--------------------------------------------------------------------------------
XXXXXXX XXXXX VARIABLE
-------------------------------------------------------------------------
SERIES FUNDS, INC.
-------------------------------------------------------------------------
PAGE
----
American Balanced Fund................ 1
Balanced Capital Focus Fund........... 15
Basic Value Focus Fund................ 29
Developing Capital Markets Focus
Fund................................ 44
Domestic Money Market Fund............ 64
Focus Twenty Select Fund.............. 76
Fundamental Growth Focus Fund......... 88
Global Bond Focus Fund................ 100
Global Growth Focus Fund.............. 114
Global Strategy Focus Fund............ 128
Government Bond Fund.................. 147
High Current Income Fund.............. 159
Index 500 Fund........................ 177
International Equity Focus Fund....... 194
Natural Resources Focus Fund.......... 215
Prime Bond Fund....................... 229
Quality Equity Fund................... 244
Reserve Assets Fund................... 259
Small Cap Value Focus Fund............ 270
Utilities and Telecommunications Focus
Fund................................ 287
Annual Report
December 31, 2000
--------------------------------------------------------------------------------
XXXXXXX XXXXX VARIABLE SERIES FUNDS, INC.--BALANCED CAPITAL FOCUS FUND
DECEMBER 31, 2000--ANNUAL REPORT
--------------------------------------------------------------------------------
DEAR SHAREHOLDER:
FISCAL YEAR IN REVIEW
The year 2000 proved to be a solid one for Balanced Capital Focus Fund. Our
emphasis on risk management and capital preservation proved decidedly
appropriate in an extremely challenging investment environment, allowing the
Fund to achieve above-average positive returns for the year. For the fiscal year
ended December 31, 2000, the Fund's Class A Shares had a total return of +6.43%.
Throughout the 12-month period, we maintained a conservative asset allocation
position with equities averaging 61.5% of net assets. In our view, slowing
economic and corporate earnings growth coupled with high equity market
valuations did not represent an attractive formula for stock price appreciation.
In contrast, bonds appeared to offer excellent value as inflation-adjusted
interest rates approached historically high levels while inflationary pressures
continued to moderate. Our strategy was justified as bonds significantly
outperformed stocks for the year. The unmanaged Xxxxxxx Xxxxx Domestic
Fixed-Income Master Index, the Fund's fixed-income benchmark, generated a total
return of +11.6% for the year ended December 31, 2000 while our equity
benchmark, the Standard & Poor's 500 (S&P 500) Index, declined 9.1% on a total
return basis. In addition, the value style of investing, our chosen approach to
stock selection, handsomely outpaced the growth style of investing for the year
as investors gravitated toward more stable, predictable and less expensive
companies. The unmanaged Xxxxxxx 1000 Value Index had a +7% total return in
2000, while the unmanaged Xxxxxxx 1000 Growth Index declined over 22%. Finally,
our concentration in consumer product, financial and energy companies during the
period resulted in positive equity returns that outpaced all major market
indexes. Overall, our cautious approach served our shareholders well this year
and represented the most significant factor in the Fund's outperformance.
MARKET REVIEW
The second half of 2000 proved to be an extraordinarily difficult period for
the US equity market. Mounting evidence of a rapid economic slowdown,
substantial negative revisions to corporate earnings expectations and tight
liquidity conditions stemming from the Federal Reserve Board's monetary policy
initiatives led to sharp declines in stock prices. For the first three months of
the period, market declines were relatively modest, ranging from 1% for the S&P
500 Index to 7% for the NASDAQ Composite Index. Investor anxiety over the
direction of the "four Es"--the economy, earnings, energy and the euro--combined
with earnings shortfalls from such prominent companies as Nokia Oyj, Xxxxxx.xxx,
Inc. and Computer Associates International, Inc. perpetuated the correction in
equity prices that began in the spring. By the fourth quarter, accelerating
declines in a number of important economic indicators suggested the economy was
heading toward a recession. As a result, corporate earnings expectations
continued to decline sharply and many forecasters predicted no growth in
corporate profits in 2001. The prevailing high equity market valuations could
not be supported by such fundamental weakness, and stock prices corrected
dramatically.
For the six-month period ended December 31, 2000, the S&P 500 Index declined
some 9%, concluding its worse year of performance since 1974. Extremely volatile
and highly valued technology stocks suffered most, with the NASDAQ Index
dropping almost 40% and 2000 representing its poorest performance year on
record. The value style of investing significantly outpaced the growth style of
investing during this period, as indicated by the style-specific Xxxxxxx
indexes. The Xxxxxxx 1000 Value Index rose 11.5% over the six months, while the
Xxxxxxx 1000 Growth Index declined 27.2%. Xxxxx proved to be the asset class of
choice with the unmanaged Xxxxxxx Xxxxx Domestic Bond Master Index providing a
7.4% return for the six-month period ended December 31, 2000 as economic
weakness was expected to constrain inflationary pressures. Xxxxx also
represented a safe haven for investors in a deteriorating equity market. Our
cash equivalents earned a +3.1% return during the period.
PORTFOLIO MATTERS
During the six-month period ended December 31, 2000, Balanced Capital Focus
Fund performed quite well. Our equity holdings generated positive returns and
outpaced all major market indexes. This positive performance was driven by solid
contributions from our positions in healthcare, consumer products and selected
energy companies. By contrast, holdings in technology and telecommunications
performed poorly. Our bonds underperformed the unmanaged benchmark Xxxxxxx Xxxxx
Domestic Fixed-Income Master Index for the period as the negative impact of
dramatic widening in credit spreads more than offset the positive contribution
from our long-duration position.
15
--------------------------------------------------------------------------------
While recent stock price declines have helped to reduce excessively high
valuations and eliminated much of the speculative fervor that gripped the market
earlier in 2000, we believe corporate earnings expectations still remain too
high given the slowing pace of economic growth and rising cost pressures.
Consequently, we expect the current volatile and unpredictable investment
conditions to persist. Our asset allocation as of December 31, 2000 was: 60.1%
of net assets in equities, 30.8% in fixed-income securities and 9.1% in cash
equivalents. This compared to 63.3% in equities, 32.5% in fixed income
securities and 5.1% in cash equivalents at June 30, 2000. While this
conservative investment stance served our investors well in 2000, the
precipitous decline in many stock groups over the past few months suggests that
some attractive new investment opportunities may be forthcoming and a more
aggressive investment strategy may be appropriate. We will look to exploit such
opportunities to improve our risk/reward profile and enhance the Fund's total
return potential.
Over the past six months, we continued to adjust Fund holdings to increase
quality and better control risk. Within the equity portfolio, we continued to
build new positions in high-quality companies such as General Electric Company,
The Home Depot, Inc. and The Reader's Digest Association, Inc., which we believe
offer strong competitive positions, solid financial characteristics and
attractive valuations. We increased our holdings in a number of technology
companies that had suffered severe price declines. These included Alcatel (ADR),
Compaq Computer Corporation and Tellabs, Inc., companies that we believe enjoy
superior growth potential while selling at reasonable prices. We eliminated
certain telecommunications names from the portfolio on the expectation that
intensifying competition may constrain appreciation potential. We also reduced
holdings that had reached targeted valuation levels or that had become
excessively large positions within the Fund, including The Boeing Company,
Anheuser-Xxxxx Companies, Inc. and Mellon Financial Corporation.
Within the Fund's fixed-income portfolio, we sought to maintain yield in a
declining interest rate environment by increasing our exposure to
investment-grade corporate bonds and reducing positions in US Treasury
securities and high-yield corporate bonds. Investment-grade corporate xxxxx xxxx
from 58.4% of fixed-income assets at June 30, 2000 to 60.1% of fixed-income
assets as of December 31, 2000. Conversely, US Treasury securities declined from
32.8% of fixed-income assets to 32.1% during the same period, and high-yield
corporate bonds fell from 8.8% to 7.8%. We maintained average credit quality at
a solid A2/A, while our average yield to maturity declined 68 basis points
(0.68%) to 7.02%, a significantly smaller contraction than the market averages.
Balanced Capital Focus Fund seeks to invest in those companies that Fund
management believes are above-average companies whose stocks sell at
below-average valuations. In general, the Fund's holdings have generated
superior returns on shareholders' equity and have stronger balance sheets while
offering faster earnings growth than the average company as measured by the S&P
500 Index. At year-end, however, these stocks sold at an average price to
earnings ratio of 20.7 times the estimated 2001 earnings per share compared to
24.4 times for the S&P 500, at 5.2 times current book value per share as
compared to 6.5 times for the S&P 500, and provided a competitive dividend
yield. We believe this formula could provide superior risk-adjusted equity
returns over time.
IN CONCLUSION
We appreciate your investment in Balanced Capital Focus Fund of Xxxxxxx Xxxxx
Variable Series Funds, Inc., and we look forward to sharing our investment
outlook and strategies with you in our next report to shareholders.
Sincerely,
/s/ Xxxxx X. Xxxxx
Xxxxx X. Xxxxx
President and Director
/s/ Xxxx Xxxxxxxxxxx
Xxxx Xxxxxxxxxxx
Senior Vice President and Senior Portfolio Manager
January 19, 2001
16
--------------------------------------------------------------------------------
XXXXXXX XXXXX VARIABLE SERIES FUNDS, INC.--BALANCED CAPITAL FOCUS FUND
TOTAL RETURN BASED ON A $10,000 INVESTMENT--CLASS A SHARES
--------------------------------------------------------------------------------
XXXXXXX XXXXX DOMESTIC
BALANCED CAPITAL FOCUS STANDARD & POOR'S 500 FIXED-INCOME MASTER
FUND+--CLASS A SHARES* INDEX++ INDEX+++
---------------------- --------------------- ----------------------
6/05/98** 10000.00 10000.00 10000.00
12/98 9760.00 11128.00 10556.00
12/99 10526.00 13469.00 10455.00
12/00 11203.00 12243.00 11681.00
* Assuming transaction costs and other operating expenses, including advisory
fees. Does not include insurance-related fees and expenses.
** Commencement of operations.
+ The Fund utilizes a fully managed investment policy through investments in
equity, debt (including money market) and convertible securities.
++ This unmanaged broad-based index is comprised of US common stocks.
+++ This unmanaged index is comprised of the entire universe of domestic
investment-grade bonds, including US Treasury bonds, corporate bonds and
mortgages.
----------------------------------------------------------------------------
XXXXXXX XXXXX VARIABLE SERIES FUNDS, INC.--BALANCED CAPITAL FOCUS FUND
AVERAGE ANNUAL TOTAL RETURN--CLASS A SHARES*
----------------------------------------------------------------------------
PERIOD COVERED % RETURN
----------------------------------------------------------------------------
One Year Ended 12/31/00 +6.43%
----------------------------------------------------------------------------
Inception (6/05/98) through 12/31/00 +4.51
----------------------------------------------------------------------------
----------------------------------------------------------------------------
XXXXXXX XXXXX VARIABLE SERIES FUNDS, INC.--BALANCED CAPITAL FOCUS FUND
RECENT PERFORMANCE RESULTS*
----------------------------------------------------------------------------
6 MONTH 12 MONTH
AS OF DECEMBER 31, 2000 TOTAL RETURN TOTAL RETURN
-----------------------------------------------------------------------------------------
Class A Shares +6.77% +6.43%
-----------------------------------------------------------------------------------------
*
Total investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date. Insurance-related fees
and expenses are not reflected in these returns.
Past results shown should not be considered a representation of future
performance.
17
--------------------------------------------------------------------------------
XXXXXXX XXXXX VARIABLE SERIES FUNDS, INC.--BALANCED CAPITAL FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2000
--------------------------------------------------------------------------------
FACE PERCENT OF
INDUSTRY AMOUNT BONDS VALUE NET ASSETS
-----------------------------------------------------------------------------------------------------------------------
AEROSPACE & DEFENSE $ 500,000 Lockheed Xxxxxx Corp., 7.70% due 6/15/2008... $ 528,070 1.5%
-----------------------------------------------------------------------------------------------------------------------
AUTO--RELATED 500,000 General Motors Acceptance Corp., 6.75% due
5/01/2028.................................. 436,295 1.2
-----------------------------------------------------------------------------------------------------------------------
BANKING 500,000 Provident Bank, 6.375% due 1/15/2004......... 477,997 1.3
-----------------------------------------------------------------------------------------------------------------------
CHEMICALS 500,000 Airgas Inc., 7.14% due 3/08/2004............. 466,811 1.3
-----------------------------------------------------------------------------------------------------------------------
FINANCE 500,000 Household Finance Corp., 7.875% due
3/01/2007.................................. 525,425 1.4
-----------------------------------------------------------------------------------------------------------------------
HOME--BUILDERS 500,000 Champion Enterprises, Inc., 7.625% due
5/15/2009.................................. 403,200 1.1
-----------------------------------------------------------------------------------------------------------------------
NATURAL GAS SUPPLIERS 500,000 The Coastal Corporation, 6.50% due
6/01/2008.................................. 491,070 1.4
-----------------------------------------------------------------------------------------------------------------------
OIL FIELD EQUIPMENT 250,000 R & B Falcon Corporation, 6.75% due
4/15/2005.................................. 235,000 0.6
-----------------------------------------------------------------------------------------------------------------------
OIL--INTEGRATED 500,000 Occidental Petroleum Corp., 7.65% due
2/15/2006.................................. 523,565 1.4
500,000 Occidental Petroleum Corp. (MOPPRS), 6.40%
due 4/01/2003(a)........................... 500,510 1.4
500,000 Xxxxx Companc SA, 8.125% due 7/15/2007(b).... 410,000 1.1
----------- -----
1,434,075 3.9
-----------------------------------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS 500,000 Champion International Corp., 6.65% due
12/15/2037................................. 486,870 1.3
-----------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 500,000 Pacific Telecom, Inc., 6.625% due
10/20/2005................................. 494,957 1.4
-----------------------------------------------------------------------------------------------------------------------
TRANSPORTATION 250,000 Northwest Airlines, Inc., 7.875% due
3/15/2008.................................. 236,747 0.6
-----------------------------------------------------------------------------------------------------------------------
TRAVEL & LODGING 500,000 Royal Caribbean Cruises Ltd., 7.25% due
8/15/2006.................................. 475,410 1.3
-----------------------------------------------------------------------------------------------------------------------
US GOVERNMENT OBLIGATIONS 500,000 US Treasury Inflation Index, 3.625% due
1/15/2008.................................. 534,559 1.5
US Treasury Notes & Bonds:
1,000,000 5.625% due 2/15/2006....................... 1,023,280 2.8
250,000 6.50% due 10/15/2006....................... 266,798 0.7
1,000,000 5.50% due 2/15/2008........................ 1,018,120 2.8
750,000 5.50% due 8/15/2028........................ 743,670 2.1
----------- -----
3,586,427 9.9
-----------------------------------------------------------------------------------------------------------------------
UTILITIES--COMMUNICATIONS 500,000 Sprint Capital Corporation, 6.90% due
5/01/2019.................................. 419,710 1.2
-----------------------------------------------------------------------------------------------------------------------
YANKEE CORPORATES*** 500,000 Enersis SA, 6.60% due 12/01/2026(1).......... 492,805 1.4
-----------------------------------------------------------------------------------------------------------------------
TOTAL BONDS (COST--$11,129,003) 11,190,869 30.8
-----------------------------------------------------------------------------------------------------------------------
SHARES
HELD COMMON STOCKS
-----------------------------------------------------------------------------------------------------------------------
AEROSPACE 10,000 The Boeing Company........................... 660,000 1.8
-----------------------------------------------------------------------------------------------------------------------
AEROSPACE & DEFENSE 6,000 General Dynamics Corporation................. 468,000 1.3
8,000 Raytheon Company (Class B)................... 248,500 0.7
----------- -----
716,500 2.0
-----------------------------------------------------------------------------------------------------------------------
BANKING 10,000 The Chase Manhattan Corporation.............. 454,375 1.3
14,000 Mellon Financial Corporation................. 688,625 1.9
13,500 Xxxxx Fargo Company.......................... 751,781 2.1
----------- -----
1,894,781 5.3
-----------------------------------------------------------------------------------------------------------------------
BEVERAGES 14,500 Anheuser-Xxxxx Companies, Inc. .............. 659,750 1.8
-----------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS 6,000 Minnesota Mining and Manufacturing Company
(3M)....................................... 723,000 2.0
-----------------------------------------------------------------------------------------------------------------------
18
--------------------------------------------------------------------------------
XXXXXXX XXXXX VARIABLE SERIES FUNDS, INC.--BALANCED CAPITAL FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2000 (CONTINUED)
--------------------------------------------------------------------------------
SHARES PERCENT OF
INDUSTRY HELD COMMON STOCKS VALUE NET ASSETS
-----------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT 12,500 +CommScope, Inc. ............................ $ 207,031 0.6%
7,500 Scientific-Atlanta, Inc. .................... 244,219 0.7
10,000 +Tellabs, Inc. .............................. 564,375 1.5
----------- -----
1,015,625 2.8
-----------------------------------------------------------------------------------------------------------------------
COMPUTER SERVICES/SOFTWARE 5,000 International Business Machines
Corporation................................ 425,000 1.2
-----------------------------------------------------------------------------------------------------------------------
COMPUTERS 20,000 Compaq Computer Corporation.................. 301,000 0.8
-----------------------------------------------------------------------------------------------------------------------
COSMETICS 14,500 Avon Products, Inc. ......................... 694,187 1.9
-----------------------------------------------------------------------------------------------------------------------
DIVERSIFIED COMPANIES 14,000 ITT Industries, Inc.......................... 542,500 1.5
7,500 United Technologies Corporation.............. 589,688 1.6
----------- -----
1,132,188 3.1
-----------------------------------------------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT 6,000 General Electric Company..................... 287,625 0.8
-----------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES 11,500 Citigroup Inc. .............................. 587,219 1.6
8,000 Federal National Mortgage Association........ 694,000 1.9
6,500 Xxxxxxxx Financial, Inc. .................... 256,344 0.7
----------- -----
1,537,563 4.2
-----------------------------------------------------------------------------------------------------------------------
FOOTWEAR 10,000 Nike, Inc. (Class B)......................... 558,125 1.5
-----------------------------------------------------------------------------------------------------------------------
HOSPITAL MANAGEMENT 10,000 HCA-The Healthcare Corporation............... 440,100 1.2
17,000 +Xxxxx Healthcare Corporation................ 755,438 2.1
----------- -----
1,195,538 3.3
-----------------------------------------------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS 10,500 Xxxxxxxx-Xxxxx Corporation................... 742,245 2.0
-----------------------------------------------------------------------------------------------------------------------
INSURANCE 8,000 ACE Limited.................................. 339,500 0.9
7,000 American International Group, Inc. .......... 689,937 1.9
8,800 XL Capital Ltd. (Class A).................... 768,900 2.1
----------- -----
1,798,337 4.9
-----------------------------------------------------------------------------------------------------------------------
MACHINERY & MACHINE TOOLS 3,000 +SPX Corporation............................. 324,563 0.9
-----------------------------------------------------------------------------------------------------------------------
NATURAL GAS SUPPLIERS 8,500 The Coastal Corporation...................... 750,656 2.1
15,500 The Xxxxxxxx Companies, Inc. ................ 619,031 1.7
----------- -----
1,369,687 3.8
-----------------------------------------------------------------------------------------------------------------------
OIL FIELD EQUIPMENT 12,000 Halliburton Company.......................... 435,000 1.2
-----------------------------------------------------------------------------------------------------------------------
OIL--RELATED 4,000 Apache Corporation........................... 280,250 0.8
-----------------------------------------------------------------------------------------------------------------------
PETROLEUM 9,500 Anadarko Petroleum Corporation............... 675,260 1.9
-----------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS 10,500 American Home Products Corporation........... 667,275 1.8
10,000 Pharmacia Corporation........................ 610,000 1.7
----------- -----
1,277,275 3.5
-----------------------------------------------------------------------------------------------------------------------
PUBLISHING 3,500 The Reader's Digest Association, Inc. (Class
A)......................................... 136,938 0.4
-----------------------------------------------------------------------------------------------------------------------
RESTAURANTS 20,000 XxXxxxxx'x Corporation....................... 680,000 1.9
-----------------------------------------------------------------------------------------------------------------------
RETAIL--SPECIALTY 6,000 The Home Depot, Inc. ........................ 274,125 0.8
-----------------------------------------------------------------------------------------------------------------------
SEMICONDUCTORS 15,000 Motorola, Inc. .............................. 303,750 0.8
-----------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS 8,000 SBC Communications Inc. ..................... 382,000 1.1
12,000 Verizon Communications....................... 601,500 1.6
----------- -----
983,500 2.7
-----------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS EQUIPMENT 9,500 Alcatel (ADR)*............................... 531,406 1.5
-----------------------------------------------------------------------------------------------------------------------
WIRELESS COMMUNICATIONS-- 8,000 +Nextel Communications, Inc. (Class A)....... 197,500 0.5
DOMESTIC PAGING & CELLULAR
-----------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST--$18,298,522) 21,810,718 60.1
-----------------------------------------------------------------------------------------------------------------------
19
--------------------------------------------------------------------------------
XXXXXXX XXXXX VARIABLE SERIES FUNDS, INC.--BALANCED CAPITAL FOCUS FUND
SCHEDULE OF INVESTMENTS AS OF DECEMBER 31, 2000 (CONCLUDED)
--------------------------------------------------------------------------------
FACE PERCENT OF
AMOUNT SHORT-TERM SECURITIES VALUE NET ASSETS
-----------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER** $ 500,000 AEP Credit Inc., 6.55% due 1/09/2001......... $ 498,999 1.4%
974,000 General Motors Acceptance Corp., 6.75% due
1/02/2001.................................. 973,270 2.7
700,000 Verizon Global Funding, 6.54% due
1/18/2001.................................. 697,457 1.9
----------- -----
2,169,726 6.0
-----------------------------------------------------------------------------------------------------------------------
US GOVERNMENT AGENCY 900,000 Freddie Mac Participation Certificates, 6.35%
OBLIGATIONS** due 1/16/2001.............................. 897,143 2.5
-----------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES
(COST--$3,066,869) 3,066,869 8.5
-----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST--$32,494,394)........ 36,068,456 99.4
OTHER ASSETS LESS LIABILITIES................ 218,471 0.6
----------- -----
NET ASSETS................................... $36,286,927 100.0%
=========== =====
-----------------------------------------------------------------------------------------------------------------------
+ Non-income producing security.
* American Depositary Receipts (ADR).
** Commercial Paper and certain US Government Agency Obligations are traded on a
discount basis; the interest rates shown reflect the discount rates paid at the
time of purchase by the Fund.
*** Corresponding industry group for foreign securities:
(1) Industrial.
(a) Floating rate note.
(b) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
See Notes to Financial Statements.
20
--------------------------------------------------------------------------------
XXXXXXX XXXXX VARIABLE SERIES FUNDS, INC.--BALANCED CAPITAL FOCUS FUND
STATEMENT OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 2000
--------------------------------------------------------------------------------
ASSETS:
Investments, at value (identified cost--$32,494,394)........ $36,068,456
Receivables:
Interest.................................................. $209,346
Capital shares sold....................................... 21,890
Dividends................................................. 13,453 244,689
--------
Deferred organization expenses.............................. 3,867
Prepaid expenses and other assets........................... 25,939
-----------
Total assets................................................ 36,342,951
-----------
-----------------------------------------------------------------------------------
LIABILITIES:
Payables:
Custodian bank............................................ 22,252
Investment adviser........................................ 15,999
Securities purchased...................................... 4,732
Capital shares redeemed................................... 92 43,075
--------
Accrued expenses and other liabilities...................... 12,949
-----------
Total liabilities........................................... 56,024
-----------
-----------------------------------------------------------------------------------
NET ASSETS.................................................. $36,286,927
===========
-----------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.10 par value, 100,000,000
shares authorized+........................................ $ 345,527
Paid-in capital in excess of par............................ 33,149,230
Accumulated distributions in excess of investment
income--net............................................... (34,099)
Accumulated realized capital losses on investments--net..... (570,118)
Accumulated distributions in excess of realized capital
gains on investments--net................................. (177,746)
Unrealized appreciation on investments and foreign currency
transactions--net......................................... 3,574,133
-----------
NET ASSETS.................................................. $36,286,927
===========
-----------------------------------------------------------------------------------
NET ASSET VALUE:
Class A--Based on net assets of $36,286,927 and 3,455,272
shares outstanding........................................ $ 10.50
===========
-----------------------------------------------------------------------------------
+ The Fund is also authorized to issue 100,000,000 Class B Shares.
See Notes to Financial Statements.
21
--------------------------------------------------------------------------------
XXXXXXX XXXXX VARIABLE SERIES FUNDS, INC.--BALANCED CAPITAL FOCUS FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000
--------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest and discount earned................................ $ 850,183
Dividends (net of $1,183 foreign withholding tax)........... 266,006
----------
Total income................................................ 1,116,189
----------
-------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees.................................... $ 197,159
Custodian fees.............................................. 15,296
Professional fees........................................... 10,079
Accounting services......................................... 7,419
Printing and shareholders reports........................... 5,308
Transfer agent fees......................................... 3,759
Pricing services............................................ 2,410
Amortization of organization expenses....................... 1,600
Directors' fees and expenses................................ 692
Other....................................................... 1,774
----------
Total expenses.............................................. 245,496
----------
Investment income--net...................................... 870,693
----------
-------------------------------------------------------------------------------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS & FOREIGN
CURRENCY TRANSACTIONS--NET:
Realized loss on investments--net........................... (710,637)
Change in unrealized appreciation on:
Investments--net.......................................... 1,950,433
Foreign currency transactions--net........................ 5 1,950,438
---------- ----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $2,110,494
==========
-------------------------------------------------------------------------------------
See Notes to Financial Statements.
22
--------------------------------------------------------------------------------
XXXXXXX XXXXX VARIABLE SERIES FUNDS, INC.--BALANCED CAPITAL FOCUS FUND
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
FOR THE
YEAR ENDED
DECEMBER 31,
--------------------------
INCREASE (DECREASE) IN NET ASSETS: 2000 1999
----------------------------------------------------------------------------------------
OPERATIONS:
Investment income--net...................................... $ 870,693 $ 816,568
Realized gain (loss) on investments--net.................... (710,637) 578,626
Change in unrealized appreciation on investments and foreign
currency transactions--net................................ 1,950,438 844,879
----------- -----------
Net increase in net assets resulting from operations........ 2,110,494 2,240,073
----------- -----------
----------------------------------------------------------------------------------------
DIVIDENDS & DISTRIBUTIONS TO SHAREHOLDERS:
Investment income--net:
Class A................................................... (856,741) (1,076,650)
In excess of investment income--net:
Class A................................................... (34,099) (15,634)
In excess of realized gain on investments--net:
Class A................................................... (177,746) --
----------- -----------
Net decrease in net assets resulting from dividends and
distributions to shareholders............................. (1,068,586) (1,092,284)
----------- -----------
----------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Net increase in net assets derived from capital share
transactions.............................................. 2,160,797 4,871,704
----------- -----------
----------------------------------------------------------------------------------------
NET ASSETS:
Total increase in net assets................................ 3,202,705 6,019,493
Beginning of year........................................... 33,084,222 27,064,729
----------- -----------
End of year................................................. $36,286,927 $33,084,222
=========== ===========
----------------------------------------------------------------------------------------
See Notes to Financial Statements.
23
--------------------------------------------------------------------------------
XXXXXXX XXXXX VARIABLE SERIES FUNDS, INC.--BALANCED CAPITAL FOCUS FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
THE FOLLOWING PER SHARE DATA AND RATIOS HAVE CLASS A
BEEN DERIVED FROM INFORMATION PROVIDED IN THE ----------------------------------
FINANCIAL STATEMENTS.
FOR THE
YEAR ENDED FOR THE PERIOD
DECEMBER 31, JUNE 5, 1998+
----------------- TO DEC. 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 2000 1999 1998
------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 10.17 $ 9.76 $ 10.00
------- ------- -------
Investment income--net...................................... .25 .26 .09
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net........................ .39 .50 (.33)
------- ------- -------
Total from investment operations............................ .64 .76 (.24)
------- ------- -------
Less dividends and distributions:
Investment income--net.................................... (.25) (.34) --
In excess of investment income--net....................... (.01) (.01) --
In excess of realized gain on investments--net............ (.05) -- --
------- ------- -------
Total dividends and distributions........................... (.31) (.35) --
------- ------- -------
Net asset value, end of period.............................. $ 10.50 $ 10.17 $ 9.76
======= ======= =======
------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.......................... 6.43% 7.85% (2.40%)++
======= ======= =======
------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... .75% .71% .86%*
======= ======= =======
Investment income--net...................................... 2.64% 2.59% 2.54%*
======= ======= =======
------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................... $36,287 $33,084 $27,065
======= ======= =======
Portfolio turnover.......................................... 82.34% 63.88% 29.48%
======= ======= =======
------------------------------------------------------------------------------------------------
* Annualized
** Total investment returns exclude insurance-related fees and expenses.
+ Commencement of operations.
++ Aggregate total investment return.
See Notes to Financial Statements.
24
--------------------------------------------------------------------------------
XXXXXXX XXXXX VARIABLE SERIES FUNDS, INC.--BALANCED CAPITAL FOCUS FUND
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
Xxxxxxx Xxxxx Variable Series Funds, Inc. (the "Company") is an open-end
management investment company that is comprised of 20 separate funds. Each fund
offers two classes of shares to the Xxxxxxx Xxxxx Life Insurance Company
("MLLIC"), ML Life Insurance Company of New York (indirect wholly-owned
subsidiaries of Xxxxxxx Xxxxx & Co., Inc. ("ML & Co.")), and other insurance
companies that are not affiliated with ML & Co., for their separate accounts to
fund benefits under certain variable annuity and variable life insurance
contracts. Class A and Class B Shares have equal voting, dividend, liquidation
and other rights, except that only shares of the respective classes are entitled
to vote on matters concerning only that class and Class B Shares bear certain
expenses related to the distribution of such shares. Balanced Capital Focus Fund
(the "Fund") (formerly Capital Focus Fund) is classified as "diversified," as
defined in the Investment Company Act of 1940. The Fund's financial statements
are prepared in conformity with accounting principles generally accepted in the
United States of America, which may require the use of management accruals and
estimates. The following is a summary of significant accounting policies
followed by the Fund.
(a) Valuation of investments--Portfolio securities that are traded on stock
exchanges are valued at the last sale price as of the close of business on the
day the securities are being valued, or lacking any sales, at the closing bid
price. Securities traded in the over-the-counter market are valued at the last
available bid price prior to the time of valuation. Portfolio securities that
are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative market, and it is
expected that for debt securities this ordinarily will be the over-the-counter
market. Options written are valued at the last sale price in the case of
exchange-traded options or, in the case of options traded in the
over-the-counter market, the last asked price. Short-term securities are valued
at amortized cost, which approximates market value. Futures contracts are valued
at the settlement price at the close of the applicable exchange. Securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors of the Company.
(b) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies to increase or decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. Losses may arise due to changes in the value of the contract or if
the counterparty does not perform under the contract.
- Options--The Fund may write covered call options. When the Fund writes an
option, an amount equal to the premium received by the Fund is reflected as an
asset and an equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option written. When
a security is purchased or sold through an exercise of an option, the related
premium paid or received is added to (or deducted from) the basis of the
security acquired or deducted from (or added to) the proceeds of the security
sold. When an option expires (or the Fund enters into a closing transaction),
the Fund realizes a gain or loss on the option to the extent of the premiums
received (or gain or loss to the extent the cost of the closing transaction
exceeds the premium received).
Written options are non-income producing investments.
- Forward foreign exchange contracts--The Fund is authorized to enter into
forward foreign exchange contracts as a hedge against either specific
transactions or portfolio positions. Such contracts are not entered on the
Fund's records. However, the effect on operations is recorded from the date the
Fund enters into such contracts.
(c) Foreign currency transactions--Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets or liabilities expressed in
foreign currencies into US dollars. Realized and unrealized gains or losses from
investments include the effects of foreign exchange rates on investments.
(d) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a
25
--------------------------------------------------------------------------------
withholding tax may be imposed on interest, dividends and capital gains at
various rates.
(e) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend dates. Dividends from foreign
securities where the ex-dividend date may have passed are subsequently recorded
when the Fund has determined the ex-dividend date. Interest income is recognized
on the accrual basis. Realized gains and losses on security transactions are
determined on the identified cost basis. The Fund will adopt the provisions of
the AICPA Audit and Accounting Guide for Investment Companies, as revised,
effective for fiscal years beginning after December 15, 2000. As required, the
Fund will begin amortizing premiums and discounts on debt securities effective
January 1, 2001. Prior to this date, the Fund did not amortize premiums or
discounts on debt securities. The cumulative effect of this accounting change
will have no impact on the total net assets of the Fund, but will result in a
$13,849 increase to cost of securities and a corresponding $13,849 decrease in
net unrealized appreciation, based on securities held as of December 31, 2000.
(f) Deferred organization expenses--Deferred organization expenses are charged
to expense on a straight-line basis over a period not exceeding five years.
(g) Dividends and distributions to shareholders--Dividends and distributions
paid by the Fund are recorded on the ex-dividend dates. Distributions in excess
of net investment income and realized capital gains are due primarily to
differing tax treatments for post-October losses.
(h) Custodian bank--The Fund recorded an amount payable to the custodian bank
reflecting an overnight overdraft that resulted from management estimates of
available cash.
2. INVESTMENT ADVISORY AGREEMENT AND
TRANSACTIONS WITH AFFILIATES:
The Company has entered into an Investment Advisory Agreement with Xxxxxxx Xxxxx
Investment Managers, L.P. ("MLIM"). The general partner of MLIM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of ML & Co., which
is the limited partner.
MLIM is responsible for the management of the Company's funds and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the funds. For such services, the Fund pays a monthly fee
at the annual rate of .60% of the average daily value of the Fund's net assets.
MLIM and Xxxxxxx Xxxxx Life Agency, Inc. ("MLLA") have entered into an
agreement which limits the operating expenses paid by the Fund, exclusive of any
distribution fees imposed on Class B Shares, to 1.25% of its average daily net
assets. Any such expenses in excess of 1.25% of average daily net assets will be
reimbursed to the Fund by MLIM which, in turn, will be reimbursed by MLLA.
For the year ended December 31, 2000, Xxxxxxx Lynch, Pierce, Xxxxxx & Xxxxx
Incorporated ("MLPF&S"), a subsidiary of ML & Co., earned $4,002 in commissions
on the execution of portfolio security transactions.
For the year ended December 31, 2000, Xxxxxxx Xxxxx Securities Pricing
Service, an affiliate of MLPF&S, earned $1,414 for providing security price
quotations to compute the Fund's net asset value.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co.,
is the Company's transfer agent.
FAM Distributors, Inc. ("FAMD"), which is a wholly-owned subsidiary of Xxxxxxx
Xxxxx Group, Inc., is the Fund's distributor.
Accounting services were provided to the Fund by MLIM.
Certain officers and/or directors of the Company are officers and/or directors
of MLIM, PSI, FDS, FAMD, and/or ML & Co.
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the
year ended December 31, 2000 were $26,585,303 and $25,653,015, respectively.
Net realized losses for the year ended December 31, 2000 and net unrealized
gains as of December 31, 2000 were as follows:
-----------------------------------------------------------------
Realized Unrealized
Losses Gains
-----------------------------------------------------------------
Long-term investments................... $(710,637) $3,574,062
Foreign currency transactions........... -- 71
--------- ----------
Total................................... $(710,637) $3,574,133
========= ==========
-----------------------------------------------------------------
At December 31, 2000, net unrealized appreciation for Federal income tax
purposes aggregated $3,522,071, of which $5,024,063 related to appreciated
securities and $1,501,992 related to depreciated securities. At December 31,
2000, the aggregate cost of investments for Federal income tax purposes was
$32,546,385.
26
--------------------------------------------------------------------------------
4. CAPITAL SHARE TRANSACTIONS:
Transactions in capital shares were as follows:
-----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 2000 Shares Amount
-----------------------------------------------------------------
Shares sold.......................... 619,837 $ 6,362,120
Shares issued to shareholders in
reinvestment of dividends and
distributions....................... 102,875 1,068,586
---------- ------------
Total issued......................... 722,712 7,430,706
Shares redeemed...................... (519,049) (5,269,909)
---------- ------------
Net increase......................... 203,663 $ 2,160,797
========== ============
-----------------------------------------------------------------
-----------------------------------------------------------------
Class A Shares for the Year Ended Dollar
December 31, 1999 Shares Amount
-----------------------------------------------------------------
Shares sold.......................... 1,588,743 $ 16,190,590
Shares issued to shareholders in
reinvestment of dividends........... 109,615 1,092,284
---------- ------------
Total issued......................... 1,698,358 17,282,874
Shares redeemed...................... (1,218,373) (12,411,170)
---------- ------------
Net increase......................... 479,985 $ 4,871,704
========== ============
-----------------------------------------------------------------
5. SHORT-TERM BORROWINGS:
On December 1, 2000, the Fund, along with certain other funds managed by MLIM
and its affiliates, renewed and amended a $1,000,000,000 credit agreement with
Bank One, N.A. and certain other lenders. The Fund may borrow under the credit
agreement to fund shareholder redemptions and for other lawful purposes other
than for leverage. The Fund may borrow up to the maximum amount allowable under
the Fund's current prospectus and statement of additional information, subject
to various other legal, regulatory or contractual limits. The Fund pays a
commitment fee of .09% per annum based on the Fund's pro rata share of the
unused portion of the facility. Amounts borrowed under the facility bear
interest at a rate equal to, at each fund's election, the Federal Funds rate
plus .50% or a base rate as determined by Bank One, N.A. The Fund did not borrow
under the facility during the year ended December 31, 2000.
6. CAPITAL LOSS CARRYFORWARD:
At December 31, 2000, the Fund had a net capital loss carryforward of
approximately $728,000, all of which expires in 2008. This amount will be
available to offset like amounts of any future taxable gains.
7. REORGANIZATION PLAN:
The Company's Board of Directors approved a plan of reorganization, subject to
shareholder approval and certain other conditions, whereby American Balanced
Fund, which is another fund of the Company, would acquire substantially all of
the assets and liabilities of the Fund in exchange for newly issued shares of
American Balanced Fund. These Funds are registered, open-end management
investment companies. Both entities have a similar investment objective and are
managed by MLIM.
27
--------------------------------------------------------------------------------
XXXXXXX XXXXX VARIABLE SERIES FUNDS, INC.--BALANCED CAPITAL FOCUS FUND
INDEPENDENT AUDITORS' REPORT
--------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND SHAREHOLDERS, BALANCED CAPITAL FOCUS FUND (FORMERLY
CAPITAL FOCUS FUND) OF XXXXXXX XXXXX VARIABLE SERIES FUNDS, INC.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Balanced Capital Focus Fund of Xxxxxxx
Xxxxx Variable Series Funds, Inc. as of December 31, 2000, the related
statements of operations for the year then ended and changes in net assets for
each of the years in the two-year period then ended, and the financial
highlights for each of the years in the two-year period then ended and for the
period June 5, 1998 (commencement of operations) to December 31, 1998. These
financial statements and the financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned at December 31, 2000 by correspondence with the custodian and
broker. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Balanced Capital
Focus Fund of Xxxxxxx Xxxxx Variable Series Funds, Inc. as of December 31, 2000,
the results of its operations, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with accounting
principles generally accepted in the United States of America.
Deloitte & Touche LLP
Princeton, New Jersey
February 9, 2001
28
---------------------------------------------------------
XXXXXXX XXXXX
VARIABLE SERIES FUNDS, INC.
---------------------------------------------------------
PRINCIPAL OFFICE OF THE FUNDS
Box 9011
Princeton, NJ 08543-9011
CUSTODIAN
For all Funds except Developing Capital
Markets Focus Fund:
The Bank of New York
000 Xxxxxxxxxx Xxxxxx
Xxx Xxxx, XX 00000
For Developing Capital Markets Focus Fund:
Brown Brothers Xxxxxxxx & Co.
00 Xxxxx Xxxxxx
Xxxxxx, XX 00000
TRANSFER AGENT
Financial Data Services, Inc.
0000 Xxxx Xxxx Xxxxx Xxxx
Xxxxxxxxxxxx, XX 00000-0000
(000) 000-0000
---------------------------------------
Xxxxxx Xxxxxx, Director of Xxxxxxx
Xxxxx Variable Series Funds, Inc., has
recently retired. The Funds' Board of
Directors wishes Xx. Xxxxxx well in his
retirement.
---------------------------------------
DIRECTORS AND OFFICERS
Xxxxx X. Xxxxx
President
Xxxxx X. Xxxxxxx
Senior Vice President
Xxx Xxxxxx
Director
Xxxxxx X. Xxxxxxxx
Senior Vice President
Xxxxxx Xxxxx
Director
Xxxxxx X. Xxxxxx
Senior Vice President
Xxxxxx X. Xxxxxxx Xx.
Director
Xxxx Xxxxxxxxxxx
Senior Vice President
Xxxxxx X. Xxxxxx
Director
Xxxxxx X. Xxxxxxx
Senior Vice President
Xxxxxxx X. Xxxxxxxx
Director
Xxxxxx X. Xxxxxx
Senior Vice President
Xxxxxxxxxxx X. Xxxxx
Senior Vice President
Xxxxxx Xxxxxxxx
Vice President
X. Xxxxx Xxxx
Senior Vice President
Xxxxxx X. Xxxxxx
Vice President
Xxxxxx X. Xxxx, Xx.
Senior Vice President
Xxxxxx X. Xxxxxx
Vice President
Xxxxxxxx X. Xxxxxx
Senior Vice President
Xxxxxxxxxx X. Xxxxxx
Vice President
Xxxxxxx X. Xxxxxxxx XXX
Senior Vice President
Xxxxxx X. Xxxxx
Vice President and
Treasurer
Xxxxx X. XxXxxx
Senior Vice President
Xxxxx X. Xxxxx
Secretary
Xxxxx X. XxXxxxx
Senior Vice President
Xxxx X. Xxxxxxxx
Senior Vice President
Xxxxxx X. Xxxxxxx Xx.
Senior Vice President
Xxxxx Xxxxxx
Senior Vice President
--------------------------------------------------------------------------------
This report is only for distribution to shareholders of one of the Funds of
Xxxxxxx Xxxxx Variable Series Funds, Inc. Past performance results shown in this
report should not be considered a representation of future performance.
Investment return and principal value of non-money market fund shares will
fluctuate so that shares, when redeemed, may be worth more or less than their
original cost. Statements and other information herein are as dated and are
subject to change.
Xxxxxxx Xxxxx Variable Series Funds, Inc.
Box 9011
Princeton, NJ
08543-9011
