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VANGUARD
VARIABLE INSURANCE
FUND
Annual Report - September 30, 1997
[PHOTO]
[THE VANGUARD GROUP LOGO]
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OUR CREW MAKES THE DIFFERENCE
Throughout our history, The Vanguard Group has received considerable attention
as the low-cost provider of mutual funds. While such accolades are gratifying,
we are most proud, not of our low operating expenses or the billions of dollars
we manage, but of our sterling reputation created by the Vanguard crew.
We recognize that it is our crew members--some 6,000 highly motivated men
and women--who form the cornerstone of our operations. As with any
cornerstone, we could not survive long--let alone prosper--without it. That's
why we chose this fiscal year's annual report to celebrate the spirit,
enthusiasm, and achievements of our crew. (We call those who work at Vanguard
crew members, not employees, because they operate as a team to accomplish our
mission of serving you, our clients.)
But while we prize the collective contributions of our crew, we also take
time to recognize the importance of the individual. Each calendar quarter, we
present our Award For Excellence to a handful of crew members who have
demonstrated particular excellence in the performance of their jobs and who
embody "The Vanguard Spirit." Our report cover shows only a few of the more
than 300 crew members who have received this distinction since 1984.
They, along with the rest of our valiant crew, look forward to serving you
in the years ahead.
[PHOTO] [PHOTO]
John C. Bogle John J. Brennan
Chairman President
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CONTENTS
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A MESSAGE TO OUR SHAREHOLDERS . . . . . . . . . . . . . . . . . . . 1
THE MARKETS IN PERSPECTIVE . . . . . . . . . . . . . . . . . . . . 7
REPORTS FROM THE ADVISERS . . . . . . . . . . . . . . . . . . . . . 9
PORTFOLIO PROFILES . . . . . . . . . . . . . . . . . . . . . . . . 20
PERFORMANCE SUMMARIES . . . . . . . . . . . . . . . . . . . . . . . 31
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . 40
</TABLE>
All comparative mutual fund data are from Lipper Analytical Services, Inc., or
Morningstar unless otherwise noted.
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FELLOW SHAREHOLDER,
Vanguard Variable Insurance Fund's fiscal year ended September 30, 1997, was a
marvelous period to be an investor. U.S. stock markets produced tremendous
gains, bonds and international stocks had solid returns, and even money market
instruments earned returns well above their long-term average and the inflation
rate. All nine of the Fund's Portfolios produced positive returns for the year,
and six of the nine outpaced comparable mutual funds.
The table at right presents the total return (capital change plus
reinvested dividends) of each Portfolio for the fiscal year, along with the
results of the average comparable mutual fund and an appropriate unmanaged
market benchmark. The total return figures reflect the change in net asset
value for each Portfolio, adjusted to include the reinvestment of any income or
capital gains distributions. Performance Summaries for the Portfolios,
including a breakdown of each fiscal year's returns into their income and
capital components, are presented on pages 31-39.
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TOTAL RETURNS
FISCAL YEAR ENDED
SEPTEMBER 30, 1997
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MONEY MARKET PORTFOLIO* + 5.5%
Average Money Market Fund* + 4.9
Salomon Three-Month
Treasury Index + 5.2
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HIGH-GRADE BOND PORTFOLIO + 9.6%
Average Intermediate-Term
U.S. Government Fund + 8.2
Lehman Aggregate Bond Index + 9.7
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HIGH YIELD BOND PORTFOLIO +14.1%
Average High Yield Bond Fund +15.6
Lehman High Yield Bond Index +14.5
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BALANCED PORTFOLIO +27.6%
Average Balanced Fund +24.0
Composite Stock/Bond Index** +30.2
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EQUITY INDEX PORTFOLIO +40.3%
Average Growth and Income Fund +36.2
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EQUITY INCOME PORTFOLIO +38.1%
Average Equity Income Fund +34.2
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GROWTH PORTFOLIO +28.8%
Average Growth Fund +33.5
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S&P 500 Index +40.4%
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SMALL COMPANY GROWTH PORTFOLIO +22.2%
Average Small Company Growth Fund +30.4
Russell 2000 Index +33.2
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INTERNATIONAL PORTFOLIO +18.6%
Average International Stock Fund +18.4
MSCI EAFE Index +12.5
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</TABLE>
* Money market funds do not assure a stable value of $1 per share, and, unlike
bank certificates of deposit, are not insured by the Federal Deposit
Insurance Corporation.
** 65% S&P 500 Index, 35% Lehman Brothers Long Corporate AA or Better Bond
Index.
FISCAL 1997 PERFORMANCE OVERVIEW
For the third year in a row, the U.S. stock market shot higher in the twelve
months ended September 30, bringing the three-year cumulative return of the
Standard & Poor's 500 Composite Stock Price Index to an incredible +119%.
Economic conditions remained ideal for equity investors, as business activity
continued to expand without engendering increases in inflation or long-term
interest rates, and corporate profits continued to burgeon. On balance during
the year, the yield on the benchmark 30-year U.S. Treasury bond declined by
0.49 percentage point to 6.43%. On the short-term side, by contrast, rates rose
slightly and the yield on the three-month U.S. Treasury bill closed the fiscal
year at 5.11%, up 0.08 percentage point from the level on September 30, 1996.
The general decline in long-term interest rates raised bond prices, bringing
the total return (including interest payments) of the Lehman Brothers Aggregate
Bond Index to +9.7%.
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This interest rate environment, along with the splendid economic
fundamentals, elevated the already-high spirits of investors so that by
year-end stock prices were at or near historic highs in relation to such
fundamentals as dividends, earnings, and book values. Most foreign stock
markets (Japan and several southeast Asian markets were notable exceptions)
also enjoyed strong returns during fiscal 1997, although returns to U.S.
investors were diminished by a strengthening of the U.S. dollar versus most
other currencies. Equity returns were especially strong in Europe and Latin
America.
The magnitude of the returns earned by each of our Portfolios during the
twelve months ended September 30 was determined largely by the type of assets
each holds. A summary of the year's results follows.
FIXED-INCOME PORTFOLIOS
The MONEY MARKET PORTFOLIO earned +5.5% in fiscal 1997, comfortably ahead of
the +4.9% return earned by the average money market mutual fund. Short-term
interest rates remained within a narrow band during fiscal 1997, with the rate
on three-month U.S. Treasury bills fluctuating from a low of 4.84% in June to
a high of 5.40% in March. There is no secret to our consistent lead over other
money market funds: Our main advantage is our lower expense ratio (expenses for
the year as a percentage of average net assets). In fiscal 1997, our expense
ratio was 0.21% ($2.10 per $1,000 in assets), more than one-half percentage
point below the 0.79% expense ratio of the average money market fund.
Our HIGH-GRADE BOND PORTFOLIO benefited from falling interest rates during
the year. Its +9.6% return outpaced the average intermediate-term U.S.
government bond fund by 1.4 percentage points and came within a whisker of the
+9.7% return on the Lehman Aggregate Bond Index, a good benchmark for the
taxable bond market.
The HIGH YIELD BOND PORTFOLIO reached its first anniversary in June. Its
+14.1% return during the fiscal year reflected the strength of the high-yield
bond market, which was buoyed not only by falling interest rates but by a
general strengthening in the balance sheets of many corporations. The
Portfolio's return lagged that of the average competing fund by 1.5 percentage
points, largely because we do not hold some of the more speculative bonds in
the high-yield arena, which performed quite well in this bullish period. We
believe that over time our remarkably low expense ratio (0.31% versus 1.39% for
the average high-yield bond fund) will enable us to provide competitive yields
and returns without reaching for the additional yield offered by the
lowest-grade bonds.
BALANCED PORTFOLIO
In a bullish market for both stocks and bonds, our BALANCED PORTFOLIO earned
+27.6%, the highest annual return in its six and one-half years of operation.
The Portfolio out-performed the average balanced fund by a comfortable margin
of 3.6 percentage points. This excellent absolute return fell short of our
unmanaged benchmark--a composite index weighted 65% in the S&P 500 Index and
35% in high-quality, long-term bonds--largely because of the Portfolio's
slightly defensive stance. The Portfolio held about 62% of its assets in
stocks, 3 percentage points less than our benchmark.
DOMESTIC EQUITY PORTFOLIOS
The EQUITY INDEX PORTFOLIO provided a return of +40.3%, more than 4 percentage
points above the typical growth and income fund and just a smidgen below the
+40.4% return on its benchmark S&P 500 Index. This close tracking of the Index
is a notable achievement because the Index exists only "on paper" and bears
none of the operating expenses
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or transaction costs incurred by actual investment portfolios. Our expense
ratio of 0.23% in fiscal 1997 is more than 1 percentage point lower than that
of the average growth and income fund, giving the Portfolio a nice head start
each year versus competing funds.
Our EQUITY INCOME PORTFOLIO earned +38.1%, surpassing the average equity
income fund by nearly 4 percentage points. We trailed the return of the S&P 500
Index by 2.3 percentage points largely because of our relatively conservative
investment strategy, which emphasizes value-oriented, high-yielding stocks.
During fiscal 1997, growth stocks in the S&P 500 Index outpaced value
stocks--returning +41.5% and +39.2%, respectively--making it difficult for a
value-oriented portfolio to beat the Index. The Portfolio's focus on
dividend-paying common stocks meant that we were underweighted in technology
stocks, many of which pay low or no dividends. Technology stocks--with total
returns of nearly +70%--were the best-performing segment of the S&P 500 Index
during fiscal 1997.
Our GROWTH PORTFOLIO, after significantly outperforming its comparative
benchmarks in fiscal 1996, lagged both the average growth fund and the S&P 500
Index in fiscal 1997. Even so, our return of +28.8% was very strong on an
absolute basis, bringing our cumulative return for the three years ended
September 30 to 117%. Most of our shortfall versus the Index in fiscal 1997 was
the result of our lagging performance in the high-flying technology sector.
Some of the very best-performing technology names were absent from our
holdings.
Our SMALL COMPANY GROWTH PORTFOLIO earned +22.2% in its first full fiscal
year of operations, a return that was solid on an absolute basis but paled in
relation to returns of +30.4% for the average small-company stock fund and
+33.2% for the Russell 2000 Index. Nearly all the shortfall versus the Index
was the result of subpar stock selections in two industry sectors--technology
and producer durables.
INTERNATIONAL PORTFOLIO
Foreign stock markets for the most part rose nicely during fiscal 1997,
although few matched Wall Street's ebullient atmosphere. Our INTERNATIONAL
PORTFOLIO earned +18.6%, which outpaced both the +18.4% return for the average
international stock fund and the +12.5% return for the Morgan Stanley Capital
International Europe, Australasia, Far East Index. The EAFE Index returned
+22.3% in local currency terms, but the dollar's rise against most currencies
sliced nearly 10 percentage points off the returns received by U.S. investors.
European bourses were particularly buoyant, with returns exceeding +40% in
local currencies and +35% in dollar terms. Japan's stock market slumped, beset
by ongoing doubts about both the nation's economic prospects and the bad-debt
problems of the country's banks. However, our adviser's selections of Japanese
stocks produced solid gains, enabling the Portfolio to handily beat the EAFE
Index. Several smaller Asian markets posted large losses because currency
devaluations exacerbated corporate debt problems, while emerging markets in
Latin America generally posted strong returns.
LONGER-TERM PERFORMANCE OVERVIEW
The table on the following page presents the lifetime records of all nine
Portfolios. With the exceptions of our High Yield Bond and Small Company Growth
Portfolios, which have been in operation only 16 months, each of the Portfolios
has outperformed its peer group since the Portfolio's inception.
We are pleased with our record so far. However, we emphasize that the past
returns shown in the table on page 4 should not be regarded as guides to our
Portfolios' future returns. Since our Portfolios began operations, returns from
U.S. stocks and bonds have
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been above long-term historical norms, which suggests the strong possibility
that future returns will be less generous. But short-term movements in the
financial markets are highly unpredictable--indeed, we sounded a cautious note
about "rougher seas ahead" in our letter to you last year. All we can say with
certainty is that returns will fluctuate from year to year.
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AVERAGE ANNUAL TOTAL RETURNS
SINCE INCEPTION THROUGH
SEPTEMBER 30, 1997
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AVERAGE
VANGUARD COMPETITIVE
PORTFOLIO (INCEPTION) FUND FUND DIFFERENCE
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<S> <C> <C> <C>
Money Market (5/2/91) + 4.7% + 4.2% +0.5%
High-Grade Bond (4/29/91) + 7.9 + 7.0 +0.9
High Yield Bond (6/3/96) +14.3 +15.3 -1.0
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Balanced (5/23/91) +14.8% +12.7% +2.1%
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Equity Index (4/29/91) +18.3% +16.8% +1.5%
Equity Income (6/7/93) +19.7 +17.5 +2.2
Growth (6/7/93) +22.0 +18.9 +3.1
Small Company Growth (6/3/96) +14.9 +19.4 -4.5
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International (6/3/94) +13.9% +10.1% +3.8%
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</TABLE>
Despite the unpredictability of absolute returns, we are confident that
our Portfolios can provide strong relative returns over time. In our quest to
provide higher long-term returns than our competitors, we are aided by our
lower costs, which year in and year out give us an edge over our peers. That
"expense advantage"--ranging from nearly 0.6% last year for our Money Market
Portfolio to approximately 1.2% for our International Portfolio--is one that we
believe will endure and will enhance your long-term returns.
IN SUMMARY
Since its creation in 1991 as a way for investors to accumulate assets in
variable annuity or variable life insurance contracts, Vanguard Variable
Insurance Fund has met with increasing acceptance and has reached nearly $3
billion in assets. Certainly part of our growth can be credited to the
generally favorable market conditions since 1991 (and, indeed, since the early
1980s). However, we also believe that a good portion of our success is due to
our strategy of providing a high-quality, clearly defined, and professionally
managed set of investment options at the lowest reasonable cost.
We pledge to adhere to our strategy, just as we advise investors to "stay
the course" with a balanced, long-term investment program that suits their
financial objectives and circumstances, their time horizons, and their
tolerance for the markets' ups and downs. For variable annuity and variable
life contract holders, Vanguard Variable Insurance Fund provides a means to
personally tailor and adjust such a customized, long-term program.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Chairman of the Board President
October 20, 1997
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Special Notice To Shareholders Of The Small Company Growth Portfolio
The Fund's Board of Trustees has approved a change to the investment advisory
agreement between the Small Company Growth Portfolio and its investment
adviser, Granahan Investment Management, Inc. Under the current agreement,
dated May 1, 1996, Granahan's advisory fees are increased or decreased based
upon the Portfolio's investment performance compared with that of the Russell
2000 Index. The revised agreement, which takes effect on January 1, 1998,
will adopt a new performance benchmark for determining the incentive/penalty
adjustment to Granahan's fees.
NEW PERFORMANCE BENCHMARK
The Portfolio's new performance benchmark is the Small Company Growth Fund
Stock Index. This index comprises the common stocks held by the 25 largest
small-company stock mutual funds (at the end of 1996, this amounted to
approximately 1,800 stocks). Morningstar, Inc., an independent consultant,
maintains the Small Company Growth Fund Stock Index exclusively for Vanguard.
WHY CHANGE THE PERFORMANCE BENCHMARK?
The Portfolio's current performance benchmark--the Russell 2000
Index--includes many value stocks that are inconsistent with the Portfolio's
growth-stock orientation. In addition, because it is a market
capitalization-weighted index, the Russell 2000 does not reflect the
characteristics and performance of the Portfolio's direct competitors--other
small-company growth funds. Overall, the Fund's Trustees and officers believe
that the Small Company Growth Fund Index is a more appropriate performance
benchmark for determining Granahan's incentive/penalty fees.
NO OTHER SIGNIFICANT CHANGES
There will be no other significant changes to the terms of the investment
advisory agreement. Granahan will continue to manage the investment and
reinvestment of the Portfolio's assets, subject to the control of the Fund's
officers and Trustees. The Portfolio will continue to pay Granahan a basic
advisory fee at the end of each fiscal quarter. On an annualized basis, this
fee amounts to 0.15% of the average month-end net assets of the Portfolio for
the quarter. As under the current agreement, Granahan's basic advisory fee
will be increased or decreased depending on the Portfolio's total return
compared with that of a performance benchmark. Although this performance
benchmark is changing from the Russell 2000 Index to the Small Company Growth
Stock Fund Index, the adjustment schedule remains the same. The new
performance benchmark will be phased in over a three-year period beginning
January 1, 1998.
MORE ON GRANAHAN
Granahan Investment Management, Inc., 275 Wyman Street, Waltham, MA 02154, is
an investment advisory firm specializing in small-company stock investments.
Founded in 1985, Granahan currently manages about $1.5 billion in assets,
including approximately $1.3 billion in assets for Vanguard Explorer Fund,
another small-company stock fund.
(continued on next page)
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For the fiscal year ended September 30, 1997, the Small Company Growth
Portfolio paid approximately $85,000 in advisory fees to Granahan. This
amount represented an effective annual rate of 0.12% of the Portfolio's
average net assets for the year, including a base fee of $107,000 and a
performance penalty of $22,000 (0.03% of average net assets). For fiscal
1997, Vanguard Explorer Fund paid Granahan advisory fees representing an
effective annual rate of approximately 0.20% of the Fund's average net
assets.
OTHER BACKGROUND INFORMATION
In 1993, the Fund received permission from shareholders and the U.S.
Securities and Exchange Commission to enter into new investment advisory
agreements without the delay and expense of a shareholder vote. This
permission was granted subject to a number of conditions, including the
requirement that shareholders be notified of any changes to the Fund's
investment advisory agreements. Shareholders of the Portfolio have never
voted on its investment advisory agreement.
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THE MARKETS IN PERSPECTIVE
Year Ended September 30, 1997
U.S. EQUITY MARKETS
For stock investors, the fiscal year ended September 30, 1997, was nothing
short of spectacular. Indeed, it was a very good year for almost all types of
investors: Virtually across the board, returns in the equity and bond markets
ranged from quite strong to exceptional, relative to historical averages. These
results can be attributed to three factors: continued solid economic growth;
harnessed inflation, remaining at levels not experienced since the 1960s; and
growth in corporate profits that was not only impressive but exceeded
expectations. The most surprising aspect of this remarkable period is that the
rate of inflation actually continued to decline despite robust growth and a
very low level of unemployment. According to traditional economic theory,
inflation should instead have accelerated at this point in the economic cycle.
The most widely accepted explanation for this paradox involves substantial
productivity gains that are not apparent from the measures in use today.
Reports indicate that even the Federal Reserve Board is otherwise at a loss to
explain the current "economic nirvana."
Large-capitalization U.S. common stocks performed extraordinarily well
during the past year, as illustrated by the 40.4% gain of the Standard & Poor's
500 Composite Stock Price Index. This advance ranks among the top 5% for all
12-month periods in the last 20 years. Among the best-performing sectors were
technology and financial services, with increases of 67.5% and 54.1%,
respectively. The surge in technology reflects robust corporate spending on
this industry's products, particularly desktop computers, networking equipment,
and software. Despite posting an aggregate gain of 24.4%, consumer
discretionary stocks could be considered laggards. (Clearly, the market has
shown amazing gains when a 24% advance over a one-year period can be viewed as
inadequate.)
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AVERAGE ANNUALIZED RETURNS
PERIODS ENDED SEPTEMBER 30, 1997
--------------------------------
1 YEAR 3 YEARS 5 YEARS
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<S> <C> <C> <C>
EQUITY
S&P 500 Index 40.4% 29.9% 20.8%
Russell 2000 Index 33.2 23.0 20.5
MSCI EAFE Index 12.5 9.1 12.7
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FIXED-INCOME
Lehman Aggregate Bond Index 9.7% 9.5% 6.9%
Lehman 10-Year Municipal Bond Index 9.5 8.7 7.4
Salomon Brothers Three-Month
U.S. Treasury Bill Index 5.2 5.4 4.6
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OTHER
Consumer Price Index 2.2% 2.6% 2.7%
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</TABLE>
The performance of small-company stocks, while they failed to match the
outsized advance of the S&P 500 Index, was more than respectable during this
period--the Russell 2000 Index gained 33.2%. The difference in return between
large and small companies is partly the result of the superior earnings growth
achieved by larger companies during the past 24 months. In addition, large
companies generated better-than-expected earnings 60% of the time over the
past year, compared to only 40% for small firms. Within sectors, the most
dramatic difference between large and small companies appeared in technology
issues. In the Russell 2000 Index, technology stocks advanced "only" 26.0% in
aggregate, over 40 percentage points less than their large-company
counterparts.
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U.S. FIXED-INCOME MARKETS
In the fixed-income markets, rates fell across the yield curve, rewarding
investors with higher total returns. For example, the rates on 1-, 5-, 10-, and
30-year U.S. Treasury issues fell 0.25%, 0.47%, 0.58%, and 0.49%, respectively,
from September 30, 1996, to September 30, 1997. These declines reflect the
continued good news regarding inflation and the relative dormancy of the
Federal Reserve. The benefit of the drop in rates can be seen in the 9.7%
return of the Lehman Brothers Aggregate Bond Index, the broadest measure of
investment-grade issues. Investors in lower-quality securities fared even
better, as illustrated by the 14.5% gain of the Lehman High Yield Bond Index.
The strength of the economy combined with the lack of inflationary pressure
produced an ideal environment for junk bonds.
INTERNATIONAL EQUITY MARKETS
Investments in non-U.S. common stocks did not match the gains in domestic
equities, with the Morgan Stanley Capital International Europe, Australasia,
Far East Index advancing 12.5% in dollars. This Index's relatively modest
performance masks the fact that the European markets were very strong during
the past year, gaining 48.1% in local currency terms and 35.4% in dollars,
while many of the Pacific Basin markets were weak, down 5.4% in local currency
and 13.1% in dollars. The Japanese market declined 15.7% in dollars and 8.6% in
yen terms. Despite the competitive benefits of a weak currency, Japan continued
to struggle with a weak domestic economy and an oversupply of equities. Smaller
Asian markets, such as Malaysia (losing 28.5% in local terms and 44.7% in
dollars), suffered from a variety of challenges, chiefly overvalued currencies
and high interest rates.
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REPORT FROM VANGUARD FIXED INCOME GROUP
Money Market Portfolio and High-Grade Bond Portfolio
In the fiscal year ended September 30, 1997, bond market investments produced
healthy returns as intermediate- and long-term interest rates fell by roughly
one-half percentage point. On top of the 6% to 7% in income earned during the
period, the general decline in market rates resulted in price appreciation,
which varied along with the maturities of bonds. In a rare "win-win" situation,
money market investors also enjoyed a slight increase in returns because of
rising interest rates for very short-term securities.
The seemingly contradictory pattern of rising short-term rates and falling
long-term rates was due to a combination of preemptive tightening of monetary
policy by the Federal Reserve Board and unexpectedly good inflation data
throughout the year. In March of this year, the Fed engineered a 0.25% increase
in the federal funds rate, the agency's first tightening of monetary policy
since early 1995. Remarks by Fed officials then--and again more
recently--indicated that they felt the economic headwinds (primarily job
insecurity) that had kept inflationary pressures in check had largely
dissipated. Low unemployment and rising wages have fueled consumer confidence
and propelled the economy's annual growth rate above the speed limit of 2% to
2.5% that had been viewed as noninflationary. Still, inflation has remained
surprisingly low during this period of rapid growth and has boosted the
confidence of long-term bond investors that price pressures will remain
subdued. This confidence has caused the inflation risk premium typically
factored into the prices of long-term bonds to shrink, flattening the yield
curve (i.e., reducing the gap between yields on short-term and long-term
bonds).
In managing the Money Market Portfolio of the Vanguard Variable Insurance
Fund, we have somewhat reduced the average maturity of the Portfolio's
holdings. The economy's continued strong growth is likely to force the Fed to
raise short-term rates again, particularly in light of the dwindling supply of
workers available to sustain the expansion. The shorter term of the Portfolio's
holdings will cause its yield to more quickly reflect changes in market rates,
which will benefit the Portfolio if rates rise. Also, we are steering our
investments into the high-quality end of the creditworthiness spectrum. This
should come as no surprise to shareholders who have invested with us for any
length of time. Our bias toward high-quality securities is long-standing, and
it has been reinforced by the situation in today's taxable money markets, which
offer only the thinnest margin of additional yield for issues of less than top
quality. This thin margin is, over time, dwarfed by the expense advantage of
Vanguard portfolios versus competing funds.
Over the last six months, the bond market experienced a moderate decline
in yields, reflecting investors' expectations that low inflation rates will
continue.
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<PAGE> 12
The Treasury yield curve flattened slightly, with yields on 2-year issues
declining by 0.6% and yields on 30-year issues declining by 0.7%.
On balance over the full fiscal year ended September 30, 1997, 2-year
rates declined by 0.3%, and yields on 10- and 30-year bonds declined by
approximately 0.6% and 0.5%, respectively.
The table below presents the performance of the various sectors of the
Lehman Aggregate Bond Index--a good proxy for the entire taxable bond
market--for the 6- and 12-month periods ended September 30, 1997.
<TABLE>
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SIX-MONTH TWELVE-MONTH
TOTAL RETURN TOTAL RETURN
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<S> <C> <C>
Lehman Aggregate Bond Index 7.12% 9.71%
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Government Sector 6.94% 9.16%
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Corporate Sector 8.20% 10.83%
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Mortgage-Backed Sector 6.83% 10.04%
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</TABLE>
Corporate bonds were the best-performing category for both periods. This
was the result of (1) higher initial yields offered by the corporate sector;
(2) a narrowing of spreads between yields on corporate bonds and yields on U.S.
Treasury securities, which was associated with stronger corporate balance
sheets; and (3) the longer average maturity of the corporate sector.
The High-Grade Bond Portfolio is designed to closely replicate the
performance of the Lehman Aggregate Bond Index. For the 6-and 12-month periods
ended September 30, the Portfolio's returns were 7.03% and 9.60%, respectively,
compared with the Index returns of 7.12% and 9.71% for the periods. Adjusted
for expenses and transaction costs (neither of which affect the theoretical
Index), the Portfolio's tracking of the benchmark was excellent, actually
outpacing it by 0.1 percentage point for the 6-month period and by 0.3
percentage point for the 12-month period.
As of September 30, the Portfolio comprised 35% government bonds, 29%
corporate bonds, 5% foreign bonds (denominated in U.S. dollars), and 31%
mortgage-backed securities.
Kenneth E. Volpert, Principal
John W. Hollyer, Principal
October 15, 1997
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,
nonfinancial 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.
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REPORT FROM WELLINGTON MANAGEMENT COMPANY, LLP
High Yield Bond Portfolio
This is our third letter to shareholders since the High Yield Bond Portfolio
began operations on June 3, 1996. For the 6- and 12-month periods ended
September 30, 1997, the Portfolio has returned 9.0% and 14.1%, respectively.
Yields on 10-year U.S. Treasury bonds have declined by approximately 60 basis
points (0.60 percentage point) since the beginning of the fiscal year, and by
some 80 basis points since its midpoint on March 31. As we mentioned in the
annual report last fall, below-investment-grade bonds usually outperform
higher-quality bonds at times when investors are anticipating strong economic
growth and interest rates are rising moderately. During the most recent
six-month period, we experienced strong growth but falling interest rates--an
unusual combination. In general, the high-yield market managed to keep pace
with the investment-grade market as the general level of interest rates fell.
Investors continue to favor below-investment-grade bonds because the
annual default rate by corporate bond issuers has fallen to historically low
levels. We expect moderate economic growth to continue, so we also expect the
default rate to remain low. Given this constructive economic outlook, we
continue to emphasize bonds issued by large companies sensitive to the economic
cycle. We do not anticipate any major problems in the economy that would cause
your Portfolio to suffer any meaningful deterioration in credit quality.
We remain very selective with respect to creditworthiness, however, in
examining the large number of new issues coming to market. With substantial
cash flows into high-yield bond funds and a broader acceptance of high-yield
bonds by investors who have traditionally bought only investment-grade
securities, the quality of the companies coming to market could decline.
Twenty-five percent of total high-yield bond issuance through the first half of
the calendar year has been from Yankee issuers (foreign issuers whose
securities are denominated in U.S. dollars). Sixty-three percent of the Yankee
issuance in the January-June period was by sovereign governments or
corporations in Latin America. Two years ago, by contrast, only 5% of such
bonds were issued by Latin American borrowers. Your Portfolio does not
currently hold bonds from issuers in Latin America, but we continue to monitor
their willingness and ability to service their debts in a timely fashion.
We remain committed to conducting in-depth credit research on a
company-by-company basis and to emphasizing diversification in the Portfolio's
construction. The Portfolio now owns more than 150 issues representing a broad
range of industries and companies. The Portfolio's holdings continue to be
focused on cash-paying issues rated B or better. Our emphasis, in short, is on
relatively higher-quality bonds within the below-investment-grade market.
Earl E. McEvoy, Senior Vice President and
Portfolio Manager
October 14, 1997
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.
11
<PAGE> 14
REPORT FROM WELLINGTON MANAGEMENT COMPANY, LLP
Balanced Portfolio
The Balanced Portfolio earned a 27.6% return during the fiscal year ended
September 30, 1997. The stock market increased sharply during the period, which
benefited the sizable portion (62%) of the Portfolio invested in equities. The
remainder of the Portfolio's investments, which are in fixed-income securities,
also provided attractive returns as interest rates declined moderately. For the
fiscal year, the equity portion of the Portfolio gained 37.2% and the
fixed-income securities segment returned 13.0%.
In the equity portion of your Portfolio, we maintain a large
representation in the financial services, health-care, basic materials, energy,
and auto & transportation sectors. During fiscal 1997, the Portfolio benefited
from its large exposure to financial services and its underweighting versus the
overall market in consumer stocks. The latter group was hurt by investor
expectations that profits on foreign operations would suffer because of the
high level of the dollar relative to other currencies. On the other hand, the
Portfolio's low exposure to technology stocks, which generally do not provide
the dividend income we look for in our equity selections, held us back a bit
since this sector enjoyed the biggest gains during fiscal 1997.
During the year, we added several new names in a number of sectors,
including H.J. Heinz, consumer staples; Fannie Mae and Marsh & McLennan,
financial services; Occidental Petroleum, energy; Boeing and Lockheed Martin,
producer durables; and IBM, technology. These were funded by sales of holdings
where we saw less opportunity, or, as in the case of Northrop Grumman, where a
takeover proposal was received.
Investors in fixed-income securities generally continue to be more
concerned than equity investors about a possible resurgence in inflation. As a
result, bond yields are at a premium over the rate of inflation. We find the
yields on long-term bonds quite attractive in the current environment.
Stocks performed extremely well during the year, despite setbacks in March
and August when investors began to worry about the economy's ability to sustain
its high growth rate without inflation. So far these corrections have turned
out to be of minor importance. However, we are concerned that inflationary
pressures may emerge and that the growth rate of corporate profits may slow
from its rapid pace in recent years. Therefore, we are keeping the portion of
the Portfolio dedicated to equities at the low end of our normal 60%-70% range.
The Portfolio continues its approach of investing in a conservative manner
in both the equity and fixed-income markets. As the equity market continues its
advance to higher territory, we believe this approach is a wise course.
Ernst H. von Metzsch, Senior Vice President and
Portfolio Manager
Paul D. Kaplan, Senior Vice President and
Portfolio Manager
October 14, 1997
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.
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<PAGE> 15
REPORT FROM NEWELL ASSOCIATES
Equity Income Portfolio
The Equity Income Portfolio earned 38.1% for the fiscal year ended September
30, within striking distance of the 40.4% return of the S&P 500 Index and well
ahead of the 34.2% return achieved by the average equity income fund.
Newell Associates uses its Relative Yield Strategy to manage the
Portfolio. We buy stocks of large U.S. companies when they are out of favor and
sell them when investors become overly enthusiastic about their prospects. The
process results in a conservative portfolio, quite broadly diversified, with
low turnover and a dividend yield well above that of the market. The
Portfolio's current yield is almost twice that of the S&P 500 Index.
Ironically, in explaining the Portfolio's performance relative to the S&P
500 Index in recent years, it has been necessary to talk about computer-related
technology stocks--a group that is not in the Portfolio because such stocks pay
low or no dividends. In the S&P 500, by contrast, technology is now the
second-largest sector, accounting for roughly 14% of the market capitalization,
up from less than 10% only five years ago. Technology therefore is a critical
factor in the performance of the Index, overwhelming the influence of more
traditional industry sectors. Fiscal 1997 was another chapter in this ongoing
saga. The technology sector soared nearly 70%, far higher than the Index's
40.4% total return, to which the sector contributed almost 8 percentage points.
Only financial stocks came remotely close to making such a contribution to the
Index return.
The most important contributors to the Portfolio's return in the fiscal
year were the financial, drug, and petroleum sectors. Since the 1990-91
recession, banks, as well as savings and loans and insurance companies, have
benefited from declining interest rates and a friendly regulatory environment.
These financial stocks have enjoyed enormous price increases since then, and
their strong performance during fiscal 1997 continued the phenomenon.
The drug stocks also remained strong during the past year. We acquired
these companies when they were deeply out of favor with investors who were
frightened in 1993 about the potential consequences of proposed national
health-care legislation. The stocks have since recovered much of their luster
in the eyes of investors. Although we have sold some holdings in the group,
others still have dividend yields high enough to keep them in the Portfolio.
The pharmaceutical group remains overweighted in the Portfolio versus the S&P
500 Index.
Petroleum stocks also contributed significantly to the Portfolio's strong
performance during the year, as energy prices held up better than many market
participants had expected.
Roger D. Newell, Chairman
October 14, 1997
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.
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<PAGE> 16
REPORT FROM LINCOLN CAPITAL MANAGEMENT COMPANY
Growth Portfolio
Enormous returns were earned from equity investments in the fiscal year ended
September 30, 1997. The S&P 500 Index generated a 40.4% return. Your Growth
Portfolio enjoyed a substantial gain for the third consecutive fiscal year.
However, after good relative performance in prior years, our 28.8% return in
fiscal 1997 was quite a bit behind the market.
What caused the lags? Here are some things that didn't happen:
1. Our industry diversification did not shift much. The only material
change involved technology stocks. This sector's representation in the
Portfolio rose from 16% to 21% during the year, a beneficial change.
2. There were no big industry bets. The Portfolio's industry weightings
are quite similar to those of the S&P/BARRA Growth Index (one reasonable
benchmark for measuring our performance). One minor bet is that the Portfolio
holds no stocks in the communications sector, which accounts for 3% of the
Growth Index.
3. The continuity of the Portfolio holdings was not disrupted. Of the 10
largest current holdings, 5 were similarly prominent a year ago (see the
accompanying table). Ditto for two years ago. Five of the largest
commitments--Intel, Philip Morris, Coca-Cola, Procter & Gamble, and
PepsiCo--have been among the Portfolio's top dozen holdings for three or four
years. So the character of the holdings is quite stable. The number of holdings
is 57, down one from the end of fiscal year 1996. Turnover during the past 12
months was a moderate 38%.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
COMPANY BUSINESS
- -------------------------------------------------------------------
<S> <C>
1. Intel Corp. #1 semiconductor manufacturer
2. Philip Morris Cos., Inc. #1 diversified consumer products
company
3. The Coca-Cola Co.* #1 soft drinks company
4. Procter & Gamble Co.* #1 household products company
5. Monsanto Co. #1 agricultural biotech company
6. Pfizer, Inc.* Innovative pharmaceutical company
7. Bristol-Myers Squibb Co. A leading pharmaceutical/consumer
products maker
8. Microsoft Corp. #1 software producer
9. PepsiCo, Inc.* #1 snack foods, #2 soft drinks
10. Hewlett-Packard Co.* #1 electronic instruments/
printers
- -------------------------------------------------------------------
</TABLE>
*In the top ten a year ago.
Most of the shortfall versus the S&P 500 and S&P/BARRA Growth Indexes
related to selections in technology--we didn't own Microsoft throughout the
period (it had seemed fully priced), Lucent, or Compaq, all of which zoomed. We
did own some moderate-sized tech companies that sagged. Our energy and business
service selections, and several forays into more moderately sized,
consumer-type companies, didn't prove successful. As you can imagine, even a
few stubbed toes were painful in such a strong bull market. Grimacing, we
apologize.
Looking back at three good years, both absolute and relative, we are
convinced that fiscal 1997 was an anomaly. While there isn't much room for it,
we have even further increased our due diligence, especially on
14
<PAGE> 17
stocks that are over-owned and slipping or under-owned and accelerating. You
may be sure we are bending every effort to provide superior returns in the year
and years ahead.
Dave Fowler, Portfolio Manager
Parker Hall, Portfolio Manager
October 14, 1997
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.
15
<PAGE> 18
REPORT FROM GRANAHAN INVESTMENT MANAGEMENT, INC.
Small Company Growth Portfolio
Small-capitalization stocks returned to favor in recent months after several
years of being outperformed by larger stocks. A chief reason for the turnaround
was the relatively faster growth of earnings for many small growth companies.
Another factor was the strengthening of the dollar, which tends to do less harm
to small companies than to large companies, as the latter typically derive more
revenue and earnings from international operations.
During the six months ended September 30, 1997, the Small Company Growth
Portfolio earned a total return of 35.3%, while the Russell 2000 Index of
small-cap stocks returned 33.5%. This positive comparison, however, did not
make up for our poor first-half performance. For the full fiscal year, the
Portfolio's return of 22.2% lagged the 33.2% return of the Russell 2000 Index.
Technology stocks rebounded nicely in the second half of the year. Other
strong areas included consumer time-share properties, brokerage firms, and
energy service companies. The health-care segment of the small-cap market was a
laggard.
INVESTMENT THEMES
Several investment themes have been at work in the Portfolio since its
inception in June 1996:
Air freight forwarders (such as Expeditors, Air Express, and Circle) have
benefited from strong global trade plus a trend among shippers to concentrate
their outsourcing of logistics management to fewer vendors. Price/earnings
ratios in this group have risen significantly, so we did some selling.
Energy service stocks (Halter, Hvide, Smith, and Trico) are benefiting
from a sharp rebound in oil-drilling activity, particularly in the Gulf of
Mexico. Valuations of these stocks have also risen.
Industry consolidators (Service Experts and Comfort Systems) are
benefiting from a trend toward combining operators in fragmented industries, in
their case heating, ventilation, and air-conditioning contractors.
Certain Internet and Intranet companies (E*TRADE, Netscape, Object Design,
QuickResponse Services, and Security Dynamics) are achieving sustainable
profitability. Valuations in this sector have generally risen.
Time-share companies (including Fairfield Communities, Vistana, and
Trendwest) have enjoyed good sales and earnings growth.
Looking ahead, investment areas that offer attractive prospects include
certain biotechnology companies (Portfolio holdings include Creative
Biomolecules, Cell Genesys, TheraTech, and PathoGenesis); the deregulation of
electric utilities; and new consumer-electronic technologies such as digital
television, the convergence of TV and personal computers, and digital versatile
discs.
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<PAGE> 19
SUMMARY
When we wrote to you six months ago, the Portfolio's stocks were selling at a
relatively attractive price/earnings (P/E) ratio of about 20, based on
most-recent earnings. We estimated that earnings on these stocks would grow at
a 23% annual rate. Today's stocks in the Portfolio have reported earnings
growth exceeding 30% and as a group are selling at prices equaling about 27
times earnings. Whereas a P/E of 27 is relatively high, it is similar to that
of the Russell 2000. We forecast earnings for our companies to grow by 27% next
year, compared with a growth rate of 24% for the companies in the Russell 2000
Index.
John J. Granahan, Portfolio Manager
Gary C. Hatton, Assistant Portfolio Manager
Jane M. White, Assistant Portfolio Manager
October 14, 1997
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.
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<PAGE> 20
REPORT FROM SCHRODER CAPITAL MANAGEMENT INTERNATIONAL
International Portfolio
The International Portfolio provided a total return of 18.6% during fiscal
1997, which ended on September 30. This exceeded the 12.5% return of the MSCI
EAFE Index and was in line with the 18.4% return on the average international
equity fund.
Diversified portfolios invariably contain both good and relatively bad
news. The extremes of good and bad were more extreme than usual in fiscal 1997.
Continental European currencies fell, on average, by some 13% against the U.S.
dollar during the year, but European equity markets soared by more than 50% in
local-currency terms. The U.K. market rose by "only" 35% in local terms, but
the pound sterling rose 3% against the dollar. The Japanese market appeared to
break the mold, as its market fell 9% in yen terms even though the yen declined
by 8% versus the dollar. But the Japanese stocks in the Portfolio followed the
European pattern, rising nearly 20% in yen terms as the currency weakened. In
the developed Southeast Asia countries, Hong Kong was up more than 20%, while
Malaysia fell by roughly 45% in dollar terms. Among emerging markets, those in
Latin America rose by more than 50% while Asia's fell by more than 15%.
Some of these contrasts look self-explanatory: Continental European
markets rose, in part, because their currencies were weak, and the U.K. market
would have risen by more had the pound sterling's strength not damaged the
profits of exporting companies. In Japan, some of our stocks' good performance
was due to the boost to companies' profits caused by the weak yen. However, in
the rest of Asia and in Latin America, stock markets simply reflected--and in
some cases exaggerated--varied local economic conditions.
Markets usually perform best when there is spare capacity in the economy
and growth is just beginning to pick up. This was the case in many continental
European countries last year, with the Netherlands among those leading the
procession and Germany, Switzerland, and France trailing it. The German, Swiss,
and French economies are still in the early stages of recovery, which suggests
that their markets have strong reasons to rise further. But any ascent will
have to surmount "walls of fear" because stock prices have risen dramatically
over the past two years. I have begun to take some profits, but have done so
selectively because many of the companies in the Portfolio are restructuring
and we believe that their results for at least the next two years will provide
more-than-adequate support for their share prices.
The United Kingdom, like the United States, is at a more advanced stage in
the economic cycle; monetary policy has already been tightened to dampen
growth, and we expect that it will be tightened further over the next six
months. Although U.K. stocks are among the cheapest in Europe, there will prove
to be good reason for this if monetary policy is tightened further. The
Portfolio's exposure to the United Kingdom, at 9.1%, is the lowest it has been
in many years.
During the past few months we began to look for opportunities to add to
our holdings in Asia--first in Japan, then in Hong Kong, and, most recently in
the smaller countries. Investors currently have very modest expectations for
Japan, and the market would be very
18
<PAGE> 21
receptive to positive surprises. The best surprise would be signs that Japanese
consumers were ready to increase spending, but tax increases there in April
diminished disposable income, and the employment outlook is not yet encouraging
enough to prompt people to spend more and save less. Foreign trade remains
strong and so does investment spending by companies, but these factors have yet
to boost consumer confidence.
The obverse of a dull jobs environment is continued cost-cutting by
Japanese companies, particularly those that compete globally. These are
predominant in our Portfolio, and their continued successes have produced
strong performance for us, as mentioned earlier. Indeed, the balance sheets of
companies in the Portfolio are flush with cash, and we are aware that the
emergence of share buybacks would provide a considerable further stimulus to
these stocks' prices. Buybacks are practicable under newly changed Japanese tax
law, but we do not expect companies to move rapidly in this direction. The
emergence of executive stock-option schemes helps by making Japanese companies
more conscious of boosting shareholder value, but this too will only slowly
grow in popularity.
We increased exposure to Hong Kong because we anticipated a successful
handover of the territory to China, and we take an increasingly positive view
of economic developments there. The recent currency turmoil in southern Asia
has affected sentiment in Hong Kong's stock market but should not materially
affect developments in China or Hong Kong. Malaysia and the smaller emerging
markets in Asia have suffered a massive setback as a result of a loss of
confidence in their currencies. We have negligible exposure to Thailand, the
epicenter of the problems, but have been taken aback by the spread of the
currency difficulties to the sounder economies of Indonesia and the
Philippines. That said, these markets have fallen sharply in U.S. dollar terms,
and many industrial and commercial stocks will be well placed to recover
strongly; banks, on the other hand, remain vulnerable to bad-debt problems
resulting from the crisis. We have negligible exposure to banks in the area.
By contrast to Southeast Asia, Latin American markets have been very
strong and have provided the highest return to the Portfolio of any region in
fiscal 1997. We continue to limit our holdings in emerging markets. The past
year provides ample proof of the riskiness of individual markets and of the
benefits of diversification.
Richard Foulkes
October 15, 1997
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.
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<PAGE> 22
PORTFOLIO PROFILE
Money Market Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
September 30, 1997. Key elements of this Profile are defined below and on page
21.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ---------------------------------------------
<S> <C>
Yield 5.5%
Average Maturity 44 days
Average Quality Aa1
Expense Ratio 0.21%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -----------------------------------------------
<S> <C>
Aaa 25.8%
Aa 54.8
A 19.4
Baa --
Ba --
B --
Not Rated --
- -----------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF PORTFOLIO)
- ---------------------------------------------
<S> <C>
Bank Note 0.8%
Certificates of Deposit 25.0
Commercial Paper 60.2
U.S. Government and Agency 14.0
- ---------------------------------------------
Total 100.0%
</TABLE>
AVERAGE COUPON. The average interest rate paid on the securities held by a
portfolio. It is expressed as a percentage of face value.
AVERAGE DURATION. An estimate of how much a bond portfolio's share price will
fluctuate in response to a change in interest rates. To see how the price
could shift, multiply the portfolio's 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 would 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 (or are called) and are repaid. In general, the longer the
average maturity, the more a 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
ratings assigned to a portfolio's securities holdings by credit-rating
agencies. The agencies make their judgment after appraising an issuer's ability
to meet its obligations. Quality is graded on a scale, with Aaa or AAA
indicating the most creditworthy bond issuers and A-1 or MIG-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 ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned 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--after
adjusting for cash held as collateral for futures contracts.
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<PAGE> 23
COUNTRY DIVERSIFICATION. The percentages of a portfolio's common stock invested
in securities of various countries.
DISTRIBUTION BY CREDIT QUALITY. This breakdown of a portfolio's securities by
credit rating can help in gauging the risk that returns could be affected by
defaults or other credit problems.
DISTRIBUTION BY ISSUER. A breakdown of a portfolio's holdings by type of issuer
or type of instrument.
DISTRIBUTION BY MATURITY. An indicator of interest-rate risk. In general, the
higher the concentration of longer-maturity issues, the more a 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.
FOREIGN HOLDINGS. The percentage of a portfolio's net assets represented by
stocks or American Depository Receipts of companies based outside the United
States.
INVESTMENT FOCUS. This 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 ASSET ALLOCATION. This chart shows the proportions of a portfolio's
holdings allocated to different types of assets.
PRICE/BOOK RATIO. The share price of a stock divided 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. For a portfolio, the weighted average P/E of the
stocks it holds. 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.
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.
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a portfolio, the weighted average return
on equity for the companies whose stocks it holds.
SECTOR DIVERSIFICATION. The percentages of a portfolio's common stocks that come
from each of the major industry groups that compose the stock market.
TURNOVER RATE. An indication of trading activity during the past year.
Portfolios with high turnover rates incur higher transaction costs and are more
likely to 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 the portfolio's net asset value, is based on
income earned over the past 30 days (7 days for money market portfolios) and is
annualized, or projected forward for the coming year. The index yield is based
on the current annualized rate of dividends paid on stocks in the index.
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<PAGE> 24
PORTFOLIO PROFILE
High-Grade Bond Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
September 30, 1997, compared where appropriate to an unmanaged index. Key
elements of this Profile are defined on pages 20 and 21.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- -----------------------------------------------------------
<S> <C>
Number of Issues 591
Yield 6.4%
Yield to Maturity 6.3%
Average Coupon 7.6%
Average Maturity 8.8 years
Average Quality Aa1, Aa2
Average Duration 4.5 years
Expense Ratio 0.29%
Cash Reserves 1.5%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- -------------------------------------------------------------
HIGH-GRADE LEHMAN
BOND INDEX*
- -------------------------------------------------------------
<S> <C> <C>
R-Squared 1.00 1.00
Beta 0.99 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- -------------------------------------------------------------
<S> <C>
Under 1 Year 2.8%
1-3 Years 19.9
3-5 Years 17.3
5-7 Years 16.2
7-10 Years 22.6
Over 10 Years 21.2
- -------------------------------------------------------------
Total 100.0%
</TABLE>
INVESTMENT FOCUS
- -------------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -------------------------------------------------------------
<S> <C>
Aaa 71.1%
Aa 4.9
A 13.1
Baa 10.9
Ba --
B --
Not Rated --
- -------------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF PORTFOLIO)
- -------------------------------------------------------------
<S> <C>
Asset-Backed 4.0%
Finance 11.0
Foreign 4.9
Industrial 10.6
Mortgage 30.7
U.S. Government and Agency 1.6
U.S. Treasury 34.0
Utilities 3.2
- -------------------------------------------------------------
Total 100.0%
</TABLE>
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<PAGE> 25
PORTFOLIO PROFILE
High Yield Bond Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
September 30, 1997, compared where appropriate to an unmanaged index. Key
elements of this Profile are defined on pages 20 and 21.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- -------------------------------------------------------------
<S> <C>
Number of Issues 156
Yield 8.6%
Yield to Maturity 8.7%
Average Coupon 9.6%
AverageMaturity 5.9 years
Average Quality B1
Average Duration 4.2 years
Expense Ratio 0.31%
Cash Reserves 6.4%
</TABLE>
INVESTMENT FOCUS
- -------------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -------------------------------------------------------------
<S> <C>
Aaa 5.2%
Aa --
A --
Baa --
Ba 26.9
B 67.9
Not Rated --
- -------------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- -------------------------------------------------------------
<S> <C>
Under 1 Year 5.2%
1-3 Years 0.6
3-5 Years 4.3
5-7 Years 14.6
7-10 Years 70.7
Over 10 Years 4.6
- -------------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF PORTFOLIO)
- -------------------------------------------------------------
<S> <C>
Asset-Backed --
Finance 4.6%
Foreign --
Industrial 93.0
Mortgage --
U.S. Government and Agency --
U.S. Treasury --
Utilities 2.4
- -------------------------------------------------------------
Total 100.0%
</TABLE>
23
<PAGE> 26
PORTFOLIO PROFILE
Balanced Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
September 30, 1997, compared where appropriate to an unmanaged index. Key
elements of this Profile are defined on pages 20 and 21.
<TABLE>
TOTAL FUND CHARACTERISTICS
- --------------------------------------------------------------------------------
<S> <C>
Yield 3.8%
Turnover Rate 25%
Expense Ratio 0.32%
Cash Reserves 1.9%
</TABLE>
<TABLE>
<CAPTION>
TOTAL FUND VOLATILITY MEASURES
- --------------------------------------------------------------------------------
BALANCED S&P 500
- --------------------------------------------------------------------------------
<S> <C> <C>
R-Squared 0.87 1.00
Beta 0.73 1.00
</TABLE>
<TABLE>
PORTFOLIO ASSET ALLOCATION
- --------------------------------------------------------------------------------
<S> <C>
Stocks 61%
Bonds 37%
Cash Reserves 2%
</TABLE>
<TABLE>
TEN LARGEST HOLDINGS (% OF EQUITIES)
- --------------------------------------------------------------------------------
<S> <C>
Allstate Corp. 3.5%
U.S. Bancorp 3.2
Citicorp 3.0
Xerox Corp. 2.5
Union Pacific Corp. 2.4
Ford Motor Co. 2.4
Wachovia Corp. 2.2
Kimberly-Clark Corp. 2.0
Phelps Dodge Corp. 2.0
General Electric Co. 2.0
- --------------------------------------------------------------------------------
Top Ten 25.2%
- --------------------------------------------------------------------------------
Top Ten as % of Total Net Assets 15.4%
</TABLE>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
--------------------------------------------------------------------
BALANCED BALANCED S&P 500
--------------------------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation 9.5% 8.8% 3.6%
Consumer Discretionary 3.3 3.3 9.6
Consumer Staples 2.2 3.0 10.8
Financial Services 18.4 22.1 16.8
Health Care 11.2 11.1 10.7
Integrated Oils 13.0 9.3 7.8
Other Energy 0.0 0.6 1.5
Materials & Processing 20.7 19.2 6.8
Producer Durables 7.8 7.9 4.6
Technology 0.0 1.3 13.2
Utilities 7.3 8.6 9.2
Other 6.6 4.8 5.4
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
EQUITY CHARACTERISTICS
- ----------------------------------------------------------
BALANCED S&P 500
- ----------------------------------------------------------
<S> <C> <C>
Number of Stocks 94 500
Median Market Cap $21.2B $35.4B
Price/Earnings Ratio 17.5x 21.9x
Price/Book Ratio 3.0x 4.0x
Dividend Yield 2.3% 1.6%
Return on Equity 16.7% 20.3%
Earnings Growth Rate 13.9% 18.2%
Foreign Holdings 8.0% 2.1%
</TABLE>
<TABLE>
FIXED-INCOME CHARACTERISTICS
- ----------------------------------------------------------
<S> <C>
Number of Bonds 104
Average Coupon 7.2%
Average Maturity 17.5 years
Average Quality Aa2
Average Duration 8.9 years
</TABLE>
<TABLE>
DISTRIBUTION BY ISSUER (% OF BONDS)
- ----------------------------------------------------------
<S> <C>
Asset-Backed --
Finance 14.2%
Foreign 11.2
Industrial 23.0
Mortgage 5.9
U.S. Government and Agency 0.6
U.S. Treasury 30.4
Utilities 14.7
- ----------------------------------------------------------
Total 100.0%
</TABLE>
EQUITY INVESTMENT FOCUS
- ----------------------------------------------------------
[GRAPH]
FIXED-INCOME INVESTMENT FOCUS
- ----------------------------------------------------------
[GRAPH]
<TABLE>
DISTRIBUTION BY CREDIT QUALITY (% OF BONDS)
- ----------------------------------------------------------
<S> <C>
Aaa 45.1%
Aa 15.9
A 27.8
Baa 11.2
Ba --
B --
Not Rated --
- ----------------------------------------------------------
Total 100.0%
</TABLE>
25
<PAGE> 28
PORTFOLIO PROFILE
Equity Index Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
September 30, 1997, compared where appropriate to an unmanaged index. Key
elements of this Profile are defined on pages 20 and 21.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ------------------------------------------------------------
EQUITY INDEX S&P 500
- ------------------------------------------------------------
<S> <C> <C>
Number of Stocks 506 500
Median Market Cap $35.4B $35.4B
Price/Earnings Ratio 21.9x 21.9x
Price/Book Ratio 4.0x 4.0x
Yield 1.6% 1.6%
Return on Equity 20.3% 20.3%
Earnings Growth Rate 18.2% 18.2%
Foreign Holdings 2.1% 2.1%
Turnover Rate 1% --
Expense Ratio 0.23% --
Cash Reserves 0% --
</TABLE>
VOLATILITY MEASURES
<TABLE>
<CAPTION>
EQUITY INDEX S&P 500
- ------------------------------------------------------------
<S> <C> <C>
R-Squared 1.00 1.00
Beta 1.00 1.00
- ------------------------------------------------------------
</TABLE>
INVESTMENT FOCUS
- ------------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- ------------------------------------------------------------
<S> <C>
General Electric Co. 2.9%
Exxon Corp. 2.1
Microsoft Corp. 2.1
The Coca-Cola Co. 2.0
Intel Corp. 2.0
Merck & Co., Inc. 1.6
Royal Dutch Petroleum Co. ADR 1.6
International Business Machines Corp. 1.4
Philip Morris Cos., Inc. 1.3
Procter & Gamble Co. 1.3
- ------------------------------------------------------------
Top Ten 18.3%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- --------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
-------------------------------------------------------------
EQUITY INDEX EQUITY INDEX S&P 500
-------------------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation 4.1% 3.6% 3.6%
Consumer Discretionary 10.5 9.5 9.6
Consumer Staples 11.8 10.9 10.8
Financial Services 15.0 16.7 16.8
Health Care 10.9 10.7 10.7
Integrated Oils 7.9 7.8 7.8
Other Energy 1.1 1.5 1.5
Materials & Processing 7.7 6.8 6.8
Producer Durables 4.5 4.6 4.6
Technology 10.3 13.2 13.2
Utilities 10.8 9.2 9.2
Other 5.4 5.5 5.4
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE> 29
PORTFOLIO PROFILE
Equity Income Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
September 30, 1997, compared where appropriate to an unmanaged index. Key
elements of this Profile are defined on pages 20 and 21.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- -----------------------------------------------------------
EQUITY INCOME S&P 500
- -----------------------------------------------------------
<S> <C> <C>
Number of Stocks 104 500
Median Market Cap $21.4B $35.4B
Price/Earnings Ratio 18.6x 21.9x
Price/Book Ratio 3.1x 4.0x
Yield 2.8% 1.6%
Return on Equity 18.4% 20.3%
Earnings Growth Rate 10.1% 18.2%
Foreign Holdings 2.1% 2.1%
Turnover Rate 8% --
Expense Ratio 0.37% --
Cash Reserves 1.1% --
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
EQUITY INCOME S&P 500
- -----------------------------------------------------------
<S> <C> <C>
R-Squared 0.85 1.00
Beta 0.70 1.00
- -----------------------------------------------------------
</TABLE>
INVESTMENT FOCUS
- -----------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
TEN LARGEST STOCKS (% OF TOTAL NET ASSETS)
- -----------------------------------------------------------
<S> <C>
Bell Atlantic Corp. 3.3%
Bristol-Myers Squibb Co. 3.0
Exxon Corp. 2.9
Mobil Corp. 2.6
Philip Morris Cos., Inc. 2.6
Chevron Corp. 2.5
Atlantic Richfield Co. 2.4
American Home Products Corp. 2.3
Texaco Inc. 2.2
AT&T Corp. 2.1
- -----------------------------------------------------------
Top Ten 25.9%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- -------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
------------------------------------------------------------
EQUITY INCOME EQUITY INCOME S&P 500
------------------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation 0.9% 2.9% 3.6%
Consumer Discretionary 6.0 5.8 9.6
Consumer Staples 7.2 8.6 10.8
Financial Services 18.3 19.6 16.8
Health Care 16.2 11.8 10.7
Integrated Oils 16.7 17.2 7.8
Other Energy 0.0 0.0 1.5
Materials & Processing 5.1 5.1 6.8
Producer Durables 1.4 1.7 4.6
Technology 0.0 0.0 13.2
Utilities 25.0 24.7 9.2
Other 3.2 2.6 5.4
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 30
PORTFOLIO PROFILE
Growth Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
September 30, 1997, compared where appropriate to an unmanaged index. Key
elements of this Profile are defined on pages 20 and 21.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- -----------------------------------------------------------
GROWTH S&P 500
- -----------------------------------------------------------
<S> <C> <C>
Number of Stocks 57 500
Median Market Cap $54.1B $35.4B
Price/Earnings Ratio 28.9x 21.9x
Price/Book Ratio 6.6x 4.0x
Yield 1.0% 1.6%
Return on Equity 25.7% 20.3%
Earnings Growth Rate 23.0% 18.2%
Foreign Holdings 4.9% 2.1%
Turnover Rate 38% --
Expense Ratio 0.38% --
Cash Reserves 3.5% --
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
GROWTH S&P 500
- -----------------------------------------------------------
<S> <C> <C>
R-Squared 0.89 1.00
Beta 0.99 1.00
- -----------------------------------------------------------
</TABLE>
INVESTMENT FOCUS
- -----------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
TEN LARGEST STOCKS (% OF TOTAL NET ASSETS)
- -----------------------------------------------------------
<S> <C>
Intel Corp. 4.8%
Philip Morris Cos., Inc. 4.3
The Coca-Cola Co. 4.2
Procter & Gamble Co. 4.0
Monsanto Co. 3.9
Pfizer, Inc. 3.9
Bristol-Myers Squibb Co. 3.5
Microsoft Corp. 3.4
PepsiCo, Inc. 3.1
Hewlett-Packard Co. 2.8
- -----------------------------------------------------------
Top Ten 37.9%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- ---------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
------------------------------------------------------------------
GROWTH GROWTH S&P 500
------------------------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation 0.0% 0.0% 3.6%
Consumer Discretionary 14.7 8.4 9.6
Consumer Staples 18.5 24.0 10.8
Financial Services 14.0 12.7 16.8
Health Care 19.2 18.1 10.7
Integrated Oils 0.0 0.0 7.8
Other Energy 2.3 1.5 1.5
Materials & Processing 6.4 8.7 6.8
Producer Durables 4.8 3.3 4.6
Technology 15.9 20.7 13.2
Utilities 4.2 0.0 9.2
Other 0.0 2.6 5.4
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 31
PORTFOLIO PROFILE
Small Company Growth Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
September 30, 1997, compared where appropriate to an unmanaged index. Key
elements of this Profile are defined on pages 20 and 21.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- -----------------------------------------------------------
SMALL COMPANY RUSSELL
GROWTH 2000
- -----------------------------------------------------------
<S> <C> <C>
Number of Stocks 127 1,950
Median Market Cap $0.5B $0.8B
Price/Earnings Ratio 26.4x 22.3x
Price/Book Ratio 4.0x 3.0x
Yield 0.8% 1.2%
Return on Equity 18.8% 13.1%
Earnings Growth Rate 15.5% 14.5%
Foreign Holdings 0% 0%
Turnover Rate 72% --
Expense Ratio 0.39% --
Cash Reserves 5.8% --
</TABLE>
INVESTMENT FOCUS
- -----------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
TEN LARGEST STOCKS (% OF TOTAL NET ASSETS)
- -----------------------------------------------------------
<S> <C>
Structural Dynamics Research Corp. 1.7%
Applied Power, Inc. 1.7
Visio Corp. 1.7
Pinnacle Systems, Inc. 1.5
Marcus Corp. 1.5
Service Experts Inc. 1.4
Vistana, Inc. 1.4
QuickResponse Services, Inc. 1.4
Arrow International, Inc. 1.4
DENTSPLY International Inc. 1.4
- -----------------------------------------------------------
Top Ten 15.1%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- ---------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
------------------------------------------------------------------
SMALL COMPANY SMALL COMPANY RUSSELL
GROWTH GROWTH 2000
------------------------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation 5.4% 5.1% 4.1%
Consumer Discretionary 18.0 20.4 16.1
Consumer Staples 1.1 0.9 2.8
Financial Services 12.0 10.9 23.4
Health Care 14.8 16.8 10.3
Integrated Oils 0.0 0.0 0.5
Other Energy 3.2 0.7 4.1
Materials & Processing 5.4 6.5 9.6
Producer Durables 14.9 8.2 8.4
Technology 24.3 29.2 13.0
Utilities 0.3 0.9 6.5
Other 0.6 0.4 1.2
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 32
PORTFOLIO PROFILE
International Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
September 30, 1997, compared where appropriate to an unmanaged index. Key
elements of this Profile are defined on pages 20 and 21.
PORTFOLIO CHARACTERISTICS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
INTERNATIONAL MSCI EAFE
- --------------------------------------------------------------------------------
<S> <C> <C>
Number of Stocks 146 1,077
Turnover Rate 22% --
Expense Ratio 0.46% --
Cash Reserves 3.3% --
</TABLE>
VOLATILITY MEASURES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
INTERNATIONAL MSCI EAFE
- --------------------------------------------------------------------------------
<S> <C> <C>
R-Squared 0.87 1.00
Beta 0.94 1.00
- --------------------------------------------------------------------------------
</TABLE>
TEN LARGEST STOCKS (% OF TOTAL NET ASSETS)
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
Novartis AG (Registered) 4.3%
ING Groep NV 4.0
Takeda Chemical Industries Ltd. 3.4
ABB AG (Bearer) 3.1
Fuji Photo Film Co., Ltd. 2.8
Elf Aquitaine SA 2.7
Philips Electronics NV 2.7
Veba AG 2.0
British Petroleum Co., PLC 1.9
Murata Manufacturing Co., Ltd. 1.8
- --------------------------------------------------------------------------------
Top Ten 28.7%
</TABLE>
PORTFOLIO ALLOCATION
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
Europe 54%
Japan 29%
Pacific (Minus Japan) 11%
Emerging Markets 6%
</TABLE>
COUNTRY DIVERSIFICATION (% OF COMMON STOCKS)
<TABLE>
<CAPTION>
INTERNATIONAL MSCI EAFE
- --------------------------------------------------------------------------------
<S> <C> <C>
Australia -- 2.8%
Argentina 0.2% --
Belgium 0.7 1.2
Brazil 2.2 --
Chile 0.2 --
Denmark 0.7 1.0
Finland -- 0.8
France 8.7 6.7
Germany 7.1 9.0
Hong Kong 7.0 3.7
Indonesia 0.5 --
Italy 1.7 3.3
Japan 29.1 31.3
Korea 0.6 --
Malaysia 1.5 1.4
Mexico 0.7 --
Netherlands 11.2 5.2
Norway -- 0.6
Philippines 0.8 --
Singapore 2.1 1.1
Spain -- 2.3
Sweden 2.3 2.6
Switzerland 13.0 6.3
Thailand 0.3 --
United Kingdom 9.4 19.8
Other -- 0.9
- --------------------------------------------------------------------------------
Total 100.0% 100.0%
</TABLE>
30
<PAGE> 33
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 per share.
TOTAL INVESTMENT RETURNS: MAY 2, 1991-SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
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
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
1997 0.0 5.5 5.5 4.9
</TABLE>
*Average Money Market Fund.
See Financial Highlights table on page 48 for dividend information for the past
five years.
CUMULATIVE PERFORMANCE: MAY 2, 1991-SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MONEY MARKET AVERAGE MONEY SALOMON THREE-MONTH
PORTFOLIO MARKET FUND TREASURY INDEX
--------- ----------- --------------
<S> <C> <C> <C>
May 2, 91 10000 10000 10000
1991 06 10095 10044 10046
1991 09 10235 10178 10137
1991 12 10360 10302 10309
1992 03 10464 10399 10414
1992 06 10564 10487 10507
1992 09 10656 10565 10548
1992 12 10739 10641 10682
1993 03 10819 10709 10765
1993 06 10899 10774 10838
1993 09 10981 10843 10873
1993 12 11064 10919 11012
1994 03 11148 10987 11101
1994 06 11251 11075 11201
1994 09 11380 11182 11275
1994 12 11528 11317 11479
1995 03 11695 11464 11642
1995 06 11867 11619 11804
1995 09 12037 11770 11917
1995 12 12206 11925 12139
1996 03 12365 12064 12298
1996 06 12525 12202 12446
1996 09 12697 12345 12552
1996 12 12867 12498 12776
1997 03 13034 12638 12941
1997 06 13209 12790 13101
1997 09 13393 13060 13271
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 1997
---------------------------------------
SINCE FINAL VALUE OF A
1 YEAR 5 YEARS INCEPTION $10,000 INVESTMENT
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market Portfolio 5.48% 4.68% 4.66% $13,393
Average Money Market Fund 4.86 4.15 4.19 13,010
Salomon Three-Month Treasury Index 5.24 4.60 4.51 13,271
- --------------------------------------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1997
<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 5.48% 4.68% 0.00% 4.66% 4.66%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 34
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.
TOTAL INVESTMENT RETURNS: APRIL 29, 1991-SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
HIGH-GRADE BOND PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------------------------------
<S> <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
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
1997 2.7 6.9 9.6 9.7
</TABLE>
*Lehman Aggregate Bond Index.
See Financial Highlights table on page 49 for dividend and capital gains
information for the past five years.
Cumulative Performance: April 29, 1991-September 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HIGH-GRADE AVERAGE INTERMEDIATE-TERM LEHMAN AGGREGATE
BOND PORTFOLIO U.S. GOVERNMENT FUND BOND INDEX
-------------- -------------------- ----------
<S> <C> <C> <C>
Apr 29, 91 10000 10000 10000
1991 06 10033 10044 10054
1991 09 10548 10582 10623
1991 12 11069 11119 11165
1992 03 10887 10945 11022
1992 06 11310 11328 11465
1992 09 11758 11847 11956
1992 12 11775 11794 11991
1993 03 12243 12263 12487
1993 06 12562 12474 12816
1993 09 12892 12796 13149
1993 12 12882 12768 13160
1994 03 12524 12469 12783
1994 06 12398 12240 12649
1994 09 12466 12316 12726
1994 12 12537 12293 12776
1995 03 13135 12873 13420
1995 06 13923 13462 14237
1995 09 14190 13713 14515
1995 12 14798 14220 15135
1996 03 14510 14009 14867
1996 06 14592 13968 14952
1996 09 14871 14229 15226
1996 12 15320 14602 15685
1997 03 15227 14551 15597
1997 06 15779 14929 16170
1997 09 16297 15412 16711
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 1997
---------------------------------------------
SINCE FINAL VALUE OF A
1 YEAR 5 YEARS INCEPTION $10,000 INVESTMENT
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
High-Grade Bond Portfolio 9.60% 6.75% 7.90% $16,297
Average Intermediate-Term U.S. Government Fund 8.17 5.38 6.97 15,412
Lehman Aggregate Bond Index 9.71 6.92 8.32 16,711
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
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 9.60% 6.75% 1.21% 6.69% 7.90%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE> 35
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.
TOTAL INVESTMENT RETURNS: JUNE 3, 1996-SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
HIGH YIELD BOND PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
<S> <C> <C> <C> <C>
1996 1.5% 3.1% 4.6% 3.7%
1997 4.4% 9.7% 14.1% 14.5%
- --------------------------------------------------------------------------------
</TABLE>
*Lehman High Yield Bond Index.
See Financial Highlights table on page 49 for dividend and capital gains
information since the Portfolio's inception.
CUMULATIVE PERFORMANCE: JUNE 3, 1996-SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HIGH YIELD AVERAGE HIGH YIELD LEHMAN HIGH YIELD
BOND PORTFOLIO BOND FUND BOND INDEX
-------------- --------- ----------
<S> <C> <C> <C>
Jun 6, 96 10000 10000 10000
1996 06 9973 9973 9973
1996 09 10456 10437 10372
1996 12 10896 10816 10734
1997 03 10943 10896 10855
1997 06 11499 11446 11358
1997 09 11933 12077 11869
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 1997
----------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
High Yield Bond Portfolio 14.12% 14.25% $11,933
Average High Yield Bond Fund 15.61 15.29 12,077
Lehman High Yield Bond Index 14.49 13.80 11,869
- ------------------------------------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION --------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
High Yield Bond Portfolio 6/3/96 14.12% 4.50% 9.75% 14.25%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE> 36
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.
TOTAL INVESTMENT RETURNS: MAY 23, 1991-SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
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
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
1997 26.0 1.6 27.6 30.2
</TABLE>
*65% S&P 500 Index, 35% Lehman Long Corporate AA or Better Bond Index. See
Financial Highlights table on page 50 for dividend and capital gains information
for the past five years. *65% S&P 500 Index, 35% Lehman Long Corporate AA or
Better Bond Index.
CUMULATIVE PERFORMANCE: MAY 23,1991-SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BALANCED AVERAGE
PORTFOLIO BALANCED FUND COMPOSITE INDEX* S&P 500 INDEX
--------- ------------- ---------------- -------------
<S> <C> <C> <C> <C>
May 23, 91 10000 10000 10000 10000
1991 06 9750 9692 9695 9929
1991 09 10250 10319 10280 10460
1991 12 10839 11113 11070 11337
1992 03 10614 10979 10820 11050
1992 06 10989 11015 11119 11260
1992 09 11305 11361 11541 11615
1992 12 11617 11903 11959 12200
1993 03 12216 12385 12517 12733
1993 06 12550 12500 12713 12795
1993 09 12898 12926 13124 13126
1993 12 13148 13179 13288 13430
1994 03 12622 12756 12748 12921
1994 06 12811 12527 12676 12975
1994 09 13243 12890 13075 13609
1994 12 13068 12847 13135 13607
1995 03 14143 13629 14276 14932
1995 06 15352 14530 15606 16358
1995 09 16375 15338 16553 17658
1995 12 17307 16083 17564 18721
1996 03 17889 16500 17879 19725
1996 06 18136 16785 18416 20611
1996 09 18874 17249 18912 21248
1996 12 20116 18296 20213 23019
1997 03 20223 18272 20411 23636
1997 06 22662 20043 23082 27762
1997 09 24083 21394 24630 29842
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 1997
------------------------------------
SINCE FINAL VALUE OF A
1 YEAR 5 YEAR INCEPTION $10,000 INVESTMENTS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balanced Portfolio 27.60% 16.33% 14.83% $24.083
Average Balanced Fund 24.03 13.49 17.71 21,394
Composite Index* 30.23 16.37 15.24 24,630
S&P 500 Index 40.45 20.77 18.77 29,842
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balanced Portfolio 5/23/91 27.60% 16.33% 10.73% 4.10% 14.83%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE> 37
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.
TOTAL INVESTMENT RETURNS: APRIL 29, 1991-SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
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
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
1997 38.9 1.4 40.3 40.4
</TABLE>
See Financial Highlights table on page 50 for dividend and capital gains
information for the past five years.
CUMULATIVE PERFORMANCE: APRIL 29, 1991-SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EQUITY INDEX AVERAGE GROWTH
PORTFOLIO & INCOME FUND S&P 500 INDEX
--------- ------------- -------------
<S> <C> <C> <C>
Apr 29, 91 10000 10000 10000
1991 06 9940 9952 10001
1991 09 10450 10528 10536
1991 12 11317 11268 11420
1992 03 11023 11215 11131
1992 06 11226 11233 11343
1992 09 11573 11560 11700
1992 12 12151 12239 12290
1993 03 12672 12772 12826
1993 06 12725 12874 12889
1993 09 13040 13351 13222
1993 12 13338 13612 13528
1994 03 12820 13162 13015
1994 06 12873 13121 13070
1994 09 13501 13738 13709
1994 12 13490 13506 13707
1995 03 14806 14585 15041
1995 06 16205 15785 16477
1995 09 17485 16988 17787
1995 12 18532 17738 18858
1996 03 19523 18675 19870
1996 06 20392 19320 20762
1996 09 21015 19951 21403
1996 12 22767 21447 23187
1997 03 23361 21627 23809
1997 06 27437 24854 27966
1997 09 29487 27163 30060
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 1997
----------------------------------
SINCE FINAL VALUE OF A
1 YEAR 5 YEARS INCEPTION $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity Index Portfolio 40.31% 20.57% 18.34% $29,487
Average Growth & Income Fund 36.15 18.63 16.84 27,163
S&P 500 Index 40.45 20.77 18.69 30,060
- -------------------------------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION --------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Equity Index Portfolio 4/29/91 40.31% 20.57% 15.95% 2.39% 18.34%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE> 38
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.
TOTAL INVESTMENT RETURNS: JUNE 7, 1993-SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------
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
1995 20.0 5.7 25.7 29.7
1996 14.8 4.3 19.1 20.3
1997 36.6 1.5 38.1 40.4
</TABLE>
See Financial Highlights table on page 51 for dividend and capital gains
information since the Portfolio's inception.
CUMULATIVE PERFORMANCE: JUNE 7, 1993-SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EQUITY INCOME AVERAGE EQUITY
PORTFOLIO INCOME FUND S&P 500 INDEX
--------- ----------- -------------
<S> <C> <C> <C>
Jun 7, 93 10000 10000 10000
1993 06 10090 10090 10078
1993 09 10681 10531 10338
1993 12 10521 10629 10578
1994 03 9862 10231 10177
1994 06 10046 10276 10219
1994 09 10506 10655 10719
1994 12 10390 10373 10717
1995 03 11432 11127 11761
1995 06 12118 11908 12884
1995 09 13205 12788 13907
1995 12 14432 13501 14745
1996 03 14827 14069 15536
1996 06 15476 14539 16233
1996 09 15722 14940 16735
1996 12 17129 16046 18130
1997 03 17763 16265 18616
1997 06 20109 18425 21866
1997 09 21705 20073 23504
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 1997
------------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Income Portfolio 38.05% 19.67% $21,705
Average Equity Income Fund 34.15 17.52 20,073
S&P 500 Index 40.45 21.90 23,504
- ------------------------------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -------------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Equity Income Portfolio 6/7/93 38.05% 15.95% 3.72% 19.67%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE> 39
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.
TOTAL INVESTMENT RETURNS: JUNE 7, 1993-SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
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
1995 30.7 1.3 32.0 29.7
1996 26.4 1.4 27.8 20.3
1997 27.4 1.4 28.8 40.4
</TABLE>
See Financial Highlights table on page 51 for dividend and capital gains
information since the Portfolio's inception.
CUMULATIVE PERFORMANCE: JUNE 7, 1993-SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH PORTFOLIO AVERAGE GROWTH FUND S&P 500 INDEX
<S> <C> <C> <C>
Jun 7, 93 10000 10000 10000
1993 06 10160 10160 10078
1993 09 10260 10669 10338
1993 12 10601 10900 10578
1994 03 10279 10525 10177
1994 06 10349 10259 10219
1994 09 10863 10799 10719
1994 12 11056 10666 10717
1995 03 12083 11453 11761
1995 06 13365 12541 12884
1995 09 14341 13593 13907
1995 12 15293 13951 14745
1996 03 16367 14695 15536
1996 06 17545 15325 16233
1996 09 18327 15753 16735
1996 12 19407 16635 18130
1997 03 19549 16421 18616
1997 06 22863 18997 21866
1997 09 23598 21075 23504
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 1997
-------------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth Portfolio 28.76% 22.01% $23,598
Average Growth Fund 33.52 18.86 21,075
S&P 500 Index 40.45 21.90 23,504
- ----------------------------------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ------------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Growth Portfolio 6/7/93 28.76% 20.93% 1.08% 22.01%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 40
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.
TOTAL INVESTMENT RETURNS: JUNE 3, 1996-SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SMALL COMPANY GROWTH PORTFOLIO RUSSELL 2000
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
1996 -1.6% 0.0% -1.6% -4.4%
1997 21.6 0.6 22.2 33.2
</TABLE>
See Financial Highlights table on page 52 for dividend and capital gains
information since the Portfolio's inception.
CUMULATIVE PERFORMANCE: JUNE 3, 1996-SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL COMPANY AVERAGE SMALL COMPANY
GROWTH PORTFOLIO GROWTH FUND RUSSELL 2000 INDEX
---------------- ----------- ------------------
<S> <C> <C> <C>
Jun 3, 96 10000 10000 10000
1996 06 9530 9530 9530
1996 09 9840 9698 9562
1996 12 9751 9942 10060
1997 03 8887 9276 9539
1997 06 10062 10835 11086
1997 09 12021 12645 12736
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 1997
----------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small Company Growth Portfolio 22.16% 14.91% $12,021
Average Small Company Growth Fund 30.39 19.36 12,645
Russell 2000 Index 33.19 20.01 12,736
- --------------------------------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ---------------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Small Company Growth Portfolio 6/3/96 22.16% 14.54% 0.37% 14.91%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE> 41
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.
TOTAL INVESTMENT RETURNS: JUNE 3, 1994-SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
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
1996 11.8 1.6 13.4 8.9
1997 17.2 1.4 18.6 12.5
</TABLE>
See Financial Highlights table on page 52 for dividend and capital gains
information since the Portfolio's inception.
CUMULATIVE PERFORMANCE: JUNE 3, 1994-SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE INTERNATIONAL
INTERNATIONAL PORTFOLIO STOCK FUND MSCI EAFE INDEX
----------------------- ---------- ---------------
<C> <C> <C> <C>
6/3/94 10000 10000 10000
199406 9990 9990 9990
199409 10310 10316 10006
199412 10159 9881 9911
199503 10138 9736 10103
199506 10883 10083 10185
199509 11466 10631 10617
199512 11773 10852 11056
199603 12447 11312 11384
199606 12926 11659 11572
199609 12998 11631 11566
199612 13492 12136 11759
199703 13768 12314 11583
199706 15706 13565 13096
199709 15409 13761 13012
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 1997
----------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
International Portfolio 18.55% 13.88% $15,409
Average International Stock Fund 18.43 10.07 13,761
MSCI EAFE Index 12.49 8.24 13,012
- --------------------------------------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ---------------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
International Portfolio 6/3/94 18.55% 12.82% 1.06% 13.88%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 42
FINANCIAL STATEMENTS
September 30, 1997
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 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>
- ----------------------------------------------------------------------------------------------------------------------------
MONEY HIGH-GRADE HIGH YIELD
MARKET BOND BOND BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-----------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1997
-----------------------------------------------------------------------
(000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends -- -- -- $ 6,387
-----------------------------------------------------------------------
Interest $19,873 $10,969 $4,734 10,321
- ----------------------------------------------------------------------------------------------------------------------------
Total Income 19,873 10,969 4,734 16,708
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 53 24 34 397
Performance Adjustment -- -- -- (6)
The Vanguard Group--Note C
Management and Administrative 523 337 107 762
Marketing and Distribution 106 27 7 62
Custodian Fees 27 54 2 6
Auditing Fees 9 9 7 10
Shareholders' Reports 13 10 2 20
Annual Meeting and Proxy Costs 1 1 -- 1
Trustees' Fees and Expenses 1 -- -- 1
-----------------------------------------------------------------------
Total Expenses 733 462 159 1,253
Expenses Paid Indirectly--Note C -- -- -- (37)
-----------------------------------------------------------------------
Net Expenses 733 462 159 1,216
- ----------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 19,140 10,507 4,575 15,492
- ----------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold -- 45 125 23,864
Futures Contracts -- -- -- --
Foreign Currencies and Forward Currency Contracts -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) -- 45 125 23,864
- ----------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities -- 4,504 2,050 55,895
Futures Contracts -- -- -- --
Foreign Currencies and Forward Currency Contracts -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) -- 4,504 2,050 55,895
- ----------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $19,140 $15,056 $6,750 $95,251
============================================================================================================================
</TABLE>
<PAGE> 43
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
SMALL
EQUITY EQUITY COMPANY
INDEX INCOME GROWTH GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1997
----------------------------------------------------------------------
(000) (000) (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends $ 9,850 $ 6,761 $ 4,668 $ 311
Interest 1,096 134 949 422
----------------------------------------------------------------------
Total Income 10,946 6,895 5,617 733
----------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 12 203 575 107
Performance Adjustment -- -- -- (22)
The Vanguard Group--Note C
Management and Administrative 1,105 451 760 159
Marketing and Distribution 84 31 60 9
Custodian Fees 9 16 12 4
Auditing Fees 10 9 9 7
Shareholders' Reports 25 13 19 5
Annual Meeting and Proxy Costs 2 1 2 1
Trustees' Fees and Expenses 1 1 1 --
----------------------------------------------------------------------
Total Expenses 1,248 725 1,438 270
Expenses Paid Indirectly--Note C -- -- -- --
----------------------------------------------------------------------
Net Expenses 1,248 725 1,438 270
- -------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 9,698 6,170 4,179 463
- -------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 976 5,925 12,234 (558)
Futures Contracts 5,555 -- -- --
Foreign Currencies and Forward Currency Contracts -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 6,531 5,925 12,234 (558)
- -------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities 165,973 51,449 75,855 20,663
Futures Contracts 295 -- -- --
Foreign Currencies and Forward Currency Contracts -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) 166,268 51,449 75,855 20,663
- -------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $182,497 $63,544 $92,268 $20,568
=========================================================================================================================
</TABLE>
41
<PAGE> 44
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS (continued)
- ------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL
PORTFOLIO
------------------
YEAR ENDED
SEPTEMBER 30, 1997
------------------
(000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends* $ 3,251
Interest 536
------------------
Total Income 3,787
------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 255
Performance Adjustment 60
The Vanguard Group--Note C
Management and Administrative 445
Marketing and Distribution 34
Custodian Fees 106
Auditing Fees 8
Shareholders' Reports 14
Annual Meeting and Proxy Costs 1
Trustees' Fees and Expenses 1
------------------
Total Expenses 924
Expenses Paid Indirectly--Note C --
------------------
Net Expenses 924
- ------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 2,863
- ------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
- ------------------------------------------------------------------------------------------------------------------------
Investment Securities Sold 881
Futures Contracts --
Foreign Currencies and Forward Currency Contracts 1,608
- ------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 2,489
- ------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 28,458
Futures Contracts --
Foreign Currencies and Forward Currency Contracts (127)
- ------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 28,331
- ------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $33,683
========================================================================================================================
</TABLE>
*Dividends for the International Portfolio are net of foreign withholding taxes
of $345,000.
42
<PAGE> 45
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 Gain, 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 different 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,
--------------------------------------------------------------------
1997 1996 1997 1996
(000) (000) (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 19,140 $ 12,917 $ 10,507 $ 8,605
Realized Net Gain (Loss) -- (1) 45 (160)
Change in Unrealized Appreciation (Depreciation) -- -- 4,504 (2,543)
--------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 19,140 12,916 15,056 5,902
--------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (19,140) (12,917) (10,507) (8,605)
Realized Capital Gain -- -- -- --
--------------------------------------------------------------------
Total Distributions (19,140) (12,917) (10,507) (8,605)
--------------------------------------------------------------------
NET EQUALIZATION CREDITS--Note A -- -- -- --
--------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 816,202 349,178 72,451 37,846
Issued in Lieu of Cash Distributions 19,140 12,917 10,507 8,605
Redeemed (727,724) (295,480) (39,093) (24,717)
--------------------------------------------------------------------
Net Increase from Capital Share Transactions 107,618 66,615 43,865 21,734
- -------------------------------------------------------------------------------------------------------------------------
Total Increase 107,618 66,614 48,414 19,031
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 284,981 218,367 139,476 120,445
--------------------------------------------------------------------
End of Year $392,599 $284,981 $187,890 $139,476
=========================================================================================================================
(1) Shares Issued (Redeemed)
Issued 816,202 349,178 6,960 3,612
Issued in Lieu of Cash Distributions 19,140 12,917 1,007 829
Redeemed (727,724) (295,480) (3,751) (2,394)
--------------------------------------------------------------------
Net Increase in Shares Outstanding 107,618 66,615 4,216 2,047
=========================================================================================================================
</TABLE>
43
<PAGE> 46
<TABLE>
<CAPTION>
STATEMENT OF CHANGES (continued)
- --------------------------------------------------------------------------------------------------------------------------
HIGH YIELD BALANCED
BOND PORTFOLIO PORTFOLIO
-----------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
YEAR ENDED JUN. 3* TO ---------------------------
SEP. 30, 1997 SEP. 30, 1996 1997 1996
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 4,575 $ 438 $ 15,492 $ 12,453
Realized Net Gain (Loss) 125 24 23,864 14,027
Change in Unrealized Appreciation (Depreciation) 2,050 319 55,895 16,862
----------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 6,750 781 95,251 43,342
----------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (4,575) (438) (4,238) (10,994)
Realized Capital Gain (25) -- (12,490) --
----------------------------------------------------------------------
Total Distributions (4,600) (438) (16,728) (10,994)
----------------------------------------------------------------------
NET EQUALIZATION CREDITS--Note A -- -- -- 68
----------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 81,826 21,643 109,112 41,663
Issued in Lieu of Cash Distributions 4,600 438 16,728 10,957
Redeemed (25,934) (179) (66,658) (34,733)
----------------------------------------------------------------------
Net Increase from Capital Share Transactions 60,492 21,902 59,182 17,887
- --------------------------------------------------------------------------------------------------------------------------
Total Increase 62,642 22,245 137,705 50,303
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 22,245 -- 330,074 279,771
----------------------------------------------------------------------
End of Period $84,887 $22,245 $467,779 $330,074
==========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 7,895 2,166 6,790 2,993
Issued in Lieu of Cash Distributions 443 44 1,151 803
Redeemed (2,512) (18) (4,193) (2,490)
----------------------------------------------------------------------
Net Increase in Shares Outstanding 5,826 2,192 3,748 1,306
==========================================================================================================================
</TABLE>
*Commencement of operations.
44
<PAGE> 47
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
EQUITY INDEX EQUITY INCOME
PORTFOLIO PORTFOLIO
------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------
1997 1996 1997 1996
(000) (000) (000) (000)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 9,698 $ 7,272 $ 6,170 $ 4,439
Realized Net Gain (Loss) 6,531 2,002 5,925 1,805
Change in Unrealized Appreciation (Depreciation) 166,268 52,345 51,449 13,769
-----------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 182,497 61,619 63,544 20,013
-----------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (4,266) (6,270) (1,585) (4,148)
Realized Capital Gain (2,021) (2,318) (1,796) (469)
-----------------------------------------------------------------------
Total Distributions (6,287) (8,588) (3,381) (4,617)
-----------------------------------------------------------------------
NET EQUALIZATION CREDITS--Note A -- -- -- 267
-----------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 247,088 95,701 107,054 44,342
Issued in Lieu of Cash Distributions 6,287 8,588 3,381 4,602
Redeemed (117,809) (27,507) (41,578) (13,910)
-----------------------------------------------------------------------
Net Increase from Capital Share Transactions 135,566 76,782 68,857 35,034
- ---------------------------------------------------------------------------------------------------------------------------
Total Increase 311,776 129,813 129,020 50,697
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 405,895 276,082 142,189 91,492
-----------------------------------------------------------------------
End of Year $717,671 $405,895 $271,209 $142,189
===========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 11,303 5,632 6,672 3,441
Issued in Lieu of Cash Distributions 341 543 244 367
Redeemed (5,455) (1,616) (2,626) (1,064)
-----------------------------------------------------------------------
Net Increase in Shares Outstanding 6,189 4,559 4,290 2,744
===========================================================================================================================
</TABLE>
45
<PAGE> 48
<TABLE>
<CAPTION>
STATEMENT OF CHANGES (continued)
- ---------------------------------------------------------------------------------------------------------------------------
GROWTH SMALL COMPANY
PORTFOLIO GROWTH PORTFOLIO
-------------------------------- ----------------------------------
YEAR ENDED SEPTEMBER 30, YEAR ENDED JUN. 3* TO
-------------------------------- ----------------------------------
1997 1996 SEP. 30, 1997 SEP. 30, 1996
(000) (000) (000) (000)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 4,179 $ 2,798 $ 463 $ 174
Realized Net Gain (Loss) 12,234 11,233 (558) (568)
Change in Unrealized Appreciation (Depreciation) 75,855 38,424 20,663 284
----------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 92,268 52,455 20,568 (110)
----------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (2,913) (1,877) (190) --
Realized Capital Gain (11,246) (2,230) -- --
----------------------------------------------------------------------
Total Distributions (14,159) (4,107) (190) --
----------------------------------------------------------------------
NET EQUALIZATION CREDITS--Note A -- -- -- --
----------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 189,268 86,806 99,236 46,109
Issued in Lieu of Cash Distributions 14,159 4,107 190 --
Redeemed (96,819) (25,301) (30,861) (1,820)
----------------------------------------------------------------------
Net Increase from Capital Share Transactions 106,608 65,612 68,565 44,289
- ---------------------------------------------------------------------------------------------------------------------------
Total Increase 184,717 113,960 88,943 44,179
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 275,602 161,642 44,179 --
----------------------------------------------------------------------
End of Period $460,319 $275,602 $133,122 $44,179
===========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 9,841 5,521 9,757 4,687
Issued in Lieu of Cash Distributions 846 293 20 --
Redeemed (4,969) (1,603) (3,146) (199)
----------------------------------------------------------------------
Net Increase in Shares Outstanding 5,718 4,211 6,631 4,488
===========================================================================================================================
</TABLE>
*Commencement of operations.
46
<PAGE> 49
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL
PORTFOLIO
--------------------------------
YEAR ENDED SEPTEMBER 30,
--------------------------------
1997 1996
(000) (000)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 2,863 $ 1,807
Realized Net Gain (Loss) 2,489 3,644
Change in Unrealized Appreciation (Depreciation) 28,331 9,849
--------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations 33,683 15,300
--------------------------------
DISTRIBUTIONS
Net Investment Income (1,802) (1,281)
Realized Capital Gain (4,118) --
--------------------------------
Total Distributions (5,920) (1,281)
--------------------------------
NET EQUALIZATION CREDITS--Note A -- --
--------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 107,424 68,539
Issued in Lieu of Cash Distributions 5,920 1,281
Redeemed (56,513) (11,933)
--------------------------------
Net Increase from Capital Share Transactions 56,831 57,887
- ---------------------------------------------------------------------------------------------------------------------------
Total Increase 84,594 71,906
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 161,522 89,616
--------------------------------
End of Year $246,116 $161,522
===========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 7,928 5,699
Issued in Lieu of Cash Distributions 489 115
Redeemed (4,189) (990)
--------------------------------
Net Increase in Shares Outstanding 4,228 4,824
===========================================================================================================================
</TABLE>
47
<PAGE> 50
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 are not required to report
a Portfolio Turnover Rate. 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 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<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 .054 .056 .035 .030
Net Realized and Unrealized Gain (Loss) on Investments -- -- -- -- --
-----------------------------------------------------------------
Total from Investment Operations .054 .054 .056 .035 .030
-----------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.054) (.054) (.056) (.035) (.030)
Distributions from Realized Capital Gains -- -- -- -- --
-----------------------------------------------------------------
Total Distributions (.054) (.054) (.056) (.035) (.030)
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00
===========================================================================================================================
TOTAL RETURN 5.48% 5.49% 5.77% 3.63% 3.05%
===========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $393 $285 $218 $171 $114
Ratio of Total Expenses to Average Net Assets 0.21% 0.19% 0.23% 0.23% 0.29%
Ratio of Net Investment Income to Average Net Assets 5.36% 5.36% 5.66% 3.66% 3.00%
Portfolio Turnover Rate N/A N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
48
<PAGE> 51
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
HIGH-GRADE BOND PORTFOLIO
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.29 $10.47 $ 9.82 $10.94 $10.64
- ---------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .678 .670 .663 .619 .636
Net Realized and Unrealized Gain (Loss) on Investments .280 (.180) .650 (.966) .349
---------------------------------------------------------------
Total from Investment Operations .958 .490 1.313 (.347) .985
---------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.678) (.670) (.663) (.619) (.636)
Distributions from Realized Capital Gains -- -- -- (.154) (.049)
---------------------------------------------------------------
Total Distributions (.678) (.670) (.663) (.773) (.685)
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $10.57 $10.29 $10.47 $ 9.82 $10.94
===========================================================================================================================
TOTAL RETURN 9.60% 4.80% 13.83% -3.31% 9.64%
===========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $188 $139 $120 $80 $85
Ratio of Total Expenses to Average Net Assets 0.29% 0.25% 0.29% 0.24% 0.29%
Ratio of Net Investment Income to Average Net Assets 6.51% 6.43% 6.58% 5.98% 5.92%
Portfolio Turnover Rate 40% 56% 29% 46% 73%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
HIGH YIELD BOND PORTFOLIO
YEAR ENDED JUN. 3* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD SEP. 30,1997 SEP. 30, 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.15 $10.00
- ---------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .922 .299
Net Realized and Unrealized Gain (Loss) on Investments .450 .150
---------------------------
Total from Investment Operations 1.372 .449
---------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.922) (.299)
Distributions from Realized Capital Gains (.010) --
---------------------------
Total Distributions (.932) (.299)
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.59 $10.15
===========================================================================================================================
TOTAL RETURN 14.12% 4.56%
===========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $85 $22
Ratio of Total Expenses to Average Net Assets 0.31% 0.32%**
Ratio of Net Investment Income to Average Net Assets 8.88% 9.29%**
Portfolio Turnover Rate 30% 8%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
49
<PAGE> 52
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (continued)
- ----------------------------------------------------------------------------------------------------------------------------
BALANCED PORTFOLIO
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $14.81 $13.33 $11.33 $11.58 $10.83
- ----------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .60 .565 .51 .46 .50
Net Realized and Unrealized Gain (Loss) on Investments 3.31 1.420 2.07 (.16) .97
----------------------------------------------------------------
Total from Investment Operations 3.91 1.985 2.58 .30 1.47
----------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.19) (.505) (.50) (.39) (.69)
Distributions from Realized Capital Gains (.56) -- (.08) (.16) (.03)
----------------------------------------------------------------
Total Distributions (.75) (.505) (.58) (.55) (.72)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $17.97 $14.81 $13.33 $11.33 $11.58
============================================================================================================================
TOTAL RETURN 27.60% 15.26% 23.65% 2.67% 14.10%
============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $468 $330 $280 $230 $191
Ratio of Total Expenses to Average Net Assets 0.32% 0.31% 0.36% 0.34% 0.39%
Ratio of Net Investment Income to Average Net Assets 3.96% 4.04% 4.25% 4.11% 4.45%
Portfolio Turnover Rate 25% 36% 26% 42% 41%
Average Commission Rate Paid $.0462 $.0393 N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
EQUITY INDEX PORTFOLIO
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $18.32 $15.69 $12.47 $12.37 $11.32
- ----------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .34 .34 .33 .31 .34
Net Realized and Unrealized Gain (Loss) on Investments 6.94 2.75 3.26 .12 1.07
----------------------------------------------------------------
Total from Investment Operations 7.28 3.09 3.59 .43 1.41
----------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.19) (.33) (.29) (.23) (.34)
Distributions from Realized Capital Gains (.09) (.13) (.08) (.10) (.02)
----------------------------------------------------------------
Total Distributions (.28) (.46) (.37) (.33) (.36)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $25.32 $18.32 $15.69 $12.47 $12.37
============================================================================================================================
TOTAL RETURN 40.31% 20.19% 29.51% 3.53% 12.68%
============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $718 $406 $276 $186 $165
Ratio of Total Expenses to Average Net Assets 0.23% 0.22% 0.28% 0.24% 0.29%
Ratio of Net Investment Income to Average Net Assets 1.78% 2.13% 2.53% 2.60% 2.63%
Portfolio Turnover Rate 1% 2% 2% 7% 16%
Average Commission Rate Paid $.0160 $.0203 N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE> 53
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
EQUITY INCOME PORTFOLIO
YEAR ENDED SEPTEMBER 30,
------------------------------------------------- JUN. 7* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1997 1996 1995 1994 SEP. 30, 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $13.71 $12.00 $10.05 $10.57 $10.00
- -------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .42 .48 .46 .45 .14
Net Realized and Unrealized Gain (Loss) on Investments 4.69 1.75 2.02 (.63) .54
-------------------------------------------------------------------
Total from Investment Operations 5.11 2.23 2.48 (.18) .68
-------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.15) (.46) (.48) (.33) (.11)
Distributions from Realized Capital Gains (.17) (.06) (.05) (.01) --
-------------------------------------------------------------------
Total Distributions (.32) (.52) (.53) (.34) (.11)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $18.50 $13.71 $12.00 $10.05 $10.57
===============================================================================================================================
TOTAL RETURN 38.05% 19.07% 25.69% -1.64% 6.81%
===============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $271 $142 $91 $68 $50
Ratio of Total Expenses to Average Net Assets 0.37% 0.35% 0.39% 0.34% 0.39%**
Ratio of Net Investment Income to Average Net Assets 3.11% 3.69% 4.28% 4.57% 4.30%**
Portfolio Turnover Rate 8% 8% 10% 18% 2%
Average Commission Rate Paid $.0558 $.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 1997 1996 1995 1994 SEP. 30, 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $17.58 $14.10 $10.79 $10.26 $10.00
- -------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .190 .18 .16 .14 .04
Net Realized and Unrealized Gain (Loss) on Investments 4.615 3.65 3.26 .46 .22
-------------------------------------------------------------------
Total from Investment Operations 4.805 3.83 3.42 .60 .26
-------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.180) (.16) (.11) (.07) --
Distributions from Realized Capital Gains (.695) (.19) -- -- --
-------------------------------------------------------------------
Total Distributions (.875) (.35) (.11) (.07) --
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $21.51 $17.58 $14.10 $10.79 $10.26
===============================================================================================================================
TOTAL RETURN 28.76% 27.79% 32.02% 5.87% 2.60%
===============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $460 $276 $162 $82 $36
Ratio of Total Expenses to Average Net Assets 0.38% 0.39% 0.47% 0.38% 0.43%**
Ratio of Net Investment Income to Average Net Assets 1.12% 1.29% 1.64% 1.55% 1.63%**
Portfolio Turnover Rate 38% 42% 32% 34% 10%
Average Commission Rate Paid $.0498 $.0499 N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
51
<PAGE> 54
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
SMALL COMPANY GROWTH PORTFOLIO
YEAR ENDED JUN. 3* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD SEP. 30, 1997 SEP. 30, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.84 $10.00
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .04 .04
Net Realized and Unrealized Gain (Loss) on Investments 2.13 (.20)
------------------------------------
Total from Investment Operations 2.17 (.16)
------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.04) --
Distributions from Realized Capital Gains -- --
------------------------------------
Total Distributions (.04) --
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.97 $ 9.84
====================================================================================================================================
TOTAL RETURN 22.16% -1.60%
====================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $133 $44
Ratio of Total Expenses to Average Net Assets 0.39% 0.45%**
Ratio of Net Investment Income to Average Net Assets 0.67% 1.42%**
Portfolio Turnover Rate 72% 18%
Average Commission Rate Paid $.0472 $.0600
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL PORTFOLIO
YEAR ENDED SEPTEMBER 30,
-------------------------------------- JUN. 3* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1997 1996 1995 SEP. 30, 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.74 $11.40 $10.31 $10.00
- -------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .17 .14 .16 .05
Net Realized and Unrealized Gain (Loss) on Investments 2.10 1.36 .99 .26
------------------------------------------------------
Total from Investment Operations 2.27 1.50 1.15 .31
------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.14) (.16) (.06) --
Distributions from Realized Capital Gains (.32) -- -- --
------------------------------------------------------
Total Distributions (.46) (.16) (.06) --
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $14.55 $12.74 $11.40 $10.31
===============================================================================================================================
TOTAL RETURN 18.55% 13.36% 11.21% 3.10%
===============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $246 $162 $90 $63
Ratio of Total Expenses to Average Net Assets 0.46% 0.49% 0.54% 0.30%**
Ratio of Net Investment Income to Average Net Assets 1.43% 1.42% 1.67% 1.91%**
Portfolio Turnover Rate 22% 19% 27% 0%
Average Commission Rate Paid $.0327 $.0403 N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
52
<PAGE> 55
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
valued 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 invest incoming cash in 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) 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.
53
<PAGE> 56
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: Prior to October 1996, the Balanced and Equity Income
Portfolios followed 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,
was credited or charged to undistributed income. As a result, undistributed
income per share was unaffected by capital share transactions. As of October 1,
1996, the Portfolios have discontinued equalization accounting and have
reclassified accumulated net equalization credits of $2,211,000 and $607,000,
respectively, from undistributed net investment income to paid in capital. These
reclassifications have no effect on the Portfolios' net assets, results of
operations, or net asset values per share.
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. Annual
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.
Wellington Management Company, LLP; Newell Associates; and Lincoln Capital
Management Company provide investment advisory services to the High Yield Bond,
Equity Income, and Growth Portfolios, respectively. For the year ended September
30, 1997, the investment advisory fees of the High Yield Bond, Equity Income,
and Growth Portfolios represented effective annual rates of 0.06%, 0.10%, and
0.15%, respectively, of average net assets.
Wellington Management Company, LLP provides investment advisory services
to the Balanced Portfolio for a fee calculated at an annual percentage rate of
average net assets. The basic fee is subject to quarterly adjustments based on
performance relative to a combined index composed of the S&P 500 Index and the
Lehman Long-Term Corporate AA or Better Bond Index. For the year ended September
30, 1997, the investment advisory fee represented an effective annual basic rate
of 0.10% of the Portfolio's average net assets before a decrease of $6,000 based
on performance.
Schroder Capital Management International Inc. provides investment
advisory services to the International Portfolio for a fee calculated at an
annual percentage rate of average net assets. The basic fee 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, 1997, the investment advisory fee represented an effective annual
basic rate of 0.13% of the Portfolio's average net assets before an increase of
$60,000 (0.03%) based on performance.
Granahan Investment Management, Inc., provides investment advisory
services to the Small Company Growth Portfolio for a fee calculated at an annual
percentage rate of average net assets.
54
<PAGE> 57
The basic fee is subject to quarterly adjustments based on performance relative
to the Russell 2000 Index. For the year ended September 30, 1997, the investment
advisory fee represented an effective annual basic rate of 0.15% of the
Portfolio's average net assets before a decrease of $22,000 (an annual rate of
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,
1997, the Fund had contributed capital aggregating $196,000 to Vanguard
(included in Other Assets), representing 1.0% of Vanguard's capitalization. The
Fund's Trustees and officers are also Directors and officers of Vanguard.
Vanguard has asked the Fund's investment advisers to direct certain
portfolio trades, subject to obtaining the best price and execution, to brokers
who have agreed to rebate to the Fund part of the commission generated; such
rebates are used solely to reduce the Fund's administrative expenses. For the
year ended September 30, 1997, these arrangements reduced the expenses of the
Balanced Portfolio by $37,000 (0.01% of average net assets).
D. During the year ended September 30, 1997, 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 $87,845 $54,514 $ 25,152 $ 9,188
High Yield Bond -- -- 70,928 14,725
Balanced 44,004 13,938 108,815 82,072
Equity Index -- -- 136,575 5,739
Equity Income -- -- 85,833 15,307
Growth -- -- 232,472 135,315
Small Company Growth -- -- 110,016 45,552
International -- -- 91,639 41,458
- ----------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1997, the following Portfolios had available realized
capital losses to offset future taxable capital gains through the following
fiscal year-ends:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
EXPIRATION
FISCAL YEARS ENDING AMOUNT
PORTFOLIO SEPTEMBER 30, (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
High-Grade Bond 2003-2005 $ 767
Small Company Growth 2004-2006 1,093
- --------------------------------------------------------------------------------
</TABLE>
Balanced and Equity Income Portfolios' gains of $2,143,000 and $363,000,
respectively, on securities held for less than one year are treated as ordinary
income for tax purposes and will be included in income dividends to
shareholders; accordingly, such gains have been reclassified from accumulated
net realized gains to undistributed net investment income.
During the year ended September 30, 1997, the International Portfolio
realized net foreign currency losses of $24,000, which decreased distributable
net income for tax purposes; accordingly, such losses have been reclassified
from accumulated net realized gains to undistributed net investment income.
E. At September 30, 1997, net unrealized appreciation of investment
securities for financial reporting and federal income tax purposes was:
55
<PAGE> 58
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
(000)
------------------------------------------------------------
APPRECIATED DEPRECIATED NET UNREALIZED
PORTFOLIO SECURITIES SECURITIES APPRECIATION
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
High-Grade Bond $ 4,312 $ (378) $ 3,934
High Yield Bond 2,433 (64) 2,369
Balanced 123,066 (794) 122,272
Equity Index 286,042 (2,832) 283,210
Equity Income 77,787 (1,175) 76,612
Growth 146,904 (359) 146,545
Small Company Growth 22,825 (1,878) 20,947
International 56,982 (11,326) 45,656
- ------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1997, the aggregate settlement value of open S&P 500
Index futures contracts expiring in December 1997 held by the Equity Index
Portfolio and the unrealized appreciation on those contracts were $24,817,000
and $323,000, respectively.
At September 30, 1997, 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:
12/19/97 JPY 1,460,000 $12,230 $12,229 $1
- -------------------------------------------------------------------------------------------------------
</TABLE>
JPY--Japanese yen.
The International Portfolio had net unrealized foreign currency losses of
$8,000 resulting from the translation of other assets and liabilities at
September 30, 1997.
F. The market value of securities on loan to broker/dealers at September 30,
1997, and collateral received with respect to such loans were:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(000)
--------------------------------------------------
MARKET VALUE CASH
OF LOANED COLLATERAL
PORTFOLIO SECURITIES RECEIVED
- --------------------------------------------------------------------------------
<S> <C> <C>
High Yield Bond $ 271 $ 290
Balanced 5,290 5,425
Small Company Growth 3,135 3,376
International 13,103 14,123
- --------------------------------------------------------------------------------
</TABLE>
Cash collateral received is invested in repurchase agreements.
SPECIAL 1997 TAX INFORMATION (UNAUDITED) FOR VANGUARD VARIABLE INSURANCE FUND
This information for the fiscal year ended September 30, 1997, is included
pursuant to provisions of the Internal Revenue Code.
The High-Yield, Balanced, Equity Index, Equity Income, Growth, and
International Portfolios designate $19,000, $20,293,000, $4,342,000, $5,606,000,
$10,561,000, and $627,000, respectively, as capital gain dividends (from net
long-term capital gains).
56
<PAGE> 59
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.
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.; Managing Director
of Global Health Care Partners/DLJ Merchant Banking Partners; Director of Sun
Company, Inc., and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER
Director of The Great Atlantic and Pacific Tea Co., IKON Office Solutions,
Inc., Raytheon Co., Knight-Ridder, Inc., Massachusetts Mutual Life Insurance
Co., and Ladies Professional Golf Association; Trustee Emerita of Wellesley
College.
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 Telecommunications 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., and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director 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
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DISTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MACKINNON
Managing Director, Fixed Income Group.
F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"Standard & Poor's 500," "S&P 500(R)," "Standard & Poor's(R)," "S&P(R)," and
"500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell Company
is the owner of trademarks and copyrights relating to the Russell Indexes.
"Wilshire 4500" and "Wilshire 5000" are trademarks of Wilshire Associates.
<PAGE> 60
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Growth and Income Portfolio
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 International Value 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 Treasury Money Market Portfolio
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, NY, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds (CA, FL, NJ, NY, OH, PA)
VARIABLE INSURANCE FUND
Vanguard Variable Insurance Fund
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
http://www.vanguard.com
[email protected]
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before you invest or send money. Prospectuses can
be obtained directly from The Vanguard Group.
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482
Q640-9/97 - (C) 1997 Vanguard Marketing Corporation, Distributor
<PAGE> 61
VANGUARD VARIABLE INSURANCE FUND
FINANCIAL STATEMENTS
September 30, 1997
The Statement of Net Assets should be read in conjunction with the Statement of
Operations, Statement of Changes in Net Assets, Financial Highlights, and Notes
to Financial Statements, which begin on page 40 of the accompanying report.
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.) and by industry sector or, for
international securities, by country. (The Equity Index Portfolio's S&P 500
Index 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 which 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 ................................... 14
Equity Index Portfolio ............................... 18
Equity Income Portfolio .............................. 23
Growth Portfolio ..................................... 25
Small Company Growth Portfolio ....................... 26
International Portfolio .............................. 28
Report Of Independent Accountants .................... 31
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
MONEY MARKET PORTFOLIO YIELD** DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (14.0%)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal Farm Credit Bank 5.456% 10/5/97 (1) $ 5,000 $ 4,998
Federal Home Loan Bank 5.436% 10/26/97 (1) 5,000 4,997
Federal Home Loan Bank 5.508% 12/19/97 (1) 5,000 4,998
Federal Home Loan Bank 5.643% 12/12/97 (1) 10,000 9,996
Federal Home Loan Mortgage Corp. 5.436% 10/20/97 (1) 10,000 9,994
Federal National Mortgage Assn. 5.476% 10/15/97 (1) 5,000 4,998
Federal National Mortgage Assn. 5.496% 10/13/97 (1) 10,000 9,998
Private Export Funding Corp. 5.556% 10/30/97 (1) 5,000 4,978
- --------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $54,957) 54,957
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
1
<PAGE> 62
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
MONEY MARKET PORTFOLIO YIELD** DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER (60.1%)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BANK HOLDING COMPANIES (4.7%)
Banc One Corp. 5.55% 10/6/97 $ 1,436 $ 1,435
Bank of New York Co. Inc. 5.287% 10/9/97 2,000 1,998
Bank of New York Co. Inc. 5.527% 10/6/97 5,000 4,996
CoreStates Capital Corp. 5.556% 10/3/97 3,000 2,999
J.P. Morgan & Co. 5.55% 11/7/97 4,000 3,977
SunTrust Banks, Inc. 5.574% 11/20/97 3,210 3,185
---------
18,590
---------
FINANCE-AUTOMOBILES (5.1%)
Daimler-Benz NA Corp. 5.525% 10/16/97 5,000 4,989
Ford Motor Credit Corp. 5.537% 11/5/97 3,000 2,984
Ford Motor Credit Corp. 5.616% 10/16/97 2,000 1,995
Toyota Motor Credit Corp. 5.527% 10/15/97 10,000 9,979
---------
19,947
---------
FINANCE-OTHER (14.4%)
American Express Credit Corp. 5.538% 10/9/97 2,000 1,998
Asset Securitization Cooperative Co. 5.553% 10/20/97 3,000 2,991
Asset Securitization Cooperative Co. 5.561% 10/17/97 2,000 1,995
Asset Securitization Cooperative Co. 5.563% 10/15/97 2,000 1,996
Associates Corp. of North America 5.557% 10/30/97 5,000 4,978
Associates Corp. of North America 5.559% 11/21/97 3,000 2,977
Ciesco LP 5.594% 10/27/97 5,000 4,980
CIT Group Holdings Inc. 5.541% 10/7/97 2,000 1,998
John Deere Capital Corp. 5.541% 10/7/97 5,000 4,995
Delaware Funding 5.567% 10/9/97 7,000 6,991
Eiger Capital Corp. 5.551% 10/15/97 3,000 2,994
Eiger Capital Corp. 5.57% 10/2/97 2,000 2,000
Enterprise Funding Corp. 5.57% 10/31/97 5,056 5,033
Enterprise Funding Corp. 5.582% 11/5/97 1,207 1,201
Enterprise Funding Corp. 5.582% 11/12/97 1,347 1,338
General Electric Capital Corp. 5.559% 11/14/97 2,000 1,987
General Electric Capital Corp. 5.568% 10/27/97 1,025 1,021
General Electric Capital Corp. 5.598% 10/6/97 5,000 4,996
---------
56,469
---------
INDUSTRIAL (9.9%)
Archer-Daniels-Midland Co. 5.537% 10/17/97 5,000 4,988
Bayer Corp. 5.558% 10/21/97 10,000 9,969
Cargill Inc. 5.609% 10/7/97 7,000 6,994
Exxon Imperial U.S. Inc. 5.53% 10/17/97 3,000 2,993
First Data Corp. 5.533% 10/14/97 3,000 2,994
H.J. Heinz Co. 5.536% 10/28/97 2,000 1,992
Koch Industries 5.523% 10/20/97 1,442 1,438
PepsiCo Inc. 5.582% 10/6/97 2,468 2,466
Pfizer Inc. 5.522% 10/29/97 5,000 4,979
---------
38,813
---------
INSURANCE (3.5%)
General RE Corp. 5.516% 10/20/97 5,000 4,986
John Hancock Capital Corp. 5.548% 10/3/97 2,728 2,727
MetLife Funding 5.553% 10/14/97 4,868 4,858
USAA Capital Corp. 5.629% 10/2/97 1,288 1,288
---------
13,859
---------
UTILITIES (3.9%)
Pacific Gas & Electric Co. 5.548% 10/1/97 2,000 2,000
SBC Communications Inc. 5.548% 10/22/97 1,442 1,437
SBC Communications Inc. 5.562% 11/5/97 5,000 4,973
Southern California Edison 5.553% 11/17/97 7,000 6,950
---------
15,360
---------
</TABLE>
2
<PAGE> 63
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
MONEY MARKET PORTFOLIO YIELD** DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FOREIGN BANKS (8.5%)
ABN-AMRO North America Finance Inc. 5.703% 1/12/98 $ 5,000 $ 4,921
Abbey National North America 5.61% 10/8/97 3,000 2,997
Abbey National North America 5.648% 10/7/97 7,000 6,994
Barclays U.S. Funding 5.55% 10/8/97 8,000 7,991
Canadian Imperial Holdings Inc. 5.55% 10/7/97 2,000 1,998
Halifax Building Society 5.543% 10/14/97 2,000 1,996
UBS Finance (Delaware), Inc. 5.526% 10/6/97 6,275 6,270
---------
33,167
---------
FOREIGN GOVERNMENT (7.1%)
Caisse D'Amortissement de la Dette Sociale 6.02% 12/29/97 5,000 4,929
Caisse des Depots et Consignations 5.526% 10/10/97 5,130 5,123
Caisse des Depots et Consignations 5.55% 10/3/97 5,000 4,998
KFW International Finance 5.546% 10/20/97 2,000 1,994
KFW International Finance 5.549% 10/1/97 2,000 2,000
KFW International Finance 5.554% 10/17/97 5,000 4,988
Oesterreichische Kontroll Bank 5.671% 1/14/98 4,000 3,935
27,967
---------
FOREIGN INDUSTRIAL (0.5%)
Glaxo Wellcome PLC 5.541% 10/22/97 2,000 1,994
---------
FOREIGN UTILITY (2.5%)
British Telecommunications PLC 5.551% 10/29/97 10,000 9,957
---------
- --------------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER
(COST $236,123) 236,123
- --------------------------------------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT (17.6%)
- --------------------------------------------------------------------------------------------------------------------------
U.S. BANKS (0.5%)
Morgan Guaranty Trust Co. 5.71% 1/6/98 2,000 2,000
---------
YANKEE CERTIFICATES OF DEPOSIT-CANADIAN BRANCHES (1.3%)
Societe Generale 5.608% 12/2/97 5,000 4,952
---------
YANKEE CERTIFICATES OF DEPOSIT-U.S. BRANCHES (15.8%)
Bank of Montreal 5.58% 12/1/97 3,000 3,000
Bank of Montreal 5.60% 10/8/97 2,000 2,000
Bayerische Landesbank Girozentrale 5.71% 2/6/98 5,000 4,997
Canadian Imperial Bank of Commerce 5.56% 10/2/97 5,000 5,000
Deutsche Bank AG 5.75% 1/9/98 2,000 2,000
Deutsche Bank AG 6.17% 4/23/98 4,000 3,999
Deutsche Bank AG 6.20% 4/24/98 2,000 2,000
Dresdner Bank AG 5.89% 3/13/98 9,000 9,004
Landesbank Hessen-Thueringen 5.96% 3/20/98 10,000 10,000
Rabobank Nederlanden 5.50% 12/5/97 5,000 4,997
Rabobank Nederlanden 5.81% 10/1/97 5,000 5,000
Swiss Bank 5.60% 10/9/97 5,000 5,000
Swiss Bank 5.70% 3/9/98 5,000 5,000
---------
61,997
---------
- --------------------------------------------------------------------------------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT
(COST $68,949) 68,949
- --------------------------------------------------------------------------------------------------------------------------
EURODOLLAR CERTIFICATES OF DEPOSIT (7.4%)
- --------------------------------------------------------------------------------------------------------------------------
Bayerische Landesbank Girozentrale 5.71% 3/2/98 5,000 5,000
Bayerische Vereinsbank AG 5.68% 10/1/97 7,000 7,000
Credit Agricole Indosuez 5.62% 12/1/97 8,000 8,000
Deutsche Bank AG 5.70% 3/10/98 5,000 5,000
National Westminster Bank PLC 5.54% 10/1/97 4,000 4,000
- --------------------------------------------------------------------------------------------------------------------------
TOTAL EURODOLLAR CERTIFICATES OF DEPOSIT
(COST $29,000) 29,000
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 64
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
MONEY MARKET PORTFOLIO YIELD** DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BANK NOTE (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
NationsBank, N.A.
(COST $3,000) 5.55% 10/20/97 $ 3,000 $ 3,000
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.9%)
(COST $392,029) 392,029
- --------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
Other Assets--Note C 3,096
Liabilities (2,526)
---------
570
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------------------------
Applicable to 392,602,005 outstanding shares of beneficial interest
(unlimited authorization--no par value) $392,599
==========================================================================================================================
NET ASSET VALUE PER SHARE $1.00
==========================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
**Represents annualized yield at date of purchase for discount securities, and
coupon for coupon-bearing securities.
(1)Floating Rate Note.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 1997, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $392,602 $1.00
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses (3) --
Unrealized Appreciation -- --
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS $392,599 $1.00
==========================================================================================================================
</TABLE>
4
<PAGE> 65
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
HIGH-GRADE BOND PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (65.2%)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT SECURITIES (33.4%)
U.S. Treasury Bond 7.875% 2/15/21 $1,890 $ 2,203
U.S. Treasury Bond 8.00% 11/15/21 1,910 2,259
U.S. Treasury Bond 8.125% 8/15/19 5,935 7,067
U.S. Treasury Bond 8.125% 8/15/21 2,925 3,502
U.S. Treasury Bond 8.50% 2/15/20 1,870 2,312
U.S. Treasury Bond 8.75% 5/15/17 505 633
U.S. Treasury Bond 8.75% 5/15/20 525 665
U.S. Treasury Bond 8.875% 8/15/17 2,350 2,980
U.S. Treasury Bond 8.875% 2/15/19 660 842
U.S. Treasury Bond 9.125% 5/15/18 510 663
U.S. Treasury Bond 10.375% 11/15/09 1,595 1,969
U.S. Treasury Bond 10.375% 11/15/12 1,915 2,490
U.S. Treasury Bond 10.75% 8/15/05 875 1,122
U.S. Treasury Bond 11.625% 11/15/02 1,000 1,244
U.S. Treasury Bond 14.00% 11/15/11 1,065 1,632
U.S. Treasury Inflation-Indexed Note 3.375% 1/15/07 593 581
U.S. Treasury Inflation-Indexed Note 3.625% 7/15/02 301 300
U.S. Treasury Note 5.125% 11/30/98 300 298
U.S. Treasury Note 5.50% 11/15/98 1,075 1,073
U.S. Treasury Note 5.625% 11/30/98 600 599
U.S. Treasury Note 5.75% 10/31/00 100 100
U.S. Treasury Note 5.875% 2/28/99 550 551
U.S. Treasury Note 5.875% 11/15/05 175 172
U.S. Treasury Note 6.25% 10/31/01 400 404
U.S. Treasury Note 6.25% 1/31/02 3,175 3,205
U.S. Treasury Note 6.25% 2/28/02 1,250 1,262
U.S. Treasury Note 6.25% 2/15/03 45 45
U.S. Treasury Note 6.375% 5/15/99 1,900 1,917
U.S. Treasury Note 6.50% 4/30/99 1,400 1,416
U.S. Treasury Note 6.50% 5/31/02 475 484
U.S. Treasury Note 6.625% 3/31/02 550 563
U.S. Treasury Note 6.75% 6/30/99 2,950 2,997
U.S. Treasury Note 6.75% 4/30/00 175 179
U.S. Treasury Note 6.875% 3/31/00 675 691
U.S. Treasury Note 6.875% 5/15/06 3,950 4,130
U.S. Treasury Note 7.00% 4/15/99 225 229
U.S. Treasury Note 7.00% 7/15/06 1,780 1,877
U.S. Treasury Note 7.125% 2/29/00 350 360
U.S. Treasury Note 7.25% 8/15/04 120 128
U.S. Treasury Note 7.50% 10/31/99 750 774
U.S. Treasury Note 7.75% 11/30/99 675 701
U.S. Treasury Note 7.75% 2/15/01 325 343
U.S. Treasury Note 7.875% 8/15/01 250 266
U.S. Treasury Note 7.875% 11/15/04 50 55
U.S. Treasury Note 8.00% 8/15/99 1,775 1,843
U.S. Treasury Note 8.50% 2/15/00 175 185
U.S. Treasury Note 8.50% 11/15/00 450 483
U.S. Treasury Note 8.75% 8/15/00 545 586
U.S. Treasury Note 8.875% 11/15/98 1,375 1,422
U.S. Treasury Note 9.125% 5/15/99 925 972
--------
62,774
--------
AGENCY BONDS AND NOTES (1.6%)
Federal Home Loan Mortgage Corp. 6.785% 3/1/06 300 299
Federal Home Loan Mortgage Corp. 7.09% 6/1/05 200 201
Federal National Mortgage Assn. 4.95% 9/30/98 700 695
Federal National Mortgage Assn. 5.35% 8/12/98 700 698
Federal National Mortgage Assn. 5.80% 12/10/03 350 342
Federal National Mortgage Assn. 6.25% 8/12/03 350 345
Federal National Mortgage Assn. 7.55% 6/10/04 350 356
--------
2,936
--------
</TABLE>
5
<PAGE> 66
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
HIGH-GRADE BOND PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MORTGAGE OBLIGATIONS (30.2%)
Federal Home Loan Mortgage Corp. 5.50% 12/1/98-11/1/08 (1) $ 194 $ 191
Federal Home Loan Mortgage Corp. 6.00% 7/1/98-1/1/24 (1) 1,106 1,085
Federal Home Loan Mortgage Corp. 6.50% 4/1/98-9/1/27 (1) 4,367 4,321
Federal Home Loan Mortgage Corp. 7.00% 1/1/98-3/1/27 (1) 5,321 5,349
Federal Home Loan Mortgage Corp. 7.50% 4/1/98-9/1/27 (1) 5,003 5,109
Federal Home Loan Mortgage Corp. 8.00% 10/1/09-6/1/27 (1) 1,953 2,024
Federal Home Loan Mortgage Corp. 8.50% 5/1/06-9/1/25 (1) 568 596
Federal Home Loan Mortgage Corp. 9.00% 11/1/05-1/1/25 (1) 717 764
Federal Home Loan Mortgage Corp. 9.50% 1/1/25-2/1/25 (1) 198 213
Federal Home Loan Mortgage Corp. 10.00% 3/1/17-11/1/19 (1) 111 121
Federal National Mortgage Assn. 5.50% 3/1/01 (1) 69 68
Federal National Mortgage Assn. 6.00% 11/15/98-10/1/25 (1) 1,483 1,450
Federal National Mortgage Assn. 6.50% 3/1/00-4/1/26 (1) 3,230 3,186
Federal National Mortgage Assn. 7.00% 5/1/00-7/1/27 (1) 5,916 5,930
Federal National Mortgage Assn. 7.50% 4/1/99-5/1/27 (1) 4,499 4,591
Federal National Mortgage Assn. 8.00% 2/1/00-9/1/27 (1) 2,622 2,716
Federal National Mortgage Assn. 8.50% 10/1/04-12/1/26 (1) 1,142 1,195
Federal National Mortgage Assn. 9.00% 3/1/20-4/1/25 (1) 485 518
Federal National Mortgage Assn. 9.50% 6/1/01-2/1/25 (1) 350 377
Federal National Mortgage Assn. 10.00% 8/1/20-8/1/21 (1) 137 151
Federal National Mortgage Assn. 10.50% 8/1/20 (1) 37 41
Government National Mortgage Assn. 6.00% 3/15/09-1/15/24 (1) 402 393
Government National Mortgage Assn. 6.50% 10/15/08-5/15/26 (1) 1,451 1,426
Government National Mortgage Assn. 7.00% 10/15/08-3/15/27 (1) 3,150 3,165
Government National Mortgage Assn. 7.50% 5/15/08-8/15/26 (1) 3,313 3,384
Government National Mortgage Assn. 8.00% 3/15/08-9/15/27 (1) 4,661 4,833
Government National Mortgage Assn. 8.50% 7/15/09-9/15/26 (1) 1,208 1,273
Government National Mortgage Assn. 9.00% 4/15/16-10/15/26 (1) 1,163 1,254
Government National Mortgage Assn. 9.50% 4/15/17-2/15/25 (1) 580 632
Government National Mortgage Assn. 10.00% 5/15/20-1/15/25 (1) 229 253
Government National Mortgage Assn. 10.50% 5/15/19 (1) 29 32
Government National Mortgage Assn. 11.00% 10/15/15 (1) 28 32
Government National Mortgage Assn. 11.50% 2/15/13 (1) 43 49
Resolution Trust Corp. Collateralized Mortgage Obligations 10.35% 8/25/21 (1) 120 125
---------
56,847
---------
- --------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $119,408) 122,557
- --------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS (28.5%)
- --------------------------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (4.0%)
Discover Card Master Trust 5.40% 11/16/01 (1) 1,400 1,394
First Chicago Master Trust 6.25% 8/15/99 (1) 188 187
First Deposit Master Trust 5.75% 6/15/01 (1) 1,400 1,401
First Deposit Master Trust 6.05% 8/15/02 (1) 1,400 1,404
MBNA Master Credit Card Trust 6.20% 8/15/99 (1) 188 187
Sears Credit Card Master Trust 8.10% 6/15/04 (1) 1,400 1,462
Standard Credit Card Master Trust 7.875% 1/7/00 (1) 1,400 1,430
---------
7,465
---------
FINANCE (10.9%)
American General Finance Corp. 8.00% 2/15/00 900 935
Associates Corp. 6.25% 3/15/99 500 502
Associates Corp. 7.50% 4/15/02 600 625
BT Capital Trust B 7.90% 1/15/27 200 201
Bank of New York Capital I 7.97% 12/31/26 400 410
BankAmerica Capital II 8.00% 12/15/26 200 208
BankAmerica Corp. 9.625% 2/13/01 500 550
BankAmerica Corp. 10.00% 2/1/03 200 231
Bear, Stearns & Co., Inc. 6.625% 1/15/04 200 199
Bear, Stearns & Co., Inc. 7.625% 4/15/00 250 258
CIT Group Holdings 6.625% 6/15/05 400 398
Chase Capital I 7.67% 12/1/26 400 399
</TABLE>
6
<PAGE> 67
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Chrysler Finance Corp. 5.875% 2/7/01 $ 500 $ 494
Citicorp Capital II 8.015% 2/15/27 500 516
CoreStates Capital Corp. 9.375% 4/15/03 250 282
Countrywide Funding MTN 7.31% 8/28/00 600 616
First Chicago Corp. 11.25% 2/20/01 300 344
First Interstate Bancorp 8.625% 4/1/99 500 519
Fleet Capital Trust II 7.92% 12/11/26 400 406
General Motors Acceptance Corp. 5.50% 12/15/01 750 724
Great Western Finance 6.375% 7/1/00 900 902
Household Finance Corp. 7.65% 5/15/07 400 422
JDN Realty Corp. 6.80% 8/1/04 350 348
Lehman Brothers Holdings 7.20% 8/15/09 320 324
Lehman Brothers Holdings 6.90% 1/29/01 1,000 1,015
Manufacturers Hanover Corp. 8.50% 2/15/99 500 516
Mellon Capital II 7.995% 1/15/27 400 409
Mellon Financial Corp. 7.625% 11/15/99 200 206
Merrill Lynch & Co., Inc. 6.50% 4/1/01 1,000 1,007
NCNB Corp. 9.50% 6/1/04 150 172
NationsBank Corp. 7.00% 9/15/01 200 204
NationsBank Corp. 7.75% 8/15/04 500 530
NationsBank Texas 6.75% 8/15/00 500 507
PaineWebber Group, Inc. 7.00% 3/1/00 450 457
Salomon, Inc. 6.70% 12/1/98 1,000 1,009
Sears Roebuck Acceptance Corp. 6.75% 9/15/05 150 151
Security Capital Pacific Trust 8.05% 4/1/17 150 160
Simon DeBartolo Group, Inc. 6.75% 7/15/04 250 249
Smith Barney Holdings, Inc. 5.875% 2/1/01 400 394
Smith Barney Holdings, Inc. 7.98% 3/1/00 700 728
Summit Properties Inc. 6.95% 8/15/04 700 701
Travelers Property Casualty Corp. 7.75% 4/15/26 275 292
U S WEST Financial MTN 8.85% 9/20/99 500 524
Wells Fargo Capital I 7.96% 12/15/26 400 406
---------
20,450
---------
INDUSTRIAL (10.4%)
Anheuser-Busch Cos., Inc. 7.10% 6/15/07 450 461
Anheuser-Busch Cos., Inc. 7.375% 7/1/23 75 75
Anheuser-Busch Cos., Inc. 8.625% 12/1/16 63 66
Applied Materials, Inc. 8.00% 9/1/04 100 107
Archer-Daniels-Midland Co. 8.875% 4/15/11 180 213
Auburn Hills 12.00% 5/1/20 115 178
Black & Decker Corp. 6.625% 11/15/00 1,000 1,008
Black & Decker Corp. 7.50% 4/1/03 500 520
Bowater, Inc. 9.375% 12/15/21 250 306
Burlington Northern Santa Fe Corp. 6.375% 12/15/05 100 98
Burlington Northern Santa Fe Corp. 6.875% 2/15/16 300 292
CSX Corp. 8.625% 5/15/22 50 57
Chrysler Corp. 7.45% 2/1/2097 100 103
Conrail Corp. 9.75% 6/15/20 100 127
Cyprus Minerals 6.625% 10/15/05 400 394
Deere & Co. 8.50% 1/9/22 100 116
Delta Airlines, Inc. (Equipment Trust Certificates) 8.54% 1/2/07 203 220
Eastman Chemical Co. 6.375% 1/15/04 400 396
Eastman Chemical Co. 7.25% 1/15/24 100 100
Federal Express Corp. MTN 10.00% 9/1/98 400 414
Ford Capital BV 9.875% 5/15/02 400 454
Ford Holdings 9.25% 3/1/00 300 320
Ford Motor Corp. 9.95% 2/15/32 65 87
Fortune Brands 7.875% 1/15/23 100 108
General Motors Corp. 9.125% 7/15/01 400 437
General Motors Corp. 9.625% 12/1/00 500 548
W.R. Grace & Co. 7.40% 2/1/00 400 411
W.R. Grace & Co. 8.00% 8/15/04 350 373
</TABLE>
7
<PAGE> 68
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
HIGH-GRADE BOND PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
International Business Machines Corp. 7.125% 12/1/2096 $ 200 $ 197
International Paper Co. 7.875% 8/1/06 100 108
May Department Stores Co. 9.75% 5/16/04 100 127
McDonald's Corp. 6.75% 2/15/03 230 233
MedPartners Inc. 7.375% 10/1/06 150 152
Mobil Corp. 7.625% 2/23/33 200 204
News America Holdings 7.50% 3/1/00 500 513
News America Holdings 8.50% 2/15/05 300 324
News America Holdings 9.125% 10/15/99 1,500 1,580
Norfolk Southern Corp. 6.875% 5/1/01 1,125 1,145
Norfolk Southern Corp. 7.70% 5/15/17 50 53
Norfolk Southern Corp. 7.90% 5/15/2097 50 54
Northrop Grumman Corp. 9.375% 10/15/24 400 466
Occidental Petroleum Corp. 8.50% 11/9/01 750 802
J.C. Penney & Co., Inc. 6.875% 6/15/99 500 507
Philip Morris Cos., Inc. 7.00% 7/15/05 150 150
Philip Morris Cos., Inc. 8.25% 10/15/03 150 160
Phillips Petroleum Co. 9.00% 6/1/01 600 653
Praxair, Inc. 6.75% 3/1/03 500 505
Quaker State Corp. 6.625% 10/15/05 175 173
Safeway Inc. 6.85% 9/15/04 700 707
Seagate Technology, Inc. 7.45% 3/1/37 300 310
Tenneco, Inc. 10.075% 2/1/01 200 222
Texaco Capital Corp. 8.875% 9/1/21 150 182
Tosco Corp. 7.00% 7/15/00 1,000 1,017
Union Carbide Corp. 6.75% 4/1/03 200 202
Union Carbide Corp. 7.75% 10/1/2096 50 52
Union Carbide Corp. 7.875% 4/1/23 125 133
Union Oil of California 6.375% 2/1/04 200 197
Union Oil of California 9.125% 2/15/06 115 133
Union Pacific Corp. 8.625% 5/15/22 175 192
Whirlpool Corp. 9.00% 3/1/03 150 166
---------
19,608
---------
UTILITIES (3.2%)
AT&T Corp. 8.35% 1/15/25 140 151
Alabama Power Co. 8.75% 12/1/21 129 134
Baltimore Gas & Electric Co. 8.375% 8/15/01 500 535
Carolina Power & Light Co. 6.875% 8/15/23 175 166
Coastal Corp. 7.75% 10/15/35 250 263
Enron Corp. 7.125% 5/15/07 150 154
Enron Corp. 9.65% 5/15/01 450 497
GTE Corp. 7.83% 5/1/23 250 257
Houston Lighting & Power Co. 8.75% 3/1/22 100 109
MCI Communications Corp. 7.50% 8/20/04 250 263
MCI Communications Corp. 7.75% 3/23/25 250 260
Michigan Bell Telephone Co. 7.50% 2/15/23 175 178
New York Telephone Co. 7.00% 8/15/25 175 169
Northern Telecom Ltd. 6.875% 9/1/23 250 242
Pacific Bell Telephone Co. 7.25% 7/1/02 225 234
Southern Bell Telephone Co. 7.625% 3/15/13 450 453
Southern California Edison Co. 6.375% 1/15/06 650 639
Southwestern Bell Telephone Co. 7.625% 10/1/13 125 126
Southwestern Bell Telephone Co. 7.625% 3/1/23 475 488
Texas Utilities Co. 7.375% 8/1/01 250 258
Texas Utilities Co. 7.875% 3/1/23 110 113
Texas Utilities Co. 8.25% 4/1/04 100 108
Virginia Electric & Power Co. 6.625% 4/1/03 200 202
---------
5,999
---------
- --------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $52,876) 53,522
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 69
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
FOREIGN AND INTERNATIONAL AGENCY BONDS
(U.S. DOLLAR DENOMINATED)(4.8%)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Province of British Columbia 7.00% 1/15/03 $ 170 $ 175
Canadian Imperial Bank of Commerce (NY Branch) 6.20% 8/1/00 1,800 1,801
Finland Global Bond 7.875% 7/28/04 350 380
Grand Metropolitan Investment Corp. 9.00% 8/15/11 150 179
Hanson Overseas 7.375% 1/15/03 400 415
Inter-American Development Bank 8.50% 3/15/11 130 152
KFW International Finance, Inc. 7.625% 2/15/04 300 319
KFW International Finance, Inc. 8.85% 6/15/99 425 445
KFW International Finance, Inc. 9.125% 5/15/01 200 219
Korean Development Bank 6.625% 11/21/03 800 779
Province of Manitoba 8.75% 5/15/01 500 540
Province of Manitoba 9.25% 4/1/20 120 152
Province of Manitoba 9.50% 10/1/00 130 141
Province of Manitoba 9.625% 12/1/18 100 130
National Westminster Bancorp Inc. 9.375% 11/15/03 350 400
Province of Newfoundland 7.32% 10/13/23 350 355
Noranda, Inc. 8.625% 7/15/02 370 400
Province of Ontario 7.375% 1/27/03 110 115
Province of Ontario 7.75% 6/4/02 200 212
Republic of Portugal 5.75% 10/8/03 650 636
Province of Saskatchewan 7.125% 3/15/08 200 207
Province of Saskatchewan 8.00% 7/15/04 550 595
Kingdom of Thailand 8.25% 3/15/02 300 309
- --------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN AND INTERNATIONAL AGENCY BONDS
(COST $8,917) 9,056
- --------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations
in a Pooled Cash Account
(COST $1,034) 6.05% 10/1/97 1,034 1,034
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.1%)
(COST $182,235) 186,169
- --------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
Other Assets--Note C 4,359
Liabilities (2,638)
---------
1,721
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------------------------
Applicable to 17,770,657 outstanding shares of beneficial interest
(unlimited authorization--no par value) $187,890
==========================================================================================================================
NET ASSET VALUE PER SHARE $10.57
==========================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
(1)The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
MTN--Medium-Term Note.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 1997, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $184,721 $10.39
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses (765) (.04)
Unrealized Appreciation--Note E 3,934 .22
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS $187,890 $10.57
==========================================================================================================================
</TABLE>
9
<PAGE> 70
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
HIGH YIELD BOND PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS (93.6%)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL (4.3%)
Amresco, Inc. 10.00% 3/15/04 $500 $ 525
Bank United Corp. 8.875% 5/1/07 500 528
Chevy Chase Savings Bank, FSB 9.25% 12/1/08 500 505
Imperial Credit Industries, Inc. 9.875% 1/15/07 700 707
Navistar Financial Corp. 9.00% 6/1/02 500 516
Olympic Financial Ltd. 11.50% 3/15/07 370 383
Western Financial Savings Bank, FSB 8.50% 7/1/03 500 496
--------
3,660
--------
INDUSTRIAL (87.0%)
AEROSPACE & DEFENSE (3.7%)
Argo-Tech Corp. 8.625% 10/1/07 (1) 695 697
Howmet Corp. 10.00% 12/1/03 500 543
K & F Industries Inc. 10.375% 9/1/04 500 567
L-3 Communications Corp. 10.375% 5/1/07 (1) 500 541
Newport News Shipbuilding Inc. 8.625% 12/1/06 750 782
AUTOMOTIVE (7.1%)
Collins & Aikman Products Co. 11.50% 4/15/06 500 572
Delco-Remy International Inc. 10.625% 8/1/06 (1) 500 538
Exide Corp. 10.00% 4/15/05 500 534
Federal-Mogul Corp. 8.80% 4/15/07 750 794
Hayes Wheels International, Inc. 11.00% 7/15/06 750 839
Johnstown America Industries, Inc. 11.75% 8/15/05 500 539
Key Plastics, Inc. 10.25% 3/15/07 500 528
LDM Technologies Inc. 10.75% 1/15/07 290 312
Lear Corp. 9.50% 7/15/06 700 766
Mark IV Industries, Inc. 8.75% 4/1/03 100 103
Walbro Corp. 9.875% 7/15/05 500 518
BASIC INDUSTRIES (8.3%)
Anchor Glass Container Corp. 11.25% 4/1/05 (1) 500 542
Cabot Safety Corp. 12.50% 7/15/05 250 276
Clark-Schwebel Inc. 10.50% 4/15/06 235 256
Consumers International 10.25% 4/1/05 (1) 500 535
Day International Group Inc. 11.125% 6/1/05 200 211
EnviroSource, Inc. 9.75% 6/15/03 200 201
Essex Group, Inc. 10.00% 5/1/03 500 530
Goss Graphic Systems, Inc. 12.00% 10/15/06 500 560
Great Lakes Carbon Corp. 10.00% 1/1/06 100 106
International Wire Group 11.75% 6/1/05 (1) 500 548
Mettler-Toledo, Inc. 9.75% 10/1/06 750 802
Neenah Corp. 11.125% 5/1/07 (1) 750 816
Roller Bearing Co. of America Inc. 9.625% 6/15/07 (1) 750 767
Specialty Equipment Cos., Inc. 11.375% 12/1/03 250 271
Synthetic Industries, Inc. 9.25% 2/15/07 250 258
UCAR Global Enterprises, Inc. 12.00% 1/15/05 300 341
BUILDING MATERIALS (3.5%)
American Standard Cos., Inc. 9.875% 6/1/01 160 168
Amtrol Inc. 10.625% 12/31/06 500 516
Falcon Building Products, Inc. 9.50% 6/15/07 (1) 750 773
Johns Manville International Group 10.875% 12/15/04 500 556
Nortek, Inc. 9.25% 3/15/07 750 761
Triangle Pacific Corp. 10.50% 8/1/03 200 213
CABLE (4.1%)
Cablevision Systems Corp. 8.125% 8/15/09 (1) 500 506
Cablevision Systems Corp. 9.25% 11/1/05 400 419
Comcast Corp. 9.125% 10/15/06 750 803
Lenfest Communications, Inc. 8.375% 11/1/05 700 703
</TABLE>
10
<PAGE> 71
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Rifkin Acquisition Partners LLLP 11.125% 1/15/06 $500 $ 545
Tele-Communications, Inc. 9.25% 1/15/23 500 538
CHEMICALS (9.4%)
Acetex Corp. 9.75% 10/1/03 750 767
Astor Corp. 10.50% 10/15/06 500 533
Borden Chemicals & Plastics Operating LP 9.50% 5/1/05 600 633
Buckeye Cellulose Corp. 8.50% 12/15/05 500 509
Freedom Chemical Inc. 10.625% 10/15/06 750 795
General Chemical Corp. 9.25% 8/15/03 300 306
Harris Chemical North America, Inc. 10.75% 10/15/03 500 516
Huntsman Corp. 9.50% 7/1/07 (1) 250 259
Huntsman Polymers Corp. 11.75% 12/1/04 500 570
LaRoche Industries Inc. 9.50% 9/15/07 (1) 500 499
Pioneer Americas Acquisition Corp. 9.25% 6/15/07 (1) 750 748
Sovereign Specialty Chemical 9.50% 8/1/07 (1) 750 765
Sterling Chemicals, Inc. 11.75% 8/15/06 500 552
Texas Petrochemicals Corp. 11.125% 7/1/06 500 548
CONSUMER GOODS & SERVICES (2.7%)
Kinder-Care Learning Centers Inc. 9.50% 2/15/09 175 171
Muzak LP/Muzak Capital Corp. 10.00% 10/1/03 500 523
Playtex Family Products Corp. 9.00% 12/15/03 750 761
Rayovac Corp. 10.25% 11/1/06 250 271
Safelite Glass Corp. 9.875% 12/15/06 (1) 500 530
CONTAINERS (2.6%)
BWAY Corp. 10.25% 4/15/07 (1) 250 270
Owens-Illinois, Inc. 8.10% 5/15/07 750 790
Silgan Corp. 9.00% 6/1/09 710 726
Sweetheart Cup Co., Inc. 9.625% 9/1/00 400 403
ENERGY AND RELATED GOODS AND SERVICES (7.5%)
AmeriGas Partners, LP Series B 10.125% 4/15/07 500 530
Cross Timbers Oil Co. 9.25% 4/1/07 750 774
Energy Corp. of America 9.50% 5/15/07 750 754
Falcon Drilling Co., Inc. 8.875% 3/15/03 500 527
Flores & Rucks, Inc. 9.75% 10/1/06 500 533
J. Ray McDermott, SA 9.375% 7/15/06 500 525
Mesa Operating Co. 10.625% 7/1/06 500 576
Plains Resources, Inc. 10.25% 3/15/06 750 810
Pride Petroleum Services, Inc. 9.375% 5/1/07 750 802
Seagull Energy Corp. 8.625% 8/1/05 500 523
FOOD & LODGING (1.5%)
B & G Foods Inc. 9.625% 8/1/07 (1) 500 499
Capstar Hotel Co. 8.75% 8/15/07 (1) 500 509
PMI Acquisition Corp. 10.25% 9/1/03 250 265
HEALTH CARE (5.6%)
Beverly Enterprises Inc. 9.00% 2/15/06 250 264
Genesis Health Ventures Inc. 9.75% 6/15/05 100 104
Graham-Field Health Products, Inc. 9.75% 8/15/07 (1) 110 114
HEALTHSOUTH Corp. 9.50% 4/1/01 650 687
Integrated Health Services, Inc. 9.50% 9/15/07 (1) 500 513
Leiner Health Products Inc. 9.625% 7/10/07 (1) 500 525
Owens & Minor, Inc. 10.875% 6/1/06 500 550
Packard Bioscience Co. 9.375% 3/1/07 500 511
Quorum Health Group, Inc. 8.75% 11/1/05 200 209
Tenet Healthcare Corp. 10.125% 3/1/05 500 550
Vencor Inc. 8.625% 7/15/07 (1) 750 761
</TABLE>
11
<PAGE> 72
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
HIGH YIELD BOND PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HOME BUILDING & REAL ESTATE (0.8%)
Continental Homes Holding Corp. 10.00% 4/15/06 $100 $ 106
Del Webb Corp. 9.00% 2/15/06 50 51
Standard Pacific Corp. 8.50% 6/15/07 500 507
MEDIA & ENTERTAINMENT (5.0%)
American Radio Systems Corp. 9.00% 2/1/06 500 535
Chancellor Media Corp. 9.375% 10/1/04 500 521
Fox/Liberty Networks LLC 8.875% 8/15/07 (1) 750 756
JCAC, Inc. 10.125% 6/15/06 100 109
Jacor Communications, Inc. 8.75% 6/15/07 (1) 280 286
Outdoor Systems Inc. 9.375% 10/15/06 300 315
Universal Outdoor Holdings, Inc. 9.75% 10/15/06 300 319
Viacom Inc. 8.00% 7/7/06 400 398
Von Hoffman Press Inc. 10.375% 5/15/07 (1) 500 530
World Color Press, Inc. 9.125% 3/15/03 200 209
Young Broadcasting Inc. 10.125% 2/15/05 250 261
METAL (9.7%)
AK Steel Corp. 9.125% 12/15/06 500 529
AK Steel Corp. 10.75% 4/1/04 500 541
Acme Metals, Inc. 12.50% 8/1/02 500 542
Algoma Steel Inc. 12.375% 7/15/05 700 819
Armco, Inc. 9.00% 9/15/07 (1) 500 504
Armco, Inc. 9.375% 11/1/00 500 514
Bethlehem Steel Corp. 10.375% 9/1/03 400 428
GS Technologies Operating Co., Inc. 12.25% 10/1/05 750 836
Kaiser Aluminum & Chemical Corp. 9.875% 2/15/02 310 322
LTV Corp. 8.20% 9/15/07 (1) 750 745
NS Group Inc. 13.50% 7/15/03 500 575
Oregon Steel Mills, Inc. 11.00% 6/15/03 500 556
Ryerson Tull, Inc. 9.125% 7/15/06 500 540
Weirton Steel Corp. 10.75% 6/1/05 500 527
Wells Aluminum Corp. 10.125% 6/1/05 (1) 250 263
PAPER & PACKAGING (5.0%)
Container Corp. of America 9.75% 4/1/03 700 758
Doman Industries, Ltd. 8.75% 3/15/04 500 494
Domtar Inc. 8.75% 8/1/06 200 209
Fonda Group Inc. 9.50% 3/1/07 500 485
Paperboard Industries International Inc. 8.375% 9/15/07 (1) 750 760
SD Warren Co. 12.00% 12/15/04 500 565
Stone Container Corp. 9.875% 2/1/01 255 259
Tembec Finance Corp. 9.875% 9/30/05 710 749
TECHNOLOGY & RELATED (4.5%)
Advanced Micro Devices 11.00% 8/1/03 750 840
Amphenol Corp. 9.875% 5/15/07 750 795
Bell & Howell Co. 9.25% 7/15/00 100 104
Fairchild Semiconductor Corp. 10.125% 3/15/07 750 804
Iron Mountain, Inc. 10.125% 10/1/06 700 756
Pierce Leahy Corp. 9.125% 7/15/07 500 524
TELECOMMUNICATIONS (3.3%)
Comcast Cellular Holdings, Inc. 9.50% 5/1/07 (1) 500 522
GCI, Inc. 9.75% 8/1/07 750 780
Paging Network, Inc. 10.125% 8/1/07 200 208
Rogers Cantel Inc. 8.30% 10/1/07 (1) 750 750
Teleport Communications Group Inc. 9.875% 7/1/06 500 550
</TABLE>
12
<PAGE> 73
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TEXTILES & RELATED (2.7%)
Dan River Inc. 10.125% 12/15/03 $500 $ 526
Dominion Textile (USA) Inc. 9.25% 4/1/06 500 521
Tultex Corp. 9.625% 4/15/07 200 214
Tultex Corp. 10.625% 3/15/05 500 546
Westpoint Stevens, Inc. 9.375% 12/15/05 425 446
--------
73,863
--------
UTILITIES (2.3%)
AES Corp. 8.375% 8/15/07 500 506
CMS Energy Corp. 8.125% 5/15/02 500 509
CalEnergy Co., Inc. 9.50% 9/15/06 500 536
El Paso Electric Co. 8.90% 2/1/06 150 163
Texas-New Mexico Power Co. 10.75% 9/15/03 200 218
--------
1,932
--------
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $77,086) 79,455
- -------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (5.5%)
- -------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government Obligations
in a Pooled Cash Account 6.05% 10/1/97 4,378 4,378
Collateralized by U.S. Government Obligations
in a Pooled Cash Account--Note F 6.11% 10/1/97 290 290
- -------------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $4,668) 4,668
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.1%)
(COST $81,754) 84,123
- -------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.9%)
- -------------------------------------------------------------------------------------------------------------------------
Other Assets--Note C 2,517
Liabilities--Note F (1,753)
--------
764
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------------------------------------------
Applicable to 8,018,185 outstanding shares of beneficial interest
(unlimited authorization--no par value) $84,887
=========================================================================================================================
NET ASSET VALUE PER SHARE $10.59
=========================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
(1)Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be sold in transactions exempt from
registration, normally to qualified institutional buyers. At September 30,
1997, the aggregate value of these securities was $17,371,000,
representing 20.5% of net assets.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 1997, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $82,394 $10.27
Undistributed Net Investment Income -- --
Accumulated Net Realized Gains 124 .02
Unrealized Appreciation--Note E 2,369 .30
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS $84,887 $10.59
=========================================================================================================================
</TABLE>
13
<PAGE> 74
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
MARKET
VALUE*
BALANCED PORTFOLIO SHARES (000)
- -------------------------------------------------------------------
COMMON STOCK (60.8%)
- -------------------------------------------------------------------
<S> <C> <C>
AUTO & TRANSPORTATION (5.3%)
Canadian National Railway Co. 45,000 $ 2,340
Chrysler Corp. 66,500 2,448
Ford Motor Co. 151,031 6,834
General Motors Corp. 44,139 2,955
KLM Royal Dutch Air Lines NV 70,300 2,412
Norfolk Southern Corp. 10,400 1,074
Union Pacific Corp. 109,800 6,876
----------
24,939
----------
CONSUMER DISCRETIONARY (2.0%)
Eastman Kodak Co. 43,400 2,818
May Department Stores Co. 33,800 1,842
J.C. Penney Co., Inc. 40,500 2,359
Sears, Roebuck & Co. 43,052 2,451
----------
9,470
----------
CONSUMER STAPLES (1.8%)
American Stores Co. 24,000 585
General Mills, Inc. 22,000 1,517
H.J. Heinz Co. 67,000 3,095
Philip Morris Cos., Inc. 33,500 1,392
SuperValu Inc. 50,900 1,998
----------
8,587
----------
FINANCIAL SERVICES (13.5%)
Allstate Corp. 123,964 9,964
BankAmerica Corp. 77,000 5,645
CIGNA Corp. 22,100 4,116
Citicorp 64,400 8,626
CoreStates Financial Corp. 44,540 2,948
Fannie Mae 68,500 3,220
First Union Corp. 103,754 5,194
Jefferson-Pilot Corp. 31,500 2,488
MBIA, Inc. 19,000 2,383
Marsh & McLennan Cos., Inc. 37,000 2,835
U.S. Bancorp 94,900 9,158
Wachovia Corp. 89,300 6,430
----------
63,007
----------
HEALTH CARE (6.8%)
Abbott Laboratories 58,600 3,747
American Home Products Corp. 45,000 3,285
C.R. Bard, Inc. 55,000 1,867
Baxter International, Inc. 65,100 3,401
Bristol-Myers Squibb Co. 58,400 4,833
Johnson & Johnson 67,000 3,861
Pfizer, Inc. 63,000 3,784
Pharmacia & Upjohn, Inc. 154,500 5,639
Zeneca Group PLC ADR 13,399 1,310
----------
31,727
----------
INTEGRATED OILS (5.7%)
Amoco Corp. 28,900 2,785
Ashland, Inc. 23,400 1,272
Atlantic Richfield Co. 9,000 769
Chevron Corp. 31,600 2,629
Equitable Resources, Inc. 45,000 1,418
Exxon Corp. 31,200 1,999
Kerr-McGee Corp. 11,000 757
Phillips Petroleum Co. 49,800 2,571
Repsol SA ADR 71,400 3,097
Royal Dutch Petroleum Co. ADR 61,800 3,430
Texaco Inc. 23,000 1,413
Total SA ADR 45,056 2,582
Unocal Corp. 41,087 1,777
----------
26,499
----------
OTHER ENERGY (0.4%)
Occidental Petroleum Corp. 67,000 1,738
----------
MATERIALS & PROCESSING (11.7%)
Aluminum Co. of America 56,000 4,592
British Steel PLC ADR 75,900 2,211
Cabot Corp. 49,200 1,325
Dow Chemical Co. 55,100 4,997
E.I. du Pont de Nemours & Co. 82,600 5,085
Imperial Chemical Industries
PLC ADR 3,000 198
International Paper Co. 45,000 2,478
Kimberly-Clark Corp. 119,300 5,838
Lubrizol Corp. 56,000 2,352
Norsk Hydro AS ADR 35,900 2,147
PPG Industries, Inc. 38,200 2,395
Phelps Dodge Corp. 73,700 5,721
Reynolds Metals Co. 36,262 2,568
Rhone-Poulenc SA ADR 69,782 2,822
Temple-Inland Inc. 45,000 2,880
Westvaco Corp. 79,300 2,860
Willamette Industries, Inc. 65,800 2,517
Witco Chemical Corp. 38,000 1,734
----------
54,720
----------
PRODUCER DURABLES (4.8%)
AMP, Inc. 23,000 1,232
The Boeing Co. 56,000 3,049
Caterpillar, Inc. 27,000 1,456
Honeywell, Inc. 61,800 4,152
Lockheed Martin Corp. 22,000 2,346
United Technologies Corp. 38,600 3,127
Xerox Corp. 85,000 7,156
----------
22,518
----------
TECHNOLOGY (0.8%)
International Business
Machines Corp. 34,000 3,602
----------
UTILITIES (5.2%)
AT&T Corp. 112,500 4,985
Bell Atlantic Corp. 17,356 1,396
BellSouth Corp. 55,600 2,572
Carolina Power & Light Co. 44,500 1,599
CINergy Corp. 66,000 2,207
Duke Energy Corp. 56,000 2,769
PacifiCorp 71,000 1,589
Pinnacle West Capital Corp. 49,000 1,648
SBC Communications Inc. 32,500 1,995
Texas Utilities Co. 55,700 2,005
U S WEST Communications Group 44,100 1,698
----------
24,463
----------
OTHER (2.8%)
Canadian Pacific Ltd. 126,000 3,725
Cooper Industries, Inc. 15,000 811
General Electric Co. 83,400 5,676
Minnesota Mining &
Manufacturing Co. 33,400 3,090
----------
13,302
----------
- -------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $169,761) 284,572
- -------------------------------------------------------------------
</TABLE>
14
<PAGE> 75
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- -------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (0.4%)
- -------------------------------------------------------------------
<S> <C> <C>
Cyprus Amax Minerals Co.
$4.00 Cvt. Pfd. Series A 11,666 $ 639
Sun Co., Inc.
$1.80 Cvt. Pfd. Series A 28,000 1,012
- -------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $1,409) 1,651
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- -------------------------------------------------------------------
CORPORATE BONDS (19.2%)
- -------------------------------------------------------------------
<S> <C> <C>
FINANCE (5.3%)
BankAmerica Corp.
7.20%, 4/15/06 $ 1,000 1,027
CIGNA Corp.
7.875%, 5/15/27 2,000 2,116
Citicorp
7.625%, 5/1/05 1,000 1,054
Comerica, Inc.
7.25%, 8/1/07 1,500 1,546
Dean Witter, Discover and Co.
6.75%, 10/15/13 1,000 970
Exxon Capital Corp.
6.00%, 7/1/05 1,000 976
First Union Corp.
7.50%, 4/15/35 1,000 1,070
Ford Motor Credit Co.
6.25%, 12/8/05 1,000 972
John Hancock
(1)7.375%, 2/15/24 1,000 1,004
Jackson National Life Insurance Co.
(1)8.15%, 3/15/27 1,500 1,605
Lumbermens Mutual Casualty
(1)9.15%, 7/1/26 1,000 1,135
NBD Bancorp
7.125%, 5/15/07 1,500 1,530
NationsBank Corp.
7.80%, 9/15/16 1,000 1,068
Ohio National Life Insurance
(1)8.50%, 5/15/26 2,000 2,127
Republic New York Corp.
7.75%, 5/15/09 1,000 1,077
Security Benefit Life Insurance Co.
(1)8.75%, 5/15/16 1,500 1,637
SunTrust Bank Atlanta
7.25%, 9/15/06 1,000 1,036
U S WEST Capital Funding, Inc.
7.90%, 2/1/27 1,500 1,583
Wachovia Corp.
6.375%, 2/1/09 1,000 970
----------
24,503
----------
INDUSTRIAL (8.5%)
Abbott Laboratories
6.80%, 5/15/05 1,000 1,021
Air Products & Chemicals, Inc.
7.375%, 5/1/05 1,000 1,048
Amoco Corp.
6.50%, 8/1/07 1,500 1,507
Archer-Daniels-Midland Co.
7.50%, 3/15/27 1,500 1,575
Baxter International, Inc.
7.65%, 2/1/27 1,500 1,587
The Boeing Co.
8.75%, 8/15/21 1,500 1,824
Bristol-Myers Squibb Co.
6.80%, 11/15/26 1,500 1,483
Browning-Ferris Industries, Inc.
6.375%, 1/15/08 1,000 969
CPC International, Inc.
7.25%, 12/15/26 1,000 1,022
Coca-Cola Enterprises, Inc.
8.50%, 2/1/22 1,000 1,151
Fluor Corp.
6.95%, 3/1/07 1,500 1,528
Georgia-Pacific Corp.
9.625%, 3/15/22 1,000 1,115
Johnson Controls, Inc.
7.125%, 7/15/17 1,200 1,210
Eli Lilly & Co.
7.125%, 6/1/25 2,000 2,057
Lockheed Martin Corp.
7.65%, 5/1/16 1,000 1,062
McDonald's Corp.
7.375%, 7/15/33 1,000 1,017
Mead Corp.
7.35%, 3/1/17 500 512
Norfolk Southern Corp.
7.70%, 5/15/17 1,500 1,593
J.C. Penney Co., Inc.
7.95%, 4/1/17 1,500 1,622
Procter & Gamble Co. ESOP
9.36%, 1/1/21 1,000 1,245
Raytheon Co.
7.20%, 8/15/27 1,500 1,498
Sears, Roebuck & Co.
9.375%, 11/1/11 1,000 1,234
Stanford Univ.
7.65%, 6/15/26 1,000 1,094
TRW, Inc.
9.375%, 4/15/21 1,000 1,259
Tosco Corp.
7.80%, 1/1/27 1,500 1,566
Union Pacific Corp.
7.00%, 2/1/16 1,000 986
United Parcel Service
8.375%, 4/1/20 2,000 2,337
United Technologies Corp.
8.75%, 3/1/21 1,000 1,185
Wal-Mart Stores, Inc.
7.25%, 6/1/13 1,000 1,046
Weyerhaeuser Co.
6.95%, 8/1/17 1,500 1,485
----------
39,838
----------
UTILITIES (5.4%)
AT&T Corp.
7.75%, 3/1/07 1,000 1,077
Atlantic City Electric Co.
(2)7.00%, 9/1/23 1,000 970
Baltimore Gas & Electric Co.
5.50%, 4/15/04 1,000 948
BellSouth Telecommunications
7.50%, 6/15/33 1,000 1,016
</TABLE>
15
<PAGE> 76
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
BALANCED PORTFOLIO (000) (000)
- -------------------------------------------------------------------
<S> <C> <C>
Central Power & Light Co.
6.625%, 7/1/05 $ 1,000 $ 999
Duke Energy Corp.
7.00%, 7/1/33 1,000 959
El Paso Natural Gas Co.
7.50%, 11/15/26 1,500 1,552
Florida Power & Light Co.
7.00%, 9/1/25 2,000 1,943
Florida Power Corp.
6.875%, 2/1/08 1,850 1,879
GTE Southwest Inc.
6.00%, 1/15/06 1,000 962
Illinois Bell Telephone Co.
6.625%, 2/1/25 1,000 931
Indiana Bell Telephone Co. Inc.
7.30%, 8/15/26 1,000 1,050
New Jersey Bell Telephone Co.
8.00%, 6/1/22 1,000 1,124
New York Telephone Co.
7.25%, 2/15/24 1,000 990
PacifiCorp MTN
6.625%, 6/1/07 1,000 986
Pacific Bell
7.125%, 3/15/26 1,000 1,014
Tennessee Gas Pipeline Co.
7.50%, 4/1/17 1,500 1,555
Texas Utilities Electric Co.
7.875%, 4/1/24 1,000 1,031
U S WEST Communications Group
6.875%, 9/15/33 1,000 929
Union Electric Co.
7.375%, 12/15/04 1,000 1,047
Washington Gas Light Co. MTN
6.15%, 1/26/26 1,500 1,463
Wisconsin Electric Power Co.
7.70%, 12/15/27 1,000 1,019
----------
25,444
----------
- -------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $86,188) 89,785
- -------------------------------------------------------------------
<CAPTION>
FOREIGN BONDS (U.S. DOLLAR DENOMINATED)(4.1%)
- -------------------------------------------------------------------
<S> <C> <C>
ABN-AMRO Bank NV (Chicago)
7.25%, 5/31/05 1,000 1,034
Banque Nationale de Paris-NY
7.20%, 1/15/07 1,500 1,526
Banque Paribas-NY
6.875%, 3/1/09 1,500 1,473
Deutsche Bank Financial Inc.
6.70%, 12/13/06 2,000 2,001
Enersis SA
7.40%, 12/1/16 1,500 1,501
Husky Oil Ltd.
7.55%, 11/15/16 1,000 1,031
Republic of Italy Global Bond
6.875%, 9/27/23 2,000 1,972
Japan Financial Corp.
7.375%, 4/27/05 1,000 1,059
KFW International Finance, Inc.
7.20%, 3/15/14 2,000 2,088
Metropolitano de Lisboa
(1) 7.42%, 10/15/16 1,000 1,053
Petro-Canada
7.875%, 6/15/26 1,000 1,084
Southern Investments UK PLC
6.80%, 12/1/06 1,500 1,492
Toronto Dominion Bank-NY
6.45%, 1/15/09 1,000 969
Zeneca Wilmington Inc.
7.00%, 11/15/23 1,000 1,007
- -------------------------------------------------------------------
TOTAL FOREIGN BONDS
(COST $18,746) 19,290
- -------------------------------------------------------------------
<CAPTION>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (13.6%)
- -------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS (11.2%)
<S> <C> <C>
U.S. Treasury Bonds
6.25%, 8/15/23 9,500 9,230
7.25%, 5/15/16 18,500 20,107
7.50%, 11/15/16 6,000 6,679
U.S. Treasury Notes
6.50%, 8/15/05 11,000 11,233
6.625%, 5/15/07 5,000 5,164
----------
52,413
----------
FEDERAL AGENCY OBLIGATION (0.2%)
Federal Home Loan Bank
7.66%, 7/20/04 1,000 1,075
----------
MORTGAGE PASS-THROUGH SECURITIES (2.2%)
Federal Home Loan Mortgage Corp.
(3)6.50%, 8/1/25--4/1/26 8,599 8,404
Government National Mortgage Assn.
(3)6.50%, 3/15/26 1,917 1,878
----------
10,282
----------
- -------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $60,692) 63,770
- -------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (2.3%)
- -------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled Cash Account
6.05%, 10/1/97 5,168 5,168
6.14%, 10/1/97--Note F 5,425 5,425
- -------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $10,593) 10,593
- -------------------------------------------------------------------
TOTAL INVESTMENTS (100.4%)
(COST $347,389) 469,661
- -------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.4%)
- -------------------------------------------------------------------
Other Assets--Note C 4,295
Liabilities--Note F (6,177)
----------
(1,882)
- -------------------------------------------------------------------
</TABLE>
16
<PAGE> 77
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
MARKET
VALUE*
(000)
- --------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------
<S> <C>
Applicable to 26,037,243 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $467,779
====================================================================
NET ASSET VALUE PER SHARE $17.97
====================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
ADR--American Depository Receipt.
MTN--Medium-Term Note.
(1)Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be sold in transactions exempt from
registration, normally to qualified institutional buyers. At September 30,
1997, the aggregate value of these securities was $8,561,000, representing
1.8% of net assets.
(2)Scheduled principal and interest payments are guaranteed by MBIA (Municipal
Bond Insurance Association).
(3)The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------------------
AT SEPTEMBER 30, 1997, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------
<S> <C> <C>
Paid in Capital--Note A $308,236 $11.84
Undistributed Net Investment
Income--Notes A and D 15,492 .59
Accumulated Net
Realized Gains--Note D 21,779 .84
Unrealized Appreciation--Note E 122,272 4.70
- ----------------------------------------------------------------------
NET ASSETS $467,779 $17.97
======================================================================
</TABLE>
17
<PAGE> 78
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
MARKET
VALUE*
EQUITY INDEX PORTFOLIO SHARES (000)
- -------------------------------------------------------------------
COMMON STOCKS
- -------------------------------------------------------------------
<S> <C> <C>
General Electric Co. 308,736 $ 21,013
Exxon Corp. 234,930 15,050
- - Microsoft Corp. 112,950 14,945
The Coca-Cola Co. 233,862 14,251
Intel Corp. 153,928 14,219
Merck & Co., Inc. 113,928 11,386
Royal Dutch Petroleum Co. ADR 202,180 11,221
International Business
Machines Corp. 93,932 9,951
Philip Morris Cos., Inc. 230,069 9,562
Procter & Gamble Co. 130,044 8,981
Bristol-Myers Squibb Co. 94,650 7,832
Wal-Mart Stores, Inc. 213,542 7,821
Pfizer, Inc. 121,836 7,318
Johnson & Johnson 126,354 7,281
American International Group, Inc. 67,485 6,964
Hewlett-Packard Co. 98,048 6,820
AT&T Corp. 153,164 6,787
E.I. du Pont de Nemours & Co. 106,840 6,577
Eli Lilly & Co. 52,602 6,335
Bell Atlantic Corp. 73,191 5,887
PepsiCo, Inc. 144,304 5,853
Citicorp 43,216 5,788
Mobil Corp. 73,898 5,468
- - Compaq Computer Corp. 71,284 5,328
SBC Communications Inc. 86,440 5,305
Chevron Corp. 63,030 5,243
The Walt Disney Co. 63,610 5,129
The Boeing Co. 94,193 5,128
Ford Motor Co. 112,558 5,093
Lucent Technologies, Inc. 61,721 5,023
BankAmerica Corp. 66,626 4,885
Chase Manhattan Corp. 40,487 4,777
Fannie Mae 100,696 4,733
- - Cisco Systems, Inc. 64,426 4,707
Abbott Laboratories 73,328 4,688
General Motors Corp. 68,982 4,617
American Home Products Corp. 62,450 4,559
Gillette Co. 52,678 4,547
Amoco Corp. 46,797 4,510
BellSouth Corp. 93,304 4,315
NationsBank Corp. 69,196 4,281
Travelers Group Inc. 60,430 4,124
Motorola, Inc. 57,256 4,115
GTE Corp. 89,835 4,076
Schlumberger Ltd. 47,700 4,016
American Express Co. 45,157 3,697
Minnesota Mining &
Manufacturing Co. 39,109 3,618
Home Depot, Inc. 68,895 3,591
Schering-Plough Corp. 69,244 3,566
Ameritech Corp. 52,936 3,520
Warner-Lambert Co. 25,654 3,462
- - Oracle Corp. 92,355 3,365
Allstate Corp. 40,858 3,284
Unilever NV ADR 15,064 3,203
McDonald's Corp. 65,293 3,110
Banc One Corp. 54,935 3,066
- - WorldCom, Inc. 86,800 3,065
Texaco Inc. 49,800 3,060
- - Dell Computer Corp. 31,200 3,021
Morgan Stanley, Dean Witter,
Discover and Co. 55,709 3,012
Time Warner, Inc. 53,151 2,880
First Union Corp. 54,172 2,712
Xerox Corp. 31,347 2,639
Kimberly-Clark Corp. 53,088 2,598
Northern Telecom Ltd. 24,748 2,572
Atlantic Richfield Co. 30,038 2,566
Computer Associates
International, Inc. 34,394 2,470
Texas Instruments, Inc. 18,161 2,454
Emerson Electric Co. 42,180 2,431
Sara Lee Corp. 46,254 2,382
Chrysler Corp. 64,536 2,376
Freddie Mac 66,856 2,357
AlliedSignal Inc. 54,512 2,317
Merrill Lynch & Co., Inc. 31,200 2,315
Wells Fargo & Co. 8,377 2,304
US Bancorp, Inc. 23,214 2,240
Norwest Corp. 35,535 2,177
Monsanto Co. 55,605 2,169
Campbell Soup Co. 43,374 2,125
Sears, Roebuck & Co. 37,107 2,113
Anheuser-Busch Cos., Inc. 46,270 2,088
Medtronic, Inc. 44,328 2,083
First Chicago NBD Corp. 27,629 2,079
Tyco International Ltd. 25,306 2,077
Sprint Corp. 40,413 2,021
Eastman Kodak Co. 30,906 2,007
Colgate-Palmolive Co. 28,518 1,987
Dow Chemical Co. 21,777 1,975
J.P. Morgan & Co., Inc. 17,343 1,971
Lockheed Martin Corp. 18,248 1,946
Caterpillar, Inc. 35,466 1,913
MCI Communications Corp. 64,622 1,894
United Technologies Corp. 22,324 1,808
Columbia/HCA Healthcare Corp. 62,257 1,790
Westinghouse Electric Corp. 65,700 1,778
U S WEST Communications Group 46,129 1,776
Pharmacia & Upjohn, Inc. 47,889 1,748
The Bank of New York Co., Inc. 36,098 1,733
- - AirTouch Communications, Inc. 47,478 1,683
Duke Energy Corp. 33,973 1,680
Washington Mutual, Inc. 24,094 1,678
- - 3Com Corp. 32,500 1,666
H.J. Heinz Co. 35,511 1,640
- - Applied Materials, Inc. 17,172 1,636
Kellogg Co. 38,658 1,628
- - Sun Microsystems, Inc. 34,400 1,608
Fleet Financial Group, Inc. 24,162 1,584
International Paper Co. 28,474 1,568
First Data Corp. 41,364 1,554
ConAgra, Inc. 22,751 1,502
Waste Management Inc. 42,583 1,488
Southern Co. 65,925 1,487
General Re Corp. 7,454 1,480
Union Pacific Corp. 23,298 1,459
PNC Bank Corp. 29,757 1,453
</TABLE>
18
<PAGE> 79
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- -------------------------------------------------------------------
<S> <C> <C>
Gannett Co., Inc. 13,396 $ 1,446
NIKE, Inc. Class B 27,180 1,441
Burlington Northern Santa Fe Corp. 14,766 1,427
SunTrust Banks, Inc. 20,590 1,399
Automatic Data Processing, Inc. 27,736 1,387
- - EMC Corp. 23,700 1,383
Baxter International, Inc. 26,321 1,375
Aluminum Co. of America 16,745 1,373
J.C. Penney Co., Inc. 23,456 1,366
Barnett Banks, Inc. 18,814 1,331
Raytheon Co. 22,260 1,316
Mellon Bank Corp. 23,860 1,306
KeyCorp 20,508 1,305
CIGNA Corp. 6,989 1,302
- - U S WEST Media Group 58,329 1,301
CoreStates Financial Corp. 19,536 1,293
Phillips Petroleum Co. 25,009 1,291
Deere & Co. 23,838 1,281
Archer-Daniels-Midland Co. 53,189 1,273
The Gap, Inc. 25,246 1,264
MBNA Corp. 31,160 1,262
CPC International, Inc. 13,499 1,250
National City Corp. 20,298 1,250
Halliburton Co. 23,904 1,243
The Seagram Co. Ltd. 35,219 1,241
Norfolk Southern Corp. 11,963 1,235
Rockwell International Corp. 19,609 1,234
Loews Corp. 10,900 1,231
Marsh & McLennan Cos., Inc. 15,890 1,218
American General Corp. 23,411 1,214
Dayton-Hudson Corp. 20,258 1,214
May Department Stores Co. 22,236 1,212
- - Amgen, Inc. 25,199 1,206
BankBoston Corp. 13,626 1,205
- - CUC International, Inc. 38,608 1,197
Walgreen Co. 46,556 1,193
CSX Corp. 20,308 1,188
Illinois Tool Works, Inc. 23,716 1,186
Aetna Inc. 14,075 1,146
The Chubb Corp. 16,118 1,145
Bankers Trust New York Corp. 9,328 1,143
Household International, Inc. 10,070 1,140
AMP, Inc. 21,098 1,130
Pitney Bowes, Inc. 13,527 1,125
Enron Corp. 29,059 1,119
Weyerhaeuser Co. 18,802 1,116
- - HFS Inc. 14,690 1,093
Wachovia Corp. 14,882 1,071
PPG Industries, Inc. 16,725 1,048
Textron, Inc. 15,920 1,035
The Goodyear Tire & Rubber Co. 15,049 1,035
USX-Marathon Group 27,719 1,031
General Mills, Inc. 14,867 1,025
- - Boston Scientific Corp. 18,342 1,012
Corning, Inc. 21,348 1,009
- - Viacom Inc. Class B 31,667 1,001
Unocal Corp. 23,099 999
- - Tele-Communications, Inc. Class A 48,055 982
- - AMR Corp. 8,693 962
Fifth Third Bancorp 14,700 959
PG&E Corp. 41,305 958
Edison International 37,894 957
- - Toys R Us, Inc. 26,818 952
The Hartford Financial Services
Group Inc. 10,888 937
CVS Corp. 16,262 925
Charles Schwab Corp. 25,500 912
State Street Corp. 14,900 908
Georgia-Pacific Corp. 8,682 906
Ralston-Ralston Purina Group 10,164 899
Mattel, Inc. 27,122 898
United Healthcare Corp. 17,788 889
- - Federated Department Stores 20,100 867
Conseco Inc. 17,700 864
FPL Group, Inc. 16,846 863
- - Tellabs, Inc. 16,696 860
Barrick Gold Corp. 34,401 851
- - HEALTHSOUTH Corp. 31,800 849
- - Federal Express Corp. 10,596 848
Air Products & Chemicals, Inc. 10,203 846
- - Tenet Healthcare Corp. 28,797 839
Texas Utilities Co. 23,174 834
Marriott International 11,703 832
Fort James Corp. 18,141 831
- - Seagate Technology 22,800 824
Aon Corp. 15,500 820
Honeywell, Inc. 12,116 814
Albertson's, Inc. 23,199 809
Wrigley, (Wm.) Jr. Co. 10,729 808
American Electric Power Co., Inc. 17,500 796
Hershey Foods Corp. 14,090 796
Occidental Petroleum Corp. 30,569 793
Hilton Hotels Corp. 23,157 780
Tenneco, Inc. 16,061 769
Comerica, Inc. 9,700 766
Avon Products, Inc. 12,294 762
Guidant Corp. 13,600 762
Praxair, Inc. 14,821 759
Service Corp. International 23,324 751
Salomon, Inc. 9,983 751
Northrop Grumman Corp. 6,162 748
Browning-Ferris Industries, Inc. 19,529 743
Consolidated Edison Co. of
New York, Inc. 21,755 740
- - Costco Cos., Inc. 19,618 737
Progressive Corp. of Ohio 6,800 728
Alcan Aluminium Ltd. 20,912 727
Cardinal Health, Inc. 10,200 724
- - ITT Corp. 10,688 724
- - The Kroger Co. 23,702 716
Dover Corp. 10,530 715
- - Bay Networks, Inc. 18,500 715
Masco Corp. 15,529 711
The Clorox Co. 9,576 710
Pioneer Hi-Bred International, Inc. 7,788 709
Baker Hughes, Inc. 16,054 702
SunAmerica Inc. 17,850 700
Dresser Industries, Inc. 16,187 696
Ingersoll-Rand Co. 16,001 689
Williams Cos., Inc. 14,715 689
</TABLE>
19
<PAGE> 80
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
MARKET
VALUE*
EQUITY INDEX PORTFOLIO SHARES (000)
- -------------------------------------------------------------------
<S> <C> <C>
Lincoln National Corp. 9,687 $ 674
- - Micron Technology, Inc. 19,397 673
Eaton Corp. 7,100 656
Newmont Mining Corp. 14,555 654
St. Paul Cos., Inc. 7,955 649
Dominion Resources, Inc. 16,996 644
Cognizant Corp. 15,734 641
- - Kmart Corp. 45,553 638
Delta Air Lines, Inc. 6,771 638
The Quaker Oats Co. 12,659 638
TRW, Inc. 11,586 636
Lowe's Cos., Inc. 16,235 631
MGIC Investment Corp. 11,000 630
The Limited, Inc. 25,786 630
- - Digital Equipment Corp. 14,543 630
Rite Aid Corp. 11,352 629
SAFECO Corp. 11,880 628
American Stores Co. 25,760 628
The McGraw-Hill Cos. 9,234 625
Cooper Industries, Inc. 11,484 621
Union Pacific Resources
Group, Inc. 23,516 616
Transamerica Corp. 6,188 616
- - Clear Channel Communications 9,450 613
Coastal Corp. 9,963 610
PacifiCorp 27,272 610
Tribune Co. 11,402 608
Sysco Corp. 16,390 605
ALLTEL Corp. 17,542 605
Burlington Resources, Inc. 11,730 602
Green Tree Financial Corp. 12,800 602
Entergy Corp. 22,950 598
Newell Co. 14,775 591
UNUM Corp. 12,894 588
Interpublic Group of Cos., Inc. 11,449 587
Republic New York Corp. 5,078 577
- - National Semiconductor Corp. 13,929 571
Union Carbide Corp. 11,618 566
Houston Industries, Inc. 25,987 565
- - Thermo Electron Corp. 13,900 556
Rohm & Haas Co. 5,763 553
Public Service Enterprise
Group Inc. 21,468 553
VF Corp. 5,930 549
Champion International Corp. 9,004 549
Crown Cork & Seal Co., Inc. 11,880 548
Becton, Dickinson & Co. 11,360 544
Fortune Brands, Inc. 15,939 537
Huntington Bancshares Inc. 14,800 533
Jefferson-Pilot Corp. 6,705 530
- - KLA-Tencor Corp. 7,800 526
- - Parametric Technology Corp. 11,900 524
UST Inc. 16,993 519
H.F. Ahmanson & Co. 9,131 519
Amerada Hess Corp. 8,378 517
Genuine Parts Co. 16,769 517
MBIA, Inc. 4,100 514
Torchmark Corp. 13,094 514
Consolidated Natural Gas Co. 8,788 511
- - Mirage Resorts, Inc. 16,900 509
Carolina Power & Light Co. 14,153 509
International Flavors &
Fragrances, Inc. 10,307 505
General Dynamics Corp. 5,780 504
- - Computer Sciences Corp. 7,082 501
Winn-Dixie Stores, Inc. 14,126 501
W.R. Grace & Co. 6,792 500
R.R. Donnelley & Sons Co. 13,927 497
Freeport-McMoRan Copper &
Gold Inc. Class B 17,200 496
PECO Energy Corp. 21,085 494
The Times Mirror Co. Class A 8,938 491
CINergy Corp. 14,573 487
Dana Corp. 9,808 484
Reynolds Metals Co. 6,833 484
Unicom Corp. 20,454 478
New York Times Co. Class A 9,082 477
Allegheny Teledyne Inc. 16,632 476
Morton International, Inc. 13,291 472
Sherwin-Williams Co. 16,024 472
TJX Cos., Inc. 15,372 470
Nordstrom, Inc. 7,343 467
Hercules, Inc. 9,378 467
Case Corp. 7,000 466
Knight-Ridder, Inc. 8,536 466
Parker Hannifin Corp. 10,342 465
Dillard's Inc. 10,606 465
Whirlpool Corp. 6,990 463
- - Cabletron Systems, Inc. 14,386 460
Golden West Financial Corp. 5,126 460
The Dun & Bradstreet Corp. 16,034 455
Eastman Chemical Co. 7,294 452
Laidlaw, Inc. 30,142 450
Central & South West Corp. 20,126 447
- - Western Atlas, Inc. 5,064 446
Comcast Corp. Class A Special 17,329 444
Phelps Dodge Corp. 5,674 440
Southwest Airlines Co. 13,688 437
Placer Dome, Inc. 22,783 436
W.W. Grainger, Inc. 4,880 434
- - Silicon Graphics, Inc. 16,439 432
- - LSI Logic Corp. 13,400 430
Nucor Corp. 8,169 430
- - Owens-Illinois, Inc. 12,650 429
Equifax, Inc. 13,600 428
- - AutoZone Inc. 14,200 426
- - Advanced Micro Devices, Inc. 13,016 424
Fluor Corp. 7,842 421
DTE Energy Co. 13,586 414
GPU Inc. 11,492 412
Sonat, Inc. 8,066 410
Dow Jones & Co., Inc. 8,731 408
Union Camp Corp. 6,575 406
Johnson Controls, Inc. 8,036 398
Willamette Industries, Inc. 10,374 397
Inco Ltd. 15,807 396
Ashland, Inc. 7,226 393
Baltimore Gas & Electric Co. 14,051 390
Anadarko Petroleum Corp. 5,400 388
Beneficial Corp. 5,084 387
</TABLE>
20
<PAGE> 81
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- -------------------------------------------------------------------
<S> <C> <C>
PACCAR, Inc. 6,960 $ 386
Comcast Corp. Class A 14,931 383
Circuit City Stores, Inc. 9,312 375
Union Electric Co. 9,647 371
Columbia Gas Systems, Inc. 5,273 369
The Stanley Works 8,570 369
Avery Dennison Corp. 9,210 368
Liz Claiborne, Inc. 6,624 364
- - Humana, Inc. 15,200 362
The Mead Corp. 5,008 362
Rubbermaid, Inc. 14,067 360
H & R Block, Inc. 9,268 358
Countrywide Credit Industries, Inc. 9,800 357
Apache Corp. 8,300 356
Pennzoil Co. 4,437 354
ITT Industries, Inc. 10,588 351
Northern States Power Co. 6,954 346
Temple-Inland Inc. 5,401 346
Raychem Corp. 4,024 340
PP&L Resources Inc. 15,400 337
Frontier Corp. 14,600 336
Ohio Edison Co. 14,323 336
Harris Corp. 7,320 335
Adobe Systems, Inc. 6,600 332
Brunswick Corp. 9,402 331
Harcourt General, Inc. 6,685 331
Providian Financial Corp. 8,308 330
Westvaco Corp. 9,040 326
Tandy Corp. 9,594 323
Hasbro, Inc. 11,400 321
Kerr-McGee Corp. 4,574 315
Black & Decker Corp. 8,412 313
- - US Airways Group Inc. 7,401 306
IKON Office Solutions 11,938 305
Brown-Forman Corp. Class B 6,099 303
Maytag Corp. 8,778 300
Sun Co., Inc. 6,805 298
Ecolab, Inc. 6,113 297
- - FMC Corp. 3,294 292
Sigma-Aldrich Corp. 8,838 290
Perkin-Elmer Corp. 3,908 286
- - St. Jude Medical, Inc. 8,128 285
Cummins Engine Co., Inc. 3,599 281
- - DSC Communications Corp. 10,450 281
- - Novell, Inc. 30,945 278
Engelhard Corp. 12,833 277
Thomas & Betts Corp. 5,002 273
- - Rowan Cos., Inc. 7,631 272
Snap-On Inc. 5,878 271
Aegon NV ARS 3,391 270
Pacific Enterprises 7,820 265
Pall Corp. 12,256 264
- - Ceridian Corp. 7,140 264
- - Woolworth Corp. 11,909 263
USX-U.S. Steel Group 7,578 263
Great Lakes Chemical Corp. 5,325 263
- - Oryx Energy Co. 10,010 255
Nalco Chemical Co. 6,269 251
Wendy's International, Inc. 11,641 247
Deluxe Corp. 7,349 247
American Greetings Corp. Class A 6,678 245
Mallinckrodt, Inc. 6,810 245
Ryder System, Inc. 6,815 245
Louisiana-Pacific Corp. 9,782 245
Whitman Corp. 8,963 244
- - Apple Computer, Inc. 11,246 244
Armstrong World Industries Inc. 3,601 241
Louisiana Land & Exploration Co. 3,070 240
- - Unisys Corp. 15,605 239
- - Reebok International Ltd. 4,886 238
SuperValu Inc. 5,988 235
The BFGoodrich Co. 5,178 234
Biomet, Inc. 9,719 233
- - NextLevel Systems, Inc. 13,800 231
- - ALZA Corp. 7,809 226
USF&G Corp. 9,844 226
- - Andrew Corp. 8,511 222
The Timken Co. 5,530 222
Solutia Inc. 10,921 218
Boise Cascade Corp. 5,136 216
Bemis Co., Inc. 4,677 209
Allergan, Inc. 5,718 207
General Signal Corp. 4,739 205
Polaroid Corp. 3,953 202
Mercantile Stores Co., Inc. 3,199 201
- - Harrah's Entertainment, Inc. 8,957 201
Tektronix, Inc. 2,968 200
Bausch & Lomb, Inc. 4,916 199
Homestake Mining Co. 12,867 197
Cyprus Amax Minerals Co. 8,130 195
- - Fruit of the Loom, Inc. 6,758 190
Millipore Corp. 3,865 190
Echlin, Inc. 5,414 190
U.S. Surgical Corp. 6,493 190
Harnischfeger Industries Inc. 4,419 189
Helmerich & Payne, Inc. 2,333 187
Caliber System Inc. 3,410 185
Cooper Tire & Rubber Co. 6,948 185
Owens Corning 5,053 184
Autodesk, Inc. 4,060 184
Manor Care Inc. 5,526 184
Worthington Industries, Inc. 9,086 183
Giant Food, Inc. Class A 5,519 180
- - Beverly Enterprises, Inc. 10,279 179
- - Navistar International Corp. 6,435 178
McDermott International, Inc. 4,771 174
National Service Industries, Inc. 3,963 174
C.R. Bard, Inc. 4,883 166
NICOR, Inc. 4,389 165
Crane Co. 3,999 164
Darden Restaurants Inc. 13,967 161
Meredith Corp. 4,722 156
Scientific-Atlanta, Inc. 6,895 156
Moore Corp. Ltd. 8,130 154
Tupperware Corp. 5,329 150
Centex Corp. 2,557 149
Alberto-Culver Co. Class B 4,902 149
Foster Wheeler Corp. 3,393 149
Battle Mountain Gold Co. Class A 20,324 146
King World Productions, Inc. 3,301 143
</TABLE>
21
<PAGE> 82
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
MARKET
VALUE*
EQUITY INDEX PORTFOLIO SHARES (000)
- -------------------------------------------------------------------
<S> <C> <C>
Pep Boys (Manny, Moe & Jack) 5,220 $ 142
Stone Container Corp. 8,879 138
Safety-Kleen Corp. 5,508 132
Potlatch Corp. 2,557 129
Adolph Coors Co. Class B 3,305 125
Aeroquip-Vickers Inc. 2,454 120
Shared Medical Systems Corp. 2,223 118
- - Data General Corp. 4,387 117
Peoples Energy Corp. 3,085 116
ASARCO, Inc. 3,525 113
- - Niagara Mohawk Power Corp. 11,462 110
Great Atlantic & Pacific Tea
Co., Inc. 3,406 108
Fleetwood Enterprises, Inc. 3,144 106
- - Bethlehem Steel Corp. 10,026 103
Briggs & Stratton Corp. 2,091 103
Springs Industries Inc. Class A 1,803 95
Jostens Inc. 3,412 93
Inland Steel Industries, Inc. 4,127 90
Longs Drug Stores, Inc. 3,320 89
Russell Corp. 2,914 86
NACCO Industries, Inc. Class A 725 85
Cincinnati Milacron, Inc. 3,070 82
ONEOK, Inc. 2,445 80
Ball Corp. 2,246 78
Pulte Corp. 1,839 70
EG&G, Inc. 3,393 70
Eastern Enterprises 1,813 68
Kaufman & Broad Home Corp. 2,865 62
Fleming Cos., Inc. 3,388 62
Echo Bay Mines Ltd. 10,481 60
John H. Harland Co. 2,279 52
- - Charming Shoppes, Inc. 7,850 48
First Michigan Bank Corp. 1,125 47
Freeport-McMoRan Copper &
Gold, Inc. Class A 1,600 44
Stride Rite Corp. 2,971 40
- - Armco, Inc. 6,637 40
- - Viacom Inc. Class A 1,056 33
- -------------------------------------------------------------------
TOTAL COMMON STOCKS (96.5%)(1)
(COST $409,543) 692,752
- -------------------------------------------------------------------
FACE
AMOUNT
(000)
- -------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (4.0%)
- -------------------------------------------------------------------
U.S. Treasury Bills
(2) 5.02%, 10/16/97 $ 200 200
(2) 5.50%, 10/23/97 800 798
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.05%, 10/1/97 27,497 27,497
- -------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $28,494) 28,495
- -------------------------------------------------------------------
TOTAL INVESTMENTS (100.5%)
(COST $438,037) 721,247
- -------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.5%)
- -------------------------------------------------------------------
Other Assets--Note C 1,825
Liabilities (5,401)
----------
(3,576)
- -------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------
Applicable to 28,346,747 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $717,671
===================================================================
NET ASSET VALUE PER SHARE $25.32
===================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income Producing Security.
(1)The combined market value of common stocks and S&P 500 Index futures
contracts represents 100.0% of net assets. See Note E.
(2)Securities with an aggregate value of $998,000 have been segregated as
initial margin for open futures contracts.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
AT SEPTEMBER 30, 1997, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $418,177 $14.75
Undistributed Net
Investment Income 9,560 .34
Accumulated Net Realized Gains 6,401 .23
Unrealized Appreciation--Note E
Investment Securities 283,210 9.99
Futures Contracts 323 .01
- ---------------------------------------------------------------------
NET ASSETS $717,671 $25.32
=====================================================================
</TABLE>
22
<PAGE> 83
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
MARKET
VALUE*
EQUITY INCOME PORTFOLIO SHARES (000)
- -------------------------------------------------------------------
COMMON STOCKS (98.9%)
- -------------------------------------------------------------------
<S> <C> <C>
AUTO & TRANSPORTATION (2.9%)
Ford Motor Co. 51,500 $ 2,330
Genuine Parts Co. 58,150 1,792
Norfolk Southern Corp. 14,000 1,446
Union Pacific Corp. 34,400 2,154
-----------
7,722
-----------
CONSUMER DISCRETIONARY (5.7%)
Deluxe Corp. 23,300 782
Eastman Kodak Co. 13,400 870
Fortune Brands, Inc. 67,900 2,287
- - Kmart Corp. 73,200 1,025
May Department Stores Co. 60,200 3,281
The McGraw-Hill Cos. 23,300 1,577
J.C. Penney Co., Inc. 69,900 4,072
Whirlpool Corp. 23,100 1,532
- - Woolworth Corp. 6,600 146
-----------
15,572
-----------
CONSUMER STAPLES (8.5%)
Anheuser-Busch Cos., Inc. 53,000 2,392
The Clorox Co. 24,400 1,809
- - Gallaher Group PLC ADR 80,000 1,535
General Mills, Inc. 34,200 2,358
H.J. Heinz Co. 47,750 2,205
International Flavors &
Fragrances, Inc. 30,700 1,504
Kellogg Co. 24,200 1,019
Philip Morris Cos., Inc. 166,600 6,924
The Quaker Oats Co. 37,100 1,869
UST Inc. 51,100 1,562
-----------
23,177
-----------
FINANCIAL SERVICES (19.4%)
American General Corp. 43,700 2,267
Banc One Corp. 60,240 3,362
Bankers Trust New York Corp. 29,800 3,651
Barnett Banks, Inc. 31,300 2,214
CoreStates Financial Corp. 41,200 2,727
The Dun & Bradstreet Corp. 51,400 1,458
First Chicago NBD Corp. 37,000 2,784
First Union Corp. 43,700 2,188
Fleet Financial Group, Inc. 28,900 1,895
KeyCorp 31,200 1,985
Lincoln National Corp. 34,000 2,367
Marsh & McLennan Cos., Inc. 34,800 2,667
Mellon Bank Corp. 28,700 1,571
J.P. Morgan & Co., Inc. 32,700 3,716
NationsBank Corp. 58,382 3,612
PNC Bank Corp. 55,600 2,714
SAFECO Corp. 49,800 2,633
St. Paul Cos., Inc. 16,900 1,378
U.S. Bancorp 17,818 1,719
Wachovia Corp. 29,600 2,131
Washington Mutual, Inc. 51,120 3,559
-----------
52,598
-----------
HEALTH CARE (11.6%)
American Home Products Corp. 85,400 6,234
Baxter International, Inc. 22,800 1,191
Bristol-Myers Squibb Co. 98,200 8,126
Glaxo Wellcome PLC ADR 84,700 3,806
Eli Lilly & Co. 26,900 3,240
Merck & Co., Inc. 37,100 3,708
Pharmacia & Upjohn, Inc. 143,950 5,254
-----------
31,559
-----------
INTEGRATED OILS (17.0%)
Amoco Corp. 50,500 4,867
Atlantic Richfield Co. 75,400 6,442
Chevron Corp. 81,100 6,747
Exxon Corp. 124,200 7,957
Mobil Corp. 94,600 7,000
Phillips Petroleum Co. 30,100 1,554
Royal Dutch Petroleum Co. ADR 70,600 3,918
Texaco Inc. 97,000 5,959
USX-Marathon Group 42,600 1,584
-----------
46,028
-----------
MATERIALS & PROCESSING (5.0%)
ARCO Chemical Co. 17,300 787
Dow Chemical Co. 52,100 4,725
E.I. du Pont de Nemours & Co. 21,000 1,293
International Paper Co. 26,600 1,465
Potlatch Corp. 28,000 1,409
Union Camp Corp. 23,700 1,462
Weyerhaeuser Co. 42,600 2,529
-----------
13,670
-----------
PRODUCER DURABLES (1.7%)
Emerson Electric Co. 24,600 1,418
Pitney Bowes, Inc. 20,200 1,680
Thomas & Betts Corp. 26,900 1,469
-----------
4,567
-----------
UTILITIES (24.5%)
AT&T Corp. 126,200 5,592
Allegheny Energy, Inc. 40,100 1,213
Ameritech Corp. 69,000 4,589
Baltimore Gas & Electric Co. 47,200 1,310
Bell Atlantic Corp. 109,992 8,847
BellSouth Corp. 77,700 3,594
Central & South West Corp. 60,200 1,336
Consolidated Edison Co. of
New York, Inc. 32,400 1,102
Consolidated Natural Gas Co. 53,500 3,113
Dominion Resources, Inc. 31,100 1,178
Duke Energy Corp. 48,100 2,378
Edison International 80,000 2,020
Energy Group PLC ADR 4,025 168
FPL Group, Inc. 17,100 876
GTE Corp. 117,900 5,350
NICOR, Inc. 25,500 956
Northern States Power Co. 17,800 886
OGE Energy Corp. 21,300 1,005
PP&L Resources Inc. 28,800 630
Pacific Enterprises 21,600 732
PacifiCorp 114,000 2,551
Potomac Electric Power Co. 35,000 796
Public Service Enterprise
Group Inc. 29,400 757
SBC Communications Inc. 58,868 3,613
SCANA Corp. 42,100 1,055
Southern Co. 94,300 2,128
TECO Energy, Inc. 50,000 1,225
</TABLE>
23
<PAGE> 84
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
MARKET
VALUE*
EQUITY INCOME PORTFOLIO SHARES (000)
- -------------------------------------------------------------------
<S> <C> <C>
Texas Utilities Co. 30,200 $ 1,087
Union Electric Co. 26,200 1,007
U S WEST Communications
Group 103,200 3,973
Wisconsin Energy Corp. 47,900 1,245
-----------
66,312
-----------
OTHER (2.6%)
General Electric Co. 27,800 1,892
Minnesota Mining &
Manufacturing Co. 42,200 3,904
Ogden Corp. 50,400 1,191
-----------
6,987
-----------
- -------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $191,580) 268,192
- -------------------------------------------------------------------
FACE
AMOUNT
(000)
- -------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (0.9%)
- -------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.05%, 10/1/97
(COST $2,356) $2,356 2,356
- -------------------------------------------------------------------
TOTAL INVESTMENTS (99.8%)
(COST $193,936) 270,548
- -------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.2%)
- -------------------------------------------------------------------
Other Assets--Note C 1,038
Liabilities (377)
-----------
661
- -------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------
Applicable to 14,660,398 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $271,209
===================================================================
NET ASSET VALUE PER SHARE $18.50
===================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income Producing Security.
ADR--American Depository Receipt
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
AT SEPTEMBER 30, 1997, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------------------
<S> <C> <C>
Paid in Capital--Note A $183,095 $12.49
Undistributed Net Investment
Income--Notes A and D 5,900 .40
Accumulated Net
Realized Gains--Note D 5,602 .38
Unrealized Appreciation--Note E 76,612 5.23
- ----------------------------------------------------------------------
NET ASSETS $271,209 $18.50
======================================================================
</TABLE>
24
<PAGE> 85
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
MARKET
VALUE*
GROWTH PORTFOLIO SHARES (000)
- -------------------------------------------------------------------
COMMON STOCKS (96.5%)
- -------------------------------------------------------------------
CONSUMER DISCRETIONARY (8.1%)
<S> <C> <C>
Carnival Corp. Class A 86,800 $ 4,014
The Walt Disney Co. 78,000 6,289
Lowe's Cos., Inc. 93,500 3,635
Mattel, Inc. 156,300 5,177
May Department Stores Co. 110,900 6,044
Sears, Roebuck & Co. 160,000 9,110
Service Corp. International 69,400 2,234
Warnaco Group 28,700 911
-----------
37,414
-----------
CONSUMER STAPLES (23.1%)
CVS Corp. 18,000 1,024
Campbell Soup Co. 91,400 4,479
The Coca-Cola Co. 319,600 19,476
Coca-Cola Enterprises, Inc. 76,200 2,053
Colgate-Palmolive Co. 81,000 5,645
Gillette Co. 119,000 10,271
PepsiCo, Inc. 354,600 14,383
Philip Morris Cos., Inc. 472,000 19,617
Procter & Gamble Co. 263,600 18,205
Unilever NV ADR 52,100 11,078
-----------
106,231
-----------
ENERGY (1.4%)
Renaissance Energy Ltd. 89,000 2,221
Talisman Energy, Inc. 123,800 4,262
-----------
6,483
-----------
FINANCIAL SERVICES (12.3%)
American International
Group, Inc. 105,000 10,835
Automatic Data Processing, Inc. 221,300 11,065
Chase Manhattan Corp. 85,400 10,077
First Data Corp. 211,200 7,933
Household International, Inc. 81,000 9,168
Norwest Corp. 86,300 5,286
Paychex, Inc. 62,300 2,173
-----------
56,537
-----------
HEALTH CARE (17.5%)
American Home Products Corp. 71,400 5,212
Bristol-Myers Squibb Co. 194,000 16,053
Cardinal Health, Inc. 65,500 4,650
- - HealthCare Compare Corp. 41,700 2,658
Johnson & Johnson 120,200 6,927
Eli Lilly & Co. 104,200 12,550
Merck & Co., Inc. 44,900 4,487
Pfizer, Inc. 297,400 17,863
- - Quintiles Transnational Corp. 43,600 3,668
SmithKline Beecham PLC ADR 132,900 6,495
-----------
80,563
-----------
MATERIALS & PROCESSING (8.4%)
W.R. Grace & Co. 148,000 10,897
Illinois Tool Works, Inc. 75,600 3,780
Kimberly-Clark Corp. 79,200 3,876
Monsanto Co. 462,600 18,041
Solutia Inc. 92,520 1,850
-----------
38,444
-----------
PRODUCER DURABLES (3.2%)
The Boeing Co. 172,000 9,363
Honeywell, Inc. 44,700 3,003
Molex, Inc. Class A 60,100 2,449
-----------
14,815
-----------
TECHNOLOGY (20.0%)
- - Altera Corp. 101,100 5,181
- - Cisco Systems, Inc. 175,100 12,793
- - DSC Communications Corp. 76,000 2,043
- - Dell Computer Corp. 39,600 3,834
Hewlett-Packard Co. 186,600 12,980
Intel Corp. 236,900 21,884
Linear Technology Corp. 38,100 2,629
- - Maxim Integrated Products, Inc. 16,300 1,159
- - Microsoft Corp. 117,900 15,600
- - Oracle Corp. 303,700 11,066
- - Xilinx, Inc. 54,300 2,742
-----------
91,911
-----------
OTHER (2.5%)
General Electric Co. 170,500 11,605
-----------
- -------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $297,458) 444,003
- -------------------------------------------------------------------
FACE
AMOUNT
(000)
- -------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (3.3%)
- -------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.05%, 10/1/97
(COST $15,381) $15,381 15,381
- -------------------------------------------------------------------
TOTAL INVESTMENTS (99.8%)
(COST $312,839) 459,384
- -------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.2%)
- -------------------------------------------------------------------
Other Assets--Note C 1,602
Liabilities (667)
-----------
935
- -------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------
Applicable to 21,397,125 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $460,319
===================================================================
NET ASSET VALUE PER SHARE $21.51
===================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income Producing Security.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
AT SEPTEMBER 30, 1997, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $297,548 $13.90
Undistributed Net
Investment Income 4,036 .19
Accumulated Net Realized Gains 12,190 .57
Unrealized Appreciation--Note E 146,545 6.85
- ---------------------------------------------------------------------
NET ASSETS $460,319 $21.51
=====================================================================
</TABLE>
25
<PAGE> 86
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
MARKET
SMALL COMPANY VALUE*
GROWTH PORTFOLIO SHARES (000)
- -------------------------------------------------------------------
COMMON STOCKS (94.2%)
- -------------------------------------------------------------------
<S> <C> <C>
AUTO & TRANSPORTATION (4.8%)
Air Express International Corp. 20,500 $ 746
Coachmen Industries, Inc. 5,000 95
Expeditors International of
Washington, Inc. 16,000 668
- - Halter Marine Group, Inc. 16,500 798
- - Heartland Express, Inc. 33,250 889
- - Hvide Marine, Inc. Class A 16,000 510
- - Kirby Corp. 20,000 384
- - Midwest Express Holdings, Inc. 54,500 1,747
- - RailTex, Inc. 31,000 527
-----------
6,364
-----------
CONSUMER DISCRETIONARY (19.2%)
- - Action Performance Cos., Inc. 9,000 260
Advantage Learning Systems, Inc. 1,500 37
Claire's Stores, Inc. 37,000 828
Cooker Restaurant Corp. 114,000 1,190
- - The Dress Barn, Inc. 37,500 900
- - Family Golf Centers, Inc. 20,000 530
- - GT Interactive Software Corp. 143,500 1,686
Hancock Fabrics, Inc. 84,800 1,140
- - ITI Technologies, Inc. 40,000 1,130
- - Lo-Jack Corp. 57,000 812
- - LodgeNet Entertainment Corp. 55,000 715
Marcus Corp. 69,800 2,033
- - Nautica Enterprises Inc. 34,000 952
- - The North Face, Inc. 45,000 1,187
- - Object Design, Inc. 136,000 1,122
Oneida Ltd. 20,000 710
- - Plantronics, Inc. 22,800 861
- - Play-By-Play Toys & Novelties, Inc. 61,500 1,391
- - QuickResponse Services, Inc. 55,000 1,884
- - Rent-Way, Inc. 25,000 528
- - Renters Choice, Inc. 20,000 450
- - Rex Stores Corp. 101,300 1,140
- - Rockshox, Inc. 50,000 709
- - Sonic Corp. 30,000 840
Trendwest Resorts, Inc. 29,300 685
- - Vistana, Inc. 88,200 1,896
-----------
25,616
-----------
CONSUMER STAPLES (0.8%)
- - Whole Foods Market, Inc. 28,500 1,094
-----------
ENERGY (0.7%)
- - Smith International, Inc. 4,000 311
- - Trico Marine Services, Inc. 17,000 589
-----------
900
-----------
FINANCIAL SERVICES (10.2%)
- - Advent Software, Inc. 48,000 1,308
Comdisco, Inc. 50,000 1,628
- - Concord EFS, Inc. 54,249 1,458
- - E*TRADE Group, Inc. 22,800 1,069
Fidelity National Financial, Inc. 15,000 355
First Washington Realty Trust,
Inc. REIT 49,700 1,224
Interra Financial, Inc. 9,100 547
- - Investment Technology Group, Inc. 38,500 1,040
Manufactured Home
Communities, Inc. REIT 30,200 785
McGrath RentCorp 26,000 595
Quick & Reilly Group, Inc. 6,000 225
Regency Realty Corp. REIT 41,100 1,099
Saul Centers, Inc. REIT 71,900 1,375
Sun Communities, Inc. REIT 26,400 947
-----------
13,655
-----------
HEALTH CARE (15.9%)
- - Advanced Magnetics, Inc. 14,300 153
- - Angeion Corp. 121,300 614
Arrow International, Inc. 56,300 1,851
Ballard Medical Products 36,000 868
- - Bio-Rad Laboratories, Inc. Class A 41,900 1,257
- - Cell Genesys, Inc. 145,600 1,147
- - Centocor, Inc. 23,500 1,116
- - Creative Biomolecules, Inc. 103,600 1,114
- - Cytotherapeutics, Inc. 54,500 296
DENTSPLY International Inc. 33,000 1,848
- - Genesis Health Ventures Inc. 12,800 498
- - Genome Therapeutics Corp. 135,500 1,169
- - Haemonetics Corp. 46,200 872
- - Harborside Healthcare Corp. 72,000 1,228
- - Molecular Dynamics, Inc. 27,700 734
- - NABI 170,200 1,234
- - PathoGenesis Corp. 24,800 877
- - Patterson Dental Co. 34,300 1,387
- - Sofamor Danek Group, Inc. 28,300 1,617
- - Sybron International Corp. 17,700 760
- - TheraTech, Inc. 42,800 495
-----------
21,135
-----------
MATERIALS & PROCESSING (6.2%)
BMC Industries, Inc. 22,000 700
- - Comfort Systems USA, Inc. 94,300 1,803
- - Fairfield Communities, Inc. 27,800 1,044
- - Lydall, Inc. 18,000 422
- - Service Experts Inc. 70,600 1,911
- - Shaw Group, Inc. 75,000 1,645
TransPro Inc. 19,000 207
Valmont Industries, Inc. 23,000 486
-----------
8,218
-----------
PRODUCER DURABLES (7.7%)
- - American Power Conversion Corp. 50,000 1,406
Applied Power, Inc. 35,000 2,203
- - Cuno Inc. 73,600 1,260
- - The Cherry Corp. Class A 42,200 770
- - Dionex Corp. 5,000 269
Donaldson Co., Inc. 15,000 720
- - Hirsch International Corp. Class A 10,100 179
Lindsay Manufacturing Co. 20,000 850
- - Nobility Homes, Inc. 40,000 530
- - Palm Harbor Homes, Inc. 39,162 1,140
- - Southern Energy Homes, Inc. 57,000 591
- - Trident International, Inc. 19,000 314
-----------
10,232
-----------
TECHNOLOGY (27.5%)
COMMUNICATIONS TECHNOLOGY (4.4%)
- - ACE*COMM Corp. 20,000 432
- - Davox Corp. 31,750 1,064
- - Harmonic Lightwaves, Inc. 48,000 780
- - Lightbridge, Inc. 78,100 1,289
- - Melita International Corp. 68,500 771
- - Netscape Communications Corp. 44,000 1,578
</TABLE>
26
<PAGE> 87
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- -------------------------------------------------------------------
<S> <C> <C>
COMPUTER SERVICES, SOFTWARE
& SYSTEMS (13.2%)
- - Arbor Software Corp. 34,500 $ 1,596
- - AXENT Technologies, Inc. 10,000 205
- - Documentum, Inc. 46,500 1,534
- - Mechanical Dynamics, Inc. 68,200 533
- - Orcad, Inc. 106,000 1,544
- - Pinnacle Systems, Inc. 70,000 2,047
- - Remedy Corp. 41,500 1,426
- - STB Systems, Inc. 15,250 555
- - Structural Dynamics Research
Corp. 86,000 2,204
- - Total Control Products, Inc. 38,000 518
- - Versant Object Technology Corp. 20,000 310
- - Viewlogic Systems, Inc. 54,000 1,286
- - Visio Corp. 53,000 2,200
- - Xionics Document
Technologies, Inc. 89,000 1,535
COMPUTER TECHNOLOGY (1.8%)
- - ENCAD, Inc. 26,000 795
- - Security Dynamics
Technologies, Inc. 42,000 1,549
ELECTRONICS (3.1%)
- - Avid Technology, Inc. 39,000 1,253
Cerprobe Corp. 40,000 1,005
IFR Systems, Inc. 31,500 1,016
- - II-VI, Inc. 35,000 892
ELECTRONICS-SEMICONDUCTORS/COMPONENTS (3.8%)
- - ANADIGICS, Inc. 36,000 1,773
- - ESS Technology, Inc. 66,000 994
- - Oak Technology, Inc. 131,000 1,572
- - S3, Inc. 61,000 713
ELECTRONICS-TECHNOLOGY (0.5%)
- - Speedfam International, Inc. 12,200 730
SCIENTIFIC EQUIPMENT & SUPPLIES (0.7%)
- - VWR Scientific Products Corp. 41,400 947
-----------
36,646
-----------
UTILITIES (0.8%)
- - Tucson Electric Power Co. 63,000 1,122
-----------
OTHER (0.4%)
Teleflex Inc. 14,000 485
-----------
- -------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $104,520) 125,467
- -------------------------------------------------------------------
FACE
AMOUNT
(000)
- -------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (9.4%)
- -------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government Obligations
in a Pooled Cash Account
6.05%, 10/1/97 $9,158 9,158
6.11%, 10/1/97--Note F 3,376 3,376
- -------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $12,534) 12,534
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
MARKET
VALUE*
(000)
- -------------------------------------------------------------------
<S> <C>
TOTAL INVESTMENTS (103.6%)
(COST $117,054) $138,001
- -------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-3.6%)
- -------------------------------------------------------------------
Other Assets--Note C 1,559
Liabilities--Note F (6,438)
-----------
(4,879)
- -------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------
Applicable to 11,118,836 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $133,122
===================================================================
NET ASSET VALUE PER SHARE $11.97
===================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income Producing Security.
REIT--Real Estate Investment Trust.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
AT SEPTEMBER 30, 1997, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $112,854 $10.15
Undistributed Net
Investment Income 447 .04
Accumulated Net
Realized Losses--Note D (1,126) (.10)
Unrealized Appreciation--Note E 20,947 1.88
- ---------------------------------------------------------------------
NET ASSETS $133,122 $11.97
=====================================================================
</TABLE>
27
<PAGE> 88
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
MARKET
VALUE*
INTERNATIONAL PORTFOLIO SHARES (000)
- -------------------------------------------------------------------
COMMON STOCKS (96.8%)
- -------------------------------------------------------------------
<S> <C> <C>
ARGENTINA (0.2%)
YPF SA ADR 15,000 $ 553
-----------
BELGIUM (0.7%)
Credit Communal Holdings/Dexia 15,500 1,574
-----------
BRAZIL (2.1%)
Telecomunicacoes Brasileiras
SA ADR 33,341 4,293
Usiminas-Usinas Siderurgicas
de Minas Gerais SA ADR 90,000 934
-----------
5,227
-----------
CHILE (0.2%)
Compania de Telecomunicaciones
de Chile SA ADR 13,600 440
-----------
DENMARK (0.7%)
Den Danske Bank A/S 16,000 1,744
-----------
Finland
Rauma Oy 250 5
-----------
FRANCE (8.4%)
Accor SA 3,000 554
Compagnie de Saint-Gobain SA 9,282 1,432
Compagnie des Gaz de Petrole
Primagaz SA 6,600 546
- - Compagnie des Gaz de Petrole
Primagaz Warrants Exp. 6/30/98 600 9
Compagnie Generale des Eaux SA 24,936 2,934
- - Compagnie Generale des Eaux SA
Warrants Exp. 5/2/01 18,200 10
Compagnie Generale des
Establissements Michelin SCA
B Shares 32,355 1,838
Elf Aquitaine SA 50,000 6,675
- - SGS-THOMSON Microelectronics
NV NY Shares 28,150 2,642
Synthelabo SA 10,260 1,214
Total SA B Shares 18,000 2,060
Valeo SA 12,126 796
-----------
20,710
-----------
GERMANY (6.8%)
Adidas AG 8,500 1,106
Bayer AG 84,000 3,346
Buderus AG 520 265
Hoechst AG 40,000 1,775
Linde AG 1,900 1,325
Mannesmann AG 5,000 2,384
SGL Carbon AG 2,000 294
Siemens AG 20,000 1,352
Veba AG 85,000 4,969
-----------
16,816
-----------
HONG KONG (6.8%)
Cheung Kong Holdings Ltd. 242,000 2,721
China Resources Enterprise Ltd. 273,000 1,143
Citic Pacific Ltd. 298,000 1,690
HSBC Holdings PLC 75,800 2,537
Hong Kong Electric Holdings Ltd. 223,000 830
Hutchison Whampoa Ltd. 305,000 3,005
New World Development Co., Ltd. 167,000 1,010
Sun Hung Kai Properties Ltd. 158,000 1,858
Swire Pacific Ltd. A Shares 143,000 1,095
Wharf Holdings Ltd. 243,000 895
-----------
16,784
-----------
INDONESIA (0.5%)
PT Bank Internasional Indonesia
(Foreign) 391,000 114
PT Gudang Garam (Foreign) 96,000 279
PT Indofood Sukses Makmur
(Foreign) 252,000 306
PT Telekomunikasi Indonesia ADR 22,000 492
-----------
1,191
-----------
ITALY (1.7%)
Telecom Italia Mobile SPA 509,000 2,020
Telecom Italia SPA 308,000 2,058
-----------
4,078
-----------
JAPAN (28.1%)
Bridgestone Corp. 156,000 3,747
DDI Corp. 250 1,255
Dai-Nippon Printing Co., Ltd. 96,000 2,052
Dowa Fire & Marine
Insurance Co. 500,000 1,988
East Japan Railway Co. 400 1,875
Fuji Photo Film Co., Ltd. 166,000 6,847
Hirose Electric Co., Ltd. 10,500 773
Ito-Yokado Co., Ltd. 63,000 3,413
Keyence Corp. 6,600 924
Kuraray Co., Ltd. 62,000 544
Kyocera Corp. 11,000 719
Mabuchi Motor Co. 24,000 1,362
Matsushita Electric Industrial
Co., Ltd. 240,000 4,334
Mitsui & Co., Ltd. 263,000 2,067
Murata Manufacturing Co., Ltd. 101,000 4,367
Nippon Steel Corp. 811,000 1,787
Nippon Television Network 3,500 1,258
Nissei Sangyo Co. 42,000 379
Omron Corp. 110,000 2,305
SMC Corp. 33,000 3,143
Shin-Etsu Chemical Co., Ltd. 32,000 880
Showa Shell Sekiyu K.K. 55,000 383
Skylark Co., Ltd. 22,000 279
Sumitomo Corp. 183,000 1,364
Sumitomo Electric Industries Ltd. 99,000 1,419
Takeda Chemical Industries Ltd. 280,000 8,396
Toho Co., Ltd. 8,250 1,114
Tokio Marine & Fire
Insurance Co. 263,000 3,159
Tokyo Electron Ltd. 17,599 1,074
Tokyo Style Co. 20,000 200
Toppan Printing Co., Ltd. 180,000 2,490
Toyota Motor Corp. 74,000 2,268
Yasuda Fire & Marine
Insurance Co. 170,000 1,001
-----------
69,166
-----------
</TABLE>
28
<PAGE> 89
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- -------------------------------------------------------------------
<S> <C> <C>
KOREA (0.5%)
- - Daewoo Securities Co. 13,000 $ 196
Korea Electric Power Corp. 15,000 333
L.G. Electronics Co. 15,000 295
Pohang Iron & Steel Co., Ltd. 2,540 201
SK Telecom Co. 515 309
-----------
1,334
-----------
MALAYSIA (1.5%)
Edaran Otomobil Nasional Bhd. 64,000 257
Genting Bhd. 88,500 276
Malayan Banking Bhd. 149,000 749
RHB Capital Bhd. 216,000 256
Sime Darby Bhd. 308,000 641
Telekom Malaysia Bhd. 136,500 415
Tenaga Nasional Bhd. 233,000 629
United Engineers Malaysia Bhd. 125,000 401
-----------
3,624
-----------
MEXICO (0.7%)
Cementos de Mexico SA de
CV ADR 150,000 1,511
Cifra SA de CV ADR 39,175 89
-----------
1,600
-----------
NETHERLANDS (10.9%)
Baan Co. NV 15,000 1,082
Delft Instruments NV 12,231 243
Elsevier NV 45,870 666
Getronics NV 81,643 2,557
Hagemeyer NV 14,800 755
Heineken NV 10,500 1,843
ING Groep NV 216,351 9,940
Oce-Van Der Grinten NV 16,076 2,036
Philips Electronics NV 78,000 6,603
Verenigde Nederlandse
Uitgeversbedrijven Verenigd
Bezit NV 41,000 952
-----------
26,677
-----------
PHILIPPINES (0.8%)
Ayala Land, Inc. Class B 1,839,843 897
Meralco Class B 118,300 410
Philippine Long Distance
Telephone Co. 24,000 650
-----------
1,957
-----------
SINGAPORE (2.0%)
City Developments Ltd. 56,000 362
DBS Land Ltd. 162,000 394
Development Bank of
Singapore Ltd. (Foreign) 69,000 704
Keppel Corp., Ltd. 76,250 304
Oversea-Chinese Banking
Corp., Ltd. (Foreign) 53,760 372
Singapore Airlines Ltd. (Foreign) 95,000 702
Singapore Press Holdings Ltd.
(Foreign) 63,600 935
United Overseas Bank Ltd.
(Foreign) 107,000 790
Wing Tai Holdings Ltd. 173,000 357
-----------
4,920
-----------
SWEDEN (2.2%)
Electrolux AB B Shares 14,000 1,095
- - Granges AB 7,000 127
LM Ericsson Telephone AB
B Shares 37,000 1,779
Svenska Handelsbanken AB
A Shares 70,000 2,428
-----------
5,429
-----------
SWITZERLAND (12.6%)
ABB AG (Bearer) 5,150 7,596
Adecco SA (Bearer) 4,950 1,994
Alusuisse-Lonza Holding AG
(Registered) 1,000 981
Novartis AG (Registered) 6,900 10,595
Roche Holdings AG
(Dividend-Right Certificates) 357 3,171
Union Bank of Switzerland AG
(Bearer) 2,800 3,276
Zurich Insurance Co. (Registered) 7,800 3,400
-----------
31,013
-----------
THAILAND (0.3%)
Land & House PLC (Foreign) 98,881 133
PTT Exploration & Production PLC
(Foreign) 18,800 252
Siam Cement PLC (Foreign) 9,000 148
- - TelecomAsia PLC (Foreign) 41,000 34
Total Access Communication PLC
(Local) 71,000 234
-----------
801
-----------
UNITED KINGDOM (9.1%)
Asda Group PLC 800,000 2,032
British Airways PLC 50,000 550
British Land Co., PLC 84,000 883
British Petroleum Co., PLC 301,846 4,561
Cable and Wireless PLC 226,000 1,928
Daily Mail & General Trust
Class A 30,000 889
David S. Smith Holdings PLC 100,000 384
EMI Group PLC 180,000 1,771
Enterprise Oil PLC 102,000 1,112
MFI Furniture Group PLC 600,000 1,425
Reckitt & Colman PLC 63,000 970
Rio Tinto PLC 33,000 524
Tesco PLC 330,000 2,495
United News & Media PLC 60,000 755
Vodafone Group PLC 124,000 665
Zeneca Group PLC 46,000 1,505
-----------
22,449
-----------
- -------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $192,436) 238,092
- -------------------------------------------------------------------
FACE
AMOUNT
(000)
- -------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (9.5%)
- -------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations
in a Pooled Cash Account
6.05%, 10/1/97 $ 9,438 9,438
6.11%, 10/1/97--Note F 14,123 14,123
- -------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $23,561) 23,561
- -------------------------------------------------------------------
TOTAL INVESTMENTS (106.3%)
(COST $215,997) 261,653
- -------------------------------------------------------------------
</TABLE>
29
<PAGE> 90
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
MARKET
VALUE*
INTERNATIONAL PORTFOLIO (000)
- --------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-6.3%)
- --------------------------------------------------------------------
<S> <C>
Other Assets--Note C $ 706
Security Lending Collateral
Payable to Brokers--Note F (14,123)
Other Liabilities (2,120)
------------
(15,537)
- --------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------
APPLICABLE TO 16,909,539 OUTSTANDING
shares of beneficial interest
(unlimited authorization--no par value) $246,116
====================================================================
NET ASSET VALUE PER SHARE $14.55
====================================================================
</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, 1997, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $195,433 $11.56
Undistributed Net
Investment Income--Note D 2,729 .16
Accumulated Net
Realized Gains--Note D 2,305 .13
Unrealized Appreciation
(Depreciation)--Note E
Investment Securities 45,656 2.70
Foreign Currencies and
Forward Currency Contracts (7) --
- --------------------------------------------------------------------
NET ASSETS $246,116 $14.55
====================================================================
</TABLE>
30
<PAGE> 91
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 1997 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 (separate portfolios
of Vanguard Variable Insurance Fund, hereafter referred to as the "Fund") at
September 30, 1997, the results of each of their operations for the year then
ended and 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, 1997 by correspondence with the
custodian and the application of alternative auditing procedures where
securities purchased had not been settled, provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
October 31, 1997
31
