<PAGE> 1
VANGUARD
TAX-MANAGED
FUND
Annual Report - December 31, 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--more than 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
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
A Message To Our Shareholders ....... 1
The Markets In Perspective .......... 6
Portfolio Profiles .................. 8
Performance Summaries ............... 14
Financial Statements ................ 17
Report Of Independent Accountants ... 42
</TABLE>
All comparative mutual fund data are from Lipper Analytical Services, Inc., or
Morningstar unless otherwise noted.
<PAGE> 3
FELLOW SHAREHOLDER,
The U.S. stock market turned in another astonishing performance in 1997, capping
a three-year run during which market averages more than doubled.
Providentially, Vanguard Tax-Managed Fund started in September 1994, just before
the advance began. The third year of this remarkable rise, reviewed in this 1997
Annual Report, helped propel the two stock Portfolios of Vanguard Tax-Managed
Fund to returns of +33.3% and +27.3%, well above the returns of our peers.
Declining interest rates helped push bond returns higher--though not to the
lofty levels reached by stocks--and our Balanced Portfolio earned a solid return
of +16.6%.
Our Growth and Income Portfolio produced the highest total return
(capital change plus reinvested dividends) of our three Portfolios and provided
a near-perfect match with its target index, the Standard & Poor's 500 Composite
Stock Price Index. Our Capital Appreciation Portfolio earned a return that was
lower but still excellent. Our Balanced Portfolio, as should be expected,
provided a return that fell between the spectacular return of stocks and the
solid return of municipal bonds. The table at right compares our Portfolios with
their respective competitive benchmark standards. The net asset values and
income dividends for each Portfolio are presented in the table that follows this
letter.
We point out that none of the Portfolios realized net capital gains
in 1997--nor have they since their 1994 inceptions--an important factor in
minimizing taxable distributions for our shareholders.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
TOTAL RETURNS
YEAR ENDED
DECEMBER 31, 1997
- ----------------------------------------------------------------
<S> <C>
TAX-MANAGED GROWTH AND
INCOME PORTFOLIO +33.3%
Average Growth and Income Fund +27.7
S&P 500 Index +33.4
- ---------------------------------------------------------------
TAX-MANAGED CAPITAL
APPRECIATION PORTFOLIO +27.3%
Average Growth Fund +25.3
Russell 1000 Index +32.9
- ---------------------------------------------------------------
TAX-MANAGED BALANCED PORTFOLIO +16.6%
Average Balanced Fund* +19.0
Balanced Composite Index** +19.9
- ---------------------------------------------------------------
</TABLE>
*Bond component not tax-exempt.
**50% Russell 1000 Index, 50% Lehman Brothers
7-Year Municipal Bond Index.
THE FINANCIAL MARKETS IN BRIEF
The historic bull market in U.S. stocks that began in August 1982 continued in
impressive fashion during 1997. The economy, corporate earnings, and employment
grew solidly and consumer confidence strengthened. Yet interest rates declined
and inflation decelerated. In short, the domestic economic news could not have
been better. The sole dark cloud--severe turmoil in Asian economies and
currencies--only briefly darkened Wall Street's mood. After a sharp decline in
October--the S&P 500 Index tumbled -7% on October 27 alone--stocks resumed their
climb. By the time the year was over, the Index produced a +33.4% return for the
year, its second-highest return (after that of 1995) in the past two decades.
Long-term interest rates rose through the first quarter of the year on
expectations that the economy's robust growth would cause inflation to
accelerate. The yield on the benchmark 30-year U.S. Treasury bond peaked at
7.17% in mid-April. Then, as the news on inflation got better rather than worse,
the yield turned downward, falling to 5.92% by the end of December, 72 basis
points below the 6.64% level at which it began the year.
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<PAGE> 4
Short-term interest rates bottomed out in June and began an irregular
climb that was apparently due to sales of short-term Treasuries by foreign
central banks and investors. At year-end 1997, the yield on three-month U.S.
Treasury bills was 5.35%, up just a bit from 5.17% when the year began. The
spread between yields on three-month T-bills and 30-year Treasury bonds was a
slim 0.57 percentage point on December 31, 1997. Such a "flattening" of the
yield curve has more often than not been a precursor of a slowing economy.
The stock market's gains in 1997 were strongest for the largest
companies, particularly for some of the huge blue-chip growth stocks that
dominate the S&P 500 Index. Though smaller stocks made up ground versus larger
stocks in the third quarter, bigger was clearly better during 1997--as it was in
1995 and 1996 as well. The S&P 500's return of +33.4% in 1997 was 7.7 percentage
points higher than that of the rest of the U.S. stock market (as represented by
the Wilshire 4500 Index), and a remarkable 11 percentage points above the +22.4%
return of the Russell 2000 Index of small-capitalization stocks.
Within the S&P 500, the +36.5% return of the Index's growth component
easily outdistanced the +30.0% return of its value component. Financial-services
stocks were the leading industry group, returning +46.9%, followed by the
health-care sector with a +42.7% return, and then the utilities sector--which
came on strong late in the year--with a gain of +38.1%. Laggards during the
period included stocks in the producer-durables (+18.8%) and materials &
processing (+12.3%) sectors--generally considered cyclical industries.
1997 PERFORMANCE OVERVIEW
Our GROWTH AND INCOME PORTFOLIO benefited from the U.S. stock market's large-cap
bias in 1997, ending the year just a hair behind the S&P 500 Index. The
Portfolio's return of +33.3% easily outpaced the +27.7% return of the average
growth and income mutual fund.
As for the Index, it is a tough competitor for all mutual funds since,
as a theoretical construct, it does not incur operating or transaction costs,
both of which are borne to one degree or another by actual funds. Indeed, we
estimate that these two costs total nearly 2% per year for the average equity
fund (compared with our low expense ratio of 0.17% and minimal trading costs),
which equals a healthy share of our return advantage over our peer group of
actively managed funds.
Our CAPITAL APPRECIATION PORTFOLIO, which tracks an index of the 1,000
largest U.S. stocks, also rode the rising large-cap tide. However, our
Portfolio's modest bias toward lower-yielding growth stocks within the Russell
1000 Index--an emphasis aimed at minimizing the taxable income you
receive--resulted in a shortfall versus the Index of more than 5 percentage
points. While growth stocks led value stocks within the S&P 500, the leadership
reversed farther down the market-capitalization ladder. In fact, the return of
the Russell 1000 Index's growth component was +30.5%, compared with the +35.2%
return of the Index's value component.
This Portfolio's performance relative to its peer group was
excellent. Our +27.3% return outpaced that of our average peer by a full 2
percentage points. Because the Capital Appreciation Portfolio's makeup is biased
toward the lower-yielding stocks in the Russell 1000 Index, we do not expect it
to track the Index as closely as our Growth and Income Portfolio tracks the S&P
500 Index. However, over time we expect the returns of the Capital Appreciation
Portfolio and the Russell 1000 Index to be similar because the short-term
differences in returns between the growth and value segments of the market
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<PAGE> 5
have tended to even out over longer periods. For this same reason, we also
expect the total returns of our Growth and Income and Capital Appreciation
Portfolios to differ only slightly over the long run (though the Capital
Appreciation Portfolio should produce lower taxable income).
The securities held in the equity portion of our BALANCED PORTFOLIO are
similar to the stocks held by Capital Appreciation, while the bond segment is
invested in high-grade, intermediate-term tax-exempt bonds. We maintain the
tax-exemption for our municipal bond interest only if municipal bonds constitute
at least 50% of the Portfolio's assets, so we slightly overweight our bond
position to ensure that we meet that requirement. (Our municipal bond position
averaged about 51% of assets during 1997.) While this divergence from the 50/50
weighting of our benchmark index was minor, it meant a significant difference in
our relative performance, given the wide gap between the +32.9% return of the
Russell 1000 Index and the +7.7% return of the Lehman 7-Year Municipal Bond
Index. Our +16.6% return trailed that of the composite index by more than 3
percentage points.
The Balanced Portfolio also recorded a shortfall versus the +19.0%
return of its average peer, a difference that is largely accounted for by the
fact that our peers invest in taxable bonds that provide higher (pre-tax)
yields. In addition, the average balanced fund holds a larger portion of its
assets in stocks than our 49% allocation. The interest income earned by the
Balanced Portfolio was fully tax-exempt and represented a yield of 4.8% on our
average bond assets.
A PERSPECTIVE ON TAXES
A review of our performance over the past year would not be complete without a
discussion of how our Portfolios have fared in their quest for tax-efficiency.
Since their inception more than three years ago, our Portfolios have met the
high standards we set for them, establishing a clear advantage over mutual funds
that strive to maximize pre-tax gain but pay little attention to the after-tax
gains their shareholders receive. We estimate that taxable capital gains
distributions reduced the 1997 return of the average general equity mutual fund
from +24.4% on a pre-tax basis to about +21% after taxes--an imposing
three-percentage-point reduction. The Portfolios of Vanguard Tax-Managed Fund,
by contrast, have preserved almost their entire pre-tax gains because they have
neither realized nor distributed capital gains. The table below shows the
annualized yields and after-tax yields for each of our Portfolios.
<TABLE>
<CAPTION>
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ANNUALIZED AFTER-TAX
PORTFOLIO YIELD YIELD*
- --------------------------------------------------------------------------------
<S> <C> <C>
Tax-Managed Growth and Income 1.47% 0.89%
Tax-Managed Capital Appreciation 0.62 0.37
Tax-Managed Balanced 2.46 2.37
- --------------------------------------------------------------------------------
</TABLE>
*Assumes maximum 39.6% marginal tax rate on dividend income.
The tremendous performance of the stock market over the past three
years has helped many mutual funds build up significant gains. Those gains are
considered unrealized until the stocks are sold, when the appreciation must be
passed on to shareholders in the form of taxable distributions. At year-end, the
Growth and Income Portfolio had net unrealized gains of $5.53 per share, or 26%
of net asset value; Capital Appreciation, $6.52 per share, or 32% of net asset
value; and Balanced, $2.69 per share, or 18% of net asset value.
While our goal is to avoid realizing these gains, we cannot guarantee
for how long we can do so. However, the level of our portfolio turnover is a
tiny fraction of the industry average, and we expect it to remain at minimal
levels. (In 1997, our Growth and Income
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<PAGE> 6
Portfolio had a turnover rate of 2%; Capital Appreciation, 4%; and Balanced, 7%.
The average general equity fund turns over its securities at an astonishing
annual rate of 83%. Essentially all of the turnover in our Portfolios stemmed
either from changes to our target indexes or from our sales of stocks that had
losses we could "harvest" to offset future realized capital gains.) By
maximizing the benefits of compounding, deferring taxes on gains for as long as
possible can provide a powerful boost to your investment returns.
Our indexing strategy--built on a foundation of buying and holding
securities--makes it highly unlikely that frequent selling of stocks will
convert our unrealized gains into realized gains. What's more, we have
substantial loss carryforwards that we can use to help offset gains that we
might be forced to realize in the event that a market downturn prompted heavy
redemptions by shareholders. Also, we sell our highest-cost shares first, so the
first shares sold during a market pullback are apt to generate realized losses,
not gains. Finally, we attempt to limit this possibility by discouraging the
participation of short-term speculators and market-timers in our Portfolios. We
do this by imposing redemption fees of 2% on shares held less than one year and
1% on shares held from one to five years. This policy seems to be working. Our
redemption rates averaged about 3% last year, far below the industry level of
17%.
LIFETIME PERFORMANCE OVERVIEW
A little more than three years is too short a period for judging any mutual
fund's performance. However, over their brief life spans the Portfolios of
Vanguard Tax-Managed Fund have demonstrated their ability to closely track their
target indexes, to outpace their (less tax-efficient) peers, and to help
minimize tax bills for their shareholders. Of course, we cannot guarantee that
this pattern will persist indefinitely, but we expect that it will do so over an
extended period of time. The table below presents the returns of our Portfolios
since their inceptions, along with the growth of hypothetical $10,000
investments in each Portfolio, its competitive group, and its benchmark
standard. As noted earlier, expenses play a significant role in mutual fund
returns. The 0.17% expense ratio (annual expenses as a percentage of average net
assets) of our Portfolios is far below the 1.44% in expenses charged by the
average equity mutual fund, an advantage that contributed about 1.3 percentage
points to the margin of superiority achieved by our equity Portfolios. Our
returns versus our higher-cost peers make it clear: Costs matter.
<TABLE>
<CAPTION>
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TOTAL RETURNS
SEP. 6, 1994, TO DEC. 31, 1997
-----------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- -----------------------------------------------------------------------------------
<S> <C> <C>
TAX-MANAGED GROWTH AND
INCOME PORTFOLIO +27.1% $22,173
Average Growth and Income Fund +22.6 19,644
S&P 500 Index +27.1 22,164
- -----------------------------------------------------------------------------------
TAX-MANAGED CAPITAL
APPRECIATION PORTFOLIO +24.3% $20,581
Average Growth Fund +21.6 19,110
Russell 1000 Index +26.8 21,983
- -----------------------------------------------------------------------------------
TAX-MANAGED BALANCED PORTFOLIO +15.3% $16,057
Average Balanced Fund* +16.6 16,629
Balanced Composite Index +16.8 16,726
- -----------------------------------------------------------------------------------
</TABLE>
*Bond component not tax-exempt.
An important note about our Balanced Portfolio's relative performance:
As we mentioned, the bond component of our Portfolio is tax-exempt, while that
of our balanced fund peers is not. This difference gives a clear
advantage--before taxes--to our competitors, who earn higher nominal yields on
their bonds, and more than
4
<PAGE> 7
accounts for our relative shortfall. We estimate that our return, on an
after-tax basis, would have outpaced our peers by about one percentage point.
It should go without saying that the annualized returns provided by our
Portfolios since their inceptions are simply not sustainable over the long run.
The lifetime of Vanguard Tax-Managed Fund has coincided with one of the most
bountiful periods ever for the U.S. stock market.
It is certainly understandable for investors to discount the impact
of taxes when returns average more than 30% over a three-year period. But it is
a mistake nonetheless. The damage that taxes inflict on mutual fund
shareholders--and may well continue to inflict--will be painfully evident when
(not if) financial market returns gravitate toward their lower long-term
averages and taxes consume a bigger share of gross returns. We believe that
attempting to reduce the bite that taxes take from your investment returns is a
prudent course in any market environment.
IN SUMMARY
Returns from the U.S. stock market over the past three years--indeed, over the
past 15 years--have no precedent in American financial history. Bonds, too, have
experienced a remarkable period as yields have generally declined since the
early 1980s. While as investors we have every reason to be grateful for the
bounty of the financial markets, we also have reason to regard the future with
some caution. Lengthy bull markets can breed complacency and cause investors to
discount the risks inherent in stocks and bonds. Make no mistake, the market
will demonstrate these risks from time to time.
However, the greatest risk is failure to invest in the first place. We
believe that the best approach to dealing with risk is to hold a balanced
portfolio that includes stock funds, bond funds, and money market funds.
Investors who maintain such portfolios allocated in accordance with their time
horizon, financial situation, tax sensitivity, and tolerance for market
volatility should be well prepared to "stay the course" toward their investment
objectives, no matter what the future has in store.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Chairman of the Board President
January 26, 1998
<TABLE>
<CAPTION>
PORTFOLIO STATISTICS
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE
DECEMBER 31, DISTRIBUTIONS FROM DIVIDENDS FROM
--------------------------- NET REALIZED NET INVESTMENT
PORTFOLIO 1996 1997 CAPITAL GAINS INCOME
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax-Managed Growth and Income $15.89 $20.88 $0.00 $0.28
Tax-Managed Capital Appreciation 15.95 20.18 0.00 0.12
Tax-Managed Balanced 12.92 14.67 0.00 0.37
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 8
THE MARKETS IN PERSPECTIVE
Year Ended December 31, 1997
U.S. EQUITY MARKETS
Despite some year-end rockiness, 1997 again provided U.S. equity investors with
exceptional returns, as illustrated by the 33.4% advance of the S&P 500 Index.
Investors' mettle was tested several times, however, and most severely by the
upheavals that devastated a number of Asian markets in the fourth quarter.
Beginning in late October, the U.S. market grew increasingly volatile, a direct
result of investors' struggle to understand the nature and implications of
Asia's economic turmoil. By the end of the year, it appeared that a new
consensus was emerging, grounded in two basic beliefs: (1) that the collapse of
currencies in the Far East would help keep inflation tame in the United States
and (2) that slower growth in Asia would most likely lead to weaker corporate
profits over the next several years.
As the dust continued to settle, many investors sought havens
traditional in periods of high uncertainty: large-capitalization issues and
particularly the "defensive" sectors of the stock market, such as utilities,
consumer staples, and health care. The closing weeks of 1997 saw a broad advance
in these "safe" sectors, with utilities gaining 20.1% and consumer staples 10.4%
in the last quarter. By contrast, more economically sensitive sectors were
thrashed in the wake of the Asian crisis, with technology issues falling 12.3%
and producer durables down 9.0% over the three months. After posting strong
results in the third quarter, small-company stocks also suffered in the fourth,
falling 3.3%.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED DECEMBER 31, 1997
--------------------------------
1 YEAR 3 YEARS 5 YEARS
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 33.4% 31.2% 20.3%
Russell 2000 Index 22.4 22.3 16.4
MSCI EAFE Index 2.1 6.6 11.7
- -----------------------------------------------------------------------------
FIXED INCOME
Lehman Aggregate Bond Index 9.7% 10.4% 7.5%
Lehman 10-Year Municipal Bond Index 9.2 10.2 7.6
Salomon Brothers Three-Month
U.S. Treasury Bill Index 5.3 5.4 4.7
- -----------------------------------------------------------------------------
OTHER
Consumer Price Index 1.7% 2.5% 2.6%
- -----------------------------------------------------------------------------
</TABLE>
The year-end excitement did not detract from 1997's overall record as a
stellar year for U.S. stock investors. The best-performing sector was financial
services, which rose 46.9%. This sector benefited from a number of factors,
including the strength of the economy, the vibrant financial markets, and merger
activity. By contrast, the commodity-oriented materials & processing sector
posted a gain of "only" 12.3%--in itself more than a percentage point above the
long-term average return from common stocks. Small-cap stocks also fared well
overall, as illustrated by the 22.4% increase of the Russell 2000 Index.
Small-company technology issues were the most glaring exception, mustering a
gain in 1997 of just 1.1%.
U.S. FIXED-INCOME MARKETS
In a year characterized by exceptionally low inflation, interest rates fell,
providing investors with very attractive total returns. The Lehman Aggregate
Bond Index, for example,
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<PAGE> 9
posted a total return of 9.7% for 1997, comprising 7.2% in income return and2.5%
in capital appreciation. The decline in rates can be attributed largely to
better-than-expected reports about the inflation rate. Early in the year,
economists were projecting a 2.9% increase in the Consumer Price Index (CPI)
during 1997. In March, the Federal Reserve grew sufficiently concerned to boost
interest rates by 0.25% in an effort to temper economic growth and thereby ward
off inflation. By year-end, however, the worries seemed to have been
unnecessary, as the actual CPI increase was a mere 1.7%--its smallest increase
since 1986.
The bond market gradually gathered strength during the year as investors
grew more confident that four seemingly strange bedfellows--strong economic
growth, reasonable inflation, low unemployment, and stable wage growth--would
continue to coexist peacefully. In the fourth quarter, the market also was
bolstered by the "flight to quality" among investors concerned about Asia's
problems. Overall, the longest-maturity issues benefited most from the decline
in interest rates. The yield on the 30-year U.S. Treasury bond closed the year
at 5.92%, compared with 6.64% on December 31, 1996. Falling rates flattened the
yield curve considerably: Only 0.57% separated the yield on Treasury bills from
that on the 30-year issue, down from a spread of 1.47% at the end of 1996.
The best-performing sector in 1997 was long-term Treasuries, as
illustrated by the 15.1% return of the Lehman Long U.S. Treasury Index.
Investors in lower-quality securities also fared well, with the Lehman High
Yield Bond Index generating a 12.8% gain. The strength of the economy, together
with the lack of inflationary pressure, created an ideal environment for junk
bonds.
INTERNATIONAL EQUITY MARKETS
Arguably, investors' greatest disappointments were in international
markets--and, of course, Asian markets in particular. During the year, the
Morgan Stanley Capital International (MSCI) Pacific Index declined by 25.7% in
U.S. dollar terms; the Index fell 20.7% in the fourth quarter alone. Among
individual markets, the fiscal year saw sharp declines (in U.S. dollar terms) in
Japan, down 23.6% (including a 19.7% drop in the fourth quarter); Thailand, down
76.8%; and Malaysia, down 68.1%. The general slump in Asian markets began in
midsummer with currency devaluations by a number of countries.
By contrast, the European markets continued to provide U.S. investors
with solid returns, although they, too, stumbled in late October and
subsequently recovered. The MSCI Europe Index posted a gain of 23.7% for the 12
months. The robust character of the European markets reflected strong corporate
earnings and optimism that the European Monetary Union would provide a solid
framework for future fiscal responsibility and economic growth.
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<PAGE> 10
PORTFOLIO PROFILE
Balanced Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
December 31, 1997, compared where appropriate to an unmanaged index. Key
elements of this Profile are defined on pages 10 and 11.
<TABLE>
<CAPTION>
TOTAL PORTFOLIO CHARACTERISTICS
- -----------------------------------------------------------------
<S> <C>
Yield 2.5%
Turnover Rate 7%
Expense Ratio 0.17%
Cash Reserves 0.1%
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO ASSET ALLOCATION
- -----------------------------------------------------------------
<S> <C>
Bonds 51%
Stocks 49%
</TABLE>
<TABLE>
<CAPTION>
TOTAL PORTFOLIO VOLATILITY MEASURES
- -----------------------------------------------------------------
BALANCED S&P 500
- -----------------------------------------------------------------
<S> <C> <C>
R-Squared 0.87 1.00
Beta 0.55 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST STOCKS (% OF EQUITIES)
- -----------------------------------------------------------------
<S> <C>
General Electric Co. 3.1%
AES Corp. 2.0
The Coca-Cola Co. 2.0
Intel Corp. 1.5
Exxon Corp. 1.4
International Business Machines Corp. 1.4
Pfizer, Inc. 1.3
Microsoft Corp. 1.3
Merck & Co., Inc. 1.1
Watson Pharmaceuticals, Inc. 1.1
- -----------------------------------------------------------------
Top Ten 16.2%
- -----------------------------------------------------------------
Top Ten as % of Total Net Assets 7.9%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- -------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 DECEMBER 31, 1997
---------------------------------------------------------------------
BALANCED BALANCED RUSSELL
PORTFOLIO PORTFOLIO 1000
---------------------------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation ... 5.0% 5.1% 3.6%
Consumer Discretionary .. 12.4 16.0 10.3
Consumer Staples ........ 9.0 6.9 10.2
Financial Services ...... 12.1 11.1 19.9
Health Care ............. 12.1 12.3 11.4
Integrated Oils ......... 4.4 2.8 5.3
Other Energy ............ 3.3 5.1 1.8
Materials & Processing .. 7.6 6.1 5.8
Producer Durables ....... 4.9 4.1 4.1
Technology .............. 17.6 18.7 11.3
Utilities ............... 6.2 6.4 11.4
Other ................... 5.4 5.4 4.9
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 11
<TABLE>
<CAPTION>
EQUITY CHARACTERISTICS
- ----------------------------------------------------------------------
RUSSELL
BALANCED 1000
- ----------------------------------------------------------------------
<S> <C> <C>
Number of Stocks 500 973
Median Market Cap $9.6B $24.9
Price/Earnings Ratio 23.7x 21.8x
Price/Book Ratio 4.1x 4.0x
Dividend Yield 0.7% 1.6%
Return on Equity 19.8% 20.0%
Earnings Growth Rate 22.0% 17.9%
Foreign Holdings 0.1% 0%
</TABLE>
EQUITY INVESTMENT FOCUS
- ----------------------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
FIXED-INCOME CHARACTERISTICS
- ----------------------------------------------------------------------
<S> <C>
Number of Issues 87
Yield to Maturity 4.3%
Average Coupon 5.8%
Average Maturity 6.1 years
Average Quality Aa1
Average Duration 4.9 years
</TABLE>
FIXED-INCOME INVESTMENT FOCUS
- ----------------------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF BONDS)
- ----------------------------------------------------------------------
<S> <C>
Under 1 Year 10.7%
1-5 Years 26.5
5-10 Years 50.6
10-20 Years 12.2
20-30 Years 0.0
Over 30 Years 0.0
- ----------------------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF BONDS)
- ----------------------------------------------------------------------
<S> <C>
Aaa 72.2%
Aa 16.9
A 6.1
Baa 4.8
Ba 0.0
B 0.0
Not Rated 0.0
- ----------------------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
LARGEST STATE CONCENTRATIONS (% OF BONDS)
- ----------------------------------------------------------------------
<S> <C>
New York 17.2%
California 14.9
Pennsylvania 8.5
Michigan 6.6
Ohio 6.1
Texas 5.2
Massachusetts 4.9
Florida 4.6
Washington 3.9
Connecticut 3.4
- ----------------------------------------------------------------------
Total 75.3%
</TABLE>
9
<PAGE> 12
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 instruments.
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 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.
DIVIDEND YIELD. The current, annualized rate of dividends paid on a share of
stock, divided by its current share price. For a portfolio, the weighted average
yield for stocks it holds.
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a portfolio.
EQUITY INVESTMENT FOCUS. This grid indicates the focus of a portfolio in terms
of two attributes: market capitalization (large, medium, or small) and relative
valuation (growth, value, or a blend).
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.
FIXED-INCOME INVESTMENT FOCUS. This grid indicates the focus of a portfolio's
fixed-income holdings in terms of two attributes: average maturity (short,
medium, or long) and average credit quality (high, medium, or low).
FOREIGN HOLDINGS. The percentage of a portfolio's net assets represented by
stocks or American Depositary Receipts of companies based outside the United
States.
LARGEST STATE CONCENTRATIONS. An indicator of diversification. The less
concentrated a portfolio's holdings of bonds, the less the portfolio will be
hurt by any financial problems in a single state or region.
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.
10
<PAGE> 13
NUMBER OF ISSUES. An indicator of diversification. The more separate issues a
portfolio holds, the less susceptible it is to a price decline stemming from the
problems of a particular issue.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a portfolio
holds, the more diversified it is and the more likely to perform in line with
the overall stock market.
PORTFOLIO ASSET ALLOCATION. This chart shows the proportions of a portfolio's
holdings allocated to different types of asset.
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.
TEN LARGEST STOCKS/HOLDINGS. The percentage of equity assets or of total net
assets that a portfolio has invested in its ten largest stocks. As this
percentage rises, a portfolio's returns are likely to be more volatile because
they are more dependent on the fortunes of a few companies.
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 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.
YIELD TO MATURITY. The rate of return an investor would receive if the
securities held by a portfolio were held to their maturity dates.
11
<PAGE> 14
PORTFOLIO PROFILE
Growth and Income Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
December 31, 1997, compared where appropriate to an unmanaged index. Key
elements of this Profile are defined on pages 10 and 11.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ----------------------------------------------------------------------
GROWTH AND
INCOME S&P 500
- ----------------------------------------------------------------------
<S> <C> <C>
Number of Stocks 510 500
Median Market Cap $35.0B $34.1B
Price/Earnings Ratio 21.9x 21.9x
Price/Book Ratio 4.1x 4.1x
Yield 1.5% 1.6%
Return on Equity 20.4% 20.4%
Earnings Growth Rate 17.6% 17.6%
Foreign Holdings 1.9% 1.9%
Turnover Rate 2% --
Expense Ratio 0.17% --
Cash Reserves 0.1% --
</TABLE>
EQUITY INVESTMENT FOCUS
- ----------------------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------------------
GROWTH AND
INCOME S&P 500
- ----------------------------------------------------------------------
<S> <C> <C>
R-Squared 1.00 1.00
Beta 1.00 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- ----------------------------------------------------------------------
<S> <C>
General Electric Co. 3.2%
The Coca-Cola Co. 2.2
Microsoft Corp. 2.1
Exxon Corp. 2.0
Merck & Co., Inc. 1.7
Royal Dutch Petroleum Co. ADR 1.6
Intel Corp. 1.5
Philip Morris Cos., Inc. 1.5
Procter & Gamble Co. 1.4
International Business Machines Corp. 1.4
- ----------------------------------------------------------------------
Top Ten 18.6%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- ----------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 DECEMBER 31, 1997
------------------------------------------------------------
GROWTH AND GROWTH AND
INCOME INCOME S&P 500
------------------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation ... 3.9% 3.5% 3.5%
Consumer Discretionary .. 9.2 9.8 9.8
Consumer Staples ........ 11.9 11.5 11.5
Financial Services ...... 15.7 17.7 17.7
Health Care ............. 10.3 11.5 11.4
Integrated Oils ......... 8.1 7.2 7.2
Other Energy ............ 1.3 1.4 1.4
Materials & Processing .. 7.2 5.7 5.8
Producer Durables ....... 4.8 4.0 4.0
Technology .............. 11.9 11.3 11.2
Utilities ............... 10.3 10.7 10.6
Other ................... 5.4 5.7 5.9
- ----------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
PORTFOLIO PROFILE
Capital Appreciation Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
December 31, 1997, compared where appropriate to an unmanaged index. Key
elements of this Profile are defined on pages 10 and 11.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ----------------------------------------------------------------------
CAPITAL RUSSELL
APPRECIATION 1000
- ----------------------------------------------------------------------
<S> <C> <C>
Number of Stocks 510 973
Median Market Cap $11.1B $24.9B
Price/Earnings Ratio 23.8x 21.8x
Price/Book Ratio 4.1x 4.0x
Yield 0.6% 1.6%
Return on Equity 20.0% 20.0%
Earnings Growth Rate 20.8% 17.9%
Foreign Holdings 0.1% 0.0%
Turnover Rate 4% --
Expense Ratio 0.17% --
Cash Reserves 0% --
</TABLE>
EQUITY INVESTMENT FOCUS
- ----------------------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------------------
CAPITAL S&P
APPRECIATION 500
- ----------------------------------------------------------------------
<S> <C> <C>
R-Squared 0.87 1.00
Beta 1.04 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- ----------------------------------------------------------------------
<S> <C>
General Electric Co. 3.1%
The Coca-Cola Co. 2.0
Merck & Co., Inc. 1.7
Intel Corp. 1.6
Procter & Gamble Co. 1.5
International Business Machines Corp. 1.4
Pfizer, Inc. 1.3
Microsoft Corp. 1.3
Johnson & Johnson 1.2
Exxon Corp. 1.1
- ----------------------------------------------------------------------
Top Ten 16.2%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- ----------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1996 DECEMBER 31, 1997
------------------------------------------------------------------
CAPITAL CAPITAL
APPRECIATION APPRECIATION RUSSELL 1000
------------------------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation ... 3.5% 3.6% 3.6%
Consumer Discretionary .. 15.0 16.2 10.3
Consumer Staples ........ 8.6 8.4 10.2
Financial Services ...... 11.6 12.2 19.9
Health Care ............. 13.2 13.1 11.4
Integrated Oils ......... 2.8 2.2 5.3
Other Energy ............ 3.1 3.8 1.8
Materials & Processing .. 7.3 6.4 5.8
Producer Durables ....... 5.4 4.3 4.1
Technology .............. 19.5 18.7 11.3
Utilities ............... 4.7 5.5 11.4
Other ................... 5.3 5.6 4.9
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 16
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 an investment in the
Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: SEPTEMBER 6, 1994-DECEMBER 31, 1997
- ---------------------------------------------------------------------
BALANCED PORTFOLIO COMPOSITE*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
1994 -2.3% 0.9% -1.4% -1.8%
1995 21.0 3.5 24.5 25.5
1996 9.0 3.2 12.2 13.2
1997 13.5 3.1 16.6 19.9
- ---------------------------------------------------------------------
</TABLE>
*50% Russell 1000 Index, 50% Lehman 7-Year Municipal Bond Index.
See Financial Highlights table on page 38 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: SEPTEMBER 6, 1994-DECEMBER 31, 1997
- -------------------------------------------------------------------------------------------------------------
TAX-MANAGED
BALANCED
BALANCED AVERAGE BALANCED COMPOSITE RUSSELL 1000 LEHMAN 7-YEAR MUNICIPAL
PORTFOLIO* FUND INDEX** INDEX BOND INDEX
--------- ---------------- --------- ------------- -----------------------
<S> <C> <C> <C> <C> <C>
Sep 6, 94 10000 10000 10000 10000 10000
1994 09 9920 9920 9877 9910 9924
1994 12 9860 9812 9854 9872 9827
1995 03 10576 10409 10580 10811 10343
1995 06 11255 11163 11225 11829 10636
1995 09 11949 11804 11883 12883 10940
1995 12 12278 12292 12364 13600 11215
1996 03 12589 12611 12680 14350 11175
1996 06 12860 12895 12966 14935 11223
1996 09 13196 13275 13303 15422 11425
1996 12 13777 13983 13999 16653 11704
1997 03 13732 13966 14106 16911 11693
1997 06 14997 15398 15465 19754 12013
1997 09 16012 16465 16354 21479 12334
1997 12 16057 16629 16726 21983 12602
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1997
-------------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced Portfolio* 16.55% 15.34% $16,057
Average Balanced Fund 19.00 16.56 16,629
Tax-Managed Balanced Composite Index** 19.90 16.77 16,726
Russell 1000 Index 32.85 26.79 21,983
Lehman 7-Year Municipal Bond Index 7.67 7.22 12,602
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
*Total returns do not reflect the 2% redemption fee on shares held less than
one year, or the 1% redemption fee on shares held at least one year but less
than five years.
**50% Russell 1000 Index, 50% Lehman 7-Year Municipal Bond Index.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ------------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balanced Portfolio* 9/6/1994 16.55% 12.18% 3.16% 15.34%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Total returns do not reflect the 2% redemption fee on shares held less than one
year, or the 1% redemption fee on shares held at least one year but less than
five years.
14
<PAGE> 17
PERFORMANCE SUMMARY
Growth and 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 an investment in the
Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: SEPTEMBER 6, 1994-DECEMBER 31, 1997
- -------------------------------------------------------------------
GROWTH AND INCOME PORTFOLIO S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
1994 -2.6% 0.9% -1.7% -1.8%
1995 34.7 2.8 37.5 37.6
1996 20.7 2.3 23.0 23.0
1997 31.4 1.9 33.3 33.4
- -------------------------------------------------------------------
</TABLE>
See Financial Highlights table on page 39 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: SEPTEMBER 6, 1994-DECEMBER 31, 1997
- ------------------------------------------------------------------------
GROWTH AND INCOME AVERAGE GROWTH AND S&P 500
PORTFOLIO* INCOME FUND INDEX
----------------- ------------------ -------
<S> <C> <C> <C>
Sep 6, 94 10000 10000 10000
1994 09 9831 9831 9826
1994 12 9830 9690 9824
1995 03 10787 10470 10781
1995 06 11818 11345 11810
1995 09 12753 12157 12749
1995 12 13519 12731 13516
1996 03 14238 13410 14241
1996 06 14888 13886 14881
1996 09 15344 14277 15341
1996 12 16633 15393 16619
1997 03 17070 15530 17065
1997 06 20051 17863 20044
1997 09 21548 19438 21545
1997 12 22173 19644 22164
- ------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1997
-------------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth and Income Portfolio* 33.31% 27.13% $22,173
Average Growth and Income Fund 27.67 22.57 19,644
S&P 500 Index 33.36 27.11 22,164
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*Total returns do not reflect the 2% redemption fee on shares held less than one
year, or the 1% redemption fee on shares held at least one year but less than
five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -----------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Growth and Income Portfolio* 9/6/1994 33.31% 24.73% 2.40% 27.13%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Total returns do not reflect the 2% redemption fee on shares held less than one
year, or the 1% redemption fee on shares held at least one year but less than
five years.
15
<PAGE> 18
PERFORMANCE SUMMARY
Capital Appreciation 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 an investment in the
Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: SEPTEMBER 6, 1994-DECEMBER 31, 1997
- ---------------------------------------------------------------------
CAPITAL APPRECIATION PORTFOLIO RUSSELL 1000
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
1994 -0.9% 0.4% -0.5% -1.9%
1995 33.5 0.9 34.4 37.8
1996 20.1 0.8 20.9 22.4
1997 26.5 0.8 27.3 32.9
- ---------------------------------------------------------------------
</TABLE>
See Financial Highlights table on page 39 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: SEPTEMBER 6, 1994-DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------
CAPITAL APPRECIATION AVERAGE RUSSELL 1000
PORTFOLIO* GROWTH FUND INDEX
-------------------- ----------- ------------
<S> <C> <C> <C>
Sep 6, 94 10000 10000 10000
1994 09 9910 9910 9910
1994 12 9950 9779 9872
1995 03 10860 10505 10811
1995 06 11950 11493 11829
1995 09 12990 12474 12883
1995 12 13371 12798 13600
1996 03 14166 13481 14350
1996 06 14750 14044 14935
1996 09 15213 14456 15422
1996 12 16169 15260 16653
1997 03 16138 15065 16911
1997 06 18845 17409 19754
1997 09 20974 19302 21479
1997 12 20581 19110 21983
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1997
-------------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Capital Appreciation Portfolio* 27.29% 24.30% $20,581
Average Growth Fund 25.30 21.55 19,110
Russell 1000 Index 32.85 26.79 21,983
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*Total returns do not reflect the 2% redemption fee on shares held less than one
year, or the 1% redemption fee on shares held at least one year but less than
five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ------------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Capital Appreciation Portfolio* 9/6/1994 27.29% 23.42% 0.88% 24.30%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Total returns do not reflect the 2% redemption fee on shares held less than one
year, or the 1% redemption fee on shares held at least one year but less than
five years.
16
<PAGE> 19
FINANCIAL STATEMENTS
December 31, 1997
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. The
Balanced and Capital Appreciation Portfolios' common stocks are grouped and
subtotaled by industry sector. The Growth and Income Portfolio's S&P 500 Index
common stocks are listed in descending market value order. The Balanced
Portfolio's municipal bond holdings are grouped and subtotaled by state. 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.
At the end of the Statement of Net Assets of each Portfolio, 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. 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>
- ---------------------------------------------------------------------
MARKET
VALUE*
BALANCED PORTFOLIO SHARES (000)
- ---------------------------------------------------------------------
COMMON STOCKS (48.6%)
- ---------------------------------------------------------------------
<S> <C> <C>
AUTO & TRANSPORTATION (2.5%)
- - AMR Corp. 1,400 $ 180
- - Atlas Air, Inc. 1,800 43
Autoliv, Inc. 1,811 59
Bandag, Inc. 300 16
Burlington Northern Santa Fe Corp. 1,246 116
CNF Transportation, Inc. 900 35
Chrysler Corp. 3,732 131
- - Consolidated Freightways Corp. 5,750 79
- - Continental Airlines, Inc. Class B 11,000 529
Delta Air Lines, Inc. 1,200 143
- - Federal Express Corp. 1,800 110
Ford Motor Co. 5,300 258
- - Fritz Cos., Inc. 2,000 28
General Motors Corp. 4,200 255
Harley-Davidson, Inc. 3,400 93
Kansas City Southern
Industries, Inc. 3,000 95
- - Lear Corp. 1,600 76
LucasVarity PLC ADR 1,656 58
- - Northwest Airlines Corp. Class A 2,400 115
Pittston Burlington Group 400 11
Southwest Airlines Co. 4,650 115
- - UAL Corp. 1,200 111
Union Pacific Corp. 359 22
- - US Airways Group, Inc. 3,800 238
- - Wisconsin Central
Transportation Corp. 2,300 54
-----------
2,970
-----------
CONSUMER DISCRETIONARY (7.7%)
- - AccuStaff, Inc. 2,700 62
- - ACNielson Corp. 3,200 78
Alberto-Culver Co. Class B 1,600 51
- - America Online, Inc. 1,700 152
- - AutoZone Inc. 3,100 90
BHC Communications, Inc. Class A 500 65
- - Barnes & Noble, Inc. 4,000 133
- - Bed Bath & Beyond, Inc. 2,000 77
- - Blyth Industries, Inc. 1,950 58
- - Boise Cascade Office
Products Corp. 3,200 48
- - Borders Group, Inc. 3,400 106
- - Brinker International, Inc. 1,300 21
- - Cendant Corp. 9,747 335
- - Chancellor Media Corp. 1,500 112
- - Choice Hotel International, Inc. 800 13
- - Chris-Craft Industries, Inc. 1,176 61
Cintas Corp. 400 16
Circuit City Stores, Inc. 2,100 75
- - Circus Circus Enterprises Inc. 3,400 70
- - Clear Channel Communications 1,700 135
Cognizant Corp. 2,200 98
- - Consolidated Stores, Inc. 2,187 96
- - Corporate Express, Inc. 4,650 60
- - Corrections Corp. of America 2,600 96
- - Costco Cos., Inc. 3,000 134
Cracker Barrel Old Country
Stores, Inc. 2,300 77
Dillard's Inc. 1,600 56
The Walt Disney Co. 5,600 555
</TABLE>
17
<PAGE> 20
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
VALUE*
BALANCED PORTFOLIO SHARES (000)
- ---------------------------------------------------------------------
<S> <C> <C>
Eastman Kodak Co. 2,000 $ 122
- - Electronic Arts Inc. 2,400 91
Fastenal Co. 1,400 54
- - Federated Department Stores 2,800 121
- - Fruit of the Loom, Inc. 2,700 69
The Gap, Inc. 3,000 106
- - Gartner Group, Inc. Class A 2,300 86
Gaylord Entertainment Co. Class A 2,900 93
- - General Nutrition Cos., Inc. 3,300 112
- - GTech Holdings Corp. 2,200 70
- - HSN, Inc. 1,900 98
- - Harrah's Entertainment, Inc. 3,900 74
Hasbro, Inc. 1,350 43
Home Depot, Inc. 6,300 371
- - Host Marriott Corp. 4,100 80
- - Host Marriott Services Corp. 420 6
IKON Office Solutions 2,700 76
- - ITT Corp. 1,600 133
International Game Technology 3,200 81
- - Jones Apparel Group, Inc. 1,800 77
- - Kmart Corp. 7,600 88
King World Productions, Inc. 1,600 92
- - Kohls Corp. 1,700 116
La Quinta Inns Inc. 4,050 78
The Limited, Inc. 1,469 37
- - Lin Television 1,250 68
Lowe's Cos., Inc. 1,400 67
- - MGM Grand, Inc. 2,000 72
Manpower Inc. 900 32
Marriott International 1,500 104
Mattel, Inc. 3,387 126
McDonald's Corp. 6,200 296
- - Fred Meyer Inc. 2,600 95
- - Mirage Resorts, Inc. 4,100 93
Newell Co. 1,800 76
NIKE, Inc. Class B 1,500 59
- - Nine West Group, Inc. 2,400 62
Nordstrom, Inc. 500 30
- - Office Depot, Inc. 4,000 96
- - OfficeMax, Inc. 4,600 66
- - Outback Steakhouse 3,300 95
- - Payless ShoeSource, Inc. 1,500 101
J.C. Penney Co., Inc. 1,178 71
Pep Boys (Manny, Moe & Jack) 200 5
- - PETsMART, Inc. 600 4
Pittston Brink's Group 800 32
- - Planet Hollywood
International, Inc. Class A 3,400 45
- - PriceSmart, Inc. 350 6
- - PRIMEDIA Inc. 5,000 63
- - Promus Hotel Corp. 1,665 70
- - Reebok International Ltd. 2,200 63
- - Robert Half International, Inc. 2,400 96
Rubbermaid, Inc. 1,800 45
Russell Corp. 600 16
- - Spiegel, Inc. Class A 1,500 7
- - Staples, Inc. 3,050 85
- - Starbucks Corp. 2,100 81
Stewart Enterprises, Inc. Class A 1,900 89
- - Sunburst Hospitality Corp 266 3
Sunbeam Corp. 2,400 101
Talbots Inc. 50 1
- - Tele-Communications Liberty
Media Group Class A 3,712 135
Time Warner, Inc. 4,300 267
- - Toys R Us, Inc. 4,200 132
- - Tricon Global Restaurants, Inc. 4,000 116
- - USA Waste Service 3,000 118
Unisource Worldwide, Inc. 600 8
- - Viacom Inc. Class B 3,363 139
- - Viking Office Products 2,900 64
Wal-Mart Stores, Inc. 10,500 414
The Warnaco Group, Inc. Class A 1,300 41
Waste Management Inc. 1,979 54
- - Woolworth Corp. 4,100 84
-----------
9,297
-----------
CONSUMER STAPLES (3.3%)
Albertson's, Inc. 2,000 95
CVS Corp. 1,414 91
The Coca-Cola Co. 17,400 1,159
Coca-Cola Enterprises, Inc. 3,900 139
Dole Food Co. 400 18
Gillette Co. 3,752 377
IBP, Inc. 3,500 73
Kellogg Co. 800 40
- - The Kroger Co. 3,600 133
PepsiCo, Inc. 9,000 328
Philip Morris Cos., Inc. 6,300 285
Procter & Gamble Co. 7,600 607
RJR Nabisco Holdings Corp. 1,460 55
- - Safeway, Inc. 3,967 251
Schweitzer-Mauduit
International, Inc. 600 22
- - Southland Corp. 5,700 12
Sysco Corp. 1,500 68
Tyson Foods, Inc. 4,100 84
Walgreen Co. 4,000 126
Wrigley, (Wm.) Jr. Co. 800 64
-----------
4,027
-----------
FINANCIAL SERVICES (5.4%)
AFLAC, Inc. 1,800 92
Advanta Corp. Class A 200 5
- - Alleghany Corp. 410 117
American International Group, Inc. 5,000 544
Automatic Data Processing, Inc. 2,000 123
Banc One Corp. 2,331 127
BankAmerica Corp. 4,600 336
- - CNA Financial Corp. 1,000 128
Capital One Financial Corp. 900 49
Citicorp 2,900 367
- - Concord EFS, Inc. 2,600 65
Conseco Inc. 2,416 110
- - ContiFinancial Corp. 1,700 43
- - DST Systems, Inc. 2,100 90
Dime Bancorp, Inc. 4,000 121
The Equitable Cos. 2,200 109
Fannie Mae 5,700 325
First Data Corp. 3,584 105
First Empire State Corp. 500 233
- - FIserv, Inc. 1,800 89
Franklin Resources Corp. 1,500 130
Freddie Mac 4,400 185
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------------------
<S> <C> <C>
General Re Corp. 400 $ 85
Golden West Financial Corp. 1,200 117
Green Tree Financial Corp. 2,100 55
The Hartford Financial
Services Group Inc. 1,000 94
Lehman Brothers Holdings, Inc. 2,300 117
Leucadia National Corp. 1,200 41
Loews Corp. 800 85
MGIC Investment Corp. 1,800 120
Merrill Lynch & Co., Inc. 2,400 175
The Money Store 800 17
Morgan Stanley, Dean Witter,
Discover and Co. 4,380 259
The PMI Group Inc. 1,100 80
Progressive Corp. of Ohio 1,000 120
Charles Schwab Corp. 3,000 126
State Street Corp. 2,400 140
SunAmerica Inc. 2,700 115
- - SunGard Data Systems, Inc. 3,200 99
Transatlantic Holdings, Inc. 900 64
Travelers Group Inc. 9,347 504
Travelers Property Casualty Corp. 1,700 75
20th Century Industries of CA 1,300 34
UNUM Corp. 1,800 98
Wells Fargo & Co. 600 204
Western National Corp. 2,400 71
Zions Bancorp 1,600 72
-----------
6,460
-----------
HEALTH CARE (6.0%)
Abbott Laboratories 4,100 269
Aetna Inc. 269 19
Aetna Inc. 6.25% Cvt. Pfd. Series C 89 6
- - ALZA Corp. 3,000 95
- - Amgen, Inc. 3,200 173
Becton, Dickinson & Co. 1,200 60
- - Beverly Enterprises, Inc. 4,600 60
- - Biogen, Inc. 2,200 80
Biomet, Inc. 3,000 77
- - Boston Scientific Corp. 2,500 115
Cardinal Health, Inc. 1,650 124
- - Centocor, Inc. 2,500 83
- - Chiron Corp. 4,340 74
Columbia/HCA Healthcare Corp. 5,002 148
- - Covance, Inc. 3,500 70
- - Crescendo Pharmaceuticals Corp. 115 1
DENTSPLY International Inc. 2,400 74
DePuy, Inc. 2,600 75
- - Forest Laboratories, Inc. 1,500 74
- - Foundation Health Systems
Class A 4,440 99
- - Fresenius Medical Care AG ADR 944 21
- - Genzyme Corp. 2,900 80
- - Genzyme Corp. (Tissue Repair) 177 1
Guidant Corp. 2,400 149
HBO & Co. 3,400 163
- - Healthcare & Retirement Corp. 1,900 76
- - HealthCare COMPARE Corp. 1,600 82
- - HEALTHSOUTH Corp. 5,400 150
- - Health Management Associates
Class A 3,375 85
- - Humana, Inc. 3,600 75
- - IVAX Corp. 8,300 56
Johnson & Johnson 7,402 488
Mallinckrodt, Inc. 1,000 38
Manor Care Inc. 2,100 74
- - Marquette Medical Systems Inc. 400 11
- - MedPartners, Inc. 3,752 84
Medtronic, Inc. 4,900 256
Merck & Co., Inc. 6,300 669
Olsten Corp. 300 5
- - Oxford Health Plan 3,200 50
- - Pacificare Health Systems Inc.
Class A 478 24
- - Pacificare Health Systems Inc.
Class B 946 50
Pharmacia & Upjohn, Inc. 2,500 92
Pfizer, Inc. 10,300 768
- - PharMerica, Inc. 2,093 22
- - PhyCor, Inc. 2,600 70
- - Quest Diagnostics, Inc. 2,700 46
- - Quintiles Transnational Corp. 1,800 69
- - Quorum Health Group, Inc. 3,150 83
- - St. Jude Medical, Inc. 3,000 91
- - R. P. Scherer Corp. 1,300 79
Stryker Corp. 2,200 82
- - Sybron International Corp. 2,000 94
- - Tenet Healthcare Corp. 5,827 193
United Healthcare Corp. 2,400 119
U.S. Surgical Corp. 2,900 85
- - Vencor, Inc. 3,200 78
- - Watson Pharmaceuticals, Inc. 19,100 620
- - Wellpoint Health Networks Inc.
Class A 2,233 94
-----------
7,148
-----------
INTEGRATED OILS (1.4%)
Amerada Hess Corp. 1,200 66
Amoco Corp. 2,900 247
Coastal Corp. 1,500 93
Exxon Corp. 13,400 820
Mobil Corp. 4,600 332
- - Seagull Energy Corp. 3,000 62
Texaco Inc. 688 37
-----------
1,657
-----------
OTHER ENERGY (2.5%)
- - AES Corp. 25,400 1,184
Anadarko Petroleum Corp. 1,500 91
Burlington Resources, Inc. 1,100 49
- - CalEnergy Co. 2,000 58
Diamond Offshore Drilling, Inc. 1,600 77
- - EEX Corp. 7,348 67
ENSCO International, Inc. 2,800 94
El Paso Natural Gas 111 7
Enron Oil & Gas Co. 2,200 47
- - Global Marine, Inc. 3,200 78
- - Input/Output, Inc. 1,100 33
- - Nabors Industries, Inc. 3,900 123
Noble Affiliates, Inc. 2,100 74
- - Noble Drilling Corp. 3,000 92
- - Oryx Energy Co. 3,500 89
Pioneer Natural Resources Co. 2,600 75
Pogo Producing Co. 2,200 65
- - Reading & Bates Corp. 2,800 117
</TABLE>
19
<PAGE> 22
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
VALUE*
BALANCED PORTFOLIO SHARES (000)
- ---------------------------------------------------------------------
<S> <C> <C>
- - Rowan Cos., Inc. 2,900 $ 88
- - Santa Fe Energy Resources, Inc. 5,700 64
- - Smith International, Inc. 1,400 86
Transocean Offshore, Inc. 1,600 77
- - TransTexas Gas Corp. 3,800 56
Union Pacific Resources
Group, Inc. 304 7
- - Weatherford Enterra, Inc. 1,700 74
- - Western Atlas, Inc. 1,400 104
-----------
2,976
-----------
MATERIALS & PROCESSING (3.0%)
- - Airgas, Inc. 4,900 69
Albemarle Corp. 900 21
Allegheny Teledyne Inc. 577 15
- - Alumax, Inc. 2,400 82
Aluminum Co. of America 1,100 77
- - American Standard Cos., Inc. 2,300 88
Archer-Daniels-Midland Co. 5,894 128
- - Bethlehem Steel Corp. 7,050 61
- - Catellus Development Corp. 4,500 90
Centex Corp. 1,400 88
Champion International Corp. 1,900 86
Crown Cork & Seal Co., Inc. 900 45
- - Cytec Industries, Inc. 1,500 70
E.I. du Pont de Nemours & Co. 6,600 396
Fluor Corp. 800 30
Fort James Corp. 3,300 126
Freeport-McMoRan Copper
& Gold, Inc. Class B 1,263 20
- - Freeport-McMoRan Sulphur, Inc. 63 1
W.R. Grace & Co. 900 72
Great Lakes Chemical Corp. 400 18
Homestake Mining Co. 200 2
IMC Global Inc. 1,870 61
Illinois Tool Works, Inc. 1,600 96
International Paper Co. 1,900 82
- - International Specialty
Products, Inc. 4,500 67
- - Jefferson Smurfit Corp. 4,100 58
Johns Manville Corp. 2,500 25
Kimberly-Clark Corp. 3,072 151
LTV Corp. 1,000 10
Louisiana-Pacific Corp. 600 11
Martin Marietta Materials, Inc. 400 15
Monsanto Co. 2,500 105
Morton International, Inc. 1,500 52
Newmont Gold Co. 1,900 57
Newmont Mining Corp. 2,894 85
Nucor Corp. 1,300 63
Owens Corning 1,100 38
- - Owens-Illinois, Inc. 2,800 106
Praxair, Inc. 1,900 86
Price Enterprises, Inc. 1,400 26
Reynolds Metals Co. 900 54
A. Schulman Inc. 700 18
- - Sealed Air Corp. 1,400 86
Sigma-Aldrich Corp. 2,000 79
Solutia, Inc. 3,300 88
- - Stone Container Corp. 5,100 53
Tyco International Ltd. 3,468 156
- - UCAR International, Inc. 1,800 72
U.S. Industries, Inc. 2,700 81
- - USG Corp. 1,600 78
-----------
3,544
-----------
PRODUCER DURABLES (2.0%)
AGCO Corp. 2,600 76
- - American Power Conversion Corp. 2,700 64
- - Applied Materials, Inc. 4,400 132
The Boeing Co. 6,740 330
Caterpillar, Inc. 2,800 136
Clayton Homes Inc. 4,638 83
- - CommScope, Inc. 5,433 73
Cummins Engine Co., Inc. 400 24
Danaher Corp. 1,500 95
Emerson Electric Co. 2,400 135
- - General Semiconductor, Inc. 5,800 67
W.W. Grainger, Inc. 600 58
- - KLA-Tencor Corp. 2,300 89
- - LAM Research Corp. 2,400 70
- - Lexmark International Group, Inc.
Class A 2,200 84
Lockheed Martin Corp. 1,300 128
Mark IV Industries, Inc. 2,038 45
Millipore Corp. 1,300 44
Molex, Inc. 2,713 87
Raychem Corp. 2,000 86
- - Republic Industries, Inc. 5,000 117
Sensormatic Electronics Corp. 50 1
- - Solectron Corp. 2,200 91
- - Teradyne, Inc. 3,600 115
- - Thermo Instrument Systems, Inc. 2,515 87
Wheelabrator Technologies, Inc. 1,500 24
York International Corp. 1,000 40
-----------
2,381
-----------
TECHNOLOGY (9.1%)
- - ADC Telecommunications, Inc. 2,700 113
- - Adaptec, Inc. 2,600 97
Adobe Systems, Inc. 2,000 82
- - Advanced Micro Devices, Inc. 1,300 23
- - Altera Corp. 1,800 60
- - Analog Devices, Inc. 3,667 102
- - Andrew Corp. 3,450 83
- - Apple Computer, Inc. 2,300 30
- - Arrow Electronics, Inc. 2,800 91
- - Ascend Communications, Inc. 1,000 25
- - Atmel Corp. 3,100 58
- - BMC Software, Inc. 2,000 131
- - Bay Networks, Inc. 3,335 85
- - Cabletron Systems, Inc. 3,600 54
- - Cadence Design Systems, Inc. 4,200 103
- - CIENA Corp. 1,700 104
- - Cisco Systems, Inc. 8,400 469
Compaq Computer Corp. 6,315 356
Computer Associates
International, Inc. 4,237 224
- - CompUSA, Inc. 4,000 124
- - Computer Sciences Corp. 1,500 125
- - Compuware Corp. 4,400 141
- - DSC Communications Corp. 3,200 77
- - Dell Computer Corp. 4,800 403
- - Digital Equipment Corp. 2,700 100
- - EMC Corp. 6,600 181
</TABLE>
20
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<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------------------
<S> <C> <C>
Electronic Data Systems Corp. 1,900 $ 83
- - Electronics for Imaging, Inc. 1,600 27
- - FORE Systems, Inc. 2,700 41
- - Gateway 2000, Inc. 3,200 104
- - Glenayre Technologies, Inc. 1,100 11
Hewlett-Packard Co. 6,000 375
- - Informix Corp. 2,400 11
Intel Corp. 12,800 899
International Business
Machines Corp. 7,800 816
- - Intuit, Inc. 2,100 87
- - Iomega Corp. 7,400 92
- - LSI Logic Corp. 3,700 73
- - Learning Co., Inc. 4,400 71
Linear Technology Corp. 1,600 92
Lucent Technologies, Inc. 5,319 425
- - MEMC Electronic Materials, Inc. 2,800 43
- - Maxim Integrated Products, Inc. 2,800 97
- - Microchip Technology, Inc. 1,900 57
- - Microsoft Corp. 5,900 762
- - Micron Electronics, Inc. 5,600 51
- - Micron Technology, Inc. 2,200 57
Motorola, Inc. 3,900 223
- - NCR Corp. 3,368 94
- - National Semiconductor Corp. 3,100 80
- - Netscape Communications Corp. 600 15
- - Network Associates, Inc. 2,300 121
Newport News Shipbuilding Inc. 3,340 85
- - NextLevel Systems, Inc. 1,300 23
- - Novell, Inc. 10,200 76
- - Oracle Corp. 7,350 164
- - Pairgain Technologies, Inc. 3,300 64
- - PanAmSat Corp. 540 23
- - Parametric Technology Corp. 2,600 123
- - PeopleSoft, Inc. 3,000 117
- - Premisys Communications, Inc. 3,200 83
- - Quantum Corp. 5,000 100
- - SCI Systems, Inc. 2,600 113
Scientific-Atlanta, Inc. 200 3
- - Seagate Technology 4,790 92
- - Silicon Graphics, Inc. 6,100 76
- - Sterling Commerce, Inc. 2,400 92
- - Sterling Software, Inc. 1,700 70
- - Storage Technology Corp. 1,900 118
- - Sun Microsystems, Inc. 4,200 168
- - Sybase, Inc. 4,400 59
- - Synopsys, Inc. 2,000 71
Tandy Corp. 200 8
- - Tellabs, Inc. 2,400 127
Texas Instruments, Inc. 2,600 117
- - 3Com Corp. 5,225 182
Total System Services, Inc. 2,800 69
- - UNOVA, Inc. 4,000 66
- - Unisys Corp. 1,700 24
- - VLSI Technology, Inc. 3,300 78
Varian Associates, Inc. 900 46
- - Vishay Intertechnology, Inc. 2,924 69
- - Western Digital Corp. 3,700 59
- - Xilinx, Inc. 2,100 74
-----------
10,887
-----------
UTILITIES (3.1%)
AT&T Corp. 4,300 263
- - AirTouch Communications, Inc. 5,100 212
- - Associated Group, Inc. 100 3
- - Associated Group, Inc. Class B 100 3
BellSouth Corp. 6,000 338
- - Cablevision Systems Corp. Class B 200 19
Century Telephone Enterprises, Inc. 1,500 75
CINergy Corp. 1,700 65
- - Citizens Utilities Co. Class B 10,201 98
Columbia Gas Systems, Inc. 1,000 79
Comcast Corp. Class A Special 4,900 155
- - Cox Communications Class A 2,400 96
- - EXCEL Communications, Inc. 3,100 45
- - FirstEnergy Corp. 3,700 107
Frontier Corp. 1,600 39
- - LCI International, Inc. 3,600 111
MCI Communications Corp. 5,700 244
NGC Corp. 2,800 49
New Century Energies, Inc. 1,900 91
- - NEXTEL Communications, Inc. 6,500 168
- - Niagara Mohawk Power Corp. 5,900 62
- - Paging Network, Inc. 1,900 20
- - QUALCOMM, Inc. 1,400 71
SBC Communications Inc. 1,772 130
Sprint Corp. 3,200 188
- - Tele-Communications, Inc. Class A 6,090 170
- - Tele-Communications
International, Inc. Series A 4,300 77
- - Tele-Communications TCI Ventures
Group Series A 2,910 82
Telephone & Data Systems, Inc. 500 23
Texas Utilities Co. 472 20
- - 360 Communications Co. 4,366 88
- - U.S. Cellular Corp. 1,800 56
- - U S WEST Media Group 6,700 193
- - Viacom Inc. Class A 548 22
- - WorldCom, Inc. 8,152 247
-----------
3,709
-----------
OTHER (2.6%)
AlliedSignal Inc. 3,400 132
CBS Corp. 8,858 261
- - Ceridian Corp. 2,100 96
- - Coltec Inc. 3,100 72
- - FMC Corp. 1,100 74
General Electric Co. 24,700 1,812
ITT Industries, Inc. 600 19
- - Litton Industries, Inc. 1,500 86
Minnesota Mining &
Manufacturing Co. 2,500 205
Raytheon Co. Class A 267 13
Raytheon Co. Class B 1,800 91
St. Joe Corp. 700 63
Tenneco, Inc. 1,200 47
- - Thermo Electron Corp. 2,650 118
Wesco Financial Corp. 200 60
-----------
3,149
-----------
- ---------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $38,528) 58,205
- ---------------------------------------------------------------------
</TABLE>
21
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<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
BALANCED PORTFOLIO (000) (000)
- ---------------------------------------------------------------------
MUNICIPAL BONDS (51.3%)
- ---------------------------------------------------------------------
<S> <C> <C>
ALASKA (0.9%)
North Slope Borough AK GO
7.50%, 6/30/2001 (3) $1,000 $ 1,111
---------
ARIZONA (1.3%)
Maricopa AZ Unified School Dist.
7.125%, 7/1/1999 1,500 1,554
---------
CALIFORNIA (7.6%)
Anaheim CA Public Improvement Corp.
Lease VRDO
3.35%, 1/7/1998 (2) 700 700
California Dept. of Water
(Central Valley Project )
8.25%, 12/1/2003 290 351
California GO
6.40%, 2/1/2006 (1) 500 573
10.00%, 4/1/1998 400 406
California Health Fac. Finance Auth.
(Catholic Healthcare West)
6.25%, 7/1/2006 (1) 395 448
California Health Fac. Finance Auth.
VRDO (Kaiser Permanente)
3.45%, 1/7/1998 275 275
Central Coast CA Water Auth.
6.00%, 10/1/2008 (2) 1,000 1,117
Clovis CA Unified School Dist.
0.00%, 8/1/2005 (3) 2,000 1,438
Los Angeles CA Unified School
Dist. GO
6.00%, 7/1/2008 (3) 1,000 1,135
Los Angeles CA Waste
Water System
5.75%, 6/1/2010 (1) 400 430
San Bernardino CA Medical
Center COP
5.50%, 8/1/2005 (1) 500 538
South Orange County CA Public
Finance Auth.
7.00%, 9/1/2006 (1) 875 1,039
Univ. of California
(Multiple Purpose Project)
12.00%, 9/1/2003 (2) 500 692
---------
9,142
---------
CONNECTICUT (1.7%)
Connecticut GO
6.00%, 5/15/2003 1,000 1,087
South Central CT Regional Water
Auth. Water System Rev.
5.75%, 8/1/2006 900 974
---------
2,061
---------
DISTRICT OF COLUMBIA (1.6%)
District of Columbia GO
5.40%, 6/1/2012 (2) 455 471
6.75%, 6/1/2005 (2) 1,400 1,498
---------
1,969
---------
FLORIDA (2.4%)
Dade County FL School Dist.
7.375%, 7/1/1999 (Prere.) 400 428
Dade County FL Water &
Sewer Rev. VRDO
3.65%, 1/7/1998 (3) 420 420
Florida Dept. of General Services
6.00%, 7/1/2003 (2) 1,000 1,083
Lee County FL School Board
6.00%, 8/1/2005 (4) 800 888
---------
2,819
---------
GEORGIA (1.1%)
Burke County GA Dev. Auth.
PCR VRDO (Oglethorpe Power)
3.65%, 1/7/1998 160 160
Georgia GO
6.00%, 3/1/2004 1,000 1,097
---------
1,257
---------
ILLINOIS (0.8%)
Illinois Sales Tax Rev.
7.20%, 6/15/1999 (Prere.) 400 426
Illinois Toll Highway Auth. VRDO
3.65%, 1/7/1998 (1) 590 590
---------
1,016
---------
INDIANA (0.3%)
Amoco IN PCR VRDO
(Amoco Co. Project)
4.95%, 1/5/1998 360 360
---------
KENTUCKY (0.4%)
Kentucky Property &
Buildings Comm.
5.80%, 9/1/2006 400 429
---------
LOUISIANA (1.1%)
East Baton Rouge Parish
LA PCR VRDO (Exxon Project)
4.80%, 1/5/1998 280 280
Louisiana GO
6.00%, 8/1/2001 (3) 1,000 1,064
---------
1,344
---------
MARYLAND (0.4%)
Maryland Dept. of Transp.
5.20%, 9/15/2004 400 422
---------
MASSACHUSETTS (2.5%)
Massachusetts Bay Transp. Auth.
6.25%, 3/1/2005 1,000 1,115
Massachusetts GO
7.25%, 7/1/1998 (Prere.) 500 516
Massachusetts Ind. Finance
Agency Rev.
(Refusetech Inc. Project)
6.30%, 7/1/2005 1,000 1,084
Massachusetts Water
Resources Auth.
5.75%, 8/1/2010 (1) 300 323
---------
3,038
---------
MICHIGAN (3.4%)
Dickinson County MI Memorial
Hospital System Rev.
7.625%, 11/1/2005 460 517
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
BALANCED PORTFOLIO (000) (000)
- ---------------------------------------------------------------------
<S> <C> <C>
Greater Detroit MI Resource
Recovery Auth.
6.25%, 12/13/2006 (2) $1,200 $ 1,354
Michigan Environmental
Protection Program
6.25%, 11/1/2008 1,000 1,103
Michigan Housing Dev. Auth. Rental
Housing Rev.
6.30%, 4/1/2004 1,000 1,067
---------
4,041
---------
NEVADA (1.3%)
Clark County NV School Dist. GO
5.90%, 6/15/2012 (3) 750 815
6.00%, 6/15/1999 (3) 700 720
---------
1,535
---------
NEW JERSEY (1.5%)
New Jersey Econ. Dev. Auth.
Market Transition Fac.
5.70%, 7/1/2005 (1) 400 433
New Jersey Health Care Fac.
Finance Auth.
(Atlantic City Medical Center)
6.80%, 7/1/2005 1,000 1,108
New Jersey Transp. Trust Fund
6.00%, 6/15/2008 250 281
---------
1,822
---------
NEW YORK (8.8%)
Erie County NY GO
6.125%, 1/15/2011 (3) 610 695
Hempstead NY GO
5.625%, 2/1/2011 (3) 840 906
Huntington NY GO
6.70%, 2/1/2010 (3) 375 448
Metropolitan NY Transp. Auth.
6.00%, 7/1/2006 (1) 1,000 1,114
New York City NY GO
6.375%, 8/15/2009 640 700
7.10%, 8/15/2007 500 564
New York City NY IDA (USTA
National Tennis Center Project)
6.25%, 11/15/2006 2,000 2,240
New York City NY Muni.
Assistance Corp.
5.00%, 7/1/1999 500 508
New York City NY Muni Water Finance
Auth. Water & Sewer System
Rev. VRDO
5.10%, 1/5/1998 (3) 440 440
New York Environmental Fac. Corp.
PCR (State Water Recovery Fund)
6.35%, 6/15/2006 520 583
New York State Dormitory Auth. Rev.
(State Univ.)
5.375%, 5/15/2007 (2) 400 430
New York State Dormitory Auth. Rev.
(Vassar Brothers Hospital)
5.10%, 7/1/2010 (4) 1,500 1,537
New York State Thruway Auth.
(Service Contract)
5.40%, 4/1/2005 (1) 400 426
---------
10,591
---------
NORTH CAROLINA (0.4%)
Charlotte NC Airport Refunding
Rev. VRDO
3.65%, 1/7/1998 (1) 500 500
---------
OHIO (3.1%)
Lorain County OH Hosp. Rev.
(Catholic Healthcare Partners)
5.625%, 9/1/2013 (1) 1,775 1,902
Ohio Public Fac. Comm. Higher
Educ. Fac.
5.50%, 12/1/2006 (1) 400 426
Ohio Water Dev. Auth.
5.75%, 12/1/2005 (1) 540 582
6.00%, 12/1/2008 (2) 750 815
---------
3,725
---------
PENNSYLVANIA (4.4%)
Pennsylvania Convention Center Auth.
6.70%, 9/1/2014 (1) 500 566
Pennsylvania GO
5.90%, 11/15/2001 1,000 1,066
Pennsylvania Higher Educ. Fac.
Auth. VRDO (Carnegie Mellon)
4.85%, 1/5/1998 50 50
Pennsylvania Higher Educ. Fac.
Health Services
(Allegheny/Delaware Valley)
5.00%, 11/15/2006 (1) 1,125 1,165
Pennsylvania Turnpike Comm. Rev.
7.625%, 12/1/1999 (Prere.) 500 543
Philadelphia PA School Dist. GO
6.25%, 9/1/2005 (2) 870 974
Pittsburgh PA GO
5.20%, 3/1/2010 (3) 580 596
Pittsburgh PA Water &
Sewer Auth. Rev.
5.60%, 9/1/2018 (3) 235 242
Sayer PA Health Care Fac. Auth. VRDO
3.65%, 1/7/1998 (2) 25 25
---------
5,227
---------
TEXAS (2.7%)
Harris County TX Toll Road VRDO
3.80%, 1/7/1998 55 55
Houston TX GO
5.70%, 3/1/2001 500 525
Houston TX Hotel Occupancy
Tax Rev.
5.25%, 7/1/2007 (4) 500 526
San Antonio TX Water Rev.
6.50%, 5/15/2010 (1) 500 549
Texas TRAN
4.75%, 8/31/1998 1,000 1,006
Univ. of Texas Permanent Fund
6.60%, 7/1/2001 (Prere.) 500 549
---------
3,210
---------
UTAH (0.2%)
Salt Lake County UT Building Auth.
Lease Rev.
5.90%, 10/1/2006 (1) 260 284
---------
</TABLE>
23
<PAGE> 26
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
BALANCED PORTFOLIO (000) (000)
- ---------------------------------------------------------------------
<S> <C> <C>
VIRGINIA (0.5%)
Virginia Transp. Board
6.00%, 5/15/2007 $ 500 $ 545
--------
WASHINGTON (2.0%)
King County WA Library System GO
6.05%, 12/1/2007 1,000 1,114
Seattle WA Muni. Light & Power Rev.
6.25%, 7/1/2007 700 781
Tacoma WA Electric System Rev.
5.50%, 1/1/2012 (2) 500 513
Washington GO VRDO
3.60%, 1/7/1998 15 15
--------
2,423
--------
WEST VIRGINIA (0.6%)
West Virginia School Building Auth.
Capital Improvement Rev.
5.625%, 7/1/2002 655 696
--------
WISCONSIN (0.3%)
Wisconsin GO
5.00%, 5/1/2000 335 343
--------
- ---------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(COST $59,165) 61,464
- ---------------------------------------------------------------------
TOTAL INVESTMENTS (99.9%)
(COST $97,693) 119,669
- ---------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.1%)
- ---------------------------------------------------------------------
Other Assets--Note B 1,277
Liabilities (1,181)
--------
96
- ---------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------
Applicable to 8,163,020 outstanding
$.001 par value shares
(authorized 250,000,000 shares) $119,765
=====================================================================
NET ASSET VALUE PER SHARE $14.67
=====================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income-Producing Security.
ADR--American Depositary Receipt.
COP--Certificate of Participation.
GO--General Obligation Bond.
IDA--Industrial Development Authority Bond.
PCR--Pollution Control Revenue Bond.
TRAN--Tax Revenue Anticipation Note.
VRDO--Variable Rate Demand Obligation.
(Prere.)--Prerefunded.
Scheduled principal and interest payments are
guaranteed by:
(1) MBIA (Municipal Bond Insurance Association).
(2) AMBAC (AMBAC Indemnity Corporation).
(3) FGIC (Financial Guaranty Insurance Company).
(4) FSA (Financial Security Assurance).
The insurance does not guarantee the market value of the municipal bonds.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------------------
AT DECEMBER 31, 1997, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $ 98,635 $12.09
Overdistributed Net
Investment Income (52) (.01)
Accumulated Net Realized
Losses--Note C (794) (.10)
Unrealized Appreciation--Note D 21,976 2.69
- ---------------------------------------------------------------------
NET ASSETS $119,765 $14.67
======================================================================
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
GROWTH AND VALUE*
INCOME PORTFOLIO SHARES (000)
- ---------------------------------------------------------------------
COMMON STOCKS (99.9%)
- ---------------------------------------------------------------------
<S> <C> <C>
General Electric Co. 252,972 $ 18,562
The Coca-Cola Co. 191,226 12,740
- - Microsoft Corp. 93,146 12,033
Exxon Corp. 190,574 11,661
Merck & Co., Inc. 92,579 9,837
Royal Dutch Petroleum Co. ADR 165,716 8,980
Intel Corp. 126,284 8,864
Philip Morris Cos., Inc. 187,179 8,482
Procter & Gamble Co. 103,868 8,290
International Business
Machines Corp. 75,168 7,860
AT&T Corp. 125,431 7,683
Pfizer, Inc. 99,980 7,455
Bristol-Myers Squibb Co. 76,088 7,200
Wal-Mart Stores, Inc. 174,243 6,872
Johnson & Johnson 103,988 6,850
Eli Lilly & Co. 85,796 5,974
American International
Group, Inc. 54,239 5,898
Bell Atlantic Corp. 60,057 5,465
E.I. du Pont de Nemours & Co. 86,632 5,203
SBC Communications Inc. 70,155 5,139
The Walt Disney Co. 51,632 5,115
Hewlett-Packard Co. 80,452 5,028
Travelers Group Inc. 88,541 4,770
Fannie Mae 82,032 4,681
Ford Motor Co. 92,718 4,514
Citicorp 35,319 4,466
Gillette Co. 43,308 4,350
Mobil Corp. 60,018 4,333
- - Cisco Systems, Inc. 77,665 4,330
BellSouth Corp. 76,686 4,318
PepsiCo, Inc. 116,152 4,232
Lucent Technologies, Inc. 49,625 3,964
Chevron Corp. 50,724 3,906
BankAmerica Corp. 53,114 3,877
GTE Corp. 74,064 3,870
Abbott Laboratories 58,497 3,835
American Home Products Corp. 49,718 3,803
The Boeing Co. 76,383 3,738
The Chase Manhattan Corp. 32,196 3,525
Schering-Plough Corp. 56,636 3,519
Ameritech Corp. 41,865 3,370
General Motors Corp. 54,841 3,325
NationsBank Corp. 54,454 3,311
Compaq Computer Corp. 58,479 3,300
Home Depot, Inc. 55,993 3,297
American Express Co. 35,888 3,203
Amoco Corp. 37,194 3,166
Unilever NV 48,984 3,058
Schlumberger Ltd. 37,866 3,048
Allstate Corp. 32,790 2,980
Time Warner, Inc. 43,291 2,684
Morgan Stanley, Dean Witter,
Discover and Co. 45,289 2,678
Motorola, Inc. 45,701 2,608
Warner-Lambert Co. 20,812 2,581
Minnesota Mining &
Manufacturing Co. 31,445 2,580
McDonald's Corp. 52,515 2,508
First Union Corp. 47,978 2,459
Banc One Corp. 44,885 2,438
Texaco Inc. 42,368 2,304
MCI Communications Corp. 53,312 2,282
Wells Fargo & Co. 6,643 2,255
Freddie Mac 53,760 2,255
Computer Associates
International, Inc. 42,216 2,232
Norwest Corp. 57,774 2,231
U.S. Bancorp 18,947 2,121
Kimberly-Clark Corp. 42,944 2,118
- - WorldCom, Inc. 69,700 2,108
- - Dell Computer Corp. 25,100 2,108
Sara Lee Corp. 37,132 2,091
- - Cendant Corp. 60,437 2,078
Campbell Soup Co. 35,412 2,058
Atlantic Richfield Co. 24,492 1,962
Emerson Electric Co. 34,232 1,932
Sprint Corp. 32,872 1,927
Monsanto Co. 45,425 1,908
Medtronic, Inc. 35,868 1,876
Merrill Lynch & Co., Inc. 25,492 1,859
First Chicago NBD Corp. 22,134 1,848
Xerox Corp. 24,965 1,843
Tyco International Ltd. 40,732 1,835
Northern Telecom Ltd. 20,257 1,803
Chrysler Corp. 51,130 1,799
Dow Chemical Co. 17,340 1,760
Colgate-Palmolive Co. 22,906 1,684
AlliedSignal Inc. 43,142 1,680
Anheuser-Busch Cos., Inc. 37,914 1,668
U S WEST Communications
Group 36,946 1,667
- - Oracle Corp. 74,879 1,666
The Bank of New York Co., Inc. 28,700 1,659
- - AirTouch Communications, Inc. 38,600 1,604
CBS Corp. 54,406 1,602
Kellogg Co. 31,736 1,575
J.P. Morgan & Co., Inc. 13,760 1,553
Duke Energy Corp. 27,503 1,523
Eastman Kodak Co. 24,728 1,504
Lockheed Martin Corp. 14,988 1,476
Columbia/HCA Healthcare Corp. 49,486 1,466
Fleet Financial Group, Inc. 19,378 1,452
Pharmacia & Upjohn, Inc. 38,870 1,424
H.J. Heinz Co. 27,888 1,417
Automatic Data Processing, Inc. 22,568 1,385
Caterpillar, Inc. 28,390 1,379
Sears, Roebuck & Co. 30,299 1,371
Southern Co. 52,412 1,356
- - U S WEST Media Group 46,946 1,356
Gannett Co., Inc. 21,904 1,354
Texas Instruments, Inc. 29,852 1,343
PNC Bank Corp. 23,201 1,324
United Technologies Corp. 17,666 1,286
Wachovia Corp. 15,763 1,279
General Re Corp. 5,987 1,269
Washington Mutual, Inc. 19,648 1,253
CoreStates Financial Corp. 15,231 1,219
CPC International, Inc. 11,111 1,197
Union Pacific Corp. 19,100 1,193
KeyCorp 16,824 1,191
ConAgra, Inc. 36,092 1,184
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
GROWTH AND VALUE*
INCOME PORTFOLIO SHARES (000)
- ---------------------------------------------------------------------
<S> <C> <C>
Walgreen Co. 37,680 $ 1,182
Mellon Bank Corp. 19,278 1,169
J.C. Penney Co., Inc. 19,306 1,164
SunTrust Banks, Inc. 16,136 1,152
Illinois Tool Works, Inc. 19,072 1,147
- - Sun Microsystems, Inc. 28,648 1,142
Dayton-Hudson Corp. 16,732 1,129
Burlington Northern
Santa Fe Corp. 12,109 1,125
- - Viacom Inc. Class B 26,924 1,116
Deere & Co. 19,079 1,113
- - Tele-Communications, Inc.
Class A 39,047 1,088
- - Amgen, Inc. 20,088 1,087
Barnett Banks, Inc. 15,064 1,083
Baxter International, Inc. 21,444 1,082
The Gap, Inc. 30,438 1,079
National City Corp. 16,400 1,078
BankBoston Corp. 11,260 1,058
MBNA Corp. 38,697 1,057
- - EMC Corp. 38,300 1,051
Household International, Inc. 8,122 1,036
Halliburton Co. 19,880 1,033
PG&E Corp. 33,558 1,021
Raytheon Co. Class B 20,222 1,021
International Paper Co. 23,323 1,006
American General Corp. 18,576 1,004
Enron Corp. 24,150 1,004
CIGNA Corp. 5,746 994
Phillips Petroleum Co. 20,392 992
The Chubb Corp. 13,098 991
Pitney Bowes, Inc. 10,940 984
First Data Corp. 33,538 981
Marsh & McLennan Cos., Inc. 13,004 970
Waste Management Inc. 35,186 968
Fifth Third Bancorp 11,700 955
Loews Corp. 8,900 945
Archer-Daniels-Midland Co. 43,125 935
- - 3Com Corp. 26,750 933
Aluminum Co. of America 13,204 929
May Department Stores Co. 17,447 919
CSX Corp. 16,714 903
- - AMR Corp. 6,959 894
The Seagram Co. Ltd. 27,672 894
Norfolk Southern Corp. 28,819 888
Albertson's, Inc. 18,565 880
NIKE, Inc. Class B 22,212 872
General Mills, Inc. 12,141 870
Charles Schwab Corp. 20,350 853
Bankers Trust New York Corp. 7,500 843
CVS Corp. 13,059 837
- - Applied Materials, Inc. 27,800 836
HBO & Co. 17,400 834
The Hartford Financial Services
Group Inc. 8,901 833
Rockwell International Corp. 15,853 828
- - HEALTHSOUTH Corp. 29,842 828
Mattel, Inc. 22,020 820
FPL Group, Inc. 13,749 814
Aetna Inc. 11,459 809
Edison International 29,728 808
Texas Utilities Co. 18,844 783
Textron, Inc. 12,504 781
- - Tenet Healthcare Corp. 23,566 781
PPG Industries, Inc. 13,525 773
Occidental Petroleum Corp. 25,745 755
The Goodyear Tire & Rubber Co. 11,816 752
Ralston-Ralston Purina Group 8,042 747
Aon Corp. 12,700 745
Weyerhaeuser Co. 15,101 741
American Electric Power Co., Inc. 14,330 740
USX-Marathon Group 21,778 735
- - Tellabs, Inc. 13,900 732
Consolidated Edison Co. of
New York, Inc. 17,800 730
- - ITT Corp. 8,801 729
Unocal Corp. 18,723 727
Comerica, Inc. 8,000 722
Service Corp. International 19,480 720
- - Costco Cos., Inc. 16,126 719
- - The Kroger Co. 19,238 711
State Street Corp. 12,200 710
United Healthcare Corp. 14,164 704
Wrigley, (Wm.) Jr. Co. 8,797 700
Comcast Corp. Class A Special 22,196 699
AMP, Inc. 16,640 699
Guidant Corp. 11,200 697
Williams Cos., Inc. 24,462 694
Air Products & Chemicals, Inc. 8,390 690
- - Boston Scientific Corp. 15,041 690
- - Federated Department Stores 15,800 680
- - Toys R Us, Inc. 21,591 679
Delta Air Lines, Inc. 5,672 675
Hershey Foods Corp. 10,798 669
Marriott International 9,634 667
Corning, Inc. 17,913 665
Honeywell, Inc. 9,646 661
Progressive Corp. of Ohio 5,500 659
Conseco Inc. 14,200 645
Masco Corp. 12,534 638
SunAmerica Inc. 14,900 637
Lowe's Cos., Inc. 13,335 636
Cardinal Health, Inc. 8,400 631
PacifiCorp 22,662 619
The Clorox Co. 7,770 614
Dover Corp. 16,980 613
Avon Products, Inc. 9,992 613
Dominion Resources, Inc. 14,274 608
Fort James Corp. 15,879 607
- - Clear Channel Communications 7,600 604
Lincoln National Corp. 7,721 603
Sysco Corp. 13,129 598
Northrop Grumman Corp. 5,168 594
Burlington Resources, Inc. 13,217 592
Cincinnati Financial Corp. 4,200 590
Tribune Co. 9,458 589
Houston Industries, Inc. 21,787 581
MGIC Investment Corp. 8,700 579
ALLTEL Corp. 14,000 575
UNUM Corp. 10,418 566
Entergy Corp. 18,886 565
The McGraw-Hill Cos., Inc. 7,638 565
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------------------
<S> <C> <C>
Hilton Hotels Corp. 18,916 $ 563
Dresser Industries, Inc. 13,398 562
Baker Hughes, Inc. 12,879 562
Rite Aid Corp. 9,501 558
Public Service Enterprise
Group, Inc. 17,535 556
Cognizant Corp. 12,280 547
The Quaker Oats Co. 10,356 546
Browning-Ferris Industries, Inc. 14,758 546
Praxair, Inc. 11,960 538
Huntington Bancshares Inc. 14,799 531
The Limited, Inc. 20,797 530
- - Federal Express Corp. 8,680 530
St. Paul Cos., Inc. 6,389 524
Eaton Corp. 5,859 523
SAFECO Corp. 10,720 521
- - Thermo Electron Corp. 11,700 521
Barrick Gold Corp. 27,879 519
Transamerica Corp. 4,841 516
UST, Inc. 13,899 513
Tenneco, Inc. 12,977 513
BB&T Corp. 8,000 513
Newell Co. 12,038 512
- - FirstEnergy Corp. 17,546 509
Ingersoll-Rand Co. 12,490 506
TRW, Inc. 9,440 504
Unicom Corp. 16,329 502
Winn-Dixie Stores, Inc. 11,308 494
Coastal Corp. 7,957 493
Crown Cork & Seal Co., Inc. 9,703 486
Carolina Power & Light Co. 11,448 486
Alcan Aluminium Ltd. 17,565 485
- - Computer Sciences Corp. 5,772 482
H.F. Ahmanson & Co. 7,199 482
Fortune Brands, Inc. 12,988 481
New York Times Co. Class A 7,265 480
Republic New York Corp. 4,200 480
Interpublic Group of Cos., Inc. 9,385 467
Union Pacific Resources
Group, Inc. 18,991 461
Becton, Dickinson & Co. 9,196 460
Genuine Parts Co. 13,537 459
- - Parametric Technology Corp. 9,700 458
CINergy Corp. 11,906 456
Rohm & Haas Co. 4,731 453
W.R. Grace & Co. 5,620 452
Union Electric Co. 10,405 450
MBIA, Inc. 6,700 448
Torchmark Corp. 10,598 446
Cooper Industries, Inc. 9,095 446
The Times Mirror Co. Class A 7,234 445
Consolidated Natural Gas Co. 7,217 437
Central & South West Corp. 16,045 434
American Stores Co. 21,072 433
International Flavors &
Fragrances, Inc. 8,382 432
- - US Airways Group, Inc. 6,802 425
VF Corp. 9,242 425
- - Kmart Corp. 36,450 421
- - Digital Equipment Corp. 11,371 421
TJX Cos., Inc. 12,202 419
Georgia-Pacific Corp. 6,900 419
Jefferson-Pilot Corp. 5,353 417
- - Bay Networks, Inc. 16,200 414
PECO Energy Corp. 17,056 414
Golden West Financial Corp. 4,218 413
R.R. Donnelley & Sons Co. 11,041 411
Equifax, Inc. 11,600 411
- - Micron Technology, Inc. 15,700 408
General Dynamics Corp. 4,716 408
Union Carbide Corp. 9,315 400
Southwest Airlines Co. 16,180 398
- - Owens-Illinois, Inc. 10,500 398
Dow Jones & Co., Inc. 7,340 394
The Dun & Bradstreet Corp. 12,680 392
Amerada Hess Corp. 7,117 391
Omnicom Group Inc. 9,200 390
Baltimore Gas & Electric Co. 11,398 388
GPU, Inc. 9,100 383
Dana Corp. 8,037 382
Parker Hannifin Corp. 8,273 380
Sherwin-Williams Co. 13,394 372
Hercules, Inc. 7,417 371
DTE Energy Co. 10,702 371
W.W. Grainger, Inc. 3,773 367
Countrywide Credit Industries, Inc. 8,300 356
H & R Block, Inc. 7,900 354
Nordstrom, Inc. 5,874 353
- - Seagate Technology 18,300 352
Morton International, Inc. 10,200 351
Eastman Chemical Co. 5,882 350
Avery Dennison Corp. 7,684 344
Laidlaw, Inc. 25,200 343
Reynolds Metals Co. 5,706 342
- - AutoZone Inc. 11,700 339
Case Corp. 5,600 338
Newmont Mining Corp. 11,509 338
Knight-Ridder, Inc. 6,470 336
Northern States Power Co. 5,728 334
Pioneer Hi-Bred International, Inc. 3,100 332
Allegheny Teledyne Inc. 12,846 332
Beneficial Corp. 3,978 331
- - National Semiconductor Corp. 12,651 328
Champion International Corp. 7,217 327
- - Tricon Global Restaurants, Inc. 11,175 325
Columbia Gas Systems, Inc. 4,073 320
Providian Financial Corp. 7,043 318
The Stanley Works 6,706 316
- - Mirage Resorts, Inc. 13,900 316
- - Western Atlas, Inc. 4,260 315
Nucor Corp. 6,497 314
PP&L Resources Inc. 12,800 306
Whirlpool Corp. 5,553 305
PACCAR, Inc. 5,760 302
Hasbro, Inc. 9,550 301
Tandy Corp. 7,732 298
Sigma-Aldrich Corp. 7,500 296
Ashland, Inc. 5,506 296
Johnson Controls, Inc. 6,176 295
Sonat, Inc. 6,397 293
Dillard's Inc. 8,286 292
Frontier Corp. 12,100 291
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
GROWTH AND VALUE*
INCOME PORTFOLIO SHARES (000)
- ---------------------------------------------------------------------
<S> <C> <C>
Harcourt General, Inc. 5,266 $ 288
Brown-Forman Corp. Class B 5,135 284
IKON Office Solutions 9,966 280
Raychem Corp. 6,492 280
ITT Industries, Inc. 8,901 279
Anadarko Petroleum Corp. 4,600 279
Rubbermaid, Inc. 11,147 279
- - Ceridian Corp. 6,051 277
Black & Decker Corp. 7,086 277
Union Camp Corp. 5,138 276
Green Tree Financial Corp. 10,500 275
Maytag Corp. 7,364 275
Harris Corp. 5,972 274
Ecolab, Inc. 4,915 272
Raytheon Co. Class A 5,497 271
Phelps Dodge Corp. 4,341 270
Willamette Industries, Inc. 8,300 267
Synovus Financial Corp. 8,100 265
- - Humana, Inc. 12,400 257
Circuit City Stores, Inc. 7,228 257
Westvaco Corp. 7,943 250
Wendy's International, Inc. 10,151 244
Pacific Enterprises 6,487 244
- - KLA-Tencor Corp. 6,300 243
The BFGoodrich Co. 5,854 243
Adobe Systems, Inc. 5,800 239
Fluor Corp. 6,380 238
Apache Corp. 6,800 238
Pennzoil Co. 3,478 232
Perkin-Elmer Corp. 3,250 231
Placer Dome, Inc. 18,112 230
Brunswick Corp. 7,426 225
- - DSC Communications Corp. 9,274 221
Sun Co., Inc. 5,245 221
Kerr-McGee Corp. 3,476 220
Temple-Inland Inc. 4,200 220
Armstrong World Industries Inc. 2,927 219
The Mead Corp. 7,804 219
Inco Ltd. 12,597 214
Deluxe Corp. 6,182 213
American Greetings Corp. Class A 5,447 213
Liz Claiborne, Inc. 5,069 212
- - LSI Logic Corp. 10,700 211
- - St. Jude Medical, Inc. 6,882 210
Freeport-McMoRan Copper &
Gold, Inc. Class B 13,200 208
Mallinckrodt, Inc. 5,462 208
- - Woolworth Corp. 10,050 205
Biomet, Inc. 7,985 204
- - Rowan Cos., Inc. 6,486 198
- - ALZA Corp. 6,179 197
Pall Corp. 9,495 196
- - Novell, Inc. 26,400 196
Great Lakes Chemical Corp. 4,343 195
- - Oryx Energy Co. 7,631 195
Whitman Corp. 7,360 192
Nalco Chemical Co. 4,835 191
USX-U.S. Steel Group, Inc. 6,100 191
Snap-On Inc. 4,367 191
SuperValu Inc. 4,546 190
- - Advanced Micro Devices, Inc. 10,608 190
- - FMC Corp. 2,823 190
- - NextLevel Systems, Inc. 10,600 189
Engelhard Corp. 10,790 187
Thomas & Betts Corp. 3,928 186
Ryder System, Inc. 5,564 182
- - Unisys Corp. 12,881 179
USF&G Corp. 7,991 176
- - Cabletron Systems, Inc. 11,400 171
Bemis Co., Inc. 3,875 171
U.S. Surgical Corp. 5,792 170
- - Silicon Graphics, Inc. 13,400 167
Mercantile Stores Co., Inc. 2,726 166
Echlin, Inc. 4,501 163
National Service Industries, Inc. 3,269 162
Cummins Engine Co., Inc. 2,741 162
Manor Care Inc. 4,613 161
Polaroid Corp. 3,260 159
Bausch & Lomb, Inc. 4,002 159
The Timken Co. 4,610 158
Allergan, Inc. 4,618 155
- - Andrew Corp. 6,460 155
King World Productions, Inc. 2,627 152
General Signal Corp. 3,562 150
Louisiana-Pacific Corp. 7,900 150
Giant Food, Inc. Class A 4,404 148
McDermott International, Inc. 4,041 148
NICOR, Inc. 3,480 147
Tektronix, Inc. 3,676 146
- - Harrah's Entertainment, Inc. 7,649 144
Crane Co. 3,303 143
- - Navistar International Corp. 5,756 143
Cooper Tire & Rubber Co. 5,785 141
- - Fruit of the Loom, Inc. 5,500 141
Meredith Corp. 3,896 139
Darden Restaurants Inc. 11,041 138
Centex Corp. 2,108 133
Caliber System Inc. 2,715 132
Tupperware Corp. 4,717 131
Alberto-Culver Co. Class B 4,086 131
C.R. Bard, Inc. 4,177 131
Comcast Corp. Class A 4,100 130
Owens Corning 3,747 128
Autodesk, Inc. 3,460 127
Harnischfeger Industries Inc. 3,587 127
Shared Medical Systems Corp. 1,876 124
Boise Cascade Corp. 4,030 122
- - Apple Computer, Inc. 9,300 121
Helmerich & Payne, Inc. 1,784 121
Safety-Kleen Corp. 4,397 121
- - Reebok International Ltd. 4,091 118
Worthington Industries, Inc. 7,102 116
Fleetwood Enterprises, Inc. 2,656 113
Pep Boys (Manny, Moe & Jack) 4,608 110
- - Niagara Mohawk Power Corp. 10,393 109
Millipore Corp. 3,194 108
Cyprus Amax Minerals Co. 6,800 105
Aeroquip-Vickers Inc. 2,097 103
Peoples Energy Corp. 2,519 99
Moore Corp. Ltd. 6,540 99
Scientific-Atlanta, Inc. 5,878 98
Battle Mountain Gold Co. Class A 16,700 98
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------------------
<S> <C> <C>
ONEOK, Inc. 2,391 $ 97
Homestake Mining Co. 10,768 96
Longs Drug Stores, Inc. 2,842 91
Adolph Coors Co. Class B 2,728 90
Potlatch Corp. 2,100 90
Briggs & Stratton Corp. 1,798 87
Great Atlantic & Pacific
Tea Co., Inc. 2,830 84
Foster Wheeler Corp. 3,022 82
Ball Corp. 2,301 81
- - Stone Container Corp. 7,300 76
Springs Industries Inc. Class A 1,460 76
Cincinnati Milacron, Inc. 2,915 76
Russell Corp. 2,720 72
- - Bethlehem Steel Corp. 8,231 71
EG&G, Inc. 3,390 71
ASARCO, Inc. 2,942 66
Jostens Inc. 2,855 66
- - UNOVA, Inc. 3,960 65
Eastern Enterprises 1,372 62
- - Data General Corp. 3,521 61
Inland Steel Industries, Inc. 3,541 61
Kaufman & Broad Home Corp. 2,611 59
Pulte Corp. 1,394 58
NACCO Industries, Inc. Class A 531 57
- - Beverly Enterprises, Inc. 4,283 56
John H. Harland Co. 2,004 42
- - Armco, Inc. 6,855 34
- - Charming Shoppes, Inc. 6,800 31
- - PharMerica, Inc. 2,723 28
- - Echo Bay Mines Ltd. 10,600 26
Freeport-McMoRan Copper &
Gold, Inc. Class A 1,300 20
- - Viacom Inc. Class A 100 4
- ---------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $425,245) 578,659
- ---------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
FACE
AMOUNT
(000)
- ---------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (0.7%)
- ---------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.54%, 1/2/1998
(COST $4,090) $4,090 4,090
- ---------------------------------------------------------------------
TOTAL INVESTMENTS (100.6%)
(COST $429,335) 582,749
- ---------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
VALUE*
(000)
- ---------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.6%)
- ---------------------------------------------------------------------
<S> <C>
Other Assets--Note B $ 3,564
Liabilities (7,021)
---------
(3,457)
- ---------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------
Applicable to 27,742,107 outstanding
$.001 par value shares
(authorized 250,000,000 shares) $579,292
=====================================================================
NET ASSET VALUE PER SHARE $20.88
=====================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income-Producing Security.
ADR--American Depositary Receipt.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
AT DECEMBER 31, 1997, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -----------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $427,600 $15.41
Overdistributed Net
Investment Income (66) --
Accumulated Net
Realized Losses--Note C (1,656) (.06)
Unrealized Appreciation--Note D 153,414 5.53
- -----------------------------------------------------------------------
NET ASSETS $579,292 $20.88
=======================================================================
</TABLE>
29
<PAGE> 32
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
CAPITAL APPRECIATION VALUE*
PORTFOLIO SHARES (000)
- ---------------------------------------------------------------------
COMMON STOCKS (100.0%)
- ---------------------------------------------------------------------
<S> <C> <C>
AUTO & TRANSPORTATION (3.6%)
- - AMR Corp. 17,900 $ 2,300
Autoliv, Inc. 33,047 1,082
Bandag, Inc. 11,850 633
Burlington Northern Santa
Fe Corp. 25,631 2,382
CNF Transportation, Inc. 24,600 944
Chrysler Corp. 17,286 608
- - Consolidated Freightways Corp. 73,371 1,009
- - Continental Airlines, Inc. Class B 26,600 1,280
Cooper Tire & Rubber Co. 38,800 946
Delta Air Lines, Inc. 16,800 1,999
- - Federal Express Corp. 25,000 1,527
Ford Motor Co. 20,200 983
General Motors Corp. 51,500 3,122
Harley-Davidson, Inc. 47,800 1,309
Kansas City Southern
Industries, Inc. 43,500 1,381
- - Lear Corp. 24,800 1,178
LucasVarity PLC ADR 11,592 404
MascoTech Inc. 14,000 257
- - Northwest Airlines Corp. Class A 28,700 1,375
Pittston Burlington Group 7,650 201
Southwest Airlines Co. 63,600 1,566
- - UAL Corp. 16,700 1,545
Union Pacific Corp. 24,653 1,539
- - US Airways Group, Inc. 29,200 1,825
Werner Enterprises, Inc. 6,000 125
- - Wisconsin Central
Transportation Corp. 32,700 767
---------
32,287
---------
CONSUMER DISCRETIONARY (16.2%)
- - AccuStaff, Inc. 40,000 920
- - America Online, Inc. 23,900 2,132
- - AutoZone Inc. 44,800 1,299
BHC Communications, Inc.
Class A 7,200 938
- - Barnes & Noble, Inc. 44,600 1,489
- - Bed Bath & Beyond, Inc. 29,300 1,126
A. H. Belo Corp. Class A 21,900 1,229
- - Boise Cascade Office Products
Corp. 48,100 718
- - Boston Chicken, Inc. 105,200 676
- - Brinker International, Inc. 34,800 557
Burlington Coat Factory
Warehouse Corp. 6,360 105
Callaway Golf Co. 34,300 980
- - Cendant Corp. 150,225 5,164
- - Chancellor Media Corp. 18,500 1,381
- - Choice Hotel International, Inc. 30,100 482
- - Chris-Craft Industries, Inc. 18,125 948
Circuit City Stores, Inc. 32,000 1,138
Cintas Corp. 28,200 1,102
- - Circus Circus Enterprises Inc. 51,600 1,058
- - Clear Channel Communications 19,000 1,509
Cognizant Corp. 38,000 1,693
- - Consolidated Stores, Inc. 29,406 1,292
- - Corporate Express, Inc. 71,000 916
- - Corrections Corp. of America 34,800 1,290
- - Costco Cos., Inc. 45,700 2,038
Cracker Barrel Old Country
Stores, Inc. 34,800 1,166
Darden Restaurants Inc. 99,900 1,249
Dillard's Inc. 32,400 1,142
The Walt Disney Co. 85,203 8,440
Dollar General Corp. 39,783 1,442
- - Electronic Arts Inc. 31,100 1,177
Fastenal Co. 19,100 734
- - Federated Department Stores 42,600 1,834
First Brands Corp. 9,200 248
- - Fruit of the Loom, Inc. 40,900 1,048
The Gap, Inc. 61,350 2,174
- - Gartner Group, Inc. Class A 33,100 1,235
Gaylord Entertainment Co. Class A 28,614 914
- - General Nutrition Cos., Inc. 37,900 1,286
- - GTech Holdings Corp. 30,000 958
- - HSN, Inc. 27,290 1,407
- - Harrah's Entertainment, Inc. 53,000 1,000
Hasbro, Inc. 41,400 1,304
Home Depot, Inc. 99,150 5,837
- - Host Marriott Services Corp. 53,520 796
- - Host Marriott Corp. 58,700 1,152
- - ITT Corp. 25,500 2,113
IKON Office Solutions 46,300 1,302
International Game Technology 57,500 1,452
- - Jones Apparel Group, Inc. 20,500 882
- - Kmart Corp. 117,700 1,361
King World Productions, Inc. 23,900 1,380
- - Kohls Corp. 20,000 1,363
La Quinta Inns Inc. 51,700 998
- - Lands' End, Inc. 1,400 49
The Limited, Inc. 37,337 952
- - Lin Television 19,800 1,080
Lowe's Cos., Inc. 38,100 1,817
- - MGM Grand, Inc. 25,600 923
Manpower Inc. 24,200 853
Marriott International 22,900 1,586
- - Marvel Entertainment Group 223,200 112
Mattel, Inc. 58,412 2,176
McDonald's Corp. 94,400 4,508
Fred Meyer Inc. 40,600 1,477
- - Micro Warehouse Inc. 43,400 606
- - Mirage Resorts, Inc. 56,000 1,274
Newell Co. 27,300 1,160
NIKE, Inc. Class B 31,900 1,252
- - Nine West Group, Inc. 33,100 859
Nordstrom, Inc. 12,100 729
- - Office Depot, Inc. 62,200 1,489
- - OfficeMax, Inc. 69,900 996
- - Outback Steakhouse 36,600 1,059
J.C. Penney Co., Inc. 13,654 824
Pep Boys (Manny, Moe & Jack) 29,100 695
- - PETsMART, Inc. 56,800 410
Pittston Brink's Group 26,000 1,047
- - PriceSmart, Inc. 3,275 57
- - PRIMEDIA Inc. 81,800 1,033
- - Promus Hotel Corp. 23,264 977
- - Reebok International Ltd. 27,750 800
- - Robert Half International, Inc. 32,700 1,308
Rubbermaid, Inc. 31,600 790
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------------------
<S> <C> <C>
Russell Corp. 17,250 $ 458
E.W. Scripps Co. Class A 14,835 719
Shaw Industries, Inc. 47,000 546
- - Staples, Inc. 52,325 1,455
- - Starbucks Corp. 33,100 1,271
Stewart Enterprises, Inc. Class A 24,300 1,135
- - Sunburst Hospitality Corp 10,033 99
Sunbeam Corp. 32,100 1,352
- - Tele-Communications Liberty
Media Group Class A 64,960 2,361
Time Warner, Inc. 65,875 4,084
- - Toys R Us, Inc. 54,600 1,716
- - Tricon Global Restaurants, Inc. 43,940 1,277
- - USA Waste Service 46,300 1,817
Unisource Worldwide, Inc. 9,800 140
- - Viacom Inc. Class B 53,006 2,196
- - Viking Office Products 47,100 1,035
Wal-Mart Stores, Inc. 178,400 7,036
The Warnaco Group, Inc. Class A 34,200 1,073
Waste Management Inc. 37,265 1,025
- - Woolworth Corp. 51,200 1,043
---------
144,310
---------
CONSUMER STAPLES (8.4%)
Albertson's, Inc. 29,200 1,383
CVS Corp. 33,014 2,115
The Coca-Cola Co. 268,300 17,875
Coca-Cola Enterprises, Inc. 54,900 1,952
Dole Food Co. 25,300 1,158
Gillette Co. 72,558 7,288
Great Atlantic & Pacific
Tea Co., Inc. 15,300 454
IBP, Inc. 45,300 949
Kellogg Co. 13,000 645
- - The Kroger Co. 52,300 1,932
PepsiCo, Inc. 195,400 7,120
Philip Morris Cos., Inc. 163,800 7,422
Procter & Gamble Co. 165,200 13,185
RJR Nabisco Holdings Corp. 4,360 164
- - Safeway, Inc. 56,092 3,548
- - Southland Corp. 343,000 718
Sysco Corp. 38,100 1,736
Tyson Foods, Inc. 62,550 1,282
Walgreen Co. 70,800 2,221
Wrigley, (Wm.) Jr. Co. 23,100 1,838
--------
74,985
--------
FINANCIAL SERVICES (12.2%)
AFLAC, Inc. 33,450 1,710
Advanta Corp. Class A 24,600 646
- - Alleghany Corp. 3,808 1,084
Allmerica Financial Corp. 25,044 1,251
AMBAC Financial Group Inc. 27,500 1,265
American International Group, Inc. 74,625 8,116
Automatic Data Processing, Inc. 34,800 2,136
Banc One Corp. 29,963 1,627
BankAmerica Corp. 74,100 5,409
- - CNA Financial Corp. 7,300 933
Capital One Financial Corp. 22,500 1,219
Citicorp 58,900 7,447
- - Concord EFS, Inc. 39,500 985
Conseco Inc. 39,366 1,789
- - DST Systems, Inc. 25,600 1,093
Dime Bancorp, Inc. 51,100 1,546
The Equitable Cos. 28,200 1,403
Fannie Mae 136,200 7,772
First Data Corp. 74,862 2,190
First Empire State Corp. 2,800 1,302
- - FIserv, Inc. 24,600 1,212
Franklin Resources Corp. 18,750 1,630
Freddie Mac 100,400 4,211
General Re Corp. 13,100 2,777
Golden West Financial Corp. 14,500 1,418
Green Tree Financial Corp. 43,200 1,131
The Hartford Financial Services
Group Inc. 17,300 1,619
Horace Mann Educators Corp. 34,400 978
ING Groep NV-Sponsored ADR 4,261 180
Lehman Brothers Holdings, Inc. 30,200 1,540
Leucadia National Corp. 29,500 1,018
Loews Corp. 15,900 1,687
MBIA, Inc. 24,400 1,630
MGIC Investment Corp. 27,200 1,809
Merrill Lynch & Co., Inc. 50,800 3,705
Morgan Stanley, Dean Witter,
Discover and Co. 71,900 4,251
The PMI Group Inc. 16,300 1,179
Paychex, Inc. 26,950 1,369
Progressive Corp. of Ohio 13,800 1,654
Provident Cos., Inc. 32,804 1,267
St. Paul Cos., Inc. 2,400 197
Charles Schwab Corp. 45,900 1,925
State Street Corp. 32,600 1,897
SunAmerica Inc. 44,650 1,909
- - SunGard Data Systems, Inc. 39,800 1,234
TIG Holdings, Inc. 20,800 690
Transatlantic Holdings, Inc. 13,600 972
Travelers Group Inc. 169,635 9,139
20th Century Industries of CA 38,400 998
UNUM Corp. 33,800 1,838
Western National Corp. 36,200 1,072
--------
109,059
--------
HEALTH CARE (13.1%)
Abbott Laboratories 78,800 5,166
Aetna Inc. 28,297 1,997
Aetna Inc. 6.25% Cvt. Pfd. Series C 1,333 95
- - ALZA Corp. 40,500 1,288
American Home Products Corp. 24,400 1,867
- - Amgen, Inc. 47,200 2,555
Beckman Instruments, Inc. 15,000 600
Becton, Dickinson & Co. 30,200 1,510
- - Beverly Enterprises, Inc. 65,500 852
- - Biogen, Inc. 33,400 1,217
Biomet, Inc. 50,100 1,281
- - Boston Scientific Corp. 31,800 1,459
Cardinal Health, Inc. 24,300 1,826
- - Centocor, Inc. 30,300 1,011
- - Chiron Corp. 65,540 1,116
Columbia/HCA Healthcare Corp. 105,421 3,123
DENTSPLY International Inc. 36,200 1,119
DePuy, Inc. 34,000 978
- - Forest Laboratories, Inc. 23,800 1,174
- - Foundation Health Systems
Class A 53,770 1,203
</TABLE>
31
<PAGE> 34
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
CAPITAL APPRECIATION VALUE*
PORTFOLIO SHARES (000)
- ---------------------------------------------------------------------
<S> <C> <C>
- - Genzyme Corp. 43,000 $ 1,191
- - Genzyme Corp. (Tissue Repair) 1,411 10
Guidant Corp. 34,200 2,129
HBO & Co. 44,400 2,130
HealthCare COMPARE Corp. 20,000 1,028
- - HEALTHSOUTH Corp. 75,702 2,101
- - Health Management Associates
Class A 54,112 1,366
- - Healthcare & Retirement Corp. 26,500 1,067
- - Humana, Inc. 54,000 1,121
- - IDEXX Laboratories Corp. 26,000 417
- - IVAX Corp. 126,700 855
Johnson & Johnson 165,006 10,870
Mallinckrodt, Inc. 16,500 627
Manor Care Inc. 30,400 1,064
- - Marquette Medical Systems Inc. 3,500 94
McKesson Corp. 13,200 1,428
- - MedPartners, Inc. 54,656 1,223
Medtronic, Inc. 71,600 3,746
Merck & Co., Inc. 144,300 15,332
Mylan Laboratories, Inc. 58,050 1,215
- - NovaCare, Inc. 10,200 133
Olsten Corp. 15,000 225
- - Oxford Health Plan 46,700 725
- - Pacificare Health Systems Inc.
Class A 4,096 206
- - Pacificare Health Systems Inc.
Class B 15,432 811
Pfizer, Inc. 159,200 11,870
- - PharMerica, Inc. 29,809 312
- - PhyCor, Inc. 43,000 1,162
- - Quintiles Transnational Corp. 30,000 1,151
- - Quorum Health Group, Inc. 42,950 1,127
- - St. Jude Medical, Inc. 38,150 1,164
- - R. P. Scherer Corp. 16,800 1,025
Schering-Plough Corp. 97,800 6,076
Stryker Corp. 29,700 1,106
- - Sybron International Corp. 26,200 1,230
- - Tenet Healthcare Corp. 70,537 2,337
United Healthcare Corp. 36,200 1,799
U.S. Surgical Corp. 39,500 1,158
- - Vencor, Inc. 41,285 1,009
- - Watson Pharmaceuticals, Inc. 41,200 1,336
- - Wellpoint Health Networks Inc.
Class A 19,703 832
--------
117,245
--------
INTEGRATED OILS (2.2%)
Amerada Hess Corp. 24,400 1,339
Amoco Corp. 23,500 2,000
Coastal Corp. 25,100 1,555
Exxon Corp. 158,000 9,668
Mobil Corp. 53,000 3,826
- - Seagull Energy Corp. 44,700 922
Texaco Inc. 7,960 433
--------
19,743
--------
OTHER ENERGY (3.8%)
- - AES Corp. 40,200 1,874
Anadarko Petroleum Corp. 19,600 1,189
Apache Corp. 31,800 1,115
- - BJ Services Co. 16,100 1,158
Burlington Resources, Inc. 37,800 1,694
- - CalEnergy Co. 30,900 888
- - Cooper Cameron Corp. 20,100 1,226
Diamond Offshore Drilling, Inc. 24,400 1,174
- - EEX Corp. 114,682 1,039
ENSCO International, Inc. 42,800 1,434
Enron Oil & Gas Co. 51,100 1,083
- - Falcon Drilling Co., Inc. 6,400 224
- - Global Marine, Inc. 48,200 1,181
- - Input/Output, Inc. 6,900 205
Mapco Inc. 22,400 1,036
- - Nabors Industries, Inc. 45,900 1,443
Noble Affiliates, Inc. 28,000 987
- - Noble Drilling Corp. 47,000 1,439
- - Oryx Energy Co. 44,650 1,139
Pioneer Natural Resources Co. 43,300 1,253
Pogo Producing Co. 30,100 888
- - Reading & Bates Corp. 34,700 1,453
- - Rowan Cos., Inc. 40,700 1,241
- - Santa Fe Energy Resources, Inc. 82,400 927
- - Smith International, Inc. 18,800 1,154
- - TransTexas Gas Corp. 50,600 750
Union Pacific Resources
Group, Inc. 62,142 1,507
Union Texas Petroleum
Holdings, Inc. 46,500 968
- - United Meridian Corp. 32,100 903
- - Western Atlas, Inc. 16,200 1,199
--------
33,771
--------
MATERIALS & PROCESSING (6.4%)
- - Airgas, Inc. 66,200 927
Albemarle Corp. 23,000 549
Allegheny Teledyne Inc. 27,142 702
- - Alumax, Inc. 30,600 1,040
Aluminum Co. of America 30,400 2,139
- - American Standard Cos., Inc. 29,900 1,146
Archer-Daniels-Midland Co. 98,347 2,133
ASARCO, Inc. 7,200 162
- - Bethlehem Steel Corp. 93,600 807
- - Burlington Industries, Inc. 1,500 21
- - Castle & Cooke Inc. 23,300 393
Centex Corp. 19,500 1,227
Champion International Corp. 26,100 1,183
Crown Cork & Seal Co., Inc. 17,500 877
E.I. du Pont de Nemours & Co. 101,600 6,102
Fluor Corp. 24,900 931
Fort James Corp. 34,587 1,323
Freeport-McMoRan Copper &
Gold, Inc. Class A 138 2
Freeport-McMoRan Copper &
Gold, Inc. Class B 11,087 175
- - Freeport-McMoRan Sulphur, Inc. 1,433 17
Georgia Gulf Corp. 14,700 450
W.R. Grace & Co. 21,300 1,713
Great Lakes Chemical Corp. 24,600 1,104
Homestake Mining Co. 97,400 864
IMC Global Inc. 42,207 1,382
- - IMC Global Inc.
Warrants Exp. 12/22/2000 2,261 9
Illinois Tool Works, Inc. 40,000 2,405
Inland Steel Industries, Inc. 47,700 817
International Paper Co. 35,600 1,535
</TABLE>
32
<PAGE> 35
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------------------
<S> <C> <C>
- - International Specialty
Products, Inc. 57,500 $ 859
- - Jefferson Smurfit Corp. 55,300 788
Johns Manville Corp. 75,900 764
Kimberly-Clark Corp. 57,696 2,845
LTV Corp. 86,800 846
Lone Star Industries, Inc. 2,000 106
Louisiana-Pacific Corp. 1,050 20
Martin Marietta Materials, Inc. 29,500 1,079
Morton International, Inc. 40,000 1,375
Newmont Gold Co. 29,100 868
Newmont Mining Corp. 47,291 1,389
Nucor Corp. 27,200 1,314
Owens Corning 29,200 997
- - Owens-Illinois, Inc. 38,400 1,457
Praxair, Inc. 37,000 1,665
Price Enterprises, Inc. 13,100 239
Reynolds Metals Co. 5,300 318
- - Sealed Air Corp. 21,300 1,315
Sigma-Aldrich Corp. 36,200 1,434
Stone Container Corp. 74,700 780
TriMas Corp. 7,700 265
Tyco International Ltd. 49,576 2,234
- - UCAR International, Inc. 25,800 1,030
- - USG Corp. 23,000 1,127
Wausau-Mosinee Paper Corp. 1,100 22
---------
57,271
---------
PRODUCER DURABLES (4.3%)
AGCO Corp. 38,200 1,117
- - American Power Conversion Corp. 45,800 1,085
- - Applied Materials, Inc. 67,400 2,028
The Boeing Co. 128,470 6,287
Caterpillar, Inc. 44,000 2,137
Clayton Homes Inc. 59,616 1,073
- - CommScope, Inc. 79,114 1,063
Cummins Engine Co., Inc. 15,800 933
Danaher Corp. 18,100 1,143
Emerson Electric Co. 47,200 2,664
- - General Semiconductor, Inc. 63,650 736
W.W. Grainger, Inc. 13,700 1,331
- - KLA-Tencor Corp. 32,000 1,235
- - LAM Research Corp. 30,700 900
- - Lexmark International Group, Inc.
Class A 33,100 1,258
Lockheed Martin Corp. 25,200 2,482
Mark IV Industries, Inc. 43,510 952
Millipore Corp. 26,100 886
Molex, Inc. 38,525 1,235
Raychem Corp. 29,800 1,283
- - Republic Industries, Inc. 67,600 1,576
- - Solectron Corp. 34,400 1,430
- - Teradyne, Inc. 34,700 1,110
- - Thermo Instrument Systems, Inc. 29,858 1,028
Wheelabrator Technologies, Inc. 36,300 583
York International Corp. 22,600 894
--------
38,449
--------
TECHNOLOGY (18.7%)
- - ADC Telecommunications, Inc. 41,000 1,714
- - Adaptec, Inc. 31,600 1,175
Adobe Systems, Inc. 27,900 1,149
- - Advanced Micro Devices, Inc. 52,900 949
- - Altera Corp. 28,600 948
- - Analog Devices, Inc. 44,533 1,233
- - Andrew Corp. 43,987 1,054
- - Apple Computer, Inc. 62,000 812
- - Arrow Electronics, Inc. 41,000 1,330
- - Ascend Communications, Inc. 52,040 1,280
- - Atmel Corp. 48,200 896
Autodesk, Inc. 26,500 977
- - BMC Software, Inc. 24,800 1,626
- - Bay Networks, Inc. 52,093 1,332
- - Cabletron Systems, Inc. 49,700 746
- - Cadence Design Systems, Inc. 62,300 1,526
- - CIENA Corp. 28,000 1,715
- - Cisco Systems, Inc. 129,900 7,250
Compaq Computer Corp. 117,540 6,634
Computer Associates
International, Inc. 63,862 3,377
- - CompUSA, Inc. 44,400 1,376
- - Computer Sciences Corp. 20,000 1,670
- - Compuware Corp. 75,600 2,422
- - DSC Communications Corp. 51,000 1,221
- - Dell Computer Corp. 66,000 5,546
- - Digital Equipment Corp. 36,900 1,365
- - EMC Corp. 85,000 2,332
Electronic Data Systems Corp. 18,900 830
- - Electronics for Imaging, Inc. 23,900 397
- - FORE Systems, Inc. 55,600 848
- - Gateway 2000, Inc. 35,200 1,148
- - Glenayre Technologies, Inc. 3,000 30
Hewlett-Packard Co. 107,500 6,719
- - Imation Corp. 25,590 409
- - Informix Corp. 144,200 689
Intel Corp. 200,300 14,065
International Business
Machines Corp. 120,900 12,642
- - Intuit, Inc. 31,800 1,314
- - Iomega Corp. 99,400 1,236
- - Komag, Inc. 47,900 710
- - LSI Logic Corp. 52,500 1,037
Linear Technology Corp. 21,200 1,220
Lucent Technologies, Inc. 83,497 6,669
- - Maxim Integrated Products, Inc. 41,600 1,438
- - Mentor Graphics Corp. 16,100 156
- - Microsoft Corp. 89,600 11,578
- - Microchip Technology, Inc. 29,800 896
- - Micron Electronics, Inc. 80,500 732
- - Micron Technology, Inc. 52,200 1,357
Motorola, Inc. 80,100 4,571
- - NCR Corp. 39,937 1,111
- - National Semiconductor Corp. 40,800 1,058
- - Network Associates, Inc. 21,800 1,151
- - Netscape Communications Corp. 35,879 872
- - NextLevel Systems, Inc. 75,100 1,342
- - Novell, Inc. 131,700 984
- - Oracle Corp. 112,675 2,511
- - Pairgain Technologies, Inc. 51,400 997
- - Parametric Technology Corp. 33,400 1,580
- - PeopleSoft, Inc. 46,400 1,804
- - Premisys Communications, Inc. 44,400 1,154
- - Quantum Corp. 76,000 1,527
- - SCI Systems, Inc. 30,000 1,307
</TABLE>
33
<PAGE> 36
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
CAPITAL APPRECIATION VALUE*
PORTFOLIO SHARES (000)
- ---------------------------------------------------------------------
<S> <C> <C>
- - Seagate Technology 63,670 $ 1,226
- - Shiva Corp. 8,000 69
- - Silicon Graphics, Inc. 83,800 1,042
- - Sterling Commerce, Inc. 34,500 1,326
- - Storage Technology Corp. 24,600 1,524
- - Sun Microsystems, Inc. 65,400 2,612
- - Sybase, Inc. 66,600 889
- - Synopsys, Inc. 27,027 965
Tandy Corp. 29,000 1,118
- - Tellabs, Inc. 35,200 1,858
Texas Instruments, Inc. 60,400 2,718
- - 3Com Corp. 82,025 2,863
Total System Services, Inc. 36,700 908
- - UNOVA, Inc. 54,200 891
- - VLSI Technology, Inc. 41,200 973
Varian Associates, Inc. 17,500 885
- - Vishay Intertechnology, Inc. 43,494 1,028
- - Western Digital Corp. 51,600 829
- - Xilinx, Inc. 32,100 1,124
---------
166,592
---------
UTILITIES (5.5%)
AT&T Corp. 61,400 3,761
- - AirTouch Communications, Inc. 79,700 3,313
- - Associated Group, Inc. 1,750 53
- - Associated Group, Inc. Class B 1,750 51
BellSouth Corp. 33,700 1,898
- - Cablevision Systems Corp. Class B 18,700 1,791
Century Telephone
Enterprises, Inc. 26,800 1,335
CINergy Corp. 5,700 218
- - Citizens Utilities Co. Class B 130,063 1,252
Columbia Gas Systems, Inc. 17,700 1,391
Comcast Corp. Class A Special 70,066 2,209
- - Cox Communications Class A 40,100 1,607
- - EXCEL Communications, Inc. 39,800 577
- - FirstEnergy Corp. 55,900 1,621
Frontier Corp. 11,400 274
MCI Communications Corp. 90,100 3,860
New Century Energies, Inc. 29,800 1,429
- - NEXTEL Communications, Inc. 63,900 1,653
- - Paging Network, Inc. 28,200 304
- - QUALCOMM, Inc. 23,200 1,172
SBC Communications Inc. 20,860 1,528
Sprint Corp. 47,000 2,755
- - Tele-Communications, Inc.
Class A 98,253 2,742
- - Tele-Communications
International, Inc. Series A 57,000 1,024
- - Tele-Communications TCI
Ventures Group Series A 44,747 1,268
Telephone & Data Systems, Inc. 23,800 1,108
Texas Utilities Co. 7,965 331
- - 360 Communications Co. 58,045 1,172
- - U.S. Cellular Corp. 28,100 871
- - U S WEST Media Group 104,500 3,017
- - Viacom Inc. Class A 6,844 280
- - WorldCom, Inc. 102,506 3,104
---------
48,969
---------
OTHER (5.6%)
AlliedSignal Inc. 78,700 3,064
CBS Corp. 118,106 3,477
- - Ceridian Corp. 30,800 1,411
- - Coltec Inc. 44,500 1,032
- - FMC Corp. 15,000 1,010
General Electric Co. 380,200 27,897
ITT Industries, Inc. 28,700 900
Lancaster Colony Corp. 13,700 778
- - Litton Industries, Inc. 20,400 1,173
Minnesota Mining &
Manufacturing Co. 29,900 2,454
Raytheon Co. Class A 3,284 162
Raytheon Co. Class B 40,700 2,055
Reynolds & Reynolds Class A 23,500 433
St. Joe Corp. 10,300 932
- - Thermo Electron Corp. 40,300 1,793
Wesco Financial Corp. 3,000 900
---------
49,471
---------
- ---------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $603,810) 892,152
- ---------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
FACE
AMOUNT
(000)
- ---------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (1.6%)
- ---------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.54%, 1/2/1998 $ 4,118 4,118
6.50%, 1/2/1998--Note E 10,595 10,595
- ----------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $14,713) 14,713
- ----------------------------------------------------------------------
TOTAL INVESTMENTS (101.6%)
(COST $618,523) 906,865
- ----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.6%)
- ----------------------------------------------------------------------
Other Assets--Note B 2,477
Liabilities--Note E (16,835)
----------
(14,358)
- ----------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------
Applicable to 44,231,285 outstanding
$.001 par value shares
(authorized 250,000,000 shares) $892,507
=======================================================================
NET ASSET VALUE PER SHARE $20.18
=======================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income-Producing Security.
ADR--American Depositary Receipt.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
AT DECEMBER 31, 1997, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $621,967 $14.06
Overdistributed Net
Investment Income (328) (.01)
Accumulated Net
Realized Losses--Note C (17,474) (.39)
Unrealized Appreciation--Note D 288,342 6.52
- ----------------------------------------------------------------------
NET ASSETS $892,507 $20.18
======================================================================
</TABLE>
34
<PAGE> 37
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. These expenses directly reduce the amount of investment income
available to pay to shareholders as dividends. 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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
GROWTH AND CAPITAL
BALANCED INCOME APPRECIATION
PORTFOLIO PORTFOLIO PORTFOLIO
---------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------
(000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends $ 368 $ 7,166 $ 5,858
Interest 2,473 68 385
---------------------------------------------------
Total Income 2,841 7,234 6,243
---------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services 19 12 12
Management and Administrative 101 501 962
Marketing and Distribution 23 87 164
Taxes (other than income taxes) 7 29 53
Custodian Fees 8 46 28
Auditing Fees 8 8 8
Shareholders' Reports 1 5 10
Annual Meeting and Proxy Costs -- 2 2
Directors' Fees and Expenses -- 1 1
---------------------------------------------------
Total Expenses 167 691 1,240
- ------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 2,674 6,543 5,003
- ------------------------------------------------------------------------------------------------------------------------------
REALIZED NET LOSS ON INVESTMENT SECURITIES SOLD (626) (199) (7,186)
- ------------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF
INVESTMENT SECURITIES 12,259 103,458 165,146
- ------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $14,307 $109,802 $162,963
==============================================================================================================================
</TABLE>
35
<PAGE> 38
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
detailed in the Statement of Operations. The amounts shown as Distributions to
shareholders from the Portfolio's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period 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>
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCED GROWTH AND INCOME
PORTFOLIO PORTFOLIO
----------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1997 1996 1997 1996
(000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 2,674 $ 1,611 $ 6,543 $ 3,404
Realized Net Gain (Loss) (626) (125) (199) (1,158)
Change in Unrealized Appreciation (Depreciation) 12,259 4,790 103,458 33,212
----------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations 14,307 6,276 109,802 35,458
----------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (2,697) (1,615) (6,484) (3,500)
Realized Capital Gain -- -- -- --
----------------------------------------------------------------
Total Distributions (2,697) (1,615) (6,484) (3,500)
----------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 46,356 21,055 249,262 104,812
Issued in Lieu of Cash Distributions 2,397 1,399 4,965 2,711
Redeemed (3,726) (2,724) (12,772) (3,299)
----------------------------------------------------------------
Net Increase from Capital Share Transactions 45,027 19,730 241,455 104,224
- ----------------------------------------------------------------------------------------------------------------------------------
Total Increase 56,637 24,391 344,773 136,182
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 63,128 38,737 234,519 98,337
----------------------------------------------------------------
End of Year $119,765 $63,128 $579,292 $234,519
==================================================================================================================================
(1)Shares Issued (Redeemed)
Issued 3,382 1,728 13,396 7,344
Issued in Lieu of Cash Distributions 169 112 254 180
Redeemed (273) (224) (671) (233)
----------------------------------------------------------------
Net Increase in Shares Outstanding 3,278 1,616 12,979 7,291
==================================================================================================================================
</TABLE>
36
<PAGE> 39
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
CAPITAL APPRECIATION
PORTFOLIO
----------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996
(000) (000)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 5,003 $ 3,593
Realized Net Gain (Loss) (7,186) (8,847)
Change in Unrealized Appreciation (Depreciation) 165,146 80,776
----------------------------------
Net Increase in Net Assets Resulting from Operations 162,963 75,522
----------------------------------
DISTRIBUTIONS
Net Investment Income (5,247) (3,520)
Realized Capital Gain -- --
----------------------------------
Total Distributions (5,247) (3,520)
----------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 233,347 194,035
Issued in Lieu of Cash Distributions 4,508 2,907
Redeemed (20,455) (5,786)
----------------------------------
Net Increase from Capital Share Transactions 217,400 191,156
- ---------------------------------------------------------------------------------------------------------------------
Total Increase 375,116 263,158
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 517,391 254,233
----------------------------------
End of Year $892,507 $517,391
=====================================================================================================================
(1)Shares Issued (Redeemed)
Issued 12,712 13,509
Issued in Lieu of Cash Distributions 229 180
Redeemed (1,141) (405)
----------------------------------
Net Increase in Shares Outstanding 11,800 13,284
=====================================================================================================================
</TABLE>
37
<PAGE> 40
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; how much it costs to
operate the Portfolio; and the extent to which the Portfolio tends to distribute
capital gains.
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. Finally, the table lists the Portfolio's
Average Commission Rate Paid, a disclosure required by the Securities and
Exchange Commission beginning in 1996. 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>
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCED PORTFOLIO
YEAR ENDED DECEMBER 31,
---------------------------------------- JUL. 25* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1997 1996 1995 DEC. 31, 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.92 $11.85 $ 9.79 $10.00
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .37 .36 .31 .09
Net Realized and Unrealized Gain (Loss) on Investments 1.75 1.07 2.07 (.21)
---------------------------------------------------------
Total from Investment Operations 2.12 1.43 2.38 (.12)
---------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.37) (.36) (.32) (.09)
Distributions from Realized Capital Gains -- -- -- --
---------------------------------------------------------
Total Distributions (.37) (.36) (.32) (.09)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $14.67 $12.92 $11.85 $ 9.79
===================================================================================================================================
TOTAL RETURN** 16.55% 12.21% 24.52% -1.40%
===================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $120 $63 $39 $17
Ratio of Total Expenses to Average Net Assets 0.17% 0.20% 0.20% 0%
Ratio of Net Investment Income to Average Net Assets 2.77% 3.04% 3.06% 2.88%+
Portfolio Turnover Rate 7% 5% 5% 0%
Average Commission Rate Paid $.0140 $.0216 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Subscription period for the Portfolio was July 25, 1994, to September 5,
1994, during which time all assets were held in money market instruments.
Performance measurement begins September 6, 1994.
**Total returns do not reflect the 2% redemption fee on shares held less than
one year, or the 1% redemption fee on shares held at least one year but less
than five years.
+Annualized.
38
<PAGE> 41
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
GROWTH AND INCOME PORTFOLIO
YEAR ENDED DECEMBER 31,
---------------------------------- JUL. 25* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1997 1996 1995 DEC. 31, 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $15.89 $13.16 $ 9.77 $10.00
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .29 .27 .25 .09
Net Realized and Unrealized Gain (Loss) on Investments 4.98 2.74 3.39 (.23)
-------------------------------------------------------
Total from Investment Operations 5.27 3.01 3.64 (.14)
-------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.28) (.28) (.25) (.09)
Distributions from Realized Capital Gains -- -- -- --
-------------------------------------------------------
Total Distributions (.28) (.28) (.25) (.09)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $20.88 $15.89 $13.16 $9.77
===================================================================================================================================
TOTAL RETURN** 33.31% 23.03% 37.53% -1.70%
===================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $579 $235 $98 $31
Ratio of Total Expenses to Average Net Assets 0.17% 0.20% 0.20% 0.20%+
Ratio of Net Investment Income to Average Net Assets 1.62% 2.04% 2.37% 2.82%+
Portfolio Turnover Rate 2% 7% 6% 0%
Average Commission Rate Paid $.0130 $.0199 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Subscription period for the Portfolio was July 25, 1994, to September 5,
1994, during which time all assets were held in money market instruments.
Performance measurement begins September 6, 1994.
**Total returns do not reflect the 2% redemption fee on shares held less than
one year, or the 1% redemption fee on shares held at least one year but less
than five years.
+Annualized.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
CAPITAL APPRECIATION PORTFOLIO
YEAR ENDED DECEMBER 31,
------------------------------------- JUL. 25* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1997 1996 1995 DEC. 31, 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $15.95 $13.28 $ 9.95 $10.00
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .11 .12 .08 .04
Net Realized and Unrealized Gain (Loss) on Investments 4.24 2.66 3.34 (.05)
----------------------------------------------------
Total from Investment Operations 4.35 2.78 3.42 (.01)
----------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.12) (.11) (.09) (.04)
Distributions from Realized Capital Gains -- -- -- --
----------------------------------------------------
Total Distributions (.12) (.11) (.09) (.04)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $20.18 $15.95 $13.28 $ 9.95
==================================================================================================================================
TOTAL RETURN** 27.29% 20.92% 34.38% -0.50%
==================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $893 $517 $254 $70
Ratio of Total Expenses to Average Net Assets 0.17% 0.20% 0.20% 0.20%+
Ratio of Net Investment Income to Average Net Assets 0.70% 0.91% 0.97% 1.26%+
Portfolio Turnover Rate 4% 12% 7% 1%
Average Commission Rate Paid $.0199 $.0214 N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Subscription period for the Portfolio was July 25, 1994, to September 5,
1994, during which time all assets were held in money market instruments.
Performance measurement begins September 6, 1994.
**Total returns do not reflect the 2% redemption fee on shares held less than
one year, or the 1% redemption fee on shares held at least one year but less
than five years.
+Annualized
39
<PAGE> 42
NOTES TO FINANCIAL STATEMENTS
Vanguard Tax-Managed Fund is registered under the Investment Company Act of 1940
as a diversified open-end investment company, or mutual fund, and comprises the
Balanced, Growth and Income, and Capital Appreciation Portfolios.
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: Securities listed on an exchange 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. Unlisted securities held by the Growth and Income
Portfolio are valued at the latest quoted bid prices; such securities held by
the Capital Appreciation Portfolio and the equity portion of the Balanced
Portfolio are valued at the mean of the latest quoted bid and asked prices.
Bonds, and temporary cash investments acquired more than 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
credit ratings), both as furnished by independent pricing services. Other
temporary cash investments are valued at amortized cost, which approximates
market value.
2. 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.
3. REPURCHASE AGREEMENTS: The Growth and Income Portfolio and the
Capital Appreciation Portfolio, 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.
4. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
5. OTHER: Dividend income is recorded on the ex-dividend date.
Security transactions are accounted for on the date 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 original
issue discounts on municipal bonds are amortized and accreted, respectively, to
interest income over the lives of the respective securities. Fees assessed on
redemptions of capital shares are credited to paid in capital.
B. The Vanguard Group provides investment advisory, corporate management,
administrative, marketing, and distribution services. The costs of such services
are allocated to the Fund under methods approved by the Board of Directors. At
December 31, 1997, the Fund had contributed capital aggregating $102,000 to
Vanguard (included in Other Assets), representing 0.5% of Vanguard's
capitalization. The Fund's Directors and officers are also Directors and
officers of Vanguard.
C. During the year ended December 31, 1997, purchases and sales of investment
securities other than temporary cash investments were:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(000)
---------------------------------
PORTFOLIO PURCHASES SALES
- --------------------------------------------------------------------------------
<S> <C> <C>
Balanced $ 48,974 $ 6,452
Growth and Income 247,129 6,836
Capital Appreciation 244,157 26,906
- --------------------------------------------------------------------------------
</TABLE>
40
<PAGE> 43
At December 31, 1997, the Fund had available realized capital losses to
offset future net capital gains through the following fiscal year-ends:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
EXPIRATION
FISCAL YEAR(S) ENDING AMOUNT
PORTFOLIO DECEMBER 31, (000)
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Balanced 2003-2006 $ 796
Growth and Income 2003-2005 1,650
Capital Appreciation 2003-2006 17,474
- -----------------------------------------------------------------------------------------
</TABLE>
D. At December 31, 1997, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
(000)
-----------------------------------------------------------------
APPRECIATED DEPRECIATED NET UNREALIZED
PORTFOLIO SECURITIES SECURITIES APPRECIATION
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced $ 23,338 $ (1,362) $ 21,976
Growth and Income 157,660 (4,246) 153,414
Capital Appreciation 305,567 (17,225) 288,342
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
E. The market value of Capital Appreciation Portfolio securities on loan to
brokers/dealers at December 31, 1997, was $8,857,000, for which the Portfolio
held cash collateral of $10,595,000. Cash collateral received is invested in
repurchase agreements.
41
<PAGE> 44
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
Vanguard Tax-Managed 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 present fairly, in all material respects, the financial position of
Balanced Portfolio, Growth and Income Portfolio, and Capital Appreciation
Portfolio (constituting Vanguard Tax-Managed Fund, hereafter referred to as the
"Fund") at December 31, 1997, the results of each of their operations for the
year then ended, the changes in each of their net assets for each of the two
years in the period then ended 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
December 31, 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
February 6, 1998
42
<PAGE> 45
SPECIAL 1997 TAX INFORMATION (UNAUDITED) FOR VANGUARD TAX-MANAGED FUND
This information for the fiscal year ended December 31, 1997, is included
pursuant to provisions of the Internal Revenue Code.
The Balanced Portfolio designates 86.99% of its income dividends as
exempt-interest dividends.
For corporate shareholders, the following percentage of investment
income (dividend income plus short-term gains, if any) qualifies for the
dividends-received deduction.
<TABLE>
<CAPTION>
- -------------------------------------------------------------
<S> <C>
Balanced Portfolio 100%*
Growth and Income Portfolio 100
Capital Appreciation Portfolio 100
- -------------------------------------------------------------
</TABLE>
*The percentage applies only to the taxable ordinary income that has been
reported on Form 1099-DIV.
43
<PAGE> 46
DIRECTORS 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," "Standard & Poor's," "S&P," 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> 47
VANGUARD FAMILY OF FUNDS
STOCK FUNDS
Convertible Securities Fund
Equity Income Fund
Explorer Fund
Growth and Income Portfolio
Horizon Fund
Aggressive Growth Portfolio
Capital Opportunity Portfolio
Global Equity Portfolio
Index Trust
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Small Capitalization Stock
Portfolio
Total Stock Market Portfolio
Value Portfolio
Institutional Index Fund
International Equity Index Fund
Emerging Markets Portfolio
European Portfolio
Pacific Portfolio
International Growth Portfolio
International Value Portfolio
Morgan Growth Fund
PRIMECAP Fund
Selected Value Portfolio
Specialized Portfolios
Energy Portfolio
Gold & Precious Metals
Portfolio
Health Care Portfolio
REIT Index Portfolio
Utilities Income Portfolio
Tax-Managed Fund
Capital Appreciation
Portfolio
Growth and Income Portfolio
Total International Portfolio
Trustees' Equity Fund
U.S. Portfolio
U.S. Growth Portfolio
Windsor Fund
Windsor II
BALANCED FUNDS
Asset Allocation Fund
Balanced Index Fund
Horizon Fund
Global Asset Allocation
Portfolio
LifeStrategy Portfolios
Conservative Growth
Portfolio
Growth Portfolio
Income Portfolio
Moderate Growth Portfolio
STAR Portfolio
Tax-Managed Fund
Balanced Portfolio
Wellesley Income Fund
Wellington Fund
BOND FUNDS
Admiral Funds
Intermediate-Term U.S.
Treasury Portfolio
Long-Term U.S. Treasury
Portfolio
Short-Term U.S. Treasury
Portfolio
Bond Index Fund
Intermediate-Term Bond
Portfolio
Long-Term Bond Portfolio
Short-Term Bond Portfolio
Total Bond Market Portfolio
Fixed Income Securities Fund
GNMA Portfolio
High Yield Corporate Portfolio
Intermediate-Term Corporate
Portfolio
Intermediate-Term U.S.
Treasury Portfolio
Long-Term Corporate
Portfolio
Long-Term U.S. Treasury
Portfolio
Short-Term Corporate
Portfolio
Short-Term Federal Portfolio
Short-Term U.S. Treasury
Portfolio
Municipal Bond Fund
High-Yield Portfolio
Insured Long-Term Portfolio
Intermediate-Term Portfolio
Limited-Term Portfolio
Long-Term Portfolio
Short-Term Portfolio
Preferred Stock Fund
State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
MONEY MARKET FUNDS
Admiral Funds
U.S. Treasury Money Market
Portfolio
Money Market Reserves
Federal Portfolio
Prime Portfolio
Municipal Bond Fund
Money Market Portfolio
Treasury Money Market Portfolio
State Tax-Free Funds
(CA, NJ, NY, OH, PA)
Q870-12/1997
(C) 1998 Vanguard Marketing
Corporation, Distributor
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
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.
