<PAGE>
[LOGO OF THE NEW ENGLAND APPEARS HERE]
The New England
Insurance and Investment
A MetLife Affiliate
-------------------------------------------------------------------------
ZENITH FUND
VARIABLE PRODUCTS
SEMIANNUAL REPORTS
JUNE 30, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Morgan Stanley International Magnum Equity Series and Loomis Sayles Bal-
anced Series Supplement................................................... I
Loomis Sayles Small Cap Series............................................. 1
Morgan Stanley International Magnum Equity Series.......................... 7
Alger Equity Growth Series................................................. 14
Capital Growth Series...................................................... 20
Loomis Sayles Avanti Growth Series......................................... 24
Davis Venture Value Series................................................. 29
Westpeak Growth & Income Series............................................ 36
Westpeak Stock Index Series................................................ 43
Loomis Sayles Balanced Series.............................................. 53
Back Bay Advisors Managed Series........................................... 61
Salomon Brothers Strategic Bond Opportunities Series....................... 69
Back Bay Advisors Bond Income Series....................................... 77
Salomon Brothers U.S. Government Series.................................... 83
Back Bay Advisors Money Market Series...................................... 87
Notes to Financial Statements.............................................. 93
Footnotes to Portfolio Manager Commentary.................................. 102
New England Variable Life Separate Account................................. 104
Fidelity VIP Overseas Portfolio............................................
Fidelity VIP Equity-Income Portfolio.......................................
Fidelity VIP High Income Portfolio.........................................
Fidelity VIPII Asset Manager Portfolio.....................................
</TABLE>
IMPORTANT:
Some funds appearing in this report may not be available under your variable
life or variable annuity product.
<PAGE>
August, 1997
TO OUR POLICYHOLDERS/CONTRACT OWNERS:
We are pleased to provide you with the 1997 Semiannual Report for the Zenith
Fund variable life insurance and variable annuity products.* This report
includes performance histories, present investments, and financial reports as
of June 30, 1997, 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 1997 Semiannual Report also contains important information pertaining to
the Loomis Sayles Balanced Series and the Morgan Stanley International Magnum
Equity Series. Please see the enclosed supplement for more details.
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,
/s/ David Allen /s/ Bruce Long
David Allen Bruce Long
Senior Vice President President
New England Life New England Annuities
* Variable products are offered through New England Securities Corporation.
[LOGO OF RECYCLABLE
PAPER APPEARS HERE]
<PAGE>
NEW ENGLAND ZENITH FUND
MORGAN STANLEY INTERNATIONAL MAGNUM EQUITY SERIES
AND LOOMIS SAYLES BALANCED SERIES
SUPPLEMENT DATED AUGUST 1, 1997 TO PROSPECTUS DATED MAY 1, 1997
THE FOLLOWING PARAGRAPH REPLACES THE SECOND PARAGRAPH UNDER MORGAN STANLEY
INTERNATIONAL MAGNUM EQUITY SERIES IN THE "INVESTMENT OBJECTIVES AND POLICIES"
SECTION:
The countries in which the Series will primarily invest are those comprising
the Morgan Stanley Capital International EAFE Index (the "EAFE Index"), which
includes Australia, Japan, New Zealand, most nations located in Western Europe
and certain developed countries in Asia, such as Hong Kong and Singapore (each
an "EAFE country," and collectively the "EAFE countries"). The Series may
invest up to 5% of its assets in non-EAFE countries. Under normal
circumstances, at least 65% of the total assets of the Series will be invested
in equity securities of issuers in at least three countries outside the United
States.
THE FOLLOWING INFORMATION REPLACES THE THIRD PARAGRAPH UNDER LOOMIS, SAYLES &
COMPANY, L.P. ("LOOMIS SAYLES") IN THE "MANAGEMENT" SECTION:
Carol C. McMurtrie, Tricia H. Mills and Roderic Dillon are the portfolio
managers of the equity portion of the Loomis Sayles Balanced Series and are
responsible for allocating the assets of the Series between equity and fixed-
income securities. Ms. McMurtrie and Ms. Mills have served in these capacities
since July 1997, and Mr. Dillon since August 1997. The portfolio management
team for the fixed-income portion of the Series consists of Meri Anne Beck,
John Hyll and Barr Segal. Ms. Beck and Mr. Hyll have had portfolio management
responsibility for the Series' fixed-income investments since 1994, and Mr.
Segal joined the team in 1996. Messrs. Dillon, Hyll and Segal and Mses. Beck,
McMurtrie and Mills are Vice Presidents of Loomis Sayles. Mses. Beck,
McMurtrie and Mills and Mr. Hyll have been employed by Loomis Sayles for more
than five years. Mr. Segal was a Senior Portfolio Manager at TCW Group before
joining Loomis Sayles in 1996. Mr. Dillon rejoins Loomis Sayles in August 1997
following several years as principal of Dillon Capital Management.
VL-111-97
<PAGE>
LOOMIS SAYLES SMALL CAP SERIES
PORTFOLIO MANAGERS: JEFFREY C. PETHERICK AND MARY CHAMPAGNE
LOOMIS, SAYLES & COMPANY, L.P.
[PICTURE APPEARS HERE] [PICTURE APPEARS HERE]
Q. HOW HAS THE SERIES PERFORMED DURING THE FIRST HALF OF 1997?
A. The Series performed favorably during the first half of 1997 with a total
return 12.36% compared to the Lipper Variable Products Small Company Aver-
age/14/ return of 8.11%. The smaller, value orientated stocks the Series fa-
vors outpaced the returns of the growth orientated small company stocks for
the first half of the year. Relative to large capitalization stocks, however,
small capitalization stocks still lagged. But after underperforming large com-
pany stocks for about three years we find small company issues are relatively
undervalued compared with their growth potential.
Q. HOW DID YOU MANAGE THE SERIES FOR THE FIRST HALF OF THE YEAR?
A. We continued to look for undervalued issues in companies with market capi-
talizations under $1 billion. The health care industry is one example of an
area offering very attractive valuations, partly due to the difficulties
caused by the proposed changes to Medicare and Medicaid. Recently, we pur-
chased Sierra Healthcare, a well-managed health maintenance organization whose
stock price was suffering when the health care sector was out of favor. An-
other promising health care issue is Hologic, Inc., a maker of equipment for
assessing the risk of developing osteoporosis. There is high growth potential
in this market as the American population ages.
Technology stocks are also currently selling at more reasonable valuations--
with good earnings prospects--after a year-long correction that began in May
1996. On the flip side, financial services stocks are reaching their peak val-
uation level after some terrific growth over the past seven years, and we
could be trimming those holdings.
Q. WHAT IS YOUR OUTLOOK OVER THE MONTHS AHEAD?
A. Overall, we see the small company stocks benefitting from a number of fac-
tors, including a rise in the U.S. dollar that began a year ago. A rising dol-
lar reduces some of the competitive edge larger companies had worldwide for
their products (because their products are more expensive for foreigners to
import), and will likely cut into these firms' relative earnings. Smaller
firms generally do not depend on overseas customers a great deal, and there-
fore their stocks aren't as susceptible to the dollar's fluctuations.
A $10,000 Investment Compared to the Russell 2000/17/
Average Annual Return
<TABLE>
<CAPTION>
Small Cap Lipper Variable Small
Series Company Fund Average/14/
<S> <C> <C>
6 mos.* 12.36% 8.11%
1 year 26.69% 14.19%
Since Inception 21.08% n/a
* not annualized
</TABLE>
[GRAPH APPEARS HERE ILLUSTRATING THE GROWTH OF A $10,000 INVESTMENT IN THE
SERIES COMPARED TO THE GROWTH OF A $10,000 INVESTMENT IN THE RUSSELL 2000 INDEX,
THE PLOT POINTS OF WHICH ARE AS FOLLOWS:]
<TABLE>
<CAPTION>
Small Cap Series Russell 2000/17/
<S> <C> <C>
Inception 5/1/94 10,000 10,000
12/31/94 9,676 10,026
12/31/95 12,471 12,877
12/31/96 16,295 15,007
6/30/97 18,309 16,538
</TABLE>
[CHECK MARK APPEARS HERE] FUND FACTS
GOAL: Long-term growth from investment in common stocks or their equivalent.
START DATE: May 1, 1994
SIZE: $138 million as of June 30, 1997
MANAGERS: Jeffrey C. 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 Aggressive Growth Fund. Mr. Petherick joined Loomis Sayles in
1990. Ms. Champagne joined Loomis Sayles in 1993.
Performance numbers are net of all Series expenses but do not include any in-
surance, 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 JUNE 30, 1997 (UNAUDITED)
- ----------------------------------------
COMMON STOCKS--85.6% OF TOTAL NET ASSETS
- ----------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
AEROSPACE--0.5%
31,400 Gencorp, Inc. ............................................ $ 726,125
-----------
AUTOMOBILE & RELATED--1.7%
9,200 Amcast Industrial Corp. .................................. 230,000
16,500 Borg Warner Automotive, Inc. ............................. 892,031
35,200 Echlin, Inc. ............................................. 1,267,200
-----------
2,389,231
-----------
BANKS--SAVINGS & LOAN--3.4%
23,300 Bank Utd. Corp. .......................................... 885,400
41,100 City National Corp. ...................................... 988,969
28,075 Commercial Federal Corp. ................................. 1,042,284
34,400 Downey Financial Corp. ................................... 812,700
31,300 First Financial Corp. .................................... 919,437
-----------
4,648,790
-----------
BUSINESS SERVICES--1.5%
27,200 Alternative Resources Corp. .............................. 554,200
6,400 CDI Corp.(c).............................................. 266,800
40,800 Cort Business Services Corp.(c)........................... 1,203,600
8,300 Team America Corp. ....................................... 69,512
-----------
2,094,112
-----------
CHEMICALS--SPECIALTY--4.0%
54,000 Cuno, Inc. ............................................... 904,500
47,100 Dexter Corp. ............................................. 1,507,200
32,900 Hexcel Corp.(c)........................................... 567,525
83,900 Lawter International, Inc. ............................... 1,059,237
13,600 Learonal, Inc. ........................................... 387,600
32,400 OM Group, Inc. ........................................... 1,073,250
-----------
5,499,312
-----------
COMPUTER SOFTWARE & SERVICES--4.6%
25,700 American Management Systems, Inc. ........................ 687,475
35,200 National Computer Systems, Inc. .......................... 937,200
29,700 Network General Corp. .................................... 441,787
32,000 Nichols Research Corp. ................................... 672,000
43,800 Platinum Technology, Inc. ................................ 580,350
34,600 Semitool, Inc. ........................................... 402,225
38,400 Sterling Software, Inc. .................................. 1,200,000
37,100 Symantec Corp.(c)......................................... 723,450
45,900 Wonderware Corp. ......................................... 648,337
-----------
6,292,824
-----------
ELECTRICAL EQUIPMENT--1.4%
30,800 York International Corp. ................................. 1,416,800
26,200 Woodhead Industries....................................... 494,525
-----------
1,911,325
-----------
ELECTRONIC COMPONENTS--3.5%
17,800 Dynatech Corp. ........................................... 636,350
42,200 International Rectifier Corp. ............................ 785,975
38,700 Merix Corp. .............................................. 643,387
26,700 Perceptron, Inc. ......................................... 724,237
52,400 Trident Microsystems, Inc. ............................... 589,500
41,000 VLSI Technology, Inc. .................................... 968,625
76,800 Xicor, Inc. .............................................. 451,200
-----------
4,799,274
-----------
ENVIROMENTAL SERVICES--1.5%
47,800 Tetra Technical, Inc. .................................... 1,153,175
39,400 World Fuel Services Corp. ................................ 861,875
-----------
2,015,050
-----------
FINANCIAL SERVICES--1.9%
40,000 DVI, Inc.(c).............................................. 580,000
34,500 Financial Federal Corp. .................................. 759,000
16,000 Firstplus Financial Group, Inc. .......................... 544,000
42,880 WFS Financial, Inc.(c).................................... 718,240
-----------
2,601,240
-----------
FOOD PACKAGING & MISCELLANEOUS--2.5%
29,200 International Multifoods Corp. ........................... 733,650
62,500 Lance, Inc. .............................................. 1,195,312
80,100 Michaels Foods............................................ 1,481,850
-----------
3,410,812
-----------
FREIGHT TRANSPORTATION--1.7%
48,200 Circle International Group, Inc. ......................... 1,271,275
39,500 Pittston Burlington Group................................. 1,110,937
-----------
2,382,212
-----------
HEALTH CARE--DRUGS--1.7%
49,300 Bindley Western Industries, Inc. ......................... 1,130,819
54,500 Gulf South Medical Supply, Inc. .......................... 1,062,750
10,000 Weider Nutrition International, Inc. ..................... 158,750
-----------
2,352,319
-----------
HEALTH CARE--MEDICAL TECHNOLOGY--4.8%
59,100 Conmed Corp.(c)........................................... 1,004,700
23,600 C. R. Bard, Inc. ......................................... 856,975
41,200 Hologic, Inc. ............................................ 1,096,950
56,300 Invacare Corp. ........................................... 1,316,012
36,000 Marquette Medical Systems, Inc. .......................... 792,000
15,000 Sofamor/Danek Group, Inc.(c).............................. 686,250
23,900 Sola International, Inc. ................................. 800,650
-----------
6,553,537
-----------
HEALTH CARE--SERVICES--5.3%
5,700 Compdent Corp. ........................................... 120,056
67,245 Grancare, Inc.(c)......................................... 727,087
58,600 Healthplan Services Corp.(c).............................. 1,106,075
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES SMALL CAP SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- --------------------------
COMMON STOCKS--(CONTINUED)
- --------------------------
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
HEALTH CARE--SERVICES--(CONTINUED)
33,000 Integrated Health Services, Inc. ......................... $ 1,270,500
52,043 Vitalink Pharmacy Services, Inc. ......................... 995,322
29,500 Phymatrix Corp. .......................................... 453,562
50,400 Physicians Resource Group, Inc. .......................... 453,600
50,000 Rotech Medical Corp.(c)................................... 1,003,125
39,400 Sierra Health Services, Inc. ............................. 1,231,250
-----------
7,360,577
-----------
HOME PRODUCTS--2.4%
9,600 Aptargroup, Inc. ......................................... 434,400
17,700 Bush Boake Allen, Inc.(c)................................. 550,912
49,600 Premark International, Inc. .............................. 1,326,800
72,550 US Can Corp.(c)........................................... 1,033,837
-----------
3,345,949
-----------
HOTELS & RESTAURANTS--0.4%
36,600 Buffets, Inc. ............................................ 308,812
19,500 Cooker Restaurant Corp. .................................. 208,406
-----------
517,218
-----------
HOUSING & BUILDING MATERIALS--2.2%
12,700 Crossman Communities, Inc.(c)............................. 269,875
26,700 Dayton Superior Corp. .................................... 340,425
56,400 Giant Cement Holdings, Inc.(c)............................ 1,057,500
35,600 Toro Co. ................................................. 1,348,350
-----------
3,016,150
-----------
INSURANCE--7.7%
34,050 Allied Group, Inc. ....................................... 1,293,900
23,900 Capital Resource Corp. ................................... 1,278,650
24,900 Capmac Holdings, Inc. .................................... 837,262
50,900 Everest Reinsurance Holdings.............................. 2,016,912
35,500 Protective Life Corp. .................................... 1,783,875
22,400 Reinsurance Group of America, Inc. ....................... 1,288,000
42,200 TIG Holdings, Inc. ....................................... 1,318,750
16,225 Triad Guaranty, Inc.(c)................................... 736,209
-----------
10,553,558
-----------
LEISURE--1.7%
28,095 Harman International...................................... 1,183,502
53,600 Scientific Games Holdings Corp.(c)........................ 1,105,500
-----------
2,289,002
-----------
MACHINERY--1.7%
31,500 Brown & Sharpe Manufacturing Co.(c)....................... 476,437
40,800 BW/IP, Inc. .............................................. 828,750
31,900 Greenfield Industries Inc. ............................... 861,300
6,700 Hardinge Brothers, Inc. .................................. 195,975
-----------
2,362,462
-----------
MEDIA & ENTERTAINMENT--2.1%
39,100 Banta Corp. .............................................. 1,060,587
41,200 Cadmus Communications Corp. .............................. 638,600
17,700 Houghton Mifflin Co. ..................................... 1,181,475
-----------
2,880,662
-----------
METALS--3.3%
62,100 Agnico Eagle Mines, Ltd. ................................. 597,712
38,400 Citation Corp.(c)......................................... 657,600
30,200 Lone Star Technologies, Inc. ............................. 864,475
44,700 LTV Corp. ................................................ 636,975
67,200 Oregon Steel Mills, Inc. ................................. 1,339,800
59,600 UNR Industries, Inc. ..................................... 409,750
-----------
4,506,312
-----------
MULTI-INDUSTRY--2.6%
11,700 Apogee Enterprises, Inc. ................................. 251,550
75,900 Griffon Corp.(c).......................................... 1,038,881
98,700 Vaid Corp. ............................................... 1,899,975
10,500 Insilco Corp.(c).......................................... 393,750
-----------
3,584,156
-----------
NATURAL GAS PIPELINES--0.3%
24,500 Public Service Co. North Carolina, Inc. .................. 470,094
-----------
OFFICE EQUIPMENT--0.4%
31,500 Telxon Corp. ............................................. 567,000
-----------
OIL--INDEPENDENT PRODUCERS--1.4%
56,900 Lomak Petroleum, Inc.(c).................................. 1,013,531
32,200 Vintage Petroleum, Inc.(c)................................ 990,150
-----------
2,003,681
-----------
OIL--SERVICES--4.6%
15,200 Falcon Drilling........................................... 875,900
35,100 Key Energy Group, Inc. ................................... 625,219
58,500 Pride International, Inc. ................................ 1,404,000
25,000 Seitel, Inc.(c)........................................... 950,000
51,200 Tuboscope Vetco International Corp. ...................... 1,017,600
38,000 Weatherford Enterra, Inc.(c).............................. 1,463,000
-----------
6,335,719
-----------
PAPER PRODUCTS--0.1%
5,700 Wausau Paper Mills, Inc. ................................. 107,587
-----------
REAL-ESTATE INVESTMENT TRUSTS--7.7%
58,100 American General Hospitality Corp. ....................... 1,437,975
52,800 Brandywine Realty Trust................................... 1,069,200
46,700 Cali Realty Corp. ........................................ 1,587,800
60,300 Capstone Capital Corp.(c)................................. 1,477,350
39,800 Health Care Property Investments, Inc. ................... 1,402,950
68,300 Koger Equity, Inc.(c)..................................... 1,246,475
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES SMALL CAP SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- --------------------------
COMMON STOCKS--(CONTINUED)
- --------------------------
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
REAL-ESTATE INVESTMENT TRUSTS--(CONTINUED)
49,000 Liberty Property......................................... $ 1,218,875
33,700 Sun Communities, Inc. ................................... 1,131,065
------------
10,571,690
------------
RETAIL--GENERAL MERCHANDISE--0.6%
30,800 Family Dollar Stores, Inc. .............................. 839,300
------------
RETAIL--SPECIALTY--3.5%
18,200 Carson Pirie Scott & Co. ................................ 577,850
40,650 Cato Corp.(c)............................................ 221,036
61,400 Heilig Meyers Co. ....................................... 1,204,975
36,600 Tandycrafts, Inc. ....................................... 173,850
35,600 United Auto Group, Inc. ................................. 705,325
26,700 Wet Seal, Inc. .......................................... 842,719
57,600 Zale Corp. .............................................. 1,141,200
------------
4,866,955
------------
TELECOMMUNICATIONS--1.7%
57,600 Alliant Communications, Inc. ............................ 1,123,200
55,500 Inter Tel, Inc. ......................................... 1,179,375
------------
2,302,575
------------
TEXTILE & APPAREL--0.3%
6,600 Timberland Co. .......................................... 425,700
------------
UTILITIES--ELECTRIC--0.9%
67,600 Calpine Corp. ........................................... 1,284,400
------------
Total Common Stocks
(Identified Cost $101,126,001).......................... 117,866,910
------------
<CAPTION>
- -----------------------------
SHORT-TERM INVESTMENTS--14.2%
- -----------------------------
FACE
AMOUNT VALUE (A)
<C> <S> <C>
$6,392,668 Associates Corp. North America
6.080%, 7/01/97..................................... $ 6,392,668
6,400,000 Chevron Oil Finance Co.
5.350%, 7/02/97..................................... 6,400,000
5,800,000 Exxon Asset Management
6.250%, 7/02/97..................................... 5,800,000
1,000,000 General Electric 5.500%, 7/01/97..................... 1,000,000
------------
19,592,668
------------
Total Short-Term Investments
(Identified Cost $19,592,668)....................... 19,592,668
------------
Total Investments--99.8%
(Identified Cost $120,718,669)(b)................... 137,459,578
Other assets less liabilities........................ 181,166
------------
TOTAL NET ASSETS--100%............................... $137,640,744
============
</TABLE>
(a) See Note 1A.
(b) Federal Tax Information:
At June 30, 1997 the net unrealized appreciation on investments based on
cost of $120,718,669 for federal income tax purposes was as follows:
<TABLE>
<S> <C>
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost..................................... $ 19,331,802
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax
cost over value................................... (2,590,893)
------------
Net unrealized appreciation........................ $ 16,740,909
============
</TABLE>
(c) Non-income producing security.
See accompanying notes to financial statements.
4
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES SMALL CAP SERIES)
- ---------------------------------
STATEMENT OF ASSETS & LIABILITIES
- ---------------------------------
JUNE 30, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments at value.................................... $137,459,578
Receivable for:
Fund shares sold....................................... 598,808
Securities sold........................................ 812,890
Dividends and interest................................. 127,490
------------
138,998,766
LIABILITIES
Payable for:
Securities purchased................................... $948,931
Fund shares redeemed................................... 214,296
Accrued expenses:
Management fees........................................ 161,602
Deferred trustees' fees................................ 1,637
Other expenses......................................... 31,556
--------
1,358,022
------------
$137,640,744
============
NET ASSETS
Net Assets consist of:
Capital paid in........................................ $112,338,672
Undistributed net investment income.................... 514,242
Accumulated net realized gains......................... 8,046,921
Unrealized appreciation on investments................. 16,740,909
------------
NET ASSETS............................................... $137,640,744
============
Computation of offering price:
Net asset value and redemption price per share
($137,640,744 divided by 848,992 shares of beneficial
interest)............................................... $ 162.12
============
Identified cost of investments........................... $120,718,669
============
<CAPTION>
- -----------------------
STATEMENT OF OPERATIONS
- -----------------------
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<S> <C> <C>
INVESTMENT INCOME
Dividends............................................... $ 641,703(a)
Interest................................................ 403,828
-----------
1,045,531
EXPENSES
Management fees......................................... $540,630
Trustees' fees and expenses............................. 11,411
Custodian............................................... 37,869
Audit and tax services.................................. 3,796
Legal................................................... 9,340
Printing................................................ 18,339
Miscellaneous........................................... 1,820
--------
Total expenses........................................ 623,205
Less expenses assumed by the investment adviser....... (82,574) 540,631
-------- -----------
NET INVESTMENT INCOME.................................... 504,900
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Realized gain on:
Investments--net....................................... 7,344,960
Unrealized appreciation on:
Investments--net....................................... 6,534,301
-----------
Net gain on investment transactions...................... 13,879,261
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS............... $14,384,161
===========
</TABLE>
(a) Net of foreign taxes of: $161
See accompanying notes to financial statements.
5
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES SMALL CAP SERIES)
- ----------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
- ----------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ ------------
<S> <C> <C>
FROM OPERATIONS
Net investment income............................. $ 591,899 $ 504,900
Net realized gain on investments.................. 5,566,031 7,344,960
Unrealized appreciation on investments............ 7,966,226 6,534,301
------------ ------------
INCREASE IN NET ASSETS FROM OPERATIONS............ 14,124,156 14,384,161
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income............................. (597,412) 0
Net realized gain on investments.................. (5,269,235) 0
------------ ------------
(5,866,647) 0
------------ ------------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares...................... 66,168,269 50,597,912
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income.......... 597,412 0
Distributions from net realized gain.............. 5,269,235 0
------------ ------------
72,034,916 50,597,912
Cost of shares redeemed........................... (18,839,546) (16,535,354)
------------ ------------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL SHARE
TRANSACTIONS..................................... 53,195,370 34,062,558
------------ ------------
TOTAL INCREASE IN NET ASSETS...................... 61,452,879 48,446,719
NET ASSETS
Beginning of the period........................... 27,741,146 89,194,025
------------ ------------
End of the period................................. $ 89,194,025 $137,640,744
============ ============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the period........................... $ 14,855 $ 9,342
============ ============
End of the period................................. $ 9,342 $ 514,242
============ ============
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares.................... 482,269 343,671
Issued in connection with the reinvestment of:
Distributions from net investment income.......... 7,195 0
Distributions from net realized gain.............. 34,411 0
------------ ------------
523,875 343,671
Redeemed.......................................... (139,206) (112,850)
------------ ------------
Net change........................................ 384,669 230,821
============ ============
<CAPTION>
- --------------------------------
FINANCIAL HIGHLIGHTS (UNAUDITED)
- --------------------------------
MAY 2, 1994(A) SIX MONTHS
THROUGH YEAR YEAR ENDED
DECEMBER 31, ENDED ENDED JUNE 30,
1994 1995 1996 1997
-------------- ------- ------- ----------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.......................... $100.00 $ 96.61 $118.80 $ 144.29
------- ------- ------- --------
Income From Investment Operations
Net Investment Income........... 0.14 0.85 1.05 0.59
Net Realized and Unrealized Gain
(Loss) on Investments.......... (3.38) 26.93 35.03 17.24
------- ------- ------- --------
Total From Investment
Operations..................... (3.24) 27.78 36.08 17.83
------- ------- ------- --------
Less Distributions
Distributions From Net
Investment Income.............. (0.15) (0.78) (1.03) 0.00
Distributions From Net Realized
Capital Gains.................. 0.00 (4.81) (9.56) 0.00
------- ------- ------- --------
Total Distributions............. (0.15) (5.59) (10.59) 0.00
------- ------- ------- --------
Net Asset Value, End of Period... $ 96.61 $118.80 $144.29 $ 162.12
======= ======= ======= ========
TOTAL RETURN (%)................. (3.23)(b) 28.88 30.67 12.36(b)
Ratio of Operating Expenses to
Average Net Assets (%).......... 1.00 (c) 1.00 1.00 1.00(c)
Ratio of Net Investment Income to
Average Net Assets (%).......... 0.32 (c) 1.26 1.15 0.92(c)
Portfolio Turnover Rate (%)...... 80 (c) 98 62 83(c)
Average Commission Rate(d)....... -- -- $0.0568 $ 0.0547
Net Assets, End of Period (000).. $ 3,105 $27,741 $89,194 $137,641
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 (c) 1.91 1.29 1.15(c)
</TABLE>
(a) Commencement of operations.
(b) Not computed on an annualized basis.
(c) 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>
MORGAN STANLEY INTERNATIONAL MAGNUM EQUITY SERIES
PORTFOLIO MANAGER: FRANCINE J. BOVICH MORGAN STANLEY ASSET MANAGEMENT INC.
[PICTURE APPEARS HERE]
Morgan Stanley Asset Management, Inc. ("MSAM") took over management of the
Draycott International Equity Series on May 1, 1997. Accordingly, the portfo-
lio was renamed the Morgan Stanley International Magnum Equity Series and re-
structured to reflect Morgan Stanley's own ideas. Specifically, as a result of
the stocks we selected, we increased the portfolio's exposure to Austria,
Switzerland, Denmark, the Netherlands, Sweden, Hong Kong, Japan, Malaysia,
Singapore and New Zealand, while reducing exposure to Australia, the United
Kingdom, Finland, Italy and Norway. Every attempt was made to minimize the
cost of the transition in the portfolio.
Q. HOW HAS THE SERIES PERFORMED SINCE YOU TOOK OVER THE MANAGEMENT OF THE
PORTFOLIO IN MAY?
A. Since taking over the investment management from Draycott Partners,Ltd. on
May 1, 1997, the International Magnum portfolio has slightly underperformed
the EAFE Index/2/, the Series' benchmark. The Series matched an impressive
EAFE Index performance in the month of May despite the fact the portfolio was
still in a transition period during the month. The portfolio slightly
underperformed in June due to a bounce back of Japanese banks in late May and
into June. For the second quarter, the series was below median performance of
its peer group but outperformed the average for each of the two months since
Morgan Stanley took over.
Q. WHAT WERE THE IMPORTANT WINNERS OR LOSERS IN TERMS OF INDIVIDUAL
SECURITIES, SECTORS OR COUNTRIES?
A. During the months of May and June the Japanese stocks in the Series gave
the Series no exposure to banks and limited exposure to finance companies, in-
stead favoring investment in companies which experienced clear earnings growth
such as blue chip export-orientated companies like NEC and Sony. The Japanese
stocks in which we are invested had a very strong run during the period
November 1996 through May 1997; in June, however, these stocks succumbed to
profit-taking while the oversold bank sector staged what we believe will be a
short-lived recovery.
Among our top performing stocks was Philips Electronics of the Netherlands,
which was up over 30% during June alone on the news of the company's link-up
with Lucent Technologies to develop telecommunications equipment. Stock selec-
tion in the United Kingdom and in Germany was strong, with Kwik Save Group,
Reckitt & Colman, Volkswagen and Lufthansa among top contributors to perfor-
mance.
A $10,000 Investment Compared to the EAFE Index
Average Annual Return
<TABLE>
<CAPTION>
International Lipper Variable International
Equity Series Funds Average/12/
<S> <C> <C>
6 mos.* 7.79% 12.13%
1 year 8.05% 16.75%
Since Inception 8.84% n/a
* not annualized
</TABLE>
[GRAPH APPEARS HERE ILLUSTRATING THE GROWTH OF A $10,000 INVESTMENT IN THE
INTERNATIONAL MAGNUM EQUITY SERIES COMPARED TO THE GROWTH OF A $10,000
INVESTMENT IN THE RUSSELL 2000 INDEX, THE PLOT POINTS OF WHICH ARE AS FOLLOWS:]
<TABLE>
<CAPTION>
International Magnum
Equity Series EAFE/2/
<S> <C> <C>
10/31/94 10,000 10,000
12/31/94 10,260 9,579
12/31/95 10,879 10,653
12/31/96 11,627 11,297
6/30/97 12,533 12,563
</TABLE>
[CHECK MARK APPEARS HERE] FUND FACTS
GOAL: Total return from long-term growth of capital
START DATE: October 31, 1994
SIZE: $49 million as of June 30, 1997
MANAGER: Francine J. Bovich manages the Morgan Stanley International Magnum
Equity Series. Ms. Bovich joined MSAM as Principal in 1993. Previously she was a
Principal and Executive Vice President of Westwood Management Corp., a
registered investment adviser.
Performance numbers are net of all Series expenses but do not include any in-
surance, 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.
7
<PAGE>
NEW ENGLAND ZENITH FUND
(MORGAN STANLEY INTERNATIONAL MAGNUM EQUITY SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- ----------------------------------------
COMMON STOCKS--94.6% OF TOTAL NET ASSETS
- ----------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
AUSTRIA--0.6%
3,500 Bochler Uddeholm.......................................... $ 271,415
480 Radex Heraklith........................................... 20,314
-----------
291,729
-----------
AUSTRALIA--2.9%
28,400 Amcor, Ltd. .............................................. 188,877
19,000 Broken Hill Proprietary, Ltd.............................. 279,761
15,500 Commonwealth Bank......................................... 187,426
8,400 Lend Lease Corp........................................... 177,752
12,700 National Australia Bank, Ltd.............................. 182,075
39,000 News Corp., Ltd. ......................................... 187,161
38,500 WMC, Ltd. ................................................ 242,955
-----------
1,446,007
-----------
BELGIUM--0.5%
5,600 GB Inno................................................... 267,704
-----------
DENMARK--1.5%
6,200 BG Bank AS................................................ 342,686
7,100 Unidanmark................................................ 398,846
-----------
741,532
-----------
FINLAND--2.2%
10,000 Amer-Yhtymae(e)........................................... 180,059
5,000 Huhtamaki OY.............................................. 215,204
1,000 Kone OY Series B.......................................... 119,397
41,300 Merita Ltd................................................ 137,594
358 Rauma OY.................................................. 8,204
26,700 Rautaruukki OY............................................ 280,227
8,000 Valmet OY................................................. 138,347
-----------
1,079,032
-----------
FRANCE--6.6%
1,200 Alcatel Alsthom........................................... 150,288
3,200 Banque Nationale de Paris................................. 131,884
600 Bongrain S.A. ............................................ 234,724
2,700 Cie de St. Gobain......................................... 393,741
2,300 Cie General des Eaux...................................... 1,378
1,800 Groupe Danone............................................. 297,412
3,200 Elf Aquitaine............................................. 345,227
1,800 Eridanig Beghin-Say....................................... 269,539
4,000 Lafarge-Coppee............................................ 248,779
5,000 Legris.................................................... 235,676
1,800 SGS Thomson Microelectronics(e)........................... 142,121
4,200 Total S.A., Series B...................................... 424,524
21,690 Usinor.................................................... 391,230
-----------
3,266,523
-----------
GERMANY--7.9%
7,400 Basf AG................................................... 273,453
6,900 Bayer AG.................................................. 265,144
250 Buderus AG................................................ 137,607
800 Dyckerhoff AG, Preferred.................................. 288,974
12,300 Gerresheimer Glas......................................... 211,570
3,700 Hornbach Holdings AG, Preferred........................... 313,973
23,850 Lufthansa AG.............................................. 457,418
300 Mannesmann AG............................................. 133,651
1,200 Metro AG.................................................. 131,483
360 Sudzucker AG, Preferred................................... 192,994
8,510 Veba AG................................................... 478,172
800 Viag AG................................................... 363,741
900 Volkswagen................................................ 689,926
-----------
3,938,106
-----------
GREAT BRITAIN--12.6%
32,100 Associated British Foods.................................. 276,368
21,355 Bank of Scotland.......................................... 137,271
24,000 Bass PLC.................................................. 292,960
30,700 Bat Industries PLC........................................ 274,796
37,500 BG PLC.................................................... 137,387
47,800 British Telecom PLC....................................... 355,022
24,550 Burmah Castrol............................................ 415,373
54,300 Courtaulds Textiles PLC................................... 277,607
52,600 Grand Metropolitan........................................ 506,298
68,400 Imperial Tobacco Group.................................... 439,680
53,800 Kwik Save Group........................................... 271,333
13,400 P & O Steam Navigation Co. ............................... 133,443
1,900 Premier Farnell........................................... 14,776
35,500 Racal Electronics PLC..................................... 141,884
34,500 Reckitt & Colman.......................................... 515,352
36,600 Royal Sun Alliance Insurance.............................. 270,618
58,200 Salveson Christian........................................ 272,347
38,600 Scottish Hydro-Electric................................... 266,765
33,000 Southern Electric PLC..................................... 242,901
47,100 Tate & Lyle PLC........................................... 350,215
9,600 Unilever PLC.............................................. 274,815
86,200 WPP Group PLC............................................. 352,413
-----------
6,219,624
-----------
HONG KONG--4.0%
38,000 Cheung Kong Holdings...................................... 375,228
50,000 China Resources Enterprises............................... 245,247
22,000 Dao Heng Bank Group....................................... 120,403
25,000 Henderson Land Development................................ 221,851
12,800 HSBC Holdings............................................. 384,960
22,000 Hutchison Whampoa......................................... 190,260
19,000 New World Development Co. ................................ 113,304
38,000 Shanghai Industrial Holdings.............................. 236,418
9,000 Sun Hung Kai Properties................................... 108,328
-----------
1,995,999
-----------
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
NEW ENGLAND ZENITH FUND
(MORGAN STANLEY INTERNATIONAL MAGNUM EQUITY SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- --------------------------
COMMON STOCKS--(CONTINUED)
- --------------------------
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
ITALY--1.4%
74,200 Sogefi................................................... $ 187,730
75,800 Stet Risp................................................ 263,137
131,000 Telecom Italia Spa....................................... 259,369
-----------
710,236
-----------
JAPAN--29.6%
28,000 Amada, Ltd. ............................................. 246,728
24,000 Asahi Tech Corp.......................................... 116,838
16,000 Canon, Inc. ............................................. 435,526
13,000 Dai Nippon Printing...................................... 293,753
31,000 Daicel Chemical.......................................... 119,813
19,000 Daifuku.................................................. 250,305
18,000 Daikin Industries........................................ 163,322
5,000 Familymart Co., Ltd. .................................... 245,158
12,000 Fuji Machine Manufacturing............................... 434,479
10,000 Fuji Photo Film, Ltd..................................... 402,199
33,000 Fujitsu, Ltd. ........................................... 457,774
18,000 Fujitec Co. ............................................. 213,575
46,000 Furukawa Electric Co. ................................... 292,567
10,000 Hitachi Credit Corp. .................................... 193,684
43,000 Hitachi, Ltd. ........................................... 480,196
15,000 Inabata & Co. ........................................... 102,207
35,000 Kaneka Corp.............................................. 219,246
11,000 Kurita Water Industries.................................. 292,706
5,000 Kyocera.................................................. 396,964
16,000 Kyudenko Corp............................................ 134,846
11,000 Lintec Corp.............................................. 200,576
22,000 Matsushita Electric Industries........................... 443,378
68,000 Mitsubishi Chemical Industries........................... 221,881
15,000 Mitsubishi Estate........................................ 217,240
44,000 Mitsubishi Heavy Industries.............................. 337,428
16,000 Mitsumi Electric......................................... 381,085
7,000 Murata Manufacturing..................................... 278,485
31,000 NEC Corp. ............................................... 432,734
10,000 Nifco, Inc. ............................................. 104,694
5,000 Nintendo, Ltd. .......................................... 418,775
39,000 Nissan Motors............................................ 302,487
13,000 Nissha Printing Co....................................... 149,712
38 NTT...................................................... 364,683
30,000 Obayashi Corp............................................ 200,750
33,000 Ricoh.................................................... 431,862
6,000 Rinnai Corp. ............................................ 128,773
5,000 Sangetsu................................................. 106,439
14,000 Sankyo Co. .............................................. 470,250
19,000 Sanwa Shutter Corp....................................... 172,396
20,000 Sekisui Chemical......................................... 202,408
19,000 Sekisui House............................................ 192,288
4,000 Shimamura, Ltd........................................... 142,384
5,500 Sony Corp. .............................................. 479,367
19,000 Sumitomo Marine and Fire................................. 155,819
20,000 Suzuki Motor............................................. 253,010
44,000 Taisei Corp., Ltd. ...................................... 203,839
5,000 TDK....................................................... 366,864
9,000 Tokyo Electyron, Ltd...................................... 430,291
64,000 Toshiba Corp. ............................................ 411,516
300 Toto...................................................... 3,691
12,000 Toyota Motor Corp. ....................................... 353,865
28,000 Tsubakimoto Chain......................................... 171,000
8,000 Yamaha Corp. ............................................. 146,571
11,000 Yamanouchi Pharmaceutical................................. 295,585
-----------
14,664,012
-----------
MALAYSIA--2.4%
85,000 Berjaya Group BHD......................................... 104,398
18,000 Berjaya Sports Toto....................................... 84,865
18,000 Commerce Asset Holdings................................... 47,425
3,000 Dialog Group.............................................. 43,383
6,000 Edaran Otomobil Nasional.................................. 51,109
13,000 Genting BHD............................................... 62,322
10,000 Jaya Tiasa Holdings....................................... 50,317
5,000 Lityan Holding BHD........................................ 60,915
13,000 Malayan Bank BHD.......................................... 136,490
19,000 Malaysian Resources Corp.................................. 52,318
18,000 Rashid Hussain BHD........................................ 114,105
22,000 Resorts World BHD......................................... 66,244
43,000 Sime Darby BHD............................................ 143,106
14,000 United Engineers BHD...................................... 100,951
-----------
1,117,948
-----------
NETHERLANDS--4.9%
14,300 ABN Amro Holdings NV...................................... 266,636
3,000 Akzo Nobel NV............................................. 411,127
9,034 ING Groep NV.............................................. 416,515
4,400 KLM Royal Dutch Air....................................... 135,616
3,600 Koninklijke KNP, BT....................................... 251,811
13,000 Koninklijke KNP........................................... 296,042
3,300 Koninklijke Van Ommeren................................... 128,106
6,700 Philips Electronics....................................... 479,912
-----------
2,385,765
-----------
NEW ZEALAND--0.3%
2,000 Fletcher Challenge Forests Division....................... 2,907
50,000 Fletcher Challenge Paper Shares........................... 121,246
-----------
124,153
-----------
NORWAY--0.6%
15,700 Saga Petroleum, Series B.................................. 274,191
-----------
SINGAPORE--2.0%
35,000 Data Craft Asia........................................... 111,300
7,000 Development Bank of Singapore............................. 88,130
36,000 Electronic Resources, Ltd. ............................... 56,655
14,500 Electronic Resources (Rights)............................. 8,215
49,000 Natsteel, Ltd............................................. 124,754
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
NEW ENGLAND ZENITH FUND
(MORGAN STANLEY INTERNATIONAL MAGNUM EQUITY SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- --------------------------
COMMON STOCKS--(CONTINUED)
- --------------------------
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
SINGAPORE--(CONTINUED)
8,400 Overseas Chinese Bank..................................... $ 86,955
40,000 Pacific Century Regional Development, Ltd................. 55,676
13,000 Parkway Holdings.......................................... 58,194
6,000 Singapore Press........................................... 120,865
77,000 Small Summit Holdings, Ltd. .............................. 58,166
61,000 Super Coffeemix Manufacturing............................. 50,773
8,000 United Overseas Bank...................................... 82,255
19,200 Want Want Holding......................................... 63,744
21,000 Wing Tai Holdings......................................... 60,516
-----------
1,026,198
-----------
SPAIN--2.7%
3,500 Banco Bilboa Vizcaya...................................... 284,323
21,200 Iberdrola S.A............................................. 267,608
16,600 Telefonica de Espana, S.A. ............................... 479,918
28,200 Uralita, S.A.............................................. 314,822
-----------
1,346,671
-----------
SWEDEN--3.6%
5,100 Esselte AB, Series B...................................... 119,992
16,600 Nordbanken AB............................................. 560,093
4,100 Pharmacia & Upjohn........................................ 138,336
533 Pricer AB Series B........................................ 18,328
5,400 SKF AB.................................................... 139,616
6,100 Skandia Forsakrings AB.................................... 224,743
9,500 Sparbanken Sverige AB..................................... 211,234
11,500 Spectra Physics AB........................................ 206,645
4,500 Svenska Handelsbkn........................................ 143,107
-----------
1,762,094
-----------
SWITZERLAND--8.0%
230 Ascom Holdings AG......................................... 321,527
110 Baloise Holdings.......................................... 262,192
160 Bobst AG.................................................. 271,781
930 Forbo Holdings............................................ 401,301
430 Holderbank Financiere Glarus.............................. 406,144
410 Nestle S.A................................................ 540,863
227 Novartis AG............................................... 362,889
1,180 Oerlikon Buehrle Holdings................................. 138,206
30 Schindler Holdings AG..................................... 38,527
172 Schindler Holdings Ptg. AG................................ 215,000
170 Sig Schweiz Industry Holdings AG.......................... 252,671
510 Sulzer AG................................................. 436,644
860 Valora Holdings AG........................................ 182,603
360 Zuerich Versicherung...................................... 143,260
-----------
3,973,608
-----------
UNITED STATES--0.3%
7,000 Coltec Industries, Inc. .................................. 136,500
-----------
Total Common Stocks
(Identified Cost $42,525,412)............................ 46,767,632
-----------
<CAPTION>
- ---------------------------
SHORT-TERM INVESTMENT--7.4%
- ---------------------------
FACE
AMOUNT
<C> <S> <C>
$3,640,000 Repurchase agreement with State Street Bank & Trust
Company dated 6/30/97 at 5% to be repurchased at
$3,640,506 on 7/01/97 collateralized by $3,520,000
U.S. Treasury Note 7.25% due 5/15/16 with a value
of $3,716,349...................................... 3,640,000
-----------
Total Short-Term Investment
(Identified Cost $3,640,000)....................... 3,640,000
-----------
Total Investments--102.0%
(Identified Cost $46,165,412)(b)................... 50,407,632
Other assets less liabilities(c).................... (966,577)
-----------
TOTAL NET ASSETS--100%.............................. $49,441,055
===========
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
NEW ENGLAND ZENITH FUND
(MORGAN STANLEY INTERNATIONAL MAGNUM EQUITY SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- ----------------------------------------------
FORWARD CONTRACTS OUTSTANDING AT JUNE 30, 1997
- ----------------------------------------------
<TABLE>
<CAPTION>
LOCAL UNREALIZED
DELIVERY CURRENCY AGGREGATE APPRECIATION/
DATE AMOUNT FACE VALUE TOTAL VALUE (DEPRECIATION)
<S> <C> <C> <C> <C> <C>
Belgian Franc
(sold)............. 08/29/97 7,411,950 $ 210,000 $ 206,826 $ 3,174
Belgian Franc
(bought)........... 08/29/97 5,315,550 150,000 148,328 (1,672)
Swiss Franc (sold).. 08/18/97 2,399,530 1,660,000 1,653,176 6,824
Swiss Franc
(bought)........... 08/18/97 1,033,125 725,000 711,780 (13,220)
Deutsche Mark
(sold)............. 08/29/97 2,663,544 1,560,000 1,533,782 26,218
Deutsche Mark
(bought)........... 08/29/97 1,029,960 600,000 593,095 (6,905)
French Franc (sold). 09/15/97 7,972,673 1,406,909 1,363,509 43,400
French Franc
(bought)........... 09/15/97 3,471,720 600,000 593,743 (6,257)
Japanese Yen (sold). 08/25/97 356,889,600 3,200,000 3,138,925 61,075
Japanese Yen (sold). 08/25/97 182,905,920 1,640,000 1,608,699 31,301
Japanese Yen (sold). 09/16/97 170,059,500 1,530,000 1,500,361 29,639
Netherland Guilder
(sold)............. 08/18/97 1,633,568 865,000 850,426 14,574
Netherland Guilder
(bought)........... 08/18/97 580,230 300,000 296,617 (3,383)
--------
$184,768
========
</TABLE>
(a) See Note 1A.
(b) Federal Tax Information:
At June 30,1997 the net unrealized appreciation on investments based on cost
of $46,165,412 for federal income tax purposes was as follows:
<TABLE>
<S> <C>
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost......... $4,666,843
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value......... (426,330)
----------
Net unrealized appreciation................................. $4,240,513
==========
</TABLE>
(c) Including deposits in foreign denominated currencies with a value of
$595,017 and a cost of $596,724.
(d) Rights attached.
(e) Non-income producing security.
See accompanying notes to financial statements.
11
<PAGE>
NEW ENGLAND ZENITH FUND
(MORGAN STANLEY INTERNATIONAL MAGNUM EQUITY SERIES)
- ---------------------------------
STATEMENT OF ASSETS & LIABILITIES
- ---------------------------------
JUNE 30, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments at value................................... $50,407,632
Cash................................................... 69
Foreign cash at value.................................. 595,017
Receivable for:
Fund shares sold...................................... 268,179
Securities sold....................................... 359,812
Open forward currency contracts--net.................. 184,768
Dividends and interest................................ 79,218
Foreign taxes......................................... 46,129
Unamortized organization............................... 4,691
-----------
51,945,515
LIABILITIES
Payable for:
Securities purchased.................................. $2,237,486
Fund shares redeemed.................................. 182,070
Withholding taxes..................................... 7,263
Accrued expenses:
Management fees....................................... 30,374
Deferred trustees' fees............................... 3,501
Other expenses........................................ 43,766
----------
2,504,460
-----------
$49,441,055
===========
NET ASSETS
Net Assets consist of:
Capital paid in....................................... $43,985,790
Undistributed net investment income................... 247,735
Accumulated net realized gains........................ 782,405
Unrealized appreciation on investments, forward
contracts and foreign currency....................... 4,425,125
-----------
NET ASSETS.............................................. $49,441,055
===========
Computation of offering price:
Net asset value and redemption price per share
($49,441,055 divided by 4,062,435 shares of beneficial
interest).............................................. $ 12.17
===========
Identified cost of investments.......................... $46,165,412
===========
<CAPTION>
- -----------------------
STATEMENT OF OPERATIONS
- -----------------------
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<S> <C> <C>
INVESTMENT INCOME
Dividends........................................... $ 503,316(a)
Interest............................................ 65,467
----------
568,783
EXPENSES
Management fees..................................... $ 184,136
Trustees' fees and expenses......................... 12,367
Custodian........................................... 83,905
Audit and tax services.............................. 8,626
Legal............................................... 9,340
Printing............................................ 9,404
Amortization of organization expenses............... 997
Miscellaneous....................................... 1,837
----------
Total expenses..................................... 310,612
Less expenses assumed by the investment adviser.... (44,638) 265,974
---------- ----------
NET INVESTMENT INCOME................................ 302,809
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FORWARD CURRENCY CONTRACTS AND FOREIGN CURRENCY
TRANSACTIONS
Realized gain (loss) on:
Investments--net................................... 1,019,883
Foreign currency transactions--net................. (258,768)
----------
Total realized gain on investments and foreign
currency transactions............................. 761,115
----------
Unrealized appreciation on:
Investments--net................................... 2,337,768
Foreign currency transactions--net................. 179,046
----------
Total unrealized appreciation on investments,
futures contracts and foreign currency
transactions...................................... 2,516,814
----------
Net gain on investment transactions.................. 3,277,929
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS........... $3,580,738
==========
</TABLE>
(a) Net of foreign taxes of: $71,139
See accompanying notes to financial statements.
12
<PAGE>
NEW ENGLAND ZENITH FUND
(MORGAN STANLEY INTERNATIONAL MAGNUM EQUITY SERIES)
- ----------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
- ----------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
<S> <C> <C>
FROM OPERATIONS
Net investment income............................... $ 191,479 $ 302,809
Net realized gain on investments and foreign
currency transactions.............................. 536,541 761,115
Unrealized appreciation on investments, and foreign
currency transactions.............................. 1,051,280 2,516,814
----------- -----------
INCREASE IN NET ASSETS FROM OPERATIONS.............. 1,779,300 3,580,738
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income............................... (50,813) 0
Net realized gain on investments.................... (542,008) 0
----------- -----------
(592,821) 0
----------- -----------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares........................ 30,118,413 14,958,063
Net asset value of shares issued in connection with
the reinvestment of:
Distributions from net investment income............ 50,813 0
Distributions from net realized gain................ 542,008 0
----------- -----------
30,711,234 14,958,063
Cost of shares redeemed............................. (8,773,034) (8,489,932)
----------- -----------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL SHARE
TRANSACTIONS....................................... 21,938,200 6,468,131
----------- -----------
TOTAL INCREASE IN NET ASSETS........................ 23,124,679 10,048,869
NET ASSETS
Beginning of the period............................. 16,267,507 39,392,186
----------- -----------
End of the period................................... $39,392,186 $49,441,055
=========== ===========
UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME
Beginning of the period............................. $ (6,800) $ (55,074)
=========== ===========
End of the period................................... $ (55,074) $ 247,735
=========== ===========
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares...................... 2,705,127 1,342,704
Issued in connection with the reinvestment of:
Distributions from net investment income............ 4,565 0
Distributions from net realized gain................ 48,698 0
----------- -----------
2,758,390 1,342,704
Redeemed............................................ (784,531) (770,845)
----------- -----------
Net change.......................................... 1,973,859 571,859
=========== ===========
<CAPTION>
- --------------------------------
FINANCIAL HIGHLIGHTS (UNAUDITED)
- --------------------------------
OCTOBER 31, 1994(A) SIX MONTHS
THROUGH YEAR YEAR ENDED
DECEMBER 31, ENDED ENDED JUNE 30,
1994 1995 1996 1997
------------------- ------- ------- ----------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period.................. $10.00 $ 10.23 $ 10.73 $ 11.29
------ ------- ------- -------
Income From Investment
Operations
Net Investment Income...... 0.03 0.09 0.06 0.08
Net Realized and Unrealized
Gain on Investments....... 0.23 0.53 0.68 0.80
------ ------- ------- -------
Total From Investment
Operations................ 0.26 0.62 0.74 0.88
------ ------- ------- -------
Less Distributions
Distributions From Net
Investment Income......... (0.02) (0.09) (0.02) 0.00
Distributions in Excess of
Net Investment Income..... 0.00 (0.03) 0.00 0.00
Distributions From Net
Realized Capital Gains.... 0.00 0.00 (0.16) 0.00
Distributions From Paid-in
Capital................... (0.01) 0.00 0.00 0.00
------ ------- ------- -------
Total Distributions........ (0.03) (0.12) (0.18) 0.00
------ ------- ------- -------
Net Asset Value, End of
Period..................... $10.23 $ 10.73 $ 11.29 $ 12.17
====== ======= ======= =======
TOTAL RETURN (%)............ 2.60(b) 6.03 6.67 7.79(b)
Ratio of Operating Expenses
to Average Net Assets (%).. 1.30(c) 1.30 1.30 1.30(c)
Ratio of Net Investment
Income to Average Net
Assets (%)................. 2.56(c) 1.29 0.67 1.45(c)
Portfolio Turnover Rate (%). 4(c) 89 64 192(c)
Average Commission Rate(d).. -- -- $0.0204 $0.0094
Net Assets, End of Period
(000)...................... $2,989 $16,268 $39,392 $49,441
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(c) 3.12 1.66 1.52(c)
</TABLE>
(a) Commencement of operations.
(b) Not computed on an annualized basis.
(c) 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.
13
<PAGE>
ALGER EQUITY GROWTH SERIES
PORTFOLIO MANAGER: DAVID ALGER
FRED ALGER MANAGEMENT, INC.
[PICTURE APPEARS HERE]
Q. HOW DID THE SERIES PERFORM DURING THE FIRST HALF OF 1997?
A. During the first quarter of 1997, the S&P 500 Index/18/ posted a modest
gain in excess of 2.5%. In comparison the Alger Equity Growth Series declined
slightly during this period. Specifically, underperformance can in part be at-
tributed to a difficult February, when unseasonably warm weather caused oil
stock holdings to decline and several technology holdings were negatively im-
pacted by the poor performance of the networking sector.
The second quarter was much more favorable. The stock market had an exceptional
quarter and the portfolio kept pace. Fueled by a 17.3% second quarter return,
the portfolio ended the first half of the year with a 16.67% return through
June 30, 1997.
Q. HOW DID YOU MANAGE THE SERIES?
A. While the first half of 1997 produced impressive gains across the board, the
discrepancy between the various indices' modest to poor showing in the first
quarter and the strong results of the second quarter proves that the road was
not a smooth one. Despite a strong January, the first quarter was extremely
challenging for growth managers as investors continued the trend toward blue-
chip type stocks with predictable earnings and away from speculative growth
stocks with more explosive earnings growth potential. This trend, which began
in the second quarter of 1996, was in response to overriding concern of invest-
ors that the economy was growing too quickly and that this would touch off a
series of preemptive strikes on inflation by the Federal Reserve Board. These
concerns caused the market to behave erratically, particularly in the growth
stock discipline.
As we entered the second quarter the multiples of quality growth stocks had
compressed to the point where these stocks were selling at a discount to the
broader market. In reviewing the outlook for growth stocks in our universe of
followed companies, we concluded that the drop in growth stock multiples did
not reflect deteriorating company fundamentals, but negative investor psycholo-
gy. As investor confidence started to rebuild, premiums for quality growth
stocks started to expand which, coupled with strong earnings, helped the Alger
Equity Growth Series to rebound significantly from an unimpressive first quar-
ter.
Although most sectors performed well during the second quarter, top to bottom,
communications and communications equipment stood out as exceptional with hold-
ings such as Tellabs (up 54.7%), Worldcom (up 45.5%), Cisco Systems (up 39.5%)
and Nokia (up 26.6%) leading the way. The Series' 6.8% stake across these two
sectors as of the end of the second quarter helped returns. At the present
time, the Series remains well diversified with pharmaceuticals, semiconductors
and retailing representing the most heavily weighted sectors.
Q. WHAT IS YOUR INVESTMENT OUTLOOK FOR THE MONTHS AHEAD?
A. Looking ahead, as concerns about interest rates wane, we believe that in-
vestors will continue their return to growth stocks with possibly favorable re-
sults in the second half of the year. We are encouraged by the reversal of neg-
ative investor psychology toward growth stocks and excited by the fact that
there is still a long way to go until these explosive stocks are fairly valued
relative to the broad market.
14
<PAGE>
A $10,000 Investment Compared to the S&P 500 Index/18/
Average Annual Return
<TABLE>
<CAPTION>
Alger Lipper Variable Growth
Equity Growth Fund Average/10/
<S> <C> <C>
6 mos.* 16.69% 13.57%
1 year 25.18% 23.67%
Since Inception 26.72% n/a
* not annualized
</TABLE>
[GRAPH APPEARS HERE ILLUSTRATING THE GROWTH OF A $10,000 INVESTMENT IN THE ALGER
EQUITY GROWTH FUND SERIES COMPARED TO THE GROWTH OF A $10,000 INVESTMENT IN THE
S&P 500 INDEX, THE PLOT POINTS OF WHICH ARE AS FOLLOWS:]
<TABLE>
<CAPTION>
Alger Equity
Growth Series S&P 500/18/
<S> <C> <C>
10/31/94 10,000 10,000
12/31/94 9,580 9,779
12/31/95 14,256 13,449
12/31/96 16,122 16,535
6/30/97 18,802 19,942
</TABLE>
[CHECK MARK APPEARS HERE] FUND FACTS
GOAL: Long-term capital appreciation.
START DATE: October 31, 1994
SIZE: $166 million as of June 30, 1997
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.
15
<PAGE>
NEW ENGLAND ZENITH FUND
(ALGER EQUITY GROWTH SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- ----------------------------------------
COMMON STOCKS--95.7% OF TOTAL NET ASSETS
- ----------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
AEROSPACE--7.0%
27,300 AlliedSignal, Inc........................................ $ 2,293,200
7,300 AMR Corp................................................. 675,250
60,900 Boeing Co................................................ 3,231,506
31,500 Gulfstream Aerospace Corp................................ 929,250
55,100 United Technologies Corp................................. 4,573,300
------------
11,702,506
------------
AGRICULTURE--0.9%
10,100 Pioneer Hi-Bred International............................ 808,000
21,000 IMC Global, Inc. ........................................ 735,000
------------
1,543,000
------------
APPAREL--1.1%
45,000 Tommy Hilfiger Corp.(c).................................. 1,808,437
------------
BANKS--3.6%
18,071 Banc One Corp. .......................................... 875,336
42,900 Citicorp................................................. 5,172,131
------------
6,047,467
------------
BIO TECHNOLOGY--0.3%
20,000 Biochem Pharmacy, Inc.(c)................................ 445,000
------------
CASINOS & RESORTS--2.1%
70,500 Carnival Corp. .......................................... 2,908,125
24,300 Mirage Resorts, Inc. .................................... 613,575
------------
3,521,700
------------
CHEMICALS--2.8%
54,200 E.I. duPont de Nemours................................... 3,407,825
27,000 Monsanto Co.............................................. 1,162,688
------------
4,570,513
------------
COMMUNICATIONS--3.2%
14,500 L.M. Ericsson Telephone Co., Class B (ADR)(d)............ 570,938
29,000 Nokia Corp. (ADR)(d)..................................... 2,138,750
80,600 Worldcom, Inc.(c)........................................ 2,579,200
------------
5,288,888
------------
COMMUNICATIONS EQUIPMENT--3.6%
62,200 Cisco Systems, Inc.(c)................................... 4,175,175
31,000 Tellabs, Inc.(c)......................................... 1,732,125
------------
5,907,300
------------
COMPUTER RELATED & BUSINESS EQUIPMENT--3.1%
35,800 Bay Networks, Inc........................................ 950,938
39,502 First Data Corp.......................................... 1,735,619
26,700 International Business Machines.......................... 2,408,006
------------
5,094,563
------------
COMPUTER SOFTWARE--5.6%
24,200 Microsoft Corp. ........................................ 3,058,275
62,400 Parametric Technology Corp. ............................ 2,655,900
72,100 Oracle Systems Corp..................................... 3,632,037
------------
9,346,212
------------
COMPUTER TECHNOLOGY--0.5%
22,400 Adaptec, Inc.(c)........................................ 778,400
------------
CONSUMER PRODUCTS--11.1%
25,700 ADT, Ltd................................................ 848,100
83,650 CUC International, Inc.(c).............................. 2,159,216
28,000 Colgate Palmolive Co.................................... 1,827,000
30,500 Corning Inc............................................. 1,696,562
45,000 Gillette Co. ........................................... 4,263,750
10,000 McKesson Corp........................................... 775,000
10,800 Newell Co. ............................................. 427,950
82,300 Sunbeam Corp. .......................................... 3,106,825
47,700 Tyco International, Ltd................................. 3,318,131
------------
18,422,534
------------
CONGLOMERATE--2.4%
62,000 General Electric Co. ................................... 4,053,250
------------
DEFENSE--1.0%
30,500 Sundstrand Corp. ....................................... 1,702,281
------------
ELECTRONICS--2.5%
30,000 Hewlett-Packard Co. .................................... 1,680,000
104,800 Westinghouse Electric................................... 2,423,500
------------
4,103,500
------------
ENERGY & ENERGY SERVICES--2.1%
19,000 Halliburton Co.......................................... 1,505,750
16,500 Schlumberger, Ltd....................................... 2,062,500
------------
3,568,250
------------
FINANCIAL SERVICES--6.1%
37,700 Charles Schwab Corp..................................... 1,533,919
35,000 Equifax, Inc. .......................................... 1,301,562
6,800 Household International................................. 798,575
39,300 Money Store, Inc........................................ 1,127,419
107,250 Morgan Stanley/Dean Witter.............................. 4,618,453
21,400 Paine Webber Group, Inc. ............................... 749,000
------------
10,128,928
------------
FOOD & BEVERAGE--1.0%
42,600 PepsiCo, Inc............................................ 1,600,163
------------
HEALTH CARE--8.9%
30,000 Becton, Dickinson....................................... 1,518,750
47,500 Eli Lilly & Co.......................................... 5,192,344
</TABLE>
See accompanying notes to financial statements.
16
<PAGE>
NEW ENGLAND ZENITH FUND
(ALGER EQUITY GROWTH SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- --------------------------
COMMON STOCKS--(CONTINUED)
- --------------------------
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
HEALTH CARE--(CONTINUED)
47,700 Merck & Co............................................... $ 4,936,950
11,400 Oxford Health Plans, Inc................................. 817,950
18,400 Warner-Lambert Co........................................ 2,286,200
------------
14,752,194
------------
INSURANCE--2.6%
22,200 American International Group............................. 3,316,125
20,000 MGIC Investment Corp..................................... 958,750
------------
4,274,875
------------
LEISURE & ENTERTAINMENT--0.8%
76,000 International Game Technology............................ 1,349,000
------------
MINING--1.0%
21,800 Diamond Offshore Drilling, Inc........................... 1,703,125
------------
MISCELLANEOUS--0.4%
19,800 Service Corp. International.............................. 650,925
------------
PHARMACEUTICALS--2.0%
10,200 Bristol-Myers Squibb Co. ................................ 826,200
13,800 Pfizer, Inc. ............................................ 1,649,100
16,800 Schering-Plough.......................................... 804,300
------------
3,279,600
------------
POLLUTION CONTROL--0.9%
40,100 USA Waste Services, Inc.(c).............................. 1,548,864
------------
RETAIL--8.6%
15,700 Cintas Corp.............................................. 1,079,375
42,700 Gucci Group N.V.(c)...................................... 2,748,812
72,000 Home Depot, Inc.......................................... 4,963,500
25,000 Rite Aid Corp............................................ 1,246,875
40,000 TJX Companies, Inc. ..................................... 1,055,000
95,000 Wal-Mart Stores, Inc. ................................... 3,212,188
------------
14,305,750
------------
SEMI-CONDUCTORS/CAPITAL
EQUIPMENT--10.5%
39,100 Altera Corp.(c).......................................... 1,974,550
23,700 Applied Materials........................................ 1,678,256
10,500 Intel Corp............................................... 1,489,031
65,300 Linear Technology Corp. ................................. 3,379,275
27,300 Maxim Integrated Products, Inc.(c)....................... 1,552,687
18,500 Motorola, Inc. .......................................... 1,406,000
47,300 Texas Instruments........................................ 3,976,156
38,600 Xilinx, Inc.(c).......................................... 1,893,812
------------
17,349,767
------------
Total Common Stocks
(Identified Cost $129,448,720).......................... 158,846,992
------------
<CAPTION>
- ----------------------------
SHORT-TERM INVESTMENTS--7.7%
- ----------------------------
FACE
AMOUNT VALUE (A)
<C> <S> <C>
$3,000,000 Merrill Lynch & Company, Inc., 5.560%, 7/02/97..... $ 2,999,537
4,000,000 OGE Energy Corp., 5.650%, 7/02/97.................. 3,996,233
5,753,225 Seven Seas U.S. Government Money Market Fund....... 5,753,225
------------
Total Short-Term Investments
(Identified Cost $12,748,995)..................... 12,748,995
------------
Total Investments--103.4%
(Identified Cost $142,197,715)(b)................. 171,595,987
Other assets less liabilities...................... (5,634,210)
------------
TOTAL NET ASSETS--100%............................. $165,961,777
============
</TABLE>
(a) See Note 1A.
(b) Federal Tax Information:
At June 30, 1997 the net unrealized appreciation on investments based on
cost of $142,197,715 for federal income tax purposes was as follows:
<TABLE>
<S> <C>
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost..................................... $ 29,820,686
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax
cost over value................................... (422,414)
------------
Net unrealized appreciation........................ $ 29,398,272
============
</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.
17
<PAGE>
NEW ENGLAND ZENITH FUND
(ALGER EQUITY GROWTH SERIES)
- ---------------------------------
STATEMENT OF ASSETS & LIABILITIES
- ---------------------------------
JUNE 30, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments at value................................. $171,595,987
Receivable for:
Fund shares sold.................................... 605,484
Securities sold..................................... 3,866,477
Dividends and interest.............................. 82,711
Unamortized organization............................. 4,691
------------
176,155,350
LIABILITIES
Payable for:
Securities purchased................................ $9,898,790
Fund shares redeemed................................ 151,628
Accrued expenses:
Management fees..................................... 98,885
Deferred trustees' fees............................. 1,989
Other expenses...................................... 42,281
----------
10,193,573
------------
$165,961,777
============
NET ASSETS
Net Assets consist of:
Capital paid in..................................... $129,654,291
Undistributed net investment income................. 111,815
Accumulated net realized gains...................... 6,797,399
Unrealized appreciation on investments and foreign
currency........................................... 29,398,272
------------
NET ASSETS............................................ $165,961,777
============
Computation of offering price:
Net asset value and redemption price per share
($165,961,777 divided by 9,130,834 shares of
beneficial interest)................................. $ 18.18
============
Identified cost of investments........................ $142,197,715
============
<CAPTION>
- -----------------------
STATEMENT OF OPERATIONS
- -----------------------
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<S> <C> <C>
INVESTMENT INCOME
Dividends............................................. $ 518,926(a)
Interest.............................................. 201,942
-----------
720,868
EXPENSES
Management fees....................................... $517,190
Trustees' fees and expenses........................... 14,231
Custodian............................................. 31,944
Audit and tax services................................ 6,211
Legal................................................. 9,340
Printing.............................................. 29,592
Amortization of organization expenses................. 997
Miscellaneous......................................... 1,820
--------
Total expenses...................................... 611,325
-----------
NET INVESTMENT INCOME.................................. 109,543
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Realized gain on:
Investments--net..................................... 6,678,156
Unrealized appreciation on:
Investments--net..................................... 15,538,223
-----------
Net gain on investment transactions.................... 22,216,379
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS............. $22,325,922
===========
</TABLE>
(a)Net of foreign taxes of: $4,090
See accompanying notes to financial statements.
18
<PAGE>
NEW ENGLAND ZENITH FUND
(ALGER EQUITY GROWTH SERIES)
- ----------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
- ----------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ ------------
<S> <C> <C>
FROM OPERATIONS
Net investment income............................. $ 204,002 $ 109,543
Net realized gain on investments.................. 965,295 6,678,156
Unrealized appreciation on investments............ 9,359,159 15,538,223
------------ ------------
INCREASE IN NET ASSETS FROM OPERATIONS............ 10,528,456 22,325,922
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income............................. (206,060) 0
------------ ------------
(206,060) 0
------------ ------------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares...................... 92,225,724 41,410,347
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income.......... 206,060 0
------------ ------------
92,431,784 41,410,347
Cost of shares redeemed........................... (28,685,075) (18,229,999)
------------ ------------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL SHARE
TRANSACTIONS..................................... 63,746,709 23,180,348
------------ ------------
TOTAL INCREASE IN NET ASSETS...................... 74,069,105 45,506,270
NET ASSETS
Beginning of the period........................... 46,386,402 120,455,507
------------ ------------
End of the period................................. $120,455,507 $165,961,777
============ ============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the period........................... $ 1,354 $ 2,272
============ ============
End of the period................................. $ 2,272 $ 111,815
============ ============
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares.................... 6,311,990 2,502,499
Issued in connection with the reinvestment of:
Distributions from net investment income.......... 13,117 0
------------ ------------
6,325,107 2,502,499
Redeemed.......................................... (1,954,136) (1,104,832)
------------ ------------
Net change........................................ 4,370,971 1,397,667
============ ============
<CAPTION>
- --------------------------------
FINANCIAL HIGHLIGHTS (UNAUDITED)
- --------------------------------
OCTOBER 31, 1994(A) SIX MONTHS
THROUGH YEAR YEAR ENDED
DECEMBER 31, ENDED ENDED JUNE 30,
1994 1995 1996 1997
------------------- ------- -------- ----------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period................. $10.00 $ 9.56 $ 13.80 $ 15.58
------ ------- -------- --------
Income From Investment
Operations
Net Investment Income..... 0.02 0.01 0.04 0.01
Net Realized and
Unrealized Gain (Loss) on
Investments.............. (0.44) 4.65 1.78 2.59
------ ------- -------- --------
Total From Investment
Operations............... (0.42) 4.66 1.82 2.60
------ ------- -------- --------
Less Distributions
Distributions From Net
Investment Income........ (0.02) (0.01) (0.04) 0.00
Distributions From Net
Realized Capital Gains... 0.00 (0.41) 0.00 0.00
------ ------- -------- --------
Total Distributions....... (0.02) (0.42) (0.04) 0.00
------ ------- -------- --------
Net Asset Value, End of
Period.................... $ 9.56 $ 13.80 $ 15.58 $ 18.18
====== ======= ======== ========
TOTAL RETURN (%)........... (4.20)(b) 48.80 13.17 16.69(b)
Ratio of Operating Expenses
to Average Net Assets (%). 0.85 (c) 0.85 0.90 0.89(c)
Ratio of Net Investment
Income to Average Net
Assets (%)................ 1.07 (c) 0.14 0.24 0.16(c)
Portfolio Turnover Rate
(%)....................... 32 (c) 107 78 111(c)
Average Commission Rate(d). -- -- $ 0.0716 $ 0.0722
Net Assets, End of Period
(000)..................... $1,917 $46,386 $120,456 $165,962
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 (c) 2.45 0.90 --
</TABLE>
(a) Commencement of operations.
(b) Not computed on an annualized basis.
(c) 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.
19
<PAGE>
CAPITAL GROWTH SERIES
PORTFOLIO MANAGER: G. KENNETH HEEBNER
CAPITAL GROWTH MANAGEMENT LIMITED PARTNERSHIP
[PICTURE APPEARS HERE]
Q. HOW DID THE CAPITAL GROWTH SERIES PERFORM FOR THE FIRST SIX MONTHS OF 1997?
A. The first half of the year provided an optimal investment scenario for the
Series: a strong economy, low inflation and a stable interest rate environ-
ment. As of June 30, 1997 the Series had posted a return of 18.71%. This com-
pares favorably to the Lipper Variable Growth Fund Average return of 13.57%
over the first six months of the year.
Q. HOW DID YOU MANAGE THE SERIES DURING THE FIRST HALF OF THE YEAR?
A. The success of the Series over the years is due in large part to a contin-
ued commitment to quality, long term investments in well-established companies
that are reasonably priced. During the first half of the year, we continued to
invest in these types of companies--with modest valuations (the value or worth
placed on an asset) and strong prospects for growth.
The industry concentration focused mainly in the areas of insurance, computers
and pharmaceuticals. Notable among the strong performers were American Inter-
national Group, Allstate and Eli Lilly. We remained fully invested, concen-
trating in companies which provided significant opportunities for apprecia-
tion.
As the market reached new highs, we kept watch on price-to-earnings ratios,
which helped indicate how much we pay for the company's earnings power. Most
stocks in the portfolio featured lower price-to-earnings ratios than the mar-
ket--giving us room to grow even with market peaks and cushioning us somewhat
from declines. Consequently, the Capital Growth Series is in a good position
to take full advantage of the overall market's continued strength.
Q. WHAT IS YOUR ECONOMIC OUTLOOK FOR THE SECOND HALF OF 1997?
A. For the second half of the year, we anticipate moderate economic growth
with relatively low inflation. And, after one-quarter percent interest in-
crease in February, the Federal Reserve seems content to maintain stable in-
terest rate environment. We feel that these factors should provide the basis
for a favorable investment climate.
Accordingly, we will continue to invest in growth companies at reasonable
prices with long term investment horizon in mind. We further believe that by
carefully selecting the companies we invest in, and by maintaining a long view
on performance, this approach will moderate any periodic bursts of market vol-
atility along the way.
A $10,000 Investment Compared to the S&P 500 Index/18/
Average Annual Return
<TABLE>
<CAPTION>
Capital Lipper Variable Growth
Growth Series Fund Average/10/
<S> <C> <C>
6 mos.* 18.71% 13.57%
1 year 36.48% 26.67%
5 years 16.21% 17.97%
10 years 12.42% 13.35%
* not annualized
</TABLE>
[GRAPH APPEARS HERE ILLUSTRATING THE GROWTH OF A $10,000 INVESTMENT IN THE
CAPITAL GROWTH SERIES COMPARED TO THE GROWTH OF A $10,000 INVESTMENT IN THE S&P
500 INDEX, THE PLOT POINTS OF WHICH ARE AS FOLLOWS:]
<TABLE>
<CAPTION>
Capital Growth Series S&P 500/18/
<S> <C> <C>
6/30/87 10,000 10,000
12/31/87 9,130 8,259
12/31/88 8,328 9,631
12/31/89 10,889 12,682
12/31/90 10,509 12,287
12/31/91 16,184 16,032
12/31/92 15,205 17,254
12/31/93 17,482 18,989
12/31/94 16,246 19,238
12/31/95 22,424 26,459
12/31/96 27,150 32,530
6/30/97 32,229 39,232
</TABLE>
[CHECK MARK APPEARS HERE] FUND FACTS
GOAL: Long-term growth of capital.
START DATE: August 26, 1983
SIZE: $1.4 billion as of June 30, 1997
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.
20
<PAGE>
NEW ENGLAND ZENITH FUND
(CAPITAL GROWTH SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- ----------------------------------------
COMMON STOCKS--99.9% OF TOTAL NET ASSETS
- ----------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
AUTO & RELATED--3.1%
275,000 Volkswagen AG (ADR)(d).............................. $ 41,800,000
--------------
BEVERAGES & TOBACCO--9.3%
1,503,000 Anheuser-Busch Companies, Inc....................... 63,032,063
1,445,000 Philip Morris Companies, Inc........................ 64,121,875
--------------
127,153,938
--------------
COMPUTER SOFTWARE &
SERVICES--18.6%
650,000 Compaq Computer Corp.(c)............................ 64,512,500
745,000 Computer Sciences Corp.(c).......................... 53,733,125
565,000 Dell Computer Corp.(c).............................. 66,352,187
538,000 Microsoft Corp.(c).................................. 67,989,750
--------------
252,587,562
--------------
DRUGS--14.1%
715,000 Eli Lilly & Co...................................... 78,158,437
245,000 Pfizer, Inc......................................... 29,277,500
681,000 Warner Lambert Co. ................................. 84,614,250
--------------
192,050,187
--------------
FINANCIAL SERVICES--0.0%
10,000 Hanover Compressor Co.(c)........................... 195,000
--------------
FOOD--RETAILERS/
WHOLESALERS--7.1%
1,188,000 Hershey Foods Corp.................................. 65,711,250
450,000 Nestle S.A. (ADR)(d)................................ 29,925,000
--------------
95,636,250
--------------
HOME PRODUCTS & COSMETIC--3.7%
385,000 Clorox Co........................................... 50,820,000
--------------
INSURANCE--17.9%
665,000 Aetna. Inc.......................................... 68,079,375
1,165,000 Allstate Corp....................................... 85,045,000
603,850 American International Group, Inc. ................. 90,200,094
--------------
243,324,469
--------------
MACHINERY--10.0%
630,000 Caterpillar Inc. ................................... 67,646,250
1,250,000 Deere & Co.......................................... 68,593,750
--------------
136,240,000
--------------
OFFICE EQUIPMENT & SUPPLY--4.8%
730,000 International Business Machines..................... 65,836,875
--------------
OIL--SERVICE--6.2%
540,000 Halliburton Co. .................................... 42,795,000
336,000 Schlumberger, Ltd. ................................. 42,000,000
--------------
84,795,000
--------------
TELEPHONE--5.1%
455,000 Telebras (ADR)(d)................................... 69,046,250
--------------
Total Common Stocks
(Identified Cost $1,101,818,488)................... 1,359,485,531
--------------
<CAPTION>
- ---------------------------
SHORT-TERM INVESTMENT--0.4%
- ---------------------------
FACE
AMOUNT
<C> <S> <C>
$5,455,000 Chevron Oil Finance Co., 5.800%, 07/01/97.......... 5,455,000
--------------
Total Short-Term Investment
(Identified Cost $5,455,000)...................... 5,455,000
--------------
Total Investments--100.3%
(Identified Cost $1,107,273,488)(b)............... 1,364,940,531
Other assets less liabilities...................... (3,594,507)
--------------
TOTAL NET ASSETS--100%............................. $1,361,346,024
==============
</TABLE>
(a) See Note 1A.
(b) Federal Tax Information:
At June 30, 1997 the net unrealized appreciation on investments based on
cost of $1,107,273,488 for federal income tax purposes was as follows:
<TABLE>
<S> <C>
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost................................... $ 263,691,039
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax
cost over value................................. (6,023,996)
--------------
Net unrealized appreciation ..................... $ 257,667,043
==============
</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.
21
<PAGE>
NEW ENGLAND ZENITH FUND
(CAPITAL GROWTH SERIES)
- ---------------------------------
STATEMENT OF ASSETS & LIABILITIES
- ---------------------------------
JUNE 30, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments at value............................... $1,364,940,531
Cash............................................... 1,629
Receivable for:
Fund shares sold.................................. 1,307,520
Securities sold................................... 5,679,403
Dividends and interest............................ 1,434,374
Miscellaneous..................................... 41,566
--------------
1,373,405,023
LIABILITIES
Payable for:
Securities purchased.............................. $10,398,264
Fund shares redeemed.............................. 657,838
Withholding taxes................................. 36,017
Miscellaneous..................................... 23,225
Accrued expenses:
Management fees................................... 688,032
Deferred trustees' fees........................... 68,379
Other expenses.................................... 187,244
-----------
12,058,999
--------------
$1,361,346,024
==============
NET ASSETS
Net Assets consist of:
Capital paid in................................... $ 868,197,722
Undistributed net investment income............... 5,287,086
Accumulated net realized gains.................... 230,194,173
Unrealized appreciation on investments............ 257,667,043
--------------
NET ASSETS.......................................... $1,361,346,024
==============
Computation of offering price:
Net asset value and redemption price per share
($1,361,346,024 divided by 2,685,203 shares of
beneficial interest)............................... $ 506.98
==============
Identified cost of investments...................... $1,107,273,488
==============
<CAPTION>
- -----------------------
STATEMENT OF OPERATIONS
- -----------------------
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<S> <C> <C>
INVESTMENT INCOME
Dividends.......................................... $ 9,213,567(a)
Interest........................................... 234,522
------------
9,448,089
EXPENSES
Management fees.................................... $3,872,900
Trustees' fees and expenses........................ 32,692
Custodian.......................................... 84,287
Audit and tax services............................. 4,831
Legal.............................................. 9,340
Printing........................................... 187,746
Miscellaneous...................................... 5,601
----------
Total expenses..................................... 4,197,397
------------
NET INVESTMENT INCOME............................... 5,250,692
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Realized gain on:
Investments--net.................................. 198,852,747
Unrealized appreciation on:
Investments--net.................................. 9,593,639
------------
Net gain on investment transactions................. 208,446,386
------------
NET INCREASE IN NET ASSETS FROM OPERATIONS.......... $213,697,078
============
</TABLE>
(a)Net of foreign taxes of: $119,267
See accompanying notes to financial statements.
22
<PAGE>
NEW ENGLAND ZENITH FUND
(CAPITAL GROWTH SERIES)
- ----------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
- ----------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
-------------- --------------
<S> <C> <C>
FROM OPERATIONS
Net investment income......................... $ 7,929,365 $ 5,250,692
Net realized gain on investments.............. 68,632,360 198,852,747
Unrealized appreciation on investments........ 121,815,567 9,593,639
-------------- --------------
INCREASE IN NET ASSETS FROM OPERATIONS........ 198,377,292 213,697,078
-------------- --------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income......................... (7,921,505) 0
Net realized gain on investments.............. (57,069,463) 0
-------------- --------------
(64,990,968) 0
-------------- --------------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares.................. 236,084,630 138,479,960
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income...... 7,921,505 0
Distributions from net realized gain.......... 57,069,463 0
-------------- --------------
301,075,598 138,479,960
Cost of shares redeemed....................... (213,245,567) (133,491,189)
-------------- --------------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL
SHARE TRANSACTIONS........................... 87,830,031 4,988,771
-------------- --------------
TOTAL INCREASE IN NET ASSETS.................. 221,216,355 218,685,849
NET ASSETS
Beginning of the period....................... 921,443,820 1,142,660,175
-------------- --------------
End of the period............................. $1,142,660,175 $1,361,346,024
============== ==============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the period....................... $ 28,556 $ 36,394
============== ==============
End of the period............................. $ 36,394 $ 5,287,086
============== ==============
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares................ 647,661 297,114
Issued in connection with the reinvestment of:
Distributions from net investment income...... 18,320 0
Distributions from net realized gain.......... 83,188 0
-------------- --------------
749,169 297,114
Redeemed...................................... (533,320) (287,416)
-------------- --------------
Net change.................................... 215,849 9,698
============== ==============
<CAPTION>
- --------------------------------
FINANCIAL HIGHLIGHTS (UNAUDITED)
- --------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
-------- -------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 347.36 $ 322.23 $ 351.63 $ 312.30 $ 374.62 $ 427.08
-------- -------- -------- -------- ---------- ----------
Income From Investment
Operations
Net Investment Income.. 4.04 2.12 5.28 3.47 3.08 1.96
Net Realized and
Unrealized Gain (Loss)
on Investments........ (25.10) 46.21 (30.54) 114.91 74.80 77.94
-------- -------- -------- -------- ---------- ----------
Total From Investment
Operations............ (21.06) 48.33 (25.26) 118.38 77.88 79.90
-------- -------- -------- -------- ---------- ----------
Less Distributions
Distributions From Net
Investment Income..... (4.07) (2.18) (5.15) (3.48) (3.08) 0.00
Distributions From Net
Realized Capital
Gains................. 0.00 (16.75) (8.92) (52.58) (22.34) 0.00
-------- -------- -------- -------- ---------- ----------
Total Distributions.... (4.07) (18.93) (14.07) (56.06) (25.42) 0.00
-------- -------- -------- -------- ---------- ----------
Net Asset Value, End of
Period................. $ 322.23 $ 351.63 $ 312.30 $ 374.62 $ 427.08 $ 506.98
======== ======== ======== ======== ========== ==========
TOTAL RETURN (%)........ (6.05) 14.97 (7.07) 38.03 21.08 18.71(a)
Ratio of Operating
Expenses to Average Net
Assets (%)............. 0.70 0.68 0.67 0.71 0.69 0.68(b)
Ratio of Net Investment
Income to Average Net
Assets (%)............. 1.53 0.67 1.61 0.92 0.79 0.78(b)
Portfolio Turnover Rate
(%).................... 207 169 140 242 207 236(b)
Average Commission
Rate(c)................ -- -- -- -- $ 0.0669 $ 0.0693
Net Assets, End of
Period (000)........... $472,017 $644,384 $667,127 $921,444 $1,142,660 $1,361,346
</TABLE>
(a) Not computed on an annualized basis.
(b) Computed on an annualized basis.
(c) 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.
23
<PAGE>
LOOMIS SAYLES AVANTI GROWTH SERIES
PORTFOLIO MANAGERS: SCOTT F. PAPE AND BRUCE A. EBEL
LOOMIS, SAYLES & COMPANY, L.P.
[PICTURE APPEARS HERE]
Q. PLEASE DISCUSS THE SERIES' PERFORMANCE IN LIGHT OF THE CURRENT INVESTMENT
ENVIRONMENT.
A. Loomis Sayles Avanti Growth Series produced a total return of 11.01% for
the six month period ended June 30, 1997. While the Series performance lagged
the 20.59% return on the Standard & Poor's 500 Stock Index/18/, results were
more in line with the average growth Series' return of 13.57%, as measured by
the Lipper Variable Growth Fund Average.
Our position in smaller, emerging growth stocks dampened results relative to
large company stocks. As in 1996, the market favored a few large-capitaliza-
tion stocks for their liquidity and perceived lower risk. Mid- and smaller-
capitalization companies were sold off or ignored, often despite strong funda-
mentals. In May and June, these emerging sectors began to recover, improving
performance.
Q. WHAT WERE THE SERIES' KEY PORTFOLIO SECTORS AND STRATEGIES?
A. We emphasized consumer staples, including household products and food com-
panies with strong international recognition. We also liked technology, a sec-
tor whose customers reaped the benefits of declining costs. In business serv-
ices, another group we favored, credit-card processors, insurers and others
continued to prosper as a basic raw material--computing power--became less
costly. Larger holdings that did well include Microsoft, Coca Cola, Gillette
and American International Group.
Meanwhile, we minimized holdings in utilities, where we see little growth
ahead, and in energy, where current growth rates appeared unsustainable.
We committed more than 30% of the Series to emerging growth companies, a sec-
tor whose valuations now appear more attractive than they have in years. Com-
pared to larger companies, these firms rely less on cost cuts and restructur-
ing to boost earnings, focusing instead on product innovation and niche mar-
kets. Some better-known holdings are Parametric Technologies, CUC Interna-
tional and Thermo Electron.
Q. WHAT IS YOUR MARKET OUTLOOK?
A. Factors supporting current price levels should persist: low inflation and
moderate growth, stable interest rates, record earnings, and strong dollar
flows into financial assets.
Appreciation may slow for those few corporate giants that have accounted for
much of the market's rise. We believe investor interest will broaden, to en-
compass smaller companies whose valuations appear reasonable. Finally, we re-
main committed to our basic strategy of owning "America's premier companies"--
industry leaders with outstanding growth potential.
A $10,000 Investment Compared to the S&P 500 Index
Average Annual Return
<TABLE>
<CAPTION>
Avanti Lipper Variable Growth
Growth Series Fund Average/10/
<S> <C> <C>
6 mos.* 11.01% 13.57%
1 year 17.76% 23.67%
Since Inception 17.34% n/a
* not annualized
</TABLE>
[GRAPH APPEARS HERE ILLUSTRATING THE GROWTH OF A $10,000 INVESTMENT IN THE
LOOMIS SAYLES AVANTI GROWTH SERIES COMPARED TO THE SAME INVESTMENT IN THE S&P
500 INDEX, THE PLOT POINTS OF WHICH ARE AS FOLLOWS:]
<TABLE>
<CAPTION>
Avanti Growth Series S&P 500/18/
<S> <C> <C>
Inception 4/30/93 10,000 10,000
12/31/93 11,474 10,807
12/31/94 11,443 10,949
12/31/95 14,916 15,058
12/31/96 17,538 18,513
6/30/97 19,469 22,327
</TABLE>
[CHECK MARK APPEARS HERE] FUND FACTS
GOAL: Long-term growth of capital.
START DATE: April 30, 1993
SIZE: $104 million as of June 30, 1997
MANAGERS: Scott F. Pape has co-managed the Series since 1993; Bruce Ebel began
co-managing the Series in June 1996. They also both 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 JUNE 30, 1997 (UNAUDITED)
- ----------------------------------
COMMON STOCKS--96.7% OF NET ASSETS
- ----------------------------------
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
AEROSPACE--1.5%
30,000 Boeing Co................................................ $ 1,591,875
------------
AIRLINES--1.1%
43,400 Southwest Airlines Co.................................... 1,122,975
------------
APPAREL & TEXTILES--0.5%
9,600 NIKE, Inc., Class B...................................... 560,400
------------
BANKS--2.0%
3,900 Chase Manhattan Corp., New............................... 378,544
19,800 First Bank Systems, Inc. ................................ 1,690,425
------------
2,068,969
------------
BEVERAGES--1.2%
19,200 Coca-Cola Co. ........................................... 1,296,000
------------
BUSINESS SERVICES--12.4%
40,000 ABR Information Services, Inc.(c)........................ 1,160,000
33,700 Automatic Data Processing................................ 1,583,900
48,000 Checkfree Corp.(c)....................................... 846,000
28,200 Cintas Corp.............................................. 1,938,750
26,400 Danka Business Systems................................... 1,079,100
46,200 First Data Corp.......................................... 2,029,913
47,250 Fiserv, Inc.(c).......................................... 2,108,531
35,850 Paychex, Inc............................................. 1,362,300
4,900 Stewart Enterprises, Inc................................. 205,800
21,750 Sykes Enterprises, Inc.(c)............................... 565,500
------------
12,879,794
------------
CHEMICALS--1.8%
43,300 Monsanto Co.............................................. 1,864,606
------------
COMPUTER SOFTWARE & SERVICES--7.2%
15,000 Aurum Software, Inc...................................... 360,000
10,400 Computer Associates International, Inc................... 579,150
24,200 HBO & Co................................................. 1,666,775
25,000 HNC Software, Inc.(c).................................... 953,125
17,700 Microsoft Corp.(c)....................................... 2,236,838
31,000 Oracle Systems Corp.(c).................................. 1,561,625
------------
7,357,513
------------
CONGLOMERATES--1.2%
36,600 Thermo Electron Corp.(c)................................. 1,244,400
------------
CONSTRUCTION MATERIALS--0.6%
13,000 Fastenal Co. ............................................ 637,000
------------
ELECTRICAL EQUIPMENT--2.2%
34,800 General Electric Co...................................... 2,275,050
------------
ELECTRONIC COMPONENTS--8.2%
11,500 Altera Corp. ............................................ 580,750
27,600 Andrew Corp. ............................................ 776,250
16,000 Cymer, Inc............................................... 780,000
12,300 Intel Corp............................................... 1,744,294
30,800 LSI Logic Corp.(c)....................................... 985,600
5,000 Molex, Inc. ............................................. 182,500
51,225 Molex, Inc. Class A...................................... 1,786,472
22,200 Solectron Corp.(c)....................................... 1,554,000
2,500 Texas Instruments, Inc. ................................. 210,156
------------
8,600,022
------------
FINANCIAL SERVICES--2.7%
20,700 Charles Schwab Corp...................................... 842,231
40,400 MGIC Investment Corp..................................... 1,936,675
------------
2,778,906
------------
FOODS--0.2%
4,300 Hershey Foods Corp....................................... 237,844
------------
GAS & PIPELINE UTILITIES--0.4%
10,900 Enron Corp............................................... 444,856
------------
HEALTH CARE--MEDICAL TECHNOLOGY--2.5%
14,300 Boston Scientific Corp.(c)............................... 878,556
36,300 Indexx Laboratories, Inc.(c)............................. 451,481
16,100 Medtronic, Inc........................................... 1,304,100
------------
2,634,137
------------
HEALTH CARE--DRUGS--8.2%
17,000 Abbott Laboratories...................................... 1,134,750
29,300 Amgen, Inc.(c)........................................... 1,703,063
24,800 Biogen, Inc.(c).......................................... 840,100
9,200 Eli Lilly & Co........................................... 1,005,675
18,000 Johnson & Johnson........................................ 1,158,750
21,600 Merck & Co. ............................................. 2,235,600
107,000 Oncor, Inc.(c)........................................... 421,313
23,000 Somatogen, Inc.(c)....................................... 106,375
------------
8,605,626
------------
HEALTH CARE--SERVICES--3.4%
24,700 Columbia/HCA Healthcare Corp............................. 971,019
70,700 Healthsouth Corp.(c)..................................... 1,763,081
24,250 Phycor, Inc.(c).......................................... 835,109
------------
3,569,209
------------
HOTELS & RESTAURANTS--4.0%
5,900 Boston Chicken, Inc.(c).................................. 82,600
9,100 Circus Circus Enterprises, Inc.(c)....................... 224,088
10,000 Einstein Noah Bagel Corp.(c)............................. 119,375
30,500 Lone Star Steakhouse Saloon(c)........................... 793,000
15,900 Primadonna Resorts, Inc.(c).............................. 307,069
67,000 Starbucks Corp.(c)....................................... 2,608,813
------------
4,134,945
------------
</TABLE>
See accompanying notes to financial statements.
25
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES AVANTI GROWTH SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- --------------------------
COMMON STOCKS--(CONTINUED)
- --------------------------
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
HOUSEHOLD PRODUCTS--4.3%
10,000 Corning, Inc. ........................................... $ 556,250
25,868 Gillette Co.............................................. 2,450,993
8,000 Kimberly-Clark Corp...................................... 398,000
27,500 Newell Co................................................ 1,089,688
------------
4,494,931
------------
INSURANCE--2.0%
12,300 American International Group, Inc.(c).................... 1,837,313
3,600 Travelers Group, Inc..................................... 227,025
------------
2,064,338
------------
LEISURE TIME--0.6%
8,800 Eastman Kodak Co......................................... 675,400
------------
MACHINERY--1.5%
30,400 Illinois Tool Works, Inc................................. 1,518,100
------------
MEDIA & ENTERTAINMENT--0.9%
12,100 Walt Disney Co. ......................................... 971,025
------------
MEDICAL PRODUCTS--0.5%
37,300 Cardiothoracic Systems, Inc.............................. 522,200
------------
MISCELLANEOUS--1.2%
2,700 Pioneer Hi Bred International, Inc. ..................... 216,000
23,000 Sun Guard Data Systems................................... 1,069,500
------------
1,285,500
------------
OFFICE EQUIPMENT & SUPPLIES--6.4%
40,100 Cascade Communications Corp.(c).......................... 1,107,763
23,900 Cisco Systems, Inc.(c)................................... 1,604,288
14,400 Hewlett-Packard Co. ..................................... 806,400
48,500 Parametric Technology Corp.(c)........................... 2,064,281
23,625 3Com Corp................................................ 1,063,125
------------
6,645,857
------------
OIL--INDEPENDENT PRODUCERS--1.6%
27,700 Anadarko Petroleum Corp.................................. 1,662,000
------------
OIL--MAJOR INTEGRATED--0.3%
3,600 Amoco Corp............................................... 312,975
------------
OIL SERVICES--2.0%
13,700 Baker Hughes, Inc........................................ 530,019
15,900 Rowan Companies(c)....................................... 448,181
9,200 Schlumberger, Ltd. ...................................... 1,150,000
------------
2,128,200
------------
PAPER & CONTAINERS--0.3%
6,800 Crown Cork & Seal, Inc. ................................. 363,375
------------
PHARMACEUTICALS--1.0%
6,200 Pfizer, Inc.............................................. 740,900
2,200 Warner Lambert Co........................................ 273,350
------------
1,014,250
------------
RETAIL--0.4%
13,600 Wal-Mart Stores, Inc. ................................... 459,850
------------
RETAIL SPECIALTY--5.2%
88,525 CUC International, Inc. ................................. 2,285,052
22,500 Home Depot, Inc.......................................... 1,551,094
135,000 Petsmart, Inc.(c)........................................ 1,552,500
------------
5,388,646
------------
SOFTWARE--1.3%
6,600 Electronic Arts.......................................... 221,925
17,500 McAfee Associates, Inc................................... 1,104,688
------------
1,326,613
------------
TELECOMMUNICATION--4.3%
5,700 MCI Communications....................................... 218,203
10,700 Paging Network, Inc.(c).................................. 93,953
40,800 PairGain Technologies, Inc.(c)........................... 632,400
23,900 QUALCOMM, Inc.(c)........................................ 1,215,913
33,700 Tellabs, Inc.(c)......................................... 1,882,988
13,200 Worldcom, Inc.(c)........................................ 422,400
------------
4,465,857
------------
TOBACCO--1.6%
38,100 Philip Morris Companies, Inc............................. 1,690,688
------------
Total Common Stocks
(Identified Cost $81,271,550)........................... 100,893,932
------------
<CAPTION>
- ---------------------------
SHORT TERM INVESTMENT--3.4%
- ---------------------------
FACE
AMOUNT
<C> <S> <C>
$3,511,911 Associates Corp. North America
6.10% 7/01/97..................................... 3,511,911
------------
Total Short-Term Investment
(Identified Cost $3,511,911)...................... 3,511,911
------------
Total Investments--100.1%
(Identified Cost $84,783,461)(b).................. 104,405,843
Other assets less liabilities...................... (63,670)
------------
TOTAL NET ASSETS--100%............................. $104,342,173
============
</TABLE>
(a) See Note 1A.
(b) Federal Tax Information:
At June 30, 1997 the net unrealized appreciation on investments based on
cost of $84,783,461 for federal income tax purposes was as follows:
<TABLE>
<S> <C>
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost..................................... $ 23,695,258
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax
cost over value................................... (4,072,876)
------------
Net unrealized appreciation........................ $ 19,622,382
============
</TABLE>
(c) Non-income producing security.
See accompanying notes to financial statements.
26
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES AVANTI GROWTH SERIES)
- ---------------------------------
STATEMENT OF ASSETS & LIABILITIES
- ---------------------------------
JUNE 30, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments at value................................... $104,405,843
Receivable for:
Fund shares sold...................................... 280,918
Securities sold....................................... 139,995
Dividends and interest................................ 59,061
Foreign taxes......................................... 45
------------
104,885,862
LIABILITIES
Payable for:
Securities purchased.................................. $204,250
Fund shares redeemed.................................. 196,202
Withholding taxes..................................... 419
Miscellaneous......................................... 474
Accrued expenses:
Management fees....................................... 113,656
Deferred trustees' fees............................... 2,494
Other expenses........................................ 26,194
--------
543,689
------------
$104,342,173
============
NET ASSETS
Net Assets consist of:
Capital paid in....................................... $ 80,672,222
Undistributed net investment loss..................... (34,675)
Accumulated net realized gains........................ 4,082,244
Unrealized appreciation on investments................ 19,622,382
------------
NET ASSETS.............................................. $104,342,173
============
Computation of offering price:
Net asset value and redemption price per share
($104,342,173 divided by 595,315 shares of beneficial
interest).............................................. $ 175.27
============
Identified cost of investments.......................... $ 84,783,461
============
</TABLE>
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends............................................. $ 267,230(a)
Interest.............................................. 85,935
----------
353,165
EXPENSES
Management fees....................................... $319,398
Trustees' fees and expenses........................... 11,422
Custodian............................................. 28,219
Audit and tax services................................ 3,796
Legal................................................. 9,340
Printing.............................................. 27,465
Miscellaneous......................................... 1,819
--------
Total expenses...................................... 401,459
Less expenses assumed by the investment adviser..... (13,619) 387,840
-------- ----------
NET INVESTMENT LOSS.................................... (34,675)
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Realized gain on:
Investments--net..................................... 2,919,801
Unrealized appreciation on:
Investments--net..................................... 7,051,374
----------
Net gain on investment transactions.................... 9,971,175
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS............. $9,936,500
==========
</TABLE>
(a)Net of foreign taxes of: $414
See accompanying notes to financial statements.
27
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES AVANTI GROWTH SERIES)
- ----------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
- ----------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ ------------
<S> <C> <C>
FROM OPERATIONS
Net investment income (loss)...................... $ 49,436 $ (34,675)
Net realized gain on investments.................. 4,796,759 2,919,801
Unrealized appreciation on investments............ 5,241,031 7,051,374
------------ ------------
INCREASE IN NET ASSETS FROM OPERATIONS............ 10,087,226 9,936,500
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income............................. (56,514) 0
Net realized gain on investments.................. (4,542,510) 0
------------ ------------
(4,599,024) 0
------------ ------------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares...................... 40,573,027 24,515,697
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income.......... 56,514 0
Distributions from net realized gain.............. 4,542,510 0
------------ ------------
45,172,051 24,515,697
Cost of shares redeemed........................... (16,825,278) (12,777,369)
------------ ------------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL SHARE
TRANSACTIONS..................................... 28,346,773 11,738,328
------------ ------------
TOTAL INCREASE IN NET ASSETS...................... 33,834,975 21,674,828
NET ASSETS
Beginning of the period........................... 48,832,370 82,667,345
------------ ------------
End of the period................................. $ 82,667,345 $104,342,173
============ ============
UNDISTRIBUTED NET INVESTMENT INCOME (LOSS)
Beginning of the period........................... $ 6,362 $ 0
============ ============
End of the period................................. $ 0 $ (34,675)
============ ============
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares.................... 265,834 150,634
Issued in connection with the reinvestment of:
Distributions from net investment income.......... 313 0
Distributions from net realized gain.............. 22,968 0
------------ ------------
289,115 150,634
Redeemed.......................................... (108,338) (78,919)
------------ ------------
Net change........................................ 180,777 71,715
============ ============
<CAPTION>
- --------------------------------
FINANCIAL HIGHLIGHTS (UNAUDITED)
- --------------------------------
APRIL 30, 1993(A) SIX MONTHS
THROUGH YEAR YEAR YEAR ENDED
DECEMBER 31, ENDED ENDED ENDED JUNE 30,
1993 1994 1995 1996 1997
----------------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $100.00 $113.67 $112.77 $142.44 $ 157.88
------- ------- ------- ------- --------
Income From Investment
Operations
Net Investment Income.. 0.18 0.59 0.42 0.11 (0.06)
Net Realized and
Unrealized Gain (Loss)
on Investments........ 14.56 (0.89) 33.80 24.88 17.45
------- ------- ------- ------- --------
Total From Investment
Operations............ 14.74 (0.30) 34.22 24.99 17.39
------- ------- ------- ------- --------
Less Distributions
Distributions From Net
Investment Income..... (0.18) (0.60) (0.40) (0.13) 0.00
Distributions From Net
Realized Capital
Gains................. (0.67) 0.00 (4.15) (9.42) 0.00
Distributions From
Paid-in Capital....... (0.22) 0.00 0.00 0.00 0.00
------- ------- ------- ------- --------
Total Distributions.... (1.07) (0.60) (4.55) (9.55) 0.00
------- ------- ------- ------- --------
Net Asset Value, End of
Period................. $113.67 $112.77 $142.44 $157.88 $ 175.27
======= ======= ======= ======= ========
TOTAL RETURN (%)........ 14.74(b) (0.27) 30.35 17.58 11.01 (b)
Ratio of Operating
Expenses to Average Net
Assets (%)............. 0.85(c) 0.84 0.85 0.85 0.85 (c)
Ratio of Net Investment
Income to Average Net
Assets (%)............. 0.46(c) 0.67 0.37 0.08 (0.07)(c)
Portfolio Turnover Rate
(%).................... 21(c) 67 58 65 36 (c)
Average Commission
Rate(d)................ -- -- -- $0.0508 $ 0.0503
Net Assets, End of
Period (000)........... $11,972 $25,622 $48,832 $82,667 $104,342
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(c) 0.84 1.06 0.92 0.88(c)
</TABLE>
(a) Commencement of operations.
(b) Not computed on an annualized basis.
(c) 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 MANAGER: CHRISTOPHER C. DAVIS
DAVIS SELECTED ADVISERS, L.P.
[PICTURE APPEARS HERE]
Q. HOW DID THE SERIES PERFORM DURING THE FIRST HALF OF THE YEAR?
A. The Series had six month and one year total returns of 18.77% and 38.76%,
respectively. These numbers compare favorably to the Lipper Variable Growth and
Income Fund Average of 15.81% and 28.12% over the same period.
Q. HOW DID YOU MANAGE THE SERIES DURING THE FIRST HALF OF 1997?
A. During the last six months we continued to see strong market returns, low
unemployment and low inflation. Looking at the current investment climate we
remain optimistic about the role of U.S.-style capitalism, the ability for com-
panies to grow and prosper over time, and the impact of good management. Our
approach is strictly long-term--that is, a 10 to 20 year time frame. And we
judge every investment in relation to the risk-free return available from
bonds. With U.S. Treasury Bonds now yielding around 7%, you could buy a zero
coupon Treasury and double your money in 10 years or quadruple it in 20 years.
That's a tough bogey for stocks. Yet over 70 years, stocks have compounded at
more than 10% as an annual average.
Today, financial brand names are emerging as baby boomers enter their peak
earning, saving and investing years. We have large investments in Wells Fargo
and Travelers, both of which we purchased at less than 10 times earnings, and
American Express--one of the great brand names worldwide--remains a top hold-
ing. We also have a core investment in Citicorp which has performed well.
In the energy services area, Halliburton, Schlumberger, Burlington Resources
and Smith International are among our holdings, and our largest technology
holdings include Intel, Hewlett Packard and IBM.
First-rate pharmaceutical companies should also benefit as the baby boomers
age. Our holdings in this sector include Merck, Pfizer and Eli Lilly, among
others.
Q. WHAT IS YOUR INVESTMENT OUTLOOK?
A. Our vision is for the Dow Jones Industrial average to approach 10,000 around
the turn of the century, punctuated by volatility and corrections along the
way. There can, of course, be no assurance that this will occur. The Dow has
gone from 1,000 to 7,000 very rapidly, and the percentage gains won't be what
we're used to. The big question to ask after any market decline is: "And then
what?" As long-term investors, we will undoubtedly be investing even through
market drops, so that we are positioned to participate in the optimism that has
always followed pessimism.
We never lose sight of the fact that our firm's 28-year track record has built
as much by avoiding the big losers as by picking winners.
29
<PAGE>
A $10,000 Investment Compared to the S&P 500
Average Annual Return
<TABLE>
<CAPTION>
Venture Lipper Variable
Value Growth Fund/10/
<S> <C> <C>
6 mos.* 18.77% 13.57%
1 year 38.76% 23.67%
Since Inception 29.91% n/a
* not annualized
</TABLE>
[GRAPH APPEARS HERE ILLUSTRATING THE GROWTH OF A $10,000 INVESTMENT IN THE DAVIS
VENTURE VALUE SERIES COMPARED TO THE SAME INVESTMENT IN THE S&P 500 INDEX, THE
PLOT POINTS OF WHICH ARE AS FOLLOWS:]
<TABLE>
<CAPTION>
Davis Venture
Value Series S&P 500/18/
<S> <C> <C>
10/31/94 10,000 10,000
12/31/94 9,650 9,779
12/31/95 13,441 13,449
12/31/96 16,914 16,535
6/30/97 20,089 19,942
</TABLE>
[CHECK MARK APPEARS HERE] FUND FACTS
GOAL: Growth of capital.
START DATE: October 31, 1994
SIZE: $186 million as of June 30, 1997
MANAGER: Christopher C. Davis has been the manager of the Series since February
19, 1997. He was co-portfolio manager with Shelby M.C. Davis from October 1995
to February 1997.
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 JUNE 30, 1997 (UNAUDITED)
- ----------------------------------------
COMMON STOCKS--90.5% OF TOTAL NET ASSETS
- ----------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
AEROSPACE--1.2%
43,000 Boeing Co. ............................................. $ 2,281,688
------------
AGRICULTURE--1.5%
117,655 Archer-Daniels-Midland Co............................... 2,764,893
------------
BANKS AND SAVINGS & LOANS--12.4%
59,560 Banc One Corp........................................... 2,884,938
66,800 BankAmerica Corp........................................ 4,312,775
10,200 Barnett Banks, Inc. .................................... 535,500
34,180 Citicorp................................................ 4,120,826
28,500 First Bank Systems, Inc. ............................... 2,433,187
500 First Union Corp. ...................................... 46,250
15,800 Golden West Financial Corp. ............................ 1,106,000
51,500 State Street Corp....................................... 2,381,875
19,500 Wells Fargo & Co. ...................................... 5,255,250
------------
23,076,601
------------
CONSUMER PRODUCTS--5.6%
500 American Home Products Corp............................. 38,250
7,100 Coca-Cola Co............................................ 479,250
900 Fortune Brands, Inc..................................... 33,581
900 Gallaher Group (ADR)(c)(d).............................. 16,594
2,600 General Electric Co. ................................... 169,975
86,300 Masco Corp.............................................. 3,603,025
23,400 Nestle S.A. (ADR)(d).................................... 1,545,713
104,100 Philip Morris Companies, Inc. .......................... 4,619,438
------------
10,505,826
------------
DIVERSIFIED FINANCIAL SERVICES--5.0%
85,100 American Express Co. ................................... 6,339,950
73,900 Federal Home Loan Mortgage Corp......................... 2,540,313
9,700 TCF Financial Corp. .................................... 478,937
------------
9,359,200
------------
DRILLING--1.5%
2,700 Nabors Industries, Inc.(c).............................. 67,500
40,200 Smith International, Inc.(c)............................ 2,442,150
------------
2,509,650
------------
ELECTRIC--0.0%
200 New England Elecricial Systems.......................... 7,400
------------
ENERGY--6.7%
400 Amerada Hess Corp....................................... 22,225
300 Amoco Corp.............................................. 26,081
1,000 Atlantic Richfield Co................................... 70,500
52,100 Burlington Resources, Inc............................... 2,298,913
1,700 Chevron Corp............................................ 125,694
5,300 Exxon Corp. ............................................ 325,950
34,400 Evi, Inc.(c)............................................ 1,444,800
54,900 Halliburton Co.......................................... 4,350,825
600 Mobil Corp.............................................. 41,925
46,264 Noble Affiliates, Inc. ................................. 1,789,838
16,200 Schlumberger, Ltd. ..................................... 2,025,000
500 Sonat, Inc.............................................. 25,625
------------
12,547,376
------------
ENTERTAINMENT--0.5%
11,700 Walt Disney Co.......................................... 938,925
------------
FOOD & RESTAURANT--3.4%
117,400 McDonald's Corp. ....................................... 5,671,888
28,550 Tyson Foods Inc......................................... 546,019
------------
6,217,907
------------
HOUSING & BUILDING MATERIALS--1.2%
67,900 Martin Marietta Materials, Inc. ........................ 2,198,262
------------
INFORMATION SERVICES--0.0%
100 Cognizant Corp.......................................... 4,050
------------
INTERNATIONAL CLOSED-END INVESTMENT COMPANY--0.5%
92,434 Morgan Stanley Asia Pacific Fund, Inc. ................. 970,557
------------
INVESTMENT FIRMS--4.5%
29,400 Donaldson Lufkin & Jenrette, Inc. ...................... 1,756,650
17,800 J.P. Morgan & Co., Inc.................................. 1,857,875
110,355 Morgan Stanley/Dean Witter.............................. 4,752,162
------------
8,366,687
------------
LIFE INSURANCE--1.4%
53,800 SunAmerica, Inc......................................... 2,622,750
------------
MANUFACTURING--0.0%
200 Dow Chemical Co. ....................................... 17,425
800 Maytag Corp. ........................................... 20,900
------------
38,325
------------
MARKETING ANALYSIS--0.7%
33 ACNeilson Corp.(c)...................................... 648
33,800 Sun Microsystems, Inc................................... 1,257,994
------------
1,258,642
------------
OIL--0.5%
14,500 British Petrol (ADR)(d)................................. 1,085,687
27,100 Tosco Corp.............................................. 811,306
------------
1,896,993
------------
</TABLE>
See accompanying notes to financial statements.
31
<PAGE>
NEW ENGLAND ZENITH FUND
(DAVIS VENTURE VALUE SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- --------------------------
COMMON STOCKS--(CONTINUED)
- --------------------------
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
PAPER PRODUCTS--0.9%
21,600 Fort Howard Corp.(c)..................................... $ 1,093,500
300 International Paper Co. ................................. 14,569
9,400 Kimberly-Clark Corp...................................... 467,650
400 Union Camp Corp.......................................... 20,000
------------
1,595,719
------------
PHARMACEUTICAL AND HEALTH CARE--6.0%
14,500 Bristol-Myers Squibb Co. ................................ 1,174,500
9,900 Eli Lilly & Co. ......................................... 1,082,194
12,200 Johnson & Johnson........................................ 785,375
5,500 Merck & Co............................................... 569,250
16,300 Novartis AG (ADR)(c)(d).................................. 1,306,038
20,100 Pfizer, Inc. ............................................ 2,401,950
41,000 SmithKline Beecham (ADR)(d).............................. 3,756,625
------------
11,075,932
------------
PROPERTY/CASUALTY INSURANCE--12.0%
39,581 The Allstate Corp. ...................................... 2,889,413
8,000 American International Group, Inc. ...................... 1,195,000
25,700 W.R. Berkley Corp. ...................................... 1,513,087
34,800 Chubb Corp............................................... 2,327,250
32,074 General Re Corp.......................................... 5,837,468
19,400 Progressive Corp......................................... 1,687,800
17,800 Transatlantic Holdings, Inc. ............................ 1,766,650
62,433 The Travelers Group, Inc................................. 3,937,181
28,200 20th Century Industries, Inc.(c)......................... 592,200
15,800 UNUM Corp. .............................................. 663,600
------------
22,409,649
------------
PUBLISHING--1.6%
100 Dun & Bradstreet Corp.................................... 2,625
20,500 Gannet Co., Inc. ........................................ 2,024,375
19,400 Tribune Co. ............................................. 932,413
------------
2,959,413
------------
RAILROAD--4.8%
58,800 Burlington Northern Santa Fe............................. 5,284,650
29,000 Illinois Central Corp.................................... 1,013,187
33,600 Union Pacific Corp....................................... 2,368,800
------------
8,666,637
------------
REAL ESTATE--2.7%
9,280 Crescent Operations, Inc................................. 111,360
92,800 Crescent Real Estate Equities............................ 2,946,400
10,300 Federal Realty Investment Trust.......................... 278,100
2,400 Kimco Realty Corp. ...................................... 76,200
5,900 Mid-Atlantic Realty Trust................................ 66,375
6,300 Saul Centers, Inc........................................ 108,675
11,100 United Dominion Realty Trust, Inc. ...................... 157,481
16,200 Vornado Realty Trust..................................... 1,168,425
3,300 Weingarten Realty........................................ 139,425
------------
5,052,441
------------
RETAIL--0.5%
17,200 Harcourt General, Inc.................................... 819,150
------------
TECHNOLOGY--10.8%
115,200 Hewlett-Packard Co. ..................................... 6,451,200
27,600 Intel Corp............................................... 3,914,025
81,700 International Business Machines.......................... 7,368,319
45,100 Komag, Inc.(c)........................................... 738,512
5,350 Molex, Inc. ............................................. 195,275
14,400 Novellus Systems, Inc.(c)................................ 1,245,600
6,100 Seagate Technology(c).................................... 214,644
------------
20,127,575
------------
TELECOMMUNICATIONS--3.5%
89,700 Airtouch Communications, Inc.(c)......................... 2,455,538
4,852 Globalstar Telecommunications(c)......................... 148,592
18,300 Loral Space Communications(c)............................ 274,500
32,600 Motorola, Inc. .......................................... 2,477,600
300 SBC Communications, Inc. ................................ 18,562
64,700 360 Communications Co.(c)................................ 1,107,987
------------
6,482,779
------------
UTILITIES--1.1%
300 Carolina Power & Light Co. .............................. 10,762
40,000 Cooper Cameron Corp.(c).................................. 1,870,000
300 Duke Power Co............................................ 14,381
200 Edison International..................................... 4,975
100 Enova Corp. ............................................. 2,406
600 Southern Co.............................................. 13,125
200 Wisconsin Energy Corp. .................................. 4,975
------------
1,920,624
------------
WASTE MANAGEMENT--0.0%
400 Waste Management International (ADR)(d).................. 12,850
------------
Total Common Stocks
(Identified Cost $128,526,355).......................... 168,688,501
------------
<CAPTION>
- ----------------------
PREFERRED STOCKS--0.5%
- ----------------------
<C> <S> <C>
4,420 Airtouch Communications, Inc.,
Class B, 6.000%........................................ 125,970
2,896 Airtouch Communications, Inc.,
Class C, 4.250%........................................ 139,008
1,600 Banc One Corp., $3.50, Series C......................... 148,800
6,800 Devon Financing Trust, 6.500%........................... 477,700
2,000 Vornada Realty Trust.................................... 106,000
------------
Total Preferred Stocks
(Identified Cost $932,865)............................. 997,478
------------
</TABLE>
See accompanying notes to financial statements.
32
<PAGE>
NEW ENGLAND ZENITH FUND
(DAVIS VENTURE VALUE SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- ----------------------------
SHORT-TERM INVESTMENTS--8.7%
- ----------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
$ 5,490,000 Federal Home Loan Mortgage,
5.420%, 7/03/97.................................. $ 5,488,347
10,660,000 Federal Home Loan Bank,
5.470%, 7/03/97.................................. 10,656,760
------------
Total Short-Term Investment
(Identified Cost $16,145,107).................... 16,145,107
------------
Total Investments--99.7%
(Identified Cost $145,604,327)(b)................ 185,831,086
Other assets less liabilities(e).................. 601,771
------------
TOTAL NET ASSETS--100%............................ $186,432,857
============
</TABLE>
(a) See Note 1A.
(b) Federal Tax Information:
At June 30, 1997 the net unrealized appreciation on investments based on
cost of $145,604,327 for federal income tax purposes was as follows:
<TABLE>
<S> <C>
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost ................................... $ 41,101,528
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax
cost over value ................................. (874,769)
------------
Net unrealized appreciation....................... $ 40,226,759
============
</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.
(e) Including deposits in foreign denominated currencies with a value of
$25,381 and a cost of $24,455.
See accompanying notes to financial statements.
33
<PAGE>
NEW ENGLAND ZENITH FUND
(DAVIS VENTURE VALUE SERIES)
- ---------------------------------
STATEMENT OF ASSETS & LIABILITIES
- ---------------------------------
JUNE 30, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments at value.................................... $185,831,086
Cash.................................................... 6,074
Foreign cash at value................................... 25,381
Receivable for:
Fund shares sold....................................... 838,843
Securities sold........................................ 689,485
Dividends and interest................................. 180,769
Foreign taxes.......................................... 3,179
Miscellaneous.......................................... 12,323
Unamortized organization................................ 4,691
------------
187,591,831
Payable for:
Securities purchased................................... $736,444
Fund shares redeemed................................... 243,607
Accrued expenses:
Management fees........................................ 128,583
Deferred trustees' fees................................ 1,964
Other expenses......................................... 48,376
--------
1,158,974
------------
$186,432,857
============
NET ASSETS
Net Assets consist of:
Capital paid in........................................ $142,541,141
Undistributed net investment income.................... 715,526
Accumulated net realized gains......................... 2,948,440
Unrealized appreciation on investments and foreign
currency.............................................. 40,227,750
------------
NET ASSETS............................................... $186,432,857
============
Computation of offering price:
Net asset value and redemption price per share
($186,432,857 divided by 9,757,678 shares of beneficial
interest)............................................... $ 19.11
============
Identified cost of investments........................... $145,604,327
============
<CAPTION>
- -----------------------
STATEMENT OF OPERATIONS
- -----------------------
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<S> <C> <C>
INVESTMENT INCOME
Dividends......................................... $ 963,662(a)
Interest.......................................... 373,232
-----------
1,336,894
EXPENSES
Management fees................................... $ 554,852
Trustees' fees and expenses....................... 14,125
Custodian......................................... 33,032
Audit and tax services............................ 6,211
Legal............................................. 9,340
Printing.......................................... 18,308
Amortization of organization expenses............. 997
Miscellaneous..................................... 1,820
-----------
Total expenses.................................. 638,685
-----------
NET INVESTMENT INCOME.............................. 698,209
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
AND FOREIGN CURRENCY TRANSACTIONS
Realized gain on:
Investments--net................................. 2,689,611
-----------
Unrealized appreciation (depreciation) on:
Investments--net................................. 22,015,796
Foreign currency transactions--net............... (26)
-----------
Total unrealized appreciation on investments and
foreign currency transactions.................. 22,015,770
-----------
Net gain on investment transactions............... 24,705,381
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS......... $25,403,590
===========
</TABLE>
(a)Net of foreign taxes of: $6,983
See accompanying notes to financial statements.
34
<PAGE>
NEW ENGLAND ZENITH FUND
(DAVIS VENTURE VALUE SERIES)
- ----------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
- ----------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ ------------
<S> <C> <C>
FROM OPERATIONS
Net investment income............................. $ 833,527 $ 698,209
Net realized gain on investments.................. 1,885,474 2,689,611
Unrealized appreciation on investments, and
foreign currency transactions.................... 14,269,167 22,015,770
------------ ------------
INCREASE IN NET ASSETS FROM OPERATIONS............ 16,988,168 25,403,590
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income............................. (818,557) 0
Net realized gain on investments.................. (1,709,985) 0
------------ ------------
(2,528,542) 0
------------ ------------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares...................... 73,335,902 68,940,005
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income.......... 818,557 0
Distributions from net realized gain.............. 1,709,985 0
------------ ------------
75,864,444 68,940,005
Cost of shares redeemed........................... (17,180,011) (16,099,764)
------------ ------------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL SHARE
TRANSACTIONS..................................... 58,684,433 52,840,241
------------ ------------
TOTAL INCREASE IN NET ASSETS...................... 73,144,059 78,243,831
NET ASSETS
Beginning of the period........................... 35,044,967 108,189,026
------------ ------------
End of the period................................. $108,189,026 $186,432,857
============ ============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the period........................... $ 3,911 $ 17,317
============ ============
End of the period................................. $ 17,317 $ 715,526
============ ============
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares.................... 5,082,303 3,959,185
Issued in connection with the reinvestment of:
Distributions from net investment income.......... 49,916 0
Distributions from net realized gain.............. 106,943 0
------------ ------------
5,239,162 3,959,185
Redeemed.......................................... (1,190,115) (924,976)
------------ ------------
Net change........................................ 4,049,047 3,034,209
============ ============
<CAPTION>
- --------------------------------
FINANCIAL HIGHLIGHTS (UNAUDITED)
- --------------------------------
OCTOBER 31, 1994(A) SIX MONTHS
THROUGH YEAR YEAR ENDED
DECEMBER 31, ENDED ENDED JUNE 30,
1994 1995 1996 1997
------------------- ------- -------- ----------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period................. $10.00 $ 9.62 $ 13.10 $ 16.09
------ ------- -------- --------
Income From Investment
Operations
Net Investment Income..... 0.03 0.10 0.13 0.07
Net Realized and
Unrealized Gain (Loss) on
Investments.............. (0.38) 3.68 3.26 2.95
------ ------- -------- --------
Total From Investment
Operations............... (0.35) 3.78 3.39 3.02
------ ------- -------- --------
Less Distributions
Distributions From Net
Investment Income........ (0.03) (0.10) (0.13) 0.00
Distributions From Net
Realized Capital Gains... 0.00 (0.20) (0.27) 0.00
------ ------- -------- --------
Total Distributions....... (0.03) (0.30) (0.40) 0.00
------ ------- -------- --------
Net Asset Value, End of
Period.................... $ 9.62 $ 13.10 $ 16.09 $ 19.11
====== ======= ======== ========
TOTAL RETURN (%)........... (3.50)(b) 39.28 25.84 18.77(b)
Ratio of Operating Expenses
to Average Net Assets (%). 0.90 (c) 0.90 0.90 0.90(c)
Ratio of Net Investment
Income to Average Net
Assets (%)................ 2.54 (c) 1.39 1.25 1.08(c)
Portfolio Turnover Rate
(%)....................... 1 (c) 20 18 25(c)
Average Commission Rate
(d)....................... -- -- $ 0.0599 $ 0.0600
Net Assets, End of Period
(000)..................... $3,371 $35,045 $108,189 $186,433
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 (c) 1.51 0.96 0.90(c)
</TABLE>
(a) Commencement of operations.
(b) Not computed on an annualized basis.
(c) 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.
35
<PAGE>
WESTPEAK GROWTH & INCOME SERIES
PORTFOLIO MANAGERS: GERALD H. SCRIVER AND PHILIP J. COOPER WESTPEAK INVESTMENT
ADVISORS, L.P.
[PICTURE APPEARS HERE] [PICTURE APPEARS HERE]
Q. HOW DID THE WESTPEAK GROWTH AND INCOME SERIES PERFORM DURING THE FIRST HALF
OF THE YEAR?
A. Westpeak Growth and Income Series generated a total return of 19.35% in the
six months ended June 30, 1997. The Series' performance falls just below that
of its benchmark, the S&P 500/18/, which posted a 20.59% return.
We're pleased to report that Lipper Analytical Services, an independent mutual
Series' tracking service, ranked Westpeak Growth & Income Series #7 out of 96
in the Lipper Growth and Income Variable Insurance peer group for its one-year
performance and 13th out of 57 for three-year performance through June 30,
1997. Past performance is no guarantee of future return.
One of our goals is to adjust the portfolio in favor of growth stocks when it
seems appropriate to do so, and to favor value stocks when the market seems
poised to shift toward them. The Series' strong first-half return came in large
part from our decision to tilt the portfolio away from so-called high momentum
stocks and toward companies with attractive value credentials. This positioning
of the Series' portfolio--more exposure to value investments and less to
growth--began to take shape a year ago, and some modification remains underway.
Q. WHAT WERE THE KEY STRATEGIC AND PORTFOLIO CHANGES DURING THIS PERIOD?
A. At the start of the period, we felt that the economy would stay strong,
based on upward trends in consumer confidence and several other key indicators.
In fact, first quarter growth widely exceeded expectations as consumers, buoyed
by vigorous employment prospects, continued to spend.
Interestingly, most stocks have not participated in this year's dramatic gains.
According to our analysis, sharp price rises in a small number of very large
company stocks--no more than 20-- account for the bulk of the increases in the
widely publicized market averages. During the early part of the year, the Se-
ries was slightly underweight in these stocks compared to the S&P 500.
Among our more successful holdings during the last six months were "baby bells"
Ameritech and Bell Atlantic, computer manufacturers IBM and Compaq, and various
other companies, such as BankAmerica, Royal Dutch and Unilever.
The Series' underweighting in growth stocks helped the portfolio in the first
quarter. By the second quarter, however, we began to view them more favorably,
and increased participation in that sector. To help manage price risk, we fo-
cused on variables such as return-on-equity, future earnings prospects, short
and long-term profit history and trends in Wall Street's earnings estimates for
each company.
Q. WHAT IS YOUR MARKET OUTLOOK AND WHAT DOES IT IMPLY FOR THE SERIES?
A. During the second quarter economic growth slowed, a trend we believe will
continue. We have begun to detect signs of wage inflation, an economic compo-
nent that the Federal Reserve watches closely. If that trend continues, a sec-
ond hike in short-term interest rates could follow.
We believe the market will slow during the second half of the year. However, a
sharp drop seems unlikely unless the Fed aggressively raises interest rates. If
the economy slows in the near term, the likelihood of rate increases would di-
minish.
We plan to pursue growth opportunities where they are available at reasonable
prices. Any decline in stock prices would create more attractive buying oppor-
tunities; in this case, we will become more aggressive in our pursuit of long-
term growth for 1998 and beyond.
36
<PAGE>
A 10,000 Investment Compared to the S&P 500 Index/18/
Average Annual Return
<TABLE>
<CAPTION>
Growth Lipper Variable Growth
& Income and Income Fund Average/12/
<S> <C> <C>
6 mos.* 19.35% 15.81%
1 year 34.62% 28.12%
Since Inception 20.44% n/a
* not annualized
</TABLE>
[GRAPH APPEARS HERE ILLUSTRATING THE GROWTH OF A $10,000 INVESTMENT IN THE
GROWTH AND INCOME SERIES COMPARED TO THE SAME INVESTMENT IN THE S&P
500 INDEX, THE PLOT POINTS OF WHICH ARE AS FOLLOWS:]
<TABLE>
<CAPTION>
Growth and
Income Series S&P 500/18/
<S> <C> <C>
4/30/93 10,000 10,000
12/31/93 11,424 10,807
12/31/94 11,286 10,949
12/31/95 15,402 15,058
12/31/96 18,189 18,513
6/30/97 21,709 22,327
</TABLE>
[CHECK MARK APPEARS HERE] FUND FACTS
GOAL: Long-term total return through investment in equity securities.
START DATE: May 1, 1993
SIZE: $115 million as of June 30, 1997
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 June, 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.
37
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK GROWTH & INCOME SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- ----------------------------------------
COMMON STOCKS--96.6% OF TOTAL NET ASSETS
- ----------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
AEROSPACE--2.1%
4,400 Boeing Co. ............................................... $ 233,475
25,600 United Technologies Corp. ................................ 2,124,800
-----------
2,358,275
-----------
AIRLINES--2.9%
22,700 AMR, Corp.(c)............................................. 2,099,750
1,100 Delta Airlines, Inc. ..................................... 90,200
15,300 UAL, Inc.(c).............................................. 1,094,906
-----------
3,284,856
-----------
AUTOMOTIVE & RELATED--1.6%
29,000 Chrysler Corp. ........................................... 951,562
16,500 General Motors Corp. ..................................... 918,844
-----------
1,870,406
-----------
BANKS--6.6%
41,000 BankAmerica Corp. ........................................ 2,647,063
2,300 First Union Corp. ........................................ 212,750
38,600 NationsBank Corp. ........................................ 2,489,700
40,000 Popular, Inc. ............................................ 1,615,000
5,800 Republic New York Corp. .................................. 623,500
-----------
7,588,013
-----------
BUSINESS SERVICES--5.0%
84,150 Comdisco, Inc. ........................................... 2,187,900
25,400 Manpower, Inc. ........................................... 1,130,300
23,500 Omnicom Group............................................. 1,448,187
30,900 Pittston Brinks Group..................................... 927,000
-----------
5,693,387
-----------
CHEMICALS--3.0%
4,600 Albemarle Corp. .......................................... 96,888
22,500 Dow Chemical Co. ......................................... 1,960,312
21,800 Lubrizol Corp. ........................................... 914,237
5,800 Rohm & Haas Co. .......................................... 522,363
-----------
3,493,800
-----------
COMPUTER SOFTWARE & SERVICES--0.2%
7,500 Adobe Systems, Inc. ...................................... 262,969
-----------
COMPUTERS & BUSINESS EQUIPMENT--2.7%
7,900 Compaq Computer Corp.(c).................................. 784,075
17,400 International Business Machines........................... 1,569,262
16,900 Lexmark International Group, Inc.(c)...................... 513,338
11,800 Quantum Corp.(c).......................................... 239,688
-----------
3,106,363
-----------
CONSUMER DURABLES--0.1%
2,400 HON Industries, Inc. ..................................... 106,200
-----------
DOMESTIC OIL--0.0%
300 Amoco Corp. .............................................. 26,081
-----------
DRUGS--8.9%
20,400 Abbott Laboratories....................................... 1,361,700
7,900 Amgen, Inc. .............................................. 459,188
34,875 Bergen Brunswig Corp. .................................... 972,141
14,700 Bristol-Myers & Squibb Co. ............................... 1,190,700
6,600 McKesson Corp. ........................................... 511,500
13,800 Merck & Co. .............................................. 1,428,300
4,600 Pfizer, Inc. ............................................. 549,700
9,300 Rhone Poulenc Rorer, Inc. ................................ 845,137
31,600 Schering-Plough Corp. .................................... 1,512,850
11,700 Warner-Lambert Co. ....................................... 1,453,725
------------
10,284,941
------------
ELECTRIC UTILITIES--1.7%
52,600 Pinnacle West Capital Corp. .............................. 1,581,287
13,000 Public Service Enterprise Group........................... 325,000
------------
1,906,287
------------
ELECTRONICS--3.9%
6,600 Intel Corp. .............................................. 935,962
57,075 Molex, Inc. .............................................. 2,083,237
8,600 Motorola, Inc. ........................................... 653,600
5,800 SCI Systems, Inc.(c)...................................... 369,750
7,700 Tektronix, Inc. .......................................... 462,000
------------
4,504,549
------------
FINANCE--2.7%
27,700 Bear Stearns Companies, Inc. ............................. 946,994
6,200 Donaldson, Lufkin & Jenrette, Inc. ....................... 370,450
24,200 Lehman Brothers Holdings, Inc. ........................... 980,100
14,400 Salomon, Inc. ............................................ 801,000
------------
3,098,544
------------
FOOD & BEVERAGES--5.4%
43,300 Archer-Daniels-Midland Co. ............................... 1,017,550
6,700 CPC International, Inc. .................................. 618,494
28,800 IBP, Inc. ................................................ 669,600
33,900 Quaker Oats Co. .......................................... 1,521,263
19,450 Tyson Foods, Inc. del..................................... 371,981
9,300 Unilever N.V. ............................................ 2,027,400
------------
6,226,288
------------
FOREIGN OIL RESERVES--0.1%
1,600 Kerr-McGee Corp. ......................................... 101,400
------------
GAS & PIPELINE UTILITIES--0.5%
9,300 National Fuel Gas Co. .................................... 390,019
5,000 Nicor, Inc. .............................................. 179,375
------------
569,394
------------
</TABLE>
See accompanying notes to financial statements.
38
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK GROWTH & INCOME SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- --------------------------
COMMON STOCKS--(CONTINUED)
- --------------------------
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
HEALTH CARE--7.5%
25,700 Beckman Instruments, Inc. ............................... $ 1,240,025
68,300 Beverly Enterprises, Inc.(c)............................. 1,109,875
3,800 Columbia HCA/Healthcare Corp. ........................... 149,388
42,000 Johnson & Johnson........................................ 2,703,750
71,175 Tenet Healthcare Corp.(c)................................ 2,104,111
3,000 United Healthcare Corp. ................................. 156,000
26,000 Wellpoint Health Networks, Inc.(c)....................... 1,192,750
------------
8,655,899
------------
INSURANCE--5.3%
7,600 Allstate Corp. .......................................... 554,800
4,300 AMBAC, Inc. ............................................. 328,413
13,100 CIGNA Corp. ............................................. 2,325,250
23,900 Everest Reinsurance Holdings............................. 947,037
14,700 Loews Corp. ............................................. 1,471,837
16,350 Old Republic International Corp. ........................ 495,609
------------
6,122,946
------------
INTERNATIONAL OIL--2.4%
3,600 Chevron Corp. ........................................... 266,175
40,000 Exxon Corp. ............................................. 2,460,000
------------
2,726,175
------------
LIFE INSURANCE--0.4%
5,600 American National Insurance Co. ......................... 499,800
------------
LIQUOR--0.9%
26,600 Fortune Brands, Inc. .................................... 992,512
------------
MEDIA & ENTERTAINMENT--1.5%
15,300 Clear Channel Communications(c).......................... 940,950
23,100 King World Productions, Inc. ............................ 808,500
------------
1,749,450
------------
METAL--1.2%
16,600 ASARCO, Inc. ............................................ 508,375
10,500 Phelps Dodge Corp. ...................................... 894,469
------------
1,402,844
------------
MISCELLANEOUS--0.1%
5,400 American Water Works, Inc. .............................. 115,425
------------
MORTGAGE--0.5%
11,900 Federal National Mortgage Association.................... 519,138
------------
OIL--2.3%
49,600 Royal Dutch Petroleum Co. ............................... 2,697,000
------------
OIL SERVICE--0.9%
8,400 Noble Drilling Corp.(c).................................. 189,525
2,600 Smith International, Inc.(c)............................. 157,950
30,600 Union Texas Peteroleum Holdings, Inc. ................... 640,688
------------
988,163
------------
PAPER & FOREST PRODUCTS--0.3%
8,000 Rayonier, Inc. .......................................... 336,500
------------
PHOTOGRAPHY--0.2%
2,400 Eastman Kodak Co. ....................................... 184,200
------------
PRODUCER OF GOODS--9.5%
24,500 Caterpillar, Inc. ....................................... 2,630,687
33,200 Cummins Engine, Inc. .................................... 2,342,675
19,600 Harsco Corp. ............................................ 793,800
9,600 Illinois Tool Works, Inc. ............................... 479,400
40,300 Ingersoll-Rand Co. ...................................... 2,488,525
4,500 Lancaster Colony Corp. .................................. 217,688
6,400 Lucent Technologies, Inc. ............................... 461,200
38,400 Premark International, Inc. ............................. 1,027,200
14,400 Timken Co. .............................................. 512,100
------------
10,953,275
------------
PUBLISHING--0.7%
39,200 Moore Corp., Ltd. ....................................... 771,750
------------
RAILROAD & EQUIPMENT--0.5%
8,700 Kansas City Southern Industries, Inc. ................... 561,150
------------
RETAIL--2.7%
19,000 Dayton Hudson Corp. ..................................... 1,010,562
30,600 Sears Roebuck & Co. ..................................... 1,644,750
17,800 TJX Companies, Inc. ..................................... 469,475
------------
3,124,787
------------
RETAIL--FOOD & DRUG--1.3%
31,000 American Stores Co. ..................................... 1,530,625
------------
SOAPS--0.8%
19,500 Ecolab, Inc. ............................................ 931,125
------------
STEEL--1.5%
49,700 USX-U.S. Steel Group..................................... 1,742,606
------------
TELECOMMUNICATION--7.6%
56,100 AT&T Corp. .............................................. 1,967,006
28,000 Ameritech Corp. ......................................... 1,902,250
24,600 Bell Atlantic Corp. ..................................... 1,866,525
22,400 BellSouth Corp. ......................................... 1,038,800
23,800 MCI Communications Corp. ................................ 911,094
9,900 Sprint Corp. ............................................ 520,988
14,300 U.S. West, Inc. ......................................... 538,931
------------
8,745,594
------------
TOBACCO--1.1%
2,000 Philip Morris Companies, Inc. ........................... 88,750
35,600 RJR Nabisco Holdings Corp. .............................. 1,174,800
------------
1,263,550
------------
Total Common Stocks
(Identified Cost $90,491,771)........................... 111,096,267
------------
</TABLE>
See accompanying notes to financial statements.
39
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK GROWTH & INCOME SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- ---------------------------
SHORT-TERM INVESTMENT--3.2%
- ---------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
$3,679,000 Repurchase agreement with
State Street Bank &
Trust Company dated
6/30/97 at 5.000% to be
repurchased at
$3,679,511 on 7/1/97.
Collateralized by
$3,555,000 U.S. Treasury
Bond 7.250% due 5/15/16
with a value of
$3,753,301.............. $ 3,679,000
------------
Total Short-Term
Investment
(Identified cost
$3,679,000)............... 3,679,000
------------
Total Investments--99.8%
(Identified cost
$94,170,771)(b)......... 114,775,267
Other assets less
liabilities............. 220,445
------------
TOTAL NET ASSETS--100%... $114,995,712
============
</TABLE>
(a) See Note 1A.
(b) Federal Tax Information:
At June 30,1997 the net unrealized appreciation on investments based on cost
of $94,170,771 for federal income tax purposes was as follows:
<TABLE>
<S> <C>
Aggregate gross unrealized appreciation
for all investments in which there is an
excess of value over tax cost............ $ 21,090,380
Aggregate gross unrealized depreciation
for all investments in which there in an
excess of tax cost over value............ (485,884)
------------
Net unrealized appreciation............... $ 20,604,496
============
</TABLE>
(c) Non-income producing security.
See accompanying notes to financial statements.
40
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK GROWTH & INCOME SERIES)
- ---------------------------------
STATEMENT OF ASSETS & LIABILITIES
- ---------------------------------
JUNE 30, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments at value.................................... $114,775,267
Cash.................................................... 168
Receivable for:
Fund shares sold....................................... 292,936
Dividends and interest................................. 158,077
------------
115,226,448
LIABILITIES
Payable for:
Fund shares redeemed................................... $ 80,645
Withholding taxes...................................... 1,382
Miscellaneous.......................................... 471
Accrued expenses:
Management fees........................................ 111,702
Deferred trustees' fees................................ 2,622
Other expenses......................................... 33,914
--------
230,736
------------
$114,995,712
============
NET ASSETS
Net Assets consist of:
Capital paid in........................................ $ 85,535,328
Undistributed net investment income.................... 694,529
Accumulated net realized gains......................... 8,161,359
Unrealized appreciation on investments................. 20,604,496
------------
NET ASSETS............................................... $114,995,712
============
Computation of offering price:
Net asset value and redemption price per share
($114,995,712 divided by 634,854 shares of beneficial
interest)............................................... $ 181.14
============
Identified cost of investments........................... $ 94,170,771
============
<CAPTION>
- -----------------------
STATEMENT OF OPERATIONS
- -----------------------
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<S> <C> <C>
INVESTMENT INCOME
Dividends............................................. $ 1,023,565(a)
Interest.............................................. 72,574
-----------
1,096,139
EXPENSES
Management fees....................................... $332,622
Trustees' fees and expenses........................... 11,533
Custodian............................................. 21,185
Audit and tax services................................ 3,796
Legal................................................. 9,340
Printing.............................................. 21,785
Miscellaneous......................................... 1,818
--------
Total expenses...................................... 402,079
-----------
NET INVESTMENT INCOME.................................. 694,060
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Realized gain on:
Investments--net..................................... 6,023,834
Unrealized appreciation on:
Investments--net..................................... 10,676,226
-----------
Net gain on investment transactions.................... 16,700,060
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS............. $17,394,120
===========
</TABLE>
(a)Net of foreign taxes of: $13,697
See accompanying notes to financial statements.
41
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK GROWTH & INCOME SERIES)
- ----------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
- ----------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ ------------
<S> <C> <C>
FROM OPERATIONS
Net investment income............................. $ 890,831 $ 694,060
Net realized gain on investments.................. 8,163,321 6,023,834
Unrealized appreciation on investments............ 2,277,386 10,676,226
------------ ------------
INCREASE IN NET ASSETS FROM OPERATIONS............ 11,331,538 17,394,120
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income............................. (904,227) 0
Net realized gain on investments.................. (6,507,691) 0
------------ ------------
(7,411,918) 0
------------ ------------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares...................... 35,852,491 28,057,500
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income.......... 904,227 0
Distributions from net realized gain.............. 6,507,691 0
------------ ------------
43,264,409 28,057,500
Cost of shares redeemed........................... (12,982,923) (12,786,051)
------------ ------------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL SHARE
TRANSACTIONS..................................... 30,281,486 15,271,449
------------ ------------
TOTAL INCREASE IN NET ASSETS...................... 34,201,106 32,665,569
NET ASSETS
Beginning of the period........................... 48,129,037 82,330,143
------------ ------------
End of the period................................. $ 82,330,143 $114,995,712
============ ============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the period........................... $ 13,865 $ 469
============ ============
End of the period................................. $ 469 $ 694,529
============ ============
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares.................... 239,114 171,272
Issued in connection with the reinvestment of:
Distributions from net investment income.......... 5,851 0
Distributions from net realized gain.............. 42,976 0
------------ ------------
287,941 171,272
Redeemed.......................................... (86,095) (78,867)
------------ ------------
Net change........................................ 201,846 92,405
============ ============
<CAPTION>
- --------------------------------
FINANCIAL HIGHLIGHTS (UNAUDITED)
- --------------------------------
APRIL 30, 1993(A) SIX MONTHS
THROUGH YEAR YEAR YEAR ENDED
DECEMBER 31, ENDED ENDED ENDED JUNE 30,
1993 1994 1995 1996 1997
----------------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $100.00 $112.32 $109.03 $141.31 $ 151.77
------- ------- ------- ------- --------
Income From Investment
Operations
Net Investment Income... 0.92 1.90 1.77 1.78 1.09
Net Realized and
Unrealized Gain (Loss)
on Investments......... 13.33 (3.25) 37.91 23.69 28.28
------- ------- ------- ------- --------
Total From Investment
Operations............. 14.25 (1.35) 39.68 25.47 29.37
------- ------- ------- ------- --------
Less Distributions
Distributions From Net
Investment Income...... (0.92) (1.92) (1.71) (1.82) 0.00
Distributions From Net
Realized Capital Gains. (1.00) 0.00 (5.69) (13.19) 0.00
Distributions in Excess
of Net Realized Capital
Gains.................. (0.01) 0.00 0.00 0.00 0.00
Distributions From Paid-
in Capital............. 0.00 (0.02) 0.00 0.00 0.00
------- ------- ------- ------- --------
Total Distributions..... (1.93) (1.94) (7.40) (15.01) 0.00
------- ------- ------- ------- --------
Net Asset Value, End of
Period................. $112.32 $109.03 $141.31 $151.77 $ 181.14
======= ======= ======= ======= ========
TOTAL RETURN (%)........ 14.24(b) (1.21) 36.46 18.10 19.35(b)
Ratio of Operating
Expenses to Average Net
Assets (%)............. 0.85(c) 0.85 0.85 0.85 0.85(c)
Ratio of Net Investment
Income to Average Net
Assets (%)............. 2.16(c) 2.30 1.63 1.40 1.45(c)
Portfolio Turnover Rate
(%).................... 49(c) 133 92 104 80(c)
Average Commission
Rate(d)................ -- -- -- $0.0344 $ 0.0329
Net Assets, End of
Period (000)........... $ 9,082 $22,934 $48,129 $82,330 $114,996
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(c) 0.86 1.06 0.91 0.85(c)
</TABLE>
(a) Commencement of operations.
(b) Not computed on an annualized basis.
(c) 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.
42
<PAGE>
WESTPEAK STOCK INDEX SERIES
PORTFOLIO MANAGERS: GERALD H. SCRIVER AND PHILIP J. COOPER
WESTPEAK INVESTMENT ADVISORS, L.P.
[PICTURE APPEARS HERE] [PICTURE APPEARS HERE]
Q. HOW DID THE SERIES' PERFORM DURING THE FIRST HALF OF 1997?
A. The Westpeak Stock Index returned 20.13% compared to 20.59% posted by the
S&P 500 Index/18/ for the six months ended June 30, 1997. For the one-year
period the Series has returned 33.90% as compared to the S&P 500 Index/18/
return of 34.62%.
Q. HOW WAS THE SERIES MANAGED DURING THE FIRST SIX MONTHS?
A. The Series is managed so as to track the performance of the S&P 500 Index.
Westpeak's approach is to seek and emulate the S&P 500 Index by owning a
majority of the stocks in the Index in the same proportion as the index. This
process seeks to minimize the tracking error (the difference between the
performance of the series to the index). For example, during the second
quarter the Series returned 17.13% while the Index returned 17.43%.
A $10,000 Investment Compared to the S&P 500 Index
Average Annual Return
<TABLE>
<CAPTION>
Stock Index Lipper Variable S&P 500
Series Fund Index Average/15/
<S> <C> <C>
6 mos.* 20.13% 20.21%
1 year 33.90% 34.14%
5 years 19.24% 19.20%
10 years 14.82% 13.99%
* not annualized
</TABLE>
[GRAPH APPEARS HERE ILLUSTRATING THE GROWTH OF A $10,000 INVESTMENT IN THE
WESTPEAK STOCK INDEX COMPARED TO THE SAME IN THE S&P 500 INDEX, THE PLOT POINTS
OF WHICH ARE AS FOLLOWS:]
<TABLE>
<CAPTION>
Stock Index Series S&P 500/18/
<S> <C> <C>
6/30/87 10,000 10,000
12/87 8,271 8,257
12/88 9,623 9,619
12/89 12,524 12,658
12/90 12,006 12,264
12/91 15,652 15,984
12/92 16,794 17,700
12/93 18,427 18,926
12/94 18,637 19,183
12/95 25,511 26,366
12/96 31,243 32,404
6/30/97 37,532 39,075
</TABLE>
[CHECK MARK APPEARS HERE] 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: $106 million as of June 30, 1997
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 June 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.
43
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK STOCK INDEX SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- ----------------------------------------
COMMON STOCKS--99.3% OF TOTAL NET ASSETS
- ----------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
AEROSPACE--2.0%
4,400 Allied Signal, Inc....................................... $ 369,600
800 B.F. Goodrich Co. ....................................... 34,650
11,294 Boeing Co................................................ 599,288
900 General Dynamics Corp.................................... 67,500
2,915 Lockheed Martin Corp. ................................... 301,885
3,200 McDonnell Douglas Corp. ................................. 219,200
900 Northrop Grumman Corp. .................................. 79,031
3,600 United Technologies Corp................................. 298,800
------------
1,969,954
------------
AIRLINES--0.4%
1,400 AMR Corp.(c)............................................. 129,500
1,100 Delta Airlines, Inc. .................................... 90,200
1,700 Federal Express Corp.(c)................................. 98,175
2,200 Southwest Airlines Co.................................... 56,925
1,200 US Air Group, Inc.(c).................................... 42,000
------------
416,800
------------
ALUMINUM--0.4%
3,600 Alcan Aluminum, Ltd. .................................... 124,875
2,600 Aluminum Company of America.............................. 195,975
1,100 Reynolds Metals Co....................................... 78,375
------------
399,225
------------
APPAREL & TEXTILES--0.5%
1,100 Fruit of the Loom, Inc.(c)............................... 34,100
1,100 Liz Claiborne, Inc. ..................................... 51,288
4,500 Nike, Inc. Class B....................................... 262,687
800 Reebok International Ltd.(c)............................. 37,400
600 Russell Corp............................................. 17,775
300 Springs Industries, Inc.................................. 15,825
700 Stride Rite Corp. ....................................... 9,013
900 VF Corp. ................................................ 76,275
------------
504,363
------------
AUTOMOTIVE & RELATED--1.9%
10,800 Chrysler Corp............................................ 354,375
1,500 Dana Corp................................................ 57,000
900 Echlin, Inc. ............................................ 32,400
500 Fleetwood Enterprises, Inc............................... 14,906
18,600 Ford Motor Co. .......................................... 702,150
11,800 General Motors Corp...................................... 657,112
1,120 Navistar International Corp., Inc.(c).................... 19,320
1,290 Paccar, Inc.............................................. 59,904
1,900 TRW, Inc................................................. 107,944
------------
2,005,111
------------
BANKS--7.6%
8,775 Banc One Corp............................................ 425,039
2,300 Bank Boston Corp......................................... 165,744
6,100 Bank of New York, Inc.................................... 265,350
11,056 BankAmerica Corp. ....................................... 713,803
1,200 Bankers Trust New York Corp.............................. 104,400
3,200 Barnett Banks of Florida, Inc............................ 168,000
6,770 Chase Manhattan Corp. ................................... 657,113
7,200 Citicorp................................................. 868,050
1,600 Comerica, Inc............................................ 108,800
3,500 Core States Financial Corp. ............................. 188,125
1,600 Fifth Third Bancorp...................................... 131,300
2,000 First Bank Systems, Inc. ................................ 170,750
4,910 First Chicago Corp. ..................................... 297,055
4,450 First Union Corp. ....................................... 411,625
3,962 Fleet Financial Group, Inc............................... 250,596
2,800 J.P. Morgan & Co., Inc................................... 292,250
3,400 Keycorp.................................................. 189,975
4,100 Mellon Bank Corp......................................... 185,012
3,500 National City Corp. ..................................... 183,750
11,542 NationsBank Corp......................................... 744,459
5,800 Norwest Corp............................................. 326,250
5,200 PNC Bank Corp. .......................................... 216,450
800 Republic New York Corp. ................................. 86,000
3,500 Suntrust Banks, Inc...................................... 192,719
2,300 U.S. Bancorp. ........................................... 147,487
2,500 Wachovia Corp. .......................................... 145,781
1,433 Wells Fargo & Co......................................... 386,193
------------
8,022,076
------------
BUSINESS SERVICES--0.9%
1,200 Deluxe Corp. ............................................ 40,950
1,400 Dow Jones & Co., Inc. ................................... 56,263
2,720 Dun & Bradstreet Corp.................................... 71,400
700 EG & G, Inc. ............................................ 15,750
2,300 Equifax, Inc. ........................................... 85,531
6,900 First Data Corp.......................................... 303,169
2,000 Ikon Office Solutions, Inc............................... 49,875
1,200 Interpublic Group Companies, Inc......................... 73,575
2,400 Marsh & McLennan Cos..................................... 171,300
1,200 Ryder Systems, Inc....................................... 39,600
2,600 Unisys, Corp.(c)......................................... 19,825
------------
927,238
------------
CHEMICALS--3.0%
1,700 Air Products and Chemicals, Inc.......................... 138,125
1,600 Avery Dennison Corp...................................... 64,200
3,650 Dow Chemical Co.......................................... 318,006
1,200 Eastman Chemical Co. .................................... 76,200
17,700 E.I. Du Pont de Nemours & Co............................. 1,112,887
2,125 Engelhard Corp. ......................................... 44,492
600 FMC Corp.(c)............................................. 47,663
900 Great Lakes Chemical Corp................................ 47,138
1,500 Hercules, Inc. .......................................... 71,812
9,300 Monsanto Co.............................................. 400,481
2,100 Morton International, Inc. .............................. 63,394
</TABLE>
See accompanying notes to financial statements.
44
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK STOCK INDEX SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- --------------------------
COMMON STOCKS--(CONTINUED)
- --------------------------
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
CHEMICALS--(CONTINUED)
1,000 Nalco Chemical Co........................................ $ 38,625
5,100 Occidental Petroleum Corp. .............................. 127,819
2,900 PPG Industries, Inc...................................... 168,562
2,500 Praxair, Inc. ........................................... 140,000
1,000 Rohm & Haas Co. ......................................... 90,062
1,500 Sigma-Aldrich Corp....................................... 52,594
1,900 Union Carbide Corp. ..................................... 89,419
1,100 W.R. Grace & Co.......................................... 60,638
------------
3,152,117
------------
COMPUTER SOFTWARE & SERVICES--3.6%
1,100 Adobe Systems, Inc....................................... 38,569
700 Autodesk, Inc............................................ 26,819
4,500 Automatic Data Processing, Inc........................... 211,500
1,200 Ceridian Corp.(c)........................................ 50,700
2,520 Cognizant Corp. ......................................... 102,060
5,600 Computer Associates International, Inc................... 311,850
1,100 Computer Sciences Corp.(c)............................... 79,337
700 Intergraph Corp.(c)...................................... 5,950
18,600 Microsoft Corp.(c)....................................... 2,350,575
5,400 Novell, Inc.(c).......................................... 37,463
10,425 Oracle Systems Corp.(c).................................. 525,159
1,900 Parametric Technology Corp.(c)........................... 80,869
400 Shared Medical System.................................... 21,600
------------
3,842,451
------------
COMPUTERS & BUSINESS EQUIPMENT--5.1%
5,200 3Com Corp.(c)............................................ 234,000
1,800 Amdahl Corp.(c).......................................... 15,750
1,900 Apple Computer, Inc.(c).................................. 27,075
3,000 Bay Networks, Inc.(c).................................... 79,687
2,300 Cabletron Systems, Inc.(c)............................... 65,119
10,400 Cisco Systems, Inc.(c)................................... 698,100
4,300 Compaq Computer Corp.(c)................................. 426,775
600 Data General Corp.(c).................................... 15,600
2,700 Dell Computer Corp.(c)................................... 317,081
2,400 Digital Equipment Corp.(c)............................... 85,050
3,900 EMC Corp.(c)............................................. 152,100
15,800 Hewlett-Packard Co. ..................................... 884,800
16,100 International Business Machines.......................... 1,452,019
2,200 Pitney Bowes, Inc. ...................................... 152,900
3,800 Seagate Technology(c).................................... 133,712
2,700 Silicon Graphics, Inc.(c)................................ 40,500
5,700 Sun Microsystems, Inc.(c)................................ 212,147
1,800 Tandem Computers, Inc.(c)................................ 36,450
5,000 Xerox Corp. ............................................. 394,375
------------
5,423,240
------------
CONSTRUCTION--0.3%
600 Armstrong World Industries, Inc. ........................ 44,025
400 Centex Corp.............................................. 16,250
1,200 Fluor Corp............................................... 66,225
600 Kaufman & Broad Home Corp................................ 10,538
2,400 Masco Corp............................................... 100,200
2,600 Sherwin Williams Co...................................... 80,275
------------
317,513
------------
CONSUMER GOODS & SERVICES--0.4%
1,400 Black & Decker Corp...................................... 52,063
6,400 CUC International, Inc.(c)............................... 165,200
1,500 Maytag Corp.............................................. 39,188
3,700 Service Corporation International........................ 121,637
1,100 Whirlpool Corp. ......................................... 60,019
------------
438,107
------------
CONTAINERS & GLASS--0.3%
500 Ball Corp. .............................................. 15,031
800 Bemis, Inc. ............................................. 34,600
1,900 Crown Cork & Seal, Inc. ................................. 101,531
800 Temple Inland, Inc. ..................................... 43,200
2,600 Tenneco, Inc. ........................................... 117,487
------------
311,849
------------
COSMETICS & TOILETRIES--0.2%
800 Alberto Culver Co........................................ 22,400
2,000 Avon Products, Inc....................................... 141,125
------------
163,525
------------
DOMESTIC OIL--1.5%
7,700 Amoco Corp. ............................................. 669,419
1,100 Ashland, Inc. ........................................... 51,013
5,000 Atlantic Richfield Co.................................... 352,500
1,900 Burlington Resources, Inc................................ 83,837
500 Louisiana Land & Exploration............................. 28,563
700 Pennzoil Co.............................................. 53,725
4,100 Phillips Petroleum Co. .................................. 179,375
1,511 Santa Fe Energy Research, Inc.(c)........................ 22,193
1,300 Sonat, Inc. ............................................. 66,625
3,964 Union Pacific Res. Group, Inc............................ 98,605
------------
1,605,855
------------
DRUGS--8.2%
12,100 Abbott Laboratories...................................... 807,675
1,000 Allergan, Inc. .......................................... 31,813
1,300 Alza Corp.(c)............................................ 37,700
10,100 American Home Products Corp.............................. 772,650
4,000 Amgen, Inc. ............................................. 232,500
15,580 Bristol-Myers & Squibb Co................................ 1,261,980
1,700 Cardinal Health, Inc. ................................... 97,325
8,700 Eli Lilly & Co........................................... 951,019
18,900 Merck & Co............................................... 1,956,150
10,100 Pfizer, Inc. ............................................ 1,206,950
</TABLE>
See accompanying notes to financial statements.
45
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK STOCK INDEX SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- --------------------------
COMMON STOCKS--(CONTINUED)
- --------------------------
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
DRUGS--(CONTINUED)
7,880 Pharmacia & Upjohn, Inc. ................................ $ 273,830
11,400 Schering-Plough Corp..................................... 545,775
4,300 Warner-Lambert Co........................................ 534,275
------------
8,709,642
------------
ELECTRIC UTILITIES--2.4%
3,000 American Electric Power Co., Inc. ....................... 126,000
2,200 Baltimore Gas & Electric Co. ............................ 58,713
2,300 Carolina Power & Light Co. .............................. 82,512
3,200 Central & South West Corp................................ 68,000
2,411 Cinergy Corp............................................. 83,933
3,700 Consolidated Edison Co. of New York...................... 108,919
2,850 Dominion Resources, Inc.................................. 104,381
2,200 DTE Energy Co............................................ 60,775
5,627 Duke Power Co............................................ 269,744
6,700 Edison International..................................... 166,662
3,700 Entergy Corp............................................. 101,287
2,800 FPL Group, Inc. ......................................... 128,975
1,800 GPU, Inc................................................. 64,575
3,600 Houston Industries, Inc. ................................ 77,175
2,200 Niagara Mohawk Power Corp.(c)............................ 18,838
1,000 Northern States Power Co................................. 51,750
2,300 Ohio Edison Co. ......................................... 50,169
6,400 Pacific Gas & Electric Corp.............................. 155,200
4,600 Pacificorp............................................... 101,200
3,500 PECO Energy Co........................................... 73,500
2,600 P.P. & L Res, Inc. ...................................... 51,838
3,600 Public Service Enterprise Group.......................... 90,000
10,700 Southern Co.............................................. 234,062
3,400 Texas Utilities Co. ..................................... 117,087
3,400 Unicom Corp. ............................................ 75,650
1,500 Union Electric Co. ...................................... 56,531
------------
2,577,476
------------
ELECTRONICS--4.4%
2,200 Advanced Micro Devices, Inc.(c).......................... 79,200
3,456 AMP, Inc................................................. 144,288
1,330 Andrew Corp.(c).......................................... 37,406
1,800 Cooper Industries, Inc................................... 89,550
600 Harris Corp. ............................................ 50,400
1,900 Honeywell, Inc. ......................................... 144,162
12,800 Intel Corp. ............................................. 1,815,200
2,100 LSI Logic Corp.(c)....................................... 67,200
3,300 Micron Technology, Inc................................... 131,794
9,300 Motorola, Inc. .......................................... 706,800
2,100 National Semiconductor Corp.(c).......................... 64,313
4,100 Northern Telecom, Ltd. .................................. 373,100
700 Raychem Corp. ........................................... 52,063
3,700 Raytheon Co. ............................................ 188,700
3,300 Rockwell International Corp.............................. 194,700
1,100 Scientific Atlanta, Inc. ................................ 24,063
500 Tektronix, Inc. ......................................... 30,000
2,700 Tellabs, Inc.(c)......................................... 150,862
3,000 Texas Instruments, Inc................................... 252,187
800 Thomas & Betts Corp. .................................... 42,050
------------
4,638,038
------------
FINANCE--2.5%
7,300 American Express Co...................................... 543,850
800 Beneficial Corp.......................................... 56,850
2,700 Charles Schwab Corp. .................................... 109,856
1,500 H & R Block, Inc......................................... 48,375
1,700 Household International, Inc............................. 199,644
5,187 MBNA Corp. .............................................. 189,974
5,200 Merrill Lynch & Company, Inc. ........................... 310,050
8,899 Morgan Stanley Group, Inc................................ 383,213
1,400 Providian Corp........................................... 44,975
1,600 Salomon, Inc. ........................................... 89,000
10,068 Travelers Group, Inc..................................... 634,913
------------
2,610,700
------------
FOOD & BEVERAGES--6.1%
8,425 Archer-Daniels-Midland Co. .............................. 197,988
7,200 Campbell Soup Co. ....................................... 360,000
38,800 Coca Cola Co. ........................................... 2,619,000
3,650 Conagra, Inc. ........................................... 234,056
2,200 CPC International, Inc................................... 203,087
2,400 General Mills, Inc. ..................................... 156,300
5,700 H.J. Heinz Co............................................ 262,912
2,300 Hershey Foods Corp. ..................................... 127,219
3,200 Kellogg Co. ............................................. 274,000
24,200 PepsiCo, Inc............................................. 909,012
1,200 Pioneer Hi Bred International, Inc. ..................... 96,000
2,000 Quaker Oats Co........................................... 89,750
7,400 Sara Lee Corp. .......................................... 308,025
2,400 Unilever N.V. ........................................... 523,200
1,500 Whitman Corp. ........................................... 37,969
1,700 William Wrigley Jr. Co................................... 113,900
------------
6,512,418
------------
FOREIGN OIL RESERVES--0.0%
700 Kerr-McGee Corp. ........................................ 44,363
------------
GAS & PIPELINE UTILITIES--0.5%
800 Columbia Gas System, Inc................................. 52,200
1,400 Consolidated Natural Gas Co. ............................ 75,338
300 Eastern Enterprises...................................... 10,406
4,000 Enron Corp............................................... 163,250
1,000 Ensearch Corp............................................ 22,250
700 Nicor, Inc. ............................................. 25,113
2,200 Noram Energy Corp........................................ 33,550
400 Oneok, Inc............................................... 12,875
1,300 Pacific Enterprises, Ltd. ............................... 43,713
</TABLE>
See accompanying notes to financial statements.
46
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK STOCK INDEX SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- --------------------------
COMMON STOCKS--(CONTINUED)
- --------------------------
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
GAS & PIPELINE UTILITIES--(CONTINUED)
500 Peoples Energy Corp. .................................... $ 18,719
2,400 Williams Companies, Inc. ................................ 105,000
------------
562,414
------------
HEALTH CARE--3.2%
800 Bausch & Lomb, Inc....................................... 37,700
4,400 Baxter International, Inc. .............................. 229,900
1,800 Becton Dickinson & Co.................................... 91,125
1,500 Beverly Enterprises, Inc.(c)............................. 24,375
1,700 Biomet, Inc. ............................................ 31,663
3,100 Boston Scientific Corp.(c)............................... 190,456
10,386 Columbia HCA/Healthcare Corp. ........................... 408,300
800 C.R. Bard, Inc. ......................................... 29,050
1,100 Guidant Corp............................................. 93,500
5,400 HEALTHSOUTH Corp.(c)..................................... 134,662
2,600 Humana, Inc.(c).......................................... 60,125
20,900 Johnson & Johnson........................................ 1,345,437
1,100 Mallinckrodt Group, Inc. ................................ 41,800
900 Manor Care, Inc.......................................... 29,363
3,600 Medtronics, Inc.......................................... 291,600
600 Millipore Corp. ......................................... 26,400
1,300 St. Jude Medical, Inc.(c)................................ 50,700
4,700 Tenet Healthcare Corp.(c)................................ 138,944
2,800 United Healthcare Corp. ................................. 145,600
1,100 United States Surgical Corp.............................. 40,975
------------
3,441,675
------------
HOTELS & RESTAURANTS--1.0%
2,400 Darden Restaurants, Inc.................................. 21,750
1,550 Harrahs Entertainment, Inc.(c)........................... 28,288
2,400 HFS, Inc.(c)............................................. 139,200
3,800 Hilton Hotels Corp....................................... 100,938
1,700 ITT Corp. ............................................... 103,806
1,900 Marriott International, Inc. ............................ 116,612
10,800 McDonald's Corp. ........................................ 521,775
2,100 Wendys International, Inc. .............................. 54,469
------------
1,086,838
------------
INSURANCE--3.0%
6,886 Allstate Corp. .......................................... 502,678
7,212 American International Group, Inc........................ 1,077,292
2,600 Aon Corp. ............................................... 134,550
2,600 Chubb Corp............................................... 173,875
1,100 CIGNA Corp. ............................................. 195,250
1,200 General Reinsurance Corp................................. 218,400
1,800 Hartford Financial Services Group........................ 148,950
1,700 Loews Corp. ............................................. 170,213
600 MBIA, Inc. .............................................. 67,688
1,800 MGIC Investment Corp..................................... 86,287
1,900 Safeco Corp. ............................................ 88,706
1,200 St. Paul Companies, Inc. ................................ 91,500
1,050 Torchmark, Inc. ......................................... 74,812
2,200 UNUM Corp. .............................................. 92,400
1,700 USF&G Corp. ............................................. 40,800
------------
3,163,401
------------
INTERNATIONAL OIL--4.2%
10,300 Chevron Corp............................................. 761,556
38,800 Exxon Corp. ............................................. 2,386,200
12,200 Mobil Corp. ............................................. 852,475
1,600 Oryx Energy Corp.(c)..................................... 33,800
4,000 Texaco, Inc. ............................................ 435,000
------------
4,469,031
------------
LEISURE TIME--0.2%
1,500 Brunswick Corp........................................... 46,875
1,950 Hasbro, Inc. ............................................ 55,331
4,450 Mattel, Inc.............................................. 150,744
------------
252,950
------------
LIFE INSURANCE--0.7%
2,283 Aetna Life & Casualty Co. ............................... 233,722
3,698 American General Corp. .................................. 176,580
2,900 Conseco, Inc. ........................................... 107,300
1,025 Jefferson Pilot Corp. ................................... 71,622
1,600 Lincoln National Corp., Inc. ............................ 103,000
1,000 Transamerica Corp. ...................................... 93,562
------------
785,786
------------
LIQUOR--0.7%
600 Adolph Coors Co. ........................................ 15,975
7,700 Anheuser-Busch Companies, Inc. .......................... 322,919
1,000 Brown Forman Corp. "B"................................... 48,813
2,600 Fortune Brands, Inc. .................................... 97,013
5,800 Seagram Company, Ltd. ................................... 233,450
------------
718,170
------------
MEDIA & ENTERTAINMENT--2.1%
5,100 Comcast Corp. ........................................... 109,012
2,000 General Instrument Corp.(c).............................. 50,000
550 King World Productions, Inc. ............................ 19,250
10,400 Tele-Communications A(c)................................. 154,700
8,800 Time-Warner, Inc. ....................................... 424,600
1,800 Tribune Co. ............................................. 86,512
9,600 U.S. West Media Group, Inc............................... 194,400
5,457 Viacom, Inc.(c).......................................... 163,710
10,398 Walt Disney Co. ......................................... 834,439
10,000 Westinghouse Electric Corp............................... 231,250
------------
2,267,873
------------
</TABLE>
See accompanying notes to financial statements.
47
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK STOCK INDEX SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- --------------------------
COMMON STOCKS--(CONTINUED)
- --------------------------
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
METAL--0.2%
600 ASARCO, Inc.............................................. $ 18,375
2,500 Inco, Ltd. .............................................. 75,156
1,000 Phelps Dodge Corp. ...................................... 85,187
------------
178,718
------------
MINING--0.0%
1,350 Cyprus Amax Minerals Co. ................................ 33,075
------------
MORTGAGE--1.2%
1,600 Countrywide Credit Industries, Inc....................... 49,900
11,000 Federal Home Loan Mortgage Corp.......................... 378,125
17,000 Federal National Mortgage Association.................... 741,625
2,100 Green Tree Acceptance Corp............................... 74,812
------------
1,244,462
------------
OIL--2.1%
1,400 Amerada Hess Corp. ...................................... 77,787
1,600 Coastal Corp. ........................................... 85,100
33,200 Royal Dutch Petroleum Co. ADR(d)......................... 1,805,250
1,100 Sun, Inc. ............................................... 34,100
3,800 Unocal Corp. ............................................ 147,487
4,500 USX Marathon Group....................................... 129,937
------------
2,279,661
------------
OIL SERVICES--0.8%
2,200 Baker Hughes, Inc........................................ 85,113
1,900 Halliburton Co. ......................................... 150,575
400 Helmerich & Payne, Inc. ................................. 23,050
1,300 Rowan Companies, Inc.(c)................................. 36,644
3,900 Schlumberger, Ltd. ...................................... 487,500
800 Western Atlas, Inc.(c)................................... 58,600
------------
841,482
------------
PAPER & FOREST PRODUCTS--1.3%
733 Boise Cascade Corp. ..................................... 25,884
1,400 Champion International Corp.............................. 77,350
1,400 Georgia Pacific Corp..................................... 119,525
4,710 International Paper Co. ................................. 228,729
1,300 James River Corp......................................... 48,100
8,712 Kimberly Clark Corp. .................................... 433,422
1,600 Louisiana Pacific Corp. ................................. 33,800
800 Mead Corp. .............................................. 49,800
400 Potlatch Corp............................................ 18,100
1,500 Stone Container Corp.(c)................................. 21,469
1,000 Union Camp Corp.......................................... 50,000
1,475 Westvaco Corp............................................ 46,370
3,000 Weyerhaeuser Co.......................................... 156,000
800 Willamette Industries, Inc............................... 56,000
------------
1,364,549
------------
PHOTOGRAPHY--0.4%
5,050 Eastman Kodak Co. ....................................... 387,587
700 Polaroid Corp............................................ 38,850
------------
426,437
------------
POLLUTION CONTROL--0.3%
3,200 Browning-Ferris Industries, Inc.......................... 106,400
900 Safety Kleen Corp........................................ 15,188
7,000 Waste Management, Inc.................................... 224,875
------------
346,463
------------
PRECIOUS METALS--0.4%
5,800 Barrick Gold Corp........................................ 127,600
3,600 Battle Mountain Gold Co. ................................ 20,475
2,100 Echo Bay Mines, Ltd.(c).................................. 12,075
3,100 Freeport McMoran Copper & Gold........................... 96,487
2,200 Homestake Mining Co. .................................... 28,738
2,341 Newmont Mining Corp...................................... 91,299
3,800 Placer Dome, Inc......................................... 62,225
------------
438,899
------------
PRODUCER OF GOODS--7.4%
400 Aeroquip-Vickers, Inc. .................................. 18,900
2,700 Applied Materials, Inc.(c)............................... 191,194
400 Briggs & Stratton Corp................................... 20,000
1,100 Case Equipment Corp...................................... 75,763
2,900 Caterpillar, Inc. ....................................... 311,387
600 Cincinnati Milacron, Inc. ............................... 15,563
700 Crane Co. ............................................... 29,269
600 Cummins Engine, Inc. .................................... 42,338
4,000 Deere & Co............................................... 219,500
1,700 Dover Corp. ............................................. 104,550
2,800 Dresser Industries, Inc.................................. 104,300
1,700 DSC Communications Corp.(c).............................. 37,825
1,100 Eaton Corp. ............................................. 96,044
6,900 Emerson Electric Co...................................... 379,931
600 Foster Wheeler Corp. .................................... 24,300
51,400 General Electric Co...................................... 3,360,275
700 General Signal Corp. .................................... 30,538
2,700 Genuine Parts Co. ....................................... 91,462
500 Giddings & Lewis, Inc. .................................. 10,438
700 Harnischfeger Industries, Inc. .......................... 29,050
3,800 Illinois Tool Works, Inc................................. 189,762
1,600 Ingersoll-Rand Co. ...................................... 98,800
1,800 ITT Industries Inc.(c)................................... 46,350
1,200 Johnson Controls, Inc.................................... 49,275
10,006 Lucent Technologies, Inc. ............................... 721,057
800 McDermott International, Inc............................. 23,350
6,500 Minnesota Mining & Mfg. Co. ............................. 663,000
700 National Services Industries, Inc. ...................... 34,081
800 Owens Corning Fiberglas Co............................... 34,500
1,900 Pall Corp................................................ 44,175
</TABLE>
See accompanying notes to financial statements.
48
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK STOCK INDEX SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- --------------------------
COMMON STOCKS--(CONTINUED)
- --------------------------
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
PRODUCER OF GOODS--(CONTINUED)
1,100 Parker Hannifin Corp..................................... $ 66,756
600 Perkin Elmer Corp........................................ 47,738
850 Snap-On Tools Corp. ..................................... 33,469
1,300 Stanley Works............................................ 52,000
2,600 Textron, Inc. ........................................... 172,575
2,400 Thermo Electron Corp.(c)................................. 81,600
1,000 Timken Co................................................ 35,563
2,500 TYCO International Ltd. ................................. 173,906
800 W.W. Grainger, Inc....................................... 62,550
------------
7,823,134
------------
PUBLISHING--0.7%
1,100 American Greetings Corp. ................................ 40,838
2,100 Gannet Co., Inc. ........................................ 207,375
1,100 Harcourt General, Inc. .................................. 52,388
500 John H. Harland Co. ..................................... 11,406
600 Jostens, Inc. ........................................... 16,050
1,400 Knight-Ridder, Inc. ..................................... 68,688
1,500 McGraw-Hill Companies, Inc............................... 88,219
800 Meredith Corp. .......................................... 23,200
1,500 Moore Corp., Ltd. ....................................... 29,531
1,400 New York Times Co........................................ 69,300
2,300 R.R. Donnelley & Sons Co................................. 84,237
1,500 Time Mirror Co........................................... 82,875
------------
774,107
------------
RAILROADS & EQUIPMENT--0.9%
2,322 Burlington Northern, Inc. ............................... 208,690
3,400 CSX Corp. ............................................... 188,700
4,900 Laidlaw, Inc............................................. 67,681
1,900 Norfolk Southern Corp.................................... 191,425
3,900 Union Pacific Corp. ..................................... 274,949
------------
931,445
------------
REAL ESTATE--0.0%
300 Pulte Corp............................................... 10,369
------------
RETAIL--4.1%
2,300 Autozone, Inc.(c)........................................ 54,194
1,600 Charming Shoppes, Inc.(c)................................ 8,350
1,500 Circuit City Stores, Inc. ............................... 53,344
2,600 CVS Corp. ............................................... 133,250
3,400 Dayton Hudson Corp....................................... 180,837
1,700 Dillard Department Stores, Inc. ......................... 58,863
3,300 Federated Department Stores(c)........................... 114,675
7,649 Home Depot, Inc.......................................... 527,303
3,800 J.C. Penney Company, Inc. ............................... 198,312
7,500 K-Mart Corp.(c).......................................... 91,875
600 Longs Drug Stores Corp. ................................. 15,713
2,600 Lowes Companies, Inc. ................................... 96,525
3,700 May Department Stores Co. ............................... 174,825
550 Mercantile Stores Co., Inc............................... 34,616
1,200 Nordstrom, Inc. ......................................... 58,875
900 Pep Boys: Manny, Moe & Jack.............................. 30,656
3,339 Price Costco.(c)......................................... 109,770
1,800 Rite Aid Corp. .......................................... 89,775
6,100 Sears, Roebuck & Co...................................... 327,875
900 Tandy Corp. ............................................. 50,400
4,300 The Gap, Inc. ........................................... 167,162
4,293 The Limited, Inc......................................... 86,933
2,400 TJX Companies, Inc. ..................................... 63,300
4,475 Toys R Us, Inc.(c)....................................... 156,625
3,900 Walgreen Co.............................................. 209,137
35,600 Wal-Mart Stores, Inc. ................................... 1,203,725
2,000 Woolworth Corp.(c)....................................... 48,000
------------
4,344,915
------------
RETAIL--FOOD & DRUG--0.6%
3,800 Albertson's, Inc......................................... 138,700
2,200 American Stores Co....................................... 108,625
600 Fleming Companies, Inc. ................................. 10,800
900 Giant Foods, Inc......................................... 29,363
600 Great Atlantic & Pacific Tea Company, Inc................ 16,313
4,000 Kroger Co.(c)............................................ 116,000
1,000 SuperValu Stores, Inc.................................... 34,500
2,700 Sysco Corp. ............................................. 98,550
2,200 Winn-Dixie Stores, Inc. ................................. 81,950
------------
634,801
------------
SOAPS--3.2%
800 Clorox Co................................................ 105,600
4,600 Colgate Palmolive Co. ................................... 300,150
3,600 Corning, Inc............................................. 200,250
1,000 Ecolab, Inc.............................................. 47,750
8,700 Gillette Co.............................................. 824,325
1,600 International Flavours & Fragrances, Inc................. 80,800
100 Nacco Industries, Inc. .................................. 5,644
2,400 Newell Co................................................ 95,100
10,460 Procter & Gamble Co. .................................... 1,477,475
1,600 Ralston Purina Co. ...................................... 131,500
2,400 Rubbermaid, Inc. ........................................ 71,400
900 Tupperware Corp. ........................................ 32,850
------------
3,372,844
------------
STEEL--0.2%
2,632 Allegheny Teldyne, Inc. ................................. 71,064
1,600 Armco, Inc.(c)........................................... 6,200
1,700 Bethlehem Steel Corp.(c)................................. 17,744
700 Inland Steel Industries, Inc............................. 18,288
1,300 Nucor Corp............................................... 73,450
</TABLE>
See accompanying notes to financial statements.
49
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK STOCK INDEX SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- --------------------------
COMMON STOCKS--(CONTINUED)
- --------------------------
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
STEEL--(CONTINUED)
1,220 USX-U.S. Steel Group..................................... $ 42,776
1,400 Worthington Industries, Inc. ............................ 25,638
------------
255,160
------------
TELECOMMUNICATION--6.1%
7,900 Airtouch Communications(c)............................... 216,263
2,800 ALLTEL Corp.............................................. 93,625
8,500 Ameritech Corp. ......................................... 577,469
25,435 AT&T Corp. .............................................. 891,815
6,800 Bell Atlantic Corp. ..................................... 515,950
15,600 BellSouth Corp. ......................................... 723,450
2,600 Frontier Corp. .......................................... 51,838
15,000 GTE Corp. ............................................... 658,125
10,800 MCI Communications Corp. ................................ 413,437
6,800 NYNEX Corp............................................... 391,850
14,308 SBC Communications, Inc. ................................ 885,307
6,700 Sprint Corp. ............................................ 352,587
7,500 U.S. West, Inc.(c)....................................... 282,656
14,000 Worldcom, Inc. .......................................... 448,000
------------
6,502,372
------------
THRIFT--0.2%
900 Golden West Financial Corp............................... 63,000
2,050 Great Western Financial Corp. ........................... 110,187
1,600 H.F. Ahmanson & Co....................................... 68,800
------------
241,987
------------
TIRES & RUBBER--0.2%
1,200 Cooper Tire & Rubber Co.................................. 26,400
2,300 Goodyear Tire & Rubber Co. .............................. 145,619
------------
172,019
------------
TOBACCO--1.7%
37,900 Philip Morris Companies, Inc............................. 1,681,812
2,800 UST, Inc. ............................................... 77,700
------------
1,759,512
------------
TRUCKING & FREIGHT FORWARDING--0.0%
600 Caliber Systems, Inc. ................................... 22,350
------------
Total Common Stocks
(Identified Cost $61,990,165)........................... 105,338,960
------------
<CAPTION>
- ---------------------------
SHORT-TERM INVESTMENT--1.5%
- ---------------------------
FACE
AMOUNT VALUE (A)
<C> <S> <C>
$1,575,000 Repurchase Agreement with State Street Bank & Trust
Co. dated 6/30/97 at 5.000% to be repurchased at
$1,575,219, on 7/01/97 collateralized by
$1,525,000, U.S. Treasury Bond 7.250% due 5/15/16,
with a value of $1,610,066........................ $ 1,575,000
------------
Total Short-Term Investment
(Identified Cost $1,575,000)...................... 1,575,000
------------
Total Investments--100.8%
(Identified Cost $63,565,165)(b).................. 106,913,960
Other assets less liabilities...................... (807,272)
------------
TOTAL NET ASSETS--100%............................. $106,106,688
============
</TABLE>
(a) See Note 1A.
(b) Federal Tax Information:
At June 30, 1997 the net unrealized appreciation on investments based on
cost of $63,565,165 for federal income tax purposes was as follows:
<TABLE>
<S> <C>
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost..................................... $ 44,216,659
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax
cost over value................................... (867,864)
------------
Net unrealized appreciation........................ $ 43,348,795
============
</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.
50
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK STOCK INDEX SERIES)
- ---------------------------------
STATEMENT OF ASSETS & LIABILITIES
- ---------------------------------
JUNE 30, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments at value.................................... $106,913,960
Cash.................................................... 235
Receivable for:
Fund shares sold....................................... 170,185
Dividends and interest................................. 123,575
Foreign taxes.......................................... 290
------------
107,208,245
LIABILITIES
Payable for:
Securities purchased................................... $904,678
Fund shares redeemed................................... 79,483
Withholding taxes...................................... 55
Accrued expenses:
Management fees........................................ 58,325
Deferred trustees' fees................................ 51,073
Other expenses......................................... 7,943
--------
1,101,557
------------
$106,106,688
============
NET ASSETS
Net Assets consist of:
Capital paid in........................................ $ 61,597,482
Undistributed net investment income.................... 698,212
Accumulated net realized gains......................... 462,199
Unrealized appreciation on investments................. 43,348,795
------------
NET ASSETS............................................... $106,106,688
============
Computation of offering price:
Net asset value and redemption price per share
($106,106,688 divided by 738,394 shares of beneficial
interest)............................................... $ 143.70
============
Identified cost of investments........................... $ 63,565,165
============
<CAPTION>
- -----------------------
STATEMENT OF OPERATIONS
- -----------------------
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<S> <C> <C>
INVESTMENT INCOME
Dividends............................................ $ 841,149(a)
Interest............................................. 30,899
-----------
872,048
EXPENSES
Management fees...................................... $113,925
Trustees' fee and expenses........................... 18,844
Custodian............................................ 38,921
Audit and tax services............................... 3,796
Legal................................................ 9,340
Printing............................................. 23,307
Miscellaneous........................................ 1,818
--------
Total expenses..................................... 209,951
Less expenses assumed by the investment adviser.... (27,670) 182,281
-------- -----------
NET INVESTMENT INCOME................................. 689,767
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Realized gain on:
Investments--net.................................... 174,769
Unrealized appreciation on:
Investments--net.................................... 16,152,770
-----------
Net gain on investment transactions................... 16,327,539
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS............ $17,017,306
===========
</TABLE>
(a) Net of foreign taxes of: $5,811
See accompanying notes to financial statements.
51
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK STOCK INDEX SERIES)
- ----------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
- ----------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ ------------
<S> <C> <C>
FROM OPERATIONS
Net investment income............................. $ 1,258,557 $ 689,767
Net realized gain on investments.................. 995,215 174,769
Unrealized appreciation on investments............ 11,760,936 16,152,770
------------ ------------
INCREASE IN NET ASSETS FROM OPERATIONS............ 14,014,708 17,017,306
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income............................. (1,270,368) 0
Net realized gain on investments.................. (675,238) 0
------------ ------------
(1,945,606) 0
------------ ------------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares...................... 21,863,034 19,366,891
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income.......... 1,270,368 0
Distributions from net realized gain.............. 675,238 0
------------ ------------
23,808,640 19,366,891
Cost of shares redeemed........................... (13,784,516) (11,041,357)
------------ ------------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL SHARE
TRANSACTIONS..................................... 10,024,124 8,325,534
------------ ------------
TOTAL INCREASE IN NET ASSETS...................... 22,093,226 25,342,840
NET ASSETS
Beginning of the period........................... 58,670,622 80,763,848
------------ ------------
End of the period................................. $ 80,763,848 $106,106,688
============ ============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the period........................... $ 20,255 $ 8,445
============ ============
End of the period................................. $ 8,445 $ 698,212
============ ============
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares.................... 198,327 148,139
Issued in connection with the reinvestment of:
Distributions from net investment income.......... 10,371 0
Distributions from net realized gain.............. 5,855 0
------------ ------------
214,553 148,139
Redeemed.......................................... (125,580) (84,891)
------------ ------------
Net change........................................ 88,973 63,248
============ ============
<CAPTION>
- --------------------------------
FINANCIAL HIGHLIGHTS (UNAUDITED)
- --------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $137.39 $ 72.00 $ 76.48 $ 75.35 $100.09 $ 119.62
------- ------- ------- ------- ------- --------
Income From Investment
Operations
Net Investment Income.. 8.35 1.54 1.80 1.88 1.91 0.93
Net Realized and
Unrealized Gain (Loss)
on Investments........ 2.02 5.18 (0.92) 25.89 20.58 23.15
------- ------- ------- ------- ------- --------
Total From Investment
Operations............ 10.37 6.72 0.88 27.77 22.49 24.08
------- ------- ------- ------- ------- --------
Less Distributions
Distributions From Net
Investment Income..... (8.35) (1.36) (1.82) (1.85) (1.93) 0.00
Distributions in Excess
of Net Investment
Income................ 0.00 (0.18) 0.00 0.00 0.00 0.00
Distributions From Net
Realized Capital
Gains................. (67.41) (0.55) (0.16) (1.18) (1.03) 0.00
Distributions in Excess
of Net Realized
Capital Gains......... 0.00 (0.15) 0.00 0.00 0.00 0.00
Distributions From
Paid-in Capital....... 0.00 0.00 (0.03) 0.00 0.00 0.00
------- ------- ------- ------- ------- --------
Total Distributions.... (75.76) (2.24) (2.01) (3.03) (2.96) 0.00
------- ------- ------- ------- ------- --------
Net Asset Value, End of
Period................. $ 72.00 $ 76.48 $ 75.35 $100.09 $119.62 $ 143.70
======= ======= ======= ======= ======= ========
TOTAL RETURN (%)........ 7.30 9.72 1.14 36.88 22.47 20.13(a)
Ratio of Operating
Expenses to Average Net
Assets (%)............. 0.35 0.34 0.33 0.40 0.40 0.40(b)
Ratio of Net Investment
Income to Average Net
Assets (%)............. 2.63 2.52 2.59 2.20 1.84 1.50(b)
Portfolio Turnover Rate
(%).................... 17 12 2 5 4 4(b)
Average Commission Rate
(c).................... -- -- -- -- $0.0309 $ 0.0304
Net Assets, End of
Period (000)........... $10,172 $28,817 $37,164 $58,671 $80,764 $106,107
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 0.46(b)
</TABLE>
(a) Not computed on an annualized basis.
(b) Computed on an annualized basis.
(c) 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.
52
<PAGE>
LOOMIS SAYLES BALANCED SERIES
PORTFOLIO MANAGERS: CAROL MCMURTRIE, TRICIA MILLS,MERI ANNE BECK, RODERIC
DILLON, JOHN HYLL AND BARR SEGAL LOOMIS, SAYLES & COMPANY, L.P.
[PICTURE APPEARS HERE] [PICTURE APPEARS HERE]
[PICTURE APPEARS HERE]
Q. HOW DID LOOMIS SAYLES BALANCED SERIES PERFORM IN THE FIRST HALF OF 1997?
A. For the six-month period ending June 30, 1997, the Series generated a total
return of 8.49%.
We're pleased to announce that Lipper ranked the Series in the top 19% (#7 out
of 37) of its balanced fund peer group for the one-year period ended June 30,
1997. Lipper is an independent mutual fund monitor whose rankings do not re-
flect sales charges and may change each month. Past performance doesn't guar-
antee future results.
Q. WHAT FACTORS INFLUENCED YOUR MANAGEMENT OF THE PORTFOLIO'S EQUITY PORTION?
A. An overweighting in strong financial stocks, such as BankAmerica and
NationsBank, helped to boost Series performance in the first half of 1997.
Several other companies, including Philips NV and Federal Express, also en-
joyed returns of 20% or more.
However, developments in specific holdings, such as York International,
Greentree Financial and United Meridian, combined to offset gains contributed
by the high-return stocks. In the case of York International, a commercial
air-conditioner and heating manufacturer and servicer, earnings were impacted
by weaker-than-expected business conditions in Europe and by cooler-than-an-
ticipated weather in the northeastern United States.
We eliminated some positions where our confidence in the fundamentals had de-
creased. We continued to focus on issue selection, adding consumer-related
companies such as Warnaco and Dayton Hudson to the portfolio--demonstrating
our more positive outlook for company prospects.
Q. AND ON THE FIXED-INCOME SIDE OF THE SERIES' PORTFOLIO?
A. Corporate bond yield spreads (the additional yield to maturity over compa-
rable Treasuries) widened in the first quarter after the Federal Reserve Board
raised interest rates in March. We added investments in brokerage-related com-
panies like Smith Barney Holdings, and positive credit trends led us to new
purchases in Archer Daniels Midland, and Northwest Airlines.
In the second quarter, improving credit outlooks spurred opportunities for
price appreciation in a number of issues, and led us to buy Sears, Roebuck Ac-
ceptance Notes, Norfolk Southern Corporation bonds, Loewen Group, and Sprint
Spectrum Senior Notes. We sold Federated Department Stores after spreads nar-
rowed, and we continue to avoid the utility sector as heavy merger and acqui-
sition activity have increased event risk in that area.
From a credit quality viewpoint we increased our holdings in BBB and BB rated
bonds, which outperformed higher-rated corporate bonds. The overall credit
quality of the Series, however, remains very high at AA.
Q. WHAT IS YOUR OUTLOOK FOR THE REST OF THE YEAR?
A. While inflation remains well behaved and we expect growth to remain steady,
the Federal Reserve may raise interest rates later this year to keep infla-
tionary pressures at bay. In this environment we expect higher short-term
rates and stable-to-slightly higher long-term rates. Economic activity should
continue to moderate, while the stock market volatility of the past few months
could continue through the rest of the year.
Issue selection will remain key to performance going forward. We'll continue
to keep our focus away from the larger growth stocks and on low price-to-earn-
ings, large and mid-capitalization companies, as is consistent with the Se-
ries' value investment strategy. We plan to retain our corporate bond emphasis
and slightly reduce our U.S. Treasury holdings.
53
<PAGE>
A $10,000 Investment Compared to the S&P 500/18/ and
Lehman Borthers Gov't/Corp./4/ Indices
Average Annual Return
<TABLE>
<CAPTION>
Balanced Lipper Variable Balanced
Series Fund Average/7/
<S> <C> <C>
6 mos.* 8.49% 10.19%
1 year 21.65% 18.94%
Since Inception 18.75% n/a
* not annualized
</TABLE>
[GRAPH APPEARS HERE ILLUSTRATING THE GROWTH OF A $10,000 INVESTMENT IN THE
LOOMIS SAYLES BALANCED SERIES COMPARED TO THE SAME IN THE S&P 500 INDEX, THE
PLOT POINTS OF WHICH ARE AS FOLLOWS:]
<TABLE>
<CAPTION>
Balanced Series S&P 500/18/ Leh/Gov't Corp./5/
<S> <C> <C> <C>
10/31/94 10,000 10,000 10,000
12/31/94 9,990 9,779 10,048
12/31/95 12,467 13,449 11,981
12/31/96 14,575 16,535 12,329
6/30/97 15,812 19,942 12,667
</TABLE>
[CHECK MARK APPEARS HERE] 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: $86 million as of June 30, 1997
MANAGERS: Effective August 1997, the Loomis Sayles Balanced Series equity
management team consists of Carol C. McMurtrie, Tricia H. Mills and Roderic
Dillon. The fixed-income team consists of Meri Anne Beck, John Hyll and Barr
Segal. Please refer to the prospectus supplement at the beginning of this report
for more details.
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.
54
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES BALANCED SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- ----------------------------------------
COMMON STOCKS--60.8% OF TOTAL NET ASSETS
- ----------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
AEROSPACE--2.5%
6,700 Lockheed Martin Corp. .................................... $ 693,869
8,600 Northrop Grumman Corp. ................................... 755,188
13,600 Raytheon Co. ............................................. 693,600
-----------
2,142,657
-----------
APPAREL & TEXTILES--2.5%
23,500 Reebok International, Ltd................................. 1,098,625
33,400 Warnaco Group, Inc........................................ 1,064,625
-----------
2,163,250
-----------
BANKS--4.5%
14,800 BankAmerica Corp. ........................................ 955,525
8,400 Chase Manhattan Corp., New................................ 815,325
18,200 NationsBank Corp.......................................... 1,173,900
16,300 Norwest Corp. ............................................ 916,875
-----------
3,861,625
-----------
BEVERAGES--1.2%
41,400 Whitman Corp.............................................. 1,047,938
-----------
CHEMICALS--4.8%
48,800 Crompton & Knowles Corp. ................................. 1,085,800
24,000 EI du Pont de Nemours & Co................................ 1,509,000
7,500 PPG Industries, Inc....................................... 435,938
20,400 W.R. Grace & Co........................................... 1,124,550
-----------
4,155,288
-----------
COMPUTERS & BUSINESS EQUIPMENT--1.9%
21,300 EMC Corp.(c).............................................. 830,700
18,500 3Com Corp................................................. 832,500
-----------
1,663,200
-----------
CONGLOMERATES--4.2%
14,200 Allied Signal, Inc........................................ 1,192,800
20,000 Dover Corp. .............................................. 1,230,000
17,100 Philips Electronics NV (ADR)(d)........................... 1,229,063
-----------
3,651,863
-----------
ELECTRICAL EQUIPMENT--1.2%
22,200 York International Corp., New............................. 1,021,200
-----------
ELECTRONIC COMPONENTS--0.4%
2,700 Intel Corp. .............................................. 382,894
-----------
FINANCIAL SERVICES--2.8%
30,200 Federal Home Loan Mortgage Corp. ......................... 1,038,125
23,000 Federal National Mortgage Association..................... 1,003,375
11,400 Green Tree Financial Corp. ............................... 406,125
-----------
2,447,625
-----------
FREIGHT TRANSPORTATION--4.3%
13,000 Burlington Northern Santa Fe.............................. 1,168,375
21,700 Canadian Pacific, Ltd., New............................... 617,094
16,400 Federal Express Corp.(c).................................. 947,100
29,400 Ryder Systems, Inc. ...................................... 970,200
-----------
3,702,769
-----------
HEALTH CARE--SERVICES--4.3%
10,500 Aetna, Inc................................................ 1,074,938
33,300 Beverly Enterprises, Inc.................................. 541,125
27,950 Columbia/HCA Healthcare Corp. ............................ 1,098,784
35,340 Foundation Health Corp.(c)................................ 1,071,244
-----------
3,786,091
-----------
HOUSEHOLD PRODUCTS--1.3%
23,300 Kimberly-Clark Corp. ..................................... 1,159,175
-----------
HOUSING & BUILDING MATERIALS--4.6%
16,700 Armstrong World Industries, Inc. ......................... 1,225,363
32,900 Leggett & Platt, Inc...................................... 1,414,700
31,000 Masco Corp. .............................................. 1,294,250
-----------
3,934,313
-----------
INSURANCE--4.9%
16,700 ACE, Ltd.................................................. 1,233,713
10,800 Allstate Corp. ........................................... 788,400
32,900 Everest Reinsurance Holdings, Inc......................... 1,303,663
27,900 TIG Holdings, Inc. ....................................... 871,872
-----------
4,197,648
-----------
LEISURE TIME--3.1%
29,600 American Greetings Corp................................... 1,098,900
37,900 Carnival Corp. ........................................... 1,563,375
-----------
2,662,275
-----------
OIL & GAS--1.5%
28,800 Tosco Corp. .............................................. 862,200
14,100 United Meridian Corp. .................................... 423,000
-----------
1,285,200
-----------
PACKAGING--1.3%
20,600 Crown Cork & Seal Co., Inc. .............................. 1,100,813
-----------
RETAIL--1.9%
19,800 Dayton Hudson Corp........................................ 1,053,113
29,400 Office Depot.............................................. 571,463
-----------
1,624,576
-----------
RETAIL--FOOD & DRUG--1.0%
28,300 The Kroger Co.(c)......................................... 820,700
-----------
</TABLE>
See accompanying notes to financial statements.
55
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES BALANCED SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- --------------------------
COMMON STOCKS--(CONTINUED)
- --------------------------
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
SOFTWARE--0.4%
16,700 Symantec Corp. ....................................... $ 325,650
-----------
TELECOMMUNICATION--3.9%
17,400 Ameritech Corp. ...................................... 1,182,113
24,400 GTE Corp. ............................................ 1,070,550
18,286 SBC Communications, Inc. ............................. 1,131,443
-----------
3,384,106
-----------
TOBACCO--2.3%
11,000 Loews Corp. .......................................... 1,101,375
30,900 UST, Inc. ............................................ 857,475
-----------
1,958,850
-----------
Total Common Stocks
(Identified Cost $42,684,023)........................ 52,479,706
-----------
<CAPTION>
- ---------------------------------------
MEDIUM & LONG TERM BONDS & NOTES--35.2%
- ---------------------------------------
FACE
AMOUNT
<C> <S> <C>
AIRLINES--0.7%
$ 600,000 Northwest Airlines, 8.375%, 03/15/04.................. 605,160
-----------
BANKS--0.9%
350,000 Capital One Bank, 6.830%, 5/17/99..................... 350,627
50,000 Chase Manhattan Corp., 9.050%, 2/01/02................ 50,122
310,000 Mellon Bank N A, 7.000%, 3/15/06...................... 306,853
50,000 Norwest Corp., 7.650%, 3/15/05........................ 51,940
-----------
759,542
-----------
CABLE & MEDIA--0.4%
350,000 TCI Communications, Inc.,
7.250%, 6/15/99...................................... 352,674
-----------
COMPUTER--0.3%
300,000 Comdisco, Inc., 5.760%, 1/19/99....................... 297,666
-----------
ENERGY--0.2%
125,000 Coastal Corp., 8.125% 9/15/02......................... 131,595
-----------
FINANCE--3.4%
125,000 Associates Corp. NA, 8.350%, 12/22/98................. 128,866
115,000 Avalon Properties, Inc., 7.375%, 9/15/02.............. 116,785
260,000 Dean Witter Discover & Co.,
6.750%, 1/01/16...................................... 239,442
200,000 Ford Motor Credit Corp., 6.850%, 8/15/00.............. 201,646
244,000 General Motors Acceptance Corp.,
5.500%, 12/15/01..................................... 231,229
280,000 Oasis Residential, Inc., 7.000%, 11/15/03............. 275,190
520,000 Sears Roebuck Acceptance Corp.,
6.95% 05/15/02....................................... 522,558
100,000 Secured Finance, 9.050%, 12/15/04..................... 111,059
575,000 Transamerica Finance Corp.,
6.750%, 6/01/00...................................... 575,558
300,000 Western Financial Services,
6.950%, 11/20/03..................................... 302,583
199,854 World Omni Automobile Lease Finance Corp., 6.550%,
6/25/02.............................................. 201,277
-----------
2,906,193
-----------
FOOD & BEVERAGES--0.8%
720,000 Archer Daniels Midland Co.,
7.500%, 03/15/27..................................... 729,461
-----------
FOREST PRODUCTS--0.8%
700,000 MacMillan Bloedel, Ltd.,
7.700%, 02/15/26..................................... 652,071
-----------
GOVERNMENT AGENCIES--14.9%
350,000 Federal Home Loan Bank,
7.151%, 9/13/05...................................... 346,346
1,020,000 United States Treasury Notes,
6.750%, 6/30/99...................................... 1,032,434
455,000 United States Treasury Notes,
6.125%, 7/31/00...................................... 453,435
600,000 United States Treasury Notes,
8.750%, 8/15/00...................................... 641,718
500,000 United States Treasury Notes, 7.500%, 11/15/01........ 521,015
600,000 United States Treasury Notes,
7.250%, 05/15/04..................................... 625,404
910,000 United States Treasury Notes,
6.500%, 8/15/05...................................... 907,443
4,000,000 United States Treasury Notes,
7.000%, 7/15/06...................................... 4,115,000
800,000 United States Treasury Notes,
Zero Coupon 11/15/09................................. 345,408
1,300,000 United States Treasury Bonds,
10.375%, 11/15/12.................................... 1,650,181
1,100,000 United States Treasury Bonds,
9.125%, 5/15/18...................................... 1,373,801
890,000 United States Treasury Bonds,
6.625%, 2/15/27...................................... 870,812
-----------
12,882,997
-----------
HEALTHCARE--0.6%
50,000 Columbia/HCA Healthcare Co.,
8.020%, 8/5/02....................................... 52,568
440,000 National Health Investments, Inc.,
7.300%, 07/16/07..................................... 437,800
-----------
490,368
-----------
</TABLE>
See accompanying notes to financial statements.
56
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES BALANCED SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- ---------------------------------------------
MEDIUM & LONG TERM BONDS & NOTES--(CONTINUED)
- ---------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
INDUSTRIALS--2.0%
$ 325,000 Amerco, 7.850%, 5/15/03.............................. $ 334,451
535,000 Loewen Group International, Inc.,
7.750%, 10/15/01.................................... 543,025
260,000 Philips Electronics NV, 7.250%, 8/15/13.............. 250,890
420,000 SKF AB, 7.125%, 07/01/07............................. 417,190
200,000 Tektronix, Inc., 7.625%, 8/15/02..................... 203,304
-----------
1,748,860
-----------
INSURANCE--0.3%
275,000 Travelers Aetna, 6.750%, 4/15/01..................... 275,454
-----------
LEISURE & LODGING--0.5%
100,000 Carnival Corp., 7.050%, 5/15/05...................... 99,964
300,000 La Quinta Inns, Inc., 7.400%, 9/15/05................ 289,500
-----------
389,464
-----------
MORTGAGE--1.7%
352,759 Federal National Mortgage Association, 7.000%,
12/01/11............................................ 351,986
271,557 Federal National Mortgage Association, 7.000%,
12/01/11............................................ 270,963
813,859 Federal National Mortgage Association, 7.500%,
2/01/27............................................. 814,022
-----------
1,436,971
-----------
MORTGAGED BACKED--2.0%
200,000 Federal Home Loan Mortgage Corp., 8.000%, 7/15/21.... 204,436
685,812 Federal Home Loan Mortgage Association, 6.000%,
8/15/22............................................. 597,726
620,000 Federal National Mortgage Association, 6.000%,
2/25/24............................................. 544,937
50,000 General Electric Capital Mortgage Services, Inc.,
10.000%, 3/25/24.................................... 51,171
75,000 Westam Mortgage Financial Corp.,
8.950%, 8/01/18..................................... 78,539
200,000 Westam Mortgage Financial Corp.,
9.400%, 12/01/18.................................... 208,062
-----------
1,684,871
-----------
RAILROADS--0.5%
460,000 Norfolk Southern Corp.,
7.050%, 05/01/37.................................... 466,638
-----------
SECURITIES--2.7%
225,000 Alex Brown, Inc., 7.625%, 8/15/05.................... 229,963
200,000 Donaldson Lufkin & Jennrette, Inc.,
6.875%, 11/01/05.................................... 195,754
100,000 Lehman Brothers Holdings, Inc.,
5.750%, 11/15/98.................................... 99,241
200,000 Lehman Brothers Holdings, Inc.,
7.360%, 12/15/03.................................... 201,568
100,000 Merrill Lynch & Co., 8.375%, 2/09/00................. 104,377
390,000 Salomon Brothers, Inc., 7.125%, 8/01/99.............. 392,894
145,000 Salomon, Inc., 7.500%, 2/01/03....................... 146,963
480,000 Smith Barney Holdings, Inc.,
7.000%, 03/15/04.................................... 480,394
450,000 Van Kampen Merritt Companies, Inc., 9.750%, 02/15/03. 475,168
-----------
2,326,322
-----------
TECHNOLOGY--0.2%
200,000 Digital Equipment Corp.,
8.625%, 11/01/12.................................... 203,306
-----------
TELECOMMUNICATION--1.0%
200,000 Southern Bell Telephone & Telegraph Co., 7.625%,
3/15/13............................................. 198,766
950,000 Sprint Spectrum L.P.,
Zero Coupon, 08/15/06............................... 693,500
-----------
892,266
-----------
TRANSPORTATION--0.2%
100,000 AMR Corp., 10.290%, 03/08/21......................... 124,798
25,000 AMR Corp., 10.180%, 1/02/13.......................... 29,951
-----------
154,749
-----------
UTILITIES--1.1%
250,000 Cincinnati Gas & Electric Co.,
7.375%, 11/01/01.................................... 252,780
520,000 Waterford 3 Funding Energy,
8.090%, 1/01/17..................................... 521,508
195,000 Detroit Edison Co., 6.340%, 3/15/00.................. 193,001
-----------
967,289
-----------
Total Bonds & Notes
(Identified Cost $30,334,694)....................... 30,353,917
-----------
</TABLE>
See accompanying notes to financial statements.
57
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES BALANCED SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- ---------------------------
SHORT-TERM INVESTMENT--4.3%
- ---------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
$3,714,000 Associates Corp. of North America,
5.450%, 7/01/97.................................... $ 3,714,000
-----------
Total Short-Term Investment
(Identified Cost $3,714,000)....................... 3,714,000
-----------
Total Investments--100.3%
(Identified Cost $76,732,717(b).................... 86,547,623
Other assets less liabilities....................... (230,952)
-----------
TOTAL NET ASSETS--100%.............................. $86,316,671
===========
</TABLE>
(a) See Note 1a.
(b) Federal Tax Information: At June 30, 1997 the net unrealized appreciation
on investments based on cost of $76,732,717 for federal income tax purposes
was as follows:
<TABLE>
<S> <C>
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost...................................... $10,513,851
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value......................................... (698,945)
-----------
Net unrealized appreciation......................... $ 9,814,906
===========
</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.
58
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES BALANCED SERIES)
- ---------------------------------
STATEMENT OF ASSETS & LIABILITIES
- ---------------------------------
JUNE 30, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments at value................................... $86,547,623
Cash................................................... 66
Receivable for:
Fund shares sold...................................... 400,704
Securities sold....................................... 616,563
Dividends and interest................................ 536,087
Foreign taxes......................................... 44
Unamortized organization............................... 4,691
-----------
88,105,778
LIABILITIES
Payable for:
Securities purchased.................................. $1,424,425
Fund shares redeemed.................................. 255,503
Miscellaneous......................................... 347
Accrued expenses:
Management fees....................................... 81,685
Deferred trustees' fees............................... 1,564
Other expenses........................................ 25,583
----------
1,789,107
-----------
$86,316,671
===========
NET ASSETS
Net Assets consist of:
Capital paid in....................................... $74,038,468
Undistributed net investment income................... 978,331
Accumulated net realized gains........................ 1,484,951
Unrealized appreciation on investments and foreign
currency............................................. 9,814,921
-----------
NET ASSETS.............................................. $86,316,671
===========
Computation of offering price:
Net asset value and redemption price per share
($86,316,671 divided by 5,872,879 shares of beneficial
interest).............................................. $ 14.70
===========
Identified cost of investments.......................... $76,732,717
===========
<CAPTION>
- -----------------------
STATEMENT OF OPERATIONS
- -----------------------
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<S> <C> <C>
INVESTMENT INCOME
Dividends.............................................. $ 323,890(a)
Interest............................................... 943,092
----------
1,266,982
EXPENSES
Management fees........................................ $ 246,414
Trustees' fees and expenses............................ 11,113
Custodian.............................................. 25,475
Audit and tax services................................. 6,901
Legal.................................................. 9,340
Printing............................................... 6,170
Amortization of organization expenses.................. 997
Miscellaneous.......................................... 1,819
----------
Total expenses....................................... 308,229
Less expenses assumed by the
investment adviser.................................. (9,012) 299,217
---------- ----------
NET INVESTMENT INCOME................................... 967,765
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS
Realized gain on:
Investments--net...................................... 963,269
----------
Unrealized appreciation on:
Investments--net...................................... 4,306,472
Foreign currency transactions--net.................... 16
----------
Total unrealized appreciation on
investments and foreign
currency transactions............................... 4,306,488
----------
Net gain on investment transactions..................... 5,269,757
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS.............. $6,237,522
==========
</TABLE>
(a) Net of foreign taxes of: $1,470
See accompanying notes to financial statements.
59
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES BALANCED SERIES)
- ----------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
- ----------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
<S> <C> <C>
FROM OPERATIONS
Net investment income............................... $ 1,121,822 $ 967,765
Net realized gain on investments and foreign
currency transactions.............................. 940,791 963,269
Unrealized appreciation on investments and foreign
currency transactions.............................. 4,480,648 4,306,488
----------- -----------
INCREASE IN NET ASSETS FROM OPERATIONS.............. 6,543,261 6,237,522
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income............................... (1,114,677) 0
Net realized gain on investments.................... (557,561) 0
----------- -----------
(1,672,238) 0
----------- -----------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares........................ 41,044,288 31,028,607
Net asset value of shares issued in connection with
the reinvestment of:
Distributions from net investment income............ 1,114,677 0
Distributions from net realized gain................ 557,561 0
----------- -----------
42,716,526 31,028,607
Cost of shares redeemed............................. (7,885,382) (9,474,301)
----------- -----------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL SHARE
TRANSACTIONS....................................... 34,831,144 21,554,306
----------- -----------
TOTAL INCREASE IN NET ASSETS........................ 39,702,167 27,791,828
NET ASSETS
Beginning of the period............................. 18,822,676 58,524,843
----------- -----------
End of the period................................... $58,524,843 $86,316,671
=========== ===========
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the period............................. $ 1,050 $ 10,566
=========== ===========
End of the period................................... $ 10,566 $ 978,331
=========== ===========
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares...................... 3,250,311 2,238,651
Issued in connection with the reinvestment of:
Distributions from net investment income............ 82,445 0
Distributions from net realized gain................ 30,535 0
----------- -----------
3,363,291 2,238,651
Redeemed............................................ (619,940) (684,216)
----------- -----------
Net change.......................................... 2,743,351 1,554,435
=========== ===========
<CAPTION>
- --------------------------------
FINANCIAL HIGHLIGHTS (UNAUDITED)
- --------------------------------
OCTOBER 31, 1994(A) SIX MONTHS
THROUGH YEAR YEAR ENDED
DECEMBER 31, ENDED ENDED JUNE 30,
1994 1995 1996 1997
------------------- ------- ------- ----------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period.................. $10.00 $ 9.94 $ 11.95 $ 13.55
------ ------- ------- -------
Income From Investment
Operations
Net Investment Income...... 0.05 0.26 0.27 0.16
Net Realized and Unrealized
Gain (Loss) on
Investments............... (0.06) 2.20 1.73 0.99
------ ------- ------- -------
Total From Investment
Operations................ (0.01) 2.46 2.00 1.15
------ ------- ------- -------
Less Distributions
Distributions From Net
Investment Income......... (0.05) (0.26) (0.27) 0.00
Distributions From Net
Realized Capital Gains.... 0.00 (0.19) (0.13) 0.00
------ ------- ------- -------
Total Distributions........ (0.05) (0.45) (0.40) 0.00
------ ------- ------- -------
Net Asset Value, End of
Period..................... $ 9.94 $ 11.95 $ 13.55 $ 14.70
====== ======= ======= =======
TOTAL RETURN (%)............ (0.10)(b) 24.79 16.91 8.49(b)
Ratio of Operating Expenses
to Average Net Assets (%).. 0.85 (c) 0.85 0.85 0.85(c)
Ratio of Net Investment
Income to Average Net
Assets (%)................. 4.16 (c) 4.03 3.08 2.72(c)
Portfolio Turnover Rate (%). 0 (c) 72 59 46(c)
Average Commission Rate (d). -- -- $0.0594 $0.0594
Net Assets, End of Period
(000)...................... $2,722 $18,823 $58,525 $86,317
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 (c) 1.85 0.99 0.88(c)
</TABLE>
(a) Commencement of operations.
(b) Not computed on an annualized basis.
(c) 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.
60
<PAGE>
BACK BAY ADVISORS MANAGED SERIES
PORTFOLIO MANAGER: PETER PALFREY BACK BAY ADVISORS, L.P.
[PICTURE APPEARS HERE]
The Zenith Managed Series is a "Flexible" managed Series, typically targeting
a 65/35 split between stocks and bond/money market holdings. As market condi-
tions 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 the first half of 1997, the stock allocation ranged from 68-73%. Over
the past five years, the stock allocation has ranged from 50-78%.
Q. HOW DID THE SERIES PERFORM DURING THE FIRST HALF OF THE YEAR?
A. The Managed Series continued its strong relative and absolute performance
during the first six months of 1997, returning 15.60% versus 10.46% for the
median Lipper "Flexible Portfolio Fund." This represented 514 basis points of
outperformance. This should be viewed in the context of a 2.74% return for the
Lehman Government/Corporate Index/5/ (the Series' fixed income benchmark), and
a 20.59% return for the S&P 500 Index/18/, including the reinvestment of
dividends (the Series' equity benchmark), during the first half of 1997. The
Managed Series now ranks among the top six Lipper Variable Products Flexible
Portfolio Funds for 1, 3, 5 and 10 year periods.
During the first quarter, above-trend economic growth, an increasingly tight
labor market, and strong gains in personal income and consumer expenditures
prompted the Federal Reserve to preemptively raise short term interest rates
as an insurance policy against "persisting strength in consumer demand." While
the rate increase was widely anticipated by the market, investors subsequently
began to price in a series of Federal Reserve rate hikes, despite the absence
of any measurable increase in inflationary pressures. Over the next several
weeks, stocks corrected nearly 10% and the 30-year bond yield rose above 7%,
before recovering a part of their losses late in March. However, by early in
the second quarter, growing evidence of significantly less robust economic
growth, coupled with continued benign inflation data, caused an "about face"
in investor expectations for additional Federal Reserve monetary policy tight-
ening. This allowed financial markets to stage a dramatic rally throughout the
quarter. While bonds posted respectable gains during this period, stocks were
the real beneficiary of the change in investor sentiment. Under the backdrop
of the moderate decline in interest rates and very solid corporate earnings,
stocks turned in one of their best quarterly performances ever, gaining more
than 17% during the second quarter alone.
The Managed Series benefited from its relative overweight position in stocks.
Additionally, large capitalization, growth stocks, which are well-represented
in the Series, continued to perform very well relative to the broader market.
Bonds also turned in a solid total return during the second quarter, recover-
ing from the sharp selloff in March, as fears of a monetary tightening "proc-
ess" by the Federal Reserve proved unfounded. Long duration US and Canadian
pay securities performed very well, as did crossover (Baa/Ba)* and emerging
market issues. The Series' issue selection and yield curve positioning allowed
it to significantly outperform the Lehman Index during the first half of the
year.
With stock market technicals and fundamentals remaining strong through the
first half of 1997, I maintained the portfolio equity allocation at a 3 to 8
percent overweight level versus my normally "targeted" 65 percent stock/35
percent bond/money market holdings split. Despite considerable volatility
caused by investor angst over the possibility of additional Federal Reserve
action after strong first quarter GDP growth, stock market capital flows re-
sumed in force in the second quarter (after a brief hiatus during the March
market correction), providing a ready "bid" for any market dip. Corporate
earnings have also continued to surprise to the upside, particularly among
larger capitalization, industry sales leaders, supporting our corporate earn-
ings outlook of 12-14 percent growth per year through 1998.
As interest rate concerns abated late in the first quarter, I modestly length-
ened the bond portfolio duration, but maintained the defensive structure of
the portfolio through a barbelled combination of short and intermediate higher
yielding US and Yankee securities and long-dated Canadian pay issues. This
structure provides a hedge against a resurgence in upward pressure on US in-
terest rates. Throughout this period, a substantial portion of the portfolio
duration has been achieved with 30-year Canadian Government and Provincial
zero coupon bonds--a strategy that has added substantially to the superior
performance of the bond portfolio thus far in 1997. The Series' overweight po-
sition in cable/media bonds also contributed significantly to its overall per-
formance, as improving sector and individual credit fundamentals drove issue
spreads considerably tighter through the second quarter.
61
<PAGE>
Q. WHAT IS YOUR INVESTMENT OUTLOOK FOR THE MONTHS AHEAD?
A. After a pronounced slowdown in economic activity in the second quarter
(largely due to a sharp pullback in consumer demand), and with continued be-
nign inflationary pressures, market sentiment has become increasingly bullish
in recent weeks for both stocks and bonds. Many analysts are now looking for a
sidelined Federal Reserve, perhaps through year-end. As of June 30, 1997 the
2-year Treasury was currently trading around 5.9 percent (only 40 basis points
over the Fed Series' Rate) and the 30-year was flirting with 6.5%--back to
levels last seen in February of this year, before the Federal Reserve tight-
ened.
While bonds should remain in the current trading range over the near term,
perhaps with a yield curve flattening bias, I believe there is now an in-
creased risk that a rebound in consumer activity (housing, retail) later in
the third quarter or early in the fourth quarter could reignite fears of an-
other preemptive strike by the Federal Reserve in its bid to contain demand-
pull price pressures. With current equity valuations very full by most histor-
ical measures, not only will investors scrutinize quarterly earnings results,
severely penalizing underperformers, but they will also keep a watchful eye
towards any sign of a reversal in the recent downward trend in interest rates.
Therefore, despite a strong start to the "earnings reporting season," I be-
lieve additional upside over the near term in stocks will be largely dependent
upon a well-behaved bond market.
A $10,000 Investment Compared to the S&P 500 and
Lehman Brothers Government/Corporation Index
Average Annual Return
<TABLE>
<CAPTION>
Lipper Variable Flexible
Zenith Managed Series Portfolio Fund Average/8/
<S> <C> <C>
6 mos.* 15.60% 10.35%
1 year 26.35% 19.40%
5 years 15.28% 13.18%
10 years 12.59% 11.01%
* not annualized
</TABLE>
[GRAPH APPEARS HERE ILLUSTRATING THE GROWTH OF A $10,000 INVESTMENT IN THE BACK-
BAY MANAGED SERIES COMPARED TO THE SAME IN THE S&P 500 INDEX AND THE
LEHMAN/GOVERNMENT CORP. INDEX OF WHICH THE PLOT POINTS ARE AS FOLLOWS:]
<TABLE>
<CAPTION>
Managed Series S&P 500/19/ Leh/Gov't Corp./5/
<S> <C> <C> <C>
6/30/87 10,000 10,000 10,000
12/31/87 9,545 8,251 10,356
12/31/88 10,450 10,205 11,141
12/31/89 12,444 13,020 12,728
12/31/90 12,844 16,988 13,782
12/31/91 15,435 18,283 16,004
12/31/92 16,469 20,121 17,217
12/31/93 18,223 20,386 19,117
12/31/94 18,020 20,386 18,448
12/31/95 23,653 28,037 21,997
12/31/96 27,210 34,470 22,636
6/30/97 31,455 41,571 23,256
</TABLE>
[CHECK MARK APPEARS HERE] 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: $177 million as of June 30, 1997
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.
LOGO
62
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS MANAGED SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- ----------------------------------------
COMMON STOCKS--69.6% OF TOTAL NET ASSETS
- ----------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
AEROSPACE--1.2%
11,276 Boeing Co................................. $ 598,333
5,400 Lockheed Martin Corp. .................... 559,237
14,600 Rockwell International Corp............... 861,400
------------
2,018,970
------------
AIR TRANSPORTATION--0.3%
2,900 Delta Air Lines, Inc. .................... 237,800
10,100 Southwest Airlines Co. ................... 261,338
------------
499,138
------------
AUTOMOBILE & RELATED--1.7%
37,764 Chrysler Corp. ........................... 1,239,131
12,500 General Motors Corp....................... 696,094
10,125 Genuine Parts Co. ........................ 342,984
4,500 Goodyear Tire & Rubber Co. ............... 284,906
7,200 Paccar, Inc............................... 334,350
------------
2,897,465
------------
BANKS--5.5%
15,186 Banc One Corp. ........................... 735,572
20,288 BankAmerica Corp.......................... 1,309,844
10,600 Bankers Trust New York Corp. ............. 922,200
8,700 Chase Manhattan Corp. New................. 844,444
9,400 Citicorp ................................. 1,133,287
7,800 First Chicago Corp. ...................... 471,900
10,900 J.P. Morgan & Co., Inc. .................. 1,137,687
14,400 NationsBank Corp. ........................ 928,800
17,100 Norwest Corp.............................. 961,875
5,000 Republic NY Corp.......................... 537,500
2,800 Wells Fargo & Co.......................... 754,600
------------
9,737,709
------------
BEVERAGES--0.3%
20,000 Whitman Corp. ............................ 506,250
------------
BUSINESS MACHINES--2.0%
8,500 Apple Computer............................ 121,125
28,400 Digital Equipment Corp.(c).................. 1,006,425
27,400 International Business Machines Corp. .... 2,471,138
------------
3,598,688
------------
BUSINESS SERVICES--0.7%
28,500 Browning Ferris Industries, Inc. ......... 947,625
9,200 H & R Block, Inc.......................... 296,700
------------
1,244,325
------------
CHEMICALS--2.7%
14,200 Allied-Signals, Inc. ..................... 1,192,800
8,200 Dow Chemical Co........................... 714,425
27,400 E.I. Du Pont de Nemours & Co.............. 1,722,775
11,000 Great Lakes Chemical Corp................. 576,125
3,900 Pitney Bowes, Inc. ....................... 271,050
5,100 Union Carbide Corp. ...................... 240,019
------------
4,717,194
------------
COMMUNICATION--5.0%
15,500 Airtouch Communications, Inc. ............ 424,313
13,100 Ameritech Corp. .......................... 889,981
39,261 AT&T Co................................... 1,376,589
16,200 BellSouth Corp. .......................... 751,275
10,600 GTE Corp. ................................ 465,075
6,400 Harris Corp. ............................. 537,600
8,834 Lucent Technologies, Inc. ................ 636,600
11,900 Northern Telecom LTD...................... 1,082,900
14,600 NYNEX Corp................................ 841,325
14,137 SBC Communications, Inc. ................. 874,727
23,900 US West, Inc.............................. 900,731
------------
8,781,116
------------
CONGLOMERATES--1.0%
11,100 Frontier Corp. ........................... 221,306
2,200 ITT Corp. ................................ 134,338
13,800 Minnesota Mining & Manufacturing.......... 1,407,600
------------
1,763,244
------------
CONSTRUCTION--0.9%
13,400 Home Depot, Inc. ......................... 923,763
14,900 Masco Corp. .............................. 622,075
------------
1,545,838
------------
CONSUMER DURABLES--2.2%
7,300 Black & Decker Corp....................... 271,469
53,400 General Electric Co....................... 3,491,025
800 Whirlpool Corp............................ 43,650
------------
3,806,144
------------
CONTAINERS--0.2%
6,000 Bemis, Inc. .............................. 259,500
------------
DATA PROCESSING--2.6%
16,100 Intel Corp. .............................. 2,283,181
17,900 Microsoft Corp............................ 2,262,113
100 Oracle Sys Corp........................... 5,038
------------
4,550,332
------------
DOMESTIC OIL--1.2%
4,300 Amerada Hess Corp. ....................... 238,919
2,800 Amoco Corp. .............................. 243,425
5,400 Atlantic Richfield Co..................... 380,700
3,600 Halliburton Co. .......................... 285,300
934 Santa Fe Energy, Inc.(c).................. 13,718
3,601 Sun, Inc. ................................ 111,631
</TABLE>
See accompanying notes to financial statements.
63
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS MANAGED SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- --------------------------
COMMON STOCKS--(CONTINUED)
- --------------------------
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
DOMESTIC OIL--(CONTINUED)
7,000 Tenneco, Inc............................................. $ 316,312
15,600 Unocal Corp. ............................................ 605,475
------------
2,195,480
------------
DRUGS & MEDICINE--6.3%
8,800 Abbott Laboratories...................................... 587,400
10,600 American Home Products Corp. ............................ 810,900
12,800 Bausch & Lomb, Inc....................................... 603,200
17,500 Baxter International, Inc. .............................. 914,375
9,600 Becton Dickerson & Co.................................... 486,000
17,000 C. R. Bard, Inc.......................................... 617,312
12,600 Corning, Inc............................................. 700,875
15,200 Eli Lilly & Co. ......................................... 1,661,550
11,200 Mallinckrodt, Inc........................................ 425,600
19,500 Merck & Co., Inc. ....................................... 2,018,250
10,400 Pfizer, Inc. ............................................ 1,242,800
21,600 Schering-Plough Corp. ................................... 1,034,100
------------
11,102,362
------------
ELECTRONICS--2.5%
21,400 AMP, Inc................................................. 893,450
18,800 Emerson Electric Co...................................... 1,035,175
20,000 Hewlett-Packard.......................................... 1,120,000
15,400 Raytheon Co. ............................................ 785,400
9,600 Tektronix, Inc. ......................................... 576,000
------------
4,410,025
------------
ENERGY & UTILITIES--2.3%
11,700 Consolidated Edison Co. ................................. 344,419
40,200 Edison International..................................... 999,975
45,700 Pacific Gas & Electric Corp.............................. 1,108,225
10,700 Pepco Energy Co.......................................... 224,700
7,700 Public Service Enterprise Group.......................... 192,500
8,900 Texas Utilities Co....................................... 306,494
38,500 Unicom Corp. ............................................ 856,625
------------
4,032,938
------------
ENERGY RAW MATERIALS--0.8%
27,200 Occidental Petroleum Corp. .............................. 681,700
------------
ENTERTAINMENT--0.0%
2,200 ITT Industry, Inc........................................ 56,650
------------
FINANCE--2.5%
10,400 American Express Co...................................... 774,800
21,800 Federal Home Loan Mortgage Corp. ........................ 749,375
21,400 Federal National Mortgage Association.................... 933,575
14,508 Morgan Stanley/Dean Witter............................... 624,751
25,100 Salomon, Inc............................................. 1,396,188
------------
4,478,689
------------
FOOD & AGRICULTURE--3.8%
36,900 Coca Cola Co. ........................................... 2,490,750
20,450 H. J. Heinz Co........................................... 943,256
11,200 Kellogg Co. ............................................. 959,000
30,700 PepsiCo, Inc. ........................................... 1,153,169
16,000 Sara Lee Corp. .......................................... 666,000
15,200 Supervalu, Inc........................................... 524,400
------------
6,736,575
------------
GAS UTILITIES--0.3%
14,200 Eastern Enterprises...................................... 492,562
------------
GOLD--0.1%
8,900 Barrick Gold Corp........................................ 195,800
------------
INSURANCE--2.7%
11,500 Aetna Life & Casualty Co. ............................... 1,177,312
10,568 Allstate Corp. .......................................... 771,464
14,400 American General Corp. .................................. 687,600
6,468 American International Group, Inc. ...................... 966,157
2,700 Cigna Corp............................................... 479,250
2,200 Hartford Financial Services Group........................ 182,050
4,600 Loews Corp. ............................................. 460,575
------------
4,724,408
------------
INTERNATIONAL OIL--4.4%
11,000 Chevron Corp............................................. 813,312
38,400 Exxon Corp. ............................................. 2,361,600
15,600 Mobil Corp. ............................................. 1,090,050
39,200 Royal Dutch Petroleum Co. (ADR)(d)....................... 2,131,500
11,900 Texaco, Inc. ............................................ 1,294,125
------------
7,690,587
------------
LEISURE--0.3%
17,000 Brunswick Corp. ......................................... 531,250
------------
LIQUOR--0.4%
6,600 Anheuser-Busch Companies, Inc. .......................... 276,787
11,700 Seagram, Ltd. ........................................... 470,925
------------
747,712
------------
MEDIA--1.1%
3,000 Gannett Company, Inc..................................... 296,250
15,200 Tele-Communications, Inc. ............................... 226,100
26,500 Time Warner, Inc. ....................................... 1,278,625
9,700 US West, Inc. ........................................... 196,425
------------
1,997,400
------------
MISCELLANEOUS--1.1%
8,000 American Greetings Corp. ................................ 297,000
10,000 Cognizant Corp. ......................................... 405,000
</TABLE>
See accompanying notes to financial statements.
64
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS MANAGED SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- --------------------------
COMMON STOCKS--(CONTINUED)
- --------------------------
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
MISCELLANEOUS--(CONTINUED)
10,900 EG & G, Inc.............................................. $ 245,250
8,500 Fortune Brands, Inc. .................................... 317,156
8,500 Gallaher Group PLC....................................... 156,719
4,400 Nacco Industries, Inc. .................................. 248,325
7,926 Newmont Mining Corp...................................... 309,114
------------
1,978,564
------------
NON-FERROUS METALS--0.0%
14,000 Aluminum Company of America.............................. 1,055,250
------------
OFFICE EQUIPMENT--1.1%
24,000 Xerox Corp. ............................................. 1,893,000
------------
OPTICAL PHOTO, EQUIPMENT--0.2%
3,600 Eastman Kodak Co. ....................................... 276,300
------------
PAPER & FOREST PRODUCTS--1.1%
3,300 Burlington Northern Santa Fe............................. 296,587
3,600 Georgia-Pacific Corp. ................................... 307,350
19,000 Kimberly-Clark Corp. .................................... 945,250
8,400 Westvaco Corp. .......................................... 264,075
4,050 Weyerhaeuser Co.......................................... 210,600
------------
2,023,862
------------
POLLUTION CONTROL--0.2%
9,500 Waste Management, Inc.................................... 305,188
------------
PRODUCER OF GOODS--0.3%
21,200 Cincinnati Milacron, Inc. ............................... 549,875
1,100 Deere & Co............................................... 60,363
------------
610,238
------------
PUBLISHING--0.3%
12,000 Knight Ridder, Inc. ..................................... 588,750
------------
RAILROADS & SHIPPING--0.6%
5,100 CSX Corp. ............................................... 283,050
4,500 Norfolk Southern Corp.................................... 453,375
4,200 Union Pacific Corp. ..................................... 296,100
3,557 Union Pacific Resources Group............................ 88,480
------------
1,121,005
------------
RESTAURANTS--0.3%
9,200 McDonald's Corp. ........................................ 444,475
------------
RETAIL--3.5%
19,000 Albertsons, Inc. ........................................ 693,500
5,000 J. C. Penney, Inc........................................ 260,938
38,900 Kmart Corp.(c)........................................... 476,525
26,400 Mattel, Inc. ............................................ 894,300
7,800 May Department Stores Co. ............................... 368,550
10,000 Mercantile Stores, Inc................................... 629,375
11,600 Nike, Inc. .............................................. 677,150
11,400 Sears Roebuck & Co. ..................................... 612,750
5,400 The Limited, Inc. ....................................... 109,350
44,900 Wal-Mart Stores, Inc. .................................. 1,518,181
------------
6,240,619
------------
SOAPS & COSMETICS--4.1%
17,000 Alberto Culver Co. ...................................... 476,000
3,900 Avon Products, Inc. ..................................... 275,194
26,920 Bristol-Myers Squibb Co. ................................ 2,180,520
1,900 Clorox Co. .............................................. 250,800
9,000 Gillette Co.............................................. 852,750
26,100 Johnson & Johnson........................................ 1,680,187
10,300 Procter & Gamble Co. .................................... 1,454,875
------------
7,170,326
------------
STEEL--0.2%
7,720 USX-US Steel Group....................................... 270,683
------------
TOBACCO--1.0%
40,800 Philip Morris Companies, Inc. ........................... 1,810,500
------------
TRAVEL & RECREATION--0.6%
13,235 Walt Disney Co. ......................................... 1,062,109
------------
Total Common Stocks
(Identified Cost $74,776,354)........................... 122,850,920
------------
<CAPTION>
- --------------------
BONDS & NOTES--29.4%
- --------------------
FACE
AMOUNT
<C> <S> <C>
CORPORATE BONDS--15.5%
$ 2,000,000 Comcast Cellular Holding, Inc,
9.500%, 5/01/07, 144A(e)........................... 2,010,000
3,000,000 Comcast Corp.,
10.625%, 7/15/12................................... 3,540,000
3,000,000 Conseco Financial Trust III,
8.796%, 4/01/27.................................... 3,102,030
1,000,000 Maxus Energy Corp.,
9.375%, 11/01/03................................... 1,075,000
4,525,000 News America Holdings, Inc.,
10.125%, 10/15/12.................................. 5,099,358
3,750,000 Norfolk Southern Corp.,
7.050%, 5/01/37.................................... 3,804,113
900,000 Owens Illinois, Inc.,
8.100%, 5/15/07.................................... 918,207
10,000,000 Time Warner, Inc.,
Zero Coupon, 12/17/12.............................. 3,925,000
2,000,000 Total Access Communication,
8.375%, 11/04/06................................... 1,932,720
</TABLE>
See accompanying notes to financial statements.
65
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS MANAGED SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- --------------------------
BONDS & NOTES--(CONTINUED)
- --------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
CORPORATE BONDS--(CONTINUED)
$ 30,000 Viacom, Inc.,
8.000%, 7/07/06................................... $ 29,100
2,000,000 Worldcom, Inc.,
7.750%, 4/01/27................................... 2,045,060
------------
27,480,588
------------
FOREIGN--7.6%
5,000,000 Government of Canada,
Zero Coupon, 3/15/21(d)........................... 696,984
11,500,000 Government of Canada,
Zero Coupon, 12/01/20(d).......................... 1,633,875
5,000,000 Government of Canada,
8.000%, 6/01/23(d)................................ 4,109,490
30,000,000 Ontario Province,
Zero Coupon, 09/08/23(d).......................... 3,334,661
4,250,000 Quebec Province,
Zero Coupon, 03/03/23(d).......................... 454,868
3,600,000 Quebec Province,
8.50%, 4/01/26(d)................................. 2,991,419
------------
13,221,297
------------
YANKEE--5.8%
3,250,000 Republic of Argentina,
11.375%, 1/30/17.................................. 3,656,250
5,000,000 Republic of Panama,
7.875%, 2/13/02, 144A(e).......................... 4,938,850
1,500,000 United Mexican States,
9.750%, 2/06/01................................... 1,586,250
------------
10,181,350
------------
U.S. GOVERNMENT BONDS--0.5%
373,822 Government National Mortgage Association, 10.000%,
9/15/18........................................... 410,879
455,992 Government National Mortgage Association, 11.500%
with various maturities to 2013................... 517,249
------------
928,128
------------
Total Bonds & Notes
(Identified Cost $48,433,755)..................... 51,811,363
------------
<CAPTION>
- ---------------------------
SHORT-TERM INVESTMENT--0.2%
- ---------------------------
FACE
AMOUNT VALUE (A)
<C> <S> <C>
$356,000 Household Finance Corp.,
6.080%, 7/01/97...................................... $ 356,000
------------
Total Short-Term Investment
(Identified Cost $356,000)........................... 356,000
------------
Total Investments--99.2%
(Identified Cost $123,566,109)(b).................... 175,018,283
Other assets less liabilities......................... 1,487,233
------------
TOTAL NET ASSETS--100%................................ $176,505,516
============
</TABLE>
(a) See Note 1A.
(b) Federal Tax Information:
At June 30, 1997 the net unrealized appreciation on investments based on
cost of $123,566,109 for federal income tax purposes was as follows:
<TABLE>
<S> <C>
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost....................................... $ 52,880,667
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value.......................................... (1,428,493)
------------
Net unrealized appreciation.......................... $ 51,452,174
============
</TABLE>
(c) Non-income producing security.
(d) Denominated in Canadian dollars.
(e) 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.
66
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS MANAGED SERIES)
- ---------------------------------
STATEMENT OF ASSETS & LIABILITIES
- ---------------------------------
JUNE 30, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments at value.............................. $175,018,283
Cash.............................................. 907
Receivable for:
Fund shares sold................................. 125,864
Securities sold.................................. 2,480,026
Dividends and interest........................... 1,133,162
Foreign taxes.................................... 632
------------
178,758,874
LIABILITIES
Payable for:
Securities purchased............................. $2,048,500
Fund shares redeemed............................. 47,996
Accrued expenses:
Management fees.................................. 72,099
Deferred trustees' fees.......................... 42,361
Other expenses................................... 42,402
----------
2,253,358
------------
$176,505,516
============
NET ASSETS
Net Assets consist of:
Capital paid in.................................. $110,792,028
Undistributed net investment income.............. 2,780,345
Accumulated net realized gains................... 11,480,706
Unrealized appreciation on investments and foreign
currency........................................ 51,452,437
------------
NET ASSETS......................................... $176,505,516
============
Computation of offering price:
Net asset value and redemption price per share
($176,505,516 divided by 896,183 shares of
beneficial interest).............................. $ 196.95
============
Identified cost of investments..................... $123,566,109
============
<CAPTION>
- -----------------------
STATEMENT OF OPERATIONS
- -----------------------
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<S> <C> <C>
INVESTMENT INCOME
Dividends......................................... $ 1,222,980(a)
Interest.......................................... 2,035,297
-----------
3,258,277
EXPENSES
Management fees................................... $ 414,226
Trustees' fees and expenses....................... 19,367
Custodian......................................... 41,400
Audit and tax services............................ 5,176
Legal............................................. 9,340
Printing.......................................... 26,636
Miscellaneous..................................... 1,816
-----------
Total expenses................................... 517,961
-----------
NET INVESTMENT INCOME.............................. 2,740,316
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Realized gain (loss) on:
Investments--net................................. 11,341,982
Foreign currency transactions--net............... (2,092)
-----------
Total realized gain on investments and foreign
currency transactions........................... 11,339,890
-----------
Unrealized appreciation on:
Investments--net................................. 10,238,831
Foreign currency transactions--net............... 1,185
-----------
Total unrealized appreciation on investments and
foreign currency transactions................... 10,240,016
-----------
Net gain on investment transactions................ 21,579,906
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS......... $24,320,222
===========
</TABLE>
(a) Net of foreign taxes of: $5,990
See accompanying notes to financial statements.
67
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS MANAGED SERIES)
- ----------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
- ----------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ ------------
<S> <C> <C>
FROM OPERATIONS
Net investment income............................. $ 5,527,070 $ 2,740,316
Net realized gain on investments and foreign
currency transactions............................ 9,531,773 11,339,890
Unrealized appreciation on investments, and
foreign currency transactions.................... 6,443,761 10,240,016
------------ ------------
Increase in net assets from operations............ 21,502,604 24,320,222
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income............................. (5,442,217) 0
Net realized gain on investments.................. (9,837,965) 0
------------ ------------
(15,280,182) 0
------------ ------------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares...................... 20,225,126 10,804,763
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income.......... 5,442,217 0
Distributions from net realized gain.............. 9,837,965 0
------------ ------------
35,505,308 10,804,763
Cost of shares redeemed........................... (28,375,038) (19,507,897)
------------ ------------
INCREASE (DECREASE) IN NET ASSETS DERIVED FROM
CAPITAL SHARE TRANSACTIONS....................... 7,130,270 (8,703,134)
------------ ------------
TOTAL INCREASE IN NET ASSETS...................... 13,352,692 15,617,088
NET ASSETS
Beginning of the period........................... 147,535,736 160,888,428
------------ ------------
End of the period................................. $160,888,428 $176,505,516
============ ============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the period........................... $ 45,930 $ 40,029
============ ============
End of the period................................. $ 40,029 $ 2,780,345
============ ============
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares.................... 120,220 59,463
Issued in connection with the reinvestment of:
Distributions from net investment income.......... 31,471 0
Distributions from net realized gain.............. 55,351 0
------------ ------------
207,042 59,463
Redeemed.......................................... (164,939) (107,650)
------------ ------------
Net change........................................ 42,103 (48,187)
============ ============
<CAPTION>
- --------------------------------
FINANCIAL HIGHLIGHTS (UNAUDITED)
- --------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $127.87 $ 130.26 $ 137.18 $ 130.30 $ 163.52 $ 170.37
------- -------- -------- -------- -------- --------
Income From Investment
Operations
Net Investment Income.. 5.14 4.35 5.42 6.34 6.43 3.06
Net Realized and
Unrealized Gain (Loss)
on Investments........ 3.45 9.58 (6.92) 34.33 18.21 23.52
------- -------- -------- -------- -------- --------
Total From Investment
Operations............ 8.59 13.93 (1.50) 40.67 24.64 26.58
------- -------- -------- -------- -------- --------
Less Distributions
Distributions From Net
Investment Income..... (5.13) (4.36) (5.38) (6.34) (6.34) 0.00
Distributions in Excess
of Net Investment
Income................ 0.00 0.00 0.00 (0.23) 0.00 0.00
Distributions From Net
Realized Capital
Gains................. (1.07) (2.65) 0.00 (0.88) (11.45) 0.00
------- -------- -------- -------- -------- --------
Total Distributions.... (6.20) (7.01) (5.38) (7.45) (17.79) 0.00
------- -------- -------- -------- -------- --------
Net Asset Value, End of
Period................. $130.26 $ 137.18 $ 130.30 $ 163.52 $ 170.37 $ 196.95
======= ======== ======== ======== ======== ========
TOTAL RETURN (%)........ 6.70 10.65 (1.11) 31.26 15.01 15.60(a)
Ratio of Operating
Expenses to Average Net
Assets (%)............. 0.54 0.53 0.54 0.64 0.62 0.63(b)
Ratio of Net Investment
Income to Average Net
Assets (%)............. 5.32 3.65 3.98 4.06 3.64 3.28(b)
Portfolio Turnover Rate
(%).................... 36 22 76 51 72 66(b)
Average Commission Rate
(c).................... -- -- -- -- $ 0.0318 $ 0.0247
Net Assets, End of
Period (000)........... $77,575 $121,339 $121,877 $147,536 $160,888 $176,506
</TABLE>
(a) Not computed on an annualized basis.
(b) Computed on an annualized basis.
(c) 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.
68
<PAGE>
SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES
PORTFOLIO MANAGERS: STEVEN GUTERMAN, PETER WILBY AND DAVID SCOTT SALOMON
BROTHERS ASSET MANAGEMENT INC
[PICTURE APPEARS HERE] [PICTURE APPEARS HERE]
[PICTURE APPEARS HERE]
Q. HOW DID THE PORTFOLIO PERFORM DURING THE FIRST HALF OF 1997?
A. For the six month period ending June 30, 1997, the Series posted a 5.08%
return versus 3.6% for the Lipper Variable Annuity General Bond Average.
Major government bond market yields ended the first half of the year at simi-
lar levels to those prevailing at the beginning of 1997. However, this appar-
ent calmness masks significant volatility in the interim period. The U.S.
Treasury market experienced upward pressure on yields early in the year sup-
ported by evidence of an exceptionally robust economy driven by above-trend
consumer expenditures. The strength of activity prompted the Federal Reserve
to hike its key Fed Funds target rate by 25 basis points to 5.50% in March.
European bond markets continued to be dominated by the moves towards European
Monetary Union. Despite a widespread perception that several European Adminis-
trations would have to "fudge" their fiscal arithmetic in order to comply with
the Maastricht Treaty criteria, yields spreads generally tightened within Eu-
rope.
Q. HOW DID YOU MANAGE THE SERIES?
A. The Series' allocation to the high yield and emerging markets debt sectors
had a positive affect on performance. High yield bonds continued to be star
performers, spurred by the anticipated heavy issuance of Collateralized Bond
Obligations (CBOs). CBOs are structured securities that pass through principal
and interest payments from high yield bonds to investors via distinct
tranches. The issuance of CBOs has increased the demand for high yield securi-
ties and tightened yield spreads to Treasuries. The sector has been supported
by strong credit quality and healthy corporate profitability. Similarly, yield
spreads in the emerging markets debt sector have narrowed to record levels
versus Treasuries. This has been led by 1) strong institutional demand, 2)
positive fundamentals, and 3) large scale programs to retire secured Brady
Bonds and issue unsecured Eurobonds. We expect to trim our allocation to this
sector over the next six months based on current spread levels.
Q. WHAT IS YOUR INVESTMENT OUTLOOK FOR THE MONTHS AHEAD?
A. Our outlook for the global investment grade bond markets remains cautious.
In the U.S., the underlying fundamentals for the consumer including high con-
fidence levels, strong disposable income growth, and low unemployment support
a snap-back in consumer activity over the balance of this year. This will
likely prompt further Federal Reserve tightening. In Europe the debate over
EMU will continue to dominate activity in the fixed income and currency mar-
kets. Recent events, such as the Bundesbank dispute over reserve revaluation
with the Kohl Administration, only serve to increase the uncertainty surround-
ing the move towards monetary union.
We expect the global high yield markets to perform well supported by positive
fundamentals and institutional investors seeking incremental yield.
69
<PAGE>
A $10,000 Investment Compared to the Lehman Brothers Aggregate Bond Index
Average Annual Return
<TABLE>
<CAPTION>
Strategic Lipper Variable General
Bond Opp. Bond Fund Average/9/
<S> <C> <C>
6 mos.* 5.08% 3.64%
1 year 13.87% 10.09%
Since Inception 13.89% n/a
* not annualized
</TABLE>
[GRAPH APPEARS HERE ILLUSTRATING THE GROWTH OF A $10,000 INVESTMENT IN STRATEGIC
BOND OPPORTUNITIES SERIES COMPARED TO THE SAME IN THE LEHMAN AGGREGATE BOND
INDEX PLOT POINTS OF WHICH ARE AS FOLLOWS:]
<TABLE>
<CAPTION>
Strategic Bond Lehman Aggregate
Opp. Series Bond/3/
<S> <C> <C>
10/31/94 10,000 10,000
12/31/94 9,860 10,047
12/31/95 11,771 11,902
12/31/96 13,461 12,332
6/30/97 14,145 12,716
</TABLE>
[CHECK MARK APPEARS HERE] FUND FACTS
GOAL: A high level of total return consistent with the preservation of capital.
START DATE: October 31, 1994
SIZE: $54 million as of June 30, 1997
MANAGERS: Peter Wilby, Beth Semmel, Steven Guterman and David Scott have managed
the Series since its inception in October of 1994. Mr. Wilby and Mr. Scott also
have managed the Salomon Brothers Investment Series--Strategic Bond Fund since
March 1995. Mr. Wilby has also managed the Salomon Brothers Investment Series--
High Yield Bond Fund since March 1995. They have also managed the North American
Strategic Income Fund since March 1995.
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.
70
<PAGE>
NEW ENGLAND ZENITH FUND
(SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- ----------------------------------------
BONDS & NOTES--81.8% OF TOTAL NET ASSETS
- ----------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
CORPORATE BONDS--43.9%
$ 125,000 Airplane Pass Thru Trust, 10.875%, 3/15/19............. $ 143,804
150,000 Alvey Systems, Inc., 11.375%, 1/31/03.................. 155,250
400,000 Allied Waste Industries, Inc., 6/01/07(j).............. 248,000
250,000 American Builders 10.625%, 5/15/07..................... 257,500
150,000 American Media Operations 11.625%, 11/15/04............ 163,500
250,000 Atlantic Express Transportation Corp. 10.750%, 2/01/04. 260,937
250,000 Bellwether Exploration Co. 10.875%, 4/01/07............ 268,125
200,000 Benton Oil & Gas Co. 11.625%, 5/01/03.................. 219,500
150,000 Berry Plastics 12.250%, 4/15/04........................ 165,000
150,000 Borg Warner Security Corp. 9.125% 5/01/03.............. 150,000
250,000 CFP Holdings, Inc. 11.625%, 1/15/04.................... 259,688
150,000 CSK Auto, Inc. 11.000%, 11/01/06....................... 156,750
150,000 Cablevision Systems Corp. 10.500%, 5/15/16............. 166,125
150,000 Carr Gottstein Foods Co. 12.000%, 11/15/05............. 167,063
166,000 Central Transportation Rental Finance Corp.
9.500%, 4/30/03....................................... 161,435
150,000 Clark Schwebel, Inc.
10.500%, 4/15/06...................................... 160,125
150,000 Cobb Theatres 10.625%, 3/01/03......................... 164,813
250,000 Cole National Group, Inc. 9.875%, 12/31/06............. 263,750
400,000 Coleman Escrow Corp. Zero Coupon, 5/15/01.............. 253,000
250,000 Collins & Aikman Floorcovering 10.000%, 1/15/07........ 253,125
250,000 Commonwealth Aluminum Corp. 10.750%, 10/1/06........... 264,375
150,000 Cross Timbers Oil Co.
9.250%, 4/01/07....................................... 153,375
200,000 Crown Paper Co. 11.000%, 9/01/05....................... 201,500
250,000 DVI, Inc. 9.875%, 2/01/04.............................. 255,313
250,000 Dawson Production Services, Inc. 9.375%, 2/01/07....... 256,250
200,000 Dole Foods, Inc. 6.750%, 7/15/00....................... 200,262
150,000 Dollar Financial Group, Inc. 10.875%, 11/15/06......... 160,875
200,000 Envirosource, Inc. 9.750%, 6/15/03..................... 197,750
100,000 Exide Electronics Group, Inc. 11.500%, 3/15/06(h)...... 106,000
200,000 Eye Care Centers of America, Inc. 12.000%, 10/01/03.... 218,750
100,000 Finlay Fine Jewelry Corp. 10.625%, 5/01/03............. 106,000
250,000 Foamex L.P/Foamex Cap. Corp. 9.875%, 6/15/07........... 257,500
250,000 Freedom Chemical Co. 10.625%, 10/15/06................. 258,125
250,000 French Fragrances, Inc. 10.375%, 5/15/07............... 258,125
150,000 Fresenius Medical Care Cap 9.000%, 12/01/06............ 153,000
400,000 Harnischfeger Industries, Inc. 6.875%, 2/15/27......... 396,092
150,000 Harveys Casino Resorts 10.625%, 6/01/06................ 160,500
100,000 Herff Jones, Inc. 11.000%, 8/15/05..................... 108,500
150,000 Hills Stores Co. 12.500%, 7/01/03...................... 117,750
150,000 Hines Horticulture 11.750%, 10/15/05................... 160,875
150,000 Hollinger International
9.250%, 2/01/06....................................... 153,750
275,000 ICG Holdings, Inc. 13.500%, 9/15/05(j)................. 200,750
200,000 Imed Corp. 9.750%, 12/01/06............................ 203,500
250,000 Integrated Health Services, Inc. 9.500%, 9/15/07....... 258,125
200,000 Intermedia Communications 12.500%, 5/15/06............. 140,000
350,000 International Cabletel, Inc., 2/01/06(j)............... 242,375
250,000 Intertek Financial PLC 10.250%, 11/01/06............... 259,375
150,000 Iron Mountain, Inc. 10.125%, 10/01/06.................. 160,500
200,000 Jacor Communications Co. 9.750%, 12/15/06.............. 211,500
150,000 Jitney Jungle Stores 12.000%, 3/01/06.................. 167,250
250,000 Jordan Industries, Inc. 10.375%, 8/01/03............... 262,500
150,000 KCS Energy, Inc. 11.000%, 1/15/03...................... 163,500
200,000 Lamar Advertising Co. 9.625%, 12/01/06................. 205,500
250,000 Loomis Fargo & Co. 10.000%, 1/15/04.................... 255,000
350,000 Marcus Cable Co. 0/14.250%, 12/15/05(j)................ 278,250
150,000 Maxxim Medical, Inc. 10.500%, 8/01/06.................. 162,750
150,000 Mesa Operating Co.
10.625%, 7/01/06...................................... 171,000
3,000,000 Mid State Trust 0/13.000%, 7/01/35(j).................. 3,016,875
250,000 NL Industries, Inc., 10/15/05(j)....................... 236,875
200,000 National Energy Group, Inc. 10.750%, 11/01/06.......... 207,500
250,000 Norcal Waste Systems, Inc. 13.250%, 11/15/05........... 280,000
400,000 Occidental Petroleum Corp. 9.250%, 8/01/19............. 466,236
</TABLE>
See accompanying notes to financial statements.
71
<PAGE>
NEW ENGLAND ZENITH FUND
(SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- --------------------------
BONDS & NOTES--(CONTINUED)
- --------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
CORPORATE BONDS--(CONTINUED)
$ 250,000 Packard Bioscience, Inc. 9.375%, 3/01/07.............. $ 254,375
450,000 Paine Webber Group, Inc. 7.000%, 3/01/00.............. 453,074
150,000 Parker Drilling Co. 9.750%, 11/15/06.................. 156,750
250,000 Pen Tab Industries, Inc. 10.875%, 2/01/07............. 256,250
200,000 Pierce Leahy Corp. 11.125%, 7/15/06................... 220,000
150,000 Printpack, Inc. 10.625%, 8/15/06...................... 159,187
250,000 Pueblo Xtra International 9.500%, 8/01/03............. 242,500
200,000 Radnor Holdings Corp. 10.000%, 12/01/03............... 202,500
150,000 Rayovac Corp. 10.250%, 11/01/06....................... 157,875
150,000 Renco Metals, Inc. 11.500%, 7/01/03................... 160,500
350,000 Revlon Worldwide Corp. Zero Coupon, 3/15/01........... 237,125
250,000 Riddell Sports, Inc. 10.500%, 7/15/07................. 256,250
150,000 Rogers Cablesystems, LTD 10.000%, 3/15/05............. 163,125
200,000 Ryder Transportation, Inc. 10.000%, 12/01/06.......... 206,000
150,000 SFX Broadcasting, Inc. 10.750%, 5/15/06............... 164,250
150,000 Selmer, Inc. 11.000%, 5/15/05......................... 164,250
150,000 Shop Vac Corp. 10.625%, 9/01/03....................... 159,750
125,000 Southdown, Inc. 10.000%, 3/01/06...................... 136,562
150,000 Specialty Equipment Companies, Inc. 11.375%, 12/01/03. 161,437
250,000 Speedy Muffler King, Inc. 10.875%, 10/01/06........... 255,000
250,000 Stone Container Corp. 12.250%, 4/01/02................ 256,875
150,000 Stroh Brewery Co. 11.100%, 7/01/06.................... 156,562
200,000 Sun International, Ltd. 9.000%, 3/15/07............... 204,000
200,000 Synthetic Industries, Inc. 9.250%, 2/15/07............ 204,500
400,000 TFM SA DE CV, 6/15/09(j).............................. 230,500
250,000 Talley Manufacturing & Technology, Inc. 10.750%,
10/15/03............................................. 261,250
250,000 Tekni Plex, Inc. 11.250%, 4/01/07..................... 271,250
250,000 Texas Petrochemicals Corp. 11.125%, 7/01/06........... 269,375
350,000 Transamerican Energy Corp., 6/15/02(j)................ 252,000
150,000 Trump Atlantic City Associates 11.250%, 5/01/06....... 147,000
150,000 Twin Laboratories, Inc. 10.250%, 5/15/06.............. 159,000
350,000 U.S. West Capital Funding, Inc. 6.850%, 1/15/02....... 350,795
250,000 United Refining Co. 10.750%, 6/15/07.................. 252,500
100,000 United States Leasing International
8.450%, 1/25/05...................................... 107,003
150,000 Universal Outdoor, Inc. 9.750%, 10/15/06.............. 155,625
250,000 Urohealth Systems, Inc. 12.500%, 4/01/04.............. 244,375
250,000 William Scotsman, Inc.
9.875%, 6/01/07...................................... 252,500
150,000 Wyndham Hotel Corp. 10.500%, 5/15/06.................. 165,750
-----------
23,839,138
-----------
FOREIGN CORPORATE BONDS--4.2%
150,000 Algoma Steel, Inc.,12.375%, 7/15/05................... 168,375
250,000 Costilla Energy, Inc.
10.250%, 10/01/06.................................... 260,000
250,000 Diamond Cable Communication 0/11.750%, 12/15/05(j).... 172,500
250,000 Doane Products Co. 10.625%, 3/01/06................... 264,375
250,000 Doman Industries, Ltd.
8.750%, 3/15/04...................................... 241,875
300,000 International Semi Tech. 0/11.500%, 8/15/03(e)(j)..... 183,000
400,000 Korea Development Bank 9.600%, 12/01/00............... 434,152
300,000 Midland Bank PLC 7.650%, 5/01/25...................... 313,623
250,000 Nextlink Communications, Ltd. 12.500%, 4/15/06........ 266,250
-----------
2,304,150
-----------
FOREIGN GOVERNMENT BONDS--17.5%
40,000 Commonwealth of Australia 10.000%, 10/15/07(c)........ 36,553
174,000 Federal Republic of Brazil 6.500%, 1/01/01............ 171,716
1,288,748 Federal Republic of Brazil 8.000%, 4/15/14(k)......... 1,035,831
250,000 Federal Republic of Brazil 5.250%, 4/15/24............ 170,312
50,000 Federal Republic of Brazil 10.125%, 5/15/27........... 48,125
80,000 Federal Republic of Germany 8.250%, 9/20/01(f)........ 52,524
120,000 Federal Republic of Germany 6.000%, 7/04/07(f)........ 70,343
330,000 Government of Canada 7.500%, 9/01/00(d)............... 253,643
60,000 Government of Canada 7.000%, 12/01/06(d).............. 45,577
710,000 Kingdom of Denmark 8.000%, 3/15/06(e)................. 120,338
</TABLE>
See accompanying notes to financial statements.
72
<PAGE>
NEW ENGLAND ZENITH FUND
(SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- --------------------------
BONDS & NOTES--(CONTINUED)
- --------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
FOREIGN GOVERNMENT BONDS--(CONTINUED)
$1,300,000 Kingdom of Morocco 6.812%, 1/01/09................... $ 1,187,063
3,700,000 Republic of Argentina 5.250%, 3/31/23................ 2,516,000
500,000 Republic of Ecuador 3.500%, 2/28/25.................. 235,938
210,000 Republic of Ireland 6.250%, 4/01/99(g)............... 319,212
500,000 Republic of Panama 3.500%, 7/17/14................... 386,250
750,000 Republic of Venezuela 6.750%, 12/18/07............... 695,888
1,100,000 Russian Ian, 6.812%, 6/30/2016....................... 840,813
250,000 United Mexican States 6.250%, 12/31/19............... 191,875
750,000 United Mexican States 6.250%, 12/31/19............... 575,625
500,000 United Mexican States 11.500%, 5/15/26............... 570,625
-----------
9,524,251
-----------
U.S. GOVERNMENT BONDS--16.2%
500,000 Federal Home Loan Bank 6.490%, 9/08/97............... 500,650
257,920 Federal Home Loan Mortgage 10.000%, 5/15/20.......... 277,280
500,000 Federal National Mortgage Association 7.000%,
1/01/99............................................. 489,840
600,000 Federal National Mortgage Association 7.000%,
1/01/99............................................. 587,808
25,092 Federal National Mortgage Association 13.000%,
11/15/15............................................ 29,702
500,000 Federal National Mortgage Association 7.000%,
11/18/15............................................ 503,828
103,770 Federal National Mortgage Association 10.400%,
4/25/19............................................. 110,699
4,204,700 Federal National Mortgage Association 0.639%,
3/17/20(j).......................................... 132,546
144,879 Federal National Mortgage Association 7.000%,
5/01/26............................................. 142,162
8,591,000 Federal National Mortgage Association 0.569%,
10/17/36(j)......................................... 258,066
750,000 Government National Mortgage Association
7.000%, 11/15/99.................................... 736,170
180,000 United States Treasury Bonds 6.625%, 2/15/27......... 176,213
2,000,000 United States Treasury Notes 5.750%, 12/31/98........ 1,994,340
730,000 United States Treasury Notes 6.250%, 5/31/99......... 732,154
1,000,000 United States Treasury Notes 5.625%, 2/28/01......... 978,180
250,000 United States Treasury Notes 6.500%, 8/31/01......... 251,233
140,000 United States Treasury Notes 6.125%, 12/31/01........ 138,622
500,000 United States Treasury Notes 6.625%, 3/31/02......... 504,475
210,000 United States Treasury Notes 3.375%, 1/15/07......... 205,012
60,000 United States Treasury Notes 6.625%, 5/15/07......... 60,490
-----------
8,809,470
-----------
Total Bonds & Notes
(Identified Cost $43,312,558)....................... 44,477,009
-----------
- --------------
WARRANTS--0.0%
- --------------
100 Exide Electronics Group, Inc......................... 2,500
-----------
Total Warrants
(Identified Cost $1,815)............................ 2,500
-----------
- ----------------------------
SHORT-TERM INVESTMENT--21.2%
- ----------------------------
11,499,000 Repurchase agreement with UBS Securities dated
6/30/97 at 5.875% to be repurchased at $11,500,877
on 7/1/97 collateralized by $11,628,000. U. S.
Treasury Note 5.625% due 10/31/97 with a value of
$11,729,745......................................... 11,499,000
-----------
Total Short-Term Investments
(Identified Cost $11,499,000)....................... 11,499,000
-----------
Total Investments--103.0%
(Identified Cost $54,813,373)(b).................... 55,978,509
Other assets less liabilities(i)..................... (1,639,701)
-----------
TOTAL NET ASSETS--100%............................... $54,338,808
===========
</TABLE>
See accompanying notes to financial statements.
73
<PAGE>
NEW ENGLAND ZENITH FUND
(SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- ---------------------------------------------
FORWARD CONTRACT OUTSTANDING AT JUNE 30, 1997
- ---------------------------------------------
<TABLE>
<CAPTION>
LOCAL AGGREGATE UNREALIZED
CURRENCY DELIVERY CURRENCY FACE TOTAL APPRECIATION/
CONTRACT DATE AMOUNT VALUE VALUE (DEPRECIATION)
<S> <C> <C> <C> <C> <C>
Australian Dollar
(sold) 07/16/97 38,546 $ 29,913 $ 29,137 $ 776
Canadian Dollar (sold) 07/16/97 2,323,705 1,678,977 1,684,553 (5,576)
Canadian Dollar
(bought) 07/16/97 1,995,503 1,436,647 1,446,625 9,978
Canadian Dollar (sold) 10/03/97 12,334 8,912 8,983 (71)
Deutsche Mark (bought) 10/06/97 119,064 69,628 68,753 (875)
Danish Krone (sold) 07/16/97 1,283,014 196,902 193,411 3,491
Danish Krone (bought) 07/16/97 549,587 84,959 82,864 (2,095)
French Franc (sold) 07/03/97 1,008,060 180,333 171,571 8,762
French Franc (bought) 07/03/97 1,013,562 174,466 172,507 (1,959)
Irish Pound (sold) 10/03/97 212,003 321,609 320,533 1,076
-------
Total Appreciation on Forward Currency Contracts............... $13,507
=======
</TABLE>
(a) See Note 1A.
(b) Federal Tax Information: At June 30, 1997 the net unrealized appreciation
on investments based on cost of $54,813,373 for federal income tax purposes
was as follows:
<TABLE>
<S> <C>
Aggregate gross unrealized appreciation for all investments in
which there is an excess of value over tax cost.............. $1,340,505
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value.............. (175,369)
----------
Net unrealized appreciation................................... $1,165,136
==========
</TABLE>
(c) Denominated in Australian Dollars.
(d) Denominated in Canadian Dollars.
(e) Denominated in Danish Krone.
(f) Denominated in German Marks.
(g) Denominated in Irish Pounds.
(h) Rights attached.
(i) Including deposits in foreign denominated currencies with a value of $2,845
and a cost of $2,912.
(j) Step Bond; Coupon rate is zero or below market for an initial period and
then increased to a higher coupon rate at a specified date and rate.
(k) Payment-in-kind security for which all or part of the interest earned is
paid by the issuance of additional bonds.
See accompanying notes to financial statements.
74
<PAGE>
NEW ENGLAND ZENITH FUND
(SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES)
- ---------------------------------
STATEMENT OF ASSETS & LIABILITIES
- ---------------------------------
JUNE 30, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments at value................................... $55,978,509
Cash................................................... 108,101
Foreign cash at value.................................. 2,845
Receivable for:
Fund shares sold...................................... 232,510
Securities sold....................................... 3,218,238
Open forward currency contracts--net.................. 13,507
Dividends and interest................................ 736,480
Miscellaneous......................................... 399
Unamortized organization............................... 4,699
-----------
60,295,288
LIABILITIES
Payable for:
Securities purchased.................................. $5,814,466
Fund shares redeemed.................................. 65,041
Withholding taxes..................................... 258
Accrued expenses:
Management fees....................................... 55,256
Deferred trustees' fees............................... 1,264
Other expenses........................................ 20,195
----------
5,956,480
-----------
$54,338,808
===========
NET ASSETS
Net Assets consist of:
Capital paid in....................................... $51,216,568
Undistributed net investment income................... 1,699,013
Accumulated net realized gains........................ 244,816
Unrealized appreciation on investments, forward
contracts and foreign currency....................... 1,178,411
-----------
NET ASSETS.............................................. $54,338,808
===========
Computation of offering price:
Net asset value and redemption price per share
($54,338,808 divided by 4,449,078 shares of beneficial
interest).............................................. $ 12.21
===========
Identified cost of investments.......................... $54,813,373
===========
<CAPTION>
- -----------------------
STATEMENT OF OPERATIONS
- -----------------------
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<S> <C> <C>
INVESTMENT INCOME
Dividends.............................................. $ 304(a)
Interest............................................... 1,871,303
----------
1,871,607
EXPENSES
Management fees........................................ $145,939
Trustees' fees and expenses............................ 8,399
Custodian.............................................. 25,028
Audit and tax services................................. 6,556
Legal.................................................. 9,340
Printing............................................... 2,143
Amortization of organization expenses.................. 996
Miscellaneous.......................................... 1,817
--------
Total expenses....................................... 200,218
Less expenses assumed by the investment
adviser............................................. (9,373) 190,845
-------- ----------
NET INVESTMENT INCOME................................... 1,680,762
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS, FORWARD CURRENCY CONTRACTS AND
FOREIGN CURRENCY TRANSACTIONS
Realized gain (loss) on:
Investments--net...................................... 319,891
Foreign currency transactions--net.................... (53,872)
--------
Total realized gain on investments and foreign
currency transactions............................... 266,019
--------
Unrealized appreciation on:
Investments--net...................................... 362,910
Foreign currency transactions--net.................... 42,806
--------
Total unrealized appreciation on investments and
foreign currency transactions....................... 405,716
--------
Net gain on investment transactions..................... 671,735
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS.............. $2,352,497
==========
</TABLE>
(a) Net of foreign taxes of: $258.
See accompanying notes to financial statements.
75
<PAGE>
NEW ENGLAND ZENITH FUND
(SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES)
- ----------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
- ----------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
<S> <C> <C>
FROM OPERATIONS
Net investment income............................... $ 1,559,506 $ 1,680,762
Net realized gain on investments and foreign
currency transactions.............................. 587,758 266,019
Unrealized appreciation on investments and foreign
currency transactions.............................. 619,201 405,716
----------- -----------
INCREASE IN NET ASSETS FROM OPERATIONS.............. 2,766,465 2,352,497
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income............................... (1,704,472) 0
Net realized gain on investments.................... (518,385) 0
----------- -----------
(2,222,857) 0
----------- -----------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares........................ 29,554,662 23,490,552
Net asset value of shares issued in connection with
the reinvestment of:
Distributions from net investment income............ 1,704,472 0
Distributions from net realized gain................ 518,385 0
----------- -----------
31,777,519 23,490,552
Cost of shares redeemed............................. (5,997,600) (7,311,892)
----------- -----------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL SHARE
TRANSACTIONS....................................... 25,779,919 16,178,660
----------- -----------
TOTAL INCREASE IN NET ASSETS........................ 26,323,527 18,531,157
NET ASSETS
Beginning of the period............................. 9,484,124 35,807,651
----------- -----------
End of the period................................... $35,807,651 $54,338,808
=========== ===========
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the period............................. $ 50,354 $ 18,251
=========== ===========
End of the period................................... $ 18,251 $ 1,699,013
=========== ===========
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares...................... 2,532,646 1,985,587
Issued in connection with the reinvestment of:
Distributions from net investment income............ 144,891 0
Distributions from net realized gain................ 42,731 0
----------- -----------
2,720,268 1,985,587
Redeemed............................................ (513,384) (617,870)
----------- -----------
Net change.......................................... 2,206,884 1,367,717
=========== ===========
<CAPTION>
- --------------------------------
FINANCIAL HIGHLIGHTS (UNAUDITED)
- --------------------------------
OCTOBER 31, 1994(A) SIX MONTHS
THROUGH YEAR YEAR ENDED
DECEMBER 31, ENDED ENDED JUNE 30,
1994 1995 1996 1997
------------------- ------ ------- ----------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period....................... $10.00 $ 9.74 $ 10.85 $ 11.62
------ ------ ------- -------
Income From Investment
Operations
Net Investment Income........ 0.12 0.58 0.51 0.38
Net Realized and Unrealized
Gain (Loss) on Investments.. (0.26) 1.30 1.05 0.21
------ ------ ------- -------
Total From Investment
Operations.................. (0.14) 1.88 1.56 0.59
------ ------ ------- -------
Less Distributions
Distributions From Net
Investment Income........... (0.12) (0.55) (0.60) 0.00
Distributions From Net
Realized Capital Gains...... 0.00 (0.22) (0.19) 0.00
------ ------ ------- -------
Total Distributions.......... (0.12) (0.77) (0.79) 0.00
------ ------ ------- -------
Net Asset Value, End of
Period....................... $ 9.74 $10.85 $ 11.62 $ 12.21
====== ====== ======= =======
TOTAL RETURN (%).............. (1.40)(b) 19.38 14.36 5.08(b)
Ratio of Operating Expenses to
Average Net Assets (%)....... 0.85 (c) 0.85 0.85 0.85(c)
Ratio of Net Investment Income
to Average Net Assets (%).... 7.05 (c) 8.39 7.79 7.43(c)
Portfolio Turnover Rate (%)... 403 (c) 202 176 239(c)
Net Assets, End of Period
(000)........................ $3,450 $9,484 $35,808 $54,339
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 (c) 2.44 1.19 0.89(c)
</TABLE>
(a) Commencement of operations.
(b) Not computed on an annualized basis.
(c) Computed on an annualized basis.
See accompanying notes to financial statements.
76
<PAGE>
BACK BAY ADVISORS BOND INCOME SERIES
PORTFOLIO MANAGER: CATHERINE L. BUNTING
BACK BAY ADVISORS, L.P.
[PICTURE APPEARS HERE]
Q. WHAT WAS THE INVESTMENT BACKDROP FOR BACK BAY ADVISORS BOND INCOME SERIES
DURING THE PERIOD?
A. Interest rates were relatively volatile on the heels of the Federal Re-
serve's March hike in short-term interest rates, though fluctuations were gen-
erally contained within a narrow range. Rising interest rates during the first
quarter tended to push bond prices lower and yields higher, as reflected in
the Series' total return of -0.24% for the first three months of this year. As
interest rates stabilized during the second quarter, the Series more than made
up for lost ground, finishing the six-month period ended June 30, 1997 with a
positive total return of 3.90%. Select investments in corporate bonds also
helped the Series' performance, which was significantly better than that of
the 2.84% average total return of the Series' peer group of A-Rated Corporate
Bond Funds, as measured by Lipper Analytical Services.
Q. HOW DID YOU STRUCTURE THE SERIES DURING THE PERIOD?
A. Corporate bonds encompassed 60% of the portfolio--and were the biggest con-
tributor to the Series' performance. Strong economic conditions helped these
bonds perform better than U.S. Government Securities. Among the portfolio's
standout corporate issues were those whose credit ratings had been upgraded to
what major ratings agencies, such as Standard & Poor's, consider investment-
grade terrain--the four highest bond ratings categories. (Lower-quality bonds
are limited to no more than 20% of the portfolio.) Improving fundamentals in
certain industries and companies fostered credit upgrades in select holdings,
subsequently translating into higher bond prices.
Utility bonds also contributed positively to the Series' performance. These
bonds, which constituted about 14% of the portfolio at the end of the period,
recently completed a round of consolidation, paving the way for credit-upgrade
opportunities.
We also maintained holdings in Canadian dollar securities, whose prices rose
as yields fell across the maturity spectrum. Thanks to Canada's low inflation
rate, these bonds provided better inflation-adjusted returns than comparable
U.S. Securities. Mortgage-backed securities and Treasury issues continued to
make up the high-quality component of the Series. During the period, lower
volatility levels enhanced their performance.
Q. WHERE DO YOU SEE OPPORTUNITY IN THE MONTHS AHEAD?
A. We continue to favor Yankee bonds (U.S. dollar-denominated bonds issued by
foreign companies), which worked well for the Series during the period. The
universe of Yankees continues to look promising, having expanded from primar-
ily Canadian issues to a competitive market that now covers the globe. Yankee
bonds represent an opportunity to participate in global bond markets without
exposure to currency risk.
Other investments that remain attractive include the Series' cable/media hold-
ings, given our expectations for credit upgrades in the cable industry. This
industry continues to benefit from global consolidation.
Q. WHAT IS YOUR OUTLOOK FOR THE SERIES?
A. Slowing economic growth and well contained inflation levels will probably
keep the Fed from raising interest rates--this translates into a stable envi-
ronment for bonds, especially select corporate securities.
Going forward, we expect to increase emphasis on higher-grade securities. The
yield gap between bonds at different credit levels has narrowed substantial-
ly--so investors are not compensated for taking added credit risk. This means
the Series can invest in better-quality securities, such as investment-grade
corporate bonds and Treasury securities, without giving up much in yield.
77
<PAGE>
A $10,000 Investment Compared to the Lehman Brothers Intermediate Government
Corporate Bond Index and the Cost of Living
Average Annual Report
<TABLE>
<CAPTION>
Zenith Lipper Variable A-Rate
Bond Income Corp. Bond Fund Avg.
<S> <C> <C>
6 mos.* 3.90% 2.84%
1 year 10.47% 7.80%
5 years 8.56% 7.04%
10 years 9.39% 8.55%
* not annualized
</TABLE>
[GRAPH APPEARS HERE ILLUSTRATING THE GROWTH OF A $10,000 INVESTMENT IN THE BACK
BAY BOND INCOME SERIES COMPARED TO THE SAME IN THE LEHMAN INTERMEDIATE
GOV'T/CORP. INDEX AND THE COST OF LIVING, THE PLOT POINTS OF WHICH ARE AS
FOLLOWS:]
<TABLE>
<CAPTION>
Bond Income Lehman Intermediate Cost of
Series Gov't/Corp./5/ Living/1/
<S> <C> <C> <C>
6/30/87 10,000 10,000 10,000
12/31/87 10,198 10,321 10,167
12/31/88 11,051 11,009 10,617
12/31/89 12,410 12,415 11,110
12/31/90 13,414 13,551 11,789
12/31/91 15,822 15,533 12,150
12/31/92 17,117 16,647 12,502
12/31/93 19,275 18,110 12,846
12/31/94 18,627 17,761 13,189
12/31/95 22,575 20,484 13,524
12/31/96 23,616 21,313 13,974
6/30/97 24,537 21,916 14,106
</TABLE>
[CHECK MARK APPEARS HERE] 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: $185 million as of June 30, 1997
MANAGER: Catherine 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.
78
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS BOND INCOME SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- ----------------------------------------
BONDS & NOTES--93.6% OF TOTAL NET ASSETS
- ----------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
BROADCASTING--5.3%
$ 2,050,000 Cablevision Industrial Corp.,
9.250%, 4/01/08................................... $ 2,173,000
4,520,000 Continental Cablevision, Inc.,
11.000%, 6/01/07.................................. 5,065,202
2,300,000 Continental Cablevision, Inc.,
9.500%, 8/01/13................................... 2,610,684
------------
9,848,886
------------
CONTAINERS--0.6%
1,000,000 Owens Illinois, Inc., 8.100%, 5/15/07.............. 1,020,230
------------
ELECTRIC UTILITIES--3.8%
5,800,000 Arizona Public Service Corp.,
8.000%, 12/30/15.................................. 6,007,814
1,000,000 Ohio Edison Corp., 8.680%, 6/01/17................. 1,035,670
------------
7,043,484
------------
FEDERAL AGENCIES--8.6%
34,536 Federal Home Loan Bank,
9.000%, 5/01/01................................... 35,734
13,395 Federal Home Loan Bank,
9.000%, 9/01/01................................... 13,859
7,482,108 Government National Mortgage Association, 7.000%
with various maturities to 2025................... 7,353,491
6,366,826 Government National Mortgage Association, 7.500%
with various maturities to 2025................... 6,390,701
1,849,881 Government National Mortgage Association, 8.5000%
with various maturities to 2022................... 1,923,876
221,350 Government National Mortgage Association, 9.000%,
10/15/16.......................................... 234,078
------------
15,951,739
------------
FINANCIAL--11.6%
2,500,000 American General Financing,
8.450%, 10/15/09.................................. 2,779,650
5,660,000 Associates Corporation of North America, 8.550%,
7/15/09........................................... 6,310,051
2,972,000 EIP Funding Corp.,
10.250%, 10/01/12................................. 3,373,131
3,000,000 Intermediate American Development Bank, 6.950%,
8/01/26........................................... 3,082,560
1,800,000 Pitney Bowes Credit Corp.,
8.550%, 9/15/09................................... 2,026,080
3,750,000 Toronto Dominion Bank,
7.875%, 8/15/04................................... 3,803,138
------------
21,374,610
------------
FOREIGN--6.9%
4,500,000 British Columbia Province Canada, 7.750%,
6/16/03(c)........................................ 3,534,632
8,665,000 Government of Canada,
8.000%, 6/01/23(c)................................ 7,121,746
15,000,000 Ontario Hydro,
Zero Coupon, 11/27/20(c).......................... 1,987,762
1,050,000 Ontario Hydro,
Zero Coupon, 8/06/21(c)........................... 132,300
------------
12,776,440
------------
LEISURE--0.9%
1,500,000 Time Warner, Inc., 9.150%, 2/01/23................. 1,651,350
------------
OIL AND GAS--2.4%
1,900,000 Gulf CDA Res. LTD., 8.350%, 8/01/06................ 2,014,000
2,250,000 Mitchell Energy & Development Corp., 9.250%,
1/15/02........................................... 2,430,113
------------
4,444,113
------------
PAPER--0.5%
1,000,000 Pope and Talbot, Inc.,
8.375%, 6/01/13................................... 953,180
------------
PUBLISHING--3.1%
2,150,000 Golden Books Publishing, Inc.,
7.650%, 9/15/02................................... 2,031,750
1,500,000 News America Holdings, Inc.,
7.750%, 2/01/24................................... 1,424,160
2,300,000 News America Holdings, Inc.,
8.250%, 8/10/18................................... 2,318,032
------------
5,773,942
------------
RAILROADS--1.1%
2,000,000 Norfolk Southern Corp.,
7.050%, 5/01/37................................... 2,028,860
------------
TELECOMMUNICATIONS--10.7%
3,300,000 AT&T Corp., 8.350%, 1/15/25........................ 3,450,249
3,000,000 Bellsouth Telecomm, Inc.,
5.850%, 11/15/45.................................. 2,962,020
1,500,000 LCI International, Inc.,
7.250%, 6/15/07................................... 1,485,750
4,420,000 MFS Communications, Inc.,
Zero Coupon, 1/15/06.............................. 3,499,712
</TABLE>
See accompanying notes to financial statements.
79
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS BOND INCOME SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- --------------------------
BONDS & NOTES--(CONTINUED)
- --------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
TELECOMMUNICATIONS--(CONTINUED)
$ 1,500,000 Tele-Communications, Inc.,
9.800%, 2/01/12................................... $ 1,711,485
2,935,000 Tele-Communications, Inc.,
9.250%, 1/15/22................................... 3,077,494
1,000,000 Total Access Communication,
8.375%, 11/04/06.................................. 966,360
2,500,000 Worldcom, Inc., 7.750%, 4/01/07.................... 2,556,700
------------
19,709,770
------------
U.S. GOVERNMENT--18.2%
10,000,000 U.S. Treasury Notes,
5.750%, 8/15/03................................... 9,659,700
1,500,000 U.S. Treasury Notes,
6.375%, 7/15/99................................... 1,508,865
2,500,000 U.S. Treasury Notes,
6.500%, 8/15/05................................... 2,493,525
6,500,000 U.S. Treasury Notes,
6.875%, 7/30/99................................... 6,595,160
3,500,000 U.S. Treasury Notes,
8.000%, 5/15/01................................... 3,697,295
9,000,000 U.S. Treasury Notes,
8.500%, 11/15/00.................................. 9,596,700
------------
33,551,245
------------
UTILITIES--(DIVERSIFIED)--8.7%
2,000,000 Long Island Lighting Co.,
9.000%, 11/01/22.................................. 2,194,380
4,400,000 Long Island Lighting Co.,
8.200%, 3/15/23................................... 4,513,960
4,250,000 New York State Electric & Gas Co., 8.875%,
11/01/21.......................................... 4,498,200
5,000,000 Tennessee Valley Authority,
6.125%, 7/15/03................................... 4,849,400
------------
16,055,940
------------
UTILITIES--(ELECTRIC)--1.6%
1,700,000 Texas Utilities Electric Co.,
8.875%, 2/01/22................................... 1,797,903
1,100,000 Toledo Edison Co., 7.875%, 8/01/04................. 1,116,214
------------
2,914,117
------------
YANKEE--9.6%
900,000 British Columbia Hydro & Power, 12.500%, 9/01/13... 994,302
1,000,000 British Columbia Hydro & Power, 12.500%, 1/15/14... 1,125,530
2,000,000 Hydro Quebec, 8.050%, 7/07/24...................... 2,170,560
2,500,000 Petroleos Mexicanos,
9.000%, 6/01/07................................... 2,521,875
4,400,000 Petroleos Mexicanos,
8.625%, 12/01/23.................................. 3,899,500
1,000,000 Province of Quebec,
8.625%, 12/01/26.................................. 1,104,300
750,000 Republic of Argentina,
11.375%, 1/30/17.................................. 843,750
2,900,000 Republic of Columbia,
8.660%, 10/07/16.................................. 3,075,189
2,000,000 Republic of Columbia,
7.250%, 2/23/04................................... 1,945,040
------------
17,680,046
------------
Total Bonds and Notes
(Identified Cost $171,634,263).................... 172,777,952
------------
<CAPTION>
- ----------------------------
SHORT-TERM INVESTMENTS--4.7%
- ----------------------------
<C> <S> <C>
COMMERCIAL PAPER--4.7%
2,680,000 American Express Credit Corp.,
6.150%, 7/01/97................................... 2,680,000
6,000,000 Household Finance Corp.,
6.080%, 7/01/97................................... 6,000,000
------------
Total Short-Term Investments
(Identified Cost $8,680,000)...................... 8,680,000
------------
Total Investments--98.3%
(Identified Cost $180,314,263)(b)................. 181,457,952
Other assets less liabilities...................... 3,040,116
------------
TOTAL NET ASSETS--100%............................. $184,498,068
============
</TABLE>
(a) See Note 1A.
(b) Federal Tax Information:
At June 30, 1997 the net unrealized appreciation on investments based on
cost of $180,314,263 for federal income tax purposes was as follows:
<TABLE>
<S> <C>
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost.................................... $ 2,899,898
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax
cost over value.................................. (1,756,209)
------------
Net unrealized appreciation....................... $ 1,143,689
============
</TABLE>
(c) Denominated in Canadian dollars.
(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.
80
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS BOND INCOME SERIES)
- ---------------------------------
STATEMENT OF ASSETS & LIABILITIES
- ---------------------------------
JUNE 30, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments at value.................................... $181,457,952
Cash.................................................... 2,075
Receivable for:
Fund shares sold....................................... 289,202
Dividends and interest................................. 3,197,069
------------
184,946,298
LIABILITIES
Payable for:
Fund shares redeemed................................... $290,840
Withholding taxes...................................... 1,989
Miscellaneous.......................................... 27,647
Accrued expenses:
Management fees........................................ 60,499
Deferred trustees' fees................................ 38,926
Other expenses......................................... 28,329
--------
448,230
------------
$184,498,068
============
NET ASSETS
Net Assets consist of:
Capital paid in........................................ $176,077,594
Undistributed net investment income.................... 6,493,914
Accumulated net realized gains......................... 782,754
Unrealized appreciation on investments................. 1,143,806
------------
NET ASSETS............................................... $184,498,068
============
Computation of offering price:
Net asset value and redemption price per share
($184,498,068 divided by 1,681,122 shares of beneficial
interest)............................................... $ 109.75
============
Identified cost of investments........................... $180,314,263
============
<CAPTION>
- -----------------------
STATEMENT OF OPERATIONS
- -----------------------
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<S> <C> <C>
INVESTMENT INCOME
Interest................................................ $6,820,008(a)
EXPENSES
Management fees......................................... $358,529
Trustees' fees and expenses............................. 15,577
Custodian............................................... 43,301
Audit and tax services.................................. 4,831
Legal................................................... 9,340
Printing................................................ 39,689
Miscellaneous........................................... 1,821
--------
Total expenses......................................... 473,088
----------
NET INVESTMENT INCOME.................................... 6,346,920
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS
Realized gain (loss) on:
Investments--net....................................... 442,126
Foreign currency transactions--net..................... (87,473)
--------
Total realized gain on investments and foreign
currency transactions................................ 354,653
--------
Unrealized appreciation on:
Investments--net....................................... 259,160
Foreign currency transactions--net..................... 297
--------
Total unrealized appreciation on investments and
foreign currency transactions........................ 259,457
--------
Net gain on investment transactions...................... 614,110
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS............... $6,961,030
==========
</TABLE>
(a) Net of foreign taxes of: $1,989.
See accompanying notes to financial statements.
81
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS BOND INCOME SERIES)
- ----------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
- ----------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ ------------
<S> <C> <C>
FROM OPERATIONS
Net investment income............................. $ 12,169,158 $ 6,346,920
Net realized gain on investments and foreign
currency transactions............................ 1,434,380 354,653
Unrealized appreciation (depreciation) on
investments, and foreign currency transactions... (5,669,381) 259,457
------------ ------------
INCREASE IN NET ASSETS FROM OPERATIONS............ 7,934,157 6,961,030
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income............................. (12,191,823) 0
Net realized gain on investments.................. (496,515) 0
------------ ------------
(12,688,338) 0
------------ ------------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares...................... 53,162,089 23,818,271
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income.......... 12,191,823 0
Distributions from net realized gain.............. 496,515 0
------------ ------------
65,850,427 23,818,271
Cost of shares redeemed........................... (43,449,240) (26,640,189)
------------ ------------
INCREASE (DECREASE) IN NET ASSETS DERIVED FROM
CAPITAL SHARE TRANSACTIONS....................... 22,401,187 (2,821,918)
------------ ------------
TOTAL INCREASE IN NET ASSETS...................... 17,647,006 4,139,112
NET ASSETS
Beginning of the period........................... 162,711,950 180,358,956
------------ ------------
End of the period................................. $180,358,956 $184,498,068
============ ============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the period........................... $ 53,292 $ 146,994
============ ============
End of the period................................. $ 146,994 $ 6,493,914
============ ============
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares.................... 491,882 222,770
Issued in connection with the reinvestment of:
Distributions from net investment income.......... 114,880 0
Distributions from net realized gain.............. 4,700 0
------------ ------------
611,462 222,770
Redeemed.......................................... (401,180) (249,171)
------------ ------------
Net change........................................ 210,282 (26,401)
============ ============
<CAPTION>
- --------------------------------
FINANCIAL HIGHLIGHTS (UNAUDITED)
- --------------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $103.44 $ 103.47 $ 106.14 $ 95.53 $ 108.67 $ 105.63
------- -------- -------- -------- -------- --------
Income From Investment
Operations
Net Investment Income.. 7.96 5.70 7.05 7.34 7.72 3.78
Net Realized and
Unrealized Gain (Loss)
on Investments........ 0.51 7.38 (10.61) 12.85 (2.70) 0.34
------- -------- -------- -------- -------- --------
Total From Investment
Operations............ 8.47 13.08 (3.56) 20.19 5.02 4.12
------- -------- -------- -------- -------- --------
Less Distributions
Distributions From Net
Investment Income..... (6.87) (6.20) (7.05) (7.05) (7.74) 0.00
Distributions in Excess
of Net Investment
Income................ 0.00 (0.05) 0.00 0.00 0.00 0.00
Distributions From Net
Realized Capital
Gains................. (1.57) (4.16) 0.00 0.00 (0.32) 0.00
------- -------- -------- -------- -------- --------
Total Distributions.... (8.44) (10.41) (7.05) (7.05) (8.06) 0.00
------- -------- -------- -------- -------- --------
Net Asset Value, End of
Period................. $103.47 $ 106.14 $ 95.53 $ 108.67 $ 105.63 $ 109.75
======= ======== ======== ======== ======== ========
TOTAL RETURN (%)........ 8.18 12.61 (3.36) 21.20 4.61 3.90(a)
Ratio of Operating
Expenses to Average Net
Assets (%)............. 0.44 0.43 0.44 0.55 0.52 0.53(b)
Ratio of Net Investment
Income to Average Net
Assets (%)............. 7.70 6.47 6.75 7.22 7.22 7.00(b)
Portfolio Turnover Rate
(%).................... 71 177 82 73 98 42(b)
Net Assets, End of
Period (000)........... $83,057 $131,242 $126,234 $162,712 $180,359 $184,498
</TABLE>
(a) Not computed on an annualized basis.
(b) Computed on an annualized basis.
As of January 1, 1993, the Bond Income Series discontinued the use of
equalization accounting.
See accompanying notes to financial statements.
82
<PAGE>
SALOMON BROTHERS U.S. GOVERNMENT SERIES
PORTFOLIO MANAGERS: STEVEN GUTERMAN AND ROGER LAVAN SALOMON BROTHERS ASSET
MANAGEMENT INC
[PICTURE APPEARS HERE] [PICTURE APPEARS HERE]
Q. HOW DID THE PORTFOLIO PERFORM DURING THE FIRST HALF OF 1997?
A. For the six months of 1997, the Series posted a 3.05% return outperforming
the 2.76% return of the Lehman Intermediate Government index.
The first half of 1997 was a turbulent period for the U.S. financial markets.
Economic growth surged in the first quarter, forcing the Federal Reserve to
raise the Federal funds target rate 25 basis points to 5.5% in March. The move
marked the first tightening in monetary policy in more than two years. In the
second quarter, with the economy showing almost no signs of inflation, and the
Federal Reserve remaining on the sidelines, interest rates fell 30-40 basis
points across the yield curve. Although, most believe the Federal Reserve is
content for now, many market participants speculate that wage pressures will
boost inflation and the chances for a Federal Reserve tightening later this
year.
Q. HOW DID YOU MANAGE THE SERIES?
A. For the six month period ending June 30, 1997 the Series continued to over-
weight mortgage backed securities and underweight Treasuries. Over the period,
mortgage backed securities outperformed Treasuries supported by the threat of
higher rates. The Series' interest rate sensitivity was reduced from 4.0 years
to 3.2 years. We remained defensive believing that the US economy was not
weakening, but pausing. First half GDP growth is likely to be close to 4%.
Q. WHAT IS YOUR INVESTMENT OUTLOOK FOR THE MONTHS AHEAD?
A. Our outlook for the US fixed income markets remains cautious. The under-
lying fundamentals for the consumer; high confidence levels, strong disposable
income growth, and low unemployment, remain very supportive, suggesting a
snap-back in consumer activity over the balance of this year. This will likely
prompt further Federal Reserve tightening.
A $10,000 Investment Compared to Lehman Intermediate Gov't. Index
Average Annual Return
<TABLE>
<CAPTION>
US Gov't Lipper Variable US Mortgage
Series and GNMA Average/18/
<S> <C> <C>
6 mos.* 3.05% 3.18%
1 year 7.63% 7.95%
Since Inception 8.14% n/a
* not annualized
</TABLE>
[GRAPH APPEARS HERE ILLUSTRATING THE GROWTH OF A $10,000 INVESTMENT IN THE U.S.
GOV'T SERIES COMPARED TO THE SAME IN THE LEHMAN INTERMEDIATE INDEX, THE PLOT
POINTS OF WHICH ARE AS FOLLOWS:]
<TABLE>
<CAPTION>
Salomon US Gov't Lehman Intermediate
<S> <C> <C>
10/31/94 10,000 10,000
12/31/94 10,060 9,989
12/31/95 11,571 11,430
12/31/96 11,955 11,912
6/30/97 12,319 12,241
</TABLE>
[CHECK MARK APPEARS HERE] 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: $16 million as of June 30, 1997
MANAGERS: Steven Guterman and Roger Lavan have managed the Series since its
inception in 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 in-
surance, 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.
83
<PAGE>
NEW ENGLAND ZENITH FUND
(SALOMON BROTHERS U.S. GOVERNMENT SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- ----------------------------------------
BONDS & NOTES--83.1% OF TOTAL NET ASSETS
- ----------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
FEDERAL AGENCY--81.8%
$ 250,000 Federal Home Loan Banks 6.490%, 9/08/97............... $ 250,325
300,000 Federal Home Loan Banks 5.940%, 6/13/00............... 296,883
301,288 Federal Home Loan Mortgage 7.500%, 5/01/07............ 304,301
21,089 Federal Home Loan Mortgage 6.000%, 10/01/10........... 20,357
389,295 Federal Home Loan Mortgage 7.000%, 7/01/11............ 389,175
68,860 Federal Home Loan Mortgage 11.750%, 1/01/12........... 77,791
431,898 Federal Home Loan Mortgage 8.250%, 4/01/17............ 450,556
59,288 Federal Home Loan Mortgage 6.500%, 5/01/26............ 56,860
62,140 Federal Home Loan Mortgage 6.500%, 6/01/26............ 59,596
882,852 Federal Home Loan Mortgage 6.500%, 7/01/26............ 846,708
600,000 Federal National Mortgage Association 7.148%,
10/17/09............................................. 605,555
18,474 Federal National Mortgage Association 12.500%, 8/01/15
..................................................... 21,626
82,445 Federal National Mortgage Association
13.000%, 11/15/15.................................... 97,594
33,221 Federal National Mortgage Association 14.500%,
11/01/14............................................. 41,070
83,888 Federal National Mortgage Association 12.500%,
9/01/15.............................................. 98,568
719,164 Federal National Mortgage Association 12.000%,
10/01/15............................................. 821,199
43,580 Federal National Mortgage Association 12.000%,
1/01/16.............................................. 50,498
422,467 Federal National Mortgage Association 12.500%,
1/01/16.............................................. 495,607
28,443 Federal National Mortgage Association 11.500%,
9/01/19.............................................. 32,425
635,929 Federal National Mortgage Association 11.000%,
9/01/20.............................................. 709,747
429,923 Federal National Mortgage Association 6.500%, 3/01/26. 411,518
1,830,000 Federal National Mortgage Association
TBA 6.500%, 1/01/2099................................ 1,793,400
1,250,000 Federal National Mortgage Association
TBA 7.000%, 12/01/2099............................... 1,224,600
1,550,000 Federal National Mortgage Association
Pool TBA 7.500%, 1/01/2099........................... 1,553,379
281,978 Government National Mortgage Association TBA 9.000%,
12/15/16............................................. 299,881
1,500,000 Government National Mortgage Association TBA 7.000%,
12/15/2099........................................... 1,472,340
300,000 Student Loan Marketing Association 7.500%, 3/08/00.... 308,727
-----------
12,790,286
-----------
U.S. TREASURY--1.3%
200,000 U.S. Treasury Notes 6.500%, 5/31/01................... 201,146
-----------
Total Bonds & Notes
(Identified Cost $12,971,623)........................ 12,991,432
-----------
<CAPTION>
- -----------------------------
SHORT-TERM INVESTMENTS--55.0%
- -----------------------------
<C> <S> <C>
1,000,000 Federal Farm Credit, Discount Note, 5.380%, 7/01/97... 1,000,000
2,000,000 Federal Farm Credit, Discount Note, 5.400%, 7/11/97... 1,997,000
2,000,000 Student Loan Marketing, Discount Note, 5.380%,
7/31/97.............................................. 1,991,033
1,808,000 Repurchase agreement with J.P. Morgan Securities
dated 6/30/97 at 5.950% to be repurchased at
$1,808,299 on 7/1/97. Collaterized by $1,823,000
U.S. Treasury Note 7.375% due 11/15/97 with a value
of $1,850,345........................................ 1,808,000
1,808,000 Repurchase agreement with UBS Securities dated
6/30/97 at 5.875% to be repurchased at $1,808,295
on 7/1/97. Collaterized by $1,229,000 U.S. Treasury
Bond 11.250% due 2/15/15 with a value of
$1,845,036........................................... 1,808,000
-----------
Total Short-Term Investments
(Identified Cost $8,604,033)......................... 8,604,033
-----------
Total Investments--138.1%
(Identified Cost $21,575,656)(b)..................... 21,595,465
Liabilities........................................... (5,953,747)
-----------
TOTAL NET ASSETS--100%................................ $15,641,718
===========
</TABLE>
(a) See Note 1a.
(b) Federal Tax Information: At June 30, 1997 the net unrealized appreciation
on investments based on cost of $21,575,656 for federal income tax
purposes was as follows:
<TABLE>
<S> <C>
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost...................................... $ 55,704
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value......................................... (35,895)
-----------
Net unrealized appreciation......................... $ 19,809
===========
</TABLE>
See accompanying notes to financial statements.
84
<PAGE>
NEW ENGLAND ZENITH FUND
(SALOMON BROTHERS U.S. GOVERNMENT SERIES)
- ---------------------------------
STATEMENT OF ASSETS & LIABILITIES
- ---------------------------------
JUNE 30, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments at value.................................. $21,595,465
Cash.................................................. 233
Receivable for:
Fund shares sold..................................... 92,113
Securities sold...................................... 512,538
Dividends and interest............................... 76,861
Due from advisor..................................... 6,102
Unamortized organization.............................. 4,699
-----------
22,288,011
LIABILITIES
Payable for:
Securities purchased................................. $6,544,332
Fund shares redeemed................................. 68,929
Accrued expenses:
Management fees...................................... 3,240
Deferred trustees' fees.............................. 1,195
Other expenses....................................... 28,597
----------
6,646,293
-----------
$15,641,718
===========
NET ASSETS
Net Assets consist of:
Capital paid in...................................... $15,177,499
Undistributed net investment income.................. 509,743
Accumulated net realized losses...................... (65,333)
Unrealized appreciation on investments............... 19,809
-----------
NET ASSETS............................................. $15,641,718
===========
Computation of offering price:
Net asset value and redemption price per share
($15,641,718 divided by 1,401,348 shares of beneficial
interest)............................................. $ 11.16
===========
Identified cost of investments......................... $21,575,656
===========
<CAPTION>
- -----------------------
STATEMENT OF OPERATIONS
- -----------------------
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<S> <C> <C>
INVESTMENT INCOME
Dividends............................................. $473,184(a)
Interest.............................................. 82,677
--------
555,861
EXPENSES
Management fees....................................... $ 41,558
Trustees' fees and expenses........................... 8,158
Custodian............................................. 8,202
Audit and tax services................................ 6,211
Legal................................................. 9,340
Printing.............................................. 820
Amortization of organization expenses................. 996
Miscellaneous......................................... 1,821
--------
Total expenses...................................... 77,106
Less expenses assumed by the
investment adviser................................. (24,212) 52,894
-------- --------
NET INVESTMENT INCOME.................................. 502,967
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Realized loss on:
Investments--net..................................... (85,947)
Unrealized appreciation on:
Investments--net..................................... 40,345
--------
Net loss on investment transactions.................... (45,602)
--------
NET INCREASE IN NET ASSETS FROM
OPERATIONS............................................ $457,365
========
</TABLE>
(a) Net of foreign taxes of:
See accompanying notes to financial statements.
85
<PAGE>
NEW ENGLAND ZENITH FUND
(SALOMON BROTHERS U.S. GOVERNMENT SERIES)
- ----------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
- ----------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
<S> <C> <C>
FROM OPERATIONS
Net investment income............................... $ 664,231 $ 502,967
Net realized gain (loss) on investments and foreign
currency transactions.............................. 1,275 (85,947)
Unrealized appreciation (depreciation) on
investments, and foreign currency transactions..... (214,900) 40,345
----------- -----------
INCREASE IN NET ASSETS FROM OPERATIONS.............. 450,606 457,365
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income............................... (639,626) 0
Net realized gain on investments.................... (16,259) 0
----------- -----------
(655,885) 0
----------- -----------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares........................ 9,363,646 5,683,610
Net asset value of shares issued in connection with
the reinvestment of:
Distributions from net investment income............ 639,626 0
Distributions from net realized gain................ 16,259 0
----------- -----------
10,019,531 5,683,610
Cost of shares redeemed............................. (4,145,624) (3,709,921)
----------- -----------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL SHARE
TRANSACTIONS....................................... 5,873,907 1,973,689
----------- -----------
TOTAL INCREASE IN NET ASSETS........................ 5,668,628 2,431,054
NET ASSETS
Beginning of the period............................. 7,542,036 13,210,664
----------- -----------
End of the period................................... $13,210,664 $15,641,718
=========== ===========
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the period............................. $ 735 $ 6,776
=========== ===========
End of the period................................... $ 6,776 $ 509,743
=========== ===========
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares...................... 852,094 520,825
Issued in connection with the reinvestment of:
Distributions from net investment income............ 58,698 0
Distributions from paid in capital.................. 0 0
Distributions from net realized gain................ 0 0
----------- -----------
910,792 520,825
Redeemed............................................ (374,295) (339,436)
----------- -----------
Net change.......................................... 536,497 181,389
=========== ===========
<CAPTION>
- --------------------------------
FINANCIAL HIGHLIGHTS (UNAUDITED)
- --------------------------------
OCTOBER 31, 1994(A) SIX MONTHS
THROUGH YEAR YEAR ENDED
DECEMBER 31, ENDED ENDED JUNE 30,
1994 1995 1996 1997
------------------- ------ ------- ----------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period....................... $10.00 $ 9.96 $ 11.04 $ 10.83
------ ------ ------- -------
Income From Investment
Operations
Net Investment Income........ 0.10 0.33 0.58 0.36
Net Realized and Unrealized
Gain (Loss) on Investments.. (0.04) 1.16 (0.21) (0.03)
------ ------ ------- -------
Total From Investment
Operations.................. 0.06 1.49 0.37 0.33
------ ------ ------- -------
Less Distributions
Distributions From Net
Investment Income........... (0.10) (0.33) (0.56) 0.00
Distributions From Net
Realized Capital Gains...... 0.00 (0.08) (0.02) 0.00
------ ------ ------- -------
Total Distributions.......... (0.10) (0.41) (0.58) 0.00
------ ------ ------- -------
Net Asset Value, End of
Period....................... $ 9.96 $11.04 $ 10.83 $ 11.16
====== ====== ======= =======
TOTAL RETURN (%).............. 0.60(b) 15.02 3.31 3.05(b)
Ratio of Operating Expenses to
Average Net Assets (%)....... 0.70(c) 0.70 0.70 0.70(c)
Ratio of Net Investment Income
to Average Net Assets (%).... 5.70(c) 5.62 6.13 6.62(c)
Portfolio Turnover Rate (%)... 1,409(c) 415 388 578(c)
Net Assets, End of Period
(000)........................ $2,012 $7,542 $13,211 $15,642
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(c) 2.90 1.37 1.02(c)
</TABLE>
(a) Commencement of operations.
(b) Not computed on an annualized basis.
(c) Computed on an annualized basis.
See accompanying notes to financial statements.
86
<PAGE>
BACK BAY ADVISORS MONEY MARKET SERIES
PORTFOLIO MANAGER: JOHN MALONEY BACK BAY ADVISORS, L.P.
[PICTURE APPEARS HERE]
Q. HOW DID BACK BAY ADVISORS MONEY MARKET SERIES PERFORM OVER THE LAST SIX
MONTHS?
A. Back Bay Advisors Money Market Series performed as it is intended, provid-
ing shareholders with a high degree of safety and liquidity. The Series main-
tained a constant share price of $100.00* and generated competitive money mar-
ket returns. For the six months ended June 30, 1997, the Money Market Series
produced a return of 2.55%. The seven-day effective yield on June 30 was
5.43%.
Q. WHAT WAS THE ENVIRONMENT LIKE FOR THE SERIES?
A. Short-term interest rates--the chief influence on money market perfor-
mance--ended the period largely unchanged from one year ago, although they
fluctuated significantly during the period. Throughout the past year, invest-
ors were concerned that stronger-than-expected economic growth would stimulate
inflation. As a preemptive strike against inflation, the Federal Reserve Board
raised the benchmark federal funds rate--the rate at which banks lend to each
other overnight--by one quarter percentage point to 5.5% in March 1997. De-
spite these concerns, inflation has remained well-contained, and with the
economy slowing from its frantic first quarter pace, investors have become
less concerned about the prospect of rising prices.
Q. WHAT STRATEGIES DID YOU USE IN MANAGING THE SERIES?
A. We managed the Series' average maturity and targeted attractive relative
value among money market instruments. We sought to shorten the average matu-
rity when interest rates were rising and lengthen when we thought rates would
decline. A shorter average maturity enables the portfolio to benefit faster
from the higher rate environment. A longer average maturity helps preserve the
Series' yield for an extended period of time. As of June 30, 1997, the Series'
average maturity stood at 43 days; we were investing primarily in instruments
with two- to four-month maturities.
Q. WHAT IS YOUR OUTLOOK FOR THE NEXT SIX MONTHS?
A. We expect investors' expectations of economic activity and its effect on
inflation will continue to guide the direction of short-term rates. While eco-
nomic growth appears to have slowed considerably in the second quarter, we are
anticipating a rebound later this year. We think the magnitude of that rebound
will be key to any changes in short-term rates.
[CHECK MARK APPEARS HERE] FUND FACTS
GOAL: The highest possible level of current income consistent with the
preservation of capital.
START DATE: August 1, 1983
SIZE: $120 million as of June 30, 1997
MANAGER: John Maloney has served as portfolio manager since 1996. Mr. Maloney
also manages the New England Tax Exempt Money Market Fund.
* Past performance does not guarantee future results. Money market funds are
neither insured nor guaranteed by the U.S. government. These Series seek but
cannot assure a stable share price of $100.00.
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.
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.
87
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS MONEY MARKET SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- ---------------------------------------
INVESTMENTS--100.0% OF TOTAL NET ASSETS
- ---------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY
VALUE DESCRIPTION RATE DATE VALUE (A)
<C> <S> <C> <C> <C>
BANK NOTE--2.5%
$3,000,000 Morgan Guarantee Trust New York... 6.150% 02/19/98 $ 2,998,982
------------
Total Bank Note (Cost $2,998,982). 2,998,982
------------
CERTIFICATES OF DEPOSIT--11.3%
1,000,000 Mitsubishi Bank, Ltd. ............ 5.810% 07/07/97 1,000,000
2,000,000 Sanwa Bank, Ltd. ................. 5.680% 07/10/97 2,000,005
2,000,000 Dai Ichi Kangyo Bank.............. 5.850% 07/18/97 2,000,122
2,000,000 Morgan Guaranty Trust Co. ........ 5.900% 09/30/97 2,000,921
3,000,000 Societe Generale.................. 5.740% 10/07/97 2,997,374
1,500,000 Deutsche Bank AG.................. 5.690% 10/28/97 1,498,007
2,000,000 Deutsche Bank Finance, Inc. ...... 5.690% 10/28/97 2,001,010
------------
Total Certificates of Deposit
(Cost $13,497,439)............... 13,497,439
------------
CERTIFICATES OF DEPOSIT--EURO
DOLLAR--7.5%
3,000,000 Sanwa Bank........................ 5.730% 07/31/97 3,000,024
4,000,000 Mitsubishi........................ 5.700% 08/20/97 4,000,055
2,000,000 Canadian Imperial Bank............ 5.710% 09/24/97 1,999,284
------------
Total Certificate of Deposit--Euro
Dollar (Cost $8,999,363)......... 8,999,363
------------
COMMERCIAL PAPER--78.7%
AUTOMOTIVE--12.1%
1,600,000 General Motors Acceptance Corp. .. 5.600% 07/02/97 1,599,751
2,500,000 Ford Motor Credit Corp. .......... 5.520% 07/08/97 2,497,317
2,000,000 American Honda Finance............ 5.420% 07/21/97 1,993,978
1,000,000 American Honda Finance............ 5.420% 07/22/97 996,838
2,365,000 General Motors Acceptance Corp. .. 5.660% 07/23/97 2,356,820
2,000,000 American Honda Finance............ 5.620% 07/24/97 1,992,819
1,050,000 General Motors Acceptance Corp. .. 5.690% 08/22/97 1,041,370
2,000,000 Ford Motor Credit Corp. .......... 5.570% 10/09/97 1,969,055
------------
14,447,948
------------
BANKING--13.7%
2,915,000 Bank of Montreal.................. 5.370% 07/03/97 2,914,130
1,950,000 Societe General Canada............ 5.640% 07/07/97 1,948,167
4,150,000 Bankers Trust Corp. .............. 5.410% 07/17/97 4,140,022
2,000,000 Svenska Handelsbanken, Inc. ...... 5.680% 07/25/97 1,992,427
1,125,000 Commerzbank U.S. Finance.......... 5.300% 08/01/97 1,119,866
595,000 Svenska Handelsbanken, Inc. ...... 5.650% 08/01/97 592,105
500,000 Banque National de Paris.......... 5.400% 08/20/97 496,250
2,315,000 Banque National de Paris.......... 5.650% 12/10/97 2,256,141
1,000,000 Banque National de Paris.......... 5.650% 12/10/97 974,575
------------
16,433,683
------------
DRUGS--2.4%
1,000,000 American Home Products Corp. ..... 5.650% 08/08/97 994,036
1,855,000 American Home Products Corp. ..... 5.560% 08/21/97 1,840,389
------------
2,834,425
------------
</TABLE>
See accompanying notes to financial statements.
88
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS MONEY MARKET SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- ------------------------
INVESTMENTS--(CONTINUED)
- ------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY
VALUE DESCRIPTION RATE DATE VALUE (A)
<C> <S> <C> <C> <C>
FINANCE--17.9%
$1,500,000 General Electric Capital Corp. .... 5.360% 07/07/97 $ 1,498,660
425,000 CIT Group Holdings, Inc. .......... 5.520% 07/14/97 424,153
2,285,000 American Express Credit Corp. ..... 5.530% 07/24/97 2,276,927
1,000,000 Heller Financial, Inc. ............ 5.680% 07/24/97 996,371
1,300,000 Heller Financial, Inc. ............ 5.600% 07/28/97 1,294,540
500,000 Heller Financial, Inc. ............ 5.620% 07/31/97 497,658
1,120,000 General Electric Capital Corp. .... 5.550% 08/12/97 1,112,748
1,465,000 Avco Financial Services, Inc. ..... 5.620% 08/13/97 1,455,166
1,260,000 American General Corp. ............ 5.550% 08/18/97 1,250,676
2,145,000 CIT Group Holdings, Inc. .......... 5.550% 08/19/97 2,128,796
3,000,000 Household Finance Corp. ........... 5.570% 08/26/97 2,974,007
2,200,000 Heller Financial, Inc. ............ 5.610% 08/28/97 2,180,116
1,900,000 Avco Financial Services, Inc. ..... 5.600% 09/03/97 1,881,084
1,500,000 Avco Financial Services, Inc. ..... 5.570% 09/15/97 1,482,362
------------
21,453,264
------------
FOOD & TOBACCO--3.9%
2,125,000 BAT Capital Corp. ................. 5.580% 07/22/97 2,118,083
1,035,000 BAT Capital Corp. ................. 5.580% 07/23/97 1,031,471
1,500,000 BAT Capital Corp. ................. 5.570% 08/01/97 1,492,805
------------
4,642,359
------------
INSURANCE--3.5%
1,885,000 Prudential Funding Corp. .......... 5.530% 07/09/97 1,882,683
2,365,000 Prudential Funding Corp. .......... 5.520% 07/11/97 2,361,374
------------
4,244,057
------------
MISCELLANEOUS--5.5%
1,500,000 PHH Corp. ......................... 5.550% 07/14/97 1,496,994
3,000,000 PHH Corp. ......................... 5.600% 07/15/97 2,993,467
2,090,000 Clipper Receivables Corp. ......... 5.580% 08/07/97 2,078,014
------------
6,568,475
------------
RETAIL--4.3%
1,500,000 Sears Roebuck Acceptance Corp. .... 5.560% 07/16/97 1,496,525
2,610,000 Sears Roebuck Acceptance Corp. .... 5.630% 07/18/97 2,603,061
1,000,000 Sears Roebuck Acceptance Corp. .... 5.650% 10/08/97 984,462
------------
5,084,048
------------
SECURITIES--11.5%
1,000,000 Lehman Brothers, Inc. ............. 6.400% 07/01/97 1,000,000
2,000,000 Merrill Lynch & Co., Inc. ......... 5.650% 07/15/97 1,995,605
1,890,000 Lehman Brothers, Inc. ............. 5.650% 09/08/97 1,869,533
2,000,000 Goldman Sachs Group................ 5.650% 07/09/97 1,997,489
2,000,000 Merrill Lynch & Co., Inc. ......... 5.570% 09/11/97 1,977,720
1,000,000 Lehman Brothers, Inc. ............. 5.660% 09/08/97 989,152
1,000,000 Merrill Lynch & Co., Inc. ......... 5.700% 10/08/97 984,325
3,000,000 Goldman Sachs Group................ 5.820% 11/17/97 2,932,585
------------
13,746,409
------------
</TABLE>
See accompanying notes to financial statements.
89
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS MONEY MARKET SERIES)
INVESTMENTS AS OF JUNE 30, 1997 (UNAUDITED)
- ------------------------
INVESTMENTS--(CONTINUED)
- ------------------------
<TABLE>
<CAPTION>
FACE INTEREST MATURITY
VALUE DESCRIPTION RATE DATE VALUE (A)
<C> <S> <C> <C> <C>
TELECOMMUNICATION--3.9%
$1,730,000 Bell Atlantic Financial Services.. 5.560% 07/01/97 $ 1,730,000
1,000,000 Bell Atlantic Financial Services.. 5.650% 07/02/97 999,843
500,000 Bell Atlantic Financial Services.. 5.550% 07/11/97 499,229
1,500,000 Bell Atlantic Financial Services.. 5.550% 07/14/97 1,496,994
------------
4,726,066
------------
Total Commercial Paper (Cost
$94,180,734)..................... 94,180,734
------------
Total Investments--100.0% (Cost
$119,676,518)(b)................. 119,676,518
Other assets less liabilities..... 46,414
------------
TOTAL NET ASSETS--100%............ $119,722,932
============
</TABLE>
(a) See Note 1A.
(b) The aggregate cost for federal income tax purposes was $119,676,518.
See accompanying notes to financial statements.
90
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS MONEY MARKET SERIES)
- ---------------------------------
STATEMENT OF ASSETS & LIABILITIES
- ---------------------------------
JUNE 30, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments at value................................. $119,676,518
Cash................................................. 2,328
Receivable for:
Fund shares sold..................................... 1,329,044
Dividends and interest............................... 471,826
------------
121,479,716
LIABILITIES
Payable for:
Fund shares redeemed................................. $1,184,103
Withholding taxes.................................... 23,792
Dividends declared................................... 474,609
Accrued expenses:
Management fees...................................... 33,869
Deferred trustees' fees.............................. 30,762
Other expenses....................................... 9,649
----------
1,756,784
------------
$119,722,932
============
NET ASSETS
Net Assets consist of:
Capital paid in...................................... $119,722,932
------------
NET ASSETS............................................ $119,722,932
============
Computation of offering price:
Net asset value and redemption price per share
($119,722,932 divided by 1,197,230 shares of
beneficial interest)................................. $ 100.00
============
Cost of investments................................... $119,676,518
============
<CAPTION>
- -----------------------
STATEMENT OF OPERATIONS
- -----------------------
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<S> <C> <C>
INVESTMENT INCOME
Interest............................................. $3,267,968
EXPENSES
Management fees...................................... $204,467
Trustees' fees and expenses.......................... 14,051
Custodian............................................ 20,102
Audit and tax services............................... 3,451
Legal................................................ 9,340
Printing............................................. 9,655
Miscellaneous........................................ 1,821
--------
Total expenses...................................... 262,887
----------
NET INVESTMENT INCOME................................ 3,005,081
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS........... $3,005,081
==========
</TABLE>
See accompanying notes to financial statements.
91
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS MONEY MARKET SERIES)
- ----------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
- ----------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------- -------------
<S> <C> <C>
FROM OPERATIONS
Net investment income........................... $ 5,024,507 $ 3,005,081
------------- -------------
INCREASE IN NET ASSETS FROM OPERATIONS.......... 5,024,507 3,005,081
------------- -------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income........................... (5,024,507) (3,005,081)
------------- -------------
(5,024,507) (3,005,081)
------------- -------------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares.................... 234,677,851 156,004,363
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income........ 4,966,805 2,986,843
------------- -------------
239,644,656 158,991,206
Cost of shares redeemed......................... (212,794,096) (156,266,993)
------------- -------------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL
SHARE TRANSACTIONS............................. 26,850,560 2,724,213
------------- -------------
TOTAL INCREASE IN NET ASSETS.................... 26,850,560 2,724,213
NET ASSETS
Beginning of the period......................... 90,148,159 116,998,719
------------- -------------
End of the period............................... $ 116,998,719 $ 119,722,932
============= =============
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares.................. 2,346,128 1,560,050
Issued in connection with the reinvestment of:
Distributions from net investment income........ 50,319 29,868
------------- -------------
2,396,447 1,589,918
Redeemed........................................ (2,127,942) (1,562,675)
------------- -------------
Net change...................................... 268,505 27,243
============= =============
<CAPTION>
- --------------------------------
FINANCIAL HIGHLIGHTS (UNAUDITED)
- --------------------------------
YEAR ENDED DECEMBER 31, SIX MONTHS
-------------------------------------------- ENDED JUNE 30,
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $100.00 $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 2.38
------- ------- ------- ------- -------- --------
Total from Investment
Operations............ 3.73 2.93 3.89 5.50 4.99 2.38
Distributions from net
investment income...... (3.73) (2.93) (3.89) (5.50) (4.99) (2.38)
------- ------- ------- ------- -------- --------
Total Distribution..... (3.73) (2.93) (3.89) (5.50) (4.99) (2.38)
------- ------- ------- ------- -------- --------
Net asset value, end of
period................. $100.00 $100.00 $100.00 $100.00 $ 100.00 $ 100.00
======= ======= ======= ======= ======== ========
TOTAL RETURN (%)........ 3.79 2.97 4.01 5.64 5.11 2.55(a)
Ratio of operating
expenses to average net
assets (%)............. 0.38 0.38 0.40 0.50 0.50 0.45(b)
Ratio of net investment
income to average net
assets (%)............. 3.71 2.93 3.89 5.50 4.99 2.38(b)
Net Assets, End of
Period (000)........... $61,607 $59,044 $73,960 $90,148 $116,999 $119,723
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>
(a) Not computed on an annualized basis.
(b) Computed on an annualized basis.
See accompanying notes to financial statements.
92
<PAGE>
NEW ENGLAND ZENITH FUND
- --------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS--JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------
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 of Metropolitan
Life Insurance Company ("MetLife") and New England Life Insurance Company
("NELICO"), a subsidiary of MetLife, as an investment vehicle for variable
life insurance or variable annuity products, although not all Series are
available to all such separate accounts.
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. Each Series (or their predecessors)
commenced operations on the date set forth below:
<TABLE>
<S> <C>
Bond Income Series............................................. August 26, 1983
Capital Growth Series.......................................... August 26, 1983
Money Market Series............................................ August 26, 1983
Stock Index Series............................................. March 30, 1987
Managed Series................................................. May 1, 1987
Avanti Growth Series........................................... April 30, 1993
Growth and Income Series....................................... April 30, 1993
Small Cap Series............................................... May 1, 1994
Balanced Series................................................ October 31, 1994
International Magnum Equity Series............................. October 31, 1994
U.S. Government Series......................................... October 31, 1994
Strategic Bond Opportunities Series............................ October 31, 1994
Venture Value Series........................................... October 31, 1994
Equity Growth 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,
approximates 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 AND INCOME, SMALL
CAP, BALANCED, INTERNATIONAL MAGNUM 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 reported at fair
value as determined in good faith under consistently applied procedures under
the general supervision of the Board of Trustees, although
93
<PAGE>
NEW ENGLAND ZENITH FUND
- ---------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS--JUNE 30, 1997--(CONTINUED) (UNAUDITED)
- ---------------------------------------------------------------------
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.
B. FOREIGN CURRENCY TRANSLATION--The books and records of the Fund 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, income and expenses are translated on the respective dates of
such transactions.
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. Such fluctuations are included with the net realized
and unrealized gain or loss on investments.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currency, currency gains or losses realized between the trade and
settlement dates on securities transactions, and the difference between the
amounts of dividends, interest, and foreign withholding taxes recorded on the
Fund's books and the U.S. dollar equivalent of the amounts actually received
or paid. Net unrealized foreign exchange gains and losses arise from changes
in the value of assets and liabilities resulting from changes in the exchange
rate.
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 Contracts Outstanding." 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.
All contracts are "marked-to-market" daily at the applicable translation
rates, and any gains or losses are recorded for financial statement purposes
as unrealized until settlement date. Risks may arise upon entering into these
contracts from the potential inability of counterparties to meet the terms of
their contracts and from unanticipated movements in the value of a foreign
currency relative to the U.S. dollar.
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 and Income, Stock Index, Managed, Balanced,
International Magnum Equity, U.S. Government, Strategic Bond Opportunities
and Venture Value Series each may enter into futures contracts on the S&P
500 Index or other indices of stocks or on interest-bearing securities or
indices thereof, 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 or index, 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
94
<PAGE>
NEW ENGLAND ZENITH FUND
- ---------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS--JUNE 30, 1997--(CONTINUED) (UNAUDITED)
- ---------------------------------------------------------------------
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 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.
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 fund 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 six months ended June 30, 1997.
G. FEDERAL TAXES--Each Series, which is a separate taxable entity, 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.
2. At June 30, 1997 MetLife held 21,464,006 shares in separate investment
accounts for annuity contracts issued by MetLife. NELICO, held the remaining
22,487,480 shares 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.
95
<PAGE>
NEW ENGLAND ZENITH FUND
- ---------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS--JUNE 30, 1997--(CONTINUED) (UNAUDITED)
- ---------------------------------------------------------------------
3. For the six months ended June 30, 1997, 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................. $ 32,614,159 $ 8,508,242 $ 30,998,206 $ 3,842,239
Capital Growth.......... 1,440,358,981 -- 1,405,305,600 --
Westpeak Stock Index.... 10,553,307 -- 1,819,233 --
Back Bay Advisors
Managed................ 54,965,963 -- 61,503,589 89,439
Loomis Sayles Avanti
Growth................. 25,228,594 -- 15,929,125 --
Westpeak Growth &
Income................. 51,369,069 -- 37,325,189 --
Loomis Sayles Small Cap. 64,686,580 -- 39,128,161 --
Loomis Sayles Balanced.. 24,408,519 12,245,926 8,193,053 7,145,416
Morgan Stanley
International Magnum
Equity................. 44,648,721 -- 37,986,035 --
Salomon Brothers U.S.
Government............. -- 39,000,974 -- 38,688,875
Salomon Brothers
Strategic Bond
Opportunities.......... 33,822,626 24,318,057 18,255,910 29,214,003
Davis Venture Value..... 62,478,110 -- 16,103,183 --
Alger Equity Growth..... 97,292,045 -- 73,776,891 --
</TABLE>
Purchases and sales of corporate short-term obligations for the Back Bay
Advisors Money Market Series aggregated $421,940,372 and $420,167,306,
respectively.
4. MANAGEMENT FEES.
TNE Advisers, Inc. ("TNE Advisers") acts as adviser to all of the Series
except the Capital Growth Series, for which Capital Growth Management Limited
Partnership ("CGM") serves as adviser. Separate advisory agreements for each
Series provide for fees as set forth below:
<TABLE>
<CAPTION>
GROSS FEES EARNED
BY TNE ADVISERS FOR
THE SIX MONTHS ENDED MANAGEMENT FEE RATE
JUNE 30, 1997 PAYABLE BY SERIES TO
BEFORE REDUCTION DUE TNE ADVISERS
SERIES TO EXPENSE LIMITS (A) (BASED ON % OF AVERAGE NET ASSETS)
------ --------------------- ---------------------------------------
<S> <C> <C>
Loomis Sayles Small Cap
Series................. $540,630 1.00% all assets
Morgan Stanley
International Magnum
Equity Series(b) ...... 184,136 0.90% all assets
Alger Equity Growth
Series................. 517,190 0.75% all assets
Loomis Sayles Avanti
Growth Series.......... 319,398 0.70% the first $200 million
0.65% the next $300 million
0.60% amounts in excess of $500 million
Davis Venture Value
Series................. 554,852 0.75% all assets
Westpeak Growth and
Income Series.......... 332,622 0.70% the first $200 million
0.65% the next $300 million
0.60% amounts in excess of $500 million
Westpeak Stock Index
Series................. 113,925 0.25% all assets
Loomis Sayles Balanced
Series................. 246,414 0.70% of all assets
Back Bay Managed Series. 414,226 0.50% of all assets
Salomon Brothers
Strategic Bond
Opportunities Series... 145,939 0.65% of all assets
Back Bay Advisors Bond
Income Series.......... 358,529 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...... 41,558 0.55% all assets
Back Bay Advisors Money
Market Series.......... 204,467 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.
(b) Effective May 1, 1997 the Draycott International Equity Series was renamed
the Morgan Stanley International Magnum Equity Series.
96
<PAGE>
NEW ENGLAND ZENITH FUND
- ---------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS--JUNE 30, 1997--(CONTINUED) (UNAUDITED)
- ---------------------------------------------------------------------
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 six months ended June 30,
1997, CGM was paid at an annual rate of 0.64% of the Capital Growth Series'
average net assets, totaling $3,872,900.
SUB-ADVISORY FEES. TNE Advisers has sub-contracted day-to-day portfolio
management responsibilities for the Series to each of the following sub-
advisers: Loomis, Sayles & Company, L.P. ("Loomis Sayles") for the Loomis
Sayles Small Cap, Loomis Sayles Avanti Growth and Loomis Sayles Balanced
Series, Draycott Partners, Ltd. for the Draycott International Equity Series
(for the period January 1, 1997 through April 30, 1997) and Morgan Stanley
Asset Management Inc. for the Morgan Stanley International Magnum Equity
Series; Fred Alger Management, Inc. for the Alger Equity Growth Series; Davis
Selected Advisers, L.P. for the Davis Venture Value Series; Westpeak
Investment Advisors, L.P. ("Westpeak") for the Westpeak Growth and Income and
Westpeak Stock Index Series; Back Bay Advisors, L.P. ("Back Bay Advisors") 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 pays each sub-adviser at the following rates
for providing sub-advisory services to the Series:
<TABLE>
<CAPTION>
FEES
PAYABLE TO ANNUAL
SUB-ADVISER BY TNE PERCENTAGE
ADVISERS RATES PAID BASED ON
FOR SIX MONTHS ENDED TO SUB- SERIES AVERAGE DAILY NET ASSET
SERIES JUNE 30, 1997 ADVISER VALUE LEVELS
------ -------------------- ---------- ------------------------------------
<S> <C> <C> <C>
Loomis Sayles Small Cap
Series................. $273,978 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
Morgan Stanley
International Magnum
Equity Series*......... 53,355 0.75% of the first $30 million
(Period May 1, 1997
through June 30, 1997) 0.60% of the next $40 million
0.45% of the next $30 million
0.40% of amounts in excess of $100 million
Draycott International
Equity Series *........ 81,855 0.75% of the first $10 million
(Period January 1, 1997
through April 30, 1997) 0.60% of the next $40 million
0.45% of amounts in excess of $50 million
Alger Equity Growth
Series................. 268,630 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.......... 194,807 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................. 308,655 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 and
Income Series.......... 201,985 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................. 45,570 0.10% of all assets
Loomis Sayles Balanced
Series................. 153,206 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......... 178,087 0.25% of the first $50 million
0.20% of amounts in excess of $50 million
</TABLE>
- -------
* Effective May 1, 1997 the Draycott International Equity Series was renamed
the Morgan Stanley International Magnum Equity Series and a new Sub-advisory
agreement between TNE Advisers and Morgan Stanley Asset Management Inc. went
into effect, replacing the prior Sub-advisory agreement between TNE Advisers
and Draycott Partners, Ltd. The Sub-advisory fees listed above reflect all
agreements which were in place during the six months ended June 30, 1997.
97
<PAGE>
NEW ENGLAND ZENITH FUND
- ---------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS--JUNE 30, 1997--(CONTINUED) (UNAUDITED)
- ---------------------------------------------------------------------
<TABLE>
<CAPTION>
FEES
PAYABLE TO ANNUAL
SUB-ADVISER BY TNE PERCENTAGE
ADVISERS RATES PAID BASED ON
FOR SIX MONTHS ENDED TO SUB- SERIES AVERAGE DAILY NET ASSET
SERIES JUNE 30, 1997 ADVISER VALUE LEVELS
------ -------------------- ---------- ------------------------------------
<S> <C> <C> <C>
Salomon Brothers
Strategic Bond
Opportunities Series... $ 78,468 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.......... 191,662 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...... 17,001 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.......... 83,214 0.15% of the first $100 million
0.10% of amounts in excess of $100 million
</TABLE>
TNE Advisers, which acts as adviser to each Series except the Capital Growth
Series, is a direct wholly-owned subsidiary of New England Life Holdings, Inc.
which in turn 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 an indirect 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, Loomis
Sayles Small Cap Series, Westpeak Growth and Income Series, Westpeak Stock
Index Series, Back Bay Advisors Managed Series, Back Bay Advisors Bond Income
Series and Back Bay Advisors Money Market Series. Pursuant to this arrangement
TNE Advisers bears expenses (other than advisory fees and any brokerage costs,
interest, taxes or extraordinary expenses) of each Series (except the Loomis
Sayles Small Cap Series) in excess of 0.15% of average daily net assets. In
the case of the Loomis Sayles Small Cap Series, TNE Advisers bears all the
expenses (other than any brokerage costs, interest, taxes or extraordinary
expenses) 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.
98
<PAGE>
NEW ENGLAND ZENITH FUND
- ---------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS--JUNE 30, 1997--(CONTINUED) (UNAUDITED)
- ---------------------------------------------------------------------
The Voluntary Expense Limitations currently limit total expenses for each of
the affected series to the following levels:
<TABLE>
<CAPTION>
TOTAL EXPENSE RATIO
UNDER CURRENT VOLUNTARY
SERIES EXPENSE LIMITATION
------ -----------------------
<S> <C>
Back Bay Advisors Money Market Series............ 0.50%
Back Bay Advisors Bond Income Series............. 0.55%
Back Bay Advisors Managed Series................. 0.65%
Westpeak Growth and Income Series................ 0.85%
Westpeak Stock Index Series...................... 0.40%
Loomis Sayles Small Cap Series................... 1.00%
Loomis Sayles Avanti Growth Series............... 0.85%
</TABLE>
TNE Advisers may terminate these expense arrangements at any time. If these
expense arrangements were terminated, some of 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, custodian and transfer agent charges and 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 Morgan Stanley
International Magnum Equity Series, Alger Equity Growth Series, Davis 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 can terminate at any time, TNE Advisers 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 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 more than two years after the end of the fiscal year in which such
expenses were incurred. The percentage applicable to each Series is as
follows:
<TABLE>
<CAPTION>
% OF
AVERAGE
SERIES NET ASSETS
------ ----------
<S> <C>
Morgan Stanley International Magnum Equity Series............. 1.30%
Alger Equity Growth Series.................................... 0.90%
Davis 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>
99
<PAGE>
NEW ENGLAND ZENITH FUND
- ---------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS--JUNE 30, 1997--(CONTINUED) (UNAUDITED)
- ---------------------------------------------------------------------
For the period January 1, 1997 to June 30, 1997, the effective expense ratios
for each Series after giving effect to the foregoing arrangements, the amounts
of expenses assumed by TNE Advisers for those Series to which the Voluntary
Expense Limitation applies, and the amounts of expenses deferred for those
Series to which the Expense Deferral Agreement applies, are as follows:
<TABLE>
<CAPTION>
TOTAL EXPENSE RATIO
UNDER CURRENT EXPENSES ASSUMED
VOLUNTARY EXPENSE BY TNE ADVISERS AS A EXPENSES DEFERRED IN EXPENSES DEFERRED IN
LIMITATION OR RESULT OF THE SERIES 1995 (SUBJECT TO 1996 (SUBJECT TO
EXPENSE DEFERRAL EXCEEDING THE REPAYMENT UNTIL REPAYMENT UNTIL
SERIES AGREEMENT VOLUNTARY EXPENSE LIMIT DECEMBER 31, 1997) DECEMBER 31, 1998)
------ ------------------- ----------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Back Bay Advisors Money
Market Series.......... 0.45% -- not applicable not applicable
Back Bay Advisors Bond
Income Series.......... 0.53% -- not applicable not applicable
Back Bay Advisors
Managed Series......... 0.63% -- not applicable not applicable
Westpeak Growth & Income
Series................. 0.85% -- not applicable not applicable
Westpeak Stock Index
Series................. 0.40% $27,670 not applicable not applicable
Loomis Sayles Small Cap
Series................. 1.00% 82,574 not applicable not applicable
Loomis Sayles Avanti
Growth Series.......... 0.85% 13,619 not applicable not applicable
Morgan Stanley
International Magnum
Equity Series.......... 1.30% not applicable $176,796 $102,652
Alger Equity Growth
Series................. 0.89%* not applicable 77,254 --
Davis Venture Value
Series................. 0.90% not applicable 88,357 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>
- -------
* Effective May 1, 1996, Fred Alger Management, Inc. has agreed with TNE
Advisers that the sub-advisory fee payable by TNE Advisers 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 and does not reduce the
management fee payable by the Series. The fee reduction agreement will
expire on (a) January 1, 1998 or (b) at such time as TNE Advisers has
recovered certain expenses (generally those expenses borne by TNE Advisers
under the Expense Deferral Arrangement prior to January 1, 1996 which were
not recovered from the Series), whichever occurs first.
For the period January 1, 1997 to June 30, 1997 the amounts of expense
deferral recovered from each Series by TNE Advisers is:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
RECOVERED RECOVERED
SERIES EXPENSES DEFERRED EXPENSES DEFERRED
------ ----------------- -----------------
<S> <C> <C>
Alger Equity Growth Series........... None None
Davis Venture Value Series........... $22,614 None
Loomis Sayles Balanced Series........ None None
Salomon Brothers Strategic Bond
Opportunities Series................ None None
Salomon Brothers U.S. Government
Series.............................. None None
</TABLE>
100
<PAGE>
5. The Fund does not pay any compensation to its officers or to any trustees
who are directors, officers or employees of MetLife, NELICO, 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 AND SMALL
INCOME GROWTH MARKET INDEX MANAGED GROWTH INCOME CAP
------ ------- ------ ------ ------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Annual Retainer......... $1,766 $3,183 $1,672 $1,119 $1,737 $1,122 $1,121 $1,131
Meeting Fee............. $ 133 $ 133 $ 133 $ 133 $ 133 $ 133 $ 133 $ 133
Committee Chairman
Annual Retainer
(Contract Review)...... $ 228 $1,442 $ 148 $ 102 $ 203 $ 104 $ 104 $ 113
Committee Chairman
Annual Retainer
(Audit)................ $ 152 $ 962 $ 98 $ 68 $ 135 $ 70 $ 69 $ 75
</TABLE>
<TABLE>
<CAPTION>
STRATEGIC
INTERNATIONAL U.S. BOND VENTURE EQUITY
BALANCED MAGNUM EQUITY GOVERNMENT OPPORTUNITIES VALUE GROWTH
-------- ------------- ---------- ------------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Annual Retainer......... $1,086 $558 $520 $553 $1,659 $1,677
Meeting Fee............. $ 133 $133 $133 $133 $ 133 $ 133
Committee Chairman
Annual Retainer
(Contract Review)...... $ 74 $ 50 $ 17 $ 45 $ 137 $ 152
Committee Chairman
Annual Retainer
(Audit)................ $ 49 $ 33 $ 11 $ 30 $ 91 $ 101
</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. SHAREHOLDER MEETING (UNAUDITED)
At a Special Meeting of shareholders of the Morgan Stanley International
Magnum Equity Series held on April 24, 1997, such shareholders voted for the
following proposals:
<TABLE>
<CAPTION>
VOTED VOTED TOTAL
FOR AGAINST VOTES
---------- --------- ----------
<S> <C> <C> <C>
1. To approve a new Sub-Advisory Agreement
(the "New Sub-Advisory Agreement") relating
to the Morgan Stanley International Magnum
Equity Series (the "Series") by and between
TNE Advisers, Inc. and Morgan Stanley Asset
Management Inc. ("MSAM")................... 427,434.82 15,401.04 442,835.86
2. To approve a second new Sub-Advisory
Agreement relating to the Series by and
between TNE Advisers, Inc. and MSAM, such
Sub-Advisory Agreement to replace the New
Sub-Advisory Agreement at the time of the
merger of MSAM's parent company, Morgan
Stanley Group Inc. with Dean Witter,
Discover & Co.............................. 426,196.37 14,600.41 440,795.78
</TABLE>
101
<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 sale charges applicable to mutual fund
investments.
(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. The index has not been adjusted
for ongoing management, distribution and operating expenses and
applicable sales charges applicable to mutual fund investment.
(4) 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 has not been adjusted for
ongoing management, distribution and operating expenses and applicable
sales charges applicable to mutual fund investment.
(5) 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 sales charges applicable to
mutual fund investments.
(6) 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.
(7) 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.
(8) 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.
(9) 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.
(10) 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.
(11) 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.
(12) 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.
(13) 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.
(14) 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.
(15) 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.
102
<PAGE>
(16) 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.
(17) Russell 2000 Index consists of 2000 small market capitalization stocks
having an average market cap of $160 million.
(18) 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.
103
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
<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>
ASSETS
Investments in New England Zenith Fund,
Variable Insurance Products Fund, and
Variable Insurance Products Fund II at
value (Note 2).......................... $712,241,856 $40,101,448 $40,089,800 $50,672,196
<CAPTION>
SHARES COST
--------- ------------
<S> <C> <C>
Capital Growth
Series......... 1,404,955 $464,415,210
Back Bay Advisors
Bond Income
Series......... 365,422 38,594,374
Back Bay Advisors
Money Market
Series......... 400,898 40,089,800
Westpeak Stock
Index Series... 352,625 35,252,284
Back Bay Advisors
Managed Series. 189,504 26,307,789
Loomis Sayles
Avanti Growth
Series......... 185,520 24,591,218
Westpeak Growth
and Income
Series......... 151,901 20,226,092
Loomis Sayles
Small Cap
Series......... 244,550 32,516,041
Salomon Bros.
U.S. Government
Series......... 9,582 105,770
Loomis Sayles
Balanced
Series......... 421,799 5,528,598
Alger Equity
Growth Series.. 2,136,897 31,660,575
Morgan Stanley
International
Magnum Equity
Series......... 545,942 6,014,094
Davis Venture
Value Series... 1,986,477 30,608,720
Salomon Bros.
Bond
Opportunities
Series......... 37,128 439,609
VIP Equity-
Income Series.. 4,738,660 82,625,965
VIP Overseas
Series......... 3,814,220 61,841,661
VIP High Income
Series......... 486,519 5,679,618
VIP II Asset
Manager Series. 310,903 4,641,156
Amount due and accrued from policy-related
transactions, net....................... 547,517 21,004 348,276 123,062
Dividends receivable..................... -- -- 158,406 --
------------ ----------- ----------- -----------
Total Assets............................ 712,789,373 40,122,452 40,596,482 50,795,258
LIABILITIES
Due New England Life Insurance Company... 64,968,451 4,085,320 5,144,544 5,239,452
------------ ----------- ----------- -----------
Total Liabilities....................... 64,968,451 4,085,320 5,144,544 5,239,452
------------ ----------- ----------- -----------
NET ASSETS FOR VARIABLE LIFE INSURANCE
POLICIES................................. $647,820,922 $36,037,132 $35,451,938 $45,555,806
============ =========== =========== ===========
<CAPTION>
-----------------------------------
GROWTH
AVANTI AND
MANAGED GROWTH INCOME
SUB- SUB- SUB-
ACCOUNT ACCOUNT ACCOUNT
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Investments in New England Zenith Fund,
Variable Insurance Products Fund, and
Variable Insurance Products Fund II at
value (Note 2).......................... $37,320,911 $32,517,863 $27,513,740
<CAPTION>
SHARES COST
--------- ------------
<S> <C> <C>
Capital Growth
Series......... 1,404,955 $464,415,210
Back Bay Advisors
Bond Income
Series......... 365,422 38,594,374
Back Bay Advisors
Money Market
Series......... 400,898 40,089,800
Westpeak Stock
Index Series... 352,625 35,252,284
Back Bay Advisors
Managed Series. 189,504 26,307,789
Loomis Sayles
Avanti Growth
Series......... 185,520 24,591,218
Westpeak Growth
and Income
Series......... 151,901 20,226,092
Loomis Sayles
Small Cap
Series......... 244,550 32,516,041
Salomon Bros.
U.S. Government
Series......... 9,582 105,770
Loomis Sayles
Balanced
Series......... 421,799 5,528,598
Alger Equity
Growth Series.. 2,136,897 31,660,575
Morgan Stanley
International
Magnum Equity
Series......... 545,942 6,014,094
Davis Venture
Value Series... 1,986,477 30,608,720
Salomon Bros.
Bond
Opportunities
Series......... 37,128 439,609
VIP Equity-
Income Series.. 4,738,660 82,625,965
VIP Overseas
Series......... 3,814,220 61,841,661
VIP High Income
Series......... 486,519 5,679,618
VIP II Asset
Manager Series. 310,903 4,641,156
Amount due and accrued from policy-related
transactions, net....................... 48,678 49,089 57,223
Dividends receivable..................... -- -- --
----------- ----------- -----------
Total Assets............................ 37,369,589 32,566,952 27,570,963
LIABILITIES
Due New England Life Insurance Company... 2,932,896 4,366,867 3,254,925
----------- ----------- -----------
Total Liabilities....................... 2,932,896 4,366,867 3,254,925
----------- ----------- -----------
NET ASSETS FOR VARIABLE LIFE INSURANCE
POLICIES................................. $34,436,693 $28,200,085 $24,316,038
=========== =========== ===========
</TABLE>
See Notes to Financial Statements
104
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
SMALL U.S. EQUITY INTERNATIONAL VENTURE
CAP GOVERNMENT BALANCED GROWTH EQUITY VALUE
SUB- SUB- SUB- SUB- SUB- SUB-
ACCOUNT ACCOUNT 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).......................... $39,646,374 $106,935 $6,200,452 $38,848,794 $6,649,576 $37,961,574
<CAPTION>
SHARES COST
--------- ------------
<S> <C> <C>
Capital Growth
Series......... 1,404,955 $464,415,210
Back Bay Advisors
Bond Income
Series......... 365,422 38,594,374
Back Bay Advisors
Money Market
Series......... 400,898 40,089,800
Westpeak Stock
Index Series... 352,625 35,252,284
Back Bay Advisors
Managed Series. 189,504 26,307,789
Loomis Sayles
Avanti Growth
Series......... 185,520 24,591,218
Westpeak Growth
and Income
Series......... 151,901 20,226,092
Loomis Sayles
Small Cap
Series......... 244,550 32,516,041
Salomon Bros.
U.S. Government
Series......... 9,582 105,770
Loomis Sayles
Balanced
Series......... 421,799 5,528,598
Alger Equity
Growth Series.. 2,136,897 31,660,575
Morgan Stanley
International
Magnum Equity
Series......... 545,942 6,014,094
Davis Venture
Value Series... 1,986,477 30,608,720
Salomon Bros.
Bond
Opportunities
Series......... 37,128 439,609
VIP Equity-
Income Series.. 4,738,660 82,625,965
VIP Overseas
Series......... 3,814,220 61,841,661
VIP High Income
Series......... 486,519 5,679,618
VIP II Asset
Manager Series. 310,903 4,641,156
Amount due and accrued from policy-related
transactions, net....................... 126,841 1,856 22,518 110,913 18,220 143,268
Dividends receivable..................... -- -- -- -- -- --
----------- -------- ---------- ----------- ---------- -----------
Total Assets............................ 39,773,215 108,791 6,222,970 38,959,707 6,667,796 38,104,842
LIABILITIES
Due New England Life Insurance Company... 5,181,514 6,108 733,951 6,029,124 1,046,305 4,561,948
----------- -------- ---------- ----------- ---------- -----------
Total Liabilities....................... 5,181,514 6,108 733,951 6,029,124 1,046,305 4,561,948
----------- -------- ---------- ----------- ---------- -----------
NET ASSETS FOR VARIABLE LIFE INSURANCE
POLICIES................................. $34,591,701 $102,683 $5,489,019 $32,930,583 $5,621,491 $33,542,894
=========== ======== ========== =========== ========== ===========
<CAPTION>
VARIABLE
INSURANCE
VARIABLE INSURANCE PRODUCTS
PRODUCTS FUND FUND II
------------- ----------------------------------- ---------- --------------
BOND EQUITY- HIGH ASSET
OPPORTUNITIES INCOME OVERSEAS INCOME MANAGER
SUB- SUB- SUB- SUB- SUB-
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT TOTAL
------------- ------------ ----------- ---------- ---------- --------------
<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).......................... $453,330 $104,534,843 $76,436,961 $6,047,428 $5,160,996 $1,262,505,077
<CAPTION>
SHARES COST
--------- ------------
<S> <C> <C>
Capital Growth
Series......... 1,404,955 $464,415,210
Back Bay Advisors
Bond Income
Series......... 365,422 38,594,374
Back Bay Advisors
Money Market
Series......... 400,898 40,089,800
Westpeak Stock
Index Series... 352,625 35,252,284
Back Bay Advisors
Managed Series. 189,504 26,307,789
Loomis Sayles
Avanti Growth
Series......... 185,520 24,591,218
Westpeak Growth
and Income
Series......... 151,901 20,226,092
Loomis Sayles
Small Cap
Series......... 244,550 32,516,041
Salomon Bros.
U.S. Government
Series......... 9,582 105,770
Loomis Sayles
Balanced
Series......... 421,799 5,528,598
Alger Equity
Growth Series.. 2,136,897 31,660,575
Morgan Stanley
International
Magnum Equity
Series......... 545,942 6,014,094
Davis Venture
Value Series... 1,986,477 30,608,720
Salomon Bros.
Bond
Opportunities
Series......... 37,128 439,609
VIP Equity-
Income Series.. 4,738,660 82,625,965
VIP Overseas
Series......... 3,814,220 61,841,661
VIP High Income
Series......... 486,519 5,679,618
VIP II Asset
Manager Series. 310,903 4,641,156
Amount due and accrued from policy-related
transactions, net....................... 1,464 206,329 180,874 33,067 803 2,041,002
Dividends receivable..................... -- -- -- -- -- 158,406
-------- ------------ ----------- ---------- ---------- --------------
Total Assets............................ 454,794 104,741,172 76,617,835 6,080,495 5,161,799 1,264,704,485
LIABILITIES
Due New England Life Insurance Company... 25,646 12,055,654 9,871,819 721,753 659,976 130,886,253
-------- ------------ ----------- ---------- ---------- --------------
Total Liabilities....................... 25,646 12,055,654 9,871,819 721,753 659,976 130,886,253
-------- ------------ ----------- ---------- ---------- --------------
NET ASSETS FOR VARIABLE LIFE INSURANCE
POLICIES................................. $429,148 $ 92,685,518 $66,746,016 $5,358,742 $4,501,823 $1,133,818,232
======== ============ =========== ========== ========== ==============
</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 SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<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.............. $ -- $ -- $1,055,187 $ -- $ -- $ -- $ --
EXPENSE
Mortality and expense
risk charge (Note 3).. 1,966,878 115,467 114,848 139,612 104,829 94,795 78,667
------------ ---------- ---------- ----------- ----------- ---------- ----------
Net investment income
(loss)................ (1,966,878) (115,467) 940,339 (139,612) (104,829) (94,795) (78,667)
NET REALIZED AND
UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net unrealized
appreciation
(depreciation) on
investments:
Beginning of period.... 138,009,405 40,519 -- 7,633,013 6,137,629 4,823,316 3,107,090
End of period.......... 247,826,646 1,507,074 -- 15,419,912 11,013,122 7,926,645 7,287,648
------------ ---------- ---------- ----------- ----------- ---------- ----------
Net change in
unrealized
appreciation
(depreciation)........ 109,817,241 1,466,555 -- 7,786,899 4,875,493 3,103,329 4,180,558
Net realized gain on
investments........... 784,609 4,340 -- 14,471 100,607 20,284 8,216
------------ ---------- ---------- ----------- ----------- ---------- ----------
Net realized and
unrealized gain (loss)
on investments........ 110,601,850 1,470,895 -- 7,801,370 4,976,100 3,123,613 4,188,774
------------ ---------- ---------- ----------- ----------- ---------- ----------
NET INCREASE IN NET
ASSETS RESULTING FROM
OPERATIONS............. $108,634,972 $1,355,428 $ 940,339 $ 7,661,758 $ 4,871,271 $3,028,818 $4,110,107
============ ========== ========== =========== =========== ========== ==========
</TABLE>
See Notes to Financial Statements
106
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
SMALL U.S. EQUITY INTERNATIONAL VENTURE BOND
CAP GOVERNMENT BALANCED GROWTH EQUITY VALUE OPPORTUNITIE
SUB- SUB- SUB- SUB- SUB- SUB- SUB-
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
---------- ---------- -------- ---------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME
Dividends.............. $ -- $ -- $ -- $ -- $ -- $ -- $ --
EXPENSE
Mortality and expense
risk charge (Note 3).. 105,626 762 20,427 109,997 20,925 99,056 2,694
---------- ------ -------- ---------- -------- ---------- -------
Net investment income
(loss)................ (105,626) (762) (20,427) (109,997) (20,925) (99,056) (2,694)
NET REALIZED AND
UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net unrealized
appreciation
(depreciation) on
investments:
Beginning of period.... 3,059,565 (819) 236,625 2,084,389 136,191 2,398,023 (1,153)
End of period.......... 7,130,333 1,165 671,854 7,188,219 635,482 7,352,854 13,721
---------- ------ -------- ---------- -------- ---------- -------
Net change in
unrealized
appreciation
(depreciation)........ 4,070,768 1,984 435,229 5,103,830 499,291 4,954,831 14,874
Net realized gain on
investments........... 4,114 -- 2,553 8,907 3,098 21,388 --
---------- ------ -------- ---------- -------- ---------- -------
Net realized and
unrealized gain (loss)
on investments........ 4,074,882 1,984 437,782 5,112,737 502,389 4,976,219 14,874
---------- ------ -------- ---------- -------- ---------- -------
NET INCREASE IN NET
ASSETS RESULTING FROM
OPERATIONS............. $3,969,256 $1,222 $417,355 $5,002,740 $481,464 $4,877,163 $12,180
========== ====== ======== ========== ======== ========== =======
<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
----------- ----------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
INCOME
Dividends.............. $ 8,872,794 $ 5,434,055 $393,295 528,401 $ 16,283,732
EXPENSE
Mortality and expense
risk charge (Note 3).. 303,865 212,711 17,318 14,772 3,523,249
----------- ----------- -------- ------- ------------
Net investment income
(loss)................ 8,568,929 5,221,344 375,977 513,629 12,760,483
NET REALIZED AND
UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net unrealized
appreciation
(depreciation) on
investments:
Beginning of period.... 16,409,989 9,502,216 362,600 547,647 194,486,245
End of period.......... 21,908,878 14,595,300 367,810 519,840 351,366,503
----------- ----------- -------- ------- ------------
Net change in
unrealized
appreciation
(depreciation)........ 5,498,889 5,093,084 5,210 (27,807) 156,880,258
Net realized gain on
investments........... 47,260 30,225 3,347 2,316 1,055,735
----------- ----------- -------- ------- ------------
Net realized and
unrealized gain (loss)
on investments........ 5,546,149 5,123,309 8,557 (25,491) 157,935,993
----------- ----------- -------- ------- ------------
NET INCREASE IN NET
ASSETS RESULTING FROM
OPERATIONS............. $14,115,078 $10,344,653 $384,534 488,138 $170,696,476
=========== =========== ======== ======= ============
</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 SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
<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.............. $ -- $ -- $585,542 $ -- $ -- $ --
EXPENSE
Mortality and expense
risk charge (Note 3).. 1,359,863 89,218 71,108 70,375 71,483 59,213
----------- --------- -------- ---------- ---------- ----------
Net investment income
(loss)................ (1,359,863) (89,218) 514,434 (70,375) (71,483) (59,213)
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
End of period.......... 95,845,614 500,732 -- 5,081,172 6,512,722 4,886,026
----------- --------- -------- ---------- ---------- ----------
Net change in
unrealized
appreciation
(depreciation)........ 23,882,024 (496,463) -- 2,227,585 1,296,174 2,004,926
Net realized gain
(loss) on investments. 209,809 (657) -- 1,270 14,663 9,736
----------- --------- -------- ---------- ---------- ----------
Net realized and
unrealized gain (loss)
on investments........ 24,091,833 (497,120) -- 2,228,855 1,310,837 2,014,662
----------- --------- -------- ---------- ---------- ----------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS........ $22,731,970 $(586,338) $514,434 $2,158,480 $1,239,354 $1,955,449
=========== ========= ======== ========== ========== ==========
</TABLE>
See Notes to Financial Statements
108
<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> <C>
INCOME
Dividends.............. $ -- $ -- $ -- $ -- $ -- $ -- $2,662,990 $1,164,550 $199,463
EXPENSE
Mortality and expense
risk charge (Note 3).. 42,766 31,125 3,065 35,347 6,487 19,771 188,019 147,792 7,913
--------- ---------- ------- -------- -------- -------- ---------- ---------- --------
Net investment income
(loss)................ (42,766) (31,125) (3,065) (35,347) (6,487) (19,771) 2,474,971 1,016,758 191,550
NET REALIZED AND
UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net unrealized
appreciation
(depreciation) on
investments:
Beginning of period.... 2,105,777 768,552 3,769 65,901 24,089 171,931 9,642,454 4,022,725 167,043
End of period.......... 2,708,687 2,199,216 44,807 494,214 175,471 632,159 10,410,830 6,408,615 140,279
--------- ---------- ------- -------- -------- -------- ---------- ---------- --------
Net change in
unrealized
appreciation
(depreciation)........ 602,910 1,430,664 41,038 428,313 151,382 460,228 768,376 2,385,890 (26,764)
Net realized gain
(loss) on investments. 2,792 32,052 305 (302) 793 635 4,426 23,389 1,502
--------- ---------- ------- -------- -------- -------- ---------- ---------- --------
Net realized and
unrealized gain (loss)
on investments........ 605,702 1,462,716 41,343 428,011 152,175 460,863 772,802 2,409,279 (25,262)
--------- ---------- ------- -------- -------- -------- ---------- ---------- --------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS........ $ 562,936 $1,431,591 $38,278 $392,664 $145,688 $441,092 $3,247,773 $3,426,037 $166,288
========= ========== ======= ======== ======== ======== ========== ========== ========
<CAPTION>
VARIABLE
INSURANCE
PRODUCTS
FUND II
--------- -----------
ASSET
MANAGER
SUB-
ACCOUNT TOTAL
--------- -----------
<S> <C> <C>
INCOME
Dividends.............. $174,907 $ 4,787,452
EXPENSE
Mortality and expense
risk charge (Note 3).. 8,876 2,212,421
-------- -----------
Net investment income
(loss)................ 166,031 2,575,031
NET REALIZED AND
UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net unrealized
appreciation
(depreciation) on
investments:
Beginning of period.... 269,255 101,153,516
End of period.......... 256,990 136,297,534
-------- -----------
Net change in
unrealized
appreciation
(depreciation)........ (12,265) 35,144,018
Net realized gain
(loss) on investments. 2,495 302,908
-------- -----------
Net realized and
unrealized gain (loss)
on investments........ (9,770) 35,446,926
-------- -----------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS........ $156,261 $38,021,957
======== ===========
</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 SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED)
<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.............. $ -- $ -- $564,140 $ -- $ -- $ -- $ --
EXPENSE
Mortality and expense
risk charge (Note 3).. 957,237 65,466 56,121 40,416 51,579 30,976 20,921
----------- ---------- -------- ---------- ---------- ---------- ----------
Net investment income
(loss)................ (957,237) (65,466) 508,019 (40,416) (51,579) (30,976) (20,921)
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 1,918
End of period.......... 97,554,400 875,829 -- 959,698 3,649,734 2,235,192 1,397,000
----------- ---------- -------- ---------- ---------- ---------- ----------
Net change in
unrealized
appreciation
(depreciation)........ 87,662,327 2,904,722 -- 2,605,442 2,946,492 2,029,512 1,395,082
Net realized gain
(loss) on investments. 472,396 591 -- 1,234 14,137 10,282 3,797
----------- ---------- -------- ---------- ---------- ---------- ----------
Net realized and
unrealized gain (loss)
on investments........ 88,134,723 2,905,313 -- 2,606,676 2,960,629 2,039,794 1,398,879
----------- ---------- -------- ---------- ---------- ---------- ----------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS........ $87,177,486 $2,839,847 $508,019 $2,566,260 $2,909,050 $2,008,818 $1,377,958
=========== ========== ======== ========== ========== ========== ==========
</TABLE>
See Notes to Financial Statements.
110
<PAGE>
<TABLE>
<CAPTION>
VARIABLE INSURANCE
PRODUCTS FUND
--------------------------------------------------- -----------------------------
SMALL EQUITY INTERNATIONAL VENTURE EQUITY HIGH
CAP BALANCED GROWTH EQUITY GROWTH INCOME OVERSEAS INCOME
SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB-
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
-------- -------- ------- ------------- ------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME
Dividends.............. $ -- $ -- $ -- $ -- $ -- $1,740,446 $ 282,520 $ 8,412
EXPENSE
Mortality and expense
risk charge (Note 3).. 6,642 13 675 128 508 93,571 111,562 1,846
-------- ---- ------- ------- ------- ---------- ---------- -------
Net investment income
(loss)................ (6,642) (13) (675) (128) (508) 1,646,875 170,958 6,566
NET REALIZED AND
UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net unrealized
appreciation
(depreciation) on
investments:
Beginning of period.... 4,662 -- -- -- -- 149,659 260,895 213
End of period.......... 264,055 573 79,573 (3,820) 27,865 3,425,550 1,750,898 55,614
-------- ---- ------- ------- ------- ---------- ---------- -------
Net change in
unrealized
appreciation
(depreciation)........ 259,393 573 79,573 (3,820) 27,865 3,275,891 1,490,003 55,401
Net realized gain
(loss) on investments. 1,553 52 6 (62) 33 2,706 3,044 932
-------- ---- ------- ------- ------- ---------- ---------- -------
Net realized and
unrealized gain (loss)
on investments........ 260,946 625 79,579 (3,882) 27,898 3,278,597 1,493,047 56,333
-------- ---- ------- ------- ------- ---------- ---------- -------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS........ $254,304 $612 $78,904 $(4,010) $27,390 $4,925,472 $1,664,005 $62,899
======== ==== ======= ======= ======= ========== ========== =======
<CAPTION>
VARIABLE
INSURANCE
PRODUCTS
FUND II
--------- ------------
ASSET
MANAGER
SUB-
ACCOUNT TOTAL
--------- ------------
<S> <C> <C>
INCOME
Dividends.............. $11,896 $ 2,607,414
EXPENSE
Mortality and expense
risk charge (Note 3).. 3,303 1,440,964
------- ------------
Net investment income
(loss)................ 8,593 1,166,450
NET REALIZED AND
UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net unrealized
appreciation
(depreciation) on
investments:
Beginning of period.... (1,503) 7,542,202
End of period.......... 65,677 112,337,838
------- ------------
Net change in
unrealized
appreciation
(depreciation)........ 67,180 104,795,636
Net realized gain
(loss) on investments. 1,426 512,127
------- ------------
Net realized and
unrealized gain (loss)
on investments........ 68,606 105,307,763
------- ------------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS........ $77,199 $106,474,213
======= ============
</TABLE>
See Notes to Financial Statements.
111
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
NEW ENGLAND ZENITH FUND
--------------------------------------------------------------------------------------------------------
GROWTH
CAPITAL BOND MONEY STOCK AVANTI AND SMALL
GROWTH INCOME MARKET INDEX MANAGED GROWTH INCOME CAP
SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB-
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------------ ----------- ------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FROM OPERATING
ACTIVITIES
Net investment
income (loss).. $ (1,966,878) $ (115,467) $ 940,339 $ (139,612) $ (104,829) $ (94,795) $ (78,667) $ (105,626)
Net realized and
unrealized gain
(loss) on
investments.... 110,601,850 1,470,895 -- 7,801,370 4,976,100 3,123,613 4,188,774 4,074,882
------------ ----------- ------------ ----------- ----------- ----------- ----------- -----------
Net Increase in
net assets
resulting from
operations..... 108,634,972 1,355,428 940,339 7,661,758 4,871,271 3,028,818 4,110,107 3,969,256
FROM POLICY-
RELATED
TRANSACTIONS
Net premiums
transferred
from New
England Life
Insurance
Company (Note
4)............. 56,520,652 4,346,975 55,787,399 4,588,248 3,007,426 3,903,848 2,907,098 5,749,209
Net transfers
(to) from other
sub-accounts... 6,498,958 551,436 (44,595,358) 6,285,322 837,432 1,053,374 2,182,810 7,205,020
Net transfers to
New England
Life Insurance
Company........ (48,833,280) (2,967,563) (6,492,721) (4,306,684) (2,864,440) (2,277,315) (2,055,673) (3,854,515)
------------ ----------- ------------ ----------- ----------- ----------- ----------- -----------
Net increase in
net assets
resulting from
policy related
transactions... 14,186,330 1,930,848 4,699,320 6,566,886 980,418 2,679,907 3,034,235 9,099,714
------------ ----------- ------------ ----------- ----------- ----------- ----------- -----------
Net increase in
net assets..... 122,821,302 3,286,276 5,639,659 14,228,644 5,851,689 5,708,725 7,144,342 13,068,970
NET ASSETS, AT
BEGINNING OF THE
PERIOD.......... 524,999,620 32,750,856 29,812,279 31,327,162 28,585,004 22,491,360 17,171,696 21,522,731
------------ ----------- ------------ ----------- ----------- ----------- ----------- -----------
NET ASSETS, AT
END OF THE
PERIOD.......... $647,820,922 $36,037,132 $ 35,451,938 $45,555,806 $34,436,693 $28,200,085 $24,316,038 $34,591,701
============ =========== ============ =========== =========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements.
112
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
U.S. EQUITY INTERNATIONAL VENTURE BOND
GOVERNMENT BALANCED GROWTH EQUITY VALUE OPPORTUNITIES
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).. $ (762) $ (20,427) $ (109,997) $ (20,925) $ (99,056) $ (2,694)
Net realized and
unrealized gain
(loss) on
investments.... 1,984 437,782 5,112,737 502,389 4,976,219 14,874
-------- ---------- ----------- ---------- ----------- --------
Net Increase in
net assets
resulting from
operations..... 1,222 417,355 5,002,740 481,464 4,877,163 12,180
FROM POLICY-
RELATED
TRANSACTIONS
Net premiums
transferred
from New
England Life
Insurance
Company (Note
4)............. -- 1,111,548 6,841,683 1,034,523 5,168,250 --
Net transfers
(to) from other
sub-accounts... 59,973 1,505,370 3,134,758 553,175 11,036,004 412,666
Net transfers to
New England
Life Insurance
Company........ (4,549) (778,663) (4,118,880) (685,646) (4,200,493) (22,466)
-------- ---------- ----------- ---------- ----------- --------
Net increase in
net assets
resulting from
policy related
transactions... 55,424 1,838,255 5,857,561 902,052 12,003,761 390,200
-------- ---------- ----------- ---------- ----------- --------
Net increase in
net assets..... 56,646 2,255,610 10,860,301 1,383,516 16,880,924 402,380
NET ASSETS, AT
BEGINNING OF THE
PERIOD.......... 46,037 3,233,409 22,070,282 4,237,975 16,661,970 26,768
-------- ---------- ----------- ---------- ----------- --------
NET ASSETS, AT
END OF THE
PERIOD.......... $102,683 $5,489,019 $32,930,583 $5,621,491 $33,542,894 $429,148
======== ========== =========== ========== =========== ========
<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
----------- ----------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
FROM OPERATING
ACTIVITIES
Net investment
income (loss).. $ 8,568,929 $ 5,221,344 $ 375,977 $ 513,629 $ 12,760,483
Net realized and
unrealized gain
(loss) on
investments.... 5,546,149 5,123,309 8,557 (25,491) 157,935,993
----------- ----------- ---------- ---------- ---------------
Net Increase in
net assets
resulting from
operations..... 14,115,078 10,344,653 384,534 488,138 170,696,476
FROM POLICY-
RELATED
TRANSACTIONS
Net premiums
transferred
from New
England Life
Insurance
Company (Note
4)............. 11,959,647 8,382,629 846,296 779,767 172,935,198
Net transfers
(to) from other
sub-accounts... 1,066,910 1,507,769 700,799 3,582 --
Net transfers to
New England
Life Insurance
Company........ (6,815,689) (4,898,376) (671,528) (349,759) (96,198,240)
----------- ----------- ---------- ---------- ---------------
Net increase in
net assets
resulting from
policy related
transactions... 6,210,868 4,992,022 875,567 433,590 76,736,958
----------- ----------- ---------- ---------- ---------------
Net increase in
net assets..... 20,325,946 15,336,675 1,260,101 921,728 247,433,434
NET ASSETS, AT
BEGINNING OF THE
PERIOD.......... 72,359,572 51,409,341 4,098,641 3,580,095 886,384,798
----------- ----------- ---------- ---------- ---------------
NET ASSETS, AT
END OF THE
PERIOD.......... $92,685,518 $66,746,016 $5,358,742 $4,501,823 $1,133,818,232
=========== =========== ========== ========== ===============
</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 SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
<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)................ $ (1,359,863) $ (89,218) $ 514,434 $ (70,375) $ (71,483) $ (59,213)
Net realized and
unrealized gain (loss)
on investments........ 24,091,833 (497,120) -- 2,228,855 1,310,837 2,014,662
------------ ----------- ------------ ----------- ----------- -----------
Increase (decrease) in
net assets resulting
from operations....... 22,731,970 (586,338) 514,434 2,158,480 1,239,354 1,955,449
FROM POLICY-RELATED
TRANSACTIONS
Net premiums
transferred from New
England Life Insurance
Company (Note 4)...... 53,435,648 4,218,292 33,049,580 2,902,396 2,664,297 3,149,453
Net transfers (to) from
other sub-accounts.... 1,339,350 592,254 (28,343,980) 2,111,786 190,777 1,126,268
Net transfers to New
England Life Insurance
Company............... (38,294,306) (2,633,015) (3,802,787) (2,505,089) (1,948,255) (2,324,302)
------------ ----------- ------------ ----------- ----------- -----------
Increase in net assets
resulting from policy
related transactions.. 16,480,692 2,177,531 902,813 2,509,093 906,819 1,951,419
------------ ----------- ------------ ----------- ----------- -----------
Net increase in net
assets................ 39,212,662 1,591,193 1,417,247 4,667,573 2,146,173 3,906,868
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
------------ ----------- ------------ ----------- ----------- -----------
NET ASSETS, AT END OF
THE PERIOD............. $434,047,318 $28,270,330 $ 20,849,103 $23,242,723 $24,145,173 $18,244,325
============ =========== ============ =========== =========== ===========
</TABLE>
See Notes to Financial Statements.
114
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
SMALL EQUITY INTERNATIONAL VENTURE
GROWTH AND CAP BALANCED GROWTH EQUITY VALUE
INCOME 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)................ $ (42,766) $ (31,125) $ (3,065) $ (35,347) $ (6,487) $ (19,771)
Net realized and
unrealized gain (loss)
on investments........ 605,702 1,462,716 41,343 428,011 152,175 460,863
----------- ----------- ---------- ----------- ---------- -----------
Increase (decrease) in
net assets resulting
from operations....... 562,936 1,431,591 38,278 392,664 145,688 441,092
FROM POLICY-RELATED
TRANSACTIONS
Net premiums
transferred from New
England Life Insurance
Company (Note 4)...... 2,342,172 1,905,133 242,433 3,550,409 546,876 1,778,905
Net transfers (to) from
other sub-accounts.... 1,245,146 2,952,358 794,239 7,071,895 1,398,090 3,421,648
Net transfers to New
England Life Insurance
Company............... (1,400,233) (1,548,285) (233,889) (2,842,352) (411,886) (1,418,288)
----------- ----------- ---------- ----------- ---------- -----------
Increase in net assets
resulting from policy
related transactions.. 2,187,085 3,309,206 802,783 7,779,952 1,533,080 3,782,265
----------- ----------- ---------- ----------- ---------- -----------
Net increase in net
assets................ 2,750,021 4,740,797 841,061 8,172,616 1,678,768 4,223,357
NET ASSETS, AT BEGINNING
OF THE PERIOD.......... 10,310,478 6,544,996 418,211 5,712,498 953,848 3,386,440
----------- ----------- ---------- ----------- ---------- -----------
NET ASSETS, AT END OF
THE PERIOD............. $13,060,499 $11,285,793 $1,259,272 $13,885,114 $2,632,616 $ 7,609,797
=========== =========== ========== =========== ========== ===========
<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
----------- ----------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
FROM OPERATING
ACTIVITIES
Net investment income
(loss)................ $ 2,474,971 $ 1,016,758 $ 191,550 $ 166,031 $ 2,575,031
Net realized and
unrealized gain (loss)
on investments........ 772,802 2,409,279 (25,262) (9,770) 35,446,926
----------- ----------- ---------- ---------- -------------
Increase (decrease) in
net assets resulting
from operations....... 3,247,773 3,426,037 166,288 156,261 38,021,957
FROM POLICY-RELATED
TRANSACTIONS
Net premiums
transferred from New
England Life Insurance
Company (Note 4)...... 9,205,421 8,101,022 427,597 577,897 128,097,531
Net transfers (to) from
other sub-accounts.... 5,173,468 76,744 483,284 366,673) --
Net transfers to New
England Life Insurance
Company............... (6,412,413) (5,503,590) (252,768) (356,241) (71,887,699)
----------- ----------- ---------- ---------- -------------
Increase in net assets
resulting from policy
related transactions.. 7,966,476 2,674,176 658,113 588,329 56,209,832
----------- ----------- ---------- ---------- -------------
Net increase in net
assets................ 11,214,249 6,100,213 824,401 744,590 94,231,789
NET ASSETS, AT BEGINNING
OF THE PERIOD.......... 47,352,852 38,382,219 1,742,493 1,972,993 612,634,284
----------- ----------- ---------- ---------- -------------
NET ASSETS, AT END OF
THE PERIOD............. $58,567,101 $44,482,432 $2,566,894 $2,717,583 $706,866,073
=========== =========== ========== ========== =============
</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 SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
NEW ENGLAND ZENITH FUND
-----------------------------------------------------------------------------
CAPITAL
GROWTH BOND MONEY STOCK AVANTI
SUB- INCOME MARKET INDEX MANAGED GROWTH
ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATING
ACTIVITIES
Net investment income
(loss)................ $ (957,237) $ (65,466) $ 508,019 $ (40,416) $ (51,579) $ (30,976)
Net realized and
unrealized gain (loss)
on investments........ 88,134,723 2,905,313 -- 2,606,676 2,960,629 2,039,794
------------ ----------- ----------- ----------- ----------- -----------
Increase (decrease) in
net assets resulting
from operations....... 87,177,486 2,839,847 508,019 2,566,260 2,909,050 2,008,818
FROM POLICY-RELATED
TRANSACTIONS
Net premiums
transferred from New
England Life Insurance
Company (Note 4)...... 49,734,998 3,544,173 18,550,018 2,071,157 2,195,879 2,349,422
Net transfers (to) from
other sub-accounts.... (6,736,788) 1,120,498 (16,699,146) 1,420,830 263,128 1,761,125
Net transfers to New
England Life Insurance
Company............... (33,892,334) (2,096,225) (2,543,340) (1,506,471) (1,743,836) (1,650,709)
------------ ----------- ----------- ----------- ----------- -----------
Increase (decrease) in
net assets resulting
from policy related
transactions.......... 9,105,876 2,568,446 (692,468) 1,985,516 715,171 2,459,838
------------ ----------- ----------- ----------- ----------- -----------
Net increase (decrease)
in net assets......... 96,283,362 5,408,293 (184,449) 4,551,776 3,624,221 4,468,656
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............. $345,778,099 $22,158,424 $16,696,294 $14,230,740 $18,383,799 $10,879,867
============ =========== =========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements.
116
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------
GROWTH
AND SMALL EQUITY INTERNATIONAL VENTURE
INCOME CAP BALANCED GROWTH EQUITY 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)................ $ (20,921) $ (6,642) $ (13) $ (675) $ (128) $ (508)
Net realized and
unrealized gain (loss)
on investments........ 1,398,879 260,946 625 79,579 (3,882) 27,898
---------- ---------- ------- ---------- -------- --------
Increase (decrease) in
net assets resulting
from operations....... 1,377,958 254,304 612 78,904 (4,010) 27,390
FROM POLICY-RELATED
TRANSACTIONS
Net premiums
transferred from New
England Life Insurance
Company (Note 4)...... 1,497,200 674,650 900 24,947 9,485 24,004
Net transfers (to) from
other sub-accounts.... 1,634,366 3,015,492 54,304 1,247,281 279,885 898,179
Net transfers to New
England Life Insurance
Company............... (1,125,185) (806,258) (5,066) (179,460) (42,059) (127,498)
---------- ---------- ------- ---------- -------- --------
Increase (decrease) in
net assets resulting
from policy related
transactions.......... 2,006,381 2,883,884 50,138 1,092,768 247,311 794,685
---------- ---------- ------- ---------- -------- --------
Net increase (decrease)
in net assets......... 3,384,339 3,138,188 50,750 1,171,672 243,301 822,075
NET ASSETS, AT BEGINNING
OF THE PERIOD.......... 4,092,981 190,830 -- -- -- --
---------- ---------- ------- ---------- -------- --------
NET ASSETS, AT END OF
THE PERIOD............. $7,477,320 $3,329,018 $50,750 $1,171,672 $243,301 $822,075
========== ========== ======= ========== ======== ========
<CAPTION>
VARIABLE
INSURANCE
VARIABLE INSURANCE PRODUCTS
PRODUCTS FUND FUND II
---------------------------------- ---------- -------------
HIGH ASSET
EQUITY INCOME MANAGER
INCOME OVERSEAS SUB- SUB-
SUB-ACCOUNT SUB-ACCOUNT ACCOUNT ACCOUNT TOTAL
----------- ----------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
FROM OPERATING
ACTIVITIES
Net investment income
(loss)................ $ 1,646,875 $ 170,958 $ 6,566 $ 8,593 $ 1,166,450
Net realized and
unrealized gain (loss)
on investments........ 3,278,597 1,493,047 56,333 68,606 105,307,763
----------- ----------- -------- ---------- -------------
Increase (decrease) in
net assets resulting
from operations....... 4,925,472 1,664,005 62,899 77,199 106,474,213
FROM POLICY-RELATED
TRANSACTIONS
Net premiums
transferred from New
England Life Insurance
Company (Note 4)...... 6,224,222 8,425,634 112,982 270,411 95,710,082
Net transfers (to) from
other sub-accounts.... 8,902,110 492,201 973,615 1,372,920 --
Net transfers to New
England Life Insurance
Company............... (4,621,563) (4,184,101) (198,454) (440,380) (55,162,939)
----------- ----------- -------- ---------- -------------
Increase (decrease) in
net assets resulting
from policy related
transactions.......... 10,504,769 4,733,734 888,143 1,202,951 40,547,143
----------- ----------- -------- ---------- -------------
Net increase (decrease)
in net assets......... 15,430,241 6,397,739 951,042 1,280,150 147,021,356
NET ASSETS, AT BEGINNING
OF THE PERIOD.......... 19,132,167 27,868,832 30,422 200,694 365,491,290
----------- ----------- -------- ---------- -------------
NET ASSETS, AT END OF
THE PERIOD............. $34,562,408 $34,266,571 $981,464 $1,480,844 $512,512,646
=========== =========== ======== ========== =============
</TABLE>
See Notes to Financial Statements.
117
<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 as 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 life 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 Accounts assets attributable to flexible
premium ("Zenith Flexible Life") variable life 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 value 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
value in the sub-accounts. These deductions, depending on the policy, could
include sales load, administrative charges, premium tax charges, risk charges,
cost of insurance charges, and charges for rider benefits and special risk
charges.
118
<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 an
indirect subsidiary of NELICO, Capital Growth Management Limited Partnership
("CGM"), 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 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.*
Morgan Stanley
International Magnum
Equity TNE Advisers, Inc. Morgan Stanley Asset Management Inc.
Davis Venture Value TNE Advisers, Inc. Davis Selected Advisers, L.P.
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
Effective May 1, 1997 the Draycott International Equity Series was renamed the
Morgan Stanley International Magnum Equity Series and a new Sub-advisory
agreement between TNE Advisers, Inc. and Morgan Stanley Asset Management Inc.
went into effect replacing the prior Sub-advisory agreement between TNE
Advisers, Inc. and Draycott Partners, Ltd.
119
<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 six months ended June 30, 1997:
<TABLE>
<CAPTION>
PURCHASES SALES
----------- -----------
<S> <C> <C>
Capital Growth Series $93,092,813 $73,998,817
Back Bay Advisors Money Market Series 84,253,224 76,284,463
Back Bay Advisors Bond Income Series 8,601,049 6,832,575
Back Bay Advisors Managed Series 6,285,601 4,976,804
Westpeak Stock Index Series 14,017,967 6,497,165
Westpeak Growth and Income Series 7,259,681 4,045,407
Loomis Sayles Avanti Growth Series 8,177,500 5,399,589
Loomis Sayles Small Cap Series 16,649,945 6,072,223
Loomis Sayles Balanced Series 3,371,630 1,362,224
Morgan Stanley International Magnum Equity Series 3,014,481 1,844,458
Davis Venture Value Series 18,500,924 4,670,828
Alger Equity Growth Series 13,715,910 6,367,926
Salomon Brothers U.S. Government Series 113,938 55,877
Salomon Brothers Strategic Bond Opportunities
Series 414,683 3,481
VIP Equity-Income Portfolio 29,838,166 14,861,047
VIP Overseas Portfolio 22,461,113 12,408,580
VIP High Income Portfolio 2,866,338 1,460,082
VIP II Asset Manager Portfolio 2,400,907 1,347,147
</TABLE>
120
<PAGE>
[LOGO APPEARS HERE] Bulk Rate
U.S.
Postage
PAID
Hudson, MA
Permit No.
19
NEW ENGLAND LIFE INSURANCE COMPANY
501 BOYLSTON STREET
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 VIP
(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS FUND
VARIABLE INSURANCE PRODUCTS FUND II
VARIABLE INSURANCE PRODUCTS FUND III
MONEY MARKET PORTFOLIO
INVESTMENT GRADE BOND PORTFOLIO
HIGH INCOME PORTFOLIO
ASSET MANAGER PORTFOLIO
BALANCED PORTFOLIO
ASSET MANAGER: GROWTH PORTFOLIO
EQUITY-INCOME PORTFOLIO
GROWTH & INCOME PORTFOLIO
INDEX 500 PORTFOLIO
GROWTH OPPORTUNITIES PORTFOLIO
CONTRAFUND PORTFOLIO
GROWTH PORTFOLIO
OVERSEAS PORTFOLIO
SEMIANNUAL REPORT
JUNE 30, 1997
CONTENTS
MONEY MARKET PORTFOLIO 4 PERFORMANCE
5 FUND TALK: THE MANAGER'S OVERVIEW
6 INVESTMENTS
9 FINANCIAL STATEMENTS
INVESTMENT GRADE BOND PORTFOLIO 11 PERFORMANCE AND INVESTMENT SUMMARY
12 FUND TALK: THE MANAGER'S OVERVIEW
13 INVESTMENTS
18 FINANCIAL STATEMENTS
HIGH INCOME PORTFOLIO 20 PERFORMANCE AND INVESTMENT SUMMARY
21 FUND TALK: THE MANAGER'S OVERVIEW
22 INVESTMENTS
30 FINANCIAL STATEMENTS
ASSET MANAGER PORTFOLIO 32 PERFORMANCE AND INVESTMENT SUMMARY
33 FUND TALK: THE MANAGERS' OVERVIEW
35 INVESTMENTS
48 FINANCIAL STATEMENTS
BALANCED PORTFOLIO 50 PERFORMANCE AND INVESTMENT SUMMARY
51 FUND TALK: THE MANAGER'S OVERVIEW
52 INVESTMENTS
61 FINANCIAL STATEMENTS
ASSET MANAGER: GROWTH PORTFOLIO 63 PERFORMANCE AND INVESTMENT SUMMARY
64 FUND TALK: THE MANAGERS' OVERVIEW
66 INVESTMENTS
78 FINANCIAL STATEMENTS
EQUITY-INCOME PORTFOLIO 80 PERFORMANCE AND INVESTMENT SUMMARY
81 FUND TALK: THE MANAGER'S OVERVIEW
82 INVESTMENTS
87 FINANCIAL STATEMENTS
GROWTH & INCOME PORTFOLIO 89 PERFORMANCE AND INVESTMENT SUMMARY
90 FUND TALK: THE MANAGER'S OVERVIEW
91 INVESTMENTS
95 FINANCIAL STATEMENTS
INDEX 500 PORTFOLIO 97 PERFORMANCE AND INVESTMENT SUMMARY
98 FUND TALK: THE MANAGER'S OVERVIEW
99 INVESTMENTS
105 FINANCIAL STATEMENTS
GROWTH OPPORTUNITIES PORTFOLIO 107 PERFORMANCE AND INVESTMENT SUMMARY
108 FUND TALK: THE MANAGER'S OVERVIEW
109 INVESTMENTS
113 FINANCIAL STATEMENTS
CONTRAFUND PORTFOLIO 115 PERFORMANCE AND INVESTMENT SUMMARY
116 FUND TALK: THE MANAGER'S OVERVIEW
117 INVESTMENTS
126 FINANCIAL STATEMENTS
GROWTH PORTFOLIO 128 PERFORMANCE AND INVESTMENT SUMMARY
129 FUND TALK: THE MANAGER'S OVERVIEW
130 INVESTMENTS
134 FINANCIAL STATEMENTS
OVERSEAS PORTFOLIO 136 PERFORMANCE AND INVESTMENT SUMMARY
137 FUND TALK: THE MANAGER'S OVERVIEW
138 INVESTMENTS
143 FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS 145 NOTES TO THE FINANCIAL STATEMENTS
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR
THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUNDS. THIS REPORT IS
NOT
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUNDS 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 FUNDS NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
VARIABLE INSURANCE PRODUCTS FUND: MONEY MARKET PORTFOLIO
PERFORMANCE
To measure a money market fund's 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 and capital
gains (the profits earned upon the sale of securities that have grown in
value). 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
JUNE 30, 1997 YEAR YEARS YEARS
MONEY MARKET 5.42% 4.64% 5.93%
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 10
year total returns would have been lower. Yield will vary.
YIELD
Row: 1, Col: 1, Value: 5.37
Row: 1, Col: 2, Value: 2.65
Row: 2, Col: 1, Value: 5.19
Row: 2, Col: 2, Value: 2.63
Row: 3, Col: 1, Value: 5.28
Row: 3, Col: 2, Value: 2.64
Row: 4, Col: 1, Value: 5.3
Row: 4, Col: 2, Value: 2.67
Row: 5, Col: 1, Value: 5.159999999999999
Row: 5, Col: 2, Value: 2.66
Money Market
MMDA
6% -
5% -
4% -
3% -
2% -
1% -
0%
7/2/97 4/2/97 12/30/96 10/2/96 6/26/96
MONEY MARKET 5.37% 5.19% 5.28% 5.30% 5.16%
MMDA 2.65% 2.63% 2.64% 2.67% 2.66%
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
NOTE TO SHAREHOLDERS: Robert Duby became
Portfolio Manager of
Money Market Portfolio
on April 1, 1997.
Q. WHAT WAS THE INVESTING ENVIRONMENT LIKE OVER THE PAST SIX MONTHS, BOB?
A. Most market observers have been surprised at the strength of the economy
over the past six months. While economic growth slowed unexpectedly in the
second quarter of 1997 from the rapid pace of the first quarter, the
economy remains quite healthy. Earlier in 1997, the Federal Reserve Board
felt that we would see this economic growth translate into inflationary
pressure. Speaking before Congress in February, Fed Chairman Alan Greenspan
indicated the Fed's tendency to strike pre-emptively against inflation.
That is, he said the Fed might raise the rates banks charge each other for
overnight loans - known as the fed funds rate - even before inflation
appeared, to slow the economy down and head off potential inflation. The
Fed followed through by raising the fed funds rate by 0.25% to 5.50% at its
March meeting. Most market participants felt the Fed would raise rates
again in May, but it did not. Economic growth tailed off and there were
very few signs of inflation. That backdrop, coupled with political pressure
from many who were unhappy with the Fed's pre-emptive stance, convinced the
Fed to stand pat through the end of the period. At this point, it appears
that the Fed has shifted its stance from one that is pre-emptive to one
that is more reactive.
Q. HOW WAS THE FUND MANAGED DURING THIS PERIOD?
A. The fund was positioned more aggressively in the first quarter than in
the second. As the first quarter unfolded and interest rates rose in
anticipation of the Fed's March move to raise the fed funds rate, the fund
employed what is known as a barbell strategy - concentrating investments on
either end of the maturity spectrum - purchasing overnight to two-month
securities on the one hand and one-year bank investments on the other. Both
areas were offering attractive rates, with one-year securities at about a
6.20% annual rate and overnight securities offering a 5.25% rate. The
fund's approach became more cautious in the second quarter as the Fed's May
meeting approached and it appeared rates would rise again. As the one-year
rate fell toward 5.85% and the overnight rate stood at 5.50%, there were
less appealing yield opportunities on the longer end of the maturity
spectrum. At the end of the period, the fund's average maturity stood at 44
days, a range that reflects a more neutral interest rate outlook.
Q. WHAT'S YOUR OUTLOOK?
A. While it softened in the second quarter, overall economic growth remains
fairly strong. Consumer spending is robust and confidence is quite high. As
a result, I expect some inflationary pressures to arise as we head into the
fall. At that point, I would expect the Fed to raise interest rates
slightly if growth proves to be stronger and if some inflationary pressure
builds up. In addition, I believe that any program of rate increases by the
Fed will be gradual, where the Fed raises interest rates, then waits a
month or two to gauge the effect.
FUND FACTS
GOAL: income and share price stability by
investing in high-quality, short-term
investments
START DATE: April 1, 1982
SIZE: as of June 30, 1997, more than
$1.0 billion
MANAGER: Robert Duby, since April 1997;
joined Fidelity in 1982
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND: MONEY MARKET PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
BANKERS' ACCEPTANCES - 1.0%
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT
(NOTE 1)
Chase Manhattan Bank
8/22/97 5.82% $ 7,000,000 $ 6,942,569
Royal Bank of Canada
7/7/97 5.58 4,000,000 3,996,300
TOTAL BANKERS' ACCEPTANCES 10,938,869
CERTIFICATES OF DEPOSIT - 41.2%
DOMESTIC CERTIFICATES OF DEPOSIT - 2.3%
Chase Manhattan Bank (USA)
7/28/97 5.55 5,000,000 5,000,000
CoreStates Capital Corp.
7/10/97 5.66 (a) 10,000,000 9,998,668
Morgan Guaranty Trust, NY
8/12/97 5.78 4,000,000 3,999,739
8/12/97 5.80 5,000,000 4,999,599
23,998,006
CHICAGO BRANCH, YANKEE DOLLAR, FOREIGN BANKS - 0.9%
ABN-AMRO Bank
12/23/97 5.70 5,000,000 4,998,849
Bank of Montreal
7/1/97 5.55 5,000,000 5,000,000
9,998,849
NEW YORK BRANCH, YANKEE DOLLAR, FOREIGN BANKS - 31.3%
Bank of Nova Scotia
4/1/98 6.20 6,000,000 5,997,422
Bank of Tokyo - Mitsubishi Ltd.
7/10/97 5.83 4,000,000 4,000,000
8/6/97 5.85 4,000,000 4,000,000
8/13/97 5.82 2,000,000 2,000,000
8/27/97 5.75 5,000,000 5,000,000
8/29/97 5.79 2,000,000 2,000,000
9/30/97 5.76 6,000,000 6,000,000
Banque Nationale de Paris
7/21/97 5.63 2,000,000 2,000,000
9/30/97 5.85 5,000,000 5,000,000
Barclays U.S. Funding Corp.
7/7/97 5.56 15,000,000 15,000,000
Bayerische Hypotheken-und Weschel
7/23/97 5.56 3,000,000 3,000,000
8/11/97 5.68 10,000,000 10,000,000
Bayerische Vereinsbank A.G.
7/14/97 5.56 5,000,000 5,000,000
Caisse Nationale de Credit Agricole
7/21/97 5.60 30,000,000 30,000,000
11/13/97 5.86 2,000,000 2,000,000
Canadian Imperial Bank of Commerce
7/21/97 5.61 5,000,000 5,000,000
Commerzbank, Germany
7/7/97 5.56 8,000,000 8,000,000
Deutsche Bank, Germany A.G.
7/9/97 5.56 20,000,000 20,000,000
Landesbank Hessen - Thuringen
9/5/97 6.20 15,000,000 15,000,259
9/11/97 6.11 14,000,000 13,999,473
National Westminster Bank, PLC
7/9/97 5.56 25,000,000 25,000,000
8/5/97 5.50 5,000,000 5,000,000
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT
(NOTE 1)
Royal Bank of Canada
8/13/97 5.80% $ 5,000,000 $ 4,999,589
Sanwa Bank Ltd. Japan
7/10/97 5.81 4,000,000 4,000,000
7/21/97 5.82 11,000,000 11,000,000
8/1/97 5.85 3,000,000 3,000,000
8/27/97 5.75 2,000,000 2,000,000
Societe Generale, France
7/11/97 5.70 5,000,000 5,000,000
7/28/97 5.55 17,000,000 17,000,000
8/7/97 5.52 10,000,000 10,000,000
11/12/97 5.90 5,000,000 5,000,000
Sumitomo Bank, Ltd.
7/21/97 5.79 4,000,000 4,000,000
7/29/97 5.75 2,000,000 2,000,000
8/4/97 5.75 2,000,000 2,000,000
8/4/97 5.75 2,000,000 2,000,000
8/19/97 5.75 2,000,000 2,000,000
8/25/97 5.75 3,000,000 3,000,000
Swiss Bank Corp.
7/22/97 5.53 12,000,000 12,000,000
8/4/97 5.50 12,000,000 12,000,000
12/22/97 5.99 8,000,000 8,000,000
2/23/98 5.80 20,000,000 20,000,000
Westdeutsche Landesbank
7/14/97 5.56 15,000,000 15,000,000
336,996,743
LONDON BRANCH, EURODOLLAR, FOREIGN BANKS - 6.7%
ABN-AMRO Bank
7/24/97 5.45 5,000,000 5,000,055
9/22/97 5.65 1,000,000 1,000,023
Abbey National, Treasury Services
7/22/97 5.60 10,000,000 10,000,000
7/28/97 5.72 10,000,000 10,000,000
9/24/97 5.65 18,000,000 18,000,000
3/4/98 5.87 5,000,000 5,000,000
Bank of Nova Scotia
7/23/97 5.60 4,000,000 4,000,000
11/12/97 5.86 4,000,000 4,000,000
Bayerische Landesbank Girozentrale
7/7/97 5.56 4,000,000 3,999,966
12/31/97 5.75 2,000,000 2,000,090
Bayerische Vereinsbank A.G.
9/17/97 5.65 2,000,000 1,999,946
12/29/97 5.75 5,000,000 5,000,122
National Australia Bank
9/23/97 5.65 2,000,000 2,000,000
72,000,202
TOTAL CERTIFICATES OF DEPOSIT 442,993,800
COMMERCIAL PAPER - 32.7%
Abbey National, North America
7/18/97 5.70 6,000,000 5,984,077
AC Acquisition Holding Company
7/7/97 5.60 3,000,000 2,997,220
7/11/97 5.63 4,100,000 4,093,622
8/27/97 5.62 2,000,000 1,982,393
COMMERCIAL PAPER - CONTINUED
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT
(NOTE 1)
American Home Products
7/16/97 5.58% $ 5,000,000 $ 4,988,438
Asset Securitization Coop. Corp.
8/21/97 5.61 6,000,000 5,952,740
Associates Corp. of North America
7/1/97 5.69 5,000,000 5,000,000
Bear Stearns Cos., Inc.
7/9/97 5.60 3,000,000 2,996,293
7/10/97 5.61 2,000,000 1,997,215
Berliner Handels-und Frankfurter Bank
7/7/97 5.57 2,000,000 1,998,153
BHF Finance (Delaware), Inc.
7/11/97 5.62 1,000,000 998,444
BMW US Capital Corp.
7/9/97 5.60 2,188,000 2,185,297
7/7/97 5.63 1,000,000 999,067
7/15/97 5.60 3,000,000 2,993,502
8/5/97 5.64 2,600,000 2,585,844
8/12/97 5.61 2,000,000 1,987,003
8/25/97 5.62 1,100,000 1,090,639
Chrysler Financial Corporation
8/4/97 5.66 2,000,000 1,989,384
8/5/97 5.66 1,000,000 994,536
Citibank Credit Card Master Trust I (Dakota Certificate Program)
7/7/97 5.61 6,000,000 5,994,420
CIT Group Holdings, Inc.
7/1/97 6.30 10,000,000 10,000,000
Cregem North America, Inc.
7/11/97 5.72 2,300,000 2,296,397
9/18/97 5.65 2,000,000 1,975,554
9/23/97 5.66 1,000,000 986,980
9/24/97 5.66 1,000,000 986,825
Enterprise Funding Corp.
7/7/97 5.57 5,000,000 4,995,375
7/7/97 5.63 2,672,000 2,669,506
7/21/97 5.61 1,687,000 1,681,780
7/22/97 5.76 3,000,000 2,990,060
8/19/97 5.67 1,000,000 992,351
Fina Oil and Chemical Company
8/28/97 5.64 10,000,000 9,910,100
Ford Motor Credit Corp.
7/14/97 5.70 10,000,000 9,979,669
7/21/97 5.62 11,000,000 10,965,961
7/23/97 5.61 6,000,000 5,979,613
Generale Bank
7/30/97 5.53 5,000,000 4,978,331
General Electric Capital Corp.
7/7/97 5.50 10,000,000 9,991,000
7/28/97 5.52 10,000,000 9,959,725
9/17/97 5.64 10,000,000 9,879,533
9/22/97 5.80 6,000,000 5,921,980
9/23/97 5.80 15,000,000 14,802,600
General Electric Capital Services, Inc.
7/9/97 5.59 10,000,000 9,987,644
General Motors Acceptance Corp.
8/7/97 5.61 3,000,000 2,982,826
8/27/97 5.50 4,000,000 3,966,117
10/14/97 6.00 12,000,000 11,796,300
10/16/97 6.01 1,000,000 982,687
10/20/97 6.03 4,000,000 3,927,912
10/29/97 6.02 2,000,000 1,961,033
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT
(NOTE 1)
11/3/97 6.02% $ 4,000,000 $ 3,918,958
11/10/97 6.02 6,000,000 5,871,520
11/12/97 6.02 2,000,000 1,956,562
Goldman Sachs Group, L.P. (The)
11/12/97 5.87 15,000,000 14,681,750
GTE Corp.
7/21/97 5.63 2,000,000 1,993,778
Halifax PLC
7/21/97 5.60 5,000,000 4,984,583
IBM Credit Corp.
7/21/97 5.60 10,000,000 9,969,111
8/19/97 5.61 4,000,000 3,969,729
Matterhorn Capital Corp. (LOC Union Bank of Switzerland)
7/8/97 5.57 5,005,000 4,999,599
Merrill Lynch & Co., Inc.
7/9/97 5.61 1,000,000 998,760
7/28/97 5.54 15,000,000 14,939,363
7/28/97 5.61 5,000,000 4,979,113
8/18/97 5.79 3,000,000 2,977,200
Morgan Stanley Dean Witter Discover & Company
8/20/97 5.61 9,000,000 8,930,500
Morgan Stanley Group, Inc.
7/23/97 5.64 6,000,000 5,979,540
Nationwide Building Society
7/21/97 5.64 5,500,000 5,482,889
Norfolk Southern Corp.
7/8/97 5.80 2,000,000 1,997,756
7/14/97 5.78 2,000,000 1,995,847
7/16/97 5.80 1,000,000 997,596
PHH Corp.
7/8/97 5.68 5,000,000 4,994,526
7/14/97 5.63 1,000,000 997,981
Preferred Receivables Funding Corp.
7/16/97 5.58 5,000,000 4,988,438
7/30/97 5.60 2,000,000 1,991,026
8/19/97 5.67 3,000,000 2,977,052
REXAM PLC
7/16/97 5.58 5,000,000 4,988,438
Sears Roebuck Acceptance Corp.
7/11/97 5.63 2,000,000 1,996,894
7/15/97 5.64 2,000,000 1,995,644
8/25/97 5.62 3,000,000 2,974,471
Toronto Dominion Holdings USA, Inc.
7/21/97 5.60 3,000,000 2,990,750
12/23/97 5.75 2,000,000 1,945,653
TOTAL COMMERCIAL PAPER 351,821,173
FEDERAL AGENCIES - 7.4%
FEDERAL HOME LOAN BANK - AGENCY COUPONS - 0.5%
9/4/97 5.71 (a) 5,000,000 4,998,140
FEDERAL NATIONAL MORTGAGE ASSOC. - AGENCY COUPONS - 4.6%
7/1/97 5.67 (a) 15,000,000 14,997,517
9/9/97 5.71 (a) 25,000,000 24,990,406
9/13/97 5.71 (a) 10,000,000 9,995,420
49,983,343
FEDERAL NATIONAL MORTGAGE ASSOC. - DISCOUNT NOTES - 2.3%
7/3/97 5.61 25,000,000 24,992,319
TOTAL FEDERAL AGENCIES 79,973,802
BANK NOTES - 2.1%
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT
(NOTE 1)
Comerica Bank
3/27/98 6.20% $ 5,000,000 $ 4,992,970
First Bank NA
7/16/97 5.65 (a) 5,000,000 4,995,975
Huntington National Bank
9/30/97 5.50 2,000,000 2,001,053
Key Bank of New York
7/1/97 5.66 (a) 5,000,000 4,999,713
7/1/97 5.69 (a) 1,000,000 999,913
PNC Bank, Inc.
7/11/97 5.65 (a) 5,000,000 4,998,597
TOTAL BANK NOTES 22,988,221
MASTER NOTES (A) - 3.6%
Goldman Sachs Group, L.P. (The)
8/5/97 5.82 5,000,000 5,000,000
9/16/97 5.81 (c) 10,000,000 10,000,000
J.P. Morgan Securities
7/1/97 6.38 18,000,000 18,000,000
Norwest Corp.
7/1/97 5.69 6,000,000 6,000,000
TOTAL MASTER NOTES 39,000,000
MEDIUM-TERM NOTES - 4.5%
Associates Corp. of North America
7/15/97 5.95 2,250,000 2,250,557
Capital One Funding Corp. (1994-B)
7/8/97 5.63 (a) 3,289,000 3,289,000
Capital One Funding Corp. (1995-E)
7/8/97 5.63 (a) 5,700,000 5,700,000
General Motors Acceptance Corp.
7/1/97 5.69 (a) 2,000,000 1,999,751
8/1/97 5.82 (a) 5,000,000 5,000,000
Liquid Asset Backed Securities Trust (1996-1) (b)
7/15/97 5.72 (a) 5,000,000 5,000,000
Liquid Asset Backed Securities Trust (1996-2) (b)
7/1/97 5.72 (a) 7,000,000 7,000,000
Merrill Lynch & Co., Inc.
7/7/97 5.67 (a) 2,000,000 1,999,669
7/18/97 5.69 (a) 5,000,000 4,999,867
Morgan Stanley Group, Inc.
7/1/97 5.68 (a) 5,000,000 5,000,000
Norwest Corp.
7/22/97 5.86 (a) 6,000,000 6,000,000
TOTAL MEDIUM-TERM NOTES 48,238,844
SHORT-TERM NOTES (A) - 2.8%
SMM Trust (1996-B) (b)
7/7/97 5.74 5,500,000 5,500,000
SMM Trust (1996-P) (b)
7/16/97 5.72 7,000,000 7,000,000
SMM Trust (1997-V) (b)
7/28/97 5.69 8,000,000 8,000,000
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT
(NOTE 1)
SMM Trust (1997-W) (b)
7/16/97 5.69% $ 7,000,000 $ 7,000,000
Transamerica Life Insurance and Annuity Co.
9/16/97 5.81 3,000,000 3,000,000
TOTAL SHORT-TERM NOTES 30,500,000
TIME DEPOSITS - 4.6%
Bank of Tokyo - Mitsubishi Ltd.
7/3/97 5.69 4,000,000 4,000,000
Canadian Imperial Bank of Commerce
7/1/97 6.25 42,000,000 42,000,000
Sumitomo Bank, Ltd.
7/9/97 5.75 3,000,000 3,000,000
TOTAL TIME DEPOSITS 49,000,000
REPURCHASE AGREEMENTS - 0.1%
MATURITY
AMOUNT
In a joint trading account
(U.S. Government Obligations)
dated 6/30/97 due 7/1/97
At 5.99% $ 1,381,230 1,381,000
TOTAL INVESTMENTS - 100% $1,076,835,709
Total Cost for Income Tax Purposes - $ 1,076,835,709
LEGEND
1. The coupon rate shown on floating or adjustable rate securities
represents the rate at period end. The due dates 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 $39,500,000 or 3.7% of net
assets.
3. 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
SECURITY DATE COST
Goldman Sachs
Group, L.P. (The)
5.81%, 9/16/97 6/16/97 $ 10,000,000
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>
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in securities, at value (including repurchase agreements of $1,381,000) - See accompanying $ 1,076,835,709
schedule
Receivable for investments sold 188,000
Interest receivable 7,287,661
TOTAL ASSETS 1,084,311,370
LIABILITIES
Payable to custodian bank $ 1,591
Payable for investments purchased 2,000,410
Share transactions in process 1,474,015
Accrued management fee 189,680
Other payables and 101,660
accrued expenses
TOTAL LIABILITIES 3,767,356
NET ASSETS $ 1,080,544,014
Net Assets consist of:
Paid in capital $ 1,080,585,466
Accumulated net realized gain (41,452)
(loss) on investments
NET ASSETS, for 1,080,585,466 shares outstanding $ 1,080,544,014
NET ASSET VALUE, offering price $1.00
and redemption price per
share ($1,080,544,014 (divided by) 1,080,585,466 shares)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INTEREST INCOME $ 31,913,288
EXPENSES
Management fee $ 1,183,256
Transfer agent fees 418,988
Accounting fees and expenses 68,373
Non-interested trustees' compensation 262
Custodian fees and expenses 19,215
Audit 8,680
Legal 1,590
Miscellaneous 37,731
Total expenses before reductions 1,738,095
Expense reductions (4,815 1,733,280
)
NET INTEREST INCOME 30,180,008
NET REALIZED GAIN (LOSS) (27,802
ON INVESTMENTS )
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 30,152,206
OTHER INFORMATION
Expense reductions
Custodian interest credits $ 4,815
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996
<TABLE>
<CAPTION>
<S> <C> <C>
Operations $ 30,180,008 $ 49,421,275
Net interest income
Net realized gain (loss) (27,802) 49,076
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 30,152,206 49,470,351
Distributions to shareholders from net interest income (30,180,008) (49,421,275)
Share transactions at net asset value of $1.00 per share 1,049,791,223 1,994,407,823
Proceeds from sales of shares
Reinvestment of distributions from net interest income 30,180,006 49,421,275
Cost of shares redeemed (1,125,554,506) (1,726,597,066)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS (45,583,277) 317,232,032
TOTAL INCREASE (DECREASE) IN NET ASSETS (45,611,079) 317,281,108
NET ASSETS
Beginning of period 1,126,155,093 808,873,985
End of period $ 1,080,544,014 $ 1,126,155,093
</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> <C>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1997
SELECTED PER-SHARE DATA (UNAUDITED) 1996 1995 1994 1993 1992
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Income from Investment Operations .026 .052 .057 .042 .032 .038
Net interest income
Less Distributions
From net interest income (.026) (.052) (.057) (.042) (.032) (.038)
Net asset value, end of period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
TOTAL RETURN B, C 2.65% 5.41% 5.87% 4.25% 3.23% 3.90%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 1,080,544 $ 1,126,155 $ 808,874 $ 748,606 $ 353,104 $ 301,002
Ratio of expenses to average net assets after expense .30% A .30% .33% .27% .22% .24%
reductions D
Ratio of net interest income to average net assets 5.29% A 5.28% 5.72% 4.32% 3.16% 3.85%
</TABLE>
A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED AND 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 RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIOD SHOWN.
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.
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 PAST 1 PAST 5 LIFE OF
JUNE 30, 1997 YEAR YEARS FUND
INVESTMENT GRADE BOND 7.74% 6.64% 8.05%
Lehman Brothers Aggregate Bond Index 8.15% 7.12% 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
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
1997/01/31 18839.68 20401.08
1997/02/28 18864.60 20451.83
1997/03/31 18668.78 20225.20
1997/04/30 18946.20 20527.95
1997/05/31 19093.07 20722.01
1997/06/30 19321.53 20967.97
Let's say hypothetically that $10,000 was invested in Investment Grade Bond
Portfolio on December 31, 1988, shortly after the fund started. By June 30,
1997, the value of the investment would have grown to $19,322 - a 93.22%
increase on the initial investment. For comparison, look at how the Lehman
Brothers Aggregate Bond Index did over the same period. With dividends and
capital gains, if any, reinvested, the same $10,000 investment would have
grown to $20,968 - a 109.68% increase.
INVESTMENT SUMMARY
QUALITY DIVERSIFICATION AS OF JUNE 30, 1997
(MOODY'S RATINGS) % OF FUND'S
INVESTMENTS
Aaa 55.7
Aa 4.4
A 15.0
Baa 13.7
Ba 6.0
B 0
Not rated 0.5
TABLE EXCLUDES SHORT-TERM INVESTMENTS. WHERE MOODY'S RATINGS ARE NOT
AVAILABLE, WE HAVE USED S&P RATINGS. UNRATED DEBT SECURITIES THAT ARE
EQUIVALENT TO BA AND BELOW AT JUNE 30, 1997, ACCOUNT FOR 0.5% OF THE FUND'S
INVESTMENTS.
AVERAGE YEARS TO MATURITY AS OF JUNE 30, 1997
Years 8.4
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 JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Finance 20.7
Utilities 5.4
Retail & Wholesale 2.8
Media & Leisure 2.3
Technology 1.9
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
NOTE TO SHAREHOLDERS: Kevin Grant became Portfolio Manager of Investment
Grade Bond Portfolio on February 3, 1997.
Q. HOW DID THE FUND PERFORM, KEVIN?
A. For the six- and 12-month periods that ended June 30, 1997, the fund
slightly underperformed the Lehman Brothers Aggregate Bond Index, a broad
measure of U.S. taxable bonds, which returned 3.09% for the six-month
period and 8.15% for the 12-month period.
Q. WHAT WAS THE INVESTMENT ENVIRONMENT LIKE DURING THE FIRST HALF OF 1997?
A. It's been a good environment for investors, both in the stock and bond
markets. We've had virtually no inflation and we've seen solid growth in
the economy and in corporate earnings. Companies have paid down debt; even
the airlines are paying down debt. The average corporate balance sheet is
in the best shape we've seen in probably 30 years. This has been a good
investing environment, particularly for corporate bonds and mortgage-backed
securities.
Q. WHAT WAS YOUR STRATEGY FOR CORPORATE BONDS IN THIS MARKET?
A. We haven't seen companies take on a lot of new debt to do such things as
acquisitions, which makes it a very good environment for corporate bonds.
In particular, we focused on three areas of the corporate bond market.
First, we used short-maturity corporate bonds - which have two-, three- and
four-year maturities - to replace Treasuries. They have marginally more
risk than Treasuries, but offer a yield advantage over them. Second, we
invested in puttable corporate bonds, which can offer attractive yields as
well as favorable price action because they can be redeemed by the fund
prior to maturity in the event interest rates rise. Third, we invested in
bank capital securities, which are long corporate bonds issued by banks. We
were overweighted in those three areas of the corporate market during the
period and that helped us.
Q. HOW HAVE MORTGAGE-BACKED SECURITIES FARED IN THIS ENVIRONMENT?
A. It's been a good environment for the mortgage market. Interest rates
haven't been particularly volatile, and rates are high enough that
prepayment risk was not an issue during the period. In 1993, when interest
rates dropped so low, many mortgage holders refinanced into lower rate
mortgages. Interest rates are now quite a bit higher. During the first half
of 1997, the mortgage market was a discount market, which means there was
very little prepayment risk. We would probably need a drop in interest
rates of about 50 basis points for prepayment risk to become a real
problem.
Q. AT THE END OF 1996, THE FUND OWNED A FAIR AMOUNT OF YANKEE BONDS. DID
THE FUND CONTINUE TO INVEST IN THIS TYPE OF SECURITY DURING THE FIRST HALF
OF THE YEAR?
A. Yes. We've continued to own yankee bonds, which are issued by foreign
entities and denominated in U.S. dollars. They often trade more cheaply
than domestic corporates and frequently carry better credit quality
characteristics. The nice thing about yankee bonds is that you can get the
same or better yield spread than you get in corporate bonds, but you have
much less event risk. By that I mean, you don't really have the possibility
of the issuer being bought by a junk-bond company, for example, so you
don't have the possibility of the bonds going from a single-A rating to a
double-B in a week. We've focused mainly on sovereign names, such as the
Canadian provinces of Ontario and Alberta. We also owned some Korean notes.
Korea carries a single-A rating, so it's a very high-grade country. The
tension between North and South Korea has not really affected the bonds.
Q. VALUATIONS OF CORPORATE BONDS WERE VERY EXPENSIVE AT THE END OF LAST
YEAR. DID THAT CONTINUE DURING THIS SIX-MONTH PERIOD?
A. Yes, that's still the case. This is an environment we're probably going
to have to live with for a while, with optimism built into the prices of
most bonds. The fund continues to hold corporate bonds. We're not going to
own just Treasuries. That would not make sense, because even though
corporate bonds are expensive, they still have a yield advantage over
Treasuries. So, we're in a defensive posture, but we're not betting on a
blow-up in corporate America. I think that would be foolhardy.
Q. WHAT'S YOUR OUTLOOK GOING INTO THE SECOND HALF OF 1997?
A. I think it's really going to be more of the same. We'll continue to
focus on the three areas of the corporate bond market that I mentioned
earlier. The mortgage market is very expensive right now, so we're probably
going to continue to be defensive in mortgage securities. The overall
market was about 30% invested in mortgage securities, and we were modestly
underweighted in that sector at the end of the period. Unless conditions
change, I think we'll stay underweighted in these securities.
FUND FACTS
GOAL: income and share price stability by
investing in high-quality, short-term
investments
START DATE: April 1, 1982
SIZE: as of June 30, 1997, more than
$1.0 billion
MANAGER: Robert Duby, since April 1997;
joined Fidelity in 1982
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
NONCONVERTIBLE BONDS - 40.4%
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
BASIC INDUSTRIES - 0.4%
CHEMICALS & PLASTICS - 0.4%
Praxair, Inc.,
6.90% 11/1/06 A3 $ 1,000,000 $ 987,300
DURABLES - 1.0%
AUTOS, TIRES, & ACCESSORIES - 0.2%
Tennessee Gas Pipeline Co.
7%, 3/15/27 Baa3 540,000 539,671
TEXTILES & APPAREL - 0.8%
Levi Strauss & Co.
7%, 11/1/06 (c) Baa2 2,000,000 1,978,400
TOTAL DURABLES 2,518,071
ENERGY - 0.9%
ENERGY SERVICES - 0.4%
Petroliam Nasional BHD
yankee 6 7/8%, 7/1/03 (c) A1 1,040,000 1,036,402
OIL & GAS - 0.5%
Husky Oil Ltd. yankee
6 7/8%, 11/15/03 Baa3 340,000 335,192
Pennzoil Co.
9 5/8%, 11/15/99 Baa3 460,000 490,089
Ras Laffan Liquid Natural Gas
Co. Ltd. yankee
7.628%, 9/15/06 (c) A3 500,000 506,405
1,331,686
TOTAL ENERGY 2,368,088
FINANCE - 20.7%
ASSET-BACKED SECURITIES - 3.4%
Discover Card Master Trust I
6.90%, 2/16/00 A2 260,000 260,242
Ford Credit Grantor Trust
5.90%, 10/15/00 Aaa 480,649 480,048
Green Tree Financial Corp.
6.10%, 4/15/27 Aaa 862,654 861,032
KeyCorp Auto Grantor Trust
5.80%, 7/15/00 A3 39,886 39,758
PNC Student Loan Trust I
6.314%, 1/25/01 Aaa 3,100,000 3,100,000
Premier Auto Trust:
4.90%, 12/15/98 Aaa 141,429 140,898
8.05%, 4/4/00 Aaa 1,430,000 1,453,238
6%, 5/6/00 Aaa 500,000 499,530
Railcar Trust 7 3/4%, 6/1/04 Aaa 761,410 789,963
Sears Credit Account Master
Trust II 7%, 1/15/04 Aaa 1,000,000 1,012,500
Standard Credit Card Master
Trust I 7.65%, 2/15/00 A2 150,000 151,359
Union Federal Savings Bank
Grantor Trust
8.20%, 1/10/01 Baa2 47,629 48,313
8,836,881
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
BANKS - 8.4%
ABN Amro Bank NV
6 5/8%, 10/31/01 Aa3 $ 1,000,000 $ 995,870
Banc One Corp.
6.70%, 3/24/00 Aa3 1,450,000 1,456,757
BankBoston Capital Trust II
7 3/4%, 12/15/26 Baa1 1,080,000 1,036,282
BanPonce Corp.:
5 3/4%, 3/1/99 A3 370,000 364,975
6.378%, 4/8/99 A3 430,000 427,725
BanPonce Trust I
8.327%, 2/1/27 (c) Baa1 1,230,000 1,243,013
Capital One Bank
6.42%, 11/12/99 Baa3 2,000,000 1,989,500
Corporacion Andina
de Fomento yankee
7.10%, 2/1/03 A3 1,000,000 1,004,820
Export-Import Bank of Korea
6 3/8%, 2/15/06 A1 1,500,000 1,405,680
First Fidelity Bancorp
8 1/2%, 4/1/98 A2 250,000 254,048
First Maryland Bancorp
10 3/8%, 8/1/99 Baa1 500,000 536,415
Firstar Corp. 7.15%, 9/1/00 A3 640,000 643,782
Hartford National Corp.
9.85%, 6/1/99 A3 1,150,000 1,219,943
Kansallis-Osake-Pankki
10%, 5/1/02 A3 260,000 291,577
KeyCorp 8.40%, 4/1/99 A2 310,000 319,883
Korea Development Bank
yankee 6 3/4%, 12/1/05 A1 2,350,000 2,276,962
Midland Bank PLC yankee
7 5/8%, 6/15/06 A1 700,000 720,895
NB Capital Trust IV
8 1/4%, 4/15/27 A1 3,000,000 3,074,220
Signet Bank 7.80%, 9/15/06 Baa1 500,000 516,240
Sovran Financial Corp.
9 3/4%, 6/15/99 A2 770,000 816,647
Union Planters Corp.
6 3/4%, 11/1/05 Baa2 400,000 387,448
Union Planters National Bank
6.81%, 8/20/01 A3 500,000 500,625
21,483,307
CREDIT & OTHER FINANCE - 5.6%
AT&T Capital Corp.:
6.02%, 12/1/98 Baa3 1,000,000 997,060
6.16%, 12/3/99 Baa3 500,000 494,605
Associates Corp. of North
America 6 7/8%, 2/15/00 Aa3 3,000,000 3,028,260
BCH Cayman Islands Ltd.
yankee 7.70%, 7/15/06 A3 500,000 510,840
Chase Capital I
7.67%, 12/1/26 A1 2,650,000 2,565,757
Chrysler Financial Corp.
6 3/8%, 1/28/00 A3 1,240,000 1,236,280
Finova Capital Corp.
6.14%, 11/2/98 Baa1 400,000 399,892
NONCONVERTIBLE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
FINANCE - CONTINUED
CREDIT & OTHER FINANCE - CONTINUED
First Security Capital I
8.41%, 12/15/26 A3 $ 210,000 $ 214,087
General Electric Capital Corp.
6.94%, 4/13/09 (b) Aaa 1,000,000 1,009,410
General Motors Acceptance Corp.:
6.40%, 5/17/99 A3 1,000,000 1,000,680
6.65%, 5/24/00 A3 1,650,000 1,651,568
KeyCorp Institutional Capital A
7.826%, 12/1/26 A1 800,000 776,968
Secured Finance, Inc. gtd.
secured 9.05%, 12/15/04 Aaa 500,000 555,295
14,440,702
INSURANCE - 1.1%
Executive Risk Capital Trust
8 5/8%, 2/1/27 Baa3 1,750,000 1,739,150
Nationwide Mutual Insurance Co.
6 1/2%, 2/15/04 (c) A1 130,000 125,562
SunAmerica, Inc.
6.20%, 10/31/99 Baa1 1,000,000 992,910
2,857,622
SAVINGS & LOANS - 2.2%
Ahmanson (H.F.) & Co.
9 7/8%, 11/15/99 Baa2 3,000,000 3,220,560
Great West Financial Trust II
8.206%, 2/1/27 Baa2 2,500,000 2,493,050
5,713,610
TOTAL FINANCE 53,332,122
HEALTH - 0.7%
MEDICAL FACILITIES MANAGEMENT - 0.7%
Columbia/HCA Healthcare Corp.:
6 1/2%, 3/15/99 A2 1,000,000 1,003,470
6 7/8%, 7/15/01 A2 750,000 753,900
1,757,370
HOLDING COMPANIES - 0.7%
Norfolk Southern Corp.
7.05%, 5/1/37 Baa1 1,700,000 1,725,398
INDUSTRIAL MACHINERY & EQUIPMENT - 1.6%
POLLUTION CONTROL - 1.6%
WMX Technologies, Inc.:
6 1/4%, 4/1/99 A3 1,200,000 1,197,300
7.10%, 8/1/26 A3 3,000,000 3,056,910
4,254,210
MEDIA & LEISURE - 2.3%
BROADCASTING - 2.2%
TCI Communication, Inc.:
7 1/4%, 6/15/99 Ba1 3,680,000 3,708,115
7 3/8%, 2/15/00 Ba1 750,000 755,700
Time Warner, Inc.
7.95%, 2/1/00 Ba1 1,170,000 1,202,865
5,666,680
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
RESTAURANTS - 0.1%
Darden Restaurants, Inc.
6 3/8%, 2/1/06 Baa1 $ 310,000 $ 286,793
TOTAL MEDIA & LEISURE 5,953,473
NONDURABLES - 1.7%
FOODS - 0.5%
ConAgra, Inc.
7 1/8%, 10/1/26 Baa1 1,270,000 1,275,639
TOBACCO - 1.2%
Philip Morris Companies, Inc.
6.95%, 6/1/06 A2 3,000,000 3,009,990
TOTAL NONDURABLES 4,285,629
RETAIL & WHOLESALE - 2.8%
GENERAL MERCHANDISE STORES - 2.0%
Dayton Hudson Corp.
6.40%, 2/15/03 Baa1 500,000 487,065
Federated Department Stores, Inc.
8 1/2%, 6/15/03 Baa2 3,000,000 3,190,050
Penney (J.C.) Co., Inc.
6.95%, 4/1/00 A2 1,000,000 1,008,420
Sears, Roebuck & Co.
9.23% 8/6/98 A2 450,000 465,120
5,150,655
GROCERY STORES - 0.8%
American Stores Co.
7 1/2%, 5/1/37 Baa2 1,400,000 1,426,558
Kroger Co. 8.15%, 7/15/06 Baa3 500,000 527,180
1,953,738
TOTAL RETAIL & WHOLESALE 7,104,393
TECHNOLOGY - 1.9%
COMPUTERS & OFFICE EQUIPMENT - 1.2%
Comdisco, Inc.
6 3/8%, 11/30/01 Baa1 3,200,000 3,132,448
ELECTRONICS - 0.7%
Texas Instruments, Inc.
6 7/8%, 7/15/00 A3 1,692,000 1,705,604
TOTAL TECHNOLOGY 4,838,052
TRANSPORTATION - 0.3%
AIR TRANSPORTATION - 0.3%
AMR Corp. 9.55%, 3/6/98 Baa3 400,000 408,564
Delta Air Lines, Inc. equipment
trust certificate
8.54%, 1/2/07 Baa1 416,138 442,646
851,210
UTILITIES - 5.4%
CELLULAR - 0.9%
360 Degrees Communications Co.:
7 1/8%, 3/1/03 Ba1 1,420,000 1,412,176
7 1/2%, 3/1/06 Ba1 850,000 847,926
2,260,102
NONCONVERTIBLE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
UTILITIES - CONTINUED
ELECTRIC UTILITY - 1.1%
British Columbia Hydro &
Power Authority yankee
12 1/2%, 1/15/14 Aa2 $ 360,000 $ 405,558
DR Investment yankee
7.10%, 5/15/02 (c) Baa1 1,500,000 1,510,860
Israel Electric Corp. Ltd. yankee
7 1/4%, 12/15/06 (c) A3 1,000,000 991,970
2,908,388
GAS - 1.2%
Florida Gas Transmission Co.
7 3/4%, 11/1/97 (c) Baa2 220,000 221,250
Mitchell Energy & Development
Corp. 8%, 7/15/99 Ba1 1,730,000 1,770,188
Southwest Gas Corp.
9 3/4%, 6/15/02 Baa2 1,000,000 1,111,370
3,102,808
TELEPHONE SERVICES - 2.2%
LCI International, Inc.
7 1/4%, 6/15/07 Ba1 950,000 940,975
MFS Communications, Inc.
0%, 1/15/04 (f) Ba3 2,000,000 1,861,600
WorldCom, Inc.
7 3/4%, 4/1/07 Ba1 2,700,000 2,761,236
5,563,811
TOTAL UTILITIES 13,835,109
TOTAL NONCONVERTIBLE BONDS
(Cost $103,327,484) 103,810,425
U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS - 35.3%
U.S. TREASURY OBLIGATIONS - 23.9%
6 5/8%, 6/30/01 Aaa 11,960,000 12,072,065
7 7/8%, 8/15/01 Aaa 510,000 537,494
10 3/4%, 5/15/03 Aaa 138,000 166,657
11 7/8%, 11/15/03 Aaa 3,000,000 3,835,770
12 3/8%, 5/15/04 Aaa 1,914,000 2,528,566
7%, 7/15/06 Aaa 21,000,000 21,603,750
12 3/4%, 11/15/10
(callable) Aaa 1,747,000 2,424,242
13 7/8%, 5/15/11 (callable) Aaa 30,000 44,367
12%, 8/15/13 (callable) Aaa 3,772,000 5,309,694
9%, 11/15/18 Aaa 7,679,000 9,499,153
8 7/8%, 2/15/19 Aaa 1,400,000 1,713,250
7 1/4%, 2/15/23 Aaa 1,680,000 1,730,400
61,465,408
U.S. GOVERNMENT AGENCY OBLIGATIONS - 11.4%
Federal Agricultural Mortgage
Corporation
7.01%, 2/10/05 Aaa 10,000 10,125
Federal Home Loan Bank:
6 3/4%, 4/5/04 Aaa 375,000 376,114
7.31%, 6/16/04 Aaa 4,155,000 4,295,231
7.36%, 7/1/04 Aaa 3,100,000 3,221,582
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
7.38%, 8/5/04 Aaa $ 110,000 $ 114,193
7.56%, 9/01/04 Aaa 310,000 324,725
7.46%, 9/9/04 Aaa 50,000 52,102
7.70%, 9/20/04 Aaa 40,000 42,225
6.46%, 12/15/04 Aaa 1,745,000 1,713,922
8.09%, 12/28/04 Aaa 10,000 10,794
7.59%, 3/10/05 Aaa 10,000 10,513
Federal Home Loan
Mortgage Corporation
6.77%, 9/15/02 Aaa 150,000 150,678
8%, 1/26/05 Aaa 520,000 556,561
8.115%, 1/31/05 Aaa 1,140,000 1,229,593
6.783%, 8/18/05 Aaa 1,000,000 999,220
planned amortization class
Series 1727 Class D,
6 1/2%, 8/15/14 Aaa 190,000 190,475
Federal National Mortgage
Association:
6.72%, 8/1/05 Aaa 1,180,000 1,174,100
sequential pay Series 1996-M5
Class A1, 7.141%,
6/25/08 Aaa 224,488 227,408
Series 1994-M3 Class A,
7.71%, 4/1/06 Aaa 14,523 14,686
Financing Corp. stripped
principal 0%, 3/26/00 - 512,000 430,249
Government Loan Trusts
(assets of Trust guaranteed
by U.S. Government through
Agency for International
Development)
8 1/2%, 4/1/06 Aaa 1,760,000 1,898,002
Government Trust Certificates
(assets of Trust guaranteed by
U.S. Government through
Defense Security Assistance
Agency):
Class T-3,
9 5/8%, 5/15/02 Aaa 67,365 71,570
Class 1-C,
9 1/4%, 11/15/01 Aaa 1,119,342 1,188,484
Class 2-E,
9.40%, 5/15/02 Aaa 955,284 1,013,662
Guaranteed Export Trust
Certificates (assets of Trust
guaranteed by U.S.
Government through
Export-Import Bank):
Series 1993-C,
5.20%, 10/15/04 Aaa 6,667 6,383
Series 1993-D,
5.23%, 5/15/05 Aaa 13,617 12,991
Series 1994-A,
7.12%, 4/15/06 Aaa 8,230 8,379
Series 1994-C,
6.61%, 9/15/99 Aaa 57,747 57,987
U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
Guaranteed Trade Trust
Certificates (assets of Trust
guaranteed by U.S. Government
through Export-Import Bank)
Series 1994-B,
7 1/2%, 1/26/06 Aaa $ 8,330 $ 8,605
Israel Export Trust Certificates
(assets of Trust guaranteed
by U.S. Government through
Export-Import Bank) Series
1994-1, 6.88%, 1/26/03 Aaa 14,118 14,228
Overseas Private Investment
Corp. U.S. Government
guaranteed participation
certificate Series 1994-1995,
6.08%, 8/15/04 (callable) Aaa 140,000 136,898
Private Export Funding Corp.:
secured 5.65%, 3/15/03 Aaa 243,000 238,169
secured 6.86%, 4/30/04 Aaa 1,604,283 1,615,160
State of Israel (guaranteed by
U.S. Government through
Agency for International
Development):
6 1/8%, 8/15/99 Aaa 770,000 768,429
7 1/8%, 8/15/99 Aaa 435,000 442,527
7 3/4%, 11/15/99 Aaa 144,000 148,349
0%, 11/15/01 Aaa 2,875,000 2,176,174
6 1/4%, 8/15/02 Aaa 352,000 347,725
6 1/8%, 3/15/03 Aaa 70,000 68,178
6 5/8%, 2/15/04 Aaa 180,000 179,890
6 3/4%, 8/15/04 Aaa 1,000,000 1,004,330
7 5/8%, 8/15/04 Aaa 330,000 347,612
5.89%, 8/15/05 Aaa 1,175,000 1,113,332
U.S. Department of Housing
and Urban Development
Government guaranteed
participation certificates:
Series 1995-A:
8.27%, 8/1/03 Aaa 415,000 448,208
8.24%, 8/1/04 Aaa 500,000 540,065
Series 1996-A,
6.98%, 8/1/05 Aaa 180,000 181,903
29,181,736
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $89,688,627) 90,647,144
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES - 14.2%
FEDERAL HOME LOAN MORTGAGE CORPORATION - 0.7%
7%, 5/01/01 Aaa 172,509 173,501
8 1/2%, 3/01/20 Aaa 1,570,252 1,649,487
1,822,988
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 10.5%
6.345%, 3/01/99 Aaa $ 77,838 $ 77,546
5 1/2%, 5/01/00 to 7/01/01 Aaa 2,647,237 2,565,126
6%, 3/01/01 to 6/01/11 Aaa 14,466,801 14,074,564
6 1/2%, 2/01/10 to 5/01/26 Aaa 8,192,990 7,842,304
8%, 12/01/24 to 7/01/27 Aaa 2,362,595 2,417,036
26,976,576
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 3.0%
6%, 8/15/08 to 4/15/11 Aaa 5,433,429 5,284,630
10%, 7/15/13 to 11/15/24 Aaa 1,891,746 2,081,200
8%, 2/15/17 Aaa 346,667 359,429
7,725,259
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $36,012,975) 36,524,823
COMMERCIAL MORTGAGE SECURITIES - 3.3%
BKB Commercial Mortgage Trust
Series 1997-C1 Class A-1,
6 7/8%, 2/25/43 (c) Aaa 3,072,923 3,084,446
CS First Boston Mortgage
Securities Corp.:
Series 1995-AEWI
Class A-1,
6.665%, 11/25/27 Aaa 79,465 79,365
floater Series 1994-CFB1
Class A-1,
6.2375%, 1/25/28 (d) Aaa 77,890 77,914
Equitable Life Assurance Society
of the United States (The):
Series 1996-1 (c):
Class B1,
7.33%, 5/15/06 Aa2 500,000 508,640
Class C1,
7.52%, 5/15/06 A2 500,000 512,065
Meritor Mortgage Security Corp.
Series 1987-1 Class A-3,
9.40%, 6/1/99 Baa3 26,987 26,954
Nomura Asset Securities
Corp. floater
Series 1994-MD-II Class A-6,
6.9564% 7/4/03 (d) - 179,477 180,907
Oregon Commercial Mortgage,
Inc. Series 1995-1 Class A,
7.15%, 6/25/23 (c)(d) Aaa 204,328 204,967
Resolution Trust Corp.:
floater Series 1993-C2
Class A-2,
6.62%, 3/25/25 (d) Aaa 264,647 265,061
COMMERCIAL MORTGAGE SECURITIES - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
Resolution Trust Corp.: - continued
commercial Series 1995-C1
Class A-4B, 6.65%,
2/25/27 Aaa $ 740,000 $ 738,844
floater Series 1994-C1
Class A-3,
6.30%, 6/25/26 (d) Aaa 228,240 228,240
SC Finance Corp. floater
7.2375%, 8/1/04 (c)(d) - 600,000 601,875
Structured Asset Securities
Corp. sequential pay:
Series 1993-C1 Class A-1A,
6.60%, 10/25/24 AA+ 39,274 39,139
Series 1996 Class A-2A,
7 3/4%, 2/25/28 Aaa 1,020,086 1,034,431
Wells Fargo Capital Markets
Apartment Financing Trust
6.56%, 12/29/05 (c) Aaa 750,000 739,770
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $8,267,612) 8,322,618
FOREIGN GOVERNMENT OBLIGATIONS (E) - 1.8%
Alberta Province yankee
9 1/4%, 4/1/00 Aa2 2,500,000 2,673,000
British Columbia Province
7%, 1/1/03 Aa2 500,000 507,230
Manitoba Province
6 3/4%, 3/1/03 A1 500,000 499,265
Ontario Province yankee
7 3/4%, 6/4/02 Aa3 1,000,000 1,044,870
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $4,824,375) 4,724,365
SUPRANATIONAL OBLIGATIONS - 0.3%
African Development Bank
7 3/4%, 12/15/01
(Cost $691,799) Aa1 660,000 687,166
CASH EQUIVALENTS - 4.7%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 5.93%, dated
6/30/97 due 7/1/97 $ 12,192,008 12,190,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $255,002,872) $ 256,906,541
LEGEND
4. Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
5. Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date.
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 $13,265,625 or 5.1% of net
assets.
7. The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
8. For foreign government obligations not 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.
9. Debt obligation initially issued in zero coupon form which converts to
coupon form at a specified rate and date.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $195,928,403 and $170,908,345, respectively, of which U.S.
government and government agency obligations aggregated $120,223,036 and
$137,847,077, respectively.
The composition of long-term debt holdings as a percentage of total value
of investment in securities, is as follows:
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 73.2% AAA, AA, A 70.2%
Baa 13.7% BBB 21.3%
Ba 6.0% BB 1.2%
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 June 30, 1997, the aggregate cost of investment securities for income
tax purposes was $255,006,227. Net unrealized appreciation aggregated
$1,900,314, of which $2,956,441 related to appreciated investment
securities and $1,056,127 related to depreciated investment securities.
At December 31, 1996, the fund had a capital loss carryforward of
approximately $1,523,000 of which $230,000, and $1,293,000 will expire on
December 31, 2003 and 2004, respectively.
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in securities, at $ 256,906,541
value (including repurchase agreements of $12,190,000)
(cost $255,002,872) - See accompanying schedule
Cash 299
Receivable for fund shares sold 441,929
Interest receivable 3,489,812
TOTAL ASSETS 260,838,581
LIABILITIES
Payable for investments purchased $ 2,048,469
Accrued management fee 93,494
Other payables and accrued expenses 49,401
TOTAL LIABILITIES 2,191,364
NET ASSETS $ 258,647,217
Net Assets consist of:
Paid in capital $ 251,000,862
Undistributed net investment income 7,603,855
Accumulated undistributed net realized gain (loss) on investments and foreign currency transactions (1,861,169
)
Net unrealized appreciation (depreciation) on investments 1,903,669
NET ASSETS, for 21,842,464 $ 258,647,217
shares outstanding
NET ASSET VALUE, offering price $11.84
and redemption price per share ($258,647,217 (divided by) 21,842,464 shares)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $ 8,376,565
Interest
EXPENSES
Management fee $ 527,568
Transfer agent fees 95,695
Accounting fees and expenses 48,849
Non-interested trustees' compensation 552
Custodian fees and expenses 8,018
Registration fees 25
Audit 18,627
Legal 326
Miscellaneous 7,852
Total expenses before reductions 707,512
Expense reductions (971 706,541
)
NET INVESTMENT INCOME 7,670,024
REALIZED AND UNREALIZED GAIN (LOSS) (333,170
Net realized gain (loss) on )
investment securities
Change in net unrealized appreciation (depreciation) on investment securities (432,325
)
NET GAIN (LOSS) (765,495
)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 6,904,529
OTHER INFORMATION $ 971
Expense reduction
Custodian credits
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
Operations $ 7,670,024 $ 13,175,925
Net investment income
Net realized gain (loss) (333,170 (1,136,463
) )
Change in net unrealized appreciation (depreciation) (432,325 (5,278,792
) )
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 6,904,529 6,760,670
Distributions to shareholders from net investment income (13,381,760 (9,612,980
) )
Share transactions 61,651,406 108,335,706
Net proceeds from sales of shares
Reinvestment of distributions 13,381,760 9,612,980
Cost of shares redeemed (38,502,521 (68,048,460
) )
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 36,530,645 49,900,226
TOTAL INCREASE (DECREASE) IN NET ASSETS 30,053,414 47,047,916
NET ASSETS
Beginning of period 228,593,803 181,545,887
End of period (including undistributed net investment income of $7,603,855 and $13,165,742,
respectively) $ 258,647,217 $ 228,593,803
OTHER INFORMATION
Shares
Sold 5,288,011 9,066,652
Issued in reinvestment of distributions 1,151,614 807,813
Redeemed (3,271,497 (5,752,069
) )
Net increase (decrease) 3,168,128 4,122,396
</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> <C>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1997
SELECTED PER-SHARE DATA (UNAUDITED) 1996 1995 1994 1993 E 1992
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 12.240 $ 12.480 $ 11.020 $ 11.480 $ 10.970 $ 11.080
Income from Investment Operations .376 D .670 .320 .733 .641 .672
Net investment income
Net realized and unrealized gain (loss) (.046) (.290) 1.530 (1.163) .559 .058
Total from investment operations .330 .380 1.850 (.430) 1.200 .730
Less Distributions
From net investment income (.730) (.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 (.730) (.620) (.390) (.030) (.690) (.840)
Net asset value, end of period $ 11.840 $ 12.240 $ 12.480 $ 11.020 $ 11.480 $ 10.970
TOTAL RETURN B, C 2.81% 3.19% 17.32% (3.76)% 10.96% 6.65%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 258,647 $ 228,594 $ 181,546 $ 111,381 $ 122,376 $ 73,598
Ratio of expenses to average net assets .60% A .58% .59% .67% .68% .76%
Ratio of net investment income to average
net assets 6.46% A 6.49% 6.53% 6.53% 6.85% 7.11%
Portfolio turnover rate 151% A 81% 182% 143% 70% 119%
A ANNUALIZED
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 THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN.
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON
AVERAGE SHARES OUTSTANDING DURING THE PERIOD.
E 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.
</TABLE>
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
JUNE 30, 1997 YEAR YEARS YEARS
HIGH INCOME 14.47% 13.24% 11.48%
Merrill Lynch High Yield Master Index 14.30% 11.60% 11.41%
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 past five year
and past 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
1987/06/30 10000.00 10000.00
1987/07/31 10010.70 10054.41
1987/08/31 10093.62 10155.16
1987/09/30 9742.14 9921.51
1987/10/31 9276.27 9656.42
1987/11/30 9549.48 9900.62
1987/12/31 9702.32 10032.09
1988/01/31 10021.30 10306.61
1988/02/29 10321.34 10586.28
1988/03/31 10247.18 10568.77
1988/04/30 10327.05 10599.29
1988/05/31 10311.70 10654.61
1988/06/30 10527.82 10858.33
1988/07/31 10637.41 10973.07
1988/08/31 10586.60 11009.12
1988/09/30 10671.47 11120.09
1988/10/31 10787.64 11293.35
1988/11/30 10746.45 11335.65
1988/12/31 10831.84 11383.62
1989/01/31 11092.14 11554.33
1989/02/28 11146.70 11631.98
1989/03/31 11003.47 11621.63
1989/04/30 10881.61 11655.93
1989/05/31 11082.67 11870.51
1989/06/30 11400.09 12038.69
1989/07/31 11325.04 12095.70
1989/08/31 11259.35 12155.45
1989/09/30 10865.39 12039.73
1989/10/31 10399.58 11849.29
1989/11/30 10408.34 11875.85
1989/12/31 10379.81 11865.11
1990/01/31 10150.37 11633.21
1990/02/28 9994.07 11463.80
1990/03/31 9888.62 11618.76
1990/04/30 9917.92 11677.80
1990/05/31 10121.70 11888.73
1990/06/30 10281.14 12119.06
1990/07/31 10439.95 12375.17
1990/08/31 10265.30 11901.42
1990/09/30 10021.90 11383.81
1990/10/31 9778.71 11094.12
1990/11/30 10008.07 11188.11
1990/12/31 10148.02 11349.32
1991/01/31 10363.32 11509.75
1991/02/28 10937.47 12364.04
1991/03/31 11325.02 12895.64
1991/04/30 11726.92 13354.88
1991/05/31 11899.16 13420.09
1991/06/30 12157.53 13690.06
1991/07/31 12616.84 14018.08
1991/08/31 12789.09 14312.71
1991/09/30 13076.16 14495.01
1991/10/31 13521.12 14925.74
1991/11/30 13635.95 15098.15
1991/12/31 13707.72 15273.55
1992/01/31 14439.75 15807.56
1992/02/29 14964.03 16200.15
1992/03/31 15447.75 16426.18
1992/04/30 15556.98 16545.74
1992/05/31 15744.22 16809.66
1992/06/30 15915.86 17018.51
1992/07/31 16227.94 17363.32
1992/08/31 16571.22 17593.20
1992/09/30 16742.86 17793.66
1992/10/31 16493.20 17568.92
1992/11/30 16696.05 17817.74
1992/12/31 16883.30 18047.16
1993/01/31 17335.81 18491.55
1993/02/28 17631.52 18841.57
1993/03/31 18038.40 19168.23
1993/04/30 18157.08 19305.82
1993/05/31 18428.33 19565.70
1993/06/30 18903.02 19933.29
1993/07/31 19089.51 20147.55
1993/08/31 19292.95 20339.61
1993/09/30 19360.77 20439.97
1993/10/31 19818.51 20825.00
1993/11/30 20004.99 20938.90
1993/12/31 20327.11 21148.27
1994/01/31 21005.24 21611.74
1994/02/28 20980.06 21456.32
1994/03/31 20273.29 20757.12
1994/04/30 20068.69 20514.55
1994/05/31 20105.89 20441.46
1994/06/30 20031.49 20516.70
1994/07/31 20105.89 20660.93
1994/08/31 20105.89 20804.44
1994/09/30 20254.69 20796.56
1994/10/31 20068.69 20849.41
1994/11/30 19901.30 20672.06
1994/12/31 19994.30 20902.00
1995/01/31 20217.49 21197.35
1995/02/28 20911.39 21858.73
1995/03/31 21171.78 22162.93
1995/04/30 21792.71 22681.84
1995/05/31 22353.55 23390.48
1995/06/30 22413.64 23569.13
1995/07/31 22954.45 23838.58
1995/08/31 23134.72 23983.26
1995/09/30 23515.29 24257.65
1995/10/31 23735.63 24429.61
1995/11/30 23855.81 24668.07
1995/12/31 24136.23 25064.04
1996/01/31 24697.07 25459.88
1996/02/29 25104.99 25498.22
1996/03/31 25039.04 25428.97
1996/04/30 25412.75 25440.49
1996/05/31 25764.49 25623.96
1996/06/30 25896.39 25777.88
1996/07/31 25808.45 25952.89
1996/08/31 26182.17 26220.91
1996/09/30 26951.59 26783.49
1996/10/31 26863.65 27077.02
1996/11/30 27149.44 27624.44
1996/12/31 27523.15 27837.00
1997/01/31 27896.87 28050.93
1997/02/28 28402.88 28444.43
1997/03/31 27520.51 28128.51
1997/04/30 27949.77 28448.66
1997/05/31 29118.32 29021.99
1997/06/30 29642.97 29463.84
Let's say hypothetically that $10,000 was invested in High Income Portfolio
on June 30, 1987. As the chart shows, by June 30, 1997, the value of the
investment would have grown to $29,643 - a 196.43% increase on the initial
investment. For comparison, look at how the Merrill Lynch High Yield Master
Index did over the same period. With dividends and capital gains, if any,
reinvested, the same $10,000 investment would have grown to $29,464 - a
194.64% increase.
INVESTMENT SUMMARY
TOP FIVE HOLDINGS AS OF JUNE 30, 1997
(BY ISSUER, EXCLUDING CASH EQUIVALENTS) % OF FUND'S
INVESTMENTS
PanAmSat Corp. 3.3
Time Warner, Inc. 2.8
NextLink Communications, Inc. 1.9
Millicom International Cellular SA 1.8
Intermedia Communications, Inc. 1.8
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Media & Leisure 31.8
Utilities 12.1
Basic Industries 11.3
Finance 5.1
Services 5.0
QUALITY DIVERSIFICATION AS OF JUNE 30, 1997
(MOODY'S RATINGS) % OF FUND'S
INVESTMENTS
Aaa, Aa, A 0.0
Baa 0.0
Ba 5.5
B 51.5
Caa, Ca, C 8.0
Nonrated 5.2
TABLE EXCLUDES SHORT-TERM INVESTMENTS. WHERE MOODY'S RATINGS ARE NOT
AVAILABLE, WE HAVE USED S&P RATINGS. UNRATED DEBT SECURITIES THAT ARE
EQUIVALENT TO BA AND BELOW AT JUNE 30, 1997, ACCOUNT FOR 5.2% 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. BARRY, HOW DID THE FUND PERFORM OVER THE PAST SIX MONTHS AND THE PAST
YEAR?
A. It did well, outperforming its benchmark, the Merrill Lynch High Yield
Master Index, which had a total return of 5.84% for the six months that
ended June 30, 1997, and 14.30% for the 12-month period.
Q. WHY DID THE FUND BEAT ITS BENCHMARK?
A. The fund had a lighter weighting in higher-quality BB-rated securities
and a heavier weighting in lower-quality B-rated securities than its
benchmark. During the period, credit spreads narrowed, meaning there was an
ever smaller gap in yield between the B- and BB-rated securities. As
spreads narrowed, B-rated securities performed better than the higher-rated
BB securities and helped the fund outpace its benchmark. There were both
fundamental and technical reasons for the performance of B-rated
securities. From a fundamental standpoint, there was continued economic
strength and the stock market's impressive rise. And from a technical
standpoint, demand for the lower-quality tiers of the high-yield market was
solid.
Q. WHICH OF THE FUND'S HOLDINGS PERFORMED PARTICULARLY WELL?
A. Many of the fund's larger media and telecommunications holdings -
including PanAmSat and Millicom International Cellular - were some of its
best performers. PanAmSat was upgraded upon the completion of its merger
with GM Hughes. Millicom not only benefited from its quickly growing
cellular businesses in emerging countries, but it also rose on the news
that it is planning to undertake a significant restructuring by selling off
its Latin American business and spinning off its Asian operations. Other
strong performers included stocks issued by high-yield companies - those
with below-investment-grade credit ratings. For example, the stock price of
Allied Waste performed well over the past six months. That rise was due, in
part, to Allied's successful integration of a recent acquisition.
Q. WERE THERE ANY DISAPPOINTMENTS?
A. Some of our paging holdings proved to be disappointing, but the industry
as a whole was plagued by a number of developments during the past six
months. First, investors became concerned that pager sales would decline in
light of new competitive products. Second, there was the bankruptcy of a
high-profile paging company and the failure of another company to
successfully introduce a new product. While the fund did not own either of
those troubled pagers, it did hold others that appeared to fall in price in
sympathy, including Arch Communications. While I reduced the fund's stake
in Arch, I continued to hold onto Pagemart because it continued to be one
of the fastest-growing paging companies and one with a strategy that I
believe should distinguish it from its competitors.
Q. IN ADDITION TO PAGING COMPANIES, THE FUND ALSO HAD SIGNIFICANT HOLDINGS
IN OTHER TELECOMMUNICATIONS-RELATED COMPANIES. WHAT IS THE ATTRACTION TO
THESE COMPANIES?
A. The growth potential for many telecommunications companies is
significant and, in my view, will be independent of the economic
environment. The companies I emphasized have fast-growing businesses in
fast-growing industries. For example, the competitive local exchange
companies - including Intermedia Communications, Nextlink, GST USA, Brooks
Fiber and McLeodUSA - gained market share in the $100 billion local
telephone market at the expense of regional Bell operating companies.
Another large telecommunications holding is McCaw International, which is a
subsidiary of Nextel and owns enhanced specialized mobile radio licenses in
Latin America and Asia used for dispatch, messaging and voice purposes.
Q. WHAT'S YOUR OUTLOOK?
A. The market is at risk to a slowing economy that likely would hurt the
weakest companies in the high-yield market. I will probably focus on
improving the overall credit quality of the fund, while concentrating the
fund's aggressive holdings in situations I believe have strong fundamental
momentum and an attractive risk/reward tradeoff.
FUND FACTS
GOAL: income and share price stability by
investing in high-quality, short-term
investments
START DATE: April 1, 1982
SIZE: as of June 30, 1997, more than
$1.0 billion
MANAGER: Robert Duby, since April 1997;
joined Fidelity in 1982
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
CORPORATE BONDS - 70.2%
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
CONVERTIBLE BONDS - 0.7%
MEDIA & LEISURE - 0.6%
RESTAURANTS - 0.6%
Boston Chicken, Inc.
4 1/2%, 2/1/04 B2 $ 14,000,000 $ 10,640,000
RETAIL & WHOLESALE - 0.1%
RETAIL & WHOLESALE, MISCELLANEOUS - 0.1%
Corporate Express, Inc.
4 1/2%, 7/1/00 B3 1,500,000 1,335,000
UTILITIES - 0.0%
TELEPHONE SERVICES - 0.0%
GST Telecommunications, Inc.
0%, 12/15/05 (d)(g) - 630,000 409,500
TOTAL CONVERTIBLE BONDS 12,384,500
NONCONVERTIBLE BONDS - 69.5%
AEROSPACE & DEFENSE - 1.3%
AEROSPACE & DEFENSE - 0.5%
Alliant Techsystems, Inc.
11 3/4%, 3/1/03 B2 40,000 44,100
Fairchild Corp.
12%, 10/15/01 Caa 1,945,000 1,964,450
RHI Holdings, Inc.
11 7/8%, 3/1/99 B2 3,160,000 3,160,000
Wyman-Gordon Co.
10 3/4%, 3/15/03 Ba3 4,740,000 5,071,800
10,240,350
DEFENSE ELECTRONICS - 0.5%
Tracor, Inc.
8 1/2%, 3/1/07 B1 9,430,000 9,524,300
SHIP BUILDING & REPAIR - 0.3%
Newport News Shipbuilding, Inc.:
8 5/8%, 12/1/06 Ba2 670,000 691,775
9 1/4%, 12/1/06 B1 4,650,000 4,847,625
5,539,400
TOTAL AEROSPACE & DEFENSE 25,304,050
BASIC INDUSTRIES - 10.7%
CHEMICALS & PLASTICS - 2.6%
Atlantis Group, Inc.
11%, 2/15/03 B2 7,785,000 8,038,013
BPC Holdings Corp.
12 1/2%, 6/15/06 Caa 350,000 381,500
Foamex LP/Foamex Capital
Corp. 9 7/8%, 6/15/07 (g) B3 5,840,000 5,913,000
Freedom Chemical Co.
10 5/8%, 10/15/06 B3 6,260,000 6,385,200
Pioneer Americas Acquisition
Corp. 9 1/4%, 6/15/07 (g) B1 5,780,000 5,693,300
Plastic Specialties & Technologies,
Inc. 11 1/4%, 12/1/03 B3 5,990,000 6,409,300
Sterling Chemicals Holdings,
Inc. 11 3/4%, 8/15/06 B3 15,560,000 16,765,900
49,586,213
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
IRON & STEEL - 1.0%
GS Technologies Operating, Inc.
12 1/4%, 10/1/05 B2 $ 3,410,000 $ 3,733,950
Republic Engineered Steels, Inc.
9 7/8%, 12/15/01 Caa 7,810,000 7,282,825
WCI Steel, Inc. 10%, 12/1/04 B2 8,070,000 8,392,800
19,409,575
METALS & MINING - 0.6%
Commonwealth Aluminum Corp.
10 3/4%, 10/1/06 B2 10,110,000 10,615,500
PAPER & FOREST PRODUCTS - 6.5%
Asia Pulp & Paper Finance II
Mauritius Ltd.
12%, 3/15/04 (g) B3 11,785,000 12,079,625
American Pad & Paper Co.,
Inc. 13%, 11/15/05 B3 2,290,000 2,679,300
Container Corp. of America:
10 3/4%, 5/1/02 B1 50,000 54,688
gtd. 9 3/4%, 4/1/03 B1 490,000 518,175
gtd. 11 1/4%, 5/1/04 B1 150,000 164,250
Crown Paper Co.
11%, 9/1/05 B3 3,780,000 3,789,450
Doman Industries Ltd. yankee
8 3/4%, 3/15/04 B1 11,660,000 11,251,900
Florida Coast Paper Co.
LLC\Florida Coast Paper
Finance Corp., Series B,
12 3/4%, 6/1/03 Caa 3,110,000 3,211,075
Gaylord Container Corp.
11 1/2%, 5/15/01 B3 1,160,000 1,219,450
Indah Kiat International
Finance Co. BV
12 1/2%, 6/15/06 Ba2 2,680,000 3,041,800
Mail-Well Corp.
10 1/2%, 2/15/04 B 1,640,000 1,705,600
Malette, Inc. yankee
12 1/4%, 7/15/04 Ba3 1,340,000 1,500,800
Repap Wisconsin, Inc.:
9 1/4%, 2/1/02 B2 11,170,000 11,225,850
9 7/8%, 5/1/06 Caa 12,510,000 12,603,825
Repap New Brunswick, Inc.
yankee 10 5/8%, 4/15/05 Caa 5,110,000 4,816,175
Riverwood International
10 7/8%, 4/1/08 Caa 8,750,000 7,940,625
SD Warren Co., Series B,
12%, 12/15/04 B1 7,330,000 8,209,600
Specialty Paperboard, Inc.
9 3/8%, 10/15/06 B1 5,000,000 5,062,500
Stone Container Corp.:
12 5/8%, 7/15/98 B2 10,000,000 10,512,500
10 3/4%, 10/1/02 B1 10,510,000 11,088,050
11 7/8%, 8/1/16 B2 8,400,000 9,072,000
Tembec Finance Corp. yankee
9 7/8%, 9/30/05 B1 1,365,000 1,405,950
123,153,188
TOTAL BASIC INDUSTRIES 202,764,476
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
DURABLES - 2.4%
AUTOS, TIRES, & ACCESSORIES - 0.6%
Jordan Industries, Inc.
10 3/8%, 8/1/03 B3 $ 11,895,000 $ 12,311,325
HOME FURNISHINGS - 0.9%
Guitar Center Management
Co., Inc. 11%, 7/1/06 B2 2,527,000 2,767,065
Interlake Corp.
12 1/8%, 3/1/02 B3 10,275,000 10,763,063
Knoll, Inc. 10 7/8%, 3/15/06 B1 3,426,000 3,790,013
17,320,141
TEXTILES & APPAREL - 0.9%
Dan River, Inc.
10 1/8%, 12/15/03 B3 4,700,000 4,982,000
GFSI, Inc.
9 5/8%, 3/1/07 (g) B3 1,410,000 1,424,100
Synthetic Industries, Inc.
9 1/4%, 2/15/07 (g) B2 9,610,000 9,730,125
16,136,225
TOTAL DURABLES 45,767,691
ENERGY - 3.8%
ENERGY SERVICES - 0.8%
DI Industries, Inc.
8 7/8%, 7/1/07 B1 3,875,000 3,816,875
McDermott International, Inc.
9 3/8%, 3/15/02 Ba3 11,680,000 12,246,363
16,063,238
OIL & GAS - 3.0%
Belden & Blake Corp.
9 7/8%, 6/15/07 (g) B3 5,805,000 5,746,950
Chesapeake Energy Corp.
10 1/2%, 6/1/02 Ba2 690,000 727,950
Cross Timbers Oil Co.
9 1/4%, 4/1/07 B2 8,000,000 8,260,000
Flores & Rucks, Inc.:
13 1/2%, 12/1/04 B1 390,000 468,975
9 3/4%, 10/1/06 B3 9,860,000 10,303,700
Harcor Energy, Inc.
14 7/8%, 7/15/02 B3 13,060,000 15,410,800
Ocean Energy, Inc.
8 7/8%, 7/15/07 (g) B3 10,850,000 10,850,000
United Meridian Corp.
10 3/8%, 10/15/05 B2 190,000 206,150
United Refining Co.
10 3/4%, 6/15/07 (g) B2 4,050,000 4,009,500
55,984,025
TOTAL ENERGY 72,047,263
FINANCE - 4.1%
ASSET-BACKED SECURITIES - 0.4%
Airplanes Pass Through Trust
10 7/8%, 3/15/19 Ba2 6,710,000 7,750,050
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
CREDIT & OTHER FINANCE - 1.8%
APP International Finance Co.
BV yankee
11 3/4%, 10/1/05 Ba3 $ 2,165,000 $ 2,392,325
GST Equipment Funding, Inc.
13 1/4%, 5/1/07 (g) - 10,360,000 11,085,200
Imperial Credit Capital Trust I
10 1/4%, 6/14/02 (g) B2 4,870,000 4,882,175
Imperial Credit Industries, Inc.
9 7/8%, 1/15/07 B2 11,200,000 11,088,000
PTC International Finance BV
0%, 7/1/07 (d)(g) B3 3,440,000 2,085,500
Polytama International Finance
BV 11 1/4%, 6/15/07 B2 2,750,000 2,839,375
34,372,575
INSURANCE - 0.4%
Integon Corp.:
8%, 8/15/99 B1 1,500,000 1,526,250
9 1/2%, 10/15/01 B1 5,200,000 5,603,000
7,129,250
SAVINGS & LOANS - 1.5%
First Nationwide Holdings, Inc.
10 5/8%, 10/1/03 Ba3 7,240,000 7,855,400
First Nationwide Parent Holdings
Ltd. 12 1/2%, 4/15/03 B3 18,180,000 20,270,700
28,126,100
SECURITIES INDUSTRY - 0.0%
ECM Corp. extendible
14%, 6/1/02 (g) - 235,942 259,537
TOTAL FINANCE 77,637,512
HEALTH - 2.8%
DRUGS & PHARMACEUTICALS - 0.1%
Leiner Health Products, Inc.
9 5/8%, 7/1/07 (g) B3 1,150,000 1,164,375
MEDICAL EQUIPMENT & SUPPLIES - 1.1%
Wright Medical Technology, Inc.
10 3/4%, 7/1/00 B3 20,920,000 21,286,089
MEDICAL FACILITIES MANAGEMENT - 1.6%
Integrated Health Services, Inc. (g):
11%, 4/30/06 (e) B1 4,890,000 5,256,750
9 1/2%, 9/15/07 B1 3,460,000 3,537,850
Mariner Health Group, Inc.
9 1/2%, 4/1/06 B2 1,180,000 1,215,400
Tenet Healthcare Corp.
8 5/8%, 1/15/07 Ba3 20,370,000 20,675,550
30,685,550
TOTAL HEALTH 53,136,014
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
INDUSTRIAL MACHINERY & EQUIPMENT - 3.1%
ELECTRICAL EQUIPMENT - 1.1%
Amphenol Corp.
9 7/8%, 5/15/07 B2 $ 1,680,000 $ 1,730,400
Motors & Gears, Inc.
10 3/4%, 11/15/06 B3 19,030,000 19,600,900
21,331,300
INDUSTRIAL MACHINERY & EQUIPMENT - 1.7%
Calmar, Inc.
11 1/2%, 8/15/05 B3 1,570,000 1,664,200
Continental Global Group, Inc.
11%, 4/1/07 (g) B2 4,000,000 4,200,000
Goss Graphic System, Inc.
12%, 10/15/06 B2 9,630,000 10,593,000
International Knife & Saw, Inc.
11 3/8%, 11/15/06 B3 2,460,000 2,626,050
MVE, Inc. 12 1/2%, 2/15/02 B3 5,735,000 5,878,375
Thermadyne Holdings Corp.:
10 1/4%, 5/1/02 B1 1,484,000 1,537,795
10 3/4%, 11/1/03 B3 5,226,000 5,421,975
31,921,395
POLLUTION CONTROL - 0.3%
Allied Waste of North America, Inc.
10 1/4%, 12/1/06 (g) B3 4,750,000 5,082,500
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 58,335,195
MEDIA & LEISURE - 17.4%
BROADCASTING - 7.1%
Adelphia Communications Corp.:
9 1/2%, 2/15/04 B3 990,000 940,500
9 7/8%, 3/1/07 (g) B3 20,610,000 19,888,650
Benedek Communications Corp.
0%, 5/15/06 (d) - 11,830,000 7,127,575
Capstar Broadcasting Partners,
Inc. 0%, 2/1/09 (d)(g) CCC 12,830,000 8,243,275
Capstar Radio Broadcasting
Partners, Inc.
9 1/4%, 7/1/07 (g) - 9,710,000 9,394,425
Chancellor Radio Broadcasting
Co. 8 3/4%, 6/15/07 (g) B3 8,640,000 8,532,000
Citadel Broadcasting Co.
10 1/4%, 7/1/07 (g) B3 5,550,000 5,550,000
CS Wireless Systems, Inc.
0%, 3/1/06 (d) Caa 12,770,000 3,064,800
Diamond Cable Communications
PLC yankee
0%, 9/30/04 (d) B3 2,030,000 1,639,225
Echostar DBS Corp.
12 1/2%, 7/1/02 (g) Caa 7,250,000 7,186,563
Echostar Satellite Broadcasting
Corp. 0%, 3/15/04 (d) Caa 5,410,000 3,841,100
Echostar Communications Corp.
0%, 6/1/04 (d) B2 17,750,000 14,910,000
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
Intermedia Capital Partners IV
L P/Intermedia Partners IV
Capital Corp.
11 1/4%, 8/1/06 B2 $ 590,000 $ 634,988
Jacor Communications Co.:
9 3/4%, 12/15/06 B2 3,190,000 3,317,600
8 3/4%, 6/15/07 (g) B2 5,260,000 5,194,250
Lenfest Communications, Inc.:
8 3/8%, 11/1/05 Ba3 2,710,000 2,669,350
10 1/2%, 6/15/06 B2 1,660,000 1,809,400
Olympus Communications LP/
Olympus Capital Corp
10 5/8%, 11/15/06 B1 5,550,000 5,799,750
SFX Broadcasting, Inc.
10 3/4%, 5/15/06 B3 3,845,000 4,142,988
Telewest PLC
0%, 10/1/07 (d) B1 16,990,000 12,275,275
UIH Australia/PAC, Inc., Series B,
0%, 5/15/06 (d) B2 13,875,000 8,394,375
134,556,089
ENTERTAINMENT - 2.6%
AMC Entertainment, Inc.
9 1/2%, 3/15/09 (g) B2 10,940,000 11,104,100
AMF Group, Inc.
0%, 3/15/06 (d) B2 12,280,000 8,749,500
Cinemark USA, Inc.
9 5/8%, 8/1/08 B2 8,240,000 8,363,600
Viacom, Inc. 8%, 7/7/06 B1 21,700,000 21,049,000
49,266,200
LEISURE DURABLES & TOYS - 1.7%
Coleman Escrow Corp. secured (g):
1st priority 0%, 5/15/01 B3 20,350,000 12,820,500
2nd priority 0%, 5/15/01 Caa 3,700,000 2,136,750
Icon Health And Fitness, Inc.
13%, 7/15/02 B3 12,750,000 14,311,875
Icon Fitness Corp.
0%, 11/15/06 (d) CCC+ 5,650,000 3,079,250
32,348,375
LODGING & GAMING - 4.1%
American Skiing Co.
12%, 7/15/06 B3 7,480,000 7,854,000
Casino Magic Financial Corp.
11 1/2%, 10/15/01 B1 3,760,000 3,290,000
HMH Properties, Inc.
9 1/2%, 5/15/05 Ba3 14,610,000 15,230,925
Hollywood Casino Corp.
12 3/4%, 11/1/03 B2 6,050,000 6,413,000
Horseshoe Gaming LLC
12 3/4%, 9/30/00 B1 15,220,000 17,008,350
KSL Recreation Group, Inc.
10 1/4%, 5/1/07 (g) B3 5,570,000 5,792,800
Prime Hospitality Corp.
9 3/4%, 4/1/07 - 5,190,000 5,462,475
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
MEDIA & LEISURE - CONTINUED
LODGING & GAMING - CONTINUED
Sun International Hotels Ltd./
Sun International North
America, Inc. yankee
9%, 3/15/07 Ba3 $ 15,030,000 $ 15,255,450
Wyndham Hotel Corp.
10 1/2%, 5/15/06 B2 1,920,000 2,145,600
78,452,600
PUBLISHING - 0.8%
Big Flower Press Holdings, Inc.
8 7/8%, 7/1/07 (g) - 16,300,000 16,014,750
RESTAURANTS - 1.1%
AFC Enterprises, Inc.
10 1/4%, 5/15/07 (g) B3 11,420,000 11,362,900
Host Marriott Travel Plazas, Inc.
9 1/2%, 5/15/05 B1 8,790,000 9,141,600
20,504,500
TOTAL MEDIA & LEISURE 331,142,514
NONDURABLES - 1.4%
FOODS - 0.1%
International Home Foods, Inc.
10 3/8%, 11/1/06 B2 2,830,000 2,914,900
HOUSEHOLD PRODUCTS - 1.2%
Renaissance Cosmetic, Inc.
11 3/4%, 2/15/04 B3 10,000,000 10,350,000
Revlon Consumer Products Corp.
10 1/2%, 2/15/03 B3 11,470,000 12,215,550
22,565,550
TOBACCO - 0.1%
North Atlantic Trading, Inc.
11%, 6/15/04 (g) B3 1,810,000 1,837,150
TOTAL NONDURABLES 27,317,600
RETAIL & WHOLESALE - 4.5%
APPAREL STORES - 1.5%
Lamonts Apparel, Inc.
10 1/4%, 11/1/99
pay-in-kind (b)(g) - 2,201,000 88,040
Mothers Work, Inc.
12 5/8%, 8/1/05 B3 21,970,000 22,684,025
Specialty Retailers, Inc. (g):
8 1/2%, 7/15/05 Ba3 4,480,000 4,468,800
9%, 7/15/07 B2 1,990,000 1,980,050
29,220,915
GENERAL MERCHANDISE STORES - 0.0%
K mart Corp. 8.70%, 8/1/97 Ba2 250,000 250,625
GROCERY STORES - 3.0%
Food 4 Less Holdings, Inc.
13 5/8%, 6/15/07 - 1,826,493 2,135,207
Grand Union Co.
12%, 9/1/04 Caa 7,270,000 5,379,800
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Pantry, Inc. 12%, 11/15/00 B2 $ 660,000 $ 676,500
Pathmark Stores, Inc.:
11 5/8%, 6/15/02 Caa 10,760,000 10,894,500
9 5/8%, 5/1/03 B3 1,960,000 1,891,400
Penn Traffic Co.:
10 1/4%, 2/15/02 B3 7,850,000 6,751,000
8 5/8%, 12/15/03 B3 3,780,000 3,052,350
10 3/8%, 10/1/04 B3 3,860,000 3,281,000
11 1/2%, 4/15/06 B3 3,180,000 2,814,300
Pueblo Xtra International, Inc.:
9 1/2%, 8/1/03 B3 11,340,000 10,858,050
9 1/2%, 8/1/03 (g) B3 3,540,000 3,416,100
Randalls Food Markets, Inc.
9 3/8%, 7/1/07 (g) B2 5,080,000 5,060,950
56,211,157
RETAIL & WHOLESALE, MISCELLANEOUS - 0.0%
Corporate Expess, Inc., Series B,
9 1/8%, 3/15/04 B2 1,070,000 1,070,000
TOTAL RETAIL & WHOLESALE 86,752,697
SERVICES - 4.1%
LEASING & RENTAL - 0.0%
GPA Holland 8.94%, 2/16/99 - 500,000 513,750
PRINTING - 1.2%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa 21,300,000 21,885,750
SERVICES - 2.9%
Orion Network Systems, Inc. unit:
11 1/4%, 1/15/07 B2 5,585,000 5,710,663
0%, 1/15/07 (d) B2 45,930,000 26,180,100
Outsourcing Solutions, Inc.
11%, 11/1/06 B3 3,960,000 4,296,600
Protection One Alarm Monitoring,
Inc. 13 5/8%, 6/30/05 Caa 18,300,000 18,757,500
54,944,863
TOTAL SERVICES 77,344,363
TECHNOLOGY - 2.9%
COMMUNICATIONS EQUIPMENT - 0.3%
Intermedia Communications,
Inc. 0%, 5/15/06 (d) B2 6,430,000 4,420,625
COMPUTER SERVICES & SOFTWARE - 0.5%
Verio, Inc. 13 1/2%, 6/15/04
unit (g) - 10,050,000 10,100,250
COMPUTERS & OFFICE EQUIPMENT - 1.6%
Dictaphone Corp.
11 3/4%, 8/1/05 B3 14,530,000 13,367,600
Exide Electronics Group, Inc.
11 1/2%, 5/15/06 B3 6,950,000 7,453,875
Unisys Corp.:
10 5/8%, 10/1/99 B1 4,080,000 4,212,600
12%, 4/15/03 B1 4,400,000 4,763,000
11 3/4%, 10/15/04 B1 1,020,000 1,101,600
30,898,675
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
TECHNOLOGY - CONTINUED
ELECTRONIC INSTRUMENTS - 0.3%
Wavetek Corp.
10 1/8%, 6/15/07 (g) B3 $ 5,270,000 $ 5,375,400
ELECTRONICS - 0.2%
Fairchild Semiconductor Corp.
10 1/8%, 3/15/07 (g) B2 470,000 495,850
Viasystems, Inc.
9 3/4%, 6/1/07 (g) B3 3,150,000 3,205,125
3,700,975
TOTAL TECHNOLOGY 54,495,925
TRANSPORTATION - 1.8%
AIR TRANSPORTATION - 0.2%
US Air Inc., pass through trust
8 5/8%, 9/1/98 B1 5,000,000 5,075,000
RAILROADS - 1.2%
TFM SA de CV (g):
10 1/4%, 6/15/07 B2 2,520,000 2,564,100
0%, 6/15/09 (d) B2 8,660,000 5,001,150
Transtar Holdings LP/Transtar
Capital Corp. 0%,
12/15/03 (d) B- 17,941,000 15,249,850
22,815,100
TRUCKING & FREIGHT - 0.4%
Greyhound Lines, Inc.
11 1/2%, 4/15/07 (g) B3 6,860,000 7,305,900
TOTAL TRANSPORTATION 35,196,000
UTILITIES - 9.2%
CELLULAR - 6.0%
Arch Communications Group,
Inc. 0%, 3/15/08 (d) B3 12,070,000 6,366,925
Clearnet Communications, Inc.
yankee 0%, 12/15/05 (d) B3 11,420,000 7,508,650
Fonorola, Inc.
12 1/2%, 8/15/02 B2 1,020,000 1,122,000
McCaw International Ltd. unit
0%, 4/15/07 (d)(g) CCC 27,110,000 13,012,800
Microcell Telecommunications,
Inc. 0%, 6/1/06 (d) B3 28,060,000 15,713,600
Millicom International Cellular
SA 0%, 6/1/06 (d) B3 49,000,000 35,035,000
Mobile Telecommunications
Technologies Corp.
13 1/2%, 12/15/02 B3 10,825,000 11,420,375
Omnipoint Corp.:
11 5/8%, 8/15/06 B2 2,150,000 2,031,750
Series A, 11 5/8%, 8/15/06 B3 5,980,000 5,651,100
Pagemart, Inc.
0%, 11/1/03 (d) - 3,250,000 2,811,250
Pagemart Nationwide, Inc.
0%, 2/1/05 (d) - 7,070,000 5,267,150
Telesystem International Wireless,
Inc. 0%, 6/30/07 (d)(g) B- 7,670,000 4,084,275
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
USA Mobile Communications,
Inc. II 9 1/2%, 2/1/04 B2 $ 3,970,000 $ 3,692,100
113,716,975
ELECTRIC UTILITY - 0.3%
CMS Energy Corp.
8 1/8%, 5/15/02 Ba3 5,680,000 5,722,600
TELEPHONE SERVICES - 2.9%
Brooks Fiber Properties, Inc.
11 7/8%, 11/1/06 - 5,730,000 3,695,850
GST USA, Inc.
0%, 12/15/05 (d) - 11,110,000 6,888,200
Hyperion Telecommunications,
Inc., Series B,
0%, 4/15/03 (d) - 12,560,000 6,311,400
McLeodUSA, Inc.
0%, 3/1/07 (d)(g) B3 11,000,000 7,012,500
Nextlink Communications, Inc.
12 1/2%, 4/15/06 - 700,000 743,750
RSL Communications Ltd./
RSL Communications PLC
12 1/4%, 11/15/06 - 9,140,000 9,299,950
Shared Technologies Fairchild
Communications Corp.
0%, 3/1/06 (d) Caa 18,290,000 16,323,825
Teleport Communications
Group, Inc.:
8%, 8/1/05 B1 5,550,000 4,002,938
9 7/8%, 7/1/06 B1 310,000 330,925
54,609,338
TOTAL UTILITIES 174,048,913
TOTAL NONCONVERTIBLE BONDS 1,321,290,213
TOTAL CORPORATE BONDS
(Cost $1,309,051,600) 1,333,674,713
COMMERCIAL MORTGAGE SECURITIES - 0.0%
Lennar Central Partners LP
Series 1995-1 Class F,
11.70%, 5/15/05 (g) - 63,357 63,951
Meritor Mortgage Security Corp.
Series 1987-1 Class B,
9.40%, 2/1/00 (b)(g) - 1,350,000 267,165
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $220,926) 331,116
COMMON STOCKS - 7.9%
SHARES
AEROSPACE & DEFENSE - 0.3%
Fairchild Corp. Class A 289,000 5,202,000
BASIC INDUSTRIES - 0.5%
CHEMICALS & PLASTICS - 0.1%
Foamex International, Inc. (a) 182,800 2,399,250
Foamex-JPS Automotive LP/Foamex
JPS Capital Corp. warrants 7/1/99 (a) 530 14,840
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
BASIC INDUSTRIES - CONTINUED
CHEMICALS & PLASTICS - CONTINUED
Sterling Chemical Holdings
warrants 8/15/08 (a) 340 $ 11,900
2,425,990
PAPER & FOREST PRODUCTS - 0.4%
Gaylord Container Corp. Class A (a) 860,600 6,723,438
SDW Holdings Corp. (a):
warrants 12/15/06 7,609 38,045
Series B warrants 12/16/06 4,450 75,650
6,837,133
TOTAL BASIC INDUSTRIES 9,263,123
DURABLES - 0.1%
TEXTILES & APPAREL - 0.1%
Arena Brands Holdings Corp. Class B 48,889 1,974,630
HM/Hat Brands Trust Class I unit (a)(f) 340,000 -
1,974,630
ENERGY - 1.0%
OIL & GAS - 1.0%
Harcor Energy, Inc. (a) 469,000 2,814,000
Harcor Energy, Inc.
warrants 7/24/00 (a) 330,000 742,500
Ocean Energy, Inc. (a) 304,200 14,069,250
Snyder Oil Corp. 50,000 918,750
18,544,500
FINANCE - 0.0%
SECURITIES INDUSTRY - 0.0%
ECM Corp. LP (g) 3,000 300,000
HEALTH - 0.0%
MEDICAL EQUIPMENT & SUPPLIES - 0.0%
Wright Medical Technology,
Inc. warrants 6/30/03 (a) 3,212 321,200
INDUSTRIAL MACHINERY & EQUIPMENT - 0.7%
POLLUTION CONTROL - 0.7%
Allied Waste Industries, Inc. (a) 717,300 12,463,088
MEDIA & LEISURE - 3.3%
BROADCASTING - 1.9%
American Radio Systems Corp. Class A (a) 216,900 8,648,888
Benedek Communications Corp.
warrants 7/1/00 (a) 57,600 115,200
CS Wireless Systems, Inc. (a)(g) 3,514 -
Jacor Communications, Inc. Class A (a) 310,600 11,880,450
PanAmSat Corp. (a) 342,400 9,929,600
United International Holdings, Inc.
Class A (a) 441,100 4,576,413
35,150,551
ENTERTAINMENT - 0.0%
Live Entertainment, Inc. (a)(f):
$2.00 warrants 3/28/98 232,000 11,600
$2.72 warrants 3/28/98 221,765 11,088
22,688
LEISURE DURABLES & TOYS - 0.1%
IHF Capital, Inc. (a)(g):
Series H warrants 11/15/04 10,250 1,691,250
Series I warrants 11/14/99 5,890 323,950
2,015,200
SHARES VALUE (NOTE 1)
LODGING & GAMING - 1.0%
Bally Gaming International, Inc.
warrants 7/29/98 (a) 90,000 $ 112,500
Host Marriott Corp. (a) 651,300 11,601,281
Motels of America, Inc. (a) 3,000 93,000
Showboat, Inc. 437,300 7,625,419
19,432,200
PUBLISHING - 0.3%
Big Flower Press Holdings, Inc. (a) 304,200 6,312,150
TOTAL MEDIA & LEISURE 62,932,789
NONDURABLES - 0.3%
HOUSEHOLD PRODUCTS - 0.0%
Renaissance Cosmetics, Inc.
warrants 8/31/06 (a)(g) 12,750 1,402,500
TOBACCO - 0.3%
North Atlantic Trading, Inc.
unit (a)(g) 210,000 5,302,500
TOTAL NONDURABLES 6,705,000
RETAIL & WHOLESALE - 0.2%
APPAREL STORES - 0.1%
Lamonts Apparel, Inc. (a) 35,870 3,364
Lamonts Apparel, Inc.
warrants 6/10/99 (a) 66,214 -
Mothers Work (a)(h) 209,100 1,515,975
1,519,339
GROCERY STORES - 0.1%
Food 4 Less Holdings, Inc.
warrants 12/31/02 (a)(f) 155,047 2,248,182
RETAIL & WHOLESALE, MISCELLANEOUS - 0.0%
Town & Country Jewelry Manufacturing
Corp. Class A (a) 8,374 2,094
TOTAL RETAIL & WHOLESALE 3,769,615
SERVICES - 0.6%
Orion Network Systems, Inc. (a) 358,700 3,945,700
Protection One, Inc. (a) 469,200 6,334,200
Protection One, Inc.
warrants 6/30/05 (a) 74,560 708,320
Vestar/LPA Investment Corp. (a) 5,177 103,540
11,091,760
TECHNOLOGY - 0.1%
COMPUTERS & OFFICE EQUIPMENT - 0.1%
Exide Electronics Group, Inc. (a) 117,600 1,389,150
Exide Electronics Group, Inc.
warrants 3/15/06 (a)(g) 6,770 169,250
1,558,400
UTILITIES - 0.8%
CELLULAR - 0.8%
Intercel, Inc. warrants 2/1/06 (a) 56,448 282,240
Microcell Telecommunications, Inc. (a):
warrants 6/1/06 112,240 1,403,000
conditional warrants 6/1/06 112,240 70,150
Pagemart Wireless, Inc. Class A (a) 1,446,000 12,291,000
14,046,390
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - CONTINUED
TELEPHONE SERVICES - 0.0%
Hyperion Telecommunications, Inc.
warrants 4/15/01 (a)(g) 12,560 $ 376,800
NextLink Communications, Inc.
warrants 2/1/09 (a) 663,204 6,632
RSL Communications Ltd./RSL
Communications PLC
warrants 11/15/06 (a) 9,140 274,200
657,632
TOTAL UTILITIES 14,704,022
TOTAL COMMON STOCKS
(Cost $121,699,279) 148,830,127
PREFERRED STOCKS - 16.2%
CONVERTIBLE PREFERRED STOCKS - 0.9%
MEDIA & LEISURE - 0.9%
BROADCASTING - 0.2%
Benedek Communications Corp. 15% (a) 33,600 3,679,200
LODGING & GAMING - 0.7%
Host Marriott Financial Trust
$3.375 (g) 251,200 14,538,200
TOTAL MEDIA & LEISURE 18,217,400
RETAIL & WHOLESALE - 0.0%
RETAIL & WHOLESALE, MISCELLANEOUS - 0.0%
Town & Country Corp. pay-in-kind 128 64
TOTAL CONVERTIBLE PREFERRED STOCKS 18,217,464
NONCONVERTIBLE PREFERRED STOCKS - 15.3%
BASIC INDUSTRIES - 0.1%
PAPER & FOREST PRODUCTS - 0.1%
SDW Holdings Corp. 15% (g) 44,500 1,596,438
FINANCE - 1.0%
CREDIT & OTHER FINANCE - 0.5%
American Annuity Group Capital
Trust II 8 3/4% 8,910 8,865,450
SAVINGS & LOANS - 0.5%
California Federal Bank FSB:
Series B, 10 5/8% 15,610 1,713,198
11 1/2% 1,778 199,136
California Federal Preferred Capital Corp.
9 1/8% 308,750 7,873,125
9,785,459
TOTAL FINANCE 18,650,909
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
ELECTRICAL EQUIPMENT - 0.1%
Ampex Corp. 8% (a)(f) 1,589 1,235,114
MEDIA & LEISURE - 9.6%
BROADCASTING - 9.4%
American Radio Systems Corp.
11 3/8% pay-in-kind 133,856 14,255,664
Cablevision System Corp.:
11 1/8% depositary shares pay-in-kind 140,667 14,137,034
Series H, $11.75 pay-in-kind 157,433 16,294,316
SHARES VALUE (NOTE 1)
Capstar Broadcasting Partners, Inc.
12% (g) 35,630 $ 3,607,538
Chancellor Radio Broadcasting Co.:
12% pay-in-kind (g) 10,317 1,114,236
Series A, 12 1/4% 64,300 8,198,250
Citadel Broadcasting Co.
13 1/4% pay-in-kind (g) 84,000 8,400,000
PanAmSat Corp. 12 3/4% pay-in-kind 43,047 52,517,340
Sinclair Capital 11 5/8%, (g) 75,000 7,912,500
Time Warner, Inc., Series M,
10 1/4% pay-in-kind 47,834 52,856,570
179,293,448
PUBLISHING - 0.2%
K-III Communications Corp.:
Series B, $11.625 pay-in-kind 29,748 3,246,251
Series D, $10 5,400 544,050
3,790,301
TOTAL MEDIA & LEISURE 183,083,749
NONDURABLES - 0.6%
HOUSEHOLD PRODUCTS - 0.6%
Renaissance Cosmetics, Inc.
pay-in-kind 14% 14,156 12,457,280
SERVICES - 0.3%
Loewen Group Capital LP,
Series A, $2.36 200,000 5,300,000
TECHNOLOGY - 1.5%
COMMUNICATIONS EQUIPMENT - 1.5%
Intermedia Communications, Inc.
pay-in-kind 13 1/2% 27,596 28,492,870
UTILITIES - 2.1%
TELEPHONE SERVICES - 2.1%
ICG Holdings, Inc. 14 1/4% pay-in-kind 3,713 3,954,345
NextLink Communications, Inc.
pay-in-kind 14% 684,175 35,406,056
39,360,401
TOTAL NONCONVERTIBLE PREFERRED STOCKS 290,176,761
TOTAL PREFERRED STOCKS
(Cost $289,883,326) 308,394,225
CASH EQUIVALENTS - 5.7%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account dated
6/30/97 due 7/1/97:
at 5 7/8% $ 11,175,824 11,174,000
at 5.93% 97,367,036 97,351,000
TOTAL CASH EQUIVALENTS 108,525,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $1,829,380,131) $ 1,899,755,181
LEGEND
1. Non-income producing
2. Non-income producing - issuer filed for protection under the Federal
Bankruptcy Code or is in default of interest payment.
3. Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
4. Debt obligation initially issued in zero coupon form which converts to
coupon form at a specified rate and date.
5. Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date.
6. 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)
Ampex Corp. 8% 2/16/95 $ 834,225
Food 4 Less Holdings, 12/30/92 $ 229,281
Inc. warrants 12/31/02 to 5/17/93
HM/Hat Brands Trust
Class I unit 2/22/94 $ 340,000
Live Entertainment, Inc.:
$2.00 warrants 3/28/98 3/23/93 $ 220,717
$2.72 warrants 3/28/98 3/23/93 $ 131,863
7. 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 $338,705,668 or 17.7% of net
assets.
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 $ - $ - $ - $1,515,975
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $1,303,270,433 and $1,021,325,332, respectively, of which U.S.
government and government agency obligations aggregated $49,578,125 and
$97,601,563, 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 $2,362 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:
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 0.0% AAA, AA, A 0.0%
Baa 0.0% BBB 0.0%
Ba 5.5% BB 5.9%
B 50.4% B 49.6%
Caa 6.7% CCC 5.2%
Ca, C 0.0% CC, C 0.9%
D 0.0%
The percentage not rated by both S&P and Moody's amounted to 5.2%. FMR has
determined that unrated debt securities that are lower quality account for
5.2% of the total value of investment in securities.
INCOME TAX INFORMATION
At June 30, 1997, the aggregate cost of investment securities for income
tax purposes was $1,829,386,624. Net unrealized appreciation aggregated
$70,368,557, of which $95,952,177 related to appreciated investment
securities and $25,583,620 related to depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in securities, at value (including repurchase agreements of $108,525,000) (cost $1,829,380,131) - $ 1,899,755,181
See accompanying schedule
Cash 12,332,427
Receivable for investments sold 17,307,645
Dividends receivable 3,882,207
Interest receivable 26,709,841
Other receivables 13,035
TOTAL ASSETS 1,960,000,336
LIABILITIES
Payable for investments purchased $ 45,858,116
Payable for fund shares redeemed 1,878,115
Accrued management fee 935,372
Other payables and 206,898
accrued expenses
TOTAL LIABILITIES 48,878,501
NET ASSETS $ 1,911,121,835
Net Assets consist of:
Paid in capital $ 1,732,723,161
Undistributed net investment income 73,506,048
Accumulated undistributed net realized gain (loss) on investments and foreign currency transactions 34,517,576
Net unrealized appreciation (depreciation) on investments 70,375,050
NET ASSETS, for 153,746,684 $ 1,911,121,835
shares outstanding
NET ASSET VALUE, offering price $12.43
and redemption price per share ($1,911,121,835 (divided by)
153,746,684 shares)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $ 13,388,030
Dividends
Interest 67,053,640
TOTAL INCOME 80,441,670
EXPENSES
Management fee $ 5,086,045
Transfer agent fees 632,302
Accounting fees and expenses 405,554
Non-interested trustees' compensation 3,770
Custodian fees and expenses 27,408
Registration fees 2,989
Audit 20,017
Legal 5,001
Miscellaneous 49,506
Total expenses before reductions 6,232,592
Expense reductions (10,217 6,222,375
)
NET INVESTMENT INCOME 74,219,295
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:
Investment securities 36,015,078
Foreign currency transactions 355 36,015,433
Change in net unrealized appreciation (depreciation) on:
Investment securities 19,411,450
Assets and liabilities in 16 19,411,466
foreign currencies
NET GAIN (LOSS) 55,426,899
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 129,646,194
OTHER INFORMATION $ 7,004
Expense reductions
Directed brokerage arrangements
Custodian credits 3,213
$ 10,217
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
Operations $ 74,219,295 $ 113,508,707
Net investment income
Net realized gain (loss) 36,015,433 15,837,127
Change in net unrealized appreciation (depreciation) 19,411,466 35,065,622
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 129,646,194 164,411,456
Distributions to shareholders (116,014,735) (81,893,762)
From net investment income
From net realized gain (14,338,900) (16,022,693)
TOTAL DISTRIBUTIONS (130,353,635) (97,916,455)
Share transactions 645,716,095 1,058,212,273
Net proceeds from sales of shares
Reinvestment of distributions 130,353,635 97,916,455
Cost of shares redeemed (453,062,260) (673,801,481)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 323,007,470 482,327,247
TOTAL INCREASE (DECREASE) IN NET ASSETS 322,300,029 548,822,248
NET ASSETS
Beginning of period 1,588,821,806 1,039,999,558
End of period (including undistributed net investment income of $73,506,048 and $113,174,121, $ 1,911,121,835 $ 1,588,821,806
respectively)
OTHER INFORMATION
Shares
Sold 53,868,295 89,104,560
Issued in reinvestment of distributions 11,056,288 8,680,536
Redeemed (38,063,304) (57,202,172)
Net increase (decrease) 26,861,279 40,582,924
</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> <C>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1997
SELECTED PER-SHARE DATA (UNAUDITED) 1996 1995 1994 1993 E 1992
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 12.520 $ 12.050 $ 10.750 $ 11.990 $ 10.820 $ 9.550
Income from Investment Operations .519 D .927 .856 .770 .728 .790
Net investment income
Net realized and unrealized gain (loss) (.391) .643 1.224 (.910) 1.332 1.290
Total from investment operations .910 1.570 2.080 (.140) 2.060 2.080
Less Distributions
From net investment income (.890) (.920) (.780) (.730) (.794) (.810)
In excess of net investment income - - - - (.036) -
From net realized gain (.110) (.180) - (.370) (.060) -
Total distributions (1.000) (1.100) (.780) (1.100) (.890) (.810)
Net asset value, end of period $ 12.430 $ 12.520 $ 12.050 $ 10.750 $ 11.990 $ 10.820
TOTAL RETURN B, C 7.70% 14.03% 20.72% (1.64)% 20.40% 23.17%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 1,911,122 $ 1,588,822 $ 1,040,000 $ 569,417 $ 463,931 $ 200,591
Ratio of expenses to average net assets .73% A .71% .71% .71% .64% F .67%
Ratio of net investment income to average
net assets 8.70% A 9.09% 9.32% 8.75% 8.69% 10.98%
Portfolio turnover rate 130% A 123% 132% 122% 155% 160%
Average commission rate G $ .0379 $ .0370
A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE
NOT ANNUALIZED AND 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. D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED
ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. E 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. F 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. G 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>
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 PAST 1 PAST 5 LIFE OF
JUNE 30, 1997 YEAR YEARS FUND
ASSET MANAGER 20.45% 12.43% 12.43%
S&P 500(registered trademark) 34.70% 19.78% 15.73%
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 long-term growth and short-term
volatility. 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 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 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
1989/09/30 10000.00 10000.00
10000.00
1989/10/31 10020.02 9768.00
10056.80
1989/11/30 10060.06 9967.27
10176.58
1989/12/31 10091.09 10206.48
10276.51
1990/01/31 9868.42 9521.63
10028.74
1990/02/28 9969.64 9644.46
10092.83
1990/03/31 10050.61 9900.03
10192.14
1990/04/30 9919.03 9652.53
10098.07
1990/05/31 10425.10 10593.65
10527.54
1990/06/30 10506.07 10521.62
10593.12
1990/07/31 10485.83 10487.95
10657.74
1990/08/31 10141.70 9539.84
10328.10
1990/09/30 9929.15 9075.25
10235.77
1990/10/31 9979.76 9036.22
10309.16
1990/11/30 10465.59 9619.96
10618.33
1990/12/31 10769.23 9888.36
10792.26
1991/01/31 11284.56 10319.49
10998.06
1991/02/28 11726.26 11057.34
11273.46
1991/03/31 11915.56 11324.93
11395.89
1991/04/30 12094.35 11352.11
11470.64
1991/05/31 12367.79 11842.52
11652.80
1991/06/30 12146.94 11300.13
11501.78
1991/07/31 12451.92 11826.72
11732.96
1991/08/31 12704.33 12107.01
11941.81
1991/09/30 12777.94 11904.82
11998.53
1991/10/31 12862.08 12064.35
12105.32
1991/11/30 12651.74 11578.15
12021.91
1991/12/31 13198.62 12902.69
12614.23
1992/01/31 13366.89 12662.70
12476.36
1992/02/29 13626.47 12827.32
12556.08
1992/03/31 13593.27 12577.19
12465.30
1992/04/30 13792.52 12946.96
12618.63
1992/05/31 13936.42 13010.40
12742.54
1992/06/30 13925.35 12816.54
12748.15
1992/07/31 14157.81 13340.74
13094.39
1992/08/31 14113.53 13067.25
13044.11
1992/09/30 14202.09 13221.45
13188.37
1992/10/31 14224.22 13267.72
13135.88
1992/11/30 14534.17 13720.15
13311.12
1992/12/31 14744.49 13888.91
13474.31
1993/01/31 15010.15 14005.57
13642.74
1993/02/28 15150.92 14196.05
13832.92
1993/03/31 15579.83 14495.59
13974.84
1993/04/30 15672.57 14144.79
13889.88
1993/05/31 15939.19 14523.87
14039.05
1993/06/30 16066.70 14565.99
14188.15
1993/07/31 16263.77 14507.73
14206.31
1993/08/31 16739.04 15057.57
14555.79
1993/09/30 16750.64 14941.63
14540.94
1993/10/31 17202.73 15250.92
14690.42
1993/11/30 17179.54 15106.04
14577.30
1993/12/31 17875.07 15288.82
14678.18
1994/01/31 18443.09 15808.64
14966.46
1994/02/28 17857.33 15380.23
14682.69
1994/03/31 17017.99 14709.65
14303.29
1994/04/30 17030.15 14897.93
14340.48
1994/05/31 17176.13 15142.26
14437.14
1994/06/30 16847.69 14771.27
14292.76
1994/07/31 17139.63 15255.77
14594.63
1994/08/31 17541.06 15881.26
14845.95
1994/09/30 17334.15 15492.17
14628.31
1994/10/31 17419.36 15840.74
14768.45
1994/11/30 17163.73 15263.82
14553.89
1994/12/31 16786.37 15490.18
14689.12
1995/01/31 16676.82 15891.84
14963.69
1995/02/28 16946.97 16511.15
15337.61
1995/03/31 17170.77 16998.39
15572.33
1995/04/30 17444.31 17498.99
15852.32
1995/05/31 17668.12 18198.43
16377.48
1995/06/30 17817.32 18621.18
16596.81
1995/07/31 18451.43 19238.66
16808.32
1995/08/31 18675.24 19286.95
16918.98
1995/09/30 18911.47 20100.85
17284.77
1995/10/31 18662.80 20029.09
17383.15
1995/11/30 19147.71 20908.37
17811.48
1995/12/31 19632.62 21311.07
18066.96
1996/01/31 20055.36 22036.50
18374.75
1996/02/29 20001.35 22240.77
18307.28
1996/03/31 20213.99 22454.95
18329.47
1996/04/30 20426.62 22785.94
18405.65
1996/05/31 20586.10 23373.59
18599.57
1996/06/30 20772.16 23462.64
18738.02
1996/07/31 20426.62 22426.06
18440.99
1996/08/31 20466.49 22899.03
18597.29
1996/09/30 21210.73 24187.79
19153.95
1996/10/31 21755.62 24854.88
19550.66
1996/11/30 22832.10 26733.66
20293.51
1996/12/31 22499.85 26204.07
20066.55
1997/01/31 23177.64 27841.30
20726.94
1997/02/28 23377.96 28059.58
20837.00
1997/03/31 22488.67 26906.61
20325.55
1997/04/30 23257.38 28512.93
21062.97
1997/05/31 24372.77 30248.80
21793.43
1997/06/30 25020.90 31603.95
22394.49
Let's say hypothetically that $10,000 was invested in Asset Manager
Portfolio on September 30, 1989, shortly after the fund started. By June
30, 1997, the value of the investment would have grown to $25,021 - a
150.21% increase. With reinvested dividends and capital gains, if any, a
$10,000 investment in the S&P 500, would have grown to $31,604 over the
same period - a 216.04% 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 (216.04%), Lehman Brothers Aggregate Bond
Index (89.88%), and the Salomon Brothers 3-month T-Bill Total Rate of
Return Index (47.88%) - 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 $22,394 - a 123.94%
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 JUNE 30, 1997
% OF FUND'S
INVESTMENT
S
Philip Morris Companies, Inc. 5.2
Federal National Mortgage Association 4.5
Federal Home Loan Mortgage Corporation 2.1
General Motors Corp. 1.9
International Business Machines Corp. 1.8
TOP FIVE BOND ISSUERS AS OF JUNE 30, 1997
(WITH MATURITIES MORE THAN ONE YEAR) % OF FUND'S
INVESTMENT
S
U.S. Treasury Obligations 5.8
Federal National Mortgage Association 4.0
Government National Mortgage Association 1.1
Ford Motor Credit Co. 0.8
AT&T Capital Corp. 0.5
ASSET ALLOCATION AS OF JUNE 30, 1997*
Row: 1, Col: 1, Value: 5.9
Row: 1, Col: 2, Value: 31.7
Row: 1, Col: 3, Value: 62.2
Stock class 62.0%
Bond class 31.9%
Short-term class 6.1%
FOREIGN INVESTMENTS 11.4%
*
ASSET ALLOCATION IN THE PIE CHART REFLECTS THE CATEGORIZATION OF ASSETS AS
DEFINED
IN THE FUND'S PROSPECTUS. FINANCIAL STATEMENT CATEGORIZATIONS CONFORM TO
ACCOUNTING STANDARDS AND WILL DIFFER FROM THE PIE CHART.
% OF FUND'S INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with Richard Habermann (top left), Portfolio Manager of Asset
Manager Portfolio, George Vanderheiden (top right), sub-manager for stocks,
Charles Morrison (bottom left), sub-manager for bonds, and John Todd
(bottom right), sub-manager for short-term/money market instruments.
Charles Morrison became sub-manager for bonds on February 3, 1997, and John
Todd became sub-manager for short-term/money market instruments on December
1, 1996.
Q. HOW DID THE FUND PERFORM, DICK?
D.H. The fund's performance historically has been compared to that of the
Standard & Poor's 500 Index. However, there are some significant
differences between the make-up of the fund and the composition of the
index. While the S&P 500 is made up exclusively of stocks, the fund invests
in stocks, bonds and short-term/money market instruments. The fund
allocates assets among these three categories in order to help control both
volatility and risk relative to funds or indexes that invest only in
stocks. That being said, the S&P 500 posted a strong 20.61% return during
the six months that ended June 30, 1997, and 34.70% over the 12 months
ended June 30, 1997. Since the fund is diversified into other asset classes
that didn't perform as well as stocks, the fund's performance lagged that
of the S&P 500. However, the fund did benefit from the performance of its
equity investments and its small stake in high-yield bonds, while the bond
and short-term money market portions of the fund performed in line with
their respective markets.
Q. WHAT WAS THE FUND'S ASSET MIX AT THE END OF THE PERIOD?
D.H. At the end of June 1997, the fund's equity position stood at about
62%, 12% above the new neutral mix the fund instituted on January 1, 1997.
That neutral mix comprises 50% stocks, 40% bonds and 10% short-term/money
market instruments. In order to add to the equity portion, we reduced both
the fund's bond and short-term/money market positions. At the end of the
period, the fund held about 32% in bonds and approximately 6% in
short-term/money market instruments.
Q. WHY DID YOU INCREASE THE FUND'S STOCK INVESTMENTS?
D.H. Because the investing environment was very favorable not only for all
financial assets, but especially for stocks. We've had limited inflation
and corporate earnings continued to be strong. Another key factor was the
strength of the dollar, although that can act as a double-edged sword. On
the negative side, a rising dollar acts as a drag on the economy by slowing
exports and suppressing corporate earnings. This especially affects large,
multinational corporations. These companies, however, generally were able
to post earnings surprises through cost cutting and to sustain their stock
prices by buying back shares. The positive side of the strong dollar is
that it helps to control inflation by keeping import prices down. In
addition, investors, especially those abroad, tend to feel more comfortable
investing in U.S. markets when the dollar is strong, helping to sustain
prices for both stocks and bonds.
Q. WHAT WAS THE ENVIRONMENT LIKE FOR THE BOND MARKET?
D.H. During the latter stages of the first quarter and the beginning of the
second quarter, the bond market struggled because of concerns that
continued economic growth might lead to inflation. Employment had reached a
level where historically there should have been increased upward pressure
on wages. The Federal Reserve Board tried to anticipate and head off
incipient inflation by raising the fed funds rate - the rate banks charge
each other for overnight loans - by 0.25% to 5.50% at the end of March.
This move was well-telegraphed, so the rate increase was already priced
into the market when the Fed acted. The Fed chose to keep rates steady in
May, a stance that surprised many in the market who were anticipating
another rate increase. The Fed stood pat mainly because economic growth
slowed and there were few if any signs of inflationary pressure. From that
point on, the bond market responded favorably.
Q. TURNING TO YOU, GEORGE, HOW DID YOU MANAGE THE STOCK PORTION OF THE FUND
IN A VIRTUALLY NO-INFLATION ENVIRONMENT?
G.V. I concentrated on four areas during the period. First, I looked at
innovators and unit growers because these companies use unit growth to
increase earnings and don't have to rely on price increases. Technology,
health care and telecommunications fall within these areas. Second were the
interest-sensitive sectors that benefited from low interest rates,
including mortgage companies, insurance, finance and construction. Third, I
looked at global growers - companies with proprietary advantages, such as
low costs or unique distribution channels and strong brands - which are
seizing market share on a global basis. Fourth were the acquisitive
companies in consolidating industries. Certain industries have stopped
growing, but certain companies have been able to show great earnings growth
by acquiring market share and paring costs.
Q. PHILIP MORRIS IS THE FUND'S LARGEST STOCK HOLDING. WHAT IS YOUR POSITION
ON TOBACCO STOCKS?
G.V. I own tobacco stocks because they operate a profitable business that
historically has offered above-average returns to shareholders over the
long term. In the past, the stocks have provided better-than-average
earnings growth, lower-than-average price-to-earnings ratios and high
yields. Nothing this year has changed that. We have determined that the
tobacco stocks are selling at a "litigation discount" in excess of any
reasonable estimate of potential liabilities. The cost of the proposed
settlement is high, but should be passed completely along to consumers.
Q. STOCK VALUATIONS WERE QUITE HIGH. WHY WAS THAT, AND WILL THEY STAY
INFLATED?
G.V. We had a nearly perfect investing environment during the period -
experiencing growth without inflation. Accelerating inflation is usually
the killer of all bond and equity bull markets, but inflation just kept
receding as the economic expansion continued. During the worst bear market
I ever encountered - the 1973-1974 bear that took prices down about 50% -
everything that could go wrong did go wrong. Today is an environment where
everything that could go right has gone right - from a declining budget
deficit, to falling inflation, to surging earnings, to big flows into
mutual funds and rising consumer confidence. If any of these factors change
for the worse, valuations should deflate. My biggest concern going forward
is that the low level of inflation and pricing power in a strong economy
will deteriorate to deflation in a slowing or contracting economy, thereby
leading to sizable earnings declines.
Q. CHARLIE, WHAT CHANGES HAVE YOU MADE SINCE TAKING OVER THE FUND'S BOND
INVESTMENTS?
C.M. For most of the period, I focused on positioning the bond portion of
the portfolio more aggressively by increasing its weighting in corporate
and mortgage-backed securities, while decreasing the percentage held in
Treasuries. Part of that move was accomplished with Dick's reallocation of
assets away from bonds. In reducing the fund's stake in bonds, I sold
Treasuries. At the same time, I tended to focus any new purchases on
investments that offered a yield advantage over Treasuries. Specific areas
of focus included BBB-rated corporate bonds and commercial mortgage-backed
securities.
Q. WHAT KINDS OF BONDS DID YOU FOCUS ON IN THE CORPORATE MARKET?
C.M. One area of interest over the period was in the bank market. I
continued to add long-term bank paper in the form of capital securities.
Last fall, the Federal Reserve Board ruled that domestic banking companies
could issue capital securities, which offered the banks significant tax
advantages, as well as the opportunity to strengthen their balance sheets.
Numerous banks took advantage of this opportunity and inundated the market
with these securities. The large amount of supply in a relatively
concentrated period of time allowed us to purchase many capital securities
at cheap levels. This market has performed well following the initial
supply.
Q. JOHN, WHAT HAS THE BACKDROP FOR THE SHORT-TERM AND MONEY MARKETS BEEN
LIKE SINCE YOU CAME ON BOARD?
J.T. As Dick pointed out, the Fed raised the fed funds rate at its March
meeting, but then chose not to continue to raise rates at its late May
meeting. For now, the Fed appears to be in a holding pattern. Some believe
that the Fed has abandoned the notion of being pre-emptive - seeking to
head off inflation before it actually appears - and instead will respond
only to actual evidence of inflation rather than trying to respond to
underlying inflationary pressures.
Q. WHAT SORT OF STRATEGY DID YOU PURSUE?
J.T. Because Fed Chairman Alan Greenspan warned that the Fed might raise
rates, I reduced the short-term/money market portion's average maturity to
about 50 days in the first quarter. Once the market adjusted to the new,
higher rate level and expectations of further Fed interest rate increases
were built into the yield curve, the maturity was extended. That's because
many longer-maturity instruments were attractively valued because their
prices and yields reflected a more aggressive Fed interest rate posture
than I felt was likely.
Q. TURNING BACK TO YOU, DICK, WHAT'S YOUR OUTLOOK?
D.H. I believe that a lack of pricing power, among other things, makes it
clear that corporations are not operating with a very strong wind at their
backs. At the same time, U.S. companies - helped by advances in technology
that help cut costs - are operating very efficiently, leading to many
positive earnings surprises. I don't see much that would change that over
the near future. Still, the economic pattern over the past year has been
like a seesaw. That is, the economy has grown in spurts, picking up for one
quarter then tailing off into weakness during the next. If the economy
shows sustained strength, interest rates could rise and put some pressure
on the markets. On the other hand, one could argue that rates might fall
because inflation is at such a low level. As always, we'll have to wait and
see what the future holds.
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 June 30, 1997, more than $4 billion
MANAGER: Richard Habermann, since March
1996; joined Fidelity in 1968
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 61.1%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 1.2%
AEROSPACE & DEFENSE - 0.9%
Boeing Co. 625,500 $ 33,190,594
Gulfstream Aerospace Corp. (a) 44,000 1,298,000
34,488,594
DEFENSE ELECTRONICS - 0.3%
Raytheon Co. 258,800 13,198,800
SHIP BUILDING & REPAIR - 0.0%
Avondale Industries, Inc. (a) 21,600 453,600
Newport News Shipbuilding, Inc. 62,300 1,210,956
1,664,556
TOTAL AEROSPACE & DEFENSE 49,351,950
BASIC INDUSTRIES - 3.0%
CHEMICALS & PLASTICS - 2.2%
Air Products & Chemicals, Inc. 74,500 6,053,125
du Pont (E.I.) de Nemours & Co. 848,100 53,324,288
Raychem Corp. 242,300 18,021,063
Union Carbide Corp. 227,800 10,720,838
88,119,314
PACKAGING & CONTAINERS - 0.2%
Owens-Illinois, Inc. (a) 227,500 7,052,500
PAPER & FOREST PRODUCTS - 0.6%
Boise Cascade Corp. 145,100 5,123,844
Champion International Corp. 216,900 11,983,725
International Paper Co. 86,200 4,186,088
Willamette Industries, Inc. 29,400 2,058,000
23,351,657
TOTAL BASIC INDUSTRIES 118,523,471
CONSTRUCTION & REAL ESTATE - 0.7%
CONSTRUCTION - 0.5%
Centex Corp. 89,800 3,648,125
D.R. Horton, Inc. 192,224 1,994,324
Fleetwood Enterprises, Inc. 364,581 10,869,071
Kaufman & Broad Home Corp. 183,700 3,226,231
U.S. Home Corp. (a) 19,700 523,281
20,261,032
ENGINEERING - 0.2%
Fluor Corp. 143,600 7,924,925
TOTAL CONSTRUCTION & REAL ESTATE 28,185,957
DURABLES - 3.4%
AUTOS, TIRES, & ACCESSORIES - 2.9%
Cummins Engine Co., Inc. 148,500 10,478,531
Dana Corp. 56,900 2,162,200
Discount Auto Parts, Inc. (a) 111,000 2,164,500
Federal-Mogul Corp. 59,500 2,082,500
General Motors Corp. 1,355,090 75,461,574
Gentex Corp. (a) 53,400 1,054,650
Goodyear Tire & Rubber Co. 62,000 3,925,375
Honda Motor Co. Ltd. 99,000 2,979,197
Magna International, Inc. Class A 165,200 9,931,264
Superior Industries International, Inc. 250,300 6,632,950
116,872,741
CONSUMER ELECTRONICS - 0.1%
Newell Co. 120,600 4,778,775
SHARES VALUE (NOTE 1)
TEXTILES & APPAREL - 0.4%
Arena Brands Holdings Corp. Class B 8,445 $ 341,094
Burlington Industries, Inc. (a) 307,100 3,685,200
Liz Claiborne, Inc. 84,700 3,949,138
NIKE, Inc. Class B 116,300 6,789,013
Reebok International Ltd. 18,600 869,550
15,633,995
TOTAL DURABLES 137,285,511
ENERGY - 5.0%
ENERGY SERVICES - 0.2%
McDermott International, Inc. 275,800 8,049,913
OIL & GAS - 4.8%
Amerada Hess Corp. 119,600 6,645,275
Anadarko Petroleum Corp. 13,100 786,000
Atlantic Richfield Co. 223,500 15,756,750
British Petroleum PLC ADR 396,568 29,693,029
Burlington Resources, Inc. 304,400 13,431,650
Canada Occidental Petroleum Ltd. 5,800 130,229
Chevron Corp. 17,600 1,301,300
Elf Aquitaine SA sponsored ADR 61,800 3,364,238
Enron Oil & Gas Co. 38,400 696,000
Kerr-McGee Corp. 58,100 3,682,088
Louisiana Land & Exploration Co. 239,200 13,664,300
Mobil Corp. 35,200 2,459,600
Noble Affiliates, Inc. 22,800 882,075
Occidental Petroleum Corp. 515,100 12,909,694
Royal Dutch Petroleum Co. Ord. 119,200 6,196,385
Royal Dutch Petroleum Co. 911,600 49,568,250
Santa Fe Energy Resources, Inc. (a) 178,000 2,614,375
Sun Co., Inc. 74,400 2,306,400
Tosco Corp. 545,700 16,336,894
Total SA:
Class B 30,733 3,104,555
sponsored ADR 89,837 4,547,998
Union Pacific Resources Group, Inc. 40,600 1,009,925
191,087,010
TOTAL ENERGY 199,136,923
FINANCE - 13.0%
BANKS - 0.4%
Canadian Imperial Bank of Commerce 5,000 126,028
Credit Suisse Group (Reg.) 63,600 8,159,425
NationsBank Corp. 87,500 5,643,750
13,929,203
CLOSED END INVESTMENT COMPANY - 0.1%
First NIS Regional Fund (a) 200,000 3,700,000
CREDIT & OTHER FINANCE - 1.1%
Fleet Financial Group, Inc. 710,900 44,964,425
FEDERAL SPONSORED CREDIT - 6.6%
Federal Home Loan Mortgage
Corporation 2,427,100 83,431,563
Federal National Mortgage Association 4,189,890 182,783,951
266,215,514
INSURANCE - 4.4%
AFLAC, Inc. 96,600 4,564,350
Aegon NV (Reg.) 97,743 6,848,119
Allmerica Financial Corp. 126,900 5,060,138
Allstate Corp. 704,300 51,413,900
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
INSURANCE - CONTINUED
American International Group, Inc. 265,000 $ 39,584,375
CIGNA Corp. 40,500 7,188,750
Equitable of Iowa Companies 15,100 845,600
General Re Corp. 66,000 12,012,000
Loews Corp. 43,400 4,345,425
MGIC Investment Corp. 306,700 14,702,431
Nationwide Financial Services, Inc.
Class A 14,400 382,500
PMI Group, Inc. 112,500 7,017,188
Provident Companies, Inc. 9,600 513,600
Providian Financial Corp. (a) 242,500 7,790,313
Reliastar Financial Corp. 42,081 3,077,173
Torchmark Corp. 142,300 10,138,875
Travelers Property Casualty Corp.
Class A 34,500 1,375,688
UNUM Corp. 25,200 1,058,400
177,918,825
SAVINGS & LOANS - 0.2%
Golden West Financial Corp. 131,400 9,198,000
SECURITIES INDUSTRY - 0.2%
United Asset Management Corp. 219,800 6,223,088
TOTAL FINANCE 522,149,055
HEALTH - 4.8%
DRUGS & PHARMACEUTICALS - 1.7%
American Home Products Corp. 10,700 818,550
Amgen, Inc. 211,800 12,310,875
Astra AB Class A Free shares 1,038,801 19,374,080
Merck & Co., Inc. 51,900 5,371,650
Novartis AG (Reg.) 9,900 15,810,195
Schering-Plough Corp. 339,100 16,234,413
69,919,763
MEDICAL EQUIPMENT & SUPPLIES - 0.6%
Allegiance Corp. 20,180 549,905
Bard (C.R.), Inc. 99,000 3,594,938
Baxter International, Inc. 42,100 2,199,725
Biomet, Inc. 235,100 4,378,738
Boston Scientific Corp. (a) 12,000 737,250
Johnson & Johnson 26,900 1,731,688
St. Jude Medical, Inc. (a) 272,000 10,608,000
23,800,244
MEDICAL FACILITIES MANAGEMENT - 2.5%
Columbia/HCA Healthcare Corp. 1,730,050 68,012,591
Health Management Associates, Inc.
Class A (a) 12,900 367,650
Humana, Inc. (a) 465,400 10,762,375
Tenet Healthcare Corp. (a) 317,600 9,389,050
United HealthCare Corp. 198,300 10,311,600
98,843,266
TOTAL HEALTH 192,563,273
HOLDING COMPANIES - 0.1%
U.S. Industries, Inc. (a) 158,900 5,660,813
INDUSTRIAL MACHINERY & EQUIPMENT - 1.2%
ELECTRICAL EQUIPMENT - 0.7%
Emerson Electric Co. 59,200 3,259,700
General Electric Co. 268,400 17,546,650
SHARES VALUE (NOTE 1)
Scientific-Atlanta, Inc. 135,300 $ 2,959,688
Sensormatic Electronics Corp. 46,200 594,825
Westinghouse Electric Corp. 205,600 4,754,500
29,115,363
INDUSTRIAL MACHINERY & EQUIPMENT - 0.4%
Caterpillar, Inc. 118,700 12,745,413
JLK Direct Distribution, Inc. Class A 1,000 25,625
Ultratech Stepper, Inc. (a) 150,000 3,431,250
16,202,288
POLLUTION CONTROL - 0.1%
Browning-Ferris Industries, Inc. 143,400 4,768,050
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 50,085,701
MEDIA & LEISURE - 1.9%
BROADCASTING - 0.1%
Cox Communications, Inc. Class A (a) 35,500 852,000
HSN, Inc. (a) 27,045 845,156
TCI Group Class A 118,900 1,768,638
3,465,794
ENTERTAINMENT - 0.1%
Cedar Fair LP (depositary unit) 10,200 446,250
Royal Caribbean Cruises Ltd. 64,200 2,242,988
2,689,238
LEISURE DURABLES & TOYS - 0.4%
Nintendo Co. Ltd. Ord. 208,400 17,450,738
LODGING & GAMING - 0.7%
Bally Gaming International, Inc.
warrants 7/29/98 (a) 38,400 48,000
Circus Circus Enterprises, Inc. (a) 319,300 7,862,763
Fitzgeralds South, Inc. warrants
3/15/99 (a)(d) 420 -
HFS, Inc. (a) 56,100 3,253,800
Harrah's Entertainment, Inc. (a) 148,600 2,711,950
Mirage Resorts, Inc. (a) 317,000 8,004,250
Sun International Hotels Ltd. Ord. (a) 152,600 5,636,663
27,517,426
PUBLISHING - 0.1%
Cognizant Corp. 89,200 3,612,600
RESTAURANTS - 0.5%
Brinker International, Inc. (a) 107,000 1,524,750
Lone Star Steakhouse Saloon (a) 79,100 2,056,600
McDonald's Corp. 334,700 16,170,194
Papa John's International, Inc. (a) 29,300 1,076,775
20,828,319
TOTAL MEDIA & LEISURE 75,564,115
NONDURABLES - 6.0%
HOUSEHOLD PRODUCTS - 0.0%
Premark International, Inc. 36,300 971,025
TOBACCO - 6.0%
Philip Morris Companies, Inc. 4,715,400 209,245,875
RJR Nabisco Holdings Corp. 925,330 30,535,890
UST, Inc. 42,400 1,176,600
240,958,365
TOTAL NONDURABLES 241,929,390
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
PRECIOUS METALS - 0.1%
Barrick Gold Corp. 34,800 $ 757,426
Newmont Mining Corp. 29,905 1,166,295
1,923,721
RETAIL & WHOLESALE - 4.8%
APPAREL STORES - 0.3%
Gap, Inc. 80,600 3,133,325
TJX Companies, Inc. 273,400 7,210,925
10,344,250
DRUG STORES - 0.0%
CVS Corp. 37,500 1,921,875
GENERAL MERCHANDISE STORES - 1.6%
Federated Department Stores, Inc. (a) 229,900 7,989,025
Proffitts, Inc. (a) 7,800 342,225
Wal-Mart Stores, Inc. 1,719,300 58,133,831
66,465,081
GROCERY STORES - 0.2%
Safeway, Inc. (a) 186,900 8,620,763
RETAIL & WHOLESALE, MISCELLANEOUS - 2.7%
Circuit City Stores, Inc. -
CarMax Group 21,900 313,444
Corporate Express, Inc. 149,600 2,159,850
Home Depot, Inc. (The) 732,000 50,462,250
Lowe's Companies, Inc. 623,600 23,151,150
Officemax, Inc. (a) 425,600 6,144,600
Office Depot, Inc. (a) 66,200 1,286,763
Rex Stores Corp. (a) 51,900 525,488
Staples, Inc. (a) 177,800 4,133,850
Toys "R" Us, Inc. (a) 356,300 12,470,500
U.S. Office Products Co. (a) 122,000 3,728,625
Viking Office Products, Inc. (a) 169,300 3,216,700
107,593,220
TOTAL RETAIL & WHOLESALE 194,945,189
SERVICES - 0.0%
ADVERTISING - 0.0%
Interpublic Group of Companies, Inc. 19,100 1,171,069
LEASING & RENTAL - 0.0%
Hanover Compressor Co. 2,600 50,700
PRINTING - 0.0%
Donnelley (R.R.) & Sons Co. 4,800 175,800
SERVICES - 0.0%
PEAPOD, Inc. 8,400 94,500
TOTAL SERVICES 1,492,069
TECHNOLOGY - 9.7%
COMMUNICATIONS EQUIPMENT - 0.6%
Alcatel Alsthom Compagnie Generale
d'Electricite SA sponsored ADR 15,900 401,475
Alcatel Alsthom Compagnie Generale
d'Electricite SA 130,100 16,284,072
Andrew Corp. 48,300 1,358,438
Cisco Systems, Inc. (a) 64,600 4,336,275
Nokia Corp. AB sponsored ADR 28,200 2,079,750
24,460,010
COMPUTER SERVICES & SOFTWARE - 1.8%
American Management Systems, Inc. (a) 21,000 561,750
Automatic Data Processing, Inc. 195,300 9,179,100
SHARES VALUE (NOTE 1)
CUC International, Inc. 140,500 $ 3,626,656
Ceridian Corp. (a) 125,300 5,293,925
CompUSA, Inc. (a) 82,400 1,771,600
Electronic Data Systems Corp. 341,600 14,005,600
First Data Corp. 254,300 11,173,306
Microsoft Corp. (a) 91,500 11,563,313
Netscape Communications Corp. (a) 22,100 708,581
Oracle Systems Corp. (a) 158,500 7,984,438
Paychex, Inc. 127,200 4,833,600
Policy Management Systems Corp. (a) 94,400 4,436,800
75,138,669
COMPUTERS & OFFICE EQUIPMENT - 3.3%
Bay Networks, Inc. (a) 199,300 5,293,906
Compaq Computer Corp. (a) 298,100 29,586,425
Hewlett-Packard Co. 133,900 7,498,400
Ingram Micro, Inc. Class A (a) 26,900 648,963
International Business Machines Corp. 809,700 73,024,819
SCI Systems, Inc. (a) 189,700 12,093,375
Tech Data Corp. (a) 155,200 4,879,100
133,024,988
ELECTRONIC INSTRUMENTS - 1.0%
Applied Materials, Inc. (a) 115,600 8,185,925
Cognex Corp. (a) 67,300 1,783,450
KLA Instruments Corp. (a) 24,200 1,179,750
Lam Research Corp. (a) 158,700 5,881,819
Novellus Systems, Inc. (a) 91,400 7,906,100
Teradyne, Inc. (a) 125,700 4,933,725
Thermo Electron Corp. (a) 141,300 4,804,200
Varian Associates, Inc. 80,800 4,383,400
39,058,369
ELECTRONICS - 3.0%
AMP, Inc. 458,700 19,150,725
Atmel Corp. (a) 28,700 803,600
Intel Corp. 216,500 30,702,406
Methode Electronics, Inc. Class A 129,500 2,573,813
Microchip Technology, Inc. (a) 25,350 754,163
Micron Technology, Inc. 527,300 21,059,044
Molex, Inc. 83,000 2,894,625
Motorola, Inc. 17,200 1,307,200
Solectron Corp. (a) 393,700 27,559,000
Storage Technology Corp. (a) 67,400 2,999,300
Texas Instruments, Inc. 105,100 8,834,969
Thomas & Betts Corp. 5,000 262,813
118,901,658
TOTAL TECHNOLOGY 390,583,694
TRANSPORTATION - 0.7%
AIR TRANSPORTATION - 0.1%
Continental Airlines, Inc. Class B (a) 31,300 1,093,544
Delta Air Lines, Inc. 21,200 1,738,400
Northwest Airlines Corp. Class A (a) 50,600 1,840,575
4,672,519
RAILROADS - 0.4%
Bombardier, Inc. Class B 119,200 2,702,321
Burlington Northern Santa Fe Corp. 52,600 4,727,425
CSX Corp. 164,860 9,149,730
16,579,476
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TRANSPORTATION - CONTINUED
SHIPPING - 0.1%
Stolt-Nielsen SA Class B sponsored ADR 105,500 $ 2,044,063
Stolt-Nielsen SA 31,300 590,788
2,634,851
TRUCKING & FREIGHT - 0.1%
Roadway Express, Inc. 25,200 589,050
Yellow Corp. (a) 107,300 2,400,838
2,989,888
TOTAL TRANSPORTATION 26,876,734
UTILITIES - 5.5%
CELLULAR - 1.8%
AirTouch Communications, Inc. (a) 734,100 20,095,988
360 Degrees Communications Co. (a) 35,900 614,788
Vodafone Group PLC sponsored ADR 620,800 30,070,000
Vodafone Group PLC 4,810,755 23,464,799
74,245,575
ELECTRIC UTILITY - 0.2%
American Electric Power Co., Inc. 59,700 2,507,400
Entergy Corp. 181,000 4,954,875
7,462,275
GAS - 0.1%
Enron Corp. 81,200 3,313,975
TELEPHONE SERVICES - 3.4%
AT&T Corp. 215,200 7,545,450
Ameritech Corp. 196,400 13,342,925
Bell Atlantic Corp. 141,700 10,751,488
BellSouth Corp. 332,000 15,396,500
Deutsche Telekom AG 82,400 1,978,450
MCI Communications Corp. 668,600 25,594,844
NextLink Communications, Inc.
warrants 2/1/09 (a) 43,900 439
NYNEX Corp. 274,500 15,818,063
Qwest Communications
International, Inc. 5,100 138,975
SBC Communications, Inc. 267,900 16,576,313
Sprint Corp. 531,200 27,954,400
WorldCom, Inc. (a) 72,600 2,323,200
137,421,047
TOTAL UTILITIES 222,442,872
TOTAL COMMON STOCKS
(Cost $1,979,750,356) 2,458,700,438
PREFERRED STOCKS - 1.0%
CONVERTIBLE PREFERRED STOCKS - 0.0%
RETAIL & WHOLESALE - 0.0%
GROCERY STORES - 0.0%
Supermarkets General Holdings Corp.
$3.52 pay-in-kind (a) 20,000 405,000
NONCONVERTIBLE PREFERRED STOCKS - 1.0%
CONSTRUCTION & REAL ESTATE - 0.0%
REAL ESTATE INVESTMENT TRUSTS - 0.0%
Walden Residential Properties,
Inc. 9.20% 49,000 1,237,250
SHARES VALUE (NOTE 1)
FINANCE - 0.1%
CREDIT & OTHER FINANCE - 0.0%
American Annuity Group Capital
Trust II 8 3/4% 1,490 $ 1,482,550
SAVINGS & LOANS - 0.1%
California Federal Preferred Capital
Corp. 9 1/8% 156,890 4,000,695
TOTAL FINANCE 5,483,245
HEALTH - 0.1%
MEDICAL FACILITIES MANAGEMENT - 0.1%
Fresenius Medical Care Capital
Trust 9% 1,381 1,415,180
MEDIA & LEISURE - 0.7%
BROADCASTING - 0.6%
American Radio Systems Corp.
11.375% pay-in-kind 27,126 2,888,919
Cablevision System Corp. 11 1/8%
depositary shares pay-in-kind 49,472 4,971,936
PanAmSat Corp. 12 3/4% pay-in-kind 202 246,440
SFX Broadcasting, Inc. 12 5/8% 29,474 3,175,824
Sinclair Capital 11 5/8% (d) 28,380 2,994,090
Time Warner, Inc., Series M, 10 1/4%
pay-in-kind 8,770 9,690,850
23,968,059
PUBLISHING - 0.1%
K-III Communications Corp.:
Series B, $11.625 pay-in-kind 1,750 190,969
Series D, $10 31,050 3,128,288
3,319,257
TOTAL MEDIA & LEISURE 27,287,316
NONDURABLES - 0.0%
HOUSEHOLD PRODUCTS - 0.0%
Revlon Group, Inc., Series B, 14 7/8% 5,100 510,000
UTILITIES - 0.1%
TELEPHONE SERVICES - 0.1%
NextLink Communications, Inc.
14% pay-in-kind 45,453 2,352,193
TOTAL NONCONVERTIBLE PREFERRED STOCKS 38,285,184
TOTAL PREFERRED STOCKS
(Cost $37,307,667) 38,690,184
NONCONVERTIBLE CORPORATE BONDS - 17.1%
MOODY'S PRINCIPAL
RATINGS (C) AMOUNT
AEROSPACE & DEFENSE - 0.2%
AEROSPACE & DEFENSE - 0.0%
Be Aerospace, Inc. 9 7/8%,
2/1/06 B2 $ 270,000 284,175
Rohr, Inc. 11 5/8%, 5/15/03 Ba3 340,000 378,250
662,425
DEFENSE ELECTRONICS - 0.1%
Tracor, Inc. 8 1/2%, 3/1/07 B1 1,170,000 1,181,700
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
AEROSPACE & DEFENSE - CONTINUED
SHIP BUILDING & REPAIR - 0.1%
Newport News Shipbuilding, Inc.:
8 5/8%, 12/1/06 Ba2 $ 920,000 $ 949,900
9 1/4%, 12/1/06 B1 3,830,000 3,992,775
4,942,675
TOTAL AEROSPACE & DEFENSE 6,786,800
BASIC INDUSTRIES - 0.7%
CHEMICALS & PLASTICS - 0.2%
Acetex Corp. yankee
9 3/4%, 10/1/03 B1 1,270,000 1,289,050
Foamex LP/Foamex Capital Corp.
9 7/8%, 6/15/07 (d) B3 320,000 324,000
General Chemical Corp.
9 1/4%, 8/15/03 B2 1,320,000 1,349,700
Pioneer Americas Acquisition
Corp. 9 1/4%, 6/15/07 (d) B1 200,000 197,000
Praxair, Inc. 6.90%, 11/1/06 A3 4,000,000 3,949,200
Sterling Chemicals Holdings,
Inc. 11 1/4%, 4/1/07 B3 1,870,000 1,982,200
9,091,150
IRON & STEEL - 0.1%
Neenah Corp. 11 1/8%,
5/1/07 (d) B3 1,690,000 1,791,400
METALS & MINING - 0.0%
Well Aluminum Corp.
10 1/8%, 6/1/05 (d) B2 80,000 82,400
PACKAGING & CONTAINERS - 0.2%
BWAY Corp. 10 1/4%,
4/15/07 (d) B2 1,490,000 1,601,750
Owens-Illinois, Inc.:
7.85%, 5/15/04 Ba1 1,180,000 1,196,225
9.95%, 10/15/04 Ba3 3,030,000 3,211,800
8.10%, 5/15/07 Ba1 940,000 952,925
Silgan Holdings, Inc.
9%, 6/1/09 (d) B1 2,060,000 2,075,450
9,038,150
PAPER & FOREST PRODUCTS - 0.2%
Asia Pulp & Paper Finance II
Mauritius Ltd. 12%,
3/15/04 (d) B3 860,000 881,500
Florida Coast Paper Co. LLC/
Florida Coast Paper Finance
Corp., Series B, 12 3/4%,
6/1/03 Caa 900,000 929,250
Gaylord Container Corp.
11 1/2%, 5/15/01 B3 220,000 231,275
Repap Wisconsin, Inc.:
9 1/4%, 2/1/02 B2 1,780,000 1,788,900
9 7/8%, 5/1/06 Caa 190,000 191,425
Repap New Brunswick, Inc.
yankee 10 5/8%, 4/15/05 Caa 690,000 650,325
Riverwood International Corp.
10 1/4%, 4/1/06 B3 1,730,000 1,704,050
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Stone Container Corp.
10 3/4%, 10/1/02 B1 $ 2,540,000 $ 2,679,700
9,056,425
TOTAL BASIC INDUSTRIES 29,059,525
CONSTRUCTION & REAL ESTATE - 0.2%
BUILDING MATERIALS - 0.1%
Building Materials Corp. of
America 0%, 7/1/04 (b) B1 3,790,000 3,448,900
Falcon Building Products, Inc.
9 1/2%, 6/15/07 (d) B3 90,000 89,325
Nortek, Inc. 9 1/4%, 3/15/07 Ba3 790,000 805,800
4,344,025
CONSTRUCTION - 0.1%
Greystone Homes, Inc.
10 3/4%, 3/1/04 Ba3 1,950,000 2,130,375
REAL ESTATE - 0.0%
Iron Mountain, Inc. 10 1/8%,
10/1/06 B3 1,050,000 1,115,625
TOTAL CONSTRUCTION & REAL ESTATE 7,590,025
DURABLES - 0.5%
AUTOS, TIRES, & ACCESSORIES - 0.1%
Aftermarket Technology Corp.
12%, 8/1/04 B3 1,313,000 1,463,995
Blue Bird Body Co. 10 3/4%,
11/15/06 B2 1,545,000 1,637,700
Delco Remy International, Inc.
10 5/8%, 8/1/06 (d) B2 390,000 413,400
Tennessee Gas Pipeline Co.
7%, 3/15/27 Baa3 2,630,000 2,628,422
6,143,517
HOME FURNISHINGS - 0.1%
Interlake Corp. 12 1/8%,
3/1/02 B3 2,470,000 2,587,325
Knoll, Inc. 10 7/8%,
3/15/06 B1 623,000 689,194
3,276,519
TEXTILES & APPAREL - 0.3%
GFSI, Inc. 9 5/8%, 3/1/07 (d) B3 2,480,000 2,504,800
Levi Strauss & Co. 7%,
11/1/06 (d) Baa2 7,700,000 7,616,840
10,121,640
TOTAL DURABLES 19,541,676
ENERGY - 0.9%
ENERGY SERVICES - 0.3%
Falcon Drilling, Inc. 9 3/4%,
1/15/01 Ba3 930,000 953,250
Parker Drilling Co. 9 3/4%,
11/15/06 B1 310,000 323,950
Petroliam Nasional BHD yankee
7 1/8%, 10/18/06 (d) A1 7,000,000 7,023,870
Pride Petroleum Services, Inc.
9 3/8%, 5/1/07 Ba3 1,690,000 1,749,150
10,050,220
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
ENERGY - CONTINUED
OIL & GAS - 0.6%
Energy Corp. America 9 1/2%,
5/15/07 (d) B2 $ 2,800,000 $ 2,758,000
Flores & Rucks, Inc. 9 3/4%,
10/1/06 B3 1,780,000 1,860,100
Forcenergy, Inc. 8 1/2%,
2/15/07 B2 1,300,000 1,270,750
Gulf Canada Resources Ltd.
yankee 9 5/8%, 7/1/05 Ba2 990,000 1,060,538
Husky Oil Ltd. yankee
6 7/8%, 11/15/03 Baa3 2,680,000 2,642,105
Occidental Petroleum Corp.:
10.94%, 5/17/00 Baa3 2,700,000 2,989,575
6.39%, 11/9/00 Baa3 1,000,000 987,290
8 1/2%, 11/9/01 Baa2 1,251,000 1,325,022
Ocean Energy, Inc. 8 7/8%,
7/15/07 (d) B3 1,860,000 1,860,000
Pennzoil Co. 9 5/8%,
11/15/99 Baa3 2,260,000 2,407,827
Petsec Energy, Inc. 9 1/2%,
6/15/07 (d) B3 190,000 190,000
Ras Laffan Liquid Natural
Gas Co. Ltd. yankee
7.628%, 9/15/06 (d) A3 4,880,000 4,942,513
United Refining Co. 10 3/4%,
6/15/07 (d) B2 760,000 752,400
25,046,120
TOTAL ENERGY 35,096,340
FINANCE - 6.4%
ASSET-BACKED SECURITIES - 1.1%
Airplanes Pass Through Trust
10 7/8%, 3/15/19 Ba2 8,550,000 9,875,250
Caterpillar Financial Asset Trust
6.55%, 5/22/02 A3 880,000 881,925
CPS Auto Grantor Trust
6.55%, 12/15/02 Aaa 3,269,748 3,276,900
Green Tree Financial Corp.:
6 1/2%, 6/15/27 Aaa 1,800,000 1,803,924
6.80%, 6/15/27 Aaa 1,900,000 1,909,500
6.45%, 9/15/28 Aaa 3,640,000 3,629,763
Olympic Automobile Receivables
Trust:
6.40%, 9/15/01 Aaa 4,550,000 4,561,577
6.70%, 3/15/02 Aaa 2,150,000 2,159,407
Premier Auto Trust:
8.05%, 4/4/00 Aaa 6,804,000 6,914,565
6%, 5/6/00 Aaa 2,320,000 2,317,819
WFS Financial Owner Trust
6.55%, 10/20/04 Aaa 4,430,000 4,417,984
41,748,614
BANKS - 1.7%
ABN Amro Bank NV 6 5/8%,
10/31/01 Aa3 7,000,000 6,971,090
Banc One Corp. 6.70%,
3/24/00 Aa3 4,500,000 4,520,970
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
BanPonce Financial Corp.
7.72%, 4/13/00 A3 $ 2,000,000 $ 2,042,740
BanPonce Corp. 6.665%,
3/5/01 A3 4,450,000 4,428,952
BanPonce Trust I 8.327%,
2/1/27 (d) Baa1 6,450,000 6,518,241
Capital One Bank:
6.74%, 5/31/99 Baa3 4,000,000 4,005,080
7.20%, 7/19/99 Baa3 8,000,000 8,093,760
6.42%, 11/12/99 Baa3 4,900,000 4,874,275 8 1/8%, 3/1/00 Baa3
1,500,000 1,550,250
Den Danske Bank AS
7.40%, 6/15/10 (d)(g) A1 4,580,000 4,576,611
Korea Development Bank yankee
7 1/4%, 5/15/06 A1 5,660,000 5,614,890
Midland Bank PLC yankee
7 5/8%, 6/15/06 A1 3,000,000 3,089,550
NB Capital Trust IV 8 1/4%,
4/15/27 A1 4,000,000 4,098,960
Signet Bank 7.80%, 9/15/06 Baa1 3,000,000 3,097,440
Signet Banking Corp.
9 5/8%, 6/1/99 Baa2 790,000 831,981
Summit Bancorp. 8 5/8%,
12/10/02 BBB 1,730,000 1,855,269
Union Planters National Bank
6.81%, 8/20/01 A3 3,500,000 3,504,375
69,674,434
CREDIT & OTHER FINANCE - 3.0%
AT&T Capital Corp.:
6.02%, 12/1/98 Baa3 7,500,000 7,477,950
6.39%, 1/22/99 Baa3 1,520,000 1,522,918
6.26%, 2/18/99 Baa3 8,000,000 7,983,120
6.16%, 12/3/99 Baa3 2,750,000 2,720,328
Ahmanson Capital Trust I
8.36%, 12/1/26 (d) Baa3 4,250,000 4,285,488
BCH Cayman Islands Ltd.
yankee 7.70%, 7/15/06 A3 2,600,000 2,656,368
CIT Group Holdings, Inc.
6 1/4%, 10/4/99 Aa3 6,500,000 6,483,750
Chrysler Financial Corp.
6 3/8%, 1/28/00 A3 7,600,000 7,577,200
Finova Capital Corp.:
6.44%, 11/6/01 Baa1 5,500,000 5,422,780
6.12%, 5/28/02 Baa1 2,000,000 1,936,840
First Security Capital I
8.41%, 12/15/26 A3 1,690,000 1,722,887
Ford Motor Credit Co.:
5.73%, 2/23/00 A1 3,250,000 3,185,423
6.65%, 5/22/00 A1 9,000,000 9,008,910
5.68%, 2/15/01 A1 5,000,000 4,835,000
6.57%, 3/19/01 A1 700,000 696,220
7%, 9/25/01 A1 12,500,000 12,605,500
General Electric Capital Corp.
6.94%, 4/13/09 (f) Aaa 7,000,000 7,065,870
General Motors Acceptance
Corp. 5 5/8%, 2/1/99 A3 5,000,000 4,947,250
GreenPoint Capital Trust I
9.10%, 6/1/27 (d) Ba1 1,200,000 1,207,200
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
FINANCE - CONTINUED
CREDIT & OTHER FINANCE - CONTINUED
Heller Financial, Inc.
7 7/8%, 11/1/99 A2 $ 5,050,000 $ 5,187,461
Household Finance Corp.
5.7825%, 6/4/98 (g) A2 12,500,000 12,500,000
KeyCorp Institutional Capital
Series A, 7.826%, 12/1/26 A1 3,600,000 3,496,356
Nordstrom Credit, Inc.
7 1/4%, 4/30/02 A2 3,500,000 3,558,450
TransAmerican Energy Corp.
11 1/2%, 6/15/02 (d) B3 230,000 224,250
Triton Energy Ltd./Triton Energy
Corp. 9 1/4%, 4/15/05 Ba2 930,000 984,638
119,292,157
INSURANCE - 0.2%
Reliance Group:
9%, 11/15/00 Ba3 180,000 185,400
9 3/4%, 11/15/03 B1 3,390,000 3,534,075
SunAmerica, Inc. 6.20%,
10/31/99 Baa1 5,500,000 5,461,005
9,180,480
SAVINGS & LOANS - 0.4%
Bank UTD Corp. 8 7/8%,
5/1/07 Ba3 3,760,000 3,886,900
Chevy Chase Savings Bank FSB
9 1/4%, 12/1/08 B1 2,410,000 2,416,025
First Nationwide Holdings, Inc.
10 5/8%, 10/1/03 Ba3 1,050,000 1,139,250
First Nationwide Parent Holdings
Ltd. 12 1/2%, 4/15/03 B3 3,530,000 3,935,950
Great Western Financial Corp.
8.60%, 2/1/02 Baa1 2,000,000 2,131,500
Long Island Savings Bank FSB
7%, 6/13/02 Baa3 2,500,000 2,503,125
16,012,750
TOTAL FINANCE 255,908,435
HEALTH - 0.5%
MEDICAL EQUIPMENT & SUPPLIES - 0.1%
McKesson Corp. 6.60%,
3/1/00 (d) A3 4,570,000 4,574,570
MEDICAL FACILITIES MANAGEMENT - 0.4%
Columbia/HCA Healthcare Corp.:
6 1/2%, 3/15/99 A2 4,500,000 4,515,615
6 7/8%, 7/15/01 A2 2,000,000 2,010,400
Integrated Health Services, Inc.
9 1/2%, 9/15/07 (d) B1 1,300,000 1,329,250
Tenet Healthcare Corp.:
8%, 1/15/05 Ba1 280,000 280,000
10 1/8%, 3/1/05 Ba3 3,760,000 4,098,400
8 5/8%, 1/15/07 Ba3 5,120,000 5,196,800
17,430,465
TOTAL HEALTH 22,005,035
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
HOLDING COMPANIES - 0.2%
Norfolk Southern Corp.
7.05%, 5/1/37 Baa1 $ 6,610,000 $ 6,708,753
INDUSTRIAL MACHINERY & EQUIPMENT - 0.2%
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
Continental Global Group, Inc.
11%, 4/1/07 (d) B2 730,000 766,500
Exide Corp. 10%, 4/15/05 B1 825,000 853,875
Goss Graphic System, Inc.
12%, 10/15/06 B2 1,890,000 2,079,000
3,699,375
POLLUTION CONTROL - 0.1%
Allied Waste of North America,
Inc. 10 1/4%, 12/1/06 (d) B3 1,990,000 2,129,300
WMX Technologies, Inc.
7.10%, 8/1/26 A3 2,700,000 2,751,219
4,880,519
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 8,579,894
MEDIA & LEISURE - 2.8%
BROADCASTING - 1.8%
Adelphia Communications Corp.:
9 1/2%, 2/15/04 B3 4,130,000 3,923,500
9 7/8%, 3/1/07 (d) - 1,020,000 984,300
Cablevision System Corp.:
9 1/4%, 11/1/05 B2 1,370,000 1,407,675
9 7/8%, 5/15/06 B2 1,330,000 1,413,125
sr. sub. deb. 9 7/8%,
2/15/13 B2 340,000 357,850
Capstar Radio Broadcasting
Partners, Inc. (d):
9 1/4%, 7/1/07 - 2,930,000 2,834,775
0%, 2/1/09 (b) CCC 600,000 385,500
Diamond Cable Communications
PLC yankee (b):
0%, 9/30/04 B3 2,320,000 1,873,400
0%, 2/15/07 (d) - 1,930,000 1,083,213
Echostar Communications Corp.
secured discount 0%,
6/1/04 (b) B2 2,320,000 1,948,800
Echostar Satellite Broadcasting
Corp. 0%, 3/15/04 (b) Caa 1,600,000 1,136,000
Echostar DBS Corp. 12 1/2%,
7/1/02 (d) Caa 930,000 921,863
Granite Broadcasting Corp.:
10 3/8%, 5/15/05 B3 710,000 718,875
9 3/8%, 12/1/05 B3 265,000 255,063
Intermedia Capital Partners IV LP/
Intermedia Partners IV Capital
Corp. 11 1/4%, 8/1/06 B2 890,000 957,863
International Cabletel, Inc.:
0%, 2/1/06 (b) B3 1,480,000 1,021,200
10%, 2/15/07 (d) - 2,480,000 2,504,800
Jacor Communications Co.
8 3/4%, 6/15/07 (d) B2 250,000 246,875
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
MEDIA & LEISURE - CONTINUED
BROADCASTING - CONTINUED
Lenfest Communications, Inc.
8 3/8%, 11/1/05 Ba3 $ 2,500,000 $ 2,462,500
Olympus Communications LP/
Olympus Capital Corp.
10 5/8%, 11/15/06 B1 1,070,000 1,118,150
Rogers Cablesystems Ltd. yankee
11%, 12/1/15 B2 1,800,000 1,971,000
SCI Television, Inc. secured
11%, 6/30/05 Ba1 1,480,000 1,561,400
SFX Broadcasting, Inc.
10 3/4%, 5/15/06 B3 1,870,000 2,014,925
TCI Communication, Inc.:
7 1/4%, 6/15/99 Ba1 8,590,000 8,655,628
6.46%, 3/6/00 Ba1 6,570,000 6,462,186
TCI Communications Financing
III 9.65%, 3/31/27 Ba3 3,480,000 3,644,743
Tele Communications, Inc.
9 1/4%, 4/15/02 Ba1 3,000,000 3,219,060
Telemundo Group, Inc.
7%, 2/15/06 (f) B1 4,170,000 3,992,775
Telewest PLC 0%, 10/1/07 (b) B1 4,860,000 3,511,350
Time Warner, Inc.:
7.95%, 2/1/00 Ba1 7,810,000 8,029,383
7 3/4%, 6/15/05 Ba1 2,150,000 2,184,938
9.15%, 2/1/23 Ba1 1,020,000 1,126,580
73,929,295
ENTERTAINMENT - 0.1%
AMC Entertainment, Inc.
9 1/2%, 3/15/09 (d) B2 1,560,000 1,583,400
Cinemark USA, Inc.
9 5/8%, 8/1/08 B2 340,000 345,100
Viacom, Inc. 8%, 7/7/06 B1 3,470,000 3,365,900
5,294,400
LEISURE DURABLES & TOYS - 0.1%
Coleman Escrow Corp.
secured 1st priority
0%, 5/15/01 (d) B3 3,000,000 1,890,000
LODGING & GAMING - 0.4%
American Skiing Co.
12%, 7/15/06 B3 2,600,000 2,730,000
Circus Circus Enterprises, Inc.
7%, 11/15/36 Baa2 2,125,000 2,063,906
Courtyard by Marriott II LP/
Courtyard II Finance Co.,
Series B, 10 3/4%, 2/1/08 B- 1,190,000 1,288,175
HMC Acquisition Properties, Inc.
9%, 12/15/07 Ba3 4,730,000 4,777,300
HMH Properties, Inc.
9 1/2%, 5/15/05 Ba3 1,620,000 1,688,850
Hollywood Casino Corp.
12 3/4%, 11/1/03 B2 330,000 349,800
Horseshoe Gaming LLC
9 3/8%, 6/15/07 (d) B3 480,000 483,000
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Prime Hospitality Corp.
9 3/4%, 4/1/07 - $ 1,880,000 $ 1,978,700
Sun International Hotels Ltd./Sun
International North America,
Inc. yankee 9%, 3/15/07 Ba3 1,810,000 1,837,150
Wyndham Hotel Corp.
10 1/2%, 5/15/06 B2 580,000 648,150
17,845,031
PUBLISHING - 0.2%
Golden Books Publishing, Inc.
7.65%, 9/15/02 B1 490,000 453,250
News America Holdings, Inc.
7.70%, 10/30/25 Baa3 5,310,000 5,028,145
Sun Media Corp. (d):
yankee 9 1/2%, 2/15/07 B3 1,200,000 1,212,000
9 1/2%, 5/15/07 B3 370,000 373,700
7,067,095
RESTAURANTS - 0.2%
Foodmaker, Inc. 9 3/4%,
6/1/02 B3 2,630,000 2,695,750
Host Marriott Travel Plazas, Inc.
9 1/2%, 5/15/05 B1 5,500,000 5,720,000
8,415,750
TOTAL MEDIA & LEISURE 114,441,571
NONDURABLES - 0.5%
FOODS - 0.2%
Chiquita Brands International, Inc.:
9 5/8%, 1/15/04 B1 1,980,000 2,041,875
10 1/4%, 11/1/06 B1 220,000 233,200
ConAgra, Inc. 7 1/8%,
10/1/26 Baa1 4,250,000 4,268,870
Specialty Foods Corp.
11 1/8%, 10/1/02 B3 2,760,000 2,732,400
9,276,345
HOUSEHOLD PRODUCTS - 0.1%
Revlon Consumer Products Corp.
10 1/2%, 2/15/03 B3 4,120,000 4,387,800
TOBACCO - 0.2%
Philip Morris Companies, Inc.:
7 1/4%, 9/15/01 A2 4,600,000 4,635,052
6.95%, 6/1/06 A2 4,420,000 4,434,719
9,069,771
TOTAL NONDURABLES 22,733,916
RETAIL & WHOLESALE - 1.1%
APPAREL STORES - 0.1%
AnnTaylor, Inc. 8 3/4%,
6/15/00 B3 2,810,000 2,824,050
Lamonts Apparel, Inc. 10 1/4%,
11/1/99 pay-in-kind (d)(h) - 2,816,000 112,640
Specialty Retailers, Inc. (d):
8 1/2%, 7/15/05 Ba3 810,000 807,975
9%, 7/15/07 B2 80,000 79,600
3,824,265
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
GENERAL MERCHANDISE STORES - 0.7%
Dayton Hudson Corp.:
6.80%, 10/1/01 Baa1 $ 4,000,000 $ 3,993,160
7 1/2%, 7/15/06 Baa1 3,500,000 3,569,545
Federated Department Stores, Inc.:
10%, 2/15/01 Baa2 8,830,000 9,659,755
8 1/8%, 10/15/02 Baa2 1,510,000 1,573,148
K Mart Corp.:
12 1/2%, 3/1/05 Ba3 2,020,000 2,434,100
7 3/4%, 10/1/12 Ba3 240,000 219,600
8 1/4%, 1/1/22 Ba3 1,790,000 1,628,900
Michaels Stores, Inc. 10 7/8%,
6/18/06 Ba2 1,090,000 1,171,750
Parisian, Inc. 9 7/8%, 7/15/03 B1 2,120,000 2,204,800
Penney (J.C.) Co., Inc.
6.95%, 4/1/00 A2 4,300,000 4,336,206
30,790,964
GROCERY STORES - 0.3%
Kroger Co. 8.15%, 7/15/06 Baa3 2,250,000 2,372,310
Pathmark Stores, Inc.:
12 5/8%, 6/15/02 Caa 1,720,000 1,763,000
9 5/8%, 5/1/03 B3 3,760,000 3,628,400
0%, 11/1/03 (b) Caa 1,670,000 1,139,775
Penn Traffic Co.:
10 1/4%, 2/15/02 B3 1,060,000 911,600
8 5/8%, 12/15/03 B3 460,000 371,450
Pueblo Xtra International, Inc.
9 1/2%, 8/1/03 (d) B3 480,000 463,200
Randalls Food Markets, Inc.
9 3/8%, 7/1/07 (d) B2 140,000 139,475
10,789,210
TOTAL RETAIL & WHOLESALE 45,404,439
SERVICES - 0.5%
LEASING & RENTAL - 0.3%
PHH Corp. 5.6775%,
6/11/98 (g) A2 12,500,000 12,498,620
PRINTING - 0.0%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa 1,410,000 1,448,775
SERVICES - 0.2%
Borg-Warner Security Corp.
9 5/8%, 3/15/07 (d) B3 960,000 964,800
Orion Network System, Inc. unit:
0%, 1/15/07 (b) B2 4,060,000 2,314,200
11 1/4%, 1/15/07 B2 2,710,000 2,770,975
6,049,975
TOTAL SERVICES 19,997,370
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
TECHNOLOGY - 0.4%
COMPUTERS & OFFICE EQUIPMENT - 0.3%
Comdisco, Inc. 6 3/8%,
11/30/01 Baa1 $ 8,300,000 $ 8,124,787
Unisys Corp.:
12%, 4/15/03 B1 2,310,000 2,500,575
11 3/4%, 10/15/04 B1 970,000 1,047,600
11,672,962
ELECTRONICS - 0.1%
Advanced Micro Devices, Inc.
11%, 8/1/03 Ba1 2,040,000 2,264,400
Fairchild Semiconductor Corp.:
10 1/8%, 3/15/07 (d) B2 1,340,000 1,413,700
11.74%, 3/15/08
pay-in-kind (e) - 1,760,000 1,696,288
Viasystems, Inc. 9 3/4%,
6/1/07 (d) B3 190,000 193,325
5,567,713
TOTAL TECHNOLOGY 17,240,675
TRANSPORTATION - 0.3%
AIR TRANSPORTATION - 0.2%
Delta Air Lines, Inc. 9 7/8%,
5/15/00 Baa3 1,500,000 1,616,640
US Air, Inc.:
9 5/8%, 2/1/01 B3 1,810,000 1,864,300
10%, 7/1/03 B3 2,200,000 2,266,000
10 3/8%, 3/1/13 B1 1,240,000 1,357,800
7,104,740
RAILROADS - 0.1%
Burlington Northern Santa Fe
Corp. 7.29%, 6/1/36 Baa2 3,000,000 3,075,360
TOTAL TRANSPORTATION 10,180,100
UTILITIES - 1.7%
CELLULAR - 0.3%
Globalstar LP/Globalstar
Capital Corp. (d):
unit 11 3/8%, 2/15/04 B3 1,410,000 1,410,000
11 1/4%, 6/15/04 B3 1,240,000 1,159,400
McCaw International Ltd.
unit 0%, 4/15/07 (b)(d) CCC 3,200,000 1,536,000
Millicom International Cellular
SA 0%, 6/1/06 (b) B3 1,550,000 1,108,250
Paging Network, Inc.
8 7/8%, 2/1/06 B2 670,000 609,700
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
UTILITIES - CONTINUED
CELLULAR - CONTINUED
Telesystem International
Wireless, Inc. 0%,
6/30/07 (b)(d) B- $ 290,000 $ 154,425
360 Degrees Communications Co.:
7 1/8%, 3/1/03 Ba1 4,310,000 4,286,252
7 1/2%, 3/1/06 Ba1 3,150,000 3,142,314
13,406,341
ELECTRIC UTILITY - 0.6%
CMS Energy Corp. 8 1/8%,
5/15/02 Ba3 2,230,000 2,246,725
CalEnergy, Inc. 9 1/2%,
9/15/06 Ba2 900,000 963,000
Commonwealth Edison Co.
7 3/8%, 9/15/02 Baa2 5,170,000 5,246,568
Hydro-Quebec yankee
7.40%, 3/28/25 A2 2,620,000 2,839,687
Israel Electric Corp. yankee
7 7/8%, 12/15/26 (d) A3 2,940,000 2,960,786
Long Island Lighting Co.
8 5/8%, 4/15/04 Ba1 6,130,000 6,385,498
NIPSCO Capital Markets, Inc.
7.39%, 4/1/04 Baa1 3,500,000 3,531,710
24,173,974
TELEPHONE SERVICES - 0.8%
LCI International, Inc.
7 1/4%, 6/15/07 Ba1 3,650,000 3,615,325
MFS Communications, Inc. (b):
0%, 1/15/04 Ba3 4,255,000 3,960,554
0%, 1/15/06 Ba3 5,945,000 4,689,119
McleodUSA, Inc. 0%,
3/1/07 (b)(d) B3 1,240,000 790,500
Shared Technologies Fairchild
Communications Corp.
0%, 3/1/06 (b) Caa 1,020,000 910,350
Teleport Communications Group,
Inc. 0%, 7/1/07 (b) B1 1,940,000 1,399,225
Winstar Equipment Corp.
12 1/2%, 3/15/04 (d) CCC 1,140,000 1,114,350
WorldCom, Inc. 7 3/4%,
4/1/07 Ba1 12,750,000 13,039,170
29,518,593
TOTAL UTILITIES 67,098,908
TOTAL NONCONVERTIBLE CORPORATE BONDS
(Cost $681,642,417) 688,373,462
U.S. GOVERNMENT AND GOVERNMENT
AGENCY OBLIGATIONS - 7.8%
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
U.S. TREASURY OBLIGATIONS - 5.8%
9 1/4%, 8/15/98 Aaa $ 37,055,000 $ 38,380,828
7 3/4%, 12/31/99 Aaa 1,560,000 1,615,817
7 7/8%, 8/15/01 Aaa 315,000 331,982
11 7/8%, 11/15/03 Aaa 38,040,000 48,637,564
7%, 7/15/06 Aaa 10,507,000 10,809,076
11 3/4%, 2/15/10 (callable) Aaa 26,045,000 33,952,002
12 3/4%, 11/15/10 (callable) Aaa 12,000,000 16,651,920
13 7/8%, 5/15/11 (callable) Aaa 25,650,000 37,934,042
9%, 11/15/18 Aaa 10,240,000 12,667,187
7 1/4%, 2/ 15/23 Aaa 14,126,000 14,549,780
6 1/2%, 11/15/26 Aaa 19,365,000 18,572,197
234,102,395
U.S. GOVERNMENT AGENCY OBLIGATIONS - 2.0%
Farm Credit Systems Financial
Assistance Corp.
8.80%, 6/10/05 Aaa 2,000,000 2,244,060
Federal Agricultural Mortgage
Corp. 7.63%, 1/16/01 Aaa 3,321,000 3,442,947
Federal Farm Credit Bank:
8.16%, 12/7/04 Aaa 5,000,000 5,401,550
9.55%, 5/9/05 Aaa 2,500,000 2,914,050
Federal Home Loan Bank:
7.31%, 6/16/04 Aaa 2,500,000 2,584,375
8.22%, 11/17/04 Aaa 4,000,000 4,315,040
7.59%, 3/10/05 Aaa 3,850,000 4,047,313
Federal Home Loan Mortgage
Corporation 6 3/4%,
8/1/05 Aaa 2,500,000 2,492,975
Federal National Mortgage
Association 6.97%,
4/8/04 Aaa 6,010,000 6,103,876
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 7,596,471 7,734,157
State of Israel (guaranteed by U.S.
Government through Agency
for International Development):
6 5/8%, 8/15/03 Aaa 7,810,000 7,829,369
5 5/8%, 9/15/03 Aaa 8,540,000 8,130,849
6 3/4%, 8/15/04 Aaa 2,144,000 2,153,284
U.S. Trade Trust Certificates
(assets of Trust guaranteed
by U.S. Government
through Export-Import Bank)
6.69%, 1/15/09 (d) Aaa 5,760,000 5,725,555
U.S. GOVERNMENT AND GOVERNMENT
AGENCY OBLIGATIONS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
U.S. GOVERNMENT AGENCY OBLIGATIONS - CONTINUED
U.S. Department of Housing
and Urban Development
Government guaranteed
participation certificates:
Series 1995-A, 8.24%,
8/1/04 Aaa $ 3,260,000 $ 3,521,224
Series 1996-A, 6.67%, 8/1/01 Aaa 9,400,000 9,436,942
Series 1996-A, 7.63%,
8/1/14 (callable) Aaa 2,825,000 2,888,421
80,965,987
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $320,604,811) 315,068,382
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES - 5.4%
FEDERAL HOME LOAN MORTGAGE CORPORATION - 0.4%
5 1/2%, 1/1/03 to 6/1/03 Aaa 4,030,042 3,846,916
7%, 4/1/01 to 8/1/01 Aaa 2,876,294 2,891,588
7 1/2%, 7/1/27 (j) Aaa 8,760,000 8,801,063
8 1/2%, 7/1/21 to 6/1/23 Aaa 268,153 280,424
15,819,991
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 3.9%
5 1/2%, 2/1/03 to 5/1/03 Aaa 4,018,328 3,834,971
6%, 10/1/02 to 5/1/26 Aaa 65,927,205 63,068,623
6 1/2%, 12/1/25 to 7/1/26 Aaa 73,328,857 70,194,335
7%, 5/1/26 Aaa 14,281,900 14,014,114
7 1/2%, 5/1/26 to 8/1/26 Aaa 5,646,930 5,665,761
156,777,804
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 1.1%
6%, 12/15/08 to 5/15/26 Aaa 10,839,939 10,530,343
6 1/2%, 6/15/08 to 7/15/09 Aaa 20,093,334 19,870,622
8%, 5/15/25 Aaa 226,289 231,661
8 1/2%, 12/15/16
to 10/15/26 Aaa 13,809,620 14,349,525
44,982,151
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $214,280,261) 217,579,946
COMMERCIAL MORTGAGE SECURITIES - 1.2%
American Southwest Financial
Securities Series 1994-C2
Class B2, 12.79%,
12/25/01 (d)(g) - 750,000 738,750
BKB Commercial Mortgage Trust
Series 1997-C1 Class D,
7.83%, 2/25/43 (d)(g) BBB 1,800,000 1,818,000
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Berkeley Federal Bank & Trust
FSB Series 1994 Class 1-B,
7.78%, 8/1/24 (d)(g) - $ 1,900,000 $ 1,371,563
Blackrock Capital Funding LLC
Series 1996 Class C2,
7.60%, 11/16/26 (d) Aaa 1,215,001 1,226,771
CBA Mortgage Corp. Series
1993-C1 Class E, 7.76%,
12/25/03 (d)(g) Ba2 500,000 480,625
CS First Boston Mortgage
Securities Corp. Series
1995-AEWI Class E,
9.80%, 11/25/97 (d)(g) - 1,100,000 1,106,875
DLJ Mortgage Acceptance Corp.
Series 1993-MF12 Class B-2,
10.10%, 9/18/03 (d) - 600,000 601,500
Equitable Life Assurance Society
of the United States (The) (d):
Series 174 Class B1, 7.33%,
5/15/06 Aa2 3,500,000 3,560,480
Series 174, Class D1, 7.77%,
5/15/06 Baa2 2,200,000 2,260,896
Series 1996-1 Class C1,
7.52%, 5/15/06 A2 2,300,000 2,355,499
First Chicago/Lennar Trust I
Series 1997-CHL1 (g):
Class D, 8.11%, 5/29/08 - 1,100,000 1,050,156
Class E, 8.11%, 4/1/39 - 1,600,000 1,223,000
General Motors Acceptance
Corp. Commercial Mortgage
Securities, Inc. Series
1996-C1 Class F, 7.86%,
11/15/06 (d) Ba3 750,000 702,758
Kidder Peabody Acceptance
Corp. sequential pay, Series
1993-M1 Class A-2, 7.15%,
4/25/25 Aa2 2,325,889 2,338,245
Merrill Lynch Mortgage
Investments, Inc. Series
1994 Class M1-E, 8.13%,
6/25/22 (d)(g) Ba2 5,670,000 5,549,513
Morgan Stanley Capital One, Inc.:
Series 1996-MBL1 Class E,
8.661%, 5/25/21 (d) - 1,870,310 1,717,178
sequential pay Series 1997-C1
Class A-1C, 7.63%,
2/15/20 Aaa 4,560,000 4,718,175
Mortgage Capital Funding, Inc.
Series 1996-MC1 Class G,
7.15%, 7/15/28 (d) BB 1,000,000 878,050
NB Commercial Mortgage
sequential pay, Series FSI
Class A, 7.187%,
10/20/23 (d) - 1,752,227 1,755,239
Penn Mutual Life Insurance Co.
(The) Series 1996-PML (d):
Class K, 7.90%, 11/15/26 - 1,473,000 911,419
Class L, 7.90%, 11/15/26 - 1,133,000 483,678
COMMERCIAL MORTGAGE SECURITIES - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Structured Asset Securities Corp.:
Series 1995-C1 Class E,
7 3/8%, 9/25/24 (d) BB $ 1,200,000 $ 1,068,750
Series 1993-C1 Class E,
6.60%, 10/25/24 (d) B 1,250,000 437,500
sequential pay Series 1996
Class A-2A, 7 3/4%,
2/25/28 Aaa 1,624,291 1,647,133
Series 1996-CFL Class G,
7 3/4%, 2/25/28 (d) - 1,000,000 855,781
Series 1996-C3 Class E,
8.46%, 6/25/30 (d) - 500,000 472,422
Wells Fargo Capital Markets
Apartment Financing Trust
6.56%, 12/29/05 (d) Aaa 4,650,000 4,586,574
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $44,396,294) 45,916,530
FOREIGN GOVERNMENT OBLIGATIONS (I) - 0.5%
Export Development Corp. yankee
8 1/8%, 8/10/99 Aa2 1,640,000 1,697,531
Israeli State euro 6 3/8%,
12/19/01 A3 5,750,000 5,642,188
Manitoba Province yankee
6 3/8%, 10/15/99 A1 7,000,000 6,999,400
Mexico Value recovery rights
6/30/03 discount A - 2,000 -
Newfoundland Province yankee
11 5/8%, 10/15/07 Baa1 2,000,000 2,652,000
Quebec Province yankee
7.22%, 7/22/36 (f) A2 3,500,000 3,644,060
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $20,474,119) 20,635,179
CERTIFICATES OF DEPOSIT - 3.0%
ABN-Amro Bank NV yankee
5.65%, 12/23/97 8,000,000 7,990,202
Banque Nationale de Paris
yankee 5.85%, 9/30/97 4,800,000 4,801,296
Bayerische Vereinsbank AG
yankee 5.56%, 7/14/97 12,500,000 12,499,668
Caisse Nationale de Credit Agricole
yankee 5.60%, 7/21/97 12,500,000 12,499,673
Deutsche Bank AG yankee
6.20%, 4/10/98 6,000,000 6,004,704
Landesbank Hessen-Thuringen
yankee:
5.78%, 1/27/98 6,200,000 6,195,567
5.67%, 2/11/98 3,000,000 2,994,737
National Westminster Bank PLC
yankee 5 1/2%, 8/5/97 12,000,000 11,996,960
Rabobank Nederlan, Coop Central
yankee:
5.97%, 3/20/98 3,500,000 3,502,013
6.20%, 4/10/98 5,000,000 5,003,920
PRINCIPAL VALUE
AMOUNT (NOTE 1)
Sanwa Bank Ltd. yankee
5 3/4%, 8/27/97 $ 12,500,000 $ 12,500,631
Societe Generale yankee
5.55%, 7/28/97 12,000,000 11,998,172
Swiss Bank Corp. yankee
5 1/2%, 8/4/97 12,000,000 11,997,162
SunTrust Bank 5.85%, 11/25/97 11,000,000 11,003,412
TOTAL CERTIFICATES OF DEPOSIT
(Cost $120,986,009) 120,988,117
COMMERCIAL PAPER - 1.5%
ABN-Amro North America, Inc.
yankee 5.82%, 12/5/97 1,000,000 975,466
AC Acquisition Holding Co.
5.56%, 7/9/97 4,500,000 4,493,700
BMW US Capital Corp. yankee
5.57%, 8/19/97 6,600,000 6,548,850
Caisse des Depots et Consignations
yankee 5.58%, 9/18/97 250,000 246,917
Citibank Credit Card Master Trust I
(Dakota Certificate Program):
5.58%, 7/7/97 2,600,000 2,597,138
5.60%, 8/22/97 1,900,000 1,884,168
Delaware Funding Corp.
5.58%, 9/16/97 2,050,000 2,025,349
Fina Oil & Chemical Co.
5.61%, 8/14/97 3,400,000 3,375,945
General Electric Capital Corp.
5.75%, 7/1/97 6,400,000 6,399,016
Goldman Sachs Group LP
5.83%, 1/26/98 5,000,000 4,836,958
Nationwide Building Society
yankee 5.32%, 8/11/97 7,000,000 6,954,593
New Center Asset Trust
5.60%, 8/15/97 1,100,000 1,092,185
Norfolk Southern Corp.
5.77%, 7/16/97 2,500,000 2,493,622
Pacific Gas & Electric Co.
5.60%, 8/28/97 1,500,000 1,486,332
Triple A One Funding Corp.
5.58%, 7/16/97 3,600,000 3,591,152
Unifunding, Inc. yankee:
5.58%, 9/15/97 4,800,000 4,742,712
5.67%, 11/12/97 8,000,000 7,832,000
TOTAL COMMERCIAL PAPER
(Cost $61,568,752) 61,576,103
BANK NOTES - 1.2%
Bank of Tokyo-Mitsubishi Ltd.
5.70%, 7/14/97 12,500,000 12,500,000
Corestates Bank NA 5.65%,
1/30/98 (g) 6,000,000 5,999,939
First Bank National Association
5.60%, 5/15/98 (g) 5,800,000 5,796,346
BANK NOTES - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
Morgan Guaranty Trust Co. 5.375%,
3/30/98 (g) $ 11,000,000 $ 10,994,720
Sumitomo Bank Ltd.
5.74%, 7/11/97 12,500,000 12,500,000
TOTAL BANK NOTES
(Cost $47,790,819) 47,791,005
CASH EQUIVALENTS - 0.2%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account dated 6/30/97
due 7/1/97:
at 5 7/8% $ 3,661,597 3,661,000
at 5.99% 250,042 250,000
at 5.93% 3,748,617 3,748,000
7,659,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $3,536,460,505) $ 4,022,978,346
LEGEND
1. Non-income producing
2. Debt obligation initially issued in zero coupon form which converts to
coupon form at a specified rate and date.
3. Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
4. 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 $132,179,126 or 3.3% of net
assets.
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
SECURITY DATE COST
Fairchild Semiconductor Corp.
11.74%, 3/15/08 pay-in-kind 4/3/97 $1,541,077
6. Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date.
7. The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
8. Non-income producing - issuer filed for protection under the Federal
Bankruptcy Code or is in default of interest payment.
9. For foreign government obligations not 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.
10. Security purchased on a delayed delivery or when-issued basis
(see Note 2 of Notes to Financial Statements).
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $1,654,154,486 and $1,477,645,288, respectively, of which U.S.
government and government agency obligations aggregated $412,461,203 and
$889,699,347, 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 $174,322 for the period.
The composition of long-term debt holdings as a percentage of total value
of investment in securities, is as follows:
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 19.5% AAA, AA, A 18.8%
Baa 3.9% BBB 5.7%
Ba 3.6% BB 2.0%
B 3.9% B 3.8%
Caa 0.2% CCC 0.4%
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 0.6%. FMR has determined that unrated debt
securities that are lower quality account for 0.2% of the total value of
investment in securities.
Distribution of investments by country of issue, as a percentage of total
value of investment in securities, is as follows:
United States 88.6%
United Kingdom 2.9
Netherlands 2.1
France 1.4
Canada 1.0
Others (individually less than 1%) 4.0
TOTAL 100.0%
INCOME TAX INFORMATION
At June 30, 1997, the aggregate cost of investment securities for income
tax purposes was $3,538,260,955. Net unrealized appreciation aggregated
$484,717,391, of which $515,085,273 related to appreciated investment
securities and $30,367,882 related to depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in $ 4,022,978,346
securities, at value
(including
repurchase
agreements of
$7,659,000) (cost
$3,536,460,505) -
See accompanying
schedule
Cash 317,016
Receivable for 3,697,569
investments sold
Receivable for fund 1,283,409
shares sold
Dividends receivable 5,653,220
Interest receivable 21,592,771
Other receivables 59,936
TOTAL ASSETS 4,055,582,267
LIABILITIES
Payable for $ 13,833,520
investments
purchased
Regular delivery
Delayed delivery 8,800,150
Payable for fund 4,879,599
shares redeemed
Accrued management 1,828,948
fee
Other payables and 396,197
accrued expenses
TOTAL LIABILITIES 29,738,414
NET ASSETS $ 4,025,843,853
Net Assets consist of:
Paid in capital $ 3,392,224,145
Undistributed net 69,229,933
investment income
Accumulated 77,872,297
undistributed
net realized gain
(loss) on
investments and
foreign
currency
transactions
Net unrealized 486,517,478
appreciation
(depreciation) on
investments
and assets and
liabilities in
foreign currencies
NET ASSETS, for $ 4,025,843,853
242,519,191
shares outstanding
NET ASSET VALUE, $16.60
offering price
and redemption
price per share
($4,025,843,853 (divided by)
242,519,191
shares)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $ 20,936,069
Dividends
Interest 60,402,478
TOTAL INCOME 81,338,547
EXPENSES
Management fee $ 10,415,204
Transfer agent fees 1,341,983
Accounting fees and 402,957
expenses
Non-interested 8,207
trustees'
compensation
Custodian fees and 105,052
expenses
Registration fees 8,446
Audit 71,538
Legal 5,834
Miscellaneous 142,608
Total expenses 12,501,829
before reductions
Expense reductions (82,260 12,419,569
)
NET INVESTMENT 68,918,978
INCOME
REALIZED AND
UNREALIZED GAIN
(LOSS)
Net realized gain
(loss) on:
Investment 82,598,838
securities
Foreign currency (10,176 82,588,662
transactions )
Change in net
unrealized
appreciation
(depreciation) on:
Investment 255,138,426
securities
Assets and 519 255,138,945
liabilities in
foreign currencies
NET GAIN (LOSS) 337,727,607
NET INCREASE $ 406,646,585
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
OTHER INFORMATION $ 71,772
Expense reductions
Directed
brokerage
arrangements
Custodian credits 10,488
$ 82,260
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) SIX MONTHS YEAR ENDED
IN NET ASSETS ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED)
Operations $ 68,918,978 $ 123,680,897
Net investment
income
Net realized gain 82,588,662 331,183,089
(loss)
Change in net 255,138,945 15,746,586
unrealized
appreciation
(depreciation)
NET INCREASE 406,646,585 470,610,572
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
Distributions to (126,645,359) (119,397,539)
shareholders
From net
investment income
From net realized (317,686,664) (98,450,602)
gain
TOTAL DISTRIBUTIONS (444,332,023) (217,848,141)
Share transactions 160,759,463 270,086,820
Net proceeds from
sales of shares
Reinvestment of 444,332,023 217,848,141
distributions
Cost of shares (182,756,372) (432,347,524)
redeemed
NET INCREASE 422,335,114 55,587,437
(DECREASE) IN NET
ASSETS RESULTING
FROM SHARE
TRANSACTIONS
TOTAL INCREASE 384,649,676 308,349,868
(DECREASE) IN NET
ASSETS
NET ASSETS
Beginning of period 3,641,194,177 3,332,844,309
End of period $ 4,025,843,853 $ 3,641,194,177
(including
undistributed net
investment
income of
$69,229,933 and
$120,488,851,
respectively)
OTHER INFORMATION
Shares
Sold 10,083,606 17,138,645
Issued in 28,796,632 14,427,029
reinvestment of
distributions
Redeemed (11,428,361) (27,544,207)
Net increase 27,451,877 4,021,467
(decrease)
<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> <C>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1997
SELECTED PER-SHARE (UNAUDITED) 1996 1995 1994 1993 E 1992
DATA
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Net asset value, $ 16.93 $ 15.79 $ 13.79 $ 15.42 $ 13.32 $ 12.55
beginning of period
Income from
Investment
Operations
Net investment .29 D .63 .30 .45 .33 .32
income
Net realized and 1.45 1.55 1.99 (1.33) 2.39 1.09
unrealized gain
(loss)
Total from 1.74 2.18 2.29 (.88) 2.72 1.41
investment
operations
Less Distributions
From net (.59) (.57) (.29) (.29) (.33) (.31)
investment income
In excess of net - - - - (.04) -
investment income
From net realized (1.48) (.47) - (.46) (.25) (.33)
gain
Total distributions (2.07) (1.04) (.29) (.75) (.62) (.64)
Net asset value, end $ 16.60 $ 16.93 $ 15.79 $ 13.79 $ 15.42 $ 13.32
of period
TOTAL RETURN B, C 11.20% 14.60% 16.96% (6.09)% 21.23% 11.71%
RATIOS AND
SUPPLEMENTAL
DATA
Net assets, end of $ 4,025,844 $ 3,641,194 $ 3,332,844 $ 3,290,527 $ 2,422,692 $ 731,724
period (000
omitted)
Ratio of expenses to .67% A .74% .81% .81% .88% .91%
average net assets
Ratio of expenses to .66% A, .73% F .79% F .80% F .88% .91%
average net assets F
after expense
reductions
Ratio of net 3.69% A 3.60% 3.54% 4.07% 3.64% 4.89%
investment income
to average net
assets
Portfolio turnover rate 86% A 168% 256% 85% 113% 92%
Average commission $ .0464 $ .0163
rate G
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE
NOT ANNUALIZED AND 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 NET INVESTMENT INCOME PER SHARE HAS
BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING
DURING THE PERIOD. E 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. F 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). G 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>
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED 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). If Fidelity had not
reimbursed certain fund expenses, the life of fund total return would have
been lower.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 LIFE OF
JUNE 30, 1997 YEAR FUND
BALANCED 24.77% 15.39%
S&P 500(registered trademark) 34.70% 33.11%
Lehman Brothers Aggregate Bond Index 8.15% 9.91%
AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and show
what would have happened if the fund had achieved that return by performing
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 -
and the performance of 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.
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.
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.
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 long-term growth and short-term
volatility. 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)
$10,000 OVER LIFE OF FUND
1995/01/03 10000.00 10000.00
10000.00
1995/01/31 9990.00 10258.23
10197.90
1995/02/28 10190.00 10658.00
10440.37
1995/03/31 10260.00 10972.51
10504.42
1995/04/30 10390.00 11295.66
10651.15
1995/05/31 10610.00 11747.14
11063.32
1995/06/30 10740.00 12020.03
11144.43
1995/07/31 10880.00 12418.61
11119.54
1995/08/31 10920.00 12449.78
11253.74
1995/09/30 11020.00 12975.16
11363.22
1995/10/31 10890.00 12928.84
11511.00
1995/11/30 11210.00 13496.42
11683.49
1995/12/31 11391.59 13756.36
11847.46
1996/01/31 11473.17 14224.63
11926.13
1996/02/29 11319.47 14356.49
11718.83
1996/03/31 11227.28 14494.74
11637.37
1996/04/30 11258.01 14708.39
11571.92
1996/05/31 11380.93 15087.72
11548.42
1996/06/30 11452.64 15145.21
11703.51
1996/07/31 11227.28 14476.09
11735.54
1996/08/31 11298.98 14781.39
11715.87
1996/09/30 11780.44 15613.29
11920.04
1996/10/31 12098.00 16043.91
12184.08
1996/11/30 12733.12 17256.66
12392.78
1996/12/31 12528.25 16914.81
12277.55
1997/01/31 12927.76 17971.65
12315.15
1997/02/28 13144.66 18112.54
12345.78
1997/03/31 12777.20 17368.30
12208.97
1997/04/30 13260.15 18405.19
12391.74
1997/05/31 13785.10 19525.70
12508.88
1997/06/30 14289.05 20400.45
12657.35
Let's say hypothetically that $10,000 was invested in Balanced Portfolio on
January 3, 1995, when the fund started. As the chart shows, by June 30,
1997, the value of the investment would have grown to $14,289 - a 42.89%
increase on the initial investment. For comparison, look at how both the
S&P 500 and Lehman Brothers Aggregate Bond Index did over the same period.
With dividends and capital gains, if any, reinvested, the same $10,000
investment in the S&P 500 would have grown to $20,400 - a 104.00% increase.
If $10,000 was put in the bond index, it would have grown to $12,657 - a
26.57% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
General Electric Co. 2.5
Bristol-Myers Squibb Co. 2.1
Philip Morris Companies, Inc. 2.1
Citicorp 2.1
Procter & Gamble Co. 2.0
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Finance 17.2
Health 10.5
Nondurables 9.8
Aerospace & Defense 6.9
Energy 6.6
ASSET ALLOCATION AS OF JUNE 30, 1997*
Row: 1, Col: 1, Value: 7.5
Row: 1, Col: 2, Value: 26.8
Row: 1, Col: 3, Value: 65.7
Row: 1, Col: 1, Value: 45.0
Row: 1, Col: 2, Value: 39.0
Row: 1, Col: 3, Value: 28.0
Row: 2, Col: 1, Value: 31.0
Row: 2, Col: 2, Value: 40.0
Row: 2, Col: 3, Value: 67.0
Row: 3, Col: 1, Value: 90.0
Row: 3, Col: 2, Value: 60.0
Row: 3, Col: 3, Value: 46.0
Stocks 65.7%
Bonds 26.8%
Short-term investments 7.5%
FOREIGN INVESTMENTS 8.4%
*
% OF FUND'S
INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with
Bettina Doulton,
Portfolio Manager of
Balanced Portfolio
Q. HOW DID THE FUND PERFORM, BETTINA?
G.V. Given the structure of the fund - a blend of equities and fixed-income
investments - the fund's performance tends to fall between its two
benchmark indices, the Standard & Poor's 500 Index and the Lehman Brothers
Aggregate Bond Index. That's exactly what happened over the six months that
ended June 30, 1997. The fund performed better than the Lehman Brothers
index, which returned 3.09% over that period, but underperformed the S&P
500, which returned a very strong 20.61%. For the 12 months that ended June
30, 1997, the Lehman Brothers index returned 8.15% and the S&P 500 returned
34.70%. Again, the fund's performance fell between that of the two indices.
Q. WHAT KEY STRATEGIES DID YOU PURSUE OVER THE PAST SIX MONTHS?
G.V. Because the asset allocation of the fund generally will approximate
60% equities and 40% fixed-income, the strategy is to add value through
security selection within each asset class. In the stock sub-portfolio, a
notable decision was my concentration on selected finance, nondurables and
pharmaceutical stocks - stocks that turned out to be among the better
performers during the period. Within these industries, diversified
financial-services company American Express and pharmaceuticals firm
Bristol-Myers Squibb were particularly strong contributors.
Q. WHAT TYPES OF EQUITY INVESTMENTS WERE MOST ATTRACTIVE TO YOU OVER THE
PERIOD?
G.V. Overall, stock selection remained company-specific, focused on firms
with competitive advantages or catalysts for positive change - including
dominant market positions, cost-structure reductions or new products - and
shareholder-friendly managements. The combination of some or all of these
attributes typically translates into solid earnings and generous free cash
flow. Of course, my decision to invest in a particular stock also is
contingent on an attractive valuation. Over the past six months, a
significant proportion of companies meeting these criteria have been
large-capitalization diversified financials and "consumer growth
companies," mainly pharmaceuticals and nondurables firms. One stock that I
found to be particularly attractive over the period was BankAmerica. This
bank is in the process of aggressively reducing its cost structure,
achieving improving returns on capital and using excess capital to
repurchase its shares. In addition, the firm has been the beneficiary of an
improving California economy.
Q. HOW DID SOME OF THE OTHER LARGER STOCK HOLDINGS PERFORM?
G.V. The fund's top five stocks performed well, including Citicorp. Its
solid business prospects shone through in the face of a rather volatile
environment for financials brought on by concerns over rising interest
rates. General Electric and Philip Morris also were positive contributors.
The upward revaluation of GE continued as investors were attracted to its
global business franchise, consistent growth prospects and stable free cash
flow. Philip Morris' underlying business prospects remained good, and the
market viewed progress on negotiations for a tobacco settlement positively.
On the negative side, the fund's aerospace and defense investments were
disappointing as they weakened early in 1997 after outperforming for most
of 1996.
Q. HOW WAS THE BOND PORTION OF THE FUND STRUCTURED?
G.V. The manager of the fund's fixed-income subportfolio, Kevin Grant,
maintained an interest rate posture in line with the overall bond market as
measured by the Lehman Brothers Aggregate Bond Index. Kevin was attracted
to corporate bonds issued by companies he felt wouldn't be affected by
shifts in the economy, including bonds issued by banks. Historically, bank
earnings were quite sensitive to interest rates. However, over the past
several years, banks have increased the fee-based portions of their
business, making them less sensitive to interest rates and loans. In the
corporate area, the fund's bonds were focused on maturities in the two- to
six-year range. These bonds offered a yield advantage over Treasuries, but
were short enough in maturity that they shouldn't markedly underperform
Treasuries if the market became nervous about credit risk.
Q. WHAT'S YOUR OUTLOOK FOR THE NEXT SIX MONTHS?
G.V. In terms of the overall U.S. economy, I believe it's likely there will
be more of the same - moderate growth and low inflation - although the
duration of the current economic expansion already has exceeded all but two
post-war expansions. Against this backdrop, corporate America is generally
performing well. Earnings growth prospects remain favorable, driven by
globalization, market share gains, continuing productivity improvements and
capital redeployment. In addition, I believe merger and acquisition
activity is likely to remain robust as companies seek to bolster their
market position and exploit revenue and cost synergies. Given this
scenario, I think it's quite probable that the same stocks that have been
market leaders recently - larger-capitalization financials, pharmaceuticals
and consumer nondurables - will continue to perform well.
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 June 30, 1997, more than $4 billion
MANAGER: Richard Habermann, since March
1996; joined Fidelity in 1968
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 64.6%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 6.7%
AEROSPACE & DEFENSE - 5.7%
AlliedSignal, Inc. 24,000 $ 2,016,000
Boeing Co. 50,628 2,686,448
Lockheed Martin Corp. 15,800 1,636,288
Rockwell International Corp. 2,600 153,400
Sundstrand Corp. 17,000 948,813
Textron, Inc. 3,400 225,675
United Technologies Corp. 22,000 1,826,000
9,492,624
DEFENSE ELECTRONICS - 0.7%
Raytheon Co. 23,900 1,218,900
SHIP BUILDING & REPAIR - 0.3%
General Dynamics Corp. 7,300 547,500
Newport News Shipbuilding, Inc. 780 15,161
562,661
TOTAL AEROSPACE & DEFENSE 11,274,185
BASIC INDUSTRIES - 4.2%
CHEMICALS & PLASTICS - 3.0%
Air Products & Chemicals, Inc. 10,600 861,250
du Pont (E.I.) de Nemours & Co. 10,000 628,750
Goodrich (B.F.) Co. 20,200 874,913
Monsanto Co. 35,000 1,507,188
Nalco Chemical Co. 3,000 115,875
Olin Corp. 3,400 132,813
Praxair, Inc. 15,900 890,400
5,011,189
PAPER & FOREST PRODUCTS - 1.2%
Fort Howard Corp. (a) 16,100 815,063
Kimberly-Clark Corp. 25,400 1,263,650
2,078,713
TOTAL BASIC INDUSTRIES 7,089,902
CONSTRUCTION & REAL ESTATE - 0.2%
BUILDING MATERIALS - 0.2%
Masco Corp. 6,800 283,900
DURABLES - 1.7%
AUTOS, TIRES, & ACCESSORIES - 0.0%
Johnson Controls, Inc. 100 4,106
Scania AB Class B 100 3,057
7,163
CONSUMER DURABLES - 1.7%
Corning, Inc. 4,700 261,438
Minnesota Mining & Manufacturing Co. 24,500 2,499,000
2,760,438
TOTAL DURABLES 2,767,601
ENERGY - 6.1%
ENERGY SERVICES - 0.2%
Halliburton Co. 5,000 396,250
OIL & GAS - 5.9%
Amoco Corp. 8,000 695,500
British Petroleum PLC:
ADR 14,986 1,122,077
Ord. 89,067 1,106,834
Exxon Corp. 13,000 799,500
Mobil Corp. 10,600 740,675
SHARES VALUE (NOTE 1)
Royal Dutch Petroleum Co. 56,000 $ 3,045,000
Royal Dutch Petroleum Co. Ord. 2,000 103,966
Texaco, Inc. 15,700 1,707,375
Total SA:
Class B 1,300 131,322
sponsored ADR 2,200 111,375
USX-Marathon Group 8,200 236,775
Unocal Corp. 1,800 69,863
9,870,262
TOTAL ENERGY 10,266,512
FINANCE - 12.1%
BANKS - 6.1%
BankAmerica Corp. 47,400 3,060,263
Citicorp 28,500 3,436,031
NationsBank Corp. 35,200 2,270,400
Wells Fargo & Co. 5,500 1,482,250
10,248,944
CREDIT & OTHER FINANCE - 1.7%
American Express Co. 29,700 2,212,650
Associates First Capital Corp. 1,000 55,500
Beneficial Corp. 3,900 277,144
Household International, Inc. 2,300 270,106
2,815,400
FEDERAL SPONSORED CREDIT - 1.7%
Federal Home Loan Mortgage
Corporation 48,200 1,656,875
Federal National Mortgage Association 27,800 1,212,775
2,869,650
INSURANCE - 2.3%
Allstate Corp. 23,000 1,679,000
Hartford Financial Services Group, Inc. 4,900 405,475
St. Paul Companies, Inc. (The) 3,300 251,625
Travelers Group, Inc. (The) 24,000 1,513,500
3,849,600
SAVINGS & LOANS - 0.3%
Great Western Financial Corp. 8,200 440,750
TOTAL FINANCE 20,224,344
HEALTH - 10.3%
DRUGS & PHARMACEUTICALS - 7.7%
American Home Products Corp. 42,500 3,251,250
Bristol-Myers Squibb Co. 44,200 3,580,200
Merck & Co., Inc. 13,800 1,428,300
Pfizer, Inc. 10,800 645,300
Schering-Plough Corp. 47,200 2,259,700
SmithKline Beecham PLC ADR 19,400 1,777,525
12,942,275
MEDICAL EQUIPMENT & SUPPLIES - 2.6%
Allegiance Corp. 30,000 817,500
Baxter International, Inc. 35,200 1,839,200
Johnson & Johnson 27,400 1,763,875
4,420,575
TOTAL HEALTH 17,362,850
HOLDING COMPANIES - 0.1%
CINergy Corp. 2,900 100,932
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - 5.9%
ELECTRICAL EQUIPMENT - 3.8%
Emerson Electric Co. 17,600 $ 969,100
General Electric Co. 64,600 4,223,225
Grainger (W.W.), Inc. 7,400 578,588
Honeywell, Inc. 7,900 599,413
6,370,326
INDUSTRIAL MACHINERY & EQUIPMENT - 1.4%
Cooper Industries, Inc. 18,098 900,376
Harnischfeger Industries, Inc. 6,200 257,300
Tyco International Ltd. 17,200 1,196,475
2,354,151
POLLUTION CONTROL - 0.7%
Browning-Ferris Industries, Inc. 24,800 824,600
Waste Management, Inc. 10,800 346,950
1,171,550
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 9,896,027
MEDIA & LEISURE - 0.3%
BROADCASTING - 0.0%
CS Wireless Systems, Inc. (a)(c) 8 -
Time Warner, Inc. 1,200 57,900
57,900
ENTERTAINMENT - 0.1%
Cedar Fair LP (depositary unit) 5,000 218,750
PUBLISHING - 0.2%
McGraw-Hill, Inc. 5,500 323,469
TOTAL MEDIA & LEISURE 600,119
NONDURABLES - 9.6%
BEVERAGES - 1.6%
Anheuser-Busch Companies, Inc. 5,300 222,269
PepsiCo, Inc. 65,000 2,441,563
2,663,832
FOODS - 1.0%
Campbell Soup Co. 1,600 80,000
Flowers Industries, Inc. 5,850 98,353
Heinz (H.J.) Co. 16,200 747,225
Hershey Foods Corp. 500 27,656
Nabisco Holdings Corp. Class A 18,100 721,738
1,674,972
HOUSEHOLD PRODUCTS - 4.8%
Avon Products, Inc. 8,900 628,006
Clorox Co. 3,600 475,200
Procter & Gamble Co. 23,800 3,361,750
Rubbermaid, Inc. 8,800 261,800
Unilever PLC Ord. 13,400 384,015
Unilever NV:
ADR 11,400 2,440,313
Ord. 2,000 420,753
7,971,837
TOBACCO - 2.2%
Philip Morris Companies, Inc. 80,100 3,554,438
RJR Nabisco Holdings Corp. 5,300 174,900
3,729,338
TOTAL NONDURABLES 16,039,979
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - 3.1%
APPAREL STORES - 0.1%
Footstar, Inc. (a) 3,022 $ 78,950
DRUG STORES - 1.0%
CVS Corp. 10,500 538,125
Rite Aid Corp. 22,920 1,143,135
1,681,260
GENERAL MERCHANDISE STORES - 1.6%
Dayton Hudson Corp. 2,000 106,375
Sears, Roebuck & Co. 18,600 999,750
Wal-Mart Stores, Inc. 47,200 1,595,950
2,702,075
GROCERY STORES - 0.4%
American Stores Co. 14,500 715,938
TOTAL RETAIL & WHOLESALE 5,178,223
SERVICES - 0.7%
LEASING & RENTAL - 0.0%
Hanover Compressor Co. 100 1,950
Ryder Systems, Inc. 400 13,200
15,150
PRINTING - 0.4%
Deluxe Corp. 11,600 395,850
Donnelley (R.R.) & Sons Co. 5,500 201,438
597,288
SERVICES - 0.3%
ADT Ltd. (a) 5,000 165,000
National Service Industries, Inc. 8,800 428,450
593,450
TOTAL SERVICES 1,205,888
TECHNOLOGY - 2.4%
COMPUTERS & OFFICE EQUIPMENT - 2.0%
Exide Electronics Group, Inc.
warrants 3/15/06 (a)(c) 10 250
Pitney Bowes, Inc. 26,400 1,834,800
Xerox Corp. 18,000 1,419,750
3,254,800
ELECTRONICS - 0.4%
Thomas & Betts Corp. 14,050 738,503
TOTAL TECHNOLOGY 3,993,303
UTILITIES - 1.2%
CELLULAR - 0.0%
Microcell Telecommunications, Inc.
6/1/06 (a):
conditional warrants 560 350 warrants 560 7,000
7,350
ELECTRIC UTILITY - 0.1%
Allegheny Power System, Inc. 1,400 37,363
Edison International 5,000 124,375
GPU, Inc. 1,000 35,875
197,613
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - CONTINUED
GAS - 0.5%
Consolidated Natural Gas Co. 300 $ 16,144
El Paso Natural Gas Co. 362 19,910
Williams Companies, Inc. 19,000 831,250
867,304
TELEPHONE SERVICES - 0.6%
ALLTEL Corp. 2,200 73,563
Ameritech Corp. 5,800 394,038
BCE, Inc. 6,000 166,878
Hyperion Telecommunications, Inc.
warrants 4/15/01 (a)(c) 60 1,800
MCI Communications Corp. 7,000 267,969
NextLink Communications, Inc.
warrants 2/1/09 (a) 3,229 32
RSL Communications Ltd./RSL
Communications PLC
warrants 11/15/06 (a) 40 1,200
905,480
TOTAL UTILITIES 1,977,747
TOTAL COMMON STOCKS
(Cost $87,743,324) 108,261,512
PREFERRED STOCKS - 1.1%
CONVERTIBLE PREFERRED STOCKS - 0.5%
DURABLES - 0.1%
AUTOS, TIRES, & ACCESSORIES - 0.1%
Republic Industries, Inc. $1.55 4,000 98,000
ENERGY - 0.0%
OIL & GAS - 0.0%
Tosco Financing Trust $2.875 (c) 1,700 95,838
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
ELECTRICAL EQUIPMENT - 0.1%
Loral Space & Communications Ltd.
Series C, $3.00 (c) 4,000 199,000
MEDIA & LEISURE - 0.1%
LODGING & GAMING - 0.1%
Host Marriott Financial Trust $3.375 (c) 3,000 173,625
RETAIL & WHOLESALE - 0.2%
APPAREL STORES - 0.2%
TJX Companies, Inc., Series E, $7.00 1,000 285,000
TOTAL CONVERTIBLE PREFERRED STOCKS 851,463
NONCONVERTIBLE PREFERRED STOCKS - 0.6%
FINANCE - 0.1%
CREDIT & OTHER FINANCE - 0.0%
American Annuity Group Capital
Trust II 8 3/4% 50 49,750
SAVINGS & LOANS - 0.1%
California Federal Preferred Capital
Corp. 9 1/8% 2,800 71,400
TOTAL FINANCE 121,150
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - 0.4%
BROADCASTING - 0.3%
American Radio Systems Corp.
11 3/8% pay-in-kind 855 $ 91,058
Citadel Broadcasting Co.
13 1/4% pay-in-kind (c) 600 60,000
Cablevision System Corp. pay-in-kind:
11 1/8% depositary shares 1,244 125,022
Series H, $11.75 267 27,635
Capstar Broadcasting Partners,
Inc. 12% (c) 100 10,125
Sinclair Capital 11 5/8% (c) 800 84,400
Time Warner, Inc., Series M,
10 1/4% pay-in-kind 145 160,225
558,465
PUBLISHING - 0.1%
K-III Communications Corp.,
Series D, $10 600 60,450
TOTAL MEDIA & LEISURE 618,915
UTILITIES - 0.1%
TELEPHONE SERVICES - 0.1%
NextLink Communications, Inc.
14% pay-in-kind 3,334 172,535
TOTAL NONCONVERTIBLE PREFERRED STOCKS 912,600
TOTAL PREFERRED STOCKS
(Cost $1,598,971) 1,764,063
CORPORATE BONDS - 12.3%
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
CONVERTIBLE BONDS - 0.2%
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
POLLUTION CONTROL - 0.1%
WMX Technologies, Inc.
2%, 1/24/05 Baa1 $ 80,000 73,800
MEDIA & LEISURE - 0.0%
LEISURE DURABLES & TOYS - 0.0%
Hasbro Corp. 6%, 11/15/98 A3 24,000 35,040
RETAIL & WHOLESALE - 0.1%
GENERAL MERCHANDISE STORES - 0.1%
Federated Department Stores, Inc.
5%, 10/1/03 Baa3 150,000 178,875
TOTAL CONVERTIBLE BONDS 287,715
NONCONVERTIBLE BONDS - 12.1%
AEROSPACE & DEFENSE - 0.2%
AEROSPACE & DEFENSE - 0.2%
Alliant Techsystems, Inc.
11 3/4%, 3/1/03 B2 13,000 14,333
Fairchild Corp. 12%, 10/15/01 Caa 10,000 10,100
Lockheed Martin Corp.
7.20%, 5/1/36 A3 300,000 307,746
332,179
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
AEROSPACE & DEFENSE - CONTINUED
DEFENSE ELECTRONICS - 0.0%
Tracor, Inc. 8 1/2%, 3/1/07 B1 $ 20,000 $ 20,200
SHIP BUILDING & REPAIR - 0.0%
Newport News Shipbuilding, Inc.
9 1/4%, 12/1/06 B1 10,000 10,425
TOTAL AEROSPACE & DEFENSE 362,804
BASIC INDUSTRIES - 0.7%
CHEMICALS & PLASTICS - 0.1%
Atlantis Group, Inc.
11%, 2/15/03 B2 10,000 10,325
Foamex LP/Foamex Capital Corp.
9 7/8%, 6/15/07 (c) B3 10,000 10,125
Freedom Chemical Co. 10 5/8%,
10/15/06 B3 60,000 61,200
Pioneer Americas Acquisition
Corp. 9 1/4%, 6/15/07 (c) B1 10,000 9,850
Sterling Chemicals Holdings, Inc.:
11 3/4%, 8/15/06 B3 70,000 75,425
11 1/4%, 4/1/07 B3 40,000 42,400
209,325
IRON & STEEL - 0.1%
GS Technologies Operating, Inc.
12 1/4%, 10/1/05 B2 20,000 21,900
Republic Engineered Steels, Inc.
9 7/8%, 12/15/01 Caa 50,000 46,625
WCI Steel, Inc. 10%, 12/1/04 B2 40,000 41,600
110,125
METALS & MINING - 0.0%
Commonwealth Aluminum Corp.
10 3/4%, 10/1/06 B2 40,000 42,000
PAPER & FOREST PRODUCTS - 0.5%
Asia Pulp & Paper Finance II
Mauritius Ltd. 12%,
3/15/04 (c) B3 85,000 87,125
American Pad & Paper Co., Inc.
13%, 11/15/05 B3 40,000 46,800
Crown Paper Co. 11%, 9/1/05 B3 30,000 30,075
Doman Industries Ltd. yankee
8 3/4%, 3/15/04 B1 50,000 48,250
Florida Coast Paper Co. LLC/
Florida Coast Paper
Finance Corp., Series B,
12 3/4%, 6/1/03 Caa 20,000 20,650
Gaylord Container Corp.
11 1/2%, 5/15/01 B3 10,000 10,513
Indah Kiat International Finance
Co. BV 12 1/2%, 6/15/06 Ba2 20,000 22,700
Mail-Well Corp. 10 1/2%,
2/15/04 B 10,000 10,400
Malette, Inc. yankee 12 1/4%,
7/15/04 Ba3 10,000 11,200
Repap Wisconsin, Inc.:
9 1/4%, 2/1/02 B2 40,000 40,200
9 7/8%, 5/1/06 Caa 50,000 50,375
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Repap New Brunswick, Inc.
yankee 10 5/8%, 4/15/05 Caa $ 20,000 $ 18,850
Riverwood International
10 7/8%, 4/1/08 Caa 50,000 45,375
SD Warren Co., Series B,
12%, 12/15/04 B1 15,000 16,800
Stone Container Corp.:
12 5/8%, 7/15/98 B2 100,000 105,125
11 7/8%, 12/1/98 B2 30,000 31,575
10 3/4%, 10/1/02 B1 80,000 84,400
11 7/8%, 8/1/16 B2 40,000 43,200
Tembec Finance Corp. yankee
9 7/8%, 9/30/05 B1 10,000 10,300
733,913
TOTAL BASIC INDUSTRIES 1,095,363
DURABLES - 0.5%
AUTOS, TIRES, & ACCESSORIES - 0.0%
Jordan Industries, Inc.
10 3/8%, 8/1/03 B3 20,000 20,700
HOME FURNISHINGS - 0.1%
Guitar Center Management Co.,
Inc. 11%, 7/1/06 B2 6,000 6,570
Interlake Corp. 12 1/8%,
3/1/02 B3 40,000 41,900
Knoll, Inc. 10 7/8%, 3/15/06 B1 38,000 42,038
90,508
TEXTILES & APPAREL - 0.4%
Dan River, Inc. 10 1/8%,
12/15/03 B3 10,000 10,600
Levi Strauss & Co. 6.80%,
11/1/03 (c) Baa2 570,000 565,138
Polymer Group, Inc.
9%, 7/1/07 (c) - 40,000 39,356
Synthetic Industries, Inc.
9 1/4%, 2/15/07 (c) B2 40,000 40,500
655,594
TOTAL DURABLES 766,802
ENERGY - 0.5%
ENERGY SERVICES - 0.1%
DI Industries, Inc. 8 7/8%,
7/1/07 B1 25,000 24,625
McDermott International, Inc.
9 3/8%, 3/15/02 Ba3 60,000 62,909
Petroliam Nasional BHD yankee
6 7/8%, 7/1/03 (c) A1 130,000 129,550
217,084
OIL & GAS - 0.4%
Belden & Blake Corp. 9 7/8%,
6/15/07 (c) B3 40,000 39,600
Cross Timbers Oil Co.
9 1/4%, 4/1/07 B2 60,000 61,950
Flores & Rucks, Inc. 9 3/4%,
10/1/06 B3 40,000 41,800
Ocean Energy, Inc. 8 7/8%,
7/15/07 (c) B3 60,000 60,000
Pennzoil Co. 9 5/8%, 11/15/99 Baa3 60,000 63,925
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
ENERGY - CONTINUED
OIL & GAS - CONTINUED
Ras Laffan Liquid Natural
Gas Co. Ltd. yankee
8.29%, 3/15/14 (c) A3 $ 300,000 $ 312,468
United Refining Co. 10 3/4%,
6/15/07 (c) B2 30,000 29,700
609,443
TOTAL ENERGY 826,527
FINANCE - 5.0%
ASSET-BACKED SECURITIES - 1.3%
Airplanes Pass Through Trust
10 7/8%, 3/15/19 Ba2 100,000 115,500
Capital Equipment Receivables
Trust 6.11%, 7/15/99 Aaa 1,410,000 1,411,763
Green Tree Financial Corp.
6.10%, 4/15/27 Aaa 71,888 71,753
Sears Credit Account Master
Trust II 6 1/2%, 10/15/03 Aaa 630,000 632,558
2,231,574
BANKS - 1.5%
ABN Amro Bank NV 6 5/8%,
10/31/01 Aa3 500,000 497,935
Banc One Corp. 6.70%,
3/24/00 Aa3 350,000 351,631
Banco Latinoamer Exportaciones
Euro 6.90%, 12/6/99 (c) Baa2 100,000 100,813
Capital One Bank 6.74%,
5/31/99 Baa3 260,000 260,330
Export-Import Bank of Korea
6 3/8%, 2/15/06 A1 600,000 562,272
First USA Bank 6 1/2%,
12/23/99 Baa3 250,000 248,785
Midland Bank PLC yankee
7 5/8%, 6/15/06 A1 250,000 257,463
Signet Bank 7.80%, 9/15/06 Baa1 250,000 258,120
Summit Bancorp. 8 5/8%,
12/10/02 BBB 100,000 107,241
2,644,590
CREDIT & OTHER FINANCE - 2.0%
APP International Finance Co. BV
yankee 11 3/4%, 10/1/05 Ba3 10,000 11,050
Ahmanson Capital Trust I
8.36%, 12/1/26 (c) Baa3 250,000 252,088
Associates Corp. of North
America 6 1/2%, 9/9/98 Aa3 250,000 250,993
CIT Group Holdings, Inc.
6 1/4%, 9/30/99 Aa3 860,000 857,859
Chrysler Financial Corp.
6 3/8%, 1/28/00 A3 180,000 179,460
First Security Capital I
8.41%, 12/15/26 A3 110,000 112,141
GST Equipment Funding, Inc.
13 1/4%, 5/1/07 (c) - 60,000 64,200
General Electric Capital Corp.
6.94%, 4/13/09 (e) Aaa 480,000 484,517
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Imperial Credit Capital Trust I
10 1/4%, 6/14/02 (c) B2 $ 20,000 $ 20,050
Imperial Credit Industries, Inc.
9 7/8%, 1/15/07 B2 50,000 49,500
MCN Investment Corp.
6.03%, 2/1/01 Baa2 180,000 175,819
Nordstrom Credit, Inc.
7 1/4%, 4/30/02 A2 200,000 203,340
PNC Institutional Capital Trust
8.315%, 5/15/27 (c) A2 600,000 606,714
Polytama International Finance
BV 11 1/4%, 6/15/07 B2 20,000 20,650
PTC International Finance BV
0%, 7/1/07 (c) B3 10,000 6,063
3,294,444
INSURANCE - 0.1%
Integon Capital I 10 3/4%,
2/15/07 (c) Ba3 100,000 121,500
SAVINGS & LOANS - 0.1%
First Nationwide Holdings, Inc.
10 5/8%, 10/1/03 Ba3 40,000 43,400
First Nationwide Parent
Holdings Ltd. 12 1/2%,
4/15/03 B3 80,000 89,200
132,600
TOTAL FINANCE 8,424,708
HEALTH - 0.2%
MEDICAL EQUIPMENT & SUPPLIES - 0.0%
Wright Medical Technology, Inc.
10 3/4%, 7/1/00 B3 40,000 40,700
MEDICAL FACILITIES MANAGEMENT - 0.2%
Columbia/HCA Healthcare Corp.
6 1/2%, 3/15/99 A2 240,000 240,833
Integrated Health Services, Inc.
9 1/2%, 9/15/07 (c) B1 10,000 10,225
Tenet Healthcare Corp.:
8%, 1/15/05 Ba1 20,000 20,000
8 5/8%, 1/15/07 Ba3 10,000 10,150
281,208
TOTAL HEALTH 321,908
HOLDING COMPANIES - 0.2%
Gray Communications System,
Inc. 10 5/8%, 10/1/06 B3 20,000 21,075
Norfolk Southern Corp.
7.05%, 5/1/37 Baa1 340,000 345,080
TOTAL HOLDING COMPANIES 366,155
INDUSTRIAL MACHINERY & EQUIPMENT - 0.5%
ELECTRICAL EQUIPMENT - 0.0%
Amphenol Corp. 9 7/8%,
5/15/07 B2 10,000 10,300
Motors & Gears, Inc. 10 3/4%,
11/15/06 B3 60,000 61,800
72,100
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
INDUSTRIAL MACHINERY & EQUIPMENT - CONTINUED
INDUSTRIAL MACHINERY & EQUIPMENT - 0.2%
Continental Global Group, Inc.
11%, 4/1/07 (c) B2 $ 20,000 $ 21,000
Goss Graphic System, Inc.
12%, 10/15/06 B2 50,000 55,000
International Knife & Saw, Inc.
11 3/8%, 11/15/06 B3 10,000 10,675
Tenneco, Inc. 8.075%, 10/1/02 Baa1 300,000 314,838
401,513
POLLUTION CONTROL - 0.3%
WMX Technologies, Inc.
7.10%, 8/1/26 A3 400,000 407,588
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 881,201
MEDIA & LEISURE - 1.2%
BROADCASTING - 0.6%
Adelphia Communications Corp.:
9 1/2%, 2/15/04 B3 10,000 9,500
9 7/8%, 3/1/07 (c) - 130,000 125,450
Benedek Communications Corp.
0%, 5/15/06 (b) - 50,000 30,125
Capstar Radio Broadcasting
Partners, Inc. (c):
9 1/4%, 7/1/07 - 60,000 58,050
0%, 2/1/09 (b) CCC 70,000 44,975
Chancellor Radio Broadcasting
Co. 8 3/4%, 6/15/07 (c) B3 60,000 59,250
Citadel Broadcasting Co.
10 1/4%, 7/1/07 (c) B3 40,000 40,000
CS Wireless Systems, Inc.
0%, 3/1/06 (b) Caa 30,000 7,200
Diamond Cable Communications
PLC yankee 0%, 9/30/04 (b) B3 10,000 8,075
Echostar DBS Corp. 12 1/2%,
7/1/02 (c) Caa 50,000 49,563
Echostar Satellite Broadcasting
Corp. 0%, 3/15/04 (b) Caa 40,000 28,400
Echostar Communications Corp.
secured discount
0%, 6/1/04 (b) B2 190,000 159,600
Jacor Communications Co.
8 3/4%, 6/15/07 (c) B2 10,000 9,875
Lenfest Communications, Inc.:
8 3/8%, 11/1/05 Ba3 10,000 9,850
10 1/2%, 6/15/06 B2 10,000 10,900
Olympus Communications LP/
Olympus Capital Corp.
10 5/8%, 11/15/06 B1 50,000 52,250
SFX Broadcasting, Inc.
10 3/4%, 5/15/06 B3 10,000 10,775
TCI Communication, Inc.
6.82%, 9/15/10 Ba1 250,000 249,878
Telewest PLC 0%, 10/1/07 (b) B1 60,000 43,350
UIH Australia/PAC, Inc., Series B,
0%, 5/15/06 (b) B2 90,000 54,450
1,061,516
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
ENTERTAINMENT - 0.1%
AMC Entertainment, Inc.
9 1/2%, 3/15/09 (c) B2 $ 70,000 $ 71,050
AMF Group, Inc., Series B:
10 7/8%, 3/15/06 B2 20,000 21,550
0%, 3/15/06 (b) B2 10,000 7,125
Cinemark USA, Inc.
9 5/8%, 8/1/08 B2 30,000 30,450
Viacom, Inc. 8%, 7/7/06 B1 100,000 97,000
227,175
LEISURE DURABLES & TOYS - 0.1%
Coleman Escrow Corp. (c):
secured 1st priority
0%, 5/15/01 B3 140,000 88,200
secured 2nd priority
0%, 5/15/01 Caa 20,000 11,550
Icon Health and Fitness, Inc.
13%, 7/15/02 B3 50,000 56,125
Icon Fitness Corp. 0%,
11/15/06 (b) CCC+ 10,000 5,450
161,325
LODGING & GAMING - 0.3%
American Skiing Co.
12%, 7/15/06 B3 30,000 31,500
Casino Magic Financial Corp.
11 1/2%, 10/15/01 B1 20,000 17,500
Circus Circus Enterprises, Inc.
7%, 11/15/36 Baa2 150,000 145,688
HMC Acquisition Properties,
Inc. 9%, 12/15/07 Ba3 60,000 60,600
Hollywood Casino Corp.
12 3/4%, 11/1/03 B2 60,000 63,600
Horseshoe Gaming LLC
12 3/4%, 9/30/00 B1 40,000 44,700
Prime Hospitality Corp.
9 3/4%, 4/1/07 - 20,000 21,050
Sun International Hotels Ltd./Sun
International North America,
Inc. yankee 9%, 3/15/07 Ba3 70,000 71,050
455,688
PUBLISHING - 0.1%
Big Flower Press Holdings, Inc.
8 7/8%, 7/1/07 (c) - 90,000 88,425
RESTAURANTS - 0.0%
AFC Enterprises, Inc. 10 1/4%,
5/15/07 (c) B3 40,000 39,800
TOTAL MEDIA & LEISURE 2,033,929
NONDURABLES - 0.2%
FOODS - 0.0%
International Home Foods,
Inc. 10 3/8%, 11/1/06 B2 10,000 10,300
HOUSEHOLD PRODUCTS - 0.0%
Renaissance Cosmetic, Inc.
11 3/4%, 2/15/04 B3 50,000 51,750
Revlon Consumer Products
Corp. 10 1/2%, 2/15/03 B3 65,000 69,225
120,975
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
NONDURABLES - CONTINUED
TOBACCO - 0.2%
North Atlantic Trading, Inc.
11%, 6/15/04 (c) B3 $ 10,000 $ 10,150
Philip Morris Companies, Inc.
6.95%, 6/1/06 A2 250,000 250,833
260,983
TOTAL NONDURABLES 392,258
RETAIL & WHOLESALE - 0.9%
APPAREL STORES - 0.1%
Mothers Work, Inc. 12 5/8%,
8/1/05 B3 10,000 10,325
Specialty Retailers, Inc.
8 1/2%, 7/15/05 (c) Ba3 30,000 29,925
40,250
GENERAL MERCHANDISE STORES - 0.5%
Dayton Hudson Corp.:
6.80%, 10/1/01 Baa1 300,000 299,487
6.40%, 2/15/03 Baa1 400,000 389,652
Penney (J.C.) Co., Inc.
6.95%, 4/1/00 A2 160,000 161,347
850,486
GROCERY STORES - 0.3%
American Stores Co.
7 1/2%, 5/1/37 Baa2 250,000 254,743
Food 4 Less Holdings, Inc.
13 5/8%, 6/15/07 - 10,681 12,486
Grand Union Co.
12%, 9/1/04 Caa 50,000 37,000
Pantry, Inc. 12%, 11/15/00 B2 10,000 10,250
Pathmark Stores, Inc.:
11 5/8%, 6/15/02 Caa 40,000 40,500
9 5/8%, 5/1/03 B3 10,000 9,650
Penn Traffic Co.:
10 1/4%, 2/15/02 B3 40,000 34,400
8 5/8%, 12/15/03 B3 30,000 24,225
10 3/8%, 10/1/04 B3 20,000 17,000
11 1/2%, 4/15/06 B3 20,000 17,700
Pueblo Xtra International, Inc.:
9 1/2%, 8/1/03 B3 60,000 57,450
9 1/2%, 8/1/03 (c) B3 10,000 9,650
Randalls Food Markets, Inc.
9 3/8%, 7/1/07 (c) B2 10,000 9,963
535,017
RETAIL & WHOLESALE, MISCELLANEOUS - 0.0%
Corporate Express, Inc., Series B,
9 1/8%, 3/15/04 B2 10,000 10,000
TOTAL RETAIL & WHOLESALE 1,435,753
SERVICES - 0.2%
PRINTING - 0.0%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa 40,000 41,100
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
SERVICES - 0.2%
Orion Network System, Inc. unit:
11 1/4%, 1/15/07 B2 $ 50,000 $ 51,125
0%, 1/15/07 (b) B2 290,000 165,300
Outsourcing Solutions, Inc.
11%, 11/1/06 B3 10,000 10,850
227,275
TOTAL SERVICES 268,375
TECHNOLOGY - 0.2%
COMMUNICATIONS EQUIPMENT - 0.0%
Intermedia Communications, Inc.
0%, 5/15/06 (b) B2 80,000 55,000
COMPUTER SERVICES & SOFTWARE - 0.0%
Verio, Inc. unit 13 1/2%,
6/15/04 (c) - 50,000 50,250
COMPUTERS & OFFICE EQUIPMENT - 0.2%
Comdisco, Inc. 6.70%, 8/6/99 Baa1 250,000 250,948
Dictaphone Corp. 11 3/4%,
8/1/05 B3 10,000 9,200
Exide Electronics Group, Inc.
11 1/2%, 5/15/06 B3 10,000 10,725
Unisys Corp. 12%, 4/15/03 B1 10,000 10,825
281,698
ELECTRONIC INSTRUMENTS - 0.0%
Wavetek Corp. 10 1/8%,
6/15/07 (c) B3 10,000 10,200
ELECTRONICS - 0.0%
Fairchild Semiconductor Corp.
10 1/8%, 3/15/07 (c) B2 30,000 31,650
Viasystems, Inc. 9 3/4%,
6/1/07 (c) B3 10,000 10,175
41,825
TOTAL TECHNOLOGY 438,973
TRANSPORTATION - 0.1%
AIR TRANSPORTATION - 0.0%
Atlas Air, Inc. pass through trust
12 1/4%, 12/1/02 Ba3 30,000 33,450
RAILROADS - 0.1%
Burlington Northern Santa Fe
Corp. 7.29%, 6/1/36 Baa2 150,000 153,768
TFM SA de CV (c):
10 1/4%, 6/15/07 B2 10,000 10,175
0%, 6/15/09 (b) B2 20,000 11,550
175,493
TOTAL TRANSPORTATION 208,943
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
UTILITIES - 1.5%
CELLULAR - 0.7%
Arch Communications Group,
Inc. 0%, 3/15/08 (b) B3 $ 90,000 $ 47,475
Clearnet Communications, Inc.
yankee 0%, 12/15/05 (b) B3 50,000 32,875
McCaw International Ltd. unit
0%, 4/15/07 (b)(c) CCC 200,000 96,000
Microcell Telecommunications,
Inc. 0%, 6/1/06 (b) B3 140,000 78,400
Millicom International Cellular
SA 0%, 6/1/06 (b) B3 260,000 185,900
Mobile Telecommunications
Technologies Corp.
13 1/2%, 12/15/02 B3 20,000 21,100
Omnipoint Corp.:
11 5/8%, 8/15/06 B2 10,000 9,450
Series A, 11 5/8%, 8/15/06 B3 30,000 28,350
Pagemart, Inc. 0%, 11/1/03 (b) - 70,000 60,550
Pagemart Nationwide, Inc.
0%, 2/1/05 (b) - 40,000 29,800
RSL Communications Ltd./RSL
Communications PLC
12 1/4%, 11/15/06 - 40,000 40,700
Telesystem International Wireless,
Inc. 0%, 6/30/07 (b)(c) B- 30,000 15,975
360 Degrees Communications
Co. 7 1/8%, 3/1/03 Ba1 400,000 397,796
USA Mobile Communications,
Inc. II 9 1/2%, 2/1/04 B2 10,000 9,300
1,053,671
ELECTRIC UTILITY - 0.0%
CMS Energy Corp. 8 1/8%,
5/15/02 Ba3 10,000 10,075
GAS - 0.2%
Columbia Gas System, Inc.
6.61%, 11/28/02 Baa1 379,000 374,717
TELEPHONE SERVICES - 0.6%
Brooks Fiber Properties, Inc.:
0%, 3/1/06 (b) - 10,000 6,750
11 7/8%, 11/1/06 - 20,000 12,900
GST USA, Inc. 0%, 12/15/05 (b) - 34,000 21,080
Hyperion Telecommunications,
Inc., Series B, 0%,
4/15/03 (b) - 60,000 30,150
LCI International, Inc.
7 1/4%, 6/15/07 Ba1 200,000 198,100
McleodUSA, Inc. 0%,
3/1/07 (b)(c) B3 40,000 25,500
MFS Communications, Inc.
0%, 1/15/06 (b) Ba3 250,000 197,188
Shared Technologies Fairchild
Communications Corp.
0%, 3/1/06 (b) Caa 87,000 77,648
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Teleport Communications Group,
Inc. 0%, 7/1/07 (b) B1 $ 20,000 $ 14,425
WorldCom, Inc. 7 3/4%,
4/1/07 Ba1 400,000 409,072
992,813
TOTAL UTILITIES 2,431,276
TOTAL NONCONVERTIBLE BONDS 20,254,975
TOTAL CORPORATE BONDS
(Cost $20,329,264) 20,542,690
U.S. GOVERNMENT AND GOVERNMENT AGENCY
OBLIGATIONS - 10.7%
U.S. TREASURY OBLIGATIONS - 9.6%
5 7/8%, 8/15/98 Aaa 1,000,000 999,690
6 5/8%, 6/30/01 Aaa 6,540,000 6,601,280
7%, 7/15/06 Aaa 5,286,000 5,437,973
12%, 8/15/13 (callable) Aaa 1,100,000 1,548,426
8 1/8%, 8/15/19 Aaa 825,000 941,144
7 1/4%, 2/15/23 Aaa 490,000 504,700
TOTAL U.S. TREASURY OBLIGATIONS 16,033,213
U.S. GOVERNMENT AGENCY OBLIGATIONS - 1.1%
Federal Home Loan Bank:
7.56%, 9/1/04 Aaa 310,000 324,725
7.59%, 3/10/05 Aaa 190,000 199,738
Federal National Mortgage
Association 6.72%, 8/1/05 Aaa 720,000 716,400
Government Trust Certificates
(assets of Trust guaranteed by
U.S. Government through Defense
Security Assistance Agency)
Class 2-E, 9.40%, 5/15/02 Aaa 127,981 135,802
State of Israel (guaranteed by
U.S. Government through Agency
for International Development):
8%, 11/15/01 Aaa 220,000 231,917
5.89%, 8/15/05 Aaa 310,000 293,730
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS 1,902,312
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $17,972,172) 17,935,525
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES - 2.4%
Federal Home Loan Mortgage
Corporation:
7%, 6/1/99 to 7/1/01 Aaa 466,372 469,127
7 1/2%, 7/1/27 (g) Aaa 970,000 974,547
Federal National Mortgage
Association:
5 1/2%, 2/1/03 to 2/1/26 Aaa 1,170,119 1,115,067
6%, 4/1/11 Aaa 461,556 446,556
Government National Mortgage
Association 7%, 10/15/23
to 8/15/27 (g) Aaa 1,111,502 1,094,199
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $4,111,968) 4,099,496
U.S. GOVERNMENT AGENCY - 0.7%
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Federal Home Loan Mortgage
Corporation planned
amortization class
Series 1645 Class ZA,
5 1/2%, 4/15/05 Aaa $ 622,356 $ 606,797
Federal National Mortgage
Association planned
amortization class
Series 1993-129 Class D,
6.10%, 6/25/05 Aaa 500,000 496,250
TOTAL U.S. GOVERNMENT AGENCY
(Cost $1,097,458) 1,103,047
COMMERCIAL MORTGAGE SECURITIES - 0.3%
BKB Commercial Mortgage Trust
Series 1997-C1 Class A-1,
6 7/8%, 2/25/43 (c) Aaa 307,292 308,445
Wells Fargo Capital Markets
Apartment Financing Trust
6.56%, 12/29/05 (c) Aaa 250,000 246,590
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $548,447) 555,035
FOREIGN GOVERNMENT OBLIGATIONS (F) - 0.4%
Manitoba Province yankee
6 3/8%, 10/15/99 A1 470,000 469,962
Quebec Province yankee
6.86%, 4/15/26 (e) A2 250,000 246,125
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $709,904) 716,087
CASH EQUIVALENTS - 7.5%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 5.93%, dated
6/30/97 due 7/1/97 $ 12,490,057 12,488,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $146,599,508) $ 167,465,455
LEGEND
1. Non-income producing
2. Debt obligation initially issued in zero coupon form which converts to
coupon form at a specified rate and 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 $4,713,489 or 2.8% of net
assets.
4. Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
5. Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified rate and date.
6. For foreign government obligations not 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.
7. Security purchased on a delayed delivery or when-issued basis (see Note
2 of Notes to Financial Statements).
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $89,201,982 and $47,453,749, respectively, of which U.S.
government and government agency obligations aggregated $28,333,982 and $
22,737,773, 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 $9,631 for the period.
The composition of long-term debt holdings as a percentage of total value
of investment in securities, is as follows:
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 19.4% AAA, AA, A 18.5%
Baa 2.8% BBB 4.4%
Ba 1.3% BB 0.4%
B 2.4% B 2.5%
Caa 0.3% CCC 0.2%
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 0.3%. FMR has determined that unrated debt
securities that are lower quality account for 0.3% of the total value of
investment in securities.
INCOME TAX INFORMATION
At June 30, 1997, the aggregate cost of investment securities for income
tax purposes was $146,608,960. Net unrealized appreciation aggregated
$20,856,495, of which $21,494,643 related to appreciated investment
securities and $638,148 related to depreciated investment securities.
At December 31, 1996, the fund had a capital loss carryforward of
approximately $372,000 which will expire on December 31, 2004.
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in $ 167,465,455
securities, at
value (including
repurchase
agreements of
$12,488,000)
(cost $146,599,508)
- - See
accompanying
schedule
Cash 1,115,612
Receivable for 670,618
investments sold
Receivable for fund 297,225
shares sold
Dividends receivable 160,685
Interest receivable 652,510
TOTAL ASSETS 170,362,105
LIABILITIES
Payable for $ 1,451,436
investments
purchased
Regular delivery
Delayed delivery 2,094,009
Accrued management 60,531
fee
Other payables and 29,741
accrued expenses
TOTAL LIABILITIES 3,635,717
NET ASSETS $ 166,726,388
Net Assets consist of:
Paid in capital $ 141,786,400
Undistributed net 2,231,662
investment income
Accumulated 1,842,367
undistributed net
realized gain (loss)
on investments and
foreign currency
transactions
Net unrealized 20,865,959
appreciation
(depreciation) on
investments
and assets and
liabilities in
foreign currencies
NET ASSETS, for $ 166,726,388
12,251,612 shares
outstanding
NET ASSET VALUE, $13.61
offering price
and redemption
price per
share
($166,726,388 (divided by)
12,251,612 shares)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $ 854,788
Dividends
Interest 1,790,207
TOTAL INCOME 2,644,995
EXPENSES
Management fee $ 294,816
Transfer agent fees 48,191
Accounting fees and 39,379
expenses
Non-interested 272
trustees'
compensation
Custodian fees and 8,008
expenses
Registration fees 21
Audit 10,725
Legal 1,119
Miscellaneous 145
Total expenses 402,676
before reductions
Expense reductions (5,162 397,514
)
NET INVESTMENT 2,247,481
INCOME
REALIZED AND
UNREALIZED GAIN
(LOSS)
Net realized gain
(loss) on:
Investment 2,241,895
securities
Foreign currency (19 2,241,876
transactions )
Change in net
unrealized
appreciation
(depreciation) on:
Investment 13,357,453
securities
Assets and (322 13,357,131
liabilities in )
foreign currencies
NET GAIN (LOSS) 15,599,007
NET INCREASE $ 17,846,488
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
OTHER INFORMATION $ 5,087
Expense reductions
Directed brokerage
arrangements
Custodian interest 75
credits
$ 5,162
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) SIX MONTHS YEAR ENDED
IN NET ASSETS ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED)
Operations $ 2,247,481 $ 2,701,775
Net investment
income
Net realized gain 2,241,876 (391,485)
(loss)
Change in net 13,357,131 6,443,286
unrealized
appreciation
(depreciation)
NET INCREASE 17,846,488 8,753,576
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
Distributions to (2,678,656) (26,804)
shareholders
From net
investment income
From net realized - (192,158)
gain
TOTAL DISTRIBUTIONS (2,678,656) (218,962)
Share transactions 50,743,701 51,928,218
Net proceeds from
sales of shares
Reinvestment of 2,678,656 218,962
distributions
Cost of shares (4,973,433) (727,396)
redeemed
NET INCREASE 48,448,924 51,419,784
(DECREASE) IN NET
ASSETS RESULTING
FROM SHARE
TRANSACTIONS
TOTAL INCREASE 63,616,756 59,954,398
(DECREASE) IN NET
ASSETS
NET ASSETS
Beginning of period 103,109,632 43,155,234
End of period $ 166,726,388 $ 103,109,632
(including
undistributed net
investment
income of
$2,231,662 and
$2,677,878,
respectively)
OTHER INFORMATION
Shares
Sold 3,992,425 4,616,047
Issued in 215,153 19,533
reinvestment of
distributions
Redeemed (390,109) (64,658)
Net increase 3,817,469 4,570,922
(decrease)
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1997
SELECTED PER-SHARE (UNAUDITED) 1996 1995
DATA
Net asset value, $ 12.23 $ 11.17 $ 10.00
beginning of period
Income from
Investment
Operations
Net investment .22 D .33 .14
income
Net realized and 1.47 .78 1.25
unrealized gain
(loss)
Total from 1.69 1.11 1.39
investment
operations
Less Distributions
From net (.31) (.01) H (.14)
investment income
From net realized - (.04) H (.08)
gain
Total distributions (.31) (.05) (.22)
Net asset value, end $ 13.61 $ 12.23 $ 11.17
of period
TOTAL RETURN B, C 14.05% 9.98% 13.92%
RATIOS AND
SUPPLEMENTAL
DATA
Net assets, end of $ 166,726 $ 103,110 $ 43,155
period (000
omitted)
Ratio of expenses to .62% A .72% 1.42%
average net assets E
Ratio of expenses to .61% A, F .71% F 1.42%
average net assets
after expense
reductions
Ratio of net 3.47% A 3.63% 3.56%
investment income
to average net
assets
Portfolio turnover rate 81% A 163% 248%
Average commission $ .0417 $ .0165
rate G
<TABLE>
<CAPTION>
<S> <C> <C> <C>
A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT
ANNUALIZED AND 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 NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED
BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. 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. F 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). G 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. H THE AMOUNTS SHOWN REFLECT CERTAIN RECLASSIFICATIONS RELATED TO
BOOK TO TAX DIFFERENCES (SEE NOTE 1 OF NOTES TO FINANCIAL STATEMENTS).
</TABLE>
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
PERIODS ENDED PAST 1 LIFE OF
JUNE 30,1997 YEAR FUND
ASSET MANAGER: GROWTH 25.51% 23.29%
S&P 500(registered trademark) 34.70% 33.11%
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 long-term growth and short-term
volatility. 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
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
1997/01/31 15367.80 17519.24
15354.72
1997/02/28 15514.22 17656.59
15451.58
1997/03/31 14781.88 16931.08
14967.66
1997/04/30 15401.55 17941.87
15652.51
1997/05/31 16336.68 19034.17
16360.18
1997/06/30 16821.15 19886.90
16925.34
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 June 30, 1997, the value of the investment would have grown to
$16,821 - a 68.21% increase. With reinvested dividends and capital gains,
if any, a $10,000 investment in the S&P 500 would have grown to $19,887
over the same period - a 98.87% 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 (98.87%),
Lehman Brothers Aggregate Bond Index (24.12%), and the Salomon Brothers
3-month T-Bill Total Rate of Return Index (13.63%) - 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 $16,925 - a 69.25% 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 JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Philip Morris Companies, Inc. 6.4
Federal National Mortgage Association 4.7
Federal Home Loan Mortgage Corporation 2.7
International Business Machines Corp. 2.3
General Motors Corp. 2.3
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997
(STOCKS ONLY) % OF FUND'S
INVESTMENTS
Finance 15.1
Technology 12.9
Nondurables 7.5
Retail & Wholesale 7.0
Utilities 6.8
ASSET ALLOCATION AS OF JUNE 30, 1997*
Row: 1, Col: 1, Value: 4.2
Row: 1, Col: 2, Value: 16.5
Row: 1, Col: 3, Value: 79.3
Stock class 79.3%
Bond class 16.5%
Short-term class 4.2%
FOREIGN INVESTMENTS 10.4%
*
ASSET ALLOCATION IN THE PIE CHART REFLECTS THE CATEGORIZATION OF ASSETS AS
DEFINED
IN THE FUND'S PROSPECTUS. FINANCIAL STATEMENT CATEGORIZATIONS CONFORM TO
ACCOUNTING STANDARDS AND WILL DIFFER FROM THE PIE CHART.
% OF FUND'S INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with Richard Habermann (top left), Portfolio Manager of Asset
Manager: Growth Portfolio, George Vanderheiden (top right), sub-manager for
stocks, Charles Morrison (bottom left), sub-manager for bonds, and John
Todd (bottom right), sub-manager for short-term/money market instruments.
Charles Morrison became sub-manager for bonds on February 3, 1997, and John
Todd became sub-manager for short-term/money market instruments on December
1, 1996.
Q. HOW DID THE FUND PERFORM, DICK?
D.H. The fund's performance historically has been compared to that of the
Standard & Poor's 500 Index. However, there are some significant
differences between the make-up of the fund and the composition of the
index. While the S&P 500 is made up exclusively of stocks, the fund invests
in stocks, bonds and short-term/money market instruments. The fund
allocates assets among these three categories in order to help control both
volatility and risk relative to funds or indexes that invest only in
stocks. That being said, the S&P 500 posted a strong 20.61% return during
the six months that ended June 30, 1997, and 34.70% over the 12 months
ended June 30, 1997. Since the fund is diversified into other asset classes
that didn't perform as well as stocks, the fund's performance lagged that
of the S&P 500. However, the fund did benefit from the performance of its
equity investments and its small stake in high-yield bonds, while the bond
and short-term money market portions of the fund performed in line with
their respective markets.
Q. WHAT WAS THE FUND'S ASSET MIX AT THE END OF THE PERIOD?
D.H. At the end of June 1997, the fund's equity position stood at about
79%, 9% above the new neutral mix the fund instituted on January 1, 1997.
That neutral mix comprises 70% stocks, 25% bonds and 5% short-term/money
market instruments. In order to add to the equity portion, we reduced both
the fund's bond and short-term/money market positions. At the end of the
period, the fund held about 17% in bonds and approximately 4% in
short-term/money market instruments.
Q. WHY DID YOU INCREASE THE FUND'S STOCK INVESTMENTS?
D.H. Because the investing environment was very favorable not only for all
financial assets, but especially for stocks. We've had limited inflation
and corporate earnings continued to be strong. Another key factor was the
strength of the dollar, although that can act as a double-edged sword. On
the negative side, a rising dollar acts as a drag on the economy by slowing
exports and suppressing corporate earnings. This especially affects large,
multinational corporations. These companies, however, generally were able
to post earnings surprises through cost cutting and sustain their stock
prices by buying back shares. The positive side of the strong dollar is
that it helps to control inflation by keeping import prices down. In
addition, investors, especially those abroad, tend to feel more comfortable
investing in U.S. markets when the dollar is strong, helping to sustain
prices for both stocks and bonds.
Q. WHAT WAS THE ENVIRONMENT LIKE FOR THE BOND MARKET?
D.H. During the latter stages of the first quarter and the beginning of the
second quarter, the bond market struggled because of concerns that
continued economic growth might lead to inflation. Employment had reached a
level where historically there should have been increased upward pressure
on wages. The Federal Reserve Board tried to anticipate and head off
incipient inflation by raising the fed funds rate - the rate banks charge
each other for overnight loans - by 0.25% to 5.50% at the end of March.
This move was well-telegraphed, so the rate increase was already priced
into the market when the Fed acted. The Fed chose to keep rates steady in
May, a stance that surprised many in the market who were anticipating
another rate increase. The Fed stood pat mainly because economic growth
slowed and there were few if any signs of inflationary pressure. From that
point on, the bond market responded favorably.
Q. TURNING TO YOU, GEORGE, HOW DID YOU MANAGE THE STOCK PORTION OF THE FUND
IN A VIRTUALLY NO-INFLATION ENVIRONMENT?
G.V. I concentrated on four areas during the period. First, I looked at
innovators and unit growers because these companies use unit growth to
increase earnings and don't have to rely on price increases. Technology,
health care and telecommunications fall within these areas. Second were the
interest sensitive sectors that benefited from low interest rates,
including mortgage companies, insurance, finance and construction. Third, I
looked at global growers - companies with proprietary advantages, such as
low costs, unique distribution channels or strong brands - which are
seizing market share on a global basis. Fourth were the acquisitive
companies in consolidating industries. Certain industries have stopped
growing, but certain companies have been able to show earnings growth by
acquiring market share and paring costs.
Q. PHILIP MORRIS IS THE FUND'S LARGEST STOCK HOLDING. WHAT IS YOUR POSITION
ON TOBACCO STOCKS?
G.V. I own tobacco stocks because they operate a profitable business that
historically has offered above-average returns to shareholders over the
long term. In the past, the stocks have provided better-than-average
earnings growth, lower-than-average price-to-earnings ratios and high
yields. Nothing this year has changed that. We have determined that the
tobacco stocks are selling at a "litigation discount" in excess of any
reasonable estimate of potential liabilities. The cost of the proposed
settlement is high, but should be passed completely along to consumers.
Q. STOCK VALUATIONS WERE QUITE HIGH. WHY WAS THAT, AND WILL THEY STAY
INFLATED?
G.V. We had a nearly perfect investing environment during the period -
experiencing growth without inflation. Accelerating inflation is usually
the killer of all bond and equity bull markets, but inflation just kept
receding as the economic expansion continued. During the worst bear market
I ever encountered - the 1973-1974 bear that took prices down about 50% -
everything that could go wrong did go wrong. Today is an environment where
everything that could go right has gone right - from a declining budget
deficit, to falling inflation, to surging earnings, to big flows into
mutual funds and rising consumer confidence. If any of these factors change
for the worse, valuations should deflate. My biggest concern going forward
is that the low level of inflation and pricing power in a strong economy
will deteriorate to deflation in a slowing or contracting economy, thereby
leading to sizable earnings declines.
Q. CHARLIE, WHAT CHANGES HAVE YOU MADE SINCE TAKING OVER THE FUND'S BOND
INVESTMENTS?
C.M. For most of the period, I focused on positioning the bond portion of
the portfolio more aggressively by increasing its weighting in securities
that offer a yield advantage over Treasuries, such as corporate securities,
while decreasing the percentage held in Treasuries. Part of that move was
accomplished with Dick's reallocation of assets away from bonds. In
reducing the fund's stake in bonds, I sold Treasuries. At the same time, I
tended to focus any new purchases on investments that offered a yield
advantage over Treasuries. Specific areas of focus included BBB-rated
corporate bonds and commercial mortgage-backed securities.
Q. WHAT KINDS OF BONDS DID YOU FOCUS ON IN THE CORPORATE MARKET?
C.M. One area of interest over the period was in the bank market. I
continued to add long-term bank paper in the form of capital securities.
Last fall, the Federal Reserve Board ruled that domestic banking companies
could issue capital securities, which offered the banks significant tax
advantages, as well as the opportunity to strengthen their balance sheets.
Numerous banks took advantage of this opportunity and inundated the market
with these securities. The large amount of supply in a relatively
concentrated period of time allowed us to purchase many capital securities
at cheap levels. This market has performed well following the initial
supply.
Q. JOHN, WHAT HAS THE BACKDROP FOR THE SHORT-TERM AND MONEY MARKETS BEEN
LIKE SINCE YOU CAME ON BOARD?
J.T. As Dick pointed out, the Fed raised the fed funds rate at its March
meeting, but then chose not to continue to raise rates at its late May
meeting. For now, the Fed appears to be in a holding pattern. Some believe
that the Fed has abandoned the notion of being pre-emptive - seeking to
head off inflation before it actually appears - and instead will respond
only to actual evidence of inflation rather than trying to respond to
underlying inflationary pressures.
Q. WHAT SORT OF STRATEGY DID YOU PURSUE?
J.T. Because Fed Chairman Alan Greenspan warned that the Fed might raise
rates, I reduced the short-term/money market portion's average maturity to
about 50 days in the first quarter. Once the market adjusted to the new,
higher rate level and expectations of further Fed interest rate increases
were built into the yield curve, the maturity was extended. That's because
many longer-maturity instruments were attractively valued because their
prices and yields reflected a more aggressive Fed interest rate posture
than I felt was likely.
Q. TURNING BACK TO YOU, DICK, WHAT'S YOUR OUTLOOK?
D.H. I believe that a lack of pricing power, among other things, makes it
clear that corporations are not operating with a very strong wind at their
backs. At the same time, U.S. companies - helped by advances in technology
that help cut costs - are operating very efficiently, leading to many
positive earnings surprises. I don't see much that would change that over
the near future. Still, the economic pattern over the past year has been
like a seesaw. That is, the economy has grown in spurts, picking up for one
quarter then tailing off into weakness during the next. If the economy
shows sustained strength, interest rates could rise and put some pressure
on the markets. On the other hand, one could argue that rates might fall
because inflation is at such a low level. As always, we'll have to wait and
see what the future holds.
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 June 30, 1997, more than $4 billion
MANAGER: Richard Habermann, since March
1996; joined Fidelity in 1968
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 78.2%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 1.6%
AEROSPACE & DEFENSE - 1.1%
Boeing Co. 80,600 $ 4,276,838
Gulfstream Aerospace Corp. (a) 5,800 171,100
4,447,938
DEFENSE ELECTRONICS - 0.4%
Raytheon Co. 34,000 1,734,000
SHIP BUILDING & REPAIR - 0.1%
Avondale Industries, Inc. (a) 2,800 58,800
Newport News Shipbuilding, Inc. 8,200 159,388
218,188
TOTAL AEROSPACE & DEFENSE 6,400,126
BASIC INDUSTRIES - 4.4%
CHEMICALS & PLASTICS - 2.8%
Air Products & Chemicals, Inc. 9,800 796,250
du Pont (E.I.) de Nemours & Co. 108,100 6,796,788
Raychem Corp. 31,900 2,372,563
Union Carbide Corp. 30,000 1,411,875
11,377,476
PACKAGING & CONTAINERS - 0.8%
Owens-Illinois, Inc. (a) 95,100 2,948,100
PAPER & FOREST PRODUCTS - 0.8%
Boise Cascade Corp. 19,400 685,063
Champion International Corp. 29,000 1,602,250
International Paper Co. 11,500 558,469
Willamette Industries, Inc. 3,900 273,000
3,118,782
TOTAL BASIC INDUSTRIES 17,444,358
CONSTRUCTION & REAL ESTATE - 0.9%
CONSTRUCTION - 0.7%
Centex Corp. 11,800 479,375
D.R. Horton, Inc. 32,900 341,338
Fleetwood Enterprises, Inc. 48,733 1,452,853
Kaufman & Broad Home Corp. 24,200 425,013
U.S. Home Corp. (a) 2,600 69,063
2,767,642
ENGINEERING - 0.2%
Fluor Corp. 18,900 1,043,044
TOTAL CONSTRUCTION & REAL ESTATE 3,810,686
DURABLES - 4.3%
AUTOS, TIRES, & ACCESSORIES - 3.6%
Circuit City Stores, Inc. -
CarMax Group 2,500 35,781
Cummins Engine Co., Inc. 19,500 1,375,969
Dana Corp. 7,500 285,000
Discount Auto Parts, Inc. (a) 12,500 243,750
Federal-Mogul Corp. 8,300 290,500
General Motors Corp. 163,100 9,081,631
Gentex Corp. (a) 7,000 138,250
Goodyear Tire & Rubber Co. 8,100 512,831
Honda Motor Co. Ltd. 13,000 391,208
Magna International, Inc. Class A 21,200 1,274,472
Superior Industries International, Inc. 32,900 871,850
14,501,242
CONSUMER ELECTRONICS - 0.2%
Newell Co. 15,900 630,038
SHARES VALUE (NOTE 1)
TEXTILES & APPAREL - 0.5%
Burlington Industries, Inc. (a) 40,400 $ 484,800
Liz Claiborne, Inc. 10,900 508,213
NIKE, Inc. Class B 15,000 875,625
Reebok International Ltd. 2,400 112,200
1,980,838
TOTAL DURABLES 17,112,118
ENERGY - 6.5%
ENERGY SERVICES - 0.3%
McDermott International, Inc. 37,600 1,097,450
OIL & GAS - 6.2%
Amerada Hess Corp. 15,700 872,331
Anadarko Petroleum Corp. 1,700 102,000
Atlantic Richfield Co. 28,700 2,023,350
British Petroleum PLC ADR 52,146 3,904,432
Burlington Resources, Inc. 40,100 1,769,413
Canada Occidental Petroleum Ltd. 700 15,717
Chevron Corp. 2,300 170,056
Elf Aquitaine SA sponsored ADR 8,100 440,944
Enron Oil & Gas Co. 5,100 92,438
Fortune Petroleum Corp. warrants
9/28/98 (a) 100,000 75,000
Kerr-McGee Corp. 7,600 481,650
Louisiana Land & Exploration Co. 31,500 1,799,438
Mobil Corp. 4,600 321,425
Noble Affiliates, Inc. 3,000 116,063
Occidental Petroleum Corp. 67,800 1,699,238
Royal Dutch Petroleum Co. Ord. 3,200 166,346
Royal Dutch Petroleum Co. 129,600 7,047,000
Santa Fe Energy Resources, Inc. (a) 23,400 343,688
Sun Co., Inc. 9,500 294,500
Tosco Corp. 68,100 2,038,744
Total SA:
Class B 2,420 244,461
sponsored ADR 15,065 762,666
Union Pacific Resources Group, Inc. 5,300 131,838
24,912,738
TOTAL ENERGY 26,010,188
FINANCE - 14.9%
BANKS - 0.4%
Canadian Imperial Bank of Commerce 200 5,041
Credit Suisse Group (Reg.) 8,400 1,077,660
NationsBank Corp. 11,500 741,750
1,824,451
CLOSED END INVESTMENT COMPANY - 0.1%
First NIS Regional Fund (a) 25,000 462,500
CREDIT & OTHER FINANCE - 0.9%
Fleet Financial Group, Inc. 55,200 3,491,400
FEDERAL SPONSORED CREDIT - 7.4%
Federal Home Loan Mortgage
Corporation 319,400 10,979,375
Federal National Mortgage Association 428,200 18,680,225
29,659,600
INSURANCE - 5.6%
AFLAC, Inc. 12,700 600,075
Aegon NV (Reg.) 12,898 903,666
Allmerica Financial Corp. 14,100 562,238
Allstate Corp. 83,100 6,066,300
American International Group, Inc. 33,900 5,063,813
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
INSURANCE - CONTINUED
CIGNA Corp. 5,300 $ 940,750
Equitable of Iowa Companies 2,000 112,000
General Re Corp. 8,700 1,583,400
Loews Corp. 5,700 570,713
MGIC Investment Corp. 40,400 1,936,675
PMI Group, Inc. 14,700 916,913
Provident Companies, Inc. 1,200 64,200
Providian Financial Corp. (a) 31,200 1,002,300
Reliastar Financial Corp. 5,700 416,813
Torchmark Corp. 18,700 1,332,375
Travelers Property Casualty Corp.
Class A 4,500 179,438
UNUM Corp. 3,300 138,600
22,390,269
SAVINGS & LOANS - 0.3%
Golden West Financial Corp. 17,300 1,211,000
SECURITIES INDUSTRY - 0.2%
United Asset Management Corp. 28,300 801,244
TOTAL FINANCE 59,840,464
HEALTH - 6.3%
DRUGS & PHARMACEUTICALS - 2.3%
American Home Products Corp. 1,400 107,100
Amgen, Inc. 27,300 1,586,813
Astra AB Class A Free shares 136,700 2,549,515
Merck & Co., Inc. 6,800 703,800
Novartis AG (Reg.) 1,296 2,069,698
Schering-Plough Corp. 44,600 2,135,225
9,152,151
MEDICAL EQUIPMENT & SUPPLIES - 0.8%
Allegiance Corp. 2,660 72,485
Bard (C.R.), Inc. 13,000 472,063
Baxter International, Inc. 5,400 282,150
Biomet, Inc. 30,900 575,513
Boston Scientific Corp. (a) 1,600 98,300
Johnson & Johnson 3,500 225,313
St. Jude Medical, Inc. (a) 35,800 1,396,200
3,122,024
MEDICAL FACILITIES MANAGEMENT - 3.2%
Columbia/HCA Healthcare Corp. 222,750 8,756,859
Health Management Associates, Inc.
Class A (a) 1,500 42,750
Humana, Inc. (a) 59,700 1,380,563
Tenet Healthcare Corp. (a) 41,800 1,235,713
United HealthCare Corp. 26,100 1,357,200
12,773,085
TOTAL HEALTH 25,047,260
HOLDING COMPANIES - 0.2%
U.S. Industries, Inc. (a) 20,900 744,563
INDUSTRIAL MACHINERY & EQUIPMENT - 1.6%
ELECTRICAL EQUIPMENT - 0.9%
Emerson Electric Co. 7,800 429,488
General Electric Co. 35,300 2,307,738
Scientific-Atlanta, Inc. 17,800 389,375
Sensormatic Electronics Corp. 6,200 79,825
Westinghouse Electric Corp. 26,500 612,813
3,819,239
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - 0.5%
Caterpillar, Inc. 15,600 $ 1,675,050
JLK Direct Distribution, Inc. Class A 100 2,563
Ultratech Stepper, Inc. (a) 19,000 434,625
2,112,238
POLLUTION CONTROL - 0.2%
Browning-Ferris Industries, Inc. 18,800 625,100
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 6,556,577
MEDIA & LEISURE - 2.4%
BROADCASTING - 0.1%
Cox Communications, Inc. Class A (a) 4,600 110,400
HSN, Inc. (a) 3,350 104,688
TCI Group Class A (a) 15,600 232,050
447,138
ENTERTAINMENT - 0.0%
Cedar Fair LP (depositary unit) 1,300 56,875
Royal Caribbean Cruises Ltd. 3,100 108,306
165,181
LEISURE DURABLES & TOYS - 0.6%
Nintendo Co. Ltd. Ord. 27,300 2,286,013
LODGING & GAMING - 0.9%
Circus Circus Enterprises, Inc. (a) 42,000 1,034,250
HFS, Inc. (a) 7,200 417,600
Harrah's Entertainment, Inc. (a) 19,500 355,875
Mirage Resorts, Inc. (a) 42,200 1,065,550
Sun International Hotels Ltd. Ord. (a) 19,400 716,588
3,589,863
PUBLISHING - 0.1%
Cognizant Corp. 11,500 465,750
RESTAURANTS - 0.7%
Brinker International, Inc. (a) 14,100 200,925
Lone Star Steakhouse Saloon (a) 10,300 267,800
McDonald's Corp. 43,100 2,082,269
Papa John's International, Inc. (a) 3,800 139,650
2,690,644
TOTAL MEDIA & LEISURE 9,644,589
NONDURABLES - 7.5%
HOUSEHOLD PRODUCTS - 0.1%
Premark International, Inc. 4,800 128,400
TOBACCO - 7.4%
Philip Morris Companies, Inc. 576,300 25,573,313
RJR Nabisco Holdings Corp. 121,820 4,020,060
UST, Inc. 5,400 149,850
29,743,223
TOTAL NONDURABLES 29,871,623
PRECIOUS METALS - 0.1%
Barrick Gold Corp. 4,600 100,120
Newmont Mining Corp. 3,886 151,554
251,674
RETAIL & WHOLESALE - 7.0%
APPAREL STORES - 0.3%
Gap, Inc. 10,600 412,075
TJX Companies, Inc. 35,200 928,400
1,340,475
DRUG STORES - 0.0%
CVS Corp. 3,900 199,875
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
GENERAL MERCHANDISE STORES - 2.2%
Federated Department Stores, Inc. (a) 30,300 $ 1,052,925
Proffitts, Inc. (a) 1,100 48,263
Wal-Mart Stores, Inc. 226,300 7,651,769
8,752,957
GROCERY STORES - 0.3%
Safeway, Inc. (a) 24,500 1,130,063
RETAIL & WHOLESALE, MISCELLANEOUS - 4.2%
Circuit City Stores, Inc. - Circuit
City Group 77,500 2,756,094
Corporate Express, Inc. 20,400 294,525
Home Depot, Inc. (The) 96,100 6,624,894
Lowe's Companies, Inc. 80,400 2,984,850
Officemax, Inc. (a) 56,000 808,500
Office Depot, Inc. (a) 8,700 169,106
Rex Stores Corp. (a) 6,800 68,850
Staples, Inc. (a) 23,400 544,050
Toys "R" Us, Inc. (a) 46,900 1,641,500
U.S. Office Products Co. (a) 15,900 485,944
Viking Office Products, Inc. (a) 21,200 402,800
16,781,113
TOTAL RETAIL & WHOLESALE 28,204,483
SERVICES - 0.0%
ADVERTISING - 0.0%
Interpublic Group of Companies, Inc. 2,500 153,281
LEASING & RENTAL - 0.0%
Hanover Compressor Co. 300 5,850
PRINTING - 0.0%
Donnelley (R.R.) & Sons Co. 600 22,058
SERVICES - 0.0%
PEAPOD, Inc. 1,100 12,375
TOTAL SERVICES 193,564
TECHNOLOGY - 12.9%
COMMUNICATIONS EQUIPMENT - 0.8%
Alcatel Alsthom Compagnie Generale
d'Electricite SA sponsored ADR 2,100 53,025
Alcatel Alsthom Compagnie Generale
d'Electricite SA 17,100 2,140,335
Andrew Corp. (a) 6,300 177,188
Cisco Systems, Inc. (a) 8,500 570,563
Nokia Corp. AB sponsored ADR 3,700 272,875
3,213,986
COMPUTER SERVICES & SOFTWARE - 2.4%
American Management Systems, Inc. (a) 2,800 74,900
Automatic Data Processing, Inc. 25,700 1,207,900
CUC International, Inc. (a) 18,200 469,788
Ceridian Corp. (a) 16,500 697,125
CompUSA, Inc. (a) 10,400 223,600
Electronic Data Systems Corp. 44,100 1,808,100
First Data Corp. 33,500 1,471,906
Microsoft Corp. (a) 12,000 1,516,500
Netscape Communications Corp. (a) 2,900 92,981
Oracle Systems Corp. (a) 20,900 1,052,838
Paychex, Inc. 16,350 621,300
Policy Management Systems Corp. (a) 10,000 470,000
9,706,938
SHARES VALUE (NOTE 1)
COMPUTERS & OFFICE EQUIPMENT - 4.6%
Bay Networks, Inc. (a) 25,300 $ 672,031
Compaq Computer Corp. (a) 40,300 3,999,775
Hewlett-Packard Co. 17,600 985,600
Ingram Micro, Inc. Class A (a) 3,500 84,438
International Business Machines Corp. 103,500 9,334,406
SCI Systems, Inc. (a) 42,200 2,690,250
Tech Data Corp. (a) 21,200 666,475
18,432,975
ELECTRONIC INSTRUMENTS - 1.3%
Applied Materials, Inc. (a) 14,500 1,026,781
Cognex Corp. (a) 8,900 235,850
KLA Instruments Corp. (a) 3,200 156,000
Lam Research Corp. (a) 20,400 756,075
Novellus Systems, Inc. (a) 12,200 1,055,300
Teradyne, Inc. (a) 16,500 647,625
Thermo Electron Corp. (a) 18,600 632,400
Varian Associates, Inc. 10,600 575,050
5,085,081
ELECTRONICS - 3.8%
AMP, Inc. 59,000 2,463,250
Atmel Corp. (a) 3,900 109,200
Intel Corp. 28,900 4,098,381
Methode Electronics, Inc. Class A 10,200 202,725
Microchip Technology, Inc. (a) 3,350 99,663
Micron Technology, Inc. 67,900 2,711,756
Molex, Inc. 10,875 379,266
Motorola, Inc. 2,300 174,800
Solectron Corp. (a) 49,100 3,437,000
Storage Technology Corp. (a) 8,600 382,700
Texas Instruments, Inc. 13,800 1,160,063
Thomas & Betts Corp. 700 36,794
15,255,598
TOTAL TECHNOLOGY 51,694,578
TRANSPORTATION - 0.9%
AIR TRANSPORTATION - 0.2%
Continental Airlines, Inc. Class B (a) 4,100 143,244
Delta Air Lines, Inc. 2,800 229,600
Northwest Airlines Corp. Class A (a) 6,800 247,350
620,194
RAILROADS - 0.5%
Bombardier, Inc. Class B 15,700 355,927
Burlington Northern Santa Fe Corp. 7,000 629,125
CSX Corp. 21,700 1,204,350
2,189,402
SHIPPING - 0.1%
Stolt-Nielsen SA Class B sponsored ADR 16,500 319,688
Stolt-Nielsen SA 1,700 32,088
351,776
TRUCKING & FREIGHT - 0.1%
Roadway Express, Inc. 3,300 77,138
Yellow Corp. (a) 13,800 308,775
385,913
TOTAL TRANSPORTATION 3,547,285
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - 6.7%
CELLULAR - 1.9%
AirTouch Communications, Inc. (a) 94,700 $ 2,592,413
360 Degrees Communications Co. (a) 4,700 80,488
Vodafone Group PLC sponsored ADR 83,700 4,054,219
Vodafone Group PLC 172,641 842,069
7,569,189
ELECTRIC UTILITY - 0.2%
American Electric Power Co., Inc. 7,900 331,800
Entergy Corp. 23,800 651,525
983,325
GAS - 0.1%
Enron Corp. 10,300 420,369
TELEPHONE SERVICES - 4.5%
AT&T Corp. 28,300 992,269
Ameritech Corp. 25,900 1,759,581
Bell Atlantic Corp. 18,700 1,418,863
BellSouth Corp. 43,700 2,026,588
Deutsche Telekom AG 10,800 259,311
MCI Communications Corp. 88,000 3,368,750
NextLink Communications, Inc.
warrants 2/1/09 (a) 5,940 59
NYNEX Corp. 36,700 2,114,838
Qwest Communications
International, Inc. 700 19,075
SBC Communications, Inc. 35,800 2,215,125
Sprint Corp. 67,700 3,562,713
WorldCom, Inc. (a) 9,600 307,200
18,044,372
TOTAL UTILITIES 27,017,255
TOTAL COMMON STOCKS
(Cost $264,403,573) 313,391,391
NONCONVERTIBLE PREFERRED STOCKS - 1.1%
CONSTRUCTION & REAL ESTATE - 0.0%
REAL ESTATE INVESTMENT TRUSTS - 0.0%
Walden Residential Properties, Inc.
9.20% 5,800 146,450
FINANCE - 0.2%
CREDIT & OTHER FINANCE - 0.1%
American Annuity Group Capital Trust II
8 3/4% 160 159,200
SAVINGS & LOANS - 0.1%
California Federal Preferred Capital
Corp. 9 1/8% 20,560 524,280
TOTAL FINANCE 683,480
HEALTH - 0.1%
MEDICAL FACILITIES MANAGEMENT - 0.1%
Fresenius Medical Care Capital
Trust 9% 166 170,109
MEDIA & LEISURE - 0.7%
BROADCASTING - 0.6%
American Radio Systems Corp. 11 3/8%
pay-in-kind 3,025 322,163
Cablevision System Corp. 11 1/8%
depositary shares pay-in-kind 4,910 493,455
SHARES VALUE (NOTE 1)
PanAmSat Corp. 12 3/4% pay-in-kind 24 $ 29,280
SFX Broadcasting, Inc. 12 5/8% 3,143 338,658
Sinclair Capital 11 5/8% (e) 3,100 327,050
Time Warner, Inc., Series M,
10 1/4% pay-in-kind 964 1,065,220
2,575,826
PUBLISHING - 0.1%
K-III Communications Corp.:
Series B, $11.625 pay-in-kind 206 22,480
Series D, $10 3,386 341,140
363,620
TOTAL MEDIA & LEISURE 2,939,446
UTILITIES - 0.1%
TELEPHONE SERVICES - 0.1%
NextLink Communications, Inc.
14% pay-in-kind 6,150 318,263
TOTAL NONCONVERTIBLE PREFERRED STOCKS
(Cost $4,110,913) 4,257,748
NONCONVERTIBLE CORPORATE BONDS - 11.1%
MOODY'S PRINCIPAL
RATINGS (D) AMOUNT
AEROSPACE & DEFENSE - 0.3%
AEROSPACE & DEFENSE - 0.1%
BE Aerospace, Inc.:
9 3/4%, 3/1/03 Ba3 $ 400,000 417,000
9 7/8%, 2/1/06 B2 10,000 10,525
Rohr, Inc. 11 5/8%, 5/15/03 Ba3 50,000 55,625
483,150
DEFENSE ELECTRONICS - 0.0%
Tracor, Inc. 8 1/2%, 3/1/07 B1 130,000 131,300
SHIP BUILDING & REPAIR - 0.2%
Newport News Shipbuilding, Inc.:
8 5/8%, 12/1/06 Ba2 155,000 160,038
9 1/4%, 12/1/06 B1 540,000 562,950
722,988
TOTAL AEROSPACE & DEFENSE 1,337,438
BASIC INDUSTRIES - 0.8%
CHEMICALS & PLASTICS - 0.1%
Acetex Corp. yankee
9 3/4%, 10/1/03 B1 120,000 121,800
Foamex LP/Foamex Capital Corp.
9 7/8%, 6/15/07 (e) B3 60,000 60,750
General Chemical Corp.
9 1/4%, 8/15/03 B2 150,000 153,375
Pioneer Americas Acquisition
Corp. 9 1/4%, 6/15/07 (e) B1 40,000 39,400
Sterling Chemicals Holdings, Inc.
11 1/4%, 4/1/07 B3 240,000 254,400
629,725
IRON & STEEL - 0.1%
Neenah Corp. 11 1/8%,
5/1/07 (e) B3 210,000 222,600
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
BASIC INDUSTRIES - CONTINUED
METALS & MINING - 0.0%
Well Aluminum Corp. 10 1/8%,
6/1/05 (e) B2 $ 20,000 $ 20,600
PACKAGING & CONTAINERS - 0.3%
BWAY Corp. 10 1/4%,
4/15/07 (e) B2 190,000 204,250
Owens Illinois, Inc.:
7.85%, 5/15/04 Ba1 150,000 152,063
9.95%, 10/15/04 Ba3 210,000 222,600
8.10%, 5/15/07 Ba1 210,000 212,888
Silgan Holdings, Inc.
9%, 6/1/09 (e) B1 260,000 261,950
1,053,751
PAPER & FOREST PRODUCTS - 0.3%
Asia Pulp & Paper Finance II
Mauritius Ltd. 12%,
3/15/04 (e) B3 110,000 112,750
Florida Coast Paper Co.
LLC/Florida Coast Paper
Finance Corp., Series B,
12 3/4%, 6/1/03 Caa 100,000 103,250
Gaylord Container Corp.
11 1/2%, 5/15/01 B3 40,000 42,050
Repap Wisconsin, Inc.:
9 1/4%, 2/1/02 B2 230,000 231,150
9 7/8%, 5/1/06 Caa 30,000 30,225
Repap New Brunswick, Inc.
yankee 10 5/8%, 4/15/05 Caa 90,000 84,825
Riverwood International Corp.
10 1/4%, 4/1/06 B3 220,000 216,700
Stone Container Corp.
10 3/4%, 10/1/02 B1 300,000 316,500
1,137,450
TOTAL BASIC INDUSTRIES 3,064,126
CONSTRUCTION & REAL ESTATE - 0.2%
BUILDING MATERIALS - 0.1%
Building Materials Corp. of
America 0%, 7/1/04 (b) B1 420,000 382,200
Falcon Building Products, Inc.
9 1/2%, 6/15/07 (e) B3 20,000 19,850
Nortek, Inc. 9 1/4%,
3/15/07 Ba3 90,000 91,800
493,850
CONSTRUCTION - 0.1%
Greystone Homes, Inc.
10 3/4%, 3/1/04 Ba3 200,000 218,500
REAL ESTATE - 0.0%
Iron Mountain, Inc. 10 1/8%,
10/1/06 B3 100,000 106,250
TOTAL CONSTRUCTION & REAL ESTATE 818,600
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
DURABLES - 0.4%
AUTOS, TIRES, & ACCESSORIES - 0.1%
Aftermarket Technology Corp.
12%, 8/1/04 B3 $ 135,000 $ 150,525
Blue Bird Body Co. 10 3/4%,
11/15/06 B2 230,000 243,800
Delco Remy International, Inc.
10 5/8%, 8/1/06 (e) B2 50,000 53,000
Tennessee Gas Pipeline Co.
7%, 3/15/27 Baa3 90,000 89,946
537,271
HOME FURNISHINGS - 0.1%
Interlake Corp. 12 1/8%,
3/1/02 B3 240,000 251,400
Knoll, Inc. 10 7/8%, 3/15/06 B1 26,000 28,763
280,163
TEXTILES & APPAREL - 0.2%
GFSI, Inc. 9 5/8%, 3/1/07 (e) B3 290,000 292,900
Levi Strauss & Co. 7%,
11/1/06 (e) Baa2 310,000 306,652
599,552
TOTAL DURABLES 1,416,986
ENERGY - 0.5%
ENERGY SERVICES - 0.1%
Falcon Drilling, Inc. 9 3/4%,
1/15/01 Ba3 120,000 123,000
Parker Drilling Co. 9 3/4%,
11/15/06 B1 30,000 31,350
Pride Petroleum Services, Inc.
9 3/8%, 5/1/07 Ba3 210,000 217,350
371,700
OIL & GAS - 0.4%
Energy Corp. America
9 1/2%, 5/15/07 (e) B2 350,000 344,750
Flores & Rucks, Inc. 9 3/4%,
10/1/06 B3 220,000 229,900
Forcenergy, Inc. 8 1/2%,
2/15/07 B2 150,000 146,625
Gulf Canada Resources Ltd.
yankee 9 5/8%, 7/1/05 Ba2 130,000 139,263
Husky Oil Ltd. yankee
6 7/8%, 11/15/03 Baa3 85,000 83,798
Occidental Petroleum Corp.
9 3/4%, 6/15/01 Baa3 100,000 109,823
Ocean Energy, Inc. 8 7/8%,
7/15/07 (e) B3 240,000 240,000
Pennzoil Co. 9 5/8%,
11/15/99 Baa3 70,000 74,579
Petsec Energy, Inc. 9 1/2%,
6/15/07 (e) B3 30,000 30,000
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
ENERGY - CONTINUED
OIL & GAS - CONTINUED
Ras Laffan Liquid Natural Gas
Co. Ltd. yankee 7.628%,
9/15/06 (e) A3 $ 70,000 $ 70,897
United Refining Co. 10 3/4%,
6/15/07 (e) B2 100,000 99,000
1,568,635
TOTAL ENERGY 1,940,335
FINANCE - 2.5%
ASSET-BACKED SECURITIES - 0.5%
Airplanes Pass Through Trust
10 7/8%, 3/15/19 Ba2 1,100,000 1,271,065
CPS Auto Grantor Trust
6.55%, 12/15/02 Aaa 105,786 106,017
Green Tree Financial Corp.:
6 1/2%, 6/15/27 Aaa 100,000 100,218
6.80%, 6/15/27 Aaa 100,000 100,500
6.45%, 9/15/28 Aaa 110,000 109,691
Olympic Automobile
Receivables Trust:
6.40%, 9/15/01 Aaa 150,000 150,382
6.70%, 3/15/02 Aaa 70,000 70,306
WFS Financial Owner Trust
6.55%, 10/20/04 Aaa 140,000 139,620
2,047,799
BANKS - 0.5%
ABN Amro Bank NV 6 5/8%,
10/31/01 Aa3 250,000 248,968
Banc One Corp. 6.70%,
3/24/00 Aa3 150,000 150,699
BanPonce Corp. 6.665%,
3/5/01 A3 150,000 149,291
BanPonce Trust I 8.327%,
2/1/27 (e) Baa1 230,000 232,433
Capital One Bank 6.42%,
11/12/99 Baa3 500,000 497,375
Den Danske Bank AS
7.40%, 6/15/10 (e)(g) A1 140,000 139,896
Korea Development Bank
yankee 7 1/4%, 5/15/06 A1 180,000 178,565
Midland Bank PLC yankee
7 5/8%, 6/15/06 A1 125,000 128,731
NB Capital Trust IV 8 1/4%,
4/15/27 A1 150,000 153,711
Nationsbank Corp.
5.67%, 2/9/01 A1 250,000 241,323
2,120,992
CREDIT & OTHER FINANCE - 0.9%
AT&T Capital Corp.:
6.39%, 1/22/99 Baa3 50,000 50,096
6.26%, 2/18/99 Baa3 350,000 349,262
6.65%, 4/30/99 Baa3 250,000 250,700
Ahmanson Capital Trust I
8.36%, 12/1/26 (e) Baa3 250,000 252,088
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
CIT Group Holdings, Inc.
6 1/4%, 10/4/99 Aa3 $ 250,000 $ 249,375
Chrysler Financial Corp.
6 3/8%, 1/28/00 A3 230,000 229,310
First Security Capital I
8.41%, 12/15/26 A3 110,000 112,141
Ford Motor Credit Co.:
6.65%, 5/22/00 A1 400,000 400,396 7%, 9/25/01 A1 325,000 327,743
General Electric Capital Corp.
6.94%, 4/13/09 (c) Aaa 250,000 252,353
GreenPoint Capital Trust I
9.10%, 6/1/27 (e) Ba1 170,000 171,020
Heller Financial, Inc.
7 7/8%, 11/1/99 A2 180,000 184,900
Household Finance Corp.
5.7825%, 6/4/98 (g) A2 500,000 500,000
KeyCorp Institutional Capital
Series A, 7.826%, 12/1/26 A1 130,000 126,257
Nordstrom Credit, Inc.
7 1/4%, 4/30/02 A2 100,000 101,670
TransAmerican Energy Corp.
11 1/2%, 6/15/02 (e) B3 40,000 39,000
Triton Energy Ltd./Triton Energy
Corp. 9 1/4%, 4/15/05 Ba2 110,000 116,463
3,712,774
INSURANCE - 0.2%
Reliance Group:
9%, 11/15/00 Ba3 360,000 370,800
9 3/4%, 11/15/03 B1 270,000 281,475
SunAmerica, Inc. 6.20%,
10/31/99 Baa1 250,000 248,228
900,503
SAVINGS & LOANS - 0.4%
Bank UTD Corp. 8 7/8%,
5/1/07 Ba3 450,000 465,188
Chevy Chase Savings Bank
FSB 9 1/4%, 12/1/08 B1 260,000 260,650
First Nationwide Holdings, Inc.
10 5/8%, 10/1/03 Ba3 160,000 173,600
First Nationwide Parent
Holdings Ltd. 12 1/2%,
4/15/03 B3 250,000 278,750
Long Island Savings Bank FSB
7%, 6/13/02 Baa3 250,000 250,313
1,428,501
TOTAL FINANCE 10,210,569
HEALTH - 0.4%
MEDICAL EQUIPMENT & SUPPLIES - 0.0%
McKesson Corp. 6.60%,
3/1/00 (e) A3 150,000 150,150
MEDICAL FACILITIES MANAGEMENT - 0.4%
Columbia/HCA Healthcare
Corp.:
6 1/2%, 3/15/99 A2 125,000 125,434
6 7/8%, 7/15/01 A2 125,000 125,650
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
HEALTH - CONTINUED
MEDICAL FACILITIES MANAGEMENT - CONTINUED
Integrated Health Services, Inc.
9 1/2%, 9/15/07 (e) B1 $ 210,000 $ 214,725
Tenet Healthcare Corp.:
8%, 1/15/05 Ba1 30,000 30,000
10 1/8%, 3/1/05 Ba3 240,000 261,600
8 5/8%, 1/15/07 Ba3 760,000 771,400
1,528,809
TOTAL HEALTH 1,678,959
HOLDING COMPANIES - 0.1%
Norfolk Southern Corp.
7.05%, 5/1/37 Baa1 220,000 223,287
INDUSTRIAL MACHINERY & EQUIPMENT - 0.2%
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
Continental Global Group, Inc.
11%, 4/1/07 (e) B2 100,000 105,000
Exide Corp. 10%, 4/15/05 B1 165,000 170,775
Goss Graphic System, Inc.
12%, 10/15/06 B2 250,000 275,000
550,775
POLLUTION CONTROL - 0.1%
Allied Waste of North America,
Inc. 10 1/4%, 12/1/06 (e) B3 290,000 310,300
WMX Technologies, Inc.
7.10%, 8/1/26 A3 80,000 81,518
391,818
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 942,593
MEDIA & LEISURE - 2.6%
BROADCASTING - 1.6%
Adelphia Communications Corp.:
9 1/2%, 2/15/04 B3 520,000 494,000
9 7/8%, 3/1/07 (e) - 120,000 115,800
Cablevision System Corp.:
9 1/4%, 11/1/05 B2 260,000 267,150
9 7/8%, 5/15/06 B2 180,000 191,250
9 7/8%, 2/15/13 B2 120,000 126,300
Capstar Broadcasting Partners,
Inc. 0%, 2/1/09 (b)(e) CCC 80,000 51,400
Capstar Radio Broadcasting
Partners, Inc. 9 1/4%,
7/1/07 (e) - 410,000 396,675
Diamond Cable Communications
PLC yankee (b):
0%, 9/30/04 B3 270,000 218,025
0%, 2/15/07 (e) - 190,000 106,638
Echostar DBS Corp. 12 1/2%,
7/1/02 (e) Caa 120,000 118,950
Echostar Satellite Broadcasting
Corp. 0%, 3/15/04 (b) Caa 220,000 156,200
Echostar Communications Corp.
secured discount 0%,
6/1/04 (b) B2 322,000 270,480
Granite Broadcasting Corp.:
10 3/8%, 5/15/05 B3 30,000 30,375
9 3/8%, 12/1/05 B3 40,000 38,800
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Intermedia Capital Partners IV
LP/Intermedia Partners IV
Capital Corp. 11 1/4%,
8/1/06 B2 $ 100,000 $ 107,625
International Cabletel, Inc.
0%, 2/1/06 (b) B3 130,000 89,700
Jacor Communications Co.
8 3/4%, 6/15/07 (e) B2 50,000 49,375
Lenfest Communications, Inc.
8 3/8%, 11/1/05 Ba3 550,000 541,750
NTL, Inc. 10%, 2/15/07 - 270,000 270,625
Olympus Communications LP/
Olympus Capital Corp.
10 5/8%, 11/15/06 B1 140,000 146,300
Rogers Cablesystems Ltd.
yankee 11%, 12/1/15 B2 190,000 208,050
SCI Television, Inc. secured
11%, 6/30/05 Ba1 150,000 158,250
SFX Broadcasting, Inc.
10 3/4%, 5/15/06 B3 320,000 344,800
TCI Communication, Inc.:
7 1/4%, 6/15/99 Ba1 330,000 332,521
6.46%, 3/6/00 Ba1 200,000 196,718
TCI Communications Financing III
9.65%, 3/31/27 Ba3 440,000 460,830
Tele Communications, Inc.
9 1/4%, 4/15/02 Ba1 100,000 107,302
Telemundo Group, Inc.
7%, 2/15/06 (c) B1 200,000 191,500
Telewest PLC 0%, 10/1/07 (b) B1 680,000 491,300
Time Warner, Inc. 7.95%,
2/1/00 Ba1 190,000 195,337
6,474,026
ENTERTAINMENT - 0.2%
AMC Entertainment, Inc.
9 1/2%, 3/15/09 (e) B2 180,000 182,700
Cinemark USA, Inc.
9 5/8%, 8/1/08 B2 140,000 142,100
Viacom, Inc. 8%, 7/7/06 B1 470,000 455,900
780,700
LEISURE DURABLES & TOYS - 0.1%
Coleman Escrow Corp. secured
1st priority 0%, 5/15/01 (e) B3 380,000 239,400
LODGING & GAMING - 0.5%
American Skiing Co.
12%, 7/15/06 B3 370,000 388,500
Courtyard by Marriott II LP/
Courtyard II Finance Co.,
Series B, 10 3/4%, 2/1/08 B- 150,000 162,375
HMC Acquisition Properties, Inc.
9%, 12/15/07 Ba3 250,000 252,500
HMH Properties, Inc.
9 1/2%, 5/15/05 Ba3 550,000 573,375
Hollywood Casino Corp.
12 3/4%, 11/1/03 B2 50,000 53,000
Horseshoe Gaming LLC
9 3/8%, 6/15/07 (e) B3 70,000 70,438
Prime Hospitality Corp.
9 3/4%, 4/1/07 - 220,000 231,550
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
MEDIA & LEISURE - CONTINUED
LODGING & GAMING - CONTINUED
Sun International Hotels Ltd./
Sun International North
America, Inc. yankee
9%, 3/15/07 Ba3 $ 260,000 $ 263,900
Wyndham Hotel Corp.
10 1/2%, 5/15/06 B2 50,000 55,875
2,051,513
PUBLISHING - 0.1%
Golden Books Publishing, Inc.
7.65%, 9/15/02 B1 40,000 37,000
News America Holdings, Inc.
7.70%, 10/30/25 Baa3 200,000 189,384
Sun Media Corp. (e):
yankee 9 1/2%, 2/15/07 B3 150,000 151,500
9 1/2%, 5/15/07 B3 60,000 60,600
438,484
RESTAURANTS - 0.1%
Foodmaker, Inc. 9 3/4%,
6/1/02 B3 170,000 174,250
Host Marriott Travel Plazas, Inc.
9 1/2%, 5/15/05 B1 450,000 468,000
642,250
TOTAL MEDIA & LEISURE 10,626,373
NONDURABLES - 0.4%
FOODS - 0.2%
Chiquita Brands International, Inc.:
9 5/8%, 1/15/04 B1 140,000 144,375
10 1/4%, 11/1/06 B1 220,000 233,200
ConAgra, Inc. 7 1/8%,
10/1/26 Baa1 150,000 150,666
Specialty Foods Corp. 11 1/8%,
10/1/02 B3 180,000 178,200
706,441
HOUSEHOLD PRODUCTS - 0.1%
Revlon Consumer Products
Corp. 10 1/2%, 2/15/03 B3 440,000 468,600
TOBACCO - 0.1%
Philip Morris Companies, Inc.:
7 1/4%, 9/15/01 A2 150,000 151,143
6.95%, 6/1/06 A2 140,000 140,466
291,609
TOTAL NONDURABLES 1,466,650
RETAIL & WHOLESALE - 0.9%
APPAREL STORES - 0.1%
AnnTaylor, Inc. 8 3/4%,
6/15/00 B3 370,000 371,850
Specialty Retailers, Inc. (e):
8 1/2%, 7/15/05 Ba3 110,000 109,725
9%, 7/15/07 B2 20,000 19,900
501,475
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
GENERAL MERCHANDISE STORES - 0.5%
Dayton Hudson Corp.:
6.80%, 10/1/01 Baa1 $ 150,000 $ 149,744
7 1/2%, 7/15/06 Baa1 250,000 254,968
Federated Department
Stores, Inc.:
10%, 2/15/01 Baa2 250,000 273,493
8 1/8%, 10/15/02 Baa2 50,000 52,091
K mart Corp.:
12 1/2%, 3/1/05 Ba3 440,000 530,200
7 3/4%, 10/1/12 Ba3 40,000 36,600
8 1/4%, 1/1/22 Ba3 200,000 182,000
Michaels Stores, Inc. 10 7/8%,
6/18/06 Ba2 70,000 75,250
Parisian, Inc. 9 7/8%, 7/15/03 B1 240,000 249,600
Penney (J.C.) Co., Inc. 6.95%,
4/1/00 A2 150,000 151,263
1,955,209
GROCERY STORES - 0.3%
Kroger Co. 8.15%, 7/15/06 Baa3 125,000 131,795
Pathmark Stores, Inc.:
12 5/8%, 6/15/02 Caa 40,000 41,000
9 5/8%, 5/1/03 B3 620,000 598,300
0%, 11/1/03 (b) Caa 110,000 75,075
Penn Traffic Co.:
10 1/4%, 2/15/02 B3 180,000 154,800
8 5/8%, 12/15/03 B3 70,000 56,525
Pueblo Xtra International, Inc.
9 1/2%, 8/1/03 (e) B3 90,000 86,850
Randalls Food Markets, Inc.
9 3/8%, 7/1/07 (e) B2 30,000 29,888
1,174,233
TOTAL RETAIL & WHOLESALE 3,630,917
SERVICES - 0.4%
LEASING & RENTAL - 0.1%
PHH Corp. 5.6775%,
6/11/98 (g) A2 500,000 499,945
PRINTING - 0.1%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa 200,000 205,500
SERVICES - 0.2%
Borg-Warner Security Corp.
9 5/8%, 3/15/07 (e) B3 110,000 110,550
Orion Network Systems, Inc. unit:
11 1/4%, 1/15/07 B2 310,000 316,975
0%, 1/15/07 (b) B2 490,000 279,300
706,825
TOTAL SERVICES 1,412,270
TECHNOLOGY - 0.4%
COMPUTERS & OFFICE EQUIPMENT - 0.2%
Comdisco, Inc.:
7.21%, 7/2/01 Baa1 125,000 126,895
6 3/8%, 11/30/01 Baa1 300,000 293,667
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
TECHNOLOGY - CONTINUED
COMPUTERS & OFFICE EQUIPMENT - CONTINUED
Unisys Corp.:
12%, 4/15/03 B1 $ 260,000 $ 281,450
11 3/4%, 10/15/04 B1 70,000 75,600
777,612
ELECTRONICS - 0.2%
Advanced Micro Devices, Inc.
11%, 8/1/03 Ba1 330,000 366,300
Fairchild Semiconductor Corp.:
10 1/8%, 3/15/07 (e) B2 220,000 232,100
11.74%, 3/15/08 pay-in-
kind (f) - 210,000 202,398
Viasystems, Inc. 9 3/4%,
6/1/07 (e) B3 30,000 30,525
831,323
TOTAL TECHNOLOGY 1,608,935
TRANSPORTATION - 0.1%
AIR TRANSPORTATION - 0.1%
US Air, Inc.:
10 3/8%, 3/1/13 B1 170,000 186,150
pass through trust:
9 5/8%, 2/1/01 B3 80,000 82,400
10%, 7/1/03 B3 250,000 257,500
526,050
UTILITIES - 0.9%
CELLULAR - 0.2%
Globalstar LP/Globalstar
Capital Corp. (e):
unit 11 3/8%, 2/15/04 B3 180,000 180,000
11 1/4%, 6/15/04 B3 160,000 149,600
McCaw International Ltd. unit
0%, 4/15/07 (b)(e) CCC 380,000 182,400
Millicom International Cellular
SA 0%, 6/1/06 (b) B3 160,000 114,400
Paging Network, Inc.
8 7/8%, 2/1/06 B2 90,000 81,900
Telesystem International Wireless,
Inc. 0%, 6/30/07 (b)(e) B- 50,000 26,625
360 Degrees Communications
Co. 7 1/8%, 3/1/03 Ba1 180,000 179,008
913,933
ELECTRIC UTILITY - 0.3%
CMS Energy Corp. 8 1/8%,
5/15/02 Ba3 290,000 292,175
CalEnergy, Inc. 9 1/2%,
9/15/06 Ba2 100,000 107,000
Cleveland Electric Illuminating
Co./Toledo Edison Co.
7.67%, 7/1/04 (e) Ba2 90,000 90,563
Commonwealth Edison Co.
7 3/8%, 9/15/02 Baa2 170,000 172,518
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Hydro-Quebec yankee
7.40%, 3/28/25 A2 $ 90,000 $ 97,547
Israel Electric Corp. yankee
7 7/8%, 12/15/26 (e) A3 120,000 120,848
Long Island Lighting Co.
8 5/8%, 4/15/04 Ba1 210,000 218,753
NIPSCO Capital Markets, Inc.
7.39%, 4/1/04 Baa1 100,000 100,906
1,200,310
TELEPHONE SERVICES - 0.4%
LCI International, Inc.
7 1/4%, 6/15/07 Ba1 150,000 148,575
MFS Communications, Inc. (b):
0%, 1/15/04 Ba3 140,000 130,312
0%, 1/15/06 Ba3 330,000 260,288
McLeodUSA, Inc. 0%, 3/1/07
(b)(e) B3 160,000 102,000
Shared Technologies Fairchild
Communications Corp.
0%, 3/1/06 (b) Caa 90,000 80,325
Teleport Communications Group,
Inc. 0%, 7/1/07 (b) B1 290,000 209,163
Winstar Equipment Corp.
12 1/2%, 3/15/04 (e) CCC+ 130,000 127,075
WorldCom, Inc. 7 3/4%,
4/1/07 Ba1 400,000 409,072
1,466,810
TOTAL UTILITIES 3,581,053
TOTAL NONCONVERTIBLE CORPORATE BONDS
(Cost $43,790,129) 44,485,141
U.S. GOVERNMENT AND GOVERNMENT
AGENCY OBLIGATIONS - 2.7%
U.S. TREASURY OBLIGATIONS - 2.3%
9 1/4%, 8/15/98 Aaa 50,000 51,789
8%, 8/15/99 Aaa 50,000 51,844
7 3/4%, 12/31/99 Aaa 450,000 466,101
6 5/8%, 6/30/01 Aaa 1,350,000 1,362,650
7 7/8%, 8/15/01 Aaa 2,102,000 2,215,319
10 3/4%, 5/15/03 Aaa 125,000 150,958
7 7/8%, 11/15/04 Aaa 2,550,000 2,752,011
7%, 7/15/06 Aaa 473,000 486,599
12 3/4%, 11/15/10 (callable) Aaa 500,000 693,830
8 7/8%, 2/15/19 Aaa 489,000 598,414
7 1/4%, 2/ 15/23 Aaa 395,000 406,850
6 1/2%, 11/15/26 Aaa 155,000 148,654
9,385,019
U.S. GOVERNMENT AGENCY OBLIGATIONS - 0.4%
Federal Home Loan Bank:
7.31%, 6/16/04 Aaa 125,000 129,219
7.56%, 9/1/04 Aaa 50,000 52,375
Federal Home Loan Mortgage
Corporation 6.783%,
8/18/05 Aaa 440,000 439,657
U.S. GOVERNMENT AND GOVERNMENT
AGENCY OBLIGATIONS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
U.S. GOVERNMENT AGENCY OBLIGATIONS - CONTINUED
Federal National Mortgage
Association:
6.97%, 4/8/04 Aaa $ 190,000 $ 192,968
6.44%, 6/21/05 Aaa 250,000 244,960
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 131,683 134,070
U.S. Department of Housing
and Urban Development
Government guaranteed
participation certificates
Series 1995-A, 8.24%,
8/1/04 Aaa 20,000 21,603
U.S. Trade Trust Certificates
(assets of Trust guaranteed
by U.S. government through
Export-Import Bank) 6.69%,
1/15/09 (e) Aaa 200,000 198,804
1,413,656
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $10,787,191) 10,798,675
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES - 1.6%
FEDERAL HOME LOAN MORTGAGE CORPORATION - 0.1%
7 1/2%, 7/1/27 Aaa 500,000 502,344
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 1.2%
6%, 3/1/11 to 5/1/11 Aaa 1,962,585 1,898,801
6 1/2%, 2/1/26 to 7/1/26 Aaa 2,421,240 2,319,686
7%, 4/1/26 to 5/1/26 Aaa 494,067 484,804
4,703,291
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 0.3%
6%, 5/15/11 to 7/15/11 Aaa 904,957 887,509
8 1/2%, 10/15/26 Aaa 490,919 510,094
1,397,603
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $6,527,820) 6,603,238
COMMERCIAL MORTGAGE SECURITIES - 0.9%
American Southwest Financial
Securities Series 1994-C2
Class B2, 12.79%,
12/25/01 (e)(g) - 250,000 246,250
Blackrock Capital Funding LLC
Series 1996 Class C2,
7.6035%, 11/16/26 (e)(g) Aaa 104,143 105,152
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
BKB Commercial Mortgage Trust
Series 1997-C1 Class D,
7.83%, 2/25/43 (e)(g) BBB $ 60,000 $ 60,600
CBA Mortgage Corp. Series
1993-C1 Class E, 7.76%,
12/25/03 (e)(g) Ba2 250,000 240,313
CS First Boston Mortgage
Securities Corp. Series 1995-
AEWI Class E, 9.7975%,
11/25/97 (e)(g) - 250,000 251,563
DLJ Mortgage Acceptance Corp.
Series 1993-MF12 Class B-2,
10.10%, 9/18/03 (e) - 250,000 250,625
First Chicago/Lennar Trust I,
Series 1997-CHL1 (g):
Class D, 8.106%, 5/29/08 - 350,000 334,141
Class E, 8.106%, 4/1/39 - 320,000 244,600
General Motors Acceptance Corp.
Commercial Mortgage
Securities, Inc. Series
1996-C1 Class F, 7.86%,
11/15/06 (e) Ba3 250,000 234,253
Kidder Peabody Acceptance
Corp. sequential pay, Series
1993-M1 Class A-2,
7.15%, 4/25/25 Aa2 72,233 72,616
Morgan Stanley Capital One, Inc.:
sequential pay Series 1997-C1
Class A-1C, 7.63%,
2/15/20 Aaa 150,000 155,203
Series 1996-MBL1 Class E,
8.661%, 5/25/21 (e)(g) - 94,940 87,166
Mortgage Capital Funding, Inc.
Series 1996-MC1 Class G,
7.15%, 7/15/28 (e) BB 100,000 87,805
Structured Asset Securities Corp.:
Series 1993-C1 Class E,
6.60%, 10/25/24 (e) B 250,000 87,500
Series 1995-C1 Class E,
7 3/8%, 9/25/24 (e) BB 1,000,000 890,625
sequential pay Series 1996
Class A-2A, 7 3/4%,
2/25/28 AAA 78,468 79,572
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $3,340,993) 3,427,984
FOREIGN GOVERNMENT OBLIGATIONS (H) - 0.2%
Export Development Corp.
yankee 8 1/8%, 8/10/99 Aa2 50,000 51,754
Israeli State euro 6 3/8%,
12/19/01 A3 210,000 206,063
Manitoba Province yankee
6 3/8%, 10/15/99 A1 125,000 124,990
FOREIGN GOVERNMENT OBLIGATIONS (H) - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Newfoundland Province yankee
11 5/8%, 10/15/07 Baa1 $ 250,000 $ 331,500
Quebec Province yankee
7.22%, 7/22/36 (c) A2 150,000 156,174
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $865,051) 870,481
CERTIFICATES OF DEPOSIT - 1.2%
Banque Nationale de Paris yankee
5.85%, 9/30/97 200,000 200,054
Bayerische Vereinsbank AG
yankee 5.56%, 7/14/97 500,000 499,987
Caisse Nationale de Credit Agricole
yankee 5.60%, 7/21/97 500,000 499,987
Deutsche Bank AG yankee
6.20%, 4/10/98 500,000 500,392
Landesbank Hessen-Thuringen
yankee 5.78%, 1/27/98 300,000 299,786
National Westminster Bank PLC
yankee 5 1/2%, 8/5/97 400,000 399,899
Rabobank Nederlan Coop
Central yankee:
5.97%, 3/20/98 200,000 200,115
6.20%, 4/10/98 200,000 200,157
Royal Bank of Canada yankee
5.58%, 12/11/97 400,000 399,432
Sanwa Bank Ltd. yankee
5 3/4%, 8/27/97 500,000 500,025
Societe Generale yankee
5.55%, 7/28/97 500,000 499,924
SunTrust Bank 5.85%, 11/25/97 500,000 500,155
TOTAL CERTIFICATES OF DEPOSIT
(Cost $4,699,379) 4,699,913
COMMERCIAL PAPER - 0.8%
AC Acquisition Holding Co.
5.56%, 7/9/97 275,000 274,615
American General Finance
Corp. 5.60%, 8/5/97 100,000 99,447
BMW US Capital Corp.
yankee:
5.57%, 7/7/97 100,000 99,892
5.57%, 8/19/97 300,000 297,675
Citibank Credit Card Master Trust I
(Dakota Certificate Program)
5.60%, 7/21/97 275,000 274,092
Fina Oil & Chemical Co.
5.61%, 8/14/97 100,000 99,293
Goldman Sachs Group LP
5.83%, 1/26/98 200,000 193,478
Merrill Lynch & Co., Inc.
5.62%, 7/8/97 435,000 434,465
Nationwide Building Society
yankee 5.32%, 8/11/97 500,000 496,757
New Center Asset Trust
5.65%, 7/21/97 100,000 99,676
PRINCIPAL VALUE
AMOUNT (NOTE 1)
Unifunding, Inc. yankee:
5.58%, 9/15/97 $ 200,000 $ 197,613
5.67%, 11/12/97 300,000 293,700
Westpac Capital Corp. yankee
5.30%, 8/29/97 165,000 163,479
TOTAL COMMERCIAL PAPER
(Cost $3,024,500) 3,024,182
BANK NOTES - 0.3%
Bank of Tokyo-Mitsubishi Ltd.
5.70%, 7/14/97 500,000 500,000
Corestates Bank NA 5.6475%,
1/30/98 (g) 200,000 199,998
First Bank National Association
5.5975%, 5/15/98 (g) 200,000 199,874
Sumitomo Bank Ltd. 5.74%,
7/11/97 500,000 500,000
TOTAL BANK NOTES
(Cost $1,399,873) 1,399,872
CASH EQUIVALENTS - 1.9%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account dated 6/30/97
due 7/1/97:
at 5.99% $ 13,002 13,000
at 5.93% 7,727,273 7,726,000
TOTAL CASH EQUIVALENTS 7,739,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $350,688,422) $ 400,697,625
LEGEND
1. Non-income producing
2. Debt obligation initially issued in zero coupon form which converts to
coupon form at a specified rate and date.
3. Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date.
4. Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
5. 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 $10,203,792 or 2.5% of net
assets.
6. 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
SECURITY DATE COST
Fairchild Semiconductor
Corp. 11.74%, 3/15/08
pay-in-kind 4/3/97 $ 183,878
7. The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
8. For foreign government obligations not 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 $194,622,823 and $ 86,184,600, respectively, of which U.S.
government and government agency obligations aggregated $16,194,987 and
$31,811,662, 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 $22,480 for the period.
The composition of long-term debt holdings as a percentage of total value
of investment in securities, is as follows:
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 6.1% AAA, AA, A 6.1%
Baa 1.3% BBB 1.9%
Ba 3.1% BB 2.6%
B 4.7% B 4.7%
Caa 0.2% CCC 0.4%
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 0.7%. FMR has determined that unrated debt
securities that are lower quality account for 0.7% of the total value of
investment in securities.
Distribution of investments by country of issue, as a percentage of total
value of investment in securities, is as follows:
United States 89.6%
United Kingdom 2.7
Netherlands 2.2
France 1.2
Others (individually less than 1%) 4.3
TOTAL 100.0%
INCOME TAX INFORMATION
At June 30, 1997, the aggregate cost of investment securities for income
tax purposes was $350,712,855. Net unrealized appreciation aggregated
$49,984,770, of which $53,389,318 related to appreciated investment
securities and $3,404,548 related to depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in $ 400,697,625
securities, at
value (including
repurchase
agreements of
$7,739,000)
(cost $350,688,422)
- - See
accompanying
schedule
Cash 50,675
Receivable for 265,717
investments sold
Receivable for fund 912,902
shares sold
Dividends receivable 650,045
Interest receivable 1,124,108
TOTAL ASSETS 403,701,072
LIABILITIES
Payable for $ 2,277,300
investments
purchased
Payable for fund 2,636
shares redeemed
Accrued management 195,789
fee
Other payables and 94,137
accrued expenses
TOTAL LIABILITIES 2,569,862
NET ASSETS $ 401,131,210
Net Assets consist of:
Paid in capital $ 338,818,399
Undistributed net 4,197,523
investment income
Accumulated 8,105,402
undistributed net
realized gain (loss)
on investments and
foreign currency
transactions
Net unrealized 50,009,886
appreciation
(depreciation) on
investments
and assets and
liabilities in
foreign currencies
NET ASSETS, for $ 401,131,210
26,873,048
shares outstanding
NET ASSET VALUE, $14.93
offering price
and redemption
price per share
($401,131,210 (divided by)
26,873,048 shares)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $ 2,430,378
Dividends
Interest 3,085,128
TOTAL INCOME 5,515,506
EXPENSES
Management fee $ 996,258
Transfer agent fees 125,480
Accounting fees and 99,808
expenses
Non-interested 844
trustees'
compensation
Custodian fees and 39,036
expenses
Audit 20,860
Legal 295
Miscellaneous 3,741
Total expenses 1,286,322
before reductions
Expense reductions (18,339 1,267,983
)
NET INVESTMENT 4,247,523
INCOME
REALIZED AND
UNREALIZED GAIN
(LOSS)
Net realized gain
(loss) on:
Investment 8,243,632
securities
Foreign currency (1,344 8,242,288
transactions )
Change in net
unrealized
appreciation
(depreciation) on:
Investment 31,836,736
securities
Assets and 575 31,837,311
liabilities in
foreign currencies
NET GAIN (LOSS) 40,079,599
NET INCREASE $ 44,327,122
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
OTHER INFORMATION $ 15,565
Expense reductions
Directed
brokerage
arrangements
Custodian credits 2,774
$ 18,339
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED)
Operations $ 4,247,523 $ 3,681,563
Net investment
income
Net realized gain 8,242,288 6,740,985
(loss)
Change in net 31,837,311 16,385,266
unrealized
appreciation
(depreciation)
NET INCREASE 44,327,122 26,807,814
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
Distributions to - (3,802,638
shareholders )
From net
investment income
From net realized (447,876) (8,710,844
gain )
TOTAL DISTRIBUTIONS (447,876) (12,513,482
)
Share transactions 127,046,008 180,656,312
Net proceeds from
sales of shares
Reinvestment of 447,876 12,513,482
distributions
Cost of shares (23,265,472) (22,687,189
redeemed )
NET INCREASE 104,228,412 170,482,605
(DECREASE) IN NET
ASSETS RESULTING
FROM SHARE
TRANSACTIONS
TOTAL INCREASE 148,107,658 184,776,937
(DECREASE) IN NET
ASSETS
NET ASSETS
Beginning of period 253,023,552 68,246,615
End of period $ 401,131,210 $ 253,023,552
(including under
(over) distribution
of net investment
income of
$4,197,523 and
$(50,000),
respectively)
OTHER INFORMATION
Shares
Sold 9,228,522 14,392,956
Issued in 32,763 975,606
reinvestment of
distributions
Redeemed (1,701,939) (1,851,290
)
Net increase 7,559,346 13,517,272
(decrease)
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED YEAR ENDED JANUARY 3, 1995
JUNE 30, 1997 DECEMBER 31, (COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31,
SELECTED PER-SHARE (UNAUDITED) 1996 1995
DATA
Net asset value, $ 13.10 $ 11.77 $ 10.00
beginning of period
Income from
Investment
Operations
Net investment .18 D .21 .10
income
Net realized and 1.67 2.08 2.20
unrealized gain
(loss)
Total from 1.85 2.29 2.30
investment
operations
Less Distributions
From net - (.21) (.11)
investment income
From net realized (.02) (.75) (.42)
gain
Total distributions (.02) (.96) (.53)
Net asset value, end $ 14.93 $ 13.10 $ 11.77
of period
TOTAL RETURN B, C 14.14% 20.04% 23.02%
RATIOS AND
SUPPLEMENTAL
DATA
Net assets, end of $ 401,131 $ 253,024 $ 68,247
period (000
omitted)
Ratio of expenses to .78% A .87% 1.00% E
average net assets
Ratio of expenses to .77% A, F .85% F 1.00%
average net assets
after expense
reductions
Ratio of net 2.59% A 2.63% 1.69%
investment income
to average net
assets
Portfolio turnover rate 56% A 120% 343%
Average commission $ .0402 $ .0211
rate G
<TABLE>
<CAPTION>
<S> <C> <C> <C>
A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT
ANNUALIZED AND 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 NET INVESTMENT INCOME PER SHARE HAS BEEN
CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. 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. F 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). G 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>
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
JUNE 30, 1997 YEAR YEARS YEARS
EQUITY-INCOME 25.66% 20.09% 13.66%
S&P 500(registered trademark) 34.70% 19.78% 14.64%
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 long-term growth and
short-term volatility. 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
1987/06/30 10000.00 10000.00
1987/07/31 10380.95 10507.00
1987/08/31 10666.67 10898.91
1987/09/30 10442.79 10660.22
1987/10/31 8404.96 8364.01
1987/11/30 8028.88 7674.82
1987/12/31 8439.31 8258.87
1988/01/31 9039.55 8606.57
1988/02/29 9487.50 9007.64
1988/03/31 9322.33 8729.30
1988/04/30 9476.65 8826.20
1988/05/31 9603.73 8902.98
1988/06/30 10150.11 9311.63
1988/07/31 10131.73 9276.25
1988/08/31 9957.04 8960.85
1988/09/30 10252.91 9342.59
1988/10/31 10429.84 9602.31
1988/11/30 10262.22 9465.00
1988/12/31 10355.90 9630.63
1989/01/31 10995.50 10335.60
1989/02/28 10939.07 10078.24
1989/03/31 11176.01 10313.06
1989/04/30 11607.33 10848.31
1989/05/31 11952.38 11287.67
1989/06/30 11960.57 11223.33
1989/07/31 12657.87 12236.79
1989/08/31 12861.25 12476.64
1989/09/30 12716.66 12425.48
1989/10/31 11983.01 12137.21
1989/11/30 12051.48 12384.81
1989/12/31 12152.05 12682.05
1990/01/31 11331.37 11831.08
1990/02/28 11398.51 11983.70
1990/03/31 11417.31 12301.27
1990/04/30 11021.46 11993.74
1990/05/31 11750.66 13163.13
1990/06/30 11633.66 13073.62
1990/07/31 11349.14 13031.78
1990/08/31 10442.90 11853.71
1990/09/30 9632.82 11276.43
1990/10/31 9387.20 11227.94
1990/11/30 10060.00 11953.27
1990/12/31 10294.08 12286.77
1991/01/31 10846.12 12822.47
1991/02/28 11593.01 13739.28
1991/03/31 11833.50 14071.77
1991/04/30 11888.80 14105.54
1991/05/31 12541.30 14714.90
1991/06/30 12028.50 14040.96
1991/07/31 12710.42 14695.26
1991/08/31 12978.71 15043.54
1991/09/30 12889.63 14792.31
1991/10/31 13104.27 14990.53
1991/11/30 12539.43 14386.41
1991/12/31 13530.38 16032.22
1992/01/31 13713.06 15734.02
1992/02/29 14158.37 15938.56
1992/03/31 13984.88 15627.76
1992/04/30 14422.98 16087.22
1992/05/31 14538.27 16166.04
1992/06/30 14410.99 15925.17
1992/07/31 14852.62 16576.51
1992/08/31 14527.21 16236.69
1992/09/30 14678.01 16428.28
1992/10/31 14853.73 16485.78
1992/11/30 15392.59 17047.95
1992/12/31 15815.27 17257.64
1993/01/31 16287.37 17402.60
1993/02/28 16653.24 17639.28
1993/03/31 17149.52 18011.46
1993/04/30 17078.21 17575.59
1993/05/31 17387.21 18046.61
1993/06/30 17591.73 18098.95
1993/07/31 17831.07 18026.55
1993/08/31 18513.20 18709.76
1993/09/30 18442.42 18565.69
1993/10/31 18611.07 18950.00
1993/11/30 18285.82 18769.98
1993/12/31 18708.50 18997.10
1994/01/31 19532.45 19643.00
1994/02/28 19029.45 19110.67
1994/03/31 18233.36 18277.45
1994/04/30 18861.65 18511.40
1994/05/31 19041.17 18814.98
1994/06/30 18923.53 18354.02
1994/07/31 19555.60 18956.03
1994/08/31 20561.76 19733.23
1994/09/30 20224.91 19249.76
1994/10/31 20640.04 19682.88
1994/11/30 19965.45 18966.03
1994/12/31 20030.39 19247.30
1995/01/31 20343.57 19746.38
1995/02/28 21119.27 20515.90
1995/03/31 21848.51 21121.32
1995/04/30 22456.18 21743.34
1995/05/31 23132.91 22612.42
1995/06/30 23465.27 23137.71
1995/07/31 24368.32 23904.96
1995/08/31 24673.96 23964.96
1995/09/30 25493.12 24976.28
1995/10/31 25199.77 24887.12
1995/11/30 26289.34 25979.66
1995/12/31 27059.54 26480.03
1996/01/31 27845.91 27381.41
1996/02/29 27939.44 27635.23
1996/03/31 28233.54 27901.36
1996/04/30 28601.16 28312.63
1996/05/31 28909.97 29042.81
1996/06/30 28645.28 29153.46
1996/07/31 27248.30 27865.46
1996/08/31 27807.09 28453.15
1996/09/30 28998.20 30054.49
1996/10/31 29468.75 30883.39
1996/11/30 31439.22 33217.87
1996/12/31 30924.55 32559.82
1997/01/31 32130.35 34594.16
1997/02/28 32486.30 34865.38
1997/03/31 31278.87 33432.76
1997/04/30 32388.40 35428.69
1997/05/31 34395.33 37585.59
1997/06/30 35994.36 39269.43
Let's say hypothetically $10,000 was invested in Equity-Income Portfolio on
June 30, 1987. As the chart shows, by June 30, 1997, the value of the
investment would have grown to $35,994 - a 259.94% increase on the initial
investment. For comparison, look at how the S&P 500 did over the same
period. With dividends and capital gains, if any, reinvested, the same
$10,000 investment would have grown to $39,269 - a 292.69% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
General Electric Co. 3.2
Philip Morris Companies, Inc. 2.7
British Petroleum PLC ADR 1.9
Federal National Mortgage Association 1.6
Royal Dutch Petroleum Co. 1.6
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Finance 19.9
Energy 12.9
Nondurables 7.4
Health 7.1
Aerospace & Defense 6.8
ASSET ALLOCATION AS OF JUNE 30, 1997 *
Row: 1, Col: 1, Value: 5.8
Row: 1, Col: 2, Value: 1.2
Row: 1, Col: 3, Value: 93.0
Stocks 93.0%
Bonds 1.2%
Short-term investments 5.8%
FOREIGN INVESTMENTS 10.2%
*
(% OF FUND'S INVESTMENTS)
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with Stephen Petersen, Portfolio Manager of Equity-Income
Portfolio
Q. STEVE, HOW DID THE FUND PERFORM?
A. For the six- and 12-month periods ending June 30, 1997, the fund
underperformed the Standard & Poor's 500 index, which returned 20.61% for
the six-month period and 34.70% for the 12-month period.
Q. WHY DID THE FUND UNDERPERFORM THE S&P 500 INDEX, ESPECIALLY OVER THE
PAST SIX MONTHS?
A. In general, when you compare the performance of most actively managed
diversified funds, like this one, against the S&P 500 index's performance
over the period, very few beat the index. In fact, in the first quarter of
1997, less than 9% of all fund managers did so. That's because the index
was heavily weighted in a small number of very large-capitalization stocks,
and those stocks were the top performers over the period. Diversified
funds, by definition, own stocks of several different cap sizes, not just
large-cap stocks. In addition, many of the top stocks that contributed to
the S&P 500 index's performance, such as technology giant Microsoft, don't
pay dividends, and are therefore not the kind of stocks this fund tends to
own.
Q. SINCE YOU TOOK OVER THE FUND IN EARLY JANUARY, HAVE YOU CHANGED ITS
POSITIONING?
A. Somewhat. In general, I looked for stocks with good dividend yields and
attractive valuation characteristics, such as the price-to-earnings ratio.
Over the period, I restructured the portfolio so it owned more of those
kinds of stocks. Going forward, my universe will be large-capitalization,
income-producing common stocks, as well as stocks that are down and out but
have great upside potential.
Q. WHAT WERE SOME OF THE FUND'S POSITIVE PERFORMERS DURING THE PERIOD?
A. General Electric, the fund's largest holding, showed consistently strong
earnings growth and performed better than initial expectations. Philip
Morris, another top five holding, continued to look strong. Over the
period, much of its earnings came from its food business and its tobacco
business outside the U.S. So, Philip Morris' major growth was outside of
the areas of the company affected by the litigation against the tobacco
industry.
Q. FINANCIAL STOCKS - WHICH MADE UP ABOUT 20% OF THE FUND AT THE END OF THE
PERIOD - GENERALLY DID WELL OVER THE PERIOD. WHY IS THAT AND HOW DID YOU
TAKE ADVANTAGE OF THIS TREND?
A. Basically, financial stocks, which tend to do well when interest rates
are low, benefited from the interest rate environment over the period. Over
the past six months, many banks generated more capital than they needed to
run their businesses, and they invested it by buying back their own stock.
In addition, both acquiring and acquired financial companies benefited from
recent mergers.
Q. WHAT WAS YOUR TOP-WEIGHTED FINANCIAL STOCK?
A. Financial service company Fannie Mae - the Federal National Mortgage
Association - which buys mortgages, packages them, creates securities and
then sells them back to the marketplace, was the fund's top financial
stock. It did well during the period.
Q. DID YOU EXPERIENCE ANY DISAPPOINTMENTS OVER THE PERIOD?
A. Sure. I expected to see a significant lift in the performance of
cyclical stocks and positioned the fund accordingly. Unfortunately,
cyclicals - those stocks whose performance is closely associated with the
strength of the economy - didn't perform well relative to growth-oriented
stocks over the period.
Q. STEVE, HOW DOES THE FUND LOOK GOING FORWARD?
A. Generally, I will be sticking with what I call the winners in the
portfolio - large-cap, steady earnings-growth companies with attractive
fundamentals and valuations. In addition, I will continue to look for
attractive, overlooked or oversold types of companies, which I believe show
some interesting possibilities going forward.
FUND FACTS
GOAL: seeks reasonable income by investing
primarily in income producing equity securities
to provide current income and increase the
value of the fund's shares
START DATE: October 9,1986
SIZE: as of June 30, 1997, more than $8.5
billion
MANAGER: Stephen Petersen, since January
1997; joined Fidelity in 1980
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 91.3%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 6.8%
AEROSPACE & DEFENSE - 3.8%
AlliedSignal, Inc. 1,055,100 $ 88,628,379
Boeing Co. 1,668,000 88,508,250
GenCorp, Inc. 200,000 4,625,000
Gulfstream Aerospace Corp. (a) 246,200 7,262,900
Lockheed Martin Corp. 850,603 88,090,573
Textron, Inc. 60,000 3,982,500
Thiokol Corp. 376,700 26,369,000
United Technologies Corp. 258,800 21,480,400
328,947,002
DEFENSE ELECTRONICS - 2.1%
Litton Industries, Inc. (a) 842,500 40,703,281
Northrop Grumman Corp. 874,500 76,792,031
Raytheon Co. 1,276,000 65,076,000
182,571,312
SHIP BUILDING & REPAIR - 0.9%
General Dynamics Corp. 991,500 74,362,500
Newport News Shipbuilding, Inc. 60,000 1,166,250
75,528,750
TOTAL AEROSPACE & DEFENSE 587,047,064
BASIC INDUSTRIES - 6.7%
CHEMICALS & PLASTICS - 2.6%
Air Products & Chemicals, Inc. 184,600 14,998,750
du Pont (E.I.) de Nemours & Co. 330,000 20,748,750
Goodrich (B.F.) Co. 91,300 3,954,431
Great Lakes Chemical Corp. 336,400 17,618,950
Hercules, Inc. 228,600 10,944,225
Millennium Chemicals, Inc. 500,000 11,375,000
Monsanto Co. 1,644,000 70,794,750
Olin Corp. 243,300 9,503,906
Union Carbide Corp. 960,000 45,180,000
Witco Corp. 403,700 15,315,369
220,434,131
IRON & STEEL - 0.4%
Aeroquip Vickers, Inc. 48,700 2,301,075
Allegheny Teledyne, Inc. 300,700 8,118,900
Inland Steel Industries, Inc. 631,300 16,492,713
Quanex Corp. 61,000 1,871,938
USX-U.S. Steel Group 124,100 4,351,256
33,135,882
METALS & MINING - 2.0%
Alcan Aluminium Ltd. 1,400,000 47,760,113
Alumax, Inc. (a) 835,000 31,677,813
Aluminum Co. of America 740,900 55,845,338
Harsco Corp. 264,700 10,720,350
Inco Ltd. 551,093 16,465,133
Kaiser Aluminum Corp. (a) 250,000 3,062,500
Metallgesellschaft AG Ord. (a) 222,500 4,629,734
Noranda, Inc. 200,000 4,309,564
174,470,545
PACKAGING & CONTAINERS - 0.0%
Owens-Illinois, Inc. (a) 108,600 3,366,600
PAPER & FOREST PRODUCTS - 1.7%
Boise Cascade Corp. 385,400 13,609,438
Champion International Corp. 485,000 26,796,250
Domtar, Inc. 627,300 5,543,085
SHARES VALUE (NOTE 1)
Georgia-Pacific Corp. 191,800 $ 16,374,925
Kimberly-Clark Corp. 656,300 32,650,925
Weyerhaeuser Co. 933,500 48,542,000
143,516,623
TOTAL BASIC INDUSTRIES 574,923,781
CONSTRUCTION & REAL ESTATE - 1.2%
BUILDING MATERIALS - 0.8%
American Standard Companies, Inc. 45,100 2,018,225
Coltec Industries, Inc. (a) 1,371,600 26,746,200
Masco Corp. 1,045,400 43,645,450
72,409,875
ENGINEERING - 0.2%
EG & G, Inc. 389,900 8,772,750
Fluor Corp. 120,500 6,650,094
15,422,844
REAL ESTATE - 0.0%
Boston Properties, Inc. 78,500 2,158,750
REAL ESTATE INVESTMENT TRUSTS - 0.2%
Equity Residential Properties Trust (SBI) 300,000 14,250,000
Weeks Corp. 170,500 5,328,125
19,578,125
TOTAL CONSTRUCTION & REAL ESTATE 109,569,594
DURABLES - 3.0%
AUTOS, TIRES, & ACCESSORIES - 1.0%
Chrysler Corp. 142,000 4,659,375
Cummins Engine Co., Inc. 138,000 9,737,625
Eaton Corp. 347,400 30,332,363
General Motors Corp. 300,000 16,706,250
Johnson Controls, Inc. 55,000 2,258,438
Modine Manufacturing Co. 98,100 2,918,475
Snap-on Tools Corp. 455,150 17,921,531
Standard Products Co. 76,700 1,936,675
TRW, Inc. 34,700 1,971,394
88,442,126
CONSUMER DURABLES - 0.6%
Minnesota Mining &
Manufacturing Co. 504,000 51,408,000
CONSUMER ELECTRONICS - 0.9%
Maytag Co. 688,900 17,997,513
Sunbeam-Oster, Inc. 1,168,400 44,107,100
Whirlpool Corp. 225,000 12,276,563
74,381,176
TEXTILES & APPAREL - 0.5%
Dexter Corp. 353,700 11,318,400
Reebok International Ltd. 687,700 32,149,975
Stride Rite Corp. 191,700 2,468,138
45,936,513
TOTAL DURABLES 260,167,815
ENERGY - 12.6%
ENERGY SERVICES - 1.2%
Halliburton Co. 25,000 1,981,250
Dresser Industries, Inc. 271,700 10,120,825
Schlumberger Ltd. 696,100 87,012,500
99,114,575
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
ENERGY - CONTINUED
OIL & GAS - 11.4%
Amerada Hess Corp. 464,500 $ 25,808,781
Amoco Corp. 365,000 31,732,188
Atlantic Richfield Co. 630,000 44,415,000
British Petroleum PLC ADR 2,181,180 163,315,853
Burlington Resources, Inc. 566,700 25,005,638
Chevron Corp. 929,600 68,732,300
Exxon Corp. 1,500,000 92,250,000
Mobil Corp. 302,600 21,144,175
Occidental Petroleum Corp. 1,665,200 41,734,075
Pennzoil Co. 850,400 65,268,200
Phillips Petroleum Co. 412,500 18,046,875
Royal Dutch Petroleum Co. 2,498,000 135,828,750
Texaco, Inc. 580,000 63,075,000
Tosco Corp. 649,800 19,453,388
Total SA:
Class B 831,600 84,005,714
sponsored ADR 200,800 10,165,500
USX-Marathon Group 1,178,600 34,032,075
Unocal Corp. 1,116,517 43,334,816
987,348,328
TOTAL ENERGY 1,086,462,903
FINANCE - 18.8%
BANKS - 9.1%
Bank of New York Co., Inc. 1,715,700 74,632,950
Bank of Nova Scotia Halifax 195,400 8,562,416
BankBoston Corp. 801,100 57,729,269
BankAmerica Corp. 1,562,000 100,846,625
Chase Manhattan Corp. 385,700 37,437,006
Citicorp 974,400 117,476,100
Comerica, Inc. 505,000 34,340,000
Credit Suisse Group (Reg.) 150,400 19,295,245
First Bank System, Inc. 592,530 50,587,249
National Bank of Canada 500,000 6,265,165
National City Corp. 976,335 51,257,588
NationsBank Corp. 1,426,800 92,028,600
Norwest Corp. 579,000 32,568,750
Royal Bank of Canada 400,000 18,121,899
U.S. Bancorp 728,700 46,727,888
Wells Fargo & Co. 144,900 39,050,550
786,927,300
CREDIT & OTHER FINANCE - 2.8%
American Express Co. 955,172 71,160,314
Beneficial Corp. 304,700 21,652,744
Edper Group Ltd. (The)
Class A (ltd. vtg.) 400,000 6,678,014
First Chicago NBD Corp. 1,384,100 83,738,050
Household International, Inc. 345,000 40,515,938
Transamerica Corp. 169,100 15,821,419
239,566,479
FEDERAL SPONSORED CREDIT - 1.7%
Federal Home Loan Mortgage
Corporation 403,600 13,873,750
Federal National Mortgage
Association 3,115,300 135,904,963
149,778,713
INSURANCE - 4.0%
Aetna, Inc. 282,700 28,941,413
Allstate Corp. 1,154,999 84,314,927
Brascan Ltd. Class A 1,000,000 24,734,726
CIGNA Corp. 20,000 3,550,000
SHARES VALUE (NOTE 1)
Fremont General Corp. 423,924 $ 17,062,941
General Re Corp. 110,000 20,020,000
Hartford Financial Services Group, Inc. 663,300 54,888,075
Marsh & McLennan Companies, Inc. 150,600 10,749,075
Norwich Union PLC (a) 844,900 4,493,784
Provident Companies, Inc. 241,600 12,925,600
Providian Financial Corp. (a) 150,000 4,818,750
Reliastar Financial Corp. 509,621 37,266,036
Travelers Group, Inc. (The) 711,667 44,879,479
348,644,806
SAVINGS & LOANS - 0.9%
Ahmanson (H.F.) & Co. 109,900 4,725,700
Great Western Financial Corp. 934,100 50,207,875
TCF Financial Corp. 25,600 1,264,000
Washington Mutual, Inc. 273,800 16,359,550
72,557,125
SECURITIES INDUSTRY - 0.3%
Bear Stearns Companies, Inc. 210,000 7,179,375
First Marathon Inc. Class A (non-vtg.) 299,400 4,228,660
Lehman Brothers Holdings, Inc. 440,200 17,828,100
29,236,135
TOTAL FINANCE 1,626,710,558
HEALTH - 7.1%
DRUGS & PHARMACEUTICALS - 4.3%
American Home Products Corp. 1,473,000 112,684,500
Barr Laboratories, Inc. (a)(d) 1,391,650 61,232,600
Bristol-Myers Squibb Co. 1,350,800 109,414,800
Merck & Co., Inc. 37,000 3,829,500
Novartis AG (Reg.) 13,300 21,239,959
Pharmacia & Upjohn, Inc. 427,100 14,841,725
Schering-Plough Corp. 1,020,000 48,832,500
372,075,584
MEDICAL EQUIPMENT & SUPPLIES - 1.1%
Allegiance Corp. 393,500 10,722,875
Bausch & Lomb, Inc. 250,000 11,781,250
Cardiac Control Systems, Inc. (a) 79,800 64,838
Cardinal Health, Inc. 618,500 35,409,125
Johnson & Johnson 40,000 2,575,000
U.S. Surgical Corp. 909,608 33,882,879
94,435,967
MEDICAL FACILITIES MANAGEMENT - 1.7%
Beverly Enterprises, Inc. (a)(d) 5,222,000 84,857,500
Columbia/HCA Healthcare Corp. 1,522,350 59,847,384
144,704,884
TOTAL HEALTH 611,216,435
HOLDING COMPANIES - 0.5%
CINergy Corp. 415,000 14,447,188
Norfolk Southern Corp. 283,400 28,552,550
42,999,738
INDUSTRIAL MACHINERY & EQUIPMENT - 6.7%
ELECTRICAL EQUIPMENT - 3.6%
General Electric Co. 4,191,100 273,993,163
Westinghouse Electric Corp. 1,489,900 34,453,938
308,447,101
INDUSTRIAL MACHINERY & EQUIPMENT - 1.8%
Cooper Industries, Inc. 60,000 2,985,000
Caterpillar, Inc. 309,500 33,232,563
Harnischfeger Industries, Inc. 279,600 11,603,400
Ingersoll-Rand Co. 430,000 26,552,500
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - CONTINUED
INDUSTRIAL MACHINERY & EQUIPMENT - CONTINUED
Parker-Hannifin Corp. 50,000 $ 3,034,375
Stewart & Stevenson Services, Inc. 283,500 7,371,000
Tyco International Ltd. 962,742 66,970,740
151,749,578
POLLUTION CONTROL - 1.3%
Browning-Ferris Industries, Inc. 958,700 31,876,775
Safety Kleen Corp. 313,200 5,285,250
Waste Management, Inc. 2,405,200 77,267,050
114,429,075
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 574,625,754
MEDIA & LEISURE - 3.3%
BROADCASTING - 0.0%
Ascent Entertainment Group, Inc. 119,365 1,089,205
ENTERTAINMENT - 1.3%
All American Communications, Inc. (a) 260,534 3,940,577
MGM Grand, Inc. (a) 266,400 9,856,800
Viacom, Inc. Class B (non-vtg.) (a) 3,148,500 94,455,000
108,252,377
LEISURE DURABLES & TOYS - 0.6%
Brunswick Corp. 375,400 11,731,250
Hasbro, Inc. 1,559,450 44,249,394
55,980,644
LODGING & GAMING - 0.4%
ITT Corp. (a) 520,000 31,752,500
Mirage Resorts, Inc. (a) 157,400 3,974,350
35,726,850
PUBLISHING - 1.0%
ACNielsen Corp. (a) 336,000 6,594,000
Cognizant Corp. 353,700 14,324,850
Harcourt General, Inc. 449,500 21,407,438
Hollinger International, Inc. Class A 1,894,400 21,193,600
Houghton Mifflin Co. 1,600 106,800
McGraw-Hill, Inc. 324,800 19,102,300
82,728,988
TOTAL MEDIA & LEISURE 283,778,064
NONDURABLES - 7.4%
BEVERAGES - 0.5%
Anheuser-Busch Companies, Inc. 902,400 37,844,400
PepsiCo, Inc. 150,000 5,634,375
43,478,775
FOODS - 0.9%
General Mills, Inc. 819,450 53,366,681
Heinz (H.J.) Co. 176,100 8,122,613
Kellogg Co. 124,800 10,686,000
Ralston Purina Co. 110,000 9,040,625
81,215,919
HOUSEHOLD PRODUCTS - 2.5%
Avon Products, Inc. 86,100 6,075,431
Dial Corp. 517,300 8,082,813
Gillette Co. 200,700 19,016,325
Premark International, Inc. 25,000 668,750
Procter & Gamble Co. 410,800 58,025,500
Rubbermaid, Inc. 1,010,400 30,059,400
SHARES VALUE (NOTE 1)
Tambrands, Inc. 100,000 $ 4,987,500
Unilever PLC Ord. 1,705,400 48,873,030
Unilever NV:
Ord. 3,100 652,166
ADR 200,000 42,812,500
219,253,415
TOBACCO - 3.5%
BAT Industries PLC Ord. 1,349,500 12,075,005
Gallaher Group PLC sponsored ADR (a) 365,700 6,742,594
Philip Morris Companies, Inc. 5,220,100 231,641,938
RJR Nabisco Holdings Corp. 1,333,400 44,002,200
Universal Corp. 182,600 5,797,550
300,259,287
TOTAL NONDURABLES 644,207,396
PRECIOUS METALS - 0.3%
Newmont Mining Corp. 567,200 22,120,800
RETAIL & WHOLESALE - 5.2%
APPAREL STORES - 0.3%
Charming Shoppes, Inc. (a) 290,100 1,513,959
Footstar, Inc. (a) 362,600 9,472,925
Limited, Inc. (The) 909,900 18,425,475
29,412,359
DRUG STORES - 0.2%
Rite Aid Corp. 337,100 16,812,863
GENERAL MERCHANDISE STORES - 2.9%
Coles Myer Ltd. 1,252,000 6,502,059
Consolidated Stores Corp. (a) 2,270,156 78,887,930
Dayton Hudson Corp. 140,000 7,446,250
Federated Department Stores, Inc. (a) 656,400 22,809,900
Sears, Roebuck & Co. 390,000 20,962,500
Wal-Mart Stores, Inc. 1,929,000 65,224,313
Woolworth Corp. (a) 2,061,200 49,468,800
251,301,752
GROCERY STORES - 0.1%
American Stores Co. 147,200 7,268,000
RETAIL & WHOLESALE, MISCELLANEOUS - 1.7%
Staples, Inc. (a) 1,845,700 42,912,525
Tandy Corp. 852,500 47,740,000
Toys "R" Us, Inc. (a) 1,180,000 41,300,000
U.S. Office Products Co. (a) 513,300 15,687,731
147,640,256
TOTAL RETAIL & WHOLESALE 452,435,230
SERVICES - 0.8%
LEASING & RENTAL - 0.0%
Hanover Compressor Co. 6,300 122,850
PRINTING - 0.7%
Deluxe Corp. 486,600 16,605,225
Donnelley (R.R.) & Sons Co. 568,400 20,817,650
Ennis Business Forms, Inc. 196,700 1,893,238
Harland (John H.) Co. 1,051,300 23,982,781
63,298,894
SERVICES - 0.1%
Dun & Bradstreet Corp. 368,800 9,681,000
TOTAL SERVICES 73,102,744
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TECHNOLOGY - 3.8%
COMMUNICATIONS EQUIPMENT - 0.4%
Alcatel Alsthom Compagnie
Generale d'Electricite SA 263,200 $ 32,943,641
COMPUTER SERVICES & SOFTWARE - 0.2%
Electronic Data Systems Corp. 262,800 10,774,800
Sabre Group Holdings, Inc. Class A (a) 178,800 4,849,950
15,624,750
COMPUTERS & OFFICE EQUIPMENT - 1.5%
International Business Machines Corp. 700,000 63,131,250
Pitney Bowes, Inc. 791,000 54,974,500
Silicon Graphics, Inc. (a) 344,200 5,163,000
Xerox Corp. 100,000 7,887,500
131,156,250
ELECTRONICS - 1.0%
AMP, Inc. 499,400 20,849,950
Intel Corp. 359,000 50,910,688
Thomas & Betts Corp. 214,800 11,290,425
83,051,063
PHOTOGRAPHIC EQUIPMENT - 0.7%
Eastman Kodak Co. 708,500 54,377,375
Polaroid Corp. 200,000 11,100,000
65,477,375
TOTAL TECHNOLOGY 328,253,079
TRANSPORTATION - 1.1%
AIR TRANSPORTATION - 0.7%
Northwest Airlines Corp. Class A (a) 1,523,500 55,417,313
Viad Corp. 275,800 5,309,150
60,726,463
RAILROADS - 0.4%
CSX Corp. 635,200 35,253,600
TOTAL TRANSPORTATION 95,980,063
UTILITIES - 6.0%
ELECTRIC UTILITY - 2.2%
Allegheny Power System, Inc. 975,000 26,020,313
American Electric Power Co., Inc. 967,700 40,643,400
Central Maine Power Co. 602,500 7,455,938
CILCORP, Inc. 76,300 3,142,606
Consolidated Edison Co. of
New York, Inc. 279,100 8,216,006
DPL, Inc. 637,300 15,693,513
Duke Power Co. 50,000 2,396,875
Entergy Corp. 1,439,500 39,406,313
Illinova Corp. 250,000 5,500,000
Niagara Mohawk Power Corp. (a) 1,006,700 8,619,869
PG&E Corp. 648,400 15,723,700
PacifiCorp. 200,000 4,400,000
Pinnacle West Capital Corp. 338,600 10,179,163
187,397,696
GAS - 0.6%
MCN Corp. 400,000 12,250,000
Nova Corp. 650,000 5,555,354
Pacific Enterprises 285,400 9,596,575
Questar Corp. 713,700 28,815,638
56,217,567
SHARES VALUE (NOTE 1)
TELEPHONE SERVICES - 3.2%
Ameritech Corp. 643,700 $ 43,731,369
AT&T Corp. 113,500 3,979,594
ALLTEL Corp. 508,900 17,016,344
BCE, Inc. 700,000 19,469,091
Bell Atlantic Corp. 365,000 27,694,375
BellSouth Corp. 525,000 24,346,875
Comsat Corp., Series 1 244,200 5,815,013
Frontier Corp. 200,000 3,987,500
MCI Communications Corp. 270,100 10,339,766
Manitoba Telecom Services, Inc. 250,000 2,661,790
NYNEX Corp. 740,000 42,642,500
SBC Communications, Inc. 195,000 12,065,625
Sprint Corp. 312,500 16,445,313
Telus Corp. 450,000 8,262,413
WorldCom, Inc. (a) 1,103,800 35,321,600
273,779,168
TOTAL UTILITIES 517,394,431
TOTAL COMMON STOCKS
(Cost $6,217,569,762) 7,890,995,449
CONVERTIBLE PREFERRED STOCKS - 1.7%
CONSTRUCTION & REAL ESTATE - 0.1%
REAL ESTATE INVESTMENT TRUSTS - 0.1%
Vornado Realty Trust $3.25, Series A 127,600 6,906,350
DURABLES - 0.1%
AUTOS, TIRES, & ACCESSORIES - 0.1%
Republic Industries, Inc. $1.55 219,200 5,370,400
ENERGY - 0.1%
OIL & GAS - 0.1%
Unocal Capital Trust $3.125 100,000 5,637,500
FINANCE - 1.1%
INSURANCE - 0.8%
Aetna, Inc. Class C 6 1/4% 760,000 71,250,000
SECURITIES INDUSTRY - 0.3%
Salomon, Inc. $2.03 840,700 28,899,063
TOTAL FINANCE 100,149,063
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
ELECTRICAL EQUIPMENT - 0.1%
Loral Space & Communications Ltd.
$3.00, Series C (b) 183,200 9,114,200
MEDIA & LEISURE - 0.1%
BROADCASTING - 0.1%
Evergreen Media Corp. $3.00 (b) 187,200 10,202,400
TECHNOLOGY - 0.1%
COMPUTERS & OFFICE EQUIPMENT - 0.1%
Wang Labs, Inc. $3.25 (b) 80,000 4,040,000
Wang Labs, Inc. $3.25 157,600 7,958,800
11,998,800
UTILITIES - 0.0%
GAS - 0.0%
MCN Corp. $4.00 25,100 1,364,813
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $122,619,633) 150,743,526
CONVERTIBLE BONDS - 1.2%
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
CONSTRUCTION & REAL ESTATE - 0.4%
REAL ESTATE INVESTMENT TRUSTS - 0.4%
Liberty Property 8%, 7/1/01 Ba2 $ 27,985,000 $ 34,701,400
DURABLES - 0.1%
CONSUMER ELECTRONICS - 0.1%
Matsushita Electric Industrial Co. Ltd.:
1.30%, 3/29/02 Aa2 JPY 410,000,000 5,114,048
1.40%, 3/31/04 Aa2 JPY 190,000,000 2,369,925
7,483,973
ENERGY - 0.2%
OIL & GAS - 0.2%
Pennzoil Co.
4 3/4%, 10/1/03 Baa3 9,820,000 12,532,775
MEDIA & LEISURE - 0.0%
LODGING & GAMING - 0.0%
Hilton Hotels Corp.
5%, 5/15/06 Baa2 3,670,000 3,899,375
RETAIL & WHOLESALE - 0.2%
RETAIL & WHOLESALE, MISCELLANEOUS - 0.2%
Home Depot, Inc.
3 1/4%, 10/1/01 A1 5,000,000 5,687,500
U.S. Office Products Co.
5 1/2%, 2/1/01 B3 10,000,000 12,250,000
17,937,500
TECHNOLOGY - 0.3%
COMPUTERS & OFFICE EQUIPMENT - 0.3%
Unisys Corp.
8 1/4%, 3/15/06 B3 17,981,000 23,734,920
TOTAL CONVERTIBLE BONDS
(Cost $93,124,832) 100,289,943
CASH EQUIVALENTS - 5.8%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 5.93%, dated
6/30/97 due 7/1/97 $ 498,485,098 498,403,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $6,931,717,227) $ 8,640,431,918
CURRENCY ABBREVIATIONS
JPY - Japanese yen
LEGEND
(a) Non-income producing
(b) 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 $23,356,600 or 0.3% of net
assets.
(c) Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
(d) 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. $ - $ 5,029,783 $ - $ 61,232,600
Beverly Enterprises, Inc. - 3,388,955 - 84,857,500
Integramed America,
Inc. - 166,375 - -
Synetic, Inc. - 40,768,344 - -
TOTALS $ - $ 49,353,457 $ - $146,090,100
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $2,976,701,733 and $2,433,124,647, 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 $623,898 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:
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 0.2% AAA, AA, A 0.1%
Baa 0.2% BBB 0.2%
Ba 0.4% BB 0.0%
B 0.4% B 0.4%
Caa 0.0% CCC 0.0%
Ca, C 0.0% CC, C 0.0%
D 0.0%
Distribution of investments by country of issue, as a percentage of total
value of investment in securities, is as follows:
United States 89.8%
United Kingdom 2.7
Netherlands 2.1
Canada 2.1
France 1.5
Netherland Antilles 1.0
Others (individually less than 1%) 0.8
TOTAL 100.0%
INCOME TAX INFORMATION
At June 30, 1997, the aggregate cost of investment securities for income
tax purposes was $6,939,210,994. Net unrealized appreciation aggregated
$1,701,220,924, of which $1,768,591,981 related to appreciated investment
securities and $67,371,057 related to depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in $ 8,640,431,918
securities, at
value (including
repurchase
agreements of
$498,403,000) (cost
$6,931,717,227) -
See accompanying
schedule
Cash 63,975
Receivable for 59,449,914
investments sold
Receivable for fund 7,030,723
shares sold
Dividends receivable 12,137,083
Interest receivable 1,916,557
Other receivables 115,759
TOTAL ASSETS 8,721,145,929
LIABILITIES
Payable for $ 126,839,504
investments
purchased
Payable for fund 1,307,053
shares redeemed
Accrued management 3,492,405
fee
Other payables and 559,932
accrued expenses
TOTAL LIABILITIES 132,198,894
NET ASSETS $ 8,588,947,035
Net Assets consist of:
Paid in capital $ 6,566,052,739
Undistributed net 64,214,928
investment income
Accumulated 249,987,580
undistributed net
realized gain (loss)
on investments and
foreign
currency
transactions
Net unrealized 1,708,691,788
appreciation
(depreciation) on
investments
and assets and
liabilities in
foreign currencies
NET ASSETS, for $ 8,588,947,035
389,282,331
shares outstanding
NET ASSET VALUE, $22.06
offering price
and redemption
price per
share
($8,588,947,035 (divided by)
389,282,331
shares)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $ 74,933,797
Dividends
Interest 11,519,913
TOTAL INCOME 86,453,710
EXPENSES
Management fee $ 18,948,541
Transfer agent fees 2,670,034
Accounting fees and 405,779
expenses
Non-interested 18,445
trustees'
compensation
Custodian fees and 92,149
expenses
Registration fees 48,392
Audit 35,310
Legal 10,069
Miscellaneous 238,137
Total expenses 22,466,856
before reductions
Expense reductions (557,661 21,909,195
)
NET INVESTMENT 64,544,515
INCOME
REALIZED AND
UNREALIZED
GAIN (LOSS)
Net realized gain
(loss) on:
Investment 265,331,361
securities (including
realized gain of
$12,689,716
on sales of
investments in
affiliated issuers)
Foreign currency (16,911 265,314,450
transactions )
Change in net
unrealized
appreciation
(depreciation) on:
Investment 847,590,904
securities
Assets and (17,469 847,573,435
liabilities in )
foreign currencies
NET GAIN (LOSS) 1,112,887,885
NET INCREASE $ 1,177,432,400
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
OTHER INFORMATION $ 553,138
Expense reductions
Directed
brokerage
arrangements
Custodian credits 4,523
$ 557,661
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED)
Operations $ 64,544,515 $ 117,458,579
Net investment
income
Net realized gain 265,314,450 597,117,485
(loss)
Change in net 847,573,435 90,992,918
unrealized
appreciation
(depreciation)
NET INCREASE 1,177,432,400 805,568,982
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
Distributions to (119,852,890) (7,876,787)
shareholders
From net
investment income
From net realized (602,593,699) (225,801,230)
gain
TOTAL DISTRIBUTIONS (722,446,589) (233,678,017)
Share transactions 822,950,455 1,829,128,598
Net proceeds from
sales of shares
Reinvestment of 722,446,589 233,678,017
distributions
Cost of shares (372,525,843) (553,042,238)
redeemed
NET INCREASE 1,172,871,201 1,509,764,377
(DECREASE) IN NET
ASSETS RESULTING
FROM SHARE
TRANSACTIONS
TOTAL INCREASE 1,627,857,012 2,081,655,342
(DECREASE) IN NET
ASSETS
NET ASSETS
Beginning of period 6,961,090,023 4,879,434,681
End of period $ 8,588,947,035 $ 6,961,090,023
(including
undistributed net
investment
income of
$64,214,928 and
$117,454,549,
respectively)
OTHER INFORMATION
Shares
Sold 40,075,873 93,794,843
Issued in 36,487,203 12,390,139
reinvestment of
distributions
Redeemed (18,261,978) (28,467,146)
Net increase 58,301,098 77,717,836
(decrease)
<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> <C>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1997
SELECTED PER-SHARE (UNAUDITED) 1996 1995 1994 1993 E 1992
DATA
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Net asset value, $ 21.03 $ 19.27 $ 15.35 $ 15.44 $ 13.40 $ 11.85
beginning of period
Income from
Investment
Operations
Net investment .18 D .35 .41 .41 .37 .40
income
Net realized and 3.02 2.30 4.69 .64 2.06 1.57
unrealized gain
(loss)
Total from 3.20 2.65 5.10 1.05 2.43 1.97
investment
operations
Less Distributions
From net (.36) (.03) (.40) (.37) (.35) (.42)
investment income
In excess of net - - - - (.04) -
investment income
From net realized (1.81) (.86) (.78) (.77) - -
gain
Total distributions (2.17) (.89) (1.18) (1.14) (.39) (.42)
Net asset value, end $ 22.06 $ 21.03 $ 19.27 $ 15.35 $ 15.44 $ 13.40
of period
TOTAL RETURN B, C 16.39% 14.28% 35.09% 7.07% 18.29% 16.89%
RATIOS AND
SUPPLEMENTAL
DATA
Net assets, end of $ 8,588,947 $ 6,961,090 $ 4,879,435 $ 2,284,412 $ 1,318,500 $ 592,880
period (000
omitted)
Ratio of expenses to .60% A .58% .61% .60% .62% .65%
average net assets
Ratio of expenses to .59% A, .56% .61% .58% .62% .65%
average net assets F F F
after
expense reductions
Ratio of net 1.72% A 1.97% 2.56% 2.83% 2.87% 3.52%
investment income
to average net
assets
Portfolio turnover rate 68% A 186% 87% 134% 120% 74%
Average commission $ .0438 $ .0426
rate G
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED AND DO NOT REFLECT
CHARGES ATTRIBUTED 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 NET
INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE
PERIOD. E 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. F 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). G 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>
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & 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 take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate each
year. Average annual total returns will appear once the fund is a year old,
and the growth of a hypothetical $10,000 investment in the fund will appear
in the fund's next report six months from now.
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 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 long-term growth and short-term
volatility. 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)
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.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
General Electric Co. 3.5
Philip Morris Companies, Inc. 2.4
BankAmerica Corp. 2.4
Tyco International Ltd. 2.2
Citicorp 1.9
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Finance 14.7
Health 12.2
Retail & Wholesale 9.6
Industrial Machinery & Equipment 9.1
Nondurables 9.0
ASSET ALLOCATION AS OF JUNE 30, 1997*
Row: 1, Col: 1, Value: 4.8
Row: 1, Col: 2, Value: 1.8
Row: 1, Col: 3, Value: 93.40000000000001
Stocks 94.4%
Bonds 0.8%
Short-term investments 4.8%
FOREIGN INVESTMENTS 7.5%
*
% OF FUND'S
INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with
Beth Terrana, Portfolio Manager of Growth &
Income Portfolio
Q. HOW DID THE FUND PERFORM, BETH?
A. For the six months that ended June 30, 1997, the fund trailed the
Standard & Poor's 500 Index, which returned 20.61%. Going forward, the
fund's semiannual report will also quote 12-month performance.
Q. LOOKING AT THE FUND'S PERFORMANCE VERSUS THAT OF ITS INDEX, WHICH
STRATEGIES PLAYED KEY ROLES?
A. Broadly, my decision to emphasize selected stocks in the strong finance,
health and diversified industrials sectors was particularly helpful. Within
the finance and health areas, I focused on money-center banks and
pharmaceuticals, including BankAmerica and Bristol-Myers Squibb - two of
the largest contributors to fund performance for the period. General
Electric - the fund's top holding - was another notable contributor based
on its strong performance as well as its overweighting in the fund.
Additionally, a substantial underweighting of generally weak electric and
telecommunications utilities stocks proved very helpful. The largest
detractor relative to the index was the fund's underexposure to a number of
large-capitalization technology and nondurables stocks, which accounted for
a disproportionate amount of the index's return. Microsoft and Coca-Cola -
two of the largest index constituents - illustrate this point particularly
well. Together, these TWO stocks alone accounted for approximately 1.5% of
the index's 20.61% return. While in hindsight I clearly wish I'd owned more
of these stocks, fundamentals for these companies didn't appear to support
their valuations, which were at steep premiums to the overall market as
well as comparable firms.
Q. HOW DID SOME OF THE FUND'S TOP POSITIONS FARE RELATIVE TO THE INDEX?
A. Many of the fund's larger exposures did well, performing in line with my
expectations. Individual security selection will always be a main driver of
performance and the fund's top positions obviously play a key role. Over
the course of the period, six of the fund's top ten positions outperformed
the index.
Q. FOR THOSE INVESTORS WHO MAY BE UNFAMILIAR WITH YOUR MANAGEMENT STYLE,
HOW WOULD YOU CHARACTERIZE YOUR INVESTMENT PROCESS?
A. Fundamentally, I am a bottom-up investor who believes that superior
investment performance results from owning companies with improving
financial returns. Improvements in financial returns drive both sustainable
improvements in a company's secular growth rate and its earnings power. The
most important elements I look for in an investment include restructuring
potential, rising returns on invested capital, good balance sheet
management, strong free cash flow and shareholder-friendly management.
Increasingly, global franchises and strong brands have also become
important factors. I've generally found that companies exhibiting some or
all of these attributes tend to generate improving financial returns -
including expanding profit margins and accelerating earnings growth rates -
through time. Further, as a firm's financial returns improve, its stock is
likely to be rewarded with a higher valuation once the market finally
catches on.
Q. WHAT'S YOUR OUTLOOK FOR THE NEXT SIX MONTHS?
A. As a backdrop to the stock market, I believe it's very likely that the
supportive environment - moderate economic growth and low inflation - will
continue. Also, given that there are few signs of incipient inflation, I
don't foresee any significant action by the Federal Reserve to raise
interest rates - an event that would likely be a negative for the market,
at least over the short term. Assuming this favorable economic environment
continues, the critical factor going forward will be corporate earnings,
which at this time appear relatively sustainable overall. However, I remain
focused on those companies with the potential to deliver exceptional
numbers, particularly given the recent propensity of the market to
dramatically reduce stock prices upon earnings disappointments. Recently,
even earnings numbers that come in as expected have resulted in large stock
price declines, partly because analysts' "real" expectations were even
higher.
FUND FACTS
GOAL: seeks reasonable income by investing
primarily in income producing equity securities
to provide current income and increase the
value of the fund's shares
START DATE: October 9,1986
SIZE: as of June 30, 1997, more than $8.5
billion
MANAGER: Stephen Petersen, since January
1997; joined Fidelity in 1980
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 93.4%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 4.5%
AEROSPACE & DEFENSE - 4.1%
AlliedSignal, Inc. 26,700 $ 2,242,800
Boeing Co. 17,200 912,661
Lockheed Martin Corp. 11,600 1,201,325
Textron, Inc. 20,800 1,380,600
United Technologies Corp. 18,500 1,535,500
7,272,886
DEFENSE ELECTRONICS - 0.4%
Raytheon Co. 14,800 754,800
TOTAL AEROSPACE & DEFENSE 8,027,686
BASIC INDUSTRIES - 5.1%
CHEMICALS & PLASTICS - 3.9%
Air Products & Chemicals, Inc. 9,900 804,375
Avery Dennison Corp. 6,000 240,750
Cytec Industries, Inc. (a) 4,300 160,713
Goodrich (B.F.) Co. 12,600 545,738
Hercules, Inc. 2,300 110,113
Monsanto Co. 35,900 1,545,944
Praxair, Inc. 45,800 2,564,800
Raychem Corp. 5,700 423,938
Sealed Air Corp. (a) 14,200 674,500
7,070,871
PAPER & FOREST PRODUCTS - 1.2%
Fort Howard Corp. (a) 7,500 379,688
International Paper Co. 3,900 189,394
James River Corp. of Virginia 10,900 403,300
Kimberly-Clark Corp. 22,300 1,109,425
2,081,807
TOTAL BASIC INDUSTRIES 9,152,678
CONSTRUCTION & REAL ESTATE - 3.0%
BUILDING MATERIALS - 1.8%
American Standard Companies, Inc. (a) 19,900 890,525
Masco Corp. 39,400 1,644,950
Sherwin-Williams Co. 21,300 657,638
3,193,113
REAL ESTATE INVESTMENT TRUSTS - 1.2%
Beacon Properties Corp. 13,600 453,900
Duke Realty Investors, Inc. 9,300 376,650
Equity Residential Properties Trust (SBI) 12,400 589,000
Public Storage, Inc. 18,400 538,200
Storage USA, Inc. 5,500 210,375
2,168,125
TOTAL CONSTRUCTION & REAL ESTATE 5,361,238
DURABLES - 3.2%
AUTOS, TIRES, & ACCESSORIES - 0.4%
Eaton Corp. 5,200 454,025
Navistar International Corp. (a) 18,200 313,950
767,975
CONSUMER DURABLES - 1.7%
Corning, Inc. 13,200 734,250
Minnesota Mining & Manufacturing Co. 23,400 2,386,800
3,121,050
CONSUMER ELECTRONICS - 0.3%
Newell Co. 14,100 558,713
SHARES VALUE (NOTE 1)
TEXTILES & APPAREL - 0.8%
Liz Claiborne, Inc. 20,100 $ 937,163
VF Corp. 5,200 442,650
1,379,813
TOTAL DURABLES 5,827,551
ENERGY - 7.5%
ENERGY SERVICES - 0.9%
Halliburton Co. 5,900 467,575
McDermott International, Inc. 7,400 215,988
Schlumberger Ltd. 7,800 975,000
1,658,563
OIL & GAS - 6.6%
Amoco Corp. 13,500 1,173,656
British Petroleum PLC ADR 30,064 2,251,042
Exxon Corp. 22,300 1,371,450
Mobil Corp. 14,800 1,034,150
Royal Dutch Petroleum Co. 33,200 1,805,250
Texaco, Inc. 15,300 1,663,875
Tosco Corp. 21,000 628,688
Total SA sponsored ADR 14,000 708,750
USX-Marathon Group 32,500 938,438
Unocal Corp. 5,900 228,994
11,804,293
TOTAL ENERGY 13,462,856
FINANCE - 14.7%
BANKS - 7.9%
Bank of New York Co., Inc. 35,700 1,552,950
BankBoston Corp. 7,600 547,675
BankAmerica Corp. 65,500 4,228,844
Citicorp 27,800 3,351,638
First Bank System, Inc. 18,400 1,570,900
First Union Corp. 8,200 758,500
Mellon Bank Corp. 19,800 893,475
NationsBank Corp. 15,100 973,950
Wells Fargo & Co. 1,200 323,400
14,201,332
CREDIT & OTHER FINANCE - 1.8%
American Express Co. 16,600 1,236,700
Associates First Capital Corp. 8,400 466,200
Household International, Inc. 12,800 1,503,200
3,206,100
FEDERAL SPONSORED CREDIT - 1.9%
Federal Home Loan Mortgage
Corporation 50,200 1,725,625
Federal National Mortgage Association 37,400 1,631,575
3,357,200
INSURANCE - 2.4%
AFLAC, Inc. 7,400 349,650
Allstate Corp. 23,800 1,737,400
MGIC Investment Corp. 3,400 162,988
PMI Group, Inc. 1,600 99,800
Progressive Corp. 300 26,100
Travelers Group, Inc. (The) 29,100 1,835,119
4,211,057
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
SAVINGS & LOANS - 0.7%
Ahmanson (H.F.) & Co. 4,900 $ 210,700
Charter One Financial Corp. 5,100 274,763
Great Western Financial Corp. 14,600 784,750
1,270,213
TOTAL FINANCE 26,245,902
HEALTH - 11.9%
DRUGS & PHARMACEUTICALS - 7.9%
American Home Products Corp. 27,300 2,088,450
Bristol-Myers Squibb Co. 38,300 3,102,300
Cytyc Corp. (a) 4,300 116,638
Merck & Co., Inc. 17,100 1,769,850
Pfizer, Inc. 32,400 1,935,900
Schering-Plough Corp. 37,000 1,771,375
SmithKline Beecham PLC ADR 25,500 2,336,438
Warner-Lambert Co. 8,400 1,043,700
14,164,651
MEDICAL EQUIPMENT & SUPPLIES - 3.7%
Bard (C.R.), Inc. 12,500 453,906
Baxter International, Inc. 26,900 1,405,525
Boston Scientific Corp. (a) 14,300 878,556
Johnson & Johnson 35,200 2,266,000
McKesson Corp. 10,500 813,750
Medtronic, Inc. 9,500 769,500
6,587,237
MEDICAL FACILITIES MANAGEMENT - 0.3%
Columbia/HCA Healthcare Corp. 3,000 117,938
Humana, Inc. (a) 20,900 483,313
601,251
TOTAL HEALTH 21,353,139
HOLDING COMPANIES - 0.1%
CINergy Corp. 6,300 219,319
INDUSTRIAL MACHINERY & EQUIPMENT - 8.5%
ELECTRICAL EQUIPMENT - 4.6%
Emerson Electric Co. 21,600 1,189,350
General Electric Co. 96,400 6,302,150
Harris Corp. 3,200 268,800
Westinghouse Electric Corp. 20,500 474,063
8,234,363
INDUSTRIAL MACHINERY & EQUIPMENT - 3.7%
Illinois Tool Works, Inc. 21,600 1,078,650
Ingersoll-Rand Co. 10,000 617,500
Stanley Works 22,700 908,000
Tyco International Ltd. 57,400 3,992,888
6,597,038
POLLUTION CONTROL - 0.2%
Waste Management, Inc. 12,000 385,500
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 15,216,901
MEDIA & LEISURE - 4.6%
BROADCASTING - 1.1%
Evergreen Media Corp. Class A (a) 20,400 910,350
Time Warner, Inc. 20,800 1,003,600
1,913,950
ENTERTAINMENT - 0.6%
Disney (Walt) Co. 12,600 1,011,150
SHARES VALUE (NOTE 1)
LEISURE DURABLES & TOYS - 0.5%
Mattel, Inc. 27,100 $ 918,013
LODGING & GAMING - 0.3%
Host Marriott Corp. (a) 31,200 555,750
PUBLISHING - 2.1%
Cognizant Corp. 15,400 623,700
Harcourt General, Inc. 9,200 438,150
McGraw-Hill, Inc. 12,500 735,156
Scholastic Corp. (a) 6,900 241,500
Times Mirror Co. Class A 27,900 1,541,475
World Color Press, Inc. (a) 7,500 178,125
3,758,106
TOTAL MEDIA & LEISURE 8,156,969
NONDURABLES - 9.0%
BEVERAGES - 0.7%
PepsiCo, Inc. 31,600 1,186,975
FOODS - 1.6%
Campbell Soup Co. 42,500 2,125,000
Heinz (H.J.) Co. 8,700 401,288
Hershey Foods Corp. 6,800 376,125
2,902,413
HOUSEHOLD PRODUCTS - 4.2%
Avon Products, Inc. 19,400 1,368,913
Clorox Co. 6,800 897,600
Colgate-Palmolive Co. 1,300 84,825
Procter & Gamble Co. 12,200 1,723,250
Rubbermaid, Inc. 9,800 291,550
Unilever PLC Ord. 30,900 885,526
Unilever NV ADR 10,900 2,333,281
7,584,945
TOBACCO - 2.5%
Philip Morris Companies, Inc. 98,500 4,370,938
TOTAL NONDURABLES 16,045,271
PRECIOUS METALS - 0.2%
Getchell Gold Corp. (a) 12,100 426,525
RETAIL & WHOLESALE - 9.4%
APPAREL STORES - 1.4%
Gap, Inc. 29,900 1,162,363
Payless ShoeSource, Inc. (a) 24,200 1,323,438
2,485,801
DRUG STORES - 1.5%
CVS Corp. 37,977 1,946,321
Walgreen Co. 14,500 777,563
2,723,884
GENERAL MERCHANDISE STORES - 5.2%
Coles Myer Ltd. 71,500 371,324
Consolidated Stores Corp. (a) 89,975 3,126,631
Dayton Hudson Corp. 20,100 1,069,069
Federated Department Stores, Inc. (a) 71,400 2,481,150
Sears, Roebuck & Co. 21,100 1,134,125
Wal-Mart Stores, Inc. 30,900 1,044,806
9,227,105
GROCERY STORES - 0.7%
American Stores Co. 10,500 518,438
Asda Group PLC 177,400 366,194
Ahold NV 3,600 303,528
1,188,160
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
RETAIL & WHOLESALE, MISCELLANEOUS - 0.6%
Home Depot, Inc. (The) 16,300 $ 1,123,681
TOTAL RETAIL & WHOLESALE 16,748,631
SERVICES - 3.6%
ADVERTISING - 1.8%
Interpublic Group of Companies, Inc. 12,500 766,406
Omnicom Group, Inc. 28,600 1,762,475
Outdoor Systems, Inc. (a) 4,800 183,600
WPP Group PLC 127,000 519,028
3,231,509
LEASING & RENTAL - 0.3%
Hanover Compressor Co. 100 1,950
Republic Industries, Inc. (a) 5,600 139,300
Ryder Systems, Inc. 12,200 402,600
543,850
PRINTING - 0.3%
Donnelley (R.R.) & Sons Co. 15,900 582,338
SERVICES - 1.2%
ADT Ltd. (a) 19,800 653,400
Ecolab, Inc. 14,300 682,825
National Service Industries, Inc. 6,300 306,731
Service Corp. International 14,818 487,142
2,130,098
TOTAL SERVICES 6,487,795
TECHNOLOGY - 7.4%
COMMUNICATIONS EQUIPMENT - 0.6%
Alcatel Alsthom Compagnie Generale
d'Electricite SA sponsored ADR 2,400 60,600
Alcatel Alsthom Compagnie Generale
d'Electricite SA 6,600 826,094
Andrew Corp. (a) 5,100 143,438
1,030,132
COMPUTER SERVICES & SOFTWARE - 1.7%
Adobe Systems, Inc. 2,500 87,656
Automatic Data Processing, Inc. 8,500 399,500
CUC International, Inc. (a) 15,600 402,675
CompUSA, Inc. (a) 22,300 479,450
Microsoft Corp. (a) 9,600 1,213,200
Oracle Systems Corp. (a) 9,700 488,638
3,071,119
COMPUTERS & OFFICE EQUIPMENT - 3.8%
Compaq Computer Corp. (a) 14,600 1,449,050
Diebold, Inc. 12,550 489,450
International Business Machines Corp. 28,100 2,534,269
Pitney Bowes, Inc. 18,700 1,299,650
Xerox Corp. 13,600 1,072,700
6,845,119
ELECTRONICS - 1.3%
Intel Corp. 11,500 1,630,844
Texas Instruments, Inc. 8,500 714,531
2,345,375
TOTAL TECHNOLOGY 13,291,745
UTILITIES - 0.7%
ELECTRIC UTILITY - 0.3%
Edison International 22,000 547,250
SHARES VALUE (NOTE 1)
TELEPHONE SERVICES - 0.4%
WorldCom, Inc. (a) 20,200 $ 646,400
TOTAL UTILITIES 1,193,650
TOTAL COMMON STOCKS
(Cost $151,597,143) 167,217,856
CONVERTIBLE PREFERRED STOCKS - 1.0%
CONSTRUCTION & REAL ESTATE - 0.2%
REAL ESTATE INVESTMENT TRUSTS - 0.2%
Vornado Realty Trust $3.25 Series A 5,300 286,863
DURABLES - 0.1%
AUTOS, TIRES, & ACCESSORIES - 0.1%
Republic Industries, Inc. $1.55 8,600 210,700
ENERGY - 0.3%
OIL & GAS - 0.3%
Tosco Financing Trust $2.875 (b) 8,200 462,275
HEALTH - 0.3%
MEDICAL EQUIPMENT & SUPPLIES - 0.3%
McKesson Financing Trust $2.50 (b) 9,400 571,050
MEDIA & LEISURE - 0.1%
LODGING & GAMING - 0.1%
Host Marriott Financial Trust
$3.375 (b) 4,800 277,800
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $1,729,992) 1,808,688
CONVERTIBLE BONDS - 0.8%
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - 0.6%
POLLUTION CONTROL - 0.6%
USA Waste Services, Inc.
4%, 2/1/02 Ba2 $ 642,000 683,730
United Waste Systems, Inc.
4 1/2%, 6/1/01 B1 198,000 271,755
955,485
RETAIL & WHOLESALE - 0.2%
GENERAL MERCHANDISE STORES - 0.1%
Federated Department Stores, Inc.
5%, 10/1/03 Baa3 220,000 262,350
RETAIL & WHOLESALE, MISCELLANEOUS - 0.1%
Staples, Inc.
4 1/2%, 10/1/00 (b) Ba2 93,000 112,995
TOTAL RETAIL & WHOLESALE 375,345
TOTAL CONVERTIBLE BONDS
(Cost $1,289,817) 1,330,830
CASH EQUIVALENTS - 4.8%
MATURITY VALUE
AMOUNT (NOTE 1)
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 5.93%, dated
6/30/97 due 7/1/97 $ 8,616,419 $ 8,615,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $163,231,952) $ 178,972,374
LEGEND
(a) Non-income producing
(b) 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 $1,424,120 or 0.8% of net
assets.
(c) Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $189,250,835 and $35,258,709, 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 $22,730 for the period (see
Note 4 of Notes to Financial Statements).
INCOME TAX INFORMATION
At June 30, 1997, the aggregate cost of investment securities for income
tax purposes was $163,231,952. Net unrealized appreciation aggregated
$15,740,422, of which $16,585,242 related to appreciated investment
securities and $844,820 related to depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in $ 178,972,374
securities, at value
(including
repurchase
agreements of
$8,615,000) (cost
$163,231,952) -
See accompanying
schedule
Cash 21,799
Receivable for 505,400
investments sold
Receivable for fund 841,663
shares sold
Dividends receivable 160,697
Interest receivable 14,678
TOTAL ASSETS 180,516,611
LIABILITIES
Payable for $ 1,047,870
investments
purchased
Payable for fund 80
shares redeemed
Accrued management 68,520
fee
Other payables and 36,258
accrued expenses
TOTAL LIABILITIES 1,152,728
NET ASSETS $ 179,363,883
Net Assets consist of:
Paid in capital $ 163,362,211
Undistributed net 592,329
investment income
Accumulated (331,075
undistributed net )
realized gain (loss)
on investments and
foreign currency
transactions
Net unrealized 15,740,418
appreciation
(depreciation) on
investments
and assets and
liabilities in
foreign currencies
NET ASSETS, for $ 179,363,883
15,613,501
shares outstanding
NET ASSET VALUE, $11.49
offering price
and redemption
price per share
($179,363,883 (divided by)
15,613,501 shares)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $ 692,052
Dividends
Interest 220,743
TOTAL INCOME 912,795
EXPENSES
Management fee $ 216,567
Transfer agent fees 35,283
Accounting fees and 34,705
expenses
Non-interested 131
trustees'
compensation
Custodian fees and 22,607
expenses
Audit 11,519
Legal 16
Total expenses 320,828
before reductions
Expense reductions (209 320,619
)
NET INVESTMENT 592,176
INCOME
REALIZED AND
UNREALIZED GAIN
(LOSS)
Net realized gain
(loss) on:
Investment (330,979
securities )
Foreign currency (96 (331,075
transactions ) )
Change in net
unrealized
appreciation
(depreciation) on:
Investment 15,750,754
securities
Assets and (4 15,750,750
liabilities in )
foreign currencies
NET GAIN (LOSS) 15,419,675
NET INCREASE $ 16,011,851
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
OTHER INFORMATION $ 209
Expense reductions
Custodian credits
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) SIX MONTHS DECEMBER 31,
IN NET ASSETS ENDED 1996
JUNE 30, 1997 (COMMENCEMENT
(UNAUDITED) OF OPERATIONS)
Operations $ 592,176 $ 153
Net investment
income
Net realized gain (331,075) -
(loss)
Change in net 15,750,750 (10,332
unrealized )
appreciation
(depreciation)
NET INCREASE 16,011,851 (10,179
(DECREASE) IN NET )
ASSETS RESULTING
FROM OPERATIONS
Share transactions 176,559,612 1,000,010
Net proceeds from
sales of shares
Cost of shares (14,197,411) -
redeemed
NET INCREASE 162,362,201 1,000,010
(DECREASE) IN NET
ASSETS RESULTING
FROM SHARE
TRANSACTIONS
TOTAL INCREASE 178,374,052 989,831
(DECREASE) IN NET
ASSETS
NET ASSETS
Beginning of period 989,831 -
End of period $ 179,363,883 $ 989,831
(including
undistributed net
investment
income of
$592,329 and
$153,
respectively)
OTHER INFORMATION
Shares
Sold 16,857,064 100,001
Redeemed (1,343,564) -
Net increase 15,513,500 100,001
(decrease)
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED) (COMMENCEMENT
OF OPERATIONS)
SELECTED PER-SHARE
DATA
Net asset value, $ 9.90 $ 10.00
beginning of period
Income from
Investment
Operations
Net investment .07 D .00
income
Net realized and 1.52 (.10)
unrealized gain
(loss)
Total from 1.59 (.10)
investment
operations
Net asset value, end $ 11.49 $ 9.90
of period
TOTAL RETURN B, C 16.06% (1.00)%
RATIOS AND
SUPPLEMENTAL
DATA
Net assets, end of $ 179,364 $ 990
period (000
omitted)
Ratio of expenses to .75% A 1.00% A,
average net assets E
Ratio of net 1.38% A 3.89% A
investment income
to average net
assets
Portfolio turnover rate 86% A 0% A
Average commission $ .0280 $ .0120
rate F
ANNUALIZED
TOTAL RETURNS FOR PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED AND DO NOT
REFLECT CHARGES ATTRIBUTABLE TO YOUR
INSURANCE COMPANY'S SEPARATE
ACCOUNT. INCLUSION OF THESE CHARGES
WOULD REDUCE THE TOTAL RETURNS SHOWN.
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).
NET INVESTMENT INCOME PER SHARE HAS
BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
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.
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.
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 PAST 1 LIFE OF
JUNE 30, 1997 YEAR FUND
INDEX 500 34.06% 19.67%
S&P 500(registered trademark) 34.70% 20.03%
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 long-term growth and short-term
volatility. 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
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
1997/01/31 21074.26 21345.29
1997/02/28 21231.99 21512.63
1997/03/31 20349.53 20628.68
1997/04/30 21559.17 21860.21
1997/05/31 22870.18 23191.06
1997/06/30 23874.76 24230.02
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 June 30,
1997, the value of the investment would have grown to $23,875 - a 138.75%
increase on the initial investment. For comparison, look at how the S&P 500
did over the same period. With dividends and capital gains, if any,
reinvested, the same $10,000 investment would have grown to $24,230 - a
142.30% increase.
INVESTMENT SUMMARY
TOP TEN STOCKS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
General Electric Co. 2.9
Coca-Cola Co. (The) 2.3
Exxon Corp. 2.1
Microsoft Corp. 2.1
Merck & Co., Inc. 1.7
Royal Dutch Petroleum Co. 1.6
Intel Corp. 1.6
Philip Morris Companies, Inc. 1.5
Procter & Gamble Co. 1.3
International Business Machines Corp. 1.3
TOP TEN MARKET SECTORS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Finance 14.3
Technology 13.3
Nondurables 10.8
Health 10.7
Utilities 8.5
Energy 8.3
Industrial Machinery & Equipment 5.6
Basic Industries 5.0
Retail & Wholesale 4.4
Durables 3.8
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 six months that ended June 30, 1997, the fund performed in line
with the 20.61% 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. The S&P 500 returned 34.70% for the 12 months ended June 30,
1997.
Q. HOW WOULD YOU CHARACTERIZE THE MARKET OVER THE PAST SIX MONTHS?
A. The U.S. stock market continued to be strong, led by
large-capitalization companies. There were a number of factors that
contributed to the positive investing environment. Most importantly,
corporate earnings were healthy, helped by a steadily growing economy that
has shown no signs of emerging inflation. Interest rates remained
relatively low, helping to sustain economic growth, keep corporate
borrowing costs under control and make investment alternatives to stocks
less attractive. Economic growth remained moderate enough to discourage the
Federal Reserve Board from aggressively raising interest rates to cool an
overheated economy and head off potential inflation.
Q. AT THE SAME TIME, THE FED DID RAISE RATES BACK IN MARCH . . .
A. That's right. In February, Fed Chairman Alan Greenspan indicated in his
semiannual Congressional testimony that the Fed was inclined to raise
short-term rates in the first half of 1997, as a pre-emptive strike against
possible inflation caused by a tight labor market. As the Fed's March 25
Open Market Committee meeting approached and data emerged showing the
economy picking up speed, the market experienced a sharp sell-off.
Investors became convinced that the Fed would raise rates. The Fed did so,
increasing a key short-term rate by 0.25% at its March meeting. However,
when statistics emerged in the second quarter showing the economy slowing
and no significant increase in inflation, the market recovered from its
late March and early April correction and continued its steady upward climb
through the end of the period.
Q. WHY DID THE STOCKS OF THE LARGEST COMPANIES CONTINUE TO PERFORM WELL?
A. Because they tended to provide reliable earnings, and earnings are one
of the main drivers of stock prices. With the economy showing strength, the
stock market broadened somewhat with the prices of small- and
mid-capitalization stocks also starting to show improvement. At the same
time, cost cutting and sustained international sales helped large-cap
stocks maintain their status as market leaders.
Q. WERE THERE ANY PARTICULAR SECTORS OF THE MARKET THAT PROVED TO BE MARKET
LEADERS?
A. Not really. No one sector stood out above the rest, although many
financial services stocks did well. In the past, the uncertain
interest-rate environment probably would have adversely affected these
stocks. However, interest rates remain at a relatively low level and many
financial services companies have emphasized steadier fee-based businesses
that tend to insulate them from the negative influence that monetary policy
might exert. In addition, many financial services firms benefited from the
strong stock market and the positive impact of significant inflows of
capital, especially through mutual funds. Positive merger and acquisition
activity also bolstered stocks in the sector.
Q. WHAT SECTORS LAGGED DURING THE PERIOD?
A. Precious metals was one area that lagged the market. Although we
continue to use more gold than we mine, its price continues to plummet.
That's because many central banks have sold their gold reserves off
recently because the metal has been such a poor performing asset. For
example, Australia recently sold off a fair amount of its reserves to buy
U.S. government bonds, among other investments. In addition, gold often is
seen as a hedge against inflation, and with such positive news on that
front recently, the precious metal has lost its luster.
Q. WHAT'S YOUR OUTLOOK FOR THE REST OF 1997?
A. Even though investors have seen valuations well above historical levels,
earnings growth and earnings surprises have supported stock prices and
driven them higher. Nevertheless, investors should understand that this
situation leads to a great deal of uncertainty looking forward. While the
large-cap stocks that make up the S&P 500 have rallied to post annual
returns in the 20% to 30% range for more than two years, the index's
historical average annual return is approximately 11%. Investors should set
their expectations accordingly.
FUND FACTS
GOAL: seeks reasonable income by investing
primarily in income producing equity securities
to provide current income and increase the
value of the fund's shares
START DATE: October 9,1986
SIZE: as of June 30, 1997, more than $8.5
billion
MANAGER: Stephen Petersen, since January
1997; joined Fidelity in 1980
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 93.0%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 2.2%
AEROSPACE & DEFENSE - 1.9%
AlliedSignal, Inc. 59,100 $ 4,964,223
Boeing Co. 149,918 7,955,024
Lockheed Martin Corp. 40,393 4,183,200
McDonnell Douglas Corp. 44,500 3,048,250
Rockwell International Corp. 45,900 2,708,100
Textron, Inc. 34,700 2,303,213
United Technologies Corp. 49,600 4,116,800
29,278,810
DEFENSE ELECTRONICS - 0.2%
Northrop Grumman Corp. 12,000 1,053,750
Raytheon Co. 49,300 2,514,300
3,568,050
SHIP BUILDING & REPAIR - 0.1%
General Dynamics Corp. 13,200 990,000
TOTAL AEROSPACE & DEFENSE 33,836,860
BASIC INDUSTRIES - 5.0%
CHEMICALS & PLASTICS - 2.7%
Air Products & Chemicals, Inc. 23,300 1,893,125
Avery Dennison Corp. 21,900 878,738
Dow Chemical Co. 50,800 4,425,950
du Pont (E.I.) de Nemours & Co. 235,800 14,825,925
Eastman Chemical Co. 16,175 1,027,113
Engelhard Corp. 30,200 632,313
FMC Corp. (a) 7,700 611,669
Goodrich (B.F.) Co. 11,300 489,431
Great Lakes Chemical Corp. 12,500 654,688
Hercules, Inc. 21,500 1,029,313
Monsanto Co. 123,000 5,296,688
Morton International, Inc. 29,700 896,569
Nalco Chemical Co. 14,000 540,750
PPG Industries, Inc. 38,300 2,226,188
Praxair, Inc. 32,800 1,836,800
Raychem Corp. 9,400 699,125
Rohm & Haas Co. 13,300 1,197,831
Union Carbide Corp. 26,600 1,251,863
W.R. Grace & Co. 15,100 832,388
41,246,467
IRON & STEEL - 0.2%
Aeroquip Vickers, Inc. 5,800 274,050
Allegheny Teledyne, Inc. 36,384 982,368
Armco, Inc. (a) 22,400 86,800
Bethlehem Steel Corp. (a) 23,300 243,194
Inland Steel Industries, Inc. 10,200 266,475
Nucor Corp. 18,300 1,033,950
USX-U.S. Steel Group 17,800 624,113
Worthington Industries, Inc. 20,150 368,997
3,879,947
METALS & MINING - 0.6%
ASARCO, Inc. 9,000 275,625
Alcan Aluminium Ltd. 47,257 1,612,143
Aluminum Co. of America 36,200 2,728,575
Cyprus Amax Minerals Co. 19,450 476,525
Freeport-McMoRan Copper & Gold, Inc.
Class B 40,500 1,260,563
Inco Ltd. 35,136 1,049,766
Phelps Dodge Corp. 13,500 1,150,031
Reynolds Metals Co. 15,300 1,090,125
9,643,353
SHARES VALUE (NOTE 1)
PACKAGING & CONTAINERS - 0.2%
Ball Corp. 6,498 $ 195,346
Bemis Co., Inc. 10,900 471,425
Crown Cork & Seal Co., Inc. 26,800 1,432,125
Tupperware Corp. 13,100 478,150
2,577,046
PAPER & FOREST PRODUCTS - 1.3%
Boise Cascade Corp. 10,200 360,188
Champion International Corp. 19,900 1,099,475
Georgia-Pacific Corp. 19,200 1,639,200
International Paper Co. 62,900 3,054,581
James River Corp. of Virginia 18,100 669,700
Kimberly-Clark Corp. 118,332 5,887,017
Louisiana-Pacific Corp. 22,700 479,538
Mead Corp. 11,000 684,750
Potlatch Corp. 6,100 276,025
Stone Container Corp. 20,800 297,700
Temple-Inland, Inc. 11,500 621,000
Union Camp Corp. 14,500 725,000
Westvaco Corp. 21,250 668,047
Weyerhaeuser Co. 41,600 2,163,200
Willamette Industries, Inc. 11,500 805,000
19,430,421
TOTAL BASIC INDUSTRIES 76,777,234
CONSTRUCTION & REAL ESTATE - 0.4%
BUILDING MATERIALS - 0.3%
Armstrong World Industries, Inc. 8,700 638,363
Crane Co. 9,700 405,581
Masco Corp. 33,500 1,398,625
Owens-Corning 10,800 465,750
Sherwin-Williams Co. 36,000 1,111,500
4,019,819
CONSTRUCTION - 0.0%
Centex Corp. 6,100 247,813
Fleetwood Enterprises, Inc. 7,500 223,594
Kaufman & Broad Home Corp. 8,200 144,013
Pulte Corp. 4,300 148,619
764,039
ENGINEERING - 0.1%
EG & G, Inc. 10,000 225,000
Fluor Corp. 17,500 965,781
Foster Wheeler Corp. 8,600 348,300
1,539,081
TOTAL CONSTRUCTION & REAL ESTATE 6,322,939
DURABLES - 3.8%
AUTOS, TIRES, & ACCESSORIES - 2.3%
AutoZone, Inc. (a) 31,550 743,397
Chrysler Corp. 147,100 4,826,719
Cooper Tire & Rubber Co. 16,500 363,000
Cummins Engine Co., Inc. 8,200 578,613
Dana Corp. 21,400 813,200
Eaton Corp. 16,200 1,414,463
Echlin, Inc. 13,000 468,000
Ford Motor Co. 248,000 9,362,000
General Motors Corp. 158,278 8,814,106
Genuine Parts Co. 37,850 1,282,169
Goodyear Tire & Rubber Co. 32,600 2,063,988
ITT Industries, Inc. 24,800 638,600
Johnson Controls, Inc. 17,500 718,594
NACCO Industries, Inc. Class A 1,800 101,588
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
DURABLES - CONTINUED
AUTOS, TIRES, & ACCESSORIES - CONTINUED
Navistar International Corp. (a) 15,270 $ 263,408
PACCAR, Inc. 16,190 751,823
Pep Boys-Manny, Moe & Jack 12,600 429,188
Snap-On Tools Corp. 12,800 504,000
TRW, Inc. 26,500 1,505,531
35,642,387
CONSUMER DURABLES - 0.8%
Corning, Inc. 47,900 2,664,438
Minnesota Mining & Manufacturing Co. 87,400 8,914,800
11,579,238
CONSUMER ELECTRONICS - 0.2%
Black & Decker Corp. 19,800 736,313
Maytag Co. 20,900 546,013
Newell Co. 33,300 1,319,513
Whirlpool Corp. 15,500 845,719
3,447,558
TEXTILES & APPAREL - 0.5%
Fruit of the Loom, Inc. Class A (a) 16,000 496,000
Liz Claiborne, Inc. 14,900 694,713
NIKE, Inc. Class B 60,300 3,520,013
Reebok International Ltd. 11,600 542,300
Russell Corp. 8,100 239,963
Springs Industries, Inc. Class A 4,300 226,825
Stride Rite Corp. 10,300 132,613
VF Corp. 13,400 1,140,675
6,993,102
TOTAL DURABLES 57,662,285
ENERGY - 8.3%
ENERGY SERVICES - 0.8%
Baker Hughes, Inc. 30,500 1,179,969
Dresser Industries, Inc. 36,700 1,367,075
Halliburton Co. 26,300 2,084,275
Helmerich & Payne, Inc. 5,300 305,413
McDermott International, Inc. 11,400 332,738
Rowan Companies, Inc. (a) 18,000 507,375
Schlumberger Ltd. 51,600 6,450,000
Western Atlas, Inc. (a) 11,300 827,725
13,054,570
OIL & GAS - 7.5%
Amerada Hess Corp. 19,400 1,077,913
Amoco Corp. 104,000 9,041,500
Ashland, Inc. 15,600 723,450
Atlantic Richfield Co. 67,600 4,765,800
Burlington Resources, Inc. 26,200 1,156,075
Chevron Corp. 136,600 10,099,863
Coastal Corp. (The) 22,100 1,175,444
Exxon Corp. 519,700 31,961,550
Kerr-McGee Corp. 10,200 646,425
Louisiana Land & Exploration Co. 7,200 411,300
Mobil Corp. 165,000 11,529,375
Occidental Petroleum Corp. 68,900 1,726,806
Oryx Energy Co. (a) 22,000 464,750
Pennzoil Co. 9,800 752,150
Phillips Petroleum Co. 55,000 2,406,250
Royal Dutch Petroleum Co. 448,400 24,381,750
Santa Fe Energy Resources, Inc. (a) 20,800 305,500
Sun Co., Inc. 15,200 471,200
Texaco, Inc. 55,400 6,024,750
SHARES VALUE (NOTE 1)
USX-Marathon Group 60,100 $ 1,735,388
Union Pacific Resources Group, Inc. 52,212 1,298,774
Unocal Corp. 52,488 2,037,191
114,193,204
TOTAL ENERGY 127,247,774
FINANCE - 14.3%
BANKS - 6.6%
Banc One Corp. 114,726 5,557,041
Bank of New York Co., Inc. 82,000 3,567,000
BankBoston Corp. 32,091 2,312,558
BankAmerica Corp. 150,000 9,684,375
Bankers Trust New York Corp. 17,200 1,496,400
Barnett Banks, Inc. 43,600 2,289,000
Chase Manhattan Corp. 91,773 8,907,717
Citicorp 96,862 11,677,925
Comerica, Inc. 22,400 1,523,200
CoreStates Financial Corp. 46,700 2,510,125
Fifth Third Bancorp 22,100 1,813,581
First Bank System, Inc. 28,200 2,407,575
First Union Corp. 59,781 5,529,743
KeyCorp 47,107 2,632,104
Mellon Bank Corp. 54,100 2,441,263
Morgan (J.P.) & Co., Inc. 38,700 4,039,313
National City Corp. 46,780 2,455,950
NationsBank Corp. 152,946 9,865,017
Norwest Corp. 77,600 4,365,000
PNC Financial Corp. 70,300 2,926,238
Republic New York Corp. 11,500 1,236,250
SunTrust Banks, Inc. 46,600 2,565,913
U.S. Bancorp 31,700 2,032,763
Wachovia Corp. 34,500 2,011,781
Wells Fargo & Co. 19,300 5,201,350
101,049,182
CREDIT & OTHER FINANCE - 1.5%
American Express Co. 99,079 7,381,386
Beneficial Corp. 11,400 810,113
Countrywide Credit Industries, Inc. 20,400 636,225
First Chicago NBD Corp. 66,659 4,032,870
Fleet Financial Group, Inc. 50,874 3,217,781
Green Tree Financial Corp. 28,700 1,022,438
Household International, Inc. 20,210 2,373,412
MBNA Corp. 70,000 2,563,750
Transamerica Corp. 13,929 1,303,232
23,341,207
FEDERAL SPONSORED CREDIT - 1.0%
Federal Home Loan
Mortgage Corporation 149,600 5,142,500
Federal National
Mortgage Association 228,600 9,972,675
15,115,175
INSURANCE - 4.2%
Aegon NV (Reg.) 7,906 553,914
Aetna, Inc. 31,500 3,224,813
Allstate Corp. 93,121 6,797,833
American General Corp. 50,552 2,413,858
American International Group, Inc. 98,175 14,664,891
Aon Corp. 34,050 1,762,088
CIGNA Corp. 15,800 2,804,500
Chubb Corp. (The) 36,500 2,440,938
Conseco, Inc. 40,000 1,480,000
General Re Corp. 17,300 3,148,600
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
INSURANCE - CONTINUED
Hartford Financial Services
Group, Inc. 24,500 $ 2,027,375
Jefferson Pilot Corp. 14,900 1,041,138
Lincoln National Corp. 21,900 1,409,813
Loews Corp. 24,000 2,403,000
MBIA, Inc. 2,800 315,875
MGIC Investment Corp. 24,600 1,179,263
Marsh & McLennan Companies, Inc. 30,200 2,155,525
Providian Financial Corp. (a) 19,700 632,863
SAFECO Corp. 26,300 1,227,881
St. Paul Companies, Inc. (The) 17,300 1,319,125
Torchmark Corp. 14,800 1,054,500
Travelers Group, Inc. (The) 133,800 8,437,763
UNUM Corp. 30,700 1,289,400
USF&G Corp. 24,300 583,200
64,368,156
SAVINGS & LOANS - 0.2%
Ahmanson (H.F.) & Co. 22,000 946,000
Golden West Financial Corp. 11,900 833,000
Great Western Financial Corp. 28,750 1,545,313
3,324,313
SECURITIES INDUSTRY - 0.8%
Merrill Lynch & Co., Inc. 69,000 4,114,125
Morgan Stanley Dean Witter Discover
and Co. 119,856 5,161,299
Salomon, Inc. 22,900 1,273,813
Schwab (Charles) Corp. 36,600 1,489,163
12,038,400
TOTAL FINANCE 219,236,433
HEALTH - 10.7%
DRUGS & PHARMACEUTICALS - 6.9%
ALZA Corp. Class A (a) 17,600 510,400
Allergan, Inc. 13,700 435,831
American Home Products Corp. 133,700 10,228,050
Amgen, Inc. 55,400 3,220,125
Bristol-Myers Squibb Co. 209,700 16,985,700
Lilly (Eli) & Co. 115,396 12,614,225
Merck & Co., Inc. 252,200 26,102,700
Pfizer, Inc. 135,000 16,132,500
Pharmacia & Upjohn, Inc. 106,260 3,692,535
Schering-Plough Corp. 154,700 7,406,263
Sigma Aldrich Corp. 21,000 736,313
Warner-Lambert Co. 56,700 7,044,975
105,109,617
MEDICAL EQUIPMENT & SUPPLIES - 3.0%
Abbott Laboratories 162,500 10,846,875
Bard (C.R.), Inc. 12,000 435,750
Bausch & Lomb, Inc. 11,700 551,363
Baxter International, Inc. 57,200 2,988,700
Becton, Dickinson & Co. 25,800 1,306,125
Biomet, Inc. 24,000 447,000
Boston Scientific Corp. (a) 40,500 2,488,219
Cardinal Health, Inc. 22,700 1,299,575
Guidant Corp. 15,600 1,326,000
Johnson & Johnson 278,800 17,947,750
Mallinckrodt, Inc. 15,400 585,200
Medtronic, Inc. 50,300 4,074,300
Millipore Corp. 9,000 396,000
SHARES VALUE (NOTE 1)
Pall Corp. 26,400 $ 613,800
St. Jude Medical, Inc. (a) 19,050 742,950
U.S. Surgical Corp. 14,600 543,850
46,593,457
MEDICAL FACILITIES MANAGEMENT - 0.8%
Beverly Enterprises, Inc. (a) 20,700 336,375
Columbia/HCA Healthcare Corp. 140,412 5,519,947
HEALTHSOUTH Rehabilitation Corp. (a) 66,000 1,645,875
Humana, Inc. (a) 34,100 788,563
Manor Care, Inc. 13,200 430,650
Tenet Healthcare Corp. (a) 63,100 1,865,394
United HealthCare Corp. 38,600 2,007,200
12,594,004
TOTAL HEALTH 164,297,078
HOLDING COMPANIES - 0.2%
CINergy Corp. 32,913 1,145,784
Norfolk Southern Corp. 26,100 2,629,575
3,775,359
INDUSTRIAL MACHINERY & EQUIPMENT - 5.6%
ELECTRICAL EQUIPMENT - 3.8%
Emerson Electric Co. 93,500 5,148,344
General Electric Co. 689,200 45,056,450
General Instrument Corp. (a) 28,600 715,000
General Signal Corp. 10,500 458,063
Grainger (W.W.), Inc. 11,200 875,700
Harris Corp. 8,100 680,400
Honeywell, Inc. 26,600 2,018,275
Scientific-Atlanta, Inc. 16,100 352,188
Westinghouse Electric Corp. 132,950 3,074,469
58,378,889
INDUSTRIAL MACHINERY & EQUIPMENT - 1.5%
Briggs & Stratton Corp. 5,400 270,000
Case Corp. 15,300 1,053,788
Caterpillar, Inc. 40,000 4,295,000
Cincinnati Milacron, Inc. 8,400 217,875
Cooper Industries, Inc. 24,646 1,226,139
Deere & Co. 53,500 2,935,813
Dover Corp. 23,600 1,451,400
Giddings & Lewis, Inc. 7,000 146,125
Harnischfeger Industries, Inc. 10,200 423,300
Illinois Tool Works, Inc. 51,900 2,591,756
Ingersoll-Rand Co. 23,000 1,420,250
Parker-Hannifin Corp. 15,650 949,759
Stanley Works 15,600 624,000
Tenneco, Inc. 35,800 1,617,713
Timken Co. 13,222 470,207
Tyco International Ltd. 34,800 2,420,775
22,113,900
POLLUTION CONTROL - 0.3%
Browning-Ferris Industries, Inc. 44,500 1,479,625
Safety Kleen Corp. 12,100 204,188
Waste Management, Inc. 94,900 3,048,663
4,732,476
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 85,225,265
MEDIA & LEISURE - 3.6%
BROADCASTING - 0.5%
TCI Group Class A (a) 138,900 2,066,138
Time Warner, Inc. 119,102 5,746,672
7,812,810
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - CONTINUED
ENTERTAINMENT - 0.9%
Disney (Walt) Co. 141,200 $ 11,331,300
King World Productions, Inc. 7,900 276,500
Viacom, Inc. Class B (non-vtg.) (a) 74,100 2,223,000
13,830,800
LEISURE DURABLES & TOYS - 0.2%
Brunswick Corp. 20,500 640,625
Hasbro, Inc. 27,150 770,381
Mattel, Inc. 60,376 2,045,237
3,456,243
LODGING & GAMING - 0.5%
HFS, Inc. (a) 32,900 1,908,200
Harrah's Entertainment, Inc. (a) 21,600 394,200
Hilton Hotels Corp. 51,800 1,375,938
ITT Corp. (a) 24,300 1,483,819
Marriott International, Inc. 26,700 1,638,713
6,800,870
PUBLISHING - 1.0%
American Greetings Corp. Class A 15,600 579,150
Cognizant Corp. 35,700 1,445,850
Dow Jones & Co., Inc. 20,300 815,806
Gannett Co., Inc. 29,400 2,903,250
Harcourt General, Inc. 14,800 704,850
Knight-Ridder, Inc. 19,700 966,531
McGraw-Hill, Inc. 20,900 1,229,181
Meredith Corp. 11,300 327,700
New York Times Co. (The) Class A 20,300 1,004,850
Times Mirror Co. Class A 19,500 1,077,375
Tribune Co. 25,700 1,235,206
U.S. West Media Group (a) 130,800 2,648,700
14,938,449
RESTAURANTS - 0.5%
Darden Restaurants, Inc. 33,400 302,688
McDonald's Corp. 146,100 7,058,456
Wendy's International, Inc. 27,000 700,313
8,061,457
TOTAL MEDIA & LEISURE 54,900,629
NONDURABLES - 10.8%
AGRICULTURE - 0.1%
Pioneer Hi-Bred International, Inc. 17,300 1,384,000
BEVERAGES - 3.7%
Anheuser-Busch Companies, Inc. 104,400 4,378,275
Brown-Forman Corp. Class B 14,500 707,781
Coca-Cola Co. (The) 520,800 35,154,000
Coors (Adolph) Co. Class B 8,000 213,000
PepsiCo, Inc. 325,200 12,215,325
Seagram Co. Ltd. 77,500 3,115,380
Whitman Corp. 21,800 551,813
56,335,574
FOODS - 2.3%
Archer-Daniels-Midland Co. 113,754 2,673,219
CPC International, Inc. 30,000 2,769,375
Campbell Soup Co. 97,700 4,885,000
ConAgra, Inc. 50,300 3,225,488
General Mills, Inc. 33,700 2,194,713
Heinz (H.J.) Co. 77,150 3,558,544
Hershey Foods Corp. 32,200 1,781,063
Kellogg Co. 44,200 3,784,625
Quaker Oats Co. 28,500 1,278,938
SHARES VALUE (NOTE 1)
Ralston Purina Co. 22,200 $ 1,824,563
Sara Lee Corp. 100,600 4,187,475
Sysco Corp. 36,900 1,346,850
Wrigley (Wm.) Jr. Co. 24,400 1,634,800
35,144,653
HOUSEHOLD PRODUCTS - 3.1%
Alberto Culver Co. Class B 11,600 324,800
Avon Products, Inc. 27,900 1,968,694
Clorox Co. 10,900 1,438,800
Colgate-Palmolive Co. 61,400 4,006,350
Gillette Co. 116,200 11,009,950
International Flavors & Fragrances, Inc. 23,000 1,161,500
Procter & Gamble Co. 142,100 20,071,625
Rubbermaid, Inc. 31,400 934,150
Unilever NV ADR 33,400 7,149,688
48,065,557
TOBACCO - 1.6%
Fortune Brands, Inc. 35,700 1,332,056
Philip Morris Companies, Inc. 511,400 22,693,375
UST, Inc. 38,900 1,079,475
25,104,906
TOTAL NONDURABLES 166,034,690
PRECIOUS METALS - 0.3%
Barrick Gold Corp. 74,800 1,628,030
Battle Mountain Gold Co. 47,100 267,881
Echo Bay Mines Ltd. 29,200 162,851
Homestake Mining Co. 30,600 399,713
Newmont Mining Corp. 32,565 1,270,035
Placer Dome, Inc. 50,200 814,457
4,542,967
RETAIL & WHOLESALE - 4.4%
APPAREL STORES - 0.3%
Charming Shoppes, Inc. (a) 22,000 114,813
Gap, Inc. 58,500 2,274,188
Limited, Inc. (The) 56,819 1,150,585
TJX Companies, Inc. 32,400 854,550
4,394,136
DRUG STORES - 0.4%
CVS Corp. 34,800 1,783,500
Long Drug Stores, Inc. 8,100 212,119
Rite Aid Corp. 25,700 1,281,788
Walgreen Co. 51,600 2,767,050
6,044,457
GENERAL MERCHANDISE STORES - 2.3%
Costco Companies, Inc. (a) 43,839 1,441,207
Dayton Hudson Corp. 45,300 2,409,394
Dillards, Inc. Class A 23,700 820,613
Federated Department Stores, Inc. (a) 43,600 1,515,100
K mart Corp. (a) 101,300 1,240,925
May Department Stores Co. (The) 51,200 2,419,200
Mercantile Stores Co., Inc. 7,800 490,913
Nordstrom, Inc. 16,700 819,344
Penney J C Co., Inc. 51,600 2,692,875
Sears, Roebuck & Co. 82,000 4,407,500
Wal-Mart Stores, Inc. 480,000 16,230,000
Woolworth Corp. (a) 28,100 674,400
35,161,471
GROCERY STORES - 0.5%
Albertson's, Inc. 52,600 1,919,900
American Stores Co. 30,600 1,510,875
Fleming Companies, Inc. 7,988 143,784
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
GROCERY STORES - CONTINUED
Giant Food, Inc. Class A 12,600 $ 407,925
Great Atlantic & Pacific Tea Co., Inc. 7,900 214,781
Kroger Co. (The) (a) 52,700 1,528,300
Supervalu, Inc. 14,100 486,450
Winn-Dixie Stores, Inc. 31,500 1,173,375
7,385,390
RETAIL & WHOLESALE, MISCELLANEOUS - 0.9%
Circuit City Stores, Inc. -
Circuit City Group 16,600 590,338
Comcast Corp. Class A special 68,250 1,458,844
Home Depot, Inc. (The) 100,600 6,935,113
IKON Office Solutions, Inc. 28,100 700,744
Lowe's Companies, Inc. 36,300 1,347,638
Tandy Corp. 12,100 677,600
Toys "R" Us, Inc. (a) 60,700 2,124,500
13,834,777
TOTAL RETAIL & WHOLESALE 66,820,231
SERVICES - 0.5%
ADVERTISING - 0.1%
Interpublic Group of Companies, Inc. 16,900 1,036,181
LEASING & RENTAL - 0.0%
Ryder Systems, Inc. 15,800 521,400
PRINTING - 0.1%
Deluxe Corp. 17,300 590,363
Donnelley (R.R.) & Sons Co. 31,500 1,153,688
Harland (John H.) Co. 6,400 146,000
Moore Corporation Ltd. 18,400 362,496
2,252,547
SERVICES - 0.3%
Block (H&R), Inc. 21,700 699,825
Dun & Bradstreet Corp. 35,700 937,125
Ecolab, Inc. 13,600 649,400
Jostens, Inc. 8,000 211,000
National Service Industries, Inc. 9,400 457,663
Service Corp. International 49,400 1,624,025
4,579,038
TOTAL SERVICES 8,389,166
TECHNOLOGY - 13.3%
COMMUNICATIONS EQUIPMENT - 2.0%
Andrew Corp. (a) 19,112 537,525
Cabletron Systems, Inc. (a) 32,700 925,819
Cisco Systems, Inc. (a) 137,500 9,229,688
DSC Communications Corp. (a) 24,600 547,350
Lucent Technologies, Inc. 133,484 9,619,191
Northern Telecom Ltd. 54,000 4,867,490
Tellabs, Inc. (a) 37,600 2,100,900
3Com Corp. (a) 66,800 3,006,000
30,833,963
COMPUTER SERVICES & SOFTWARE - 3.8%
Adobe Systems, Inc. 15,100 529,444
Autodesk, Inc. 9,900 379,294
Automatic Data Processing, Inc. 61,200 2,876,400
CUC International, Inc. (a) 83,075 2,144,373
Ceridian Corp. (a) 16,900 714,025
Computer Associates International, Inc. 76,075 4,236,427
Computer Sciences Corp. (a) 16,100 1,161,213
Equifax, Inc. 31,600 1,175,125
First Data Corp. 93,600 4,112,550
SHARES VALUE (NOTE 1)
Microsoft Corp. (a) 251,700 $ 31,808,588
Novell, Inc. (a) 72,500 502,969
Oracle Systems Corp. (a) 141,400 7,123,025
Parametric Technology Corp. (a) 26,600 1,132,163
Shared Medical Systems Corp. 5,000 270,000
58,165,596
COMPUTERS & OFFICE EQUIPMENT - 3.9%
Amdahl Corp. (a) 25,300 221,375
Apple Computer, Inc. (a) 26,000 370,500
Bay Networks, Inc. (a) 41,200 1,094,375
Compaq Computer Corp. (a) 56,600 5,617,550
Data General Corp. (a) 8,300 215,800
Dell Computer Corp. (a) 36,700 4,309,956
Digital Equipment Corp. (a) 33,000 1,169,438
EMC Corp. (a) 51,500 2,008,500
Hewlett-Packard Co. 212,300 11,888,800
Intergraph Corp. (a) 10,000 85,000
International Business Machines Corp. 216,700 19,543,631
Pitney Bowes, Inc. 31,000 2,154,500
Seagate Technology (a) 51,800 1,822,713
Silicon Graphics, Inc. (a) 37,000 555,000
Sun Microsystems, Inc. (a) 77,100 2,869,566
Tandem Computers, Inc. (a) 24,800 502,200
Unisys Corp. (a) 36,500 278,313
Xerox Corp. 68,000 5,363,500
60,070,717
ELECTRONIC INSTRUMENTS - 0.3%
Applied Materials, Inc. (a) 37,800 2,676,713
Perkin-Elmer Corp. 9,200 731,975
Tektronix, Inc. 7,000 420,000
Thermo Electron Corp. (a) 31,300 1,064,200
4,892,888
ELECTRONICS - 2.9%
AMP, Inc. 45,896 1,916,158
Advanced Micro Devices, Inc. (a) 28,500 1,026,000
Intel Corp. 171,800 24,363,388
LSI Logic Corp. (a) 29,300 937,600
Micron Technology, Inc. 43,900 1,753,256
Motorola, Inc. 124,000 9,424,000
National Semiconductor Corp. (a) 29,300 897,313
Texas Instruments, Inc. 39,900 3,354,094
Thomas & Betts Corp. 11,200 588,700
44,260,509
PHOTOGRAPHIC EQUIPMENT - 0.4%
Eastman Kodak Co. 69,800 5,357,150
Polaroid Corp. 9,600 532,800
5,889,950
TOTAL TECHNOLOGY 204,113,623
TRANSPORTATION - 1.1%
AIR TRANSPORTATION - 0.3%
AMR Corp. (a) 19,100 1,766,750
Delta Air Lines, Inc. 15,400 1,262,800
Southwest Airlines Co. 30,300 784,013
US Airways Group, Inc. (a) 16,400 574,000
4,387,563
RAILROADS - 0.6%
Burlington Northern Santa Fe Corp. 31,918 2,868,630
CSX Corp. 45,338 2,516,259
Union Pacific Corp. 51,300 3,616,650
9,001,539
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TRANSPORTATION - CONTINUED
TRUCKING & FREIGHT - 0.2%
Caliber System, Inc. 8,100 $ 301,725
Federal Express Corp. (a) 23,800 1,374,450
Laidlaw, Inc. Class B 65,800 907,898
2,584,073
TOTAL TRANSPORTATION 15,973,175
UTILITIES - 8.5%
CELLULAR - 0.2%
AirTouch Communications, Inc. (a) 105,000 2,874,375
ELECTRIC UTILITY - 2.2%
American Electric Power Co., Inc. 39,300 1,650,600
Baltimore Gas & Electric Co. 30,800 821,975
Carolina Power & Light Co. 31,600 1,133,650
Central & South West Corp. 44,200 939,250
Consolidated Edison Co. of
New York, Inc. 49,100 1,445,381
DTE Energy Co. 30,300 837,038
Dominion Resources, Inc. 37,800 1,384,425
Duke Power Co. 75,207 3,605,236
Edison International 90,600 2,253,675
Entergy Corp. 48,400 1,324,950
FPL Group, Inc. 38,200 1,759,588
GPU, Inc. 25,300 907,638
Houston Industries, Inc. 49,000 1,050,438
Niagara Mohawk Power Corp. (a) 30,300 259,444
Northern States Power Co. 14,400 745,200
Ohio Edison Co. 32,000 698,000
PECO Energy Co. 46,500 976,500
PG&E Corp. 86,200 2,090,350
PP&L Resources, Inc. 33,900 675,881
PacifiCorp. 61,600 1,355,200
Public Service Enterprise Group, Inc. 50,000 1,250,000
Southern Co. 140,900 3,082,188
Texas Utilities Co. 47,100 1,622,006
Unicom Corp. 45,200 1,005,700
Union Electric Co. 21,300 802,744
33,677,057
GAS - 0.6%
Columbia Gas System, Inc. (The) 11,500 750,375
Consolidated Natural Gas Co. 19,900 1,070,869
ENSERCH Corp. 14,500 322,625
Eastern Enterprises Co. 4,200 145,688
Enron Corp. 53,200 2,171,225
NICOR, Inc. 10,500 376,688
Noram Energy Corp. 28,679 437,355
ONEOK, Inc. 5,789 186,333
Pacific Enterprises 17,700 595,163
Peoples Energy Corp. 7,400 277,038
Sonat, Inc. 18,100 927,625
Williams Companies, Inc. 32,950 1,441,563
8,702,547
TELEPHONE SERVICES - 5.5%
ALLTEL Corp. 39,100 1,307,406
AT&T Corp. 339,000 11,886,188
Ameritech Corp. 114,900 7,806,019
Bell Atlantic Corp. 91,700 6,957,738
BellSouth Corp. 207,500 9,622,813
Frontier Corp. 34,300 683,856
GTE Corp. 201,200 8,827,650
MCI Communications Corp. 143,400 5,489,531
NYNEX Corp. 92,000 5,301,500
SHARES VALUE (NOTE 1)
SBC Communications, Inc. 191,824 $ 11,869,110
Sprint Corp. 90,000 4,736,250
U.S. West Communications Group 100,400 3,783,825
WorldCom, Inc. (a) 181,100 5,795,200
84,067,086
TOTAL UTILITIES 129,321,065
TOTAL COMMON STOCKS
(Cost $1,138,887,654) 1,424,476,773
U.S. TREASURY OBLIGATIONS - 0.3%
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
U.S. Treasury Bills, yields at dates
of purchase 5.11% to 5.28%,
8/07/97 to 1/08/98 (b)
(Cost $3,973,818) $ 4,050,000 3,973,818
CASH EQUIVALENTS - 6.7%
MATURITY VALUE
AMOUNT (NOTE 1)
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 5.93%, dated
6/30/97 due 7/1/97 $ 103,083,977 103,067,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $1,245,928,472) $ 1,531,517,591
FUTURES CONTRACTS
EXPIRATION UNDERLYING FACE UNREALIZED
DATE AMOUNT AT VALUE GAIN/(LOSS)
PURCHASED
239 S&P 500 Index Contracts Sept. 1997 $106,384,623 $(54,809)
THE FACE VALUE OF FUTURES PURCHASED AS A PERCENTAGE OF TOTAL INVESTMENTS -
6.9%
LEGEND
(a) Non-income producing
(b) Security was pledged to cover margin requirements for futures
contracts. At the period end, the value of securities pledged amounted to
$3,973,818.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $494,675,041 and $5,220,911, respectively.
The market value of futures contracts opened and closed during the period
amounted to $543,582,086 and $529,220,148 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 $63 for the period (see
Note 4 of Notes to Financial Statements).
INCOME TAX INFORMATION
At June 30, 1997 the aggregate cost of investment securities for income tax
purposes was $1,245,928,472. Net unrealized appreciation aggregated
$285,589,119, of which $300,312,750 related to appreciated investment
securities and $14,723,631 related to depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in $ 1,531,517,591
securities, at value
(including
repurchase
agreements of
$103,067,000) (cost
$1,245,928,472) -
See accompanying
schedule
Cash 105
Receivable for fund 5,931,316
shares sold
Dividends receivable 1,629,782
Other receivables 3,346
TOTAL ASSETS 1,539,082,140
LIABILITIES
Payable for $ 1,257,374
investments
purchased
Payable for fund 979,674
shares redeemed
Accrued management 188,667
fee
Payable for daily 792,556
variation on
futures contracts
Other payables and 172,255
accrued expenses
TOTAL LIABILITIES 3,390,526
NET ASSETS $ 1,535,691,614
Net Assets consist of:
Paid in capital $ 1,226,167,647
Undistributed net 10,647,945
investment income
Accumulated 13,341,727
undistributed net
realized gain (loss)
on investments and
foreign currency
transactions
Net unrealized 285,534,295
appreciation
(depreciation) on
investments
and assets and
liabilities in
foreign currencies
NET ASSETS, for $ 1,535,691,614
14,820,532
shares outstanding
NET ASSET VALUE, $103.62
offering price
and redemption
price per share
($1,535,691,614 (divided by)
14,820,532 shares)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $ 9,963,719
Dividends
Interest 2,280,379
TOTAL INCOME 12,244,098
EXPENSES
Management fee $ 1,607,543
Transfer agent fees 426,756
Accounting fees and 247,982
expenses
Non-interested 2,305
trustees'
compensation
Custodian fees and 25,316
expenses
Registration fees 8,223
Audit 26,892
Legal 1,004
Miscellaneous 13,097
Total expenses 2,359,118
before reductions
Expense reductions (771,246 1,587,872
)
NET INVESTMENT 10,656,226
INCOME
REALIZED AND
UNREALIZED GAIN
(LOSS)
Net realized gain
(loss) on:
Investment 1,026,442
securities
Foreign currency (17
transactions )
Futures contracts 11,550,416 12,576,841
Change in net
unrealized
appreciation
(depreciation) on:
Investment 190,817,156
securities
Assets and 25
liabilities in
foreign currencies
Futures contracts 810,769 191,627,950
NET GAIN (LOSS) 204,204,791
NET INCREASE $ 214,861,017
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
OTHER INFORMATION $ 23,179
Expense reductions
Directed
brokerage
arrangements
Custodian credits 629
FMR 747,438
reimbursement
$ 771,246
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) SIX MONTHS YEAR ENDED
IN NET ASSETS ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED)
Operations $ 10,656,226 $ 10,838,949
Net investment
income
Net realized gain 12,576,841 22,654,377
(loss)
Change in net 191,627,950 68,025,688
unrealized
appreciation
(depreciation)
NET INCREASE 214,861,017 101,519,014
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
Distributions to (10,847,444) (3,387,922
shareholders )
From net
investment income
From net realized (22,010,833) (8,711,800
gain )
TOTAL DISTRIBUTIONS (32,858,277) (12,099,722
)
Share transactions 621,256,178 568,794,744
Net proceeds from
sales of shares
Reinvestment of 32,858,277 12,099,722
distributions
Cost of shares (123,668,266) (92,770,768
redeemed )
NET INCREASE 530,446,189 488,123,698
(DECREASE) IN NET
ASSETS RESULTING
FROM SHARE
TRANSACTIONS
TOTAL INCREASE 712,448,929 577,542,990
(DECREASE) IN NET
ASSETS
NET ASSETS
Beginning of period 823,242,685 245,699,695
End of period $ 1,535,691,614 $ 823,242,685
(including
undistributed net
investment
income of
$10,647,945 and
$10,839,163,
respectively)
OTHER INFORMATION
Shares
Sold 6,545,398 6,984,700
Issued in 357,466 161,200
reinvestment of
distributions
Redeemed (1,326,621) (1,146,896
)
Net increase 5,576,243 5,999,004
(decrease)
<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> <C>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, AUGUST 27, 1992
JUNE 30, 1997 (COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31,
SELECTED PER-SHARE (UNAUDITED) 1996 1995 1994 1993 E 1992
DATA
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Net asset value, $ 89.05 $ 75.71 $ 56.22 $ 55.74 $ 52.60 $ 50.00
beginning of period
Income from
Investment
Operations
Net investment .87 D 1.04 .85 1.14 1.31 .44
income
Net realized and 16.82 15.55 19.72 (.56) 3.80 2.71
unrealized gain
(loss)
Total from 17.69 16.59 20.57 .58 5.11 3.15
investment
operations
Less Distributions
From net (1.03) (.91) (.95) - (1.28) (.47)
investment income
From net realized (2.09) (2.34) (.11) (.10) (.60) (.08)
gain
In excess of net - - (.02) - (.09) -
realized gain
Total distributions (3.12) (3.25) (1.08) (.10) (1.97) (.55)
Net asset value, end $ 103.62 $ 89.05 $ 75.71 $ 56.22 $ 55.74 $ 52.60
of period
TOTAL RETURN B, C 20.31% 22.71% 37.19% 1.04% 9.74% 6.31%
RATIOS AND
SUPPLEMENTAL
DATA
Net assets, end of $ 1,535,692 $ 823,243 $ 245,700 $ 51,301 $ 25,153 $ 17,961
period (000
omitted)
Ratio of expenses to .28% A, .28% F .28% F .28% F .28% F .28% A,
average net assets F F
Ratio of net 1.88% A 2.26% 2.70% 2.81% 2.65% 2.89% A
investment income
to average net
assets
Portfolio turnover rate 1% A 14% 16% 2% 9% 0%
Average commission $ .0322 $ .0315
rate G
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR
ARE NOT ANNUALIZED AND 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 NET INVESTMENT
INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES
OUTSTANDING DURING THE
PERIOD. E 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. F 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). G 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>
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES 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 JUNE 30, 1997 PAST 1 LIFE OF
YEAR FUND
GROWTH OPPORTUNITIES 29.02% 26.86%
S&P 500(registered trademark) 34.70% 33.11%
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.
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.
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 long-term growth and short-term
volatility. 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 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
1987/06/30 10000.00 10000.00
1987/07/31 10400.00 10507.00
1987/08/31 10710.20 10898.91
1987/09/30 10587.76 10660.22
1987/10/31 8261.22 8364.01
1987/11/30 7681.63 7674.82
1987/12/31 8473.47 8258.87
1988/01/31 8657.31 8606.57
1988/02/29 9359.26 9007.64
1988/03/31 9275.69 8729.30
1988/04/30 9392.68 8826.20
1988/05/31 9309.12 8902.98
1988/06/30 9777.08 9311.63
1988/07/31 9726.94 9276.25
1988/08/31 9492.96 8960.85
1988/09/30 9760.37 9342.59
1988/10/31 9785.44 9602.31
1988/11/30 9693.52 9465.00
1988/12/31 9793.79 9630.63
1989/01/31 10495.74 10335.60
1989/02/28 10278.47 10078.24
1989/03/31 10589.20 10313.06
1989/04/30 11149.21 10848.31
1989/05/31 11548.00 11287.67
1989/06/30 11395.27 11223.33
1989/07/31 12413.46 12236.79
1989/08/31 12625.58 12476.64
1989/09/30 12735.89 12425.48
1989/10/31 12379.52 12137.21
1989/11/30 12583.16 12384.81
1989/12/31 12880.13 12682.05
1990/01/31 12133.46 11831.08
1990/02/28 12249.36 11983.70
1990/03/31 12399.06 12301.27
1990/04/30 12038.01 11993.74
1990/05/31 13103.55 13163.13
1990/06/30 13376.54 13073.62
1990/07/31 13165.20 13031.78
1990/08/31 11809.05 11853.71
1990/09/30 10593.80 11276.43
1990/10/31 10215.14 11227.94
1990/11/30 11042.91 11953.27
1990/12/31 11368.74 12286.77
1991/01/31 12126.07 12822.47
1991/02/28 13030.73 13739.28
1991/03/31 13423.97 14071.77
1991/04/30 13298.85 14105.54
1991/05/31 14085.34 14714.90
1991/06/30 13039.67 14040.96
1991/07/31 14281.96 14695.26
1991/08/31 14916.52 15043.54
1991/09/30 15032.71 14792.31
1991/10/31 15497.45 14990.53
1991/11/30 14612.65 14386.41
1991/12/31 16543.13 16032.22
1992/01/31 17553.05 15734.02
1992/02/29 17920.26 15938.56
1992/03/31 16821.98 15627.76
1992/04/30 16163.01 16087.22
1992/05/31 16025.73 16166.04
1992/06/30 15403.37 15925.17
1992/07/31 15998.27 16576.51
1992/08/31 15558.96 16236.69
1992/09/30 15833.53 16428.28
1992/10/31 16446.73 16485.78
1992/11/30 17545.01 17047.95
1992/12/31 18085.00 17257.64
1993/01/31 18441.94 17402.60
1993/02/28 18061.76 17639.28
1993/03/31 18781.98 18011.46
1993/04/30 18585.56 17575.59
1993/05/31 19969.89 18046.61
1993/06/30 20175.67 18098.95
1993/07/31 20119.55 18026.55
1993/08/31 21129.73 18709.76
1993/09/30 21522.58 18565.69
1993/10/31 21728.36 18950.00
1993/11/30 20849.13 18769.98
1993/12/31 21588.06 18997.10
1994/01/31 22130.57 19643.00
1994/02/28 21902.31 19110.67
1994/03/31 20907.20 18277.45
1994/04/30 21036.57 18511.40
1994/05/31 20548.96 18814.98
1994/06/30 19504.10 18354.02
1994/07/31 20180.77 18956.03
1994/08/31 21325.15 19733.23
1994/09/30 21066.42 19249.76
1994/10/31 21922.21 19682.88
1994/11/30 21046.52 18966.03
1994/12/31 21583.88 19247.30
1995/01/31 21175.88 19746.38
1995/02/28 22052.83 20515.90
1995/03/31 22853.30 21121.32
1995/04/30 23623.75 21743.34
1995/05/31 24544.28 22612.42
1995/06/30 26715.55 23137.71
1995/07/31 29357.09 23904.96
1995/08/31 29717.30 23964.96
1995/09/30 30487.74 24976.28
1995/10/31 30177.56 24887.12
1995/11/30 30157.55 25979.66
1995/12/31 29217.00 26480.03
1996/01/31 29677.27 27381.41
1996/02/29 30672.28 27635.23
1996/03/31 30790.66 27901.36
1996/04/30 31996.03 28312.63
1996/05/31 32996.92 29042.81
1996/06/30 32351.18 29153.46
1996/07/31 29875.88 27865.46
1996/08/31 30769.14 28453.15
1996/09/30 32835.48 30054.49
1996/10/31 32760.15 30883.39
1996/11/30 34578.96 33217.87
1996/12/31 33513.50 32559.82
1997/01/31 35439.94 34594.16
1997/02/28 34634.29 34865.38
1997/03/31 32693.44 33432.76
1997/04/30 34266.20 35428.69
1997/05/31 36642.08 37585.59
1997/06/30 38147.92 39269.43
Let's say hypothetically that $10,000 was invested in Growth Opportunities
Portfolio on January 3, 1995, when the fund started. As the chart shows, by
June 30, 1997, the value of the investment would have grown to $18,095 - a
80.95% increase on the initial investment. For comparison, look at how the
S&P 500 did over the same period. With dividends and capital gains, if any,
reinvested, the same $10,000 investment would have grown to $20,400 - a
104.00% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Philip Morris Companies, Inc. 5.9
Federal National Mortgage Association 4.6
Federal Home Loan Mortgage Corporation 2.9
International Business Machines Corp. 2.4
General Motors Corp. 2.4
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Finance 16.5
Technology 13.8
Retail & Wholesale 7.1
Nondurables 7.0
Energy 6.8
ASSET ALLOCATION AS OF JUNE 30, 1997*
Row: 1, Col: 1, Value: 6.0
Row: 1, Col: 2, Value: 12.0
Row: 1, Col: 3, Value: 82.0
Stocks 82.0%
Bonds 12.0%
Short-term investments 6.0%
FOREIGN INVESTMENTS 8.0%
*
% OF FUND'S
INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with George Vanderheiden, Portfolio Manager of Growth
Opportunities Portfolio
Q. HOW DID THE FUND PERFORM, GEORGE?
A. For the six- and 12-month periods that ended June 30, 1997, the fund
underperformed the Standard & Poor's 500 Index, which rose 20.61% for the
six-month period and 34.70% for the 12-month period.
Q. WHY DID THE FUND'S RETURN TRAIL THE S&P 500 DURING THE PERIOD?
A. Much of the fund's underperformance relative to the S&P 500 can be
traced to asset allocation. Over the six-month period, the fund had an
average of 13% of assets in Treasury bonds and 4% of assets in cash. This
total of 17% of assets appreciated only about 1% during the period.
Conversely, the other 83% in stocks was up about 18%, close to the S&P 500
gain.
Q. THE ECONOMY STRENGTHENED IN THE FIRST HALF OF 1997 AND YOU STILL OWNED
BONDS. WHY?
A. Bonds were purchased originally as a short-term tactical move to hedge
against slowing corporate earnings growth in 1996. Earnings growth did slow
as I expected in 1996, but the stock market did not correct as it has done
in the past. However, with Treasury bond yields at 3.5-times the yield on
the S&P 500, I considered bonds a good safety cushion in an expensive
market.
Q. WHAT IS YOUR POSITION ON TOBACCO STOCKS?
A. I own the tobacco stocks because they operate a profitable business that
historically has offered above-average returns to shareholders over the
long term. In the past, the stocks have provided better-than-average
earnings growth, lower-than-average price-to-earnings ratios and high
yields. Nothing this year has changed that. We have determined that the
tobacco stocks are selling at a "litigation discount" far in excess of any
reasonable estimate of potential liabilities. The cost of the proposed
settlement is high, but should be completely passed along to consumers.
Q. WHY ARE STOCK VALUATIONS SO HIGH AND DO YOU THINK THEY WILL STAY
INFLATED?
A. We had a near perfect investing environment during the period -
experiencing growth without inflation. Accelerating inflation is usually a
killer of all bond and equity bull markets, but inflation just keeps
receding as the economic expansion continues. During the worst bear market
I ever encountered - the 1973-1974 bear that took prices down about 50% -
everything that could go wrong did go wrong. Today is an environment where
everything that could go right has gone right - from a declining budget
deficit, to falling inflation, to surging earnings, to big flows into
mutual funds and rising consumer confidence. If any of these factors change
for the worse, valuations will deflate. My biggest concern going forward is
that the low level of inflation and pricing power in a strong economy will
deteriorate to deflation in a slowing or contracting economy, thereby
leading to sizable earnings declines.
Q. HOW DID YOU MANAGE IN A LOW-INFLATION ENVIRONMENT?
A. I concentrated on four areas during the period. First, I looked at
innovators and unit growers because these companies use unit growth to grow
earnings and don't need price increases. Technology, health care and
telecommunications companies fall within these areas. Second were the
interest-sensitive sectors that benefited from low interest rates,
including mortgage companies, insurance, finance and construction. Third
were global growers - companies with proprietary advantages such as low
costs or unique distribution channels and strong brands - which are seizing
market share on a global basis. Fourth were the acquisitive companies in
consolidating industries. Certain industries have stopped growing, but
certain companies have been able to show great earnings growth by acquiring
market share and paring costs.
Q. WHAT'S YOUR OUTLOOK?
A. With the market continuing to advance sharply over the past six months
and Fed policy becoming restrictive in the spring, the investing climate
has become more precarious. Investors with short-term orientations should
be prepared for some downside risk. Risks to the market include rising
inflation and/or falling earnings. However, whatever the shorter term
holds, remember that since 1945 the stock market has risen 70% of the time,
so chances are if one year is down, the next two could very well be up.
FUND FACTS
GOAL: to provide capital growth by investing
primarily in common stocks and securities
convertible into common stocks
START DATE: January 3, 1995
SIZE: as of June 30, 1997, more than
$706 million
MANAGER: George Vanderheiden, since
inception; joined Fidelity in 1971
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 82.0%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 1.7%
AEROSPACE & DEFENSE - 1.2%
Boeing Co. 151,700 $ 8,049,408
Gulfstream Aerospace Corp. (a) 10,700 315,650
8,365,058
DEFENSE ELECTRONICS - 0.4%
Raytheon Co. 62,800 3,202,800
SHIP BUILDING & REPAIR - 0.1%
Avondale Industries, Inc. (a) 5,300 111,300
Newport News Shipbuilding, Inc. 15,200 295,450
406,750
TOTAL AEROSPACE & DEFENSE 11,974,608
BASIC INDUSTRIES - 4.6%
CHEMICALS & PLASTICS - 3.0%
Air Products & Chemicals, Inc. 18,200 1,478,750
du Pont (E.I.) de Nemours & Co. 201,700 12,681,888
Raychem Corp. 59,200 4,403,000
Union Carbide Corp. 55,700 2,621,381
21,185,019
PACKAGING & CONTAINERS - 0.8%
Owens-Illinois, Inc. (a) 176,700 5,477,700
PAPER & FOREST PRODUCTS - 0.8%
Boise Cascade Corp. 36,000 1,271,250
Champion International Corp. 53,800 2,972,450
International Paper Co. 21,400 1,039,238
Willamette Industries, Inc. 7,200 504,000
5,786,938
TOTAL BASIC INDUSTRIES 32,449,657
CONSTRUCTION & REAL ESTATE - 1.0%
CONSTRUCTION - 0.7%
Centex Corp. 22,000 893,750
D.R. Horton, Inc. 48,636 504,599
Fleetwood Enterprises, Inc. 90,562 2,699,880
Kaufman & Broad Home Corp. 44,900 788,556
U.S. Home Corp. (a) 4,800 127,500
5,014,285
ENGINEERING - 0.3%
Fluor Corp. 35,100 1,937,081
TOTAL CONSTRUCTION & REAL ESTATE 6,951,366
DURABLES - 4.5%
AUTOS, TIRES, & ACCESSORIES - 3.8%
Circuit City Stores, Inc. - CarMax Group 4,200 60,113
Cummins Engine Co., Inc. 36,300 2,561,419
Dana Corp. 13,600 516,800
Discount Auto Parts, Inc. (a) 29,400 573,300
Federal-Mogul Corp. 13,300 465,500
General Motors Corp. 309,600 17,240,850
Gentex Corp. (a) 13,100 258,725
Goodyear Tire & Rubber Co. 14,700 930,694
Honda Motor Co. Ltd. 24,000 722,229
Magna International, Inc. Class A 39,300 2,362,583
Superior Industries International, Inc. 59,600 1,579,400
27,271,613
CONSUMER ELECTRONICS - 0.2%
Newell Co. 29,500 1,168,938
SHARES VALUE (NOTE 1)
TEXTILES & APPAREL - 0.5%
Burlington Industries, Inc. (a) 75,100 $ 901,200
Liz Claiborne, Inc. 19,800 923,175
NIKE, Inc. Class B 28,300 1,652,013
Reebok International Ltd. 4,400 205,700
3,682,088
TOTAL DURABLES 32,122,639
ENERGY - 6.8%
ENERGY SERVICES - 0.3%
McDermott International, Inc. 69,800 2,037,288
OIL & GAS - 6.5%
Amerada Hess Corp. 29,200 1,622,425
Anadarko Petroleum Corp. 3,200 192,000
Atlantic Richfield Co. 54,600 3,849,300
British Petroleum PLC ADR 94,528 7,077,784
Burlington Resources, Inc. 74,400 3,282,900
Canada Occidental Petroleum Ltd. 1,300 29,189
Chevron Corp. 4,300 317,931
Elf Aquitaine SA sponsored ADR 14,700 800,231
Enron Oil & Gas Co. 9,400 170,375
Kerr-McGee Corp. 14,200 899,925
Louisiana Land & Exploration Co. 58,500 3,341,813
Mobil Corp. 8,600 600,925
Noble Affiliates, Inc. 5,600 216,650
Occidental Petroleum Corp. 125,900 3,155,369
Royal Dutch Petroleum Co. 239,600 13,028,250
Santa Fe Energy Resources, Inc. (a) 43,500 638,906
Sun Co., Inc. 18,800 582,800
Tosco Corp. 137,700 4,122,394
Total SA:
Class B 3,853 389,218
sponsored ADR 28,368 1,436,130
Union Pacific Resources Group, Inc. 9,700 241,288
45,995,803
TOTAL ENERGY 48,033,091
FINANCE - 16.5%
BANKS - 0.5%
Credit Suisse Group (Reg.) 15,100 1,937,222
NationsBank Corp. 21,400 1,380,300
3,317,522
CREDIT & OTHER FINANCE - 2.1%
Fleet Financial Group, Inc. 235,282 14,881,587
FEDERAL SPONSORED CREDIT - 7.4%
Federal Home Loan Mortgage
Corporation 593,300 20,394,688
Federal National Mortgage Association 741,700 32,356,663
52,751,351
INSURANCE - 6.0%
AFLAC, Inc. 23,650 1,117,463
Aegon NV (Reg.) 23,341 1,635,329
Allmerica Financial Corp. 23,400 933,075
Allstate Corp. 167,859 12,253,707
American International Group, Inc. 64,800 9,679,500
CIGNA Corp. 9,900 1,757,250
Equitable of Iowa Companies 3,700 207,200
General Re Corp. 16,100 2,930,200
Loews Corp. 10,600 1,061,325
MGIC Investment Corp. 75,000 3,595,313
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
INSURANCE - CONTINUED
Nationwide Financial Services, Inc.
Class A 3,500 $ 92,969
PMI Group, Inc. 26,700 1,665,413
Provident Companies, Inc. 2,400 128,400
Providian Financial Corp. (a) 57,700 1,853,613
Reliastar Financial Corp. 10,700 782,438
Torchmark Corp. 34,800 2,479,500
Travelers Property Casualty Corp.
Class A 8,400 334,950
UNUM Corp. 6,200 260,400
42,768,045
SAVINGS & LOANS - 0.3%
Golden West Financial Corp. 32,100 2,247,000
SECURITIES INDUSTRY - 0.2%
United Asset Management Corp. 51,800 1,466,588
TOTAL FINANCE 117,432,093
HEALTH - 6.5%
DRUGS & PHARMACEUTICALS - 2.4%
American Home Products Corp. 2,600 198,900
Amgen, Inc. 50,400 2,929,500
Astra AB Class A Free shares 247,566 4,617,213
Merck & Co., Inc. 12,600 1,304,100
Novartis AG (Reg.) 2,300 3,673,076
Schering-Plough Corp. 82,900 3,968,838
16,691,627
MEDICAL EQUIPMENT & SUPPLIES - 0.8%
Allegiance Corp. 4,880 132,980
Bard (C.R.), Inc. 24,200 878,763
Baxter International, Inc. 10,300 538,175
Biomet, Inc. 57,500 1,070,938
Boston Scientific Corp. (a) 2,900 178,169
Johnson & Johnson 6,600 424,875
St. Jude Medical, Inc. (a) 66,500 2,593,500
5,817,400
MEDICAL FACILITIES MANAGEMENT - 3.3%
Columbia/HCA Healthcare Corp. 411,550 16,179,059
Health Management Associates, Inc.
Class A (a) 2,900 82,650
Humana, Inc. (a) 113,700 2,629,313
Tenet Healthcare Corp. (a) 77,600 2,294,050
United HealthCare Corp. 48,400 2,516,800
23,701,872
TOTAL HEALTH 46,210,899
HOLDING COMPANIES - 0.2%
U.S. Industries, Inc. (a) 38,800 1,382,250
INDUSTRIAL MACHINERY & EQUIPMENT - 1.7%
ELECTRICAL EQUIPMENT - 1.0%
Emerson Electric Co. 14,500 798,406
General Electric Co. 65,600 4,288,600
Scientific-Atlanta, Inc. 33,100 724,063
Sensormatic Electronics Corp. 11,000 141,625
Westinghouse Electric Corp. 50,300 1,163,188
7,115,882
INDUSTRIAL MACHINERY & EQUIPMENT - 0.5%
Caterpillar, Inc. 29,000 3,113,875
JLK Direct Distribution, Inc. Class A 200 5,125
Ultratech Stepper, Inc. (a) 34,400 786,900
3,905,900
SHARES VALUE (NOTE 1)
POLLUTION CONTROL - 0.2%
Browning-Ferris Industries, Inc. 35,700 $ 1,187,025
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 12,208,807
MEDIA & LEISURE - 2.7%
BROADCASTING - 0.1%
Cox Communications, Inc. Class A (a) 8,600 206,400
HSN, Inc. (a) 6,440 201,250
TCI Group Class A (a) 29,100 432,863
840,513
ENTERTAINMENT - 0.3%
Cedar Fair LP (depositary unit) 2,500 109,375
Royal Carribean Cruises Ltd. 50,100 1,750,369
1,859,744
LEISURE DURABLES & TOYS - 0.6%
Nintendo Co. Ltd. Ord. 49,100 4,111,474
LODGING & GAMING - 0.9%
Circus Circus Enterprises, Inc. (a) 78,100 1,923,213
HFS, Inc. (a) 13,700 794,600
Harrah's Entertainment, Inc. (a) 36,300 662,475
Mirage Resorts, Inc. (a) 80,300 2,027,575
Sun International Hotels Ltd. Ord. (a) 33,200 1,226,325
6,634,188
PUBLISHING - 0.1%
Cognizant Corp. 21,600 874,800
RESTAURANTS - 0.7%
Brinker International, Inc. (a) 26,200 373,350
Lone Star Steakhouse Saloon (a) 19,300 501,800
McDonald's Corp. 81,800 3,951,963
Papa John's International, Inc. (a) 7,200 264,600
5,091,713
TOTAL MEDIA & LEISURE 19,412,432
NONDURABLES - 7.0%
HOUSEHOLD PRODUCTS - 0.0%
Premark International, Inc. 8,900 238,075
TOBACCO - 7.0%
Philip Morris Companies, Inc. 939,000 41,668,125
RJR Nabisco Holdings Corp. 226,260 7,466,580
UST, Inc. 10,100 280,275
49,414,980
TOTAL NONDURABLES 49,653,055
PRECIOUS METALS - 0.1%
Barrick Gold Corp. 8,300 180,650
Newmont Mining Corp. 7,269 283,491
464,141
RETAIL & WHOLESALE - 7.1%
APPAREL STORES - 0.4%
Gap, Inc. 19,700 765,838
TJX Companies, Inc. 66,800 1,761,850
2,527,688
DRUG STORES - 0.0%
CVS Corp. 6,800 348,500
GENERAL MERCHANDISE STORES - 2.3%
Federated Department Stores, Inc. (a) 56,200 1,952,950
Proffitts, Inc. (a) 1,900 83,363
Wal-Mart Stores, Inc. 420,300 14,211,394
16,247,707
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
GROCERY STORES - 0.3%
Safeway, Inc. (a) 45,500 $ 2,098,688
RETAIL & WHOLESALE, MISCELLANEOUS - 4.1%
Circuit City Stores, Inc. -
Circuit City Group 91,900 3,268,194
Corporate Express, Inc. 37,900 547,181
Home Depot, Inc. (The) 178,600 12,312,238
Lowe's Companies, Inc. 147,400 5,472,225
Officemax, Inc. (a) 104,075 1,502,583
Office Depot, Inc. (a) 16,200 314,888
Rex Stores Corp. (a) 12,700 128,588
Staples, Inc. (a) 43,500 1,011,375
Toys "R" Us, Inc. (a) 87,100 3,048,500
U.S. Office Products Co. (a) 28,800 880,200
Viking Office Products, Inc. (a) 43,400 824,600
29,310,572
TOTAL RETAIL & WHOLESALE 50,533,155
SERVICES - 0.1%
ADVERTISING - 0.1%
Interpublic Group of Companies, Inc. 4,700 288,169
LEASING & RENTAL - 0.0%
Hanover Compressor Co. 600 11,700
PRINTING - 0.0%
Donnelley (R.R.) & Sons Co. 1,100 40,439
SERVICES - 0.0%
PEAPOD, Inc. 2,000 22,500
TOTAL SERVICES 362,808
TECHNOLOGY - 13.8%
COMMUNICATIONS EQUIPMENT - 0.8%
Alcatel Alsthom Compagnie Generale
d'Electricite SA sponsored ADR 3,800 95,950
Alcatel Alsthom Compagnie Generale
d'Electricite SA 31,000 3,880,140
Andrew Corp. (a) 11,300 317,813
Cisco Systems, Inc. (a) 15,800 1,060,575
Nokia Corp. AB sponsored ADR 6,700 494,125
5,848,603
COMPUTER SERVICES & SOFTWARE - 2.7%
American Management Systems, Inc. (a) 5,100 136,425
Automatic Data Processing, Inc. 47,700 2,241,900
CUC International, Inc. (a) 33,200 856,975
Ceridian Corp. (a) 30,600 1,292,850
CompUSA, Inc. (a) 20,300 436,450
Electronic Data Systems Corp. 83,400 3,419,400
First Data Corp. 62,200 2,732,913
Microsoft Corp. (a) 22,400 2,830,800
Netscape Communications Corp. (a) 5,500 176,344
Oracle Systems Corp. (a) 38,750 1,952,031
Paychex, Inc. 30,200 1,147,600
Policy Management Systems Corp. (a) 40,200 1,889,400
19,113,088
COMPUTERS & OFFICE EQUIPMENT - 4.5%
Bay Networks, Inc. (a) 48,000 1,275,000
Compaq Computer Corp. (a) 74,600 7,404,050
Hewlett-Packard Co. 32,700 1,831,200
Ingram Micro, Inc. Class A (a) 6,600 159,225
International Business Machines Corp. 191,700 17,288,944
SCI Systems, Inc. (a) 44,000 2,805,000
Tech Data Corp. (a) 39,300 1,235,494
31,998,913
SHARES VALUE (NOTE 1)
ELECTRONIC INSTRUMENTS - 1.3%
Applied Materials, Inc. (a) 27,000 $ 1,911,938
Cognex Corp. (a) 16,500 437,250
KLA Instruments Corp. (a) 5,900 287,625
Lam Research Corp. (a) 35,000 1,297,188
Novellus Systems, Inc. (a) 22,100 1,911,650
Teradyne, Inc. (a) 30,700 1,204,975
Thermo Electron Corp. (a) 34,500 1,173,000
Varian Associates, Inc. 19,800 1,074,150
9,297,776
ELECTRONICS - 4.5%
AMP, Inc. 109,100 4,554,925
Atmel Corp. (a) 7,000 196,000
Intel Corp. 57,900 8,210,944
Methode Electronics, Inc. Class A 114,100 2,267,738
Microchip Technology, Inc. (a) 6,250 185,938
Micron Technology, Inc. 128,600 5,135,963
Molex, Inc. 20,243 705,975
Motorola, Inc. 4,200 319,200
Solectron Corp. (a) 103,500 7,245,000
Storage Technology Corp. (a) 16,000 712,000
Texas Instruments, Inc. 25,700 2,160,406
Thomas & Betts Corp. 1,200 63,075
31,757,164
TOTAL TECHNOLOGY 98,015,544
TRANSPORTATION - 0.9%
AIR TRANSPORTATION - 0.1%
Continental Airlines, Inc. Class B (a) 7,400 258,538
Delta Air Lines, Inc. 5,200 426,400
Northwest Airlines Corp. Class A (a) 12,600 458,325
1,143,263
RAILROADS - 0.6%
Bombardier, Inc. Class B 28,400 643,842
Burlington Northern Santa Fe Corp. 13,000 1,168,375
CSX Corp. 40,300 2,236,650
4,048,867
SHIPPING - 0.1%
Stolt-Nielsen SA Class B sponsored ADR 29,400 569,625
Stolt-Nielsen SA 4,300 81,163
650,788
TRUCKING & FREIGHT - 0.1%
Roadway Express, Inc. 6,200 144,925
Yellow Corp. (a) 26,200 586,225
731,150
TOTAL TRANSPORTATION 6,574,068
UTILITIES - 6.8%
CELLULAR - 1.7%
AirTouch Communications, Inc. (a) 174,200 4,768,725
360 Degrees Communications Co. (a) 8,706 149,090
Vodafone Group PLC sponsored ADR 142,380 6,896,531
Vodafone Group PLC 24,023 117,174
11,931,520
ELECTRIC UTILITY - 0.3%
American Electric Power Co., Inc. 14,600 613,200
Entergy Corp. 44,200 1,209,975
1,823,175
GAS - 0.1%
Enron Corp. 19,600 799,925
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - CONTINUED
TELEPHONE SERVICES - 4.7%
AT&T Corp. 52,600 $ 1,844,288
Ameritech Corp. 46,700 3,172,681
Bell Atlantic Corp. 34,600 2,625,275
BellSouth Corp. 81,200 3,765,650
Deutsche Telekom AG 19,600 470,602
MCI Communications Corp. 163,500 6,258,984
NYNEX Corp. 68,100 3,924,263
Qwest Communications
International, Inc. 1,200 32,700
SBC Communications, Inc. 66,500 4,114,688
Sprint Corp. 125,700 6,614,963
WorldCom, Inc. (a) 17,700 566,400
33,390,494
TOTAL UTILITIES 47,945,114
TOTAL COMMON STOCKS
(Cost $476,697,141) 581,725,727
U.S. TREASURY OBLIGATIONS - 12.0%
PRINCIPAL
AMOUNT
8 1/8%, 8/15/19 $ 21,640,000 24,686,479
7 5/8%, 11/15/22 2,000,000 2,178,440
6 1/4%, 8/15/23 45,953,000 42,542,368
stripped principal:
0%, 2/15/19 43,750,000 9,819,688
0%, 8/15/19 10,000,000 2,170,600
0%, 8/15/20 20,000,000 4,047,200
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $85,961,758) 85,444,775
CASH EQUIVALENTS - 6.0%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 5.93%, dated
6/30/97 due 7/1/97 $ 42,594,015 42,587,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $605,245,899) $ 709,757,502
LEGEND
1. Non-income producing
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $298,528,669 and $68,291,517, respectively, of which U.S.
government and government agency obligations aggregated $33,871,823 and
$6,563,299, respectively.
The market value of futures contracts opened and closed during the period
amounted to $9,619,242 and $9,579,433, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research. The
commissions paid to these affiliated firms were $45,612 for the period.
(see Note 4 of Notes to Financial Statements)
INCOME TAX INFORMATION
At June 30, 1997, the aggregate cost of investment securities for income
tax purposes was $605,271,604. Net unrealized appreciation aggregated
$104,485,898, of which $110,709,066 related to appreciated investment
securities and $6,223,168 related to depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in $ 709,757,502
securities, at
value (including
repurchase
agreements of
$42,587,000)
(cost $605,245,899)
- - See
accompanying
schedule
Cash 808
Receivable for 491,197
investments sold
Receivable for fund 2,101,658
shares sold
Dividends receivable 1,086,338
Interest receivable 1,745,837
TOTAL ASSETS 715,183,340
LIABILITIES
Payable for $ 8,490,520
investments
purchased
Payable for fund 152
shares redeemed
Accrued management 337,600
fee
Other payables and 106,664
accrued expenses
TOTAL LIABILITIES 8,934,936
NET ASSETS $ 706,248,404
Net Assets consist of:
Paid in capital $ 582,572,383
Undistributed net 4,997,998
investment income
Accumulated 14,166,109
undistributed net
realized gain (loss)
on investments and
foreign currency
transactions
Net unrealized 104,511,914
appreciation
(depreciation) on
investments
and assets and
liabilities in
foreign currencies
NET ASSETS, for $ 706,248,404
41,242,299
shares outstanding
NET ASSET VALUE, $17.12
offering price
and redemption
price per
share
($706,248,404 (divided by)
41,242,299 shares)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $ 3,981,833
Dividends
Interest 3,195,610
TOTAL INCOME 7,177,443
EXPENSES
Management fee $ 1,583,318
Transfer agent fees 191,171
Accounting fees and 150,696
expenses
Non-interested 1,358
trustees'
compensation
Custodian fees and 50,475
expenses
Registration fees 21
Audit 14,906
Legal 4,232
Miscellaneous 356
Total expenses 1,996,533
before reductions
Expense reductions (20,025 1,976,508
)
NET INVESTMENT 5,200,935
INCOME
REALIZED AND
UNREALIZED GAIN
(LOSS)
Net realized gain
(loss) on:
Investment 14,399,104
securities
Foreign currency (2,166
transactions )
Futures contracts (39,809 14,357,129
)
Change in net
unrealized
appreciation
(depreciation) on:
Investment 58,370,392
securities
Assets and 347 58,370,739
liabilities in
foreign currencies
NET GAIN (LOSS) 72,727,868
NET INCREASE $ 77,928,803
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
OTHER INFORMATION $ 19,204
Expense reductions
Directed brokerage
arrangements
Custodian credits 821
$ 20,025
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED)
Operations $ 5,200,935 $ 6,366,110
Net investment
income
Net realized gain 14,357,129 9,088,610
(loss)
Change in net 58,370,739 35,812,890
unrealized
appreciation
(depreciation)
NET INCREASE 77,928,803 51,267,610
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
Distributions to (6,567,693) -
shareholders
From net
investment income
From net realized (9,194,770) (705,098
gain )
TOTAL DISTRIBUTIONS (15,762,463) (705,098
)
Share transactions 253,984,326 170,852,927
Net proceeds from
sales of shares
Reinvestment of 15,762,463 705,098
distributions
Cost of shares (8,750,145) (3,337,769
redeemed )
NET INCREASE 260,996,644 168,220,256
(DECREASE) IN NET
ASSETS RESULTING
FROM SHARE
TRANSACTIONS
TOTAL INCREASE 323,162,984 218,782,768
(DECREASE) IN NET
ASSETS
NET ASSETS
Beginning of period 383,085,420 164,302,652
End of period $ 706,248,404 $ 383,085,420
(including
undistributed net
investment
income of
$4,997,998 and
$6,366,110,
respectively)
OTHER INFORMATION
Shares
Sold 15,911,548 12,499,499
Issued in 1,011,711 53,538
reinvestment of
distributions
Redeemed (556,728) (246,129
)
Net increase 16,366,531 12,306,908
(decrease)
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1997
SELECTED PER-SHARE DATA (UNAUDITED) 1996 1995
Net asset value, $ 15.40 $ 13.07 $ 10.00
beginning of period
Income from
Investment
Operations
Net investment .16 D .26 .11
income
Net realized and 2.16 2.12 3.14
unrealized gain
(loss)
Total from 2.32 2.38 3.25
investment
operations
Less Distributions
From net (.25) - (.11)
investment income
From net realized (.35) (.05) (.07)
gain
Total distributions (.60) (.05) (.18)
Net asset value, end $ 17.12 $ 15.40 $ 13.07
of period
TOTAL RETURN B, C 15.45% 18.27% 32.52%
RATIOS AND
SUPPLEMENTAL
DATA
Net assets, end of $ 706,248 $ 383,085 $ 164,303
period (000
omitted)
Ratio of expenses to .77% A .77% .85%
average net assets E
Ratio of expenses to .76% A, F .76% .83%
average net assets F F
after expense
reductions
Ratio of net 1.99% A 2.29% 2.49%
investment income
to average net
assets
Portfolio turnover rate 27% A 28% 38%
Average commission $ .0364 $ .0367
rate G
A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED AND 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 NET INVESTMENT INCOME PER SHARE HAS BEEN
CALCULATED BASED ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD.
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.
F 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).
G 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.
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 PAST 1 LIFE OF
JUNE 30, 1997 YEAR FUND
CONTRAFUND 25.07% 29.11%
S&P 500(registered trademark) 34.70% 33.11%
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 long-term growth and short-term
volatility. 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
1995/01/03 10000.00 10000.00
1995/01/31 9870.00 10258.23
1995/02/28 10370.00 10658.00
1995/03/31 10890.00 10972.51
1995/04/30 11480.00 11295.66
1995/05/31 11730.00 11747.14
1995/06/30 12490.00 12020.03
1995/07/31 13470.00 12418.61
1995/08/31 13640.00 12449.78
1995/09/30 13940.00 12975.16
1995/10/31 13650.00 12928.84
1995/11/30 13900.00 13496.42
1995/12/31 13971.98 13756.36
1996/01/31 14073.30 14224.63
1996/02/29 14124.25 14356.49
1996/03/31 14584.49 14494.74
1996/04/30 15065.18 14708.39
1996/05/31 15239.05 15087.72
1996/06/30 15116.32 15145.21
1996/07/31 14410.62 14476.09
1996/08/31 14962.90 14781.39
1996/09/30 15597.01 15613.29
1996/10/31 16077.71 16043.91
1996/11/30 17039.10 17256.66
1996/12/31 16936.82 16914.81
1997/01/31 17591.38 17971.65
1997/02/28 17103.08 18112.54
1997/03/31 16660.22 17368.30
1997/04/30 17060.91 18405.19
1997/05/31 18115.35 19525.70
1997/06/30 18906.18 20400.45
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 June 30,
1997, the value of the investment would have grown to $18,906 - a 89.06%
increase on the initial investment. For comparison, look at how the S&P 500
did over the same period. With dividends and capital gains, if any,
reinvested, the same $10,000 investment would have grown to $20,400 - a
104.00% increase.
INVESTMENT SUMMARY
TOP TEN STOCKS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Schlumberger Ltd. 1.6
Microsoft Corp. 1.2
Lucent Technologies, Inc. 1.1
Home Depot, Inc. (The) 1.1
American International Group, Inc. 1.1
Royal Dutch Petroleum Co. 1.0
Alcatel Alsthom Compagnie Generale d'Electricite SA 1.0
Texas Instruments, Inc. 1.0
Tyco International Ltd. 1.0
Westinghouse Electric Corp. 1.0
TOP TEN MARKET SECTORS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Technology 14.8
Finance 13.5
Energy 12.8
Retail & Wholesale 7.5
Industrial Machinery & Equipment 6.2
Media & Leisure 6.2
Durables 4.8
Basic Industries 4.8
Health 4.7
Nondurables 3.8
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with
Will Danoff, Portfolio Manager of
Contrafund Portfolio
Q. HOW DID THE FUND PERFORM, WILL?
A. Results were disappointing. For the six months that ended June 30, 1997,
the fund trailed the 20.61% return of the Standard & Poor's 500 Index. From
a 12-month perspective, the fund also lagged the S&P 500, which had a
return of 34.70%. I consider this performance to be unsatisfactory and I'm
working as hard as ever with Fidelity's research staff to find stocks that
can help boost second-half performance.
Q. WHAT FACTORS WERE BEHIND THE FUND'S UNDERPERFORMANCE RELATIVE TO THE S&P
500?
A. A primary reason was the narrowness of the market. By that I mean that
the market's advance was concentrated chiefly among stocks of the largest
companies in the index. To illustrate, shares of the 100 largest S&P 500
stocks appreciated approximately 25% over the past six months, while the
100 smallest stocks in the index rose only around 15%. This phenomenon hurt
the fund, which tends to emphasize small- and mid-sized companies.
Q. WERE THERE ANY OTHER SPECIFIC FACTORS THAT HAD A NEGATIVE IMPACT ON THE
FUND'S RETURN?
A. The fund's underweighting in health care stocks relative to the index -
health care stocks make up around 11% of the index, while they comprised
almost 5% of the fund - hurt performance. With governments throughout the
world attempting to limit health care expenditure growth and U.S. health
maintenance organizations (HMOs) trying to contain industry costs, I
thought the industry would suffer a slowdown. Unfortunately, many health
care stocks - particularly pharmaceuticals - continued to perform well,
rising about 23% during the period. Thus, my strategy of underweighting
these stocks hurt the fund's return.
Q. ASIDE FROM HEALTH STOCKS, HOW DID OTHER SECTORS PERFORM DURING THE
PERIOD?
A. The finance sector, which accounted for around 14% of the fund's
investments at the end of the period, rose approximately 23%. This strong
showing was due largely to falling interest rates, good expense control and
continuing industry consolidation. Some financial stocks held by the fund
included American International Group, a leading insurer with operations in
Asia; Washington Mutual, a rapidly growing West Coast thrift; and First
Bank Systems, a Minneapolis bank with one of the lowest expense ratios in
the industry and a recent acquirer of another stock in Contrafund's
portfolio, U.S. Bancorp. On the other hand, the fund's energy exploration
and production positions were hurt by falling oil and natural gas prices.
As of period end, the fund's exposure to these stocks had fallen from about
23% six months ago to approximately 13%. Low capital investment in the
energy sector has resulted in a tight supply of oil service equipment.
Examples of fund positions that benefited from this positive trend included
Schlumberger, Halliburton, ENSCO International and Smith International, all
top 25 positions within the portfolio.
Q. DID YOU PLAY ANY OTHER PARTICULAR THEMES DURING THE PERIOD?
A. One area of optimism is the Internet and certain stocks that could
benefit from the Internet's popularity. The cable television industry is an
example. These stocks have had a tough four-year stretch, as government
regulation limited companies' ability to raise prices, and subscriber
growth slowed. As a result, the market still holds a pessimistic view on
cable TV stocks. However, with the Internet's popularity, these companies
have a huge opportunity to reaccelerate their earnings growth. Many cable
TV companies are offering access to the Internet at dramatically faster
speeds than is currently available over telephone wires. This could help
turn the cable TV industry's fortunes around. Along the same lines, the
technology and telecommunications industries could also benefit from the
Internet demand. Two of the fund's top positions - Lucent Technologies and
Alcatel - are leading providers of the equipment being used to improve the
Internet's operating efficiency.
Q. WHAT'S YOUR OUTLOOK?
A. As I mentioned, the biggest stocks in the S&P 500 are quite expensive, a
trend that could continue for several years. If it does, I'll continue my
contrarian approach of looking for undervalued companies that are growing
their earnings rapidly and therefore have the capability to produce good
share price appreciation.
FUND FACTS
GOAL: to provide capital growth by investing
primarily in common stocks and securities
convertible into common stocks
START DATE: January 3, 1995
SIZE: as of June 30, 1997, more than
$706 million
MANAGER: George Vanderheiden, since
inception; joined Fidelity in 1971
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 93.0%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 2.3%
AEROSPACE & DEFENSE - 2.2%
AlliedSignal, Inc. 115,900 $ 9,736,589
Boeing Co. 178,500 9,471,656
GenCorp, Inc. 96,700 2,236,188
General Motors Corp. Class H 10,600 612,150
Gulfstream Aerospace Corp. (a) 125,000 3,687,500
Kellstrom Industries, Inc. (a) 189,100 2,978,325
Lockheed Martin Corp. 116,000 12,013,250
Sundstrand Corp. 99,300 5,542,181
Textron, Inc. 104,700 6,949,463
United Technologies Corp. 205,400 17,048,200
70,275,502
DEFENSE ELECTRONICS - 0.0%
Datum, Inc. (a) 8,000 248,000
Raytheon Co. 11,900 606,900
854,900
SHIP BUILDING & REPAIR - 0.1%
General Dynamics Corp. 23,600 1,770,000
TOTAL AEROSPACE & DEFENSE 72,900,402
BASIC INDUSTRIES - 4.8%
CHEMICALS & PLASTICS - 2.5%
Air Products & Chemicals, Inc. 27,100 2,201,875
Avery Dennison Corp. 6,200 248,775
Cambrex Corp. 90,800 3,609,300
Crompton & Knowles Corp. 332,292 7,393,497
Cytec Industries, Inc. (a) 170,100 6,357,488
du Pont (E.I.) de Nemours & Co. 65,400 4,112,025
Engelhard Corp. 1,000 20,938
FMC Corp. (a) 1,800 142,988
Ferro Corp. 24,000 889,500
Fuller (H.B.) Co. 53,900 2,964,500
Goodrich (B.F.) Co. 47,600 2,061,675
International Specialty Products, Inc. (a) 75,500 1,061,719
Monsanto Co. 337,500 14,533,594
Morton International, Inc. 150,900 4,555,294
Nalco Chemical Co. 46,100 1,780,613
Praxair, Inc. 138,500 7,756,000
Raychem Corp. 22,600 1,680,875
Sealed Air Corp. (a) 242,100 11,499,750
Union Carbide Corp. 42,600 2,004,863
W.R. Grace & Co. 62,900 3,467,363
Witco Corp. 53,000 2,010,688
80,353,320
IRON & STEEL - 0.1%
Aeroquip Vickers, Inc. 9,700 458,325
Nucor Corp. 51,000 2,881,500
Steel Dynamics, Inc. (a) 42,100 1,052,500
4,392,325
METALS & MINING - 0.7%
Alcan Aluminium Ltd. 44,300 1,511,266
Aluminum Co. of America 103,600 7,808,850
Falconbridge Ltd. 79,200 1,554,572
Reynolds Metals Co. 62,600 4,460,250
Rio Tinto PLC (Reg.) 309,900 5,398,794
20,733,732
PACKAGING & CONTAINERS - 0.5%
Crown Cork & Seal Co., Inc. 48,800 2,607,750
Owens-Illinois, Inc. (a) 397,900 12,334,900
SHARES VALUE (NOTE 1)
Peak International, Ltd. 38,900 $ 466,800
Silgan Holdings, Inc. 37,100 1,437,625
16,847,075
PAPER & FOREST PRODUCTS - 1.0%
Abitibi-Consolidated, Inc. 28,300 505,266
American Pad & Paper Co. (a) 90,100 1,520,438
Bowater, Inc. 23,900 1,105,375
Champion International Corp. 39,900 2,204,475
Deltic Timber Corp. 16,557 485,327
Fort Howard Corp. (a) 12,400 627,750
Georgia-Pacific Corp. 12,500 1,067,188
International Paper Co. 29,300 1,422,881
James River Corp. of Virginia 271,600 10,049,200
Kimberly-Clark Corp. 181,100 9,009,725
Mail-Well, Inc. (a) 83,500 2,379,750
Temple-Inland, Inc. 33,000 1,782,000
32,159,375
TOTAL BASIC INDUSTRIES 154,485,827
CONSTRUCTION & REAL ESTATE - 3.3%
BUILDING MATERIALS - 0.9%
American Residential Services, Inc. (a) 42,100 978,825
American Standard Companies,
Inc. (a) 9,400 420,650
Coltec Industries, Inc. (a) 166,900 3,254,550
Lilly Industrial Coatings, Inc. Class A 66,400 1,336,300
Mark IV Industries, Inc. 25,000 600,000
Masco Corp. 168,600 7,039,050
Medusa Corp. 20,200 775,175
Nortek, Inc. (a) 29,200 704,450
Sherwin-Williams Co. 140,500 4,337,938
Southdown, Inc. 73,600 3,210,800
USG Corp. (a) 155,400 5,672,100
York International Corp. 2,100 96,600
28,426,438
CONSTRUCTION - 0.1%
Centex Corp. 31,500 1,279,688
Lennar Corp. 33,300 1,063,519
Morrison Knudsen Corp. (a) 56,700 772,538
Walter Industries, Inc. (a) 3,600 60,300
3,176,045
ENGINEERING - 0.0%
DSP Group, Inc. (a) 13,900 208,283
Stone & Webster, Inc. 1,300 55,494
263,777
REAL ESTATE - 0.2%
Boston Properties, Inc. 67,200 1,848,000
Catellus Development Corp. (a) 18,700 338,938
Crescent Operating, Inc. 27,790 333,480
Rouse Co. (The) 185,723 5,478,829
Stewart Enterprises, Inc. Class A 2,100 88,200
8,087,447
REAL ESTATE INVESTMENT TRUSTS - 2.1%
Arden Realty Group, Inc. 74,300 1,931,800
BRE Properties, Inc. Class A 3,600 90,450
Bay Apartment Communities, Inc. 40,200 1,487,400
Bedford Property Investors, Inc. 72,900 1,467,113
Bradley Real Estate Trust (SBI) 33,200 639,100
Cali Realty Corp. 49,300 1,676,200
Crescent Real Estate Equities, Inc. 277,900 8,823,325
Duke Realty Investors, Inc. 22,400 907,200
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
CONSTRUCTION & REAL ESTATE - CONTINUED
REAL ESTATE INVESTMENT TRUSTS - CONTINUED
Equity Residential Properties Trust (SBI) 121,000 $ 5,747,500
Essex Property Trust, Inc. 13,300 427,263
Felcor Suite Hotels, Inc. 132,700 4,943,075
First Industrial Realty Trust, Inc. 80,200 2,345,850
Glenborough Realty Trust, Inc. 53,000 1,338,250
Golf Trust of America, Inc. 89,600 2,492,000
Home Properties of NY, Inc. 8,900 200,250
Irvine Apartment Communities, Inc. 3,600 106,200
Kilroy Realty Corp. 11,800 297,950
Kimco Realty Corp. 70,100 2,225,675
LTC Properties, Inc. 51,700 937,063
Macerich Co. 60,400 1,676,100
Pacific Gulf Properties, Inc. 2,600 57,200
Patriot American Hospitality, Inc. 147,800 3,768,900
Public Storage, Inc. 40,700 1,190,475
Reckson Associates Realty Corp. 124,500 2,863,500
Speiker Properties, Inc. 72,200 2,540,538
Starwood Lodging Trust combined
certificate (SBI) 270,000 11,525,625
Sunstone Hotel Investors, Inc. 32,600 472,700
Urban Shopping Centers, Inc. 5,100 162,563
Vornado Realty Trust 32,900 2,372,913
Weeks Corp. 31,300 978,125
65,692,303
TOTAL CONSTRUCTION & REAL ESTATE 105,646,010
DURABLES - 4.8%
AUTOS, TIRES, & ACCESSORIES - 2.1%
Chrysler Corp. 212,200 6,962,813
Circuit City Stores, Inc. - CarMax Group 88,400 1,265,225
Cross-Continent Auto Retailers, Inc. (a) 43,900 463,694
Danaher Corp. 227,100 11,539,519
Eaton Corp. 28,400 2,479,675
Echlin, Inc. 49,400 1,778,400
Federal-Mogul Corp. 40,700 1,424,500
Ford Motor Co. 293,000 11,060,750
General Motors Corp. 103,200 5,746,950
Lear Corp. (a) 131,000 5,813,125
Navistar International Corp. (a) 203,600 3,512,100
O'Gara Co. (a) 297,400 3,048,350
OmniQuip International, Inc. 24,400 564,250
SPX Corp. 102,400 6,636,800
Superior Industries International, Inc. 1,700 45,050
TRW, Inc. 9,600 545,400
Tower Automotive, Inc. (a) 41,500 1,784,500
Toyota Motor Corp. 66,000 1,945,833
United Auto Group, Inc. (a) 50,300 996,569
67,613,503
CONSUMER DURABLES - 1.2%
Blyth Industries, Inc. (a) 14,100 475,875
Corning, Inc. 249,700 13,889,563
Minnesota Mining & Manufacturing Co. 203,200 20,726,400
Samsonite Corp. (a) 50,300 2,219,488
37,311,326
CONSUMER ELECTRONICS - 0.5%
Electrolux AB 7,100 513,120
Gemstar International Group Ltd. (a) 46,900 861,788
Maytag Co. 48,400 1,264,450
Philips Electronics NV 165,000 11,859,375
SHARES VALUE (NOTE 1)
Philips Electronics NV (Bearer) 36,350 $ 2,602,113
Sunbeam-Oster, Inc. 12,500 471,875
17,572,721
HOME FURNISHINGS - 0.3%
Carpetright PLC 347,500 2,903,986
Furniture Brands International, Inc. 12,500 242,188
Leggett & Platt, Inc. 61,500 2,644,500
Linens'n Things, Inc. 91,800 2,719,575
Miller (Herman), Inc. 4,000 144,000
8,654,249
TEXTILES & APPAREL - 0.7%
Cutter & Buck, Inc. (a) 144,200 2,343,250
Dexter Corp. 50,200 1,606,400
House of Fraser PLC Class L 673,400 1,788,009
Intimate Brands, Inc. Class A 41,500 871,500
Kellwood Co. 6,400 177,600
Liz Claiborne, Inc. 117,900 5,497,088
Mohawk Industries, Inc. (a) 2,100 47,775
Oxford Industries, Inc. 33,100 939,213
Polo Ralph Lauren Corp. Class A 9,100 249,113
Reebok International Ltd. 154,000 7,199,500
Stride Rite Corp. 41,100 529,163
Unifi, Inc. 22,300 833,463
Warnaco Group, Inc. Class A 45,000 1,434,375
23,516,449
TOTAL DURABLES 154,668,248
ENERGY - 12.8%
ENERGY SERVICES - 6.3%
BJ Services Co. (a) 172,700 9,261,038
Baker Hughes, Inc. 120,300 4,654,106
Diamond Offshore Drilling, Inc. (a) 208,500 16,236,938
Dresser Industries, Inc. 190,300 7,088,675
ENSCO International, Inc. (a) 475,387 25,076,664
Falcon Drilling, Inc. (a) 75,800 4,367,975
Global Marine, Inc. (a) 217,000 5,045,250
Halliburton Co. 305,900 24,242,575
Marine Drilling Companies, Inc. (a) 287,300 5,638,263
McDermott International, Inc. 195,700 5,711,994
Nabors Industries, Inc. (a) 311,300 7,782,500
Noble Drilling Corp. (a) 260,100 5,868,506
Reading & Bates Corp. (a) 29,300 783,775
Smedvig AS, Series B 55,200 1,356,136
Santa Fe International Corp. 7,200 244,800
Schlumberger Ltd. 402,200 50,275,000
Smith International, Inc. (a) 361,600 21,967,200
Varco International, Inc. (a) 63,300 2,041,425
Weatherford Enterra, Inc. (a) 81,100 3,122,350
Western Atlas, Inc. (a) 8,800 644,600
201,409,770
OIL & GAS - 6.5%
Amoco Corp. 120,500 10,475,969
Anadarko Petroleum Corp. 5,000 300,000
Atlantic Richfield Co. 12,400 874,200
Barrett Resources Corp. (a) 600 17,963
British Petroleum PLC ADR 292,284 21,884,765
Burlington Resources, Inc. 220,000 9,707,500
Camco International, Inc. 168,600 9,230,850
Canadian Natural Resources Ltd. (a) 186,400 4,840,068
Chesapeake Energy Corp. (a) 10,700 104,994
Coastal Corp. (The) 109,900 5,845,306
Cooper Cameron Corp. (a) 167,140 7,813,795
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
ENERGY - CONTINUED
OIL & GAS - CONTINUED
Enron Oil & Gas Co. 7,000 $ 126,875
Forcenergy Gas Exploration, Inc. (a) 107,900 3,277,463
Mesa, Inc. (a) 160,600 923,450
Mobil Corp. 130,700 9,132,663
Murphy Oil Corp. 153,900 7,502,625
Newfield Exploration Co. (a) 214,300 4,286,000
Norcen Energy Resources Ltd. 17,800 424,163
Ocean Energy, Inc. (a) 9,800 453,250
Oryx Energy Co. (a) 46,400 980,200
Parker & Parsley Petroleum Co. 53,100 1,878,413
Penn West Petroleum Ltd. (a) 38,600 493,456
Penn West Petroleum Ltd. (a)(b) 68,600 876,971
Petsec Energy Ltd. sponsored ADR 73,000 1,660,750
Phillips Petroleum Co. 85,900 3,758,125
Pogo Producing Co. 133,000 5,145,438
Renaissance Energy Ltd. (a) 238,800 6,641,741
Rio Alto Exploration Ltd. (a) 32,200 269,373
Royal Dutch Petroleum Co. 598,000 32,516,250
Santa Fe Energy Resources, Inc. (a) 217,700 3,197,469
Swift Energy Co. (a) 127,300 3,039,288
Texaco, Inc. 102,500 11,146,875
Tosco Corp. 379,900 11,373,256
Total SA Class B 123,633 12,489,031
United Meridian Corp. (a) 138,300 4,149,000
Unocal Corp. 287,400 11,154,713
Vastar Resources, Inc. 4,000 140,250
Vintage Petroleum, Inc. 11,000 338,250
YPF Sociedad Anonima sponsored ADR 2,600 79,950
YPF Sociedad Anonima D shares 4,200 129,379
208,680,077
TOTAL ENERGY 410,089,847
FINANCE - 13.5%
BANKS - 3.9%
Bank of New York Co., Inc. 229,300 9,974,550
Bank of Nova Scotia Halifax 2,600 114,314
BankBoston Corp. 500 36,031
BankAmerica Corp. 331,900 21,428,294
Citicorp 24,200 2,917,613
Comerica, Inc. 71,300 4,848,400
Credit Suisse Group (Reg.) 87,200 11,187,137
Credito Italiano Ord. 1,584,000 2,897,378
Fifth Third Bancorp 23,200 1,903,850
First Bank System, Inc. 224,500 19,166,688
First Union Corp. 29,400 2,719,500
HSBC Holdings PLC 226,655 6,716,164
Imperial Bancorp 6,200 179,025
Lloyds TSB Group PLC 198,900 2,039,630
Mellon Bank Corp. 28,500 1,286,063
National City Corp. 98,100 5,150,250
North Fork Bancorp., Inc. 186,500 3,986,438
Norwest Corp. 43,000 2,418,750
Royal Bank of Canada 6,200 280,889
Standard Chartered Bank PLC 278,000 4,239,125
Star Banc Corp. 1,900 80,275
Texas Regional Bancshares, Inc.
Class A (vtg.) 116,300 4,884,600
U.S. Bancorp 168,700 10,817,888
SHARES VALUE (NOTE 1)
Wells Fargo & Co. 11,500 $ 3,099,250
Zions Bancorp 83,200 3,130,400
125,502,502
CLOSED-END INVESTMENT COMPANIES - 0.1%
Morgan Stanley Emerging Markets
Fund, Inc. 23,900 427,213
Morgan Stanley Asia-Pacific Fund, Inc. 82,100 862,050
Templeton Dragon Fund, Inc. 43,400 705,250
1,994,513
CREDIT & OTHER FINANCE - 1.9%
American Express Co. 263,900 19,660,550
Associates First Capital Corp. 23,200 1,287,600
Finova Group, Inc. 32,800 2,509,200
Fleet Financial Group, Inc. 240,300 15,198,975
Greenpoint Financial Corp. 159,200 10,596,750
Homeside, Inc. 2,100 45,319
Household International, Inc. 83,900 9,853,006
59,151,400
FEDERAL SPONSORED CREDIT - 1.3%
Federal Home Loan Mortgage
Corporation 487,400 16,754,375
Federal National Mortgage Association 582,400 25,407,200
42,161,575
INSURANCE - 4.6%
AFLAC, Inc. 39,400 1,861,650
ARM Financial Group, Inc. Class A 2,300 46,000
ACE Ltd. 31,700 2,341,838
Aetna, Inc. 68,800 7,043,400
Allmerica Financial Corp. 79,400 3,166,075
Allstate Corp. 296,700 21,659,100
AMBAC, Inc. 12,000 916,500
American General Corp. 28,400 1,356,100
American International Group, Inc. 225,800 33,728,875
Aon Corp. 61,350 3,174,863
Berkshire Hathaway, Inc. (a) 60 2,832,000
Brascan Ltd. Class A 13,600 336,392
CIGNA Corp. 38,900 6,904,750
Chubb Corp. (The) 8,800 588,500
Exel Ltd. 6,200 327,050
Hartford Financial Services Group, Inc. 78,100 6,462,775
MGIC Investment Corp. 31,500 1,510,031
Mid Ocean Ltd. 4,900 256,944
Old Republic International Corp. 9,500 287,969
Progressive Corp. 51,400 4,471,800
Provident Companies, Inc. 19,100 1,021,850
Providian Financial Corp. (a) 13,000 417,625
Reinsurance Group of America, Inc. 4,000 230,000
Reliastar Financial Corp. 24,600 1,798,875
St. Paul Companies, Inc. (The) 24,000 1,830,000
Security-Connecticut Corp. 70,800 3,898,425
SunAmerica, Inc. 77,900 3,797,625
Torchmark Corp. 65,200 4,645,500
Travelers Property Casualty Corp.
Class A 90,800 3,620,650
Travelers Group, Inc. (The) 305,766 19,282,368
UNUM Corp. 124,200 5,216,400
USF&G Corp. 152,200 3,652,800
148,684,730
SAVINGS & LOANS - 1.6%
Ahmanson (H.F.) & Co. 90,400 3,887,200
Charter One Financial Corp. 25,185 1,356,842
Dime Bancorp., Inc. 117,400 2,054,500
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
SAVINGS & LOANS - CONTINUED
Glendale Federal Bank FSB (a) 247,900 $ 6,476,388
Golden West Financial Corp. 71,080 4,975,600
Great Western Financial Corp. 182,200 9,793,250
Ocwen Financial Corp. 10,000 326,250
TCF Financial Corp. 50,300 2,483,563
Washington Mutual, Inc. 323,900 19,353,025
50,706,618
SECURITIES INDUSTRY - 0.1%
Guoco Group Ltd. 450,000 2,369,950
Morgan Stanley Dean Witter Discover
and Co. 18,900 813,881
3,183,831
TOTAL FINANCE 431,385,169
HEALTH - 4.6%
DRUGS & PHARMACEUTICALS - 2.1%
Andrx Corp. 78,600 3,006,450
Barr Laboratories, Inc. (a) 207,700 9,138,800
Bristol-Myers Squibb Co. 118,400 9,590,400
Elan Corp. PLC ADR (a) 55,400 2,506,850
Glaxo PLC sponsored ADR 12,500 522,656
Immunex Corp. 1,000 36,250
Interneuron Pharmaceuticals, Inc. 3,600 72,450
Merck & Co., Inc. 11,400 1,179,900
Novartis AG (Reg.) 15,111 24,132,107
Pfizer, Inc. 58,400 3,489,400
Schering-Plough Corp. 156,000 7,468,500
Sepracor, Inc. (a) 23,400 604,013
Warner-Lambert Co. 55,800 6,933,150
68,680,926
MEDICAL EQUIPMENT & SUPPLIES - 0.6%
Bausch & Lomb, Inc. 56,700 2,671,988
Baxter International, Inc. 38,700 2,022,075
Boston Scientific Corp. (a) 2,300 141,306
Cardinal Health, Inc. 22,500 1,288,125
McKesson Corp. 12,500 968,750
Medtronic, Inc. 51,200 4,147,200
Nitinol Medical Technologies, Inc. 1,000 15,125
St. Jude Medical, Inc. (a) 102,400 3,993,600
Sybron International Corp. (a) 36,800 1,467,400
Ventana Medical Systems, Inc. 65,000 804,375
17,519,944
MEDICAL FACILITIES MANAGEMENT - 1.9%
Beverly Enterprises, Inc. (a) 75,400 1,225,250
Carematrix Corp. (a) 53,200 1,313,375
Columbia/HCA Healthcare Corp. 7,800 306,638
Coventry Corp. (a) 102,600 1,551,825
FPA Medical Management, Inc. 11,500 272,406
HEALTHSOUTH Rehabilitation Corp. (a) 617,500 15,398,906
Health Management Associates, Inc.
Class A (a) 316,200 9,011,700
Humana, Inc. (a) 46,900 1,084,563
Integrated Health Services, Inc. 194,100 7,472,850
NovaCare, Inc. (a) 48,600 674,325
Oxford Health Plans, Inc. (a) 64,600 4,635,050
Quorum Health Group, Inc. (a) 9,300 332,475
Safeguard Health Enterprises, Inc. (a) 63,700 676,813
Sunrise Assisted Living, Inc. (a) 119,300 4,175,500
Tenet Healthcare Corp. (a) 196,400 5,806,075
SHARES VALUE (NOTE 1)
Trigon Healthcare, Inc. 131,000 $ 3,176,750
United HealthCare Corp. 36,500 1,898,000
Vencor, Inc. (a) 31,500 1,330,875
60,343,376
TOTAL HEALTH 146,544,246
HOLDING COMPANIES - 0.5%
Norfolk Southern Corp. 161,500 16,271,125
PartnerRe Ltd. 16,000 610,000
Triarc Companies, Inc. Class A (a) 24,000 489,000
17,370,125
INDUSTRIAL MACHINERY & EQUIPMENT - 6.2%
ELECTRICAL EQUIPMENT - 1.9%
AMETEK, Inc. 67,000 1,574,500
Common Development International
Ltd. (a)(b) 41,200 753,486
Computer Products, Inc. (a) 2,100 52,500
General Electric Co. 85,400 5,583,025
General Instrument Corp. (a) 86,800 2,170,000
Honeywell, Inc. 43,000 3,262,625
Kuhlman Corp. 9,900 319,275
Loral Space & Communications Ltd. (a) 864,600 12,969,000
Roper Industries, Inc. 8,700 451,313
Scientific-Atlanta, Inc. 166,900 3,650,938
Spectrain Corp. 3,100 114,313
Viasat, Inc. 6,800 98,600
Westinghouse Electric Corp. 1,348,615 31,186,722
62,186,297
INDUSTRIAL MACHINERY & EQUIPMENT - 3.2%
AGCO Corp. 10,200 366,563
Case Corp. 204,100 14,057,388
Caterpillar, Inc. 84,000 9,019,500
Cooper Industries, Inc. 26,800 1,333,300
Dover Corp. 34,600 2,127,900
Harnischfeger Industries, Inc. 80,200 3,328,300
Illinois Tool Works, Inc. 209,900 10,481,881
Ingersoll-Rand Co. 121,000 7,471,750
Kaydon Corp. 117,800 5,845,825
Keystone International, Inc. 98,700 3,423,656
New Holland NV 324,100 8,872,238
Parker-Hannifin Corp. 16,000 971,000
Stanley Works 63,300 2,532,000
Tyco International Ltd. 453,714 31,560,506
Thermo Fibergen, Inc.
rights 12/31/01 (a) 13,700 36,819
101,428,626
POLLUTION CONTROL - 1.1%
Allied Waste Industries, Inc. (a) 17,300 300,588
Browning-Ferris Industries, Inc. 32,800 1,090,600
Thermo Instrument Systems, Inc. (a) 68,800 2,107,000
USA Waste Services, Inc. (a) 573,780 22,162,253
United Waste Systems, Inc. (a) 186,200 7,634,200
Waste Management, Inc. 2,800 89,950
33,384,591
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 196,999,514
MEDIA & LEISURE - 6.2%
BROADCASTING - 1.6%
APT Satellite Holdings Ltd.
sponsored ADR 263,500 3,326,688
American Radio Systems Corp.
Class A (a) 32,700 1,303,913
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - CONTINUED
BROADCASTING - CONTINUED
Asia Satellite Telecommunications
Holdings Ltd. 255,000 $ 781,754
Canal Plus SA 2,200 428,013
Clear Channel Communications, Inc. (a) 41,400 2,548,688
Cox Communications, Inc. Class A (a) 56,300 1,351,200
Evergreen Media Corp. Class A (a) 5,600 249,900
HSN, Inc. (a) 8,300 259,375
Jacor Communications, Inc. Class A (a) 110,100 4,211,325
Metro Networks, Inc. (a) 40,500 982,125
Smartalk Teleservices, Inc. (a) 46,900 726,950
TCA Cable TV, Inc. 9,300 349,913
TCI Group Class A (a) 269,100 4,002,863
Telemundo Group, Inc. Class A (a) 136,400 3,273,600
Time Warner, Inc. 488,100 23,550,825
Univision Communications, Inc.
Class A (a) 9,900 387,338
Westwood One, Inc. (a) 50,000 1,612,500
49,346,970
ENTERTAINMENT - 0.8%
Airtours PLC 29,600 572,577
Disney (Walt) Co. 237,800 19,083,450
Family Golf Centers, Inc. (a) 12,200 280,600
Premier Parks, Inc. (a) 93,300 3,440,438
Regal Cinemas, Inc. (a) 19,600 646,800
Viacom, Inc. (a):
Class A 39,900 1,184,531
Class B (non-vtg.) 49,800 1,494,000
26,702,396
LEISURE DURABLES & TOYS - 1.0%
Brunswick Corp. 200,500 6,265,625
Callaway Golf Co. 67,700 2,403,350
Champion Enterprises, Inc. (a) 36,600 549,000
Harley-Davidson, Inc. 35,200 1,687,400
Hasbro, Inc. 466,025 13,223,459
Mattel, Inc. 142,550 4,828,881
Nintendo Co. Ltd. Ord. 33,300 2,788,434
31,746,149
LODGING & GAMING - 1.0%
Bristol Hotel Co. (a) 7,200 277,200
Doubletree Corp. (a) 39,000 1,603,875
Four Seasons Hotels, Inc. 125,800 3,735,777
HFS, Inc. (a) 260,600 15,114,800
Hilton Hotels Corp. 3,600 95,625
Host Marriott Corp. (a) 102,900 1,832,906
ITT Corp. 6,300 384,117
La Quinta Motor Inns, Inc. 132,700 2,902,813
Marriott International, Inc. 3,000 184,125
Patriot American Hospitality, Inc. 76,700 3,458,217
WMS Industries, Inc. 105,300 2,639,081
32,228,536
PUBLISHING - 0.8%
Big Flower Press Holdings, Inc. (a) 194,600 4,037,950
Dow Jones & Co., Inc. 32,500 1,306,094
Harte Hanks Communications, Inc. 7,700 227,150
Meredith Corp. 51,500 1,493,500
New York Times Co. (The) Class A 99,900 4,945,050
Pearson, PLC 215,600 2,498,009
Playboy Enterprises, Inc. Class B (a) 30,400 351,500
SHARES VALUE (NOTE 1)
Times Mirror Co. Class A 158,900 $ 8,779,225
Tribune Co. 61,500 2,955,844
26,594,322
RESTAURANTS - 1.0%
Boston Chicken, Inc. (a) 88,100 1,233,400
Chart House Enterprises, Inc. 4,800 35,976
Compass Group PLC Ord. 46,600 522,468
Cracker Barrel Old Country Store, Inc. 10,800 286,200
Fine Host Corp. (a) 31,500 992,250
Foodmaker, Inc. (a) 58,600 959,575
Landry's Seafood Restaurants, Inc. (a) 96,000 2,208,000
Logan's Roadhouse, Inc. (a) 24,900 591,375
Lone Star Steakhouse Saloon 2,600 67,600
McDonald's Corp. 246,700 11,918,694
Morton's Restaurant Group, Inc. (a) 316,900 6,298,388
Papa John's International, Inc. (a) 14,400 529,200
Rainforest Cafe, Inc. (a) 11,100 281,663
ShowBiz Pizza Time, Inc. (a) 77,700 2,049,338
Starbucks Corp. (a) 17,600 685,300
Wendy's International, Inc. 56,500 1,465,469
30,124,896
TOTAL MEDIA & LEISURE 196,743,269
NONDURABLES - 3.8%
AGRICULTURE - 0.1%
Pioneer Hi-Bred International, Inc. 17,900 1,432,000
BEVERAGES - 0.7%
Cadbury-Schweppes PLC Ord. 1,103,597 9,847,166
Coors (Adolph) Co. Class B 25,000 665,625
COTT Corp. 6,200 66,012
PepsiCo, Inc. 343,600 12,906,475
23,485,278
FOODS - 1.5%
CPC International, Inc. 2,100 193,856
Campbell Soup Co. 133,400 6,670,000
Dean Foods Co. 103,100 4,162,663
Dole Food, Inc. 30,000 1,282,500
Earthgrains Co. 6,200 406,488
Flowers Industries, Inc. 30,000 504,375
Hershey Foods Corp. 83,500 4,618,594
Interstate Bakeries Corp. 7,800 462,638
Nabisco Holdings Corp. Class A 182,500 7,277,188
Nestle SA (Reg.) 6,735 8,875,546
Ralston Purina Co. 83,600 6,870,875
Sara Lee Corp. 87,100 3,625,538
Tasty Baking Co. 500 8,750
Tootsie Roll Industries, Inc. 23,455 1,043,748
Tyson Foods, Inc. 88,400 1,690,650
47,693,409
HOUSEHOLD PRODUCTS - 1.3%
Church & Dwight Co., Inc. 24,200 647,350
Dial Corp. 249,800 3,903,125
Estee Lauder Companies, Inc. 12,100 608,025
Gillette Co. 163,100 15,453,725
Premark International, Inc. 69,500 1,859,125
Stanhome, Inc. 5,500 180,813
Unilever NV:
Ord. 74,810 15,738,248
ADR 21,430 4,587,359
42,977,770
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONDURABLES - CONTINUED
TOBACCO - 0.2%
Consolidated Cigar Holdings, Inc.
Class A (a) 93,000 $ 2,580,750
Culbro Corp. (a) 2,200 306,213
Dimon, Inc. 7,200 190,800
Gallaher Group PLC sponsored ADR (a) 79,700 1,469,469
General Cigar Holdings, Inc. Class A 10,700 314,981
Swisher International Group, Inc.
Class A 60,100 1,036,725
Universal Corp. 8,200 260,350
6,159,288
TOTAL NONDURABLES 121,747,745
PRECIOUS METALS - 0.7%
Euro-Nevada Mining Ltd. 177,700 5,470,068
Franco-Nevada Mining Corp. 228,900 11,481,060
Getchell Gold Corp. (a) 43,300 1,526,325
Indochina Goldfields Ltd. (a) 133,900 630,391
Indochina Goldfields Ltd. (a)(b) 75,600 355,919
Newmont Mining Corp. 48,000 1,872,000
21,335,763
RETAIL & WHOLESALE - 7.4%
APPAREL STORES - 0.8%
AnnTaylor Stores Corp. (a) 53,600 1,045,200
Charming Shoppes, Inc. (a) 1,202,800 6,277,113
Footstar, Inc. (a) 17,500 457,188
Gap, Inc. 113,000 4,392,875
Goody's Family Clothing (a) 161,900 4,432,013
Payless ShoeSource, Inc. (a) 34,488 1,886,063
Ross Stores, Inc. 9,800 320,338
TJX Companies, Inc. 219,000 5,776,125
24,586,915
DRUG STORES - 0.9%
CVS Corp. 524,061 26,858,126
General Nutrition Companies, Inc. (a) 12,400 347,200
27,205,326
GENERAL MERCHANDISE STORES - 2.2%
Coles Myer Ltd. 261,700 1,359,096
Costco Companies, Inc. (a) 227,400 7,475,775
Dayton Hudson Corp. 176,400 9,382,275
Dollar Tree Stores (a) 20,000 1,007,500
Federated Department Stores, Inc. (a) 41,800 1,452,550
Hudson's Bay Co. Ord. 7,000 157,172
K mart Corp. (a) 319,200 3,910,200
Kohls Corp. (a) 54,600 2,890,388
Meyer (Fred), Inc. (a) 38,900 2,010,644
Michaels Stores, Inc. (a) 3,600 76,275
99 Cents Only Stores (a) 50,000 1,506,250
Nordstrom, Inc. 72,500 3,557,031
Stein Mart, Inc. (a) 99,200 2,976,000
Wal-Mart Stores, Inc. 685,200 23,168,325
Woolworth Corp. (a) 347,200 8,332,800
Woolworths Ltd. 440,700 1,444,973
70,707,254
GROCERY STORES - 1.1%
Ahold NV 23,645 1,993,591
American Stores Co. 9,600 474,000
Asda Group PLC 866,100 1,787,828
Dominick's Supermarkets, Inc. (a) 161,000 4,286,625
SHARES VALUE (NOTE 1)
Fleming Companies, Inc. 28,500 $ 513,000
Loblaw Companies Ltd. 37,600 517,437
Quality Food Centers, Inc. (a) 142,200 5,403,600
Richfood Holdings, Inc. Class A 313,100 8,140,600
Safeway, Inc. (a) 289,600 13,357,800
36,474,481
RETAIL & WHOLESALE, MISCELLANEOUS - 2.4%
Barnes & Noble, Inc. (a) 2,200 94,600
Bed Bath & Beyond, Inc. 1,000 30,375
Circuit City Stores, Inc. - Circuit City
Group 223,900 7,962,444
Comcast Corp.:
Class A 109,000 2,282,188
Class A special 123,800 2,646,225
Fabri-Centers of America, Inc.
Class A (a) 3,500 95,375
Fingerhut Companies, Inc. 23,100 402,806
Hancock Fabrics, Inc. 79,400 1,091,750
Home Depot, Inc. (The) 493,800 34,041,338
Pier 1 Imports, Inc. 7,200 190,800
Staples, Inc. (a) 307,100 7,140,075
Tiffany & Co., Inc. 39,700 1,833,644
Toys "R" Us, Inc. (a) 253,507 8,872,745
U.S. Office Products Co. (a) 291,600 8,912,025
Viking Office Products, Inc. (a) 16,300 309,700
Williams-Sonoma, Inc. 1,000 42,750
75,948,840
TOTAL RETAIL & WHOLESALE 234,922,816
SERVICES - 3.4%
ADVERTISING - 0.4%
Interpublic Group of Companies, Inc. 75,400 4,622,963
Lycos, Inc. (a) 5,200 66,300
Omnicom Group, Inc. 64,400 3,968,650
Outdoor Systems, Inc. (a) 88,200 3,373,650
12,031,563
EDUCATIONAL SERVICES - 0.0%
Apollo Group, Inc. Class A (a) 700 24,675
LEASING & RENTAL - 0.6%
Alrenco, Inc. (a) 150,000 1,987,500
Budget Group, Inc. Class A (a) 106,600 3,677,700
Danka Business Systems PLC
sponsored ADR 21,300 870,638
Hanover Compressor Co. 2,400 46,800
Hertz Corp. Class A 185,700 6,685,200
Rent-Way, Inc. (a) 37,800 557,550
Republic Industries, Inc. (a) 162,400 4,039,700
Ryder Systems, Inc. 48,300 1,593,900
19,458,988
PRINTING - 0.2%
ASM Lithography Holding NV (a) 56,800 3,322,800
Standard Register Co. 72,300 2,214,188
Valassis Communications, Inc. (a) 35,400 849,600
6,386,588
SERVICES - 2.2%
ADT Ltd. (a) 465,900 15,374,700
APAC Teleservices, Inc. (a) 695,000 13,509,063
AccuStaff, Inc. (a) 186,400 4,415,350
Assisted Living Concepts, Inc. (a) 8,100 223,763
Borg Warner Security Corp. (a) 37,400 668,525
Corestaff, Inc. 3,100 83,700
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SERVICES - CONTINUED
SERVICES - CONTINUED
Corrections Corp. of America (a) 29,700 $ 1,180,575
Dun & Bradstreet Corp. 48,300 1,267,875
Ecolab, Inc. 237,400 11,335,850
Hays PLC 271,800 2,579,053
International Service Systems AS,
Series B (a) 22,100 791,948
Learning Tree International, Inc. (a) 12,200 541,375
National Service Industries, Inc. 48,300 2,351,606
Norrell Corp. GA 7,100 234,300
Personnel Group of America, Inc. (a) 6,900 198,806
Pierce Leahy Corp. 8,600 154,800
Pittston Co. (Brinks Group) 7,600 228,000
Premier Technologies, Inc. (a) 11,700 304,200
Registry, Inc. 1,200 55,200
Rentokil Group PLC 741,244 2,598,696
Robert Half International, Inc. (a) 64,600 3,040,238
Securicor Group PLC 528,800 2,508,836
Securitas AB Class B 83,800 2,366,067
Service Corp. International 8,300 272,863
Snyder Communications, Inc. (a) 15,200 409,450
Staffmark, Inc. (a) 17,300 387,088
SGS Societe Generale de Surveillance
Holdings SA:
(Bearer) 900 1,921,314
(Reg.) 1,340 527,198
Telespectrum Worldwide, Inc. (a) 135,700 954,141
Wackenhut Corp. 2,600 62,400
Wackenhut Corrections Corp. (a) 27,900 812,588
71,359,568
TOTAL SERVICES 109,261,382
TECHNOLOGY - 14.7%
COMMUNICATIONS EQUIPMENT - 4.2%
Alcatel Alsthom Compagnie Generale
d'Electricite SA 258,660 32,375,388
ADC Telecommunications, Inc. 11,300 377,138
Advanced Fibre Communication, Inc. 93,900 5,669,213
Boston Technology, Inc. (a) 27,600 815,925
Ciena Corp. 84,800 3,996,200
Cisco Systems, Inc. (a) 49,900 3,349,538
DSC Communications Corp. (a) 66,700 1,484,075
Davox Corp. (a) 23,650 845,488
Dynatech Corp. (a) 31,300 1,118,975
Ericsson (L.M.) Telephone Co.:
Class B 5,800 228,740
Class B ADR 116,800 4,599,000
Lucent Technologies, Inc. 482,600 34,777,363
Newbridge Networks Corp. (a) 212,000 9,222,000
Nokia Corp. AB sponsored ADR 111,900 8,252,625
Northern Telecom Ltd. 184,200 16,603,549
Tekelec (a) 9,800 346,675
Tellabs, Inc. (a) 156,300 8,733,263
132,795,155
COMPUTER SERVICES & SOFTWARE - 3.6%
Acxiom Corp. (a) 2,100 43,050
Advanced Communication Systems, Inc. 275,100 2,097,638
Alphanet Solutions, Inc. (a) 29,900 441,025
Aspen Technology, Inc. (a) 2,500 94,063
Automatic Data Processing, Inc. 280,300 13,174,100
Broderbund Software, Inc. (a) 49,300 1,217,094
Baan Co. NV (a) 23,100 1,591,013
SHARES VALUE (NOTE 1)
CBT Group PLC sponsored ADR (a) 20,000 $ 1,262,500
CUC International, Inc. (a) 321,300 8,293,556
Ceridian Corp. (a) 252,216 10,656,126
Citrix Systems, Inc. (a) 61,300 2,689,538
Computer Learning Centers, Inc. 2,000 84,000
Computer Sciences Corp. (a) 17,600 1,269,400
DST Systems, Inc. 94,000 3,131,375
ECI Telecom Ltd. 51,600 1,535,100
Electronic Arts, Inc. (a) 11,700 393,413
Electronics for Imaging, Inc. 4,000 189,000
Engineering Animation, Inc. (a) 36,900 1,245,375
Equifax, Inc. 145,300 5,403,344
First Data Corp. 172,000 7,557,250
GT Interactive Software, Inc. (a) 94,000 1,116,250
HBO & Co. 11,900 819,613
Intersolv, Inc. (a) 22,600 211,875
Keane, Inc. (a) 67,400 3,504,800
Maxis, Inc. (a) 32,000 384,000
McAfee Associates, Inc. (a) 37,900 2,392,438
Metro Information Services, Inc. 3,100 61,225
Microsoft Corp. (a) 302,300 38,203,163
Netscape Communications Corp. (a) 12,400 397,575
New Era of Networks, Inc. 27,800 458,700
Ontrack Data International, Inc. 3,600 82,800
Open Market, Inc. (a) 48,000 636,000
Oracle Systems Corp. (a) 4,400 221,650
Paychex, Inc. 11,250 427,500
RWD Technologies, Inc. 500 8,625
Radiant Systems, Inc. 4,400 91,850
Saville Systems Ireland PLC
sponsored ADR (a) 19,000 988,000
Scopus Technology, Inc. (a) 46,500 1,040,438
Simulation Sciences, Inc. 7,700 117,425
Symantec Corp. (a) 6,300 122,850
USCS International, Inc. (a) 23,000 753,250
Visio Corp. (a) 8,600 606,300
115,014,287
COMPUTERS & OFFICE EQUIPMENT - 2.3%
Apex PC Solutions, Inc. 2,600 51,350
Bay Networks, Inc. (a) 5,200 138,125
Bell & Howell Co. (a) 13,700 422,131
Compaq Computer Corp. (a) 147,000 14,589,750
Comverse Technology, Inc. (a) 14,700 764,400
Creative Technology Corp. Ltd. (a) 36,700 623,900
Data General Corp. (a) 53,900 1,401,400
Dell Computer Corp. (a) 117,100 13,751,931
Diebold, Inc. 10,575 412,425
EMC Corp. (a) 455,600 17,768,400
International Business Machines Corp. 48,000 4,329,000
Kronos, Inc. (a) 58,800 1,617,000
Overland Data, Inc. 6,300 33,863
Pitney Bowes, Inc. 97,600 6,783,200
Procom Technology, Inc. 44,900 482,675
Quantum Corp. (a) 136,200 2,766,563
Seagate Technology (a) 500 17,594
Stratus Computer, Inc. (a) 27,900 1,395,000
Sun Microsystems, Inc. (a) 38,500 1,432,922
Symbol Technologies, Inc. 132,300 4,448,588
73,230,217
ELECTRONIC INSTRUMENTS - 1.1%
Applied Materials, Inc. (a) 104,200 7,378,663
KLA Instruments Corp. (a) 31,400 1,530,750
Laser Power Corp. 100,000 587,500
Perkin-Elmer Corp. 142,100 11,305,831
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TECHNOLOGY - CONTINUED
ELECTRONIC INSTRUMENTS - CONTINUED
Tektronix, Inc. 28,000 $ 1,680,000
Teradyne, Inc. (a) 51,100 2,005,675
Thermo Electron Corp. (a) 219,800 7,473,200
Thermoquest Corp. (a) 5,100 79,050
Waters Corp. (a) 113,100 4,057,463
36,098,132
ELECTRONICS - 3.3%
Altera Corp. (a) 92,300 4,661,150
Analog Devices, Inc. (a) 15,200 403,750
DII Group, Inc. 9,300 409,200
Etec Systems, Inc. (a) 4,900 210,088
Griffon Corp. (a) 118,300 1,619,231
Intel Corp. 111,700 14,167,069
KEMET Corp. (a) 15,700 390,538
Kent Electronics Corp. (a) 7,400 271,488
Lattice Semiconductor Corp. (a) 49,100 2,774,150
Linear Technology Corp. 35,400 1,831,950
MRV Communications, Inc. (a) 12,400 365,800
Maxim Integrated Products, Inc. (a) 53,700 3,054,188
Micro Linear Corp. (a) 17,000 178,500
Microchip Technology, Inc. (a) 29,300 871,675
Micron Technology, Inc. 259,700 10,371,769
Motorola, Inc. 120,900 9,188,400
National Semiconductor Corp. (a) 206,000 6,308,750
PMC-Sierra, Inc. (a) 34,700 910,875
Photronics, Inc. (a) 8,100 386,775
SGS Thomson Microelectronics NV (a) 7,400 592,000
Sanmina Corp. (a) 5,950 377,825
Semtech Corp. (a) 52,400 1,912,600
Solectron Corp. (a) 25,500 1,785,000
Sterling Commerce, Inc. 9,400 309,025
Storage Technology Corp. (a) 75,500 3,359,750
Texas Instruments, Inc. 381,900 32,103,469
Unitrode Corp. (a) 102,600 5,168,475
Vishay Intertechnology, Inc. 115 3,328
Vitesse Semiconductor Corp. (a) 33,000 1,078,688
Zero Corp. 74,400 1,953,000
107,018,506
PHOTOGRAPHIC EQUIPMENT - 0.2%
Polaroid Corp. 125,500 6,965,250
TOTAL TECHNOLOGY 471,121,547
TRANSPORTATION - 1.1%
AIR TRANSPORTATION - 0.3%
Comair Holdings, Inc. 13,600 376,550
Continental Airlines, Inc. Class B (a) 169,400 5,918,413
Delta Air Lines, Inc. 33,900 2,779,800
Ryanair Holdings PLC sponsored ADR 13,100 355,338
Viad Corp. 43,700 841,225
10,271,326
RAILROADS - 0.3%
Bombardier, Inc. Class B 73,600 1,668,547
CSX Corp. 25,100 1,393,050
Canadian Pacific Ltd. 2,300 65,469
Canadian National Railway Co. 17,600 767,407
Wisconsin Central Transportation
Corp. (a) 158,200 5,892,950
9,787,423
SHARES VALUE (NOTE 1)
TRUCKING & FREIGHT - 0.5%
Air Express International Corp. 7,700 $ 306,075
Airborne Freight Corp. 1,500 62,813
CNF Transportation, Inc. 168,700 5,440,575
Expeditors International of
Washington, Inc. 84,800 2,406,200
Roadway Express, Inc. 21,300 497,888
Swift Transportation Co., Inc. (a) 43,400 1,280,300
USFreightways Corp. 98,200 2,540,925
Werner Enterprises, Inc. 3,400 65,875
XTRA Corp. 4,600 202,113
Yellow Corp. (a) 124,100 2,776,738
15,579,502
TOTAL TRANSPORTATION 35,638,251
UTILITIES - 2.9%
CELLULAR - 0.3%
Mobile Telecommunications Technologies,
Inc. (a) 138,900 1,988,006
Vodafone Group PLC sponsored ADR 128,100 6,204,844
8,192,850
ELECTRIC UTILITY - 0.5%
Edison International 333,200 8,288,350
National Grid Co. PLC 1,637,600 5,983,817
Ogden Corp. 9,300 202,275
14,474,442
GAS - 0.2%
El Paso Natural Gas Co. 81,400 4,477,000
Enron Corp. 39,300 1,603,931
Sonat, Inc. 28,800 1,476,000
7,556,931
TELEPHONE SERVICES - 1.9%
Brooks Fiber Properties, Inc. (a) 122,500 4,134,375
Cable & Wireless PLC Ord. 666,900 6,106,036
Cincinnati Bell, Inc. 27,000 850,500
Excel Communication, Inc. 20,300 583,625
MCI Communications Corp. 192,000 7,350,000
McLeodUSA, Inc. 132,600 4,475,250
Qwest Communications
International, Inc. 45,000 1,226,250
Sprint Corp. 5,600 294,700
STAR Telecommunications, Inc. 49,400 654,550
Tel-Save Holdings, Inc. (a) 2,600 39,650
Telco Communications Group, Inc. 40,000 1,300,000
Teleport Communications Group, Inc.
Class A (a) 101,000 3,446,625
US WEST Media Group (a) 108,400 2,195,100
WorldCom, Inc. (a) 909,390 29,100,480
61,757,141
TOTAL UTILITIES 91,981,364
TOTAL COMMON STOCKS
(Cost $2,418,784,303) 2,972,841,525
PREFERRED STOCKS - 0.8%
CONVERTIBLE PREFERRED STOCKS - 0.3%
CONSTRUCTION & REAL ESTATE - 0.2%
REAL ESTATE INVESTMENT TRUSTS - 0.2%
Vornado Realty Trust $3.25, Series A 120,800 6,538,300
PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
CONVERTIBLE PREFERRED STOCKS - CONTINUED
RETAIL & WHOLESALE - 0.1%
APPAREL STORES - 0.1%
TJX Companies, Inc.,
Series E, $7.00 8,400 $ 2,394,000
TOTAL CONVERTIBLE PREFERRED STOCKS 8,932,300
NONCONVERTIBLE PREFERRED STOCKS - 0.5%
TECHNOLOGY - 0.1%
COMPUTER SERVICES & SOFTWARE - 0.1%
SAP AG 27,900 5,754,225
UTILITIES - 0.4%
TELEPHONE SERVICES - 0.4%
Stet (Societa Finanziaria
Telefonica) Spa 1,396,200 4,838,120
Telecom Italia Mobile Spa de Risp 4,234,800 7,516,731
12,354,851
TOTAL NONCONVERTIBLE PREFERRED STOCKS 18,109,076
TOTAL PREFERRED STOCKS
(Cost $25,279,293) 27,041,376
CONVERTIBLE BONDS - 0.1%
MOODY'S PRINCIPAL
RATINGS (C) AMOUNT
HEALTH - 0.1%
MEDICAL FACILITIES MANAGEMENT - 0.1%
NovaCare, Inc.
5 1/2%, 1/15/00 B1 $ 1,624,000 1,526,560
MEDIA & LEISURE - 0.0%
BROADCASTING - 0.0%
Home Shopping Network, Inc.
5 7/8%, 3/1/06 (b) B- 445,000 570,713
Home Shopping Network, Inc.
5 7/8%, 3/1/06 B3 29,000 37,193
Jacor Communications, Inc.
liquid yield option notes
0%, 6/12/11 B3 302,000 169,498
777,404
TECHNOLOGY - 0.0%
ELECTRONICS - 0.0%
National Semiconductor Corp.
6 1/2%, 10/1/02 (b) Ba2 1,355,000 1,397,344
TOTAL CONVERTIBLE BONDS
(Cost $3,298,523) 3,701,308
U.S. TREASURY OBLIGATIONS - 1.2%
7 5/8%, 2/15/25 Aaa $ 30,000,000 32,850,000
6 3/4%, 8/15/26 Aaa 5,000,000 4,948,450
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $38,564,727) 37,798,450
CASH EQUIVALENTS - 4.9%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 5.93%, dated
6/30/97 due 7/1/97 $ 157,004,858 $ 156,979,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $2,642,905,846) $ 3,198,361,659
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 $3,954,433 or 0.1% of net
assets.
3. Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
4. 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. $ - $ 130,000 $ - $ -
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $2,581,519,143 and $2,067,054,575, respectively, of which U.S.
government and government agency obligations aggregated $12,330,855 and
$83,163,081, respectively.
The market value of futures contracts opened and closed during the period
amounted to $191,296,108 and $192,542,878, 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 $736,024 for the period.
Distribution of investments by country of issue, as a percentage of total
value of investment in securities, is as follows:
United States 85.1%
Netherlands 2.6
United Kingdom 2.6
Canada 2.2
Netherland Antilles 1.6
Switzerland 1.4
France 1.4
Bermuda 1.1
Others (individually less than 1%) 2.0
TOTAL 100.0%
INCOME TAX INFORMATION
At June 30, 1997, the aggregate cost of investment securities for income
tax purposes was $2,644,690,371. Net unrealized appreciation aggregated
$553,671,288, of which $586,693,869 related to appreciated investment
securities and $33,022,581 related to depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in $ 3,198,361,659
securities, at
value (including
repurchase
agreements of
$156,979,000) (cost
$2,642,905,846) -
See accompanying
schedule
Receivable for 59,459,081
investments sold
Receivable for fund 6,523,051
shares sold
Dividends receivable 2,975,377
Interest receivable 1,050,854
TOTAL ASSETS 3,268,370,022
LIABILITIES
Payable to custodian $ 9,448
bank
Payable for 42,551,506
investments
purchased
Payable for fund 751,649
shares redeemed
Accrued management 1,562,871
fee
Other payables and 294,808
accrued expenses
TOTAL LIABILITIES 45,170,282
NET ASSETS $ 3,223,199,740
Net Assets consist of:
Paid in capital $ 2,591,680,584
Undistributed net 14,872,629
investment income
Accumulated 61,194,489
undistributed net
realized gain (loss)
on investments and
foreign currency
transactions
Net unrealized 555,452,038
appreciation
(depreciation) on
investments
and assets and
liabilities in foreign
currencies
NET ASSETS, for $ 3,223,199,740
179,793,883 shares
outstanding
NET ASSET VALUE, $17.93
offering price
and redemption
price per share
($3,223,199,740 (divided by)
179,793,883
shares)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $ 16,173,638
Dividends
Interest 9,201,324
TOTAL INCOME 25,374,962
EXPENSES
Management fee $ 8,331,378
Transfer agent fees 997,003
Accounting fees and 401,998
expenses
Non-interested 5,810
trustees'
compensation
Custodian fees and 207,894
expenses
Registration fees 13,357
Audit 20,419
Legal 2,911
Miscellaneous 46,997
Total expenses 10,027,767
before reductions
Expense reductions (513,563 9,514,204
)
NET INVESTMENT 15,860,758
INCOME
REALIZED AND
UNREALIZED GAIN
(LOSS)
Net realized gain
(loss) on:
Investment 69,106,380
securities (including
realized gain of
$2,496 on sales of
investments in
affiliated issuers)
Foreign currency (13,416
transactions )
Futures contracts 1,246,770 70,339,734
Change in net
unrealized
appreciation
(depreciation) on:
Investment 232,852,484
securities
Assets and (4,098 232,848,386
liabilities in )
foreign currencies
NET GAIN (LOSS) 303,188,120
NET INCREASE $ 319,048,878
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
OTHER INFORMATION $ 506,300
Expense reductions
Directed
brokerage
arrangements
Custodian interest 7,263
credits
$ 513,563
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED)
Operations $ 15,860,758 $ 20,976,837
Net investment
income
Net realized gain 70,339,734 49,001,422
(loss)
Change in net 232,848,386 254,150,553
unrealized
appreciation
(depreciation)
NET INCREASE 319,048,878 324,128,812
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
Distributions to (21,846,321) -
shareholders
From net
investment income
From net realized (57,736,705) (9,296,351)
gain
TOTAL DISTRIBUTIONS (79,583,026) (9,296,351)
Share transactions 704,874,447 1,380,209,873
Net proceeds from
sales of shares
Reinvestment of 79,583,026 9,296,351
distributions
Cost of shares (194,826,644) (187,235,370)
redeemed
NET INCREASE 589,630,829 1,202,270,854
(DECREASE) IN NET
ASSETS RESULTING
FROM SHARE
TRANSACTIONS
TOTAL INCREASE 829,096,681 1,517,103,315
(DECREASE) IN NET
ASSETS
NET ASSETS
Beginning of period 2,394,103,059 876,999,744
End of period $ 3,223,199,740 $ 2,394,103,059
(including
undistributed net
investment
income of
$14,872,629 and
$20,976,837,
respectively)
OTHER INFORMATION
Shares
Sold 42,121,561 92,660,951
Issued in 4,834,935 674,626
reinvestment of
distributions
Redeemed (11,722,580) (12,369,121)
Net increase 35,233,916 80,966,456
(decrease)
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
SIX MONTHS YEARS ENDED JANUARY 3, 1995
ENDED DECEMBER 31, (COMMENCEMENT
JUNE 30, 1997 OF OPERATIONS) TO
DECEMBER 31,
SELECTED PER-SHARE DATA (UNAUDITED) 1996 1995
Net asset value, $ 16.56 $ 13.79 $ 10.00
beginning of period
Income from
Investment
Operations
Net investment .10 D .14 .06
income
Net realized and 1.78 2.76 3.91
unrealized gain
(loss)
Total from 1.88 2.90 3.97
investment
operations
Less Distributions
From net (.14) - (.06)
investment income
From net realized (.37) (.13) (.12)
gain
Total distributions (.51) (.13) (.18)
Net asset value, end $ 17.93 $ 16.56 $ 13.79
of period
TOTAL RETURN B, C 11.63% 21.22% 39.72%
RATIOS AND
SUPPLEMENTAL
DATA
Net assets, end of $ 3,223,200 $ 2,394,103 $ 877,000
period (000
omitted)
Ratio of expenses to .73% A .74% .72%
average net assets
Ratio of expenses to .69% A, E .71% E .72%
average net assets
after expense
reductions
Ratio of net 1.16% A 1.33% 1.07%
investment income
to average net
assets
Portfolio turnover rate 163% A 178% 132%
Average commission $ .0365 $ .0343
rate F
A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR
ARE NOT ANNUALIZED AND 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 NET INVESTMENT INCOME PER SHARE HAS BEEN
CALCULATED BASED ON AVERAGE SHARES OUTSTANDING
DURING THE PERIOD.
E 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).
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.
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
JUNE 30, 1997 YEAR YEARS YEARS
GROWTH 17.92% 19.89% 14.33%
S&P 500(registered trademark) 34.70% 19.78% 14.64%
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 long-term growth and
short-term volatility. 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 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
1995/01/03 10000.00 10000.00
1995/01/31 10060.00 10258.23
1995/02/28 10370.00 10658.00
1995/03/31 10560.00 10972.51
1995/04/30 10930.00 11295.66
1995/05/31 11440.00 11747.14
1995/06/30 11790.00 12020.03
1995/07/31 12180.00 12418.61
1995/08/31 12260.00 12449.78
1995/09/30 12470.00 12975.16
1995/10/31 12560.00 12928.84
1995/11/30 12920.00 13496.42
1995/12/31 13251.81 13756.36
1996/01/31 13444.45 14224.63
1996/02/29 13434.43 14356.49
1996/03/31 13393.72 14494.74
1996/04/30 13607.45 14708.39
1996/05/31 13912.77 15087.72
1996/06/30 14024.73 15145.21
1996/07/31 13617.62 14476.09
1996/08/31 13699.05 14781.39
1996/09/30 14360.59 15613.29
1996/10/31 14950.89 16043.91
1996/11/30 16080.60 17256.66
1996/12/31 15673.50 16914.81
1997/01/31 16416.46 17971.65
1997/02/28 16573.05 18112.54
1997/03/31 15727.48 17368.30
1997/04/30 16446.21 18405.19
1997/05/31 17513.74 19525.70
1997/06/30 18095.06 20400.45
Let's say hypothetically that $10,000 was invested in Growth Portfolio on
June 30, 1987. As the chart shows, by June 30, 1997, the value of the
investment would have grown to $38,148 - a 281.48% increase on the initial
investment. For comparison, look at how the S&P 500 did over the same
period. With dividends and capital gains, if any, reinvested, the same
$10,000 investment would have grown to $39,269 - a 292.69% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Philip Morris Companies, Inc. 4.3
Microsoft Corp. 3.3
Merck & Co., Inc. 3.1
Wal-Mart Stores, Inc. 2.3
Boeing Co. 2.2
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Technology 20.1
Health 16.7
Nondurables 9.2
Retail & Wholesale 8.5
Finance 7.8
ASSET ALLOCATION AS OF JUNE 30, 1997 *
Row: 1, Col: 1, Value: 8.4
Row: 1, Col: 2, Value: 91.59999999999999
Stocks 91.6%
Short-term investments 8.4%
FOREIGN INVESTMENTS 6.8%
*
(% OF FUND'S INVESTMENTS)
VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with
Jennifer Uhrig,
Portfolio Manager of Growth Portfolio
Q. HOW DID THE FUND PERFORM, JENNIFER?
A. The performance was disappointing. For the six months that ended June
30, 1997, the fund underperformed the Standard & Poor's 500 Index, which
had a six-month return of 20.61%. For the 12-month period that ended June
30, 1997, the fund trailed the S&P 500's return of 34.70%.
Q. WHAT FACTORS INFLUENCED THE FUND'S PERFORMANCE?
A. A distinct lack of market breadth during the period affected the
performance of many diversified stock funds, as much of the market's gain
throughout the period was concentrated among a select group of
household-name, large-cap stocks. Many of these "mega-cap" stocks comprised
the top tier of the S&P 500. The fund participated in this rally to some
extent - I increased the fund's weightings in the market's 50 largest
stocks to around 35% of total investments - but I wasn't overweighted in
enough of them to fully capitalize on the large-cap rally. Additionally, a
technology stock correction in early 1997 had a negative impact on
performance.
Q. WHAT SORTS OF CHANGES HAVE YOU MADE SINCE TAKING OVER THE FUND IN
JANUARY?
A. First off, I've reduced the number of individual positions within the
portfolio. Rather than having an abundance of smaller positions, none of
which are particularly meaningful to performance, I've concentrated on the
stocks in which I'm most confident. A by-product of this strategy is that
the concentration among the fund's top positions has increased. At the
beginning of the period, the fund's top 10 positions comprised
approximately 18% of the fund's investments; at the end of the period, that
percentage had jumped to approximately 25%. In addition, I also raised the
fund's average market capitalization weighting. At the beginning of the
period, the fund's weighted market cap was around $13 billion. This figure
rose to around $23 billion by period's end, but still was well below the
S&P 500's average market cap of $33 billion.
Q. WHICH STOCKS PERFORMED WELL? WHERE DID THE DISAPPOINTMENTS LIE?
A. Health care stocks did well, with some of the larger pharmaceutical
companies leading the way. The fund owned large-cap health care names such
as Bristol-Myers Squibb and Schering-Plough, both of which performed well.
Other stocks that contributed positively included WorldCom, a
telecommunications services company, CompUSA and Philip Morris. Retail
stocks, on the other hand, turned in a subpar performance as the fund's
positions in PETsMART, Viking Office Products and Just for Feet had
negative effects on performance.
Q. PHILIP MORRIS IS THE FUND'S LARGEST SINGLE POSITION AT AROUND 4.3%. CAN
YOU EXPLAIN HOW THIS STOCK WILL BE AFFECTED BY THE RECENT TOBACCO
LITIGATION SETTLEMENT?
A. I think the settlement will eventually benefit everyone involved.
Cigarette prices will likely rise, as tobacco companies search for ways to
fund their liabilities. From a public health perspective, a price increase
would almost certainly reduce the number of smokers. So that's positive.
From a shareholder perspective, Philip Morris' earnings may be affected by
lower sales volumes, but any decline may be offset by the potential for the
stock's price-to-earnings ratio to rise. This is because the valuation of
the stock was penalized during litigation due to certain risks. As a final
note, I would add that the settlement still needs to go to Congress to
become law. So while the settlement appears logical from all sides, it
still may get bogged down in the political arena.
Q. WHAT'S YOUR OUTLOOK?
A. Over the past year or so, stocks in general have benefited from
favorable investment conditions. Economic growth has remained strong and,
with no signs of inflation, interest rate levels have remained low. I don't
know how long this backdrop can continue, but I'm optimistic about the
outlook for growth stocks. High interest rates, even more so than weak
earnings, have a negative influence on growth stocks. I think higher rates,
as a result of an acceleration in the economy and higher inflation, are
unlikely given the Federal Reserve Board's recent action to reign in the
economy before it overheats.
FUND FACTS
GOAL: to provide capital growth by investing
primarily in common stocks and securities
convertible into common stocks
START DATE: January 3, 1995
SIZE: as of June 30, 1997, more than
$706 million
MANAGER: George Vanderheiden, since
inception; joined Fidelity in 1971
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 91.6%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 3.8%
AEROSPACE & DEFENSE - 3.3%
Boeing Co. 2,843,000 $ 150,856,688
Gulfstream Aerospace Corp. (a) 514,300 15,171,850
Lockheed Martin Corp. 323,800 33,533,538
United Technologies Corp. 301,000 24,983,000
Wyman-Gordon Co. (a) 184,200 4,973,400
229,518,476
DEFENSE ELECTRONICS - 0.5%
Raytheon Co. 619,000 31,569,000
TOTAL AEROSPACE & DEFENSE 261,087,476
BASIC INDUSTRIES - 3.1%
CHEMICALS & PLASTICS - 1.0%
Air Products & Chemicals, Inc. 158,300 12,861,875
Cytec Industries, Inc. (a) 443,300 16,568,338
Monsanto Co. 782,700 33,705,019
Praxair, Inc. 178,300 9,984,800
73,120,032
IRON & STEEL - 0.7%
Inland Steel Industries, Inc. 557,000 14,551,625
Nucor Corp. 555,500 31,385,750
45,937,375
PACKAGING & CONTAINERS - 0.5%
Owens-Illinois, Inc. 1,050,100 32,553,100
PAPER & FOREST PRODUCTS - 0.9%
Kimberly-Clark Corp. 1,024,700 50,978,825
Stone Container Corp. 595,000 8,515,938
59,494,763
TOTAL BASIC INDUSTRIES 211,105,270
DURABLES - 1.9%
AUTOS, TIRES, & ACCESSORIES - 0.2%
AutoZone, Inc. (a) 357,900 8,433,019
Circuit City Stores, Inc. - CarMax Group 324,500 4,644,406
13,077,425
CONSUMER DURABLES - 0.8%
Corning, Inc. 491,300 27,328,563
Minnesota Mining & Manufacturing Co. 255,400 26,050,800
53,379,363
TEXTILES & APPAREL - 0.9%
Liz Claiborne, Inc. 322,500 15,036,563
Reebok International Ltd. 399,900 18,695,325
Timberland Co. Class A (a)(b) 481,700 31,310,500
65,042,388
TOTAL DURABLES 131,499,176
ENERGY - 6.1%
ENERGY SERVICES - 3.7%
Dresser Industries, Inc. 657,100 24,476,975
Falcon Drilling, Inc. (a) 445,000 25,643,125
Halliburton Co. 800,200 63,415,850
Schlumberger Ltd. 769,600 96,200,000
Transocean Offshore, Inc. 132,400 9,615,550
Varco International, Inc. (a) 292,000 9,417,000
Western Atlas, Inc. (a) 337,500 24,721,875
253,490,375
SHARES VALUE (NOTE 1)
OIL & GAS - 2.4%
British Petroleum PLC ADR 376,326 $ 28,177,409
Burlington Resources, Inc. 168,300 7,426,238
Chesapeake Energy Corp. (a) 372,000 3,650,250
EVI, Inc. (a) 154,000 6,468,000
Royal Dutch Petroleum Co. 706,800 38,432,250
Tosco Corp. 1,099,600 32,919,275
Total SA:
Class B 310,400 31,355,668
sponsored ADR 179,800 9,102,375
Union Pacific Resources Group, Inc. 247,441 6,155,095
Vintage Petroleum, Inc. 209,200 6,432,900
170,119,460
TOTAL ENERGY 423,609,835
FINANCE - 7.8%
BANKS - 0.9%
Bank of New York Co., Inc. 533,900 23,224,650
NationsBank Corp. 642,500 41,441,250
64,665,900
CREDIT & OTHER FINANCE - 1.7%
American Express Co. 645,600 48,097,200
Associates First Capital Corp. 271,600 15,073,800
Beneficial Corp. 266,900 18,966,581
Household International, Inc. 268,108 31,485,933
113,623,514
FEDERAL SPONSORED CREDIT - 2.5%
Federal Home Loan Mortgage
Corporation 1,883,600 64,748,750
Federal National Mortgage Association 1,760,500 76,801,813
Student Loan Marketing Association 262,300 33,312,100
174,862,663
INSURANCE - 2.7%
Allmerica Financial Corp. 313,100 12,484,863
Allstate Corp. 503,600 36,762,800
AMBAC, Inc. 424,200 32,398,275
American International Group, Inc. 300,000 44,812,500
MBIA, Inc. 92,000 10,378,750
UNUM Corp. 1,165,600 48,955,200
185,792,388
TOTAL FINANCE 538,944,465
HEALTH - 16.7%
DRUGS & PHARMACEUTICALS - 9.0%
American Home Products Corp. 1,048,500 80,210,250
Barr Laboratories, Inc. (a) 52,400 2,305,600
Bristol-Myers Squibb Co. 1,834,600 148,602,600
Elan Corp. PLC ADR (a) 456,900 20,674,725
Genentech, Inc. (a) 356,900 21,034,794
Merck & Co., Inc. 2,084,900 215,787,150
Novartis sponsored ADR 485,400 38,832,000
Schering-Plough Corp. 1,198,000 57,354,250
SmithKline Beecham PLC ADR 429,400 39,343,775
624,145,144
MEDICAL EQUIPMENT & SUPPLIES - 4.9%
Abbott Laboratories 1,103,400 73,651,950
Boston Scientific Corp. (a) 569,000 34,957,938
Cardinal Health, Inc. 210,100 12,028,225
Johnson & Johnson 2,193,300 141,193,688
Medtronic, Inc. 275,600 22,323,600
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
HEALTH - CONTINUED
MEDICAL EQUIPMENT & SUPPLIES - CONTINUED
St. Jude Medical, Inc. (a) 777,700 $ 30,330,300
Sofamor/Danek Group, Inc. (a) 346,300 15,843,225
Sybron International Corp. (a) 259,100 10,331,613
340,660,539
MEDICAL FACILITIES MANAGEMENT - 2.8%
Carematrix Corp. (a) 205,300 5,068,344
Columbia/HCA Healthcare Corp. 621,837 24,445,967
HEALTHSOUTH Rehabilitation
Corp. (a) 1,907,800 47,575,763
Health Management Associates, Inc.
Class A (a) 672,800 19,174,800
Humana, Inc. (a) 518,900 11,999,563
Oxford Health Plans, Inc. (a) 448,700 32,194,225
Tenet Healthcare Corp. (a) 741,800 21,929,463
United HealthCare Corp. 632,500 32,890,000
195,278,125
TOTAL HEALTH 1,160,083,808
HOLDING COMPANIES - 0.4%
Norfolk Southern Corp. 289,500 29,167,125
INDUSTRIAL MACHINERY & EQUIPMENT - 2.3%
ELECTRICAL EQUIPMENT - 1.5%
General Electric Co. 876,300 57,288,113
Harris Corp. 277,900 23,343,600
Westinghouse Electric Corp. 1,159,700 26,818,063
107,449,776
INDUSTRIAL MACHINERY & EQUIPMENT - 0.2%
Tyco International Ltd. 169,500 11,790,844
POLLUTION CONTROL - 0.6%
USA Waste Services, Inc. (a) 918,700 35,484,788
Zurn Industries, Inc. 146,500 4,211,875
39,696,663
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 158,937,283
MEDIA & LEISURE - 5.3%
BROADCASTING - 0.2%
Clear Channel Communications,
Inc. (a) 168,800 10,391,750
ENTERTAINMENT - 1.6%
Disney (Walt) Co. 1,398,200 112,205,550
LEISURE DURABLES & TOYS - 0.2%
Harley-Davidson, Inc. 240,000 11,505,000
Nintendo Co. Ltd. Ord. 64,000 5,359,152
16,864,152
LODGING & GAMING - 1.7%
Circus Circus Enterprises, Inc. (a) 635,100 15,639,338
HFS, Inc. (a) 891,500 51,707,000
Mirage Resorts, Inc. (a) 1,314,800 33,198,700
Sun International Hotels Ltd. Ord. (a) 487,900 18,021,806
118,566,844
PUBLISHING - 0.5%
New York Times Co. (The) Class A 72,000 3,564,000
Times Mirror Co. Class A 534,700 29,542,175
33,106,175
SHARES VALUE (NOTE 1)
RESTAURANTS - 1.1%
Landry's Seafood Restaurants, Inc. (a) 324,100 $ 7,454,300
McDonald's Corp. 475,500 22,972,594
Starbucks Corp. (a) 1,093,300 42,570,369
72,997,263
TOTAL MEDIA & LEISURE 364,131,734
NONDURABLES - 9.2%
BEVERAGES - 2.2%
Coca-Cola Enterprises, Inc. 805,400 18,524,200
PepsiCo, Inc. 3,600,600 135,247,538
153,771,738
FOODS - 0.7%
Campbell Soup Co. 499,900 24,995,000
Hershey Foods Corp. 391,600 21,660,375
46,655,375
HOUSEHOLD PRODUCTS - 1.4%
Clorox Co. 301,300 39,771,600
Procter & Gamble Co. 416,100 58,774,125
98,545,725
TOBACCO - 4.9%
Philip Morris Companies, Inc. 6,685,600 296,673,500
RJR Nabisco Holdings Corp. 1,286,100 42,441,300
339,114,800
TOTAL NONDURABLES 638,087,638
PRECIOUS METALS - 0.4%
Barrick Gold Corp. 415,000 9,032,521
Getchell Gold Corp. (a) 270,753 9,544,043
Newmont Mining Corp. 295,000 11,505,000
30,081,564
RETAIL & WHOLESALE - 8.5%
APPAREL STORES - 1.1%
Just for Feet, Inc. (a) 1,110,500 19,364,344
Ross Stores, Inc. 550,100 17,981,394
TJX Companies, Inc. 1,065,200 28,094,650
Talbots, Inc. 264,700 8,999,800
74,440,188
DRUG STORES - 1.0%
CVS Corp. 917,805 47,037,506
Rite Aid Corp. 497,600 24,817,800
71,855,306
GENERAL MERCHANDISE STORES - 3.0%
Consolidated Stores Corp. (a) 667,812 23,206,467
Costco Companies, Inc. (a) 694,900 22,844,838
Wal-Mart Stores, Inc. 4,798,800 162,259,425
208,310,730
GROCERY STORES - 0.1%
Safeway, Inc. (a) 200,500 9,248,063
RETAIL & WHOLESALE, MISCELLANEOUS - 3.3%
Bed Bath & Beyond, Inc. (a) 461,400 14,015,025
Corporate Express, Inc. 1,244,900 17,973,244
Home Depot, Inc. (The) 1,117,500 77,037,656
Lowe's Companies, Inc. 992,300 36,839,138
Officemax, Inc. (a) 490,600 7,083,038
Staples, Inc. (a) 386,400 8,983,800
Toys "R" Us, Inc. (a) 1,266,900 44,341,500
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
RETAIL & WHOLESALE, MISCELLANEOUS - CONTINUED
U.S. Office Products Co. (a) 243,300 $ 7,435,856
Viking Office Products, Inc. (a) 621,600 11,810,400
225,519,657
TOTAL RETAIL & WHOLESALE 589,373,944
SERVICES - 1.7%
ADVERTISING - 0.1%
Omnicom Group, Inc. 82,900 5,108,713
EDUCATIONAL SERVICES - 0.2%
Apollo Group, Inc. Class A (a) 334,300 11,784,075
LEASING & RENTAL - 0.2%
Hanover Compressor Co. 5,100 99,450
Hertz Corp. Class A 328,100 11,811,600
11,911,050
SERVICES - 1.2%
ADT Ltd. (a) 706,800 23,324,400
AccuStaff, Inc. (a) 1,002,500 23,746,719
Gartner Group, Inc. Class A (a) 837,000 30,079,688
Sitel Corp. (a) 497,900 10,269,188
87,419,995
TOTAL SERVICES 116,223,833
TECHNOLOGY - 20.1%
COMMUNICATIONS EQUIPMENT - 3.6%
ADC Telecommunications, Inc. (a) 754,400 25,178,100
Alcatel Alsthom Compagnie Generale
d'Electricite SA sponsored ADR 16,000 404,000
Alcatel Alsthom Compagnie Generale
d'Electricite SA 599,900 75,086,970
Aspect Telecommunications Corp. (a) 822,000 18,289,500
Cisco Systems, Inc. (a) 94,900 6,370,163
Lucent Technologies, Inc. 835,900 60,237,044
Nokia Corp. AB sponsored ADR 458,300 33,799,625
Tellabs, Inc. (a) 583,700 32,614,238
251,979,640
COMPUTER SERVICES & SOFTWARE - 7.8%
Broderbund Software, Inc. (a) 659,900 16,291,281
CUC International, Inc. (a) 1,482,600 38,269,613
Cadence Design Systems, Inc. (a) 573,300 19,205,550
CompUSA, Inc. (a) 2,059,700 44,283,550
Electronics for Imaging, Inc. (a) 345,900 16,343,775
Equifax, Inc. 420,500 15,637,344
Henry (Jack) & Associates, Inc. 165,600 4,015,800
Keane, Inc. (a) 344,100 17,893,200
Microsoft Corp. (a) 1,799,700 227,437,088
Oracle Systems Corp. (a) 810,800 40,844,050
Parametric Technology Corp. (a) 437,700 18,629,606
PeopleSoft, Inc. (a) 699,100 36,877,525
Policy Management Systems Corp. (a) 206,500 9,705,500
Sabre Group Holdings, Inc. Class A (a) 376,600 10,215,275
SunGard Data Systems, Inc. (a) 393,600 18,302,400
Yahoo, Inc. (a) 204,800 7,219,200
541,170,757
COMPUTERS & OFFICE EQUIPMENT - 2.5%
Adaptec, Inc. (a) 692,400 24,060,900
Compaq Computer Corp. (a) 677,100 67,202,175
Fore Systems, Inc. (a) 1,457,200 19,854,350
SHARES VALUE (NOTE 1)
Ingram Micro, Inc. Class A (a) 162,200 $ 3,913,075
Pitney Bowes, Inc. 379,500 26,375,250
Quantum Corp. (a) 560,400 11,383,125
SCI Systems, Inc. (a) 100,200 6,387,750
Tech Data Corp. (a) 539,400 16,957,388
176,134,013
ELECTRONIC INSTRUMENTS - 0.4%
Applied Materials, Inc. (a) 210,600 14,913,113
Novellus Systems, Inc. (a) 33,600 2,906,400
Waters Corp. (a) 217,800 7,813,575
25,633,088
ELECTRONICS - 5.8%
Altera Corp. (a) 393,100 19,851,550
Intel Corp. 359,900 51,038,319
Linear Technology Corp. 375,400 19,426,950
Maxim Integrated Products, Inc. (a) 273,700 15,566,688
Micron Technology, Inc. 950,600 37,964,588
Motorola, Inc. 716,600 54,461,600
Sanmina Corp. (a) 501,600 31,851,600
Solectron Corp. (a) 204,500 14,315,000
Texas Instruments, Inc. 1,315,400 110,575,813
Uniphase Corp. (a) 380,800 22,181,600
Xilinx, Inc. (a) 429,000 21,047,813
398,281,521
TOTAL TECHNOLOGY 1,393,199,019
TRANSPORTATION - 0.5%
RAILROADS - 0.5%
Wisconsin Central Transportation
Corp. (a) 919,800 34,262,550
UTILITIES - 3.8%
CELLULAR - 0.9%
AirTouch Communications, Inc. (a) 1,227,800 33,611,025
Nextel Communications, Inc.
Class A (a) 659,800 12,494,963
Vanguard Cellular Systems, Inc.
Class A (a) 1,146,700 15,623,788
61,729,776
TELEPHONE SERVICES - 2.9%
Cincinnati Bell, Inc. 657,800 20,720,700
MCI Communications Corp. 260,300 9,964,609
Sprint Corp. 893,300 47,009,913
WorldCom, Inc. (a) 3,860,170 123,525,420
201,220,642
TOTAL UTILITIES 262,950,418
TOTAL COMMON STOCKS
(Cost $4,948,655,239) 6,342,745,138
CASH EQUIVALENTS - 8.4%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 5.93%, dated
6/30/97 due 7/1/97 $ 584,241,222 584,145,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $5,532,800,239) $ 6,926,890,138
LEGEND
1. Non-income producing
2. 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
Timberland Co. Class A $ 3,474,754 $ 1,222,255 $ - $ 31,310,500
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $4,244,176,604 and $4,238,684,327, 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 $1,377,437 for the period
(see Note 4 of Notes to Financial Statements).
INCOME TAX INFORMATION
At June 30, 1996, the aggregate cost of investment securities for income
tax purposes was $5,537,054,914. Net unrealized appreciation aggregated
$1,389,835,224, of which $1,460,271,254 related to appreciated investment
securities and $70,436,030 related to depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in $ 6,926,890,138
securities, at
value (including
repurchase
agreements of
$584,145,000) (cost
$5,532,800,239) -
See accompanying
schedule
Cash 251
Receivable for 18,347,400
investments sold
Receivable for fund 3,541,061
shares sold
Dividends receivable 7,495,963
Other receivables 728,658
TOTAL ASSETS 6,957,003,471
LIABILITIES
Payable for $ 15,738,603
investments
purchased
Payable for fund 1,935,837
shares redeemed
Accrued management 3,400,703
fee
Other payables and 509,241
accrued expenses
TOTAL LIABILITIES 21,584,384
NET ASSETS $ 6,935,419,087
Net Assets consist of:
Paid in capital $ 4,909,839,898
Undistributed net 20,298,488
investment income
Accumulated 611,204,466
undistributed net
realized gain (loss)
on investments and
foreign currency
transactions
Net unrealized 1,394,076,235
appreciation
(depreciation) on
investments
and assets and
liabilities in
foreign currencies
NET ASSETS, for $ 6,935,419,087
202,783,458 shares
outstanding
NET ASSET VALUE, $34.20
offering price
and redemption
price per
share
($6,935,419,087 (divided by)
202,783,458
shares)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $ 31,247,401
Dividends
Interest 10,168,233
TOTAL INCOME 41,415,634
EXPENSES
Management fee $ 19,103,779
Transfer agent fees 2,231,258
Accounting fees and 404,942
expenses
Non-interested 13,729
trustees'
compensation
Custodian fees and 106,069
expenses
Registration fees 60,637
Audit 25,840
Legal 10,909
Miscellaneous 211,034
Total expenses 22,168,197
before reductions
Expense reductions (787,052 21,381,145
)
NET INVESTMENT 20,034,489
INCOME
REALIZED AND
UNREALIZED GAIN
(LOSS)
Net realized gain
(loss) on:
Investment 626,563,617
securities (including
realized gain of
$281,124 on sales of
investments in
affiliated issuers)
Foreign currency 288 626,563,905
transactions
Change in net
unrealized
appreciation
(depreciation) on:
Investment 189,156,287
securities
Assets and (13,643 189,142,644
liabilities in )
foreign currencies
NET GAIN (LOSS) 815,706,549
NET INCREASE $ 835,741,038
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
OTHER INFORMATION $ 781,353
Expense reductions
Directed brokerage
arrangements
Custodian interest 5,699
credits
$ 787,052
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996
Operations $ 20,034,489 $ 42,344,647
Net investment
income
Net realized gain 626,563,905 186,713,569
(loss)
Change in net 189,142,644 451,420,339
unrealized
appreciation
(depreciation)
NET INCREASE 835,741,038 680,478,555
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
Distributions to (41,142,087) (11,769,237)
shareholders
From net
investment income
From net realized (184,159,819) (297,173,230)
gain
TOTAL DISTRIBUTIONS (225,301,906) (308,942,467)
Share transactions 805,853,592 2,599,782,601
Net proceeds from
sales of shares
Reinvestment of 225,301,906 308,942,467
distributions
Cost of shares (792,599,197) (1,356,539,313)
redeemed
NET INCREASE 238,556,301 1,552,185,755
(DECREASE) IN NET
ASSETS RESULTING
FROM SHARE
TRANSACTIONS
TOTAL INCREASE 848,995,433 1,923,721,843
(DECREASE) IN NET
ASSETS
NET ASSETS
Beginning of period 6,086,423,654 4,162,701,811
End of period $ 6,935,419,087 $ 6,086,423,654
(including
undistributed net
investment
income of
$20,298,488 and
$41,404,557,
respectively)
OTHER INFORMATION
Shares
Sold 25,455,810 87,784,118
Issued in 7,138,844 11,121,040
reinvestment of
distributions
Redeemed (25,234,555) (46,058,296)
Net increase 7,360,099 52,846,862
(decrease)
<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> <C>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1997
SELECTED PER-SHARE DATA (UNAUDITED) 1996 1995 1994 1993 D 1992
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Net asset value, $ 31.14 $ 29.20 $ 21.69 $ 23.08 $ 19.76 $ 18.51
beginning of period
Income from
Investment
Operations
Net investment .10 G .22 .08 .12 .12 .09
income
Net realized and 4.11 3.82 7.55 (.12) 3.64 1.64
unrealized gain
(loss)
Total from 4.21 4.04 7.63 - 3.76 1.73
investment
operations
Less Distributions
From net (.21) (.08) (.12) (.12) (.11) (.05)
investment income
From net realized (.94) (2.02) - (1.27) (.21) (.43)
gain
In excess of net - - - - (.12) -
realized gain
Total distributions (1.15) (2.10) (.12) (1.39) (.44) (.48)
Net asset value, end $ 34.20 $ 31.14 $ 29.20 $ 21.69 $ 23.08 $ 19.76
of period
TOTAL RETURN B, C 13.83% 14.71% 35.36% (.02)% 19.37% 9.32%
RATIOS AND
SUPPLEMENTAL
DATA
Net assets, end of $ 6,935,419 $ 6,086,424 $ 4,162,702 $ 2,141,869 $ 1,383,849 $ 749,837
period (000
omitted)
Ratio of expenses to .71% A .69% .70% .70% .71% .75%
average net assets
Ratio of expenses to .68% A, .67% .70% .69% .71% .75%
average net assets E E E
after expense
reductions
Ratio of net .64% A .81% .37% .69% .72% .83%
investment income
to average net
assets
Portfolio turnover rate 144% A 81% 108% 122% 159% 262%
Average commission $ .0428 $ .0416
rate F
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT
ANNUALIZED AND 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 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). 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. G NET
INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING
THE PERIOD.
</TABLE>
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 PAST 10
JUNE 30, 1997 YEAR YEARS YEARS
OVERSEAS 22.69% 11.30% 8.93%
Morgan Stanley EAFE Index 12.88% 12.84% 6.58%
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.
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
1987/06/30 10000.00 10000.00
1987/07/31 9885.93 9982.53
1987/08/31 10760.46 10731.04
1987/09/30 10522.81 10562.10
1987/10/31 8327.00 9082.16
1987/11/30 8403.04 9171.60
1987/12/31 8994.45 9443.94
1988/01/31 8686.62 9612.55
1988/02/29 8917.49 10253.29
1988/03/31 9321.52 10883.72
1988/04/30 9475.43 11041.88
1988/05/31 9302.28 10687.92
1988/06/30 9138.74 10406.21
1988/07/31 9071.41 10732.69
1988/08/31 8753.95 10034.87
1988/09/30 9129.12 10473.34
1988/10/31 9533.15 11369.46
1988/11/30 9706.31 12046.70
1988/12/31 9725.55 12113.86
1989/01/31 10014.14 12327.00
1989/02/28 10187.29 12390.36
1989/03/31 10178.12 12147.18
1989/04/30 10478.61 12259.84
1989/05/31 10090.88 11592.87
1989/06/30 10052.10 11397.72
1989/07/31 10992.37 12828.97
1989/08/31 10914.82 12252.00
1989/09/30 11593.36 12810.10
1989/10/31 10963.29 12295.42
1989/11/30 11554.59 12913.51
1989/12/31 12281.59 13389.98
1990/01/31 12116.81 12891.76
1990/02/28 11833.99 11991.98
1990/03/31 12281.29 10742.71
1990/04/30 12349.36 10657.45
1990/05/31 13156.44 11873.48
1990/06/30 13448.16 11768.90
1990/07/31 14128.83 11934.67
1990/08/31 12689.69 10775.72
1990/09/30 11483.93 9273.97
1990/10/31 12553.56 10719.02
1990/11/30 12164.60 10086.73
1990/12/31 12077.09 10250.13
1991/01/31 12193.77 10581.67
1991/02/28 12604.58 11716.01
1991/03/31 12235.91 11012.68
1991/04/30 12504.94 11120.82
1991/05/31 12534.83 11236.86
1991/06/30 11847.31 10411.17
1991/07/31 12435.19 10922.69
1991/08/31 12475.05 10700.87
1991/09/30 12983.22 11303.96
1991/10/31 13072.89 11464.20
1991/11/30 12604.58 10929.00
1991/12/31 13043.00 11493.41
1992/01/31 13202.43 11247.91
1992/02/29 12927.30 10845.33
1992/03/31 12664.72 10129.36
1992/04/30 13452.48 10177.51
1992/05/31 14038.24 10858.75
1992/06/30 13775.66 10343.69
1992/07/31 12897.01 10078.96
1992/08/31 12785.91 10711.12
1992/09/30 12270.84 10499.61
1992/10/31 11432.59 9948.86
1992/11/30 11371.99 10042.48
1992/12/31 11644.67 10094.42
1993/01/31 11977.96 10093.18
1993/02/28 12212.57 10398.06
1993/03/31 13059.80 11304.42
1993/04/30 13927.70 12377.23
1993/05/31 14227.33 12638.64
1993/06/30 13876.04 12441.45
1993/07/31 14423.64 12876.96
1993/08/31 15198.55 13572.10
1993/09/30 15115.90 13266.60
1993/10/31 15663.50 13675.44
1993/11/30 15002.24 12480.07
1993/12/31 15994.13 13381.22
1994/01/31 17037.67 14512.54
1994/02/28 16737.18 14472.34
1994/03/31 16321.86 13849.00
1994/04/30 16861.77 14436.60
1994/05/31 16654.11 14353.71
1994/06/30 16477.61 14556.56
1994/07/31 16913.69 14696.55
1994/08/31 17110.96 15044.49
1994/09/30 16664.50 14570.66
1994/10/31 17007.13 15055.86
1994/11/30 16363.39 14332.27
1994/12/31 16269.95 14422.02
1995/01/31 15595.06 13867.99
1995/02/28 15636.10 13828.19
1995/03/31 16117.53 14690.67
1995/04/30 16578.03 15243.17
1995/05/31 16808.28 15061.46
1995/06/30 16965.27 14797.33
1995/07/31 17718.81 15718.56
1995/08/31 17226.92 15118.95
1995/09/30 17478.10 15414.22
1995/10/31 17132.72 14999.89
1995/11/30 17331.58 15417.24
1995/12/31 17854.87 16038.41
1996/01/31 18189.78 16104.25
1996/02/29 18229.84 16158.69
1996/03/31 18508.65 16501.84
1996/04/30 19023.38 16981.60
1996/05/31 19034.10 16669.11
1996/06/30 19173.51 16762.92
1996/07/31 18605.16 16272.99
1996/08/31 18744.57 16308.64
1996/09/30 19291.46 16741.89
1996/10/31 19098.44 16570.58
1996/11/30 20095.72 17229.89
1996/12/31 20202.96 17008.25
1997/01/31 20202.96 16413.00
1997/02/28 20671.03 16681.45
1997/03/31 20858.84 16741.86
1997/04/30 21034.92 16830.69
1997/05/31 22349.60 17929.23
1997/06/30 23523.42 18921.25
Let's say hypothetically that $10,000 was invested in Overseas Portfolio on
June 30, 1987. As the chart shows, by June 30, 1997, the value of the
investment would have grown to $23,523 - a 135.23% increase on the initial
investment. For comparison, look at how the Morgan Stanley EAFE Index did
over the same period. With dividends and capital gains, if any, reinvested,
the same $10,000 investment would have grown to $18,921 over the same
period - a 89.21% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Alcatel Alsthom Compagnie Generale d'Electricite SA 2.1
Novartis AG (Reg.) 1.9
Total SA Class B 1.8
Philips Electronics NV (Bearer) 1.8
Takeda Chemical Industries Ltd. 1.5
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Finance 15.1
Technology 10.1
Durables 9.8
Basic Industries 9.7
Health 8.8
TOP FIVE COUNTRIES AS OF JUNE 30, 1997
(EXCLUDING CASH EQUIVALENTS) % OF FUND'S
INVESTMENTS
Japan 25.4
United Kingdom 13.5
France 9.5
Netherlands 7.9
Sweden 5.3
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. HOW HAS THE FUND PERFORMED, RICK?
A. Pretty well. For the six months that ended June 30, 1997, the fund
topped the 11.25% return registered by the Morgan Stanley Capital
International EAFE Index. For the 12-month period that ended June 30, 1997,
the fund again topped the EAFE index, which returned 12.88%.
Q. WHAT FACTORS CONTRIBUTED TO THE FUND'S STRONG SHOWING?
A. Individual stock selection had the biggest influence on the fund's
return, as several of the fund's larger positions posted positive results.
Market selection - specifically, the fund's underweighting in Japan
relative to the index - also played a key role. While the EAFE index had an
approximate Japanese weighting of 30% during the period, I kept the fund at
around 23% on average. As Japan's well-documented economic woes continued
to hamper the overall performance of Japanese securities, my strategy of
underweighting Japanese securities worked in the fund's favor. I would add,
however, that while market selection is important, I place more emphasis on
analyzing the specific pluses and minuses of a stock than I do on the
country where a stock is issued.
Q. HOW DID THE EUROPEAN PORTION OF THE PORTFOLIO PERFORM?
A. The across-the-board decline in European interest rates had favorable
implications for Europe's stock markets. This rate environment, which may
have been related to continuing optimism on proposed economic unity
throughout Europe, led to strong performances in countries such as Spain,
Italy and Sweden. In Europe, I basically continued my strategy of looking
for companies based on three themes: those that would benefit from a rising
dollar, those that would gain from the overall improvement of world
economies and those companies that were engaging in restructurings designed
to improve the return on capital employed in their businesses.
Q. DID YOUR STRATEGIES LEAD YOU TO ANY OTHER REGIONS OF THE WORLD?
A. One area that came into play was Canada. I've previously mentioned my
strategy of looking for stocks than can benefit from improving economies,
and Canada's many natural resource-related stocks fit that bill. Stocks
such as Inco, a nickel producer; Alcan, an aluminum producer; and Noranda,
a paper and forest products company, reflected this strategy.
Q. FOLLOWING THE LEAD OF MANY AMERICAN COMPANIES, SOME INTERNATIONAL FIRMS
HAVE BEEN IMPLEMENTING VARIOUS COST-CUTTING AND RESTRUCTURING STRATEGIES.
WHY IS THIS A POSITIVE TREND? HOW HAS IT AFFECTED THE FUND?
A. Worldwide, I think company managements have gotten smarter about how
they run their businesses. In order to earn returns above their cost of
capital, companies have had to reduce expenses, either by cutting
personnel, restructuring their balance sheets or upgrading their
technology. As they strive to become more shareholder-friendly,
international companies also are coming up with new ways to utilize their
existing assets. In terms of the fund, several individual holdings are good
illustrations of this trend. For example, Volvo, one of the fund's larger
stakes and a strong performer during the period, divested many of its
non-core businesses and announced plans to implement a share redemption
program in which the company will buy back one of every 20 outstanding
shares.
Q. WHICH INDIVIDUAL STOCK POSITIONS BENEFITED THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
A. As I mentioned earlier, individual stock selection was a real key to
performance. Aside from the strong performances of Volvo and Telebras, a
Brazilian telecommunications company, the fund's stake in Total, a
French-based oil company, and Alcatel, which specializes in
telecommunications and electrical equipment, turned in favorable results.
Disappointments included the poor performance of several Japanese brokerage
companies, including Nomura Securities and Nikko Securities.
Q. WHAT'S YOUR OUTLOOK?
A. More and more, individual stock selection is outdistancing country
selection in terms of performance influence. I think this trend will most
likely continue and will place even more emphasis on thorough research and
analysis of individual stocks. With this in mind, I'll continue to use my
three-pronged approach of looking for stocks that can benefit from a rising
dollar, stronger economies and increased corporate efficiencies.
FUND FACTS
GOAL: to increase the value of the fund's
shares by investing mainly in stocks in
Europe, the Far East and the Pacific Basin
START DATE: January 28, 1987
SIZE: as of June 30, 1997, more than $2.0 billion
MANAGER: Richard Mace, since 1996; joined
Fidelity in 1987
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 88.0%
SHARES VALUE (NOTE 1)
ARGENTINA - 0.2%
Perez Companc Class B 481,414 $ 3,866,315
AUSTRALIA - 1.8%
Aberfoyle Ltd. 22,800 63,586
Australia & New Zealand Banking
Group Ltd. 376,800 2,811,729
Brambles Industries Ltd. 200,200 3,952,242
Broken Hill Proprietary Co. Ltd. (The) 226,800 3,330,629
CSR Ltd. 882,500 3,412,396
Coles Myer Ltd. 877,000 4,554,557
Colonial Ltd. (a) 682,200 1,738,024
National Australia Bank Ltd. 182,300 2,606,642
Pasminco Ltd. 476,800 966,754
QNI Ltd. 871,880 1,570,659
Tabcorp Holdings Ltd. 162,800 883,516
Western Mining Holdings Ltd. 953,939 6,003,913
Westpac Banking Corp. 143,800 863,862
Woolworths Ltd. 1,211,500 3,972,281
36,730,790
AUSTRIA - 0.1%
Voest-Alpine Stahl AG 21,900 992,005
BELGIUM - 0.2%
BBL (Banque Bruxelles Lambert) 6,700 1,693,329
Credit Communal Holding/Dexia (b) 13,500 1,449,133
3,142,462
BERMUDA - 0.1%
Fuji International Trust unit sponsored
ADR (b) 100 2,698,015
BRAZIL - 1.0%
Centrais Electricas Brasileiras SA 2,080,000 1,240,464
Compania Energertica Minas Gerais 87,262,000 4,498,880
Multicanal Participacoes SA
sponsored ADR 92,800 1,264,400
Telebras sponsored ADR 95,000 14,416,250
21,419,994
CANADA - 2.8%
Alcan Aluminium Ltd. 269,700 9,200,645
Alliance Forest Products (a)(b) 83,700 2,043,016
BCE, Inc. 233,000 6,480,426
Bro-X Minerals Ltd. 42,700 -
Canadian Imperial Bank of Commerce 34,800 877,152
Canadian Natural Resources Ltd. (a) 159,900 4,151,968
Cominco Ltd. (a) 245,900 6,545,341
Domtar, Inc. 312,700 2,763,148
Greenstone Resources Ltd. (a) 141,300 1,238,352
Inco Ltd. 310,100 9,264,930
National Bank of Canada 361,200 4,525,955
Noranda, Inc. 373,200 8,041,647
Renaissance Energy Ltd. (a) 66,900 1,860,689
St Laurent Paperboard, Inc. (a)(b) 155,900 2,427,733
59,421,002
CHINA (PEOPLES REPUBLIC) - 0.0%
First Tractor Co. Ltd. Class H (a) 416,000 273,861
DENMARK - 0.8%
Den Danske Bank Group AS 55,900 5,437,154
International Service Systems AS,
Series B (a) 128,800 4,615,514
Novo-Nordisk AS Class B 30,900 3,368,405
Sophus Berendsen AS, Series B 6,300 910,624
Unidanmark AS Class A 34,500 1,937,560
16,269,257
SHARES VALUE (NOTE 1)
EMERGING MARKETS - 0.3%
GT Global Developing Markets Fund 249,700 $ 3,511,406
TCW/DW Emerging Markets
Opportunities Trust (SBI) 82,500 1,227,188
Templeton Dragon Fund, Inc. 52,300 849,875
5,588,469
FINLAND - 1.9%
Cultor OY, Series 1 57,600 3,046,271
Huhtamaki Ord. 190,700 8,196,748
Metsa-Serla Ltd. Class B 575,100 4,678,397
Nokia Corp. AB, Series A 130,300 9,720,253
Outokumpu OY Class A 135,300 2,680,084
Pohjola Class B 124,900 3,699,104
Rauma OY 2,317 53,026
UPM-Kymmene Corp. 83,200 1,920,074
Valmet OY 344,400 5,947,752
39,941,709
FRANCE - 9.5%
Alcatel Alsthom Compagnie Generale
d'Electricite SA 356,650 44,640,386
Axa SA 114,726 7,131,110
Axime SA Ex Segin (a) 2,100 248,206
Canal Plus SA 5,189 1,009,526
Cap Gemini Sogeti SA 28,700 1,513,044
Carrefour Supermarche SA 2,400 1,741,982
Compagnie de Saint Gobain 15,900 2,317,319
Credit Commercial de France Ord. 56,700 2,400,990
Eramet SA 98,162 4,523,979
Generale des Eaux, Cie 18,950 2,426,678
Generale des Eaux warrants
5/2/01 (a) 18,950 11,344
Groupe Danone 30,800 5,086,017
Lafarge Coppee SA 62,520 3,886,103
Lagardere S.C.A. (Reg.) 77,700 2,255,602
Michelin SA (Compagnie Generale
des Etablissements) Class B 163,000 9,782,439
Nationale Elf Aquitaine 127,700 13,768,545
Pechiney SA Class A 384,164 15,124,310
Paribas SA (Cie Financiere) Class A 46,200 3,189,892
Rhone Poulenc SA Class A 653,400 26,668,480
Societe Generale Class A 65,500 7,307,234
Total SA Class B 378,614 38,246,440
Unibail 8,100 757,627
Usinor Sacilor 242,100 4,364,239
Valeo SA 15,900 986,956
199,388,448
GERMANY - 3.8%
Allianz Aktiengesellschaft Holdings (Reg.) 12,500 2,604,555
Altana AG 7,000 739,903
Beta Systems Software AG 3,000 171,999
BASF AG 136,400 4,962,131
Bayer AG 269,300 10,414,065
Buderus AG 8,300 4,564,881
Continental Gummi-Werke AG 134,300 3,335,380
Daimler-Benz AG Ord. 77,900 6,274,844
Dresdner Bank AG Ord. 30,000 1,034,145
Emerging Germany Fund, Inc. 70,600 732,475
Hoechst AG Ord. 84,000 3,556,345
Lufthansa 117,300 2,210,925
Mannesmann AG Ord. 11,300 4,999,708
Metallgesellschaft AG Ord. 276,300 5,749,193
New Germany Fund, Inc. (The) 231,800 3,650,850
Thyssen AG Ord. 4,300 1,022,343
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
GERMANY - CONTINUED
Veba AG Ord. 113,500 $ 6,320,367
Volkswagen AG 23,965 18,150,518
80,494,627
HONG KONG - 1.6%
Great Eagle Holdings Ltd. 546,000 1,800,736
HSBC Holdings PLC 745,100 22,078,550
Hong Kong & China Gas Co. Ltd. 1,708,800 3,418,923
Hutchison Whampoa Ltd. Ord. 240,000 2,075,642
Peregrine Investments Holdings Ltd. 1,200,000 2,470,634
Wharf Holdings Ltd. 206,000 893,456
32,737,941
INDONESIA - 0.4%
Matahari Putra Prima PT (For. Reg.) 2,301,000 4,636,058
PT Multipolar (For. Reg.) 2,383,000 808,377
PT Multipolar Corp. rights 12/31/97
(For. Reg.) 13,106,500 1,751,485
Putra Surya Multidana PT (For. Reg.) (a) 880,000 1,402,137
8,598,057
IRELAND - 0.8%
Bank of Ireland, Inc. 968,400 10,639,830
CRH PLC 145,000 1,511,364
Independent Newspapers PLC 889,749 5,035,962
17,187,156
ITALY - 1.2%
Credito Italiano Ord. 3,572,700 6,535,015
Eni Spa 2,128,800 12,042,644
Mondadori Arnoldo Editore Spa 1,700 9,925
Telecom Italia:
Mobile Spa 1,942,000 6,250,390 Spa 380,000 1,220,358
26,058,332
JAPAN - 23.6%
Acom Co. Ltd. 100,900 4,858,197
Amway Japan Ltd. 171,200 5,794,025
Aoyama Trading Co. Ord. 3,300 105,927
Asahi Chemical Industry Co. Ltd. 271,000 1,619,216
Asahi Breweries Ltd. 50,000 745,780
Bank of Tokyo-Mitsubishi Ltd. 327,000 6,560,251
Canon, Inc. 355,000 9,661,127
Circle K Japan Co. Ltd. 13,000 746,129
Citizen Watch Co. Ltd. Ord. 472,000 3,639,478
Dai-Ichi Kangyo Bank 124,000 1,687,295
DDI Corp. Ord. 913 6,737,302
Dai-Tokyo Fire & Marine Insurance Ord. 354,000 2,050,294
Daiichi Pharmaceutical Co. Ltd. 99,000 1,744,341
Daiwa House Industry Co. Ltd. 227,000 2,772,035
Daiwa Securities Co. Ltd. 774,000 6,103,153
Denso Corp. 212,000 5,066,771
Denny's Japan Co. Ltd. 79,000 2,377,339
Daito Trust Construction Co. 340,700 4,011,906
Fuji Bank Ltd. 498,000 7,471,411
Fuji Photo Film Co. Ltd. 719,000 28,911,770
Fujitsu Ltd. 1,086,000 15,061,624
Hitachi Ltd. 2,232,000 24,920,056
Hitachi Maxell Ltd. 385,000 9,537,267
Honda Motor Co. Ltd. 425,000 12,789,480
Hoya Corp. 22,000 978,673
Ibiden Co. Ltd. 200,000 2,878,451
Ito-Yokado Co. Ltd. 152,000 8,816,782
Japan Associated Finance Co. 46,000 3,611,147
Jusco Co. Ltd. 111,000 3,746,958
SHARES VALUE (NOTE 1)
Kao Corp. 301,000 $ 4,174,539
Kobe Steel Ltd. Ord. (a) 847,000 1,617,977
Komatsu Ltd. Ord. 1,001,000 8,120,109
Kyocera Corp. 58,000 4,603,777
Long Term Credit Bank of Japan Ltd. (The) 413,000 1,783,200
Matsushita Electric Industrial Co. Ltd. 1,300,000 26,193,902
Matsushita Communication Industrial
Co. Ltd. 185,000 6,244,930
Matsushita Electric Works Co. Ltd. 293,000 3,322,430
Minebea Co. Ltd. 273,000 2,905,142
Minolta Camera Co. Ltd. 711,000 4,452,859
Mitsubishi Estate Co. Ltd. 282,000 4,083,213
Mitsubishi Heavy Industries Ltd. 625,000 4,791,966
Mitsubishi Trust & Banking Corp. 100,000 1,578,787
Mitsui Fudosan (Re Devel) Co. 60,000 826,900
Murata Manufacturing Co. Ltd. 31,000 1,233,024
NKK Corp. 775,000 1,662,960
NEC Corp. 313,000 4,368,267
Nikko Securities Co. Ltd. 570,000 3,505,168
Nintendo Co. Ltd. Ord. 182,000 15,240,088
Nippon Telegraph & Telephone
Corp. Ord. 1,744 16,733,394
Nitto Denko Corp. 27,000 525,186
Nomura Securities Co. Ltd. 805,000 11,094,247
Nichiei Co. Ltd. 31,400 3,642,723
Onward Kashiyama & Co. Ltd. 233,000 3,861,485
Omron Corp. 176,000 3,730,472
Orix Corp. 198,100 14,670,234
Ricoh Co. Ltd. Ord. 493,000 6,450,346
Rohm Co. Ltd. 93,000 9,572,157
Sakura Bank Ltd. 2,191,000 16,779,606
Sankyo Co. Ltd. 345,000 11,585,764
Sekisui Chemical Co. Ltd. 6,000 60,709
Shin-Etsu Chemical Co. Ltd. 113,000 2,996,380
Sony Corp. 214,200 18,665,078
Sumitomo Sitix Corp. 39,000 833,442Sony Music Entertainment Japan, Inc.
32,500 1,522,308Shohkoh Fund & Co. Ltd. 3,600 1,089,624
Shinko Electric Industries Co. Ltd. 44,600 1,630,023
TDK Corp. 102,000 7,482,402
Takeda Chemical Industries Ltd. 1,128,000 31,681,799
Takefuji Corp. 16,000 873,653
Terumo Corp. 125,000 2,387,806
THK Co. Ltd. 184,600 3,155,968
Toyota Motor Corp. 665,000 19,605,739
Toyo Trust & Banking Co. Ltd. 33,000 277,770
Tokyo Electron Ltd. 107,800 5,152,811
Uni Charm Corp. Ord. 80,000 2,847,049
Uny Co. Ltd. 310,000 6,056,958
World Co. Ltd. 35,300 1,548,772
Xebio Co. Ltd. 37,200 915,033
Yamanouchi Pharmaceutical Co. Ltd. 79,000 2,122,378
Yasuda Trust & Banking 212,000 809,944
496,074,683
KOREA (SOUTH) - 0.3%
Korea Electric Power Corp. 204,960 6,116,486
MALAYSIA - 0.3%
Arab Malaysian Corp. BHD 668,000 2,487,304
Magnum Corp. BHD 397,000 597,584
Oriental Holdings BHD 178,000 1,339,671
Rothmans of Pall Mall Malaysia BHD 79,000 776,074
5,200,633
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
MEXICO - 0.4%
Cifra SA de CV:
Series A 227,993 $ 421,927
Series C 1,864,100 2,984,440
Gruma SA Class B sponsored
ADR (a)(b) 91,596 1,671,627
Grupo Financiero Bancomer Class B (a) 2,228,000 1,072,923
Grupo Financiero Inbursa SA Class B 237,000 1,009,846
Tubos De Acero De Mexico ADR (a) 78,200 1,441,813
8,602,576
MULTI-NATIONAL - 0.0%
Morgan Stanley Asia-Pacific Fund, Inc. 82,900 870,450
NETHERLANDS - 7.9%
AKZO Nobel NV 145,500 19,927,448
Ahold NV 36,600 3,085,871
Chicago Bridge & Iron Co. NV 94,000 2,079,750
DSM NV 71,700 7,129,479
ING Groep NV 377,422 17,390,505
KBB NV Ord. 37,200 2,600,458
KLM Royal Dutch Air Lines NV 39,506 1,216,900
Koninklijke Hoogovens NV 121,600 6,773,097
Koninklijke KNP BT NV 288,800 6,572,659
Koninklijke Pakhoed NV 24,600 866,718
New Holland NV 248,000 6,789,000
Philips Electronics NV (Bearer) 521,700 37,345,868
Royal Dutch Petroleum Co. Ord. 456,160 23,712,609
Unilever NV Ord. 101,900 21,437,340
VNU Ord. 33,300 735,818
Vendex International NV (b) 121,600 6,655,466
Vedior NV BDR (a)(b) 66,800 1,765,144
166,084,130
NETHERLANDS ANTILLES - 0.2%
Schlumberger Ltd. 32,700 4,087,500
NEW ZEALAND - 0.2%
Air New Zealand Ltd. Class B 552,200 1,689,359
Lion Nathan Ltd. 572,000 1,450,501
Lion Nathan Ltd. (Australia) (a) 59,200 151,715
3,291,575
NORWAY - 0.6%
Den Norske Bank AS Class A Free shares 682,500 2,673,475
Elkem ASA 275,400 5,393,956
NCL Holdings AS (a) 460,300 1,451,258
Orkla AS Class B (non-vtg.) 15,600 1,058,212
Saga Petroleum AS Class B 126,300 2,206,505
12,783,406
PERU - 0.1%
Compania de Minas Buenaventura SA
Class B sponsored ADR 80,200 1,578,938
PORTUGAL - 0.2%
Electricidade de Portugal SA (a) 234,300 4,295,057
RUSSIA - 0.0%
Vimpel Communications sponsored ADR 12,800 486,400
SINGAPORE - 0.2%
Creative Technology Corp. Ltd. (a) 109,000 1,853,000
Kim Engineering Holdings Ltd. 2,683,000 2,251,941
4,104,941
SOUTH AFRICA - 0.3%
Gencor Ltd. (Reg.) 820,800 3,782,739
JCI Ltd. 187,500 1,442,944
5,225,683
SHARES VALUE (NOTE 1)
SPAIN - 2.1%
Acerinox SA (Reg.) 29,750 $ 5,567,853
Asturiana del Zinc SA (a)(b) 259,900 5,496,614
Banco Bilbao Vizcaya SA Ord. (Reg.) 74,600 6,052,954
Banco de Santander SA Ord. (Reg.) 127,800 3,932,974
Banco Intercontinental Espanol 10,500 1,850,534
Tabacalera SA, Series A 126,300 6,771,957
Telefonica de Espana SA Ord. 511,500 14,770,310
44,443,196
SWEDEN - 5.3%
ABB AB:
Series A 297,900 4,186,265
Series B 153,000 2,140,137
Astra AB Class A Free shares 1,216,000 22,678,928
Assi Doman AB Free shares 63,600 1,812,200
Electrolux AB 87,200 6,301,982
Ericsson (L.M.) Telephone Co.:
Class B 154,400 6,089,211
Class B ADR 49,400 1,945,125
Esselte AB Class B Free shares 90,900 2,142,702
Graenges AB (Reg.) (a) 48,600 645,188
Investor AB Class B Free shares 82,000 4,327,807
Nordbanken AB 156,900 5,303,834
SKF AB Ord. 34,100 883,305
Scania AB Class B 211,700 6,470,820
Skandia Foersaekrings AB 249,800 9,220,697
Svenska Cellulosa AB (SCA) Class B Ord. 101,900 2,138,039
Svenska Handelsbanken 160,200 5,104,157
Swedish Match Co. 4,500,200 15,154,151
Volvo AB Class B 582,600 15,619,505
112,164,053
SWITZERLAND - 4.8%
ABB AG (Bearer) 650 982,894
Credit Suisse Group (Reg.) 190,477 24,436,837
Danzas Holdings AG (Reg.) 1,160 226,206
Julius Baer Holding AG 5,313 8,124,909
Nestle SA (Reg.) 9,030 11,899,952
Novartis AG (Reg.) 25,000 39,924,735
Roche Holding AG participation
certificates 1,250 11,294,047
Sulzer AG (Reg.) 2,500 2,138,214
SGS Societe Generale de Surveillance
Holding SA (Bearer) 800 1,707,834
100,735,628
UNITED KINGDOM - 13.5%
Allied Domecq PLC 6,200 44,587
Asda Group PLC 2,705,400 5,584,562
BAT Industries PLC Ord. 1,709,800 15,298,884
BOC Group PLC 49,900 868,066
Barclays PLC Ord. 227,500 4,514,333
Barratt Developments PLC 847,125 3,469,114
Bass PLC Ord. 242,300 2,956,605
Blue Circle Industries PLC 430,400 3,073,729
Boots Co. PLC Class L (The) 323,900 3,793,246
British Aerospace PLC 257,400 5,726,819
British Petroleum PLC:
ADR 47,800 3,579,025
Ord. 998,909 12,413,428
British Land Co. PLC, (The) Ord. 176,200 1,663,125
British Steel PLC Ord. 1,230,000 3,061,134
British Telecommunications PLC Ord. 850,300 6,313,105
Cable & Wireless PLC Ord. 348,900 3,194,476
Caradon PLC 2,419,380 8,095,359
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UNITED KINGDOM - CONTINUED
Cookson Group PLC 4,377,200 $ 15,411,423
Dixons Group PLC 333,400 2,625,202
DR Solomons Group PLC sponsored
ADR 13,400 340,025
English China Clay PLC 352,200 1,196,067
Glaxo Holdings PLC 538,800 11,122,060
Granada Group PLC 811,000 10,665,566
Grand Metropolitan PLC 1,492,491 14,360,698
Guinness PLC Ord. 221,100 2,164,223
HSBC Holdings PLC Ord. 57,600 1,772,465
Hays PLC 94,200 893,844
ICI (Imperial Chemical Industries) PLC
Class L 133,900 1,859,014
Inchcape PLC Ord. 739,600 3,484,330
Ladbroke Group PLC Ord. 1,328,800 5,220,446
Lloyds TSB Group PLC 1,896,498 19,447,737
LucasVarity PLC 2,165,700 7,498,901
Mercury Asset Management Group PLC 77,400 1,591,270
National Grid Co. PLC 1,566,100 5,722,555
Norwich Union PLC (a) 194,300 1,033,427
Pearson, PLC 68,300 791,345
Perpetual PLC 19,600 874,434
Prudential Corp. PLC 428,318 4,146,217
Reckitt & Colman Ltd. Ord. 91,800 1,370,791
Redland PLC Ord. 458,900 2,597,365
Rentokil Group PLC 5,403,900 18,945,307
Rio Tinto PLC (Reg.) 53,900 938,997
Rolls Royce PLC Ord. 765,355 2,917,658
Rugby Group PLC 795,600 1,589,322Somerfield PLC 866,000 2,609,351
Shell Transport & Trading Co. PLC (Reg.) 2,313,300 15,769,642
SmithKline Beecham PLC Ord. 947,218 17,431,898
Tarmac 128,200 264,634
Thames Water PLC Ord. 144,800 1,663,235
Tomkins PLC Ord. 179,800 778,214
Unigate PLC 333,200 2,679,095
Unilever PLC Ord. 276,800 7,932,482
Vodafone Group PLC 1,865,929 9,101,201
WPP Group PLC 252,900 1,033,561
283,493,599
UNITED STATES OF AMERICA - 1.5%
Alumax, Inc. (a) 222,700 8,448,681
Aluminum Co. of America 139,600 10,522,350
D.R. Horton, Inc. 161,600 1,676,600
Hanover Compressor Co. 1,500 29,250
Jefferson Smurfit Corp. 34,400 550,400
Kaiser Aluminum Corp. (a) 8,200 100,450
MCI Communications Corp. 213,800 8,184,531
Newmont Mining Corp. 46,000 1,794,000
Silgan Holdings, Inc. 2,600 100,750
31,407,012
TOTAL COMMON STOCKS
(Cost $1,450,354,067) 1,845,854,386
PREFERRED STOCKS - 1.0%
SHARES VALUE (NOTE 1)
CONVERTIBLE PREFERRED STOCKS - 0.1%
JAPAN - 0.1%
AJL participating trust 73,000 $ 1,272,938
NONCONVERTIBLE PREFERRED STOCKS - 0.9%
ITALY - 0.9%
Stet (Societa Finanziaria Telefonica) Spa 3,435,100 11,903,329
Telecom Italia:
Mobile Spa de Risp 3,961,100 7,030,916 Ord. 435,400 871,518
TOTAL NONCONVERTIBLE PREFERRED STOCKS 19,805,763
TOTAL PREFERRED STOCKS
(Cost $12,443,054) 21,078,701
CORPORATE BONDS - 0.8%
MOODY'S PRINCIPAL
RATINGS (D) AMOUNT
BERMUDA - 0.2%
MBL International Finance of
Bermuda 3%, 11/30/02 Aa2 $ 4,472,000 4,896,840
JAPAN - 0.6%
Asahi Breweries Ltd
6.40%, 10/16/98 - JPY 501,000,000 6,817,218
Matsushita Electric Industrial
Co. Ltd.:
1.30%, 3/29/02 Aa2 JPY 186,000,000 2,320,031
1.40%, 3/31/04 Aa2 JPY 174,000,000 2,170,352
11,307,601
TOTAL CORPORATE BONDS
(Cost $15,280,034) 16,204,441
GOVERNMENT OBLIGATIONS - 0.0%
U.S. Treasury Bills, yields at dates of purchase
4.85%, to 5.28%, 8/7/97 to 1/8/98 (c)
(Cost $886,510) $900,000 886,492
CASH EQUIVALENTS - 10.2%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 5.93%, dated
6/30/97 due 7/1/97 $ 214,820,380 214,785,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $1,693,748,665) $ 2,098,809,020
FUTURES CONTRACTS
EXPIRATION UNDERLYING FACE UNREALIZED
DATE AMOUNT AT VALUE GAIN/(LOSS)
PURCHASED
232 Nikkei 225 Stock
Index Contracts Sept. 1997 $ 23,890,200 $ 40,693
THE FACE VALUE OF FUTURES PURCHASED AS A PERCENTAGE OF TOTAL INVESTMENT IN
SECURITIES - 1.1%
CURRENCY ABBREVIATIONS
JPY - Japanese yen
LEGEND
(a) Non-income producing
(b) 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 $24,206,748 or 1.2% of net
assets.
(c) 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 $788,676.
(d) Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $712,738,103 and $575,228,156, respectively.
The market value of futures contracts opened and closed during the period
amounted to $49,056,147 and $39,254,194, 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 $127,548 for the period
(see Note 4 of Notes to Financial Statements).
MARKET SECTOR DIVERSIFICATION
As a Percentage of Total Value of Investments
Aerospace & Defense 0.4%
Basic Industries 9.7
Cash Equivalents 10.2
Construction & Real Estate 2.9
Durables 9.8
Energy 6.5
Finance 15.1
Government Obligations 0.0
Health 8.8
Holding Companies 1.3
Industrial Machinery & Equipment 2.5
Media & Leisure 2.2
Nondurables 6.6
Precious Metals 0.5
Retail & Wholesale 3.7
Services 2.1
Technology 10.1
Transportation 0.5
Utilities 7.1
100.0%
INCOME TAX INFORMATION
At June 30, 1997, the aggregate cost of investment securities for income
tax purposes was $1,694,697,195. Net unrealized appreciation aggregated
$404,111,825, of which $447,629,963 related to appreciated investment
securities and $43,518,138 related to depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in $ 2,098,809,020
securities, at
value (including
repurchase
agreements of
$214,785,000) (cost
$1,693,748,665) -
See accompanying
schedule
Cash 2,443
Receivable for 3,065,615
investments sold
Receivable for fund 1,404,647
shares sold
Dividends receivable 7,012,340
Interest receivable 149,101
Other receivables 27,542
TOTAL ASSETS 2,110,470,708
LIABILITIES
Payable for $ 16,404,484
investments
purchased
Payable for fund 2,602,874
shares redeemed
Accrued management 1,275,223
fee
Payable for daily 34,800
variation on
futures contracts
Other payables and 342,806
accrued expenses
TOTAL LIABILITIES 20,660,187
NET ASSETS $ 2,089,810,521
Net Assets consist of:
Paid in capital $ 1,603,802,130
Undistributed net 14,431,091
investment income
Accumulated 66,527,361
undistributed net
realized gain (loss)
on investments and
foreign currency
transactions
Net unrealized 405,049,939
appreciation
(depreciation) on
investments
and assets and
liabilities in
foreign currencies
NET ASSETS, for $ 2,089,810,521
104,279,605
shares outstanding
NET ASSET VALUE, $20.04
offering price
and redemption
price per share
($2,089,810,521 (divided by)
104,279,605
shares)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $ 26,148,620
Dividends
Interest 5,052,251
31,200,871
Less foreign taxes (3,188,198
withheld )
TOTAL INCOME 28,012,673
EXPENSES
Management fee $ 6,739,466
Transfer agent fees 648,554
Accounting fees and 400,724
expenses
Non-interested 3,852
trustees'
compensation
Custodian fees and 422,619
expenses
Registration fees 4,483
Audit 14,836
Legal 2,287
Miscellaneous 71,824
Total expenses 8,308,645
before reductions
Expense reductions (71,550 8,237,095
)
NET INVESTMENT 19,775,578
INCOME
REALIZED AND
UNREALIZED GAIN
(LOSS)
Net realized gain
(loss) on:
Investment 69,225,765
securities
Foreign currency (83,526
transactions )
Futures contracts (182,586 68,959,653
)
Change in net
unrealized
appreciation
(depreciation) on:
Investment 199,312,047
securities
Assets and (61,369
liabilities in )
foreign currencies
Futures contracts 511,033 199,761,711
NET GAIN (LOSS) 268,721,364
NET INCREASE $ 288,496,942
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
OTHER INFORMATION $ 70,664
Expense reductions
Directed brokerage
arrangements
Custodian credits 886
$ 71,550
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED)
Operations $ 19,775,578 $ 28,360,200
Net investment
income
Net realized gain 68,959,653 114,395,097
(loss)
Change in net 199,761,711 46,672,077
unrealized
appreciation
(depreciation)
NET INCREASE 288,496,942 189,427,374
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
Distributions to (29,012,812) (16,689,141)
shareholders
From net
investment income
From net realized (115,172,073) (18,358,055)
gain
TOTAL DISTRIBUTIONS (144,184,885) (35,047,196)
Share transactions 478,306,941 649,592,564
Net proceeds from
sales of shares
Reinvestment of 144,184,885 35,047,196
distributions
Cost of shares (344,594,600) (514,552,645)
redeemed
NET INCREASE 277,897,226 170,087,115
(DECREASE) IN NET
ASSETS RESULTING
FROM SHARE
TRANSACTIONS
TOTAL INCREASE 422,209,283 324,467,293
(DECREASE) IN NET
ASSETS
NET ASSETS
Beginning of period 1,667,601,238 1,343,133,945
End of period $ 2,089,810,521 $ 1,667,601,238
(including
undistributed net
investment
income of
$14,431,091 and
$22,748,929,
respectively)
OTHER INFORMATION
Shares
Sold 26,141,924 37,069,614
Issued in 8,319,959 2,053,145
reinvestment of
distributions
Redeemed (18,706,716) (29,349,715)
Net increase 15,755,167 9,773,044
(decrease)
<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> <C>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1997
SELECTED PER-SHARE DATA (UNAUDITED) 1996 1995 1994 1993 F 1992
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Net asset value, $ 18.84 $ 17.06 $ 15.67 $ 15.48 $ 11.53 $ 13.09
beginning of period
Income from
Investment
Operations
Net investment .20 D .32 D, .17 .19 .06 .16
income E
Net realized and 2.64 1.88 1.34 .08 4.16 (1.54)
unrealized gain
(loss)
Total from 2.84 2.20 1.51 .27 4.22 (1.38)
investment
operations
Less Distributions
From net (.33) (.20) (.06) (.08) (.18) (.18)
investment income
In excess of net - - - - (.04) -
investment income
From net realized (1.31) (.22) (.02) - - -
gain
In excess of net - - (.04) - (.05) -
realized gain
Total distributions (1.64) (.42) (.12) (.08) (.27) (.18)
Net asset value, end $ 20.04 $ 18.84 $ 17.06 $ 15.67 $ 15.48 $ 11.53
of period
TOTAL RETURN B, C 16.44% 13.15% 9.74% 1.72% 37.35% (10.72)%
RATIOS AND
SUPPLEMENTAL
DATA
Net assets, end of $ 2,089,811 $ 1,667,601 $ 1,343,134 $ 1,297,701 $ 777,961 $ 180,837
period (000
omitted)
Ratio of expenses to .94% A .93% .91% .92% 1.03% 1.14%
average net assets
Ratio of expenses to .93% A, G .92% .91% .92% 1.03% 1.14%
average net assets G
after expense
reductions
Ratio of net 2.23% A 1.84% 1.88% 1.28% 1.21% 1.86%
investment income
to average net
assets
Portfolio turnover rate 72% A 92% 50% 42% 42% 61%
Average commission $ .0115 $ .0137
rate H
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR
ARE NOT ANNUALIZED AND 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 NET INVESTMENT
INCOME PER SHARE HAS BEEN
CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE
PERIOD. E INVESTMENT INCOME PER
SHARE REFLECTS A SPECIAL DIVIDEND WHICH AMOUNTED TO $.05 PER
SHARE. F 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. G 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). H 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 June 30, 1997 (Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES.
The Money Market Portfolio, High Income Portfolio, Equity-Income Portfolio,
Growth Portfolio and Overseas Portfolio (the funds) are funds of Variable
Insurance Products Fund. Investment Grade Bond Portfolio, Asset Manager
Portfolio, Asset Manager: Growth Portfolio, Index 500 Portfolio and
Contrafund Portfolio (the funds) are funds of Variable Insurance Products
Fund II. Balanced Portfolio, Growth & Income Portfolio and Growth
Opportunities Portfolio (the funds) are funds of Variable Insurance
Products Fund III. The Variable Insurance Products Fund, Variable Insurance
Products Fund II and Variable Insurance Products Fund III (the trusts) are
registered under the Investment Company Act of 1940, as amended (the 1940
Act), as open-end management investment companies organized as
Massachusetts business trusts. Each fund is authorized to issue an
unlimited number of shares. Shares of each fund may only be purchased by
insurance companies for the purpose of funding variable annuity or variable
life insurance contracts. On July 17, 1997, the Board of Trustees approved
the creation of Service Class, a new class of shares of each fund. The
Service Class shares of High Income Portfolio, Equity-Income Portfolio,
Growth Portfolio, Overseas Portfolio, Asset Manager Portfolio, Asset
Manager: Growth Portfolio, Contrafund Portfolio, Balanced Portfolio, Growth
& Income Portfolio and Growth Opportunities Portfolio will be subject to an
annual distribution and service fee of .10% of each class' average net
assets. Service Class shares of the Money Market Portfolio, Index 500
Portfolio and Investment Grade Portfolio will be available without a 12b-1
fee. Service Class shares of each fund are expected to be available on or
about October 31, 1997. 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 funds:
SECURITY VALUATION:
MONEY MARKET PORTFOLIO. 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.
INVESTMENT GRADE BOND PORTFOLIO. 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.
HIGH INCOME PORTFOLIO. 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.
ASSET MANAGER, BALANCED AND ASSET MANAGER: GROWTH PORTFOLIOS. 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.
EQUITY-INCOME, GROWTH & INCOME, INDEX 500, GROWTH OPPORTUNITIES, CONTRAFUND
AND GROWTH PORTFOLIOS. 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.
OVERSEAS PORTFOLIO. 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
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
OVERSEAS PORTFOLIO - CONTINUED
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 funds 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. Growth & Income intends to qualify as a regulated investment
company under Subchapter M of the Internal Revenue Code. As qualified
regulated investment companies under Subchapter M of the Internal Revenue
Code, each fund is not subject to U.S. federal income taxes to the extent
that it distributes substantially all of its taxable income for the fiscal
year. Each fund may be subject to foreign taxes on income and gains on
investments which are accrued based upon each fund's understanding of the
tax rules and regulations that exist in the markets in which they invest.
Each fund accrues such taxes as applicable. The schedules of investments
include information regarding income taxes under the caption "Income Tax
Information."
INVESTMENT INCOME:
MONEY MARKET PORTFOLIO. Interest income, which includes amortization of
premium and accretion of discount, is accrued as earned.
INVESTMENT GRADE BOND, HIGH INCOME, ASSET MANAGER,
BALANCED, ASSET MANAGER: GROWTH, EQUITY-INCOME, INDEX 500, GROWTH
OPPORTUNITIES, GROWTH & INCOME, CONTRAFUND, GROWTH AND OVERSEAS PORTFOLIOS.
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 funds are 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 each 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 for the Money Market Portfolio.
Distributions are recorded on the ex-dividend date for all other funds.
Certain foreign currency gains (losses), if applicable, are taxable as
ordinary income and, therefore, increase (decrease) taxable ordinary income
available for distributions.
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, defaulted bonds, foreign currency transactions, passive
foreign investment companies (PFIC), market discount, partnerships,
non-taxable dividends, capital loss carryforwards, losses deferred due to
wash sales and excise tax regulations.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital.
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. Certain funds generally use 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 SEC), the funds, 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 funds, 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 funds'
investment adviser, is responsible for determining that the value of the
underlying securities remains in accordance with the market value
requirements stated above.
DELAYED DELIVERY TRANSACTIONS. Each fund may purchase or sell securities on
a delayed delivery basis. Payment and delivery may take place a month or
more after the date of the transaction. The price of the underlying
securities and the date when the securities will be delivered and paid for
are fixed at the time the transaction is negotiated. The market values of
the securities purchased or sold on a delayed delivery basis are identified
as such in each applicable fund's schedule of investments. Each fund may
receive compensation for interest forgone in the purchase of a delayed
delivery security. With respect to purchase commitments, the fund
identifies securities as segregated in its custodial records with a value
at least equal to the amount of the commitment. Losses may arise due to
changes in the market value of the underlying securities or if the
counterparty does not perform under the contract.
INTERFUND LENDING PROGRAM. Pursuant to an Exemptive Order issued by the
SEC, the funds, 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
funds to borrow from, or lend money to, other participating funds.
FUTURES CONTRACTS. Certain funds may use futures contracts to manage their
exposure to the stock and bond markets and to fluctuations in interest
rates and currency values. Buying futures tends to increase a fund's
exposure to the underlying instrument, while selling futures tends to
decrease a 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 each applicable fund's
Statement of Assets and Liabilities. The underlying face amount at value of
any open futures contracts at period end is shown in each applicable fund's
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. Each 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 $10,000,000,
$3,505,987, $1,696,288 and $202,398 or 0.9%, 0.2%, 0.0% and 0.1% of net
assets of the Money Market, High Income, Asset Manager and Asset Manager:
Growth Portfolios, respectively.
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities) and 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 each fund's investment adviser, FMR receives a monthly
fee.
For the Money Market Portfolio, 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 an income-based
fee. The group fee rate is the weighted average of a series of rates
ranging from .1100% to .3700% and is based on the monthly average net
assets of all the mutual funds advised by FMR. 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 Index 500 Portfolio, FMR receives a fee that is computed at an
annual rate of .28% of the fund's average net assets.
For all other funds, 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 Investment Grade Bond and High Income Portfolios and .2500%
to .5200% for
4. FEES AND OTHER TRANSACTIONS WITH
AFFILIATES - CONTINUED
MANAGEMENT FEE - CONTINUED
the Asset Manager, Balanced, Asset Manager: Growth, Equity-Income, Growth &
Income, Growth Opportunities, Contrafund, Growth and Overseas Portfolios
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 rates are .30% for Investment Grade Bond,
Asset Manager: Growth, Growth Opportunities, Contrafund and Growth and,
.45% for High Income and Overseas, .25% for Asset Manager, .15% for
Balanced, and .20% for Equity-Income and Growth & Income Portfolios.
For the period, each funds' management fee was equivalent to the following
annualized rates expressed as a percentage of average net assets:
Money Market .21%
Investment Grade Bond .44%
High Income .60%
Asset Manager .56%
Balanced .46%
Asset Manager: Growth, Growth Opportunities,
Contrafund, Growth .61%
Equity-Income .51%
Growth & Income .50%
Index 500 .28%
Overseas .76%
SUB-ADVISER FEE. As the Money Market Portfolio'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.
FMR, on behalf of the High Income, Asset Manager, Balanced, Asset Manager:
Growth, Growth & Income, Growth Opportunities, Contrafund and Overseas
Portfolios, entered into sub-advisory agreements with Fidelity Management &
Research (U.K.) Inc., Fidelity Management & Research (Far East) Inc., and
with respect only to Overseas Portfolio, 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 funds' 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 a portion of the expenses related to the typesetting, printing
and mailing of shareholder reports, except proxy statements.
For the period, each funds' transfer agent fees was equivalent to the
following annualized rates expressed as a percentage of average net assets:
Money Market, High Income, .07
Asset Manager, Balanced, Equity-Income, %
Growth Opportunities, Contrafund,
Growth and Overseas
Investment Grade Bond, Asset Manager: .08
Growth, Growth & Income and Index 500 %
ACCOUNTING FEES. Fidelity Service Company Inc., an affiliate of FMR,
maintains the funds' accounting records. The fee is based on the level of
average net assets for the month plus out-of-pocket expenses.
BROKERAGE COMMISSIONS. Certain funds placed a portion of their 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 each applicable fund's schedule of
investments.
5. EXPENSE REDUCTIONS.
FMR voluntarily agreed to reimburse the Index 500 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
certain funds' expenses. In addition, certain funds have entered into
arrangements with their custodian and transfer agent whereby credits
realized on uninvested cash balances were used to offset a portion of
certain funds' expenses.
For the period, the reductions under these arrangements are shown under the
caption "Other Information" on each applicable fund's Statement of
Operations.
6. INTERFUND LENDING PROGRAM.
Contrafund Portfolio participated in the interfund lending program as a
lender. The maximum loan and the average daily loan balances during the
period for which loans were outstanding amounted to $36,999,000 and
$17,934,833, respectively. The weighted average interest rate was 5.42%.
Interest earned from the interfund lending program amounted to $16,203 and
is included in interest income on the Statement of Operations.
7. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investments Life Insurance Company and
its subsidiaries, affiliates of FMR, were the record owners of more than 5%
of the outstanding shares and certain unaffiliated insurance companies were
record owners of 10% or more of the total outstanding shares of the
following funds:
FILI UNAFFILIATED INSURANCE COMPANIES
FUND % OF OWNERSHIP # OF % OF OWNERSHIP
Money Market 50 1 11
Investment Grade Bond 35 1 11
High Income 14 2 57
Asset Manager 20 3 49
Balanced 23 1 76
Asset Manager: Growth 76 - -
Equity-Income 20 1 29
Growth & Income 90 - -
Index 500 44 1 10
Growth Opportunities 28 1 71
Contrafund 37 2 35
Growth 15 1 28
Overseas 15 1 36
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 in the "Legend" at the end of each
applicable fund's schedule of investments.
9. ASSET TRANSFER INFORMATION.
In September 1996, the Board of Trustees approved a proposal to liquidate
Money Market Fund, Government Investment Fund, High Yield Fund, and
Overseas Fund of the Fidelity Advisor Annuity Fund trust, and to transfer
the assets of those funds to Money Market Portfolio, Investment Grade Bond
Portfolio, High Income Portfolio, and Overseas Portfolio, respectively. The
liquidation and transfer of assets was completed on March 14, 1997.
VALUE OF
FUND ASSETS TRANSFERRED SHARES EACH SHARE
Money Market Fund $27,320,971 27,320,971 $ 1.00
Investment Grade Portfolio $19,784,453 1,717,566 $ 11.52
High Income Portfolio $91,391,383 7,733,642 $ 11.82
Overseas Portfolio $46,754,098 2,644,463 $ 17.68
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
INVESTMENT SUB-ADVISERS
FMR Texas Inc., Irving, TX
MONEY MARKET PORTFOLIO
Fidelity Management & Research (U.K.) Inc.,
London, England
HIGH INCOME, ASSET MANAGER, ASSET MANAGER: GROWTH,
CONTRAFUND, BALANCED, GROWTH OPPORTUNITIES,
GROWTH & INCOME AND OVERSEAS PORTFOLIOS
Fidelity Management & Research (Far East) Inc.,
Tokyo, Japan
HIGH INCOME, ASSET MANAGER, ASSET MANAGER: GROWTH,
CONTRAFUND, BALANCED, GROWTH OPPORTUNITIES,
GROWTH & INCOME AND OVERSEAS PORTFOLIOS
Fidelity International Investment Advisors
Pembroke, Bermuda
OVERSEAS PORTFOLIO
Fidelity International Investment Advisors (U.K.) Limited
Kent, England
OVERSEAS PORTFOLIO
OFFICERS
Edward C. Johnson 3d, PRESIDENT
Robert C. Pozen, SENIOR VICE PRESIDENT
Abigail Johnson, VICE PRESIDENT - GROWTH, CONTRAFUND
AND GROWTH OPPORTUNITIES PORTFOLIOS
Richard A. Spillane, Jr., VICE PRESIDENT - EQUITY INCOME,
OVERSEAS, BALANCED AND GROWTH & INCOME PORTFOLIOS
William J. Hayes, VICE PRESIDENT
Fred L. Henning, Jr., VICE PRESIDENT - HIGH INCOME,
INVESTMENT GRADE BOND, ASSET MANAGER AND
ASSET MANAGER: GROWTH PORTFOLIOS
Robert A. Lawrence, VICE PRESIDENT - INVESTMENT GRADE BOND,
INDEX 500, ASSET MANAGER, ASSET MANAGER: GROWTH AND
HIGH INCOME PORTFOLIOS
Barry J. Coffman, VICE PRESIDENT - HIGH INCOME PORTFOLIO
William Danoff, VICE PRESIDENT - CONTRAFUND PORTFOLIO
Bettina Doulton, VICE PRESIDENT - BALANCED PORTFOLIO
Jennifer Farrelly, VICE PRESIDENT - INDEX 500 PORTFOLIO
Kevin E. Grant, VICE PRESIDENT - INVESTMENT GRADE BOND
AND BALANCED PORTFOLIOS
Richard C. Habermann, VICE PRESIDENT - ASSET MANAGER
AND ASSET MANAGER: GROWTH PORTFOLIOS
Robert K. Duby, VICE PRESIDENT - MONEY MARKET PORTFOLIO
Richard M. Mace, Jr., VICE PRESIDENT - OVERSEAS PORTFOLIO
Charles S. Morrison, VICE PRESIDENT - ASSET MANAGER AND
ASSET MANAGER: GROWTH PORTFOLIOS
Stephen Petersen, VICE PRESIDENT - EQUITY INCOME
Beth Terrana, VICE PRESIDENT - GROWTH & INCOME PORTFOLIO
John Todd, VICE PRESIDENT - ASSET MANAGER AND
ASSET MANAGER: GROWTH PORTFOLIOS
Jennifer Uhrig, VICE PRESIDENT - GROWTH OPPORTUNITIES PORTFOLIO
George Vanderheiden, VICE PRESIDENT -
ASSET MANAGER, ASSET MANAGER: GROWTH AND
GROWTH OPPORTUNITIES PORTFOLIOS
Sarah H. Zenoble, VICE PRESIDENT - MONEY MARKET PORTFOLIOS
Thomas D. Maher, ASSISTANT VICE PRESIDENT -
MONEY MARKET PORTFOLIO
Arthur S. Loring, SECRETARY
Richard A. Silver, TREASURER
Boyce Greer, VICE PRESIDENT - MONEY MARKET PORTFOLIO
Robert H. Morrison, MANAGER, SECURITY TRANSACTIONS
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
Thomas J. Simpson, ASSISTANT TREASURER -
MONEY MARKET PORTFOLIO
BOARD OF TRUSTEES
Robert C. Pozen **
Ralph F. Cox *
Phyllis Burke Davis *
Robert M. Gates **
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Marvin L. Mann *
William O. McCoy *
Gerald C. McDonough *
Thomas R. Williams *
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER SERVICING AGENT
Fidelity Investments Institutional Operations Co., Inc.
Boston, MA
CUSTODIAN
The Bank of New York, New York, NY
MONEY MARKET, INVESTMENT GRADE BOND AND
HIGH INCOME PORTFOLIOS
The Chase Manhattan Bank, New York, NY
EQUITY-INCOME, ASSET MANAGER, ASSET MANAGER: GROWTH,
GROWTH & INCOME, BALANCED AND OVERSEAS PORTFOLIOS
Brown Brothers Harriman & Co., Boston, MA
GROWTH, GROWTH OPPORTUNITIES, CONTRAFUND AND
INDEX 500 PORTFOLIOS
* INDEPENDENT TRUSTEES
** BALANCED, GROWTH & INCOME AND GROWTH OPPORTUNITIES PORTFOLIOS ONLY
