Portfolio Partners, Inc. MFS Emerging Equities Portfolio
Portfolio Partners, Inc. MFS Research Growth Portfolio
Portfolio Partners, Inc. MFS Value Equity Portfolio
- --------------------------------------------------------------------------------
Dear Portfolio Partners Shareholders:
MFS is very pleased to be part of the new Portfolio Partners series of funds
offered by Aetna Life Insurance and Annuity Company (Aetna). MFS is America's
oldest mutual fund organization. MFS and its predecessor organizations have a
history of money management, knowledge, and experience dating back to 1924 and
the founding of the first mutual fund in the United States. We appreciate your
support and thank you for the opportunity to serve you.
Portfolio Commentary
Thanks to a sustained period of relative stability and moderate growth, the U.S.
economy has produced thousands of new jobs, inflation has remained under
control, and the investment climate has -- for the most part -- been favorable.
The increased use of technology and other productivity enhancements, as well as
corporate restructuring and global competition, is improving companies' balance
sheets and helping control inflation. The rapid pace of growth seen in the first
quarter slowed to an annual rate of 3.3% in the second quarter, and 3.5% in the
third. We believe this economic momentum will carry well into the first quarter
of 1998 as a result of lower interest rates and continuing growth in the money
supply. While economic growth in the United States continues to be impressive,
this is partially being offset by events in the Pacific Rim. Thus, markets will
most likely continue to focus on activity by the Federal Reserve Board and its
response to both U.S. and world events.
The extreme volatility seen in the U.S. equity market in the fall was, we
believe, the consequence of overvaluations that had been evident for some
months. As a result, the stock market has been vulnerable to some type of
correction and has been impacted in the near term by chaotic market conditions
in the Pacific Rim. In the face of all this, however, the equity market
continues to exhibit surprising strength, much of it the result of continued
gains in corporate earnings, a trend that could be an important indicator of the
market's future direction. Nevertheless, the situation throughout Asia bears
close scrutiny because it appears to be clearly deflationary and raises the
prospect of trade wars developing throughout the area. We are not convinced that
U.S. markets have escaped totally from October's volatility. Thus, not only is
the near-term outlook for profits in question due to the Asian crisis, but we
believe equity valuations have risen to a point where a cautious investment
approach seems warranted, with a need for particular attention to be paid to the
effect of Pacific Rim volatility on the earnings of U.S. companies.
The Portfolio Partners MFS Emerging Equities invests primarily in common stocks
of companies that are early in their life cycles but which have the potential to
become major enterprises (emerging growth companies). The portfolio may invest
in more established companies whose rates of earnings growth are expected to
accelerate because of special factors such as rejuvenated management, new
products, changes in demand, or basic changes in the economic environment. As of
December 31, 1997, 42% of the portfolio was invested in the technology sector,
15% was in retail, and 13% was in the leisure sector.
Looking ahead, the fundamental outlook for emerging growth stocks remains
positive. Emerging growth stocks should generate stronger relative earnings
growth than their large cap, multinational counterparts who are typically more
exposed to the turmoil in Asia. Robust earnings, combined with attractive
valuations, should help performance. Moreover, the recent capital gains tax cut
should also increase the investment appeal of this market sector. We believe
that our strategy of searching out rapidly growing companies, early in their
development, and buying growth stocks at reasonable prices will reward investors
in 1998 and beyond.
(3)
<PAGE>
Portfolio Partners, Inc. MFS Emerging Equities Portfolio
Portfolio Partners, Inc. MFS Research Growth Portfolio
Portfolio Partners, Inc. MFS Value Equity Portfolio, cont
- --------------------------------------------------------------------------------
The Portfolio Partners MFS Research Growth Portfolio selects stocks based upon
the MFS research analysts' best ideas within his or her industries. The stocks
are selected after careful, in-depth fundamental analysis of the earnings
outlook of the companies. These companies typically demonstrate: dominant and/or
growing market share, quality new/existing products, superior management teams,
and strong financial statements. Portfolio sector/industry weightings are a
fallout of the "best ideas" stock selection process. However, the analysts
revisit weightings regularly to assure agreement within the changing economic
landscape.
The portfolio's underperformance relative to the S&P 500 Index since inception
in November can be attributed to four factors including: the narrowness of the
U.S. equity market; a decline in value of numerous foreign holdings; and our
relative weightings in the technology, consumer staples, transportation, and
healthcare (pharmaceuticals in particular) sectors of the market. During the
month of December, we were able to reposition the portfolio from the assets that
were received to reflect the best ideas of the MFS equity analysts while taking
care to invest at reasonable valuations in a volatile marketplace.
Looking forward, we believe that the environment of favorable corporate
earnings, increasing productivity, and low inflation should continue to support
the equity market. We also believe this is an earnings-driven market and we are
focused on companies that can sustain their earnings growth. Also, as we are
late in this economic cycle, we view company selection as the most important
factor in determining performance. We expect 8% to 10% earnings growth in 1998.
While parts of the healthcare and leisure sectors continue to offer attractive
earnings growth prospects, the Asian crisis clearly has placed a near-term cloud
over the entire technology sector, but we still remain positive about the
long-term prospects for this sector.
The Portfolio Partners MFS Value Equity Portfolio was focused on three top
industry sectors. These were: financial services, technology, and healthcare.
The portfolio was overweighed in financial services which outperformed the S&P
500 over the period. In banking, the big story has been consolidation, which has
driven stock prices, while insurance has been helped by asset gatherers that
have benefited from the growth in 401(k) retirement plans as well as from strong
equity market performance. Also, property/casualty and life insurers have
benefited from ongoing consolidation.
The technology sector significantly under-performed over the period and the
portfolio was slightly over-weighted. The focus continues to be on finding
those companies with long-term franchise value at attractive valuations. We
generally try to purchase these stocks after short-term earnings disappointments
create long-term opportunities.
In healthcare, the portfolio was also slightly over-weighted and the sector
significantly outperformed. Our current holdings include United Healthcare,
Bristol-Myers Squibb, Sanofi, and Novartis. We believe United Healthcare is at
the early stages of returning to its long-term growth track. HMO pricing is
improving and UNH is benefiting from internal cost reductions. In the
pharmaceutical area we have focused on companies which trade at below-peer
multiples and have internal dynamics working in their favor, such as cost
reduction (Novartis) or new products (Sanofi and Bristol).
Respectfully submitted,
John W. Ballen, Senior Vice President
John R. Brennan, Jr., Senior Vice President
Kevin R. Parke, Senior Vice President
(4)
<PAGE>
Portfolio Partners, Inc. Scudder International Growth Portfolio
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Dear Portfolio Partners Shareholders,
Market Performance
Scudder Kemper Investments, Inc. is pleased to have been chosen as subadviser
for the new Portfolio Partners Scudder International Growth Portfolio. In
reviewing 1997, it was a year of sharply contrasting returns within the
international equity markets. Markets in Europe were all up strongly, advancing
an aggregate 38% in local terms. As U.S. dollar investors, we lost about a third
of these gains due to dollar strength against the local currencies. At the other
side of the world, the Japanese market disappointed once again, dropping 24% in
U.S. dollar terms. The smaller markets in the rest of Asia fell even more,
experiencing dollar declines that ranged from 61%-76%.
Portfolio Review
Your portfolio outperformed the benchmark index over the month primarily due to
its positioning in Japan. The Japanese market overall was the worst performing
of the major exchanges, with stock prices and the yen both weakening. We
benefited from maintaining a significant underweight stance, ending the year
with an exposure of 17%, versus an index weighting of 25%. Solid security
selection was also key. We focused on the more global, blue chip companies,
whose performance continued to break away from the more troubled,
domestically-oriented sectors of the economy. Portfolio names such as
Bridgestone, Keyence, Nichiei, and Sony stood us well.
Our focus on the European stock markets also helped performance. Overweight
stances and stock selection were particularly helpful in Germany, France,
Sweden, and Switzerland. From a thematic viewpoint, we continued to build
positions around the extensive corporate and industry restructuring underway.
The dual forces of looming global competition and European Monetary Union
continued to push companies towards further repositioning and consolidation. In
particular, the financial sector (both insurance and banking) has witnessed
heightened activity and expectations, with stock prices rising sharply.
Financial names that added to portfolio returns include AGF in France,
Commerzbank in Germany, UBS in Switzerland, and Skandia in Sweden.
The emerging markets were a volatile group over the course of the year, although
in aggregate they had a negligible impact on the overall performance. At the end
of 1997, total emerging markets exposure was just over 2%.
Economic Outlook
In as much as the Asian economies have been at the center of a growing storm
through the latter part of 1997, so will developments in Asia dictate much of
the outlook for the global capital markets as the current year unfolds. The
uncertainty is high, since the future course of the Asian crisis depends on
multiple government policy actions not yet decided or taken. Policy responses
may well differ widely from country to country, and how the global capital flows
will react is unclear. The key wildcards lie in the hands of policymakers in the
larger economies of Japan and China/Hong Kong.
The net effect we expect is a slower growth, deflationary global economy in
1998. What is not certain is whether in the balance, the U.S. and European
capital markets can remain relatively unscathed, or be drawn further into the
Asian morass. In our opinion, timely policy actions in Asia will stem the
deflationary pressures now unleashed, allowing continued growth in the rest of
the world to absorb the weakness from Asia. The capital markets will ultimately
be pleased by this resolution, but as it unfolds we would expect market
volatility to be high.
Nicholas Bratt, Portfolio Manager Carol L. Franklin, Portfolio Manager
Irene T. Cheng, Portfolio Manager Joan R. Gregory, Portfolio Manager
Marc S. Joseph, Portfolio Manager
(5)
<PAGE>
Portfolio Partners, Inc. T. Rowe Price Growth Equity Portfolio
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Dear Portfolio Partners Shareholders:
I am delighted to have the opportunity to work with Aetna Life Insurance and
Annuity Company (Aetna) through the Portfolio Partners T. Rowe Price Growth
Equity Portfolio. Since we have recently completed the first month of operation,
I wanted to update you on the conversion of assets to T. Rowe Price and the
performance for December. I also wanted to touch upon our philosophy and outlook
for growth stocks in 1998.
Conversion of Assets to T. Rowe Price
The assets for the T. Rowe Price Growth Equity Portfolio were transferred from a
previous investment manager to T. Rowe Price on November 28, 1997. Through our
team of trading and investment professionals, we were able to restructure the
portfolio with minimal transaction costs to conform to our growth stock style.
The Portfolio Partners T. Rowe Price Growth Equity Portfolio follows an
investment strategy similar to that of the T. Rowe Price Growth Stock Fund. The
portfolio out-performed the market benchmark for the one month period ending
December 31, 1997.
Portfolio Strategy
Our growth stock strategy leads us to search for companies with leadership in
growth markets, experienced management, strong cash flow, and solid returns on
cash flow.
A few firms which meet our investment criteria as leading companies in growth
markets include Cendant, Bristol-Myers Squibb, Network Associates, and EMC, all
of which are gaining market share in growth markets and generating solid free
cash flow.
The ability of management to generate increasing free cash flow over time
underpins our evaluation of a promising growth stock. Cash flow can produce a
more conservative and consistent estimate of a company's earning power than one
based on sales growth or stock price momentum.
Companies in the portfolio that are both good generators and users of cash flow
include: Tenet Healthcare, a consolidator in the hospital industry; Safeway, in
our view the best-managed supermarket company; and AT&T, which should begin to
generate solid cash flow as effective new management takes control.
While investors have benefited from an ideal environment for stocks,
particularly those of large growth companies, it is important to realize that
stock prices tend to rise with earnings and cash flow growth. The portfolio's
investments are in companies that have demonstrated both strong earnings and
cash flow growth, but we believe that stock prices have outpaced these growth
rates. In addition, the fallout from Asia is likely to slow corporate profits
growth of both domestic and international companies. For these reasons, we
anticipate more modest returns for world markets in 1998.
We still anticipate moderate U.S. economic growth in 1998. We believe the
current environment should favor the portfolio's holdings, as our focus on
experienced management and strong cash flow should help these growth stocks
prosper in what could prove to be a tough environment.
Respectfully submitted,
Robert W. Smith
Portfolio Manager
The views expressed are those of the three PPI subadvisers as of January 1998
and are subject to change based on market and other conditions. Information
about a fund's portfolio, asset allocation, or country diversification is
historical, and is no indication of future portfolio composition, which will
vary.
(6)
<PAGE>
Portfolio Partners, Inc.
Financial Highlights
Period from November 28, 1997 (commencement of operations) to December 31, 1997
- --------------------------------------------------------------------------------
Selected data for a share outstanding for the period:
MFS Emerging MFS Research
Equities Portfolio Growth Portfolio
-------------------- ------------------
Net asset value, beginning of
period ................................ $ 43.39 $ 9.89
------- ------
Income from investment
operations:
Net investment income ................. 0.09 --
Net realized and change in
unrealized gain (loss) on
investments, futures, foreign
currency and forward foreign
currency exchange contracts ( 0.57) (0.18)
-------- -------
Total income from
investment operations .............. ( 0.48) (0.18)
-------- -------
Net asset value, end of period ......... $ 42.91 $ 9.71
======== =======
Total return (1) ....................... ( 1.13)% (1.82)%
Net assets, end of period (000's) ...... $768,108 $399,548
Ratio of total expenses to average
net assets (2) ........................ 0.81% 0.85%
Ratio of net investment income to
average net assets (2) ................ 2.31% 0.22%
Portfolio turnover rate (1) ............ 0.07% 57.88%
Average commission rate paid per
share on purchases of equity
securities ............................ $0.0601 $0.0635
<TABLE>
<CAPTION>
MFS Value Scudder International T. Rowe Price Growth
Equity Portfolio Growth Portfolio Equity Portfolio
------------------ ----------------------- ---------------------
<S> <C> <C> <C>
Net asset value, beginning of
period ................................ $ 29.49 $ 13.88 $ 42.74
------- ------- -------
Income from investment
operations:
Net investment income ................. 0.05 -- 0.06
Net realized and change in
unrealized gain (loss) on
investments, futures, foreign
currency and forward foreign
currency exchange contracts 0.37 0.22 0.81
------- --------- -------
Total income from
investment operations .............. 0.42 0.22 0.87
------- --------- -------
Net asset value, end of period ......... $29.91 $ 14.10 $ 43.61
======= ========= =======
Total return (1) ....................... 1.43% 1.58% 2.03%
Net assets, end of period (000's) ...... $134,508 $378,200 $371,194
Ratio of total expenses to average
net assets (2) ........................ 0.90% 1.00% 0.75%
Ratio of net investment income to
average net assets (2) ................ 1.98% 0.12% 1.58%
Portfolio turnover rate (1) ............ 12.06% 3.01% 2.94%
Average commission rate paid per
share on purchases of equity
securities ............................ $0.0482 $0.0185 $0.0408
</TABLE>
(1) Not annualized.
(2) Annualized.
See Notes to Financial Statements.
7
<PAGE>
MFS Emerging Equities Portfolio
Schedule of Investments
December 31, 1997
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<TABLE>
<CAPTION>
Number of Market
Shares Value
----------------- -----------------
<S> <C> <C>
COMMON STOCKS (75.2%)
Aerospace and Defense (0.1%)
Loral Space & Communications* .......................... 6,500 $ 139,344
Newport News Shipbuilding .............................. 8,600 218,763
Thiokol Corp. .......................................... 500 40,625
------------
398,732
------------
Airlines and Freight (0.0%)
Atlas Air, Inc. ........................................ 1,500 36,000
Midway Airlines Corp.* ................................. 3,300 49,913
------------
85,913
------------
Apparel Manufacturers (0.0%)
Tefron Ltd.* ........................................... 200 4,600
------------
Banks and Credit (0.5%)
Associates First Capital Corp. ......................... 2,300 163,588
Charter One Financial, Inc. ............................ 2,000 126,250
Donaldson Lufkin & Jenrette, Inc. ...................... 1,100 87,450
Franklin Resources, Inc. ............................... 42,100 3,660,069
Lehman Brothers Holdings ............................... 1,200 61,200
U.S. Trust Corp. ....................................... 500 31,313
------------
4,129,870
------------
Beverages and Tobacco (0.0%)
Beringer Wine Estates Holdings, Inc.* .................. 200 7,600
------------
Broadcast and Cable TV (0.8%)
American Radio Systems Corp.* .......................... 4,000 213,250
CBS Corp. .............................................. 4,500 132,469
Chancellor Media Corp.* ................................ 1,800 134,325
Clear Channel Communications, Inc.* .................... 16,600 1,318,663
Cox Radio, Inc., Class A* .............................. 5,600 225,400
Emmis Broadcasting Corp., Class A* ..................... 2,300 104,938
Gemstar International Group Ltd.* ...................... 1,700 41,438
Hearst--Argyle Television, Inc.* ....................... 2,000 59,500
Jacor Communications, Inc.* ............................ 50,400 2,677,500
LIN Television Corp.* .................................. 7,300 397,850
SFX Broadcasting, Inc., Class A* ....................... 3,000 240,750
Univision Communications, Inc., Class A* ............... 3,000 209,438
------------
5,755,521
------------
Brokers and Asset Managers (0.5%)
Consolidation Capital Corp. ............................ 151,100 3,069,219
Friedman, Billings, Ramsey Group, Inc.,
Class A* ............................................. 6,200 111,213
LINC Capital, Inc.* .................................... 200 3,925
Morgan Stanley Dean Witter Discover & Co. .............. 2,700 159,638
T. Rowe Price Assoc., Inc. ............................. 2,700 169,763
------------
3,513,758
------------
Computer Software (23.5%)
Adobe Systems, Inc. .................................... 300 12,375
Aspen Technologies, Inc.* .............................. 600 20,550
Autodesk, Inc. ......................................... 23,300 862,100
Computer Software (continued)
BMC Software, Inc.* .................................... 385,000 $ 25,265,791
Cadence Design Systems, Inc.* .......................... 519,200 12,720,400
Computer Associates International, Inc. ................ 695,900 36,795,713
Compuware Corp.* ....................................... 677,800 21,689,600
Dassault Systems SA ADR (France) ....................... 400 12,350
F.Y.I., Inc.* .......................................... 62,000 1,426,000
Microsoft Corp.* ....................................... 299,200 38,671,600
Oracle Systems Corp.* .................................. 1,706,500 38,076,281
Rational Software Corp.* ............................... 800 9,100
Scopus Technology, Inc.* ............................... 18,000 216,000
Synopsys, Inc.* ........................................ 122,800 4,390,100
The Learning Co., Inc.* ................................ 5,600 89,950
Transaction Systems Architects, Inc., Class A* ......... 500 19,000
Veritas Software Corp.* ................................ 400 20,400
Xionics Document Technologies, Inc.* ................... 1,500 5,719
------------
180,303,029
------------
Computer Systems (0.5%)
CHS Electronics, Inc.* ................................. 205,000 3,510,625
Sun Microsystems, Inc.* ................................ 2,800 111,650
------------
3,622,275
------------
Conglomerates (3.8%)
Tyco International Ltd. ................................ 648,300 29,214,019
------------
Containers (0.0%)
Ivex Packaging Corp.* .................................. 300 7,200
------------
Drugs (0.0%)
Creative BioMolecules, Inc.* ........................... 1,600 11,800
PathoGenesis Corp.* .................................... 1,100 40,838
Zonagen, Inc.* ......................................... 1,300 23,644
------------
76,282
------------
Electronics (2.3%)
Altera Corp.* .......................................... 367,400 12,170,125
Analog Devices, Inc.* .................................. 44,500 1,232,094
Teradyne, Inc.* ........................................ 103,300 3,305,600
Xilinx, Inc.* .......................................... 26,500 929,156
------------
17,636,975
------------
Food (0.0%)
Tootsie Roll Industries, Inc. .......................... 400 25,000
------------
Food and Drug Stores (4.1%)
CVS Corp. .............................................. 18,400 1,178,750
Fred Myer, Inc.* ....................................... 20,400 742,050
Rite Aid Corp. ......................................... 312,400 18,333,975
Safeway, Inc.* ......................................... 175,500 11,100,375
------------
31,355,150
------------
Gaming and Lodging (8.4%)
Avis Rent A Car, Inc.* ................................. 1,600 51,100
Cendant Corp.* ......................................... 1,496,842 51,453,620
Dollar Thrifty Automotive Group, Inc.* ................. 44,300 908,150
</TABLE>
8 See Notes to Schedule of Investments.
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Market
Shares Value
----------------- -----------------
<S> <C> <C>
Gaming and Lodging (continued)
Four Seasons Hotels, Inc. (Canada) ................... 4,800 $ 151,800
Harrah's Entertainment, Inc.* ........................ 5,500 103,813
Hilton Hotels Corp. .................................. 5,900 175,525
ITT Corp.* ........................................... 3,000 248,625
Mirage Resorts, Inc.* ................................ 67,800 1,542,450
Promus Hotel Corp.* .................................. 225,865 9,486,330
Signature Resorts, Inc. .............................. 15,000 328,125
United Rentals, Inc.* ................................ 5,800 112,013
------------
64,561,551
------------
General Stores (0.0%)
Consolidated Stores Corp.* ........................... 5,100 224,081
------------
Health Maintenance Organizations (4.1%)
Foundation Health Systems* ........................... 100 2,238
Oxford Health Plans, Inc.* ........................... 54,100 841,931
PacifiCare Health Systems, Inc., Class A ............. 10,000 502,500
PacifiCare Health Systems, Inc., Class B* ............ 3,900 204,263
United Healthcare Corp. .............................. 601,700 29,896,969
------------
31,447,901
------------
Household and Personal Care (0.0%)
Carson, Inc.* ........................................ 8,800 58,850
------------
Insurance (0.5%)
Ace Ltd. (Bermuda) ................................... 400 38,600
Conning Corp.* ....................................... 1,900 31,825
Conseco, Inc. ........................................ 84,500 3,839,469
ESG Re Ltd.* ......................................... 5,300 124,550
Hartford Life, Inc., Class A ......................... 200 9,063
------------
4,043,507
------------
Machinery and Tools (0.0%)
Halter Marine Group, Inc.* ........................... 1,600 46,200
Munters AB (Sweden)* ................................. 200 1,725
Si Handling Systems, Inc. ............................ 2,800 38,500
------------
86,425
------------
Medical Equipment (0.7%)
Arterial Vascular Engineering Co.* ................... 3,400 221,000
Boston Scientific Corp.* ............................. 100,000 4,587,500
Cyberonics, Inc.* .................................... 10,200 155,550
Guidant Corp. ........................................ 6,700 417,075
McKesson Corp. ....................................... 800 86,550
Medtronic, Inc. ...................................... 1,000 52,313
Mentor Corp. ......................................... 700 25,550
Safeskin Corp.* ...................................... 700 39,725
St Jude Medical, Inc.* ............................... 300 9,150
------------
5,594,413
------------
Medical Services (1.0%)
Capital Senior Living Corp.* ......................... 75,000 782,813
Columbia/HCA Healthcare Corp. ........................ 3,000 88,875
Health Management Associates, Inc., Class A* ......... 900 22,725
Healthsouth Corp.* ................................... 97,000 2,691,750
Medical Services (continued)
Integrated Health Services, Inc. ..................... 4,700 $ 146,581
Mariner Health Group, Inc.* .......................... 1,900 30,875
Orthodontic Centers of America, Inc.* ................ 213,100 3,542,788
Renal Treatment Centers, Inc.* ....................... 3,900 140,888
Renex Corp.* ......................................... 20,000 105,000
------------
7,552,295
------------
Metals (0.1%)
NS Group, Inc.* ...................................... 50,000 856,250
------------
Network and Telecommunications (4.9%)
Ascend Communications, Inc.* ......................... 50,000 1,225,000
Aspect Telecommunication Corp.* ...................... 1,300 27,138
Bay Networks* ........................................ 1,500 38,344
Cisco Systems, Inc.* ................................. 632,100 35,239,575
International Network Services* ...................... 10,000 231,250
Inter-Tel, Inc. ...................................... 2,000 38,750
Lucent Technologies, Inc. ............................ 4,000 319,500
P-COM, Inc.* ......................................... 600 10,350
Premisys Communications, Inc.* ....................... 1,000 26,125
Security Dynamics Tech, Inc.* ........................ 20,500 732,875
------------
37,888,907
------------
Oil Service (0.2%)
BJ Services Co.* ..................................... 2,000 143,875
Camco International, Inc. ............................ 2,900 184,694
Companie Generale de Geophysique, SA ADR
(France)* .......................................... 900 23,063
Cooper Cameron Corp.* ................................ 4,400 268,400
Diamond Offshore Drilling, Inc. ...................... 2,400 115,500
Dril-Quip, Inc.* ..................................... 200 7,025
Global Industries Ltd.* .............................. 6,700 113,900
Input/Output, Inc.* .................................. 900 26,719
National-Oilwell, Inc.* .............................. 1,200 41,025
Noble Drilling Corp.* ................................ 8,200 251,125
Precision Drilling Corp. (Canada)* ................... 800 19,500
Rowan Cos, Inc.* ..................................... 700 21,350
Veritas DGC, Inc.* ................................... 500 19,750
Weatherford Enterra, Inc.* ........................... 3,900 170,625
------------
1,406,551
------------
PC's and Peripherals (0.3%)
Compaq Computer Corp. ................................ 37,400 2,110,763
SCI System, Inc.* .................................... 4,400 191,675
------------
2,302,438
------------
Pollution Control (0.4%)
Allied Waste Industries, Inc.* ....................... 2,600 60,613
Philip Services Corp. (Canada) ....................... 60,000 862,500
USA Waste Services, Inc.* ............................ 50,000 1,962,500
U.S. Filter Corp.* ................................... 2,700 80,831
------------
2,966,444
------------
Printing and Publishing (0.0%)
Applied Graphics Technologies, Inc.* ................. 700 37,275
------------
</TABLE>
See Notes to Schedule of Investments. 9
<PAGE>
MFS Emerging Equities Portfolio
Schedule of Investments
December 31, 1997 (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Market
Shares Value
----------------- -----------------
<S> <C> <C>
Real Estate (0.0%)
Starwood Lodging Trust ............................... 500 $ 28,938
------------
Restaurants (0.6%)
Applebee's International, Inc. ....................... 116,000 2,095,250
Friendly Ice Cream Corp.* ............................ 50,000 581,250
Schlotzsky's, Inc.* .................................. 125,000 1,828,125
------------
4,504,625
------------
Retail and Shipping (0.0%)
Canadian National Railway Co. (Canada) ............... 700 33,075
Kansas City Southern Industries ...................... 7,400 234,950
------------
268,025
------------
Special Services (5.5%)
Accustaff, Inc.* ..................................... 726,500 16,709,500
Affiliated Computer Services, Inc., Class A* ......... 3,900 102,619
BISYS Group, Inc.* ................................... 3,600 119,700
Bright Horizons, Inc.* ............................... 100 1,875
CORESTAFF, Inc.* ..................................... 30,600 810,900
Cornell Corrections, Inc.* ........................... 10,000 207,500
Danka Business Systems PLC ADR (Great Britain) 346,300 5,519,156
DST Systems, Inc.* ................................... 1,100 46,956
EduTrek International, Inc.* ......................... 100 2,600
Fine Host Corp.* ..................................... 1,100 8,250
First Data Corp. ..................................... 494,800 14,472,900
Galileo International, Inc. .......................... 700 19,338
Ikon Office Solutions, Inc. .......................... 51,800 1,456,875
Learning Tree International, Inc.* ................... 14,200 410,025
PRT Group Inc. ....................................... 100,000 1,137,500
Staff Leasing, Inc. .................................. 45,000 849,375
Syntel, Inc.* ........................................ 10,000 142,500
Technology Solutions Co.* ............................ 13,400 353,425
------------
42,370,994
------------
Specialty Stores (7.6%)
Corporate Express, Inc.* ............................. 18,000 231,750
General Nutrition Co., Inc.* ......................... 6,400 217,600
Global DirectMail Corp.* ............................. 1,800 31,163
Home Depot, Inc. ..................................... 8,400 494,550
Micro Warehouse, Inc.* ............................... 135,300 1,885,744
Office Depot, Inc.* .................................. 386,300 9,247,056
Republic Industries, Inc.* ........................... 1,459,100 34,015,269
Staples, Inc.* ....................................... 6,400 177,600
U.S. Office Products Co.* ............................ 625,800 12,281,325
------------
58,582,057
------------
Telephone Services (4.8%)
American Communications Services, Inc.* .............. 2,100 26,906
Brooks Fiber Properties, Inc.* ....................... 700 38,500
Intermedia Communications, Inc.* ..................... 8,200 498,150
MCI Communications Corp. ............................. 525,400 22,493,688
NEXTLINK Communications, Inc., Class A* .............. 1,800 38,363
Tel-Save Holdings, Inc.* ............................. 627,000 12,461,625
Worldcom, Inc.* ...................................... 43,000 1,300,750
------------
36,857,982
------------
Total Common Stocks (Cost $588,359,746) 577,775,433
------------
PREFERRED STOCKS (0.1%)
SAP AG--Vorzug (Germany) ............................. 2,900 $ 948,692
------------
Total Preferred Stocks (Cost $882,995) 948,692
------------
WARRANTS (0.5%)
Intel Corp. expires (03/14/98)* ...................... 70,000 3,495,625
------------
Total Warrants (Cost $4,020,457) 3,495,625
------------
Principal
Amount
---------------
SHORT-TERM INVESTMENTS (21.2%)
Investors Bank & Trust Repurchase Agreement,
dated 12/31/97, due 01/02/98, with a maturity
value of $163,044,825 and an effective yield of
4.95%, collateralized by the following government
instruments having an aggregate market value,
including accrued interest, of $171,151,708:
Federal National Mortgage Association
Obligations with rates ranging from 5.79% to
7.89% and maturity dates ranging from
02/01/2010 to 10/01/2027.
U.S. Treasury obligations with rates ranging
from 6.13% to 7.25% and maturity dates
ranging from 02/15/98 to 05/15/98.
Federal National Mortgage Corporation
obligations with rates ranging from 7.08% to
7.50% and maturity dates ranging from
11/15/2002 to 02/01/2003.
Small Business Administration obligations with
rates ranging from 6.25% to 9.38% and maturity
dates ranging from 11/25/2002 to 01/25/2009 .............. $163,000,000 163,000,000
-----------
Total Short-Term Investments
(Cost $163,000,000) 163,000,000
-----------
TOTAL INVESTMENTS (97.0%) (Cost $756,263,198) (a) 745,219,750
Other assets less liabilities (3.0%) 22,888,443
-----------
Total Net Assets (100.0%) $768,108,193
============
Notes to Schedule of Investments
(a) The cost of investments for federal income tax purposes amounts to
$756,263,198. Unrealized gains and losses, based on identified tax cost at
December 31, 1997, are as follows:
Unrealized gains ......................................................... $ 16,649,753
Unrealized losses ........................................................ (27,693,201)
------------
Net unrealized loss ..................................................... $(11,043,448)
============
</TABLE>
* Non-income producing security.
Category percentages are based on net assets.
Information concerning open futures contracts at December 31, 1997 is shown
below:
No. of Initial Expiration Unrealized
Contracts Value Date Gain/(Loss)
----------- -------------- ------------ ------------
Long Contracts
- --------------
S&P 500 Index
Futures ......... 300 $71,332,500 Mar 98 $2,122,938
=========== ==========
10 See Notes to Financial Statements.
<PAGE>
MFS Research Growth Portfolio
Schedule of Investments
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Market
Shares Value
----------------- -----------------
<S> <C> <C>
COMMON STOCKS (97.3%)
Aerospace and Defense (2.6%)
Lockheed Martin Corp. ............................... 34,600 $ 3,408,100
Newport News Shipbuilding ........................... 7,600 193,325
United Technologies ................................. 93,700 6,822,531
------------
10,423,956
------------
Airlines and Freight (1.0%)
Air Express International Corp. ..................... 131,200 4,001,600
------------
Apparel Manufacturers (0.8%)
Polo Ralph Lauren Corp.* ............................ 106,100 2,579,556
Reebok International Ltd.* .......................... 21,100 607,944
------------
3,187,500
------------
Automotive (0.4%)
Tower Automotive, Inc.* ............................. 38,500 1,619,406
------------
Banks and Credit (6.7%)
Advanta Corp., Class B .............................. 7,800 197,925
American Express Corp. .............................. 3,500 312,375
Associates First Capital Corp. ...................... 3,300 234,713
BankBoston Corp. .................................... 3,400 319,388
Chase Manhattan Bank ................................ 39,400 4,314,300
Comerica, Inc. ...................................... 46,200 4,169,550
CoreStates Financial Corp. .......................... 15,000 1,200,938
Fleet Financial Group, Inc. ......................... 52,100 3,904,244
Franklin Resources, Inc. ............................ 2,600 226,038
Green Tree Financial Corp. .......................... 138,900 3,637,444
PNC Bank Corp. ...................................... 55,000 3,138,438
Union Planters Corp. ................................ 31,100 2,112,856
Wells Fargo & Co. ................................... 8,300 2,817,331
------------
26,585,540
------------
Beverages and Tobacco (3.9%)
Coca-Cola Co. ....................................... 109,300 7,282,114
Companhia Cervejaria Brahma ADR (Brazil) ............ 18,300 259,631
Philip Morris Co., Inc. ............................. 179,700 8,142,656
------------
15,684,401
------------
Broadcast and Cable TV (0.8%)
Clear Channel Communications, Inc.* ................. 4,300 341,581
Jacor Communications, Inc.* ......................... 54,300 2,884,688
------------
3,226,269
------------
Brokers and Asset Managers (1.6%)
CIT Group, Inc., Class A* ........................... 1,300 41,925
Merrill Lynch & Co. ................................. 34,700 2,530,931
Morgan Stanley Dean Witter Discover & Co. ........... 3,400 201,025
Travelers Property Casualty ......................... 71,050 3,827,819
------------
6,601,700
------------
Chemicals (1.3%)
Air Products & Chemicals, Inc. ...................... 36,200 2,977,450
DuPont (E I) de Nemours ............................. 34,400 2,066,150
------------
5,043,600
------------
Computer Software (9.0%)
Adobe Systems, Inc. ................................. 58,700 $ 2,421,375
BMC Software, Inc.* ................................. 61,900 4,062,188
Cadence Design Systems, Inc.* ....................... 145,400 3,562,300
Computer Associates International, Inc. ............. 106,150 5,612,681
Compuware Corp.* .................................... 113,100 3,619,200
Electronic Arts, Inc.* .............................. 11,500 434,844
Microsoft Corp.* .................................... 36,700 4,743,475
Networks Associates, Inc.* .......................... 92,400 4,885,650
Oracle Systems Corp.* ............................... 207,700 4,634,306
Sybase, Inc.* ....................................... 7,200 95,850
Synopsys, Inc.* ..................................... 54,600 1,951,950
------------
36,023,819
------------
Computer Systems (0.5%)
Sequent Computer* ................................... 98,500 1,970,000
Sun Microsystems, Inc.* ............................. 3,000 119,625
------------
2,089,625
------------
Conglomerates (2.9%)
Tyco International Ltd. ............................. 254,600 11,472,913
------------
Drugs (5.3%)
Bristol-Myers Squibb Co. ............................ 115,500 10,929,178
Jones Medical Industries, Inc. ...................... 82,400 3,151,800
Novartis AG-Registered Shares (Switzerland) ......... 4,400 7,136,356
Sankyo Co. Ltd. (Japan) ............................. 4,000 90,400
------------
21,307,734
------------
Electrical Equipment (2.1%)
American Standard Companies, Inc.* .................. 53,600 2,053,550
Cooper Industries, Inc. ............................. 60,500 2,964,500
Orbotech Ltd. (Israel)* ............................. 105,800 3,372,375
------------
8,390,425
------------
Electronic Power (0.5%)
Calenergy, Inc.* .................................... 65,500 1,883,125
------------
Electronics (6.6%)
Analog Devices, Inc.* ............................... 124,100 3,436,019
Computer Products, Inc.* ............................ 174,700 3,952,588
Flextronics International Ltd.* ..................... 195,400 6,741,300
Intel Corp. ......................................... 91,000 6,392,750
Sony Corp. (Japan) .................................. 44,400 3,945,757
Teradyne, Inc.* ..................................... 55,100 1,763,200
------------
26,231,614
------------
Food (0.7%)
Earthgrains Co. ..................................... 2,500 117,500
McCormick & Co, Inc. ................................ 90,900 2,545,200
------------
2,662,700
------------
Food and Drug Stores (4.1%)
CVS Corp. ........................................... 67,400 4,317,813
Fred Myer, Inc.* .................................... 28,600 1,040,325
Rite Aid Corp. ...................................... 81,300 4,771,294
</TABLE>
See Notes to Schedule of Investments. 11
<PAGE>
MFS Research Growth Portfolio
Schedule of Investments
December 31, 1997 (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Market
Shares Value
----------------- -----------------
<S> <C> <C>
Food and Drug Stores (continued)
Safeway, Inc.* .................................... 96,700 $ 6,116,275
------------
16,245,707
------------
Forest and Paper (0.1%)
Stone Container Corp.* ............................ 25,800 269,288
------------
Furniture and Appliances (0.9%)
Ethan Allen Interiors, Inc. ....................... 90,100 3,474,481
------------
Gaming and Lodging (1.0%)
Cendant Corp.* .................................... 93,581 3,216,833
Hilton Hotels Corp. ............................... 12,800 380,800
Host Marriott Corp.* .............................. 17,600 345,400
Promus Hotel Corp.* ............................... 185 7,770
------------
3,950,803
------------
General Stores (0.9%)
Consolidated Stores Corp.* ........................ 83,800 3,681,963
------------
Health Maintenance Organizations (1.8%)
United Healthcare Corp. ........................... 142,300 7,070,531
------------
Household and Personal Care (4.3%)
Clorox Co. ........................................ 4,400 347,875
Colgate-Palmolive Co. ............................. 14,400 1,058,400
Dial Corp. ........................................ 4,000 83,250
Gillette Co. ...................................... 71,900 7,221,456
Kimberly-Clark Corp. .............................. 113,200 5,582,175
Procter & Gamble Co. .............................. 11,000 877,938
Revlon, Inc., Class A* ............................ 55,000 1,942,188
------------
17,113,282
------------
Insurance (7.2%)
Allstate Corp. .................................... 34,200 3,107,925
Chubb Corp. ....................................... 46,200 3,493,875
CIGNA Corp. ....................................... 22,100 3,824,681
Conseco, Inc. ..................................... 144,600 6,570,263
FPIC Insurance Group, Inc.* ....................... 800 23,300
Hartford Financial Services Group ................. 46,100 4,313,231
Lincoln National Corp. ............................ 14,500 1,132,813
Penncorp Financial Group, Inc. .................... 5,700 203,419
Reliastar Financial Corp. ......................... 76,900 3,167,319
Skandia Forsakrings AB (Sweden) ................... 64,100 3,023,392
------------
28,860,218
------------
Machinery and Tools (1.1%)
Miller (Herman), Inc. ............................. 83,300 4,545,056
------------
Medical Equipment (1.8%)
AmeriSource Health Corp., Class A* ................ 52,100 3,060,875
Boston Scientific Corp.* .......................... 70,400 3,229,600
Cardinal Health, Inc. ............................. 12,600 946,575
Uromed Corp.* ..................................... 11,400 40,256
------------
7,277,306
------------
Medical Services (2.5%)
Healthsouth Corp.* ................................ 14,400 $ 399,600
Quorum Health Group, Inc.* ........................ 161,200 4,211,350
Tenet Healthcare Corp.* ........................... 158,300 5,243,688
------------
9,854,638
------------
Network and Telecommunications (2.1%)
Alcatel Alsthom Compagnie Generale
d'electricite ADR (France) ...................... 156,000 3,948,750
Aspect Telecommunication Corp.* ................... 24,300 507,263
Cisco Systems, Inc.* .............................. 74,400 4,147,800
------------
8,603,813
------------
Oil Service (1.6%)
Baker Hughes, Inc. ................................ 74,100 3,232,613
Marine Drilling Companies, Inc.* .................. 151,500 3,143,625
------------
6,376,238
------------
Oil and Gas (2.4%)
British Petroleum Co. PLC ADR (Great Britain) ..... 65,900 5,251,406
Chevron Corp. ..................................... 5,500 423,500
USX-Marathon Group ................................ 111,900 3,776,625
------------
9,451,531
------------
PC's and Peripherals (2.6%)
Canon, Inc. (Japan) ............................... 140,900 3,281,505
Compaq Computer Corp. ............................. 124,500 7,026,469
------------
10,307,974
------------
Pollution Control (3.6%)
Browning-Ferris Industries, Inc. .................. 268,000 9,916,000
U.S. Filter Corp.* ................................ 147,600 4,418,775
------------
14,334,775
------------
Real Estate (0.1%)
Federal National Mortgage Association ............. 8,300 473,619
------------
Retail and Shipping (1.7%)
Burlington Northern Santa Fe ...................... 42,000 3,903,375
Wisconsin Central Transport* ...................... 127,400 2,977,975
------------
6,881,350
------------
Special Services (5.0%)
Accustaff, Inc.* .................................. 50,400 1,159,200
First Data Corp. .................................. 115,000 3,363,750
HBO & Co. ......................................... 248,700 11,937,600
Robert Half International, Inc.* .................. 83,600 3,344,000
------------
19,804,550
------------
Specialty Chemicals (1.2%)
Cytec Industries, Inc.* ........................... 62,300 2,924,206
Praxair, Inc. ..................................... 44,800 2,016,000
------------
4,940,206
------------
</TABLE>
12 See Notes to Schedule of Investments
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Market
Shares Value
---------- ------
<S> <C> <C>
Specialty Stores (2.1%)
Gymboree Corp.* ................................... 7,900 $ 216,263
Home Depot, Inc. .................................. 91,200 5,369,400
Kwik--Fit Holdings PLC (Great Britain) ............ 37,800 219,304
Office Depot, Inc.* ............................... 115,300 2,759,994
------------
8,564,961
------------
Telephone Services (2.5%)
Brooks Fiber Properties, Inc.* .................... 2,700 148,500
Intermedia Communications, Inc.* .................. 3,300 200,475
MCI Communications Corp. .......................... 61,100 2,615,844
Sprint Corp. ...................................... 77,400 4,537,575
Worldcom, Inc.* ................................... 86,500 2,616,625
------------
10,119,019
------------
Total Common Stocks (Cost $391,424,116) 388,637,236
------------
TOTAL INVESTMENTS (97.3%) (Cost $391,424,116) (a) 388,637,236
Other assets less liabilities (2.7%) 10,910,897
------------
Total Net Assets (100.0%) $399,548,133
============
Notes to Schedule of Investments
(a) The cost of investments for federal income tax purposes amounts to
$391,481,655. Unrealized gains and losses, based on identified tax cost at
December 31, 1997, are as follows:
Unrealized gains ......................................................... $10,455,422
Unrealized losses ........................................................ (13,299,841)
------------
Net unrealized loss ...................................................... $(2,844,419)
============
</TABLE>
* Non-income producing security.
Category percentages are based on net assets.
See Notes to Financial Statements. 13
<PAGE>
MFS Value Equity Portfolio
Schedule of Investments
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Market
Shares Value
----------------- -----------------
<S> <C> <C>
COMMON STOCKS (92.2%)
Aerospace and Defense (4.3%)
Howmet International, Inc.* ......................... 88,300 $ 1,318,981
Newport News Shipbuilding ........................... 7,200 183,150
Raytheon Co., Class A ............................... 72,800 3,589,950
Thiokol Corp. ....................................... 7,900 641,875
------------
5,733,956
------------
Banks and Credit (8.9%)
Banco Totta & Acores (Portugal) ..................... 44,200 867,907
Dah Sing Financial Group (Hong Kong) ................ 147,200 354,266
First Union Corp. ................................... 37,800 1,937,250
Fleet Financial Group, Inc. ......................... 38,100 2,855,119
Liu Chong Hing Bank Ltd. (Hong Kong) ................ 182,000 265,392
National City Corp. ................................. 31,400 2,064,550
Sparbanken Sverige AB., Class A (Sweden) ............ 46,100 1,048,001
Wells Fargo & Co. ................................... 7,300 2,477,894
Wing Hang Bank Ltd. (Hong Kong) ..................... 25,800 72,913
------------
11,943,292
------------
Beverages and Tobacco (2.2%)
Philip Morris Co., Inc. ............................. 64,100 2,904,531
------------
Broadcast and Cable TV (2.2%)
American Radio Systems Corp.* ....................... 24,600 1,311,488
Granite Broadcasting Corp.* ......................... 31,100 281,844
Gray Communications Systems, Inc. ................... 6,500 170,625
Hearst-Argyle Television, Inc.* ..................... 300 8,925
LIN Television Corp.* ............................... 16,000 872,000
Telemundo Group, Inc., Class A* ..................... 8,800 359,700
------------
3,004,582
------------
Brokers and Asset Managers (0.0%)
CIT Group, Inc., Class A* ........................... 100 3,225
------------
Chemicals (2.1%)
Akzo Nobel N.V. (Netherlands) ....................... 11,000 1,896,579
Cambrex Corp. ....................................... 21,600 993,600
------------
2,890,179
------------
Computer Software (4.1%)
Adobe Systems, Inc. ................................. 56,400 2,326,494
Computer Associates International, Inc. ............. 36,300 1,919,363
Synopsys, Inc.* ..................................... 36,065 1,289,307
------------
5,535,164
------------
Conglomerates (6.1%)
Allied Signal, Inc. ................................. 19,200 747,600
Tyco International Ltd. ............................. 166,700 7,511,919
------------
8,259,519
------------
Drugs (6.1%)
Bristol-Myers Squibb Co. ............................ 16,500 1,561,313
Novartis AG-Registered Shares (Switzerland) ......... 1,100 1,784,089
Sanofi SA (France) .................................. 43,600 4,853,700
------------
8,199,102
------------
Electronics (3.2%)
Analog Devices, Inc.* ............................... 68,500 $ 1,896,594
Teradyne, Inc.* ..................................... 52,300 1,673,600
Xilinx, Inc.* ....................................... 21,500 753,844
------------
4,324,038
------------
Food and Drug Stores (9.6%)
Fred Myer, Inc.* .................................... 184,600 6,714,825
Rite Aid Corp. ...................................... 51,900 3,045,881
Safeway, Inc.* ...................................... 49,000 3,099,250
------------
12,859,956
------------
Forest and Paper (1.1%)
Jefferson Smurfit Corp.* ............................ 2,600 36,725
Stone Container Corp.* .............................. 94,500 986,344
Temple Inland, Inc. ................................. 8,900 465,581
------------
1,488,650
------------
Gaming and Lodging (6.3%)
Casino America, Inc.* ............................... 500 1,219
Dollar Thrifty Automotive Group, Inc.* .............. 7,800 159,900
Harrah's Entertainment, Inc.* ....................... 129,600 2,446,200
Hilton Hotels Corp. ................................. 39,000 1,160,250
ITT Corp.* .......................................... 24,300 2,013,863
Mandarin Oriental International Ltd. (Malaysia) 8,900 5,963
Promus Hotel Corp.* ................................. 53,780 2,258,760
Tanjong PLC (Malaysia) .............................. 251,000 416,233
------------
8,462,388
------------
Health Maintenance Organizations (2.9%)
United Healthcare Corp. ............................. 78,200 3,885,563
------------
Household and Personal Care (0.8%)
Benckiser NV (Netherlands)* ......................... 25,600 1,059,274
------------
Insurance (7.0%)
CIGNA Corp. ......................................... 10,300 1,782,544
Hartford Financial Services Group ................... 22,000 2,058,375
Lincoln National Corp. .............................. 33,000 2,578,125
Penncorp Financial Group, Inc. ...................... 47,100 1,680,881
Reliastar Financial Corp. ........................... 32,100 1,322,119
------------
9,422,044
------------
Medical Equipment (0.5%)
AmeriSource Health Corp., Class A* .................. 10,800 634,500
------------
Medical Services (1.6%)
Integrated Health Services, Inc. .................... 1,400 43,663
Tenet Healthcare Corp.* ............................. 62,000 2,053,750
------------
2,097,413
------------
Network and Telecommunications (4.7%)
Alcatel Alsthom Compagnie Generale
d'electricite ADR (France) ........................ 34,700 878,344
Alcatel Alsthom (France) ............................ 29,000 3,686,132
Ascend Communications, Inc.* ........................ 7,900 193,550
Nokia Oyj ADR (Finland) ............................. 21,400 1,498,000
------------
6,256,026
------------
</TABLE>
14 See Notes to Schedule of Investments
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Market
Shares Value
----------------- -----------------
<S> <C> <C>
Oil and Gas (3.3%)
British Petroleum Co. PLC ADR (Great Britain) ..... 28,300 $ 2,255,156
Enron Oil & Gas Co. ............................... 101,900 2,159,006
-----------
4,414,162
-----------
PC's and Peripherals (2.0%)
Compaq Computer Corp. ............................. 48,600 2,742,863
-----------
Pollution Control (1.3%)
Waste Management, Inc. ............................ 65,000 1,787,500
-----------
Printing and Publishing (0.1%)
New Straits Times Press (Malaysia) ................ 133,000 164,814
-----------
Real Estate (0.9%)
Federal Home Loan Mortgage Corp. .................. 29,400 1,232,963
-----------
Restaurants (0.7%)
Cafe De Coral Holdings (Hong Kong) ................ 524,600 114,363
Outback Steakhouse, Inc.* ......................... 31,000 891,250
-----------
1,005,613
-----------
Retail and Shipping (2.4%)
Canadian National Railway Co. (Canada) ............ 51,500 2,433,375
Wisconsin Central Transport* ...................... 36,300 848,513
-----------
3,281,888
-----------
Special Services (1.6%)
Corporate Services Group PLC (Great Britain) ...... 33,700 117,974
Galileo International, Inc. ....................... 72,400 2,000,050
-----------
2,118,024
-----------
Specialty Chemicals (0.1%)
NL Industries, Inc. ............................... 11,200 152,600
-----------
Specialty Stores (0.8%)
Gymboree Corp.* ................................... 300 8,213
Office Depot, Inc.* ............................... 41,900 1,002,981
-----------
1,011,194
-----------
Telephone Services (5.3%)
Cellular Communications International, Inc.* ...... 51,000 2,384,250
LCI International, Inc.* .......................... 43,600 1,340,700
SK Telecom Co. Ltd. ADR (South Korea) ............. 136,784 889,096
Sprint Corp. ...................................... 10,600 621,425
Telecom Italia SpA (Italy)* ....................... 415,400 1,831,582
-----------
7,067,053
-----------
Total Common Stocks (Cost $122,113,332) 123,942,076
-----------
PREFERRED STOCKS (1.9%)
Henkel KGAA (Germany) ............................. 25,700 $ 1,621,472
Wella Aktiengesellschaft (Germany) ................ 1,200 910,531
------------
2,532,003
------------
Total Preferred Stocks (Cost $2,487,030) 2,532,003
------------
TOTAL INVESTMENTS (94.1%) (Cost $124,600,362) (a) 126,474,079
Other assets less liabilities (5.9%) 8,034,082
------------
Total Net Assets (100.0%) $134,508,161
============
Notes to Schedule of Investments
(a) The cost of investments for federal income tax purposes amounts to
$124,648,720. Unrealized gains and losses, based on identified tax cost at
December 31, 1997, are as follows:
Unrealized gains .................................. $ 4,250,343
Unrealized losses ................................. (2,424,984)
------------
Net unrealized gain .............................. $ 1,825,359
============
</TABLE>
* Non-income producing security.
Category percentages are based on net assets.
See Notes to Financial Statements. 15
<PAGE>
Scudder International Growth Portfolio
Schedule of Investments
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Market
Shares Value
----------------- -----------------
<S> <C> <C>
COMMON STOCKS (91.6%)
Argentina (0.7%)
YPF Sociedad Anonima ADR (Oil and Gas) ............ 79,900 $ 2,731,581
------------
Canada (1.2%)
Canadian National Railway Co. (Transportation)..... 97,000 4,567,817
------------
China (0.1%)
Jiangsu Expressway Co. Ltd. (Transportation)* ..... 2,174,700 448,858
------------
Finland (1.9%)
Nokia Oyj., Class A (Communications) .............. 55,000 3,904,819
Pohjola Insurance Group., Class B (Insurance) ..... 90,000 3,335,193
------------
Total Finland 7,240,012
------------
France (14.7%)
Accor SA (Lodging) ................................ 20,483 3,808,337
AGF-Assurances Generales de France
(Insurance) ..................................... 101,087 5,356,256
Alcatel Alsthom (Communications) .................. 39,669 5,042,247
Axa UAP (Insurance) ............................... 37,063 2,867,861
Carrefour SA (Food Retailers) ..................... 6,557 3,420,948
Christian Dior SA (Diversified) ................... 12,549 1,286,488
Compagnie Bancaire SA (Financial Services) ........ 15,357 2,487,840
Credit Commercial de France (Financial Services) 31,858 2,183,503
Elf Aquitaine SA (Oil and Gas) .................... 47,771 5,556,149
France Telecom SA (France) (Communications)* ...... 76,234 2,765,114
Lagardere S.C.A. (Financial Services) ............. 33,738 1,115,537
Renault SA (Automotive) ........................... 11,460 3,408,390
Rhone-Polenc., Class A (Chemicals) ................ 90,641 4,060,282
Schneider SA (Electronics) ........................ 55,617 3,019,959
Suez Lyonnaise des Eaux (Diversified) ............. 39,139 4,331,075
Thomson CSF (Electronics) ......................... 85,846 2,705,814
Total SA-Series B (Oil and Gas) ................... 21,723 2,364,138
------------
Total France 55,779,938
------------
Germany (15.2%)
Allianz AG (Insurance) ............................ 20,100 5,206,702
BASF AG (Chemicals) ............................... 85,600 3,033,433
Bayerische Vereinsbank AG (Banking) ............... 131,000 8,570,937
Commerzbank AG (Banking) .......................... 184,900 7,276,961
Dresdner Bank AG (Banking) ........................ 92,700 4,276,993
Heidelberger Druckmaschinen AG (Heavy
Machinery) ...................................... 14,157 775,154
Hoechst AG (Chemicals) ............................ 72,300 2,531,975
Mannesmann AG (Heavy Machinery) ................... 9,600 4,850,829
Muenchener Rueckversicherungs-Gesellschaft
AG (Insurance) .................................. 14,800 5,577,920
Schering AG (Pharmaceuticals) ..................... 32,400 3,124,821
Siemens AG (Electronics) .......................... 32,200 1,906,279
Thyssen AG (Diversified) .......................... 13,100 2,803,579
Veba AG (Electric Utilities) ...................... 80,500 5,481,664
Viag AG (Industrial--Diversified) ................. 3,552 1,913,276
------------
Total Germany 57,330,523
------------
Great Britain (14.5%)
Avis Europe PLC (Automotive)** .................... 169,150 $ 483,718
BOC Group PLC (Chemicals) ......................... 239,831 3,945,676
British Petroleum Co. PLC (Oil and Gas) ........... 300,329 3,948,816
Carlton Communications PLC (Communications) 418,300 3,231,200
General Electric PLC (Electronics) ................ 633,701 4,108,727
Glaxo Wellcome PLC (Pharmaceuticals) .............. 176,549 4,178,385
Imperial Chemical Industries PLC (Chemicals)* ..... 218,550 3,415,958
Pearson PLC (Communications) ...................... 270,250 3,513,358
Pilkington PLC (Building Materials) ............... 890,321 1,865,668
Powergen PLC (Electric Utilities) ................. 408,188 5,313,300
Reuters Holdings PLC (Media--Broadcasting
and Publishing) ................................. 302,398 3,305,059
Rio Tinto PLC (Mining) ............................ 147,702 1,818,226
SmithKline Beecham PLC (Pharmaceuticals) .......... 585,171 5,991,741
WPP Group PLC (Communications) .................... 1,033,295 4,602,296
Zeneca Group PLC (Pharmaceuticals) ................ 141,000 4,952,287
------------
Total Great Britain 54,674,415
------------
Hong Kong (4.2%)
Anhui Expressway Co. Ltd. (Transportation)* ....... 2,442,100 409,540
Cheung Kong Ltd. (Real Estate) .................... 238,300 1,560,674
China Telecom Ltd. (Communications)* .............. 110,500 189,651
Citic Pacific Ltd. (Diversified) .................. 143,800 571,562
Cosco Pacific Ltd. (Transportation) ............... 862,600 701,294
Great Eagle Holdings Ltd. (Real Estate) ........... 562,600 787,696
Guangshen Railway Co. Ltd. ADR
(Transportation) ................................ 90,163 1,211,565
GZI Transportation Ltd. (Transportation)* ......... 249,600 83,741
Hong Kong & China Gas Co. Ltd. (Oil and Gas) ...... 400 774
HSBC Holdings PLC (Financial Services) ............ 132,800 3,273,294
Hutchison Whampoa Ltd. (Diversified) .............. 277,800 1,742,278
Kerry Properties Ltd. (Real Estate) ............... 946,100 1,562,768
New World Development Co. Ltd. (Real Estate) 400,000 1,383,400
New World Infrastructure Ltd. (Heavy
Machinery)* ..................................... 100,400 226,091
Shenzhen Expressway Co. Ltd.
(Transportation)* ............................... 2,061,600 398,920
Television Broadcasts Ltd. (Communications) ....... 518,400 1,478,425
Zhejiang Expressway Co. Ltd. (Transportation)* 2,314,300 468,877
------------
Total Hong Kong 16,050,550
------------
Indonesia (0.0%)
Asia Pacific Resource International Ltd.,
Class A (Forest Products and Paper)* ............ 17,355 32,541
------------
Italy (3.0%)
Istituto Nazionale delle Assicurazioni
(Insurance) ..................................... 2,121,900 4,300,030
Telecom Italia Mobile SpA (Communications) ........ 1,556,000 7,181,874
------------
Total Italy 11,481,904
------------
</TABLE>
16 See Notes to Schedule of Investments
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Market
Shares Value
----------------- -----------------
<S> <C> <C>
Japan (15.3%)
Advantest Corp. (Electronics) .......................... 53,000 $ 3,004,671
Bridgestone Corp. (Automotive) ......................... 132,000 2,861,866
Canon, Inc. (Electronics) .............................. 188,000 4,378,445
Daiwa Securities Co. Ltd. (Financial Services) ......... 477,000 1,644,410
Fujitsu Ltd. (Computers and Information) ............... 348,000 3,732,474
Hitachi Construction Machinery Co. (Heavy
Machinery) ........................................... 89,000 280,234
Keyence Corp. (Electronics) ............................ 27,100 4,006,971
Matsushita Electric Works, Ltd. (Electronics) .......... 132,000 1,142,724
Minebea Co. Ltd. (Heavy Machinery) ..................... 189,000 2,027,120
Nichiei (Financial Services) ........................... 43,000 4,579,023
Nintendo Corp Ltd. (Diversified) ....................... 42,400 4,157,816
Nippon Telegraph & Telephone Corp.
(Communications) ..................................... 290 2,488,317
Nomura Securities Co. Ltd. (Financial Services) 210,000 2,799,342
Orix Corp. (Financial Services) ........................ 41,500 2,893,202
Ricoh Co. Ltd. (Office Equipment and Supplies) 183,000 2,271,195
Secom Co. Ltd. (Commercial Services) ................... 34,000 2,172,372
Shohkoh Fund (Financial Services) ...................... 8,000 2,439,286
SMC Corp. (Heavy Machinery) ............................ 41,200 3,629,815
Sony Corp. (Electronics) ............................... 43,700 3,883,549
Sumitomo Metal Industries (Metals) ..................... 804,000 1,028,557
Tokyo Electron Ltd. (Electronics) ...................... 78,000 2,497,810
------------
Total Japan 57,919,199
------------
Malaysia (0.4%)
Arab Malaysian Corp. (Financial Services) .............. 506,200 149,633
Arab Malaysian Finance (Financial Services) ............ 747,300 149,834
Malayan Banking (Financial Services) ................... 129,300 375,642
Malaysian Resources Corp. (Financial Services) 803,400 185,826
Multi-Purpose Holdings (Financial Services) ............ 927,300 238,409
United Engineers (Heavy Machinery) ..................... 364,700 303,769
------------
Total Malaysia 1,403,113
------------
Netherlands (4.4%)
Aegon N.V. (Insurance) ................................. 54,300 4,833,748
Akzo Nobel N.V. (Chemicals) ............................ 11,300 1,948,304
Elsevier N.V. (Media--Broadcasting and
Publishing) .......................................... 96,300 1,557,778
Heineken Holding N.V., Class A (Beverages,
Food and Tobacco) .................................... 20,600 3,169,778
Philips Electronics N.V. (Electronics) ................. 53,800 3,226,434
Royal Dutch Petroleum Co. (Oil and Gas) ................ 36,800 2,019,992
------------
Total Netherlands 16,756,034
------------
Philippines (0.5%)
Ayala Land, Inc., Class B (Real Estate) ................ 317,000 125,215
C & P Homes, Inc. (Real Estate) ........................ 4,377,000 254,741
Manila Electric Co. (Electronics) ...................... 437,000 1,445,858
------------
Total Philippines 1,825,814
------------
Portugal (2.0%)
Estabelecimentos Jeronimo Martins & Filho, SA
(Food Retailers) ..................................... 28,400 $ 901,146
Portugal Telecom SA (Communications) ................... 141,000 6,542,456
------------
Total Portugal 7,443,602
------------
Sweden (3.7%)
AGA AB., B Shares (Chemicals) .......................... 119,000 1,573,692
Skandia Forsakrings AB (Insurance) ..................... 163,500 7,711,772
Telefonaktiebolaget LM Ericsson ADR
(Communications) ..................................... 120,508 4,496,455
------------
Total Sweden 13,781,919
------------
Switzerland (9.0%)
Ciba Specialty Chemicals AG (Chemicals)* ............... 37,245 4,434,989
Clariant AG (Chemicals) ................................ 5,955 4,971,839
Credit Suisse Group (Banking) .......................... 37,442 5,790,858
Nestle SA (Beverages, Food and Tobacco) ................ 2,308 3,457,459
Novartis AG-Registered Shares
(Pharmaceuticals) .................................... 2,961 4,802,443
Novartis AG (Pharmaceuticals) .......................... 2,356 3,829,256
Roche Holding AG (Pharmaceuticals) ..................... 410 4,069,837
Union Bank of Switzerland (Banking) .................... 1,849 2,672,430
------------
Total Switzerland 34,029,111
------------
United States (0.8%)
Autoliv, Inc. (Automotive) ............................. 94,940 3,109,285
------------
Total Common Stocks (Cost $341,329,105) 346,606,216
------------
PREFERRED STOCKS (2.4%)
Germany (2.4%)
RWE AG (Diversified) ................................... 130,100 5,496,309
SAP AG--Vorzug (Computer Software and
Processing) .......................................... 10,600 3,467,633
------------
Total Germany 8,963,942
------------
Total Preferred Stocks (Cost $8,543,754) 8,963,942
------------
WARRANTS (0.0%)
Hong Kong (0.0%)
Great Eagle Holdings Ltd. expires 11/30/98
(Real Estate)* ....................................... 112,500 14,513
------------
Total Warrants (Cost $33,472) 14,513
------------
</TABLE>
See Notes to Schedule of Investments. 17
<PAGE>
Scudder International Growth Portfolio
Schedule of Investments
December 31, 1997 (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Amount Value
-------------- ------------
<S> <C> <C>
CONVERTIBLE PREFERRED (0.3%)
Japan (0.3%)
Softbank Corp. (Computer Software and
Processing) 0.50%, due 3/29/02 .................. -Y-188,000,000 $1,123,300
-----------
Total Convertible Preferred (Cost $936,533) 1,123,300
-----------
TOTAL INVESTMENTS (94.3%) (Cost $350,842,864) (a) 356,707,971
Other assets less liabilities (5.7%) 21,492,206
-----------
Total Net Assets (100.0%) $378,200,177
===========
Notes to Schedule of Investments
(a) The cost of investments for federal income tax purposes amounts to
$351,509,537. Unrealized gains and losses, based on identified tax cost at
December 31, 1997, are as follows:
Unrealized gains ......................................................... $14,601,749
Unrealized losses ........................................................ (9,403,315)
-----------
Net unrealized gain ..................................................... $ 5,198,434
===========
</TABLE>
* Non-income producing security.
** Security exempt from registration under Rule 144A of the Securities Act of
1933. This security may be resold in transactions exempt from registration,
normally to qualified institutional buyers. At December 31, 1997, the
market value of this security amounted to $483,718 or 0.13% of net assets.
Category percentages are based on net assets.
18 See Notes to Financial Statements.
<PAGE>
T. Rowe Price Growth Equity Portfolio
Schedule of Investments
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Market
Shares Value
----------------- -----------------
<S> <C> <C>
COMMON STOCKS (91.7%)
Advertising (0.8%)
The Interpublic Group of Companies, Inc. ............ 57,400 $ 2,859,238
------------
Aerospace and Defense (2.1%)
Allied Signal, Inc. ................................. 129,600 5,046,300
Teleflex, Inc. ...................................... 78,300 2,955,825
------------
8,002,125
------------
Banking (7.0%)
Banca Fideuram SpA (Italy) .......................... 379,300 1,660,613
Barnett Banks, Inc. ................................. 27,100 1,947,812
Citicorp ............................................ 25,500 3,224,156
First Union Corp. ................................... 43,100 2,208,875
Mellon Bank Corp. ................................... 30,800 1,867,250
Northern Trust Corp. ................................ 25,400 1,771,650
Norwest Corp. ....................................... 138,800 5,361,150
Societe Generale., Class A (France) ................. 10,100 1,376,090
Toronto-Dominion Bank (Canada) ...................... 71,800 2,705,963
Wells Fargo & Co. ................................... 10,900 3,699,869
------------
25,823,428
------------
Beverages, Food and Tobacco (3.0%)
Pepsico, Inc. ....................................... 90,900 3,312,169
Philip Morris Co., Inc. ............................. 134,100 6,076,406
Unilever NV (Netherlands) ........................... 29,500 1,841,906
------------
11,230,481
------------
Chemicals (0.5%)
Great Lakes Chemical Corp. .......................... 11,300 507,088
Rhone-Polenc., Class A (France) ..................... 30,200 1,352,815
------------
1,859,903
------------
Commercial Services (1.9%)
Halliburton Co. ..................................... 38,300 1,989,206
H&R Block, Inc. ..................................... 67,000 3,002,438
Service Corp. International ......................... 56,100 2,072,194
------------
7,063,838
------------
Communications (3.4%)
AT&T Corp. .......................................... 52,600 3,221,750
MCI Communications Corp. ............................ 71,800 3,073,938
Nokia Oyj ADR (Finland) ............................. 22,400 1,568,000
Telecom Italia Mobile SpA (Italy) ................... 291,500 1,345,447
Vodafone Group PLC ADR (Great Britain) .............. 14,800 1,073,000
Vodafone Group PLC (Great Britain) .................. 95,700 690,485
Worldcom, Inc.* ..................................... 57,400 1,736,350
------------
12,708,970
------------
Computer Software and Processing (7.3%)
Automatic Data Processing, Inc. ..................... 47,800 2,933,725
BMC Software, Inc.* ................................. 67,000 4,396,875
First Data Corp. .................................... 137,100 4,010,175
Getronics NV (Netherlands) .......................... 41,100 1,309,425
Microsoft Corp.* .................................... 38,300 4,950,275
Computer Software and Processing (continued)
Networks Associates, Inc.* .......................... 69,900 $ 3,695,963
Oracle Systems Corp.* ............................... 92,100 2,054,981
Parametric Technology Co.* .......................... 83,300 3,946,338
------------
27,297,757
------------
Computers and Information (2.6%)
Cisco Systems, Inc.* ................................ 40,350 2,249,513
Compaq Computer Corp. ............................... 47,300 2,669,494
Dell Computer Corp.* ................................ 12,800 1,075,200
EMC Corp.* .......................................... 47,800 1,311,513
Hewlett-Packard Co. ................................. 35,400 2,212,500
------------
9,518,220
------------
Containers and Packaging (0.6%)
TriMas Corp. ........................................ 67,000 2,303,125
------------
Cosmetics and Personal Care (0.6%)
Procter & Gamble Co. ................................ 26,800 2,138,975
------------
Diversified (2.5%)
Hutchison Whampoa Ltd. (Hong Kong) .................. 431,000 2,703,103
SLM Holding Corp. ................................... 7,700 1,071,263
Tyco International Ltd. ............................. 119,900 5,402,980
------------
9,177,346
------------
Electronics (3.6%)
Analog Devices, Inc.* ............................... 70,100 1,940,894
ASM Lithography Holding N.V. (Netherlands)* ......... 29,600 1,998,000
Intel Corp. ......................................... 20,700 1,454,175
Linear Technology Corp. ............................. 38,300 2,207,038
Maxim Intergrated Products, Inc.* ................... 91,000 3,139,500
Molex Inc., Class A ................................. 44,275 1,272,906
National Semiconductor Corp.* ....................... 48,800 1,265,750
------------
13,278,263
------------
Entertainment and Leisure (2.4%)
Granada Group PLC (Great Britain) ................... 134,000 2,048,177
Mattel, Inc. ........................................ 60,300 2,246,175
The Walt Disney Co. ................................. 47,100 4,665,844
------------
8,960,196
------------
Environmental Controls (0.8%)
USA Waste Services, Inc.* ........................... 71,800 2,818,150
------------
Financial Services (8.5%)
Berkshire Hathaway, Inc., Class A* .................. 150 6,900,000
Cendant Corp.* ...................................... 133,800 4,599,375
Federal Home Loan Mortgage Corp. .................... 208,000 8,723,000
Federal National Mortgage Association ............... 112,100 6,396,706
Mutual Risk Management Ltd. ......................... 121,000 3,622,438
Reuters Holdings PLC ADR (Great Britain) ............ 17,900 1,185,875
------------
31,427,394
------------
Food Retailers (1.0%)
Safeway, Inc.* ...................................... 60,300 3,813,975
------------
</TABLE>
See Notes to Schedule of Investments. 19
<PAGE>
T. Rowe Price Growth Equity Portfolio
Schedule of Investments
December 31, 1997 (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Market
Shares Value
------------ --------------
<S> <C> <C>
Forest Products and Paper (1.5%)
Ikon Office Solutions, Inc. ..................... 58,600 $ 1,648,125
Kimberly-Clark Corp. ............................ 57,400 2,830,538
Kimberly-Clark de Mexico, SA de CV (Mexico) ..... 244,200 1,155,847
------------
5,634,510
------------
Health Care Providers (0.9%)
Healthsouth Corp.* .............................. 114,500 3,177,375
------------
Healthcare Providers (0.9%)
PacifiCare Health Systems, Inc., Class B* ....... 21,400 1,120,825
United Healthcare Corp. ......................... 45,800 2,275,688
------------
3,396,513
------------
Heavy Machinery (0.4%)
Mannesmann AG (Germany) ......................... 3,000 1,515,884
------------
Home Construction, Furnishings and Appliances (2.7%)
General Electric Co. ............................ 138,800 10,184,450
------------
Industrial--Diversified (2.1%)
Rentokil Initial PLC (Great Britain) ............ 794,900 3,462,107
Swire Pacific Ltd., Class A (Hong Kong) ......... 287,000 1,574,052
Tomkins PLC (Great Britain) ..................... 555,100 2,654,877
------------
7,691,036
------------
Insurance (6.8%)
Ace Ltd. (Bermuda) .............................. 34,800 3,358,200
EXEL Ltd. (Bermuda) ............................. 16,900 1,071,038
Fairfax Financial Holdings Ltd.* ................ 13,200 2,955,603
Partner Re Ltd. (Bermuda) ....................... 145,400 6,742,925
St. Paul Companies, Inc. ........................ 16,100 1,321,206
Travelers Property Casualty ..................... 61,500 3,313,313
Travelers Property Casualty Corp., Class A ...... 38,300 1,685,200
UNUM Corp. ...................................... 86,900 4,725,188
------------
25,172,673
------------
Media--Broadcasting and Publishing (3.5%)
Cox Communications, Inc., Class A* .............. 57,400 2,299,588
Schibsted ASA (Norway)** ........................ 64,100 1,097,866
Tribune Co. ..................................... 67,000 4,170,750
TV Azteca, S.A. de C.V. ADR (Mexico)* ........... 39,600 893,475
VNU--Verenigde Nederlandse
Uitgeversbedrijven (Netherlands) .............. 107,500 3,032,564
Wolters Kluwer NV (Netherlands) ................. 11,900 1,537,055
------------
13,031,298
------------
Medical Supplies (1.8%)
Baxter International, Inc. ...................... 23,700 1,195,369
Johnson & Johnson ............................... 24,900 1,640,288
Medtronic, Inc. ................................. 31,100 1,626,919
Tenet Healthcare Corp.* ......................... 68,700 2,275,688
------------
6,738,264
------------
Medical and Bio-Technology (0.4%)
Honeywell, Inc. ................................. 20,400 1,397,400
------------
Metals (2.8%)
Danaher Corp. ................................... 116,900 $ 7,379,313
Masco Corp. ..................................... 62,200 3,164,425
------------
10,543,738
------------
Mining (0.5%)
Newmont Mining Corp. ............................ 67,000 1,968,125
------------
Oil and Gas (3.3%)
Mobil Corp. ..................................... 43,100 3,111,281
Royal Dutch Petroleum Co. (Netherlands) ......... 143,600 7,781,325
Schlumberger Ltd. ............................... 18,000 1,449,000
------------
12,341,606
------------
Pharmaceuticals (8.6%)
American Home Products Corp. .................... 31,100 2,379,150
Amgen, Inc.* .................................... 26,900 1,455,963
Astra AB., B Shares (Sweden) .................... 104,400 1,755,361
Biogen, Inc.* ................................... 40,700 1,480,463
Bristol-Myers Squibb Co. ........................ 37,800 3,576,825
Genentech, Inc.* ................................ 47,800 2,897,875
Merck & Co., Inc. ............................... 45,900 4,876,875
Novartis AG-Registered Shares (Switzerland) ..... 1,900 3,081,608
Pfizer, Inc. .................................... 64,000 4,772,000
Warner-Lambert Co. .............................. 19,100 2,368,400
Zeneca Group PLC (Great Britain) ................ 95,700 3,361,233
------------
32,005,753
------------
Real Estate (1.6%)
Security Capital U.S. Realty (Luxembourg)* ...... 136,500 1,938,300
Starwood Lodging Trust .......................... 66,600 3,854,475
------------
5,792,775
------------
Restaurants (0.4%)
McDonald's Corp. ................................ 32,100 1,532,775
------------
Retailers (3.6%)
Circuit City Stores--Circuit City Group ......... 26,300 935,294
Corporate Express, Inc.* ........................ 96,800 1,246,300
CVS Corp. ....................................... 30,200 1,934,688
Dillards, Inc., Class A ......................... 52,600 1,854,150
Home Depot, Inc. ................................ 42,100 2,478,638
Kohl's Corp.* ................................... 15,500 1,055,938
TAG Heuer International SA ADR (Switzerland)* 25,000 206,250
TAG Heuer International SA (Switzerland)* ....... 11,850 1,029,905
Wal-Mart Stores, Inc. ........................... 62,200 2,453,013
------------
13,194,176
------------
Textiles, Clothing and Fabrics (0.7%)
Sara Lee Corp. .................................. 47,600 2,680,475
------------
Transportation (0.6%)
Carnival Corp., Class A ......................... 38,400 2,126,400
------------
Total Common Stocks (Cost $335,345,320) 340,406,610
------------
</TABLE>
20 See Notes to Schedule of Investments.
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Market
Shares Value
------------ -------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (7.9%)
U.S. Treasury Bill, 5.15%, 01/22/98 ............. $14,433,000 $14,335,008
Barnett Banks, Inc. Commercial Paper, 5.85%,
01/16/98 ...................................... 5,000,000 4,970,750
Yale University, Commercial Paper, 5.83%,
01/15/98 ...................................... 10,000,000 9,943,319
-----------
Total Short-Term Investments (Cost $29,249,077) 29,249,077
-----------
TOTAL INVESTMENTS (99.6%) (Cost $364,594,397) (a) 369,655,687
Other assets less liabilities (0.4%) 1,537,923
-----------
Total Net Assets (100.0%) $371,193,610
===========
Notes to Schedule of Investments
(a) The cost of investments for federal income tax purposes amounts to
$364,731,771. Unrealized gains and losses, based on identified tax cost at
December 31, 1997, are as follows:
Unrealized gains ................................ $12,069,913
Unrealized losses ............................... (7,145,997)
------------
Net unrealized gain ............................ $ 4,923,916
===========
</TABLE>
* Non-income producing security.
** Security exempt from registration under Rule 144A of the Securities Act of
1933. This security may be resold in transactions exempt from registration,
normally to qualified institutional buyers. At December 31, 1997, the
market value of this security amounted to $1,097,866 or 0.30% of net
assets.
Category percentages are based on net assets.
See Notes to Financial Statements. 21
<PAGE>
Portfolio Partners, Inc.
Statements of Assets and Liabilities
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MFS Emerging MFS Research
Equities Portfolio Growth Portfolio
-------------------- ------------------
<S> <C> <C>
Assets:
Investments, at market value ................... $582,219,750 $388,637,236
Repurchase Agreement ........................... 163,000,000 --
------------ ------------
Total investments ........................... 745,219,750 338,637,236
Cash ........................................... 82,874,140 23,452,576
Cash denominated in foreign currencies ......... -- --
Receivable for:
Dividends and interest ........................ 467,621 368,721
Investments sold .............................. -- 48,851,906
Fund shares sold .............................. -- 25,939
Recoverable foreign taxes ..................... 1,404 405
Deposit with broker ............................ 3,015,000
Gross unrealized gain on forward foreign
currency exchange contracts ................... -- 367
------------ ------------
Total Assets ................................ 831,577,915 461,337,150
------------ ------------
Liabilities:
Payable for:
Investments purchased ......................... 54,731,311 59,954,518
Fund shares redeemed .......................... 8,148,987 1,521,873
Variation margin on open futures contracts 15,000 --
Foreign currency overdraft .................... -- --
Administrative services fees payable ........... 91,856 55,169
Advisory fees payable .......................... 482,568 257,457
Gross unrealized loss on forward foreign
currency exchange contracts ................... -- --
------------ ------------
Total Liabilities ........................... 63,469,722 61,789,017
------------ ------------
NET ASSETS ..................................... $768,108,193 $399,548,133
============ ============
Net assets represented by:
Paid-in Capital ................................ $776,543,294 $406,878,167
Net unrealized gain (loss) on investments,
open futures contracts and foreign
currency related translations ................. (8,920,510) (2,786,810)
Undistributed net investment income ............ 1,629,226 103,342
Accumulated net realized gain (loss) on
investments ................................... (1,143,817) (4,646,566)
------------ ------------
NET ASSETS ..................................... $768,108,193 $399,548,133
============ ============
Capital Shares, $.001 par value:
Outstanding ................................... 17,899,936 41,145,690
Net Assets .................................... $768,108,193 $399,548,133
Net Asset Value, offering and
redemption price per share (net
assets divided by shares outstanding) $ 42.91 $ 9.71
Cost of investments ............................ $756,263,198 $391,424,116
Cost of cash denominated in foreign
currencies .................................... $ -- $ --
<CAPTION>
MFS Value Scudder International T. Rowe Price Growth
Equity Portfolio Growth Portfolio Equity Portfolio
------------------ ----------------------- ----------------------
<S> <C> <C> <C>
Assets:
Investments, at market value ................... $126,474,079 $ 356,707,971 $ 369,655,687
Repurchase Agreement ........................... -- -- --
------------ ------------- -------------
Total investments ........................... 126,474,079 356,707,971 369,655,687
Cash ........................................... 8,953,939 24,746,050 276
Cash denominated in foreign currencies ......... 5,052,201 -- 2,763,337
Receivable for:
Dividends and interest ........................ 143,322 233,270 468,254
Investments sold .............................. 374,763 7,236,226 2,151,286
Fund shares sold .............................. -- -- --
Recoverable foreign taxes ..................... 56 27,858 1,608
Deposit with broker ............................
Gross unrealized gain on forward foreign
currency exchange contracts ................... -- 20,189 --
------------ ------------- -------------
Total Assets ................................ 140,998,360 388,971,564 375,040,448
------------ ------------- -------------
Liabilities:
Payable for:
Investments purchased ......................... 6,321,371 5,267,640 3,239,507
Fund shares redeemed .......................... 56,430 2,970,050 354,043
Variation margin on open futures contracts -- -- --
Foreign currency overdraft .................... -- 2,160,952 --
Administrative services fees payable ........... 30,466 70,741 50,658
Advisory fees payable .......................... 79,213 282,965 202,630
Gross unrealized loss on forward foreign
currency exchange contracts ................... 2,719 19,039 --
------------ ------------- -------------
Total Liabilities ........................... 6,490,199 10,771,387 3,846,838
------------ ------------- -------------
NET ASSETS ..................................... $134,508,161 $ 378,200,177 $ 371,193,610
============ ============= =============
Net assets represented by:
Paid-in Capital ................................ $132,623,488 $ 372,261,993 $ 363,796,621
Net unrealized gain (loss) on investments,
open futures contracts and foreign
currency related translations ................. 1,866,691 5,855,722 5,067,172
Undistributed net investment income ............ 230,432 44,729 554,334
Accumulated net realized gain (loss) on
investments ................................... (212,450) 37,733 1,775,483
------------ ------------- -------------
NET ASSETS ..................................... $134,508,161 $ 378,200,177 $ 371,193,610
============ ============= =============
Capital Shares, $.001 par value:
Outstanding ................................... 4,497,589 26,828,266 8,512,069
Net Assets .................................... $134,508,161 $ 378,200,177 $ 371,193,610
Net Asset Value, offering and
redemption price per share (net
assets divided by shares outstanding) $ 29.91 $ 14.10 $ 43.61
Cost of investments ............................ $124,600,362 $ 350,842,864 $ 364,594,397
Cost of cash denominated in foreign
currencies .................................... $ 5,131,525 $ -- $ 2,803,592
</TABLE>
22 See Notes to Financial Statements.
<PAGE>
Portfolio Partners, Inc.
Statements of Operations
Period from November 28, 1997 (commencement of operations) to December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MFS Emerging MFS Research
Equities Portfolio Growth Portfolio
-------------------- ------------------
<S> <C> <C>
Investment Income:
Dividends .................................... $ 87,741 $ 310,951
Interest ..................................... 2,120,093 84,868
------------- ------------
2,207,834 395,819
Foreign taxes withheld on dividends ........... (4,184) (1,217)
------------- ------------
Total investment income .................... 2,203,650 394,602
------------- ------------
Investment Expenses:
Investment advisory fee ....................... 482,568 257,457
Administrative services fees .................. 91,856 55,169
------------- ------------
Total expenses ............................. 574,424 312,626
------------- ------------
Net investment income ......................... 1,629,226 81,976
------------- ------------
Net Realized and Unrealized Gain (Loss):
Net realized gain (loss) on:
Sale of investments .......................... 971 (4,646,566)
Futures, foreign currency and forward
foreign currency exchange contracts ......... (1,144,788) 21,366
------------- ------------
Net realized gain (loss) on investments,
futures, foreign currency and forward
foreign currency exchange contracts ......... (1,143,817) (4,625,200)
------------- ------------
Net change in unrealized gain or (loss) on:
Investments .................................. (11,043,448) (2,786,880)
Futures, foreign currency and forward
foreign currency exchange contracts ......... 2,122,938 70
------------- ------------
Net change in unrealized gain or
(loss) on investments, futures,
foreign currency and forward
foreign currency exchange
contracts ................................ (8,920,510) (2,786,810)
------------- ------------
Net realized and change in unrealized gain
or (loss) on investments, futures, foreign
currency and forward foreign currency
exchange contracts ........................... (10,064,327) (7,412,010)
------------- ------------
Net increase (decrease) in net assets
resulting from operations .................... $ (8,435,101) $ (7,330,034)
============= ============
<CAPTION>
MFS Value Scudder International T. Rowe Price Growth
Equity Portfolio Growth Portfolio Equity Portfolio
------------------ ----------------------- ----------------------
<S> <C> <C> <C>
Investment Income:
Dividends .................................... $ 77,948 $ 325,120 $ 349,717
Interest ..................................... 273,515 100,928 438,305
---------- ---------- ----------
351,463 426,048 788,022
Foreign taxes withheld on dividends ........... (173) (31,413) (2,421)
---------- ---------- ----------
Total investment income .................... 351,290 394,635 785,601
---------- ---------- ----------
Investment Expenses:
Investment advisory fee ....................... 79,213 282,965 202,630
Administrative services fees .................. 30,466 70,741 50,658
---------- ---------- ----------
Total expenses ............................. 109,679 353,706 253,288
---------- ---------- ----------
Net investment income ......................... 241,611 40,929 532,313
---------- ---------- ----------
Net Realized and Unrealized Gain (Loss):
Net realized gain (loss) on:
Sale of investments .......................... (417,752) 37,733 301,621
Futures, foreign currency and forward
foreign currency exchange contracts ......... 194,123 3,800 1,495,883
---------- ---------- ----------
Net realized gain (loss) on investments,
futures, foreign currency and forward
foreign currency exchange contracts ......... (223,629) 41,533 1,797,504
---------- ---------- ----------
Net change in unrealized gain or (loss) on:
Investments .................................. 1,873,717 5,865,107 5,061,290
Futures, foreign currency and forward
foreign currency exchange contracts ......... (7,026) (9,385) 5,882
---------- ---------- ----------
Net change in unrealized gain or
(loss) on investments, futures,
foreign currency and forward
foreign currency exchange
contracts ................................ 1,866,691 5,855,722 5,067,172
---------- ---------- ----------
Net realized and change in unrealized gain
or (loss) on investments, futures, foreign
currency and forward foreign currency
exchange contracts ........................... 1,643,062 5,897,255 6,864,676
---------- ---------- ----------
Net increase (decrease) in net assets
resulting from operations .................... $1,884,673 $5,938,184 $7,396,989
========== ========== ==========
</TABLE>
See Notes to Financial Statements. 23
<PAGE>
Portfolio Partners, Inc.
Statements of Changes in Net Assets
Period from November 28, 1997 (commencement of operations) to December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MFS Emerging MFS Research
Equities Portfolio Growth Portfolio
-------------------- ------------------
<S> <C> <C>
From Operations:
Net investment income ................ $ 1,629,226 $ 81,976
Net realized gain (loss) on
investments, futures, foreign
currency and forward foreign
currency exchange contracts ......... (1,143,817) (4,625,200)
Net change in unrealized gain or
(loss) on investments, futures,
foreign currency and forward
foreign currency exchange
contracts ........................... (8,920,510) (2,786,810)
------------- ------------
Net increase (decrease) in net
assets resulting from operations (8,435,101) (7,330,034)
------------- ------------
Fund Share Transactions:
Proceeds from shares sold ............ 824,137,595 412,691,854
Payments for shares redeemed ......... (47,614,301) (5,833,687)
------------- ------------
Net increase in net assets from
fund share transactions ............. 776,523,294 406,858,167
------------- ------------
Change in net assets ................. 768,088,193 399,528,133
Net Assets:
Beginning of period .................. 20,000 20,000
------------- ------------
End of period ........................ $ 768,108,193 $399,548,133
============= ============
End of period net assets includes
undistributed net investment
income .............................. $ 1,629,226 $ 103,342
============= ============
Share Transactions:
Number of shares sold ................ 19,024,246 41,744,286
Number of shares redeemed ............ (1,124,771) (600,618)
------------- ------------
Net increase ........................ 17,899,475 41,143,668
------------- ------------
<CAPTION>
MFS Value Scudder International T. Rowe Price Growth
Equity Portfolio Growth Portfolio Equity Portfolio
------------------ ----------------------- ----------------------
<S> <C> <C> <C>
From Operations:
Net investment income ................ $ 241,611 $ 40,929 $ 532,313
Net realized gain (loss) on
investments, futures, foreign
currency and forward foreign
currency exchange contracts ......... (223,629) 41,533 1,797,504
Net change in unrealized gain or
(loss) on investments, futures,
foreign currency and forward
foreign currency exchange
contracts ........................... 1,866,691 5,855,722 5,067,172
------------ ------------- -------------
Net increase (decrease) in net
assets resulting from operations 1,884,673 5,938,184 7,396,989
------------ ------------- -------------
Fund Share Transactions:
Proceeds from shares sold ............ 133,258,100 392,303,919 375,624,450
Payments for shares redeemed ......... (654,612) (20,061,926) (11,847,829)
------------ ------------- -------------
Net increase in net assets from
fund share transactions ............. 132,603,488 372,241,993 363,776,621
------------ ------------- -------------
Change in net assets ................. 134,488,161 378,180,177 371,173,610
Net Assets:
Beginning of period .................. 20,000 20,000 20,000
------------ ------------- -------------
End of period ........................ $134,508,161 $ 378,200,177 $ 371,193,610
============ ============= =============
End of period net assets includes
undistributed net investment
income .............................. $ 230,432 $ 44,729 $ 554,334
============ ============= =============
Share Transactions:
Number of shares sold ................ 4,519,003 28,251,298 8,787,184
Number of shares redeemed ............ (22,092) (1,424,473) (275,583)
------------ ------------- -------------
Net increase ........................ 4,496,911 26,826,825 8,511,601
------------ ------------- -------------
</TABLE>
24 See Notes to Financial Statements.
<PAGE>
Portfolio Partners, Inc.
Notes to Financial Statements
December 31, 1997
- --------------------------------------------------------------------------------
1. Organization
Aetna Life Insurance and Annuity Company ("Aetna") created Portfolio Partners,
Inc. (the "Company") to serve as an investment option underlying Aetna's
variable insurance products. The Company is an open-end management investment
company registered under the Investment Company Act of 1940 (the 1940 Act). It
was incorporated under the laws of Maryland on May 7, 1997. The Articles of
Incorporation permit the Company to offer separate series ("Portfolios"), each
of which has its own investment objective, policies and restrictions.
The Company currently consists of five diversified Portfolios: MFS Value Equity
Portfolio ("MFS Value Equity"), MFS Emerging Equities Portfolio ("MFS Emerging
Equities"), MFS Research Growth Portfolio ("MFS Research Growth"), Scudder
International Growth Portfolio ("Scudder International Growth") and T. Rowe
Price Growth Equity Portfolio ("T. Rowe Price Growth Equity"). Aetna serves as
the Investment Advisor and the principal underwriter to each Portfolio.
Massachusetts Financial Services ("MFS") serves as sub-advisor to MFS Value
Equity, MFS Emerging Equities and MFS Research Growth. Scudder Kemper
Investments, Inc. ("Scudder") serves as sub-advisor to Scudder International
Growth and T. Rowe Price Associates, Inc. ("T. Rowe") serves as sub-advisor to
T. Rowe Price Growth Equity. Shares of each Portfolio were first made available
to the public on November 28, 1997.
The following is a brief description of each Portfolio's investment objective:
MFS Emerging Equities seeks to provide long-term growth of capital. Dividend
and interest income from portfolio securities, if any, is incidental to MFS
Emerging Equities' investment objective;
MFS Research Growth seeks long-term growth of capital and future income;
MFS Value Equity seeks capital appreciation. Dividend income, if any, is
considered incidental to MFS Value Equity's objective of capital appreciation;
Scudder International Growth seeks long-term growth of capital primarily
through a diversified portfolio of marketable foreign equity securities; and
T. Rowe Price Growth Equity seeks long-term growth of capital and, secondarily,
to increase dividend income by investing primarily in common stocks of well
established growth companies.
2. Summary of Significant Accounting Policies
A. Valuation of Investments
The accompanying financial statements of the Portfolios have been prepared in
accordance with generally accepted accounting principles. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
amounts reported therein. Although actual results could differ from these
estimates, any such differences are expected to be immaterial to the net assets
of the Portfolios.
Securities of the Portfolios are generally valued by independent pricing
services. The values for equity securities traded on registered securities
exchanges are based on the last sale price or, if there has been no sale that
day, at the mean of the last bid and asked price on the exchange where the
security is principally traded. Securities traded over-the-counter are valued
at the last sale price or at the last bid price if there has been no sale that
day. Short-term debt securities that have a maturity date of more than sixty
days will be valued at the mean of the last bid and asked price obtained from
principal market makers. Long-term debt securities are valued at the mean of
the last bid and asked price of such securities obtained from a broker that is
a market-maker in the securities or a service providing quotations based upon
the assessment of market-makers in those securities.
Options are valued at the mean of the last bid and asked price on the exchange
where the option is primarily traded. Stock index futures contracts and
interest rate futures contracts are valued daily at a settlement price based on
rules of the exchange where the futures contract is primarily traded.
The accounting records of the Portfolios are maintained in U.S. dollars.
Investment securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars at the prevailing rates of exchange
at the end of each day. Purchases and sales of securities, income receipts, and
expense payments are translated into U.S. dollars at the prevailing exchange
rate on the respective date of the transactions.
25
<PAGE>
Portfolio Partners, Inc.
Notes to Financial Statements
December 31, 1997 (continued)
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies (continued)
B. Option Contracts
MFS Emerging Equities, MFS Value Equity and T. Rowe Price Growth Equity may
invest in put and call options if as a result not more than 5% of their total
assets would be invested in premiums for those options. MFS Emerging Equities,
MFS Value Equity and Scudder International Growth may only write covered call
options.
Option contracts are valued daily and unrealized gains or losses are recorded
based upon the last sales price on the principal exchange on which the options
are traded.
The Portfolios will realize a gain or loss upon the expiration or closing of
the option contract. When an option is exercised, the proceeds on sales of the
underlying security for a written call option, the purchase cost of the
security for a written put option, or the cost of the security for a purchased
put or call option is adjusted by the amount of premium received or paid.
Realized and unrealized gains or losses on option contracts are reflected in
the accompanying financial statements.
The risk in writing a call option is that the Portfolios give up the
opportunity for profit if the market price of the security increases and the
option is exercised. The risk in buying an option is that the Portfolios pay a
premium whether or not the option is exercised. Risks may also arise from an
illiquid secondary market or from the inability of counterparties to meet the
terms of the contract.
C. Futures and Forward Foreign Currency Exchange Contracts
MFS Research Growth may not purchase futures or options on futures or
securities. Scudder International Growth may enter into futures and options on
futures contracts for hedging purposes only. MFS Emerging Equities and the MFS
Value Equity may enter into future contracts to the extent that the value of
securities and other underlying obligations does not exceed 50% of total assets
of the Portfolio. T. Rowe Price Growth Equity may enter into futures contracts
to the extent that the value of securities and other underlying obligations
does not exceed 100% of total assets of the Portfolio.
A futures contract is an agreement between two parties to buy and sell a
specific amount of a commodity, security or financial instrument including an
index of stocks at a set price on a future date. The Portfolios sell futures
contracts as a hedge against declines in the value of portfolio securities. The
Portfolios may purchase futures contracts to manage the risk of changes in
interest rates, equity prices, currency exchange rates or in anticipation of
future purchases and sales of portfolio securities.
Upon entering into a futures contract, a Portfolio is required to deposit with
a broker an amount (initial margin) equal to a percentage of the purchase price
indicated by the futures contract. Subsequent deposits (variation margin) are
received or paid each day by the Portfolio equal to the daily fluctuations in
the market value of the contract. These amounts are recorded by the Portfolio
as unrealized gains or losses. When a contract is closed, the Portfolio records
a realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
Futures contracts held by the Portfolios are closed prior to expiration.
A forward foreign currency exchange contract is an agreement to pay or receive
specific amounts of a currency at a future date in exchange for another
currency at an agreed upon exchange rate. The Portfolios, where authorized, may
use forward foreign currency exchange contracts to hedge certain foreign
currency assets or liabilities. Contracts are recorded at market value and
marked-to-market daily.
The risks associated with futures and forward foreign currency exchange
contracts may arise from an imperfect correlation between the change in market
value of the securities held by the Portfolios and the price of the contracts.
Risks may also arise from an illiquid secondary market or from the inability of
counterparties to meet the terms of the contracts.
Realized and unrealized gains or losses on futures and forward foreign currency
exchange contracts are reflected in the accompanying financial statements. The
amounts at risk under such futures and forward foreign currency exchange
contracts may exceed the amounts reflected in the financial statements. The
notional amounts (economic exposure) of these contracts are disclosed in the
Schedules of Investments and in Note 6 of the Notes to Financial Statements.
For federal income tax purposes, any futures and forward foreign currency
exchange contracts which remain open at fiscal year end are marked-to-market
and the resultant net gain or loss is reported to shareholders as federal
taxable income.
26
<PAGE>
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies (continued)
D. Illiquid and Restricted Securities
Illiquid securities are securities that are not readily marketable. Disposing
of illiquid investments may involve time-consuming negotiation and legal
expenses, and it may be difficult or impossible for the Portfolios to sell them
promptly at an acceptable price. Each Portfolio may invest up to 15% of its net
assets in illiquid securities.
Restricted securities are subject to legal or contractual restrictions on
resale and may not be publicly sold without registration under the Securities
Act of 1933 (1933 Act), under Rule 144A or, are securities offered pursuant to
Section 4(2) of the 1933 Act. Each Portfolio may invest more than 15% of its
net assets in restricted securities which have been determined to be liquid
under guidelines established by the Board of Directors.
Illiquid and restricted securities are valued using market quotations when
readily available. In the absence of market quotations, restricted securities
are valued based upon their fair value determined under procedures approved by
the Board of Directors.
E. Delayed Delivery Transactions
The Portfolios may purchase or sell securities on a when-issued or delayed
delivery basis. The price of the underlying securities and date when the
securities will be delivered and paid for are fixed at the time the transaction
is negotiated. The market value of the securities purchased or sold are
identified in the Portfolios' schedule of investments. Losses may arise due to
changes in the market value of the securities or from the inability of
counterparties to meet the terms of the contract. A Portfolio will segregate
assets at its custodian in an amount equal to the market value of securities
purchased on a when-issued or delayed delivery basis.
F. Federal Income Taxes
As qualified regulated investment companies, the Portfolios are relieved of
federal income and excise taxes by distributing substantially all of their net
taxable investment income and capital gains, if any, in compliance with the
applicable provisions of the Internal Revenue Code. Therefore, no provision for
income taxes has been made in the accompanying financial statements.
G. Distributions
Distributions from net investment income are based on taxable net income.
Distributions are recorded on the ex-dividend date. Income and capital gain
distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These differences are
primarily due to differing treatments for foreign currency transactions,
investments in certain foreign issuers that derive a majority of their income
from passive investments (e.g., interest or dividends) and deferred losses on
wash sales.
H. Other
Investment transactions are accounted for on the day following trade date,
except same day settlements which are accounted for on trade date. Interest
income is recorded on an accrual basis. Discounts and premiums on securities
purchased are accreted or amortized, respectively, using an effective yield
method over the life of the security. Dividend income and stock splits are
recorded on the ex-dividend date. Realized gains and losses from investment
transactions are determined on an identified cost basis.
3. Investment Advisory and Administrative Service Agreements
Each Portfolio pays the Investment Advisor an annual fee expressed as a
percentage of its average daily net assets. As certain of the Portfolios' net
assets exceed predetermined thresholds, lower advisory fees apply. Below are
the Portfolios' investment advisory fee ranges and the effective rates as of
December 31, 1997:
Fee Range Effective Rate
------------- --------------
MFS Emerging Equities .70%-.65% .68%
MFS Research Growth .70%-.65% .70%
MFS Value Equity .65% .65%
Scudder International Growth .80% .80%
T. Rowe Price Growth Equity .60% .60%
27
<PAGE>
Portfolio Partners, Inc.
Notes to Financial Statements
December 31, 1997 (continued)
- --------------------------------------------------------------------------------
3. Investment Advisory and Administrative Service Agreements (continued)
Under the terms of separate Subadvisory Agreements between the Investment
Advisor and each subadvisor, each subadvisor is responsible for the investment
and reinvestment of cash and securities for each Portfolio in exchange for fees
payable by the Investment Advisor, which are expressed as a percentage of the
average daily net assets of each Portfolio. For the period from November 28,
1997 through December 31, 1997, the Investment Advisor paid MFS $446,631 for
MFS Emerging Equities, MFS Research Growth, and MFS Value Equity, paid Scudder
$150,126 for Scudder International Growth, and paid T. Rowe $135,087 for T.
Rowe Price Growth Equity in accordance with the terms of each agreement.
Under an Administrative Services Agreement between the Company and Aetna, Aetna
provides all administrative services necessary for the Company's operations and
is responsible for the supervision of the Company's other service providers.
Aetna also assumes all ordinary recurring direct costs of the Company, such as
custodian fees, director's fees, transfer agency fees and accounting fees. As
compensation for these services, Aetna receives a monthly fee from each
Portfolio at an annual rate based on the average daily net assets of each
Portfolio as follows:
Portfolio Rate
--------------------------------------------------------
MFS Emerging Equities ...................... 0.13%
MFS Research Growth ........................ 0.15%
MFS Value Equity ........................... 0.25%
Scudder International Growth ............... 0.20%
T. Rowe Price Growth Equity ................ 0.15%
Each Portfolio's aggregate expenses are limited to the advisory and
administrative service fees disclosed above. Aetna has agreed to reimburse the
Portfolios for expenses and/or waive its fees, so that, through at least April
30, 1999, the aggregate of each Portfolio's expenses will not exceed the
combined investment advisory and administrative service fees rate shown above.
4. Purchases and Sales of Investment Securities
Purchases and sales of investment securities, excluding short-term investments,
for the period from November 28, 1997 (commencement of operations) to December
31, 1997 were:
Cost of Purchases Proceeds from Sales
------------------- --------------------
MFS Emerging Equities $551,111,394 $ 229,284
MFS Research Growth 253,025,620 216,625,587
MFS Value Equity 128,746,876 7,869,100
Scudder International Growth 10,732,732 15,902,855
T. Rowe Price Growth Equity 344,929,449 9,885,749
5. Capital Loss Carryforwards
At December 31, 1997, for federal income tax purposes, the Portfolios had the
following capital loss carryforwards:
Capital Loss Year of
Portfolio Carryforward Expiration
--------------------------------------------------------
MFS Research Growth $4,589,027 2005
MFS Value Equity 164,092 2005
- --------------------------------------------------------------------------------
The Board of Directors will not distribute any realized capital gains until the
above capital loss carryforwards have been used to offset future capital gains
or expire.
28
<PAGE>
Portfolio Partners, Inc.
Notes to Financial Statements
December 31, 1997 (continued)
- --------------------------------------------------------------------------------
6. Forward Foreign Currency Exchange Contracts
Notes to Financial Statements - December 31, 1997 (continued)
At December 31, 1997, MFS Research Growth, MFS Value Equity, and Scudder
International Growth had open forward foreign currency exchange contracts that
obligate each Portfolio to deliver or receive currencies at specified future
dates. The net unrealized gain(loss) of $ 367, ($ 2,719), and $ 1,150,
respectively, on these contracts are included in the accompanying financial
statements. The terms of the open contracts are as follows:
MFS Research Growth
<TABLE>
<CAPTION>
Foreign Currency U.S. Dollar U.S. Dollar Value Net Unrealized
Currency and Exchange Date Units Sold Proceeds at December 31, 1997 Gain (Loss)
- -------------------------------- ---------------------- ------------------- ----------------------- --------------------
<S> <C> <C> <C> <C>
Sale Contracts
Japanese Yen, 01/06/98 5,791,257 $44,741 $44,407 $ $334
Japanese Yen, 01/07/98 2,935,260 22,544 22,511 33
--------
$ 367
========
MFS Value Equity
Foreign Currency U.S. Dollar U.S. Dollar Value Net Unrealized
Currency and Exchange Date Units Purchased Cost at December 31, 1997 Gain (Loss)
- -------------------------------- ---------------------- ------------------- ----------------------- --------------------
Purchase Contracts
German Deutsche Mark, 01/02/98 130,931 $73,741 $72,791 $ (950)
Great British Pound, 01/02/98 10,417 17,365 17,119 (246)
Hong Kong Dollar, 01/02/98 166,346 21,465 21,465 0
Malaysian Ringgit, 01/02/98 153,573 40,255 39,486 (769)
Hong Kong Dollar, 01/05/98 183,362 23,663 23,658 (5)
Malaysian Ringgit, 01/05/98 153,330 40,097 39,426 (671)
Malaysian Ringgit, 01/06/98 51,852 13,374 13,333 (41)
Malaysian Ringgit, 01/07/98 9,823 2,530 2,526 (4)
Malaysian Ringgit, 01/08/98 19,599 5,073 5,040 (33)
----------
$(2,719)
==========
Scudder International Growth
Foreign Currency U.S. Dollar U.S. Dollar Value Net Unrealized
Currency and Exchange Date Units Purchased/Sold Cost/Proceeds at December 31, 1997 Gain (Loss)
- -------------------------------- ---------------------- ------------------- ----------------------- --------------------
Purchase Contracts
Hong Kong Dollar, 01/02/98 721,317 $ 93,085 $ 93,077 $ (8)
Italian Lira, 01/02/98 653,021,406 374,094 369,140 (4,954)
Hong Kong Dollar, 01/05/98 5,830 752 752 0
Italian Lira, 01/05/98 662,093,454 380,087 374,258 (5,829)
Italian Lira, 01/07/98 555,697,833 316,333 314,110 (2,223)
Italian Lira, 01/08/98 1,126,144,016 640,173 636,551 (3,622)
French Franc, 1/30/98 1,157,412 195,058 192,655 (2,403)
Sale Contracts
Great British Pound, 01/02/98 489,347 815,520 804,185 11,335
Great British Pound, 01/06/98 53,138 88,732 87,308 1,424
Great British Pound, 01/07/98 545,259 903,275 895,845 7,430
----------
$ 1,150
==========
</TABLE>
29
<PAGE>
Portfolio Partners, Inc.
Notes to Financial Statements
December 31, 1997 (continued)
- --------------------------------------------------------------------------------
7. Authorized Capital Shares
The Company is authorized to issue a total of 1.0 billion shares of common
stock with a par value of $0.001 per share. The shares may be issued in series
(i.e. portfolios) having separate assets and liabilities and separate
investment objectives and policies. Upon liquidation of a Portfolio, its
shareholders are entitled to share pro rata in the net assets of that portfolio
available for distribution to shareholders. Aetna utilizes the Portfolios as
funding options for certain of their variable annuities and variable life
separate accounts. At December 31, 1997, Aetna owned all shares of beneficial
interest of the Portfolios.
8. Certain Reclassifications
In accordance with generally accepted accounting principles, the following
reclassifications were made in order to present the Portfolios' capital
accounts on a tax basis. These reclassifications have no impact on the net
asset value of the Portfolios.
<TABLE>
<CAPTION>
Accumulated
Net Realized
Undistributed Net Gain/(Loss)
Paid-in Capital Investment Income on Investments
Increase/(Decrease) Increase/(Decrease) Increase/(Decrease)
--------------------- --------------------- --------------------
<S> <C> <C> <C>
MFS Research Growth -- $ 21,366 $(21,366)
MFS Value Equity -- (11,179) 11,179
Scudder International Growth -- 3,800 (3,800)
T. Rowe Price Growth Equity -- 22,021 (22,021)
</TABLE>
- --------------------------------------------------------------------------------
Additional Information
Federal Tax Status of Dividends Declared During the Fiscal Year
There were no dividends declared for any of the Portfolios during the period
from November 28, 1997 (commencement of operations) to December 31, 1997.
30
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Portfolio Partners, Inc.:
We have audited the accompanying statements of assets and liabilities,
including the schedules of investments of MFS Emerging Equities Portfolio, MFS
Research Growth Portfolio, MFS Value Equity Portfolio, Scudder International
Growth Portfolio and T. Rowe Price Growth Equity Portfolio, series of Portfolio
Partners, Inc. (the Portfolios), as of December 31, 1997, and the related
statements of operations, statements of changes in net assets and financial
highlights for the period from November 28, 1997 (commencement of operations)
to December 31, 1997. These financial statements and financial highlights are
the responsibility of the Portfolios' management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and 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 and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1997 by correspondence with the custodian
and brokers. 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, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Portfolios as of December 31, 1997, results of their operations, changes in
their net assets, and financial highlights for the period from November 28,
1997 (commencement of operations) to December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
January 30, 1998
31
<PAGE>
32
