<PAGE>
[N/E THE NEW ENGLAND/(R)/ INSURANCE AND INVESTMENT LOGO]
-------------------------------------------------------------------------
ZENITH FUND
VARIABLE PRODUCTS
ANNUAL REPORTS
DECEMBER 31, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Draycott International Equity Series Supplement . . . . . . . . . . . I
Davis Venture Value Series Supplement . . . . . . . . . . . . . . . . II
Loomis Sayles Small Cap Series . . . . . . . . . . . . . . . . . . . . 1
Draycott International Equity Series . . . . . . . . . . . . . . . . . 7
Alger Equity Growth Series . . . . . . . . . . . . . . . . . . . . . . 13
Capital Growth Series . . . . . . . . . . . . . . . . . . . . . . . . 19
Loomis Sayles Avanti Growth Series . . . . . . . . . . . . . . . . . . 23
Davis Venture Value Series . . . . . . . . . . . . . . . . . . . . . . 29
Westpeak Growth and Income Series . . . . . . . . . . . . . . . . . . 35
Westpeak Stock Index Series . . . . . . . . . . . . . . . . . . . . . 42
Loomis Sayles Balanced Series . . . . . . . . . . . . . . . . . . . . 52
Back Bay Advisors Managed Series . . . . . . . . . . . . . . . . . . . 59
Salomon Brothers Strategic Bond Opportunities Series . . . . . . . . . 67
Back Bay Advisors Bond Income Series . . . . . . . . . . . . . . . . . 75
Salomon Brothers U.S. Government Series . . . . . . . . . . . . . . . 81
Back Bay Advisors Money Market Series . . . . . . . . . . . . . . . . 85
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . 91
Footnotes to Portfolio Manager Commentary . . . . . . . . . . . . . . 100
New England Variable Life Separate Account . . . . . . . . . . . . . . 102
Fidelity VIP Equity-Income Portfolio Supplement . . . . . . . . . . . VIPI
Fidelity VIPII Asset Manager Portfolio Supplement (November 29) . . . VIPII
Fidelity VIPII Asset Manager Portfolio Supplement (February 10) . . . VIPIV
</TABLE>
IMPORTANT:
Some funds appearing in this report may not be available under your variable
life or variable annuity product.
<PAGE>
February, 1997
TO ZENITH VARIABLE PRODUCT POLICYHOLDERS/CONTRACT OWNERS:
I am pleased to provide you with the 1996 Annual Report for the Zenith Fund
variable life insurance and variable annuity products.* This report includes
performance histories, present investments, and financial reports as of December
31, 1996, as well as the outlook and strategy of each fund. It is intended to
help you make an informed decision regarding the investment of the cash value of
your variable product.
The 1996 Annual Report also contains important information pertaining to several
funds that may be available under your variable life or variable annuity
product. An explanation of the changes affecting these funds can be found on the
next few pages.
The New England and its affiliates offer many variable life and variable annuity
products to help you meet your financial objectives. We are committed to meeting
your expectations by providing quality products with strong performance
potential and excellent personal service.
Please feel free to contact your Registered Representative with any questions
you may have regarding your financial objectives. Thank you for choosing a
Zenith variable product.
Sincerely,
[DAVID ALLEN SIGNATURE] [BRUCE LONG SIGNATURE]
David Allen Bruce Long
Senior Vice President President
New England Life New England Annuities
* Variable products are offered through New England Securities
[RECYCLE LOGO]
<PAGE>
LOOMIS SAYLES SMALL CAP SERIES
PORTFOLIO MANAGERS: JEFFREY PETHERICK, MARY CHAMPAGNE
LOOMIS, SAYLES & COMPANY, L.P.
[PHOTOS OF JEFFREY PETHERICK & MARY CHAMPAGNE]
Q. HOW DID THE LOOMIS SAYLES SMALL CAP SERIES PERFORM IN 1996?
A. For the fiscal year ended December 31, 1996 the total return for the Series
was 30.67%. This compares favorably to the Russell 2000 Index/18/ return of
16.50% over the same period. The Series also outperformed the Lipper Variable
Small Company Fund Average which returned 19.85% over the same period.
Q. HOW DID YOU MANAGE THE LOOMIS SAYLES SMALL CAP SERIES IN 1996?
A. As always, we concentrated on locating undervalued, growing companies that
dominate, or are becoming dominant, in a specific market subsegment. Earlier in
1996, we increased our weighting in consumer cyclicals--retail stores,
restaurants and other services--with great success. Healthy consumer spending
throughout the year boosted many stocks, including Ann Taylor, an upscale
women's clothier, and Cole National, a specialty eyewear and giftware retailer.
We adopted a more defensive portfolio strategy in the second half of the year,
moving away from economically sensitive companies and toward companies with
strong value characteristics. That explains our increased exposure to Real
Estate Investment Trusts (REITs) and a more aggressive move into food stocks.
Q. WOULD YOU GIVE US MORE EXAMPLES?
A. Virtually every sector showed positive returns. The capital goods sector was
the exception; mixed stock selection held back portfolio performance in that
sector. Strong individual performers were Lance, Inc., a snack food
manufacturer; Public Service Company of North Carolina; Patriot American, a REIT
that owns valuable hotel property; and Alliant Telecommunications, a
Nebraska-based telephone company.
Q. WHAT IS YOUR INVESTMENT OUTLOOK FOR THE MONTHS AHEAD?
A. We expect that the economy will continue to slow in 1997 and that corporate
earnings will suffer as a result. In light of that assumption, we will move away
from sectors that are more economically sensitive, like capital goods and raw
materials. We'll look to sectors with favorable valuations, like health care,
where fundamentals are sound and earnings prospects are excellent.
[A CHART APPEARS HERE COMPARING THE GROWTH OF A
$10,000 INVESTMENT COMPARED TO AN INDEX]
<TABLE>
<CAPTION>
Small Cap Russell
Series 2000
<S> <C> <C>
Inception
5/1/94 10000 10000
12/31/94 9676 10027
12/31/95 12470 12879
12/31/96 16295 15004
</TABLE>
FUND FACTS
GOAL: Long-term capital growth from investments in common stocks or their
equivalent.
START DATE: May 1, 1994
SIZE: $89 million as of December 31, 1996
MANAGERS: Jeffrey Petherick and Mary Champagne. Mr. Petherick has managed the
Series since its inception in May 1994. Ms. Champagne joined the management of
the Fund in July 1995. Mr. Petherick has also managed the Loomis Sayles portion
of the New England Star Advisers Fund since July 1, 1994. Ms. Champagne has
co-managed the Loomis Sayles portion of the New England Star Advisers Fund
since July 1995. They also manage the Loomis Sayles Small Cap Value Fund and
the Maxim Series--Small Cap Fund. Mr. Petherick joined Loomis Sales in 1990.
Ms. Champagne joined Loomis Sayles in 1993.
Performance numbers are net of all Series expenses but do not include any
insurance, sales or administrative charges of variable annuity or life insurance
contracts. If these charges were included, the returns shown would be lower.
This information represents past performance and is not indicative of future
results. Investment return and principal value will fluctuate so that shares,
upon redemption, may be worth more or less than the original cost.
1
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES SMALL CAP SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCKS--87.9% OF TOTAL NET ASSETS
SHARES VALUE (A)
<C> <S> <C>
AEROSPACE--0.2%
17,100 Kaman Corp. . . . . . . . . . . . . . $ 222,300
----------
AUTOMOBILE & RELATED--1.6%
9,200 Amcast Industrial Corp. . . . . . . . 227,700
11,100 Borg Warner Automotive, Inc. . . . . 427,350
24,900 Echlin, Inc. . . . . . . . . . . . . 787,463
----------
1,442,513
----------
BANKS--SAVINGS & LOAN--3.4%
28,700 Bank Utd. Corp. . . . . . . . . . . . 767,725
1,525 Charter One Financial, Inc. . . . . . 64,050
12,050 Commercial Federal Corp. . . . . . . 578,400
28,500 First Financial Corp. . . . . . . . . 698,250
32,500 Magna Group, Inc. . . . . . . . . . . 958,750
----------
3,067,175
----------
BUSINESS SERVICES--2.0%
12,800 CDI Corp.(c) . . . . . . . . . . . . 363,200
36,900 Cort Business Services Corp.(c) . . . 761,063
20,900 Prime Service, Inc.(c) . . . . . . . 574,750
8,300 Team America Corp.(c) . . . . . . . . 94,413
----------
1,793,426
----------
CHEMICALS--SPECIALTY--4.7%
9,850 Cambrex Corp. . . . . . . . . . . . . 322,588
36,900 Dexter Corp. . . . . . . . . . . . . 1,176,187
56,600 Hexcel Corp.(c) . . . . . . . . . . . 919,750
27,200 Intertape Polymer Group, Inc. . . . 625,600
64,300 Lawter International, Inc. . . . . . 811,787
13,600 Learonal, Inc. . . . . . . . . . . . 312,800
----------
4,168,712
----------
COMPUTER SOFTWARE & SERVICES--3.5%
21,600 Award Software International,
Inc.(c) . . . . . . . . . . . . . . 210,600
21,000 Boole & Babbage, Inc. . . . . . . . . 525,000
22,000 ESS Technology, Inc.(c) . . . . . . . 618,750
31,000 National Computer Systems, Inc. . . . 790,500
18,600 Nichols Research Corp. . . . . . . . 474,300
33,500 Symantec Corp.(c) . . . . . . . . . . 485,750
----------
3,104,900
----------
ELECTRICAL EQUIPMENT--1.2%
19,400 Belden, Inc. . . . . . . . . . . . . 717,800
26,200 Woodhead Industries . . . . . . . . . 360,250
----------
1,078,050
----------
ELECTRONIC COMPONENTS--2.9%
30,000 Amphenol Corp.(c) . . . . . . . . . . 667,500
22,000 Burr Brown Corp.(c) . . . . . . . . . 572,000
6,200 Etec Systems, Inc.(c) . . . . . . . . 237,150
30,000 Merix Corp.(c) . . . . . . . . . . . 457,500
22,000 Unitrode Corp.(c) . . . . . . . . . . 646,250
----------
2,580,400
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
ENVIRONMENTAL SERVICES--0.8%
32,100 World Fuel Services Corp. . . . . . $ 714,225
----------
FINANCIAL SERVICES--2.1%
40,000 DVI, Inc.(c) . . . . . . . . . . . . 520,000
34,500 Financial Federal Corp. . . . . . . 577,875
17,720 Imperial Credit Industries,
Inc.(c) . . . . . . . . . . . . . . 372,120
20,580 WFS Financial, Inc.(c) . . . . . . . 409,028
----------
1,879,023
----------
FOOD PACKAGING & MISCELLANEOUS--2.1%
28,800 Flowers Industries, Inc. . . . . . . 619,200
42,700 Lance, Inc. . . . . . . . . . . . . 768,600
37,200 Michaels Foods . . . . . . . . . . . 474,300
----------
1,862,100
----------
FREIGHT TRANSPORTATION--3.3%
37,500 Harper Group, Inc. . . . . . . . . . 890,625
39,400 Pittston Co. . . . . . . . . . . . . 788,000
46,000 US Freightways Corp. . . . . . . . . 1,262,125
----------
2,940,750
----------
HEALTH CARE--DRUGS--1.1%
49,300 Bindley Western Industries, Inc. . . 955,188
----------
HEALTH CARE--MEDICAL TECHNOLOGY--2.5%
36,800 Conmed Corp.(c) . . . . . . . . . . 754,400
21,700 Protocol Systems, Inc.(c) . . . . . 282,100
39,000 Sofamor/Danek Group, Inc.(c) . . . . 1,189,500
----------
2,226,000
----------
HEALTH CARE--SERVICES--5.3%
56,245 Grancare, Inc.(c) . . . . . . . . . 1,005,379
40,800 Health Images, Inc. . . . . . . . . 678,300
35,800 Healthplan Services Corp.(c) . . . . 756,275
36,900 Integrated Health Services, Inc. . . 899,437
33,000 Regency Health Services(c) . . . . . 317,625
51,500 Rotech Medical Corp.(c) . . . . . . 1,081,500
----------
4,738,516
----------
HOME PRODUCTS--3.2%
10,000 Aptargroup, Inc. . . . . . . . . . . 352,500
14,000 Bush Boake Allen, Inc.(c) . . . . . 372,750
14,800 Department 56, Inc.(c) . . . . . . . 366,300
37,800 Premark International, Inc. . . . . 841,050
53,650 US Can Corp.(c) . . . . . . . . . . 905,344
----------
2,837,944
----------
HOTELS & RESTAURANTS--0.8%
19,500 Cooker Restaurant Corp. . . . . . . 226,688
24,800 WMS Industries, Inc.(c) . . . . . . 496,000
----------
722,688
----------
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES SMALL CAP SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCKS--(CONTINUED)
SHARES VALUE (A)
<C> <S> <C>
HOUSING & BUILDING MATERIALS--3.5%
31,300 Congoleum Corp.(c) . . . . . . . . $ 434,287
12,700 Crossman Communities, Inc.(c) . . . 215,900
26,700 Dayton Superior Corp.(c) . . . . . 350,437
56,400 Giant Cement Holdings, Inc.(c) . . 909,450
34,000 Toro Co. . . . . . . . . . . . . . 1,241,000
----------
3,151,074
----------
INSURANCE--7.1%
34,050 Allied Group, Inc. . . . . . . . . 1,110,881
20,400 Capital Resource Corp. . . . . . . 951,150
15,500 Capmac Holdings, Inc. . . . . . . . 513,438
21,400 Dignity Partners, Inc.(c) . . . . . 56,175
31,100 Everest Reinsurance Holdings . . . 894,125
20,900 Meadrowbrook Insurance Group(c) . . 438,900
25,100 Protective Life Corp. . . . . . . . 1,000,862
18,000 Reinsurance Group of America,
Inc. . . . . . . . . . . . . . . . 848,250
17,925 Triad Guaranty, Inc.(c) . . . . . . 515,344
----------
6,329,125
----------
LEISURE--1.6%
7,795 Harman International . . . . . . . 433,597
37,500 Scientific Games Holdings
Corp.(c) . . . . . . . . . . . . . 1,003,125
----------
1,436,722
----------
MACHINERY--2.5%
33,200 Brown & Sharpe Manufacturing
Co.(c) . . . . . . . . . . . . . . 464,800
18,500 BW/IP, Inc. . . . . . . . . . . . . 305,250
20,800 Greenfield Industries Inc. . . . . 637,000
6,700 Hardinge Bros., Inc. . . . . . . . 178,387
34,000 Keystone International, Inc. . . . 684,250
----------
2,269,687
----------
MEDIA & ENTERTAINMENT--2.7%
33,800 Banta Corp. . . . . . . . . . . . . 773,175
33,200 Cadmus Communications Corp. . . . . 514,600
20,400 Houghton Mifflin Co. . . . . . . . 1,155,150
----------
2,442,925
----------
METALS--3.5%
38,400 Citation Corp.(c) . . . . . . . . . 393,600
16,900 Clevland Cliffs, Inc. . . . . . . . 766,837
28,700 Lone Star Technologies, Inc.(c) . . 487,900
51,100 Oregon Steel Mills, Inc. . . . . . 855,925
9,300 RMI Titanium Co.(c) . . . . . . . . 261,563
59,600 UNR Industries Inc. . . . . . . . . 357,600
----------
3,123,425
----------
MULTI-INDUSTRY--2.7%
84,000 Griffon Corp.(c) . . . . . . . . . 1,029,000
10,500 Insilco Corp.(c) . . . . . . . . . 404,250
56,600 Viad Corp. . . . . . . . . . . . . 933,900
----------
2,367,150
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
NATURAL GAS PIPELINES--0.3%
14,000 Public Service Co. of North Carolina . $ 255,500
----------
OIL--INDEPENDENT PRODUCERS--2.5% . . .
42,800 American Exploration Co.(c) . . . . . 684,800
21,200 Belden & Blake Corp.(c) . . . . . . . 540,600
34,500 Lomak Petroleum, Inc.(c) . . . . . . . 590,812
12,300 Vintage Petroleum, Inc.(c) . . . . . . 424,350
----------
2,240,562
----------
OIL--SERVICES--4.2%
38,100 Global Industries, Inc.(c) . . . . . . 709,612
54,100 Pride Petroleum Services, Inc.(c) . . 1,257,825
16,100 Seitel, Inc.(c) . . . . . . . . . . . 644,000
33,200 Tuboscope Vetco International
Corp.(c) . . . . . . . . . . . . . . 514,600
22,100 Weatherford Enterra, Inc.(c) . . . . . 663,000
----------
3,789,037
----------
PAPER PRODUCTS--0.4%
10,000 Caraustar Industries, Inc. . . . . . . 332,500
----------
REAL-ESTATE INVESTMENT TRUSTS--7.2%
25,500 Brandywine Realty Trust . . . . . . . 497,250
21,800 Cali Realty Corp. . . . . . . . . . . 673,075
52,400 Capstone Capital Corp.(c) . . . . . . 1,172,450
46,000 Koger Equity, Inc.(c) . . . . . . . . 862,500
42,100 Liberty Property . . . . . . . . . . . 1,084,075
27,600 Patriot American Hospitality(c) . . . 1,190,250
27,000 Sun Communities, Inc. . . . . . . . . 931,500
----------
6,411,100
----------
RETAIL--GENERAL MERCHANDISE--1.6%
49,000 Family Dollar Stores, Inc. . . . . . . 998,375
25,000 99 Cents Only Stores(c) . . . . . . . 409,375
----------
1,407,750
----------
RETAIL--SPECIALTY--3.3%
32,000 Carson Pirie Scott & Co.(c) . . . . . 808,000
40,650 Cato Corp.(c) . . . . . . . . . . . . 203,250
34,100 Cole National Corp.(c) . . . . . . . . 895,125
36,600 Tandycrafte, Inc.(c) . . . . . . . . . 219,600
41,300 Zale Corp.(c) . . . . . . . . . . . . 789,862
----------
2,915,837
----------
TELECOMMUNICATIONS--2.1%
53,000 Alliant Communications, Inc. . . . . . 901,000
33,200 Inter Tel, Inc.(c) . . . . . . . . . . 630,800
21,000 Vertex Communications Corp.(c) . . . . 380,626
----------
1,912,426
----------
TEXTILE & APPAREL--0.8%
15,000 Kenneth Cole Productions CLA(c) . . . 232,500
44,400 Stride Rite Corp. . . . . . . . . . . 444,000
----------
676,500
----------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES SMALL CAP SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCKS--(CONTINUED)
SHARES VALUE (A)
<C> <S> <C>
UTILITIES--ELECTRIC--1.2%
51,700 Calpine Corp. (c) . . . . . . . . . $ 1,034,000
-----------
Total Common Stocks (Identified Cost
$68,222,622). . . . . . . . . . . . 78,429,230
-----------
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM INVESTMENTS--12.9%
FACE
AMOUNT
<C> <S> <C>
$4,121,000 Repurchase Agreement with State Street Bank
& Trust Company dated 12/31/96 at 4.750% to
be repurchased at $4,122,087 on 1/02/97
collateralized by $3,835,000 U.S. Treasury
Bond 7.250% due 8/15/22 valued at
$4,205,319 . . . . . . . . . . . . . . . . 4,121,000
4,100,000 Chevron Oil Finance Co.
5.350%, 1/02/97 . . . . . . . . . . . . . 4,100,000
3,300,000 Exxon Asset Management
6.250%, 1/02/97 . . . . . . . . . . . . . 3,300,000
-----------
Short-Term Investments
(Identified Cost $11,521,000) . . . . . . 11,521,000
-----------
Total Investments--100.8%
(Identified Cost $79,743,622)(b) . . . . . 89,950,230
Other assets less liabilities . . . . . . . (756,205)
-----------
TOTAL NET ASSETS--100% . . . . . . . . . . $89,194,025
===========
</TABLE>
(a) See Note 1A.
(b) Federal Tax Information: At December 31, 1996 the net unrealized
appreciation on investments based on cost of $79,776,544 for federal income
tax purposes was as follows:
<TABLE>
<CAPTION>
<C> <S> <C>
Aggregate gross unrealized appreciation for
all investments in which there is an excess
of value over tax cost . . . . . . . . . . $11,583,498
Aggregate gross unrealized depreciation for
all investments in which there is an excess
of tax cost over value . . . . . . . . . . (1,409,812)
-----------
Net unrealized appreciation. . . . . . . . . $10,173,686
===========
</TABLE>
(c) Non-income Producing Security
See accompanying notes to financial statements.
4
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES SMALL CAP SERIES)
<TABLE>
<CAPTION>
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1996
<S> <C> <C>
ASSETS
Investments at value . . . . . . . . . $89,950,230
Cash . . . . . . . . . . . . . . . . . 4,302
Receivable for:
Fund shares sold . . . . . . . . . . . 601,019
Securities sold . . . . . . . . . . . 307,835
Dividends and interest . . . . . . . . 91,955
-----------
90,955,341
LIABILITIES
Payable for:
Securities purchased . . . . . . . . . $1,513,473
Fund shares redeemed . . . . . . . . . 130,505
Accrued expenses:
Management fees . . . . . . . . . . . 85,761
Deferred trustees' fees . . . . . . . 291
Other expenses . . . . . . . . . . . . 31,286
----------
1,761,316
-----------
$89,194,025
===========
NET ASSETS
Net Assets consist of:
Capital paid in . . . . . . . . . . . $78,276,114
Undistributed net investment income . 9,342
Accumulated net realized gains . . . . 701,961
Unrealized appreciation on
investments . . . . . . . . . . . . . 10,206,608
-----------
NET ASSETS . . . . . . . . . . . . . . . $89,194,025
===========
Computation of offering price:
Net asset value and redemption price per
share ($89,194,025 divided by 618,171
shares of beneficial interest) . . . . $ 144.29
===========
Identified cost of investments . . . . . $79,743,622
===========
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<S> <C> <C>
INVESTMENT INCOME
Dividends . . . . . . . . . . . . $ 717,775
Interest . . . . . . . . . . . . . 380,416
-----------
1,098,191
EXPENSES
Management fees . . . . . . . . . $ 506,292
Trustees' fees and expenses . . . 10,713
Custodian . . . . . . . . . . . . 73,049
Audit and tax services . . . . . . 13,200
Legal . . . . . . . . . . . . . . 11,564
Printing . . . . . . . . . . . . . 28,409
Miscellaneous . . . . . . . . . . 8,418
---------
Total expenses . . . . . . . . . 651,645
Less expenses assumed by the
investment adviser . . . . . . (145,353) 506,292
--------- -----------
NET INVESTMENT INCOME . . . . . . . 591,899
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Realized gain on:
Investments--net . . . . . . . . 5,566,031
Unrealized appreciation on:
Investments--net . . . . . . . . 7,966,226
-----------
Net gain on investment transactions 13,532,257
-----------
NET INCREASE IN NET ASSETS FROM
OPERATIONS . . . . . . . . . . . . $14,124,156
===========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES SMALL CAP SERIES)
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ---------------
<S> <C> <C>
FROM OPERATIONS
Net investment income . . . . . . . . . . . . $ 186,550 $ 591,899
Net realized gain on investments . . . . . . . 1,462,220 5,566,031
Unrealized appreciation on investments . . . . 2,281,753 7,966,226
----------- ------------
INCREASE IN NET ASSETS FROM OPERATIONS . . . . 3,930,523 14,124,156
----------- ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income . . . . . . . . . . . . (171,695) (597,412)
Net realized gain on investments . . . . . . . (1,055,203) (5,269,235)
----------- ------------
(1,226,898) (5,866,647)
----------- ------------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares . . . . . . . . . 25,462,402 66,168,269
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income . . 171,695 597,412
Distributions from net realized gain . . . . 1,055,203 5,269,235
----------- ------------
26,689,300 72,034,916
Cost of shares redeemed . . . . . . . . . . . (4,756,656) (18,839,546)
----------- ------------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL
SHARE TRANSACTIONS. . . . . . . . . . . . . . 21,932,644 53,195,370
----------- ------------
TOTAL INCREASE IN NET ASSETS . . . . . . . . . 24,636,269 61,452,879
NET ASSETS
Beginning of the year . . . . . . . . . . . . 3,104,877 27,741,146
----------- ------------
End of the year . . . . . . . . . . . . . . . $27,741,146 $ 89,194,025
=========== ============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the year . . . . . . . . . . . . $ 0 $ 14,855
=========== ============
End of the year . . . . . . . . . . . . . . . $ 14,855 $ 9,342
=========== ============
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares . . . . . . . . 234,111 482,269
Issued in connection with the reinvestment of:
Distributions from net investment income . . 1,477 7,195
Distributions from net realized gain . . . . 9,076 34,411
----------- ------------
244,664 523,875
Redeemed . . . . . . . . . . . . . . . . . . . (43,301) (139,206)
----------- ------------
Net change . . . . . . . . . . . . . . . . . . 201,363 384,669
=========== ============
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
MAY 2, 1994(A)
THROUGH YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
-------------- ------------ --------------
<S> <C> <C> <C>
Net Asset Value, Beginning of
Period. . . . . . . . . . . . . $100.00 $ 96.61 $118.80
------- ------- -------
Income From Investment Operations
Net Investment Income . . . . . 0.14 0.85 1.05
Net Realized and Unrealized Gain
(Loss) on Investments . . . . (3.38) 26.93 35.03
------- ------- -------
Total From Investment
Operations . . . . . . . . . . (3.24) 27.78 36.08
------- ------- -------
Less Distributions
Dividends From Net Investment
Income . . . . . . . . . . . . (0.15) (0.78) (1.03)
Distributions From Net Realized
Capital Gains . . . . . . . . 0.00 (4.81) (9.56)
------- ------- -------
Total Distributions . . . . . . (0.15) (5.59) (10.59)
------- ------- -------
Net Asset Value, End of
Period . . . . . . . . . . . . $ 96.61 $118.80 $144.29
======= ======= =======
TOTAL RETURN (%) . . . . . . . . (3.23)(c) 28.88 30.67
Ratio of Operating Expenses to
Average Net Assets (%) . . . . 1.00 (b) 1.00 1.00
Ratio of Net Investment Income to
Average Net Assets (%) . . . . 0.32 (b) 1.26 1.15
Portfolio Turnover Rate (%) . . 80 (b) 98 62
Average Commission Rate (d) . . -- -- $0.0568
Net Assets, End of
Period (000) . . . . . . . . . $ 3,105 $27,741 $89,194
The ratios of expenses to average
net assets without giving effect
to the voluntary expense
agreement described in Note 4 to
the Financial Statements would
have been (%) . . . . . . . . . 2.31 (b) 1.91 1.29
</TABLE>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
(d) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for trades on which
commissions are charged. This rate generally does not reflect mark-ups,
mark-downs, or spreads on shares traded on a principal basis.
See accompanying notes to financial statements.
6
<PAGE>
DRAYCOTT INTERNATIONAL EQUITY SERIES*
PORTFOLIO MANAGERS: NICHOLAS CARN, TIMOTHY GRIFFEN,
GREGORY ECKERSLEY AND NIGEL HANKIN
DRAYCOTT PARTNERS, LTD.
[PHOTOS OF NICHOLAS CARN, TIM GRIFFEN, GREGORY ECKERSLEY AND NIGEL HANKIN]
Q. HOW DID THE DRAYCOTT INTERNATIONAL EQUITY SERIES PERFORM IN 1996?
A. The Series generated 6.67% total return for the year ended December 31, 1996,
this compares favorably to the Morgan Stanley Capital Europe Australasia Far
East (EAFE) Index/2/, which returned 6.36% for the same period.
The Series' performance was most influenced by its relatively large exposure to
the Japanese stock market. The perception that the Japanese domestic economy was
weakening as the fiscal stimulus of the first quarter subsided, caused the stock
market to deteriorate once again in the second half. In addition, the Japanese
stocks in the Series' portfolio as a whole underperformed the Japanese broad
market indexes.
European markets, however, staged a second half recovery from a weak showing at
the beginning of the year. The world economy continued to register steady
non-inflationary growth, due in part to the desynchronization of the European
and Japanese economies and also to the continued slow, steady growth of the U.S.
economy. It should be noted that exposure to the UK, Spain and Italy benefited
performance as interest rates fell further.
Unprecedented earnings growth and a decline in long-term interest rates in Japan
during the year slowed the Japanese stock market. This environment contrasts
sharply to the U.S. stock market, where earnings growth slowed, long term
interest rates rose and fell, and the equity risk premium declined to historical
lows. Consequently, we believe that the underperformance of the Japanese stock
market in 1996 is mostly attributable to an unprecedented rise in equity risk
premiums.
Q. HOW DID YOU MANAGE THE SERIES IN 1996?
A. Through the first half of the year we maintained a weighting in Japan below
that of the EAFE Index, the Series was overweighted in the UK and underweighted
in East Asia, while we kept our continental European holdings broadly in line
with the EAFE Index.
In the Fall, we increased our investments in Japan, primarily because of lower
stock market performance and signs of improvement in the Japanese economy.
Q. WHAT IS YOUR INVESTMENT OUTLOOK FOR THE MONTHS AHEAD?*
A. Global monetary policy is currently very accommodative and global interest
rates are at twenty-year lows. Some of the challenges facing the world
economy--continuing balance-sheet problems in Japan, high labor costs and rigid
labor markets in Europe, together with the legacy of exchange rate overvaluation
and the prospect of tight fiscal policy to remedy the effects of the long
recession in Japan and the wish to meet the Maastricht criteria in Europe.
We believe that this policy mix generally favors world stock markets in the
coming months. The discount rate applied to future earnings is likely to remain
low while an environment of low economic volatility favors companies
restructuring efforts.
* On January 22, 1997, the Board of Trustees of New England Zenith Fund approved
a new subadvisory agreement relating to the Draycott International Equity
Series between TNE Advisers, Inc. and Morgan Stanley Asset Management Inc.
("MSAM"). This new agreement, is expected to become effective May 1, 1997
(subject to shareholder approval). Under this new agreement MSAM would become
subadviser of the Series, succeeding Draycott Partners, Ltd. and would be
responsible for the day to day management of the Series. The new name of the
Series will be Morgan Stanley International Magnum Equity Series.
7
<PAGE>
[A CHART APPEARS HERE COMPARING A $10,000
INVESTMENT IN THE SERIES COMPARED TO AN INDEX]
<TABLE>
<CAPTION>
International
Equity Series EAFE
<S> <C> <C>
10/31/94 10000 10000
1994 10260 9555
1995 10879 10455
1996 11627 10915
</TABLE>
FUND FACTS
GOAL: Total return from long-term growth of capital and dividend income,
primarily through investment in international equity securities.
START DATE: October 31, 1994
SIZE: $39 million as of December 31, 1996
MANAGERS: Nicholas Carn, Timothy Griffen, Gregory Eckersley and Nigel Hankin
have served as portfolio managers since the Series' inception in 1994. Each
have also served as portfolio manager of New England International Equity Fund
since 1991. They also have managed the Maxim Series Fund--Foreign Equity
Portfolio since November 1994.
Performance numbers are net of all Series expenses but do not include any
insurance, sales or administrative charges of variable annuity or life insurance
contracts. If these charges were included, the returns shown would be lower.
This information represents past performance and is not indicative of future
results. Investment return and principal value will fluctuate so that shares,
upon redemption, may be worth more or less than the original cost.
8
<PAGE>
NEW ENGLAND ZENITH FUND
(DRAYCOTT INTERNATIONAL EQUITY SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCKS--93.3% OF TOTAL NET ASSETS
SHARES VALUE (A)
<C> <S> <C>
AUSTRALIA--4.8%
28,800 Australian & New Zealand Bank Group,
144A(d) . . . . . . . . . . . . . . . . . $ 181,531
28,900 Boral Ltd. . . . . . . . . . . . . . . . . 82,237
9,200 Broken Hill Proprietary Co., 144A(d) . . . 131,042
18,100 Capral Aluminum . . . . . . . . . . . . . . 57,547
40,250 Fairfax, John . . . . . . . . . . . . . . . 91,179
8,200 Lend Lease Corp., 144A(d) . . . . . . . . . 159,033
29,500 News Corp. . . . . . . . . . . . . . . . . 155,695
21,800 Normandy Mining Ltd. . . . . . . . . . . . 7,278
100,400 Normandy Mining Ltd. Warrants . . . . . . . 138,857
50,400 North Ltd. . . . . . . . . . . . . . . . . 147,422
81,000 Oil Search Ltd. . . . . . . . . . . . . . . 157,738
48,000 QNI Limited . . . . . . . . . . . . . . . . 96,527
27,400 Southcorp Holdings Ltd. . . . . . . . . . . 87,115
9,000 Wesfarmers . . . . . . . . . . . . . . . . 62,952
31,100 Westpac Bank Corp. . . . . . . . . . . . . 176,994
26,500 WMC Ltd. . . . . . . . . . . . . . . . . . 167,034
----------
1,900,181
----------
BELGIUM--1.2%
3,630 Delhaize Le Lion, 144A(d) . . . . . . . . . 215,666
1,270 Glaverbel . . . . . . . . . . . . . . . . . 147,504
740 Powerfin . . . . . . . . . . . . . . . . . 113,120
----------
476,290
----------
DENMARK--0.8%
1,300 BG Bank . . . . . . . . . . . . . . . . . . 60,909
2,000 Crisplant Industries . . . . . . . . . . . 96,761
6,470 ISS International
Service Systems, 144A(d) . . . . . . . . . 170,240
----------
327,910
----------
FINLAND--2.1%
2,535 Huhtamaki OY . . . . . . . . . . . . . . . 117,933
7,720 Kesko . . . . . . . . . . . . . . . . . . . 108,919
870 Kone Corp. . . . . . . . . . . . . . . . . 96,078
1,800 Metra AB . . . . . . . . . . . . . . . . . 101,348
2,200 Raison Tehtaat . . . . . . . . . . . . . . 138,696
12,860 UPM Kymmene OY . . . . . . . . . . . . . . 269,780
----------
832,754
----------
GERMANY--8.6%
3,630 Adidas AG . . . . . . . . . . . . . . . . . 313,745
180 Bayer Motoren Werk . . . . . . . . . . . . 125,513
190 Boss Hugo AG . . . . . . . . . . . . . . . 238,673
3,950 Deutsche Telekom . . . . . . . . . . . . . 83,297
3,460 Henkel Kgaa . . . . . . . . . . . . . . . . 173,810
11,350 Hoechst AG . . . . . . . . . . . . . . . . 536,226
23,850 Lufthansa AG, 144A(d) . . . . . . . . . . . 325,481
1,130 Mannesmann AG,144A(d) . . . . . . . . . . . 489,804
1,200 Preussag AG . . . . . . . . . . . . . . . . 271,770
1,590 SGL Carbon, 144A(d) . . . . . . . . . . . . 200,455
6,350 Tarkett AG . . . . . . . . . . . . . . . . 126,686
8,510 Veba AG . . . . . . . . . . . . . . . . . . 492,195
----------
3,377,655
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
GREAT BRITAIN--26.8%
42,400 BAA . . . . . . . . . . . . . $ 351,578
47,400 BTR . . . . . . . . . . . . . 231,437
23,000 BPB . . . . . . . . . . . . . 151,311
48,350 Barclays . . . . . . . . . . . 828,751
23,200 Bass . . . . . . . . . . . . . 326,716
29,450 British Aerospace . . . . . . 644,802
28,400 British Petroleum . . . . . . 340,586
29,700 British Sky Broadcasting . . . 265,606
45,850 British Telecommunication . . 310,275
35,700 Cadbury Schweppes . . . . . . 301,527
40,000 Caradon PLC . . . . . . . . . 164,468
31,675 Carlton Communications . . . . 277,624
10,765 EMI Group . . . . . . . . . . 254,463
35,900 General Electric Co. PLC . . . 235,561
27,850 Glaxo Wellcome . . . . . . . . 453,272
29,300 Greenalls Group . . . . . . . 295,158
177,450 Hanson . . . . . . . . . . . . 249,287
39,100 IMI . . . . . . . . . . . . . 250,529
35,700 J. Sainsbury . . . . . . . . . 236,695
116,800 Ladbroke Group . . . . . . . . 464,239
80,650 National Grid Group . . . . . 269,432
19,750 National Westminster . . . . . 232,114
98,250 Orange . . . . . . . . . . . . 318,130
19,850 Pearson . . . . . . . . . . . 253,354
62,200 Rank Group . . . . . . . . . . 466,740
29,920 Reed International . . . . . . 562,826
17,750 Reuters Holdings . . . . . . . 228,223
16,520 Shell Transportation &
Trading . . . . . . . . . . . 286,418
18,450 Smithkline Beecham . . . . . . 255,398
98,400 Telewest Communication . . . . 208,196
44,150 Ti Group . . . . . . . . . . . 437,945
89,100 Toxkins . . . . . . . . . . . 412,147
-----------
10,564,808
-----------
ITALY--3.4%
73,250 BCA Fideuram SPA . . . . . . . 161,034
83,000 ENI Spa . . . . . . . . . . . 425,943
28,700 Edison . . . . . . . . . . . . 181,621
51,950 Saipem, 144A(d) . . . . . . . 239,032
90,800 Stet . . . . . . . . . . . . . 306,757
-----------
1,314,387
-----------
JAPAN--28.6%
23,000 Asahi Glass Co. . . . . . . . 216,475
22,000 Dai Nippon Printing . . . . . 385,632
87,000 Daiwa Bank . . . . . . . . . . 454,494
9,000 Daiwa Securities, 144A(d) . . 80,045
16,000 Denso Corp. . . . . . . . . . 385,459
72 East Japan Railway, 144A(d) . 323,910
26,000 Fuji Bank . . . . . . . . . . 379,415
1,000 Hitachi . . . . . . . . . . . 9,326
151,000 Hokkaido Takushoku, 144A(d) . 293,368
67,000 Ishikawajima Har . . . . . . . 297,945
18,000 Kirin Brewery Co. . . . . . . 177,187
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
NEW ENGLAND ZENITH FUND
(DRAYCOTT INTERNATIONAL EQUITY SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCKS--(CONTINUED)
SHARES VALUE (A)
<C> <S> <C>
JAPAN--(CONTINUED)
26,000 Matsushita Electronic Industries,
144A(d) . . . . . . . . . . . . . . . . . $ 424,316
21,000 Mitsubishi Corp., 144A(d) . . . . . . . . 217,598
40,000 Mitsubishi Chemical . . . . . . . . . . . 129,522
21,000 Mitsubishi Logistic . . . . . . . . . . . 271,997
23,000 Mitsubishi Heavy Industry, Ltd., 144A(d) . 182,713
23,000 Mitsui & Co. . . . . . . . . . . . . . . . 186,685
43,000 Mitsukoshi . . . . . . . . . . . . . . . . 305,207
21,000 Mitsui Fudosan Co., 144A(d) . . . . . . . 210,344
7,000 Nintendo Co. . . . . . . . . . . . . . . . 501,079
70,000 Nippon Credit Bank . . . . . . . . . . . . 184,354
93,000 Nippon Steel Corp. . . . . . . . . . . . . 274,639
31 Nippon Telephone & Telegraph Corp. . . . . 235,023
16,000 Nomura Securities . . . . . . . . . . . . 240,394
43,000 Odakyu Electric Railway . . . . . . . . . 258,052
18,000 Onward Kashiyama . . . . . . . . . . . . . 253,346
96,000 Osaka Gas Co. . . . . . . . . . . . . . . 262,775
23,000 Ricoh Co. . . . . . . . . . . . . . . . . 264,139
21,000 Sakura Bank . . . . . . . . . . . . . . . 150,142
21,000 Sanwa Bank, 144A(d) . . . . . . . . . . . 286,504
36,000 Sato Kogyo Co. . . . . . . . . . . . . . . 125,585
9,000 Secom Co. . . . . . . . . . . . . . . . . 544,772
5,000 Sony Corp. . . . . . . . . . . . . . . . . 327,692
12,000 Sumitomo Bank, 144A(d) . . . . . . . . . . 173,042
1,000 Sumitomo Marine & Fire, 144A(d) . . . . . 6,217
39,000 Taisei Corp. . . . . . . . . . . . . . . . 202,055
17,000 Takashimaya Co. . . . . . . . . . . . . . 204,041
34,000 Tokai Bank . . . . . . . . . . . . . . . . 355,237
20,000 Tokyo Electric Power Co. . . . . . . . . . 438,649
23,000 Toto . . . . . . . . . . . . . . . . . . . 262,154
8,000 Toyota Motor Corp. . . . . . . . . . . . . 230,032
26,000 Yakult Honsha Co. . . . . . . . . . . . . 269,407
65,000 Yasuda Trust & Banking . . . . . . . . . . 275,581
-----------
11,256,549
-----------
NETHERLANDS--4.2%
2,250 ABN Amro Holdings NV . . . . . . . . . . . 146,481
1,060 Akzo Nobel NV . . . . . . . . . . . . . . 144,894
1,800 CSM NV . . . . . . . . . . . . . . . . . . 100,087
16,200 Fortis Amev NV . . . . . . . . . . . . . . 567,680
2,300 Kon Ahrend NV . . . . . . . . . . . . . . 128,289
13,600 Vendex International . . . . . . . . . . . 582,126
-----------
1,669,557
-----------
NORWAY--2.1%
13,100 Benor Tankers. . . . . . . . . . . . . . . 85,394
4,500 Narvesen ASA . . . . . . . . . . . . . . . 132,700
2,000 Orkla ASA . . . . . . . . . . . . . . . . 138,132
10,000 Schibsted ASA . . . . . . . . . . . . . . 182,366
9,450 Smedvig . . . . . . . . . . . . . . . . . 192,136
7,400 Unitor A/S . . . . . . . . . . . . . . . . 94,178
-----------
824,906
-----------
SPAIN--3.5%
2,880 Abengoa SA . . . . . . . . . . . . . . . . 99,827
10,250 Autupistas del Mare . . . . . . . . . . . 161,063
7,200 BCO Santander SA . . . . . . . . . . . . . 460,866
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
65,250 Corp Fin Reunido . . . . . . . . . . . . . $ 214,107
4,300 Repsol SA . . . . . . . . . . . . . . . . . 164,945
4,000 Tabacalera SA . . . . . . . . . . . . . . . 172,232
6,800 Viscofan Envoltura . . . . . . . . . . . . 99,519
-----------
1,372,559
-----------
SWEDEN--0.4%
8,300 Scandic Hotels AB . . . . . . . . . . . . . 138,741
-----------
SWITZERLAND--6.8%
425 Alusuisse Lonza HD . . . . . . . . . . . . 338,793
907 Adecco SA . . . . . . . . . . . . . . . . . 227,682
79 Baloise Holdings . . . . . . . . . . . . . 158,767
250 Danzas Holding . . . . . . . . . . . . . . 277,363
244 Nestle SA . . . . . . . . . . . . . . . . . 261,956
227 Novartis AG . . . . . . . . . . . . . . . . 259,986
52 Roche Holdings AG . . . . . . . . . . . . . 404,617
172 Schindler Holdings AG . . . . . . . . . . . 186,971
227 Swissair . . . . . . . . . . . . . . . . . 183,669
2,400 Tag Heuer . . . . . . . . . . . . . . . . . 387,299
-----------
2,687,103
-----------
Total Common Stocks
(Identified Cost $34,842,843) . . . . . . 36,743,400
-----------
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM INVESTMENT--2.1%
FACE
AMOUNT
<C> <S> <C>
$845,000 Repurchase agreement with State Street Bank &
Trust Company dated 12/31/96 at 4.750% to be
repurchased at $845,223 on 1/02/97
collateralized by $675,000 U.S. Treasury
Notes 8.875% due 8/15/17 with a value of
$865,055 . . . . . . . . . . . . . . . . . . 845,000
-----------
Total Short-Term Investment
(Identified Cost $845,000) . . . . . . . . . 845,000
-----------
Total Investments--95.4%
(Identified Cost $35,687,843)(b) . . . . . . 37,588,400
Other assets less liabilities(c) . . . . . . 1,803,786
-----------
TOTAL NET ASSETS--100% . . . . . . . . . . . $39,392,186
===========
</TABLE>
(a) See Note 1a.
(b) Federal Tax Information: At December 31,1996 the net unrealized appreciation
on investments based on cost of $35,771,235 for federal income tax purposes
was as follows:
<TABLE>
<CAPTION>
<C> <S> <C>
Aggregate gross unrealized appreciation for all
investments in which there is an excess of
value over tax cost . . . . . . . . . . . . . $ 3,909,393
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax
cost over value . . . . . . . . . . . . . . . (2,092,228)
-----------
Net unrealized appreciation . . . . . . . . . . $ 1,817,165
===========
</TABLE>
(c) Including deposits in foreign denominated currencies with a value of
$1,642,744 and a cost of $1,640,556.
(d) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
See accompanying notes to financial statements.
10
<PAGE>
NEW ENGLAND ZENITH FUND
(DRAYCOTT INTERNATIONAL EQUITY SERIES)
<TABLE>
<CAPTION>
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1996
ASSETS
<S> <C> <C>
Investments at value . . . . . . . . . . $37,588,400
Cash . . . . . . . . . . . . . . . . . . 716
Foreign cash at value
(Cost $1,640,556) . . . . . . . . . . . 1,642,744
Receivable for:
Fund shares sold . . . . . . . . . . . 178,332
Securities sold . . . . . . . . . . . . 162,550
Dividends and interest . . . . . . . . 46,471
Foreign taxes . . . . . . . . . . . . . 9,279
Unamortized organization expense . . . . 5,688
-----------
39,634,180
LIABILITIES
Payable for:
Securities purchased . . . . . . . . . $ 42,498
Fund shares redeemed . . . . . . . . . 101,049
Withholding taxes . . . . . . . . . . . 5,779
Accrued expenses:
Management fees . . . . . . . . . . . . 34,246
Deferred trustees' fees . . . . . . . . 277
Other expenses . . . . . . . . . . . . 58,145
--------
241,994
-----------
$39,392,186
===========
NET ASSETS
Net Assets consist of:
Capital paid in . . . . . . . . . . . . $37,517,658
Overdistributed net investment income . (55,074)
Accumulated net realized gain . . . . . 21,291
Unrealized appreciation on investments
and foreign currency . . . . . . . . . 1,908,311
-----------
NET ASSETS . . . . . . . . . . . . . . . $39,392,186
===========
Computation of offering price:
Net asset value and redemption price per
share ($39,392,186 divided by 3,490,576
shares of beneficial interest) . . . . . $ 11.29
===========
Identified cost of investments . . . . . $35,687,843
===========
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
INVESTMENT INCOME
<S> <C> <C>
Dividends . . . . . . . . . . . . . . . . $ 448,320(a)
Interest . . . . . . . . . . . . . . . . 113,890
----------
562,210
EXPENSES
Management fees . . . . . . . . . . . . . $ 256,659
Trustees' fees and expenses . . . . . . . 10,340
Custodian . . . . . . . . . . . . . . . . 145,265
Audit and tax services . . . . . . . . . 21,500
Legal . . . . . . . . . . . . . . . . . . 11,566
Printing . . . . . . . . . . . . . . . . 14,701
Amortization of organization
expenses . . . . . . . . . . . . . . . . 2,017
Miscellaneous . . . . . . . . . . . . . . 11,335
----------
Total expenses . . . . . . . . . . . . 473,383
Less expenses assumed by the investment
adviser. . . . . . . . . . . . . . . . (102,652) 370,731
---------- ----------
NET INVESTMENT INCOME . . . . . . . . . . 191,479
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCY
TRANSACTIONS
Realized gain (loss) on:
Investments--net . . . . . . . . . . . . 727,827
Foreign currency transactions--net . . . (191,286)
----------
Net realized gain on investments and
foreign currency transactions . . . . . 536,541
----------
Unrealized appreciation (depreciation) on:
Investments--net . . . . . . . . . . . . 1,298,183
Foreign currency transactions--net . . . (246,903)
----------
Net unrealized appreciation on
investments and foreign currency
transactions. . . . . . . . . . . . . . 1,051,280
----------
Net gain on investment transactions . . . 1,587,821
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS $1,779,300
==========
</TABLE>
(a) Net of foreign taxes of: $68,624.
See accompanying notes to financial statements.
11
<PAGE>
NEW ENGLAND ZENITH FUND
(DRAYCOTT INTERNATIONAL EQUITY SERIES)
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------ --------------
<S> <C> <C>
FROM OPERATIONS
Net investment income . . . . . . . . . . . . . $ 123,277 $ 191,479
Net realized gain (loss) on investments and
foreign currency transactions . . . . . . . . (125,269) 536,541
Unrealized appreciation on investments and
foreign currency transactions . . . . . . . . 798,519 1,051,280
----------- -----------
INCREASE IN NET ASSETS FROM OPERATIONS . . . . 796,527 1,779,300
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income . . . . . . . . . . . . . (123,277) (50,813)
In excess of net investment income . . . . . . (48,516) 0
Net realized gain on investments . . . . . . . 0 (542,008)
----------- -----------
(171,793) (592,821)
----------- -----------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares . . . . . . . . . 16,189,698 30,118,413
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income . . . 171,793 50,813
Distributions from net realized gain . . . . . 0 542,008
----------- -----------
16,361,491 30,711,234
Cost of shares redeemed . . . . . . . . . . . . (3,707,935) (8,773,034)
----------- -----------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL
SHARE TRANSACTIONS . . . . . . . . . . . . . . 12,653,556 21,938,200
----------- -----------
TOTAL INCREASE IN NET ASSETS . . . . . . . . . 13,278,290 23,124,679
NET ASSETS
Beginning of the year . . . . . . . . . . . . . 2,989,217 16,267,507
----------- -----------
End of the year . . . . . . . . . . . . . . . . $16,267,507 $39,392,186
=========== ===========
OVERDISTRIBUTED NET INVESTMENT INCOME
Beginning of the year . . . . . . . . . . . . . $ 0 $ (6,800)
=========== ===========
End of the year . . . . . . . . . . . . . . . . $ (6,800) $ (55,074)
=========== ===========
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares . . . . . . . . 1,564,292 2,705,127
Issued in connection with the reinvestment of:
Distributions from net investment income . . . 16,055 4,565
Distributions from net realized gain . . . . . 0 48,698
----------- -----------
1,580,347 2,758,390
Redeemed . . . . . . . . . . . . . . . . . . . (355,736) (784,531)
----------- -----------
Net change . . . . . . . . . . . . . . . . . . 1,224,611 1,973,859
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
OCTOBER 31, 1994 (A)
THROUGH YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
-------------------- ------------ --------------
<S> <C> <C> <C>
Net Asset Value, Beginning
of Period . . . . . . . . $10.00 $ 10.23 $ 10.73
------ ------- -------
Income From Investment
Operations
Net Investment Income . . 0.03 0.09 0.06
Net Realized and
Unrealized Gain (Loss) on
Investments. . . . . . . 0.23 0.53 0.68
------ ------- -------
Total From Investment
Operations . . . . . . . 0.26 0.62 0.74
------ ------- -------
Less Distributions
Dividends From Net
Investment Income . . . (0.02) (0.09) (0.02)
Distributions in Excess of
Net Investment Income . 0.00 (0.03) 0.00
Distributions From Net
Realized Capital Gains . 0.00 0.00 (0.16)
Distributions From Paid-in
Capital. . . . . . . . . (0.01) 0.00 0.00
------ ------- -------
Total Distributions . . . (0.03) (0.12) (0.18)
------ ------- -------
Net Asset Value, End of
Period. . . . . . . . . . $10.23 $ 10.73 $ 11.29
====== ======= =======
TOTAL RETURN (%) . . . . . 2.60(c) 6.03 6.67
Ratio of Operating Expenses
to Average Net
Assets (%) . . . . . . . 1.30(b) 1.30 1.30
Ratio of Net Investment
Income to Average Net
Assets (%) . . . . . . . 2.56(b) 1.29 0.67
Portfolio Turnover
Rate (%) . . . . . . . . 4(b) 89 64
Average Commission
Rate (d) . . . . . . . . -- -- $0.0204
Net Assets, End of
Period (000) . . . . . . $2,989 $16,268 $39,392
The ratios of expenses to
average net assets without
giving effect to the
voluntary expense
agreement described in
Note 4 to the Financial
Statements would have
been (%) . . . . . . . . 5.38(b) 3.12 1.66
</TABLE>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
(d) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for trades on which
commissions are charged. This rate generally does not reflect mark-ups,
mark-downs, or spreads on shares traded on a principal basis.
See accompanying notes to financial statements.
12
<PAGE>
ALGER EQUITY GROWTH SERIES
PORTFOLIO MANAGER: DAVID D. ALGER
FRED ALGER MANAGEMENT, INC.
[PHOTO OF DAVID D. ALGER]
Q. HOW DID THE ALGER EQUITY GROWTH SERIES PERFORM IN 1996?
A. 1996 proved to be an interesting and turbulent time in the market. In
January, the Alger Equity Growth Series was coming off an extraordinary year,
having significantly outperformed all relevant major market indices. During the
past twelve months, however, it has been much more difficult to outperform the
market. Although the portfolio posted a positive return of 13.17%, it lagged its
benchmark index, the S&P 500 Index/19/, which returned 22.90% for the year.
In a sense, this past year has been almost a cycle. We began with the assumption
that the economy was exceedingly weak, went through a period from mid-March to
late October during which the popular view was that the economy was too strong,
and then moved back in the direction to close the year where we began it.
The economic uncertainty which existed throughout most of the year resulted in
defensive positioning of investors. Consequently, there was a flight to
blue-chip stocks. Therefore, both the Dow Jones Industrial Average and the S&P
500 Index/ /enjoyed very strong years. It appears that the performance of the
S&P 500 was primarily driven by a handful of blue-chip type stocks noted for
stable and predictable earnings growth. The portfolio typically invests in
stocks of companies that are expected to grow their earnings at a faster rate
(25% and above). Thus, the portfolio did not perform as well as funds largely
investing in blue chip companies or broad market indices. In addition, many of
the growth stocks the portfolio invested in were hit more severely during the
sell off in July and recovered less impressively.
Q. HOW DID YOU MANAGE THE SERIES IN 1996?
A. Although there were shifts within the portfolio, our strategy remained
consistent, emphasizing the individual selection of quality growth stocks
through in-depth, internal research conducted by talented analysts. At no time
during the course of the year did we stray from the philosophy and process that
have driven our long term success as an investment manager.
One specific area which contributed to underperformance was our failure to
foresee the earnings collapse of the HMO's. As a result, many medical technology
companies we owned did very poorly after the first quarter.
Although the portfolio remained diversified, owning many stocks across numerous
sectors, several key holdings impacted performance. Intel and Adaptec, for
instance, performed exceptionally well in spite of significant volatility within
their sector. Glenayre Technologies, which the portfolio held at year end, fell
victim to this volatility, and performance was disappointing.
Q. WHAT IS YOUR INVESTMENT OUTLOOK FOR THE MONTHS AHEAD?
A. The good news is that we feel that the factors which have contributed to our
recent performance are now behind us, setting the stage for a strong rebound in
1997. We continue to maintain that economic growth is not overly robust. Factors
which support our belief include a recent drop in the price of gold, the rising
dollar and slowing corporate profits. We contend that the stock market continues
to be undervalued relative to the bond market. Furthermore, we feel that growth
stocks are undervalued relative to the rest of the stock market. Currently, good
quality growth stocks, which typically trade in the range of 1.5 to 2.5 times
the market multiple, are trading at 1.3 times based on our 1997 estimated
earnings per share: below the low-end of the historical range. In other words,
investors are paying only a very small premium for quality growth stocks, such
as those in the portfolio. As it becomes clearer in the months ahead that the
economy is expanding at a noninflationary, steady pace, we expect that investor
confidence will rebound and premiums for growth stocks will expand. This should
translate into strong performance potential for the portfolio.
13
<PAGE>
<TABLE>
<CAPTION>
Alger Equity
Growth Series S&P 500
<S> <C> <C>
10/31/94 10000 10000
1994 9580 9794
1995 14245 13461
1996 16122 16544
</TABLE>
FUND FACTS
GOAL: Long-term capital appreciation.
START DATE: October 31, 1994
SIZE: $120 million as of December 31, 1996
MANAGER: David D. Alger, President and Chief Financial Officer (since 1975),
Executive Vice President, portfolio Manager and Director of Research (since
1971), Fred Alger Management, Inc.; Portfolio Manager, The Alger Growth
Portfolio (since 1986), The Alger American Fund Growth Portfolio (since 1989)
and the Alger Retirement Fund (since 1993).
Performance numbers are net of all Series expenses but do not include any
insurance, sales or administrative charges of variable annuity or life insurance
contracts. If these charges were included, the returns shown would be lower.
This information represents past performance and is not indicative of future
results. Investment return and principal value will fluctuate so that shares,
upon redemption, may be worth more or less than the original cost.
14
<PAGE>
NEW ENGLAND ZENITH FUND
(ALGER EQUITY GROWTH SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCKS--93.9% OF TOTAL NET ASSETS
SHARES VALUE (A)
<C> <S> <C>
AEROSPACE--3.4%
25,700 Boeing Co. . . . . . . . . . . $ 2,733,837
31,500 Gulfstream Aerospace Corp.
New(c) . . . . . . . . . . . . . 763,875
9,100 United Technologies Corp. . . . 600,600
------------
4,098,312
------------
APPAREL--0.6%
15,000 Tommy Hilfiger Corp.(c) . . . . . 720,000
------------
BANKS--5.3%
28,000 Chase Manhattan Corp. . . . . . 2,499,000
37,900 Citicorp . . . . . . . . . . . . 3,903,700
------------
6,402,700
------------
BIO TECHNOLOGY--0.7%
10,300 Amgen, Inc.(c) . . . . . . . . . 560,063
6,000 Biochem Pharmacy, Inc.(c) . . . . 301,500
------------
861,563
------------
BUILDING & CONSTRUCTION--0.8%
17,200 Case Corp. . . . . . . . . . . 937,400
------------
CASINOS & RESORTS--0.7%
40,000 Mirage Resorts, Inc. . . . . . 865,000
------------
CHEMICALS--2.6%
14,100 Avery Dennison Corp. . . . . . 498,788
68,500 Monsanto Co. . . . . . . . . . 2,662,937
------------
3,161,725
------------
COMMUNICATIONS--4.4%
14,300 LCI International, Inc.(c) . . . 307,450
9,000 Lucent Technologies, Inc. . . . 416,250
12,400 Nokia Corp. . . . . . . . . . . 714,550
16,000 PictureTel Corp.(c) . . . . . . 416,000
18,000 QUALCOMM, Inc.(c) . . . . . . . 717,750
18,500 Telecomunicacoes Brasileiras . . 1,415,250
48,700 Worldcom, Inc.(c) . . . . . . . . 1,269,244
------------
5,256,494
------------
COMMUNICATIONS EQUIPMENT--6.3%
19,300 Ascend Communications, Inc.(c) . 1,199,013
12,200 Cascade Communications
Corp.(c) . . . . . . . . . . . . 672,525
59,000 Cisco Systems, Inc.(c) . . . . . 3,753,875
20,000 Glenayre Technologies, Inc.(c) . 431,250
13,200 PairGain Technologies, Inc. . . 401,775
30,800 Tellabs, Inc.(c) . . . . . . . . 1,158,850
------------
7,617,288
------------
COMPUTER RELATED & BUSINESS EQUIPMENT--6.0%
82,502 First Data Corp. . . . . . . . 3,011,323
39,000 Ingram Micro, Inc.(c) . . . . . 897,000
48,600 Sun Microsystems, Inc. . . . . 1,248,413
28,500 3Com Corp.(c) . . . . . . . . . . 2,091,187
------------
7,247,923
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
COMPUTER SERVICES--0.4%
16,200 SABRE Group Holdings, Inc.(c) . . . . $ 451,575
------------
COMPUTER SOFTWARE--4.9%
9,400 Computer Associates International,
Inc. . . . . . . . . . . . . . . . . 467,650
25,000 Compuware Corp.(c) . . . . . . . . . . . 1,253,125
54,900 Informix Corp.(c) . . . . . . . . . . . 1,118,588
28,600 Microsoft Corp. . . . . . . . . . . . 2,363,075
12,400 Parametric Technology Corp. . . . . . 637,050
------------
5,839,488
------------
COMPUTER TECHNOLOGY--2.4%
71,500 Adaptec, Inc.(c) . . . . . . . . . . . . 2,860,000
------------
CONSUMER PRODUCTS--4.3%
50,750 CUC International, Inc.(c) . . . . . . . 1,205,312
11,000 Colgate Palmolive Co. . . . . . . . . 1,014,750
39,500 Nike, Inc. . . . . . . . . . . . . . . 2,360,125
12,000 Tyco International, Ltd. . . . . . . . 634,500
------------
5,214,687
------------
CONGLOMERATE--2.0%
24,500 General Electric Co. . . . . . . . . . 2,422,437
------------
DEFENSE--1.8%
3,000 Lockheed Martin Corp. . . . . . . . . 274,500
45,400 Sundstrand Corp. . . . . . . . . . . . 1,929,500
------------
2,204,000
------------
ELECTRONICS--1.1%
26,300 Hewlett-Packard Co. . . . . . . . . . 1,321,575
------------
ENERGY & ENERGY SERVICES--3.1%
19,000 Halliburton Co. . . . . . . . . . . . 1,144,750
18,500 Schlumberger, Ltd. . . . . . . . . . . 1,847,687
15,000 Tidewater, Inc. . . . . . . . . . . . 678,750
------------
3,671,187
------------
FINANCE--5.3%
29,400 American International Group, Inc. . . 3,182,550
39,500 Green Tree Financial Corp. . . . . . . 1,525,687
13,000 MBNA Corp. . . . . . . . . . . . . . . 539,500
39,300 Money Store, Inc. . . . . . . . . . . 1,085,663
------------
6,333,400
------------
FINANCIAL SERVICES--1.9%
37,700 Charles Schwab Corp. . . . . . . . . . 1,206,400
35,000 Equifax, Inc. . . . . . . . . . . . . 1,071,875
------------
2,278,275
------------
FOOD CHAINS--0.5%
14,000 Safeway, Inc. . . . . . . . . . . . . 598,500
------------
HEALTH CARE--8.9%
11,000 Boston Scientific Corp.(c) . . . . . . 660,000
45,500 Columbia/HCA Healthcare Corp. . . . . 1,854,125
</TABLE>
See accompanying notes to financial statements.
15
<PAGE>
NEW ENGLAND ZENITH FUND
(ALGER EQUITY GROWTH SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCKS--(CONTINUED)
SHARES VALUE (A)
<C> <S> <C>
HEALTH CARE--(CONTINUED)
33,100 Eli Lilly & Co. . . . . . . . . . $ 2,416,300
40,900 Merck & Co. . . . . . . . . . . . 3,241,325
33,600 Warner-Lambert Co. . . . . . . . . 2,520,000
------------
10,691,750
------------
LEISURE & ENTERTAINMENT--0.8%
56,000 International Game Technology . . 1,022,000
------------
MEDICAL SERVICES--1.6%
28,000 Medtronic, Inc. . . . . . . . . . 1,904,000
------------
MISCELLANEOUS--3.1%
33,200 Loewen Group, Inc. . . . . . . . . 1,298,950
87,600 Service Corp. International . . . 2,452,800
------------
3,751,750
------------
OIL & GAS--0.5%
12,100 BJ Services Co.(c) . . . . . . . . 617,100
------------
PHARMACEUTICALS--1.5%
5,100 Bristol-Myers Squibb Co. . . . . . 554,625
14,500 Pfizer, Inc. . . . . . . . . . . . 1,201,688
------------
1,756,313
------------
POLLUTION CONTROL--1.3%
51,000 USA Waste Services, Inc.(c) . . . 1,625,625
------------
RESTAURANTS & LODGING--2.5%
36,200 Boston Chicken, Inc.(c) . . . . . 1,298,675
55,800 Lone Star Steakhouse Saloon(c) . . 1,492,650
8,900 Outback Steakhouse, Inc.(c) . . . 238,075
------------
3,029,400
------------
RETAILING--7.8%
15,700 Cintas Corp. . . . . . . . . . . . 922,375
18,500 Dollar General Corp. . . . . . . . 592,000
22,800 Gucci Group NY, Inc.(c) . . . . . 1,456,350
58,500 Home Depot, Inc. . . . . . . . . . 2,932,312
15,000 Nine West Group, Inc.(c) . . . . . 695,625
121,500 Officemax, Inc.(c) . . . . . . . . 1,290,938
15,000 Rite Aid Corp. . . . . . . . . . . 596,250
20,000 TJX Companies, Inc. . . . . . . . 947,500
------------
9,433,350
------------
SEMI-CONDUCTORS--7.4%
33,500 Altera Corp.(c) . . . . . . . . . 2,435,031
29,900 Intel Corp. . . . . . . . . . . . 3,915,031
15,400 Linear Technology Corp. . . . . . 675,675
13,000 Maxim Integrated Products,
Inc.(c) . . . . . . . . . . . . . 562,250
36,200 Xilinx, Inc.(c) . . . . . . . . . 1,332,613
------------
8,920,600
------------
Total Common Stocks
(Identified Cost $99,255,368) . . 113,115,417
------------
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM INVESTMENTS--4.9%
FACE
AMOUNT VALUE (A)
<C> <S> <C>
$3,000,000 Baltimore Gas & Electric Co.
5.85% 01/07/97 . . . . . . . . . $ 2,997,075
2,903,196 Seven Seas U.S. Government Money
Market Fund . . . . . . . . . . . 2,903,196
------------
Total Short-Term Investments
(Identified Cost $5,900,271) . . 5,900,271
------------
Total Investments--98.8%
(Identified Cost
$105,155,639)(b) . . . . . . . . 119,015,688
Other assets less liabilities . . 1,439,819
------------
TOTAL NET ASSETS--100% . . . . . . $120,455,507
============
</TABLE>
(a) See Note 1A.
(b) Federal Tax Information:
At December 31, 1996 the net unrealized appreciation on investments based on
cost of $105,368,896 for federal income tax purposes was as follows:
<TABLE>
<CAPTION>
<C> <S> <C>
Aggregate gross unrealized appreciation for
all investments in which there is an excess
of value over tax cost . . . . . . . . . . $ 16,735,570
Aggregate gross unrealized depreciation for
all investments in which there is an excess
of tax cost over value. . . . . . . . . . . (3,088,778)
------------
Net unrealized appreciation. . . . . . . . . $ 13,646,792
============
</TABLE>
(c) Non-income producing security.
See accompanying notes to financial statements.
16
<PAGE>
NEW ENGLAND ZENITH FUND
(ALGER EQUITY GROWTH SERIES)
<TABLE>
<CAPTION>
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1996
ASSETS
<S> <C> <C>
Investments at value . . . . . . . . . $119,015,688
Cash . . . . . . . . . . . . . . . . . 2,209
Receivable for:
Fund shares sold . . . . . . . . . . . 676,306
Securities sold . . . . . . . . . . . 2,594,031
Dividends and interest . . . . . . . . 71,336
Due from advisor . . . . . . . . . . . 44,918
Unamortized organization expense . . . 5,688
------------
122,410,176
LIABILITIES
Payable for:
Securities purchased . . . . . . . . . $1,684,074
Fund shares redeemed . . . . . . . . . 169,719
Accrued expenses:
Management fees . . . . . . . . . . . 35,929
Deferred trustees' fees . . . . . . . 313
Other expenses . . . . . . . . . . . . 64,634
----------
1,954,669
------------
$120,455,507
============
NET ASSETS
Net Assets consist of:
Capital paid in . . . . . . . . . . . $106,473,943
Undistributed net investment income . 2,272
Accumulated net realized gains . . . . 119,243
Unrealized appreciation on
investments . . . . . . . . . . . . . 13,860,049
------------
NET ASSETS . . . . . . . . . . . . . . . $120,455,507
============
Computation of offering price:
Net asset value and redemption price per
share ($120,455,507 divided by 7,733,167
shares of beneficial interest) . . . . $ 15.58
============
Identified cost of investments . . . . . $105,155,639
============
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
INVESTMENT INCOME
<S> <C> <C>
Dividends . . . . . . . . . . . . . . $ 473,183(a)
Interest . . . . . . . . . . . . . . 487,549
-----------
960,732
EXPENSES
Management fees . . . . . . . . . . . $620,895
Trustees' fees and expenses . . . . . 11,316
Custodian . . . . . . . . . . . . . . 52,986
Audit and tax services . . . . . . . 11,935
Legal . . . . . . . . . . . . . . . . 11,567
Printing . . . . . . . . . . . . . . 40,276
Amortization of organization
expenses . . . . . . . . . . . . . . 2,017
Miscellaneous . . . . . . . . . . . . 5,738
--------
Total expenses . . . . . . . . . . 756,730
-----------
NET INVESTMENT INCOME . . . . . . . . 204,002
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Realized gain on:
Investments--net . . . . . . . . . . 965,295
Unrealized appreciation on:
Investments--net . . . . . . . . . . 9,359,159
-----------
Net gain on investment transactions . 10,324,454
-----------
NET INCREASE IN NET ASSETS FROM
OPERATIONS. . . . . . . . . . . . . . $10,528,456
===========
</TABLE>
(a) Net of foreign taxes of: $2,410.
See accompanying notes to financial statements.
17
<PAGE>
NEW ENGLAND ZENITH FUND
(ALGER EQUITY GROWTH SERIES)
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ---------------
<S> <C> <C>
FROM OPERATIONS
Net investment income . . . . . . . . . . . . $ 30,373 $ 204,002
Net realized gain on investments . . . . . . . 448,499 965,295
Unrealized appreciation on investments . . . . 4,579,507 9,359,159
----------- ------------
INCREASE IN NET ASSETS FROM OPERATIONS . . . . 5,058,379 10,528,456
----------- ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income . . . . . . . . . . . . (30,373) (206,060)
In excess of net investment income . . . . . . (993) 0
Net realized gain on investments . . . . . . . (1,285,986) 0
----------- ------------
(1,317,352) (206,060)
----------- ------------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares . . . . . . . . . 47,127,562 92,225,724
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income . . 31,366 206,060
Distributions from net realized gain . . . . 1,285,986 0
----------- ------------
48,444,914 92,431,784
Cost of shares redeemed . . . . . . . . . . . (7,716,452) (28,685,075)
----------- ------------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL
SHARE TRANSACTIONS . . . . . . . . . . . . . 40,728,462 63,746,709
----------- ------------
TOTAL INCREASE IN NET ASSETS . . . . . . . . . 44,469,489 74,069,105
NET ASSETS
Beginning of the year . . . . . . . . . . . . 1,916,913 46,386,402
----------- ------------
End of the year . . . . . . . . . . . . . . . $46,386,402 $120,455,507
=========== ============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the year . . . . . . . . . . . . $ 0 $ 1,354
=========== ============
End of the year . . . . . . . . . . . . . . . $ 1,354 $ 2,272
=========== ============
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares . . . . . . . . 3,648,304 6,311,990
Issued in connection with the reinvestment of:
Distributions from net investment income . . 2,303 13,117
Distributions from net realized gain . . . . 94,419 0
----------- ------------
3,745,026 6,325,107
Redeemed . . . . . . . . . . . . . . . . . . . (583,251) (1,954,136)
----------- ------------
Net change . . . . . . . . . . . . . . . . . . 3,161,775 4,370,971
=========== ============
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
OCTOBER 31, 1994(A)
THROUGH YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
------------------- ------------ --------------
<S> <C> <C> <C>
Net Asset Value, Beginning
of Period . . . . . . . . $10.00 $ 9.56 $ 13.80
------ ------- --------
Income From Investment
Operations
Net Investment Income . . 0.02 0.01 0.04
Net Realized and
Unrealized Gain (Loss)
on Investments . . . . . (0.44) 4.65 1.78
------ ------- --------
Total From Investment
Operations . . . . . . . (0.42) 4.66 1.82
------ ------- --------
Less Distributions
Dividends From Net
Investment Income . . . . (0.02) (0.01) (0.04)
Distributions From Net
Realized Capital Gains . 0.00 (0.41) 0.00
------ ------- --------
Total Distributions . . . (0.02) (0.42) (0.04)
------ ------- --------
Net Asset Value, End of
Period . . . . . . . . . . $ 9.56 $ 13.80 $ 15.58
====== ======= ========
TOTAL RETURN (%) . . . . . (4.20)(c) 48.80 13.17
Ratio of Operating
Expenses to Average
Net Assets (%) . . . . . . 0.85 (b) 0.85 0.90
Ratio of Net Investment
Income to Average Net
Assets (%) . . . . . . . . 1.07 (b) 0.14 0.24
Portfolio Turnover
Rate (%) . . . . . . . . . 32 (b) 107 78
Average Commission
Rate(d) . . . . . . . . . -- -- $ 0.0716
Net Assets, End of
Period (000) . . . . . . . $1,917 $46,386 $120,456
The ratios of expenses to
average net assets without
giving effect to the
voluntary expense agreement
described in Note 4 to the
Financial Statements would
have been (%) . . . . . . 2.74 (b) 2.45 0.90
</TABLE>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
(d) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for trades on which
commissions are charged. This rate generally does not reflect mark-ups,
mark-downs, or spreads on shares traded on a principal basis.
See accompanying notes to financial statements.
18
<PAGE>
CAPITAL GROWTH SERIES
PORTFOLIO MANAGER: G. KENNETH HEEBNER
CAPITAL GROWTH MANAGEMENT LIMITED PARTNERSHIP
[Photo Of G. Kenneth Heebner]
Q. HOW DID THE CAPITAL GROWTH SERIES PERFORM IN 1996?
A. A continuing strong economy, low-to-moderate inflation, and a relatively
stable interest rate environment contributed to a strong stock market overall.
The Series posted solid performance of 21.08% for the year, on top of 1995's
return of 38.03%, as compared to the S&P 500 Index/19/ return of 37.44% and
22.90% for 1995 and 1996, respectively. Well-managed, moderate growth companies,
which the Series favors, continue to be steady, long-term performers. Many offer
double-digit growth rates, yet still sold at deep discounts, particularly in the
first half of the year. Sectors that fueled the Series' performance included
energy, banks, insurance and computers. Growth companies within these sectors,
most notably Citicorp, Intel, Dell Computer and Chase Manhattan, performed
admirably, benefiting from sustained, positive economic and market conditions.
Q. HOW DID YOU MANAGE THE SERIES IN 1996?
A. Throughout 1996, we remained confident about the economy. We therefore
maintained substantial positions in banking, energy and computing stocks, which
held up well throughout the year after a strong start.
While 1996 may have presented an uphill battle for business in terms of earnings
growth, nothing on the horizon seriously challenges this optimal business
scenario. In recent years, price earnings ratios for companies, especially
exotic technology firms, have risen to high levels not seen since the late
1960's. While some attractive values remain, they now are difficult to find. The
Series' concentrated investment approach is well-suited to this type of market
environment.
Our overall strategy of buying quality, long-term investments in
well-established companies at reasonable prices remains in place.
Q. WHAT IS YOUR INVESTMENT OUTLOOK FOR THE MONTHS AHEAD?
A. For the economy, we expect to see moderate growth with relatively low
inflation, an environment that favors the type of growth companies that comprise
your Series' portfolio. We will continue to avoid companies with high
price/earnings ratios relative to high growth rates. Many investors, we believe,
continue to be overly enthusiastic about growth without closely examining
valuations.
More specifically, we will continue to invest in companies that are industry
leaders that have reasonable valuations and proven track records. While periodic
bursts of volatility may surface along the way, we feel that the companies we
selected using this approach continue to hold potential for investor rewards
over the long term.
[A CHART APPEARS HERE COMPARING THE GROWTH
OF A $10,000 INVESTMENT COMPARED TO AN INDEX]
<TABLE>
<CAPTION>
Capital Growth
Series S&P 500
<S> <C> <C>
12/31/86 10000 10000
1987 15270 10518
1988 13928 12253
1989 18212 16124
1990 17577 15622
1991 27068 20360
1992 25430 21909
1993 29240 24108
1994 27171 24435
1995 37504 33585
1996 45409 41276
</TABLE>
FUND FACTS
GOAL: Long-term growth of capital.
START DATE: August 26, 1983
SIZE: $1.1 billion as of December 31, 1996
MANAGER: G. Kenneth Heebner, since 1983; portfolio manager of New England
Growth Fund since 1976; CGM Capital Development Fund since 1976; CGM Mutual
Fund since 1981; CGM Realty Fund since May 1994; CGM Fixed Income Fund since
June 1993.
Performance numbers are net of all Series expenses but do not include any
insurance, sales or administrative charges of variable annuity or life insurance
contracts. If these charges were included, the returns shown would be lower.
This information represents past performance and is not indicative of future
results. Investment return and principal value will fluctuate so that shares,
upon redemption, may be worth more or less than the original cost.
19
<PAGE>
NEW ENGLAND ZENITH FUND
(CAPITAL GROWTH SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCKS--97.7% OF TOTAL NET ASSETS
SHARES VALUE (A)
<C> <S> <C>
AEROSPACE--5.3%
567,000 Boeing Co. . . . . . . . . . . . . $ 60,314,625
------------
AIRLINES--2.3%
415,000 UAL Corp.(c) . . . . . . . . . . . 25,937,500
------------
BANKS--MONEY CENTER--12.8%
630,000 Chase Manhattan Corp. . . . . . . 56,227,500
871,000 Citicorp . . . . . . . . . . . . . 89,713,000
------------
145,940,500
------------
BEVERAGES & TOBACCO--4.2%
1,198,000 Anheuser-Busch Companies, Inc. . . 47,920,000
------------
COMPUTER SOFTWARE & SERVICES--3.2%
244,000 Compaq Computer Corp.(c) . . . . . 18,117,000
350,000 Dell Computer Corp.(c) . . . . . . 18,593,750
------------
36,710,750
------------
ELECTRONIC COMPONENTS--6.8%
593,000 Intel Corp. . . . . . . . . . . . 77,645,937
------------
FOOD--RETAILERS/WHOLESALERS--9.8%
1,063,000 Hershey Foods Corp. . . . . . . . 46,506,250
585,000 Philip Morris Companies, Inc. . . 65,885,625
------------
112,391,875
------------
HOME PRODUCTS & COSMETIC--2.6%
275,000 Procter & Gamble Co. . . . . . . . 29,562,500
------------
INSURANCE--16.0%
473,000 Aetna, Inc. . . . . . . . . . . . 37,840,000
1,165,000 Allstate Corp. . . . . . . . . . . 67,424,375
603,850 American International
Group, Inc. . . . . . . . . . . . 65,366,763
200,000 Aon Corp. . . . . . . . . . . . . 12,425,000
------------
183,056,138
------------
MISCELLANEOUS--5.7%
876,000 NIKE, Inc. Class B . . . . . . . . 52,341,000
190,000 United Technologies Corp. . . . . 12,540,000
------------
64,881,000
------------
OFFICE EQUIPMENT & SUPPLIES--1.8%
136,000 International Business Machines . 20,536,000
------------
OIL--MAJOR INTEGRATED--9.5%
364,500 British Petroleum PLC (ADR)(d) . . 51,531,188
586,000 Texaco, Inc. . . . . . . . . . . . 57,501,250
------------
109,032,438
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
OIL--SERVICE--13.1%
740,000 Baker Hughes, Inc. . . . . . . $ 25,530,000
1,015,000 Halliburton Co. . . . . . . . . 61,153,750
626,000 Schlumberger Ltd. . . . . . . . 62,521,750
--------------
149,205,500
--------------
PERIPHERALS--4.6%
1,338,000 Seagate Technology(c) . . . . . 52,851,000
--------------
Total Common Stock
(Identified Cost
$867,912,359) . . . . . . . . 1,115,985,763
--------------
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM INVESTMENT--1.9%
FACE
AMOUNT
<C> <S> <C>
$21,290,000 American Express Credit Corp.
6.55%, 01/02/97 . . . . . . . . . 21,290,000
--------------
Total Short-Term Investment
(Identified Cost $21,290,000) . . 21,290,000
--------------
Total Investments--99.6%
(Identified Cost
$889,202,359)(b) . . . . . . . . 1,137,275,763
Other assets less liabilities . . 5,384,412
--------------
TOTAL NET ASSETS--100% . . . . . . $1,142,660,175
==============
</TABLE>
(a) See Note 1A.
(b) Federal Tax Information:
At December 31, 1996 the net unrealized appreciation on investments based on
cost of $889,787,876 for federal income tax purposes was as follows:
<TABLE>
<CAPTION>
<C> <S> <C>
Aggregate gross unrealized appreciation for
all investments in which there is an excess
of value over tax cost . . . . . . . . . . $251,334,507
Aggregate gross unrealized depreciation for
all investments in which there is an excess
of tax cost over value . . . . . . . . . . (3,846,620)
------------
Net unrealized appreciation . . . . . . . . $247,487,887
============
</TABLE>
(c) Non-Income producing security.
(d) An American Depository Receipt (ADR) is a certificate issued by a U.S. bank
representing the right to receive securities of the foreign issuer
described. The values of ADRs are significantly influenced by trading on
exchanges not located in the United States or Canada.
See accompanying notes to financial statements.
20
<PAGE>
NEW ENGLAND ZENITH FUND
(CAPITAL GROWTH SERIES)
<TABLE>
<CAPTION>
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1996
ASSETS
<S> <C> <C>
Investments at value . . . . . . . $1,137,275,763
Cash . . . . . . . . . . . . . . . 1,293
Receivable for:
Fund shares sold . . . . . . . . . 739,181
Securities sold . . . . . . . . . 17,254,428
Dividends and interest . . . . . . 1,510,108
--------------
1,156,780,773
LIABILITIES
Payable for:
Securities purchased . . . . . . . $12,706,300
Fund shares redeemed . . . . . . . 616,582
Withholding taxes . . . . . . . . 74,007
Miscellaneous . . . . . . . . . . 23,225
Accrued expenses:
Management fees . . . . . . . . . 613,663
Deferred trustees' fees . . . . . 56,092
Other expenses . . . . . . . . . . 30,729
-----------
14,120,598
--------------
$1,142,660,175
==============
NET ASSETS
Net Assets consist of:
Capital paid in . . . . . . . . . $ 863,208,951
Undistributed net
investment income . . . . . . . . 36,394
Accumulated net realized gains . . 31,341,426
Unrealized appreciation on
investments . . . . . . . . . . . 248,073,404
--------------
NET ASSETS . . . . . . . . . . . . . $1,142,660,175
==============
Computation of offering price:
Net asset value and redemption price
per share ($1,142,660,175 divided by
2,675,506 shares of beneficial
interest) . . . . . . . . . . . . . $ 427.08
==============
Identified cost of investments . . . $ 889,202,359
==============
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
INVESTMENT INCOME
<S> <C> <C>
Dividends . . . . . . . . . . . . $ 14,724,056(a)
Interest . . . . . . . . . . . . . 163,836
------------
14,887,892
EXPENSES
Management fees . . . . . . . . . $6,398,659
Trustees' fees and expenses . . . 59,562
Custodian . . . . . . . . . . . . 156,442
Audit and tax services . . . . . . 16,800
Legal . . . . . . . . . . . . . . 11,564
Printing . . . . . . . . . . . . . 304,709
Miscellaneous . . . . . . . . . . 10,791
----------
Total expenses . . . . . . . . . 6,958,527
------------
NET INVESTMENT INCOME . . . . . . . 7,929,365
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Realized gain on:
Investments--net . . . . . . . . 68,632,360
Unrealized appreciation on:
Investments--net . . . . . . . . 121,815,567
------------
Net gain on investment transactions 190,447,927
------------
NET INCREASE IN NET ASSETS FROM
OPERATIONS . . . . . . . . . . . . $198,377,292
============
</TABLE>
(a) Net of foreign taxes of: $74,164.
See accompanying notes to financial statements.
21
<PAGE>
NEW ENGLAND ZENITH FUND
(CAPITAL GROWTH SERIES)
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
-------------- -----------------
<S> <C> <C>
FROM OPERATIONS
Net investment income . . . . . . . . . . $ 7,450,611 $ 7,929,365
Net realized gain on investments . . . . . 132,068,325 68,632,360
Unrealized appreciation on investments . . 114,117,353 121,815,567
------------- --------------
INCREASE IN NET ASSETS FROM OPERATIONS . . 253,636,289 198,377,292
------------- ---------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income . . . . . . . . . . (7,422,072) (7,921,505)
============= ==============
Net realized gain on investments . . . . . (112,289,797) (57,069,463)
------------- --------------
(119,711,869) (64,990,968)
------------- --------------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares . . . . . . . 211,234,567 236,084,630
Net asset value of shares issued in
connection with the reinvestment of:
Distributions from net investment income 7,422,051 7,921,505
Distributions from net realized gain . . 112,289,762 57,069,463
------------- --------------
330,946,380 301,075,598
Cost of shares redeemed . . . . . . . . . (210,553,681) (213,245,567)
------------- --------------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL
SHARE TRANSACTIONS . . . . . . . . . . . 120,392,699 87,830,031
------------- --------------
TOTAL INCREASE IN NET ASSETS . . . . . . . 254,317,119 221,216,355
NET ASSETS
Beginning of the year . . . . . . . . . . 667,126,701 921,443,820
------------- --------------
End of the year . . . . . . . . . . . . . $ 921,443,820 $1,142,660,175
============= ==============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the year . . . . . . . . . . $ 278,739 $ 28,556
============= ==============
End of the year . . . . . . . . . . . . . $ 28,556 $ 36,394
============= ==============
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares . . . . . . 561,255 647,661
Issued in connection with the reinvestment
of:
Distributions from net investment income 19,951 18,320
Distributions from net realized gain . . 301,846 83,188
------------- --------------
883,052 749,169
Redeemed . . . . . . . . . . . . . . . . . (559,603) (533,320)
------------- --------------
Net change . . . . . . . . . . . . . . . . 323,449 215,849
============= ==============
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 347.36 $ 322.23 $ 351.63 $ 312.30 $ 374.62
-------- -------- -------- -------- ----------
Income From Investment
Operations
Net Investment
Income . . . . . . 4.04 2.12 5.28 3.47 3.08
Net Realized and
Unrealized Gain
(Loss) on
Investments . . . . (25.10) 46.21 (30.54) 114.91 74.80
-------- -------- -------- -------- ----------
Total From Investment
Operations. . . . . (21.06) 48.33 (25.26) 118.38 77.88
-------- -------- -------- -------- ----------
Less Distributions
Dividends From Net
Investment Income . (4.07) (2.18) (5.15) (3.48) (3.08)
Distributions From
Net Realized Capital
Gains . . . . . . . 0.00 (16.75) (8.92) (52.58) (22.34)
-------- -------- -------- -------- ----------
Total Distributions (4.07) (18.93) (14.07) (56.06) (25.42)
-------- -------- -------- -------- ----------
Net Asset Value, End
of Period . . . . . $ 322.23 $ 351.63 $ 312.30 $ 374.62 $ 427.08
======== ======== ======== ======== ==========
TOTAL RETURN (%) . . (6.05) 14.97 (7.07) 38.03 21.08
Ratio of Operating
Expenses to Average
Net Assets (%) . . . 0.70 0.68 0.67 0.71 0.69
Ratio of Net
Investment Income to
Average Net
Assets (%) . . . . . 1.53 0.67 1.61 0.92 0.79
Portfolio Turnover
Rate (%) . . . . . . 207 169 140 242 207
Average Commission
Rate (a) . . . . . . -- -- -- -- $ 0.0669
Net Assets, End of
Period (000) . . . . $472,017 $644,384 $667,127 $921,444 $1,142,660
</TABLE>
(a) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for trades on which
commissions are charged. This rate generally does not reflect mark-ups,
mark-downs, or spreads on shares traded on a principal basis.
See accompanying notes to financial statements.
22
<PAGE>
LOOMIS SAYLES AVANTI GROWTH SERIES
PORTFOLIO MANAGERS: SCOTT PAPE AND BRUCE EBEL
LOOMIS, SAYLES & COMPANY, L.P.
[PHOTO OF SCOTT PAPE & BRUCE EBEL]
Q. HOW DID LOOMIS SAYLES AVANTI GROWTH SERIES PERFORM IN 1996?
A. The Series' total return of 17.58% was not far behind the Lipper Variable
Growth Average/11/ of 20.39%. Meanwhile, the widely-followed large-cap
indices--the Dow Jones Industrial Average and the Standard & Poor's 500 Stock
Index/19/--gained 26.01% and 22.90%, respectively. These strong returns by the
major indices masked underperformance by the broader marketplace.
In absolute terms, the Series' 1996 total return of 17.58% came on top of 1995's
figure of 30.35%. In both cases, shareholders profited from a positive
foundation for equities: a strong profit picture coupled with modest inflation.
In addition, fairly stable interest rates favored investors through most of the
year. Long-term rates began the year at around 6%, moved up briefly to the 7%
range during the summer, and had settled back down to around 6% by the end of
December.
The U.S. economy was more vigorous than we expected, especially in the first two
quarters. Later, a slowdown that we had anticipated began to materialize, as
first half growth of over 3% in the nation's Gross Domestic Product (GDP) had
shrunk to less than 2% by the third quarter. The market then grew defensive,
favoring larger cap issues for their greater liquidity and lower risk potential.
This shift drove the major indices higher, creating relative underperformance in
the rest of the marketplace.
Q. HOW DID YOU MANAGE THE SERIES THIS YEAR?
A. We took advantage of corporate earnings trends that tracked the economic
pattern; higher first-half growth rates gave way to a slowdown in growth--not a
downturn--later in the year. As a result, the market's leadership group became
narrower, as investors were willing to pay more for those companies whose
earnings met or exceeded expectations.
The Series benefited from this blue-chip trend because of its positions in
General Electric, Coca Cola, Merck and Microsoft, all industry leaders and good
examples of our long-standing strategy.
Using a bottom-up approach, we look for America's premier companies: dominant
well-managed companies whose earnings potential should reward shareholders with
above- average long term returns. We make few assumptions about sectors; the
Series' industry allocation is chiefly the result of our stock selection
process.
Performance also benefited from our technology holdings, including positions in
Cisco Systems, Oracle, Hewlett Packard and Intel. Strength in financial issues
also favored the Series. These interest-rate sensitive companies did
particularly well in the second half of the year as rates began to fall. Among
our financial holdings were American International Group, First Bank Systems and
MGIC. Two mergers also boosted performance; the acquisition of Duracell by
Gillette and St. Jude Medical's purchase of Ventritex.
We increased our defensive stance with a commitment to consumer staples--health
care, food and beverage and consumer products companies. Better than expected
earnings from these less economically sensitive companies added value to the
portfolio. Our focus on energy stocks was also beneficial, as an improved
supply/demand balance led to a pickup in drilling and exploration, after years
of underinvestment in this sector. Meanwhile, our exposure to emerging growth
companies hampered performance. Although many of these fast-growing companies
did well, their stock prices lagged as the market began to favor more
established names.
Late in the year we took profits in--but did not eliminate--some of our blue
chips, where prices seemed overextended. We reinvested part of the proceeds into
emerging companies like Amgen, Informix, Idexx Labs and Thermo Electron, which
we judged to offer attractive growth prospects.
Q. WHAT IS YOUR INVESTMENT OUTLOOK FOR THE MONTHS AHEAD?
A. For the next several months, the economy should continue to slow, putting
pressure on profit growth. In a more sluggish environment, investors will
probably be willing to pay a premium for companies with strong potential for
earnings increases. Over the next six to twelve months, we believe interest
rates will remain stable or decline.
Historically, markets are not as strong following presidential elections. Also,
the increase in stock prices over the last two years has pushed overall
valuations to the high end of historical ranges, making stock selection even
more important in 1997. Large cap stocks are unlikely to outrun the rest of the
market again, a view which favors mid-cap and emerging growth companies.
American companies continue to do a good job of bringing money to the bottom
line. Productivity is up. U.S. firms have become more competitive globally. Many
are leaders in a wide range of industries; semiconductors, medical devices,
telecommunications products, software and semiconductor capital equipment.
23
<PAGE>
The cost of technology goods and services is declining steadily. Technology's
share of the economy continues to grow--it now represents 15% of GDP--producing
a disinflationary effect and a positive impact on productivity. Labor costs have
increased slightly--but this is not unusual at this stage in the economic cycle.
Thus, these costs present very little threat of future inflation.
Q. HOW HAVE YOU POSITIONED THE SERIES IN LIGHT OF THESE ASSUMPTIONS?
A. We believe the Series is well-positioned in view of our outlook for a more
positive tone in the broader stock market. We are emphasizing consumer
non-durables and have increased exposure to emerging growth stocks. We have also
built a strong position in technology, designed to take advantage of a long-term
trend toward expanded spending in this area.
A pickup in consumer spending could counter our thesis of a slowing economy.
Also, accelerating economic activity abroad might be a contrary indicator.
Finally, we will continue to watch closely the flow of money into mutual funds
and the stock market overall.
[A CHART APPEARS HERE COMPARING THE GROWTH OF A
$10,000 INVESTMENT IN THE SERIES COMPARED TO
AN INDEX]
<TABLE>
<CAPTION>
Avanti Growth
Series S&P 500
<S> <C> <C>
Inception 4/30/93 10000 10000
1993 11474 10819
1994 11443 10966
1995 14916 15072
12/31/96 17538 18524
</TABLE>
FUND FACTS
GOAL: Long-term growth of capital.
START DATE: April 30, 1993
SIZE: $83 million as of December 31, 1996
MANAGERS: Scott Pape has co-managed the Series since 1993; Bruce Ebel began
co-managing the Series in June 1996. They both also manage the New England
Capital Growth Fund. Mr. Pape joined Loomis Sayles in 1991 and Mr. Ebel joined
Loomis Sayles in 1994.
Performance numbers are net of all Series expenses but do not include any
insurance, sales or administrative charges of variable annuity or life insurance
contracts. If these charges were included, the returns shown would be lower.
This information represents past performance and is not indicative of future
results. Investment return and principal value will fluctuate so that shares,
upon redemption, may be worth more or less than the original cost.
24
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES AVANTI GROWTH SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCKS--98.8% OF NET ASSETS
SHARES VALUE (A)
<C> <S> <C>
AEROSPACE--1.9%
15,000 Boeing Co. . . . . . . . . . . . . . . $ 1,595,625
-----------
AIRLINES--0.9%
34,900 Southwest Airlines Co.. . . . . . . . . 772,162
-----------
APPAREL & TEXTILES--0.6%
8,100 NIKE, Inc., Class B . . . . . . . . . . 483,975
-----------
BANKS--1.8%
2,900 Chase Manhattan Corp., New . . . . . . 258,825
17,800 First Bank Systems, Inc. . . . . . . . 1,214,850
-----------
1,473,675
-----------
BEVERAGES--2.7%
25,100 Coca-Cola Co. . . . . . . . . . . . . . 1,320,887
31,200 PepsiCo, Inc. . . . . . . . . . . . . . 912,600
-----------
2,233,487
-----------
BUSINESS SERVICES--10.9%
14,000 ABR Information Services, Inc.(c) . . . 551,250
30,700 Automatic Data Processing . . . . . . . 1,316,263
36,000 Checkfree Corp.(c) . . . . . . . . . . 616,500
24,200 Cintas Corp. . . . . . . . . . . . . . 1,421,750
21,400 Danka Business Systems . . . . . . . . 757,025
41,500 First Data Corp. . . . . . . . . . . . 1,514,750
44,250 Fiserv, Inc.(c) . . . . . . . . . . . . 1,626,188
22,100 Paychex, Inc. . . . . . . . . . . . . . 1,136,769
1,500 Sykes Enterprises, Inc.(c) . . . . . . 56,250
-----------
8,996,745
-----------
CHEMICALS--1.6%
34,500 Monsanto Co. . . . . . . . . . . . . . 1,341,188
-----------
COMPUTER SOFTWARE & SERVICES--7.1%
5,500 Computer Associates International, Inc. 273,625
18,400 HBO & Co. . . . . . . . . . . . . . . . 1,092,500
16,500 HNC Software, Inc.(c) . . . . . . . . . 515,625
47,400 Informix Corp.(c) . . . . . . . . . . . 965,775
22,100 Microsoft Corp. . . . . . . . . . . . . 1,826,013
27,800 Oracle Systems Corp.(c) . . . . . . . . 1,160,650
-----------
5,834,188
-----------
CONGLOMERATES--1.4%
27,500 Thermo Electron Corp.(c) . . . . . . . 1,134,375
-----------
ELECTRICAL EQUIPMENT--2.6%
21,800 General Electric Co. . . . . . . . . . 2,155,475
-----------
ELECTRONIC COMPONENTS--6.5%
28,500 Glenayre Technologies, Inc.(c) . . . . 614,531
12,900 Intel Corp. . . . . . . . . . . . . . . 1,689,094
27,800 LSI Logic Corp.(c) . . . . . . . . . . 743,650
7,000 Molex, Inc. . . . . . . . . . . . . . . 273,875
30,000 Molex, Inc. Class A . . . . . . . . . . 1,068,750
18,700 Solectron Corp.(c) . . . . . . . . . . 998,112
-----------
5,388,012
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
FINANCIAL SERVICES--2.3%
17,300 Charles Schwab Corp., New . . . . . . $ 553,600
17,800 MGIC Investment Corp. . . . . . . . . 1,352,800
-----------
1,906,400
-----------
GAS & PIPELINE UTILITIES--0.5%
9,800 Enron Corp. . . . . . . . . . . . . . 422,625
-----------
HEALTH CARE--MEDICAL TECHNOLOGY--5.0%
21,200 Boston Scientific Corp.(c) . . . . . 1,272,000
40,300 Indexx Laboratories, Inc.(c) . . . . 1,450,800
21,100 Medtronic, Inc. . . . . . . . . . . . 1,434,800
-----------
4,157,600
-----------
HEALTH CARE--DRUGS--9.2%
18,000 Abbott Laboratories . . . . . . . . . 913,500
26,300 Amgen, Inc.(c) . . . . . . . . . . . 1,430,063
26,000 Biogen, Inc.(c) . . . . . . . . . . . 1,007,500
6,900 Eli Lilly & Co. . . . . . . . . . . 503,700
19,700 Johnson & Johnson . . . . . . . . . . 980,075
26,000 Merck & Co. . . . . . . . . . . . 2,060,500
107,000 Oncor, Inc.(c) . . . . . . . . . . . 421,312
23,000 Somatogen, Inc.(c) . . . . . . . . . 253,000
-----------
7,569,650
-----------
HEALTH CARE--SERVICES--3.8%
33,000 Columbia / HCA Healthcare Corp. . . 1,344,750
32,600 Healthsouth Corp.(c) . . . . . . . . 1,259,175
17,650 Phycor, Inc.(c) . . . . . . . . . . . 500,819
-----------
3,104,744
-----------
HOTELS & RESTAURANTS--4.7%
14,000 Boston Chicken, Inc.(c) . . . . . . . 502,250
8,100 Circus Circus Enterprises, Inc.(c) . 278,437
10,000 Einstein Noah Bagel Corp.(c) . . . . 297,500
30,000 Lone Star Steakhouse Saloon(c) . . . 802,500
3,300 McDonald's Corp. . . . . . . . . . 149,325
15,900 Primadonna Resorts, Inc.(c) . . . . . 270,300
54,900 Starbucks Corp.(c) . . . . . . . . . 1,571,513
-----------
3,871,825
-----------
HOUSEHOLD PRODUCTS--5.0%
22,200 Duracell International, Inc. . . . . 1,551,225
19,500 Gillette Co. . . . . . . . . . . . . 1,516,125
2,000 Kimberly-Clark Corp. . . . . . . . 190,500
22,500 Newell Co. . . . . . . . . . . . . 708,750
1,600 Procter & Gamble Co. . . . . . . . 172,000
-----------
4,138,600
-----------
INSURANCE--1.7%
13,100 American International Group, Inc.(c) 1,418,075
-----------
LEISURE TIME--1.3%
13,400 Eastman Kodak Co. . . . . . . . . . . 1,075,350
-----------
</TABLE>
See accompanying notes to financial statements.
25
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES AVANTI GROWTH SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCKS--(CONTINUED)
SHARES VALUE (A)
<C> <S> <C>
MACHINERY--1.5%
15,400 Illinois Tool Works, Inc. . . . . . $1,230,075
----------
MEDIA & ENTERTAINMENT--1.3%
1,550 TCI Satellite Entertainment, Inc.(c) 15,306
17,300 Tele-Communicationas, Inc.(c) . . . 225,981
12,100 Walt Disney Co. . . . . . . . . . . 842,462
----------
1,083,749
----------
METALS---0.2%
3,900 Nucor Corp. . . . . . . . . . . . . 198,900
----------
OFFICE EQUIPMENT & SUPPLIES--7.3%
24,600 Cascade Communications Corp.(c) . . 1,356,075
25,400 Cisco Systems, Inc.(c) . . . . . . . 1,616,075
21,400 Hewlett-Packard Co. . . . . . . . . 1,075,350
26,200 Parametric Technology Corp. . . . . 1,346,025
8,500 U.S. Robotics Corp.(c) . . . . . . . 612,000
----------
6,005,525
----------
OIL--INDEPENDENT PRODUCERS--2.4%
27,700 Anadarko Petroleum Corp. . . . . . . 1,793,575
6,000 Enron Oil & Gas Co. . . . . . . . . 151,500
----------
1,945,075
----------
OIL--MAJOR INTEGRATED--0.3%
3,300 Amoco Corp. . . . . . . . . . . . . 265,650
----------
OIL SERVICES--2.4%
14,500 Baker Hughes, Inc. . . . . . . . . . 500,250
14,300 Rowan Companies(c) . . . . . . . . . 323,537
11,500 Schlumberger, Ltd. . . . . . . . . . 1,148,563
----------
1,972,350
----------
RETAIL---0.2%
7,800 Wal-Mart Stores, Inc. . . . . . . . 178,425
----------
RETAIL SPECIALTY--5.4%
70,125 CUC International, Inc.(c) . . . . . 1,665,469
21,500 Home Depot, Inc. . . . . . . . . . . 1,077,687
77,200 Petsmart, Inc.(c) . . . . . . . . . 1,688,750
----------
4,431,906
----------
TELECOMMUNICATION--4.4%
8,100 MCI Communications . . . . . . . . . 264,769
8,400 Paging Network, Inc.(c) . . . . . . 128,100
17,200 PairGain Technologies, Inc.(c) . . . 523,525
30,900 QUALCOMM, Inc.(c) . . . . . . . . . 1,232,138
28,000 Tellabs, Inc.(c) . . . . . . . . . . 1,053,500
8,800 U.S. West Media Group(c) . . . . . . 162,800
11,800 Worldcom, Inc.(c) . . . . . . . . . 307,537
----------
3,672,369
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
TOBACCO--1.9%
13,900 Philip Morris Companies, Inc. $ 1,565,488
-----------
Total Common Stocks
(Identified Cost
$69,052,280) . . . . . . . . 81,623,288
-----------
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM INVESTMENT--4.0%
FACE
AMOUNT VALUE (A)
<C> <S> <C>
$3,285,796 Associates Corp. North America
6.55% 1/02/97 . . . . . . . . . 3,285,796
-----------
Total Short-Term Investment
(Identified cost $3,285,796) . . 3,285,796
-----------
Total Investments 102.8%
(Identified cost $72,338,076)(b) 84,909,084
Other assets less liabilities . . (2,241,739)
-----------
TOTAL NET ASSETS--100% . . . . . $82,667,345
===========
</TABLE>
(a) See Note 1A.
(b) Federal Tax Information:
At December 31, 1996 the net unrealized appreciation on investments based on
cost of $72,665,614 for federal income tax purposes was as follows:
<TABLE>
<CAPTION>
<C> <S> <C>
Aggregate gross unrealized appreciation for
all investments in which there is an excess
of value over tax cost . . . . . . . . . . $14,356,377
Aggregate gross unrealized depreciation for
all investments in which there is an excess
of tax cost over value . . . . . . . . . . (2,112,907)
-----------
Net unrealized appreciation . . . . . . . . $12,243,470
===========
</TABLE>
(c) Non-income producing security.
See accompanying notes to financial statements.
26
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES AVANTI GROWTH SERIES)
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1996
ASSETS
Investments at value . . . . . . . . . $84,909,084
Receivable for:
Fund shares sold . . . . . . . . . . . 260,183
Dividends and interest . . . . . . . . 66,351
Foreign taxes . . . . . . . . . . . . 44
-----------
85,235,662
LIABILITIES
Payable for:
Securities purchased . . . . . . . . . $2,383,605
Fund shares redeemed . . . . . . . . . 74,873
Withholding taxes . . . . . . . . . . 351
Miscellaneous . . . . . . . . . . . . 474
Accrued expenses:
Management fees . . . . . . . . . . . 82,461
Deferred trustees' fees . . . . . . . 1,086
Other expenses . . . . . . . . . . . . 25,467
----------
2,568,317
-----------
$82,667,345
===========
NET ASSETS
Net Assets consist of:
Capital paid in . . . . . . . . . . . $68,933,894
Accumulated net realized gains . . . . 1,162,443
Unrealized appreciation on
investments . . . . . . . . . . . . . 12,571,008
-----------
NET ASSETS . . . . . . . . . . . . . . . $82,667,345
===========
Computation of offering price:
Net asset value and redemption price per
share ($82,667,345 divided by 523,600
shares of beneficial interest) . . . . $ 157.88
===========
Identified cost of investments . . . . . $72,338,076
===========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
INVESTMENT INCOME
Dividends . . . . . . . . . . . . $ 436,309(a)
Interest . . . . . . . . . . . . . 164,434
-----------
600,743
EXPENSES
Management fees . . . . . . . . . $454,015
Trustees' fees and expenses . . . 11,532
Custodian . . . . . . . . . . . . 55,097
Audit and tax services . . . . . . 13,200
Legal . . . . . . . . . . . . . . 11,564
Printing . . . . . . . . . . . . . 44,769
Miscellaneous . . . . . . . . . . 4,122
--------
Total expenses . . . . . . . . . 594,299
Less expenses assumed by the
investment adviser. . . . . . . (42,992) 551,307
-------- -----------
NET INVESTMENT INCOME . . . . . . . 49,436
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Realized gain on:
Investments--net . . . . . . . . 4,796,759
Unrealized appreciation on:
Investments--net . . . . . . . . 5,241,031
-----------
Net gain on investment transactions 10,037,790
-----------
NET INCREASE IN NET ASSETS FROM
OPERATIONS . . . . . . . . . . . . $10,087,226
===========
</TABLE>
(a) Net of foreign taxes of: $514.
See accompanying notes to financial statements.
27
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES AVANTI GROWTH SERIES)
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------- ---------------
<S> <C> <C>
FROM OPERATIONS
Net investment income . . . . . . . . . . . . $ 138,413 $ 49,436
Net realized gain on investments . . . . . . 2,703,726 4,796,759
Unrealized appreciation on investments . . . 6,182,432 5,241,031
------------ ------------
INCREASE IN NET ASSETS FROM OPERATIONS . . . 9,024,571 10,087,226
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income . . . . . . . . . . . . (132,051) (56,514)
Net realized gain on investments . . . . . . (1,364,969) (4,542,510)
------------ ------------
(1,497,020) (4,599,024)
------------ ------------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares . . . . . . . . 25,328,373 40,573,027
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income . . 132,051 56,514
Distributions from net realized gain . . . . 1,364,969 4,542,510
------------ ------------
26,825,393 45,172,051
Cost of shares redeemed . . . . . . . . . . . (11,142,834) (16,825,278)
------------ ------------
Increase in net assets derived from capital
share transactions . . . . . . . . . . . . . 15,682,559 28,346,773
------------ ------------
Total increase in net assets . . . . . . . . 23,210,110 33,834,975
NET ASSETS
Beginning of the year . . . . . . . . . . . . 25,622,260 48,832,370
------------ ------------
End of the year . . . . . . . . . . . . . . . $ 48,832,370 $ 82,667,345
============ ============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the year . . . . . . . . . . . . $ 0 $ 6,362
============ ============
End of the year . . . . . . . . . . . . . . . $ 6,362 $ 0
============ ============
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares . . . . . . . 188,223 265,834
Issued in connection with the reinvestment of:
Distributions from net investment income . . 929 313
Distributions from net realized gain . . . . 9,604 22,968
------------ ------------
198,756 289,115
Redeemed . . . . . . . . . . . . . . . . . . (83,183) (108,338)
------------ ------------
Net change . . . . . . . . . . . . . . . . . 115,573 180,777
============ ============
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
APRIL 30, 1993(A) YEAR YEAR YEAR
THROUGH ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995 1996
----------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $100.00 $113.67 $112.77 $142.44
------- ------- ------- -------
Income From Investment
Operations
Net Investment
Income . . . . . . 0.18 0.59 0.42 0.11
Net Realized and
Unrealized Gain
(Loss) on
Investment . . . . 14.56 (0.89) 33.80 24.88
------- ------- ------- -------
Total From Investment
Operations. . . . . 14.74 (0.30) 34.22 24.99
------- ------- ------- -------
Less Distributions
Dividends From Net
Investment Income . (0.18) (0.60) (0.40) (0.13)
Distributions From
Net Realized Capital
Gains . . . . . . . (0.67) 0.00 (4.15) (9.42)
Distributions From
Paid-in Capital . . (0.22) 0.00 0.00 0.00
------- ------- ------- -------
Total Distributions (1.07) (0.60) (4.55) (9.55)
------- ------- ------- -------
Net Asset Value, End
of Period . . . . . $113.67 $112.77 $142.44 $157.88
======= ======= ======= =======
TOTAL RETURN (%) . . 14.74(c) (0.27) 30.35 17.58
Ratio of Operating
Expenses to Average
Net Assets (%) . . . 0.85(b) 0.84 0.85 0.85
Ratio of Net
Investment Income
to Average Net
Assets (%) . . . . . 0.46(b) 0.67 0.37 0.08
Portfolio Turnover
Rate (%) . . . . . . 21(b) 67 58 65
Average Commission
Rate(d) . . . . . . -- -- -- $0.0508
Net Assets, End of
Period (000) . . . . $11,972 $25,622 $48,832 $82,667
The ratios of expenses
to average net assets
without giving effect
to the voluntary
expense agreement
described in Note 4
to the Financial
Statements would have
been (%) . . . . . . 0.89(b) 0.84 1.06 0.92
</TABLE>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
(d) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for trades on which
commissions are charged. This rate generally does not reflect mark-ups,
mark-downs, or spreads on shares traded on a principal basis.
See accompanying notes to financial statements.
28
<PAGE>
DAVIS VENTURE VALUE SERIES
PORTFOLIO MANAGERS: SHELBY M.C. DAVIS AND CHRISTOPHER C. DAVIS
DAVIS SELECTED ADVISERS, L.P.
PHOTO OF SHELBY AND CHRISTOPHER DAVIS
Q. HOW DID THE SERIES PERFORM IN 1996?
A. The Davis Venture Value Series delivered a total return of 25.84% for the
twelve months ended December 31, 1996, compared to a 22.90% gain for the
Standard & Poor's 500 Index/19/.
The strong performance of the index and the Series was to a large extent the
result of a fairly benign U.S. economy during 1996. While various economic
indicators argued for an acceleration of growth and a step-up in inflation,
others contradicted this conclusion, and the net result was a so-called
"Goldilocks" economy--neither too fast nor too slow. Combined with widely
reported strong corporate profits, the result was a buoyant (if somewhat
skittish) stock market during most of the year.
The final quarter of 1996 was an exceptionally strong period for U.S. stocks,
with the Dow Jones Industrial Average broaching an all-time high of 6548 on
December 27, 1996. However, as happened generally throughout 1996,
large-capitalization stocks fared better than smaller-capitalization issues.
Also, investors continued to punish the stock of any company, large or small,
that reported disappointing earnings, creating considerable volatility and a
dichotomous market of substantial winners and losers.
Q. HOW DID YOU MANAGE THE SERIES IN 1996?
A. Consistent with our long-term approach to investing, we did not revise the
portfolio in response to the economy or market momentum, except to take
advantage of others' short-term thinking. We believed that staying the course
would best serve our strategy, the key tenets of which are:
. An emphasis on stocks of financial companies with strong brand names that are
selling at a discount to the market. Such companies stand to be the
beneficiaries of long-term demographic trends as baby-boomers approach their
peak earnings and savings years with greater discretionary cash and an
increasing need to invest for retirement. Despite a strong year for many banks
and brokerage firms, financial company stocks remain undervalued relative to
the broader market.
. Purchasing high-quality growth companies during temporary lows. As we
mentioned earlier, the market tended to abandon stocks quickly if quarterly
earnings disappointed, regardless of sound fundamentals or long-term
prospects. In keeping with our longer-term perspective, we view these
short-term price dips as an opportunity to buy at favorable prices. Among our
opportunistic additions to the portfolio was IBM, which did extremely well.
. Investing in high-quality U.S.-based multinational corporations positioned to
grow with the expanding economies overseas.
. Choosing companies with strong cash flows and top management teams that are
undergoing restructuring. We look for those where the cash is being used to
implement a long-term vision and/or to buy back stock.
As a group, financial stocks continued to be our strong- performing sector, led
primarily by banks and brokerage firms. The best-performing individual stocks,
however, were pri marily very large companies with consistently strong earnings,
spread across a wide variety of industries, including consumer products (Philip
Morris), technology (IBM and Intel), diversified financial services (American
Express), oil services (Noble Drilling) and automotive ( General Motors).
Results were least favorable overall for the telecommunications sector, where
the market, in our view, tended to overreact to any negative event or
information. The least profitable of the portfolio's holdings were in a variety
of industries, such as life insurance (Equitable) and food (McDonald's). Stock
prices of both companies fell as a result of lower-than-expected short-term
earnings. However, the downturn was neither sudden nor unpredictable in either
case, and we continue to believe in their long-term potential.
Q. WHAT IS YOUR INVESTMENT OUTLOOK FOR THE MONTHS AHEAD?
A. We remain optimistic about the state of the economy and believe that 1997
could be another year of modest growth and stable interest rates. We are less
positive about the outlook for corporate profits, as few companies can sustain
earnings growth rates of 20% and 30% indefinitely. Benign economic conditions
notwithstanding, a falloff in profits would likely spell a slower-growing stock
market.
Whether or not the market continues its record-setting runup, we do not
anticipate major adjustments to the portfolio. As value-conscious, buy-and-hold
investors, we make commitments to companies with superior managements that are
positioned to take
29
<PAGE>
advantage of broad economic, demographic and social trends and have the
attributes to consistently deliver more reasonable (i.e., sustainable) earnings
growth. Historically, this has resulted in solid results during up cycles and
superior returns during downturns.
[A CHART APPEARS HERE COMPARING A $10,000
INVESTMENT IN THE SERIES AND AN INDEX]
<TABLE>
<CAPTION>
Venture Value
Series S&P 500
<S> <C> <C>
10/31/94 10000 10000
12/94 9650 9794
12/95 13441 13461
12/96 16914 16544
</TABLE>
FUND FACTS
GOAL: Growth of capital.
START DATE: October 31, 1994
SIZE: $108 million as of December 31, 1996
MANAGER: Shelby M.C. Davis has served as portfolio manager since the Series'
inception in 1994 and has served as portfolio manager of Davis New York Venture
Fund since 1968 and of Selected American Shares since May 1993. He also
managed the Selected Special Fund from May 1993 through October 1994 and the
Davis Financial Fund from May 1991 through May 1995. Christopher C. Davis has
co-managed the Series since October 1995 and has been an assistant portfolio
manager and research analyst at Davis Selected.
Performance numbers are net of all Series expenses but do not include any
insurance, sales or administrative charges of variable annuity or life insurance
contracts. If these charges were included, the returns shown would be lower.
This information represents past performance and is not indicative of future
results. Investment return and principal value will fluctuate so that shares,
upon redemption, may be worth more or less than the original cost.
30
<PAGE>
NEW ENGLAND ZENITH FUND
(DAVIS VENTURE VALUE SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCKS--90.8% OF TOTAL NET ASSETS
SHARES VALUE (A)
<C> <S> <C>
AEROSPACE--1.9%
19,600 Boeing Co. . . . . . . . . . . . $ 2,084,950
-----------
AGRICULTURE--1.0%
48,855 Archer-Daniels-Midland Co. . . . . 1,074,810
-----------
AUTOMOTIVE--2.4%
30,100 General Motors Corp. . . . . . . . 1,678,075
17,200 General Motors Corp., Class H . . . 967,500
-----------
2,645,575
-----------
BANKS AND SAVINGS & LOANS--12.3%
24,160 Banc One Corp. . . . . . . . . . . 1,038,880
23,900 BankAmerica Corp. . . . . . . . . . 2,384,025
18,100 Barnett Banks, Inc. . . . . . . . . 744,363
22,880 Citicorp . . . . . . . . . . . . . 2,356,640
25,700 First Bank Systems, Inc. . . . . . 1,754,025
400 First Union Corp. . . . . . . . . . 29,600
14,300 Golden West Financial Corp. . . . . 902,687
23,100 State Street Boston Corp. . . . . . 1,489,950
9,500 Wells Fargo & Co. . . . . . . . . . 2,562,625
-----------
13,262,795
-----------
CONSUMER PRODUCTS--5.9%
800 American Brands, Inc. . . . . . . . 39,700
500 American Home Products Corp. . . . 29,313
21,400 Coca-Cola Co. . . . . . . . . . . 1,126,175
1,200 General Electric Co. . . . . . . . 118,650
63,400 Guinness PLC(f) . . . . . . . . . . 498,554
30,000 Masco Corp. . . . . . . . . . . . . 1,080,000
12,300 Nestle S.A. (ADR)(d) . . . . . . . 658,180
25,500 Philip Morris Companies, Inc. . . . 2,871,937
-----------
6,422,509
-----------
DIVERSIFIED FINANCIAL SERVICES--6.4%
62,400 American Express Co. . . . . . . . 3,525,600
24,400 Dean Witter, Discover & Co. . . . 1,616,500
16,600 Federal Home Loan Mortgage Corp. . 1,828,075
-----------
6,970,175
-----------
DRILLING EQUIPMENT--0.3%
8,400 Smith International, Inc.(c) . . . 376,950
-----------
ENERGY--7.8%
400 Amerada Hess Corp. . . . . . . . . 23,150
300 Amoco Corp. . . . . . . . . . . . . 24,150
500 Atlantic Richfield Co. . . . . . . 66,250
46,100 Burlington Resources, Inc. . . . . 2,322,287
1,500 Chevron Corp. . . . . . . . . . . . 97,500
15,500 Energy Venture, Inc.(c) . . . . . . 788,562
2,400 Exxon Corp. . . . . . . . . . . . 235,200
4,000 Falcon Drilling(c) . . . . . . . . 157,000
33,500 Halliburton Co. . . . . . . . . . 2,018,375
200 Mobil Corp. . . . . . . . . . . . . 24,450
27,364 Noble Affiliates, Inc. . . . . . . 1,310,052
13,100 Schlumberger, Ltd. . . . . . . . . 1,308,362
400 Sonat, Inc. . . . . . . . . . . . . 20,600
-----------
8,395,938
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
ENTERTAINMENT--0.7%
10,600 Walt Disney Co. . . . . . . . . . . . . $ 738,025
-----------
FOOD & RESTAURANT--2.1%
39,600 McDonald's Corp. . . . . . . . . . . . . 1,791,900
15,100 Tyson Foods Inc. . . . . . . . . . . . 517,175
-----------
2,309,075
-----------
HOUSING & BUILDING MATERIALS--1.2%
53,800 Martin Marietta Materials, Inc. . . . . 1,250,850
-----------
INFORMATION SERVICES--0.0%
100 Cognizant Corp.(c) . . . . . . . . . . . 3,300
-----------
INTERNATIONAL CLOSED-END INVESTMENT COMPANY--0.7%
76,034 Morgan Stanley Asia Pacific Fund,
Inc. . . . . . . . . . . . . . . . . 741,332
-----------
INVESTMENT FIRMS--4.1%
23,500 Donaldson Lufkin & Jenrette, Inc. . . 846,000
16,000 J.P. Morgan & Co., Inc. . . . . . . . . 1,562,000
35,600 Morgan Stanley Group, Inc. . . . . . . 2,033,650
-----------
4,441,650
-----------
LIFE INSURANCE--3.1%
59,300 Equitable Companies, Inc. . . . . . . . 1,460,262
43,700 SunAmerica, Inc. . . . . . . . . . . . . 1,939,187
------------
3,399,449
------------
MANUFACTURING--0.0%
200 Dow Chemical Co. . . . . . . . . . . . . 15,675
800 Maytag Corp. . . . . . . . . . . . . . . 15,800
-----------
31,475
-----------
MARKETING ANALYSIS--0.0%
33 ACNeilson Corp. (c) . . . . . . . . . . 499
-----------
PAPER PRODUCTS--1.4%
25,200 Fort Howard Corp.(c) . . . . . . . . . . 697,725
300 International Paper Co. . . . . . . . 12,113
21,500 Jefferson Smurfit Corp.(c) . . . . . . . 345,344
4,200 Kimberly-Clark Corp. . . . . . . . . . . 400,050
400 Union Camp Corp. . . . . . . . . . . . . 19,100
-----------
1,474,332
-----------
PHARMACEUTICAL AND HEALTH CARE--2.9%
200 Bristol-Myers Squibb Co. . . . . . . . . 21,750
8,900 Eli Lilly & Co. . . . . . . . . . . . . 649,700
11,000 Johnson & Johnson . . . . . . . . . . . 547,250
5,100 Merck & Co. . . . . . . . . . . . . . . 404,175
18,100 Pfizer, Inc. . . . . . . . . . . . . . . 1,500,037
-----------
3,122,912
-----------
PHOTOGRAPHIC--1.6%
21,100 Eastman Kodak Co. . . . . . . . . . . 1,693,275
-----------
PROPERTY/CASUALTY INSURANCE--12.6%
35,481 The Allstate Corp. . . . . . . . . . . 2,053,463
7,200 American International Group, Inc. . . 779,400
23,200 W.R. Berkley Corp. . . . . . . . . . . . 1,177,400
31,400 Chubb Corp. . . . . . . . . . . . . . . 1,687,750
</TABLE>
See accompanying notes to financial statements.
31
<PAGE>
NEW ENGLAND ZENITH FUND
(DAVIS VENTURE VALUE SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCKS--(CONTINUED)
SHARES VALUE (A)
<C> <S> <C>
PROPERTY/CASUALTY INSURANCE--(CONTINUED)
12,774 General Re Corp. . . . . . . . . . $ 2,015,098
6,100 NAC Re Corp. . . . . . . . . . . . 206,638
13,500 Progressive Corp. . . . . . . . . . . 909,563
15,500 Transatlantic Holdings, Inc. . . . 1,247,750
56,033 The Travelers Group, Inc. . . . . . . 2,542,497
25,400 20th Century Industries, Inc.(c) . . 428,625
7,100 UNUM Corp. . . . . . . . . . . . . 512,975
------------
13,561,159
------------
PUBLISHING--2.8%
100 Dun & Bradstreet Corp. . . . . . . . 2,375
18,400 Gannet Co., Inc. . . . . . . . . . . 1,377,700
52,900 News Corporation, Ltd. . . . . . . . 932,362
8,700 Tribune Co. . . . . . . . . . . . . . 686,213
------------
2,998,650
------------
RAILROAD--3.4%
21,900 Burlington Northern Santa Fe . . . . 1,891,612
11,800 Illinois Central Corp. . . . . . . 377,600
23,800 Union Pacific Corp. . . . . . . . . 1,430,975
------------
3,700,187
------------
REAL ESTATE--2.3%
19,400 Crescent Real Estate Equities . . . . 1,023,350
9,100 Federal Realty Investment Trust . . . 246,838
2,100 Kimco Realty Corp. . . . . . . . . . 73,238
5,200 Mid-Atlantic Realty Trust . . . . . . 58,500
5,900 Saul Centers, Inc. . . . . . . . . . 93,663
10,100 United Dominion Realty Trust, Inc. . 156,550
14,600 Vornado Realty Trust . . . . . . . . 766,500
2,900 Weingarten Realty . . . . . . . . . . 117,813
------------
2,536,452
------------
RETAIL--1.3%
25,600 Federated Department Stores, Inc.(c) 873,600
12,500 Harcourt General, Inc. . . . . . . . 576,562
------------
1,450,162
------------
TECHNOLOGY--9.7%
18,700 Applied Materials, Inc.(c) . . . . . 672,031
39,700 Hewlett-Packard Co. . . . . . . . . . 1,994,925
23,500 Intel Corp. . . . . . . . . . . . . . 3,077,031
19,200 International Business Machines . . . 2,899,200
41,200 Komag, Inc.(c) . . . . . . . . . . . 1,117,550
13,000 Novellus Systems, Inc.(c) . . . . . . 704,438
------------
10,465,175
------------
TELECOMMUNICATIONS--2.3%
60,800 Airtouch Communications(c) . . . . . 1,535,200
2,800 AT&T Corp. . . . . . . . . . . . . . 121,800
1,900 Globalstar Telecommunications . . . . 119,700
842 Lucent Technologies, Inc. . . . . . . 38,943
300 SBC Communications, Inc. . . . . . . 15,525
27,000 360 Communications Co.(c) . . . . . . 624,375
------------
2,455,543
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
UTILITIES--0.6%
300 Carolina Power & Light Co. . . . . . . . . . . $ 10,950
2,200 Cooper Cameron Corp. (c) . . . . . . . . . . . 168,300
300 Duke Power Co. . . . . . . . . . . . . . . . . 13,875
200 Edison International . . . . . . . . . . . . . 3,975
100 Enova Corp. . . . . . . . . . . . . . . . . . 2,275
15,359 Union Pacific Resources Group . . . . . . . . 449,251
200 Wisconsin Energy Corp. . . . . . . . . . . . . 5,375
-----------
654,001
-----------
Total Common Stocks
(Identified Cost $80,077,440) . . . . . . . . 98,261,205
-----------
</TABLE>
<TABLE>
<CAPTION>
PREFERRED STOCK--0.3%
<C> <S> <C>
3,920 Airtouch Communications, Inc. . . . . . . . . $106,820
2,496 Airtouch Communications, Inc. . . . . . . . . 112,944
1,500 Banc One Corp., $3.50, Ser. C Conv. Pfd. . . 124,500
--------
Total Preferred Stocks
(Identified Cost $317,241) . . . . . . . . . 344,264
--------
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM INVESTMENTS--8.6%
FACE
AMOUNT
<C> <S> <C>
$4,150,000 Federal National Mortgage Assn., Discount
Note, 5.715%, 1/02/97 . . . . . . . . . $ 4,149,352
5,160,000 Repurchase agreement with State Street
Bank & Trust Company dated 12/31/96 at
5.50% to be repurchased at $5,161,577 on
1/2/97. Collateralized by $5,265,000 U.S
Treasury Bills 4.75% due 8/31/98 with a
value of $5,265,374 . . . . . . . . . . 5,160,000
------------
Total Short-Term Investment
(Identified Cost $9,309,352) . . . . . . 9,309,352
------------
Total Investments--99.7%
(Identified Cost $89,704,033)(b) . . . . 107,914,821
Other assets less liabilities(e) . . . . 274,205
------------
TOTAL NET ASSETS--100% . . . . . . . . . $108,189,026
============
</TABLE>
(a) See Note 1a.
(b) Federal Tax Information:
At December 31, 1996 the net unrealized appreciation on investments based on
cost of $89,706,946 for federal income tax purposes was as follows:
<TABLE>
<CAPTION>
<C> <S> <C>
Aggregate gross unrealized appreciation for
all investments in which there is an excess
of value over tax cost . . . . . . . . . . $18,568,358
Aggregate gross unrealized depreciation for
all investments in which there is an excess
of tax cost over value . . . . . . . . . . (360,483)
-----------
Net unrealized appreciation . . . . . . . . $18,207,875
===========
</TABLE>
(c) Non-income producing security.
(d) An American Depository Receipt (ADR) is a certificate issued by a U.S. bank
representing the right to receive securities of the foreign issuer
described. The values of ADRs are significantly influenced by trading on
exchanges not located in the United States or Canada.
(e) Including deposits in foreign denominated currencies with a value of $12,397
and a cost of $11,296.
(f) Denominated in Great Britain Pounds.
See accompanying notes to financial statements.
32
<PAGE>
NEW ENGLAND ZENITH FUND
(DAVIS VENTURE VALUE SERIES)
<TABLE>
<CAPTION>
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1996
ASSETS
<S> <C> <C>
Investments at value . . . . . . . . . . $107,914,821
Cash . . . . . . . . . . . . . . . . . . 1,072
Foreign cash at value (Cost $11,296) . . 12,397
Receivable for:
Fund shares sold . . . . . . . . . . . . 737,470
Dividends and interest . . . . . . . . . 185,699
Foreign taxes . . . . . . . . . . . . . 697
Unamortized organization expense . . . . 5,688
------------
108,857,844
LIABILITIES
Payable for:
Securities purchased . . . . . . . . . . $398,508
Fund shares redeemed . . . . . . . . . . 132,279
Withholding taxes . . . . . . . . . . . 24
Accrued expenses:
Management fees . . . . . . . . . . . . 110,121
Deferred trustees' fees . . . . . . . . 300
Other expenses . . . . . . . . . . . . . 27,586
--------
668,818
------------
$108,189,026
============
NET ASSETS
Net Assets consist of:
Capital paid in . . . . . . . . . . . . $ 89,700,900
Undistributed net investment income . . 17,317
Accumulated net realized gains . . . . . 258,829
Unrealized appreciation on
investments and foreign currency . . . 18,211,980
------------
NET ASSETS . . . . . . . . . . . . . . . . $108,189,026
============
Computation of offering price:
Net asset value and redemption price per
share ($108,189,026 divided by 6,723,469
shares of beneficial interest) . . . . . $ 16.09
============
Identified cost of investments . . . . . . $ 89,704,033
============
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
INVESTMENT INCOME
<S> <C> <C>
Dividends . . . . . . . . . . . . . . $ 1,003,895(a)
Interest . . . . . . . . . . . . . . . 424,772
-----------
1,428,667
EXPENSES
Management fees . . . . . . . . . . . $495,948
Trustees' fees and expenses . . . . . 10,949
Custodian . . . . . . . . . . . . . . 71,633
Audit and tax services . . . . . . . . 13,200
Legal . . . . . . . . . . . . . . . . 11,567
Printing . . . . . . . . . . . . . . . 26,071
Amortization of organization
expenses . . . . . . . . . . . . . . 2,017
Miscellaneous . . . . . . . . . . . . 5,661
--------
Total expenses . . . . . . . . . . . 637,046
Less expenses assumed by the
investment adviser . . . . . . . . (41,906) 595,140
-------- -----------
NET INVESTMENT INCOME . . . . . . . . . 833,527
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS AND FOREIGN CURRENCY
TRANSACTIONS
Realized gain on:
Investments--net . . . . . . . . . . 1,885,474
Unrealized appreciation on:
Investments--net . . . . . . . . . . 14,269,076
Foreign currency transactions--net . 91
-----------
Total unrealized appreciation on
investments and foreign currency
transactions. . . . . . . . . . . . 14,269,167
-----------
Net gain on investment transactions . . 16,154,641
-----------
NET INCREASE IN NET ASSETS FROM
OPERATIONS . . . . . . . . . . . . . . $16,988,168
===========
</TABLE>
(a) Net of foreign taxes of: $5,824.
See accompanying notes to financial statements.
33
<PAGE>
NEW ENGLAND ZENITH FUND
(DAVIS VENTURE VALUE SERIES)
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ---------------
<S> <C> <C>
FROM OPERATIONS
Net investment income . . . . . . . . . . . . $ 246,049 $ 833,527
Net realized gain on investments . . . . . . . 600,646 1,885,474
Unrealized appreciation on investments and
foreign currency transactions . . . . . . . . 3,966,150 14,269,167
----------- ------------
INCREASE IN NET ASSETS FROM OPERATIONS . . . . 4,812,845 16,988,168
----------- ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income . . . . . . . . . . . . (244,485) (818,557)
Net realized gain on investments . . . . . . . (517,278) (1,709,985)
----------- ------------
(761,763) (2,528,542)
----------- ------------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares . . . . . . . . . 31,372,928 73,335,902
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income . . 244,485 818,557
Distributions from net realized gain . . . . 517,278 1,709,985
----------- ------------
32,134,691 75,864,444
Cost of shares redeemed . . . . . . . . . . . (4,512,250) (17,180,011)
----------- ------------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL
SHARE TRANSACTIONS . . . . . . . . . . . . . 27,622,441 58,684,433
----------- ------------
TOTAL INCREASE IN NET ASSETS . . . . . . . . . 31,673,523 73,144,059
NET ASSETS
Beginning of the year . . . . . . . . . . . . 3,371,444 35,044,967
----------- ------------
End of the year . . . . . . . . . . . . . . . $35,044,967 $108,189,026
=========== ============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the year . . . . . . . . . . . . $ 0 $ 3,911
=========== ============
End of the year . . . . . . . . . . . . . . . $ 3,911 $ 17,317
=========== ============
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares . . . . . . . . 2,627,688 5,082,303
Issued in connection with the reinvestment of:
Distributions from net investment income . . 18,850 49,916
Distributions from net realized gain . . . . 39,883 106,943
----------- ------------
2,686,421 5,239,162
Redeemed . . . . . . . . . . . . . . . . . . . (362,591) (1,190,115)
----------- ------------
Net change . . . . . . . . . . . . . . . . . . 2,323,830 4,049,047
=========== ============
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
OCTOBER 31, 1994 (A)
THROUGH YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
-------------------- ------------ --------------
<S> <C> <C> <C>
Net Asset Value, Beginning
of Period . . . . . . . . $10.00 $ 9.62 $ 13.10
------ ------- --------
Income From Investment
Operations
Net Investment Income . . 0.03 0.10 0.13
Net Realized and
Unrealized Gain (Loss) on
Investments. . . . . . . (0.38) 3.68 3.26
------ ------- --------
Total From Investment
Operations . . . . . . . (0.35) 3.78 3.39
------ ------- --------
Less Distributions
Dividends From Net
Investment Income . . . (0.03) (0.10) (0.13)
Distributions From Net
Realized Capital Gains . 0.00 (0.20) (0.27)
------ ------- --------
Total Distributions . . . (0.03) (0.30) (0.40)
------ ------- --------
Net Asset Value, End of
Period. . . . . . . . . . $ 9.62 $ 13.10 $ 16.09
====== ======= ========
TOTAL RETURN (%) . . . . . (3.50)(c) 39.28 25.84
Ratio of Operating
Expenses to Average
Net Assets (%) . . . . . 0.90 (b) 0.90 0.90
Ratio of Net Investment
Income to Average Net
Assets (%) . . . . . . . 2.54 (b) 1.39 1.25
Portfolio Turnover
Rate (%) . . . . . . . . 1 (b) 20 18
Average Commission
Rate(d) . . . . . . . . . -- -- $ 0.0599
Net Assets, End of
Period (000) . . . . . . $3,371 $35,045 $108,189
The ratios of expenses to
average net assets without
giving effect to the
voluntary expense
agreement described in
Note 4 to the Financial
Statements would have
been (%) . . . . . . . . 3.97 (b) 1.51 0.96
</TABLE>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
(d) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for trades on which
commissions are charged. This rate generally does not reflect mark-ups,
mark-downs, or spreads on shares traded on a principal basis.
See accompanying notes to financial statements.
34
<PAGE>
WESTPEAK GROWTH AND INCOME SERIES
PORTFOLIO MANAGERS: GERALD SCRIVER AND PHILIP COOPER
WESTPEAK INVESTMENT ADVISORS, L.P.
[PHOTOS OF GERALD SCRIVER PHILIP COOPER]
Q. HOW DID WESTPEAK GROWTH AND INCOME SERIES PERFORM IN 1996?
For the year ended December 31, 1996, Westpeak Growth and Income delivered a
total return of 18.10%. This compares with 22.90% for the S&P 500 Index/19/, the
Series' benchmark. Most of this relative underperformance occurred in the first
half of the year. As the year progressed, the Series began to close the gap,
outperforming the S&P 500 in six of the last seven months of 1996.
The Series' track record remains exceptional: An investment of $10,000 at the
Series' inception date of April 30, 1993 would have grown to $18,189 by year-end
1996. This is a hypothetical value attributable to the Series since inception
and does not include variable annuity and life insurance contract charges and
expenses.
Q. HOW DID YOU MANAGE THE SERIES IN 1996?
Entering the year, our outlook for the U.S. economy was positive. As events
played out, however, particularly in the first half of the year, the economy's
continued vigor surpassed our expectations.
The strong economy produced rising interest rates, accompanied by notable
volatility in the nation's securities markets. These factors led us to believe
that a continued rise in stock prices was limited. What's more, these conditions
implied a weaker market environment ahead, one more favorable to value
stocks--companies whose market prices appear low relative to their potential
worth--than to growth stocks--those with expanding earnings. We therefore moved
cautiously, tilting the Series' portfolio toward value investments and away from
growth.
By July our view had changed somewhat. Interest rates seemed likely to remain
flat--although higher than in late 1995--as the economy's expansionary trend
began to cool. Therefore we maintained a cautious position, focusing the
portfolio on stocks that, while carrying lower price/earnings ratios (a measure
of a stock's price relative to the company's earning power), than our S&P
benchmark, appeared to offer attractive prospects for price appreciation.
We also underestimated the remarkably strong and persistent cash flows into
mutual funds. This record influx, coupled with an underlying tone of speculation
and excitement over new issues, helped to drive the stock market higher.
A heavy commitment to the regional telephone operating companies--the so-called
Baby Bells, as well as some large international oil companies, hindered
performance early in the year. These companies, selected for their value
characteristics, underperformed despite their size and quality.
Our decision to emphasize value stocks came too early. But during the second
half of the year the market favored such stocks, enabling the Series to close
part of the performance gap. We took advantage of downturns to build positions
in IBM, Intel and Compaq Computer while they were available at attractive
prices. These selections were very positive contributors to Series performance
as the year progressed.
Overall our conservative approach held Series performance back somewhat this
year. But we prefer to stick to our established philosophy rather than deviate
from it as markets ebb and flow. We hope that our avoidance of timing the market
will reduce the effects of risk on your Series' portfolio over the long-term.
Q. WHAT IS YOUR INVESTMENT OUTLOOK FOR THE MONTHS AHEAD?
As is often the case, changes in interest rates are the most powerful influence
on the stock market's direction. And a pickup in inflation, which has been
modest by historical measures in recent years, would almost certainly bring Fed
tightening.
But taking a longer term view, we see a continued favorable investment scenario,
marked by low inflation and good earnings growth. While there is some risk built
into the current market environment, a drop in stock prices would cause
investors' expectations to fall. This may create a very positive situation for
long-term investors.
35
<PAGE>
[A CHART APPEARS HERE COMPARING A $10,000
INVESTMENT IN THE SERIES AND AN INDEX]
<TABLE>
<CAPTION>
Growth and
Income Series S&P 500
<S> <C> <C>
4/30/93 10000 10000
12/31/93 11424 10819
12/31/94 11286 10966
12/31/95 15402 15072
12/31/96 18189 18524
</TABLE>
FUND FACTS
GOAL: Long-term total return through investment in equity securities.
START DATE: May 1, 1993
SIZE: $82 million as of December 31, 1996.
MANAGERS: Gerald Scriver and Philip Cooper. Mr. Scriver and Mr. Cooper have
managed the Series from its inception in 1993; they also have managed Westpeak
Stock Index Series since August 1993 and New England Growth Opportunities Fund
since May 1, 1995. Mr. Scriver joined Westpeak in July, 1991 and Mr. Cooper
joined Westpeak in December 1991.
Performance numbers are net of all Series expenses but do not include any
insurance, sales or administrative charges of variable annuity or life insurance
contracts. If these charges were included, the returns shown would be lower.
This information represents past performance and is not indicative of future
results. Investment return and principal value will fluctuate so that shares,
upon redemption, may be worth more or less than the original cost.
36
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK GROWTH & INCOME SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCKS--97.6% OF TOTAL NET ASSETS
SHARES VALUE (A)
<C> <S> <C>
AEROSPACE--3.0%
7,700 Boeing Co. . . . . . . . . . . . $ 819,087
25,600 United Technologies Corp. . . . . 1,689,600
----------
2,508,687
----------
AGRICULTURE & FOOD--6.3%
44,500 Archer-Daniels-Midland Co. . . . 979,000
18,700 CPC International, Inc. . . . . . 1,449,250
28,800 IBP, Inc. . . . . . . . . . . . . 698,400
13,100 Tyson Foods, Inc. . . . . . . . . 448,675
9,300 Unilever NV . . . . . . . . . . . 1,629,825
----------
5,205,150
----------
AIRLINES--0.2%
2,800 UAL, Inc.(c) . . . . . . . . . . 175,000
----------
BANKS--7.7%
12,000 BankAmerica Corp. . . . . . . . . 1,197,000
8,300 Bankers Trust NY . . . . . . . . 715,875
40,000 Banponce Corp., New . . . . . . . 1,350,000
10,500 First Union Corp. . . . . . . . . 777,000
19,300 NationsBank Corp. . . . . . . . . 1,886,575
5,800 Republic NY Corp. . . . . . . . . 473,425
----------
6,399,875
----------
BEVERAGE--0.9%
14,300 Coca-Cola Co. . . . . . . . . . . 752,537
----------
BUSINESS MACHINES--5.2%
16,900 Compaq Computer Corp.(c) . . . . 1,254,825
11,400 International Business Machines . 1,721,400
23,100 Western Digital Corp.(c) . . . . 1,313,817
----------
4,290,042
----------
CHEMICAL--3.3%
4,700 Albemarle Corp. . . . . . . . . . 85,188
22,500 Dow Chemical Co. . . . . . . . . 1,763,437
4,000 EI Du Pont de Nemours & Co. . . . 377,500
5,900 Rohm & Haas Co. . . . . . . . . . 481,587
----------
2,707,712
----------
COMPUTER SOFTWARE & SERVICES--1.3%
27,500 Comdisco, Inc. . . . . . . . . . 873,125
3,600 Compuware Corp.(c) . . . . . . . 180,450
----------
1,053,575
----------
COSMETICS--2.5%
42,000 Johnson & Johnson . . . . . . . . 2,089,500
----------
DRUGS--7.2%
20,400 Abbott Laboratories . . . . . . . 1,035,300
7,900 Amgen, Inc.(c) . . . . . . . . 429,562
6,100 Bristol Myers & Squibb Co. . . . 663,375
20,800 Merck & Co. . . . . . . . . . . . 1,648,400
4,600 Pfizer, Inc. . . . . . . . . . . 381,225
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
DRUGS--(CONTINUED)
9,300 Rhone Poulenc Rorer, Inc. . . . $ 726,562
15,800 Schering Plough Corp. . . . . . 1,023,050
----------
5,907,474
----------
ELECTRIC UTILITIES--3.9%
27,700 Entergy Corp. . . . . . . . . . 768,675
52,900 Pinnacle West Capital Corp. . . 1,679,575
29,600 Unicom Corp. . . . . . . . . . . 802,900
----------
3,251,150
----------
ELECTRONICS--2.6%
3,600 Intel Corp. . . . . . . . . . . 471,375
27,400 KLA Instruments Corp.(c) . . . . 972,700
6,100 SCI Systems, Inc.(c) . . . . . . 272,213
10,600 Tellabs, Inc.(c) . . . . . . . . 398,825
----------
2,115,113
----------
FINANCIAL--SERVICES--3.2%
19,810 Bear Stearns Companies, Inc. . . 552,204
42,600 Lehman Brothers Holdings, Inc. . 1,336,575
9,500 Merrill Lynch & Co., Inc. . . . 774,250
----------
2,663,029
----------
GAS UTILITIES--0.2%
5,000 Nicor, Inc. . . . . . . . . . . 178,750
----------
HEALTHCARE--2.6%
28,800 OrNda Healthcorp.(c) . . . . . . 842,400
57,600 Tenet Healthcare Corp.(c) . . . 1,260,000
----------
2,102,400
----------
INSURANCE--OTHER--3.7%
12,000 AMBAC, Inc.(c) . . . . . . . . . 796,500
3,000 CIGNA Corp. . . . . . . . . . . 409,875
15,100 Loews Corp. . . . . . . . . . . 1,423,175
16,650 Old Republic International
Corp. . . . . . . . . . . . . . 445,387
----------
3,074,937
----------
INTERNATIONAL OIL--5.2%
3,600 Chevron Corp. . . . . . . . . . 234,000
28,400 Exxon Corp. . . . . . . . . . . 2,783,200
10,500 Mobil Corp. . . . . . . . . . . 1,283,625
----------
4,300,825
----------
LIFE INSURANCE--1.0%
12,300 Conseco, Inc. . . . . . . . . . 784,125
----------
MEDIA--1.0%
22,100 King World Productions(c) . . . 814,937
----------
METALS--1.1%
11,500 Asarco, Inc. . . . . . . . . . . 286,062
9,000 Phelps Dodge Corp. . . . . . . . 607,500
----------
893,562
----------
</TABLE>
See accompanying notes to financial statements.
37
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK GROWTH & INCOME SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCKS--(CONTINUED)
SHARES VALUE (A)
<C> <S> <C>
MISCELLANEOUS--0.1%
5,600 American Water Works, Inc. . . . $ 115,500
----------
MORTGAGE--1.2%
16,600 Federal National Mortgage Assoc. 618,350
8,700 Green Tree Financial Corp. . . . 336,037
----------
954,387
----------
MOTOR VEHICLES--1.8%
22,500 Chrysler Corp. . . . . . . . . . 742,500
13,900 General Motors Corp. . . . . . . 774,925
----------
1,517,425
----------
OIL REFINEMENT/DISTRIBUTION--2.6%
12,400 Royal Dutch Petroleum Co. . . . 2,117,300
----------
OIL SERVICE--0.3%
8,700 Noble Drilling Corp.(c) . . . . 172,913
2,000 Rowan Companies(c) . . . . . . . 45,250
----------
218,163
----------
OIL RESERVES--3.1%
14,800 Amoco Corp. . . . . . . . . . . 1,191,400
9,300 National Fuel Gas Co. . . . . . 383,625
21,200 Phillips Petroleum Co. . . . . . 938,100
----------
2,513,125
----------
PAPER--3.3%
9,200 Champion International Corp. . . 397,900
7,800 Georgia-Pacific Corp. . . . . . 561,600
24,400 Mead Corp. . . . . . . . . . . . 1,418,250
8,300 Rayonier, Inc. . . . . . . . . . 318,512
----------
2,696,262
----------
PHOTOGRAPHY--1.5%
14,900 Eastman Kodak Co. . . . . . . . 1,195,725
----------
PRODUCER OF GOODS--5.6%
8,300 Applied Materials, Inc.(c) . . . 298,282
5,500 Case Corp. . . . . . . . . . . . 299,750
24,300 Caterpillar Tractor Co. . . . . 1,828,575
9,800 Harsco Corp. . . . . . . . . . . 671,300
8,300 Illinois Tool Works, Inc. . . . 662,962
38,400 Premark International, Inc. . . 854,400
----------
4,615,269
----------
PUBLISHING--1.0%
39,300 Moore Corp., Ltd. . . . . . . . 800,737
----------
RAILROAD--1.5%
29,100 CSX Corp. . . . . . . . . . . . 1,229,475
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
RETAIL--3.0%
19,000 Dayton Hudson Corp. . . . . . . $ 745,750
6,598 Eckerd Corp.(c) . . . . . . . . 211,136
10,700 Gap, Inc. . . . . . . . . . . . 322,337
12,700 Mercantile Stores Co., Inc. . . 627,062
2,800 Tiffany & Co., New . . . . . . 102,550
9,300 TJX Companies, Inc. . . . . . . 440,587
-----------
2,449,422
-----------
SAVINGS & LOAN--1.5%
1,900 Ahmanson & Co. . . . . . . . . 61,750
20,300 Dime Bancorp(c) . . . . . . . . 299,425
6,600 Golden West Financial Corp.
del . . . . . . . . . . . . . 416,625
7,400 Standard Federal Bancorp. . . . 420,875
-----------
1,198,675
-----------
SERVICES--0.2%
2,800 Omnicom Group . . . . . . . . . 128,100
-----------
SOAPS--0.1%
2,500 First Brands Corp. . . . . . . 70,938
-----------
STEEL--1.3%
34,900 USX-U.S. Steel Group . . . . . 1,094,987
-----------
TELEPHONE--6.4%
28,000 Ameritech Corp. . . . . . . . . 1,697,500
24,600 Bell Atlantic Corp. . . . . . . 1,592,850
22,400 Bell South Corp. . . . . . . . 904,400
24,100 MCI Communications . . . . . . 787,769
9,900 Sprint Corp. . . . . . . . . . 394,763
-----------
5,377,282
-----------
TIRES AND RUBBER GOODS--1.0%
15,400 Goodyear Tire & Rubber Co. . . 791,175
-----------
Total Common Stocks
(Identified Cost $70,424,057) 80,352,327
------------
</TABLE>
See accompanying notes to financial statements.
38
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK GROWTH & INCOME SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
SHORT-TERM INVESTMENT--2.3%
FACE
AMOUNT VALUE (A)
<C> <S> <C>
$1,900,000 Repurchase agreement with State Street Bank
& Trust Company dated 12/31/96 at 4.75% to
be repurchased at $1,900,501 on 1/2/97.
Collaterized by $1,515,000 U.S. Treasury
Bond 8.875% due 8/15/97 with a value of
$1,941,568 . . . . . . . . . . . . . . . . $ 1,900,000
-----------
Total Short-Term Investment
(Identified cost $1,900,000) . . . . . . . 1,900,000
-----------
Total Investments --99.9%
(Identified cost $72,324,057)(b) . . . . . 82,252,327
Other assets less liabilities . . . . . . . 77,816
-----------
TOTAL NET ASSETS--100% . . . . . . . . . . $82,330,143
===========
</TABLE>
(a) See Note 1A.
(b) Federal Tax Information:
At December 31,1996 the net unrealized appreciation on investments based on
cost of $72,331,708 for federal income tax purposes was as follows:
<TABLE>
<CAPTION>
<C> <S> <C>
Aggregate gross unrealized appreciation for all
investments in which there is an excess of
value over tax cost . . . . . . . . . . . . . $10,880,192
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax
cost over value . . . . . . . . . . . . . . . (959,573)
-----------
Net unrealized appreciation . . . . . . . . . . $ 9,920,619
===========
</TABLE>
(c) Non-income producing security.
See accompanying notes to financial statements.
39
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK GROWTH & INCOME SERIES)
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1996
ASSETS
Investments at value . . . . . . . . . . . . $82,252,327
Cash . . . . . . . . . . . . . . . . . . . . 728
Receivable for:
Fund shares sold . . . . . . . . . . . . . . 129,763
Dividends and interest . . . . . . . . . . . 115,999
-----------
82,498,817
LIABILITIES
Payable for:
Fund shares redeemed . . . . . . . . . . . . $59,014
Withholding taxes . . . . . . . . . . . . . 565
Miscellaneous . . . . . . . . . . . . . . . 471
Accrued expenses:
Management fees . . . . . . . . . . . . . . 79,576
Deferred trustees' fees . . . . . . . . . . 1,102
Other expenses . . . . . . . . . . . . . . . 27,946
-------
168,674
-----------
$82,330,143
===========
NET ASSETS
Net Assets consist of:
Capital paid in . . . . . . . . . . . . . . $70,263,879
Undistributed net investment income . . . . 469
Accumulated net realized gains . . . . . . . 2,137,525
Unrealized appreciation on
investments . . . . . . . . . . . . . . . . 9,928,270
-----------
NET ASSETS . . . . . . . . . . . . . . . . . . $82,330,143
===========
Computation of offering price:
Net asset value and redemption price per share
($82,330,143 divided by 542,449 shares of
beneficial interest) . . . . . . . . . . . . $ 151.77
===========
Identified cost of investments . . . . . . . . $72,324,057
===========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
INVESTMENT INCOME
Dividends . . . . . . . . . . . . $ 1,301,995(a)
Interest . . . . . . . . . . . . . 127,382
-----------
1,429,377
EXPENSES
Management fees . . . . . . . . . $443,509
Trustees' fees and expenses . . . 11,505
Custodian . . . . . . . . . . . . 57,352
Audit and tax services . . . . . . 13,200
Legal . . . . . . . . . . . . . . 11,564
Printing . . . . . . . . . . . . . 35,527
Miscellaneous . . . . . . . . . . 3,883
--------
Total expenses . . . . . . . . . 576,540
Less expenses assumed by the
investment adviser . . . . . . (37,994) 538,546
-------- -----------
NET INVESTMENT INCOME . . . . . . . 890,831
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Realized gain on:
Investments--net . . . . . . . . 8,163,321
Unrealized appreciation on:
Investments--net . . . . . . . . 2,277,386
-----------
Net gain on investment transactions 10,440,707
-----------
NET INCREASE IN NET ASSETS FROM
OPERATIONS . . . . . . . . . . . . $11,331,538
===========
</TABLE>
(a) Net of foreign taxes of: $6,549.
See accompanying notes to financial statements.
40
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK GROWTH & INCOME SERIES)
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ---------------
<S> <C> <C>
FROM OPERATIONS
Net investment income . . . . . . . . . . . . $ 563,717 $ 890,831
Net realized gain on investments . . . . . . . 2,941,365 8,163,321
Unrealized appreciation on investments . . . . 6,907,865 2,277,386
----------- ------------
INCREASE IN NET ASSETS FROM OPERATIONS . . . . 10,412,947 11,331,538
----------- ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income . . . . . . . . . . . . (549,852) (904,227)
Net realized gain on investments . . . . . . . (1,825,459) (6,507,691)
----------- ------------
(2,375,311) (7,411,918)
----------- ------------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares . . . . . . . . . 22,945,280 35,852,491
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income . . 549,852 904,227
Distributions from net realized gain . . . . 1,825,459 6,507,691
----------- ------------
25,320,591 43,264,409
Cost of shares redeemed . . . . . . . . . . . (8,163,352) (12,982,923)
----------- ------------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL
SHARE TRANSACTIONS . . . . . . . . . . . . . 17,157,239 30,281,486
----------- ------------
TOTAL INCREASE IN NET ASSETS . . . . . . . . . 25,194,875 34,201,106
NET ASSETS
Beginning of the year . . . . . . . . . . . . 22,934,162 48,129,037
----------- ------------
End of the year . . . . . . . . . . . . . . . $48,129,037 $ 82,330,143
=========== ============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the year . . . . . . . . . . . . $ 0 $ 13,865
=========== ============
End of the year . . . . . . . . . . . . . . . $ 13,865 $ 469
=========== ============
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares . . . . . . . . 175,593 239,114
Issued in connection with the reinvestment of:
Distributions from net investment income . . 3,932 5,851
Distributions from net realized gain . . . . 13,054 42,976
----------- ------------
192,579 287,941
Redeemed . . . . . . . . . . . . . . . . . . . (62,314) (86,095)
----------- ------------
Net change . . . . . . . . . . . . . . . . . . 130,265 201,846
=========== ============
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
APRIL 30, 1993 (A) YEAR YEAR YEAR
THROUGH ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995 1996
------------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period . . . . . . . $100.00 $112.32 $109.03 $141.31
------- ------- ------- -------
Income From Investment
Operations
Net Investment
Income . . . . . . 0.92 1.90 1.77 1.78
Net Realized and
Unrealized Gain
(Loss) on
Investments . . . . 13.33 (3.25) 37.91 23.69
------- ------- ------- -------
Total From Investment
Operations. . . . . 14.25 (1.35) 39.68 25.47
------- ------- ------- -------
Less Distributions
Dividends From Net
Investment Income . (0.92) (1.92) (1.71) (1.82)
Distributions From
Net Realized Capital
Gains . . . . . . . (1.00) 0.00 (5.69) (13.19)
Distributions in
Excess of Net
Realized Capital
Gains . . . . . . . (0.01) 0.00 0.00 0.00
Distributions From
Paid-in Capital . . 0.00 (0.02) 0.00 0.00
------- ------- ------- -------
Total Distributions . (1.93) (1.94) (7.40) (15.01)
------- ------- ------- -------
Net Asset Value, End
of Period . . . . . $112.32 $109.03 $141.31 $151.77
======= ======= ======= =======
TOTAL RETURN (%) . . 14.24(c) (1.21) 36.46 18.10
Ratio of Operating
Expenses to Average
Net Assets (%) . . . 0.85(b) 0.85 0.85 0.85
Ratio of Net
Investment Income
to Average Net
Assets (%) . . . . . 2.16(b) 2.30 1.63 1.40
Portfolio Turnover
Rate (%) . . . . . . 49(b) 133 92 104
Average Commission
Rate(d). . . . . . . -- -- -- $0.0344
Net Assets, End of
Period (000) . . . . $ 9,082 $22,934 $48,129 $82,330
The ratios of expenses
to average net assets
without giving effect
to the voluntary
expense agreement
described in Note 4
to the Financial
Statements would have
been (%) . . . . . . 0.94(b) 0.86 1.06 0.91
</TABLE>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
(d) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for trades on which
commissions are charged. This rate generally does not reflect mark-ups,
mark-downs, or spread on shares traded on a principal basis.
See accompanying notes to financial statements.
41
<PAGE>
WESTPEAK STOCK INDEX SERIES
PORTFOLIO MANAGERS: GERALD SCRIVER AND PHILIP COOPER
WESTPEAK INVESTMENT ADVISORS, L. P.
[PHOTOS OF GERALD SCRIVER & PHILIP COOPER]
Q. HOW DID THE WESTPEAK STOCK INDEX SERIES PERFORM IN 1996?
A. The Westpeak Stock Index Series returned 22.47% compared to 22.90% posted by
the S&P 500 Index/19/ for the fiscal year ended December 31, 1996. The backdrop
for the continued market success was the continued low interest rate environment
with little action from the Federal Reserve Board to raise interest rates.
Q. HOW DID YOU MANAGE THE SERIES IN 1996?
A. The Series' seeks to track the performance of the S&P 500 Stock Index. Our
approach is to own all of the 500 stocks in the Index in the same proportion as
the Index.
The past year was a difficult year for actively managed Funds to keep pace. This
was due to the fact that much of the most profitable returns came from a small
concentration of stocks such as Microsoft and Intel.
Q. WHAT IS THE OUTLOOK FOR THE MONTHS AHEAD?
A. Although recent market returns may not be sustainable in 1997, the Westpeak
Stock Index Series seeks to maintain full participation in S&P 500 returns.
[A CHART APPEARS HERE WHICH COMPARES A $10,000
INVESTMENT VERSUS AN INDEX]
<TABLE>
<CAPTION>
Stock Index
Series S&P 500
<S> <C> <C>
4/30/87 10000 10000
1987 8780 8770
1988 10215 10216
1989 13294 13444
1990 12743 13025
1991 16614 16976
1992 17826 18268
1993 19560 20101
1994 19783 20374
1995 27079 28003
1996 33163 34415
</TABLE>
FUND FACTS
GOAL: Investment results that correspond to the composite price and yield
performance of United States publicly traded common stocks.
START DATE: May 1, 1987.
SIZE: $81 million as of December 31, 1996
MANAGERS: Gerald Scriver and Philip Cooper. Mr. Scriver and Mr. Cooper have
managed the Series since 1993; they have also managed Westpeak Growth and
Income Series since August 1993 and New England Growth Opportunities Fund since
May 1, 1995. Mr. Scriver joined Westpeak in July 1991 and Mr. Cooper joined
Westpeak in December 1991.
Performance numbers are net of all Series expenses but do not include any
insurance, sales or administrative charges of variable annuity or life insurance
contracts. If these charges were included, the returns shown would be lower.
This information represents past performance and is not indicative of future
results. Investment return and principal value will fluctuate so that shares,
upon redemption, may be worth more or less than the original cost.
42
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK STOCK INDEX SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCKS--99.4% OF TOTAL NET ASSETS
SHARES VALUE (A)
<C> <S> <C>
AEROSPACE--2.0%
4,100 Allied Signal, Inc. . . . . . . . $ 274,700
5,247 Boeing Co. . . . . . . . . . . . 558,150
900 General Dynamics Corp. . . . . . . 63,450
2,815 Lockheed Martin Corp. . . . . . . 257,573
3,000 McDonnell Douglas Corp. . . . . . . 192,000
900 Northrop Grumman Corp. . . . . . . 74,475
3,500 United Technologies Corp. . . . . . 231,000
----------
1,651,348
----------
AGRICULTURE AND FOOD--2.8%
7,725 Archer-Daniels-Midland Co. . . . . 169,950
3,300 Campbell Soup Co. . . . . . . . . . 264,825
3,250 Conagra, Inc. . . . . . . . . . . 161,687
2,100 CPC International, Inc. . . . . . . 162,750
2,200 General Mills, Inc. . . . . . . . . 139,425
5,200 H.J. Heinz Co. . . . . . . . . . . 185,900
2,200 Hershey Foods Corp. . . . . . . . . 96,250
2,900 Kellogg Co. . . . . . . . . . . . . 190,312
1,200 Pioneer Hi Bred International,
Inc. . . . . . . . . . . . . . . . 84,000
1,900 Quaker Oats Co. . . . . . . . . . 72,437
7,000 Sara Lee Corp. . . . . . . . . . 260,750
2,200 Unilever N.V. . . . . . . . . . . . 385,550
1,800 William Wrigley Jr. Co. . . . . . . 101,250
----------
2,275,086
----------
AIR TRANSPORT--0.4%
1,400 AMR Corp.(c) . . . . . . . . . . . 123,375
1,100 Delta Airlines, Inc. . . . . . . 77,963
1,600 Federal Express Corp.(c) . . . . . 71,200
2,100 Southwest Airlines Co. . . . . . . 46,463
900 US Air Group, Inc.(c) . . . . . . . 21,038
----------
340,039
----------
ALUMINUM--0.4%
3,200 Alcan Aluminum, Ltd. . . . . . . . 107,600
2,500 Aluminum Company of America . . . . 159,375
900 Reynolds Metals Co. . . . . . . . 50,738
----------
317,713
----------
APPAREL--0.6%
1,000 Fruit of the Loom, Inc. . . . . . . 37,875
1,000 Liz Claiborne, Inc. . . . . . . . . 38,625
4,000 Nike, Inc. . . . . . . . . . . . . 239,000
800 Reebok International Ltd. . . . . 33,600
600 Russell Corp. . . . . . . . . . . . 17,850
100 Springs Industries, Inc. . . . . 4,300
700 Stride Rite Corp. . . . . . . . . 7,000
1,000 VF Corp. . . . . . . . . . . . . . 67,500
----------
445,750
----------
BANKS--7.5%
6,175 Banc One Corp. . . . . . . . . . . 265,525
2,200 Bank of Boston Corp. . . . . . . 141,350
5,400 Bank of New York, Inc. . . . . . . 182,250
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
4,928 BankAmerica Corp. . . . . . . . . . $ 491,568
900 Bankers Trust New York Corp. . . . . 77,625
2,600 Barnett Banks of Florida, Inc. . . . 106,925
2,000 Boatmens Bancshares, Inc. . . . . . . 129,000
6,070 Chase Manhattan Corp. . . . . . . . . 541,747
6,700 Citicorp(c) . . . . . . . . . . . . . 690,100
1,600 Comerica, Inc. . . . . . . . . . . 83,800
3,200 Core States Financial Corp. . . . . . 166,000
1,300 Fifth Third Bancorp. . . . . . . . . 81,656
1,900 First Bank Systems, Inc. . . . . . 129,675
4,510 First Chicago Corp. . . . . . . . . . 242,412
3,950 First U.N. Corp. . . . . . . . . . 292,300
3,662 Fleet Financial Group, Inc. . . . . . 182,642
2,600 J.P. Morgan & Co., Inc. . . . . . . . 253,825
3,100 Keycorp . . . . . . . . . . . . . . . 156,550
1,750 Mellon Bank Corp. . . . . . . . . . 124,250
3,100 National City Corp. . . . . . . . . . 139,112
4,016 Nationsbank Corp. . . . . . . . . . . 392,564
5,100 Norwest Corp. . . . . . . . . . . . 221,850
4,800 PNC Bank Corp. . . . . . . . . . . 180,600
800 Republic New York Corp. . . . . . . 65,300
3,200 Suntrust Banks, Inc. . . . . . . . 157,600
2,200 U.S. Bancorp. . . . . . . . . . . . . 98,863
2,300 Wachovia Corp. . . . . . . . . . . . 129,950
1,333 Wells Fargo & Co. . . . . . . . . . 359,577
----------
6,084,616
----------
BEVERAGES--3.1%
35,300 Coca Cola Co. . . . . . . . . . . . . 1,857,662
22,400 PepsiCo, Inc. . . . . . . . . . . . . 655,200
1,300 Whitman Corp. . . . . . . . . . . . 29,738
----------
2,542,600
----------
BUSINESS MACHINES--5.2%
2,300 3Com Corp. . . . . . . . . . . . . . 168,762
1,600 Alco Standard Corp. . . . . . . . . . 82,600
1,700 Amdahl Corporation(c) . . . . . . . . 20,612
1,900 Apple Computer, Inc. . . . . . . . 39,662
2,800 Bay Networks, Inc. . . . . . . . . 58,450
2,000 Cabletron Systems, Inc.(c) . . . . . 66,500
9,400 Cisco Systems, Inc. . . . . . . . . 598,075
3,800 Compaq Computer Corp.(c) . . . . . . 282,150
600 Data General Corp.(c) . . . . . . . . 8,700
2,400 Dell Computer Corp. . . . . . . . . . 127,500
2,200 Digital Equipment Corp.(c) . . . . . 80,025
3,200 EMC Corp. . . . . . . . . . . . . . . 106,000
14,400 Hewlett-Packard Co. . . . . . . . . 723,600
7,300 International Business Machines
Corp. . . . . . . . . . . . . . . . 1,102,300
2,000 Pitney Bowes, Inc. . . . . . . . . . 109,000
3,200 Seagate Technology . . . . . . . . . 126,400
2,500 Silicon Graphics, Inc.(c) . . . . . . 63,750
5,300 Sun Microsystems, Inc.(c) . . . . . . 136,144
1,800 Tandem Computers, Inc.(c) . . . . . . 24,750
2,500 Unisys, Corp.(c) . . . . . . . . . . 16,875
4,500 Xerox Corp. . . . . . . . . . . . . 236,813
----------
4,178,668
----------
</TABLE>
See accompanying notes to financial statements.
43
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK STOCK INDEX SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCKS--(CONTINUED)
SHARES VALUE (A)
<C> <S> <C>
CHEMICALS--3.2%
1,500 Air Products and
Chemicals, Inc. . . . . . . . . $ 103,687
900 Ashland, Inc. . . . . . . . . . 39,488
1,500 Avery Dennison Corp. . . . . . . 53,063
700 B.F. Goodrich Co. . . . . . . . 28,350
3,450 Dow Chemical Co. . . . . . . . . 270,394
1,100 Eastman Chemical Co. . . . . . . 60,775
8,100 E.I. Du Pont de Nemours & Co. . 764,437
2,025 Engelhard Corp. . . . . . . . . 38,728
500 FMC Corp.(c) . . . . . . . . . . 35,063
800 Great Lakes Chemical Corp. . . . 37,400
1,500 Hercules, Inc. . . . . . . . . . 64,875
8,500 Monsanto Co. . . . . . . . . . . 330,437
2,100 Morton International, Inc. . . . 85,575
1,000 Nalco Chemical Co. . . . . . . . 36,125
4,700 Occidental Petroleum Corp. . . . 109,862
2,600 PPG Industries, Inc. . . . . . . 145,925
2,100 Praxair, Inc. . . . . . . . . . 96,862
1,000 Rohm & Haas Co. . . . . . . . . 81,625
700 Sigma-Aldrich Corp. . . . . . . 43,706
1,700 Union Carbide Corp. . . . . . . 69,488
1,300 W.R. Grace & Co. . . . . . . . . 67,275
----------
2,563,140
----------
CONSTRUCTION--0.4%
600 Armstrong World
Industries, Inc. . . . . . . . 41,700
400 Centex Corp. . . . . . . . . . . 15,050
1,200 Fluor Corp. . . . . . . . . . . 75,300
600 Kaufman & Broad Home Corp. . . . 7,725
2,300 Masco Corp. . . . . . . . . . . 82,800
1,200 Sherwin Williams Co. . . . . . . 67,200
----------
289,775
----------
CONSUMER DURABLES--0.1%
1,300 Black & Decker Corp. . . . . . . 39,163
1,400 Maytag Corp. . . . . . . . . . . 27,650
1,000 Whirlpool Corp. . . . . . . . . 46,625
----------
113,438
----------
CONTAINERS--0.4%
200 Ball Corp. . . . . . . . . . . . 5,200
700 Bemis, Inc. . . . . . . . . . . 25,813
1,800 Crown Cork & Seal, Inc.(c) . . . 97,875
900 Temple Inland, Inc. . . . . . . 48,713
2,400 Tenneco, Inc. . . . . . . . . . 108,300
----------
285,901
----------
COSMETICS--1.3%
200 Alberto Culver Co. . . . . . . . 9,600
1,900 Avon Products, Inc. . . . . . . 108,537
19,200 Johnson & Johnson . . . . . . . 955,200
----------
1,073,337
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
DOMESTIC OIL RESERVES--1.7%
7,200 Amoco Corp. . . . . . . . . . . . . $ 579,600
2,300 Atlantic Richfield Co. . . . . . . 304,750
1,600 Burlington Resources, Inc. . . . . 80,600
400 Louisiana Land & Exploration . . . 21,450
800 Pennzoil Co. . . . . . . . . . . . 45,200
3,800 Phillips Petroleum Co. . . . . . . 168,150
1,311 Santa Fe Energy Research, Inc.(c) . 18,190
3,464 Union Pacific Resources
Group, Inc. . . . . . . . . . . . 101,322
2,400 Williams Companies, Inc. . . . . . 90,000
----------
1,409,262
----------
DRUGS & MEDICINE--7.2%
11,200 Abbott Laboratories, Inc. . . . . . 568,400
900 Allergan, Inc. . . . . . . . . . . 32,063
1,200 Alza Corp.(c) . . . . . . . . . . . 31,050
9,200 American Home Products Corp. . . . 539,350
3,800 Amgen, Inc.(c) . . . . . . . . . . 206,625
7,240 Bristol Myers & Squibb Co. . . . . 787,350
7,700 Eli Lilly & Co. . . . . . . . . . . 562,100
1,100 Mallinckrodt Group, Inc. . . . . . 48,537
17,400 Merck & Co., Inc. . . . . . . . . . 1,378,950
9,300 Pfizer, Inc. . . . . . . . . . . . 770,737
7,180 Pharmacia & Upjohn, Inc. . . . . . 284,507
5,100 Schering-Plough Corp. . . . . . . . 330,225
4,000 Warner-Lambert Co. . . . . . . . . 300,000
----------
5,839,894
----------
ELECTRIC UTILITIES--2.8%
2,500 American Electric Power Co., Inc. . 102,812
2,100 Baltimore Gas & Electric Co. . . . 56,175
2,200 Carolina Power & Light Co. . . . . 80,300
2,900 Central & South West Corp. . . . . 74,313
2,211 Cinergy Corp. . . . . . . . . . . . 73,792
3,400 Consolidated Edison Co. of
New York . . . . . . . . . . . . . 99,450
2,350 Dominion Resources, Inc. . . . . . 90,475
2,100 DTE Energy Co. . . . . . . . . . . 67,988
2,800 Duke Power Co. . . . . . . . . . . 129,500
6,200 Edison International . . . . . . . 123,225
3,200 Entergy Corp. . . . . . . . . . . . 88,800
2,600 FPL Group, Inc. . . . . . . . . . . 119,600
1,500 GPU, Inc. . . . . . . . . . . . . . 50,437
3,400 Houston Industries, Inc. . . . . . 76,925
2,000 Niagara Mohawk Power Corp. . . . . 19,750
900 Northern States Power Co. . . . . . 41,288
2,100 Ohio Edison Co. . . . . . . . . . . 47,775
5,900 Pacific Gas & Electric Corp. . . . 123,900
4,000 Pacificorp . . . . . . . . . . . . 82,000
3,200 PECO Energy Co. . . . . . . . . . . 80,800
2,300 P.P. & L Res, Inc. . . . . . . . . 52,900
3,200 Public Service Enterprise Group . . 87,200
9,700 Southern Co. . . . . . . . . . . . 219,462
3,100 Texas Utilities Co. . . . . . . . . 126,325
3,200 Unicom Corp. . . . . . . . . . . . 86,800
1,400 Union Electric Co. . . . . . . . . 53,900
----------
2,255,892
----------
</TABLE>
See accompanying notes to financial statements.
44
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK STOCK INDEX SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCKS--(CONTINUED)
SHARES VALUE (A)
<C> <S> <C>
ELECTRONICS--4.8%
1,900 Advanced Micro Devices,
Inc.(c) . . . . . . . . . . . $ 48,925
2,632 Allegheny Teldyne, Inc. . . . . 60,536
3,056 AMP, Inc. . . . . . . . . . . . 117,274
887 Andrew Corp.(c) . . . . . . . . 47,066
1,600 Cooper Industries, Inc. . . . . 67,400
500 Harris Corp. . . . . . . . . . 34,312
1,700 Honeywell, Inc. . . . . . . . . 111,775
11,900 Intel Corp. . . . . . . . . . . 1,558,156
2,000 LSI Logic Corp.(c) . . . . . . 53,500
3,000 Micron Technology, Inc. . . . . 87,375
8,500 Motorola, Inc. . . . . . . . . 521,687
1,900 National Semiconductor Corp.(c) 46,312
3,600 Northern Telecom, Ltd. . . . . 222,750
600 Raychem Corp. . . . . . . . . . 48,075
3,300 Raytheon Co. . . . . . . . . . 158,812
3,500 Rockwell International Corp. . 213,062
1,100 Scientific Atlanta, Inc. . . . 16,500
500 Tektronix, Inc. . . . . . . . . 25,625
2,600 Tellabs, Inc.(c) . . . . . . . 97,825
2,600 Texas Instruments, Inc. . . . . 165,750
600 Thomas & Betts Corp. . . . . . 26,625
8,900 U.S. West Media Group,
Inc.(c) . . . . . . . . . . . 164,650
----------
3,893,992
----------
FINANCE--2.0%
6,900 American Express Co. . . . . . 389,850
800 Beneficial Corp. . . . . . . . 50,700
2,402 Dean Witter, Discover & Co. . . 159,132
1,200 Household International, Inc. . 110,700
3,325 MBNA Corp. . . . . . . . . . . 137,987
2,300 Merrill Lynch & Co., Inc. . . . 187,450
2,000 Morgan Stanley Group, Inc. . . 114,250
1,600 Salomon, Inc. . . . . . . . . . 75,400
9,168 Travelers Group, Inc. . . . . . 415,998
----------
1,641,467
----------
FOREIGN OIL RESERVES--0.1%
700 Kerr McGee Corp. . . . . . . . 50,400
----------
FOREST PRODUCTS--0.0%
1,600 Louisiana Pacific Corp. . . . . 33,800
----------
GAS UTILITIES--0.7%
900 Columbia Gas System, Inc.(c) . 57,263
1,300 Consolidated Natural Gas Co. . 71,825
300 Eastern Enterprises . . . . . . 10,612
3,600 Enron Corp. . . . . . . . . . . 155,250
900 Ensearch Corp. . . . . . . . . 20,700
700 Nicor, Inc. . . . . . . . . . . 25,025
1,900 Noram Energy Corp. . . . . . . 29,212
200 Oneok, Inc. . . . . . . . . . . 6,000
1,100 Pacific Enterprises, Ltd. . . . 33,412
2,229 PanEnergy Corp. . . . . . . . . 100,305
500 Peoples Energy Corp. . . . . . 16,937
1,000 Sonat, Inc. . . . . . . . . . . 51,500
----------
578,041
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
HEALTH CARE--1.9%
800 Bausch & Lomb, Inc. . . . . $ 28,000
3,800 Baxter International, Inc. . 155,800
1,700 Becton Dickinson & Co. . . . 73,738
1,300 Beverly Enterprises,
Inc.(c) . . . . . . . . . . 16,575
1,700 Biomet, Inc.(c) . . . . . . 25,713
2,600 Boston Scientific Corp.(c) . 156,000
9,686 Columbia Healthcare Corp. . 394,704
800 C.R. Bard, Inc. . . . . . . 22,400
1,100 Guidant Corp. . . . . . . . 62,700
2,300 Humana, Inc.(c) . . . . . . 43,987
900 Manor Care, Inc. . . . . . . 24,300
3,600 Medtronics, Inc. . . . . . . 244,800
400 Millipore Corp. . . . . . . 16,550
1,100 St. Jude Medical, Inc.(c) . 46,888
3,000 Tenet Healthcare Corp.(c) . 65,625
2,800 United Healthcare Corp. . . 126,000
900 United States Surgical
Corp. . . . . . . . . . . . 35,438
----------
1,539,218
----------
HOTELS AND RESTAURANTS--1.1%
2,200 Darden Restaurants,
Inc.(c) . . . . . . . . . . 19,250
1,450 Harrahs Entertainment,
Inc. . . . . . . . . . . . 28,819
1,900 HFS, Inc. . . . . . . . . . 113,525
3,600 Hilton Hotels Corp. . . . . 94,050
1,600 ITT Corp. New . . . . . . . 69,400
1,800 Marriott International,
Inc. . . . . . . . . . . . 99,450
10,100 McDonald's Corp. . . . . . . 457,025
1,800 Wendys International, Inc. . 36,900
----------
918,419
----------
INTERNATIONAL OIL--4.4%
9,400 Chevron Corp. . . . . . . . 611,000
17,900 Exxon Corp. . . . . . . . . 1,754,200
5,700 Mobil Corp. . . . . . . . . 696,825
1,500 Oryx Energy Corp.(c) . . . . 37,125
3,700 Texaco, Inc. . . . . . . . . 363,063
----------
3,462,213
----------
LEISURE--0.3%
1,200 Brunswick Corp. . . . . . . 28,800
1,200 Hasbro, Inc. . . . . . . . . 46,650
3,750 Mattel, Inc. . . . . . . . . 104,062
----------
179,512
----------
LIFE INSURANCE--0.8%
2,283 Aetna Life and Casualty
Co. . . . . . . . . . . . . 182,640
2,900 American General Corp. . . . 118,537
1,025 Jefferson Pilot Corp. . . . 58,041
1,400 Lincoln National Corp.,
Inc. . . . . . . . . . . . 73,500
1,400 Providian Corp. . . . . . . 71,925
1,000 Transamerica Corp. . . . . . 79,000
450 USLife Corp. . . . . . . . . 14,963
----------
598,606
----------
</TABLE>
See accompanying notes to financial statements.
45
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK STOCK INDEX SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCKS--(CONTINUED)
SHARES VALUE (A)
<C> <S> <C>
LIQUOR--0.7%
300 Adolph Coors Co. . . . . . . . . . . $ 5,700
7,000 Anheuser-Busch Companies, Inc. . . . 280,000
1,100 Brown Forman Corp. "B" . . . . . . . 50,325
5,400 Seagram Company, Ltd. . . . . . . . . 209,250
----------
545,275
----------
MEDIA--2.1%
4,600 Comcast Corp. . . . . . . . . . . . . 81,938
1,900 General Instrument Corp. . . . . . . 41,087
450 King World Productions, Inc.(c) . . . 16,594
9,600 Tele-Communications A(c) . . . . . . 125,400
8,000 Time-Warner, Inc. . . . . . . . . . . 300,000
1,000 Tribune Co. . . . . . . . . . . . . . 78,875
4,857 Viacom, Inc.(c) . . . . . . . . . . . 169,388
9,798 Walt Disney Co. . . . . . . . . . . . 682,186
9,000 Westinghouse Electric Corp. . . . . . 178,875
----------
1,674,343
----------
MISCELLANEOUS FINANCE--0.1%
1,500 H & R Block, Inc. . . . . . . . . . . 43,500
----------
MISCELLANEOUS MINING--0.2%
600 Asarco, Inc. . . . . . . . . . . . . 14,925
1,250 Cyprus Amax Minerals Co. . . . . . . 29,219
2,400 Inco, Ltd. . . . . . . . . . . . . . 76,500
1,000 Phelps Dodge Corp. . . . . . . . . . 67,500
----------
188,144
----------
MORTGAGE--1.1%
2,400 Federal Home Loan Mortgage Corp. . . 264,300
15,700 Federal National Mortgage
Association . . . . . . . . . . . . 584,825
1,800 Green Tree Acceptance Corp. . . . . . 69,525
----------
918,650
----------
MOTOR VEHICLES--2.1%
10,600 Chrysler Corp. . . . . . . . . . . . 349,800
1,300 Dana Corp. . . . . . . . . . . . . . 42,413
900 Echlin, Inc. . . . . . . . . . . . . 28,462
500 Fleetwood Enterprises, Inc. . . . . . 13,750
17,100 Ford Motor Co. . . . . . . . . . . . 545,062
10,400 General Motors Corp. . . . . . . . . 579,800
1,220 Navistar International
Corp., Inc.(c) . . . . . . . . . . . 11,132
645 Paccar, Inc. . . . . . . . . . . . . 43,860
1,800 TRW, Inc. . . . . . . . . . . . . . . 89,100
----------
1,703,379
----------
OIL REFINING--2.1%
1,300 Amerada Hess Corp. . . . . . . . . . 75,237
1,400 Coastal Corp. . . . . . . . . . . . . 68,425
7,500 Royal Dutch Petroleum Co. ADR(d) . . 1,280,625
1,100 Sun, Inc. . . . . . . . . . . . . . . 26,813
3,500 Unocal Corp. . . . . . . . . . . . . 142,188
4,000 USX Marathon Group . . . . . . . . . 95,500
----------
1,688,788
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
OIL SERVICES--0.8%
2,000 Baker Hughes, Inc. . . . . . . . . $ 69,000
1,800 Halliburton Co. . . . . . . . . . 108,450
300 Helmerich & Payne, Inc. . . . . . 15,638
1,100 Rowan Companies, Inc.(c) . . . . . 24,888
3,600 Schlumberger, Ltd. . . . . . . . . 359,550
700 Western Atlas, Inc.(c) . . . . . . 49,613
----------
627,139
----------
OTHER INSURANCE--3.0%
6,386 Allstate Corp. . . . . . . . . . . 369,590
6,812 American International
Group, Inc. . . . . . . . . . . . 737,399
1,500 Aon Corp. . . . . . . . . . . . . 93,188
2,500 Chubb Corp. . . . . . . . . . . . 134,375
1,000 CIGNA Corp. . . . . . . . . . . . 136,625
1,200 General Reinsurance Corp. . . . . 189,300
1,600 ITT Hartford Group, Inc. . . . . . 108,000
1,600 Loews Corp. . . . . . . . . . . . 150,800
1,000 Marsh & McLennan Companies . . . . 104,000
700 MBIA, Inc. . . . . . . . . . . . . 70,875
800 MGIC Investment Corp. . . . . . . 60,800
1,800 Safeco Corp. . . . . . . . . . . . 70,988
1,200 St. Paul Companies, Inc. . . . . . 70,350
950 Torchmark, Inc. . . . . . . . . . 47,975
1,000 UNUM Corp. . . . . . . . . . . . . 72,250
1,700 USF&G Corp. . . . . . . . . . . . 35,488
----------
2,452,003
----------
PAPER--1.4%
733 Boise Cascade Corp. . . . . . . . 23,273
1,400 Champion International Corp. . . . 60,550
1,300 Georgia Pacific Corp. . . . . . . 93,600
4,310 International Paper Co. . . . . . 174,016
1,200 James River Corp. . . . . . . . . 39,750
4,106 Kimberly Clark Corp. . . . . . . . 391,096
900 Mead Corp. . . . . . . . . . . . . 52,312
200 Potlatch Corp. . . . . . . . . . . 8,600
1,400 Stone Container Corp. . . . . . . 20,825
1,000 Union Camp Corp. . . . . . . . . . 47,750
1,475 Westvaco Corp. . . . . . . . . . . 42,406
2,900 Weyerhaeuser Co. . . . . . . . . . 137,388
700 Willamette Industries, Inc. . . . 48,738
----------
1,140,304
----------
PHOTOGRAPHY--0.5%
7,850 Eastman Kodak Co. . . . . . . . . 381,188
800 Polaroid Corp. . . . . . . . . . . 34,800
----------
415,988
----------
POLLUTION CONTROL--0.4%
2,900 Browning-Ferris Industries, Inc. . 76,125
4,400 Laidlaw, Inc. . . . . . . . . . . 50,600
700 Safety Kleen Corp. . . . . . . . . 11,463
6,900 WMX Technologies, Inc. . . . . . . 225,112
----------
363,300
----------
</TABLE>
See accompanying notes to financial statements.
46
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK STOCK INDEX SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCKS--(CONTINUED)
SHARES VALUE (A)
<C> <S> <C>
PRECIOUS METALS--0.6%
5,100 Barrick Gold Corp. . . . . . . . . . $ 146,625
3,100 Battle Mountain Gold Co. . . . . . . 21,313
1,800 Echo Bay Mines, Ltd. . . . . . . . . 11,925
2,700 Freeport McMoran Copper & Gold . . . 80,662
1,900 Homestake Mining Co. . . . . . . . . 27,075
1,424 Newmont Mining Corp. . . . . . . . . 63,724
3,400 Placer Dome, Inc. . . . . . . . . . 73,950
1,900 Santa Fe Pacific Gold Corp. . . . . 29,213
----------
454,487
----------
PRODUCER OF GOODS--6.8%
2,600 Applied Materials, Inc.(c) . . . . . 93,438
400 Briggs & Stratton Corp. . . . . . . 17,600
1,000 Case Equipment Corp. . . . . . . . . 54,500
2,800 Caterpillar Tractor Co. . . . . . . 210,700
700 Cincinnati Milacron, Inc. . . . . . 15,313
700 Crane Co. . . . . . . . . . . . . . 20,300
700 Cummins Engine, Inc. . . . . . . . . 32,200
3,600 Deere & Co. . . . . . . . . . . . . 146,250
1,600 Dover Corp. . . . . . . . . . . . . 80,400
2,500 Dresser Industries, Inc. . . . . . . 77,500
1,800 DSC Communications Corp.(c) . . . . 32,175
1,000 Eaton Corp. . . . . . . . . . . . . 69,750
3,100 Emerson Electric Co. . . . . . . . . 299,925
600 Foster Wheeler Corp. . . . . . . . . 22,275
23,700 General Electric Co. . . . . . . . . 2,343,337
500 General Signal Corp. . . . . . . . . 21,375
1,700 Genuine Parts Co. . . . . . . . . . 75,650
400 Giddings & Lewis, Inc. . . . . . . . 5,150
800 Harnischfeger Industries, Inc. . . . 38,500
1,700 Illinois Tool Works, Inc. . . . . . 135,787
1,500 Ingersoll Rand Co. . . . . . . . . . 66,750
1,600 ITT Industries Inc. . . . . . . . . 39,200
600 Johnson Controls, Inc. . . . . . . . 49,725
9,206 Lucent Technologies, Inc. . . . . . 425,777
600 McDermott International, Inc. . . . 9,975
5,800 Minnesota Mining &
Manufacturing Co. . . . . . . . . . 480,675
700 National Services Industries, Inc. . 26,162
800 Owens Corning Fiberglas Co.(c) . . . 34,100
1,700 Pall Corp. . . . . . . . . . . . . . 43,350
1,000 Parker Hannifin Corp. . . . . . . . 38,750
600 Perkin Elmer Corp. . . . . . . . . . 35,325
850 Snap-On Tools Corp. . . . . . . . . 30,281
1,200 Stanley Works . . . . . . . . . . . 32,400
1,100 Textron, Inc. . . . . . . . . . . . 103,675
2,100 Thermo Electron Corp. . . . . . . . 86,625
200 Timken Co. . . . . . . . . . . . . . 9,175
400 Trinova Corp. . . . . . . . . . . . 14,550
2,100 TYCO International Ltd. . . . . . . 111,037
900 W.W. Grainger, Inc. . . . . . . . . 72,225
----------
5,501,882
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
PROPERTY--0.0%
200 Pulte Corp. . . . . . . . . . . . . . . . $ 6,150
----------
PUBLISHING--0.7%
1,100 American Greetings Corp. . . . . . . . . . 31,212
2,100 Gannet Co., Inc. . . . . . . . . . . . . . 157,237
1,000 Harcourt General, Inc. . . . . . . . . . . 46,125
300 John H. Harland Co. . . . . . . . . . . . 9,900
600 Jostens, Inc. . . . . . . . . . . . . . . 12,675
1,200 Knight-Ridder, Inc. . . . . . . . . . . . 45,900
1,400 McGraw-Hill Companies, Inc. . . . . . . . 64,575
200 Meredith Corp. . . . . . . . . . . . . . . 10,550
1,200 Moore Corp., Ltd. . . . . . . . . . . . . 24,450
1,400 New York Times Co. . . . . . . . . . . . . 53,200
2,100 R.R.Donnelley & Sons Co. . . . . . . . . . 65,888
1,400 Time Mirror Co. . . . . . . . . . . . . . 69,650
----------
591,362
----------
RAILROADS--0.9%
2,122 Burlington Northern, Inc. . . . . . . . . 183,288
1,100 Conrail, Inc. . . . . . . . . . . . . . . 109,588
3,100 CSX Corporation . . . . . . . . . . . . . 130,975
1,500 Norfolk Southern Corp. . . . . . . . . . . 131,250
3,500 Union Pacific Corp. . . . . . . . . . . . 210,438
----------
765,539
----------
RETAIL-FOOD--0.7%
3,600 Albertson's, Inc. . . . . . . . . . . . . 128,250
2,100 American Stores Co. . . . . . . . . . . . 85,837
300 Fleming Companies, Inc. . . . . . . . . . 5,175
900 Giant Foods, Inc. . . . . . . . . . . . . 31,050
600 Great Atlantic & Pacific Tea
Company, Inc. . . . . . . . . . . . . . . 19,125
1,800 Kroger Co.(c) . . . . . . . . . . . . . . 83,700
1,000 SuperValu Stores, Inc. . . . . . . . . . . 28,375
2,700 Sysco Corp. . . . . . . . . . . . . . . . 88,088
2,100 Winn-Dixie Stores, Inc. . . . . . . . . . 66,413
----------
536,013
----------
RETAIL-OTHER--3.8%
2,100 Autozone, Inc. . . . . . . . . . . . . . . 57,750
1,400 Charming Shoppes, Inc.(c) . . . . . . . . 7,088
1,200 Circuit City Stores, Inc. . . . . . . . . 36,150
1,500 CVS Corp. . . . . . . . . . . . . . . . . 62,062
3,000 Dayton Hudson Corp. . . . . . . . . . . . 117,750
1,700 Dillard Department Stores, Inc. . . . . . 52,488
3,100 Federated Department Stores . . . . . . . 105,787
6,849 Home Depot, Inc. . . . . . . . . . . . . . 343,306
3,100 J.C. Penney Company, Inc. . . . . . . . . 151,125
6,900 K-Mart Corp.(c) . . . . . . . . . . . . . 71,587
200 Longs Drug Stores Corp. . . . . . . . . . 9,825
2,400 Lowes Companies, Inc. . . . . . . . . . . 85,200
3,400 May Department Stores Co. . . . . . . . . 158,950
450 Mercantile Stores Co., Inc. . . . . . . . 22,219
1,200 Nordstrom, Inc. . . . . . . . . . . . . . 42,525
900 Pep Boys: Manny, Moe & Jack . . . . . . . 27,675
2,739 Price Costco.(c) . . . . . . . . . . . . . 68,817
</TABLE>
See accompanying notes to financial statements.
47
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK STOCK INDEX SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCKS--(CONTINUED)
SHARES VALUE (A)
<C> <S> <C>
RETAIL-OTHER--(CONTINUED)
1,800 Rite Aid Corp. . . . . . . . . . . . . . $ 71,550
5,400 Sears, Roebuck & Co. . . . . . . . . . . 249,075
800 Tandy Corp. . . . . . . . . . . . . . . . 35,200
4,000 The Gap, Inc. . . . . . . . . . . . . . . 120,500
3,693 The Limited, Inc. . . . . . . . . . . . . 67,859
1,100 TJX Companies, Inc. . . . . . . . . . . . 52,113
3,975 Toys R Us, Inc.(c) . . . . . . . . . . . 119,250
3,500 Walgreen Co. . . . . . . . . . . . . . . 140,000
32,000 Wal-Mart Stores, Inc. . . . . . . . . . . 732,000
1,800 Woolworth Corp.(c) . . . . . . . . . . . 39,375
-----------
3,047,226
-----------
SERVICES--4.0%
600 Alexander & Alexander Services . . . . . 10,425
600 Autodesk, Inc. . . . . . . . . . . . . . 16,800
4,000 Automatic Data Processing, Inc. . . . . . 171,500
900 Ceridian Corp.(c) . . . . . . . . . . . . 36,450
5,100 Computer Associates International, Inc. . 253,725
1,000 Computer Sciences Corp.(c) . . . . . . . 82,125
2,320 Cognizant Corp. . . . . . . . . . . . . . 76,560
5,500 CUC International, Inc.(c) . . . . . . . 130,625
1,000 De Luxe Corp. . . . . . . . . . . . . . . 32,750
1,300 Dow Jones & Co., Inc. . . . . . . . . . . 44,038
2,320 Dun & Bradstreet Corp. . . . . . . . . . 55,100
700 EG & G, Inc. . . . . . . . . . . . . . . 14,088
6,200 First Data Corp. . . . . . . . . . . . . 226,300
600 Intergraph Corp.(c) . . . . . . . . . . . 6,150
1,100 Interpublic Group Companies, Inc. . . . . 52,250
17,200 Microsoft Corp.(c) . . . . . . . . . . . 1,421,150
5,000 Novell, Inc.(c) . . . . . . . . . . . . . 47,344
9,525 Oracle Systems Corp.(c) . . . . . . . . . 397,669
1,200 Ryder Systems, Inc. . . . . . . . . . . . 33,750
3,400 Service Corporation International . . . . 95,200
200 Shared Medical System . . . . . . . . . . 9,850
-----------
3,213,849
-----------
SOAPS--3.0%
700 Clorox Co. . . . . . . . . . . . . . . . 70,263
2,200 Colgate Palmolive Co. . . . . . . . . . . 202,950
3,300 Corning, Inc. . . . . . . . . . . . . . . 152,625
700 Ecolab, Inc. . . . . . . . . . . . . . . 26,338
7,700 Gillette Co. . . . . . . . . . . . . . . 598,675
1,600 International Flavours & Fragrances,
Inc. . . . . . . . . . . . . . . . . . . 72,000
100 Nacco Industries, Inc. . . . . . . . . . 5,350
2,200 Newell Co. . . . . . . . . . . . . . . . 69,300
9,560 Procter & Gamble Co. . . . . . . . . . . 1,027,700
1,500 Ralston Purina Co. . . . . . . . . . . . 110,063
2,200 Rubbermaid, Inc. . . . . . . . . . . . . 50,050
900 Tupperware Corp. . . . . . . . . . . . . 48,263
-----------
2,433,577
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
STEEL & IRON--0.2%
1,300 Armco, Inc.(c) . . . . . . . . . . . . . $ 5,363
1,600 Bethlehem Steel Corp.(c) . . . . . . . . 14,400
800 Inland Steel Industries, Inc. . . . . . 16,000
1,300 Nucor Corp. . . . . . . . . . . . . . . 66,300
1,020 USX US Steel Corp. . . . . . . . . . . . 32,003
1,200 Worthington Industries, Inc. . . . . . . 21,750
-----------
155,816
-----------
TELEPHONE--6.7%
7,200 Airtouch Communications . . . . . . . . 181,800
2,700 ALLTEL Corp. . . . . . . . . . . . . . . 84,712
7,900 Ameritech Corp. . . . . . . . . . . . . 478,937
22,735 AT & T Corp. . . . . . . . . . . . . . . 988,972
6,100 Bell Atlantic Corp. . . . . . . . . . . 394,975
14,300 BellSouth Corp. . . . . . . . . . . . . 577,362
2,300 Frontier Corp. . . . . . . . . . . . . . 52,037
13,900 GTE Corp. . . . . . . . . . . . . . . . 632,450
9,900 MCI Communications Corp. . . . . . . . . 323,606
6,200 NYNEX Corp. . . . . . . . . . . . . . . 298,375
6,200 Pacific Telesis Group . . . . . . . . . 227,850
8,500 SBC Communications, Inc. . . . . . . . . 439,875
6,100 Sprint Corp. . . . . . . . . . . . . . . 243,237
6,900 U.S. West, Inc.(c) . . . . . . . . . . . 222,525
10,300 Worldcom, Inc. . . . . . . . . . . . . . 268,444
-----------
5,415,157
-----------
THRIFT--0.2%
800 Golden West Financial Corp. . . . . . . 50,500
1,850 Great Western Financial Corp. . . . . . 53,650
1,500 H.F. Ahmanson & Co. . . . . . . . . . . 48,750
-----------
152,900
-----------
TIRES AND RUBBER GOODS--0.2%
1,100 Cooper Tire & Rubber Co. . . . . . . . . 21,725
2,200 Goodyear Tire & Rubber Co. . . . . . . . 113,025
-----------
134,750
-----------
TOBACCO--1.9%
2,600 American Brands, Inc. . . . . . . . . . 129,025
11,700 Philip Morris Companies, Inc. . . . . . 1,317,712
2,700 UST, Inc. . . . . . . . . . . . . . . . 87,413
-----------
1,534,150
-----------
TRUCKING AND FREIGHT--0.0%
600 Caliber Systems, Inc. . . . . . . . . . 11,550
-----------
Total Common Stocks
(Identified cost $53,081,323) . . . . . 80,277,348
-----------
</TABLE>
See accompanying notes to financial statements.
48
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK STOCK INDEX SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
SHORT-TERM INVESTMENT--0.5%
FACE
AMOUNT VALUE (A)
<C> <S> <C>
$419,000 Repurchase Agreement with State Street Bank &
Trust Co. dated 12/31/96 at 4.750% to be
repurchased at $419,111, on 1/02/97
collateralized by $335,000, U.S. Treasury
Bills 8.875% due 8/15/17, with a value of
$429,324 . . . . . . . . . . . . . . . . . . $ 419,000
-----------
Total Short Term Investment
(Identified cost $419,000) . . . . . . . . . 419,000
-----------
Total Investments--99.9%
(Identified cost $53,500,323)(b) . . . . . . 80,696,348
Other assets less liabilities . . . . . . . . 67,500
-----------
TOTAL NET ASSETS--100% . . . . . . . . . . . $80,763,848
===========
</TABLE>
(a) See Note 1A.
(b) Federal Tax Information:
At December 31, 1996 the net unrealized appreciation on investments based on
cost of $53,630,435 for federal income tax purposes was as follows:
<TABLE>
<CAPTION>
<C> <S> <C>
Aggregate gross unrealized appreciation for all
investments in which there is an excess of
value over tax cost . . . . . . . . . . . . . $28,002,651
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax
cost over value . . . . . . . . . . . . . . . (936,738)
-----------
Net unrealized appreciation . . . . . . . . . . $27,065,913
===========
</TABLE>
(c) Non-income producing security.
(d) An American Depository Receipt (ADR) is a certificate issued by a U.S. bank
representing the right to receive securities of the foreign issuer
described. The values of ADR's are significantly influenced by trading on
exchanges not located in the United States or Canada.
See accompanying notes to financial statements.
49
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK STOCK INDEX SERIES)
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1996
ASSETS
Investments at value . . . . . . . . . . . . $80,696,348
Cash . . . . . . . . . . . . . . . . . . . . 699
Receivable for:
Fund shares sold . . . . . . . . . . . . . . 113,468
Dividends and interest . . . . . . . . . . . 138,258
Foreign taxes . . . . . . . . . . . . . . . 290
-----------
80,949,063
LIABILITIES
Payable for:
Fund shares redeemed . . . . . . . . . . . . $88,403
Withholding taxes . . . . . . . . . . . . . 42
Accrued expenses:
Management fees . . . . . . . . . . . . . . 24,772
Deferred trustees' fees . . . . . . . . . . 42,230
Other expenses . . . . . . . . . . . . . . . 29,768
-------
185,215
-----------
$80,763,848
===========
Net Assets
Net Assets consist of:
Capital paid in . . . . . . . . . . . . . . $53,271,948
Undistributed net investment income . . . . 8,445
Accumulated net realized gains . . . . . . . 287,430
Unrealized appreciation on investments . . . 27,196,025
-----------
NET ASSETS . . . . . . . . . . . . . . . . . . $80,763,848
===========
Computation of offering price:
Net asset value and redemption price per share
($80,763,848 divided by 675,146 shares of
beneficial interest) . . . . . . . . . . . . $ 119.62
===========
Identified cost of investments . . . . . . . . $53,500,323
===========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
INVESTMENT INCOME
Dividends . . . . . . . . . . . . $ 1,474,292(a)
Interest . . . . . . . . . . . . . 57,446
-----------
1,531,738
EXPENSES
Management fees . . . . . . . . . $170,651
Trustees' fees and expenses . . . 24,999
Custodian . . . . . . . . . . . . 78,749
Audit and tax services . . . . . . 11,800
Legal . . . . . . . . . . . . . . 14,012
Printing . . . . . . . . . . . . . 37,606
Miscellaneous . . . . . . . . . . 6,367
--------
Total expenses . . . . . . . . . 344,184
Less expenses assumed by the
investment adviser . . . . . . (71,003) 273,181
-------- -----------
NET INVESTMENT INCOME . . . . . . . 1,258,557
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Realized gain on:
Investments--net . . . . . . . . 995,215
Unrealized appreciation on:
Investments--net . . . . . . . . 11,760,936
-----------
Net gain on investment
transactions . . . . . . . . . . . 12,756,151
-----------
NET INCREASE IN NET ASSETS FROM
OPERATIONS . . . . . . . . . . . . $14,014,708
===========
</TABLE>
(a) Net of foreign taxes of: $9,140.
See accompanying notes to financial statements.
50
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK STOCK INDEX SERIES)
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
FROM OPERATIONS
Net investment income . . . . . . . . . . . . $ 1,070,362 $ 1,258,557
Net realized gain on investments . . . . . . 775,273 995,215
Unrealized appreciation on investments . . . 13,212,050 11,760,936
------------ ------------
INCREASE IN NET ASSETS FROM OPERATIONS . . . 15,057,685 14,014,708
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income . . . . . . . . . . . . (1,050,107) (1,270,368)
Net realized gain on investments . . . . . . (673,888) (675,238)
------------ ------------
(1,723,995) (1,945,606)
------------ ------------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares . . . . . . . . 17,851,781 21,863,034
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income . . 1,050,107 1,270,368
Distributions from net realized gain . . . . 673,888 675,238
------------ ------------
19,575,776 23,808,640
Cost of shares redeemed . . . . . . . . . . . (11,403,132) (13,784,516)
------------ ------------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL
SHARE TRANSACTIONS . . . . . . . . . . . . . 8,172,644 10,024,124
------------ ------------
TOTAL INCREASE IN NET ASSETS . . . . . . . . 21,506,334 22,093,226
NET ASSETS
Beginning of the year . . . . . . . . . . . . 37,164,288 58,670,622
------------ ------------
End of the year . . . . . . . . . . . . . . . $ 58,670,622 $ 80,763,848
============ ============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the year . . . . . . . . . . . . $ 0 $ 20,255
============ ============
End of the year . . . . . . . . . . . . . . . $ 20,255 $ 8,445
============ ============
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares . . . . . . . 202,803 198,327
Issued in connection with the reinvestment of:
Distributions from net investment income . . 10,562 10,371
Distributions from net realized gain . . . . 6,778 5,855
------------ ------------
220,143 214,553
Redeemed . . . . . . . . . . . . . . . . . . (127,215) (125,580)
------------ ------------
Net change . . . . . . . . . . . . . . . . . 92,928 88,973
============ ============
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Year . . . . . . . . . $137.39 $ 72.00 $ 76.48 $ 75.35 $100.09
------- ------- ------- ------- -------
Income From Investment
Operations
Net Investment Income . . 8.35 1.54 1.80 1.88 1.91
Net Realized and
Unrealized Gain (Loss) on
Investments. . . . . . . 2.02 5.18 (0.92) 25.89 20.58
------- ------- ------- ------- -------
Total From Investment
Operations . . . . . . . 10.37 6.72 0.88 27.77 22.49
------- ------- ------- ------- -------
Less Distributions
Dividends From Net
Investment Income . . . (8.35) (1.36) (1.82) (1.85) (1.93)
Distributions in Excess of
Net Investment Income . 0.00 (0.18) 0.00 0.00 0.00
Distributions From Net
Realized Capital Gains . (67.41) (0.55) (0.16) (1.18) (1.03)
Distributions in Excess of
Net Realized Capital
Gains. . . . . . . . . . 0.00 (0.15) 0.00 0.00 0.00
Distributions From Paid-in
Capital. . . . . . . . . 0.00 0.00 (0.03) 0.00 0.00
------- ------- ------- ------- -------
Total Distributions . . . (75.76) (2.24) (2.01) (3.03) (2.96)
------- ------- ------- ------- -------
Net Asset Value, End of
Year . . . . . . . . . . $ 72.00 $ 76.48 $ 75.35 $100.09 $119.62
======= ======= ======= ======= =======
TOTAL RETURN (%) . . . . . 7.30 9.72 1.14 36.88 22.47
Ratio of Operating Expenses
to Average Net Assets (%) 0.35 0.34 0.33 0.40 0.40
Ratio of Net Investment
Income to Average Net
Assets (%) . . . . . . . 2.63 2.52 2.59 2.20 1.84
Portfolio Turnover
Rate (%) . . . . . . . . 17 12 2 5 4
Average Commission
Rate (a) . . . . . . . . -- -- -- -- $0.0309
Net Assets, End of
Year (000) . . . . . . . $10,172 $28,817 $37,164 $58,671 $80,764
The ratios of expenses to
average net assets without
giving effect to the
voluntary expense
agreement described in
Note 4 to the Financial
Statements would have
been (%) . . . . . . . . -- -- -- 0.54 0.50
</TABLE>
(a) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for trades on which
commissions are charged. This rate generally does not reflect mark-ups,
mark-downs, or spreads on shares traded on a principal basis.
See accompanying notes to financial statements.
51
<PAGE>
LOOMIS SAYLES BALANCED SERIES
PORTFOLIO MANAGERS: DOUG RAMOS AND
MERI ANNE BECK
LOOMIS, SAYLES & COMPANY, L.P.
[PHOTOS OF DOUG RAMOS & MERI ANNE BECK]
Q. HOW DID LOOMIS SAYLES BALANCED SERIES PERFORM IN 1996?
A. The Series generated 16.91% total return through December 31, 1996, thanks
primarily to strong performance in the equity portion of the Series during the
second half of the year. The Series outperformed its benchmark, the Lipper
Variable Balanced Fund Average, which finished the year with a 12.41% total
return.
Q. HOW DID YOU MANAGE THE SERIES IN 1996?
A. For the equity component of the Series' portfolio, the key to performance in
1996 was stock selection. In the technology area, strong demand for personal
computers and computer networks resulted in outstanding performance for
companies such as EMC Corp. and Intel Corp.
Solid business fundamentals and higher energy prices powered investments in
Tosco and Pan Energy. In the financial sector, where the portfolio had a large
weighting, ongoing consolidation in the banking industry benefited our holdings
in NationsBank and Chase Manhattan. Attractive business fundamentals also helped
produce strong performance in other financial services holdings such as Ace
Ltd., a liability insurer; Federal Home Loan Mortgage Corporation (Freddie Mac);
and Green Tree, a financial services company.
In the capital goods sector, McDonnell-Douglas and Northrup were solid
performers that benefited from the ongoing consolidation in the defense
industry. Specific company events also contributed to performance in the case of
Eckerd, a drugstore chain, that was bought out by JCPenney. Allied Signal, a
large multinational conglomerate in the businesses of aerospace, automotive and
engineered materials, and Carnival Corp., the popular cruise line operator,
performed well as they continued to execute their business strategies.
Higher interest rates and new telecommunications legislation contributed to weak
performance in the Series' utilities and communications holdings. It should be
noted, however, that the Series was significantly underweighted in these
industries.
On the fixed-income side, our overweighting in corporate bonds had a positive
impact on the Series for most of the year. Profits were taken in Hospital Corp.
of America, International Lease Finance, Lockheed Martin and Smith Barney
corporate bonds. Coastal Corp. and Tektronix also performed well due to
improving fundamentals, and Carnival Corp. was upgraded in quality while TCI
Communications performed poorly as the company recorded losses. Toward the end
of the year we increased our allocation to U.S. Treasury and U.S. Government
Agency mortgage bonds as the risk/reward trade-off now favors these issues. Our
continuing focus is on credit and sector selection to provide the best total
return potential.
Q. WHAT IS YOUR OUTLOOK FOR THE MONTHS AHEAD?
A. We continue to expect moderate economic growth, low inflation and a stable
interest rate environment in 1997. Overall, this should not produce any major
dislocations in the financial markets. However, we believe that equity markets
will experience increased volatility in 1997. An increase in the possibility of
earnings disappointments and investor concerns over lower corporate earnings
growth than last year should contribute to this volatility. We believe these
concerns will make stock selection an important factor in performance in 1997.
52
<PAGE>
[A CHART APPEARS HERE WHICH COMPARES A $10,000
INVESTMENT IN THE SERIES VERSUS AN INDEX]
<TABLE>
<CAPTION>
Balanced Leh/Gov't
Series S&P 500 Corp.
<S> <C> <C> <C>
10/31/94 10000 10000 10000
1994 9990 9794 10048
1995 12467 13461 11981
1996 14575 16552 12328
</TABLE>
FUND FACTS
GOAL: Reasonable long-term investment return from a combination of long-term
capital appreciation and moderate current income.
START DATE: October 31, 1994
SIZE: $59 million as of December 31, 1996
MANAGERS: Douglas Ramos and Meri Anne Beck have managed the Series since its
inception. Mr. Ramos serves as portfolio manager of New England Balanced Fund
and New England Value Fund. Ms. Beck also serves as portfolio manager of New
England Balanced Fund. Mr. Ramos joined Loomis Sayles in 1985 and Ms. Beck
joined Loomis Sayles in 1986.
Performance numbers are net of all Series expenses but do not include any
insurance, sales or administrative charges of variable annuity or life insurance
contracts. If these charges were included, the returns shown would be lower.
This information represents past performance and is not indicative of future
results. Investment return and principal value will fluctuate so that shares,
upon redemption, may be worth more or less than the original cost.
53
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES BALANCED SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCKS--62.9% OF TOTAL NET ASSETS
SHARES VALUE (A)
<C> <S> <C>
AEROSPACE--3.3%
6,700 Lockheed Martin Corp. . . . . . . . . $ 613,050
7,900 Northrop Grumman Corp. . . . . . . . 653,725
13,600 Raytheon Co. . . . . . . . . . . . . 654,500
-----------
1,921,275
-----------
APPAREL & TEXTILES--1.2%
17,200 Reebok International, Ltd. . . . . 722,400
-----------
AUTOMOTIVE & RELATED--1.1%
11,600 General Motors Corp. . . . . . . . 646,700
-----------
BANKS--5.3%
7,400 BankAmerica Corp. . . . . . . . . . . 738,150
8,400 Chase Manhattan Corp., New . . . . . 749,700
9,100 NationsBank Corp. . . . . . . . . . . 889,525
16,300 Norwest Corp. . . . . . . . . . . . . 709,050
-----------
3,086,425
-----------
BEVERAGES--1.4%
35,600 Whitman Corp. . . . . . . . . . . . . 814,350
-----------
CHEMICALS--3.7%
26,300 Crompton & Knowles Corp. . . . . . . 506,275
8,900 El du Pont de Nemours & Co. . . . . . 839,938
14,700 PPG Industries, Inc. . . . . . . . . 825,037
-----------
2,171,250
-----------
COMPUTERS & BUSINESS EQUIPMENT--1.2%
21,300 EMC Corp.(c) . . . . . . . . . . . . 705,562
-----------
CONGLOMERATES--3.2%
12,100 Allied Signal, Inc. . . . . . . . . . 810,700
16,400 Dover Corp. . . . . . . . . . . . . . 824,100
6,600 Philips Electronics NV (ADR)(d) . . . 264,000
-----------
1,898,800
-----------
ELECTRIC UTILITIES--1.1%
33,300 Edison International . . . . . . . . 661,837
-----------
ELECTRICAL EQUIPMENT--1.1%
11,900 York International Corp., New . . . . 664,913
-----------
ELECTRONIC COMPONENTS--1.1%
5,100 Intel Corp. . . . . . . . . . . . 667,781
-----------
FINANCIAL SERVICES--3.5%
6,800 Federal Home Loan Mortgage Corp. . . 748,850
17,000 Federal National Mortgage Association 633,250
17,400 Green Tree Financial Corp. . . . . 672,075
-----------
2,054,175
-----------
FOOD--AGRIBUSINESS--0.8%
19,200 IBP, Inc. . . . . . . . . . . . . . . 465,600
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
FREIGHT TRANSPORTATION--3.5%
9,600 Burlington Northern Santa Fe . . . . $ 829,200
20,100 Canadian Pacific, Ltd., New . . . . 532,650
15,200 Federal Express Corp.(c) . . . . . . 676,400
-----------
2,038,250
-----------
GAS & PIPELINE UTILITIES--1.4%
3,200 Columbia Gas Systems, Inc. . . . . . 203,600
13,900 Panenergy Corp. . . . . . . . . . . 625,500
-----------
829,100
-----------
HEALTH CARE--SERVICES--4.1%
10,500 Aetna, Inc. . . . . . . . . . . . . 840,000
32,300 Beverly Enterprises, Inc. . . . . 411,825
21,450 Columbia/HCA Healthcare Corp. . . . 874,088
7,900 Foundation Health Corp.(c) . . . . . 250,825
-----------
2,376,738
-----------
HOUSEHOLD PRODUCTS--2.4%
4,000 Kimberly-Clark Corp. . . . . . . . . 381,000
9,200 Premark International, Inc. . . . . 204,700
15,500 Tupperware Corp. . . . . . . . . . . 831,188
-----------
1,416,888
-----------
HOUSING & BUILDING MATERIALS--5.0%
12,200 Armstrong World Industries, Inc. . . 847,900
9,000 Black & Decker Corp. . . . . . . 271,125
28,500 Leggett & Platt, Inc. . . . . . . . 986,812
23,200 Masco Corp. . . . . . . . . . . . . 835,200
-----------
2,941,037
-----------
INSURANCE--5.1%
14,200 ACE, Ltd. . . . . . . . . . . . . . 853,775
11,200 Allstate Corp. . . . . . . . . . . . 648,200
14,800 Chubb Corp. . . . . . . . . . . . . 795,500
22,900 Everest Reinsurance Holdings,
Inc. . . . . . . . . . . . . . . 658,375
-----------
2,955,850
-----------
LEISURE TIME--2.3%
15,600 American Greetings Corp. . . . . . . 442,650
27,900 Carnival Corp. . . . . . . . . . . . 920,700
-----------
1,363,350
-----------
OIL & GAS--3.0%
10,800 Tosco Corp. . . . . . . . . . . . . 854,550
17,000 United Meridian Corp.(c) . . . . . . 879,750
-----------
1,734,300
-----------
PACKAGING--1.5%
15,900 Crown Cork & Seal Co., Inc. . . . . 864,563
-----------
RETAIL--FOOD & DRUG--1.5%
18,400 Kroger Co.(c) . . . . . . . . . . . 855,600
-----------
</TABLE>
See accompanying notes to financial statements.
54
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES BALANCED SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCKS--(CONTINUED)
SHARES VALUE (A)
<C> <S> <C>
TELECOMMUNICATION--3.3%
3,100 Ameritech Corp. . . . . . . . . . . . . $ 187,937
19,200 GTE Corp. . . . . . . . . . . . . . . . 873,600
23,400 Pacific Telesis Group . . . . . . . . . 859,950
-----------
1,921,487
-----------
TOBACCO--1.8%
6,600 Loews Corp. . . . . . . . . . . . . . . 622,050
12,400 UST, Inc. . . . . . . . . . . . . . . . 401,450
-----------
1,023,500
-----------
Total Common Stocks
(Identified Cost $31,413,750) . . . . 36,801,731
-----------
MEDIUM & LONG TERM BONDS & NOTES--33.1%
FACE
AMOUNT
BANKS--1.3%
$ 350,000 Capital One Bank,
6.830%, 5/17/99 . . . . . . . . . . . 351,543
50,000 Chase Manhattan Corp.,
9.050%, 2/01/02 . . . . . . . . . . . 50,093
310,000 Mellon Bank N A,
7.000%, 3/15/06 . . . . . . . . . . . 308,258
50,000
Norwest Corp.,
7.650%, 3/15/05 . . . . . . . . . . . 52,436
-----------
762,330
-----------
CABLE & MEDIA--0.6%
350,000
TCI Communications, Inc.,
7.250%, 6/15/99 . . . . . . . . . . . 350,987
-----------
COMPUTER--0.5%
300,000
Comdisco, Inc.,
5.760%, 1/19/99 . . . . . . . . . . . 297,045
-----------
ENERGY--0.2%
125,000
Coastal Corp.,
8.125% , 9/15/02 . . . . . . . . . . . 132,210
-----------
FINANCE--4.2%
125,000 Associates Corp. NA,
8.350%, 12/22/98 . . . . . . . . . . . 130,106
115,000 Avalon Properties, Inc.,
7.375%, 9/15/02 . . . . . . . . . . . 116,018
260,000 Dean Witter Discover & Co.,
6.750%, 1/01/16 . . . . . . . . . . . 239,361
200,000 Ford Motor Credit Corp.,
6.850%, 8/15/00 . . . . . . . . . . . 201,818
244,000 General Motors Acceptance Corp.
5.500%, 12/15/01 . . . . . . . . . . . 230,868
280,000 Oasis Residential, Inc.,
7.000%, 11/15/03 . . . . . . . . . . . 276,825
100,000 Secured Finance,
9.050%, 12/15/04 . . . . . . . . . . . 112,709
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
$ 50,000 Standard Credit Card,
8.625%, 1/07/02 . . . . . . . . . . . $ 50,175
575,000 Transamerica Finance Corp.,
6.750%, 6/01/00 . . . . . . . . . . . 577,312
300,000 Western Financial Services,
6.950%, 11/20/03 . . . . . . . . . . . 304,071
200,000 World Omni Automobile Lease Finance
Corp., 6.550%, 6/25/02 . . . . . . . . 200,938
-----------
2,440,201
-----------
GOVERNMENT AGENCIES--0.6%
350,000 Federal Home Loan Bank,
7.151%, 9/13/05 . . . . . . . . . . . 347,295
-----------
U.S. GOVERNMENT--14.6%
700,000 United States Treasury Notes,
5.375%, 5/31/98 . . . . . . . . . . . 696,388
1,020,000 United States Treasury Notes,
6.750%, 6/30/99 . . . . . . . . . . . 1,038,013
455,000 United States Treasury Notes,
6.125%, 7/31/00 . . . . . . . . . . . 455,000
1,815,000 United States Treasury Notes,
6.250%, 2/15/03 . . . . . . . . . . . 1,812,731
2,550,000 United States Treasury Notes,
6.500%, 8/15/05 . . . . . . . . . . . 2,566,346
2,500,000 United States Treasury Notes,
Zero Coupon, 11/15/09 . . . . . . . . 1,055,475
830,000 United States Treasury Bonds,
7.875%, 2/15/21 . . . . . . . . . . . 938,157
-----------
8,562,110
-----------
HEALTH CARE--SERVICES--0.1%
50,000 Columbia/HCA Healthcare Co.,
8.020%, 8/5/02 . . . . . . . . . . . . 53,104
-----------
INDUSTRIALS--1.7%
325,000 Amerco,
7.850%, 5/15/03. . . . . . . . . . . . 332,429
200,000 Martin Marietta Corp.,
6.500%, 4/15/03 . . . . . . . . . . . 197,248
260,000 Philips Electronics NV,
7.250%, 8/15/13 . . . . . . . . . . . 253,539
200,000 Tektronix, Inc.,
7.625%, 8/15/02 . . . . . . . . . . . 205,600
-----------
988,816
-----------
INSURANCE--0.5%
275,000 Travelers Aetna Property & Casualty Co.,
6.750%, 4/15/01 . . . . . . . . . . . 276,086
-----------
</TABLE>
See accompanying notes to financial statements.
55
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES BALANCED SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
MEDIUM & LONG TERM BONDS & NOTES--(CONTINUED)
FACE
AMOUNT VALUE (A)
<C> <S> <C>
LEISURE & LODGING--0.7%
$ 100,000 Carnival Corp.,
7.050%, 5/15/05 . . . . . . . . . . . . . $ 99,539
300,000 La Quinta Inns, Inc.,
7.400%, 9/15/05 . . . . . . . . . . . . . 294,750
-----------
394,289
-----------
MORTGAGE--2.0%
368,008 Federal National Mortgage Association,
7.000%, 12/01/11 . . . . . . . . . . . . 279,650
280,000 Federal National Mortgage Association,
7.000%, 12/01/11 . . . . . . . . . . . . 367,548
620,000 Federal National Mortgage Association,
6.000%, 2/25/24 . . . . . . . . . . . . . 548,712
-----------
1,195,910
-----------
MORTGAGED BACKED--1.5%
200,000 Federal Home Loan Mortgage Corp.,
8.000%, 7/15/21 . . . . . . . . . . . . . 206,374
390,220 Federal Home Loan Mortgage Association,
6.000%, 8/15/22 . . . . . . . . . . . . . 348,880
50,000 General Electric Capital Mortgage Services,
Inc.,10.000%, 3/25/24 . . . . . . . . . . 51,344
75,000 Westam Mortgage Financial Corp.,
8.950%, 8/01/18 . . . . . . . . . . . . . 80,132
200,000 Westam Mortgage Financial Corp.,
9.400%, 12/01/18 . . . . . . . . . . . . 211,186
-----------
897,916
-----------
RETAIL--0.6%
335,000 Federated Department Stores, Inc.,
8.500%, 6/15/03 . . . . . . . . . . . . . 350,799
-----------
SECURITIES--2.3%
225,000 Alex. Brown, Inc.,
7.625%, 8/15/05 . . . . . . . . . . . . . 229,556
200,000 Donaldson Lufkin & Jennrette, Inc.,
6.875%, 11/01/05 . . . . . . . . . . . . 194,868
100,000 Lehman Brothers Holdings, Inc.,
5.750%, 11/15/98 . . . . . . . . . . . . 98,865
200,000 Lehman Brothers Holdings, Inc.,
7.360%, 12/15/03 . . . . . . . . . . . . 200,798
100,000 Merrill Lynch & Co.,
8.375%, 2/09/00 . . . . . . . . . . . . . 105,262
390,000 Salomon Bros., Inc,
7.125%, 8/01/99 . . . . . . . . . . . . . 394,376
145,000 Salomon, Inc,
7.500%, 2/01/03 . . . . . . . . . . . . . 146,814
-----------
1,370,539
-----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
TECHNOLOGY--0.3%
$ 200,000 Digital Equipment Corp.,
8.625%, 11/01/12 . . . . . . . . . . . . $ 193,806
----------
TELECOMMUNICATION--0.3%
200,000 Southern Bell Telephone & Telegraph Co.,
7.625%, 3/15/13 . . . . . . . . . . . . . 199,266
----------
TRANSPORTATION--0.3%
25,000 American Airlines,
10.180%, 1/02/13 . . . . . . . . . . . . 30,196
100,000 AMR Corp.,
10.290%, 3/08/21 . . . . . . . . . . . . 126,975
----------
157,171
----------
UTILITIES--0.8%
250,000 Cincinnati Gas & Electric Co.,
7.375%, 11/01/01 . . . . . . . . . . . . 252,930
195,000 Detroit Edison Co.,
6.340%, 3/15/00 . . . . . . . . . . . . . 193,292
----------
446,222
----------
Total Bonds & Notes
(Identified Cost $19,295,649) . . . . . . 19,416,102
----------
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM INVESTMENT--3.3%
<C> <S> <C>
$1,937,000 Associates Corp. of North America,
6.550%, 1/2/97 . . . . . . . . . 1,937,000
-----------
Total Short-Term Investment
(Identified Cost $1,937,000) . . 1,937,000
-----------
Total Investments--99.3%
(Identified Cost
$52,646,399 (b)) . . . . . . . . 58,154,833
Other assets less liabilities . . 370,010
------------
TOTAL NET ASSETS--100% . . . . . . $58,524,843
============
</TABLE>
(a) See Note 1a.
(b) Federal Tax Information: At December 31, 1996 the net unrealized
appreciation on investments based on cost of $52,686,315 for federal income
tax purposes was as follows:
<TABLE>
<CAPTION>
<C> <S> <C>
Aggregate gross unrealized appreciation for all
investments in which there is an excess of
value over tax cost . . . . . . . . . . . . $5,702,244
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax
cost over value . . . . . . . . . . . . . . . (233,726)
----------
Net unrealized appreciation . . . . . . . . . . $5,468,518
==========
</TABLE>
(c) Non-income producing security.
(d) An American Depository Receipt (ADR) is a certificate issued by a U.S. bank
representing the right to receive securities of the foreign issuer
described. The values of ADRs are significantly influenced by trading on
exchanges not located in the United States or Canada.
See accompanying notes to financial statements.
56
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES BALANCED SERIES)
<TABLE>
<CAPTION>
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1996
ASSETS
<S> <C> <C>
Investments at value . . . . . . . . . . . . $58,154,833
Cash . . . . . . . . . . . . . . . . . . . . 748
Receivable for:
Fund shares sold . . . . . . . . . . . . . . 242,693
Securities sold . . . . . . . . . . . . . . 52,642
Dividends and interest . . . . . . . . . . . 298,016
Foreign taxes . . . . . . . . . . . . . . . 275
Unamortized organization expense . . . . . . 5,689
-----------
58,754,896
LIABILITIES
Payable for:
Securities purchased . . . . . . . . . . . . $ 24,224
Fund shares redeemed . . . . . . . . . . . . 132,521
Withholding taxes . . . . . . . . . . . . . 265
Accrued expenses:
Management fees . . . . . . . . . . . . . . 34,792
Deferred trustees' fees . . . . . . . . . . 280
Other expenses . . . . . . . . . . . . . . . 37,971
--------
230,053
-----------
$58,524,843
===========
NET ASSETS
Net Assets consist of:
Capital paid in . . . . . . . . . . . . . . $52,484,161
Undistributed net investment income . . . . 10,566
Accumulated net realized gains . . . . . . . 521,682
Unrealized appreciation on investments . . . 5,508,434
-----------
NET ASSETS . . . . . . . . . . . . . . . . . . $58,524,843
===========
Computation of offering price:
Net asset value and redemption price per share
($58,524,843 divided by 4,318,444 shares of
beneficial interest) . . . . . . . . . . . . $ 13.55
===========
Identified cost of investments . . . . . . . . $52,646,399
===========
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
INVESTMENT INCOME
<S> <C> <C>
Dividends . . . . . . . . . . . . . . $ 432,720(a)
Interest . . . . . . . . . . . . . . . 996,102
----------
1,428,822
EXPENSES
Management fees . . . . . . . . . . . $252,822
Trustees' fees and expenses . . . . . 10,423
Custodian . . . . . . . . . . . . . . 53,131
Audit and tax services . . . . . . . . 14,100
Legal . . . . . . . . . . . . . . . . 11,567
Printing . . . . . . . . . . . . . . . 9,528
Amortization of organization expenses 2,017
Miscellaneous . . . . . . . . . . . . 5,490
--------
Total expenses . . . . . . . . . . . 359,078
Less expenses assumed by the
investment adviser . . . . . . . . (52,078) 307,000
-------- ----------
NET INVESTMENT INCOME . . . . . . . . . 1,121,822
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Realized gain on:
Investments--net . . . . . . . . . . 940,791
Unrealized appreciation on:
Investments--net . . . . . . . . . . 4,480,648
----------
Net gain on investment transactions . 5,421,439
----------
NET INCREASE IN NET ASSETS FROM
OPERATIONS . . . . . . . . . . . . . . $6,543,261
==========
</TABLE>
(a) Net of foreign taxes of: $5,506.
See accompanying notes to financial statements.
57
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES BALANCED SERIES)
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------ --------------
<S> <C> <C>
FROM OPERATIONS
Net investment income . . . . . . . . . . . . . $ 382,625 $ 1,121,822
Net realized gain on investments . . . . . . . 426,765 940,791
Unrealized appreciation on investments . . . . 1,029,622 4,480,648
----------- -----------
Increase in net assets from operations . . . . 1,839,012 6,543,261
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income . . . . . . . . . . . . . (382,625) (1,114,677)
In excess of net investment income . . . . . . (1,297) 0
Net realized gain on investments . . . . . . . (288,315) (557,561)
----------- -----------
(672,237) (1,672,238)
----------- -----------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares . . . . . . . . . 18,594,352 41,044,288
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income . . . 383,922 1,114,677
Distributions from net realized gain . . . . . 288,315 557,561
----------- -----------
19,266,589 42,716,526
Cost of shares redeemed . . . . . . . . . . . . (4,333,030) (7,885,382)
----------- -----------
Increase in net assets derived from capital
share transactions . . . . . . . . . . . . . . 14,933,559 34,831,144
----------- -----------
Total increase in net assets . . . . . . . . . 16,100,334 39,702,167
NET ASSETS
Beginning of the year . . . . . . . . . . . . . 2,722,342 18,822,676
----------- -----------
End of the year . . . . . . . . . . . . . . . . $18,822,676 $58,524,843
=========== ===========
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the year . . . . . . . . . . . . . $ 251 $ 1,050
=========== ===========
End of the year . . . . . . . . . . . . . . . . $ 1,050 $ 10,566
=========== ===========
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares . . . . . . . . 1,626,505 3,250,311
Issued in connection with the reinvestment of:
Distributions from net investment income . . . 32,426 82,445
Distributions from net realized gain . . . . . 24,351 30,535
----------- -----------
1,683,282 3,363,291
Redeemed . . . . . . . . . . . . . . . . . . . (382,082) (619,940)
----------- -----------
Net change . . . . . . . . . . . . . . . . . . 1,301,200 2,743,351
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
OCTOBER 31, 1994 (A)
THROUGH YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
-------------------- ------------ --------------
<S> <C> <C> <C>
Net Asset Value, Beginning
of Period . . . . . . . . $10.00 $ 9.94 $ 11.95
------ ------- -------
Income From Investment
Operations
Net Investment Income . . 0.05 0.26 0.27
Net Realized and
Unrealized Gain (Loss) on
Investments. . . . . . . (0.06) 2.20 1.73
------ ------- -------
Total From Investment
Operations . . . . . . . (0.01) 2.46 2.00
------ ------- -------
Less Distributions
Dividends From Net
Investment Income . . . (0.05) (0.26) (0.27)
Distributions From Net
Realized Capital Gains . 0.00 (0.19) (0.13)
------ ------- -------
Total Distributions . . . (0.05) (0.45) (0.40)
------ ------- -------
Net Asset Value, End of
Period. . . . . . . . . . $ 9.94 $ 11.95 $ 13.55
====== ======= =======
TOTAL RETURN (%) . . . . . (0.10)(c) 24.79 16.91
Ratio of Operating Expenses
to Average Net
Assets (%) . . . . . . . 0.85 (b) 0.85 0.85
Ratio of Net Investment
Income to Average Net
Assets (%) . . . . . . . 4.16 (b) 4.03 3.08
Portfolio Turnover
Rate (%) . . . . . . . . 0 (b) 72 59
Average Commission
Rate(d) . . . . . . . . . -- -- $0.0594
Net Assets, End of
Period (000) . . . . . . $2,722 $18,823 $58,525
The ratios of expenses to
average net assets without
giving effect to the
voluntary expense
agreement described in
Note 4 to the Financial
Statements would have
been (%) . . . . . . . . 3.73 (b) 1.85 0.99
</TABLE>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
(d) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for trades on which
commissions are charged. This rate generally does not reflect mark-ups,
mark-downs, or spread on shares traded on a principal basis.
See accompanying notes to financial statements.
58
<PAGE>
BACK BAY ADVISORS MANAGED SERIES
PORTFOLIO MANAGER: PETER PALFREY
BACK BAY ADVISORS, L.P.
[PHOTO OF PETER PALFREY]
The Back Bay Advisors Managed Series is a "Flexible" fund, typically targeting a
65%/35% split between stocks and bonds. As market conditions dictate, the stock
allocation can vary from 50% to 80% of the total, based on market outlook, and
the relative valuation between stocks and bonds. During 1996, the stock
allocation ranged from 68-73%. Over the past three years, the stock allocation
has ranged from 50-75%.
Q. HOW DID THE BACK BAY ADVISORS MANAGED SERIES PERFORM IN 1996?
A. The Managed Series continued its strong relative and absolute performance in
1996, returning 15.01% for the year versus 13.85% for the average Lipper
Variable Flexible Portfolio Fund. This should be viewed in the context of a
2.90% return for the year ended December 31, 1996 for the Lehman Brothers
Government/Corporate Index/4/ and a 22.90% return for the S&P 500 Index/19/.
The U.S. economy rebounded sharply during the first half of 1996, fueled in part
by the lagged effect of easier Federal Reserve monetary policy through 1995 and
into early 1996. With the backdrop of a favorable interest rate environment,
corporations continued their strong year-over-year earnings growth in 1996,
propelled by the rebound in U.S. economic activity, particularly during the
first two quarters. Additionally, leaner and more efficient operations and
healthier balance sheets allowed corporations to translate robust top line
revenue growth into solid bottom line earnings. This, coupled with monthly flows
of $10-20 billion into stock mutual funds throughout the year supported the
strong performance in U.S. equity markets.
The fixed income market, however, suffered from the strong rebound in the U.S.
economy early in 1996, with investors worried that higher than expected Gross
Domestic Product (GDP) growth would translate into increased inflationary
pressures going forward. Steady gains in nonfarm payrolls, solid personal income
growth and relatively high manufacturing capacity utilization rates, coupled
with a spike in energy costs, all served to push interest rates sharply higher
through the first half of 1996, as investors speculated over the timing (or
necessity) of a pre-emptive strike by the Federal Reserve. After a very
difficult first half of the year for bonds, signs of continued modest
inflationary pressures, coupled with a modest slowdown in the U.S. economy
during the early part of the second half of the year, allowed bond prices to
rebound somewhat.
The Series' overweight position in equities throughout 1996 positively impacted
performance, with stocks significantly outperforming bonds for the year. Within
the equity portfolio, larger capitalization growth stocks performed relatively
better than value and mid-to-small cap holdings.
Within the fixed income portfolio, short and intermediate holdings performed
relatively better than longer duration issues, given the 70-85 basis point
backup in interest rates during 1996. Emerging market, upgraded bonds and high
yield issues were among the best performing sectors in the fixed income market,
due to significant spread tightening. Canadian denominated obligations also
turned in a very strong performance due to significant spread tightening versus
U.S. Treasuries.
Q. HOW DID YOU MANAGE THE SERIES IN 1996?
A. Given the continued strong capital flows into equities, our positive
corporate earnings outlook, and expectations for a range-bound interest rate
environment, overall portfolio strategy during the year continued to favor a
bias towards stocks (68.3% at December 31, 1996). While the stock allocation
remains slightly overweight versus the normally "targeted" 65% stock/35% bond
split, the allocation to stocks was reduced from nearly 73% in November as a
hedge against very "full" equity valuations. The proceeds were redirected into
intermediate and longer maturity bonds.
The U.S. economy slowed from a 4.7% pace in the second quarter to 2.1% in the
third quarter, easing investor fears of runaway economic growth pushing
inflation much beyond the 3.1% year-over-year rate experienced through November
1996. While fourth quarter 1996 GDP estimates had been running at 2-2.5%, the
most recent payroll figures, earnings and manufacturing data now point to a
greater than expected rebound in economic growth as we enter 1997.
Q. WHAT IS YOUR INVESTMENT OUTLOOK FOR THE MONTHS AHEAD?
A. Although the rising GDP has put considerable pressure on fixed income markets
(and to a lesser degree, equity markets)
59
<PAGE>
over the past several weeks, I remain constructive on the bond and equity
markets over the longer term, and would need to see several months of stronger
data before changing my expectation of a sidelined Federal Reserve.
[A CHART APPEARS HERE COMPARING A $10,000
INVESTMENT IN THE SERIES COMPARED TO AN INDEX]
<TABLE>
<CAPTION>
Managed Leh/Gov't
Series S&P 500 Corp.
<S> <C> <C> <C>
5/1/87 10000 10000 10000
1987 9935 8770 10357
1988 10877 10216 11142
1989 12952 13444 12729
1990 13369 13025 13782
1991 16065 16976 16001
1992 17142 18268 17213
1993 18968 20101 19117
1994 18756 20374 18447
1995 24620 28003 21997
1996 28316 34432 22635
</TABLE>
FUND FACTS
GOAL: A favorable total return through investment in diversified portfolio. The
Series' portfolio is expected to include a mix of (1) common stocks, (2) notes
and bonds and (3) money market instruments.
START DATE: May 1, 1987
SIZE: $161 million as of December 31, 1996
MANAGER: Peter Palfrey has managed the Series since January 1994 and joined
Back Bay Advisors in 1993. Mr. Palfrey also manages several other fixed income
and separate accounts.
Performance numbers are net of all Series expenses but do not include any
insurance, sales or administrative charges of variable annuity or life insurance
contracts. If these charges were included, the returns shown would be lower.
This information represents past performance and is not indicative of future
results. Investment return and principal value will fluctuate so that shares,
upon redemption, may be worth more or less than the original cost.
60
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS MANAGED SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCKS--68.2% OF TOTAL NET ASSETS
SHARES VALUE (A)
<C> <S> <C>
AEROSPACE--1.1%
5,638 Boeing Co. . . . . . . . . . . . . . $ 599,742
14,600 Rockwell International Corp. . . . . 888,775
5,000 United Technologies Corp. . . . . . . 330,000
----------
1,818,517
----------
AUTOMOBILE & RELATED--1.3%
30,864 Chrysler Corp. . . . . . . . . . . . 1,018,512
4,600 Ford Motor Co. . . . . . . . . . . . 146,625
12,500 General Motors Corp. . . . . . . . . 696,875
6,750 Genuine Parts Co. . . . . . . . . . . 300,375
----------
2,162,387
----------
BANKS--5.4%
32,186 Banc One Corp. . . . . . . . . . . . 1,383,998
10,144 Bank America Corp. . . . . . . . . . 1,011,864
5,400 Bankers Trust NY . . . . . . . . . . 465,750
8,700 Chase Manhattan Corp. New . . . . . . 776,475
9,400 Citicorp . . . . . . . . . . . . . . 968,200
10,300 First Union Corp. . . . . . . . . . . 762,200
10,900 J.P. Morgan & Co., Inc. . . . . . . . 1,064,113
7,200 Nations Bank Corp. . . . . . . . . . 703,800
17,100 Norwest Corp. . . . . . . . . . . . . 743,850
2,800 Wells Fargo & Co. . . . . . . . . . . 755,300
----------
8,635,550
----------
BUSINESS MACHINES--1.7%
8,500 Apple Computer . . . . . . . . . . . 177,437
28,400 Digital Equipment Corp.(c) . . . . . 1,033,050
10,300 International Business Machines
Corp. . . . . . . . . . . . . . . . 1,555,300
----------
2,765,787
----------
BUSINESS SERVICES--1.0%
28,500 Browning Ferris Industries, Inc. . . 748,125
10,000 Dun & Bradstreet Corp. . . . . . . . 237,500
9,200 H & R Block, Inc. . . . . . . . . . . 266,800
9,500 WMX Technologies, Inc. . . . . . . . 309,938
----------
1,562,363
----------
CHEMICALS--2.2%
14,200 Allied-Signals, Inc. . . . . . . . . 951,400
8,200 Dow Chemical Co. . . . . . . . . . . 642,675
13,700 E.I. Du Pont de Nemours & Co. . . . . 1,292,937
17,500 Monsanto Co. . . . . . . . . . . . . 680,313
500 PPG Industries, Inc. . . . . . . . . 28,063
----------
3,595,388
----------
COMMUNICATION--5.1%
15,500 Airtouch Communications, Inc. . . . . 391,375
13,100 Ameritech Corp. . . . . . . . . . . . 794,187
27,261 AT & T Co. . . . . . . . . . . . . . 1,185,853
12,200 Bell Atlantic Corp. . . . . . . . . . 789,950
16,200 Bellsouth Corp. . . . . . . . . . . . 654,075
10,600 GTE Corp. . . . . . . . . . . . . . . 482,300
8,834 Lucent Technologies, Inc. . . . . . . 408,572
11,900 Northern Telecom LTD . . . . . . . . 736,313
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
14,600 NYNEX Corp. . . . . . . . . . . . . $ 702,625
15,500 Pacific Telesis Group . . . . . . . 569,625
21,900 SBC Comunications, Inc. . . . . . . 1,133,325
9,700 US West, Inc. . . . . . . . . . . . 312,825
----------
8,161,025
----------
CONGLOMERATES--0.8%
2,200 ITT Corp. . . . . . . . . . . . . . 95,425
13,800 Minnesota Mining &
Manufacturing . . . . . . . . . 1,143,675
----------
1,239,100
----------
CONSTRUCTION--0.8%
13,400 Home Depot, Inc. . . . . . . . . . 671,675
14,900 Masco Corp. . . . . . . . . . . . . 536,400
----------
1,208,075
----------
CONSUMER DURABLES--0.0%
800 Whirlpool Corp. . . . . . . . . . . 37,300
----------
DATA PROCESSING--3.0%
16,100 Intel Corp. . . . . . . . . . . . . 2,108,094
23,400 Microsoft Corp. . . . . . . . . . . 1,933,425
17,100 Oracle Sys. Corp. . . . . . . . . . 713,925
----------
4,755,444
----------
DOMESTIC OIL--1.3%
9,700 Amoco Corp. . . . . . . . . . . . . 780,850
2,700 Atlantic Richfield Co. . . . . . . 357,750
3,600 Halliburton Co. . . . . . . . . . . 216,900
934 Santa Fe Energy, Inc.(c) . . . . . 12,959
3,601 Sun, Inc. . . . . . . . . . . . . . 87,774
800 Tenneco, Inc. . . . . . . . . . . . 36,100
15,600 Unocal Corp. . . . . . . . . . . . 633,750
----------
2,126,083
----------
DRUGS & MEDICINE--5.6%
8,800 Abbott Laboratories . . . . . . . . 446,600
22,000 American Home Products Corp. . . . 1,289,750
17,500 Baxter International, Inc. . . . . 717,500
15,200 Eli Lilly & Co. . . . . . . . . . . 1,109,600
31,500 Merck & Co., Inc. . . . . . . . . . 2,496,376
19,200 Pfizer, Inc. . . . . . . . . . . . 1,591,200
18,705 Pharmacia & Upjohn, Inc. . . . . . 741,186
10,800 Schering Plough Corp. . . . . . . . 699,300
----------
9,091,512
----------
ELECTRONICS--3.0%
21,400 AMP, Inc. . . . . . . . . . . . . . 821,225
9,400 Emerson Electric Co. . . . . . . . 909,450
20,000 Hewlett-Packard . . . . . . . . . . 1,005,000
22,000 Motorola, Inc. . . . . . . . . . . 1,350,250
15,400 Raytheon Co. . . . . . . . . . . . 741,125
----------
4,827,050
----------
</TABLE>
See accompanying notes to financial statements.
61
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS MANAGED SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCKS--(CONTINUED)
SHARES VALUE (A)
<C> <S> <C>
ENERGY & UTILITIES--2.6%
18,300 American Electric Power, Inc. . . $ 752,587
11,700 Consolidated Edison Co. . . . . . 342,225
40,200 Edison International . . . . . . . 798,975
74 El Paso Nat. Gas Co. . . . . . . . 3,737
45,700 Pacific Gas & Electric Co. . . . . 959,700
7,700 Public Service Enterprise Group . 209,825
10,200 Southern Co. . . . . . . . . . . . 230,775
8,900 Texas Utilities Co. . . . . . . . 362,675
17,300 Unicom Corp. . . . . . . . . . . . 469,263
------------
4,129,762
------------
ENERGY RAW MATERIALS--0.8%
58,800 Occidental Petroleum Corp. . . . . 1,374,450
------------
ENTERTAINMENT--0.0%
2,200 ITT Industry, Inc. . . . . . . . . 53,900
1,520 TCI Satellite Entertainment Inc. . 15,010
------------
68,910
------------
FINANCE--2.8%
25,000 American Express Co. . . . . . . . 1,412,500
4,449 Dean Witter, Discover & Co. . . . 294,746
11,600 Federal Home Loan Mortgage Corp. . 1,277,450
21,400 Federal Nat'l Mortgage Assn. . . . 797,150
16,900 Salomon, Inc. . . . . . . . . . . 796,413
------------
4,578,259
------------
FOOD & AGRICULTURE--4.2%
48,800 Coca Cola Co. . . . . . . . . . . 2,568,100
5,000 General Mills, Inc. . . . . . . . 316,875
20,450 H. J. Heinz Co. . . . . . . . . . 731,087
11,200 Kellogg Co. . . . . . . . . . . . 735,000
30,700 PepsiCo, Inc. . . . . . . . . . . 897,975
13,300 Ralston Purina Co. . . . . . . . . 975,888
16,000 Sara Lee Corp. . . . . . . . . . . 596,000
------------
6,820,925
------------
GOLD--0.2%
18,434 Santa Fe Pacific Gold Corp. . . . 283,423
------------
INSURANCE--2.5%
11,500 Aetna Life & Casualty Co. . . . . 920,000
10,568 Allstate Corp. . . . . . . . . . . 611,623
14,400 American General Corp. . . . . . . 588,600
6,468 American International Group, Inc. 700,161
2,700 CIGNA Corp. . . . . . . . . . . . 368,887
4,300 General Reinsurance Corp. . . . . 678,325
2,200 ITT Hartford Group, Inc. . . . . . 148,500
------------
4,016,096
------------
INTERNATIONAL OIL--4.3%
11,000 Chevron Corp. . . . . . . . . . . 715,000
9,400 Cooper Industries, Inc. . . . . . 395,975
25,100 Exxon Corp. . . . . . . . . . . . 2,459,800
7,800 Mobil Corp. . . . . . . . . . . . 953,550
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
9,800 Royal Dutch Petroleum Co. ADR(d) $ 1,673,350
7,100 Texaco, Inc. . . . . . . . . . . 696,688
------------
6,894,363
------------
LIQUOR--0.4%
6,600 Anheuser-Busch Companies, Inc. . 264,000
11,700 Seagram, Ltd. . . . . . . . . . 453,375
------------
717,375
------------
MEDIA--1.0%
3,000 Gannett Company, Inc. . . . . . 224,625
15,200 Tele-Communications, Inc. . . . 198,550
26,500 Time Warner, Inc. . . . . . . . 993,750
9,700 US West, Inc. . . . . . . . . . 179,450
------------
1,596,375
------------
MISCELLANEOUS--0.9%
3,333 Acnielson Corp. . . . . . . . . 50,412
7,420 Allegiance Corp. . . . . . . . . 204,977
12,700 Cisco Sys. Corp. . . . . . . . . 808,037
10,000 Cognizant Corp. . . . . . . . . 330,000
160 Newport News Shipbuilding . . . 2,400
------------
1,395,826
------------
NON-FERROUS METALS--0.7%
8,075 Alcan Aluminum Ltd. . . . . . . 271,522
14,000 Aluminum Company of America . . 892,500
------------
1,164,022
------------
OFFICE EQUIPMENT--0.5%
15,600 Xerox Corp. . . . . . . . . . . 820,950
------------
OPTICAL PHOTO, EQUIPMENT--0.2%
3,600 Eastman Kodak Co. . . . . . . . 288,900
------------
PAPER & FOREST PRODUCTS--1.8%
12,640 Burlington Northern Santa Fe . . 1,091,780
3,600 Georgia-Pacific Corp. . . . . . 259,200
11,800 International Paper Co. . . . . 476,425
9,500 Kimberly Clark Corp. . . . . . . 904,875
4,050 Weyerhaeuser Co. . . . . . . . . 191,869
------------
2,924,149
------------
PRODUCER OF GOODS--2.5%
5,600 Caterpillar, Inc. . . . . . . . 421,400
1,100 Deere & Co. . . . . . . . . . . 44,687
34,400 General Electric Co. . . . . . . 3,401,300
4,200 Westinghouse Electric Corp. . . 83,475
------------
3,950,862
------------
RAILROADS & SHIPPING--0.5%
4,500 Norfolk Southern Corp. . . . . . 393,750
4,200 Union Pacific Corp. . . . . . . 252,525
3,557 Union Pacific Resources Group IN 104,042
------------
750,317
------------
</TABLE>
See accompanying notes to financial statements.
62
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS MANAGED SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCKS--(CONTINUED)
SHARES VALUE (A)
<C> <S> <C>
RESTAURANTS--0.3%
5,000 Darden Restaurants, Inc. . . . . . $ 43,750
9,200 McDonald's Corp. . . . . . . . . . 416,300
------------
460,050
------------
RETAIL--3.8%
19,000 Albertsons, Inc. . . . . . . . . . 676,875
7,400 CVS Corp. . . . . . . . . . . . . . 306,175
24,000 Dayton Hudson Corp. . . . . . . . . 942,000
38,900 Kmart Corp.(c) . . . . . . . . . . 403,587
26,400 Mattel Inc. . . . . . . . . . . . . 732,600
7,800 May Department Stores Co. . . . . . 364,650
11,600 Nike Inc. . . . . . . . . . . . . . 693,100
11,400 Sears Roebuck & Co. . . . . . . . . 525,825
5,400 The Limited, Inc. . . . . . . . . . 99,225
11,625 Toys R Us(c) . . . . . . . . . . . 348,750
44,900 Wal-Mart Stores, Inc. . . . . . . . 1,027,088
------------
6,119,875
------------
SOAPS & COSMETICS--3.6%
9,860 Bristol-Myers Squibb Co. . . . . . 1,072,275
18,400 Gillette Co. . . . . . . . . . . . 1,430,600
26,100 Johnson & Johnson . . . . . . . . . 1,298,475
10,300 Procter & Gamble Co. . . . . . . . 1,107,250
4,800 Unilever, N.V. . . . . . . . . . . 841,200
------------
5,749,800
------------
STEEL--0.5%
31,700 USX Marathon Group . . . . . . . . 756,838
220 USX-US Steel Group . . . . . . . . 6,903
------------
763,741
------------
TOBACCO--1.2%
8,500 American Brands, Inc. . . . . . . . 421,812
13,600 Philip Morris Companies, Inc. . . . 1,531,700
------------
1,953,512
------------
TRAVEL & RECREATION--0.6%
13,235 Walt Disney Co. . . . . . . . . . . 921,487
------------
Total Common Stock
(Identified cost $70,717,612) . . 109,729,010
------------
</TABLE>
<TABLE>
<CAPTION>
BONDS & NOTES--30.9%
FACE
AMOUNT
<C> <S> <C>
CORPORATE BONDS--20.2%
$ 4,000,000 Banco de Comercio Exterior,
8.625%, 6/02/00 . . . . . . . 4,144,440
1,000,000 Boston Edison Co.,
7.800%, 5/15/10 . . . . . . . 966,000
500,000 Continental Cablevision Inc.,
11.00%, 06/01/07 . . . . . . 573,750
2,000,000 Continental Cablevision IN,
9.00%, 09/01/08 . . . . . . . 2,218,160
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
$ 2,000,000 Lehman Brothers Holdings, Inc.,
8.500%, 5/01/07 . . . . . . . . . $ 2,145,720
1,000,000 Maxus Energy Corp.,
9.375%, 11/01/03 . . . . . . . . . 1,015,000
4,025,000 News Amer. Holdings Inc.,
10.125%, 10/15/12 . . . . . . . . 4,615,910
1,000,000 Paramount Communications, Inc.,
8.250%, 8/01/22 . . . . . . . . . 944,970
7,000,000 Tele-Communications, Inc.,
9.800%, 2/01/12 . . . . . . . . . 7,575,400
10,000,000 Time Warner, Inc.,
Zero Coupon, 12/17/12 . . . . . . 3,762,500
4,500,000 Total Access Communication,
8.375%, 11/04/06 . . . . . . . . . 4,527,495
30,000 Viacom, Inc.,
8.000%, 7/07/06 . . . . . . . . . 29,025
-----------
32,518,370
-----------
FOREIGN--7.8%
5,000,000 Government of Canada,
Zero Coupon, 3/15/21(d) . . . . . 644,599
11,500,000 Government of Canada,
Zero Coupon,12/01/20(d) . . . . . 1,494,924
5,000,000 Government of Canada,
8.000%, 6/01/23(d) . . . . . . . . 4,058,643
30,000,000 Ontario Province,
Zero Coupon, 09/08/23(d) . . . . . 2,968,670
4,250,000 Quebec Province,
Zero Coupon, 03/30/23(d) . . . . . 397,283
3,600,000 Quebec Province,
8.50%, 04/01/26(d) . . . . . . . . 2,895,932
-----------
12,460,051
-----------
YANKEE--2.3%
2,000,000 Republic of Colombia, 144A(f),
8.66%, 10/07/16 . . . . . . . . . 2,119,240
1,500,000 United Mexican States,
9.750%, 2/06/01 . . . . . . . . . 1,558,125
-----------
3,677,365
-----------
U.S. GOVERNMENT BONDS--0.6%
427,561 Government National Mortgage
Association,
10.000%, 9/15/18 . . . . . . . . . 470,715
491,692 Government National Mortgage
Association,
11.500% with various maturities to
2013 . . . . . . . . . . . . . . . 562,209
-----------
1,032,924
-----------
Total Bonds & Notes
(Identified Cost $47,486,764) . . 49,688,710
-----------
</TABLE>
See accompanying notes to financial statements.
63
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS MANAGED SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
SHORT-TERM INVESTMENT--2.0%
FACE
AMOUNT VALUE (A)
<C> <S> <C>
$ 3,160,000 Household Finance Corp.,
6.250%, 1/02/97 . . . . . . . . . $ 3,159,451
------------
Short-Term Investment
(Identified Cost $3,159,451) . . 3,159,451
------------
Total Investments--101.1%
(Identified Cost $121,363,826)(b) 162,577,171
Other assets less liabilities(e) . (1,688,743)
------------
TOTAL NET ASSETS--100% . . . . . . $160,888,428
============
</TABLE>
(a) See Note 1A.
(b) Federal Tax Information:
At December 31, 1996 the net unrealized appreciation on investments based on
cost of $121,363,826 for federal income tax purposes was as follows:
<TABLE>
<CAPTION>
<C> <S> <C>
Aggregate gross unrealized appreciation
for all investments in which there is an
excess of value over tax cost . . . . . $43,001,247
Aggregate gross unrealized depreciation
for all investments in which there is an
excess of tax cost over value . . . . . (1,787,902)
-------------
Net unrealized appreciation . . . . . . . $41,213,345
=============
</TABLE>
(c) Non-income producing security.
(d) Denominated in Canadian dollars.
(e) Including deposits in foreign denominated currency with a value of $131 and
a cost of $133.
(f) Security exempt from registration under Rule-144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified-institutional buyers.
See accompanying notes to financial statements.
64
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS MANAGED SERIES)
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1996
ASSETS
Investments at value . . . . . . . . . $162,577,171
Cash . . . . . . . . . . . . . . . . . 2,364
Foreign cash at value (Cost $133) . . . 131
Receivable for:
Fund shares sold . . . . . . . . . . . 44,425
Dividends and interest . . . . . . . . 1,058,524
Foreign taxes . . . . . . . . . . . . 632
------------
163,683,247
LIABILITIES
Payable for:
Securities purchased . . . . . . . . . $2,593,440
Fund shares redeemed . . . . . . . . . 63,083
Accrued expenses:
Management fees . . . . . . . . . . . 68,383
Deferred trustees' fees . . . . . . . 35,859
Other expenses . . . . . . . . . . . . 34,054
----------
2,794,819
------------
$160,888,428
============
NET ASSETS
Net Assets consist of:
Capital paid in . . . . . . . . . . . $119,495,162
Undistributed net investment income . 40,029
Accumulated net realized gains . . . . 140,816
Unrealized appreciation on investments
and foreign currency . . . . . . . . 41,212,421
------------
NET ASSETS . . . . . . . . . . . . . . . $160,888,428
============
Computation of offering price:
Net asset value and redemption price per
share ($160,888,428 divided by 944,370
shares of beneficial interest) . . . . $ 170.37
============
Identified cost of investments . . . . . $121,363,826
============
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
INVESTMENT INCOME
Dividends . . . . . . . . . . . . . $ 2,573,306(a)
Interest . . . . . . . . . . . . . . 3,903,015
-----------
6,476,321
EXPENSES
Management fees . . . . . . . . . . $ 759,871
Trustees' fees and expenses . . . . 28,419
Custodian . . . . . . . . . . . . . 79,808
Audit and tax services . . . . . . . 17,400
Legal . . . . . . . . . . . . . . . 11,564
Printing . . . . . . . . . . . . . . 45,989
Miscellaneous . . . . . . . . . . . 6,200
----------
Total expenses . . . . . . . . . . 949,251
-----------
NET INVESTMENT INCOME . . . . . . . . 5,527,070
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCY
TRANSACTIONS
Realized gain (loss) on:
Investments--net . . . . . . . . . 9,604,547
Foreign currency
transactions--net . . . . . . . . (72,774)
Net realized gain on investments
and foreign currency transactions 9,531,773
----------
Unrealized appreciation (depreciation) on:
Investments--net . . . . . . . . . 6,444,788
Foreign currency transactions--net (1,027)
----------
Net unrealized appreciation on
investments and foreign currency
transactions. . . . . . . . . . . 6,443,761
----------
Net gain on investment transactions . 15,975,534
-----------
NET INCREASE IN NET ASSETS FROM
OPERATIONS . . . . . . . . . . . . . $21,502,604
===========
</TABLE>
(a) Net of foreign taxes of: $16,633.
See accompanying notes to financial statements.
65
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS MANAGED SERIES)
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
FROM OPERATIONS
Net investment income . . . . . . . . . . . . $ 5,487,603 $ 5,527,070
Net realized gain on investments and foreign
currency transactions . . . . . . . . . . . 2,566,425 9,531,773
Unrealized appreciation on investments and
foreign currency transactions . . . . . . . 28,568,247 6,443,761
------------ ------------
INCREASE IN NET ASSETS FROM OPERATIONS . . . 36,622,275 21,502,604
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income . . . . . . . . . . . . (5,487,603) (5,442,217)
In excess of net investment income . . . . . (212,274) 0
Net realized gain on investments . . . . . . (764,206) (9,837,965)
------------ ------------
(6,464,083) (15,280,182)
------------ ------------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares . . . . . . . . 22,221,525 20,225,126
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income . . 5,699,877 5,442,217
Distributions from net realized gain . . . . 764,206 9,837,965
------------ ------------
28,685,608 35,505,308
Cost of shares redeemed . . . . . . . . . . . (33,185,396) (28,375,038)
------------ ------------
INCREASE (DECREASE) IN NET ASSETS DERIVED FROM
CAPITAL SHARE TRANSACTIONS . . . . . . . . . (4,499,788) 7,130,270
------------ ------------
TOTAL INCREASE IN NET ASSETS . . . . . . . . 25,658,404 13,352,692
NET ASSETS
Beginning of the year . . . . . . . . . . . . 121,877,332 147,535,736
------------ ------------
End of the year . . . . . . . . . . . . . . . $147,535,736 $160,888,428
============ ============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the year . . . . . . . . . . . . $ 85 $ 45,930
============ ============
End of the year . . . . . . . . . . . . . . . $ 45,930 $ 40,029
============ ============
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares . . . . . . . 150,563 120,220
Issued in connection with the reinvestment of:
Distributions from net investment income . . 35,150 31,471
Distributions from net realized gain . . . . 4,713 55,351
------------ ------------
190,426 207,042
Redeemed . . . . . . . . . . . . . . . . . . (223,554) (164,939)
------------ ------------
Net change . . . . . . . . . . . . . . . . . (33,128) 42,103
============ ============
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1992 1993 1994 1995 1996
-------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year . . $127.87 $ 130.26 $ 137.18 $ 130.30 $ 163.52
------- -------- -------- -------- --------
Income From Investment
Operations
Net Investment Income 5.14 4.35 5.42 6.34 6.43
Net Realized and
Unrealized Gain
(Loss) on
Investments . . . . 3.45 9.58 (6.92) 34.33 18.21
------- -------- -------- -------- --------
Total From Investment
Operations . . . . . 8.59 13.93 (1.50) 40.67 24.64
------- -------- -------- -------- --------
Less Distributions
Dividends From Net
Investment Income . (5.13) (4.36) (5.38) (6.34) (6.34)
Distributions in
Excess of Net
Investment Income . 0.00 0.00 0.00 (0.23) 0.00
Distributions From Net
Realized Capital
Gains. . . . . . . . (1.07) (2.65) 0.00 (0.88) (11.45)
------- -------- -------- -------- --------
Total Distributions . (6.20) (7.01) (5.38) (7.45) (17.79)
------- -------- -------- -------- --------
Net Asset Value, End of
Year. . . . . . . . . $130.26 $ 137.18 $ 130.30 $ 163.52 $ 170.37
======= ======== ======== ======== ========
TOTAL RETURN (%) . . . 6.70 10.65 (1.11) 31.26 15.01
Ratio of Operating
Expenses to Average
Net Assets (%) . . . 0.54 0.53 0.54 0.64 0.62
Ratio of Net Investment
Income to Average Net
Assets (%) . . . . . 5.32 3.65 3.98 4.06 3.64
Portfolio Turnover Rate
(%) . . . . . . . . . 36 22 76 51 72
Average Commission Rate
(a) . . . . . . . . . -- -- -- -- $ 0.0318
Net Assets, End of Year
(000) . . . . . . . . $77,575 $121,339 $121,877 $147,536 $160,888
</TABLE>
(a) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for trades on which
commissions are charged. This rate generally does not reflect mark-ups,
mark-downs, or spreads on shares traded on a principal basis.
See accompanying notes to financial statements.
66
<PAGE>
SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES
PORTFOLIO MANAGERS: STEVEN GUTERMAN, PETER WILBY AND DAVID SCOTT
SALOMON BROTHERS ASSET MANAGEMENT INC
[PHOTOS OF STEVEN GUTERMAN, PETER WILBY AND DAVID SCOTT]
Q. HOW DID THE SERIES PERFORM IN 1996?
A. For the year ended December 31, 1996, the Series posted a 14.36% return
versus 3.63% for the Lehman Brothers Aggregate Bond Index/3/. The Series'
ability to rotate its assets among global fixed income markets enabled it to
outperform the broad fixed income market. Over the course of the year, the
Series maintained and allocated about 35% of its assets to the high yield sector
and about 22% to emerging markets debt (Brady Bonds). These two sectors
responded favorably to the improving credit quality of their issuers. High yield
issuers were supported by moderate economic growth as corporations strengthened
their balance sheets by posting higher earnings and paying down debt. The
strength in the emerging markets debt sector is attributable to the improving
fiscal and monetary practices of these countries. During the year, both Moody's
and S&P upgraded Poland's debt to investment grade. This positive development
helped to boost prices across the whole emerging markets debt sector. In
addition, during 1996, a large and growing number of institutional investors,
particularly U.S. pension funds and insurance companies, entered this market in
search of higher yields. This flow of institutional funds has helped to
stabilize and support the market sector.
Q. HOW DID YOU MANAGE THE SERIES IN 1996?
A. During 1996, the Series allocated its assets among the U.S. high yield
sector, U.S. investment grade sector, emerging markets debt and non-dollar
government bonds. Our strategy for the U.S. investment grade sector was to
overweight mortgage pass-through securities and underweight U.S. Treasuries. We
believed that mortgage pass-through securities were attractive as higher
interest rates reduced the incentive for homeowners to refinance their
mortgages. In the non-dollar portion of the Series, we allocated assets among
government bonds of Germany, Denmark, Ireland, the United Kingdom, Canada and
Australia. The Canadian government bond market posted solid gains for the year
supported by the absence of constitutional problems, and fiscal consolidation
and a pro-growth monetary policy stance from the Bank of Canada. The progress
toward European Monetary Union dominated the European bond market in 1996. As
prospects improved for a prompt start to the single currency on January 1, 1999,
yield spreads to the German market converged.
Q. WHAT IS YOUR INVESTMENT OUTLOOK FOR THE MONTHS AHEAD?
A. We anticipate moderate economic growth in the U.S. and positive supply and
demand factors in the high yield corporate market. We also maintain a positive
outlook on emerging market debt as broader participation in the sector and
favorable monetary and fiscal policies by emerging market nations should
continue to be positive for the market. Our U.S. investment grade outlook is
cautious over the short run. However, long-term we remain constructive on the
fixed income market as inflation remains benign and economic growth remains
modest.
67
<PAGE>
[A CHART APPEARS HERE COMPARING A
$10,000 INVESTMENT IN THE SERIES
VERSUS AN INDEX]
<TABLE>
<CAPTION>
Strategic Lehman
Bond Opp. Aggregate
Series Bond
<S> <C> <C>
10/31/94 10000 10000
1994 9860 10047
1995 11771 11903
1996 13461 12335
</TABLE>
FUND FACTS
GOAL: A high level of total return consistent with preservation of capital.
START DATE: October 31, 1994
SIZE: $36 million as of December 31, 1996
MANAGERS: Peter Wilby, Steven Guterman and David Scott have managed the Series
since its inception in October of 1994. Mr. Wilby and Mr. Scott have also
managed the Salomon Brothers Investment Series--Strategic Bond Fund since March
1995. Mr. Wilby also manages the Salomon Brothers Investment Series--High Yield
Bond Fund. Mr. Guterman also co-manages the Salomon Brothers U.S. Government
Series of New England Zenith Fund.
Performance numbers are net of all Series expenses but do not include any
insurance, sales or administrative charges of variable annuity or life insurance
contracts. If these charges were included, the returns shown would be lower.
This information represents past performance and is not indicative of future
results. Investment return and principal value will fluctuate so that shares,
upon redemption, may be worth more or less than the original cost.
68
<PAGE>
NEW ENGLAND ZENITH FUND
(SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
BONDS & NOTES--92.4% OF TOTAL NET ASSETS
FACE
AMOUNT VALUE (A)
<C> <S> <C>
CORPORATE BONDS--37.2%
$ 125,000 Airplane Pass Thru Trust,
10.875%, 3/15/19 . . . . . . . . . . . . . $ 137,884
150,000 Alvey Systems, Inc.,
11.375%, 1/31/03 . . . . . . . . . . . . . 158,250
150,000 American Media Operations
11.625%, 11/15/04 . . . . . . . . . . . . 161,250
150,000 Americold Corp.
12.875%, 5/01/08 . . . . . . . . . . . . . 154,875
200,000 Arch Communications Group
0/10.875%, 3/15/08(j) . . . . . . . . . . 115,000
200,000 Arkla, Inc.
8.875%, 7/15/99 . . . . . . . . . . . . . 211,224
150,000 Berry Plastics
12.250%, 4/15/04 . . . . . . . . . . . . . 163,125
150,000 Borg Warner Security Corp.
9.125%, 5/01/03 . . . . . . . . . . . . . 147,000
150,000 Cablevision Systems Corp.
10.500%, 5/15/16 . . . . . . . . . . . . . 155,625
150,000 Carr Gottstein Foods Co.
12.000%, 11/15/05 . . . . . . . . . . . . 160,875
166,000 Central Transportation Rental Finance Corp.
9.500%, 4/30/03 . . . . . . . . . . . . . 158,115
150,000 Cinemark USA, Inc.
9.625%, 8/01/08 . . . . . . . . . . . . . 151,500
150,000 Clark Schwebel, Inc.
10.500%, 4/15/06 . . . . . . . . . . . . . 159,750
150,000 Cobb Theaters
10.625%, 3/01/03 . . . . . . . . . . . . . 158,062
200,000 Crown Paper Co.
11.000%, 9/01/05 . . . . . . . . . . . . . 188,000
240,000 CS Wireless Systems, Inc.
0/11.375%, 3/01/06(j) . . . . . . . . . . 87,600
150,000 CSK Auto, Inc.
11.000%, 11/01/06 . . . . . . . . . . . . 155,250
200,000 Dole Foods, Inc.
6.750%, 7/15/00 . . . . . . . . . . . . . 199,870
150,000 Dollar Financial Group, Inc.
10.875%, 11/15/06 . . . . . . . . . . . . 154,875
150,000 Ekco Group, Inc.
9.250%, 4/01/06 . . . . . . . . . . . . . 146,250
100,000 Excide Electronics Group, Inc.
11.500%, 3/15/06 (h) . . . . . . . . . . . 109,000
200,000 Eye Care Ctrs. America, Inc.
12.000%, 10/01/03 . . . . . . . . . . . . 215,750
100,000 Finlay Fine Jewerly Corp.
10.625%, 5/01/03 . . . . . . . . . . . . . 105,000
150,000 Foamex L.P/Foamex Cap. Corp.
11.875%, 10/01/04 . . . . . . . . . . . . 160,875
150,000 Four M Corp.
12.000%, 6/01/06 . . . . . . . . . . . . . 158,250
150,000 Freedom Chemical Co.
10.625%, 10/15/06 . . . . . . . . . . . . 156,750
150,000 Fresenius Medical Care Cap
9.000%, 12/01/06 . . . . . . . . . . . . . 152,625
150,000 Guitar CTR Management Co., Inc.
11.000%, 7/01/06 . . . . . . . . . . . . . 159,750
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
$ 150,000 Harveys Casino Resorts
10.625%, 6/01/06 . . . . . $ 162,000
100,000 Herff Jones, Inc.
11.000%, 8/15/05 . . . . . 108,000
150,000 Hills Stores Co.
12.500%, 7/01/03 . . . . . 133,500
150,000 Hines Horticulture
11.750%, 10/15/05 . . . . 159,000
150,000 HMH Properties, Inc.
9.500%, 5/15/05 . . . . . 156,750
150,000 Hollinger International
9.250%, 2/01/06 . . . . . 148,500
275,000 ICG Holdings, Inc.
0/13.500%, 9/15/05(j) . . 193,875
200,000 Imed Corp.
9.750%, 12/01/06 . . . . . 204,500
200,000 International Cabletel, Inc.
0/11.500%, 2/01/06(j) . . 136,000
150,000 Iron Mountain, Inc.
10.125%, 10/01/06 . . . . 158,813
200,000 Jacor Communications Co.
9.750%, 12/15/06 . . . . . 206,000
150,000 Jitney Jungle Stores
12.000%, 3/01/06 . . . . . 159,000
250,000 Jordan Industries, Inc.
10.375% 8/01/03 . . . . . 247,500
150,000 KCS Energy, Inc.
11.000%, 1/15/03 . . . . . 162,000
200,000 Lamar Advertising Co.
9.625%, 12/01/06 . . . . . 206,500
250,000 Marcus Cable Co.
0/14.250%, 12/15/05(j) . . 177,500
150,000 Maxxam Medical, Inc.
10.500%, 8/01/06 . . . . . 157,125
180,000 Mellon Financial Co.
9.750%, 6/15/01 . . . . . 201,289
150,000 Mesa Oper Co.
10.625%, 7/01/06 . . . . . 163,500
250,000 NL Industries, Inc.
0/13.000%, 10/15/05(j) . . 215,625
200,000 National Energy Group, Inc.
10.750%, 11/01/06 . . . . 208,500
250,000 Norcal Waste Systems, Inc.
12.500%, 11/15/05 . . . . 277,500
450,000 Paine Webber Group, Inc.
7.000%, 3/01/00 . . . . . 453,091
150,000 Parker Distilling Co.
9.750%, 11/15/06 . . . . . 158,250
150,000 Penn Traffic Co.
9.625%, 4/15/05 . . . . . 85,500
200,000 Peoples Choice TV Corp.
0/13.125%, 6/01/04(j) . . 85,000
150,000 Printpack, Inc.
10.625%, 8/15/06 . . . . . 156,750
</TABLE>
See accompanying notes to financial statements.
69
<PAGE>
NEW ENGLAND ZENITH FUND
(SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
BONDS & NOTES--(CONTINUED)
FACE
AMOUNT VALUE(A)
<C> <S> <C>
CORPORATE BONDS--(CONTINUED)
$ 150,000 Quest Diagnostics, Inc.
10.750%, 12/15/06 . . . . . . . . . . $ 157,875
200,000 Radnor Holdings Corp.
10.000%, 12/01/03 . . . . . . . . . . 204,500
150,000 Rayovac Corp.
10.250%, 11/01/06 . . . . . . . . . . 154,875
150,000 Remington Product Co.
11.000%, 5/15/06 . . . . . . . . . . . 127,500
150,000 Renco Metals, Inc.
11.500%, 7/01/03 . . . . . . . . . . . 156,750
250,000 Revlon Worldwide Corp.
Zero Coupon 3/15/98 . . . . . . . . . 215,625
150,000 Rogers Cablesystems, LTD
10.000%, 3/15/05 . . . . . . . . . . . 160,688
200,000 Ryder Transportation, Inc.
10.000%, 12/01/06 . . . . . . . . . . 208,000
150,000 Selmer, Inc.
11.000%, 5/15/05 . . . . . . . . . . . 161,062
150,000 SFX Broadcasting, Inc.
10.750%, 5/15/06 . . . . . . . . . . . 158,625
150,000 Smiths Food & Drug
11.250%, 5/15/07 . . . . . . . . . . . 166,500
125,000 Southdown, Inc.
10.000%, 3/01/06 . . . . . . . . . . . 132,500
150,000 Specialty Equipment Companies, Inc.
11.375%, 12/01/03 . . . . . . . . . . 162,938
100,000 Specialty Retailers, Inc.
11.000%, 8/15/03 . . . . . . . . . . . 104,250
250,000 Speedy Muffler King, Inc.
10.875%, 10/01/06 . . . . . . . . . . 268,125
150,000 Stroh Brewery Co.
11.100%, 7/01/06 . . . . . . . . . . . 156,750
150,000 Talley Manufacturing & Technology, Inc.
10.750%, 10/15/03 . . . . . . . . . . 157,125
150,000 Telex Communications, Inc.
12.000%, 7/15/04 . . . . . . . . . . . 165,000
150,000 Trump Atlantic City Associates
11.250%, 5/01/06 . . . . . . . . . . . 148,500
150,000 Twin Laboratories, Inc.
10.250%, 5/15/06 . . . . . . . . . . . 156,937
250,000 UNC, Inc.
11.000%, 6/01/06 . . . . . . . . . . . 267,500
100,000 United States Leasing International
8.450%, 1/25/05 . . . . . . . . . . . 108,102
150,000 Universal Outdoor, Inc.
9.750%, 10/15/06 . . . . . . . . . . . 155,250
150,000 Winstar Communications, Inc.
0/14.000%, 10/15/05(j) . . . . . . . . 91,500
150,000 Wyndham Hotel Corp.
10.500%, 5/15/06 . . . . . . . . . . . 159,375
-----------
13,329,800
-----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE(A)
<C> <S> <C>
FOREIGN CORPORATE BONDS--5.4%
$ 150,000 Algoma Steel, Inc.,
12.375%, 7/15/05 . . . . . . $ 162,750
250,000 Costilla Energy, Inc.
10.250%, 10/01/06 . . . . . . 265,000
250,000 Diamond Cable Communication
0/11.750%, 12/15/05(j) . . . 178,750
250,000 Doane Products Co.
10.625%, 3/01/06 . . . . . . 266,875
150,000 Doman Industries, Ltd.
8.750%, 3/15/04 . . . . . . . 141,375
300,000 International Semi Tech.
0/11.500%, 8/15/03(e)(j) . . 197,250
400,000 Korea Development Bank
9.600%, 12/01/00 . . . . . . 441,952
250,000 Nextlink Communications, Ltd.
12.500%, 4/15/06 . . . . . . 268,125
-----------
1,922,077
-----------
FOREIGN GOVERNMENT BONDS--21.0%
1,323,000 Argentina (Republic of)
6.3125%, 3/31/05 . . . . . . 1,152,664
40,000 Australia (Commonwealth of)
6.750%, 11/15/06(c) . . . . . 30,446
182,000 Brazil (Federal Republic of)
6.375%, 1/01/01 . . . . . . . 176,426
1,266,575 Brazil (Federal Republic of)
C Bonds 8.000%, 4/15/14 . . . 935,683
250,000 Brazil (Federal Republic of)
5.000%, 4/15/24 . . . . . . . 158,125
730,000 Canada (Government of)
6.500%, 8/01/99(d) . . . . . 557,125
330,000 Canada (Government of)
7.500%, 9/01/00(d) . . . . . 259,662
270,000 Canada (Government of)
7.000%, 9/01/01(d) . . . . . 209,406
950,000 Denmark (Kingdom of)
8.000%, 11/15/01(e) . . . . . 179,008
500,000 Ecuador (Republic of)
3.250%, 2/28/25 . . . . . . . 233,125
80,000 Germany (Federal Republic of)
8.250%, 9/20/01(f) . . . . . 59,522
260,000 Germany (Federal Republic of)
7.500%, 11/11/04(f) . . . . . 188,884
100,000 Ireland (Republic of)
6.250%, 4/01/99(g) . . . . . 170,395
120,000 Ireland (Republic of)
6.500%, 10/18/01(g) . . . . . 206,711
1,300,000 Morocco (Kingdom of)
4.375%, 1/01/09(k) . . . . . 1,073,313
500,000 Panama (Republic of)
3.500%, 7/17/14 . . . . . . . 346,250
</TABLE>
See accompanying notes to financial statements.
70
<PAGE>
NEW ENGLAND ZENITH FUND
(SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
BONDS & NOTES--(CONTINUED)
FACE
AMOUNT VALUE (A)
<C> <S> <C>
FOREIGN GOVERNMENT BONDS--(CONTINUED)
$ 216,000 Philippines (Republic of)
8.750% 10/07/16 . . . . . . . . . . $ 224,640
250,000 United Mexican States
6.250%, 12/31/19 . . . . . . . . . . 184,062
750,000 United Mexican States
6.250%, 12/31/19 . . . . . . . . . . 547,500
750,000 Venezuela (Republic of)
6.563%, 12/18/07 . . . . . . . . . . 637,500
-----------
7,530,447
-----------
U.S. GOVERNMENT BONDS--28.8%
500,000 Federal Home Loan Bank
6.490%, 9/08/97 . . . . . . . . . . 502,755
295,275 Federal Home Loan Mortgage
10.000%, 5/15/20 . . . . . . . . . . 314,831
500,000 Federal National Mortgage Association
7.000%, 12/01/99 . . . . . . . . . . 488,905
28,523 Federal National Mortgage Association
13.000%, 11/01/15 . . . . . . . . . 33,684
117,446 Federal National Mortgage Association
13.000%, 04/25/19 . . . . . . . . . 126,186
297,663 Federal National Mortgage Association
6.500%, 3/01/26 . . . . . . . . . . 284,176
146,928 Federal National Mortgage Association
7.000%, 5/01/26 . . . . . . . . . . 143,668
200,000 Government National Mortgage
Association 7.000%, 11/15/99 . . . . 195,624
23,326 Government National Mortgage
Association 7.000%, 4/15/24 . . . . 22,823
547,468 Government National Mortgage
Association 7.000%, 5/15/26 . . . . 535,664
2,000,000 United States Treasury Bonds
5.750%, 12/31/98 . . . . . . . . . . 1,995,500
150,000 United States Treasury Bonds
6.875%, 8/15/25 . . . . . . . . . . 152,922
140,000 United States Treasury Bonds
6.750%, 8/15/26 . . . . . . . . . . 141,243
90,000 United States Treasury Bonds
6.125%, 5/31/97 . . . . . . . . . . 90,272
1,870,000 United States Treasury Notes
5.625%, 2/28/01 . . . . . . . . . . 1,833,628
100,000 United States Treasury Notes
6.250%, 4/30/01 . . . . . . . . . . 100,289
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
$ 250,000 United States Treasury Notes
6.500%, 8/31/01 . . . . . . . . . . $ 252,867
750,000 United States Treasury Notes
6.125%, 12/31/01 . . . . . . . . . . 747,292
1,100,000 United States Treasury Notes
6.875%, 5/15/06 . . . . . . . . . . 1,133,935
1,200,000 United States Treasury Notes
6.500%, 10/15/06 . . . . . . . . . . 1,206,744
-----------
10,303,008
-----------
Total Bonds & Notes
(Identified Cost $32,283,175) . . . 33,085,332
-----------
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM INVESTMENT--20.1%
<S> <C> <C>
$7,187,000 Repurchase agreement with Merrill Lynch &
Co. dated 12/31/96 at 6.500% to be
repurchased at $7,189,595 on 1/2/97
collateralized by $5,735,000. U. S.
Treasury Bond 8.875% due 2/15/19 with a
value of $7,333,631 . . . . . . . . . . 7,187,000
-----------
Total Short-Term Investment
(Identified Cost $7,187,000) . . . . . . 7,187,000
-----------
Total Investments--112.5%
(Identified Cost $39,470,175)(b) . . . . 40,272,332
Other assets less liabilities(i) . . . . (4,464,681)
-----------
TOTAL NET ASSETS--100% . . . . . . . . . $35,807,651
===========
</TABLE>
See accompanying notes to financial statements.
71
<PAGE>
NEW ENGLAND ZENITH FUND
(SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
FORWARD CONTRACT OUTSTANDING AT DECEMBER 31, 1996
LOCAL AGGREGATE UNREALIZED
CURRENCY DELIVERY CURRENCY FACE TOTAL APPRECIATION/
CONTRACT DATE AMOUNT VALUE VALUE DEPRECIATION
<S> <C> <C> <C> <C> <C>
Australian Dollar
(sold) 01/22/97 38,653 $ 30,714 $ 30,536 $ (178)
Canadian Dollar (sold) 01/22/97 358,684 262,324 268,275 5,951
Canadian Dollar (sold) 01/22/97 292,121 213,642 219,640 5,998
Canadian Dollar (sold) 01/22/97 483,711 353,763 362,059 8,296
Canadian Dollar (sold) 01/22/97 297,222 217,374 219,352 1,978
Deutsche Mark (bought) 01/22/97 1,080,900 703,441 720,000 (16,559)
Deutsche Mark (bought) 01/22/97 284,369 185,065 189,529 (4,464)
Deutsche Mark (bought) 01/22/97 522,375 339,958 350,000 (10,042)
Deutsche Mark (bought) 01/22/97 693,074 451,047 462,049 (11,002)
Deutsche Mark (bought) 01/22/97 520,680 338,854 344,821 (5,967)
Deutsche Mark (bought) 01/22/97 225,907 147,017 145,221 1,796
Deutsche Mark (bought) 01/22/97 715,654 465,742 474,950 (9,208)
Deutsche Mark (sold) 01/22/97 2,477,588 1,612,395 1,615,116 2,721
Deutsche Mark (sold) 01/22/97 799,290 520,172 536,797 16,625
Deutsche Mark (sold) 01/22/97 520,422 338,687 348,808 10,121
Deutsche Mark (sold) 01/22/97 264,852 172,363 170,000 (2,363)
Deutsche Mark (sold) 01/22/97 92,986 60,515 59,837 (678)
Danish Krone (bought) 01/22/97 334,390 56,831 56,200 631
Danish Krone (sold) 01/22/97 1,364,953 231,979 234,649 2,670
Pound Sterling
(bought) 01/22/97 280,931 476,007 455,951 20,056
Pound Sterling
(bought) 01/22/97 166,943 282,867 275,790 7,077
Pound Sterling
(bought) 01/22/97 251,712 426,498 423,882 2,616
Pound Sterling
(bought) 01/22/97 146,286 247,867 241,226 6,641
Pound Sterling (sold) 01/22/97 276,963 469,284 442,587 (26,697)
Pound Sterling (sold) 01/22/97 289,739 490,931 474,950 (15,981)
Pound Sterling (sold) 01/22/97 250,245 424,014 414,156 (9,858)
Pound Sterling (sold) 01/22/97 252,445 427,741 414,534 (13,207)
New Zealand Dollar
(bought) 01/22/97 1,316,335 929,316 925,779 3,537
New Zealand Dollar
(sold) 01/22/97 1,316,335 929,316 929,431 115
--------
Total depreciation on Forward Currency contracts . . . . . . . . . . . $(29,375)
========
</TABLE>
(a) See Note 1A.
(b) Federal Tax Information:
At December 31, 1996 the net unrealized appreciation on investments based on
cost of $39,482,198 for federal income tax purposes was as follows:
<TABLE>
<CAPTION>
<S> <C>
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost . . . . $1,043,478
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value . . . . (253,344)
----------
Net unrealized appreciation . . . . . . . . . . . . . . . . $ 790,134
==========
</TABLE>
(c) Denominated in Australian dollars.
(d) Denominated in Canadian Dollars.
(e) Denominated in Danish Kroner.
(f) Denominated in German Marks.
(g) Denominated in Irish Pounds.
(h) Rights attached.
(i) Including deposits in foreign denominated currencies with a value of $54 and
a cost of $54.
(j) Step Bond; Coupon rate is zero or below market for an initial period and
then increases to a higher coupon rate at a specified date and rate.
(k) These securities represent loan participations which are arranged through
private negotiations between the Fund and a lender. Due to the nature of
these securities, they are typically purchased on a forward delivery basis
(Note 1), some of which remain unsettled, in whole or in part, at December
31, 1996.
See accompanying notes to financial statements.
72
<PAGE>
NEW ENGLAND ZENITH FUND
(SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES)
<TABLE>
<CAPTION>
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1996
ASSETS
<S> <C> <C>
Investments at value . . . . . . . . . . $40,272,332
Foreign cash at value (Cost $54) . . . . 54
Receivable for:
Fund shares sold . . . . . . . . . . . 93,719
Dividends and interest . . . . . . . . 546,979
Miscellaneous . . . . . . . . . . . . . 1,574
Unamortized organization expense . . . . 5,694
-----------
40,920,352
LIABILITIES
Payable for:
Securities purchased . . . . . . . . . $4,362,169
Loan participations purchased . . . . . 664,000
Open forward currency contracts--net . 29,375
Fund shares redeemed . . . . . . . . . 5,503
Due to custodian bank . . . . . . . . . 355
Accrued expenses:
Management fees . . . . . . . . . . . . 21,647
Deferred trustees' fees . . . . . . . . 270
Other expenses . . . . . . . . . . . . 29,382
----------
5,112,701
-----------
$35,807,651
===========
NET ASSETS
Net Assets consist of:
Capital paid in . . . . . . . . . . . . $35,037,908
Undistributed net investment income . . 18,251
Accumulated net realized loss . . . . . (21,203)
Unrealized appreciation on investments,
forward contracts and foreign
currency . . . . . . . . . . . . . . . 772,695
-----------
NET ASSETS . . . . . . . . . . . . . . . $35,807,651
===========
Computation of offering price:
Net asset value and redemption price per
share ($35,807,651 divided by 3,081,361
shares of beneficial interest) . . . . . $ 11.62
===========
Identified cost of investments . . . . . $39,470,175
===========
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
INVESTMENT INCOME
<S> <C> <C>
Dividends . . . . . . . . . . . . . . . . . $ 150
Interest . . . . . . . . . . . . . . . . . 1,729,474(a)
----------
1,729,624
EXPENSES
Management fees . . . . . . . . . . . . . . $130,094
Trustees' fees and expenses . . . . . . . . 10,121
Custodian . . . . . . . . . . . . . . . . . 61,710
Audit and tax services . . . . . . . . . . 13,000
Legal . . . . . . . . . . . . . . . . . . . 11,498
Printing . . . . . . . . . . . . . . . . . 4,280
Amortization of organization expenses . . . 2,013
Miscellaneous . . . . . . . . . . . . . . . 5,776
--------
Total expenses . . . . . . . . . . . . . 238,492
Less expenses assumed by the investment
adviser. . . . . . . . . . . . . . . . . (68,374) 170,118
-------- ----------
NET INVESTMENT INCOME . . . . . . . . . . . 1,559,506
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS, FORWARD CURRENCY CONTRACTS AND
FOREIGN CURRENCY TRANSACTIONS
Realized gain on:
Investments--net . . . . . . . . . . . . . 480,879
Foreign currency transactions--net . . . . 106,879
--------
Net realized gain on Investments and
foreign currency transactions . . . . . . 587,758
--------
Unrealized appreciation (depreciation) on:
Investments--net . . . . . . . . . . . . . 634,136
Foreign currency transactions--net . . . . (14,935)
--------
Net unrealized appreciation on investments
and foreign currency transactions . . . . 619,201
--------
Net gain on investment transactions . . . . 1,206,959
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS . $2,766,465
==========
</TABLE>
(a) Net of foreign taxes of: $178.
See accompanying notes to financial statements.
73
<PAGE>
NEW ENGLAND ZENITH FUND
(SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES)
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------ --------------
<S> <C> <C>
FROM OPERATIONS
Net investment income . . . . . . . . . . . . . $ 460,904 $ 1,559,506
Net realized gain on investments and foreign
currency transactions . . . . . . . . . . . . 248,441 587,758
Unrealized appreciation on investments and
foreign currency transactions . . . . . . . . 208,090 619,201
----------- -----------
Increase in net assets from operations . . . . 917,435 2,766,465
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income . . . . . . . . . . . . . (435,233) (1,704,472)
Net realized gain on investments . . . . . . . (170,001) (518,385)
----------- -----------
(605,234) (2,222,857)
----------- -----------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares . . . . . . . . . 9,873,846 29,554,662
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income . . . 435,233 1,704,472
Distributions from net realized gain . . . . . 170,001 518,385
----------- -----------
10,479,080 31,777,519
Cost of shares redeemed . . . . . . . . . . . . (4,757,322) (5,997,600)
----------- -----------
Increase in net assets derived from capital
share transactions . . . . . . . . . . . . . . 5,721,758 25,779,919
----------- -----------
Total increase in net assets . . . . . . . . . 6,033,959 26,323,527
NET ASSETS
Beginning of the year . . . . . . . . . . . . . 3,450,165 9,484,124
----------- -----------
End of the year . . . . . . . . . . . . . . . . $ 9,484,124 $35,807,651
=========== ===========
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the year . . . . . . . . . . . . . $ 0 $ 50,354
=========== ===========
End of the year . . . . . . . . . . . . . . . . $ 50,354 $ 18,251
=========== ===========
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares . . . . . . . . 919,222 2,532,646
Issued in connection with the reinvestment of:
Distributions from net investment income . . . 40,562 144,891
Distributions from net realized gain . . . . . 15,844 42,731
----------- -----------
975,628 2,720,268
Redeemed . . . . . . . . . . . . . . . . . . . (455,476) (513,384)
----------- -----------
Net change . . . . . . . . . . . . . . . . . . 520,152 2,206,884
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
OCTOBER 31, 1994(A)
THROUGH YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
------------------- ------------ --------------
<S> <C> <C> <C>
Net Asset Value, Beginning
of Period . . . . . . . . $10.00 $ 9.74 $ 10.85
------ ------ -------
Income From Investment
Operations
Net Investment Income . . 0.12 0.58 0.51
Net Realized and Unrealized
Gain (Loss) on
Investments . . . . . . . (0.26) 1.30 1.05
------ ------ -------
Total From Investment
Operations. . . . . . . . (0.14) 1.88 1.56
------ ------ -------
Less Distributions
Dividends From Net
Investment Income . . . . (0.12) (0.55) (0.60)
Distributions From Net
Realized Capital Gains . 0.00 (0.22) (0.19)
------ ------ -------
Total Distributions . . . (0.12) (0.77) (0.79)
------ ------ -------
Net Asset Value, End of
Period . . . . . . . . . . $ 9.74 $10.85 $ 11.62
====== ====== =======
TOTAL RETURN (%) . . . . . (1.40)(c) 19.38 14.36
Ratio of Operating Expenses
to Average Net Assets (%) 0.85 (b) 0.85 0.85
Ratio of Net Investment
Income to Average Net
Assets (%) . . . . . . . . 7.05 (b) 8.39 7.79
Portfolio Turnover Rate (%) 403 (b) 202 176
Net Assets, End of
Period (000) . . . . . . . $3,450 $9,484 $35,808
The ratios of expenses to
average net assets without
giving effect to the
voluntary expense agreement
described in Note 4 to the
Financial Statements would
have been (%) . . . . . . 2.01 (b) 2.44 1.19
</TABLE>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
See accompanying notes to financial statements.
74
<PAGE>
BACK BAY ADVISORS BOND INCOME SERIES
PORTFOLIO MANAGER: CATHY BUNTING
BACK BAY ADVISORS, L.P.
[PHOTO OF CATHY BUNTING]
Q. HOW DID THE BACK BAY ADVISORS BOND INCOME SERIES PERFORM IN 1996?
A. The Back Bay Advisors Bond Income Series continued to deliver consistently
strong results, despite the challenging conditions that pervaded bond markets.
Rising long-term interest rates early in 1996 along with weak bond market
returns stood in vivid contrast to the remarkable strength of bonds in 1995.
Concerned that robust economic growth might cause inflationary pressures to
escalate, bond investors pushed down fixed income prices and drove up yields. By
the second half of the year, slower yet steady economic growth, continued low
inflation and strong demand for U.S. government bonds from foreign investors
fostered better performance from bonds.
After a disappointing first half in 1996, the Series more than made up for lost
ground by the year's end. For the 12 months ended December 31, 1996, the Series
generated a total return of 4.61%. This return reflects the reinvestment of
$8.05 per share in income distributions paid during the year and a decline in
share price to $105.63 on December 31, 1996, from $108.67 a year ago. By
comparison, the Lipper Variable "A" Rated Bond Funds Average return was 2.61%
for the same period. The Series also outperformed the Lehman Brothers
Intermediate Government/ Corporate Index/6/, the Series' benchmark, which posted
a return of 4.05%.
Q. WHAT WAS BEHIND THE SERIES' STRONG PERFORMANCE?
A. An emphasis on corporate bonds--ranging between 60% to 70% of the
portfolio--worked well for the Series. When economic activity is strong, as was
the case last year, improving company fundamentals can help cushion price
declines of corporate bonds from rising interest rates. Supply and demand
relationships also worked to the advantage of the corporate sector.
Institutional investors kept demand at healthy levels, which helped support bond
prices even as interest rates rose and prices of government securities fell.
Government issues are particularly sensitive to changes in interest rates, in
part because they gain no additional benefit from improving credit
conditions--they already enjoy the distinction as the most creditworthy fixed
income instruments around.
Q. HOW DID YOU MANAGE THE SERIES DURING THE YEAR?
A. We took steps to make the most of mixed conditions in the bond markets. For
example, we focused on corporate bonds from select industries. We favored
fundamentally solid though undervalued corporate sectors. Careful credit
research played a critical role in enabling us to identify attractive issues in
areas such as utilities, oil and gas, and cable and media. Utility bonds, for
instance, benefited from a combination of technical factors, including low
levels of bond issuance and expanded debt repurchase programs, which tipped the
supply/demand balance toward higher bond prices. The sector's fundamentals also
were attractive, thanks to merger activity that improved the operating and
financial strength of formerly separate entities. We invested in utility bonds
that offered favorable price and yield characteristics, namely those with a
15-year maturity structure. These holdings contributed positively to the Series'
performance, as did energy investments. Severe winter weather across the country
significantly increased oil prices, providing a windfall for the energy industry
and price gains for the Series' holdings of Oryx Energy, Mitchell Energy, Pemex
and Transgas.
The cable/media sector, meanwhile, experienced setbacks. During the first half
of the year, Moody's--an independent bond rating agency--downgraded the credit
quality of Tele-Communications, Inc. to below investment grade. (Bonds rated BBB
and above are considered "investment grade.") This event raised concerns about
the industry's financial condition as a whole, taking a toll on the Series'
cable bond holdings. However, many companies, including Tele-Communications,
have begun programs to improve their financial position by reducing their debt
loads. We remain invested in cable bonds, believing that industry fundamentals
are essentially sound and that bond prices should recover.
Nearly 6.9% of the Series' assets were invested in the Canadian bond market.
Canada's lower inflation rates and moderate economic growth, compared to that of
the United States, enabled Canadian bonds to outperform their U.S. counterparts.
Further, the postponement of Quebec's Separatist referendum to 1998 improved
investor sentiment and attracted foreign investors, further buoying the market.
The Series' approach to duration worked both for and against it during the year.
Duration is measured in years, and is a more precise gauge than maturity of a
bond's sensitivity to interest rate changes. Essentially, the longer a bond's
duration, the more its price reacts to changes in interest rates--rising when
interest rates fall and declining when interest rates rise. The portfolio's
75
<PAGE>
average duration at the beginning of the period was relatively long--about six
years--which boosted the Series' current yield but hampered its price
performance when interest rates were rising. As market conditions improved,
however, the Series' longer duration enhanced its performance by capturing price
gains and offsetting losses sustained earlier in 1996.
During 1996, we selectively invested in lower-grade bonds. Given the strength of
the economy, taking a measure of credit risk was amply rewarded with higher
yields and additional price gains relative to higher-grade issues. Nevertheless,
the overall quality of the portfolio remains high at A.
Q. WHAT IS YOUR INVESTMENT OUTLOOK FOR THE MONTHS AHEAD?
A. Going forward, we believe the ingredients that foster positive bond market
performance--moderate economic growth, low inflation, and stable interest
rates--will remain in place. As always, thorough credit research continues to be
instrumental in helping us sort through opportunities in the bond markets. And,
we will closely monitor the investment landscape to help gauge the direction of
interest rates over the short term and adjust portfolio strategy to take
advantage of market changes.
[A CHART APPEARS HERE COMPARING A $10,000 INVESTMENT
IN THE SERIES COMPARED TO AN INDEX]
<TABLE>
<CAPTION>
Lehman
Bond Income Intermediate Cost of
Series Gov't/Corp. Living
<S> <C> <C> <C>
12/31/86 10000 10000 10000
1987 10143 10366 10443
1988 10992 11057 10905
1989 12343 12469 11412
1990 13341 13612 12109
1991 15737 15602 12480
1992 17025 16721 12842
1993 19171 18191 13195
1994 18527 17840 13548
1995 22454 20575 13891
1996 23489 21408 14353
</TABLE>
FUND FACTS
GOAL: A high level of current income consistent with the protection of capital
and moderate investment risk.
START DATE: August 26, 1983
SIZE: $180 million as of December 31, 1996
MANAGER: Cathy Bunting has managed the Series since 1989. She has also acted as
portfolio manager of New England Bond Income Fund since 1989. She joined Back
Bay Advisors in April 1987.
Performance numbers are net of all Series expenses but do not include any
insurance, sales or administrative charges of variable annuity or life insurance
contracts. If these charges were included, the returns shown would be lower.
This information represents past performance and is not indicative of future
results. Investment return and principal value will fluctuate so that shares,
upon redemption, may be worth more or less than the original cost.
76
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS BOND INCOME SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
BONDS AND NOTES--91.9% OF TOTAL NET ASSETS
FACE
AMOUNT VALUE (A)
<C> <S> <C>
BROADCASTING--5.5%
$ 2,050,000 Cablevision Industrial Corp.,
9.250%, 4/01/08 . . . . . . . . . . . $ 2,190,938
4,520,000 Continental Cablevision, Inc.,
11.000%, 6/01/07 . . . . . . . . . . . 5,149,772
2,300,000 Continental Cablevision, Inc.,
9.500%, 8/01/13 . . . . . . . . . . . 2,641,665
------------
9,982,375
------------
FEDERAL AGENCIES--10.2%
42,105 Federal Home Loan Bank,
9.000%, 5/01/01 . . . . . . . . . . . 43,816
16,084 Federal Home Loan Bank,
9.000%, 9/01/01 . . . . . . . . . . . 16,737
1,500,000 Federal National Mortgage Association,
7.850%, 9/10/04 . . . . . . . . . . . 1,521,375
7,948,949 Government National Mortgage
Association, 7.000% with various
maturities to 2025 . . . . . . . . . . 7,777,570
6,552,031 Government National Mortgage
Association, 7.500% with various
maturities to 2025 . . . . . . . . . . 6,558,190
2,013,581 Government National Mortgage
Association, 8.5000% with various
maturities to 2022 . . . . . . . . . . 2,087,197
242,199 Government National Mortgage
Association, 9.000%, 10/15/16 . . . . 255,217
------------
18,260,102
------------
FINANCIAL--9.9%
2,500,000 American General Financing,
8.450%, 10/15/09 . . . . . . . . . . . 2,795,625
5,160,000 Associates Corporation of North America,
8.550%, 7/15/09 . . . . . . . . . . . 5,819,706
3,000,000 Intermediate American Development Bank,
6.950%, 8/01/26 . . . . . . . . . . . 3,101,340
1,800,000 Pitney Bowes Credit Corp.,
8.550%, 9/15/09 . . . . . . . . . . . 2,049,786
3,750,000 Toronto Dominion Bank,
7.875%, 8/15/04 . . . . . . . . . . . 3,873,300
------------
17,639,757
------------
FOREIGN--6.9%
4,500,000 British Columbia Province,
7.750%, 6/16/03(c) . . . . . . . . . . 3,567,301
6,500,000 Government of Canada,
8.000%, 6/01/23(c) . . . . . . . . . . 5,276,236
15,000,000 Ontario Hydro,
Zero Coupon, 11/27/20(c) . . . . . . . 1,818,447
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
$16,050,000 Ontario Hydro,
Zero Coupon, 8/06/21(c) . . . . . . . $ 1,846,108
------------
12,508,092
------------
LEISURE--2.7%
4,500,000 Time Warner, Inc.
9.150%, 2/01/23 . . . . . . . . . . . 4,889,700
------------
OIL AND GAS--2.7%
2,400,000 Gulf Canada Resources, Ltd.,
9.000%, 8/15/99 . . . . . . . . . . . 2,526,000
2,250,000 Mitchell Energy & Development Corp.,
9.250%, 1/15/02 . . . . . . . . . . . 2,430,743
------------
4,956,743
------------
PUBLISHING--2.6%
2,150,000 Golden Books Publishing, Inc.,
7.650%, 9/15/02 . . . . . . . . . . . 1,945,750
1,500,000 News America Holdings, Inc.,
7.750%, 2/01/24 . . . . . . . . . . . 1,434,705
1,300,000 News America Holdings, Inc.,
8.250%, 8/10/18 . . . . . . . . . . . 1,327,599
------------
4,708,054
------------
TELECOMMUNICATIONS--11.5%
2,600,000 360 Communications,
7.125%, 3/01/03 . . . . . . . . . . . 2,567,318
7,300,000 AT&T Corp.,
8.350%, 1/15/25 . . . . . . . . . . . 7,702,303
3,000,000 Bellsouth Telecomm, Inc.,
5.850%, 11/15/45 . . . . . . . . . . . 2,964,180
2,935,000 Tele-Communications, Inc.,
9.250%, 1/15/03 . . . . . . . . . . . 2,920,530
1,500,000 Tele-Communications, Inc.,
9.800%, 2/01/12 . . . . . . . . . . . 1,622,385
3,000,000 Total Access Communication,
8.375%, 11/04/06 . . . . . . . . . . . 3,018,330
------------
20,795,046
------------
U.S. GOVERNMENT--14.9%
10,000,000 U.S. Treasury Notes,
5.750%, 8/15/03 . . . . . . . . . . . 9,705,201
1,500,000 U.S. Treasury Notes,
6.375%, 7/15/99 . . . . . . . . . . . 1,515,105
2,500,000 U.S. Treasury Notes,
6.500%, 8/15/05 . . . . . . . . . . . 2,516,125
6,500,000 U.S. Treasury Notes,
6.875%, 7/30/99 . . . . . . . . . . . 6,635,200
3,500,000 U.S. Treasury Notes,
8.000%, 5/15/01 . . . . . . . . . . . 3,741,640
2,500,000 U.S. Treasury Notes,
8.500%, 11/15/00 . . . . . . . . . . . 2,701,950
------------
26,815,221
------------
</TABLE>
See accompanying notes to financial statements.
77
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS BOND INCOME SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
BONDS AND NOTES--(CONTINUED)
FACE
AMOUNT VALUE (A)
<C> <S> <C>
UTILITIES--(DIVERSIFIED)--8.5%
$ 5,000,000 Long Island Lighting Co.,
9.000%, 11/01/22 . . . . . . . . $ 5,296,900
625,000 New York State Electric & Gas Co.,
9.875%, 2/01/20 . . . . . . . . . 626,681
4,250,000 New York State Electric & Gas Co.,
8.875%, 11/01/21 . . . . . . . . 4,485,832
5,000,000 Tennessee Valley Authority,
6.125%, 7/15/03 . . . . . . . . . 4,862,700
------------
15,272,113
------------
UTILITIES--(ELECTRIC)--7.8%
6,700,000 Arizona Public Service Co.,
8.000%, 12/30/15 . . . . . . . . 6,879,359
3,000,000 New Mexico Public Service Corp.,
10.250%, 10/01/12 . . . . . . . . 3,371,250
1,000,000 Ohio Edison Corp.,
8.680%, 6/01/17 . . . . . . . . . 992,030
1,700,000 Texas Utilities Electric Co.,
8.875%, 2/01/22 . . . . . . . . . 1,832,549
1,100,000 Toledo Edison Co.,
7.875%, 8/01/04 . . . . . . . . . 1,089,748
------------
14,164,936
------------
YANKEE--8.7%
900,000 British Columbia Hydro & Power,
12.500%, 9/01/13 . . . . . . . . 1,020,600
1,000,000 British Columbia Hydro & Power,
12.500%, 1/15/14 . . . . . . . . 1,152,720
2,000,000 Hydro Quebec,
8.050%, 7/07/24 . . . . . . . . . 2,196,380
5,400,000 Petroleos Mexicanos,
8.625%, 12/01/23 . . . . . . . . 4,428,000
2,000,000 Province of Quebec,
8.625%, 12/01/26 . . . . . . . . 2,234,540
1,700,000 Republic of Colombia,
8.660%, 10/07/16 . . . . . . . . 1,801,352
2,700,000 Transgas de Occidente SA,
9.790%, 11/01/10 . . . . . . . . 2,862,000
------------
15,695,592
------------
Total Bonds and Notes
(Identified Cost $164,803,203) . 165,687,731
------------
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM INVESTMENT--6.3%
FACE
AMOUNT VALUE (A)
<C> <S> <C>
COMMERCIAL PAPER---6.3%
$11,320,000 Household Finance Corp.
6.250%, 1/02/97 . . . . . . . . . $ 11,318,035
------------
Total Short-Term Investment
(Identified Cost $11,318,035) . . 11,318,035
------------
Total Investments--98.2%
(Identified Cost
$176,121,238)(b) . . . . . . . . 177,005,766
Other assets less liabilities(e) . 3,353,190
------------
TOTAL NET ASSETS--100% . . . . . . $180,358,956
============
</TABLE>
(a) See Note 1A.
(b) Federal Tax Information:
At December 31, 1996 the net unrealized appreciation on investments based on
cost of $176,234,143 for federal income tax purposed was as follows:
<TABLE>
<CAPTION>
<C> <S> <C>
Aggregate gross unrealized appreciation for
all investments in which there is an excess
of value over tax cost . . . . . . . . . . $ 2,646,350
Aggregate gross unrealized depreciation for
all investments in which there is an excess
of tax cost over value . . . . . . . . . . (1,874,727)
-----------
Net unrealized appreciation . . . . . . . . $ 771,623
===========
</TABLE>
(c) Denominated in Canadian dollars.
(d) Including deposits in foreign denominated currency with a value of $274
and a cost of $275.
See accompanying notes to financial statements.
78
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS BOND INCOME SERIES)
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1996
ASSETS
Investments at value . . . . . . . . . . $177,005,766
Cash . . . . . . . . . . . . . . . . . . 3,991
Foreign cash at value (Cost $275) . . . . 274
Receivable for:
Fund shares sold . . . . . . . . . . . . 331,818
Accrued interest . . . . . . . . . . . . 3,304,914
------------
180,646,763
LIABILITIES
Payable for:
Fund shares redeemed . . . . . . . . . . $155,160
Miscellaneous . . . . . . . . . . . . . 27,647
Accrued expenses:
Management fees . . . . . . . . . . . . 60,640
Deferred trustees' fees . . . . . . . . 36,363
Other expenses . . . . . . . . . . . . . 7,997
--------
287,807
------------
$180,358,956
============
NET ASSETS
Net Assets consist of:
Capital paid in . . . . . . . . . . . . $178,899,513
Undistributed net investment income . . 146,994
Accumulated net realized gains . . . . . 428,101
Unrealized appreciation on investments
and foreign currency . . . . . . . . . 884,348
------------
NET ASSETS . . . . . . . . . . . . . . . . $180,358,956
============
Computation of offering price:
Net asset value and redemption price per
share ($180,358,956 divided by 1,707,523
shares of beneficial interest) . . . . . $ 105.63
============
Identified cost of investments . . . . . . $176,121,238
============
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . $13,045,963
-----------
13,045,963
EXPENSES
Management fees . . . . . . . . . . . $ 672,348
Trustees' fees and expenses . . . . . 27,049
Custodian . . . . . . . . . . . . . . 75,732
Audit and tax services . . . . . . . . 17,000
Legal . . . . . . . . . . . . . . . . 11,564
Printing . . . . . . . . . . . . . . . 66,987
Miscellaneous . . . . . . . . . . . . 6,125
-----------
Total expenses . . . . . . . . . . . 876,805
-----------
NET INVESTMENT INCOME . . . . . . . . . 12,169,158
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCY
TRANSACTIONS
Realized gain on:
Investments--net . . . . . . . . . . 1,392,369
Foreign currency transactions--net . 42,011
-----------
Net realized gain on investments and
foreign currency transactions . . . 1,434,380
-----------
Unrealized appreciation (depreciation)
on:
Investments--net . . . . . . . . . . (5,669,661)
Foreign currency transactions--net . 280
-----------
Net unrealized depreciation on
investments and foreign currency
transactions . . . . . . . . . . . . (5,669,381)
-----------
Net loss on investment transactions . . (4,235,001)
-----------
NET INCREASE IN NET ASSETS FROM
OPERATIONS . . . . . . . . . . . . . . $ 7,934,157
===========
</TABLE>
See accompanying notes to financial statements.
79
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS BOND INCOME SERIES)
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------- ---------------
<S> <C> <C>
FROM OPERATIONS
Net investment income . . . . . . . . . . . . $ 10,335,393 $ 12,169,158
Net realized gain on investments and foreign
currency transactions . . . . . . . . . . . 1,559,812 1,434,380
Unrealized appreciation (depreciation) on
investments and foreign currency
transactions . . . . . . . . . . . . . . . . 15,392,179 (5,669,381)
------------ ------------
INCREASE IN NET ASSETS FROM OPERATIONS . . . 27,287,384 7,934,157
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income . . . . . . . . . . . . (9,888,438) (12,191,823)
Net realized gain on investments . . . . . . 0 (496,515)
------------ ------------
(9,888,438) (12,688,338)
------------ ------------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares . . . . . . . . 46,886,957 53,162,089
Net asset value of shares issued in
connection with the reinvestment of:
Distributions from net investment income . . 9,888,437 12,191,823
Distributions from net realized gain . . . . 0 496,515
------------ ------------
56,775,394 65,850,427
Cost of shares redeemed . . . . . . . . . . . (37,696,007) (43,449,240)
------------ ------------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL
SHARE TRANSACTIONS . . . . . . . . . . . . . 19,079,387 22,401,187
------------ ------------
TOTAL INCREASE IN NET ASSETS . . . . . . . . 36,478,333 17,647,006
NET ASSETS
Beginning of the year . . . . . . . . . . . . 126,233,617 162,711,950
------------ ------------
End of the year . . . . . . . . . . . . . . . $162,711,950 $180,358,956
============ ============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the year . . . . . . . . . . . . $ 0 $ 53,292
============ ============
End of the year . . . . . . . . . . . . . . . $ 53,292 $ 146,994
============ ============
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares . . . . . . . 440,564 491,882
Issued in connection with the reinvestment of:
Distributions from net investment income . . 91,832 114,880
Distributions from net realized gain . . . . 0 4,700
------------ ------------
532,396 611,462
Redeemed . . . . . . . . . . . . . . . . . . (356,518) (401,180)
------------ ------------
Net change . . . . . . . . . . . . . . . . . 175,878 210,282
============ ============
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1992 1993 1994 1995 1996
-------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year . . $103.44 $ 103.47 $ 106.14 $ 95.53 $ 108.67
------- -------- -------- -------- --------
Income From Investment
Operations
Net Investment
Income . . . . . . . 7.96 5.70 7.05 7.34 7.72
Net Realized and
Unrealized Gain
(Loss) on
Investments . . . . 0.51 7.38 (10.61) 12.85 (2.70)
------- -------- -------- -------- --------
Total From Investment
Operations . . . . . 8.47 13.08 (3.56) 20.19 5.02
------- -------- -------- -------- --------
Less Distributions
Dividends From Net
Investment Income . (6.87) (6.20) (7.05) (7.05) (7.74)
Distributions in
Excess of Net
Investment Income . 0.00 (0.05) 0.00 0.00 0.00
Distributions From Net
Realized Capital
Gains. . . . . . . . (1.57) (4.16) 0.00 0.00 (0.32)
------- -------- -------- -------- --------
Total Distributions . (8.44) (10.41) (7.05) (7.05) (8.06)
------- -------- -------- -------- --------
Net Asset Value, End of
Year. . . . . . . . . $103.47 $ 106.14 $ 95.53 $ 108.67 $ 105.63
======= ======== ======== ======== ========
TOTAL RETURN (%) . . . 8.18 12.61 (3.36) 21.20 4.61
Ratio of Operating
Expenses to Average
Net Assets (%) . . . 0.44 0.43 0.44 0.55 0.52
Ratio of Net Investment
Income to Average Net
Assets (%) . . . . . 7.70 6.47 6.75 7.22 7.22
Portfolio Turnover
Rate (%) . . . . . . 71 177 82 73 98
Net Assets, End of
Year (000) . . . . . $83,057 $131,242 $126,234 $162,712 $180,359
</TABLE>
As of January 1, 1993, the Bond Income Series discontinued the use of
equalization accounting.
See accompanying notes to financial statements.
80
<PAGE>
SALOMON BROTHERS U.S. GOVERNMENT SECURITIES
PORTFOLIO MANAGERS: STEVEN GUTERMAN AND ROGER LAVAN
SALOMON BROTHERS ASSET MANAGEMENT INC
[PHOTOS OF STEVEN GUTERMAN & ROGER LAVAN]
Q. HOW DID THE SERIES PERFORM IN 1996?
A. For the year ended December 31, 1996, the Series posted a 3.31% return versus
a 4.06% return for the Lehman Intermediate Government Index/5/. In general, the
performance of the U.S. government bond market and the Salomon Brothers U.S.
Government Securities Series was hindered by the dramatic rise in interest rates
during the first half of 1996. Although a rally occurred in the fourth quarter
as inflation remained in check while economic indicators signaled moderate
growth, it was not enough to overcome the dramatic rise in rates during the
first half of 1996.
Q. HOW DID YOU MANAGE THE SERIES IN 1996?
A. For most of the year, the Series maintained a neutral duration strategy in
anticipation of higher yields. This defensive strategy posture was taken in
response to reports of stronger economic growth (e.g. strong job growth and
increases in consumption and housing activity). Market participants also focused
on stronger than expected rises in average hourly earnings which led to concerns
that inflationary pressures could develop and influence the Federal Reserve to
hike short term rates.
The Series also had an overweight allocation to the mortgage pass-through sector
versus its benchmark. Mortgage pass-through securities performed strongly in
1996 as higher interest rates reduced the incentive for homeowners to refinance
their mortgages.
During the fourth quarter, the Series extended its duration to about 4.25 years
as inflation threats subsided and it became clear that Federal Reserve policy
was on hold. At year-end, the Series' assets were allocated as follows: U.S.
Treasuries 30%, U.S. Agency debentures 7%, mortgage pass-throughs 62% and
short-term investments 1%.
Q. WHAT IS YOUR INVESTMENT OUTLOOK FOR THE MONTHS AHEAD?
A. Bonds are likely to experience volatility early in 1997 as investors sort out
the implications of stronger growth. We do not expect Fed action in the first
several months of 1997. Given our optimistic view of inflation, we believe
interest rates will move modestly lower during the year.
[A CHART APPEARS HERE COMPARING A $10,000
INVESTMENT IN THE SERIES VERSUS AN INDEX]
<TABLE>
<CAPTION>
US Gov't Lehman Intermediate
Series Government
<S> <C> <C>
10/31/94 10000 10000
1994 10060 9989
1995 11571 11430
1996 11955 11894
</TABLE>
FUND FACTS
GOAL: A high level of current income consistent with the preservation of
capital and maintenance of liquidity.
START DATE: October 31, 1994
SIZE: $13 million as of December 31, 1996
MANAGERS: Steven Guterman and Roger Lavan have managed the Series since its
inception in October of 1994. Mr. Guterman and Mr. Lavan have also managed the
Salomon Brothers Investment Series--U.S. Government Income Fund since March
1995 and the North American U.S. Government Securities Fund since January 1992.
They both joined Salomon Brothers Asset Management Inc in 1990.
Performance numbers are net of all Series expenses but do not include any
insurance, sales or administrative charges of variable annuity or life insurance
contracts. If these charges were included, the returns shown would be lower.
This information represents past performance and is not indicative of future
results. Investment return and principal value will fluctuate so that shares,
upon redemption, may be worth more or less than the original cost.
81
<PAGE>
NEW ENGLAND ZENITH FUND
(SALOMON BROTHERS U.S. GOVERNMENT SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
BONDS & NOTES--92.7% OF TOTAL NET ASSETS
FACE
AMOUNT VALUE (A)
<C> <S> <C>
FEDERAL AGENCY--71.6%
$ 250,000 Federal Home Loan Banks
6.490%, 9/08/97 . . . . . . . . . . . $ 251,377
300,000 Federal Home Loan Banks
5.940%, 6/13/00 . . . . . . . . . . . 297,231
22,355 Federal Home Loan Mortgage
6.000%, 10/01/10 . . . . . . . . . . . 21,537
412,932 Federal Home Loan Mortgage
7.000%, 7/01/11 . . . . . . . . . . . 413,060
72,265 Federal Home Loan Mortgage
11.750%, 1/01/12 . . . . . . . . . . . 81,795
46,446 Federal Home Loan Mortgage
11.750%, 12/01/13 . . . . . . . . . . 52,571
447,285 Federal Home Loan Mortgage
8.250%, 4/01/17 . . . . . . . . . . . 465,176
1,000,000 Federal Home Loan Mortgage
6.500%, 1/01/99 . . . . . . . . . . . 955,930
1,835,342 Federal National Mortgage Association
6.500%, 12/01/10 . . . . . . . . . . . 1,802,654
40,089 Federal National Mortgage Association
14.500%, 11/01/14 . . . . . . . . . . 49,447
19,584 Federal National Mortgage Association
12.500%, 8/01/15 . . . . . . . . . . . 22,870
92,292 Federal National Mortgage Association
12.500%, 9/01/15 . . . . . . . . . . . 108,184
93,718 Federal National Mortgage Association
13.000%, 11/01/15 . . . . . . . . . . 110,675
48,599 Federal National Mortgage Association
12.000%, 1/01/16 . . . . . . . . . . . 56,177
30,326 Federal National Mortgage Association
11.500%, 9/01/19 . . . . . . . . . . . 34,486
99,536 Federal National Mortgage Association
11.500%, 2/01/20 . . . . . . . . . . . 112,601
440,611 Federal National Mortgage Association
6.500%, 3/01/26 . . . . . . . . . . . 420,783
450,000 Federal National Mortgage Association
Pool TBA 7.000%, 12/01/2099 . . . . . 440,014
291,904 Government National Mortgage Association
TBA 9.000%, 12/15/16 . . . . . . . . . 309,555
28,366 Government National Mortgage Association
TBA 7.000%, 4/15/24 . . . . . . . . . 27,755
38,430 Government National Mortgage Association
TBA 7.000%, 3/15/26 . . . . . . . . . 37,601
2,104,732 Government National Mortgage Association
TBA 7.000%, 5/15/26 . . . . . . . . . 2,059,357
350,000 Government National Mortgage Association
TBA 7.000%, 12/15/2099 . . . . . . . . 341,908
300,000 Student Loan Marketing Association
7.500%, 3/08/00 . . . . . . . . . . . 311,157
----------
8,783,901
----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
U.S. TREASURY--21.1%
$ 500,000 U.S. Treasury Notes 6.125%, 5/31/97 $ 501,510
1,000,000 U.S. Treasury Notes
5.750%, 12/31/98 . . . . . . . . . 997,750
500,000 U.S. Treasury Notes 5.625%, 2/28/01 490,275
200,000 U.S. Treasury Notes 6.500%, 5/31/01 202,348
270,000 U.S. Treasury Notes 6.625%, 7/31/01 274,388
100,000 U.S. Treasury Notes 6.875%, 5/15/06 103,085
100,000 U.S. Treasury Notes 7.000%, 7/15/06 103,940
1,260,000 U.S. Treasury Notes
6.500%, 10/15/06 . . . . . . . . . 1,267,081
-----------
3,940,377
-----------
Total Bonds & Notes
(Identified Cost $12,744,814) . . 12,724,278
===========
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM INVESTMENT--23.2%
<C> <S> <C>
3,120,000 Repurchase Agreement with Merrill Lynch
dated 12/31/96 at 6.500% to be
repurchased at $3,121,127 on 1/02/97
collateralized by $2,490,000 U.S.
Treasury Bonds 8.875% due 2/15/19 with
a value of $3,184,088 . . . . . . . . 3,120,000
-----------
Total Short-Term Investment
(Identified Cost $3,120,000) . . . . . 3,120,000
-----------
Total Investments--115.9%
(Identified Cost $15,864,814)(b) . . . 15,844,278
Liabilities . . . . . . . . . . . . . . (2,633,614)
-----------
TOTAL NET ASSETS--100% . . . . . . . . $13,210,664
===========
</TABLE>
(a) See Note 1a.
(b) Federal Tax Information: At December 31, 1996 the net unrealized
depreciation on investments based on cost of $15,866,361 for federal income
tax purposes was as follows:
<TABLE>
<CAPTION>
<C> <S> <C>
Aggregate gross unrealized appreciation for
all investments in which there is an excess
of value over tax cost . . . . . . . . . . $ 45,984
Aggregate gross unrealized depreciation for
all investments in which there is an excess
of tax cost over value . . . . . . . . . . (68,067)
--------
Net unrealized depreciation . . . . . . . . $(22,083)
========
</TABLE>
See accompanying notes to financial statements.
82
<PAGE>
NEW ENGLAND ZENITH FUND
(SALOMON BROTHERS U.S. GOVERNMENT SERIES)
<TABLE>
<CAPTION>
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1996
ASSETS
<S> <C> <C>
Investments at value . . . . . . . . . $15,844,278
Cash . . . . . . . . . . . . . . . . . 796
Receivable for:
Fund shares sold . . . . . . . . . . . 65,804
Accrued interest . . . . . . . . . . . 101,198
Due from advisor . . . . . . . . . . . 6,102
Unamortized organization . . . . . . . 5,694
-----------
16,023,872
LIABILITIES
Payable for:
Securities purchased . . . . . . . . . $2,757,054
Fund shares redeemed . . . . . . . . . 28,921
Accrued expenses:
Management fees . . . . . . . . . . . 2,465
Deferred trustees' fees . . . . . . . 267
Other expenses . . . . . . . . . . . . 24,501
----------
2,813,208
-----------
$13,210,664
===========
NET ASSETS
Net Assets consist of:
Capital paid in . . . . . . . . . . . $13,203,810
Undistributed net investment income . 6,776
Accumulated net realized gains . . . . 20,614
Unrealized depreciation on
investments . . . . . . . . . . . . . (20,536)
-----------
NET ASSETS . . . . . . . . . . . . . . . $13,210,664
===========
Computation of offering price:
Net asset value and redemption price per
share ($13,210,664 divided by 1,219,959
shares of beneficial interest) . . . . $ 10.83
===========
Identified cost of investments . . . . . $15,864,814
===========
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
INVESTMENT INCOME
<S> <C> <C>
Interest . . . . . . . . . . . . . . . . $ 740,123
---------
740,123
EXPENSES
Management fees . . . . . . . . . . . . . $ 59,626
Trustees' fees and expenses . . . . . . . 10,057
Custodian . . . . . . . . . . . . . . . . 44,258
Audit and tax services . . . . . . . . . 13,000
Legal . . . . . . . . . . . . . . . . . . 11,495
Printing . . . . . . . . . . . . . . . . 2,423
Amortization of organization expenses . . 2,013
Miscellaneous . . . . . . . . . . . . . . 5,424
--------
Total expenses . . . . . . . . . . . . 148,296
Less expenses assumed by the investment
adviser . . . . . . . . . . . . . . . (72,404) 75,892
-------- ---------
NET INVESTMENT INCOME . . . . . . . . . . 664,231
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Realized gain on:
Investments--net . . . . . . . . . . . . 1,275
Unrealized depreciation on:
Investments--net . . . . . . . . . . . . (214,900)
---------
Net loss on investment transactions . . . (213,625)
---------
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 450,606
=========
</TABLE>
See accompanying notes to financial statements.
83
<PAGE>
NEW ENGLAND ZENITH FUND
(SALOMON BROTHERS U.S. GOVERNMENT SERIES)
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------ --------------
<S> <C> <C>
FROM OPERATIONS
Net investment income . . . . . . . . . . . . . $ 214,389 $ 664,231
Net realized gain on investments . . . . . . . 71,273 1,275
Unrealized appreciation (depreciation) on
investments. . . . . . . . . . . . . . . . . . 195,460 (214,900)
----------- -----------
INCREASE IN NET ASSETS FROM OPERATIONS . . . . 481,122 450,606
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income . . . . . . . . . . . . . (214,389) (639,626)
In excess of net investment income . . . . . . (1,001) 0
Net realized gain on investments . . . . . . . (50,946) (16,259)
----------- -----------
(266,336) (655,885)
----------- -----------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares . . . . . . . . . 7,348,256 9,363,646
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income . . . 215,390 639,626
Distributions from net realized gain . . . . . 50,946 16,259
----------- -----------
7,614,592 10,019,531
Cost of shares redeemed . . . . . . . . . . . . (2,299,033) (4,145,624)
----------- -----------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL
SHARE TRANSACTIONS . . . . . . . . . . . . . . 5,315,559 5,873,907
----------- -----------
TOTAL INCREASE IN NET ASSETS . . . . . . . . . 5,530,345 5,668,628
NET ASSETS
Beginning of the year . . . . . . . . . . . . . 2,011,691 7,542,036
----------- -----------
End of the year . . . . . . . . . . . . . . . . $ 7,542,036 $13,210,664
=========== ===========
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the year . . . . . . . . . . . . . $ 0 $ 735
=========== ===========
End of the year . . . . . . . . . . . . . . . . $ 735 $ 6,776
=========== ===========
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares . . . . . . . . 671,863 852,094
Issued in connection with the reinvestment of:
Distributions from net investment income . . . 19,652 58,698
Distributions from net realized gain . . . . . 4,648 0
----------- -----------
696,163 910,792
Redeemed . . . . . . . . . . . . . . . . . . . . (214,709) (374,295)
----------- -----------
Net change . . . . . . . . . . . . . . . . . . . 481,454 536,497
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
OCTOBER 31, 1994 (A)
THROUGH YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
-------------------- ------------ --------------
<S> <C> <C> <C>
Net Asset Value, Beginning
of Period . . . . . . . . $10.00 $ 9.96 $ 11.04
------ ------ -------
Income From Investment
Operations
Net Investment Income . . 0.10 0.33 0.58
Net Realized and
Unrealized Gain (Loss) on
Investments. . . . . . . (0.04) 1.16 (0.21)
------ ------ -------
Total From Investment
Operations . . . . . . . 0.06 1.49 0.37
------ ------ -------
Less Distributions
Dividends From Net
Investment Income . . . (0.10) (0.33) (0.56)
Distributions From Net
Realized Capital Gains . 0.00 (0.08) (0.02)
------ ------ -------
Total Distributions . . . (0.10) (0.41) (0.58)
------ ------ -------
Net Asset Value, End of
Period. . . . . . . . . . $ 9.96 $11.04 $ 10.83
====== ====== =======
TOTAL RETURN (%) . . . . . 0.60(c) 15.02 3.31
Ratio of Operating Expenses
to Average Net Assets (%) 0.70(b) 0.70 0.70
Ratio of Net Investment
Income to Average Net
Assets (%) . . . . . . . 5.70(b) 5.62 6.13
Portfolio Turnover
Rate (%) . . . . . . . . 1,409(b) 415 388
Net Assets, End of
Period (000) . . . . . . $2,012 $7,542 $13,211
The ratios of expenses to
average net assets without
giving effect to the
voluntary expense
agreement described in
Note 4 to the Financial
Statements would have
been (%) . . . . . . . . 2.54(b) 2.90 1.37
</TABLE>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
See accompanying notes to financial statements.
84
<PAGE>
BACK BAY ADVISORS MONEY MARKET SERIES*
PORTFOLIO MANAGER: JOHN DONOVAN
BACK BAY ADVISORS, L.P.
[PHOTO OF JOHN DONOVAN]
Q. HOW DID BACK BAY ADVISORS MONEY MARKET SERIES PERFORM DURING 1996?
A. The Series continued to provide shareholders a stable cash reserve,
maintaining a constant share price of $100 while delivering competitive money
market yields. As was the case in the first half of the year, short-term
interest rates remained volatile as the markets debated the strength of the
economy and the outlook for inflation. Although short rates ended the year
moderately below their early July highs, the Series' dividend distributions
remained fairly stable throughout the period. For the fiscal year ended December
31, 1996, the Money Market Series had a total return of 5.11%. This compares
favorably to the Lipper Variable Money Market Fund average of 4.97%
Q. HOW DID YOU MANAGE THE SERIES DURING THE PERIOD?
A. Although interest rates were volatile during the period, the actual indicator
of the direction of short-term interest rates--the overnight Federal Funds
level--remained unchanged. In this environment, we attempted to extend the
average days to maturity of the portfolio when interest rates rose and,
conversely, to shorten that figure when rates reversed their direction.
Q. WHAT IS YOUR INVESTMENT OUTLOOK FOR THE MONTHS AHEAD?
A. After a weak third quarter, Gross Domestic Product appears to have rebounded
significantly in the last three months of the year. Despite few signs of rising
inflation, fixed income investors continue to be concerned from time to time
about the economy overheating. At this juncture, however, we do not foresee a
significant sustained rise in short-term rates, and thus our recent investment
strategy remains in place.
FUND FACTS
GOAL: The highest possible level of current income
consistent with the preservation of capital.
START DATE: August 1, 1983
SIZE: $116 million as of December 31, 1996
MANAGER: John Donovan has served as portfolio
manager since 1995. Mr. Donovan joined Back Bay
Advisors in 1992.
This information represents past performance and is not indicative of future
results. Investment return and principal value will fluctuate so that shares,
upon redemption, may be worth more or less than the original cost.
* Money Market Funds are not insured or guaranteed by the U.S. Government. There
can be no assurance that the Series will maintain a stable net asset value of
$100.00 per share.
Performance numbers are net of all Series expenses but do not include any
insurance, sales or administrative charges of variable annuity or life insurance
contracts. If these charges were included, the returns shown would be lower.
85
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS MONEY MARKET SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
INVESTMENTS--98.8% OF TOTAL NET ASSETS
FACE INTEREST MATURITY
VALUE DESCRIPTION RATE DATE VALUE (A)
<C> <S> <C> <C> <C>
CERTIFICATES OF DEPOSIT--11.1%
$2,000,000 Sumitomo Bank, Ltd. . . . . . . 5.647% 01/13/97 $ 1,999,913
2,000,000 Societe Generale New York . . . 5.450% 02/10/97 1,999,996
3,000,000 Sumitomo Bank, Ltd. . . . . . . 5.580% 02/10/97 2,999,415
1,000,000 National Westminster Bank . . . 5.420% 02/24/97 1,000,028
1,000,000 Societe Generale New York . . . 5.650% 04/01/97 999,746
2,000,000 Morgan Guaranty Trust Co. . . . 5.900% 09/30/97 2,002,754
2,000,000 Deutsche Bank Finance, Inc. . . 5.690% 10/28/97 2,002,547
-----------
Total Certificates of Deposit
($13,004,399). . . . . . . . . 13,004,399
-----------
CERTIFICATE OF DEPOSIT--EURO
DOLLAR--0.9%
1,000,000 Toronto Dominion Bank . . . . . 5.170% 01/17/97 1,000,039
-----------
Total Certificate of
Deposit--Euro Dollar
($1,000,039) . . . . . . . . . 1,000,039
-----------
COMMERCIAL PAPER--86.8%
AUTOMOTIVE--8.2%
1,280,000 General Motors Acceptance Corp. 5.340% 01/17/97 1,276,962
2,500,000 Ford Motor Credit Corp. . . . . 5.310% 01/27/97 2,490,413
720,000 Ford Motor Credit Corp. . . . . 5.320% 01/30/97 716,914
3,345,000 General Motors Acceptance Corp. 5.470% 02/27/97 3,316,030
535,000 Ford Motor Credit Corp. . . . . 5.330% 05/07/97 525,020
1,295,000 Ford Motor Credit Corp. . . . . 5.260% 08/14/97 1,252,427
-----------
9,577,766
-----------
BANKING--15.6%
2,000,000 Banque National de Paris . . . 5.450% 01/09/97 1,997,578
1,500,000 Societe Gereral North America . 5.450% 01/22/97 1,495,231
3,035,000 Commerzbank U.S. Finance . . . 5.300% 01/31/97 3,021,595
1,055,000 Banque National de Paris . . . 5.420% 02/04/97 1,049,600
500,000 Banque National de Paris . . . 5.420% 02/18/97 496,387
2,000,000 Bank of Nova Scotia . . . . . . 5.340% 03/10/97 1,979,827
1,000,000 Banque National de Paris . . . 5.400% 03/13/97 989,350
1,700,000 Svenska Handelsbanken, Inc. . . 5.340% 03/26/97 1,678,818
2,000,000 ABN Amro North . . . . . . . . 5.430% 04/01/97 1,972,850
500,000 Banque National de Paris . . . 5.330% 05/06/97 490,747
2,000,000 First UN National Bank . . . . 5.890% 06/03/97 2,000,000
1,125,000 Commerzbank U.S. Finance . . . 5.300% 08/01/97 1,089,887
-----------
18,261,870
-----------
FINANCE--32.8%
3,000,000 International Lease Finance
Corp.. . . . . . . . . . . . . 5.320% 01/06/97 2,997,783
1,000,000 CIT Group Holdings, Inc. . . . 5.420% 01/10/97 998,645
910,000 Heller Financial, Inc. . . . . 5.370% 01/10/97 908,778
2,170,000 UBS Finance, Inc. . . . . . . . 5.400% 01/10/97 2,167,070
3,000,000 CIT Group Holdings, Inc. . . . 5.420% 01/14/97 2,994,128
230,000 Avco Financial Services, Inc. . 5.340% 01/15/97 229,522
660,000 Heller Financial, Inc. . . . . 5.440% 01/15/97 658,604
2,000,000 American General Corp. . . . . 5.100% 01/16/97 1,995,492
2,000,000 Household Finance Corp. . . . . 5.310% 01/21/97 1,994,100
750,000 Household Finance Corp. . . . . 5.530% 01/21/97 747,696
2,000,000 Beneficial Corp. . . . . . . . 5.320% 01/27/97 1,992,316
2,500,000 Heller Financial, Inc. . . . . 5.580% 01/28/97 2,489,537
2,000,000 Beneficial Corp. . . . . . . . 5.320% 01/29/97 1,991,724
1,325,000 American Express Credit Corp. . 5.300% 01/31/97 1,319,148
</TABLE>
See accompanying notes to financial statements.
86
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS MONEY MARKET SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
INVESTMENTS--(CONTINUED)
FACE INTEREST MATURITY
VALUE DESCRIPTION RATE DATE VALUE (A)
<C> <S> <C> <C> <C>
$3,000,000 Transamerica Finance
Group, Inc. . . . . . . . . . 5.300% 02/03/97 $ 2,985,425
2,000,000 Commercial Credit Co. . . . . . 5.470% 02/05/97 1,989,364
2,000,000 American Express Credit Corp. . 5.310% 02/13/97 1,987,315
1,000,000 General Electric Capital Corp. 5.600% 02/21/97 992,067
1,000,000 Heller Financial, Inc. . . . . 5.440% 02/28/97 991,236
500,000 General Electric Capital Corp. 5.620% 03/07/97 494,926
2,000,000 Avco Financial Services, Inc. . 5.480% 03/24/97 1,975,036
2,000,000 Household Finance Corp. . . . . 5.460% 05/22/97 2,000,000
1,500,000 General Electric Capital Corp. 5.360% 07/07/97 1,458,237
-----------
38,358,149
-----------
FOOD & TOBACCO--1.2%
1,355,000 Philip Morris Capital Corp. . . 6.150% 01/03/97 1,354,537
-----------
FORESTRY--1.5%
1,750,000 Weyerhauser MTG . . . . . . . . 5.300% 01/07/97 1,748,454
-----------
INSURANCE--5.4%
3,000,000 Prudential Funding Corp. . . . 6.000% 01/02/97 2,999,500
1,000,000 Prudential Funding Corp. . . . 5.350% 01/23/97 996,731
2,335,000 USAA Capital Corp. . . . . . . 5.300% 01/09/97 2,332,250
-----------
6,328,481
-----------
OIL & GAS--3.4%
3,000,000 BP America, Inc. . . . . . . . 6.750% 01/02/97 2,999,437
1,010,000 Michigan Consolidated Gas Co. . 5.580% 01/21/97 1,006,869
-----------
4,006,306
-----------
POLLUTION CONTROL--2.5%
1,000,000 WMX Technologies, Inc. . . . . 5.420% 01/24/97 996,537
500,000 WMX Technologies, Inc. . . . . 5.630% 02/04/97 497,341
500,000 WMX Technologies, Inc. . . . . 5.630% 03/04/97 495,152
1,000,000 WMX Technologies, Inc. . . . . 5.630% 04/18/97 983,266
-----------
2,972,296
-----------
RETAIL--3.5%
1,390,000 Sears Roebuck Acceptance Corp. 5.480% 01/29/97 1,384,076
315,000 Sears Roebuck Acceptance Corp. 5.400% 02/14/97 312,921
2,395,000 Sears Roebuck Acceptance Corp. 5.440% 02/14/97 2,379,076
-----------
4,076,073
-----------
SECURITIES--11.4%
2,000,000 Lehman Brothers, Inc. . . . . . 5.500% 01/13/97 1,996,333
1,700,000 Merrill Lynch & Co., Inc. . . . 5.400% 01/13/97 1,696,940
2,000,000 Lehman Brothers, Inc. . . . . . 5.500% 01/15/97 1,995,722
1,000,000 Goldman Sachs Group . . . . . . 5.430% 01/16/97 997,737
800,000 Merrill Lynch & Co., Inc. . . . 5.410% 01/17/97 798,076
390,000 Merrill Lynch & Co., Inc. . . . 5.330% 01/23/97 388,730
2,000,000 Merrill Lynch & Co., Inc. . . . 5.440% 01/24/97 1,993,049
1,500,000 Goldman Sachs Group . . . . . . 5.420% 02/06/97 1,491,870
2,000,000 Goldman Sachs Group . . . . . . 5.300% 04/21/97 1,967,611
-----------
13,326,068
-----------
</TABLE>
See accompanying notes to financial statements.
87
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS MONEY MARKET SERIES)
INVESTMENTS AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
INVESTMENTS--(CONTINUED)
FACE INTEREST MATURITY
VALUE DESCRIPTION RATE DATE VALUE (A)
<C> <S> <C> <C> <C>
GOVERNMENT AGENCIES--1.3%
$1,530,000 Canadian Wheat Board . . . . . 5.420% 03/19/97 $ 1,512,264
------------
Total Commercial Papers
(Cost $101,522,264) . . . . . 101,522,264
------------
Total Investments--98.8%
(Cost $115,526,702) (b) . . . 115,526,702
Other assets less liabilities 1,472,017
------------
TOTAL NET ASSETS--100% . . . . $116,998,719
============
</TABLE>
(a) See Note 1A.
(b) The aggregate cost for federal income tax purposes was $115,526,702
See accompanying notes to financial statements.
88
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS MONEY MARKET SERIES)
<TABLE>
<CAPTION>
STATEMENT OF ASSETS & LIABILITIES
<S> <C> <C>
DECEMBER 31, 1996
ASSETS
Investments at value . . . . . . . . . . $115,526,702
Cash . . . . . . . . . . . . . . . . . . 903
Receivable for:
Fund shares sold . . . . . . . . . . . 2,354,876
Accrued interest . . . . . . . . . . . 218,005
------------
118,100,486
LIABILITIES
Payable for:
Fund shares redeemed . . . . . . . . . $555,513
Dividends declared . . . . . . . . . . 441,934
Accrued expenses:
Management fees . . . . . . . . . . . . 32,519
Deferred trustees' fees . . . . . . . . 29,240
Other expenses . . . . . . . . . . . . 42,561
--------
1,101,767
------------
$116,998,719
============
NET ASSETS
Net Assets consist of:
Capital paid in . . . . . . . . . . . . $116,998,719
------------
NET ASSETS . . . . . . . . . . . . . . . $116,998,719
============
Computation of offering price:
Net asset value and redemption price per
share ($116,998,719 divided by 1,169,987
shares of beneficial interest) . . . . . $ 100.00
============
Cost of investments . . . . . . . . . . . $115,526,702
============
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996
INVESTMENT INCOME
Interest . . . . . . . . . . . . . $5,523,727
EXPENSES
Management fees . . . . . . . . . . $350,632
Trustees' fees and expenses . . . . 18,295
Custodian . . . . . . . . . . . . . 57,962
Audit and tax services . . . . . . 12,911
Legal . . . . . . . . . . . . . . . 16,412
Printing . . . . . . . . . . . . . 24,379
Miscellaneous . . . . . . . . . . . 18,629
--------
Total expenses . . . . . . . . . 499,220
----------
NET INVESTMENT INCOME . . . . . . . 5,024,507
NET INCREASE IN NET ASSETS FROM
OPERATIONS. . . . . . . . . . . . . $5,024,507
==========
</TABLE>
See accompanying notes to financial statements.
89
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS MONEY MARKET SERIES)
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
-------------- ----------------
<S> <C> <C>
FROM OPERATIONS
Net investment income . . . . . . . . . . . $ 4,403,095 $ 5,024,507
------------- -------------
INCREASE IN NET ASSETS FROM OPERATIONS . . 4,403,095 5,024,507
------------- -------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income . . . . . . . . . . . (4,403,095) (5,024,507)
------------- -------------
(4,403,095) (5,024,507)
------------- -------------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares . . . . . . . 141,012,985 234,677,851
Net asset value of shares issued in
connection with the reinvestment of:
Distributions from net investment income . 4,331,085 4,966,805
------------- -------------
145,344,070 239,644,656
Cost of shares redeemed . . . . . . . . . . (129,156,304) (212,794,096)
------------- -------------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL
SHARE TRANSACTIONS . . . . . . . . . . . . 16,187,766 26,850,560
------------- -------------
TOTAL INCREASE IN NET ASSETS . . . . . . . 16,187,766 26,850,560
NET ASSETS
Beginning of the year . . . . . . . . . . . 73,960,393 90,148,159
------------- -------------
End of the year . . . . . . . . . . . . . . $ 90,148,159 $ 116,998,719
============= =============
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares . . . . . . 1,410,130 2,346,128
Issued in connection with the reinvestment
of:
Distributions from net investment income . 43,311 50,319
------------- -------------
1,453,441 2,396,447
Redeemed . . . . . . . . . . . . . . . . . (1,291,563) (2,127,942)
------------- -------------
Net change . . . . . . . . . . . . . . . . 161,878 268,505
============= =============
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
YEAR ENDED DECEMBER 31,
------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
Net Asset Value Beginning
of Year. . . . . . . . . $100.00 $100.00 $100.00 $100.00 $ 100.00
------- ------- ------- ------- --------
Income From Investment
Operations
Net investment income . 3.73 2.93 3.89 5.50 4.99
------- ------- ------- ------- --------
Total from Investment
Operations. . . . . . . 3.73 2.93 3.89 5.50 4.99
Distributions from net
investment income . . . (3.73) (2.93) (3.89) (5.50) (4.99)
------- ------- ------- ------- --------
Total Distributions . . (3.73) (2.93) (3.89) (5.50) (4.99)
------- ------- ------- ------- --------
Net Asset Value End of
Year . . . . . . . . . . $100.00 $100.00 $100.00 $100.00 $ 100.00
======= ======= ======= ======= ========
TOTAL RETURN (%) . . . . 3.79 2.97 4.01 5.64 5.11
Ratio of operating
expenses to average net
assets (%) . . . . . . . 0.38 0.38 0.40 0.50 0.50
Ratio of net investment
income to average net
assets (%) . . . . . . . 3.71 2.93 3.89 5.50 4.99
Net Assets, End of Year
(000). . . . . . . . . . $61,607 $59,044 $73,960 $90,148 $116,999
The ratios of expenses to
average net assets
without giving effect to
the voluntary expense
agreement described in
Note 4 to the Financial
Statements would have
been (%) . . . . . . . . -- -- -- 0.51 0.50
</TABLE>
See accompanying notes to financial statements.
90
<PAGE>
NEW ENGLAND ZENITH FUND
NOTES TO FINANCIAL STATEMENTS--DECEMBER 31, 1996
1. New England Zenith Fund (the "Fund") is organized as a Massachusetts business
trust under the laws of the Commonwealth of Massachusetts pursuant to an
Agreement and Declaration of Trust dated December 16, 1986. The Fund succeeded
to the operations of The New England Zenith Fund, Inc. on February 27, 1987. The
Fund is registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company.
Shares in the Fund are not offered directly to the general public and,
currently, are available only to certain separate accounts established by New
England Life Insurance Company ("NELICO") or Metropolitan Life Insurance Company
("MetLife") as an investment vehicle for variable life insurance or variable
annuity products, although not all Series are available to all such separate
accounts. In the future, shares may be offered to separate accounts of other
insurance companies, including companies unaffiliated with NELICO or MetLife.
The Fund's Agreement and Declaration of Trust permits the issuance of an
unlimited number of shares of beneficial interest, no par value, in separate
Series, with shares of each Series representing interests in a separate
portfolio of assets. Each Series is separately managed and has its own
investment objective and policies. The Series (or its predecessor) commenced
operations on the dates set forth below:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Bond Income Series . August 26, 1983 Small Cap Series . . May 1, 1994
Capital Growth
Series . . . . . . . August 26, 1983 Balanced Series . . . October 31, 1994
Money Market Series . August 26, 1983 International Equity
Series . . . . . . . October 31, 1994
Stock Index Series . March 30, 1987 U.S. Government
Series . . . . . . . October 31, 1994
Managed Series . . . May 1, 1987 Strategic Bond
Opportunities
Series . . . . . . . October 31, 1994
Avanti Growth Venture Value
Series . . . . . . . April 30, 1993 Series . . . . . . . October 31, 1994
Growth & Income Equity Growth
Series . . . . . . . April 30, 1993 Series . . . . . . . October 31, 1994
</TABLE>
The following is a summary of significant accounting policies followed by the
Fund in the preparation of the financial statements of the Series. The policies
are in conformity with generally accepted accounting principles for investment
companies. The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
A. SECURITY VALUATION
MONEY MARKET SERIES--The Money Market Series employs the amortized cost
method of security valuation which, in the opinion of the Board of Trustees,
represents the fair market value of the particular security. The Board
monitors the deviations between the Series' net asset value per share, as
determined by using available market quotations, and its amortized cost price
per share. If the deviation exceeds 1/2 of 1%, the Board will consider what
action, if any, should be initiated to provide fair valuation of the Series.
BOND INCOME, MANAGED, BALANCED, U.S. GOVERNMENT AND STRATEGIC BOND
OPPORTUNITIES SERIES--Debt securities (other than short-term obligations) are
valued on the basis of valuations furnished by a pricing service, authorized
by the Board of Trustees, which service determines valuations for normal,
institutional-size trading units of such securities using market information,
transactions for comparable securities and various relationships between
securities which are generally recognized by institutional traders.
Short-term notes are stated at amortized cost, which approximates market
value.
CAPITAL GROWTH, MANAGED, STOCK INDEX, AVANTI GROWTH, GROWTH & INCOME, SMALL
CAP, BALANCED, INTERNATIONAL EQUITY, VENTURE VALUE AND EQUITY GROWTH
SERIES--Equity securities are valued on the basis of market valuations
furnished by a pricing service, authorized by the Board of Trustees. The
pricing service provides the last reported sale price for securities listed
on a national securities exchange or on the NASDAQ National Market System, or
if there is no reported sale during the day, and in the case of
over-the-counter securities not so listed, the last bid price. Securities for
which current market quotations are not readily available are taken at fair
value as determined in good faith by the Board of Trustees, although the
actual calculations may be made by persons acting pursuant to the direction
of the Board. Short-term notes are stated at amortized cost, which
approximates market value.
91
<PAGE>
NEW ENGLAND ZENITH FUND
NOTES TO FINANCIAL STATEMENTS--DECEMBER 31, 1996--(CONTINUED)
B. FOREIGN CURRENCY TRANSLATION--The books and records of the Funds are
maintained in U.S. dollars. The values of securities, currencies and other
assets and liabilities denominated in currencies other than U.S. dollars are
translated into U.S. dollars based upon foreign exchange rates prevailing at
the end of the period. Purchases and sales of investment securities
denominated in foreign currencies, income and expenses are translated on the
respective dates of such transactions, and items of income and expense
payable in foreign currencies are translated on the date they arise.
Since the values of investment securities are presented at the foreign
exchange rates prevailing at the end of the period, it is not practical to
isolate that portion of the results of operations arising from changes in
exchange rates from fluctuations arising from changes in market prices of the
investment securities.
Net realized and unrealized gains and losses on foreign currency transactions
represent foreign exchange gains from the sale of short-term securities and
holdings of foreign currencies, foreign currency gains and losses between
trade dates and settlement dates on investment securities transactions, and
the difference between the amounts of daily interest accruals on the books of
the Fund and the amounts actually received resulting from changes in exchange
rates on the payable date.
FORWARD FOREIGN CURRENCY CONTRACTS. The Fund may use foreign currency
contracts to facilitate transactions in foreign securities and to manage the
Fund's currency exposure. Contracts to buy generally are used to acquire
exposure to foreign currencies, while contracts to sell are used to hedge the
Fund's investments against currency fluctuations. Also, a contract to buy or
sell can offset a previous contract. These contracts involve market risk in
excess of the unrealized gain or loss reflected in the Fund's Statements of
Assets and Liabilities. The U.S. dollar value of the currencies the Fund has
committed to buy or sell is shown in the Schedules of Investments under the
caption "Forward Foreign Currency Contracts." This amount represents the
aggregate exposure to each currency the Fund has acquired or hedged through
currency contracts at period end. Losses may arise from changes in the value
of the foreign currency or if the counterparties do not perform under the
contract's terms. The U.S. dollar value of forward foreign currency contracts
is determined using forward currency exchange rates supplied by a quotation
service.
C. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME--Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Dividend income is recorded on the ex-dividend date and interest
income is recorded on the accrual basis. In determining gain or loss on
securities sold, the cost of securities has been determined on the identified
cost basis.
D. FUTURES CONTRACTS--The Growth & Income, Stock Index, Managed, Balanced,
International Equity, U.S. Government, Strategic Bond Opportunities and
Venture Value Series each may enter into futures contracts on the S&P 500
Index or on interest-bearing securities or indices thereof, or on indices of
stocks to hedge against changes in the values of securities the Series owns
or expects to purchase. Upon entering into a futures contract, the Series is
required to deposit with a broker an amount ("initial margin") equal to a
certain percentage of the purchase price indicated in the futures contract.
Subsequent payments ("variation margin") are made or received by the Series
each day, dependent on the daily fluctuations in the value of the underlying
security, and are recorded for financial reporting purposes as unrealized
gains or losses by the Series. When entering into a closing transaction, the
Series will realize, for book purposes, a gain or loss equal to the
difference between the value of the futures contract to sell and the futures
contract to buy. Futures contracts are valued at the most recent settlement
price, unless such price does not reflect the fair market value of the
contract, in which case the position will be valued by or under the direction
of the Board of Trustees. Certain risks are associated with investments in
futures contracts, including risk of imperfect correlation between the value
of a position in futures contracts and the value of the stocks or bonds that
the Series is attempting to hedge. In addition, there is a risk that the
Series may not be able to close out its futures positions due to an illiquid
secondary market.
E. REPURCHASE AGREEMENTS--The Series, through their custodian, receive delivery
of the underlying securities collateralizing repurchase agreements. It is the
Series' policy that the market value of the collateral be at least equal to
100% of the repurchase price. Each Series' adviser is responsible for
determining that the value of the collateral is at all times at least equal
to the repurchase price. In connection with transactions in repurchase
agreements, if the seller defaults and the value of the collateral declines
or if the seller enters an insolvency proceeding, realization of the
collateral by the Series may be delayed or limited.
92
<PAGE>
NEW ENGLAND ZENITH FUND
NOTES TO FINANCIAL STATEMENTS--DECEMBER 31, 1996--(CONTINUED)
F. SHORT SALES AGAINST THE BOX--The Equity Growth Series may hedge against
changes in the value of investments by engaging in short sales against the
box. In a short sale against the box, the Series sells a borrowed security,
while at the same time either owning an identical security or having the
right to obtain such a security. By selling short against the box the equity
underlying one of its convertible holdings, the Series would seek to offset
the effect that a decline in the underlying equity might have on the value of
the convertible security. While the short sale is outstanding, the Series
will not dispose of the security hedged by the short sale. The Series is
required to establish a margin account with the broker lending the security
sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale and the Series instructs the custodian to maintain
in a separate account securities having a value at least equal to the amount
of the securities sold short. The Series had no such transactions during the
year ended December 31, 1996.
G. FEDERAL TAXES--Each Series is a separate taxable entity and intends to meet
the requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute to its shareholders all of its taxable
income and any net realized capital gains at least annually. Accordingly, no
provision for federal income tax has been made.
H. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS--Money Market Series dividends
are declared daily to shareholders of record at the time and are paid
monthly. Dividends and distributions are recorded by all other Series on the
ex-dividend date. Net realized gains from security transactions are
distributed at least annually to shareholders. The timing and
characterization of certain income and capital gains distributions are
determined in accordance with federal tax regulations which may differ from
generally accepted accounting principles. Permanent book and tax basis
differences relating to shareholder distributions will result in
reclassification to paid in capital. These differences primarily relate to
tax equalization, investments in mortgage backed securities and investments
in foreign securities.
I. OTHER--The Money Market Series invests primarily in a portfolio of money
market instruments maturing in 397 days or less whose ratings are within the
two highest ratings categories by a nationally recognized rating agency or,
if not rated, are believed to be of comparable quality. The weighted average
maturity of the Series is less than ninety days. The ability of the issuers
of the securities held by the Series to meet their obligations may be
affected by foreign economic, political and legal developments in the case of
foreign banks or of foreign branches or subsidiaries of U.S. banks or
domestic economic developments in a specific industry, state or region.
J. WHEN-ISSUED SECURITIES AND FORWARD DELIVERY SECURITIES--Delivery and payment
for securities purchased on a when-issued or forward delivery basis can take
place one month or more after the date of the transaction. The securities so
purchased are subject to market fluctuation during this period.
2. At December 31, 1996 MetLife held 19,352,266 shares of the Fund in separate
investment accounts for annuity contracts issued by MetLife. NELICO, a life
insurance subsidiary of MetLife, held the remaining 16,071,462 shares of the
Fund then outstanding in separate investment accounts for life insurance and
annuity contracts issued by NELICO.
As long as MetLife owns (directly or through NELICO) more than 25% of the Fund's
outstanding shares, it will be presumed to be in control (as that term is
defined by the Investment Company Act of 1940, as amended) of the Fund.
3. For the year ended December 31, 1996, purchases and sales of securities
(excluding short-term investments) for each of the Series were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
------------------------------- -------------------------------
SERIES OTHER U.S. GOVERNMENT OTHER U.S. GOVERNMENT
------ -------------- --------------- -------------- -----------------
<S> <C> <C> <C> <C>
Back Bay Advisors Bond
Income . . . . . . . $ 137,692,765 $35,235,320 $ 130,989,953 $23,057,601
Capital Growth . . . 2,055,920,897 -- 2,037,625,313 --
Westpeak Stock Index 12,219,996 -- 2,831,698 --
Back Bay Advisors
Managed . . . . . . 104,791,938 617,880 107,609,326 597,480
Loomis Sayles Avanti
Growth . . . . . . . 65,735,396 -- 40,422,818 --
Westpeak Growth &
Income . . . . . . . 87,838,838 -- 63,909,195 --
Loomis Sayles Small
Cap . . . . . . . . 69,835,843 -- 27,766,266 --
Loomis Sayles
Balanced . . . . . . 41,932,898 11,418,054 16,369,200 3,877,406
Draycott International
Equity . . . . . . . 36,645,208 -- 16,747,918 --
Salomon Brothers U.S.
Government . . . . . 33,158,910 11,099,705 28,772,597 9,489,383
Salomon Brothers
Strategic Bond
Opportunities . . . 41,128,270 14,362,320 24,965,572 6,343,657
Venture Value . . . . 61,385,281 -- 10,733,253 --
Alger Equity Growth . 121,063,456 -- 59,061,091 --
</TABLE>
Purchases and sales of corporate short-term obligations for the Money Market
Series aggregated $737,083,687 and $714,742,304, respectively.
93
<PAGE>
NEW ENGLAND ZENITH FUND
NOTES TO FINANCIAL STATEMENTS--DECEMBER 31, 1996--(CONTINUED)
Transactions in index futures contracts for the Managed Series for the year
ended December 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
PURCHASES OF FUTURES
CONTRACTS
------------------------
AGGREGATE
NUMBER OF FACE VALUE
CONTRACTS OF CONTRACTS
---------- --------------
<S> <C> <C>
Contracts opened . . . . . . . . . . . . . . . . . 10 $ 3,153,870
Contracts closed . . . . . . . . . . . . . . . . . (10) (3,153,870)
--- -----------
Open at December 31, 1996 . . . . . . . . . . . . 0 $ 0
=== ===========
</TABLE>
Transactions in forward currency contracts for the Strategic Bond Opportunities
Series for the year ended December 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
SALES OF CONTRACTS
--------------------
AGGREGATED FACE
VALUE OF CONTRACTS
--------------------
<S> <C>
Open at December 31, 1995 . . . . . . . . . . . . . . . $ 919,184
Contracts opened . . . . . . . . . . . . . . . . . . . . 17,086,127
Contracts closed . . . . . . . . . . . . . . . . . . . . (15,855,033)
------------
Open at December 31, 1996 . . . . . . . . . . . . . . . $ 2,150,278
============
</TABLE>
4. MANAGEMENT FEES.
TNE Advisers, Inc. acts as adviser to all of the Series (except the Capital
Growth Series, for which Capital Growth Management, L.P. ("CGM"), serves as
adviser). Separate management agreements for each Series provide for fees as set
forth below:
<TABLE>
<CAPTION>
FEES PAYABLE TO
BY TNE ADVISERS MANAGEMENT FEE RATE
FOR THE YEAR ENDED PAYABLE BY THE SERIES TO
DECEMBER 31, 1996 TNE ADVISERS, INC.
BEFORE REDUCTION DUE TO (ANNUAL % OF AVERAGE NET
SERIES EXPENSE LIMITS (A) ASSETS)
------ ----------------------- -----------------------------
<S> <C> <C>
Loomis Sayles Small
Cap Series . . . . . $240,646 1.00% all assets
Draycott International
Equity Series . . . 70,553 0.90% all assets
Alger Equity Growth
Series . . . . . . . 281,325 0.75% all assets
Loomis Sayles Avanti
Growth Series . . . 169,578 0.70% the first $200 million
0.65% the next $300 million
0.60% amounts in excess of $500
million
Venture Value Series 198,620 0.75% all assets
Westpeak Growth &
Income Series . . . 165,074 0.70% the first $200 million
0.65% the next $300 million
0.60% amounts in excess of $500
million
Westpeak Stock Index
Series . . . . . . . 102,444 0.25% all assets
Loomis Sayles Balanced
Series . . . . . . . 83,980 0.70% of all assets
Back Bay Managed
Series . . . . . . . 430,921 0.50% of all assets
Salomon Brothers
Strategic Bond
Opportunities Series 60,044 0.65% of all assets
Back Bay Advisors Bond
Income Series . . . 311,174 0.40% the first $400 million
0.35% the next $300 million
0.30% the next $300 million
0.25% amounts in excess of $1
billion
Salomon Brothers U.S.
Government Series . 35,234 0.55% all assets
Back Bay Advisors
Money Market Series 201,904 0.35% the first $500 million
0.30% the next $500 million
0.25% amounts in excess of $1
billion
</TABLE>
(a) There are two forms of expense limit, a Voluntary Expense Limitation and an
Expense Deferral Arrangement. Only one pertains to each of these Series, as
described below.
94
<PAGE>
NEW ENGLAND ZENITH FUND
NOTES TO FINANCIAL STATEMENTS--DECEMBER 31, 1996--(CONTINUED)
The Capital Growth Series pays its adviser, CGM, a management fee at an annual
rate of 0.70% of the first $200 million of average net assets, 0.65% of the next
$300 million of such assets and 0.60% of such assets in excess of $500 million.
For advisory services rendered during the year ended December 31, 1996, CGM was
paid at an annual rate of 0.64% of the Capital Growth Series' average net
assets, totaling $6,398,659.
SUB-ADVISORY FEES. TNE Advisers, Inc. has sub-contracted day-to-day portfolio
management responsibilities to each of the following sub-advisers to manage the
Series: Loomis, Sayles & Company, L.P. for the Loomis Sayles Small Cap, Loomis
Sayles Avanti Growth and Loomis Sayles Balanced Series, Draycott Partners, Ltd.
for the Draycott International Equity Series; Fred Alger Management, Inc. for
the Alger Equity Growth Series; Davis Selected Advisers, L.P. for the Venture
Value Series; Westpeak Investment Advisors, L.P. for the Westpeak Growth &
Income and Westpeak Stock Index Series; Back Bay Advisors, L.P. for the Back Bay
Advisors Managed, Back Bay Advisors Bond Income and Back Bay Advisors Money
Market Series and Salomon Brothers Asset Management Inc for the Salomon Brothers
Strategic Bond Opportunities and Salomon Brothers U.S. Government Series. TNE
Advisers, Inc. pays each sub-adviser at the following rates for providing
sub-advisory services to the following Series:
<TABLE>
<CAPTION>
FEES ANNUAL
PAID TO PERCENTAGE
SUB-ADVISER RATES PAID SERIES AVERAGE DAILY NET
FOR YEAR ENDED TO SUB- ASSET
SERIES DECEMBER 31, 1996 ADVISER VALUE LEVELS
------ ----------------- ---------- ---------------------------
<S> <C> <C> <C>
Loomis Sayles Small
Cap Series . . . . . $265,646 0.55% of the first $25 million
0.50% of the next $75 million
0.45% of the next $100 million
0.40% of amounts in excess of $200
million
Draycott International
Equity Series . . . 186,106 0.75% of the first $10 million
0.60% of the next $40 million
0.45% of amounts in excess of $50
million
Alger Equity Growth
Series* . . . . . . 339,570 0.45% of the first $100 million
0.40% of the next $400 million
0.35% of amounts in excess of $500
million
Loomis Sayles Avanti
Growth Series . . . 284,437 0.50% of the first $25 million
0.40% of the next $75 million
0.35% of the next $100 million
0.30% of amounts in excess of $200
million
Davis Venture Value
Series . . . . . . . 297,328 0.45% of the first $100 million
0.40% of the next $400 million
0.35% of amounts in excess of $500
million
Westpeak Growth &
Income Series . . . 278,435 0.50% of the first $25 million
0.40% of the next $75 million
0.35% of the next $100 million
0.30% of amounts in excess of $200
million
Westpeak Stock Index
Series . . . . . . . 68,207 0.10% of all assets
Loomis Sayles Balanced
Series . . . . . . . 168,842 0.50% of the first $25 million
0.40% of the next $75 million
0.30% of amounts in excess of $100
million
Back Bay Advisors
Managed Series . . . 328,950 0.25% of the first $50 million
0.20% of amounts in excess of $50
million
</TABLE>
- ---------
* Amount shown does not reflect fee reduction pursuant to the agreement between
TNE Advisers, Inc. and Fred Alger Management, Inc. that is described in this
Note 4. During the period January 1, 1996 through May 1, 1996 the annual
percentage rates of the sub-advisory fees for the Alger Equity Growth Series
were: 0.45% of the Series' first $10 million of average daily net assets; 0.40%
of the next $90 million of such assets, 0.35% of the next $150 million of such
assets, 0.30% of the next $250 million of such assets and 0.25% of such assets
in excess of $500 million.
95
<PAGE>
NEW ENGLAND ZENITH FUND
NOTES TO FINANCIAL STATEMENTS--DECEMBER 31, 1996--(CONTINUED)
<TABLE>
<CAPTION>
FEES ANNUAL
PAID TO PERCENTAGE
SUB-ADVISER RATES PAID SERIES AVERAGE DAILY NET
FOR YEAR ENDED TO SUB- ASSET
SERIES DECEMBER 31, 1996 ADVISERS VALUE LEVELS
------ ----------------- ---------- ---------------------------
<S> <C> <C> <C>
Salomon Brothers
Strategic Bond
Opportunities Series $ 70,050 0.35% of the first $50 million
0.30% of the next $150 million
0.25% of the next $300 million
0.20% of amounts in excess of $500
million
Back Bay Advisors Bond
Income Series . . . $361,174 0.25% of the first $50 million
0.20% of the next $200 million
0.15% of amounts in excess of $250
million
Salomon Brothers U.S.
Government Series . $ 24,392 0.225% of the first $200 million
0.150% of the next $300 million
0.100% of amounts in excess of $500
million
Back Bay Advisors
Money Market Series $148,728 0.15% of the first $100 million
0.10% of amounts in excess of $100
million
</TABLE>
TNE Advisers, Inc., which acts as adviser to each Series of the Fund (except the
Capital Growth Series) is a wholly-owned subsidiary of NELICO. Loomis Sayles,
Westpeak and Back Bay Advisors are each independently operated subsidiaries, and
CGM is an independently operated affiliate, of New England Investment Companies,
L.P. ("NEIC"). The general partners of each of Loomis Sayles, Westpeak and Back
Bay Advisors are special purpose corporations which are indirect wholly-owned
subsidiaries of NEIC. NEIC's sole general partner, New England Investment
Companies, Inc., is a wholly-owned subsidiary of MetLife, which also owns a
majority of the limited partnership interest in NEIC. NEIC is the owner of a
majority limited partnership interest in the Capital Growth Series' investment
adviser, CGM. Consequently, the subadvisers (Loomis Sayles, Westpeak and Back
Bay Advisors) of eight Series of the Fund are currently wholly-owned
subsidiaries of NEIC and an additional Series is advised by a majority-owned
subsidiary (CGM) of NEIC. The sub-advisers of the remaining five Series are not
affiliated with MetLife or NEIC.
VOLUNTARY EXPENSE LIMITATION AND EXPENSE DEFERRAL AGREEMENT.
Each Series (except the Capital Growth Series) is subject to one of two forms of
expense limit. The first form of expense limit is a Voluntary Expense
Limitation, which relates to the Loomis Sayles Avanti Growth Series, Westpeak
Growth & Income Series, Westpeak Stock Index Series, Back Bay Advisors Managed,
Back Bay Advisors Bond Income and Back Bay Advisors Money Market Series.
Pursuant to this arrangement, TNE Advisers, Inc. bears expenses (other than
advisory fees and any brokerage costs, interest, taxes or extraordinary
expenses) of each Series in excess of 0.15% of Series' average daily net assets.
In the case of the Loomis Sayles Small Cap Series, TNE Advisers, Inc. bears all
the expenses (other than any brokerage costs, interest, taxes or extraordinary
expenses) of the Series in excess of 1.00% of the Series' average daily net
assets. Similar Voluntary Expense Limitations with New England Mutual Life
Insurance Company ("The New England") were, in effect with respect to the
Capital Growth Series from November 1, 1994 to April 30, 1996 and with respect
to the Back Bay Advisors Money Market, Back Bay Advisors Bond Income, Back Bay
Advisors Managed and Westpeak Stock Index Series from November 1, 1994 to April
30, 1995 and with respect to the Loomis Sayles Small Cap, Loomis Sayles Avanti
Growth and Westpeak Growth & Income Series from December 1, 1994 to April 30,
1995.
The current voluntary expense arrangements limit each of the affected series to
the following levels:
<TABLE>
<CAPTION>
TOTAL EXPENSE RATIO
UNDER CURRENT VOLUNTARY
SERIES EXPENSE ARRANGEMENT
------ -------------------------
<S> <C>
Back Bay Advisors Money Market Series 0.50%
Back Bay Advisors Bond Income Series . 0.55%
Back Bay Advisors Managed Series . . . 0.64%
Westpeak Value Growth Series . . . . . 0.85%
Westpeak Stock Index Series . . . . . 0.40%
Loomis Sayles Small Cap Series . . . . 1.00%
Loomis Sayles Avanti Growth Series . . 0.85%
</TABLE>
96
<PAGE>
NEW ENGLAND ZENITH FUND
NOTES TO FINANCIAL STATEMENTS--DECEMBER 31, 1996--(CONTINUED)
TNE Advisers, Inc. may terminate these expense agreements at any time. If these
expense arrangements were terminated, the expense ratios would be higher.
Prior to November 1, 1994, The New England had agreed to pay the charges and
expenses of preparing, printing and distributing prospectuses and reports to
shareholders, custodial and transfer agent charges and expenses, auditing,
accounting and legal fees and certain other expenses in connection with the
affairs of the Fund and the expenses of shareholders' and trustees' meetings.
The second form of expense limit is an Expense Deferral Agreement, which has
been in effect since November 1, 1994 and relates to the Draycott International
Equity Series, Alger Equity Growth Series, Venture Value Series, Loomis Sayles
Balanced Series, Salomon Brothers Strategic Bond Opportunities Series and
Salomon Brothers U.S. Government Series. Under this Agreement, which TNE
Advisers, Inc. can terminate at any time, TNE Advisers, Inc. has agreed to pay
expenses of the Series' operations (exclusive of any brokerage costs, interest,
taxes or extraordinary expenses) in excess of the annual percentages of the
Series net assets set forth below, subject to the obligation of the Series to
repay TNE Advisers, Inc. such expenses in future years, if any, when the Series'
expenses fall below that percentage; provided, however, that no Series is
obligated to repay any expenses paid by TNE Advisers, Inc. more than two years
after the end of the fiscal year in which such expenses were incurred. The
percentage applicable to each Series are as follows:
<TABLE>
<CAPTION>
% OF SERIES
AVERAGE
SERIES NET ASSETS
------ -------------
<S> <C>
Draycott International Equity Series . . . . . . . . 1.30%
Alger Equity Growth Series . . . . . . . . . . . . . 0.90
Venture Value Series . . . . . . . . . . . . . . . . 0.90
Loomis Sayles Balanced Series . . . . . . . . . . . . 0.85
Salomon Brothers Strategic Bond Opportunities Series 0.85
Salomon Brothers U.S. Government Series . . . . . . . 0.70
</TABLE>
For the period January 1, 1996 to December 31, 1996, the effective expense
ratios for each Series, after giving effect to the foregoing arrangements, and
the amounts of expenses deferred for those Series to which the Expense Deferral
Agreement applies, are:
<TABLE>
<CAPTION>
EXPENSES ASSUMED
TOTAL EXPENSE RATIO BY THE NEW ENGLAND OR
UNDER CURRENT VOLUNTARY TNE ADVISERS AS A
EXPENSE ARRANGEMENT RESULT OF THE SERIES EXPENSES DEFERRED
OR EXPENSE DEFERRAL EXCEEDING THE UNTIL EXPENSES DEFERRED UNTIL
SERIES AGREEMENT VOLUNTARY EXPENSE LIMIT DECEMBER 31, 1997 DECEMBER 31, 1998
------ ----------------------- ----------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Back Bay Advisors Money Market
Series 0.50% -- not applicable not applicable
Back Bay Advisors Bond Income
Series 0.52% -- not applicable not applicable
Back Bay Advisors Managed
Series 0.63% -- not applicable not applicable
Westpeak Growth & Income Series 0.85% $ 37,994 not applicable not applicable
Westpeak Stock Index Series 0.40% 71,003 not applicable not applicable
Loomis Sayles Small Cap Series 1.00% 145,353 not applicable not applicable
Loomis Sayles Avanti Growth
Series 0.85% 42,992 not applicable not applicable
Draycott International Equity
Series 1.30% not applicable $176,796 $102,652
Alger Equity Growth Series 0.90%* not applicable 77,254 --
Davis Venture Value Series 0.90% not applicable 108,971 41,906
Loomis Sayles Balanced Series 0.85% not applicable 96,085 52,078
Salomon Brothers Strategic Bond
Opportunities Series 0.85% not applicable 88,120 68,374
Salomon Brothers U.S.
Government Series 0.70% not applicable 84,623 72,404
</TABLE>
* Prior to January 1, 1996, the voluntary expense limit was 0.85%.
Effective May 1, 1996, Fred Alger Management, Inc. has agreed with TNE Advisers,
Inc. that the sub-advisory fee payable by TNE Advisers, Inc. to Fred Alger
Management, Inc. will be reduced by 0.05% of the first $240 million of the
excess of the Series' average daily net assets over $10 million, and by 0.10% of
the excess of the Series' average daily net assets over $250 million. This fee
reduction benefits TNE Advisers, Inc. but does not reduce the advisory fee
payable by the Series. The fee
97
<PAGE>
NEW ENGLAND ZENITH FUND
NOTES TO FINANCIAL STATEMENTS--DECEMBER 31, 1996--(CONTINUED)
reduction agreement will expire on (a) January 1, 1998 or (b) at such time as
TNE Advisers, Inc. has recovered certain expenses (generally those expenses
borne by TNE Advisers, Inc. under the Expense Deferral Arrangement prior to
January 1, 1996 which were not recovered from the Series), whichever occurs
first.
5. The Fund does not pay any compensation to its officers or to any trustees who
are directors, officers or employees of MetLife, NELICO, Back Bay Advisors,
L.P., Capital Growth Management Limited Partnership, Loomis, Sayles & Company,
L.P., Westpeak Investment Advisors, L.P., New England Funds L.P. or their
affiliates, other than registered investment companies. Each disinterested
trustee is compensated by each Series as follows:
<TABLE>
<CAPTION>
BOND CAPITAL MONEY STOCK AVANTI GROWTH & SMALL
INCOME GROWTH MARKET INDEX MANAGED GROWTH INCOME CAP
------ ------- ------ ------ ------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Annual Retainer . . . $2,416 $3,692 $1,580 $1,527 $2,391 $796 $795 $761
Meeting Fee . . . . . $ 133 $ 133 $ 133 $ 133 $ 133 $133 $133 $133
Committee Chairman
Annual Retainer
(Contract Review). . $ 287 $1,627 $ 159 $ 104 $ 261 $ 86 $ 85 $ 49
Committee Chairman
Annual Retainer
(Audit). . . . . . . $ 192 $1,084 $ 106 $ 69 $ 174 $ 57 $ 57 $ 33
</TABLE>
<TABLE>
<CAPTION>
STRATEGIC
INTERNATIONAL U.S. BOND VENTURE EQUITY
BALANCED EQUITY GOVERNMENT OPPORTUNITIES VALUE GROWTH
-------- ------------- ---------- ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Annual Retainer . . . $746 $742 $727 $730 $773 $792
Meeting Fee . . . . . $133 $133 $133 $133 $133 $133
Committee Chairman
Annual Retainer
(Contract Review) . $ 33 $ 29 $ 73 $ 77 $ 62 $ 82
Committee Chairman
Annual Retainer
(Audit) . . . . . . $ 22 $ 19 $ 9 $ 11 $ 41 $ 55
</TABLE>
A deferred compensation plan is available to trustees on a voluntary basis. Each
participating trustee will receive deferred compensation in an amount equal to
the value that such compensation would have had if it had been invested in the
relevant Series on the normal payment date.
6. SUBSEQUENT EVENT
On January 22, 1997, the Board of Trustees of New England Zenith Fund (the
"Fund") approved a new Subadvisory Agreement (the "New Agreement") relating to
the Fund's Draycott International Equity Series (the "Series") between TNE
Advisers, Inc. and Morgan Stanley Asset Management Inc. ("MSAM"). The New
Agreement is expected to become effective on May 1, 1997, subject to shareholder
approval, if required. (Shareholder approval of the New Agreement will be
required unless the Fund obtains an order of exemption from the Securities and
Exchange Commission relieving it of that requirement.) Under the New Agreement,
MSAM would become the subadviser of the Series, succeeding Draycott Partners,
Ltd., and would be responsible for the day-to-day management of the Series'
investment operations under the oversight of TNE Advisers, Inc. The name of the
Series will be changed to the "Morgan Stanley International Magnum Equity
Series" at the time the New Agreement takes effect. In the event that the Fund's
shareholders do not approve the Agreement at the special shareholder meeting,
then the Trust's Board of Trustees will convene a special meeting of trustees to
consider alternative arrangements for the management of the Series' investment
portfolio.
7. SHAREHOLDER MEETING (UNAUDITED)
At a Special Meeting of the shareholders of the Davis Venture Value Series held
on December 16, 1996 such shareholders voted for the following proposals:
<TABLE>
<CAPTION>
VOTED VOTED ABSTAINED
FOR AGAINST VOTES
------------ --------- ------------
<S> <C> <C> <C>
1. To approve a new Sub-Advisory
Agreement relating to the Series by and
among TNE Advisers, Inc., Davis
Selected Advisers, L.P. and Davis
Selected Advisors--NY, Inc. 1,590,110.29 53,103.34 101,225.26
</TABLE>
98
<PAGE>
NEW ENGLAND ZENITH FUND
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees of New England Zenith Fund:
We have audited the accompanying statements of assets and liabilities of New
England Zenith Fund (comprising, respectively, the Back Bay Advisors Bond Income
Series, Capital Growth Series, Back Bay Advisors Money Market Series, Westpeak
Stock Index Series, Back Bay Advisors Managed Series, Loomis Sayles Avanti
Growth Series, Westpeak Growth & Income Series, Loomis Sayles Small Cap Series,
Loomis Sayles Balanced Series, Draycott International Equity Series, Salomon
Brothers U.S. Government Series, Salomon Brothers Strategic Bond Opportunities
Series, Davis Venture Value Series, and Alger Equity Growth Series--the
"Series"), including the schedules of portfolio investments, as of December 31,
1996, and the related statements of operations, changes in net assets and
financial highlights for the periods indicated herein. These financial
statements and financial highlights are the responsibility of the Fund's
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. Our procedures included confirmation of securities owned as of
December 31, 1996, 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 each
of the respective Series constituting New England Zenith Fund as of December 31,
1996, the results of their operations, the changes in their net assets, and the
financial highlights for the periods indicated herein, in conformity with
generally accepted accounting principles.
Boston, Massachetts COOPERS & LYBRAND L.L.P.
February 14, 1997
99
<PAGE>
FOOTNOTES TO PORTFOLIO MANAGER COMMENTARY
- -----------------------------------
(1) COL (Cost of Living) is based on the Consumer Price Index, a widely
recognized measure of the cost of goods and services in the United States,
calculated by the U.S. Bureau of Labor Statistics.
(2) EAFE-Morgan Stanley Capital International Europe, AustralAsia, Far East
Index is an arithmetical average (weighted by market value) of the
performance (in U.S. dollars) of 1,036 companies representing the stock
markets of Europe, Australia, New Zealand and the Far East. The Index
performance has not been adjusted for ongoing management, distribution and
operating expenses and sales charges.
(3) Lehman Brothers Aggregate Bond Index includes most obligations of the U.S.
Treasury, agencies and quasi-federal corporations, most publicly issued
investment grade corporate bonds, and most bonds backed by mortgage pools
of GNMA, FNMA and FHLMC.
(4) Lehman Brothers Government/Corporate Index is an unmanaged index of the
market value of approximately 5,300 bonds with a face value currently in
excess of $1.3 trillion. To be included in the Lehman Brothers Government/
Corporate Bond Index, an issue must have amounts outstanding in excess of
$25 million, have at least one year to maturity and be rated "Baa" or
higher ("investment grade") by a nationally recognized rating agency. The
index has not been adjusted for ongoing management, distribution and
operating expenses and applicable sales charges.
(5) Lehman Brothers Intermediate Government Bond Index includes most
obligations of the U.S. Treasury, agencies and quasi-federal corporations
having maturities of 1 to 10 years. The Index performance has not been
adjusted for ongoing management, distribution and operating expenses and
applicable sales charges.
(6) Lehman Brothers Intermediate Government/Corporate Bond Index is an
unmanaged index of investment grade bonds issued by the U.S. government and
U.S. corporations having maturities between one and ten years. The Index
performance has not been adjusted for ongoing management, distribution and
operating expenses and applicable sales charges
(7) Lipper Variable A-Rated Corporate Bond Fund Average is an average of the
total return performance (calculated on the basis of net asset value) of
funds with similar investment objectives as calculated by Lipper Analytical
Services, an independent mutual fund ranking service.
(8) Lipper Variable Balanced Fund Average is an average of the total return
performance (calculated on the basis of net asset level) of funds with
similar investment objectives as calculated by Lipper Analytical Services,
an independent mutual fund ranking service.
(9) Lipper Variable Flexible Portfolio Fund Average is an average of the total
return performance (calculated on the basis of net asset value) of funds
with similar investment objectives as calculated by Lipper Analytical
Services, an independent mutual fund ranking service.
(10) Lipper Variable General Bond Fund Average is an average of the total return
performance (calculated on the basis of net asset value) of funds with
similar investment objectives as calculated by Lipper Analytical Services,
an independent mutual fund ranking service.
(11) Lipper Variable Growth Fund Average is an average of the total return
performance (calculated on the basis of net asset value) of funds with
similar investment objectives as calculated by Lipper Analytical Services,
an independent mutual fund ranking service.
(12) Lipper Variable Growth and Income Fund Average is an average of the total
return performance (calculated on the basis of net asset value) of funds
with similar investment objectives as calculated by Lipper Analytical
Services, an independent mutual fund ranking service.
(13) Lipper Variable International Funds Average is an average of the total
return performance (calculated on the basis of net asset value) of funds
with similar investment objectives as calculated by Lipper Analytical
Services, an independent mutual fund ranking service.
(14) Lipper Variable Intermediate Investment Grade Debt Average is an average of
the total return performance (calculated on the basis of net asset value)
of funds with similar investment objectives as calculated by Lipper
Analytical Services, an independent mutual fund ranking service.
100
<PAGE>
(15) Lipper Variable Small Company Fund Average is an average of the total
return performance (calculated on the basis of net asset value) of funds with
similar investment objectives as calculated by Lipper Analytical Services, an
independent mutual fund ranking service.
(16) Lipper Variable S&P 500 Index Fund Average is an average of the total
return performance (calculated on the basis of net asset value) of funds with
similar investment objectives as calculated by Lipper Analytical Services, an
independent mutual fund ranking service.
(17) Lipper Variable U.S. Mortgage and GNMA Fund Average is an average of the
total return performance (calculated on the basis of net asset value) of
funds with similar investment objectives as calculated by Lipper Analytical
Services, an independent mutual fund ranking service.
(18) Russell 2000 Index consists of 2000 small market capitalization stocks
having an average market cap of $160 million.
(19) Standard & Poor's 500 Index (S&P 500) is an unmanaged index representing
the performance of 500 major companies, most of which are listed on the New
York Stock Exchange. The S&P 500 performance has not been adjusted for
ongoing management, distribution and operating expenses and sales charges
applicable to mutual fund investments.
(20) S&P/BARRA Growth Index is constructed by dividing stocks in the S&P 500
according to price-to-book ratios. The Growth Index contains stocks with
higher price-to-book ratios than the average ratio.
(21) S&P/BARRA Value Index is constructed by dividing stocks in the S&P 500
according to price-to-book ratios. The Value Index contains stocks with lower
price-to-book ratios than the average ratio.
101
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
REPORT OF INDEPENDENT ACCOUNTANTS
To the Policy Owners and Board of Directors of New England Life Insurance
Company:
We have audited the accompanying statement of assets and liabilities of the New
England Variable Life Separate Account (comprised of Capital Growth Sub-Account,
Bond Income Sub-Account, Money Market Sub-Account, Stock Index Sub-Account,
Managed Sub-Account, Avanti Growth Sub-Account, Growth and Income Sub-Account
(formerly Value Growth Sub-Account), Small Cap Sub-Account, U.S. Government
Sub-Account, Balanced Sub-Account, Equity Growth Sub-Account, International
Equity Sub-Account, Venture Value Sub-Account, Bond Opportunities Sub-Account,
Equity-Income Sub-Account, Overseas Sub-Account, High Income Sub-Account and
Asset Manager Sub-Account) of New England Life Insurance Company (formerly New
England Variable Life Insurance Company) as of December 31, 1996, and the
related statements of operations and changes in net assets for the year then
ended for all Sub-Accounts, except for U.S. Government Sub-Account and Bond
Opportunities Sub-Account which are for the period July 1, 1996 (Commencement of
Operations) through December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The financial
statements of New England Variable Life Separate Account for the years ended
December 31, 1995 and 1994 were audited by other auditors whose report, dated
February 6, 1996, expressed an unqualified opinion on those statements.
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 are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. 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 referred to above present fairly, in
all material respects, the financial position of the respective aforementioned
sub-accounts comprising the New England Variable Life Separate Account of New
England Life Insurance Company as of December 31, 1996, and the results of their
operations and changes in their net assets for the period then ended, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 18, 1997
102
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
103
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
NEW ENGLAND ZENITH FUND
---------------------------------------------------
CAPITAL BOND MONEY STOCK
GROWTH INCOME MARKET INDEX
SUB- SUB- SUB- SUB-
ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in New England Zenith Fund, Variable Insurance Products
Fund, and Variable Insurance Products Fund II at value (Note 2) . . . $583,330,618 $36,866,420 $32,121,040 $35,364,494
SHARES COST
---------- -------------
Capital Growth
Series . . . . . . . . . . . . . . . . 1,365,890 $445,321,213
Back Bay Advisors Bond Income
Series . . . . . . . . . . . . . . . . 349,015 36,825,901
Back Bay Advisors Money Market
Series . . . . . . . . . . . . . . . . 321,210 32,121,040
Westpeak Stock Index Series . . . . . . 295,640 27,731,481
Back Bay Advisors Managed Series . . . 182,770 24,998,992
Loomis Sayles Avanti Growth Series . . 168,672 21,813,307
Westpeak Growth and Income Series . . . 132,562 17,011,817
Loomis Sayles Small Cap Series . . . . 173,260 21,938,318
Salomon Bros. U.S. Government
Series . . . . . . . . . . . . . . . . 4,330 47,709
Loomis Sayles Balanced Series . . . . . 277,182 3,519,191
Alger Equity Growth Series . . . . . . 1,694,286 24,312,591
Draycott International Equity Series . 441,122 4,844,072
Davis Venture Value Series . . . . . . 1,191,836 16,778,624
Salomon Bros. Bond Opportunities
Series . . . . . . . . . . . . . . . . 2,345 28,407
VIP Equity-Income Series . . . . . . . 3,994,844 67,601,587
VIP Overseas Series . . . . . . . . . . 3,251,652 51,758,903
VIP High Income Series . . . . . . . . 370,017 4,270,016
VIP II Asset Manager Series . . . . . . 244,107 3,585,079
Amount due and accrued (payable) from policy-related transactions,
net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 378,429 37,297 1,495,891 73,267
Dividends receivable . . . . . . . . . . . . . . . . . . . . . . . . . -- -- 135,927 --
------------ ----------- ----------- -----------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 583,709,047 36,903,717 33,752,858 35,437,761
LIABILITIES
Due New England Life Insurance Company . . . . . . . . . . . . . . . . 58,709,427 4,152,861 3,940,579 4,110,599
------------ ----------- ----------- -----------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 58,709,427 4,152,861 3,940,579 4,110,599
------------ ----------- ----------- -----------
NET ASSETS FOR VARIABLE LIFE INSURANCE POLICIES . . . . . . . . . . . . $524,999,620 $32,750,856 $29,812,279 $31,327,162
============ =========== =========== ===========
<CAPTION>
GROWTH
AVANTI AND
MANAGED GROWTH INCOME
SUB- SUB- SUB-
ACCOUNT ACCOUNT ACCOUNT
- ----------- ----------- ----------
<C> <C> <C>
$31,136,621 $26,636,623 $20,118,907
36,326 69,074 23,180
-- -- --
- ----------- ----------- -----------
31,172,947 26,705,697 20,142,087
2,587,943 4,214,337 2,970,391
- ----------- ----------- -----------
2,587,943 4,214,337 2,970,391
- ----------- ----------- -----------
$28,585,004 $22,491,360 $17,171,696
=========== =========== ===========
</TABLE>
See Notes to Financial Statements
104
<PAGE>
<TABLE>
<CAPTION>
VARIABLE INSURANCE
PRODUCTS FUND
- ------------------------------------------------------------------------------------------- ------------------------------------
SMALL U.S. EQUITY INTERNATIONAL VENTURE BOND EQUITY- HIGH
CAP GOVERNMENT BALANCED GROWTH EQUITY VALUE OPPORTUNITIES INCOME OVERSEAS INCOME
SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB-
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
- ----------- ---------- ---------- ----------- ------------- ----------- ------------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$24,997,883 $46,890 $3,755,816 $26,396,980 $4,980,263 $19,176,647 $27,254 $84,011,576 $61,261,119 $4,632,616
49,863 (56) 446 33,786 (6,452) 90,311 -- 39,225 91,476 388
-- -- -- -- -- -- -- -- -- --
- ----------- ------- ---------- ----------- ---------- ----------- ------- ----------- ----------- ----------
25,047,746 46,834 3,756,262 26,430,766 4,973,811 19,266,958 27,254 84,050,801 61,352,595 4,633,004
3,525,015 797 522,853 4,360,484 735,836 2,604,988 486 11,691,229 9,943,254 534,363
- ----------- ------- ---------- ----------- ---------- ----------- ------- ----------- ----------- ----------
3,525,015 797 522,853 4,360,484 735,836 2,604,988 486 11,691,229 9,943,254 534,363
- ----------- ------- ---------- ----------- ---------- ----------- ------- ----------- ----------- ----------
$21,522,731 $46,037 $3,233,409 $22,070,282 $4,237,975 $16,661,970 $26,768 $72,359,572 $51,409,341 $4,098,641
=========== ======= ========== =========== ========== =========== ======= =========== =========== ==========
<CAPTION>
VARIABLE
INSURANCE
PRODUCTS
FUND II
- ----------- -------------
ASSET
MANAGER
SUB-
ACCOUNT TOTAL
- ----------- -------------
<C> <C>
$4,132,726 $ 998,994,493
(5,236) 2,407,215
-- 135,927
- ---------- --------------
4,127,490 1,001,537,635
547,395 115,152,837
- ---------- --------------
547,395 115,152,837
- ---------- --------------
$3,580,095 $ 886,384,798
========== ==============
</TABLE>
See Notes to Financial Statements
105
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
NEW ENGLAND ZENITH FUND
-------------------------------------------------------------------------------------
GROWTH
CAPITAL BOND MONEY STOCK AVANTI AND
GROWTH INCOME MARKET INDEX MANAGED GROWTH INCOME
SUB- SUB- SUB- SUB- SUB- SUB- SUB-
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------------ ----------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME
Dividends . . . . . . . . . . . . . . . $ 32,991,113 $2,579,133 $1,306,712 $ 841,454 $2,942,415 $1,494,679 $1,804,344
EXPENSE
Mortality and expense risk charge (Note
3). . . . . . . . . . . . . . . . . . . 2,981,244 192,456 160,903 168,590 158,607 137,775 100,738
------------ ---------- ---------- ---------- ---------- ---------- ----------
Net investment income (loss) . . . . . . 30,009,869 2,386,677 1,145,809 672,864 2,783,808 1,356,904 1,703,606
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net unrealized appreciation
(depreciation) on investments:
Beginning of
period . . . . . . . . . . . . . . . . 71,963,590 997,195 -- 2,853,587 5,216,548 2,881,100 2,105,777
End of period . . . . . . . . . . . . . 138,009,405 40,519 -- 7,633,013 6,137,629 4,823,316 3,107,090
------------ ---------- ---------- ---------- ---------- ---------- ----------
Net change in unrealized appreciation
(depreciation). . . . . . . . . . . . . 66,045,815 (956,676) -- 4,779,426 921,081 1,942,216 1,001,313
Net realized gain (loss) on investments 985,421 299 -- 1,808 69,775 27,429 18,964
------------ ---------- ---------- ---------- ---------- ---------- ----------
Net realized and unrealized gain (loss)
on investments . . . . . . . . . . . . 67,031,236 (956,377) -- 4,781,234 990,856 1,969,645 1,020,277
------------ ---------- ---------- ---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM
OPERATIONS . . . . . . . . . . . . . . . $ 97,041,105 $1,430,300 $1,145,809 $5,454,098 $3,774,664 $3,326,549 $2,723,883
============ ========== ========== ========== ========== ========== ==========
</TABLE>
* For the period July 1, 1996 (Commencement of Operations) through December 31,
1996.
See Notes to Financial Statements
106
<PAGE>
<TABLE>
<CAPTION>
VARIABLE INSURANCE
PRODUCTS FUND
- --------------------------------------------------------------------------------------- ---------------------------------
SMALL U.S. EQUITY INTERNATIONAL VENTURE BOND EQUITY- HIGH
CAP GOVERNMENT BALANCED GROWTH EQUITY VALUE OPPORTUNITIES INCOME OVERSEAS INCOME
SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB-
ACCOUNT ACCOUNT* ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT* ACCOUNT ACCOUNT ACCOUNT
- ---------- ---------- -------- ----------- ------------- ---------- ------------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$1,624,708 $ 702 $104,939 $ 44,863 $ 71,347 $ 444,012 $ 1,218 $ 2,662,990 $1,164,550 $199,463
90,146 28 11,713 104,685 19,385 64,656 40 428,473 325,346 19,551
- ---------- ----- -------- ---------- -------- ---------- ------- ----------- ---------- --------
1,534,562 674 93,226 (59,822) 51,962 379,356 1,178 2,234,517 839,204 179,912
768,552 -- 3,769 65,901 24,089 171,931 -- 9,642,454 4,022,725 167,043
3,059,565 (819) 236,625 2,084,389 136,191 2,398,023 (1,153) 16,409,989 9,502,216 362,600
- ---------- ----- -------- ---------- -------- ---------- ------- ----------- ---------- --------
2,291,013 (819) 232,856 2,018,488 112,102 2,226,092 (1,153) 6,767,535 5,479,491 195,557
31,570 -- 2,318 11,723 159 4,907 -- 27,750 44,049 1,942
- ---------- ----- -------- ---------- -------- ---------- ------- ----------- ---------- --------
2,322,583 (819) 235,174 2,030,211 112,261 2,230,999 (1,153) 6,795,285 5,523,540 197,499
- ---------- ----- -------- ---------- -------- ---------- ------- ----------- ---------- --------
$3,857,145 $(145) $328,400 $1,970,389 $164,223 $2,610,355 $ 25 $ 9,029,802 $6,362,744 $377,411
========== ===== ======== ========== ======== ========== ======= =========== ========== ========
<CAPTION>
VARIABLE
INSURANCE
PRODUCTS
FUND II
- --------- -----------
ASSET
MANAGER
SUB-
ACCOUNT TOTAL
- --------- -----------
<C> <C>
$174,907 $ 50,453,549
20,483 4,984,819
- -------- ------------
154,424 45,468,730
269,255 101,153,516
547,647 194,486,245
- -------- ------------
278,392 93,332,729
4,122 1,232,236
- -------- ------------
282,514 94,564,965
- -------- ------------
$436,938 $140,033,695
======== ============
</TABLE>
See Notes to Financial Statements
107
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
NEW ENGLAND ZENITH FUND
----------------------------------------------------------------------------
CAPITAL BOND MONEY STOCK AVANTI
GROWTH INCOME MARKET INDEX MANAGED GROWTH
SUB- SUB- SUB- SUB- SUB- SUB-
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------------ ------------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
INCOME
Dividends . . . . . $ 58,318,276 $ 1,844,411 $1,109,838 $ 627,118 $1,061,289 $ 535,217
EXPENSE
Mortality and expense
risk charge
(Note 3) . . . . . 2,173,846 143,873 112,033 95,240 113,501 77,636
------------ ----------- ---------- ----------- ---------- ----------
Net investment
income . . . . . . 56,144,430 1,700,538 997,805 531,878 947,788 457,581
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net unrealized
appreciation
(depreciation) on
investments:
Beginning of
period . . . . . . 9,892,073 (2,028,893) -- (1,645,744) 703,242 205,680
End of period . . . 71,963,590 997,195 -- 2,853,587 5,216,548 2,881,100
------------ ----------- ---------- ----------- ---------- ----------
Net change in
unrealized
appreciation
(depreciation). . . 62,071,517 3,026,088 -- 4,499,331 4,513,306 2,675,420
Net realized gain
(loss) on
investments . . . . 1,613,390 7,382 -- 7,637 42,457 21,233
------------ ----------- ---------- ----------- ---------- ----------
Net realized and
unrealized gain on
investments . . . . 63,684,907 3,033,470 -- 4,506,968 4,555,763 2,696,653
------------ ----------- ---------- ----------- ---------- ----------
NET INCREASE IN NET
ASSETS RESULTING FROM
OPERATIONS . . . . . $119,829,337 $ 4,734,008 $ 997,805 $ 5,038,846 $5,503,551 $3,154,234
============ =========== ========== =========== ========== ==========
</TABLE>
* For the period May 1, 1995 (Commencement of Operations) through December 31,
1995.
See Notes to Financial Statements
108
<PAGE>
<TABLE>
<CAPTION> VARIABLE
INSURANCE
VARIABLE INSURANCE PRODUCTS
PRODUCTS FUND FUND II
- ------------------------------------------------------------------- --------------------------------- --------- -----------
GROWTH
AND SMALL EQUITY INTERNATIONAL VENTURE EQUITY- HIGH ASSET
INCOME CAP BALANCED GROWTH EQUITY VALUE INCOME OVERSEAS INCOME MANAGER
SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB-
ACCOUNT ACCOUNT ACCOUNT* ACCOUNT* ACCOUNT* ACCOUNT* ACCOUNT ACCOUNT ACCOUNT ACCOUNT TOTAL
- ---------- ---------- -------- -------- ------------- -------- ----------- ---------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 606,696 $ 365,015 $17,538 $195,436 $12,460 $ 86,716 $ 2,284,557 $ 282,520 $ 8,412 $ 11,896 $ 67,367,395
52,633 24,746 743 11,686 2,165 7,251 233,864 240,253 6,639 9,537 3,305,646
- ---------- ---------- ------- -------- ------- -------- ----------- ---------- -------- -------- ------------
554,063 340,269 16,795 183,750 10,295 79,465 2,050,693 42,267 1,773 2,359 64,061,749
1,918 4,662 -- -- -- -- 149,659 260,895 213 (1,503) 7,542,202
2,105,777 768,552 3,769 65,901 24,089 171,931 9,642,454 4,022,725 167,043 269,255 101,153,516
- ---------- ---------- ------- -------- ------- -------- ----------- ---------- -------- -------- ------------
2,103,859 763,890 3,769 65,901 24,089 171,931 9,492,795 3,761,830 166,830 270,758 93,611,314
9,493 1,325 223 237 (34) 203 61,089 32,279 2,817 4,661 1,804,392
- ---------- ---------- ------- -------- ------- -------- ----------- ---------- -------- -------- ------------
2,113,352 765,215 3,992 66,138 24,055 172,134 9,553,884 3,794,109 169,647 275,419 95,415,706
- ---------- ---------- ------- -------- ------- -------- ----------- ---------- -------- -------- ------------
$2,667,415 $1,105,484 $20,787 $249,888 $34,350 $251,599 $11,604,577 $3,836,376 $171,420 $277,778 $159,477,455
========== ========== ======= ======== ======= ======== =========== ========== ======== ======== ============
</TABLE>
See Notes to Financial Statements
109
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
NEW ENGLAND ZENITH FUND
-------------------------------------------------------------------------------------
GROWTH
CAPITAL BOND MONEY STOCK AVANTI AND
GROWTH INCOME MARKET INDEX MANAGED GROWTH INCOME
SUB- SUB- SUB- SUB- SUB- SUB- SUB-
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------------- ------------ -------- ------------ ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME
Dividends . . . . . . . . . . . . . . . $ 13,519,083 $ 1,399,070 $691,932 $ 307,159 $ 678,949 $ 43,109 $ 89,817
EXPENSE
Mortality and expense risk
charge (Note 3) . . . . . . . . . . . 1,637,278 107,252 93,830 59,230 86,049 31,737 18,214
------------ ----------- -------- ----------- ---------- -------- --------
Net investment income (loss) . . . . . 11,881,805 1,291,818 598,102 247,929 592,900 11,372 71,603
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net unrealized appreciation
(depreciation) on investments:
Beginning of period . . . . . . . . . 46,100,393 41,284 -- (1,457,732) 1,602,795 143,154 67,310
End of period . . . . . . . . . . . . 9,892,073 (2,028,893) -- (1,645,744) 703,242 205,680 1,918
------------ ----------- -------- ----------- ---------- -------- --------
Net change in unrealized appreciation
(depreciation) . . . . . . . . . . . . (36,208,320) (2,070,177) -- (188,012) (899,553) 62,526 (65,392)
Net realized gain (loss) on
investments . . . . . . . . . . . . . 67,810 1,763 -- 6,200 37,994 542 776
------------ ----------- -------- ----------- ---------- -------- --------
Net realized and unrealized gain (loss)
on investments . . . . . . . . . . . . (36,140,510) (2,068,414) -- (181,812) (861,559) 63,068 (64,616)
------------ ----------- -------- ----------- ---------- -------- --------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS . . . . . . . $(24,258,705) $ (776,596) $598,102 $ 66,117 $ (268,659) $ 74,440 $ 6,987
============ =========== ======== =========== ========== ======== ========
<CAPTION> VARIABLE
INSURANCE
VARIABLE INSURANCE PRODUCTS
PRODUCTS FUND FUND II
-------------------------------- --------- ---------------
SMALL EQUITY- HIGH ASSET
CAP INCOME OVERSEAS INCOME MANAGER
SUB- SUB- SUB- SUB- SUB-
ACCOUNT* ACCOUNT ACCOUNT ACCOUNT** ACCOUNT** TOTAL
-------- --------- ---------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
INCOME
Dividends . . . . . . . . . . . . . . . $ 327 $670,101 $ 69,390 $ -- $ -- $ 17,468,937
EXPENSE
Mortality and expense risk
charge (Note 3) . . . . . . . . . . . 28 75,586 133,276 6 34 2,242,520
------ -------- --------- ---- ------- ------------
Net investment income (loss) . . . . . 299 594,515 (63,886) (6) (34) 15,226,417
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net unrealized appreciation
(depreciation) on investments:
Beginning of period . . . . . . . . . -- 93,013 700,341 -- -- 47,290,558
End of period . . . . . . . . . . . . 4,662 149,659 260,895 213 (1,503) 7,542,202
------ -------- --------- ---- ------- ------------
Net change in unrealized appreciation
(depreciation) . . . . . . . . . . . . 4,662 56,646 (439,446) 213 (1,503) (39,748,356)
Net realized gain (loss) on
investments . . . . . . . . . . . . . -- (929) (471) -- -- 113,685
------ -------- --------- ---- ------- ------------
Net realized and unrealized gain (loss)
on investments . . . . . . . . . . . . 4,662 55,717 (439,917) 213 (1,503) (39,634,671)
------ -------- --------- ---- ------- ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS . . . . . . . $4,961 $650,232 $(503,803) $207 $(1,537) $(24,408,254)
====== ======== ========= ==== ======= ============
</TABLE>
* For the period May 2, 1994 (Commencement of Operations) through December 31,
1994.
** For the period August 31, 1994 (Commencement of Operations) through December
31, 1994.
See Notes to Financial Statements
110
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
111
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
STATEMENT OF CHANGES IN NET ASSETS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
NEW ENGLAND ZENITH FUND
-------------------------------------------------------------------------------------------------
GROWTH
CAPITAL BOND MONEY STOCK AVANTI AND
GROWTH INCOME MARKET INDEX MANAGED GROWTH INCOME
SUB- SUB- SUB- SUB- SUB- SUB- SUB-
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------------- ------------ ------------- ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
FROM OPERATING ACTIVITIES
Net investment income
(loss) . . . . . . . . . . $ 30,009,869 $ 2,386,677 $ 1,145,809 $ 672,864 $ 2,783,808 $ 1,356,904 $ 1,703,606
Net realized and unrealized
gain (loss) on
investments . . . . . . . 67,031,236 (956,377) -- 4,781,234 990,856 1,969,645 1,020,277
------------ ----------- ------------ ----------- ----------- ----------- -----------
Net increase (decrease) in
net assets resulting from
operations . . . . . . . 97,041,105 1,430,300 1,145,809 5,454,098 3,774,664 3,326,549 2,723,883
FROM POLICY-RELATED
TRANSACTIONS
Net premiums transferred
from New England Life
Insurance Company
(Note 4) . . . . . . . . . 111,194,198 8,517,031 79,806,482 6,566,717 5,631,293 7,140,375 5,201,936
Net transfers (to) from
other sub-accounts . . . . (1,541,352) 1,894,963 (61,482,739) 5,875,439 1,412,522 2,859,556 2,274,270
Net transfers to New England
Life Insurance Company . . (76,528,987) (5,770,575) (9,089,129) (5,144,242) (4,232,475) (5,172,577) (3,338,871)
------------ ----------- ------------ ----------- ----------- ----------- -----------
Net increase in net assets
resulting from policy
related
transactions . . . . . . 33,123,859 4,641,419 9,234,614 7,297,914 2,811,340 4,827,354 4,137,335
------------ ----------- ------------ ----------- ----------- ----------- -----------
Net increase in net assets 130,164,964 6,071,719 10,380,423 12,752,012 6,586,004 8,153,903 6,861,218
NET ASSETS, AT BEGINNING OF
THE PERIOD . . . . . . . . 394,834,656 26,679,137 19,431,856 18,575,150 21,999,000 14,337,457 10,310,478
------------ ----------- ------------ ----------- ----------- ----------- -----------
NET ASSETS, AT END OF THE
PERIOD. . . . . . . . . . . $524,999,620 $32,750,856 $ 29,812,279 $31,327,162 $28,585,004 $22,491,360 $17,171,696
============ =========== ============ =========== =========== =========== ===========
</TABLE>
* For the period July 1, 1996 (Commencement of Operations) through
December 31, 1996.
See Notes to Financial Statements
112
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
SMALL U.S. EQUITY INTERNATIONAL VENTURE BOND
CAP GOVERNMENT BALANCED GROWTH EQUITY VALUE OPPORTUNITIES
SUB- SUB- SUB- SUB- SUB- SUB- SUB-
ACCOUNT ACCOUNT* ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT*
- ------------ ---------- ----------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
$ 1,534,562 $ 674 $ 93,226 $ (59,822) $ 51,962 $ 379,356 $ 1,178
2,322,583 (819) 235,174 2,030,211 112,261 2,230,999 (1,153)
- ----------- ------- ---------- ----------- ----------- ----------- -------
3,857,145 (145) 328,400 1,970,389 164,223 2,610,355 25
5,440,860 -- 811,932 9,286,073 1,454,605 4,876,053 --
10,060,122 46,951 2,383,695 11,496,667 2,908,047 9,510,686 27,190
(4,380,392) (769) (708,829) (6,395,345) (1,242,748) (3,721,564) (447)
- ----------- ------- ---------- ----------- ----------- ----------- -------
11,120,590 46,182 2,486,798 14,387,395 3,119,904 10,665,175 26,743
- ----------- ------- ---------- ----------- ----------- ----------- -------
14,977,735 46,037 2,815,198 16,357,784 3,284,127 13,275,530 26,768
6,544,996 -- 418,211 5,712,498 953,848 3,386,440 --
- ----------- ------- ---------- ----------- ----------- ----------- -------
$21,522,731 $46,037 $3,233,409 $22,070,282 $ 4,237,975 $16,661,970 $26,768
=========== ======= ========== =========== =========== =========== =======
<CAPTION> VARIABLE
INSURANCE
VARIABLE INSURANCE PRODUCTS
PRODUCTS FUND FUND II
- ---------------------------------------- ----------- -------------
EQUITY- HIGH ASSET
INCOME OVERSEAS INCOME MANAGER
SUB- SUB- SUB- SUB-
ACCOUNT ACCOUNT ACCOUNT ACCOUNT TOTAL
- ------------- ------------- ----------- ----------- -------------
<C> <C> <C> <C> <C>
$ 2,234,517 $ 839,204 $ 179,912 $ 154,424 $ 45,468,730
6,795,285 5,523,540 197,499 282,514 94,564,965
- ------------ ------------ ---------- ---------- -------------
9,029,802 6,362,744 377,411 436,938 140,033,695
20,426,731 17,135,189 970,763 1,258,847 285,719,085
9,029,810 1,051,463 1,631,762 560,948 --
(13,479,623) (11,522,274) (623,788) (649,631) (152,002,266)
- ------------ ------------ ---------- ---------- -------------
15,976,918 6,664,378 1,978,737 1,170,164 133,716,819
- ------------ ------------ ---------- ---------- -------------
25,006,720 13,027,122 2,356,148 1,607,102 273,750,514
47,352,852 38,382,219 1,742,493 1,972,993 612,634,284
- ------------ ------------ ---------- ---------- -------------
$ 72,359,572 $ 51,409,341 $4,098,641 $3,580,095 $ 886,384,798
============ ============ ========== ========== =============
</TABLE>
See Notes to Financial Statements
113
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
STATEMENT OF CHANGES IN NET ASSETS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
NEW ENGLAND ZENITH FUND
-----------------------------------------------------------------------------------
CAPITAL BOND MONEY STOCK AVANTI
GROWTH INCOME MARKET INDEX MANAGED GROWTH
SUB- SUB- SUB- SUB- SUB- SUB-
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------------- ------------ ------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATING ACTIVITIES
Net investment income . . . . . . . . . . $ 56,144,430 $ 1,700,538 $ 997,805 $ 531,878 $ 947,788 $ 457,581
Net realized and unrealized gain on
investments. . . . . . . . . . . . . . . 63,684,907 3,033,470 -- 4,506,968 4,555,763 2,696,653
------------ ----------- ------------ ----------- ----------- -----------
Increase in net assets resulting from
operations. . . . . . . . . . . . . . . 119,829,337 4,734,008 997,805 5,038,846 5,503,551 3,154,234
FROM POLICY-RELATED TRANSACTIONS
Net premiums transferred from New England
Life Insurance Company (Note 4) . . . . 100,611,223 7,330,838 40,457,027 4,559,195 4,757,562 5,407,500
Net transfers (to) from other
sub-accounts . . . . . . . . . . . . . . (7,820,362) 2,481,090 (32,083,917) 2,734,513 286,111 3,131,998
Net transfers to New England Life
Insurance Company . . . . . . . . . . . (67,280,279) (4,616,930) (6,819,802) (3,436,368) (3,307,802) (3,767,486)
------------ ----------- ------------ ----------- ----------- -----------
Increase in net assets resulting from
policy related transactions . . . . . . 25,510,582 5,194,998 1,553,308 3,857,340 1,735,871 4,772,012
------------ ----------- ------------ ----------- ----------- -----------
Net increase in net assets . . . . . . . 145,339,919 9,929,006 2,551,113 8,896,186 7,239,422 7,926,246
NET ASSETS, AT BEGINNING OF THE PERIOD . . 249,494,737 16,750,131 16,880,743 9,678,964 14,759,578 6,411,211
------------ ----------- ------------ ----------- ----------- -----------
NET ASSETS, AT END OF THE PERIOD . . . . . $394,834,656 $26,679,137 $ 19,431,856 $18,575,150 $21,999,000 $14,337,457
============ =========== ============ =========== =========== ===========
</TABLE>
* For the period May 1, 1995 (Commencement of Operations) through December 31,
1995.
See Notes to Financial Statements
114
<PAGE>
<TABLE>
<CAPTION>
VARIABLE INSURANCE
PRODUCTS FUND
- ------------------------------------------------------------------------------ --------------------------------------
GROWTH
AND SMALL EQUITY INTERNATIONAL VENTURE EQUITY- HIGH
INCOME CAP BALANCED GROWTH EQUITY VALUE INCOME OVERSEAS INCOME
SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB-
ACCOUNT ACCOUNT ACCOUNT* ACCOUNT* ACCOUNT* ACCOUNT* ACCOUNT ACCOUNT ACCOUNT
- ------------ ------------ --------- ------------ ------------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 554,063 $ 340,269 $ 16,795 $ 183,750 $ 10,295 $ 79,465 $ 2,050,693 $ 42,267 $ 1,773
2,113,352 765,215 3,992 66,138 24,055 172,134 9,553,884 3,794,109 169,647
- ----------- ----------- -------- ----------- --------- ---------- ----------- ----------- ----------
2,667,415 1,105,484 20,787 249,888 34,350 251,599 11,604,577 3,836,376 171,420
3,473,273 2,237,626 81,978 1,048,361 241,835 625,044 13,985,879 17,076,602 395,370
2,645,617 4,814,141 409,874 5,735,744 948,764 3,228,499 12,483,761 (2,007,296) 1,503,857
(2,568,808) (1,803,085) (94,428) (1,321,495) (271,101) (718,702) (9,853,532) (8,392,295) (358,576)
- ----------- ----------- -------- ----------- --------- ---------- ----------- ----------- ----------
3,550,082 5,248,682 397,424 5,462,610 919,498 3,134,841 16,616,108 6,677,011 1,540,651
- ----------- ----------- -------- ----------- --------- ---------- ----------- ----------- ----------
6,217,497 6,354,166 418,211 5,712,498 953,848 3,386,440 28,220,685 10,513,387 1,712,071
4,092,981 190,830 -- -- -- -- 19,132,167 27,868,832 30,422
- ----------- ----------- -------- ----------- --------- ---------- ----------- ----------- ----------
$10,310,478 $ 6,544,996 $418,211 $ 5,712,498 $ 953,848 $3,386,440 $47,352,852 $38,382,219 $1,742,493
=========== =========== ======== =========== ========= ========== =========== =========== ==========
<CAPTION>
VARIABLE
INSURANCE
PRODUCTS
FUND II
- ----------- ----------------
ASSET
MANAGER
SUB-
ACCOUNT TOTAL
- ----------- ----------------
<C> <C>
$ 2,359 $ 64,061,749
275,419 95,415,706
- ---------- -------------
277,778 159,477,455
696,227 202,985,540
1,507,606 --
(709,312) (115,320,001)
- ---------- -------------
1,494,521 87,665,539
- ---------- -------------
1,772,299 247,142,994
200,694 365,491,290
- ---------- -------------
$1,972,993 $ 612,634,284
========== =============
</TABLE>
See Notes to Financial Statements
115
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
STATEMENT OF CHANGES IN NET ASSETS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
NEW ENGLAND ZENITH FUND
------------------------------------------------------------------------------------
CAPITAL BOND MONEY STOCK AVANTI
GROWTH INCOME MARKET INDEX MANAGED GROWTH
SUB- SUB- SUB- SUB- SUB- SUB-
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------------- ------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATING ACTIVITIES
Net investment income (loss) . . . $ 11,881,805 $ 1,291,818 $ 598,102 $ 247,929 $ 592,900 $ 11,372
Net realized and unrealized gain
(loss) on investments . . . . . . (36,140,510) (2,068,414) -- (181,812) (861,559) 63,068
------------ ----------- ------------ ----------- ----------- -----------
Increase (decrease) in net assets
resulting from operations . . . (24,258,705) (776,596) 598,102 66,117 (268,659) 74,440
FROM POLICY-RELATED TRANSACTIONS
Net premiums transferred from New
England Life Insurance Company
(Note 4) . . . . . . . . . . . . 101,802,783 6,362,705 39,544,492 3,600,140 4,112,835 3,173,029
Net transfers (to) from other
sub-accounts. . . . . . . . . . . (1,234,289) (822,617) (29,858,294) 718,688 (186,357) 2,527,486
Net transfers to New England Life
Insurance Company . . . . . . . . (56,761,722) (4,458,223) (6,161,941) (2,075,140) (3,102,454) (2,027,427)
------------ ----------- ------------ ----------- ----------- -----------
Increase in net assets resulting
from policy-related
transactions . . . . . . . . . . 43,806,772 1,081,865 3,524,257 2,243,688 824,024 3,673,088
------------ ----------- ------------ ----------- ----------- -----------
Net increase in net assets . . . . 19,548,067 305,269 4,122,359 2,309,805 555,365 3,747,528
NET ASSETS, AT BEGINNING OF THE
PERIOD . . . . . . . . . . . . . . 229,946,670 16,444,862 12,758,384 7,369,159 14,204,213 2,663,683
------------ ----------- ------------ ----------- ----------- -----------
NET ASSETS, AT END OF THE PERIOD . $249,494,737 $16,750,131 $ 16,880,743 $ 9,678,964 $14,759,578 $ 6,411,211
============ =========== ============ =========== =========== ===========
<CAPTION> VARIABLE
INSURANCE
VARIABLE INSURANCE PRODUCTS
PRODUCTS FUND FUND II
------------------------------------- --------- ---------------
GROWTH
AND SMALL EQUITY- HIGH ASSET
INCOME CAP INCOME OVERSEAS INCOME MANAGER
SUB- SUB- SUB- SUB- SUB- SUB-
ACCOUNT ACCOUNT* ACCOUNT ACCOUNT ACCOUNT** ACCOUNT** TOTAL
----------- --------- ------------ ------------ --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
FROM OPERATING ACTIVITIES
Net investment income (loss) . . . $ 71,603 $ 299 $ 594,515 $ (63,886) $ (6) $ (34) $ 15,226,417
Net realized and unrealized gain
(loss) on investments . . . . . . (64,616) 4,662 55,717 (439,917) 213 (1,503) (39,634,671)
---------- -------- ----------- ----------- ------- -------- ------------
Increase (decrease) in net assets
resulting from operations . . . 6,987 4,961 650,232 (503,803) 207 (1,537) (24,408,254)
FROM POLICY-RELATED TRANSACTIONS
Net premiums transferred from New
England Life Insurance Company
(Note 4) . . . . . . . . . . . . 1,762,484 4,323 9,237,234 11,268,285 102 8,495 180,876,907
Net transfers (to) from other
sub-accounts. . . . . . . . . . . 2,012,595 226,677 9,868,299 16,487,055 36,048 224,709 --
Net transfers to New England Life
Insurance Company . . . . . . . . (1,190,128) (45,131) (4,905,512) (8,836,370) (5,935) (30,973) (89,600,956)
---------- -------- ----------- ----------- ------- -------- ------------
Increase in net assets resulting
from policy-related
transactions . . . . . . . . . . 2,584,951 185,869 14,200,021 18,918,970 30,215 202,231 91,275,951
---------- -------- ----------- ----------- ------- -------- ------------
Net increase in net assets . . . . 2,591,938 190,830 14,850,253 18,415,167 30,422 200,694 66,867,697
NET ASSETS, AT BEGINNING OF THE
PERIOD . . . . . . . . . . . . . . 1,501,043 -- 4,281,914 9,453,665 -- -- 298,623,593
---------- -------- ----------- ----------- ------- -------- ------------
NET ASSETS, AT END OF THE PERIOD . $4,092,981 $190,830 $19,132,167 $27,868,832 $30,422 $200,694 $365,491,290
========== ======== =========== =========== ======= ======== ============
</TABLE>
* For the period May 2, 1994 (Commencement of Operations) through December 31,
1994.
** For the period August 31, 1994 (Commencement of Operations) through
December 31, 1994.
See Notes to Financial Statements
116
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS. New England Variable Life Separate Account (the
"Account") of New England Life Insurance Company ("NELICO"), formerly New
England Variable Life Insurance Company ("NEVLICO"), was established by NELICO's
Board of Directors on January 31, 1983 in accordance with the regulations of the
Delaware Insurance Department and is now operating in accordance with the
regulations of the Commonwealth of Massachusetts Division of Insurance. The
Account is registered as a unit investment trust under the Investment Company
Act of 1940. The assets of the Account are owned by NELICO. The net assets of
the Account are restricted from use in the ordinary business of NELICO.
Effective with the merger on August 30, 1996 of New England Mutual Life
Insurance Company ("NEMLICO") and Metropolitan Life Insurance Company ("MLI"),
NEMLICO ceased to exist, with MLI the surviving company of the merger. NELICO
then became an indirect wholly-owned subsidiary of MLI.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. SUB-ACCOUNTS. The Account has eighteen investment sub-accounts each of which
invest in the shares of one portfolio of the New England Zenith Fund ("Zenith
Fund"), the Variable Insurance Products Fund or the Variable Insurance Products
Fund II. The portfolios of the Zenith Fund, the Variable Insurance Products Fund
and the Variable Insurance Products Fund II in which the sub-accounts invest are
referred to herein as the "Eligible Funds". The Zenith Fund, the Variable
Insurance Products Fund and the Variable Insurance Products Fund II are
diversified, open-end management investment companies. The Account purchases or
redeems shares of the eighteen Eligible Funds based on the amount of net
premiums invested in the Account, transfers among the sub-accounts, policy
loans, surrender payments, and death benefit payments. The values of the shares
of the Eligible Funds are determined as of the close of the New York Stock
Exchange (normally 4:00 p.m. EST) on each day the Exchange is open for trading.
Realized gains and losses on the sale of Eligible Funds' shares are computed on
the basis of identified cost on the trade date. Income from dividends is
recorded on the ex-dividend date. Charges for investment advisory fees and other
expenses are reflected in the carrying value of the assets of the Eligible
Funds.
3. MORTALITY AND EXPENSE RISK CHARGES. NELICO charges the Account for the
mortality and expense risk NELICO assumes. The mortality risk assumed by NELICO
is the risk that insureds may live for shorter periods of time than NELICO
estimated when setting its cost of insurance charges. The expense risk assumed
by NELICO is the risk that the deductions for sales and administrative charges
may prove insufficient to cover actual cost. If these deductions are
insufficient to cover the cost of the mortality and expense risk assumed by
NELICO, NELICO absorbs the resulting losses and makes sufficient transfers to
the Fund from its general assets. Conversely, if those deductions are more than
sufficient after the establishment of any contingency reserves deemed prudent or
required by law, the excess is retained by NELICO. Currently, the charges are
made daily at an annual rate of .35% of the Account assets attributable to fixed
premium ("Zenith Life") variable policies, .45% of the Account assets
attributable to single premium ("Zenith Life One") variable life policies, .60%
of the Account assets attributable to variable ordinary ("Zenith Life Plus" and
"Zenith Life Plus II") life policies and limited payment ("Zenith Life Executive
65") variable life policies, .90% of the Account assets attributable to variable
survivorship ("Zenith Survivorship Life") life policies, and .75% of the Account
assets attributable to flexible premium ("Zenith Flexible Life") variable
policies. For the modified single premium ("American Gateway") variable life
policies mortality and expense risk charges are not charged against the
sub-account assets but are deducted from the policy cash values monthly at an
annual rate of .90%.
4. NET PREMIUM TRANSFERS AND DEDUCTIONS FROM CASH VALUE. Certain deductions are
made from each premium payment paid to NELICO to arrive at a net premium that is
transferred to the Account. Certain deductions are made from cash values in the
sub-accounts. These deductions, depending on the policy, could include sales
loads, administrative charges, premium tax charges, risk charges, cost of
insurance charges, and charges for rider benefits and special risk charges.
117
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. FEDERAL INCOME TAXES. For federal income tax purposes the Account's
operations are included with those of NELICO. NELICO intends to make appropriate
charges against the Account in the future if and when tax liabilities arise.
6. INVESTMENT ADVISERS. The adviser and sub-adviser for each series of the
Zenith Fund are listed in the chart below. TNE Advisers, Inc. which is a
subsidiary of NELICO, and each of the sub-advisers are registered with the SEC
as investment advisers under the Investment Advisers Act of 1940.
<TABLE>
<CAPTION>
SERIES ADVISER SUB-ADVISER
------ ---------------------- -----------------------
<S> <C> <C>
Capital Growth Capital Growth
Management, L.P.
("CGM")*
Back Bay Advisors Money
Market TNE Advisers, Inc.** Back Bay Advisors, L.P.*
Back Bay Advisors Bond
Income TNE Advisers, Inc.** Back Bay Advisors, L.P.*
Back Bay Advisors Managed TNE Advisers, Inc.** Back Bay Advisors, L.P.*
Westpeak Stock Index TNE Advisers, Inc.** Westpeak Investment
Advisors, L.P.*
Westpeak Growth and Income TNE Advisers, Inc.** Westpeak Investment
Advisors, L.P.*
Loomis Sayles Avanti Growth TNE Advisers, Inc.** Loomis, Sayles & Company,
L.P.*
Loomis Sayles Small Cap TNE Advisers, Inc.** Loomis, Sayles & Company,
L.P.*
Loomis Sayles Balanced TNE Advisers, Inc.** Loomis, Sayles & Company,
L.P.*
Draycott International
Equity TNE Advisers, Inc.** Draycott Partners, Ltd.
Davis Venture Value TNE Advisers, Inc.** Davis Selected Advisers,
Inc.
Alger Equity Growth TNE Advisers, Inc.** Fred Alger Management,
Inc.
Salomon Brothers U.S.
Government TNE Advisers, Inc.** Salomon Brothers Asset
Management, Inc.
Salomon Brothers Strategic
Bond Opportunities TNE Advisers, Inc.** Salomon Brothers Asset
Management, Inc.
</TABLE>
* An affiliate of NELICO
** A subsidiary of NELICO
In the case of the Back Bay Advisors Money Market Series, Back Bay Advisors Bond
Income Series, Back Bay Advisors Managed Series, Westpeak Stock Index Series,
Westpeak Growth and Income Series, Loomis Sayles Avanti Growth Series and Loomis
Sayles Small Cap Series, TNE Advisers became the adviser on May 1, 1995. Prior
to that date those Series were advised by their current sub-adviser, except as
follows. NEMLICO, the former parent of NELICO, itself served as investment
adviser to the Back Bay Advisors Money Market Series and Back Bay Advisors Bond
Income Series until September 10, 1986 when Back Bay Advisors assumed its
responsibilities under the investment advisory agreements with those Series.
Back Bay Advisors served as investment adviser to the Westpeak Stock Index
Series until August 2, 1993, when Westpeak became the investment adviser. The
Capital Growth Series was managed by Loomis, Sayles until March 1, 1990, when
its Capital Growth Management division was reorganized into CGM. The
Equity-Income, Overseas, and High Income Portfolios of the Variable Insurance
Products Fund and the Asset Manager Portfolio of the Variable Insurance Products
Fund II receive investment advice from Fidelity Management & Research Company.
On January 22, 1997, the Board of Trustees of New England Zenith Fund approved a
new subadvisory agreement relating to the Draycott International Equity Series
between TNE Advisers, Inc. and Morgan Stanley Asset Management Inc. ("MSAM").
This new agreement, is expected to become effective May 1, 1997 (subject to
shareholder approval, if necessary). Under this new agreement MSAM would become
subadviser of the Series, succeeding Draycott Partners, Ltd. and would be
responsible for the day to day management of the Series. The new name of the
Series will be Morgan Stanley International Magnum Equity Series.
118
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. INVESTMENT PURCHASES AND SALES. The following table shows the aggregate cost
of Eligible Fund shares purchased and proceeds from the sales of Eligible Fund
shares for each sub-account for the year ended December 31, 1996:
<TABLE>
<CAPTION>
PURCHASES SALES
------------ --------------
<S> <C> <C>
Capital Growth Series $192,435,910 $125,337,191
Back Bay Advisors Money Market Series 98,065,488 87,200,674
Back Bay Advisors Bond Income Series 18,719,861 11,239,097
Back Bay Advisors Managed Series 13,159,539 7,382,329
Westpeak Stock Index Series 16,840,737 7,613,106
Westpeak Growth and Income Series 11,290,092 4,514,904
Loomis Sayles Avanti Growth Series 14,804,586 7,554,161
Loomis Sayles Small Cap Series 20,487,120 6,016,762
Loomis Sayles Balanced Series 3,720,239 699,768
Draycott International Equity Series 5,234,589 1,560,413
Davis Venture Value Series 16,761,770 3,814,839
Alger Equity Growth Series 25,051,802 7,538,044
Salomon Brothers U.S. Government Series* 47,709 --
Salomon Brothers Strategic Bond Opportunities
Series* 28,407 --
VIP Equity-Income Series 40,788,600 18,781,619
VIP Overseas Series 29,417,696 19,661,090
VIP High Income Series 3,849,778 1,456,754
VIP II Asset Manager Series 2,822,409 1,496,363
</TABLE>
* For the period July 1, 1996 (Commencement of Operations of the sub-account)
through December 31, 1996.
8. NET INVESTMENT RETURNS. The following table shows the net investment return
of the sub-account for each type of variable life insurance policy investing in
the Account. The net investment return reflects the appropriate mortality and
expense risk charge against sub-account assets, where applicable, for each type
of variable life insurance policy shown (in the case of the American Gateway
Series, the mortality and expense risk charge is deducted monthly from cash
values rather than daily from sub-account assets and, therefore, does not impact
sub-account net investment returns). These figures do not reflect charges
deducted from premiums and the cash values of the policies. Such charges will
affect the actual cash values and benefits of the policies. Certain amounts have
been restated to conform with the current calculation of net investment return
to provide greater comparability with industry convention.
119
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FIXED PREMIUM ("ZENITH LIFE") POLICIES
<TABLE>
<CAPTION>
NET INVESTMENT RETURN OF THE SUB-ACCOUNTS
--------------------------------------------------------------------------------------------------
1/1/87- 1/1/88- 1/1/89- 1/1/90- 1/1/91- 1/1/92- 1/1/93- 1/1/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/87 12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital Growth . . . . . . . 52.17% (9.11)% 30.30% (3.82)% 53.45% (6.38)% 14.57% (7.39)% 37.55% 20.65%
Bond Income . . . . . . . . . 1.91% 7.99% 11.91% 7.71% 17.55% 7.80% 12.22% (3.70)% 20.78% 4.24%
Money Market . . . . . . . . 6.16% 7.14% 8.87% 7.81% 5.84% 3.43% 2.61% 3.61% 5.33% 4.76%
</TABLE>
<TABLE>
<CAPTION>
5/1/87- 1/1/88- 1/1/89- 1/1/90- 1/1/91- 1/1/92- 1/1/93- 1/1/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/87 12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock Index . . . . . . . . . (12.40)% 15.93% 29.70% (4.48)% 29.98% 6.92% 9.34% 0.76% 36.44% 22.04%
Managed . . . . . . . . . . . (0.89)% 9.10% 18.67% 2.85% 19.75% 6.33% 10.26% (1.46)% 30.81% 14.62%
</TABLE>
<TABLE>
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/93 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- -------- ----------
<S> <C> <C> <C> <C>
Avanti Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.47% (0.62)% 29.90% 17.20%
Growth and Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.97% (1.55)% 35.99% 17.68%
</TABLE>
<TABLE>
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/93 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- -------- ----------
<S> <C> <C> <C> <C>
Equity-Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.29% 6.69% 34.62% 13.88%
Overseas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.57% 1.37% 9.30% 12.82%
</TABLE>
<TABLE>
<CAPTION>
5/2/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- ----------
<S> <C> <C> <C>
Small Cap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3.45)% 28.40% 30.22%
</TABLE>
<TABLE>
<CAPTION>
8/31/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- ----------
<S> <C> <C> <C>
High Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.58)% 20.18% 13.63%
Asset Manager . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4.41)% 16.55% 14.20%
</TABLE>
<TABLE>
<CAPTION>
5/1/95- 1/1/96-
SUB-ACCOUNT 12/31/95 12/31/96
- ----------- -------- ----------
<S> <C> <C>
Equity Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.84% 12.78%
Balanced . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.75% 16.50%
International Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.85% 6.30%
Venture Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.64% 25.40%
</TABLE>
120
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SINGLE PREMIUM ("ZENITH LIFE ONE") POLICIES
<TABLE>
<CAPTION>
NET INVESTMENT RETURN OF THE SUB-ACCOUNTS
--------------------------------------------------------------------------------------------------
1/1/87- 1/1/88- 1/1/89- 1/1/90- 1/1/91- 1/1/92- 1/1/93- 1/1/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/87 12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital Growth . . . . . . . . 52.02% (9.20)% 30.17% (3.91)% 53.29% (6.47)% 14.46% (7.38)% 37.41% 20.53%
Bond Income . . . . . . . . . 1.81% 7.88% 11.79% 7.60% 17.43% 7.69% 12.10% (3.80)% 20.66% 4.14%
Money Market . . . . . . . . . 6.05% 7.03% 8.77% 7.71% 5.74% 3.33% 2.51% 3.35% 5.23% 4.65%
</TABLE>
<TABLE>
<CAPTION>
5/1/87- 1/1/88- 1/1/89- 1/1/90- 1/1/91- 1/1/92- 1/1/93- 1/1/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/87 12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock Index . . . . . . . . . (12.46)% 15.82% 29.57% (4.58)% 29.85% 6.81% 9.23% 0.66% 36.30% 21.91%
Managed . . . . . . . . . . . (0.96)% 8.99% 18.55% 2.75% 19.63% 6.22% 10.15% (1.56)% 30.67% 14.51%
</TABLE>
<TABLE>
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/93 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- -------- ----------
<S> <C> <C> <C> <C>
Avanti Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.39% (0.72)% 29.77% 17.08%
Growth and Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.90% (1.65)% 35.85% 17.56%
</TABLE>
<TABLE>
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/93 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- -------- ----------
<S> <C> <C> <C> <C>
Equity-Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.22% 6.59% 34.49% 13.77%
Overseas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.49% 1.27% 9.19% 12.70%
</TABLE>
<TABLE>
<CAPTION>
5/2/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- ----------
<S> <C> <C> <C>
Small Cap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3.52)% 28.27% 30.09%
</TABLE>
<TABLE>
<CAPTION>
8/31/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- ----------
<S> <C> <C> <C>
High Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.61)% 20.06% 13.52%
Asset Manager . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4.45)% 16.43% 14.09%
</TABLE>
<TABLE>
<CAPTION>
5/1/95- 1/1/96-
SUB-ACCOUNT 12/31/95 12/31/96
- ----------- -------- ----------
<S> <C> <C>
Equity Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.76% 12.66%
Balanced . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.67% 16.39%
International Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.79% 6.19%
Venture Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.56% 25.27%
</TABLE>
121
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
VARIABLE ORDINARY ("ZENITH LIFE PLUS" AND "ZENITH LIFE PLUS II") AND
LIMITED PAYMENT ("ZENITH LIFE EXECUTIVE 65") POLICIES
<TABLE>
<CAPTION>
NET INVESTMENT RETURN OF THE SUB-ACCOUNTS
--------------------------------------------------------------------------------------------------
1/1/87- 1/1/88- 1/1/89- 1/1/90- 1/1/91- 1/1/92- 1/1/93- 1/1/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/87 12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital Growth . . . 51.79% (9.34)% 29.98% (4.06)% 53.06% (6.61)% 14.28% (7.62)% 37.21% 20.34%
Bond Income . . . . 1.65% 7.72% 11.63% 7.44% 17.25% 7.53% 11.94% (3.94)% 20.47% 3.98%
Money Market . . . . 5.89% 6.87% 8.60% 7.54% 5.58% 3.18% 2.36% 3.35% 5.07% 4.50%
</TABLE>
<TABLE>
<CAPTION>
5/1/87- 1/1/88- 1/1/89- 1/1/90- 1/1/91- 1/1/92- 1/1/93- 1/1/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/87 12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock Index . . . . (12.55)% 15.65% 29.37% (4.72)% 29.65% 6.65% 9.07% 0.51% 36.10% 21.73%
Managed . . . . . . (1.06)% 8.83% 18.37% 2.59% 19.45% 6.06% 9.99% (1.70)% 30.48% 14.34%
</TABLE>
<TABLE>
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/93 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- -------- ----------
<S> <C> <C> <C> <C>
Avanti Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.28% (0.87)% 29.57% 16.90%
Growth and Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.78% (1.80)% 35.65% 17.38%
</TABLE>
<TABLE>
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/93 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- -------- ----------
<S> <C> <C> <C> <C>
Equity-Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.11% 6.43% 34.29% 13.59%
Overseas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.38% 1.12% 9.02% 12.53%
</TABLE>
<TABLE>
<CAPTION>
5/2/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- ----------
<S> <C> <C> <C>
Small Cap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3.61)% 28.08% 29.90%
</TABLE>
<TABLE>
<CAPTION>
8/31/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- ----------
<S> <C> <C> <C>
High Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.66)% 19.88% 13.35%
Asset Manager . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4.49)% 16.26% 13.91%
</TABLE>
<TABLE>
<CAPTION>
5/1/95- 1/1/96-
SUB-ACCOUNT 12/31/95 12/31/96
- ----------- -------- ----------
<S> <C> <C>
Equity Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.64% 12.49%
Balanced . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.56% 16.21%
International Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.68% 6.03%
Venture Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.44% 25.08%
</TABLE>
122
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
VARIABLE SURVIVORSHIP ("ZENITH SURVIVORSHIP LIFE") POLICIES
<TABLE>
<CAPTION>
NET INVESTMENT RETURN OF THE SUB-ACCOUNTS
--------------------------------------------------------------------------------------------------
1/1/87- 1/1/88- 1/1/89- 1/1/90- 1/1/91- 1/1/92- 1/1/93- 1/1/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/87 12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital Growth . . . . . . . 51.34% (9.61)% 29.59% (4.35)% 52.61% (6.90)% 13.94% (7.90)% 36.80% 19.98%
Bond Income . . . . . . . . . 1.35% 7.40% 11.29% 7.11% 16.90% 7.21% 11.60% (4.23)% 20.12% 3.67%
Money Market . . . . . . . . 5.57% 6.55% 8.28% 7.22% 5.26% 2.87% 2.05% 3.04% 4.75% 4.18%
</TABLE>
<TABLE>
<CAPTION>
5/1/87- 1/1/88- 1/1/89- 1/1/90- 1/1/91- 1/1/92- 1/1/93- 1/1/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/87 12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock Index . . . . . . . . . (12.73)% 15.30% 28.99% (5.01)% 29.27% 6.33% 8.74% 0.21% 35.69% 21.36%
Managed . . . . . . . . . . . (1.26)% 8.50% 18.02% 2.28% 19.10% 5.74% 9.69% (2.00)% 30.09% 13.99%
</TABLE>
<TABLE>
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/93 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- -------- ----------
<S> <C> <C> <C> <C>
Avanti Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.05% (1.16)% 29.19% 16.55%
Growth and Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.55% (2.09)% 35.25% 17.03%
</TABLE>
<TABLE>
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/93 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- -------- ----------
<S> <C> <C> <C> <C>
Equity-Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.89% 6.11% 33.89% 13.25%
Overseas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.15% 0.82% 8.70% 12.19%
</TABLE>
<TABLE>
<CAPTION>
5/2/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- ----------
<S> <C> <C> <C>
Small Cap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3.80)% 27.69% 29.50%
</TABLE>
<TABLE>
<CAPTION>
8/31/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- ----------
<S> <C> <C> <C>
High Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.76)% 19.53% 13.00%
Asset Manager . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4.59)% 15.91% 13.57%
</TABLE>
<TABLE>
<CAPTION>
5/1/95- 1/1/96-
SUB-ACCOUNT 12/31/95 12/31/96
- ----------- -------- ----------
<S> <C> <C>
Equity Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.39% 12.15%
Balanced . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.33% 15.86%
International Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.48% 5.71%
Venture Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.20% 24.71%
</TABLE>
123
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FLEXIBLE PREMIUM ("ZENITH FLEXIBLE LIFE") POLICIES
<TABLE>
<CAPTION>
NET INVESTMENT RETURN OF THE SUB-ACCOUNTS
--------------------------------------------------------------------------------------------------
1/1/87- 1/1/88- 1/1/89- 1/1/90- 1/1/91- 1/1/92- 1/1/93- 1/1/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/87 12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital Growth . . . . . . . . 51.56% (9.47)% 31.88% (5.73)% 52.83% (6.75)% 14.11% (7.76)% 37.00% 20.16%
Bond Income . . . . . . . . . 1.50% 7.56% 11.46% 7.28% 17.08% 7.37% 11.77% (4.08)% 20.29% 3.82%
Money Market . . . . . . . . . 5.73% 6.71% 8.44% 7.38% 5.42% 3.02% 2.20% 3.20% 4.91% 4.34%
</TABLE>
<TABLE>
<CAPTION>
5/1/87- 1/1/88- 1/1/89- 1/1/90- 1/1/91- 1/1/92- 1/1/93- 1/1/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/87 12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock Index . . . . . . . . . (13.06)% 15.47% 29.18% (4.86)% 29.46% 6.49% 8.90% 0.36% 35.90% 21.55%
Managed . . . . . . . . . . . (1.15)% 8.67% 18.20% 2.44% 19.28% 5.90% 9.82% (1.85)% 30.28% 14.16%
</TABLE>
<TABLE>
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/93 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- -------- ----------
<S> <C> <C> <C> <C>
Avanti Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.16% (1.01)% 29.38% 16.72%
Growth and Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.67% (1.94)% 35.45% 17.21%
</TABLE>
<TABLE>
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/93 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- -------- ----------
<S> <C> <C> <C> <C>
Equity-Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.00% 6.27% 34.09% 13.42%
Overseas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.26% 0.97% 8.86% 12.36%
</TABLE>
<TABLE>
<CAPTION>
5/2/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- ----------
<S> <C> <C> <C>
Small Cap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3.71)% 27.88% 29.70%
</TABLE>
<TABLE>
<CAPTION>
8/31/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- ----------
<S> <C> <C> <C>
High Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.71)% 19.71% 13.17%
Asset Manager . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4.54)% 16.08% 13.74%
</TABLE>
<TABLE>
<CAPTION>
5/1/95- 1/1/96-
SUB-ACCOUNT 12/31/95 12/31/96
- ----------- -------- ----------
<S> <C> <C>
Equity Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.51% 12.32%
Balanced . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.44% 16.03%
International Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.58% 5.87%
Venture Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.32% 24.89%
</TABLE>
124
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MODIFIED SINGLE PREMIUM ("AMERICAN GATEWAY") POLICIES
<TABLE>
<CAPTION>
NET INVESTMENT RETURN OF THE SUB-ACCOUNTS
--------------------------------------------------------------------------------------------------
1/1/87- 1/1/88- 1/1/89- 1/1/90- 1/1/91- 1/1/92- 1/1/93- 1/1/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/87 12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Bond Income . . . . . . . . . 2.27% 8.37% 12.30% 8.09% 17.96% 8.18% 12.61% (3.36)% 21.20% 4.61%
Money Market . . . . . . . . . 6.53% 7.52% 9.25% 8.19% 6.21% 3.80% 2.97% 3.97% 5.70% 5.13%
</TABLE>
<TABLE>
<CAPTION>
5/1/87- 1/1/88- 1/1/89- 1/1/90- 1/1/91- 1/1/92- 1/1/93- 1/1/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/87 12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock Index . . . . . . . . . (12.20)% 16.34% 30.15% (4.14)% 30.43% 7.30% 9.72% 1.12% 36.92% 22.47%
Managed . . . . . . . . . . . (0.66)% 9.48% 19.08% 3.21% 20.17% 6.70% 10.65% (1.11)% 31.26% 15.03%
</TABLE>
<TABLE>
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/93 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- -------- ----------
<S> <C> <C> <C> <C>
Avanti Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.74% (0.27)% 30.35% 17.61%
Growth and Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.24% (1.21)% 36.47% 18.10%
</TABLE>
<TABLE>
<CAPTION>
5/2/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/94 12/31/95 12/31/96
- ----------- -------- -------- ----------
<S> <C> <C> <C>
Small Cap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3.23)% 28.84% 30.68%
</TABLE>
<TABLE>
<CAPTION>
10/31/94- 1/1/95- 1/1/96-
SUB-ACCOUNT 12/31/94 12/31/95 12/31/96
- ----------- --------- -------- ----------
<S> <C> <C> <C>
Equity Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4.20)% 48.69% 13.17%
Balanced . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.10)% 24.79% 16.91%
International Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.60% 6.23% 6.67%
Venture Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3.50)% 39.28% 25.84%
U.S. Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.60% 15.02% 3.31%
Strategic Bond Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.40)% 19.38% 14.36%
</TABLE>
The net investment return of a sub-account is calculated by taking the
difference between the sub-account's ending value and the beginning value for
the period and dividing it by the beginning value for the period.
125
<PAGE>
Bulk Rate
[N/E THE NEW ENGLAND/(R)/ INSURANCE AND INVESTMENT LOGO] U.S. Postage
PAID
NEW ENGLAND LIFE INSURANCE COMPANY Hudson, MA
501 BOYLSTON STREET Permit No. 19
BOSTON, MASSACHUSETTS 02116
---------------
EQUAL OPPORTUNITY EMPLOYER M/F
/(C) /1997 NEW ENGLAND LIFE INSURANCE COMPANY
-----------------------------------------------------------------------------
This booklet has been prepared for variable contract owners of
New England Life Insurance Company.
VL 1
(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS
FUND: GROWTH PORTFOLIO
ANNUAL REPORT
DECEMBER 31, 1996
CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
MARKET ENVIRONMENT 3 A review of what happened in world markets
during the last year.
PERFORMANCE 4 How the fund has done over time.
FUND TALK 5 The manager's review of fund performance, strategy
and outlook.
INVESTMENTS 6 A complete list of the fund's investments with their
market values.
FINANCIAL STATEMENTS 11 Statements of assets and liabilities, operations, and
changes in net assets, as well as financial highlights.
NOTES 13 Notes to the financial statements.
REPORT OF INDEPENDENT ACCOUNTANTS 15 The auditors' opinion.
DISTRIBUTIONS 16
</TABLE>
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR
THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS
PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY,
ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED
BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
MARKET ENVIRONMENT
Most stock and bond markets posted positive returns in 1996, aided by
moderate growth and low inflation. Sustained corporate earnings growth and
a favorable interest rate environment also proved beneficial. Japan,
however, was the major exception as an underperforming stock market and a
weak yen undermined returns for U.S.-based investors. The strongest gains
came from the often-volatile emerging bond markets in 1996, while
performance of the bond markets of developed countries was mixed.
U.S. STOCK MARKETS
The Standard & Poor's 500 Index - a broad measure of U.S. stock market
performance - rose 22.96% for the 12 months that ended December 31, 1996,
well above the index's long-term average annual return of about 12%. The
Russell 2000 Index - a measure of small stock performance - rose 16.49%.
The Dow Jones Industrial Average - an index of 30 blue-chip stocks - posted
a return of 28.70%, closing above 6500 for the first time in November.
The U.S. stock market spent much of the past year breaking price and
trading volume records. Solid corporate earnings reports, large cash
inflows into mutual funds, widespread optimism and a generally favorable
interest rate environment propelled share prices higher.
Large-capitalization stocks thrived as investors sought their lower
volatility and higher degree of liquidity over smaller-cap stocks in an
environment where it was sometimes difficult to discern the health of the
economy.
Most industry sectors experienced positive, if not strong performance. At
mid-year, technology stocks suffered from a sell-off sparked by fears that
company earnings were weakening. Nevertheless, this sector proved to be the
strongest in the U.S. market in 1996. Earnings surprises and positive
earnings projections were the main drivers of solid performance, especially
among semiconductor manufacturers, companies that make disk drives and
monitors, and software firms. Even though consensus estimates pointed
toward increases in short-term interest rates by the Fed, financial stocks
- - usually sensitive to changes in interest rates - shrugged off this
concern and posted solid performance based on low interest rates and
positive business prospects. Energy stocks reaped the benefits of
higher-than-expected energy prices, which resulted in part from the delayed
re-entry of Iraq into the world market. Uncertainty over the direction of
the economy benefited consumer nondurables - such as food, beverage and
tobacco companies - health care and traditional big-name growth stocks, as
these companies tend to post steady earnings growth in many economic
environments.
Utilities stocks struggled in 1996 for two reasons. First, and most
important, uncertainty over the direction and form of deregulation in the
sector tended to diminish investor interest. Second, stocks in the sector
tend to move in concert with bonds, which lagged due to periodic inflation
fears and confusing economic signals. Stocks in the telecommunications
field especially were affected by uncertainty over legislation signed into
law in February 1996. Biotechnology issues had a hard time recovering from
a correction in stock prices from overvalued levels that they experienced
earlier in 1996. Cyclical stocks - those that usually rise and fall with
the economy - posted mixed results that largely depended on the outlook for
companies in the specific sector rather than the direction of the economy.
FOREIGN STOCK MARKETS
Foreign stock markets posted mixed results in 1996. The Morgan Stanley
Capital International (MSCI) EAFE Index - which measures stock performance
in Europe, Australia and the Far East - returned 6.05% in 1996. Europe
posted the most consistently strong equity markets due to stronger economic
growth, lower interest rates, higher corporate earnings, the relative
weakness of the continent's major currencies and a new emphasis on
shareholder friendliness by many of the region's corporations. The MSCI
Europe Index was up 21.09% in 1996. The Japanese stock market
underperformed on the weakness of the economic recovery and the uncertainty
for any substantial economic reform. The Tokyo Stock Exchange TOPIX Total
Return Index was off 16.26%. Emerging market equity performance ran the
gamut from negative to positive, with the MSCI Emerging Markets Free Index
returning 6.03% for 1996. While Hong Kong was a top performer - benefiting
from the rising value of the property sector, solid economic growth and
stable interest rates - other Asian markets posted mixed returns as
concerns rose over declining export growth in the region. Latin America
enjoyed a strong first half, but faded toward the end of 1996 due to low
domestic savings rates and inefficient governments, among other factors.
U.S. BOND MARKETS
Uncertainty over the direction of the economy led to mixed performance in
U.S. bond markets in 1996. For the year, the Lehman Brothers Aggregate Bond
Index - a broad measure of the performance of the U.S. taxable bond market
- - posted a total return of 3.63%. Stronger-than-expected economic signals
rattled the bond market in the early spring. Investors spent most of the
summer anticipating a short-term interest rate increase by the Federal
Reserve Board. However, the Fed neither raised nor lowered rates through
the end of 1996. Interest rates responded to the Fed's inaction by falling
during much of October and November. In December, though, bond prices
dropped due to inflation concerns, stronger-than-expected economic data and
comments by Fed Chairman Alan Greenspan that the stock markets may be
overvalued.
FOREIGN BOND MARKETS
While low inflation and moderate growth helped provide a positive backdrop
for most bond markets in 1996, performance in overseas bond markets was
mixed. The Salomon Brothers World Government Bond Index - a measure of
government bond market performance in developed nations - returned 3.62%
for the 12 months that ended December 31, 1996. In Europe, focus centered
on the continuing progress toward the European Monetary Union (EMU).
Attractive opportunities arose as countries worked to meet the requirements
for joining the EMU. However, Germany and Japan - two of the larger
components of the Salomon Brothers World Government Bond Index -
experienced currency problems that hurt returns. In stark contrast to the
developed world, the often-volatile emerging debt markets enjoyed a
particularly strong year, helped by inflows of foreign capital, low
interest rates and the implementation of country-specific reforms -
especially in Latin America. The J.P. Morgan Emerging Markets Bond Index -
of which Latin America is a large component - posted a return of 34.16%
during the period.
VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can
look at the total percentage change in value, the average annual percentage
change, or the growth of a hypothetical $10,000 investment. Total return
reflects the change in the value of an investment, assuming reinvestment of
the fund's dividend income and capital gains (the profits earned upon the
sale of securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10
DECEMBER 31, 1996 YEAR YEARS YEARS
Growth 14.71% 15.16% 15.15%
S&P 500(registered trademark) 22.96% 15.22% 15.27%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what
would have happened if the fund had performed at a constant rate each year.
You can compare these figures to the performance of the Standard & Poor's
500 Index - a widely recognized, unmanaged index of common stocks. This
benchmark reflects the reinvestment of dividends and capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for
example, has a history of growth in the long run
and volatility in the short run. In turn, the share
price and return of a fund that invests in stocks
will vary. That means if you sell your shares
during a market downturn, you might lose
money. But if you can ride out the market's ups
and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of return
and are not the fund's year-by-year results, which fluctuated over the
periods shown.
If Fidelity had not reimbursed certain fund expenses, the fund's past 10
years total return would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL
CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER THE PAST 10 YEARS
IMAHDR PRASUN SHR__CHT 19961231 19970108 094950 S00000000000001
VIP: Growth SP Standard & Poor 500
00151 SP001
1986/12/31 10000.00 10000.00
1987/01/31 11066.80 11347.00
1987/02/28 11615.15 11795.21
1987/03/31 11804.55 12136.09
1987/04/30 11804.55 12028.08
1987/05/31 11884.45 12132.72
1987/06/30 12233.99 12745.42
1987/07/31 12723.35 13391.62
1987/08/31 13102.85 13891.12
1987/09/30 12953.05 13586.91
1987/10/31 10106.77 10660.29
1987/11/30 9397.70 9781.88
1987/12/31 10366.43 10526.28
1988/01/31 10591.35 10969.44
1988/02/29 11450.11 11480.61
1988/03/31 11347.87 11125.86
1988/04/30 11491.00 11249.36
1988/05/31 11388.77 11347.23
1988/06/30 11961.27 11868.07
1988/07/31 11899.93 11822.97
1988/08/31 11613.68 11420.99
1988/09/30 11940.82 11907.52
1988/10/31 11971.49 12238.55
1988/11/30 11859.04 12063.54
1988/12/31 11981.72 12274.65
1989/01/31 12840.48 13173.16
1989/02/28 12574.67 12845.14
1989/03/31 12954.82 13144.44
1989/04/30 13639.93 13826.63
1989/05/31 14127.81 14386.61
1989/06/30 13940.96 14304.61
1989/07/31 15186.62 15596.31
1989/08/31 15446.13 15902.00
1989/09/30 15581.07 15836.80
1989/10/31 15145.09 15469.39
1989/11/30 15394.23 15784.96
1989/12/31 15757.54 16163.80
1990/01/31 14844.06 15079.21
1990/02/28 14985.85 15273.73
1990/03/31 15169.00 15678.49
1990/04/30 14727.29 15286.53
1990/05/31 16030.87 16776.96
1990/06/30 16364.85 16662.88
1990/07/31 16106.29 16609.56
1990/08/31 14447.18 15108.05
1990/09/30 12960.44 14372.29
1990/10/31 12497.19 14310.49
1990/11/30 13509.89 15234.95
1990/12/31 13908.51 15660.00
1991/01/31 14835.02 16342.78
1991/02/28 15941.78 17511.29
1991/03/31 16422.88 17935.06
1991/04/30 16269.80 17978.11
1991/05/31 17231.99 18754.76
1991/06/30 15952.72 17895.79
1991/07/31 17472.54 18729.74
1991/08/31 18248.86 19173.63
1991/09/30 18391.00 18853.43
1991/10/31 18959.57 19106.07
1991/11/30 17877.10 18336.09
1991/12/31 20238.85 20433.74
1992/01/31 21474.39 20053.67
1992/02/29 21923.63 20314.37
1992/03/31 20579.99 19918.24
1992/04/30 19773.81 20503.84
1992/05/31 19605.86 20604.31
1992/06/30 18844.46 20297.30
1992/07/31 19572.27 21127.46
1992/08/31 19034.81 20694.35
1992/09/30 19370.72 20938.54
1992/10/31 20120.92 21011.83
1992/11/30 21464.55 21728.33
1992/12/31 22125.17 21995.59
1993/01/31 22561.85 22180.35
1993/02/28 22096.74 22482.00
1993/03/31 22977.86 22956.37
1993/04/30 22737.56 22400.83
1993/05/31 24431.14 23001.17
1993/06/30 24682.89 23067.88
1993/07/31 24614.23 22975.60
1993/08/31 25850.09 23846.38
1993/09/30 26330.71 23662.76
1993/10/31 26582.46 24152.58
1993/11/30 25506.80 23923.13
1993/12/31 26410.81 24212.60
1994/01/31 27074.51 25035.83
1994/02/28 26795.26 24357.36
1994/03/31 25577.85 23295.38
1994/04/30 25736.12 23593.56
1994/05/31 25139.58 23980.49
1994/06/30 23861.30 23392.97
1994/07/31 24689.14 24160.26
1994/08/31 26089.17 25150.83
1994/09/30 25772.64 24534.64
1994/10/31 26819.61 25086.67
1994/11/30 25748.29 24173.01
1994/12/31 26405.69 24531.50
1995/01/31 25906.55 25167.60
1995/02/28 26979.42 26148.38
1995/03/31 27958.71 26920.02
1995/04/30 28901.27 27712.81
1995/05/31 30027.46 28820.49
1995/06/30 32683.78 29489.99
1995/07/31 35915.43 30467.88
1995/08/31 36356.11 30544.36
1995/09/30 37298.68 31833.33
1995/10/31 36919.20 31719.68
1995/11/30 36894.72 33112.18
1995/12/31 35744.06 33749.92
1996/01/31 36307.15 34898.76
1996/02/29 37524.44 35222.28
1996/03/31 37669.27 35561.47
1996/04/30 39143.91 36085.64
1996/05/31 40368.39 37016.29
1996/06/30 39578.41 37157.32
1996/07/31 36550.12 35515.71
1996/08/31 37642.94 36264.74
1996/09/30 40170.90 38305.72
1996/10/31 40078.73 39362.19
1996/11/30 42303.87 42337.58
1996/12/31 41000.39 41498.87
IMATRL PRASUN SHR__CHT 19961231 19970108 094953 R00000000000123
Let's say hypothetically that $10,000 was invested in Growth Portfolio on
December 31, 1986. As the chart shows, by December 31, 1996, the value of
the investment would have grown to $41,000 - a 310.00% increase on the
initial investment. With reinvested dividends and capital gains, if any, a
$10,000 investment in the S&P 500 would have grown to $41,499 over the same
period - a 314.99% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1996
% OF FUND'S
INVESTMENTS
Intel Corp. 2.5
General Electric Co. 2.4
Cisco Systems, Inc. 2.4
HFS, Inc. 1.9
Oracle Systems Corp. 1.8
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1996
% OF FUND'S
INVESTMENTS
Technology 25.6
Health 11.0
Retail & Wholesale 9.0
Finance 8.2
Media & Leisure 6.3
ASSET ALLOCATION AS OF DECEMBER 31, 1996 *
Row: 1, Col: 1, Value: 9.199999999999999
Row: 1, Col: 2, Value: 45.0
Row: 1, Col: 3, Value: 45.8
Stocks 90.8%
Short-term investments 9.2%
FOREIGN INVESTMENTS 3.6%
*
(% OF FUND'S INVESTMENTS)
VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
NOTE TO SHAREHOLDERS: Jennifer Uhrig became Portfolio Manager of Growth
Portfolio on January 7, 1997, after the period ended.
Q. WHAT CAN YOU TELL US ABOUT THE FUND'S PERFORMANCE, JENNIFER?
A. During the 12 months that ended December 31, 1996, the fund
significantly underperformed the Standard & Poor's 500 Index, which
returned 22.96% during the past one year.
Q. WHAT WERE THE CAUSES OF THE FUND'S RELATIVELY POOR PERFORMANCE?
A. There were three reasons for the fund's underperformance, and most of
them affected the fourth quarter. First, the fund was significantly
underweighted compared to the S&P 500 in financial services and energy
stocks. Financial services was one of the best-performing groups in the
stock market in 1996. In fact, it was one of only a few sectors that
outperformed the general market. However, financial services is not what
one would typically consider to be a growth area, and the fund
traditionally has not had a strong weighting in this sector. Second, the
fund's cash position was high - over 9% both six months ago and when the
period ended - while the market was very strong throughout. Third and
perhaps most important, the fund had twice the market's weighting in
retail. This sector as a whole performed poorly, and some of the fund's
retail holdings blew up, including Sunglass Hut. So those are three key
reasons why the fund lagged its index.
Q. WHAT TYPE OF IMPACT DID THE FUND'S TECHNOLOGY INVESTMENTS HAVE ON
PERFORMANCE?
A. As it turned out, the technology investments did not help, relatively
speaking. With about 26% of its holdings in technology at year-end, the
fund had about twice the weighting of its index in this market sector.
While technology generally performed well, the sector's strength came from
just a few very large capitalization stocks - including Microsoft and IBM.
The fund did own these stocks, but was not overweighted in them. In
retrospect, larger investments in these stocks would have helped the fund.
Q. WHAT WAS THE STORY WITH THE FUND'S HEALTH CARE POSITION?
A. Health care was a strong sector, with the drug stocks doing quite well,
particularly in the second half of the year. Unit growth has been better
than expected, and pricing has stabilized. So the earnings momentum across
this sector has been strong. Drug therapy is a lot cheaper than other types
of therapy, such as hospitalization. Therefore, it is being preferred over
hospital stays - hence the unit growth in prescription medicine. Drug
stocks were also helped by the stock market's concern about the economy.
Drug stocks such as Merck, Pfizer and Bristol-Myers Squibb are what I
consider strong non-cyclical or economically defensive investments, meaning
that they are not as influenced by the strength of the economy. If your
health is at risk, you'll spend money on medicine, whether the economy is
strong, weak or in-between.
Q. HOW ABOUT RETAIL?
A. Retailers are early cyclicals - what I call the "front end of the
economy." They typically lead economic cycles up and lead economic cycles
down. In this respect, they're the other side of the coin from health care.
People who are worried about the economy typically are not spending as much
money on retail goods. I believe investors' concern about the health of the
economy was justified by the relatively lackluster Christmas season for
retail. The fund's overweighting in this sector hurt, and investments in
PETsMART, Staples and Lowe's - as well as Sunglass Hut that I mentioned
earlier - dragged performance down.
Q. WHAT'S YOUR OUTLOOK FOR THE FIRST HALF OF THE YEAR, JENNIFER?
A. A lot depends on how well the economy does, and chances are it will be
slower in 1997 than it was in 1996. I believe consumers are somewhat
over-extended on their borrowing, and that's an environment that typically
doesn't bode well for economic growth. Another argument for a slowdown in
the economy is that we're five years into a recovery, which is a long time
without a breather. I don't know if there will be a recession, but I can't
really see the economy taking off a whole lot from the level it's at today.
The good news is that growth stocks - because they tend to be less
influenced by general economic cycles - can still do well if things slow
down.
FUND FACTS
GOAL: to increase the value of the fund's
shares over the long term by investing in stocks
with above-average growth potential
START DATE: October 9, 1986
SIZE: as of December 31, 1996, more than
$6.0 billion
MANAGER: Jennifer Uhrig, since January 1997;
joined Fidelity in 1987
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO
INVESTMENTS DECEMBER 31, 1996
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 90.8%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 1.4%
AEROSPACE & DEFENSE - 1.2%
Boeing Co. 467,200 $ 49,698,363
Gulfstream Aerospace Corp. (a) 185,300 4,493,525
Lockheed Martin Corp. 165,000 15,097,500
Wyman-Gordon Co. (a) 132,000 2,937,000
72,226,388
DEFENSE ELECTRONICS - 0.2%
Raytheon Co. 259,100 12,469,188
TOTAL AEROSPACE & DEFENSE 84,695,576
BASIC INDUSTRIES - 1.8%
CHEMICALS & PLASTICS - 1.0%
Air Products & Chemicals, Inc. 71,100 4,914,788
Airgas, Inc. (a) 177,600 3,907,200
du Pont (E.I.) de Nemours & Co. 250,000 23,593,750
Monsanto Co. 600,000 23,325,000
Praxair, Inc. 150,000 6,918,750
62,659,488
IRON & STEEL - 0.1%
Nucor Corp. 133,500 6,808,500
METALS & MINING - 0.3%
Aluminum Co. of America 155,500 9,913,125
Freeport McMoRan Copper & Gold, Inc.
Class A 125,000 3,515,625
Inco Ltd. 151,800 4,844,622
Titanium Metals Corp. (a) 30,100 989,538
19,262,910
PACKAGING & CONTAINERS - 0.3%
Crown Cork & Seal Co., Inc. 175,100 9,521,063
Tupperware Corp. 100,000 5,362,500
14,883,563
PAPER & FOREST PRODUCTS - 0.1%
Kimberly-Clark Corp. 85,400 8,134,350
TOTAL BASIC INDUSTRIES 111,748,811
CONGLOMERATES - 1.0%
AlliedSignal, Inc. 300,000 20,100,000
Tyco International Ltd. 369,500 19,537,313
United Technologies Corp. 273,400 18,044,400
57,681,713
CONSTRUCTION & REAL ESTATE - 0.7%
CONSTRUCTION - 0.3%
Oakwood Homes Corp. 875,000 20,015,625
ENGINEERING - 0.2%
MasTec, Inc. (a) 250,000 13,250,000
REAL ESTATE INVESTMENT TRUSTS - 0.2%
First Industrial Realty Trust, Inc. 178,800 5,431,050
RFS Hotel Investors, Inc. 343,300 6,780,175
12,211,225
TOTAL CONSTRUCTION & REAL ESTATE 45,476,850
DURABLES - 4.1%
AUTOS, TIRES, & ACCESSORIES - 2.3%
AutoZone, Inc. (a) 775,000 21,312,500
Chrysler Corp. 1,285,700 42,428,100
Danaher Corp. 140,000 6,527,500
Eaton Corp. 150,000 10,462,500
General Motors Corp. 834,846 46,542,665
SHARES VALUE (NOTE 1)
Honda Motor Co. Ltd. 165,000 $ 4,710,220
PACCAR, Inc. 60,400 4,107,200
TRW, Inc. 100,000 4,950,000
141,040,685
CONSUMER DURABLES - 0.4%
Minnesota Mining & Manufacturing Co. 302,900 25,102,838
CONSUMER ELECTRONICS - 0.3%
Harman International Industries, Inc. 150,100 8,349,313
Newell Co. 218,000 6,867,000
15,216,313
HOME FURNISHINGS - 0.0%
Furniture Brands International, Inc. (a) 85,700 1,199,800
TEXTILES & APPAREL - 1.1%
Adidas AG 63,300 5,461,499
Adidas AG (b) 45,600 3,934,350
Gucci Group NV 100,000 6,387,500
Liz Claiborne, Inc. 107,400 4,148,325
Mohawk Industries, Inc. (a) 216,700 4,767,400
NIKE, Inc. Class B 625,800 37,391,550
Tommy Hilfiger (a) 100,000 4,800,000
66,890,624
TOTAL DURABLES 249,450,260
ENERGY - 6.0%
ENERGY SERVICES - 1.6%
Baker Hughes, Inc. 204,600 7,058,700
Diamond Offshore Drilling, Inc. (a) 145,100 8,270,700
Dresser Industries, Inc. 197,100 6,110,100
Halliburton Co. 269,800 16,255,450
Schlumberger Ltd. 350,000 34,956,250
Tidewater, Inc. 113,800 5,149,450
Transocean Offshore, Inc. 101,300 6,343,913
Varco International, Inc. (a) 239,500 5,538,438
Western Atlas, Inc. (a) 100,000 7,087,500
96,770,501
OIL & GAS - 4.4%
Abacan Resource Corp. (a) 274,600 2,385,588
Amerada Hess Corp. 315,800 18,276,925
Anadarko Petroleum Corp. 103,300 6,688,675
Apache Corp. 263,900 9,335,463
Atlantic Richfield Co. 250,700 33,217,750
Barrett Resources Corp. (a) 300,000 12,787,500
Belco Oil & Gas Corp. (a) 69,000 1,888,875
Benton Oil & Gas Co. (a) 240,000 5,430,000
British Petroleum PLC ADR 209,871 29,670,513
Burlington Resources, Inc. 104,600 5,269,225
Chesapeake Energy Corp. (a) 209,400 11,647,875
Kerr-McGee Corp. 98,000 7,056,000
Louisiana Land & Exploration Co. 177,000 9,491,625
Nationale Elf Aquitaine 67,800 6,169,931
Noble Affiliates, Inc. 200,000 9,575,000
Occidental Petroleum Corp. 315,200 7,367,800
Parker & Parsley Petroleum Co. 137,200 5,042,100
Pennzoil Co. 89,500 5,056,750
Royal Dutch Petroleum Co. ADR 333,300 56,910,975
Texaco, Inc. 60,500 5,936,563
Titan Exploration, Inc. 141,700 1,700,400
Union Pacific Resources Group, Inc. 247,441 7,237,649
Unocal Corp. 254,601 10,343,166
268,486,348
TOTAL ENERGY 365,256,849
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - 8.2%
BANKS - 2.3%
Bank of New York Co., Inc. 150,000 $ 5,062,500
BankAmerica Corp. 365,000 36,408,750
Chase Manhattan Corp. 60,400 5,390,700
Citicorp 467,300 48,131,900
First Bank System, Inc. 144,000 9,828,000
NationsBank Corp. 300,200 29,344,550
Norwest Corp. 130,200 5,663,700
139,830,100
CREDIT & OTHER FINANCE - 1.1%
American Express Co. 625,000 35,312,500
Beneficial Corp. 136,100 8,625,338
Concord EFS, Inc. (a) 12,100 341,825
Green Tree Financial Corp. 230,000 8,883,750
Household International, Inc. 150,008 13,838,238
67,001,651
FEDERAL SPONSORED CREDIT - 2.4%
Federal Home Loan Mortgage
Corporation 400,000 44,050,000
Federal National Mortgage Association 2,650,000 98,712,500
Student Loan Marketing Association 15,000 1,396,875
144,159,375
INSURANCE - 2.2%
Allstate Corp. 275,000 15,915,625
American General Corp. 75,400 3,081,975
American International Group, Inc. 300,000 32,475,000
CIGNA Corp. 80,000 10,930,000
Capital Re Corp. 94,400 4,401,400
General Re Corp. 75,200 11,862,800
ITT Hartford Group, Inc. 125,000 8,437,500
MBIA, Inc. 90,100 9,122,625
MGIC Investment Corp. 129,800 9,864,800
Marsh & McLennan Companies, Inc. 52,900 5,501,600
SunAmerica, Inc. 150,000 6,656,250
Travelers Group, Inc. (The) 220,000 9,982,500
UNUM Corp. 75,000 5,418,750
133,650,825
SECURITIES INDUSTRY - 0.2%
Schwab (Charles) Corp. 311,300 9,961,600
United Asset Management Corp. 75,300 2,004,863
11,966,463
TOTAL FINANCE 496,608,414
HEALTH - 11.0%
DRUGS & PHARMACEUTICALS - 5.9%
ALZA Corp. Class A (a) 176,500 4,566,938
American Home Products Corp. 550,000 32,243,750
Amgen, Inc. (a) 221,900 12,065,813
Biochem Pharmaceuticals, Inc. (a) 134,500 6,755,170
Biogen, Inc. (a) 579,400 22,451,750
Bristol-Myers Squibb Co. 422,800 45,979,500
Dura Pharmaceuticals, Inc. (a) 50,000 2,387,500
Elan Corp. PLC ADR (a) 200,000 6,650,000
Genentech, Inc. special (a) 385,000 20,645,625
Lilly (Eli) & Co. 275,000 20,075,000
Merck & Co., Inc. 895,500 70,968,375
Perseptive Biosystem, Inc. Class G
(warrants) (a) 1,390 0
Pfizer, Inc. 645,300 53,479,238
Protein Design Labs, Inc. (a) 225,000 8,212,500
Schering-Plough Corp. 398,100 25,776,975
SHARES VALUE (NOTE 1)
SmithKline Beecham PLC ADR 352,300 $ 23,956,400
Thermotrex Corp. (a) 2,800 76,650
356,291,184
MEDICAL EQUIPMENT & SUPPLIES - 2.6%
Bergen Brunswig Corp. Class A 375,000 10,687,500
Boston Scientific Corp. (a) 215,700 12,942,000
Cardinal Health, Inc. 270,900 15,779,925
Johnson & Johnson 1,030,400 51,262,400
Medtronic, Inc. 552,500 37,570,000
Pall Corp. 200,000 5,100,000
St. Jude Medical, Inc. (a) 375,000 15,984,375
Sofamor/Danek Group, Inc. (a) 137,000 4,178,500
Sybron International, Inc. (a) 235,000 7,755,000
161,259,700
MEDICAL FACILITIES MANAGEMENT - 2.5%
American Medical Response, Inc. (a) 185,000 6,012,500
Carematrix Corp. (a) 205,300 2,694,563
Columbia/HCA Healthcare Corp. 815,037 33,212,758
HEALTHSOUTH Rehabilitation Corp. (a) 1,320,300 50,996,588
Lincare Holdings, Inc. (a) 276,900 11,352,900
Oxford Health Plans, Inc. (a) 363,000 21,258,188
PacifiCare Health Systems, Inc. Class B (a) 168,300 14,347,575
United HealthCare Corp. 215,900 9,715,500
Vencor, Inc. (a) 76,925 2,432,753
152,023,325
TOTAL HEALTH 669,574,209
HOLDING COMPANIES - 0.1%
Norfolk Southern Corp. 45,300 3,963,750
INDUSTRIAL MACHINERY & EQUIPMENT - 3.9%
ELECTRICAL EQUIPMENT - 3.0%
Alcatel Alsthom Compagnie Generale
d'Electricite SA 67,900 5,452,933
American Power Conversion Corp. (a) 150,400 4,098,400
Duracell International, Inc. 25,500 1,781,813
Emerson Electric Co. 214,800 20,781,900
General Electric Co. 1,505,200 148,826,650
United Communication Industry PCL
(For. Reg.) 154,000 1,656,947
182,598,643
INDUSTRIAL MACHINERY & EQUIPMENT - 0.7%
Case Corp. 175,000 9,537,500
Caterpillar, Inc. 176,100 13,251,525
Illinois Tool Works, Inc. 67,600 5,399,550
Ingersoll-Rand Co. 200,000 8,900,000
MSC Industrial Direct, Inc. (a) 72,000 2,664,000
Stanley Works (The) 205,600 5,551,200
45,303,775
POLLUTION CONTROL - 0.2%
USA Waste Services, Inc. (a) 160,000 5,100,000
WMX Technologies, Inc. 75,400 2,459,925
Zurn Industries, Inc. 146,500 3,827,313
11,387,238
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 239,289,656
MEDIA & LEISURE - 6.3%
BROADCASTING - 0.4%
Clear Channel Communications, Inc. (a) 82,800 2,991,150
Evergreen Media Corp. Class A (a) 275,000 6,875,000
Lin Television Corp. (a) 105,800 4,470,050
PanAmSat Corp. (a) 320,000 8,960,000
Time Warner, Inc. 252 9,450
23,305,650
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - CONTINUED
ENTERTAINMENT - 0.5%
Disney (Walt) Co. 157,600 $ 10,972,900
MGM Grand, Inc. (a) 184,900 6,448,388
Regal Cinemas, Inc. (a) 150,000 4,612,500
Viacom, Inc. Class B (non-vtg.) (a) 175,000 6,103,125
28,136,913
LEISURE DURABLES & TOYS - 0.3%
Harley-Davidson, Inc. 240,000 11,280,000
Nintendo Co. Ltd. Ord. 64,000 4,575,765
15,855,765
LODGING & GAMING - 3.6%
Anchor Gaming (a) 100,000 4,025,000
Circus Circus Enterprises, Inc. (a) 640,700 22,024,063
Doubletree Corp. (a) 100,000 4,500,000
Extended Stay America, Inc. (a) 234,400 4,717,300
HFS, Inc. (a) 1,900,900 113,578,775
Hilton Hotels Corp. 500,000 13,062,500
Host Marriott Corp. (a) 350,000 5,600,000
ITT Corp. (a) 100,000 4,337,500
Mirage Resorts, Inc. (a) 1,281,100 27,703,788
Prime Hospitality Corp. (a) 76,500 1,233,563
Studio Plus Hotels, Inc. (a) 375,000 5,906,250
Sun International Hotels Ltd. Ord. (a) 198,600 7,248,900
Wyndham Hotel Corp. (a) 189,700 4,671,363
218,609,002
PUBLISHING - 0.4%
Gannett Co., Inc. 75,000 5,615,625
Knight-Ridder, Inc. 100,000 3,825,000
New York Times Co. (The) Class A 131,100 4,981,800
Scholastic Corp. (a) 74,000 4,976,500
Times Mirror Co. Class A 167,900 8,353,025
27,751,950
RESTAURANTS - 1.1%
Apple South, Inc. 505,600 6,825,600
Applebee's International, Inc. 235,000 6,462,500
Landry's Seafood Restaurants, Inc. (a) 518,100 11,074,388
Lone Star Steakhouse Saloon (a) 543,400 14,535,950
Outback Steakhouse, Inc. (a) 137,700 3,683,475
Planet Hollywood International, Inc.
Class A (a) 275,000 5,431,250
Rainforest Cafe, Inc. (a) 45,100 1,059,850
Starbucks Corp. (a) 678,200 19,413,475
68,486,488
TOTAL MEDIA & LEISURE 382,145,768
NONDURABLES - 4.1%
BEVERAGES - 1.3%
Anheuser-Busch Companies, Inc. 451,700 18,068,000
Coca-Cola Co. (The) 623,700 32,822,213
PepsiCo, Inc. 1,004,600 29,384,550
80,274,763
FOODS - 0.2%
General Mills, Inc. 105,500 6,686,063
Smithfield Foods, Inc. (a) 28,100 1,067,800
7,753,863
HOUSEHOLD PRODUCTS - 1.5%
Avon Products, Inc. 97,700 5,581,113
Clorox Co. 75,600 7,588,350
Gillette Co. 495,600 38,532,900
Premark International, Inc. 100,000 2,225,000
SHARES VALUE (NOTE 1)
Procter & Gamble Co. 340,300 $ 36,582,250
USA Detergents, Inc. (a) 48,900 2,035,463
92,545,076
TOBACCO - 1.1%
Philip Morris Companies, Inc. 538,500 60,648,563
RJR Nabisco Holdings Corp. 150,900 5,130,600
65,779,163
TOTAL NONDURABLES 246,352,865
PRECIOUS METALS - 0.6%
Barrick Gold Corp. 415,000 11,882,226
Bre-X Minerals Ltd. (a) 259,800 4,112,529
Getchell Gold Corp. (a) 191,853 7,362,359
Newmont Mining Corp. 295,000 13,201,250
36,558,364
RETAIL & WHOLESALE - 9.0%
APPAREL STORES - 1.0%
Footstar, Inc. (a) 79,172 1,969,404
Gap, Inc. 515,000 15,514,375
Just for Feet, Inc. (a) 1,313,800 34,487,250
Loehmanns, Inc. (a) 145,600 3,348,800
Saks Holdings, Inc. (a) 194,200 5,243,400
60,563,229
DRUG STORES - 0.3%
CVS Corp. 275,000 11,378,125
General Nutrition Companies, Inc. (a) 63,700 1,074,938
Revco (D.S.), Inc. (a) 120,600 4,462,200
16,915,263
GENERAL MERCHANDISE STORES - 2.2%
Consolidated Stores Corp. (a) 385,250 12,376,156
Dayton Hudson Corp. 195,900 7,689,075
Dollar General Corp. 135,312 4,329,984
Family Dollar Stores, Inc. 500,100 10,189,538
Federated Department Stores, Inc. (a) 300,000 10,237,500
Meyer (Fred), Inc. (a) 107,200 3,805,600
Price/Costco, Inc. (a) 131,700 3,308,963
Sears, Roebuck & Co. 275,000 12,684,375
Stein Mart, Inc. (a) 107,800 2,182,950
Wal-Mart Stores, Inc. 2,828,500 64,701,938
Woolworth Corp. (a) 218,700 4,784,063
136,290,142
GROCERY STORES - 0.1%
Safeway, Inc. (a) 200,500 8,571,375
RETAIL & WHOLESALE, MISCELLANEOUS - 5.4%
Barnes & Noble, Inc. (a) 128,000 3,456,000
Bed Bath & Beyond, Inc. (a) 401,100 9,726,675
Circuit City Stores, Inc. 140,300 4,226,538
Corporate Express, Inc. (a) 496,200 14,606,888
Home Depot, Inc. (The) 1,018,500 51,052,313
Lowe's Companies, Inc. 1,700,000 60,350,000
Officemax, Inc. (a) 1,335,400 14,188,625
Office Depot, Inc. (a) 1,130,200 20,061,050
Petco Animal Supplies, Inc. (a) 88,100 1,828,075
PETsMART, Inc. (a) 2,937,900 64,266,563
Sports Authority, Inc. (a) 200,550 4,361,963
Staples, Inc. (a) 1,361,700 24,595,706
Sunglass Hut International, Inc. (a) 1,793,200 13,000,700
Toys "R" Us, Inc. (a) 829,400 24,882,000
U.S. Office Products Co. (a) 130,000 4,436,250
Viking Office Products, Inc. (a) 451,500 12,049,406
327,088,752
TOTAL RETAIL & WHOLESALE 549,428,761
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SERVICES - 1.4%
ADVERTISING - 0.1%
Omnicom Group, Inc. 75,700 $ 3,463,275
Universal Outdoor Holdings, Inc. (a) 112,100 2,634,350
6,097,625
EDUCATIONAL SERVICES - 0.1%
Sylvan Learning Systems (a) 101,000 2,878,500
LEASING & RENTAL - 0.4%
Hollywood Entertainment Corp. (a) 1,250,000 23,125,000
Movie Gallery, Inc. (a) 309,000 4,017,000
27,142,000
SERVICES - 0.8%
ADT Ltd. (a) 271,600 6,212,850
APAC Teleservices, Inc. (a) 223,700 8,584,488
AccuStaff, Inc. (a) 435,000 9,189,375
Employee Solutions, Inc. (a) 30,000 615,000
Medpartners, Inc. (a) 205,500 4,315,500
Service Corp. International 585,700 16,399,600
Sitel Corp. (a) 150,100 2,120,163
Teletech Holdings, Inc. (a) 90,300 2,347,800
Zebra Technologies Corp. Class A (a) 32,300 755,013
50,539,789
TOTAL SERVICES 86,657,914
TECHNOLOGY - 25.6%
COMMUNICATIONS EQUIPMENT - 4.1%
ADC Telecommunications, Inc. (a) 120,000 3,735,000
Ascend Communications, Inc. (a) 476,700 29,614,988
Aspect Telecommunications Corp. (a) 197,000 12,509,500
Checkpoint Systems, Inc. (a) 130,000 3,217,500
Cisco Systems, Inc. (a) 2,255,500 143,506,188
Lucent Technologies, Inc. 470,200 21,746,750
Nokia Corp. AB sponsored ADR 115,900 6,678,738
P-COM, Inc. (a) 22,500 666,563
Tellabs, Inc. (a) 188,900 7,107,363
3Com Corp. (a) 249,300 18,292,388
U.S. Robotics Corp. (a) 57,500 4,140,000
251,214,978
COMPUTER SERVICES & SOFTWARE - 10.8%
Affiliated Computer Services, Inc.
Class A (a) 300,000 8,925,000
America Online, Inc. (a) 224,500 7,464,625
American Management Systems, Inc. (a) 250,000 6,125,000
Automatic Data Processing, Inc. 547,700 23,482,638
BBN Corp. (a) 100,000 2,250,000
BMC Software, Inc. (a) 300,000 12,412,500
CUC International, Inc. (a) 3,977,600 94,468,000
Cadence Design Systems, Inc. (a) 450,000 17,887,500
Ceridian Corp. (a) 120,000 4,860,000
Citrix Systems, Inc. (a) 42,300 1,652,344
Computer Associates International, Inc. 354,600 17,641,350
Computer Horizons Corp. (a) 15,000 577,500
Computer Sciences Corp. (a) 294,800 24,210,450
CompUSA, Inc. (a) 1,479,000 30,504,375
DST Systems, Inc. (a) 100,000 3,137,500
Electronic Data Systems Corp. 244,300 10,565,975
Electronics for Imaging, Inc. (a) 160,000 13,160,000
Equifax, Inc. 225,300 6,899,813
First Data Corp. 322,380 11,766,870
HBO & Co. 435,800 25,875,625
Henry (Jack) & Associates, Inc. 53,900 1,926,925
SHARES VALUE (NOTE 1)
Inso Corp. (a) 132,300 $ 5,258,925
McAfee Associates, Inc. (a) 466,500 20,526,000
Microsoft Corp. (a) 725,000 59,903,125
Netscape Communications Corp. (a) 412,100 23,438,188
Oracle Systems Corp. (a) 2,636,700 110,082,225
Parametric Technology Corp. 531,000 27,280,125
Paychex, Inc. 287,500 14,788,281
PeopleSoft, Inc. (a) 540,000 25,886,250
Physician Computer Network, Inc. (a) 351,200 2,985,200
Policy Management Systems Corp. (a) 150,000 6,918,750
Remedy Corp. (a) 120,400 6,471,500
Sabre Group Holdings, Inc. Class A (a) 76,200 2,124,075
SunGard Data Systems, Inc. (a) 275,000 10,862,500
Sybase, Inc. (a) 136,400 2,276,175
Technology Solutions, Inc. (a) 175,000 7,262,500
Viasoft, Inc. (a) 125,000 5,906,250
657,764,059
COMPUTERS & OFFICE EQUIPMENT - 5.5%
Adaptec, Inc. (a) 1,040,800 41,632,000
Bay Networks, Inc. (a) 270,000 5,636,250
Compaq Computer Corp. (a) 701,400 52,078,950
Dell Computer Corp. (a) 454,700 24,155,938
Diebold, Inc. 28,600 1,798,225
EMC Corp. (a) 563,000 18,649,375
FileNet Corp. (a) 236,600 7,571,200
Gateway 2000, Inc. (a) 89,300 4,783,131
Hewlett-Packard Co. 356,500 17,914,125
Ingram Micro, Inc. Class A (a) 162,200 3,730,600
International Business Machines Corp. 615,000 92,865,000
Lexmark International Group, Inc. (a) 142,700 3,942,088
Micron Electronics, Inc. (a) 322,600 6,270,538
Pitney Bowes, Inc. 200,000 10,900,000
Quantum Corp. (a) 231,600 6,629,550
Seagate Technology (a) 668,200 26,393,900
Tech Data Corp. (a) 275,500 7,541,813
332,492,683
ELECTRONIC INSTRUMENTS - 0.4%
Applied Materials, Inc. (a) 184,000 6,612,500
Perkin-Elmer Corp. 79,700 4,692,338
Thermo Electron Corp. 275,000 11,343,750
22,648,588
ELECTRONICS - 4.6%
Analog Devices, Inc. (a) 300,000 10,162,500
Atmel Corp. (a) 398,500 13,200,313
Cirrus Logic, Inc. (a) 225,900 3,501,450
Etec Systems, Inc. (a) 151,000 5,775,750
Intel Corp. 1,150,000 150,578,125
KEMET Corp. (a) 199,700 4,643,025
Linear Technology Corp. 515,000 22,595,625
Maxim Integrated Products, Inc. (a) 530,400 22,939,800
Micron Technology, Inc. 256,500 7,470,563
Motorola, Inc. 135,400 8,310,175
Solectron Corp. (a) 95,100 5,075,963
Storage Technology Corp. (a) 162,300 7,729,538
Texas Instruments, Inc. 152,300 9,709,125
Xilinx, Inc. (a) 159,300 5,864,231
277,556,183
PHOTOGRAPHIC EQUIPMENT - 0.2%
Eastman Kodak Co. 185,100 14,854,275
TOTAL TECHNOLOGY 1,556,530,766
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TRANSPORTATION - 1.0%
AIR TRANSPORTATION - 0.8%
AMR Corp. (a) 185,000 $ 16,303,125
America West Airlines, Inc. Class B (a) 529,600 8,407,400
Atlantic Southeast Airlines, Inc. 269,700 5,899,688
Comair Holdings, Inc. 150,000 3,600,000
Delta Air Lines, Inc. 37,600 2,664,900
Midwest Express Holdings, Inc. (a) 200,000 7,200,000
UAL Corp. (a) 125,000 7,812,500
51,887,613
RAILROADS - 0.2%
CSX Corp. 244,000 10,309,000
TOTAL TRANSPORTATION 62,196,613
UTILITIES - 4.6%
CELLULAR - 1.6%
AirTouch Communications, Inc. (a) 1,851,800 46,757,950
Arch Communications Group, Inc. (a) 325,043 3,047,278
Palmer Wireless, Inc. (a) 947,200 9,945,600
360 Degrees Communications Co. (a) 675,800 15,627,875
Vanguard Cellular Systems, Inc.
Class A (a) 1,146,700 18,060,525
93,439,228
GAS - 0.2%
Enron Corp. 304,900 13,148,813
TELEPHONE SERVICES - 2.8%
Ameritech Corp. 190,500 11,549,063
Bell Atlantic Corp. 183,700 11,894,575
BellSouth Corp. 374,700 15,128,513
Cincinnati Bell, Inc. 65,400 4,030,275
Comsat Corp., Series 1 125,000 3,078,125
GTE Corp. 75,500 3,435,250
LCI International, Inc. (a) 771,200 16,580,800
MCI Communications Corp. 806,200 26,352,663
MFS Communications, Inc. 641,700 34,972,650
Mastech Corp. 56,400 1,071,600
SBC Communications, Inc. 162,500 8,409,375
Sprint Corp. 258,500 10,307,688
Telebras sponsored ADR 75,000 5,737,500
Telefonos de Mexico SA sponsored
ADR representing Ord. Class L shares 75,000 2,475,000
WorldCom, Inc. (a) 625,600 16,304,700
171,327,777
TOTAL UTILITIES 277,915,818
TOTAL COMMON STOCKS
(Cost $4,316,599,345) 5,521,532,957
CASH EQUIVALENTS - 9.2%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 6.75%, dated
12/31/96 due 1/2/97 $ 556,529,620 556,321,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $4,872,920,345) $ 6,077,853,957
LEGEND
1. Non-income producing
2. Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of these securities amounted to $3,934,350 or 0.1% of net
assets.
3. An affiliated company is a company in which the fund has ownership of at
least 5% of the voting securities. Transactions during the period with
companies which are or were affiliates are as follows:
PURCHASE SALES DIVIDEND VALUE
AFFILIATE COST COST INCOME
Hollywood
Entertainment Corp. $ 172,425 $ 546,875 $ - $ -
Lycos, Inc. - - - -
Microwave Power
Devices, Inc. - 1,172,000 - -
Sunglass Hut
International, Inc. 17,079,408 19,336,265 - -
Vanguard Cellular
Systems, Inc. Class A 1,032,413 15,999,485 - -
Wyndham Hotel Corp. 324,910 - - -
TOTALS $ 18,609,156 $ 37,054,625 $ - $ -
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $5,184,860,168 and $3,798,902,641, respectively, of which U.S.
government and government agency obligations aggregated $109,306,406 and
$168,455,938, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company. The
commissions paid to these affiliated firms were $1,209,835 for the period
(see Note 4 of Notes to Financial Statements).
INCOME TAX INFORMATION
At December 31, 1996, the aggregate cost of investment securities for
income tax purposes was $4,886,896,501. Net unrealized appreciation
aggregated $1,190,957,456, of which $1,309,441,776 related to appreciated
investment securities and $118,484,320 related to depreciated investment
securities.
The fund hereby designates approximately $182,971,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
DECEMBER 31, 1996
ASSETS
Investment in securities, at $ 6,077,853,957
value (including repurchase agreements of $556,321,000) (cost $4,872,920,345) -
See accompanying schedule
Cash 832
Receivable for investments sold 6,982,553
Receivable for fund shares sold 8,213,411
Dividends receivable 4,888,033
Other receivables 435,798
TOTAL ASSETS 6,098,374,584
LIABILITIES
Payable for fund shares redeemed $ 8,403,261
Accrued management fee 3,074,604
Other payables and 473,065
accrued expenses
TOTAL LIABILITIES 11,950,930
NET ASSETS $ 6,086,423,654
Net Assets consist of:
Paid in capital $ 4,671,288,904
Undistributed net investment income 41,404,557
Accumulated undistributed 168,796,602
net realized gain (loss) on
investments and foreign
currency transactions
Net unrealized appreciation (depreciation) on investments 1,204,933,591
and assets and liabilities in
foreign currencies
NET ASSETS, for 195,423,359 shares outstanding $ 6,086,423,654
NET ASSET VALUE, offering price $31.14
and redemption price per
share ($6,086,423,654 (divided by) 195,423,359 shares)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996
INVESTMENT INCOME $ 44,216,166
Dividends
Interest 33,387,635
TOTAL INCOME 77,603,801
EXPENSES
Management fee $ 31,760,621
Transfer agent fees 3,029,150
Accounting fees and expenses 808,115
Non-interested trustees' compensation 29,313
Custodian fees and expenses 156,863
Registration fees 47,360
Audit 66,493
Legal 33,943
Miscellaneous 28,325
Total expenses before reductions 35,960,183
Expense reductions (701,029 35,259,154
)
NET INVESTMENT INCOME 42,344,647
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:
Investment securities (including 186,716,014
realized loss of $15,650,936
on sales of investments in
affiliated issuers)
Foreign currency transactions (2,445 186,713,569
)
Change in net unrealized appreciation (depreciation) on:
Investment securities 451,420,485
Assets and liabilities in (146 451,420,339
foreign currencies )
NET GAIN (LOSS) 638,133,908
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 680,478,555
OTHER INFORMATION
Expense reductions $ 694,383
Directed brokerage arrangements
Custodian interest credits 6,646
$ 701,029
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
<TABLE>
<CAPTION>
<S> <C> <C>
Operations $ 42,344,647 $ 11,674,225
Net investment income
Net realized gain (loss) 186,713,569 361,319,825
Change in net unrealized appreciation (depreciation) 451,420,339 474,991,263
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 680,478,555 847,985,313
Distributions to shareholders (11,769,237) (12,404,421)
From net investment income
From net realized gain (297,173,230) -
TOTAL DISTRIBUTIONS (308,942,467) (12,404,421)
Share transactions 2,599,782,601 2,059,928,760
Net proceeds from sales of shares
Reinvestment of distributions 308,942,467 12,404,421
Cost of shares redeemed (1,356,539,313) (887,081,596)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 1,552,185,755 1,185,251,585
TOTAL INCREASE (DECREASE) IN NET ASSETS 1,923,721,843 2,020,832,477
NET ASSETS
Beginning of period 4,162,701,811 2,141,869,334
End of period (including undistributed net investment income of $41,404,557 and $10,790,283, $ 6,086,423,654 $ 4,162,701,811
respectively)
OTHER INFORMATION
Shares
Sold 87,784,118 76,302,442
Issued in reinvestment of distributions 11,121,040 568,749
Redeemed (46,058,296) (33,037,870)
Net increase (decrease) 52,846,862 43,833,321
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1996 1995 1994 1993 C 1992
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 29.20 $ 21.69 $ 23.08 $ 19.76 $ 18.51
Income from Investment Operations
Net investment income .22 .08 .12 .12 .09
Net realized and unrealized gain (loss) 3.82 7.55 (.12) 3.64 1.64
Total from investment operations 4.04 7.63 - 3.76 1.73
Less Distributions
From net investment income (.08) (.12) (.12) (.11) (.05)
From net realized gain (2.02) - (1.27) (.21) (.43)
In excess of net realized gain - - - (.12) -
Total distributions (2.10) (.12) (1.39) (.44) (.48)
Net asset value, end of period $ 31.14 $ 29.20 $ 21.69 $ 23.08 $ 19.76
TOTAL RETURN A, B 14.71% 35.36% (.02)% 19.37% 9.32%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 6,086,424 $ 4,162,702 $ 2,141,869 $ 1,383,849 $ 749,837
Ratio of expenses to average net assets .69% .70% .70% .71% .75%
Ratio of expenses to average net assets
after expense reductions .67% D .70% .69% .71% .75%
D
Ratio of net investment income to average
net assets .81% .37% .69% .72% .83%
Portfolio turnover rate 81% 108% 122% 159% 262%
Average commission rate E $ .0416
A THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS). B TOTAL
RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE
THE TOTAL RETURNS
SHOWN. C EFFECTIVE JANUARY 1, 1993, THE FUND ADOPTED STATEMENT OF
POSITION 93-2, "DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT
PRESENTATION OF INCOME,
CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT
COMPANIES." AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT
CERTAIN RECLASSIFICATIONS
RELATED TO BOOK TO TAX DIFFERENCES. D FMR OR THE FUND HAS ENTERED
INTO VARYING ARRANGEMENTS WITH THIRD PARTIES WHO EITHER PAID OR
REDUCED A PORTION OF THE FUND'S
EXPENSES (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). E FOR
FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS
REQUIRED TO DISCLOSE ITS AVERAGE
COMMISSION RATE PER SHARE FOR SECURITY TRADES ON WHICH COMMISSIONS
ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND
TO FUND DEPENDING ON THE
MIX OF TRADES EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES
AND COMMISSION RATE STRUCTURES MAY DIFFER.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
For the period ended December 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES.
Growth Portfolio (the fund) is a fund of Variable Insurance Products Fund
(the trust) and is authorized to issue an unlimited number of shares. The
trust is registered under the Investment Company Act of 1940, as amended
(the 1940 Act), as an open-end management investment company organized as a
Massachusetts business trust. Shares of the fund may only be purchased by
insurance companies for the purpose of funding variable annuity or variable
life insurance contracts. The financial statements have been prepared in
conformity with generally accepted accounting principles which permit
management to make certain estimates and assumptions at the date of the
financial statements. The following summarizes the significant accounting
policies of the fund:
SECURITY VALUATION. Securities for which exchange quotations are readily
available are valued at the last sale price, or if no sale price, at the
closing bid price. Securities (including restricted securities) for which
exchange quotations are not readily available (and in certain cases debt
securities which trade on an exchange) are valued primarily using
dealer-supplied valuations or at their fair value as determined in good
faith under consistently applied procedures under the general supervision
of the Board of Trustees. Short-term securities with remaining maturities
of sixty days or less for which quotations are not readily available are
valued at amortized cost or original cost plus accrued interest, both of
which approximate current value.
FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S.
dollars at the prevailing rates of exchange at period end. Income receipts
and expense payments are translated into U.S. dollars at the prevailing
exchange rate on the respective dates of the transactions. Purchases and
sales of securities are translated into U.S. dollars at the contractual
currency exchange rates established at the time of each trade.
Net realized gains and losses on foreign currency transactions represent
net gains and losses from sales and maturities of forward currency
contracts, disposition of foreign currencies, and the difference between
the amount of net investment income accrued and the U.S. dollar amount
actually received. The effects of changes in foreign currency exchange
rates on investments in securities are included with the net realized and
unrealized gain or loss on investment securities.
INCOME TAXES. As a qualified regulated investment company under Subchapter
M of the Internal Revenue Code, the fund is not subject to income taxes to
the extent that it distributes substantially all of its taxable income for
its fiscal year. The schedule of investments includes information regarding
income taxes under the caption "Income Tax Information."
INVESTMENT INCOME. Dividend income is recorded on the ex-dividend date,
except certain dividends from foreign securities where the ex-dividend date
may have passed, are recorded as soon as the fund is informed of the
ex-dividend date. Non-cash dividends included in dividend income, if any,
are recorded at the fair market value of the securities received. Interest
income, which includes accretion of original issue discount, is accrued as
earned. Investment income is recorded net of foreign taxes withheld where
recovery of such taxes is uncertain.
EXPENSES. Most expenses of the trust can be directly attributed to a fund.
Expenses which cannot be directly attributed are apportioned between the
funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. 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, which may result in distribution
reclassifications, are primarily due to differing treatments for litigation
proceeds, foreign currency transactions and losses deferred due to wash
sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital and may
affect the per-share allocation between net investment income and realized
and unrealized gain (loss). Undistributed net investment income and
accumulated undistributed net realized gain (loss) on investments and
foreign currency transactions may include temporary book and tax basis
differences which will reverse in a subsequent period. Any taxable income
or gain remaining at fiscal year end is distributed in the following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of trade
date. Gains and losses on securities sold are determined on the basis of
identified cost.
2. OPERATING POLICIES.
FOREIGN CURRENCY CONTRACTS. The fund generally uses foreign currency
contracts to facilitate transactions in foreign-denominated securities.
Losses may arise from changes in the value of the foreign currency or if
the counterparties do not perform under the contracts' terms. The U.S.
dollar value of foreign currency contracts is determined using contractual
currency exchange rates established at the time of each trade. The cost of
the foreign currency contracts is included in the cost basis of the
associated investment.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission (the SEC), the fund, along with other
affiliated entities of Fidelity Management & Research Company (FMR), may
transfer uninvested cash balances into one or more joint trading accounts.
These balances are invested in one or more repurchase agreements that
mature in 60 days or less from the date of purchase for U.S. Treasury or
Federal Agency obligations.
2. OPERATING POLICIES - CONTINUED
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
Securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are marked-to-market
daily and maintained at a value at least equal to the principal amount of
the repurchase agreement (including accrued interest). FMR, the fund's
investment adviser, is responsible for determining that the value of the
underlying securities remains in accordance with the market value
requirements stated above.
RESTRICTED SECURITIES. The fund is permitted to invest in securities that
are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from registration
or to the public if the securities are registered. Disposal of these
securities may involve time-consuming negotiations and expense, and prompt
sale at an acceptable price may be difficult. At the end of the period, the
fund had no investments in restricted securities (excluding 144A issues).
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities) is included under the caption "Other Information" at
the end of the fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a monthly
fee that is calculated on the basis of a group fee rate plus a fixed
individual fund fee rate applied to the average net assets of the fund. The
group fee rate is the weighted average of a series of rates and is based on
the monthly average net assets of all the mutual funds advised by FMR. The
rates ranged from .2500% to .5200% for the period. In the event that these
rates were lower than the contractual rates in effect during the period,
FMR voluntarily implemented the above rates, as they resulted in the same
or a lower management fee. The annual individual fund fee rate is .30%. For
the period, the management fee was equivalent to an annual rate of .61% of
average net assets.
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations Company
(FIIOC), an affiliate of FMR, is the fund's transfer, dividend disbursing
and shareholder servicing agent. FIIOC receives account fees and
asset-based fees that vary according to account size and type of account.
FIIOC pays for typesetting, printing and mailing of all shareholder
reports, except proxy statements. For the period, the transfer agent fees
were equivalent to an annual rate of .06% of average net assets.
ACCOUNTING FEES. Fidelity Service Co. (FSC), an affiliate of FMR, maintains
the fund's accounting records. The fee is based on the level of average net
assets for the months plus out-of-pocket expenses.
BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms are shown under the caption
"Other Information" at the end of the fund's schedule of investments.
5. EXPENSE REDUCTIONS.
FMR voluntarily agreed to reimburse the fund's operating expenses
(excluding interest, taxes, brokerage commissions and extraordinary
expenses) above an annual rate of 1.50% of average net assets.
FMR has directed certain portfolio trades to brokers who paid a portion of
the fund's expenses. In addition, the fund has entered into an arrangement
with its custodian whereby interest earned on uninvested cash balances was
used to offset a portion of the fund's expenses.
For the period, the reduction under these arrangements are shown under the
caption "Other Information" on the fund's Statement of Operations.
6. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investments Life Insurance Company
(FILI) and its subsidiaries, affiliates of FMR, were the record owners of
approximately 16% of the outstanding shares of the fund. In addition, one
unaffiliated insurance company was record owner of 10% or more of the total
outstanding shares of the fund, totaling 28%.
7. TRANSACTIONS WITH AFFILIATED COMPANIES.
An affiliated company is a company in which the fund has ownership of at
least 5% of the voting securities. Information regarding transactions with
affiliated companies is included under the caption "Legend" at the end of
the fund's schedule of investments.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Variable Insurance Products Fund and the Shareholders of
Growth Portfolio:
We have audited the accompanying statement of assets and liabilities of
Variable Insurance Products Fund: Growth Portfolio, including the schedule
of portfolio investments, as of December 31, 1996, and the related
statement of operations for the year then ended, the statement of changes
in net assets for each of the two years in the period then ended and the
financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility
of the fund's 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. Our procedures included confirmation of
securities owned as of December 31, 1996 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 Variable Insurance Products Fund: Growth Portfolio as of December 31,
1996, the results of its operations for the year then ended, the changes in
its net assets for each of the two years in the period then ended, and the
financial highlights for each of the five years in the period then ended,
in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 10, 1997
DISTRIBUTIONS
The Board of Trustees of Growth Portfolio voted to pay on February 7, 1997,
to shareholders of record at the opening of business on February 7, 1997, a
distribution of $.94 per share derived from capital gains realized from
sales of portfolio securities and a dividend of $.21 per share from net
investment income.
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
OFFICERS
Edward C. Johnson 3d, PRESIDENT
J. Gary Burkhead, SENIOR VICE PRESIDENT
William J. Hayes, VICE PRESIDENT
Jennifer Uhrig, VICE PRESIDENT
Arthur S. Loring, SECRETARY
Kenneth A. Rathgeber, TREASURER
Robert H. Morrison, MANAGER, SECURITY TRANSACTIONS
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
BOARD OF TRUSTEES
J. Gary Burkhead
Ralph F. Cox *
Phyllis Burke Davis *
Richard J. Flynn *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Edward H. Malone *
Marvin L. Mann *
Gerald C. McDonough *
Thomas R. Williams *
ADVISORY BOARD
William O. McCoy
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Investments Institutional Operations Co.
Boston, MA
CUSTODIAN
Brown Brothers Harriman & Co., Boston, MA
* INDEPENDENT TRUSTEES
(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS
FUND: EQUITY-INCOME PORTFOLIO
ANNUAL REPORT
DECEMBER 31, 1996
CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
MARKET ENVIRONMENT 3 A review of what happened in world markets
during the last year.
PERFORMANCE 4 How the fund has done over time.
FUND TALK 5 The manager's review of fund performance, strategy
and outlook.
INVESTMENTS 6 A complete list of the fund's investments with their
market values.
FINANCIAL STATEMENTS 10 Statements of assets and liabilities, operations, and
changes in net assets, as well as financial highlights.
NOTES 12 Notes to the financial statements.
REPORT OF INDEPENDENT ACCOUNTANTS 14 The auditors' opinion.
DISTRIBUTIONS 15
</TABLE>
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR
THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS
PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY,
ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED
BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
MARKET ENVIRONMENT
Most stock and bond markets posted positive returns in 1996, aided by
moderate growth and low inflation. Sustained corporate earnings growth and
a favorable interest rate environment also proved beneficial. Japan,
however, was the major exception as an underperforming stock market and a
weak yen undermined returns for U.S.-based investors. The strongest gains
came from the often-volatile emerging bond markets in 1996, while
performance of the bond markets of developed countries was mixed.
U.S. STOCK MARKETS
The Standard & Poor's 500 Index - a broad measure of U.S. stock market
performance - rose 22.96% for the 12 months that ended December 31, 1996,
well above the index's long-term average annual return of about 12%. The
Russell 2000 Index - a measure of small stock performance - rose 16.49%.
The Dow Jones Industrial Average - an index of 30 blue-chip stocks - posted
a return of 28.70%, closing above 6500 for the first time in November.
The U.S. stock market spent much of the past year breaking price and
trading volume records. Solid corporate earnings reports, large cash
inflows into mutual funds, widespread optimism and a generally favorable
interest rate environment propelled share prices higher.
Large-capitalization stocks thrived as investors sought their lower
volatility and higher degree of liquidity over smaller-cap stocks in an
environment where it was sometimes difficult to discern the health of the
economy.
Most industry sectors experienced positive, if not strong performance. At
mid-year, technology stocks suffered from a sell-off sparked by fears that
company earnings were weakening. Nevertheless, this sector proved to be the
strongest in the U.S. market in 1996. Earnings surprises and positive
earnings projections were the main drivers of solid performance, especially
among semiconductor manufacturers, companies that make disk drives and
monitors, and software firms. Even though consensus estimates pointed
toward increases in short-term interest rates by the Fed, financial stocks
- - usually sensitive to changes in interest rates - shrugged off this
concern and posted solid performance based on low interest rates and
positive business prospects. Energy stocks reaped the benefits of
higher-than-expected energy prices, which resulted in part from the delayed
re-entry of Iraq into the world market. Uncertainty over the direction of
the economy benefited consumer nondurables - such as food, beverage and
tobacco companies - health care and traditional big-name growth stocks, as
these companies tend to post steady earnings growth in many economic
environments.
Utilities stocks struggled in 1996 for two reasons. First, and most
important, uncertainty over the direction and form of deregulation in the
sector tended to diminish investor interest. Second, stocks in the sector
tend to move in concert with bonds, which lagged due to periodic inflation
fears and confusing economic signals. Stocks in the telecommunications
field especially were affected by uncertainty over legislation signed into
law in February 1996. Biotechnology issues had a hard time recovering from
a correction in stock prices from overvalued levels that they experienced
earlier in 1996. Cyclical stocks - those that usually rise and fall with
the economy - posted mixed results that largely depended on the outlook for
companies in the specific sector rather than the direction of the economy.
FOREIGN STOCK MARKETS
Foreign stock markets posted mixed results in 1996. The Morgan Stanley
Capital International (MSCI) EAFE Index - which measures stock performance
in Europe, Australia and the Far East - returned 6.05% in 1996. Europe
posted the most consistently strong equity markets due to stronger economic
growth, lower interest rates, higher corporate earnings, the relative
weakness of the continent's major currencies and a new emphasis on
shareholder friendliness by many of the region's corporations. The MSCI
Europe Index was up 21.09% in 1996. The Japanese stock market
underperformed on the weakness of the economic recovery and the uncertainty
for any substantial economic reform. The Tokyo Stock Exchange TOPIX Total
Return Index was off 16.26%. Emerging market equity performance ran the
gamut from negative to positive, with the MSCI Emerging Markets Free Index
returning 6.03% for 1996. While Hong Kong was a top performer - benefiting
from the rising value of the property sector, solid economic growth and
stable interest rates - other Asian markets posted mixed returns as
concerns rose over declining export growth in the region. Latin America
enjoyed a strong first half, but faded toward the end of 1996 due to low
domestic savings rates and inefficient governments, among other factors.
U.S. BOND MARKETS
Uncertainty over the direction of the economy led to mixed performance in
U.S. bond markets in 1996. For the year, the Lehman Brothers Aggregate Bond
Index - a broad measure of the performance of the U.S. taxable bond market
- - posted a total return of 3.63%. Stronger-than-expected economic signals
rattled the bond market in the early spring. Investors spent most of the
summer anticipating a short-term interest rate increase by the Federal
Reserve Board. However, the Fed neither raised nor lowered rates through
the end of 1996. Interest rates responded to the Fed's inaction by falling
during much of October and November. In December, though, bond prices
dropped due to inflation concerns, stronger-than-expected economic data and
comments by Fed Chairman Alan Greenspan that the stock markets may be
overvalued.
FOREIGN BOND MARKETS
While low inflation and moderate growth helped provide a positive backdrop
for most bond markets in 1996, performance in overseas bond markets was
mixed. The Salomon Brothers World Government Bond Index - a measure of
government bond market performance in developed nations - returned 3.62%
for the 12 months that ended December 31, 1996. In Europe, focus centered
on the continuing progress toward the European Monetary Union (EMU).
Attractive opportunities arose as countries worked to meet the requirements
for joining the EMU. However, Germany and Japan - two of the larger
components of the Salomon Brothers World Government Bond Index -
experienced currency problems that hurt returns. In stark contrast to the
developed world, the often-volatile emerging debt markets enjoyed a
particularly strong year, helped by inflows of foreign capital, low
interest rates and the implementation of country-specific reforms -
especially in Latin America. The J.P. Morgan Emerging Markets Bond Index -
of which Latin America is a large component - posted a return of 34.16%
during the period.
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can
look at the total percentage change in value, the average annual percentage
change, or the growth of a hypothetical $10,000 investment. Total return
reflects the change in the value of an investment, assuming reinvestment of
the fund's dividend income and capital gains (the profits earned upon the
sale of securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10
DECEMBER 31, 1996 YEAR YEARS YEARS
EQUITY-INCOME 14.28% 17.98% 13.74%
S&P 500 (registered trademark) 22.96% 15.22% 15.27%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what
would have happened if the fund had performed at a constant rate each year.
You can compare these figures to the performance of the Standard & Poor's
500 Index - a widely recognized, unmanaged index of common stocks. This
benchmark reflects the reinvestment of dividends and capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for
example, has a history of growth in the long run
and volatility in the short run. In turn, the share
price and return of a fund that invests in stocks
will vary. That means if you sell your shares
during a market downturn, you might lose
money. But if you can ride out the market's ups
and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of return
and are not the fund's year-by-year results, which fluctuated over the
periods shown.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL
CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER THE PAST 10 YEARS
IMAHDR PRASUN SHR__CHT 19961231 19970120 075109 S00000000000001
VIP: Equity-Income SP Standard & Poor 500
00150 SP001
1986/12/31 10000.00 10000.00
1987/01/31 11147.70 11347.00
1987/02/28 11407.19 11795.21
1987/03/31 11696.79 12136.09
1987/04/30 11405.62 12028.08
1987/05/31 11475.90 12132.72
1987/06/30 11715.12 12745.42
1987/07/31 12161.41 13391.62
1987/08/31 12496.13 13891.12
1987/09/30 12233.85 13586.91
1987/10/31 9846.51 10660.29
1987/11/30 9405.93 9781.88
1987/12/31 9886.75 10526.28
1988/01/31 10589.95 10969.44
1988/02/29 11114.72 11480.61
1988/03/31 10921.23 11125.86
1988/04/30 11102.01 11249.36
1988/05/31 11250.88 11347.23
1988/06/30 11890.98 11868.07
1988/07/31 11869.44 11822.97
1988/08/31 11664.79 11420.99
1988/09/30 12011.40 11907.52
1988/10/31 12218.68 12238.55
1988/11/30 12022.31 12063.54
1988/12/31 12132.06 12274.65
1989/01/31 12881.37 13173.16
1989/02/28 12815.25 12845.14
1989/03/31 13092.83 13144.44
1989/04/30 13598.12 13826.63
1989/05/31 14002.36 14386.61
1989/06/30 14011.95 14304.61
1989/07/31 14828.85 15596.31
1989/08/31 15067.11 15902.00
1989/09/30 14897.72 15836.80
1989/10/31 14038.23 15469.39
1989/11/30 14118.45 15784.96
1989/12/31 14236.27 16163.80
1990/01/31 13274.83 15079.21
1990/02/28 13353.50 15273.73
1990/03/31 13375.52 15678.49
1990/04/30 12911.77 15286.53
1990/05/31 13766.04 16776.96
1990/06/30 13628.98 16662.88
1990/07/31 13295.66 16609.56
1990/08/31 12233.98 15108.05
1990/09/30 11284.97 14372.29
1990/10/31 10997.21 14310.49
1990/11/30 11785.41 15234.95
1990/12/31 12059.63 15660.00
1991/01/31 12706.36 16342.78
1991/02/28 13581.35 17511.29
1991/03/31 13863.09 17935.06
1991/04/30 13927.87 17978.11
1991/05/31 14692.28 18754.76
1991/06/30 14091.53 17895.79
1991/07/31 14890.40 18729.74
1991/08/31 15204.71 19173.63
1991/09/30 15100.36 18853.43
1991/10/31 15351.81 19106.07
1991/11/30 14690.09 18336.09
1991/12/31 15851.00 20433.74
1992/01/31 16065.02 20053.67
1992/02/29 16586.70 20314.37
1992/03/31 16383.45 19918.24
1992/04/30 16896.70 20503.84
1992/05/31 17031.76 20604.31
1992/06/30 16882.65 20297.30
1992/07/31 17400.02 21127.46
1992/08/31 17018.80 20694.35
1992/09/30 17195.47 20938.54
1992/10/31 17401.32 21011.83
1992/11/30 18032.60 21728.33
1992/12/31 18527.78 21995.59
1993/01/31 19080.85 22180.35
1993/02/28 19509.47 22482.00
1993/03/31 20090.87 22956.37
1993/04/30 20007.33 22400.83
1993/05/31 20369.33 23001.17
1993/06/30 20608.92 23067.88
1993/07/31 20889.31 22975.60
1993/08/31 21688.44 23846.38
1993/09/30 21605.52 23662.76
1993/10/31 21803.09 24152.58
1993/11/30 21422.06 23923.13
1993/12/31 21917.23 24212.60
1994/01/31 22882.50 25035.83
1994/02/28 22293.23 24357.36
1994/03/31 21360.60 23295.38
1994/04/30 22096.65 23593.56
1994/05/31 22306.96 23980.49
1994/06/30 22169.14 23392.97
1994/07/31 22909.62 24160.26
1994/08/31 24088.35 25150.83
1994/09/30 23693.72 24534.64
1994/10/31 24180.06 25086.67
1994/11/30 23389.76 24173.01
1994/12/31 23465.84 24531.50
1995/01/31 23832.73 25167.60
1995/02/28 24741.48 26148.38
1995/03/31 25595.80 26920.02
1995/04/30 26307.69 27712.81
1995/05/31 27100.48 28820.49
1995/06/30 27489.85 29489.99
1995/07/31 28547.77 30467.88
1995/08/31 28905.84 30544.36
1995/09/30 29865.49 31833.33
1995/10/31 29521.83 31719.68
1995/11/30 30798.28 33112.18
1995/12/31 31700.57 33749.92
1996/01/31 32621.81 34898.76
1996/02/29 32731.39 35222.28
1996/03/31 33075.93 35561.47
1996/04/30 33506.60 36085.64
1996/05/31 33868.37 37016.29
1996/06/30 33558.28 37157.32
1996/07/31 31921.71 35515.71
1996/08/31 32576.34 36264.74
1996/09/30 33971.73 38305.72
1996/10/31 34523.00 39362.19
1996/11/30 36831.42 42337.58
1996/12/31 36228.48 41498.87
IMATRL PRASUN SHR__CHT 19961231 19970120 075111 R00000000000123
Let's say hypothetically $10,000 was invested in Equity-Income Portfolio on
December 31, 1986. As the chart shows, by December 31, 1996, the value of
the investment would have grown to $36,228 - a 262.28% increase on the
initial investment. With reinvested dividends and capital gains, if any, a
$10,000 investment in the S&P 500 would have grown to $41,499 over the same
period - a 314.99% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1996
% OF FUND'S
INVESTMENTS
British Petroleum PLC ADR 3.2
Aetna, Inc. 2.5
General Electric Co. 2.2
Intel Corp. 2.0
Royal Dutch Petroleum Co. ADR 1.8
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 19966
% OF FUND'S
INVESTMENTS
Finance 16.4
Energy 14.6
Health 13.3
Technology 7.9
Nondurables 7.9
ASSET ALLOCATION AS OF DECEMBER 31, 1996 *
Row: 1, Col: 1, Value: 6.8
Row: 1, Col: 2, Value: 1.7
Row: 1, Col: 3, Value: 91.5
Stocks 91.5%
Bonds 1.7%
Short-term investments 6.8%
FOREIGN INVESTMENTS 8.1%
*
(% OF FUND'S INVESTMENTS)
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
NOTE TO SHAREHOLDERS: Stephen Petersen became Portfolio Manager of
Equity-Income Portfolio on January 6, 1997, after the period ended.
Q. HOW DID THE FUND PERFORM, STEPHEN?
A. While performing well on an absolute basis, the fund underperformed the
Standard & Poor's 500 Index, which returned 22.96% for the 12 months ended
December 31, 1996.
Q. WHY WERE THE FUND'S RETURNS DISAPPOINTING DURING THE PAST SIX MONTHS?
A. There are a couple of reasons. Primarily, though, it's because of the
equity-income style of investing that the fund follows. Equity-income fund
managers seek to own stocks of quality companies that also have attractive
dividend yields equal to or greater than the market average. Having that
sort of orientation attracts equity-income style managers to utility
stocks, financial stocks and cyclical stocks such as automobiles and basic
industries. As a group, the industries I just mentioned - with the
exception of financial stocks - performed well on an absolute basis but
underperformed the overall market during the past year. As in 1995, the
strong performance of the overall stock market was primarily concentrated
in technology stocks and larger market-capitalization stocks such as Coca
Cola and Gillette.
Q. AND THE FUND DIDN'T HAVE LARGE HOLDINGS IN MANY OF THE OUTPERFORMING
STOCKS?
A. Exactly. The past 12 months have not really been a stock picker's
market, but one in which the S&P 500 managed to outperform most actively
managed mutual funds such as this one. Also, the fund had a fairly large
weighting in mid-cap stocks that also underperformed the market average.
Q. WHAT HOLDINGS DID PERFORM WELL?
A. Some of the fund's top holdings performed well, including General
Electric, IBM and Philip Morris. The fund also was helped by its weighting
in financial stocks such as Aetna, the Federal National Mortgage
Association, Citicorp and American Express. However, some of the fund's
utility stocks and convertible bonds were drags on performance.
Q. YOU TOOK OVER THE FUND IN EARLY JANUARY 1997. WHAT ARE YOUR PLANS FOR
THE FUND? WHAT CHANGES CAN SHAREHOLDERS EXPECT FROM YOU?
A. As an equity-income manager, my investment strategy is to look for
better-than-average yielding large-cap stocks with attractive attributes
that will lead to capital appreciation over time. I try to buy stocks that
are currently out-of-favor within this framework, and try to avoid taking
large positions in certain segments of the market, such as mid-cap stocks
or convertible bonds. Once the out-of-favor stocks appreciate, I sell them
and buy other out-of-favor stocks. Mine is a methodical, straight-forward
process that emphasizes individual stock picking more than anything else.
Q. WHAT DO YOU LOOK FOR IN DIVIDEND-YIELDING STOCKS?
A. I usually buy stocks that have dividend yields equal to or above the
average yield of the S&P 500 - currently about 2%. If I own companies with
lower yields, it's because the company has decided to distribute excess
capital to shareholders in other ways, such as stock repurchase programs.
This is consistent with my strategy of owning companies that are strong
income producers with higher-than-average dividends, along with stocks of
undervalued companies that I think have the potential to appreciate over
time.
Q. DOES THE FUND OWN TURNAROUND STOCKS OR COMPANIES THAT ARE UNDERGOING
POSITIVE CHANGE?
A. Yes. While my goal is to have the fund primarily invested in quality
companies with consistent earnings growth, I would like to own some
companies that haven't performed well in the market recently, and therefore
may have lower valuations and better opportunity for capital appreciation.
It's an approach I've used in the past with some other funds I've managed
and it's worked well.
Q. WHAT'S YOUR OUTLOOK FOR THE MONTHS AHEAD?
A. I don't sense that there's been any significant change in the mood of
the market - it still favors consistent earnings growth. Since the market
continues to reward stocks of large-cap companies with consistent earnings,
it's quite difficult to outperform the general market, especially with the
equity-income style of investing. However, as everyone knows, the economic
recovery has been underway since 1991 - historically, quite a long period
of time for a strong economy without an interruption or correction.
Therefore, I'm trying to structure the fund so it can perform relatively
well when and if the market changes course. While I think the outlook for
this fund remains good, investors should be cautious after the past two
years of more than 20% returns from the overall market.
FUND FACTS
GOAL: to increase the value of the fund's
shares over the long term by investing in stocks
with above-average growth potential
START DATE: October 9, 1986
SIZE: as of December 31, 1996, more than
$6.0 billion
MANAGER: Jennifer Uhrig, since January 1997;
joined Fidelity in 1987
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
INVESTMENTS DECEMBER 31, 1996
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 89.7%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 5.0%
AEROSPACE & DEFENSE - 3.3%
Alliant Techsystems, Inc. (a) 215,000 $ 11,825,000
Boeing Co. 834,000 88,716,750
Lockheed Martin Corp. 425,603 38,942,675
Northrop Grumman Corp. 874,500 72,364,875
Thiokol Corp. 376,700 16,857,325
228,706,625
DEFENSE ELECTRONICS - 0.7%
Litton Industries, Inc. (a) 1,042,500 49,649,063
SHIP BUILDING & REPAIR - 1.0%
General Dynamics Corp. 991,500 69,900,750
TOTAL AEROSPACE & DEFENSE 348,256,438
BASIC INDUSTRIES - 4.6%
CHEMICALS & PLASTICS - 2.8%
IMC Fertilizer Group, Inc. 1,084,900 42,446,713
Monsanto Co. 1,940,000 75,417,500
Raychem Corp. 239,400 19,181,925
Synetic, Inc. (a)(d) 1,157,582 56,142,727
193,188,865
METALS & MINING - 1.8%
Alcan Aluminium Ltd. 1,400,000 47,233,468
Aluminum Co. of America 740,900 47,232,375
Inco Ltd. 1,029,193 32,846,186
127,312,029
TOTAL BASIC INDUSTRIES 320,500,894
CONGLOMERATES - 2.1%
AlliedSignal, Inc. 1,055,100 70,691,700
Coltec Industries, Inc. (a) 1,371,600 25,888,950
Tyco International Ltd. 962,742 50,904,983
147,485,633
CONSTRUCTION & REAL ESTATE - 0.5%
BUILDING MATERIALS - 0.5%
Masco Corp. 1,045,400 37,634,400
DURABLES - 2.1%
AUTOS, TIRES, & ACCESSORIES - 0.2%
Snap-on Tools Corp. 335,150 11,939,719
CONSUMER DURABLES - 0.3%
Minnesota Mining &
Manufacturing Co. 269,500 22,334,813
CONSUMER ELECTRONICS - 1.2%
Sunbeam-Oster, Inc. 3,092,300 79,626,725
TEXTILES & APPAREL - 0.4%
Reebok International Ltd. 687,700 28,883,400
TOTAL DURABLES 142,784,657
ENERGY - 14.5%
ENERGY SERVICES - 1.1%
BJ Services Co. (a) 144,100 7,349,100
Schlumberger Ltd. 720,600 71,969,925
79,319,025
OIL & GAS - 13.4%
Amerada Hess Corp. 464,500 26,882,938
Amoco Corp. 150,000 12,075,000
British Petroleum PLC ADR 1,591,493 224,997,323
Burlington Resources, Inc. 566,700 28,547,513
SHARES VALUE (NOTE 1)
Chevron Corp. 929,600 $ 60,424,000
Exxon Corp. 1,040,000 101,920,000
Lomak Petroleum, Inc. 329,000 5,634,125
Mobil Corp. 136,300 16,662,675
Occidental Petroleum Corp. 1,665,200 38,924,050
Pennzoil Co. 1,100,400 62,172,600
Royal Dutch Petroleum Co. ADR 724,500 123,708,375
Texaco, Inc. 1,080,000 105,975,000
Tosco Corp. 216,600 17,138,475
Total SA Class B 594,700 48,355,183
Unocal Corp. 1,447,665 58,811,391
932,228,648
TOTAL ENERGY 1,011,547,673
FINANCE - 15.2%
BANKS - 7.8%
Bank of Boston Corp. 1,127,100 72,416,175
Bank of New York Co., Inc. 1,675,000 56,531,250
BankAmerica Corp. 734,700 73,286,325
Chase Manhattan Corp. 1,040,000 92,820,000
Citicorp 874,400 90,063,200
First Bank System, Inc. 592,530 40,440,173
National City Corp. 1,057,785 47,468,102
SunTrust Banks, Inc. 767,300 37,789,525
U.S. Bancorp 728,700 32,745,956
543,560,706
CREDIT & OTHER FINANCE - 0.7%
American Express Co. 905,172 51,142,218
FEDERAL SPONSORED CREDIT - 1.5%
Federal Home Loan
Mortgage Corporation 100,900 11,111,613
Federal National Mortgage
Association 2,478,700 92,331,575
103,443,188
INSURANCE - 4.4%
Aetna, Inc. 2,135,700 170,856,000
Allstate Corp. 774,999 44,853,056
ITT Hartford Group, Inc. 663,300 44,772,750
Travelers Group, Inc. (The) 1,011,667 45,904,375
306,386,181
SAVINGS & LOANS - 0.5%
Great Western Financial Corp. 1,184,100 34,338,900
SECURITIES INDUSTRY - 0.3%
Lehman Brothers Holdings, Inc. 598,800 18,787,350
TOTAL FINANCE 1,057,658,543
HEALTH - 12.2%
DRUGS & PHARMACEUTICALS - 5.4%
American Home Products Corp. 1,773,000 103,942,125
Barr Laboratories, Inc. (a)(d) 1,141,800 28,973,175
Bristol-Myers Squibb Co. 675,400 73,449,750
Genentech, Inc. special (a) 534,400 28,657,200
Lilly (Eli) & Co. 495,800 36,193,400
Schering-Plough Corp. 219,700 14,225,575
Sepracor, Inc. (a) 475,000 7,896,875
Warner-Lambert Co. 1,049,000 78,675,000
372,013,100
MEDICAL EQUIPMENT & SUPPLIES - 3.6%
Bard (C.R.), Inc. 1,173,500 32,858,000
Cardiac Control Systems, Inc. (a)(d) 99,800 149,700
Cardinal Health, Inc. 1,768,700 103,026,775
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
HEALTH - CONTINUED
MEDICAL EQUIPMENT & SUPPLIES - CONTINUED
Nellcor, Inc. (a) 421,700 $ 9,224,688
U.S. Surgical Corp. 2,707,000 106,588,125
251,847,288
MEDICAL FACILITIES MANAGEMENT - 3.2%
Beverly Enterprises, Inc. (a)(d) 5,522,000 70,405,500
Columbia/HCA Healthcare Corp. 2,422,350 98,710,763
Integramed America, Inc. (a)(d) 605,500 983,938
PacifiCare Health Systems, Inc.
Class B (a) 624,000 53,196,000
US Diagnostic Labs, Inc. (a) 100,000 925,000
224,221,201
TOTAL HEALTH 848,081,589
HOLDING COMPANIES - 0.1%
Koor Industries Ltd. sponsored ADR 617,300 10,494,100
INDUSTRIAL MACHINERY & EQUIPMENT - 4.2%
ELECTRICAL EQUIPMENT - 2.3%
American Superconductor Corp. (a) 419,800 4,460,375
General Electric Co. 1,572,800 155,510,600
159,970,975
INDUSTRIAL MACHINERY & EQUIPMENT - 0.8%
Caterpillar, Inc. 695,000 52,298,750
POLLUTION CONTROL - 1.1%
WMX Technologies, Inc. 2,405,200 78,469,650
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 290,739,375
MEDIA & LEISURE - 4.4%
ENTERTAINMENT - 1.7%
All American Communications, Inc. (a) 280,434 3,785,859
GC Cos., Inc. (a) 251,100 8,694,338
Viacom, Inc. Class B (non-vtg.)(a) 3,148,500 109,803,938
122,284,135
LEISURE DURABLES & TOYS - 1.4%
Hasbro, Inc. 2,490,500 96,818,188
LODGING & GAMING - 0.7%
HFS, Inc. 365,000 21,808,750
Mirage Resorts, Inc. (a) 266,600 5,765,225
WMS Industries, Inc. (a) 981,800 19,636,000
47,209,975
PUBLISHING - 0.6%
Harcourt General, Inc. 385,600 17,785,800
Hollinger International, Inc. Class A 1,989,400 22,878,100
40,663,900
TOTAL MEDIA & LEISURE 306,976,198
NONDURABLES - 7.9%
BEVERAGES - 0.9%
Anheuser-Busch Companies, Inc. 1,595,300 63,812,000
FOODS - 1.0%
General Mills, Inc. 1,060,600 67,215,525
HOUSEHOLD PRODUCTS - 4.5%
Avon Products, Inc. 90,600 5,175,525
Colgate-Palmolive Co. 330,000 30,442,500
Gillette Co. 1,250,700 97,241,925
Procter & Gamble Co. 810,800 87,161,000
Stanhome, Inc. 474,900 12,584,850
SHARES VALUE (NOTE 1)
Unilever NV ADR 200,000 $ 35,050,000
Unilever PLC Ord. 1,705,400 41,337,105
308,992,905
TOBACCO - 1.5%
Philip Morris Companies, Inc. 944,800 106,408,100
TOTAL NONDURABLES 546,428,530
PRECIOUS METALS - 0.0%
Naxos Resources Ltd. (a) 60,200 233,275
RETAIL & WHOLESALE - 5.4%
APPAREL STORES - 0.0%
Limited, Inc. (The) 90,800 1,668,450
DRUG STORES - 1.0%
Rite Aid Corp. 1,187,100 47,187,225
Walgreen Co. 634,200 25,368,000
72,555,225
GENERAL MERCHANDISE STORES - 1.8%
Consolidated Stores Corp. (a) 2,066,125 66,374,266
Wal-Mart Stores, Inc. 573,800 13,125,675
Woolworth Corp. (a) 2,100,800 45,955,000
125,454,941
RETAIL & WHOLESALE, MISCELLANEOUS - 2.6%
Staples, Inc. (a) 2,095,700 37,853,581
Tandy Corp. 1,817,800 79,983,200
Toys "R" Us, Inc. (a) 1,180,000 35,400,000
U.S. Office Products Co. (a) 750,800 25,621,050
178,857,831
TOTAL RETAIL & WHOLESALE 378,536,447
SERVICES - 1.2%
ADVERTISING - 0.5%
Interpublic Group of Companies, Inc. 658,500 31,278,750
PRINTING - 0.6%
Harland (John H.) Co. 1,251,300 41,292,900
SERVICES - 0.1%
HealthCare COMPARE Corp. (a) 223,800 9,483,525
TOTAL SERVICES 82,055,175
TECHNOLOGY - 7.6%
COMPUTER SERVICES & SOFTWARE - 0.7%
Equifax, Inc. 1,568,900 48,047,563
COMPUTERS & OFFICE EQUIPMENT - 3.2%
Hewlett-Packard Co. 1,000,000 50,250,000
International Business Machines Corp. 730,000 110,230,000
Pitney Bowes, Inc. 991,000 54,009,500
Silicon Graphics, Inc. (a) 444,200 11,327,100
225,816,600
ELECTRONIC INSTRUMENTS - 0.3%
Varian Associates, Inc. 360,900 18,360,788
ELECTRONICS - 2.1%
AMP, Inc. 187,500 7,195,313
Intel Corp. 1,059,000 138,662,813
145,858,126
PHOTOGRAPHIC EQUIPMENT - 1.3%
Eastman Kodak Co. 988,500 79,327,125
Panavision, Inc. (a)(d) 437,400 9,076,050
88,403,175
TOTAL TECHNOLOGY 526,486,252
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TRANSPORTATION - 1.7%
AIR TRANSPORTATION - 1.1%
Northwest Airlines Corp. Class A (a) 1,976,200 $ 77,318,825
RAILROADS - 0.6%
CSX Corp. 217,900 9,206,275
Conrail, Inc. 286,826 28,575,040
37,781,315
TOTAL TRANSPORTATION 115,100,140
UTILITIES - 1.0%
TELEPHONE SERVICES - 1.0%
LCI International, Inc. (a) 649,400 13,962,100
Southern New England
Telecommunications Corp. 670,300 26,057,913
WorldCom, Inc. (a) 1,103,800 28,767,788
68,787,801
TOTAL COMMON STOCKS
(Cost $5,403,361,996) 6,239,787,120
CONVERTIBLE PREFERRED STOCKS - 1.8%
FINANCE - 1.2%
INSURANCE - 0.8%
Aetna, Inc. Class C 6.25% 760,000 60,325,000
SECURITIES INDUSTRY - 0.4%
Salomon, Inc. $2.03 840,700 25,641,350
TOTAL FINANCE 85,966,350
HEALTH - 0.6%
MEDICAL EQUIPMENT & SUPPLIES - 0.6%
U.S. Surgical Corp. $2.20 (c) 1,027,500 39,301,875
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $109,599,084) 125,268,225
CONVERTIBLE BONDS - 1.7%
MOODY'S RATINGS PRINCIPAL
(UNAUDITED) (B) AMOUNT
CONSTRUCTION & REAL ESTATE - 0.5%
REAL ESTATE INVESTMENT TRUSTS - 0.5%
Liberty Property exchangeable
8%, 7/1/01 B1 $ 27,985,000 35,785,819
ENERGY - 0.1%
OIL & GAS - 0.1%
Lomak Petroleum, Inc.
6%, 2/1/07 (c) - 10,000,000 10,750,000
HEALTH - 0.5%
MEDICAL FACILITIES MANAGEMENT - 0.5%
NovaCare, Inc.
5 1/2%, 1/15/00 B1 38,787,000 34,811,333
MEDIA & LEISURE - 0.1%
LEISURE DURABLES & TOYS - 0.1%
Hasbro Corp. 6%, 11/15/98 A3 3,000,000 3,952,500
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (B) AMOUNT (NOTE 1)
RETAIL & WHOLESALE - 0.2%
RETAIL & WHOLESALE, MISCELLANEOUS - 0.2%
US Office Products Co.
5 1/2%, 2/1/01 B3 $ 10,000,000 $ 13,200,000
TECHNOLOGY - 0.3%
COMPUTERS & OFFICE EQUIPMENT - 0.3%
Unisys Corp.
8 1/4%, 8/1/00 B3 22,579,000 21,901,630
TOTAL CONVERTIBLE BONDS
(Cost $111,371,760) 120,401,282
CASH EQUIVALENTS - 6.8%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 6.75%, dated
12/31/96 due 1/2/97 $ 468,719,704 468,544,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $6,092,876,840) $ 6,954,000,627
LEGEND
1. Non-income producing
2. Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
3. Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of these securities amounted to $50,051,875 or 0.7% of net
assets.
4. An affiliated company is a company in which the fund has ownership of at
least 5% of the voting securities. Transactions during the period with
companies which are or were affiliates are as follows:
PURCHASE SALES DIVIDEND VALUE
AFFILIATE COST COST INCOME
Advanced Medical, Inc. $ - $ 2,059,931 $ - $ -
Barr Laboratories, Inc. - - - 28,973,175
Beverly Enterprises, Inc. - - - 70,405,500
Cardiac Control
Systems, Inc. - - - 149,700
Integramed
America, Inc. - - - 983,938
Panavision, Inc. 527,021 - - 9,076,050
Synetic, Inc. 2,831,088 - - 56,142,727
TOTALS $ 3,358,109 $ 2,059,931 $ - $ 165,731,090
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $11,836,384,153 and $10,451,663,817, respectively, of which U.S.
government and government agency obligations aggregated $0 and
$328,865,673, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company. The
commissions paid to these affiliated firms were $3,583,630, for the period
(see Note 4 of Notes to Financial Statements).
The composition of long-term debt holdings as a percentage of total value
of investment in securities, is as follows (ratings are unaudited):
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 0.1% AAA, AA, A 0.1%
Baa 0.0% BBB 0.0%
Ba 0.0% BB 0.0%
B 1.5% B 0.8%
Caa 0.0% CCC 0.2%
Ca, C 0.0% CC, C 0.0%
D 0.0%
The percentage not rated by both S&P and Moody's amounted to 0.1%. FMR has
determined that unrated debt securities that are lower quality account for
0.1% of the total value of investment in securities.
The fund participated in the bank borrowing program. The maximum loan and
average daily balances during the period for which loans were outstanding
amounted to $21,073,000 and $6,793,750, respectively. The weighted average
interest rate was 5.8% (see Note 5 of Notes to Financial Statements).
INCOME TAX INFORMATION
At December 31, 1996, the aggregate cost of investment securities for
income tax purposes was $6,108,113,364. Net unrealized appreciation
aggregated $845,887,263, of which $912,793,695 related to appreciated
investment securities and $66,906,432 related to depreciated investment
securities.
The fund hereby designates approximately $446,325,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
DECEMBER 31, 1996
ASSETS
Investment in securities, at $ 6,954,000,627
value (including repurchase agreements of $468,544,000) (cost $6,092,876,840) -
See accompanying schedule
Cash 1,686,975
Receivable for investments sold 20,320,841
Receivable for fund shares sold 4,023,402
Dividends receivable 8,912,470
Interest receivable 3,117,054
Other receivables 122,761
TOTAL ASSETS 6,992,184,130
LIABILITIES
Payable for investments purchased $ 22,508,059
Payable for fund shares redeemed 5,207,198
Accrued management fee 2,904,152
Other payables and 474,698
accrued expenses
TOTAL LIABILITIES 31,094,107
NET ASSETS $ 6,961,090,023
Net Assets consist of:
Paid in capital $ 5,393,181,590
Undistributed net investment income 117,454,549
Accumulated undistributed net realized gain (loss) on investments and foreign 589,335,531
currency transactions
Net unrealized appreciation (depreciation) on investments 861,118,353
and assets and liabilities in
foreign currencies
NET ASSETS, for 330,981,233 $ 6,961,090,023
shares outstanding
NET ASSET VALUE, offering price $21.03
and redemption price per
share ($6,961,090,023 (divided by) 330,981,233 shares)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996
INVESTMENT INCOME $ 103,954,015
Dividends
Interest 46,819,075
TOTAL INCOME 150,773,090
EXPENSES
Management fee $ 30,150,885
Transfer agent fees 3,382,642
Accounting fees and expenses 809,457
Non-interested trustees' compensation 37,037
Custodian fees and expenses 148,790
Registration fees 42,083
Audit 88,174
Legal 36,257
Interest 4,392
Miscellaneous 34,321
Total expenses before reductions 34,734,038
Expense reductions (1,419,527 33,314,511
)
NET INVESTMENT INCOME 117,458,579
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:
Investment securities (including 597,126,563
realized gain of $529,821
on sales of investments in
affiliated issuers)
Foreign currency transactions (9,078 597,117,485
)
Change in net unrealized appreciation (depreciation) on:
Investment securities 91,004,487
Assets and liabilities in (11,569 90,992,918
foreign currencies )
NET GAIN (LOSS) 688,110,403
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 805,568,982
OTHER INFORMATION $ 1,390,319
Expense reductions
Directed brokerage arrangements
Custodian interest credits 29,208
$ 1,419,527
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
<TABLE>
<CAPTION>
<S> <C> <C>
Operations $ 117,458,579 $ 88,914,157
Net investment income
Net realized gain (loss) 597,117,485 220,997,465
Change in net unrealized appreciation (depreciation) 90,992,918 715,587,919
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 805,568,982 1,025,499,541
Distributions to shareholders (7,876,787) (84,729,039)
From net investment income
From net realized gain (225,801,230) (121,254,353)
TOTAL DISTRIBUTIONS (233,678,017) (205,983,392)
Share transactions 1,829,128,598 1,784,340,253
Net proceeds from sales of shares
Reinvestment of distributions 233,678,017 205,981,922
Cost of shares redeemed (553,042,238) (214,815,736)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 1,509,764,377 1,775,506,439
TOTAL INCREASE (DECREASE) IN NET ASSETS 2,081,655,342 2,595,022,588
NET ASSETS
Beginning of period 4,879,434,681 2,284,412,093
End of period (including undistributed net investment income of $117,454,549 and $8,997,355, $ 6,961,090,023 $ 4,879,434,681
respectively)
OTHER INFORMATION
Shares
Sold 93,794,843 103,951,843
Issued in reinvestment of distributions 12,390,139 12,868,445
Redeemed (28,467,146) (12,384,683)
Net increase (decrease) 77,717,836 104,435,605
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1996 1995 1994 1993 C 1992
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 19.27 $ 15.35 $ 15.44 $ 13.40 $ 11.85
Income from Investment Operations
Net investment income .35 .41 .41 .37 .40
Net realized and unrealized gain (loss) 2.30 4.69 .64 2.06 1.57
Total from investment operations 2.65 5.10 1.05 2.43 1.97
Less Distributions
From net investment income (.03) (.40) (.37) (.35) (.42)
In excess of net investment income - - - (.04) -
From net realized gain (.86) (.78) (.77) - -
Total distributions (.89) (1.18) (1.14) (.39) (.42)
Net asset value, end of period $ 21.03 $ 19.27 $ 15.35 $ 15.44 $ 13.40
TOTAL RETURN A, B 14.28% 35.09% 7.07% 18.29% 16.89%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 6,961,090 $ 4,879,435 $ 2,284,412 $ 1,318,500 $ 592,880
Ratio of expenses to average net assets .58% .61% .60% .62% .65%
Ratio of expenses to average net assets after expense reductions.56% D .61% .58% .62% .65%
D
Ratio of net investment income to average net assets 1.97% 2.56% 2.83% 2.87% 3.52%
Portfolio turnover rate 186% 87% 134% 120% 74%
Average commission rate E $ .0426
THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN (SEE NOTE 6 OF NOTES TO FINANCIAL
STATEMENTS).
TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE
THE TOTAL RETURNS SHOWN.
EFFECTIVE JANUARY 1,1993, THE FUND ADOPTED STATEMENT OF POSITION 93-2,
"DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF
INCOME, CAPITAL GAIN,
AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT COMPANIES." AS A
RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT CERTAIN
RECLASSIFICATIONS RELATED TO BOOK
TO TAX DIFFERENCES.
FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES
(SEE NOTE 6 OF NOTES TO
FINANCIAL STATEMENTS).
FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS
REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR
SECURITY TRADES ON WHICH
COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD
AND FUND TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS
MARKETS WHERE
TRADING PRACTICES AND COMMISSION RATE STRUCTURES MAY DIFFER.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
For the period ended December 31, 1996
5. SIGNIFICANT ACCOUNTING POLICIES.
Equity-Income Portfolio (the fund) is a fund of Variable Insurance Products
Fund (the trust) and is authorized to issue an unlimited number of shares.
The trust is registered under the Investment Company Act of 1940, as
amended (the 1940 Act), as an open-end management investment company
organized as a Massachusetts business trust. Shares of the fund may only be
purchased by insurance companies for the purpose of funding variable
annuity or variable life insurance contracts. The financial statements have
been prepared in conformity with generally accepted accounting principles
which permit management to make certain estimates and assumptions at the
date of the financial statements. The following summarizes the significant
accounting policies of the fund:
SECURITY VALUATION. Securities for which exchange quotations are readily
available are valued at the last sale price, or if no sale price, at the
closing bid price. Securities (including restricted securities) for which
exchange quotations are not readily available (and in certain cases debt
securities which trade on an exchange) are valued primarily using
dealer-supplied valuations or at their fair value as determined in good
faith under consistently applied procedures under the general supervision
of the Board of Trustees. Short-term securities with remaining maturities
of sixty days or less for which quotations are not readily available are
valued at amortized cost or original cost plus accrued interest, both of
which approximate current value.
FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S.
dollars at the prevailing rates of exchange at period end. Income receipts
and expense payments are translated into U.S. dollars at the prevailing
exchange rate on the respective dates of the transactions. Purchases and
sales of securities are translated into U.S. dollars at the contractual
currency exchange rates established at the time of each trade.
Net realized gains and losses on foreign currency transactions represent
net gains and losses from sales and maturities of forward currency
contracts, disposition of foreign currencies, and the difference between
the amount of net investment income accrued and the U.S. dollar amount
actually received. The effects of changes in foreign currency exchange
rates on investments in securities are included with the net realized and
unrealized gain or loss on investment securities.
INCOME TAXES. As a qualified regulated investment company under Subchapter
M of the Internal Revenue Code, the fund is not subject to income taxes to
the extent that it distributes substantially all of its taxable income for
its fiscal year. The schedule of investments includes information regarding
income taxes under the caption "Income Tax Information."
INVESTMENT INCOME. Dividend income is recorded on the ex-dividend date,
except certain dividends from foreign securities where the ex-dividend date
may have passed, are recorded as soon as the fund is informed of the
ex-dividend date. Non-cash dividends included in dividend income, if any,
are recorded at the fair market value of the securities received. Interest
income, which includes accretion of original issue discount, is accrued as
earned. Investment income is recorded net of foreign taxes withheld where
recovery of such taxes is uncertain.
EXPENSES. Most expenses of the trust can be directly attributed to a fund.
Expenses which cannot be directly attributed are apportioned between the
funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. 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, which may result in distribution
reclassifications, are primarily due to differing treatments for market
discount and losses deferred due to wash sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital and may
affect the per-share allocation between net investment income and realized
and unrealized gain (loss). Undistributed net investment income and
accumulated undistributed net realized gain (loss) on investments and
foreign currency transactions may include temporary book and tax basis
differences which will reverse in a subsequent period. Any taxable income
or gain remaining at fiscal year end is distributed in the following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of trade
date. Gains and losses on securities sold are determined on the basis of
identified cost.
6. OPERATING POLICIES.
FOREIGN CURRENCY CONTRACTS. The fund generally uses foreign currency
contracts to facilitate transactions in foreign-denominated securities.
Losses may arise from changes in the value of the foreign currency or if
the counterparties do not perform under the contracts' terms. The U.S.
dollar value of foreign currency contracts is determined using contractual
currency exchange rates established at the time of each trade. The cost of
the foreign currency contracts is included in the cost basis of the
associated investment.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission (the SEC), the fund, along with other
affiliated entities of Fidelity Management & Research Company (FMR), may
transfer uninvested cash balances into one or more joint trading accounts.
These balances are invested in one or more repurchase agreements that
mature in 60 days or less from the date of purchase for U.S. Treasury or
Federal Agency obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
Securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are marked-to-market
daily and maintained at a value at least equal to the principal amount of
the repurchase agreement (including accrued interest). FMR, the fund's
investment
2. OPERATING POLICIES - CONTINUED
REPURCHASE AGREEMENTS - CONTINUED
adviser, is responsible for determining that the value of the underlying
securities remains in accordance with the market value requirements stated
above.
RESTRICTED SECURITIES. The fund is permitted to invest in securities that
are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from registration
or to the public if the securities are registered. Disposal of these
securities may involve time-consuming negotiations and expense, and prompt
sale at an acceptable price may be difficult. At the end of the period, the
fund had no investments in restricted securities (excluding 144A issues).
7. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities), is included under the caption "Other Information"
at the end of the fund's schedule of investments.
8. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a monthly
fee that is calculated on the basis of a group fee rate plus a fixed
individual fund fee rate applied to the average net assets of the fund. The
group fee rate is the weighted average of a series of rates and is based on
the monthly average net assets of all the mutual funds advised by FMR. The
rates ranged from .2500% to .5200% for the period. In the event that these
rates were lower than the contractual rates in effect during the period,
FMR voluntarily implemented the above rates, as they resulted in the same
or a lower management fee. The annual individual fund fee rate is .20%. For
the period, the management fee was equivalent to an annual rate of .51% of
average net assets.
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations Company
(FIIOC), an affiliate of FMR, is the fund's transfer, dividend disbursing
and shareholder servicing agent. FIIOC receives account fees and
asset-based fees that vary according to account size and type of account.
FIIOC pays for typesetting, printing and mailing of all shareholder
reports, except proxy statements. For the period, the transfer agent fees
were equivalent to an annual rate of .06% of average net assets.
ACCOUNTING FEES. Fidelity Service Co. (FSC), an affiliate of FMR, maintains
the fund's accounting records. The fee is based on the level of average net
assets for the month plus out-of-pocket expenses.
BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms are shown under the caption
"Other Information" at the end of the fund's schedule of investments.
9. BANK BORROWINGS.
The fund is permitted to have bank borrowings for temporary or emergency
purposes to fund shareholder redemptions. The fund has established
borrowing arrangements with certain banks. Under the most restrictive
arrangement, the fund must pledge to the bank securities having a market
value in excess of 220% of the total bank borrowings. The interest rate on
the borrowings is the bank's base rate, as revised from time to time.
Information regarding the fund's participation in the program is included
under the caption "Other Information" at the end of the fund's schedule of
investments.
10. EXPENSE REDUCTIONS.
FMR voluntarily agreed to reimburse the fund's operating expenses
(excluding interest, taxes, brokerage commissions and extraordinary
expenses) above an annual rate of 1.50% of average net assets.
FMR has directed certain portfolio trades to brokers who paid a portion of
the fund's expenses. In addition, the fund has entered into an arrangement
with its custodian whereby interest earned on uninvested cash balances was
used to offset a portion of the fund's expenses.
For the period, the reduction under these arrangements are shown under the
caption "Other Information" on the fund's Statement of Operations.
11. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investments Life Insurance Company
(FILI) and its subsidiaries, affiliates of FMR, were the record owners of
approximately 20% of the outstanding shares of the fund. In addition, one
unaffiliated insurance company was record owner of 10% or more of the total
outstanding shares of the fund, totaling 29%.
12. TRANSACTIONS WITH AFFILIATED COMPANIES.
An affiliated company is a company in which the fund has ownership of at
least 5% of the voting securities. Information regarding transactions with
affiliated companies is included under the caption "Legend" at the end of
the fund's schedule of investments.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Variable Insurance Products Fund and the Shareholders of
Equity-Income Portfolio:
We have audited the accompanying statement of assets and liabilities of
Variable Insurance Products Fund: Equity-Income Portfolio, including the
schedule of portfolio investments, as of December 31, 1996, and the related
statement of operations for the year then ended, the statement of changes
in net assets for each of the two years in the period then ended and the
financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility
of the fund's 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. Our procedures included confirmation of
securities owned as of December 31, 1996 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 Variable Insurance Products Fund: Equity-Income Portfolio as of December
31, 1996, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the
period then ended, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 10, 1997
DISTRIBUTIONS
The Board of Trustees of Equity-Income Portfolio voted to pay on February
7, 1997, to shareholders of record at the opening of business on February
7, 1997, a distribution of $1.81 per share derived from capital gains
realized from sales of portfolio securities and a dividend of $.36 per
share from net investment income.
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
OFFICERS
Edward C. Johnson 3d, PRESIDENT
J. Gary Burkhead, SENIOR VICE PRESIDENT
William J. Hayes, VICE PRESIDENT
Stephen Petersen, VICE PRESIDENT
Arthur S. Loring, SECRETARY
Kenneth A. Rathgeber, TREASURER
Robert H. Morrison, MANAGER, SECURITY TRANSACTIONS
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
BOARD OF TRUSTEES
J. Gary Burkhead
Ralph F. Cox *
Phyllis Burke Davis *
Richard J. Flynn *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Edward H. Malone *
Marvin L. Mann *
Gerald C. McDonough *
Thomas R. Williams *
ADVISORY BOARD
William O. McCoy
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Investments Institutional Operations Co.
Boston, MA
CUSTODIAN
The Chase Manhattan Bank, N.A., New York, NY
* INDEPENDENT TRUSTEES
(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS
FUND: MONEY MARKET PORTFOLIO
ANNUAL REPORT
DECEMBER 31, 1996
CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
PERFORMANCE 3 How the fund has done over time.
FUND TALK 4 The manager's review of fund performance, strategy
and outlook.
INVESTMENTS 5 A complete list of the fund's investments with their
market values.
FINANCIAL STATEMENTS 9 Statements of assets and liabilities, operations, and
changes in net assets, as well as financial highlights.
NOTES 11 Notes to the financial statements.
REPORT OF INDEPENDENT ACCOUNTANTS 12 The auditors' opinion.
</TABLE>
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR
THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS
PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY,
ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED
BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
VARIABLE INSURANCE PRODUCTS FUND: MONEY MARKET PORTFOLIO
PERFORMANCE
To evaluate a money market fund's historical performance, you can look at
either total return or yield. Total return reflects the change in value of
an investment, assuming reinvestment of the fund's dividend income. Yield
measures the income paid by a fund. Since a money market fund tries to
maintain a $1 share price, yield is an important measure of performance.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10
DECEMBER 31, 1996 YEAR YEARS YEARS
MONEY MARKET 5.41% 4.53% 5.96%
AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had achieved that return by performing
at a constant rate each year.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL
CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
If Fidelity had not reimbursed certain fund expenses, the past five and ten
year total returns would have been lower. Yield will vary.
YIELD
Row: 1, Col: 1, Value: 5.56
Row: 1, Col: 2, Value: 2.83
Row: 2, Col: 1, Value: 5.13
Row: 2, Col: 2, Value: 2.71
Row: 3, Col: 1, Value: 5.159999999999999
Row: 3, Col: 2, Value: 2.66
Row: 4, Col: 1, Value: 5.3
Row: 4, Col: 2, Value: 2.67
Row: 5, Col: 1, Value: 5.28
Row: 5, Col: 2, Value: 2.64
Money Market
MMDA
6% -
5% -
4% -
3% -
2% -
1% -
0%
12/27/95 4/3/96 6/26/96 10/2/96 12/30/96
MONEY MARKET 5.56% 5.13% 5.16% 5.30% 5.28%
MMDA 2.83% 2.71% 2.66% 2.67% 2.64
YIELD refers to the income paid by the fund over a given period. Yields for
money market funds are usually for seven-day periods, expressed as annual
percentage rates. A yield that assumes income earned is reinvested or
compounded is called an effective yield. The chart above shows the fund's
current seven-day yield at quarterly intervals over the past year. You can
compare these yields to the all taxable money market funds average and the
bank money market deposit account (MMDA) average. The MMDA average is
supplied by BANK RATE MONITOR. TM
COMPARING PERFORMANCE
There are some important differences between a
bank money market deposit account (MMDA)
and a money market fund. First, the U.S.
Government neither insures nor guarantees a
money market fund. In fact, there is no assurance
that a money fund will maintain a $1 share price.
Second, a money market fund returns to its
shareholders income earned by the fund's
investments after expenses. This is in contrast to
banks, which set their MMDA rates periodically
based on current interest rates, competitors' rates,
and internal criteria.
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND: MONEY MARKET PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with Bob Litterst, Portfolio Manager of Money Market Portfolio
Q. BOB, WHAT WAS THE INVESTING ENVIRONMENT LIKE OVER THE PAST YEAR?
A. It has gone through some interesting changes. At the beginning of the
period, the economy was growing slowly, inflationary pressures were mild
and it seemed a balanced budget agreement was in the offing. The Federal
Reserve Board reduced short-term rates in January, and market participants
were optimistic that additional rate cuts would occur in the months ahead.
But things changed dramatically, beginning with Fed Chairman Alan
Greenspan's Congressional testimony in February suggesting that market
expectations of further rate cuts were excessive. February's employment
report then came in well above most analysts' predictions, depicting a much
stronger labor market than previously thought. Stronger economic signals
caused participants to revise their expectations regarding monetary policy,
and short-term rates rose. Ultimately, the economy grew at a 4.7% annual
rate in the second quarter, well above a non-inflationary pace. As a
result, short-term interest rates rose higher through the second quarter
and into the summer.
Q. BUT THE FED DIDN'T RAISE RATES . . .
A. That's right, for two reasons. First, the key inflation indices were
well-behaved. Rising wages didn't get translated into higher prices. And
second, the Fed anticipated a slowdown in economic activity in the second
half of the year. Minutes from the Fed's Open Market Committee meetings
indicated that the Fed did adopt a tightening bias in July and maintained
it through its November meeting. Nonetheless, the Fed did not take direct
action on short-term interest rates. During September and October, the
market breathed a sigh of relief as the Fed's economic projections turned
out to be correct. Job growth decelerated, third quarter gross domestic
product (GDP) slowed sharply and inflation numbers were reassuring. With
the economy slowing and inflation subdued, tightening fears subsided and
short-term rates retraced their earlier rise.
Q. WHAT HAS YOUR STRATEGY BEEN THROUGH THIS FLUCTUATING MARKET?
A. At the start of the period, the fund's average maturity was 70 days
because I felt rates were on a downward trend and I wanted to lock in
higher yields. When market sentiment shifted and rates rose in anticipation
of an increase in the federal funds rate, I shortened the average maturity
somewhat - to help me position the fund so I could reinvest at ever-higher
yields as the fund's existing holdings matured. In the summer, I shortened
the maturity further to the 50-day range because the potential for Fed
tightening was strong, and, again, I wanted to be able to obtain higher
yields going forward. From that point, I increased the average maturity of
the fund by purchasing some securities further out on the yield curve that
I felt were factoring in the worst case scenario regarding potential Fed
tightening. At the end of September, the fund's average maturity was back
out to 70 days, reflecting my opinion that Fed policy would remain steady
for the foreseeable future. Since that time, I've kept the maturity in the
60-70 day range.
Q. WHAT DO YOU SEE LOOKING OUT OVER THE NEXT SEVERAL MONTHS?
A. The consumer retrenched a great deal in the third quarter after
contributing to strong GDP growth in the first half of the year. The debate
at this point is whether this slowdown is a "pause to refresh" or the
beginning of a new trend where consumers are too debt-strapped to keep on
spending. Recent economic data suggest that fourth-quarter real GDP growth
may be stronger than initially expected, led by consumption, trade and
construction spending. Nevertheless, I expect Fed monetary policy to be
stable at least through the first quarter of 1997. If the economy grows at
an above-trend pace and/or wage and price pressures accelerate,
expectations of tightening should reappear. On the other hand, I think it's
unlikely the Fed will ease because of concern about tight labor market
conditions and rising wage pressures. Additionally, in December Greenspan
warned of "irrational exuberance" in the equity markets, a condition that
probably would not cause the Fed to increase rates, but might restrict its
ability to ease if the economy weakens.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER
ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER.
THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED ON MARKET AND
OTHER CONDITIONS.
FUND FACTS
GOAL: to increase the value of the fund's
shares over the long term by investing in stocks
with above-average growth potential
START DATE: October 9, 1986
SIZE: as of December 31, 1996, more than
$6.0 billion
MANAGER: Jennifer Uhrig, since January 1997;
joined Fidelity in 1987
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND: MONEY MARKET PORTFOLIO
INVESTMENTS DECEMBER 31, 1996
Showing Percentage of Total Value of Investment in Securities
BANKERS' ACCEPTANCES - 0.7%
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT
(NOTE 1)
Chase Manhattan Bank
2/3/97 5.42% $ 3,062,567 $ 3,047,547
5/13/97 5.64 3,000,000 2,939,280
6/12/97 5.54 2,270,786 2,215,811
TOTAL BANKERS' ACCEPTANCES 8,202,638
CERTIFICATES OF DEPOSIT - 33.0%
DOMESTIC CERTIFICATES OF DEPOSIT - 5.5%
American Express Centurion Bank
1/13/97 5.47 10,000,000 10,000,000
1/16/97 5.50 3,000,000 3,000,000
Bank of America-Illinois
3/24/97 5.43 500,000 500,288
Bank of New York, NY
1/29/97 5.31 (a) 3,000,000 3,000,000
Chase Manhattan Bank
1/8/97 5.85 10,000,000 10,000,000
Corestates Bank
1/10/97 5.58 (a) 10,000,000 9,997,181
Mellon Bank, N.A.
1/29/97 5.60 15,000,000 15,000,000
Morgan Guaranty Trust, NY
8/12/97 5.78 4,000,000 3,998,612
8/12/97 5.80 5,000,000 4,997,870
60,493,951
CHICAGO BRANCH, YANKEE DOLLAR, FOREIGN BANKS - 1.9%
ABN-AMRO Bank
3/10/97 5.40 10,000,000 10,000,000
3/18/97 5.80 2,000,000 1,998,271
12/23/97 5.70 5,000,000 4,997,659
Bank of Montreal
1/7/97 5.45 4,000,000 3,999,290
20,995,220
NEW YORK BRANCH, YANKEE DOLLAR, FOREIGN BANKS - 17.3%
Bank of Scotland Treasury Services
3/20/97 5.48 10,000,000 10,000,000
Bank of Tokyo-Mitsubishi Ltd.
1/6/97 5.60 5,000,000 5,000,000
1/16/97 5.48 4,000,000 3,999,996
2/24/97 5.45 3,000,000 3,000,000
3/3/97 5.50 7,000,000 7,000,000
Bayerische Hypotheken-und Weschel
4/7/97 5.40 6,000,000 6,000,000
Bayerische Landesbank Girozentrale
1/22/97 5.53 6,000,000 6,000,000
Bayerische Vereinsbank A.G.
2/3/97 5.57 25,000,000 25,000,000
Caisse Nationale de Credit Agricole
2/18/97 5.41 5,000,000 5,000,000
6/16/97 5.50 5,000,000 5,000,000
Canadian Imperial Bank of Commerce
1/27/97 5.40 8,000,000 8,000,000
Commerzbank, Germany
2/26/97 5.42 10,000,000 10,001,825
2/26/97 5.73 1,000,000 999,764
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT
(NOTE 1)
Landesbank Hessen-Thuringen
9/5/97 6.20% $ 15,000,000 $ 15,000,968
9/11/97 6.11 14,000,000 13,998,147
National Bank of Canada
2/24/97 5.40 4,000,000 4,000,000
National Westminster Bank, PLC
2/18/97 5.42 5,000,000 5,000,000
5/1/97 5.42 3,000,000 3,000,163
Royal Bank of Canada
8/13/97 5.80 5,000,000 4,997,861
Sanwa Bank, Ltd.
1/13/97 5.50 4,000,000 4,000,000
1/17/97 5.52 2,000,000 2,000,000
2/28/97 5.50 2,000,000 2,000,016
3/27/97 5.71 2,000,000 2,000,000
Societe Generale, France
1/9/97 5.50 8,000,000 7,999,941
5/22/97 5.53 7,000,000 7,000,877
6/10/97 5.53 5,000,000 5,007,585
Sumitomo Bank, Ltd.
1/13/97 5.55 3,000,000 3,000,000
1/17/97 5.53 2,000,000 2,000,000
1/21/97 5.54 3,000,000 3,000,000
2/18/97 5.50 4,000,000 4,000,000
Westdeutsche Landesbank
3/10/97 5.40 2,000,000 2,000,000
4/9/97 5.45 3,000,000 3,000,000
4/21/97 5.50 2,000,000 2,000,000
190,007,143
LONDON BRANCH, EURODOLLAR, FOREIGN BANKS - 8.3%
ABN-AMRO Bank
3/27/97 5.60 15,000,000 15,000,344
Abbey National, Treasury Services
2/14/97 5.40 2,000,000 1,999,911
2/18/97 5.42 4,000,000 4,000,000
3/17/97 5.43 10,000,000 10,000,000
4/16/97 5.50 5,000,000 4,999,260
Bank of Nova Scotia
3/6/97 5.40 10,000,000 10,000,000
Bank of Tokyo-Mitsubishi Ltd.
1/28/97 5.50 1,000,000 1,000,037
2/18/97 5.46 3,000,000 2,999,987
2/25/97 5.46 2,000,000 2,000,000
3/3/97 5.48 3,000,000 3,000,050
Banque Nationale de Paris
2/13/97 5.56 5,000,000 5,000,105
Bayerische Hypotheken-und Weschel
3/10/97 5.80 4,000,000 4,000,000
Bayerische Vereinsbank A.G.
3/11/97 5.42 6,000,000 6,000,113
Canadian Imperial Bank of Commerce
3/19/97 5.45 2,000,000 2,000,000
Sanwa Bank, Ltd.
1/24/97 5.49 1,000,000 1,000,019
1/29/97 5.51 2,000,000 2,000,029
1/31/97 5.51 2,000,000 2,000,031
CERTIFICATES OF DEPOSIT - CONTINUED
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT
(NOTE 1)
LONDON BRANCH, EURODOLLAR, FOREIGN BANKS - CONTINUED
Sumitomo Bank, Ltd.
1/6/97 5.50% $ 3,000,000 $ 3,000,009
1/6/97 5.55 1,000,000 1,000,010
2/21/97 5.49 2,000,000 2,000,028
Westpac Banking Corp.
3/24/97 5.52 8,000,000 8,003,610
91,003,543
TOTAL CERTIFICATES OF DEPOSIT 362,499,857
COMMERCIAL PAPER - 45.3%
ABN-AMRO North America Finance, Inc.
3/10/97 5.57 5,000,000 4,949,000
6/19/97 5.50 5,000,000 4,874,424
A.H. Robins Company, Inc.
2/27/97 5.40 1,000,000 991,561
AVCO Financial Services
2/10/97 5.39 10,000,000 9,941,000
American Express Credit Corp.
3/19/97 5.37 25,000,000 24,717,667
Asset Securitization Coop. Corp.
2/18/97 5.43 2,000,000 1,985,680
2/18/97 5.44 2,000,000 1,985,627
2/26/97 5.44 1,000,000 991,631
BHF Finance (Delaware), Inc.
2/19/97 5.50 3,000,000 2,977,746
Bank of Nova Scotia
3/17/97 5.40 5,000,000 4,944,583
Bayerische Vereinsbank A.G.
2/18/97 5.42 5,000,000 4,964,533
Bear Stearns Cos., Inc.
2/14/97 5.41 2,000,000 1,986,922
2/26/97 5.38 3,000,000 2,975,243
Beneficial Corp.
3/17/97 5.48 5,000,000 4,943,646
CIT Group Holdings, Inc.
3/17/97 5.48 8,000,000 7,909,833
Caisse d'Amortissement de la Dette Sociale
2/24/97 5.42 15,000,000 14,880,300
2/24/97 5.43 10,000,000 9,920,050
6/3/97 6.01 10,000,000 9,755,625
6/24/97 5.60 2,000,000 1,947,800
Caisse des Depots et Consignations
2/19/97 5.41 2,000,000 1,985,518
3/13/97 5.47 5,000,000 4,946,750
Cheltenham & Gloucester PLC
2/28/97 5.41 10,000,000 9,914,289
Chrysler Financial Corporation
1/23/97 5.50 2,000,000 1,993,339
1/24/97 5.50 2,000,000 1,993,036
1/27/97 5.51 2,000,000 1,992,128
2/24/97 5.60 4,000,000 3,966,760
Citibank Credit Card Master Trust I (Dakota Certificate Program)
1/23/97 5.43 2,000,000 1,993,449
2/6/97 5.41 1,000,000 994,660
2/21/97 5.40 5,000,000 4,962,246
Commercial Credit Co.
2/26/97 5.52 5,000,000 4,957,455
CoreStates Capital Corp.
1/8/97 5.55 (a) 5,000,000 5,000,000
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT
(NOTE 1)
Delaware Funding Corporation
1/27/97 5.65% $ 4,678,000 $ 4,659,013
Electronic Data Systems
1/24/97 5.68 2,000,000 1,992,780
2/14/97 5.58 4,000,000 3,972,965
Eiger Capital Corp.
1/13/97 5.45 2,000,000 1,996,387
1/23/97 5.65 4,000,000 3,986,263
Enterprise Funding Corp.
1/29/97 5.41 4,000,000 3,983,293
1/31/97 5.61 2,553,000 2,541,150
2/19/97 5.43 1,540,000 1,528,744
2/20/97 5.49 2,000,000 1,984,916
2/25/97 5.49 2,000,000 1,983,408
2/27/97 5.51 4,000,000 3,965,483
Ford Motor Credit Corp.
3/17/97 5.66 10,000,000 9,885,417
3/24/97 5.66 24,000,000 23,699,333
GTE Corp.
1/15/97 5.53 2,000,000 1,995,722
Generale Bank
4/10/97 5.44 5,000,000 4,926,850
6/19/97 5.53 15,000,000 14,621,158
General Electric Capital Corp.
2/19/97 5.42 15,000,000 14,891,383
3/3/97 5.52 1,000,000 990,731
3/12/97 5.76 6,000,000 5,934,667
3/18/97 5.39 15,000,000 14,832,484
6/4/97 5.44 10,000,000 9,773,706
General Electric Co.
3/3/97 5.37 3,000,000 2,973,058
General Motors Acceptance Corp.
2/20/97 5.70 2,000,000 1,984,597
2/24/97 5.71 2,000,000 1,983,350
2/25/97 5.71 4,000,000 3,966,083
3/3/97 5.45 10,000,000 9,909,008
3/31/97 5.70 5,000,000 4,931,520
5/7/97 5.51 5,000,000 4,906,200
4/14/97 5.63 4,000,000 3,937,342
4/15/97 5.63 2,000,000 1,968,367
6/23/97 5.62 5,000,000 4,868,688
6/30/97 5.62 3,000,000 2,918,025
Goldman Sachs Group, L.P. (The)
4/29/97 5.50 10,000,000 9,824,639
5/12/97 5.45 7,000,000 6,864,997
IBM Credit Corp.
3/3/97 5.39 1,000,000 991,020
3/10/97 5.38 5,000,000 4,949,945
3/12/97 5.38 2,000,000 1,979,389
Matterhorn Capital Corp.
1/10/97 5.50 3,647,000 3,642,013
Merrill Lynch & Co., Inc.
2/4/97 5.43 5,000,000 4,974,760
2/4/97 5.63 15,000,000 14,922,508
2/27/97 5.45 4,000,000 3,966,117
3/11/97 5.76 3,000,000 2,967,800
3/12/97 5.68 1,000,000 989,257
5/15/97 5.44 10,000,000 9,802,722
Morgan Stanley Group, Inc.
2/4/97 5.40 3,000,000 2,984,927
2/10/97 5.40 7,000,000 6,958,623
COMMERCIAL PAPER - CONTINUED
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT
(NOTE 1)
National Australia Funding, Inc.
1/27/97 5.78% $ 5,000,000 $ 4,979,723
3/13/97 5.60 5,000,000 4,946,553
National Bank of Canada
1/6/97 5.50 1,000,000 999,240
Nationwide Building Society
2/25/97 5.45 1,000,000 991,826
3/6/97 5.40 10,000,000 9,905,334
New Center Asset Trust
2/19/97 5.63 2,000,000 1,985,082
3/17/97 5.39 3,000,000 2,966,875
J.C. Penney Funding Corp.
2/10/97 5.50 5,000,000 4,969,722
2/13/97 5.50 1,000,000 993,490
PHH Corp.
1/24/97 5.45 2,000,000 1,993,100
2/6/97 5.43 1,000,000 994,630
2/7/97 5.43 1,000,000 994,481
2/14/97 5.51 5,000,000 4,966,694
Preferred Receivables Funding Corp.
1/16/97 5.39 2,000,000 1,995,542
1/23/97 5.65 3,000,000 2,989,697
1/24/97 5.40 1,000,000 996,582
1/27/97 5.40 1,000,000 996,136
1/28/97 5.66 3,950,000 3,933,351
2/25/97 5.53 2,000,000 1,983,286
Sherwood Medical Company
2/26/97 5.51 5,751,000 5,702,244
Southern Company Group
1/21/97 5.40 5,000,000 4,985,139
Textron, Inc.
1/15/97 5.63 1,000,000 997,822
1/16/97 5.63 1,000,000 997,666
Unifunding, Inc.
1/21/97 5.41 2,000,000 1,994,067
3/4/97 5.45 3,000,000 2,972,229
Westpac Capital Corp.
3/13/97 5.70 10,000,000 9,890,739
TOTAL COMMERCIAL PAPER 498,774,559
FEDERAL AGENCIES (A) - 6.9%
FEDERAL HOME LOAN BANK - AGENCY COUPONS - 0.5%
3/4/97 5.40 5,000,000 4,995,982
FEDERAL NATIONAL MORTGAGE ASSOC. - AGENCY COUPONS - 6.4%
1/2/97 4.97 9,500,000 9,500,000
1/2/97 5.42 15,000,000 14,991,002
1/29/97 5.60 6,000,000 5,998,023
3/9/97 5.40 25,000,000 24,979,620
3/13/97 5.43 10,000,000 9,993,023
3/20/97 5.49 5,000,000 4,998,867
70,460,535
TOTAL FEDERAL AGENCIES 75,456,517
BANK NOTES - 2.4%
Fifth Third Bank - Cincinnati
2/24/97 5.80 5,000,000 4,997,971
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT
(NOTE 1)
First National Bank of Boston
3/6/97 5.44% $ 12,000,000 $ 12,000,000
Key Bank of New York
1/2/97 4.93 (a) 5,000,000 4,998,034
PNC Bank
1/8/97 5.56 (a) 4,300,000 4,298,820
TOTAL BANK NOTES 26,294,825
MASTER NOTES (A) - 2.2%
Goldman Sachs Group, L.P. (The) (c)
2/8/97 5.50 5,000,000 5,000,000
J.P. Morgan Securities
1/7/97 5.60 13,000,000 13,000,000
Norwest Corp.
1/2/97 5.99 6,000,000 6,000,000
TOTAL MASTER NOTES 24,000,000
MEDIUM-TERM NOTES - 2.8%
Associates Corp. of North America
7/15/97 5.95 2,250,000 2,257,754
Beneficial Corp.
1/19/97 5.50 (a) 5,000,000 4,999,777
General Motors Acceptance Corp.
2/1/97 5.50 (a) 5,000,000 5,000,000
2/13/97 5.64 (a) 2,000,000 1,999,952
Merrill Lynch & Co., Inc.
1/21/97 5.62 (a) 4,000,000 3,999,505
Morgan Stanley Group, Inc.
1/2/97 4.95 (a) 4,000,000 4,000,000
Norwest Corp.
4/22/97 5.55 (a) 6,000,000 6,000,000
Transamerica Life Insurance and Annuity Co. (c)
3/16/97 5.57 (a) 3,000,000 3,000,000
TOTAL MEDIUM-TERM NOTES 31,256,988
SHORT-TERM NOTES (A) - 4.7%
Capital One Funding Corp. (1994-B)
1/8/97 5.84 3,477,000 3,477,000
Capital One Funding Corp. (1995-E)
1/8/97 5.84 5,800,000 5,800,000
Liquid Asset Backed Securities Trust (1996-1) (b)
1/15/97 5.63 4,000,000 4,000,000
Liquid Asset Backed Securities Trust (1996-2) (b)
1/2/97 5.59 7,000,000 7,000,000
SMM Trust (1996-B) (b)
1/6/97 5.61 5,500,000 5,500,000
SMM Trust (1996-I) (b)
1/29/97 5.71 5,000,000 5,000,000
SMM Trust (1996-P) (b)
1/16/97 5.64 7,000,000 7,000,000
SMM Trust (1996-V) (b)
3/26/97 5.64 14,000,000 14,000,000
TOTAL SHORT-TERM NOTES 51,777,000
REPURCHASE AGREEMENTS - 2.0%
MATURITY VALUE
AMOUNT (NOTE 1)
In a joint trading account
(U.S. Government Obligations)
dated 12/31/96 due 1/2/97:
At 7.32% $ 11,619,725 $ 11,615,000
(U.S. Government Obligations)
dated 12/12/96 due 1/15/97:
At 5.50% 10,051,944 10,000,000
TOTAL REPURCHASE AGREEMENTS 21,615,000
TOTAL INVESTMENTS - 100% $1,099,877,384
Total Cost for Income Tax Purposes - $ 1,099,877,384
LEGEND
1. The coupon rate shown on floating or adjustable rate securities
represents the rate at period end. The due date on these types of
securities reflects the next interest rate reset date or, when applicable,
the final maturity date.
2. Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of these securities amounted to $42,500,000 or 3.8% of net
assets.
3. Restricted security; subject to resale restrictions.
INCOME TAX INFORMATION
At December 31, 1996, the fund had a capital loss carryforward of
approximately $29,000 which will expire on December 31, 2002.
VARIABLE INSURANCE PRODUCTS FUND: MONEY MARKET PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
DECEMBER 31, 1996
ASSETS
Investment in securities, at value (including repurchase agreements of $21,615,000) - See accompanying $ 1,099,877,384
schedule
Cash 20,039,138
Receivable for investments sold 92,000
Interest receivable 6,464,974
TOTAL ASSETS 1,126,473,496
LIABILITIES
Accrued management fee $ 197,699
Other payables and 120,704
accrued expenses
TOTAL LIABILITIES 318,403
NET ASSETS $ 1,126,155,093
Net Assets consist of:
Paid in capital $ 1,126,168,743
Accumulated net realized gain (loss) on investments (13,650)
NET ASSETS, for 1,126,168,743 $ 1,126,155,093
shares outstanding
NET ASSET VALUE, offering price $1.00
and redemption price per
share ($1,126,155,093 (divided by) 1,126,168,743 shares)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996
INTEREST INCOME $ 52,233,571
EXPENSES
Management fee $ 1,949,037
Transfer agent fees 695,000
Accounting fees and expenses 120,582
Non-interested trustees' compensation 10,374
Custodian fees and expenses 32,905
Audit 31,416
Legal 5,045
Miscellaneous 2,722
Total expenses before reductions 2,847,081
Expense reductions (34,785 2,812,296
)
NET INTEREST INCOME 49,421,275
NET REALIZED GAIN (LOSS) 49,076
ON INVESTMENTS
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 49,470,351
OTHER INFORMATION
Expense reductions
Transfer agent interest credits $ 34,785
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
<TABLE>
<CAPTION>
<S> <C> <C>
Operations $ 49,421,275 $ 43,984,366
Net interest income
Net realized gain (loss) 49,076 16,876
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 49,470,351 44,001,242
Distributions to shareholders from net interest income (49,421,275) (43,984,366)
Share transactions at net asset value of $1.00 per share 1,994,407,823 1,212,453,074
Proceeds from sales of shares
Reinvestment of distributions from net interest income 49,421,275 43,984,366
Cost of shares redeemed (1,726,597,066) (1,196,186,142)
NET INCREASE (DECREASE) IN NET ASSETS AND SHARES RESULTING FROM SHARE TRANSACTIONS 317,232,032 60,251,298
TOTAL INCREASE (DECREASE) IN NET ASSETS 317,281,108 60,268,174
NET ASSETS
Beginning of period 808,873,985 748,605,811
End of period $ 1,126,155,093 $ 808,873,985
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1996 1995 1994 1993 1992
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Income from Investment Operations .052 .057 .042 .032 .038
Net interest income
Less Distributions
From net interest income (.052) (.057) (.042) (.032) (.038)
Net asset value, end of period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
TOTAL RETURN A 5.41% 5.87% 4.25% 3.23% B 3.90%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 1,126,155 $ 808,874 $ 748,606 $ 353,104 $ 301,002
Ratio of expenses to average net assets after expense .30% .33% .27% .22% C .24%
reductions
Ratio of net interest income to average net assets 5.28% 5.72% 4.32% 3.16% 3.85%
</TABLE>
A TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE
TOTAL RETURNS.
B THE TOTAL RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIOD.
C FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE
BEEN HIGHER.
NOTES TO FINANCIAL STATEMENTS
For the period ended December 31, 1996
4. SIGNIFICANT ACCOUNTING POLICIES.
Money Market Portfolio (the fund) is a fund of Variable Insurance Products
Fund (the trust) and is authorized to issue an unlimited number of shares.
The trust is registered under the Investment Company Act of 1940, as
amended (the 1940 Act), as an open-end management investment company
organized as a Massachusetts business trust. The financial statements have
been prepared in conformity with generally accepted accounting principles
which permit management to make certain estimates and assumptions at the
date of the financial statements. The following summarizes the significant
accounting policies of the fund:
SECURITY VALUATION. As permitted under Rule 2a-7 of the 1940 Act, and
certain conditions therein, securities are valued initially at cost and
thereafter assume a constant amortization to maturity of any discount or
premium.
INCOME TAXES. As a qualified regulated investment company under Subchapter
M of the Internal Revenue Code, the fund is not subject to income taxes to
the extent that it distributes substantially all of its taxable income for
its fiscal year. The schedule of investments includes information regarding
income taxes under the caption "Income Tax Information."
INTEREST INCOME. Interest income, which includes amortization of premium
and accretion of discount, is accrued as earned.
EXPENSES. Most expenses of the trust can be directly attributed to a fund.
Expenses which cannot be directly attributed are apportioned between the
funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Dividends are declared daily and paid
monthly from net interest income.
SECURITY TRANSACTIONS. Security transactions are accounted for as of trade
date. Gains and losses on securities sold are determined on the basis of
identified cost.
5. OPERATING POLICIES.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the fund, along with other affiliated
entities of Fidelity Management & Research Company (FMR), may transfer
uninvested cash balances into one or more joint trading accounts. These
balances are invested in one or more repurchase agreements for U.S.
Treasury or Federal Agency obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
Securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are marked-to-market
daily and maintained at a value at least equal to the principal amount of
the repurchase agreement (including accrued interest). FMR, the fund's
investment adviser, is responsible for determining that the value of the
underlying securities remains in accordance with the market value
requirements stated above.
6. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a monthly
fee that is calculated on the basis of a basic fund fee rate of .03% of the
fund's average net assets, plus a fixed income group fee rate and a
income-based fee. The group fee rate is the weighted average of a series of
rates and is based on the monthly average net assets of all the mutual
funds advised by FMR. The rates ranged from .1100% to .3700% for the
period. In the event that these rates were lower than the contractual rates
in effect during the period, FMR voluntarily implemented the above rates,
as they resulted in the same or a lower management fee. The income-based
fee is added only when the fund's gross yield exceeds 5%. At that time the
income-based fee would equal 6% of that portion of the fund's gross income
that represents a gross yield of more than 5% per year. The maximum income
based component is 0.24% of average net assets. For the period, the
management fee was equivalent to an annual rate of .21% of average net
assets.
SUB-ADVISER FEE. As the fund's investment sub-adviser, FMR Texas Inc., a
wholly owned subsidiary of FMR, receives a fee from FMR of 50% of the
management fee payable to FMR. The fee is paid prior to any voluntary
expense reimbursements which may be in effect.
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations Company
(FIIOC), an affiliate of FMR, is the fund's transfer, dividend disbursing
and shareholder servicing agent. FIIOC receives account fees and
asset-based fees that vary according to account size and type of account.
FIIOC pays for typesetting, printing and mailing of all shareholder
reports, except proxy statements. For the period, the transfer agent fees
were equivalent to an annual rate of .07% of average net assets.
ACCOUNTING FEES. Fidelity Service Co., an affiliate of FMR, maintains the
fund's accounting records. The fee is based on the level of average net
assets for the month plus out-of-pocket expenses.
7. EXPENSE REDUCTIONS.
The fund has entered into an arrangement with its transfer agent whereby
interest earned on uninvested cash balances was used to offset a portion of
the fund's expenses. For the period, the reduction under this arrangement
is shown under the caption "Other Information" on the fund's Statement Of
Operations.
8. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investments Life Insurance Company
(FILI) and its subsidiaries, affiliates of FMR, were record owners of
approximately 50% of the outstanding shares of the fund. In addition, an
unaffiliated insurance company was record owner of 11% of the total
outstanding shares of the fund.
9. ASSET TRANSFER INFORMATION.
In September 1996, the Board of Trustees approved a proposal to liquidate
Fidelity Advisor Annuity Money Market Fund and transfer the assets of
Fidelity Advisor Annuity Money Market Fund to the fund. The liquidation and
transfer of assets are expected to occur in the first quarter of 1997.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Variable Insurance Products Fund and the Shareholders of
Money Market Portfolio:
We have audited the accompanying statement of assets and liabilities of
Variable Insurance Products Fund: Money Market Portfolio, including the
schedule of portfolio investments, as of December 31, 1996, and the related
statement of operations for the year then ended, the statement of changes
in net assets for each of the two years in the period then ended, and the
financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility
of the fund's 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. Our procedures included confirmation of
securities owned as of December 31, 1996 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 Variable Insurance Products Fund: Money Market Portfolio as of December
31, 1996, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the
period then ended, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
February 11, 1997
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
INVESTMENT SUB-ADVISERS
FMR Texas Inc., Irving, TX
OFFICERS
Edward C. Johnson 3d, PRESIDENT
J. Gary Burkhead, SENIOR VICE PRESIDENT
Sarah H. Zenoble, VICE PRESIDENT
Robert Litterst, VICE PRESIDENT
Arthur S. Loring, SECRETARY
Kenneth A. Rathgeber, TREASURER
Thomas D. Maher, ASSISTANT VICE PRESIDENT
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
Thomas J. Simpson, ASSISTANT TREASURER
BOARD OF TRUSTEES
J. Gary Burkhead
Ralph F. Cox *
Phyllis Burke Davis *
Richard J. Flynn *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Edward H. Malone *
Marvin L. Mann *
Gerald C. McDonough *
Thomas R. Williams *
ADVISORY BOARD
William O. McCoy
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Investments Institutional Operations Co.
Boston, MA
CUSTODIAN
The Bank of New York, New York, NY
* INDEPENDENT TRUSTEES
(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS
FUND: HIGH INCOME PORTFOLIO
ANNUAL REPORT
DECEMBER 31, 1996
CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
MARKET ENVIRONMENT 3 A review of what happened in world markets
during the last year.
PERFORMANCE 4 How the fund has done over time.
FUND TALK 5 The manager's review of fund performance, strategy
and outlook.
INVESTMENTS 6 A complete list of the fund's investments with their
market values.
FINANCIAL STATEMENTS 13 Statements of assets and liabilities, operations, and
changes in net assets, as well as financial highlights.
NOTES 15 Notes to the financial statements.
REPORT OF INDEPENDENT ACCOUNTANTS 17 The auditors' opinion.
DISTRIBUTIONS 18
</TABLE>
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR
THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS
PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY,
ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED
BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
MARKET ENVIRONMENT
Most stock and bond markets posted positive returns in 1996, aided by
moderate growth and low inflation. Sustained corporate earnings growth and
a favorable interest rate environment also proved beneficial. Japan,
however, was the major exception as an underperforming stock market and a
weak yen undermined returns for U.S.-based investors. The strongest gains
came from the often-volatile emerging bond markets in 1996, while
performance of the bond markets of developed countries was mixed.
U.S. STOCK MARKETS
The Standard & Poor's 500 Index - a broad measure of U.S. stock market
performance - rose 22.96% for the 12 months that ended December 31, 1996,
well above the index's long-term average annual return of about 12%. The
Russell 2000 Index - a measure of small stock performance - rose 16.49%.
The Dow Jones Industrial Average - an index of 30 blue-chip stocks - posted
a return of 28.70%, closing above 6500 for the first time in November.
The U.S. stock market spent much of the past year breaking price and
trading volume records. Solid corporate earnings reports, large cash
inflows into mutual funds, widespread optimism and a generally favorable
interest rate environment propelled share prices higher.
Large-capitalization stocks thrived as investors sought their lower
volatility and higher degree of liquidity over smaller-cap stocks in an
environment where it was sometimes difficult to discern the health of the
economy.
Most industry sectors experienced positive, if not strong performance. At
mid-year, technology stocks suffered from a sell-off sparked by fears that
company earnings were weakening. Nevertheless, this sector proved to be the
strongest in the U.S. market in 1996. Earnings surprises and positive
earnings projections were the main drivers of solid performance, especially
among semiconductor manufacturers, companies that make disk drives and
monitors, and software firms. Even though consensus estimates pointed
toward increases in short-term interest rates by the Fed, financial stocks
- - usually sensitive to changes in interest rates - shrugged off this
concern and posted solid performance based on low interest rates and
positive business prospects. Energy stocks reaped the benefits of
higher-than-expected energy prices, which resulted in part from the delayed
re-entry of Iraq into the world market. Uncertainty over the direction of
the economy benefited consumer nondurables - such as food, beverage and
tobacco companies - health care and traditional big-name growth stocks, as
these companies tend to post steady earnings growth in many economic
environments.
Utilities stocks struggled in 1996 for two reasons. First, and most
important, uncertainty over the direction and form of deregulation in the
sector tended to diminish investor interest. Second, stocks in the sector
tend to move in concert with bonds, which lagged due to periodic inflation
fears and confusing economic signals. Stocks in the telecommunications
field especially were affected by uncertainty over legislation signed into
law in February 1996. Biotechnology issues had a hard time recovering from
a correction in stock prices from overvalued levels that they experienced
earlier in 1996. Cyclical stocks - those that usually rise and fall with
the economy - posted mixed results that largely depended on the outlook for
companies in the specific sector rather than the direction of the economy.
FOREIGN STOCK MARKETS
Foreign stock markets posted mixed results in 1996. The Morgan Stanley
Capital International (MSCI) EAFE Index - which measures stock performance
in Europe, Australia and the Far East - returned 6.05% in 1996. Europe
posted the most consistently strong equity markets due to stronger economic
growth, lower interest rates, higher corporate earnings, the relative
weakness of the continent's major currencies and a new emphasis on
shareholder friendliness by many of the region's corporations. The MSCI
Europe Index was up 21.09% in 1996. The Japanese stock market
underperformed on the weakness of the economic recovery and the uncertainty
for any substantial economic reform. The Tokyo Stock Exchange TOPIX Total
Return Index was off 16.26%. Emerging market equity performance ran the
gamut from negative to positive, with the MSCI Emerging Markets Free Index
returning 6.03% for 1996. While Hong Kong was a top performer - benefiting
from the rising value of the property sector, solid economic growth and
stable interest rates - other Asian markets posted mixed returns as
concerns rose over declining export growth in the region. Latin America
enjoyed a strong first half, but faded toward the end of 1996 due to low
domestic savings rates and inefficient governments, among other factors.
U.S. BOND MARKETS
Uncertainty over the direction of the economy led to mixed performance in
U.S. bond markets in 1996. For the year, the Lehman Brothers Aggregate Bond
Index - a broad measure of the performance of the U.S. taxable bond market
- - posted a total return of 3.63%. Stronger-than-expected economic signals
rattled the bond market in the early spring. Investors spent most of the
summer anticipating a short-term interest rate increase by the Federal
Reserve Board. However, the Fed neither raised nor lowered rates through
the end of 1996. Interest rates responded to the Fed's inaction by falling
during much of October and November. In December, though, bond prices
dropped due to inflation concerns, stronger-than-expected economic data and
comments by Fed Chairman Alan Greenspan that the stock markets may be
overvalued.
FOREIGN BOND MARKETS
While low inflation and moderate growth helped provide a positive backdrop
for most bond markets in 1996, performance in overseas bond markets was
mixed. The Salomon Brothers World Government Bond Index - a measure of
government bond market performance in developed nations - returned 3.62%
for the 12 months that ended December 31, 1996. In Europe, focus centered
on the continuing progress toward the European Monetary Union (EMU).
Attractive opportunities arose as countries worked to meet the requirements
for joining the EMU. However, Germany and Japan - two of the larger
components of the Salomon Brothers World Government Bond Index -
experienced currency problems that hurt returns. In stark contrast to the
developed world, the often-volatile emerging debt markets enjoyed a
particularly strong year, helped by inflows of foreign capital, low
interest rates and the implementation of country-specific reforms -
especially in Latin America. The J.P. Morgan Emerging Markets Bond Index -
of which Latin America is a large component - posted a return of 34.16%
during the period.
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can
look at the total percentage change in value, the average annual percentage
change, or the growth of a hypothetical $10,000 investment. Total return
reflects the change in the value of an investment, assuming reinvestment of
the fund's dividend income and capital gains (the profits earned upon the
sale of securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10
DECEMBER 31, 1996 YEAR YEARS YEARS
High Income 14.03% 14.96% 11.12%
Merrill Lynch High Yield Master Index 11.06% 12.76% 11.25%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what
would have happened if the fund had performed at a constant rate each year.
You can compare the fund's returns to those of the Merrill Lynch High Yield
Master Index - a market capitalization weighted index of all domestic and
yankee high-yield bonds. Issues included in the index have maturities of at
least one year and have a credit rating lower than BBB-/Baa3, but are not
in default. This benchmark reflects the reinvestment of dividends and
capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of
how it will do tomorrow. Bond prices, for
example, generally move in the opposite
direction of interest rates. In turn, the share price,
return, and yield of a fund that invests in bonds
will vary. That means if you sell your shares
during a market downturn, you might lose
money. But if you can ride out the market's ups
and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of return
and are not the fund's year-by-year results, which fluctuated over the
periods shown.
If Fidelity had not reimbursed certain fund expenses, the fund's five and
10 year total returns would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL
CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money. The fund includes high yielding, lower-rated
securities which are subject to greater price volatility and may involve
greater risk of default. The market for these securities may be less
liquid.
$10,000 OVER 10 YEARS
IMAHDR PRASUN SHR__CHT 19961231 19970110 144943 S00000000000001
VIP: High Income ML High Yield Master
00152 ML002
1986/12/31 10000.00 10000.00
1987/01/31 10364.57 10282.75
1987/02/28 10543.92 10452.51
1987/03/31 10639.95 10568.08
1987/04/30 10307.45 10337.62
1987/05/31 10211.62 10291.04
1987/06/30 10432.16 10433.29
1987/07/31 10443.32 10490.06
1987/08/31 10529.83 10595.18
1987/09/30 10163.16 10351.40
1987/10/31 9677.16 10074.83
1987/11/30 9962.17 10329.61
1987/12/31 10121.62 10466.77
1988/01/31 10454.39 10753.19
1988/02/29 10767.39 11044.97
1988/03/31 10690.03 11026.71
1988/04/30 10773.35 11058.55
1988/05/31 10757.33 11116.27
1988/06/30 10982.80 11328.81
1988/07/31 11097.12 11448.53
1988/08/31 11044.12 11486.14
1988/09/30 11132.65 11601.92
1988/10/31 11253.84 11782.68
1988/11/30 11210.87 11826.82
1988/12/31 11299.96 11876.86
1989/01/31 11571.50 12054.97
1989/02/28 11628.42 12135.98
1989/03/31 11479.00 12125.19
1989/04/30 11351.87 12160.97
1989/05/31 11561.62 12384.85
1989/06/30 11892.76 12560.32
1989/07/31 11814.47 12619.80
1989/08/31 11745.94 12682.14
1989/09/30 11334.95 12561.40
1989/10/31 10849.01 12362.72
1989/11/30 10858.15 12390.42
1989/12/31 10828.39 12379.22
1990/01/31 10589.03 12137.27
1990/02/28 10425.98 11960.52
1990/03/31 10315.98 12122.20
1990/04/30 10346.54 12183.79
1990/05/31 10559.13 12403.87
1990/06/30 10725.46 12644.18
1990/07/31 10891.12 12911.38
1990/08/31 10708.93 12417.11
1990/09/30 10455.01 11877.07
1990/10/31 10201.31 11574.83
1990/11/30 10440.59 11672.88
1990/12/31 10586.58 11841.08
1991/01/31 10811.19 12008.46
1991/02/28 11410.15 12899.77
1991/03/31 11814.44 13454.41
1991/04/30 12233.71 13933.54
1991/05/31 12413.40 14001.58
1991/06/30 12682.93 14283.24
1991/07/31 13162.10 14625.48
1991/08/31 13341.78 14932.88
1991/09/30 13641.26 15123.08
1991/10/31 14105.46 15572.46
1991/11/30 14225.25 15752.34
1991/12/31 14300.12 15935.34
1992/01/31 15063.79 16492.49
1992/02/29 15610.72 16902.09
1992/03/31 16115.35 17137.92
1992/04/30 16229.29 17262.66
1992/05/31 16424.63 17538.01
1992/06/30 16603.69 17755.91
1992/07/31 16929.25 18115.67
1992/08/31 17287.37 18355.50
1992/09/30 17466.43 18564.65
1992/10/31 17205.98 18330.18
1992/11/30 17417.60 18589.77
1992/12/31 17612.93 18829.13
1993/01/31 18085.00 19292.78
1993/02/28 18393.49 19657.97
1993/03/31 18817.96 19998.78
1993/04/30 18941.76 20142.33
1993/05/31 19224.74 20413.47
1993/06/30 19719.95 20796.99
1993/07/31 19914.49 21020.53
1993/08/31 20126.73 21220.91
1993/09/30 20197.47 21325.62
1993/10/31 20674.99 21727.34
1993/11/30 20869.54 21846.17
1993/12/31 21205.57 22064.62
1994/01/31 21913.02 22548.16
1994/02/28 21886.74 22386.01
1994/03/31 21149.43 21656.52
1994/04/30 20935.99 21403.44
1994/05/31 20974.80 21327.18
1994/06/30 20897.18 21405.68
1994/07/31 20974.80 21556.15
1994/08/31 20974.80 21705.88
1994/09/30 21130.02 21697.66
1994/10/31 20935.99 21752.80
1994/11/30 20761.36 21567.76
1994/12/31 20858.38 21807.67
1995/01/31 21091.22 22115.82
1995/02/28 21815.10 22805.86
1995/03/31 22086.75 23123.24
1995/04/30 22734.51 23664.64
1995/05/31 23319.59 24403.97
1995/06/30 23382.28 24590.37
1995/07/31 23946.46 24871.49
1995/08/31 24134.52 25022.44
1995/09/30 24531.54 25308.72
1995/10/31 24761.39 25488.13
1995/11/30 24886.77 25736.93
1995/12/31 25179.31 26150.05
1996/01/31 25764.39 26563.05
1996/02/29 26189.93 26603.04
1996/03/31 26121.13 26530.79
1996/04/30 26511.00 26542.81
1996/05/31 26877.94 26734.23
1996/06/30 27015.54 26894.82
1996/07/31 26923.80 27077.42
1996/08/31 27313.67 27357.05
1996/09/30 28116.34 27944.01
1996/10/31 28024.61 28250.25
1996/11/30 28322.74 28821.39
1996/12/31 28712.61 29043.17
IMATRL PRASUN SHR__CHT 19961231 19970110 144946 R00000000000123
Let's say hypothetically that $10,000 was invested in High Income Portfolio
on December 31, 1986. As the chart shows, by December 31, 1996, the value
of the investment would have grown to $28,713 - a 187.13% increase on the
initial investment. With reinvested dividends and capital gains, if any, a
$10,000 investment in the Merrill Lynch High Yield Master Index would have
grown to $29,043 over the same period - a 190.43% increase.
INVESTMENT SUMMARY
TOP FIVE HOLDINGS AS OF DECEMBER 31, 1996
(BY ISSUER, EXCLUDING CASH EQUIVALENTS) % OF FUND'S
INVESTMENTS
PanAmSat Corp. 3.5
U.S. Government Obligations 3.2
Time Warner, Inc., Series M, exchangeable 2.3
pay-in-kind
Millicom International Cellular SA 0%, 6/1/06 2.2
Viacom, Inc. 8% 7/7/06 1.9
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1996
% OF FUND'S
INVESTMENTS
Media & Leisure 29.3
Utilities 8.5
Basic Industries 7.3
Industrial Machinery & Equipment 5.4
Technology 5.4
QUALITY DIVERSIFICATION AS OF DECEMBER 31, 1996
(MOODY'S RATINGS) % OF FUND'S
INVESTMENTS
Aaa, Aa, A 3.2
Baa 0.0
Ba 5.7
B 49.5
Caa, Ca, C 7.4
Nonrated 2.9
TABLE EXCLUDES SHORT-TERM INVESTMENTS. WHERE MOODY'S RATINGS ARE
UNAVAILABLE, WE HAVE USED S&P RATINGS. UNRATED DEBT SECURITIES THAT ARE
EQUIVALENT TO BA AND BELOW AT DECEMBER 31, 1996, ACCOUNT FOR 2.9% OF THE
FUND'S INVESTMENTS.
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with
Barry Coffman, Portfolio Manager of High Income Portfolio
Q. HOW DID THE FUND PERFORM, BARRY?
A. Last year was a good year for the high-yield market and the fund's
performance reflects that. The fund performed well and outperformed its
benchmark, the Merrill Lynch High Yield Master Index, which had a total
return of 11.06% for the 12 months ending December 31, 1996.
Q. WHY DID THE FUND BEAT THE BENCHMARK?
A. Credit spreads - which measure the difference in yields between bonds of
various credit qualities - narrowed during the year, primarily due to the
economy's continued strength and strong demand for high-yield bonds from
mutual funds, pension plans and insurance companies. As spreads narrowed,
lower-quality B-rated securities - which the fund emphasizes - did better
than higher-quality BB-rated securities. The latter are much more sensitive
to interest rate changes than B-rated securities, and went down in value
when interest rates rose.
Q. WHICH HOLDINGS WERE AMONG THE FUND'S BEST PERFORMERS DURING THE YEAR?
A. Satellite company PanAmSat, which was the fund's largest holding at the
end of the year, as well as one of its best performers, continued to post
strong revenues and cash flows. In addition, the company announced a merger
with a division of GM Hughes, giving its bonds an added boost. The fund's
holdings in Harcor Energy, Inc. also performed well thanks to rising energy
prices, its drilling successes and the relatively high coupon the bonds
carried. The company also did an equity offering during the year to help
reduce its debt, which had a very positive effect on its bond prices.
Q. THE FUND'S STAKE IN STOCKS ISSUED BY HIGH-YIELD COMPANIES (THOSE WITH
BELOW-INVESTMENT-GRADE CREDIT RATINGS) ROSE DURING THE YEAR. HOW DID THE
FUND'S EQUITY HOLDINGS PERFORM?
A. Generally speaking, the fund's holdings in common stocks did well. One
worth particular note was the stock of Flores & Rucks - another energy
company - which more than tripled in price during the year. The fund also
owned the high-yield debt issued by the company, which also performed
relatively well. Another strong equity performer was Host Marriott. The
full-service hotel industry had a tremendous year, benefiting from rising
occupancy rates and the lack of any new supply in most major markets. The
fund's debt holdings issued by Host Marriott also performed well.
Q. EVEN THOUGH THE HIGH-YIELD MARKET HAD A GOOD YEAR, THERE MUST HAVE BEEN
SOME DISAPPOINTMENTS.
A. That's true, and two come to mind. First, bonds issued by Marvel
Entertainment - best known for its comic books and trading cards - tumbled
when the company declared bankruptcy. The fund no longer holds these bonds.
The second disappointment was the fund's holdings in wireless cable
companies. Investors had anticipated that the regional Bell operating
companies would partner with these companies to deliver wireless cable
services. But when some of those expected combinations failed to
materialize, it sent shock waves throughout the industry. However, I
continued to hold onto People's Choice and CS Wireless Systems because I
felt that their balance sheets were solid enough to allow them to proceed
on rolling out wireless cable services.
Q. AT THE END OF THE PERIOD, 11.5% OF THE FUND'S INVESTMENTS WERE IN CASH
OR CASH EQUIVALENTS. WHAT WAS THE RATIONALE FOR THAT?
A. There were several reasons. First, there were rather healthy new cash
inflows coming into the fund at the end of the period. Second, as has been
the case historically there was a relatively low level of news bonds issued
in December. Finally, given current spreads, I was being very selective in
adding new positions to the fund.
Q. WHAT IS YOUR OUTLOOK?
A. It's been a while since the high-yield market has witnessed credit
spreads as narrow as they were at the end of the period. Given that, it's
hard for me to be extremely bullish about the prospects for the high-yield
market. However, I believe that there are still attractive opportunities
out there. The economy looks like it is cooperating now, but given current
spread levels and the increasing likelihood of a slowdown in economic
growth in 1997, I'll likely look to relatively higher-quality companies in
more defensive industries, such as media and telecommunications. In my
view, the penalty for being wrong with riskier situations outweighs the
potential rewards. As a result, capital preservation has become a priority
and earning an attractive coupon could look favorable relative to the
returns from other markets.
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
INVESTMENTS DECEMBER 31, 1996
Showing Percentage of Total Value of Investment in Securities
CORPORATE BONDS - 65.5%
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
CONVERTIBLE BONDS - 1.1%
MEDIA & LEISURE - 0.6%
PUBLISHING - 0.6%
Hollinger liquid yield option
note yankee 0%, 10/5/13 B2 $ 30,000,000 $ 10,612,500
RETAIL & WHOLESALE - 0.5%
RETAIL & WHOLESALE, MISCELLANEOUS - 0.5%
Comcast Corp. 1 1/8%,
4/15/07 B1 15,000,000 7,518,750
UTILITIES - 0.0%
TELEPHONE SERVICES - 0.0%
GST Telecommunications, Inc.
0%, 12/15/05 (c)(f) - 70,000 53,900
TOTAL CONVERTIBLE BONDS 18,185,150
NONCONVERTIBLE BONDS - 64.4%
AEROSPACE & DEFENSE - 0.5%
AEROSPACE & DEFENSE - 0.4%
RHI Holdings, Inc. 11 7/8%,
3/1/99 B2 2,160,000 2,160,000
Wyman-Gordon Co.
10 3/4%, 3/15/03 Ba3 4,490,000 4,815,525
6,975,525
SHIP BUILDING & REPAIR - 0.1%
Newport News Shipbuilding, Inc.
9 1/4%, 12/1/06 (f) B1 1,430,000 1,476,475
TOTAL AEROSPACE & DEFENSE 8,452,000
BASIC INDUSTRIES - 6.9%
CHEMICALS & PLASTICS - 2.4%
American Pacific Corp.
11%, 2/21/02 (f) - 743,750 706,559
Atlantis Group, Inc.
11%, 2/15/03 B2 7,785,000 8,096,400
Foamex-JPS Automotive LP/
Foamex JPS Capital Corp.
0%, 7/1/04 (c) Caa 2,760,000 2,290,800
Foamex LP/Foamex Capital Corp.:
9 1/2%, 6/1/00 B1 380,000 381,900
11 7/8%, 10/1/04 B3 2,480,000 2,653,600
Freedom Chemical Co. 10 5/8%,
10/15/06 (f) B3 5,940,000 6,237,000
Plastic Containers, Inc.
10%, 12/15/06 (f) B1 1,285,000 1,323,550
Plastic Specialties &
Technologies, Inc.
11 1/4%, 12/1/03 B3 9,770,000 10,258,500
Sterling Chemicals Holdings, Inc.
11 3/4%, 8/15/06 B3 5,420,000 5,718,100
37,666,409
IRON & STEEL - 1.3%
AK Steel Corp. 9 1/8%,
12/15/06 (f) Ba2 8,340,000 8,558,925
Republic Engineered Steels, Inc.
9 7/8%, 12/15/01 B3 4,620,000 4,319,700
WCI Steel, Inc. 10%,
12/1/04 (f) B1 6,840,000 6,908,400
19,787,025
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
METALS & MINING - 0.8%
Commonwealth Aluminum Corp.
10 3/4%, 10/1/06 B2 $ 7,190,000 $ 7,405,700
Renco Metals, Inc.
11 1/2%, 7/1/03 B2 4,660,000 4,893,000
12,298,700
PACKAGING & CONTAINERS - 0.1%
Crown Packaging Holdings Ltd.
0%, 11/1/03 (c) Ca 6,840,000 1,710,000
PAPER & FOREST PRODUCTS - 2.3%
Doman Industries Ltd. yankee
8 3/4%, 3/15/04 Ba3 12,660,000 11,868,750
Repap New Brunswick, Inc.
yankee 10 5/8%, 4/15/05 B3 8,390,000 8,851,450
SD Warren Co., Series B,
12%, 12/15/04 B1 3,790,000 4,093,200
Specialty Paperboard, Inc.
9 3/8%, 10/15/06 (f) B1 5,000,000 5,100,000
Stone Container Corp.
11 7/8%, 8/1/16 B1 6,290,000 6,667,400
36,580,800
TOTAL BASIC INDUSTRIES 108,042,934
CONGLOMERATES - 0.8%
Jordan Industries, Inc.:
10 3/8%, 8/1/03 B3 11,895,000 11,776,050
0%, 8/1/05 (c) Caa 1,070,000 850,650
12,626,700
CONSTRUCTION & REAL ESTATE - 1.0%
CONSTRUCTION - 1.0%
McDermott J Ray SA
9 3/8%, 7/15/06 B1 10,000,000 10,500,000
WCI Communities LP
17%, 7/24/98 (e) - 5,000,000 5,000,000
15,500,000
DURABLES - 2.7%
AUTOS, TIRES, & ACCESSORIES - 1.2%
APS, Inc. 11 7/8%, 1/15/06 B2 960,000 1,039,200
Blue Bird Body Co. 10 3/4%,
11/15/06 (f) B2 6,645,000 6,944,025
Delco Remy International, Inc.
10 5/8%, 8/1/06 (f) B2 4,840,000 5,130,400
Lear Corp. 9 1/2%, 7/15/06 B1 5,150,000 5,510,500
18,624,125
HOME FURNISHINGS - 1.0%
Interlake Corp.
12 1/8%, 3/1/02 B3 10,000,000 10,350,000
Knoll, Inc. 10 7/8%, 3/15/06 B3 5,280,000 5,834,400
16,184,400
TEXTILES & APPAREL - 0.5%
Dan River, Inc.
10 1/8%, 12/15/03 B3 4,620,000 4,666,200
Hat Brands, Inc. (g):
Series B, 12 5/8%, 9/15/02 - 1,520,000 836,000
Series D, 12 5/8%, 9/15/02 - 680,000 374,000
Pillowtex Corp.
10%, 11/15/06 (f) B2 1,710,000 1,782,675
7,658,875
TOTAL DURABLES 42,467,400
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
ENERGY - 2.1%
OIL & GAS - 2.1%
Flores & Rucks, Inc.
9 3/4%, 10/1/06 B3 $ 8,360,000 $ 8,861,600
Forcenergy, Inc.
9 1/2%, 11/1/06 B2 2,520,000 2,627,100
Harcor Energy, Inc.
14 7/8%, 7/15/02 B3 13,060,000 15,051,650
KCS Energy, Inc.
11%, 1/15/03 B1 4,725,000 5,126,625
Plains Resources, Inc., Series B,
10 1/4%, 3/15/06 B2 790,000 841,350
TOTAL ENERGY 32,508,325
FINANCE - 2.2%
SAVINGS & LOANS - 2.2%
First Nationwide Parent Holdings
Ltd. 12 1/2%, 4/15/03 B2 17,480,000 19,359,100
First Nationwide Escrow Corp.
10 5/8%, 10/1/03 (f) Ba3 12,970,000 14,007,600
33,366,700
SECURITIES INDUSTRY - 0.0%
ECM Corp. extendible
14%, 6/1/02 (f) - 288,264 317,090
TOTAL FINANCE 33,683,790
HEALTH - 1.5%
MEDICAL EQUIPMENT & SUPPLIES - 1.4%
Wright Medical Technology, Inc.
10 3/4%, 7/1/00 B3 20,920,000 21,129,200
MEDICAL FACILITIES MANAGEMENT - 0.1%
Quest Diagnostics, Inc.
10 3/4%, 12/15/06 B2 1,810,000 1,905,025
TOTAL HEALTH 23,034,225
HOLDING COMPANIES - 0.5%
Gray Communications System, Inc.
10 5/8%, 10/1/06 B3 5,135,000 5,443,100
Veritas Holding GMBH
9 5/8%, 12/15/03 (f) BB- 2,140,000 2,161,400
7,604,500
INDUSTRIAL MACHINERY & EQUIPMENT - 4.8%
ELECTRICAL EQUIPMENT - 2.8%
Magnetek, Inc.
10 3/4%, 11/15/98 B1 11,675,000 12,112,813
Motors & Gears, Inc.
10 3/4%, 11/15/06 (f) B3 15,170,000 15,625,100
Omnipoint Corp.:
11 5/8%, 8/15/06 B2 9,280,000 9,628,000
11 5/8%, 8/15/06 (f) B2 3,190,000 3,309,625
Telex Communications, Inc.
12%, 7/15/04 B2 3,500,000 3,745,000
44,420,538
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - 1.3%
Goss Graphic System, Inc.
12%, 10/15/06 B2 $ 2,090,000 $ 2,152,700
Howmet Corp. 10%, 12/1/03 B3 2,050,000 2,219,125
International Knife & Saw, Inc.
11 3/8%, 11/15/06 (f) B3 2,310,000 2,385,075
MVE, Inc. 12 1/2%, 2/15/02 B3 5,595,000 5,930,700
Thermadyne Holdings Corp.:
10 1/4%, 5/1/02 B1 1,484,000 1,541,505
10 3/4%, 11/1/03 B3 5,226,000 5,435,040
19,664,145
POLLUTION CONTROL - 0.7%
Allied Waste of North America, Inc.
10 1/4%, 12/1/06 (f) B3 3,570,000 3,748,500
Norcal Waste Systems, Inc.
13%, 11/15/05 (d) B3 6,850,000 7,603,500
11,352,000
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 75,436,683
MEDIA & LEISURE - 17.4%
BROADCASTING - 5.3%
American Telecasting, Inc. (c):
0%, 6/15/04 Caa 2,500,000 1,000,000
0%, 8/15/05 Caa 500,000 185,000
Benedek Communications Corp.
0%, 5/15/06 (c) - 2,880,000 1,648,800
Comcast UK Cable Partners Ltd.
0%, 11/15/07 B2 952,000 661,640
CS Wireless Systems, Inc.
0%, 3/1/06 (c) Caa 24,360,000 8,769,600
Diamond Cable Communications
PLC yankee
0%,12/15/05 (c) B3 17,110,000 12,169,488
Granite Broadcasting Corp.:
10 3/8%, 5/15/05 B3 3,360,000 3,444,000
9 3/8%, 12/1/05 B3 2,010,000 1,944,675
Jacor Communications Co.
9 3/4%, 12/15/06 B2 3,190,000 3,253,800
NWCG Holdings Corp.
0%, 6/15/99 Caa 21,815,000 18,106,450
Peoples Choice TV Corp. unit
0%, 6/1/04 (c) Caa 23,430,000 9,840,600
SFX Broadcasting, Inc.
10 3/4%, 5/15/06 B3 2,375,000 2,493,750
Telewest PLC 0%, 10/1/07 (c) B1 4,770,000 3,315,150
Tevecap SA 12 5/8%,
11/26/04 (f) B2 7,200,000 7,362,000
UIH Australia/PAC, Inc.,
Series B, 0%, 5/15/06 (c) B2 15,870,000 8,252,400
United International Holdings, Inc.
0%, 11/15/99:
Discount Notes B3 1,070,000 765,050
Sr. Discount Notes B3 1,000,000 715,000
83,927,403
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
MEDIA & LEISURE - CONTINUED
ENTERTAINMENT - 4.3%
AMF Group, Inc., Series B:
10 7/8%, 3/15/06 B2 $ 11,900,000 $ 12,554,500
Alliance Gaming Corp.
12 7/8%, 6/30/03 B2 8,560,000 9,095,000
0%, 3/15/06 (c) B2 17,280,000 11,426,400
Cinemark USA, Inc.
9 5/8%, 8/1/08 B2 4,300,000 4,353,750
Viacom, Inc. 8%, 7/7/06 B1 30,620,000 29,701,400
67,131,050
LEISURE DURABLES & TOYS - 2.0%
ICON Fitness Corp.
0%, 11/15/06 (f) - 9,440,000 4,956,000
ICON Health and Fitness, Inc.
13%, 7/15/02 B3 16,480,000 18,540,000
IHF Holdings, Inc.
0%, 11/15/04 (c) Caa 10,250,000 8,097,500
31,593,500
LODGING & GAMING - 4.8%
American Skiing Co.
12%, 7/15/06 (f) B3 5,310,000 5,588,775
Aztar Corp.
13 3/4%, 10/1/04 B2 1,570,000 1,672,050
Grand Casinos, Inc.
10 1/8%, 12/1/03 Ba3 24,720,000 24,843,600
HMH Properties, Inc.
9 1/2%, 5/15/05 Ba3 20,510,000 21,381,675
Horseshoe Gaming LLC
12 3/4%, 9/30/00 B1 17,850,000 19,278,000
Wyndham Hotel Corp.
10 1/2%, 5/15/06 B2 1,810,000 1,918,600
74,682,700
PUBLISHING - 0.3%
Hollinger International
Publishing, Inc.
9 1/4%, 2/1/06 B1 4,830,000 4,781,700
RESTAURANTS - 0.7%
Host Marriott Travel Plazas, Inc.
9 1/2%, 5/15/05 B1 10,690,000 11,144,325
TOTAL MEDIA & LEISURE 273,260,678
NONDURABLES - 3.3%
FOODS - 1.4%
International Home Foods, Inc.
10 3/8%, 11/1/06 (f) B2 8,070,000 8,412,975
Specialty Foods Corp.:
10 1/4%, 8/15/01 B3 4,030,000 3,768,050
11 1/8%, 10/1/02 B3 10,670,000 10,136,500
22,317,525
HOUSEHOLD PRODUCTS - 1.9%
Revlon Worldwide Corp. secured
0%, 3/15/98 B3 34,100,000 29,539,125
TOTAL NONDURABLES 51,856,650
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
RETAIL & WHOLESALE - 4.4%
APPAREL STORES - 2.3%
Lamonts Apparel, Inc. 10 1/4%,
11/1/99 pay-in-kind (f)(g) - $ 2,201,000 $ 93,543
Mothers Work, Inc.
12 5/8%, 8/1/05 B3 25,190,000 26,197,600
Specialty Retailers, Inc.:
10%, 8/15/00 B1 2,250,000 2,340,000
11%, 8/15/03 B3 7,220,000 7,581,000
36,212,143
GENERAL MERCHANDISE STORES - 0.4%
Pantry, Inc. 12%, 11/15/00 B2 7,260,000 6,951,450
GROCERY STORES - 1.4%
Food 4 Less Holdings, Inc.
0%, 7/15/05 (c) Caa 17,500,000 10,937,500
Pathmark Stores, Inc.
11 5/8%, 6/15/02 Caa 2,382,000 2,435,595
Star Markets, Inc.
13%, 11/1/04 B3 6,905,000 7,785,388
21,158,483
RETAIL & WHOLESALE, MISCELLANEOUS - 0.3%
Guitar Center Management Co.,
Inc. 11%, 7/1/06 B2 3,650,000 3,869,000
TOTAL RETAIL & WHOLESALE 68,191,076
SERVICES - 3.1%
PRINTING - 1.0%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa 16,010,000 15,449,650
SERVICES - 2.1%
Celestica International, Inc. yankee
10 1/2%, 12/31/06 (f) B2 10,060,000 10,563,000
Outsourcing Solutions, Inc.
11%, 11/1/06 (f) B3 3,860,000 4,043,350
Prime Succession Acquisition Corp.
10 3/4%, 8/15/04 (f) B 1,390,000 1,508,150
Protection One Alarm
Monitoring, Inc.
13 5/8%, 6/30/05 Caa 18,300,000 17,019,000
33,133,500
TOTAL SERVICES 48,583,150
TECHNOLOGY - 4.3%
COMMUNICATIONS EQUIPMENT - 1.7%
Echostar Satellite Broadcasting
Corp. 0%, 3/15/04 (c) Caa 17,390,000 13,172,925
Hyperion Telecommunications, Inc.,
Series B, 0%, 4/15/03 (c) - 23,550,000 13,364,625
26,537,550
COMPUTERS & OFFICE EQUIPMENT - 2.6%
Dictaphone Corp.
11 3/4%, 8/1/05 B3 14,440,000 12,923,800
Exide Electronics Group, Inc.
11 1/2%, 5/15/06 B3 6,380,000 6,794,700
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
TECHNOLOGY - CONTINUED
COMPUTERS & OFFICE EQUIPMENT - CONTINUED
Unisys Corp.:
10 5/8%, 10/01/99 B1 $ 4,080,000 $ 4,222,800
12%, 4/15/03 B1 12,300,000 13,161,000
11 3/4%, 10/15/04 B1 3,190,000 3,401,338
40,503,638
TOTAL TECHNOLOGY 67,041,188
TRANSPORTATION - 1.2%
AIR TRANSPORTATION - 0.3%
US Air Inc., pass through trust
8 5/8%, 9/1/98 B1 5,000,000 5,012,500
RAILROADS - 0.9%
Transtar Holdings LP/Transtar
Cap Corp. 0%, 12/15/03 (c) B- 17,941,000 14,173,390
TOTAL TRANSPORTATION 19,185,890
UTILITIES - 7.7%
CELLULAR - 4.7%
Arch Communications Group, Inc.
0%, 3/15/08 (c) B3 23,890,000 13,647,163
Microcell Telecommunications, Inc.
0%, 6/1/06 (c) B3 29,540,000 16,468,550
Millicom International Cellular SA
0%, 6/1/06 (c) B3 56,710,000 35,160,200
Mobile Telecommunications
Technologies Corp.
13 1/2%, 12/15/02 B3 7,555,000 7,555,000
USA Mobile Communications, Inc.
9 1/2%, 2/1/04 B2 1,280,000 1,209,600
74,040,513
ELECTRIC UTILITY - 0.2%
AES China Generating Ltd.
yankee 10 1/8%, 12/15/06 Ba3 2,200,000 2,282,500
TELEPHONE SERVICES - 2.8%
Brooks Fiber Properties, Inc.
0%, 11/1/06 (c)(f) - 13,850,000 8,829,375
GST USA, Inc.
0%, 12/15/05 (c) - 12,430,000 7,613,375
MFS Communications, Inc. (c):
0%, 1/15/04 B1 9,520,000 8,258,600
0%, 1/15/06 B1 18,490,000 13,497,700
Pagemart, Inc.
0%, 11/1/03 (c) - 1,330,000 1,050,700
Shared Technologies Fairchild
Communications Corp.
0%, 3/1/06 (c) Caa 6,290,000 5,252,150
44,501,900
TOTAL UTILITIES 120,824,913
TOTAL NONCONVERTIBLE BONDS 1,008,300,102
TOTAL CORPORATE BONDS
(Cost $999,782,437) 1,026,485,252
U.S. GOVERNMENT AND GOVERNMENT
AGENCY OBLIGATIONS - 3.2%
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
U.S. TREASURY OBLIGATIONS - 3.2%
5.875%, 11/30/01
(Cost $49,531,250) Aaa $ 50,000,000 $ 49,273,500
COMMERCIAL MORTGAGE SECURITIES - 0.0%
Meritor Mortgage Security Corp.
commercial Series 1987-1
Class B, 9.40%, 2/1/00 (f)(g)
(Cost $182,359) - 1,350,000 208,440
COMMON STOCKS - 9.2%
SHARES
AEROSPACE & DEFENSE - 0.4%
Thiokol Corp. 133,900 5,992,025
BASIC INDUSTRIES - 0.4%
CHEMICALS & PLASTICS - 0.3%
American Azide (warrants) (a)(e) 102 1
American Pacific Corp. (warrants) (a)(e) 60,714 15,179
Foamex International, Inc. 307,600 5,075,400
5,090,580
PACKAGING & CONTAINERS - 0.1%
Gaylord Container Corp. Class A (a) 240,800 1,474,900
TOTAL BASIC INDUSTRIES 6,565,480
DURABLES - 0.0%
TEXTILES & APPAREL - 0.0%
Hat Brands, Inc. (warrants) (a)(e) 27,466 89,263
HM/Hat Brands Trust Class I Unit (a)(e) 340,000 210,800
300,063
ENERGY - 0.7%
OIL & GAS - 0.7%
Flores & Rucks, Inc. (a) 150,000 7,987,500
Harcor Energy, Inc. (a) 355,000 1,730,625
Harcor Energy, Inc. (warrants) (a) 330,000 660,000
10,378,125
FINANCE - 1.2%
INSURANCE - 1.2%
American Financial Group, Inc. 474,700 17,919,925
Penncorp. Financial Group, Inc. 25,000 900,000
18,819,925
SECURITIES INDUSTRY - 0.0%
ECM Corp. LP (f) 3,000 300,000
TOTAL FINANCE 19,119,925
HEALTH - 0.0%
MEDICAL EQUIPMENT & SUPPLIES - 0.0%
Wright Medical Technology, Inc.
(warrants) (a) 3,212 417,560
HOLDING COMPANIES - 0.0%
SDW Holdings Corp. (a):
(warrants) 3,720 19,158
Series B (warrants) 4,450 75,650
94,808
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - 0.5%
POLLUTION CONTROL - 0.5%
Allied Waste Industries, Inc. (a) 755,300 $ 6,986,525
MEDIA & LEISURE - 3.2%
BROADCASTING - 1.7%
American Radio Systems Corp.
Class A (a) 342,800 9,341,300
Benedek Communications Corp.
(warrants) (a) 57,600 172,800
CS Wireless Systems, Inc. (a)(f) 6,699 0
Jacor Communications, Inc. Class A (a) 209,400 5,732,325
PanAmSat Corp. (a) 254,200 7,117,600
United International Holdings, Inc.
Class A (a) 441,100 5,403,475
27,767,500
ENTERTAINMENT - 0.0%
Live Entertainment, Inc. (a)(e):
$2.00 (warrant) 232,000 11,600
$2.72 (warrant) 221,765 11,088
22,688
LEISURE DURABLES & TOYS - 0.1%
IHF Capital, Inc. (a)(f):
Series H (warrants) 10,250 1,127,500
Series I (warrants) 5,890 206,150
1,333,650
LODGING & GAMING - 0.7%
Bally Gaming International, Inc.
(warrants) (a) 90,000 157,500
Host Marriott Corp. (a) 651,300 10,420,800
Motels of America, Inc. (a) 3,000 105,000
10,683,300
PUBLISHING - 0.7%
Big Flower Press Holdings, Inc. (a) 580,500 10,884,375
TOTAL MEDIA & LEISURE 50,691,513
NONDURABLES - 1.0%
HOUSEHOLD PRODUCTS - 1.0%
Renaissance Cosmetics, Inc. unit (f) 12,750 12,750,000
Revlon, Inc. Class A (a) 113,300 3,384,838
16,134,838
RETAIL & WHOLESALE - 0.4%
APPAREL STORES - 0.1%
Lamonts Apparel, Inc. (a) 35,870 4,484
Lamonts Apparel, Inc. (warrants) (a) 66,214 1
Mothers Work (a)(h) 209,100 2,143,275
2,147,760
GROCERY STORES - 0.3%
Food 4 Less Holdings, Inc.
(warrants) (a)(e) 9,348 112,176
Smith's Food & Drug Center, Inc. 149,100 4,622,100
4,734,276
RETAIL & WHOLESALE, MISCELLANEOUS - 0.0%
Barry's Jewelers, Inc. (warrants) (a) 5,697 712
Town & Country Jewelry Manufacturing
Corp. Class A (a) 8,374 3,140
3,852
TOTAL RETAIL & WHOLESALE 6,885,888
SHARES VALUE (NOTE 1)
SERVICES - 0.4%
Protection One, Inc. (a) 505,900 $ 4,995,763
Protection One, Inc. (warrants) (a) 74,560 521,920
Vestar/LPA Investment Corp. (a) 5,177 51,770
5,569,453
TECHNOLOGY - 0.2%
COMMUNICATIONS EQUIPMENT - 0.1%
Hyperion Telecommunications, Inc.
(warrants) (a)(f) 23,550 471,000
COMPUTERS & OFFICE EQUIPMENT - 0.1%
Exide Electronics Group, Inc. (a) 117,600 1,734,600
Exide Electronics Group, Inc.
(warrants) (a)(f) 6,380 191,400
1,926,000
TOTAL TECHNOLOGY 2,397,000
UTILITIES - 0.8%
CELLULAR - 0.3%
Arch Communications Group, Inc. (a) 351,737 3,297,534
Intercel, Inc. (warrants) (a) 53,504 374,528
Microcell Telecommunications, Inc. (a):
(warrants) 118,160 1,477,000
(conditional warrants) 118,160 73,850
5,222,912
ELECTRIC UTILITY - 0.0%
El Paso Electric Co. (a) 6,900 44,850
TELEPHONE SERVICES - 0.5%
WorldCom, Inc. (a) 300,000 7,818,750
TOTAL UTILITIES 13,086,512
TOTAL COMMON STOCKS
(Cost $131,566,252) 144,619,715
PREFERRED STOCKS - 10.6%
CONVERTIBLE PREFERRED STOCKS - 1.4%
FINANCE - 0.5%
INSURANCE - 0.5%
Pennsylvania Corp. Financial Group, Inc.
Series II, $3.50 (f) 150,000 8,700,000
MEDIA & LEISURE - 0.9%
BROADCASTING - 0.4%
Benedek Communications Corp. 15% 57,600 5,673,600
LODGING & GAMING - 0.5%
Host Marriott Financial Trust
$3.375 (a)(f) 151,200 8,070,300
TOTAL MEDIA & LEISURE 13,743,900
RETAIL & WHOLESALE - 0.0%
RETAIL & WHOLESALE, MISCELLANEOUS - 0.0%
Town & Country Corp. pay-in-kind 128 96
TOTAL CONVERTIBLE PREFERRED STOCKS 22,443,996
NONCONVERTIBLE PREFERRED STOCKS - 9.2%
ENERGY - 0.0%
OIL & GAS - 0.0%
Gulf Canada Resources Ltd.,
Series 1, adj. rate 193,351 627,648
PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONCONVERTIBLE PREFERRED STOCKS - CONTINUED
FINANCE - 0.7%
SAVINGS & LOANS - 0.7%
California Federal Bank
Series B, $10.625 15,610 $ 1,726,856
Chevy Chase Capital Corp.,
Series A, $5.1875 180,000 9,315,000
11,041,856
HOLDING COMPANIES - 0.1%
SDW Holdings Corp. (f) 44,500 1,624,250
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
ELECTRICAL EQUIPMENT - 0.1%
Ampex Corp. 8% (a)(e) 1,589 1,235,114
MEDIA & LEISURE - 7.2%
BROADCASTING - 7.0%
Cablevision Systems Corp., Series H,
$11.75 exchangeable pay-in-kind 193,949 18,134,232
Chancellor Radio Broadcasting Co.,
Series A, exchangeable (a) 64,300 7,137,300
PanAmSat Corp. 12 3/4% pay-in-kind 39,533 48,427,925
Time Warner, Inc., Series M,
exchangeable pay-in-kind 33,341 36,174,985
109,874,442
PUBLISHING - 0.2%
K-III Communications Corp., Series B,
$11.625 pay-in-kind (a) 27,428 2,777,085
TOTAL MEDIA & LEISURE 112,651,527
NONDURABLES - 0.0%
HOUSEHOLD PRODUCTS - 0.0%
Renaissance Cosmetics, Inc.
pay-in-kind 14% (f) 446 383,560
SERVICES - 0.2%
Loewen Group Capital LP,
Series A, $2.36 91,000 2,411,500
TECHNOLOGY - 0.9%
COMPUTER SERVICES & SOFTWARE - 0.9%
ICG Holdings, Inc.
exchangeable pay-in-kind 12,269 13,557,245
TOTAL NONCONVERTIBLE PREFERRED STOCKS 143,532,700
TOTAL PREFERRED STOCKS
(Cost $154,537,705) 165,976,696
CASH EQUIVALENTS - 11.5%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 6.75%, dated
12/31/96 due 1/2/97 $ 179,625,334 $179,558,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $1,515,158,003) $ 1,566,121,603
LEGEND
1. Non-income producing
2. Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
3. Debt obligation initially issued in zero coupon form which converts to
coupon form at a specified rate and date.
4. Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date.
5. Restricted securities - Investment in securities not registered under
the Securities Act of 1933 (see Note 2 of Notes to Financial Statements).
Additional information on each holding is as follows:
ACQUISITION ACQUISITION COST
SECURITY DATE (000S)
American Azide (warrants) 2/5/92 $ 1
American Pacific Corp. (warrants) 2/5/92 $ 15,179
Ampex Corp. 8% 2/16/95 $ 834,225
Food 4 Less Holdings, Inc. 12/30/92
(warrants) to 5/17/93 $ 229,281
Hat Brands, Inc. 9/2/92 to
(warrants) 2/23/94 $ -
HM/Hat Brands Trust
Class I Unit 2/22/94 $ 340,000
Live Entertainment, Inc.
(warrants):
$2.00 3/23/93 $ 220,717
$2.72 3/23/93 $ 131,863
WCI Communities LP
17%, 7/24/98 7/24/95 $ 4,937,231
6. Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of these securities amounted to $171,166,067 or 10.8% of net
assets.
7. Non-income producing - issuer filed for protection under the Federal
Bankruptcy Code or is in default of interest payment.
8. An affiliated company is a company in which the fund has ownership of at
least 5% of the voting securities. Transactions during the period with
companies which are or were affiliates are as follows:
PURCHASE SALES DIVIDEND VALUE
AFFILIATE COST COST INCOME
Mothers Work 153,555 - - 2,143,275
TOTALS $ 153,555 $ - $ - $ 2,143,275
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $1,751,402,823 and $1,372,062,734, respectively, of which U.S.
government and government agency obligations aggregated $123,798,438 and
$76,085,547, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company. The
commissions paid to these affiliated firms were $10,168 for the period (see
Note 4 of Notes to Financial Statements).
The composition of long-term debt holdings as a percentage of total value
of investment in securities, is as follows (ratings are unaudited):
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 3.2% AAA, AA, A 3.2%
Baa 0.0% BBB 0.0%
Ba 5.6% BB 11.0%
B 48.6% B 45.1%
Caa 7.2% CCC 4.1%
Ca, C 0.1% CC, C 0.0%
D 0.0%
The percentage not rated by both S&P and Moody's amounted to 2.9%. FMR has
determined that unrated debt securities that are lower quality account for
2.9% of the total value of investment in securities.
INCOME TAX INFORMATION
At December 31, 1996, the aggregate cost of investment securities for
income tax purposes was $1,515,230,055. Net unrealized appreciation
aggregated $50,891,548, of which $82,915,487 related to appreciated
investment securities and $32,023,939 related to depreciated investment
securities.
The fund hereby designates approximately $5,382,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
DECEMBER 31, 1996
ASSETS
Investment in securities, at value (including repurchase agreements of $179,558,000) (cost $1,515,158,003) $ 1,566,121,603
- - See accompanying schedule
Cash 837
Receivable for investments sold 2,334,175
Receivable for fund shares sold 6,562,145
Dividends receivable 1,357,186
Interest receivable 20,619,080
TOTAL ASSETS 1,596,995,026
LIABILITIES
Payable for investments purchased $ 6,205,205
Payable for fund shares redeemed 1,019,389
Accrued management fee 759,029
Other payables and 189,597
accrued expenses
TOTAL LIABILITIES 8,173,220
NET ASSETS $ 1,588,821,806
Net Assets consist of:
Paid in capital $ 1,409,715,693
Undistributed net investment income 113,174,121
Accumulated undistributed net realized gain (loss) on investments and foreign 14,968,408
currency transactions
Net unrealized appreciation (depreciation) on investments 50,963,584
and assets and liabilities in foreign currencies
NET ASSETS, for 126,885,405 shares outstanding $ 1,588,821,806
NET ASSET VALUE, offering price $12.52
and redemption price per share ($1,588,821,806 (divided by) 126,885,405 shares)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996
INVESTMENT INCOME $ 14,136,865
Dividends
Interest 108,216,784
TOTAL INCOME 122,353,649
EXPENSES
Management fee $ 7,422,311
Transfer agent fees 670,254
Accounting fees and expenses 662,535
Non-interested trustees' compensation 9,623
Registration fees 4,022
Custodian fees and expenses 57,474
Audit 47,856
Legal 15,253
Miscellaneous 9,056
Total expenses before reductions 8,898,384
Expense reductions (53,442 8,844,942
)
NET INVESTMENT INCOME 113,508,707
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:
Investment securities 15,835,086
Foreign currency transactions 2,041 15,837,127
Change in net unrealized appreciation (depreciation) on:
Investment securities 35,061,068
Assets and liabilities in 4,554 35,065,622
foreign currencies
NET GAIN (LOSS) 50,902,749
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 164,411,456
OTHER INFORMATION $ 36,272
Expense reductions
Directed brokerage arrangements
Custodian interest credits 17,170
$ 53,442
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
<TABLE>
<CAPTION>
<S> <C>
<C>
Operations $ 113,508,707 $ 76,879,046
Net investment income
Net realized gain (loss) 15,837,127 21,706,316
Change in net unrealized appreciation (depreciation) 35,065,622 49,316,188
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 164,411,456 147,901,550
Distributions to shareholders (81,893,762) (43,871,918)
From net investment income
From net realized gain (16,022,693) -
TOTAL DISTRIBUTIONS (97,916,455) (43,871,918)
Share transactions 1,058,212,273 747,404,302
Net proceeds from sales of shares
Reinvestment of distributions 97,916,455 43,871,918
Cost of shares redeemed (673,801,481) (424,723,050)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 482,327,247 366,553,170
TOTAL INCREASE (DECREASE) IN NET ASSETS 548,822,248 470,582,802
NET ASSETS
Beginning of period 1,039,999,558 569,416,756
End of period (including undistributed net investment income of $113,174,121 and
$76,334,012, respectively) $ 1,588,821,806 $ 1,039,999,558
OTHER INFORMATION
Shares
Sold 89,104,560 66,375,373
Issued in reinvestment of distributions 8,680,536 4,326,619
Redeemed (57,202,172) (37,385,468)
Net increase (decrease) 40,582,924 33,316,524
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1996 1995 1994 1993 C 1992
Net asset value, beginning of period $ 12.050 $ 10.750 $ 11.990 $ 10.820 $ 9.550
Income from Investment Operations .927 .856 .770 .728 .790
Net investment income
Net realized and unrealized gain (loss) .643 1.224 (.910) 1.332 1.290
Total from investment operations 1.570 2.080 (.140) 2.060 2.080
Less Distributions
From net investment income (.920) (.780) (.730) (.794) (.810)
In excess of net investment income - - - (.036) -
From net realized gain (.180) - (.370) (.060) -
Total distributions (1.100) (.780) (1.100) (.890) (.810)
Net asset value, end of period $ 12.520 $ 12.050 $ 10.750 $ 11.990 $ 10.820
TOTAL RETURN A, B 14.03% 20.72% (1.64)% 20.40% 23.17%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 1,588,822 $ 1,040,000 $ 569,417 $ 463,931 $ 200,591
Ratio of expenses to average net assets .71% .71% .71% .64% .67%
D
Ratio of net investment income to average net assets 9.09% 9.32% 8.75% 8.69% 10.98%
Portfolio turnover rate 123% 132% 122% 155% 160%
Average commission rate E $ .0370
A THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN. B TOTAL RETURNS DO NOT
REFLECT CHARGES ATTRIBUTABLE TO
YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE
CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN. C EFFECTIVE
JANUARY 1, 1993, THE FUND ADOPTED
STATEMENT OF POSITION 93-2, "DETERMINATION, DISCLOSURE, AND
FINANCIAL STATEMENT PRESENTATION OF INCOME, CAPITAL GAIN, AND
RETURN OF CAPITAL DISTRIBUTIONS BY
INVESTMENT COMPANIES." AS A RESULT, NET INVESTMENT INCOME PER
SHARE MAY REFLECT CERTAIN RECLASSIFICATIONS RELATED TO BOOK TO
TAX DIFFERENCES. D FMR AGREED TO
REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE PERIOD.
WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE
BEEN HIGHER. E FOR FISCAL YEARS
BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS REQUIRED TO
DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY TRADES
ON WHICH COMMISSIONS ARE
CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND TO
FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS MARKETS
WHERE TRADING PRACTICES AND
COMMISSION RATE STRUCTURES MAY DIFFER.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
For the period ended December 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES.
High Income Portfolio (the fund) is a fund of Variable Insurance Products
Fund (the trust) and is authorized to issue an unlimited number of shares.
The trust is registered under the Investment Company Act of 1940, as
amended (the 1940 Act), as an open-end management investment company
organized as a Massachusetts business trust. Shares of the fund may only be
purchased by insurance companies for the purpose of funding variable
annuity of variable life insurance products. The financial statements have
been prepared in conformity with generally accepted accounting principles
which permit management to make certain estimates and assumptions at the
date of the financial statements. The following summarizes the significant
accounting policies of the fund:
SECURITY VALUATION. Securities for which quotations are readily available
are valued by a pricing service at their market values as determined by
their most recent bid prices in the principal market (sales prices if the
principal market is an exchange) in which such securities are normally
traded. Securities (including restricted securities) for which market
quotations are not readily available are valued at their fair value as
determined in good faith under consistently applied procedures under the
general supervision of the Board of Trustees. Short-term securities with
remaining maturities of sixty days or less for which quotations are not
readily available are valued at amortized cost or original cost plus
accrued interest, both of which approximate current value.
FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S.
dollars at the prevailing rates of exchange at period end. Income receipts
and expense payments are translated into U.S. dollars at the prevailing
exchange rate on the respective dates of the transactions. Purchases and
sales of securities are translated into U.S. dollars at the contractual
currency exchange rates established at the time of each trade.
Net realized gains and losses on foreign currency transactions represent
net gains and losses from sales and maturities of forward currency
contracts, disposition of foreign currencies, and the difference between
the amount of net investment income accrued and the U.S. dollar amount
actually received. The effects of changes in foreign currency exchange
rates on investments in securities are included with the net realized and
unrealized gain or loss on investment securities.
INCOME TAXES. As a qualified regulated investment company under Subchapter
M of the Internal Revenue Code, the fund is not subject to income taxes to
the extent that it distributes substantially all of its taxable income for
its fiscal year. The schedule of investments includes information regarding
income taxes under the caption "Income Tax Information."
INVESTMENT INCOME. Dividend income is recorded on the ex-dividend date,
except certain dividends from foreign securities where the ex-dividend date
may have passed, are recorded as soon as the fund is informed of the
ex-dividend date. Non-cash dividends included in dividend income, if any,
are recorded at the fair market value of the securities received. Interest
income, which includes accretion of original issue discount, is accrued as
earned. Investment income is recorded net of foreign taxes withheld where
recovery of such taxes is uncertain.
EXPENSES. Most expenses of the trust can be directly attributed to a fund.
Expenses which cannot be directly attributed are apportioned between the
funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. 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, which may result in distribution
reclassifications, are primarily due to differing treatments for foreign
currency transactions, market discount, partnerships, and losses deferred
due to wash sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital and may
affect the per-share allocation between net investment income and realized
and unrealized gain (loss). Undistributed net investment income and
accumulated undistributed net realized gain (loss) on investments and
foreign currency transactions may include temporary book and tax basis
differences which will reverse in a subsequent period. Any taxable income
or gain remaining at fiscal year end is distributed in the following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of trade
date. Gains and losses on securities sold are determined on the basis of
identified cost.
2. OPERATING POLICIES.
FOREIGN CURRENCY CONTRACTS. The fund generally uses foreign currency
contracts to facilitate transactions in foreign-denominated securities.
Losses may arise from changes in the value of the foreign currency or if
the counterparties do not perform under the contracts' terms. The U.S.
dollar value of foreign currency contracts is determined using contractual
currency exchange rates established at the time of each trade. The cost of
the foreign currency contracts is included in the cost basis of the
associated investment.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission (the SEC), the fund, along with other
affiliated entities of Fidelity Management & Research Company (FMR), may
transfer uninvested cash balances into one or more joint trading accounts.
These balances are invested in one or more repurchase agreements that
mature in 60 days or less from the date of purchase for U.S. Treasury or
Federal Agency obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
Securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The
2. OPERATING POLICIES - CONTINUED
REPURCHASE AGREEMENTS - CONTINUED
securities are marked-to-market daily and maintained at a value at least
equal to the principal amount of the repurchase agreement (including
accrued interest). FMR, the fund's investment adviser, is responsible for
determining that the value of the underlying securities remains in
accordance with the market value requirements stated above.
RESTRICTED SECURITIES. The fund is permitted to invest in securities that
are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from registration
or to the public if the securities are registered. Disposal of these
securities may involve time-consuming negotiations and expense, and prompt
sale at an acceptable price may be difficult. At the end of the period,
restricted securities (excluding 144A issues) amounted to $6,685,221 or
0.4% of net assets.
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities), is included under the caption "Other Information"
at the end of the fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a monthly
fee that is calculated on the basis of a group fee rate plus a fixed
individual fund fee rate applied to the average net assets of the fund. The
group fee rate is the weighted average of a series of rates and is based on
the monthly average net assets of all the mutual funds advised by FMR. The
rates ranged from .1100% to .3700% for the period. In the event that these
rates were lower than the contractual rates in effect during the period,
FMR voluntarily implemented the above rates, as they resulted in the same
or a lower management fee. The annual individual fund fee rate is .45%. For
the period, the management fee was equivalent to an annual rate of .59% of
average net assets.
SUB-ADVISER FEE. As the fund's investment sub-advisers, Fidelity Management
& Research (U.K.) Inc., and Fidelity Management & Research (Far East) Inc.,
each a wholly owned subsidiary of FMR, receive a fee from FMR of 110% and
105% respectively, of costs incurred in connection with each sub-advisory
agreement.
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations Company
(FIIOC), an affiliate of FMR, is the fund's transfer, dividend disbursing
and shareholder servicing agent. FIIOC receives account fees and
asset-based fees that vary according to account size and type of account.
FIIOC pays for typesetting, printing and mailing of all shareholder
reports, except proxy statements. For the period, the transfer agent fees
were equivalent to an annual rate of .05% of average net assets.
ACCOUNTING FEES. Fidelity Service Co. (FSC), an affiliate of FMR, maintains
the fund's accounting records. The fee is based on the level of average net
assets for the month plus out-of-pocket expenses.
BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms are shown under the caption
"Other Information" at the end of the fund's schedule of investments.
5. EXPENSE REDUCTIONS.
FMR voluntarily agreed to reimburse the fund's operating expenses
(excluding interest, taxes, brokerage commissions and extraordinary
expenses) above an annual rate of 1.00% of average net assets.
FMR has directed certain portfolio trades to brokers who paid a portion of
the fund's expenses. In addition, the fund has entered into an arrangement
with its custodian whereby interest earned on uninvested cash balances was
used to offset a portion of the fund's expenses.
For the period, the reduction under these arrangements are shown under the
caption "Other Information" on the fund's Statement of Operations.
6. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investments Life Insurance Company
(FILI) and its subsidiaries, affiliates of FMR, were the record owners of
approximately 16% of the outstanding shares of the fund. In addition, two
unaffiliated insurance companies were each record owner of 10% or more of
the total outstanding shares of the fund, totaling 53%.
7. TRANSACTIONS WITH AFFILIATED COMPANIES.
An affiliated company is a company in which the fund has ownership of at
least 5% of the voting securities. Information regarding transactions with
affiliated companies is included under the caption "Legend" at the end of
the fund's schedule of investments.
8. ASSET TRANSFER INFORMATION.
In September 1996, the Board of Trustees approved a proposal to liquidate
Fidelity Advisor Annuity High Yield Fund and transfer the assets of
Fidelity Advisor Annuity High Yield Fund to the fund. The liquidation and
transfer of assets are expected to occur in the first quarter of 1997.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Variable Insurance Products Fund and the Shareholders of
High Income Portfolio:
We have audited the accompanying statement of assets and liabilities of
Variable Insurance Products Fund: High Income Portfolio, including the
schedule of portfolio investments, as of December 31, 1996, and the related
statement of operations for the year then ended, the statement of changes
in net assets for each of the two years in the period then ended and the
financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility
of the fund's 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. Our procedures included confirmation of
securities owned as of December 31, 1996 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 Variable Insurance Products Fund: High Income Portfolio as of December
31, 1996, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the
period then ended, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 10, 1997
DISTRIBUTIONS
The Board of Trustees of High Income Portfolio voted to pay on February 7,
1997, to shareholders of record at the opening of business on February 7,
1997, a distribution of $.11 per share derived from capital gains realized
from sales of portfolio securities and a dividend of $.89 per share from
net investment income.
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
INVESTMENT SUB-ADVISERS
Fidelity Management & Research (U.K.) Inc.,
London, England
Fidelity Management & Research (Far East) Inc.,
Tokyo, Japan
OFFICERS
Edward C. Johnson 3d, PRESIDENT
J. Gary Burkhead, SENIOR VICE PRESIDENT
Fred L. Henning, Jr., VICE PRESIDENT
Robert A. Lawrence, VICE PRESIDENT
Barry J. Coffman, VICE PRESIDENT
Arthur S. Loring, SECRETARY
Kenneth A. Rathgeber, TREASURER
Robert H. Morrison, MANAGER, SECURITY TRANSACTIONS
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
BOARD OF TRUSTEES
J. Gary Burkhead
Ralph F. Cox *
Phyllis Burke Davis *
Richard J. Flynn *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Edward H. Malone *
Marvin L. Mann *
Gerald C. McDonough *
Thomas R. Williams *
ADVISORY BOARD
William O. McCoy
* INDEPENDENT TRUSTEES
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Investments Institutional Operations Co.
Boston, MA
CUSTODIAN
The Bank of New York, New York, NY
(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS
FUND: OVERSEAS PORTFOLIO
ANNUAL REPORT
DECEMBER 31, 1996
CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
MARKET ENVIRONMENT 3 A review of what happened in world markets during
the
last year.
PERFORMANCE 4 How the fund has done over time.
FUND TALK 5 The manager's review of fund performance, strategy
and outlook.
INVESTMENTS 6 A complete list of the fund's investments with their
market values.
FINANCIAL STATEMENTS 10 Statements of assets and liabilities, operations, and
changes in net assets, as well as financial highlights.
NOTES 12 Notes to the financial statements.
REPORT OF INDEPENDENT ACCOUNTANTS 15 The auditors' opinion.
</TABLE>
DISTRIBUTIONS
The Board of Trustees of Overseas Portfolio voted to pay on February 7,
1997, to shareholders of record at the opening of business on
February 7, 1997, a distribution of $1.31 per share derived from capital
gains realized from sales of portfolio securities and a dividend of
$.33 per share from net investment income.
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR
THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS
PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY,
ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED
BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
MARKET ENVIRONMENT
Most stock and bond markets posted positive returns in 1996, aided by
moderate growth and low inflation. Sustained corporate earnings growth and
a favorable interest rate environment also proved beneficial. Japan,
however, was the major exception as an underperforming stock market and a
weak yen undermined returns for U.S.-based investors. The strongest gains
came from the often-volatile emerging bond markets in 1996, while
performance of the bond markets of developed countries was mixed.
U.S. STOCK MARKETS
The Standard & Poor's 500 Index - a broad measure of U.S. stock market
performance - rose 22.96% for the 12 months that ended December 31, 1996,
well above the index's long-term average annual return of about 12%. The
Russell 2000 Index - a measure of small stock performance - rose 16.49%.
The Dow Jones Industrial Average - an index of 30 blue-chip stocks - posted
a return of 28.70%, closing above 6500 for the first time in November.
The U.S. stock market spent much of the past year breaking price and
trading volume records. Solid corporate earnings reports, large cash
inflows into mutual funds, widespread optimism and a generally favorable
interest rate environment propelled share prices higher.
Large-capitalization stocks thrived as investors sought their lower
volatility and higher degree of liquidity over smaller-cap stocks in an
environment where it was sometimes difficult to discern the health of the
economy.
Most industry sectors experienced positive, if not strong performance. At
mid-year, technology stocks suffered from a sell-off sparked by fears that
company earnings were weakening. Nevertheless, this sector proved to be the
strongest in the U.S. market in 1996. Earnings surprises and positive
earnings projections were the main drivers of solid performance, especially
among semiconductor manufacturers, companies that make disk drives and
monitors, and software firms. Even though consensus estimates pointed
toward increases in short-term interest rates by the Fed, financial stocks
- - usually sensitive to changes in interest rates - shrugged off this
concern and posted solid performance based on low interest rates and
positive business prospects. Energy stocks reaped the benefits of
higher-than-expected energy prices, which resulted in part from the delayed
re-entry of Iraq into the world market. Uncertainty over the direction of
the economy benefited consumer nondurables - such as food, beverage and
tobacco companies - health care and traditional big-name growth stocks, as
these companies tend to post steady earnings growth in many economic
environments.
Utilities stocks struggled in 1996 for two reasons. First, and most
important, uncertainty over the direction and form of deregulation in the
sector tended to diminish investor interest. Second, stocks in the sector
tend to move in concert with bonds, which lagged due to periodic inflation
fears and confusing economic signals. Stocks in the telecommunications
field especially were affected by uncertainty over legislation signed into
law in February 1996. Biotechnology issues had a hard time recovering from
a correction in stock prices from overvalued levels that they experienced
earlier in 1996. Cyclical stocks - those that usually rise and fall with
the economy - posted mixed results that largely depended on the outlook for
companies in the specific sector rather than the direction of the economy.
FOREIGN STOCK MARKETS
Foreign stock markets posted mixed results in 1996. The Morgan Stanley
Capital International (MSCI) EAFE Index - which measures stock performance
in Europe, Australia and the Far East - returned 6.05% in 1996. Europe
posted the most consistently strong equity markets due to stronger economic
growth, lower interest rates, higher corporate earnings, the relative
weakness of the continent's major currencies and a new emphasis on
shareholder friendliness by many of the region's corporations. The MSCI
Europe Index was up 21.09% in 1996. The Japanese stock market
underperformed on the weakness of the economic recovery and the uncertainty
for any substantial economic reform. The Tokyo Stock Exchange TOPIX Total
Return Index was off 16.26%. Emerging market equity performance ran the
gamut from negative to positive, with the MSCI Emerging Markets Free Index
returning 6.03% for 1996. While Hong Kong was a top performer - benefiting
from the rising value of the property sector, solid economic growth and
stable interest rates - other Asian markets posted mixed returns as
concerns rose over declining export growth in the region. Latin America
enjoyed a strong first half, but faded toward the end of 1996 due to low
domestic savings rates and inefficient governments, among other factors.
U.S. BOND MARKETS
Uncertainty over the direction of the economy led to mixed performance in
U.S. bond markets in 1996. For the year, the Lehman Brothers Aggregate Bond
Index - a broad measure of the performance of the U.S. taxable bond market
- - posted a total return of 3.63%. Stronger-than-expected economic signals
rattled the bond market in the early spring. Investors spent most of the
summer anticipating a short-term interest rate increase by the Federal
Reserve Board. However, the Fed neither raised nor lowered rates through
the end of 1996. Interest rates responded to the Fed's inaction by falling
during much of October and November. In December, though, bond prices
dropped due to inflation concerns, stronger-than-expected economic data and
comments by Fed Chairman Alan Greenspan that the stock markets may be
overvalued.
FOREIGN BOND MARKETS
While low inflation and moderate growth helped provide a positive backdrop
for most bond markets in 1996, performance in overseas bond markets was
mixed. The Salomon Brothers World Government Bond Index - a measure of
government bond market performance in developed nations - returned 3.62%
for the 12 months that ended December 31, 1996. In Europe, focus centered
on the continuing progress toward the European Monetary Union (EMU).
Attractive opportunities arose as countries worked to meet the requirements
for joining the EMU. However, Germany and Japan - two of the larger
components of the Salomon Brothers World Government Bond Index -
experienced currency problems that hurt returns. In stark contrast to the
developed world, the often-volatile emerging debt markets enjoyed a
particularly strong year, helped by inflows of foreign capital, low
interest rates and the implementation of country-specific reforms -
especially in Latin America. The J.P. Morgan Emerging Markets Bond Index -
of which Latin America is a large component - posted a return of 34.16%
during the period.
VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can
look at the total percentage change in value, the average annual percentage
change, or the growth of a hypothetical $10,000 investment. Total return
reflects the change in the value of an investment, assuming reinvestment of
the fund's dividend income and capital gains (the profits earned upon the
sale of securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 LIFE OF
DECEMBER 31, 1996 YEAR YEARS FUND
OVERSEAS 13.15% 9.15% 7.88%
Morgan Stanley EAFE Index 6.05% 8.15% 7.38%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what
would have happened if the fund had performed at a constant rate each year.
You can compare the fund's figures to the performance of the Morgan Stanley
Capital International Europe, Australasia, Far East (EAFE) Index - a market
capitalization weighted, unmanaged index of over 1,000 foreign stocks.
UNDERSTANDING PERFORMANCE
Many markets around the globe offer the potential
for significant growth over time; however,
investing in foreign markets means assuming
greater risks than investing in the United States.
Factors like changes in a country's financial
markets, its local political and economic
climate, and the fluctuating value of its currency
create these risks. For these reasons an
international fund's performance may be more
volatile than a fund that invests exclusively in the
United States.
(checkmark)
Figures for more than one year assume a steady compounded rate of return
and are not the fund's year-by-year results, which fluctuated over the
periods shown. The life of fund figures are from commencement of operations
January 28, 1987.
If Fidelity had not reimbursed certain fund expenses, the fund's life of
fund total return would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL
CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money. Foreign investments involve greater risks and
potential rewards than U.S. investments. These risks include political and
economic uncertainties of foreign countries, as well as the risk of
currency fluctuations.
$10,000 OVER LIFE OF FUND
IMAHDR PRASUN SHR__CHT 19961231 19970114 110207 S00000000000001
VIP: Overseas MS EAFE Index
00154 MS001
1987/01/28 10000.00 10000.00
1987/01/31 10000.00 9997.46
1987/02/28 10010.00 10296.66
1987/03/31 10460.00 11140.41
1987/04/30 11220.00 12319.18
1987/05/31 11060.00 12319.14
1987/06/30 10520.00 11926.66
1987/07/31 10400.00 11905.82
1987/08/31 11320.00 12798.54
1987/09/30 11070.00 12597.05
1987/10/31 8760.00 10831.98
1987/11/30 8840.00 10938.65
1987/12/31 9462.16 11263.46
1988/01/31 9138.32 11464.55
1988/02/29 9381.20 12228.75
1988/03/31 9806.24 12980.64
1988/04/30 9968.16 13169.27
1988/05/31 9786.00 12747.12
1988/06/30 9613.96 12411.13
1988/07/31 9543.12 12800.51
1988/08/31 9209.16 11968.24
1988/09/30 9603.84 12491.19
1988/10/31 10028.88 13559.96
1988/11/30 10211.04 14367.68
1988/12/31 10231.28 14447.79
1989/01/31 10534.87 14701.99
1989/02/28 10717.03 14777.56
1989/03/31 10707.38 14487.53
1989/04/30 11023.50 14621.89
1989/05/31 10615.60 13826.42
1989/06/30 10574.81 13593.67
1989/07/31 11563.97 15300.67
1989/08/31 11482.39 14612.54
1989/09/30 12196.21 15278.16
1989/10/31 11533.38 14664.33
1989/11/30 12155.42 15401.50
1989/12/31 12920.24 15969.77
1990/01/31 12746.88 15375.56
1990/02/28 12449.36 14302.43
1990/03/31 12919.92 12812.46
1990/04/30 12991.52 12710.78
1990/05/31 13840.58 14161.09
1990/06/30 14147.46 14036.37
1990/07/31 14863.53 14234.08
1990/08/31 13349.56 12851.83
1990/09/30 12081.09 11060.74
1990/10/31 13206.34 12784.21
1990/11/30 12797.16 12030.10
1990/12/31 12705.10 12224.98
1991/01/31 12827.85 12620.40
1991/02/28 13260.02 13973.29
1991/03/31 12872.18 13134.44
1991/04/30 13155.20 13263.42
1991/05/31 13186.64 13401.82
1991/06/30 12463.37 12417.04
1991/07/31 13081.82 13027.11
1991/08/31 13123.75 12762.56
1991/09/30 13658.34 13481.84
1991/10/31 13752.68 13672.96
1991/11/30 13260.02 13034.64
1991/12/31 13721.24 13707.79
1992/01/31 13888.95 13415.00
1992/02/29 13599.52 12934.85
1992/03/31 13323.28 12080.93
1992/04/30 14152.01 12138.36
1992/05/31 14768.23 12950.85
1992/06/30 14491.99 12336.56
1992/07/31 13567.65 12020.83
1992/08/31 13450.78 12774.79
1992/09/30 12908.92 12522.52
1992/10/31 12027.08 11865.66
1992/11/30 11963.33 11977.32
1992/12/31 12250.20 12039.27
1993/01/31 12600.81 12037.79
1993/02/28 12847.62 12401.41
1993/03/31 13738.91 13482.39
1993/04/30 14651.94 14761.90
1993/05/31 14967.16 15073.67
1993/06/30 14597.60 14838.49
1993/07/31 15173.67 15357.91
1993/08/31 15988.88 16186.97
1993/09/30 15901.92 15822.62
1993/10/31 16478.00 16310.23
1993/11/30 15782.36 14884.55
1993/12/31 16825.82 15959.32
1994/01/31 17923.63 17308.60
1994/02/28 17607.51 17260.66
1994/03/31 17170.60 16517.22
1994/04/30 17738.58 17218.03
1994/05/31 17520.13 17119.18
1994/06/30 17334.44 17361.11
1994/07/31 17793.20 17528.07
1994/08/31 18000.73 17943.05
1994/09/30 17531.05 17377.92
1994/10/31 17891.50 17956.61
1994/11/30 17214.29 17093.61
1994/12/31 17115.99 17200.65
1995/01/31 16406.01 16539.88
1995/02/28 16449.17 16492.41
1995/03/31 16955.64 17521.06
1995/04/30 17440.09 18180.00
1995/05/31 17682.31 17963.28
1995/06/30 17847.46 17648.27
1995/07/31 18640.19 18746.98
1995/08/31 18122.72 18031.85
1995/09/30 18386.96 18384.02
1995/10/31 18023.62 17889.85
1995/11/30 18232.82 18387.61
1995/12/31 18783.33 19128.45
1996/01/31 19135.65 19206.98
1996/02/29 19177.79 19271.92
1996/03/31 19471.10 19681.17
1996/04/30 20012.59 20253.37
1996/05/31 20023.87 19880.67
1996/06/30 20170.53 19992.56
1996/07/31 19572.63 19408.23
1996/08/31 19719.29 19450.76
1996/09/30 20294.62 19967.48
1996/10/31 20091.56 19763.16
1996/11/30 21140.70 20549.50
1996/12/31 21253.51 20285.15
IMATRL PRASUN SHR__CHT 19961231 19970114 110211 R00000000000123
Let's say hypothetically that $10,000 was invested in Overseas Portfolio on
January 28, 1987, when the fund started. As the chart shows, by December
31, 1996, the value of the investment would have grown to $21,254 - a
112.54% increase on the initial investment. With reinvested dividends and
capital gains, if any, a $10,000 investment in the Morgan Stanley EAFE
Index would have grown to $20,285 over the same period - a 102.85%
increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1996
% OF FUND'S
INVESTMENTS
Veba AG Ord 2.6
Volvo AB Class B 2.2
Toyota Motor Corp. 2.0
Novartis AG (Reg.) 1.8
Total SA Class B 1.7
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1996
% OF FUND'S
INVESTMENTS
Finance 14.3
Durables 12.4
Basic Industries 10.7
Utilities 8.5
Energy 8.3
TOP FIVE COUNTRIES AS OF DECEMBER 31, 1996
(EXCLUDING CASH EQUIVALENTS) % OF FUND'S
INVESTMENTS
Japan 22.4
United Kingdom 12.7
France 9.4
Germany 6.6
Netherlands 6.0
TOP COUNTRIES ARE BASED ON THE LOCATION OF THE ISSUER OF EACH SECURITY,
INDICATING WHERE THE FUND IS EXPOSED TO POLITICAL AND CREDIT RISKS.
PERCENTAGES ARE ADJUSTED FOR THE EFFECT OF OPEN FUTURES CONTRACTS, IF
APPLICABLE.
VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with
Richard Mace,
Portfolio Manager
of Overseas Portfolio
Q. RICK, HOW DID THE FUND PERFORM?
A. Quite well. For the 12-month period that ended December 31, 1996, the
fund outperformed the Morgan Stanley Capital International EAFE Index,
which tracks the performance of stocks in Europe, Australia and the Far
East. The index had a total return of 6.05% for the period.
Q. WHAT WERE SOME OF THE MORE SIGNIFICANT CHANGES YOU MADE TO THE PORTFOLIO
OVER THE COURSE OF THE YEAR?
A. I continued to sell Japanese stocks in order to keep the fund
underweighted in Japan relative to the EAFE Index. I've placed the proceeds
from these sales in European cyclical stocks, which tend to benefit from a
strong economy. This strategy has been effective in moving the fund into
undervalued European equities that I believe have appealing risk/reward
characteristics. It also has limited the fund's exposure to the negative
effects of the weak Japanese yen and the underperforming Japanese stock
market.
Q. DOES THIS MEAN YOU HAVE A NEGATIVE VIEW ON JAPAN?
A. Not at all. In fact, I solidified the fund's position in what I consider
my value holdings in Japan. These are companies that I believe will benefit
from the weak yen, the recent Japanese economic revival, world economic
growth and solid management intent on raising the value of their
businesses. I only invest with conviction, and I believed in the fund's
remaining Japanese holdings. Some examples included Toyota and Honda, and
broad-based export companies such as Canon.
Q. BASED ON YOUR INVESTMENTS DURING THE PERIOD, YOU SAW OPPORTUNITIES IN
EUROPE . . .
A. Six months ago, I saw great potential in Europe. Stocks were generally
undervalued, there was the potential for economic recovery and some
companies were taking steps to raise shareholder value. Some stocks have
appreciated and realized their underlying value. Economic growth has come,
although not as uniformly as I would have hoped. Additionally, many more
corporate managements have been proactive in growing the value of their
businesses by restructuring their balance sheets, selling off
poor-performing subsidiaries and redeploying excess cash more efficiently.
Q. WHAT SPECIFIC TYPES OF COMPANIES DID YOU LIKE IN EUROPE?
A. As I said before, I looked for cyclical names - especially in the energy
sector. I believed many European energy stocks' prices did not reflect
rising oil prices and were discounting lower oil prices that never came to
pass. Some energy stocks in the fund were Total, Royal Dutch Petroleum,
Shell Transport & Trading and British Petroleum.
Q. MANY OF THE FUND'S CANADIAN HOLDINGS ARE RELATIVELY NEW TO THE
PORTFOLIO. WHAT WAS THE STORY THERE?
A. Many Canadian oil and gas, natural resources and bank stocks were
attractively valued during the period. Two additions included Canadian
Natural Resources and Inco.
Q. DID YOU HAVE ANY DISAPPOINTMENTS?
A. Yes. One would be the weakness of the Japanese market. I consider
another to be the legal and governmental impediments to recognizing
shareholder value in Europe. For example, it's not yet legal in many
European countries for corporations to buy back stock, even though many
corporate managements seek to do so. I also continue to be disappointed by
the problems that arise from partial government ownership of companies.
Take the case of Eramet, which is one of the fund's French holdings. It's
been reported in the media that the French government, a partial owner of
Eramet, is pressuring the company's management to sell a nickel mine it
owns in the colony of New Caledonia. The government has denied the report.
However, it's also been reported that the government will take steps to
oust the management if they choose not to comply. I think it's unfortunate
that the government may be unduly influencing management's decision-making
process.
Q. WHAT'S YOUR OUTLOOK?
A. I'm hopeful that the economic recoveries that have begun in Europe and
Japan will continue. I think the key to a company's stock price will be the
company's shareholder-friendly attitude, reflected in stock buybacks or a
proactive management. Therefore, I will try to position the fund in
companies that could benefit from economic growth and that are focused on
providing returns for shareholders.
FUND FACTS
GOAL: to increase the value of the fund's
shares over the long term by investing in stocks
with above-average growth potential
START DATE: October 9, 1986
SIZE: as of December 31, 1996, more than
$6.0 billion
MANAGER: Jennifer Uhrig, since January 1997;
joined Fidelity in 1987
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO
INVESTMENTS DECEMBER 31, 1996
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 86.9%
SHARES VALUE (NOTE 1)
ARGENTINA - 0.2%
Perez Companc Class B 406,980 $ 2,861,596
AUSTRALIA - 1.4%
Brambles Industries Ltd. 375,600 7,329,296
CSR Ltd. 1,521,102 5,319,811
Coles Myer Ltd. 680,400 2,801,427
Western Mining Holdings Ltd. 917,611 5,783,849
Woolworths Ltd. 1,143,300 2,753,519
23,987,902
BELGIUM - 0.2%
Credit Communal Holding/Dexia (b) 26,000 2,371,343
Delhaize Freres & Cie Le Lion SA 22,000 1,306,491
3,677,834
BERMUDA - 0.2%
Fuji International Trust unit
sponsored ADR (a)(b) 100 2,630,565
BRAZIL - 1.0%
Multicanal Participacoes SA
sponsored ADR (a) 90,500 1,159,531
Telebras sponsored ADR 213,300 16,317,450
17,476,981
CANADA - 2.5%
Alliance Communications Corp.
Class B (non-vtg.) (a) 28,900 255,090
Alcan Aluminium Ltd. 259,900 8,768,556
BCE, Inc. 102,800 4,896,845
Bre-X Minerals Ltd. (a) 289,700 4,585,834
Bro-X Minerals Ltd. (a) 41,630 72,883
Canada Occidental Petroleum Ltd. 66,600 1,071,255
Canadian Natural Resources Ltd. (a) 190,400 5,222,337
Greenstone Resources Ltd. (a) 138,000 1,605,646
Inco Ltd. 403,600 12,880,694
Renaissance Energy Ltd. (a) 64,100 2,181,322
41,540,462
DENMARK - 0.5%
Den Danske Bank Group AS 31,900 2,570,617
International Service Systems AS,
Series B 178,100 4,683,264
Unidanmark AS Class A 32,500 1,681,652
8,935,533
EMERGING MARKETS - 0.1%
GT Global Developing Markets Fund 51,000 592,875
Templeton Dragon Fund, Inc. 22,500 362,812
955,687
FINLAND - 1.8%
Cultor OY, Series 1 56,100 3,045,470
Huhtamaki Ord. 176,300 8,192,521
Metsa-Serla Ltd. Class B 343,400 2,572,592
Nokia Corp. AB, Series A 31,800 1,842,317
Pohjola Class B 226,500 5,090,496
UPM-Kymmene Corp. 77,200 1,617,693
Valmet OY 317,100 5,577,412
Valmet OY (b) 108,000 1,885,521
29,824,022
FRANCE - 9.4%
Alcatel Alsthom Compagnie
Generale d'Electricite SA 280,739 22,545,668
Axa SA 134,018 8,521,376
CLF-Dexia 56,000 4,877,071
SHARES VALUE (NOTE 1)
Canal Plus SA 35,300 $ 7,794,566
Compagnie de Saint Gobain 9,500 1,343,545
Credit Commercial de France Ord. 50,500 2,335,260
Eramet SA 159,097 8,338,032
Generale des Eaux, Cie 18,500 2,292,004
Groupe Danone 33,000 4,597,110
Lafarge Coppee SA 70,190 4,210,048
Michelin SA (Compagnie Generale des
Etablissements) Class B 325,824 17,584,451
Nationale Elf Aquitaine 139,400 12,685,669
Paribas SA (Cie Financiere) Class A 13,300 899,224
Pechiney SA Class A 468,480 19,623,806
Peugeot SA Ord. 18,000 2,025,434
Rhone Poulenc SA Class A 24,800 845,303
Societe Generale Class A 25,800 2,788,786
Total SA Class B 338,215 27,500,333
Usinor Sacilor 374,300 5,445,019
Valeo SA 4,900 302,119
156,554,824
GERMANY - 6.3%
Allianz Versich Holdings Ord. (Reg.) 450 817,094
BASF AG 125,100 4,747,551
Bayer AG 291,500 11,913,396
Buderus AG 2,900 1,429,776
Continental Gummi-Werke AG 207,200 3,736,724
Daimler-Benz AG Ord. (a) 151,600 10,439,403
Dresdner Bank AG Ord. 55,700 1,663,954
Hoechst AG Ord. 98,900 4,629,020
Karstadt AG 3,700 1,200,130
Mannesmann AG Ord. 10,500 4,550,114
New Germany Fund, Inc. (The) 106,000 1,417,750
Veba AG Ord. 756,800 43,822,230
Volkswagen AG 35,600 14,757,314
105,124,456
HONG KONG - 2.1%
Great Eagle Holdings Ltd. 994,000 4,099,632
HSBC Holdings PLC 700,000 15,228,570
Hong Kong & China Gas Co. Ltd. 2,220,000 4,291,034
Hutchison Whampoa Ltd. Ord. 234,000 1,837,934
Hysan Development Co. Ltd. 1,481,000 5,897,576
Oriental Press Group Ltd. (warrants) (a) 337,800 24,021
Peregrine Investments Holdings Ltd. 1,168,000 2,000,905
Wharf Holdings Ltd. (b) 380,000 1,896,438
35,276,110
INDONESIA - 0.2%
Matahari Putra Prima PT (For. Reg.) 2,724,000 3,171,465
IRELAND - 0.8%
Bank of Ireland, Inc. 998,600 9,117,508
Independent Newspapers PLC 824,216 4,094,458
13,211,966
ITALY - 1.5%
Credito Italiano Ord. 1,430,300 1,571,635
Eni Spa 2,141,500 11,007,995
Magneti Marelli Spa 1,524,400 1,897,970
Montedison Spa Ord. (a) 1,294,852 885,413
Olivetti & Co. Spa Ord. (a) 4,522,150 1,586,031
Pirelli Spa Ord. 1,593,200 2,941,860
SAI (Sta Assieuratrice Industriale) Spa 193,100 1,772,756
Telecom Italia Mobile Spa 711,400 1,801,933
Telecom Italia Spa 709,700 1,842,042
25,307,635
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
JAPAN - 22.3%
Acom Co. Ltd. 35,900 $ 1,529,504
Amway Japan Ltd. 159,900 5,130,039
Aoyama Trading Co. Ord. 221,800 5,891,712
Asahi Breweries Ltd. 241,000 2,494,179
Asahi Chemical Industry Co. Ltd. 250,000 1,414,403
Bank of Tokyo-Mitsubishi Ltd. 120,000 2,225,097
Bridgestone Corp. 160,000 3,035,791
Canon, Inc. 886,000 19,561,535
Citizen Watch Co. Ltd. Ord. 445,000 3,185,425
DDI Corp. Ord. 802 5,298,249
Daito Trust Construction Co. 704,400 7,836,792
Daiwa House Industry Co. Ltd. 280,000 3,598,103
Daiwa Securities Co. Ltd. 811,000 7,204,226
Denny's Japan Co. Ltd. 67,000 2,045,537
Fuji Bank Ltd. 256,000 3,731,263
Fuji Photo Film Co. Ltd. 775,000 25,532,557
Fujitsu Ltd. 346,000 3,222,768
Hitachi Koki Co. Ltd. Ord. 144,000 1,029,547
Hitachi Ltd. 1,041,000 9,696,248
Hitachi Maxell Ltd. 353,000 7,793,704
Honda Motor Co. Ltd. 541,000 15,443,812
Hoya Corp. 31,000 1,216,473
Ito-Yokado Co. Ltd. 277,000 12,040,362
Jusco Co. Ltd. 51,000 1,728,590
Kao Corp. 136,000 1,583,441
Kobe Steel Ltd. Ord. (a) 733,000 1,542,492
Komatsu Ltd. Ord. 1,144,000 9,373,006
Kyocera Corp. 26,000 1,618,974
Matsushita Electric Industrial Co. Ltd. 877,000 14,295,213
Minebea Co. Ltd. 707,000 5,902,337
Minolta Camera Co. Ltd. 141,000 852,445
Mitsubishi Electric Co. Ord. 672,000 3,998,965
Mitsubishi Estate Co. Ltd. 265,000 2,719,707
Mitsubishi Heavy Industries Ltd. 1,001,000 7,942,389
NEC Corp. 132,000 1,593,790
NKK Corp. (a) 684,000 1,539,664
Namco Ltd. 69,100 2,115,610
Nichiei Co. Ltd. 27,900 2,057,309
Nikko Securities Co. Ltd. 537,000 4,001,449
Nintendo Co. Ltd. Ord. 190,800 13,641,501
Nippon Telegraph &
Telephone Corp. Ord. 220 1,665,890
Nitto Denko Corp. 107,000 1,568,780
Nomura Securities Co. Ltd. 755,000 11,329,883
Omron Corp. 156,000 2,932,988
Onward Kashiyama & Co. Ltd. 307,000 4,315,740
Orix Corp. 242,000 10,059,853
Ricoh Co. Ltd. Ord. 578,000 6,629,927
Rohm Co. Ltd. 80,000 5,243,639
Sakura Bank Ltd. 913,000 6,519,741
Sankyo Co. Ltd. 216,000 6,110,220
Sekisui Chemical Co. Ltd. 232,000 2,341,009
Sho Bond Corp. Ord. 1,800 48,435
Sony Corp. 211,500 13,844,631
TDK Corp. 106,000 6,902,113
Tadano Ltd. 17,000 120,664
Takeda Chemical Industries Ltd. (a) 1,216,000 25,484,088
Toyota Motor Corp. 1,148,000 32,969,728
Uni Charm Corp. Ord. 75,000 1,836,999
Uny Co. Ltd. 221,000 4,040,707
York Benimaru Co. 22,300 621,207
371,250,450
SHARES VALUE (NOTE 1)
KOREA (SOUTH) - 0.3%
Korea Electric Power Corp. 200,070 $ 5,824,523
MEXICO - 0.4%
Cifra SA Class C (a) 1,824,100 2,220,282
Gruma SA Class B sponsored ADR (a)(b) 83,400 2,001,600
Tubos De Acero De Mexico ADR (a) 144,900 2,300,288
6,522,170
MALAYSIA - 0.1%
Arab Malaysian Corp. BHD 362,000 1,806,058
MULTI-NATIONAL - 0.0%
Morgan Stanley Asia-Pacific Fund, Inc. 35,200 343,200
NETHERLANDS - 6.0%
AKZO Nobel NV 112,000 15,293,641
DSM NV 61,900 6,102,968
ING Groep NV 426,862 15,362,389
KBB NV Ord. 34,300 2,470,838
KLM Royal Dutch Air Lines NV 76,896 2,162,325
Koninklijke KNP BT NV 32,600 711,115
New Holland NV (a) 146,000 3,047,750
Philips Electronics NV (Bearer) 292,900 11,863,102
Royal Dutch Petroleum Co. Ord. 115,500 20,242,406
Unilever NV Ord. 76,600 13,544,500
Vendex International NV 18,400 786,762
Vendex International NV (b) 188,500 8,060,030
99,647,826
NETHERLANDS ANTILLES - 0.4%
Schlumberger Ltd. 60,300 6,022,463
NORWAY - 1.4%
Den Norske Bank AS Class A
Free shares 1,903,000 7,310,050
Norsk Hydro AS 156,350 8,481,828
Orkla AS Class B (non-vtg.) 30,400 1,925,619
Saga Petroleum AS Class B 323,100 5,065,851
22,783,348
PERU - 0.1%
Compania de Minas Buenaventura SA
Class B sponsored ADR (a) 78,600 1,326,375
PORTUGAL - 0.1%
Telecel Comunicacoes Pessoais SA (a) 19,700 1,257,041
SINGAPORE - 0.1%
Kim Engineering Holdings Ltd. 2,529,000 2,313,055
SOUTH AFRICA - 0.2%
JCI Ltd. (a) 280,000 2,753,019
SPAIN - 3.6%
ACERINOX SA (Reg.) 27,050 3,906,829
Banco Bilbao Vizcaya SA Ord. (Reg.) 258,000 13,923,935
Banco de Santander SA Ord. (Reg.) 193,000 12,347,602
Banco Intercontinental Espanol 30,600 4,742,305
FOCSA (Fomento Construcciones y
Contratas SA) 30,664 2,856,528
Tabacalera SA, Series A 276,700 11,908,176
Telefonica de Espana SA Ord. 474,500 11,014,069
60,699,444
SWEDEN - 5.6%
ABB AB, Series B 15,000 1,690,597
Assi Doman AB Free shares 59,500 1,650,449
Astra AB Class A Free shares 102,400 5,038,038
Bure Investment AB (b) 62,000 733,176
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SWEDEN - CONTINUED
Electrolux AB 115,000 $ 6,648,515
Esselte AB Class B Free shares 86,700 1,911,295
Investor AB Class B Free shares 161,300 7,099,918
Nordbanken AB 113,900 3,433,803
Scania AB Class B 377,500 9,396,648
Scania AB, Series B (warrants) (a) 170,000 151,395
Skandia Foersaekrings AB 230,000 6,480,623
Skandinaviska Enskilda Banken Class A
Free shares 198,600 2,029,593
Svenska Cellulosa AB (SCA)
Class B Ord. 95,400 1,928,989
Svenska Handelsbanken 54,000 1,545,188
Swedish Match Co. 1,807,000 6,331,418
Volvo AB Class B 1,674,500 36,791,989
92,861,634
SWITZERLAND - 3.3%
Credit Suisse Group (Reg.) 88,700 9,091,502
Julius Baer Holding AG 1,600 1,673,351
Nestle SA (Reg.) 5,925 6,346,795
Novartis AG (Reg.) 26,258 30,006,347
Roche Holding AG
participation certificates 900 6,987,328
54,105,323
UNITED KINGDOM - 12.7%
Asda Group PLC 1,738,900 3,663,845
BAT Industries PLC Ord. 200,100 1,659,013
Barclays PLC Ord. 518,000 8,864,467
Barratt Developments PLC 1,384,725 5,977,525
Bass PLC Ord. 236,100 3,324,491
Blue Circle Industries PLC 409,800 2,506,095
Boots Co. PLC (The) 303,600 3,130,802
British Airways PLC Ord. 203,600 2,115,271
British Aerospace PLC 134,500 2,944,493
British Petroleum PLC Ord. 1,498,136 17,964,149
British Telecommunications PLC Ord. 725,500 4,908,987
Cable & Wireless PLC Ord. 321,400 2,686,724
Caradon PLC 2,104,700 8,652,843
Christies International PLC 86,800 344,957
Cookson Group PLC 3,517,200 14,188,789
Courtaulds PLC Ord. 42,800 289,600
Dixons Group PLC 1,022,700 9,512,736
Glaxo Holdings PLC 524,800 8,540,333
Granada Group PLC 652,900 9,651,945
Grand Metropolitan PLC 1,446,745 11,350,496
ICI (Imperial Chemical Industries)
PLC Ord. 123,300 1,625,283
Ladbroke Group PLC Ord. 463,000 1,840,036
Lloyds TSB Group PLC 2,158,267 15,934,550
Lucas Varity PLC 210,000 802,198
National Grid Co. PLC 1,046,400 3,495,342
National Westminster Bank PLC Ord. 304,020 3,572,594
Prudential Corp. PLC 362,913 3,058,616
Redland PLC Ord. 428,000 2,705,375
Rentokil Group PLC 112,800 850,196
Rolls Royce PLC Ord. 945,384 4,161,968
Rugby Group PLC 1,465,600 2,359,938
Sears PLC 2,152,400 3,465,838
Shell Transport & Trading Co. PLC:
(Reg.) 940,000 16,279,324
ADR 17,300 1,771,088
SmithKline Beecham PLC Ord. 786,347 10,883,860
SHARES VALUE (NOTE 1)
Unigate PLC 313,800 $ 2,236,164
Unilever PLC Ord. 269,600 6,534,821
Vodafone Group PLC 1,713,404 7,249,601
Vodafone Group PLC sponsored ADR 18,400 761,300
Wickes PLC 806,200 276,204
212,141,857
UNITED STATES OF AMERICA - 2.1%
Alumax, Inc. (a) 360,100 12,018,338
Aluminum Co. of America 196,000 12,495,000
Jefferson Smurfit Corp. (a) 20,700 332,494
Kaiser Aluminum Corp. (a) 414,300 4,816,238
MCI Communications Corp. 115,500 3,775,406
Newmont Mining Corp. 42,500 1,901,875
35,339,351
TOTAL COMMON STOCKS
(Cost $1,250,112,325) 1,447,534,175
PREFERRED STOCKS - 1.6%
CONVERTIBLE PREFERRED STOCKS - 0.1%
JAPAN - 0.1%
AJL participating trust exchangeable 71,700 1,174,088
NONCONVERTIBLE PREFERRED STOCKS - 1.5%
GERMANY - 0.3%
Volkswagen AG 13,900 4,499,578
ITALY - 1.2%
SAI (Sta Assicuratrice Industriale) Spa 587,000 2,098,584
Stet (Societa Finanziaria
Telefonica) Spa 4,463,700 15,061,323
Telecom Italia Mobile Spa de Risp 2,219,000 3,217,406
20,377,313
TOTAL NONCONVERTIBLE PREFERRED STOCKS 24,876,891
TOTAL PREFERRED STOCKS
(Cost $17,409,312) 26,050,979
CORPORATE BONDS - 0.3%
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
BERMUDA - 0.3%
MBL International Finance of
Bermuda 3%, 11/30/02
(Cost $4,974,627) Aa2 $ 4,392,000 4,655,520
GOVERNMENT OBLIGATIONS - 0.0%
U.S. Treasury Bills, yield at date of purchase
4.97% to 5.33%, 3/6/97 (c)
(Cost $491,752) 500,000 495,650
CASH EQUIVALENTS - 11.2%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 6.75%, dated
12/31/96 due 1/2/97 $ 186,103,763 $ 186,034,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $1,459,022,016) $ 1,664,770,324
FUTURES CONTRACTS
EXPIRATION UNDERLYING FACE UNREALIZED
DATE AMOUNT AT VALUE GAIN/(LOSS)
PURCHASED
142 Nikkei 225 Stock
Index Contracts Mar. 1997 $ 13,759,800 $ (470,340)
THE FACE VALUE OF FUTURES PURCHASED AS A PERCENTAGE OF TOTAL INVESTMENT IN
SECURITIES - 0.8%
LEGEND
1. Non-income producing
2. Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of these securities amounted to $19,578,673 or 1.2% of net
assets.
3. A portion of the security was pledged to cover margin requirements for
futures contracts. At the period end, the value of securities pledged
amounted to $421,303.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $1,375,490,679 and $1,257,669,344, respectively.
The market value of futures contracts opened and closed during the period
amounted to $21,162,620 and $6,694,480 respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company. The
commissions paid to these affiliated firms were $362,193 for the period
(see Note 4 of Notes to Financial Statements).
MARKET SECTOR DIVERSIFICATION (UNAUDITED)
As a Percentage of Total Value of Investment in Securities
Aerospace & Defense 0.4%
Basic Industries 10.7
Construction & Real Estate 3.3
Durables 12.4
Energy 8.3
Finance 14.3
Health 5.7
Holding Companies 0.1
Industrial Machinery & Equipment 4.3
Media & Leisure 2.6
Nondurables 5.3
Precious Metals 0.9
Retail & Wholesale 4.5
Services 0.7
Repurchase Agreements 11.2
Technology 6.1
Transportation 0.7
Utilities 8.5
100.0%
INCOME TAX INFORMATION
At December 31, 1996, the aggregate cost of investment securities for
income tax purposes was $1,461,448,025. Net unrealized appreciation
aggregated $203,322,299, of which $263,621,221 related to appreciated
investment securities and $60,298,922 related to depreciated investment
securities.
The fund hereby designates approximately $90,538,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
For the period, interest and dividends from foreign countries were
$36,399,701. Taxes accrued or paid to foreign countries were $4,140,215.
VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
DECEMBER 31, 1996
ASSETS
Investment in securities, at value (including repurchase agreements of $186,034,000) (cost $1,459,022,016) $ 1,664,770,324
- -
See accompanying schedule
Cash 343,982
Receivable for investments sold 4,499,183
Receivable for fund shares sold 1,381,858
Dividends receivable 2,631,493
Interest receivable 10,980
Other receivables 48,345
TOTAL ASSETS 1,673,686,165
LIABILITIES
Payable for investments purchased $ 3,244,113
Payable for fund shares redeemed 1,450,217
Accrued management fee 1,031,065
Payable for daily variation on 16,374
futures contracts
Other payables and 343,158
accrued expenses
TOTAL LIABILITIES 6,084,927
NET ASSETS $ 1,667,601,238
Net Assets consist of:
Paid in capital $ 1,325,904,904
Undistributed net investment income 22,748,929
Accumulated undistributed net realized gain (loss) on investments and foreign 113,659,177
currency transactions
Net unrealized appreciation (depreciation) on investments 205,288,228
and assets and liabilities in foreign currencies
NET ASSETS, for 88,524,438 $ 1,667,601,238
shares outstanding
NET ASSET VALUE, offering price $18.84
and redemption price per share ($1,667,601,238 (divided by) 88,524,438 shares)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996
INVESTMENT INCOME $ 4,427,657
Special dividend from Volvo AB
Class B
Dividends 31,954,205
Interest 10,284,426
46,666,288
Less foreign taxes withheld (4,140,215
)
TOTAL INCOME 42,526,073
EXPENSES
Management fee $ 11,667,177
Transfer agent fees 892,751
Accounting fees and expenses 760,136
Non-interested trustees' compensation 8,998
Custodian fees and expenses 881,998
Registration fees 7,276
Audit 50,845
Legal 22,968
Miscellaneous 6,000
Total expenses before reductions 14,298,149
Expense reductions (132,276 14,165,873
)
NET INVESTMENT INCOME 28,360,200
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:
Investment securities 114,832,092
Foreign currency transactions (198,995
)
Futures contracts (238,000 114,395,097
)
Change in net unrealized appreciation (depreciation) on:
Investment securities 47,133,390
Assets and liabilities in 9,027
foreign currencies
Futures contracts (470,340 46,672,077
)
NET GAIN (LOSS) 161,067,174
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 189,427,374
OTHER INFORMATION $ 131,377
Expense reductions
Directed brokerage arrangements
Custodian interest credits 899
$ 132,276
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
<TABLE>
<CAPTION>
<S> <C> <C>
Operations $ 28,360,200 $ 24,265,663
Net investment income
Net realized gain (loss) 114,395,097 10,642,375
Change in net unrealized appreciation (depreciation) 46,672,077 85,131,645
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 189,427,374 120,039,683
Distributions to shareholders (16,689,141) (4,893,543)
From net investment income
From net realized gain (18,358,055) (1,797,170)
In excess of net realized gain - (3,096,373)
TOTAL DISTRIBUTIONS (35,047,196) (9,787,086)
Share transactions 649,592,564 466,436,535
Net proceeds from sales of shares
Reinvestment of distributions 35,047,196 9,787,086
Cost of shares redeemed (514,552,645) (541,043,324)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 170,087,115 (64,819,703)
TOTAL INCREASE (DECREASE) IN NET ASSETS 324,467,293 45,432,894
NET ASSETS 1,343,133,945 1,297,701,051
Beginning of period
End of period (including undistributed net investment income of $22,748,929 and
$18,738,964, respectively) $ 1,667,601,238 $ 1,343,133,945
OTHER INFORMATION
Shares
Sold 37,069,614 29,090,043
Issued in reinvestment of distributions 2,053,145 652,472
Redeemed (29,349,715) (33,802,732)
Net increase (decrease) 9,773,044 (4,060,217)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1996 1995 1994 1993 C 1992
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 17.06 $ 15.67 $ 15.48 $ 11.53 $ 13.09
Income from Investment Operations
Net investment income .32 F, G .17 .19 .06 .16
Net realized and unrealized gain (loss) 1.88 1.34 .08 4.16 (1.54)
Total from investment operations 2.20 1.51 .27 4.22 (1.38)
Less Distributions
From net investment income (.20) (.06) (.08) (.18) (.18)
In excess of net investment income - - - (.04) -
From net realized gain (.22) (.02) - - -
In excess of net realized gain - (.04) - (.05) -
Total distributions (.42) (.12) (.08) (.27) (.18)
Net asset value, end of period $ 18.84 $ 17.06 $ 15.67 $ 15.48 $ 11.53
TOTAL RETURN A, B 13.15% 9.74% 1.72% 37.35% (10.72)%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 1,667,601 $ 1,343,134 $ 1,297,701 $ 777,961 $ 180,837
Ratio of expenses to average net assets .93% .91% .92% 1.03% 1.14%
Ratio of expenses to average net assets after expense reductions .92% D .91% .92% 1.03% 1.14%
Ratio of net investment income to average net assets 1.84% 1.88% 1.28% 1.21% 1.86%
Portfolio turnover rate 92% 50% 42% 42% 61%
Average commission rate E $ .0137
A THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES
NOT BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS). B TOTAL
RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE
THE TOTAL RETURNS
SHOWN. C EFFECTIVE JANUARY 1, 1993, THE FUND ADOPTED STATEMENT OF
POSITION 93-2, "DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT
PRESENTATION OF INCOME,
CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT
COMPANIES." AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY
REFLECT CERTAIN RECLASSIFICATIONS
RELATED TO BOOK TO TAX DIFFERENCES. D FMR OR THE FUND HAS ENTERED
INTO VARYING ARRANGEMENTS WITH THIRD PARTIES WHO EITHER PAID OR
REDUCED A PORTION OF THE FUND'S
EXPENSES (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). E FOR
FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS
REQUIRED TO DISCLOSE ITS AVERAGE
COMMISSION RATE PER SHARE FOR SECURITY TRADES ON WHICH COMMISSIONS
ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND TO
FUND DEPENDING ON THE
MIX OF TRADES EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES
AND COMMISSION RATE STRUCTURES MAY DIFFER. F NET INVESTMENT INCOME
PER SHARE INCLUDES A
SPECIAL DIVIDEND FROM VOLVO AB CLASS B WHICH AMOUNTED TO $.05 PER
SHARE. G NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED
ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
For the period ended December 31, 1996
4. SIGNIFICANT ACCOUNTING POLICIES.
Overseas Portfolio (the fund) is a fund of Variable Insurance Products Fund
(the trust) and is authorized to issue an unlimited number of shares. The
trust is registered under the Investment Company Act of 1940, as amended
(the 1940 Act), as an open-end management investment company organized as a
Massachusetts business trust. Shares of the fund may only be purchased by
insurance companies for the purpose of funding variable annuity or variable
life insurance contracts. The financial statements have been prepared in
conformity with generally accepted accounting principles which permit
management to make certain estimates and assumptions at the date of the
financial statements. The following summarizes the significant accounting
policies of the fund:
SECURITY VALUATION. Securities for which quotations are readily available
are valued at the last sale price, or if no sale price, at the closing bid
price in the principal market in which such securities are normally traded.
Securities (including restricted securities) for which quotations are not
readily available are valued primarily using dealer-supplied valuations or
at their fair value as determined in good faith under consistently applied
procedures under the general supervision of the Board of Trustees.
Short-term securities with remaining maturities of sixty days or less for
which quotations are not readily available are valued at amortized cost or
original cost plus accrued interest, both of which approximate current
value.
FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S.
dollars at the prevailing rates of exchange at period end. Income receipts
and expense payments are translated into U.S. dollars at the prevailing
exchange rate on the respective dates of the transactions. Purchases and
sales of securities are translated into U.S. dollars at the contractual
currency exchange rates established at the time of each trade.
Net realized gains and losses on foreign currency transactions represent
net gains and losses from sales and maturities of forward currency
contracts, disposition of foreign currencies, and the difference between
the amount of net investment income accrued and the U.S. dollar amount
actually received. The effects of changes in foreign currency exchange
rates on investments in securities are included with the net realized and
unrealized gain or loss on investment securities.
INCOME TAXES. As a qualified regulated investment company under Subchapter
M of the Internal Revenue Code, the fund is not subject to income taxes to
the extent that it distributes substantially all of its taxable income for
its fiscal year. The fund may be subject to foreign taxes on income, gains
on investments or currency repatriation. The fund accrues such taxes as
applicable. The schedule of investments includes information regarding
income taxes under the caption "Income Tax Information."
INVESTMENT INCOME. Dividend income is recorded on the ex-dividend date,
except certain dividends from foreign securities where the ex-dividend date
may have passed, are recorded as soon as the fund is informed of the
ex-dividend date. Non-cash dividends included in dividend income, if any,
are recorded at the fair market value of the securities received. Interest
income, which includes accretion of original issue discount, is accrued as
earned. Investment income is recorded net of foreign taxes withheld where
recovery of such taxes is uncertain.
EXPENSES. Most expenses of the trust can be directly attributed to a fund.
Expenses which cannot be directly attributed are apportioned between the
funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are recorded on the
ex-dividend date. Certain foreign currency gains (losses) are taxable as
ordinary income and, therefore, increase (decrease) taxable ordinary income
available for distribution.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences, which may result in distribution
reclassifications, are primarily due to differing treatments for paydown
gains/losses on certain securities, futures and options transactions,
foreign currency transactions, passive foreign investment companies (PFIC),
market discount and losses deferred due to wash sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital and may
affect the per-share allocation between net investment income and realized
and unrealized gain (loss). Undistributed net investment income and
accumulated undistributed net realized gain (loss) on investments and
foreign currency transactions may include temporary book and tax basis
differences which will reverse in a subsequent period. Any taxable income
or gain remaining at fiscal year end is distributed in the following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of trade
date. Gains and losses on securities sold are determined on the basis of
identified cost.
5. OPERATING POLICIES.
FOREIGN CURRENCY CONTRACTS. The fund generally uses foreign currency
contracts to facilitate transactions in foreign-denominated securities.
Losses may arise from changes in the value of the foreign currency or if
the counterparties do not perform under the contracts' terms. The U.S.
dollar value of foreign currency contracts is determined using contractual
currency exchange rates established at the time of each trade. The cost of
the foreign currency contracts is included in the cost basis of the
associated investment.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission (the SEC), the fund, along with other
affiliated entities of Fidelity Management & Research Company (FMR), may
transfer uninvested cash balances into one or more joint trading accounts.
These balances
2. OPERATING POLICIES - CONTINUED
JOINT TRADING ACCOUNT - CONTINUED
are invested in one or more repurchase agreements that mature in 60 days or
less from the date of purchase for U.S. Treasury or Federal Agency
obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
Securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are marked-to-market
daily and maintained at a value at least equal to the principal amount of
the repurchase agreement (including accrued interest). FMR, the fund's
investment adviser, is responsible for determining that the value of the
underlying securities remains in accordance with the market value
requirements stated above.
FUTURES CONTRACTS. The fund may use futures contracts to manage its
exposure to the stock market. Buying futures tends to increase the fund's
exposure to the underlying instrument, while selling futures tends to
decrease the fund's exposure to the underlying instrument or hedge other
fund investments. Futures contracts involve, to varying degrees, risk of
loss in excess of the futures variation margin reflected in the Statement
of Assets and Liabilities. The underlying face amount at value of any open
futures contracts at period end, is shown in the schedule of investments
under the caption "Futures Contracts." This amount reflects each contract's
exposure to the underlying instrument at period end. Losses may arise from
changes in the value of the underlying instruments, if there is an illiquid
secondary market for the contracts, or if the counterparties do not perform
under the contracts' terms. Futures contracts are valued at the settlement
price established each day by the board of trade or exchange on which they
are traded.
RESTRICTED SECURITIES. The fund is permitted to invest in securities that
are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from registration
or to the public if the securities are registered. Disposal of these
securities may involve time-consuming negotiations and expense, and prompt
sale at an acceptable price may be difficult. At the end of the period, the
fund had no investments in restricted securities (excluding 144A issues).
6. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities), is included under the caption "Other Information"
at the end of the fund's schedule of investments.
7. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a monthly
fee that is calculated on the basis of a group fee rate plus a fixed
individual fund fee rate applied to the average net assets of the fund. The
group fee rate is the weighted average of a series of rates and is based on
the monthly average
net assets of all the mutual funds advised by FMR. The rates ranged from
.2500% to .5200% for the period. In the event that these rates were lower
than the contractual rates in effect during the period, FMR voluntarily
implemented the above rates, as they resulted in the same or a lower
management fee. The annual individual fund fee rate is .45%. For the
period, the management fee was equivalent to an annual rate of .76% of
average net assets.
SUB-ADVISER FEE. FMR, on behalf of the fund, entered into sub-advisory
agreements with Fidelity Management & Research (U.K.) Inc., Fidelity
Management & Research Far East Inc., and Fidelity International Investment
Advisors (FIIA). In addition, FIIA entered into a sub-advisory agreement
with its subsidiary, Fidelity International Investment Advisors (U.K.)
Limited (FIIAL U.K.). Under the sub-advisory arrangements, FMR may receive
investment advice and research services and may grant the sub-advisers
investment management authority to buy and sell securities. FMR pays its
sub-advisers either a portion of its management fee or a fee based on costs
incurred for these services. FIIA pays FIIAL U.K. a fee based on costs
incurred for either service.
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations Company
(FIIOC), an affiliate of FMR, is the fund's transfer, dividend disbursing
and shareholder servicing agent. FIIOC receives account fees and
asset-based fees that vary according to account size and type of account.
FIIOC pays for typesetting, printing and mailing of all shareholder
reports, except proxy statements. For the period, the transfer agent fees
were equivalent to an annual rate of .06% of average net assets.
ACCOUNTING FEES. Fidelity Service Co. (FSC), an affiliate of FMR, maintains
the fund's accounting records. The fee is based on the level of average net
assets for the month plus out-of-pocket expenses.
BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms are shown under the caption
"Other Information" at the end of the fund's schedule of investments.
8. EXPENSE REDUCTIONS.
FMR voluntarily agreed to reimburse the fund's operating expenses
(excluding interest, taxes, brokerage commissions and extraordinary
expenses) above an annual rate of 1.50% of average net assets.
FMR has directed certain portfolio trades to brokers who paid a portion of
the fund's expenses. In addition, the fund has entered into an arrangement
with its custodian whereby interest earned on uninvested cash balances was
used to offset a portion of the fund's expenses.
For the period, the reduction under these arrangements are shown under the
caption "Other Information" on the fund's Statement of Operations.
9. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investments Life Insurance Company
(FILI) and its subsidiaries, affiliates of FMR, were the record owners of
approximately 15% of the outstanding shares of the fund. In addition, one
unaffiliated insurance company was record owner of 10% or more of the total
outstanding shares of the fund, totaling 35%.
10. ASSET TRANSFER INFORMATION.
In September 1996, the Board of Trustees approved a proposal to liquidate
Fidelity Advisor Annuity Overseas Fund and transfer the assets of Fidelity
Advisor Annuity Overseas Fund to the fund. The liquidation and transfer of
assets are expected to occur in the first quarter of 1997.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Variable Insurance Products Fund and the Shareholders of
Overseas Portfolio:
We have audited the accompanying statement of assets and liabilities of
Variable Insurance Products Fund: Overseas Portfolio, including the
schedule of portfolio investments, as of December 31, 1996, and the related
statement of operations for the year then ended, the statement of changes
in net assets for each of the two years in the period then ended and the
financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility
of the fund's 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. Our procedures included confirmation of
securities owned as of December 31, 1996 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 Variable Insurance Products Fund: Overseas Portfolio as of December 31,
1996, the results of its operations for the year then ended, the changes in
its net assets for each of the two years in the period then ended, and the
financial highlights for each of the five years in the period then ended,
in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 10, 1997
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
INVESTMENT SUB-ADVISERS
Fidelity Management & Research (U.K.) Inc.,
London, England
Fidelity Management & Research (Far East) Inc.,
Tokyo, Japan
Fidelity International Investment Advisors
Pembroke, Bermuda
Fidelity International Investment Advisors (U.K.) Limited
Kent, England
OFFICERS
Edward C. Johnson 3d, PRESIDENT
J. Gary Burkhead, SENIOR VICE PRESIDENT
William J. Hayes, VICE PRESIDENT
Robert A. Lawrence, VICE PRESIDENT
Richard R. Mace, VICE PRESIDENT
Arthur S. Loring, SECRETARY
Kenneth A. Rathgeber, TREASURER
Robert H. Morrison, MANAGER, SECURITY TRANSACTIONS
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
BOARD OF TRUSTEES
J. Gary Burkhead
Ralph F. Cox *
Phyllis Burke Davis *
Richard J. Flynn *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Edward H. Malone *
Marvin L. Mann *
Gerald C. McDonough *
Thomas R. Williams *
ADVISORY BOARD
William O. McCoy
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Investments Institutional Operations Co.
Boston, MA
CUSTODIAN
The Chase Manhattan Bank, N.A., New York, NY
* INDEPENDENT TRUSTEES
(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS
FUND II: INVESTMENT GRADE BOND PORTFOLIO
ANNUAL REPORT
DECEMBER 31, 1996
CONTENTS
<TABLE>
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MARKET ENVIRONMENT 3 A review of what happened in world markets
during the last year.
PERFORMANCE 4 How the fund has done over time.
FUND TALK 5 The manager's review of fund performance, strategy
and outlook.
INVESTMENTS 6 A complete list of the fund's investments with their
market values.
FINANCIAL STATEMENTS 10 Statements of assets and liabilities, operations, and
changes in net assets, as well as financial highlights.
NOTES 12 Notes to the financial statements.
REPORT OF INDEPENDENT ACCOUNTANTS 14 The auditors' opinion.
DISTRIBUTIONS 15
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THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR
THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS
PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY,
ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED
BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
MARKET ENVIRONMENT
Most stock and bond markets posted positive returns in 1996, aided by
moderate growth and low inflation. Sustained corporate earnings growth and
a favorable interest rate environment also proved beneficial. Japan,
however, was the major exception as an underperforming stock market and a
weak yen undermined returns for U.S.-based investors. The strongest gains
came from the often-volatile emerging bond markets in 1996, while
performance of the bond markets of developed countries was mixed.
U.S. STOCK MARKETS
The Standard & Poor's 500 Index - a broad measure of U.S. stock market
performance - rose 22.96% for the 12 months that ended December 31, 1996,
well above the index's long-term average annual return of about 12%. The
Russell 2000 Index - a measure of small stock performance - rose 16.49%.
The Dow Jones Industrial Average - an index of 30 blue-chip stocks - posted
a return of 28.70%, closing above 6500 for the first time in November.
The U.S. stock market spent much of the past year breaking price and
trading volume records. Solid corporate earnings reports, large cash
inflows into mutual funds, widespread optimism and a generally favorable
interest rate environment propelled share prices higher.
Large-capitalization stocks thrived as investors sought their lower
volatility and higher degree of liquidity over smaller-cap stocks in an
environment where it was sometimes difficult to discern the health of the
economy.
Most industry sectors experienced positive, if not strong performance. At
mid-year, technology stocks suffered from a sell-off sparked by fears that
company earnings were weakening. Nevertheless, this sector proved to be the
strongest in the U.S. market in 1996. Earnings surprises and positive
earnings projections were the main drivers of solid performance, especially
among semiconductor manufacturers, companies that make disk drives and
monitors, and software firms. Even though consensus estimates pointed
toward increases in short-term interest rates by the Fed, financial stocks
- - usually sensitive to changes in interest rates - shrugged off this
concern and posted solid performance based on low interest rates and
positive business prospects. Energy stocks reaped the benefits of
higher-than-expected energy prices, which resulted in part from the delayed
re-entry of Iraq into the world market. Uncertainty over the direction of
the economy benefited consumer nondurables - such as food, beverage and
tobacco companies - health care and traditional big-name growth stocks, as
these companies tend to post steady earnings growth in many economic
environments.
Utilities stocks struggled in 1996 for two reasons. First, and most
important, uncertainty over the direction and form of deregulation in the
sector tended to diminish investor interest. Second, stocks in the sector
tend to move in concert with bonds, which lagged due to periodic inflation
fears and confusing economic signals. Stocks in the telecommunications
field especially were affected by uncertainty over legislation signed into
law in February 1996. Biotechnology issues had a hard time recovering from
a correction in stock prices from overvalued levels that they experienced
earlier in 1996. Cyclical stocks - those that usually rise and fall with
the economy - posted mixed results that largely depended on the outlook for
companies in the specific sector rather than the direction of the economy.
FOREIGN STOCK MARKETS
Foreign stock markets posted mixed results in 1996. The Morgan Stanley
Capital International (MSCI) EAFE Index - which measures stock performance
in Europe, Australia and the Far East - returned 6.05% in 1996. Europe
posted the most consistently strong equity markets due to stronger economic
growth, lower interest rates, higher corporate earnings, the relative
weakness of the continent's major currencies and a new emphasis on
shareholder friendliness by many of the region's corporations. The MSCI
Europe Index was up 21.09% in 1996. The Japanese stock market
underperformed on the weakness of the economic recovery and the uncertainty
for any substantial economic reform. The Tokyo Stock Exchange TOPIX Total
Return Index was off 16.26%. Emerging market equity performance ran the
gamut from negative to positive, with the MSCI Emerging Markets Free Index
returning 6.03% for 1996. While Hong Kong was a top performer - benefiting
from the rising value of the property sector, solid economic growth and
stable interest rates - other Asian markets posted mixed returns as
concerns rose over declining export growth in the region. Latin America
enjoyed a strong first half, but faded toward the end of 1996 due to low
domestic savings rates and inefficient governments, among other factors.
U.S. BOND MARKETS
Uncertainty over the direction of the economy led to mixed performance in
U.S. bond markets in 1996. For the year, the Lehman Brothers Aggregate Bond
Index - a broad measure of the performance of the U.S. taxable bond market
- - posted a total return of 3.63%. Stronger-than-expected economic signals
rattled the bond market in the early spring. Investors spent most of the
summer anticipating a short-term interest rate increase by the Federal
Reserve Board. However, the Fed neither raised nor lowered rates through
the end of 1996. Interest rates responded to the Fed's inaction by falling
during much of October and November. In December, though, bond prices
dropped due to inflation concerns, stronger-than-expected economic data and
comments by Fed Chairman Alan Greenspan that the stock markets may be
overvalued.
FOREIGN BOND MARKETS
While low inflation and moderate growth helped provide a positive backdrop
for most bond markets in 1996, performance in overseas bond markets was
mixed. The Salomon Brothers World Government Bond Index - a measure of
government bond market performance in developed nations - returned 3.62%
for the 12 months that ended December 31, 1996. In Europe, focus centered
on the continuing progress toward the European Monetary Union (EMU).
Attractive opportunities arose as countries worked to meet the requirements
for joining the EMU. However, Germany and Japan - two of the larger
components of the Salomon Brothers World Government Bond Index -
experienced currency problems that hurt returns. In stark contrast to the
developed world, the often-volatile emerging debt markets enjoyed a
particularly strong year, helped by inflows of foreign capital, low
interest rates and the implementation of country-specific reforms -
especially in Latin America. The J.P. Morgan Emerging Markets Bond Index -
of which Latin America is a large component - posted a return of 34.16%
during the period.
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can
look at the total percentage change in value, the average annual percentage
change, or the growth of a hypothetical $10,000 investment. Total return
reflects the change in the value of an investment, assuming reinvestment of
the fund's dividend income and capital gains (the profits earned upon the
sale of securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1996 PAST 1 PAST 5 LIFE OF
YEAR YEARS FUND
INVESTMENT GRADE BOND 3.19% 6.64% 8.19%
Lehman Brothers Aggregate Bond Index 3.63% 7.04% n/a
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what
would have happened if the fund had performed at a constant rate each year.
You can compare these figures to the Lehman Brothers Aggregate Bond Index -
a market value weighted performance benchmark for investment-grade
fixed-rate debt issues, including government, corporate, asset-backed, and
mortgage-backed securities, with maturities of at least one year. This
benchmark includes reinvested dividends and capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of
how it will do tomorrow. Bond prices, for
example, generally move in the opposite
direction of interest rates. In turn, the share price,
return, and yield of a fund that invests in bonds
will vary. That means if you sell your shares
during a market downturn, you might lose
money. But if you can ride out the market's ups
and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of return
and are not the fund's year-by-year results, which fluctuated over the
periods shown. The life of fund figures are from commencement of
operations, December 5, 1988.
If Fidelity had not reimbursed certain fund expenses, the life of fund
total return figures would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL
CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
IMAHDR PRASUN SHR__CHT 19960930 19961009 151627 S00000000000001
Invest. Grade Bond LB Aggregate Bond
00227 LB001
1988/12/31 10000.00 10000.00
1989/01/31 10086.92 10143.88
1989/02/28 10109.25 10070.36
1989/03/31 10172.02 10113.90
1989/04/30 10285.31 10325.54
1989/05/31 10399.91 10596.87
1989/06/30 10600.00 10919.52
1989/07/31 10765.35 11151.64
1989/08/31 10679.56 10986.42
1989/09/30 10721.69 11042.65
1989/10/31 10887.69 11314.55
1989/11/30 10981.36 11422.39
1989/12/31 11026.21 11452.96
1990/01/31 11001.11 11316.86
1990/02/28 11063.52 11353.48
1990/03/31 11097.11 11361.84
1990/04/30 11101.82 11257.75
1990/05/31 11276.11 11591.07
1990/06/30 11364.07 11777.05
1990/07/31 11476.89 11939.97
1990/08/31 11475.79 11780.51
1990/09/30 11520.66 11877.97
1990/10/31 11521.38 12028.78
1990/11/30 11590.77 12287.71
1990/12/31 11711.43 12479.17
1991/01/31 11735.04 12633.43
1991/02/28 11853.10 12741.27
1991/03/31 12053.80 12828.93
1991/04/30 12230.89 12967.91
1991/05/31 12325.33 13043.74
1991/06/30 12348.94 13037.11
1991/07/31 12455.20 13217.90
1991/08/31 12714.93 13503.94
1991/09/30 12951.04 13777.57
1991/10/31 13092.71 13930.97
1991/11/30 13234.39 14058.71
1991/12/31 13629.42 14476.23
1992/01/31 13494.11 14279.29
1992/02/29 13567.97 14372.13
1992/03/31 13543.27 14291.11
1992/04/30 13642.04 14394.34
1992/05/31 13851.92 14665.96
1992/06/30 14012.41 14867.80
1992/07/31 14296.36 15171.13
1992/08/31 14382.78 15324.82
1992/09/30 14555.62 15506.47
1992/10/31 14370.44 15300.89
1992/11/30 14333.40 15304.35
1992/12/31 14536.36 15547.71
1993/01/31 14841.14 15845.85
1993/02/28 15093.07 16123.24
1993/03/31 15159.39 16190.42
1993/04/30 15252.23 16303.16
1993/05/31 15278.75 16323.92
1993/06/30 15570.53 16619.76
1993/07/31 15676.64 16713.76
1993/08/31 15955.15 17006.72
1993/09/30 16034.73 17053.43
1993/10/31 16114.31 17117.15
1993/11/30 16034.73 16971.54
1993/12/31 16129.93 17063.52
1994/01/31 16312.59 17293.91
1994/02/28 16045.19 16993.45
1994/03/31 15678.93 16574.49
1994/04/30 15538.06 16442.14
1994/05/31 15495.80 16439.84
1994/06/30 15453.53 16403.51
1994/07/31 15707.10 16729.33
1994/08/31 15721.19 16750.09
1994/09/30 15552.14 16503.56
1994/10/31 15566.23 16488.86
1994/11/30 15594.40 16452.24
1994/12/31 15523.97 16565.84
1995/01/31 15749.36 16893.69
1995/02/28 16053.30 17295.35
1995/03/31 16155.46 17401.46
1995/04/30 16374.37 17644.53
1995/05/31 17031.09 18327.33
1995/06/30 17162.44 18461.69
1995/07/31 17104.06 18420.46
1995/08/31 17308.38 18642.77
1995/09/30 17468.91 18824.14
1995/10/31 17702.41 19068.94
1995/11/30 17965.10 19354.69
1995/12/31 18213.20 19626.31
1996/01/31 18329.95 19756.64
1996/02/29 17995.20 19413.22
1996/03/31 17857.01 19278.28
1996/04/30 17749.53 19169.86
1996/05/31 17718.82 19130.94
1996/06/30 17933.78 19387.85
1996/07/31 17979.84 19440.90
1996/08/31 17964.49 19408.32
1996/09/30 18256.22 19746.55
1996/10/31 18655.43 20183.96
1996/11/30 18962.52 20529.68
1996/12/31 18793.62 20338.80
IMATRL PRASUN SHR__CHT 19960930 19961009 151629 R00000000000123
Let's say hypothetically that $10,000 was invested in Investment Grade Bond
Portfolio on December 31, 1988, shortly after the fund started. By December
31, 1996, the value of the investment would have grown to $18,794 - an
87.94% increase on the initial investment. With reinvested dividends and
capital gains, if any, a $10,000 investment in the Lehman Brothers
Aggregate Bond Index would have grown to $20,339 over the same period - a
103.39% increase.
INVESTMENT SUMMARY
QUALITY DIVERSIFICATION AS OF DECEMBER 31, 1996
(MOODY'S RATINGS) % OF FUND'S
INVESTMENTS
Aaa 62.7
Aa 2.8
A 12.6
Baa 9.7
Ba 1.9
B 0.0
Not rated 0.5
TABLE EXCLUDES SHORT-TERM INVESTMENTS. WHERE MOODY'S RATINGS ARE
UNAVAILABLE, WE HAVE USED S&P RATINGS. UNRATED DEBT SECURITIES THAT ARE
EQUIVALENT TO BA AND BELOW AS OF DECEMBER 31, 1996, ACCOUNT FOR 0.5% OF THE
FUND'S INVESTMENTS.
AVERAGE YEARS TO MATURITY AS OF DECEMBER 31, 1996
Years 8.3
AVERAGE YEARS TO MATURITY IS BASED ON THE AVERAGE TIME UNTIL PRINCIPAL
PAYMENTS ARE EXPECTED FROM EACH OF THE FUND'S BONDS, WEIGHTED BY DOLLAR
AMOUNT.
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1996
% OF FUND'S
INVESTMENTS
Finance 13.5
Energy 1.9
Utilities 1.9
Technology 1.8
Media & Leisure 1.3
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with Michael Gray, Portfolio Manager of Investment Grade Bond
Portfolio
Q. HOW DID THE FUND PERFORM, MICHAEL?
A. For the 12-month period that ended December 31, 1996, the fund trailed
the Lehman Brothers Aggregate Bond Index, which returned 3.63% for the
period.
Q. CAN YOU CHARACTERIZE THE ATMOSPHERE IN WHICH YOU
WERE INVESTING?
A. It was really a tale of two periods. During the first six months of
1996, a stronger-than-expected economy caught many investors off guard. We
went from anticipating an easing of interest rates by the Federal Reserve
Board to expecting an increase in rates. Investors also showed concerns
over inflation creeping into the picture. The second half of 1996 was a
different story. The economy weakened some, and inflation fears subsided.
Optimism was further buoyed when the Fed announced in the fall that an
interest rate increase was unnecessary. Other factors contributing to the
more favorable second half included an improved budget deficit situation
and the strong showing by the stock market.
Q. THERE SEEMED TO BE INTENSE SCRUTINY OF FED POLICY DURING THE PERIOD. DID
THIS AFFECT YOUR STRATEGY AT ALL?
A. While there is always concern over what the Fed will do in terms of
monetary policy, it may have been a bit more intensified in 1996. This type
of attention doesn't affect how I manage the fund. I do watch economic
indicators closely, but I'm not trying to time the daily hiccups of the
market. While my duration-neutral focus may not allow me to reap all the
rewards of a big market rally, the fund will most likely benefit from not
being on the wrong side in a downturn.
Q. YOU'VE INCREASED YOUR CORPORATE BOND EXPOSURE SLIGHTLY. HOW DID
CORPORATES PERFORM DURING THE PERIOD?
A. The prolonged stability of the economy, coupled with very low inflation,
translated into bright results for corporates. While the demand for spread
products - instruments offering advantageous yields relative to Treasuries
- - was high, there was somewhat of a dichotomy in that spreads weren't all
that attractive. Corporate valuations were rich and got richer as the
period progressed. I sought the issues that I thought would most benefit
the fund, but the valuation situation will be something worth monitoring in
the months ahead. While some feel corporates may have reached their
ceiling, I'll continue to invest in them until I see a reason not to.
Q. HOW DID MORTGAGE-BACKED ISSUES FARE DURING THE PERIOD? DID YOU FOLLOW
ANY PARTICULAR STRATEGY IN TERMS OF MORTGAGES?
A. The mortgage market kept pace with the corporate market, due largely to
the demand for the spread products I just mentioned. I had a slightly
underweighted position compared to my index in mortgages throughout most of
the period, but did try to buy more discounted mortgage-backed issues.
Discounted mortgages are less susceptible to prepayment risk than those
with current coupons. If we're at a certain rate level and rates drop or
rise slightly, this will have a big impact on a current coupon mortgage.
When a mortgage bond is already at a discount, however, a slight variation
in rates won't have as much of an effect.
Q. WERE THERE ANY OTHER INVESTMENTS THAT CAUGHT YOUR EYE?
A. I owned a fair amount of yankee bonds, which are issued by foreign
entities and denominated in U.S. dollars. The benefits of yankees are that
they often trade cheaper relative to domestic corporates, and they
frequently carry better credit quality characteristics. The fund's Canadian
yankee issues contributed positively to performance.
Q. WHAT'S YOUR OUTLOOK GOING FORWARD?
A. It's been a favorable environment overall, and I think we could see a
continuation of the trends that we saw in 1996. The economy is progressing
along with moderate growth, and inflation should remain low, both of which
could result in continued strength in the corporate sector. Regarding
valuations, however, I'm somewhat cautious. Valuations were expensive in
1996, and I'll be monitoring any developments there.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER
ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER.
THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED ON MARKET AND
OTHER CONDITIONS.
FUND FACTS
GOAL: seeks to provide a high rate of income
consistent with reasonable risk, by investing in a
broad range of investment-grade, fixed-income
securities; in addition, the fund seeks to protect
capital
START DATE: December 5, 1988
SIZE: as of December 31, 1996, more than
$228 million
MANAGER: Michael Gray, since 1995; joined
Fidelity in 1982
(checkmark)
NOTE TO SHAREHOLDERS: Kevin Grant became portfolio manager of the fund on
February 3, 1997, after the period ended.
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO
INVESTMENTS DECEMBER 31, 1996
Showing Percentage of Total Value of Investment in Securities
NONCONVERTIBLE BONDS - 27.0%
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (A) AMOUNT (NOTE 1)
AEROSPACE & DEFENSE - 0.7%
Lockheed Martin Corp.:
7.70%, 6/15/08 A3 $ 500,000 $ 523,115
7 3/4%, 5/1/26 A3 1,000,000 1,038,680
1,561,795
BASIC INDUSTRIES - 0.4%
CHEMICALS & PLASTICS - 0.4%
Praxair, Inc., 6.90%, 11/1/06 A3 1,000,000 996,900
DURABLES - 0.9%
TEXTILES & APPAREL - 0.9%
Levi Strauss & Co.
7%, 11/1/06 (c) Baa2 2,000,000 1,988,240
ENERGY - 1.9%
ENERGY SERVICES - 0.9%
Petroliam Nasional BHD yankee (c):
6 7/8%, 7/1/03 A1 1,040,000 1,041,487
7 1/8%, 10/18/06 A+ 1,000,000 1,009,150
2,050,637
OIL & GAS - 1.0%
Husky Oil Ltd. yankee
6 7/8%, 11/15/03 Baa3 500,000 496,380
Petro-Canada
8.60%, 10/15/01 A3 750,000 803,528
Petro-Canada, Inc. yankee
7 7/8%, 6/15/26 Baa1 500,000 526,095
Ras Laffan Liquid Natural
Gas Co. Ltd. 7.628%,
9/15/06 (c) A3 500,000 501,900
2,327,903
TOTAL ENERGY 4,378,540
FINANCE - 13.5%
ASSET-BACKED SECURITIES - 3.1%
Discover Card Master Trust I
6.90%, 2/16/00 A2 260,000 260,975
Ford Credit Auto Loan Master
Trust 7 3/8%, 4/15/99 Aaa 500,000 502,030
Ford Credit Grantor Trust
5.90%, 10/15/00 Aaa 627,750 627,652
Green Tree Financial Corp.
6.10%, 4/15/27 Aaa 1,019,401 1,010,004
KeyCorp Auto Grantor Trust
5.80%, 7/15/00 A3 59,888 59,852
Premier Auto Trust:
4.90%, 12/15/98 Aaa 262,209 260,939
8.05%, 4/4/00 Aaa 1,430,000 1,464,856
6%, 5/6/00 Aaa 500,000 500,000
Railcar Trust 7 3/4%, 6/1/04 Aaa 797,610 831,259
Sears Credit Account
Master Trust II 7%, 1/15/04 Aaa 1,000,000 1,018,750
Standard Credit Card Master
Trust I 7.65%, 2/15/00 A2 150,000 152,438
Union Federal Savings
Bank Grantor Trust
8.20%, 1/10/01 Baa2 62,803 63,651
6,752,406
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (A) AMOUNT (NOTE 1)
BANKS - 5.8%
ABN Amro Bank NV
6 5/8%, 10/31/01 Aa3 $ 1,000,000 $ 1,000,350
BankBoston Captial Trust I
7 3/4%, 12/15/26 (c) Baa1 1,080,000 1,037,171
Banponce Corp.:
5 3/4%, 3/1/99 A3 370,000 364,361
6.378%, 4/8/99 A3 430,000 428,198
Citicorp euro 5%, 1/30/98 (d) A2 500,000 500,000
Corporacion Andina de Fomento
yankee 7.10%, 2/1/03 Baa2 1,000,000 1,001,380
First Fidelity Bancorp
8 1/2%, 4/1/98 A2 250,000 256,885
First Maryland Bancorp
10 3/8%, 8/1/99 Baa1 500,000 544,885
Firstar Corp. 7.15%, 9/1/00 A3 640,000 645,990
Kansallis-Osake-Pankki
10%, 5/1/02 A3 260,000 295,074
KeyCorp 8.40%, 4/1/99 A2 310,000 323,395
HSBC Americas, Inc.
8 5/8%, 3/1/97 Baa1 250,000 250,915
Mellon Financial Co.
6 1/2%, 12/1/97 A2 200,000 200,758
Merita Bank Ltd. yankee
6 1/2%, 1/15/06 A3 1,000,000 952,690
Midland Bank PLC yankee
7 5/8%, 6/15/06 A1 700,000 724,822
National City Corp.
5.67%, 1/31/97 (d) A2 850,000 850,094
Signet Banking Corp. 5.63%,
5/15/97 (d) Baa2 350,000 349,146
Signet Bank 7.80%, 9/15/06 Baa1 500,000 518,755
Sovran Financial Corp.
9 3/4%, 6/15/99 A2 770,000 828,289
Union Planters Corp.
6 3/4%, 11/1/05 Baa2 400,000 387,784
Union Planters National Bank
6.81%, 8/20/01 A3 500,000 501,875
Wells Fargo Capital B 7.95%,
12/1/26 (c) A1 1,080,000 1,070,928
13,033,745
CREDIT & OTHER FINANCE - 4.1%
AT&T Capital Corp.:
6.02%, 12/1/98 Baa3 1,000,000 996,270
6.16%, 12/3/99 Baa3 500,000 496,165
BCH Cayman Islands Ltd.
yankee 7.70%, 7/15/06 A3 500,000 516,585
Chase Capital I
7.67%, 12/1/26 A1 1,300,000 1,271,101
Finova Capital Corp.
6.14%, 11/2/98 Baa1 400,000 399,516
First Securities Capital I
8.41%, 12/15/26 (c) A3 500,000 504,975
General Electric Capital Corp.
6.94%, 4/13/09 (b) Aaa 1,000,000 1,013,970
General Motors Acceptance Corp.:
5.65%, 12/15/97 A3 1,000,000 998,580
5 3/8%, 3/9/98 A3 1,400,000 1,392,244
NONCONVERTIBLE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (A) AMOUNT (NOTE 1)
FINANCE - CONTINUED
CREDIT & OTHER FINANCE - CONTINUED
Keycorp Institutional Capital A
7.826%, 12/1/26 (c) Aa $ 1,080,000 $ 1,059,480
Secured Finance, Inc. gtd.
secured 9.05%, 12/15/04 Aaa 500,000 563,545
9,212,431
INSURANCE - 0.5%
Nationwide Mutual Insurance Co.
6 1/2%, 2/15/04 (c) A1 130,000 126,152
SunAmerica, Inc.
6.20%, 10/31/99 Baa1 1,000,000 995,530
1,121,682
TOTAL FINANCE 30,120,264
HEALTH - 0.8%
MEDICAL FACILITIES MANAGEMENT - 0.8%
Columbia/HCA Healthcare Corp.:
6 1/2%, 3/15/99 A2 1,000,000 1,004,770
6 7/8%, 7/15/01 A3 750,000 758,903
1,763,673
INDUSTRIAL MACHINERY & EQUIPMENT - 0.5%
POLLUTION CONTROL - 0.5%
WMX Technologies, Inc.
6 1/4%, 4/1/99 A1 1,200,000 1,199,292
MEDIA & LEISURE - 1.3%
LODGING & GAMING - 1.2%
Circus Circus Enterprises, Inc.:
6.45%, 2/1/06 Baa2 1,000,000 946,660
7%, 11/15/36 Baa2 750,000 732,713
Mirage Resorts, Inc.
7 1/4%, 10/15/06 Baa2 1,000,000 1,006,700
2,686,073
RESTAURANTS - 0.1%
Darden Restaurants, Inc.
6 3/8%, 2/1/06 Baa1 310,000 287,479
TOTAL MEDIA & LEISURE 2,973,552
NONDURABLES - 0.7%
FOODS - 0.7%
Ralcorp Holdings, Inc.
8 3/4%, 9/15/04 Ba1 1,335,000 1,458,821
RETAIL & WHOLESALE - 0.8%
GENERAL MERCHANDISE STORES - 0.6%
Dayton Hudson Corp.
6.40%, 2/15/03 Baa1 500,000 486,935
J C Penney, Inc.
6.90%, 8/15/26 A1 250,000 252,785
Sears, Roebuck & Co.
9.23%, 8/6/98 A2 450,000 471,438
1,211,158
GROCERY STORES - 0.2%
Kroger Co. 8.15%, 7/15/06 Ba1 500,000 517,630
TOTAL RETAIL & WHOLESALE 1,728,788
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (A) AMOUNT (NOTE 1)
SERVICES - 0.6%
LEASING & RENTAL - 0.6%
Ryder System, Inc.
9 1/4%, 5/15/01 A3 $ 1,190,000 $ 1,304,169
TECHNOLOGY - 1.8%
COMPUTERS & OFFICE EQUIPMENT - 1.8%
Comdisco, Inc.:
9 3/4%, 1/15/97 Baa1 200,000 200,172
7 3/4%, 1/29/97 Baa2 700,000 700,945
6 3/8%, 11/30/01 Baa1 3,200,000 3,148,480
4,049,597
TRANSPORTATION - 1.2%
AIR TRANSPORTATION - 1.2%
AMR Corp.
9.55%, 3/6/98 Baa3 400,000 415,040
Delta Air Lines, Inc.:
equipment trust certificate
8.54%, 1/2/07 Baa1 434,123 461,330
10 1/2%, 4/30/16 Baa1 1,000,000 1,221,640
United Airlines Pass Through
Trust 7.27%, 1/30/13 Baa1 610,000 590,669
2,688,679
UTILITIES - 1.9%
CELLULAR - 0.9%
360 Degrees Communications Co.:
7 1/8%, 3/1/03 Ba2 1,120,000 1,106,459
7 1/2%, 3/1/06 Ba2 1,000,000 991,910
2,098,369
ELECTRIC UTILITY - 0.4%
British Columbia Hydro &
Power Authority yankee
12 1/2%, 1/15/14 Aa2 360,000 415,796
Israel Electric Corp. Ltd. yankee
7 1/4%, 12/15/06 (c) A3 500,000 497,110
912,906
GAS - 0.6%
Florida Gas Transmission Co.
7 3/4%, 11/1/97 (c) Baa2 220,000 223,071
Southwest Gas Corp.
9 3/4%, 6/15/02 Baa2 1,000,000 1,127,840
1,350,911
TOTAL UTILITIES 4,362,186
TOTAL NONCONVERTIBLE BONDS
(Cost $60,371,493) 60,574,496
U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS - 40.0%
U.S. TREASURY OBLIGATIONS - 29.5%
6 1/8%, 3/31/98 Aaa 6,710,000 6,742,476
9 1/4%, 8/15/98 Aaa 9,950,000 10,467,699
8 7/8%, 11/15/98 Aaa 1,332,000 1,401,517
8 7/8%, 2/15/99 Aaa 130,000 137,536
6 3/4%, 6/30/99 Aaa 500,000 508,830
7 3/4%, 12/31/99 Aaa 7,332,000 7,668,832
11 7/8%, 11/15/03 Aaa 3,000,000 3,913,590
U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (A) AMOUNT (NOTE 1)
U.S. TREASURY OBLIGATIONS - CONTINUED
7%, 7/15/06 Aaa $ 500,000 $ 519,455
12 3/4%, 11/15/10
(callable) Aaa 1,367,000 1,934,947
13 7/8%, 5/15/11 Aaa 30,000 45,291
12%, 8/15/13 (callable) Aaa 3,140,000 4,491,676
9%, 11/15/18 Aaa 11,400,000 14,305,176
8 7/8%, 2/15/19 Aaa 8,455,000 10,496,122
8 1/8%, 8/15/19 Aaa 2,200,000 2,544,784
6%, 2/15/26 Aaa 790,000 719,026
65,896,957
U.S. GOVERNMENT AGENCY OBLIGATIONS - 10.5%
Farm Credit System Financial
Assistance Corp. 9 3/8%,
7/21/03 Aaa 305,000 351,037
Federal Home Loan Bank:
6.365%, 4/9/01 Aaa 1,565,000 1,569,883
6.225%, 10/17/02 Aaa 1,000,000 990,160
7.31%, 6/16/04 Aaa 4,155,000 4,327,682
7.36%, 7/1/04 Aaa 1,000,000 1,043,120
7.66%, 7/20/04 Aaa 1,940,000 2,056,710
7.56%, 9/1/04 Aaa 310,000 325,829
6.46%, 12/15/04 Aaa 1,745,000 1,724,008
Federal Home Loan
Mortgage Corp.:
8.115%, 1/31/05 Aaa 640,000 696,602
6.783%, 8/18/05 Aaa 1,000,000 1,006,870
Federal National Mortgage
Association 6.85%, 8/22/05 Aaa 1,000,000 1,012,500
Government Trust Certificates
(assets of Trust guaranteed
by U.S. Government through
Defense Security Assistance
Agency):
Class 1-C, 9 1/4%,
11/15/01 Aaa 189,691 203,042
Class 2-E, 9.40%,
5/15/02 Aaa 988,328 1,059,892
Class T-2, 9 5/8%,
5/15/02 Ba3 76,093 81,529
Guaranteed Export Trust Certificates
(assets of Trust guaranteed by
U.S. Government through
Export-Import Bank) Series
1994-C 6.61%, 9/15/99 Aaa 68,797 69,358
Guaranteed Trade Trust Certificates
(assets of Trust guaranteed
by U.S. Government through
Export-Import Bank) Series
1994-A 7.39%, 6/26/06 Aaa 513,000 530,429
Private Export Funding Corp.
secured 6.24%, 5/15/02 Aaa 220,000 217,703
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (A) AMOUNT (NOTE 1)
State of Israel (guaranteed by
U.S. Government through
Agency for International
Development):
7 3/4%, 4/1/98 Aaa $ 60,069 $ 60,939
4 7/8%, 9/15/98 Aaa 190,000 186,637
7 1/8%, 8/15/99 Aaa 435,000 445,221
7 3/4%, 11/15/99 Aaa 144,000 149,763
6.86%, 4/30/04 Aaa 718,875 729,378
6 3/4%, 8/15/04 Aaa 1,000,000 1,012,490
5.89%, 8/15/05 Aaa 690,000 654,945
8 1/2%, 4/1/06 Aaa 1,750,000 1,911,000
U.S. Housing & Urban Development:
8.27%, 8/1/03 Aaa 415,000 453,350
8.24%, 8/1/04 participation
certificate Aaa 500,000 547,960
23,418,037
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $87,788,352) 89,314,994
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES - 16.9%
FEDERAL HOME LOAN MORTGAGE CORPORATION - 0.9%
7%, 5/1/01 Aaa 183,028 184,285
8 1/2%, 3/1/20 Aaa 1,693,352 1,774,091
1,958,376
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 11.4%
5 1/2%, 5/1/00 to 7/1/01 Aaa 2,846,983 2,724,194
6%, 3/1/01 to 4/1/11 Aaa 13,067,954 12,717,779
6 1/2%, 1/1/26 to 5/1/26 Aaa 8,383,107 8,000,874
8 1/2%, 12/1/24 to 9/1/26 Aaa 1,902,682 1,940,758
25,383,605
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 4.6%
6%, 8/15/08 to 4/15/11 Aaa 5,749,836 5,578,300
8%, 2/15/17 to 7/15/26 Aaa 2,387,651 2,441,045
10%, 7/15/13 to 11/15/24 Aaa 2,069,137 2,277,020
10,296,365
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $37,180,266) 37,638,346
COMMERCIAL MORTGAGE SECURITIES - 3.5%
CS First Boston Mortgage
Securities Corp. Series:
1994-CFB1 Class A-1,
5.93%, 1/25/28 (d) Aaa 280,531 280,356
1995-AEWI Class A1,
6.665%, 11/25/27 AAA 222,014 222,499
COMMERCIAL MORTGAGE SECURITIES - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (A) AMOUNT (NOTE 1)
Equitable Life Assurance Society
of the United States (c):
Series 1996-1:
Class B1, 7.33%, 5/15/06 Aa2 $ 500,000 $ 514,531
Class C1, 7.52%, 5/15/06 A2 500,000 516,875
sequential pay Series 174
Class A1, 7.24%, 5/15/06 Aaa 1,000,000 1,033,750
Lennar Central Partner LP
floater Series 1994-1 Class B,
6.38%, 9/15/01 (c)(d) - 338,128 338,128
Meritor Mortgage Security Corp.
Series 1987-1 Class A3,
9.40%, 6/1/99 Baa3 90,128 90,016
Nomura Asset Securities Corp.
floater Series 1994-MD-II
Class A-6, 6.66%, 7/4/03 (d) - 179,477 180,879
Oregon Commercial Mortgage,
Inc. Series 1995-1 Class A,
7.15%, 6/25/23 (c) AAA 298,181 298,740
Resolution Trust Corp. commercial Series :
1995-C1 Class A-2B,
6.55%, 2/25/27 Aaa 270,641 269,965
1995-C1 Class A-4B,
6.65%, 2/25/27 Aaa 740,000 737,919
Resolution Trust Corp. floater Series (d):
1993-C2 Class A-2,
6.62%, 3/25/25 AAA 410,984 410,984
1994-C1 Class A-3,
6.30%, 6/25/26 AAA 277,992 278,513
SC Finance Corp. floater
6.93%, 8/1/04 (c)(d) - 600,000 602,625
Structured Asset Securities
Corp. Series:
1993-C1, Class A-1,
6.60%, 10/25/24 AA+ 80,787 80,661
1996 Class A-2A,
7 3/4%, 2/25/28 AAA 1,146,122 1,161,523
Wells Fargo Capital Markets
Apartment Financing Trust
6.56%, 12/29/05 (c) Aaa 750,000 750,000
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $7,668,518) 7,767,964
FOREIGN GOVERNMENT OBLIGATIONS (E) - 2.8%
Alberta Province
9 1/4%, 4/1/00 Aa2 1,400,000 1,519,686
British Columbia Province
7%, 1/1/03 Aa2 500,000 510,540
Manitoba Province
6 3/4%, 3/1/03 A1 500,000 503,180
Ontario Province yankee
7 3/4%, 6/4/02 Aa3 1,000,000 1,056,020
Quebec Province yankee:
7 1/2%, 7/15/02 A2 500,000 515,200
7.22%, 7/22/36 (b) A2 2,000,000 2,096,480
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $6,152,283) 6,201,106
CASH EQUIVALENTS - 9.8%
MATURITY VALUE
AMOUNT (NOTE 1)
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 6.75%, dated
12/31/96 due 1/2/97 $ 21,853,192 $ 21,845,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $221,005,912) $ 223,341,906
LEGEND
1. Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
2. Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date.
3. Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of these securities amounted to $13,114,313 or 5.7% of net
assets.
4. The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
5. Some foreign government obligations have not been individually rated by
S&P or Moody's. The ratings listed are assigned to securities by FMR, the
fund's investment adviser, based principally on S&P and Moody's ratings of
the sovereign credit of the issuing government.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $193,393,952 and $153,217,879, respectively, of which U.S.
government and government agency obligations aggregated $132,314,642 and
$119,719,497, respectively.
The composition of long-term debt holdings as a percentage of total value
of investment in securities, is as follows (ratings are unaudited):
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 77.0% AAA, AA, A 70.8%
Baa 9.7% BBB 15.2%
Ba 1.9% BB 0.8%
B 0.0% B 0.0%
Caa 0.0% CCC 0.0%
Ca, C 0.0% CC, C 0.0%
D 0.0%
For some foreign government obligations, FMR has assigned the ratings of
the sovereign credit of the issuing government. The percentage not rated by
both S&P and Moody's amounted to 0.5%.
INCOME TAX INFORMATION
At December 31, 1996, the aggregate cost of investment securities for
income tax purposes was $221,009,785. Net unrealized appreciation
aggregated $2,332,121, of which $3,805,870 related to appreciated
investment securities and $1,473,749 related to depreciated investment
securities.
At December 31, 1996, the fund had a capital loss carryforward of
approximately $1,514,000 of which $230,000 and $1,284,000 will expire on
December 31, 2002 and 2004, respectively.
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
DECEMBER 31, 1996
ASSETS
Investment in securities, at value (including repurchase agreements of $21,845,000) (cost $221,005,912) - $ 223,341,906
See accompanying schedule
Cash 499
Receivable for investments sold 942,178
Receivable for fund shares sold 1,591,439
Interest receivable 2,835,556
Other receivables 1,563
TOTAL ASSETS 228,713,141
LIABILITIES
Accrued management fee $ 82,668
Other payables and accrued expenses 36,670
TOTAL LIABILITIES 119,338
NET ASSETS $ 228,593,803
Net Assets consist of:
Paid in capital $ 214,473,804
Undistributed net investment income 13,165,742
Accumulated undistributed net realized gain (loss) on investments (1,381,737
)
Net unrealized appreciation (depreciation) on investments 2,335,994
NET ASSETS, for 18,674,336 $ 228,593,803
shares outstanding
NET ASSET VALUE, offering price $12.24
and redemption price per
share ($228,593,803 (divided by) 18,674,336 shares)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996
INVESTMENT INCOME $ 14,356,561
Interest
EXPENSES
Management fee $ 903,441
Transfer agent fees 131,401
Accounting fees and expenses 82,156
Non-interested trustees' compensation 1,978
Custodian fees and expenses 24,328
Audit 36,944
Legal 1,207
Miscellaneous 1,661
Total expenses before reductions 1,183,116
Expense reductions (2,480 1,180,636
)
NET INVESTMENT INCOME 13,175,925
REALIZED AND UNREALIZED GAIN (LOSS) (1,136,463
Net realized gain (loss) on )
investment securities
Change in net unrealized appreciation (depreciation) (5,278,792
on investment securities )
NET GAIN (LOSS) (6,415,255
)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 6,760,670
OTHER INFORMATION
Expense reductions
Custodian interest credits $ 2,480
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
<TABLE>
<CAPTION>
<S> <C> <C>
Operations $ 13,175,925 $ 9,555,423
Net investment income
Net realized gain (loss) (1,136,463) 2,634,445
Change in net unrealized appreciation (depreciation) (5,278,792) 10,799,845
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 6,760,670 22,989,713
Distributions to shareholders from net investment income (9,612,980) (4,480,858)
Share transactions 108,335,706 116,054,959
Net proceeds from sales of shares
Reinvestment of distributions 9,612,980 4,480,858
Cost of shares redeemed (68,048,460) (68,879,418)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 49,900,226 51,656,399
TOTAL INCREASE (DECREASE) IN NET ASSETS 47,047,916 70,165,254
NET ASSETS
Beginning of period 181,545,887 111,380,633
End of period (including undistributed net investment income of $13,165,742 and $9,528,238,
respectively) $ 228,593,803 $ 181,545,887
OTHER INFORMATION
Shares
Sold 9,066,652 9,944,966
Issued in reinvestment of distributions 807,813 413,363
Redeemed (5,752,069) (5,910,491)
Net increase (decrease) 4,122,396 4,447,838
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1996 1995 1994 1993 C 1992
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 12.480 $ 11.020 $ 11.480 $ 10.970 $ 11.080
Income from Investment Operations .670 .320 .733 .641 .672
Net investment income
Net realized and unrealized gain (loss) (.290) 1.530 (1.163) .559 .058
Total from investment operations .380 1.850 (.430) 1.200 .730
Less Distributions
From net investment income (.620) (.390) - (.628) (.680)
In excess of net investment income - - - (.002) -
From net realized gain - - (.010) (.050) (.160)
In excess of net realized gain - - (.020) (.010) -
Total distributions (.620) (.390) (.030) (.690) (.840)
Net asset value, end of period $ 12.240 $ 12.480 $ 11.020 $ 11.480 $ 10.970
TOTAL RETURN A, B 3.19% 17.32% (3.76)% 10.96% 6.65%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 228,594 $ 181,546 $ 111,381 $ 122,376 $ 73,598
Ratio of expenses to average net assets .58% .59% .67% .68% .76%
Ratio of net investment income to average net assets 6.49% 6.53% 6.53% 6.85% 7.11%
Portfolio turnover rate 81% 182% 143% 70% 119%
</TABLE>
A TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE
TOTAL RETURNS SHOWN.
B THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS).
C EFFECTIVE JANUARY 1, 1993, THE FUND ADOPTED STATEMENT OF POSITION 93-2,
"DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF INCOME,
CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT COMPANIES."
AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT CERTAIN
RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES.
NOTES TO FINANCIAL STATEMENTS
For the period ended December 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES.
Investment Grade Bond Portfolio (the fund) is a fund of Variable Insurance
Products Fund II (the trust) and is authorized to issue an unlimited number
of shares. The trust is registered under the Investment Company Act of
1940, as amended (the 1940 Act), as an open-end management investment
company organized as a Massachusetts business trust. Shares of the fund may
only be purchased by insurance companies for the purpose of funding
variable annuity or variable life insurance contracts. The financial
statements have been prepared in conformity with generally accepted
accounting principles which permit management to make certain estimates and
assumptions at the date of the financial statements. The following
summarizes the significant accounting policies of the fund:
SECURITY VALUATION. Securities are valued based upon a computerized matrix
system and/or appraisals by a pricing service, both of which consider
market transactions and dealer-supplied valuations. Securities (including
restricted securities) for which market quotations are not readily
available are valued at their fair value as determined in good faith under
consistently applied procedures under the general supervision of the Board
of Trustees. Short-term securities with remaining maturities of sixty days
or less for which quotations are not readily available are valued at
amortized cost or original cost plus accrued interest, both of which
approximate current value.
INCOME TAXES. As a qualified regulated investment company under Subchapter
M of the Internal Revenue Code, the fund is not subject to income taxes to
the extent that it distributes substantially all of its taxable income for
its fiscal year. The schedule of investments includes information regarding
income taxes under the caption "Income Tax Information."
INVESTMENT INCOME. Dividend income is recorded on the ex-dividend date,
except certain dividends from foreign securities where the ex-dividend date
may have passed, are recorded as soon as the fund is informed of the
ex-dividend date. Non-cash dividends included in dividend income, if any,
are recorded at the fair market value of the securities received. Interest
income, which includes accretion of original issue discount, is accrued as
earned. Investment income is recorded net of foreign taxes withheld where
recovery of such taxes is uncertain.
EXPENSES. Most expenses of the trust can be directly attributed to a fund.
Expenses which cannot be directly attributed are apportioned between the
funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. 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, which may result in distribution
reclassifications, are primarily due to differing treatments
for paydown gains/losses on certain securities, market discount, capital
loss carryforwards and losses deferred due to wash sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital and may
affect the per-share allocation between net investment income and realized
and unrealized gain (loss). Undistributed net investment income and
accumulated undistributed net realized gain (loss) on investments may
include temporary book and tax basis differences which will reverse in a
subsequent period. Any taxable income or gain remaining at fiscal year end
is distributed in the following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of trade
date. Gains and losses on securities sold are determined on the basis of
identified cost.
2. OPERATING POLICIES.
FOREIGN CURRENCY CONTRACTS. The fund generally uses foreign currency
contracts to facilitate transactions in foreign-denominated securities.
Losses may arise from changes in the value of the foreign currency or if
the counterparties do not perform under the contracts' terms. The U.S.
dollar value of foreign currency contracts is determined using contractual
currency exchange rates established at the time of each trade. The cost of
the foreign currency contracts is included in the cost basis of the
associated investment.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the fund, along with other affiliated
entities of Fidelity Management & Research Company (FMR), may transfer
uninvested cash balances into one or more joint trading accounts. These
balances are invested in one or more repurchase agreements that mature in
60 days or less from the date of purchase for U.S. Treasury or Federal
Agency obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
Securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are marked-to-market
daily and maintained at a value at least equal to the principal amount of
the repurchase agreement (including accrued interest). FMR, the fund's
investment adviser, is responsible for determining that the value of the
underlying securities remains in accordance with the market value
requirements stated above.
RESTRICTED SECURITIES. The fund is permitted to invest in securities that
are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from registration
or to the public if the securities are registered. Disposal of these
securities may involve time-consuming negotiations and expense, and prompt
sale at an acceptable price may be difficult. At the end of the period, the
fund had no investments in restricted securities (excluding 144A issues).
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities), is included under the caption "Other Information"
at the end of the fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a monthly
fee that is calculated on the basis of a group fee rate plus a fixed
individual fund fee rate applied to the average net assets of the fund. The
group fee rate is the weighted average of a series of rates and is based on
the monthly average
net assets of all the mutual funds advised by FMR. The rates ranged from
.1100% to .3700% for the period. In the event that these rates were lower
than the contractual rates in effect during the period, FMR voluntarily
implemented the above rates, as they resulted in the same or a lower
management fee. The annual individual fund fee rate is .30%. For the
period, the management fee was equivalent to an annual rate of .45% of
average net assets.
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations Company
(FIIOC), an affiliate of FMR, is the fund's transfer, dividend disbursing
and shareholder servicing agent. FIIOC receives account fees and
asset-based fees that vary according to account size and type of account.
FIIOC pays for typesetting, printing and mailing of all shareholder
reports, except proxy statements. For the period, the transfer agent fees
were equivalent to an annual rate of .06% of average net assets.
ACCOUNTING FEES. Fidelity Service Co. (FSC), an affiliate of FMR, maintains
the fund's accounting records. The fee is based on the level of average net
assets for the month plus out-of-pocket expenses.
5. EXPENSE REDUCTIONS.
FMR voluntarily agreed to reimburse the fund's operating expenses
(excluding interest, taxes, brokerage commissions and extraordinary
expenses) above an annual rate of .80% of average net assets.
The fund has entered into an arrangement with its custodian whereby
interest earned on uninvested cash balances was used to offset a portion of
the fund's expenses.
For the period, the reduction under these arrangements are shown under the
caption "Other Information" on the fund's Statement of Operations.
6. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investment Life Insurance Company (FILI)
and its subsidiaries, affiliates of FMR, were the record owners of
approximately 37% of the outstanding shares of the fund. In addition, one
unaffiliated insurance company was record owner of 10% or more of the total
outstanding shares of the fund, totaling 13%.
7. ASSET TRANSFER INFORMATION.
In September 1996, the Board of Trustees approved a proposal to liquidate
Fidelity Advisor Annuity Government Investment Fund and transfer the assets
of Fidelity Advisor Annuity Government Investment Fund to the fund. The
liquidation and transfer of assets are expected to occur in the first
quarter of 1997.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Variable Insurance Products Fund II and the Shareholders
of Investment Grade Bond Portfolio:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments (except for Moody's and Standard &
Poor's ratings), and the related statements of operations and of changes in
net assets and the financial highlights present fairly, in all material
respects, the financial position of Investment Grade Bond Portfolio (a fund
of Variable Insurance Products Fund II) at December 31, 1996, the results
of its operations for the year then ended, and the changes in its net
assets and the financial highlights for the periods indicated in conformity
with generally accepted accounting principles. These financial statements
and financial highlights (hereafter referred to as "financial statements")
are the responsibility of the Investment Grade Bond Portfolio's management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these financial statements
in accordance with generally accepted auditing standards which require that
we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at December 31, 1996
by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 10, 1997
DISTRIBUTIONS
The Board of Trustees of Investment Grade Bond Portfolio voted to pay on
February 7, 1997, to shareholders of record at the opening of business on
February 7, 1997, a distribution of $.00 per share derived from capital
gains realized from sales of portfolio securities and a dividend of $.73
per share from net investment income.
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
OFFICERS
Edward C. Johnson 3d, PRESIDENT
J. Gary Burkhead, SENIOR VICE PRESIDENT
Fred L. Henning, Jr., VICE PRESIDENT
Robert A. Lawrence, VICE PRESIDENT
Michael S. Gray, VICE PRESIDENT
Arthur S. Loring, SECRETARY
Kenneth A. Rathgeber, TREASURER
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
BOARD OF TRUSTEES
J. Gary Burkhead
Ralph F. Cox *
Phyllis Burke Davis *
Richard J. Flynn *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Edward H. Malone *
Marvin L. Mann *
Gerald C. McDonough *
Thomas R. Williams *
ADVISORY BOARD
William O. McCoy
* INDEPENDENT TRUSTEES
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Investments Institutional Operations Co.
Boston, MA
CUSTODIAN
The Bank of New York, New York, NY
(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS
FUND II: INDEX 500 PORTFOLIO
ANNUAL REPORT
DECEMBER 31, 1996
CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
MARKET ENVIRONMENT 3 A review of what happened in world markets
during the last year.
PERFORMANCE 4 How the fund has done over time.
FUND TALK 5 The manager's review of fund performance, strategy
and outlook.
INVESTMENTS 6 A complete list of the fund's investments with their
market values.
FINANCIAL STATEMENTS 13 Statements of assets and liabilities, operations, and
changes in net assets, as well as financial highlights.
NOTES 15 Notes to the financial statements.
REPORT OF INDEPENDENT ACCOUNTANTS 17 The auditors' opinion.
DISTRIBUTIONS 18
</TABLE>
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR
THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS
PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY,
ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED
BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
MARKET ENVIRONMENT
Most stock and bond markets posted positive returns in 1996, aided by
moderate growth and low inflation. Sustained corporate earnings growth and
a favorable interest rate environment also proved beneficial. Japan,
however, was the major exception as an underperforming stock market and a
weak yen undermined returns for U.S.-based investors. The strongest gains
came from the often-volatile emerging bond markets in 1996, while
performance of the bond markets of developed countries was mixed.
U.S. STOCK MARKETS
The Standard & Poor's 500 Index - a broad measure of U.S. stock market
performance - rose 22.96% for the 12 months that ended December 31, 1996,
well above the index's long-term average annual return of about 12%. The
Russell 2000 Index - a measure of small stock performance - rose 16.49%.
The Dow Jones Industrial Average - an index of 30 blue-chip stocks - posted
a return of 28.70%, closing above 6500 for the first time in November.
The U.S. stock market spent much of the past year breaking price and
trading volume records. Solid corporate earnings reports, large cash
inflows into mutual funds, widespread optimism and a generally favorable
interest rate environment propelled share prices higher.
Large-capitalization stocks thrived as investors sought their lower
volatility and higher degree of liquidity over smaller-cap stocks in an
environment where it was sometimes difficult to discern the health of the
economy.
Most industry sectors experienced positive, if not strong performance. At
mid-year, technology stocks suffered from a sell-off sparked by fears that
company earnings were weakening. Nevertheless, this sector proved to be the
strongest in the U.S. market in 1996. Earnings surprises and positive
earnings projections were the main drivers of solid performance, especially
among semiconductor manufacturers, companies that make disk drives and
monitors, and software firms. Even though consensus estimates pointed
toward increases in short-term interest rates by the Fed, financial stocks
- - usually sensitive to changes in interest rates - shrugged off this
concern and posted solid performance based on low interest rates and
positive business prospects. Energy stocks reaped the benefits of
higher-than-expected energy prices, which resulted in part from the delayed
re-entry of Iraq into the world market. Uncertainty over the direction of
the economy benefited consumer nondurables - such as food, beverage and
tobacco companies - health care and traditional big-name growth stocks, as
these companies tend to post steady earnings growth in many economic
environments.
Utilities stocks struggled in 1996 for two reasons. First, and most
important, uncertainty over the direction and form of deregulation in the
sector tended to diminish investor interest. Second, stocks in the sector
tend to move in concert with bonds, which lagged due to periodic inflation
fears and confusing economic signals. Stocks in the telecommunications
field especially were affected by uncertainty over legislation signed into
law in February 1996. Biotechnology issues had a hard time recovering from
a correction in stock prices from overvalued levels that they experienced
earlier in 1996. Cyclical stocks - those that usually rise and fall with
the economy - posted mixed results that largely depended on the outlook for
companies in the specific sector rather than the direction of the economy.
FOREIGN STOCK MARKETS
Foreign stock markets posted mixed results in 1996. The Morgan Stanley
Capital International (MSCI) EAFE Index - which measures stock performance
in Europe, Australia and the Far East - returned 6.05% in 1996. Europe
posted the most consistently strong equity markets due to stronger economic
growth, lower interest rates, higher corporate earnings, the relative
weakness of the continent's major currencies and a new emphasis on
shareholder friendliness by many of the region's corporations. The MSCI
Europe Index was up 21.09% in 1996. The Japanese stock market
underperformed on the weakness of the economic recovery and the uncertainty
for any substantial economic reform. The Tokyo Stock Exchange TOPIX Total
Return Index was off 16.26%. Emerging market equity performance ran the
gamut from negative to positive, with the MSCI Emerging Markets Free Index
returning 6.03% for 1996. While Hong Kong was a top performer - benefiting
from the rising value of the property sector, solid economic growth and
stable interest rates - other Asian markets posted mixed returns as
concerns rose over declining export growth in the region. Latin America
enjoyed a strong first half, but faded toward the end of 1996 due to low
domestic savings rates and inefficient governments, among other factors.
U.S. BOND MARKETS
Uncertainty over the direction of the economy led to mixed performance in
U.S. bond markets in 1996. For the year, the Lehman Brothers Aggregate Bond
Index - a broad measure of the performance of the U.S. taxable bond market
- - posted a total return of 3.63%. Stronger-than-expected economic signals
rattled the bond market in the early spring. Investors spent most of the
summer anticipating a short-term interest rate increase by the Federal
Reserve Board. However, the Fed neither raised nor lowered rates through
the end of 1996. Interest rates responded to the Fed's inaction by falling
during much of October and November. In December, though, bond prices
dropped due to inflation concerns, stronger-than-expected economic data and
comments by Fed Chairman Alan Greenspan that the stock markets may be
overvalued.
FOREIGN BOND MARKETS
While low inflation and moderate growth helped provide a positive backdrop
for most bond markets in 1996, performance in overseas bond markets was
mixed. The Salomon Brothers World Government Bond Index - a measure of
government bond market performance in developed nations - returned 3.62%
for the 12 months that ended December 31, 1996. In Europe, focus centered
on the continuing progress toward the European Monetary Union (EMU).
Attractive opportunities arose as countries worked to meet the requirements
for joining the EMU. However, Germany and Japan - two of the larger
components of the Salomon Brothers World Government Bond Index -
experienced currency problems that hurt returns. In stark contrast to the
developed world, the often-volatile emerging debt markets enjoyed a
particularly strong year, helped by inflows of foreign capital, low
interest rates and the implementation of country-specific reforms -
especially in Latin America. The J.P. Morgan Emerging Markets Bond Index -
of which Latin America is a large component - posted a return of 34.16%
during the period.
VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can
look at the total percentage change in value, the average annual percentage
change, or the growth of a hypothetical $10,000 investment. Total return
reflects the change in the value of an investment, assuming reinvestment of
the fund's dividend income and capital gains (the profits earned upon the
sale of securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1996 PAST 1 LIFE OF
YEAR FUND
INDEX 500 22.71% 17.06%
S&P 500 (registered trademark) 22.96% 17.39%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what
would have happened if the fund had performed at a constant rate each year.
You can compare the fund's returns to the performance of the Standard &
Poor's 500 Index - a widely recognized, unmanaged index of common stocks.
This benchmark includes reinvested dividends and capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of growth in the long run and volatility
in the short run. In turn, the share price and return
of a fund that invests in stocks will vary. That
means if you sell your shares during a market
downturn, you might lose money. But if you can
ride out the market's ups and downs, you may
have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of return
and are not the fund's year-by-year results, which fluctuated over the
periods shown. The life of fund figures are from commencement of
operations, August 27, 1992.
If Fidelity had not reimbursed certain fund expenses, the past one year and
life of fund return figures would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL
CHARGES, THE TOTAL RETURNS WOULD BE LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
IMAHDR PRASUN SHR__CHT 19961231 19970109 133236 S00000000000001
VIP II: Index 500 SP Standard & Poor 500
00157 SP001
1992/08/27 10000.00 10000.00
1992/08/31 10014.00 10018.36
1992/09/30 10130.00 10136.58
1992/10/31 10152.00 10172.06
1992/11/30 10498.00 10518.92
1992/12/31 10630.67 10648.31
1993/01/31 10707.47 10737.75
1993/02/28 10856.70 10883.79
1993/03/31 11095.84 11113.43
1993/04/30 10822.25 10844.49
1993/05/31 11103.95 11135.12
1993/06/30 11132.32 11167.41
1993/07/31 11081.66 11122.74
1993/08/31 11501.17 11544.30
1993/09/30 11407.95 11455.40
1993/10/31 11641.01 11692.53
1993/11/30 11527.52 11581.45
1993/12/31 11666.06 11721.59
1994/01/31 12059.53 12120.12
1994/02/28 11732.95 11791.67
1994/03/31 11223.46 11277.55
1994/04/30 11357.65 11421.90
1994/05/31 11533.77 11609.22
1994/06/30 11252.82 11324.80
1994/07/31 11623.93 11696.25
1994/08/31 12087.29 12175.80
1994/09/30 11793.76 11877.49
1994/10/31 12055.84 12144.73
1994/11/30 11617.64 11702.42
1994/12/31 11787.47 11875.97
1995/01/31 12099.87 12183.91
1995/02/28 12563.64 12658.72
1995/03/31 12931.02 13032.28
1995/04/30 13311.22 13416.08
1995/05/31 13834.52 13952.32
1995/06/30 14148.51 14276.43
1995/07/31 14620.55 14749.84
1995/08/31 14656.86 14786.86
1995/09/30 15269.88 15410.86
1995/10/31 15218.62 15355.85
1995/11/30 15880.76 16029.97
1995/12/31 16171.25 16338.71
1996/01/31 16724.46 16894.88
1996/02/29 16880.36 17051.49
1996/03/31 17054.17 17215.70
1996/04/30 17292.62 17469.46
1996/05/31 17733.85 17919.99
1996/06/30 17809.61 17988.27
1996/07/31 17020.75 17193.55
1996/08/31 17370.61 17556.16
1996/09/30 18342.21 18544.22
1996/10/31 18848.06 19055.67
1996/11/30 20260.89 20496.09
1996/12/31 19844.17 20090.06
IMATRL PRASUN SHR__CHT 19961231 19970109 133238 R00000000000056
Let's say hypothetically that $10,000 was invested in Index 500 Portfolio
on August 27, 1992, when the fund started. As the chart shows, by December
31, 1996, the value of the investment would have grown to $19,844 - a
98.44% increase on the initial investment. With reinvested dividends and
capital gains, if any, a $10,000 investment in the S&P 500 would have grown
to $20,090 over the same period - a 100.90% increase.
INVESTMENT SUMMARY
TOP TEN STOCKS AS OF DECEMBER 31, 1996
% OF FUND'S
INVESTMENTS
General Electric Co. 2.6
Coca-Cola Co. (The) 2.1
Exxon Corp. 1.9
Intel Corp. 1.7
Microsoft Corp. 1.6
Merck & Co., Inc. 1.5
Philip Morris Companies, Inc. 1.5
Royal Dutch Petroleum Co. ADR 1.5
International Business Machines Corp. 1.3
Procter & Gamble Co. 1.2
TOP TEN MARKET SECTORS AS OF DECEMBER 31, 1996
% OF FUND'S
INVESTMENTS
Finance 13.1
Technology 12.3
Nondurables 10.3
Utilities 9.6
Health 9.3
Energy 8.2
Basic Industries 5.3
Industrial Machinery & Equipment 5.0
Retail & Wholesale 3.9
Durables 3.7
VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with Jennifer Farrelly, Portfolio Manager of Index 500
Portfolio
Q. HOW DID THE FUND PERFORM, JEN?
A. For the year ended December 31, 1996, the fund performed in line with
the 22.96% return of the Standard & Poor's 500 Index. Of course, the fund's
total return is slightly lower than the index due to management expenses.
Q. WHAT HAVE BEEN SOME OF THE MAJOR DEVELOPMENTS IN THE MARKET RECENTLY?
A. As was the case throughout 1996, the market was able to shake off brief
downturns and rebound strongly. In one such event in early December,
Federal Reserve Chairman Alan Greenspan caused markets to tumble worldwide
when he mused in a speech about the "irrational exuberance" of the stock
market. The faith that has held investors all year in a slow but steadily
growing economy with relatively low inflation helped the market rebound.
Investors took heart in the fact that a slower economy would not spawn a
rise in interest rates and, thus, crimp corporate profits.
Q. WERE INVESTORS CONCERNED ABOUT CORPORATE EARNINGS?
A. Absolutely. The strong dollar, combined with a tight labor market, the
potential for rising wages, a slower economy and pricing pressure, had
investors concerned throughout the period that earnings were going to be
lower. A strong dollar is significant because it raises the costs of
American goods sold abroad. Additionally, if companies are not able to pass
on higher employment costs in the form of price increases, then their
profits will suffer. As it turned out, third quarter earnings came in
stronger than expected.
Q. WHY HAVE LARGE-CAPITALIZATION STOCKS OUTPERFORMED SMALL-COMPANY STOCKS?
A. What we've witnessed this year is what investors call a "flight to
quality," where large-capitalization companies are sought because of their
liquidity, meaning they are easier to buy and sell. As the market climbs
higher and higher, it becomes more difficult for portfolio managers to pick
stocks that will outperform. Many managers therefore have moved to larger
companies with established track records as a way of keeping up with the
market. Some large-cap stocks are also considered "defensive" because they
are not influenced by the vagaries of the economy. In the past few months,
investors sought defensive stocks - such as food or personal care companies
- - as signs of a slowing economy emerged.
Q. LET'S LOOK AT SOME OF THE MAJOR SECTORS OF THE MARKET. WHAT HAPPENED IN
TECHNOLOGY?
A. Memory chip demand recovered after dynamic random access memory chip
prices plunged 80%. In addition, personal computer sales came in stronger
than expected - up 20% in 1996 from 1995 - which buoyed many companies with
products related to PCs. As an example, chip-maker Intel reported a 41%
year-over-year earnings gain for the third quarter. Microsoft also
continued its dominance of the software business, and IBM had better
earnings than the Street anticipated.
Q. WE HEAR FINANCIAL COMPANIES WERE ALSO A BIG PART OF THE STOCK MARKET'S
PERFORMANCE THIS YEAR . . .
A. That's right. Bank stocks turned in their second big year in a row
helped by steadily improving earnings, strong balance sheets and a greater
emphasis on fee-based businesses. Additionally, while interest rates did
not fall significantly from 1995, banks enjoyed a relatively benign
interest rate environment for much of 1996. Brokerage firms also remained
the beneficiaries of the booming stock market.
Q. WAS THERE ANY DOWNSIDE TO THE CONTINUALLY STRONG PERFORMANCE OF THE
STOCK MARKET?
A. With investors so fearful about future earnings, companies reporting
earnings below Street expectations or those that don't beat expectations by
enough are seeing their stock prices punished by the market. One prime
example was AT&T, which lost 10% of its value when it announced its
earnings would be adversely affected by a slowdown in the consumer
long-distance market. As for sectors, some basic industries such as paper
and commodity chemicals were hurt by falling prices and increased costs.
Q. WHAT DO YOU SEE GOING FORWARD?
A. The current evidence of a slowing economy has increased investors'
confidence in the stock market. Despite this development, I think that
investors should understand there is still a great amount of uncertainty
given the stock market's high valuations and the questionable strength of
future corporate earnings.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER
ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER.
THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED ON MARKET AND
OTHER CONDITIONS.
FUND FACTS
GOAL: to provide returns that correspond to
those of the S&P 500 Index
START DATE: August 27, 1992
SIZE: as of December 31,1996, more than
$823 million
MANAGER: Jennifer Farrelly, since 1994; joined
Fidelity in 1988
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO
INVESTMENTS DECEMBER 31, 1996
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 89.7%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 1.7%
AEROSPACE & DEFENSE - 1.4%
Boeing Co. 47,109 $ 5,011,220
Lockheed Martin Corp. 26,393 2,414,960
McDonnell Douglas Corp. 28,400 1,817,600
Northrop Grumman Corp. 7,500 620,625
Rockwell International Corp. 28,800 1,753,200
11,617,605
DEFENSE ELECTRONICS - 0.2%
Raytheon Co. 31,000 1,491,875
SHIP BUILDING & REPAIR - 0.1%
General Dynamics Corp. 8,200 578,100
Newport News Shipbuilding, Inc. (a) 4,480 67,200
645,300
TOTAL AEROSPACE & DEFENSE 13,754,780
BASIC INDUSTRIES - 5.3%
CHEMICALS & PLASTICS - 2.7%
Air Products & Chemicals, Inc. 14,600 1,009,225
Avery Dennison Corp. 13,600 481,100
Dow Chemical Co. 32,200 2,523,675
du Pont (E.I.) de Nemours & Co. 73,700 6,955,438
Eastman Chemical Co. 10,375 573,219
Engelhard Corp. 19,000 363,375
FMC Corp. (a) 4,800 336,600
Goodrich (B.F.) Co. 7,100 287,550
Grace (WR) & Co. 11,500 595,125
Great Lakes Chemical Corp. 8,300 388,025
Hercules, Inc. 14,000 605,500
Monsanto Co. 77,000 2,993,375
Morton International, Inc. 18,800 766,100
Nalco Chemical Co. 8,900 321,513
PPG Industries, Inc. 24,600 1,380,675
Praxair, Inc. 20,400 940,950
Raychem Corp. 5,800 464,725
Rohm & Haas Co. 8,500 693,813
Union Carbide Corp. 17,100 698,963
22,378,946
IRON & STEEL - 0.2%
Allegheny Teledyne, Inc. 22,784 524,032
Armco, Inc. (a) 14,100 58,163
Bethlehem Steel Corp. (a) 14,500 130,500
Inland Steel Industries, Inc. 6,300 126,000
Nucor Corp. 11,600 591,600
USX-U.S. Steel Group 11,000 345,125
Worthington Industries, Inc. 11,850 214,781
1,990,201
METALS & MINING - 0.7%
ASARCO, Inc. 5,700 141,788
Alcan Aluminium Ltd. 29,657 1,000,574
Aluminum Co. of America 22,800 1,453,500
Cyprus Amax Minerals Co. 12,350 288,681
Freeport-McMoRan Copper &
Gold, Inc. Class B 25,600 764,800
Inco Ltd. 22,036 703,268
Phelps Dodge Corp. 8,700 587,250
Reynolds Metals Co. 8,300 467,913
5,407,774
PACKAGING & CONTAINERS - 0.4%
Ball Corp. 4,039 105,011
Bemis Co., Inc. 7,000 258,125
Corning, Inc. 30,200 1,396,750
SHARES VALUE (NOTE 1)
Crown Cork & Seal Co., Inc. 16,900 $ 918,938
Tupperware Corp. 8,100 434,363
3,113,187
PAPER & FOREST PRODUCTS - 1.3%
Boise Cascade Corp. 6,300 200,025
Champion International Corp. 12,600 544,950
Georgia-Pacific Corp. 12,100 871,200
International Paper Co. 39,500 1,594,813
James River Corp. 11,100 367,688
Kimberly-Clark Corp. 37,116 3,535,299
Louisiana-Pacific Corp. 14,200 299,975
Mead Corp. 6,800 395,250
Potlatch Corp. 3,700 159,100
Stone Container Corp. 13,100 194,863
Temple-Inland, Inc. 7,200 389,700
Union Camp Corp. 9,100 434,525
Westvaco Corp. 13,450 386,688
Weyerhaeuser Co. 26,000 1,231,750
Willamette Industries, Inc. 7,200 501,300
11,107,126
TOTAL BASIC INDUSTRIES 43,997,234
CONGLOMERATES - 1.0%
AlliedSignal, Inc. 37,100 2,485,700
Crane Co. 6,000 174,000
Harris Corp. 5,200 356,850
ITT Industries, Inc. 15,400 377,300
Textron, Inc. 10,700 1,008,475
Tyco International Ltd. 20,000 1,057,500
United Technologies Corp. 32,200 2,125,200
Whitman Corp. 13,900 317,963
7,902,988
CONSTRUCTION & REAL ESTATE - 0.4%
BUILDING MATERIALS - 0.2%
Armstrong World Industries, Inc. 4,700 326,650
Masco Corp. 21,200 763,200
Owens-Corning 6,700 285,588
Sherwin-Williams Co. 11,200 627,200
2,002,638
CONSTRUCTION - 0.1%
Centex Corp. 3,800 142,975
Fleetwood Enterprises, Inc. 4,600 126,500
Kaufman & Broad Home Corp. 5,200 66,950
Pulte Corp. 3,200 98,400
434,825
ENGINEERING - 0.1%
EG&G, Inc. 6,300 126,788
Fluor Corp. 10,900 683,975
Foster Wheeler Corp. 5,400 200,475
1,011,238
TOTAL CONSTRUCTION & REAL ESTATE 3,448,701
DURABLES - 3.7%
AUTOS, TIRES, & ACCESSORIES - 2.4%
AutoZone, Inc. 20,250 556,875
Chrysler Corp. 95,700 3,158,100
Cooper Tire & Rubber Co. 11,100 219,225
Cummins Engine Co., Inc. 5,300 243,800
Dana Corp. 13,300 433,913
Eaton Corp. 10,300 718,425
Echlin, Inc. 8,000 253,000
Ford Motor Co. 155,400 4,953,375
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
DURABLES - CONTINUED
AUTOS, TIRES, & ACCESSORIES - CONTINUED
General Motors Corp. 99,478 $ 5,545,899
Genuine Parts Co. 16,000 712,000
Goodyear Tire & Rubber Co. 20,500 1,053,188
Johnson Controls, Inc. 5,500 455,813
NACCO Industries, Inc. Class A 1,100 58,850
Navistar International Corp. (a) 9,970 90,976
PACCAR, Inc. 5,045 343,060
Pep Boys-Manny, Moe & Jack 8,100 249,075
Snap-on Tools Corp. 8,100 288,563
TRW, Inc. 16,800 831,600
20,165,737
CONSUMER DURABLES - 0.6%
Minnesota Mining & Manufacturing Co. 55,200 4,574,700
CONSUMER ELECTRONICS - 0.2%
Black & Decker Corp. 11,600 349,450
Maytag Co. 13,400 264,650
Newell Co. 20,800 655,200
Whirlpool Corp. 9,700 452,263
1,721,563
TEXTILES & APPAREL - 0.5%
Fruit of the Loom, Inc. Class A (a) 10,100 382,538
Liz Claiborne, Inc. 9,700 374,663
NIKE, Inc. Class B 37,800 2,258,550
Reebok International Ltd. 7,300 306,600
Russell Corp. 5,000 148,750
Springs Industries, Inc. Class A 2,700 116,100
Stride Rite Corp. 6,600 66,000
VF Corp. 8,300 560,250
4,213,451
TOTAL DURABLES 30,675,451
ENERGY - 8.2%
ENERGY SERVICES - 0.8%
Baker Hughes, Inc. 19,100 658,950
Dresser Industries, Inc. 23,600 731,600
Halliburton Co. 16,500 994,125
Helmerich & Payne, Inc. 3,200 166,800
McDermott International, Inc. 7,100 118,038
Rowan Companies, Inc. (a) 11,100 251,138
Schlumberger Ltd. 32,300 3,225,963
Western Atlas, Inc. (a) 7,100 503,213
6,649,827
OIL & GAS - 7.4%
Amerada Hess Corp. 12,300 711,863
Amoco Corp. 65,300 5,256,650
Ashland, Inc. 8,400 368,550
Atlantic Richfield Co. 21,200 2,809,000
Burlington Resources, Inc. 16,400 826,150
Chevron Corp. 85,900 5,583,500
Coastal Corp. (The) 13,800 674,475
Exxon Corp. 163,200 15,993,600
Kerr-McGee Corp. 6,400 460,800
Louisiana Land & Exploration Co. 4,400 235,950
Mobil Corp. 51,700 6,320,325
Occidental Petroleum Corp. 42,400 991,100
Oryx Energy Co. (a) 13,700 339,075
Pennzoil Co. 6,200 350,300
Phillips Petroleum Co. 34,600 1,531,050
Royal Dutch Petroleum Co. ADR 70,400 12,020,800
SHARES VALUE (NOTE 1)
Santa Fe Energy Resources, Inc. (a) 12,000 $ 166,500
Sun Co., Inc. 9,800 238,875
Texaco, Inc. 34,800 3,414,750
USX-Marathon Group 37,700 900,088
Union Pacific Resources Group, Inc. 32,712 956,826
Unocal Corp. 32,722 1,329,331
61,479,558
TOTAL ENERGY 68,129,385
FINANCE - 13.1%
BANKS - 6.7%
Banc One Corp. 57,326 2,465,018
Bank of Boston Corp. 20,091 1,290,847
Bank of New York Co., Inc. 45,000 1,518,750
BankAmerica Corp. 47,400 4,728,150
Bankers Trust New York Corp. 10,600 914,250
Barnett Banks, Inc. 25,300 1,040,463
Boatmen's Bancshares, Inc. 20,700 1,335,150
Chase Manhattan Corp. 57,273 5,111,615
Citicorp 63,262 6,515,986
Comerica, Inc. 15,200 796,100
CoreStates Financial Corp. 29,200 1,514,750
Fifth Third Bancorp 14,000 879,375
First Bank System, Inc. 18,600 1,269,450
First Union Corp. 36,442 2,696,550
Fleet Financial Group, Inc. 34,574 1,724,378
KeyCorp. 30,207 1,525,454
Mellon Bank Corp. 17,200 1,221,200
Morgan (J.P.) & Co., Inc. 24,600 2,401,575
National City Corp. 29,255 1,312,818
NationsBank Corp. 38,217 3,735,712
Norwest Corp. 48,800 2,122,800
PNC Financial Corp. 44,900 1,689,363
Republic New York Corp. 7,200 587,700
SunTrust Banks, Inc. 29,400 1,447,950
U.S. Bancorp 20,400 916,725
Wachovia Corp. 22,000 1,243,000
Wells Fargo & Co. 12,300 3,317,925
55,323,054
CREDIT & OTHER FINANCE - 1.2%
American Express Co. 32,979 1,863,314
Beneficial Corp. 7,100 449,963
Dean Witter, Discover & Co. 21,658 1,434,843
First Chicago NBD Corp. 41,559 2,233,796
Green Tree Financial Corp. 18,100 699,113
Household International, Inc. 12,810 1,181,723
MBNA Corp. 29,200 1,211,800
Transamerica Corp. 8,629 681,691
9,756,243
FEDERAL SPONSORED CREDIT - 0.9%
Federal Home Loan Mortgage Corporation 23,600 2,598,950
Federal National Mortgage Association 143,500 5,345,375
7,944,325
INSURANCE - 3.7%
Aetna, Inc. 19,900 1,592,000
Alexander & Alexander Services, Inc. 6,000 104,250
Allstate Corp. 58,421 3,381,115
American General Corp. 26,800 1,095,450
American International Group, Inc. 61,675 6,676,319
Aon Corp. 14,100 875,963
CIGNA Corp. 9,900 1,352,588
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
INSURANCE - CONTINUED
Chubb Corp. (The) 23,000 $ 1,236,250
General Re Corp. 10,800 1,703,700
ITT Hartford Group, Inc. 15,500 1,046,250
Jefferson Pilot Corp. 9,300 526,613
Lincoln National Corp. 13,800 724,500
Loews Corp. 15,200 1,432,600
MGIC Investment Corp. 7,800 592,800
Marsh & McLennan Companies, Inc. 9,400 977,600
Providian Corp. 12,200 626,775
SAFECO Corp. 16,500 650,719
St. Paul Companies, Inc. (The) 11,100 650,738
Torchmark Corp. 9,500 479,750
Travelers Group, Inc. (The) 84,300 3,825,113
UNUM Corp. 9,700 700,825
USF&G Corp. 15,400 321,475
USLIFE Corp. 4,575 152,119
30,725,512
SAVINGS & LOANS - 0.2%
Ahmanson (H.F.) & Co. 14,000 455,000
Golden West Financial Corp. 7,500 473,438
Great Western Financial Corp. 17,950 520,550
1,448,988
SECURITIES INDUSTRY - 0.4%
Merrill Lynch & Co., Inc. 22,100 1,801,150
Morgan Stanley Group, Inc. 19,900 1,136,788
Salomon, Inc. 13,900 655,038
3,592,976
TOTAL FINANCE 108,791,098
HEALTH - 9.3%
DRUGS & PHARMACEUTICALS - 5.8%
ALZA Corp. Class A (a) 11,000 284,625
Allergan, Inc. 8,500 302,813
American Home Products Corp. 83,700 4,906,913
Amgen, Inc. (a) 34,700 1,886,813
Bristol-Myers Squibb Co. 66,000 7,177,500
Lilly (Eli) & Co. 71,996 5,255,708
Merck & Co., Inc. 160,000 12,680,000
Pfizer, Inc. 84,400 6,994,650
Pharmacia & Upjohn, Inc. 66,760 2,645,365
Schering-Plough Corp. 48,700 3,153,325
Sigma Aldrich Corp. 6,500 405,844
Warner-Lambert Co. 35,600 2,670,000
48,363,556
MEDICAL EQUIPMENT & SUPPLIES - 2.8%
Abbott Laboratories 102,700 5,212,025
Bard (C.R.), Inc. 7,400 207,200
Bausch & Lomb, Inc. 7,500 262,500
Baxter International, Inc. 35,900 1,471,900
Becton, Dickinson & Co. 16,300 707,013
Biomet, Inc. 15,200 229,900
Boston Scientific Corp. (a) 23,200 1,392,000
Guidant Corp. 9,700 552,900
Johnson & Johnson 175,300 8,721,175
Mallinckrodt, Inc. 9,800 432,425
Medtronic, Inc. 31,400 2,135,200
Millipore Corp. 5,600 231,700
SHARES VALUE (NOTE 1)
Pall Corp. 15,100 $ 385,050
St. Jude Medical, Inc. (a) 10,550 449,694
U.S. Surgical Corp. 8,200 322,875
22,713,557
MEDICAL FACILITIES MANAGEMENT - 0.7%
Beverly Enterprises, Inc. (a) 13,100 167,025
Columbia/HCA Healthcare Corp. 88,112 3,590,564
Humana, Inc. (a) 21,300 407,363
Manor Care, Inc. 8,200 221,400
Tenet Healthcare Corp. (a) 28,500 623,438
United HealthCare Corp. 24,100 1,084,500
6,094,290
TOTAL HEALTH 77,171,403
HOLDING COMPANIES - 0.3%
CINergy Corp. 20,813 694,634
Norfolk Southern Corp. 16,500 1,443,750
2,138,384
INDUSTRIAL MACHINERY & EQUIPMENT - 5.0%
ELECTRICAL EQUIPMENT - 3.4%
Emerson Electric Co. 29,400 2,844,450
General Electric Co. 217,200 21,475,650
General Instrument Corp. (a) 18,100 391,413
General Signal Corp. 6,600 282,150
Grainger (W.W.), Inc. 6,800 545,700
Honeywell, Inc. 16,700 1,098,025
Scientific-Atlanta, Inc. 10,000 150,000
Westinghouse Electric Corp. 81,650 1,622,794
28,410,182
INDUSTRIAL MACHINERY & EQUIPMENT - 1.2%
Briggs & Stratton Corp. 3,900 171,600
Case Corp. 5,900 321,550
Caterpillar, Inc. 25,300 1,903,825
Cincinnati Milacron, Inc. 5,300 115,938
Cooper Industries, Inc. 14,246 600,113
Deere & Co. 33,900 1,377,188
Dover Corp. 14,900 748,725
Giddings & Lewis, Inc. 4,600 59,225
Harnischfeger Industries, Inc. 6,100 293,563
Illinois Tool Works, Inc. 16,000 1,278,000
Ingersoll-Rand Co. 14,300 636,350
Parker-Hannifin Corp. 9,850 381,688
Stanley Works (The) 11,600 313,200
TRINOVA Corp. 3,800 138,225
Tenneco, Inc. 22,400 1,010,800
Timken Co. 4,246 194,785
9,544,775
POLLUTION CONTROL - 0.4%
Browning-Ferris Industries, Inc. 28,000 735,000
Laidlaw, Inc. Class B 41,200 479,367
Safety Kleen Corp. 7,700 126,088
WMX Technologies, Inc. 64,500 2,104,313
3,444,768
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 41,399,725
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - 3.5%
BROADCASTING - 0.5%
TCI Group Class A 85,900 $ 1,122,069
TCI Satellite Entertainment, Inc.
Class A (a) 8,590 84,826
Time Warner, Inc. 74,992 2,812,180
4,019,075
ENTERTAINMENT - 1.0%
Disney (Walt) Co. 89,100 6,203,588
King World Productions, Inc. (a) 5,000 184,375
Viacom, Inc. Class B (non-vtg.) (a) 46,800 1,632,150
8,020,113
LEISURE DURABLES & TOYS - 0.2%
Brunswick Corp. 13,000 312,000
Hasbro, Inc. 11,400 443,175
Mattel, Inc. 35,876 995,559
1,750,734
LODGING & GAMING - 0.4%
HFS, Inc. (a) 16,300 973,925
Harrah's Entertainment, Inc. (a) 13,600 270,300
Hilton Hotels Corp. 32,400 846,450
ITT Corp. 15,300 663,638
Marriott International, Inc. 16,900 933,725
3,688,038
PUBLISHING - 0.8%
American Greetings Corp. Class A 9,900 280,913
Cognizant Corp. (a) 22,300 735,900
Dow Jones & Co., Inc. 12,700 430,213
Dun & Bradstreet Corp. 22,400 532,000
Gannett Co., Inc. 18,600 1,392,675
Harcourt General, Inc. 9,500 438,188
Knight-Ridder, Inc. 12,700 485,775
McGraw-Hill, Inc. 13,000 599,625
Meredith Corp. 3,600 189,900
New York Times Co. (The) Class A 12,900 490,200
Times Mirror Co. Class A 13,600 676,600
Tribune Co. 8,100 638,888
6,890,877
RESTAURANTS - 0.6%
Darden Restaurants, Inc. 20,800 182,000
McDonald's Corp. 92,000 4,163,000
Wendy's International, Inc. 17,000 348,500
4,693,500
TOTAL MEDIA & LEISURE 29,062,337
NONDURABLES - 10.3%
AGRICULTURE - 0.1%
Pioneer Hi-Bred International, Inc. 10,900 763,000
BEVERAGES - 3.4%
Anheuser-Busch Companies, Inc. 65,100 2,604,000
Brown-Forman Corp. Class B 9,000 411,750
Coca-Cola Co. (The) 327,700 17,245,213
Coors (Adolph) Co. Class B 5,100 96,900
PepsiCo, Inc. 205,900 6,022,575
Seagram Co. Ltd. 49,300 1,950,998
28,331,436
SHARES VALUE (NOTE 1)
FOODS - 2.2%
Archer-Daniels-Midland Co. 71,854 $ 1,580,788
CPC International, Inc. 19,100 1,480,250
Campbell Soup Co. 30,800 2,471,700
ConAgra, Inc. 31,900 1,587,025
General Mills, Inc. 21,000 1,330,875
Heinz (H.J.) Co. 48,550 1,735,663
Hershey Foods Corp. 20,300 888,125
Kellogg Co. 27,900 1,830,938
Quaker Oats Co. 17,900 682,438
Ralston Purina Group 14,000 1,027,250
Sara Lee Corp. 63,900 2,380,275
Sysco Corp. 23,900 779,738
Wrigley (Wm.) Jr. Company 15,200 855,000
18,630,065
HOUSEHOLD PRODUCTS - 2.9%
Alberto Culver Co. Class B 3,600 172,800
Avon Products, Inc. 17,400 993,975
Clorox Co. 6,700 672,513
Colgate-Palmolive Co. 19,400 1,789,650
Gillette Co. 72,400 5,629,100
International Flavors & Fragrances, Inc. 14,600 657,000
Procter & Gamble Co. 90,200 9,696,500
Rubbermaid, Inc. 19,600 445,900
Unilever NV ADR 21,100 3,697,775
23,755,213
TOBACCO - 1.7%
American Brands, Inc. 22,500 1,116,563
Philip Morris Companies, Inc. 107,700 12,129,713
UST, Inc. 24,800 802,900
14,049,176
TOTAL NONDURABLES 85,528,890
PRECIOUS METALS - 0.4%
Barrick Gold Corp. 46,900 1,342,835
Battle Mountain Gold Co. 29,600 203,500
Echo Bay Mines Ltd. 18,400 122,143
Homestake Mining Co. 19,200 273,600
Newmont Mining Corp. 13,024 582,824
Placer Dome, Inc. 31,400 688,310
Santa Fe Pacific Gold Corp. 17,220 264,758
3,477,970
RETAIL & WHOLESALE - 3.9%
APPAREL STORES - 0.3%
Charming Shoppes, Inc. (a) 13,700 69,356
Gap, Inc. 37,800 1,138,725
Limited, Inc. (The) 35,519 652,662
TJX Companies, Inc. 9,500 450,063
2,310,806
DRUG STORES - 0.3%
CVS Corp. 13,800 570,975
Long Drug Stores, Inc. 2,700 132,638
Rite Aid Corp. 11,100 441,225
Walgreen Co. 32,300 1,292,000
2,436,838
GENERAL MERCHANDISE STORES - 2.0%
Dayton Hudson Corp. 28,500 1,118,625
Dillard Department Stores, Inc. Class A 15,000 463,125
Federated Department Stores, Inc. (a) 27,400 935,025
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
GENERAL MERCHANDISE STORES - CONTINUED
K mart Corp. 64,000 $ 664,000
May Department Stores Co. (The) 32,900 1,538,075
Mercantile Stores Co., Inc. 4,900 241,938
Nordstrom, Inc. 10,600 375,638
Penney (J.C.) Co., Inc. 29,500 1,438,125
Price/Costco, Inc. (a) 25,839 649,205
Sears, Roebuck & Co. 51,400 2,370,825
Wal-Mart Stores, Inc. 301,600 6,899,100
Woolworth Corp. (a) 17,400 380,625
17,074,306
GROCERY STORES - 0.5%
Albertson's, Inc. 33,200 1,182,750
American Stores Co. 19,100 780,713
Fleming Companies, Inc. 4,973 85,784
Giant Food, Inc. Class A 7,900 272,550
Great Atlantic & Pacific Tea Co., Inc. 5,100 162,563
Kroger Co. (The) (a) 16,600 771,900
Supervalu, Inc. 8,800 249,700
Winn-Dixie Stores, Inc. 20,000 632,500
4,138,460
RETAIL & WHOLESALE, MISCELLANEOUS - 0.8%
Circuit City Stores, Inc. 12,800 385,600
Comcast Corp. Class A special 43,050 766,828
Home Depot, Inc. (The) 62,900 3,152,863
Lowe's Companies, Inc. 22,700 805,850
Tandy Corp. 7,900 347,600
Toys "R" Us, Inc. (a) 35,900 1,077,000
6,535,741
TOTAL RETAIL & WHOLESALE 32,496,151
SERVICES - 0.6%
ADVERTISING - 0.1%
Interpublic Group of Companies, Inc. 10,800 513,000
LEASING & RENTAL - 0.0%
Ryder Systems, Inc. 10,600 298,125
PRINTING - 0.3%
Alco Standard Corp. 17,200 887,950
Deluxe Corp. 10,900 356,975
Donnelley (R.R.) & Sons Co. 20,200 633,775
Harland (John H.) Co. 4,100 135,300
Moore Corporation Ltd. 13,200 273,465
2,287,465
SERVICES - 0.2%
Block (H&R), Inc. 13,500 391,500
Ecolab, Inc. 8,400 316,050
Jostens, Inc. 5,000 105,625
National Service Industries, Inc. 6,300 235,463
Service Corp. International 30,900 865,200
1,913,838
TOTAL SERVICES 5,012,428
TECHNOLOGY - 12.3%
COMMUNICATIONS EQUIPMENT - 1.8%
Andrew Corp. (a) 7,875 417,867
Cabletron Systems, Inc. (a) 19,800 658,350
Cisco Systems, Inc. (a) 85,200 5,420,850
DSC Communications Corp. (a) 15,400 275,275
Lucent Technologies, Inc. 83,784 3,875,010
SHARES VALUE (NOTE 1)
Northern Telecom Ltd. 33,900 $ 2,106,926
Tellabs, Inc. (a) 23,500 884,188
3Com Corp. (a) 22,100 1,621,588
15,260,054
COMPUTER SERVICES & SOFTWARE - 3.1%
Autodesk, Inc. 6,100 170,800
Automatic Data Processing, Inc. 38,000 1,629,250
CUC International, Inc. (a) 51,675 1,227,281
Ceridian Corp. (a) 8,900 360,450
Computer Associates International, Inc. 47,975 2,386,756
Computer Sciences Corp. (a) 9,800 804,825
First Data Corp. 58,800 2,146,200
Microsoft Corp. (a) 157,200 12,988,650
Novell, Inc. (a) 46,500 440,297
Oracle Corp. (a) 86,100 3,594,675
Shared Medical Systems Corp. 3,000 147,750
25,896,934
COMPUTERS & OFFICE EQUIPMENT - 3.7%
Amdahl Corp. (a) 15,800 191,575
Apple Computer, Inc. 16,300 340,263
Bay Networks, Inc. (a) 24,800 517,700
Compaq Computer Corp. (a) 35,500 2,635,875
Data General Corp. (a) 5,200 75,400
Dell Computer Corp. (a) 23,800 1,264,375
Digital Equipment Corp. (a) 20,500 745,688
EMC Corp. (a) 30,500 1,010,313
Hewlett-Packard Co. 134,500 6,758,625
Intergraph Corp. (a) 6,100 62,525
International Business Machines Corp. 69,300 10,464,300
Pitney Bowes, Inc. 19,700 1,073,650
Seagate Technology (a) 32,200 1,271,900
Silicon Graphics, Inc. (a) 22,700 578,850
Sun Microsystems, Inc. (a) 48,600 1,248,413
Tandem Computers, Inc. (a) 15,400 211,750
Unisys Corp. (a) 22,700 153,225
Xerox Corp. 42,800 2,252,350
30,856,777
ELECTRONIC INSTRUMENTS - 0.3%
Applied Materials, Inc. (a) 23,500 844,531
Perkin-Elmer Corp. 5,800 341,475
Tektronix, Inc. 4,400 225,500
Thermo Electron Corp. 20,100 829,068
2,240,574
ELECTRONICS - 2.9%
AMP, Inc. 28,796 1,105,047
Advanced Micro Devices, Inc. (a) 17,700 455,775
Intel Corp. 108,200 14,167,438
LSI Logic Corp. (a) 16,900 452,075
Micron Technology, Inc. 27,500 800,938
Motorola, Inc. 78,000 4,787,250
National Semiconductor Corp. (a) 18,100 441,188
Texas Instruments, Inc. 25,000 1,593,750
Thomas & Betts Corp. 5,300 235,188
24,038,649
PHOTOGRAPHIC EQUIPMENT - 0.5%
Eastman Kodak Co. 44,200 3,547,050
Polaroid Corp. 5,900 256,650
3,803,700
TOTAL TECHNOLOGY 102,096,688
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TRANSPORTATION - 1.1%
AIR TRANSPORTATION - 0.3%
AMR Corp. (a) 11,900 $ 1,048,688
Delta Air Lines, Inc. 10,300 730,013
Southwest Airlines Co. 19,100 422,588
USAir Group, Inc. (a) 8,300 194,013
2,395,302
RAILROADS - 0.7%
Burlington Northern Santa Fe Corp. 20,218 1,746,330
CSX Corp. 27,738 1,171,931
Conrail, Inc. 10,600 1,056,025
Union Pacific Corp. 32,100 1,930,013
5,904,299
TRUCKING & FREIGHT - 0.1%
Caliber System, Inc. 5,200 100,100
Consolidated Freightways Corp. (a) 2,850 25,294
Consolidated Freightways, Inc. 5,700 126,825
Federal Express Corp. (a) 14,900 663,050
915,269
TOTAL TRANSPORTATION 9,214,870
UTILITIES - 9.6%
CELLULAR - 0.2%
AirTouch Communications, Inc. (a) 65,700 1,658,925
ELECTRIC UTILITY - 2.5%
American Electric Power Co., Inc. 24,700 1,015,788
Baltimore Gas & Electric Co. 19,500 521,625
Carolina Power & Light Co. 19,900 726,350
Central & South West Corp. 27,700 709,813
Consolidated Edison Co. of New York, Inc. 30,800 900,900
DTE Energy Co. 19,000 615,125
Dominion Resources, Inc. 23,300 897,050
Duke Power Co. 26,600 1,230,250
Edison International 57,700 1,146,788
Entergy Corp. 29,900 829,725
FPL Group, Inc. 24,200 1,113,200
GPU, Inc. 15,900 534,638
Houston Industries, Inc. 32,800 742,100
Niagara Mohawk Power Corp. 19,000 187,625
Northern States Power Co. 9,100 417,463
Ohio Edison Co. 20,000 455,000
PECO Energy Co. 29,200 737,300
PP&L Resources, Inc. 21,300 489,900
Pacific Gas & Electric Co. 54,700 1,148,700
PacifiCorp. 38,600 791,300
Public Service Enterprise Group, Inc. 32,200 877,450
Southern Co. 88,500 2,002,313
Texas Utilities Co. 29,600 1,206,200
Unicom Corp. 28,400 770,350
Union Electric Co. 13,500 519,750
20,586,703
GAS - 0.8%
Columbia Gas System, Inc. (The) 7,300 464,463
Consolidated Natural Gas Co. 12,500 690,625
ENSERCH Corp. 9,000 207,000
Eastern Enterprises Co. 2,600 91,975
El Paso Natural Gas Co. 2,083 105,192
Enron Corp. 33,300 1,436,063
NICOR, Inc. 6,500 232,375
Noram Energy Corp. 18,157 279,441
ONEOK, Inc. 3,500 105,000
Pacific Enterprises 11,100 337,163
PanEnergy Corp. 19,900 895,500
SHARES VALUE (NOTE 1)
Peoples Energy Corp. 4,500 $ 152,438
Sonat, Inc. 11,400 587,100
Williams Companies, Inc. 20,550 770,625
6,354,960
TELEPHONE SERVICES - 6.1%
ALLTEL Corp. 25,000 784,375
AT&T Corp. 211,900 9,217,650
Ameritech Corp. 72,200 4,377,125
Bell Atlantic Corp. 57,500 3,723,125
BellSouth Corp. 130,600 5,272,975
Frontier Corp. 21,800 493,225
GTE Corp. 127,300 5,792,150
MCI Communications Corp. 90,500 2,958,219
NYNEX Corp. 57,700 2,776,813
Pacific Telesis Group 56,400 2,072,700
SBC Communications, Inc. 80,200 4,150,350
Sprint Corp. 56,700 2,260,913
U.S. West, Inc. (a) 62,700 2,022,075
U.S. West, Inc. (Media Group) (a) 82,200 1,520,700
WorldCom, Inc. (a) 111,100 2,895,544
50,317,939
TOTAL UTILITIES 78,918,527
TOTAL COMMON STOCKS
(Cost $648,485,937) 743,217,010
U.S. TREASURY OBLIGATIONS - 0.5%
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (A) AMOUNT (NOTE 1)
U.S. Treasury Bills, yields at date
of purchase 5.06% to 5.40%,
3/6/97 (b)
(Cost $4,122,570) $ 4,200,000 4,163,460
CASH EQUIVALENTS - 9.8%
MATURITY VALUE
AMOUNT (NOTE 1)
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 6.75%, dated
12/31/96 due 1/2/97 $ 81,298,476 81,268,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $733,876,507) $ 828,648,470
FUTURES CONTRACTS
EXPIRATION UNDERLYING FACE UNREALIZED
DATE AMOUNT AT VALUE GAIN/(LOSS)
PURCHASED
214 S&P 500 Index Contracts Mar. 1997 $ 79,661,500 $ (865,578)
THE FACE VALUE OF FUTURES PURCHASED AS A PERCENTAGE OF TOTAL INVESTMENT IN
SECURITIES - 9.6%
LEGEND
1. Non-income producing
2. Security pledged to cover margin requirements for futures contracts. At
the period end, the value of securities pledged amounted to $4,163,460.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $498,627,105 and $60,621,879, respectively.
The market value of futures contracts opened and closed during the period
amounted to $629,542,879 and $580,149,403, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company. The
commissions paid to these affiliated firms were $374 for the period (see
Note 4 of Notes to Financial Statements).
The fund participated in the interfund lending program as a lender. The
maximum loan and average daily balances during the period for which loans
were outstanding amounted to $15,966,000 and $10,572,000, respectively. The
weighted average interest rate was 5.42% (see Note 2 of Notes to Financial
Statements).
INCOME TAX INFORMATION
At December 31, 1996, the aggregate cost of investment securities for
income tax purposes was $733,876,507. Net unrealized appreciation
aggregated $94,771,963, of which $108,388,822 related to appreciated
investment securities and $13,616,859 related to depreciated investment
securities.
The fund hereby designates approximately $13,962,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
DECEMBER 31, 1996
ASSETS
Investment in securities, at value (including repurchase agreements of $81,268,000) (cost $733,876,507) - $ 828,648,470
See accompanying schedule
Cash 359
Receivable for investments sold 28,659,261
Receivable for fund shares sold 3,319,301
Dividends receivable 1,274,804
Other receivables 146
TOTAL ASSETS 861,902,341
LIABILITIES
Payable for investments purchased $ 33,566,854
Payable for fund shares redeemed 3,271,797
Accrued management fee 87,009
Payable for daily variation on 1,635,565
futures contracts
Other payables and 98,431
accrued expenses
TOTAL LIABILITIES 38,659,656
NET ASSETS $ 823,242,685
Net Assets consist of:
Paid in capital $ 695,721,458
Undistributed net investment income 10,839,163
Accumulated undistributed net realized gain (loss) on investments and foreign currency transactions 22,775,719
Net unrealized appreciation (depreciation) on investments 93,906,345
and assets and liabilities in
foreign currencies
NET ASSETS, for 9,244,289 $ 823,242,685
shares outstanding
NET ASSET VALUE, offering price $89.05
and redemption price per share ($823,242,685 (divided by) 9,244,289 shares)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996
INVESTMENT INCOME $ 9,687,701
Dividends
Interest 2,483,300
TOTAL INCOME 12,171,001
EXPENSES
Management fee $ 1,346,765
Transfer agent fees 371,637
Accounting fees and expenses 271,956
Non-interested trustees' compensation 2,347
Custodian fees and expenses 43,234
Registration fees 319
Audit 44,006
Legal 2,309
Miscellaneous 1,443
Total expenses before reductions 2,084,016
Expense reductions (751,964 1,332,052
)
NET INVESTMENT INCOME 10,838,949
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:
Investment securities 16,384,201
Foreign currency transactions 124
Futures contracts 6,270,052 22,654,377
Change in net unrealized appreciation (depreciation) on:
Investment securities 68,765,773
Assets and liabilities in (57
foreign currencies )
Futures contracts (740,028 68,025,688
)
NET GAIN (LOSS) 90,680,065
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 101,519,014
OTHER INFORMATION $ 313
Expense reductions
Directed brokerage arrangements
Custodian interest credits 1,380
Transfer agent interest credits 11,997
FMR reimbursement 738,274
$ 751,964
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
<TABLE>
<CAPTION>
<S> <C> <C>
Operations $ 10,838,949 $ 3,388,217
Net investment income
Net realized gain (loss) 22,654,377 8,859,319
Change in net unrealized appreciation (depreciation) 68,025,688 24,840,544
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 101,519,014 37,088,080
Distributions to shareholders (3,387,922) (1,038,071)
From net investment income
From net realized gain (8,711,800) (125,271)
In excess of net realized gain - (16,781)
TOTAL DISTRIBUTIONS (12,099,722) (1,180,123)
Share transactions 568,794,744 176,225,141
Net proceeds from sales of shares
Reinvestment of distributions 12,099,722 1,180,123
Cost of shares redeemed (92,770,768) (18,914,447)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 488,123,698 158,490,817
TOTAL INCREASE (DECREASE) IN NET ASSETS 577,542,990 194,398,774
NET ASSETS
Beginning of period 245,699,695 51,300,921
End of period (including undistributed net investment income of $10,839,163 and $3,389,130,
respectively) $ 823,242,685 $ 245,699,695
OTHER INFORMATION
Shares
Sold 6,984,700 2,593,616
Issued in reinvestment of distributions 161,200 20,470
Redeemed (1,146,896) (281,351)
Net increase (decrease) 5,999,004 2,332,735
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31, AUGUST 27, 1992
(COMMENCEMENT
OF
OPERATIONS) TO
DECEMBER 31,
SELECTED PER-SHARE DATA 1996 1995 1994 1993 D 1992
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 75.71 $ 56.22 $ 55.74 $ 52.60 $ 50.00
Income from Investment Operations
Net investment income 1.04 .85 1.14 1.31 .44
Net realized and unrealized gain (loss) 15.55 19.72 (.56) 3.80 2.71
Total from investment operations 16.59 20.57 .58 5.11 3.15
Less Distributions
From net investment income (.91) (.95) - (1.28) (.47)
From net realized gain (2.34) (.11) (.10) (.60) (.08)
In excess of net realized gain - (.02) - (.09) -
Total distributions (3.25) (1.08) (.10) (1.97) (.55)
Net asset value, end of period $ 89.05 $ 75.71 $ 56.22 $ 55.74 $ 52.60
TOTAL RETURN B, C 22.71% 37.19% 1.04% 9.74% 6.31%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 823,243 $ 245,700 $ 51,301 $ 25,153 $ 17,961
Ratio of expenses to average net assets .28% .28% .28% .28% .28% A,
E E E E E
Ratio of net investment income to average net assets 2.26% 2.70% 2.81% 2.65% 2.89% A
Portfolio turnover rate 14% 16% 2% 9% 0%
Average commission rate F $ .0315
A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT
ANNUALIZED. TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR
INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL
RETURNS SHOWN. C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN
EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS). D EFFECTIVE JANUARY 1, 1993, THE FUND ADOPTED STATEMENT
OF POSITION 93-2,
"DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF
INCOME, CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT
COMPANIES." AS A
RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT CERTAIN
RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES. E FMR AGREED TO
REIMBURSE A PORTION OF THE FUND'S
EXPENSES DURING THE PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S
EXPENSE RATIO WOULD HAVE BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS). F FOR
FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS
REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR
SECURITY TRADES ON WHICH COMMISSIONS
ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND
TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS MARKETS
WHERE TRADING PRACTICES AND
COMMISSION RATE STRUCTURES MAY DIFFER.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
For the period ended December 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES.
Index 500 Portfolio (the fund) is a fund of Variable Insurance Products
Fund II (the trust) and is authorized to issue an unlimited number of
shares. The trust is registered under the Investment Company Act of 1940,
as amended (the 1940 Act), as an open-end management investment company
organized as a Massachusetts business trust. Shares of the fund may only be
purchased by insurance companies for the purpose of funding variable
annuity or variable life insurance contracts. The financial statements have
been prepared in conformity with generally accepted accounting principles
which permit management to make certain estimates and assumptions at the
date of the financial statements. The following summarizes the significant
accounting policies of the fund:
SECURITY VALUATION. Securities for which exchange quotations are readily
available are valued at the last sale price, or if no sale price, at the
closing bid price. Securities (including restricted securities) for which
exchange quotations are not readily available (and in certain cases debt
securities which trade on an exchange) are valued primarily using
dealer-supplied valuations or at their fair value as determined in good
faith under consistently applied procedures under the general supervision
of the Board of Trustees. Short-term securities with remaining maturities
of sixty days or less for which quotations are not readily available are
valued at amortized cost or original cost plus accrued interest, both of
which approximate current value.
FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S.
dollars at the prevailing rates of exchange at period end. Income receipts
and expense payments are translated into U.S. dollars at the prevailing
exchange rate on the respective dates of the transactions. Purchases and
sales of securities are translated into U.S. dollars at the contractual
currency exchange rates established at the time of each trade.
Net realized gains and losses on foreign currency transactions represent
net gains and losses from sales and maturities of forward currency
contracts, disposition of foreign currencies, and the difference between
the amount of net investment income accrued and the U.S. dollar amount
actually received. The effects of changes in foreign currency exchange
rates on investments in securities are included with the net realized and
unrealized gain or loss on investment securities.
INCOME TAXES. As a qualified regulated investment company under Subchapter
M of the Internal Revenue Code, the fund is not subject to income taxes to
the extent that it distributes substantially all of its taxable income for
its fiscal year. The schedule of investments includes information regarding
income taxes under the caption "Income Tax Information."
INVESTMENT INCOME. Dividend income is recorded on the ex-dividend date,
except certain dividends from foreign securities where the ex-dividend date
may have passed, are recorded as soon as the fund is informed of the
ex-dividend date. Non-cash dividends included in dividend income, if any,
are recorded at the fair market value of the securities received. Interest
income, which includes accretion of original issue discount, is accrued as
earned. Investment income is recorded net of foreign taxes withheld where
recovery of such taxes is uncertain.
EXPENSES. Most expenses of the trust can be directly attributed to a fund.
Expenses which cannot be directly attributed are apportioned between the
funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. 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, which may result in distribution
reclassifications, are primarily due to differing treatments for futures
and options transactions.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital and may
affect the per-share allocation between net investment income and realized
and unrealized gain (loss). Undistributed net investment income and
accumulated undistributed net realized gain (loss) on investments and
foreign currency transactions may include temporary book and tax basis
differences which will reverse in a subsequent period. Any taxable income
or gain remaining at fiscal year end is distributed in the following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of trade
date. Gains and losses on securities sold are determined on the basis of
identified cost.
2. OPERATING POLICIES.
FOREIGN CURRENCY CONTRACTS. The fund generally uses foreign currency
contracts to facilitate transactions in foreign-denominated securities.
Losses may arise from changes in the value of the foreign currency or if
the counterparties do not perform under the contracts' terms. The U.S.
dollar value of foreign currency contracts is determined using contractual
currency exchange rates established at the time of each trade. The cost of
the foreign currency contracts is included in the cost basis of the
associated investment.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the fund, along with other affiliated
entities of Fidelity Management & Research Company (FMR), may transfer
uninvested cash balances into one or more joint trading accounts. These
balances are invested in one or more repurchase agreements that mature in
60 days or less from the date of purchase for U.S. Treasury or Federal
Agency obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
Securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are marked-to-market
daily and maintained at a value
2. OPERATING POLICIES - CONTINUED
REPURCHASE AGREEMENTS - CONTINUED
at least equal to the principal amount of the repurchase agreement
(including accrued interest). FMR, the fund's investment adviser, is
responsible for determining that the value of the underlying securities
remains in accordance with the market value requirements stated above.
INTERFUND LENDING PROGRAM. Pursuant to an Exemptive Order issued by the
SEC, the fund, along with other registered investment companies having
management contracts with FMR, may participate in an interfund lending
program. This program provides an alternative credit facility allowing the
fund to borrow from, or lend money to, other participating funds.
Information regarding the fund's participation in the program is included
under the caption "Other Information" at the end of the fund's schedule of
investments.
FUTURES CONTRACTS. The fund may use futures contracts to manage its
exposure to the stock market and to fluctuations in interest rates and
currency values. Buying futures tends to increase the fund's exposure to
the underlying instrument, while selling futures tends to decrease the
fund's exposure to the underlying instrument or hedge other fund
investments. Futures contracts involve, to varying degrees, risk of loss in
excess of the futures variation margin reflected in the Statement of Assets
and Liabilities. The underlying face amount at value of any open futures
contracts at period end, is shown in the schedule of investments under the
caption "Futures Contracts." This amount reflects each contract's exposure
to the underlying instrument at period end. Losses may arise from changes
in the value of the underlying instruments, if there is an illiquid
secondary market for the contracts, or if the counterparties do not perform
under the contracts' terms. Futures contracts are valued at the settlement
price established each day by the board of trade or exchange on which they
are traded.
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities) and the market value of futures contracts opened and
closed, is included under the caption "Other Information" at the end of the
fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a fee that
is computed daily at an annual rate of .28% of the fund's average net
assets.
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations Company
(FIIOC), an affiliate of FMR, is the fund's transfer, dividend disbursing
and shareholder servicing agent. FIIOC receives account fees and
asset-based fees that vary according to account size and type of account.
FIIOC pays for typesetting, printing and mailing of all shareholder
reports, except proxy statements. For the period, the transfer agent fees
were equivalent to an annual rate of .08% of average net assets.
ACCOUNTING FEES. Fidelity Service Co. (FSC), an affiliate of FMR, maintains
the fund's accounting records. The fee is based on the level of average net
assets for the month plus out-of-pocket expenses.
BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms are shown under the caption
"Other Information" at the end of the fund's schedule of investments.
5. EXPENSE REDUCTIONS.
FMR voluntarily agreed to reimburse the fund's operating expenses
(excluding interest, taxes, brokerage commissions and extraordinary
expenses) above an annual rate of .28% of average net assets.
FMR has directed certain portfolio trades to brokers who paid a portion of
the fund's expenses. In addition, the fund has entered into arrangements
with its custodian and transfer agent whereby interest earned on uninvested
cash balances was used to offset a portion of the fund's expenses.
For the period, the reduction under these arrangements are shown under the
caption "Other Information" on the fund's Statement of Operations.
6. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investment Life Insurance Company (FILI)
and its subsidiaries, affiliates of FMR, were the record owners of
approximately 43% of the outstanding shares of the fund. In addition, one
unaffiliated insurance company was record owner of 10% or more of the total
outstanding shares of the fund, totaling 10%.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Variable Insurance Products Fund II and the Shareholders
of Index 500 Portfolio:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of Index
500 Portfolio (a fund of Variable Insurance Products Fund II) at December
31, 1996, the results of its operations for the year then ended, and the
changes in its net assets and the financial highlights for the periods
indicated in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to
as "financial statements") are the responsibility of the Index 500
Portfolio's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1996 by correspondence with the
custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 10, 1997
DISTRIBUTIONS
The Board of Trustees of Index 500 Portfolio voted to pay on February 7,
1997, to shareholders of record at the opening of business on February 7,
1997, a distribution of $2.09 per share derived from capital gains realized
from sales of portfolio securities and a dividend of $1.03 per share from
net investment income.
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
OFFICERS
Edward C. Johnson 3d, PRESIDENT
J. Gary Burkhead, SENIOR VICE PRESIDENT
Jennifer G. Farrelly, VICE PRESIDENT
William J. Hayes, VICE PRESIDENT
Arthur S. Loring, SECRETARY
Kenneth A. Rathgeber, TREASURER
Robert H. Morrison, MANAGER, SECURITY TRANSACTIONS
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
BOARD OF TRUSTEES
J. Gary Burkhead
Ralph F. Cox *
Phyllis Burke Davis *
Richard J. Flynn *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Edward H. Malone *
Marvin L. Mann *
Gerald C. McDonough *
Thomas R. Williams *
ADVISORY BOARD
William O. McCoy
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Investments Institutional Operations Co.
Boston, MA
CUSTODIAN
Brown Brothers Harriman & Co., Boston, MA
* INDEPENDENT TRUSTEES
(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS
FUND II: ASSET MANAGER PORTFOLIO
ANNUAL REPORT
DECEMBER 31, 1996
CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
MARKET ENVIRONMENT 3 A review of what happened in world markets
during the last year.
PERFORMANCE 4 How the fund has done over time.
FUND TALK 5 The managers' review of fund performance, strategy
and outlook.
ADDITIONAL INTERVIEW ON POLICY CHANGES 7 A discussion of recent changes to
VIP II: Asset Manager
INVESTMENTS 8 A complete list of the fund's investments with their
market values.
FINANCIAL STATEMENTS 19 Statements of assets and liabilities, operations, and
changes in net assets, as well as financial highlights.
NOTES 21 Notes to the financial statements.
REPORT OF INDEPENDENT ACCOUNTANTS 24 The auditors' opinion.
DISTRIBUTIONS 25
</TABLE>
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR
THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS
PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY,
ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED
BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
MARKET ENVIRONMENT
Most stock and bond markets posted positive returns in 1996, aided by
moderate growth and low inflation. Sustained corporate earnings growth and
a favorable interest rate environment also proved beneficial. Japan,
however, was the major exception as an underperforming stock market and a
weak yen undermined returns for U.S.-based investors. The strongest gains
came from the often-volatile emerging bond markets in 1996, while
performance of the bond markets of developed countries was mixed.
U.S. STOCK MARKETS
The Standard & Poor's 500 Index - a broad measure of U.S. stock market
performance - rose 22.96% for the 12 months that ended December 31, 1996,
well above the index's long-term average annual return of about 12%. The
Russell 2000 Index - a measure of small stock performance - rose 16.49%.
The Dow Jones Industrial Average - an index of 30 blue-chip stocks - posted
a return of 28.70%, closing above 6500 for the first time in November.
The U.S. stock market spent much of the past year breaking price and
trading volume records. Solid corporate earnings reports, large cash
inflows into mutual funds, widespread optimism and a generally favorable
interest rate environment propelled share prices higher.
Large-capitalization stocks thrived as investors sought their lower
volatility and higher degree of liquidity over smaller-cap stocks in an
environment where it was sometimes difficult to discern the health of the
economy.
Most industry sectors experienced positive, if not strong performance. At
mid-year, technology stocks suffered from a sell-off sparked by fears that
company earnings were weakening. Nevertheless, this sector proved to be the
strongest in the U.S. market in 1996. Earnings surprises and positive
earnings projections were the main drivers of solid performance, especially
among semiconductor manufacturers, companies that make disk drives and
monitors, and software firms. Even though consensus estimates pointed
toward increases in short-term interest rates by the Fed, financial stocks
- - usually sensitive to changes in interest rates - shrugged off this
concern and posted solid performance based on low interest rates and
positive business prospects. Energy stocks reaped the benefits of
higher-than-expected energy prices, which resulted in part from the delayed
re-entry of Iraq into the world market. Uncertainty over the direction of
the economy benefited consumer nondurables - such as food, beverage and
tobacco companies - health care and traditional big-name growth stocks, as
these companies tend to post steady earnings growth in many economic
environments.
Utilities stocks struggled in 1996 for two reasons. First, and most
important, uncertainty over the direction and form of deregulation in the
sector tended to diminish investor interest. Second, stocks in the sector
tend to move in concert with bonds, which lagged due to periodic inflation
fears and confusing economic signals. Stocks in the telecommunications
field especially were affected by uncertainty over legislation signed into
law in February 1996. Biotechnology issues had a hard time recovering from
a correction in stock prices from overvalued levels that they experienced
earlier in 1996. Cyclical stocks - those that usually rise and fall with
the economy - posted mixed results that largely depended on the outlook for
companies in the specific sector rather than the direction of the economy.
FOREIGN STOCK MARKETS
Foreign stock markets posted mixed results in 1996. The Morgan Stanley
Capital International (MSCI) EAFE Index - which measures stock performance
in Europe, Australia and the Far East - returned 6.05% in 1996. Europe
posted the most consistently strong equity markets due to stronger economic
growth, lower interest rates, higher corporate earnings, the relative
weakness of the continent's major currencies and a new emphasis on
shareholder friendliness by many of the region's corporations. The MSCI
Europe Index was up 21.09% in 1996. The Japanese stock market
underperformed on the weakness of the economic recovery and the uncertainty
for any substantial economic reform. The Tokyo Stock Exchange TOPIX Total
Return Index was off 16.26%. Emerging market equity performance ran the
gamut from negative to positive, with the MSCI Emerging Markets Free Index
returning 6.03% for 1996. While Hong Kong was a top performer - benefiting
from the rising value of the property sector, solid economic growth and
stable interest rates - other Asian markets posted mixed returns as
concerns rose over declining export growth in the region. Latin America
enjoyed a strong first half, but faded toward the end of 1996 due to low
domestic savings rates and inefficient governments, among other factors.
U.S. BOND MARKETS
Uncertainty over the direction of the economy led to mixed performance in
U.S. bond markets in 1996. For the year, the Lehman Brothers Aggregate Bond
Index - a broad measure of the performance of the U.S. taxable bond market
- - posted a total return of 3.63%. Stronger-than-expected economic signals
rattled the bond market in the early spring. Investors spent most of the
summer anticipating a short-term interest rate increase by the Federal
Reserve Board. However, the Fed neither raised nor lowered rates through
the end of 1996. Interest rates responded to the Fed's inaction by falling
during much of October and November. In December, though, bond prices
dropped due to inflation concerns, stronger-than-expected economic data and
comments by Fed Chairman Alan Greenspan that the stock markets may be
overvalued.
FOREIGN BOND MARKETS
While low inflation and moderate growth helped provide a positive backdrop
for most bond markets in 1996, performance in overseas bond markets was
mixed. The Salomon Brothers World Government Bond Index - a measure of
government bond market performance in developed nations - returned 3.62%
for the 12 months that ended December 31, 1996. In Europe, focus centered
on the continuing progress toward the European Monetary Union (EMU).
Attractive opportunities arose as countries worked to meet the requirements
for joining the EMU. However, Germany and Japan - two of the larger
components of the Salomon Brothers World Government Bond Index -
experienced currency problems that hurt returns. In stark contrast to the
developed world, the often-volatile emerging debt markets enjoyed a
particularly strong year, helped by inflows of foreign capital, low
interest rates and the implementation of country-specific reforms -
especially in Latin America. The J.P. Morgan Emerging Markets Bond Index -
of which Latin America is a large component - posted a return of 34.16%
during the period.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can
look at the total percentage change in value, the average annual percentage
change, or the growth of a hypothetical $10,000 investment. Total return
reflects the change in the value of an investment, assuming reinvestment of
the fund's dividend income and capital gains (the profits earned upon the
sale of securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1996 PAST 1 PAST 5 LIFE OF
YEAR YEARS FUND
Asset Manager 14.60% 11.26% 11.69%
S&P 500 (registered trademark) 22.96% 15.22% 13.93%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what
would have happened if the fund had performed at a constant rate each year.
You can compare the fund's returns to those of the Standard & Poor's 500
Index - a widely recognized, unmanaged index of common stocks. This
benchmark reflects the reinvestment of dividends and capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of growth in the long run and volatility
in the short run. In turn, the share price and return
of a fund that invests in stocks will vary. That
means if you sell your shares during a market
downturn, you might lose money. But if you can
ride out the market's ups and downs, you may
have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of return
and are not the fund's year-by-year results, which fluctuated over the
periods shown. The life of fund figures are from commencement of
operations, September 6, 1989.
If Fidelity had not reimbursed certain fund expenses, the past five years
and life of fund total return figures would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL
CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
IMAHDR PRASUN SHR__CHT 19960930 19961009 151627 S00000000000001
VIP II:Asset Manage S&P500 Fid.
Composite Index
00228 SP001 F0001
1989/09/30 10000.00 10000.00
10000.00
1989/10/31 10020.02 9768.00
10057.20
1989/11/30 10060.06 9967.27
10176.98
1989/12/31 10091.09 10206.48
10276.92
1990/01/31 9868.42 9521.63
10029.14
1990/02/28 9969.64 9644.46
10093.23
1990/03/31 10050.61 9900.03
10192.55
1990/04/30 9919.03 9652.53
10098.47
1990/05/31 10425.10 10593.65
10527.96
1990/06/30 10506.07 10521.62
10593.55
1990/07/31 10485.83 10487.95
10658.17
1990/08/31 10141.70 9539.84
10328.51
1990/09/30 9929.15 9075.25
10236.17
1990/10/31 9979.76 9036.22
10309.57
1990/11/30 10465.59 9619.96
10618.75
1990/12/31 10769.23 9888.36
10792.69
1991/01/31 11284.56 10319.49
10998.50
1991/02/28 11726.26 11057.34
11273.90
1991/03/31 11915.56 11324.93
11396.34
1991/04/30 12094.35 11352.11
11471.10
1991/05/31 12367.79 11842.52
11653.26
1991/06/30 12146.94 11300.13
11502.23
1991/07/31 12451.92 11826.72
11733.43
1991/08/31 12704.33 12107.01
11942.28
1991/09/30 12777.94 11904.82
11999.01
1991/10/31 12862.08 12064.35
12105.80
1991/11/30 12651.74 11578.15
12022.39
1991/12/31 13198.62 12902.69
12614.73
1992/01/31 13366.89 12662.70
12476.86
1992/02/29 13626.47 12827.32
12556.58
1992/03/31 13593.27 12577.19
12465.80
1992/04/30 13792.52 12946.96
12619.13
1992/05/31 13936.42 13010.40
12743.05
1992/06/30 13925.35 12816.54
12748.65
1992/07/31 14157.81 13340.74
13094.91
1992/08/31 14113.53 13067.25
13044.62
1992/09/30 14202.09 13221.45
13188.90
1992/10/31 14224.22 13267.72
13136.41
1992/11/30 14534.17 13720.15
13311.65
1992/12/31 14744.49 13888.91
13474.85
1993/01/31 15010.15 14005.57
13643.28
1993/02/28 15150.92 14196.05
13833.47
1993/03/31 15579.83 14495.59
13975.40
1993/04/30 15672.57 14144.79
13890.43
1993/05/31 15939.19 14523.87
14039.61
1993/06/30 16066.70 14565.99
14188.71
1993/07/31 16263.77 14507.73
14206.88
1993/08/31 16739.04 15057.57
14556.36
1993/09/30 16750.64 14941.63
14541.52
1993/10/31 17202.73 15250.92
14691.00
1993/11/30 17179.54 15106.04
14577.88
1993/12/31 17875.07 15288.82
14678.76
1994/01/31 18443.09 15808.64
14967.05
1994/02/28 17857.33 15380.23
14683.28
1994/03/31 17017.99 14709.65
14303.86
1994/04/30 17030.15 14897.93
14341.05
1994/05/31 17176.13 15142.26
14437.71
1994/06/30 16847.69 14771.27
14293.33
1994/07/31 17139.63 15255.77
14595.21
1994/08/31 17541.06 15881.26
14846.54
1994/09/30 17334.15 15492.17
14628.89
1994/10/31 17419.36 15840.74
14769.03
1994/11/30 17163.73 15263.82
14554.47
1994/12/31 16786.37 15490.18
14689.71
1995/01/31 16676.82 15891.84
14964.29
1995/02/28 16946.97 16511.15
15338.22
1995/03/31 17170.77 16998.39
15572.95
1995/04/30 17444.31 17498.99
15852.95
1995/05/31 17668.12 18198.43
16378.13
1995/06/30 17817.32 18621.18
16597.47
1995/07/31 18451.43 19238.66
16808.98
1995/08/31 18675.24 19286.95
16919.65
1995/09/30 18911.47 20100.85
17285.46
1995/10/31 18662.80 20029.09
17383.85
1995/11/30 19147.71 20908.37
17812.18
1995/12/31 19632.62 21311.07
18067.68
1996/01/31 20055.36 22036.50
18375.48
1996/02/29 20001.35 22240.77
18308.01
1996/03/31 20213.99 22454.95
18330.20
1996/04/30 20426.62 22785.94
18406.38
1996/05/31 20586.10 23373.59
18600.31
1996/06/30 20772.16 23462.64
18738.77
1996/07/31 20426.62 22426.06
18441.72
1996/08/31 20466.49 22899.03
18598.03
1996/09/30 21210.73 24187.79
19154.71
1996/10/31 21755.62 24854.88
19551.44
1996/11/30 22832.10 26733.66
20294.32
1996/12/31 22499.85 26204.07
20067.35
IMATRL PRASUN SHR__CHT 19960930 19961009 151629 R00000000000123
Let's say hypothetically that $10,000 was invested in Asset Manager
Portfolio on September 30, 1989, shortly after the fund started. By
December 31, 1996, the value of the investment would have grown to $22,500
- - a 125.00% increase. With reinvested dividends and capital gains, if any,
a $10,000 investment in the S&P 500, which would have grown to $26,204 over
the same period - a 162.04% increase on the initial investment.
You can also look at how the Fidelity Composite Index did over the same
period. The composite index combines the cumulative total returns of three
unmanaged indexes - the S&P 500 (162.04%), Lehman Brothers Aggregate Bond
Index (84.18%), and the Salomon Brothers 3-month T-Bill Total Rate of
Return Index (44.16%) - according to the fund's neutral mix,* assuming
monthly rebalancing. With reinvested dividends and capital gains, if any, a
$10,000 investment in the index would have grown to $20,067 - a 100.67%
increase.
* 50% STOCKS, 40% BONDS AND 10% SHORT-TERM INSTRUMENTS EFFECTIVE JANUARY 1,
1997; 40%, 40% AND 20%, RESPECTIVELY, BETWEEN JUNE 1, 1992 AND DECEMBER 31,
1996; 30%, 40% AND 30%, RESPECTIVELY, PRIOR TO JUNE 1, 1992.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1996
% OF FUND'S
INVESTMENT
S
Philip Morris Companies, Inc. 4.6
Federal National Mortgage Association 4.3
General Motors Corp. 2.5
Compaq Computer Corp. 1.9
International Business Machines Corp. 1.9
TOP FIVE BOND ISSUERS AS OF DECEMBER 31, 1996
(WITH MATURITIES MORE THAN ONE YEAR) % OF FUND'S
INVESTMENT
S
U.S. Treasury Obligations 19.0
Federal National Mortgage Association 4.5
Government National Mortgage Association 2.3
Federal Home Loan Mortgage Corporation 1.6
Federal Home Loan Bank 0.5
ASSET ALLOCATION AS OF DECEMBER 31, 1996*
Row: 1, Col: 1, Value: 7.7
Row: 1, Col: 2, Value: 44.9
Row: 1, Col: 3, Value: 47.4
Stocks 47.4%
Bonds 44.9%
Short-term investments 7.7%
FOREIGN INVESTMENTS 11.6%
*
% OF FUND'S INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
FUND TALK: THE MANAGERS' OVERVIEW
An interview with Richard Habermann (center), Portfolio Manager of Asset
Manager Portfolio, as well as George Vanderheiden (left) and Michael Gray,
sub-managers for stocks and bonds, respectively
Q. HOW DID THE FUND PERFORM, DICK?
D.H. The fund continued to lag the stock market somewhat during the period.
That's not altogether surprising, however, since the fund invests in both
stocks and bonds, and stocks markedly outperformed bonds over the past
year. The Standard & Poor's 500 Index had a total return of 22.96% for the
12 months that ended December 31, 1996. The fund benefited most from the
performance of its equity investments, and performed in line with other
flexible portfolios and with our expectations following a repositioning of
the fund that we executed earlier in the year.
Q. CAN YOU ELABORATE ON THIS REPOSITIONING?
D.H. On the bond side, we focused on investment-grade, dollar-denominated
securities, bringing the bond portfolio's duration - its sensitivity to
changes in interest rates - in line with the bond market average as
represented by the Lehman Brothers Aggregate Index. Our stock selection
emphasized large-capitalization stocks whose dividend yields were slightly
higher than that of the market. Fortunately, these kinds of stocks provided
very strong performance in 1996.
Q. WHAT WAS THE FUND'S ASSET MIX AT THE END OF THE PERIOD?
D.H. We aimed to bring the fund in line with the new neutral mix we have
developed for the fund. As a result, the fund had about 47% in stocks, 45%
in bonds and 8% in short-term money market securities. For more information
on this policy change, please refer to the additional interview that
follows.
Q. WHAT HAS YOUR ASSET ALLOCATION STRATEGY BEEN OVER THE PAST SIX MONTHS?
D.H. We've kept the stock weighting fairly steady over that period. As I
said, stocks performed very well. Stock prices rebounded starting in July,
after it became evident that some negative corporate earnings reports were
not indicative of the state of the overall market. A benign economic and
interest rate environment helped stocks maintain their momentum through the
last three months of the year. Federal Reserve Board Chairman Alan
Greenspan's comments about the market's exuberance caused some short-term
volatility in December, but the stock market rebounded fairly quickly.
There were times when we added to the fixed-income component, buying bonds
when they became undervalued during periods of market duress. Periodically,
economic data that some feared signaled impending inflation shook the
market. Inflation is a negative influence on bond investing because it
erodes the value of a bond's fixed payments. We added to the fund's
position in investment-grade bonds when their prices fell and their yields
rose in response to the economic data, enabling us to lock in higher yields
on our new fixed-income investments. When yields subsequently fell, the
value of the fixed-income investments we purchased earlier increased.
Q. TURNING TO YOU, GEORGE, WHAT STOCK-PICKING STRATEGIES HAVE YOU PURSUED?
G.V. I've sought to minimize the risk in the stock holdings because I
considered stock market valuations to be high on a historical basis. As a
result, I've pursued two strategies - growth at a reasonable price and
vulture investing. I have always felt the most prudent way to buy growth
stocks is to get as much total return, meaning stock appreciation plus
dividend yield, for as small a price as possible. The price you pay for a
growth stock is reflected in its price-to-earnings ratio, or how much times
earnings the market thinks that stock is worth. To give an example, both
Philip Morris and Coca-Cola are growth stocks with each having grown its
earnings per share at an 18% growth rate over the past 10 years. Assuming
they can sustain similar growth rates in the future, Philip Morris would
have a higher total return because its dividend yield is 5%, whereas Coke's
is 1%. But look at what the market was paying for each stock's total return
at the beginning of October. Coke was at around $51 and the consensus
estimate for its earnings per share was $1.40 for 1996, thereby producing a
price-to-earnings ratio of 36 times. Philip Morris, on the other hand, was
at $93 with a consensus earnings-per-share estimate of $7.70 for 1996,
thereby producing a price-to-earnings ratio of 12 times. Litigation
concerns have been dragging down Philip Morris' ratio, but these worries
have been around for 15 years and this was the biggest gap between the two
companies' price-to-earnings ratios. That's why I invested in Philip Morris
and not Coca-Cola.
Q. WHAT DO YOU MEAN BY VULTURE INVESTING?
G.V. Occasionally bad things happen to good stocks. Quality growth stocks
may stumble temporarily due to new product introductions, too much
inventory or manufacturing problems that cause a disappointment in
quarterly earnings. If these are truly temporary occurrences, they can be
wonderful opportunities to buy a stock or sector when prices are down. For
example, in January 1996, Intel's price had dropped to $50 from $75 months
before as concerns developed over its receivables with Packard Bell. Nine
months later the stock had increased substantially. Buying a sector with
good long-term fundamentals after it has suffered a big decline can
mitigate risk and enhance the ultimate upside gain. However, it does
require patience.
Q. MICHAEL, WHERE HAVE YOU FOUND OPPORTUNITIES IN THE BOND PORTFOLIO?
M.G. I've increased the fund's investments in bonds that offered a yield
advantage over Treasuries - agency issues, mortgage-backed securities and
corporate bonds.
Q. WHAT MADE CORPORATE BONDS MORE ATTRACTIVE?
M.G. As Dick said, they became more attractive earlier in the period. In
addition, for most of the period, the fundamental outlook for corporations
was favorable. That is, business prospects appeared to improve. The best
indicator of a favorable corporate environment has been a strong stock
market. This strength showed that corporations were doing well and that
investors were comfortable with prospects as they drove up stock prices.
Part of that optimism was a function of the economic environment, which has
been fairly positive. Despite the bond market's inflation fears in the
spring, the economy looked as if it was growing, while inflation remained
under control. Moderate growth with low inflation is a good recipe for
corporations. In addition, there was a limited supply of new corporate
issues, along with fairly strong demand. Many investors were looking for
added yield, and there wasn't much to buy in the way of corporate bonds.
This backdrop helped corporate bonds post strong price gains on a relative
basis.
Q. WERE THERE OTHER TYPES OF BONDS THAT WERE ATTRACTIVE TO YOU?
M.G. I was attracted to Yankee bonds. These are dollar-denominated bonds
issued in the U.S. by foreign banks, governments and corporations. They
tend to trade more cheaply than other bonds with similar credit ratings and
often don't drop in price as quickly as corporate bonds when bad news
affects the issuer.
Q. WHAT KINDS OF MORTGAGE-BACKED SECURITIES DID YOU FAVOR?
M.G. When rates rose earlier in the period, I bought mortgage-backed
securities that were selling at a discount. In general, I sought securities
that I thought would be less susceptible to changes in interest rates than
other choices in the mortgage-backed sector. Mortgage-backed securities
tend not to perform well if rates go up or down sharply, so I looked for
those bonds that by the nature of their structure would be less sensitive
to interest rate changes. Those securities tended to be in 15-year and
30-year mortgages that were selling at a discount.
Q. TURNING BACK TO YOU, DICK, WHAT'S YOUR OUTLOOK?
D.H. Twice this year, there has been real excitement in the stock market,
in July and December. Both occasions were related to concerns about
earnings. Going forward, I think we'll find more risk in the markets.
Sometimes people tend to forget that stocks, most importantly, are stocks
of COMPANIES. So what we've been trying to do is to spend a lot of time
listening to companies and trying to get a sense of what's going on. There
might be a pick-up in the economy to sustain earnings, but in the short
term, earnings disappointments will hit a stock hard. The stocks and
markets that have done poorly are those that haven't met expectations. If
the low-interest, low-inflation environment continues, earnings will be
more crucial. That is, because of lower interest rates, there will be more
of a reaction when earnings don't meet expectations. In addition, stock
prices will be more sensitive to any changes in interest rates. As for
fixed-income, we'll continue to keep an eye on the strength of the economy
and to look for value in the various sectors of the market.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGERS
ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER.
THE MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED ON MARKET AND
OTHER CONDITIONS.
NOTE TO SHAREHOLDERS: Charles Morrison became sub-manager for bonds on
February 3, 1997, after the period ended.
FUND FACTS
GOAL: maximum total return over the long term
by allocating assets among stocks, bonds and
short-term instruments anywhere in the world
START DATE: September 6, 1989
SIZE: as of December 31, 1996, more than
$3.6 billion
MANAGER: Richard Habermann, since March
1996; joined Fidelity in 1968
(checkmark)
ADDITIONAL INTERVIEW ON POLICY CHANGES
NOTE TO SHAREHOLDERS: Beginning on December 1, 1996, Asset Manager
Portfolio's neutral mix of investments changed, and there was a change in
how bonds and short-term instruments are classified. In the following
additional interview segment, Portfolio Manager Dick Habermann discusses
these changes.
Q. WE UNDERSTAND THAT THE FUND'S NEUTRAL ALLOCATION PERCENTAGES CHANGED.
CAN YOU EXPLAIN?
A. Yes. Asset Manager's neutral mix - which represents how the fund's
investments are allocated, on average, over the long term - was 40% stocks,
40% bonds and 20% short-term instruments. Under a new policy approved by
the fund's Board of Trustees, the neutral mix is now 50% stocks, 40% bonds
and 10% short-term/money market instruments. As always, this allocation
will vary over short-term periods as fund management makes gradual
adjustments to the portfolio's holdings - within defined ranges - based on
the current outlook for the different markets. The neutral mix is designed
to establish a general direction for the fund and communicate the expected
posture of the fund going forward.
Q. WHAT DO THESE CHANGES MEAN?
A. The most significant impact of the changes is a 10% increase in the
fund's equity allocation and a reduction in the fixed-income classes. The
other changes to the bond and short-term positions are mainly a
redefinition of the dividing line of short-term securities and longer-term
bonds.
Q. SO YOU ALSO CHANGED THE DEFINITION OF "SHORT-TERM" FOR THE PURPOSES OF
HOW THE FUND LOOKS AT ITS ALLOCATIONS . . .
A. The short-term asset class in the fund included all bonds and short-term
instruments with maturities of three years or less. Under our new
definition, we now move most securities with one to three years remaining
maturity into the bond class, leaving shorter-term instruments in a newly
named "short-term/money market" class. This class, in general, will include
securities with remaining maturities of 12 months or less and securities
with comparable interest rate sensitivity. In addition to redefining the
bond and short-term class, we also assigned a manager to the
short-term/money market part of the fund: John Todd, a veteran manager in
our money market fund group who has been with Fidelity since 1981.
Q. WHY DID YOU MAKE THESE CHANGES?
A. With the changes in the management structure, we thought it was a good
time to reassess the neutral mix based on what we learned since we launched
the first Asset Manager fund in 1988.
One thing we found is that stocks have continued to provide superior
returns relative to both intermediate and long term bonds. At the same
time, the volatility of stocks and bonds by some measures has been
converging. Based on this comparison and other factors we evaluated, we
believe the fund can modestly increase its allocation to equities and thus
its potential return without unduly affecting its volatility.
Shareholders should remember that these allocations simply represent a
neutral mix. Because the fund is actively managed, allocations will change
based on the market environment. The allocation ranges for each asset class
have been modified to accommodate the change in the neutral mix.
Q. AND WHY DID YOU REDEFINE THE SHORT-TERM CLASS AND ADD A SUB-MANAGER?
A. We believe that actively managing the short-term part of the portfolio
more like a money market fund will help to make this category more stable.
Additionally, this redefinition is in line with the way Fidelity looks at
fixed-income asset classes across our funds.
Q. WILL THESE CHANGES HAVE ANY IMPACT ON THE LEVEL OF FOREIGN SECURITIES
HELD IN THE FUND?
A. Because part of the fund's goal is to produce high total return over the
long-term through diversification, foreign investments will continue to
play a role in the fund. However, we are more likely to seek investment
opportunities first in domestic markets. For example, foreign holdings were
down to about 12% at the end of the period, compared with 19% six months
before that. That said, we have removed the limit on foreign investment in
order to standardize policy with other funds.
Q. HOW HAVE YOU BROUGHT THE FUND IN LINE WITH THE NEW POLICIES?
A. We have been making gradual changes so that at the start of 1997, the
fund's neutral allocation mix and holdings are where we want them.
Shareholders should keep in mind that we're continually fine-tuning the
fund within its prospectus parameters to achieve the best risk-reward
ratio, so making changes over the next month won't be unusual.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
INVESTMENTS DECEMBER 31, 1996
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 47.1%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 0.6%
AEROSPACE & DEFENSE - 0.3%
Boeing Co. 92,800 $ 9,871,600
Gulfstream Aerospace Corp. (a) 46,700 1,132,475
11,004,075
DEFENSE ELECTRONICS - 0.3%
Raytheon Co. 256,800 12,358,500
TOTAL AEROSPACE & DEFENSE 23,362,575
BASIC INDUSTRIES - 2.4%
CHEMICALS & PLASTICS - 1.6%
Air Products & Chemicals, Inc. 61,200 4,230,450
du Pont (E.I.) de Nemours & Co. 423,900 40,005,563
Raychem Corp. 95,800 7,675,975
Union Carbide Corp. 190,000 7,766,250
59,678,238
METALS & MINING - 0.1%
Reynolds Metals Co. 33,300 1,877,288
PACKAGING & CONTAINERS - 0.1%
Owens-Illinois, Inc. (a) 59,500 1,353,625
Tupperware Corp. 45,300 2,429,213
3,782,838
PAPER & FOREST PRODUCTS - 0.6%
Boise Cascade Corp. 126,700 4,022,725
Champion International Corp. 204,300 8,835,975
International Paper Co. 108,500 4,380,688
Temple-Inland, Inc. 36,900 1,997,213
Willamette Industries, Inc. 23,800 1,657,075
20,893,676
TOTAL BASIC INDUSTRIES 86,232,040
CONSTRUCTION & REAL ESTATE - 0.5%
CONSTRUCTION - 0.4%
Centex Corp. 102,200 3,845,275
DR Horton, Inc. 123,224 1,340,061
Fleetwood Enterprises, Inc. 296,181 8,144,978
Kaufman & Broad Home Corp. 150,700 1,940,263
Lennar Corp. 4,600 125,350
U.S. Home Corp. (a) 18,000 468,000
15,863,927
ENGINEERING - 0.1%
Fluor Corp. 63,400 3,978,350
TOTAL CONSTRUCTION & REAL ESTATE 19,842,277
DURABLES - 4.0%
AUTOS, TIRES, & ACCESSORIES - 3.8%
Cummins Engine Co., Inc. 82,400 3,790,400
Dana Corp. 82,300 2,685,038
Discount Auto Parts, Inc. (a) 47,800 1,117,325
Federal-Mogul Corp. 108,800 2,393,600
General Motors Corp. 1,604,990 89,478,193
Goodyear Tire & Rubber Co. 48,400 2,486,550
Honda Motor Co. Ltd. 397,000 11,333,075
Magna International, Inc. Class A 247,000 13,738,739
Superior Industries International, Inc. 116,900 2,703,313
Volvo AB Class B 336,300 7,389,159
137,115,392
CONSUMER ELECTRONICS - 0.1%
Newell Co. 100,000 3,150,000
Whirlpool Corp. 22,100 1,030,413
4,180,413
SHARES VALUE (NOTE 1)
TEXTILES & APPAREL - 0.1%
Burlington Industries, Inc. (a) 315,900 $ 3,474,900
TOTAL DURABLES 144,770,705
ENERGY - 4.3%
ENERGY SERVICES - 0.1%
McDermott International, Inc. 208,900 3,472,963
OIL & GAS - 4.2%
Amerada Hess Corp. 98,200 5,683,325
Anadarko Petroleum Corp. 13,900 900,025
Atlantic Richfield Co. 145,900 19,331,750
British Petroleum PLC ADR 178,178 25,189,915
Burlington Resources, Inc. 216,400 10,901,150
Canada Occidental Petroleum Ltd. 227,700 3,662,534
Elf Aquitaine SA sponsored ADR 50,700 2,294,175
Enron Oil & Gas Co. 15,000 378,750
Kerr-McGee Corp. 47,600 3,427,200
Noble Affiliates, Inc. 23,600 1,129,850
Occidental Petroleum Corp. 145,600 3,403,400
Royal Dutch Petroleum Co.:
ADR 275,700 47,075,775
Ord. 29,800 5,222,716
Santa Fe Energy Resources, Inc. (a) 149,100 2,068,763
Sun Co., Inc. 142,800 3,480,750
Tosco Corp. 154,500 12,224,813
Total SA:
Class B 19,733 1,604,494
sponsored ADR 56,437 2,271,589
Ultramar Diamond Shamrock Corp. 5,500 173,938
Union Pacific Resources Group, Inc. 39,500 1,155,375
151,580,287
TOTAL ENERGY 155,053,250
FINANCE - 10.1%
BANKS - 1.2%
Canadian Imperial Bank of Commerce 18,700 824,609
Fleet Financial Group, Inc. 700,000 34,912,500
Nations Bank Corp. 39,800 3,890,450
State Street Boston Corp. 42,900 2,767,050
42,394,609
CLOSED END INVESTMENT COMPANY - 0.1%
First NIS Regional Fund (a) 200,000 2,200,000
CREDIT & OTHER FINANCE - 0.0%
Transamerica Corp. 15,700 1,240,300
FEDERAL SPONSORED CREDIT - 5.8%
Federal Home Loan Mortgage
Corporation 497,200 54,754,150
Federal National Mortgage
Association 4,176,290 155,566,803
210,320,953
INSURANCE - 2.7%
AFLAC, Inc. 81,300 3,475,575
Allmerica Financial Corp. 110,700 3,708,450
Allstate Corp. 543,100 31,431,913
American International Group, Inc. 193,700 20,968,025
CIGNA Corp. 10,200 1,393,575
Equitable of Iowa Companies 12,400 568,850
General Re Corp. 91,200 14,386,800
Loews Corp. 19,400 1,828,450
MGIC Investment Corp. 25,200 1,915,200
Provident Companies, Inc. 8,800 425,700
Providian Corp. 184,700 9,488,963
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
INSURANCE - CONTINUED
Reliastar Financial Corp. 14,500 $ 837,375
Torchmark Corp. 112,700 5,691,350
Travelers/Aetna Property Casualty Corp.
Class A 28,300 1,001,113
UNUM Corp. 10,400 751,400
97,872,739
SAVINGS & LOANS - 0.2%
Golden West Financial Corp. 113,900 7,189,938
SECURITIES INDUSTRY - 0.1%
United Asset Management Corp. 219,500 5,844,188
TOTAL FINANCE 367,062,727
HEALTH - 2.6%
DRUGS & PHARMACEUTICALS - 0.6%
Astra AB Class A Free shares 175,400 8,629,609
Novartis AG (Reg.) 3,300 3,771,077
Pharmacia & Upjohn, Inc. 15,900 630,038
Schering-Plough Corp. 130,400 8,443,400
21,474,124
MEDICAL EQUIPMENT & SUPPLIES - 0.1%
Allegiance Corp. 16,580 458,023
Baxter International, Inc. 32,400 1,328,400
Biomet, Inc. 193,000 2,919,125
4,705,548
MEDICAL FACILITIES MANAGEMENT - 1.9%
Columbia/HCA Healthcare Corp. 1,390,150 56,648,613
Humana, Inc. (a) 194,000 3,710,250
Tenet Healthcare Corp. (a) 211,100 4,617,813
United HealthCare Corp. 49,000 2,205,000
67,181,676
TOTAL HEALTH 93,361,348
HOLDING COMPANIES - 0.1%
U.S. Industries, Inc. (a) 62,800 2,158,750
INDUSTRIAL MACHINERY & EQUIPMENT - 1.0%
ELECTRICAL EQUIPMENT - 0.5%
Emerson Electric Co. 24,200 2,341,350
General Electric Co. 91,800 9,076,725
Scientific-Atlanta, Inc. 61,000 915,000
Sensormatic Electronics Corp. 59,900 1,003,325
Westinghouse Electric Corp. 153,900 3,058,763
16,395,163
INDUSTRIAL MACHINERY & EQUIPMENT - 0.3%
Caterpillar, Inc. 141,600 10,655,400
Dover Corp. 12,000 603,000
Illinois Tool Works, Inc. 3,600 287,550
Kaydon Corp. 900 42,413
Kennametal, Inc. 1,517 58,973
11,647,336
POLLUTION CONTROL - 0.2%
Browning-Ferris Industries, Inc. 258,200 6,777,750
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 34,820,249
MEDIA & LEISURE - 0.9%
BROADCASTING - 0.0%
CS Wireless Systems, Inc. (a)(c) 47 -
HSN, Inc. (a) 29,745 706,444
706,444
SHARES VALUE (NOTE 1)
ENTERTAINMENT - 0.1%
Cedar Fair LP (depositary unit) 8,400 $ 310,800
Royal Carribean Cruises Ltd. 53,800 1,257,575
1,568,375
LEISURE DURABLES & TOYS - 0.4%
Nintendo Co. Ltd. Ord. 200,400 14,327,865
LODGING & GAMING - 0.3%
Bally Gaming International, Inc.
(warrants) (a) 38,400 67,200
Circus Circus Enterprises, Inc. (a) 269,100 9,250,313
Fitzgeralds South, Inc.
(warrants) (a)(c) 420 -
Mirage Resorts, Inc. (a) 34,400 743,900
Sun International Hotels Ltd. Ord. (a) 51,800 1,890,700
11,952,113
RESTAURANTS - 0.1%
Brinker International, Inc. (a) 86,000 1,376,000
Darden Restaurants, Inc. 48,800 427,000
McDonald's Corp. 42,000 1,900,500
3,703,500
TOTAL MEDIA & LEISURE 32,258,297
NONDURABLES - 5.3%
HOUSEHOLD PRODUCTS - 0.0%
Premark International, Inc. 50,000 1,112,500
TOBACCO - 5.3%
Philip Morris Companies, Inc. 1,466,100 165,119,513
RJR Nabisco Holdings Corp. 647,430 22,012,620
UST, Inc. 140,400 4,545,450
191,677,583
TOTAL NONDURABLES 192,790,083
PRECIOUS METALS - 0.1%
Barrick Gold Corp. 34,900 999,252
Santa Fe Pacific Gold Corp. 143,000 2,198,625
3,197,877
RETAIL & WHOLESALE - 2.6%
APPAREL STORES - 0.2%
TJX Companies, Inc. 124,200 5,883,975
DRUG STORES - 0.0%
CVS Corp. 33,400 1,381,925
GENERAL MERCHANDISE STORES - 1.1%
Federated Department Stores, Inc. (a) 364,200 12,428,325
Wal-Mart Stores, Inc. 1,230,600 28,149,975
40,578,300
GROCERY STORES - 0.0%
Safeway, Inc. 11,300 483,075
RETAIL & WHOLESALE, MISCELLANEOUS - 1.3%
Home Depot, Inc. (The) 391,300 19,613,913
Lowe's Companies, Inc. 316,200 11,225,100
Officemax, Inc. (a) 262,800 2,792,250
Office Depot, Inc. (a) 119,200 2,115,800
Rex Stores Corp. (a) 62,100 504,563
Tandy Corp. 46,100 2,028,400
Toys "R" Us, Inc. (a) 292,400 8,772,000
47,052,026
TOTAL RETAIL & WHOLESALE 95,379,301
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SERVICES - 0.0%
ADVERTISING - 0.0%
Interpublic Group of Companies, Inc. 15,700 $ 745,750
SERVICES - 0.0%
HCIA, Inc. (a) 19,900 686,550
TOTAL SERVICES 1,432,300
TECHNOLOGY - 8.3%
COMMUNICATIONS EQUIPMENT - 0.1%
Cisco Systems, Inc. (a) 70,600 4,491,925
Nokia Corp. AB sponsored ADR 12,900 743,363
5,235,288
COMPUTER SERVICES & SOFTWARE - 0.8%
America Online, Inc. (a) 75,200 2,500,400
Automatic Data Processing, Inc. 150,700 6,461,263
Electronic Data Systems Corp. 140,300 6,067,975
Microsoft Corp. (a) 45,900 3,792,488
Oracle Corp. (a) 112,500 4,696,875
Policy Management Systems Corp. (a) 94,400 4,354,200
Sabre Group Holdings, Inc. Class A (a) 7,400 206,275
28,079,476
COMPUTERS & OFFICE EQUIPMENT - 4.8%
Adaptec, Inc. (a) 21,600 864,000
Bay Networks, Inc. (a) 396,000 8,266,500
Compaq Computer Corp. (a) 919,700 68,287,725
Hewlett-Packard Co. 184,800 9,286,200
Ingram Micro, Inc. Class A (a) 7,200 165,600
International Business Machines Corp. 447,600 67,587,600
SCI Systems, Inc. (a) 188,500 8,411,813
Seagate Technology (a) 208,300 8,227,850
Silicon Graphics, Inc. (a) 38,400 979,200
Tech Data Corp. (a) 10,600 290,175
172,366,663
ELECTRONIC INSTRUMENTS - 0.6%
Applied Materials, Inc. (a) 157,800 5,670,938
KLA Instruments Corp. (a) 33,800 1,199,900
Lam Research Corp. (a) 81,400 2,289,375
Novellus System, Inc. (a) 69,500 3,766,031
Teradyne, Inc. (a) 196,700 4,794,563
Varian Associates, Inc. 74,900 3,810,538
21,531,345
ELECTRONICS - 2.0%
AMP, Inc. 370,400 14,214,100
Atmel Corp. (a) 77,000 2,550,625
Intel Corp. 106,700 13,971,031
Methode Electronics, Inc. Class A 5,400 109,350
Microchip Technology, Inc. (a) 12,500 635,938
Micron Technology, Inc. 86,200 2,510,575
Molex, Inc. 54,500 1,941,563
Motorola, Inc. 41,700 2,559,338
National Semiconductor Corp. (a) 88,800 2,164,500
Solectron Corp. (a) 376,100 20,074,338
Storage Technology Corp. (a) 62,400 2,971,800
Texas Instruments, Inc. 118,900 7,579,875
Xilinx, Inc. (a) 48,600 1,789,088
73,072,121
TOTAL TECHNOLOGY 300,284,893
SHARES VALUE (NOTE 1)
TRANSPORTATION - 0.3%
RAILROADS - 0.2%
Bombardier, Inc. Class B 94,600 $ 1,745,909
Burlington Northern Santa Fe Corp. 45,600 3,938,700
CSX Corp. 53,460 2,258,685
7,943,294
SHIPPING - 0.1%
Stolt-Nielsen SA Class B
sponsored ADR 84,900 1,591,875
Stolt-Nielsen SA 33,000 622,875
2,214,750
TOTAL TRANSPORTATION 10,158,044
UTILITIES - 4.0%
CELLULAR - 1.6%
AirTouch Communications, Inc. (a) 352,000 8,888,000
Microcell Telecommunications, Inc. (a):
(warrants) 680 8,500
(conditional warrants) 680 425
360 Degrees Communications Co. (a) 37,200 860,250
Vodafone Group PLC sponsored ADR 676,200 27,977,775
Vodafone Group PLC 4,766,050 20,165,682
57,900,632
GAS - 0.1%
Enron Corp. 107,900 4,653,188
TELEPHONE SERVICES - 2.3%
Ameritech Corp. 170,400 10,330,500
Bell Atlantic Corp. 130,000 8,417,500
BellSouth Corp. 277,900 11,220,213
Deutsche Telekom AG (a) 83,300 1,734,629
MCI Communications Corp. 548,700 17,935,631
NYNEX Corp. 247,800 11,925,375
SBC Communications, Inc. 293,800 15,204,150
Sprint Corp. 143,400 5,718,075
82,486,073
TOTAL UTILITIES 145,039,893
TOTAL COMMON STOCKS
(Cost $1,488,768,510) 1,707,204,609
PREFERRED STOCKS - 0.3%
CONVERTIBLE PREFERRED STOCKS - 0.0%
RETAIL & WHOLESALE - 0.0%
GROCERY STORES - 0.0%
Supermarkets General Holdings Corp.
pay-in-kind $3.52 (a) 20,000 540,000
NONCONVERTIBLE PREFERRED STOCKS - 0.3%
ENERGY - 0.0%
OIL & GAS - 0.0%
Gulf Canada Resources Ltd., Series 1,
adj. rate 114,600 372,010
FINANCE - 0.0%
SAVINGS & LOANS - 0.0%
Chevy Chase Capital Corp., Series A,
$5.1875 6,000 310,500
PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONCONVERTIBLE PREFERRED STOCKS - CONTINUED
MEDIA & LEISURE - 0.3%
BROADCASTING - 0.3%
Cablevision System Corp.
(depositary shares) 30,120 $ 2,710,800
Time Warner, Inc., 10 1/4% Series M,
pay-in-kind 6,027 6,539,295
TOTAL MEDIA & LEISURE 9,250,095
NONDURABLES - 0.0%
HOUSEHOLD PRODUCTS - 0.0%
Revlon Group, Inc., Series B,
14 7/8% 5,100 510,000
TECHNOLOGY - 0.0%
COMPUTER SERVICES & SOFTWARE - 0.0%
ICG Holdings, Inc.
14 1/4% pay-in-kind 1,039 1,148,095
TOTAL NONCONVERTIBLE PREFERRED STOCKS 11,590,700
TOTAL PREFERRED STOCKS
(Cost $11,707,866) 12,130,700
CORPORATE BONDS - 13.6%
MOODY'S RATINGS PRINCIPAL
(UNAUDITED) (B) AMOUNT
CONVERTIBLE BONDS - 0.5%
RETAIL & WHOLESALE - 0.5%
DRUG STORES - 0.5%
Rite Aid Corp. liquid yield
option notes 0%, 7/24/06 Baa1 $ 30,020,000 19,062,700
NONCONVERTIBLE BONDS - 13.1%
AEROSPACE & DEFENSE - 0.3%
AEROSPACE & DEFENSE - 0.2%
Be Aerospace, Inc.
9 7/8%, 2/1/06 B2 270,000 283,500
Lockheed Martin Corp.:
7.70%, 6/15/08 A3 2,750,000 2,877,133
7 3/4%, 5/1/26 A3 3,000,000 3,116,040
6,276,673
SHIP BUILDING & REPAIR - 0.1%
Newport News Shipbuilding,
Inc. (c):
8 5/8%, 12/1/06 Ba2 1,310,000 1,339,475
9 1/4%, 12/1/06 B1 1,200,000 1,239,000
2,578,475
TOTAL AEROSPACE & DEFENSE 8,855,148
BASIC INDUSTRIES - 0.4%
CHEMICALS & PLASTICS - 0.3%
Acetex Corp. yankee
9 3/4%, 10/1/03 B1 2,140,000 2,118,600
Freedom Chemical Co.
10 5/8%, 10/15/06 (c) B3 310,000 325,500
Ivex Holdings Corp. 0%,
3/15/05 (e) Caa 680,000 516,800
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (B) AMOUNT (NOTE 1)
NL Industries, Inc.
11 3/4%, 10/15/03 B1 $ 900,000 $ 954,000
Praxair, Inc.
6.90%, 11/1/06 A3 4,000,000 3,987,600
Sterling Chemicals Holdings,
Inc. 11 3/4%, 8/15/06 B3 870,000 917,850
8,820,350
IRON & STEEL - 0.0%
AK Steel Corp. 9 1/8%,
12/15/06 (c) Ba2 1,480,000 1,518,850
PACKAGING & CONTAINERS - 0.1%
Owens-Illinois, Inc.
9.95%, 10/15/04 B2 2,280,000 2,425,350
TOTAL BASIC INDUSTRIES 12,764,550
CONSTRUCTION & REAL ESTATE - 0.4%
BUILDING MATERIALS - 0.2%
Building Materials Corp. of
America 0%, 7/1/04 (e) B1 2,770,000 2,399,513
Usinor Sacilor yankee
7 1/4%, 8/1/06 Baa2 5,000,000 4,992,100
7,391,613
CONSTRUCTION - 0.0%
Greystone Homes, Inc.
10 3/4%, 3/1/04 B1 1,800,000 1,840,500
REAL ESTATE - 0.2%
Henderson Capital International
Ltd. euro 4%, 3/28/97 - 7,220,000 6,245,300
TOTAL CONSTRUCTION & REAL ESTATE 15,477,413
DURABLES - 0.5%
AUTOS, TIRES, & ACCESSORIES - 0.2%
APS, Inc. 11 7/8%, 1/15/06 B2 330,000 357,225
Aetna Industries, Inc.
11 7/8%, 10/1/06 B3 1,780,000 1,913,500
Aftermarket Technology Corp.
12%, 8/1/04 B3 1,750,000 1,955,625
Blue Bird Body Co. 10 3/4%,
11/15/06 (c) B2 1,240,000 1,295,800
Delco Remy International, Inc.
10 5/8%, 8/1/06 (c) B2 1,620,000 1,717,200
7,239,350
CONSUMER ELECTRONICS - 0.0%
Tag Heuer International SA
yankee 12%, 12/15/05 B3 790,000 908,500
HOME FURNISHINGS - 0.1%
Interlake Corp.
12 1/8%, 3/1/02 B3 2,470,000 2,556,450
Knoll, Inc. 10 7/8%, 3/15/06 B3 960,000 1,060,800
3,617,250
TEXTILES & APPAREL - 0.2%
Hat Brands, Inc., Series B,
12 5/8%, 9/15/02 (g) - 380,000 209,000
Levi Strauss & Co.
7%, 11/1/06 (c) Baa2 6,000,000 5,964,720
Pillowtex Corp. 10%,
11/15/06 (c) B2 1,450,000 1,511,625
7,685,345
TOTAL DURABLES 19,450,445
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (B) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
ENERGY - 1.1%
ENERGY SERVICES - 0.4%
Parker Drilling Co. 9 3/4%,
11/15/06 (c) B1 $ 310,000 $ 325,500
Petroliam Nasional BHD yankee (c):
7 1/8%, 10/18/06 A+ 7,000,000 7,064,050
7 5/8%, 10/15/26 A1 6,000,000 6,048,420
13,437,970
OIL & GAS - 0.7%
Diamond Shamrock, Inc.
7.65%, 7/1/26 Baa3 2,000,000 2,073,280
Flores & Rucks, Inc.
9 3/4%, 10/1/06 B3 590,000 625,400
HS Resource, Inc.
9 1/4%, 11/15/06 (c) B2 170,000 174,675
Husky Oil Ltd. yankee
6 7/8%, 11/15/03 Baa3 4,000,000 3,971,040
Norcen Energy Resources Ltd.
yankee 7 3/8%, 5/15/06 Baa3 2,200,000 2,234,100
Occidental Petroleum Corp.:
10.94%, 5/17/00 Baa3 2,700,000 3,047,355
6.39%, 11/9/00 Baa3 1,000,000 991,130
8 1/2%, 11/9/01 Baa2 1,251,000 1,340,096
Petro-Canada, Inc. yankee
7 7/8%, 6/15/26 Baa1 3,000,000 3,156,570
Ras Laffan Liquid Natural Gas
Co. Ltd. 7.628%, 9/15/06 (c) A3 2,800,000 2,810,640
Tosco Corp. 7 5/8%, 5/15/06 Baa2 3,500,000 3,613,470
24,037,756
TOTAL ENERGY 37,475,726
FINANCE - 5.8%
ASSET-BACKED SECURITIES - 0.6%
Airplanes Pass Through Trust
Class D 10 7/8%, 3/15/19 Ba2 6,250,000 6,953,125
Caterpillar Financial Asset Trust
6.55%, 5/22/02 A3 880,000 885,500
Green Tree Financial Corp.:
6 1/2%, 6/15/27 Aaa 1,800,000 1,807,308
6.80%, 6/15/27 Aaa 1,900,000 1,915,428
Premier Auto Trust:
8.05%, 4/4/00 Aaa 6,804,000 6,969,848
6%, 5/6/00 Aaa 2,320,000 2,320,000
20,851,209
BANKS - 1.6%
ABN Amro Bank NV
6 5/8%, 10/31/01 Aa3 7,000,000 7,002,450
Bank of America National Trust
& Savings 5 1/2%, 6/19/97 - 5,000,000 4,998,550
Banponce Financial Corp.
7.72%, 4/13/00 A3 2,000,000 2,057,160
Capital One Bank:
8 1/8%, 2/27/98 Baa3 1,035,000 1,056,663
6.74%, 5/31/99 Baa3 4,000,000 4,012,000
7.20%, 7/19/99 Baa3 8,000,000 8,089,680
Central Fidelity Banks, Inc.
8.15%, 11/15/02 Baa2 100,000 105,880
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (B) AMOUNT (NOTE 1)
HSBC Americas, Inc.
7%, 11/1/06 Baa1 $ 7,000,000 $ 6,910,400
KeyCorp 7 1/2%, 6/15/06 A2 6,300,000 6,461,217
Midland Bank PLC yankee
7 5/8%, 6/15/06 A1 3,000,000 3,106,380
Signet Bank
7.80%, 9/15/06 Baa1 3,000,000 3,112,530
Signet Banking Corp.
9 5/8%, 6/1/99 Baa2 790,000 842,654
Southern National Corp.
7.05%, 5/23/03 A3 5,000,000 5,045,300
Summit Bancorp
8 5/8%, 12/10/02 BBB- 1,730,000 1,875,683
Union Planters National Bank
6.81%, 8/20/01 A3 3,500,000 3,513,125
58,189,672
CREDIT & OTHER FINANCE - 3.1%
AT&T Capital Corp.:
6.02%, 12/1/98 Baa3 7,500,000 7,472,025
6.16%, 12/3/99 Baa3 2,750,000 2,728,908
Aames Financial Corp.
9 1/8%, 11/1/03 Ba3 100,000 101,750
Ahmanson Capital Trust I
8.36%, 12/1/26 (c) Baa3 4,250,000 4,294,838
BCH Cayman Islands Ltd.
yankee 7.70%, 7/15/06 A3 2,600,000 2,686,242
CIT Group Holdings, Inc.
6 1/4%, 10/4/99 Aa3 6,500,000 6,493,890
Chase Capital I
7.67%, 12/1/26 A1 10,000,000 9,777,700
ContiFinancial Corp.
8 3/8%, 8/15/03 Ba 1,110,000 1,141,191
Finova Capital Corp.:
6.44%, 11/6/01 Baa1 5,500,000 5,443,955
6.12%, 5/28/02 Baa1 2,000,000 1,941,900
First Securities Capital I
8.41%, 12/15/26 (c) A3 4,000,000 4,039,800
Ford Motor Credit:
5.73%, 2/23/00 A1 3,250,000 3,185,975
6.65%, 5/22/00 A1 9,000,000 9,048,150
5.68%, 2/15/01 A1 5,000,000 4,838,950
6.57%, 3/19/01 A1 700,000 699,146
7%, 9/25/01 A1 12,500,000 12,686,375
General Electric Capital Corp.
6.94%, 4/13/09 (d) Aaa 7,000,000 7,097,790
General Motors Acceptance
Corp. 5 5/8%, 2/1/99 A3 5,000,000 4,936,350
HMC Acquisition Properties, Inc.
9%, 12/15/07 Ba3 4,730,000 4,800,950
Keycorp Institutional Capital A
7.826%, 12/1/26 (c) Aa 5,000,000 4,905,000
North American Mortgage Co.
7.29%, 8/19/03 Baa2 1,000,000 1,016,510
Repsol International Finance BV
yankee 7%, 8/1/05 Aa3 3,000,000 3,016,620
Wells Fargo Capital C
7.73%, 12/1/26 (c) A1 10,350,000 10,040,742
112,394,757
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (B) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
FINANCE - CONTINUED
INSURANCE - 0.2%
Reliance Group
9 3/4%, 11/15/03 B1 $ 2,440,000 $ 2,537,600
SunAmerica, Inc.
6.20%, 10/31/99 Baa1 5,500,000 5,475,415
8,013,015
SAVINGS & LOANS - 0.3%
Chevy Chase Savings Bank FSB
9 1/4%, 12/1/08 B1 1,920,000 1,958,400
First Nationwide Escrow Corp.
10 5/8%, 10/1/03 (c) Ba3 1,050,000 1,134,000
First Nationwide Parent Holdings
Ltd. 12 1/2%, 4/15/03 B2 3,960,000 4,385,700
Great Western Financial Corp.
8.60%, 2/1/02 Baa1 2,000,000 2,148,420
9,626,520
TOTAL FINANCE 209,075,173
HEALTH - 0.3%
MEDICAL EQUIPMENT & SUPPLIES - 0.0%
IMED Corp. 9 3/4%,
12/1/06 (c) B3 250,000 254,375
MEDICAL FACILITIES MANAGEMENT - 0.3%
Columbia/HCA Healthcare
Corp.:
6 1/2%, 3/15/99 A2 4,500,000 4,521,465
6 7/8%, 7/15/01 A3 2,000,000 2,023,740
Quest Diagnostics, Inc.
10 3/4%, 12/15/06 B2 90,000 94,725
Tenet Healthcare Corp.
10 1/8%, 3/1/05 Ba3 3,760,000 4,154,800
10,794,730
TOTAL HEALTH 11,049,105
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
Exide Corp. 10%, 4/15/05 B1 825,000 849,750
Goss Graphic System, Inc.
12%, 10/15/06 B2 1,650,000 1,699,500
2,549,250
POLLUTION CONTROL - 0.0%
Allied Waste of North America,
Inc. 10 1/4%, 12/1/06 (c) B3 180,000 189,000
Envirosource, Inc.
9 3/4%, 6/15/03 B3 550,000 512,875
701,875
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 3,251,125
MEDIA & LEISURE - 1.4%
BROADCASTING - 0.7%
Bell Cablemedia PLC yankee
0%, 9/15/05 (e) B2 960,000 777,600
Granite Broadcasting Corp.
10 3/8%, 5/15/05 B3 710,000 727,750
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (B) AMOUNT (NOTE 1)
Intermedia Capital Partners IV
LP/Intermedia Partners
Capital Corp. 11 1/4%,
8/1/06 (c) B2 $ 890,000 $ 923,375
International Cabletel, Inc.
0%, 2/1/06 (e) B3 320,000 216,800
Jacor Communications Co.
9 3/4%, 12/15/06 B2 120,000 122,400
NWCG Holdings Corp.
0%, 6/15/99 Caa 520,000 431,600
SCI Television, Inc. secured
11%, 6/30/05 B2 4,850,000 5,189,500
SFX Broadcasting, Inc.
10 3/4%, 5/15/06 B3 3,200,000 3,360,000
Telemundo Group, Inc. 7%,
2/15/06 (d) B1 4,170,000 4,024,050
Telewest PLC 0%,
10/1/07 (e) B1 3,390,000 2,356,050
Time Warner, Inc.:
7.95%, 2/1/00 Ba1 2,000,000 2,065,380
7 3/4%, 6/15/05 Ba1 5,300,000 5,331,429
9.15%, 2/1/23 Ba1 1,020,000 1,105,670
26,631,604
ENTERTAINMENT - 0.1%
Viacom, Inc. 8%, 7/7/06 B1 2,500,000 2,425,000
LODGING & GAMING - 0.4%
American Skiing Co.
12%, 7/15/06 (c) B3 2,240,000 2,357,600
Circus Circus Enterprises, Inc.
7%, 11/15/36 Baa2 4,250,000 4,152,038
Courtyard by Marriott II LP/
Courtyard II Finance Co.,
Series B, 10 3/4%, 2/1/08 B- 1,190,000 1,255,450
HMH Properties, Inc.
9 1/2%, 5/15/05 Ba3 1,020,000 1,063,350
Mirage Resorts, Inc.
7 1/4%, 10/15/06 Baa2 6,000,000 6,040,200
Wyndham Hotel Corp.
10 1/2%, 5/15/06 B2 580,000 614,800
15,483,438
PUBLISHING - 0.0%
Golden Books Publishing, Inc.
7.65%, 9/15/02 B1 490,000 436,100
RESTAURANTS - 0.2%
Foodmaker, Inc.
9 3/4%, 6/1/02 B3 2,180,000 2,212,700
Host Marriott Travel Plazas, Inc.
9 1/2%, 5/15/05 B1 4,960,000 5,170,800
7,383,500
TOTAL MEDIA & LEISURE 52,359,642
NONDURABLES - 0.6%
FOODS - 0.4%
Chiquita Brands International,
Inc. 9 5/8%, 1/15/04 B1 4,350,000 4,447,875
ConAgra, Inc.
7 1/8%, 10/1/26 Baa1 3,250,000 3,321,045
Foodbrands of America, Inc.
10 3/4%, 5/15/06 B3 1,150,000 1,207,500
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (B) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
NONDURABLES - CONTINUED
FOODS - CONTINUED
Ralcorp Holdings, Inc.
8 3/4%, 9/15/04 Ba1 $ 2,500,000 $ 2,731,875
Specialty Foods Corp.:
11 1/8%, 10/1/02 B3 3,200,000 3,040,000
11 1/4%, 8/15/03 Caa 805,000 611,800
15,360,095
HOUSEHOLD PRODUCTS - 0.2%
Revlon Consumer Products
Corp. 10 1/2%, 2/15/03 B3 1,800,000 1,887,750
Revlon Worldwide Corp.
secured 0%, 3/15/98 B3 4,940,000 4,279,275
6,167,025
TOTAL NONDURABLES 21,527,120
RETAIL & WHOLESALE - 0.7%
APPAREL STORES - 0.0%
Lamonts Apparel, Inc.
pay-in-kind 10 1/4%,
11/1/99 (c)(g) - 2,816,000 119,680
Loehmann's, Inc.
11 7/8%, 5/15/03 B2 1,030,000 1,112,400
1,232,080
GENERAL MERCHANDISE STORES - 0.5%
Dayton Hudson Corp.:
6.80%, 10/1/01 Baa1 7,500,000 7,503,300
7 1/2%, 7/15/06 Baa1 3,500,000 3,578,120
J.C. Penney, Inc.
6.90%, 8/15/26 A1 1,000,000 1,011,140
K Mart Corp.:
12 1/2%, 3/1/05 Ba3 1,000,000 1,152,500
8 1/4%, 1/1/22 Ba3 1,430,000 1,201,200
Michaels Stores, Inc.
10 7/8%, 6/18/06 Ba2 1,810,000 1,755,700
16,201,960
GROCERY STORES - 0.2%
Kroger Co. 8.15%, 7/15/06 Ba1 2,250,000 2,329,335
Pathmark Stores, Inc.:
12 5/8%, 6/15/02 Caa 1,720,000 1,763,000
9 5/8%, 5/1/03 B3 2,030,000 1,943,725
0%, 11/1/03 (e) Caa 2,510,000 1,625,225
7,661,285
TOTAL RETAIL & WHOLESALE 25,095,325
SERVICES - 0.1%
PRINTING - 0.0%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa 1,410,000 1,360,650
SERVICES - 0.1%
Iron Mountain, Inc.
10 1/8%, 10/1/06 B3 1,050,000 1,107,750
Prime Succession Acquisition
Corp. 10 3/4%, 8/15/04 (c) B 80,000 86,800
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (B) AMOUNT (NOTE 1)
Speedy Muffler King, Inc./
Speedy USA, Inc. yankee
10 7/8%, 10/1/06 B1 $ 1,190,000 $ 1,276,275
2,470,825
TOTAL SERVICES 3,831,475
TECHNOLOGY - 0.5%
COMMUNICATIONS EQUIPMENT - 0.1%
Echostar Satellite Broadcasting
Corp. 0%, 3/15/04 (e) Caa 1,790,000 1,355,925
Echostar Communications Corp.
0%, 6/1/04 (e) B2 2,430,000 1,998,675
3,354,600
COMPUTERS & OFFICE EQUIPMENT - 0.3%
Comdisco, Inc.
6 3/8%, 11/30/01 Baa1 8,300,000 8,166,370
Unisys Corp.:
12%, 4/15/03 B1 2,310,000 2,471,700
11 3/4%, 10/15/04 B1 1,330,000 1,418,113
12,056,183
ELECTRONICS - 0.1%
Advanced Micro Devices, Inc.
11%, 8/1/03 Ba1 2,580,000 2,792,850
TOTAL TECHNOLOGY 18,203,633
TRANSPORTATION - 0.3%
AIR TRANSPORTATION - 0.2%
Delta Air Lines, Inc.:
9 7/8%, 5/15/00 Baa3 1,500,000 1,624,830
10 1/2%, 4/30/16 Baa1 2,500,000 3,054,100
US Air, Inc.:
9 5/8%, 2/1/01 B3 2,180,000 2,169,100
10%, 7/1/03 B3 2,200,000 2,189,000
9,037,030
RAILROADS - 0.1%
Burlington Northern Santa Fe
Corp. 7.29%, 6/1/36 Baa2 3,000,000 3,095,310
TOTAL TRANSPORTATION 12,132,340
UTILITIES - 0.6%
CELLULAR - 0.3%
Arch Communications Group,
Inc. 0%, 3/15/08 (e) B3 1,820,000 1,039,675
Microcell Telecommunications,
Inc. 0%, 6/1/06 (e) B3 170,000 94,775
Millicom International Cellular
SA 0%, 6/1/06 (e) B3 600,000 372,000
Mobile Telecommunications
Technologies Corp.
13 1/2%, 12/15/02 B3 1,050,000 1,050,000
Paging Network, Inc.
10%, 10/15/08 B2 620,000 630,075
Rogers Cantel, Inc.
9 3/8%, 6/1/08 Ba3 1,540,000 1,617,000
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (B) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
UTILITIES - CONTINUED
CELLULAR - CONTINUED
360 Degrees Communications
Co.:
7 1/8%, 3/1/03 Ba2 $ 3,500,000 $ 3,457,685
7 1/2%, 3/1/06 Ba2 2,750,000 2,727,753
Western Wireless Corp.
10 1/2%, 6/1/06 B3 1,000,000 1,048,750
12,037,713
ELECTRIC UTILITY - 0.0%
El Paso Electric Co. 1st Mtg.
9.40%, 5/1/11 Ba3 1,030,000 1,102,100
TELEPHONE SERVICES - 0.3%
Brooks Fiber Properties, Inc.
0%, 11/1/06 (c)(e) - 1,040,000 663,000
Call-Net Enterprises, Inc. yankee
0%, 12/1/04 (e) B2 3,360,000 2,755,200
MFS Communications, Inc.
0%, 1/15/06 (e) B1 4,510,000 3,292,300
Shared Technologies Fairchild
Communications Corp.
0%, 3/1/06 (e) Caa 2,730,000 2,279,550
8,990,050
TOTAL UTILITIES 22,129,863
TOTAL NONCONVERTIBLE BONDS 472,678,083
TOTAL CORPORATE BONDS
(Cost $482,786,798) 491,740,783
U.S. GOVERNMENT AND GOVERNMENT
AGENCY OBLIGATIONS - 22.9%
U.S. TREASURY OBLIGATIONS - 19.0%
6 1/8%, 3/31/98 Aaa 226,665,000 227,762,059
8 7/8%, 11/15/98 Aaa 23,075,000 24,279,284
8 7/8%, 2/15/99 Aaa 7,540,000 7,977,094
6 3/4%, 6/30/99 Aaa 2,700,000 2,747,682
8%, 8/15/99 Aaa 7,420,000 7,772,450
7 3/4%, 12/31/99 Aaa 21,945,000 22,953,153
5 1/2%, 12/31/00 Aaa 47,000,000 45,912,890
7 7/8%, 8/15/01 Aaa 72,260,000 77,024,824
10 3/4%, 5/15/03 Aaa 12,725,000 15,655,695
11 7/8%, 11/15/03 Aaa 41,040,000 53,537,911
7%, 7/15/06 Aaa 2,700,000 2,805,057
11 3/4%, 2/15/10 Aaa 51,045,000 67,786,229
12 3/4%, 11/15/10
(callable) Aaa 12,000,000 16,985,640
13 7/8%, 5/15/11 Aaa 25,650,000 38,723,549
9%, 11/15/18 Aaa 59,690,000 74,901,400
8 7/8%, 2/15/19 Aaa 1,340,000 1,663,489
688,488,406
U.S. GOVERNMENT AGENCY OBLIGATIONS - 3.9%
Federal Agricultural Mortgage
Corp. 7.63%, 1/16/01 Aaa 3,321,000 3,476,157
Farm Credit Systems Financial
Assistance Corp.
8.80%, 6/10/05 - 2,000,000 2,270,320
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (B) AMOUNT (NOTE 1)
Federal Farm Credit Bank:
8.16%, 12/7/04 Aaa $ 5,000,000 $ 5,448,450
9.55%, 5/9/05 Aaa 2,500,000 2,949,600
Federal Home Loan Bank:
5.695%, 12/19/00 Aaa 4,000,000 3,916,880
5.95%, 3/6/03 Aaa 4,000,000 3,895,640
7.31%, 6/16/04 Aaa 2,500,000 2,603,900
8.22%, 11/17/04 Aaa 4,000,000 4,365,160
7.59%, 3/10/05 Aaa 3,850,000 4,073,762
Federal Home Loan Mortgage
Corporation:
0%, 1/23/97 - 24,000,000 23,921,760
0%, 1/31/97 - 24,390,000 24,278,686
6 3/4%, 8/1/05 Aaa 2,500,000 2,509,375
Federal National Mortgage
Association
5 1/2%, 2/2/01 Aaa 9,030,000 8,763,344
Guaranteed Export Trust
Certificates (assets of Trust
Guaranteed by U.S.
Government through
Export-Import Bank):
Series 1994-A,
7.12%, 4/15/06 Aaa 7,893,296 8,085,695
Series 1996-A,
6.55%, 6/15/04 Aaa 4,279,407 4,314,327
Guaranteed Trade Trust
Certificates (asset Guaranteed
Trust guaranteed by U.S.
Government through Export-
Import Bank) Series 1994-A,
7.39%, 6/26/06 Aaa 2,922,042 3,021,318
State of Israel (guaranteed by
U.S. Government through
Agency for International
Development):
6 5/8%, 8/15/03 Aaa 7,810,000 7,858,344
5 5/8%, 9/15/03 Aaa 8,540,000 8,144,598
6 3/4%, 8/15/04 Aaa 2,144,000 2,170,779
U.S. Housing & Urban
Development:
6.67%, 8/1/01 Aaa 9,400,000 9,490,898
8.24%, 8/1/04
participate certificate Aaa 2,450,000 2,685,004
7.63%, 8/1/14 Aaa 2,825,000 2,868,675
141,112,672
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $830,856,827) 829,601,078
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES - 6.8%
FEDERAL HOME LOAN MORTGAGE CORPORATION - 0.2%
5 1/2%, 1/1/03 to 6/1/03 Aaa 4,197,497 4,016,459
7%, 4/1/01 to 8/1/01 Aaa 2,942,091 2,962,303
8 1/2%, 7/1/21 to 6/1/23 Aaa 270,843 282,857
7,261,619
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (B) AMOUNT (NOTE 1)
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 4.3%
5 1/2%, 2/1/03 to 5/1/03 Aaa $ 4,187,180 $ 4,006,587
6%, 10/1/02 to 6/1/26 Aaa 43,567,905 41,310,311
6 1/2%, 6/1/00 to 7/1/26 Aaa 82,478,168 78,696,439
7%, 5/1/26 to 11/1/26 Aaa 29,630,381 29,293,601
153,306,938
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 2.3%
6%, 12/15/08 to 5/15/26 Aaa $ 11,334,802 10,972,223
6 1/2%, 6/15/08 to 7/15/09 Aaa 21,491,247 21,285,023
8%, 5/15/25 to 10/15/26. Aaa 24,776,159 25,273,598
8 1/2%, 12/15/16 to
10/15/26 Aaa 25,557,003 26,484,667
84,015,511
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $241,223,453) 244,584,068
COMMERCIAL MORTGAGE SECURITIES - 1.0%
American Southwest Financial
Securities Series 1994-C2
Class B2, 12.79%,
12/25/01 (c) - 750,000 731,250
Berkeley Federal Bank & Trust
FSB Series 1994 Class 1-B,
7.9038%, 8/1/24 (c)(f) - 2,900,000 1,958,406
Blackrock Capital Funding
LLC Series 1996 Class C2,
7.6414%, 11/16/26 (c)(f) AAA 1,573,448 1,593,608
CBA Mortgage Corp.
Series 1993-C1 Class E,
7.7732%, 12/25/03 (c)(f) Ba2 500,000 449,688
CS First Boston Mortgage
Securities Corp.
Series 1994-M1 Class E,
12.60%, 2/15/02 (c) - 500,000 498,750
DLJ Mortgage Acceptance
Corp. Series 1993-MF12
Class B-2, 10.10%,
9/18/03 (c) - 600,000 562,500
Equitable Life Assurance Society
of the United States (c):
Series 174 Class A1,
7.24%, 5/15/06 Aaa 5,000,000 5,168,750
Series 174 Class B1,
7.33%, 5/15/06 Aa2 3,500,000 3,601,719
Series 1996-1 Class C1,
7.52%, 5/15/06 A2 2,300,000 2,377,625
General Motors Acceptance
Corp. Commercial
Mortgage Securities, Inc.
Series 1996-C1 Class F,
7.86%, 11/15/06 (c) Ba3 750,000 645,469
Lehman Structured Securities
Corp. Series 1996-1 Class E-2,
7.995%, 6/25/26 BB 1,710,704 1,591,490
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (B) AMOUNT (NOTE 1)
Merrill Lynch Mortgage
Investments, Inc.:
Series 1994 Class M1-E,
8.137%, 6/25/22 (c)(f) Ba2 $ 5,670,000 $ 5,104,772
Series 1995 Class C2-E,
7.9886%, 6/15/21 (c)(f) Ba3 464,135 431,936
Mortgage Capital Funding, Inc.
Series 1996-MC1 Class G,
7.15%, 7/15/28 (c) BB 1,000,000 800,625
Morgan Stanley Capital One,
Inc. Series 1996-MBL1
Class E, 8.5191%,
5/25/21 (c)(f) - 1,910,136 1,719,719
NB Commercial Mortgage
sequential pay, Series FSI
Class A, 7.187%,
10/20/23 (c) - 2,402,428 2,412,939
Penn Mutual Life Insurance Co.
(The) (c):
Series 1996-PML Class K,
7.90%, 11/15/26 - 1,473,000 861,705
Series 1996-PML Class L,
7.90%, 11/15/26 - 1,133,000 495,348
Structured Asset Securities Corp. (c):
Series 1993-C1 Class E,
6.60%, 10/25/24 B 1,250,033 487,122
Series 1996-C3 Class E,
8.458%, 6/25/30 (f) - 500,000 441,094
Wells Fargo Capital Markets
Apartment Financing Trust
6.56%, 12/29/05 (c) Aaa 3,250,000 3,250,000
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $34,126,408) 35,184,515
FOREIGN GOVERNMENT OBLIGATIONS - 0.6%
Newfoundland Province yankee
11 5/8%, 10/15/07 Baa1 2,000,000 2,678,160
Manitoba Province yankee
6 3/8%, 10/15/99 A1 7,000,000 7,025,410
Mexico Value recovery rights - 2,000 -
Quebec Province yankee
7.22%, 7/22/36 (d) A2 10,000,000 10,482,400
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $19,660,950) 20,185,970
CERTIFICATES OF DEPOSIT - 3.3%
Abbey National Treasury
Services PLC yankee
5.43%, 3/17/97 14,000,000 13,997,469
Bank of Scotland yankee
5.39%, 3/5/97 12,000,000 11,996,995
Bank of Tokyo-Mitsubishi Ltd.
yankee 5.51%, 3/6/97 14,500,000 14,494,248
Bayerische Hypotheken und
Wechsel Bank AG
yankee 5.40%, 4/7/97 14,500,000 14,494,132
Bayerische Vereinsbank AG
yankee 5.40%, 4/2/97 14,500,000 14,500,000
CERTIFICATES OF DEPOSIT - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
National Westminster Bank PLC
yankee 5.41%, 2/10/97 $ 14,500,000 $ 14,498,553
Sanwa Bank Ltd. yankee
5.49%, 1/15/97 11,000,000 10,999,938
Sumitomo Bank Ltd. yankee
5.54%, 1/31/97 12,000,000 12,000,373
Westdeutsche Landesbank Giron
yankee 5.40%, 2/5/97 14,500,000 14,498,524
TOTAL CERTIFICATES OF DEPOSIT
(Cost $121,498,614) 121,480,232
COMMERCIAL PAPER - 3.2%
Commonwealth Bank of Australia
yankee 5.325%, 3/11/97 12,000,000 11,867,700
Dakota 5.40%, 3/12/97 14,750,000 14,584,185
Enterprise Funding Corp.
5.47%, 1/24/97 13,461,000 13,406,887
Ford Motor Credit Co.
5.30%, 3/11/97 14,500,000 14,339,291
General Electric Capital Corp.
5.29%, 6/4/97 14,500,000 14,159,128
General Motors Acceptance Corp.
5.465%, 6/23/97 12,000,000 11,678,680
PHH Corp. 5 1/2%, 1/17/97 13,000,000 12,962,983
Sherwood Medical Co.
5.32%, 3/10/97 12,000,000 11,867,749
Unifunding, Inc.
5.37%, 2/24/97 10,000,000 9,910,777
TOTAL COMMERCIAL PAPER
(Cost $114,880,494) 114,777,380
CASH EQUIVALENTS - 1.2%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations), in a joint
trading account dated 12/31/96
due 1/2/97:
at 6.82% $ 25,830,783 25,821,000
at 6 3/4% 18,067,773 18,061,000
43,882,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $3,389,391,920) $ 3,620,771,335
LEGEND
(a) Non-income producing
(b) Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
(c) Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of these securities amounted to $93,936,690 or 2.6% of net
assets.
(d) Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date.
(e) Debt obligation initially issued in zero coupon form which converts to
coupon form at a specified rate and date.
(f) The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
(g) Non-income producing - issuer filed for protection under the Federal
Bankruptcy Code or is in default of interest payment.
(h) An affiliated company is a company in which the fund has ownership of
at least 5% of the voting securities. Transactions during the period with
companies which are or were affiliates are as follows:
PURCHASE SALES DIVIDEND VALUE
AFFILIATE COST COST INCOME
Barr Laboratories, Inc. $ - $ 16,365,800 $ - $ -
Synetic, Inc. - 25,400,727 - -
WMS Industries, Inc. 344,890 2,617,463 - -
Totals $ 344,890 $ 44,383,990 $ - $ -
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $5,236,434,286 and $5,033,786,308, respectively, of which U.S.
government and government agency obligations aggregated $1,026,406,839 and
$814,153,575, respectively.
The market value of futures contracts opened and closed during the period
amounted to $16,398,668 and $180,511,750, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company. The
commissions paid to these affiliated firms were $628,942 for the period
(see Note 4 of Notes to Financial Statements).
The fund participated in the bank borrowing program. The maximum loan and
average daily balance during the period for which the loan was outstanding
amounted to $6,956,000. The weighted average interest rate was 5.6%. (see
Note 5 of Notes to Financial Statements).
The composition of long-term debt holdings as a percentage of total value
of investment in securities, is as follows (ratings are unaudited):
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 33.5% AAA, AA, A 32.1%
Baa 4.1% BBB 5.7%
Ba 1.6% BB 1.4%
B 3.1% B 2.7%
Caa 0.3% CCC 0.3%
Ca, C 0.0% CC, C 0.0%
D 0.0%
The percentage not rated by both S&P and Moody's amounted to 0.5%.
Distribution of investments by country of issue, as a percentage of total
value of investment in securities, is as follows:
United States 88.4%
United Kingdom 3.3
Japan 1.7
Netherlands 1.6
Canada 1.6
Germany 1.2
Others (individually less than 1%) 2.2
TOTAL 100.0%
INCOME TAX INFORMATION
At December 31, 1996, the aggregate cost of investment securities for
income tax purposes was $3,393,524,538. Net unrealized appreciation
aggregated $227,246,797, of which $259,014,716 related to appreciated
investment securities and $31,767,919 related to depreciated investment
securities.
The fund hereby designates approximately $77,081,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
DECEMBER 31, 1996
ASSETS
Investment in securities, at value (including repurchase agreements of $43,882,000) (cost $3,389,391,920) $ 3,620,771,335
- -
See accompanying schedule
Cash 368
Receivable for investments sold 12,629,838
Receivable for fund shares sold 1,477,468
Dividends receivable 4,091,627
Interest receivable 21,130,140
Other receivables 84,928
TOTAL ASSETS 3,660,185,704
LIABILITIES
Payable for investments purchased $ 15,938,580
Payable for fund 1,089,638
shares redeemed
Accrued management fee 1,688,073
Other payables and 275,236
accrued expenses
TOTAL LIABILITIES 18,991,527
NET ASSETS $ 3,641,194,177
Net Assets consist of:
Paid in capital $ 2,969,889,033
Undistributed net investment income 120,488,851
Accumulated undistributed 319,437,760
net realized gain (loss) on investments and foreign currency transactions
Net unrealized appreciation (depreciation) on investments 231,378,533
and assets and liabilities in
foreign currencies
NET ASSETS, for 215,067,314 shares outstanding $ 3,641,194,177
NET ASSET VALUE, offering price $16.93
and redemption price per share ($3,641,194,177 (divided by) 215,067,314 shares)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996
INVESTMENT INCOME $ 34,783,182
Dividends
Interest 113,908,635
TOTAL INCOME 148,691,817
EXPENSES
Management fee $ 22,022,749
Transfer agent fees 2,187,494
Accounting fees and expenses 808,547
Non-interested trustees' compensation 28,265
Custodian fees and expenses 393,000
Registration fees 8,154
Audit 30,576
Legal 22,462
Interest 1,087
Miscellaneous 4,586
Total expenses before reductions 25,506,920
Expense reductions (496,000 25,010,920
)
NET INVESTMENT INCOME 123,680,897
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:
Investment securities (including 305,682,042
realized gain of $23,048,578
on sales of investments in
affiliated issuers)
Foreign currency transactions 12,006,469
Futures contracts 13,494,578 331,183,089
Change in net unrealized
appreciation (depreciation) on:
Investment securities 31,145,689
Assets and liabilities in (6,941,808
foreign currencies )
Futures contracts (8,457,295 15,746,586
)
NET GAIN (LOSS) 346,929,675
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 470,610,572
OTHER INFORMATION $ 472,893
Expense reductions
Directed brokerage arrangements
Custodian interest credits 23,107
$ 496,000
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
<TABLE>
<CAPTION>
<S> <C> <C>
Operations $ 123,680,897 $ 114,776,593
Net investment income
Net realized gain (loss) 331,183,089 108,752,522
Change in net unrealized appreciation (depreciation) 15,746,586 284,744,744
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 470,610,572 508,273,859
Distributions to shareholders (119,397,539) (67,894,650)
From net investment income
From net realized gain (98,450,602) -
TOTAL DISTRIBUTIONS (217,848,141) (67,894,650)
Share transactions 270,086,820 239,926,948
Net proceeds from sales of shares
Reinvestment of distributions 217,848,141 67,894,650
Cost of shares redeemed (432,347,524) (705,883,879)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 55,587,437 (398,062,281)
TOTAL INCREASE (DECREASE) IN NET ASSETS 308,349,868 42,316,928
NET ASSETS
Beginning of period 3,332,844,309 3,290,527,381
End of period (including undistributed net investment income of $120,488,851 and $105,158,635, $ 3,641,194,177 $ 3,332,844,309
respectively)
OTHER INFORMATION
Shares
Sold 17,138,645 16,731,500
Issued in reinvestment of distributions 14,427,029 5,014,376
Redeemed (27,544,207) (49,259,550)
Net increase (decrease) 4,021,467 (27,513,674)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1996 1995 1994 1993 D 1992
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 15.79 $ 13.79 $ 15.42 $ 13.32 $ 12.55
Income from Investment Operations
Net investment income .63 .30 .45 .33 .32
Net realized and unrealized gain (loss) 1.55 1.99 (1.33) 2.39 1.09
Total from investment operations 2.18 2.29 (.88) 2.72 1.41
Less Distributions
From net investment income (.57) (.29) (.29) (.33) (.31)
In excess of net investment income - - - (.04) -
From net realized gain (.47) - (.46) (.25) (.33)
Total distributions (1.04) (.29) (.75) (.62) (.64)
Net asset value, end of period $ 16.93 $ 15.79 $ 13.79 $ 15.42 $ 13.32
TOTAL RETURN A, B 14.60% 16.96% (6.09)% 21.23% 11.71%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 3,641,194 $ 3,332,844 $ 3,290,527 $ 2,422,692 $ 731,724
Ratio of expenses to average net assets .74% .81% .81% .88% .91%
Ratio of expenses to average net assets after expense reductions .73% .79% .80% .88% .91%
C C C
Ratio of net investment income to average net assets 3.60% 3.54% 4.07% 3.64% 4.89%
Portfolio turnover rate 168% 256% 85% 113% 92%
Average commission rate E $ .0163
A TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE
TOTAL RETURNS
SHOWN. B THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES
NOT BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 6 OF NOTES TO
FINANCIAL
STATEMENTS). C FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS
WITH THIRD PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S
EXPENSES (SEE NOTE
6 OF NOTES TO FINANCIAL STATEMENTS). D EFFECTIVE JANUARY 1, 1993, THE
FUND ADOPTED STATEMENT OF POSITION 93-2, "DETERMINATION, DISCLOSURE,
AND FINANCIAL
STATEMENT PRESENTATION OF INCOME, CAPITAL GAIN, AND RETURN OF CAPITAL
DISTRIBUTIONS BY INVESTMENT COMPANIES." AS A RESULT, NET INVESTMENT
INCOME PER SHARE
MAY REFLECT CERTAIN RECLASSIFICATIONS RELATED TO BOOK TO TAX
DIFFERENCES.. E FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1,
1995, A FUND IS REQUIRED TO
DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY TRADES
ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD
TO PERIOD AND FUND TO FUND
DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS MARKETS WHERE
TRADING PRACTICES AND COMMISSION RATE STRUCTURES MAY DIFFER.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
For the period ended December 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES.
Asset Manager Portfolio (the fund) is a fund of Variable Insurance Products
Fund II (the trust) and is authorized to issue an unlimited number of
shares. The trust is registered under the Investment Company Act of 1940,
as amended (the 1940 Act), as an open-end management investment company
organized as a Massachusetts business trust. Shares of the fund may only be
purchased by insurance companies for the purpose of funding variable
annuity or variable life insurance contracts. The financial statements have
been prepared in conformity with generally accepted accounting principles
which permit management to make certain estimates and assumptions at the
date of the financial statements. The following summarizes the significant
accounting policies of the fund:
SECURITY VALUATION. Equity securities for which quotations are readily
available are valued at the last sale price, or if no sale price, at the
closing bid price. Debt securities for which quotations are readily
available are valued by a pricing service at their market values as
determined by their most recent bid prices in the principal market (sales
prices if the principal market is an exchange) in which such securities are
normally traded. Securities (including restricted securities) for which
market quotations are not readily available are valued at their fair value
as determined in good faith under consistently applied procedures under the
general supervision of the Board of Trustees. Short-term securities with
remaining maturities of sixty days or less for which quotations are not
readily available are valued at amortized cost or original cost plus
accrued interest, both of which approximate current value.
FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S.
dollars at the prevailing rates of exchange at period end. Income receipts
and expense payments are translated into U.S. dollars at the prevailing
exchange rate on the respective dates of the transactions. Purchases and
sales of securities are translated into U.S. dollars at the contractual
currency exchange rates established at the time of each trade.
Net realized gains and losses on foreign currency transactions represent
net gains and losses from sales and maturities of forward currency
contracts, disposition of foreign currencies, and the difference between
the amount of net investment income accrued and the U.S. dollar amount
actually received. The effects of changes in foreign currency exchange
rates on investments in securities are included with the net realized and
unrealized gain or loss on investment securities.
INCOME TAXES. As a qualified regulated investment company under Subchapter
M of the Internal Revenue Code, the fund is not subject to U.S. federal
income taxes to the extent that it distributes substantially all of its
taxable income for its fiscal year. The fund may be subject to foreign
taxes on income, gains on investments or currency repatriation. The fund
accrues such taxes as applicable. The schedule of investments includes
information regarding income taxes under the caption "Income Tax
Information."
INVESTMENT INCOME. Dividend income is recorded on the ex-dividend date,
except certain dividends from foreign securities where the ex-dividend date
may have passed, are recorded as soon as the fund is informed of the
ex-dividend date. Non-cash dividends included in dividend income, if any,
are recorded at the fair market value of the securities received. Interest
income, which includes accretion of original issue discount, is accrued as
earned. Investment income is recorded net of foreign taxes withheld where
recovery of such taxes is uncertain.
EXPENSES. Most expenses of the trust can be directly attributed to a fund.
Expenses which cannot be directly attributed are apportioned between the
funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. 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, which may result in distribution
reclassifications, are primarily due to differing treatments for litigation
proceeds, paydown gains/losses on certain securities, futures and options
transactions, foreign currency transactions, passive foreign investment
companies (PFIC), market discount, partnerships, non-taxable dividends and
losses deferred due to wash sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital and may
affect the per-share allocation between net investment income and realized
and unrealized gain (loss). Undistributed net investment income and
accumulated undistributed net realized gain (loss) on investments and
foreign currency transactions may include temporary book and tax basis
differences which will reverse in a subsequent period. Any taxable income
or gain remaining at fiscal year end is distributed in the following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of trade
date. Gains and losses on securities sold are determined on the basis of
identified cost.
2. OPERATING POLICIES.
FOREIGN CURRENCY CONTRACTS. The fund generally uses foreign currency
contracts to facilitate transactions in foreign-denominated securities.
Losses may arise from changes in the value of the foreign currency or if
the counterparties do not perform under the contracts' terms. The U.S.
dollar value of foreign currency contracts is determined using contractual
currency exchange rates established at the time of each trade. The cost of
the foreign currency contracts is included in the cost basis of the
associated investment.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the fund, along with other affiliated
entities of Fidelity Management & Research Company (FMR), may transfer
uninvested cash balances into one or more joint trading accounts. These
balances are invested in one or more repurchase agreements that mature in
60 days or less from the date of purchase for U.S. Treasury or Federal
Agency obligations.
2. OPERATING POLICIES - CONTINUED
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
Securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are marked-to-market
daily and maintained at a value at least equal to the principal amount of
the repurchase agreement (including accrued interest). FMR, the fund's
investment adviser, is responsible for determining that the value of the
underlying securities remains in accordance with the market value
requirements stated above.
FUTURES CONTRACTS. The fund may use futures contracts to manage its
exposure to the stock market and to fluctuations in interest rates and
currency values. Buying futures tends to increase the fund's exposure to
the underlying instrument, while selling futures tends to decrease the
fund's exposure to the underlying instrument or hedge other fund
investments. Losses may arise from changes in the value of the underlying
instruments, if there is an illiquid secondary market for the contracts, or
if the counterparties do not perform under the contracts' terms. Futures
contracts are valued at the settlement price established each day by the
board of trade or exchange on which they are traded.
RESTRICTED SECURITIES. The fund is permitted to invest in securities that
are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from registration
or to the public if the securities are registered. Disposal of these
securities may involve time-consuming negotiations and expense, and prompt
sale at an acceptable price may be difficult. At the end of the period, the
fund had no investments in restricted securities (excluding 144A issues).
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities), the market value of futures contracts opened and
closed, is included under the caption "Other Information" at the end of the
fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a monthly
fee that is calculated on the basis of a group fee rate plus a fixed
individual fund fee rate applied to the
average net assets of the fund. The group fee rate is the weighted average
of a series of rates and is based on the monthly average net assets of all
the mutual funds advised by FMR. The rates ranged from .2500% to .5200% for
the period. In the event that these rates were lower than the contractual
rates in effect during the period, FMR voluntarily implemented the above
rates, as they resulted in the same or a lower management fee. The annual
individual fund fee rate is .25%. For the period, the management fee was
equivalent to an annual rate of .64% of average net assets. Effective
August 1, 1996, FMR voluntarily agreed to reduce the individual fund fee
rate from .40% to .25%.
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations Company
(FIIOC), an affiliate of FMR, is the fund's transfer, dividend disbursing
and shareholder servicing agent. FIIOC receives account fees and
asset-based fees that vary according to account size and type of account.
FIIOC pays for typesetting, printing and mailing of all shareholder
reports, except proxy statements. For the period, the transfer agent fees
were equivalent to an annual rate of .06% of average net assets.
ACCOUNTING FEES. Fidelity Service Co. (FSC), an affiliate of FMR, maintains
the fund's accounting records. The fee is based on the level of average net
assets for the month plus out-of-pocket expenses.
BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms are shown under the caption
"Other Information" at the end of the fund's schedule of investments.
5. BANK BORROWINGS.
The fund is permitted to have bank borrowings for temporary or emergency
purposes to fund shareholder redemptions. The fund has established
borrowing arrangements with certain banks. Under the most restrictive
arrangement, the fund must pledge to the bank securities having a market
value in excess of 220% of the total bank borrowings. The interest rate on
the borrowings is the bank's base rate, as revised from time to time.
Information regarding the fund's participation in the program is included
under the caption "Other Information" at the end of the fund's schedule of
investments.
6. EXPENSE REDUCTIONS.
FMR voluntarily agreed to reimburse the fund's operating expenses
(excluding interest, taxes, brokerage commissions and extraordinary
expenses) above an annual rate of 1.25% of average net assets.
FMR has directed certain portfolio trades to brokers who paid a portion of
the fund's expenses. In addition, the fund has entered into an arrangement
with its custodian whereby interest earned on uninvested cash balances was
used to offset a portion of the fund's expenses.
For the period, the reduction under these arrangements are shown under the
caption "Other Information" on the fund's Statement of Operations.
7. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investment Life Insurance Company (FILI)
and its subsidiaries, affiliates of FMR, were the record owners of
approximately 19% of the outstanding shares of the fund. In addition, three
unaffiliated insurance companies were each record owner of 10% or more of
the total outstanding shares of the fund, totaling 49%.
8. TRANSACTIONS WITH AFFILIATED COMPANIES.
An affiliated company is a company in which the fund has ownership of at
least 5% of the voting securities. Information regarding transactions with
affiliated companies is included under the caption "Legend" at the end of
the fund's schedule of investments.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Variable Insurance Products Fund II and the Shareholders
of Asset Manager Portfolio:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments (except for Moody's and Standard &
Poor's ratings), and the related statements of operations and of changes in
net assets and the financial highlights present fairly, in all material
respects, the financial position of Asset Manager Portfolio (a fund of
Variable Insurance Products Fund II) at December 31, 1996, the results of
its operations for the year then ended, and the changes in its net assets
and the financial highlights for the periods indicated in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Asset Manager Portfolio's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of securities at December 31, 1996 by correspondence
with the custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 10, 1997
DISTRIBUTIONS
The Board of Trustees of Asset Manager Portfolio voted to pay on February
7, 1997, to shareholders of record at the opening of business on February
7, 1997, a distribution of $1.48 per share derived from capital gains
realized from sales of portfolio securities and a dividend of $.59 per
share from net investment income.
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
INVESTMENT SUB-ADVISERS
Fidelity Management & Research (U.K.) Inc.,
London, England
Fidelity Management & Research (Far East) Inc.,
Tokyo, Japan
OFFICERS
Edward C. Johnson 3d, PRESIDENT
J. Gary Burkhead, SENIOR VICE PRESIDENT
William J. Hayes, VICE PRESIDENT
Fred L. Henning, Jr., VICE PRESIDENT
Robert A. Lawrence, VICE PRESIDENT
Richard C. Habermann, VICE PRESIDENT
John Todd, VICE PRESIDENT
George Vanderheiden, VICE PRESIDENT
Arthur S. Loring, SECRETARY
Kenneth A. Rathgeber, TREASURER
Robert H. Morrison, MANAGER, SECURITY TRANSACTIONS
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
BOARD OF TRUSTEES
J. Gary Burkhead
Ralph F. Cox *
Phyllis Burke Davis *
Richard J. Flynn *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Edward H. Malone *
Marvin L. Mann *
Gerald C. McDonough *
Thomas R. Williams *
ADVISORY BOARD
William O. McCoy
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Investments Institutional Operations Co.
Boston, MA
CUSTODIAN
The Chase Manhattan Bank, N.A., New York, NY
* INDEPENDENT TRUSTEES
(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS
FUND II: CONTRAFUND PORTFOLIO
ANNUAL REPORT
DECEMBER 31, 1996
CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
MARKET ENVIRONMENT 3 A review of what happened in world markets
during the last year.
PERFORMANCE 4 How the fund has done over time.
FUND TALK 5 The manager's review of fund performance, strategy
and outlook.
INVESTMENTS 6 A complete list of the fund's investments with their
market values.
FINANCIAL STATEMENTS 15 Statements of assets and liabilities, operations, and
changes in net assets, as well as financial highlights.
NOTES 17 Notes to the financial statements.
REPORT OF INDEPENDENT ACCOUNTANTS 19 The auditors' opinion.
DISTRIBUTIONS 20
</TABLE>
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR
THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS
PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY,
ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED
BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
MARKET ENVIRONMENT
Most stock and bond markets posted positive returns in 1996, aided by
moderate growth and low inflation. Sustained corporate earnings growth and
a favorable interest rate environment also proved beneficial. Japan,
however, was the major exception as an underperforming stock market and a
weak yen undermined returns for U.S.-based investors. The strongest gains
came from the often-volatile emerging bond markets in 1996, while
performance of the bond markets of developed countries was mixed.
U.S. STOCK MARKETS
The Standard & Poor's 500 Index - a broad measure of U.S. stock market
performance - rose 22.96% for the 12 months that ended December 31, 1996,
well above the index's long-term average annual return of about 12%. The
Russell 2000 Index - a measure of small stock performance - rose 16.49%.
The Dow Jones Industrial Average - an index of 30 blue-chip stocks - posted
a return of 28.70%, closing above 6500 for the first time in November.
The U.S. stock market spent much of the past year breaking price and
trading volume records. Solid corporate earnings reports, large cash
inflows into mutual funds, widespread optimism and a generally favorable
interest rate environment propelled share prices higher.
Large-capitalization stocks thrived as investors sought their lower
volatility and higher degree of liquidity over smaller-cap stocks in an
environment where it was sometimes difficult to discern the health of the
economy.
Most industry sectors experienced positive, if not strong performance. At
mid-year, technology stocks suffered from a sell-off sparked by fears that
company earnings were weakening. Nevertheless, this sector proved to be the
strongest in the U.S. market in 1996. Earnings surprises and positive
earnings projections were the main drivers of solid performance, especially
among semiconductor manufacturers, companies that make disk drives and
monitors, and software firms. Even though consensus estimates pointed
toward increases in short-term interest rates by the Fed, financial stocks
- - usually sensitive to changes in interest rates - shrugged off this
concern and posted solid performance based on low interest rates and
positive business prospects. Energy stocks reaped the benefits of
higher-than-expected energy prices, which resulted in part from the delayed
re-entry of Iraq into the world market. Uncertainty over the direction of
the economy benefited consumer nondurables - such as food, beverage and
tobacco companies - health care and traditional big-name growth stocks, as
these companies tend to post steady earnings growth in many economic
environments.
Utilities stocks struggled in 1996 for two reasons. First, and most
important, uncertainty over the direction and form of deregulation in the
sector tended to diminish investor interest. Second, stocks in the sector
tend to move in concert with bonds, which lagged due to periodic inflation
fears and confusing economic signals. Stocks in the telecommunications
field especially were affected by uncertainty over legislation signed into
law in February 1996. Biotechnology issues had a hard time recovering from
a correction in stock prices from overvalued levels that they experienced
earlier in 1996. Cyclical stocks - those that usually rise and fall with
the economy - posted mixed results that largely depended on the outlook for
companies in the specific sector rather than the direction of the economy.
FOREIGN STOCK MARKETS
Foreign stock markets posted mixed results in 1996. The Morgan Stanley
Capital International (MSCI) EAFE Index - which measures stock performance
in Europe, Australia and the Far East - returned 6.05% in 1996. Europe
posted the most consistently strong equity markets due to stronger economic
growth, lower interest rates, higher corporate earnings, the relative
weakness of the continent's major currencies and a new emphasis on
shareholder friendliness by many of the region's corporations. The MSCI
Europe Index was up 21.09% in 1996. The Japanese stock market
underperformed on the weakness of the economic recovery and the uncertainty
for any substantial economic reform. The Tokyo Stock Exchange TOPIX Total
Return Index was off 16.26%. Emerging market equity performance ran the
gamut from negative to positive, with the MSCI Emerging Markets Free Index
returning 6.03% for 1996. While Hong Kong was a top performer - benefiting
from the rising value of the property sector, solid economic growth and
stable interest rates - other Asian markets posted mixed returns as
concerns rose over declining export growth in the region. Latin America
enjoyed a strong first half, but faded toward the end of 1996 due to low
domestic savings rates and inefficient governments, among other factors.
U.S. BOND MARKETS
Uncertainty over the direction of the economy led to mixed performance in
U.S. bond markets in 1996. For the year, the Lehman Brothers Aggregate Bond
Index - a broad measure of the performance of the U.S. taxable bond market
- - posted a total return of 3.63%. Stronger-than-expected economic signals
rattled the bond market in the early spring. Investors spent most of the
summer anticipating a short-term interest rate increase by the Federal
Reserve Board. However, the Fed neither raised nor lowered rates through
the end of 1996. Interest rates responded to the Fed's inaction by falling
during much of October and November. In December, though, bond prices
dropped due to inflation concerns, stronger-than-expected economic data and
comments by Fed Chairman Alan Greenspan that the stock markets may be
overvalued.
FOREIGN BOND MARKETS
While low inflation and moderate growth helped provide a positive backdrop
for most bond markets in 1996, performance in overseas bond markets was
mixed. The Salomon Brothers World Government Bond Index - a measure of
government bond market performance in developed nations - returned 3.62%
for the 12 months that ended December 31, 1996. In Europe, focus centered
on the continuing progress toward the European Monetary Union (EMU).
Attractive opportunities arose as countries worked to meet the requirements
for joining the EMU. However, Germany and Japan - two of the larger
components of the Salomon Brothers World Government Bond Index -
experienced currency problems that hurt returns. In stark contrast to the
developed world, the often-volatile emerging debt markets enjoyed a
particularly strong year, helped by inflows of foreign capital, low
interest rates and the implementation of country-specific reforms -
especially in Latin America. The J.P. Morgan Emerging Markets Bond Index -
of which Latin America is a large component - posted a return of 34.16%
during the period.
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can
look at the total percentage change in value, the average annual percentage
change, or the growth of a hypothetical $10,000 investment. Total return
reflects the change in the value of an investment, assuming reinvestment of
the fund's dividend income and capital gains (the profits earned upon the
sale of securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1996 PAST 1 LIFE OF
YEAR FUND
Contrafund 21.22% 30.19%
S&P 500 (registered trademark) 22.96% 30.11%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what
would have happened if the fund had performed at a constant rate each year.
You can compare the fund's return to the performance of the Standard &
Poor's 500 Index - a widely recognized, unmanaged index of common stocks.
This benchmark reflects the reinvestment of dividends and capital gains, if
any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of growth in the long run and volatility
in the short run. In turn, the share price and return
of a fund that invests in stocks will vary. That
means if you sell your shares during a market
downturn, you might lose money. But if you can
ride out the market's ups and downs, you may
have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of return
and are not the fund's year-by-year results, which fluctuated over the
periods shown. The life of the fund figures are from commencement of
operations January 3, 1995.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL
CHARGES, THE TOTAL RETURN WOULD BE LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
Fidelity VIP II: Contrafund Standard & Poor's 500
$16,937
$16,915
$
Let's say hypothetically that $10,000 was invested in Contrafund Portfolio
on January 3, 1995, when the fund started. As the chart shows, by December
31, 1996, the value of the investment would have grown to $16,937 - a
69.37% increase on the initial investment. With reinvested dividends and
capital gains, if any, a $10,000 investment in the S&P 500 would have grown
to $16,915 over the same period - a 69.15% increase.
INVESTMENT SUMMARY
TOP TEN STOCKS AS OF DECEMBER 31, 1996
% OF FUND'S
INVESTMENTS
Schlumberger Ltd. 2.1
Intel Corp. 1.8
International Business Machines Corp. 1.5
Royal Dutch Petroleum Co. ADR 1.3
Halliburton Co. 1.2
British Petroleum PLC ADR 1.1
ENSCO International, Inc. 1.0
EMC Corp. 0.9
Federal National Mortgage Association 0.8
Unocal Corp. 0.8
TOP TEN MARKET SECTORS AS OF DECEMBER 31, 1996
% OF FUND'S
INVESTMENTS
Energy 24.2
Technology 15.3
Finance 10.3
Retail & Wholesale 6.3
Industrial Machinery & Equipment 4.0
Health 4.0
Basic Industries 3.8
Media & Leisure 3.8
Durables 3.7
Utilities 2.9
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with
William Danoff, Portfolio Manager of Contrafund Portfolio
Q. HOW DID THE FUND PERFORM OVER THE PAST YEAR, WILL?
A. The fund slightly trailed the Standard & Poor's 500 Index, which rose
22.96% during the 12-month period that ended December 31, 1996.
Q. WHAT WAS THE INVESTING ENVIRONMENT LIKE IN 1996?
A. The market environment was more difficult than the Dow Jones Industrial
Index's 28.7% performance would indicate. Market breadth, measured by the
number of stocks participating in a rally, was only fair.
Larger-capitalization companies led the market's advance, and broader
measures of market performance lagged. Specifically, the Russell 2000
Index, which measures the performance of smaller-cap companies, and the
Standard & Poor's MidCap 400 Index rose 16.4% and 19.2%, respectively, both
below the S&P 500 Index's advance in 1996. In addition, the sectors leading
the market changed frequently during the year, a phenomenon called market
rotation. For example, the technology sector - and particularly the
semiconductor stocks - was borderline schizophrenic. Semiconductor stocks
plunged by a third or more in July's correction after performing poorly
during the first six months of the year, then rose sharply in the second
half of the year. This volatility made for a more challenging year than
usual for stock fund portfolio managers.
Q. WHAT FACTORS CONTRIBUTED TO THE FUND'S PERFORMANCE SINCE YOUR REPORT TO
SHAREHOLDERS EARLY IN THE SUMMER?
A. The fund's investments in the energy and energy services sectors, which
accounted for approximately 24% of the fund's holdings on December 31,
helped its performance. I started adding to our holdings in these sectors
because I felt the market was too pessimistic about the prospectus for
energy-related companies, and was undervaluing them as a result. As it
turned out, the sector rose about 45% during the year, and the fund's
holdings in Schlumberger, Halliburton, British Petroleum, ENSCO and Unocal,
among others, appreciated nicely since the last report to you. Production
capacity in the energy industry has been shrinking for the past decade, and
capacity utilization exceeded 90 percent in 1996. With conditions so tight
in the sector, earnings exploded when oil and natural gas prices rose
throughout the year.
Q. YOU SIGNIFICANTLY INCREASED THE FUND'S HOLDINGS IN TECHNOLOGY FROM SIX
MONTHS AGO. HOW DID IT WORK OUT?
A. Since many technology stocks were temporarily out-of-favor after the
summer correction I mentioned earlier, I boosted the fund's technology
holdings to over 15% of the fund's investments on December 31 from just
over 6% at the end of June. Computing and electronics continue to play a
growing part in the global economy, and earnings in both sectors rebounded
significantly after the industry's excessive inventory position returned to
normal levels during the second quarter. The fund's holdings in Intel, IBM
and EMC did particularly well during the period.
Q. THE FUND MUST HAVE SUFFERED SOME DISAPPOINTMENTS. WHAT DECISIONS DO YOU
REGRET?
A. The biggest disappointment to me was carrying too much cash during the
year. While I reduced the fund's cash position from 15% six months ago to
under 10% at the end of December, not being more fully invested in the
stock market undeniably hurt the fund's performance. Given the market's
strong performance, I estimate the fund's cash position detracted 2% from
the fund's showing in 1996. I was correct to hold cash during the
technology rout in the spring, but I regret not moving faster to build the
fund's technology positions after fundamentals began to improve in the late
summer.
Q. WHAT'S YOUR OUTLOOK FOR THE FIRST HALF OF 1997, WILL?
A. While the stock market outlook appears bright, expectations are high.
Inflation remains low, and corporate profit growth remains good, fueled by
excellent productivity gains. I have attempted to position the fund to
participate if the market continues its ascent in 1997. But, as I did last
year, I have tried to dampen some of the downside risk should unforeseen
events cloud the otherwise clear economic skies. Stocks could fall
meaningfully if interest rates continue their recent rise, or if a slowing
economy or the strong U.S. dollar hurt corporate earnings growth. With the
help of Fidelity's large research staff, I'll continue to look for those
investment ideas that will perform well regardless of the market
environment.
FUND FACTS
GOAL: maximum total return over the long term
by allocating assets among stocks, bonds and
short-term instruments anywhere in the world
START DATE: September 6, 1989
SIZE: as of December 31, 1996, more than
$3.6 billion
MANAGER: Richard Habermann, since March
1996; joined Fidelity in 1968
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO
INVESTMENTS DECEMBER 31, 1996
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 89.0%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 1.2%
AEROSPACE & DEFENSE - 1.0%
BE Aerospace, Inc. (a) 6,800 $ 184,450
Boeing Co. 53,500 5,691,063
Gulfstream Aerospace Corp. (a) 109,400 2,652,950
Lockheed Martin Corp. 73,400 6,716,100
McDonnell Douglas Corp. 91,600 5,862,400
Orbital Sciences Corp. (a) 66,500 1,147,125
Sundstrand Corp. 32,500 1,381,250
23,635,338
SHIP BUILDING & REPAIR - 0.2%
Avondale Industries, Inc. (a) 22,000 473,000
General Dynamics Corp. 76,100 5,365,050
5,838,050
TOTAL AEROSPACE & DEFENSE 29,473,388
BASIC INDUSTRIES - 3.8%
CHEMICALS & PLASTICS - 2.5%
Air Products & Chemicals, Inc. 68,200 4,714,325
Avery Dennison Corp. 69,800 2,469,175
Betz Dearborn, Inc. 25,300 1,480,050
Cambrex Corp. 67,200 2,200,800
Crompton & Knowles Corp. 335,392 6,456,296
Cytec Industries, Inc. (a) 33,500 1,360,938
du Pont (E.I.) de Nemours & Co. 105,900 9,994,313
FMC Corp. (a) 5,100 357,638
International Specialty Products, Inc. (a) 20,600 252,350
Monsanto Co. 276,200 10,737,275
Nalco Chemical Co. 32,600 1,177,675
Olin Corp. 11,200 421,400
Potash Corp. 5,800 493,752
Praxair, Inc. 144,700 6,674,288
Raychem Corp. 1,000 80,125
Sealed Air Corp. (a) 224,100 9,328,163
Union Carbide Corp. 20,500 837,938
Witco Corp. 35,800 1,091,900
60,128,401
IRON & STEEL - 0.0%
Steel Dynamics, Inc. (a) 46,400 887,400
METALS & MINING - 0.3%
Alcan Aluminium Ltd. 20,900 705,128
Aluminum Co. of America 19,800 1,262,250
Falconbridge Ltd. 21,800 464,354
Falconbridge Ltd.
Final Installment Receipt (d) 81,700 1,168,122
Freeport-McMoRan Copper
& Gold, Inc. Class B 66,800 1,995,650
Inco Ltd. 5,000 159,573
QNI Ltd. 244,146 490,970
6,246,047
PACKAGING & CONTAINERS - 0.5%
Corning, Inc. 49,800 2,303,250
Crown Cork & Seal Co., Inc. 38,800 2,109,750
Owens-Illinois, Inc. (a) 295,600 6,724,900
11,137,900
PAPER & FOREST PRODUCTS - 0.5%
American Pad & Paper Co. (a) 67,500 1,527,188
James River Corp. 55,900 1,851,688
Kimberly-Clark Corp. 82,600 7,867,650
11,246,526
TOTAL BASIC INDUSTRIES 89,646,274
SHARES VALUE (NOTE 1)
CONGLOMERATES - 1.1%
AlliedSignal, Inc. 89,400 $ 5,989,800
American Standard Companies, Inc. (a) 60,400 2,310,300
Brascan Ltd. Class A 40,200 894,409
Coltec Industries, Inc. (a) 22,500 424,688
GenCorp, Inc. 39,700 719,563
Lancaster Colony Corp. 13,100 602,600
Textron, Inc. 3,500 329,875
Tyco International Ltd. 271,900 14,376,713
United Technologies Corp. 19,400 1,280,400
26,928,348
CONSTRUCTION & REAL ESTATE - 2.9%
BUILDING MATERIALS - 0.6%
Armstrong World Industries, Inc. 4,100 284,950
Dexter Corp. 98,200 3,130,125
Lilly Industrial Coatings, Inc. Class A 40,100 731,825
Masco Corp. 62,200 2,239,200
Nortek, Inc. (a) 1,200 24,000
Sherwin-Williams Co. 60,800 3,404,800
Southdown, Inc. 50,400 1,568,700
USG Corp. (a) 90,100 3,052,138
14,435,738
CONSTRUCTION - 0.1%
Bouygues Offshore SA
sponsored ADR (a) 97,300 1,252,738
Fairfield Communities, Inc. (a) 11,300 279,675
Oakwood Homes Corp. 55,900 1,278,713
2,811,126
ENGINEERING - 0.1%
Fluor Corp. 41,700 2,616,675
REAL ESTATE - 0.3%
New World Development Co. Ltd. 16,000 108,087
Rouse Co. (The) 218,123 6,925,405
7,033,492
REAL ESTATE INVESTMENT TRUSTS - 1.8%
Arden Realty Group, Inc. 83,000 2,303,250
Bay Apartment Communities, Inc. 3,400 122,400
Beacon Properties Corp. 116,400 4,263,150
Bradley Real Estate Trust (SBI) 26,900 484,200
Cali Realty Corp. 62,700 1,935,863
Capstead Mortgage Corp. 16,800 403,200
CenterPoint Properties Corp. 43,300 1,418,075
Crescent Real Estate Equities, Inc. 137,700 7,263,675
Duke Realty Investors, Inc. 43,100 1,659,350
Equity Residential Properties Trust (SBI) 18,700 771,375
Essex Property Trust, Inc. 43,100 1,266,063
Felcor Suite Hotels, Inc. 21,200 749,950
First Industrial Realty Trust, Inc. 103,200 3,134,700
Kimco Realty Corp. 500 17,438
LTC Properties, Inc. 60,800 1,124,800
Macerich Co. 64,700 1,690,288
Patriot American Hospitality, Inc. 71,100 3,066,188
Public Storage, Inc. 26,200 812,200
Reckson Associates Realty Corp. 22,500 950,625
Regency Realty Group 8,400 220,500
Sovran Self Storage, Inc. 900 28,125
Speiker Properties, Inc. 71,300 2,566,800
Starwood Lodging Trust combined
certificate (SBI) 63,300 3,489,413
Vornado Realty Trust 1,400 73,500
Weeks Corp. 29,400 977,550
40,792,678
TOTAL CONSTRUCTION & REAL ESTATE 67,689,709
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
DURABLES - 3.7%
AUTOS, TIRES, & ACCESSORIES - 2.2%
Chrysler Corp. 310,400 $ 10,243,200
Cross-Continent Auto Retailers, Inc. (a) 46,400 968,600
Danaher Corp. 168,300 7,846,988
Federal-Mogul Corp. 5,000 110,000
Federal Signal Co. 8,300 214,763
General Motors Corp. 310,700 17,321,525
Johnson Controls, Inc. 19,700 1,632,638
Lear Corp. (a) 80,900 2,760,713
Lucas Varity PLC sponsored ADR (a) 14,452 549,176
O'Gara Co. (a) 17,000 165,750
PACCAR, Inc. 7,700 523,600
Pep Boys-Manny, Moe & Jack 12,300 378,225
SPX Corp. 117,600 4,557,000
Smith (A.O.) Corp. Class B 3,500 104,563
Snap-on Tools Corp. 33,000 1,175,625
Toyota Motor Corp. 43,000 1,234,929
United Auto Group, Inc. (a) 53,500 1,377,625
51,164,920
CONSUMER DURABLES - 0.2%
Minnesota Mining & Manufacturing Co. 72,900 6,041,588
CONSUMER ELECTRONICS - 0.1%
Harman International Industries, Inc. 12,800 712,000
Sunbeam-Oster, Inc. 42,000 1,081,500
1,793,500
HOME FURNISHINGS - 0.4%
Carpetright PLC 347,500 3,440,646
Furniture Brands International, Inc. (a) 99,700 1,395,800
Leggett & Platt, Inc. 48,500 1,679,313
Miller (Herman), Inc. 37,200 2,106,450
8,622,209
TEXTILES & APPAREL - 0.8%
Cutter & Buck, Inc. (a)(e) 280,000 3,255,000
Fruit of the Loom, Inc. Class A (a) 59,600 2,257,350
Jones Apparel Group, Inc. (a) 19,800 740,025
Liz Claiborne, Inc. 123,800 4,781,775
NIKE, Inc. Class B 39,700 2,372,075
Nine West Group, Inc. (a) 100 4,638
Reebok International Ltd. 101,400 4,258,800
Russell Corp. 19,900 592,025
Stride Rite Corp. 34,000 340,000
Timberland Co. Class A (a) 19,400 737,200
Unifi, Inc. 19,200 616,800
Warnaco Group, Inc. Class A 9,100 269,588
Westpoint Stevens, Inc. Class A (a) 6,400 191,200
20,416,476
TOTAL DURABLES 88,038,693
ENERGY - 24.0%
COAL - 0.0%
MAPCO, Inc. 6,300 214,200
ENERGY SERVICES - 10.2%
Atwood Oceanics, Inc. (a) 800 50,800
BJ Services Co. (a) 196,100 10,001,100
Baker Hughes, Inc. 429,900 14,831,550
Carbo Ceramics, Inc. 33,100 695,100
Diamond Offshore Drilling, Inc. (a) 255,000 14,535,000
Dresser Industries, Inc. 420,900 13,047,900
ENSCO International, Inc. (a) 485,787 23,560,670
Eni Spa 483,800 2,486,887
Falcon Drilling, Inc. (a) 117,000 4,592,250
SHARES VALUE (NOTE 1)
Global Marine, Inc. (a) 323,600 $ 6,674,250
Halliburton Co. 460,900 27,769,225
Helmerich & Payne, Inc. 52,700 2,746,988
Marine Drilling Companies, Inc. (a) 287,300 5,656,219
Nabors Industries, Inc. (a) 536,400 10,325,700
Newpark Resources, Inc. (a) 24,400 908,900
Noble Drilling Corp. (a) 311,700 6,195,038
Oceaneering International, Inc. (a) 11,700 185,738
Reading & Bates Corp. (a) 192,500 5,101,250
Schlumberger Ltd. 502,400 50,177,200
Smedvig AS, Series B (a) 55,200 1,151,082
Smith International, Inc. (a) 397,900 17,855,763
Tidewater, Inc. 151,159 6,839,945
Transocean Offshore, Inc. 149,174 9,342,022
Varco International, Inc. (a) 185,300 4,285,063
Western Atlas, Inc. (a) 16,900 1,197,788
240,213,428
OIL & GAS - 13.8%
Amerada Hess Corp. 13,800 798,675
American Exploration Co. (a) 77,800 1,244,800
Amoco Corp. 13,400 1,078,700
Anadarko Petroleum Corp. 117,200 7,588,700
Ashland, Inc. 49,700 2,180,588
Atlantic Richfield Co. 15,800 2,093,500
Barrett Resources Corp. (a) 140,100 5,971,763
British Petroleum PLC ADR 176,800 24,995,100
Burlington Resources, Inc. 264,500 13,324,188
Camco International, Inc. 280,900 12,956,513
Canada Occidental Petroleum Ltd. 103,600 1,666,397
Canadian Natural Resources Ltd. (a) 273,300 7,496,137
Chesapeake Energy Corp. (a) 96,400 5,362,250
Chieftain International, Inc. (a) 65,700 1,725,353
Coastal Corp. (The) 160,500 7,844,438
Cooper Cameron Corp. (a) 214,620 16,418,430
Dorset Exploration Ltd. (a) 3,500 15,447
Enron Oil & Gas Co. 246,100 6,214,025
Enterprise Oil PLC 174,700 1,933,227
Exxon Corp. 36,300 3,557,400
Flores & Rucks, Inc. (a) 64,200 3,418,650
Forcenergy Gas Exploration, Inc. (a) 119,400 4,328,250
Imperial Oil Ltd. 4,300 202,320
Kerr-McGee Corp. 41,600 2,995,200
Louisiana Land & Exploration Co. 79,400 4,257,825
Monterey Resources, Inc. (a) 31,600 509,550
Murphy Oil Corp. 71,600 3,982,750
Nationale Elf Aquitaine 4,700 427,709
National-Oilwell, Inc. (a) 33,600 1,033,200
Newfield Exploration Co. (a) 264,200 6,869,200
Noble Affiliates, Inc. 118,600 5,677,975
Norcen Energy Resources Ltd. 17,900 396,951
Northstar Energy Corp. (a) 150,300 1,748,758
Occidental Petroleum Corp. 126,600 2,959,275
Oryx Energy Co. (a) 90,200 2,232,450
Parker & Parsley Petroleum Co. 64,200 2,359,350
Penn West Petroleum Ltd. (a) 33,600 343,145
Penn West Petroleum Ltd. (a)(c) 82,100 838,458
Pennzoil Co. 6,000 339,000
Petro-Canada 109,500 1,545,629
Petro-Canada
Final Installment Receipt (d) 151,100 1,658,865
Petroleum Securities Australia Ltd.
sponsored ADR (a) 84,500 1,922,375
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
ENERGY - CONTINUED
OIL & GAS - CONTINUED
Phillips Petroleum Co. 317,000 $ 14,027,250
Poco Petroleums Ltd. (a) 20,800 198,767
Pogo Producing Co. 173,000 8,174,250
Renaissance Energy Ltd. (a) 358,200 12,189,539
Rio Alto Exploration Ltd. (a) 3,100 22,501
Rio Alto Exploration Ltd. (a)(c) 39,300 285,250
Royal Dutch Petroleum Co. ADR 177,800 30,359,350
Saga Petroleum AS Class B 44,100 691,439
Santa Fe Energy Resources, Inc. (a) 387,800 5,380,725
Stone Energy Corp. (a) 4,800 143,400
Suncor, Inc. 34,200 1,414,553
Swift Energy Co. (a) 211,200 6,309,600
Texaco, Inc. 76,100 7,467,313
Tosco Corp. 110,000 8,703,750
Total SA:
Class B 66,686 5,422,253
sponsored ADR 16,600 668,150
USX-Marathon Group 99,700 2,380,338
Ultramar Diamond Shamrock Corp. 153,100 4,841,788
Union Pacific Resources Group, Inc. 114,600 3,352,050
United Meridian Corp. (a) 284,800 14,738,400
Unocal Corp. 449,600 18,265,000
Valero Energy Corp. 3,700 105,913
Vastar Resources, Inc. 76,200 2,895,600
Vintage Petroleum, Inc. 120,700 4,164,150
326,713,845
TOTAL ENERGY 567,141,473
FINANCE - 10.3%
BANKS - 3.3%
Bank of New York Co., Inc. 222,100 7,495,875
BankAmerica Corp. 164,700 16,428,825
Citicorp 32,500 3,347,500
Comerica, Inc. 2,000 104,750
Cullen Frost Bankers, Inc. 26,600 884,450
Fifth Third Bancorp 5,900 370,594
First Bank System, Inc. 148,400 10,128,300
First Empire State Corp. 800 230,400
Fleet Financial Group, Inc. 143,800 7,172,025
HSBC Holdings PLC 476,655 10,369,677
Hang Seng Bank Ltd. 332,000 4,034,909
North Fork Bancorporation, Inc. 88,000 3,135,000
Norwest Corp. 80,100 3,484,350
Regions Financial Corp. 3,300 170,569
Texas Regional Bancshares, Inc.
Class A (vtg.) 9,500 323,000
U.S. Bancorp 147,600 6,632,775
Westpac Banking Corp. 354,800 2,019,212
Zions Bancorp 22,900 2,381,600
78,713,811
CLOSED END INVESTMENT COMPANY - 0.1%
Morgan Stanley Emerging Markets
Fund, Inc. 23,900 331,613
Morgan Stanley Asia-Pacific Fund, Inc. 82,100 800,475
Templeton Dragon Fund, Inc. 43,400 699,825
1,831,913
CREDIT & OTHER FINANCE - 1.4%
American Express Co. 105,800 5,977,700
Associates First Capital Corp. 51,200 2,259,200
SHARES VALUE (NOTE 1)
Beneficial Corp. 29,400 $ 1,863,225
Finova Group, Inc. 13,500 867,375
First Chicago NBD Corp. 24,300 1,306,125
Green Tree Financial Corp. 10,000 386,250
Greenpoint Financial Corp. 169,300 8,020,588
Household International, Inc. 106,100 9,787,725
Transamerica Corp. 37,300 2,946,700
33,414,888
FEDERAL SPONSORED CREDIT - 1.3%
Federal Home Loan Mortgage
Corporation 107,900 11,882,488
Federal National Mortgage Association 519,200 19,340,200
Student Loan Marketing Association 400 37,250
31,259,938
INSURANCE - 2.8%
ACE Ltd. 9,600 577,200
Aetna, Inc. 129,000 10,320,000
Allmerica Financial Corp. 72,100 2,415,350
Allstate Corp. 249,900 14,462,963
American International Group, Inc. 113,500 12,286,375
Chubb Corp. (The) 8,100 435,375
Conseco, Inc. 33,800 2,154,750
General Re Corp. 5,500 867,625
ITT Hartford Group, Inc. 51,200 3,456,000
MMI Companies, Inc. 37,100 1,196,475
Marsh & McLennan Companies, Inc. 20,300 2,111,200
Mercury General Corp. 5,600 294,000
Mid Ocean Ltd. 26,200 1,375,500
Penncorp. Financial Group, Inc. 3,800 136,800
Progressive Corp. 12,500 842,188
Provident Companies, Inc. 4,600 222,525
Providian Corp. 19,000 976,125
Reinsurance Group of America, Inc. 1,900 89,538
Reliastar Financial Corp. 7,800 450,450
SunAmerica, Inc. 68,700 3,048,563
Travelers/Aetna Property Casualty
Corp. Class A 8,700 307,763
Travelers Group, Inc. (The) 142,366 6,459,857
UNUM Corp. 8,000 578,000
USF&G Corp. 50,200 1,047,925
66,112,547
SAVINGS & LOANS - 1.2%
Ahmanson (H.F.) & Co. 28,000 910,000
Charter One Financial Corp. 19,085 801,570
Dime Bancorp., Inc. (a) 58,800 867,300
Glendale Federal Bank FSB (a) 197,900 4,601,175
Golden West Financial Corp. 118,080 7,453,800
Great Western Financial Corp. 102,200 2,963,800
Long Island Bancorp., Inc. 7,800 273,000
Sovereign Bancorp., Inc. 400 5,250
TCF Financial Corporation 27,800 1,209,300
Washington Mutual, Inc. 184,400 7,986,825
27,072,020
SECURITIES INDUSTRY - 0.2%
Guoco Group Ltd. 188,000 1,052,479
Peregrine Investments Holdings Ltd. 882,000 1,510,957
Salomon, Inc. 23,300 1,098,013
Schwab (Charles) Corp. 26,800 857,600
4,519,049
TOTAL FINANCE 242,924,166
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
HEALTH - 3.9%
DRUGS & PHARMACEUTICALS - 1.4%
Alkermes, Inc. (a) 7,100 $ 165,075
Alliance Pharmaceutical Corp. (a) 3,600 49,050
Andrx Corp. 1,600 25,800
Biogen, Inc. 12,000 465,000
Bristol-Myers Squibb Co. 60,600 6,590,250
Human Genome Sciences, Inc. (a) 10,000 407,500
Lilly (Eli) & Co. 18,600 1,357,800
Merck & Co., Inc. 14,900 1,180,825
Millennium Pharmaceuticals, Inc. (a) 13,200 229,350
Novartis AG (Reg.) 4,653 5,317,219
Pfizer, Inc. 23,800 1,972,425
Schering-Plough Corp. 28,000 1,813,000
Sepracor, Inc. (a) 93,600 1,556,100
Sequus Pharmaceuticals, Inc. (a) 5,000 80,000
Warner-Lambert Co. 145,000 10,875,000
32,084,394
MEDICAL EQUIPMENT & SUPPLIES - 0.9%
Acuson Corp. (a) 20,600 502,125
Boston Scientific Corp. (a) 58,200 3,492,000
Cardinal Health, Inc. 24,400 1,421,300
Datascope Corp. (a) 4,900 98,000
Guidant Corp. 2,700 153,900
InControl, Inc. (a) 29,100 232,800
Mallinckrodt, Inc. 127,100 5,608,288
Medtronic, Inc. 72,300 4,916,400
St. Jude Medical, Inc. (a) 57,600 2,455,200
U.S. Surgical Corp. 84,400 3,323,250
22,203,263
MEDICAL FACILITIES MANAGEMENT - 1.6%
Beverly Enterprises, Inc. (a) 69,100 881,025
Carematrix Corp. (a) 17,200 225,750
Columbia/HCA Healthcare Corp. 205,300 8,365,975
HEALTHSOUTH Rehabilitation Corp. (a) 315,200 12,174,600
Health Management Associates, Inc.
Class A (a) 218,700 4,920,750
Integrated Health Services, Inc. 31,800 775,125
National Surgery Centers, Inc. (a) 8,400 319,200
NovaCare, Inc. (a) 36,600 402,600
Oxford Health Plans, Inc. (a) 56,000 3,279,500
PacifiCare Health Systems, Inc.
Class B (a) 6,800 579,700
Quorum Health Group, Inc. (a) 6,700 199,325
Safeguard Health Enterprises, Inc. (a) 63,700 1,114,750
Sunrise Assisted Living, Inc. (a) 52,300 1,457,863
Tenet Healthcare Corp. (a) 115,200 2,520,000
37,216,163
TOTAL HEALTH 91,503,820
HOLDING COMPANIES - 0.3%
CINergy Corp. 31,500 1,051,313
Citic Pacific Ltd. Ord. 228,000 1,323,576
Norfolk Southern Corp. 41,100 3,596,250
PartnerRe Ltd. 20,700 703,800
6,674,939
INDUSTRIAL MACHINERY & EQUIPMENT - 4.0%
ELECTRICAL EQUIPMENT - 1.4%
AMETEK, Inc. 52,900 1,177,025
Alcatel Alsthom Compagnie Generale
d'Electricite SA 40,900 3,284,609
SHARES VALUE (NOTE 1)
American Power Conversion Corp. (a) 70,100 $ 1,910,225
Common Development International
Ltd. (a)(c) 58,100 519,185
Computer Products, Inc. (a) 2,100 40,950
Emerson Electric Co. 3,200 309,600
Hutchison Whampoa Ltd. Ord. 468,000 3,675,868
Loral Space & Communications Ltd. (a) 395,900 7,274,663
Roper Industries, Inc. 43,300 1,694,113
Westinghouse Electric Corp. 636,800 12,656,400
32,542,638
INDUSTRIAL MACHINERY & EQUIPMENT - 2.0%
Case Corp. 187,500 10,218,750
Caterpillar, Inc. 151,700 11,415,425
Deere & Co. 5,000 203,125
Detroit Diesel Corp. (a) 40,600 933,800
Dover Corp. 5,400 271,350
Harnischfeger Industries, Inc. 76,000 3,657,500
Illinois Tool Works, Inc. 41,600 3,322,800
Ingersoll-Rand Co. 79,000 3,515,500
Kaydon Corp. 118,300 5,574,888
Manitowoc Co., Inc. 26,500 1,073,250
New Holland NV (a) 261,100 5,450,463
Parker-Hannifin Corp. 4,500 174,375
Thermo Fibergen, Inc. (a) 13,700 143,850
Thermo Fibergen, Inc. (rights)(a) 13,700 34,250
Thermo Fibertek, Inc. (a) 2,100 19,556
UCAR International, Inc. (a) 5,200 195,650
46,204,532
POLLUTION CONTROL - 0.6%
Republic Industries, Inc. (a) 24,000 748,500
Sevenson Environmental Services, Inc. 13,200 240,900
USA Waste Services, Inc. (a) 287,880 9,176,175
United Waste Systems, Inc. (a) 154,600 5,314,375
15,479,950
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 94,227,120
MEDIA & LEISURE - 3.8%
BROADCASTING - 1.0%
American Radio Systems Corp.
Class A (a) 36,900 1,005,525
Asia Satellite Telecommunications
Holdings Ltd. (a) 94,200 218,617
Canal Plus SA 2,200 485,780
Carlton Communications PLC 19,900 174,398
HSN, Inc. (a) 56,790 1,348,763
Infinity Broadcasting Corp. Class A 303,050 10,190,056
Jacor Communications, Inc. Class A (a) 44,800 1,226,400
Metro Networks, Inc. (a) 25,500 643,875
Renaissance Communications Corp. (a) 68,900 2,463,175
Telemundo Group, Inc. Class A (a) 136,400 3,955,600
Young Broadcasting, Inc. Class A (a) 37,300 1,091,025
22,803,214
ENTERTAINMENT - 0.1%
Disney (Walt) Co. 13,300 926,013
Regal Cinemas, Inc. (a) 4,400 135,300
Viacom, Inc. (a):
Class A 18,300 631,350
Class B (non-vtg.) 4,600 160,425
1,853,088
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - CONTINUED
LEISURE DURABLES & TOYS - 0.8%
Brunswick Corp. 5,700 $ 136,800
Champion Enterprises, Inc. (a) 211,800 4,130,100
Golden Bear Golf, Inc. (a) 10,100 113,625
Hasbro, Inc. 278,550 10,828,631
Mattel, Inc. 70,150 1,946,663
Nintendo Co. Ltd. Ord. 28,300 2,023,346
19,179,165
LODGING & GAMING - 0.4%
Circus Circus Enterprises, Inc. (a) 58,600 2,014,375
HFS, Inc. (a) 67,600 4,039,100
Hilton Hotels Corp. 41,300 1,078,963
Host Marriott Corp. (a) 166,400 2,662,400
US Franchise Services, Inc. Class A (a) 3,900 39,488
9,834,326
PUBLISHING - 1.1%
Acnielsen Corp. (a) 25,000 378,125
Cognizant Corp. (a) 83,400 2,752,200
Gannett Co., Inc. 53,300 3,990,838
Gibson Greetings, Inc. (a) 800 15,700
Harcourt General, Inc. 29,600 1,365,300
Knight-Ridder, Inc. 39,100 1,495,575
Meredith Corp. 51,700 2,727,175
New York Times Co. (The) Class A 155,100 5,893,800
Playboy Enterprises, Inc. Class B (a) 25,600 249,600
Times Mirror Co. Class A 118,200 5,880,450
Tribune Co. 25,300 1,995,538
26,744,301
RESTAURANTS - 0.4%
Landry's Seafood Restaurants, Inc. (a) 92,600 1,979,325
Morton's Restaurant Group, Inc. (a) 316,900 5,347,688
Papa John's International, Inc. (a) 10,800 364,500
Shoney's, Inc. (a) 4,800 33,600
Starbucks Corp. (a) 23,800 681,275
8,406,388
TOTAL MEDIA & LEISURE 88,820,482
NONDURABLES - 1.5%
AGRICULTURE - 0.1%
Pioneer Hi-Bred International, Inc. 38,600 2,702,000
BEVERAGES - 0.0%
Pete's Brewing Co. (a) 42,400 339,200
FOODS - 0.7%
Campbell Soup Co. 161,100 12,928,275
Ralston Purina Group 41,800 3,067,075
Tyson Foods, Inc. 4,100 140,425
16,135,775
HOUSEHOLD PRODUCTS - 0.6%
Dial Corp. 271,900 4,010,525
Gillette Co. 119,700 9,306,675
Premark International, Inc. 34,700 772,075
14,089,275
TOBACCO - 0.1%
Consolidated Cigar Holdings, Inc.
Class A (a) 19,600 485,100
Dimon, Inc. 3,800 87,875
Philip Morris Companies, Inc. 5,000 563,125
RJR Nabisco Holdings Corp. 9,800 333,200
Swisher International Group, Inc. Class A 54,500 865,188
Universal Corp. 11,800 379,075
2,713,563
TOTAL NONDURABLES 35,979,813
SHARES VALUE (NOTE 1)
PRECIOUS METALS - 1.5%
Agnico Eagle Mines Ltd. 31,900 $ 447,952
Barrick Gold Corp. 32,700 936,262
Bre-X Minerals Ltd. (a) 412,700 6,532,874
Euro-Nevada Mining Ltd. 146,400 4,367,918
Franco Nevada Mining Corp. 191,400 8,761,243
Getchell Gold Corp. (a) 90,900 3,488,288
Greenstone Resources Ltd. (a) 89,300 1,039,016
Indochina Goldfields Ltd. (a) 111,400 1,308,342
Indochina Goldfields Ltd. (a)(c) 75,600 887,887
Kinross Gold Corp. (a) 84,100 595,083
Newmont Mining Corp. 167,400 7,491,150
TVI Pacific, Inc. (a)(c) 123,300 114,229
35,970,244
RETAIL & WHOLESALE - 6.2%
APPAREL STORES - 1.0%
Abercrombie & Fitch Co. (a) 3,500 57,750
Baby Superstore, Inc. (a) 57,300 1,375,200
Cato Corp. Class A 85,000 425,000
Charming Shoppes, Inc. (a) 864,800 4,378,050
Footstar, Inc. (a) 96,132 2,391,284
Gap, Inc. 35,100 1,057,388
Goody's Family Clothing (a) 77,200 1,379,950
Limited, Inc. (The) 27,512 505,533
Payless ShoeSource, Inc. (a) 85,188 3,194,550
Ross Stores, Inc. 400 20,000
Saks Holdings, Inc. (a) 8,700 234,900
TJX Companies, Inc. 187,700 8,892,288
23,911,893
DRUG STORES - 0.8%
Arbor Drugs, Inc. 46,800 813,150
CVS Corp. 298,600 12,354,575
Revco (D.S.), Inc. (a) 182,500 6,752,500
Rite Aid Corp. 2,200 87,450
20,007,675
GENERAL MERCHANDISE STORES - 1.4%
Dayton Hudson Corp. 101,000 3,964,250
Family Dollar Stores, Inc. 8,300 169,113
Federated Department Stores, Inc. (a) 96,800 3,303,300
Kohls Corp. (a) 60,100 2,358,925
MacFrugals Bargains Closeouts, Inc. (a) 12,300 321,338
Mazel Stores, Inc. (a) 11,200 252,000
Price/Costco, Inc. (a) 227,900 5,725,988
Stein Mart, Inc. (a) 102,900 2,083,725
Woolworth Corp. (a) 636,300 13,919,063
32,097,702
GROCERY STORES - 1.5%
Ahold NV 14,552 909,342
American Stores Co. 27,300 1,115,888
Asda Group PLC 741,500 1,562,333
Dominick's Supermarkets, Inc. (a) 91,700 1,994,475
Food Lion, Inc.:
Class A 846,000 8,274,938
Class B 134,400 1,360,800
Giant Food, Inc. Class A 51,700 1,783,650
Loblaw Companies Ltd. 56,500 583,197
Performance Food Group Co. (a) 1,150 17,825
Provigo, Inc. (a) 11,400 46,154
Quality Food Centers, Inc. (a) 12,600 425,250
Richfood Holdings, Inc. Class A 282,000 6,838,500
Safeway, Inc. (a) 218,100 9,323,775
Weis Markets, Inc. 21,900 698,063
34,934,190
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
RETAIL & WHOLESALE, MISCELLANEOUS - 1.5%
Bulgari Spa 4,200 $ 85,217
Circuit City Stores, Inc. 139,400 4,199,425
Home Depot, Inc. (The) 270,500 13,558,813
Lowe's Companies, Inc. 74,200 2,634,100
Staples, Inc. (a) 178,100 3,216,931
Toys "R" Us, Inc. (a) 283,600 8,508,000
U.S. Office Products Co. (a) 65,700 2,242,013
34,444,499
TOTAL RETAIL & WHOLESALE 145,395,959
SERVICES - 1.5%
ADVERTISING - 0.3%
Interpublic Group of Companies, Inc. 8,300 394,250
Omnicom Group, Inc. 61,100 2,795,325
Snyder Communications, Inc. (a) 91,600 2,473,200
5,662,775
EDUCATIONAL SERVICES - 0.0%
Education Management Corp. (a) 32,400 680,400
LEASING & RENTAL - 0.0%
Ryder Systems, Inc. 10,600 298,125
Team Rental Group, Inc. Class A (a) 3,300 53,213
351,338
PRINTING - 0.3%
ASM Lithography Holding NV (a) 45,200 2,251,525
Deluxe Corp. 21,800 713,950
Harland (John H.) Co. 96,400 3,181,200
Reynolds & Reynolds Co. Class A 2,600 67,600
Standard Register Co. 1,300 42,250
Valassis Communications, Inc. (a) 6,800 143,650
6,400,175
SERVICES - 0.9%
APAC Teleservices, Inc. (a) 213,200 8,181,480
CDI Corp. (a) 400 11,350
Ecolab, Inc. 255,700 9,620,713
Orion Network Systems, Inc. (a) 1,700 21,888
Registry, Inc. 2,300 106,088
Robert Half International, Inc. (a) 64,500 2,217,188
Signature Resorts, Inc. (a) 12,800 451,200
Telespectrum Worldwide, Inc. (a) 77,900 1,236,663
Teletech Holdings, Inc. (a) 800 20,800
Zebra Technologies Corp. Class A (a) 6,000 140,250
22,007,620
TOTAL SERVICES 35,102,308
TECHNOLOGY - 15.2%
COMMUNICATIONS EQUIPMENT - 1.3%
ADC Telecommunications, Inc. (a) 28,100 874,613
Ascend Communications, Inc. (a) 20,800 1,292,200
Aspect Telecommunications Corp. (a) 12,500 793,750
Cisco Systems, Inc. (a) 76,600 4,873,675
Dynatech Corp. (a) 71,700 3,172,725
Ericsson (L.M.) Telephone Co.
Class B ADR 40,800 1,231,650
Lucent Technologies, Inc. 160,700 7,432,375
Nokia Corp. AB sponsored ADR 27,100 1,561,638
Northern Telecom Ltd. 42,300 2,628,997
Tellabs, Inc. (a) 50,400 1,896,300
3Com Corp. (a) 78,800 5,781,950
U.S. Robotics Corp. (a) 2,900 208,800
31,748,673
SHARES VALUE (NOTE 1)
COMPUTER SERVICES & SOFTWARE - 2.3%
America Online, Inc. (a) 25,200 $ 837,900
Autodesk, Inc. 5,000 140,000
Automatic Data Processing, Inc. 138,000 5,916,750
BMC Software, Inc. (a) 3,400 140,675
Borland International, Inc. (a) 4,800 26,100
CACI International, Inc. Class A (a) 32,800 688,800
CBT Group PLC sponsored ADR 1,800 97,650
CUC International, Inc. (a) 64,200 1,524,750
Ceridian Corp. (a) 82,616 3,345,948
Computer Sciences Corp. (a) 42,700 3,506,738
DST Systems, Inc. 19,500 611,813
Electronic Arts, Inc. (a) 14,800 443,075
Equifax, Inc. 163,500 5,007,188
First Data Corp. 34,700 1,266,550
Intuit (a) 46,000 1,449,000
Keane, Inc. (a) 101,400 3,219,450
McAfee Associates, Inc. (a) 15,400 677,600
Microsoft Corp. (a) 167,200 13,814,900
Midway Games, Inc. (a) 51,400 1,040,850
Ontrack Data International, Inc. (a) 37,300 559,500
Open Market, Inc. (a) 27,500 371,250
Oracle Corp. (a) 82,400 3,440,200
Parametric Technology Corp. (a) 45,100 2,317,013
Paychex, Inc. 10,400 534,950
Scopus Technology, Inc. (a) 7,600 353,400
SunGard Data Systems, Inc. (a) 49,700 1,963,150
Viisage Technology, Inc. (a) 5,000 72,500
53,367,700
COMPUTERS & OFFICE EQUIPMENT - 5.8%
Adaptec, Inc. (a) 74,600 2,984,000
Amdahl Corp. (a) 126,300 1,531,388
Applied Magnetics Corp. (a) 123,900 3,701,513
Bay Networks, Inc. (a) 429,700 8,969,988
Bell & Howell Co. (a) 47,300 1,123,375
Comdisco, Inc. 19,300 612,775
Compaq Computer Corp. (a) 129,100 9,585,675
Dell Computer Corp. (a) 13,500 717,188
Diebold, Inc. 79,350 4,989,131
Digital Equipment Corp. (a) 75,700 2,753,588
EMC Corp. (a) 614,100 20,342,063
Gateway 2000, Inc. (a) 4,000 214,250
Hewlett-Packard Co. 36,500 1,834,125
Ingram Micro, Inc. Class A (a) 12,900 296,700
International Business Machines Corp. 237,000 35,787,000
Kronos, Inc. (a) 76,600 2,451,200
Lexmark International Group, Inc. (a) 169,600 4,685,200
Pitney Bowes, Inc. 112,500 6,131,250
Procom Technology, Inc. 49,100 466,450
Quantum Corp. (a) 40,000 1,145,000
Seagate Technology (a) 422,500 16,688,750
Sequent Computer Systems, Inc. (a) 14,500 257,375
Silicon Graphics, Inc. (a) 166,500 4,245,750
Symbol Technologies, Inc. (a) 10,200 451,350
Tech Data Corp. (a) 6,300 172,463
Trident Microsystems, Inc. (a) 12,100 204,188
Western Digital Corp. (a) 84,800 4,823,000
137,164,735
ELECTRONIC INSTRUMENTS - 0.5%
Applied Materials, Inc. (a) 21,600 776,250
Perkin-Elmer Corp. 134,800 7,936,350
Silicon Valley Group, Inc. (a) 2,700 54,338
Teradyne, Inc. (a) 39,000 950,625
Thermo Electron Corp. 1,600 66,000
Waters Corp. (a) 89,500 2,718,563
12,502,126
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TECHNOLOGY - CONTINUED
ELECTRONICS - 4.8%
AVX Corp. 9,400 $ 202,100
Altera Corp. (a) 55,700 4,048,694
Arrow Electronics, Inc. (a) 14,400 770,400
Atmel Corp. (a) 61,700 2,043,813
Avnet, Inc. 34,500 2,009,625
Chips & Technologies, Inc. (a) 127,000 2,317,750
Cirrus Logic, Inc. (a) 45,400 703,700
Griffon Corp. (a) 38,900 476,525
Integrated Device Technology, Inc. (a) 325,700 4,437,663
Intel Corp. 323,400 42,345,188
KEMET Corp. (a) 34,900 811,425
Kent Electronics Corp. (a) 98,900 2,546,675
Lattice Semiconductor Corp. (a) 73,500 3,381,000
Linear Technology Corp. 30,100 1,320,638
Maxim Integrated Products, Inc. (a) 25,600 1,107,200
Microchip Technology, Inc. (a) 54,400 2,767,600
Micron Technology, Inc. 69,700 2,030,013
Motorola, Inc. 55,600 3,412,450
National Semiconductor Corp. (a) 225,900 5,506,313
SGS Thomson Microelectronics NV (a) 14,600 1,022,000
S3, Inc. (a) 7,000 113,750
Sanmina Corp. (a) 32,800 1,853,200
Solectron Corp. (a) 34,500 1,841,438
Storage Technology Corp. (a) 315,100 15,006,638
Texas Instruments, Inc. 88,700 5,654,625
Thomas & Betts Corp. 46,400 2,059,000
Unitrode Corp. (a) 32,900 966,438
VLSI Technology, Inc. (a) 19,900 475,113
Xilinx, Inc. (a) 36,200 1,332,613
Zero Corp. 65,300 1,306,000
Zilog, Inc. (a) 10,700 279,538
114,149,125
PHOTOGRAPHIC EQUIPMENT - 0.5%
Eastman Kodak Co. 77,300 6,203,325
Imation Corp. (a) 159,300 4,480,313
10,683,638
TOTAL TECHNOLOGY 359,615,997
TRANSPORTATION - 1.2%
AIR TRANSPORTATION - 0.1%
AMR Corp. (a) 13,300 1,172,063
Continental Airlines, Inc. Class B (a) 39,200 1,107,400
Delta Air Lines, Inc. 1,500 106,313
Northwest Airlines Corp. Class A (a) 12,100 473,413
UAL Corp. (a) 2,700 168,750
3,027,939
RAILROADS - 0.9%
Bombardier, Inc. Class B 72,400 1,336,193
Burlington Northern Santa Fe Corp. 46,800 4,042,350
CSX Corp. 6,500 274,625
Canadian Pacific Ltd. 241,900 6,361,378
Conrail, Inc. 21,540 2,145,923
Tranz Rail Holdings Ltd.
sponsored ADR (a) 28,500 504,094
Trinity Industries, Inc. 4,900 183,750
Wisconsin Central Transportation
Corp. (a) 158,700 6,288,488
21,136,801
SHIPPING - 0.0%
Kirby Corp. (a) 10,000 197,500
SHARES VALUE (NOTE 1)
TRUCKING & FREIGHT - 0.2%
Air Express International Corp. 20,000 $ 645,000
Consolidated Freightways, Inc. 25,200 560,700
Expeditors International of
Washington, Inc. 86,200 1,982,600
USFreightways Corp. 10,900 299,069
Werner Enterprises, Inc. 3,300 59,813
Yellow Corp. (a) 103,900 1,493,563
5,040,745
TOTAL TRANSPORTATION 29,402,985
UTILITIES - 2.9%
CELLULAR - 0.1%
McLeod, Inc. (a) 38,200 974,100
Palmer Wireless, Inc. (a) 28,500 299,250
1,273,350
ELECTRIC UTILITY - 0.6%
Allegheny Power System, Inc. 17,000 516,375
American Electric Power Co., Inc. 90,000 3,701,250
Consolidated Edison Co. of
New York, Inc. 7,100 207,675
DPL, Inc. 16,800 411,600
DQE, Inc. 4,900 142,100
Entergy Corp. 39,300 1,090,575
FPL Group, Inc. 35,300 1,623,800
GPU, Inc. 1,600 53,800
KU Energy Corp. 18,500 555,000
National Grid Co. PLC 1,132,000 3,781,276
Pinnacle West Capital Corp. 22,200 704,850
Public Service Co. of Colorado 5,300 206,038
Sevillana de Electricidad 18,296 207,765
Tucson Electric Power Co. (a) 15,000 249,375
13,451,479
GAS - 0.7%
Consolidated Natural Gas Co. 5,300 292,825
Enron Corp. 199,600 8,607,750
Italgas Spa 259,100 1,084,193
Noram Energy Corp. 17,100 262,913
ONEOK, Inc. 9,000 270,000
Sonat, Inc. 121,000 6,231,500
Tejas Gas Corp. (a) 1,600 76,200
16,825,381
TELEPHONE SERVICES - 1.5%
BCE, Inc. 154,500 7,359,558
British Telecommunications PLC Ord. 140,100 947,966
Cincinnati Bell, Inc. 32,200 1,984,325
MCI Communications Corp. 181,100 5,919,706
MFS Communications, Inc. 68,900 3,755,050
Smartalk Teleservices, Inc. (a) 71,300 1,212,100
Teleport Communications Group, Inc.
Class A (a) 31,100 948,550
WorldCom, Inc. (a) 537,000 13,995,563
36,122,818
WATER - 0.0%
Yorkshire Water PLC Ord. 17,400 210,134
TOTAL UTILITIES 67,883,162
TOTAL COMMON STOCKS
(Cost $1,780,742,211) 2,102,418,880
CONVERTIBLE PREFERRED STOCKS - 0.2%
SHARES VALUE (NOTE 1)
ENERGY - 0.1%
OIL & GAS - 0.1%
Tosco Financing Trust $2.875 (c) 11,100 $ 570,263
Ultramar Diamond Shamrock
Corp. $2.50 (c) 17,200 1,062,100
TOTAL ENERGY 1,632,363
RETAIL & WHOLESALE - 0.1%
APPAREL STORES - 0.1%
TJX Companies, Inc., Series E, $7.00 5,900 1,545,063
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $2,631,081) 3,177,426
CONVERTIBLE BONDS - 0.3%
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (B) AMOUNT (NOTE 1)
ENERGY - 0.1%
ENERGY SERVICES - 0.0%
Nabors Industries, Inc. 5%,
5/1/06 Ba2 $ 1,016,000 1,249,680
OIL & GAS - 0.1%
Pogo Producing Co. 5 1/2%,
6/15/06 (c) B2 1,100,000 1,388,750
TOTAL ENERGY 2,638,430
HEALTH - 0.1%
MEDICAL FACILITIES MANAGEMENT - 0.1%
NovaCare, Inc. 5 1/2%,
1/15/00 B1 2,130,000 1,911,675
MEDIA & LEISURE - 0.0%
BROADCASTING - 0.0%
Home Shopping Network, Inc.
5 7/8%, 3/1/06 (c) B- 445,000 478,375
Jacor Communications, Inc.
liquid yield option notes
0%, 6/12/11 B3 302,000 135,523
TOTAL MEDIA & LEISURE 613,898
RETAIL & WHOLESALE - 0.0%
APPAREL STORES - 0.0%
Charming Shoppes, Inc.
7 1/2%, 7/15/06 B2 395,000 383,150
TECHNOLOGY - 0.1%
ELECTRONICS - 0.1%
National Semiconductor Corp.
6 1/2%, 10/1/02 (c) Ba2 1,655,000 1,630,175
TOTAL CONVERTIBLE BONDS
(Cost $6,587,222) 7,177,328
U.S. TREASURY OBLIGATIONS - 4.7%
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (B) AMOUNT (NOTE 1)
U.S. Treasury Bill, yields at date
of purchase 5.34%, 3/6/97 - $ 250,000 $ 247,825
7 1/4%, 2/15/23 Aaa 6,300,000 6,577,578
6 1/4%, 8/15/23 Aaa 22,100,000 20,718,750
7 1/2%, 11/15/24 Aaa 5,690,000 6,223,438
7 5/8%, 2/15/25 Aaa 39,000,000 43,320,420
6 7/8%, 8/15/25 Aaa 7,000,000 7,137,830
6%, 2/15/26 Aaa 13,000,000 11,832,080
6 3/4%, 8/15/26 Aaa 16,000,000 16,120,000
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $112,387,712) 112,177,921
CASH EQUIVALENTS - 5.8%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 6.75%, dated
12/31/96 due 1/2/97 $ 137,218,438 137,167,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $2,039,515,226) $ 2,362,118,555
CURRENCY ABBREVIATIONS
CAD - Canadian dollar
LEGEND
(a) Non-income producing
(b) Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
(c) Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of these securities amounted to $7,774,672 or 0.3% of net
assets.
(d) Purchased on an installment basis. Market value reflects only those
payments made through December 31, 1996. The remaining installment for
Falconbridge Ltd., aggregating CAD 776,150 is due January 31, 1997. The
remaining installment for Petro-Canada, aggregating CAD 642,175 is due
March 24, 1997.
(e) An affiliated company is a company in which the fund has ownership of
at least 5% of the voting securities. Transactions during the period with
companies which are or were affiliates are as follows:
PURCHASE SALES DIVIDEND VALUE
AFFILIATE COST COST INCOME
Cutter & Buck, Inc. $ 39,000 $ - $ - $ 3,255,000
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $3,728,210,661 and $2,494,655,085, respectively, of which U.S.
government and government agency obligations aggregated $139,603,569 and
$109,833,563, respectively.
The market value of futures contracts opened and closed during the period
amounted to $83,367,121 and $82,962,684, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company. The
commissions paid to these affiliated firms were $1,028,246 for the period
(see Note 4 of Notes to Financial Statements).
INCOME TAX INFORMATION
At December 31, 1996, the aggregate cost of investment securities for
income tax purposes was $2,046,267,190. Net unrealized appreciation
aggregated $315,851,365, of which $341,028,736 related to appreciated
investment securities and $25,177,371 related to depreciated investment
securities.
The fund hereby designates approximately $13,087,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
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DECEMBER 31, 1996
ASSETS
Investment in securities, at value (including repurchase agreements of $137,167,000) (cost $2,039,515,226) $ 2,362,118,555
- -
See accompanying schedule
Cash 266,665
Receivable for investments sold 17,594,993
Receivable for fund shares sold 17,326,528
Dividends receivable 1,963,857
Interest receivable 2,844,453
TOTAL ASSETS 2,402,115,051
LIABILITIES
Payable for investments purchased $ 5,325,350
Payable for fund shares redeemed 1,294,444
Accrued management fee 1,164,508
Other payables and 227,690
accrued expenses
TOTAL LIABILITIES 8,011,992
NET ASSETS $ 2,394,103,059
Net Assets consist of:
Paid in capital $ 2,002,049,755
Undistributed net investment income 20,976,837
Accumulated undistributed net realized gain (loss) on investments and foreign 48,472,815
currency transactions
Net unrealized appreciation (depreciation) on investments 322,603,652
and assets and liabilities in foreign currencies
NET ASSETS, for 144,559,967 shares outstanding $ 2,394,103,059
NET ASSET VALUE, offering price $16.56
and redemption price per
share ($2,394,103,059 (divided by) 144,559,967 shares)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
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YEAR ENDED DECEMBER 31, 1996
INVESTMENT INCOME $ 18,426,701
Dividends
Interest 13,714,953
TOTAL INCOME 32,141,654
EXPENSES
Management fee $ 9,539,179
Transfer agent fees 1,141,270
Accounting fees and expenses 622,337
Non-interested trustees' compensation 7,709
Custodian fees and expenses 324,660
Registration fees 3,486
Audit 42,110
Legal 7,818
Miscellaneous 3,876
Total expenses before reductions 11,692,445
Expense reductions (527,628 11,164,817
)
NET INVESTMENT INCOME 20,976,837
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:
Investment securities 49,545,658
Foreign currency transactions (139,799
)
Futures contracts (404,437 49,001,422
)
Change in net unrealized appreciation (depreciation) on:
Investment securities 254,150,260
Assets and liabilities in 293 254,150,553
foreign currencies
NET GAIN (LOSS) 303,151,975
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 324,128,812
OTHER INFORMATION $ 516,935
Expense reductions
Directed brokerage arrangements
Custodian interest credits 10,693
$ 527,628
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED JANUARY 3, 1995
DECEMBER 31, (COMMENCEMENT
1996 OF OPERATIONS) TO
DECEMBER 31,
1995
<TABLE>
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Operations $ 20,976,837 $ 4,056,021
Net investment income
Net realized gain (loss) 49,001,422 16,037,745
Change in net unrealized appreciation (depreciation) 254,150,553 68,453,099
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 324,128,812 88,546,865
Distributions to shareholders - (3,710,433)
From net investment income
From net realized gain (9,296,351) (7,420,866)
TOTAL DISTRIBUTIONS (9,296,351) (11,131,299)
Share transactions 1,380,209,873 806,897,529
Net proceeds from sales of shares
Reinvestment of distributions 9,296,351 11,131,299
Cost of shares redeemed (187,235,370) (18,444,650)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 1,202,270,854 799,584,178
TOTAL INCREASE (DECREASE) IN NET ASSETS 1,517,103,315 876,999,744
NET ASSETS
Beginning of period 876,999,744 -
End of period (including undistributed net investment income of $20,976,837 and $275,151,
respectively) $ 2,394,103,059 $ 876,999,744
OTHER INFORMATION
Shares
Sold 92,660,951 64,153,925
Issued in reinvestment of distributions 674,626 816,078
Redeemed (12,369,121) (1,376,492)
Net increase (decrease) 80,966,456 63,593,511
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
YEAR ENDED JANUARY 3, 1995
DECEMBER 31, (COMMENCEMENT
1996 OF OPERATIONS) TO
DECEMBER 31,
1995
SELECTED PER-SHARE DATA
<TABLE>
<CAPTION>
<S> <C> <C>
Net asset value, beginning of period $ 13.79 $ 10.00
Income from Investment Operations
Net investment income .14 .06
Net realized and unrealized gain (loss) 2.76 3.91
Total from investment operations 2.90 3.97
Less Distributions
From net investment income - (.06)
From net realized gain (.13) (.12)
Total distributions (.13) (.18)
Net asset value, end of period $ 16.56 $ 13.79
TOTAL RETURN A 21.22% 39.72%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 2,394,103 $ 877,000
Ratio of expenses to average net assets .74% .72%
Ratio of expenses to average net assets after expense reductions .71% B .72%
Ratio of net investment income to average net assets 1.33% 1.07%
Portfolio turnover rate 178% 132%
Average commission rate C $ .0343
A TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE
TOTAL RETURNS
SHOWN. B FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH
THIRD PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S
EXPENSES (SEE NOTE 5 OF
NOTES TO FINANCIAL STATEMENTS). C FOR FISCAL YEARS BEGINNING ON OR
AFTER SEPTEMBER 1, 1995, A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE
COMMISSION RATE PER
SHARE FOR SECURITY TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS
AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND TO FUND DEPENDING ON
THE MIX OF TRADES EXECUTED
IN VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE
STRUCTURES MAY DIFFER.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
For the period ended December 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES.
Contrafund Portfolio (the fund) is a fund of Variable Insurance Products
Fund II (the trust) and is authorized to issue an unlimited number of
shares. The trust is registered under the Investment Company Act of 1940,
as amended (the 1940 Act), as an open-end management investment company
organized as a Massachusetts business trust. Shares of the fund may only be
purchased by insurance companies for the purpose of funding variable
annuity or variable life insurance contracts. The financial statements have
been prepared in conformity with generally accepted accounting principles
which permit management to make certain estimates and assumptions at the
date of the financial statements. The following summarizes the significant
accounting policies of the fund:
SECURITY VALUATION. Securities for which exchange quotations are readily
available are valued at the last sale price, or if no sale price, at the
closing bid price. Securities (including restricted securities) for which
exchange quotations are not readily available (and in certain cases debt
securities which trade on an exchange) are valued primarily using
dealer-supplied valuations or at their fair value as determined in good
faith under consistently applied procedures under the general supervision
of the Board of Trustees. Short-term securities with remaining maturities
of sixty days or less for which quotations are not readily available are
valued at amortized cost or original cost plus accrued interest, both of
which approximate current value.
FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S.
dollars at the prevailing rates of exchange at period end. Income receipts
and expense payments are translated into U.S. dollars at the prevailing
exchange rate on the respective dates of the transactions. Purchases and
sales of securities are translated into U.S. dollars at the contractual
currency exchange rates established at the time of each trade.
Net realized gains and losses on foreign currency transactions represent
net gains and losses from sales and maturities of forward currency
contracts, disposition of foreign currencies, and the difference between
the amount of net investment income accrued and the U.S. dollar amount
actually received. The effects of changes in foreign currency exchange
rates on investments in securities are included with the net realized and
unrealized gain or loss on investment securities.
INCOME TAXES. As a qualified regulated investment company under Subchapter
M of the Internal Revenue Code, the fund is not subject to income taxes to
the extent that it distributes substantially all of its taxable income for
its fiscal year. The schedule of investments includes information regarding
income taxes under the caption "Income Tax Information."
INVESTMENT INCOME. Dividend income is recorded on the ex-dividend date,
except certain dividends from foreign securities where the ex-dividend date
may have passed, are recorded
as soon as the fund is informed of the ex-dividend date. Non-cash dividends
included in dividend income, if any, are recorded at the fair market value
of the securities received. Interest income, which includes accretion of
original issue discount, is accrued as earned. Investment income is
recorded net of foreign taxes withheld where recovery of such taxes is
uncertain.
EXPENSES. Most expenses of the trust can be directly attributed to a fund.
Expenses which cannot be directly attributed are apportioned between the
funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. 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, which may result in distribution
reclassifications, are primarily due to differing treatments for futures
and options transactions, foreign currency transactions, passive foreign
investment companies (PFIC), partnerships, non-taxable dividends and losses
deferred due to wash sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital and may
affect the per-share allocation between net investment income and realized
and unrealized gain (loss). Undistributed net investment income and
accumulated undistributed net realized gain (loss) on investments and
foreign currency transactions may include temporary book and tax basis
differences which will reverse in a subsequent period. Any taxable income
or gain remaining at fiscal year end is distributed in the following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of trade
date. Gains and losses on securities sold are determined on the basis of
identified cost.
2. OPERATING POLICIES.
FOREIGN CURRENCY CONTRACTS. The fund generally uses foreign currency
contracts to facilitate transactions in foreign-denominated securities.
Losses may arise from changes in the value of the foreign currency or if
the counterparties do not perform under the contracts' terms. The U.S.
dollar value of foreign currency contracts is determined using contractual
currency exchange rates established at the time of each trade. The cost of
the foreign currency contracts is included in the cost basis of the
associated investment.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the fund, along with other affiliated
entities of Fidelity Management & Research Company (FMR), may transfer
uninvested cash balances into one or more joint trading accounts. These
balances are invested in one or more repurchase agreements that mature in
60 days or less from the date of purchase for U.S. Treasury or Federal
Agency obligations.
2. OPERATING POLICIES - CONTINUED
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
Securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are marked-to-market
daily and maintained at a value at least equal to the principal amount of
the repurchase agreement (including accrued interest). FMR, the fund's
investment adviser, is responsible for determining that the value of the
underlying securities remains in accordance with the market value
requirements stated above.
FUTURES CONTRACTS. The fund may use futures contracts to manage its
exposure to the stock market and to fluctuations in interest rates and
currency values. Buying futures tends to increase the fund's exposure to
the underlying instrument, while selling futures tends to decrease the
fund's exposure to the underlying instrument or hedge other fund
investments. Losses may arise from changes in the value of the underlying
instruments, if there is an illiquid secondary market for the contracts, or
if the counterparties do not perform under the contracts' terms. Futures
contracts are valued at the settlement price established each day by the
board of trade or exchange on which they are traded.
RESTRICTED SECURITIES. The fund is permitted to invest in securities that
are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from registration
or to the public if the securities are registered. Disposal of these
securities may involve time-consuming negotiations and expense, and prompt
sale at an acceptable price may be difficult. At the end of the period, the
fund had no investments in restricted securities (excluding 144A issues).
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities) and the market value of futures contracts opened and
closed, is included under the caption "Other Information" at the end of the
fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a monthly
fee that is calculated on the basis of a group fee rate plus a fixed
individual fund fee rate applied to the average net assets of the fund. The
group fee rate is the weighted average of a series of rates and is based on
the monthly average net assets of all the mutual funds advised by FMR. The
rates ranged from .2500% to .5200% for the period. In the event that these
rates were lower than the contractual rates in effect during the period,
FMR voluntarily implemented the above rates, as they resulted in the same
or a lower management fee. The annual individual fund fee rate is .30%. For
the period, the management fee was equivalent to an annual rate of .61% of
average net assets.
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations Company
(FIIOC), an affiliate of FMR, is the fund's transfer, dividend disbursing
and shareholder servicing agent. FIIOC receives account fees and
asset-based fees that vary according to account size and type of account.
FIIOC pays for typesetting, printing and mailing of all shareholder
reports, except proxy statements. For the period, the transfer agent fees
were equivalent to an annual rate of .07% of average net assets.
ACCOUNTING FEES. Fidelity Service Co. (FSC), an affiliate of FMR, maintains
the fund's accounting records. The fee is based on the level of average net
assets for the month plus out-of-pocket expenses.
BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms are shown under the caption
"Other Information" at the end of the fund's schedule of investments.
5. EXPENSE REDUCTIONS.
FMR voluntarily agreed to reimburse the fund's operating expenses
(excluding interest, taxes, brokerage commissions and extraordinary
expenses) above an annual rate of 1.00% of average net assets.
FMR has directed certain portfolio trades to brokers who paid a portion of
the fund's expenses. In addition, the fund has entered into an arrangement
with its custodian whereby interest earned on uninvested cash balances was
used to offset a portion of the fund's expenses.
For the period, the reduction under these arrangements are shown under the
caption "Other Information" on the fund's Statement of Operations.
6. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investment Life Insurance Company (FILI)
and its subsidiaries, affiliates of FMR, were the record owners of
approximately 38% of the outstanding shares of the fund. In addition, one
unaffiliated insurance company was record owner of 10% or more of the total
outstanding shares of the fund, totaling 23%.
7. TRANSACTIONS WITH AFFILIATED COMPANIES.
An affiliated company is a company in which the fund has ownership of at
least 5% of the voting securities. Information regarding transactions with
affiliated companies is included under the caption "Legend" at the end of
the fund's schedule of investments.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Variable Insurance Products Fund II and the Shareholders
of Contrafund Portfolio:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments (except for Moody's and Standard &
Poor's ratings), and the related statements of operations and of changes in
net assets and the financial highlights present fairly, in all material
respects, the financial position of Contrafund Portfolio (a fund of
Variable Insurance Products Fund II) at December 31, 1996, the results of
its operations for the year then ended, and the changes in its net assets
and the financial highlights for the periods indicated in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Contrafund Portfolio's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of securities at December 31, 1996 by correspondence
with the custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 10, 1997
DISTRIBUTIONS
The Board of Trustees of Contrafund Portfolio voted to pay on February 7,
1997, to shareholders of record at the opening of business on February 7,
1997, a distribution of $.37 per share derived from capital gains realized
from sales of portfolio securities and a dividend of $.14 per share from
net investment income.
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
INVESTMENT SUB-ADVISERS
Fidelity Management & Research (U.K.) Inc.,
London, England
Fidelity Management & Research (Far East) Inc.,
Tokyo, Japan
OFFICERS
Edward C. Johnson 3d, PRESIDENT
J. Gary Burkhead, SENIOR VICE PRESIDENT
William J. Hayes, VICE PRESIDENT
Robert A. Lawrence, VICE PRESIDENT
William Danoff, VICE PRESIDENT
Arthur S. Loring, SECRETARY
Kenneth A. Rathgeber, TREASURER
Robert H. Morrison, MANAGER, SECURITY TRANSACTIONS
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
BOARD OF TRUSTEES
J. Gary Burkhead
Ralph F. Cox *
Phyllis Burke Davis *
Richard J. Flynn *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Edward H. Malone *
Marvin L. Mann *
Gerald C. McDonough *
Thomas R. Williams *
ADVISORY BOARD
William O. McCoy
* INDEPENDENT TRUSTEES
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Investments Institutional Operations Co.
Boston, MA
CUSTODIAN
Brown Brothers Harriman & Co., Boston, MA
(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS
FUND II: ASSET MANAGER: GROWTH PORTFOLIO
ANNUAL REPORT
DECEMBER 31, 1996
CONTENTS
<TABLE>
<CAPTION>
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MARKET ENVIRONMENT 3 A review of what happened in world markets
during the last year.
PERFORMANCE 4 How the fund has done over time.
FUND TALK 5 The managers' review of fund performance, strategy
and outlook.
ADDITIONAL INTERVIEW ON POLICY CHANGES 7 A discussion of recent changes to
VIP II: Asset Manager: Growth
INVESTMENTS 8 A complete list of the fund's investments with their
market values.
FINANCIAL STATEMENTS 17 Statements of assets and liabilities, operations, and
changes in net assets, as well as financial highlights.
NOTES 19 Notes to the financial statements.
REPORT OF INDEPENDENT ACCOUNTANTS 21 The auditors' opinion.
DISTRIBUTIONS 22
</TABLE>
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR
THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS
PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY,
ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED
BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
MARKET ENVIRONMENT
Most stock and bond markets posted positive returns in 1996, aided by
moderate growth and low inflation. Sustained corporate earnings growth and
a favorable interest rate environment also proved beneficial. Japan,
however, was the major exception as an underperforming stock market and a
weak yen undermined returns for U.S.-based investors. The strongest gains
came from the often-volatile emerging bond markets in 1996, while
performance of the bond markets of developed countries was mixed.
U.S. STOCK MARKETS
The Standard & Poor's 500 Index - a broad measure of U.S. stock market
performance - rose 22.96% for the 12 months that ended December 31, 1996,
well above the index's long-term average annual return of about 12%. The
Russell 2000 Index - a measure of small stock performance - rose 16.49%.
The Dow Jones Industrial Average - an index of 30 blue-chip stocks - posted
a return of 28.70%, closing above 6500 for the first time in November.
The U.S. stock market spent much of the past year breaking price and
trading volume records. Solid corporate earnings reports, large cash
inflows into mutual funds, widespread optimism and a generally favorable
interest rate environment propelled share prices higher.
Large-capitalization stocks thrived as investors sought their lower
volatility and higher degree of liquidity over smaller-cap stocks in an
environment where it was sometimes difficult to discern the health of the
economy.
Most industry sectors experienced positive, if not strong performance. At
mid-year, technology stocks suffered from a sell-off sparked by fears that
company earnings were weakening. Nevertheless, this sector proved to be the
strongest in the U.S. market in 1996. Earnings surprises and positive
earnings projections were the main drivers of solid performance, especially
among semiconductor manufacturers, companies that make disk drives and
monitors, and software firms. Even though consensus estimates pointed
toward increases in short-term interest rates by the Fed, financial stocks
- - usually sensitive to changes in interest rates - shrugged off this
concern and posted solid performance based on low interest rates and
positive business prospects. Energy stocks reaped the benefits of
higher-than-expected energy prices, which resulted in part from the delayed
re-entry of Iraq into the world market. Uncertainty over the direction of
the economy benefited consumer nondurables - such as food, beverage and
tobacco companies - health care and traditional big-name growth stocks, as
these companies tend to post steady earnings growth in many economic
environments.
Utilities stocks struggled in 1996 for two reasons. First, and most
important, uncertainty over the direction and form of deregulation in the
sector tended to diminish investor interest. Second, stocks in the sector
tend to move in concert with bonds, which lagged due to periodic inflation
fears and confusing economic signals. Stocks in the telecommunications
field especially were affected by uncertainty over legislation signed into
law in February 1996. Biotechnology issues had a hard time recovering from
a correction in stock prices from overvalued levels that they experienced
earlier in 1996. Cyclical stocks - those that usually rise and fall with
the economy - posted mixed results that largely depended on the outlook for
companies in the specific sector rather than the direction of the economy.
FOREIGN STOCK MARKETS
Foreign stock markets posted mixed results in 1996. The Morgan Stanley
Capital International (MSCI) EAFE Index - which measures stock performance
in Europe, Australia and the Far East - returned 6.05% in 1996. Europe
posted the most consistently strong equity markets due to stronger economic
growth, lower interest rates, higher corporate earnings, the relative
weakness of the continent's major currencies and a new emphasis on
shareholder friendliness by many of the region's corporations. The MSCI
Europe Index was up 21.09% in 1996. The Japanese stock market
underperformed on the weakness of the economic recovery and the uncertainty
for any substantial economic reform. The Tokyo Stock Exchange TOPIX Total
Return Index was off 16.26%. Emerging market equity performance ran the
gamut from negative to positive, with the MSCI Emerging Markets Free Index
returning 6.03% for 1996. While Hong Kong was a top performer - benefiting
from the rising value of the property sector, solid economic growth and
stable interest rates - other Asian markets posted mixed returns as
concerns rose over declining export growth in the region. Latin America
enjoyed a strong first half, but faded toward the end of 1996 due to low
domestic savings rates and inefficient governments, among other factors.
U.S. BOND MARKETS
Uncertainty over the direction of the economy led to mixed performance in
U.S. bond markets in 1996. For the year, the Lehman Brothers Aggregate Bond
Index - a broad measure of the performance of the U.S. taxable bond market
- - posted a total return of 3.63%. Stronger-than-expected economic signals
rattled the bond market in the early spring. Investors spent most of the
summer anticipating a short-term interest rate increase by the Federal
Reserve Board. However, the Fed neither raised nor lowered rates through
the end of 1996. Interest rates responded to the Fed's inaction by falling
during much of October and November. In December, though, bond prices
dropped due to inflation concerns, stronger-than-expected economic data and
comments by Fed Chairman Alan Greenspan that the stock markets may be
overvalued.
FOREIGN BOND MARKETS
While low inflation and moderate growth helped provide a positive backdrop
for most bond markets in 1996, performance in overseas bond markets was
mixed. The Salomon Brothers World Government Bond Index - a measure of
government bond market performance in developed nations - returned 3.62%
for the 12 months that ended December 31, 1996. In Europe, focus centered
on the continuing progress toward the European Monetary Union (EMU).
Attractive opportunities arose as countries worked to meet the requirements
for joining the EMU. However, Germany and Japan - two of the larger
components of the Salomon Brothers World Government Bond Index -
experienced currency problems that hurt returns. In stark contrast to the
developed world, the often-volatile emerging debt markets enjoyed a
particularly strong year, helped by inflows of foreign capital, low
interest rates and the implementation of country-specific reforms -
especially in Latin America. The J.P. Morgan Emerging Markets Bond Index -
of which Latin America is a large component - posted a return of 34.16%
during the period.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can
look at the total percentage change in value, the average annual percentage
change, or the growth of a hypothetical $10,000 investment. Total return
reflects the change in the value of an investment, assuming reinvestment of
the fund's dividend income and capital gains (the profits earned upon the
sale of securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIOD ENDED DECEMBER 31, 1996 PAST 1 LIFE OF
YEAR FUND
Asset Manager: Growth 20.04% 21.56%
S&P 500 (registered trademark) 22.96% 30.11%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what
would have happened if the fund had performed at a constant rate each year.
You can compare the fund's return to those of the Standard & Poor's 500
Index - a widely recognized, unmanaged index of common stocks. This
benchmark reflects the reinvestment of dividends and capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of growth in the long run and volatility
in the short run. In turn, the share price and return
of a fund that invests in stocks will vary. That
means if you sell your shares during a market
downturn, you might lose money. But if you can
ride out the market's ups and downs, you may
have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of return
and are not the fund's year-by-year results, which fluctuated over the
periods shown. The life of fund figures are from commencement of
operations, January 3, 1995.
If Fidelity had not reimbursed certain fund expenses, the life of fund
total return figure would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL
CHARGES, THE TOTAL RETURN WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
IMAHDR PRASUN SHR__CHT 19960930 19961009 151627 S00000000000001
Asset Manager:Growt S&P500 Fid. Aggr.Asset. Alloc.
00159 SP001 F0022
1995/01/31 10000.00 10000.00
10000.00
1995/02/28 10149.70 10389.70
10319.41
1995/03/31 10289.42 10696.30
10539.38
1995/04/30 10558.88 11011.31
10785.08
1995/05/31 10708.58 11451.43
11198.64
1995/06/30 11137.72 11717.44
11396.90
1995/07/31 11546.91 12106.00
11632.64
1995/08/31 12065.87 12136.38
11694.83
1995/09/30 12245.51 12648.54
12051.93
1995/10/31 11776.45 12603.38
12082.78
1995/11/30 11986.03 13156.67
12486.40
1995/12/31 12277.71 13410.07
12699.16
1996/01/31 12569.78 13866.55
13007.00
1996/02/29 12613.39 13995.09
13008.05
1996/03/31 12840.37 14129.86
13058.25
1996/04/30 13143.01 14338.14
13160.97
1996/05/31 13348.36 14707.92
13378.10
1996/06/30 13402.41 14763.95
13465.02
1996/07/31 13067.35 14111.68
13090.93
1996/08/31 13164.62 14409.30
13265.02
1996/09/30 13705.04 15220.25
13818.40
1996/10/31 14104.95 15640.03
14160.36
1996/11/30 15023.67 16822.26
14932.58
1996/12/31 14737.79 16489.01
14697.36
IMATRL PRASUN SHR__CHT 19960930 19961009 151629 R00000000000123
Let's say hypothetically that $10,000 was invested in Asset Manager: Growth
Portfolio on January 31, 1995, shortly after the fund began. As the chart
shows, by December 31, 1996, the value of the investment would have grown
to $14,738 - a 47.38% increase. With reinvested dividends and capital
gains, if any, a $10,000 investment in the S&P 500 would have grown to
$16,489 over the same period - a 64.89% increase.
You can also look at how the Fidelity Aggressive Asset Allocation Composite
Index, a hypothetical combination of unmanaged indices, did over the same
period. The Aggressive Asset Allocation Composite index combines the
cumulative total returns of three unmanaged indexes - the S&P 500 (64.89%),
Lehman Brothers Aggregate Bond Index (20.39%), and the Salomon Brothers
3-month T-Bill Total Rate of Return Index (10.78%) - according to the
fund's neutral mix*, assuming monthly rebalancing. With reinvested
dividends and capital gains, if any, a $10,000 investment in the index
would have grown to $14,697 - a 46.97% increase.
* 70% STOCKS, 25% BONDS AND 5% SHORT-TERM INSTRUMENTS EFFECTIVE JANUARY 1,
1997; 65%, 30% AND 5%, RESPECTIVELY, PRIOR TO DECEMBER 31, 1996.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1996
% OF FUND'S
INVESTMENTS
Philip Morris Companies, Inc. 6.6
Federal National Mortgage Association 6.2
General Motors Corp. 3.5
International Business Machines Corp. 2.8
Compaq Computer Corp. 2.4
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1996
(STOCKS ONLY) % OF FUND'S
INVESTMENTS
Finance 14.3
Technology 12.0
Nondurables 7.7
Utilities 5.8
Durables 5.7
ASSET ALLOCATION AS OF DECEMBER 31, 1996*
Row: 1, Col: 1, Value: 8.9
Row: 1, Col: 2, Value: 22.5
Row: 1, Col: 3, Value: 68.59999999999999
Stocks 68.6%
Bonds 22.5%
Short-term investments 8.9%
FOREIGN INVESTMENTS 9.2%
*
% OF FUND'S INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
FUND TALK: THE MANAGERS' OVERVIEW
An interview with Richard Habermann (center), Portfolio Manager of VIP II:
Asset Manager: Growth, as well as George Vanderheiden (left) and Michael
Gray, sub-managers for stocks and bonds, respectively
Q. HOW DID THE FUND PERFORM, DICK?
D.H. Pretty well. For most of the past year - when the stock market was
quite strong and bonds posted mixed results - the fund nearly performed in
line with the broad stock market. For the 12 months that ended December 31,
1996, the Standard & Poor's 500 Index posted a return of 22.96%. The fund
benefited most from the performance of its equity investments, a result of
restructuring of the portfolio after a management change in March.
Q. WHAT WAS THE NATURE OF THIS REPOSITIONING?
D.H. On the equity side, we emphasized large-capitalization stocks whose
dividend yields were slightly higher than that of the market. This approach
helped the fund, as stocks in this area were among the best performing
asset classes in 1996. We focused the fund's bond investments on
investment-grade, dollar-denominated securities, and brought the bond
portfolio's duration - its sensitivity to changes in interest rates - in
line with the bond market average as represented by the Lehman Brothers
Aggregate Index.
Q. WHAT WAS THE FUND'S ASSET MIX AT THE END OF THE PERIOD?
D.H. The fund had about 69% in stocks, 22% in bonds and 9% in short-term
money-market securities. This asset allocation is fairly close to the new
neutral mix we have developed for the fund. For more information on that
policy change, shareholders should refer to the additional interview that
follows in this report.
Q. CAN YOU GIVE US SOME DETAILS ON YOUR ASSET ALLOCATION STRATEGY OVER THE
PAST SIX MONTHS?
D.H. We've maintained a fairly consistent weighting in stocks over that
period, a position that has helped the fund because stocks performed so
well. Investors bid up stock prices in July after finding that some
negative corporate earnings reports were not indicative of the state of the
overall market. Through the last three months of the year, stocks continued
to do well, spurred by a benign economic and interest rate environment.
Federal Reserve Board Chairman Alan Greenspan's comments about the market's
exuberance caused some short-term volatility in December, but the stock
market rebounded fairly quickly. The fixed-income component was increased
at times, as we bought bonds when they became undervalued during periods of
market duress. At those times, the market was spooked by
stronger-than-expected economic data that was considered to be a signal of
inflation. Bond investors fear inflation because it erodes the value of a
bond's fixed payments. We bought more investment-grade bonds when their
prices fell and their yields rose in response to the economic data.
Therefore, we were able to lock in higher yields on our new fixed-income
investments. When yields subsequently fell, the value of the fixed-income
investments we purchased earlier increased.
Q. TURNING TO YOU, GEORGE, WHAT STOCK-PICKING STRATEGIES HAVE YOU PURSUED?
G.V. I've sought to minimize the risk in the stock holdings because I
considered stock market valuations to be high on a historical basis. As a
result, I've pursued two strategies - growth at a reasonable price and
vulture investing. I have always felt the most prudent way to buy growth
stocks is to get as much total return, meaning stock appreciation plus
dividend yield, for as small a price as possible. The price you pay for a
growth stock is reflected in its price-to-earnings ratio, or how much times
earnings the market thinks that stock is worth. To give an example, both
Philip Morris and Coca-Cola are growth stocks with each having grown its
earnings per share at an 18% growth rate over the past 10 years. Assuming
they can sustain similar growth rates in the future, Philip Morris would
have a higher total return because its dividend yield is 5%, whereas Coke's
is 1%. But look at what the market was paying for each stock's total return
at the beginning of October. Coke was at around $51 and the consensus
estimate for its earnings per share was $1.40 for 1996, thereby producing a
price-to-earnings ratio of 36 times. Philip Morris, on the other hand, was
at $93 with a consensus earnings-per-share estimate of $7.70 for 1996,
thereby producing a price-to-earnings ratio of 12 times. Litigation
concerns have been dragging down Philip Morris' ratio, but these worries
have been around for 15 years and this was the biggest gap between the two
companies' price-to-earnings ratios. That's why I invested in Philip Morris
and not Coca-Cola.
Q. WHAT DO YOU MEAN BY VULTURE INVESTING?
G.V. Occasionally bad things happen to good stocks. Quality growth stocks
may stumble temporarily due to new product introductions, too much
inventory or manufacturing problems that cause a disappointment in
quarterly earnings. If these are truly temporary occurrences, they can be
wonderful opportunities to buy a stock or sector when prices are down. For
example, in January 1996, Intel's price had dropped to $50 from $75 months
before as concerns developed over its receivables with Packard Bell. Nine
months later the stock had increased substantially. Buying a sector with
good long-term fundamentals after it has suffered a big decline can
mitigate risk and enhance the ultimate upside gain. However, it does
require patience.
Q. MICHAEL, WHERE HAVE YOU FOUND OPPORTUNITIES IN THE BOND PORTFOLIO?
M.G. I've increased the fund's investments in bonds that offered a yield
advantage over Treasuries - agency issues, mortgage-backed securities and
corporate bonds.
Q. WHAT MADE CORPORATE BONDS MORE ATTRACTIVE?
M.G. As Dick said, they became more attractive earlier in the period. In
addition, for most of the period, the fundamental outlook for corporations
was favorable. That is, business prospects appeared to improve. The best
indicator of a favorable corporate environment has been a strong stock
market. This strength showed that corporations were doing well and that
investors were comfortable with prospects as they drove up stock prices.
Part of that optimism was a function of the economic environment, which has
been fairly positive. Despite the bond market's inflation fears in the
spring, the economy looked as if it was growing, while inflation remained
under control. Moderate growth with low inflation is a good recipe for
corporations. In addition, there was a limited supply of new corporate
issues, along with fairly strong demand. Many investors were looking for
added yield, and there wasn't much to buy in the way of corporate bonds.
This backdrop helped corporate bonds post strong price gains on a relative
basis.
Q. WERE THERE OTHER TYPES OF BONDS THAT WERE ATTRACTIVE TO YOU?
M.G. I was attracted to Yankee bonds. These are dollar-denominated bonds
issued in the U.S. by foreign banks, governments and corporations. They
tend to trade more cheaply than other bonds with similar credit ratings and
often don't drop in price as quickly as corporate bonds when bad news
affects the issuer.
Q. WHAT KINDS OF MORTGAGE-BACKED SECURITIES DID YOU FAVOR?
M.G. When rates rose earlier in the period, I bought mortgage-backed
securities that were selling at a discount. In general I sought securities
that I thought would be less susceptible to changes in interest rates than
other choices in the mortgage-backed sector. Mortgage-backed securities
tend not to perform well if rates go up or down sharply, so I looked for
those bonds that by the nature of their structure would be less sensitive
to interest rate changes. Those securities tended to be in 15-year and
30-year mortgages that were selling at a discount.
Q. TURNING BACK TO YOU, DICK, WHAT'S YOUR OUTLOOK?
D.H. Twice this year, there has been real excitement in the stock market,
in July and December. Both occasions were related to concerns about
earnings. Going forward, I think we'll find more risk in the markets.
Sometimes people tend to forget that stocks, most importantly, are stocks
of COMPANIES. So what we've been trying to do is to spend a lot of time
listening to companies and trying to get a sense of what's going on. There
might be a pick-up in the economy to sustain earnings, but in the short
term, earnings disappointments will hit a stock hard. The stocks and
markets that have done poorly are those that haven't met expectations. If
the low-interest, low-inflation environment continues, earnings will be
more crucial. That is, because of lower interest rates, there will be more
of a reaction when earnings don't meet expectations. In addition, stock
prices will be more sensitive to any changes in interest rates. As for
fixed-income, we'll continue to keep an eye on the strength of the economy
and to look for value in the various sectors of the market.
NOTE TO SHAREHOLDERS: Charles Morrison became sub-manager for bonds on
February 3,1997, after the period ended.
FUND FACTS
GOAL: maximum total return over the long term
by allocating assets among stocks, bonds and
short-term instruments anywhere in the world
START DATE: January 3, 1995
SIZE: as of December 31, 1996, more than
$253 million
MANAGER: Richard Habermann, since March
1996; joined Fidelity in 1968
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
ADDITIONAL INTERVIEW ON POLICY CHANGES
NOTE TO SHAREHOLDERS: Beginning on December 1, 1996, Asset Manager: Growth
Portfolio's neutral mix of investments changed, and there was a change in
how bonds and short-term instruments are classified. In the following
additional interview segment, Portfolio Manager Dick Habermann discusses
these changes.
Q. WE UNDERSTAND THAT THE FUND'S NEUTRAL ALLOCATION PERCENTAGES CHANGED.
CAN YOU EXPLAIN?
A. Yes. Asset Manager: Growth's neutral mix - which represents how the
fund's investments are allocated, on average, over the long term - was 65%
stocks, 30% bonds and 5% short-term instruments. Under a new policy
approved by the fund's Board of Trustees, the neutral mix is now 70%
stocks, 25% bonds and 5% short-term/money market. As always, this mix will
vary over short-term periods as fund management makes gradual adjustments
to the portfolio's holdings - within defined ranges - based on the current
outlook for the different markets. The neutral mix is designed to establish
a general direction for the fund and communicate the expected posture of
the fund going forward.
Q. WHAT DO THESE CHANGES MEAN?
A. The most significant impact of the changes is a 5% increase in the
fund's equity allocation at the expense of the bond component. The other
changes to the bond and short-term classes are mainly a redefinition of the
dividing line of short-term securities and longer-term bonds.
Q. SO YOU ALSO CHANGED THE DEFINITION OF "SHORT-TERM" FOR THE PURPOSES OF
HOW THE FUND LOOKS AT ITS ALLOCATIONS . . .
A. The short-term asset class in the fund included all bonds and short-term
instruments with maturities of three years or less. Under our new
definition, we now generally move securities with one to three years
remaining maturity into the bond class, leaving shorter-term instruments in
a newly named "short-term/money market" class. In addition to redefining
the bond and short-term classes, we also assigned a manager to the
short-term/money market part of the fund: John Todd, a veteran manager in
our money market fund group who has been with Fidelity since 1981.
Q. WHY DID YOU MAKE THESE CHANGES?
A. With the changes in the management structure, we thought it was a good
time to reassess the neutral mix based on what we learned since we launched
the first Asset Manager fund in 1988. One thing we found is that stocks
have continued to provide superior returns relative to both intermediate
and long term bonds. At the same time, the volatility of stocks and bonds
by some measures has been converging. Based on this comparison and other
factors we evaluated, we believe the fund can modestly increase its
allocation to equities and thus its potential return without unduly
affecting its volatility.
Shareholders should remember that these allocations simply represent a
neutral mix. Because the fund is actively managed, allocations will change
based on the market environment. The allocation ranges for each asset class
have been modified to accommodate the change in the neutral mix.
Q. AND WHY DID YOU REDEFINE THE SHORT-TERM CLASS AND ASSIGN A SUB-PORTFOLIO
MANAGER?
A. We believe that actively managing the short-term part of the portfolio
more like a money market fund will help to make this category more stable.
Additionally, this redefinition is in line with the way Fidelity looks at
fixed-income asset classes across our funds.
Q. WILL THESE CHANGES HAVE ANY IMPACT ON THE LEVEL OF FOREIGN SECURITIES
HELD IN THE FUND?
A. Because part of the fund's goal is to produce high total return over the
long-term through diversification, foreign investments will continue to
play a role in the fund. However, we are more likely to seek investment
opportunities first in domestic markets.
Q. HOW HAVE YOU BROUGHT THE FUND IN LINE WITH THE NEW POLICIES?
A. We have been making gradual changes, so that at the start of 1997, the
fund's neutral allocation mix and holdings are where we want them.
Shareholders should keep in mind that we're continually fine-tuning the
fund within its prospectus parameters to achieve the best risk-reward
ratio, so making changes over the next month won't be unusual.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
INVESTMENTS DECEMBER 31, 1996
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 68.3%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 1.0%
AEROSPACE & DEFENSE - 0.5%
Boeing Co. 9,800 $ 1,042,475
Gulfstream Aerospace Corp. (a) 5,000 121,250
1,163,725
DEFENSE ELECTRONICS - 0.5%
Raytheon Co. 26,900 1,294,563
TOTAL AEROSPACE & DEFENSE 2,458,288
BASIC INDUSTRIES - 3.2%
CHEMICALS & PLASTICS - 2.2%
Air Products & Chemicals, Inc. 6,500 449,313
du Pont (E.I.) de Nemours & Co. 36,100 3,406,938
Raychem Corp. 10,100 809,263
Union Carbide Corp. 19,800 809,325
5,474,839
METALS & MINING - 0.1%
Reynolds Metals Co. 3,400 191,675
PACKAGING & CONTAINERS - 0.1%
Owens-Illinois, Inc. (a) 2,200 50,050
Tupperware Corp. 4,400 235,950
286,000
PAPER & FOREST PRODUCTS - 0.8%
Boise Cascade Corp. 13,500 428,625
Champion International Corp. 21,700 938,525
International Paper Co. 11,400 460,275
Temple-Inland, Inc. 2,700 146,138
Willamette Industries, Inc. 2,500 174,063
2,147,626
TOTAL BASIC INDUSTRIES 8,100,140
CONSTRUCTION & REAL ESTATE - 0.9%
CONSTRUCTION - 0.7%
Centex Corp. 10,900 410,113
DR Horton, Inc. 32,900 357,788
Fleetwood Enterprises, Inc. 29,933 823,158
Kaufman & Broad Home Corp. 15,700 202,138
Lennar Corp. 500 13,625
U.S. Home Corp. (a) 1,700 44,200
1,851,022
ENGINEERING - 0.2%
Fluor Corp. 7,000 439,250
TOTAL CONSTRUCTION & REAL ESTATE 2,290,272
DURABLES - 5.7%
AUTOS, TIRES, & ACCESSORIES - 5.4%
Cummins Engine Co., Inc. 7,600 349,600
Dana Corp. 8,300 270,788
Discount Auto Parts, Inc. (a) 5,100 119,213
Federal-Mogul Corp. 11,600 255,200
General Motors Corp. 161,200 8,986,900
Goodyear Tire & Rubber Co. 5,100 262,013
Honda Motor Co. Ltd. 21,000 599,483
Magna International, Inc. Class A 28,700 1,596,364
Superior Industries International, Inc. 22,500 520,313
Volvo AB Class B 35,900 788,792
13,748,666
CONSUMER ELECTRONICS - 0.2%
Newell Co. 10,600 333,900
Whirlpool Corp. 2,200 102,575
436,475
SHARES VALUE (NOTE 1)
TEXTILES & APPAREL - 0.1%
Burlington Industries, Inc. (a) 31,000 $ 341,000
TOTAL DURABLES 14,526,141
ENERGY - 5.6%
ENERGY SERVICES - 0.1%
McDermott International, Inc. 22,200 369,075
OIL & GAS - 5.5%
Amerada Hess Corp. 10,400 601,900
Anadarko Petroleum Corp. 1,500 97,125
Atlantic Richfield Co. 14,300 1,894,750
British Petroleum PLC ADR 13,702 1,937,120
Burlington Resources, Inc. 23,100 1,163,663
Canada Occidental Petroleum Ltd. 20,100 323,307
Elf Aquitaine SA sponsored ADR 5,400 244,350
Enron Oil & Gas Co. 1,600 40,400
Fortune Petroleum Corp. (warrants)(a) 100,000 175,000
Kerr-McGee Corp. 5,000 360,000
Louisiana Land & Exploration Co. 17,700 949,163
Noble Affiliates, Inc. 2,300 110,113
Occidental Petroleum Corp. 15,500 362,313
Royal Dutch Petroleum Co.:
Ord. 800 140,207
ADR 19,100 3,261,325
Santa Fe Energy Resources, Inc. (a) 15,800 219,225
Sun Co., Inc. 15,100 368,063
Tosco Corp. 16,500 1,305,563
Total SA:
Class B 920 74,805
sponsored ADR 8,065 324,616
Ultramar Diamond Shamrock Corp. 600 18,975
Union Pacific Resources Group, Inc. 4,200 122,850
14,094,833
TOTAL ENERGY 14,463,908
FINANCE - 14.3%
BANKS - 1.4%
Canadian Imperial Bank of Commerce 2,000 88,193
Fleet Financial Group, Inc. 53,900 2,688,263
NationsBank Corp. 4,200 410,550
State Street Boston Corp. 4,600 296,700
3,483,706
CLOSED END INVESTMENT COMPANY - 0.1%
First NIS Regional Fund (a) 25,000 275,000
CREDIT & OTHER FINANCE - 0.1%
Transamerica Corp. 1,700 134,300
FEDERAL SPONSORED CREDIT - 8.4%
Federal Home Loan Mortgage
Corporation 52,100 5,737,513
Federal National Mortgage Association 426,500 15,887,125
21,624,638
INSURANCE - 3.8%
AFLAC, Inc. 8,500 363,375
Allmerica Financial Corp. 11,800 395,300
Allstate Corp. 47,200 2,731,700
American International Group, Inc. 20,300 2,197,475
CIGNA Corp. 1,100 150,288
Equitable of Iowa Companies 1,300 59,638
General Re Corp. 9,600 1,514,400
Loews Corp. 2,100 197,925
MGIC Investment Corp. 2,500 190,000
Provident Companies, Inc. 900 43,538
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
INSURANCE - CONTINUED
Providian Corp. 19,600 $ 1,006,950
Reliastar Financial Corp. 1,600 92,400
Torchmark Corp. 12,000 606,000
Travelers/Aetna Property Casualty Corp.
Class A 3,000 106,125
UNUM Corp. 1,100 79,475
9,734,589
SAVINGS & LOANS - 0.3%
Golden West Financial Corp. 12,400 782,750
SECURITIES INDUSTRY - 0.2%
United Asset Management Corp. 22,500 599,063
TOTAL FINANCE 36,634,046
HEALTH - 3.8%
DRUGS & PHARMACEUTICALS - 0.9%
Astra AB Class A Free shares 18,600 915,112
Novartis AG (Reg.) 400 457,100
Pharmacia & Upjohn, Inc. 1,400 55,475
Schering-Plough Corp. 13,700 887,075
2,314,762
MEDICAL EQUIPMENT & SUPPLIES - 0.2%
Allegiance Corp. 1,760 48,620
Baxter International, Inc. 3,200 131,200
Biomet, Inc. 20,500 310,063
489,883
MEDICAL FACILITIES MANAGEMENT - 2.7%
Columbia/HCA Healthcare Corp. 145,050 5,910,788
Humana, Inc. (a) 20,600 393,975
Tenet Healthcare Corp. (a) 22,300 487,813
United HealthCare Corp. 5,200 234,000
7,026,576
TOTAL HEALTH 9,831,221
HOLDING COMPANIES - 0.1%
U.S. Industries, Inc. 6,900 236,700
INDUSTRIAL MACHINERY & EQUIPMENT - 1.5%
ELECTRICAL EQUIPMENT - 0.7%
Emerson Electric Co. 2,500 241,875
General Electric Co. 9,800 968,975
Scientific-Atlanta, Inc. 11,500 172,500
Sensormatic Electronics Corp. 5,800 97,150
Westinghouse Electric Corp. 16,300 323,963
1,804,463
INDUSTRIAL MACHINERY & EQUIPMENT - 0.5%
Caterpillar, Inc. 15,200 1,143,800
Dover Corp. 1,300 65,325
Illinois Tool Works, Inc. 400 31,950
Kaydon Corp. 100 4,713
Kennametal, Inc. 200 7,775
1,253,563
POLLUTION CONTROL - 0.3%
Browning-Ferris Industries, Inc. 25,100 658,875
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 3,716,901
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - 1.1%
BROADCASTING - 0.0%
CS Wireless Systems, Inc. (a)(f) 9 $ -
HSN, Inc. (a) 3,150 74,813
74,813
ENTERTAINMENT - 0.0%
Cedar Fair LP (depositary unit) 900 33,300
Royal Carribean Cruises Ltd. 1,800 42,075
75,375
LEISURE DURABLES & TOYS - 0.5%
Nintendo Co. Ltd. Ord. 18,300 1,308,383
LODGING & GAMING - 0.4%
Circus Circus Enterprises, Inc. (a) 22,200 763,125
Mirage Resorts, Inc. (a) 3,600 77,850
Sun International Hotels Ltd. Ord. (a) 5,400 197,100
1,038,075
RESTAURANTS - 0.2%
Brinker International, Inc. (a) 8,100 129,600
Darden Restaurants, Inc. 4,800 42,000
McDonald's Corp. 4,500 203,625
375,225
TOTAL MEDIA & LEISURE 2,871,871
NONDURABLES - 7.7%
HOUSEHOLD PRODUCTS - 0.0%
Premark International, Inc. 5,300 117,925
TOBACCO - 7.7%
Philip Morris Companies, Inc. 149,700 16,859,963
RJR Nabisco Holdings Corp. 68,720 2,336,480
UST, Inc. 14,900 482,388
19,678,831
TOTAL NONDURABLES 19,796,756
PRECIOUS METALS - 0.1%
Barrick Gold Corp. 3,800 108,801
Santa Fe Pacific Gold Corp. 15,300 235,238
344,039
RETAIL & WHOLESALE - 4.9%
APPAREL STORES - 0.2%
TJX Companies, Inc. 12,400 587,450
DRUG STORES - 0.1%
CVS Corp. 3,500 144,813
GENERAL MERCHANDISE STORES - 1.7%
Federated Department Stores, Inc. (a) 39,200 1,337,700
Wal-Mart Stores, Inc. 130,700 2,989,763
4,327,463
GROCERY STORES - 0.0%
Safeway, Inc. 1,200 51,300
RETAIL & WHOLESALE, MISCELLANEOUS - 2.9%
Circuit City Stores, Inc. 77,500 2,334,688
Home Depot, Inc. (The) 41,600 2,085,200
Lowe's Companies, Inc. 33,800 1,199,900
Officemax, Inc. (a) 27,900 296,438
Office Depot, Inc. (a) 12,700 225,425
Rex Stores Corp. (a) 5,800 47,125
Tandy Corp. 4,600 202,400
Toys "R" Us, Inc. (a) 31,000 930,000
7,321,176
TOTAL RETAIL & WHOLESALE 12,432,202
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SERVICES - 0.0%
ADVERTISING - 0.0%
Interpublic Group of Companies, Inc. 1,700 $ 80,750
SERVICES - 0.0%
HCIA, Inc. (a) 2,200 75,900
TOTAL SERVICES 156,650
TECHNOLOGY - 12.0%
COMMUNICATIONS EQUIPMENT - 0.2%
Cisco Systems, Inc. (a) 7,500 477,188
Nokia Corp. AB sponsored ADR 1,400 80,675
557,863
COMPUTER SERVICES & SOFTWARE - 1.1%
America Online, Inc. (a) 7,800 259,350
Automatic Data Processing, Inc. 15,900 681,713
Electronic Data Systems Corp. 14,700 635,775
Microsoft Corp. (a) 4,800 396,600
Oracle Systems Corp. (a) 11,900 496,825
Policy Management Systems Corp. (a) 6,000 276,750
Sabre Group Holdings, Inc. Class A (a) 800 22,300
2,769,313
COMPUTERS & OFFICE EQUIPMENT - 6.7%
Adaptec, Inc. (a) 2,000 80,000
Bay Networks, Inc. (a) 41,900 874,663
Compaq Computer Corp. (a) 82,100 6,095,925
Hewlett-Packard Co. 19,200 964,800
Ingram Micro, Inc. Class A (a) 800 18,400
International Business Machines Corp. 47,000 7,097,000
SCI Systems, Inc. (a) 20,400 910,350
Seagate Technology (a) 22,100 872,950
Silicon Graphics, Inc. (a) 4,100 104,550
Tech Data Corp. (a) 7,100 194,363
17,213,001
ELECTRONIC INSTRUMENTS - 0.9%
Applied Materials, Inc. (a) 16,800 603,750
KLA Instruments Corp. (a) 3,500 124,250
Lam Research Corp. (a) 8,800 247,500
Novellus System, Inc. (a) 7,400 400,988
Teradyne, Inc. (a) 20,900 509,438
Varian Associates, Inc. 8,000 407,000
2,292,926
ELECTRONICS - 3.1%
AMP, Inc. 41,900 1,607,913
Atmel Corp. (a) 8,200 271,625
Intel Corp. 11,100 1,453,406
Methode Electronics, Inc. Class A 300 6,075
Microchip Technology, Inc. (a) 1,300 66,138
Micron Technology, Inc. 9,400 273,775
Molex, Inc. 5,800 206,625
Motorola, Inc. 4,400 270,050
National Semiconductor Corp. (a) 9,500 231,563
Solectron Corp. (a) 40,300 2,151,013
Storage Technology Corp. (a) 6,600 314,325
Texas Instruments, Inc. 12,600 803,250
Xilinx, Inc. (a) 5,200 191,425
7,847,183
TOTAL TECHNOLOGY 30,680,286
SHARES VALUE (NOTE 1)
TRANSPORTATION - 0.6%
RAILROADS - 0.5%
Bombardier, Inc. Class B 10,000 $ 184,557
Burlington Northern Santa Fe Corp. 4,700 405,963
CSX Corp. 17,300 730,925
1,321,445
SHIPPING - 0.1%
Stolt-Nielsen SA 1,800 33,975
Stolt-Nielsen SA Class B sponsored ADR 10,700 200,625
234,600
TOTAL TRANSPORTATION 1,556,045
UTILITIES - 5.8%
CELLULAR - 2.2%
AirTouch Communications, Inc. (a) 37,400 944,350
Microcell Telecommunications, Inc.:
(warrants) (a) 40 500
(conditional warrants) (a) 40 25
360 Degrees Communications Co. (a) 4,000 92,500
Vodafone Group PLC 171,037 723,676
Vodafone Group PLC sponsored ADR 91,400 3,781,675
5,542,726
GAS - 0.2%
Enron Corp. 11,300 487,313
TELEPHONE SERVICES - 3.4%
Ameritech Corp. 18,100 1,097,313
Bell Atlantic Corp. 13,800 893,550
BellSouth Corp. 29,500 1,191,063
Deutsche Telekom AG (a) 8,700 181,168
MCI Communications Corp. 58,300 1,905,681
NYNEX Corp. 26,300 1,265,688
SBC Communications, Inc. 31,200 1,614,600
Sprint Corp. 15,100 602,113
8,751,176
TOTAL UTILITIES 14,781,215
TOTAL COMMON STOCKS
(Cost $157,378,764) 174,876,681
PREFERRED STOCKS - 0.3%
CONVERTIBLE PREFERRED STOCKS - 0.0%
MEDIA & LEISURE - 0.0%
BROADCASTING - 0.0%
Triathalon Broadcasting Co. $0.945
depositary share representing
1/10 pfd 2,000 17,000
NONCONVERTIBLE PREFERRED STOCKS - 0.3%
FINANCE - 0.0%
SAVINGS & LOANS - 0.0%
Chevy Chase Capital Corp.,
Series A, $5.1875 2,000 103,500
MEDIA & LEISURE - 0.3%
BROADCASTING - 0.3%
Cablevision System Corp. depositary
shares representing 1/100 pfd.,
Series M pay-in-kind 1,989 179,010
Time Warner, Inc., Series M,
10 1/4% pay-in-kind 550 596,750
TOTAL MEDIA & LEISURE 775,760
PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TECHNOLOGY - 0.0%
COMPUTER SERVICES & SOFTWARE - 0.0%
ICG Holdings, Inc. 14 1/4% pay-in-kind 42 $ 46,410
TOTAL NONCONVERTIBLE PREFERRED STOCKS 925,670
TOTAL PREFERRED STOCKS
(Cost $929,984) 942,670
CORPORATE BONDS - 8.8%
MOODY'S RATINGS (B) PRINCIPAL
(UNAUDITED) AMOUNT
NONCONVERTIBLE BONDS - 8.8%
AEROSPACE & DEFENSE - 0.2%
AEROSPACE & DEFENSE - 0.1%
Be Aerospace, Inc. 9 7/8%,
2/1/06 B2 $ 10,000 10,500
Lockheed Martin Corp. 7.70%,
6/15/08 A3 150,000 156,935
167,435
SHIP BUILDING & REPAIR - 0.1%
Newport News Shipbuilding, Inc. (f):
8 5/8%, 12/1/06 Ba2 130,000 132,925
9 1/4%, 12/1/06 B1 120,000 123,900
256,825
TOTAL AEROSPACE & DEFENSE 424,260
BASIC INDUSTRIES - 0.3%
CHEMICALS & PLASTICS - 0.2%
Acetex Corp. yankee 9 3/4%,
10/1/03 B1 200,000 198,000
Freedom Chemical Co.
10 5/8%, 10/15/06 (f) B3 150,000 157,500
Ivex Holdings Corp. 0%,
3/15/05 (c) Caa 50,000 38,000
NL Industries, Inc. 11 3/4%,
10/15/03 B1 80,000 84,800
Sterling Chemicals Holdings, Inc.
11 3/4%, 8/15/06 B3 80,000 84,400
562,700
IRON & STEEL - 0.1%
AK Steel Corp. 9 1/8%,
12/15/06 (f) Ba2 150,000 153,938
PACKAGING & CONTAINERS - 0.0%
Owens-Illinois, Inc. 9.95%,
10/15/04 B2 110,000 117,013
TOTAL BASIC INDUSTRIES 833,651
CONSTRUCTION & REAL ESTATE - 0.2%
BUILDING MATERIALS - 0.1%
Building Materials Corp. of
America 0%, 7/1/04 (c) B1 290,000 251,213
Usinor Sacilor yankee 7 1/4%,
8/1/06 Baa2 125,000 124,803
376,016
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
CONSTRUCTION - 0.1%
Greystone Homes, Inc.
10 3/4%, 3/1/04 B1 $ 180,000 $ 184,050
TOTAL CONSTRUCTION & REAL ESTATE 560,066
DURABLES - 0.6%
AUTOS, TIRES, & ACCESSORIES - 0.3%
APS, Inc. 11 7/8%, 1/15/06 B2 30,000 32,475
Aetna Industries, Inc.
11 7/8%, 10/1/06 (f) B3 200,000 215,000
Aftermarket Technology Corp.
12%, 8/1/04 B3 180,000 201,150
Blue Bird Body Co. 10 3/4%,
11/15/06 (f) B2 120,000 125,400
Delco Remy International, Inc.
10 5/8%, 8/1/06 (f) B2 220,000 233,200
807,225
CONSUMER ELECTRONICS - 0.0%
Tag Heuer International SA
yankee 12%, 12/15/05 B3 55,000 63,250
HOME FURNISHINGS - 0.1%
Interlake Corp. 12 1/8%,
3/1/02 B3 240,000 248,400
Knoll, Inc. 10 7/8%,
3/15/06 B3 40,000 44,200
292,600
TEXTILES & APPAREL - 0.2%
Levi Strauss & Co. 7%,
11/1/06 (f) Baa2 250,000 248,530
Pillowtex Corp. 10%,
11/15/06 (f) B2 160,000 166,800
415,330
TOTAL DURABLES 1,578,405
ENERGY - 0.4%
ENERGY SERVICES - 0.1%
Parker Drilling Co. 9 3/4%,
11/15/06 (f) B1 30,000 31,500
Petroliam Nasional BHD yankee
7 5/8%, 10/15/26 (f) A1 250,000 252,018
283,518
OIL & GAS - 0.3%
Flores & Rucks, Inc. 9 3/4%,
10/1/06 B3 60,000 63,600
HS Resource, Inc. 9 1/4%,
11/15/06 (f) B2 20,000 20,550
Husky Oil Ltd. yankee 6 7/8%,
11/15/03 Baa3 125,000 124,095
Occidental Petroleum Corp.
9 3/4%, 6/15/01 Baa3 100,000 111,505
Petro-Canada 8.60%,
10/15/01 A3 250,000 267,843
Petro-Canada, Inc. yankee
7 7/8%, 6/15/26 Baa1 125,000 131,524
Tosco Corp. 7 5/8%, 5/15/06 Baa2 100,000 103,242
822,359
TOTAL ENERGY 1,105,877
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
FINANCE - 2.4%
BANKS - 0.4%
ABN Amro Bank NV
6 5/8%, 10/31/01 Aa3 $ 250,000 $ 250,088
Capital One Bank 6.74%,
5/31/99 Baa3 125,000 125,375
HSBC Americas, Inc. 7%,
11/1/06 Baa1 150,000 148,080
KeyCorp 7 1/2%, 6/15/06 A2 100,000 102,559
Midland Bank PLC yankee
7 5/8%, 6/15/06 A1 125,000 129,433
Nationsbank Corp. 5.67%,
2/9/01 A1 250,000 241,548
Southern National Corp.
7.05%, 5/23/03 A3 100,000 100,906
1,097,989
ASSET-BACKED SECURITIES - 0.3%
Airplanes Pass Through Trust
Class D 10 7/8%, 3/15/19 Ba2 510,000 567,375
Green Tree Financial Corp.
6 1/2%, 6/15/27 Aaa 100,000 100,406
6.80%, 6/15/27 Aaa 100,000 100,812
768,593
CREDIT & OTHER FINANCE - 1.2%
AT&T Capital Corp. 6.02%,
12/4/98 Baa3 250,000 249,018
Aames Financial Corp.
9 1/8%, 11/1/03 Ba3 10,000 10,175
Ahmanson Capital Trust I
8.36%, 12/1/26 (f) Baa3 250,000 252,638
CIT Group Holdings, Inc.
6 1/4%, 10/4/99 Aa3 250,000 249,765
Chase Capital I
7.67%, 12/1/26 A1 300,000 293,331
ContiFinancial Corp. 8 3/8%,
8/15/03 Ba 110,000 113,091
First Securities Capital 8.41%,
12/15/26 (f) A3 250,000 252,488
Ford Motor Credit:
6.65%, 5/22/00 A1 100,000 100,535
7%, 9/25/01 A1 325,000 329,846
General Electric Capital Corp.
6.94%, 4/13/09 (d) Aaa 250,000 253,493
HMC Acquisition Properties, Inc.
9%, 12/15/07 Ba3 250,000 253,750
Keycorp Institutional Capital A
7.826%, 12/1/26 (f) Aa 250,000 245,250
PNC Funding Corp. 9 7/8%,
3/1/01 A3 250,000 278,733
Wells Fargo Capital C 7.73%,
12/1/26 (f) A1 300,000 291,036
3,173,149
INSURANCE - 0.2%
Reliance Group:
9%, 11/15/00 Ba3 80,000 82,000
9 3/4%, 11/15/03 B1 150,000 156,000
SunAmerica, Inc. 6.20%,
10/31/99 Baa1 250,000 248,883
486,883
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
SAVINGS & LOANS - 0.3%
Chevy Chase Savings Bank
FSB 9 1/4%, 12/1/08 B1 $ 190,000 $ 193,800
First Nationwide Parent Holdings
Ltd. 12 1/2%, 4/15/03 B2 280,000 310,100
First Nationwide Escrow Corp.
10 5/8%, 10/1/03 (f) Ba3 160,000 172,800
676,700
TOTAL FINANCE 6,203,314
HEALTH - 0.2%
MEDICAL EQUIPMENT & SUPPLIES - 0.0%
IMED Corp. 9 3/4%,
12/1/06 (f) B3 20,000 20,350
MEDICAL FACILITIES MANAGEMENT - 0.2%
Columbia/HCA Healthcare Corp.:
6 1/2%, 3/15/99 A2 125,000 125,596
6 7/8%, 7/15/01 A3 125,000 126,484
Quest Diagnostics, Inc.
10 3/4%, 12/15/06 B2 10,000 10,525
Tenet Healthcare Corp.
10 1/8%, 3/1/05 Ba3 240,000 265,200
527,805
TOTAL HEALTH 548,155
INDUSTRIAL MACHINERY & EQUIPMENT - 0.2%
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
Exide Corp. 10%, 4/15/05 B1 65,000 66,950
Goss Graphic System, Inc.
12%, 10/15/06 B2 170,000 175,100
242,050
POLLUTION CONTROL - 0.1%
Allied Waste of North America, Inc.
10 1/4%, 12/1/06 (f) B3 120,000 126,000
Envirosource, Inc. 9 3/4%,
6/15/03 B3 50,000 46,625
172,625
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 414,675
MEDIA & LEISURE - 1.3%
BROADCASTING - 0.5%
Bell Cablemedia PLC yankee
0%, 9/15/05 (c) B2 60,000 48,600
Granite Broadcasting Corp.
10 3/8%, 5/15/05 B3 30,000 30,750
Intermedia Capital Partners IV
LP/ Intermedia Partners IV
Capital Corp. 11 1/4%,
8/1/06 (f) B2 100,000 103,750
Jacor Communications Co.
9 3/4%, 12/15/06 B2 20,000 20,400
NWCG Holdings Corp. 0%,
6/15/99 Caa 60,000 49,800
SCI Television, Inc. secured
11%, 6/30/05 B2 250,000 267,500
SFX Broadcasting, Inc.
10 3/4%, 5/15/06 B3 260,000 273,000
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
MEDIA & LEISURE - CONTINUED
BROADCASTING - CONTINUED
Telemundo Group, Inc.
7%, 2/15/06 (d) B1 $ 200,000 $ 193,000
Telewest PLC 0%, 10/1/07 (c) B1 270,000 187,650
1,174,450
ENTERTAINMENT - 0.1%
Viacom, Inc. 8%, 7/7/06 B1 260,000 252,200
LODGING & GAMING - 0.5%
American Skiing Co. 12%,
7/15/06 (f) B3 230,000 242,075
Circus Circus Enterprises, Inc.
7%, 11/15/36 Baa2 250,000 244,238
Courtyard by Marriott II
LP/Courtyard II Finance Co.
Series B, 10 3/4%, 2/1/08 B- 150,000 158,250
HMH Properties, Inc. 9 1/2%,
5/15/05 Ba3 360,000 375,300
Mirage Resorts, Inc. 7 1/4%,
10/15/06 Baa2 250,000 251,675
Wyndham Hotel Corp.
10 1/2%, 5/15/06 B2 50,000 53,000
1,324,538
PUBLISHING - 0.0%
Golden Books Publishing, Inc.
7.65%, 9/15/02 B1 40,000 35,600
RESTAURANTS - 0.2%
Foodmaker, Inc. 9 3/4%,
6/1/02 B3 120,000 121,800
Host Marriott Travel Plazas, Inc.
9 1/2, 5/15/05 B1 380,000 396,150
517,950
TOTAL MEDIA & LEISURE 3,304,738
NONDURABLES - 0.5%
FOODS - 0.2%
Chiquita Brands International, Inc.:
9 5/8%, 1/15/04 B1 200,000 204,500
10 1/4%, 11/1/06 B1 100,000 106,500
Foodbrands of America, Inc.
10 3/4%, 5/15/06 B3 50,000 52,500
Specialty Foods Corp.:
11 1/8%, 10/1/02 B3 110,000 104,500
11 1/4%, 8/15/03 Caa 80,000 60,800
528,800
HOUSEHOLD PRODUCTS - 0.3%
Revlon Consumer Products Corp.:
9 3/8%, 4/1/01 B2 150,000 152,250
10 1/2%, 2/15/03 B3 100,000 104,875
Revlon Worldwide Corp.
secured 0%, 3/15/98 B3 510,000 441,788
698,913
TOTAL NONDURABLES 1,227,713
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
RETAIL & WHOLESALE - 0.8%
APPAREL STORES - 0.1%
Limited, Inc. 7.80%, 5/15/02 Baa2 $ 250,000 $ 254,420
Loehmann's, Inc.
11 7/8%, 5/15/03 B2 50,000 54,000
308,420
GENERAL MERCHANDISE STORES - 0.4%
Dayton Hudson Corp.:
6.80%, 10/1/01 Baa1 250,000 250,110
7 1/2%, 7/15/06 Baa1 250,000 255,580
K Mart Corp.:
12 1/2%, 3/1/05 Ba3 170,000 195,925
8 1/4%, 1/1/22 Ba3 150,000 126,000
Michaels Stores, Inc. 10 7/8%,
6/18/06 Ba2 130,000 126,100
953,715
GROCERY STORES - 0.3%
Kroger Co. 8.15%, 7/15/06 Ba1 125,000 129,408
Pathmark Stores, Inc.:
12 5/8%, 6/15/02 Caa 40,000 41,000
9 5/8%, 5/1/03 B3 350,000 335,125
0%, 11/1/03 (c) Caa 210,000 135,975
641,508
TOTAL RETAIL & WHOLESALE 1,903,643
SERVICES - 0.2%
PRINTING - 0.0%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa 100,000 96,500
SERVICES - 0.2%
Iron Mountain, Inc.
10 1/8%, 10/1/06 B3 100,000 105,500
Prime Succession Acquisition
Corp. 10 3/4%,
8/15/04 (f) B 210,000 227,850
Speedy Muffler King, Inc./
Speedy USA, Inc. yankee
10 7/8%, 10/1/06 B1 230,000 246,675
580,025
TOTAL SERVICES 676,525
TECHNOLOGY - 0.6%
COMMUNICATIONS EQUIPMENT - 0.2%
Echostar Satellite Broadcasting
Corp. 0%, 3/15/04 (c) Caa 260,000 197,405
Echostar Communications Corp.
0%, 6/1/04 (c) B2 150,000 123,375
320,780
COMPUTERS & OFFICE EQUIPMENT - 0.3%
Comdisco, Inc.:
7.21%, 7/2/01 Baa1 125,000 127,731
6 3/8%, 11/30/01 Baa1 300,000 295,170
Unisys Corp.:
12%, 4/15/03 B1 260,000 278,200
11 3/4%, 10/15/04 B1 100,000 106,625
807,726
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
TECHNOLOGY - CONTINUED
ELECTRONICS - 0.1%
Advanced Micro Devices, Inc.
11%, 8/1/03 Ba1 $ 290,000 $ 313,925
TOTAL TECHNOLOGY 1,442,431
TRANSPORTATION - 0.1%
AIR TRANSPORTATION - 0.1%
US Air, Inc.:
9 5/8%, 2/1/01 B3 100,000 99,500
10%, 7/1/03 B3 250,000 248,750
348,250
UTILITIES - 0.8%
CELLULAR - 0.4%
Arch Communications Group,
Inc. 0%, 3/15/08 (c) B3 120,000 68,550
Microcell Telecommunications,
Inc. 0%, 6/1/06 (c) B3 10,000 5,575
Millicom International Cellular
SA 0%, 6/1/06 (c) B3 50,000 31,000
Mobile Telecommunications
Technologies Corp. 13 1/2%,
12/15/02 B3 140,000 140,000
Paging Network, Inc. 10%,
10/15/08 (f) B2 50,000 50,813
Rogers Cantel, Inc. 9 3/8%,
6/1/08 Ba3 180,000 189,000
360 Degrees Communications
Co. 7 1/8%, 3/1/03 Ba2 350,000 345,769
Western Wireless Corp.
10 1/2%, 6/1/06 B3 75,000 78,656
909,363
ELECTRIC UTILITY - 0.1%
El Paso Electric Co. 1st Mtg.
9.40%, 5/1/11 Ba3 50,000 53,500
Israel Electric Corp. Ltd. yankee
7 1/4%, 12/15/06 (f) A3 250,000 248,555
302,055
TELEPHONE SERVICES - 0.3%
Brooks Fiber Properties, Inc.
0%, 11/1/06 (c)(f) - 90,000 57,375
Call-Net Enterprises, Inc.
yankee 0%, 12/1/04 (c) B2 150,000 123,000
MFS Communications, Inc.
0%, 1/15/06 (c) B1 420,000 306,600
Shared Technologies Fairchild
Communications Corp.
0%, 3/1/06 (c) Caa 270,000 225,450
712,425
TOTAL UTILITIES 1,923,843
TOTAL NONCONVERTIBLE BONDS 22,495,546
TOTAL CORPORATE BONDS
(Cost $21,990,918) 22,495,546
U.S. GOVERNMENT AND GOVERNMENT
AGENCY OBLIGATIONS - 9.4%
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
U.S. TREASURY OBLIGATIONS - 8.0%
7 3/8%, 11/15/97 Aaa $ 900,000 $ 912,933
9%, 5/15/98 Aaa 2,000,000 2,084,380
8 7/8%, 2/15/99 Aaa 2,460,000 2,602,606
8%, 8/15/99 Aaa 290,000 303,775
7 3/4%, 12/31/99 Aaa 4,895,000 5,119,876
7 7/8%, 8/15/01 Aaa 2,372,000 2,528,410
10 3/4%, 5/15/03 Aaa 315,000 387,548
7 7/8, 11/15/04 Aaa 2,710,000 2,957,288
12 3/4%, 11/15/10 (callable) Aaa 500,000 707,735
8 7/8%, 2/15/19 Aaa 2,313,000 2,871,381
20,475,932
U.S. GOVERNMENT AGENCY OBLIGATIONS - 1.4%
Federal Home Loan Bank
7.31%, 6/16/04 Aaa 125,000 130,195
7.56%, 9/1/04 Aaa 50,000 52,553
Federal Home Loan Mortgage
Corporation:
0%, 1/14/97 P-1 270,000 269,506
0%, 1/23/97 P-1 1,000,000 996,740
0%, 1/31/97 P-1 1,000,000 995,436
6.783%, 8/18/05 Aaa 440,000 443,023
Federal National Mortgage
Association 6.44%, 6/21/05 Aaa 250,000 246,485
Guaranteed Export Trust
Certificates (assets of Trust
guaranteed by U.S.
Government through
Export-Import Bank)
Series 1994-A, 7.12%,
4/15/06 Aaa 139,334 142,730
Guaranteed Trade Trust Certificates
Series 1994-A (assets of Trust
guaranteed by U.S. Government
through Export-Import Bank)
7.39%, 6/26/06 Aaa 36,667 37,912
State of Israel (guaranteed by
U.S. Government through
Agency for International
Development) 5 5/8%,
9/15/03 Aaa 210,000 200,277
U.S. Housing & Urban
Development 8.24%, 8/1/04
participation certificate Aaa 20,000 21,918
3,536,775
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $23,906,278) 24,012,707
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES - 4.3%
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 3.1%
6%, 3/1/11 Aaa $ 1,868,504 $ 1,796,099
6 1/2%, 2/1/26 to 7/1/26 Aaa 2,460,745 2,349,349
7%, 4/1/26 to 9/1/26 Aaa 1,975,620 1,931,780
7 1/2%, 8/1/26 to 11/1/26 Aaa 1,980,996 1,979,749
8,056,977
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 1.2%
6%, 5/15/11 to 7/15/11 Aaa 964,382 930,927
8%, 6/15/26 to10/15/26 Aaa 1,472,586 1,502,037
8 1/2%, 10/15/26 Aaa 494,407 512,329
2,945,293
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $10,975,853) 11,002,270
COMMERCIAL MORTGAGE SECURITIES - 0.6%
American Southwest Financial
Securities Series 1994-C2
Class B2, 12.79%,
12/25/01 (f)(g) - 250,000 243,750
Blackrock Capital Funding LLC
Series 1996 Class C2, 7.6414%,
11/16/26 (f) AAA 134,867 136,595
CBA Mortgage Corp.
Series 1993-C1 Class E,
7.7732%, 12/25/03 (f)(g) Ba2 250,000 224,844
CS First Boston Mortgage
Securities Corp. Series
1994-M1 Class E,
12.60%, 2/15/02 (f) - 100,000 99,750
DLJ Mortgage Acceptance Corp.
Series 1993-MF12 Class B-2,
10.10%, 9/18/03 (f) - 250,000 234,375
General Motors Acceptance
Corp. Commercial Mortgage
Securities, Inc. Series 1996-C1
Class F, 7.86%, 11/15/06 (f) Ba3 250,000 215,156
Merrill Lynch Mortgage
Investments, Inc. Series 1995
Class C2-E, 8.15%,
6/15/21 (f) Ba3 92,207 85,810
Morgan Stanley Capital One,
Inc. Series 1996-MBL1
Class E, 8.661%, 5/25/21 (f) - 96,961 87,295
Mortgage Capital Funding, Inc.
Series 1996-MC1 Class G,
7.15%, 7/15/28 (f) BB 100,000 80,063
Structured Asset Securities
Corp. Series 1993-C1
Class E, 6.60%,
10/25/24 (f) B 250,000 97,422
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $1,491,001) 1,505,060
FOREIGN GOVERNMENT OBLIGATIONS - 0.3%
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
Manitoba Province yankee
6 3/8%, 10/15/99 A1 $ 125,000 $ 125,454
Newfoundland Province yankee
11 5/8%, 10/15/07 Baa1 250,000 334,770
Quebec Province yankee 7.22%,
7/22/36 (d) A2 250,000 262,060
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $708,121) 722,284
CERTIFICATES OF DEPOSIT - 0.8%
Bank of Tokyo-Mitsubishi Ltd. yankee
5.51%, 3/6/97 400,000 399,841
Bayerische Hypotheken und Wechsel
Bank AG yankee 5.40%, 4/7/97 400,000 399,838
Bayerische Vereinsbank AG yankee
5.40%, 4/2/97 400,000 400,000
National Westminster Bank PLC yankee
5.41%, 2/10/97 400,000 399,960
Westdeutsche Landesbank Giron yankee
5.40%, 2/5/97 400,000 399,959
TOTAL CERTIFICATES OF DEPOSIT
(Cost $2,000,000) 1,999,598
COMMERCIAL PAPER - 1.5%
Commonwealth Bank of
Australia yankee 5.325%,
3/11/97 400,000 395,590
Dakota 5.40%, 3/12/97 450,000 444,941
Enterprise Funding Corp.
5.47%, 1/24/97 400,000 398,392
Ford Motor Credit Co.
5.30%, 3/11/97 475,000 469,735
General Electric Capital Corp.
5.29%, 6/4/97 450,000 439,421
General Motors Acceptance
Corp. 5.465%, 6/23/97 400,000 389,289
MCI Communications Corp.
5.65%, 2/20/97 200,000 198,399
PHH Corp. 5 1/2%, 1/17/97 450,000 448,719
Sherwood Medical Co.
5.32%, 3/10/97 400,000 395,592
Unifunding, Inc. 5.37%,
2/24/97 364,000 360,752
TOTAL COMMERCIAL PAPER
(Cost $3,944,260) 3,940,830
CASH EQUIVALENTS - 5.7%
MATURITY VALUE
AMOUNT (NOTE 1)
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account dated 12/31/96
due 1/2/97:
at 6.82% $ 2,232,846 $ 2,232,000
at 6 3/4% 12,267,599 12,263,000
TOTAL CASH EQUIVALENTS
(Cost $14,495,000) 14,495,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $237,820,179) $ 255,992,646
LEGEND
1. Non-income producing
2. Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
3. Debt obligation initially issued in zero coupon form which converts to
coupon form at a specified rate and date.
4. Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date.
5. A company in which the fund has ownership of at least 5% of the voting
securities is an affiliated company. A summary of the transactions during
the period in which the issuers were affiliates is as follows:
PURCHASE SALES DIVIDEND MARKET
AFFILIATE COST COST INCOME VALUE
Cardiac Control Systems, Inc. $ 50,600 $ 358,569 $ - $ -
IVF America, Inc. - 1,364,593 - -
Totals $ 50,600 $ 1,723,162 $ - $ -
6. Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of these securities amounted to $5,657,301 or 2.2% of net
assets.
7. The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $307,230,436 and $153,774,137, respectively, of which U.S.
government and government agency obligations aggregated $65,004,481 and
$28,178,731, respectively.
The market value of futures contracts opened and closed during the period
amounted to $1,122,861 and $4,735,264, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of FMR. The commissions paid to these affiliated
firms were $54,212 for the period. (See Note 4 of Notes to Financial
Statements).
The composition of long-term debt holdings as a percentage of total value
of investment in securities, is as follows (ratings are unaudited):
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 14.7% AAA, AA, A 14.1%
Baa 1.5% BBB 2.3%
Ba 1.6% BB 1.8%
B 3.7% B 3.5%
Caa 0.3% CCC 0.3%
Ca, C 0.0% CC, C 0.0%
D 0.0%
The percentage not rated by both S&P and Moody's amounted to 0.3%.
INCOME TAX INFORMATION
At December 31, 1996, the aggregate cost of investment securities for
income tax purposes was $237,896,311. Net unrealized appreciation
aggregated $18,096,335, of which $21,181,377 related to appreciated
investment securities and $3,085,042 related to depreciated investment
securities.
The fund hereby designates approximately $316,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
DECEMBER 31, 1996
ASSETS
Investment in securities, at value (including repurchase agreements of $14,495,000) (cost $237,820,179) - $ 255,992,646
See accompanying schedule
Receivable for investments sold 524,815
Receivable for fund shares sold 1,091,669
Dividends receivable 386,979
Interest receivable 816,088
TOTAL ASSETS 258,812,197
LIABILITIES
Payable to custodian bank $ 184
Payable for investments purchased 5,081,562
Payable for fund shares redeemed 521,618
Accrued management fee 122,881
Other payables and 62,400
accrued expenses
TOTAL LIABILITIES 5,788,645
NET ASSETS $ 253,023,552
Net Assets consist of:
Paid in capital $ 234,589,987
Distributions in excess of net investment income (50,000
)
Accumulated undistributed net realized gain (loss) on investments and foreign currency transactions 310,990
Net unrealized appreciation (depreciation) on investments 18,172,575
and assets and liabilities in
foreign currencies
NET ASSETS, for 19,313,702 $ 253,023,552
shares outstanding
NET ASSET VALUE, offering price $13.10
and redemption price per share ($253,023,552 (divided by) 19,313,702 shares)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996
INVESTMENT INCOME $ 1,970,962
Dividends
Interest 2,897,055
TOTAL INCOME 4,868,017
EXPENSES
Management fee $ 906,614
Transfer agent fees 103,447
Accounting fees and expenses 87,337
Non-interested trustees' compensation 495
Custodian fees and expenses 86,353
Audit 32,529
Legal 644
Miscellaneous 391
Total expenses before reductions 1,217,810
Expense reductions (31,356 1,186,454
)
NET INVESTMENT INCOME 3,681,563
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:
Investment securities (including 6,261,398
realized gain of $267,451
on sales of investments in
affiliated issuers)
Foreign currency transactions 216,929
Futures contracts 262,658 6,740,985
Change in net unrealized appreciation (depreciation) on:
Investment securities 16,678,547
Assets and liabilities in (132,526
foreign currencies )
Futures contracts (160,755 16,385,266
)
NET GAIN (LOSS) 23,126,251
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 26,807,814
OTHER INFORMATION $ 30,590
Expense reductions
Directed brokerage arrangements
Custodian interest credits 766
$ 31,356
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED JANUARY 3, 1995
DECEMBER 31, (COMMENCEMENT
1996 OF OPERATIONS) TO
DECEMBER 31,
1995
<TABLE>
<CAPTION>
<S> <C> <C>
Operations $ 3,681,563 $ 621,277
Net investment income
Net realized gain (loss) 6,740,985 4,773,781
Change in net unrealized appreciation (depreciation) 16,385,266 1,787,309
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 26,807,814 7,182,367
Distributions to shareholders (3,802,638) (591,903)
From net investment income
From net realized gain (8,710,844) (2,259,995)
TOTAL DISTRIBUTIONS (12,513,482) (2,851,898)
Share transactions 180,656,312 68,544,838
Net proceeds from sales of shares
Reinvestment of distributions 12,513,482 2,851,898
Cost of shares redeemed (22,687,189) (7,480,590)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 170,482,605 63,916,146
TOTAL INCREASE (DECREASE) IN NET ASSETS 184,776,937 68,246,615
NET ASSETS
Beginning of period 68,246,615 -
End of period (including distributions in excess of net investment income of $50,000 and $31,082, $ 253,023,552 $ 68,246,615
respectively)
OTHER INFORMATION
Shares
Sold 14,392,956 6,215,852
Issued in reinvestment of distributions 975,606 243,336
Redeemed (1,851,290) (662,758)
Net increase (decrease) 13,517,272 5,796,430
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
YEAR ENDED JANUARY 3, 1995
DECEMBER 31, (COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31,
SELECTED PER-SHARE DATA 1996 1995
<TABLE>
<CAPTION>
<S> <C> <C>
Net asset value, beginning of period $ 11.77 $ 10.00
Income from Investment Operations
Net investment income .21 .10
Net realized and unrealized gain (loss) 2.08 2.20
Total from investment operations 2.29 2.30
Less Distributions
From net investment income (.21) (.11)
From net realized gain (.75) (.42)
Total distributions (.96) (.53)
Net asset value, end of period $ 13.10 $ 11.77
TOTAL RETURN A, B 20.04% 23.02%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 253,024 $ 68,247
Ratio of expenses to average net assets .87% 1.00% C
Ratio of expenses to average net assets after expense reductions .85% D 1.00%
Ratio of net investment income to average net assets 2.63% 1.69%
Portfolio turnover rate 120% 343%
Average commission rate E $ .0211 -
A TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE
TOTAL RETURNS
SHOWN. B THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES
NOT BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO
FINANCIAL
STATEMENTS). C FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES
DURING THE PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO
WOULD HAVE
BEEN HIGHER. D FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS
WITH THIRD PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S
EXPENSES (SEE NOTE 5 OF
NOTES TO FINANCIAL STATEMENTS). E FOR FISCAL YEARS BEGINNING ON OR
AFTER SEPTEMBER 1, 1995, A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE
COMMISSION RATE PER SHARE
FOR SECURITY TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY
VARY FROM PERIOD TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN
VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE STRUCTURES
MAY DIFFER.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
For the period ended December 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES.
Asset Manager: Growth Portfolio (the fund) is a fund of Variable Insurance
Products Fund II (the trust) and is authorized to issue an unlimited number
of shares. The trust is registered under the Investment Company Act of
1940, as amended (the 1940 Act), as an open-end management investment
company organized as a Massachusetts business trust. Shares of the fund may
only be purchased by insurance companies for the purpose of funding
variable annuity or variable life insurance contracts. The financial
statements have been prepared in conformity with generally accepted
accounting principles which permit management to make certain estimates and
assumptions at the date of the financial statements. The following
summarizes the significant accounting policies of the fund:
SECURITY VALUATION. Equity securities for which quotations are readily
available are valued at the last sale price, or if no sale price, at the
closing bid price. Debt securities for which quotations are readily
available are valued by a pricing service at their market values as
determined by their most recent bid prices in the principal market (sales
prices if the principal market is an exchange) in which such securities are
normally traded. Securities (including restricted securities) for which
market quotations are not readily available are valued at their fair value
as determined in good faith under consistently applied procedures under the
general supervision of the Board of Trustees. Short-term securities with
remaining maturities of sixty days or less for which quotations are not
readily available are valued at amortized cost or original cost plus
accrued interest, both of which approximate current value.
FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S.
dollars at the prevailing rates of exchange at period end. Income receipts
and expense payments are translated into U.S. dollars at the prevailing
exchange rate on the respective dates of the transactions. Purchases and
sales of securities are translated into U.S. dollars at the contractual
currency exchange rates established at the time of each trade.
Net realized gains and losses on foreign currency transactions represent
net gains and losses from sales and maturities of forward currency
contracts, disposition of foreign currencies, and the difference between
the amount of net investment income accrued and the U.S. dollar amount
actually received. The effects of changes in foreign currency exchange
rates on investments in securities are included with the net realized and
unrealized gain or loss on investment securities.
INCOME TAXES. As a qualified regulated investment company under Subchapter
M of the Internal Revenue Code, the fund is not subject to U.S. federal
income taxes to the extent that it distributes substantially all of its
taxable income for its fiscal year. The fund may be subject to foreign
taxes on income, gains on
investments or currency repatriation. The fund accrues such taxes as
applicable. The schedule of investments includes information regarding
income taxes under the caption "Income Tax Information."
INVESTMENT INCOME. Dividend income is recorded on the ex-dividend date,
except certain dividends from foreign securities where the ex-dividend date
may have passed, are recorded as soon as the fund is informed of the
ex-dividend date. Non-cash dividends included in dividend income, if any,
are recorded at the fair market value of the securities received. Interest
income, which includes accretion of original issue discount, is accrued as
earned. Investment income is recorded net of foreign taxes withheld where
recovery of such taxes is uncertain.
EXPENSES. Most expenses of the trust can be directly attributed to a fund.
Expenses which cannot be directly attributed are apportioned between the
funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. 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, which may result in distribution
reclassifications, are primarily due to differing treatments for paydown
gains/losses on certain securities, futures and options transactions,
foreign currency transactions, passive foreign investment companies (PFIC),
market discount and losses deferred due to wash sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital and may
affect the per-share allocation between net investment income and realized
and unrealized gain (loss). Distributions in excess of net investment
income and accumulated undistributed net realized gain (loss) on
investments and foreign currency transactions may include temporary book
and tax basis differences which will reverse in a subsequent period. Any
taxable income or gain remaining at fiscal year end is distributed in the
following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of trade
date. Gains and losses on securities sold are determined on the basis of
identified cost.
2. OPERATING POLICIES.
FOREIGN CURRENCY CONTRACTS. The fund generally uses foreign currency
contracts to facilitate transactions in foreign-denominated securities.
Losses may arise from changes in the value of the foreign currency or if
the counterparties do not perform under the contracts' terms. The U.S.
dollar value of foreign currency contracts is determined using contractual
currency exchange rates established at the time of each trade. The cost of
the foreign currency contracts is included in the cost basis of the
associated investment.
2. OPERATING POLICIES - CONTINUED
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the fund, along with other affiliated
entities of Fidelity Management & Research Company (FMR), may transfer
uninvested cash balances into one or more joint trading accounts. These
balances are invested in one or more repurchase agreements that mature in
60 days or less from the date of purchase for U.S. Treasury or Federal
Agency obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
Securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are marked-to-market
daily and maintained at a value at least equal to the principal amount of
the repurchase agreement (including accrued interest). FMR, the fund's
investment adviser, is responsible for determining that the value of the
underlying securities remains in accordance with the market value
requirements stated above.
FUTURES CONTRACTS. The fund may use futures contracts to manage its
exposure to the stock market. Buying futures tends to increase the fund's
exposure to the underlying instrument, while selling futures tends to
decrease the fund's exposure to the underlying instrument or hedge other
fund investments. Losses may arise from changes in the value of the
underlying instruments, if there is an illiquid secondary market for the
contracts, or if the counterparties do not perform under the contracts'
terms. Futures contracts are valued at the settlement price established
each day by the board of trade or exchange on which they are traded.
RESTRICTED SECURITIES. The fund is permitted to invest in securities that
are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from registration
or to the public if the securities are registered. Disposal of these
securities may involve time-consuming negotiations and expense, and prompt
sale at an acceptable price may be difficult. At the end of the period, the
fund had no investments in restricted securities (excluding 144A issues).
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities), the market value of future contracts opened and
closed is included under the caption "Other Information" at the end of each
applicable fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a monthly
fee that is calculated on the basis of a group fee rate plus a fixed
individual fund fee rate applied to the average net assets of the fund. The
group fee rate is the weighted average of a series of rates and is based on
the monthly average net assets of all the mutual funds advised by FMR. The
rates ranged from .2500% to .5200% for the period. In the event that these
rates were lower than the contractual rates in effect during the period,
FMR voluntarily implemented the above rates, as they resulted in the same
or a lower management fee. The annual individual fund fee rate is .30%. For
the period, the management fee was equivalent to an annual rate of .65% of
average net assets. Effective August 1, 1996, FMR voluntarily agreed to
reduce the individual fund fee rate from .40% to .30%.
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations Company
(FIIOC), an affiliate of FMR, is the fund's transfer, dividend disbursing
and shareholder servicing agent. FIIOC receives account fees and
asset-based fees that vary according to account size and type of account.
FIIOC pays for typesetting, printing and mailing of all shareholder
reports, except proxy statements. For the period, the transfer agent fees
were equivalent to an annual rate of .07% of average net assets.
ACCOUNTING FEES. Fidelity Service Co. (FSC), an affiliate of FMR, maintains
the fund's accounting records. The fee is based on the level of average net
assets for the month plus out-of-pocket expenses.
BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms are shown under the caption
"Other Information" at the end of the fund's schedule of investments.
5. EXPENSE REDUCTIONS.
FMR voluntarily agreed to reimburse the fund's operating expenses
(excluding interest, taxes, brokerage commissions and extraordinary
expenses) above an annual rate of 1.00% of average net assets.
FMR has directed certain portfolio trades to brokers who paid a portion of
the fund's expenses. In addition, the fund has entered into an arrangement
with its custodian whereby interest earned on uninvested cash balances was
used to offset a portion of the fund's expenses.
For the period, the reductions under these arrangements are shown under the
caption "Other Information" on the fund's Statement of Operations.
6. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investments Life Insurance Company
(FILI) and its subsidiaries, affiliates of FMR, were the record owners of
approximately 80% of the outstanding shares of the fund.
7. TRANSACTIONS WITH AFFILIATED COMPANIES.
An affiliated company is a company in which the fund has ownership of at
least 5% of the voting securities. Information regarding affiliated
companies is included under the caption "Other Information" at the end of
the fund's schedule of investments.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Variable Insurance Products II and the Shareholders of
Asset Manager: Growth Portfolio:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments (except for Moody's and Standard &
Poor's ratings), and the related statements of operations and of changes in
net assets and the financial highlights present fairly, in all material
respects, the financial position of Asset Manager: Growth Portfolio (a fund
of Variable Insurance Products II) at December 31, 1996, the results of its
operations for the year then ended, and the changes in its net assets and
the financial highlights for the periods indicated in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Asset Manager: Growth Portfolio's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of securities at December 31, 1996 by correspondence
with the custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 10, 1997
DISTRIBUTIONS
The Board of Trustees of Asset Manager: Growth Portfolio voted to pay on
February 7, 1997, to shareholders of record at the opening of business on
February 7, 1997, a distribution of $.02 per share derived from capital
gains realized from sales of portfolio securities.
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
INVESTMENT SUB-ADVISERS
Fidelity Management & Research (U.K.) Inc.,
London, England
Fidelity Management & Research (Far East) Inc.,
Tokyo, Japan
OFFICERS
Edward C. Johnson 3d, PRESIDENT
J. Gary Burkhead, SENIOR VICE PRESIDENT
William J. Hayes, VICE PRESIDENT
Fred L. Henning, Jr., VICE PRESIDENT
Robert A. Lawrence, VICE PRESIDENT
Richard C. Habermann, VICE PRESIDENT
John Todd, VICE PRESIDENT
George Vanderheiden, VICE PRESIDENT
Arthur S. Loring, SECRETARY
Kenneth A. Rathgeber, TREASURER
Robert H. Morrison, MANAGER, SECURITY TRANSACTIONS
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
BOARD OF TRUSTEES
J. Gary Burkhead
Ralph F. Cox *
Phyllis Burke Davis *
Richard J. Flynn *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Edward H. Malone *
Marvin L. Mann *
Gerald C. McDonough *
Thomas R. Williams *
ADVISORY BOARD
William O. McCoy
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Investments Institutional Operations Co.
Boston, MA
CUSTODIAN
The Chase Manhattan Bank, N.A., New York, NY
* INDEPENDENT TRUSTEES
