<PAGE>
[LOGO OF NEW ENGLAND FINANCIAL APPEARS HERE]
-------------------------------------------------------------------------
ZENITH FUND
VARIABLE PRODUCTS
ANNUAL REPORTS
DECEMBER 31, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Loomis Sayles Avanti Growth Series Supplement.......................... I
Loomis Sayles Small Cap Series......................................... 1
Morgan Stanley International Magnum Equity Series...................... 7
Alger Equity Growth Series............................................. 15
Capital Growth Series.................................................. 21
Loomis Sayles Avanti Growth Series..................................... 26
Davis Venture Value Series............................................. 32
Westpeak Growth & Income Series........................................ 39
Westpeak Stock Index Series............................................ 46
Loomis Sayles Balanced Series.......................................... 56
Back Bay Advisors Managed Series....................................... 64
Salomon Brothers Strategic Bond Opportunities Series................... 72
Back Bay Advisors Bond Income Series................................... 81
Salomon Brothers U.S. Government Series................................ 87
Back Bay Advisors Money Market Series.................................. 91
Notes to Financial Statements.......................................... 96
Footnotes to Portfolio Manager Commentary.............................. 107
New England Variable Life Separate Account............................. 109
Fidelity VIP Overseas Portfolio Supplement............................. VIP-OVE
Fidelity VIP Equity-Income Portfolio Supplement........................ VIP-EI
Fidelity VIP High Income Portfolio Supplement.......................... VIP-HI
Fidelity VIPII Asset Manager Portfolio Supplement...................... VIPII-AM
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 product.
<PAGE>
February, 1998
TO OUR POLICYHOLDERS/CONTRACT OWNERS:
We are pleased to provide you with the 1997 Annual Report for the Zenith
variable life insurance and variable annuity products.* This report includes
performance histories, present investments, and financial reports as of
December 31, 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
contract value of your variable product.
The 1997 Annual Report also contains important information pertaining to one
or more funds that may be available under your variable life or variable
annuity product. An explanation of the changes affecting these funds can be
found in the Supplement(s) included in this Annual Report. Please refer to the
Table of Contents to find the locations of the Supplement(s).
New England Financial 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 L. Allen /s/ Bruce Long
David Allen Bruce Long
Senior Vice President President
New England Life Insurance Company New England Annuities
(A business unit of New England Life
Insurance Company)
* Variable products are offered through New England Securities Corporation.
New England Financial is the service mark for New England Life Insurance
Company, Boston, MA and related companies.
[PRINTED ON RECYCLED PAPER]
<PAGE>
NEW ENGLAND ZENITH FUND
LOOMIS SAYLES AVANTI GROWTH SERIES
Supplement dated February 5, 1998
to
Prospectus dated May 1, 1997,
as supplemented August 1 and December 1, 1997
On January 28, 1998, the Board of Trustees of New England Zenith Fund (the
"Fund") approved new advisory and subadvisory agreements (the "New Agreements")
relating to the Fund's Loomis Sayles Avanti Growth Series (the "Series")
between TNE Advisers, Inc.("TNE Advisers") and the Fund on behalf of the
Series, and between TNE Advisers and Goldman Sachs Asset Management ("Goldman
Sachs"), respectively. The New Agreements, which are subject to shareholder
approval, are expected to become effective on or about May 1, 1998. Under the
New Agreements, Goldman Sachs would become the subadviser of the Series,
succeeding Loomis, Sayles & Company, L.P. ("Loomis Sayles"), and would become
responsible for the day-to-day management of the Series' investment operations
under the oversight of TNE Advisers. Accordingly, the name of the Series would
be changed to the "Goldman Sachs Midcap Value Series" at the time the New
Agreements take effect. Goldman Sachs, One New York Plaza, New York, New York
10004, is a separate operating division of Goldman, Sachs & Co., a privately-
owned global financial services company.
The transition from Loomis Sayles to Goldman Sachs as subadviser of the
Series will involve certain portfolio transaction costs as Goldman Sachs
restructures the Series' portfolio to reflect a change in the Series'
investment objective and strategy, as described below. It is impossible to
estimate with certainty what the amount of these transaction costs will be, but
it is currently not expected that such costs will exceed 1.00% of the Series'
net asset value.
The management fee payable by the Series to TNE Advisers under the new
advisory agreement will be at an annual rate of 0.75% of the Series' average
daily net assets. The subadvisory fee payable by TNE Advisers to Goldman Sachs
under the new subadvisory agreement will be at the annual rate of 0.45% of the
first $100 million of the Series' average daily net assets, 0.40% of the next
$400 million of such assets and 0.35% of such assets in excess of $500 million.
In connection with the new advisory agreement, it is expected that the
Voluntary Expense Agreement described in the prospectus between TNE Advisers
and the Fund with respect to the Series would be terminated, and TNE Advisers
would enter into an Expense Deferral Arrangement with the Fund with respect to
the Series. The terms of such arrangement would be similar to those of the
Expense Deferral Arrangements described in the prospectus with respect to
several other series of the Fund, with an annual expense limit of 0.90% of net
assets.
The current investment objective of the Series is long-term capital growth.
Assuming shareholder approval of the New Agreements, the Series will continue
to invest primarily in common stocks after Goldman Sachs becomes subadviser;
however, the Series' investment objective will be long-term capital
appreciation. The change in investment objective is subject to shareholder
approval. In managing the Series, Goldman Sachs will invest, under normal
circumstances, substantially all of the Series' assets in equity securities and
at least 65% of the Series' total assets in equity securities of companies with
public stock market capitalizations (based upon shares available for trading on
an unrestricted basis) of between $500 million and $10 billion at the time of
investment. If the capitalization of an issuer increases above or decreases
below this range after purchase of such issuer's securities, the Series may,
but is not required to, sell the securities. Dividend income, if any, will be
an incidental consideration. The Series may invest up to 35% of its total
assets in fixed income securities. In addition, although the Series will invest
primarily in publicly traded U.S. securities, it may invest up to 25% of its
total assets in foreign securities, including issuers in emerging markets and
securities quoted in foreign currencies.
Ronald E. Gutfleish, Managing Director of Goldman Sachs, G. Lee Anderson,
Vice President of Goldman Sachs and Lawrence S. Sibley, Vice President of
Goldman Sachs will serve as portfolio managers of the Series. Mr. Gutfleish
joined Goldman Sachs in 1993. Prior to that, he was a principal of Sanford C.
Bernstein & Co. in its Investment Research Department. Mr. Anderson joined
Goldman Sachs in 1992. Mr. Sibley joined Goldman Sachs in 1997. Prior to that
he was Vice President at J.P. Morgan Securities and before that he was a
partner in Institutional Sales at Sanford C. Bernstein & Co.
VL-119-98
<PAGE>
LOOMIS SAYLES SMALL CAP SERIES
PORTFOLIO MANAGERS: JEFFREY PETHERICK AND MARY CHAMPAGNE
LOOMIS, SAYLES & COMPANY, L.P.
[PHOTO OF JEFFREY PETHERICK APPEARS HERE]
[PHOTO OF MARY CHAMPAGNE APPEARS HERE]
Q. HOW DID THE SERIES PERFORM IN 1997?
A. The Series posted a total return 24.9% (based on net asset value) for the
year. This compares favorably to the Lipper Variable Products Small Cap
Fund/15/ average return of 19.6%. The Series also outpaced the Russell 2000
Index/18/, the Series' benchmark, which returned 22.4% over the same period.
Q. WHAT FACTORS HAD THE GREATEST INFLUENCE ON THE SERIES' PERFORMANCE OVER THE
YEAR?
A. Increased investor interest in smaller companies' performance bolstered
performance in mid-year, enabling the segment to stay ahead of its benchmark
for 1997. But the interest was short-lived due to the financial problems in
Asia and the resulting market downturn, which drove investors back to the com-
fort of better-known, large-company names. As a result, the portfolio lagged
the larger-company market indices during the year.
Q. HOW DID YOU MANAGE THE SERIES DURING 1997?
A. Careful stock selection was the key to keeping performance positive in the
face of uneasy conditions for smaller companies. For instance, we found select
opportunities in both health care and technology, two otherwise stormy sectors
in 1997. Meanwhile, we emphasized financial services stocks, which have risen
significantly, driven by a growing economy and falling interest rates. We have
also added several utilities for their yields and which may also benefit from
continuing deregulation.
Toward the end of 1997, we were finding some good values in technology which
had suffered from the Asian financial difficulties. We've increased these
holdings from about 7% to 10% of the portfolio, being careful to select firms
that we believe to have minimal exposure to Asia. A good example is National
Computer Systems, a company that depends mostly on the school-testing market
rather than overseas customers for its business. The portfolio also benefited
in 1997 from financial holdings such as Commercial Federal Corp. and First Fi-
nancial.
Q. WHAT IS YOUR CURRENT OUTLOOK FOR 1998?
A. We remain cautiously optimistic that the market has absorbed most of its
Asian worries. If so, market performance in general should be solid throughout
1998, and the smaller-company investments that the portfolio favors could do
better because their earnings depend less on the international economy than
those of some larger firms.
A $10,000 Investment Compared to a Russell 2000/18/
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Small Cap
Series Russel 2000
--------- -----------
<S> <C> <C>
5/1/94 10,000 10,000
12/31/94 9,676 10,026
12/31/95 12,471 12,879
12/31/96 16,295 15,003
12/31/97 20,344 18,358
</TABLE>
[X] FUND FACTS
GOAL: Long-term growth from investment in common stocks or their equivalent.
START DATE: May 2, 1994
SIZE: $200 million as of December 31, 1997
MANAGERS: Jeffrey Petherick and Mary Champagne. Mr. Petherick has managed the
Series since its inception in May 1994. Ms. Champagne joined the management of
the Series in July 1995. Mr. Petherick has also managed the Loomis Sayles
portion of the New England Star Advisers Fund since July 1, 1994. Ms. Champagne
has co-managed the Loomis Sayles portion of the New England Star Advisers Fund
since July 1995. They also manage the Loomis Sayles Small Cap Value Fund and the
Maxim Series--Small Cap Fund. Mr. Petherick joined Loomis 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 DECEMBER 31, 1997
COMMON STOCKS--86.8% OF TOTAL NET ASSETS
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
AEROSPACE--2.0%
31,200 Alliant TechSystem, Inc. ............................... $ 1,739,400
59,200 Gencorp, Inc. .......................................... 1,480,000
33,500 Nichols Research Corp. ................................. 837,500
------------
4,056,900
------------
AUTOMOBILE & RELATED--2.4%
77,200 Aftermarket Technology Corp. ........................... 1,399,250
19,300 Borg Warner Automotive, Inc. ........................... 1,003,600
37,000 Echlin, Inc. ........................................... 1,338,937
58,500 Intermet Corp. ......................................... 1,023,750
------------
4,765,537
------------
BANKS--SAVINGS & LOAN--4.6%
33,277 Associated Banc Corp. .................................. 1,834,395
23,300 Bank Utd. Corp. ........................................ 1,140,244
30,200 City National Corp. .................................... 1,115,512
10,600 CNB Bancshares Inc. .................................... 510,787
44,212 Commercial Federal Corp. ............................... 1,572,289
50,500 Downey Financial Corp. ................................. 1,436,094
28,500 UST Corp. .............................................. 790,875
8,700 Westamerica Bancorporation.............................. 889,575
------------
9,289,771
------------
BUILDING & RELATED--3.6%
52,000 Champion Enterprises, Inc. ............................. 1,069,250
38,350 Crossman Communities, Inc.(c)........................... 1,059,419
116,100 Furniture Brands International, Inc. ................... 2,380,050
45,200 Giant Cement Holdings, Inc.(c).......................... 1,045,250
147,500 Shaw Industries, Inc. .................................. 1,714,687
------------
7,268,656
------------
BUSINESS SERVICES--3.4%
38,400 Alternative Resources Corp. ............................ 885,600
107,600 Apac Teleservices, Inc. ................................ 1,452,600
24,200 CDI Corp.(c)............................................ 1,107,150
31,500 Cort Business Services Corp.(c)......................... 1,254,094
8,300 Team America Corp. ..................................... 87,150
103,400 Viad Corp. ............................................. 1,996,912
------------
6,783,506
------------
CAPTIVE FINANCE--0.9%
93,300 Franchise Mortgage Acceptance Corp. .................... 1,714,387
------------
CELLULAR--WIRELESS COMMUNICATION--0.3%
54,900 Vanguard Cellular Systems, Inc. ........................ 699,975
------------
COMMUNICATION EQUIPMENT--0.3%
36,200 California Microwave.................................... 701,375
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
CHEMICALS--SPECIALTY--3.1%
42,300 Amcol International Corp. ............................... $ 671,512
56,600 Cuno, Inc. .............................................. 863,150
19,700 Dexter Corp. ............................................ 850,794
27,000 Fuller H.B. Co. ......................................... 1,336,500
32,500 General Chemical Group, Inc. ............................ 869,375
45,300 Hanna M.A. Co. .......................................... 1,143,825
27,200 Mississippi Chemical Corp. .............................. 496,400
-----------
6,231,556
-----------
COMPUTER HARDWARE--1.4%
64,700 Digi International, Inc. ................................ 1,099,900
51,000 Komag, Inc. ............................................. 758,625
40,100 Telxon Corp. ............................................ 957,387
-----------
2,815,912
-----------
COMPUTER SOFTWARE & SERVICES--4.0%
42,000 American Management Systems, Inc. ....................... 819,000
53,400 Filenet Corp. ........................................... 1,608,675
71,700 Platinum Technology, Inc. ............................... 2,025,525
36,600 Sterling Software, Inc. ................................. 1,500,600
56,000 Structural Dynamics Research Corp. ...................... 1,260,000
21,800 WMS Industries, Inc. .................................... 460,525
27,600 Wonderware Corp. ........................................ 389,850
-----------
8,064,175
-----------
CONSUMER--JEWELRY/NOVELTIES/GIFTS--0.7%
21,600 Gibson Greetings, Inc. .................................. 472,500
41,000 Zale Corp. .............................................. 943,000
-----------
1,415,500
-----------
CONTAINERS--METALS/GLASS--0.6%
65,350 US Can Corp.(c).......................................... 1,102,781
-----------
ELECTRICAL EQUIPMENT--1.2%
37,300 Alpha Industries, Inc. .................................. 601,462
109,600 Sensormatic Electronics Corp. ........................... 1,801,550
-----------
2,403,012
-----------
ELECTRONICS--2.0%
64,700 BMC Industries, Inc. .................................... 1,043,287
43,800 Cypress Semiconductor Corp. ............................. 372,300
34,600 Exar Corp. .............................................. 570,900
109,400 Integrated Device Technology............................. 1,032,462
68,000 International Rectifier Corp. ........................... 803,250
51,300 Xicor, Inc. ............................................. 153,900
-----------
3,976,099
-----------
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES SMALL CAP SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
COMMON STOCKS--(CONTINUED)
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
FINANCIAL--CONSUMER/DIVERSIFIED--9.9%
American General
60,900 Hospitality Corp. ...................................... $ 1,629,075
55,300 Brandywine Realty Trust................................. 1,389,412
24,100 Capmac Holdings, Inc. .................................. 837,475
56,500 Capstone Capital Corp. ................................. 1,444,281
54,450 Financial Federal Corp. ................................ 1,286,381
Health Care Property
51,100 Investments, Inc. ..................................... 1,932,219
164,400 Imperial Credit
Commercial Mortgage
Investment Corp. ...................................... 2,404,350
90,100 Koger Equity, Inc. ..................................... 1,976,569
51,500 Liberty Property........................................ 1,470,969
48,800 Mack CA Realty Corp. ................................... 2,000,800
35,600 Sun Communities, Inc. .................................. 1,279,375
Sunstone Hotel Investors
90,700 Inc. .................................................. 1,564,575
44,880 WFS Financial, Inc.(c).................................. 504,900
-------------
19,720,381
-------------
FOOD PACKAGING & MISCELLANEOUS--1.7%
13,400 International Home Foods................................ 375,200
39,200 International Multifoods Corp........................... 1,109,850
53,800 Lance, Inc. ............................................ 1,415,612
24,400 Michaels Foods.......................................... 594,750
-------------
3,495,412
-------------
FREIGHT TRANSPORTATION--2.1%
43,400 Circle International Group, Inc......................... 995,488
64,300 Pittston Burlington Group .............................. 1,687,875
49,300 US Freightways Corp..................................... 1,602,250
-------------
4,285,613
-------------
HEALTH CARE--DRUGS--0.4%
63,400 Weider Nutrition International, Inc..................... 788,537
-------------
HEALTH CARE--MEDICAL PROPERTY/SUPPLIES--0.8%
42,500 DVI, Inc.(c)............................................ 786,250
24,200 Gulf South Medical Supply, Inc. ........................ 901,450
-------------
1,687,700
-------------
HEALTH CARE--MEDICAL TECHNOLOGY--3.0%
62,000 Conmed Corp.(c)......................................... 1,627,500
54,900 C. R. Bard, Inc. ....................................... 1,719,056
57,100 Hologic, Inc. .......................................... 1,181,256
34,500 Invacare Corp. ......................................... 750,375
23,500 Sola International, Inc. ............................... 763,750
-------------
6,041,937
-------------
HEALTH CARE--SERVICES--5.4%
47,500 Compdent Corp. ......................................... 963,359
41,500 Genesis Health Ventures, Inc. .......................... 1,094,562
61,700 Healthplan Services Corp. ............................. 1,295,700
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
HEALTH CARE--SERVICES--(CONTINUED)
77,372 Integrated Health Services, Inc. ........................ $ 2,413,039
43,500 Pharmerica Inc. ......................................... 451,312
30,900 Phymatrix Corp. ......................................... 486,675
57,400 Sierra Health Services, Inc. ............................ 1,930,075
47,900 Trigon Healthcare Inc. .................................. 1,251,387
42,043 Vitalink Pharmacy Services, Inc. ........................ 1,014,287
------------
10,900,396
------------
HOUSEHOLD PRODUCTS--1.0%
99,500 Dial Corp. New........................................... 2,070,844
------------
INSURANCE--5.8%
64,125 Allied Group, Inc. ...................................... 1,835,578
37,100 Capital Re Corp. ........................................ 2,302,519
54,000 Everest Reinsurance Holdings............................. 2,227,500
46,000 Protective Life Corp. ................................... 2,748,500
57,800 Reinsurance Group of America, Inc. ...................... 2,460,112
------------
11,574,209
------------
MANUFACTURING--DIVERSIFIED--2.9%
99,700 Apogee Enterprises, Inc. ................................ 1,183,937
79,500 Griffon Corp.(c)......................................... 1,162,687
52,100 Premark International, Inc. ............................. 1,510,900
55,000 Trimas Corp. ............................................ 1,890,625
------------
5,748,149
------------
MANUFACTURING--SPECIAL--1.4%
41,800 Federal Signal Corp. .................................... 903,925
64,300 Regal Beloit Corp. ...................................... 1,900,869
------------
2,804,794
------------
METALS & MINING--2.1%
65,100 Agnico Eagle Mines Ltd. ................................. 353,981
53,500 Chart Industries, Inc. .................................. 1,220,469
54,900 Imco Recycling, Inc. .................................... 881,831
70,500 Oregon Steel Mills, Inc. ................................ 1,502,531
59,600 Rohn Industries, Inc. ................................... 307,312
------------
4,266,124
------------
NATURAL GAS PIPELINES--1.5%
52,900 Eastern Enterprises...................................... 2,380,500
25,900 Public Service Co. N.C., Inc. ........................... 592,462
------------
2,972,962
------------
OFFICE EQUIPMENT--1.2%
76,000 Kimball International, Inc............................... 1,401,250
26,300 National Computer Systems, Inc. ......................... 927,075
------------
2,328,325
------------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES SMALL CAP SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
COMMON STOCKS--(CONTINUED)
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
OIL & GAS--DRILLING EQUIPMENT--2.9%
20,600 Atwood Oceanics, Inc. .................................. $ 975,925
33,100 Offshore Logistics, Inc. ............................... 707,512
65,100 Pride International, Inc. .............................. 1,643,775
42,800 Seitel, Inc.(c)......................................... 732,950
39,900 Weatherford Enterra, Inc.(c)............................ 1,745,925
------------
5,806,087
------------
OIL & GAS--EXPLORATION PRODUCTS--2.4%
65,400 Forcenergy, Inc. ....................................... 1,712,662
59,800 Lomak Petroleum, Inc.................................... 971,750
28,500 Plains Resources, Inc.(c)............................... 489,844
87,100 Vintage Petroleum, Inc.................................. 1,654,900
------------
4,829,156
------------
PAPER & FOREST PRODUCTS--0.9%
55,400 Boise Cascade Corp ..................................... 1,675,850
5,700 Wausau Paper Mills, Inc. ............................... 114,712
------------
1,790,562
------------
PUBLISHING--0.5%
24,500 Houghton Mifflin Co. ................................... 940,187
------------
RESTAURANTS--1.4%
85,600 Buffets, Inc. .......................................... 802,500
18,700 Cracker Barrel Old Country Store........................ 624,112
20,600 Cooker Restaurant Corp. ................................ 196,987
97,100 Darden Restaurants, Inc. ............................... 1,213,750
------------
2,837,349
------------
RETAIL--FOOD CHAINS--0.9%
39,700 Hannaford Bros. Co. .................................... 1,724,469
------------
RETAIL--GENERAL MERCHANDISE--0.5%
44,100 Saks Holdings, Inc. .................................... 912,319
------------
RETAIL--SPECIALTY--2.4%
32,800 Family Dollar Stores, Inc. ............................. 961,450
101,000 Heilig Meyers Co. ...................................... 1,212,000
22,300 Office Max Inc. ........................................ 317,775
36,600 Tandycrafts, Inc. ...................................... 166,700
70,800 United Auto Group, Inc. ................................ 1,283,250
27,900 Wet Seal Inc. .......................................... 823,050
------------
4,764,225
------------
SPECIALTY PRINTING--1.2%
53,100 Banta Corp. ............................................ 1,433,700
43,300 Cadmus Communications Corp. ............................ 887,650
------------
2,321,350
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
TELEPHONE--0.6%
72,000 Antec Corp. ............................................. $ 1,125,000
------------
TEXTILE & APPAREL--1.3%
98,000 Stride Rite Corp. ....................................... 1,176,000
6,900 Timberland Co. .......................................... 400,631
22,700 Westpoint Stevens, Inc. ................................. 1,072,575
------------
2,649,206
------------
UTILITIES--ELECTRIC--1.4%
45,400 Calpine Corp. ........................................... 675,325
9,200 Commonwealth Energy Systems.............................. 305,900
34,500 Rochester Gas & Electric Corp. .......................... 1,173,000
17,100 WPS Resource Corp. ...................................... 578,194
------------
2,732,419
------------
WASTE MANAGEMENT--0.7%
62,250 World Fuel Services Corp. ............................... 1,307,250
------------
Total Common Stocks
(Identified Cost $157,526,364).......................... 173,714,104
------------
</TABLE>
SHORT-TERM INVESTMENTS--14.2%
<TABLE>
<CAPTION>
FACE
AMOUNT
<C> <S> <C>
$9,600,000 Chevron Oil Finance Co.
5.350%, 1/02/98.................................... 9,600,000
9,200,000 Exxon Asset Management
6.250%, 1/02/98.................................... 9,200,000
9,600,000 General Electric
5.500%, 1/02/98.................................... 9,600,000
------------
Short-Term Investments
(Identified Cost $28,400,000)...................... 28,400,000
------------
Total Investments--101.0%
(Identified Cost $185,926,364)(b).................. 202,114,104
Other assets less liabilities....................... (2,008,650)
------------
TOTAL NET ASSETS--100%.............................. $200,105,454
============
</TABLE>
(a) See Note 1A.
(b) Federal Tax Information:
At December 31,1997 the net unrealized appreciation on investments based on
cost of $186,027,269 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........................... $ 25,092,827
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value................ (9,005,992)
------------
Net unrealized appreciation..................................... $ 16,086,835
============
</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 STATEMENT OF OPERATIONS
DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
ASSETS
Investments at value................................. $202,114,104
Cash................................................. 28,550
Receivable for:
Fund shares sold..................................... 851,935
Securities sold...................................... 1,024,975
Dividends and interest............................... 267,737
------------
204,287,301
LIABILITIES
Payable for:
Securities purchased................................. $3,812,135
Fund shares redeemed................................. 199,368
Accrued expenses:
Management fees...................................... 151,462
Deferred trustees' fees.............................. 2,640
Other................................................ 16,242
----------
4,181,847
------------
$200,105,454
============
NET ASSETS
Net Assets consist of:
Capital paid in...................................... $181,986,241
Undistributed net investment income.................. 35,427
Accumulated net realized gains....................... 1,896,046
Unrealized appreciation on investments............... 16,187,740
------------
NET ASSETS............................................ $200,105,454
============
Computation of offering price:
Net asset value and redemption price per share
($200,105,454 divided by 1,259,130 shares of
beneficial interest)................................. $ 158.92
============
Identified cost of investments........................ $185,926,364
============
</TABLE>
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends.......................................... $ 1,624,425(a)
Interest........................................... 1,142,688
-----------
2,767,113
EXPENSES
Management fees.................................... $1,404,831
Trustees' fees and expenses........................ 20,331
Custodian.......................................... 86,945
Audit and tax services............................. 7,591
Legal.............................................. 22,022
Printing........................................... 55,598
Miscellaneous...................................... 3,231
----------
Total expenses..................................... 1,600,549
Less expenses assumed by the investment adviser.... (195,718) 1,404,831
---------- -----------
NET INVESTMENT INCOME............................... 1,362,282
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Realized gain on:
Investments--net................................... 22,598,381
Unrealized appreciation on:
Investments--net................................... 5,981,132
-----------
Net gain on investment transactions................. 28,579,513
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS.......... $29,941,795
===========
</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
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
FROM OPERATIONS
Net investment income............................. $ 591,899 $ 1,362,282
Net realized gain on investments.................. 5,566,031 22,598,381
Unrealized appreciation on investments............ 7,966,226 5,981,132
------------ ------------
INCREASE IN NET ASSETS FROM OPERATIONS............ 14,124,156 29,941,795
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income............................. (597,412) (1,336,197)
Net realized gain on investments.................. (5,269,235) (21,404,296)
------------ ------------
(5,866,647) (22,740,493)
------------ ------------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares...................... 66,168,269 117,472,557
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income.......... 597,412 1,336,197
Distributions from net realized gain.............. 5,269,235 21,404,296
------------ ------------
72,034,916 140,213,050
Cost of shares redeemed........................... (18,839,546) (36,502,923)
------------ ------------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL SHARE
TRANSACTIONS..................................... 53,195,370 103,710,127
------------ ------------
TOTAL INCREASE IN NET ASSETS...................... 61,452,879 110,911,429
NET ASSETS
Beginning of the year............................. 27,741,146 89,194,025
------------ ------------
End of the year................................... $ 89,194,025 $200,105,454
============ ============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the year............................. $ 14,855 $ 9,342
============ ============
End of the year................................... $ 9,342 $ 35,427
============ ============
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares.................... 482,269 721,830
Issued in connection with the reinvestment of:
Distributions from net investment income.......... 7,195 8,598
Distributions from net realized gain.............. 34,411 137,451
------------ ------------
523,875 867,879
Redeemed.......................................... (139,206) (226,920)
------------ ------------
Net change........................................ 384,669 640,959
============ ============
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
MAY 2, 1994(A)
THROUGH YEAR YEAR YEAR
DECEMBER 31, ENDED ENDED ENDED
1994 1995 1996 1997
-------------- ------- ------- --------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year............................. $100.00 $ 96.61 $118.80 $ 144.29
------- ------- ------- --------
Income From Investment Operations
Net Investment Income............ 0.14 0.85 1.05 1.22
Net Realized and Unrealized Gain
(Loss) on Investments........... (3.38) 26.93 35.03 34.11
------- ------- ------- --------
Total From Investment Operations. (3.24) 27.78 36.08 35.33
------- ------- ------- --------
Less Distributions
Distributions From Net Investment
Income.......................... (0.15) (0.78) (1.03) (1.21)
Distributions From Net Realized
Capital Gains................... 0.00 (4.81) (9.56) (19.49)
------- ------- ------- --------
Total Distributions.............. (0.15) (5.59) (10.59) (20.70)
------- ------- ------- --------
Net Asset Value, End of Year...... $ 96.61 $118.80 $144.29 $ 158.92
======= ======= ======= ========
TOTAL RETURN (%).................. (3.23)(c) 28.88 30.67 24.85
Ratio of Operating Expenses to
Average Net Assets (%)........... 1.00 (b) 1.00 1.00 1.00
Ratio of Net Investment Income to
Average Net Assets (%)........... 0.32 (b) 1.26 1.15 0.97
Portfolio Turnover Rate (%)....... 80 (b) 98 62 87
Average Commission Rate(d)........ -- -- $0.0568 $ 0.0534
Net Assets, End of Year (000)..... $ 3,105 $27,741 $89,194 $200,105
The ratios of expenses to average
net assets without giving effect
to the voluntary expense
agreement described in Note 4 to
the Financial Statements would
have been (%).................... 2.31 (b) 1.91 1.29 1.14
</TABLE>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
(d) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate generally does not reflect mark-
ups, mark-downs, or spreads on shares traded on a principal basis.
See accompanying notes to financial statements.
6
<PAGE>
MORGAN STANLEY INTERNATIONAL MAGNUM EQUITY SERIES
(FORMERLY, DRAYCOTT INTERNATIONAL EQUITY SERIES)
PORTFOLIO MANAGER: FRANCINE J. BOVICH
MORGAN STANLEY ASSET MANAGEMENT INC.
[PICTURE OF FRANCINE J. BOVICH
APPEARS HERE]
Q. HOW DID THE SERIES PERFORM DURING THE YEAR?
A. The Series posted a -1.30% total return (based on net asset value) during
the period. The Lipper Variable Products International Funds average returned
5.11%. The Series underperformed the EAFE Index, which returned 1.8% over the
same period.
Q. HOW DID YOU MANAGE THE SERIES DURING THE YEAR?
A. Morgan Stanley took over the Series in May 1997, and spent the first few
weeks restructuring to take advantage of the best ideas of our global research
team. Shortly after we finished restructuring the portfolio, the Asian currency
crisis began with the devaluation of the Thai baht on July 2. The crisis
quickly spread throughout the Pacific Rim, causing markets in the region to
plummet. In response to the crisis, we significantly reduced our holdings in
Asia and Japan, increased exposure to Europe and temporarily boosted our cash
position. We also hedged our exposure to the Japanese yen, Singapore dollar
and, through the fall, certain European currencies, to protect investors from
the depreciation of these currencies versus the U. S. dollar.
Overall stock selection in the portfolio was positive, particularly in Japan,
where we have continued to avoid banks altogether, and instead have focused on
companies such as Sony that have strong franchises, managements and balance
sheets. In Europe, our stocks include cyclical companies and should benefit
from continuing economic improvement across the continent. Unfortunately, the
turmoil in Asia caused a "flight to quality" which caused some of our holdings
to underperform compared to the largest, most liquid names. Our underweight po-
sition in European banking stocks, which have become rather expensive, also
held back performance as the financial sector experienced a significant amount
of merger activity near year-end.
Q. WHAT IS YOUR CURRENT OUTLOOK IN 1998?
Looking ahead, we expect the beginning of 1998 to continue to be volatile, par-
ticularly as the Asian crisis plays itself out. The financial sectors in both
Asia and Japan are in fragile shape, and the world will be watching very care-
fully to see how these difficulties are resolved. The wildcard in Asia will be
whether or not China and in turn Hong Kong allow their currencies to devalue in
light of the competitive devaluations sweeping the region. Although we do not
believe such a devaluation is likely in the near term, the possibility nonethe-
less makes us cautious about the outlook for the Hong Kong market and the re-
gion overall, as another round of devaluations would likely ensue. We are cur-
rently underweighted in Asia relative to the benchmark EAFE Index, with a ma-
jority of our Asian holdings in Australia.
In Japan, we believe that the government will come under increasing pressure to
implement policies to stimulate the domestic economy and reform the banking
sectors. Thus far, however, the government's anti-deficit stance has precluded
any government spending package or meaningful tax cut, and no approach has been
announced to deal with the weakest banks or the huge amount of bad debt on bank
balance sheets. Therefore, despite valuations that have become increasingly at-
tractive, we will remain wary and underweight with regard to the Japanese mar-
ket until we see signs of change. Because of our bearishness regarding these
two markets, we have been holding a higher-than-average amount of cash--some-
thing we view as a temporary defensive measure.
Of the developed international regions, we believe Europe offers the most in-
vestment potential throughout 1998. As a result, Europe currently represents
our largest weighting, with about 65% (at the time of writing) of the portfolio
invested there. Restructuring, consolidation and deregulation should continue
as European Monetary Union (EMU) approaches, with companies jockeying for bet-
ter strategic position in the new pan-European world. Additionally, with the
introduction of the new euro currency scheduled for 1999, interest rates should
continue to converge with rates falling in the peripheral nations and rising in
the core countries. Although we expect growth to slow as exports of European
luxury and capital goods moderate due to lower Asian demand, overall the envi-
ronment is benign for European equities. In particular, we are finding new in-
vestment opportunities in the UK in companies offering the attractive combina-
tion of strong business franchises with low capital requirements and manage-
ments focused on shareholder value.
Overall, we will continue to monitor conditions around the world, seeking the
best investment opportunities available. With valuations in both Japan and Asia
looking more compelling, we hope that we will see positive change at the margin
that will signal our re-entry into these markets and be the catalyst that will
cause the market to rise. We strive to remain agile regarding stock selection,
and will put cash to work as soon as we find suitable opportunities to do so.
7
<PAGE>
A $10,000 Investment Compared to the EAFE Index/2/
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
International
Equity Series EAFE
------------- ----
<S> <C> <C>
10/31/94 10,000 10,000
10/31/94 10,260 9,554
10/31/95 10,879 10,454
10/31/96 11,627 10,914
10/31/97 11,476 11,497
</TABLE>
[X] FUND FACTS
GOAL: Total return from long-term growth of capital
START DATE: October 31, 1994
SIZE: $53 million as of December 31, 1997
MANAGER: Francine J. Bovich manages the Morgan Stanley International Magnum
Equity Series. Ms. Bovich is also a Managing Director of Morgan Stanley Asset
Management.
Performance numbers are net of all Series expenses but do not include any
insurance, sales or administrative charges of variable annuity or life
insurance contracts. If these charges were included, the returns shown would
be lower.
This information represents past performance and is not indicative of future
results. Investment return and principal value will fluctuate so that shares,
upon redemption, may be worth more or less than the original cost.
8
<PAGE>
NEW ENGLAND ZENITH FUND
(MORGAN STANLEY INTERNATIONAL MAGNUM EQUITY SERIES)
(FORMERLY, DRAYCOTT INTERNATIONAL EQUITY)
INVESTMENTS AS OF DECEMBER 31, 1997
COMMON STOCKS--85.6% OF TOTAL NET ASSETS
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
AUSTRIA--0.5%
4,200 Bochler Uddeholm......................................... $ 246,218
-----------
AUSTRALIA--1.9%
22,000 Australia & New Zealand Bank............................. 145,392
15,500 Commonwealth Bank........................................ 177,798
8,400 Lend Lease Corp.......................................... 164,241
12,700 National Australia Bank, Ltd............................. 177,381
39,000 News Corp., Ltd. ........................................ 215,293
61,800 Telstra Corp. ........................................... 130,501
8,000 Telstra Corp. ........................................... 16,893
-----------
1,027,499
-----------
BELGIUM--0.7%
7,100 GB Inno.................................................. 344,930
-----------
DENMARK--1.3%
5,300 BG Bank AS............................................... 356,587
4,700 Unidanmark............................................... 345,029
-----------
701,616
-----------
FINLAND--3.2%
10,000 Amer-Yhtymae Series A.................................... 191,710
6,480 Huhtamaki OY "I' Free.................................... 267,476
1,670 Kone OY Series B......................................... 202,203
52,800 Merita Ltd Series A...................................... 288,654
6,650 Merita Ltd Series B...................................... 156,156
358 Rauma OY................................................. 5,583
42,100 Rautaruukki OY........................................... 339,831
17,280 Valmet OY................................................ 238,391
-----------
1,690,004
-----------
FRANCE--7.8%
1,500 Alcatel Alsthom.......................................... 190,662
640 Bongrain S.A. ........................................... 270,101
3,251 Cie de St. Gobain........................................ 461,843
2,300 Cie General des Eaux..................................... 1,563
6,500 France Telecommunication................................. 235,765
2,470 Groupe Danone............................................ 441,181
4,560 Elf Aquitaine............................................ 530,365
5,100 Lafarge-Coppee........................................... 334,633
10,200 Legris................................................... 354,208
3,200 Scor..................................................... 153,021
2,000 SGS Thomson Microelectronics............................. 123,785
1,800 SGS Thomson Microelectronics............................. 111,407
5,100 Total SA Series B........................................ 555,039
26,190 Usinor................................................... 378,152
-----------
4,141,725
-----------
GERMANY--9.1%
10,910 Basf AG.................................................. 386,621
8,300 Bayer AG................................................. 310,048
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
750 Buderus AG............................................... $ 336,029
1,000 Dyckerhoff AG Preferred.................................. 264,043
13,100 Gerresheimer Glas........................................ 182,415
3,700 Hornbach Hldg AG Preferred............................... 256,066
15,450 Lufthansa AG............................................. 296,298
4,300 Metro AG................................................. 154,173
600 Philipp Holzmann......................................... 153,423
2,440 Plettac AG............................................... 337,730
580 Sudzucker AG Preferred................................... 283,721
10,310 Veba AG.................................................. 702,062
1,220 Viag AG.................................................. 657,150
1,000 Volkswagen............................................... 562,551
-----------
4,882,330
-----------
GREAT BRITAIN--18.0%
58,200 Aggreko.................................................. 149,126
2,600 Associated British Foods................................. 22,634
26,800 Bank of Ireland.......................................... 411,582
38,072 Bank of Scotland......................................... 345,809
11,300 Bass PLC................................................. 175,773
17,200 Bat Industries PLC....................................... 156,850
40,005 BG PLC................................................... 180,040
34,900 Booker PLC............................................... 183,434
63,200 British Telecom PLC...................................... 497,988
41,800 Bunzl PLC................................................ 162,373
29,800 Burmah Castrol........................................... 519,812
30,400 Charter PLC.............................................. 373,991
12,900 Commercial Union PLC..................................... 179,888
8,400 Danka Business Systems................................... 32,699
52,600 Diageo PLC............................................... 481,223
8,900 Glynwed International.................................... 37,861
51,600 Great Universal Stores PLC............................... 650,056
84,800 Imperial Tobacco Group................................... 533,458
53,800 Kwik Save Group.......................................... 258,914
80,300 Medeva................................................... 213,666
32,500 P and O Steam Navigation Co.............................. 369,665
26,000 Premier Farnell.......................................... 187,048
129,700 Premier Cons Oilfields LTD............................... 112,907
42,800 Racal Electronics PLC.................................... 187,698
41,600 Reckitt and Colman....................................... 652,532
59,154 Royal Sun Alliance Insurance............................. 595,594
61,900 Salveson Christian....................................... 99,637
93,200 Scapa Group.............................................. 356,679
33,300 Tate and Lyle PLC........................................ 274,023
38,000 Unilever PLC............................................. 326,867
35,700 Westminster Health Care Holdings......................... 214,026
131,000 WPP Group PLC............................................ 583,104
-----------
9,526,957
-----------
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
NEW ENGLAND ZENITH FUND
(MORGAN STANLEY INTERNATIONAL MAGNUM EQUITY SERIES)
(FORMERLY, DRAYCOTT INTERNATIONAL EQUITY)
INVESTMENTS AS OF DECEMBER 31, 1997
COMMON STOCKS--(CONTINUED)
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
HONG KONG--1.5%
34,000 Cheung Kong Holdings..................................... $ 222,674
15,000 China Light & Power Co. ................................. 83,237
15,000 Dao Heng Bank Group...................................... 37,456
28,000 Hong Kong Telecommunications............................. 57,633
5,400 HSBC Holdings............................................ 133,101
17,000 Hutchison Whampoa........................................ 106,620
24,000 NG Fung Hong............................................. 25,242
11,000 Shanghai Industrial Holdings............................. 40,883
9,000 Sun Hung Kai Properties.................................. 62,718
5,000 Swire Pacific............................................ 27,423
-----------
796,987
-----------
ITALY--2.8%
89,000 Magneti Marelli Spa...................................... 152,190
4,350 Marzotto & Figli......................................... 54,344
43,450 Mediaset................................................. 213,443
86,000 Sogefi................................................... 218,768
192,812 Telecom Italia Spa....................................... 850,161
-----------
1,488,906
-----------
JAPAN--16.5%
20,000 Amada, Ltd............................................... 74,290
24,000 Asahi Tech Corp.......................................... 38,049
14,000 Canon.................................................... 325,955
9,000 Dai Nippon Printing...................................... 168,875
51,000 Daicel Chemical.......................................... 66,401
19,000 Daifuku.................................................. 92,403
27,000 Daikin Industries........................................ 101,739
3,000 Familymart Co., Ltd. .................................... 107,529
10,000 Fuji Machine Manufacturing............................... 241,250
7,000 Fuji Photo Film, Ltd..................................... 268,055
28,000 Fujitsu, Ltd. ........................................... 300,222
18,000 Fujitec Co. ............................................. 99,257
45,000 Furukawa Electric Co. ................................... 192,655
10,000 Hitachi Credit Corp. .................................... 164,663
39,000 Hitachi, Ltd............................................. 277,782
15,000 Inabata and Co........................................... 47,101
31,000 Kaneka Corp. ............................................ 139,841
9,000 Kurita Water Industries.................................. 91,675
3,000 Kyocera.................................................. 136,019
10,000 Kyudenko Corp............................................ 50,471
8,000 Lintec Corp.............................................. 123,765
18,000 Matsushita Electric Industries........................... 263,307
53,000 Mitsubishi Chemical Industries........................... 75,906
15,000 Mitsubishi Estate........................................ 163,131
48,000 Mitsubishi Heavy Industries.............................. 199,985
14,000 Mitsumi Electric......................................... 199,433
5,000 Murata Manufacturing..................................... 125,603
29,000 NEC Corp. ............................................... 308,723
10,000 Nifco, Inc............................................... 65,099
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
4,000 Nintendo, Ltd. .......................................... $ 392,127
34,000 Nissan Motors............................................ 140,614
13,000 Nissha Printing Co....................................... 78,257
38 NTT...................................................... 325,955
26,000 Ricoh.................................................... 322,586
8,000 Rinnai Corp. ............................................ 120,702
5,000 Sangetsu................................................. 51,313
9,000 Sankyo Company........................................... 203,339
19,000 Sanwa Shutter Corp....................................... 95,458
15,000 Sekisui Chemical......................................... 76,166
16,000 Sekisui House............................................ 102,811
5,000 Shimamura, Ltd........................................... 86,926
25,000 Shin-Estu Polymer Co. ................................... 82,331
4,500 Sony Corporation......................................... 399,785
9,000 Sumitomo Marine and Fire................................. 47,561
16,000 Suzuki Motor............................................. 144,597
4,000 TDK...................................................... 301,447
5,000 Tokyo Electron, Ltd...................................... 160,067
74,000 Toshiba Corporation...................................... 307,743
300 Toto..................................................... 1,916
12,000 Toyota Motor Corp........................................ 343,724
38,000 Tsubakimoto Chain........................................ 136,785
10,000 Yamaha Corp.............................................. 113,349
11,000 Yamanouchi Pharm. ....................................... 235,889
-----------
8,780,632
-----------
MALAYSIA--0.3%
40,000 Tenaga Nasional BHD...................................... 85,358
-----------
NETHERLANDS--5.4%
13,000 ABN Amro Holdings........................................ 253,249
3,700 Akzo Nobel NV............................................ 637,940
2,100 Benckiser Series B NLG................................... 86,894
13,020 Ing Groep NV............................................. 548,373
4,900 KLM Royal Dutch Air...................................... 181,244
3,600 Koninklijke KNP, BT...................................... 225,483
15,700 Koninklijke KNP.......................................... 361,596
4,000 Koninklijke Van Ommeren.................................. 134,145
6,350 Philips Electronics...................................... 380,815
-----------
2,809,739
-----------
NEW ZEALAND--0.0%
36,000 AMP Office Trust......................................... 21,530
2,000 Fletcher Challenge Forests Division...................... 1,661
-----------
23,191
-----------
NORWAY--0.9%
23,600 Saga Petroleum Series B.................................. 357,876
3,900 Sparebanken Primary Cap.................................. 138,874
-----------
496,750
-----------
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
NEW ENGLAND ZENITH FUND
(MORGAN STANLEY INTERNATIONAL MAGNUM EQUITY SERIES)
(FORMERLY, DRAYCOTT INTERNATIONAL EQUITY)
INVESTMENTS AS OF DECEMBER 31, 1997
COMMON STOCKS--(CONTINUED)
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
SINGAPORE--0.9%
3,800 Creative Technology...................................... $ 77,105
550 Creative Technology Ltd. ................................ 12,031
6,000 Development Bank of Singapore............................ 51,261
3,000 Electronic Res., Ltd..................................... 3,044
26,000 Natsteel Electronics, Ltd................................ 33,319
18,400 Overseas Chinese Bank.................................... 106,983
13,000 Parkway Holdings......................................... 29,309
3,000 Singapore Press.......................................... 37,556
77,000 Small Summit Holdings, Ltd. ............................. 16,218
17,000 United Overseas Bank..................................... 94,304
13,000 Venture Manufacturing.................................... 36,250
-----------
497,380
-----------
SPAIN--3.3%
12,700 Banco Bilboa Vizcaya..................................... 410,968
47,700 Iberdrola S.A. .......................................... 627,755
12,200 Telefonica de Espana..................................... 348,343
34,000 Uralita.................................................. 388,316
-----------
1,775,382
-----------
SWEDEN--4.4%
16,600 Esselte AB Series B...................................... 336,604
7,000 Foreningssparbanken AB................................... 159,133
129,500 Nordbanken AS............................................ 732,320
10,100 Pharmacia and Upjohn..................................... 371,440
533 Pricer AB Series B....................................... 9,868
6,000 SKF AB................................................... 127,709
13,800 Spectra Physics AB....................................... 261,578
10,200 Svenska Handelsbk........................................ 352,637
-----------
2,351,289
-----------
SWITZERLAND--7.0%
283 Ascom Holding AG......................................... 364,112
245 Bobst AG................................................. 360,491
1,120 Forbo Holdings........................................... 457,597
520 Holderbk Financiere Glarus............................... 424,199
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
500 Nestle S.A........................................... $ 749,042
77 Novartis AG.......................................... 124,891
140 Schindler Holding AG................................. 150,328
172 Schindler Holding Ptg. AG............................ 179,157
210 Sig Schweiz Industry Holding AG...................... 286,716
366 Sulzer AG............................................ 231,944
1,820 Valora Holding AG.................................... 383,630
-----------
3,712,107
-----------
Total Common Stocks
(Identified Cost $45,927,695)....................... 45,379,000
-----------
BOND & NOTES--0.0%
<CAPTION>
FACE
AMOUNT
<C> <S> <C>
NEW ZEALAND
$ 36,000 AMP Office Trust, 7.500%, 6/30/03.................... 21,530
-----------
Total Bonds
(Identified Cost $21,310)........................... 21,530
-----------
SHORT-TERM INVESTMENT--13.9%
7,355,000 Repurchase agreement with State Street Bank & Trust
Company dated 12/31/97 at 5% to be repurchased at
$7,357,043 on 1/02/98 collateralized by $7,315,000
U.S. Treasury Note 5.875% due 1/31/99 with a value
of $7,506,251....................................... 7,355,000
-----------
Total Short-Term Investment
(Identified Cost $7,355,000) 7,355,000
-----------
Total Investments--99.5%
(Identified Cost $53,304,005)(b).................... 52,755,530
Other assets less liabilities(c)..................... 279,023
-----------
TOTAL NET ASSETS--100%............................... $53,034,553
===========
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
NEW ENGLAND ZENITH FUND
(MORGAN STANLEY INTERNATIONAL MAGNUM EQUITY SERIES)
(FORMERLY, DRAYCOTT INTERNATIONAL EQUITY)
INVESTMENTS AS OF DECEMBER 31, 1997
FORWARD CONTRACTS OUTSTANDING AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
LOCAL AGGREGATE UNREALIZED
DELIVERY CURRENCY FACE TOTAL APPRECIATION/
DATE AMOUNT VALUE VALUE (DEPRECIATION)
<S> <C> <C> <C> <C> <C>
Japanese Yen (sold). 01/29/98 254,381,600 $2,110,000 $1,956,439 $153,561
Japanese Yen (sold). 01/29/98 129,237,500 1,055,000 993,961 61,039
Japanese Yen (sold). 02/05/98 248,315,350 2,110,000 1,911,770 198,230
Japanese Yen (sold). 02/05/98 129,100,350 1,055,000 993,938 61,062
Singapore Dollar
(sold)............. 03/05/98 599,905 371,343 355,921 15,422
Singapore Dollar
(bought)........... 03/05/98 599,905 373,377 355,921 (17,456)
Singapore Dollar
(sold)............. 03/18/98 383,040 224,000 225,370 (1,370)
--------
$470,488
========
</TABLE>
TEN LARGEST INDUSTRY HOLDINGS AT DECEMBER 31, 1997 (UNAUDITED)
1 Banks 8.24%
2 Industrial Machinery 6.64%
3 Food & Beverages 5.80%
4 Electronics 4.23%
5 Telephone 4.03%
6 Construction Materials 3.98%
7 Chemicals 3.86%
8 Drugs & Health Care 3.27%
9 Automobiles 3.19%
10 Conglomerates 3.03%
(a) See Note 1a.
(b) Federal Tax Information:
At December 31,1997 the net unrealized depreciation on investments based on
cost of $53,552,454 for federal income tax purposes was as follows:
<TABLE>
<C> <S> <C>
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost........ $ 3,884,677
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value........ (4,681,601)
-----------
Net unrealized depreciation................................ $ (796,924)
===========
</TABLE>
(c) Including deposits in foreign denominated currencies with a value of
$597,018 and a cost of $603,942.
See accompanying notes to financial statements.
12
<PAGE>
NEW ENGLAND ZENITH FUND
(MORGAN STANLEY INTERNATIONAL MAGNUM EQUITY SERIES)
(FORMERLY, DRAYCOTT INTERNATIONAL EQUITY)
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
ASSETS
Investments at value.................................. $52,755,530
Cash.................................................. 878
Foreign cash at value (Cost $603,942)................. 597,018
Receivable for:
Fund shares sold...................................... 285,902
Securities sold....................................... 270,587
Open forward currency contracts--net.................. 470,488
Dividends and interest................................ 107,288
Foreign taxes......................................... 40,517
Unamortized organization.............................. 3,677
-----------
54,531,885
LIABILITIES
Payable for:
Securities purchased.................................. $1,186,949
Fund shares redeemed.................................. 237,470
Withholding taxes..................................... 12,133
Accrued expenses:
Management fees....................................... 32,547
Deferred trustees' fees............................... 3,727
Other................................................. 24,506
----------
1,497,332
-----------
$53,034,553
===========
NET ASSETS
Net Assets consist of:
Capital paid in....................................... $53,639,990
Overdistributed net investment income................. (116,715)
Accumulated net realized losses....................... (412,258)
Unrealized depreciation on investments, forward
contracts and foreign currency....................... (76,464)
-----------
NET ASSETS............................................. $53,034,553
===========
Computation of offering price:
Net asset value and redemption price per share
($53,034,553 divided by 4,885,124 shares of beneficial
interest).............................................
$ 10.86
===========
Identified cost of investments......................... $53,304,005
===========
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<S> <C> <C>
INVESTMENT INCOME
Dividends......................................... $ 859,777(a)
Interest.......................................... 202,728
-----------
1,062,505
EXPENSES
Management fees................................... $ 422,850
Trustees' fees and expenses....................... 14,151
Custodian......................................... 198,448
Audit and tax services............................ 17,252
Legal............................................. 42,472
Printing.......................................... 46,353
Amortization of organization expenses............. 2,011
Miscellaneous..................................... 2,990
-----------
Total expenses................................... 746,527
Less expenses assumed by the investment adviser.. (135,743) 610,784
----------- -----------
NET INVESTMENT INCOME.............................. 451,721
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FORWARD CURRENCY CONTRACTS AND FOREIGN CURRENCY
TRANSACTIONS
Realized gain (loss) on:
Investments--net.................................. 489,183
Foreign currency transactions--net................ (97,103)
-----------
Total realized gain on investments and foreign
currency transactions............................ 392,080
-----------
Unrealized appreciation (depreciation) on:
Investments--net.................................. (2,449,032)
Foreign currency transactions--net................ 464,257
-----------
Total unrealized depreciation on investments and
foreign currency transactions.................... (1,984,775)
-----------
Net loss on investment transactions................ (1,592,695)
-----------
NET DECREASE IN NET ASSETS FROM OPERATIONS......... $(1,140,974)
===========
</TABLE>
(a) Net of foreign taxes of: $124,405.
See accompanying notes to financial statements.
13
<PAGE>
NEW ENGLAND ZENITH FUND
(MORGAN STANLEY INTERNATIONAL MAGNUM EQUITY SERIES)
(FORMERLY, DRAYCOTT INTERNATIONAL EQUITY)
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
FROM OPERATIONS
Net investment income.............................. $ 191,479 $ 451,721
Net realized gain on investments and foreign
currency transactions............................. 536,541 392,080
Unrealized appreciation (depreciation) on
investments and foreign currency transactions..... 1,051,280 (1,984,775)
----------- -----------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS.. 1,779,300 (1,140,974)
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income.............................. (50,813) (401,271)
Net realized gain on investments................... (542,008) (937,720)
----------- -----------
(592,821) (1,338,991)
----------- -----------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares....................... 30,118,413 31,343,810
Net asset value of shares issued in connection with
the reinvestment of:
Distributions from net investment income........... 50,813 401,271
Distributions from net realized gain............... 542,008 937,720
----------- -----------
30,711,234 32,682,801
Cost of shares redeemed............................ (8,773,034) (16,560,469)
----------- -----------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL SHARE
TRANSACTIONS...................................... 21,938,200 16,122,332
----------- -----------
TOTAL INCREASE IN NET ASSETS....................... 23,124,679 13,642,367
NET ASSETS
Beginning of the year.............................. 16,267,507 39,392,186
----------- -----------
End of the year.................................... $39,392,186 $53,034,553
=========== ===========
OVERDISTRIBUTED NET INVESTMENT INCOME
Beginning of the year.............................. $ (6,800) $ (55,074)
=========== ===========
End of the year.................................... $ (55,074) $ (116,715)
=========== ===========
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares..................... 2,705,127 2,737,081
Issued in connection with the reinvestment of:
Distributions from net investment income........... 4,565 36,467
Distributions from net realized gain............... 48,698 86,482
----------- -----------
2,758,390 2,860,030
Redeemed........................................... (784,531) (1,465,482)
----------- -----------
Net change......................................... 1,973,859 1,394,548
=========== ===========
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
OCTOBER 31, 1994(A)
THROUGH YEAR YEAR YEAR
DECEMBER 31, ENDED ENDED ENDED
1994 1995 1996 1997
------------------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year........................... $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 (Loss) on Investments.... 0.23 0.53 0.68 (0.23)
------ ------- ------- -------
Total From Investment
Operations.................... 0.26 0.62 0.74 (0.15)
------ ------- ------- -------
Less Distributions
Distributions From Net
Investment Income............. (0.02) (0.09) (0.02) (0.09)
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) (0.08)
Distributions in Excess of Net
Realized Capital Gains........ 0.00 0.00 0.00 (0.11)
Distributions From Paid-in
Capital....................... (0.01) 0.00 0.00 0.00
------ ------- ------- -------
Total Distributions............ (0.03) (0.12) (0.18) (0.28)
------ ------- ------- -------
Net Asset Value, End of Year.... $10.23 $ 10.73 $ 11.29 $ 10.86
====== ======= ======= =======
TOTAL RETURN (%)................ 2.60(c) 6.03 6.67 (1.30)
Ratio of Operating Expenses to
Average Net Assets (%)......... 1.30(b) 1.30 1.30 1.30
Ratio of Net Investment Income
to Average Net Assets (%)...... 2.56(b) 1.29 0.67 0.96
Portfolio Turnover Rate (%)..... 4(b) 89 64 115
Average Commission Rate(d)...... -- -- $0.0204 $0.0123
Net Assets, End of Year (000)... $2,989 $16,268 $39,392 $53,035
The ratios of expenses to
average net assets without
giving effect to the voluntary
expense agreement described in
Note 4 to the Financial
Statements would have been (%). 5.38(b) 3.12 1.66 1.59
</TABLE>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
(d) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate generally does not reflect mark-
ups, mark-downs, or spreads on shares traded on a principal basis.
See accompanying notes to financial statements.
14
<PAGE>
ALGER EQUITY GROWTH SERIES
PORTFOLIO MANAGER: DAVID D. ALGER
FRED ALGER MANAGEMENT, INC.
[PICTURE OF DAVID D. ALGER
APPEARS HERE]
Q. HOW DID THE PORTFOLIO PERFORM IN 1997?
A. While 1997 resulted in strong overall performance for the U.S. stock market
in general, the year was less smooth for growth stocks. During the first quar-
ter, investors shunned growth stocks amid speculation that the Federal Reserve
would find it necessary to raise interest rates. As these fears subsided and
investor confidence increased, the favorable relative multiples of growth
stocks attracted investors during the second quarter. This trend continued, be-
coming even more pronounced during the third quarter as a non-inflationary, low
interest rate environment further boosted investor confidence and increased the
amount of risk they were willing to assume. Despite the unemployment rate
reaching a twenty-four year low of 4.7%, inflation dropped throughout the year.
This phenomenon led to the theory that there was a new economic paradigm, which
allowed for rapid economic expansion without inflation due to improved produc-
tivity. Although promptly rebutted by Federal Reserve Chairman Alan Greenspan,
this highly publicized viewpoint helped foster the optimistic investor psychol-
ogy that fueled the rise in growth stocks.
During the fourth quarter, incidents of international economic turbulence led
to a heightened sense of domestic uncertainty, which in turn triggered an
abrupt return to defensive equity investing. A dramatic sell-off in Hong Kong
preceded an historic 554-point drop in the Dow on October 27th. Currency col-
lapses and subsequent banking failures throughout the Pacific Rim caused in-
vestors to question the ability of U.S. companies dependent on this region for
revenue to meet future earnings expectations. Technology stocks with consider-
able business in Asia, particularly semiconductors, were among the hardest hit.
Although the broad market recovered from the late October sell-off, the rebound
was dominated by blue-chip stocks and interest-rate sensitive stocks such as
utilities, causing the S&P 500 to outdistance other market indices and growth
stocks in general.
The Series posted an annual return of 25.6% in 1997. Although we are pleased
with this result in absolute terms, the Series did underperform its benchmark,
the S&P 500 Index, which returned 33.2% for the year.
Q. HOW DID YOU MANAGE THE SERIES?
A. Although there were shifts within the portfolio, our strategy remained con-
sistent, emphasizing the individual selection of quality growth stocks through
in-depth, internal research conducted by talented analysts. At no time during
the course of the year did we stray from the philosophy and process that have
driven our long-term success as an investment manager.
One sector that drove performance throughout the entire year was pharmaceuti-
cals. Drug stocks such as Warner-Lambert, Bristol Myers and Pfizer were held
throughout the entire year, returning 54.5%, 73.6%, and 79.5%, respectively.
During the third quarter, a large technology position drove performance. The
position was drastically reduced the following quarter, as we sold off those
stocks we felt would be most impacted by the Asian crisis. Despite their liqui-
dation, technology holdings negatively impacted fourth quarter performance.
Q. WHAT IS YOUR INVESTMENT OUTLOOK FOR THE MONTHS AHEAD?
A. Looking ahead, low inflation and the fear that a stronger dollar may further
hurt debilitated Asian nations will likely prevent the Federal Reserve from
raising interest rates in the near future. Additionally, we feel the economy
will slow, leading to modest earnings growth in 1998. Price to earnings ratios,
however, could reach very high levels because of the lack of inflation and
lower interest rates. Assuming our bottom-up forecast of Dow earnings of $486 a
share is accurate, and the Dow trades at a multiple of 18.5 times earnings, the
Dow could rise to around the 9000 level during the year. Given this, we are
still bullish on stocks and given their favorable valuations, we are especially
bullish on domestic growth stocks.
15
<PAGE>
A $10,000 Investment Compared to the S&P 500 Index/19/
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Alger
Equity
Growth S&P 500
------ -------
<S> <C> <C>
10/31/94 10,000 10,000
12/31/94 9,580 9,793
12/31/95 14,256 13,461
12/31/96 16,122 16,543
12/31/97 20,254 22,055
</TABLE>
[X] FUND FACTS
GOAL: Long-term capital appreciation.
START DATE: October 31, 1994
SIZE: $205 million as of December 31, 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.
16
<PAGE>
NEW ENGLAND ZENITH FUND
(ALGER EQUITY GROWTH SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
COMMON STOCKS--91.1% OF TOTAL NET ASSETS
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
AEROSPACE--3.2%
43,700 AMR Corp.(c)............................................ $ 5,615,450
31,500 Gulfstream Aerospace Corp.(c)........................... 921,375
------------
6,536,825
------------
BANKS--6.6%
31,271 Banc One Corp. ......................................... 1,698,406
80,300 Bank of New York........................................ 4,642,344
54,500 BankAmerica Corp........................................ 3,978,500
14,700 CoreStates Financial.................................... 1,176,919
38,800 First Union Corp. ...................................... 1,988,500
------------
13,484,669
------------
BROADCASTING--3.0%
209,000 CBS Corp. .............................................. 6,152,437
------------
CASINOS & RESORTS--2.4%
80,500 Carnival Corp. ......................................... 4,457,687
24,300 Mirage Resorts, Inc.(c)................................. 552,825
------------
5,010,512
------------
COMMUNICATIONS--1.2%
80,600 Worldcom, Inc.(c)....................................... 2,438,150
------------
COMMUNICATIONS EQUIPMENT--2.7%
67,950 Cisco Systems, Inc.(c).................................. 3,788,212
31,000 Tellabs, Inc.(c)........................................ 1,639,125
------------
5,427,337
------------
COMPUTER RELATED & BUSINESS EQUIPMENT--3.1%
46,600 America Online(c)....................................... 4,156,138
86,600 Bay Networks, Inc.(c)................................... 2,213,713
------------
6,369,851
------------
COMPUTER SOFTWARE--3.1%
49,900 HBO & Co. .............................................. 2,395,200
30,400 Microsoft Corp. ........................................ 3,929,200
------------
6,324,400
------------
CONSUMER PRODUCTS--10.2%
27,000 Fortune Brands.......................................... 1,000,688
43,000 Masco Corp. ............................................ 2,187,625
103,500 Mattel, Inc. ........................................... 3,855,375
20,000 McKesson Corp. ......................................... 2,163,750
128,700 Sunbeam Corp. .......................................... 5,421,487
139,340 Tyco International, Ltd. ............................... 6,279,009
------------
20,907,934
------------
CONSUMER SERVICES--3.5%
209,950 Cendant Corp............................................ 7,217,031
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
ENERGY & ENERGY SERVICES--1.0%
38,000 Halliburton Co. ........................................ $ 1,973,625
------------
FINANCIAL SERVICES--7.5%
41,550 Charles Schwab Corp. ................................... 1,742,503
56,400 Federal Home Loan Mortgage Corp. ....................... 2,365,275
13,400 Household International................................. 1,709,338
2,600 Money Store, Inc. ...................................... 54,600
73,450 Morgan Stanley Dean Witter.............................. 4,342,731
32,100 Paine Webber Group, Inc. ............................... 1,109,456
76,300 Travelers Group......................................... 4,110,663
------------
15,434,566
------------
FOOD & BEVERAGE--0.8%
42,600 PepsiCo, Inc. .......................................... 1,552,237
------------
HEALTH CARE--2.8%
40,800 AmeriSource Health, Class A(c).......................... 2,376,600
24,500 Bergen Brunswig, Class A................................ 1,032,063
32,200 Cardinal Health......................................... 2,419,025
------------
5,827,688
------------
INSURANCE--2.3%
32,000 American International Group............................ 3,480,000
20,000 MGIC Investment Corp. .................................. 1,330,000
------------
4,810,000
------------
LEISURE & ENTERTAINMENT--2.5%
201,000 International Game Technology........................... 5,075,250
------------
MEDICAL EQUIPMENT--2.4%
79,500 Guidant Corp. .......................................... 4,948,875
------------
MINING--0.7%
31,600 Diamond Offshore Drilling, Inc. ........................ 1,520,750
------------
PHARMACEUTICALS--10.8%
52,900 Bristol-Myers Squibb Co. ............................... 5,005,663
50,200 Eli Lilly & Co. ........................................ 3,495,175
30,500 Omnicare, Inc. ......................................... 945,500
20,400 Pfizer, Inc. ........................................... 1,521,075
91,900 Schering-Plough......................................... 5,709,287
44,000 Warner-Lambert Co. ..................................... 5,456,000
------------
22,132,700
------------
POLLUTION CONTROL--2.1%
109,700 USA Waste Services, Inc.(c)............................. 4,305,725
------------
RAILROAD--1.9%
42,800 Burlington Northern Santa Fe............................ 3,977,725
------------
</TABLE>
See accompanying notes to financial statements.
17
<PAGE>
NEW ENGLAND ZENITH FUND
(ALGER EQUITY GROWTH SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
COMMON STOCKS--(CONTINUED) SHORT-TERM INVESTMENTS--9.6%
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
RETAIL--10.3%
25,100 CVS Corp. .............................................. $ 1,607,969
42,500 General Nutrition(c).................................... 1,445,000
107,600 Home Depot, Inc. ....................................... 6,334,950
25,000 Rite Aid Corp. ......................................... 1,467,188
40,000 Safeway, Inc.(c)........................................ 2,530,000
72,200 Staples, Inc.(c)........................................ 2,003,550
145,000 Wal-Mart Stores, Inc. .................................. 5,718,437
------------
21,107,094
------------
REAL ESTATE INVESTMENT TRUST--0.8%
28,000 Starwood Lodging Trust.................................. 1,620,500
------------
SEMI-CONDUCTORS/CAPITAL
EQUIPMENT--2.0%
62,400 Altera Corp.(c)......................................... 2,067,000
36,000 Linear Technology Corp. ................................ 2,074,500
------------
4,141,500
------------
TECHNICAL SERVICES--1.5%
69,700 Cognizant Corp. ........................................ 3,106,006
------------
TELECOM NETWORKS--2.7%
33,800 AT&T Corp. ............................................. 2,070,250
57,800 CIENA Corp.(c).......................................... 3,533,025
------------
5,603,275
------------
Total Common Stocks
(Identified Cost $157,592,892)......................... 187,006,662
------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
$ 4,000,000 International Lease Finance Corp., 5.950%,
1/02/98.......................................... $ 3,999,339
4,000,000 Brooklyn Union Gas, 6.050%, 1/06/98............... 3,996,639
11,805,937 Street Street Global Advisors Money Market Fund... 11,805,937
------------
Total Short-Term Investments
(Identified Cost $19,801,915).................... 19,801,915
------------
Total Investments--100.7%
(Identified cost $178,117,853)(b)................ 206,808,577
Other assets less liabilities..................... (1,490,142)
------------
TOTAL NET ASSETS--100%............................ $205,318,435
============
(a) See Note 1A.
(b) Federal Tax Information:
At December 31, 1997 the net unrealized appreciation on investments based on
cost of $178,337,803 for federal income tax purposes was as follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost.......... $ 31,344,609
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value.......... (2,873,835)
------------
Net unrealized appreciation.................................. $ 28,470,774
============
</TABLE>
(c) Non-income producing security.
See accompanying notes to financial statements.
18
<PAGE>
NEW ENGLAND ZENITH FUND
(ALGER EQUITY GROWTH SERIES)
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
ASSETS
Investments at value................................. $206,808,577
Receivable for:
Fund shares sold..................................... 441,523
Securities sold...................................... 3,098,523
Dividends and interest............................... 147,778
Foreign taxes........................................ 1,708
Unamortized organization............................. 3,677
------------
210,501,786
LIABILITIES
Payable for:
Securities purchased................................. $4,833,070
Fund shares redeemed................................. 202,416
Accrued expenses:
Management fees...................................... 127,111
Deferred trustees' fees.............................. 3,303
Other................................................ 17,451
----------
5,183,351
------------
$205,318,435
============
NET ASSETS
Net Assets consist of:
Capital paid in...................................... $176,847,661
Accumulated net realized losses...................... (219,950)
Unrealized appreciation on investments............... 28,690,724
------------
NET ASSETS............................................ $205,318,435
============
Computation of offering price:
Net asset value and redemption price per share
($205,318,435 divided by 11,653,426 shares of
beneficial interest)................................. $ 17.62
============
Identified cost of investments........................ $178,117,853
============
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<S> <C> <C>
INVESTMENT INCOME
Dividends........................................... $ 1,131,303(a)
Interest............................................ 531,296
-----------
1,662,599
EXPENSES
Management fees..................................... $1,246,269
Trustees' fees and expenses......................... 25,963
Custodian........................................... 65,704
Audit and tax services.............................. 12,422
Legal............................................... 22,022
Printing............................................ 70,722
Amortization of organization expenses............... 2,011
Miscellaneous....................................... 3,375
----------
Total expenses..................................... 1,448,488
-----------
NET INVESTMENT INCOME................................ 214,111
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Realized gain on:
Investments--net.................................... 19,818,623
Unrealized appreciation on:
Investments--net.................................... 14,830,675
-----------
Net gain on investment transactions.................. 34,649,298
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS........... $34,863,409
===========
</TABLE>
(a)Net of foreign taxes of: $4,944
See accompanying notes to financial statements.
19
<PAGE>
NEW ENGLAND ZENITH FUND
(ALGER EQUITY GROWTH SERIES)
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
FROM OPERATIONS
Net investment income............................. $ 204,002 $ 214,111
Net realized gain on investments.................. 965,295 19,818,623
Unrealized appreciation on investments............ 9,359,159 14,830,675
------------ ------------
INCREASE IN NET ASSETS FROM OPERATIONS............ 10,528,456 34,863,409
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income............................. (206,060) (155,793)
Net realized gain on investments.................. 0 (19,679,801)
------------ ------------
(206,060) (19,835,594)
------------ ------------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares...................... 92,225,724 86,896,157
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income.......... 206,060 155,793
Distributions from net realized gain.............. 0 19,679,801
------------ ------------
92,431,784 106,731,751
Cost of shares redeemed........................... (28,685,075) (36,896,638)
------------ ------------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL SHARE
TRANSACTIONS..................................... 63,746,709 69,835,113
------------ ------------
TOTAL INCREASE IN NET ASSETS...................... 74,069,105 84,862,928
NET ASSETS
Beginning of the year............................. 46,386,402 120,455,507
------------ ------------
End of the year................................... $120,455,507 $205,318,435
============ ============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the year............................. $ 1,354 $ 2,272
============ ============
End of the year................................... $ 2,272 $ 0
============ ============
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares.................... 6,311,990 4,818,140
Issued in connection with the reinvestment of:
Distributions from net investment income.......... 13,117 9,023
Distributions from net realized gain.............. 0 1,146,276
------------ ------------
6,325,107 5,973,439
Redeemed.......................................... (1,954,136) (2,053,180)
------------ ------------
Net change........................................ 4,370,971 3,920,259
============ ============
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
OCTOBER 31, 1994(A)
THROUGH YEAR YEAR YEAR
DECEMBER 31, ENDED ENDED ENDED
1994 1995 1996 1997
------------------- ------- -------- --------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year......................... $10.00 $ 9.56 $ 13.80 $ 15.58
------ ------- -------- --------
Income From Investment
Operations
Net Investment Income........ 0.02 0.01 0.04 0.02
Net Realized and Unrealized
Gain (Loss) on Investments.. (0.44) 4.65 1.78 3.92
------ ------- -------- --------
Total From Investment
Operations.................. (0.42) 4.66 1.82 3.94
------ ------- -------- --------
Less Distributions
Distributions From Net
Investment Income........... (0.02) (0.01) (0.04) (0.02)
Distributions From Net
Realized Capital Gains...... 0.00 (0.41) 0.00 (1.88)
------ ------- -------- --------
Total Distributions.......... (0.02) (0.42) (0.04) (1.90)
------ ------- -------- --------
Net Asset Value, End of Year.. $ 9.56 $ 13.80 $ 15.58 $ 17.62
====== ======= ======== ========
TOTAL RETURN (%).............. (4.20)(c) 48.80 13.17 25.63
Ratio of Operating Expenses to
Average Net Assets (%)....... 0.85 (b) 0.85 0.90 0.87
Ratio of Net Investment Income
to Average Net Assets (%).... 1.07 (b) 0.14 0.24 0.12
Portfolio Turnover Rate (%)... 32 (b) 107 78 137
Average Commission Rate(d).... -- -- $ 0.0716 $ 0.0723
Net Assets, End of Year (000). $1,917 $46,386 $120,456 $205,318
The ratios of expenses to
average net assets without
giving effect to the
voluntary expense agreement
described in Note 4 to the
Financial Statements would
have been (%)................ 2.74 (b) 2.45 0.90 --
</TABLE>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
(d) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate generally does not reflect mark-
ups, mark-downs, or spreads on shares traded on a principal basis.
See accompanying notes to financial statements.
20
<PAGE>
CAPITAL GROWTH SERIES
PORTFOLIO MANAGER: G. KENNETH HEEBNER
CAPITAL GROWTH MANAGEMENT LIMITED PARTNERSHIP
[PICTURE OF G. KENNETH HEEBNER
APPEARS HERE]
Q. HOW DID THE SERIES PERFORM IN 1997?
A. The Series performed well in a year during which the stock market--in my
opinion--enjoyed the best of all worlds. A strong economy, low inflation and a
benign interest rate environment provided a favorable investment climate for
equities--many of which delivered double-digit returns for the year.
Against this backdrop, the Capital Growth Series posted a return of 23.48% (at
net asset value) for the 12 months ended December 31, 1997. This one-year per-
formance is in line with that of similar growth funds underlying variable in-
surance products, which delivered an average return of 25.31%, as tracked by
Lipper Analytical Services, yet trails that of the S&P 500 Index, which re-
turned 33.2%. Although the overall market was strong in 1997, the bulk of re-
turns came from the largest stocks, which dominated the market for much of the
year. Most of the market--including the more aggressive, growth-oriented is-
sues in which I invest--posted modest returns.
Q. HOW DID YOU MANAGE THE SERIES DURING THE YEAR?
A. During 1997, I kept the Series fully invested to capitalize on--in my
view--a near-perfect investment environment. Throughout the year, I remained
committed to my stock selection discipline of choosing well-managed, moderate
growth companies that are attractively valued.
Some of my favorites over the past 12 months included Allstate Insurance, Eli
Lily, Warner Lambert and Pfizer. I also maintained a substantial weighting in
oil services stocks but eliminated positions late in the year in the face of
falling oil prices.
In addition, the technology sector provided attractive investment opportuni-
ties--as well as several disappointments. Compaq Computer was a significant
contributor to performance, while a handful of other holdings failed to live
up to expectations.
Finally, over the course of the year, I shied away from many sectors including
utilities, biotechnology and basic industries such as steel, paper, chemicals
and aluminum. I failed to find issues that met my demanding investment crite-
ria--specifically, the potential to produce greater-than-average increases in
earnings.
Q. HOW DO YOU DESCRIBE YOUR STOCK SELECTION PROCESS?
A. When selecting stocks for the Series, I combine a top-down and bottom-up
approach. I first look at the overall economic picture, including the level
and direction of interest rates, the pace of economic growth as well as the
potential impact of inflation. I then conduct a thorough analysis of indus-
tries and companies--evaluating the fundamentals of each on a case-by-case ba-
sis.
The end result is a carefully selected portfolio of 20 to 30 stocks that I be-
lieve will deliver earnings growth in excess of investor expectations--at rea-
sonable prices. Why focus on earnings? Because I believe, over time, a stock's
price will follow the direction of earnings.
Q. WHAT FACTORS HELPED OR HURT SERIES PERFORMANCE DURING THE YEAR?
A. The Series' emphasis on oil services, insurance and drug and health care-
related stocks contributed positively to performance while several of the Se-
ries' technology issues lagged.
Q. WHAT IS YOUR OUTLOOK FOR 1998?
A. Looking ahead, I expect a continuation of moderate economic growth and low
inflation--an environment favorable for equities. Growth in production capac-
ity remains vigorous--welcome news amidst an unemployment rate that's near a
25-year low. This growth in capacity can allow production to expand while
keeping inflation under control.
Surprisingly, economic problems in Asia could prove beneficial to our economy
here in the United States. Lower-priced Asian imports could help keep infla-
tion pressures in check, offsetting the potential inflationary impact of ex-
tremely high employment levels.
As always, I continue to focus on well-established, reasonably priced compa-
nies in industries that appear to offer the greatest potential for growth.
21
<PAGE>
A $10,000 Investment Compared to the S&P 500 Index/19/
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Zenith Capital
Growth S&P 500
-------------- -------
<S> <C> <C>
12/31/87 10,000 10,000
12/31/88 9,121 11,649
12/31/89 11,927 15,329
12/31/90 11,511 14,852
12/31/91 17,726 19,358
12/31/92 16,654 20,831
12/31/93 19,149 22,921
12/31/94 17,794 23,232
12/31/95 24,561 31,931
12/31/96 29,737 39,243
12/31/97 36,719 52,317
</TABLE>
[X] FUND FACTS
GOAL: Long-term growth of capital.
START DATE: August 26, 1983
SIZE: $1.4 billion as of December 31, 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 and CGM Fixed Income Fund since June 1993.
CGM Focus Fund since May 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.
22
<PAGE>
NEW ENGLAND ZENITH FUND
(CAPITAL GROWTH SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
COMMON STOCKS--99.6% OF TOTAL NET ASSETS
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
AIRLINES--14.3%
653,400 AMR Corp.(c).......................................... $ 83,961,900
630,000 Delta Air Lines....................................... 74,970,000
492,200 UAL Corp.(c).......................................... 45,528,500
------------
204,460,400
------------
AUTOMOTIVE & RELATED--5.0%
635,000 Volkswagen AG (ADR)(d)................................ 70,961,250
------------
BANKS--9.9%
1,215,000 Bank of New York...................................... 70,242,188
967,000 BankAmerica Corp. .................................... 70,591,000
------------
140,833,188
------------
BANKS--MONEY CENTER--10.2%
665,000 Chase Manhattan....................................... 72,817,500
570,000 Citicorp.............................................. 72,069,375
------------
144,886,875
------------
BEVERAGE & TOBACCO--6.0%
1,900,000 Philip Morris Companies............................... 86,093,750
------------
COMPUTER SOFTWARE & SERVICES--15.4%
1,280,000 Compaq Computer Corp.................................. 72,240,000
889,000 Computer Sciences Corp.(c)............................ 74,231,500
877,500 Dell Computer Corp.(c)................................ 73,710,000
------------
220,181,500
------------
DRUGS--15.7%
1,090,000 Eli Lilly............................................. 75,891,250
960,000 Pfizer, Inc........................................... 71,580,000
616,000 Warner Lambert Co. ................................... 76,384,000
------------
223,855,250
------------
ELECTRONICS--3.8%
895,000 Philips Electronics NV (ADR)(d)....................... 54,147,500
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
FOOD--RETAILERS/
WHOLESALERS--6.1%
1,408,000 Hershey Foods Corp.................................. $ 87,208,000
--------------
INSURANCE--9.2%
741,275 American International Group, Inc. ................. 80,613,656
649,000 Jefferson Pilot..................................... 50,540,875
--------------
131,154,531
--------------
MACHINERY--4.0%
970,000 Deere & Co. ........................................ 56,563,125
--------------
Total Common Stock
(Identified Cost $1,272,820,990)................... 1,420,345,369
--------------
</TABLE>
SHORT-TERM INVESTMENT--0.6%
<TABLE>
<CAPTION>
FACE
AMOUNT
<C> <S> <C>
$7,975,000 Chevron Oil Finance Co.,
6.750%, 1/02/98................................. 7,975,000
--------------
Total Short-Term Investment
(Identified Cost $7,975,000).................... 7,975,000
--------------
Total Investments--100.2%
(Identified Cost $1,280,795,990)(b)............. 1,428,320,369
Other assets less liabilities.................... (2,601,281)
--------------
TOTAL NET ASSETS--100%........................... $1,425,719,088
==============
(a) See Note 1A.
(b) Federal Tax Information:
At December 31, 1997 the net unrealized appreciation on investments based on
cost of $1,284,903,823 for federal income tax purposes was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost................................... $ 195,619,085
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax
cost over value................................. (52,202,539)
--------------
Net unrealized appreciation ..................... $ 143,416,546
==============
</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.
23
<PAGE>
NEW ENGLAND ZENITH FUND
(CAPITAL GROWTH SERIES)
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
ASSETS
Investments at value............................... $1,428,320,369
Cash............................................... 1,152
Receivable for:
Fund shares sold................................... 607,979
Securities sold.................................... 9,892,123
Dividends and interest............................. 1,037,671
Foreign taxes...................................... 41,232
--------------
1,439,900,526
LIABILITIES
Payable for:
Securities purchased............................... $12,261,420
Fund shares redeemed............................... 1,075,077
Accrued expenses:
Management fees.................................... 744,190
Deferred trustees' fees............................ 72,941
Other.............................................. 27,810
-----------
14,181,438
--------------
$1,425,719,088
==============
NET ASSETS
Net Assets consist of:
Capital paid in.................................... $1,223,547,466
Undistributed net investment income................ 70,406
Accumulated net realized gains..................... 54,576,837
Unrealized appreciation on investments............. 147,524,379
--------------
NET ASSETS.......................................... $1,425,719,088
==============
Computation of offering price:
Net asset value and redemption price per share
($1,425,719,088 divided by 3,567,853 shares of
beneficial interest)............................... $ 399.60
==============
Identified cost of investments...................... $1,280,795,990
==============
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<S> <C> <C>
INVESTMENT INCOME
Dividends......................................... $ 15,597,895(a)
Interest.......................................... 370,163
-------------
15,968,058
EXPENSES
Management fees................................... $8,434,722
Trustees' fees and expenses....................... 55,844
Custodian......................................... 178,897
Audit and tax services............................ 9,661
Legal............................................. 22,022
Printing.......................................... 277,450
Miscellaneous..................................... 11,866
----------
Total expenses.................................... 8,990,462
-------------
NET INVESTMENT INCOME.............................. 6,977,596
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain on:
Investments--net.................................. 362,271,018
Unrealized depreciation on:
Investments--net.................................. (100,549,025)
-------------
Net gain on investment transactions................ 261,721,993
-------------
NET INCREASE IN NET ASSETS FROM OPERATIONS......... $ 268,699,589
=============
</TABLE>
(a)Net of foreign taxes of: $121,501.
See accompanying notes to financial statements.
24
<PAGE>
NEW ENGLAND ZENITH FUND
(CAPITAL GROWTH SERIES)
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
-------------- --------------
<S> <C> <C>
FROM OPERATIONS
Net investment income......................... $ 7,929,365 $ 6,977,596
Net realized gain on investments.............. 68,632,360 362,271,018
Unrealized appreciation (depreciation) on
investments.................................. 121,815,567 (100,549,025)
-------------- --------------
INCREASE IN NET ASSETS FROM OPERATIONS........ 198,377,292 268,699,589
-------------- --------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income......................... (7,921,505) (6,943,584)
Net realized gain on investments.............. (57,069,463) (339,035,607)
-------------- --------------
(64,990,968) (345,979,191)
-------------- --------------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares.................. 236,084,630 281,227,370
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income...... 7,921,505 6,943,584
Distributions from net realized gain.......... 57,069,463 339,035,607
-------------- --------------
301,075,598 627,206,561
Cost of shares redeemed....................... (213,245,567) (266,868,046)
-------------- --------------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL
SHARE TRANSACTIONS........................... 87,830,031 360,338,515
-------------- --------------
TOTAL INCREASE IN NET ASSETS.................. 221,216,355 283,058,913
NET ASSETS
Beginning of the year......................... 921,443,820 1,142,660,175
-------------- --------------
End of the year............................... $1,142,660,175 $1,425,719,088
============== ==============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the year......................... $ 28,556 $ 36,394
============== ==============
End of the year............................... $ 36,394 $ 70,406
============== ==============
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares................ 647,661 569,332
Issued in connection with the reinvestment of:
Distributions from net investment income...... 18,320 17,731
Distributions from net realized gain.......... 83,188 845,144
-------------- --------------
749,169 1,432,207
Redeemed...................................... (533,320) (539,860)
-------------- --------------
Net change.................................... 215,849 892,347
============== ==============
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year....... $ 322.23 $ 351.63 $ 312.30 $ 374.62 $ 427.08
-------- -------- -------- ---------- ----------
Income From Investment
Operations
Net Investment Income... 2.12 5.28 3.47 3.08 2.52
Net Realized and
Unrealized Gain (Loss)
on Investments......... 46.21 (30.54) 114.91 74.80 95.67
-------- -------- -------- ---------- ----------
Total From Investment
Operations............. 48.33 (25.26) 118.38 77.88 98.19
-------- -------- -------- ---------- ----------
Less Distributions
Distributions From Net
Investment Income...... (2.18) (5.15) (3.48) (3.08) (2.52)
Distributions From Net
Realized Capital Gains. (16.75) (8.92) (52.58) (22.34) (123.15)
-------- -------- -------- ---------- ----------
Total Distributions..... (18.93) (14.07) (56.06) (25.42) (125.67)
-------- -------- -------- ---------- ----------
Net Asset Value, End of
Year.................... $ 351.63 $ 312.30 $ 374.62 $ 427.08 $ 399.60
======== ======== ======== ========== ==========
TOTAL RETURN (%)......... 14.97 (7.07) 38.03 21.08 23.48
Ratio of Operating
Expenses to Average Net
Assets (%).............. 0.68 0.67 0.71 0.69 0.67
Ratio of Net Investment
Income to Average Net
Assets (%).............. 0.67 1.61 0.92 0.79 0.52
Portfolio Turnover Rate
(%)..................... 169 140 242 207 214
Average Commission
Rate(a)................. -- -- -- $ 0.0669 $ 0.0691
Net Assets, End of Year
(000)................... $644,384 $667,127 $921,444 $1,142,660 $1,425,719
</TABLE>
(a) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate generally does not reflect mark-
ups, mark-downs, or spreads on shares traded on a principal basis.
See accompanying notes to financial statements.
25
<PAGE>
LOOMIS SAYLES AVANTI GROWTH SERIES*
PORTFOLIO MANAGERS: SCOTT PAPE AND BRUCE EBEL
LOOMIS, SAYLES & COMPANY, L.P.
[PHOTO OF SCOTT PAPE AND BRUCE EBEL
APPEARS HERE]
Q. PLEASE COMMENT ON THE SERIES' 1997 PERFORMANCE.
A. We were somewhat disappointed in the Series' 1997 results. The Loomis
Sayles Avanti Growth Series' total return for the year (based on net asset
value) was 17.35%, compared to 33.2% for the S&P 500 Index, an unmanaged in-
dex. The Series' return reflects an $12.71 per share gain in net asset value
to $170.59 and the reinvestment of $14.41 per share in capital gains
distributions.
While major market indicators like the S&P 500 and the Dow Jones Industrial
Average surged ahead again this year, the bulk of their gains came from a lim-
ited number of large-capitalization companies. The broader market, including
smaller- and mid-cap companies, like those to which we have committed a por-
tion of the Series' portfolio, produced more modest gains. For example, the
Russell 2000, a small-cap index, rose 22.4%, while the NASDAQ Industrial In-
dex, which represents the non-financial stocks in the broad-based NASDAQ In-
dex, added only 22.0%.
Q. HOW WOULD YOU DESCRIBE THE INVESTMENT ENVIRONMENT?
A. America's "Goldilocks" economy--neither too hot nor too cold--has inspired
continued investor confidence for several years. Inflation figures have re-
peatedly come in below many forecasts, fueling rises in both fixed-income and
equity markets. Adding to investor comfort, the Federal Reserve Board was dis-
inclined to rock the economic boat by raising interest rates. And corporate
profits exceeded expectations in every quarter of the year. The effect on in-
vestors was clear, as the flow of cash into financial assets continued at a
vigorous pace.
Market activity went through three distinct phases in 1997. During the first
quarter, investors favored large-capitalization companies, just as they had in
1996, both because of greater earnings visibility and for defensive reasons.
From April through October, a wider range of stocks attracted attention, and
many averages overtook the blue-chip indicators temporarily. Then, as the
looming currency crisis in Southeast Asia spread to the region's equity
markets, investors once again fled to the relative safety of the very largest
companies, reinstating the performance gap between the major indicators and the
rest of the market.
We were encouraged through the middle part of the year by the strong rally in
the broader market, a trend that we believe would have persisted but for the
instability in Asia.
- -------
* Please refer to prospectus supplement included with this Annual Report for
information concerning change in subadviser for this Series effective May
1, 1998.
Q. GIVEN THIS ENVIRONMENT, WHAT WAS YOUR STRATEGY DURING THE COURSE OF THE
YEAR?
A. Throughout 1997, we pursued the strategy that we had followed for the pre-
vious 18 months, slightly over-weighting smaller and mid-sized companies. We
believe that these companies represent the area of greatest earnings growth
potential combined with attractive valuations. Recent turbulence in interna-
tional markets reinforces our conviction, since these small- and mid-cap firms
are generally focused on growing their businesses in markets here in the
United States. While America's economic fundamentals remain strong, inflated
prices of multi-national enterprises represent the primary threat to the mar-
ket, in our opinion.
Therefore, during the second half of the year, we increased exposure to compa-
nies that focus on the United States and moved away from those that focus on
overseas economies. In that context, we note that all of the Series' holdings
are based in the United States.
Q. WHAT WERE SOME OF THE FACTORS THAT AFFECTED PERFORMANCE, BOTH POSITIVELY
AND NEGATIVELY?
A. Stock performance depended principally on company size. The Series' hold-
ings that fit the market's demand for large, defensive companies with strong
earnings did well. Among these were General Electric, Microsoft, Disney, John-
son & Johnson, and Schlumberger (a major provider of oil drilling services).
A second group of companies also turned in strong earnings, but since they
fell outside the large-cap pattern, share prices did not always keep up. Some
examples: consumer-focused Starbucks, Cendank Corp.--a marketing services com-
pany, Healthsouth--a manager of rehabilitation hospitals, and Fiserv, which
provides data processing services.
Two notable disappointments were PETsMART, a chain of pet supply superstores
and Ascend Communications, a developer and marketer of network communications
products. Ascend experienced difficulties digesting its acquisition of Cascade
Communications, while PETsMART's management scaled back expansion plans, hav-
ing previously overextended the company's infrastructure and systems capabili-
ties.
26
<PAGE>
Q. WHAT IS YOUR OUTLOOK FOR THE MARKET AND ITS IMPLICATIONS FOR THE SERIES?
A. We think the array of good economic news--low inflation, moderate growth,
low interest rates--will continue. However, the current recovery is now seven
years old--and a moderate slowdown in 1998 would not surprise us. Contributing
to this view are persistently high consumer debt levels and some indications
of weakness in the closely watched automobile sector. Also, constrained Asian
economies could weaken U.S.-based companies' exports into the region. A slump
might also grow out of any Federal Reserve Board action or from simple exhaus-
tion; either way, profits would come under pressure. In this scenario, the
market would assess earnings prospects more closely, focusing on companies
with the potential to produce consistent, predictable financial results.
The search for these opportunities is the foundation of our research-intensive
management process. We seek to build a portfolio of America's premier compa-
nies, those operating in dynamic growth markets, that are dominant in their
industries and that have the potential to deliver real (inflation-adjusted)
earnings growth over time.
A $10,000 Investment Compared to the S&P 500 Index/19/
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Avanti Growth S&P 500
------------- -------
<S> <C> <C>
4/30/93 10,000 10,000
12/31/93 11,474 10,819
12/31/94 11,443 10,966
12/31/95 14,916 15,072
12/31/96 17,538 18,524
12/31/97 20,581 24,695
</TABLE>
[X] FUND FACTS
GOAL: Long-term growth of capital.
START DATE: April 30, 1993
SIZE: $115 million as of December 31, 1997
MANAGERS: Scott 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.
27
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES AVANTI GROWTH SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
COMMON STOCKS--97.8% OF NET ASSETS
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
AEROSPACE--1.2%
28,500 Boeing Co. .............................................. $ 1,394,719
------------
AIRLINES--1.5%
67,800 Southwest Airlines Co. .................................. 1,669,575
------------
BANKS--2.1%
5,700 Star Banc Corp. ......................................... 327,037
18,200 US Bancorp .............................................. 2,037,262
------------
2,364,299
------------
BEVERAGES--0.9%
16,100 Coca-Cola Co. ........................................... 1,072,662
------------
BUSINESS SERVICES--15.2%
58,000 ABR Information Services, Inc.(c)........................ 1,384,750
35,500 Automatic Data Processing................................ 2,178,812
12,000 Cambridge Technology Partners............................ 499,500
44,200 Checkfree Corp. ......................................... 1,193,400
53,400 Cintas Corp. ............................................ 2,082,600
24,700 Corrections Corp. America................................ 915,444
12,500 Danka Business Systems ADR(d)............................ 199,219
45,400 First Data Corp. ........................................ 1,327,950
49,750 Fiserv, Inc.(c).......................................... 2,443,969
40,850 Paychex, Inc. ........................................... 2,068,031
11,400 Stewart Enterprises, Inc. ............................... 531,525
63,100 Sun Guard Data Systems .................................. 1,956,100
31,950 Sykes Enterprises, Inc.(c)............................... 623,025
------------
17,404,325
------------
CHEMICALS--1.5%
4,500 EI du Pont de Nemours & Co. ............................. 270,281
34,100 Monsanto Co. ............................................ 1,432,200
------------
1,702,481
------------
COMPUTERS & BUSINESS EQUIPMENT--1.2%
11,100 Diebold, Inc. ........................................... 561,937
29,400 EMC Corp. ............................................... 806,662
------------
1,368,599
------------
COMPUTER SOFTWARE & SERVICES--12.9%
16,700 America Online, Inc. .................................... 1,489,431
41,100 Cisco Systems, Inc.(c)................................... 2,291,325
13,800 Computer Associates International, Inc. ................. 729,675
27,400 Compuware Corp. ......................................... 876,800
51,700 HBO & Co. ............................................... 2,481,600
30,500 HNC Software, Inc.(c).................................... 1,311,500
14,200 Microsoft Corp.(c)....................................... 1,835,350
22,600 Networks Associates, Inc. ............................... 1,194,975
47,500 Parametric Technology Corp.(c)........................... 2,250,312
10,000 Security Dynamics Technologies........................... 357,500
------------
14,818,468
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
CONGLOMERATES--1.1%
29,400 Thermo Electron Corp.(c).............................. $ 1,308,300
------------
CONSTRUCTION MATERIALS--0.8%
24,100 Fastenal Co. ......................................... 921,825
------------
ELECTRICAL EQUIPMENT--2.7%
42,200 General Electric Co. ................................. 3,096,425
------------
ELECTRONIC COMPONENTS--6.3%
26,600 Altera Corp. ......................................... 881,125
49,200 Cymer, Inc. .......................................... 738,000
20,500 Intel Corp. .......................................... 1,440,125
60,281 Molex, Inc. Class A................................... 1,733,079
42,000 Solectron Corp.(c).................................... 1,745,625
14,800 Texas Instruments, Inc. .............................. 666,000
------------
7,203,954
------------
FINANCIAL SERVICES--3.7%
32,450 Charles Schwab Corp., New............................. 1,360,872
12,400 Federal National Mortgage Association................. 707,575
33,100 MGIC Investment Corp. Wisconsin....................... 2,201,150
------------
4,269,597
------------
FOODS--0.5%
8,500 Hershey Foods Corp.................................... 526,469
------------
HEALTH CARE--MEDICAL TECHNOLOGY--3.7%
13,000 Arterial Vascular Engineering, Inc. .................. 845,000
15,500 Boston Scientific Corp.(c)............................ 711,062
37,300 Cardiothoracic Systems, Inc. ......................... 205,150
36,300 Idexx Laboratories, Inc.(c)........................... 578,531
29,200 Medtronic, Inc. ...................................... 1,527,525
17,000 Perclose, Inc. ....................................... 327,250
------------
4,194,518
------------
HEALTH CARE--DRUGS--8.5%
18,600 Abbott Laboratories................................... 1,219,462
29,000 Amgen, Inc.(c)........................................ 1,569,625
7,100 Eli Lilly & Co. ...................................... 494,337
16,900 Johnson & Johnson..................................... 1,113,287
14,600 Merck & Co. .......................................... 1,551,250
22,100 Omnicare, Inc. ....................................... 685,100
107,000 Oncor, Inc.(c)........................................ 494,875
15,500 Pfizer, Inc. ......................................... 1,155,719
23,000 Somatogen, Inc.(c).................................... 102,062
10,400 Warner Lambert Co. ................................... 1,289,600
------------
9,675,317
------------
</TABLE>
See accompanying notes to financial statements.
28
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES AVANTI GROWTH SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
COMMON STOCKS--(CONTINUED)
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
HEALTH CARE--SERVICES--2.9%
40,000 American Physician Partners, Inc. ...................... $ 425,000
77,700 Healthsouth Corp.(c).................................... 2,156,175
26,900 Phycor, Inc.(c)......................................... 726,300
------------
3,307,475
------------
HOTELS & RESTAURANTS--2.4%
38,000 Einstein Noah Bagel Corp.(c)............................ 211,375
67,000 Starbucks Corp.(c)...................................... 2,571,125
------------
2,782,500
------------
HOUSEHOLD PRODUCTS--3.6%
5,700 Corning, Inc. .......................................... 211,612
27,268 Gillette Co............................................. 2,738,730
27,500 Newell Co............................................... 1,168,750
------------
4,119,092
------------
INSURANCE--2.4%
18,900 American International Group, Inc. ..................... 2,055,375
3,200 General Re Corp. ....................................... 678,400
------------
2,733,775
------------
LEISURE TIME--1.1%
13,000 Walt Disney Co. ........................................ 1,287,812
------------
MACHINERY--1.7%
33,200 Illinois Tool Works, Inc................................ 1,996,150
------------
OFFICE EQUIPMENT & SUPPLIES--0.3%
10,325 3Com Corp............................................... 360,730
------------
OIL--INDEPENDENT PRODUCERS--1.4%
20,000 Anadarko Petroleum Corp................................. 1,213,750
4,300 Ocean Energy, Inc....................................... 212,044
20,000 Unit Corp. ............................................. 192,500
------------
1,618,294
------------
OIL--MAJOR INTEGRATED--0.4%
5,400 Amoco Corp. ............................................ 459,675
------------
OIL SERVICES--2.1%
8,900 Baker Hughes, Inc. ..................................... 388,262
7,700 Nabors Industries, Inc. ................................ 242,069
10,100 Rowan Companies(c)...................................... 308,050
18,900 Schlumberger, Ltd. ..................................... 1,521,457
------------
2,459,838
------------
RETAIL--2.5%
6,000 Kohls Corp.............................................. 408,750
6,500 Nordstrom, Inc. ........................................ 392,437
42,500 Walgreen Co............................................. 1,333,437
16,800 Wal-Mart Stores, Inc. .................................. 662,550
------------
2,797,174
------------
RETAIL SPECIALTY--4.7%
73,125 Cendant Corp. .......................................... 2,513,672
32,650 Home Depot, Inc. ....................................... 1,922,269
135,000 PETsMART, Inc.(c)....................................... 978,750
------------
5,414,691
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
TELECOMMUNICATION EQUIPMENT--6.4%
32,100 Andrew Corp........................................ $ 770,400
25,970 Ascend Communications, Inc......................... 636,265
22,700 Ciena Corp. ....................................... 1,387,537
3,200 Lucent Technologies, Inc. ......................... 255,600
46,800 PairGain Technologies, Inc.(c)..................... 906,750
22,900 QUALCOMM, Inc.(c).................................. 1,156,450
41,300 Tellabs, Inc.(c)................................... 2,183,737
------------
7,296,739
------------
TELECOMMUNICATION SERVICES--0.8%
7,000 Ameritech Corp..................................... 563,500
10,100 Cox Communications, Inc. .......................... 404,631
------------
968,131
------------
TOBACCO--1.3%
33,500 Philip Morris Companies, Inc....................... 1,517,969
------------
Total Common Stocks (Identified Cost $92,806,572).. 112,111,578
------------
SHORT TERM INVESTMENT--3.7%
<CAPTION>
FACE
AMOUNT
<C> <S> <C>
$4,270,000 Repurchase Agreement with State Street Bank & Trust
dated 12/31/97 at 5.000% to be repurchased at
$4,276,186 on 1/02/98 collateralized by $4,275,000
U.S. Treasury Note 6.375% due 4/30/99 with a value
of $4,356,995..................................... 4,270,000
------------
Total Short-Term Investment
(Identified cost $4,270,000)...................... 4,270,000
------------
Total Investments 101.5%
(Identified cost $97,076,572)(b).................. 116,381,578
Other assets less liabilities...................... (1,764,999)
------------
TOTAL NET ASSETS--100%............................. $114,616,579
============
(a) See Note 1A.
(b) Federal Tax Information:
At December 31, 1997 the net unrealized appreciation on investments based on
cost of $97,214,888 for federal income tax purposes was as follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost.......... $ 26,256,306
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value.......... (7,089,616)
------------
Net unrealized appreciation.................................. $ 19,166,690
============
</TABLE>
(c) Non-income producing security.
(d) An American Depository Receipt (ADR) is a certificate issued by a US 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.
29
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES AVANTI GROWTH SERIES)
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
ASSETS
Investments at value.................................. $116,381,578
Cash.................................................. 613
Receivable for:
Fund shares sold...................................... 256,123
Securities sold....................................... 265,940
Dividends and interest................................ 60,406
------------
116,964,660
LIABILITIES
Payable for:
Securities purchased.................................. $1,971,204
Fund shares redeemed.................................. 291,076
Withholding taxes..................................... 440
Miscellaneous......................................... 474
Accrued expenses:
Management fees....................................... 66,154
Deferred trustees' fees............................... 3,464
Other................................................. 15,269
----------
2,348,081
------------
$114,616,579
============
NET ASSETS
Net Assets consist of:
Capital paid in....................................... $ 93,693,284
Accumulated net realized gains........................ 1,618,289
Unrealized appreciation on investments................ 19,305,006
------------
NET ASSETS............................................. $114,616,579
============
Computation of offering price:
Net asset value and redemption price per share
($114,616,579 divided by 671,881 shares of beneficial
interest)............................................. $ 170.59
============
Identified cost of investments......................... $ 97,076,572
============
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<S> <C> <C>
INVESTMENT INCOME
Dividends............................................ $ 533,739(a)
Interest............................................. 166,344
-----------
700,083
EXPENSES
Management fees...................................... $711,667
Trustees' fees and expenses.......................... 20,257
Custodian............................................ 55,641
Audit and tax services............................... 7,591
Legal................................................ 24,112
Printing............................................. 49,010
Miscellaneous........................................ 3,181
--------
Total expenses...................................... 871,459
Less expenses assumed by the investment adviser..... (7,292) 864,167
-------- -----------
NET INVESTMENT LOSS................................... (164,084)
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Realized gain on:
Investments--net..................................... 9,407,484
Unrealized appreciation on:
Investments--net..................................... 6,733,998
-----------
Net gain on investment transactions................... 16,141,482
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS............ $15,977,398
===========
</TABLE>
(a) Net of foreign taxes of: $861.
See accompanying notes to financial statements.
30
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES AVANTI GROWTH SERIES)
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
FROM OPERATIONS
Net investment income (loss)....................... $ 49,436 $ (164,084)
Net realized gain on investments................... 4,796,759 9,407,484
Unrealized appreciation on investments............. 5,241,031 6,733,998
----------- ------------
INCREASE IN NET ASSETS FROM OPERATIONS............. 10,087,226 15,977,398
----------- ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income.............................. (56,514) 0
Net realized gain on investments................... (4,542,510) (8,951,638)
----------- ------------
(4,599,024) (8,951,638)
----------- ------------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares....................... 40,573,027 43,452,563
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 8,951,638
----------- ------------
45,172,051 52,404,201
Cost of shares redeemed............................ (16,825,278) (27,480,727)
----------- ------------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL SHARE
TRANSACTIONS...................................... 28,346,773 24,923,474
----------- ------------
TOTAL INCREASE IN NET ASSETS....................... 33,834,975 31,949,234
NET ASSETS
Beginning of the year.............................. 48,832,370 82,667,345
----------- ------------
End of the year.................................... $82,667,345 $114,616,579
=========== ============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the year.............................. $ 6,362 $ 0
=========== ============
End of the year.................................... $ 0 $ 0
=========== ============
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares..................... 265,834 255,355
Issued in connection with the reinvestment of:
Distributions from net investment income........... 313 0
Distributions from net realized gain............... 22,968 52,904
----------- ------------
289,115 308,259
Redeemed........................................... (108,338) (159,978)
----------- ------------
Net change......................................... 180,777 148,281
=========== ============
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
APRIL 30, 1993(A)
THROUGH YEAR YEAR YEAR YEAR
DECEMBER 31, ENDED ENDED ENDED ENDED
1993 1994 1995 1996 1997
----------------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year...... $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
Net Realized and
Unrealized Gain (Loss)
on Investments........ 14.56 (0.89) 33.80 24.88 27.12
------- ------- ------- ------- --------
Total From Investment
Operations............ 14.74 (0.30) 34.22 24.99 27.12
------- ------- ------- ------- --------
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) (14.41)
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) (14.41)
------- ------- ------- ------- --------
Net Asset Value, End of
Year................... $113.67 $112.77 $142.44 $157.88 $ 170.59
======= ======= ======= ======= ========
TOTAL RETURN (%)........ 14.74(c) (0.27) 30.35 17.58 17.35
Ratio of Operating
Expenses to Average Net
Assets (%)............. 0.85(b) 0.84 0.85 0.85 0.85
Ratio of Net Investment
Income to Average Net
Assets (%)............. 0.46(b) 0.67 0.37 0.08 (0.16)
Portfolio Turnover Rate
(%).................... 21(b) 67 58 65 49
Average Commission
Rate(d)................ -- -- -- $0.0508 $ 0.0504
Net Assets, End of Year
(000).................. $11,972 $25,622 $48,832 $82,667 $114,617
The ratios of expenses
to average net assets
without giving effect
to the voluntary
expense agreement
described in Note 4 to
the Financial
Statements would have
been (%)............... 0.89(b) 0.84 1.06 0.92 0.86
</TABLE>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
(d) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate generally does not reflect mark-
ups, mark-downs, or spreads on shares traded on a principal basis.
See accompanying notes to financial statements.
31
<PAGE>
DAVIS VENTURE VALUE SERIES
PORTFOLIO MANAGER: CHRISTOPHER C. DAVIS
DAVIS SELECTED ADVISERS, L.P.
[PHOTO OF CHRISTOPHER C. DAVIS
APPEARS HERE]
Q. HOW DID THE PORTFOLIO PERFORM DURING 1997?
A. The Davis Venture Value Series performed well this year. The Series had six
month and one year total returns of 12.4% and 33.5%, respectively for the peri-
ods ended 12/31/97. These numbers compare favorably to the Lipper Variable
Products Growth Fund/11/ average of 10.4% and 25.3%, over the same periods.
Q. HOW DID YOU MANAGE THE SERIES?
A. In general 1997 delivered strong returns to equity investors, and by remain-
ing true to our investment discipline, we continued to find opportunities to
purchase good stocks with strong long-term growth potential when they were tem-
porarily out of favor in the market.
Our investments in financial services companies, energy-related companies and
technology companies continued to drive our performance. Currently, Travelers,
American Express and General Re are among our top holdings in the financial
services sector.
IBM, one of the portfolio's largest holdings, and Intel are two technology com-
panies that we expect to generate solid returns over the long-term, and the en-
ergy sector continues to be a focus for the portfolio. Schlumberger and
Haliburton are two energy-related holdings that we believe offer investors
long-term growth opportunity.
Overall, stocks of financial services, technology and energy- related companies
comprise approximately 22% of the portfolio's total holdings.
Q. WHAT IS YOUR INVESTMENT OUTLOOK FOR THE MONTHS AHEAD?
A. We believe the long-term case for investing in equities remains strong. But
we have already enjoyed a long bull market with a lack of major corrections,
and we are now entering a period when investors' expectations should be lower.
From our perspective, the way to get a bargain at this stage in a bull market
is to take advantage of volatility on the downside. By knowing companies well
through careful research, we can move quickly and act with conviction when
there is inevitable rotation out of one industry group into another.
Assuming a starting level of 8,000 for the Dow and compounding that figure at
7% annually, the Dow would be at 64,000 in three decades. Even assuming a
starting level of 6,000 and compounding that amount at 7% a year, the Dow would
reach 48,000 in 30 years. Either figure is so far ahead of where the market is
today that we tend not to worry about the next 2,000 points on the Dow. This
compelling, long-term potential is why we intend to remain committed owners of
equities in 1998, investing in shares of strong companies when they are out of
favor in the market.
32
<PAGE>
A $10,000 Investment Compared to the S&P 500/19/
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Davis Venture
Value S&P 500
------------- -------
<S> <C> <C>
10/31/94 10,000 10,000
12/31/94 9,650 9,793
12/31/95 13,441 13,461
12/31/96 16,914 16,544
12/31/97 22,580 22,055
</TABLE>
[X] FUND FACTS
GOAL: Growth of capital
START DATE: October 31, 1994
SIZE: $280 million as of December 31, 1997
MANAGER: Christopher C. Davis has been the manager of the Series since February
1997. Previously, 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.
33
<PAGE>
NEW ENGLAND ZENITH FUND
(DAVIS VENTURE VALUE SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
COMMON STOCKS--87.6% OF TOTAL NET ASSETS
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
AEROSPACE--0.8%
46,700 Boeing Co. ............................................. $ 2,285,381
------------
AGRICULTURE--1.1%
140,222 Archer-Daniels-Midland Co. ............................. 3,041,065
------------
BANKS AND SAVINGS & LOANS--12.0%
62,560 Banc One Corp. ......................................... 3,397,790
90,200 BankAmerica Corp. ...................................... 6,584,600
600 Barnett Banks, Inc. .................................... 43,125
47,480 Citicorp................................................ 6,003,253
8,000 First Union Corp. ...................................... 410,000
16,700 Golden West Financial Corp. ............................ 1,633,469
36,400 State Street Corp. ..................................... 2,118,025
30,000 U.S. Bancorp............................................ 3,358,125
29,800 Wells Fargo & Co. ...................................... 10,115,237
------------
33,663,624
------------
BUILDING MATERIALS--3.1%
122,900 Masco Corp. ............................................ 6,252,538
71,300 Martin Marietta Materials, Inc. ........................ 2,606,906
------------
8,859,444
------------
COMMUNICATION SERVICES--0.6%
29,900 Qwest Communications(c)................................. 1,779,050
------------
CONSUMER PRODUCTS--5.6%
14,200 American Home Products Corp. ........................... 1,086,300
2,700 Coca-Cola Co. .......................................... 179,888
900 Fortune Brands, Inc. ................................... 33,356
900 Gallaher Group (ADR)(c)(d).............................. 19,237
2,800 General Electric Co. ................................... 205,450
78,500 Nestle S.A. (ADR)(d).................................... 5,890,656
67,900 NIKE, Inc., Class B..................................... 2,665,075
129,000 Philip Morris Cos....................................... 5,845,312
------------
15,925,274
------------
DIVERSIFIED FINANCIAL SERVICES--4.6%
100,800 American Express Co. ................................... 8,996,400
77,500 Federal Home Loan Mortgage Corp. ....................... 3,250,156
20,200 TCF Financial Corp. .................................... 685,537
------------
12,932,093
------------
DRILLING--1.0%
45,100 Smith International, Inc.(c)............................ 2,768,013
------------
ELECTRONIC EQUIPMENT--2.0%
18,887 Molex, Inc. ............................................ 606,745
109,600 Texas Instruments....................................... 4,932,000
------------
5,538,745
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
ENERGY--8.5%
400 Amerada Hess Corp. ..................................... $ 21,950
300 Amoco Corp. ............................................ 25,537
1,000 Atlantic Richfield Co. ................................. 80,125
18,730 British Petrol (ADR)(d)................................. 1,492,547
86,200 Burlington Resources, Inc. ............................. 3,862,838
1,700 Chevron Corp. .......................................... 130,900
47,200 Cooper Cameron Corp.(c)................................. 2,879,200
5,600 Exxon Corp. ............................................ 342,650
41,600 EVI, Inc.(c)............................................ 2,152,800
115,200 Halliburton Co. ........................................ 5,983,200
600 Mobil Corp. ............................................ 43,312
9,900 Nabors Industries, Inc.(c).............................. 311,231
56,664 Noble Affiliates, Inc. ................................. 1,997,406
41,800 Schlumberger, Ltd. ..................................... 3,364,900
500 Sonat, Inc. ............................................ 22,875
27,800 Tosco Corp. ............................................ 1,051,188
------------
23,762,659
------------
FOOD & RESTAURANT--3.0%
152,400 McDonald's Corp. ....................................... 7,277,100
63,450 Tyson Foods, Inc. ...................................... 1,300,725
------------
8,577,825
------------
INFORMATION SERVICES--0.0%
100 Cognizant Corp. ........................................ 4,456
------------
INTERNATIONAL CLOSED-END INVESTMENT COMPANY--0.3%
106,934 Morgan Stanley Asia Pacific Fund, Inc. ................. 795,322
------------
INVESTMENT FIRMS--3.9%
24,300 Donaldson, Lufkin & Jenrette............................ 1,931,850
18,700 J.P. Morgan & Co., Inc. ................................ 2,110,763
115,855 Morgan Stanley Dean Witter.............................. 6,849,927
------------
10,892,540
------------
LIFE INSURANCE--1.4%
90,950 SunAmerica, Inc. ....................................... 3,888,112
------------
MANUFACTURING--0.6%
51,100 Applied Materials(c).................................... 1,539,388
200 Dow Chemical Co. ....................................... 20,300
800 Maytag Corp. ........................................... 29,850
------------
1,589,538
------------
MARKETING--0.0%
33 ACNeilson Corp.(c)...................................... 804
------------
OIL--0.8%
15,700 J.Ray McDermott S.A.(c)................................. 675,100
11,200 McDermott International................................. 410,200
38,800 Pioneer Natural Resources............................... 1,122,775
------------
2,208,075
------------
</TABLE>
See accompanying notes to financial statements.
34
<PAGE>
NEW ENGLAND ZENITH FUND
(DAVIS VENTURE VALUE SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
COMMON STOCKS--(CONTINUED)
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
PAPER PRODUCTS--0.0%
300 International Paper Co. ................................ $ 12,937
400 Union Camp Corp......................................... 21,475
------------
34,412
------------
PHARMACEUTICAL & HEALTH CARE--5.1%
11,700 Bristol-Myers Squibb Co. ............................... 1,107,112
13,600 Eli Lilly & Co. ........................................ 946,900
12,700 Johnson & Johnson....................................... 836,613
5,800 Merck & Co. ............................................ 616,250
28,800 Novartis AG (ADR)(d).................................... 2,343,600
42,300 Pfizer, Inc. ........................................... 3,153,994
102,600 SmithKline Beecham (ADR)(d)............................. 5,277,487
------------
14,281,956
------------
PROPERTY/CASUALTY INSURANCE--10.9%
41,481 Allstate Corp........................................... 3,769,586
12,650 American International Group, Inc....................... 1,375,688
40,700 W.R. Berkley Corp....................................... 1,785,713
36,700 Chubb Corp.............................................. 2,775,438
36,074 General Re Corp......................................... 7,647,688
20,400 Progressive Corp., Ohio................................. 2,445,450
29,050 Transatlantic Holdings, Inc............................. 2,077,075
134,187 Travelers Group......................................... 7,229,325
29,300 20th Century Industries, Inc. .......................... 761,800
11,200 UNUM Corp. ............................................. 609,000
------------
30,476,763
------------
PUBLISHING--1.6%
100 Dun & Bradstreet Corp. ................................. 3,094
43,100 Gannet Co., Inc. ....................................... 2,664,119
27,100 News Corp. Ltd. (ADR)(d)................................ 604,669
20,400 Tribune Co.............................................. 1,269,900
------------
4,541,782
------------
RAILROAD--4.0%
63,400 Burlington Northern Santa Fe Corp. ..................... 5,892,237
48,300 Illinois Central Corp. ................................. 1,645,219
58,400 Union Pacific Corp...................................... 3,646,350
------------
11,183,806
------------
REAL ESTATE--3.8%
9,880 Crescent Operations, Inc.(c)............................ 242,060
103,200 Crescent Real Estate Equities........................... 4,063,500
10,900 Federal Realty Investment Trust......................... 280,675
52,200 General Growth Properties............................... 1,885,725
2,400 Kimco Realty Corp....................................... 84,600
63,500 Rouse Co................................................ 2,079,625
200 Simon DeBartolo Group................................... 6,537
12,000 United Dominion Realty Trust............................ 167,250
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
36,900 Vornado Realty Trust.................................... $ 1,731,993
3,300 Weingarten Realty SBI................................... 147,881
------------
10,689,846
------------
RETAIL--0.7%
34,300 Harcourt General........................................ 1,877,925
------------
TECHNOLOGY--8.5%
146,400 Hewlett-Packard Co. .................................... 9,150,000
35,900 Intel Corp. ............................................ 2,521,975
93,700 International Business Machines......................... 9,797,506
70,600 Novellus Systems, Inc.(c)............................... 2,281,262
------------
23,750,743
------------
TELECOMMUNICATIONS--3.7%
94,500 Airtouch Communications, Inc.(c)........................ 3,927,656
4,852 Globalstar Telecommunications(c)........................ 238,355
18,900 Loral Space Communications(c)........................... 405,169
78,700 Motorola, Inc. ......................................... 4,490,819
300 SBC Communications, Inc. ............................... 21,975
68,200 360 Communications Co.(c)............................... 1,376,787
------------
10,460,761
------------
UTILITIES--0.0%
300 Carolina Power & Light Co. ............................. 12,731
300 Duke Energy Co. ........................................ 16,613
200 Edison International.................................... 5,437
100 Enova Corp. ............................................ 2,706
200 New England Elecricial Systems.......................... 8,550
600 Southern Co............................................. 15,525
200 Wisconsin Energy Corp. ................................. 5,750
------------
67,312
------------
WASTE MANAGMENT--0.0%
400 Waste Managment, Inc.................................... 11,000
------------
Total Common Stocks
(Identified Cost $186,427,972)......................... 245,888,326
------------
CONVERTIBLE PREFERRED STOCKS--0.4%
5,696 Airtouch Communications, Inc.,
Class C, 4.250%........................................ 354,932
1,700 Banc One Corp., $3.50, Series C......................... 178,713
7,000 Devon Financing Trust, 6.500%........................... 519,750
2,200 Rouse Co., Series B..................................... 111,100
2,000 Vornada Realty Trust, 6.500%............................ 132,000
------------
Total Preferred Stocks
(Identified Cost $1,101,074)........................... 1,296,495
------------
</TABLE>
See accompanying notes to financial statements.
35
<PAGE>
NEW ENGLAND ZENITH FUND
(DAVIS VENTURE VALUE SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
SHORT TERM INVESTMENTS--12.0%
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
$10,675,000 Federal Home Loan Bank,
5.700%, 1/02/98.................................... $ 10,673,310
10,295,000 Federal Home Loan Bank,
5.720%, 1/05/98.................................... 10,288,457
12,640,000 Federal Home Loan Bank,
4.900%, 1/08/98.................................... 12,627,957
------------
Total Short-Term Investments
(Identified Cost $33,589,724)...................... 33,589,724
------------
Total Investments--100.1%
(Identified Cost $221,118,770)(b).................. 280,774,545
Other assets less liabilities(e).................... (326,468)
------------
TOTAL NET ASSETS--100%.............................. $280,448,077
============
</TABLE>
(a) See Note 1a.
(b) Federal Tax Information:
At December 31, 1997 the net unrealized appreciation on investments based on
cost of $221,121,585 for federal income tax purposes was as follows:
Aggregate gross unrealized appreciation for all investments in
which there is an excess of value over tax cost.............. $64,013,745
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value.............. (4,360,785)
-----------
Net unrealized appreciation................................... $59,652,960
===========
(c) Non-income producing security.
(d) An American Depository Receipt (ADR) is a certificate issued by a US 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
$25,561 and a cost of $24,985.
See accompanying notes to financial statements.
36
<PAGE>
NEW ENGLAND ZENITH FUND
(DAVIS VENTURE VALUE SERIES)
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
ASSETS
Investments at value.................................. $280,774,545
Cash.................................................. 15,726
Foreign cash at value (Cost $24,985).................. 25,561
Receivable for:
Fund shares sold...................................... 816,935
Dividends and interest................................ 333,554
Foreign taxes......................................... 3,157
Unamortized organization.............................. 3,678
------------
LIABILITIES 281,973,156
Payable for:
Securities purchased.................................. $1,052,309
Fund shares redeemed.................................. 232,453
Accrued expenses:
Management fees....................................... 215,187
Deferred trustees' fees............................... 3,307
Other................................................. 21,823
----------
1,525,079
------------
$280,448,077
============
NET ASSETS
Net Assets consist of:
Capital paid in....................................... $220,341,787
Accumulated net realized gains........................ 449,896
Unrealized appreciation on investments and foreign
currency............................................. 59,656,394
------------
NET ASSETS............................................. $280,448,077
============
Computation of offering price:
Net asset value and redemption price per share
($280,448,077 divided by 13,483,556 shares of
beneficial interest).................................. $ 20.80
============
Identified cost of investments......................... $221,118,770
============
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<S> <C> <C>
INVESTMENT INCOME
Dividends......................................... $ 2,362,524(a)
Interest.......................................... 1,125,427
-----------
3,487,951
EXPENSES
Management fees................................... $ 1,425,245
Deferred expense reimbursement.................... 96,162
Trustees' fees and expenses....................... 25,786
Custodian......................................... 64,879
Audit and tax services............................ 12,421
Legal............................................. 22,022
Printing.......................................... 58,400
Amortization of organization expenses............. 2,011
Miscellaneous..................................... 3,365
-----------
Total expenses................................... 1,710,291
-----------
NET INVESTMENT INCOME.............................. 1,777,660
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Realized gain on:
Investments--net.................................. 6,969,133
-----------
Unrealized appreciation
(depreciation) on:
Investments--net.................................. 41,444,987
Foreign currency transactions--net................ (573)
-----------
Total unrealized appreciation on investments and
foreign currency transactions................... 41,444,414
-----------
Net gain on investment transactions............... 48,413,547
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS......... $50,191,207
===========
</TABLE>
(a)Net of foreign taxes of: $11,295.
See accompanying notes to financial statements.
37
<PAGE>
NEW ENGLAND ZENITH FUND
(DAVIS VENTURE VALUE SERIES)
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
FROM OPERATIONS
Net investment income............................. $ 833,527 $ 1,777,660
Net realized gain on investments.................. 1,885,474 6,969,133
Unrealized appreciation on investments and foreign
currency transactions............................ 14,269,167 41,444,414
------------ ------------
INCREASE IN NET ASSETS FROM OPERATIONS............ 16,988,168 50,191,207
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income............................. (818,557) (1,734,376)
Net realized gain on investments.................. (1,709,985) (6,838,667)
------------ ------------
(2,528,542) (8,573,043)
------------ ------------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares...................... 73,335,902 161,182,195
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income.......... 818,557 1,734,376
Distributions from net realized gain.............. 1,709,985 6,838,667
------------ ------------
75,864,444 169,755,238
Cost of shares redeemed........................... (17,180,011) (39,114,351)
------------ ------------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL SHARE
TRANSACTIONS..................................... 58,684,433 130,640,887
------------ ------------
TOTAL INCREASE IN NET ASSETS...................... 73,144,059 172,259,051
NET ASSETS
Beginning of the year............................. 35,044,967 108,189,026
------------ ------------
End of the year................................... $108,189,026 $280,448,077
============ ============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the year............................. $ 3,911 $ 17,317
============ ============
End of the year................................... $ 17,317 $ 0
============ ============
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares.................... 5,082,303 8,370,050
Issued in connection with the reinvestment of:
Distributions from net investment income.......... 49,916 85,008
Distributions from net realized gain.............. 106,943 335,095
------------ ------------
5,239,162 8,790,153
Redeemed.......................................... (1,190,115) (2,030,066)
------------ ------------
Net change........................................ 4,049,047 6,760,087
============ ============
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
OCTOBER 31, 1994(A)
THROUGH YEAR YEAR YEAR
DECEMBER 31, ENDED ENDED ENDED
1994 1995 1996 1997
------------------- ------- -------- --------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year......................... $10.00 $ 9.62 $ 13.10 $ 16.09
------ ------- -------- --------
Income From Investment
Operations
Net Investment Income........ 0.03 0.10 0.13 0.18
Net Realized and Unrealized
Gain (Loss) on Investments.. (0.38) 3.68 3.26 5.20
------ ------- -------- --------
Total From Investment
Operations.................. (0.35) 3.78 3.39 5.38
------ ------- -------- --------
Less Distributions
Distributions From Net
Investment Income........... (0.03) (0.10) (0.13) (0.14)
Distributions From Net
Realized Capital Gains...... 0.00 (0.20) (0.27) (0.53)
------ ------- -------- --------
Total Distributions.......... (0.03) (0.30) (0.40) (0.67)
------ ------- -------- --------
Net Asset Value, End of Year.. $ 9.62 $ 13.10 $ 16.09 $ 20.80
====== ======= ======== ========
TOTAL RETURN (%).............. (3.50)(c) 39.28 25.84 33.50
Ratio of Operating Expenses to
Average Net Assets (%)....... 0.90 (b) 0.90 0.90 0.90
Ratio of Net Investment Income
to Average Net Assets (%).... 2.54 (b) 1.39 1.25 0.94
Portfolio Turnover Rate (%)... 1 (b) 20 18 17
Average Commission Rate(d).... -- -- $ 0.0599 $ 0.0600
Net Assets, End of Year (000). $3,371 $35,045 $108,189 $280,448
The ratios of expenses to
average net assets without
giving effect to the
voluntary expense agreement
described in Note 4 to the
Financial Statements would
have been (%)................ 3.97 (b) 1.51 0.96 0.90
</TABLE>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
(d) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate generally does not reflect mark-
ups, mark-downs, or spreads on shares traded on a principal basis.
See accompanying notes to financial statements.
38
<PAGE>
WESTPEAK GROWTH AND INCOME SERIES
PORTFOLIO MANAGERS: GERALD H. SCRIVER AND PHILIP J. COOPER
WESTPEAK INVESTMENT ADVISORS, L.P.
[PHOTO OF GERALD H. SCRIVER [PHOTO OF PHILIP J. COOPER
APPEARS HERE] APPEARS HERE]
Q. HOW DID THE SERIES PERFORM IN 1997?
A. The Series produced a total return for 1997 of 33.5% (based on net asset
value), significantly better than the average 27.2% return of the Series' peers
in the Lipper Variable Products Growth and Income Fund category. This return
reflects a $28.21 per share gain in net asset value and the reinvestment of
$20.57 per share in capital gains and $1.35 in net income distributions.
Q. WHAT WAS THE INVESTMENT ENVIRONMENT LIKE?
A. The growing economy that greeted 1997 provided an ideal environment for eq-
uities. As more and more corporations reported earnings above analysts' expec-
tations, the markets gathered momentum and moved higher. But as institutional
investors looked ahead, they grew wary that the Federal Reserve Board might un-
dertake a series of interest rate increases aimed at forestalling possible in-
flation by restraining the economy's rate of expansion. Therefore, investors
concentrated on a limited number of large-capitalization companies that seemed
positioned to do well in a slower economy. In reality, prices rose only mod-
estly and the Fed boosted rates just once, a quarter-percentage point increase
in March.
Fears of a downturn abated by mid-year, prompting investors to cast a wider,
more aggressive net. Smaller- and mid-sized growth stocks began to move up, and
many small-company market averages outperformed the large-company-dominated
S&P 500--at least for a time. Then, when the currency crisis in Southeast Asia
unsettled the region's equity markets, investors changed focus again, backing
away from the smaller- and mid-sized segments to return to the largest, most
liquid companies.
Q. GIVEN THIS ENVIRONMENT, WHAT WAS YOUR STRATEGY DURING THE YEAR?
A. In the first half of the year, we established a portfolio structure that was
more oriented toward value than the S&P 500. We emphasized large-company stocks
with low price-to-earnings ratios, a measure of a stock's price relative to the
issuing company's earning power.
In the third quarter we tilted the Series' portfolio mix a little more toward
growth stocks, paring back the percentage of the portfolio devoted to companies
with low price/earnings ratios. We also increased the Series' orientation to-
ward smaller companies.
In terms of specific sectors, the portfolio's technology exposure, which was
about equal to the S&P 500's allocation at the end of 1996, was slightly under-
weight by the end of 1997. Also at year-end, we were over-represented in utili-
ties, relative to the S&P 500.
Q. WHAT WERE SOME OF THE FACTORS THAT AFFECTED PERFORMANCE?
A. The conservative structure we created early in the year rewarded sharehold-
ers, as stocks with modest valuations outperformed the usual growth sectors of
the market. We also took advantage of the market's second and third quarter
shift toward growth, and to smaller- and mid-sized growth companies in particu-
lar.
Performance might have been even stronger had we taken a larger position in the
top tier of large-cap issues, the group that accounted for a disproportionate
part of the market's rise during the first half of the year.
The portfolio benefited from positions in some of the regional Bells,
NationsBank, where we took profits early, and IBM. On the other hand, Loewe's
Corporation did poorly because of its association with the tobacco industry,
although the company is also involved in other businesses.
Q. WHAT IS YOUR MARKET OUTLOOK, AND WHAT DOES IT IMPLY FOR THE SERIES?
A. Earnings surprises--corporate earnings reports that come in lower or higher
than analysts' expectations--are one of the elements in our stock evaluation
model. Whereas in the first half of 1997 surprises were predominantly positive,
later in the year we began to see results coming in below Wall Street's projec-
tions. That trend could continue in 1998, especially if our expectation of
slower growth for the economy is accurate. But we also think that continued low
inflation and further declines in interest rates will dampen the effect that
lower corporate profits have on the stock market. Historically, most market de-
clines have been driven by higher interest rates; a market decline during a pe-
riod of falling interest rates is an unlikely prospect, in our opinion. In
part, we believe that inflation will
39
<PAGE>
be held in check by faltering economies in Southeast Asia, where weak local
currencies and the strong dollar could drive down prices on the billions of
dollars in goods that American companies import each year. A deflationary
price trend would build sentiment for a possible easing of short-term interest
rates by the Federal Reserve Board, which in turn could be a stimulus to stock
prices.
We plan to stay fully invested, with the goal of adding value through our pro-
prietary value/growth research and stock selection discipline.
A $10,000 Investment Compared to the S&P 500 Index/19/
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Growth and
Income S&P 500
---------- -------
<S> <C> <C>
4/30/93 10,000 10,000
12/31/93 11,424 10,819
12/31/94 11,286 10,966
12/31/95 15,402 15,072
12/31/96 18,189 18,524
12/31/97 24,278 24,695
</TABLE>
[X] FUND FACTS
GOAL: Long-term total return through investment in equity securities.
START DATE: April 30, 1993
SIZE: $153 million as of December 31, 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 the
Westpeak Stock Index Series since August 1993 and New England Growth
Opportunities Fund since May 1995. Mr. Scriver joined Westpeak in July, 1991 and
Mr. Cooper joined Westpeak in December 1991.
Performance numbers are net of all Series expenses but do not include any
insurance, sales or administrative charges of variable annuity or life
insurance contracts. If these charges were included, the returns shown would
be lower.
This information represents past performance and is not indicative of future
results. Investment return and principal value will fluctuate so that shares,
upon redemption, may be worth more or less than the original cost.
40
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK GROWTH & INCOME SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
COMMON STOCKS--97.4% OF TOTAL NET ASSETS
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
AEROSPACE--1.4%
2,800 Thiokol Corp............................................. $ 227,500
25,600 United Technologies Corp................................. 1,864,000
------------
2,091,500
------------
AIRLINES--2.4%
12,100 AMR, Corp.(c)............................................ 1,554,850
15,300 UAL, Inc.(c)............................................. 1,415,250
12,100 US Airways Group, Inc.(c)................................ 756,250
------------
3,726,350
------------
APPAREL & TEXTILES--0.2%
6,000 Jones Apparel Group, Inc.(c)............................. 258,000
------------
AUTOMOTIVE & RELATED--5.6%
83,600 Ford Motor Co. .......................................... 4,070,275
60,500 General Motors Corp...................................... 3,667,812
10,700 Lear Corp.(c)............................................ 508,250
11,200 Navistar International Corp.(c).......................... 277,900
------------
8,524,237
------------
BANKS--5.9%
13,000 BankAmerica Corp. ....................................... 949,000
3,900 Bankers Trust New York Corp. ............................ 438,506
27,900 Barnett Banks, Inc. ..................................... 2,005,312
13,500 Comerica, Inc. .......................................... 1,218,375
13,500 NationsBank Corp. ....................................... 820,969
28,100 Popular, Inc. ........................................... 1,390,950
5,800 Republic New York Corp. ................................. 662,288
20,500 SunTrust Banks, Inc. .................................... 1,463,187
------------
8,948,587
------------
BUSINESS SERVICES--0.9%
2,300 Pittston Brinks Group.................................... 92,575
30,300 Robert Half International, Inc.(c)....................... 1,212,000
------------
1,304,575
------------
CHEMICALS--1.2%
4,600 Albemarle Corp. ......................................... 109,825
4,200 Dow Chemical Co. ........................................ 426,300
21,800 Lubrizol Corp. .......................................... 803,875
5,800 Rohm & Haas Co. ......................................... 555,350
------------
1,895,350
------------
COMPUTER SOFTWARE & SERVICES--2.1%
20,800 Cadence Design Systems, Inc.(c).......................... 509,600
17,600 Microsoft Corp.(c)....................................... 2,274,800
17,500 Symantec Corp.(c)........................................ 383,906
------------
3,168,306
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
COMPUTERS & BUSINESS EQUIPMENT--4.5%
19,750 Compaq Computer Corp..................................... $ 1,114,641
48,400 Digital Equipment Corp., Rights(c)....................... 1,790,800
14,600 EMC Corp.(c)............................................. 400,588
18,000 International Business Machines.......................... 1,882,125
13,800 Iomega Corp.(c).......................................... 171,638
16,900 Lexmark International Group, Inc.(c)..................... 642,200
12,200 Sun Microsystems, Inc.(c)................................ 486,475
5,200 Xerox Corp. ............................................. 383,825
------------
6,872,292
------------
CONSTRUCTION--0.4%
10,300 Centex Corp.............................................. 648,256
------------
CONSUMER DURABLES--0.1%
2,400 HON Industries, Inc...................................... 141,600
------------
DRUGS--6.7%
1,700 Amgen, Inc. ............................................. 92,013
14,500 Bristol-Myers Squibb Co. ................................ 1,372,062
25,400 Cardinal Health, Inc..................................... 1,908,175
16,100 Dura Pharmaceuticals, Inc.(c)............................ 738,588
13,800 Merck & Co............................................... 1,466,250
30,300 Mylan Labs, Inc.......................................... 634,406
29,672 PharMerica, Inc.(c)...................................... 307,847
59,700 Schering-Plough Corp..................................... 3,708,862
------------
10,228,203
------------
ELECTRIC UTILITIES--3.1%
29,700 AES Corp.(c)............................................. 1,384,762
8,700 IPALCO Enterprises....................................... 364,856
69,000 Pinnacle West Capital Corp............................... 2,923,875
------------
4,673,493
------------
ELECTRONICS--1.4%
8,600 Motorola, Inc. .......................................... 490,738
18,700 National Semiconductor Corp.(c).......................... 485,031
7,400 Raychem Corp. ........................................... 318,663
3,858 Raytheon Co. ............................................ 190,247
11,600 SCI Systems, Inc.(c)..................................... 505,325
2,400 Tellabs, Inc.(c)......................................... 126,900
------------
2,116,904
------------
FINANCE--4.2%
8,300 American Express Co...................................... 740,775
27,700 Bear Stearns Companies, Inc.............................. 1,315,750
6,100 Donaldson, Lufkin & Jenrette, Inc........................ 484,950
9,100 Franklin Resources, Inc.................................. 791,131
24,200 Lehman Brothers Holdings, Inc. .......................... 1,234,200
3,800 Merrill Lynch & Company, Inc. ........................... 277,163
12,600 Morgan Stanley Dean Witter............................... 744,975
</TABLE>
See accompanying notes to financial statements.
41
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK GROWTH & INCOME SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
COMMON STOCKS--(CONTINUED)
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
FINANCE--(CONTINUED)
15,600 Travelers Group, Inc. ................................... $ 840,450
------------
6,429,394
------------
FOOD & BEVERAGES--5.3%
45,045 Archer-Daniels-Midland Co. .............................. 976,913
15,000 Dean Foods Co. .......................................... 892,500
21,400 Interstate Bakeries...................................... 799,825
18,600 Kellogg Co. ............................................. 923,025
33,900 Quaker Oats Co. ......................................... 1,788,225
18,850 Tyson Foods, Inc......................................... 386,425
37,200 Unilever N.V............................................. 2,322,675
------------
8,089,588
------------
GAS & PIPELINE UTILITIES--2.1%
41,700 Columbia Gas Systems, Inc. .............................. 3,276,056
------------
HEALTH CARE--2.3%
14,500 Beckman Instruments, Inc. ............................... 580,000
65,200 Beverly Enterprises, Inc.(c)............................. 847,600
14,800 Johnson & Johnson........................................ 974,950
25,700 Wellpoint Health Networks, Inc.(c)....................... 1,085,825
------------
3,488,375
------------
HOTELS & RESTAURANTS--0.3%
9,417 Promus Hotel Corp.(c).................................... 395,514
------------
INSURANCE--5.1%
23,400 Allstate Corp. .......................................... 2,126,475
8,600 AMBAC, Inc. ............................................. 395,600
5,600 American National Insurance Co. ......................... 520,800
13,100 CIGNA Corp. ............................................. 2,267,119
23,900 Everest Reinsurance Holdings, Inc. ...................... 985,875
12,400 MGIC Investment Corp. ................................... 824,600
16,250 Old Republic International Corp. ........................ 604,297
------------
7,724,766
------------
INTERNATIONAL OIL--3.5%
19,300 Chevron Corp. ........................................... 1,486,100
49,300 Exxon Corp. ............................................. 3,016,544
10,900 Mobil Corp., Rights...................................... 786,844
------------
5,289,488
------------
MEDIA & ENTERTAINMENT--4.1%
15,800 Chancellor Media Corp.(c)................................ 1,179,075
24,400 Clear Channel Communications(c).......................... 1,938,275
41,000 Jacor Communications, Inc.(c)............................ 2,178,125
16,400 Time Warner, Inc. ....................................... 1,016,800
------------
6,312,275
------------
METAL--0.4%
10,500 Phelps Dodge Corp. ...................................... 653,625
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
MORTGAGE--0.4%
11,200 Federal National Mortgage Association.................... $ 639,100
------------
OIL--REFINING & DISTRIBUTION--0.7%
16,700 Coastal Corp. ........................................... 1,034,356
------------
OIL SERVICES--2.4%
8,000 BJ Services Co.(c)....................................... 575,500
5,800 ENSCO International, Inc. ............................... 194,300
20,200 Global Marine, Inc.(c)................................... 494,900
4,800 Rowan Companies, Inc.(c)................................. 146,400
18,100 Smith International, Inc.(c)............................. 1,110,887
9,200 Tidewater, Inc., Rights.................................. 507,150
30,000 Union Texas Petroleum Holdings, Inc. .................... 624,375
------------
3,653,512
------------
PAPER & FOREST PRODUCTS--1.2%
4,600 Bowater, Inc. ........................................... 204,413
15,700 Champion International Corp. ............................ 711,406
14,600 Fort James Corp. ........................................ 558,450
8,000 Rayonier, Inc. .......................................... 340,500
------------
1,814,769
------------
PRODUCER GOODS--6.9%
49,000 Caterpillar, Inc. ....................................... 2,379,562
13,000 Cummins Engine, Inc. .................................... 767,813
4,700 Illinois Tool Works, Inc. ............................... 282,588
58,500 Ingersoll-Rand Co. ...................................... 2,369,250
13,400 Litton Industries, Inc.(c)............................... 770,500
23,200 Lucent Technologies, Inc. ............................... 1,853,100
16,600 Precision Castparts Corp. ............................... 1,001,187
24,500 Premark International, Inc. ............................. 710,500
14,400 Timken Co. .............................................. 495,000
------------
10,629,500
------------
PUBLISHING--2.0%
13,600 Gannett Co. ............................................. 840,650
29,000 McGraw-Hill Companies, Inc. ............................. 2,146,000
------------
2,986,650
------------
RAILROAD & EQUIPMENT--0.5%
26,100 Kansas City Southern Industries, Inc. ................... 828,675
------------
RETAIL--6.3%
30,900 Borders Group, Inc.(c)................................... 967,556
10,900 CompUSA, Inc.(c)......................................... 337,900
8,600 Consolidated Stores Corp.(c)............................. 377,863
19,000 Dayton Hudson Corp. ..................................... 1,282,500
6,500 Federated Department Stores, Inc.(c)..................... 279,906
15,600 Fred Meyer, Inc.(c)...................................... 567,450
28,000 General Nutrition Companies, Inc.(c)..................... 952,000
</TABLE>
See accompanying notes to financial statements.
42
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK GROWTH & INCOME SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
COMMON STOCKS--(CONTINUED) SHORT-TERM INVESTMENT--2.5%
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
RETAIL--(CONTINUED)
32,800 Home Depot, Inc. ......................................... $ 1,931,100
13,500 Neiman Marcus Group, Inc.(c).............................. 408,375
24,200 Payless ShoeSource, Inc.(c)............................... 1,624,425
17,300 TJX Companies, Inc. ...................................... 594,688
6,500 Wal-Mart Stores, Inc. .................................... 256,344
-----------
9,580,107
-----------
RETAIL--FOOD & DRUG--0.5%
11,400 Safeway, Inc.(c).......................................... 721,050
-----------
SAVINGS & LOAN--1.1%
56,700 Dime Bancorp., Inc. ...................................... 1,715,175
-----------
SERVICES--0.3%
13,900 Cendant Corp.(c).......................................... 477,813
-----------
STEEL--1.2%
56,300 USX-U.S. Steel Group...................................... 1,759,375
-----------
TELECOMMUNCIATION--10.0%
80,900 AirTouch Communications, Inc.(c).......................... 3,362,406
3,600 ALLTEL Corp. ............................................. 147,825
53,100 Ameritech Corp. .......................................... 4,274,550
28,700 Bell Atlantic Corp. ...................................... 2,611,700
46,200 BellSouth Corp. .......................................... 2,601,637
22,100 MCI Communications Corp. ................................. 946,156
24,800 United States Cellular Corp.(c)........................... 768,800
14,300 U.S. West, Inc. .......................................... 645,288
-----------
15,358,362
-----------
TOBACCO--0.9%
32,700 Universal Corp. .......................................... 1,344,788
-----------
Total Common Stocks
(Identified Cost $125,892,263)........................... 148,799,966
-----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
$3,780,000 Repurchase agreement with State Street Bank & Trust
Company dated 12/31/97 at 5.000% to be repurchased
at $3,781,050 on 1/02/98 collaterized by $3,760,000
U.S. Treasury Note 5.875% due 01/31/99 with a value
of $3,858,305...................................... $ 3,780,000
------------
Total Short-Term Investment
(Identified cost $3,780,000)....................... 3,780,000
------------
Total Investments--99.9%
(Identified cost $129,672,263)(b).................. 152,579,966
Other assets less liabilities....................... 158,412
------------
TOTAL NET ASSETS--100%.............................. $152,738,378
============
</TABLE>
(a) See Note 1A.
(b) Federal Tax Information:
At December 31,1997 the net unrealized appreciation on investments based on
cost of $129,677,784 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.............. $25,062,385
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value.............. (2,160,203)
-----------
Net unrealized appreciation................................... $22,902,182
===========
</TABLE>
(c) Non-income producing security.
See accompanying notes to financial statements.
43
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK GROWTH & INCOME SERIES)
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
ASSETS
Investments at value.................................... $152,579,966
Cash.................................................... 856
Receivable for:
Fund shares sold........................................ 288,448
Dividends and interest.................................. 131,129
------------
153,000,399
LIABILITIES
Payable for:
Fund shares redeemed.................................... $154,721
Withholding taxes....................................... 880
Accrued expenses:
Management fees......................................... 87,861
Deferred trustees' fees................................. 3,767
Other................................................... 14,792
--------
262,021
------------
$152,738,378
============
NET ASSETS
Net Assets consist of:
Capital paid in......................................... $125,096,920
Undistributed net investment income..................... 14,579
Accumulated net realized gains.......................... 4,719,176
Unrealized appreciation on investments.................. 22,907,703
------------
NET ASSETS............................................... $152,738,378
============
Computation of offering price:
Net asset value and redemption price per share
($152,738,378 divided by 848,644 shares of beneficial
interest)............................................... $ 179.98
============
Identified cost of investments........................... $129,672,263
============
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<S> <C> <C>
INVESTMENT INCOME
Dividends............................................. $ 1,812,884(a)
Interest.............................................. 185,375
-----------
1,998,259
EXPENSES
Management fees....................................... $808,891
Trustees' fees and expenses........................... 20,540
Custodian............................................. 49,591
Audit and tax services................................ 7,591
Legal................................................. 22,022
Printing.............................................. 39,060
Miscellaneous......................................... 3,201
--------
Total expenses....................................... 950,896
-----------
NET INVESTMENT INCOME.................................. 1,047,363
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Realized gain on:
Investments--net...................................... 17,943,986
Unrealized appreciation on:
Investments--net...................................... 12,979,433
-----------
Net gain on investment transactions.................... 30,923,419
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS............. $31,970,782
===========
</TABLE>
(a) Net of foreign taxes of: $17,611.
See accompanying notes to financial statements.
44
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK GROWTH & INCOME SERIES)
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
FROM OPERATIONS
Net investment income............................. $ 890,831 $ 1,047,363
Net realized gain on investments.................. 8,163,321 17,943,986
Unrealized appreciation on investments............ 2,277,386 12,979,433
------------ ------------
INCREASE IN NET ASSETS FROM OPERATIONS............ 11,331,538 31,970,782
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income............................. (904,227) (1,033,253)
Net realized gain on investments.................. (6,507,691) (15,362,335)
------------ ------------
(7,411,918) (16,395,588)
------------ ------------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares...................... 35,852,491 64,665,884
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income.......... 904,227 1,033,253
Distributions from net realized gain.............. 6,507,691 15,362,335
------------ ------------
43,264,409 81,061,472
Cost of shares redeemed........................... (12,982,923) (26,228,431)
------------ ------------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL SHARE
TRANSACTIONS..................................... 30,281,486 54,833,041
------------ ------------
TOTAL INCREASE IN NET ASSETS...................... 34,201,106 70,408,235
NET ASSETS
Beginning of the year............................. 48,129,037 82,330,143
------------ ------------
End of the year................................... $ 82,330,143 $152,738,378
============ ============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the year............................. $ 13,865 $ 469
============ ============
End of the year................................... $ 469 $ 14,579
============ ============
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares.................... 239,114 362,661
Issued in connection with the reinvestment of:
Distributions from net investment income.......... 5,851 5,886
Distributions from net realized gain.............. 42,976 86,752
------------ ------------
287,941 455,299
Redeemed.......................................... (86,095) (149,104)
------------ ------------
Net change........................................ 201,846 306,195
============ ============
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
APRIL 30, 1993(A)
THROUGH YEAR YEAR YEAR YEAR
DECEMBER 31, ENDED ENDED ENDED ENDED
1993 1994 1995 1996 1997
----------------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year...... $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 1.37
Net Realized and
Unrealized Gain (Loss)
on Investments......... 13.33 (3.25) 37.91 23.69 48.76
------- ------- ------- ------- --------
Total From Investment
Operations............. 14.25 (1.35) 39.68 25.47 50.13
------- ------- ------- ------- --------
Less Distributions
Distributions From Net
Investment Income...... (0.92) (1.92) (1.71) (1.82) (1.35)
Distributions From Net
Realized Capital Gains. (1.00) 0.00 (5.69) (13.19) (20.57)
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) (21.92)
------- ------- ------- ------- --------
Net Asset Value, End of
Year................... $112.32 $109.03 $141.31 $151.77 $ 179.98
======= ======= ======= ======= ========
TOTAL RETURN (%)........ 14.24(c) (1.21) 36.46 18.10 33.48
Ratio of Operating
Expenses to Average Net
Assets (%)............. 0.85(b) 0.85 0.85 0.85 0.82
Ratio of Net Investment
Income to Average Net
Assets (%)............. 2.16(b) 2.30 1.63 1.40 0.91
Portfolio Turnover Rate
(%).................... 49(b) 133 92 104 93
Average Commission
Rate(d)................ -- -- -- $0.0344 $ 0.0334
Net Assets, End of Year
(000).................. $ 9,082 $22,934 $48,129 $82,330 $152,738
The ratios of expenses
to average net assets
without giving effect
to the voluntary
expense agreement
described in Note 4 to
the Financial
Statements would have
been (%)............... 0.94(b) 0.86 1.06 0.91 --
</TABLE>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
(d) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate generally does not reflect mark-
ups, mark-downs, or spreads on shares traded on a principal basis.
See accompanying notes to financial statements.
45
<PAGE>
WESTPEAK STOCK INDEX SERIES
PORTFOLIO MANAGERS: GERALD H. SCRIVER AND PHILIP J. COOPER
WESTPEAK INVESTMENT ADVISORS, L.P.
[PHOTOGRAPH OF GERALD H. SCRIVER APPEARS HERE]
[PHOTOGRAPH OF PHILIP J. COOPER]
Q. HOW DID THE PORTFOLIO PERFORM DURING 1997?
A. The Westpeak Stock Index Series returned 32.5% for 1997, while the unman-
aged S&P 500 Index returned 33.2%. The Series remained fully participated in
the 500 stocks which make up the Index, weighting the portfolio virtually in
the same proportion as the Index. This strategy is designed to reduce tracking
error.
Q. WHAT IS YOUR INVESTMENT OUTLOOK FOR THE MONTHS AHEAD?
A. As we enter 1998, U.S. economic activity is likely to slow. A slowdown in
domestic demand will most likely coincide with a significant slowdown in
external trade. Inflation will not be a problem in 1998, and the next move by
the Fed is likely to be a reduction in the Fed Funds rate.
The slowdown we see will most likely result in weaker sales growth and
declining margins for corporate America in general. However, declining long-
term interest rates should provide support for the stock market. Long-term
rates could decline to the 5.25% - 5.50% range in 1998. The U.S. dollar should
remain firm throughout the year.
A $10,000 Investment Compared to the S&P 500 Index/19/
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Stock Index
Series S&P 500
----------- -------
<S> <C> <C>
12/31/87 10,000 10,000
12/31/88 11,634 11,649
12/31/89 15,142 15,329
12/31/90 14,514 14,852
12/31/91 18,923 19,357
12/31/92 20,304 20,830
12/31/93 22,278 22,920
12/31/94 22,532 23,231
12/31/95 30,842 31,931
12/31/96 37,771 39,243
12/31/97 50,045 52,317
</TABLE>
[X] FUND FACTS
GOAL: Investment results that correspond to the composite price and yield
performance of United States publicly traded common stocks.
START DATE: March 30, 1987
SIZE: $127 million as of December 31, 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
1995. Mr. Scriver joined Westpeak in July 1991, and Mr. Cooper joined Westpeak
in December 1991.
Performance numbers are net of all Series expenses but do not include any
insurance, sales or administrative charges of variable annuity or life
insurance contracts. If these charges were included, the returns shown would
be lower.
This information represents past performance and is not indicative of future
results. Investment return and principal value will fluctuate so that shares,
upon redemption, may be worth more or less than the original cost.
46
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK STOCK INDEX SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
COMMON STOCKS--98.4% OF TOTAL NET ASSETS
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
AEROSPACE--1.6%
9,500 Allied Signal, Inc. ...................................... $ 369,906
800 B.F. Goodrich Co. ........................................ 33,150
16,554 Boeing Co. ............................................... 810,111
900 General Dynamics Corp. ................................... 77,794
3,115 Lockheed Martin Corp. .................................... 306,828
1,100 Northrop Grumman Corp. ................................... 126,500
4,000 United Technologies Corp. ................................ 291,250
-----------
2,015,539
-----------
AIRLINES--0.5%
1,400 AMR Corp.(c).............................................. 179,900
1,100 Delta Air Lines........................................... 130,900
1,900 Federal Express Corp.(c).................................. 116,019
3,600 Southwest Airlines........................................ 88,650
1,500 US Airways Group, Inc.(c)................................. 93,750
-----------
609,219
-----------
ALUMINUM--0.3%
3,800 Alcan Aluminum, Ltd. ..................................... 104,975
2,800 Aluminum Company of America............................... 197,050
1,100 Reynolds Metals Co. ...................................... 66,000
-----------
368,025
-----------
APPAREL & TEXTILES--0.3%
1,100 Fruit of the Loom, Inc.(c)................................ 28,187
1,100 Liz Claiborne, Inc. ...................................... 45,994
4,900 NIKE, Inc., Class B....................................... 192,325
800 Reebok International, Ltd.(c)............................. 23,050
600 Russell Corp. ............................................ 15,938
300 Springs Industries, Inc. ................................. 15,600
2,100 VF Corp. ................................................. 96,469
-----------
417,563
-----------
AUTOMOTIVE--1.9%
11,300 Chrysler Corp. ........................................... 397,619
1,700 Dana Corp. ............................................... 80,750
1,100 Echlin, Inc. ............................................. 39,806
500 Fleetwood Enterprises, Inc. .............................. 21,219
19,900 Ford Motor Co. ........................................... 968,881
12,000 General Motors Corp. ..................................... 727,500
1,120 Navistar International Corp.(c)........................... 27,790
1,290 PACCAR, Inc. ............................................. 67,725
2,100 TRW, Inc. ................................................ 112,087
-----------
2,443,377
-----------
BANKS--8.4%
9,775 Banc One Corp. ........................................... 530,905
6,300 Bank of New York.......................................... 364,219
11,556 BankAmerica Corp. ........................................ 843,588
2,300 BankBoston Corp. ......................................... 216,056
1,700 Bankers Trust New York Corp. ............................. 191,144
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
3,200 Barnett Banks, Inc. ...................................... $ 230,000
2,300 BB&T Corp. ............................................... 147,344
6,970 Chase Manhattan........................................... 763,215
7,600 Citicorp.................................................. 960,925
1,800 Comerica, Inc. ........................................... 162,450
3,500 CoreStates Financial Corp. ............................... 280,219
2,600 Fifth Third Bancorp....................................... 212,550
4,910 First Chicago Corp. ...................................... 409,985
10,300 First Union Corp. ........................................ 527,875
4,162 Fleet Financial Group, Inc. .............................. 311,890
3,200 Huntington Bancshares, Inc. .............................. 115,200
3,000 J.P. Morgan & Company, Inc. .............................. 338,625
3,600 Keycorp................................................... 254,925
4,100 Mellon Bank Corp. ........................................ 248,562
3,500 National City Corp. ...................................... 230,125
11,842 NationsBank Corp. ........................................ 720,142
12,300 Norwest Corp. ............................................ 475,087
5,200 PNC Bank Corp. ........................................... 296,725
800 Republic New York Corp. .................................. 91,350
2,600 State Street Corp. ....................................... 151,287
3,500 SunTrust Banks, Inc. ..................................... 249,812
2,900 Synovus Financial Corp. .................................. 94,975
3,936 U.S. Bancorp.............................................. 440,586
3,400 Wachovia Corp. ........................................... 275,825
1,433 Wells Fargo & Co. ........................................ 486,414
-----------
10,622,005
-----------
BUSINESS SERVICES--0.8%
1,400 Deluxe Corp. ............................................. 48,300
1,600 Dow Jones & Company, Inc. ................................ 85,900
2,720 Dun & Bradstreet Corp. ................................... 84,150
700 EG & G, Inc. ............................................. 14,569
2,500 Equifax, Inc. ............................................ 88,593
7,500 First Data Corp. ......................................... 219,375
2,200 Ikon Office Solutions, Inc. .............................. 61,875
2,000 Interpublic Group Companies, Inc. ........................ 99,625
2,800 Marsh & McLennan Companies, Inc. ......................... 208,775
1,400 Omnicom Group............................................. 59,325
1,200 Ryder Systems, Inc. ...................................... 39,300
2,800 Unisys Corp.(c)........................................... 38,850
-----------
1,048,637
-----------
CHEMICALS--2.6%
1,700 Air Products & Chemicals, Inc. ........................... 139,825
1,600 Avery Dennison Corp. ..................................... 71,600
3,650 Dow Chemical Co. ......................................... 370,475
1,200 Eastman Chemical Co. ..................................... 71,475
18,700 El duPont deNemours & Co. ................................ 1,123,169
2,325 Engelhard Corp. .......................................... 40,397
600 FMC Corp.(c).............................................. 40,387
900 Great Lakes Chemical Corp. ............................... 40,388
1,700 Hercules, Inc. ........................................... 85,106
</TABLE>
See accompanying notes to financial statements.
47
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK STOCK INDEX SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
COMMON STOCKS--(CONTINUED)
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
CHEMICALS--(CONTINUED)
9,900 Monsanto Co. ............................................. $ 415,800
2,300 Morton International, Inc. ............................... 79,062
1,000 Nalco Chemical Co. ....................................... 39,563
5,500 Occidental Petroleum Corp. ............................... 161,219
2,900 PPG Industries, Inc. ..................................... 165,662
2,700 Praxair, Inc. ............................................ 121,500
1,000 Rohm & Haas Co. .......................................... 95,750
1,700 Sigma-Aldrich............................................. 67,575
2,100 Union Carbide Corp. ...................................... 90,169
1,100 W.R. Grace & Co. ......................................... 88,481
-----------
3,307,603
-----------
COMPUTER SOFTWARE & SERVICES--3.6%
1,100 Adobe Systems, Inc. ...................................... 45,375
700 Autodesk, Inc. ........................................... 25,900
4,700 Automatic Data Processing, Inc. .......................... 288,462
1,200 Ceridian Corp.(c)......................................... 54,975
2,720 Cognizant Corp. .......................................... 121,210
9,000 Computer Associates International, Inc. .................. 475,875
1,300 Computer Sciences Corp.(c)................................ 108,550
3,300 HBO & Co., Rights......................................... 158,400
19,800 Microsoft Corp.(c)........................................ 2,559,150
5,900 Novell, Inc.(c)........................................... 44,250
16,437 Oracle Systems Corp.(c)................................... 366,751
2,100 Parametric Technology Corp.(c)............................ 99,488
400 Shared Medical System..................................... 26,400
-----------
4,374,786
-----------
COMPUTERS & BUSINESS EQUIPMENT--5.2%
5,800 3Com Corp.(c)............................................. 202,637
2,100 Apple Computer(c)......................................... 27,563
3,500 Bay Networks, Inc.(c)..................................... 89,469
2,500 Cabletron Systems, Inc.(c)................................ 37,500
16,650 Cisco Systems, Inc.(c).................................... 928,237
12,495 Compaq Computer Corp. .................................... 705,187
800 Data General Corp.(c)..................................... 13,950
5,400 Dell Computer Corp.(c).................................... 453,600
2,600 Digital Equipment Corp., Rights(c)........................ 96,200
8,200 EMC Corp.(c).............................................. 224,987
17,100 Hewlett-Packard Co. ...................................... 1,068,750
16,300 International Business Machines........................... 1,704,369
2,400 Pitney Bowes, Inc. ....................................... 215,850
4,000 Seagate Technology(c)..................................... 77,000
2,900 Silicon Graphics, Inc.(c)................................. 36,069
6,100 Sun Microsystems, Inc.(c)................................. 243,237
5,500 Xerox Corp. .............................................. 405,969
-----------
6,530,574
-----------
CONSTRUCTION--0.3%
600 Armstrong World Industries, Inc. ......................... 44,850
400 Centex Corp. ............................................. 25,175
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
1,300 Fluor Corp. .............................................. $ 48,588
600 Kaufman & Broad Home Corp. ............................... 13,463
2,700 Masco Corp. .............................................. 137,362
2,800 Sherwin Williams Co. ..................................... 77,700
-----------
347,138
-----------
CONSUMER GOODS & SERVICES--0.3%
1,600 Black & Decker Corp. ..................................... 62,500
1,700 Maytag Corp. ............................................. 63,431
4,100 Service Corp. International............................... 151,444
1,300 Whirlpool Corp. .......................................... 71,500
-----------
348,875
-----------
CONTAINERS & GLASS--0.2%
500 Ball Corp. ............................................... 17,656
800 Bemis, Inc. .............................................. 35,250
2,100 Crown Cork & Seal Co., Inc. .............................. 105,262
2,400 Owens Illinois, Inc.(c)................................... 91,050
1,000 Temple-Inland, Inc. ...................................... 52,313
-----------
301,531
-----------
COSMETICS & TOILETRIES--0.1%
800 Alberto Culver Co. ....................................... 25,650
2,200 Avon Products, Inc. ...................................... 135,025
-----------
160,675
-----------
DOMESTIC OIL--1.4%
8,100 Amoco Corp. .............................................. 689,512
900 Anadarko Petroleum Corp. ................................. 54,619
1,400 Apache Corp. ............................................. 49,088
5,400 Atlantic Richfield Co. ................................... 432,675
2,962 Burlington Resources, Inc. ............................... 132,735
700 Pennzoil Co. ............................................. 46,769
4,300 Phillips Petroleum Co. ................................... 209,087
1,300 Sonat, Inc. .............................................. 59,475
4,164 Union Pacific Resources Group, Inc. ...................... 100,977
-----------
1,774,937
-----------
DRUGS--8.1%
12,700 Abbott Laboratories....................................... 832,644
1,000 Allergan, Inc. ........................................... 33,563
1,300 Alza Corp.(c)............................................. 41,356
10,600 American Home Products Corp. ............................. 810,900
4,400 Amgen, Inc. .............................................. 238,150
16,480 Bristol-Myers Squibb Co. ................................. 1,559,420
1,700 Cardinal Health, Inc. .................................... 127,713
18,300 Eli Lilly................................................. 1,274,137
19,800 Merck & Co. .............................................. 2,103,750
21,300 Pfizer, Inc. ............................................. 1,588,181
8,380 Pharmacia & Upjohn, Inc. ................................. 306,917
12,200 Schering-Plough Corp. .................................... 757,925
4,500 Warner-Lambert Co. ....................................... 558,000
-----------
10,232,656
-----------
</TABLE>
See accompanying notes to financial statements.
48
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK STOCK INDEX SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
COMMON STOCKS--(CONTINUED)
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
ELECTRIC UTILITIES--2.7%
3,200 American Electric Power, Inc. ............................ $ 165,200
2,400 Baltimore Gas & Electric Co. ............................. 81,750
2,500 Carolina Power & Light Co. ............................... 106,094
3,600 Central & South West Corp. ............................... 97,425
2,611 Cinergy Corp. ............................................ 100,034
3,900 Consolidated Edison Co. New York, Inc. ................... 159,900
3,050 Dominion Resources, Inc. ................................. 129,816
2,400 DTE Energy Co. ........................................... 83,250
5,827 Duke Power Co. ........................................... 322,670
6,700 Edison International...................................... 182,156
4,100 Entergy Corp. ............................................ 122,744
3,900 FirstEnergy Corp.(c)...................................... 113,100
3,000 FPL Group, Inc. .......................................... 177,562
2,000 GPU, Inc. ................................................ 84,250
4,648 Houston Industries, Inc. ................................. 124,044
2,400 Niagara Mohawk Power Corp.(c)............................. 25,200
1,200 Northern States Power Co. ................................ 69,900
7,400 Pacific Gas & Electric Corp. ............................. 225,237
5,000 Pacificorp................................................ 136,562
3,700 PECO Energy Co. .......................................... 89,725
2,800 PP&L Resources, Inc. ..................................... 67,025
3,800 Public Service Enterprise Group........................... 120,413
11,500 Southern Co. ............................................. 297,562
4,025 Texas Utilities Co. ...................................... 167,289
3,600 Unicom Corp. ............................................. 110,700
1,700 Union Electric Co. ....................................... 73,525
-----------
3,433,133
-----------
ELECTRONICS--3.7%
2,400 Advanced Micro Devices, Inc.(c)........................... 43,050
3,656 AMP, Inc. ................................................ 153,552
1,530 Andrew Corp.(c)........................................... 36,720
2,000 Cooper Industries, Inc. .................................. 98,000
1,200 Harris Corp. ............................................. 55,050
2,100 Honeywell, Inc. .......................................... 143,850
26,900 Intel Corp. .............................................. 1,889,725
1,300 KLA Instruments Corp.(c).................................. 50,213
2,300 LSI Logic Corp.(c)........................................ 45,425
3,500 Micron Technology, Inc. .................................. 91,000
10,000 Motorola, Inc. ........................................... 570,625
2,600 National Semiconductor Corp.(c)........................... 67,437
4,300 Northern Telecom, Ltd. ................................... 382,700
1,400 Raychem Corp. ............................................ 60,288
765 Raytheon Co. ............................................. 37,724
3,900 Raytheon Co., Class B..................................... 196,950
3,500 Rockwell International Corp. ............................. 182,875
1,300 Scientific Atlanta, Inc. ................................. 21,775
750 Tektronix, Inc. .......................................... 29,766
2,900 Tellabs, Inc.(c).......................................... 153,337
6,400 Texas Instruments, Inc. .................................. 288,000
800 Thomas & Betts Corp. ..................................... 37,800
-----------
4,635,862
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
FINANCE--2.6%
7,700 American Express Co. ..................................... $ 687,225
800 Beneficial Corp. ......................................... 66,500
4,350 Charles Schwab Corp. ..................................... 182,428
1,700 Household International, Inc. ............................ 216,856
8,380 MBNA Corp. ............................................... 228,879
5,400 Merrill Lynch & Company, Inc. ............................ 393,863
9,899 Morgan Stanley Dean Witter................................ 585,278
1,600 Providian Financial Corp. ................................ 72,300
18,953 Travelers Group, Inc. .................................... 1,021,093
-----------
3,454,422
-----------
FOOD & BEVERAGES--5.8%
9,446 Archer-Daniels-Midland Co. ............................... 204,860
7,600 Campbell Soup Co. ........................................ 441,750
41,000 Coca-Cola Co. ............................................ 2,731,625
7,700 ConAgra, Inc. ............................................ 252,656
2,400 CPC International, Inc. .................................. 258,600
2,600 General Mills, Inc. ...................................... 186,225
6,100 H.J. Heinz Co. ........................................... 309,956
2,300 Hershey Foods............................................. 142,456
6,700 Kellogg Co. .............................................. 332,488
25,300 PepsiCo, Inc. ............................................ 921,869
1,400 Pioneer Hi-Bred International, Inc. ...................... 150,150
2,200 Quaker Oats Co. .......................................... 116,050
8,000 Sara Lee Corp. ........................................... 450,500
10,600 Unilever NV .............................................. 661,838
1,700 Whitman Corp. ............................................ 44,306
2,000 William Wrigley Jr. Co. .................................. 159,125
-----------
7,364,454
-----------
GAS & PIPELINE UTILITIES--0.5%
800 Columbia Gas Systems, Inc. ............................... 62,850
1,600 Consolidated Natural Gas Co. ............................. 96,800
300 Eastern Enterprises....................................... 13,500
5,100 Enron Corp. .............................................. 211,969
700 Nicor, Inc. .............................................. 29,531
400 ONEOK, Inc., New.......................................... 16,150
1,300 Pacific Enterprises, Ltd. ................................ 48,912
500 Peoples Energy Corp. ..................................... 19,688
5,200 Williams Companies, Inc. ................................. 147,550
-----------
646,950
-----------
HEALTH CARE--2.9%
800 Bausch & Lomb, Inc. ...................................... 31,700
4,600 Baxter International, Inc. ............................... 232,012
2,000 Becton, Dickinson & Co. .................................. 100,000
1,900 Biomet, Inc. ............................................. 48,688
3,300 Boston Scientific Corp.(c)................................ 151,387
1,000 C.R. Bard, Inc. .......................................... 31,313
10,786 Columbia/HCA Healthcare Corp. ............................ 319,535
2,400 Guidant Corp. ............................................ 149,400
</TABLE>
See accompanying notes to financial statements.
49
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK STOCK INDEX SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
COMMON STOCKS--(CONTINUED)
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
HEALTH CARE--(CONTINUED)
6,500 HEALTHSOUTH Corp.(c)...................................... $ 180,375
2,600 Humana, Inc.(c)........................................... 53,950
22,000 Johnson & Johnson......................................... 1,449,250
1,100 Mallinckrodt, Inc. ....................................... 41,800
1,100 Manor Care, Inc. ......................................... 38,500
7,900 Medtronic, Inc. .......................................... 413,269
1,400 St. Jude Medical, Inc.(c)................................. 42,700
5,100 Tenet Healthcare Corp.(c)................................. 168,937
3,100 United Healthcare Corp. .................................. 154,031
1,100 United States Surgical Corp. ............................. 32,244
-----------
3,639,091
-----------
HOTELS & RESTAURANTS--1.0%
2,600 Darden Restaurants, Inc. ................................. 32,500
1,550 Harrahs Entertainment, Inc.(c)............................ 29,256
4,200 Hilton Hotels Corp. ...................................... 124,950
1,900 ITT Corp. ................................................ 157,463
2,100 Marriott International, Inc. ............................. 145,425
11,500 McDonald's Corp. ......................................... 549,125
3,000 Mirage Resorts, Inc.(c)................................... 68,250
2,420 Tricon Global Restaurants, Inc.(c)........................ 70,331
2,100 Wendy's International, Inc. .............................. 50,531
-----------
1,227,831
-----------
INSURANCE--3.1%
7,286 Allstate Corp. ........................................... 662,115
11,618 American International Group, Inc. ....................... 1,263,457
2,800 Aon Corp. ................................................ 164,150
2,800 Chubb Corp. .............................................. 211,750
1,100 CIGNA Corp. .............................................. 190,369
900 Cincinnati Financial Corp. ............................... 126,675
1,200 General Re Corp. ......................................... 254,400
2,000 Hartford Financial Services Group......................... 187,125
1,900 Loews Corp. .............................................. 201,637
1,500 MBIA, Inc. ............................................... 100,219
1,800 MGIC Investment Corp. .................................... 119,700
1,100 Progressive Corp. ........................................ 131,862
2,300 Safeco Corp. ............................................. 112,125
1,400 St. Paul Companies, Inc. ................................. 114,888
2,300 Torchmark Corp. .......................................... 96,744
2,200 UNUM Corp. ............................................... 119,625
1,900 USF&G Corp. .............................................. 41,919
-----------
4,098,760
-----------
INTERNATIONAL OIL--3.9%
10,900 Chevron Corp. ............................................ 839,300
40,900 Exxon Corp. .............................................. 2,502,569
13,000 Mobil Corp., Rights....................................... 938,437
1,800 Oryx Energy Corp.(c)...................................... 45,900
8,700 Texaco, Inc. ............................................. 473,063
4,000 Unocal Corp. ............................................. 155,250
-----------
4,954,519
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
LEISURE TIME--0.2%
1,700 Brunswick Corp. .......................................... $ 51,531
2,150 Hasbro, Inc. ............................................. 67,725
4,850 Mattel, Inc. ............................................. 180,663
-----------
299,919
-----------
LIFE INSURANCE--0.8%
2,483 Aetna, Inc. .............................................. 175,207
4,098 American General Corp. ................................... 221,548
3,100 Conseco, Inc. ............................................ 140,856
1,225 Jefferson Pilot........................................... 95,397
1,600 Lincoln National Corp., Inc. ............................. 125,000
3,200 SunAmerica, Inc. ......................................... 136,800
1,000 Transamerica Corp. ....................................... 106,500
-----------
1,001,308
-----------
LIQUOR--0.6%
600 Adolph Coors Co. ......................................... 19,950
8,100 Anheuser-Busch Companies, Inc. ........................... 356,400
1,200 Brown-Forman Corp., Class B............................... 66,300
2,800 Fortune Brands, Inc. ..................................... 103,775
6,200 Seagram Co., Ltd. ........................................ 200,338
-----------
746,763
-----------
MEDIA & ENTERTAINMENT--2.5%
11,900 CBS Corp. ................................................ 350,306
1,600 Clear Channel Communications(c)........................... 127,100
5,900 Comcast Corp. ............................................ 186,219
550 King World Productions, Inc.(c)........................... 31,762
8,500 Tele-Communications, Inc.(c).............................. 237,469
9,400 Time Warner, Inc. ........................................ 582,800
10,200 U.S. West Media Group(c).................................. 294,525
5,957 Viacom, Inc.(c)........................................... 246,843
11,098 Walt Disney Co. .......................................... 1,099,396
-----------
3,156,420
-----------
METAL--0.1%
600 ASARCO, Inc. ............................................. 13,463
2,700 Inco, Ltd. ............................................... 45,900
1,000 Phelps Dodge Corp. ....................................... 62,250
-----------
121,613
-----------
MINING--0.0%
1,550 Cyprus Amax Minerals Co. ................................. 23,831
-----------
MORTGAGE--1.3%
1,800 Countrywide Credit Industries, Inc. ...................... 77,175
11,600 Federal Home Loan Mortgage Corp. ......................... 486,475
17,700 Federal National Mortgage Association..................... 1,010,006
2,300 Green Tree Financial Corp. ............................... 60,231
-----------
1,633,887
-----------
OIL--FOREIGN--0.0%
700 Kerr-McGee Corp. ......................................... 44,319
-----------
</TABLE>
See accompanying notes to financial statements.
50
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK STOCK INDEX SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
COMMON STOCKS--(CONTINUED)
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
OIL--REFINING & DISTRIBUTION--1.9%
1,400 Amerada Hess Corp. ....................................... $ 76,825
1,300 Ashland, Inc. ............................................ 69,794
1,800 Coastal Corp. ............................................ 111,487
35,300 Royal Dutch Petroleum Co. ................................ 1,912,819
1,100 Sun, Inc. ................................................ 46,269
4,700 USX-Marathon Group........................................ 158,625
-----------
2,375,819
-----------
OIL SERVICES--0.9%
2,800 Baker Hughes, Inc. ....................................... 122,150
4,200 Halliburton Co. .......................................... 218,137
400 Helmerich & Payne, Inc. .................................. 27,150
800 McDermott International, Inc. ............................ 29,300
1,500 Rowan Companies, Inc.(c).................................. 45,750
8,300 Schlumberger, Ltd. ....................................... 668,150
800 Western Atlas, Inc.(c).................................... 59,200
-----------
1,169,837
-----------
PAPER & FOREST PRODUCTS--1.1%
933 Boise Cascade Corp., Rights............................... 28,223
1,600 Champion International Corp. ............................. 72,500
3,100 Fort James Corp. ......................................... 118,575
1,400 Georgia Pacific Corp. .................................... 85,050
5,110 International Paper Co. .................................. 220,369
9,112 Kimberly-Clark Corp. ..................................... 449,335
1,800 Louisiana Pacific Corp. .................................. 34,200
1,800 Mead Corp. ............................................... 50,400
400 Potlatch Corp. ........................................... 17,200
1,700 Stone Container Corp., Rights............................. 17,744
1,200 Union Camp Corp. ......................................... 64,425
1,575 Westvaco Corp. ........................................... 49,514
3,200 Weyerhaeuser Co. ......................................... 157,000
1,800 Willamette Industries, Inc. .............................. 57,938
-----------
1,422,473
-----------
PHOTOGRAPHY--0.3%
5,250 Eastman Kodak Co. ........................................ 319,266
700 Polaroid Corp. ........................................... 34,081
-----------
353,347
-----------
POLLUTION CONTROL--0.3%
3,400 Browning-Ferris Industries, Inc. ......................... 125,800
900 Safety-Kleen Corp. ....................................... 24,694
7,600 Waste Management, Inc. ................................... 209,000
-----------
359,494
-----------
PRECIOUS METAL--0.3%
6,200 Barrick Gold Corp. ....................................... 115,475
3,800 Battle Mountain Gold Co. ................................. 22,325
2,300 Echo Bay Mines, Ltd.(c)................................... 5,606
3,300 Freeport McMoran Copper & Gold............................ 51,975
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
2,400 Homestake Mining Co. ..................................... $ 21,300
2,541 Newmont Mining Corp. ..................................... 74,642
4,000 Placer Dome, Inc. ........................................ 50,750
-----------
342,073
-----------
PRODUCER GOODS--7.3%
400 Aeroquip-Vickers, Inc. ................................... 19,625
6,000 Applied Materials, Inc.(c)................................ 180,750
400 Briggs & Stratton Corp. .................................. 19,425
1,300 Case Corp. ............................................... 78,569
6,200 Caterpillar, Inc. ........................................ 301,087
600 Cincinnati Milacron, Inc. ................................ 15,563
700 Crane Co. ................................................ 30,363
600 Cummins Engine, Inc. ..................................... 35,438
4,200 Deere & Co. .............................................. 244,912
3,800 Dover Corp. .............................................. 137,275
2,800 Dresser Industries, Inc. ................................. 117,425
1,900 DSC Communications Corp.(c)............................... 45,600
1,300 Eaton Corp. .............................................. 116,025
7,500 Emerson Electric Co. ..................................... 423,281
600 Foster Wheeler Corp., Rights.............................. 16,238
54,000 General Electric Co. ..................................... 3,962,250
700 General Signal Corp. ..................................... 29,531
3,000 Genuine Parts Co. ........................................ 101,812
700 Harnischfeger Industries, Inc. ........................... 24,719
4,000 Illinois Tool Works, Inc. ................................ 240,500
2,800 Ingersoll-Rand Co. ....................................... 113,400
2,000 ITT Industries, Inc. ..................................... 62,750
1,400 Johnson Controls, Inc. ................................... 66,850
10,606 Lucent Technologies, Inc. ................................ 847,154
600 Millipore Corp. .......................................... 20,363
7,000 Minnesota Mining & Manufacturing Co. ..................... 574,437
700 National Service Industries, Inc. ........................ 34,694
2,400 Nextlevel Systems, Inc.(c)................................ 42,900
800 Owens-Corning............................................. 27,300
2,100 Pall Corp. ............................................... 43,444
1,850 Parker Hannifin Corp. .................................... 84,869
600 Perkin Elmer Corp. ....................................... 42,637
1,050 Snap-On, Inc. ............................................ 45,806
1,500 Stanley Works, Rights..................................... 70,781
2,800 Tenneco, Inc. ............................................ 110,600
2,800 Textron, Inc. ............................................ 175,000
2,400 Thermo Electron Corp.(c).................................. 106,800
1,000 Timken Co. ............................................... 34,375
9,000 TYCO International, Ltd. ................................. 405,562
800 W.W. Grainger, Inc. ...................................... 77,750
-----------
9,127,860
-----------
PUBLISHING--0.8%
1,300 American Greetings Corp. ................................. 50,862
4,600 Gannett Co. .............................................. 284,337
500 John H. Harland Co., Rights............................... 10,500
</TABLE>
See accompanying notes to financial statements.
51
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK STOCK INDEX SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
COMMON STOCKS--(CONTINUED)
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
PUBLISHING--(CONTINUED)
600 Jostens, Inc. ............................................ $ 13,838
1,400 Knight-Ridder, Inc. ...................................... 72,800
1,700 McGraw-Hill Companies, Inc. .............................. 125,800
800 Meredith Corp. ........................................... 28,550
1,500 Moore Corporation, Ltd. .................................. 22,688
1,600 New York Times Co. ....................................... 105,800
2,500 R.R. Donnelley & Sons Co. ................................ 93,125
1,500 Times Mirror Co. ......................................... 92,250
2,000 Tribune Co. .............................................. 124,500
-----------
1,025,050
-----------
RAILROADS & EQUIPMENT--0.8%
2,522 Burlington Northern Santa Fe.............................. 234,388
3,600 CSX Corp. ................................................ 194,400
5,500 Laidlaw, Inc. ............................................ 74,938
6,200 Norfolk Southern Corp. ................................... 191,037
4,100 Union Pacific Corp. ...................................... 255,994
-----------
950,757
-----------
REAL ESTATE--0.0%
300 Pulte Corp. .............................................. 12,544
-----------
RETAIL--4.3%
2,500 Autozone, Inc.(c)......................................... 72,500
1,800 Charming Shoppes, Inc.(c)................................. 8,438
1,700 Circuit City Stores, Inc. ................................ 60,456
3,539 Costco Companies, Inc.(c)................................. 157,928
2,800 CVS Corp. ................................................ 179,375
3,600 Dayton Hudson Corp. ...................................... 243,000
1,900 Dillard's, Inc. .......................................... 66,975
3,500 Federated Department Stores, Inc.(c)...................... 150,719
6,450 The Gap, Inc. ............................................ 228,572
1,100 Harcourt General, Inc. ................................... 60,225
12,173 Home Depot, Inc. ......................................... 716,685
4,000 J.C. Penney, Inc. ........................................ 241,250
8,200 Kmart Corp.(c)............................................ 94,812
4,493 The Limited, Inc. ........................................ 114,571
600 Longs Drug Stores Corp. .................................. 19,275
2,800 Lowe's Companies.......................................... 133,525
3,900 May Department Stores Co. ................................ 205,481
550 Mercantile Stores, Inc. .................................. 33,481
1,200 Nordstrom, Inc. .......................................... 72,450
1,100 Pep Boys-Manny, Moe & Jack, Rights........................ 26,263
2,000 Rite Aid Corp. ........................................... 117,375
6,600 Sears, Roebuck & Co. ..................................... 298,650
1,800 Tandy Corp. .............................................. 69,413
2,700 TJX Companies, Inc. ...................................... 92,813
4,675 Toys R Us, Inc.(c)........................................ 146,970
37,300 Wal-Mart Stores, Inc. .................................... 1,471,019
8,300 Walgreen Co. ............................................. 260,412
2,200 Woolworth Corp.(c)........................................ 44,825
-----------
5,387,458
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
RETAIL--FOOD & DRUG--0.6%
4,000 Albertson's, Inc. ........................................ $ 189,500
4,600 American Stores Co. ...................................... 94,587
900 Giant Foods, Inc. ........................................ 30,319
600 Great Atlantic & Pacific Tea, Inc. ....................... 17,813
4,200 The Kroger Co.(c)......................................... 155,137
1,000 Supervalu, Inc. .......................................... 41,875
2,900 Sysco Corp. .............................................. 132,131
2,400 Winn-Dixie Stores Inc. ................................... 104,850
-----------
766,212
-----------
SERVICES--0.4%
12,848 Cendant Corp.(c).......................................... 441,650
1,700 H & R Block, Inc. ........................................ 76,181
-----------
517,831
-----------
SOAPS--3.0%
1,600 Clorox Co. ............................................... 126,500
4,800 Colgate Palmolive Co. .................................... 352,800
3,800 Corning, Inc. ............................................ 141,075
1,000 Ecolab, Inc. ............................................. 55,437
9,200 Gillette Co. ............................................. 924,025
1,800 International Flavours & Fragrances, Inc. ................ 92,700
100 Nacco Industries, Inc. ................................... 10,719
2,600 Newell Co. ............................................... 110,500
22,220 Procter & Gamble Co. ..................................... 1,773,434
1,800 Ralston Purina Co. ....................................... 167,287
2,400 Rubbermaid, Inc. ......................................... 60,000
900 Tupperware Corp. ......................................... 25,088
-----------
3,839,565
-----------
STEEL--0.2%
2,832 Allegheny Teldyne, Inc. .................................. 73,278
1,800 Armco, Inc.(c)............................................ 8,888
1,900 Bethlehem Steel Corp.(c).................................. 16,387
700 Inland Steel Industries, Inc. ............................ 11,987
1,500 Nucor Corp. .............................................. 72,469
1,420 USX-U.S. Steel Group...................................... 44,375
1,600 Worthington Industries, Inc. ............................. 26,400
-----------
253,784
-----------
TELECOMMUNICATION--6.8%
8,300 AirTouch Communications, Inc.(c).......................... 344,969
3,000 ALLTEL Corp. ............................................. 123,188
9,000 Ameritech Corp. .......................................... 724,500
26,835 AT&T Corp. ............................................... 1,643,644
12,876 Bell Atlantic Corp. ...................................... 1,171,716
16,400 BellSouth Corp. .......................................... 923,525
2,800 Frontier Corp. ........................................... 67,375
15,800 GTE Corp. ................................................ 825,550
11,500 MCI Communications Corp. ................................. 492,344
15,108 SBC Communications, Inc. ................................. 1,106,661
</TABLE>
See accompanying notes to financial statements.
52
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK STOCK INDEX SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
COMMON STOCKS--(CONTINUED)
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
TELECOMMUNICATION--(CONTINUED)
7,100 Sprint Corp. ............................................ $ 416,237
7,900 U.S. West Communications Group........................... 356,487
15,100 WorldCom, Inc.(c)........................................ 456,775
------------
8,652,971
------------
THRIFT--0.4%
900 Golden West Financial Corp. ............................. 88,031
1,600 H F Ahmanson & Co. ...................................... 107,100
4,145 Washington Mutual, Inc. ................................. 264,503
------------
459,634
------------
TIRES & RUBBER--0.2%
1,200 Cooper Tire & Rubber Co. ................................ 29,250
2,500 Goodyear Tire & Rubber................................... 159,063
------------
188,313
------------
TOBACCO--1.5%
39,900 Philip Morris Companies.................................. 1,807,969
3,000 UST, Inc. ............................................... 110,812
------------
1,918,781
------------
TRUCKING & FREIGHT FORWARDING--0.0%
600 Caliber Systems, Inc..................................... 29,213
------------
Total Common Stocks
(Identified Cost $70,900,354)........................... 124,539,238
------------
</TABLE>
SHORT-TERM INVESTMENT--1.5%
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
$1,883,000 Repurchase Agreement with State Street Bank & Trust
Co. dated 12/31/97 at 5.00% to be repurchased at
$1,883,523 on 1/02/98 collateralized by $1,875,000
U.S. Treasury Note 5.875% due 1/31/99 with a value
of $1,924,022..................................... $ 1,883,000
------------
Total Short Term Investment
(Identified Cost $1,883,000)...................... 1,883,000
------------
Total Investments--99.9%
(Identified Cost $72,783,354)(b).................. 126,422,238
Other assets less liabilities...................... 161,290
------------
TOTAL NET ASSETS--100%............................. $126,583,528
============
(a) See Note 1A.
(b) Federal Tax Information:
At December 31, 1997 the net unrealized appreciation on investments based on
cost of $72,912,578 for federal income tax purposes was as follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost.......... $ 54,811,495
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value.......... (1,301,835)
------------
Net unrealized appreciation.................................. $ 53,509,660
============
</TABLE>
(c) Non-income producing security.
See accompanying notes to financial statements.
53
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK STOCK INDEX SERIES)
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
ASSETS
Investments at value.................................... $126,422,238
Cash.................................................... 389
Receivable for:
Fund shares sold........................................ 169,408
Securities sold......................................... 41,697
Dividends and interest.................................. 170,152
Foreign taxes........................................... 290
------------
126,804,174
LIABILITIES
Payable for:
Securities purchased.................................... $56,655
Fund shares redeemed.................................... 61,296
Withholding taxes....................................... 53
Accrued expenses:
Management fees......................................... 30,795
Deferred trustees' fees................................. 57,250
Other................................................... 14,597
-------
220,646
------------
$126,583,528
============
NET ASSETS
Net Assets consist of:
Capital paid in......................................... $ 73,054,715
Undistributed net investment income..................... 7,372
Accumulated net realized losses......................... (117,443)
Unrealized appreciation on investments.................. 53,638,884
------------
NET ASSETS............................................... $126,583,528
============
Computation of offering price:
Net asset value and redemption price per share
($126,583,528 divided by 812,689 shares of beneficial
interest)............................................... $ 155.76
============
Identified cost of investments........................... $ 72,783,354
============
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends............................................ $ 1,828,124(a)
Interest............................................. 64,871
-----------
1,892,995
EXPENSES
Management fees...................................... $261,396
Trustees' fees and expenses.......................... 32,870
Custodian............................................ 79,575
Audit and tax services............................... 7,591
Legal................................................ 22,022
Printing............................................. 38,542
Miscellaneous........................................ 3,180
--------
Total expenses...................................... 445,176
Less expenses assumed by the investment adviser..... (26,941) 418,235
-------- -----------
NET INVESTMENT INCOME................................. 1,474,760
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Realized gain on:
Investments--net..................................... 327,190
Unrealized appreciation on:
Investments--net..................................... 26,442,859
-----------
Net gain on investment transactions................... 26,770,049
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS............ $28,244,809
===========
</TABLE>
(a) Net of foreign taxes of: $10,784
See accompanying notes to financial statements.
54
<PAGE>
NEW ENGLAND ZENITH FUND
(WESTPEAK STOCK INDEX SERIES)
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
FROM OPERATIONS
Net investment income.............................. $ 1,258,557 $ 1,474,760
Net realized gain on investments................... 995,215 327,190
Unrealized appreciation on investments............. 11,760,936 26,442,859
----------- ------------
INCREASE IN NET ASSETS FROM OPERATIONS............. 14,014,708 28,244,809
----------- ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income.............................. (1,270,368) (1,486,184)
Net realized gain on investments................... (675,238) (619,246)
----------- ------------
(1,945,606) (2,105,430)
----------- ------------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares....................... 21,863,034 41,747,560
Net asset value of shares issued in connection with
the reinvestment of:
Distributions from net investment income........... 1,270,368 1,486,184
Distributions from net realized gain............... 675,238 619,246
----------- ------------
23,808,640 43,852,990
Cost of shares redeemed............................ (13,784,516) (24,172,689)
----------- ------------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL SHARE
TRANSACTIONS...................................... 10,024,124 19,680,301
----------- ------------
TOTAL INCREASE IN NET ASSETS....................... 22,093,226 45,819,680
NET ASSETS
Beginning of the year.............................. 58,670,622 80,763,848
----------- ------------
End of the year.................................... $80,763,848 $126,583,528
=========== ============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the year.............................. $ 20,255 $ 8,445
=========== ============
End of the year.................................... $ 8,445 $ 7,372
=========== ============
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares..................... 198,327 294,863
Issued in connection with the reinvestment of:
Distributions from net investment income........... 10,371 9,711
Distributions from net realized gain............... 5,855 4,056
----------- ------------
214,553 308,630
Redeemed........................................... (125,580) (171,087)
----------- ------------
Net change......................................... 88,973 137,543
=========== ============
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year............................ $ 72.00 $ 76.48 $ 75.35 $100.09 $ 119.62
------- ------- ------- ------- --------
Income From Investment Operations
Net Investment Income........... 1.54 1.80 1.88 1.91 1.86
Net Realized and Unrealized Gain
(Loss) on Investments.......... 5.18 (0.92) 25.89 20.58 36.95
------- ------- ------- ------- --------
Total From Investment
Operations..................... 6.72 0.88 27.77 22.49 38.81
------- ------- ------- ------- --------
Less Distributions
Distributions From Net
Investment Income.............. (1.36) (1.82) (1.85) (1.93) (1.86)
Distributions in Excess of Net
Investment Income.............. (0.18) 0.00 0.00 0.00 0.00
Distributions From Net Realized
Capital Gains.................. (0.55) (0.16) (1.18) (1.03) (0.67)
Distributions in Excess of Net
Realized Capital Gains......... (0.15) 0.00 0.00 0.00 (0.14)
Distributions From Paid-in
Capital........................ 0.00 (0.03) 0.00 0.00 0.00
------- ------- ------- ------- --------
Total Distributions............. (2.24) (2.01) (3.03) (2.96) (2.67)
------- ------- ------- ------- --------
Net Asset Value, End of Year..... $ 76.48 $ 75.35 $100.09 $119.62 $ 155.76
======= ======= ======= ======= ========
TOTAL RETURN (%)................. 9.72 1.14 36.88 22.47 32.50
Ratio of Operating Expenses to
Average Net Assets (%).......... 0.34 0.33 0.40 0.40 0.40
Ratio of Net Investment Income to
Average Net Assets (%).......... 2.52 2.59 2.20 1.84 1.41
Portfolio Turnover Rate (%)...... 12 2 5 4 3
Average Commission Rate(a)....... -- -- -- $0.0309 $ 0.0322
Net Assets, End of Year (000).... $28,817 $37,164 $58,671 $80,764 $126,584
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 0.43
</TABLE>
(a) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate generally does not reflect mark-
ups, mark-downs, or spreads on shares traded on a principal basis.
See accompanying notes to financial statements.
55
<PAGE>
LOOMIS SAYLES BALANCED SERIES
PORTFOLIO MANAGERS: CAROL C. MCMURTRIE, TRICIA H. MILLS,
MERI ANNE BECK, RODERIC DILLON, BARR SEGAL AND
JOHN HYLL-LOOMIS, SAYLES & COMPANY, L.P.
[PHOTO OF CAROL C. MCMURTRIE [PHOTO OF TRICIA H. MILLS
APPEARS HERE] APPEARS HERE]
[PHOTO OF MERI ANNE BECK [PHOTO OF RODERIC DILLON
APPEARS HERE] APPEARS HERE]
[PHOTO OF BARR SEGAL [PHOTO OF JOHN HYLL
APPEARS HERE] APPEARS HERE]
Q. HOW DID THE SERIES PERFORM DURING 1997?
A. For the year ended December 31, 1997, the Loomis Sayles Balanced Series
shares had a total return (based on net asset value) of 16.18%, compared to an
average return of 18.75% for the Lipper Variable Products Balanced Fund/8/ av-
erage. Both the equity and fixed-income portions of the portfolio contributed
to the Series' return, which reflected an $1.31 gain in net asset value to
$14.86 per share and the reinvestment of $0.87 in distributions.
Q. WHAT WAS THE INVESTMENT ENVIRONMENT LIKE?
A. Early in 1997, investors concentrated on a few very large companies ex-
pected to do well despite the economic slowdown that many foresaw. This large-
capitalization bias fed sharp rises in the major market indicators--the S&P
500 and the Dow Jones Industrial Average.
But instead of slowing, the economy kept expanding, shifting institutional fo-
cus to large-capitalization cyclical companies that might benefit from an up-
turn. In March, the Federal Reserve Board raised short-term interest rates a
one-quarter percentage point, the only increase in 1997, despite the growing
economy.
Sustained economic vigor and low inflation encouraged investors to seek wider
opportunities. Consequently, in the second and third quarters, value stocks
and mid-sized companies, categories that the Series emphasized, outperformed
the large-cap sector. Then, as the Asian economic crisis began to unsettle the
region's markets, capital once again poured into big, highly liquid holdings
with defensive characteristics.
Q. GIVEN THIS ENVIRONMENT, WHAT WAS YOUR STRATEGY DURING THE YEAR?
A. During the market's rise, the portfolio's equity exposure reached 67%.
Bonds, meanwhile, were weak (due to fears of inflation and higher interest
rates) keeping the fixed-income portion of the Series below its usual 35% to
40% range.
When stocks began to look overvalued, we eased back our equity commitment to
the lower end of our 60% to 65% target range. We ended 1997 slightly below
that range, having found more "sell" candidates than "buy" ideas in the waning
weeks of the year.
Q. WHAT WERE SOME OF THE FACTORS THAT AFFECTED EQUITY PERFORMANCE, EITHER
POSITIVELY OR NEGATIVELY?
A. The Series benefited from its emphasis on banks and its underweighting in
utilities. The economic background--low inflation and declining interest
rates--favored earnings growth for banks. Meanwhile, the new, competitive op-
erating environment introduced uncertainty into earnings estimates for utili-
ties and held back their dividend growth. Elsewhere, the portfolio's telecom-
munications holdings lagged until late in the fourth quarter, while stocks in
the healthcare services sector were disappointing. Our commitment to technol-
ogy stocks, while small, served the Series well.
Because we emphasize value-based stock selection, the Series was underexposed
to the large-cap growth stocks that the market favored. The Series benefited
from the summer rally in mid-cap stocks, especially those with lower price-
/earnings ratios that more closely fit our value-investing mission.
Q. WHAT WAS THE FIXED-INCOME ENVIRONMENT LIKE, AND HOW DID YOU RESPOND?
A. After rising early in the year, interest rates declined as inflation con-
cerns dwindled, moving bond prices higher. By August, economic instability in
Southeast Asia led investors to the safer harbor of U.S. Treasury securities,
driving prices up and yields down further.
56
<PAGE>
Over the spring and summer, we extended the portfolio's duration--a measure of
its overall sensitivity to interest rate changes--to capture more of the price
rises we anticipated. We also increased holdings of U.S. agency mortgage
passthroughs when that sector presented the opportunity to add yield at at-
tractive valuations.
Our commitment to corporate bonds paid off, as corporates outperformed for
most of the year. After the Fed raised short-term rates, we invested in Sprint
Spectrum and Loewen Group to take advantage of wider spreads (the difference
between the yields of corporate bonds and Treasury securities of similar matu-
rities). We also purchased bonds of Saga Petroleum and SKF. We eliminated our
bond position in Columbia HCA opportunistically, and took profits in Federated
Department Stores.
As the year ended, the average quality of the bonds in the portfolio was AA,
with a few carefully selected high-yield bonds. There has been no exposure to
Southeast Asia; at year-end, all foreign holdings were Yankee bonds, which are
foreign issues that are insulated from currency fluctuations because they are
denominated in U.S. dollars.
Q. WHAT DO YOU SEE AHEAD FOR THE BOND AND STOCK MARKETS, AND WHAT DOES IT
IMPLY FOR THE SERIES?
A. Given our favorable outlook for bonds--slower growth with low inflation--we
continue to extend duration. Prolonged turmoil in Southeast Asia could limit
pricing power for U.S. companies, dampening inflation further--another posi-
tive for bond prices.
On the equity side, we will continue to focus on areas where Loomis Sayles'
analysts expect above-market growth rates. The Series started 1998 with a
portfolio priced below the market's average price/earnings ratio while having
an overall better earnings growth outlook. We believe valuations generally fa-
vor mid-cap stocks over large companies, particularly those mid-cap firms with
above-average growth prospects, an area in which the Series is well-posi-
tioned.
As in the past, we will rely on the extensive proprietary research capability
of Loomis Sayles, focusing on sound value in selecting stocks and bonds for
the portfolio.
A $10,000 Investment Compared to the S&P 500/19/ and
Lehman Brothers Gov't/Corp./4/ Indices
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Balanced Leh/Gov't
Series S&P 500 Corp.
-------- ------- ---------
<S> <C> <C> <C>
10/31/94 10,000 10,000 10,000
12/31/94 9,990 9,794 10,048
12/31/95 12,467 13,461 11,981
12/31/96 14,575 16,552 12,328
12/31/97 16,933 23,055 13,015
</TABLE>
[X] 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: $137 million as of December 31, 1997
MANAGERS: Carol C. McMurtrie, Tricia H. Mills and Roderic Dillon are the
portfolio managers of the equity portion, and Meri Anne Beck, John Hyll and Barr
Segal are the portfolio management team of the fixed-income portion of the
Loomis Sayles Balanced Series.
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.
57
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES BALANCED SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
COMMON STOCKS--55.5% OF TOTAL NET ASSETS
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
AEROSPACE--1.4%
17,200 Northrop Grumman Corp. .............................. $ 1,978,000
------------
APPAREL & TEXTILES--1.6%
22,100 Reebok International, Ltd............................ 636,756
48,600 Warnaco Group, Inc. ................................. 1,524,825
------------
2,161,581
------------
BANKS--6.0%
25,200 BankAmerica Corp..................................... 1,839,600
12,600 Chase Manhattan Corp., New........................... 1,379,700
28,700 Charter One Financial Inc............................ 1,811,688
11,700 Fleet Financial Group Inc. .......................... 876,769
13,200 NationsBank Corp..................................... 802,725
38,300 Norwest Corp......................................... 1,479,337
------------
8,189,819
------------
CHEMICALS--5.5%
63,600 Crompton & Knowles Corp. ............................ 1,685,400
27,000 EI du Pont de Nemours & Co........................... 1,621,687
50,700 IMC Global Inc....................................... 1,660,425
13,800 PPG Industries, Inc.................................. 788,325
66,300 Solutia Inc.......................................... 1,769,381
------------
7,525,218
------------
COMPUTERS & BUSINESS EQUIPMENT--1.9%
48,900 Gateway 2000 Inc.(c)................................. 1,595,362
29,700 3Com Corp.(c)........................................ 1,037,644
------------
2,633,006
------------
CONSUMER--JEWELRY/
NOVELTIES/GIFTS--1.3%
44,300 American Greetings Corp. ............................ 1,733,237
------------
ELECTRIC COMPANIES--0.0%
1,200 CMS Energy Corp...................................... 52,875
------------
ELECTRONICS--1.2%
32,100 Raytheon Co. ........................................ 1,621,050
------------
FINANCIAL SERVICES--2.5%
34,100 Federal Home Loan Mortgage Corp. .................... 1,430,069
33,900 Federal National Mortgage Association................ 1,934,419
------------
3,364,488
------------
FREIGHT TRANSPORTATION--1.9%
56,400 Canadian Pacific, Ltd., New.......................... 1,536,900
18,000 Federal Express Corp.(c)............................. 1,099,125
------------
2,636,025
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
HEALTH CARE--SERVICES--2.2%
9,600 Aetna, Inc. ............................................. $ 677,400
49,500 Columbia/HCA Healthcare Corp. ........................... 1,466,438
37,540 Foundation Health Corp.(c)............................... 839,957
------------
2,983,795
------------
HOUSING & BUILDING MATERIALS--4.5%
23,100 Armstrong World Industries, Inc. ........................ 1,726,725
40,000 Leggett & Platt, Inc. ................................... 1,675,000
38,100 Masco Corp............................................... 1,938,337
14,400 Philips Electronics NV (ADR)(d).......................... 871,200
------------
6,211,262
------------
INSURANCE--5.1%
17,100 ACE, Ltd. ............................................... 1,650,150
15,100 Allstate Corp. .......................................... 1,372,212
33,900 Everest Reinsurance Holdings, Inc........................ 1,398,375
12,400 Loews Corp. ............................................. 1,315,950
40,100 TIG Holdings, Inc. ...................................... 1,330,819
------------
7,067,506
------------
LEISURE TIME--1.4%
61,400 Hasbro Inc............................................... 1,934,100
------------
MACHINERY--2.5%
14,000 Case Corp................................................ 846,125
15,000 Deere & Co............................................... 874,687
48,000 Dover Corp. ............................................. 1,734,000
------------
3,454,812
------------
MANUFACTURING--DIVERSIFIED--1.2%
43,600 Allied Signal, Inc....................................... 1,697,675
------------
MANUFACTURING--SPECIAL--0.7%
25,000 York International Corp., New............................ 989,062
------------
OIL & GAS--3.3%
11,200 British Petroleum PLC.................................... 892,500
47,700 Tosco Corp. ............................................. 1,803,656
23,400 United Meridian Corp..................................... 658,125
29,100 Unocal Corp.............................................. 1,129,447
------------
4,483,728
------------
PAPER & FOREST PRODUSTS--0.5%
5,400 Georgia Pacific Corp..................................... 328,050
3,900 Georgia Pacific Timber Corp.............................. 88,481
10,200 Mead Corp. .............................................. 285,600
------------
702,131
------------
</TABLE>
See accompanying notes to financial statements.
58
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES BALANCED SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
COMMON STOCKS--(CONTINUED)
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
RETAIL--2.6%
46,000 Dillards Inc........................................ $ 1,621,500
83,400 Office Depot........................................ 1,996,387
------------
3,617,887
------------
RETAIL--FOOD & DRUG--1.4%
52,800 The Kroger Co.(c)................................... 1,950,300
------------
TELEPHONE--5.4%
24,300 Ameritech Corp...................................... 1,956,150
17,000 Bell Atlantic Corp. ................................ 1,547,000
36,000 BellSouth Corp. .................................... 2,027,250
26,100 SBC Communications, Inc. ........................... 1,911,825
------------
7,442,225
------------
TOBACCO--1.4%
50,400 UST, Inc............................................ 1,861,650
------------
Total Common Stocks
(Identified Cost $66,574,519)...................... 76,291,432
------------
MEDIUM & LONG TERM BONDS & NOTES--38.8%
<CAPTION>
FACE
AMOUNT
<C> <S> <C>
BANKS--0.0%
$ 50,000 Norwest Corp., 7.650%, 3/15/05...................... 53,657
------------
CABLE & MEDIA--0.3%
350,000 TCI Communications, Inc.,
7.250%, 6/15/99.................................... 354,014
------------
COMPUTER--0.2%
300,000 Comdisco, Inc., 5.760%, 1/19/99..................... 299,355
------------
ENERGY--0.1%
125,000 Coastal Corp., 8.125% 9/15/02....................... 133,127
------------
FINANCE--2.2%
125,000 Associates Corp. NA,
8.350%, 12/22/98................................... 127,711
115,000 Avalon Properties, Inc.,
7.375%, 9/15/02.................................... 119,132
260,000 Dean Witter Discover & Co.,
6.750%, 1/01/16.................................... 257,434
200,000 Ford Motor Credit Corp.,
6.850%, 8/15/00.................................... 203,790
244,000 General Motors Acceptance Corp., 5.500%, 12/15/01... 237,080
280,000 Oasis Residential, Inc.,
7.000%, 11/15/03................................... 283,982
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
$ 520,000 Sears Roebuck Acceptance Corp.,
6.95% 05/15/02.................................... $ 532,605
100,000 Secured Finance, 9.050%, 12/15/04.................. 114,187
575,000 Transamerica Finance Corp.,
6.750%, 6/01/00................................... 581,727
300,000 Western Financial Services,
6.950%, 11/20/03.................................. 304,455
198,516 World Omni Automobile Lease Finance Corp., 6.550%,
6/25/02........................................... 199,447
------------
2,961,550
------------
FOOD & BEVERAGES--0.6%
720,000 Archer Daniels Midland Co.,
7.500%, 03/15/27.................................. 788,760
------------
HEALTHCARE--0.3%
440,000 National Health Investors, Inc.,
7.300%, 07/16/07.................................. 459,932
------------
INDUSTRIALS--3.2%
325,000 Amerco, 7.850%, 5/15/03............................ 343,193
535,000 Loewen Group International, Inc., 7.750%, 10/15/01. 557,331
260,000 Philips Electronics NV,
7.250%, 8/15/13................................... 266,932
1,420,000 SKF AB, 7.125%, 07/01/07........................... 1,484,227
700,000 Textron Inc., 6.625, 11/15/07...................... 709,107
200,000 Tektronix, Inc., 7.625%, 8/15/02................... 207,610
740,000 USX Marathon, 8.500%, 3/01/23...................... 855,151
------------
4,423,551
------------
INSURANCE--0.2%
275,000 Travelers Aetna, 6.750%, 4/15/01................... 278,465
------------
LEISURE & LODGING--1.7%
1,100,000 Carnival Corp., 7.050%, 5/15/05.................... 1,132,923
300,000 La Quinta Inns, Inc.,
7.400%, 9/15/05................................... 307,500
760,000 Royal Caribbean Cruises Line,
7.500%, 10/15/27.................................. 773,938
------------
2,214,361
------------
MORTGAGE--1.7%
1,076,032 Federal Home Loan Bank,
6.000%, 8/15/22................................... 1,008,780
1,390,000 Federal Home Loan Bank,
6.000%, 12/01/27.................................. 1,340,043
------------
2,348,823
------------
</TABLE>
See accompanying notes to financial statements.
59
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES BALANCED SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
MEDIUM & LONG TERM BONDS & NOTES--(CONTINUED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
MORTGAGED BACKED--2.0%
$ 331,194 Federal National Mortgage Association, 7.000%,
12/01/11.......................................... $ 336,506
248,946 Federal National Mortgage Association, 7.000%,
12/01/11.......................................... 252,939
550,000 Federal National Mortgage Association, 7.000%,
1/01/13........................................... 558,074
1,043,024 Federal National Mortgage Association, 7.000%,
11/1/12........................................... 1,058,336
620,000 Federal National Mortgage Association, 6.000%,
2/25/24........................................... 580,165
------------
2,786,020
------------
OIL & GAS--1.4%
1,040,000 Kerr McGee, 6.625%, 10/15/07....................... 1,071,918
835,000 Saga Petroleum, 7.250%, 9/23/27.................... 870,496
------------
1,942,414
------------
RAILROADS--0.4%
460,000 Norfolk Southern Corp.,
7.050%, 05/01/37.................................. 488,262
------------
SECURITIES--2.5%
225,000 Bankers Trust N.Y. Corp.,
7.625%, 08/15/05.................................. 239,704
1,040,000 Bear Stearns Cos., Inc.,
6.750%, 12/15/07.................................. 1,044,368
200,000 Donaldson Lufkin & Jenrette, Inc., 6.875%,
11/01/05.......................................... 203,370
100,000 Lehman Brothers Holdings, Inc.,
5.750%, 11/15/98.................................. 99,593
200,000 Lehman Brothers Holdings, Inc.,
7.360%, 12/15/03.................................. 208,742
100,000 Merrill Lynch & Co.,
8.375%, 2/09/00................................... 104,298
390,000 Salomon Brothers., Inc.,
7.125%, 8/01/99................................... 395,347
145,000 Salomon, Inc., 7.500%, 2/01/03..................... 151,560
480,000 Salomon, Inc., 7.000%, 3/15/04..................... 493,430
450,000 Van Kampen Merritt Companies, Inc., 9.750%,
02/15/03.......................................... 467,851
------------
3,408,263
------------
TECHNOLOGY--0.2%
200,000 Digital Equipment Corp.,
8.625%, 11/01/12.................................. 219,066
------------
TELECOMMUNICATION--0.5%
950,000 Sprint Spectrum L.P.,
Zero Coupon, 08/15/06............................. 736,250
------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
TRANSPORTATION--0.5%
$ 100,000 American Airlines,
10.290%, 03/08/21................................. $ 136,343
25,000 American Airlines,
10.180%, 1/02/13.................................. 31,244
600,000 Northwest Airlines,
8.375%, 03/15/04.................................. 617,724
------------
785,311
------------
U.S. GOVERNMENT & GOVERNMENT AGENCIES--20.1%
350,000 Federal Home Loan Bank,
7.151%, 9/13/05................................... 349,989
600,000 United States Treasury Notes,
7.250%, 5/15/04................................... 647,532
330,000 United States Treasury Notes,
7.875%, 11/15/04.................................. 368,930
13,010,000 United States Treasury Notes,
6.500%, 8/15/05................................... 13,575,154
2,200,000 United States Treasury Notes,
5.625%, 2/15/06................................... 2,175,250
5,270,000 United States Treasury Notes,
7.000%, 7/15/06................................... 5,688,280
500,000 United States Treasury Notes,
6.625%, 5/15/07................................... 529,220
800,000 United States Treasury Notes, Zero Coupon
11/15/09.......................................... 396,416
1,300,000 United States Treasury
Bonds, 10.375% 11/15/12........................... 1,727,375
1,100,000 United States Treasury
Bonds, 9.125% 5/15/18............................. 1,498,233
605,000 United States Treasury
Bonds, 6.625% 2/15/27............................. 656,800
------------
27,613,179
------------
UTILITIES--0.7%
250,000 Cincinnati Gas & Electric Co.,
7.375%, 11/01/01.................................. 252,302
520,000 Waterford 3 Funding
Energy 8.090%, 01/01/17........................... 543,577
195,000 Detroit Edison Co.,
6.340%, 3/15/00................................... 195,696
------------
991,575
------------
51,346,712 Total Bonds & Notes
(Identified Cost $51,882,393)..................... 53,285,935
------------
</TABLE>
See accompanying notes to financial statements.
60
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES BALANCED SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
SHORT-TERM INVESTMENTS--5.2%
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
$ 5,000,000 American Express Credit Corp,
6.650%, 1/02/98.................................. $ 5,000,000
2,182,000 Repurchase agreement with State Street Bank &
Trust Co. dated 12/31/97 at 5.000% to be
repurchased at $2,182,606 on 1/02/98
collateralized by $2,170,000 U.S Treasury Note
5.875% due 1/31/99 with a value of $2,226,735.... 2,182,000
------------
Total Short-Term Investments
(Identified Cost $7,182,000)..................... 7,182,000
------------
Total Investments--99.5%
(Identified Cost $125,638,912)(b)................ 136,759,367
Other assets less liabilities..................... 683,759
------------
TOTAL NET ASSETS--100%............................ $137,443,126
============
(a) See Note 1a.
(b) Federal Tax Information: At December 31, 1997 the net unrealized
appreciation on investments based on cost of $125,761,823 for federal
income tax purposes was as follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost.......... 13,311,001
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value.......... (2,313,457)
------------
Net unrealized appreciation.................................. $ 10,997,544
============
</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.
61
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES BALANCED SERIES)
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
ASSETS
Investments at value.................................... $136,759,367
Cash.................................................... 577
Receivable for:
Fund shares sold........................................ 625,442
Securities sold......................................... 147,796
Dividends and interest.................................. 1,034,577
Unamortized organization................................ 3,676
------------
LIABILITIES 138,571,435
Payable for:
Securities purchased.................................... $729,743
Fund shares redeemed.................................... 302,808
Withholding taxes....................................... 1,272
Accrued expenses:
Management fees......................................... 65,387
Deferred trustees' fees................................. 2,489
Other................................................... 26,610
--------
1,128,309
------------
$137,443,126
============
NET ASSETS
Net Assets consist of:
Capital paid in......................................... $125,683,115
Undistributed net investment income..................... 51,774
Accumulated net realized gains.......................... 587,771
Unrealized appreciation on investments.................. 11,120,466
------------
NET ASSETS............................................... $137,443,126
============
Computation of offering price:
Net asset value and redemption price per share
($137,443,126 divided by 9,249,784 shares of beneficial
interest)............................................... $ 14.86
============
Identified cost of investments........................... $125,638,912
============
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends.......................................... $ 695,570(a)
Interest........................................... 2,465,423
-----------
3,160,993
EXPENSES
Management fees.................................... $ 607,641
Trustees' fees and expenses........................ 19,710
Custodian.......................................... 60,797
Audit and tax services............................. 13,802
Legal.............................................. 22,022
Printing........................................... 19,451
Amortization of organization expenses.............. 2,011
Miscellaneous...................................... 3,080
----------
Total expenses.................................... 748,514
Less expenses assumed by the investment adviser... (10,668) 737,846
---------- -----------
NET INVESTMENT INCOME............................... 2,423,147
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS
Realized gain on:
Investments--net................................... 5,050,034
----------
Total realized
gain on investments.............................. 5,050,034
----------
Unrealized appreciation on:
Investments--net................................... 5,612,021
Foreign currency transactions--net................. 11
----------
Total unrealized appreciation
on investments and foreign
currency transactions............................ 5,612,032
----------
Net gain on investment transactions................. 10,662,066
-----------
NET INCREASE IN NET ASSETS FROM
OPERATIONS......................................... $13,085,213
===========
</TABLE>
(a) Net of foreign taxes of: $3,259
See accompanying notes to financial statements.
62
<PAGE>
NEW ENGLAND ZENITH FUND
(LOOMIS SAYLES BALANCED SERIES)
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
FROM OPERATIONS
Net investment income.............................. $ 1,121,822 $ 2,423,147
Net realized gain on investments................... 940,791 5,050,034
Unrealized appreciation on investments and foreign
currency transactions............................. 4,480,648 5,612,032
----------- ------------
INCREASE IN NET ASSETS FROM OPERATIONS............. 6,543,261 13,085,213
----------- ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income.............................. (1,114,677) (2,381,795)
Net realized gain on investments................... (557,561) (4,984,089)
----------- ------------
(1,672,238) (7,365,884)
----------- ------------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares....................... 41,044,288 86,766,541
Net asset value of shares issued in connection with
the reinvestment of:
Distributions from net investment income........... 1,114,677 2,381,795
Distributions from net realized gain............... 557,561 4,984,089
----------- ------------
42,716,526 94,132,425
Cost of shares redeemed............................ (7,885,382) (20,933,471)
----------- ------------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL SHARE
TRANSACTIONS...................................... 34,831,144 73,198,954
----------- ------------
TOTAL INCREASE IN NET ASSETS....................... 39,702,167 78,918,283
NET ASSETS
Beginning of the year.............................. 18,822,676 58,524,843
----------- ------------
End of the year.................................... $58,524,843 $137,443,126
=========== ============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the year.............................. $ 1,050 $ 10,566
=========== ============
End of the year.................................... $ 10,566 $ 51,774
=========== ============
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares..................... 3,250,311 5,865,131
Issued in connection with the reinvestment of:
Distributions from net investment income........... 82,445 161,887
Distributions from net realized gain............... 30,535 337,428
----------- ------------
3,363,291 6,364,446
Redeemed........................................... (619,940) (1,433,106)
----------- ------------
Net change......................................... 2,743,351 4,931,340
=========== ============
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
OCTOBER 31, 1994(A)
THROUGH YEAR YEAR YEAR
DECEMBER 31, ENDED ENDED ENDED
1994 1995 1996 1997
------------------- ------- ------- --------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year.......................... $10.00 $ 9.94 $ 11.95 $ 13.55
------ ------- ------- --------
Income From Investment
Operations
Net Investment Income......... 0.05 0.26 0.27 0.28
Net Realized and Unrealized
Gain (Loss) on Investments... (0.06) 2.20 1.73 1.90
------ ------- ------- --------
Total From Investment
Operations................... (0.01) 2.46 2.00 2.18
------ ------- ------- --------
Less Distributions
Distributions From Net
Investment Income............ (0.05) (0.26) (0.27) (0.27)
Distributions From Net
Realized Capital Gains....... 0.00 (0.19) (0.13) (0.60)
------ ------- ------- --------
Total Distributions........... (0.05) (0.45) (0.40) (0.87)
------ ------- ------- --------
Net Asset Value, End of Year... $ 9.94 $ 11.95 $ 13.55 $ 14.86
====== ======= ======= ========
TOTAL RETURN (%)............... (0.10)(c) 24.79 16.91 16.18
Ratio of Operating Expenses to
Average Net Assets (%)........ 0.85 (b) 0.85 0.85 0.85
Ratio of Net Investment Income
to Average Net Assets (%)..... 4.16 (b) 4.03 3.08 2.79
Portfolio Turnover Rate (%).... 0 (b) 72 59 60
Average Commission Rate(d)..... -- -- $0.0594 $ 0.0594
Net Assets, End of Year (000).. $2,722 $18,823 $58,525 $137,443
The ratios of expenses to
average net assets without
giving effect to the voluntary
expense agreement described in
Note 4 to the Financial
Statements would have been
(%)........................... 3.73 (b) 1.85 0.99 0.86
</TABLE>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
(d) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate generally does not reflect mark-
ups, mark-downs, or spreads on shares traded on a principal basis.
See accompanying notes to financial statements.
63
<PAGE>
BACK BAY ADVISORS MANAGED SERIES
PETER W. PALFREY, CFA
BACK BAY ADVISORS, L.P.
[PHOTOGRAPH OF PETER W. PALFREY APPEARS HERE]
Q. HOW DID THE SERIES PERFORM DURING THE YEAR?
A. The Back Bay Advisors Managed Series continued its strong relative and abso-
lute performance in 1997, returning 26.56% versus 19.05% for the median Lipper
Variable Products Flexible Portfolio Fund/9/, an outperformance of 751 basis
points. The Series also outpaced an unmanaged composite of 65% of the S&P 500
Index (33.2% in 1997) and 35% of the Lehman Government/Corporate Bond Index/4/
(9.76% in 1997) which returned 25.1% for the year on a blended basis. The Se-
ries was ranked 1st of 83 funds in its peer group of Lipper Variable Products
Flexible Portfolio Funds for the year, and is ranked in the top 5 for the three
and five year periods.
Q. HOW DID YOU MANAGE THE SERIES DURING THE PAST YEAR?
A. The Back Bay Advisors Managed Series maintained an overweight allocation in
stocks through most of 1997, given the favorable US financial market backdrop,
ranging from 68% to 73% of total assets. This benefited overall Series perfor-
mance, given the strong absolute performance of stocks during this period.
Large-capitalization growth stocks, which are well-represented in the Series,
also performed very well during 1997, relative to the broader market. However,
with stock market technicals and fundamentals coming under pressure during the
latter part of the year, spurred largely by the growing Asia crisis (weaker
fund flows, increased price volatility and weakening year-over-year earnings
growth), I rebalanced the portfolio on several occasions, taking advantage of
periods of relative stock market strength to reduce equity exposure. Proceeds
from stock sales were redirected to longer duration bonds, lengthening the av-
erage maturity of the bond portfolio.
As uncertainty from the growing financial crisis in the Pacific Rim spread to
global financial markets, investors scrambled to the safe haven of U.S. Trea-
suries, pushing domestic interest rates sharply lower late in 1997. In addition
to this "flight to quality" to the U.S. bond market, investors became more con-
structive on the longer term outlook for interest rates. This was a function of
slower anticipated US economic growth in 1998, coupled with decreased price
pressures, as the currency devaluations and the sharp economic contraction of
the Pacific Rim weighed on global economic growth. With the short-end of the
Treasury yield curve anchored by a 5.5 percent Federal Funds Rate, investors
stretched out the yield curve, driving 30-year bond yields nearly 50 basis
points lower during the fourth quarter of 1997. The bond portfolio benefited
from this pronounced drop in United States interest rates, actually
outperforming stocks during the fourth quarter. A barbelled combination of
higher-yielding United States and Yankee securities and long dated United
States corporate and Canadian issues contributed to the Series' solid perfor-
mance.
Q. WHAT IS YOUR OUTLOOK FOR THE MONTHS AHEAD?
A. Even as the growing impact of the Asian crisis on the United States economy
has started to become more apparent to United States investors--e.g. reduced US
corporate export growth, lack of pricing power overseas and domestically, nar-
rowing profit margins, etc.--analysts have been relatively slow to revise their
1998 earnings estimates lower. Accordingly, I took advantage of the year-end
stock rally to trim the Series' equity position over a period of days, from 70%
to 65% stocks, with the proceeds redirected to a combination of cash and bonds.
Of particular note, this is the first time since early 1995 that our internal
asset allocation model has shifted from an "overweight" to a "neutral" weight-
ing in stocks.
The domestic United States economy has been quite robust for some time, and
will likely be aided for the next several quarters by the recent decline in
corporate and consumer borrowing costs. Additionally, the Federal Reserve is
expected to maintain a neutral monetary policy stance over the near term, given
the favorable inflation outlook in the United States and the likelihood that
United States economic growth will slow to a more moderate pace in 1998. Howev-
er, the current confidence crisis in the Pacific Rim could easily contaminate
United States (and other Western) financial markets if the situation does not
stabilize fairly soon. With stock prices remaining near their all-time highs,
and with interest rates only modestly lower thus far in 1998, stock valuations
remain very "full" by most historical measures. I expect to maintain a neutral
weighting to stocks over the near term, but must see to what extent the United
States economy is impacted by the events in the Pacific Rim over upcoming
months.
64
<PAGE>
A $10,000 Investment Compared to the S&P 500 and
Lehman Brothers Government/Corporate Index
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Zenith Managed Leh Gov't/
Series S&P 500 Corp.
-------------- ------- ---------
<S> <C> <C> <C>
12/31/87 10,000 10,000 10,000
12/31/88 10,948 11,649 10,678
12/31/89 13,037 15,329 12,041
12/31/90 13,456 14,852 13,145
12/31/91 16,171 19,357 15,068
12/31/92 17,255 20,830 16,148
12/31/93 19,092 22,920 17,567
12/31/94 18,880 23,231 17,228
12/31/95 24,782 31,931 19,886
12/31/96 28,508 39,243 20,673
12/31/97 36,078 52,317 23,994
</TABLE>
[X] FUND FACTS
GOAL: A favorable total return through investment in a 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: $189 million as of December 31, 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.
65
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS MANAGED SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
COMMON STOCKS--65.0% OF TOTAL NET ASSETS
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
AEROSPACE--1.0%
11,276 Boeing Co. .............................................. $ 551,819
5,400 Lockheed Martin Corp. ................................... 531,900
14,600 Rockwell International Corp. ............................ 762,850
------------
1,846,569
------------
AIR TRANSPORTATION--0.4%
2,900 Delta Air Lines, Inc. ................................... 345,100
15,150 Southwest Airlines Co. .................................. 373,069
------------
718,169
------------
AUTOMOBILE & RELATED--1.7%
37,764 Chrysler Corp. .......................................... 1,328,821
16,900 Ford Motor Co. .......................................... 822,819
10,125 Genuine Parts Co. ....................................... 343,617
4,500 Goodyear Tire & Rubber Co. .............................. 286,313
7,200 Paccar, Inc. ............................................ 378,000
------------
3,159,570
------------
BANKS--5.6%
15,186 Banc One Corp. .......................................... 824,790
9,888 Bank America Corp. ...................................... 721,824
10,600 Bankers Trust New York Corp. ............................ 1,191,837
8,700 Chase Manhattan Corp. New................................ 952,650
9,400 Citicorp................................................. 1,188,513
7,800 First Chicago Corp. ..................................... 651,300
10,900 J.P. Morgan & Co., Inc. ................................. 1,230,337
14,400 Nations Bank Corp. ...................................... 875,700
34,200 Norwest Corp. ........................................... 1,320,975
5,000 Republic NY Corp. ....................................... 570,938
2,800 Wells Fargo & Co. ....................................... 950,425
------------
10,479,289
------------
BEVERAGES--0.3%
20,000 Whitman Corp. ........................................... 521,250
------------
BUSINESS MACHINES--1.7%
8,500 Apple Computer........................................... 111,563
28,400 Digital Equipment Corp.(c)............................... 1,050,800
19,800 International Business Machines Corp. ................... 2,070,337
------------
3,232,700
------------
BUSINESS SERVICES--0.8%
28,500 Browning Ferris Industries, Inc. ........................ 1,054,500
9,200 H & R Block, Inc. ....................................... 412,275
------------
1,466,775
------------
CHEMICALS--1.6%
28,400 Allied-Signals, Inc. .................................... 1,105,825
15,100 E.I. Du Pont de Nemours & Co. ........................... 906,944
11,000 Great Lakes Chemical Corp. .............................. 493,625
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
3,900 Pitney Bowes, Inc. ...................................... $ 350,756
5,100 Union Carbide Corp. ..................................... 218,981
------------
3,076,131
------------
COMMUNICATION--5.9%
15,500 Airtouch Communications, Inc. ........................... 644,219
13,100 Ameritech Corp. ......................................... 1,054,550
39,261 AT&T Co. ................................................ 2,404,736
11,212 Bell Atlantic Corp. ..................................... 1,020,292
16,200 BellSouth Corp. ......................................... 912,263
10,600 GTE Corp. ............................................... 553,850
12,800 Harris Corp. ............................................ 587,200
8,834 Lucent Technologies, Inc. ............................... 705,616
11,900 Northern Telecom LTD..................................... 1,059,100
14,137 SBC Comunications, Inc. ................................. 1,035,535
23,900 US West, Inc. ........................................... 1,078,487
------------
11,055,848
------------
CONGLOMERATES--0.7%
11,100 Frontier Corp. .......................................... 267,094
13,800 Minnesota Mining & Manufacturing......................... 1,132,462
------------
1,399,556
------------
CONSTRUCTION--1.0%
20,100 Home Depot, Inc. ........................................ 1,183,388
14,900 Masco Corp. ............................................. 758,038
------------
1,941,426
------------
CONSUMER DURABLES--1.9%
7,300 Black & Decker Corp. .................................... 285,156
43,700 General Electric Co. .................................... 3,206,487
800 Whirlpool Corp. ......................................... 44,000
------------
3,535,643
------------
CONTAINERS--0.1%
6,000 Bemis, Inc. ............................................. 264,375
------------
DATA PROCESSING--2.1%
23,100 Intel Corp. ............................................. 1,622,775
17,900 Microsoft Corp. ......................................... 2,313,575
150 Oracle Systems Corp. .................................... 3,347
------------
3,939,697
------------
DOMESTIC OIL--1.2%
4,300 Amerada Hess Corp. ...................................... 235,963
2,800 Amoco Corp. ............................................. 238,350
5,400 Atlantic Richfield Co. .................................. 432,675
7,200 Halliburton Co. ......................................... 373,950
3,601 Sun, Inc. ............................................... 151,467
</TABLE>
See accompanying notes to financial statements.
66
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS MANAGED SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
COMMON STOCKS--(CONTINUED)
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
DOMESTIC OIL--(CONTINUED)
6,200 Tenneco, Inc............................................. $ 244,900
15,600 Unocal Corp.............................................. 605,475
------------
2,282,780
------------
DRUGS & MEDICINE--5.3%
8,800 Abbott Laboratories...................................... 576,950
12,800 Bausch & Lomb, Inc....................................... 507,200
17,500 Baxter International, Inc................................ 882,656
9,600 Becton Dickerson & Co.................................... 480,000
17,000 C.R. Bard, Inc........................................... 532,312
12,600 Corning, Inc............................................. 467,775
15,800 Eli Lilly & Co. ......................................... 1,100,075
11,200 Mallinckrodt, Inc........................................ 425,600
19,500 Merck & Co., Inc......................................... 2,071,875
20,800 Pfizer, Inc. ............................................ 1,550,900
21,600 Schering Plough Corp..................................... 1,341,900
------------
9,937,243
------------
ELECTRONICS--2.4%
21,400 AMP, Inc................................................. 898,800
18,800 Emerson Electric Co...................................... 1,061,025
20,000 Hewlett-Packard.......................................... 1,250,000
15,400 Raytheon Co. ............................................ 777,700
14,400 Tektronix, Inc. ......................................... 571,500
------------
4,559,025
------------
ENERGY & UTILITIES--2.4%
11,700 Consolidated Edison Co. ................................. 479,700
40,200 Edison International..................................... 1,092,937
45,700 Pacific Gas & Electric Corp.............................. 1,390,994
10,700 Pepco Energy Co. ........................................ 259,475
7,700 Public Service Enterprise Group.......................... 243,994
8,900 Texas Utilities Co....................................... 369,906
21,200 Unicom Corp. ............................................ 651,900
------------
4,488,906
------------
ENERGY RAW MATERIALS--0.4%
27,200 Occidental Petroleum Corp. .............................. 797,300
------------
FINANCE--2.1%
10,400 American Express Co...................................... 928,200
21,800 Federal Home Loan Mortgage Corp. ........................ 914,238
21,400 Federal National Mortgage Association.................... 1,221,137
14,508 Morgan Stanley, Dean Witter.............................. 857,785
------------
3,921,360
------------
FOOD & AGRICULTURE--3.5%
36,900 Coca Cola Co. ........................................... 2,458,462
20,450 H. J. Heinz Co........................................... 1,039,116
22,400 Kellogg Co. ............................................. 1,111,600
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
30,700 PepsiCo, Inc............................................. $ 1,118,631
16,000 Sara Lee Corp. .......................................... 901,000
------------
6,628,809
------------
GAS UTILITIES--0.3%
14,200 Eastern Enterprises...................................... 639,000
------------
GOLD--0.1%
8,900 Barrick Gold Corp........................................ 165,763
------------
INSURANCE--2.7%
11,500 Aetna Life & Casualty Co. ............................... 811,469
10,568 Allstate Corp. .......................................... 960,367
14,400 American General Corp. .................................. 778,500
9,702 American International Group, Inc........................ 1,055,092
2,700 Cigna Corp............................................... 467,269
4,600 Loews Corp. ............................................. 488,175
8,444 Travelers Group, Inc..................................... 454,921
------------
5,015,793
------------
INTERNATIONAL OIL--3.7%
11,000 Chevron Corp. ........................................... 847,000
38,400 Exxon Corp. ............................................. 2,349,600
15,600 Mobil Corp. ............................................. 1,126,125
39,200 Royal Dutch Petroleum Co. (ADR)(g)....................... 2,124,150
9,600 Texaco, Inc. ............................................ 522,000
------------
6,968,875
------------
LEISURE--0.3%
17,000 Brunswick Corp........................................... 515,313
------------
LIQUOR--0.4%
6,600 Anheuser-Busch Companies, Inc. .......................... 290,400
11,700 Seagram, Ltd. ........................................... 378,056
------------
668,456
------------
MEDIA--1.3%
13,400 Cisco Systems, Inc....................................... 747,050
6,000 Gannett Company, Inc..................................... 370,875
15,200 Tele-Communications, Inc. ............................... 424,650
13,200 Time Warner, Inc. ....................................... 818,400
------------
2,360,975
------------
MISCELLANEOUS--0.9%
8,000 American Greetings Corp. ................................ 313,000
10,000 Cognizant Corp. ......................................... 445,625
10,900 EG & G, Inc.............................................. 226,856
4,400 Nacco Industries, Inc. .................................. 471,625
7,926 Newmont Mining Corp...................................... 232,826
------------
1,689,932
------------
</TABLE>
See accompanying notes to financial statements.
67
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS MANAGED SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
COMMON STOCKS--(CONTINUED)
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
NON-FERROUS METALS--0.5%
14,000 Aluminum Company of America.............................. $ 985,250
------------
OFFICE EQUIPMENT--0.9%
24,000 Xerox Corp. ............................................. 1,771,500
------------
OPTICAL PHOTO, EQUIPMENT--0.1%
3,600 Eastman Kodak Co. ....................................... 218,925
------------
PAPER & FOREST PRODUCTS--1.0%
3,300 Burlington Northern Santa Fe............................. 306,694
3,600 Georgia-Pacific Corp. ................................... 218,700
3,600 Georgia-Pacific Corp. Timber Group....................... 81,675
19,000 Kimberly Clark Corp. .................................... 936,937
8,400 Westvaco Corp............................................ 264,075
------------
1,808,081
------------
POLLUTION CONTROL--0.1%
9,500 Waste Management, Inc.................................... 261,250
------------
PRODUCER OF GOODS--0.3%
21,200 Cincinnati Milacron, Inc. ............................... 549,875
------------
PUBLISHING--0.3%
12,000 Knight Ridder, Inc. ..................................... 624,000
------------
RAILROADS & SHIPPING--0.4%
5,100 CSX Corp. ............................................... 275,400
13,500 Norfolk Southern Corp.................................... 415,969
------------
691,369
------------
RESTAURANTS--0.0%
3,070 Tricon Global Restaurants, Inc. ......................... 89,222
------------
RETAIL--3.7%
19,000 Albertsons, Inc. ........................................ 900,125
5,000 J. C. Penney, Inc........................................ 301,563
38,900 Kmart Corp.(c)........................................... 449,781
26,400 Mattel, Inc. ............................................ 983,400
7,800 May Department Stores Co. ............................... 410,963
10,000 Mercantile Stores, Inc................................... 608,750
11,600 Nike, Inc. .............................................. 455,300
11,400 Sears Roebuck & Co. ..................................... 515,850
15,200 Supervalu, Inc........................................... 636,500
44,900 Wal-Mart Stores, Inc. ................................... 1,770,744
------------
7,032,976
------------
SOAPS & COSMETICS--4.2%
17,000 Alberto Culver Co........................................ 545,062
3,900 Avon Products, Inc....................................... 239,363
26,920 Bristol-Myers Squibb Co. ................................ 2,547,305
3,800 Clorox Co................................................ 300,438
9,000 Gillette Co.............................................. 903,937
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE (A)
<C> <S> <C>
26,100 Johnson & Johnson................................... $ 1,719,337
20,600 Procter & Gamble Co................................. 1,644,137
------------
7,899,579
------------
STEEL--0.1%
7,720 USX-US Steel Group.................................. 241,250
------------
TOBACCO--1.0%
40,800 Philip Morris Companies, Inc. ...................... 1,848,750
------------
TRAVEL & RECREATION--0.7%
13,235 Walt Disney Co. .................................... 1,311,092
------------
Total Common Stock
(Identified cost $69,647,086)...................... 122,609,647
------------
BONDS & NOTES--30.5%
<CAPTION>
FACE
AMOUNT
<C> <S> <C>
CORPORATE BONDS--12.6%
$ 3,000,000 Cablevision Systems Corp.,
7.875%, 12/15/07................................... 3,070,470
5,000,000 Comcast Cable Communications,
8.500%, 5/01/27.................................... 5,874,300
2,000,000 Comcast Cellular Holding, Inc,
9.500%, 5/01/07.................................... 2,080,000
4,525,000 News America Holdings, Inc.,
10.125%, 10/15/12.................................. 5,254,023
3,750,000 Norfolk Southern Corp.,
7.050%, 5/01/37.................................... 3,980,400
2,000,000 Total Access Communication,
8.375%, 11/04/06................................... 1,320,000
30,000 Viacom, Inc.,
8.000%, 7/07/06.................................... 30,150
2,000,000 Worldcom, Inc.,
7.750%, 4/01/27.................................... 2,201,300
------------
23,810,643
------------
FOREIGN--10.0%
5,000,000 Government of Canada,
Zero Coupon, 3/15/21(d)............................ 874,401
15,000,000 Government of Canada,
Zero Coupon, 6/01/25(d)............................ 2,055,999
4,000,000 Government of Canada,
10.250%, 3/15/14(d)................................ 4,080,753
30,000,000 Ontario Prov CTF Dep Book,
Zero Coupon, 09/08/23(d)........................... 4,156,345
3,000,000 Ontario Prov CDA,
8.100%, 9/08/23(d)................................. 2,588,433
15,000,000 Quebec Prov Global Insurance Co., 1/16/23(d)........ 2,032,119
3,600,000 Quebec Prov CDA,
8.500%, 04/01/26(d)................................ 3,176,656
------------
18,964,706
------------
</TABLE>
See accompanying notes to financial statements.
68
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS MANAGED SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
BONDS & NOTES--(CONTINUED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
YANKEE--7.4%
$ 2,000,000 Petroleos Mexicanos,
9.500%, 9/15/27............................... $ 1,999,860
925,000 Pindo Deli Fin Mauritius,
10.750%, 10/01/07, 144A(e).................... 795,500
3,000,000 Republic of Argentina,
11.375%, 1/30/17.............................. 3,296,250
3,000,000 Republic of Argentina PCT,
11.375%, 1/30/17.............................. 3,296,250
4,958,000 Republic of Panama,
8.875%, 9/30/27............................... 4,638,208
-----------
14,026,068
-----------
U.S. GOVERNMENT AGENCY BONDS--0.4%
304,559 Government National Mortgage Association,
10.000%, 9/15/18.............................. 338,889
413,300 Government National Mortgage Association,
11.500% with various maturities to 2013....... 474,701
-----------
813,590
-----------
112,505,859 Total Bonds & Notes
(Identified Cost $55,114,931)................. 57,615,007
-----------
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM INVESTMENT--3.7%
FACE
AMOUNT VALUE (A)
<C> <S> <C>
$7,034,000 Household Finance Corp.,
6.500%, 1/02/98................................... $ 7,032,730
------------
Short-Term Investment
(Identified Cost $7,032,730)...................... 7,032,730
------------
Total Investments--99.2%
(Identified Cost $131,794,747)(b)................. 187,257,384
Other assets less liabilities(f)................... 1,525,317
------------
TOTAL NET ASSETS--100%............................. $188,782,701
============
(a) See Note 1A.
(b) Federal Tax Information:
At December 31, 1997 the net unrealized appreciation on investments based on
cost of $131,794,747 for federal income tax purposes was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost..................................... $ 57,829,249
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax
cost over value................................... (2,366,612)
------------
Net unrealized appreciation........................ $ 55,462,637
============
</TABLE>
(c) Non-income producing security.
(d) Denominated in Canadian dollars.
(e) Securities exempt from registration under Rule 144A of the Securities Act
of of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
(f) Including deposits in foreign denominated currencies with a value of
$507,349 and a cost of $519,251.
(g) 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.
69
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISERS MANAGED SERIES)
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
ASSETS
Investments at value.................................... $187,257,384
Cash.................................................... 3,443
Foreign cash at value (Cost $519,251)................... 507,349
Receivable for:
Fund shares sold........................................ 107,689
Dividends and interest.................................. 1,270,722
Foreign taxes........................................... 632
------------
189,147,219
LIABILITIES
Payable for:
Fund shares redeemed.................................... $217,001
Accrued expenses:
Management fees......................................... 79,188
Deferred trustees' fees................................. 47,527
Other................................................... 20,802
--------
364,518
------------
$188,782,701
============
NET ASSETS
Net Assets consist of:
Capital paid in......................................... $128,705,410
Undistributed net investment income..................... 5,466
Accumulated net realized gains.......................... 4,624,182
Unrealized appreciation on investments and foreign
currency............................................... 55,447,643
------------
NET ASSETS............................................... $188,782,701
============
Computation of offering price:
Net asset value and redemption price per share
($188,782,701 divided by 994,358 shares of beneficial
interest)............................................... $ 189.85
============
Identified cost of investments........................... $131,794,747
============
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends......................................... $ 2,464,443(a)
Interest.......................................... 4,245,701
-----------
6,710,144
EXPENSES
Management fees................................... $ 878,632
Trustees' fees and expenses....................... 35,273
Custodian......................................... 91,179
Audit and tax services............................ 10,351
Legal............................................. 22,022
Printing.......................................... 38,544
Miscellaneous..................................... 3,525
-----------
Total expenses................................... 1,079,526
-----------
NET INVESTMENT INCOME.............................. 5,630,618
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FUTURES CONTRACTS, AND FOREIGN CURRENCY
TRANSACTIONS
Realized gain (loss) on:
Investments--net.................................. 21,193,170
Futures--net...................................... (5,005)
Foreign currency transactions--net................ (129,917)
-----------
Total realized gain on investments, futures
contracts, and foreign currency transactions.... 21,058,248
-----------
Unrealized appreciation (depreciation) on:
Investments--net.................................. 14,249,294
Foreign currency transactions--net................ (14,072)
-----------
Total unrealized appreciation on investments and
foreign currency transactions................... 14,235,222
-----------
Net gain on investment transactions................ 35,293,470
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS......... $40,924,088
===========
</TABLE>
(a) Net of foreign taxes of: $11,038
See accompanying notes to financial statements.
70
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS MANAGED SERIES)
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
FROM OPERATIONS
Net investment income............................. $ 5,527,070 $ 5,630,618
Net realized gain on investments, futures
contracts, and foreign currency transactions..... 9,531,773 21,058,248
Unrealized appreciation on investments and foreign
currency transactions............................ 6,443,761 14,235,222
------------ ------------
Increase in net assets from operations............ 21,502,604 40,924,088
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income............................. (5,442,217) (5,622,790)
Net realized gain on investments.................. (9,837,965) (16,617,273)
------------ ------------
(15,280,182) (22,240,063)
------------ ------------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares...................... 20,225,126 22,338,847
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income.......... 5,442,217 5,622,790
Distributions from net realized gain.............. 9,837,965 16,617,273
------------ ------------
35,505,308 44,578,910
Cost of shares redeemed........................... (28,375,038) (35,368,662)
------------ ------------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL SHARE
TRANSACTIONS..................................... 7,130,270 9,210,248
------------ ------------
TOTAL INCREASE IN NET ASSETS...................... 13,352,692 27,894,273
NET ASSETS
Beginning of the year............................. 147,535,736 160,888,428
------------ ------------
End of the year................................... $160,888,428 $188,782,701
============ ============
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the year............................. $ 45,930 $ 40,029
============ ============
End of the year................................... $ 40,029 $ 5,466
============ ============
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares.................... 120,220 115,122
Issued in connection with the reinvestment of:
Distributions from net investment income.......... 31,471 30,044
Distributions from net realized gain.............. 55,351 88,778
------------ ------------
207,042 233,944
Redeemed.......................................... (164,939) (183,956)
------------ ------------
Net change........................................ 42,103 49,988
============ ============
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year........................ $ 130.26 $ 137.18 $ 130.30 $ 163.52 $ 170.37
-------- -------- -------- -------- --------
Income From Investment
Operations
Net Investment Income....... 4.35 5.42 6.34 6.43 6.38
Net Realized and Unrealized
Gain (Loss) on Investments. 9.58 (6.92) 34.33 18.21 38.47
-------- -------- -------- -------- --------
Total From Investment
Operations................. 13.93 (1.50) 40.67 24.64 44.85
-------- -------- -------- -------- --------
Less Distributions
Distributions From Net
Investment Income.......... (4.36) (5.38) (6.34) (6.34) (6.42)
Distributions in Excess of
Net Investment Income...... 0.00 0.00 (0.23) 0.00 0.00
Distributions From Net
Realized Capital Gains..... (2.65) 0.00 (0.88) (11.45) (18.95)
-------- -------- -------- -------- --------
Total Distributions......... (7.01) (5.38) (7.45) (17.79) (25.37)
-------- -------- -------- -------- --------
Net Asset Value, End of Year. $ 137.18 $ 130.30 $ 163.52 $ 170.37 $ 189.85
======== ======== ======== ======== ========
TOTAL RETURN (%)............. 10.65 (1.11) 31.26 15.01 26.56
Ratio of Operating Expenses
to Average Net Assets (%)... 0.53 0.54 0.64 0.62 0.61
Ratio of Net Investment
Income to Average Net Assets
(%)......................... 3.65 3.98 4.06 3.64 3.20
Portfolio Turnover Rate (%).. 22 76 51 72 65
Average Commission Rate(a)... -- -- -- $ 0.0318 $ 0.0248
Net Assets, End of Year
(000)....................... $121,339 $121,877 $147,536 $160,888 $188,783
</TABLE>
(a) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged. This rate generally does not reflect mark-
ups, mark-downs, or spreads on shares traded on a principal basis.
See accompanying notes to financial statements.
71
<PAGE>
SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES
PORTFOLIO MANAGERS: STEVEN GUTERMAN, PETER WILBY AND DAVID SCOTT
SALOMON BROTHERS ASSET MANAGEMENT INC
[PHOTOGRAPH OF STEVEN GUTERMAN APPEARS HERE]
[PHOTOGRAPH OF PETER WILBY APPEARS HERE]
[PHOTOGRAPH OF DAVID SCOTT APPEARS HERE]
Q. HOW DID THE SERIES PERFORM IN 1997?
A. The Salomon Brothers Strategic Bond Opportunities Series returned 11.07%
(based on net asset value) for 1997 versus 9.50% for the Lipper Variable Prod-
ucts General Bond Fund category and 9.65% for the Lehman Brothers Aggregate
Index.
Q. HOW DID YOU MANAGE THE SERIES DURING THE YEAR?
A. The U.S. economy grew moderately with low inflation and falling interest
rates. Asian economies were mired in crisis for the latter part of 1997 with
currencies and stock market values plummeting. That led to an increase of
credit risk premiums globally and pressured the emerging markets and high
yield sectors for most of the fourth quarter.
The Series lowered its allocation to the high yield and emerging markets sec-
tors while raising the investment grade portion in the third quarter. The high
yield allocation was lowered from 40% to 35%, emerging markets were lowered
from 20% to 15% and investment grade was raised to 40%. The target allocation
for non-U.S. dollar denominated bonds was left unchanged at 10%. The Series
also extended duration in the third quarter and increased the commitment to
the MBS sector.
The allocation to high yield and emerging markets was reduced in the third
quarter as the sectors were viewed as fully valued, having tightened dramati-
cally throughout the year. Duration was extended as a function of a positive
inflation outlook and an improved technical situation in the government market
as falling budget deficits and strong buying of Treasuries by foreigners por-
tended further declines in interest rates.
Q. WHAT IS YOUR OUTLOOK FOR THE SERIES IN 1998?
A. Our outlook for the investment grade markets is positive given our sanguine
inflation view and optimistic assumptions regarding the budget deficit. Al-
though we are positive on the fundamentals for the emerging markets and high
yield sectors, in the short run the market may experience some volatility as
Asian countries continue to try and resolve their economic problems. The prob-
lems will take years to correct, but what the markets are looking for is a
long term, multi-year strategy combined with a refinancing of short term obli-
gations into longer term obligations that would resolve the liquidity crisis
in countries such as Indonesia and Korea.
Our current high yield and emerging markets allocations remain at 35% and 15%
respectively, below our long term targets of 40% and 20%.
We will be monitoring the employment cost index for signs of rising inflation
pressures, progress on the U.S. budget deficit, flows into bond mutual funds,
Asian economic reforms and credit fundamentals in both the United States and
emerging market economies.
72
<PAGE>
A $10,000 Investment Compared to the Lehman Brothers Aggregate Bond Index/3/
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Stragic Bond Lehman Aggregate
Opp. Series Bond
------------ ----------------
<S> <C> <C>
10/31/94 10,000 10,000
12/31/94 9,860 10,047
12/31/95 11,771 11,903
12/31/96 13,461 12,332
12/31/97 14,952 13,526
</TABLE>
[X] FUND FACTS
GOAL: A high level of total return consistent with the preservation of capital.
START DATE: October 31, 1994
SIZE: $71 million as of December 31, 1997
MANAGERS: Peter Wilby, 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 November 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.
73
<PAGE>
NEW ENGLAND ZENITH FUND
(SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
BONDS & NOTES--95.0% OF TOTAL NET ASSETS
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
APPAREL & TEXTILES--0.7%
$ 250,000 Collins & Aikman Floorcovering 10.000%, 1/15/07. $ 260,000
200,000 Synthetic Industries, Inc.
9.250%, 2/15/07................................ 212,000
------------
472,000
------------
AUTOMOTIVE & RELATED--0.7%
200,000 Foamex L.P/Foamex Capital Corp. 9.875%, 6/15/07. 202,000
250,000 Key Plastic, Inc. 10.250%, 3/15/07.............. 265,625
------------
467,625
------------
BANKS--0.5%
415,000 Malayan Banking Berhad
7.125%, 9/15/05................................ 388,029
------------
BROADCASTING--2.3%
250,000 Adelphia Communications Corp. 10.500%, 7/15/04.. 270,000
150,000 American Media Operations 11.625%, 11/15/04..... 162,750
150,000 Cablevision Systems Corp.
10.500%, 5/15/16............................... 174,750
250,000 Fox Kids Worldwide, Inc., 0/10.250%,
11/01/07(l).................................... 148,750
200,000 Jacor Communications Co.
9.750%, 12/15/06............................... 215,500
350,000 Marcus Cable Co.
14.250%, 12/15/05.............................. 303,625
150,000 Rogers Cablesystems, Ltd.
10.000%, 3/15/05............................... 166,125
150,000 SFX Broadcasting, Inc.
10.750%, 5/15/06............................... 164,625
------------
1,606,125
------------
BUILDING MATERIAL & CONSTRUCTION--0.2%
125,000 Southdown, Inc. 10.000%, 3/01/06................ 136,406
------------
BUSINESS SERVICES--1.5%
150,000 Borg-Warner Security Corp.
9.125% 5/01/03................................. 153,000
250,000 Intertek Financial PLC
10.250%, 11/01/06.............................. 261,875
250,000 Iron Mountain, Inc.
10.125%, 10/01/06.............................. 275,625
200,000 Lamar Advertising Co.
9.625%, 12/01/06............................... 216,000
125,000 Loomis Fargo & Co.
10.000%, 1/15/04............................... 125,938
------------
1,032,438
------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
CHEMICALS--0.4%
$ 250,000 Texas Petrochemicals Corp.
11.125%, 7/01/06............................... $ 273,437
------------
COMPUTER SOFTWARE & SERVICES--0.7%
200,000 DecisionOne Corp.
9.750%, 8/01/07................................ 208,500
250,000 Unisys Corp. 11.750%, 10/15/04.................. 285,000
------------
493,500
------------
COSMETICS & TOILETRIES--0.5%
125,000 French Fragrances, Inc.
10.375%, 5/15/07............................... 131,875
350,000 Revlon Worldwide Corp.
Zero Coupon, 3/15/01........................... 241,500
------------
373,375
------------
ELECTRONICS--0.2%
100,000 Exide Electronics Group, Inc. 11.500%,
3/15/06(j)..................................... 118,750
------------
ENERGY--2.1%
250,000 AES Corp.
8.500%, 11/01/07 144A(n)....................... 250,625
250,000 Costilla Energy, Inc.
10.250%, 10/01/06.............................. 260,625
400,000 Occidental Petroleum Corp.
9.250%, 8/01/19................................ 500,432
250,000 Transamerican Energy Corp., 0/13.000%,
6/15/02(l)..................................... 201,875
250,000 United Refining Co.
10.750%, 6/15/07............................... 257,500
------------
1,471,057
------------
ENVIRONMENTAL CONTROL--0.8%
400,000 Allied Waste Industries, Inc., 0/11.300%,
6/01/07(l)..................................... 282,500
250,000 Norcal Waste Systems, Inc.
13.500%, 11/15/05.............................. 290,000
------------
572,500
------------
FINANCE--2.1%
125,000 Airplane Pass Thru Trust,
10.875%, 3/15/19............................... 140,628
575,000 Banc One Corp. 7.600%, 5/01/07.................. 616,538
50,000 Dollar Financial Group, Inc.
10.875%, 11/15/03.............................. 53,563
250,000 DVI, Inc. 9.875%, 2/01/04....................... 260,625
450,000 Paine Webber Group, Inc.
7.000%, 3/01/00................................ 456,556
------------
1,527,910
------------
</TABLE>
See accompanying notes to financial statements.
74
<PAGE>
NEW ENGLAND ZENITH FUND
(SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
BONDS & NOTES--(CONTINUED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
FOOD & BEVERAGES--2.1%
$ 250,000 AmeriServe Food Distributors, Inc. 10.125%,
7/15/07........................................ $ 262,500
125,000 B&G Foods, Inc. 9.625%, 8/01/07................. 126,250
250,000 CFP Holdings, Inc.
11.625%, 1/15/04............................... 246,875
250,000 Doane Products Co.
10.625%, 3/01/06............................... 267,187
200,000 Dole Foods, Inc. 6.750%, 7/15/00................ 202,534
250,000 SC International Services, Inc. 9.250%, 9/01/07. 258,125
150,000 Stroh Brewery Co.
11.100%, 7/01/06............................... 144,375
------------
1,507,846
------------
FOREIGN--6.1%
200,000 Algoma Steel, Inc.,
12.375%, 7/15/05............................... 232,000
1,820,000 Bundesrepublik Deutche
6.500%, 7/04/27................................ 1,095,875
250,000 Diamond Cable Communication, 0/11.750%,
12/15/05(l).................................... 195,000
250,000 Doman Industries, Ltd.
8.750%, 3/15/04................................ 247,500
200,000 International Semi Tech.
0/11.500%, 8/15/03(e)(l)....................... 76,000
400,000 Korea Development Bank
9.600%, 12/01/00............................... 358,976
250,000 Mexico Par Ser Acum VRR,
6.250%, 12/31/19............................... 208,750
300,000 Midland Bank PLC
7.650%, 5/01/25................................ 331,530
250,000 Nextlink Communications, Ltd. 12.500%, 4/15/06.. 285,937
400,000 TFM, SA DE CV, 0/11.750%, 6/15/09(l)............ 254,000
490,000 Treuhandanstalt 7.375%, 12/02/02................ 302,180
1,100,000 Vnesheconombank USSR, 6.718%, 12/02/15(o)....... 775,841
------------
4,363,589
------------
FOREIGN GOVERNMENT--20.9%
40,000 Commonwealth of Australia
8.750%, 8/15/08(c)............................. 31,422
2,050,000 Federal Republic of Brazil
10.125%, 5/15/27............................... 1,955,187
1,650,000 Federal Republic of Germany
5.250%, 10/20/98(f)............................ 927,291
1,150,000 Government of Canada
6.500%, 9/01/98(d)............................. 812,247
330,000 Government of Canada
7.500%, 9/01/00(d)............................. 242,896
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
$ 60,000 Government of Canada
7.000%, 12/01/06(d)............................ $ 45,856
710,000 Kingdom of Denmark
8.000%, 3/15/06(e)............................. 120,045
3,790,000 Kingdom of Denmark
6.000%, 11/15/02(e)............................ 574,427
1,300,000 Kingdom of Morocco
6.656%, 1/01/09................................ 1,118,000
4,800,000 Kingdom of Sweden
11.000%, 1/21/99(i)............................ 640,590
1,500,000 Kingdom of Sweden
6.500%, 10/25/06(i)............................ 196,439
1,160,000 New Zealand 8.000%, 7/15/98(h).................. 671,857
3,700,000 Republic of Argentina
5.250%, 3/31/23................................ 2,710,250
500,000 Republic of Ecuador
3.500%, 2/28/25................................ 276,250
1,200,000,000 Rupublic of Italy,
Zero Coupon, 7/31/98(g)........................ 658,813
500,000 Republic of Panama
3.500%, 7/17/14................................ 381,875
2,619,048 Republic of Venezuela
6.812%, 12/18/07............................... 2,304,893
750,000 United Mexican States
6.250%, 12/31/19............................... 626,250
500,000 United Mexican States
11.500%, 5/15/26............................... 590,625
------------
14,885,213
------------
GOVERNMENT AGENCIES--16.4%
227,480 Federal Home Loan Mortgage 10.000%, 5/15/20..... 246,550
800,000 Federal National Mortgage Association 7.500%,
12/01/99....................................... 818,744
7,400,000 Federal National Mortgage Association 7.000%,
1/01/99........................................ 7,453,132
1,000,000 Federal National Mortgage Association 6.650%,
8/25/07........................................ 1,022,812
22,552 Federal National Mortgage Association 13.000%,
11/01/14....................................... 27,027
500,000 Federal National Mortgage Association 7.000%,
11/18/15....................................... 508,240
92,177 Federal National Mortgage Association 10.400%,
4/25/19........................................ 101,172
4,204,700 Federal National Mortgage Association 0.635%,
3/17/20(l)..................................... 128,874
968,386 Federal National Mortgage Association 6.500%,
3/01/26........................................ 958,092
139,428 Federal National Mortgage Association 7.000%,
5/01/26........................................ 140,734
8,591,000 Federal National Mortgage Association 0.560%,
10/17/36(l).................................... 268,469
------------
11,673,846
------------
</TABLE>
See accompanying notes to financial statements.
75
<PAGE>
NEW ENGLAND ZENITH FUND
(SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
BONDS & NOTES--(CONTINUED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
HEALTH CARE--0.8%
$ 250,000 Integrated Health Services, Inc. 9.250%,
1/15/08...................................... $ 255,000
150,000 Fresenius Medical Care Cap
9.000%, 12/01/06............................. 157,125
150,000 Maxxim Medical, Inc.
10.500%, 8/01/06............................. 162,750
------------
574,875
------------
HEALTH CARE--MEDICAL TECHNOLOGY--0.3%
250,000 Imagyn Medical Technologies, Inc. 12.500%,
4/01/04...................................... 239,688
------------
INDUSTRIAL GOODS & SERVICES--0.5%
150,000 Alvey Systems, Inc.,
11.375%, 1/31/03............................. 156,750
200,000 EnviroSource, Inc.
9.750%, 6/15/03.............................. 203,250
------------
360,000
------------
INSURANCE--0.6%
400,000 Aetna Services, Inc.
7.625%, 8/15/26.............................. 436,480
------------
LEASING--0.5%
100,000 United States Leasing International, Inc.
8.450%, 1/25/05.............................. 110,767
250,000 William Scotsman, Inc.
9.875%, 6/01/07.............................. 257,500
------------
368,267
------------
LEISURE TIME--1.4%
250,000 Grand Casino 9.000%, 10/15/04................. 252,500
150,000 Harvey's Casino Resorts
10.625%, 6/01/06............................. 163,313
250,000 Prime Hospitality Corp.
9.750%, 4/01/07.............................. 268,750
100,000 Sun International, Ltd.
9.000%, 3/15/07.............................. 103,500
150,000 Wyndham Hotel Corp.
10.500%, 5/15/06............................. 173,250
------------
961,313
------------
METAL--0.8%
250,000 Commonwealth Aluminum Corp. 10.750%, 10/1/06.. 268,437
250,000 Renco Metals, Inc.
11.500%, 7/01/03............................. 267,187
------------
535,624
------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
MANUFACTURING--2.5%
$ 250,000 Burke Industries, Inc.
10.000%, 8/15/07............................... $ 260,000
150,000 Clark-Schwebel, Inc.
10.500%, 4/15/06............................... 163,313
250,000 Insilco Corp. 10.250%, 8/15/07.................. 262,187
250,000 International Knife & Saw
11.375%, 11/15/06.............................. 271,250
250,000 Jordan Industries, Inc.
11.750% 4/01/09................................ 147,645
250,000 Packard Biosciences, Inc.
9.375%, 3/01/07................................ 241,250
150,000 Polymer Group, Inc.
9.000%, 7/01/07................................ 150,000
250,000 Talley Manufacturing & Technology, Inc. 10.750%,
10/15/03....................................... 272,500
------------
1,768,145
------------
MISCELLANEOUS--2.2%
1,256,650 Mid State Trust VI
7.340%, 7/01/35................................ 1,289,637
250,000 Murrin Murrin Holdings Property, Ltd. 9.375%,
8/31/07........................................ 250,000
------------
1,539,637
------------
MORTGAGE--2.4%
1,690,960 Green Tree Financial Corp.
7.070%, 9/15/07................................ 1,739,575
------------
OIL & GAS--1.3%
250,000 Bellwether Exploration Co.
10.875%, 4/01/07............................... 275,000
150,000 Benton Oil & Gas Co.
11.625%, 5/01/03............................... 166,125
150,000 Cross Timbers Oil Co.
9.250%, 4/01/07................................ 156,750
150,000 KCS Energy, Inc.
11.000%, 1/15/03............................... 164,438
200,000 National Energy Group, Inc. 10.750%, 11/01/06... 210,000
------------
972,313
------------
PAPER--1.2%
200,000 Crown Paper Co.
11.000%, 9/01/05............................... 210,500
400,000 Harnischfeger Industries, Inc.
6.875%, 2/15/27................................ 414,880
250,000 Stone Container Corp.
12.250%, 4/01/02............................... 255,000
------------
880,380
------------
</TABLE>
See accompanying notes to financial statements.
76
<PAGE>
NEW ENGLAND ZENITH FUND
(SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
BONDS & NOTES--(CONTINUED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
PETROLEUM SERVICES--0.6%
$ 250,000 Dawson Production Services, Inc. 9.375%,
2/01/07........................................ $ 262,500
150,000 Parker Drilling Co.
9.750%, 11/15/06............................... 162,000
------------
424,500
------------
PHARMACEUTICALS--0.3%
200,000 Alaris Medical Systems, Inc.
9.750%, 12/01/06............................... 209,250
------------
PLASTICS & PACKAGING--1.5%
150,000 Berry Plastics 12.250%, 4/15/04................. 164,625
250,000 Huntsman Packaging Corp.
9.125%, 10/01/07............................... 258,125
150,000 Printpack, Inc. 10.625%, 8/15/06................ 159,750
200,000 Radnor Holdings Corp.
10.000%, 12/01/03.............................. 208,000
250,000 Tekni-Plex, Inc. 11.250%, 4/01/07............... 270,000
------------
1,060,500
------------
PRODUCER OF GOODS--2.2%
400,000 CLN Holdings, Inc.
Zero Coupon, 5/15/01........................... 266,000
100,000 Herff Jones, Inc. 11.000%, 8/15/05.............. 108,500
150,000 Hines Horticulture, Inc.
11.750%, 10/15/05.............................. 167,063
250,000 North Atlantic Trading, Inc.
11.000%, 7/15/04............................... 262,500
162,000 Rayovac Corp.
10.250%, 11/01/06.............................. 176,580
250,000 Riddell Sports, Inc.
10.500%, 7/15/07............................... 260,000
150,000 Selmer Company, Inc.
11.000%, 5/15/05............................... 165,563
150,000 Shop-Vac Corp. 10.625%, 9/01/03................. 163,313
------------
1,569,519
------------
PUBLISHING--0.6%
250,000 Garden State Newspapers, Inc. 8.750%, 10/01/09.. 251,250
150,000 Hollinger International
9.250%, 2/01/06................................ 158,250
------------
409,500
------------
RETAIL--FOOD & DRUG--0.9%
150,000 Carr-Gottstein Foods Co.
12.000%, 11/15/05.............................. 167,250
250,000 Jitney-Jungle Stores
12.000%, 3/01/06............................... 283,750
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
$ 250,000 Pueblo Xtra International
9.500%, 8/01/03................................ $ 238,125
------------
689,125
------------
RETAIL--1.6%
250,000 Cole National Group, Inc.
9.875%, 12/31/06............................... 267,500
200,000 Eye Care Centers of America, Inc. 12.000%,
10/01/03....................................... 217,500
150,000 Hills Stores Co. 12.500%, 7/01/03............... 119,250
500,000 Staples, Inc. 7.125%, 8/15/07................... 514,115
------------
1,118,365
------------
TELECOMMUNICATIONS--1.5%
250,000 Comcast Cellular Holdings, Inc. 9.500%, 5/01/07. 261,875
275,000 ICG Holdings, Inc.
13.500%, 9/15/05(l)............................ 225,844
200,000 Intermedia Communications
12.500%, 5/15/06............................... 158,000
350,000 International CableTel, Inc.,
0/11.500%, 2/01/06(l).......................... 272,125
200,000 Nextel Communications, Inc., 0/9.750%,
8/15/04(l)..................................... 178,000
------------
1,095,844
------------
TRANSPORTATION--0.7%
250,000 Atlantic Express Transportation Corp. 10.750%,
2/01/04........................................ 265,625
200,000 Ryder Transportation, Inc.
10.000%, 12/01/06.............................. 201,000
------------
466,625
------------
U.S. GOVERNMENT--12.4%
1,020,000 United States Treasury Bonds
6.375%, 8/15/27................................ 1,076,987
500,000 United States Treasury Notes
6.625%, 3/31/02................................ 516,410
2,500,000 United States Treasury Notes
6.250%, 8/31/02................................ 2,552,300
1,000,000 United States Treasury Notes
5.875%, 9/30/02................................ 1,005,840
213,925 United States Treasury Notes
3.375%, 1/15/07................................ 208,442
3,410,000 United States Treasury Notes
6.125%, 8/15/07(m)............................. 3,505,719
------------
8,865,698
------------
Total Bonds & Notes
(Identified Cost $66,171,925).................. 67,648,869
------------
</TABLE>
See accompanying notes to financial statements.
77
<PAGE>
NEW ENGLAND ZENITH FUND
(SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
WARRANT--0.0%
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
$ 250 Urohealth Systems, Inc........................... $ 8
------------
Total Warrants
(Identified Cost $0)............................ 8
------------
</TABLE>
SHORT-TERM INVESTMENT--19.7%
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
$ 14,029,000 Repurchase agreement with State Street Bank &
Trust dated 12/31/97 at 6.00% to be
repurchased at $14,034,144 on 1/02/98
collateralized by $9,295,000 U.S. Treasury
Bond 10.625% due 8/15/15 with a value of
$14,311,419................................... $ 14,029,000
------------
Total Short-Term Investment
(Identified Cost $14,029,000)................. 14,029,000
------------
Total Investments--114.7%
(Identified Cost $80,200,925)(b).............. 81,677,877
Other assets less liabilities(k)............... (10,475,932)
------------
TOTAL NET ASSETS--100%......................... $ 71,201,945
============
</TABLE>
FORWARD CONTRACTS OUTSTANDING AT DECEMBER 31, 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) 02/11/98 33,827 $ 22,314 $ 22,067 $ 247
Canadian Dollar
(sold) 02/11/98 1,481,682 1,043,438 1,038,305 5,133
Deutsche Mark
(sold) 02/11/98 5,244,691 2,989,621 2,922,607 67,014
Deutsche Mark
(bought) 02/11/98 412,469 234,092 229,849 (4,243)
Deutsche Mark
(bought) 02/11/98 1,200,000 679,771 668,700 (11,071)
Italian Lira
(sold) 02/11/98 1,133,710,174 656,356 640,674 15,682
--------
Total Appreciation on Forward Currency contracts.............. $ 72,762
========
</TABLE>
(a) See Note 1A.
(b) Federal Tax Information: At December 31, 1997 the net unrealized
appreciation on investments based on cost of $80,202,621 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.............. $1,984,803
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value.............. (509,547)
----------
Net unrealized appreciation................................... $1,475,256
==========
</TABLE>
(c) Denominated in Australian dollars.
(d) Denominated in Canadian Dollars.
(e) Denominated in Danish Krone.
(f) Denominated in German Marks.
(g) Denominated in Italian Lira.
(h) Denominated in New Zealand Dollars.
(i) Denominated in Swedish Krona.
(j) Rights attached.
(k) Including deposits in foreign denominated currencies with a value of $219
and a cost of $223.
(l) 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.
(m) Portion of or entire principal amount delivered as collateral for reverse
repurchase agreements.
(n) Securities 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.
(o) Variable or floating rate security. Rate disclosed is as of December 31,
1997.
See accompanying notes to financial statements.
78
<PAGE>
NEW ENGLAND ZENITH FUND
(SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES)
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
ASSETS
Investments at value.................................. $81,677,877
Cash.................................................. 53
Foreign cash at value (Cost $223)..................... 219
Receivable for:
Fund shares sold...................................... 154,503
Open forward currency
contracts--net....................................... 72,762
Dividends and interest................................ 1,130,038
Miscellaneous......................................... 399
Unamortized organization.............................. 3,687
-----------
83,039,538
LIABILITIES
Payable for:
Securities purchased.................................. $8,245,528
Fund shares redeemed.................................. 67,228
Reverse repurchase agreement.......................... 3,465,000
Withholding taxes..................................... 86
Interest payable...................................... 578
Accrued expenses:
Management fees....................................... 34,312
Deferred trustees' fees............................... 1,883
Other................................................. 22,978
----------
11,837,593
-----------
$71,201,945
===========
NET ASSETS
Net Assets consist of:
Capital paid in....................................... $69,581,546
Overdistributed net investment income................. (14,223)
Accumulated net realized gains........................ 87,409
Unrealized appreciation on investments, forward
contracts and foreign currency....................... 1,547,213
-----------
NET ASSETS............................................. $71,201,945
===========
Computation of offering price:
Net asset value and redemption price per share
($71,201,945 divided by 5,926,550 shares of beneficial
interest)............................................. $ 12.01
===========
Identified cost of investments......................... $80,200,925
===========
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Dividends............................................. $ 2,187
Interest.............................................. 4,441,579
----------
4,443,766
EXPENSES
Management fees....................................... $ 353,611
Trustees' fees and expenses........................... 14,258
Custodian............................................. 57,110
Audit and tax services................................ 13,112
Legal................................................. 22,022
Printing.............................................. 9,620
Amortization of organization expenses................. 2,008
Miscellaneous......................................... 2,971
----------
Total expenses....................................... 474,712
Less expenses assumed by the
investment adviser.................................. (12,296) 462,416
---------- ----------
NET INVESTMENT INCOME.................................. 3,981,350
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS, FORWARD CURRENCY
CONTRACTS AND FOREIGN CURRENCY
TRANSACTIONS
Realized gain on:
Investments--net.................................... 888,717
Foreign currency transactions--net.................... 115,836
----------
Total realized gain on
investments and foreign
currency transactions............................... 1,004,553
----------
Unrealized appreciation on:
Investments--net.................................... 674,790
Foreign currency transactions--net.................... 99,728
----------
Total unrealized appreciation on
investments and foreign
currency transactions............................... 774,518
----------
Net gain on investment transactions.................... 1,779,071
----------
NET INCREASE IN NET ASSETS FROM
OPERATIONS............................................ $5,760,421
==========
</TABLE>
(a) Net of foreign taxes of: $93
See accompanying notes to financial statements.
79
<PAGE>
NEW ENGLAND ZENITH FUND
(SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES)
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
FROM OPERATIONS
Net investment income.............................. $ 1,559,506 $ 3,981,350
Net realized gain on investments and foreign
currency transactions............................. 587,758 1,004,553
Unrealized appreciation on investments, and foreign
currency transactions............................. 619,201 774,518
----------- -----------
INCREASE IN NET ASSETS FROM OPERATIONS............. 2,766,465 5,760,421
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income.............................. (1,704,472) (4,170,493)
Net realized gain on investments................... (518,385) (739,272)
----------- -----------
(2,222,857) (4,909,765)
----------- -----------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares....................... 29,554,662 45,476,971
Net asset value of shares issued in connection with
the reinvestment of:
Distributions from net investment income........... 1,704,472 4,170,493
Distributions from net realized gain............... 518,385 739,272
----------- -----------
31,777,519 50,386,736
Cost of shares redeemed............................ (5,997,600) (15,843,098)
----------- -----------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL SHARE
TRANSACTIONS...................................... 25,779,919 34,543,638
----------- -----------
TOTAL INCREASE IN NET ASSETS....................... 26,323,527 35,394,294
NET ASSETS
Beginning of the year.............................. 9,484,124 35,807,651
----------- -----------
End of the year.................................... $35,807,651 $71,201,945
=========== ===========
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the year.............................. $ 50,354 $ 18,251
=========== ===========
End of the year.................................... $ 18,251 $ (14,223)
=========== ===========
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares..................... 2,532,646 3,727,495
Issued in connection with the reinvestment of:
Distributions from net investment income........... 144,891 347,510
Distributions from net realized gain............... 42,731 61,591
----------- -----------
2,720,268 4,136,596
Redeemed........................................... (513,384) (1,291,407)
----------- -----------
Net change......................................... 2,206,884 2,845,189
=========== ===========
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
OCTOBER 31, 1994(A)
THROUGH YEAR YEAR YEAR
DECEMBER 31, ENDED ENDED ENDED
1994 1995 1996 1997
------------------- ------ ------- -------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year............................ $10.00 $ 9.74 $ 10.85 $ 11.62
------ ------ ------- -------
Income From Investment Operations
Net Investment Income........... 0.12 0.58 0.51 0.75
Net Realized and Unrealized Gain
(Loss) on Investments.......... (0.26) 1.30 1.05 0.54
------ ------ ------- -------
Total From Investment
Operations..................... (0.14) 1.88 1.56 1.29
------ ------ ------- -------
Less Distributions
Distributions From Net
Investment Income.............. (0.12) (0.55) (0.60) (0.76)
Distributions From Net Realized
Capital Gains.................. 0.00 (0.22) (0.19) (0.14)
------ ------ ------- -------
Total Distributions............. (0.12) (0.77) (0.79) (0.90)
------ ------ ------- -------
Net Asset Value, End of Year..... $ 9.74 $10.85 $ 11.62 $ 12.01
====== ====== ======= =======
TOTAL RETURN (%)................. (1.40)(c) 19.38 14.36 11.07
Ratio of Operating Expenses to
Average Net Assets (%).......... 0.85 (b) 0.85 0.85 0.85
Ratio of Net Investment Income to
Average Net Assets (%).......... 7.05 (b) 8.39 7.79 7.32
Portfolio Turnover Rate (%)...... 403 (b) 202 176 258
Net Assets, End of Year (000).... $3,450 $9,484 $35,808 $71,202
The ratios of expenses to average
net assets without giving effect
to the voluntary expense
agreement described in Note 4 to
the Financial Statements would
have been (%)................... 2.01 (b) 2.44 1.19 0.87
</TABLE>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
See accompanying notes to financial statements.
80
<PAGE>
BACK BAY ADVISORS BOND INCOME SERIES
PORTFOLIO MANAGER: CATHERINE BUNTING
BACK BAY ADVISORS, L.P.
[PHOTOGRAPH OF CATHERINE BUNTING APPEARS HERE]
Q. HOW DID BACK BAY ADVISORS BOND INCOME SERIES PERFORM DURING THE LAST YEAR?
A. Very well--the Series finished the period with a total return of 10.90%
based on net asset value, reflecting a $2.89 per share gain in net asset value
to $108.52 and the reinvestment of distributions totalling $8.59 per share. By
comparison, the Series' return exceeded its benchmark, the Lehman Intermediate
Government/Corporate Index, which generated a 7.87% return for the same peri-
od.
During the year, U.S. corporate bonds and Yankee bonds contributed strongly to
the Series' impressive results. Yankee bonds are U.S. dollar-denominated secu-
rities issued in the United States by foreign companies. Because these bonds
are dollar based, investors have an opportunity to participate in global bond
markets--without the currency risk.
Q. DID THE INVESTMENT ENVIRONMENT HELP OR HURT BONDS DURING THE YEAR?
A. The environment was hospitable for bonds. Economic growth was strong, in-
terest rates were relatively stable, and inflation was contained--a positive
combination for fixed-income investments. For the first nine months of the
year, the negligible difference between yields on corporate bonds and on U.S.
Treasury bonds translated into fewer attractive opportunities in the U.S. cor-
porate market.
In July, several Asian countries devalued their currencies, which had a nega-
tive impact on Yankee bonds--even though they are denominated in U.S. dollars.
Asian financial troubles resulted in a flight to quality to the U.S. bond mar-
ket, where yields declined and bond prices rose.
Q. HOW DID YOU STRUCTURE THE PORTFOLIO IN VIEW OF THESE CONDITIONS?
A. I maintained my strategy of investing in high-quality fixed-income securi-
ties. On December 31, 1997, 49.1% of the portfolio was invested in domestic
corporate bonds, with 34.6% of the portfolio in so-called defensive domestic
industries such as cable, media, utilities and telecommunications. These bonds
benefited from continued strong U.S. economic growth and a wave of corporate
merger activity. For example, in the telecommunications sector, the Series in-
vested in MFS Communications and WorldCom, Inc. These companies merged a few
months ago and, soon afterward, bond rating agencies upgraded the credit qual-
ity of the newly formed company's bonds.
At the end of the year, 20.5% of the portfolio was invested in U.S. Treasurys,
agency bonds and mortgage-backed securities. When interest rates fall, under-
lying mortgage holders tend to refinance their debt, forcing investors to re-
invest the proceeds from prepaid loans, usually at lower prevailing rates. The
mortgage holdings included lower-coupon GNMA securities with fixed interest
payments of 7.0% to 9.0%. These securities performed well because they were
less likely than higher-coupon securities to be prepaid when long-term inter-
est rates fell.
Dollar-denominated Canadian bonds accounted for 7% of the Series' assets at
year end. The Series held investments in emerging markets, including a 0.23%
position in Pemex, the Mexican oil company, which was only mildly affected by
problems in Asia. Overall, the Series' investments were well insulated from
the Asian financial turmoil.
Q. WHAT STEPS DID YOU TAKE GIVEN THE DECLINING INTEREST RATE ENVIRONMENT?
A. Throughout the 12 months, I kept the portfolio's duration relatively long.
Duration is a measure of a bond's sensitivity to interest rate changes. The
longer a bond's duration, the more its price reacts to changes in rates--ris-
ing when interest rates fall and declining when interest rates rise. I believe
the portfolio's relatively long duration contributed to gains in the Series'
share price.
Q. WHAT IS YOUR OUTLOOK FOR 1998?
A. I am optimistic but cautious. The problems in Asia could brake U.S. eco-
nomic growth, which would help keep inflation at relatively modest levels.
These factors should foster relatively stable government and corporate bond
markets. To capture the best possible yields, I am likely to emphasize longer-
duration bonds. Meanwhile, to help manage price fluctuations, I am maintaining
the Series emphasis on high-quality corporate bonds in defensive areas of the
economy, those that I believe will be unaffected by any continuing problems in
the Far East.
81
<PAGE>
A $10,000 Investment Compared to the Lehman Brothers Intermediate Government
Corporate Bond Index/5/ and the Cost of Living
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Bond Income Lehman Lehman Cost
Series Gov't/corp of Living
----------- ---------- -----------
<S> <C> <C> <C>
12/31/87 10,000 10,000 10,000
12/31/88 10,837 10,678 10,442
12/31/89 12,169 12,041 10,928
12/31/90 13,153 13,145 11,595
12/31/91 15,515 15,068 11,950
12/31/92 16,785 16,148 12,297
12/31/93 18,901 17,567 12,635
12/31/94 18,266 17,228 12,972
12/31/95 22,137 19,866 13,302
12/31/96 23,158 20,673 13,743
12/31/97 25,682 22,300 13,995
</TABLE>
[X] FUND FACTS
BACK BAY ADVISORS BOND INCOME SERIES
GOAL: A high level of current income consistent with the protection of capital
and moderate investment risk.
START DATE: August 26, 1983
SIZE: $203 million as of December 31, 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.
82
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS BOND INCOME SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
BONDS & NOTES--94.4% OF TOTAL NET ASSETS
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
BROADCASTING--5.1%
$ 1,500,000 Cablevision Systems Corp., 7.875%, 12/15/07........ $ 1,535,235
3,100,000 Continental Cablevision, Inc., 9.500%, 8/01/13..... 3,622,567
1,500,000 Tele-Communications, Inc., 9.800%, 2/01/12......... 1,853,490
2,935,000 Tele-Communications, Inc., 9.250%, 1/15/23......... 3,343,053
------------
10,354,345
------------
CONTAINERS--0.5%
1,000,000 Owens Illinois, Inc., 8.100%, 5/15/07.............. 1,073,060
------------
ELECTRIC UTILITIES--6.5%
5,800,000 Arizona Public Service Corp., 8.000%, 12/30/15..... 6,306,050
1,500,000 CalEnergy, Inc., 9.500%, 9/15/06................... 1,635,000
1,000,000 CalEnergy, Inc., 7.630%, 10/15/07.................. 1,007,410
1,250,000 Niagara Mohawk Power Corp., 5.875%, 9/01/02........ 1,202,963
1,000,000 Ohio Edison Corp., 8.680%, 6/01/17................. 1,089,790
1,700,000 Texas Utilities Electric Co., 8.875%, 2/01/22...... 1,892,967
------------
13,134,180
------------
FEDERAL AGENCIES--7.6%
39,143 Federal Home Loan Bank,
9.000%, with various maturities to 2001........... 40,661
7,087,698 Government National Mortgage Association, 7.000%
with various maturities to 2025................... 7,149,715
6,017,794 Government National Mortgage Association, 7.500%
with various maturities to 2025................... 6,170,104
1,746,008 Government National Mortgage Association, 8.500%
with various maturities to 2022................... 1,834,949
218,606 Government National Mortgage Association, 9.000%,
10/15/16.......................................... 233,909
------------
15,429,338
------------
FINANCIAL--12.2%
2,500,000 American General Financing, 8.450%, 10/15/09....... 2,876,325
2,500,000 Associates Corporation of North America, 7.950%,
2/15/10........................................... 2,791,425
5,660,000 Associates Corporation of North America, 8.550%,
7/15/09........................................... 6,621,011
2,942,000 EIP Funding Corp., 10.250%, 10/01/12............... 3,440,139
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
$ 3,000,000 Intermediate American Development Bank, 6.375%,
10/22/07.......................................... $ 3,053,190
1,800,000 Pitney Bowes Credit Corp., 8.550%, 9/15/09......... 2,127,996
3,750,000 Toronto Dominion Bank, 7.875%, 8/15/04............. 3,844,350
------------
24,754,436
------------
FOREIGN--6.3%
4,500,000 British Columbia Province Canada, 7.750%,
6/16/03(c)........................................ 3,456,502
7,665,000 Government of Canada, 8.000%, 6/01/23(c)........... 6,760,948
15,000,000 Ontario Hydro, Zero Coupon, 11/27/20(c)............ 2,454,472
1,050,000 Ontario Hydro, Zero Coupon, 8/06/21(c)............. 164,438
------------
12,836,360
------------
PAPER--0.8%
501,844 Fort Howard Trust, 11.000%, 1/02/02................ 525,054
1,000,000 Pope and Talbot, Inc., 8.375%, 6/01/13............. 1,057,740
------------
1,582,794
------------
PUBLISHING--2.8%
2,150,000 Golden Books Publishing, Inc., 7.650%, 9/15/02..... 2,074,750
1,500,000 News America Holdings, Inc., 7.750%, 2/01/24....... 1,578,075
1,300,000 News America Holdings, Inc., 8.250%, 8/10/18....... 1,434,823
500,000 Time Warner, Inc. 9.150%, 2/01/23.................. 615,095
------------
5,702,743
------------
RAILROADS--1.0%
2,000,000 Norfolk Southern Corp., 7.050%, 5/01/37............ 2,122,880
------------
TELECOMMUNICATIONS--12.6%
2,300,000 AT&T Corp., 8.350%, 1/15/25........................ 2,539,268
3,000,000 Bellsouth Telecomm, Inc., 5.850%, 11/15/45......... 3,008,310
6,000,000 GTE Corp., 7.900%, 2/01/27......................... 6,303,840
5,000,000 MCI Communications 7.500%, 8/20/04................. 5,275,000
1,000,000 MCI Communications 7.750%, 3/15/24................. 1,035,340
1,000,000 Total Access Communication, 8.375%, 11/04/06....... 620,000
</TABLE>
See accompanying notes to financial statements.
83
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS BOND INCOME SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
BONDS & NOTES--(CONTINUED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
TELECOMMUNICATIONS--(CONTINUED)
$ 3,761,000 WorldCom Inc., 8.875%, 1/15/06..................... $ 4,047,776
2,500,000 WorldCom Inc., 7.750%, 4/01/07..................... 2,684,725
------------
25,514,259
------------
U.S. GOVERNMENT--20.5%
5,000,000 U.S. Treasury Bonds, 6.375%, 8/15/27............... 5,279,350
10,000,000 U.S. Treasury Notes, 5.750%, 8/15/03............... 10,008,700
1,500,000 U.S. Treasury Notes, 6.375%, 7/15/99............... 1,517,055
2,500,000 U.S. Treasury Notes, 6.500%, 8/15/05............... 2,609,450
6,500,000 U.S. Treasury Notes, 6.875%, 7/30/99............... 6,618,365
3,500,000 U.S. Treasury Notes, 8.000%, 5/15/01............... 3,739,925
9,000,000 U.S. Treasury Notes, 8.500%, 11/15/00.............. 9,662,310
2,000,000 U.S. Treasury Notes, 6.125%, 8/15/07............... 2,056,140
------------
41,491,295
------------
UTILITIES--(DIVERSIFIED)--7.6%
2,000,000 Long Island Lighting Co., 9.000%, 11/01/22......... 2,227,180
4,400,000 Long Island Lighting Co., 8.200%, 3/15/23.......... 4,761,416
1,250,000 New York State Electric & Gas Co., 8.875%,
11/01/21.......................................... 1,376,775
5,000,000 Tennessee Valley Authority, 6.125%, 7/15/03........ 4,996,400
2,000,000 Tennessee Valley Authority, 6.750%, 11/01/25....... 2,111,720
------------
15,473,491
------------
YANKEE--10.9%
900,000 British Columbia Hydro & Power, 12.500%, 9/01/13... 969,894
1,000,000 British Columbia Hydro & Power, 12.500%, 1/15/14... 1,098,330
3,500,000 Hydro Quebec, 8.050%, 7/07/24...................... 4,058,005
3,500,000 Merita Bank, Ltd., 7.150%, 12/29/49................ 3,552,115
500,000 Pemex Petroleos Mexicanos, 8.625%, 12/01/23........ 474,865
3,500,000 Petroleos Mexicanos, 144A, 9.000%, 6/01/07 (d)..... 3,506,475
2,900,000 Petroleos Mexicanos, 144A, 8.625%, 12/01/23(d)..... 2,754,217
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
$ 750,000 Republic of Argentina 11.375%, 1/30/17............ $ 824,063
2,900,000 Republic of Colombia, 8.660%, 10/07/16............ 2,990,190
2,000,000 Republic of Colombia, 7.250%, 2/23/04............. 1,899,500
------------
22,127,654
------------
Total Bonds and Notes
(Identified Cost $185,872,907)................... 191,596,835
------------
SHORT-TERM INVESTMENTS--6.4%
3,302,000 American Express Credit Corp., 5.750%, 1/02/98.... 3,301,473
9,589,000 Household Finance Corp., 6.500%, 1/02/98.......... 9,587,269
------------
Total Short-Term Investments (Identified Cost
$12,888,742)..................................... 12,888,742
------------
Total Investments--100.8%
(Identified Cost $198,761,649)(b)................ 204,485,577
Other assets less liabilities..................... (1,597,594)
------------
TOTAL NET ASSETS--100%............................ $202,887,983
============
(a) See Note 1A.
(b) Federal Tax Information:
At December 31, 1997 the net unrealized appreciation on investments based on
cost of $198,815,054 for federal income tax purposes was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost.................................... $ 7,072,232
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax
cost over value.................................. (1,401,709)
------------
Net unrealized appreciation....................... $ 5,670,523
============
</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 qualified institutional buyers.
See accompanying notes to financial statements.
84
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS BOND INCOME SERIES)
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
ASSETS
Investments at value................................ $204,485,577
Cash................................................ 5,107
Receivable for:
Fund shares sold.................................... 425,820
Interest............................................ 3,771,716
------------
208,688,220
LIABILITIES
Payable for:
Securities purchased................................ $5,392,075
Fund shares redeemed................................ 276,799
Accrued expenses:
Management fees..................................... 67,887
Deferred trustees' fees............................. 42,712
Other............................................... 20,764
----------
5,800,237
------------
$202,887,983
============
NET ASSETS
Net Assets consist of:
Capital paid in..................................... $196,844,831
Overdistributed net investment income............... (939)
Accumulated net realized gains...................... 320,163
Unrealized appreciation on investments.............. 5,723,928
------------
NET ASSETS........................................... $202,887,983
============
Computation of offering price:
Net asset value and redemption price per share
($202,887,983 divided by 1,869,650 shares of
beneficial interest)................................ $ 108.52
============
Identified cost of investments....................... $198,761,649
============
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest............................................... $13,994,029
EXPENSES
Management fees........................................ $ 747,372
Trustees' fees and expenses............................ 30,258
Custodian.............................................. 92,350
Audit and tax services................................. 9,661
Legal.................................................. 22,022
Printing............................................... 58,902
Miscellaneous.......................................... 3,602
---------
Total expenses........................................ 964,167
-----------
NET INVESTMENT INCOME................................... 13,029,862
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS
Realized gain (loss) on:
Investments--net....................................... 1,701,423
Foreign currency transactions--net..................... (96,767)
---------
Total realized gain on investments and foreign
currency transactions................................ 1,604,656
---------
Unrealized appreciation on:
Investments--net....................................... 4,839,400
Foreign currency transactions--net..................... 180
---------
Total unrealized appreciation on investments and
foreign currency transactions........................ 4,839,580
---------
Net gain on investment transactions..................... 6,444,236
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS.............. $19,474,098
===========
</TABLE>
See accompanying notes to financial statements.
85
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS BOND INCOME SERIES)
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
FROM OPERATIONS
Net investment income............................. $ 12,169,158 $ 13,029,862
Net realized gain on investments and foreign
currency transactions............................ 1,434,380 1,604,656
Unrealized appreciation (depreciation) on
investments, and foreign currency transactions... (5,669,381) 4,839,580
------------ ------------
INCREASE IN NET ASSETS FROM OPERATIONS............ 7,934,157 19,474,098
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income............................. (12,191,823) (13,039,485)
Net realized gain on investments.................. (496,515) (1,850,904)
------------ ------------
(12,688,338) (14,890,389)
------------ ------------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares...................... 53,162,089 54,067,705
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income.......... 12,191,823 13,039,485
Distributions from net realized gain.............. 496,515 1,850,904
------------ ------------
65,850,427 68,958,094
Cost of shares redeemed........................... (43,449,240) (51,012,776)
------------ ------------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL SHARE
TRANSACTIONS..................................... 22,401,187 17,945,318
------------ ------------
TOTAL INCREASE IN NET ASSETS...................... 17,647,006 22,529,027
NET ASSETS
Beginning of the year............................. 162,711,950 180,358,956
------------ ------------
End of the year................................... $180,358,956 $202,887,983
============ ============
UNDISTRIBUTED NET INVESTMENT INCOME (LOSS)
Beginning of the year............................. $ 53,292 $ 146,994
============ ============
End of the year................................... $ 146,994 $ (939)
============ ============
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares.................... 491,882 489,276
Issued in connection with the reinvestment of:
Distributions from net investment income.......... 114,880 120,361
Distributions from net realized gain.............. 4,700 16,902
------------ ------------
611,462 626,539
Redeemed.......................................... (401,180) (464,412)
------------ ------------
Net change........................................ 210,282 162,127
============ ============
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year........................ $ 103.47 $ 106.14 $ 95.53 $ 108.67 $ 105.63
-------- -------- -------- -------- --------
Income From Investment
Operations
Net Investment Income....... 5.70 7.05 7.34 7.72 7.43
Net Realized and Unrealized
Gain (Loss) on Investments. 7.38 (10.61) 12.85 (2.70) 4.05
-------- -------- -------- -------- --------
Total From Investment
Operations................. 13.08 (3.56) 20.19 5.02 11.48
-------- -------- -------- -------- --------
Less Distributions
Distributions From Net
Investment Income.......... (6.20) (7.05) (7.05) (7.74) (7.51)
Distributions in Excess of
Net Investment Income...... (0.05) 0.00 0.00 0.00 0.00
Distributions From Net
Realized Capital Gains..... (4.16) 0.00 0.00 (0.32) (1.08)
-------- -------- -------- -------- --------
Total Distributions......... (10.41) (7.05) (7.05) (8.06) (8.59)
-------- -------- -------- -------- --------
Net Asset Value, End of Year. $ 106.14 $ 95.53 $ 108.67 $ 105.63 $ 108.52
======== ======== ======== ======== ========
TOTAL RETURN (%)............. 12.61 (3.36) 21.20 4.61 10.90
Ratio of Operating Expenses
to Average Net Assets (%)... 0.43 0.44 0.55 0.52 0.52
Ratio of Net Investment
Income to Average Net Assets
(%)......................... 6.47 6.75 7.22 7.22 6.97
Portfolio Turnover Rate (%).. 177 82 73 98 40
Net Assets, End of Year
(000)....................... $131,242 $126,234 $162,712 $180,359 $202,888
</TABLE>
See accompanying notes to financial statements.
86
<PAGE>
SALOMON BROTHERS U.S. GOVERNMENT SERIES
PORTFOLIO MANAGERS: STEVEN GUTERMAN AND ROGER LAVAN
SALOMON BROTHERS ASSET MANAGEMENT INC
[PHOTOGRAPH OF STEVEN GUTERMAN APPEARS HERE]
[PHOTOGRAPH OF ROGER LAVAN APPEARS HERE]
Q. HOW DID THE SERIES PERFORM DURING 1997?
A. The Salomon Brothers U.S. Government Series posted an 8.57% return (based
on net asset value) in 1997. This performance compares favorably versus the
Lehman Intermediate Government Index, the Series' benchmark, which returned
7.72% over the same period.
Economic conditions in the United States remained surprisingly favorable
throughout 1997. The combination of moderate growth and low inflation sup-
ported the financial markets. The Federal Reserve's decision to raise interest
rates in March was widely anticipated, and since then, the market continued to
be comforted by the fact that strong growth did not translate into higher in-
flation readings. The turmoil in Asian markets reverberated throughout the
world later in the year, and the resultant dampening effects are likely to
keep the Fed on hold for the near term.
Q. HOW DID YOU MANAGE THE SERIES DURING THE YEAR?
A. Early in 1997, bonds sold off on the expectation that strong U.S. economic
growth would begin to translate into higher inflation readings. Following the
March tightening by the Fed-- when long bond yields were more than 7%--infla-
tion unexpectedly continued to decline. This led to a rally in U.S. fixed-
income securities, and yields fell some 75 basis points through the summer.
The rally continued in the fall, when it was widely believed that the Asian
crisis would slow economic growth in the United States to more sustainable
levels. The Series' strong performance reflects the continued overweight posi-
tion in mortgage-backed securities. Indeed, mortgages (as measured by the un-
managed Salomon Brothers Mortgage Index) posted returns of 9.27% in 1997,
which on a duration-adjusted basis outdistanced benchmark Treasurys by approx-
imately 132 basis points. The Series' performance was also helped by the
slightly longer duration position relative to the benchmark since midyear.
Q. WHAT IS YOUR OUTLOOK FOR THE YEAR AHEAD?
A. As we move into 1998, the effects of the turmoil in Asia will continue.
While we believe that the direct impact on the U.S. will be limited, the indi-
rect effects could be larger. The weakness in Asia should dampen U.S. growth
to sustainable levels, offsetting strength in housing and other consumer sec-
tors. This should also serve to curb mounting pressure in the labor force. We
believe that the inflation picture will improve going forward, as price compe-
tition in commodities and produced goods from countries such as Korea and Ja-
pan keep U.S. prices in check. This combination of slower growth and lower in-
flation should benefit financial assets in 1998. Barring a significant decline
in interest rates, we believe that additional spreads from mortgages will lead
to higher returns versus Treasuries.
A $10,000 Investment Compared to Lehman Intermediate Gov't. Index/5/
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Salomon US Lehman Intermediate
Gov't Government
---------- -------------------
<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 11,894
12/31/97 12,979 12,832
</TABLE>
[X] 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: $22 million as of December 31, 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.
87
<PAGE>
NEW ENGLAND ZENITH FUND
(SALOMON BROTHERS U.S. GOVERNMENT SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
BONDS & NOTES--84.5% OF TOTAL NET ASSETS
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
FEDERAL AGENCY--62.5%
$ 300,000 Federal Home Loan Banks
5.940%, 6/13/00...................................... $ 300,933
281,016 Federal Home Loan Mortgage
7.500%, 5/01/07...................................... 286,636
19,675 Federal Home Loan Mortgage
6.000%, 10/01/10..................................... 19,367
380,446 Federal Home Loan Mortgage
7.000%, 7/01/11...................................... 386,510
64,618 Federal Home Loan Mortgage
11.750%, 1/01/12..................................... 73,180
378,368 Federal Home Loan Mortgage
8.250%, 4/01/17...................................... 397,279
381,514 Federal Home Loan Mortgage
8.000%, 12/01/19..................................... 391,288
1,081,712 Federal Home Loan Mortgage
8.000%, 7/01/20...................................... 1,133,093
246,477 Federal Home Loan Mortgage
7.000%, 4/15/21...................................... 249,250
58,794 Federal Home Loan Mortgage
6.500%, 5/01/26...................................... 58,151
55,948 Federal Home Loan Mortgage
6.500%, 6/01/26...................................... 55,336
859,379 Federal Home Loan Mortgage
6.500%, 7/01/26...................................... 849,977
500,000 Federal Home Loan Mortgage
6.500%, 12/01/2099................................... 500,780
750,000 Federal National Mortgage Association 6.740%, 8/25/07. 774,141
27,411 Federal National Mortgage Association 14.500%,
11/15/14............................................. 33,741
15,791 Federal National Mortgage Association 12.500%,
8/01/15.............................................. 18,648
76,962 Federal National Mortgage Association 12.500%,
9/20/15.............................................. 91,657
658,378 Federal National Mortgage Association 12.000%,
10/01/15............................................. 765,489
74,100 Federal National Mortgage Association 13.000%,
11/15/15............................................. 88,804
39,635 Federal National Mortgage Association 12.000%,
1/15/16.............................................. 46,454
363,056 Federal National Mortgage Association 12.500%,
1/01/16.............................................. 427,838
600,000 Federal National Mortgage Association 6.909%, 6/25/16. 615,938
25,593 Federal National Mortgage Association 11.500%,
9/01/19.............................................. 29,712
417,382 Federal National Mortgage Association 6.500%, 3/01/26. 412,946
1,830,000 Federal National Mortgage Association TBA 6.500%,
1/01/99.............................................. 1,832,288
900,000 Federal National Mortgage Association TBA 6.500%,
1/01/99.............................................. 888,750
2,350,000 Federal National Mortgage Association TBA 7.000%,
1/01/99.............................................. 2,366,873
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (A)
<C> <S> <C>
$ 147,197 Government National Mortgage Association TBA 9.000%,
10/20/16........................................... $ 159,109
272,815 Government National Mortgage Association TBA 9.000%,
12/15/16........................................... 294,316
300,000 Student Loan Marketing Association 7.500%, 3/08/00.. 310,716
-----------
13,859,200
-----------
U.S. TREASURY--22.0%
100,000 U.S. Treasury Bonds 6.375%, 8/15/27................. 105,469
200,000 U.S. Treasury Notes 6.500%, 5/31/01................. 204,824
450,000 U.S. Treasury Notes 6.000%, 8/31/02................. 459,414
500,000 U.S. Treasury Notes 5.875%, 9/30/02................. 502,920
1,400,000 U.S. Treasury Notes 6.625%, 5/15/07................. 1,482,460
2,050,000 U.S. Treasury Notes 6.125%, 8/15/07(c).............. 2,107,543
-----------
4,862,630
-----------
Total Bonds & Notes
(Identified Cost $18,515,250)...................... 18,721,830
-----------
SHORT-TERM INVESTMENTS--49.4%
5,466,000 Repurchase agreement with Merrill Lynch dated
12/31/97 at 6.00% to be repurchased at $5,468,004
on 1/02/98 collateralized by $5,330,000 U.S.
Treasury Note 6.50% due 8/31/01 with a value of
$5,576,513......................................... 5,466,000
5,466,000 Repurchase agreement with State Street Bank & Trust
dated 12/31/97 at 6.00% to be repurchased at
$5,467,822 on 1/02/98 collateralized by $3,625,000
U.S. Treasury Bond 10.625% due 8/15/15 with a value
of $5,581,376...................................... 5,466,000
-----------
Total Short-Term Investments
(Identified Cost $10,932,000)...................... 10,932,000
-----------
Total Investments--133.9%
(Identified Cost $29,447,250)(b)................... 29,653,830
Liabilities......................................... (7,510,483)
-----------
TOTAL NET ASSETS--100%.............................. $22,143,347
===========
</TABLE>
(a) See Note 1a.
(b) Federal Tax Information:
At December 31, 1997 the net unrealized appreciation on investments based on
cost of $29,454,641 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................. $220,895
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value................. (21,706)
--------
Net unrealized appreciation...................................... $199,189
========
</TABLE>
(c)Portion of or entire principal amount delivered as collateral for reverse
repurchase agreement.
See accompanying notes to financial statements.
88
<PAGE>
NEW ENGLAND ZENITH FUND
(SALOMON BROTHERS U.S. GOVERNMENT SERIES)
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
ASSETS
Investments at value.................................. $29,653,830
Cash.................................................. 386
Receivable for:
Fund shares sold...................................... 81,623
Dividends and interest................................ 165,215
Due from advisor...................................... 2,536
Unamortized organization.............................. 3,687
-----------
29,907,277
LIABILITIES
Payable for:
Securities purchased.................................. $5,583,312
Reverse repurchase agreement.......................... 1,890,000
Fund shares redeemed.................................. 263,329
Interest payable...................................... 300
Miscellaneous......................................... 1,573
Accrued expenses:
Management fees....................................... 5,774
Deferred trustees' fees............................... 1,790
Other................................................. 17,852
----------
7,763,930
-----------
$22,143,347
===========
NET ASSETS
Net Assets consist of:
Capital paid in....................................... $21,939,786
Accumulated net realized losses....................... (3,019)
Unrealized appreciation on investments................ 206,580
-----------
NET ASSETS............................................. $22,143,347
===========
Computation of offering price:
Net asset value and redemption price per share
($22,143,347 divided by 1,988,617 shares of beneficial
interest)............................................. $ 11.14
===========
Identified cost of investments........................ $29,447,250
===========
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest.............................................. $1,201,589
----------
EXPENSES
Management fees....................................... $ 92,762
Trustees' fees and expenses........................... 13,813
Custodian............................................. 16,269
Audit and tax services................................ 12,421
Legal................................................. 22,022
Printing.............................................. 2,547
Amortization of organization expenses................. 2,008
Miscellaneous......................................... 2,856
--------
Total expenses....................................... 164,698
Less expenses
assumed by the
investment
adviser............................................. (46,636) 118,062
-------- ----------
NET INVESTMENT
INCOME................................................ 1,083,527
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Realized gain on:
Investments--net...................................... 78,575
Unrealized appreciation on:
Investments--net...................................... 227,116
----------
Net gain on investment transactions..................... 305,691
----------
NET INCREASE IN NET ASSETS FROM
OPERATIONS............................................ $1,389,218
==========
</TABLE>
See accompanying notes to financial statements.
89
<PAGE>
NEW ENGLAND ZENITH FUND
(SALOMON BROTHERS U.S. GOVERNMENT SERIES)
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
FROM OPERATIONS
Net investment income.............................. $ 664,231 $ 1,083,527
Net realized gain on investments................... 1,275 78,575
Unrealized appreciation (depreciation) on
investments....................................... (214,900) 227,116
----------- -----------
INCREASE IN NET ASSETS FROM OPERATIONS............. 450,606 1,389,218
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income.............................. (639,626) (1,038,280)
Net realized gain on investments................... (16,259) (154,231)
----------- -----------
(655,885) (1,192,511)
----------- -----------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares....................... 9,363,646 14,986,752
Net asset value of shares issued in connection with
the reinvestment of:
Distributions from net investment income........... 639,626 1,038,280
Distributions from net realized gain............... 16,259 154,231
----------- -----------
10,019,531 16,179,263
Cost of shares redeemed............................ (4,145,624) (7,443,287)
----------- -----------
INCREASE IN NET ASSETS DERIVED FROM CAPITAL SHARE
TRANSACTIONS...................................... 5,873,907 8,735,976
----------- -----------
TOTAL INCREASE IN NET ASSETS....................... 5,668,628 8,932,683
NET ASSETS
Beginning of the year.............................. 7,542,036 13,210,664
----------- -----------
End of the year.................................... $13,210,664 $22,143,347
=========== ===========
UNDISTRIBUTED NET INVESTMENT INCOME
Beginning of the year.............................. $ 735 $ 6,776
=========== ===========
End of the year.................................... $ 6,776 $ 0
=========== ===========
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares..................... 852,094 1,328,315
Issued in connection with the reinvestment of:
Distributions from net investment income........... 58,698 93,361
Distributions from net realized gain............... 0 13,834
----------- -----------
910,792 1,435,510
Redeemed........................................... (374,295) (666,852)
----------- -----------
Net change......................................... 536,497 768,658
=========== ===========
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
OCTOBER 31, 1994(A)
THROUGH YEAR YEAR YEAR
DECEMBER 31, ENDED ENDED ENDED
1994 1995 1996 1997
------------------- ------ ------- -------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year............................ $10.00 $ 9.96 $ 11.04 $ 10.83
------ ------ ------- -------
Income From Investment Operations
Net Investment Income........... 0.10 0.33 0.58 0.53
Net Realized and Unrealized Gain
(Loss) on Investments.......... (0.04) 1.16 (0.21) 0.40
------ ------ ------- -------
Total From Investment
Operations..................... 0.06 1.49 0.37 0.93
------ ------ ------- -------
Less Distributions
Distributions From Net
Investment Income.............. (0.10) (0.33) (0.56) (0.53)
Distributions From Net Realized
Capital Gains.................. 0.00 (0.08) (0.02) (0.05)
Distributions in Excess of net
realized Capital Gain.......... 0.00 0.00 0.00 (0.04)
------ ------ ------- -------
Total Distributions............. (0.10) (0.41) (0.58) (0.62)
------ ------ ------- -------
Net Asset Value, End of Year..... $ 9.96 $11.04 $ 10.83 $ 11.14
====== ====== ======= =======
TOTAL RETURN (%)................. 0.60(c) 15.02 3.31 8.57
Ratio of Operating Expenses to
Average Net Assets (%).......... 0.70(b) 0.70 0.70 0.70
Ratio of Net Investment Income to
Average Net Assets (%).......... 5.70(b) 5.62 6.13 6.42
Portfolio Turnover Rate (%)...... 1,409(b) 415 388 572
Net Assets, End of Year (000).... $2,012 $7,542 $13,211 $22,143
The ratios of expenses to average
net assets without giving effect
to the voluntary expense
agreement described in Note 4 to
the Financial Statements would
have been (%)................... 2.54(b) 2.90 1.37 0.98
</TABLE>
(a) Commencement of operations.
(b) Computed on an annualized basis.
(c) Not computed on an annualized basis.
See accompanying notes to financial statements.
90
<PAGE>
BACK BAY ADVISORS MONEY MARKET SERIES
PORTFOLIO MANAGER: JOHN MALONEY
BACK BAY ADVISORS, L.P.
[PHOTOGRAPH OF JOHN MALONEY APPEARS HERE]
Q. HOW DID THE BACK BAY ADVISORS MONEY MARKET SERIES PERFORM OVER THE LAST
YEAR?
A. Although long-term interest rates declined during the period, short-term
rates remained relatively stable, as the Federal Reserve Board kept the Fed-
eral Funds rate at 5.5%. The Federal Funds rate is the rate at which banks
lend to each other overnight and is the benchmark for short-term interest
rates.
In this environment, the Back Bay Advisors Money Market Series provided
competitive money market yields while maintaining a constant $100* share
price. For the year ended December 31, 1997, the Series provided a total
return of 5.20%, which included the reinvestment of $5.08 per share in income
distributions. The Series' seven-day yield at year-end was 5.27%.
Q. WHAT STRATEGIES DID YOU USE IN MANAGING THE PORTFOLIO DURING THAT TIME?
A. In a period when short-term interest rates remained in a fairly narrow
range, we worked to maximize returns by managing the average maturity of the
Money Market Series. We purchased securities with longer maturities when their
yields rose in comparison to those of securities with shorter maturities, and
invested in instruments with shorter maturities when they provided similar
yields to those with longer maturities. This strategy helped us to lock in
rates while they hovered near the top of their range during the period. As in
the past, we concentrated on commercial paper, supplemented by the certifi-
cates of deposit of both domestic and foreign banks. During the period, we
held obligations of Japanese banks, which had matured by year-end. The Series'
average maturity stood at 42.4 days, as of December 31, 1997.
Q. WHAT IS YOUR OUTLOOK FOR MONEY MARKET INSTRUMENTS FOR 1998?
A. With the economy continuing to grow at a rate in excess of 3% and unemploy-
ment at historically low levels, we normally would anticipate the Federal Re-
serve Board to raise interest rates. However, the events in Asia during the
fourth quarter have clouded the economic outlook for 1998 and the direction of
interest rates. The Federal Reserve will likely monitor the lingering effects
of the Asian financial turmoil on the U.S. economy before adjusting monetary
policy. Investors' attempts to anticipate the next Fed policy move may create
some volatility in interest rates.
[X] FUND FACTS
GOAL: The highest possible level of current income consistent with the
preservation of capital.
START DATE: August 26, 1983
SIZE: $111 million as of December 31, 1997
MANAGER: John Maloney has served as portfolio manager since 1996. Mr. Maloney
also manages the New England Tax Exempt Money Market Trust.
*Money market funds are neither insured nor guaranteed by the U.S. Government.
This Series seeks but cannot assure a stable share price of $100.
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.
91
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS MONEY MARKET SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
INVESTMENTS--98.9% OF TOTAL NET ASSETS
<TABLE>
<CAPTION>
FACE INTEREST MATURITY
VALUE DESCRIPTION RATE DATE VALUE (A)
<C> <S> <C> <C> <C>
BANK NOTE--2.7%
$3,000,000 Morgan Guaranty Trust New York.... 5.365% 02/19/98 $ 2,999,786
------------
Total Bank Note (Cost $2,999,786). 2,999,786
------------
CERTIFICATES OF DEPOSIT--14.1%
1,000,000 Svenska Handelsbank............... 5.780% 01/07/98 1,000,015
1,300,000 Societe Generale New York......... 5.810% 02/03/98 1,299,899
2,364,000 Canadian Imperial................. 5.685% 03/02/98 2,362,800
2,000,000 Banque National De Paris.......... 5.860% 03/09/98 2,000,210
3,000,000 Societe Generale New York......... 5.970% 03/18/98 3,000,471
5,000,000 Royal Bank of Canada.............. 5.950% 03/24/98 5,000,547
1,000,000 Societe Generale New York......... 6.190% 05/11/98 1,000,881
------------
Total Certificates of Deposit
(Cost $15,664,823)............... 15,664,823
------------
CERTIFICATES OF DEPOSIT--EURO
DOLLAR--4.5%
2,000,000 Sanwa Bank........................ 5.680% 01/02/98 1,999,996
3,000,000 Barclays Bank..................... 5.670% 02/10/98 2,999,692
------------
Total Certificates of Deposit--
Euro Dollar (Cost $4,999,688).... 4,999,688
------------
COMMERCIAL PAPER--77.6%
ASSET BACKED--3.5%
1,855,000 Clipper Receivables Corp. ........ 5.620% 01/23/98 1,848,629
2,000,000 Clipper Receivables Corp. ........ 5.900% 01/29/98 1,990,822
------------
3,839,451
------------
AUTOMOTIVE--11.5%
480,000 Ford Motor Credit Corp. .......... 5.600% 01/07/98 479,552
705,000 American Honda Finance............ 5.920% 01/09/98 704,073
1,000,000 PACCAR Financial Corp. ........... 5.620% 01/12/98 998,283
2,325,000 Ford Motor Credit Corp. .......... 5.510% 01/16/98 2,319,662
800,000 Ford Motor Credit Corp. .......... 5.600% 01/16/98 798,133
270,000 Ford Motor Credit Corp. .......... 5.600% 01/21/98 269,160
1,500,000 Ford Motor Credit Corp. .......... 5.600% 01/22/98 1,495,100
655,000 American Honda Finance............ 5.850% 01/27/98 652,233
1,700,000 General Motors Acceptance Corp. .. 5.570% 02/17/98 1,687,638
1,500,000 General Motors Acceptance Corp. .. 5.580% 02/17/98 1,489,073
1,000,000 General Motors Acceptance Corp. .. 5.710% 03/09/98 989,373
1,000,000 General Motors Acceptance Corp. .. 5.620% 03/10/98 989,384
------------
12,871,664
------------
BANKING--13.4%
2,310,000 UBS Finance Delaware, Inc. ....... 6.500% 01/02/98 2,309,583
4,000,000 Bankers Trust NY Corp. ........... 5.560% 01/12/98 3,993,204
1,240,000 Banque National de Paris.......... 5.700% 01/12/98 1,237,840
1,000,000 Bankers Trust NY Corp. ........... 5.550% 01/13/98 998,150
1,300,000 Svenska Handelsbanken, Inc. ...... 5.580% 01/16/98 1,296,977
100,000 Bankers Trust NY Corp. ........... 5.600% 02/17/98 99,269
1,910,000 Svenska Handelsbanken, Inc. ...... 5.750% 02/17/98 1,895,662
1,255,000 Norwest Corp. .................... 5.730% 02/25/98 1,244,014
500,000 Banque National de Paris.......... 5.610% 03/02/98 495,325
1,265,000 Banque National de Paris.......... 5.750% 03/17/98 1,249,846
------------
14,819,870
------------
DRUGS--0.8%
950,000 American Home Products Corp. ..... 5.780% 02/26/98 941,458
------------
</TABLE>
See accompanying notes to financial statements.
92
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS MONEY MARKET SERIES)
INVESTMENTS AS OF DECEMBER 31, 1997
INVESTMENTS--(CONTINUED)
<TABLE>
<CAPTION>
FACE INTEREST MATURITY
VALUE DESCRIPTION RATE DATE VALUE (A)
<C> <S> <C> <C> <C>
FINANCE--21.4%
$2,000,000 Heller Financial, Inc. ........... 5.650% 01/05/98 $ 1,998,744
2,500,000 Heller Financial, Inc. ........... 5.640% 01/06/98 2,498,042
570,000 General Electric Capital Corp. ... 5.550% 01/20/98 568,330
1,500,000 General Electric Capital Corp. ... 5.600% 01/22/98 1,495,100
2,010,000 Household Finance Corp. .......... 5.540% 01/29/98 2,001,339
4,475,000 Beneficial Corp. ................. 5.630% 02/06/98 4,449,805
1,125,000 Avco Financial Services, Inc. .... 5.610% 02/10/98 1,117,988
1,500,000 Avco Financial Services, Inc. .... 5.560% 02/11/98 1,490,502
2,000,000 General Electric Capital Corp. ... 5.600% 02/20/98 1,984,444
1,190,000 Avco Financial Services, Inc. .... 5.680% 02/23/98 1,180,049
3,000,000 Household Finance Corp. .......... 5.510% 02/27/98 2,973,828
1,040,000 CIT Group Holdings, Inc. ......... 5.540% 03/13/98 1,028,637
1,070,000 General Electric Capital Corp. ... 5.680% 03/17/98 1,057,338
------------
23,844,146
------------
INSURANCE--4.5%
2,000,000 Prudential Funding Corp. ......... 5.680% 01/09/98 1,997,476
1,500,000 Prudential Funding Corp. ......... 5.550% 01/23/98 1,494,913
1,500,000 Prudential Funding Corp. ......... 5.510% 01/26/98 1,494,260
------------
4,986,649
------------
LEASING--3.9%
3,395,000 PHH Corp. ........................ 5.750% 02/26/98 3,364,634
930,000 PHH Corp. ........................ 5.750% 03/16/98 919,008
------------
4,283,642
------------
RETAIL--4.8%
3,000,000 Sears Roebuck Acceptance Corp. ... 5.550% 01/14/98 2,993,987
1,000,000 Sears Roebuck Acceptance Corp. ... 5.560% 02/10/98 993,822
1,300,000 Sears Roebuck Acceptance Corp. ... 5.700% 03/11/98 1,285,798
------------
5,273,607
------------
SECURITIES--13.8%
635,000 Merrill Lynch & Co., Inc. ........ 5.550% 01/12/98 633,923
1,265,000 Merrill Lynch & Co., Inc. ........ 5.630% 01/16/98 1,262,033
1,500,000 Lehman Brothers, Inc. ............ 5.780% 01/21/98 1,495,183
1,000,000 Lehman Brothers, Inc. ............ 5.780% 01/28/98 995,665
520,000 Merrill Lynch & Co., Inc. ........ 5.560% 01/28/98 517,832
2,000,000 Merrill Lynch & Co., Inc. ........ 5.570% 02/02/98 1,990,098
790,000 Merrill Lynch & Co., Inc. ........ 5.530% 02/20/98 783,932
1,000,000 Lehman Brothers, Inc. ............ 5.870% 02/25/98 991,032
1,500,000 Lehman Brothers, Inc. ............ 5.800% 03/27/98 1,479,458
2,250,000 Goldman Sachs Group............... 5.700% 05/06/98 2,205,469
3,000,000 Goldman Sachs Group............... 5.700% 05/07/98 2,940,150
------------
15,294,775
------------
Total Commercial Paper (Cost
$86,155,262)..................... 86,155,262
------------
Total Investments--98.9% (Cost
$109,819,559)(b)................. 109,819,559
Other assets less liabilities..... 1,188,966
------------
TOTAL NET ASSETS--100%............ $111,008,525
============
</TABLE>
(a) See Note 1A.
(b) The aggregate cost for federal income tax purposes was $109,819,559.
See accompanying notes to financial statements.
93
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS MONEY MARKET SERIES)
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
ASSETS
Investments at value.................................... $109,819,559
Cash.................................................... 2,452
Receivable for:
Interest................................................ 712,324
Fund Shares sold........................................ 1,621,233
------------
112,155,568
LIABILITIES
Payable for:
Fund shares redeemed.................................... $591,568
Dividends declared...................................... 477,078
Accrued expenses:
Management fees......................................... 32,896
Deferred trustees' fees................................. 33,404
Other................................................... 12,097
--------
1,147,043
------------
$111,008,525
============
NET ASSETS
Net Assets consist of:
Capital paid in......................................... $111,008,525
------------
NET ASSETS............................................... $111,008,525
============
Computation of offering price:
Net asset value and redemption price per share
($111,008,525 divided by 1,110,085 shares of beneficial
interest)............................................... $ 100.00
============
Cost of investments...................................... $109,819,559
============
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest.................................................. $6,559,725
EXPENSES
Management fees........................................... $405,959
Trustees' fees and expenses............................... 27,082
Custodian................................................. 44,466
Audit and tax services.................................... 5,030
Legal..................................................... 17,310
Printing.................................................. 21,413
Miscellaneous............................................. 122
--------
Total expenses........................................... 521,382
----------
NET INVESTMENT INCOME..................................... 6,038,343
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS................ $6,038,343
==========
</TABLE>
See accompanying notes to financial statements.
94
<PAGE>
NEW ENGLAND ZENITH FUND
(BACK BAY ADVISORS MONEY MARKET SERIES)
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------- -------------
<S> <C> <C>
FROM OPERATIONS
Net investment income........................... $ 5,024,507 $ 6,038,343
------------- -------------
INCREASE IN NET ASSETS FROM OPERATIONS.......... 5,024,507 6,038,343
------------- -------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income........................... (5,024,507) (6,038,343)
------------- -------------
(5,024,507) (6,038,343)
------------- -------------
FROM CAPITAL SHARES TRANSACTIONS
Proceeds from sale of shares.................... 234,677,851 314,876,956
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income........ 4,966,805 6,003,198
------------- -------------
239,644,656 320,880,154
Cost of shares redeemed......................... (212,794,096) (326,870,348)
------------- -------------
INCREASE (DECREASE) IN NET ASSETS DERIVED FROM
CAPITAL SHARE TRANSACTIONS..................... 26,850,560 (5,990,194)
------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS......... 26,850,560 (5,990,194)
NET ASSETS
Beginning of the year........................... 90,148,159 116,998,719
------------- -------------
End of the year................................. $ 116,998,719 $ 111,008,525
============= =============
NUMBER OF SHARES OF THE FUND:
Issued from the sale of shares.................. 2,346,779 3,148,769
Issued in connection with the reinvestment of:
Distributions from net investment income........ 49,668 60,032
------------- -------------
2,396,447 3,208,801
Redeemed........................................ (2,127,942) (3,268,703)
------------- -------------
Net change...................................... 268,505 (59,902)
============= =============
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year........................... $100.00 $100.00 $100.00 $ 100.00 $ 100.00
------- ------- ------- -------- --------
Income From Investment
Operations
Net Investment Income.......... 2.93 3.89 5.50 4.99 5.08
------- ------- ------- -------- --------
Total From Investment
Operations.................... 2.93 3.89 5.50 4.99 5.08
Distributions From Net
Investment Income.............. (2.93) (3.89) (5.50) (4.99) (5.08)
------- ------- ------- -------- --------
Total Distributions............ (2.93) (3.89) (5.50) (4.99) (5.08)
------- ------- ------- -------- --------
Net Asset Value, End of Year.... $100.00 $100.00 $100.00 $ 100.00 $ 100.00
======= ======= ======= ======== ========
TOTAL RETURN (%)................ 2.97 4.01 5.64 5.11 5.20
Ratio of Operating Expenses to
Average Net Assets (%)......... 0.38 0.40 0.50 0.50 0.45
Ratio of Net Investment Income
to Average Net Assets (%)...... 2.93 3.89 5.50 4.99 5.21
Net Assets, End of Year (000)... $59,044 $73,960 $90,148 $116,999 $111,009
The ratios of expenses to
average net assets without
giving effect to the voluntary
expense agreement described in
Note 4 to the Financial
Statements would have been (%). -- -- 0.51 0.50 --
</TABLE>
See accompanying notes to financial statements.
95
<PAGE>
NEW ENGLAND ZENITH FUND
NOTES TO FINANCIAL STATEMENTS--DECEMBER 31, 1997
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 are
currently 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 2, 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.
OTHER SERIES--FIXED INCOME SECURITIES--Debt securities (other than short
term obligations with a remaining maturity of less than sixty days) are
valued on the basis of valuations furnished by independent pricing services
authorized by the Board of Trustees. Short term obligations with a
remaining maturity of less than sixty days are stated at amortized cost,
which approximates market value. Securities and assets for which market
quotations are not available are valued at their fair value as determined
in good faith by the Fund's advisers and subadvisers, under the supervision
of the Board of Trustees.
OTHER SERIES--EQUITY SECURITIES--Equity securities are valued using the
last reported sale price for securities listed on a securities exchange or
on the NASDAQ National Market System, or, if no sale was reported and in
the case of over-the-counter securities not so listed, the last reported
bid price. Short-term obligations with a remaining maturity of less than
sixty days are stated at amortized cost, which approximates market value.
Securities and assets for which market quotations are not available are
valued at their fair value as determined in good faith by the Fund's
advisers and subadvisers, under the supervision of the Board of Trustees.
96
<PAGE>
NEW ENGLAND ZENITH FUND
NOTES TO FINANCIAL STATEMENTS--DECEMBER 31, 1997--(CONTINUED)
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.
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, other than investment securities,
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 supervision of the Board of Trustees.
Certain risks are associated with investments in futures contracts,
including risk of imperfect correlation between the value of a position in
futures contracts and the value of the stocks or bonds that the Series is
attempting to hedge. In addition, there is a risk that the Series may not
be able to close out its futures positions due to an illiquid secondary
market.
97
<PAGE>
NEW ENGLAND ZENITH FUND
NOTES TO FINANCIAL STATEMENTS--DECEMBER 31, 1997--(CONTINUED)
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 or subadviser is responsible for determining that the value of the
collateral is at all times at least equal to the repurchase price. In
connection with transactions in repurchase agreements if the seller
defaults and the value of the collateral declines or if the seller enters
an insolvency proceeding, realization of the collateral by the Series may
be delayed or limited.
F. SHORT SALES AGAINST THE BOX--The Equity Growth and International Magnum
Equity 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 year
ended December 31, 1997.
G. REVERSE REPURCHASE AGREEMENTS--The U.S. Government and Strategic Bond
Opportunities Series may enter into reverse repurchase agreements with
qualified, third party broker-dealers as determined by and under the
direction of the Fund's Board of Trustees. Interest on the value of reverse
repurchase agreements issued and outstanding will be based upon competitive
market rates at the time of issuance. At the time a Series enters into a
reverse repurchase agreement, it will establish and maintain a segregated
account with the lender, the value of which at least equals the principal
amount of the reverse repurchase transactions including accrued interest.
The amount of reverse repurchase agreements outstanding at December 31,
1997 with maturities of less than 30 days was $1,890,000, which was 6.32%
of total assets, for the Salomon Brothers U.S. Government Series, and
$3,465,157, which was 4.17% of total assets for the Salomon Brothers
Strategic Bond Opportunities Series.
H. 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.
I. 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.
J. 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.
98
<PAGE>
NEW ENGLAND ZENITH FUND
NOTES TO FINANCIAL STATEMENTS--DECEMBER 31, 1997--(CONTINUED)
2. At December 31, 1997, MetLife held 27,574,368 shares in separate investment
accounts for annuity contracts issued by MetLife. NELICO held the remaining
30,746,978 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.
3. For the year ended December 31, 1997, purchases and sales of securities
(excluding short-term investments) for each of the Series were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
------------------------------ ------------------------------
SERIES U.S. GOVERNMENT OTHER U.S. GOVERNMENT OTHER
------ --------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Back Bay Advisors Bond
Income................. $15,819,336 $ 75,148,059 $ 4,701,086 $ 67,149,684
Capital Growth.......... -- 2,847,744,981 -- 2,805,107,370
Westpeak Stock Index.... -- 20,908,159 -- 3,416,317
Back Bay Advisors
Managed................ -- 112,182,298 201,394 127,148,130
Loomis Sayles Avanti
Growth................. -- 62,222,347 -- 47,875,538
Westpeak Growth &
Income................. -- 141,899,320 -- 104,375,102
Loomis Sayles Small Cap. -- 171,517,975 -- 104,812,615
Loomis Sayles Balanced.. 41,148,270 70,864,853 19,949,624 29,436,940
Morgan Stanley
International Magnum
Equity................. -- 59,743,551 -- 49,126,573
Salomon Brothers U.S.
Government............. 88,316,866 -- 82,626,054 --
Salomon Brothers
Strategic Bond
Opportunities.......... 90,058,325 70,992,494 83,142,340 45,138,490
Davis Venture Value..... -- 129,204,886 -- 29,037,006
Alger Equity Growth..... -- 252,610,526 -- 213,638,794
</TABLE>
Purchases and sales of corporate short-term obligations for the Back Bay
Advisors Money Market Series aggregated $797,826,706 and $808,344,225,
respectively.
99
<PAGE>
NEW ENGLAND ZENITH FUND
NOTES TO FINANCIAL STATEMENTS--DECEMBER 31, 1997--(CONTINUED)
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>
FEES EARNED
BY TNE ADVISERS FOR MANAGEMENT FEE RATE PAYABLE
THE YEAR ENDED BY SERIES TO TNE ADVISERS
SERIES DECEMBER 31, 1997 (BASED ON % OF AVERAGE NET ASSETS)
------ ------------------- ----------------------------------------
<S> <C> <C>
Loomis Sayles Small Cap Series... $1,404,831 1.00% of all assets
Morgan Stanley International 422,850 0.90% of all assets
Magnum Equity Series(a).........
Alger Equity Growth Series....... 1,246,269 0.75% of all assets
Loomis Sayles Avanti Growth 711,667 0.70% of the first $200 million
Series.......................... 0.65% of the next $300 million
0.60% of amounts in excess of $500
million
Davis Venture Value Series....... 1,425,245 0.75% of all assets
Westpeak Growth and Income 808,891 0.70% of the first $200 million
Series.......................... 0.65% of the next $300 million
0.60% of amounts in excess of $500
million
Westpeak Stock Index Series...... 261,396 0.25% of all assets
Loomis Sayles Balanced Series.... 607,641 0.70% of all assets
Back Bay Managed Series.......... 878,632 0.50% of all assets
Salomon Brothers Strategic Bond 353,611 0.65% of all assets
Opportunities Series............
Back Bay Advisors Bond Income 747,372 0.40% of the first $400 million
Series.......................... 0.35% of the next $300 million
0.30% of the next $300 million
0.25% of amounts in excess of $1 billion
Salomon Brothers U.S. Government 92,762 0.55% of all assets
Series..........................
Back Bay Advisors Money Market 405,959 0.35% of the first $500 million
Series.......................... 0.30% of the next $500 million
0.25% of amounts in excess of $1 billion
</TABLE>
- -------
(a) Effective May 1, 1997 the Draycott International Equity Series was renamed
the Morgan Stanley International Magnum Equity Series.
100
<PAGE>
NEW ENGLAND ZENITH FUND
NOTES TO FINANCIAL STATEMENTS--DECEMBER 31, 1997--(CONTINUED)
The Capital Growth Series pays its adviser, CGM, a management fee at an
annual rate of 0.70% of the first $200 million of average net assets, 0.65% of
the next $300 million of such assets and 0.60% of such assets in excess of
$500 million. For advisory services rendered during the year ended December
31, 1997, CGM was paid at an average annual rate of 0.63% of the Capital
Growth Series' average net assets, totaling $8,434,722.
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
EARNED BY ANNUAL
SUB-ADVISER FROM PERCENTAGE
TNE ADVISERS RATES PAID BASED ON
FOR YEAR ENDED TO SUB- SERIES AVERAGE DAILY NET ASSET
SERIES DECEMBER 31, 1997 ADVISER VALUE LEVELS
------ ----------------- ---------- ------------------------------------
<S> <C> <C> <C>
Loomis Sayles Small Cap $694,375 0.55% of the first $25 million
Series.................
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 235,183 0.75% of the first $30 million
International Magnum
Equity Series(a).......
(Period May 1, 1997
through December 31,
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 81,855 0.75% of the first $10 million
Equity Series(a).......
(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 652,366(b) 0.45% of the first $100 million
Series.................
0.40% of the next $400 million
0.35% of amounts in excess of $500 million
Loomis Sayles Avanti 428,751 0.50% of the first $25 million
Growth Series..........
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 810,131 0.45% of the first $100 million
Series.................
0.40% of the next $400 million
0.35% of amounts in excess of $500 million
</TABLE>
- -------
(a) 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 year ended December 31, 1997.
(b) Amount shown reflects a fee reduction of $77,254 pursuant to an agreement
between TNE Advisers and Fred Alger Management, Inc. Effective May 1,
1996, Fred Alger Management, Inc. agreed with TNE Advisers that the sub-
advisory fee payable by TNE Advisers to Fred Alger Management, Inc. would
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 expired during October 1997.
101
<PAGE>
NEW ENGLAND ZENITH FUND
NOTES TO FINANCIAL STATEMENTS--DECEMBER 31, 1997--(CONTINUED)
<TABLE>
<CAPTION>
FEES
EARNED BY ANNUAL
SUB-ADVISER FROM PERCENTAGE
TNE ADVISERS RATES PAID BASED ON
FOR YEAR ENDED TO SUB- SERIES AVERAGE DAILY NET ASSET
SERIES DECEMBER 31, 1997 ADVISER VALUE LEVELS
------ ----------------- ---------- ------------------------------------
<S> <C> <C> <C>
Westpeak Growth and
Income Series.......... $477,928 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................. 104,559 0.10% of all assets
Loomis Sayles Balanced
Series................. 369,658 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......... 376,454 0.25% of the first $50 million
0.20% of amounts in excess of $50 million
Salomon Brothers
Strategic Bond
Opportunities
Series(c).............. 186,919 0.35% of the first $50 million
0.30% of the next $150 million
0.25% of the next $300 million
0.10% of amounts in excess of $500 million
Back Bay Advisors Bond
Income Series.......... 398,687 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(c)... 37,948 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.......... 165,989 0.15% of the first $100 million
0.10% of amounts in excess of $100 million
</TABLE>
(c) From November 28, 1997 and until the New Sub-Advisory Agreement between
Salomon Brothers Asset Management and TNE Advisors, Inc. for the Salomon
Brothers Strategic Bond Opportunities and Salomon Brothers U.S. Government
Series is approved by shareholders of the respective Series, the fees
earned under the New Sub-Advisory Agreements have been and continue to be
deposited into two interest-bearing escrow accounts, upon approval by such
shareholders, the amounts held in each escrow account will be paid out in
accordance with the terms and conditions set forth in the New Sub-Advisory
Agreements. If either of the New Sub-Advisory Agreements are not approved
by the respective shareholders, the New Sub-Advisory Agreement for that
Series will be terminated and amounts held in the escrow account will be
returned to that Series.
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") and NEIC Operating Partnership, L.P. ("NEICOP"). NEICOP owns the
entire limited partnership interest in each of Loomis Sayles, Westpeak and
Back Bay Advisors. The general partners of each of Loomis Sayles, Westpeak and
Back Bay Advisors are special purpose corporations which are indirect wholly-
owned subsidiaries of NEICOP. NEICOP's managing general partner and NEIC's
general partner, New England Investment Companies, Inc., is an indirect
wholly-owned subsidiary of MetLife, a mutual life insurance company. MetLife
owns directly 46% (and in the aggregate, directly and indirectly, 47%) of the
limited partnership interests in NEICOP. NEICOP's advising general partner,
NEIC, is a publicly traded company listed on the New York Stock Exchange.
NEICOP 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 NEICOP and an additional Series is
advised by a majority-owned subsidiary (CGM) of NEICOP. The sub-advisers of
the remaining five Series are not affiliated with MetLife, NEIC or NEICOP.
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
102
<PAGE>
NEW ENGLAND ZENITH FUND
NOTES TO FINANCIAL STATEMENTS--DECEMBER 31, 1997--(CONTINUED)
Bond Income Series and Back Bay Advisors Money Market Series. Pursuant to this
arrangement TNE Advisers bears all 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 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.
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 shown
below:
TNE Advisers may terminate these expense arrangements at any time. If these
expense arrangements were terminated, some of the Series would have higher
expense ratios. For the period January 1, 1997 to December 31, 1997, the
effective expense ratio for each Series after giving effect to the foregoing
arrangements and without 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>
MAXIMUM EXPENSE EXPENSE RATIO
RATIO UNDER WITHOUT GIVING
CURRENT EFFECT TO EXPENSES ASSUMED
VOLUNTARY EXPENSE VOLUNTARY EXPENSE BY TNE ADVISERS AS A EXPENSES DEFERRED IN EXPENSES DEFERRED IN
LIMITATION OR LIMITATION OR RESULT OF THE SERIES 1996 (SUBJECT TO 1997 (SUBJECT TO
EXPENSE DEFERRAL EXPENSE DEFERRAL EXCEEDING THE REPAYMENT UNTIL REPAYMENT UNTIL
SERIES AGREEMENT AGREEMENT VOLUNTARY EXPENSE LIMIT DECEMBER 31, 1998) DECEMBER 31, 1999)
------ ----------------- ----------------- ----------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C>
Back Bay Advisors
Money Market Series. 0.50% 0.45% -- not applicable not applicable
Back Bay Advisors
Bond Income Series.. 0.55% 0.52% -- not applicable not applicable
Back Bay Advisors
Managed Series...... 0.65% 0.61% -- not applicable not applicable
Westpeak Growth &
Income Series....... 0.85% 0.82% -- not applicable not applicable
Westpeak Stock Index
Series.............. 0.40% 0.43% $26,941 not applicable not applicable
Loomis Sayles Small
Cap Series.......... 1.00% 1.14% 195,718 not applicable not applicable
Loomis Sayles Avanti
Growth Series....... 0.85% 0.86% 7,292 not applicable not applicable
Morgan Stanley
International Magnum
Equity Series....... 1.30% 1.59% not applicable $102,652 $135,743
Alger Equity Growth
Series.............. 0.90% 0.87% not applicable -- --
Davis Venture Value
Series.............. 0.90% 0.90% not applicable 41,906 --
Loomis Sayles
Balanced Series..... 0.85% 0.86% not applicable 52,078 10,668
Salomon Brothers
Strategic Bond
Opportunities
Series.............. 0.85% 0.87% not applicable 68,374 12,296
Salomon Brothers U.S.
Government Series... 0.70% 0.98% not applicable 72,404 46,636
</TABLE>
103
<PAGE>
NEW ENGLAND ZENITH FUND
NOTES TO FINANCIAL STATEMENTS--DECEMBER 31, 1997--(CONTINUED)
For the year ended December 31, 1997 the amount of deferred expense recovered
by TNE Advisers from each Series subject to the Expense Deferral Agreement is:
<TABLE>
<CAPTION>
DEFERRED EXPENSES DEFERRED EXPENSES
RECOVERED BY RECOVERED BY
TNE ADVISERS TNE ADVISERS
SERIES FROM 1995 FROM 1996
------ ----------------- -----------------
<S> <C> <C>
Morgan Stanley International Magnum
Equity Series....................... None None
Alger Equity Growth Series*.......... None None
Davis Venture Value Series........... $96,162 None
Loomis Sayles Balanced Series........ None None
Salomon Brothers Strategic Bond
Opportunities Series................ None None
Salomon Brothers U.S. Government
Series.............................. None None
</TABLE>
* For the year ended December 31, 1997, the fee earned by Fred Alger
Management, Inc. from TNE Advisers was reduced by $77,254 as a result of an
agreement to reimburse TNE Advisers for 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). This entire
amount was retained by TNE Advisers as reimbursement for deferred expenses
under the Expense Deferral Arrangement. For more information about this
agreement, see Note 4 under Sub-Advisory Fees.
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 affiliated registered investment
companies. Each disinterested trustee (i.e. trustee not so affiliated)
received for 1997 the following amounts of compensation from each Series:
<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 disinterested 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 Series on the normal payment date.
6. SUBSEQUENT EVENT
On January 28, 1998, the Fund's Board of Trustees approved new advisory and
subadvisory agreements (the "New Agreements") relating to the Loomis Sayles
Avanti Growth Series between TNE Advisers and the Fund on behalf of the
Series, and between TNE Advisers and Goldman Sachs Asset Management ("Goldman
Sachs"), respectively. The New Agreements, which are subject to shareholder
approval, are expected to become effective on or about May 1, 1998. Under the
New Agreements, Goldman Sachs would become the subadviser of the Series,
succeeding Loomis Sayles, and would become responsible for the day-to-day
management of the Series' investment operations under the oversight of TNE
Advisers. Accordingly, the name of the Series would be changed to the "Goldman
Sachs Midcap Value Series" at the time the New Agreements take effect. Goldman
Sachs is a separate operating division of Goldman, Sachs & Co., a privately-
owned global financial services company.
104
<PAGE>
NEW ENGLAND ZENITH FUND
NOTES TO FINANCIAL STATEMENTS--DECEMBER 31, 1997--(CONTINUED)
7. SHAREHOLDER MEETING (UNAUDITED)
At a Special Meeting of shareholders of the Morgan Stanley International Magnum
Equity Series (then called the Draycott International Equity Series) held on
April 24, 1997, such shareholders voted for the following proposals:
<TABLE>
<CAPTION>
VOTED VOTED TOTAL
FOR AGAINST ABSTAIN VOTES
--------- ------- ------- ---------
<S> <C> <C> <C> <C>
1. That the proposed new Sub-Advisory
Agreement (the "New Subadvisory
Agreement") relating to the Series by
and between TNE Advisers and Morgan
Stanley Asset Management Inc. ("MSAM")
is hereby approved..................... 2,998,542 211,020 198,843 3,408,405
2. That the proposed new Sub-Advisory
Agreement relating to the Series by and
between TNE Advisers, Inc. and MSAM to
replace the New Sub-Advisory Agreement
at the time of the merger of MSAM's
parent company, Morgan Stanley Group
Inc., with and into Dean Witter,
Discover & Co. is hereby approved...... 3,102,154 106,104 200,147 3,408,405
</TABLE>
105
<PAGE>
NEW ENGLAND ZENITH FUND
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees of New England Zenith Fund:
We have audited the accompanying statements of assets and liabilities of New
England Zenith Fund (the "Fund") (comprising, respectively, the Back Bay
Advisors Bond Income Series, Capital Growth Series, Back Bay Advisors Money
Market Series, Westpeak Stock Index Series, Back Bay Advisors Managed Series,
Loomis Sayles Avanti Growth Series, Westpeak Growth & Income Series, Loomis
Sayles Small Cap Series, Loomis Sayles Balanced Series, Morgan Stanley
International Magnum Equity Series (formerly the Draycott International Equity
Series), Salomon Brothers U.S. Government Series, Salomon Brothers Strategic
Bond Opportunities Series, Davis Venture Value Series, and Alger Equity Growth
Series--the "Series"), including the portfolio of investments, as of December
31, 1997, and the related statements of operations, changes in net assets and
financial highlights for the year then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit. The statement of changes in net
assets for the year ended December 31, 1996 and financial highlights for other
periods indicated herein were audited by other auditors whose report dated
February 14, 1997 expressed an unqualified opinion on these statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1997, by correspondence with the custodian and
brokers; where replies were not received from brokers, we performed other
auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as sell as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective Series constituting New England Zenith Fund as of December
31, 1997, the results of their operations, the changes in their net assets,
and the financial highlights for the year then ended, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 10, 1998
106
<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 has
not been adjusted for ongoing management, distribution, operating
expenses and sales charges.
(3) Lehman Aggregate Bond Index is an unmanaged 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, operating
expenses and sales charges.
(4) Lehman Government/Corporate Bond Index is an unmanaged index of the
market value of approximately 5,300 bonds with a face value in excess of
$1.3 trillion. To be included in the Lehman Government/Corporate Bond
Index, an issuer must have amounts outstanding in excess of $25 million,
have at least one year to maturity and be rated "Baa" or higher
(investment grade) by a nationally recognized rating agency. The index
has not been adjusted for ongoing management, distribution, operating
expenses and sales charges.
(5) Lehman 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, operating expenses and sales charges.
(6) Lehman 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.
(7) Lipper Variable Products A-Rated Corporate Bond Fund Average is an
average of the total return performance (calculated on the basis of net
asset value) of funds with similar investment objectives as calculated by
Lipper Analytical Services, an independent mutual fund ranking service.
(8) Lipper Variable Products Balanced Fund Average is an average of the total
return performance (calculated on the basis of net asset level) of funds
with similar investment objectives as calculated by Lipper Analytical
Services, an independent mutual fund ranking service.
(9) Lipper Variable Products Flexible Portfolio Fund Average is an average of
the total return performance (calculated on the basis of net asset value)
of funds with similar investment objectives as calculated by Lipper
Analytical Services, an independent mutual fund ranking service.
(10) Lipper Variable Products General Bond Fund Average is an average of the
total return performance (calculated on the basis of net asset value) of
funds with similar investment objectives as calculated by Lipper
Analytical Services, an independent mutual fund ranking service.
(11) Lipper Variable Products Growth Fund Average is an average of the total
return performance (calculated on the basis of net asset value) of funds
with similar investment objectives as calculated by Lipper Analytical
Services, an independent mutual fund ranking service.
(12) Lipper Variable Products Growth and Income Fund Average is an average of
the total return performance (calculated on the basis of net asset value)
of funds with similar investment objectives as calculated by Lipper
Analytical Services, an independent mutual fund ranking service.
(13) Lipper Variable Products International Funds Average is an average of the
total return performance (calculated on the basis of net asset value) of
funds with similar investment objectives as calculated by Lipper
Analytical Services, an independent mutual fund ranking service.
(14) Lipper Variable Products 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.
107
<PAGE>
(15) Lipper Variable Products Small Cap Fund Average is an average of the
total return performance (calculated on the basis of net asset value) of
funds with similar investment objectives as calculated by Lipper
Analytical Services, an independent mutual fund ranking service.
(16) Lipper Variable Products S&P 500 Index Fund Average is an average of the
total return performance (calculated on the basis of net asset value) of
funds with similar investment objectives as calculated by Lipper
Analytical Services, an independent mutual fund ranking service.
(17) Lipper Variable Products U.S. Mortgage and GNMA Fund Average is an
average of the total return performance (calculated on the basis of net
asset value) of funds with similar investment objectives as calculated by
Lipper Analytical Services, an independent mutual fund ranking service.
(18) Russell 2000 Index consists of 2000 small market capitalization stocks
having an average market cap of $160 million. The index has not been
adjusted for ongoing management, distribution, operating expenses and
sales charges.
(19) Standard & Poor's 500 Index (S&P 500) is an unmanaged index representing
the performance of 500 major companies, most of which are listed on the
New York Stock Exchange. The S&P 500 performance has not been adjusted
for ongoing management, distribution and operating expenses and sales
charges applicable to mutual fund investments.
108
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
REPORT OF INDEPENDENT AUDITORS
To the Policy Owners and Board of Directors of New England Life Insurance
Company:
We have audited the accompanying statement of assets and liabilities of the
New England Variable Life Separate Account (comprised of Capital Growth Sub-
Account, Bond Income Sub-Account, Money Market Sub-Account, Stock Index Sub-
Account, Managed Sub-Account, Avanti Growth Sub-Account, Growth and Income
Sub-Account (formerly Value Growth Sub-Account), Small Cap Sub-Account, U.S.
Government Sub-Account, Balanced Sub-Account, Equity Growth Sub-Account,
International Equity Sub-Account, Venture Value Sub-Account, Bond
Opportunities Sub-Account, Equity-Income Sub-Account, Overseas Sub-Account,
High Income Sub-Account and Asset Manager Sub-Account) of New England Life
Insurance Company (formerly New England Variable Life Insurance Company) as of
December 31, 1997, and the related statements of operations and changes in net
assets for the two years then ended for all Sub-Accounts. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The statements of operations and changes in net assets of New
England Variable Life Separate Account for the year ended December 31, 1995
were audited by other auditors whose report, dated February 6, 1996, expressed
an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the respective aforementioned
sub-accounts comprising the New England Variable Life Separate Account of New
England Life Insurance Company as of December 31, 1997, and the results of
their operations and the changes in their net assets for the two years then
ended, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 10, 1998
109
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<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>
ASSETS
Investments in New
England Zenith Fund,
Variable Insurance
Products Fund, and
Variable Insurance
Products Fund II at
value (Note 2)....... $761,342,931 $46,779,684 $36,990,546 $66,002,486 $42,839,748 $35,698,565 $36,701,292
<CAPTION>
SHARES COST
--------- --------------
<S> <C> <C>
Capital Growth
Series......... 1,905,310 $ 669,976,568
Back Bay
Advisors Bond
Income Series.. 431,109 45,887,625
Back Bay
Advisors Money
Market Series.. 369,905 36,990,546
Westpeak Stock
Index Series... 423,745 46,113,427
Back Bay
Advisors
Managed Series. 225,651 33,392,311
Loomis Sayles
Avanti Growth
Series......... 209,265 28,734,184
Westpeak Growth
and Income
Series......... 203,930 29,842,628
Loomis Sayles
Small Cap
Series......... 347,003 49,723,722
Salomon Brothers
U.S. Government
Series......... 15,715 176,828
Loomis Sayles
Balanced
Series......... 547,678 7,495,878
Alger Equity
Growth Series.. 2,783,337 43,651,128
Morgan Stanley
International
Magnum Equity
Series......... 773,563 8,555,901
Davis Venture
Value Series... 2,875,094 49,085,168
Salomon Brothers
Bond
Opportunities
Series......... 52,710 635,304
VIP Equity-
Income
Portfolio...... 5,116,958 91,540,584
VIP Overseas
Portfolio...... 4,049,703 66,617,006
VIP High Income
Portfolio...... 622,056 7,482,998
VIP II Asset
Manager
Portfolio...... 350,236 5,336,650
--------------
Total $1,221,238,456
==============
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Amount due and accrued
(payable) from policy-
related transactions,
net................... 101,231 159,544 897,289 107,549 48,961 (8,730) 9,824
Dividends receivable... -- -- 165,664 -- -- -- --
------------ ----------- ----------- ----------- ----------- ----------- -----------
Total Assets.......... 761,444,162 46,939,228 38,053,499 66,110,035 42,888,709 35,689,835 36,711,116
LIABILITIES
Due New England Life
Insurance Company..... 69,802,554 5,423,528 4,948,075 8,559,199 4,348,325 4,623,232 4,943,446
------------ ----------- ----------- ----------- ----------- ----------- -----------
NET ASSETS FOR VARIABLE
LIFE INSURANCE
POLICIES............... $691,641,608 $41,515,700 $33,105,424 $57,550,836 $38,540,384 $31,066,603 $31,767,670
============ =========== =========== =========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements
110
<PAGE>
<TABLE>
<CAPTION>
VARIABLE INSURANCE
PRODUCTS FUND
- --------------------------------------------------------------------------------------- -----------------------------------
SMALL U.S. EQUITY INTERNATIONAL VENTURE BOND EQUITY- HIGH
CAP GOVERNMENT BALANCED GROWTH EQUITY VALUE OPPORTUNITIES INCOME OVERSEAS INCOME
SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB-
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
- ----------- ---------- ---------- ----------- ------------- ----------- ------------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$55,145,780 $174,912 $8,138,490 $49,042,395 $8,400,895 $59,801,951 $633,048 $124,239,747 $77,754,305 $8,447,518
140,958 (1,259) 1,139 (20,153) (30,340) 168,093 (525) 127,430 31,232 10,331
-- -- -- -- -- -- -- -- -- --
- ----------- -------- ---------- ----------- ---------- ----------- -------- ------------ ----------- ----------
55,286,738 173,653 8,139,629 49,022,242 8,370,555 59,970,044 632,523 124,367,177 77,785,537 8,457,849
7,776,303 12,470 1,264,381 7,085,182 1,237,518 8,553,311 44,786 17,035,856 9,960,217 1,277,576
- ----------- -------- ---------- ----------- ---------- ----------- -------- ------------ ----------- ----------
$47,510,435 $161,183 $6,875,248 $41,937,060 $7,133,037 $51,416,733 $587,737 $107,331,321 $67,825,320 $7,180,273
=========== ======== ========== =========== ========== =========== ======== ============ =========== ==========
<CAPTION>
VARIABLE
INSURANCE
PRODUCTS
FUND II
- ----------- --------------
ASSET
MANAGER
SUB-
ACCOUNT TOTAL
- ----------- --------------
<S> <C>
$6,307,747 $1,424,442,040
(2,214) 1,740,360
-- 165,664
- ----------- --------------
6,305,533 1,426,348,064
856,655 157,752,614
- ----------- --------------
$5,448,878 $1,268,595,450
=========== ==============
</TABLE>
See Notes to Financial Statements.
111
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
<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.............. $184,229,729 $3,419,409 $1,852,865 $ 1,082,727 $5,025,764 $2,781,138 $3,928,553
EXPENSE
Mortality and expense
risk charge (Note 3).. 4,170,905 253,374 241,048 333,771 229,423 207,451 190,264
------------ ---------- ---------- ----------- ---------- ---------- ----------
Net investment income.. 180,058,824 3,166,035 1,611,817 748,956 4,796,341 2,573,687 3,738,289
NET REALIZED AND
UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net unrealized
appreciation
(depreciation) on
investments:
Beginning of year...... 138,009,405 40,519 -- 7,633,013 6,137,629 4,823,316 3,107,090
End of year............ 91,366,363 892,059 -- 19,889,059 9,447,437 6,964,381 6,858,664
------------ ---------- ---------- ----------- ---------- ---------- ----------
Net change in
unrealized
appreciation
(depreciation)........ (46,643,042) 851,540 -- 12,256,046 3,309,808 2,141,065 3,751,574
Net realized gain on
investments........... 1,699,829 15,488 -- 35,165 242,079 87,159 17,721
------------ ---------- ---------- ----------- ---------- ---------- ----------
Net realized and
unrealized gain (loss)
on investments........ (44,943,213) 867,028 -- 12,291,211 3,551,887 2,228,224 3,769,295
------------ ---------- ---------- ----------- ---------- ---------- ----------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS........ $135,115,611 $4,033,063 $1,611,817 $13,040,167 $8,348,228 $4,801,911 $7,507,584
============ ========== ========== =========== ========== ========== ==========
</TABLE>
See Notes to Financial Statements
112
<PAGE>
<TABLE>
<CAPTION>
VARIABLE INSURANCE
PRODUCTS FUND
- --------------------------------------------------------------------------------- -------------------------------
SMALL U.S. EQUITY INTERNATIONAL VENTURE BOND EQUITY- HIGH
CAP GOVERNMENT BALANCED GROWTH EQUITY VALUE OPPORTUNITIES INCOME OVERSEAS INCOME
SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB-
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
- ---------- ---------- -------- ---------- ------------- ---------- ------------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$6,279,206 $9,089 $438,430 $4,721,050 $ 209,389 $1,822,395 $43,914 $ 8,872,794 $5,434,055 $393,295
275,141 2,290 50,941 265,599 51,702 276,055 9,400 676,059 447,597 41,502
- ---------- ------ -------- ---------- --------- ---------- ------- ----------- ---------- --------
6,004,065 6,799 387,489 4,455,451 157,687 1,546,340 34,514 8,196,735 4,986,458 351,793
3,059,565 (819) 236,625 2,084,389 136,191 2,398,023 (1,153) 16,409,989 9,502,216 362,600
5,422,058 (1,916) 642,612 5,391,267 (155,006) 10,716,783 (2,256) 32,699,163 11,137,299 964,520
- ---------- ------ -------- ---------- --------- ---------- ------- ----------- ---------- --------
2,362,493 (1,097) 405,987 3,306,878 (291,197) 8,318,760 (1,103) 16,289,174 1,635,083 601,920
20,956 1 55,231 75,802 8,303 21,718 201 126,489 67,905 12,234
- ---------- ------ -------- ---------- --------- ---------- ------- ----------- ---------- --------
2,383,449 (1,096) 461,218 3,382,680 (282,894) 8,340,478 (902) 16,415,663 1,702,988 614,154
- ---------- ------ -------- ---------- --------- ---------- ------- ----------- ---------- --------
$8,387,514 $5,703 $848,707 $7,838,131 ($125,207) $9,886,818 $33,612 $24,612,398 $6,689,446 $965,947
========== ====== ======== ========== ========= ========== ======= =========== ========== ========
<CAPTION>
VARIABLE
INSURANCE
PRODUCTS
FUND II
- --------- ------------
ASSET
MANAGER
SUB-
ACCOUNT TOTAL
- --------- ------------
<S> <C>
$528,401 $231,072,203
33,135 7,755,657
- -------- ------------
495,266 223,316,546
547,647 194,486,245
971,097 203,203,584
- -------- ------------
423,450 8,717,339
5,368 2,491,649
- -------- ------------
428,818 11,208,988
- -------- ------------
$924,084 $234,525,534
======== ============
</TABLE>
See Notes to Financial Statements
113
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
NEW ENGLAND ZENITH FUND
------------------------------------------------------------------------------
CAPITAL BOND MONEY STOCK AVANTI GROWTH AND
GROWTH INCOME MARKET INDEX MANAGED GROWTH INCOME
SUB- SUB- SUB- SUB- SUB- SUB- SUB-
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
----------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME
Dividends.............. $32,991,113 $2,579,133 $1,306,712 $ 841,454 $2,942,415 $1,494,679 $1,804,344
EXPENSE
Mortality and expense
risk charge (Note 3).. 2,981,244 192,456 160,903 168,590 158,607 137,775 100,738
----------- ---------- ---------- ---------- ---------- ---------- ----------
Net investment income
(loss)................ 30,009,869 2,386,677 1,145,809 672,864 2,783,808 1,356,904 1,703,606
NET REALIZED AND
UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net unrealized
appreciation
(depreciation) on
investments:
Beginning of year...... 71,963,590 997,195 -- 2,853,587 5,216,548 2,881,100 2,105,777
End of year............ 138,009,405 40,519 -- 7,633,013 6,137,629 4,823,316 3,107,090
----------- ---------- ---------- ---------- ---------- ---------- ----------
Net change in
unrealized
appreciation
(depreciation)........ 66,045,815 (956,676) -- 4,779,426 921,081 1,942,216 1,001,313
Net realized gain
(loss) on investments. 985,421 299 -- 1,808 69,775 27,429 18,964
----------- ---------- ---------- ---------- ---------- ---------- ----------
Net realized and
unrealized gain (loss)
on investments........ 67,031,236 (956,377) -- 4,781,234 990,856 1,969,645 1,020,277
----------- ---------- ---------- ---------- ---------- ---------- ----------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS........ $97,041,105 $1,430,300 $1,145,809 $5,454,098 $3,774,664 $3,326,549 $2,723,883
=========== ========== ========== ========== ========== ========== ==========
</TABLE>
* For the period July 1, 1996 (Commencement of Operations) through December 31,
1996.
See Notes to Financial Statements
114
<PAGE>
<TABLE>
<CAPTION>
VARIABLE INSURANCE
PRODUCTS FUND
- ---------------------------------------------------------------------------------- ------------------------------
SMALL U.S. EQUITY INTERNATIONAL VENTURE BOND EQUITY- HIGH
CAP GOVERNMENT BALANCED GROWTH EQUITY VALUE OPPORTUNITIES INCOME OVERSEAS INCOME
SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB-
ACCOUNT ACCOUNT* ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT* ACCOUNT ACCOUNT ACCOUNT
- ---------- ---------- -------- ---------- ------------- ---------- ------------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$1,624,708 $ 702 $104,939 $ 44,863 $ 71,347 $ 444,012 $1,218 $2,662,990 $1,164,550 $199,463
90,146 28 11,713 104,685 19,385 64,656 40 428,473 325,346 19,551
- ---------- ----- -------- ---------- -------- ---------- ------ ---------- ---------- --------
1,534,562 674 93,226 (59,822) 51,962 379,356 1,178 2,234,517 839,204 179,912
768,552 -- 3,769 65,901 24,089 171,931 -- 9,642,454 4,022,725 167,043
3,059,565 (819) 236,625 2,084,389 136,191 2,398,023 (1,153) 16,409,989 9,502,216 362,600
- ---------- ----- -------- ---------- -------- ---------- ------ ---------- ---------- --------
2,291,013 (819) 232,856 2,018,488 112,102 2,226,092 (1,153) 6,767,535 5,479,491 195,557
31,570 -- 2,318 11,723 159 4,907 -- 27,750 44,049 1,942
- ---------- ----- -------- ---------- -------- ---------- ------ ---------- ---------- --------
2,322,583 (819) 235,174 2,030,211 112,261 2,230,999 (1,153) 6,795,285 5,523,540 197,499
- ---------- ----- -------- ---------- -------- ---------- ------ ---------- ---------- --------
$3,857,145 $(145) $328,400 $1,970,389 $164,223 $2,610,355 $ 25 $9,029,802 $6,362,744 $377,411
========== ===== ======== ========== ======== ========== ====== ========== ========== ========
<CAPTION>
VARIABLE
INSURANCE
PRODUCTS
FUND II
- --------- ------------
ASSET
MANAGER
SUB- TOTAL
- --------- ------------
<S> <C>
$174,907 $ 50,453,549
20,483 4,984,819
- -------- ------------
154,424 45,468,730
269,255 101,153,516
547,647 194,486,245
- -------- ------------
278,392 93,332,729
4,122 1,232,236
- -------- ------------
282,514 94,564,965
- -------- ------------
$436,938 $140,033,695
======== ============
</TABLE>
See Notes to Financial Statements
115
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
NEW ENGLAND ZENITH FUND
--------------------------------------------------------------------------------
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.............. $ 58,318,276 $1,844,411 $1,109,838 $ 627,118 $1,061,289 $ 535,217 $ 606,696
EXPENSE
Mortality and expense
risk charge (Note 3).. 2,173,846 143,873 112,033 95,240 113,501 77,636 52,633
------------ ---------- ---------- ---------- ---------- ---------- ----------
Net investment income.. 56,144,430 1,700,538 997,805 531,878 947,788 457,581 554,063
NET REALIZED AND
UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net unrealized
appreciation
(depreciation) on
investments:
Beginning of year...... 9,892,073 (2,028,893) -- (1,645,744) 703,242 205,680 1,918
End of year............ 71,963,590 997,195 -- 2,853,587 5,216,548 2,881,100 2,105,777
------------ ---------- ---------- ---------- ---------- ---------- ----------
Net change in
unrealized
appreciation
(depreciation)........ 62,071,517 3,026,088 -- 4,499,331 4,513,306 2,675,420 2,103,859
Net realized gain
(loss) on investments. 1,613,390 7,382 -- 7,637 42,457 21,233 9,493
------------ ---------- ---------- ---------- ---------- ---------- ----------
Net realized and
unrealized gain on
investments........... 63,684,907 3,033,470 -- 4,506,968 4,555,763 2,696,653 2,113,352
------------ ---------- ---------- ---------- ---------- ---------- ----------
NET INCREASE IN NET
ASSETS RESULTING FROM
OPERATIONS............. $119,829,337 $4,734,008 $ 997,805 $5,038,846 $5,503,551 $3,154,234 $2,667,415
============ ========== ========== ========== ========== ========== ==========
</TABLE>
* For the period May 1, 1995 (Commencement of Operations) through December 31,
1995.
See Notes to Financial Statements
116
<PAGE>
<TABLE>
<CAPTION>
VARIABLE
INSURANCE
VARIABLE INSURANCE PRODUCTS
PRODUCTS FUND FUND II
- ---------------------------------------------------- ------------------------------- --------- ------------
SMALL EQUITY INTERNATIONAL VENTURE EQUITY HIGH ASSET
CAP BALANCED GROWTH EQUITY VALUE INCOME OVERSEAS INCOME MANAGER
SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB-
ACCOUNT ACCOUNT* ACCOUNT* ACCOUNT* ACCOUNT* ACCOUNT ACCOUNT ACCOUNT ACCOUNT TOTAL
- ---------- -------- -------- ------------- -------- ----------- ---------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$365,015 $17,538 $195,436 $12,460 $ 86,716 $ 2,284,557 $ 282,520 $ 8,412 $ 11,896 $ 67,367,395
24,746 743 11,686 2,165 7,251 233,864 240,253 6,639 9,537 3,305,646
- ---------- ------- -------- ------- -------- ----------- ---------- -------- -------- ------------
340,269 16,795 183,750 10,295 79,465 2,050,693 42,267 1,773 2,359 64,061,749
4,662 -- -- -- -- 149,659 260,895 213 (1,503) 7,542,202
768,552 3,769 65,901 24,089 171,931 9,642,454 4,022,725 167,043 269,255 101,153,516
- ---------- ------- -------- ------- -------- ----------- ---------- -------- -------- ------------
763,890 3,769 65,901 24,089 171,931 9,492,795 3,761,830 166,830 270,758 93,611,314
1,325 223 237 (34) 203 61,089 32,279 2,817 4,661 1,804,392
- ---------- ------- -------- ------- -------- ----------- ---------- -------- -------- ------------
765,215 3,992 66,138 24,055 172,134 9,553,884 3,794,109 169,647 275,419 95,415,706
- ---------- ------- -------- ------- -------- ----------- ---------- -------- -------- ------------
$1,105,484 $20,787 $249,888 $34,350 $251,599 $11,604,577 $3,836,376 $171,420 $277,778 $159,477,455
========== ======= ======== ======= ======== =========== ========== ======== ======== ============
</TABLE>
See Notes to Financial Statements
117
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
STATEMENT OF CHANGES IN NET ASSETS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
NEW ENGLAND ZENITH FUND
----------------------------------------------------------------------------------------------------------
CAPITAL BOND MONEY STOCK AVANTI SMALL
GROWTH INCOME MARKET INDEX MANAGED GROWTH GROWTH AND CAP
SUB- SUB- SUB- SUB- SUB- SUB- INCOME 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......... $180,058,824 $ 3,166,035 $ 1,611,817 $ 748,956 $ 4,796,341 $ 2,573,687 $ 3,738,289 $ 6,004,065
Net realized and
unrealized gain
(loss) on
investments.... (44,943,213) 867,028 -- 12,291,211 3,551,887 2,228,224 3,769,295 2,383,449
------------ ----------- ------------- ------------ ----------- ----------- ----------- -----------
Net Increase
(decrease) in
net assets
resulting from
operations..... 135,115,611 4,033,063 1,611,817 13,040,167 8,348,228 4,801,911 7,507,584 8,387,514
FROM POLICY-
RELATED
TRANSACTIONS
Net premiums
transferred
from New
England Life
Insurance
Company
(Note 4)....... 115,563,292 9,916,442 112,790,933 11,030,326 6,066,893 8,052,822 6,483,236 12,931,007
Net transfers
(to) from other
sub-accounts... 19,184,703 2,250,884 (100,492,346) 13,670,086 2,168,458 728,467 6,112,407 13,551,252
Net transfers to
New England
Life Insurance
Company........ (103,221,618) (7,435,545) (10,617,259) (11,516,905) (6,628,199) (5,007,957) (5,507,253) (8,882,069)
------------ ----------- ------------- ------------ ----------- ----------- ----------- -----------
Net Increase in
net assets
resulting from
policy related
transactions... 31,526,377 4,731,781 1,681,328 13,183,507 1,607,152 3,773,332 7,088,390 17,600,190
------------ ----------- ------------- ------------ ----------- ----------- ----------- -----------
Net increase in
net assets..... 166,641,988 8,764,844 3,293,145 26,223,674 9,955,380 8,575,243 14,595,974 25,987,704
NET ASSETS, AT
BEGINNING OF THE
YEAR............ 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 YEAR. $691,641,608 $41,515,700 $ 33,105,424 $ 57,550,836 $38,540,384 $31,066,603 $31,767,670 $47,510,435
============ =========== ============= ============ =========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements
118
<PAGE>
<TABLE>
<CAPTION>
VARIABLE INSURANCE
PRODUCTS FUND
- ------------------------------------------------------------------------------- --------------------------------------
U.S. EQUITY INTERNATIONAL VENTURE BOND EQUITY- HIGH
GOVERNMENT BALANCED GROWTH EQUITY VALUE OPPORTUNITIES 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>
$ 6,799 $ 387,489 $ 4,455,451 $ 157,687 $ 1,546,340 $ 34,514 $ 8,196,735 $ 4,986,458 $ 351,793
(1,096) 461,218 3,382,680 (282,894) 8,340,478 (902) 16,415,663 1,702,988 614,154
-------- ----------- ----------- ----------- ------------ -------- ------------ ----------- -----------
5,703 848,707 7,838,131 (125,207) 9,886,818 33,612 24,612,398 6,689,446 965,947
-- 2,146,406 14,606,449 3,056,999 13,157,429 -- 23,866,781 17,551,475 2,042,291
118,925 2,461,028 6,194,266 1,537,466 22,596,463 563,357 5,377,892 1,724,137 1,829,771
(9,482) (1,814,302) (8,772,068) (1,574,196) (10,885,947) (36,000) (18,885,322) (9,549,079) (1,756,377)
-------- ----------- ----------- ----------- ------------ -------- ------------ ----------- -----------
109,443 2,793,132 12,028,647 3,020,269 24,867,945 527,357 10,359,351 9,726,533 2,115,685
-------- ----------- ----------- ----------- ------------ -------- ------------ ----------- -----------
115,146 3,641,839 19,866,778 2,895,062 34,754,763 560,969 34,971,749 16,415,979 3,081,632
46,037 3,233,409 22,070,282 4,237,975 16,661,970 26,768 72,359,572 51,409,341 4,098,641
-------- ----------- ----------- ----------- ------------ -------- ------------ ----------- -----------
$161,183 $ 6,875,248 $41,937,060 $ 7,133,037 $ 51,416,733 $587,737 $107,331,321 $67,825,320 $ 7,180,273
======== =========== =========== =========== ============ ======== ============ =========== ===========
<CAPTION>
VARIABLE
INSURANCE
PRODUCTS
FUND II
- ----------- ---------------
ASSET
MANAGER
SUB-
ACCOUNT TOTAL
- ----------- ---------------
<S> <C>
$ 495,266 $ 223,316,546
428,818 11,208,988
- ----------- ---------------
924,084 234,525,534
1,403,144 360,665,925
422,784 --
(881,229) (212,980,807)
- ----------- ---------------
944,699 147,685,118
- ----------- ---------------
1,868,783 382,210,652
3,580,095 886,384,798
- ----------- ---------------
$5,448,878 $1,268,595,450
=========== ===============
</TABLE>
See Notes to Financial Statements
119
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
STATEMENT OF CHANGES IN NET ASSETS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
NEW ENGLAND ZENITH FUND
--------------------------------------------------------------------------------------------------------
GROWTH
CAPITAL BOND MONEY STOCK AVANTI AND 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)...... $ 30,009,869 $ 2,386,677 $ 1,145,809 $ 672,864 $ 2,783,808 $ 1,356,904 $ 1,703,606 $ 1,534,562
Net realized and
unrealized gain
(loss) on
investments........ 67,031,236 (956,377) -- 4,781,234 990,856 1,969,645 1,020,277 2,322,583
------------ ----------- ------------ ----------- ----------- ----------- ----------- -----------
Net Increase
(decrease) in net
assets resulting
from operations.... 97,041,105 1,430,300 1,145,809 5,454,098 3,774,664 3,326,549 2,723,883 3,857,145
FROM POLICY-RELATED
TRANSACTIONS
Net premiums
transferred from
New England Life
Insurance Company
(Note 4)........... 111,194,198 8,517,031 79,806,482 6,566,717 5,631,293 7,140,375 5,201,936 5,440,860
Net transfers (to)
from other sub-
accounts........... (1,541,352) 1,894,963 (61,482,739) 5,875,439 1,412,522 2,859,556 2,274,270 10,060,122
Net transfers to New
England Life
Insurance Company.. (76,528,987) (5,770,575) (9,089,129) (5,144,242) (4,232,475) (5,172,577) (3,338,871) (4,380,392)
------------ ----------- ------------ ----------- ----------- ----------- ----------- -----------
Net Increase in net
assets resulting
from policy related
transactions....... 33,123,859 4,641,419 9,234,614 7,297,914 2,811,340 4,827,354 4,137,335 11,120,590
------------ ----------- ------------ ----------- ----------- ----------- ----------- -----------
Net increase in net
assets............. 130,164,964 6,071,719 10,380,423 12,752,012 6,586,004 8,153,903 6,861,218 14,977,735
NET ASSETS, AT
BEGINNING OF THE
YEAR................ 394,834,656 26,679,137 19,431,856 18,575,150 21,999,000 14,337,457 10,310,478 6,544,996
------------ ----------- ------------ ----------- ----------- ----------- ----------- -----------
NET ASSETS, AT END OF
THE YEAR............ $524,999,620 $32,750,856 $ 29,812,279 $31,327,162 $28,585,004 $22,491,360 $17,171,696 $21,522,731
============ =========== ============ =========== =========== =========== =========== ===========
</TABLE>
*For the period July 1, 1996 (Commencement of Operations) through December 31,
1996.
See Notes to Financial Statements
120
<PAGE>
<TABLE>
<CAPTION>
VARIABLE INSURANCE
PRODUCTS FUND
- ----------------------------------------------------------------------------- ------------------------------------
U.S. EQUITY INTERNATIONAL VENTURE BOND EQUITY- HIGH
GOVERNMENT BALANCED GROWTH EQUITY VALUE OPPORTUNITIES 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>
$ 674 $ 93,226 $ (59,822) $ 51,962 $ 379,356 $ 1,178 $ 2,234,517 $ 839,204 $ 179,912
(819) 235,174 2,030,211 112,261 2,230,999 (1,153) 6,795,285 5,523,540 197,499
------- ---------- ----------- ---------- ----------- ------- ----------- ----------- ----------
(145) 328,400 1,970,389 164,223 2,610,355 25 9,029,802 6,362,744 377,411
-- 811,932 9,286,073 1,454,605 4,876,053 -- 20,426,731 17,135,189 970,763
46,951 2,383,695 11,496,667 2,908,047 9,510,686 27,190 9,029,810 1,051,463 1,631,762
(769) (708,829) (6,395,345) (1,242,748) (3,721,564) (447) (13,479,623) (11,522,274) (623,788)
------- ---------- ----------- ---------- ----------- ------- ----------- ----------- ----------
46,182 2,486,798 14,387,395 3,119,904 10,665,175 26,743 15,976,918 6,664,378 1,978,737
------- ---------- ----------- ---------- ----------- ------- ----------- ----------- ----------
46,037 2,815,198 16,357,784 3,284,127 13,275,530 26,768 25,006,720 13,027,122 2,356,148
-- 418,211 5,712,498 953,848 3,386,440 -- 47,352,852 38,382,219 1,742,493
------- ---------- ----------- ---------- ----------- ------- ----------- ----------- ----------
$46,037 $3,233,409 $22,070,282 $4,237,975 $16,661,970 $26,768 $72,359,572 $51,409,341 $4,098,641
======= ========== =========== ========== =========== ======= =========== =========== ==========
<CAPTION>
VARIABLE
INSURANCE
PRODUCTS
FUND II
- ---------- -------------
ASSET
MANAGER
SUB-
ACCOUNT TOTAL
- ---------- -------------
<S> <C>
$ 154,424 $ 45,468,730
282,514 94,564,965
- ---------- -------------
436,938 140,033,695
1,258,847 285,719,085
560,948 --
(649,631) (152,002,266)
- ---------- -------------
1,170,164 133,716,819
- ---------- -------------
1,607,102 273,750,514
1,972,993 612,634,284
- ---------- -------------
$3,580,095 $ 886,384,798
========== =============
</TABLE>
See Notes to Financial Statements
121
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
STATEMENT OF CHANGES IN NET ASSETS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
NEW ENGLAND ZENITH FUND
-------------------------------------------------------------------------------------------
GROWTH
CAPITAL BOND MONEY STOCK AVANTI AND
GROWTH INCOME MARKET INDEX MANAGED GROWTH INCOME
SUB- SUB- SUB- SUB- SUB- SUB- SUB-
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
------------ ----------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
FROM OPERATING
ACTIVITIES
Net investment income.. $ 56,144,430 $ 1,700,538 $ 997,805 $ 531,878 $ 947,788 $ 457,581 $ 554,063
Net realized and
unrealized gain on
investments........... 63,684,907 3,033,470 -- 4,506,968 4,555,763 2,696,653 2,113,352
------------ ----------- ------------ ----------- ----------- ----------- -----------
Net Increase in net
assets resulting from
operations............ 119,829,337 4,734,008 997,805 5,038,846 5,503,551 3,154,234 2,667,415
FROM POLICY-RELATED
TRANSACTIONS
Net premiums
transferred from New
England
Life Insurance Company
(Note 4).............. 100,611,223 7,330,838 40,457,027 4,559,195 4,757,562 5,407,500 3,473,273
Net transfers (to) from
other sub-accounts.... (7,820,362) 2,481,090 (32,083,917) 2,734,513 286,111 3,131,998 2,645,617
Net transfers to New
England Life Insurance
Company............... (67,280,279) (4,616,930) (6,819,802) (3,436,368) (3,307,802) (3,767,486) (2,568,808)
------------ ----------- ------------ ----------- ----------- ----------- -----------
Net Increase in net
assets resulting from
policy related
transactions.......... 25,510,582 5,194,998 1,553,308 3,857,340 1,735,871 4,772,012 3,550,082
------------ ----------- ------------ ----------- ----------- ----------- -----------
Net increase in net
assets................ 145,339,919 9,929,006 2,551,113 8,896,186 7,239,422 7,926,246 6,217,497
NET ASSETS, AT BEGINNING
OF THE YEAR............ 249,494,737 16,750,131 16,880,743 9,678,964 14,759,578 6,411,211 4,092,981
------------ ----------- ------------ ----------- ----------- ----------- -----------
NET ASSETS, AT END OF
THE YEAR............... $394,834,656 $26,679,137 $ 19,431,856 $18,575,150 $21,999,000 $14,337,457 $10,310,478
============ =========== ============ =========== =========== =========== ===========
</TABLE>
* For the period May 1, 1995 (Commencement of Operations) through December 31,
1995.
See Notes to Financial Statements
122
<PAGE>
<TABLE>
<CAPTION>
VARIABLE
INSURANCE
VARIABLE INSURANCE PRODUCTS
PRODUCTS FUND FUND II
- ----------------------------------------------------------- ------------------------------------ --------- -------------
SMALL EQUITY INTERNATIONAL VENTURE EQUITY- HIGH ASSET
CAP BALANCED GROWTH EQUITY VALUE INCOME OVERSEAS INCOME MANAGER
SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB-
ACCOUNT ACCOUNT* ACCOUNT* ACCOUNT* ACCOUNT* ACCOUNT ACCOUNT ACCOUNT ACCOUNT TOTAL
---------- -------- ----------- ------------- ---------- ----------- ----------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 340,269 $ 16,795 $ 183,750 $ 10,295 $ 79,465 $ 2,050,693 $ 42,267 $ 1,773 $ 2,359 $ 64,061,749
765,215 3,992 66,138 24,055 172,134 9,553,884 3,794,109 169,647 275,419 95,415,706
---------- -------- ----------- --------- ---------- ----------- ----------- ---------- ---------- -------------
1,105,484 20,787 249,888 34,350 251,599 11,604,577 3,836,376 171,420 277,778 159,477,455
2,237,626 81,978 1,048,361 241,835 625,044 13,985,879 17,076,602 395,370 696,227 202,985,540
4,814,141 409,874 5,735,744 948,764 3,228,499 12,483,761 (2,007,296) 1,503,857 1,507,606 --
(1,803,085) (94,428) (1,321,495) (271,101) (718,702) (9,853,532) (8,392,295) (358,576) (709,312) (115,320,001)
---------- -------- ----------- --------- ---------- ----------- ----------- ---------- ---------- -------------
5,248,682 397,424 5,462,610 919,498 3,134,841 16,616,108 6,677,011 1,540,651 1,494,521 87,665,539
---------- -------- ----------- --------- ---------- ----------- ----------- ---------- ---------- -------------
6,354,166 418,211 5,712,498 953,848 3,386,440 28,220,685 10,513,387 1,712,071 1,772,299 247,142,994
190,830 -- -- -- -- 19,132,167 27,868,832 30,422 200,694 365,491,290
---------- -------- ----------- --------- ---------- ----------- ----------- ---------- ---------- -------------
$6,544,996 $418,211 $ 5,712,498 $ 953,848 $3,386,440 $47,352,852 $38,382,219 $1,742,493 $1,972,993 $ 612,634,284
========== ======== =========== ========= ========== =========== =========== ========== ========== =============
</TABLE>
See Notes to Financial Statements
123
<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 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", "Zenith Life Plus II" and "Zenith Variable Whole Life")
life policies and limited payment ("Zenith Life Executive 65") variable life
policies, .90% of the Account assets attributable to variable survivorship
("Zenith Survivorship Life") life policies, and .75% of the Account assets
attributable to flexible premium ("Zenith Flexible Life") variable life
policies. For the modified single premium ("American Gateway") variable life
policies mortality and expense risk charges are not charged daily against the
sub-account assets but are deducted from the policy cash values monthly at an
annual rate of .90%.
4. NET PREMIUM TRANSFERS AND DEDUCTIONS FROM CASH VALUE. Certain deductions
are made from each premium payment paid to NELICO to arrive at a net premium
that is transferred to the Account. Certain deductions are made from cash
value in the sub-accounts. These deductions, depending on the policy, could
include sales loads, administrative charges, premium tax charges, risk
charges, cost of insurance charges, and charges for rider benefits and special
risk charges.
124
<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 agreement between TNE Advisers, Inc. and
Draycott Partners, Ltd.
On January 28, 1998, the Fund's Board of Trustees approved new advisory and
subadvisory agreements (the "New Agreements") relating to the Loomis Sayles
Avanti Growth Series between TNE Advisers, Inc. and the Fund on behalf of the
Series, and between TNE Advisers, Inc. and Goldman Sachs Asset Management
("Goldman Sachs"), respectively. The New Agreements, which are subject to
shareholder approval, are expected to become effective on or about May 1,
1998. Under the New Agreements, Goldman Sachs would become the subadviser of
the Series, succeeding Loomis Sayles & Company, L.P., and would become
responsible for the day-to-day management of the Series' investment operations
under the oversight of TNE Advisers, Inc. Accordingly, the name of the Series
would be changed to the "Goldman Sachs Midcap Value Series" at the time the
New Agreements take effect. Goldman Sachs is a separate operating division of
Goldman, Sachs & Co., a privately-owned global financial services company.
125
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. INVESTMENT PURCHASES AND SALES. The following table shows the aggregate
cost of Eligible Fund shares purchased and proceeds from the sales of Eligible
Fund shares for each sub-account for the year ended December 31, 1997:
<TABLE>
<CAPTION>
PURCHASES SALES
------------ ------------
<S> <C> <C>
Capital Growth Series $190,848,855 $152,123,058
Back Bay Advisors Money Market Series 165,843,613 162,797,235
Back Bay Advisors Bond Income Series 19,577,841 13,951,014
Back Bay Advisors Managed Series 12,248,935 9,123,459
Westpeak Stock Index Series 31,190,566 13,926,513
Westpeak Growth and Income Series 16,870,544 7,986,008
Loomis Sayles Avanti Growth Series 14,966,505 10,913,924
Loomis Sayles Small Cap Series 35,774,167 14,288,925
Loomis Sayles Balanced Series 6,944,300 3,461,274
Morgan Stanley International Magnum Equity Series 7,071,617 3,577,480
Davis Venture Value Series 41,982,387 11,519,957
Alger Equity Growth Series 27,712,451 13,170,766
Salomon Brothers U.S. Government Series 315,478 195,450
Salomon Brothers Strategic Bond Opportunities
Series 711,406 148,625
VIP Equity-Income Portfolio 43,541,020 28,601,305
VIP Overseas Portfolio 33,752,160 24,396,016
VIP High Income Portfolio 5,573,049 2,765,596
VIP II Asset Manager Portfolio 3,323,050 2,105,248
</TABLE>
8. NET INVESTMENT RETURNS. The following table shows the net investment return
of the sub-account for each type of variable life insurance policy investing
in the Account. The net investment return reflects the appropriate mortality
and expense risk charge against sub-account assets, where applicable, for each
type of variable life insurance policy shown (in the case of American Gateway
Series, the mortality and expense risk charge is deducted monthly from the
cash values rather than daily from sub-account assets and, therefore, does not
impact sub-account net investment returns). These figures do not reflect
charges deducted from premiums and the cash values of the policies. Such
charges will affect the actual cash values and benefits of the policies.
Certain amounts have been restated to conform with the current calculation of
net investment return to provide greater comparability with industry
convention.
126
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FIXED PREMIUM ("ZENITH LIFE") POLICIES
<TABLE>
<CAPTION>
1/1/88- 1/1/89- 1/1/90- 1/1/91- 1/1/92- 1/1/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97-
12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
SUB-ACCOUNT -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital Growth.......... (9.11)% 30.30% (3.82)% 53.45% (6.38)% 14.57% (7.39)% 37.55% 20.65% 23.05 %
Bond Income............. 7.99 % 11.91% 7.71 % 17.55% 7.80 % 12.22% (3.70)% 20.78% 4.24% 10.50 %
Money Market............ 7.14 % 8.87% 7.81 % 5.84% 3.43 % 2.61% 3.61 % 5.33% 4.76% 4.97 %
<CAPTION>
1/1/88- 1/1/89- 1/1/90- 1/1/91- 1/1/92- 1/1/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97-
12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
SUB-ACCOUNT -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock Index............. 15.93 % 29.70% (4.48)% 29.98% 6.92 % 9.34% 0.76 % 36.44% 22.04% 32.03 %
Managed................. 9.10 % 18.67% 2.85 % 19.75% 6.33 % 10.26% (1.46)% 30.81% 14.62% 26.12 %
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97-
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
SUB-ACCOUNT -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Avanti Growth........................................................ 14.47% (0.62)% 29.90% 17.20% 16.91 %
Growth and Income.................................................... 13.97% (1.55)% 35.99% 17.68% 33.01 %
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97-
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
SUB-ACCOUNT -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Equity-Income........................................................ 9.29% 6.69 % 34.62% 13.88% 27.66 %
Overseas............................................................. 14.57% 1.37 % 9.30% 12.82% 11.17 %
<CAPTION>
5/2/94- 1/1/95- 1/1/96- 1/1/97-
12/31/94 12/31/95 12/31/96 12/31/97
SUB-ACCOUNT -------- -------- -------- --------
<S> <C> <C> <C> <C>
Small Cap..................................................................... (3.45)% 28.40% 30.22% 24.42 %
<CAPTION>
8/31/94- 1/1/95- 1/1/96- 1/1/97-
12/31/94 12/31/95 12/31/96 12/31/97
SUB-ACCOUNT -------- -------- -------- --------
<S> <C> <C> <C> <C>
High Income................................................................... (0.58)% 20.18% 13.63% 17.26 %
Asset Manager................................................................. (4.41)% 16.55% 14.20% 20.23 %
<CAPTION>
5/1/95- 1/1/96- 1/1/97-
12/31/95 12/31/96 12/31/97
SUB-ACCOUNT -------- -------- --------
<S> <C> <C> <C>
Equity Growth.......................................................................... 24.84% 12.78% 25.19 %
Balanced............................................................................... 13.75% 16.50% 15.77 %
International Equity................................................................... 3.85% 6.30% (1.64)%
Venture Value.......................................................................... 21.64% 25.40% 33.03 %
</TABLE>
127
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SINGLE PREMIUM ("ZENITH LIFE ONE") POLICIES
<TABLE>
<CAPTION>
NET INVESTMENT RETURN OF THE SUB-ACCOUNTS
---------------------------------------------------------------------------------------------
1/1/88- 1/1/89- 1/1/90- 1/1/91- 1/1/92- 1/1/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97-
SUB-ACCOUNT 12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital Growth.......... (9.20)% 30.17% (3.91)% 53.29% (6.47)% 14.46% (7.38)% 37.41% 20.53% 22.92 %
Bond Income............. 7.88 % 11.79% 7.60 % 17.43% 7.69 % 12.10% (3.80)% 20.66% 4.14% 10.39 %
Money Market............ 7.03 % 8.77% 7.71 % 5.74% 3.33 % 2.51% 3.35 % 5.23% 4.65% 4.87 %
<CAPTION>
1/1/88- 1/1/89- 1/1/90- 1/1/91- 1/1/92- 1/1/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97-
SUB-ACCOUNT 12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock Index............. 15.82 % 29.57% (4.58)% 29.85% 6.81 % 9.23% 0.66 % 36.30% 21.91% 31.90 %
Managed................. 8.99 % 18.55% 2.75 % 19.63% 6.22 % 10.15% (1.56)% 30.67% 14.51% 25.99 %
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97-
SUB-ACCOUNT 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Avanti Growth........................................................ 14.39% (0.72)% 29.77% 17.08% 16.80 %
Growth and Income.................................................... 13.90% (1.65)% 38.85% 17.56% 32.87 %
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97-
SUB-ACCOUNT 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Equity Income........................................................ 9.22% 6.59 % 34.49% 13.77% 27.53 %
Overseas............................................................. 14.49% 1.27 % 9.19% 12.70% 11.05 %
<CAPTION>
5/2/94- 1/1/95- 1/1/96- 1/1/97-
SUB-ACCOUNT 12/31/94 12/31/95 12/31/96 12/31/97
- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Small Cap..................................................................... (3.52)% 28.27% 30.09% 24.29 %
<CAPTION>
8/31/94- 1/1/95- 1/1/96- 1/1/97-
SUB-ACCOUNT 12/31/94 12/31/95 12/31/96 12/31/97
- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
High Income................................................................... (0.61)% 20.06% 13.52% 17.14 %
Asset Manager................................................................. (4.45)% 16.43% 14.09% 20.11 %
<CAPTION>
5/1/95- 1/1/96- 1/1/97-
SUB-ACCOUNT 12/31/95 12/31/96 12/31/97
- ----------- -------- -------- --------
<S> <C> <C> <C>
Equity Growth.......................................................................... 24.76% 12.66% 25.06 %
Balanced............................................................................... 13.67% 16.39% 15.66 %
International Equity................................................................... 3.79% 6.19% (1.74)%
Venture Value.......................................................................... 21.56% 25.27% 32.90 %
</TABLE>
128
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
VARIABLE ORDINARY ("ZENITH LIFE PLUS", "ZENITH LIFE PLUS II" AND "ZENITH
VARIABLE WHOLE LIFE") AND LIMITED PAYMENT ("ZENITH LIFE EXECUTIVE 65") POLICIES
<TABLE>
<CAPTION>
NET INVESTMENT RETURN OF THE SUB-ACCOUNTS
---------------------------------------------------------------------------------------------
1/1/88- 1/1/89- 1/1/90- 1/1/91- 1/1/92- 1/1/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97-
SUB-ACCOUNT 12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital Growth.......... (9.34)% 29.98% (4.06)% 53.06% (6.61)% 14.28% (7.62)% 37.21% 20.34% 22.74 %
Bond Income............. 7.72 % 11.63% 7.44 % 17.25% 7.53 % 11.94% (3.94)% 20.47% 3.98% 10.23 %
Money Market............ 6.87 % 8.60% 7.54 % 5.58% 3.18 % 2.36% 3.35 % 5.07% 4.50% 4.71 %
<CAPTION>
1/1/88- 1/1/89- 1/1/90- 1/1/91- 1/1/92- 1/1/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97-
SUB-ACCOUNT 12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock Index............. 15.65 % 29.37% (4.72)% 29.65% 6.65 % 9.07% 0.51 % 36.10% 21.73% 31.70 %
Managed................. 8.83 % 18.37% 2.59 % 19.45% 6.06 % 9.99% (1.70)% 30.48% 14.34% 25.81 %
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97-
SUB-ACCOUNT 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Avanti Growth........................................................ 14.28% (0.87)% 29.57% 16.90% 16.62 %
Growth and Income.................................................... 13.78% (1.80)% 35.65% 17.38% 32.67 %
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97-
SUB-ACCOUNT 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Equity-Income........................................................ 9.11% 6.43 % 34.29% 13.59% 27.34 %
Overseas............................................................. 14.38% 1.12 % 9.02% 12.53% 10.89 %
<CAPTION>
5/2/94- 1/1/95- 1/1/96- 1/1/97-
SUB-ACCOUNT 12/31/94 12/31/95 12/31/96 12/31/97
- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Small Cap..................................................................... (3.61)% 28.08% 29.90% 24.11 %
<CAPTION>
8/31/94- 1/1/95- 1/1/96- 1/1/97-
SUB-ACCOUNT 12/31/94 12/31/95 12/31/96 12/31/97
- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
High Income................................................................... (0.66)% 19.88% 13.35% 16.96 %
Asset Manager................................................................. (4.49)% 16.26% 13.91% 19.93 %
<CAPTION>
5/1/95- 1/1/96- 1/1/97-
SUB-ACCOUNT 12/31/95 12/31/96 12/31/97
- ----------- -------- -------- --------
<S> <C> <C> <C>
Equity Growth.......................................................................... 24.64% 12.49% 24.88 %
Balanced............................................................................... 13.56% 16.21% 15.48 %
International Equity................................................................... 3.68% 6.03% (1.89)%
Venture Value.......................................................................... 21.44% 25.08% 32.70 %
</TABLE>
129
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
VARIABLE SURVIVORSHIP ("ZENITH SURVIVORSHIP LIFE") POLICIES
<TABLE>
<CAPTION>
NET INVESTMENT RETURN OF THE SUB-ACCOUNTS
---------------------------------------------------------------------------------------------
1/1/88- 1/1/89- 1/1/90- 1/1/91- 1/1/92- 1/1/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97-
SUB-ACCOUNT 12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital Growth.......... (9.61)% 29.59% (4.35)% 52.61% (6.90)% 13.94% (7.90)% 36.80% 19.98% 22.37%
Bond Income............. 7.40 % 11.29% 7.11 % 16.90% 7.21 % 11.60% (4.23)% 20.12% 3.67% 9.90%
Money Market............ 6.55 % 8.28% 7.22 % 5.26% 2.87 % 2.05% 3.04 % 4.75% 4.18% 4.39%
<CAPTION>
1/1/88- 1/1/89- 1/1/90- 1/1/91- 1/1/92- 1/1/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97-
SUB-ACCOUNT 12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock Index............. 15.30 % 28.99% (5.01)% 29.27% 6.33 % 8.74% 0.21 % 35.69% 21.36% 31.31%
Managed................. 8.50 % 18.02% 2.28 % 19.10% 5.74 % 9.69% (2.00)% 30.09% 13.99% 25.43%
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97-
SUB-ACCOUNT 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Avanti Growth........................................................ 14.05% (1.16)% 29.19% 16.55% 16.27%
Growth and Income.................................................... 13.55% (2.09)% 35.25% 17.03% 32.28%
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97-
SUB-ACCOUNT 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Equity-Income........................................................ 8.89% 6.11 % 33.89% 13.25% 26.96%
Overseas............................................................. 14.15% 0.82 % 8.70% 12.19% 10.56%
<CAPTION>
5/2/94- 1/1/95- 1/1/96- 1/1/97-
SUB-ACCOUNT 12/31/94 12/31/95 12/31/96 12/31/97
- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Small Cap..................................................................... (3.80)% 27.69% 29.50% 23.73%
<CAPTION>
8/31/94- 1/1/95- 1/1/96- 1/1/97-
SUB-ACCOUNT 12/31/94 12/31/95 12/31/96 12/31/97
- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
High Income................................................................... (0.76)% 19.53% 13.00% 16.61%
Asset Manager................................................................. (4.59)% 15.91% 13.57% 19.57%
<CAPTION>
5/1/95- 1/1/96- 1/1/97-
SUB-ACCOUNT 12/31/95 12/31/96 12/31/97
- ----------- -------- -------- --------
<S> <C> <C> <C>
Equity Growth.......................................................................... 24.39% 12.15% 24.50 %
Balanced............................................................................... 13.33% 15.86% 15.14 %
International Equity................................................................... 3.48% 5.71% (2.18)%
Venture Value.......................................................................... 21.20% 24.71% 32.30 %
</TABLE>
130
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FLEXIBLE PREMIUM ("ZENITH FLEXIBLE LIFE") POLICIES
<TABLE>
<CAPTION>
NET INVESTMENT RETURN OF THE SUB-ACCOUNTS
---------------------------------------------------------------------------------------------
1/1/88- 1/1/89- 1/1/90- 1/1/91- 1/1/92- 1/1/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97-
SUB-ACCOUNT 12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital Growth.......... (9.47)% 31.88% (5.73)% 52.83% (6.75)% 14.11% (7.76)% 37.00% 20.16% 22.56 %
Bond Income............. 7.56 % 11.46% 7.28 % 17.08% 7.37 % 11.77% (4.08)% 20.29% 3.82% 10.06 %
Money Market............ 6.71 % 8.44% 7.38 % 5.42% 3.02 % 2.20% 3.20 % 4.91% 4.34% 4.55 %
<CAPTION>
1/1/88- 1/1/89- 1/1/90- 1/1/91- 1/1/92- 1/1/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97-
SUB-ACCOUNT 12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock Index............. 15.47 % 29.18% (4.86)% 29.46% 6.49 % 8.90% 0.36 % 35.90% 21.55% 31.51 %
Managed................. 8.67 % 18.20% 2.44 % 19.28% 5.90 % 9.82% (1.85)% 30.28% 14.16% 25.62 %
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97-
SUB-ACCOUNT 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Avanti Growth........................................................ 14.16% (1.01)% 29.38% 16.72% 16.45 %
Growth and Income.................................................... 13.67% (1.94)% 35.45% 17.21% 32.47 %
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97-
SUB-ACCOUNT 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Equity-Income........................................................ 9.00% 6.27 % 34.09% 13.42% 27.15 %
Overseas............................................................. 14.26% 0.97 % 8.86% 12.36% 10.72 %
<CAPTION>
5/2/94- 1/1/95- 1/1/96- 1/1/97-
SUB-ACCOUNT 12/31/94 12/31/95 12/31/96 12/31/97
- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Small Cap..................................................................... (3.71)% 27.88% 29.70% 23.92 %
<CAPTION>
8/31/94- 1/1/95- 1/1/96- 1/1/97-
SUB-ACCOUNT 12/31/94 12/31/95 12/31/96 12/31/97
- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
High Income................................................................... (0.71)% 19.71% 13.17% 16.79 %
Asset Manager................................................................. (4.54)% 16.08% 13.74% 19.75 %
<CAPTION>
5/1/95- 1/1/96- 1/1/97-
SUB-ACCOUNT 12/31/95 12/31/96 12/31/97
- ----------- -------- -------- --------
<S> <C> <C> <C>
Equity Growth.......................................................................... 24.51% 12.32% 24.69 %
Balanced............................................................................... 13.44% 16.03% 15.31 %
International Equity................................................................... 3.58% 5.87% (2.04)%
Venture Value.......................................................................... 21.32% 24.89% 32.50 %
</TABLE>
131
<PAGE>
NEW ENGLAND VARIABLE LIFE SEPARATE ACCOUNT OF
NEW ENGLAND LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MODIFIED SINGLE PREMIUM ("AMERICAN GATEWAY") POLICIES
<TABLE>
<CAPTION>
1/1/88- 1/1/89- 1/1/90- 1/1/91- 1/1/92- 1/1/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97-
12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
SUB-ACCOUNT -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Bond Income............. 8.37% 12.30% 8.09 % 17.96% 8.18% 12.61% (3.36)% 21.20% 4.61% 10.89 %
Money Market............ 7.52% 9.25% 8.19 % 6.21% 3.80% 2.97% 3.97 % 5.70% 5.13% 5.34 %
<CAPTION>
1/1/88- 1/1/89- 1/1/90- 1/1/91- 1/1/92- 1/1/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97-
12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
SUB-ACCOUNT -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock Index............. 16.34% 30.15% (4.14)% 30.43% 7.30% 9.72% 1.12 % 36.92% 22.47% 32.50 %
Managed................. 9.48% 19.08% 3.21 % 20.17% 6.70% 10.65% (1.11)% 31.26% 15.03% 26.56 %
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97-
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
SUB-ACCOUNT -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Avanti Growth........................................................ 14.74% (0.27)% 30.35% 17.61% 17.32 %
Growth and Income.................................................... 14.24% (1.21)% 36.47% 18.10% 33.47 %
<CAPTION>
5/2/94- 1/1/95- 1/1/96- 1/1/97-
12/31/94 12/31/95 12/31/96 12/31/97
SUB-ACCOUNT -------- -------- -------- --------
<S> <C> <C> <C> <C>
Small Cap..................................................................... (3.23)% 28.84% 30.68% 24.85 %
<CAPTION>
5/1/95- 1/1/96- 1/1/97-
12/31/95 12/31/96 12/31/97
SUB-ACCOUNT -------- -------- --------
<S> <C> <C> <C>
Equity Growth.......................................................................... 25.13% 13.17% 25.63 %
Balanced............................................................................... 14.01% 16.91% 16.18 %
International Equity................................................................... 4.01% 6.67% (1.30)%
Venture Value.......................................................................... 21.92% 25.84% 33.50 %
<CAPTION>
6/28/96- 1/1/97-
12/31/96 12/31/97
SUB-ACCOUNT -------- --------
<S> <C> <C>
U.S. Government................................................................................. 4.55% 8.47 %
Strategic Bond Opportunities.................................................................... 8.46% 11.07 %
</TABLE>
The net investment return of a sub-account is calculated by taking the
difference between the sub-account's ending value and the beginning value for
the period and dividing it by the beginning value for the period.
132
<PAGE>
[LOGO OF NEW ENGLAND FINANCIAL 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) 1998 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: OVERSEAS PORTFOLIO
ANNUAL REPORT
DECEMBER 31, 1997
CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
MARKET ENVIRONMENT 3 A REVIEW OF WHAT HAPPENED IN WORLD MARKETS DURING
THE LAST YEAR.
PERFORMANCE 4 HOW THE FUND HAS DONE OVER TIME.
FUND TALK 5 THE MANAGER'S REVIEW OF FUND PERFORMANCE, STRATEGY
AND OUTLOOK.
INVESTMENTS 6 A COMPLETE LIST OF THE FUND'S INVESTMENTS WITH THEIR
MARKET VALUES.
FINANCIAL STATEMENTS 11 STATEMENTS OF ASSETS AND LIABILITIES, OPERATIONS, AND
CHANGES IN NET ASSETS, AS WELL AS FINANCIAL HIGHLIGHTS.
NOTES 14 NOTES TO THE FINANCIAL STATEMENTS.
REPORT OF INDEPENDENT ACCOUNTANTS 17 THE AUDITORS' OPINION.
DISTRIBUTIONS 18
</TABLE>
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE
SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND.
THIS REPORT IS NOT AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED
OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED
BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE
SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
MARKET ENVIRONMENT
Despite an infectious currency crisis that erupted in Southeast Asia
in October, most stock and bond markets around the globe posted
another year of positive returns. Sustained corporate earnings growth,
low interest-rate levels and an overall lack of inflationary concern
provided a favorable investing backdrop. The U.S. and European stock
markets continued to perform well, with U.S. stocks posting their
third consecutive year of strong results. The problems in Southeast
Asia, though, reverberated throughout the world, with investors
becoming increasingly concerned toward the end of the period regarding
the sustainability of corporate earnings. The U.S. bond market enjoyed
a nice run in 1997.
U.S. STOCK MARKETS
The U.S. stock market went through many phases during 1997. Entering
the year, the market was still being dominated by an extremely narrow
contingent of well-known, large-capitalization stocks. In fact, much
of the Standard & Poor's 500 Index 12-month gain of 33.36% came from
these bigger stocks. Stock prices soared to historic highs and the Dow
Jones Industrial Average hurtled past the 8000-point mark in August.
But, investors became increasingly concerned about the market's
ability to sustain its lofty performance levels. In mid-August,
several large multinationals - companies that derive a significant
portion of their revenues from overseas operations - justified these
concerns by announcing earnings disappointments. These announcements
triggered a slowdown among larger-cap stocks, while smaller- and
medium-sized stocks gained momentum. From August through December, the
S&P MidCap 400 Index - a measure of mid-sized stock performance -
returned 6.50%, while the S&P 500 returned 2.43%.
In late October, economic turmoil shook Southeast Asia. Since this
region accounts for a significant portion of world economic growth,
shock tremors rippled through developed markets such as those in the
U.S. and Europe, as well as emerging-market nations in Eastern Europe
and Latin America. In New York, the uncertainty was punctuated by a
554-point drop in the Dow one day and a 337-point recovery the next.
In terms of industry groups, moderate economic growth coupled with
nonexistent inflation translated into near nirvana for the finance
sector. Banks and brokerages demonstrated their ability to sustain
impressive earnings growth as borrowing demand remained high and cash
flows were healthy. Consolidation in the form of merger and
acquisition activity also brought positive results to the group. Due
to strong oil exploration and production demand, the energy service
sector also fared nicely. Demand for offshore drilling, in particular,
was very high and the industry enjoyed favorable pricing trends.
Technology stocks were a mixed bag in 1997, with the group
experiencing a decent rally through the first half of the year. The
second-half Asian crisis, however, proved particularly harmful to many
technology companies with Asian business ties. With Asia accounting
for a considerable amount of the world's technology production, the
region's economic troubles were far-reaching. Going into 1998, many
money managers - sensing an economic slowdown due to Asia - were
concentrating on stocks that were less cyclical, or economically
sensitive.
FOREIGN STOCK MARKETS
Stock markets around the world reacted differently in 1997. Europe -
bolstered by continued economic reform and a convergence in monetary
policy - posted strong overall returns as Finland, Italy, Spain,
Switzerland and the United Kingdom led the way. The Morgan Stanley
Capital International (MSCI) Europe Index returned 24.17% during the
period. In contrast, the MSCI EAFE Index, which measures the
performance of Europe, Australasia and the Far East, reflected the
problems brought on by the Asian crisis. The MSCI EAFE returned 2.01%
for the period. Japan and Hong Kong were two noteworthy laggards, as
economic recovery in Japan trudged along and Hong Kong felt the brunt
of Asia's woes. Emerging market equity performance was solid through
the first half of the period, but trailed off some in the second.
Uncertainty in Asia and South Korea made some investors question the
well-being of other pivotal emerging-market nations such as Russia,
which proved particularly vulnerable to the Asian dilemma.
U.S. BOND MARKETS
Bonds benefited from low interest rates - which in turn drove prices
upward - as well as a distinct lack of inflation indicators. The
Lehman Brothers Aggregate Bond Index - a measure of the U.S. taxable
bond market - returned 9.65% during the year. The Federal Reserve
Board's raising of a key short-term interest rate in March proved to
be one of the few obstacles to the bond market. Bonds rallied from
April through mid-September, buoyed in large part by encouraging
economic data and the Fed's reluctance to raise rates further.
Additionally, while the Asian crisis brought some equity markets to
their knees, many bond markets welcomed wary stock investors in search
of lower volatility. Interest rates reached attractive levels, with
the yield on the 30-year Treasury bond going below the 6% mark in
November. Corporate bonds performed reasonably well due to continued
economic growth and high demand for yield. Mortgage-backed bonds also
fared relatively well, in spite of increased refinancing activity due
to the lower rates.
FOREIGN BOND MARKETS
While low inflation and steady growth boosted the U.S. bond market,
results were varied on the international front. The Salomon Brothers
World Government Bond Index - a measure of government bond market
performance in developed nations - returned 0.23% for the 12 months
that ended December 31, 1997. In Europe, countries continued to make
progress in the drive toward meeting European Monetary Union
requirements. But a strong dollar relative to many currencies eroded
gains for U.S.-based investors. Japan - one of the more significant
components of the Salomon Brothers index - continued to struggle as
economic reform continued to develop slowly. The often-volatile world
of emerging-market debt also had mixed results, as Asian concerns
trickled into these regions. Brazil and Argentina performed well,
while Ecuador stumbled due to political uncertainty. Nevertheless, The
J.P. Morgan Emerging Markets Bond Index still managed to return 16.15%
during the period.
VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10
DECEMBER 31, 1997 YEAR YEARS YEARS
VIP: OVERSEAS - "INITIAL CLASS" 11.56% 14.12% 9.62%
MSCI EAFE 2.01% 11.44% 6.27%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate
each year.
You can compare the fund's returns 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.
3
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown.
If Fidelity had not reimbursed certain fund expenses, the fund's past
10 year total return would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money. Foreign investments involve greater risks and
potential rewards than U.S. investments. These risks include political
and economic uncertainties of foreign countries, as well as the risk
of currency fluctuations.
$10,000 OVER LIFE OF FUND
IMAHDR PRASUN SHR__CHT 19971231 19980109 104657 S00000000000001
VIP Overseas MS EAFE Index (Net)
00154 MS001
1987/12/31 10000.00 10000.00
1988/01/31 9657.75 10178.54
1988/02/29 9914.44 10857.01
1988/03/31 10363.64 11524.56
1988/04/30 10534.76 11692.04
1988/05/31 10342.25 11317.23
1988/06/30 10160.43 11018.93
1988/07/31 10085.56 11364.64
1988/08/31 9732.62 10625.73
1988/09/30 10149.73 11090.01
1988/10/31 10598.93 12038.90
1988/11/30 10791.44 12756.01
1988/12/31 10812.83 12827.14
1989/01/31 11133.69 13052.82
1989/02/28 11326.20 13119.91
1989/03/31 11316.00 12862.42
1989/04/30 11650.09 12981.71
1989/05/31 11219.01 12275.47
1989/06/30 11175.90 12068.82
1989/07/31 12221.28 13584.34
1989/08/31 12135.06 12973.40
1989/09/30 12889.46 13564.37
1989/10/31 12188.95 13019.38
1989/11/30 12846.35 13673.86
1989/12/31 13654.64 14178.39
1990/01/31 13471.43 13650.84
1990/02/28 13156.99 12698.08
1990/03/31 13654.30 11375.24
1990/04/30 13729.98 11284.97
1990/05/31 14627.29 12572.60
1990/06/30 14951.62 12461.86
1990/07/31 15708.39 12637.39
1990/08/31 14108.36 11410.20
1990/09/30 12767.80 9820.02
1990/10/31 13957.01 11350.17
1990/11/30 13524.57 10680.64
1990/12/31 13427.27 10853.67
1991/01/31 13557.00 11204.73
1991/02/28 14013.73 12405.86
1991/03/31 13603.85 11661.11
1991/04/30 13902.95 11775.62
1991/05/31 13936.19 11898.49
1991/06/30 13171.80 11024.18
1991/07/31 13825.41 11565.82
1991/08/31 13869.72 11330.94
1991/09/30 14434.70 11969.54
1991/10/31 14534.40 12139.22
1991/11/30 14013.73 11572.51
1991/12/31 14501.17 12170.15
1992/01/31 14678.42 11910.20
1992/02/29 14372.54 11483.91
1992/03/31 14080.60 10725.78
1992/04/30 14956.42 10776.77
1992/05/31 15607.68 11498.12
1992/06/30 15315.74 10952.73
1992/07/31 14338.85 10672.42
1992/08/31 14215.34 11341.80
1992/09/30 13642.68 11117.83
1992/10/31 12710.71 10534.65
1992/11/30 12643.34 10633.78
1992/12/31 12946.51 10688.78
1993/01/31 13317.05 10687.47
1993/02/28 13577.90 11010.31
1993/03/31 14519.85 11970.03
1993/04/30 15484.78 13106.01
1993/05/31 15817.91 13382.81
1993/06/30 15427.34 13174.01
1993/07/31 16036.16 13635.16
1993/08/31 16897.71 14371.23
1993/09/30 16805.81 14047.74
1993/10/31 17414.63 14480.66
1993/11/30 16679.45 13214.90
1993/12/31 17782.22 14169.11
1994/01/31 18942.43 15367.04
1994/02/28 18608.34 15324.48
1994/03/31 18146.60 14664.43
1994/04/30 18746.87 15286.63
1994/05/31 18515.99 15198.87
1994/06/30 18319.75 15413.66
1994/07/31 18804.58 15561.89
1994/08/31 19023.91 15930.32
1994/09/30 18527.54 15428.59
1994/10/31 18908.48 15942.36
1994/11/30 18192.77 15176.17
1994/12/31 18088.88 15271.20
1995/01/31 17338.54 14684.55
1995/02/28 17384.16 14642.40
1995/03/31 17919.42 15555.66
1995/04/30 18431.40 16140.69
1995/05/31 18687.39 15948.29
1995/06/30 18861.93 15668.61
1995/07/31 19699.72 16644.07
1995/08/31 19152.83 16009.16
1995/09/30 19432.10 16321.82
1995/10/31 19048.11 15883.09
1995/11/30 19269.19 16325.02
1995/12/31 19850.99 16982.76
1996/01/31 20223.34 17052.48
1996/02/29 20267.88 17110.12
1996/03/31 20577.86 17473.47
1996/04/30 21150.13 17981.49
1996/05/31 21162.06 17650.59
1996/06/30 21317.05 17749.94
1996/07/31 20685.16 17231.15
1996/08/31 20840.15 17268.91
1996/09/30 21448.19 17727.67
1996/10/31 21233.59 17546.26
1996/11/30 22342.36 18244.40
1996/12/31 22461.58 18009.70
1997/01/31 22461.58 17382.97
1997/02/28 22981.99 17671.52
1997/03/31 23190.80 17738.68
1997/04/30 23386.56 17836.24
1997/05/31 24848.22 19000.41
1997/06/30 26153.27 20051.13
1997/07/31 27040.70 20378.37
1997/08/31 25004.82 18859.17
1997/09/30 26844.95 19918.49
1997/10/31 24965.67 18392.53
1997/11/30 24848.22 18208.61
1997/12/31 25057.02 18370.85
IMATRL PRASUN SHR__CHT 19971231 19980109 104700 R00000000000123
Let's say hypothetically that $10,000 was invested in VIP: Overseas
Portfolio on December 31, 1987. As the chart shows, by December 31,
1997, the value of the investment would have grown to $25,057 - a
150.57% 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 $18,371 over the same period - a 83.71%
increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
ALCATEL ALSTHOM COMPAGNIE GENERALE D'ELECTRICITE SA 2.3
TOTAL SA CLASS B 2.2
RHONE POULENC SA CLASS A 2.1
NOVARTIS AG (REG.) 2.1
VOLVO AB CLASS B 1.7
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
FINANCE 18.2
HEALTH 10.0
DURABLES 9.1
BASIC INDUSTRIES 8.4
UTILITIES 8.2
TOP FIVE COUNTRIES AS OF DECEMBER 31, 1997
(EXCLUDING CASH EQUIVALENTS) % OF FUND'S
INVESTMENTS
JAPAN 18.0
UNITED KINGDOM 16.3
FRANCE 12.5
NETHERLANDS 8.1
SWEDEN 6.3
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 DID THE FUND PERFORM RELATIVE TO ITS BENCHMARK, RICK?
A. Quite well. For the 12 months that ended December 31, 1997, the
fund topped the 2.01% return of the Morgan Stanley Capital
International Europe, Australasia, Far East (EAFE) Index.
Q. WHAT FACTORS CONTRIBUTED MOST TO THE FUND'S PERFORMANCE?
A. The fund's European financial-related stocks performed very well.
Additionally, substantial exposure to the technology, energy and
health care sectors helped, as these groups registered strong
performances. Another plus was the fund's minimal exposure - relative
to the EAFE - to the poorly performing Japanese market, combined with
better-than-market average returns from export-oriented Japanese auto
and technology positions. All that being said, individual stock
picking continued to have the biggest influence on performance. In
general, the fund's largest 20 positions performed well.
Q. YOU MENTIONED FINANCE-RELATED STOCKS AS BEING POSITIVE CONTRIBUTORS
TO PERFORMANCE. WHAT DROVE THIS GROUP?
A. While I don't spend a lot of time analyzing interest rates,
inflation levels or economic conditions, low interest rates throughout
Europe were beneficial to many of the fund's top finance stocks. More
importantly, though, many of these companies fit the profile I was
looking for - management was focused on delivering results to
shareholders; the company was generating strong earnings growth; and
each had healthy balance sheets. Examples included Switzerland's
Credit Suisse and Lloyds Bank in the United Kingdom. Both of these top
positions performed quite well.
Q. YOU MENTIONED HEALTH CARE AND TECHNOLOGY STOCKS AS WELL . . .
A. In terms of the health care group, the fund's
pharmaceutical-related positions performed well. Because of strong
product development, many drug companies generated good cash flows,
enabling some to pay dividends. Two of the fund's top five positions
at the end of the period - Novartis and Rhone Poulenc - were examples.
Novartis, a company that was created by the merger of two substantial
Swiss drug firms, implemented favorable cost-cutting measures during
the period, while French-based Rhone Poulenc engaged in a major
restructuring effort designed to focus on aspects of its business with
the most growth potential. For the most part, the fund's technology
exposure also helped performance. Top positions such as Philips
Electronics and Alcatel both enjoyed solid sales and earnings growth.
Some of the fund's Japanese tech stocks - such as Sony and Canon -
also performed well, as they benefited from strong product development
in the areas of camcorders, cameras, TVs and VCRs.
Q. ASIDE FROM SOME OF THE POSITIONS YOU'VE MENTIONED, WHICH ONES
PERFORMED WELL? WHICH WERE DISAPPOINTMENTS?
A. Some of the fund's oil-related positions performed well, notably
Total and Nationale Elf Aquitaine. Each company thrived due to
shareholder-friendly management, healthy cash flows and reduced costs.
In terms of disappointments, Volkswagen underwent a significant
capital-raising exercise that didn't seem to correlate with the best
interests of its shareholders. Another area of discomfort was the
Japanese finance sector. Many Japanese brokerage firms performed
poorly, mostly due to the weak local market and low trading volumes.
Q. WHAT'S YOUR TAKE ON THE RECENT VOLATILITY WE'VE SEEN, PARTICULARLY
THE LATE-OCTOBER CORRECTION IN SOUTHEAST ASIA?
A. Strange as it may sound, I actually enjoy volatility. Market
fluctuations can be a bit frustrating on a day-to-day basis, but
volatility can present great buying opportunities for investors like
myself who follow a value-oriented discipline. When I see that stocks
are down, I generally look to see whether a buying opportunity is
present. On the other hand, when stocks are up significantly, it
creates an opportunity to sell some of the fund's more expensive
holdings and to buy stocks that may be less in favor but may offer
potential. So, while the fund's share price fluctuation may be
frustrating for shareholders to watch, I think it helps overall
performance to be able to find cheap stocks.
Q. WHAT'S YOUR OUTLOOK?
A. I can't emphasize enough how important researching individual
stocks is to the fund's performance, and Fidelity has an abundance of
talent and resources in place to try to uncover opportunities. My job
going forward will be the same as it always is: To find the best
possible investments for the fund's shareholders.
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 December 31, 1997, more than $1.9
billion
MANAGER: Richard Mace, since 1996; joined
Fidelity in 1987
3
VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO
INVESTMENTS DECEMBER 31, 1997
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 89.5%
SHARES VALUE (NOTE 1)
ARGENTINA - 0.4%
Telecom Argentina Class B
sponsored ADR 102,500 $ 3,664,375
Telefonica de Argentina SA
sponsored ADR 36,600 1,363,350
YPF Sociedad Anonima sponsored
ADR representing Class D shares 95,700 3,271,744
8,299,469
AUSTRALIA - 2.4%
Australia & New Zealand
Banking Group Ltd. 1,246,100 8,225,681
Brambles Industries Ltd. 200,200 3,968,555
Broken Hill Proprietary Co. Ltd. (The) 318,100 2,950,934
CSR Ltd. 497,600 1,684,476
Coles Myer Ltd. 700,400 3,360,428
Colonial Ltd. 682,200 1,945,211
Colonial Ltd. warrants 2/2/98 (a) 682,200 31,976
Commonwealth Bank of Australia (c) 201,300 2,306,415
Leighton Holdings Ltd. 405,800 1,415,982
National Australia Bank Ltd. 294,300 4,105,759
National Mutual Holdings Ltd. 969,807 1,839,737
News Corp. Ltd. 346,500 1,910,591
QNI Ltd. 1,054,780 700,395
Western Mining Holdings Ltd. 1,550,939 5,401,688
Westpac Banking Corp. 143,800 918,913
Woodside Petroleum Ltd. 242,000 1,704,604
Woolworths Ltd. 1,211,500 4,045,962
46,517,307
AUSTRIA - 0.1%
OMV AG 7,600 1,051,176
Voest-Alpine Stahl AG 39,000 1,501,126
2,552,302
BRAZIL - 1.5%
Centrais Electricas Brasileiras SA 70,550,000 3,603,200
Compania Energertica Minas Gerais 168,444,000 7,318,538
Petrobras PN (Pfd. Reg.) 30,358,000 7,099,537
Telebras sponsored ADR 79,600 9,268,425
Telesp PN (Pfd. Reg.) 4,499,000 1,197,220
28,486,920
CANADA - 3.2%
Abitibi-Consolidated, Inc. 88,300 1,232,265
Alcan Aluminium Ltd. 269,700 7,433,234
Alliance Forest Products, Inc. (a) 78,800 1,295,373
Alliance Forest Products, Inc. (a)(c) 83,700 1,375,922
BCE, Inc. 258,200 8,606,366
Bro-X Minerals Ltd. (a) 42,700 -
Canadian Pacific Ltd. 28,100 756,777
Canadian National Railway Co. 15,500 729,705
Canadian Natural Resources Ltd. (a) 159,900 3,422,713
Cinar Films, Inc. Class B (sub-vtg.) (a) 23,400 913,378
Cominco Ltd. 305,800 4,674,009
Domtar, Inc. 518,800 3,610,968
Greenstone Resources Ltd. (a) 141,300 672,128
Hudson's Bay Co. Ord. 73,600 1,639,789
Inco Ltd. 155,000 2,634,745
Leitch Technology Corp. (a) 68,000 2,045,399
National Bank of Canada 376,000 6,207,268
Noranda, Inc. 320,600 5,516,953
Renaissance Energy Ltd. (a) 153,600 3,169,669
Rio Alto Exploration Ltd. (a) 137,900 1,157,567
St Laurent Paperboard, Inc. (a)(c) 155,900 2,006,617
Seagram Co. Ltd. 57,300 1,853,818
Teleglobe, Inc. 25,000 760,729
61,715,392
SHARES VALUE (NOTE 1)
DENMARK - 1.0%
Den Danske Bank Group AS 55,900 $ 7,450,722
International Service Systems AS,
Series B (a) 96,600 3,553,804
Jyske Bank AS (Reg.) 6,800 828,917
Novo-Nordisk AS Class B 30,900 4,420,794
Sophus Berendsen AS, Series B 11,400 1,880,611
Unidanmark AS Class A 21,400 1,571,439
19,706,287
FINLAND - 2.2%
Cultor OY, Series 1 57,600 3,129,688
Enso OY Class R 614,800 4,762,480
Huhtamaki Ord. 144,500 5,968,115
Metsa-Serla Ltd. Class B 738,500 5,761,376
Nokia Corp. AB, Series A 52,000 3,694,036
Outokumpu OY Class A 156,800 1,914,055
Pohjola Class B 124,900 4,631,276
UPM-Kymmene Corp. 351,300 7,028,966
Valmet OY 382,300 5,277,266
42,167,258
FRANCE - 12.5%
Accor SA 9,900 1,839,147
Alcatel Alsthom Compagnie Generale
d'Electricite SA 342,250 43,466,631
Axa SA 114,726 8,869,909
Axime SA Ex Segin (a) 45,100 5,810,177
Cap Gemini Sogeti SA 98,500 8,070,017
Carrefour Supermarche SA 7,800 4,066,075
Coflexip sponsored ADR 5,000 279,688
Compagnie de Saint Gobain 15,900 2,256,910
Credit Commercial de France Ord. 81,800 5,601,810
Eramet SA 98,162 3,715,603
Elf Sanofi SA 52,900 5,884,121
GAN (Groupe Des Assur Natl.) (a) 130,000 3,179,049
Lafarge SA 40,020 2,623,707
Lagardere S.C.A. (Reg.) 104,100 3,439,180
Michelin SA (Compagnie Generale
des Etablissements) Class B 125,919 6,334,101
Nationale Elf Aquitaine 133,800 15,549,099
Pechiney SA Class A 310,284 12,239,309
Rhone Poulenc SA Class A 906,172 40,558,475
Scor SA 37,400 1,786,954
Societe Generale Class A 50,000 6,806,674
Total SA Class B 384,114 41,768,850
Usinor Sacilor 503,000 7,256,695
Union Assurancesfederale SA 32,500 4,262,472
Valeo SA 74,700 5,062,263
240,726,916
GERMANY - 3.2%
Allianz Aktiengesellschaft Holdings (Reg.) 30,200 7,791,382
BASF AG 114,400 4,026,422
Bayer AG 168,100 6,224,887
(BMW) Muenchen Bayerische
Motorenwerke AG 2,200 1,639,144
BHF Bank (Bank Berlin Hand) 233,900 6,762,747
Continental Gummi-Werke AG 134,300 2,987,680
Daimler-Benz AG Ord. 151,100 10,585,822
Hoechst AG Ord. 112,100 3,926,772
Lufthansa Deutsche AG (Reg.) 158,900 3,034,871
Mannesmann AG Ord. 16,300 8,292,744
Veba AG Ord. 98,100 6,676,364
61,948,835
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
HONG KONG - 0.6%
China Light & Power Co. Ltd. 374,000 $ 2,075,686
China Telecom (Hong Kong) Ltd. 2,126,000 3,649,526
Great Eagle Holdings Ltd. 546,000 764,617
Great Eagle Holdings Ltd.
warrants 11/30/98 (a) 109,200 14,094
Hutchison Whampoa Ltd. Ord. 240,000 1,505,460
National Mutual Asia Ltd. 1,040,000 1,033,584
Peregrine Investments Holdings Ltd. 1,200,000 851,855
Vtech Holdings Ltd. 346,000 1,020,432
10,915,254
INDIA - 0.1%
Mahindra & Mahindra Ltd. GDR 66,500 665,000
State Bank of India GDR (Reg.) 38,000 674,500
1,339,500
IRELAND - 1.4%
Bank of Ireland, Inc. 813,900 12,497,190
CRH PLC 145,682 1,705,568
Elan Corp. PLC ADR (a) 16,000 819,000
Independent Newspapers PLC 889,749 4,690,757
Smurfit (Jefferson) Group PLC 2,287,900 6,461,611
26,174,126
ITALY - 1.3%
Credito Italiano Ord. 1,078,700 3,336,618
Eni Spa 1,638,600 9,357,075
Istituto Nazionale Delle
Assicurazioni Spa 1,084,100 2,198,779
Telecom Italia Mobile Spa 1,942,000 8,959,950
Telecom Italia Spa 211,110 1,350,397
25,202,819
JAPAN - 17.5%
Acom Co. Ltd. 106,900 5,894,543
Amway Japan Ltd. 171,200 3,277,810
Aoyama Trading Co. Ord. 3,300 58,886
Asahi Breweries Ltd. 50,000 727,551
Bridgestone Corp. 168,000 3,641,126
Canon, Inc. 326,000 7,589,814
Circle K Japan Co. Ltd. 13,000 622,248
Citizen Watch Co. Ltd. Ord. 472,000 3,162,933
Dai-Ichi Kangyo Bank 124,000 731,227
Daiwa House Industry Co. Ltd. 113,000 597,128
Daiwa Securities Co. Ltd. 774,000 2,667,433
Denso Corp. 106,000 1,907,716
Denny's Japan Co. Ltd. 79,000 1,742,447
Daito Trust Construction Co. 79,500 485,250
Fuji Bank Ltd. 498,000 2,013,739
Fuji International Trust unit
sponsored ADR (c) 100 863,365
Fuji Machine Manufacturing Co.
Ltd. Ord. 30,000 723,722
Fuji Photo Film Co. Ltd. 488,000 18,686,579
Fujitsu Ltd. 339,000 3,634,693
Hitachi Maxell Ltd. 326,000 5,742,294
Honda Motor Co. Ltd. 442,000 16,214,283
Ibiden Co. Ltd. 157,000 1,899,751
Ito-Yokado Co. Ltd. 103,000 5,245,644
Jafco Co. Ltd. 46,000 1,638,139
Jusco Co. Ltd. 119,000 1,676,891
Kao Corp. 301,000 4,333,755
Komatsu Ltd. Ord. 988,000 4,956,079
Kyocera Corp. 58,000 2,629,600
Long Term Credit Bank of Japan Ltd. (The) 2,009,000 3,215,631
SHARES VALUE (NOTE 1)
Matsushita Electric Industrial Co. Ltd. 1,023,000 $ 14,964,044
Matsushita Communication
Industrial Co. Ltd. 92,000 2,451,924
Matsushita Electric Works Co. Ltd. 331,000 2,864,484
Minebea Co. Ltd. 899,000 9,638,905
Minolta Camera Co. Ltd. 868,000 4,872,633
Mitsubishi Electric Co. Ord. 586,000 1,498,939
Mitsubishi Estate Co. Ltd. 580,000 6,307,486
Mitsubishi Heavy Industries Ltd. 379,000 1,578,985
Mitsubishi Trust & Banking Corp. 100,000 1,003,255
Mitsui Fudosan Co. Ltd. 380,000 3,666,858
Nichiei Co. Ltd. 31,400 3,342,600
Nikko Securities Co. Ltd. 570,000 1,510,396
Nintendo Co. Ltd. Ord. 174,000 17,056,864
Nippon Telegraph &
Telephone Corp. Ord. 997 8,551,714
Nitto Denko Corp. 69,000 1,188,972
Nomura Securities Co. Ltd. 805,000 10,727,169
Omron Corp. 539,000 8,420,908
Orix Corp. 143,900 10,028,643
Onward Kashiyama & Co. Ltd. 233,000 2,694,467
Ricoh Co. Ltd. Ord. 219,000 2,717,059
Rohm Co. Ltd. 106,000 10,796,860
Sakura Bank Ltd. 2,796,000 7,987,042
Sankyo Co. Ltd. 345,000 7,794,371
Sekisui House Ltd. 107,000 687,521
Sekisui Chemical Co. Ltd. 6,000 30,465
Shinko Electric Industries Co. Ltd. 44,600 1,492,644
Shin-Etsu Chemical Co. Ltd. 150,000 2,860,425
Sony Corp. 182,600 16,221,789
Shohkoh Fund & Co. Ltd. 3,600 1,097,300
Sony Music Entertainment Japan, Inc. 103,300 3,797,358
Sumitomo Realty & Development Co. Ltd. 959,000 5,508,329
TDK Corp. 102,000 7,686,617
Takeda Chemical Industries Ltd. 949,000 27,036,416
Takefuji Corp. 55,500 2,546,008
Terumo Corp. 125,000 1,838,024
THK Co. Ltd. 455,800 4,433,207
Tokio Marine & Fire Insurance Co.
Ltd. (The) 312,000 3,536,358
Toyota Motor Corp. 96,000 2,749,684
Toyo Trust & Banking Co. Ltd. 33,000 194,601
Tokyo Electron Ltd. 53,000 1,696,649
Uni Charm Corp. Ord. 80,000 2,830,557
Uny Co. Ltd. 105,000 1,439,403
World Co. Ltd. 35,300 783,994
Xebio Co. Ltd. 37,200 296,289
Yasuda Trust & Banking 652,000 649,129
337,657,622
MALAYSIA - 0.1%
Malayan Banking BHD 28,000 81,452
Oriental Holdings BHD 1,027,000 1,258,468
1,339,920
MEXICO - 1.3%
BANACCI SA de CV Class B (a) 616,000 1,843,420
DESC (Sociedad de Fomento
Industrial SA) Class B 188,000 1,796,134
Grupo Carso SA de CV Class A-1 153,000 1,023,792
Grupo Financiero Bancomer Class B (a) 13,455,000 8,669,888
Grupo Financiero Inbursa SA Class B 237,000 969,145
Grupo Mexico SA Class L 80,000 252,788
Industrias Penoles SA 54,000 244,238
Telefonos de Mexico SA sponsored ADR
representing Ord. Class L shares 161,600 9,059,700
Tubos De Acero De Mexico ADR (a) 91,700 1,983,013
25,842,118
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NETHERLANDS - 8.1%
Ahold NV 355,484 $ 9,279,597
AKZO Nobel NV 139,900 24,134,735
Beter Bed Holding NV 87,200 1,682,467
Benckiser NV Class B 96,600 3,999,378
ING Groep NV 367,617 15,491,977
KLM Royal Dutch Air Lines NV 66,706 2,468,764
Koninklijke Hoogovens NV 143,600 5,888,557
Koninklijke KNP BT NV 96,300 2,219,201
Nutreco Holding NV (a) 111,500 2,541,969
Philips Electronics NV (Bearer) 454,100 27,248,241
Royal Dutch Petroleum Co. Ord. 445,360 24,460,187
Unilever NV Ord. 366,200 22,588,206
Vendex International NV (c) 121,600 6,714,552
VNU Ord. 251,500 7,098,840
155,816,671
NETHERLANDS ANTILLES - 0.1%
Schlumberger Ltd. 32,700 2,632,350
NEW ZEALAND - 0.2%
Air New Zealand Ltd. Class B 552,200 1,106,953
Lion Nathan Ltd. 572,000 1,282,912
Lion Nathan Ltd. (Astl) 59,200 134,887
Sky Network Television Ltd. (a) 375,600 565,248
3,090,000
NORWAY - 0.5%
Den Norske Bank AS
Class A Free shares 894,400 4,221,500
Elkem ASA 122,100 1,622,921
NCL Holdings AS (a) 1,215,800 4,353,332
NCL Holdings AS rights 12/23/97 (a) 1,215,800 7,328
10,205,081
PERU - 0.1%
Compania de Minas Buenaventura SA
Class B sponsored ADR 80,200 1,283,200
PORTUGAL - 0.3%
BPI-SGPS SA (Reg.) 161,100 3,918,057
Electricidade de Portugal SA 117,300 2,221,688
6,139,745
RUSSIA - 0.1%
Vimpel Communications
sponsored ADR (a) 49,300 1,756,313
SINGAPORE - 0.1%
Kim Engineering Holdings Ltd. 2,683,000 877,058
Singapore International Airlines Ltd. 98,000 640,713
1,517,771
SOUTH AFRICA - 0.3%
Gencor Ltd. (Reg.) 164,160 271,548
JCI Ltd. 187,500 838,000
Sasol Ltd. 557,800 5,845,639
6,955,187
SPAIN - 1.5%
Acerinox SA (Reg.) 14,900 2,199,442
Banco Bilbao Vizcaya SA Ord. (Reg.) 344,400 11,139,197
Mapfre Vida SA 26,000 914,286
Telefonica de Espana SA Ord. 511,500 15,526,144
29,779,069
SHARES VALUE (NOTE 1)
SWEDEN - 6.3%
ABB AB:
Series A 297,900 $ 3,529,398
Series B 153,000 1,803,040
Astra AB Class A Free shares 1,160,900 20,118,697
Assi Doman AB Free shares 63,600 1,611,222
Electrolux AB 87,200 6,055,785
Ericsson (L.M.) Telephone Co. Class B 75,000 2,821,681
Esselte AB Class B Free shares 90,900 1,844,557
Granges AB (Reg.) 48,600 762,620
IBS (International Business Systems) AB
Class B Free shares (a) 256,800 2,977,729
Investor AB Class B Free shares 82,000 3,999,698
Nordbanken Holding AB 1,749,300 9,899,493
SKF AB Ord. 117,100 2,494,284
Skandia Foersaekrings AB 168,700 7,962,863
Svenska Handelsbanken 171,100 5,919,632
Swedish Match Co. 4,756,500 15,886,774
Volvo AB Class B 1,221,200 32,784,512
120,471,985
SWITZERLAND - 5.3%
Ciba Specialty Chemicals AG 18,400 2,189,877
Credit Suisse Group (Reg.) 151,700 23,450,205
Julius Baer Holding AG 5,603 10,385,862
Nestle SA (Reg.) 9,730 14,568,379
Novartis AG (Reg.) 25,000 40,526,676
Sulzer AG (Reg.) 3,469 2,197,192
SGS Societe Generale de Surveillance
Holding SA (Bearer) 800 1,532,148
Swiss Bank Corp. (Reg.) 5,400 1,676,881
Union Bank of Switzeland Ord. (Bearer) 3,500 5,056,088
101,583,308
TURKEY - 0.1%
Tupras-Turkiye Petrol Rafinerileri AS (a) 19,623,000 2,222,236
UNITED KINGDOM - 16.3%
Allied Domecq PLC 6,200 53,524
BAT Industries PLC Ord. 1,217,300 11,110,480
BBA Group PLC 282,372 1,888,744
Barclays PLC Ord. 582,100 15,516,778
Barratt Developments PLC 847,125 3,237,881
Billiton PLC 820,800 2,109,538
Boots Co. PLC Class L (The) 161,900 2,337,891
British Aerospace PLC 317,625 9,079,033
British Petroleum PLC Ord. 981,356 12,934,272
British Land Co. PLC (The) Ord. 176,200 1,930,425
British Telecommunications PLC Ord. 850,300 6,703,159
Cable & Wireless PLC Ord. 348,900 3,075,248
Caradon PLC 3,680,180 10,731,681
Cookson Group PLC 3,846,100 12,482,806
Courtaulds Textiles PLC 237,900 1,399,227
Devro PLC 118,100 733,528
Diageo PLC 916,791 8,413,001
Dorling Kindersley Holdings PLC Class L 175,400 621,289
DR Solomons Group PLC
sponsored ADR (a) 147,000 4,740,750
English China Clay PLC 191,400 845,088
Gallaher Group PLC 1,449,000 7,722,681
Glaxo Wellcome PLC 786,600 18,661,298
Granada Group PLC 268,000 4,106,229
HSBC Holdings PLC 345,100 8,539,655
HSBC Holdings PLC Ord. 56,500 1,452,107
Hays PLC 94,200 1,260,179
Inchcape PLC Ord. 952,800 2,558,673
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UNITED KINGDOM - CONTINUED
Ladbroke Group PLC Ord. 1,328,800 $ 5,779,483
Lloyds TSB Group PLC 1,896,495 24,589,622
National Grid Co. PLC 790,400 3,763,312
National Westminster Bank PLC Ord. 125,000 2,084,088
Pearson PLC 397,300 5,177,504
Perpetual PLC 19,600 904,148
Pilkington PLC Ord. 729,300 1,531,940
Rentokil Initial PLC 5,387,000 23,518,969
Royal & Sun Alliance Insurance
Group PLC 464,908 4,695,187
Scholl PLC 354,800 1,508,095
Securicor Group PLC 1,138,100 5,353,181
Shell Transport & Trading Co. PLC (Reg.) 2,177,300 15,783,248
Siebe PLC 102,300 2,014,044
SmithKline Beecham PLC Ord. 2,463,742 25,287,663
SIG PLC 38,800 162,364
Somerfield PLC 1,044,600 3,614,055
Tarmac 554,200 1,040,871
Thames Water PLC Ord. 144,800 2,162,528
Tomkins PLC Ord. 179,800 853,115
Unigate PLC 333,200 3,299,171
Unilever PLC Ord. 1,107,200 9,503,624
Vodafone Group PLC 2,109,244 15,289,910
WPP Group PLC 252,900 1,129,129
313,290,416
UNITED STATES OF AMERICA - 1.4%
Alumax, Inc. (a) 117,900 4,008,600
Aluminum Co. of America 95,400 6,713,775
Continental Homes Holding Corp. 49,600 1,996,400
D.R. Horton, Inc. 319,200 5,546,100
Kaiser Aluminum Corp. (a) 8,200 72,263
MCI Communications Corp. 154,300 6,605,969
Newmont Mining Corp. 46,000 1,351,250
26,294,357
TOTAL COMMON STOCKS
(Cost $1,474,140,020) 1,723,629,734
PREFERRED STOCKS - 2.3%
CONVERTIBLE PREFERRED STOCKS - 0.4%
AUSTRALIA - 0.2%
National Australia Bank Ltd. 7.875% 111,700 3,176,469
JAPAN - 0.0%
AJL participating trust $1.44 73,000 803,000
UNITED STATES OF AMERICA - 0.2%
WBK Trust $3.135 STRYPES 86,400 2,889,000
TOTAL CONVERTIBLE PREFERRED STOCKS 6,868,469
NONCONVERTIBLE PREFERRED STOCKS - 1.9%
AUSTRALIA - 0.1%
Sydney Harbour Casino Holdings Ltd. (a) 1,517,100 1,437,005
GERMANY - 0.5%
Boss (Hugo) AG 650 831,248
SAP AG (Systeme
Anwendungen Produkte) 21,700 6,899,440
Wella AG 2,635 2,008,666
9,739,354
PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
ITALY - 1.3%
Telecom Italia Mobile Spa de Risp 3,961,100 $ 11,206,750
Telecom Italia Spa 3,272,325 14,378,212
25,584,962
TOTAL NONCONVERTIBLE PREFERRED STOCKS 36,761,321
TOTAL PREFERRED STOCKS
(Cost $27,030,220) 43,629,790
CLOSED-END INVESTMENT COMPANIES - 0.5%
EMERGING MARKETS - 0.2%
TCW/DW Emerging Markets
Opportunities Trust (SBI) 82,500 1,087,969
Templeton Dragon Fund, Inc. 183,500 1,972,625
3,060,594
GERMANY - 0.3%
Emerging Germany Fund, Inc. 70,600 794,250
New Germany Fund, Inc. (The) 338,800 4,573,800
5,368,050
MULTI-NATIONAL - 0.0%
Morgan Stanley Asia-Pacific Fund, Inc. 82,900 616,569
TOTAL CLOSED-END INVESTMENT COMPANIES
(Cost $10,484,356) 9,045,213
GOVERNMENT OBLIGATIONS - 0.0%
PRINCIPAL
AMOUNT
U.S. Treasury Bills, yields at date of
purchase 5.18% to 5.14%,
1/8/98 (d) (Cost $899,226) $ 900,000 899,226
CASH EQUIVALENTS - 7.7%
SHARES
Taxable Central Cash Fund (b)
(Cost $147,575,915) 147,575,915 147,575,915
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $1,660,129,737) $ 1,924,779,878
FUTURES CONTRACTS
EXPIRATION UNDERLYING FACE UNREALIZED
DATE AMOUNT AT VALUE GAIN/(LOSS)
PURCHASED
123 Nikkei 225 Stock Index
Contracts Mar. 1998 $ 9,363,375 $ (929,988)
THE FACE VALUE OF FUTURES PURCHASED AS A PERCENTAGE OF TOTAL
INVESTMENT
IN SECURITIES - 0.5%
SECURITY TYPE ABBREVIATIONS
STRYPES - Structured Yield Product Exchangeable
for Common Stock
LEGEND
1. Non-income producing
2. At period end, the seven-day yield of the Taxable Central Cash Fund
was 5.69%. The yield refers to the income earned by investing in the
fund over the seven-day period, expressed as an annual percentage.
3. Security exempt from registration under Rule 144A of the Securities
Act of 1933. These securities may be resold in transactions exempt
from registration, normally to qualified institutional buyers. At the
period end, the value of these securities amounted to $13,266,871 or
0.7% of net assets.
4. 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 $580,000.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $1,273,107,159 and $1,153,696,427, respectively.
The market value of futures contracts opened and closed during the
period amounted to $72,126,834 and $72,521,418, 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 $294,845 for the
period (see Note 4 of Notes to Financial Statements).
MARKET SECTOR DIVERSIFICATION
As a Percentage of Total Value of Investments
Aerospace & Defense 0.5%
Basic Industries 8.4
Cash Equivalents 7.7
Construction & Real Estate 3.2
Durables 9.1
Energy 7.6
Finance 18.2
Government Obligations 0.0
Health 10.0
Holding Companies 1.3
Industrial Machinery & Equipment 4.8
Media & Leisure 3.2
Nondurables 5.6
Precious Metals 0.5
Retail & Wholesale 2.7
Services 2.3
Technology 6.0
Transportation 0.7
Utilities 8.2
100.0%
INCOME TAX INFORMATION
At December 31, 1997, the aggregate cost of investment securities for
income tax purposes was $1,661,721,342. Net unrealized appreciation
aggregated $263,058,536, of which $407,371,007 related to appreciated
investment securities and $144,312,471 related to depreciated
investment securities.
The fund hereby designates approximately $78,646,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
INVESTMENT IN SECURITIES, AT VALUE $
1,924,779,878
(COST $1,660,129,737) - SEE ACCOMPANYING SCHEDULE
RECEIVABLE FOR INVESTMENTS SOLD
6,519,325
RECEIVABLE FOR FUND SHARES SOLD
2,144,375
DIVIDENDS RECEIVABLE
4,115,885
INTEREST RECEIVABLE 722,953
RECEIVABLE FOR DAILY VARIATION ON FUTURES CONTRACTS 24,600
OTHER RECEIVABLES 68,255
TOTAL ASSETS
1,938,375,271
LIABILITIES
PAYABLE TO CUSTODIAN BANK $ 16,012
PAYABLE FOR INVESTMENTS PURCHASED 4,375,455
PAYABLE FOR FUND SHARES REDEEMED 5,099,912
ACCRUED MANAGEMENT FEE 1,183,740
DISTRIBUTION FEES PAYABLE 36
OTHER PAYABLES AND ACCRUED EXPENSES 446,767
TOTAL LIABILITIES
11,121,922
NET ASSETS $
1,927,253,349
NET ASSETS CONSIST OF:
PAID IN CAPITAL $
1,524,828,498
UNDISTRIBUTED NET INVESTMENT INCOME
16,641,512
ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS
122,131,238
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS
263,652,101
AND ASSETS AND LIABILITIES IN
FOREIGN CURRENCIES
NET ASSETS $
1,927,253,349
</TABLE>
INITIAL CLASS: $19.20
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($1,926,322,380 (DIVIDED BY) 100,320,693
SHARES)
SERVICE CLASS: $19.20
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($930,969 (DIVIDED BY) 48,486 SHARES)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME $ 41,192,284
DIVIDENDS
INTEREST 10,126,931
51,319,215
LESS FOREIGN TAXES WITHHELD (4,339,379
)
TOTAL INCOME 46,979,836
EXPENSES
MANAGEMENT FEE $ 14,309,058
TRANSFER AGENT FEES 1,302,648
DISTRIBUTION FEES - SERVICE CLASS 41
ACCOUNTING FEES AND EXPENSES 803,038
NON-INTERESTED TRUSTEES' COMPENSATION 6,136
CUSTODIAN FEES AND EXPENSES 945,179
REGISTRATION FEES 4,483
AUDIT 47,109
LEGAL 11,069
MISCELLANEOUS 129,020
TOTAL EXPENSES BEFORE REDUCTIONS 17,557,781
EXPENSE REDUCTIONS (225,308 17,332,473
)
NET INVESTMENT INCOME 29,647,363
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES 121,016,257
FOREIGN CURRENCY TRANSACTIONS (427,681
)
FUTURES CONTRACTS (3,542,193 117,046,383
)
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES 58,901,833
ASSETS AND LIABILITIES IN (79,542
FOREIGN CURRENCIES )
FUTURES CONTRACTS (458,418 58,363,873
)
NET GAIN (LOSS) 175,410,256
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 205,057,619
OTHER INFORMATION $ 223,816
EXPENSE REDUCTIONS
DIRECTED BROKERAGE ARRANGEMENTS
CUSTODIAN CREDITS 1,492
$ 225,308
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
OPERATIONS $ 29,647,363 $ 28,360,200
NET
INVESTMENT
INCOME
NET REALIZED 117,046,383 114,395,097
GAIN (LOSS)
CHANGE IN NET 58,363,873 46,672,077
UNREALIZED
APPRECIATION
(DEPRECIATION)
NET INCREASE 205,057,619 189,427,374
(DECREASE)
IN NET
ASSETS
RESULTING
FROM
OPERATIONS
DISTRIBUTIONS TO (29,012,812 (16,689,141
SHAREHOLDERS ) )
FROM NET
INVESTMENT
INCOME
FROM NET (115,172,073 (18,358,055
REALIZED GAIN ) )
TOTAL (144,184,885 (35,047,196
DISTRIBUTIONS ) )
SHARE 198,779,377 170,087,115
TRANSACTIONS
- - NET
INCREASE
(DECREASE)
TOTAL 259,652,111 324,467,293
INCREASE
(DECREASE) IN
NET ASSETS
NET ASSETS
BEGINNING OF 1,667,601,238 1,343,133,945
PERIOD
END OF PERIOD $ 1,927,253,349 $ 1,667,601,238
(INCLUDING
UNDISTRIBUTE
D NET
INVESTMENT
INCOME OF
$16,641,512
AND
$22,748,929
,
RESPECTIVELY
)
OTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
SHARES DOLLARS SHARES DOLLARS
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SHARE 51,240,982 $ 973,125,045 37,069,614 $ 649,592,564
TRANSACTIONS
INITIAL CLASS
SOLD
REINVESTED 8,319,959 144,184,885 2,053,145 35,047,196
REDEEMED (47,764,686) (919,455,709) (29,349,715) (514,552,645)
NET INCREASE 11,796,255 $ 197,854,221 9,773,044 $ 170,087,115
(DECREASE)
SERVICE CLASS 48,794 $ 931,087 - $ -
A
SOLD
REINVESTED - - - -
REDEEMED (308) (5,931) - -
NET INCREASE 48,486 $ 925,156 - $ -
(DECREASE)
DISTRIBUTIONS $ 29,012,812 $ 16,689,141
INITIAL CLASS -
NET
INVESTMENT
INCOME
INITIAL CLASS - 115,172,073 18,358,055
NET REALIZED
GAIN
TOTAL $ 144,184,885 $ 35,047,196
SERVICE CLASS $ - $ -
- - NET
INVESTMENT
INCOME
SERVICE CLASS - -
- - NET REALIZED
GAIN
TOTAL $ - $ -
$ 144,184,885 $ 35,047,196
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
A SERVICE CLASS COMMENCED SALE OF SHARES NOVEMBER 3, 1997.
FINANCIAL HIGHLIGHTS - INITIAL CLASS
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1997 1996 1995 1994 1993
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, $ 18.84 $ 17.06 $ 15.67 $ 15.48 $ 11.53
BEGINNING OF
PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
NET .30 E .32 D, E .17 .19 .06
INVESTMENT
INCOME
NET REALIZED 1.70 1.88 1.34 .08 4.16
AND
UNREALIZED
GAIN (LOSS)
TOTAL FROM 2.00 2.20 1.51 .27 4.22
INVESTMENT
OPERATIONS
LESS
DISTRIBUTIONS
FROM NET (.33) (.20) (.06) (.08) (.18)
INVESTMENT
INCOME
IN EXCESS OF - - - - (.04)
NET INVESTMENT
INCOME
FROM NET (1.31) (.22) (.02) - -
REALIZED GAIN
IN EXCESS OF - - (.04) - (.05)
NET REALIZED
GAIN
TOTAL (1.64) (.42) (.12) (.08) (.27)
DISTRIBUTIONS
NET ASSET VALUE, $ 19.20 $ 18.84 $ 17.06 $ 15.67 $ 15.48
END OF PERIOD
TOTAL 11.56% 13.15% 9.74% 1.72% 37.35%
RETURN B, C
RATIOS AND
SUPPLEMENTAL
DATA
NET ASSETS, END $ 1,926,322 $ 1,667,601 $ 1,343,134 $ 1,297,701 $ 777,961
OF PERIOD (000
OMITTED)
RATIO OF .92% .93% .91% .92% 1.03%
EXPENSES TO
AVERAGE NET
ASSETS
RATIO OF .90% G .92% G .91% .92% 1.03%
EXPENSES TO
AVERAGE NET
ASSETS AFTER
EXPENSE
REDUCTIONS
RATIO OF NET 1.55% 1.84% 1.88% 1.28% 1.21%
INVESTMENT
INCOME TO
AVERAGE NET
ASSETS
PORTFOLIO 67% 92% 50% 42% 42%
TURNOVER RATE
AVERAGE $ .0092 $ .0137
COMMISSION
RATE H
</TABLE>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEAR ENDED
DECEMBER 31,
SELECTED PER-SHARE DATA 1997 F
NET ASSET VALUE, $ 19.36
BEGINNING OF
PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
NET .01 E
INVESTMENT
INCOME
NET REALIZED (.17)
AND
UNREALIZED
GAIN (LOSS)
TOTAL FROM (.16)
INVESTMENT
OPERATIONS
NET ASSET VALUE, $ 19.20
END OF PERIOD
TOTAL (.83)%
RETURN B, C
RATIOS AND
SUPPLEMENTAL
DATA
NET ASSETS, END $ 931
OF PERIOD (000
OMITTED)
RATIO OF 1.02% A
EXPENSES TO
AVERAGE NET
ASSETS
RATIO OF 1.01% A,
EXPENSES TO G
AVERAGE NET
ASSETS AFTER
EXPENSE
REDUCTIONS
RATIO OF NET .31% A
INVESTMENT
INCOME TO
AVERAGE NET
ASSETS
PORTFOLIO 67%
TURNOVER
AVERAGE $ .0092
COMMISSION
RATE H
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 (SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS).
D INVESTMENT INCOME PER SHARE REFLECTS A SPECIAL DIVIDEND WHICH
AMOUNTED TO $.05 PER SHARE.
E NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
F FOR THE PERIOD NOVEMBER 3, 1997 (COMMENCEMENT OF SALE OF SERVICE
CLASS SHARES) TO DECEMBER 31, 1997.
G FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE CLASS' 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.
NOTES TO FINANCIAL STATEMENTS
For the period ended December 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES.
Overseas Portfolio (the fund) is a fund of Variable Insurance Products
Fund (the trust) and is authorized to issue an unlimited number of
shares. The trust is registered under the Investment Company Act of
1940, as amended (the 1940 Act), as an open-end management investment
company organized as a Massachusetts business trust. Shares of the
fund may only be purchased by insurance companies for the purpose of
funding variable annuity or variable life insurance contracts. The
fund offers two classes of shares; the fund's original class of shares
(Initial Class shares) and Service Class shares. The fund commenced
sale of Service Class shares on November 3, 1997. Both classes of
shares have equal rights and voting privileges, except for matters
affecting a single class. Investment income, realized and unrealized
capital gains and losses, the common expenses of the fund, and
fund-level expense reductions if any, are allocated on a pro rata
basis to each class based on the relative net assets of each class to
the total net assets of the fund. Each class of shares differs in its
respective distribution plan.
The financial statements have been prepared in conformity with
generally accepted accounting principles which permit management to
make certain estimates and assumptions at the date of the financial
statements. The following summarizes the significant accounting
policies of the fund:
SECURITY VALUATION. Securities for which quotations are readily
available are valued at the last sale price, or if no sale price, at
the closing bid price in the principal market in which such securities
are normally traded. If events which are expected to materially affect
the value of securities occur after the close of a principal market in
which those securities are traded, then those securities are valued at
their fair value as determined in good faith under consistently
applied procedures under the general supervision of the Board of
Trustees ("fair value"). Securities (including restricted securities)
for which quotations are not readily available are valued primarily
using dealer-supplied valuations or at their fair value. Short-term
securities with remaining maturities of sixty days or less for which
quotations are not readily available are valued at amortized cost or
original cost plus accrued interest, both of which approximate current
value.
FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S.
dollars at the prevailing rates of exchange at period end. Income
receipts and expense payments are translated into U.S. dollars at the
prevailing exchange rate on the respective dates of the transactions.
Purchases and sales of securities are translated into U.S. dollars at
the contractual currency exchange rates established at the time of
each trade.
Net realized gains and losses on foreign currency transactions
represent net gains and losses from sales and maturities of foreign
currency contracts, disposition of foreign currencies, and the
difference between the amount of net investment income accrued and the
U.S. dollar amount actually received. The effects of changes in
foreign currency exchange rates on investments in securities are
included with the net realized and unrealized gain or loss on
investment securities.
INCOME TAXES. As a qualified regulated investment company under
Subchapter M of the Internal Revenue Code, the fund is not subject to
U.S. federal income taxes to the extent that it distributes
substantially all of its taxable income for its fiscal year. The fund
may be subject to foreign taxes on income and gains on investments
which are accrued based upon the fund's understanding of the tax rules
and regulations that exist in the markets in which it invests. The
fund accrues such taxes as applicable. The schedule of investments
includes information regarding income taxes under the caption "Income
Tax Information."
INVESTMENT INCOME. Dividend income is recorded on the ex-dividend
date, except certain dividends from foreign securities where the
ex-dividend date may have passed, are recorded as soon as the fund is
informed of the ex-dividend date. Non-cash dividends included in
dividend income, if any, are recorded at the fair market value of the
securities received. Interest income, which includes accretion of
original issue discount, is accrued as earned. Investment income is
recorded net of foreign taxes withheld where recovery of such taxes is
uncertain.
EXPENSES. Most expenses of the trust can be directly attributed to a
fund. Expenses which cannot be directly attributed are apportioned
among the funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are recorded on the
ex-dividend date. Income dividends and capital gain distributions are
declared separately for each class. Certain foreign currency gains
(losses) are taxable as ordinary income and, therefore, increase
(decrease) taxable ordinary income available for distribution.
Income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences, which may result in
distribution reclassifications, are primarily due to differing
treatments for futures and options transactions, foreign currency
transactions, passive foreign investment companies (PFIC) and losses
deferred due to wash sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital.
Undistributed net investment income and accumulated undistributed net
realized gain (loss) on investments and foreign currency transactions
may include temporary book and tax basis differences which will
reverse in a subsequent period. Any taxable income or gain remaining
at fiscal year end is distributed in the following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of
trade date. Gains and losses on securities sold are determined on the
basis of identified cost.
2. OPERATING POLICIES.
FOREIGN CURRENCY CONTRACTS. The fund generally uses foreign currency
contracts to facilitate transactions in foreign-denominated
securities. Losses may arise from changes in the value of the foreign
currency or if the counterparties do not perform under the contracts'
terms. The U.S. dollar value of foreign currency contracts is
determined using contractual currency exchange rates established at
the time of each trade. The cost of the foreign currency contracts is
included in the cost basis of the associated investment.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission (the SEC), the fund, along with
other affiliated entities of Fidelity Management & Research Company
(FMR), may transfer uninvested cash balances into one or more joint
trading accounts. These balances are invested in one or more
repurchase agreements for U.S. Treasury or Federal Agency obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are
marked-to-market daily and maintained at a value at least equal to the
principal amount of the repurchase agreement (including accrued
interest). FMR, the fund's investment adviser, is responsible for
determining that the value of the underlying securities remains in
accordance with the market value requirements stated above.
TAXABLE CENTRAL CASH FUND. Pursuant to an Exemptive Order issued by
the SEC, the fund may invest in the Taxable Central Cash Fund (the
Cash Fund) managed by Fidelity Investments Money Management, Inc.
(formerly FMR Texas, Inc.), an affiliate of FMR. The Cash Fund is an
open-end money market fund available only to investment companies and
other accounts managed by FMR and its affiliates. The Cash Fund seeks
preservation of capital, liquidity, and current income by investing in
U.S. Treasury securities and repurchase agreements for these
securities. Income distributions from the Cash Fund are declared daily
and paid monthly from net interest income. Income distributions earned
by the fund are recorded as interest income in the accompanying
financial statements.
FUTURES CONTRACTS. The fund may use futures contracts to manage its
exposure to the stock market and to fluctuations in currency values.
Buying futures tends to increase the fund's exposure to the underlying
instrument, while selling futures tends to decrease the fund's
exposure to the underlying instrument or hedge other fund investments.
Futures contracts involve, to varying degrees, risk of loss in excess
of the futures variation margin reflected in the Statement of Assets
and Liabilities. The underlying face amount at value of any open
futures contracts at period end is shown in the schedule of
investments under the caption "Futures Contracts." This amount
reflects each contract's exposure to the underlying instrument at
period end. Losses may arise from changes in the value of the
underlying instruments or if the counterparties do not perform under
the contracts' terms. Gains (losses) are realized upon the expiration
or closing of the futures contracts. Futures contracts are valued at
the settlement price established each day by the board of trade or
exchange on which they are traded.
RESTRICTED SECURITIES. The fund is permitted to invest in securities
that are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from
registration or to the public if the securities are registered.
Disposal of these securities may involve time-consuming negotiations
and expense, and prompt sale at an acceptable price may be difficult.
At the end of the period, the fund had no investments in restricted
securities (excluding 144A issues).
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities) and the market value of future contracts opened
and closed, is included under the caption "Other Information" at the
end of the fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a
monthly fee that is calculated on the basis of a group fee rate plus a
fixed individual fund fee rate applied to the average net assets of
the fund. The group fee rate is the weighted average of a series of
rates and is based on the monthly average net assets of all the mutual
funds advised by FMR. The rates ranged from .2500% to .5200% for the
period. The annual individual fund fee rate is .45%. 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. For the period, the management
fee was equivalent to an annual rate of .75% of average net assets.
SUB-ADVISER FEE. FMR, on behalf of the fund, entered into sub-advisory
agreements with Fidelity Management & Research (U.K.) Inc., Fidelity
Management & Research (Far East) Inc., and Fidelity International
Investment Advisors (FIIA). In addition, FIIA entered into a
sub-advisory agreement with its subsidiary, Fidelity International
Investment Advisors (U.K.) Limited (FIIA(U.K.)L.). 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 FIIA(U.K)L. a fee based on costs incurred
for either service.
DISTRIBUTION AND SERVICE PLAN. In accordance with Rule 12b-1 of the
1940 Act, the Trustees have adopted separate distribution plans with
respect to each class of shares (collectively referred to as "the
Plans"). Under the Service Class Plan, the class pays Fidelity
Distributors Corporation (FDC), an affiliate of FMR, a distribution
and service fee (12b-1 fee). This fee is based on an
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
DISTRIBUTION AND SERVICE PLAN - CONTINUED
annual rate of .10% of Service Class average net assets. Initial Class
shares are not subject to a 12b-1 fee.
For the period, Service Class paid FDC $41, all of which was reallowed
to insurance companies, for the distribution of shares and providing
shareholder support services.
Under the Plans, FMR or FDC may use its resources to pay
administrative and promotional expenses related to the sale of each
class of shares. Subject to the approval of the Board of Trustees, the
Plans also authorize payments to third parties that assist in the sale
of each class of shares or render shareholder support services. For
the period, FMR or FDC informed the fund that payments made to third
parties under the Plans amounted to $854,467 and $70 for the Initial
Class and Service Class, respectively.
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations
Company, Inc. (FIIOC), an affiliate of FMR, is the fund's transfer,
dividend disbursing and shareholder servicing agent. FIIOC receives
account fees and asset-based fees that vary according to account size
and type of account. FIIOC pays a portion of the expenses related to
the typesetting, printing and mailing of all shareholder reports,
except proxy statements. For the period, the transfer agent fees of
the fund were equivalent to an annual rate of .07% of average net
assets.
ACCOUNTING FEES. Fidelity Service Company, Inc., an affiliate of FMR,
maintains the fund's accounting records. The fee is based on the level
of average net assets for the month plus out-of-pocket expenses.
BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms are shown under the caption
"Other Information" at the end of the fund's schedule of investments
5. EXPENSE REDUCTIONS.
FMR has directed certain portfolio trades to brokers who paid a
portion of the fund's expenses.
In addition, the fund has entered into an arrangement with its
custodian whereby credits realized on uninvested cash balances were
used to reduce a portion of the fund's expenses.
For the period, the reductions under these arrangements are shown
under the caption "Other Information" on the fund's Statement of
Operations.
6. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investments Life Insurance Company
(FILI) and its subsidiaries, affiliates of FMR, were the record owners
of approximately 14% of the outstanding shares of the fund. In
addition, one unaffiliated insurance company was record owner of 10%
or more of the total outstanding shares of the fund, totaling 36%.
7. ASSET TRANSFER INFORMATION.
On March 14, 1997, the fund accepted assets from Nationwide Life
Insurance Co. with a value of $46,754,098 in exchange for 2,644,463
shares (valued at $17.68 per share).
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Variable Insurance Products Fund and the
Shareholders of Overseas Portfolio:
We have audited the accompanying statement of assets and liabilities
of Variable Insurance Products Fund: Overseas Portfolio, including the
schedule of portfolio investments, as of December 31, 1997, and the
related statement of operations for the year then ended, the statement
of changes in net assets for each of the two years in the period then
ended and the financial highlights of the Initial Class and the
Service Class for each of the periods indicated therein. These
financial statements and financial highlights are the responsibility
of the fund's management. Our responsibility is to express an opinion
on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1997, by
correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of Variable Insurance Products Fund: Overseas
Portfolio as of December 31, 1997, the results of its operations for
the year then ended, the changes in its net assets for each of the two
years in the period then ended, and the financial highlights of the
Initial Class and the Service Class for each of the periods indicated
therein, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 5, 1998
DISTRIBUTIONS
The Board of Trustees of Overseas Portfolio voted to pay to
shareholders of record at the opening of business on record date, the
following distributions derived from capital gains realized from sales
of portfolio securities, and dividends derived from net investment
income:
INITIAL CLASS
Pay Date 2/7/97 2/6/98
Record Date 2/7/97 2/6/98
Dividends $.33 $.38
Short-Term
Capital Gains $.28 $.33
Long-Term
Capital Gains $1.03 $.79
Long-Term
Capital Gain Breakdown:
28% rate 100% 49.64%
20% rate - 50.36%
SERVICE CLASS
Pay Date 2/6/98
Record Date 2/6/98
Dividends $.38
Short-Term
Capital Gains $.33
Long-Term
Capital Gains $.79
Long-Term
Capital Gain Breakdown:
28% rate 49.64%
20% rate 50.36%
The amounts per share which represent income derived from sources
within, and taxes paid to, foreign countries or possessions of the
United States are $.40 and $.05, respectively, for the dividend paid
February 7, 1997.
The fund has notified shareholders in January 1998 of the applicable
percentage for use in preparing 1997 income tax returns.
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
INVESTMENT SUB-ADVISERS
Fidelity Management & Research (U.K.) Inc.,
London, England
Fidelity Management & Research (Far East) Inc.,
Tokyo, Japan
Fidelity International Investment Advisors
Pembroke, Bermuda
Fidelity International Investment Advisors (U.K.) Limited
Kent, England
OFFICERS
Edward C. Johnson 3d, PRESIDENT
Robert C. Pozen, SENIOR VICE PRESIDENT
Richard A. Spillane, VICE PRESIDENT
Richard R. Mace, VICE PRESIDENT
Eric D. Roiter, SECRETARY
Richard A. Silver, TREASURER
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
BOARD OF TRUSTEES
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 *
* INDEPENDENT TRUSTEES
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER SERVICING AGENT
Fidelity Investments Institutional Operations Co., Inc.
Boston, MA
CUSTODIAN
The Chase Manhattan Bank
New York, NY
(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS
FUND: EQUITY-INCOME PORTFOLIO
ANNUAL REPORT
DECEMBER 31, 1997
CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
MARKET ENVIRONMENT 3 A REVIEW OF WHAT HAPPENED IN WORLD MARKETS DURING THE
LAST YEAR.
PERFORMANCE 4 HOW THE FUND HAS DONE OVER TIME.
FUND TALK 5 THE MANAGER'S REVIEW OF FUND PERFORMANCE, STRATEGY
AND OUTLOOK.
INVESTMENTS 6 A COMPLETE LIST OF THE FUND'S INVESTMENTS WITH THEIR
MARKET VALUES.
FINANCIAL STATEMENTS 12 STATEMENTS OF ASSETS AND LIABILITIES, OPERATIONS, AND
CHANGES IN NET ASSETS, AS WELL AS FINANCIAL HIGHLIGHTS.
NOTES 15 NOTES TO THE FINANCIAL STATEMENTS.
REPORT OF INDEPENDENT ACCOUNTANTS 18 THE AUDITORS' OPINION.
DISTRIBUTIONS 19
</TABLE>
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE
SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND.
THIS REPORT IS NOT AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED
OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED
BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE
SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
MARKET ENVIRONMENT
Despite an infectious currency crisis that erupted in Southeast Asia
in October, most stock and bond markets around the globe posted
another year of positive returns. Sustained corporate earnings growth,
low interest-rate levels and an overall lack of inflationary concern
provided a favorable investing backdrop. The U.S. and European stock
markets continued to perform well, with U.S. stocks posting their
third consecutive year of strong results. The problems in Southeast
Asia, though, reverberated throughout the world, with investors
becoming increasingly concerned toward the end of the period regarding
the sustainability of corporate earnings. The U.S. bond market enjoyed
a nice run in 1997.
U.S. STOCK MARKETS
The U.S. stock market went through many phases during 1997. Entering
the year, the market was still being dominated by an extremely narrow
contingent of well-known, large-capitalization stocks. In fact, much
of the Standard & Poor's 500 Index 12-month gain of 33.36% came from
these bigger stocks. Stock prices soared to historic highs and the Dow
Jones Industrial Average hurtled past the 8000-point mark in August.
But, investors became increasingly concerned about the market's
ability to sustain its lofty performance levels. In mid-August,
several large multinationals - companies that derive a significant
portion of their revenues from overseas operations - justified these
concerns by announcing earnings disappointments. These announcements
triggered a slowdown among larger-cap stocks, while smaller- and
medium-sized stocks gained momentum. From August through December, the
S&P MidCap 400 Index - a measure of mid-sized stock performance -
returned 6.50%, while the S&P 500 returned 2.43%.
In late October, economic turmoil shook Southeast Asia. Since this
region accounts for a significant portion of world economic growth,
shock tremors rippled through developed markets such as those in the
U.S. and Europe, as well as emerging-market nations in Eastern Europe
and Latin America. In New York, the uncertainty was punctuated by a
554-point drop in the Dow one day and a 337-point recovery the next.
In terms of industry groups, moderate economic growth coupled with
nonexistent inflation translated into near nirvana for the finance
sector. Banks and brokerages demonstrated their ability to sustain
impressive earnings growth as borrowing demand remained high and cash
flows were healthy. Consolidation in the form of merger and
acquisition activity also brought positive results to the group. Due
to strong oil exploration and production demand, the energy service
sector also fared nicely. Demand for offshore drilling, in particular,
was very high and the industry enjoyed favorable pricing trends.
Technology stocks were a mixed bag in 1997, with the group
experiencing a decent rally through the first half of the year. The
second-half Asian crisis, however, proved particularly harmful to many
technology companies with Asian business ties. With Asia accounting
for a considerable amount of the world's technology production, the
region's economic troubles were far-reaching. Going into 1998, many
money managers - sensing an economic slowdown due to Asia - were
concentrating on stocks that were less cyclical, or economically
sensitive.
FOREIGN STOCK MARKETS
Stock markets around the world reacted differently in 1997. Europe -
bolstered by continued economic reform and a convergence in monetary
policy - posted strong overall returns as Finland, Italy, Spain,
Switzerland and the United Kingdom led the way. The Morgan Stanley
Capital International (MSCI) Europe Index returned 24.17% during the
period. In contrast, the MSCI EAFE Index, which measures the
performance of Europe, Australasia and the Far East, reflected the
problems brought on by the Asian crisis. The MSCI EAFE returned 2.01%
for the period. Japan and Hong Kong were two noteworthy laggards, as
economic recovery in Japan trudged along and Hong Kong felt the brunt
of Asia's woes. Emerging market equity performance was solid through
the first half of the period, but trailed off some in the second.
Uncertainty in Asia and South Korea made some investors question the
well-being of other pivotal emerging-market nations such as Russia,
which proved particularly vulnerable to the Asian dilemma.
U.S. BOND MARKETS
Bonds benefited from low interest rates - which in turn drove prices
upward - as well as a distinct lack of inflation indicators. The
Lehman Brothers Aggregate Bond Index - a measure of the U.S. taxable
bond market - returned 9.65% during the year. The Federal Reserve
Board's raising of a key short-term interest rate in March proved to
be one of the few obstacles to the bond market. Bonds rallied from
April through mid-September, buoyed in large part by encouraging
economic data and the Fed's reluctance to raise rates further.
Additionally, while the Asian crisis brought some equity markets to
their knees, many bond markets welcomed wary stock investors in search
of lower volatility. Interest rates reached attractive levels, with
the yield on the 30-year Treasury bond going below the 6% mark in
November. Corporate bonds performed reasonably well due to continued
economic growth and high demand for yield. Mortgage-backed bonds also
fared relatively well, in spite of increased refinancing activity due
to the lower rates.
FOREIGN BOND MARKETS
While low inflation and steady growth boosted the U.S. bond market,
results were varied on the international front. The Salomon Brothers
World Government Bond Index - a measure of government bond market
performance in developed nations - returned 0.23% for the 12 months
that ended December 31, 1997. In Europe, countries continued to make
progress in the drive toward meeting European Monetary Union
requirements. But a strong dollar relative to many currencies eroded
gains for U.S.-based investors. Japan - one of the more significant
components of the Salomon Brothers index - continued to struggle as
economic reform continued to develop slowly. The often-volatile world
of emerging-market debt also had mixed results, as Asian concerns
trickled into these regions. Brazil and Argentina performed well,
while Ecuador stumbled due to political uncertainty. Nevertheless, The
J.P. Morgan Emerging Markets Bond Index still managed to return 16.15%
during the period.
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10
DECEMBER 31, 1997 YEAR YEARS YEARS
VIP: EQUITY-INCOME - "INITIAL CLASS" 28.11% 20.16% 16.72%
S&P 500 (REGISTERED TRADEMARK) 33.36% 20.27% 18.05%
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.
3
Figures for more than one year assume a steady compounded rate of
return and are not the fund's year-by-year results, which fluctuated
over the periods shown.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER THE PAST 10 YEARS
IMAHDR PRASUN SHR__CHT 19971231 19980109 105649 S00000000000001
VIP Equity-Income S&P 500
00150 SP001
1987/12/31 10000.00 10000.00
1988/01/31 10711.25 10421.00
1988/02/29 11242.04 10906.62
1988/03/31 11046.33 10569.60
1988/04/30 11229.18 10686.93
1988/05/31 11379.76 10779.90
1988/06/30 12027.19 11274.70
1988/07/31 12005.40 11231.86
1988/08/31 11798.41 10849.97
1988/09/30 12148.99 11312.18
1988/10/31 12358.65 11626.66
1988/11/30 12160.03 11460.40
1988/12/31 12271.04 11660.96
1989/01/31 13028.92 12514.54
1989/02/28 12962.05 12202.93
1989/03/31 13242.80 12487.26
1989/04/30 13753.89 13135.34
1989/05/31 14162.76 13667.32
1989/06/30 14172.46 13589.42
1989/07/31 14998.71 14816.55
1989/08/31 15239.70 15106.95
1989/09/30 15068.37 15045.01
1989/10/31 14199.04 14695.97
1989/11/30 14280.18 14995.77
1989/12/31 14399.35 15355.66
1990/01/31 13426.89 14325.30
1990/02/28 13506.46 14510.09
1990/03/31 13528.73 14894.61
1990/04/30 13059.67 14522.25
1990/05/31 13923.73 15938.17
1990/06/30 13785.10 15829.79
1990/07/31 13447.96 15779.13
1990/08/31 12374.12 14352.70
1990/09/30 11414.24 13653.72
1990/10/31 11123.19 13595.01
1990/11/30 11920.41 14473.25
1990/12/31 12197.78 14877.05
1991/01/31 12851.91 15525.69
1991/02/28 13736.93 16635.78
1991/03/31 14021.89 17038.36
1991/04/30 14087.41 17079.26
1991/05/31 14860.58 17817.08
1991/06/30 14252.95 17001.06
1991/07/31 15060.97 17793.31
1991/08/31 15378.88 18215.01
1991/09/30 15273.33 17910.82
1991/10/31 15527.66 18150.82
1991/11/30 14858.37 17419.34
1991/12/31 16032.57 19412.12
1992/01/31 16249.04 19051.05
1992/02/29 16776.70 19298.72
1992/03/31 16571.12 18922.39
1992/04/30 17090.25 19478.71
1992/05/31 17226.86 19574.15
1992/06/30 17076.04 19282.50
1992/07/31 17599.34 20071.15
1992/08/31 17213.75 19659.70
1992/09/30 17392.44 19891.68
1992/10/31 17600.65 19961.30
1992/11/30 18239.16 20641.98
1992/12/31 18740.01 20895.88
1993/01/31 19299.42 21071.40
1993/02/28 19732.95 21357.97
1993/03/31 20321.01 21808.63
1993/04/30 20236.52 21280.86
1993/05/31 20602.66 21851.19
1993/06/30 20845.00 21914.55
1993/07/31 21128.60 21826.90
1993/08/31 21936.88 22654.14
1993/09/30 21853.01 22479.70
1993/10/31 22052.84 22945.03
1993/11/30 21667.45 22727.05
1993/12/31 22168.29 23002.05
1994/01/31 23144.61 23784.12
1994/02/28 22548.60 23139.57
1994/03/31 21605.28 22130.68
1994/04/30 22349.77 22413.96
1994/05/31 22562.48 22781.54
1994/06/30 22423.09 22223.40
1994/07/31 23172.05 22952.32
1994/08/31 24364.28 23893.37
1994/09/30 23965.13 23307.98
1994/10/31 24457.04 23832.41
1994/11/30 23657.69 22964.43
1994/12/31 23734.64 23305.00
1995/01/31 24105.73 23909.30
1995/02/28 25024.90 24841.04
1995/03/31 25889.00 25574.10
1995/04/30 26609.04 26327.26
1995/05/31 27410.91 27379.56
1995/06/30 27804.74 28015.58
1995/07/31 28874.79 28944.58
1995/08/31 29236.96 29017.23
1995/09/30 30207.60 30241.76
1995/10/31 29860.01 30133.80
1995/11/30 31151.07 31456.67
1995/12/31 32063.70 32062.53
1996/01/31 32995.49 33153.93
1996/02/29 33106.32 33461.27
1996/03/31 33454.81 33783.50
1996/04/30 33890.42 34281.47
1996/05/31 34256.33 35165.59
1996/06/30 33942.69 35299.57
1996/07/31 32287.38 33740.04
1996/08/31 32949.50 34451.61
1996/09/30 34360.88 36390.55
1996/10/31 34918.46 37394.20
1996/11/30 37253.33 40220.83
1996/12/31 36643.47 39424.06
1997/01/31 38072.27 41887.27
1997/02/28 38494.04 42215.67
1997/03/31 37063.32 40481.03
1997/04/30 38378.03 42897.74
1997/05/31 40756.12 45509.36
1997/06/30 42650.85 47548.18
1997/07/31 45763.63 51331.58
1997/08/31 43617.55 48455.99
1997/09/30 46014.97 51109.92
1997/10/31 44332.91 49402.85
1997/11/30 45956.97 51689.71
1997/12/31 46943.01 52577.22
IMATRL PRASUN SHR__CHT 19971231 19980109 105651 R00000000000123
Let's say hypothetically $10,000 was invested in VIP: Equity-Income
Portfolio on December 31, 1987. As the chart shows, by December 31,
1997, the value of the investment would have grown to $46,943 - a
369.43% 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 $52,577 - a 425.77% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
GENERAL ELECTRIC CO. 3.1
PHILIP MORRIS COMPANIES, INC. 2.5
FANNIE MAE 2.0
BRITISH PETROLEUM PLC ADR 1.6
VIACOM, INC. CLASS B (NON-VTG.) 1.3
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
FINANCE 23.4
ENERGY 11.7
UTILITIES 7.3
NONDURABLES 7.3
HEALTH 6.9
ASSET ALLOCATION AS OF DECEMBER 31, 1997 *
ROW: 1, COL: 1, VALUE: 5.8
ROW: 1, COL: 2, VALUE: 1.2
ROW: 1, COL: 3, VALUE: 93.0
STOCKS 93.9%
BONDS 1.6%
SHORT-TERM INVESTMENTS 4.5%
FOREIGN INVESTMENTS 9.8%
*
(% 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 COMPARED TO ITS BENCHMARK OVER THE
PAST YEAR?
A. While the fund performed well, it underperformed the Standard &
Poor's 500 Index, which returned 33.36% for the 12-month period ending
December 31, 1997.
Q. WHY DID THE FUND UNDERPERFORM THE INDEX?
A. Mainly because the fund's equity-income style of management - which
favors companies that pay high dividends instead of high-growth
companies - was not as effective in the strong market of 1997 as some
other management styles. To be in line with the fund's management
style, I could not invest in some of the year's top-performing
companies because they did not pay dividends.
Q. STILL, THE FUND DID WELL OVER THE PERIOD . . .
A. That's true. Within the context of an equity-income management
style, many of the fund's top holdings did very well over the period.
One standout performer was the fund's largest holding, General
Electric. This company showed strong earnings growth and solid
underlying fundamentals. Fannie Mae, which packages and facilitates
mortgage loans, also turned in a solid performance over the period. In
addition to strong individual stock selection, the fund also benefited
from its sector weightings. It was overweighted relative to the index
in the financial sector - which outperformed the market - and
underweighted compared to the index in the utility sector - which
underperformed the market.
Q. FINANCIAL HOLDINGS MADE UP OVER 23% OF THE FUND AT THE END OF THE
PERIOD. WHY DID THIS SECTOR PERFORM SO WELL OVER THE PAST YEAR?
A. In general, financial stocks move in step with interest rates.
That is, when interest rates go down, financial stocks usually do
well, and, conversely, when rates go up, financial stocks tend to turn
in weaker performances. So it was good news for the sector that
interest rates trended downward in 1997. The sector also benefited
from a fair amount of consolidation. Some standout financial stocks
over the period were Bank of New York and Allstate Insurance.
Q. YOU FREQUENTLY MENTION YOUR EQUITY-INCOME STYLE OF INVESTING. WHAT
DO YOU LOOK FOR IN COMPANIES, AND WHAT IS A GOOD EXAMPLE OF A CLASSIC
EQUITY-INCOME HOLDING?
A. As I've noted, the fund looks for companies that pay shareholders
higher-than-average dividends. Usually, these are big, mature
companies that have recently performed poorly or were not able to grow
as fast as the rest of the market. So to compensate shareholders, they
pay high dividends when earned. The fund also looks for high-quality
stocks that are currently out of favor. A good example of a classic
equity-income stock is Philip Morris. This company has been able to
grow its earnings-per-share consistently over the past 20 years.
However, right now the market doesn't like the company because of
pending litigation, leaving investors concerned about the true
valuation of the company. So, with Philip Morris you have a company
that grew earnings as well as Coca-Cola or Gillette over the period,
but traded at a discount valuation to the rest of the market and paid
a high dividend yield.
Q. DID YOU HAVE ANY REGRETS OVER THE PERIOD?
A. Sure. I wish I had reduced the fund's exposure to cyclical stocks -
those stocks that tend to perform well when the economy is up and
poorly when the economy is weak - during the fourth quarter of 1997.
These stocks were hit hard when Southeast Asian markets plummeted.
Q. STEVE, HOW DOES THE FUND LOOK GOING FORWARD?
A. On the positive side, it looks like pretty much all of the factors
that allowed the market to perform well in 1997 still exist - little
to no inflation, low interest rates and a fairly benign political
environment. On the negative side, I expect the market declines
throughout Asia to have an impact on the earnings of a number of
companies. In addition, the U.S. dollar continues to remain stronger
than most European currencies, hurting U.S.-based multinationals when
they try to price their goods against foreign companies. Overall,
while I think that the fund will have some challenges going forward -
mostly due to factors outside the United States - the general
environment still looks pretty good.
FUND FACTS
GOAL: to provide current income and increase the
value of the fund's shares
START DATE: October 9, 1986
SIZE: As of December 31, 1997, more than $10.1
billion
MANAGER: Stephen Petersen, since January 1997;
joined Fidelity in 1980
3
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
INVESTMENTS DECEMBER 31, 1997
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 91.5%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 5.8%
AEROSPACE & DEFENSE - 3.1%
AlliedSignal, Inc. 2,110,200 $ 82,165,892
Boeing Co. 352,200 17,235,788
GenCorp, Inc. 555,100 13,877,500
Gulfstream Aerospace Corp. (a) 246,200 7,201,350
Harsco Corp. 531,100 22,903,688
Lockheed Martin Corp. 850,303 83,754,846
Textron, Inc. 560,000 35,000,000
Thiokol Corp. 133,000 10,806,250
United Technologies Corp. 558,800 40,687,625
313,632,939
DEFENSE ELECTRONICS - 2.1%
Litton Industries, Inc. (a) 842,500 48,443,750
Northrop Grumman Corp. 874,500 100,567,500
Raytheon Company:
Class A 19,131 943,397
Class B 1,276,000 64,438,000
214,392,647
SHIP BUILDING & REPAIR - 0.6%
General Dynamics Corp. 716,500 61,932,469
Newport News Shipbuilding, Inc. 58,400 1,485,550
63,418,019
TOTAL AEROSPACE & DEFENSE 591,443,605
BASIC INDUSTRIES - 6.6%
CHEMICALS & PLASTICS - 3.1%
Air Products & Chemicals, Inc. 276,300 22,725,675
du Pont (E.I.) de Nemours & Co. 330,000 19,820,625
Goodrich (B.F.) Co. 480,400 19,906,575
Great Lakes Chemical Corp. 487,800 21,890,025
Hercules, Inc. 668,500 33,466,781
Hoechst AG Ord. 365,000 12,785,655
Millennium Chemicals, Inc. 500,000 11,781,250
Monsanto Co. 1,644,000 69,048,000
Olin Corp. 585,200 27,431,250
Solutia, Inc. 639,800 17,074,663
Union Carbide Corp. 946,300 40,631,756
Witco Corp. 445,000 18,161,563
314,723,818
IRON & STEEL - 0.4%
Dofasco Inc. 749,800 12,063,516
Inland Steel Industries, Inc. 768,000 13,152,000
Quanex Corp. 21,300 599,063
USX-U.S. Steel Group 448,600 14,018,750
39,833,329
METALS & MINING - 1.4%
Alcan Aluminium Ltd. 1,400,000 38,585,569
Alumax, Inc. (a) 835,000 28,390,000
Aluminum Co. of America 740,900 52,140,838
Inco Ltd. 279,693 4,754,321
Kaiser Aluminum Corp. (a) 250,000 2,203,125
Noranda, Inc. 200,000 3,441,642
Phelps Dodge Corp. 127,100 7,911,975
137,427,470
PACKAGING & CONTAINERS - 0.1%
Corning, Inc. 151,900 5,639,288
PAPER & FOREST PRODUCTS - 1.6%
Boise Cascade Corp. 385,400 11,658,350
Champion International Corp. 485,000 21,976,563
Domtar, Inc. 994,500 6,921,951
Georgia-Pacific Corp. 191,800 11,651,850
SHARES VALUE (NOTE 1)
Georgia Pacific Corp. (Timber Group) (a) 191,800 $ 4,351,463
Kimberly-Clark Corp. 1,340,500 66,103,406
Weyerhaeuser Co. 861,900 42,286,969
164,950,552
TOTAL BASIC INDUSTRIES 662,574,457
CONSTRUCTION & REAL ESTATE - 1.6%
BUILDING MATERIALS - 1.1%
American Standard Companies, Inc. (a) 579,300 22,194,431
Coltec Industries, Inc. (a) 1,371,600 31,803,975
Masco Corp. 1,045,400 53,184,725
107,183,131
ENGINEERING - 0.2%
EG & G, Inc. 389,900 8,114,794
Fluor Corp. 274,900 10,274,388
Foster Wheeler Corp. 164,400 4,449,075
22,838,257
REAL ESTATE INVESTMENT TRUSTS - 0.3%
Alexandria Real Estate Equities, Inc. 109,600 3,459,250
Boston Properties, Inc. 78,500 2,595,406
Equity Residential Properties Trust (SBI) 300,000 15,168,750
Weeks Corp. 170,500 5,456,000
26,679,406
TOTAL CONSTRUCTION & REAL ESTATE 156,700,794
DURABLES - 2.7%
AUTOS, TIRES, & ACCESSORIES - 1.1%
Chrysler Corp. 142,000 4,996,625
Cummins Engine Co., Inc. 113,500 6,703,594
Eaton Corp. 347,400 31,005,450
General Motors Corp. 300,000 18,187,500
Johnson Controls, Inc. 399,500 19,076,125
Meritor Automotive, Inc. 513,200 10,809,275
Modine Manufacturing Co. 98,100 3,347,663
Snap-On Tools Corp. 59,050 2,576,056
TRW, Inc. 194,300 10,370,763
107,073,051
CONSUMER DURABLES - 0.7%
Minnesota Mining & Manufacturing Co. 912,100 74,849,206
CONSUMER ELECTRONICS - 0.4%
Maytag Co. 788,900 29,435,831
Sunbeam-Oster, Inc. 155,000 6,529,375
Whirlpool Corp. 139,500 7,672,500
43,637,706
TEXTILES & APPAREL - 0.5%
Dexter Corp. 353,700 15,275,419
Reebok International Ltd. (a) 687,700 19,814,356
Stride Rite Corp. 191,700 2,300,400
Unifi, Inc. 192,600 7,836,413
45,226,588
TOTAL DURABLES 270,786,551
ENERGY - 11.5%
ENERGY SERVICES - 1.1%
Dresser Industries, Inc. 271,700 11,394,419
Eni Spa 51,400 293,515
Halliburton Co. 450,000 23,371,875
Schlumberger Ltd. 942,400 75,863,200
110,923,009
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
ENERGY - CONTINUED
OIL & GAS - 10.4%
Amerada Hess Corp. 464,500 $ 25,489,438
Amoco Corp. 365,000 31,070,625
Atlantic Richfield Co. 780,000 62,497,500
British Petroleum PLC:
Ord. 800,000 10,544,000
ADR 2,040,141 162,573,736
Burlington Resources, Inc. 566,700 25,395,244
Chevron Corp. 929,600 71,579,200
Coastal Corp. (The) 244,400 15,137,525
Exxon Corp. 1,500,000 91,781,250
Kerr-McGee Corp. 164,500 10,414,906
Mobil Corp. 502,600 36,281,438
Occidental Petroleum Corp. 1,665,200 48,811,175
Pennzoil Co. 500,400 33,432,975
Phillips Petroleum Co. 537,100 26,116,488
Royal Dutch Petroleum Co. 2,267,500 122,870,156
Texaco, Inc. 1,160,000 63,075,000
Tosco Corp. 449,800 17,008,063
Total SA:
Class B 831,600 90,428,821
sponsored ADR 576,600 32,001,300
USX-Marathon Group 1,178,600 39,777,750
Ultramar Diamond Shamrock Corp. 226,700 7,226,063
Unocal Corp. 426,884 16,568,435
Valero Energy Corp. 246,700 7,755,631
1,047,836,719
TOTAL ENERGY 1,158,759,728
FINANCE - 22.1%
BANKS - 11.0%
Banc One Corp. 1,512,700 82,158,519
Bank of New York Co., Inc. 2,115,700 122,313,906
Bank of Nova Scotia 332,500 15,664,982
BankBoston Corp. 801,100 75,253,331
BankAmerica Corp. 1,633,400 119,238,200
Chase Manhattan Corp. 337,300 36,934,350
Citicorp 974,400 123,200,700
Comerica, Inc. 505,000 45,576,250
Credit Suisse Group (Reg.) 150,400 23,249,248
National Bank of Canada 1,547,300 25,543,898
National City Corp. 990,975 65,156,606
NationsBank Corp. 1,861,800 113,220,713
Norwest Corp. 1,158,000 44,727,750
Royal Bank of Canada 400,000 21,153,510
Societe Generale Class A 56,600 7,705,155
U.S. Bancorp 1,142,698 127,910,757
Wells Fargo & Co. 167,500 56,855,781
1,105,863,656
CREDIT & OTHER FINANCE - 3.4%
American Express Co. 1,255,172 112,024,101
Beneficial Corp. 367,300 30,531,813
First Chicago NBD Corp. 1,322,100 110,395,350
Fleet Financial Group, Inc. 299,800 22,466,263
Household International, Inc. 345,000 44,009,063
Transamerica Corp. 223,000 23,749,500
343,176,090
FEDERAL SPONSORED CREDIT - 2.1%
Freddie Mac 403,600 16,925,975
Fannie Mae 3,477,300 198,423,431
215,349,406
SHARES VALUE (NOTE 1)
INSURANCE - 4.3%
Aetna, Inc. 227,800 $ 16,074,138
Allstate Corp. 1,429,499 129,905,722
CIGNA Corp. 93,700 16,215,956
Edperbrascan Corp. Ltd., Class A (vtg.) 2,699,800 49,102,725
Fremont General Corp. 423,924 23,209,839
General Re Corp. 110,000 23,320,000
Hartford Financial Services Group, Inc. 663,300 62,060,006
Highlands Insurance Group, Inc. (a) 163,600 4,642,150
Marsh & McLennan Companies, Inc. 150,600 11,229,113
Reliastar Financial Corp. 1,157,588 47,678,156
SAFECO Corp. 37,200 1,813,500
Travelers Group, Inc. (The) 961,749 51,814,227
437,065,532
SAVINGS & LOANS - 0.9%
Washington Mutual, Inc. 1,457,990 93,037,987
SECURITIES INDUSTRY - 0.4%
Bear Stearns Companies, Inc. 178,300 8,469,250
First Marathon Inc. Class A (non-vtg.) 299,400 4,282,977
Lehman Brothers Holdings, Inc. 426,700 21,761,700
34,513,927
TOTAL FINANCE 2,229,006,598
HEALTH - 6.9%
DRUGS & PHARMACEUTICALS - 4.5%
American Home Products Corp. 1,473,000 112,684,500
Barr Laboratories, Inc. (a)(d) 1,391,650 47,490,056
Bristol-Myers Squibb Co. 1,350,800 127,819,450
Merck & Co., Inc. 335,900 35,689,375
Novartis AG (Reg.) 25,200 40,850,889
Pharmacia & Upjohn, Inc. 427,100 15,642,538
Schering-Plough Corp. 1,197,800 74,413,325
454,590,133
MEDICAL EQUIPMENT & SUPPLIES - 1.1%
Allegiance Corp. 393,500 13,944,656
Bausch & Lomb, Inc. 250,000 9,906,250
Baxter International, Inc. 786,100 39,648,919
Johnson & Johnson 40,000 2,635,000
PharMerica, Inc. (a) 2,062,757 21,401,104
U.S. Surgical Corp. 740,908 21,717,851
109,253,780
MEDICAL FACILITIES MANAGEMENT - 1.3%
Beverly Enterprises, Inc. 4,972,000 64,636,000
Columbia/HCA Healthcare Corp. 2,259,150 66,927,319
131,563,319
TOTAL HEALTH 695,407,232
HOLDING COMPANIES - 0.5%
CINergy Corp. 415,000 15,899,688
Norfolk Southern Corp. 1,159,200 35,717,850
51,617,538
INDUSTRIAL MACHINERY & EQUIPMENT - 6.1%
ELECTRICAL EQUIPMENT - 3.5%
Alcatel Alsthom Compagnie Generale
d'Electricite SA 263,200 33,427,077
General Electric Co. 4,291,100 314,859,463
Loral Space & Communications Ltd. (a) 70,300 1,507,056
349,793,596
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - CONTINUED
INDUSTRIAL MACHINERY & EQUIPMENT - 1.7%
Caterpillar, Inc. 290,000 $ 14,083,125
Cooper Industries, Inc. 194,300 9,520,700
Harnischfeger Industries, Inc. 279,600 9,873,375
Ingersoll-Rand Co. 665,400 26,948,700
Parker-Hannifin Corp. 375,000 17,203,125
Stewart & Stevenson Services, Inc. 514,400 13,117,200
Tyco International Ltd. 1,925,484 86,767,123
177,513,348
POLLUTION CONTROL - 0.9%
Browning-Ferris Industries, Inc. 1,061,198 39,264,326
Ogden Corp. 181,900 5,127,306
Safety Kleen Corp. 313,200 8,593,425
Waste Management, Inc. 1,383,000 38,032,500
91,017,557
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 618,324,501
MEDIA & LEISURE - 4.0%
BROADCASTING - 0.6%
Ascent Entertainment Group, Inc. (a) 44,564 462,352
CBS Corp. 1,889,900 55,633,931
56,096,283
ENTERTAINMENT - 1.4%
MGM Grand, Inc. (a) 370,700 13,368,369
Viacom, Inc. Class B (non-vtg.) (a) 3,148,500 130,465,969
143,834,338
LEISURE DURABLES & TOYS - 0.3%
Brunswick Corp. 431,200 13,070,750
Hasbro, Inc. 596,700 18,796,050
31,866,800
LODGING & GAMING - 0.6%
Circus Circus Enterprises, Inc. (a) 674,000 13,817,000
ITT Corp. (a) 520,000 43,095,000
Mirage Resorts, Inc. (a) 283,400 6,447,350
63,359,350
PUBLISHING - 1.1%
ACNielsen Corp. (a) 636,000 15,502,500
Cognizant Corp. 353,700 15,761,756
Dun & Bradstreet Corp. 368,800 11,409,750
Harcourt General, Inc. 561,700 30,753,075
Hollinger International, Inc. Class A 1,444,400 20,221,600
McGraw-Hill, Inc. 269,500 19,943,000
113,591,681
RESTAURANTS - 0.0%
Tricon Global Restaurants, Inc. 15,000 435,938
TOTAL MEDIA & LEISURE 409,184,390
NONDURABLES - 7.3%
BEVERAGES - 0.4%
Anheuser-Busch Companies, Inc. 352,500 15,510,000
PepsiCo, Inc. 143,200 5,217,850
Seagram Co. Ltd. 607,600 19,657,585
40,385,435
FOODS - 1.0%
CPC International, Inc. 286,100 30,827,275
General Mills, Inc. 555,950 39,819,919
Heinz (H.J.) Co. 393,500 19,994,719
Ralston Purina Co. 110,000 10,223,125
100,865,038
SHARES VALUE (NOTE 1)
HOUSEHOLD PRODUCTS - 2.2%
Avon Products, Inc. 60,900 $ 3,737,738
Dial Corp. 517,300 10,766,306
Gillette Co. 100,700 10,114,056
Premark International, Inc. 25,000 725,000
Procter & Gamble Co. 821,600 65,573,950
Rubbermaid, Inc. 1,010,400 25,260,000
Unilever:
PLC Ord. 6,821,600 58,553,033
NV Ord. 12,400 764,866
NV ADR 800,000 49,950,000
225,444,949
TOBACCO - 3.7%
BAT Industries PLC Ord. 993,646 9,069,156
Dimon, Inc. 14,200 372,750
Gallaher Group PLC sponsored ADR 922,600 19,720,575
Philip Morris Companies, Inc. 5,548,800 251,430,000
RJR Nabisco Holdings Corp. 1,873,700 70,263,750
UST, Inc. 230,600 8,517,788
Universal Corp. 182,600 7,509,425
366,883,444
TOTAL NONDURABLES 733,578,866
PRECIOUS METALS - 0.2%
Newmont Mining Corp. 685,400 20,133,625
RETAIL & WHOLESALE - 4.0%
APPAREL STORES - 0.4%
Charming Shoppes, Inc. (a) 418,100 1,959,844
Footstar, Inc. (a) 362,600 9,744,875
Limited, Inc. (The) 967,100 24,661,050
TJX Companies, Inc. 175,100 6,019,063
42,384,832
DRUG STORES - 0.2%
CVS Corp. 211,400 13,542,813
Rite Aid Corp. 87,100 5,111,681
18,654,494
GENERAL MERCHANDISE STORES - 2.8%
Consolidated Stores Corp. (a) 2,020,156 88,760,615
Dayton Hudson Corp. 140,000 9,450,000
Federated Department Stores, Inc. (a) 656,400 28,266,225
Hudson's Bay Co. Ord. 377,500 8,410,601
Wal-Mart Stores, Inc. 2,684,300 105,862,081
Woolworth Corp. (a) 2,061,200 41,996,950
282,746,472
GROCERY STORES - 0.0%
American Stores Co. 294,400 6,053,600
RETAIL & WHOLESALE, MISCELLANEOUS - 0.6%
Staples, Inc. (a) 345,700 9,593,175
Tandy Corp. 530,400 20,453,550
Toys "R" Us, Inc. (a) 369,700 11,622,444
U.S. Office Products Co. (a) 769,950 15,110,269
56,779,438
TOTAL RETAIL & WHOLESALE 406,618,836
SERVICES - 1.0%
LEASING & RENTAL - 0.1%
Ryder Systems, Inc. 459,200 15,038,800
PRINTING - 0.7%
Deluxe Corp. 668,500 23,063,250
Donnelley (R.R.) & Sons Co. 568,400 21,172,900
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SERVICES - CONTINUED
PRINTING - CONTINUED
Ennis Business Forms, Inc. 196,700 $ 1,819,475
Harland (John H.) Co. 1,051,300 22,077,300
68,132,925
SERVICES - 0.2%
Block (H&R), Inc. 499,600 22,388,325
Manpower, Inc. 24,300 856,575
23,244,900
TOTAL SERVICES 106,416,625
TECHNOLOGY - 3.4%
COMPUTER SERVICES & SOFTWARE - 0.8%
Electronic Data Systems Corp. 1,326,800 58,296,275
First Data Corp. 386,100 11,293,425
NCR Corp. (a) 328,500 9,136,406
Sabre Group Holdings, Inc. Class A (a) 178,800 5,162,850
83,888,956
COMPUTERS & OFFICE EQUIPMENT - 1.9%
Digital Equipment Corp. (a) 131,400 4,861,800
International Business Machines Corp. 600,400 62,779,325
Pitney Bowes, Inc. 791,000 71,140,563
Silicon Graphics, Inc. (a) 144,200 1,793,488
Unisys Corp. (a) 3,018,317 41,879,148
Xerox Corp. 86,800 6,406,925
188,861,249
ELECTRONICS - 0.3%
AMP, Inc. 499,400 20,974,800
Thomas & Betts Corp. 214,800 10,149,300
31,124,100
PHOTOGRAPHIC EQUIPMENT - 0.4%
Eastman Kodak Co. 358,400 21,795,200
Polaroid Corp. 339,300 16,519,669
38,314,869
TOTAL TECHNOLOGY 342,189,174
TRANSPORTATION - 1.0%
AIR TRANSPORTATION - 0.4%
Northwest Airlines Corp. Class A (a) 648,500 31,046,938
Viad Corp. 275,800 5,326,388
36,373,326
RAILROADS - 0.6%
CSX Corp. 1,168,100 63,077,400
TOTAL TRANSPORTATION 99,450,726
UTILITIES - 6.8%
ELECTRIC UTILITY - 2.6%
Allegheny Energy, Inc. 1,052,200 34,196,500
American Electric Power Co., Inc. 967,700 49,957,513
Central Maine Power Co. 602,500 9,188,125
CILCORP, Inc. 152,300 7,443,663
Consolidated Edison Co. of
New York, Inc. 473,450 19,411,450
DPL, Inc. 637,300 18,322,375
Duke Energy Corp. 297,200 16,457,450
Entergy Corp. 1,439,500 43,095,031
Illinova Corp. 250,000 6,734,375
Niagara Mohawk Power Corp. (a) 1,006,700 10,570,350
PG&E Corp. 687,678 20,931,199
SHARES VALUE (NOTE 1)
PacifiCorp. 200,000 $ 5,462,500
Pinnacle West Capital Corp. 472,600 20,026,425
261,796,956
GAS - 0.7%
MCN Corp. 400,000 16,150,000
Nova Corp. 650,000 6,183,764
Pacific Enterprises 285,400 10,738,175
Questar Corp. 813,700 36,311,363
69,383,302
TELEPHONE SERVICES - 3.5%
AT&T Corp. 331,600 20,310,500
ALLTEL Corp. 508,900 20,896,706
Ameritech Corp. 803,700 64,697,850
BCE, Inc. 480,100 16,002,774
Bell Atlantic Corp. 1,133,320 103,132,120
BellSouth Corp. 525,000 29,564,063
Comsat Corp., Series 1 294,600 7,144,050
France Telecom SA 40,000 1,449,656
MCI Communications Corp. 270,100 11,563,656
SBC Communications, Inc. 410,000 30,032,500
Sprint Corp. 312,500 18,320,313
WorldCom, Inc. (a) 953,800 28,852,450
351,966,638
TOTAL UTILITIES 683,146,896
TOTAL COMMON STOCKS
(Cost $7,022,135,101) 9,235,340,142
CONVERTIBLE PREFERRED STOCKS - 2.4%
CONSTRUCTION & REAL ESTATE - 0.1%
REAL ESTATE INVESTMENT TRUSTS - 0.1%
Vornado Realty Trust Series A, $3.25 127,600 8,421,600
DURABLES - 0.0%
AUTOS, TIRES, & ACCESSORIES - 0.0%
Republic Industries, Inc. $1.55 219,200 5,151,200
ENERGY - 0.1%
OIL & GAS - 0.1%
Unocal Capital Trust $3.125 100,000 5,612,500
FINANCE - 1.2%
CREDIT & OTHER FINANCE - 0.1%
DECS Trust $2.01 DECS 93,000 2,394,750
WBK Trust $3.135 STRYPES 285,400 9,543,063
11,937,813
INSURANCE - 0.6%
Aetna, Inc. Class C 6.25%, PRIDES 760,000 54,340,000
Conseco, Inc. $3.50 PRIDES 171,800 8,794,013
63,134,013
SAVINGS & LOANS - 0.1%
Ahmanson (H.F.) & Co., Series D, $3.00 70,600 9,707,500
SECURITIES INDUSTRY - 0.4%
Salomon, Inc. $2.03 DECS 840,700 34,468,700
Salomon, Inc. $3.484 DECS 93,900 5,563,575
40,032,275
TOTAL FINANCE 124,811,601
CONVERTIBLE PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - 0.2%
ELECTRICAL EQUIPMENT - 0.2%
Loral Space & Communications Ltd.,
Series C, $3.00 (b) 183,200 $ 11,289,700
Loral Space & Communications Ltd.,
Series C, $3 76,300 4,711,525
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 16,001,225
MEDIA & LEISURE - 0.1%
BROADCASTING - 0.1%
Evergreen Media Corp. $3.00 (b) 187,200 14,718,600
RETAIL & WHOLESALE - 0.1%
GENERAL MERCHANDISE STORES - 0.1%
K mart Financing I $3.875 100,000 5,162,500
TECHNOLOGY - 0.1%
COMPUTERS & OFFICE EQUIPMENT - 0.1%
Wang Laboratories, Inc. $3.25 (b) 80,000 4,070,000
Wang Laboratories, Inc. $3.25 157,600 8,077,000
TOTAL TECHNOLOGY 12,147,000
UTILITIES - 0.5%
ELECTRIC UTILITY - 0.2%
Houston Industries, Inc. $3.215 ACES 285,500 16,291,344
GAS - 0.0%
MCN Corp. $4.00 25,100 1,556,200
TELEPHONE SERVICES - 0.3%
Enhance Financial Services Group, Inc.
$7.625 DECS 184,800 9,609,600
US West, Inc., Series D $2.25 381,900 23,558,456
33,168,056
TOTAL UTILITIES 51,015,600
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $205,646,957) 243,041,826
CONVERTIBLE BONDS - 1.6%
MOODY'S RATINGS PRINCIPAL
(UNAUDITED) AMOUNT
CONSTRUCTION & REAL ESTATE - 0.4%
REAL ESTATE INVESTMENT TRUSTS - 0.4%
Liberty Property exchangeable
8%, 7/1/01 Ba2 $ 27,985,000 40,088,513
DURABLES - 0.1%
CONSUMER ELECTRONICS - 0.1%
Matsushita Electric Industrial
Co. Ltd. 1.3%, 3/29/02 Aa2 JPY 452,000,000 4,309,707
Matsushita Electric Industrial
Co. Ltd. 1.4%, 3/31/04 Aa2 JPY 209,000,000 1,992,763
6,302,470
ENERGY - 0.1%
OIL & GAS - 0.1%
Pennzoil Co. 4 3/4%,10/1/03 Baa3 9,820,000 13,281,550
FINANCE - 0.1%
INSURANCE - 0.1%
Loews Corp. 3 1/8%, 9/15/07 A2 4,320,000 4,320,000
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
MEDIA & LEISURE - 0.5%
BROADCASTING - 0.3%
Time Warner, Inc. liquid yield
option notes 0%, 6/22/13 Ba1 $ 58,550,000 $ 29,933,688
LODGING & GAMING - 0.0%
Hilton Hotels Corp.
5%, 5/15/06 Baa2 3,670,000 4,000,300
PUBLISHING - 0.2%
News America Holdings, Inc.
liquid yield option notes
0%, 3/11/13 Baa3 35,920,000 16,972,200
TOTAL MEDIA & LEISURE 50,906,188
RETAIL & WHOLESALE - 0.3%
DRUG STORES - 0.1%
Rite Aid Corp. 5 1/4%,
9/15/05 (b) Baa2 11,620,000 12,622,225
RETAIL & WHOLESALE, MISCELLANEOUS - 0.2%
Home Depot, Inc.
3 1/4%, 10/1/01 A1 5,000,000 6,675,000
U.S. Office Products Co.
5 1/2%, 2/1/01 B3 10,000,000 11,700,000
18,375,000
TOTAL RETAIL & WHOLESALE 30,997,225
TECHNOLOGY - 0.1%
COMPUTERS & OFFICE EQUIPMENT - 0.0%
Quantum Corp. 7%, 8/1/04 B2 4,280,000 4,108,800
ELECTRONICS - 0.1%
Micron Technology, Inc.
7%, 7/1/04 B1 12,840,000 11,925,150
TOTAL TECHNOLOGY 16,033,950
TOTAL CONVERTIBLE BONDS
(Cost $150,094,993) 161,929,896
CASH EQUIVALENTS - 4.5%
SHARES
Taxable Central Cash Fund (c)
(Cost $458,376,604) 458,376,604 458,376,604
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $7,836,253,655) $ 10,098,688,468
SECURITY TYPE ABBREVIATIONS
ACES - Automatic Common Exchange Securities
DECS - Dividend Enhanced Convertible Stock/Debt Exch.
for Common
PRIDES - Preferred Redeemable Increased Dividend Equity Securities
STRYPES - Structured Yield Product Exchangeable for Common Stock
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
$42,700,525 or .4% of net assets.
(c) At period end, the seven-day yield of the Taxable Central Cash
Fund was 5.69%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
(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 $ - $ 47,490,056
Beverly Enterprises, Inc. - 6,467,030 - -
Cardiac Control
Systems, Inc.. - 380,488 - -
Integramed America,
Inc. - 1,610,125 - -
Synetic, Inc. - 38,641,532 - -
TOTALS $ - $ 52,128,958 $ - $ 47,490,056
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $4,830,022,045 and $3,593,546,065, 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 $850,201 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 0.5% BBB 0.8%
Ba 0.7% BB 0.4%
B 0.3% B 0.3%
Caa 0.0% CCC 0.0%
Ca, C 0.0% CC, C 0.0%
D 0.0%
The percentage not rated by Moody's or S&P amounted to 0.0%. FMR has
determined that unrated debt securities that are lower quality account
for 0.0% of the total value of investment in securities.
INCOME TAX INFORMATION
At December 31, 1997, the aggregate cost of investment securities for
income tax purposes was $7,845,905,101. Net unrealized appreciation
aggregated $2,252,783,367, of which $2,386,782,461 related to
appreciated investment securities and $133,999,094 related to
depreciated investment securities.
The fund hereby designates approximately $225,002,000 as a capital
gain dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
INVESTMENT IN SECURITIES, AT VALUE $ 10,098,688,468
(COST $7,836,253,655) - SEE ACCOMPANYING SCHEDULE
RECEIVABLE FOR INVESTMENTS SOLD 15,785,858
RECEIVABLE FOR FUND SHARES SOLD 10,327,412
DIVIDENDS RECEIVABLE 15,891,959
INTEREST RECEIVABLE 4,432,709
OTHER RECEIVABLES 52,063
TOTAL ASSETS 10,145,178,469
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 26,357,641
PAYABLE FOR FUND SHARES REDEEMED 2,018,549
ACCRUED MANAGEMENT FEE 4,072,569
OTHER PAYABLES AND 659,813
ACCRUED EXPENSES
TOTAL LIABILITIES 33,108,572
NET ASSETS $ 10,112,069,897
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 7,208,544,669
UNDISTRIBUTED NET INVESTMENT INCOME 140,172,474
ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN 500,938,191
CURRENCY TRANSACTIONS
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 2,262,414,563
AND ASSETS AND LIABILITIES IN
FOREIGN CURRENCIES
NET ASSETS $ 10,112,069,897
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
INITIAL CLASS : $24.28
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER
SHARE ($10,106,742,355 (DIVIDED BY) 416,258,047 SHARES)
SERVICE CLASS : $24.27
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE ($5,327,542 (DIVIDED BY) 219,493 SHARES)
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME $ 162,618,935
DIVIDENDS
INTEREST 26,175,230
TOTAL INCOME 188,794,165
EXPENSES
MANAGEMENT FEE $ 42,199,618
TRANSFER AGENT FEES 5,689,149
DISTRIBUTION FEES - SERVICE CLASS 226
ACCOUNTING FEES AND EXPENSES 819,525
NON-INTERESTED TRUSTEES' COMPENSATION 32,639
CUSTODIAN FEES AND EXPENSES 230,735
REGISTRATION FEES 48,392
AUDIT 78,670
LEGAL 48,842
MISCELLANEOUS 349,519
TOTAL EXPENSES BEFORE REDUCTIONS 49,497,315
EXPENSE REDUCTIONS (875,649 48,621,666
)
NET INVESTMENT INCOME 140,172,499
REALIZED AND UNREALIZED
GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES (INCLUDING 516,651,001
REALIZED GAIN OF $12,866,742
ON SALES OF INVESTMENTS IN
AFFILIATED ISSUERS)
FOREIGN CURRENCY TRANSACTIONS (56,354 516,594,647
)
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES 1,401,311,026
ASSETS AND LIABILITIES IN (14,816 1,401,296,210
FOREIGN CURRENCIES )
NET GAIN (LOSS) 1,917,890,857
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 2,058,063,356
OTHER INFORMATION $ 867,177
EXPENSE REDUCTIONS
DIRECTED BROKERAGE ARRANGEMENTS
CUSTODIAN CREDITS 8,472
$ 875,649
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
OPERATIONS $ 140,172,499 $ 117,458,579
NET
INVESTMENT
INCOME
NET REALIZED 516,594,647 597,117,485
GAIN (LOSS)
CHANGE IN NET 1,401,296,210 90,992,918
UNREALIZED
APPRECIATION
(DEPRECIATION)
NET INCREASE 2,058,063,356 805,568,982
(DECREASE)
IN NET
ASSETS
RESULTING
FROM
OPERATIONS
DISTRIBUTIONS TO (119,523,328) (7,876,787)
SHAREHOLDERS
FROM NET
INVESTMENT
INCOME
FROM NET (602,923,285) (225,801,230)
REALIZED GAIN
TOTAL (722,446,613) (233,678,017)
DISTRIBUTIONS
SHARE 1,815,363,131 1,509,764,377
TRANSACTIONS
- - NET
INCREASE
(DECREASE)
TOTAL 3,150,979,874 2,081,655,342
INCREASE
(DECREASE) IN
NET ASSETS
NET ASSETS
BEGINNING OF 6,961,090,023 4,879,434,681
PERIOD
END OF PERIOD $ 10,112,069,897 $ 6,961,090,023
(INCLUDING
UNDISTRIBUTE
D NET
INVESTMENT
INCOME OF
$140,172,47
4 AND
$117,454,54
9,
RESPECTIVELY
)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
OTHER INFORMATION:
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
SHARES DOLLARS SHARES DOLLARS
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SHARE 81,081,134 $ 1,787,907,743 93,794,843 $ 1,829,128,598
TRANSACTIONS
INITIAL CLASS
SOLD
REINVESTED 36,487,203 722,446,589 12,390,139 233,678,017
REDEEMED (32,291,523) (700,239,679) (28,467,146) (553,042,238)
NET INCREASE 85,276,814 $ 1,810,114,653 77,717,836 $ 1,509,764,377
(DECREASE)
SERVICE CLASS 222,682 5,321,346 - -
A
SOLD
REINVESTED - - - -
REDEEMED (3,189) (72,868) - -
NET INCREASE 219,493 $ 5,248,478 - $ -
(DECREASE)
DISTRIBUTIONS $ 119,523,328 $ 7,876,787
INITIAL CLASS -
NET
INVESTMENT
INCOME
INITIAL CLASS - 602,923,285 225,801,230
NET REALIZED
GAIN
TOTAL $ 722,446,613 $ 233,678,017
SERVICE CLASS - -
- - NET
INVESTMENT
INCOME
SERVICE CLASS - -
- - NET REALIZED
GAIN
TOTAL $ - $ -
$ 722,446,613 $ 233,678,017
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1. SERVICE CLASS COMMENCED SALE OF SHARES NOVEMBER 3, 1997.
FINANCIAL HIGHLIGHTS - INITIAL CLASS
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1997 1996 1995 1994 1993
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, $ 21.03 $ 19.27 $ 15.35 $ 15.44 $ 13.40
BEGINNING OF
PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
NET .36 D .35 .41 .41 .37
INVESTMENT
INCOME
NET REALIZED 5.06 2.30 4.69 .64 2.06
AND
UNREALIZED
GAIN (LOSS)
TOTAL FROM 5.42 2.65 5.10 1.05 2.43
INVESTMENT
OPERATIONS
LESS
DISTRIBUTIONS
FROM NET (.36) (.03) (.40) (.37) (.35)
INVESTMENT
INCOME
IN EXCESS OF - - - - (.04)
NET INVESTMENT
INCOME
FROM NET (1.81) (.86) (.78) (.77) -
REALIZED GAIN
TOTAL (2.17) (.89) (1.18) (1.14) (.39)
DISTRIBUTIONS
NET ASSET VALUE, $ 24.28 $ 21.03 $ 19.27 $ 15.35 $ 15.44
END OF PERIOD
TOTAL 28.11% 14.28% 35.09% 7.07% 18.29%
RETURN B, C
RATIOS AND
SUPPLEMENTAL
DATA
NET ASSETS, END $ 10,106,742 $ 6,961,090 $ 4,879,435 $ 2,284,412 $ 1,318,500
OF PERIOD (000
OMITTED)
RATIO OF .58% .58% .61% .60% .62%
EXPENSES TO
AVERAGE NET
ASSETS
RATIO OF .57% F .56% .61% .58% .62%
EXPENSES TO F F
AVERAGE NET
ASSETS AFTER
EXPENSE
REDUCTIONS
RATIO OF NET 1.65% 1.97% 2.56% 2.83% 2.87%
INVESTMENT
INCOME TO
AVERAGE NET
ASSETS
PORTFOLIO 44% 186% 87% 134% 120%
TURNOVER RATE
AVERAGE $ .0440 $ .0426
COMMISSION
RATE G
</TABLE>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEAR ENDED
DECEMBER 31,
SELECTED PER-SHARE DATA 1997 E
NET ASSET VALUE, $ 23.44
BEGINNING OF
PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
NET .05 D
INVESTMENT
INCOME
NET REALIZED .78
AND
UNREALIZED
GAIN (LOSS)
TOTAL FROM .83
INVESTMENT
OPERATIONS
LESS
DISTRIBUTIONS
NET ASSET VALUE, $ 24.27
END OF PERIOD
TOTAL 3.54%
RETURN B, C
RATIOS AND
SUPPLEMENTAL
DATA
NET ASSETS, END $ 5,328
OF PERIOD (000
OMITTED)
RATIO OF .68% A
EXPENSES TO
AVERAGE NET
ASSETS
RATIO OF .65% A,
EXPENSES TO F
AVERAGE NET
ASSETS AFTER
EXPENSE
REDUCTIONS
RATIO OF NET 1.63% A
INVESTMENT
INCOME TO
AVERAGE NET
ASSETS
PORTFOLIO 44%
TURNOVER
AVERAGE $ .0440
COMMISSION
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 FOR THE PERIOD NOVEMBER 3, 1997
(COMMENCEMENT OF SALE OF
SERVICE CLASS SHARES) TO
DECEMBER 31, 1997.
F FMR OR THE FUND HAS ENTERED INTO
VARYING ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR
REDUCED A PORTION OF THE CLASS'
EXPENSES (SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
G 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.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES.
Equity-Income Portfolio(the fund) is a fund of Variable Insurance
Products Fund (the trust) and is authorized to issue an unlimited
number of shares. The trust is registered under the Investment Company
Act of 1940, as amended (the 1940 Act), as an open-end management
investment company organized as a Massachusetts business trust. Shares
of the fund may only be purchased by insurance companies for the
purpose of funding variable annuity or variable life insurance
contracts. The fund offers two classes of shares; the fund's original
class of shares (Initial Class shares) and Service Class shares. The
fund commenced sale of Service Class shares on November 3, 1997. Both
classes of shares have equal rights and voting privileges, except for
matters affecting a single class. Investment income, realized and
unrealized capital gains and losses, the common expenses of the fund,
and fund-level expense reductions, if any, are allocated on a pro rata
basis to each class based on the relative net assets of each class to
total net assets of the fund. Each class of shares differs in its
respective distribution plan. The financial statements have been
prepared in conformity with generally accepted accounting principles
which permit management to make certain estimates and assumptions at
the date of the financial statements. The following summarizes the
significant accounting policies of the fund:
SECURITY VALUATION. Securities for which exchange quotations are
readily available are valued at the last sale price, or if no sale
price, at the closing bid price. Securities (including restricted
securities) for which exchange quotations are not readily available
(and in certain cases debt securities which trade on an exchange) are
valued primarily using dealer-supplied valuations or at their fair
value as determined in good faith under consistently applied
procedures under the general supervision of the Board of Trustees.
Short-term securities with remaining maturities of sixty days or less
for which quotations are not readily available are valued at amortized
cost or original cost plus accrued interest, both of which approximate
current value.
FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S.
dollars at the prevailing rates of exchange at period end. Income
receipts and expense payments are translated into U.S. dollars at the
prevailing exchange rate on the respective dates of the transactions.
Purchases and sales of securities are translated into U.S. dollars at
the contractual currency exchange rates established at the time of
each trade.
Net realized gains and losses on foreign currency transactions
represent net gains and losses from sales and maturities of foreign
currency contracts, disposition of foreign currencies, and the
difference between the amount of net investment income accrued and the
U.S. dollar amount actually received. The effects of changes in
foreign currency exchange rates on investments in securities are
included with the net realized and unrealized gain or loss on
investment securities.
INCOME TAXES. As a qualified regulated investment company under
Subchapter M of the Internal Revenue Code, the fund is not subject to
income taxes to the extent that it distributes substantially all of
its taxable income for its fiscal year. The schedule of investments
includes information regarding income taxes under the caption "Income
Tax Information."
INVESTMENT INCOME. Dividend income is recorded on the ex-dividend
date, except certain dividends from foreign securities where the
ex-dividend date may have passed, are recorded as soon as the 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 the trust can be directly attributed to a
fund. Expenses which cannot be directly attributed are apportioned
among the funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are recorded on the
ex-dividend date. Income dividends and capital gain distributions are
declared separately for each class.
Income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences, which may result in
distribution reclassifications, are primarily due to differing
treatments for market discount, foreign currency transactions and
losses deferred due to wash sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital.
Undistributed net investment income and accumulated undistributed net
realized gain (loss) on investments and foreign currency transactions
may include temporary book and tax basis differences which will
reverse in a subsequent period. Any taxable income or gain remaining
at fiscal year end is distributed in the following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of
trade date. Gains and losses on securities sold are determined on the
basis of identified cost.
2. OPERATING POLICIES.
FOREIGN CURRENCY CONTRACTS. The fund generally uses foreign currency
contracts to facilitate transactions in foreign-denominated
securities. Losses may arise from changes in the value of the foreign
currency or if the counterparties do not perform under the contracts'
terms. The U.S. dollar value of foreign currency contracts is
determined using contractual currency exchange rates established at
the time of each trade. The cost of the foreign currency contracts is
included in the cost basis of the associated investment.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission (the SEC), the fund, along with
other affiliated entities of Fidelity Management &
2. OPERATING POLICIES POLICIES - CONTINUED
JOINT TRADING ACCOUNT - CONTINUED
Research Company (FMR), may transfer uninvested cash balances into one
or more joint trading accounts. These balances are invested in one or
more repurchase agreements for U.S. Treasury or Federal Agency
obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are
marked-to-market daily and maintained at a value at least equal to the
principal amount of the repurchase agreement (including accrued
interest). FMR, the fund's investment adviser, is responsible for
determining that the value of the underlying securities remains in
accordance with the market value requirements stated above.
TAXABLE CENTRAL CASH FUND. Pursuant to an Exemptive Order issued by
the SEC, the fund may invest in the Taxable Central Cash Fund (the
Cash Fund) managed by Fidelity Investments Money Management, Inc.
(formerly FMR Texas, Inc.) an affiliate of FMR. The Cash Fund is an
open-end money market fund available only to investment companies and
other accounts managed by FMR and its affiliates. The Cash Fund seeks
preservation of capital, liquidity, and current income by investing in
U.S. Treasury securities and repurchase agreements for these
securities. Income distributions from the Cash Fund are declared daily
and paid monthly from net interest income. Income distributions earned
by the fund are recorded as interest income in the accompanying
financial statements.
RESTRICTED SECURITIES. The fund is permitted to invest in securities
that are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from
registration or to the public if the securities are registered.
Disposal of these securities may involve time-consuming negotiations
and expense, and prompt sale at an acceptable price may be difficult.
At the end of the period, the fund had no investments in restricted
securities (excluding 144A issues).
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities), is included under the caption "Other
Information" at the end of the fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a
monthly fee that is calculated on the basis of a group fee rate plus a
fixed individual fund fee rate applied to the average net assets of
the fund. The group fee rate is the weighted average of a series of
rates and is based on the monthly average net assets of all the mutual
funds advised by FMR. The rates ranged from .2500% to .5200% for the
period. The annual individual
fund fee rate is .20%. 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. For the period, the management fee was equivalent to
an annual rate of .50% of average net assets.
DISTRIBUTION AND SERVICE PLAN. In accordance with Rule 12b-1 of the
1940 Act, the Trustees have adopted separate distribution plans with
respect to each class of shares(collectively referred to as "the
Plans"). Under the Service Class Plan, the class pays Fidelity
Distributors Corporation (FDC), an affiliate of FMR, a distribution
and service fee (12b-1 fee). This fee is based on an annual rate of
.10% of Service Class average net assets. Initial Class shares are not
subject to a 12b-1 fee.
For the period, Service Class paid FDC $226, all of which was
reallowed to insurance companies, for the distribution of shares and
providing shareholder support services.
Under the Plans, FMR or FDC may use its resources to pay
administrative and promotional expenses related to the sale of each
class of shares. Subject to the approval of the Board of Trustees, the
Plans also authorize payments to third parties that assist in the sale
of each class of shares or render shareholder support services. For
the period, FMR or FDC informed the fund that payments made to third
parties under the Plans amounted to $3,693,878 and $414 for the
Initial Class and Service Class, respectively.
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations
Company, Inc. (FIIOC), an affiliate of FMR, is the fund's transfer,
dividend disbursing and shareholder servicing agent. FIIOC receives
account fees and asset-based fees that vary according to account size
and type of account. FIIOC pays a portion of the expenses related to
typesetting, printing and mailing of shareholder reports, except proxy
statements. For the period, the transfer agent fees of the fund were
equivalent to an annual rate of .07%, of average net assets.
ACCOUNTING FEES. Fidelity Service Company, Inc., an affiliate of FMR,
maintains the fund's accounting records. The fee is based on the level
of average net assets for the month plus out-of-pocket expenses.
BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms are shown under the caption
"Other Information" at the end of the fund's schedule of investments
5. EXPENSE REDUCTIONS.
FMR has directed certain portfolio trades to brokers who paid a
portion of the fund's expenses.
In addition, the fund has entered into an arrangement with its
custodian whereby credits realized as a result of uninvested cash
balances were used to reduce a portion of the fund's expenses.
5. EXPENSE REDUCTIONS - CONTINUED
For the period, the reductions under these arrangements are shown
under the caption "Other Information" on the fund's Statement of
Operations.
6. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investments Life Insurance Company
and its subsidiaries, affiliates of FMR, were the record owners of
approximately 18% of the outstanding shares of the fund. In addition,
one unaffiliated insurance company was record owner of 10% or more of
the total outstanding shares of the fund, totaling 28%.
7. TRANSACTIONS WITH AFFILIATED COMPANIES.
An affiliated company is a company which the fund has ownership of at
least 5% of the voting securities. Information regarding transactions
with affiliated companies is included in "Other Information" at the
end of the fund's schedule of investments.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Variable Insurance Products Fund and the
Shareholders of Equity-Income Portfolio:
We have audited the accompanying statement of assets and liabilities
of Variable Insurance Products Fund: Equity-Income Portfolio,
including the schedule of portfolio investments, as of December 31,
1997, and the related statement of operations for the year then ended,
the statement of changes in net assets for each of the two years in
the period then ended and the financial highlights of the Initial
Class and Service Class for each of the periods indicated therein.
These financial statements and financial highlights are the
responsibility of the fund's management. Our responsibility is to
express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1997, by
correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of Variable Insurance Products Fund: Equity-Income
Portfolio, as of December 31, 1997, the results of its operations for
the year then ended, the changes in its net assets for each of the two
years in the period then ended, and the financial highlights of the
Initial Class and Service Class for each of the periods indicated
therein, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 5, 1998
DISTRIBUTIONS
The Board of Trustees of VIP: Equity-Income voted to pay to
shareholders of record at the opening of business on record date, the
following distributions derived from capital gains realized from sales
of portfolio securities, and dividends derived from net investment
income:
INITIAL CLASS
Pay Date 2/7/97 2/6/98
Record Date 2/7/97 2/6/98
Dividends $.36 $.34
Short-Term
Capital Gains $.47 $.68
Long-Term
Capital Gains $1.34 $.53
Long-Term
Capital Gain Breakdown:
28% rate 100% 53.78%
20% rate - 46.22%
SERVICE CLASS
Pay Date 2/6/98
Record Date 2/6/98
Dividends $.34
Short-Term
Capital Gains $.68
Long-Term
Capital Gains $.53
Long-Term
Capital Gain Breakdown:
28% rate 53.78%
20% rate 46.22%
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
OFFICERS
Edward C. Johnson 3d, PRESIDENT
Robert C. Pozen, SENIOR VICE PRESIDENT
Richard A. Spillane, Jr., VICE PRESIDENT
Stephen Petersen, VICE PRESIDENT
Eric D. Roiter, SECRETARY
Richard A. Silver, TREASURER
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
BOARD OF TRUSTEES
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 Company, Inc.
Boston, MA
CUSTODIAN
The Chase Manhattan Bank
New York, NY
* INDEPENDENT TRUSTEES
(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS
FUND: HIGH INCOME PORTFOLIO
ANNUAL REPORT
DECEMBER 31, 1997
CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
MARKET ENVIRONMENT 3 A REVIEW OF WHAT HAPPENED IN WORLD MARKETS
DURING THE LAST YEAR.
PERFORMANCE 4 HOW THE FUND HAS DONE OVER TIME.
FUND TALK 5 THE MANAGER'S REVIEW OF FUND PERFORMANCE, STRATEGY
AND OUTLOOK.
INVESTMENTS 6 A COMPLETE LIST OF THE FUND'S INVESTMENTS WITH THEIR
MARKET VALUES.
FINANCIAL STATEMENTS 14 STATEMENTS OF ASSETS AND LIABILITIES, OPERATIONS, AND
CHANGES IN NET ASSETS, AS WELL AS FINANCIAL HIGHLIGHTS.
NOTES 17 NOTES TO THE FINANCIAL STATEMENTS.
REPORT OF INDEPENDENT ACCOUNTANTS 20 THE AUDITORS' OPINION.
DISTRIBUTIONS 21
</TABLE>
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE
SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND.
THIS REPORT IS NOT AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED
OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED
BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE
SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
MARKET ENVIRONMENT
Despite an infectious currency crisis that erupted in Southeast Asia
in October, most stock and bond markets around the globe posted
another year of positive returns. Sustained corporate earnings growth,
low interest-rate levels and an overall lack of inflationary concern
provided a favorable investing backdrop. The U.S. and European stock
markets continued to perform well, with U.S. stocks posting their
third consecutive year of strong results. The problems in Southeast
Asia, though, reverberated throughout the world, with investors
becoming increasingly concerned toward the end of the period regarding
the sustainability of corporate earnings. The U.S. bond market enjoyed
a nice run in 1997.
U.S. STOCK MARKETS
The U.S. stock market went through many phases during 1997. Entering
the year, the market was still being dominated by an extremely narrow
contingent of well-known, large-capitalization stocks. In fact, much
of the Standard & Poor's 500 Index 12-month gain of 33.36% came from
these bigger stocks. Stock prices soared to historic highs and the Dow
Jones Industrial Average hurtled past the 8000-point mark in August.
But, investors became increasingly concerned about the market's
ability to sustain its lofty performance levels. In mid-August,
several large multinationals - companies that derive a significant
portion of their revenues from overseas operations - justified these
concerns by announcing earnings disappointments. These announcements
triggered a slowdown among larger-cap stocks, while smaller- and
medium-sized stocks gained momentum. From August through December, the
S&P MidCap 400 Index - a measure of mid-sized stock performance -
returned 6.50%, while the S&P 500 returned 2.43%.
In late October, economic turmoil shook Southeast Asia. Since this
region accounts for a significant portion of world economic growth,
shock tremors rippled through developed markets such as those in the
U.S. and Europe, as well as emerging-market nations in Eastern Europe
and Latin America. In New York, the uncertainty was punctuated by a
554-point drop in the Dow one day and a 337-point recovery the next.
In terms of industry groups, moderate economic growth coupled with
nonexistent inflation translated into near nirvana for the finance
sector. Banks and brokerages demonstrated their ability to sustain
impressive earnings growth as borrowing demand remained high and cash
flows were healthy. Consolidation in the form of merger and
acquisition activity also brought positive results to the group. Due
to strong oil exploration and production demand, the energy service
sector also fared nicely. Demand for offshore drilling, in particular,
was very high and the industry enjoyed favorable pricing trends.
Technology stocks were a mixed bag in 1997, with the group
experiencing a decent rally through the first half of the year. The
second-half Asian crisis, however, proved particularly harmful to many
technology companies with Asian business ties. With Asia accounting
for a considerable amount of the world's technology production, the
region's economic troubles were far-reaching. Going into 1998, many
money managers - sensing an economic slowdown due to Asia - were
concentrating on stocks that were less cyclical, or economically
sensitive.
FOREIGN STOCK MARKETS
Stock markets around the world reacted differently in 1997. Europe -
bolstered by continued economic reform and a convergence in monetary
policy - posted strong overall returns as Finland, Italy, Spain,
Switzerland and the United Kingdom led the way. The Morgan Stanley
Capital International (MSCI) Europe Index returned 24.17% during the
period. In contrast, the MSCI EAFE Index, which measures the
performance of Europe, Australasia and the Far East, reflected the
problems brought on by the Asian crisis. The MSCI EAFE returned 2.01%
for the period. Japan and Hong Kong were two noteworthy laggards, as
economic recovery in Japan trudged along and Hong Kong felt the brunt
of Asia's woes. Emerging market equity performance was solid through
the first half of the period, but trailed off some in the second.
Uncertainty in Asia and South Korea made some investors question the
well-being of other pivotal emerging-market nations such as Russia,
which proved particularly vulnerable to the Asian dilemma.
U.S. BOND MARKETS
Bonds benefited from low interest rates - which in turn drove prices
upward - as well as a distinct lack of inflation indicators. The
Lehman Brothers Aggregate Bond Index - a measure of the U.S. taxable
bond market - returned 9.65% during the year. The Federal Reserve
Board's raising of a key short-term interest rate in March proved to
be one of the few obstacles to the bond market. Bonds rallied from
April through mid-September, buoyed in large part by encouraging
economic data and the Fed's reluctance to raise rates further.
Additionally, while the Asian crisis brought some equity markets to
their knees, many bond markets welcomed wary stock investors in search
of lower volatility. Interest rates reached attractive levels, with
the yield on the 30-year Treasury bond going below the 6% mark in
November. Corporate bonds performed reasonably well due to continued
economic growth and high demand for yield. Mortgage-backed bonds also
fared relatively well, in spite of increased refinancing activity due
to the lower rates.
FOREIGN BOND MARKETS
While low inflation and steady growth boosted the U.S. bond market,
results were varied on the international front. The Salomon Brothers
World Government Bond Index - a measure of government bond market
performance in developed nations - returned 0.23% for the 12 months
that ended December 31, 1997. In Europe, countries continued to make
progress in the drive toward meeting European Monetary Union
requirements. But a strong dollar relative to many currencies eroded
gains for U.S.-based investors. Japan - one of the more significant
components of the Salomon Brothers index - continued to struggle as
economic reform continued to develop slowly. The often-volatile world
of emerging-market debt also had mixed results, as Asian concerns
trickled into these regions. Brazil and Argentina performed well,
while Ecuador stumbled due to political uncertainty. Nevertheless, The
J.P. Morgan Emerging Markets Bond Index still managed to return 16.15%
during the period.
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10
DECEMBER 31, 1997 YEAR YEARS YEARS
VIP: HIGH INCOME - "INITIAL CLASS" 17.67% 13.91% 12.81%
ML HIGH YIELD MASTER 12.82% 11.72% 12.09%
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.
3
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
IMAHDR PRASUN SHR__CHT 19971231 19980126 092646 S00000000000001
VIP High Income ML High Yield Master
00152 ML002
1987/12/31 10000.00 10000.00
1988/01/31 10328.76 10273.65
1988/02/29 10638.01 10552.42
1988/03/31 10561.58 10534.96
1988/04/30 10643.90 10565.39
1988/05/31 10628.07 10620.54
1988/06/30 10850.82 10823.60
1988/07/31 10963.78 10937.97
1988/08/31 10911.41 10973.91
1988/09/30 10998.88 11084.53
1988/10/31 11118.61 11257.23
1988/11/30 11076.16 11299.39
1988/12/31 11164.18 11347.21
1989/01/31 11432.46 11517.38
1989/02/28 11488.69 11594.77
1989/03/31 11341.07 11584.46
1989/04/30 11215.47 11618.65
1989/05/31 11422.69 11832.54
1989/06/30 11749.86 12000.18
1989/07/31 11672.50 12057.01
1989/08/31 11604.80 12116.57
1989/09/30 11198.75 12001.22
1989/10/31 10718.65 11811.39
1989/11/30 10727.68 11837.86
1989/12/31 10698.27 11827.16
1990/01/31 10461.79 11596.01
1990/02/28 10300.70 11427.13
1990/03/31 10192.02 11581.60
1990/04/30 10222.21 11640.45
1990/05/31 10432.25 11850.71
1990/06/30 10596.58 12080.30
1990/07/31 10760.25 12335.59
1990/08/31 10580.25 11863.36
1990/09/30 10329.38 11347.40
1990/10/31 10078.73 11058.64
1990/11/30 10315.13 11152.32
1990/12/31 10459.37 11313.02
1991/01/31 10681.28 11472.94
1991/02/28 11273.04 12324.50
1991/03/31 11672.48 12854.40
1991/04/30 12086.71 13312.16
1991/05/31 12264.24 13377.17
1991/06/30 12530.53 13646.27
1991/07/31 13003.94 13973.25
1991/08/31 13181.47 14266.94
1991/09/30 13477.35 14448.65
1991/10/31 13935.96 14878.00
1991/11/30 14054.31 15049.86
1991/12/31 14128.28 15224.70
1992/01/31 14882.78 15757.00
1992/02/29 15423.14 16148.33
1992/03/31 15921.70 16373.64
1992/04/30 16034.28 16492.82
1992/05/31 16227.27 16755.89
1992/06/30 16404.18 16964.08
1992/07/31 16725.83 17307.79
1992/08/31 17079.64 17536.93
1992/09/30 17256.55 17736.75
1992/10/31 16999.23 17512.73
1992/11/30 17208.30 17760.75
1992/12/31 17401.29 17989.44
1993/01/31 17867.69 18432.41
1993/02/28 18172.47 18781.31
1993/03/31 18591.84 19106.92
1993/04/30 18714.15 19244.07
1993/05/31 18993.73 19503.12
1993/06/30 19482.99 19869.54
1993/07/31 19675.20 20083.11
1993/08/31 19884.88 20274.55
1993/09/30 19954.77 20374.59
1993/10/31 20426.56 20758.40
1993/11/30 20618.77 20871.93
1993/12/31 20950.76 21080.63
1994/01/31 21649.71 21542.61
1994/02/28 21623.75 21387.69
1994/03/31 20895.29 20690.73
1994/04/30 20684.42 20448.94
1994/05/31 20722.76 20376.08
1994/06/30 20646.08 20451.08
1994/07/31 20722.76 20594.84
1994/08/31 20722.76 20737.90
1994/09/30 20876.12 20730.05
1994/10/31 20684.42 20782.72
1994/11/30 20511.89 20605.94
1994/12/31 20607.74 20835.14
1995/01/31 20837.78 21129.55
1995/02/28 21552.97 21788.82
1995/03/31 21821.35 22092.05
1995/04/30 22461.33 22609.30
1995/05/31 23039.38 23315.67
1995/06/30 23101.31 23493.75
1995/07/31 23658.72 23762.33
1995/08/31 23844.52 23906.55
1995/09/30 24236.77 24180.07
1995/10/31 24463.86 24351.47
1995/11/30 24587.73 24589.17
1995/12/31 24876.75 24983.88
1996/01/31 25454.80 25378.45
1996/02/29 25875.23 25416.66
1996/03/31 25807.26 25347.64
1996/04/30 26192.44 25359.12
1996/05/31 26554.97 25542.00
1996/06/30 26690.91 25695.43
1996/07/31 26600.28 25869.89
1996/08/31 26985.46 26137.04
1996/09/30 27778.49 26697.83
1996/10/31 27687.86 26990.42
1996/11/30 27982.41 27536.09
1996/12/31 28367.59 27747.97
1997/01/31 28752.77 27961.22
1997/02/28 29274.31 28353.46
1997/03/31 28364.86 28038.55
1997/04/30 28807.30 28357.67
1997/05/31 30011.70 28921.90
1997/06/30 30552.45 29369.60
1997/07/31 31658.53 30074.41
1997/08/31 31928.91 30006.75
1997/09/30 33059.57 30519.07
1997/10/31 32764.61 30721.61
1997/11/30 33010.41 30996.75
1997/12/31 33379.10 31306.66
IMATRL PRASUN SHR__CHT 19971231 19980126 092649 R00000000000123
Let's say hypothetically that $10,000 was invested in VIP: High Income
Portfolio on December 31, 1987. As the chart shows, by December 31,
1997, the value of the investment would have grown to $33,379 - a
233.79% 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 $31,307 - a 213.07% increase.
INVESTMENT SUMMARY
TOP FIVE HOLDINGS AS OF DECEMBER 31, 1997
(BY ISSUER, EXCLUDING CASH EQUIVALENTS) % OF FUND'S
INVESTMENTS
TIME WARNER, INC. 2.5
NEXTLINK COMMUNICATIONS, INC. 2.2
ORION NETWORK SYSTEMS, INC. 2.0
INTERMEDIA COMMUNICATIONS, INC. 1.9
CABLEVISION SYSTEMS CORP. 1.9
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
MEDIA & LEISURE 27.6
UTILITIES 17.1
BASIC INDUSTRIES 9.8
RETAIL & WHOLESALE 4.7
INDUSTRIAL MACHINERY & EQUIPMENT 4.7
QUALITY DIVERSIFICATION AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
AAA, AA, A 0.0
BAA 0.0
BA 5.5
B 51.3
CAA, CA. C 8.5
NOT RATED 4.3
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 DECEMBER 31, 1997, ACCOUNT FOR 4.3% OF
THE FUND'S INVESTMENTS.
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with
Barry Coffman,
Portfolio Manager of
High Income Portfolio
Q. HOW DID THE FUND PERFORM COMPARED TO ITS BENCHMARK, BARRY?
A. Quite well. The fund significantly outperformed its benchmark, the
Merrill Lynch High Yield Master Index, which had a total return of
12.82% for the year that ended December 31, 1997.
Q. WHAT HELPED THE FUND OUTPACE THE INDEX DURING THE YEAR?
A. One of the biggest contributors to the fund's outperformance was
its large weighting - relative to the Merrill Lynch High Yield Master
Index - in telecommunications companies. A wave of merger activity -
capped by WorldCom's winning bid for MCI Communications - pushed many
telecom companies to the top of the high-yield leader board. The
emerging competitive local exchange networks (Clecs) that provide
telephone and data transmission services to small- and mid-sized
business continued to make strides by building out networks and
quickening their pace of customer growth. In addition, the expectation
of continued industry consolidation benefited the fund's holdings
including Intermedia Communications and NEXTLINK. Also within the
telecommunications sector we saw strong gains from the fund's
satellite companies including PanAmSat and Orion Network. After the
acquisition of PanAmSat by GM Hughes, PanAmSat's bonds were redeemed
at a significant profit to the fund at year end. When Orion was
acquired by Loral, its bonds were upgraded and, as a result, posted
strong gains.
Q. APART FROM TELECOMMUNICATIONS HOLDINGS, WHAT WERE SOME OF THE OTHER
BRIGHT SPOTS FOR THE FUND?
A. The fund's cable and broadcasting holdings also performed quite
well during the year. After falling out of favor earlier in the year,
cable companies staged an impressive comeback partly due to
Microsoft's investment in Comcast, which excited investors about the
industry. The cable companies are aggressively upgrading their
networks to enhance the services they provide - including pay-per-view
and cable modems. In addition, they are aggressively swapping systems
with other operators to create larger, more efficient clusters. The
fund's holdings in Cablevision Systems benefited from these trends, as
well as an investment in the company from cable giant TCI . Among
broadcasters, I focused on radio companies where a wave of merger
activity boosted prices, including holdings in American Radio Systems
and Chancellor Broadcasting. Other bright spots included common stocks
issued by high-yield companies - those with below-investment-grade
credit ratings - including Allied Waste and Viacom. Allied Waste
successfully integrated a major acquisition and sold off assets.
Viacom also sold some assets, including its radio and cable holdings,
and made progress with its Blockbuster division.
Q. WERE THERE ANY DISAPPOINTMENTS?
A. The fund's holdings in paper companies - particularly investments
in Indonesian paper company Asia Pulp & Paper (APP) and its three
subsidiaries Indah Kiat, Pindo Deli and Tjiwi Kimia - were
disappointing. Not only were paper prices unable to sustain some
mid-year gains, but APP's securities also were hurt in the fourth
quarter of 1997, when Indonesia suffered from a host of related
currency, economic, fiscal and political problems. I've held onto
those investments in part because the company continues to be one of
the lowest-cost producers of paper products, which are U.S.
dollar-denominated, easily exported commodities. The company also has
ample liquidity to execute its expansion plans and is experiencing
improving profit margins due to Indonesia's currency crisis.
Q. WHAT'S YOUR OUTLOOK?
A. I'm a little cautious because I'm concerned that a large portion of
the world's economy represented by Southeast Asia could sink into a
depression. Not that the region provides huge demand for U.S. goods,
but the threat is that cheaper Asian-based goods will undercut
domestic products, and ultimately, corporate earnings. That said, it's
important to remember that the high-yield market is comprised mainly
of companies that do business domestically and the fallout from Asia
will be indirect. The U.S. economy remains in relatively decent shape,
and I think it will continue to grow, albeit at a slower pace. If
inflation remains in check - which appears more likely now given
Asia's problems - that would likely be a positive for the high-yield
market. Of course, the effects of these countervailing forces remain
to be seen. However, given the high yields that securities in this
market can offer - which often serve as a "cushion" in difficult
market environments - I think they stand a decent chance of outpacing
U.S. stocks.
FUND FACTS
GOAL: to seek high current income by
investing in high-yielding, lower-rated fixed
income securities
START DATE: September 19, 1985
SIZE: as of December 31, 1997, more than $2.3
billion
MANAGER: Barry Coffman, since 1990; joined
Fidelity in 1986
3
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
INVESTMENTS DECEMBER 31, 1997
Showing Percentage of Total Value of Investment in Securities
CORPORATE BONDS - 69.6%
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
CONVERTIBLE BONDS - 0.0%
UTILITIES - 0.0%
TELEPHONE SERVICES - 0.0%
GST Telecommunications, Inc.
0%, 12/15/05 (c)(e) - $ 630,000 $ 604,800
NONCONVERTIBLE BONDS - 69.6%
AEROSPACE & DEFENSE - 1.3%
AEROSPACE & DEFENSE - 0.5%
Alliant Techsystems, Inc.
11 3/4%, 3/1/03 B2 1,050,000 1,153,688
Argo-Tech Corp.
8 5/8%, 10/1/07 (e) B3 5,900,000 5,900,000
Fairchild Corp.
12%, 10/15/01 Caa 1,945,000 1,954,725
RHI Holdings, Inc.
11 7/8%, 3/1/99 B2 2,357,000 2,357,000
11,365,413
DEFENSE ELECTRONICS - 0.5%
Tracor, Inc. 8 1/2%, 3/1/07 B1 12,150,000 12,332,250
SHIP BUILDING & REPAIR - 0.3%
Newport News Shipbuilding, Inc.:
8 5/8%, 12/1/06 Ba2 670,000 710,200
9 1/4%, 12/1/06 B1 4,650,000 4,917,375
5,627,575
TOTAL AEROSPACE & DEFENSE 29,325,238
BASIC INDUSTRIES - 9.6%
CHEMICALS & PLASTICS - 2.6%
Atlantis Group, Inc.
11%, 2/15/03 B2 8,205,000 8,420,381
Freedom Chemical Co.
10 5/8%, 10/15/06 B3 7,470,000 8,235,675
Huntsman Corp.
9 1/2%, 7/1/07 (e) B2 19,400,000 20,370,000
Koppers Industries, Inc.
9 7/8%, 12/1/07 (e) B2 4,985,000 5,128,319
Sovereign Specialty Chemicals,
Inc. 9 1/2%, 8/1/07 (e) B3 1,070,000 1,099,425
Sterling Chemicals Holdings,
Inc. 11 3/4%, 8/15/06 B3 15,160,000 15,463,200
58,717,000
IRON & STEEL - 1.1%
GS Technologies Operating, Inc.
12 1/4%, 10/1/05 B2 3,410,000 3,810,675
Republic Engineered Steels, Inc.
9 7/8%, 12/15/01 Caa 17,315,000 16,622,400
WCI Steel, Inc. 10%, 12/1/04 B2 5,830,000 5,932,025
26,365,100
METALS & MINING - 0.5%
Commonwealth Aluminum Corp.
10 3/4%, 10/1/06 B2 9,815,000 10,379,363
PACKAGING & CONTAINERS - 0.1%
Huntsman Packaging Corp.
9 1/8%, 10/1/07 (e) B2 2,660,000 2,739,800
PAPER & FOREST PRODUCTS - 5.3%
APP Finance II Mauritius Ltd.
12%, 3/15/04 B3 11,785,000 10,135,100
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
Advanced Argo Public
Company Ltd.
13%, 11/15/07 (e) B2 $ 11,250,000 $ 9,900,000
Ainsworth Lumber Co. Ltd.
12 1/2%, 7/15/07
pay-in-kind B3 4,930,000 4,954,650
American Pad & Paper Co.,
Inc. 13%, 11/15/05 B3 2,290,000 2,404,500
Container Corp. of America:
10 3/4%, 5/1/02 B1 50,000 54,375
gtd.:
9 3/4%, 4/1/03 B1 490,000 523,075
11 1/4%, 5/1/04 B1 150,000 163,875
Doman Industries Ltd.:
yankee 8 3/4%, 3/15/04 B1 20,180,000 19,473,700
9 1/4%, 11/15/07 (e) B1 5,000,000 4,875,000
Florida Coast Paper Co.
LLC/Florida Coast Paper
Finance Corp., Series B,
12 3/4%, 6/1/03 Caa 1,740,000 1,844,400
Indah Kiat Finance Mauritius
Ltd. 10%, 7/1/07 (e) Ba3 8,250,000 6,826,875
Mail-Well Corp.
10 1/2%, 2/15/04 B 1,640,000 1,722,000
Omega Cabinets Ltd.
10 1/2%, 6/15/07 (e) B3 6,190,000 6,422,125
Paperboard Industries
International, Inc.
8 3/8%, 9/15/07 (e) Ba3 1,490,000 1,512,350
Pindo Deli Finance Mauritius
Ltd. 10 1/4%, 10/1/02 (e) Ba3 3,740,000 3,188,350
Repap New Brusnwick, Inc.
yankee 9 7/8%, 7/15/00 B2 4,730,000 4,824,600
SD Warren Co., Series B,
12%, 12/15/04 B1 7,330,000 8,191,275
Specialty Paperboard, Inc.
9 3/8%, 10/15/06 B1 5,000,000 5,225,000
Stone Container Corp.:
12 5/8%, 7/15/98 B2 10,000,000 10,262,500
10 3/4%, 10/1/02 B1 8,140,000 8,506,300
Tjiwi Kimia Mauritius Ltd.
10%, 8/1/04 (e) Ba3 7,860,000 6,366,600
Tembec Finance Corp. yankee
9 7/8%, 9/30/05 B1 4,865,000 4,998,788
122,375,438
TOTAL BASIC INDUSTRIES 220,576,701
CONSTRUCTION & REAL ESTATE - 0.8%
BUILDING MATERIALS - 0.8%
American Architectural
Products, Inc.
11 3/4%, 12/1/07 (e) Caa 6,550,000 6,615,500
Airxcel, Inc. 11%,
11/15/07 (e) B3 7,350,000 7,570,500
Insiloc Corp.
10 1/4%, 8/15/07 B3 4,660,000 4,893,000
19,079,000
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
DURABLES - 3.0%
AUTOS, TIRES, & ACCESSORIES - 0.2%
Blue Bird Body Co.
10 3/4%, 11/15/06 B2 $ 3,180,000 $ 3,418,500
HOME FURNISHINGS - 1.3%
Guitar Center Management Co.,
Inc. 11%, 7/1/06 B1 6,587,000 7,311,570
Interlake Corp.
12 1/8%, 3/1/02 B3 12,265,000 12,632,950
Knoll, Inc.
10 7/8%, 3/15/06 B1 3,426,000 3,837,120
Sealy Mattress Co. (e):
9 7/8%, 12/15/07 B3 3,530,000 3,618,250
0%, 12/15/07 (c) B3 4,855,000 2,937,275
30,337,165
TEXTILES & APPAREL - 1.5%
Nine West Group, Inc.
8 3/8%, 8/15/05 (e) Ba2 3,300,000 3,143,250
Pillowtex Corp.
9%, 12/15/07 (e) B2 1,980,000 2,029,500
Polymer Group, Inc.
9%, 7/1/07 B2 9,060,000 9,060,000
Synthetic Industries, Inc.
9 1/4%, 2/15/07 B2 11,770,000 12,417,350
Worldtex, Inc.
9 5/8%, 12/15/07 (e) B1 7,105,000 7,282,625
33,932,725
TOTAL DURABLES 67,688,390
ENERGY - 3.6%
COAL - 0.4%
AEI Holding, Inc.
10%, 11/15/07 (e) B2 9,380,000 9,661,400
ENERGY SERVICES - 0.3%
DI Industries, Inc.
8 7/8%, 7/1/07 B1 3,905,000 4,051,438
Newpark Resources, Inc.
8 5/8%, 12/15/07 (e) B2 2,310,000 2,344,650
6,396,088
OIL & GAS - 2.9%
Belden & Blake Corp.
9 7/8%, 6/15/07 B3 4,945,000 4,994,450
Chesapeake Energy Corp.:
7 7/8%, 3/15/04 Ba3 880,000 871,200
9 1/8%, 4/15/06 Ba3 2,580,000 2,650,950
8 1/2%, 3/15/12 Ba3 610,000 606,950
Cross Timbers Oil Co.:
9 1/4%, 4/1/07 B2 8,000,000 8,320,000
8 3/4%, 11/1/09 B2 5,060,000 5,161,200
Flores & Rucks, Inc.
9 3/4%, 10/1/06 B3 10,960,000 12,028,600
Harcor Energy, Inc.
14 7/8%, 7/15/02 B3 13,060,000 14,104,800
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
Ocean Energy, Inc.
8 7/8%, 7/15/07 B3 $ 11,390,000 $ 12,101,875
Plains Resources, Inc., Series B,
10 1/4%, 3/15/06 B2 4,430,000 4,762,250
Southwest Royalties, Inc.
10 1/2%, 10/15/04 (e) B3 1,630,000 1,613,700
United Meridian Corp.
10 3/8%, 10/15/05 B2 190,000 208,050
67,424,025
TOTAL ENERGY 83,481,513
FINANCE - 3.5%
ASSET-BACKED SECURITIES - 0.3%
Airplanes Pass Through Trust
Class D 10 7/8%, 3/15/19 Ba2 6,710,000 7,498,425
CREDIT & OTHER FINANCE - 2.0%
Cityscape Financial Corp.
12 3/4%, 6/1/04 Caa 6,560,000 2,886,400
Delta Financial Corp.
9 1/2%, 8/1/04 B1 8,260,000 8,198,050
Imperial Credit Capital Trust I
10 1/4%, 6/14/02 (e) B2 4,870,000 4,870,000
Imperial Credit Industries, Inc.
9 7/8%, 1/15/07 B2 17,470,000 17,295,300
Ocwen Capital Trust
10 7/8%, 8/1/27 B2 6,190,000 6,747,100
Olympic Financial Ltd.
11 1/2%, 3/15/07 B2 5,200,000 5,096,000
45,092,850
SAVINGS & LOANS - 1.2%
First Nationwide Holdings, Inc.
10 5/8%, 10/1/03 Ba3 7,240,000 8,090,700
First Nationwide Parent
Holdings Ltd.
12 1/2%, 4/15/03 B3 16,030,000 18,234,125
26,324,825
SECURITIES INDUSTRY - 0.0%
ECM Corp. extendible
14%, 6/1/02 (e) - 235,942 235,352
TOTAL FINANCE 79,151,452
HEALTH - 2.4%
MEDICAL EQUIPMENT & SUPPLIES - 1.0%
Graham-Field Health Products,
Inc. 9 3/4%, 8/15/07 (e) B3 4,830,000 5,071,500
Wright Medical Technology, Inc.
11 3/4%, 7/1/00 (d) Caa 18,650,000 18,836,500
23,908,000
MEDICAL FACILITIES MANAGEMENT - 1.4%
Integrated Health Services, Inc.:
10 1/4%, 4/30/06 B2 4,890,000 5,183,400
9 1/2%, 9/15/07 (e) B2 6,980,000 7,189,400
9 1/4%, 1/15/08 (e) B2 7,860,000 8,017,200
Tenet Healthcare Corp.
8 5/8%, 1/15/07 Ba3 10,500,000 10,815,000
31,205,000
TOTAL HEALTH 55,113,000
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
INDUSTRIAL MACHINERY & EQUIPMENT - 4.4%
ELECTRICAL EQUIPMENT - 2.1%
Echostar Communications Corp.
secured discount
0%, 6/1/04 (c) B2 $ 19,010,000 $ 17,394,150
Motors & Gears, Inc.:
10 3/4%, 11/15/06 B3 19,550,000 20,723,000
10 3/4%, 11/15/06 (e) B3 8,180,000 8,691,250
46,808,400
INDUSTRIAL MACHINERY & EQUIPMENT - 1.6%
Calmar, Inc.
11 1/2%, 8/15/05 B3 1,570,000 1,656,350
Continental Global Group, Inc.
11%, 4/1/07 B2 4,000,000 4,260,000
Goss Graphic System, Inc.
12%, 10/15/06 B2 9,630,000 10,881,900
McDermott International, Inc.
9 3/8%, 3/15/02 Ba3 11,680,000 12,585,200
Thermadyne Holdings Corp.:
10 1/4%, 5/1/02 B1 1,484,000 1,543,360
10 3/4%, 11/1/03 B3 5,226,000 5,585,288
36,512,098
POLLUTION CONTROL - 0.7%
Allied Waste North America
10 1/4%, 12/1/06 B2 5,830,000 6,398,425
Envirosource, Inc.:
9 3/4%, 6/15/03 B3 5,750,000 5,836,250
9 3/8%, 6/15/03 (e) B3 4,600,000 4,651,750
16,886,425
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 100,206,923
MEDIA & LEISURE - 16.9%
BROADCASTING - 8.7%
ACME Television/ACME Financial
Corp. 0%, 9/30/04 (c)(e) B3 12,910,000 9,504,988
Adelphia Communications Corp.:
9 1/2%, 2/15/04 B3 6,516,518 6,392,313
9 7/8%, 3/1/07 B3 5,380,000 5,689,350
Ascent Entertainment Group,
Inc. 0%, 12/15/04 (c)(e) B3 12,100,000 6,987,750
Benedek Communications Corp.
0%, 5/15/06 (c) B3 280,000 212,800
Capstar Broadcasting Partners, Inc.:
9 1/4%, 7/1/07 B2 9,710,000 9,989,163
0%, 2/1/09 (c) B3 14,970,000 10,815,825
Chancellor Radio Broadcasting
Company 8 1/8%,
12/15/07 (e) - 12,000,000 11,760,000
Chancellor Media Corp.
8 3/4%, 6/15/07 B3 5,320,000 5,413,100
CS Wireless Systems, Inc.
0%, 3/1/06 (c) Caa 12,770,000 3,575,600
Falcon Holdings Group LP
11%, 9/15/03 pay-in-kind - 14,692,965 15,187,236
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
FrontierVision Holdings LP/
FrontierVision Holdings
Capital Corp. 0%,
9/15/07 (c) Caa $ 2,255,000 $ 1,617,963
Granite Broadcasting Corp.:
10 3/8%, 5/15/05 B3 1,560,000 1,634,100
9 3/8%, 12/1/05 B3 3,750,000 3,796,875
Intermedia Capital Partners IV
LP/Intermedia Partners IV
Capital Corp.
11 1/4%, 8/1/06 B2 590,000 655,638
International Cabletel, Inc.
0%, 2/1/06 (c) B3 20,205,000 15,759,900
Olympus Communications LP/
Olympus Capital Corp.
10 5/8%, 11/15/06 B1 9,320,000 10,321,900
Orion Network Systems, Inc.:
11 1/4%, 1/15/07 B2 5,585,000 6,311,050
0%, 1/15/07 (c) B2 45,930,000 34,103,025
SFX Broadcasting, Inc.
10 3/4%, 5/15/06 B3 9,275,000 10,202,500
Telewest PLC 0%, 10/1/07 (c) B1 6,290,000 4,874,750
UIH Australia/Pacific, Inc. (c):
Series B, 0%, 5/15/06 B2 27,675,000 18,265,500
0%, 5/15/06 (e) B2 1,090,000 719,400
United International Holdings,
Inc. 0%, 11/15/99 B3 4,960,000 4,067,200
Viacom International, Inc.,
Series B, 7%, 7/1/03 B1 1,560,000 1,489,800
199,347,726
ENTERTAINMENT - 2.6%
AMC Entertainment, Inc.
9 1/2%, 3/15/09 B2 10,940,000 11,350,250
Ameristar Casinos, Inc.
10 1/2%, 8/1/04 B3 8,200,000 8,282,000
AMF Group, Inc., Series B:
10 7/8%, 3/15/06 B2 1,100,000 1,204,500
0%, 3/15/06 (c) B2 5,736,000 4,509,930
Cinemark USA, Inc.
9 5/8%, 8/1/08 B2 5,240,000 5,423,400
Regal Cinemas, Inc.
8 1/2%, 10/1/07 B1 1,620,000 1,632,150
Town Sports International, Inc.
9 3/4%, 10/15/04 (e) B2 3,400,000 3,332,000
Viacom, Inc. 8%, 7/7/06 B1 24,430,000 24,521,613
60,255,843
LEISURE DURABLES & TOYS - 0.1%
ICON Fitness Corp.
0%, 11/15/06 (c) Caa 5,650,000 3,192,250
LODGING & GAMING - 2.4%
HMH Properties, Inc.:
9 1/2%, 5/15/05 Ba3 14,610,000 15,541,388
8 7/8%, 7/15/07 Ba3 12,500,000 13,093,750
KSL Recreation Group, Inc.
10 1/4%, 5/1/07 B3 7,760,000 8,303,200
Station Casinos, Inc.
9 3/4%, 4/15/07 B2 3,720,000 3,850,200
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) 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 $ 13,040,000 $ 13,431,200
54,219,738
PUBLISHING - 2.0%
Big Flower Press Holdings, Inc.:
8 7/8%, 7/1/07 B2 19,000,000 19,118,750
8 7/8%, 7/1/07 (e) B2 3,550,000 3,567,750
Hollinger International
Publishing, Inc.
9 1/4%, 3/15/07 B1 5,600,000 5,880,000
ITT Publimedia BV
9 3/8%, 9/15/07 (e) B3 13,600,000 14,280,000
Perry Judds, Inc.
10 5/8%, 12/15/07 (e) B3 1,710,000 1,769,850
Transwestern Holding LP/TWP
Capital Corp. 0%,
11/15/08 (c)(e) B3 2,300,000 1,380,000
45,996,350
RESTAURANTS - 1.1%
AFC Enterprises, Inc.
10 1/4%, 5/15/07 B3 6,840,000 7,199,100
Host Marriott Travel Plazas,
Inc. 9 1/2%, 5/15/05 Ba3 8,790,000 9,339,375
SC International Services,
Inc. 9 1/4%, 9/1/07 (e) B2 7,200,000 7,416,000
23,954,475
TOTAL MEDIA & LEISURE 386,966,382
NONDURABLES - 1.7%
FOODS - 0.1%
Del Monte Foods Co.
0%, 12/15/07 (c)(e) Caa 5,840,000 3,343,400
HOUSEHOLD PRODUCTS - 1.4%
RBX Corp. 12%, 1/15/03 (e) B2 4,150,000 4,253,750
Renaissance Cosmetic, Inc.
11 3/4%, 2/15/04 B3 10,000,000 9,000,000
Revlon Consumer Products
Corp. 10 1/2%, 2/15/03 B3 17,180,000 18,081,950
31,335,700
TOBACCO - 0.2%
North Atlantic Trading, Inc.
11%, 6/15/04 B3 3,640,000 3,794,700
TOTAL NONDURABLES 38,473,800
PRECIOUS METALS - 0.4%
Centaur Mining & Exploration
Ltd. 11%, 12/1/07 (e) B1 9,830,000 9,879,150
RETAIL & WHOLESALE - 4.5%
APPAREL STORES - 1.5%
Lamonts Apparel, Inc.
10 1/4%, 11/1/99
pay-in-kind (e)(g) - 2,201,000 82,538
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
Mothers Work, Inc.
12 5/8%, 8/1/05 B3 $ 15,140,000 $ 16,124,100
Specialty Retailers, Inc.:
8 1/2%, 7/15/05 Ba3 4,480,000 4,569,600
9%, 7/15/07 B2 13,520,000 13,790,400
34,566,638
GROCERY STORES - 1.9%
Di Giorgio Corp.
10%, 6/15/07 B3 6,760,000 6,641,700
Food 4 Less Holdings, Inc.
13 5/8%, 6/15/07 - 1,950,941 2,300,042
Pathmark Stores, Inc.:
11 5/8%, 6/15/02 Caa 11,740,000 9,597,450
9 5/8%, 5/1/03 Caa 10,950,000 10,087,688
Penn Traffic Co.:
10 1/4%, 2/15/02 B3 4,060,000 3,694,600
8 5/8%, 12/15/03 B3 3,780,000 3,213,000
Pueblo Xtra International, Inc.
9 1/2%, 8/1/03 B3 7,970,000 7,533,700
43,068,180
RETAIL & WHOLESALE, MISCELLANEOUS - 1.1%
Big 5 Corp.
10 7/8%, 11/15/07 (e) B2 8,855,000 8,810,725
Central Tractor Farm & Country,
Inc. 10 5/8%, 4/1/07 B2 3,440,000 3,629,200
Corporate Express, Inc.,
Series B, 9 1/8%, 3/15/04 B2 1,070,000 1,091,400
J Crew Operating Corp.
10 3/8%, 10/15/07 (e) B3 10,760,000 9,361,200
J Crew Group, Inc.
0%, 10/15/08 (c)(e) Caa 7,787,000 3,387,345
26,279,870
TOTAL RETAIL & WHOLESALE 103,914,688
SERVICES - 2.9%
LEASING & RENTAL - 1.0%
GPA Holland 8.94%, 2/16/99 - 500,000 510,000
Hollywood Entertainment Corp.
10 5/8%, 8/15/04 B3 21,710,000 21,167,250
21,677,250
PRINTING - 0.9%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa 21,300,000 21,513,000
SERVICES - 1.0%
Iron Mountain, Inc.
8 3/4%, 9/30/09 (e) B3 4,115,000 4,197,300
Outsourcing Solutions, Inc.
11%, 11/1/06 B3 2,760,000 3,042,900
Protection One Alarm
Monitoring, Inc.
13 5/8%, 6/30/05 Caa 13,300,000 14,364,000
21,604,200
TOTAL SERVICES 64,794,450
TECHNOLOGY - 2.7%
COMMUNICATIONS EQUIPMENT - 0.9%
Intermedia Communications, Inc.
0%, 7/15/07 (c) B2 7,760,000 5,529,000
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
TECHNOLOGY - CONTINUED
COMMUNICATIONS EQUIPMENT - CONTINUED
Jordan Telecommunication
Products, Inc.:
9 7/8%, 8/1/07 B3 $ 4,720,000 $ 4,796,700
0%, 8/1/07 (c) B3 11,400,000 9,234,000
19,559,700
COMPUTER SERVICES & SOFTWARE - 0.7%
Concentric Network Corp.
12 3/4%, 12/15/07 (e) - 3,270,000 3,359,925
DecisionOne Corp.
9 3/4%, 8/1/07 B3 2,220,000 2,275,500
DecisionOne Holdings Corp.
0%, 8/1/08 (c) Caa 3,730,000 2,387,200
Federal Data Corp.
10 1/8%, 8/1/05 (e) B3 7,030,000 7,100,300
15,122,925
COMPUTERS & OFFICE EQUIPMENT - 0.4%
Dictaphone Corp.
11 3/4%, 8/1/05 Caa 6,200,000 5,952,000
Unisys Corp.
10 5/8%, 10/1/99 B1 4,080,000 4,187,100
10,139,100
ELECTRONIC INSTRUMENTS - 0.3%
Wavetek Corp.
10 1/8%, 6/15/07 B3 6,020,000 6,200,600
ELECTRONICS - 0.4%
Communications Instruments,
Inc. 10%, 9/15/04 (e) B3 2,450,000 2,499,000
ViaSystems, Inc.
9 3/4%, 6/1/07 B3 7,120,000 7,351,400
9,850,400
TOTAL TECHNOLOGY 60,872,725
TRANSPORTATION - 1.5%
AIR TRANSPORTATION - 0.8%
Amtran, Inc.
10 1/2%, 8/1/04 (e) B2 5,000,000 5,193,750
Kitty Hawk, Inc.
9.95%, 11/15/04 (e) B1 8,010,000 8,250,300
US Air, Inc. euro pass through
trust 8 5/8%, 9/1/98 B1 5,000,000 5,031,250
18,475,300
RAILROADS - 0.7%
Transtar Holdings LP/Transtar
Capital Corp. 0%,
12/15/03 (c) B- 17,941,000 15,608,670
TOTAL TRANSPORTATION 34,083,970
UTILITIES - 10.4%
CELLULAR - 5.7%
CellNet Data Systems, Inc.
0%, 10/1/07 (c)(e) - 18,000,000 8,010,000
Fonorola, Inc.
12 1/2%, 8/15/02 B2 1,020,000 1,134,750
McCaw International Ltd.
0%, 4/15/07 (c) CCC 36,915,000 21,410,700
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
Microcell Telecommunications,
Inc. 0%, 6/1/06 (c) B3 $ 8,050,000 $ 5,433,750
Millicom International Cellular
SA 0%, 6/1/06 (c) B3 54,640,000 39,887,200
Pagemart Nationwide, Inc.:
12 1/4%, 11/1/03 - 14,275,000 13,347,125
0 %, 2/1/05 (c) - 7,070,000 6,044,850
Rogers Communications, Inc.
8 7/8%, 7/15/07 B2 5,520,000 5,520,000
Teletrac, Inc. 14%, 8/1/07 Caa 9,820,000 9,329,000
Telesystem International Wireless,
Inc. (c)(e):
0%, 6/30/07 Caa 13,870,000 8,668,750
0%, 11/1/07 Caa 6,460,000 3,585,300
USA Mobile Communications,
Inc. II:
9 1/2%, 2/1/04 B2 3,970,000 3,831,050
14%, 11/1/04 B2 3,350,000 3,701,750
129,904,225
ELECTRIC UTILITY - 0.2%
AES Corp. 8 3/8%, 8/15/07 Ba1 4,375,000 4,364,063
TELEPHONE SERVICES - 4.5%
American Communications
Services, Inc. 0%, 4/1/06 (c) - 1,580,000 1,212,650
GST Equipment Funding, Inc.
13 1/4%, 5/1/07 - 4,960,000 5,654,400
GST Telecommunications, Inc.
12 3/4%, 11/15/07 - 11,240,000 11,745,800
GST USA, Inc.
0%, 12/15/05 (c) - 8,080,000 6,181,200
Hyperion Telecommunications,
Inc., Series B:
0%, 4/15/03 (c) B 14,340,000 10,396,500
12 1/4%, 9/1/04 B 7,455,000 8,181,863
McLeodUSA, Inc.
0%, 3/1/07 (c) B3 14,940,000 10,775,475
Netia Holdings BV
10 1/4%, 11/1/07 (e) B3 4,330,000 4,156,800
NEXTLINK Communications, Inc.
9 5/8%, 10/1/07 B3 7,610,000 7,838,300
Optel Communications Corp.
15%, 12/29/04 (f) - 12,000,000 11,240,624
Telegroup, Inc. 0%,
11/1/04 (c)(e) - 1,940,000 1,508,350
Winstar Communications, Inc.:
0%, 10/15/05 (c) Caa 9,080,000 7,127,800
14 1/2%, 10/15/05 Caa 13,220,000 17,450,400
Winstar Equipment
12 1/2%, 3/15/04 B3 160,000 179,600
103,649,762
TOTAL UTILITIES 237,918,050
TOTAL NONCONVERTIBLE BONDS 1,591,525,432
TOTAL CORPORATE BONDS
(Cost $1,562,354,035) 1,592,130,232
COMMERCIAL MORTGAGE SECURITIES - 0.0%
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
Meritor Mortgage Security Corp.
commercial Series 1987-1
Class B, 9.40%, 2/1/00
(Cost $130,910) (e)(g) - $ 1,350,000 $ 266,760
COMMON STOCKS - 5.9%
SHARES
AEROSPACE & DEFENSE - 0.3%
Wyman-Gordon Co. (a) 300,000 5,887,500
BASIC INDUSTRIES - 0.2%
CHEMICALS & PLASTICS - 0.0%
Sterling Chemical Holdings
warrants 8/15/08 (a) 340 10,200
IRON & STEEL - 0.0%
Republic Engineered Steels, Inc. (a) 67,500 151,875
PACKAGING & CONTAINERS - 0.2%
Gaylord Container Corp. Class A (a) 887,000 5,100,250
TOTAL BASIC INDUSTRIES 5,262,325
DURABLES - 0.2%
CONSUMER DURABLES - 0.1%
Samsonite Corp. (a) 100,000 3,162,500
TEXTILES & APPAREL - 0.1%
Arena Brands Holdings Corp. Class B (a) 48,889 1,974,630
Hat Brands, Inc. (a)(f)(h) 340,000 -
1,974,630
TOTAL DURABLES 5,137,130
ENERGY - 0.6%
OIL & GAS - 0.6%
Harcor Energy, Inc.
warrants 7/24/00 (a) 330,000 82,500
Harcor Energy, Inc. (a) 694,000 1,149,438
Ocean Energy, Inc. (a) 266,700 13,151,644
14,383,582
FINANCE - 0.0%
CREDIT & OTHER FINANCE - 0.0%
Olympic Financial Ltd.
warrants 3/15/07 (a) 498 7,470
SECURITIES INDUSTRY - 0.0%
ECM Corp. LP (e) 3,000 329,250
TOTAL FINANCE 336,720
HEALTH - 0.2%
MEDICAL EQUIPMENT & SUPPLIES - 0.0%
Imagyn Medical Technologies, Inc. 110,000 271,563
Wright Medical Technology, Inc.
warrants 6/30/03 (a) 3,212 321,200
592,763
MEDICAL FACILITIES MANAGEMENT - 0.2%
Integrated Health Services, Inc. 137,400 4,285,163
TOTAL HEALTH 4,877,926
INDUSTRIAL MACHINERY & EQUIPMENT - 0.2%
POLLUTION CONTROL - 0.2%
Allied Waste Industries, Inc. (a) 182,300 4,249,869
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - 2.4%
BROADCASTING - 0.8%
Adelphia Communications Class A (a) 88,200 $ 1,631,700
Benedek Communications Corp.
warrants 7/1/00 (a) 57,600 86,400
CS Wireless Systems, Inc. (a)(e) 3,514 -
Orion Network Systems, Inc. (a) 337,000 5,771,125
Orion Network Systems, Inc.
warrants 1/15/07 (a) 51,515 577,835
Teletrac Holdings, Inc.
warrants 8/1/07 (a) 9,820 540,100
UIH Australia/Pacific, Inc.
warrants 5/15/06 (a) 26,805 321,660
United International Holdings, Inc.
Class A (a) 806,500 9,274,750
18,203,570
ENTERTAINMENT - 1.0%
Live Entertainment, Inc. (a)(f):
$2.00 warrants 3/28/98 232,000 -
$2.72 warrants 3/28/98 221,765 -
Viacom, Inc. Class B (non-vtg.) (a) 577,800 23,942,592
23,942,592
LEISURE DURABLES & TOYS - 0.1%
IHF Capital, Inc. (a)(e):
Series I warrants 11/14/99 5,890 353,400 Series H warrants
11/15/04 10,250 1,742,500
2,095,900
LODGING & GAMING - 0.4%
Bally Gaming International, Inc.
warrants 7/29/98 (a) 90,000 67,500
Motels of America, Inc. (a) 3,000 75,000
Showboat, Inc. 337,300 9,908,188
10,050,688
RESTAURANTS - 0.1%
Friendly Ice Cream Corp. 95,000 1,104,375
TOTAL MEDIA & LEISURE 55,397,125
NONDURABLES - 0.0%
HOUSEHOLD PRODUCTS - 0.0%
Renaissance Cosmetics, Inc.
warrants 8/31/06 (a)(e) 12,750 130
TOBACCO - 0.0%
North Atlantic Trading, Inc.
warrants 6/15/07 (a) 210 -
TOTAL NONDURABLES 130
RETAIL & WHOLESALE - 0.2%
APPAREL STORES - 0.1%
Lamonts Apparel, Inc. (a) 35,870 2,243
Lamonts Apparel, Inc.
warrants 6/10/99 (a) 66,214 -
Mothers Work (a)(h) 264,100 2,079,788
2,082,031
GROCERY STORES - 0.1%
Food 4 Less Holdings, Inc.
warrants 12/31/02 (a)(f) 155,047 2,131,896
TOTAL RETAIL & WHOLESALE 4,213,927
SERVICES - 0.6%
LEASING & RENTAL - 0.1%
Hollywood Entertainment Corp. (a) 307,600 3,268,250
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SERVICES - CONTINUED
PRINTING - 0.3%
Big Flower Holdings, Inc. (a) 232,300 $ 5,604,238
SERVICES - 0.2%
Protection One, Inc.
warrants 6/30/05 (a) 74,560 969,280
Protection One, Inc. 221,700 2,507,981
Vestar/LPA Investment Corp. (a) 5,177 150,133
3,627,394
TOTAL SERVICES 12,499,882
UTILITIES - 1.0%
CELLULAR - 0.6%
CellNet Data Systems, Inc.
warrants 10/1/07 (a)(e) 18,000 360,000
McCaw International Ltd.
warrants 4/15/07 (a)(e) 36,915 92,288
Microcell Telecommunications, Inc.
warrants 6/1/06 (a)(e) 103,480 1,433,198
Millicom International Cellular SA (a) 50,000 1,881,250
Pagemart Wireless, Inc. Class A (a) 1,065,900 8,393,963
Powertel, Inc. warrants 2/1/06 (a) 56,448 508,032
Telesystem International Wireless,
Inc. (sub-vtg.) (a) 72,600 1,041,097
13,709,828
TELEPHONE SERVICES - 0.4%
GST Telecommunications, Inc. (a) 200,000 2,470,000
Hyperion Telecommunications, Inc.
warrants 4/15/01 (a)(e) 12,560 753,600
MCI Communications Corp. 100,000 4,281,250
Optel Communications warrants
12/29/04 (a)(f) 2,559,515 759,408
RSL Communications Ltd./RSL
Communications PLC
warrants 11/15/06 (a) 9,700 892,400
9,156,658
TOTAL UTILITIES 22,866,486
TOTAL COMMON STOCKS
(Cost $118,483,739) 135,112,602
PREFERRED STOCKS - 17.3%
CONVERTIBLE PREFERRED STOCKS - 0.9%
MEDIA & LEISURE - 0.9%
BROADCASTING - 0.4%
Benedek Communications Corp. 15% (a) 66,928 8,667,176
LODGING & GAMING - 0.5%
Host Marriott Financial Trust
$3.375 QUIPS (e) 201,200 12,046,850
20,714,026
NONCONVERTIBLE PREFERRED STOCKS - 16.4%
ENERGY - 0.2%
OIL & GAS - 0.2%
Clark USA, Inc. 11 1/2%,
pay-in-kind (e) 4,348 4,608,880
SHARES VALUE (NOTE 1)
FINANCE - 0.5%
INSURANCE- 0.5%
American Annuity Group Capital
Trust II 8 3/4% 8,910 $ 9,625,001
SIG Capital Trust I 9 1/2% 2,460 2,588,432
12,213,433
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
ELECTRICAL EQUIPMENT - 0.1%
Ampex Corp. 8% (f) 1,589 1,235,114
MEDIA & LEISURE - 7.4%
BROADCASTING - 7.1%
Adelphia Communications Corp. $13 43,500 5,154,750
American Radio Systems Corp.
11 3/8%, pay-in-kind 133,856 14,991,872
Cablevision Systems Corp.:
11 1/8%, depositary shares pay-in-kind 210,970 24,367,035
Series H, $11.75, pay-in-kind 166,817 19,767,815
Capstar Broadcasting Partners, Inc.
12%, pay-in-kind 37,934 4,120,581
Chancellor Media Corp.:
12%, pay-in-kind (e) 73,629 8,393,706
Series A, $12.25 (a) 64,300 8,873,400
Citadel Brodcasting Co. 13 1/4%,
pay-in-kind (e) 89,503 10,248,094
Granite Broadcasting Corp. 12 3/4%,
pay-in-kind 7,912 8,782,320
SFX Broadcasting, Inc. 12 5/8% 10,583 1,211,754
Time Warner, Inc., Series M,
10 1/4%, pay-in-kind 50,316 56,479,710
162,391,037
PUBLISHING - 0.3%
Primedia, Inc.:
Series B, $11.625, pay-in-kind 69,893 7,461,078
Series D, $10 5,400 564,300
8,025,378
TOTAL MEDIA & LEISURE 170,416,415
NONDURABLES - 0.6%
HOUSEHOLD PRODUCTS - 0.3%
Renaissance Cosmetics, Inc.
14%, pay-in-kind 15,175 7,587,500
TOBACCO - 0.3%
North Atlantic Trading, Inc.
12%, pay-in-kind 222,212 6,001,668
TOTAL NONDURABLES 13,589,168
SERVICES - 0.2%
PRINTING - 0.2%
Big Flower Trust I $3.00 QUIPS (e) 72,500 3,724,688
TECHNOLOGY - 1.7%
COMMUNICATIONS EQUIPMENT - 1.7%
Intermedia Communications, Inc.
13 1/2%, pay-in-kind 31,856 39,023,600
UTILITIES - 5.7%
CELLULAR - 1.3%
Nextel Communications, Inc., Series D,
13%, pay-in-kind 25,503 29,073,420
TELEPHONE SERVICES - 4.4%
American Communications Services,
Inc. 12 3/4%, pay-in-kind (e) 13,495 13,596,213
PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONCONVERTIBLE PREFERRED STOCKS - CONTINUED
UTILITIES - CONTINUED
TELEPHONE SERVICES - CONTINUED
Hyperion Telecommunications, Inc.
12 7/8%, pay-in-kind (Reg.) 15,835 $ 15,953,763
ICG Holdings, Inc. 14 1/4%,
pay-in-kind 13,815 16,198,088
NEXTLINK Communications, Inc.
14%, pay-in-kind 693,057 43,316,063
Winstar Communications, Inc.
14 1/2% (a)(e) 11,698 12,224,410
101,288,537
TOTAL UTILITIES 130,361,957
TOTAL NONCONVERTIBLE PREFERRED STOCKS 375,173,255
TOTAL PREFERRED STOCKS
(Cost $362,843,296) 395,887,281
CASH EQUIVALENTS - 7.2%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations), in a joint
trading account at 6.40%, dated
12/31/97 due 1/2/98 $ 163,515,118 163,457,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $2,207,268,980) $ 2,286,853,875
SECURITY TYPE ABBREVIATIONS
QUIPS - Quarterly Income Preferred
Securities
LEGEND
(a) Non-income producing
(b) Standard & Poor's credit ratings are used in the absence of a
rating by Moody's Investors Service, Inc.
(c) Debt obligation initially issued in zero coupon form which
converts to coupon form at a specified rate and date.
(d) The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
(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.
At the period end, the value of these securities amounted to
$387,016,332 or 16.6% of net assets.
(f) 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
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
Hat Brands, Inc. 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
Optel Communications Corp.
15%, 12/29/04 12/31/97 $ 11,240,640
Optel Communications warrants
12/29/04 12/31/97 $ 759,408
(g) Non-income producing - issuer filed for protection under the
Federal Bankruptcy Code or is in default of interest payment.
(h) An affiliated company is a company in which the fund has ownership
of at least 5% of the voting securities. Transactions during the
period with companies which are or were affiliates are as follows:
PURCHASE SALES DIVIDEND VALUE
AFFILIATE COST COST INCOME
Hat Brands, Inc. $ - $ - $ - $ -
Mothers Work 421,250 - - 2,079,788
Totals $ 421,250 $ - $ - $ 2,079,788
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $2,678,301,794 and $2,118,888,634, 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 $13,664 for the
period (see Note 4 of Notes to Financial Statements).
The composition of long-term debt holdings as a percentage of total
value of investment in securities, is as follows (ratings are
unaudited):
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 0.0% AAA, AA, A 0.0%
Baa 0.0% BBB 0.0%
Ba 5.5% BB 7.2%
B 49.9% B 51.1%
Caa 7.6% CCC 5.7%
Ca, C 0.0% CC, C 0.0%
D 0.0%
The percentage not rated by both S&P and Moody's amounted to 4.3%. FMR
has determined that unrated debt securities that are lower quality
account for 4.3% of the total value of investment in securities.
INCOME TAX INFORMATION
At December 31, 1997, the aggregate cost of investment securities for
income tax purposes was $2,207,529,405. Net unrealized appreciation
aggregated $79,324,470, of which $126,174,483 related to appreciated
investment securities and $46,850,013 related to depreciated
investment securities.
The fund hereby designates approximately $41,373,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
INVESTMENT IN SECURITIES, AT $ 2,286,853,875
VALUE (INCLUDING REPURCHASE AGREEMENTS OF $163,457,000) (COST $2,207,268,980) -
SEE ACCOMPANYING SCHEDULE
CASH 879
RECEIVABLE FOR FUND SHARES SOLD 16,340,634
DIVIDENDS 4,751,166
INTEREST RECEIVABLE 34,636,386
OTHER RECEIVABLES 636,474
TOTAL ASSETS 2,343,219,414
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 8,360,735
PAYABLE FOR FUND SHARES REDEEMED 1,051,802
ACCRUED MANAGEMENT FEE 1,118,382
OTHER PAYABLES AND ACCRUED EXPENSES 253,551
TOTAL LIABILITIES 10,784,470
NET ASSETS $ 2,332,434,944
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 1,970,299,749
UNDISTRIBUTED NET INVESTMENT INCOME 171,323,283
ACCUMULATED UNDISTRIBUTED 111,227,017
NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 79,584,895
NET ASSETS $ 2,332,434,944
</TABLE>
INITIAL CLASS: $13.58
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($2,329,516,442 (DIVIDED BY) 171,543,403
SHARES)
SERVICE CLASS: $13.57
NET ASSET VALUE, OFFERING PRICE AND
REDEMPTION PRICE PER SHARE
($2,918,502 (DIVIDED BY) 215,034
SHARES)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME $ 35,690,559
DIVIDENDS
INTEREST 150,119,840
TOTAL INCOME 185,810,399
EXPENSES
MANAGEMENT FEE $ 11,403,916
TRANSFER AGENT FEES 1,407,745
DISTRIBUTION FEES - SERVICE CLASS 147
ACCOUNTING FEES AND EXPENSES 812,930
NON-INTERESTED TRUSTEES' COMPENSATION 7,719
CUSTODIAN FEES AND EXPENSES 67,944
REGISTRATION FEES 2,989
AUDIT 47,809
LEGAL 15,404
MISCELLANEOUS 77,638
TOTAL EXPENSES BEFORE REDUCTIONS 13,844,241
EXPENSE REDUCTIONS (70,916 13,773,325
)
NET INVESTMENT INCOME 172,037,074
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES 112,724,521
FOREIGN CURRENCY TRANSACTIONS 355 112,724,876
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES 28,621,295
ASSETS AND LIABILITIES IN 16 28,621,311
FOREIGN CURRENCIES
NET GAIN (LOSS) 141,346,187
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 313,383,261
OTHER INFORMATION $ 57,264
EXPENSE REDUCTIONS
DIRECTED BROKERAGE ARRANGEMENTS
CUSTODIAN CREDITS 13,652
$ 70,916
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
OPERATIONS $ 172,037,074 $ 113,508,707
NET
INVESTMENT
INCOME
NET REALIZED 112,724,876 15,837,127
GAIN (LOSS)
CHANGE IN NET 28,621,311 35,065,622
UNREALIZED
APPRECIATION
(DEPRECIATION)
NET INCREASE 313,383,261 164,411,456
(DECREASE)
IN NET
ASSETS
RESULTING
FROM
OPERATIONS
DISTRIBUTIONS TO (116,015,279) (81,893,762)
SHAREHOLDERS
FROM NET
INVESTMENT
INCOME
FROM NET (14,338,900) (16,022,693)
REALIZED GAIN
TOTAL (130,354,179) (97,916,455)
DISTRIBUTIONS
SHARE 560,584,056 482,327,247
TRANSACTIONS
- - NET
INCREASE
(DECREASE)
TOTAL 743,613,138 548,822,248
INCREASE
(DECREASE) IN
NET ASSETS
NET ASSETS
BEGINNING OF 1,588,821,806 1,039,999,558
PERIOD
END OF PERIOD $ 2,332,434,944 $ 1,588,821,806
(INCLUDING
UNDISTRIBUTE
D NET
INVESTMENT
INCOME OF
$171,323,28
3 AND
$113,174,12
1,
RESPECTIVELY
)
OTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
SHARES DOLLARS SHARES DOLLARS
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SHARE 99,919,218 $ 1,254,908,724 89,104,560 $ 1,058,212,273
TRANSACTIONS
INITIAL CLASS
SOLD
REINVESTED 11,056,288 130,354,179 8,680,536 97,916,455
REDEEMED (66,317,508) (827,580,626) (57,202,172) (673,801,481)
NET INCREASE 44,657,998 $ 557,682,277 40,582,924 $ 482,327,247
(DECREASE)
SERVICE 215,034 $ 2,901,779 - $ -
CLASS A
SOLD
REINVESTED - - - -
REDEEMED - - - -
NET INCREASE 215,034 $ 2,901,779 - $ -
(DECREASE)
DISTRIBUTIONS
INITIAL CLASS - $ 116,015,279 $ 81,893,762
NET
INVESTMENT
INCOME
INITIAL CLASS - 14,338,900 16,022,693
NET REALIZED
GAIN
TOTAL $ 130,354,179 $ 97,916,455
SERVICE CLASS - -
- - NET
INVESTMENT
INCOME
SERVICE CLASS - -
- - NET REALIZED
GAIN
TOTAL $ - $ -
$ 130,354,179 $ 97,916,455
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1. SERVICE CLASS COMMENCED SALE OF SHARES NOVEMBER 3, 1997.
FINANCIAL HIGHLIGHTS - INITIAL CLASS
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1997 1996 1995 1994 1993
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, $ 12.520 $ 12.050 $ 10.750 $ 11.990 $ 10.820
BEGINNING OF
PERIOD
INCOME FROM 1.124 E .927 .856 .770 .728
INVESTMENT
OPERATIONS
NET
INVESTMENT
INCOME
NET REALIZED .936 .643 1.224 (.910) 1.332
AND
UNREALIZED
GAIN (LOSS)
TOTAL FROM 2.060 1.570 2.080 (.140) 2.060
INVESTMENT
OPERATIONS
LESS
DISTRIBUTIONS
FROM NET (.890) (.920) (.780) (.730) (.794)
INVESTMENT
INCOME
IN EXCESS OF - - - - (.036)
NET INVESTMENT
INCOME
FROM NET (.110) (.180) - (.370) (.060)
REALIZED GAIN
TOTAL (1.000) (1.100) (.780) (1.100) (.890)
DISTRIBUTIONS
NET ASSET VALUE, $ 13.580 $ 12.520 $ 12.050 $ 10.750 $ 11.990
END OF PERIOD
TOTAL 17.67% 14.03% 20.72% (1.64)% 20.40%
RETURN B, C
RATIOS AND
SUPPLEMENTAL
DATA
NET ASSETS, END $ 2,329,516 $ 1,588,822 $ 1,040,000 $ 569,417 $ 463,931
OF PERIOD (000
OMITTED)
RATIO OF .71% .71% .71% .71% .64% F
EXPENSES TO
AVERAGE NET
ASSETS
RATIO OF NET 8.88% 9.09% 9.32% 8.75% 8.69%
INVESTMENT
INCOME TO
AVERAGE NET
ASSETS
PORTFOLIO 118% 123% 132% 122% 155%
TURNOVER RATE
AVERAGE $ .0389 $ .0370
COMMISSION
RATE G
</TABLE>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEAR ENDED
DECEMBER 31,
SELECTED PER-SHARE DATA 1997 D
NET ASSET VALUE, $ 13.380
BEGINNING OF
PERIOD
INCOME FROM
INVESTMENT
OPERATIONS
NET .203 E
INVESTMENT
INCOME
NET REALIZED (.013)
AND
UNREALIZED
GAIN (LOSS)
TOTAL FROM .190
INVESTMENT
OPERATIONS
NET ASSET VALUE, $ 13.570
END OF PERIOD
TOTAL 1.42%
RETURN B, C
RATIOS AND
SUPPLEMENTAL
DATA
NET ASSETS, END $ 2,919
OF PERIOD (000
OMITTED)
RATIO OF .81% A
EXPENSES TO
AVERAGE NET
ASSETS
RATIO OF .80% A,
EXPENSES TO H
AVERAGE NET
ASSETS AFTER
EXPENSE
REDUCTIONS
RATIO OF NET 10.75% A
INVESTMENT
INCOME TO
AVERAGE NET
ASSETS
PORTFOLIO 118%
TURNOVER RATE
AVERAGE $ .0389
COMMISSION
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 FOR THE PERIOD NOVEMBER 3, 1997
(COMMENCEMENT OF SALE OF
SERVICE CLASS SHARES) TO
DECEMBER 31, 1997.
E NET INVESTMENT INCOME PER SHARE
HAS BEEN CALCULATED BASED ON
AVERAGE SHARES OUTSTANDING
DURING THE PERIOD.
F FMR AGREED TO REIMBURSE A
PORTION OF THE CLASS' EXPENSES
DURING THE PERIOD. WITHOUT THIS
REIMBURSEMENT, THE CLASS'
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.
H FMR OR THE FUND HAS ENTERED INTO
VARYING ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR
REDUCED A PORTION OF THE CLASS'
EXPENSES (SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES.
High Income Portfolio (the fund) is a fund of Variable Insurance
Products Fund (the trust) and is authorized to issue an unlimited
number of shares. The trust is registered under the Investment Company
Act of 1940, as amended (the 1940 Act), as an open-end management
investment company organized as a Massachusetts business trust. Shares
of the fund may only be purchased by insurance companies for the
purpose of funding variable annuity or variable life insurance
contracts. The fund offers two classes of shares; the fund's original
class of shares (Initial Class shares) and Service Class shares. The
fund commenced sale of Service Class shares on November 3, 1997. Both
classes of shares have equal rights and voting privileges, except for
matters affecting a single class. Investment income, realized and
unrealized capital gains and losses, the common expenses of the fund,
and fund-level expense reductions, if any, are allocated on a pro rata
basis to each class based on the relative net assets of each class to
the total net assets of the fund. Each class of shares differs in its
respective distribution plan.
The financial statements have been prepared in conformity with
generally accepted accounting principles which permit management to
make certain estimates and assumptions at the date of the financial
statements. The following summarizes the significant accounting
policies of the fund:
SECURITY VALUATION. 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 in an exchange) in which such
securities are normally traded. 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. Securities (including restricted
securities) for which market quotations are not readily available are
valued primarily using dealer-supplied valuations or at their fair
value as determined in good faith under consistently applied
procedures under the general supervision of the Board of Trustees.
Short-term securities with remaining maturities of sixty days or less
for which quotations are not readily available are valued at amortized
cost or original cost plus accrued interest, both of which approximate
current value.
FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S.
dollars at the prevailing rates of exchange at period end. Income
receipts and expense payments are translated into U.S. dollars at the
prevailing exchange rate on the respective dates of the transactions.
Purchases and sales of securities are translated into U.S. dollars at
the contractual currency exchange rates established at the time of
each trade.
Net realized gains and losses on foreign currency transactions
represent net gains and losses from sales and maturities of foreign
currency contracts, disposition of foreign currencies, and the
difference between the amount of net investment income accrued and the
U.S. dollar amount actually received. The effects of changes in
foreign currency exchange rates on investments in securities are
included with the net realized and unrealized gain or loss on
investment securities.
INCOME TAXES. As a qualified regulated investment company under
Subchapter M of the Internal Revenue Code, the fund is not subject to
income taxes to the extent that it distributes
substantially all of its taxable income for its fiscal year. The
schedule of investments includes information regarding income taxes
under the caption "Income Tax Information."
INVESTMENT INCOME. Dividend income is recorded on the ex-dividend
date, except certain dividends from foreign securities where the
ex-dividend date may have passed, are recorded as soon as the fund is
informed of the ex-dividend date. Non-cash dividends included in
dividend income, if any, are recorded at the fair market value of the
securities received. Interest income, which includes accretion of
original issue discount, is accrued as earned. Investment income is
recorded net of foreign taxes withheld where recovery of such taxes is
uncertain.
EXPENSES. Most expenses of the trust can be directly attributed to a
fund. Expenses which cannot be directly attributed are apportioned
among the funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are recorded on the
ex-dividend date. Income dividends and capital gain distributions are
declared separately for each class.
Income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences, which may result in
distribution reclassifications, are primarily due to differing
treatments for paydown gains/losses on certain securities, foreign
currency transactions, market discount and losses deferred due to wash
sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital.
Undistributed net investment income and accumulated undistributed net
realized gain (loss) on investments and foreign currency transactions
may include temporary book and tax basis differences which will
reverse in a subsequent period. Any taxable income or gain remaining
at fiscal year end is distributed in the following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of
trade date. Gains and losses on securities sold are determined on the
basis of identified cost.
2. OPERATING POLICIES.
FOREIGN CURRENCY CONTRACTS. The fund generally uses foreign currency
contracts to facilitate transactions in foreign-denominated
securities. Losses may arise from changes in the value of the foreign
currency or if the counterparties do not perform under the contracts'
terms. The U.S. dollar value of foreign currency contracts is
determined using contractual currency exchange rates established
2. OPERATING POLICIES - CONTINUED
FOREIGN CURRENCY CONTRACTS - CONTINUED
at the time of each trade. The cost of the foreign currency contracts
is included in the cost basis of the associated investment.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the fund, along with other
affiliated entities of Fidelity Management & Research Company (FMR),
may transfer uninvested cash balances into one or more joint trading
accounts. These balances are invested in one or more repurchase
agreements for U.S. Treasury or Federal Agency obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are
marked-to-market daily and maintained at a value at least equal to the
principal amount of the repurchase agreement (including accrued
interest). FMR, the fund's investment adviser, is responsible for
determining that the value of the underlying securities remains in
accordance with the market value requirements stated above.
RESTRICTED SECURITIES. The fund is permitted to invest in securities
that are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from
registration or to the public if the securities are registered.
Disposal of these securities may involve time-consuming negotiations
and expense, and prompt sale at an acceptable price may be difficult.
At the end of the period, restricted securities (excluding 144A
issues) amounted to $15,367,042 or 0.7% of net assets.
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities), is included under the caption "Other
Information" at the end of the fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a
monthly fee that is calculated on the basis of a group fee rate plus a
fixed individual fund fee rate applied to the average net assets of
the fund. The group fee rate is the weighted average of a series of
rates and is based on the monthly average net assets of all the mutual
funds advised by FMR. The rates ranged from .1100% to .3700% for the
period. The annual individual fund fee rate is .45%. 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. For the period, the management
fee was equivalent to an annual rate of .59% of average net assets.
DISTRIBUTION AND SERVICE PLAN. In accordance with Rule 12b-1 of the
1940 Act, the Trustees have adopted separate distribution plans with
respect to each class of shares (collectively referred to as "the
Plans"). Under the Service Class Plan, the class pays Fidelity
Distributors Corporation (FDC), an affiliate of FMR, a distribution
and service fee (12b-1 fee). This fee is based on an annual rate of
.10% of Service Class average net assets. Initial Class shares are not
subject to a 12b-1 fee.
For the period, Service Class paid FDC $147, all of which was
reallowed to insurance companies, for the distribution of shares and
providing shareholder support services.
Under the Plans, FMR or FDC may use its resources to pay
administrative and promotional expenses related to the sale of each
class of shares. Subject to the approval of the Board of Trustees, the
Plans also authorize payments to third parties that assist in the sale
of each class of shares or render shareholder support services. For
the period, FMR or FDC informed the fund that payments made to third
parties under the Plans amounted to $854,029 and $253 for the Initial
Class and Service Class, respectively.
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations
Company, Inc. (FIIOC), an affiliate of FMR, is the fund's transfer,
dividend disbursing and shareholder servicing agent. FIIOC receives
account fees and asset-based fees that vary according to account size
and type of account. FIIOC pays a portion of the expenses related to
the typesetting, printing and mailing of all shareholder reports,
except proxy statements. For the period, the transfer agent fees for
the fund were equivalent to an annual rate of .07% of average net
assets.
ACCOUNTING FEES. Fidelity Service Company, Inc., an affiliate of FMR,
maintains the fund's accounting records. The fee is based on the level
of average net assets for the month plus out-of-pocket expenses.
BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms are shown under the caption
"Other Information" at the end of the fund's schedule of investments
5. EXPENSE REDUCTIONS.
FMR has directed certain portfolio trades to brokers who paid a
portion of the fund's expenses.
In addition, the fund has entered into an arrangement with its
custodian whereby credits realized on uninvested cash balances were
used to reduce a portion of certain funds' expenses.
For the period, the reductions under these arrangements are shown
under the caption "Other Information" on the fund's Statement of
Operations.
6. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investments Life Insurance Company
(FILI) and its subsidiaries, affiliates of FMR, were the record owners
of approximately 15% of the outstanding shares of the fund. In
addition, two unaffiliated insurance companies were each record owners
of 10% or more of the total outstanding shares of the fund, totaling
58%.
7. TRANSACTIONS WITH AFFILIATED COMPANIES.
An affiliated company is a company which the fund has ownership of at
least 5% of the voting securities. Information regarding transactions
with affiliated companies is included under the caption "Legend" at
the end of the fund's schedule of investments.
8. ASSET TRANSFER INFORMATION
On March 14, 1997, the fund accepted assets from Nationwide Life
Insurance Co. with a value of $91,391,383 in exchange for 7,733,642
shares (valued at $11.82 per share).
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Variable Insurance Products Fund and the
Shareholders of High Income Portfolio:
We have audited the accompanying statement of assets and liabilities
of Variable Insurance Products Fund: High Income Portfolio, including
the schedule of portfolio investments, as of December 31, 1997, and
the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the
period then ended and the financial highlights of the Initial Class
and Service Class for each of the periods indicated therein. These
financial statements and financial highlights are the responsibility
of the fund's management. Our responsibility is to express an opinion
on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1997 by
correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of Variable Insurance Products Fund: High Income
Portfolio as of December 31, 1997, the results of its operations for
the year then ended, the changes in its net assets for each of the two
years in the period then ended, and the financial highlights of the
Initial Class and Service Class for each of the periods indicated
therein, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 5, 1998
DISTRIBUTIONS
The Board of Trustees of High Income Portfolio voted to pay to
shareholders of record at the opening of business on record date, the
following distributions derived from capital gains realized from sales
of portfolio securities, and dividends derived from net investment
income:
INITIAL CLASS
Pay Date 2/7/97 2/6/98
Record Date 2/7/97 2/6/98
Dividends $.89 $.96
Short-Term
Capital Gains $.06 $.39
Long-Term
Capital Gains $.05 $.22
Long-Term
Capital Gain Breakdown:
28% rate 100% 34.18%
20% rate - 65.82%
SERVICE CLASS
Pay Date 2/6/98
Record Date 2/6/98
Dividends $.96
Short-Term
Capital Gains $.39
Long-Term
Capital Gains $.22
Long-Term
Capital Gain Breakdown:
28% rate 34.18%
20% rate 65.82%
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
INVESTMENT SUB-ADVISERS
Fidelity Management & Research (U.K.) Inc.,
London, England
Fidelity Management & Research (Far East) Inc.,
Tokyo, Japan
OFFICERS
Edward C. Johnson 3d, PRESIDENT
Robert C. Pozen, SENIOR VICE PRESIDENT
Fred L. Henning, Jr., VICE PRESIDENT
Robert A. Lawrence, VICE PRESIDENT
Barry J. Coffman, VICE PRESIDENT
Eric D. Roiter, SECRETARY
Richard A. Silver, TREASURER
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
BOARD OF TRUSTEES
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 *
* INDEPENDENT TRUSTEES
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
(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS
FUND II: ASSET MANAGER PORTFOLIO
ANNUAL REPORT
DECEMBER 31, 1997
CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
MARKET ENVIRONMENT 3 A REVIEW OF WHAT HAPPENED IN WORLD MARKETS
DURING THE LAST YEAR.
PERFORMANCE 4 HOW THE FUND HAS DONE OVER TIME.
FUND TALK 5 THE MANAGERS' REVIEW OF FUND PERFORMANCE, STRATEGY
AND OUTLOOK.
INVESTMENTS 7 A COMPLETE LIST OF THE FUND'S INVESTMENTS WITH THEIR
MARKET VALUES.
FINANCIAL STATEMENTS 20 STATEMENTS OF ASSETS AND LIABILITIES, OPERATIONS, AND
CHANGES IN NET ASSETS, AS WELL AS FINANCIAL HIGHLIGHTS.
NOTES 23 NOTES TO THE FINANCIAL STATEMENTS.
REPORT OF INDEPENDENT ACCOUNTANTS 26 THE AUDITORS' OPINION.
DISTRIBUTIONS 27
</TABLE>
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE
SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND.
THIS REPORT IS NOT AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED
OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED
BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE
SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
MARKET ENVIRONMENT
Despite an infectious currency crisis that erupted in Southeast Asia
in October, most stock and bond markets around the globe posted
another year of positive returns. Sustained corporate earnings growth,
low interest-rate levels and an overall lack of inflationary concern
provided a favorable investing backdrop. The U.S. and European stock
markets continued to perform well, with U.S. stocks posting their
third consecutive year of strong results. The problems in Southeast
Asia, though, reverberated throughout the world, with investors
becoming increasingly concerned toward the end of the period regarding
the sustainability of corporate earnings. The U.S. bond market enjoyed
a nice run in 1997.
U.S. STOCK MARKETS
The U.S. stock market went through many phases during 1997. Entering
the year, the market was still being dominated by an extremely narrow
contingent of well-known, large-capitalization stocks. In fact, much
of the Standard & Poor's 500 Index 12-month gain of 33.36% came from
these bigger stocks. Stock prices soared to historic highs and the Dow
Jones Industrial Average hurtled past the 8000-point mark in August.
But, investors became increasingly concerned about the market's
ability to sustain its lofty performance levels. In mid-August,
several large multinationals - companies that derive a significant
portion of their revenues from overseas operations - justified these
concerns by announcing earnings disappointments. These announcements
triggered a slowdown among larger-cap stocks, while smaller- and
medium-sized stocks gained momentum. From August through December, the
S&P MidCap 400 Index - a measure of mid-sized stock performance -
returned 6.50%, while the S&P 500 returned 2.43%.
In late October, economic turmoil shook Southeast Asia. Since this
region accounts for a significant portion of world economic growth,
shock tremors rippled through developed markets such as those in the
U.S. and Europe, as well as emerging-market nations in Eastern Europe
and Latin America. In New York, the uncertainty was punctuated by a
554-point drop in the Dow one day and a 337-point recovery the next.
In terms of industry groups, moderate economic growth coupled with
nonexistent inflation translated into near nirvana for the finance
sector. Banks and brokerages demonstrated their ability to sustain
impressive earnings growth as borrowing demand remained high and cash
flows were healthy. Consolidation in the form of merger and
acquisition activity also brought positive results to the group. Due
to strong oil exploration and production demand, the energy service
sector also fared nicely. Demand for offshore drilling, in particular,
was very high and the industry enjoyed favorable pricing trends.
Technology stocks were a mixed bag in 1997, with the group
experiencing a decent rally through the first half of the year. The
second-half Asian crisis, however, proved particularly harmful to many
technology companies with Asian business ties. With Asia accounting
for a considerable amount of the world's technology production, the
region's economic troubles were far-reaching. Going into 1998, many
money managers - sensing an economic slowdown due to Asia - were
concentrating on stocks that were less cyclical, or economically
sensitive.
FOREIGN STOCK MARKETS
Stock markets around the world reacted differently in 1997. Europe -
bolstered by continued economic reform and a convergence in monetary
policy - posted strong overall returns as Finland, Italy, Spain,
Switzerland and the United Kingdom led the way. The Morgan Stanley
Capital International (MSCI) Europe Index returned 24.17% during the
period. In contrast, the MSCI EAFE Index, which measures the
performance of Europe, Australasia and the Far East, reflected the
problems brought on by the Asian crisis. The MSCI EAFE returned 2.01%
for the period. Japan and Hong Kong were two noteworthy laggards, as
economic recovery in Japan trudged along and Hong Kong felt the brunt
of Asia's woes. Emerging market equity performance was solid through
the first half of the period, but trailed off some in the second.
Uncertainty in Asia and South Korea made some investors question the
well-being of other pivotal emerging-market nations such as Russia,
which proved particularly vulnerable to the Asian dilemma.
U.S. BOND MARKETS
Bonds benefited from low interest rates - which in turn drove prices
upward - as well as a distinct lack of inflation indicators. The
Lehman Brothers Aggregate Bond Index - a measure of the U.S. taxable
bond market - returned 9.65% during the year. The Federal Reserve
Board's raising of a key short-term interest rate in March proved to
be one of the few obstacles to the bond market. Bonds rallied from
April through mid-September, buoyed in large part by encouraging
economic data and the Fed's reluctance to raise rates further.
Additionally, while the Asian crisis brought some equity markets to
their knees, many bond markets welcomed wary stock investors in search
of lower volatility. Interest rates reached attractive levels, with
the yield on the 30-year Treasury bond going below the 6% mark in
November. Corporate bonds performed reasonably well due to continued
economic growth and high demand for yield. Mortgage-backed bonds also
fared relatively well, in spite of increased refinancing activity due
to the lower rates.
FOREIGN BOND MARKETS
While low inflation and steady growth boosted the U.S. bond market,
results were varied on the international front. The Salomon Brothers
World Government Bond Index - a measure of government bond market
performance in developed nations - returned 0.23% for the 12 months
that ended December 31, 1997. In Europe, countries continued to make
progress in the drive toward meeting European Monetary Union
requirements. But a strong dollar relative to many currencies eroded
gains for U.S.-based investors. Japan - one of the more significant
components of the Salomon Brothers index - continued to struggle as
economic reform continued to develop slowly. The often-volatile world
of emerging-market debt also had mixed results, as Asian concerns
trickled into these regions. Brazil and Argentina performed well,
while Ecuador stumbled due to political uncertainty. Nevertheless, The
J.P. Morgan Emerging Markets Bond Index still managed to return 16.15%
during the period.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance.
You can look at the total percentage change in value, the average
annual percentage change or the growth of a hypothetical $10,000
investment. Total return reflects the change in the value of an
investment, assuming reinvestment of the fund's dividend income and
capital gains (the profits earned upon the sale of securities that
have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 LIFE OF
DECEMBER 31, 1997 YEAR YEARS FUND
VIP II: ASSET MANAGER - "INITIAL CLASS" 20.65% 12.98% 12.73%
S&P 500 (REGISTERED TRADEMARK) 33.36% 20.27% 16.25%
FIDELITY COMPOSITE 20.77% 12.46% 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 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.
3
You can also compare the fund's returns to the Fidelity Composite
Index, a hypothetical combination of unmanaged indices.
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 would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF
THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
IMAHDR PRASUN SHR__CHT 19971231 19980127 114143 S00000000000001
VIP II Asset Manager S&P 500
FID Composite
00156 SP001
F0001
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
1997/07/31 26467.89 34118.67
23536.95
1997/08/31 25744.40 32207.35
22807.77
1997/09/30 26573.40 33971.34
23576.97
1997/10/31 26136.29 32836.70
23330.35
1997/11/30 26739.20 34356.71
23923.06
1997/12/31 27146.17 34946.61
24235.37
IMATRL PRASUN SHR__CHT 19971231 19980127 114146 R00000000000102
Let's say hypothetically that $10,000 was invested in VIP II: Asset
Manager Portfolio on September 30, 1989, shortly after the fund
started. By December 31, 1997, the value of the investment would have
grown to $27,146 - a 171.46% increase. With reinvested dividends and
capital gains, if any, a $10,000 investment in the S&P 500, would have
grown to $34,947 over the same period - a 249.47% 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 (249.47%), Lehman Brothers
Aggregate Bond Index (101.97%), and the Salomon Brothers 3-month
T-Bill Total Rate of Return Index (51.72%) - 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 $24,235 - a 142.35% increase.
* 50% STOCKS, 40% BONDS AND 10% SHORT-TERM INSTRUMENTS EFFECTIVE
JANUARY 1, 1997; 40%, 40% AND 20%, RESPECTIVELY, BETWEEN JUNE 1, 1992
AND DECEMBER 31, 1996; 30%, 40% AND 30%, RESPECTIVELY, PRIOR TO JUNE
1, 1992.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1997
% OF FUND'S
INVESTMENTS
AT&T CORP. 1.9
FANNIE MAE 1.7
INTERNATIONAL BUSINESS MACHINES CORP. 1.5
WAL-MART STORES, INC. 1.5
AMERICAN INTERNATIONAL GROUP, INC. 1.4
TOP FIVE BOND ISSUERS AS OF DECEMBER 31, 1997
(WITH MATURITIES MORE THAN ONE YEAR) % OF FUND'S
INVESTMENTS
FANNIE MAE 4.9
U.S. TREASURY OBLIGATIONS 3.5
FORD MOTOR CREDIT CO. 0.7
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION 0.5
AT&T CAPITAL CORP. 0.4
ASSET ALLOCATION AS OF DECEMBER 31, 1997*
ROW: 1, COL: 1, VALUE: 10.3
ROW: 1, COL: 2, VALUE: 32.5
ROW: 1, COL: 3, VALUE: 57.2
STOCKS 57.2%
BONDS 32.5%
SHORT-TERM INVESTMENTS 10.3%
FOREIGN INVESTMENTS 4.7%
*
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 MANAGERS' OVERVIEW
An interview with Richard Habermann (top left), Portfolio Manager of
Asset Manager Portfolio; Steven Snider (top right), sub-manager for
stocks; Charles Morrison (bottom left), sub-manager for bonds; John
Todd (bottom right), sub-manager for short-term/money market
instruments; and Fred Hoff, who assisted with the fund's high-yield
investments. Steven Snider became sub-manager for stocks on October 1,
1997.
Q. HOW DID THE FUND PERFORM, DICK?
D.H. The fund allocates its assets among stocks, bonds and
short-term/money market instruments in an effort to provide
competitive returns with restrained volatility relative to funds or
indexes that invest only in stocks. The fund provided both during the
period, benefiting from the performance of its investments in equities
and high-yield bonds, as well as from its successful asset allocation
moves during certain times in the period. Accordingly, the fund
performed in line with the 20.77% return of the Fidelity Composite
Index, a combination of unmanaged indices, during the 12 months that
ended December 31, 1997. The composite index, as defined on the
previous page, reflects the fund's neutral asset allocation mix, which
comprises 50% stocks, 40% bonds and 10% short-term/money market
instruments. The fund underperformed the 33.36% return for the
Standard & Poor's 500 Index, which is made up exclusively of stocks,
because the fund is diversified into other asset classes that didn't
perform as well as equities.
Q. WHAT WAS THE FUND'S ASSET MIX AT THE END OF THE PERIOD?
D.H. At the end of 1997, the fund's equity position stood at about
57%, more aggressive than the neutral mix the fund instituted at the
beginning of the year. I pared back the equity portion from an even
more aggressive position toward the end of the third quarter,
increasing both the fund's bond and short-term/money market positions.
At the end of the period, the fund held about 33% in bonds and about
10% in short-term/money market instruments. It's important to note
that each of the fund's managers strive to manage risks within the
portfolio. The shifts made in the fund's asset allocations are subtle.
As a result, the volatility of the fund is significantly lower than it
is for equity-only funds and the S&P 500 index.
Q. WHY DID YOU REDUCE THE FUND'S STOCK INVESTMENTS?
D.H. I became more cautious in late summer as the economic crisis in
Asia started to unfold, influencing my decision to decrease the fund's
equity position and marginally increase bonds. The fund was fairly
aggressive during the first half of the year, investing as much as 65%
of the fund's assets in equities. In response to some concerns I had
related to the pace of earnings growth, I pared the equity weighting
back in September, thus dampening the portfolio impact of the
late-year weakness caused by financial problems in Southeast Asia. My
concern that the Asian turmoil would dampen the growth prospects of
many U.S. companies led me to maintain comparatively lower equity
weightings through the fourth quarter.
Q. WHAT HAPPENED IN THE BOND MARKET?
D.H. Overall, bonds had a good year. During the first half of the
year, the bond market struggled because of concerns that continued
economic growth might lead to inflation. The fears heightened just
before and after the Federal Reserve Board tried to head off inflation
by raising the fed funds rate - the rate banks charge each other for
overnight loans - from 5.25% to 5.50% at the end of March. Once the
market received signs that economic growth was moderating and
inflation continued to be almost non-existent, the bond market
rallied. As it turned out, inflation was benign throughout the rest of
the year. There were opportunities for the fund in the high-yield
segment of the bond market as a lot of cash flow was going into that
sector, and I'll ask Fred Hoff of Fidelity's High-Income Group - who
assisted me with the fund's high-yield investments - to elaborate.
F.H. The fund's high-yield investments - based on our strategy of
using intensive credit research to find companies with promising cash
flow growth - were, indeed, among the better-performing sectors of the
fixed-income market this year. The fund was helped specifically during
the period by its large holdings in the telecommunications and
broadcasting industries, which benefited from significant merger
activity as well as favorable new legislation that created growth
opportunities.
Q. TURNING TO YOU, STEVEN, HOW DID YOU MANAGE THE STOCK PORTION OF THE
FUND?
S.S. I began managing the fund in October, after the reduction in the
equity portion of the portfolio had already begun. Before that time,
George Vanderheiden managed the stock portion. George used a
fundamental, bottom-up approach to finding individual stocks. I manage
the fund quite differently because I use quantitative models to help
me pick stocks. This means that I also rely on computer models to sort
through large amounts of quantitative information on companies - such
as earnings, balance-sheet data, cash flows, liquidity, volatility and
external factors - trying to find misvaluations, or stocks that are
trading above or below their "fair value" in the marketplace. I
evaluate the portfolio, along with the information the computers
generate daily, and make an assessment about which stocks to hold,
which to buy and which to sell.
Q. WHAT ARE THE MAJOR DIFFERENCES BETWEEN YOUR STRATEGY AND A
FUNDAMENTAL APPROACH?
S.S. I think it's important to remember that both quantitative and
fundamental approaches have a common rationale. In both cases, the
portfolio manager analyzes data about a company to estimate a fair
value for the stock. A manager using a fundamental stock-picking
strategy - such as George Vanderheiden's - typically evaluates one
stock at a time, using experience to assess its prospects and
valuation. Our group's quantitative models instead allow me to monitor
a large number of stocks simultaneously - currently over 3,000 -
constantly calculating the value of each stock relative to the others.
Finally, risk control is also a very important part of the
quantitative discipline. Stock valuation is only the first part of the
process, since I consider the risk characteristics of the entire
portfolio when I review buy and sell candidates.
Q. CHARLIE, WHAT WAS YOUR STRATEGY FOR THE FUND'S BOND INVESTMENTS?
C.M. I focused on two broad strategies in the bond portion of the fund
during the year. First, I maintained an overweighted position -
relative to the Lehman Brothers Aggregate Bond Index - in the
corporate sector, focusing on securities with relatively short
maturities. Corporate bonds were trading at historically low yields
for much of the year. Owning short-maturity issues added yield to the
fund, yet exposed the fund to less total-return risk in the event that
corporate bonds began to underperform Treasury securities. My second
broad strategy focused on the mortgage market, where I maintained an
underweighted position in mortgage pass-through securities, and an
overweighted exposure to commercial mortgage-backed securities, bonds
backed by commercial real estate properties such as office buildings
and retail malls.
Q. WHAT WAS THE ENVIRONMENT IN THE MORTGAGE MARKET?
C.M. The mortgage market, in general, had a strong year. A combination
of lower issuance, relatively low interest-rate volatility and strong
investor demand allowed mortgage pass-through securities to perform
very well. The fund was underweighted in these securities during the
period - a position that modestly hurt the fund, particularly in the
first half of the year. However, as interest rates rallied for much of
the second half of 1997, the fund's underweighting in pass-throughs,
particularly in higher-coupon mortgages, helped performance. Market
concerns over increased prepayment risk - the risk that homeowners
refinance their current mortgages at lower rates - and a pick-up in
interest-rate volatility contributed to the weaker market at year-end.
Q. JOHN, WHAT WAS THE BACKDROP FOR THE SHORT-TERM AND MONEY MARKET
INSTRUMENTS LIKE DURING THE PERIOD?
J.T. The central theme was robust economic growth with no noticeable
threat posed by inflation. While real gross domestic product grew at a
rate approaching 4% in 1997 - a pace believed to be above the
economy's capacity to expand without generating inflation - the Fed
remained on the sidelines after its initial fed funds rate hike in
March. In addition, the financial difficulties that arose in Asia in
late summer could have a dampening effect on the U.S. economy because
U.S. companies export a fair amount to the region. As a result, market
participants expect the Fed to take a more balanced stance with
respect to short-term interest rates.
Q. WHAT SORT OF STRATEGY DID YOU PURSUE?
J.T. At the end of the first quarter, prices in the market reflected
the sentiment that the Fed would continue with a series of
interest-rate increases that appeared to begin in March. I felt the
market was jumping the gun and that the resulting yields offered by
longer-term securities were particularly attractive. As a result, I
extended my portion of the fund's average maturity to the low 70-day
range. Moving into the summer, the markets reversed course, with
prices and yields indicating that the Fed would hold off making any
moves for the foreseeable future. So, I let my portion of the fund's
maturity slip back to the low 60s. By the end of the year, some market
observers were actually calling for the Fed to lower rates because of
the risk of deflation from the intensifying competition posed by
cheaper Asian goods.
Q. TURNING BACK TO YOU, DICK, WHAT'S YOUR OUTLOOK?
D.H. I'm cautiously optimistic. Despite high valuations, I think
foreign investors will continue to come to the U.S. stock market
because they are attracted by the strength of the dollar. And while
it's difficult to predict short-term movements in the markets,
investors may discover that investing in U.S. companies can generate
competitive long-term returns compared to the rest of the world. I
also think we will continue to see a low-inflation environment, which
bodes well for the fixed-income markets. I expect earnings growth to
slow from its pace last year, when stock prices rose at a higher rate
than earnings in many cases. I think stock prices will keep pace with
earnings growth in 1998. Overall, I would say it won't be a great year
or a bad year - I think it will be an average year.
FUND FACTS
GOAL: maximum total return over the long term by
allocating assets among stocks, bonds and
short-term instruments anywhere in the world
START DATE: September 6, 1989
SIZE: as of December 31, 1997, more than
$4.3 billion
MANAGER: Richard Habermann, since 1996;
joined Fidelity in 1968
3
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
INVESTMENTS DECEMBER 31, 1997
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 55.8%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 0.9%
AEROSPACE & DEFENSE - 0.4%
United Technologies Corp. 253,700 $ 18,472,531
DEFENSE ELECTRONICS - 0.5%
Litton Industries, Inc. (a) 108,100 6,215,750
Raytheon Company:
Class A 53,878 2,656,859
Class B 247,000 12,473,500
21,346,109
SHIP BUILDING & REPAIR - 0.0%
Avondale Industries, Inc. (a) 20,500 608,594
TOTAL AEROSPACE & DEFENSE 40,427,234
BASIC INDUSTRIES - 2.4%
CHEMICALS & PLASTICS - 1.7%
Dow Chemical Co. 295,800 30,023,700
Lubrizol Corp. 133,200 4,911,750
Millennium Chemicals, Inc. 379,000 8,930,188
Raychem Corp. 458,800 19,757,075
Union Carbide Corp. 223,200 9,583,650
73,206,363
METALS & MINING - 0.1%
Aluminum Co. of America 101,400 7,136,025
PACKAGING & CONTAINERS - 0.6%
Owens-Illinois, Inc. (a) 655,300 24,860,444
TOTAL BASIC INDUSTRIES 105,202,832
CONSTRUCTION & REAL ESTATE - 0.7%
BUILDING MATERIALS - 0.0%
Vulcan Materials Co. 25,700 2,624,613
CONSTRUCTION - 0.7%
Centex Corp. 75,700 4,764,369
D.R. Horton, Inc. 189,224 3,287,767
Fleetwood Enterprises, Inc. 351,981 14,937,194
Kaufman & Broad Home Corp. 260,500 5,844,969
U.S. Home Corp. (a) 19,700 773,225
29,607,524
TOTAL CONSTRUCTION & REAL ESTATE 32,232,137
DURABLES - 2.6%
AUTOS, TIRES, & ACCESSORIES - 2.4%
Cummins Engine Co., Inc. 121,200 7,158,375
Discount Auto Parts, Inc. (a) 44,600 852,975
Eaton Corp. 187,300 16,716,525
Federal-Mogul Corp. 60,200 2,438,100
Ford Motor Co. 363,900 17,717,381
General Motors Corp. 844,890 51,221,456
Goodyear Tire & Rubber Co. 59,700 3,798,413
Superior Industries International, Inc. 211,800 5,678,888
105,582,113
TEXTILES & APPAREL - 0.2%
Arena Brands Holdings Corp.
Class B (a) 8,445 341,094
Burlington Industries, Inc. (a) 291,900 4,031,869
Liz Claiborne, Inc. 87,800 3,671,138
8,044,101
TOTAL DURABLES 113,626,214
SHARES VALUE (NOTE 1)
ENERGY - 7.7%
ENERGY SERVICES - 1.1%
BJ Services Co. (a) 211,900 $ 15,243,556
ENSCO International, Inc. 339,100 11,359,850
McDermott International, Inc. 267,000 9,778,875
Tidewater, Inc. 220,400 12,149,550
48,531,831
OIL & GAS - 6.6%
Atlantic Richfield Co. 525,700 42,121,713
British Petroleum PLC ADR 2,924 233,006
Burlington Resources, Inc. 614,530 27,538,626
Chevron Corp. 641,600 49,403,200
Enron Oil & Gas Co. 31,400 665,288
Kerr-McGee Corp. 67,700 4,286,256
Mobil Corp. 739,800 53,404,313
Occidental Petroleum Corp. 519,200 15,219,050
Royal Dutch Petroleum Co. Ord. 119,200 6,546,736
Royal Dutch Petroleum Co. 604,100 32,734,669
Texaco, Inc. 724,800 39,411,000
Tosco Corp. 545,700 20,634,281
Valero Energy Corp. 53,200 1,672,475
293,870,613
TOTAL ENERGY 342,402,444
FINANCE - 15.9%
BANKS - 3.9%
BankAmerica Corp. 711,100 51,910,300
Bankers Trust New York Corp. 149,600 16,820,650
Chase Manhattan Corp. 442,400 48,442,800
Citicorp 153,900 19,458,731
First Union Corp. 387,506 19,859,683
Republic New York Corp. 122,600 13,999,388
170,491,552
CLOSED END INVESTMENT COMPANY - 0.0%
First NIS Regional Fund (a) 114,100 1,882,650
CREDIT & OTHER FINANCE - 0.3%
First of America Bank Corp. 131,500 10,141,938
Green Tree Financial Corp. 102,800 2,692,075
12,834,013
FEDERAL SPONSORED CREDIT - 2.8%
Freddie Mac 1,123,800 47,129,363
Fannie Mae 1,318,390 75,230,629
122,359,992
INSURANCE - 8.0%
Allmerica Financial Corp. 114,900 5,737,819
Allstate Corp. 663,300 60,277,388
American International Group, Inc. 574,700 62,498,625
CIGNA Corp. 210,200 36,377,738
Conseco, Inc. 797,900 36,254,581
Financial Security Assurance
Holdings Ltd. 37,300 1,799,725
General Re Corp. 60,100 12,741,200
Hartford Financial Services Group, Inc. 118,000 11,040,375
ING Groep NV sponsored ADR 4,145 175,385
Loews Corp. 89,300 9,476,963
MGIC Investment Corp. 300,800 20,003,200
Old Republic International Corp. 122,100 4,540,594
Orion Capital Corp. 40,800 1,894,650
PMI Group, Inc. 143,900 10,405,769
Provident Companies, Inc. 16,600 641,175
Reliastar Financial Corp. 79,870 3,289,646
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
INSURANCE - CONTINUED
Torchmark Corp. 325,200 $ 13,678,725
Travelers Property Casualty Corp. Class A 61,400 2,701,600
Travelers Group, Inc. (The) 1,099,200 59,219,400
352,754,558
SAVINGS & LOANS - 0.3%
Golden West Financial Corp. 118,800 11,620,125
SECURITIES INDUSTRY - 0.6%
Lehman Brothers Holdings, Inc. 562,400 28,682,400
TOTAL FINANCE 700,625,290
HEALTH - 3.2%
DRUGS & PHARMACEUTICALS - 2.0%
Bristol-Myers Squibb Co. 80,300 7,598,388
Merck & Co., Inc. 92,700 9,849,375
Pfizer, Inc. 292,100 21,779,706
Schering-Plough Corp. 784,300 48,724,638
87,952,107
MEDICAL EQUIPMENT & SUPPLIES - 0.4%
Allegiance Corp. 13,180 467,066
Biomet, Inc. 223,500 5,727,188
Guidant Corp. 169,000 10,520,250
16,714,504
MEDICAL FACILITIES MANAGEMENT - 0.8%
Coram Healthcare Corp. (a) 6,391 21,570
FPA Medical Management, Inc. (a) 296,200 5,516,725
Lincare Holdings, Inc. (a) 100,000 5,700,000
United HealthCare Corp. 350,100 17,395,594
Wellpoint Health Networks, Inc. (a) 150,000 6,337,500
34,971,389
TOTAL HEALTH 139,638,000
HOLDING COMPANIES - 0.1%
U.S. Industries, Inc. 216,300 6,516,038
INDUSTRIAL MACHINERY & EQUIPMENT - 1.9%
ELECTRICAL EQUIPMENT - 0.5%
General Electric Co. 255,100 18,717,963
Grainger (W.W.), Inc. 21,100 2,050,656
Scientific-Atlanta, Inc. 128,600 2,154,050
22,922,669
INDUSTRIAL MACHINERY & EQUIPMENT - 1.3%
Case Corp. 258,300 15,611,006
Caterpillar, Inc. 475,000 23,067,188
Ingersoll-Rand Co. 467,100 18,917,550
57,595,744
POLLUTION CONTROL - 0.1%
Browning-Ferris Industries, Inc. 79,500 2,941,500
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 83,459,913
MEDIA & LEISURE - 0.4%
BROADCASTING - 0.1%
Orion Network Systems, Inc.
warrants 1/15/07 (a) 860 11,180
Orion Network Systems, Inc.
warrants 1/15/07 (a) 2,920 32,120
Tele-Communications, Inc.
(TCI Ventures Group), Series A 130,356 3,690,704
3,734,004
SHARES VALUE (NOTE 1)
LODGING & GAMING - 0.0%
Bally Gaming International, Inc.
warrants 7/29/98 (a) 38,400 $ 28,800
Fitzgeralds South, Inc.
warrants 3/15/99 (a)(e) 420 -
Rio Hotel & Casino, Inc. (a) 20,600 432,600
461,400
PUBLISHING - 0.1%
Cognizant Corp. 84,200 3,752,163
US WEST Media Group (a) 33,300 961,538
4,713,701
RESTAURANTS - 0.2%
Brinker International, Inc. (a) 93,800 1,500,800
Papa John's International, Inc. (a) 23,600 823,050
Wendy's International, Inc. 218,900 5,267,281
7,591,131
TOTAL MEDIA & LEISURE 16,500,236
NONDURABLES - 2.3%
BEVERAGES - 0.1%
Coors (Adolph) Co. Class B 106,800 3,551,100
PepsiCo, Inc. 32,100 1,169,644
4,720,744
FOODS - 0.2%
Dean Foods Co. 116,200 6,913,900
HOUSEHOLD PRODUCTS - 0.0%
Premark International, Inc. 34,500 1,000,500
TOBACCO - 2.0%
Philip Morris Companies, Inc. 1,310,400 59,377,500
RJR Nabisco Holdings Corp. 807,630 30,286,125
89,663,625
TOTAL NONDURABLES 102,298,769
RETAIL & WHOLESALE - 5.2%
APPAREL STORES - 0.3%
Gap, Inc. 114,900 4,071,769
TJX Companies, Inc. 260,000 8,937,500
13,009,269
GENERAL MERCHANDISE STORES - 1.8%
Federated Department Stores, Inc. (a) 311,300 13,405,356
Wal-Mart Stores, Inc. 1,634,300 64,452,706
77,858,062
GROCERY STORES - 0.3%
Safeway, Inc. (a) 204,000 12,903,000
RETAIL & WHOLESALE, MISCELLANEOUS - 2.8%
Home Depot, Inc. 1,013,100 59,646,263
Lowe's Companies, Inc. 381,000 18,168,938
Officemax, Inc. (a) 404,500 5,764,125
Office Depot, Inc. (a) 127,400 3,049,638
Staples, Inc. (a) 169,000 4,689,750
Tandy Corp. 581,500 22,424,094
Toys "R" Us, Inc. (a) 338,600 10,644,738
124,387,546
TOTAL RETAIL & WHOLESALE 228,157,877
SERVICES - 0.4%
ADVERTISING - 0.0%
Interpublic Group of Companies, Inc. 27,250 1,357,391
PRINTING - 0.0%
Donnelley (R.R.) & Sons Co. 24,800 923,800
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SERVICES - CONTINUED
SERVICES - 0.4%
Cendant Corp. (a) 513,667 $ 17,657,288
TOTAL SERVICES 19,938,479
TECHNOLOGY - 6.1%
COMMUNICATIONS EQUIPMENT - 0.6%
Globalstar Telecommunications Ltd.
warrants 2/15/04 (a) 1,410 155,100
Lucent Technologies, Inc. 320,000 25,560,000
25,715,100
COMPUTER SERVICES & SOFTWARE - 0.5%
Microsoft Corp. (a) 97,500 12,601,875
Paychex, Inc. 75,900 3,842,438
Policy Management Systems Corp. (a) 94,400 6,566,700
23,011,013
COMPUTERS & OFFICE EQUIPMENT - 3.7%
Bay Networks, Inc. (a) 84,300 2,154,919
Compaq Computer Corp. 619,000 34,934,813
Digital Equipment Corp. (a) 296,300 10,963,100
Hewlett-Packard Co. 127,300 7,956,250
Ingram Micro, Inc. Class A (a) 25,600 745,600
International Business Machines Corp. 643,000 67,233,688
Quantum Corp. (a) 30,200 605,888
SCI Systems, Inc. (a) 587,100 25,575,544
Tech Data Corp. (a) 151,500 5,889,563
Xerox Corp. 101,400 7,484,588
163,543,953
ELECTRONIC INSTRUMENTS - 0.0%
Applied Materials, Inc. (a) 39,600 1,192,950
ELECTRONICS - 1.3%
AMP, Inc. 392,400 16,480,800
Intel Corp. 180,100 12,652,025
Molex, Inc. 98,625 2,835,469
Solectron Corp. (a) 607,700 25,257,531
57,225,825
TOTAL TECHNOLOGY 270,688,841
TRANSPORTATION - 1.2%
AIR TRANSPORTATION - 1.2%
AMR Corp. (a) 352,400 45,283,400
Northwest Airlines Corp. Class A (a) 33,000 1,579,875
US Airways Group, Inc. 84,500 5,281,250
52,144,525
TRUCKING & FREIGHT - 0.0%
Roadway Express, Inc. 24,000 531,000
Yellow Corp. (a) 101,800 2,557,725
3,088,725
TOTAL TRANSPORTATION 55,233,250
UTILITIES - 4.8%
CELLULAR - 0.7%
AirTouch Communications, Inc. (a) 746,600 31,030,563
McCaw International Ltd.
warrants 4/15/07 (a)(e) 4,850 12,125
31,042,688
ELECTRIC UTILITY - 1.1%
American Electric Power Co., Inc. 72,500 3,742,813
Dominion Resources, Inc. 149,500 6,363,094
Edison International 270,500 7,354,219
SHARES VALUE (NOTE 1)
Entergy Corp. 187,600 $ 5,616,275
FPL Group, Inc. 148,100 8,765,669
GPU, Inc. 212,300 8,943,138
Long Island Lighting Co. 162,700 4,901,338
Niagara Mohawk Power Corp. (a) 79,800 837,900
46,524,446
TELEPHONE SERVICES - 3.0%
AT&T Corp. 1,358,300 83,195,875
Ameritech Corp. 227,700 18,329,850
BellSouth Corp. 280,700 15,806,919
GTE Corp. 150,000 7,837,500
U S WEST Communications Group 160,000 7,220,000
132,390,144
TOTAL UTILITIES 209,957,278
TOTAL COMMON STOCKS
(Cost $2,079,214,580) 2,466,904,832
NONCONVERTIBLE PREFERRED STOCKS - 1.4%
CONSTRUCTION & REAL ESTATE - 0.2%
REAL ESTATE INVESTMENT TRUSTS - 0.2%
California Federal Preferred
Capital Corp. 9 1/8% 167,261 4,348,786
Crown America Realty Trust, Series A, 11% 25,058 1,309,281
Walden Residential Properties, Inc.
9.20% 49,000 1,252,999
6,911,066
FINANCE - 0.0%
INSURANCE - 0.0%
American Annuity Group Capital
Trust II 8 3/4% 1,490 1,609,568
SIG Capital Trust I 9 1/2% 500 526,104
2,135,672
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
ELECTRICAL EQUIPMENT - 0.1%
Echostar Communications Corp.
12 1/8%, pay-in-kind (e) 2,509 2,584,291
MEDIA & LEISURE - 0.9%
BROADCASTING - 0.8%
Adelphia Communications Corp. $13 11,243 1,332,296
American Radio Systems Corp.
11 3/8%, pay-in-kind 27,126 3,038,112
Cablevision System Corp. 11 1/8%,
depositary shares pay-in-kind 72,968 8,427,804
Capstar Broadcasting Partners, Inc.
12%, pay-in-kind 2,910 316,099
Chancellor Media Corp.:
12%, pay-in-kind (e) 19,323 2,202,822
Series A, $12.25 (a) 11,863 1,637,094
Granite Broadcasting Corp.
12 3/4%, pay-in-kind 2,066 2,293,260
SFX Broadcasting, Inc. 12 5/8% 25,367 2,904,522
Sinclair Capital 11 5/8% 28,380 3,107,610
Time Warner, Inc., Series M,
10 1/4%, pay-in-kind 8,301 9,317,873
34,577,492
PUBLISHING - 0.1%
Primedia, Inc. Series D, $10 31,050 3,244,725
TOTAL MEDIA & LEISURE 37,822,217
NONCONVERTIBLE PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONDURABLES - 0.0%
HOUSEHOLD PRODUCTS - 0.0%
Revlon Group, Inc., Series B, 14 7/8% 5,100 $ 515,100
RETAIL & WHOLESALE - 0.0%
GROCERY STORES - 0.0%
Supermarkets General Holdings Corp.
$3.52, pay-in-kind 20,000 240,000
TECHNOLOGY - 0.0%
COMMUNICATIONS EQUIPMENT - 0.0%
Intermedia Communications, Inc.
13 1/2%, pay-in-kind 1,490 1,825,250
UTILITIES - 0.2%
TELEPHONE SERVICES - 0.2%
Hyperion Telecommunications, Inc.
12 7/8%, pay-in-kind (Reg.) 1,919 1,933,393
IXC Communications, Inc. 12 1/2%,
pay-in-kind (e) 1,473 1,723,410
NEXTLINK Communications, Inc.
14%, pay-in-kind 48,689 3,043,063
Winstar Communications, Inc.
14 1/2% (a)(e) 3,166 3,308,470
10,008,336
TOTAL NONCONVERTIBLE PREFERRED STOCKS
(Cost $57,682,976) 62,041,932
NONCONVERTIBLE BONDS - 18.9%
MOODY'S RATINGS PRINCIPAL
(UNAUDITED)(D) AMOUNT
AEROSPACE & DEFENSE - 0.2%
AEROSPACE & DEFENSE - 0.0%
Be Aerospace, Inc.
9 7/8%, 2/1/06 B2 $ 270,000 284,850
Wyman-Gordon Co.
8%, 12/15/07 Ba2 200,000 201,500
486,350
DEFENSE ELECTRONICS - 0.1%
Raytheon Co.
6.45%, 8/15/04 Baa1 5,940,000 5,969,165
Tracor, Inc.
8 1/2%, 3/1/07 B1 1,170,000 1,187,550
7,156,715
SHIP BUILDING & REPAIR - 0.1%
Newport News Shipbuilding, Inc.
9 1/4%, 12/1/06 B1 3,830,000 4,050,225
TOTAL AEROSPACE & DEFENSE 11,693,290
BASIC INDUSTRIES - 0.2%
CHEMICALS & PLASTICS - 0.1%
Acetex Corp. yankee
9 3/4%, 10/1/03 B1 750,000 772,500
General Chemical Corp.
9 1/4%, 8/15/03 B2 1,320,000 1,366,200
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
Huntsman Corp.
9 1/2%, 7/1/07 (e) B2 $ 2,100,000 $ 2,205,000
Sterling Chemicals, Inc.
11 1/4%, 4/1/07 B3 1,800,000 1,800,000
6,143,700
PACKAGING & CONTAINERS - 0.1%
BWAY Corp. 10 1/4%,
4/15/07 (e) B2 1,120,000 1,222,200
U.S. Can Corp.
10 1/8%, 10/15/06 B2 590,000 619,500
1,841,700
PAPER & FOREST PRODUCTS - 0.0%
Omega Cabinets Ltd.
10 1/2%, 6/15/07 (e) B3 1,280,000 1,328,000
TOTAL BASIC INDUSTRIES 9,313,400
CONSTRUCTION & REAL ESTATE - 0.1%
BUILDING MATERIALS - 0.1%
Nortek, Inc.:
9 1/4%, 3/15/07 B1 790,000 805,800
9 1/8%, 9/1/07 B1 1,800,000 1,822,500
2,628,300
CONSTRUCTION - 0.0%
U.S. Home Corp.
8.88%, 8/15/07 B1 1,660,000 1,693,200
TOTAL CONSTRUCTION & REAL ESTATE 4,321,500
DURABLES - 0.5%
AUTOS, TIRES, & ACCESSORIES - 0.1%
Aftermarket Technology Corp.
12%, 8/1/04 B3 1,313,000 1,457,430
Blue Bird Body Co.
10 3/4%, 11/15/06 B2 1,545,000 1,660,875
United Auto Group, Inc.
11%, 7/15/07 (e) B3 750,000 742,500
3,860,805
HOME FURNISHINGS - 0.0%
Sealy Mattress Co. 9 7/8%,
12/15/07 (e) B3 100,000 102,500
TEXTILES & APPAREL - 0.4%
Dyersburg Corp., Series B,
9 3/4%, 9/1/07 B2 1,120,000 1,173,200
GFSI, Inc. 9 5/8%, 3/1/07 B3 1,540,000 1,586,200
Levi Strauss & Co.
7%, 11/1/06 (e) Baa2 7,700,000 7,879,949
Nine West Group, Inc.
9%, 8/15/07 (e) Ba3 4,160,000 3,962,400
Pillowtex Corp. 9%,
12/15/07 (e) B2 80,000 82,000
Worldtex, Inc. 9 5/8%,
12/15/07 (e) B1 1,960,000 2,009,000
16,692,749
TOTAL DURABLES 20,656,054
NONCONVERTIBLE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
ENERGY - 0.4%
COAL - 0.1%
AEI Holding, Inc.
10%, 11/15/07 (e) B2 $ 1,680,000 $ 1,730,400
Anker Coal Group, Inc.
9 3/4%, 10/1/07 (e) B3 2,470,000 2,457,650
4,188,050
ENERGY SERVICES - 0.0%
Newpark Resources, Inc.
8 5/8%, 12/15/07 (e) B2 290,000 294,350
OIL & GAS - 0.3%
Belden & Blake Corp.
9 7/8%, 6/15/07 B3 560,000 565,600
Flores & Rucks, Inc.
9 3/4%, 10/1/06 B3 1,780,000 1,953,550
Occidental Petroleum Corp.:
10.94%, 5/17/00 Baa3 2,700,000 2,978,424
6.39%, 11/9/00 Baa3 1,000,000 1,004,450
8 1/2%, 11/9/01 Baa2 1,251,000 1,346,089
Ocean Energy, Inc.
8 7/8%, 7/15/07 B3 930,000 988,125
Pennzoil Co.
9 5/8%, 11/15/99 Baa3 2,260,000 2,386,311
Petsec Energy, Inc.
9 1/2%, 6/15/07 B3 480,000 492,600
11,715,149
TOTAL ENERGY 16,197,549
FINANCE - 7.5%
ASSET-BACKED SECURITIES - 1.8%
Airplanes Pass Through Trust
Class D 10 7/8%, 3/15/19 Ba2 5,040,000 5,632,200
Caterpillar Financial Asset
Trust 6.55%, 5/22/02 A3 880,000 885,638
CPS Auto Grantor Trust
6.55%, 12/15/02 Aaa 2,863,688 2,875,321
Capita Equipment Receivables
Trust 6.48%, 10/15/06 Baa2 2,950,000 2,922,624
Contimortgage Home Equity
Loan Trust 6.26%, 7/15/12 Aaa 4,790,000 4,792,245
Dayton Hudson Credit Card
Master Trust 6 1/4%,
8/25/05 Aaa 4,800,000 4,803,696
Ford Credit Auto Owner Trust
6.40%, 5/15/02 A1 3,120,000 3,131,856
Green Tree Financial Corp.:
6 1/2%, 6/15/27 Aaa 1,800,000 1,803,366
6.80%, 6/15/27 Aaa 1,900,000 1,916,017
6.45%, 9/15/28 Aaa 3,640,000 3,667,584
6.68%, 1/15/29 AAA 6,680,000 6,753,012
Key Plastics, Inc.
10 1/4%, 3/15/07 A2 3,730,000 3,728,834
MBNA Master Credit Card
Trust II 6.55%, 1/15/07 Aaa 9,440,000 9,616,622
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
Olympic Automobile Receivables
Trust:
6.40%, 9/15/01 Aaa $ 4,550,000 $ 4,530,688
6.70%, 3/15/02 Aaa 2,150,000 2,175,531
Premier Auto Trust:
8.05%, 4/4/00 Aaa 6,444,936 6,502,336
6%, 5/6/00 Aaa 2,320,000 2,318,538
6.34%, 1/6/03 Aaa 7,310,000 7,344,211
WFS Financial Owner Trust
6.55%, 10/20/04 Aaa 4,430,000 4,431,827
79,832,146
BANKS - 1.8%
ABN Amro Bank NV
6 5/8%, 10/31/01 Aa3 7,000,000 7,084,490
Banc One Corp.:
6.70%, 3/24/00 Aa3 4,500,000 4,549,005
6 1/4%, 9/1/00 Aa3 4,770,000 4,775,963
BanPonce Financial Corp.
7.72%, 4/13/00 A3 2,000,000 2,057,260
BanPonce Corp.
6.665%, 3/5/01 A3 4,450,000 4,484,265
Bankers Trust Co. 5.96%,
7/21/98 (g) A1 11,000,000 10,995,599
Capital One Bank:
6.74%, 5/31/99 Baa3 4,000,000 4,039,240
7.20%, 7/19/99 Baa3 8,000,000 8,111,040
6.42%, 11/12/99 Baa3 4,900,000 4,914,994
8 1/8%, 3/1/00 Baa3 1,500,000 1,554,810
Den Danske Bank AS 7.40%,
6/15/10 (e)(g) A1 4,580,000 4,745,155
Morgan Stanley Dean Witter
Discover & Co. 5.68%,
1/15/99 (g) A1 10,500,000 10,500,000
NB Capital Trust IV
8 1/4%, 4/15/27 A1 2,650,000 2,891,839
Provident Bank
6 1/8%, 12/15/00 A3 1,740,000 1,731,874
Signet Banking Corp.
9 5/8%, 6/1/99 A2 790,000 825,131
Summit Bancorp.
8 5/8%, 12/10/02 BBB 1,730,000 1,887,897
Union Planters National Bank
6.81%, 8/20/01 A3 3,500,000 3,552,500
78,701,062
CREDIT & OTHER FINANCE - 3.1%
AT&T Capital Corp.:
6.39%, 1/22/99 Baa3 1,520,000 1,526,536
6.26%, 2/18/99 Baa3 8,000,000 8,021,040
6.41%, 8/13/99 Baa3 7,500,000 7,529,250
6.16%, 12/3/99 Baa3 2,750,000 2,746,865
Advanced Accessory Systems
LLC/AAC Capital Corp.
9 3/4%, 10/1/07 (e) B3 1,110,000 1,093,350
Ahmanson Capital Trust I
8.36%, 12/1/26 (e) Baa3 4,250,000 4,624,765
NONCONVERTIBLE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
FINANCE - CONTINUED
CREDIT & OTHER FINANCE - CONTINUED
BCH Cayman Islands Ltd.
yankee 7.70%, 7/15/06 A3 $ 950,000 $ 998,745
BanPonce Trust I
8.327%, 2/1/27 (e) Baa1 6,450,000 6,895,695
CIT Group Holdings, Inc.
6 1/4%, 10/4/99 Aa3 6,500,000 6,514,300
Chrysler Financial Corp.
6 3/8%, 1/28/00 A3 7,600,000 7,636,404
Finova Capital Corp.:
6.44%, 11/6/01 Baa1 5,500,000 5,547,520
6.12%, 5/28/02 Baa1 2,000,000 1,990,860
First Security Capital I
8.41%, 12/15/26 A3 1,690,000 1,847,897
Ford Motor Credit Co.:
5.73%, 2/23/00 A1 3,250,000 3,224,228
6.65%, 5/22/00 A1 9,000,000 9,098,370
5.68%, 2/15/01 A1 5,000,000 4,926,850
6.57%, 3/19/01 A1 700,000 707,168
7%, 9/25/01 A1 12,500,000 12,810,625
General Electric Capital Corp.
6.94%, 4/13/09 (h) Aaa 7,000,000 7,072,100
General Motors Acceptance Corp.
6 3/4%, 7/10/02 A3 7,990,000 8,138,614
Greenpoint Capital Trust I
9.10%, 6/1/27 Ba1 1,200,000 1,321,500
Heller Financial, Inc.
7 7/8%, 11/1/99 A2 5,050,000 5,181,805
Household Finance Corp.
5.888%, 6/4/98 (g) - 12,500,000 12,500,000
KeyCorp Institutional Capital
Series A, 7.826%, 12/1/26 A1 3,600,000 3,734,784
Nordstrom Credit, Inc.
7 1/4%, 4/30/02 A2 3,500,000 3,645,495
Unicco Services Co./
Unicco Finance Corp.
9 7/8%, 10/15/07 (e) B3 1,580,000 1,580,000
U.S. West Capital Funding,
Inc. 6.95%, 1/15/37 Baa1 3,730,000 3,842,161
134,756,927
INSURANCE - 0.2%
Reliance Group
9 3/4%, 11/15/03 B1 3,390,000 3,567,975
SunAmerica, Inc.
6.20%, 10/31/99 Baa1 5,500,000 5,501,815
9,069,790
SAVINGS & LOANS - 0.4%
Chevy Chase Savings Bank FSB:
9 1/4%, 12/1/05 B1 850,000 875,500
9 1/4%, 12/1/08 B1 1,560,000 1,606,800
First Nationwide Parent
Holdings Ltd.
12 1/2%, 4/15/03 B3 3,530,000 4,015,375
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
Great West Financial Trust II
8.206%, 2/1/27 A3 $ 3,780,000 $ 4,009,144
Great Western Financial Corp.
8.60%, 2/1/02 A3 2,000,000 2,163,740
Home Savings of America
FSB 6 1/2%, 8/15/04 A3 2,830,000 2,842,820
Long Island Savings Bank FSB
7%, 6/13/02 Baa3 2,500,000 2,537,500
18,050,879
SECURITIES INDUSTRY - 0.2%
Merrill Lynch & Co., Inc.
5.95%, 7/28/98 (g) - 10,500,000 10,500,000
TOTAL FINANCE 330,910,804
HEALTH - 0.5%
DRUGS & PHARMACEUTICALS - 0.0%
ICN Pharmaceuticals, Inc.,
Series B, 9 1/4%, 8/15/05 B1 810,000 858,600
MEDICAL EQUIPMENT & SUPPLIES - 0.2%
Graham-Field Health Products,
Inc. 9 3/4%, 8/15/07 (e) B3 2,440,000 2,562,000
McKesson Corp.
6.60%, 3/1/00 A3 4,570,000 4,616,751
7,178,751
MEDICAL FACILITIES MANAGEMENT - 0.3%
Integrated Health Services,
Inc. (e):
9 1/2%, 9/15/07 B2 2,710,000 2,791,300
9 1/4%, 1/15/08 B2 3,850,000 3,927,000
Tenet Healthcare Corp.
8 5/8%, 1/15/07 Ba3 4,240,000 4,367,200
Vencor, Inc. 8 5/8%, 7/15/07 B1 1,880,000 1,875,300
12,960,800
TOTAL HEALTH 20,998,151
HOLDING COMPANIES - 0.1%
Norfolk Southern Corp.
7.05%, 5/1/37 Baa1 6,610,000 6,986,373
INDUSTRIAL MACHINERY & EQUIPMENT - 0.4%
ELECTRICAL EQUIPMENT - 0.0%
Echostar Communications Corp.
secured discount 0%,
6/1/04 (c) B2 1,290,000 1,180,350
Motors & Gears, Inc. 10 3/4%,
11/15/06 (e) B3 430,000 456,875
1,637,225
INDUSTRIAL MACHINERY & EQUIPMENT - 0.2%
Bucyrus International, Inc.
9 3/4%, 9/15/07 B1 2,200,000 2,216,500
Continental Global Group, Inc.
11%, 4/1/07 B2 730,000 777,450
Exide Corp. 10%, 4/15/05 B1 825,000 866,250
Goss Graphic System, Inc.
12%, 10/15/06 B2 1,890,000 2,135,700
Roller Bearing Holdings, Inc.
0%, 6/15/09 (c)(e) - 3,550,000 2,165,500
8,161,400
NONCONVERTIBLE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - CONTINUED
POLLUTION CONTROL - 0.2%
Allied Waste North America
10 1/4%, 12/1/06 B2 $ 1,990,000 $ 2,184,025
Envirosource, Inc. 9 3/8%,
6/15/03 (e) B3 870,000 879,788
WMX Technologies, Inc.
7.10%, 8/1/26 Baa1 4,610,000 4,767,478
7,831,291
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 17,629,916
MEDIA & LEISURE - 3.7%
BROADCASTING - 2.6%
ACME Television/ACME
Financial Corp. 0%,
9/30/04 (c)(e) B3 1,740,000 1,281,075
Adelphia Communications Corp.:
9 1/2%, 2/15/04 B3 6,111,175 5,994,696
9 7/8%, 3/1/07 B3 1,350,000 1,427,625
Ascent Entertainment Group, Inc.
0%, 12/15/04 (c)(e) B3 1,560,000 900,900
Cablevision System Corp.:
9 1/4%, 11/1/05 B1 1,370,000 1,452,200
9 7/8%, 5/15/06 B1 1,330,000 1,472,975
7 7/8%, 12/15/07 Ba2 1,610,000 1,636,163
9 7/8%, 2/15/13 B1 340,000 372,300
Capstar Broadcasting
Partners, Inc.:
9 1/4%, 7/1/07 B2 3,360,000 3,456,600
0%, 2/1/09 (c) B3 1,230,000 888,675
Century Communications Corp.
8 3/4%, 10/1/07 Ba3 2,840,000 2,896,800
Chancellor Radio Broadcasting
Company 8 1/8%,
12/15/07 (e) - 4,380,000 4,292,400
Citadel Broadcasting Co.
10 1/4%, 7/1/07 (e) B3 650,000 703,625
Comcast UK Cable Partners Ltd.
0%, 11/15/07 (c) B2 2,420,000 1,954,150
Continental Cablevision, Inc.:
8 5/8%, 8/15/03 Baa3 2,790,000 3,031,670
8.30%, 5/15/06 Baa3 2,605,000 2,843,123
9%, 9/1/08 Baa3 2,630,000 3,038,492
Echostar Satellite Broadcasting
Corp. 0%, 3/15/04 (c) B3 1,030,000 867,775
Fox Kids Worldwide, Inc.
0%, 11/1/07 (c)(e) B1 2,620,000 1,552,350
Fox/Liberty Networks LLC/FLN
Finance, Inc. 0%,
8/15/07 (c)(e) B1 1,710,000 1,094,400
Frontiervision Operating
Partners LP/Frontiervision
Capital Corp.:
11%, 10/15/06 B3 3,460,000 3,818,975
0%, 9/15/07 (c) Caa 3,020,000 2,166,850
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
Granite Broadcasting Corp.:
10 3/8%, 5/15/05 B3 $ 1,460,000 $ 1,529,350
9 3/8%, 12/1/05 B3 2,355,000 2,384,438
Hearst-Argyle Television, Inc.
7 1/2%, 11/15/27 Baa3 5,060,000 5,134,483
Intermedia Capital Partners IV
LP/Intermedia Partners IV
Capital Corp. 11 1/4%,
8/1/06 B2 1,362,000 1,513,523
International Cabletel, Inc.
0%, 2/1/06 (c) B3 1,480,000 1,154,400
Iridium LLC/Iridium Capital
Corp.:
11 1/4%, 7/15/05 (e) B3 1,350,000 1,329,750
14%, 7/15/05 B3 540,000 587,250
Lenfest Communications, Inc.
8 3/8%, 11/1/05 Ba3 2,030,000 2,093,438
NTL, Inc. 10%, 2/15/07 B3 2,480,000 2,610,200
Olympus Communications LP/
Olympus Capital Corp.
10 5/8%, 11/15/06 B1 1,160,000 1,284,700
Orion Network Systems, Inc.:
11 1/4%, 1/15/07 B2 860,000 971,800
0%, 1/15/07 (c) B2 2,050,000 1,522,125
Pegasus Communications Corp.
9 5/8%, 10/15/05 (e) B3 945,000 963,900
Rogers Cablesystems Ltd.
yankee 11%, 12/1/15 B2 1,800,000 2,079,000
SFX Broadcasting, Inc.
10 3/4%, 5/15/06 B3 930,000 1,023,000
Sinclair Broadcast Group, Inc.
8 3/4%, 12/15/07 B2 2,540,000 2,540,000
TCI Communications, Inc.
6.46%, 3/6/00 Ba1 6,570,000 6,550,881
TCI Communications Financing III
9.65%, 3/31/27 Ba3 5,120,000 5,907,200
Tele Communications, Inc.
9 1/4%, 4/15/02 Ba1 3,000,000 3,293,010
Telemundo Group, Inc.
7%, 2/15/06 (h) B1 4,170,000 4,378,500
Telewest PLC 0%, 10/1/07 (c) B1 4,860,000 3,766,500
Time Warner, Inc.:
7.95%, 2/1/00 Ba1 7,810,000 8,050,079
7 3/4%, 6/15/05 Ba1 2,150,000 2,267,691
8.18%, 8/15/07 Ba1 5,250,000 5,722,500
115,801,537
ENTERTAINMENT - 0.4%
AMC Entertainment, Inc.
9 1/2%, 3/15/09 B2 4,080,000 4,233,000
Ameristar Casinos, Inc.
10 1/2%, 8/1/04 B3 1,290,000 1,302,900
Bally Total Fitness Holding Corp.
9 7/8%, 10/15/07 (e) B3 2,910,000 2,953,650
Livent, Inc. 9 3/8%,
10/15/04 (e) B1 2,080,000 2,080,000
NONCONVERTIBLE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
MEDIA & LEISURE - CONTINUED
ENTERTAINMENT - CONTINUED
Viacom, Inc.:
7 3/4%, 6/1/05 Ba2 $ 3,340,000 $ 3,431,316
8%, 7/7/06 B1 4,180,000 4,195,675
18,196,541
LODGING & GAMING - 0.3%
American Skiing Co.
12%, 7/15/06 B3 2,600,000 2,879,500
Courtyard by Marriott II LP/
Courtyard II Finance Co.,
Series B, 10 3/4%, 2/1/08 B- 1,190,000 1,309,000
HMC Acquisition Properties, Inc.
9%, 12/15/07 Ba3 4,730,000 4,966,500
HMH Properties, Inc.:
9 1/2%, 5/15/05 Ba3 1,620,000 1,723,275
8 7/8%, 7/15/07 Ba3 1,820,000 1,906,450
Sun International Hotels Ltd./
Sun International North
America, Inc. yankee
9%, 3/15/07 Ba3 1,810,000 1,864,300
14,649,025
PUBLISHING - 0.2%
Big Flower Press Holdings, Inc.
8 7/8%, 7/1/07 (e) B2 1,170,000 1,175,850
Garden State Newspapers, Inc.
8 3/4%, 10/1/09 (e) B1 2,620,000 2,629,825
News America Holdings, Inc.
8 1/2%, 2/15/05 Baa3 2,080,000 2,280,949
Sun Media Corp. yankee:
9 1/2%, 2/15/07 B3 900,000 967,500
9 1/2%, 5/15/07 B3 370,000 397,750
7,451,874
RESTAURANTS - 0.2%
Foodmaker, Inc.
9 3/4%, 6/1/02 B2 2,630,000 2,708,900
Host Marriott Travel Plazas,
Inc. 9 1/2%, 5/15/05 Ba3 5,500,000 5,843,750
8,552,650
TOTAL MEDIA & LEISURE 164,651,627
NONDURABLES - 0.6%
AGRICULTURE - 0.0%
Windy Hill Pet Food, Inc.
9 3/4%, 5/15/07 B3 1,140,000 1,185,600
FOODS - 0.2%
Chiquita Brands International,
Inc. 9 5/8%, 1/15/04 B1 1,980,000 2,098,800
ConAgra, Inc.
7 1/8%, 10/1/26 Baa1 4,250,000 4,513,458
6,612,258
HOUSEHOLD PRODUCTS - 0.1%
Playtex Products, Inc.
8 7/8%, 7/15/04 B1 1,470,000 1,488,375
Revlon Consumer Products
Corp. 10 1/2%, 2/15/03 B3 4,120,000 4,336,300
5,824,675
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
TOBACCO - 0.3%
Philip Morris Companies, Inc.:
7 1/4%, 9/15/01 A2 $ 4,600,000 $ 4,712,930
7%, 7/15/05 A2 4,710,000 4,801,186
6.95%, 6/1/06 A2 4,420,000 4,577,617
14,091,733
TOTAL NONDURABLES 27,714,266
RETAIL & WHOLESALE - 1.4%
APPAREL STORES - 0.1%
AnnTaylor, Inc.
8 3/4%, 6/15/00 B3 2,630,000 2,616,850
Lamonts Apparel, Inc.
10 1/4%, 11/1/99
pay-in-kind (e)(i) - 2,816,000 105,600
Specialty Retailers, Inc.
8 1/2%, 7/15/05 Ba3 810,000 826,200
3,548,650
GENERAL MERCHANDISE STORES - 0.8%
Dayton Hudson Corp.:
6.80%, 10/1/01 Baa1 4,000,000 4,060,200
7 1/2%, 7/15/06 Baa1 3,500,000 3,715,985
Federated Department Stores,
Inc.:
10%, 2/15/01 Baa2 8,830,000 9,699,755
8 1/8%, 10/15/02 Baa2 1,510,000 1,610,944
6.79%, 7/15/27 Baa2 3,000,000 3,080,310
K mart Corp.:
12 1/2%, 3/1/05 Ba3 2,020,000 2,469,450
7 3/4%, 10/1/12 Ba3 240,000 233,400
8 1/4%, 1/1/22 Ba3 1,790,000 1,767,625
Parisian, Inc.
9 7/8%, 7/15/03 B1 2,120,000 2,268,400
Penney (J.C.) Co., Inc.
6.95%, 4/1/00 A2 4,300,000 4,369,316
33,275,385
GROCERY STORES - 0.5%
Ameriserve Food Distribution,
Inc. 8 7/8%, 10/15/06 B1 3,290,000 3,322,900
Di Giorgio Corp.
10%, 6/15/07 B3 790,000 776,175
Fleming Companies, Inc.
10 5/8%, 7/31/07 (e) B3 1,830,000 1,930,650
Kroger Co. 8.15%, 7/15/06 Baa3 2,250,000 2,483,258
Mrs. Fields Original
Cookies, Inc. 10 1/8%,
12/1/04 (e) B2 1,420,000 1,427,100
Pathmark Stores, Inc.:
12 5/8%, 6/15/02 Caa 4,080,000 3,335,400
9 5/8%, 5/1/03 Caa 5,060,000 4,661,525
Pueblo Xtra International, Inc.
9 1/2%, 8/1/03 B3 3,100,000 2,931,150
Randalls Food Markets, Inc.
9 3/8%, 7/1/07 (e) B2 2,030,000 2,090,900
22,959,058
NONCONVERTIBLE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
RETAIL & WHOLESALE, MISCELLANEOUS - 0.0%
J Crew Operating Corp.
10 3/8%, 10/15/07 (e) B3 $ 510,000 $ 443,700
J Crew Group, Inc. 0%,
10/15/08 (c)(e) Caa 630,000 274,050
717,750
TOTAL RETAIL & WHOLESALE 60,500,843
SERVICES - 0.4%
LEASING & RENTAL - 0.3%
PHH Corp. 5.99%, 6/11/98 (g) - 12,500,000 12,498,745
PRINTING - 0.0%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa 1,410,000 1,424,100
SERVICES - 0.1%
Borg-Warner Security Corp.
9 5/8%, 3/15/07 B3 960,000 1,003,200
Iron Mountain, Inc.
8 3/4%, 9/30/09 (e) B3 1,530,000 1,560,600
2,563,800
TOTAL SERVICES 16,486,645
TECHNOLOGY - 0.4%
COMPUTER SERVICES & SOFTWARE - 0.1%
Federal Data Corp.
10 1/8%, 8/1/05 (e) B3 2,690,000 2,716,900
COMPUTERS & OFFICE EQUIPMENT - 0.2%
Comdisco, Inc.
6 3/8%, 11/30/01 Baa1 8,300,000 8,300,000
ELECTRONICS - 0.1%
Advanced Micro Devices, Inc.
11%, 8/1/03 Ba1 1,750,000 1,872,500
Communications Instruments,
Inc. 10%, 9/15/04 (e) B3 230,000 234,600
Fairchild Semiconductor Corp.:
10 1/8%, 3/15/07 B2 1,340,000 1,417,050
11.74%, 3/15/08
pay-in-kind (f) - 1,866,427 1,829,304 5,353,454
TOTAL TECHNOLOGY 16,370,354
TRANSPORTATION - 0.3%
AIR TRANSPORTATION - 0.3%
Delta Air Lines, Inc.
9 7/8%, 5/15/00 Baa3 1,500,000 1,616,130
Kitty Hawk, Inc.
9.95%, 11/15/04 (e) B1 2,455,000 2,528,650
US Air, Inc.:
9 5/8%, 2/1/01 B3 1,810,000 1,882,400
10%, 7/1/03 B3 2,200,000 2,288,000
10 3/8%, 3/1/13 B1 3,340,000 3,715,750
12,030,930
RAILROADS - 0.0%
Burlington Corp. 7.29%,
6/1/36 Baa2 3,000,000 3,213,570
TOTAL TRANSPORTATION 15,244,500
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
UTILITIES - 2.2%
CELLULAR - 0.4%
Clearnet Communications, Inc.
yankee 0%, 12/15/05 (c) B3 $ 2,440,000 $ 1,927,600
Globalstar LP/Globalstar
Capital C Corp.
11 3/8%, 2/15/04 B3 550,000 555,500
McCaw International Ltd.
0%, 4/15/07 (c) CCC 4,850,000 2,813,000
Millicom International Cellular
SA 0%, 6/1/06 (c) B3 2,250,000 1,642,500
Nextel Communications,
Inc. (c)(e):
0%, 9/15/07 B3 881,000 557,233
0%, 10/31/07 B3 8,840,000 5,359,250
Paging Network, Inc.
8.875%, 2/1/06 B2 670,000 658,275
Rogers Communications, Inc.
8 7/8%, 7/15/07 B2 2,520,000 2,520,000
360 Degrees Communications
Co. 7 1/8%, 3/1/03 Ba1 2,770,000 2,828,890
18,862,248
ELECTRIC UTILITY - 0.7%
AES Corp. 8 3/8%, 8/15/07 Ba1 1,235,000 1,231,913
Avon Energy Partners Holdings
6.73%, 12/11/02 (e) Baa2 4,910,000 4,943,879
CalEnergy, Inc.
9 1/2%, 9/15/06 Ba1 900,000 970,875
Calpine Corp. 8 3/4%,
7/15/07 (e) Ba3 3,100,000 3,162,000
Hydro-Quebec yankee
7.40%, 3/28/25 A2 2,620,000 3,185,527
Israel Electric Corp. Ltd. (e):
yankee 7 7/8%, 12/15/26 A3 1,960,000 2,044,770
7 3/4%, 12/15/27 A3 5,450,000 5,488,259
Long Island Lighting Co.
8 5/8%, 4/15/04 Ba1 6,130,000 6,350,374
NIPSCO Capital Markets, Inc.
7.39%, 4/1/04 Baa1 3,500,000 3,649,013
31,026,610
TELEPHONE SERVICES - 1.1%
Brooks Fiber Properties, Inc.
0%, 11/1/06 (c) - 5,220,000 4,176,000
GCI, Inc. 9 3/4%, 8/1/07 B2 440,000 457,600
Hyperion Telecommunications,
Inc.:
Series B, 0%, 4/15/03 (c) B 2,300,000 1,667,500
12 1/4%, 9/1/04 B 2,460,000 2,699,850
ICG Holdings, Inc. (c):
0%, 9/15/05 - 1,820,000 1,478,750
0%, 5/1/06 - 940,000 707,350
McLeodUSA, Inc.
9 1/4%, 7/15/07 (e) B3 1,330,000 1,386,525
NEXTLINK Communications, Inc.
9 5/8%, 10/1/07 B3 4,440,000 4,573,200
NONCONVERTIBLE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
UTILITIES - CONTINUED
TELEPHONE SERVICES - CONTINUED
Netia Holdings BV 0%,
11/1/07 (c)(e) B3 $ 2,420,000 $ 1,379,400
Qwest Communications
International, Inc. 0%,
10/15/07 (c)(e) B2 6,560,000 4,460,800
Teleport Communications
Group, Inc. 0%, 7/1/07 (c) B1 3,050,000 2,501,000
Transtel SA 12 1/2%,
11/1/07 (e) B2 1,240,000 1,174,900
Winstar Equipment
12 1/2%, 3/15/04 B3 3,460,000 3,883,850
WorldCom, Inc.:
9 3/8%, 1/15/04 Ba1 3,708,000 3,925,919
8 7/8%, 1/15/06 Ba1 3,139,000 3,377,313
7 3/4%, 4/1/07 Ba1 7,540,000 8,097,131
45,947,088
TOTAL UTILITIES 95,835,946
TOTAL NONCONVERTIBLE BONDS
(Cost $798,223,075) 835,511,218
U.S. GOVERNMENT AND GOVERNMENT
AGENCY OBLIGATIONS - 5.4%
U.S. TREASURY OBLIGATIONS - 3.5%
6 7/8%, 3/31/00 Aaa 3,580,000 3,668,390
11 7/8%, 11/15/03 Aaa 19,540,000 25,417,241
7%, 7/15/06 Aaa 4,017,000 4,335,829
11 3/4%, 2/15/10 (callable) Aaa 26,045,000 34,839,355
12 3/4%, 11/15/10 (callable)Aaa 12,000,000 17,128,080
13 7/8%, 5/15/11 (callable) Aaa 25,650,000 39,032,118
9%, 11/15/18 Aaa 8,240,000 11,131,746
7 1/4%, 2/15/23 Aaa 7,316,000 8,351,653
7 5/8%, 2/15/25 Aaa 6,390,000 7,754,840
6 1/2%, 11/15/26 Aaa 3,055,000 3,261,213
6 3/8%, 8/15/27 Aaa 1,350,000 1,423,832
156,344,297
U.S. GOVERNMENT AGENCY OBLIGATIONS - 1.9%
Farm Credit Systems Financial
Assistance Corp. 8.80%,
6/10/05 Aaa 2,000,000 2,326,240
Federal Agricultural Mortgage
Corp. 7.63%, 1/16/01 Aaa 3,321,000 3,482,899
Federal Farm Credit Bank:
8.16%, 12/7/04 Aaa 5,000,000 5,588,300
9.55%, 5/9/05 Aaa 2,500,000 3,014,450
Federal Home Loan Bank:
7.31%, 6/16/04 Aaa 2,500,000 2,675,400
8.22%, 11/17/04 Aaa 4,000,000 4,468,480
7.59%, 3/10/05 Aaa 3,850,000 4,192,881
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
Freddie Mac 6 3/4%, 8/1/05 Aaa $ 2,500,000 $ 2,605,850
Fannie Mae 6.97%, 4/8/04 Aaa 6,010,000 6,334,901
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 7,288,986 7,568,871
State of Israel (guaranteed by U.S.
Government through Agency
for International Development):
6 5/8%, 8/15/03 Aaa 7,810,000 8,079,445
5 5/8%, 9/15/03 Aaa 8,540,000 8,434,360
6 3/4%, 8/15/04 Aaa 2,144,000 2,237,243
U.S. Trade Trust Certificates
(assets of Trust guaranteed by
U.S. government through
Export-Import Bank) 6.69%,
1/15/09 (e) Aaa 5,599,795 5,747,691
U.S. Department of Housing and
Urban Development government
guaranteed participation
certificates:
Series 1995-A,
8.24%, 8/1/04 Aaa 3,260,000 3,639,660
Series 1996-A,
6.67%, 8/1/01 Aaa 9,400,000 9,592,324
Series 1996-A, 7.63%,
8/1/14 (callable) Aaa 2,825,000 3,014,388
83,003,383
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $237,063,894) 239,347,680
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES - 5.7%
FREDDIE MAC - 0.4%
5 1/2%, 1/1/03 to 8/1/01 Aaa 3,890,579 3,786,602
7%, 4/1/01 to 8/1/01 Aaa 2,552,505 2,585,150
7 1/2%, 6/1/25 to 12/1/27 Aaa 8,613,005 8,821,155
8 1/2%, 7/1/21 to 6/1/23 Aaa 233,268 245,612
15,438,519
FANNIE MAE - 4.8%
5 1/2%, 2/1/03 to 5/1/03 Aaa 3,713,104 3,624,398
6%, 10/1/02 to 5/1/26 Aaa 62,531,858 61,261,698
6 1/2%, 12/1/25 to 7/1/26 Aaa 84,250,411 83,636,017
7%, 1/1/28 Aaa 38,080,000 38,365,600
7 1/2%, 2/1/27 to 10/1/27 Aaa 24,815,552 25,397,813
212,285,526
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 0.5%
6%, 12/15/08 to 6/15/09 Aaa $ 3,676,577 $ 3,655,489
6 1/2%, 6/15/08 to 7/15/09 Aaa 18,387,291 18,569,889
8%, 5/15/25 Aaa 200,685 208,085
8 1/2%, 12/15/16 Aaa 120,441 128,720
22,562,183
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $258,652,237) 250,286,228
COLLATERALIZED MORTGAGE OBLIGATIONS - 0.0%
PRIVATE SPONSOR - 0.0%
Credit-Based Asset Servicing
and Securitization LLC
Series 1997-2 Class 2B,
7.289%, 12/29/25 (e)(g)(i)
(Cost $797,344) Ba3 1,500,000 772,969
COMMERCIAL MORTGAGE SECURITIES - 1.7%
American Southwest Financial
Securities Series 1994-C2
Class B2, 11.425%,
12/25/01 (e)(g) - 750,000 762,422
Blackrock Capital Funding LLC
Series 1996 Class C2,
7.588%, 11/16/26 (e)(g) AAA 712,200 714,871
BKB Commercial Mortgage Trust
Series 1997-C1 Class D,
7.83%, 2/25/43 (e)(g) BBB 1,800,000 1,828,898
Berkeley Federal Bank & Trust
FSB Series 1994 Class 1B,
7.692%, 8/1/24 (e)(g) - 1,900,000 1,443,406
CS First Boston Mortgage
Securities Corp.:
Series 1995-AEWI
Class E, 9.656%,
11/25/27 (e)(g) - 550,000 556,359
Series 1997-C2 Class D
7.27%, 4/17/11 Baa2 5,300,000 5,311,594
DLJ Mortgage Acceptance
Corp. Series 1993-MF12
Class B-2, 10.10%,
9/18/03 (e) - 600,000 610,169
Equitable Life Assurance Society
of the United States (The) (e):
Series 1996-1 Class C1,
7.52%, 5/15/06 A2 2,300,000 2,442,784
Series 174, Class D1
7.77%, 5/15/06 Baa2 2,200,000 2,350,788
Series 174 Class B1, 7.33%,
5/15/06 Aa2 3,500,000 3,701,250
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
Franchise Mortgage Acceptance
Company LLC Loan Receivables
Trust (e)(g):
Series 1997-A Class E,
8.104%, 4/15/19 - $ 500,000 $ 471,094
Series 1997-B Class E,
7.89%, 9/15/19 - 500,000 434,844
First Chicago/Lennar Trust I
Series 1997-CHL1 (g):
Class D, 8.116%, 5/29/08 - 1,100,000 1,095,531
Class E, 8.116%, 2/28/11 - 1,600,000 1,365,000
First Union-Lehman Brothers
Commercial Mortgage Trust
sequential pay Series
1997-C2 Class B,
6.79%, 10/18/11 Aa2 11,350,000 11,461,727
General Motors Acceptance
Corp. Commercial Mortgage
Securities, Inc.:
Series 1996-C1 Class F,
7.86%, 11/15/06 (e) Ba3 750,000 720,240
Series 1997-C2 Class D,
7.192%, 1/15/08 Baa1 1,470,000 1,477,335
Series 1997-C2 Class E,
7.624%, 4/15/11 Baa3 3,120,000 3,103,901
GS Mortgage Securities Corp. II
Series 1997-GL Class A2-B,
6.86%, 7/13/30 Aaa 4,640,000 4,765,605
Kidder Peabody Acceptance
Corp. sequential pay,
Series 1993-M1 Class A2,
7.15%, 4/25/25 Aa2 1,765,346 1,772,517
Morgan Stanley Capital One, Inc.:
Series 1996-MBL1 Class E,
8.565%, 5/25/21 (e)(g) - 1,826,056 1,717,812
Series 1997-C1 Class A-1C,
7.63%, 2/15/20 Aaa 4,560,000 4,833,600
NB Commercial Mortgage
sequential pay, Series FSI
Class A, 7.187%,
10/20/23 (e) - 926,652 927,520
Penn Mutual Life Insurance Co.
(The) Series 1996-PML (e):
Class K, 7.90%, 11/15/26 - 1,473,000 1,085,395
Class L, 7.90%, 11/15/26 - 1,133,000 546,899
Resolution Trust Corp.
Series 1991-M2 Class A3,
7.542%, 9/25/20 (g) Ba3 454,838 391,160
Structured Asset Securities Corp.:
Series 1993-C1 Class E,
6.60%, 10/25/24 (e) B 1,250,000 500,000
Series 1995-C1 Class E,
7 3/8%, 9/25/24 (e) BB 1,200,000 1,144,875
sequential pay Series 1996
Class A-2A, 7 3/4%,
2/25/28 AAA 1,483,722 1,500,471
COMMERCIAL MORTGAGE SECURITIES - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED)(D) AMOUNT (NOTE 1)
Structured Asset Securities Corp.: - continued
Series 1996-CFL Class E,
7 3/4%, 2/25/28 BB+ $ 2,390,000 $ 2,449,003
Series 1996-CFL Class G,
7 3/4%, 2/25/28 (e) - 1,000,000 919,375
Thirteen Affiliates of General
Growth Properties, Inc. (e):
Series A2, 6.602%,
11/15/07 Aaa 3,830,000 3,839,920
Series D2, 6.992%,
11/15/12 Baa2 4,120,000 4,177,762
Series E2, 7.224%,
11/15/12 Baa3 2,450,000 2,466,538
Wells Fargo Capital Markets
Apartment Financing Trust
6.56%, 12/29/05 (e) Aaa 2,676,825 2,706,940
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $73,587,968) 75,597,605
FOREIGN GOVERNMENT OBLIGATIONS (J) - 0.4%
Export Development Corp.
yankee 8 1/8%, 8/10/99 Aa2 1,640,000 1,691,086
Israeli State euro
6 3/8%, 12/19/01 A3 3,350,000 3,333,250
Manitoba Province yankee
6 3/8%, 10/15/99 A1 7,000,000 7,038,640
Mexico Value recovery rights
6/30/03 discount A - 2,000 -
Newfoundland Province yankee
11 5/8%, 10/15/07 Baa1 2,000,000 2,742,580
Quebec Province yankee
7.22%, 7/22/36 (h) A2 2,800,000 3,091,200
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $17,429,170) 17,896,756
SUPRANATIONAL OBLIGATIONS - 0.1%
Inter American Development Bank
yankee 6.29%, 7/16/27
(Cost $4,720,123) Aaa 4,750,000 4,934,300
BANK NOTES - 0.5%
Key Bank N.A.
5.836%, 8/20/99 (g) 10,500,000 10,489,920
Morgan Guaranty Trust Co.
6.155%, 3/30/98 (g) 11,000,000 10,997,909
TOTAL BANK NOTES
(Cost $21,480,400) 21,487,829
CERTIFICATES OF DEPOSIT - 2.4%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
Australia & New Zealand Banking
Group Ltd. yankee
5.825%, 7/28/98 $ 5,000,000 $ 4,999,938
Banque Nationale de Paris
yankee 5 3/4%, 7/31/98 5,500,000 5,495,915
Barclays Bank PLC yankee
5.80%, 3/2/98 8,500,000 8,501,463
Bayerische Vereinsbank AG
yankee 5.695%, 3/17/98 10,000,000 9,999,118
Canadian Imperial Bank of
Commerce:
5.91%, 8/28/98 10,000,000 9,996,147
yankee 6.20%, 8/1/00 5,730,000 5,738,595
Chase Manhattan Bank
5 3/4%, 2/9/98 5,500,000 5,499,827
Deutsche Bank AG yankee:
6.20%, 4/10/98 6,000,000 6,003,935
5.94%, 10/26/98 10,000,000 9,998,286
Landesbank Hessen-Thuringen
yankee:
5.78%, 1/27/98 6,200,000 6,198,937
5.67%, 2/11/98 3,000,000 2,998,925
PNC Bank 5.6075%,
2/2/98 (g) 5,000,000 4,964,887
Rabobank Nederland Coop
Central yankee:
5.97%, 3/20/98 3,500,000 3,500,236
6.20%, 4/10/98 5,000,000 5,003,279
Societe Generale France
yankee 5.91%, 10/15/98 7,000,000 6,996,005
Westdeutsche Landesbank
yankee 5.83%, 8/3/98 9,000,000 8,991,482
Westpac Banking Corp.
yankee 5.885%, 8/27/98 2,000,000 1,998,761
TOTAL CERTIFICATES OF DEPOSIT
(Cost $106,898,216) 106,885,736
COMMERCIAL PAPER - 1.0%
Bear Stearns Cos., Inc.
5.56%, 1/12/98 4,600,000 4,592,167
Citibank Credit Card Master Trust I
(Dakota Certificate program)
5.80%, 2/24/98 8,300,000 8,229,127
General Motors Acceptance
Corp. 5.77%, 2/11/98 11,800,000 11,723,562
Goldman Sachs Group LP
5.83%, 1/26/98 5,000,000 4,980,233
GTE Corp. 6.02%, 2/24/98 11,800,000 11,698,546
TOTAL COMMERCIAL PAPER
(Cost $41,222,358) 41,223,635
MASTER NOTES - 0.4%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
Corestates Bank NA
5.66%, 1/30/98 (g) $ 6,000,000 $ 5,999,939
First Bank National Association
5.87%, 5/15/98 (g) 5,800,000 5,796,346
Goldman Sachs Group LP (The)
5.75%, 5/4/98 (f)(g) 6,700,000 6,699,263
TOTAL MASTER NOTES
(Cost $23,493,963) 18,495,548
CASH EQUIVALENTS - 6.3%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations), in a joint
trading account at 6.84% dated
12/31/97 due 1/2/98 $ 11,406,333 11,402,000
SHARES
Taxable Central Cash Fund (b) 265,348,211 265,348,211
TOTAL CASH EQUIVALENTS
(Cost $276,750,211) 276,750,211
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $3,997,216,515) $ 4,418,136,479
LEGEND
1. Non-income producing
2. At period end, the seven-day yield of the Taxable Central Cash Fund
was 5.69%. The yield refers to the income earned by investing in the
fund over the seven-day period, expressed as an annual percentage.
3. Debt obligation initially issued in zero coupon form which converts
to coupon form at a specified rate and date. The rate shown is the
rate at period end.
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 $172,386,807 or
3.9% 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 $ 1,541,077
9/15/97 $ 106,427
Goldman Sachs Group LP (The)
5.75%, 5/4/98 8/5/97 $ 6,700,000
7. The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
8. Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date. The rate shown is the rate at
period end.
9. Non-income producing - issuer filed for protection under the
Federal Bankruptcy Code or is in default of interest payment.
10. 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 $3,823,522,395 and $3,745,273,290, respectively, of which
U.S. government and government agency obligations aggregated
$772,490,801 and $1,280,593,277, 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 $539,413 for the
period (see Note 4 of Notes to Financial Statements).
The composition of long-term debt holdings as a percentage of total
value of investment in securities, is as follows (ratings are
unaudited):
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 17.4% AAA, AA, A 16.9%
Baa 4.4% BBB 5.3%
Ba 2.5% BB 1.6%
B 5.2% B 4.9%
Caa 0.3% CCC 0.6%
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 Moody's or S&P amounted to 1.1%. FMR has determined that
unrated debt securities that are lower quality account for 1.0% of the
total value of investment in securities.
INCOME TAX INFORMATION
At December 31, 1997, the aggregate cost of investment securities for
income tax purposes was $3,998,564,924. Net unrealized appreciation
aggregated $419,571,555, of which $491,902,520 related to appreciated
investment securities and $72,330,965 related to depreciated
investment securities.
The fund hereby designates approximately $285,641,000 as a capital
gain dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
DECEMBER 31, 1997
ASSETS
INVESTMENT IN SECURITIES, AT VALUE (INCLUDING REPURCHASE AGREEMENTS OF $11,402,000)
(COST $3,997,216,515) - $ 4,418,136,479
SEE ACCOMPANYING SCHEDULE
CASH 525,048
RECEIVABLE FOR INVESTMENTS SOLD 11,698,866
RECEIVABLE FOR FUND SHARES SOLD 7,469,532
DIVIDENDS RECEIVABLE 4,376,743
INTEREST RECEIVABLE 25,005,795
OTHER RECEIVABLES 116,994
TOTAL ASSETS 4,467,329,457
LIABILITIES
PAYABLE FOR INVESTMENTS PURCHASED $ 61,426,889
PAYABLE FOR FUND SHARES REDEEMED 3,614,252
ACCRUED MANAGEMENT FEE 1,973,892
DISTRIBUTION FEES PAYABLE 1
OTHER PAYABLES AND 366,850
ACCRUED EXPENSES
TOTAL LIABILITIES 67,381,884
NET ASSETS $ 4,399,947,573
NET ASSETS CONSIST OF:
PAID IN CAPITAL $ 3,423,257,690
UNDISTRIBUTED NET INVESTMENT INCOME 137,705,425
ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS 418,070,024
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 420,914,434
AND ASSETS AND LIABILITIES IN
FOREIGN CURRENCIES
NET ASSETS $ 4,399,947,573
</TABLE>
INITIAL CLASS: $18.01
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($4,399,937,352 (DIVIDED BY) 244,269,732
SHARES)
SERVICE CLASS: $17.99
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
($10,221 (DIVIDED BY) 568 SHARES)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1997
INVESTMENT INCOME $ 41,933,420
DIVIDENDS
INTEREST 121,750,422
TOTAL INCOME 163,683,842
EXPENSES
MANAGEMENT FEE $ 22,002,088
TRANSFER AGENT FEES 2,712,765
DISTRIBUTION FEES - SERVICE CLASS 2
ACCOUNTING FEES AND EXPENSES 809,468
NON-INTERESTED TRUSTEES' COMPENSATION 19,680
CUSTODIAN FEES AND EXPENSES 184,740
REGISTRATION FEES 8,446
AUDIT 154,951
LEGAL 24,813
MISCELLANEOUS 179,975
TOTAL EXPENSES BEFORE REDUCTIONS 26,096,928
EXPENSE REDUCTIONS (306,423 25,790,505
)
NET INVESTMENT INCOME 137,893,337
REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:
INVESTMENT SECURITIES 422,313,957
FOREIGN CURRENCY TRANSACTIONS (26,433 422,287,524
)
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:
INVESTMENT SECURITIES 189,542,068
ASSETS AND LIABILITIES IN (6,167 189,535,901
FOREIGN CURRENCIES )
NET GAIN (LOSS) 611,823,425
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 749,716,762
OTHER INFORMATION $ 291,902
EXPENSE REDUCTIONS
DIRECTED BROKERAGE ARRANGEMENTS
CUSTODIAN CREDITS 14,521
$ 306,423
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
<TABLE>
<CAPTION>
<S> <C> <C>
OPERATIONS $ 137,893,337 $ 123,680,897
NET INVESTMENT INCOME
NET REALIZED GAIN (LOSS) 422,287,524 331,183,089
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) 189,535,901 15,746,586
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 749,716,762 470,610,572
DISTRIBUTIONS TO SHAREHOLDERS (127,145,659 (119,397,539
FROM NET INVESTMENT INCOME ) )
FROM NET REALIZED GAIN (317,186,364 (98,450,602
) )
TOTAL DISTRIBUTIONS (444,332,023 (217,848,141
) )
SHARE TRANSACTIONS - NET INCREASE (DECREASE) 453,368,657 55,587,437
TOTAL INCREASE (DECREASE) IN NET ASSETS 758,753,396 308,349,868
NET ASSETS
BEGINNING OF PERIOD 3,641,194,177 3,332,844,309
END OF PERIOD (INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $137,705,425 AND
$120,488,851, RESPECTIVELY) $ 4,399,947,573 $ 3,641,194,177
</TABLE>
OTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
SHARES DOLLARS SHARES DOLLARS
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SHARE TRANSACTIONS 22,516,597 $ 378,800,337 17,138,645 $ 270,086,820
INITIAL CLASS
SOLD
REINVESTED 28,796,632 444,332,023 14,427,029 217,848,141
REDEEMED (22,110,811) (369,773,703) (27,544,207) (432,347,524)
NET INCREASE (DECREASE) 29,202,418 $ 453,358,657 4,021,467 $ 55,587,437
SERVICE CLASS A 568 $ 10,000 - $ -
SOLD
REINVESTMENT - - - -
REDEEMED - - - -
NET INCREASE (DECREASE) 568 $ 10,000 - $ -
DISTRIBUTIONS $ 127,145,659 $ 119,397,539
INITIAL CLASS - NET INVESTMENT INCOME
INITIAL CLASS - NET REALIZED GAIN 317,186,364 98,450,602
TOTAL $ 444,332,023 $ 217,848,141
SERVICE CLASS - NET INVESTMENT INCOME $ - $ -
SERVICE CLASS - NET REALIZED GAIN - -
TOTAL $ - $ -
$ 444,332,023 $ 217,848,141
A SERVICE CLASS COMMENCED SALE OF SHARES NOVEMBER 3, 1997.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1997 1996 1995 1994 1993
NET ASSET VALUE, BEGINNING OF PERIOD $ 16.93 $ 15.79 $ 13.79 $ 15.42 $ 13.32
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .57 D .63 .30 .45 .33
NET REALIZED AND UNREALIZED GAIN (LOSS) 2.58 1.55 1.99 (1.33) 2.39
TOTAL FROM INVESTMENT OPERATIONS 3.15 2.18 2.29 (.88) 2.72
LESS DISTRIBUTIONS
FROM NET INVESTMENT INCOME (.59) (.57) (.29) (.29) (.33)
IN EXCESS OF NET INVESTMENT INCOME - - - - (.04)
FROM NET REALIZED GAIN (1.48) (.47) - (.46) (.25)
TOTAL DISTRIBUTIONS (2.07) (1.04) (.29) (.75) (.62)
NET ASSET VALUE, END OF PERIOD $ 18.01 $ 16.93 $ 15.79 $ 13.79 $ 15.42
TOTAL RETURN B, C 20.65% 14.60% 16.96% (6.09)% 21.23%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 4,399,937 $ 3,641,194 $ 3,332,844 $ 3,290,527 $ 2,422,692
RATIO OF EXPENSES TO AVERAGE NET ASSETS .65% .74% .81% .81% .88%
RATIO OF EXPENSES TO AVERAGE NET ASSETS AFTER
EXPENSE REDUCTIONS .64% F .73% .79% .80% .88%
F F F
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 3.43% 3.60% 3.54% 4.07% 3.64%
PORTFOLIO TURNOVER RATE 101% 168% 256% 85% 113%
AVERAGE COMMISSION RATE G $ .0408 $ .0163
</TABLE>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEAR ENDED
DECEMBER 31,
SELECTED PER-SHARE DATA 1997 E
<TABLE>
<CAPTION>
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 17.60
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME .10 D
NET REALIZED AND UNREALIZED GAIN (LOSS) .29
TOTAL FROM INVESTMENT OPERATIONS .39
NET ASSET VALUE, END OF PERIOD $ 17.99
TOTAL RETURN B 2.22%
RATIOS AND SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD (000 OMITTED) $ 10
RATIO OF EXPENSES TO AVERAGE NET ASSETS .75%
A
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 3.52%
A
PORTFOLIO TURNOVER 101%
AVERAGE COMMISSION RATE G $ .0408
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 FOR THE PERIOD NOVEMBER 3, 1997 (COMMENCEMENT OF SALE OF
SERVICE CLASS SHARES) TO DECEMBER 31, 1997.
F FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH
THIRD PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE CLASS'
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>
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES.
Asset Manager Portfolio (the fund) is a fund of Variable Insurance
Products Fund II (the trust) and is authorized to issue an unlimited
number of shares. The trust is registered under the Investment Company
Act of 1940, as amended (the 1940 Act), as an open-end management
investment company organized as a Massachusetts business trust. Shares
of the fund may only be purchased by insurance companies for the
purpose of funding variable annuity or variable life insurance
contracts. The fund offers two classes of shares; the fund's original
class of shares (Initial Class shares) and Service Class shares. The
fund commenced sale of Service Class shares on November 3, 1997. Both
classes of shares have equal rights and voting privileges, except for
matters affecting a single class. Investment income, realized and
unrealized capital gains and losses, the common expenses of the fund,
and fund-level expense reductions, if any, are allocated on a pro rata
basis to each class based on the relative net assets of each class to
the total net assets of the fund. Each class of shares differs in its
respective distribution plan.
The financial statements have been prepared in conformity with
generally accepted accounting principles which permit management to
make certain estimates and assumptions at the date of the financial
statements. The following summarizes the significant accounting
policies of the fund:
SECURITY VALUATION. Equity securities for which quotations are readily
available are valued at the last sale price, or if no sale price, at
the closing bid price. Debt securities for which quotations are
readily available are valued by a pricing service at their market
values as determined by their most recent bid prices in the principal
market (sales prices if the principal market is an exchange) in which
such securities are normally traded. Securities (including restricted
securities) for which market quotations are not readily available are
valued at their fair value as determined in good faith under
consistently applied procedures under the general supervision of the
Board of Trustees. Short-term securities with remaining maturities of
sixty days or less for which quotations are not readily available are
valued at amortized cost or original cost plus accrued interest, both
of which approximate current value.
FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S.
dollars at the prevailing rates of exchange at period end. Income
receipts and expense payments are translated into U.S. dollars at the
prevailing exchange rate on the respective dates of the transactions.
Purchases and sales of securities are translated into U.S. dollars at
the contractual currency exchange rates established at the time of
each trade.
Net realized gains and losses on foreign currency transactions
represent net gains and losses from sales and maturities of foreign
currency contracts, disposition of foreign currencies, and the
difference between the amount of net investment income accrued and the
U.S. dollar amount actually received. The effects of changes in
foreign currency exchange rates on investments in securities are
included with the net realized and unrealized gain or loss on
investment securities.
INCOME TAXES. As a qualified regulated investment company under
Subchapter M of the Internal Revenue Code, the fund is not subject to
income taxes to the extent that it distributes substantially all of
its taxable income for its fiscal year. The schedule of investments
includes information regarding income taxes under the caption "Income
Tax Information."
INVESTMENT INCOME. Dividend income is recorded on the ex-dividend
date, except certain dividends from foreign securities where the
ex-dividend date may have passed, are recorded as soon as the fund is
informed of the ex-dividend date. Non-cash dividends included in
dividend income, if any, are recorded at the fair market value of the
securities received. Interest income, which includes accretion of
original issue discount, is accrued as earned. Investment income is
recorded net of foreign taxes withheld where recovery of such taxes is
uncertain.
EXPENSES. Most expenses of the trust can be directly attributed to a
fund. Expenses which cannot be directly attributed are apportioned
among the funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are recorded on the
ex-dividend date. Income dividends and capital gain distributions are
declared separately for each class.
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, foreign currency transactions, passive foreign investment
companies (PFIC), market discount, partnerships and losses deferred
due to wash sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital.
Undistributed net investment income and accumulated undistributed net
realized gain (loss) on investments and foreign currency transactions
may include temporary book and tax basis differences which will
reverse in a subsequent period. Any taxable income or gain remaining
at fiscal year end is distributed in the following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of
trade date. Gains and losses on securities sold are determined on the
basis of identified cost.
2. OPERATING POLICIES.
FOREIGN CURRENCY CONTRACTS. The fund generally uses foreign currency
contracts to facilitate transactions in foreign-denominated
securities. Losses may arise from changes in the value of the foreign
currency or if the counterparties do not perform under the contracts'
terms. The U.S. dollar value of foreign
2. OPERATING POLICIES - CONTINUED
FOREIGN CURRENCY CONTRACTS - CONTINUED
currency contracts is determined using contractual currency exchange
rates established at the time of each trade. The cost of the foreign
currency contracts is included in the cost basis of the associated
investment.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission (the SEC), the fund, along with
other affiliated entities of Fidelity Management & Research Company
(FMR), may transfer uninvested cash balances into one or more joint
trading accounts. These balances are invested in one or more
repurchase agreements for U.S. Treasury or Federal Agency obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are
marked-to-market daily and maintained at a value at least equal to the
principal amount of the repurchase agreement (including accrued
interest). FMR, the fund's investment adviser, is responsible for
determining that the value of the underlying securities remains in
accordance with the market value requirements stated above.
TAXABLE CENTRAL CASH FUND. Pursuant to an Exemptive Order issued by
the SEC, the fund may invest in the Taxable Central Cash Fund (the
Cash Fund) managed by Fidelity Investments Money Management, Inc.
(formerly FMR Texas, Inc.), an affiliate of FMR. The Cash Fund is an
open-end money market fund available only to investment companies and
other accounts managed by FMR and its affiliates. The Cash Fund seeks
preservation of capital, liquidity, and current income by investing in
U.S. Treasury securities and repurchase agreements for these
securities. Income distributions from the Cash Fund are declared daily
and paid monthly from net interest income. Income distributions earned
by the fund are recorded as interest income in the accompanying
financial statements.
RESTRICTED SECURITIES. The fund is permitted to invest in securities
that are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from
registration or to the public if the securities are registered.
Disposal of these securities may involve time-consuming negotiations
and expense, and prompt sale at an acceptable price may be difficult.
At the end of the period, restricted securities (excluding 144A
issues) amounted to $8,528,567 or 0.2% of net assets.
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities), is included under the caption "Other
Information" at the end of the fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a
monthly fee that is calculated on the basis of a group fee rate plus a
fixed individual fund fee rate applied to the average net assets of
the fund. The group fee rate is the weighted average of a series of
rates and is based on the monthly average net assets of all the mutual
funds advised by FMR. The rates ranged from .2500% to .5200% for the
period. The annual individual fund fee rate is .25%. 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. For the period, the management
fee was equivalent to an annual rate of .55% of average net assets.
DISTRIBUTION AND SERVICE PLAN. In accordance with Rule 12b-1 of the
1940 Act, the Trustees have adopted separate distribution plans with
respect to each class of shares (collectively referred to as "the
Plans"). Under the Service Class Plan, the class pays Fidelity
Distributors Corporation (FDC), an affiliate of FMR, a distribution
and service fee (12b-1 fee). This fee is based on an annual rate of
.10% of Service Class average net assets. Initial Class shares are not
subject to a 12b-1 fee.
For the period, Service Class paid FDC $2, all of which was reallowed
to insurance companies, for the distribution of shares and providing
shareholder support services.
Under the Plans, FMR or FDC may use its resources to pay
administrative and promotional expenses related to the sale of each
class of shares. Subject to the approval of the Board of Trustees, the
Plans also authorize payments to third parties that assist in the sale
of each class of shares or render shareholder support services. For
the period, FMR or FDC informed the fund that payments made to third
parties under the Plans amounted to $1,779,647 and $0 for the Initial
Class and Service Class, respectively.
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations
Company, Inc. (FIIOC), an affiliate of FMR, is the fund's transfer,
dividend disbursing and shareholder servicing agent. FIIOC receives
account fees and asset-based fees that vary according to account size
and type of account. FIIOC pays a portion of the expenses related to
the typesetting, printing and mailing of all shareholder reports
except proxy statements. For the period, the transfer agent fees of
the fund were equivalent to an annual rate of .07% of average net
assets.
ACCOUNTING FEES. Fidelity Service Company, Inc., an affiliate of FMR,
maintains the fund's accounting records. The fee is based on the level
of average net assets for the month plus out-of-pocket expenses.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms are shown under the caption
"Other Information" at the end of the fund's schedule of investments.
5. EXPENSE REDUCTIONS.
FMR has directed certain portfolio trades to brokers who paid a
portion of the fund's expenses.
In addition, the fund has entered into an arrangement with its
custodian whereby credits realized on uninvested cash balances were
used to reduce a portion of the funds' expenses.
For the period, the reductions under these arrangements are shown
under the caption "Other Information" on the fund's Statement of
Operations.
6. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investments Life Insurance Company
(FILI) and its subsidiaries, affiliates of FMR, were the record owners
of approximately 20% of the outstanding shares of the fund. In
addition, three unaffiliated insurance companies were each record
owners of 10% or more of the total outstanding shares of the fund,
totaling 47%.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Variable Insurance Products Fund II and the
Shareholders of Asset Manager Portfolio:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments (except for Moody's and Standard
& Poor's ratings), and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in
all material respects, the financial position of Asset Manager
Portfolio (a fund of Variable Insurance Products Fund II) at December
31, 1997, the results of its operations for the year then ended, and
the changes in its net assets and the financial highlights for the
periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the
responsibility of Asset Manager Portfolio's management; our
responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation
of securities at December 31, 1997, by correspondence with the
custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide
a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
February 10, 1998
DISTRIBUTIONS
The Board of Trustees of VIP II: Asset Manager Portfolio voted to pay
to shareholders of record at the opening of business on record date,
the following distributions derived from capital gains realized from
sales of portfolio securities, and dividends derived from net
investment income:
INITIAL CLASS
Pay Date 2/7/97 2/6/98
Record Date 2/7/97 2/6/98
Dividends $.59 $.57
Short-Term
Capital Gains $1.12 $.54
Long-Term
Capital Gains $.36 $1.17
Long-Term
Capital Gain Breakdown:
28% rate 100% 61.85%
20% rate - 38.15%
SERVICE CLASS
Pay Date 2/6/98
Record Date 2/6/98
Dividends $.57
Short-Term
Capital Gains $.54
Long-Term
Capital Gains $1.17
Long-Term
Capital Gain Breakdown:
28% rate 61.85%
20% rate 38.15%
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
INVESTMENT SUB-ADVISERS
Fidelity Management & Research (U.K.) Inc.,
London, England
Fidelity Management & Research (Far East) Inc.,
Tokyo, Japan
OFFICERS
Edward C. Johnson 3d, PRESIDENT
Robert C. Pozen, SENIOR VICE PRESIDENT
Fred L. Henning, Jr., VICE PRESIDENT
Robert A. Lawrence, VICE PRESIDENT
Richard C. Habermann, VICE PRESIDENT
Charles S. Morrison, VICE PRESIDENT
John Todd, VICE PRESIDENT
Eric D. Roiter, SECRETARY
Richard A. Silver, TREASURER
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
BOARD OF TRUSTEES
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 *
* INDEPENDENT TRUSTEES
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER SERVICING AGENT
Fidelity Investments Institutional Operations Co., Inc.
Boston, MA
CUSTODIAN
The Chase Manhattan Bank
New York, NY
