,910) (19,367)
------------------------------------------------------------
Net Increase from Capital Share Transactions 76,782 37,430 35,034 9,296
- -------------------------------------------------------------------------------------------------------------------
Total Increase 129,813 90,136 50,697 23,521
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 276,082 185,946 91,492 67,971
------------------------------------------------------------
End of Period $405,895 $276,082 $142,189 $91,492
===================================================================================================================
(1)Shares Issued and Redeemed
Issued 5,632 5,632 3,441 2,369
Issued in Lieu of Cash Distributions 543 447 367 359
Redeemed (1,616) (2,854) (1,064) (1,867)
------------------------------------------------------------
Net Increase in Shares Outstanding 4,559 2,687 2,744 861
===================================================================================================================
</TABLE>
40
<PAGE> 43
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
GROWTH SMALL COMPANY
PORTFOLIO GROWTH PORTFOLIO
------------------------------ ----------------------
YEAR ENDED SEPTEMBER 30,
------------------------------ JUN. 3* TO
1996 1995 SEP. 30, 1996
(000) (000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 2,798 $ 1,916 $ 174
Realized Net Gain (Loss) 11,233 3,088 (568)
Change in Unrealized Appreciation (Depreciation) 38,424 28,739 284
---------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 52,455 33,743 (110)
---------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (1,877) (862) --
Realized Net Gain (2,230) -- --
---------------------------------------------------------------
Total Distributions (4,107) (862) --
---------------------------------------------------------------
NET EQUALIZATION CREDITS--NOTE A -- -- --
---------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 86,806 68,148 46,109
Issued in Lieu of Cash Distributions 4,107 862 --
Redeemed (25,301) (22,177) (1,820)
---------------------------------------------------------------
Net Increase from Capital Share Transactions 65,612 46,833 44,289
- -------------------------------------------------------------------------------------------------------------------
Total Increase 113,960 79,714 44,179
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 161,642 81,928 --
---------------------------------------------------------------
End of Period $275,602 $161,642 $44,179
===================================================================================================================
(1)Shares Issued and Redeemed
Issued 5,521 5,637 4,687
Issued in Lieu of Cash Distributions 293 81 --
Redeemed (1,603) (1,846) (199)
---------------------------------------------------------------
Net Increase in Shares Outstanding 4,211 3,872 4,488
===================================================================================================================
</TABLE>
*Commencement of operations.
41
<PAGE> 44
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS (Continued)
- ----------------------------------------------------------------------------------------------------------
INTERNATIONAL
PORTFOLIO
----------------------------
YEAR ENDED SEPTEMBER 30,
----------------------------
1996 1995
(000) (000)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 1,807 $ 1,258
Realized Net Gain (Loss) 3,644 241
Change in Unrealized Appreciation (Depreciation) 9,849 6,769
--------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations 15,300 8,268
--------------------------
DISTRIBUTIONS
Net Investment Income (1,281) (397)
Realized Net Gain -- --
--------------------------
Total Distributions (1,281) (397)
---------------------------
NET EQUALIZATION CREDITS--Note A -- --
---------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 68,539 47,204
Issued in Lieu of Cash Distributions 1,281 397
Redeemed (11,933) (28,360)
--------------------------
Net Increase from Capital Share Transactions 57,887 19,241
- ----------------------------------------------------------------------------------------------------------
Total Increase 71,906 27,112
- ----------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 89,616 62,504
--------------------------
End of Period $161,522 $ 89,616
==========================================================================================================
(1)Shares Issued and Redeemed
Issued 5,699 4,526
Issued in Lieu of Cash Distributions 115 38
Redeemed (990) (2,766)
---------------------------
Net Increase in Shares Outstanding 4,824 1,798
==========================================================================================================
</TABLE>
42
<PAGE> 45
FINANCIAL HIGHLIGHTS
This table summarizes each Portfolio's investment results and distributions to
shareholders on a per-share basis. It also presents the Portfolio's Total
Return and shows net investment income and expenses as percentages of average
net assets. These data will help you assess: the variability of the Portfolio's
net income and total returns from year to year; the relative contributions of
net income and capital gains to the Portfolio's total return; and how much it
costs to operate the Portfolio.
The table also shows the Portfolio Turnover Rate, a measure of trading
activity. A turnover rate of 100% means that the average security is held in
the Portfolio for one year. Money market portfolios do not show a turnover rate
because securities with less than one year to maturity are excluded from the
calculation of turnover rates. Finally, the table lists the Portfolio's Average
Commission Rate Paid, a disclosure required by the SEC beginning in 1996 for
Portfolios that invest in equity securities. This rate is calculated by
dividing total commissions paid on portfolio securities by the total number of
shares purchased and sold on which commissions were charged.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00
- ----------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .054 .056 .035 .030 .040
Net Realized and Unrealized
Gain (Loss) on Investments -- -- -- -- --
---------------------------------------------
Total from Investment Operations .054 .056 .035 .030 .040
---------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.054) (.056) (.035) (.030) (.040)
Distributions from Realized Capital Gains -- -- -- -- --
----------------------------------------------
Total Distributions (.054) (.056) (.035) (.030) (.040)
- ----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00
================================================================================================================
TOTAL RETURN 5.49% 5.77% 3.63% 3.05% 4.11%
================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $285 $218 $171 $114 $71
Ratio of Total Expenses to Average Net Assets 0.19% 0.23% 0.23% 0.29% 0.33%
Ratio of Net Investment Income to Average Net Assets 5.36% 5.66% 3.66% 3.00% 3.90%
Portfolio Turnover Rate N/A N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE> 46
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
HIGH-GRADE BOND PORTFOLIO
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.47 $ 9.82 $10.94 $10.64 $10.24
----------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .670 .663 .619 .636 .705
Net Realized and Unrealized Gain (Loss) on Investments (.180) .650 (.966) .349 .427
----------------------------------------------
Total from Investment Operations .490 1.313 (.347) .985 1.132
----------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.670) (.663) (.619) (.636) (.705)
Distributions from Realized Capital Gains -- -- (.154) (.049) (.027)
Total Distributions (.670) (.663) (.773) (.685) (.732)
- -------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $10.29 $10.47 $ 9.82 $10.94 $10.64
=======================================================================================================
TOTAL RETURN 4.80% 13.83% -3.31% 9.64% 11.47%
=======================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $139 $120 $80 $85 $52
Ratio of Total Expenses to Average Net Assets 0.25% 0.29% 0.24% 0.29% 0.32%
Ratio of Net Investment Income to Average Net Assets 6.43% 6.58% 5.98% 5.92% 6.66%
Portfolio Turnover Rate 56% 29% 46% 73% 31%
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
HIGH YIELD BOND PORTFOLIO
JUN. 3* TO
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD SEP. 30, 1996
- -------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- -------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .299
Net Realized and Unrealized Gain (Loss) on Investments .150
-------
Total from Investment Operations .449
-------
DISTRIBUTIONS
Dividends from Net Investment Income (.299)
Distributions from Realized Capital Gains --
-------
Total Distributions (.299)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.15
===============================================================================
TOTAL RETURN 4.56%
===============================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $22
Ratio of Total Expenses to Average Net Assets 0.32%**
Ratio of Net Investment Income to Average Net Assets 9.29%**
Portfolio Turnover Rate 8%
- -------------------------------------------------------------------------------
*Commencement of operations.
**Annualized.
</TABLE>
44
<PAGE> 47
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
BALANCED PORTFOLIO
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $13.33 $11.33 $11.58 $10.83 $10.25
- ---------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .565 .51 .46 .50 .51
Net Realized and Unrealized Gain (Loss) on Investments1 .420 2.07 (.16) .97 .52
----------------------------------------------
Total from Investment Operations 1.985 2.58 .30 1.47 1.03
----------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.505) (.50) (.39) (.69) (.45)
Distributions from Realized Capital Gains -- (.08) (.16) (.03) --
Total Distributions (.505) (.58) (.55) (.72) (.45)
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $14.81 $13.33 $11.33 $11.58 $10.83
=========================================================================================================
TOTAL RETURN 15.26% 23.65% 2.67% 14.10% 10.29%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $330 $280 $230 $191 $76
Ratio of Total Expenses to Average Net Assets 0.31% 0.36% 0.34% 0.39% 0.42%
Ratio of Net Investment Income to Average Net Assets 4.04% 4.25% 4.11% 4.45% 4.77%
Portfolio Turnover Rate 36% 26% 42% 41% 15%
Average Commission Rate Paid $.0221 N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
EQUITY INDEX PORTFOLIO
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $15.69 $12.47 $12.37 $11.32 $10.45
- ---------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .34 .33 .31 .34 .26
Net Realized and Unrealized Gain (Loss) on Investments 2.75 3.26 .12 1.07 .85
----------------------------------------------
Total from Investment Operations 3.09 3.59 .43 1.41 1.11
----------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.33) (.29) (.23) (.34) (.24)
Distributions from Realized Capital Gains (.13) (.08) (.10) (.02) --
----------------------------------------------
Total Distributions (.46) (.37) (.33) (.36) (.24)
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $18.32 $15.69 $12.47 $12.37 $11.32
=========================================================================================================
TOTAL RETURN 20.19% 29.51% 3.53% 12.68% 10.74%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $406 $276 $186 $165 $85
Ratio of Total Expenses to Average Net Assets 0.22% 0.28% 0.24% 0.29% 0.32%
Ratio of Net Investment Income to Average Net Assets 2.13% 2.53% 2.60% 2.63% 2.84%
Portfolio Turnover Rate 2% 2% 7% 16% 1%
Average Commission Rate Paid $.0203 N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE> 48
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (CONTINUED)
- ----------------------------------------------------------------------------------------------------
EQUITY INCOME PORTFOLIO
YEAR ENDED SEPTEMBER 30,
------------------------------ JUN. 7* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1996 1995 1994 Sep. 30, 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.00 $10.05 $10.57 $10.00
- ----------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .48 .46 .45 .14
Net Realized and Unrealized Gain (Loss) on Investments 1.75 2.02 (.63) .54
-----------------------------------------
Total from Investment Operations 2.23 2.48 (.18) .68
-----------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.46) (.48) (.33) (.11)
Distributions from Realized Capital Gains (.06) (.05) (.01) --
Total Distributions (.52) (.53) (.34) (.11)
- ----------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $13.71 $12.00 $10.05 $10.57
====================================================================================================
TOTAL RETURN 19.07% 25.69% -1.64% 6.81%
====================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $142 $91 $68 $50
Ratio of Total Expenses to Average Net Assets 0.35% 0.39% 0.34% 0.39%**
Ratio of Net Investment Income to Average Net Assets 3.69% 4.28% 4.57% 4.30%**
Portfolio Turnover Rate 8% 10% 18% 2%
Average Commission Rate Paid $.0583 N/A N/A N/A
- ----------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
GROWTH PORTFOLIO
YEAR ENDED SEPTEMBER 30,
---------------------------- Jun. 7* to
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1996 1995 1994 Sep. 30, 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $14.10 $10.79 $10.26 $10.00
- --------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .18 .16 .14 .04
Net Realized and Unrealized Gain (Loss) on Investments 3.65 3.26 .46 .22
------------------------------------------
Total from Investment Operations 3.83 3.42 .60 .26
------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.16) (.11) (.07) --
Distributions from Realized Capital Gains (.19) -- -- --
Total Distributions (.35) (.11) (.07) --
- --------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $17.58 $14.10 $10.79 $10.26
==================================================================================================
TOTAL RETURN 27.79% 32.02% 5.87% 2.60%
==================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $276 $162 $82 $36
Ratio of Total Expenses to Average Net Assets 0.39% 0.47% 0.38% 0.43%**
Ratio of Net Investment Income to Average Net Assets 1.29% 1.64% 1.55% 1.63%**
Portfolio Turnover Rate 42% 32% 34% 10%
Average Commission Rate Paid $.0499 N/A N/A N/A
- --------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
47
<PAGE> 49
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SMALL COMPANY GROWTH PORTFOLIO
JUN. 3* TO
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD SEP. 30, 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
- -------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .04
Net Realized and Unrealized Gain (Loss) on Investments (.20)
--------
Total from Investment Operations (.16)
--------
DISTRIBUTIONS
Dividends from Net Investment Income --
Distributions from Realized Capital Gains --
--------
Total Distributions --
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.84
===============================================================================================================================
TOTAL RETURN -1.60%
===============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $44
Ratio of Total Expenses to Average Net Assets 0.45%**
Ratio of Net Investment Income to Average Net Assets 1.42%**
Portfolio Turnover Rate 18%
Average Commission Rate Paid $.0600
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL PORTFOLIO
YEAR ENDED
SEPTEMBER 30,
---------------------- JUN. 3* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1996 1995 SEP. 30, 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.40 $10.31 $10.00
- -------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .14 .16 .05
Net Realized and Unrealized Gain (Loss) on Investments 1.36 .99 .26
-------------------------------------------
Total from Investment Operations 1.50 1.15 .31
-------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.16) (.06) --
Distributions from Realized Capital Gains -- -- --
-------------------------------------------
Total Distributions (.16) (.06) --
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.74 $11.40 $10.31
===============================================================================================================================
TOTAL RETURN 13.36% 11.21% 3.10%
===============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $162 $90 $63
Ratio of Total Expenses to Average Net Assets 0.49% 0.54% 0.30%**
Ratio of Net Investment Income to Average Net Assets 1.42% 1.67% 1.91%**
Portfolio Turnover Rate 19% 27% 0%
Average Commission Rate Paid $.0403 N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
47
<PAGE> 50
NOTES TO FINANCIAL STATEMENTS
Vanguard Variable Insurance Fund is registered under the Investment Company Act
of 1940 as a diversified open-end investment company and comprises the Money
Market, High-Grade Bond, High Yield Bond, Balanced, Equity Index, Equity
Income, Growth, Small Company Growth, and International Portfolios.
Certain investments of the Money Market, High-Grade Bond, High Yield Bond,
and Balanced Portfolios are in corporate debt instruments; the issuers'
abilities to meet their obligations may be affected by economic developments in
their respective industries. The International Portfolio invests in securities
of foreign issuers, which may subject the Portfolio to investment risks not
normally associated with investing in securities of U.S. corporations.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The Fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Money Market Portfolio: investment securities are
stated at amortized cost, which approximates market value. Other Portfolios:
common stocks listed on U.S. exchanges are valued at the latest quoted sales
prices as of the close of trading on the New York Stock Exchange (generally
4:00 p.m. Eastern time) on the valuation date; such securities not traded on
the valuation date are valued at the mean of the latest quoted bid and asked
prices. Securities listed on foreign exchanges are valued at the latest quoted
sales prices. Securities not listed on an exchange are valued at the latest
quoted bid prices. Bonds, and temporary cash investments acquired over 60 days
to maturity, are valued using the latest bid prices or using valuations based
on a matrix system (which considers such factors as security prices, yields,
maturities, and ratings), both as furnished by independent pricing services.
Other temporary cash investments are valued at amortized cost, which
approximates market value.
2. FOREIGN CURRENCY: Securities and other assets and liabilities
denominated in foreign currencies are translated into U.S. dollars at the bid
prices of those currencies against U.S. dollars last quoted by major banks as
of 5:00 p.m. Geneva time on the valuation date.
Realized gains (losses) and unrealized appreciation (depreciation) on
investment securities include the effects of changes in exchange rates since
the securities were purchased, combined with the effects of changes in security
prices. Fluctuations in the value of other assets and liabilities resulting
from changes in exchange rates are recorded as unrealized foreign currency
gains (losses) until the asset or liability is settled in cash, when they are
recorded as realized foreign currency gains (losses).
3. FUTURES AND FORWARD CURRENCY CONTRACTS: The Equity Index Portfolio uses
S&P 500 Index futures contracts to a limited extent, with the objectives of
maintaining full exposure to the stock market, enhancing returns, maintaining
liquidity, and minimizing transaction costs. The Portfolio may purchase futures
contracts to immediately put incoming cash into the market, or sell futures in
response to cash outflows, thereby simulating a fully invested position in the
underlying index while maintaining a cash balance for liquidity. The Portfolio
may seek to enhance returns by using futures contracts instead of the
underlying securities when futures are believed to be priced more attractively
than the underlying securities. The primary risks associated with the use of
futures contracts are imperfect correlation between changes in market values of
stocks held by the Portfolio and the prices of futures contracts, and the
possibility of an illiquid market.
The International Portfolio enters into forward currency contracts to
protect the value of securities and related receivables and payables against
changes in foreign exchange rates. The Portfolio's risks in using these
contracts include movement in the values of the foreign currencies relative to
the U.S. dollar and the ability of the counterparties to fulfill their
obligations under the contracts.
Futures and forward currency contracts are valued at their quoted daily
settlement prices. The aggregate principal amounts of the contracts are not
recorded in the financial statements. Fluctuations in the value of the
contracts are recorded in the Statement of Net Assets as an asset (liability)
48
<PAGE> 51
and in the Statement of Operations as unrealized appreciation (depreciation)
until the contracts are closed, when they are recorded as realized gains
(losses) on futures or forward currency contracts.
4. FEDERAL INCOME TAXES: Each Portfolio intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for Federal income taxes is required in the financial
statements.
5. EQUALIZATION: The Balanced and Equity Income Portfolios follow the
accounting practice known as "equalization," under which a portion of the price
of capital shares issued and redeemed, equivalent to undistributed net
investment income per share on the date of the transaction, is credited or
charged to undistributed income. As a result, undistributed income per share is
unaffected by capital share transactions.
6. REPURCHASE AGREEMENTS: The Money Market Portfolio may invest in
repurchase agreements secured by U.S. Government obligations. The other
Portfolios, along with other members of The Vanguard Group, transfer uninvested
cash balances to a Pooled Cash Account, which is invested in repurchase
agreements secured by U.S. Government securities.
Securities pledged as collateral for repurchase agreements are held by a
custodian bank until the agreements mature. Each agreement requires that the
market value of the collateral be sufficient to cover payments of interest and
principal; however, in the event of default or bankruptcy by the other party to
the agreement, retention of the collateral may be subject to legal proceedings.
7. DISTRIBUTIONS: Distributions of net investment income to shareholders of
the Money Market, High-Grade Bond, and High Yield Bond Portfolios are declared
daily and paid on the first business day of the following month. Distributions
of net investment income to shareholders of the Balanced, Equity Index, Equity
Income, Growth, Small Company Growth, and International Portfolios are recorded
on the ex-dividend date. Annual distributions from realized capital gains, if
any, are recorded on the ex-dividend date.
8. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date the securities are bought or sold.
Costs used to determine realized gains (losses) on the sale of investment
securities are those of the specific securities sold. Premiums and discounts on
debt securities purchased are amortized and accreted, respectively, to interest
income over the lives of the securities.
B. The Vanguard Group furnishes investment advisory services to the Money
Market, High-Grade Bond, and Equity Index Portfolios on an at-cost basis.
Under advisory contracts, investment advisory fee payments are calculated
at an annual percentage rate of average net assets of the following Portfolios:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
CONTRACT
EXPIRATION
PORTFOLIO INVESTMENT ADVISER DATE
---------------------------------------------------------------------------------------
<S> <C> <C>
High Yield Bond Wellington Management Company, LLP April 30, 1998
Balanced Wellington Management Company, LLP June 30, 1998
Equity Income Newell Associates May 31, 1997
Growth Lincoln Capital Management Company May 31, 1997
Small Company Growth Granahan Investment Management, Inc. April 30, 1998
International Schroder Capital Management International May 31, 1997
---------------------------------------------------------------------------------------
</TABLE>
The advisory fees of the High Yield Bond, Equity Income, Growth, and Small
Company Growth Portfolios represented effective annual rates of 0.06%, 0.10%,
0.15%, and 0.15%, respectively, of average net assets for the periods ended
September 30, 1996.
The basic fee for the Balanced Portfolio is subject to quarterly
adjustments based on performance relative to a combined index composed of the
S&P 500 Stock Index and the Lehman Long-Term Corporate AA or Better Bond Index.
For the year ended September 30, 1996, the in
49
<PAGE> 52
vestment advisory fee represented an effective annual basic rate of 0.10% of
the Balanced Portfolio's average net assets before an increase of $1,000 based
on performance.
The basic fee for the International Portfolio is subject to quarterly
adjustments based on performance relative to the Morgan Stanley Capital
International-Europe, Australasia, Far East Index. For the year ended September
30, 1996, the investment advisory fee represented an effective annual base rate
of 0.13% of the International Portfolio's average net assets before an increase
of $42,000 (0.03%) based on performance.
C. The Vanguard Group furnishes at cost corporate management,
administrative, marketing, and distribution services. The costs of such
services are allocated to the Fund under methods approved by the Board of
Trustees. At September 30, 1996, the Fund had contributed capital aggregating
$168,000 to Vanguard (included in Other Assets), representing 0.8% of
Vanguard's capitalization. The Fund's trustees and officers are also directors
and officers of Vanguard.
D. During the period ended September 30, 1996, purchases and sales of
investment securities other than temporary cash investments were:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES OTHER INVESTMENT SECURITIES
(000) (000)
-------------------------------------------------------------
PORTFOLIO PURCHASES SALES PURCHASES SALES
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
High-Grade Bond $79,313 $60,598 $ 24,182 $13,089
High Yield Bond -- -- 21,792 988
Balanced 45,250 49,788 85,677 60,173
Equity Index -- -- 74,927 6,528
Equity Income -- -- 43,691 9,728
Growth -- -- 144,524 87,656
Small Company Growth -- -- 45,680 4,484
International -- -- 84,522 23,305
- -----------------------------------------------------------------------------------
</TABLE>
The Balanced and International Portfolios used capital loss
carryforwards of $1,537,000 and $55,000, respectively, to offset taxable capital
gains realized during the year ended September 30, 1996, reducing the amount of
capital gains that would otherwise be available to distribute to shareholders.
At September 30, 1996, the following Portfolios had available realized capital
losses to offset future taxable capital gains through the following fiscal
year ends:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
EXPIRATION
FISCAL YEAR(S) ENDING AMOUNT
PORTFOLIO SEPTEMBER 30, (000)
- ------------------------------------------------------------------------
<S> <C> <C>
High-Grade Bond 2003-2005 $812
Small Company Growth 2004 568
- ------------------------------------------------------------------------
</TABLE>
During the year ended September 30, 1996, the International Portfolio
realized net foreign currency losses of $22,000, which decreased distributable
net income for tax purposes; accordingly, such losses have been reclassified
from accumulated net realized gains to undistributed net investment income.
50
<PAGE> 53
E. At September 30, 1996, net unrealized appreciation (depreciation) of
investment securities for financial reporting and Federal income tax purposes
was:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
(000)
---------------------------------------------------------
NET UNREALIZED
APPRECIATED DEPRECIATED APPRECIATION
PORTFOLIO SECURITIES SECURITIES (DEPRECIATION)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
High-Grade Bond $ 1,312 $(1,882) $ (570)
High Yield Bond 350 (31) 319
Balanced 70,282 (3,905) 66,377
Equity Index 122,016 (4,779) 117,237
Equity Income 27,311 (2,148) 25,163
Growth 71,873 (1,183) 70,690
Small Company Growth 2,666 (2,382) 284
International 21,005 (3,807) 17,198
- ------------------------------------------------------------------------------------
</TABLE>
At September 30, 1996, the aggregate settlement value of open S&P 500
Index futures contracts expiring in December 1996 held by the Equity Index
Portfolio, the unrealized appreciation on those contracts, and the market value
of U.S. Treasury bills deposited as initial margin for those contracts were
$10,717,000, $28,000, and $399,000, respectively. Unrealized appreciation on
open futures contracts is required to be treated as realized gain for Federal
income tax purposes.
At September 30, 1996, the International Portfolio had open forward
currency contracts to deliver foreign currency in exchange for U.S. dollars as
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
(000)
-------------------------------------------------------
CONTRACT AMOUNT
-----------------------
FOREIGN U.S. MARKET VALUE UNREALIZED
CONTRACT SETTLEMENT DATE CURRENCY DOLLARS IN U.S. DOLLARS APPRECIATION
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deliver:
12/16/96 CHF 11,500 $9,373 $9,251 $122
- ----------------------------------------------------------------------------------
CHF--Swiss Francs.
</TABLE>
Net unrealized appreciation of $122,000 related to open forward currency
contracts is required to be treated as realized gain for tax purposes.
The International Portfolio had net unrealized foreign currency losses
of $2,000 resulting from the translation of other assets and liabilities at
September 30, 1996.
F. The market value of securities on loan to broker/dealers at September
30, 1996, and collateral received with respect to such loans were:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
(000)
------------------------------------
MARKET VALUE CASH
OF LOANED COLLATERAL
PORTFOLIO SECURITIES RECEIVED
- ----------------------------------------------------------------------------------
<S> <C> <C>
Balanced $ 162 $ 168
Small Company Growth 1,529 1,595
International 15,295 16,186
- ----------------------------------------------------------------------------------
</TABLE>
51
<PAGE> 54
SPECIAL 1996 TAX INFORMATION (UNAUDITED)
VANGUARD VARIABLE INSURANCE FUND
This information for the fiscal year ended September 30, 1996, is included
pursuant to provisions of the Internal Revenue Code.
The Balanced, Equity Index, Equity Income, Growth, and International
Portfolios designate $11,608,000, $1,652,000, $1,478,000, $8,246,000, and
$3,438,000, respectively, as capital gain dividends (from net long-term capital
gains).
All comparative mutual fund data are from Lipper Analytical Services, Inc. or
Morningstar unless otherwise noted.
52
<PAGE> 55
TRUSTEES AND OFFICERS
JOHN C. BOGLE, Chairman of the Board and Director of The Vanguard Group, Inc.
and of each of the investment companies in The Vanguard Group; Director of
Chris-Craft Industries, Inc.
JOHN J. BRENNAN, President, Chief Executive Officer, and Director of The
Vanguard Group, Inc. and of each of the investment companies in The
Vanguard Group.
ROBERT E. CAWTHORN, Chairman Emeritus and Director of Rhone-Poulenc Rorer Inc.;
Director of Sun Company, Inc. and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and Massachusetts
Mutual Life Insurance Co.
BRUCE K. MACLAURY, President Emeritus of The Brookings Institution; Director of
American Express Bank Ltd., The St. Paul Companies, Inc., and National
Steel Corp.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl Corp.,
Baker Fentress & Co., The Jeffrey Co., and Southern New England
Communications Co.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Co.,
and The Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric
Co., Procter & Gamble Co., and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc. and
Kmart Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
RICHARD F. HYLAND, Treasurer; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
KAREN E. WEST, Controller; Principal of The Vanguard Group, Inc.; Controller of
each of the investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
ROBERT A. DISTEFANO, Senior Vice President, Information Technology.
JAMES H. GATELY, Senior Vice President, Individual Investor Group.
IAN A. MACKINNON, Senior Vice President, Fixed Income Group.
F. WILLIAM MCNABB III, Senior Vice President, Institutional.
RALPH K. PACKARD, Senior Vice President and Chief Financial Officer.
[VANGUARD LOGO]
Please send your comments to us at: Post Office Box 2600, Valley Forge,
Pennsylvania 19482
Fund Information: 1-800-662-7447
Individual Account Services: 1-800-662-2739
Institutional Investor Services: 1-800-523-1036
[email protected] http://www.vanguard.com
This Report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
<PAGE> 56
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity-U.S. Portfolio
Vanguard Convertible Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Portfolios
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity-International
Portfolio
INDEX FUNDS
Vanguard Index Trust
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Vanguard International Equity Index Fund
Vanguard Total International Portfolio
FIXED-INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Admiral Funds
INCOME FUNDS
Vanguard Fixed Income Securities Fund
Vanguard Admiral Funds
Vanguard Preferred Stock Fund
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
VARIABLE ANNUITY
Vanguard Variable Annuity Fund
Q640-9/96
[PHOTO]
<PAGE> 57
[PHOTO]
VANGUARD VARIABLE INSURANCE FUND
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
The Statement of Net Assets should be read in conjunction with the accompanying
Statement of Operations, Statement of Changes in Net Assets, Financial
Highlights, and Notes to Financial Statements.
STATEMENT OF NET ASSETS
This Statement provides a detailed list of each Portfolio's holdings, including
each security's market value on the last day of the reporting period.
Securities are grouped and subtotaled by asset type (common stocks, U.S.
Government and agency issues, corporate bonds, etc.), by industry sector, and,
for international securities, by country. (The Equity Index Portfolio's
securities are listed in descending market value order.) Other assets are added
to, and liabilities are subtracted from, the value of Total Investments to
calculate the Portfolio's Net Assets. Finally, Net Assets are divided by the
outstanding shares of the Portfolio to arrive at its share price, or Net Asset
Value (NAV) Per Share. The NAV is the price used for Portfolio share
transactions with separate accounts of insurance companies, and differs from
the accumulated value of units in their variable annuity plans or variable life
insurance contracts.
At the end of the Statement of Net Assets, you will find a table
displaying the composition of the Portfolio's net assets on both a dollar and
per-share basis. Because all income and any realized gains must be distributed
to shareholders each year, the bulk of net assets consists of Paid in Capital
(money invested by shareholders). The amounts shown for Undistributed Net
Investment Income and Accumulated Net Realized Gains usually approximate the
sums the Portfolio had available to distribute to shareholders as income
dividends or capital gains as of the statement date; Portfolios that distribute
net income to shareholders as a dividend each day usually have no Undistributed
Net Income. Any Accumulated Net Realized Losses, and any cumulative excess of
distributions over net income or net realized gains, will appear as negative
balances. Unrealized Appreciation (Depreciation) is the difference between the
market value of the Portfolio's investments and their cost, and reflects the
gains (losses) that would be realized if the Portfolio were to sell all of its
investments at their statement-date values.
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Money Market Portfolio . . . . . . . 1
High-Grade Bond Portfolio . . . . . 5
High Yield Bond Portfolio . . . . . 10
Balanced Portfolio . . . . . . . . . 13
Equity Index Portfolio . . . . . . . 16
Equity Income Portfolio . . . . . . 21
Growth Portfolio . . . . . . . . . . 23
Small Company Growth Portfolio . . . 24
International Portfolio . . . . . . 26
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
FACE MARKET
INTEREST MATURITY AMOUNT VALUE*
MONEY MARKET PORTFOLIO RATE DATE (000) (000)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS (9.8%)
- ---------------------------------------------------------------------------------------------------------
Federal Home Loan Bank 5.277% 10/4/96 (1) $ 5,000 $ 4,998
Federal Home Loan Bank 5.452% 12/6/96 (1) 5,000 4,999
Federal Home Loan Bank 5.84% 6/27/97 3,000 2,997
Federal Home Loan Mortgage Corp. 5.485% 12/4/96 5,000 4,952
Federal National Mortgage Assn. 5.359% 10/15/96 (1) 5,000 4,997
Federal National Mortgage Assn. 5.37% 11/7/96 (1) 5,000 4,997
- ---------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(COST $27,940) 27,940
- ---------------------------------------------------------------------------------------------------------
</TABLE>
1
<PAGE> 58
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
FACE MARKET
INTEREST MATURITY AMOUNT VALUE*
MONEY MARKET PORTFOLIO RATE DATE (000) (000)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER (56.7%)
- ---------------------------------------------------------------------------------------------------------
BANK HOLDING COMPANIES (5.5%)
Banc One Corp. 5.353% 10/22/96 $2,000 $1,994
Bank of New York Co. Inc. 5.318% 10/2/96 4,000 3,999
BankAmerica Corp. 5.381% 11/7/96 2,000 1,989
J.P. Morgan & Co., Inc. 5.312% 10/15/96 3,600 3,593
Norwest Corp. 5.333% 10/10/96 4,000 3,995
------
15,570
------
FINANCE-AUTO (2.5%)
Ford Motor Credit Corp. 5.465% 11/25/96 2,100 2,083
Toyota Motor Credit Corp. 5.349% 11/13/96 5,000 4,968
------
7,051
------
FINANCE-OTHER (18.2%)
A.I. Credit Corp. 5.339% 10/22/96 3,000 2,991
American Express Credit Corp. 5.341% 10/11/96 2,000 1,997
American Express Credit Corp. 5.375% 10/21/96 3,455 3,445
Ameritech Capital Funding Corp. 5.498% 1/24/97 3,000 2,948
Asset Securitization Cooperative Corp. 5.341% 10/18/96 1,000 997
Asset Securitization Cooperative Corp. 5.437% 11/5/96 2,000 1,989
Asset Securitization Cooperative Corp. 5.449% 11/18/96 2,000 1,986
Associates Corp. 5.329% 10/24/96 3,000 2,990
Associates Corp. 5.39% 11/5/96 2,000 1,990
Ciesco LP 5.325% 10/18/96 1,870 1,865
CIT Group Holdings Inc. 5.375% 10/7/96 2,000 1,998
Commercial Credit Co. 5.305% 10/7/96 3,000 2,997
Commercial Credit Co. 5.376% 10/2/96 2,000 2,000
Corporate Asset Funding Corp. 5.349% 10/29/96 4,000 3,984
Delaware Funding 5.338% 10/21/96 2,000 1,994
Eiger Capital Corp. 5.349% 10/22/96 4,000 3,988
Eiger Capital Corp. 5.38% 10/16/96 4,000 3,991
General Electric Capital Corp. 5.545% 10/28/96 2,000 1,992
General Electric Capital Corp. 5.586% 2/14/97 4,000 3,917
General Electric Capital Corp. 5.741% 3/10/97 2,000 1,951
------
52,010
------
INDUSTRIAL (9.5%)
Bayer Corp. 5.45% 10/2/96 2,000 2,000
Campbell Soup Co. 5.182% 10/4/96 2,000 1,999
Chevron Transport Corp. 5.412% 11/6/96 2,000 1,989
Chevron Transport Corp. 5.526% 10/16/96 2,000 1,996
Chevron U.K. 5.306% 10/8/96 3,000 2,997
Chevron U.K. 5.428% 12/3/96 2,000 1,981
Glaxo 5.363% 11/14/96 2,000 1,987
Lucent Technologies 5.457% 11/8/96 3,000 2,983
Mobil Australia Finance Co. 5.369% 10/3/96 2,000 1,999
Raytheon Co. 5.325% 10/2/96 4,282 4,281
Warner-Lambert Co. 5.372% 10/9/96 3,004 3,001
------
27,213
------
INSURANCE (5.1%)
AIG Funding Inc. 5.348% 10/29/96 2,000 1,992
Prudential Funding Corp. 5.379% 10/31/96 5,000 4,978
SAFECO Credit Co., Inc. 5.499% 11/22/96 2,576 2,556
USAA Capital Corp. 5.483% 1/7/97 3,054 3,009
USAA Capital Corp. 5.549% 11/1/96 2,000 1,990
------
14,525
------
UTILITY (0.8%)
Consolidated Natural Gas Corp. 5.382% 10/9/96 2,315 2,312
------
FOREIGN BANKS (5.3%)
Abbey National 5.756% 3/10/97 2,000 1,950
ABN AMRO North America Finance Inc. 5.378% 11/20/96 1,000 993
Bank of Nova Scotia 5.498% 1/3/97 3,000 2,957
</TABLE>
2
<PAGE> 59
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
FACE MARKET
INTEREST MATURITY AMOUNT VALUE*
MONEY MARKET PORTFOLIO RATE DATE (000) (000)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
National Australia Funding 5.477% 11/4/96 $4,000 $ 3,980
Toronto Dominion Holdings USA Inc. 5.499% 10/7/96 3,000 2,997
UBS Finance (Delaware), Inc. 5.80% 10/1/96 2,209 2,209
------
15,086
------
CANADIAN GOVERNMENT-NATIONAL AND PROVINCIAL (3.1%)
Canadian Wheat Board 5.352% 11/12/96 4,000 3,975
Province of British Columbia 5.493% 10/23/96 3,000 2,990
Province of British Columbia 5.497% 2/6/97 2,000 1,962
------
8,927
------
OTHER FOREIGN GOVERNMENT (4.2%)
Caisse D'Amortissement de la Dette 5.317% 10/21/96 3,000 2,991
Caisse D'Amortissement de la Dette 5.391% 10/7/96 1,000 999
Caisse D'Amortissement de la Dette 5.741% 2/28/97 1,000 977
Western Australia Treasury Corp. 5.495% 11/1/96 4,000 3,981
Wool International 5.519% 10/8/96 3,000 2,997
------
11,945
------
FOREIGN INDUSTRIAL (0.7%)
Reed Elsevier 5.348% 10/28/96 2,000 1,992
------
FOREIGN UTILITY (1.8%)
France Telecom 5.395% 10/8/96 5,168 5,163
------
- ---------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER
(COST $161,794) 161,794
- ---------------------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT (17.9%)
- ---------------------------------------------------------------------------------------------------------
U.S. BANK (0.3%)
Morgan Guaranty 5.93% 6/6/97 1,000 1,000
------
YANKEE CERTIFICATE OF DEPOSIT-CANADIAN BRANCH (1.1%)
National Westminster Bank 5.474% 10/1/96 3,000 3,000
------
YANKEE CERTIFICATES OF DEPOSIT-U.S. BRANCHES (16.5%)
Bank of Montreal 5.37% 11/27/96 2,000 2,000
Bank of Nova Scotia 5.57% 10/8/96 2,000 2,000
Barclays Bank 5.37% 10/7/96 2,000 2,000
Barclays Bank 5.37% 10/18/96 2,000 2,000
Barclays Bank 5.54% 1/27/97 3,000 3,000
Bayerische Landesbank 5.45% 10/8/96 7,000 7,000
Bayerische Vereinsbank 5.53% 1/23/97 2,000 2,000
Caisse Nationale de Credit Agricole 5.50% 10/24/96 4,000 4,000
Caisse Nationale de Credit Agricole 5.54% 11/1/96 2,000 2,000
Dresdner Bank 5.51% 12/3/96 2,000 2,000
Landesbank Hessen-Thueringen 6.07% 6/11/97 2,000 2,000
Rabobank Nederlanden 5.46% 10/1/96 2,000 2,000
Rabobank Nederlanden 5.56% 1/14/97 3,000 3,000
Union Bank of Switzerland 5.38% 11/26/96 5,000 5,000
Westdeutsche Landesbank Girozentrale 5.35% 10/28/96 3,000 3,000
Westdeutsche Landesbank Girozentrale 5.36% 10/7/96 2,000 2,000
Westdeutsche Landesbank Girozentrale 5.76% 1/15/97 2,000 2,001
------
47,001
------
- ---------------------------------------------------------------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT
(COST $51,001) 51,001
- ---------------------------------------------------------------------------------------------------------
EURODOLLAR CERTIFICATES OF DEPOSIT (14.4%)
- ---------------------------------------------------------------------------------------------------------
Abbey National 5.40% 11/29/96 2,000 2,000
ABN AMRO 5.38% 10/1/96 2,000 2,000
Barclays Bank 4.94% 2/10/97 2,000 1,994
Bayerische Landesbank 5.63% 12/16/96 2,000 2,001
Bayerische Vereinsbank 5.56% 2/10/97 2,000 1,999
Bayerische Vereinsbank 5.61% 10/10/96 2,000 2,000
</TABLE>
3
<PAGE> 60
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
FACE MARKET
INTEREST MATURITY AMOUNT VALUE*
MONEY MARKET PORTFOLIO RATE DATE (000) (000)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deutsche Bank 5.38% 11/7/96 $5,000 $ 5,000
Deutsche Bank 5.56% 1/21/97 3,000 3,000
Landesbank Hessen-Thueringen 5.47% 12/9/96 2,000 2,000
Lloyds Bank 5.48% 11/20/96 3,000 3,000
National Westminster Bank 5.52% 12/4/96 2,000 2,000
National Westminster Bank 5.53% 1/6/97 2,000 2,000
Rabobank Nederlanden 5.45% 11/29/96 2,000 2,000
Swiss Bank 5.53% 2/10/97 4,000 4,000
Swiss Bank 5.58% 10/11/96 4,000 4,000
Toronto Dominion Bank 5.50% 1/3/97 2,000 2,000
- ---------------------------------------------------------------------------------------------------------
TOTAL EURODOLLAR CERTIFICATES OF DEPOSIT
(COST $40,994) 40,994
- ---------------------------------------------------------------------------------------------------------
BANKERS ACCEPTANCE (1.1%)
- ---------------------------------------------------------------------------------------------------------
Seafirst Bank
(COST $2,993) 5.523% 10/15/96 3,000 2,993
- ---------------------------------------------------------------------------------------------------------
BANK NOTE (0.4%)
- ---------------------------------------------------------------------------------------------------------
Morgan Guaranty Trust Co.
(COST $999) 5.25% 1/15/97 1,000 999
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.3%)
(COST $285,721) 285,721
- ---------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.3%)
- ---------------------------------------------------------------------------------------------------------
Other Assets--Note C 2,625
Liabilities (3,365)
-------
(740)
- ---------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------------------------------------------
Applicable to 284,984,428 outstanding shares of beneficial interest
(unlimited authorization-no par value) $284,981
=========================================================================================================
NET ASSET VALUE PER SHARE $1.00
=========================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
(1)--Floating Rate Note.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 1996, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Paid in Capital $284,984 $1.00
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses (3) --
Unrealized Appreciation -- --
- ---------------------------------------------------------------------------------------------------------
NET ASSETS $284,981 $1.00
=========================================================================================================
</TABLE>
4
<PAGE> 61
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
FACE MARKET
INTEREST MATURITY AMOUNT VALUE*
HIGH-GRADE BOND PORTFOLIO RATE DATE (000) (000)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY OBLIGATIONS (31.6%)
- ---------------------------------------------------------------------------------------------------------
U.S. TREASURY BONDS (18.9%)
U.S. Treasury Bond 7.875% 2/15/21 $1,890 $2,064
U.S. Treasury Bond 8.00% 11/15/21 250 277
U.S. Treasury Bond 8.125% 8/15/19 1,650 1,845
U.S. Treasury Bond 8.125% 8/15/21 1,900 2,132
U.S. Treasury Bond 8.50% 2/15/20 1,870 2,173
U.S. Treasury Bond 8.75% 5/15/17 2,230 2,636
U.S. Treasury Bond 8.75% 5/15/20 525 625
U.S. Treasury Bond 8.875% 8/15/17 2,635 3,153
U.S. Treasury Bond 8.875% 2/15/19 660 793
U.S. Treasury Bond 9.125% 5/15/18 1,335 1,638
U.S. Treasury Bond 10.375% 11/15/09 2,095 2,555
U.S. Treasury Bond 10.375% 11/15/12 1,340 1,695
U.S. Treasury Bond 10.75% 8/15/05 875 1,108
U.S. Treasury Bond 11.625% 11/15/02 1,000 1,253
U.S. Treasury Bond 14.00% 11/15/11 1,565 2,377
------
26,324
U.S. TREASURY NOTES (12.7%) ------
U.S. Treasury Note 5.25% 7/31/98 275 271
U.S. Treasury Note 5.375% 5/31/98 550 544
U.S. Treasury Note 5.75% 8/15/03 300 286
U.S. Treasury Note 6.25% 4/30/01 825 819
U.S. Treasury Note 6.25% 2/15/03 45 45
U.S. Treasury Note 6.75% 5/31/99 400 405
U.S. Treasury Note 7.00% 4/15/99 225 229
U.S. Treasury Note 7.125% 2/29/00 350 358
U.S. Treasury Note 7.25% 2/15/98 450 457
U.S. Treasury Note 7.25% 8/15/04 120 124
U.S. Treasury Note 7.50% 10/31/99 1,300 1,342
U.S. Treasury Note 7.50% 2/15/05 275 289
U.S. Treasury Note 7.75% 11/30/99 615 640
U.S. Treasury Note 7.75% 2/15/01 100 105
U.S. Treasury Note 7.875% 4/15/98 900 924
U.S. Treasury Note 7.875% 11/15/04 225 242
U.S. Treasury Note 8.00% 8/15/99 4,115 4,297
U.S. Treasury Note 8.25% 7/15/98 2,150 2,228
U.S. Treasury Note 8.50% 2/15/00 475 506
U.S. Treasury Note 8.75% 8/15/00 925 998
U.S. Treasury Note 8.875% 11/15/98 250 263
U.S. Treasury Note 9.00% 5/15/98 1,300 1,359
U.S. Treasury Note 9.125% 5/15/99 925 988
------
17,719
------
- ---------------------------------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $43,922) 44,043
- ---------------------------------------------------------------------------------------------------------
FEDERAL AGENCY OBLIGATIONS (3.2%)
- ---------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp. 6.785% 3/1/06 300 288
Federal Home Loan Mortgage Corp. 7.09% 6/1/05 200 196
Federal National Mortgage Assn. 4.95% 9/30/98 700 683
Federal National Mortgage Assn. 5.30% 3/11/98 525 520
Federal National Mortgage Assn. 5.35% 8/12/98 700 690
Federal National Mortgage Assn. 5.80% 12/10/03 600 564
Federal National Mortgage Assn. 6.25% 8/12/03 350 333
Federal National Mortgage Assn. 7.00% 8/12/02 900 888
Federal National Mortgage Assn. 7.55% 6/10/04 350 350
- ---------------------------------------------------------------------------------------------------------
TOTAL FEDERAL AGENCY OBLIGATIONS
(COST $4,423) 4,512
- ---------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 62
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
FACE MARKET
INTEREST MATURITY AMOUNT VALUE*
HIGH-GRADE BOND PORTFOLIO RATE DATE (000) (000)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MORTGAGE PASS-THROUGH SECURITIES (30.3%)
- ---------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT (30.0%)
Federal Home Loan Mortgage Corp. 5.50% 12/1/98-11/1/08 $ 230 $ 222
Federal Home Loan Mortgage Corp. 6.00% 7/1/98-1/1/24 976 933
Federal Home Loan Mortgage Corp. 6.50% 4/1/98-5/1/26 3,240 3,114
Federal Home Loan Mortgage Corp. 7.00% 1/1/98-6/1/26 3,611 3,532
Federal Home Loan Mortgage Corp. 7.50% 4/1/98-8/1/26 2,844 2,835
Federal Home Loan Mortgage Corp. 8.00% 10/1/09-9/1/25 1,286 1,306
Federal Home Loan Mortgage Corp. 8.50% 5/1/06-9/1/25 661 681
Federal Home Loan Mortgage Corp. 9.00% 11/1/05-6/1/22 536 561
Federal Home Loan Mortgage Corp. 9.50% 1/1/25-2/1/25 258 275
Federal Home Loan Mortgage Corp. 10.00% 3/1/17-11/1/19 137 148
Federal National Mortgage Assn. 5.50% 3/1/01 81 79
Federal National Mortgage Assn. 6.00% 11/15/98-10/1/25 1,633 1,550
Federal National Mortgage Assn. 6.50% 3/1/00-4/1/26 3,210 3,070
Federal National Mortgage Assn. 7.00% 5/1/00-7/1/26 4,381 4,267
Federal National Mortgage Assn. 7.50% 4/1/99-9/1/26 3,329 3,310
Federal National Mortgage Assn. 8.00% 2/1/00-12/1/25 1,968 1,994
Federal National Mortgage Assn. 8.50% 10/1/04-1/15/25 741 763
Federal National Mortgage Assn. 9.00% 3/1/20-4/1/25 573 600
Federal National Mortgage Assn. 9.50% 6/1/01-2/1/25 424 453
Federal National Mortgage Assn. 10.00% 8/1/20-8/1/21 163 177
Federal National Mortgage Assn. 10.50% 8/1/20 46 50
Government National Mortgage Assn. 6.00% 3/15/09-1/15/24 172 160
Government National Mortgage Assn. 6.50% 10/15/08-5/15/26 1,265 1,193
Government National Mortgage Assn. 7.00% 10/15/08-3/15/26 2,595 2,514
Government National Mortgage Assn. 7.50% 5/15/08-12/15/25 2,404 2,385
Government National Mortgage Assn. 8.00% 3/15/08-10/15/25 2,465 2,498
Government National Mortgage Assn. 8.50% 7/15/09-4/15/25 1,106 1,144
Government National Mortgage Assn. 9.00% 4/15/16-8/15/21 1,031 1,091
Government National Mortgage Assn. 9.50% 4/15/17-2/15/25 464 500
Government National Mortgage Assn. 10.00% 5/15/20-1/15/25 281 307
Government National Mortgage Assn. 10.50% 5/15/19 29 32
Government National Mortgage Assn. 11.00% 10/15/15 28 32
Government National Mortgage Assn. 11.50% 2/15/13 77 88
------
41,864
------
PRIVATE (0.3%)
Resolution Trust Corp. 7.75% 12/25/18 265 264
Resolution Trust Corp. 10.40% 8/25/21 148 154
------
418
------
- ---------------------------------------------------------------------------------------------------------
TOTAL MORTGAGE PASS-THROUGH SECURITIES
(COST $42,673) 42,282
- ---------------------------------------------------------------------------------------------------------
CORPORATE BONDS (29.1%)
- ---------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (6.2%)
Chase Manhattan Credit Card Master Trust 7.40% 5/15/00 300 302
Chase Manhattan Credit Card Master Trust 8.75% 8/15/99 75 75
Discover Card Master Trust 5.40% 11/16/01 1,400 1,374
First Chicago Master Trust 6.25% 8/15/99 450 449
First Chicago Master Trust 8.40% 6/15/98 113 113
First Deposit Master Trust 5.75% 6/15/01 1,400 1,390
First Deposit Master Trust 6.05% 8/15/02 1,400 1,397
MBNA Credit Card Master Trust 6.20% 8/15/99 450 449
MBNA Credit Card Master Trust 7.75% 10/15/98 175 176
Sears Credit Card Account Master Trust 5.90% 11/15/98 25 25
Sears Credit Card Account Master Trust 8.10% 6/15/04 1,400 1,456
Standard Credit Card Master Trust .875% 1/7/00 1,400 1,437
------
8,643
------
FINANCE (10.7%)
American General Finance 8.00% 2/15/00 900 933
Associates Corp. 6.25% 3/15/99 500 497
</TABLE>
6
<PAGE> 63
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
FACE MARKET
INTEREST MATURITY AMOUNT VALUE*
RATE DATE (000) (000)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Associates Corp. 7.50% 4/15/02 $ 600 $ 615
BankAmerica Corp. 9.625% 2/13/01 500 551
BankAmerica Corp. 10.00% 2/1/03 200 229
Bear Stearns Cos. 6.625% 1/15/04 200 192
Bear Stearns Cos. 7.625% 4/15/00 250 256
Bear Stearns Cos. 9.125% 4/15/98 250 260
The Chase Manhattan Corp. 6.625% 1/15/98 250 251
CIT Group Holdings 6.625% 6/15/05 400 384
Citicorp 10.15% 2/15/98 900 946
CoreStates Capital 9.375% 4/15/03 250 279
Countrywide Funding Corp. MTN 7.31% 8/28/00 600 608
Dean Witter Discover & Co. 6.00% 3/1/98 1,010 1,007
First Chicago Corp. 11.25% 2/20/01 300 348
First Interstate Bancorp 8.625% 4/1/99 500 524
General Motors Acceptance Corp. 5.50% 12/15/01 750 700
Great Western Finance 6.375% 7/1/00 900 886
Household Finance Corp. 7.65% 5/15/07 400 408
Lehman Brothers Holdings 5.75% 2/15/98 500 495
Manufacturers Hanover Corp. 8.50% 2/15/99 500 521
Mellon Finance Corp. 7.625% 11/15/99 200 205
Morgan Stanley Group Inc. 9.25% 3/1/98 200 208
NationsBank Corp. 6.75% 8/15/00 500 500
NationsBank Corp. 7.75% 8/15/04 500 513
NCNB Corp. 9.50% 6/1/04 150 169
PaineWebber Group Inc. 7.00% 3/1/00 450 449
Sears Roebuck Acceptance Corp. 6.75% 9/15/05 150 145
Smith Barney Holdings Inc. 7.98% 3/1/00 700 725
Transamerica Financial Corp. 8.375% 2/15/98 325 332
Travelers/Aetna Property & Casualty Corp. 7.75% 4/15/26 275 273
U S WEST Financial MTN 8.85% 9/20/99 500 528
------
14,937
------
INDUSTRIAL (8.6%)
American Airlines Equipment Trust 9.71% 1/2/07 196 218
American Brands Inc. 7.875% 1/15/23 100 100
Anheuser-Busch Co., Inc. 7.375% 7/1/23 75 72
Anheuser-Busch Co., Inc. 8.625% 12/1/16 150 157
Applied Materials 8.00% 9/1/04 100 103
Archer-Daniels-Midland Co. 8.875% 4/15/11 180 205
Auburn Hills 12.00% 5/1/20 115 168
British Petroleum 8.875% 12/1/97 600 618
Burlington Northern 6.875% 2/15/16 300 272
Chrysler Corp. 10.40% 8/1/99 300 310
Conrail Corp. 9.75% 6/15/20 100 122
CSX Corp. 8.625% 5/15/22 50 55
Cyprus Minerals 6.625% 10/15/05 400 378
Deere & Co. 8.50% 1/9/22 100 109
Delta Airlines Equipment Trust 8.54% 1/2/07 212 221
Eastman Chemical Co. 6.375% 1/15/04 400 381
Eastman Chemical Co. 7.25% 1/15/24 100 95
Federal Express Co. MTN 10.00% 9/1/98 400 424
Ford Capital B.V. 9.875% 5/15/02 400 451
Ford Holdings Inc. 9.25% 3/1/00 300 322
Ford Motor Corp. 9.95% 2/15/32 65 82
General Motors Corp. 9.125% 7/15/01 400 434
W.R. Grace & Co. 7.40% 2/1/00 400 406
W.R. Grace & Co. 8.00% 8/15/04 100 104
International Paper Co. 7.625% 1/15/07 100 102
May Department Stores Co. 9.75% 2/15/21 100 120
McDonald's Corp. 6.75% 2/15/03 230 228
Mobil Corp. 7.625% 2/23/33 200 195
Occidental Petroleum Corp. MTN 8.50% 11/9/01 500 531
</TABLE>
7
<PAGE> 64
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
FACE MARKET
INTEREST MATURITY AMOUNT VALUE*
HIGH-GRADE BOND PORTFOLIO RATE DATE (000) (000)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
J.C. Penney Co., Inc. 6.875% 6/15/99 $500 $ 503
PepsiCo Inc. 6.125% 1/15/98 200 199
Philip Morris Co., Inc. 8.25% 10/15/03 150 157
Phillips Petroleum Co. 9.00% 6/1/01 600 648
Quaker State Corp. 6.625% 10/15/05 175 166
Sears, Roebuck & Co. 9.25% 4/15/98 750 782
Tenneco Inc. 9.875% 2/1/01 200 222
Tenneco Inc. 10.00% 8/1/98 500 530
Tenneco Inc. 10.375% 11/15/00 500 562
Texaco Capital Corp. 8.875% 9/1/21 150 172
Union Carbide Corp. 6.75% 4/1/03 200 196
Union Carbide Corp. 7.875% 4/1/23 125 124
Union Oil of California 6.375% 2/1/04 200 188
Union Oil of California 9.125% 2/15/06 115 128
Union Oil of California 9.25% 2/1/03 80 88
Union Pacific Corp. 8.625% 5/15/22 175 186
Whirlpool Corp. 9.00% 3/1/03 150 164
------
11,998
------
UTILITIES (3.6%)
Alabama Power Co. 8.75% 12/1/21 129 134
Arizona Public Service 8.00% 2/1/25 150 147
Baltimore Gas & Electric Co. 8.375% 8/15/01 500 530
Carolina Power & Light Co. 6.875% 8/15/23 175 157
Coastal Corp. 7.75% 10/15/35 250 242
Enron Corp. 7.125% 5/15/07 150 148
Enron Corp. 9.65% 5/15/01 450 494
GTE Corp. 7.83% 5/1/23 250 247
Houston Lighting & Power Co. 8.75% 3/1/22 100 105
MCI Communications Corp. 7.50% 8/20/04 250 255
MCI Communications Corp. 7.75% 3/23/25 250 245
Michigan Bell Telephone 7.50% 2/15/23 175 169
New York Telephone 7.00% 8/15/25 175 159
PaciPc Bell Telephone Co. 7.25% 7/1/02 225 229
Southern Bell Telephone Co. 7.625% 3/15/13 450 447
Southwestern Bell Telephone 7.625% 10/1/13 125 124
Southwestern Bell Telephone 7.625% 3/1/23 475 463
Texas Utilities Corp. 7.375% 8/1/01 250 253
Texas Utilities Corp. 7.875% 3/1/23 110 107
Texas Utilities Corp. 8.25% 4/1/04 100 105
Virginia Electric & Power Co. 6.625% 4/1/03 200 195
------
4,955
------
- --------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $40,887) 40,533
- --------------------------------------------------------------------------------------------------------
FOREIGN & INTERNATIONAL AGENCY BONDS (Dollar Denominated) (4.6%)
- --------------------------------------------------------------------------------------------------------
CANADA (1.4%)
Province of British Columbia 7.00% 1/15/03 170 171
Province of Manitoba 8.75% 5/15/01 500 538
Province of Manitoba 9.25% 4/1/20 120 143
Province of Manitoba 9.50% 10/1/00 130 142
Province of Ontario 7.375% 1/27/03 110 112
Province of Ontario 7.75% 6/4/02 200 209
Province of Saskatchewan 7.125% 3/15/08 200 198
Province of Saskatchewan 8.00% 7/15/04 400 419
------
1,932
------
WORLD BANKS (0.4%)
European Investment Bank 8.875% 3/1/01 225 244
InterAmerican Development Bank 8.50% 3/15/11 130 145
International Bank for Reconstruction and Development 12.375% 10/15/02 175 222
------
611
------
</TABLE>
8
<PAGE> 65
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
FACE MARKET
INTEREST MATURITY AMOUNT VALUE*
RATE DATE (000) (000)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OTHER (2.8%)
Grand Metropolitan Investments 9.00% 8/15/11 $ 150 $ 174
Hanson Overseas 7.375% 1/15/03 400 406
Republic of Indonesia 7.75% 8/1/06 150 150
KFW International Finance 7.625% 2/15/04 300 310
KFW International Finance 8.85% 6/15/99 425 449
KFW International Finance 9.125% 5/15/01 200 219
National Westminster Bancorp Inc. 9.375% 11/15/03 350 394
Noranda, Inc. 8.625% 7/15/02 370 394
Philips Electronics NV 8.375% 9/15/06 400 427
Republic of Portugal 5.75% 10/8/03 250 235
Kingdom of Thailand 8.25% 3/15/02 700 738
------
3,896
------
- --------------------------------------------------------------------------------------------------------
TOTAL FOREIGN & INTERNATIONAL AGENCY BONDS
(COST $6,474) 6,439
- --------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.0%)
- --------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations
in a Pooled Cash Account
(COST $1,419) 5.74% 10/1/96 1,419 1,419
- --------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.8%)
(COST $139,798) 139,228
- --------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.2%)
- ---------------------------------------------------------------------------------------------------------
Other Assets--Note C 2,216
Liabilities (1,968)
------
248
- --------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------
Applicable to 13,554,654 outstanding shares of beneficial interest
(unlimited authorization--no par value) $139,476
========================================================================================================
NET ASSET VALUE PER SHARE $10.29
========================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
MTN--Medium-Term Note.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 1996, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $ 140,856 $10.39
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note D (810) (0.06)
Unrealized Depreciation of Investments--Note E (570) (0.04)
- --------------------------------------------------------------------------------------------------------
NET ASSETS $139,476 $10.29
========================================================================================================
</TABLE>
9
<PAGE> 66
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
FACE MARKET
INTEREST MATURITY AMOUNT VALUE*
HIGH YIELD BOND PORTFOLIO RATE DATE (000) (000)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORPORATE BONDS (95.1%)
- --------------------------------------------------------------------------------------------------------
BASIC INDUSTRIES (22.0%)
American Standard Inc. 9.875% 6/1/01 $ 200 $ 210
Bell & Howell Co. 9.25% 7/15/00 100 101
Collins & Aikman Products Co. 11.50% 4/15/06 400 421
Coltec Industries, Inc. 9.75% 4/1/00 200 207
Dan River Inc. 10.125% 12/15/03 150 149
Day International Group Inc. 11.125% 6/1/05 200 209
Dominion Textile (USA) Inc. 9.25% 4/1/06 200 199
Envirosource, Inc. 9.75% 6/15/03 200 190
Exide Corp. 10.00% 4/15/05 200 205
Great Lakes Carbon Corp. 10.00% 1/1/06 100 105
Hayes Wheels International, Inc. 11.00% 7/15/06 300 316
Howmet Corp. 10.00% 12/1/03 125 134
Iron Mountain Inc. 10.125% 10/1/06 270 275
Koppers Industries, Inc. 8.50% 2/1/04 200 192
Lear Corp. 9.50% 7/15/06 200 207
Mark IV Industries, Inc. 8.75% 4/1/03 100 102
Owens Illinois, Inc. 11.00% 12/1/03 300 328
Penda Industries 10.75% 3/1/04 100 97
Portola Packaging, Inc. 10.75% 10/1/05 50 53
Schuller International Group, Inc. 10.875% 12/15/04 150 164
Specialty Equipment Cos., Inc. 11.375% 12/1/03 50 54
Tultex Corp. 10.625% 3/15/05 125 131
UCAR Global Enterprises, Inc. 12.00% 1/15/05 300 342
Walbro Corp. 9.875% 7/15/05 300 306
Wolverine Tube, Inc. 10.125% 9/1/02 200 212
------
4,909
------
CABLE (4.9%)
CableVision Systems Corp. 9.25% 11/1/05 150 145
Comcast Corp. 9.125% 10/15/06 400 398
Galaxy Telecom, LP 12.375% 10/1/05 100 107
Lenfest Communications, Inc. 8.375% 11/1/05 150 141
Rifkin Acquisition Partners, LLP 11.125% 1/15/06 200 206
Tele-Communications, Inc. 9.25% 1/15/23 100 97
------
1,094
------
CHEMICALS (8.5%)
Agricultural Minerals & Chemicals 10.75% 9/30/03 250 265
Arcadian Partners, LP 10.75% 5/1/05 200 220
Borden Chemicals & Plastics, LP 9.50% 5/1/05 100 100
Buckeye Cellulose Corp. 8.50% 12/15/05 150 146
General Chemical 9.25% 8/15/03 100 99
Harris Chemical North America, Inc. 10.75% 10/15/03 300 304
Rexene Corp. 11.75% 12/1/04 300 327
Sterling Chemicals, Inc. 11.75% 8/15/06 200 209
Viridian, Inc. 10.50% 3/31/14 200 221
------
1,891
------
COMPUTERS & ELECTRONIC EQUIPMENT (1.2%)
Advanced Micro Devices, Inc. 11.00% 8/1/03 250 258
------
CONSUMER GOODS & SERVICES (2.7%)
American Safety Razor Co. 9.875% 8/1/05 150 153
Dr. Pepper Bottling Co. 10.25% 2/15/00 150 155
Westpoint Stevens, Inc. 9.375% 12/15/05 300 301
------
609
------
ENERGY & RELATED GOODS & SERVICES (8.7%)
Falcon Drilling Co., Inc. 8.875% 3/15/03 200 196
Flores & Rucks, Inc. 9.75% 10/1/06 100 101
Maxus Energy Corp. 9.375% 11/1/03 100 100
</TABLE>
10
<PAGE> 67
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
FACE MARKET
INTEREST MATURITY AMOUNT VALUE*
RATE DATE (000) (000)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
J. Ray McDermott, S.A. 9.375% 7/15/06 $300 $ 304
Mesa Operating Co. 10.625% 7/1/06 300 315
Noble Drilling Corp. 9.25% 10/1/03 150 155
Oryx Energy Co. 8.125% 10/15/05 200 197
Plains Resources, Inc. 10.25% 3/15/06 300 312
Seagull Energy Corp. 8.625% 8/1/05 250 248
------
1,928
------
FINANCE (0.6%)
Contifinancial Corp. 8.375% 8/15/03 125 125
------
FOOD & LODGING (2.3%)
Foodbrands America, Inc. 10.75% 5/15/06 100 103
John Q. Hammons Hotel, LP 8.875% 2/15/04 50 48
PMI Acquisition Corp. 10.25% 9/1/03 300 306
Red Roof Inns, Inc. 9.625% 12/15/03 50 49
------
506
------
GROCERY STORES (4.2%)
Bruno's 10.50% 8/1/05 300 307
Dominick's Finer Foods, Inc. 10.875% 5/1/05 100 108
Grand Union Co. 12.00% 9/1/04 300 303
Smith's Food & Drug Centers, Inc. 11.25% 5/15/07 200 213
------
931
------
HEALTH CARE (8.5%)
Abbey Healthcare Group, Inc. 9.50% 11/1/02 150 155
Beverly Enterprises Inc. 9.00% 2/15/06 200 194
Genesis Health Ventures Inc. 9.75% 6/15/05 200 206
Grancare Inc. 9.375% 9/15/05 200 210
Integrated Health Services, Inc. 9.625% 5/31/02 200 204
OrNda Healthcorp 11.375% 8/15/04 260 290
Owens & Minor, Inc. 10.875% 6/1/06 200 209
Quorum Health Group, Inc. 8.75% 11/1/05 200 202
Tenet Healthcare Corp. 10.125% 3/1/05 200 217
------
1,887
------
HOME BUILDING & REAL ESTATE (1.4%)
Continental Homes Holdings Corp. 10.00% 4/15/06 100 99
Triangle Pacific Corp. 10.50% 8/1/03 150 156
Del Webb Corp. 9.00% 2/15/06 50 48
------
303
------
MEDIA & COMMUNICATIONS (8.1%)
American Radio Systems Corp. 9.00% 2/1/06 200 194
Chancellor Broadcasting Co. 9.375% 10/1/04 200 198
Jacor Communications, Inc. 10.125% 6/15/06 100 103
MobileMedia Communications, Inc. 9.375% 11/1/07 150 120
Muzak LP Capital Corp. 10.00% 10/1/03 210 211
Paging Network, Inc. 10.125% 8/1/07 200 203
Time Warner Inc. 7.48% 1/15/08 100 94
Viacom International Inc. 8.00% 7/7/06 300 280
Westinghouse Electric Corp. 8.375% 6/15/02 50 51
World Color Press 9.125% 3/15/03 200 198
Young Broadcasting, Inc. 10.125% 2/15/05 150 149
------
1,801
------
METAL (9.8%)
AK Steel Holding Corp. 10.75% 4/1/04 250 273
Acme Metals Inc. 12.50% 8/1/02 250 265
Algoma Steel Inc. 12.375% 7/15/05 200 209
Armco Inc. 9.375% 11/1/00 170 170
Bethlehem Steel Corp. 10.375% 9/1/03 100 105
GS Technologies Operating Co. Inc. 12.25% 10/1/05 150 159
Kaiser Aluminum & Chemical Corp. 9.875% 2/15/02 200 203
NS Group Inc. 13.50% 7/15/03 250 250
</TABLE>
11
<PAGE> 68
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
FACE MARKET
INTEREST MATURITY AMOUNT VALUE*
HIGH YIELD BOND PORTFOLIO RATE DATE (000) (000)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Northwestern Steel & Wire Co. 9.50% 6/15/01 $ 200 $ 193
Oregon Steel Mills, Inc. 11.00% 6/15/03 150 158
Ryerson Tull, Inc. 9.125% 7/15/06 200 201
------
2,186
------
PAPER (9.7%)
Container Corp. of America 9.75% 4/1/03 200 203
Doman Industries, Ltd. 8.75% 3/15/04 200 186
Domtar Inc. 8.75% 8/1/06 200 204
Fort Howard Corp. 9.00% 2/1/06 300 295
Quno Corp. 9.125% 5/15/05 100 100
Repap New Brunswick, Inc. 10.625% 4/15/05 100 101
Riverwood International Corp. 10.875% 4/1/08 150 148
SD Warren Co. 12.00% 12/15/04 250 269
Stone Consolidated Corp. 10.25% 12/12/00 200 212
Stone Container Corp. 9.875% 2/1/01 150 151
Tembec Finance Corp. 9.875% 9/30/05 300 290
------
2,159
------
UTILITIES (2.5%)
Amerigas Partners, LP 10.125% 4/15/07 100 103
El Paso Electric Co. 8.90% 2/1/06 150 152
Long Island Lighting Co. 9.00% 11/1/22 100 94
Texas-New Mexico Power Co. 10.75% 9/15/03 200 210
------
559
------
- --------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $20,827) 21,146
- --------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (3.4%)
- --------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations
in a Pooled Cash Account
(COST $755) 5.74% 10/1/96 755 755
- --------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.5%)
(COST $21,582) 21,901
- --------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.5%)
- --------------------------------------------------------------------------------------------------------
Other Assets--Note C 843
Liabilities (499)
-----
344
- --------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------
Applicable to 2,191,887 outstanding shares of beneficial interest
(unlimited authorization--no par value) $22,245
========================================================================================================
NET ASSETS VALUE PER SHARE $10.15
========================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 1996, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $21,902 $ 9.99
Undistributed Net Investment Income -- --
Accumulated Net Realized Gains 24 .01
Unrealized Appreciation--Note E 319 .15
- --------------------------------------------------------------------------------------------------------
NET ASSETS $22,245 $10.15
========================================================================================================
</TABLE>
12
<PAGE> 69
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
MARKET
VALUE*
BALANCED PORTFOLIO SHARES (000)
- ---------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (64.1%)
- ---------------------------------------------------------------------------------
BASIC MATERIALS (12.7%)
Aluminum Co. of America 57,000 $ 3,363
British Steel PLC ADR 89,400 2,727
Cabot Corp. 47,200 1,316
Dow Chemical Co. 62,000 4,975
E.I. du Pont de Nemours & Co. 49,300 4,351
International Paper Co. 53,000 2,252
Kimberly-Clark Corp. 60,600 5,340
Lubrizol Corp. 72,000 2,070
Norsk Hydro AS ADR 21,900 1,029
PPG Industries, Inc. 38,200 2,077
Phelps Dodge Corp. 46,000 2,950
Reynolds Metals Co. 31,700 1,621
Temple-Inland Inc. 44,000 2,321
Westvaco Corp. 74,300 2,201
Willamette Industries, Inc. 30,400 1,976
Witco Chemical Corp. 38,000 1,249
------
41,818
------
CAPITAL GOODS & CONSTRUCTION (5.8%)
General Electric Co. 81,600 7,426
Honeywell, Inc. 65,800 4,154
Northrop Grumman Corp. 64,500 5,176
United Technologies Corp. 18,800 2,258
------
19,014
------
CONSUMER CYCLICAL (5.9%)
Brunswick Corp. 56,000 1,344
Chrysler Corp. 90,000 2,576
Eastman Kodak Co. 20,100 1,578
Ford Motor Co. 146,031 4,563
General Motors Corp. 85,139 4,087
May Department Stores Co. 33,800 1,643
J.C. Penney Co., Inc. 36,000 1,948
Sears, Roebuck & Co. 42,052 1,882
------
19,621
------
CONSUMER STAPLES (1.4%)
General Mills, Inc. 22,000 1,328
Philip Morris Cos., Inc. 22,000 1,974
SuperValu Inc. 51,900 1,427
------
4,729
------
ENERGY (8.1%)
Amerada Hess Corp. 32,000 1,692
Amoco Corp. 35,400 2,496
Ashland Inc. 23,400 930
Atlantic Richfield Co. 10,000 1,275
Chevron Corp. 42,600 2,668
Exxon Corp. 43,300 3,605
Kerr-McGee Corp. 20,500 1,248
Mobil Corp. 7,900 914
Pennzoil Co. 10,700 566
Phillips Petroleum Co. 28,800 1,231
Repsol SA ADR 60,400 2,001
Royal Dutch Petroleum Co. ADR 13,700 2,139
Texaco Inc. 27,000 2,484
Total SA ADR 46,056 1,802
Unocal Corp. 49,587 1,785
------
26,836
------
FINANCIAL (11.8%)
Allstate Corp. 127,064 6,258
Banc One Corp. 58,971 2,418
The Bank of New York Co., Inc. 60,800 1,786
BankAmerica Corp. 38,000 3,121
Citicorp 78,100 7,078
CoreStates Financial Corp. 83,540 3,613
First Bank System, Inc. 95,000 6,353
First Union Corp. 51,876 3,463
Jefferson-Pilot Corp. 31,500 1,630
Wachovia Corp. 64,800 3,208
------
38,928
------
HEALTH CARE (7.8%)
Abbott Laboratories 65,600 3,231
American Home Products Corp. 74,000 4,717
C.R. Bard, Inc. 54,000 1,681
Baxter International, Inc. 67,100 3,137
Bristol-Myers Squibb Co. 33,200 3,200
Johnson & Johnson 76,000 3,895
Pfizer, Inc. 34,000 2,690
Rhone-Poulenc SA ADR 67,593 1,893
Zeneca Group ADR 16,399 1,218
------
25,662
------
TECHNOLOGY (1.5%)
Xerox Corp. 90,000 4,826
------
TRANSPORT & SERVICES (3.5%)
Canadian National Railway Co. 54,000 1,107
Canadian Pacific Ltd. 120,500 2,787
Conrail, Inc. 22,000 1,592
Norfolk Southern Corp. 15,400 1,407
Union Pacific Corp. 63,800 4,673
------
11,566
------
UTILITIES (4.9%)
AT&T Corp. 46,000 2,404
Carolina Power & Light Co. 45,000 1,552
CINergy Corp. 48,000 1,482
Equitable Resources, Inc. 23,000 656
NYNEX Corp. 15,600 679
Pacific Gas & Electric Co. 66,000 1,435
PacifiCorp 72,000 1,485
Pinnacle West Capital Corp. 44,000 1,303
SBC Communications Inc. 24,500 1,179
Sonat, Inc. 22,000 974
Texas Utilities Co. 56,200 2,227
U S WEST Communications Group 22,100 657
------
16,033
------
MISCELLANEOUS (0.7%)
Minnesota Mining &
Manufacturing Co. 35,400 2,474
------
- ---------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $144,458) 211,507
- ---------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (1.1%)
- ---------------------------------------------------------------------------------
Alumax, Inc. $4.00 6,334 875
Bethlehem Steel Corp. $3.50 10,000 392
Cyprus Amax Minerals Co. $4.00 11,666 604
Reynolds Metals Co. $3.31 14,100 649
Sun Co., Inc. $1.80 44,000 1,056
- ---------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $3,517) 3,576
- ---------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 70
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
BALANCED PORTFOLIO (000) (000)
- ---------------------------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS (20.8%)
- ---------------------------------------------------------------------------------
ASSET-BACKED (0.3%)
American Express Credit Europe
5.375%, 9/15/00 $ 1,000 $ 953
------
FINANCE (6.5%)
BankAmerica Corp.
7.20%, 4/15/06 1,000 986
Banponce Corp.
6.805%, 5/17/00 2,000 1,995
Chase Manhattan Corp.
8.625%, 5/1/02 1,000 1,072
Citicorp
7.625%, 5/1/05 1,000 1,017
Comerica, Inc.
7.25%, 8/1/07 1,500 1,478
Dean Witter Discover & Co.
6.75%, 10/15/13 1,000 904
First Chicago NBD Corp.
7.125%, 5/15/07 1,500 1,469
First Union Corp.
7.50%, 4/15/35 1,000 1,028
Ford Motor Credit Corp.
6.25%, 12/8/05 1,000 927
General Motors Acceptance
Corp. MTN
8.50%, 1/1/03 1,000 1,065
John Hancock
7.375%, 2/15/24 1,000 935
Lumbermans Mutual Casualty
9.15%, 7/1/26 1,000 1,044
NationsBank Corp.
7.80%, 9/15/16 1,000 1,003
Ohio National Life
8.50%, 5/15/26 2,000 2,009
Republic New York Corp.
7.75%, 5/15/09 1,000 1,028
Security Benefit Life
8.75%, 5/15/16 1,500 1,532
Wachovia Corp.
6.375%, 2/1/09 1,000 914
Wells Fargo & Co.
6.125%, 11/1/03 1,000 930
------
21,336
------
INDUSTRIAL (6.9%)
Abbott Laboratories
6.80%, 5/15/05 1,000 980
Air Products & Chemicals, Inc.
7.375%, 5/1/05 1,000 1,014
Boeing Co.
8.75%, 8/15/21 1,000 1,135
Browning-Ferris Industries, Inc.
6.375%, 1/15/08 1,000 927
Coca-Cola Enterprises, Inc.
8.50%, 2/1/22 1,000 1,091
Exxon Capital Corp.
6.00%, 7/1/05 1,000 933
Georgia-Pacific Corp.
9.625%, 3/15/22 1,000 1,080
Eli Lilly & Co.
7.125%, 6/1/25 1,000 954
Lockheed Martin Corp.
7.65%, 5/1/16 1,000 1,004
McDonald's Corp.
7.375%, 7/15/33 1,000 953
Petro-Canada
7.875%, 6/15/26 1,000 1,011
Procter & Gamble Co. ESOP
9.36%, 1/1/21 1,000 1,186
Sears, Roebuck & Co.
9.375%, 11/1/11 1,000 1,167
TRW, Inc.
9.375%, 4/15/21 1,000 1,166
Temple-Inland Inc.
9.00%, 5/1/01 1,000 1,077
Union Pacific Corp.
7.00%, 2/1/16 1,000 926
United Parcel Service
8.375%, 4/1/20 2,000 2,204
United Technologies Corp.
8.75%, 3/1/21 1,000 1,129
WMX Technologies Inc.
6.375%, 12/1/03 1,000 961
Wal-Mart Stores, Inc.
7.25%, 6/1/13 1,000 978
Zeneca Group
7.00%, 11/15/23 1,000 925
------
22,801
------
UTILITIES (7.1%)
AT&T Corp.
7.75%, 3/1/07 1,000 1,039
Atlantic City Electric
7.00%, 9/1/23 1,000 890
Baltimore Gas & Electric Co.
5.50%, 4/15/04 1,000 908
BellSouth Telecommunications
7.50%, 6/15/33 1,000 964
Carolina Power & Light Co.
6.75%, 10/1/02 1,000 985
Central Power & Light
6.625%, 7/1/05 1,000 960
Duke Power Co.
7.00%, 7/1/33 1,000 901
Florida Power Corp.
6.875%, 2/1/08 1,850 1,777
Florida Power & Light Co.
7.00%, 9/1/25 2,000 1,796
GTE Southwest Inc.
6.00%, 1/15/06 1,000 919
Illinois Bell Telephone Co.
6.625%, 2/1/25 1,000 877
Indiana Bell Telephone Co.
7.30%, 8/15/26 1,000 981
New Jersey Bell Telephone Co.
8.00%, 6/1/22 1,000 1,049
New York Telephone Co.
7.25%, 2/15/24 1,000 928
Pacific Bell Telephone Co.
7.125%, 3/15/26 1,000 943
Pacific Gas & Electric Co.
6.25%, 8/1/03 1,000 957
PacifiCorp
6.625%, 6/1/07 1,000 948
</TABLE>
14
<PAGE> 71
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- ---------------------------------------------------------------------------------
<S> <C> <C>
Southern California Gas Co.
5.75%, 11/15/03 $1,000 $ 924
Texas Utilities Electric Co.
7.875%, 4/1/24 1,000 969
Union Electric Co.
7.375%, 12/15/04 1,000 1,014
U S WEST Communications Group
6.875%, 9/15/33 1,000 874
Virginia Electric & Power Co.
8.00%, 3/1/04 1,000 1,048
Wisconsin Electric Power Co.
7.70%, 12/15/27 1,000 982
------
23,633
------
- ---------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $69,745) 68,723
- ---------------------------------------------------------------------------------
TAXABLE MUNICIPAL SECURITIES (0.3%)
Stanford Univ.
7.65%, 6/15/26
(COST $992) 1,000 1,014
- ---------------------------------------------------------------------------------
FOREIGN BONDS (DOLLAR DENOMINATED) (2.1%)
- ---------------------------------------------------------------------------------
ABN AMRO Holding NV
7.25%, 5/31/05 1,000 1,001
Italy Global Bond
6.875%, 9/27/23 1,000 910
Japanese Financial Corp.
7.375%, 4/27/05 1,000 1,020
KFW International Finance
7.20%, 3/15/14 2,000 1,977
Philips Electronics NV
7.75%, 4/15/04 1,000 1,021
Toronto Dominion Bank
6.45%, 1/15/09 1,000 929
- ---------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(COST $6,925) 6,858
- ---------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS (9.5%)
- ---------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS (6.1%)
U.S. Treasury Bonds
7.25%, 5/15/16 9,000 9,195
7.50%, 11/15/16 6,000 6,284
U.S. Treasury Notes
6.375%, 8/15/02 3,500 3,476
6.50%, 8/15/05 1,000 987
------
19,942
------
FEDERAL AGENCY OBLIGATION (0.3%)
Federal Home Loan Bank
7.66%, 7/20/04 1,000 1,045
------
MORTGAGE PASS-THROUGH SECURITIES (3.1%)
Federal Home Loan Mortgage Corp.
6.50%, 8/1/25-4/1/26 8,952 8,421
Government National Mortgage Assn.
6.50%, 3/15/26 1,999 1,870
------
10,291
------
- ---------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (Cost $30,942) 31,278
- ---------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.3%)
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash Account
5.74%, 10/1/96
(COST $4,560) 4,560 $ 4,560
- ---------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.2%)
(COST $261,139) 327,516
- ---------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.8%)
- ---------------------------------------------------------------------------------
Other Assets--Notes C and F 3,010
Liabilities--Note F (452)
------
2,558
- ---------------------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------------------
Applicable to 22,289,103 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $ 330,074
=================================================================================
NET ASSET VALUE PER SHARE $14.81
=================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
ADR--American Depository Receipt.
MTN--Medium-Term Note.
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
AT SEPTEMBER 30, 1996, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $246,843 $11.08
Undistributed Net
Investment Income 4,306 .19
Accumulated Net
Realized Gains 12,548 .56
Unrealized Appreciation
of Investments--Note E 66,377 2.98
- ---------------------------------------------------------------------------------
NET ASSETS $330,074 $14.81
=================================================================================
</TABLE>
15
<PAGE> 72
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
MARKET
VALUE*
EQUITY INDEX PORTFOLIO SHARES (000)
- ---------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (97.4%)(1)
- ---------------------------------------------------------------------------------
General Electric Co. 125,768 $ 11,445
The Coca-Cola Co. 190,362 9,685
Exxon Corp. 94,715 7,885
Merck & Co., Inc. 92,828 6,533
AT&T Corp. 122,564 6,404
Royal Dutch Petroleum Co. ADR 40,895 6,385
- - Microsoft Corp. 45,475 5,991
Intel Corp. 62,414 5,953
Philip Morris Cos., Inc. 62,423 5,602
Johnson & Johnson 101,554 5,205
Procter & Gamble Co. 52,122 5,082
International Business
Machines Corp. 40,216 5,007
Wal-Mart Stores, Inc. 174,242 4,596
Pfizer, Inc. 48,868 3,867
Hewlett-Packard Co. 77,748 3,790
E.I. du Pont de Nemours & Co. 42,620 3,761
Bristol-Myers Squibb Co. 38,375 3,698
American International Group, Inc. 36,090 3,636
Mobil Corp. 29,849 3,455
PepsiCo, Inc. 119,104 3,365
Citicorp 36,916 3,345
The Walt Disney Co. 51,410 3,258
Chevron Corp. 49,630 3,108
American Home Products Corp. 48,350 3,082
- Cisco Systems, Inc. 49,226 3,052
Abbott Laboratories 59,728 2,942
Federal National Mortgage Assn. 82,996 2,894
GTE Corp. 73,935 2,847
Ford Motor Co. 89,658 2,802
BellSouth Corp. 75,504 2,794
General Motors Corp. 57,182 2,745
Eli Lilly & Co. 41,702 2,690
Chase Manhattan Corp. 33,187 2,659
Amoco Corp. 37,597 2,650
McDonald's Corp. 53,393 2,529
The Boeing Co. 26,348 2,490
Gillette Co. 33,878 2,443
Motorola, Inc. 45,156 2,331
BankAmerica Corp. 27,513 2,259
SBC Communications Inc. 46,265 2,226
Minnesota Mining &
Manufacturing Co. 31,809 2,223
Ameritech Corp. 41,636 2,191
- Oracle Corp. 49,503 2,104
Home Depot, Inc. 36,330 2,066
Eastman Kodak Co. 25,706 2,018
Bell Atlantic Corp. 33,069 1,980
NationsBank Corp. 22,202 1,929
Columbia/HCA Healthcare Corp. 33,805 1,923
Unilever NV ADR 12,164 1,917
Kimberly-Clark Corp. 21,294 1,876
Wells Fargo & Co. 7,177 1,866
Texaco Inc. 20,100 1,849
Travelers Group Inc. 36,298 1,783
Schering-Plough Corp. 28,072 1,726
American Express Co. 36,257 1,677
Allstate Corp. 33,758 1,663
Computer Associates
International, Inc. 27,694 1,655
Monsanto Co. 44,605 1,628
Chrysler Corp. 56,036 1,604
Pharmacia & Upjohn, Inc. 38,589 1,592
Schlumberger Ltd. 18,500 1,563
Atlantic Richfield Co. 12,169 1,552
Emerson Electric Co. 16,940 1,527
Dow Chemical Co. 18,677 1,499
Campbell Soup Co. 18,953 1,478
NYNEX Corp. 33,145 1,442
First Union Corp. 21,486 1,434
Anheuser-Busch Co., Inc. 37,870 1,425
AlliedSignal Inc. 21,506 1,417
Banc One Corp. 33,835 1,387
First Data Corp. 16,932 1,382
Lockheed Martin Corp. 15,148 1,365
Union Pacific Corp. 18,498 1,355
Warner-Lambert Co. 20,454 1,350
MCI Communications Corp. 52,522 1,339
Sears, Roebuck & Co. 29,707 1,329
Nike, Inc. Class B 10,890 1,323
Federal Home Loan
Mortgage Corp. 13,514 1,323
Xerox Corp. 24,647 1,322
Sara Lee Corp. 36,654 1,310
COMPAQ Computer Corp. 20,302 1,302
- Amgen, Inc. 20,099 1,269
- J.P. Morgan & Co., Inc. 14,243 1,266
Sprint Corp. 32,513 1,264
WMX Technologies Inc. 37,419 1,230
Medtronic, Inc. 18,064 1,158
Southern Co. 50,925 1,152
Norwest Corp. 28,135 1,150
Time Warner, Inc. 29,751 1,149
Northern Telecom Ltd. 19,548 1,129
Caterpillar, Inc. 14,783 1,114
United Technologies Corp. 9,262 1,113
Kellogg Co. 16,129 1,111
Pacific Telesis Group 32,339 1,087
First Chicago NBD Corp. 23,929 1,083
U S WEST Communications Group 36,029 1,072
The Seagram Co. Ltd. 28,419 1,062
- AirTouch Communications 37,678 1,041
Raytheon Co. 17,960 999
Burlington Northern Santa Fe Corp. 11,566 976
Baxter International, Inc. 20,621 964
International Paper Co. 22,674 964
Automatic Data Processing, Inc. 22,036 961
Colgate-Palmolive Co. 11,059 961
- Viacom International Class B 26,867 954
H.J. Heinz Co. 28,111 949
Rockwell International Corp. 16,509 931
J.C. Penney Co., Inc. 17,056 923
May Department Stores Co. 18,836 916
ConAgra, Inc. 18,351 904
Norfolk Southern Corp. 9,663 883
Fleet Financial Group, Inc. 19,762 879
The Bank of New York Co., Inc. 29,898 878
McDonnell Douglas Corp. 16,638 874
- Sun Microsystems, Inc. 13,950 865
PNC Bank Corp. 25,757 860
General Re Corp. 6,054 858
</TABLE>
16
<PAGE> 73
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------------------------------
<S> <C> <C>
Phillips Petroleum Co. 20,009 $ 855
Merrill Lynch & Co., Inc. 12,900 847
Deere & Co. 19,538 821
CPC International, Inc. 10,899 816
CSX Corp. 16,108 813
Albertson's, Inc. 19,199 809
Aetna Inc. 11,375 801
Archer-Daniels-Midland Co. 41,532 799
Texas Instruments, Inc. 14,361 792
Enron Corp. 19,259 785
Aluminum Co. of America 13,245 781
- - Boston Scientific Corp. 13,442 773
The Dun & Bradstreet Corp. 12,934 771
PPG Industries, Inc. 14,025 763
- - 3 Com Corp. 12,700 762
KeyCorp 17,308 762
Gannett Co., Inc. 10,696 753
- - CUC International, Inc. 18,739 747
- - Tele-Communications, Inc. Class A 49,603 738
CoreStates Financial Corp. 17,036 737
First Bank System, Inc. 10,900 729
General Mills, Inc. 12,067 729
Duke Power Co. 15,601 727
National City Corp. 16,698 703
SunTrust Banks, Inc. 16,990 697
Weyerhaeuser Co. 15,102 697
Dean Witter Discover & Co. 12,582 692
Walgreen Co. 18,628 689
Pacific Gas & Electric Co. 31,605 687
CIGNA Corp. 5,689 682
Corning, Inc. 17,448 680
Barrick Gold Corp. 26,801 673
Loews Corp. 8,700 673
Unocal Corp. 18,699 673
Texas Utilities Co. 16,866 668
Bank of Boston Corp. 11,526 667
Illinois Tool Works, Inc. 9,208 664
Boatmen's Bancshares, Inc. 11,878 662
Tenneco, Inc. 12,961 650
AMP, Inc. 16,598 643
The Gap, Inc. 21,946 634
Wachovia Corp. 12,782 633
- - WorldCom, Inc. 29,100 622
- - HFS Inc. 9,300 622
The Chubb Corp. 13,218 608
- - U S WEST Media Group 35,729 603
Honeywell, Inc. 9,516 601
Household International, Inc. 7,270 598
- - Toys R Us, Inc. 20,518 598
Pitney Bowes, Inc. 11,327 598
Edison International 33,394 597
FPL Group, Inc. 13,746 595
Westinghouse Electric Corp. 31,800 592
Hershey Foods Corp. 11,690 587
American General Corp. 15,472 584
MBNA Corp. 16,707 581
United Healthcare Corp. 13,888 578
Mellon Bank Corp. 9,730 577
American Electric Power Co., Inc. 14,100 573
Morgan Stanley Group, Inc. 11,500 572
Occidental Petroleum Corp. 24,369 570
American Brands, Inc. 13,139 555
- - W.R. Grace & Co. 7,392 554
Georgia-Pacific Corp. 6,982 552
Ralston-Ralston Purina Group 8,064 552
- - AMR Corp. 6,893 549
The Goodyear Tire & Rubber Co. 11,749 542
Service Corp. International 17,724 536
Marriott International 9,703 535
Marsh & McLennan Cos., Inc. 5,495 534
Mattel, Inc. 20,622 534
Dayton-Hudson Corp. 16,158 533
Lowe's Cos., Inc. 13,035 533
Textron, Inc. 6,260 532
- - Federated Department Stores 15,800 529
- - Dell Computer 6,800 528
Wrigley, (Wm.) Jr. Co. 8,729 526
ITT Hartford Group, Inc. 8,888 524
Dominion Resources, Inc. 13,496 509
Alcan Aluminium Ltd. 16,912 507
Praxair, Inc. 11,721 504
Avon Products, Inc. 10,094 501
Tyco International Ltd. 11,606 501
Public Service Enterprise
Group Inc. 18,368 491
Barnett Banks, Inc. 14,514 490
Air Products & Chemicals, Inc. 8,403 489
Consolidated Edison Co. of
New York, Inc. 17,555 487
Alco Standard Corp. 9,738 486
Micron Technology Inc. 15,897 485
U.S. Bancorp 12,264 483
Bankers Trust New York Corp. 6,128 482
- - Tellabs, Inc. 6,798 479
USX-Marathon Group 21,719 470
Fifth Third Bancorp 8,000 464
Sysco Corp. 13,790 464
PacifiCorp 22,372 461
Entergy Corp. 17,050 460
TRW, Inc. 4,943 460
Union Carbide Corp. 10,018 457
Comerica, Inc. 8,800 453
Crown Cork & Seal Co., Inc. 9,780 451
- - Seagate Technology 8,000 447
Halliburton Co. 8,602 444
Conrail, Inc. 6,128 444
Morton International, Inc. 11,091 441
Houston Industries, Inc. 19,904 440
Aon Corp. 8,100 439
American Stores Co. 10,980 439
- - Computer Sciences Corp. 5,682 437
Hercules, Inc. 7,978 437
Delta Air Lines, Inc. 5,971 430
- - Digital Equipment Corp. 11,843 423
Becton, Dickinson & Co. 9,560 423
- - The Kroger Co. 9,451 423
Placer Dome, Inc. 17,883 422
Burlington Resources, Inc. 9,430 418
Hilton Hotels Corp. 14,636 415
UST Inc. 13,993 415
Dover Corp. 8,630 412
Central & South West Corp. 15,826 411
</TABLE>
17
<PAGE> 74
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
MARKET
VALUE*
EQUITY INDEX PORTFOLIO SHARES (000)
- ---------------------------------------------------------------------------------
<S> <C> <C>
Dresser Industries, Inc. 13,787 $ 410
Freeport-McMoRan Copper &
Gold Inc. Class B 13,100 409
Unicom Corp. 16,254 408
Genuine Parts Co. 9,246 405
Browning-Ferris Industries, Inc. 16,129 403
Winn Dixie Stores, Inc. 11,526 402
Green Tree Financial Corp. 10,200 400
ALLTEL Corp. 14,342 400
Carolina Power & Light Co. 11,553 399
Williams Cos., Inc. 7,810 398
PECO Energy Corp. 16,585 394
The Limited, Inc. 20,586 394
Ingersoll-Rand Co. 8,267 393
- - Cabletron Systems, Inc. 5,743 392
PanEnergy Corp. 11,287 391
- - EMC Corp. 17,200 389
- - ITT Corp. 8,888 388
Inco Ltd. 12,607 388
- - Bay Networks Inc. 14,200 387
Consolidated Natural Gas Co. 7,188 385
Fluor Corp. 6,242 384
Kmart Corp. 37,253 382
Pioneer Hi Bred International 6,288 380
- - Applied Materials, Inc. 13,672 378
The Quaker Oats Co. 10,259 376
R.R. Donnelley & Sons Co. 11,627 375
Amerada Hess Corp. 7,078 374
The Clorox Co. 3,888 373
International Flavors &
Fragrances, Inc. 8,407 367
- - Tenet Healthcare Corp. 16,397 365
CINergy Corp. 11,773 363
Salomon, Inc. 7,883 360
Masco Corp. 11,929 358
Newell Co. 11,875 356
Eaton Corp. 5,900 356
Newmont Mining Corp. 7,529 356
Tribune Co. 4,551 355
Times Mirror Co. Class A 7,938 353
St. Paul Cos., Inc. 6,355 353
Northrop Grumman Corp. 4,362 350
Cooper Industries, Inc. 8,084 350
UNUM Corp. 5,447 349
Transamerica Corp. 4,988 349
Melville Corp. 7,862 347
Eastman Chemical 5,894 344
Lincoln National Corp. 7,787 342
- - Federal Express Corp. 4,298 341
Nucor Corp. 6,669 338
Champion International Corp. 7,304 335
SAFECO Corp. 9,480 329
Baker Hughes, Inc. 10,754 327
Rohm & Haas Co. 4,963 325
Coastal Corp. 7,863 324
General Dynamics Corp. 4,680 322
The McGraw-Hill Cos. 7,534 321
Phelps Dodge Corp. 4,974 319
DTE Energy Co. 10,986 308
Providian Corp. 7,108 306
Harcourt General, Inc. 5,485 303
Sherwin-Williams Co. 6,462 300
- - Price/Costco Inc. 14,618 300
MGIC Investment Corp. 4,400 296
- - Novell, Inc. 26,845 295
Allegheny Teledyne Inc. 12,932 293
Interpublic Group of Cos., Inc. 6,166 291
Sonat, Inc. 6,566 291
Baltimore Gas & Electric Co. 11,051 289
- - Silicon Graphics, Inc. 13,039 288
Whirlpool Corp. 5,690 288
Union Electric Co. 7,747 286
VF Corp. 4,730 284
Republic New York Corp. 4,078 282
Great Lakes Chemical Corp. 4,925 281
Jefferson-Pilot Corp. 5,305 275
Dillard Department Stores Class A 8,506 274
Rubbermaid, Inc. 11,167 274
GPU Inc. 8,892 273
Great Western Financial Corp. 10,316 273
W.W. Grainger, Inc. 3,880 273
Willamette Industries, Inc. 4,187 272
Knight-Ridder, Inc. 7,336 271
Dow Jones & Co., Inc. 7,331 271
Black & Decker Corp. 6,512 270
Circuit City Stores, Inc. 7,412 268
PP&L Resources Inc. 12,100 265
Case Corp. 5,400 263
- - General Instrument Corp. 10,400 257
Raychem Corp. 3,424 257
Laidlaw Inc. Class B 23,042 253
- - Ceridian Corp. 5,040 252
Engelhard Corp. 10,933 251
Southwest Airlines Co. 10,988 251
New York Times Co. Class A 7,382 249
Union Camp Corp. 5,075 248
Pall Corp. 8,756 247
- - Humana, Inc. 12,200 247
- - Western Atlas Inc. 3,964 247
Golden West Financial Corp. 4,226 247
Hasbro, Inc. 6,567 244
Torchmark Corp. 5,297 243
Reynolds Metals Co. 4,733 242
Northern States Power Co. 5,154 240
- - St. Jude Medical, Inc. 5,928 239
H.F. Ahmanson & Co. 8,431 236
Deluxe Corp. 6,249 236
Beneficial Corp. 4,084 235
H & R Block, Inc. 7,868 234
Johnson Controls, Inc. 3,118 234
Columbia Gas Systems, Inc. 4,173 234
Mallinckrodt Group, Inc. 5,610 234
Dana Corp. 7,708 233
Tupperware Corp. 4,729 232
Parker Hannifin Corp. 5,495 231
Rite Aid Corp. 6,352 230
Kerr-McGee Corp. 3,774 230
Westvaco Corp. 7,740 229
The Mead Corp. 3,908 229
- - LSI Logic Corp. 9,800 228
- - Andrew Corp. 4,574 228
Nordstrom, Inc. 5,943 226
</TABLE>
18
<PAGE> 75
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------------------------------
<S> <C> <C>
Ohio Edison Co. 11,623 $ 225
Avery Dennison Corp. 4,005 222
Temple-Inland Inc. 4,201 222
- - DSC Communications Corp. 8,650 217
ITT Industries, Inc. 8,988 217
Sigma Aldrich Corp. 3,769 215
- - National Semiconductor Corp. 10,429 210
Wendy's International, Inc. 9,741 209
- - Woolworth Corp. 10,109 209
Apple Computer, Inc. 9,346 207
Brown-Forman Corp. Class B 5,199 203
Liz Claiborne, Inc. 5,424 202
TJX Cos., Inc. 5,586 200
United States Surgical Corp. 4,693 199
Ashland Inc. 4,926 196
Pacific Enterprises 6,420 194
Perkin-Elmer Corp. 3,308 191
The Stanley Works 6,770 190
- - FMC Corp. 2,794 190
Harris Corp. 2,910 190
Louisiana-Pacific Corp. 8,282 188
Allergan, Inc. 4,918 188
Pennzoil Co. 3,537 187
Tandy Corp. 4,597 186
Whitman Corp. 7,963 184
Ryder System, Inc. 6,215 184
The BF Goodrich Co. 4,078 184
Nalco Chemical Co. 5,069 184
USX-U.S. Steel Group 6,378 182
James River Corp. 6,441 178
Manor Care Inc. 4,626 178
- - Fruit of the Loom, Inc. 5,658 175
- - ALZA Corp. 6,409 172
Brunswick Corp. 7,102 170
Armstrong World Industries Inc. 2,701 168
Ecolab, Inc. 4,913 166
USF&G Corp. 8,944 165
General Signal Corp. 3,739 165
Homestake Mining Co. 11,167 163
Paccar, Inc. 2,980 163
American Greetings Corp. Class A 5,678 163
Pep Boys (Manny, Moe & Jack) 4,520 161
Comcast Corp. Class A Special 10,029 154
Maytag Corp. 7,878 154
Cyprus Amax Minerals Co. 7,130 153
- - Advanced Micro Devices, Inc. 10,316 152
Polaroid Corp. 3,453 152
Bausch & Lomb, Inc. 4,116 151
Mercantile Stores Co., Inc. 2,799 151
Reebok International Ltd. 4,286 149
Echlin, Inc. 4,714 148
Giant Food, Inc. Class A 4,319 147
NorAm Energy Corp. 9,850 147
- - Harrah's Entertainment, Inc. 7,857 146
Owens Corning 3,953 146
Lucent Technologies, Inc. 3,100 142
Snap-On Inc. 4,378 141
- - Oryx Energy Co. 7,910 140
- - Biomet, Inc. 8,519 137
Millipore Corp. 3,465 137
Bemis Co., Inc. 3,977 135
SuperValu Inc. 4,888 134
Moore Corp. Ltd. 7,230 133
Harnischfeger Industries Inc. 3,519 133
Worthington Industries, Inc. 6,586 133
C.R. Bard, Inc. 4,183 130
Louisiana Land & Exploration Co. 2,470 130
Battle Mountain Gold Co. Class A 16,724 130
Cooper Tire & Rubber Co. 5,948 129
NICOR, Inc. 3,789 128
Thomas & Betts Corp. 3,102 127
Foster Wheeler Corp. 2,893 127
National Service Industries, Inc. 3,563 125
Sun Co., Inc. 5,405 124
Santa Fe Pacific Gold Corp. 9,693 121
Stone Container Corp. 7,579 118
Boise Cascade Corp. 3,436 117
- - Rowan Cos., Inc. 6,231 116
Comcast Corp. Class A 7,531 115
Cummins Engine Co., Inc. 2,899 114
- - Bally Entertainment Corp. 3,921 111
ENSERCH Corp. 4,958 104
Shared Medical Systems Corp. 1,823 103
Crane Co. 2,266 101
Autodesk, Inc. 3,860 100
Darden Restaurants Inc. 11,567 100
- - King World Productions, Inc. 2,701 100
Meredith Corp. 1,961 97
- - Santa Fe Energy Resources, Inc. 6,735 96
Russell Corp. 2,914 94
Tektronix, Inc. 2,268 93
Echo Bay Mines Ltd. 10,481 92
- - Tandem Computers, Inc. 8,508 91
Briggs & Stratton Corp. 2,060 91
Alberto-Culver Co. Class B 2,051 89
The Timkin Co. 2,265 89
Peoples Energy Corp. 2,585 88
Scientific-Atlanta, Inc. 5,495 87
- - Amdahl Corp. 9,221 87
McDermott International, Inc. 3,971 86
- - Bethlehem Steel Corp. 8,426 84
Consolidated Freightways, Inc. 3,317 81
Potlatch Corp. 2,057 80
- - Beverly Enterprises Inc. 7,279 79
Niagara Mohawk Power Corp. 9,862 79
Fleetwood Enterprises, Inc. 2,544 78
ASARCO, Inc. 2,925 78
Helmerich & Payne, Inc. 1,733 76
- - USAir Group, Inc. 4,501 74
USLIFE Corp. 2,436 73
- - Unisys Corp. 11,805 72
Safety-Kleen Corp. 4,308 71
Great Atlantic & Pacific Tea
Co., Inc. 2,706 70
John H. Harland Co. 2,279 68
Centex Corp. 2,057 67
Trinova Corp. 2,054 65
Springs Industries Inc. Class A 1,403 62
Viad Corp. 4,374 61
EG & G, Inc. 3,393 61
Dial Corp. 4,374 60
Inland Steel Industries, Inc. 3,327 59
</TABLE>
19
<PAGE> 76
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
MARKET
VALUE*
EQUITY INDEX PORTFOLIO SHARES (000)
- ---------------------------------------------------------------------------------
<S> <C> <C>
Adolph Coors Co. Class B 2,705 $ 59
Jostens Inc. 2,812 59
Cincinnati Milacron, Inc. 3,070 58
Longs Drug Stores, Inc. 1,310 57
Ball Corp. 2,246 55
ONEOK, Inc. 1,845 51
Eastern Enterprises 1,313 50
Alexander & Alexander
Services, Inc. 2,931 49
Freeport-McMoRan Copper &
Gold Inc. Class A 1,600 47
Pulte Corp. 1,839 47
- - Charming Shoppes, Inc. 7,850 47
Navistar International Corp. 5,235 45
Caliber System Inc. 2,710 44
Fleming Cos., Inc. 2,388 41
Kaufman & Broad Home Corp. 2,865 37
- - Viacom International Class A 1,056 37
Luby's Cafeterias, Inc. 1,535 37
- - Data General Corp. 2,487 35
- - Intergraph Corp. 2,951 32
NACCO Industries, Inc. Class A 648 31
- - Armco, Inc. 6,637 30
Giddings & Lewis, Inc. 2,517 29
Stride Rite Corp. 2,971 27
- - Shoney's Inc. 2,918 27
- - Community Psychiatric Centers 2,779 26
- - Ryan's Family Steak Houses, Inc. 3,387 25
- - LucasVarity PLC ADR 539 21
- - Yellow Corp. 1,552 20
Outboard Marine Corp. 707 11
- ---------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $278,098) 395,335
- ---------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- ---------------------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (2.5%)
- ---------------------------------------------------------------------------------
U.S. TREASURY BILLS--Note E
5.17%, 1/9/97 $ 100 99
5.218%, 10/3/96 300 300
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash Account
5.74%, 10/1/96 9,756 9,756
- ---------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $10,155) 10,155
- ---------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.9%)
(Cost $288,253) 405,490
- ---------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.1%)
- ---------------------------------------------------------------------------------
Other Assets--Note C 1,314
Liabilities (909)
------
405
- ---------------------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------------------
Applicable to 22,157,747 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $405,895
=================================================================================
NET ASSET VALUE PER SHARE $18.32
=================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income Producing Security.
(1) The combined market value of common stocks and Standard & Poor's 500
Index Futures Contracts represents 100.0% of net assets.
See Note E.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
AT SEPTEMBER 30, 1996, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $282,611 $12.75
Undistributed Net
Investment Income 4,128 .19
Accumulated Net Realized Gains 1,891 .09
Unrealized Appreciation--Note E:
Investment Securities 117,237 5.29
Futures Contracts 28 --
- ---------------------------------------------------------------------------------
NET ASSETS $405,895 $18.32
=================================================================================
</TABLE>
20
<PAGE> 77
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
MARKET
VALUE*
EQUITY INCOME PORTFOLIO SHARES (000)
- ---------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (98.7%)
- ---------------------------------------------------------------------------------
BASIC MATERIALS (5.0%)
ARCO Chemical Co. 13,600 $ 680
Dow Chemical Co. 28,400 2,279
E.I. du Pont de Nemours & Co. 18,600 1,641
Potlatch Corp. 19,300 748
Union Camp Corp. 16,600 811
Weyerhaeuser Co. 21,700 1,001
------
7,160
------
CAPITAL GOODS & CONSTRUCTION (1.6%)
Emerson Electric Co. 6,200 559
General Electric Co. 11,000 1,001
Thomas & Betts Corp. 17,400 713
------
2,273
------
CONSUMER CYCLICAL (5.9%)
Deluxe Corp. 13,800 521
The Dun & Bradstreet Corp. 30,800 1,836
Eastman Kodak Co. 7,800 612
Genuine Parts Co. 16,300 713
Kmart Corp. 73,200 750
May Department Stores Co. 20,500 997
The McGraw-Hill Cos. 19,800 844
J.C. Penney Co., Inc. 26,600 1,440
- - Woolworth Corp. 29,900 617
------
8,330
------
CONSUMER STAPLES (8.9%)
American Brands, Inc. 61,900 2,615
The Clorox Co. 10,400 997
General Mills, Inc. 20,600 1,244
H.J. Heinz Co. 35,050 1,183
International Flavors &
Fragrances, Inc. 6,500 284
Philip Morris Cos., Inc. 41,100 3,689
The Quaker Oats Co. 24,700 905
Tambrands, Inc. 20,200 851
UST Inc. 30,000 889
------
12,657
------
ENERGY (16.5%)
Amoco Corp. 26,700 1,882
Atlantic Richfield Co. 23,900 3,047
Chevron Corp. 55,700 3,488
Exxon Corp. 43,900 3,655
Mobil Corp. 32,400 3,750
Phillips Petroleum Co. 19,900 851
Royal Dutch Petroleum Co. ADR 12,800 1,998
Sun Co., Inc. 14,458 333
Texaco Inc. 37,900 3,487
USX-Marathon Group 42,600 921
------
23,412
------
FINANCIAL (17.3%)
Aetna Inc. 12,000 845
H.F. Ahmanson & Co. 45,300 1,268
American General Corp. 30,700 1,159
Banc One Corp. 29,040 1,191
Bankers Trust New York Corp. 20,000 1,573
Barnett Banks, Inc. 26,800 905
Boatmen's Bancshares, Inc. 20,600 1,148
CIGNA Corp. 1,700 204
CoreStates Financial Corp. 27,000 1,168
First Chicago NBD Corp. 25,200 1,140
First Union Corp. 14,800 988
Fleet Financial Group, Inc. 23,400 1,041
Great Western Financial Corp. 56,800 1,505
KeyCorp 23,400 1,030
Lincoln National Corp. 26,400 1,158
Marsh & McLennan Cos., Inc. 10,800 1,049
Mellon Bank Corp. 14,350 850
J.P. Morgan & Co., Inc. 19,600 1,742
NationsBank Corp. 11,400 990
PNC Bank Corp. 35,300 1,178
SAFECO Corp. 25,100 872
U.S. Bancorp 19,800 780
Wachovia Corp. 17,800 881
------
24,665
------
HEALTH CARE (15.4%)
American Home Products Corp. 65,200 4,157
Baxter International, Inc. 16,300 762
Bristol-Myers Squibb Co. 49,100 4,732
Glaxo Wellcome PLC ADR 51,900 1,615
Eli Lilly & Co. 68,200 4,399
Merck & Co., Inc. 27,200 1,914
Pharmacia & Upjohn, Inc. 72,350 2,984
Warner-Lambert Co. 20,400 1,346
------
21,909
------
TECHNOLOGY (0.5%)
Pitney Bowes, Inc. 12,200 644
------
TRANSPORT & SERVICES (0.4%)
Union Pacific Corp. 7,500 549
------
UTILITIES (24.7%)
Allegheny Power System, Inc. 24,700 716
Ameritech Corp. 51,600 2,716
Baltimore Gas & Electric Co. 29,200 763
Bell Atlantic Corp. 40,100 2,401
BellSouth Corp. 54,800 2,028
Central & South West Corp. 29,600 770
Consolidated Edison Co. of
New York, Inc. 26,500 735
Consolidated Natural Gas Co. 40,800 2,188
Dominion Resources, Inc. 22,200 838
Duke Power Co. 18,200 849
Edison International 62,700 1,121
FPL Group, Inc. 17,100 740
GTE Corp. 79,800 3,072
NICOR, Inc. 21,100 712
Northern States Power Co. 12,000 560
NYNEX Corp. 59,500 2,588
Oklahoma Gas & Electric Co. 15,900 636
PP&L Resources Inc. 28,800 630
Pacific Enterprises 22,800 690
Pacific Telesis Group 31,200 1,049
PacifiCorp 77,800 1,605
Potomac Electric Power Co. 26,300 667
Public Service Enterprise
Group Inc. 29,400 787
SCANA Corp. 33,800 887
Southern New England
Telecommunications Corp. 8,300 306
TECO Energy, Inc. 32,900 781
</TABLE>
21
<PAGE> 78
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
MARKET
VALUE*
EQUITY INCOME PORTFOLIO SHARES (000)
- ---------------------------------------------------------------------------------
<S> <C> <C>
Texas Utilities Co. 15,200 $ 602
Union Electric Co. 22,500 830
U S WEST Communications Group 70,800 2,106
Wisconsin Energy Corp. 28,900 780
------
35,153
------
MISCELLANEOUS (2.5%)
Hanson PLC ADR 65,800 814
Minnesota Mining &
Manufacturing Co. 24,500 1,712
Ogden Corp. 50,400 1,014
------
3,540
------
- ---------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $115,129) 140,292
- ---------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (0.9%)
- ---------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- ---------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.74%, 10/1/96
(COST $1,368) $1,368 1,368
- ---------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.6%)
(COST $116,497) 141,660
- ---------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.4%)
- ---------------------------------------------------------------------------------
Other Assets--Note C 820
Liabilities (291)
------
529
- ---------------------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------------------
Applicable to 10,370,756 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $142,189
=================================================================================
NET ASSET VALUE PER SHARE $13.71
=================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income Producing Security.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------------------------------
AT SEPTEMBER 30, 1996, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $113,631 $10.95
Undistributed Net
Investment Income 1,559 .15
Accumulated Net Realized Gains 1,836 .18
Unrealized Appreciation--Note E 25,163 2.43
- ---------------------------------------------------------------------------------
NET ASSETS $142,189 $13.71
=================================================================================
</TABLE>
22
<PAGE> 79
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
MARKET
VALUE*
GROWTH PORTFOLIO SHARES (000)
- ---------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (93.9%)
- ---------------------------------------------------------------------------------
BASIC MATERIALS (5.4%)
- - W.R. Grace & Co. 104,700 $ 7,853
Monsanto Co. 191,500 6,990
------
14,843
------
CAPITAL GOODS & CONSTRUCTION (3.5%)
The Boeing Co. 64,500 6,095
Honeywell, Inc. 28,800 1,818
Illinois Tool Works, Inc. 25,400 1,832
------
9,745
------
CONSUMER CYCLICAL (13.1%)
- - Brinker International, Inc. 70,300 1,195
Carnival Corp. Class A 65,600 2,034
- - Circus Circus Enterprises Inc. 17,700 626
The Walt Disney Co. 73,000 4,626
Eastman Kodak Co. 90,500 7,104
Lowe's Cos., Inc. 95,100 3,887
Mattel, Inc. 143,400 3,711
May Department Stores Co. 94,600 4,600
McDonald's Corp. 75,400 3,572
- - Mirage Resorts, Inc. 37,800 969
- - Payless ShoeSource, Inc. 36,912 1,241
Sears, Roebuck & Co. 28,200 1,262
Warnaco Group 47,900 1,138
------
35,965
------
CONSUMER STAPLES (17.4%)
The Coca-Cola Co. 214,800 10,928
Coca-Cola Enterprises, Inc. 35,400 1,602
Gillette Co. 88,800 6,405
PepsiCo, Inc. 260,300 7,353
Philip Morris Cos., Inc. 71,500 6,417
Procter & Gamble Co. 84,400 8,229
Unilever NV ADR 43,800 6,904
------
47,838
------
ENERGY (2.2%)
Enron Oil & Gas Co. 30,200 751
- - Renaissance Energy Ltd. 85,300 2,501
- - Talisman Energy, Inc. 102,100 2,796
------
6,048
------
FINANCIAL (8.7%)
American International Group, Inc. 67,300 6,781
Chase Manhattan Corp. 88,900 7,123
Federal National Mortgage Assn. 67,100 2,340
Household International, Inc. 58,400 4,803
Norwest Corp. 72,100 2,947
------
23,994
------
HEALTH CARE (18.0%)
American Home Products Corp. 142,400 9,078
Bristol-Myers Squibb Co. 71,100 6,852
Cardinal Health, Inc. 39,713 3,282
- - HealthCare Compare Corp. 38,000 1,800
Johnson & Johnson 156,200 8,005
Eli Lilly & Co. 42,600 2,748
Pharmacia & Upjohn, Inc. 68,100 2,809
Pfizer, Inc. 97,100 7,683
SmithKline Beecham PLC ADR 120,900 7,360
------
49,617
------
TECHNOLOGY (21.0%)
- - Altera Corp. 50,700 2,567
AMP, Inc. 86,600 3,356
Automatic Data Processing, Inc. 218,200 9,519
- - Cisco Systems, Inc. 161,600 10,019
Electronic Data Systems Corp. 89,200 5,475
First Data Corp. 14,146 1,154
Hewlett-Packard Co. 167,800 8,180
- - Informix Corp. 81,900 2,283
Intel Corp. 63,800 6,085
Molex, Inc. Class A 31,300 1,048
- - Oracle Corp. 100,600 4,275
Reuters Holdings PLC ADR 24,300 1,680
- - Xilinx, Inc. 69,300 2,348
------
57,989
------
UTILITIES (3.9%)
AT&T Corp. 188,300 9,839
MCI Communications Corp. 38,600 984
------
10,823
------
MISCELLANEOUS (0.7%)
Service Corp. International 66,200 2,003
------
- ---------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $188,175) 258,865
- ---------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- ---------------------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT (6.0%)
- ---------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 5.74%, 10/1/96
(COST $16,578) $16,578 16,578
- ---------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.9%)
(COST $204,753) 275,443
- ---------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.1%)
- ---------------------------------------------------------------------------------
Other Assets--Note C 1,913
Liabilities (1,754)
-------
159
- ---------------------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------------------
Applicable to 15,678,904 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $275,602
=================================================================================
NET ASSET VALUE PER SHARE $17.58
=================================================================================
*See Note A in Notes to Financial Statements.
oNon-Income Producing Security.
ADR--American Depository Receipt.
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
AT SEPTEMBER 30, 1996, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $190,940 $12.18
Undistributed Net Investment
Income 2,770 .18
Accumulated Net Realized Gains 11,202 .71
Unrealized Appreciation--Note E 70,690 4.51
- ---------------------------------------------------------------------------------
NET ASSETS $275,602 $17.58
=================================================================================
</TABLE>
23
<PAGE> 80
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
MARKET
SMALL COMPANY VALUE*
GROWTH PORTFOLIO SHARES (000)
- ---------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (92.6%)
- ---------------------------------------------------------------------------------
BASIC MATERIALS (1.0%)
- - Lydall, Inc. 18,000 $ 439
-----
CAPITAL GOODS & CONSTRUCTION (9.4%)
- - American Buildings Co. 9,400 249
- - American Homestar Corp. 16,000 380
- - Brooks Automation, Inc. 31,500 398
- - The Cherry Corp. Class A 20,400 219
- - Cuno Inc. 10,000 154
- - Hirsch International Corp. Class A 29,250 527
- - Jason, Inc. 30,000 225
- - Newpark Resources, Inc. 8,000 291
Oakwood Homes Corp. 7,000 193
- - Palm Harbor Homes, Inc. 6,750 192
- - Photran Corp. 23,000 129
- - Redman Industries, Inc. 2,700 75
- - Security Dynamics
Technologies, Inc. 6,000 430
- - Southern Energy Homes, Inc. 23,250 372
Valmont Industries, Inc. 9,000 307
-----
4,141
-----
CONSUMER CYCLICAL (14.2%)
- - Action Performance Cos., Inc. 15,000 188
- - Alrenco, Inc. 23,000 474
- - Best Buy, Inc. 9,000 205
- - Brightpoint, Inc. 15,000 362
- - Broderbund Software, Inc. 13,000 371
- - Catalina Marketing Corp. 5,000 266
- - Chicago Miniature Lamp, Inc. 2,700 78
Coachmen Industries, Inc. 8,500 219
- - LodgeNet Entertainment Corp. 30,300 356
Marcus Corp. 23,700 569
McGrath Rent Corp. 13,000 338
- - Nobility Homes, Inc. 35,000 472
- - Play By Play Toy & Novelties, Inc. 40,500 334
- - Quality Dining, Inc. 11,500 322
- - Renters Choice, Inc. 23,500 429
- - Rex Stores Corp. 32,500 358
- - Tuesday Morning, Inc. 40,000 735
- - VWR Scientific Products Corp. 13,200 214
-----
6,290
-----
CONSUMER STAPLES (1.0%)
- - Sylvan, Inc. 16,000 172
- - Whole Food Markets, Inc. 10,500 278
-----
450
-----
ENERGY (1.6%)
- - Smith International, Inc. 12,000 421
- - 3-D Geophysical, Inc. 37,000 287
-----
708
-----
FINANCIAL (6.2%)
Chateau Properties, Inc. REIT 15,800 391
Fidelity National Financial, Inc. 30,000 472
Inter-Regional Financial Group, Inc. 15,000 486
Manufactured Home
Communities, Inc. REIT 25,600 493
The Quick & Reilly Group, Inc. 17,500 459
Sun Communities, Inc. REIT 15,600 445
-----
2,746
-----
HEALTH CARE (12.4%)
- - Advanced Magnetics, Inc. 6,000 101
- - Angeion Corp. 20,700 127
Arrow International, Inc. 17,700 602
- - Bio-Rad Labs, Inc. Class A 11,100 319
- - Biotechnology General 34,250 272
- - Cell Genesys, Inc. 38,500 265
- - Centocor, Inc. 3,100 110
- - Cohr, Inc. 12,300 335
- - Creative Biomolecules, Inc. 17,300 123
- - Cytotherapeutics, Inc. 10,200 85
- - Genetics Institute Inc.
Depository Shares 3,500 241
- - Genome Therapeutics Corp. 3,000 27
- - Haemonetics Corp. 20,700 427
- - NABI, Inc. 23,000 273
Pathogenesis Corp. 16,500 289
- - Sofamor/Danek Group Inc. 13,700 423
Sullivan Dental Products, Inc. 23,300 259
- - Sybron Corp. 10,000 290
- - Target Therapeutics, Inc. 17,700 752
- - Ventritex Inc. 8,300 145
-----
5,465
-----
TECHNOLOGY (38.8%)
COMMUNICATION EQUIPMENT (2.4%)
- - Amati Communications Corp. 2,000 44
- - Aspect Telecommunications 9,000 560
- - Davox Corp. 12,500 469
COMPUTER RELATED (2.2%)
- - Auspex Systems, Inc. 21,000 318
- - CompuCom Systems, Inc. 26,000 224
- - Lanvision Systems, Inc. 14,300 172
- - Pinnacle Systems, Inc. 21,500 258
COMPUTER SERVICES (0.9%)
- - MDL Information Systems, Inc. 13,000 411
COMPUTER SOFTWARE (22.0%)
- - Acxiom Corp. 11,000 448
- - Advent Software, Inc. 18,500 546
- - Applied Voice Technology, Inc. 11,100 136
- - Applix, Inc. 10,000 263
- - Arbor Software Corp. 14,500 609
- - Aware, Inc. 10,000 168
- - Concord EFS, Inc. 18,249 470
- - Correctional Services Corp. 8,000 113
- - DH Technology, Inc. 16,000 380
- - Documentum, Inc. 7,000 215
- - E*TRADE Group, Inc. 21,000 276
- - Expert Software Inc. 45,500 313
- - FileNet Corp. 3,800 96
GT Interactive Software Corp. 23,000 523
- - Mechanical Dynamics, Inc. 32,000 560
- - Orcad, Inc. 40,500 354
- - PC Docs Group International, Inc. 26,700 360
- - PRI Automation, Inc. 17,000 544
- - Pure Atria Software Corp. 7,950 300
- - Red Brick Systems, Inc. 18,500 435
- - Remedy Corp. 9,000 718
</TABLE>
24
<PAGE> 81
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------------------------------
<S> <C> <C>
- - SunGard Data Systems, Inc. 11,500 $ 517
- - Synopsys, Inc. 11,500 529
- - Verilink Corp. 15,000 362
- - Visio Corp. 11,000 489
ELECTRONIC COMPONENTS-INSTRUMENT (8.3%)
- - Acres Gaming, Inc. 36,000 491
- - Advanced Lighting
Technologies, Inc. 25,000 494
BMC Industries, Inc. 3,700 106
- - Computer Products, Inc. 11,400 249
- - Dionex Corp. 10,000 375
- - ITI Technologies, Inc. 11,000 388
- - Input/Output, Inc. 11,000 327
- - Shiva Corp. 8,500 487
- - Sterling Electronics Corp. 16,000 190
Teleflex Inc. 5,000 248
- - Trident International, Inc. 18,000 306
OFFICE EQUIPMENT (1.2%)
Encad, Inc. 4,000 167
- - International Imaging
Materials Inc. 17,500 376
SEMICONDUCTORS (0.6%)
- - Tegal Corp. 45,000 236
TELECOMMUNICATIONS (1.2%)
- - Harmonic Lightwaves, Inc. 20,000 385
- - Teltrend, Inc. 3,000 126
------
17,131
------
TRANSPORT & SERVICES (4.5%)
Air Express International Corp. 9,000 254
- - Boyd Brothers Transportation, Inc. 20,000 155
Expeditors International of
Washington, Inc. 8,000 282
Frozen Food Express
Industries, Inc. 12,000 113
Harper Group, Inc. 12,000 246
- - Heartland Express, Inc. 8,500 240
- - Midwest Express Holdings, Inc. 12,000 359
- - RailTex, Inc. 14,500 344
------
1,993
------
UTILITIES (0.3%)
- - Tucson Electric Power Co. 8,000 135
------
MISCELLANEOUS (3.2%)
American List Corp. 11,000 298
- - Asyst Technologies, Inc. 6,000 116
- - NFO Research Inc. 18,000 387
- - Rent-Way, Inc. 32,500 398
- - Right Management Consultants 4,000 92
- - Service Experts Inc. 6,300 124
------
1,415
------
- ---------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $40,629) 40,913
- ---------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (13.5%)
- ---------------------------------------------------------------------------------
Repurchase Agreement
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.74%, 10/1/96
(COST $5,978) $5,978 $ 5,978
- ---------------------------------------------------------------------------------
TOTAL INVESTMENTS (106.1%)
(COST $46,607) 46,891
- ---------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-6.1%)
- ---------------------------------------------------------------------------------
Other Assets--Notes C and F 1,712
Payables for Investment Securities Purchased (2,796)
Other Liabilities--Note F (1,628)
------
(2,712)
- ---------------------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------------------
Applicable to 4,487,592 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $44,179
=================================================================================
NET ASSET VALUE PER SHARE $9.84
=================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income Producing Security.
REIT--Real Estate Investment Trust.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
AT SEPTEMBER 30, 1996, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $44,289 $9.87
Undistributed Net
Investment Income 174 .04
Accumulated Net
Realized Losses--Note D (568) (.13)
Unrealized Appreciation of
Investments--Note E 284 .06
- ---------------------------------------------------------------------------------
NET ASSETS $44,179 $9.84
=================================================================================
</TABLE>
25
<PAGE> 82
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
MARKET
VALUE*
INTERNATIONAL PORTFOLIO SHARES (000)
- ---------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (98.4%)
- ---------------------------------------------------------------------------------
AUSTRALIA (0.3%)
News Corp. Ltd. 38,084 $ 200
News Corp. Ltd. Pfd. 19,000 81
WMC Ltd. 35,000 225
-------
506
-------
BRAZIL (0.9%)
Telecomunicacoes Brasileiras
SA ADR 15,341 1,204
Usinas Siderurgicas de Minas
Gerais SA ADR 30,000 296
------
1,500
------
CANADA (2.2%)
Canadian Pacific, Ltd. 43,000 997
Noranda Inc. 40,000 818
NOVA Corp. 95,000 833
Royal Bank of Canada 33,000 940
------
3,588
------
CHILE (0.2%)
Compania de Telecomunicaciones
de Chile SA ADR 3,200 309
------
DENMARK (0.5%)
Den Danske Bank 12,000 875
------
FINLAND (0.2%)
Metsa-Serla Oy B 15,000 99
- - UPM-Kymmene Oy 15,000 313
------
412
------
FRANCE (5.6%)
Cie. Generale des Eaux 16,100 1,750
Elf Aquitaine SA 36,000 2,817
Michelin Series B (Registered) 35,600 1,818
Primagaz Cie. 6,600 694
- - Primagaz Cie. Warrants
Exp. 6/30/98 600 11
- - SGS-Thomson Microelectronics
NV ADR 27,000 1,279
Valeo SA 12,126 669
------
9,038
------
GERMANY (7.6%)
Bayer AG 69,000 2,533
Buderus AG 520 231
Linde AG 1,900 1,215
Mannesmann AG 3,200 1,200
Muenchener Rueckversicherungs-
Gesellschaft AG 11 25
SGL Carbon AG 2,000 233
Siemens AG 43,000 2,268
Veba AG 75,000 3,929
Wella AG Pfd. 1,000 603
------
12,237
------
HONG KONG (5.4%)
Cheung Kong Holdings Ltd. 177,000 1,362
Citic Pacific Ltd. 145,000 656
Hong Kong Electric Holdings Ltd. 115,000 372
HSBC Holdings PLC 60,600 1,125
Hutchison Whampoa Ltd. 227,000 1,526
Sun Hung Kai Properties Ltd. 124,000 1,319
Swire Pacific Ltd. A 143,000 1,281
Wharf Holdings Ltd. 243,000 1,006
------
8,647
------
INDONESIA (1.6%)
PT Gudang Garam (Foreign) 96,000 362
PT Indocement Tunggal (Foreign) 210,000 330
PT Indofood Sukses Makmur
(Foreign) 210,000 448
PT Indosat ADR 22,000 726
PT Telekomunikasi Indonesia ADR 22,000 685
------
2,551
------
ITALY (0.4%)
Telecom Italia Mobile SPA 269,000 597
------
JAPAN (28.5%)
Bridgestone Corp. 147,000 2,653
Dai Nippon Printing Co., Ltd. 30,000 560
DDI Corp. 250 2,022
East Japan Railway Co. 150 725
Eisai Co., Ltd. 600 11
Fanuc Co., Ltd. 8,000 295
Fuji Photo Film Co., Ltd. 117,000 3,561
Hirose Electronics Co., Ltd. 10,500 643
Hitachi Ltd. 169,000 1,639
Ito-Yokado Co. Ltd. 63,000 3,581
Keyence Corp. 6,000 743
Kuraray Co., Ltd. 62,000 629
Kyocera Corp. 11,000 785
Mabuchi Motor Co. 24,000 1,336
Matsushita Electric Industrial
Co., Ltd. 134,000 2,250
Mitsubishi Corp. 125,000 1,594
Mitsui & Co., Ltd. 183,000 1,592
Murata Manufacturing Co., Ltd. 85,000 3,037
Nippon Television Network 1,000 310
Nissei Sangyo Co. 40,000 542
Omron Corp. 77,000 1,445
Sankyo Co., Ltd. 22,000 563
Seino Transportation Co., Ltd. 45,000 642
Shin-Etsu Chemical Co., Ltd. 32,000 575
Showa Shell Sekiyu 55,000 558
Skylark Co., Ltd. 22,000 423
SMC Corp. 30,000 2,101
Sumitomo Electric Industries 99,000 1,360
Takeda Chemical Industries 230,000 4,213
Toho Co., Ltd. 5,000 831
Tokio Marine & Fire Insurance Co. 125,000 1,482
Tokyo Electron Ltd. 16,000 464
Tokyo Style Co. 20,000 327
Toppan Printing Co., Ltd. 34,000 479
Toray Industries, Inc. 90,000 571
Toyota Motor Corp. 60,000 1,535
------
46,077
------
KOREA (1.0%)
Korea Electric Power Corp. 15,000 496
Korea Mobile
Telecommunications Corp. 500 600
Korean Airlines 14,100 321
Pohang Iron & Steel Co., Ltd. 2,540 183
------
1,600
------
</TABLE>
26
<PAGE> 83
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------------------------------
<S> <C> <C>
MALAYSIA (2.1%)
Edaran Otomobil Nasional Bhd. 64,000 $ 631
Genting Bhd. 88,500 643
Malayan Banking Bhd. 99,000 983
Telekom Malaysia Bhd. 91,000 802
United Engineers (Malaysia) Bhd. 50,000 387
-------
3,446
-------
NETHERLANDS (12.2%)
Delft Instruments NV 12,000 277
Elsevier NV 98,000 1,621
Getronics NV 81,192 2,060
Hagemeyer NV 7,400 574
Heineken NV 14,500 2,648
Hunter Douglas NV 14,291 998
Internationale Nederlanden
Groep NV 124,595 3,889
KLM Royal Dutch Airlines NV 14,341 384
Koninklijke Ahold NV 31,200 1,767
Oce-Van Der Grinten NV 16,000 1,748
Philips Electronics NV (non-voting) 75,000 2,709
Samas Groep NV 8,195 285
VNU-Verenigde Nederlandse
Uitgeversbedrijven Verenigd
Bezit NV 41,000 803
------
19,763
------
PHILIPPINES (2.1%)
Ayala Land Inc. B 1,471,875 1,795
Manila Electric Co. B 91,000 673
Philippines Long Distance
Telephone Co. 12,000 746
SM Prime Holdings Inc. 759,520 177
------
3,391
------
SINGAPORE (1.8%)
DBS Land Ltd. 162,000 536
Development Bank of
Singapore Ltd. (Foreign) 36,000 442
Keppel Corp., Ltd. 61,000 472
Oversea-Chinese Banking
Corp. Ltd. (Foreign) 30,800 370
Singapore Airlines Ltd. (Foreign) 32,000 323
Singapore Press Holdings Ltd.
(Foreign) 30,600 559
Wing Tai Holdings Ltd. 73,000 176
------
2,878
------
SWEDEN (2.7%)
Astra AB Series B 48,000 1,975
Electrolux AB Series B 14,000 787
LM Ericsson Telephone AB
Series B 48,000 1,210
Stora Kopparbergs Bergslags
AB Series A 26,000 338
------
4,310
------
SWITZERLAND (9.2%)
ABB AG (Bearer) 3,000 3,671
Adecco SA (Bearer) 2,630 724
Ciba-Geigy AG (Registered) 4,850 6,206
CS Holding AG (Registered) 15,300 1,513
Nestle SA (Registered) 1,450 1,617
Roche Holding AG 147 1,083
------
14,814
------
THAILAND (1.7%)
Bangkok Bank Public Co., Ltd.
(Foreign) 48,000 627
Land and House Public Co., Ltd.
(Foreign) 59,000 729
Thai Farmers Bank Public Co., Ltd.
(Foreign) 54,000 569
- - Thai Farmers Bank Public Co., Ltd.
Warrants Exp. 9/15/02 6,750 18
United Communication Industry
Public Co., Ltd. (Foreign) 75,000 779
------
2,722
------
UNITED KINGDOM (12.2%)
Asda Group PLC 600,000 985
British Airways PLC 50,000 425
British Land Co., PLC 84,000 598
British Petroleum PLC 370,000 3,835
British Steel PLC 180,000 556
Cable and Wireless PLC 110,000 777
Courtaulds PLC 77,900 587
Daily Mail & General Trust Class A 30,000 620
De La Rue PLC 25,000 231
EMI Group PLC 40,000 834
Enterprise Oil PLC 102,000 871
- - LucasVarity PLC 212,000 844
MFI Furniture Group PLC 300,000 924
Peninsular & Oriental Steam
Navigation Co. 52,000 506
Rank Organisation PLC 170,000 1,143
RTZ Corp. PLC 154,000 2,355
David S. Smith Holdings PLC 100,000 506
Tesco PLC 250,000 1,184
- - Thorn PLC 40,000 227
United News & Media PLC 60,000 647
Vodafone Group PLC 150,000 518
Zeneca Group PLC 20,000 497
------
19,670
------
- ---------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $141,733) 158,931
- ---------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- ---------------------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT (1.2%)
- ---------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.74%, 10/1/96
(COST $1,946) $1,946 1,946
- ---------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.6%)
(COST $143,679) 160,877
- ---------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.4%)
- ---------------------------------------------------------------------------------
Other Assets--Notes C and F 17,123
Liabilities--Note F (16,478)
--------
645
- ---------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 84
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
MARKET
VALUE*
INTERNATIONAL PORTFOLIO SHARES (000)
- ---------------------------------------------------------------------------------
<S> <C>
NET ASSETS (100%)
- ---------------------------------------------------------------------------------
Applicable to 12,681,222 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $161,522
=================================================================================
NET ASSET VALUE PER SHARE $12.74
=================================================================================
*See Note A in Notes to Financial Statements.
- -Non-Income Producing Security.
ADR--American Depository Receipt.
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------------------------------
AT SEPTEMBER 30, 1996, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $138,602 $10.93
Undistributed Net
Investment Income--Note D 1,672 .13
Accumulated Net
Realized Gains--Note D 3,930 .31
Unrealized Appreciation--Note E:
Investment Securities 17,198 1.36
Foreign Currencies and
Forward Currency Contracts 120 .01
- ---------------------------------------------------------------------------------
NET ASSETS $161,522 $12.74
=================================================================================
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Trustees of
Vanguard Variable Insurance Fund
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights appearing in the Vanguard Variable Insurance Fund 1996 Annual Report
present fairly, in all material respects, the financial position of Money
Market Portfolio, High-Grade Bond Portfolio, High Yield Bond Portfolio,
Balanced Portfolio, Equity Index Portfolio, Equity Income Portfolio, Growth
Portfolio, Small Company Growth Portfolio and International Portfolio
(constituting Vanguard Variable Insurance Fund, hereafter referred to as the
"Fund") at September 30, 1996, 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 indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund'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 September 30, 1996 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
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
October 31, 1996 F640-9/96
28
