<PAGE>
The New England Financial Logo Appears Here
-------------------------------------------------------------------------
Zenith Fund
Variable Products
Annual Reports
December 31, 1998
<PAGE>
Table of Contents
<TABLE>
<S> <C>
Loomis Sayles Small Cap Series.............................................. 1
Morgan Stanley International Magnum Equity Series........................... 9
Alger Equity Growth Series.................................................. 17
Capital Growth Series....................................................... 23
Goldman Sachs Midcap Value Series........................................... 28
Davis Venture Value Series.................................................. 34
Westpeak Growth and Income Series........................................... 41
Westpeak Stock Index Series................................................. 48
Loomis Sayles Balanced Series............................................... 58
Back Bay Advisors Managed Series............................................ 67
Salomon Brothers Strategic Bond Opportunities Series........................ 75
Back Bay Advisors Bond Income Series........................................ 85
Salomon Brothers U.S. Government Series..................................... 93
Back Bay Advisors Money Market Series....................................... 99
Notes to Financial Statements............................................... 105
Footnotes to Portfolio Manager Commentary................................... 114
New England Variable Life Separate Account.................................. 117
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, 1999
To Our Policyholders/Contract Owners:
We are pleased to provide you with the 1998 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, 1998, 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.
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 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.
[RECYCLED LOGO APPEARS HERE]
<PAGE>
Loomis Sayles Small Cap Series
Portfolio Managers: Jeffrey C. Petherick and Mary C. 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 1998?
A. The Series posted a total return of (1.7)% (based on net asset value) for
the year. The Series lagged the Lipper Variable Products Small Cap Fund Aver-
age/15/ return of 1.4%. However, the Series did outpace the Russell 2000 In-
dex/23/, which returned (2.6)% over the same period.
Q. What factors had the greatest influence on performance over the year?
A. The past year was difficult for small-cap investors. Because economic trou-
bles in global markets had a negative effect on U.S. stocks, most investors
were risk averse. As a result, they favored the liquidity and perceived safety
of large-cap stocks, even though, in our opinion, small-cap stocks appeared
more attractively valued and appeared to present greater potential for earn-
ings growth and price appreciation.
Throughout the year, the portfolio held its value relative to the Russell 2000
Index. It weathered the July-August market correction well, and when the
market rebounded in the fall, the Series outperformed many of its peers.
Q. How did you manage the Series during 1998?
A. In managing the Series, we emphasized high quality securities with attrac-
tive valuations and consistent projected earnings growth. During the first six
months, we invested a significant portion of assets in real estate investment
trusts (REITs). While REITs provided relatively high dividend yields in the 6%
to 8% range, they still underperformed the Russell 2000 Index. Because of
their poor performance, we reduced the Series' allocation to REITs, and at the
end of the year, they comprised only about 5.5% of the Series assets. We be-
lieve the remaining REITs have the potential to produce solid gains and should
be attractive to investors because of their excellent yields and low prices.
During the second half of the year, we emphasized companies that had been out
of favor for a significant period. We found value in technology and health
stocks. At the end of the year, technology and health stocks accounted for
21.5% of the Series' assets. Many high quality technology companies had been
underperformers since 1996 and were selling at very low valuations. Two par-
ticularly strong performers were Alpha Industries, a semiconductor manufac-
turer and Hutchinson Technology, a company that supplies components to the
disk-drive industry. Both stocks more than doubled in price during the fourth
quarter.
At the end of the year, 9.1% of the assets were invested in health care
stocks. Athough these stocks got off to a slow start, by the end of the year
many of them generated double digit returns. These companies included Alle-
giance Corporation, Pathogensis and Respironics, all of which performed well
for the year.
Q. What is your current outlook for 1999?
A. Looking ahead, we believe the economic troubles in world markets may result
in a slower growing U.S. economy. We anticipate a challenging investment envi-
ronment, one in which industry groups rotate in and out of favor with invest-
ors. We feel strongly, however, that small-cap stocks offer relatively favora-
ble values. Some of the valuations of these companies are at twenty-year lows
relative to large cap stocks, and most small companies have limited exposure
to global markets. We believe these companies have the potential for strong
earnings growth and price appreciation in the months ahead.
1
<PAGE>
[CHART APPEARS HERE]
Date Small Cap Series Russell 2000
---- ---------------- ------------
5/1/94 $10,000 $10,000
12/31/94 $ 9,676 $10,027
12/31/95 $12,470 $12,879
12/31/96 $16,295 $15,004
12/31/97 $20,344 $18,358
12/31/98 $19,998 $17,891
Average Annual Return
Small Cap Russell Lipper Variable Small
Series 2000/23/ Company Fund Average/15/
1 year (1.7)% (2.6)% 1.4%
3 years 17.0 11.6 14.0
Since Inception 16.0 14.5 n/a
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE] Fund Facts
Goal: Long-term growth from investment in common stocks or their equivalent.
Start date: May 2, 1994
Size: $239 million as of December 31, 1998
Managers: Jeffrey Petherick and Mary Champagne. Mr. Petherick has managed the
Series since its inception in May 1994. Ms. Champagne joined the management of
the Fund in July 1995. Mr. Petherick has also managed the Loomis Sayles portion
of the New England Star Advisers Fund since July 1, 1994. Ms. Champagne has co-
managed the Loomis Sayles portion of the New England Star Advisers Fund since
July 1995. They also manage the Loomis Sayles Small Cap 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.
2
<PAGE>
New England Zenith Fund
(Loomis Sayles Small Cap Series)
Investments as of December 31, 1998
Common Stocks--93.3% of Total Net Assets
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Aerospace/Defense--2.4%
30,500 Alliant Techsystems, Inc.(c)............................. $ 2,514,344
31,900 Gencorp, Inc............................................. 795,506
44,600 Newport News Shipbuilding, Inc........................... 1,491,312
43,200 Nichols Research Corp.................................... 901,800
-----------
5,702,962
-----------
Automobile & Related--1.7%
48,400 Dura Automotive Systems, Inc. ........................... 1,651,650
86,300 Intermet Corp. .......................................... 1,127,294
51,800 Tower Automotive, Inc. .................................. 1,291,762
-----------
4,070,706
-----------
Banks--Savings & Loan--6.1%
49,400 Bank United Corp. ....................................... 1,938,950
89,500 Community First Bancshares, Inc. ........................ 1,885,094
49,900 City National Corp. ..................................... 2,077,088
30,995 CNB Bancshares........................................... 1,445,142
71,512 Commercial Federal Corp. ................................ 1,658,185
34,600 Cullen/Frost Bankers, Inc. .............................. 1,898,675
46,120 Downey Financial Corp. .................................. 1,173,178
57,200 Local Financial Corp. ................................... 514,800
3,800 Pacific Bank National Association........................ 165,775
47,700 Staten Island Bancorp.................................... 951,019
32,200 Western Bancorp.......................................... 941,850
-----------
14,649,756
-----------
Beverages--0.5%
49,500 Whitman Corp. ........................................... 1,256,063
-----------
Broadcast--T.V./Radio/Cable--0.7%
54,000 Hearst Argyle Television, Inc. .......................... 1,782,000
-----------
Building & Related--3.0%
93,900 Champion Enterprises, Inc. .............................. 2,570,513
75,700 Furniture Brands International, Inc. .................... 2,062,825
40,300 Giant Cement Holdings, Inc.(c)........................... 997,425
59,700 Shaw Industries, Inc. ................................... 1,447,725
-----------
7,078,488
-----------
Business Services--3.0%
74,900 ACNielson Corp. ......................................... 2,115,925
35,800 Cort Business Services Corp.(c).......................... 868,150
57,800 Information Resources.................................... 588,838
115,900 Viad Corp. .............................................. 3,520,463
-----------
7,093,376
-----------
Chemicals-Major--1.4%
63,900 Ferro Corp. ............................................. 1,661,400
77,800 Solutia, Inc. ........................................... 1,740,775
-----------
3,402,175
-----------
Chemicals--Specialty--1.7%
44,300 Cuno, Inc. .............................................. 719,875
47,600 Cytec Industries, Inc. .................................. 1,011,500
Great Lakes Chemical
27,300 Corp. .................................................. 1,092,000
35,000 Scotts Co. .............................................. 1,345,313
-----------
4,168,688
-----------
Communucations Equipment--1.0%
58,000 Inter-Tel, Inc. ......................................... 1,355,750
64,100 Tekelec, Inc. ........................................... 1,061,656
-----------
2,417,406
-----------
Computer Hardware--3.1%
Digi International,
71,000 Inc. ................................................... 789,875
71,900 Fore Systems, Inc. ...................................... 1,316,669
Hutchinson Technology,
21,400 Inc. ................................................... 762,375
Micron Electronics,
35,900 Inc. ................................................... 621,519
62,000 Quantum Corp. ........................................... 1,317,500
Sequent Computer
93,200 Systems, Inc. .......................................... 1,124,225
Smart Modular
47,800 Technologies, Inc. ..................................... 1,326,450
-----------
7,258,613
-----------
Computer Software & Services--4.3%
38,500 Choicepoint, Inc. ....................................... 2,483,250
62,900 DSP Group, Inc. ......................................... 1,313,037
Platinum Technology,
121,700 Inc. ................................................... 2,327,513
Sterling Software,
42,000 Inc. ................................................... 1,136,625
71,400 Symantec Corp. .......................................... 1,552,950
Wang Laboratories,
53,400 Inc. ................................................... 1,481,850
-----------
10,295,225
-----------
Consumer--Jewelry/Novelties/Gifts--1.0%
62,000 Jostens, Inc. ........................................... 1,623,625
23,300 Zale Corp.(c)............................................ 751,425
-----------
2,375,050
-----------
Electric Companies--2.4%
27,700 BEC Energy............................................... 1,140,894
Commonwealth Energy
20,800 System.................................................. 842,400
Rochester Gas &
40,800 Electric................................................ 1,275,000
68,700 WPS Resources Corp. ..................................... 2,421,675
-----------
5,679,969
-----------
Electrical Equipment--1.5%
27,800 Alpha Industries, Inc. .................................. 1,000,800
54,500 Artesyn Technology....................................... 763,000
Sensormatic Electronics
84,500 Corp. .................................................. 586,219
Vishay Intertechnology,
79,820 Inc. ................................................... 1,157,390
-----------
3,507,409
-----------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
New England Zenith Fund
(Loomis Sayles Small Cap Series)
Investments as of December 31, 1998
Common Stocks--(Continued)
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Electronics--4.0%
29,100 ATMI, Inc. .............................................. $ 734,775
52,700 AVX Corp. ............................................... 892,606
32,000 Beckman Coulter.......................................... 1,736,000
30,500 Credence Systems Corp. .................................. 564,250
107,600 Cypress Semiconductor Corp. ............................. 894,425
29,000 Litton Industries, Inc. ................................. 1,892,250
6,300 Novellus Systems, Inc. .................................. 311,850
20,100 Photronics, Inc. ........................................ 481,772
27,100 Speedfam International, Inc. ............................ 464,087
49,200 Textronicx, Inc. ........................................ 1,479,075
-----------
9,451,090
-----------
Entertainment--0.6%
52,800 CEC Entertainment, Inc. ................................. 1,465,200
-----------
Financial--Consumer/Diversified--6.0%
136,100 Amresco, Inc. ........................................... 1,190,875
122,700 Anthracite Capital, Inc. ................................ 958,594
79,200 Brandywine Realty Trust.................................. 1,415,700
129,900 Capital Automotive REIT.................................. 1,932,262
79,399 Healthcare Realty Trust.................................. 1,771,590
85,100 Imperial Credit Industries............................... 712,713
63,200 Koger Equity, Inc. ...................................... 1,086,250
83,700 Liberty Properties, Inc. ................................ 2,061,112
60,400 Sun Communities, Inc. ................................... 2,102,675
144,500 Unicapital Corp. ........................................ 1,065,687
-----------
14,297,458
-----------
Foods--3.5%
29,500 Corn Products International, Inc. ....................... 896,062
65,400 International Home Foods, Inc. .......................... 1,103,625
97,000 International Multifoods Corp. .......................... 2,503,812
103,800 Michael Foods, Inc. ..................................... 3,114,000
31,000 Vlasic Foods International............................... 738,187
-----------
8,355,686
-----------
Freight Transportation--0.7%
44,500 CNF Transportation, Inc. ................................ 1,671,531
-----------
Health Care--Drugs--1.5%
41,800 Biovail Corp. International.............................. 1,580,562
24,100 Chirex, Inc. ............................................ 515,137
38,700 Jones Pharmaceuticals, Inc. ............................. 1,412,550
-----------
3,508,249
-----------
Health Care--Medical Property/Supplies--5.8%
85,900 ADAC Labs................................................ 1,715,316
89,300 Conmed Corp. ............................................ 2,946,900
84,000 DVI, Inc. ............................................... 1,522,500
89,800 Dentsply International, Inc. ............................ 2,312,350
120,100 Endosonics Corp. ........................................ 1,193,494
39,600 PSS World Medical, Inc. ................................. 910,800
48,100 Respironics, Inc. ....................................... 963,503
42,500 Safeskin Corp. .......................................... 1,025,312
46,600 Steris Corp. ............................................ 1,325,187
-----------
13,915,362
-----------
Health Care--Services--1.8%
51,100 Alternative Living Services, Inc.(c)..................... 1,750,175
73,700 Capital Senior Living Corp. ............................. 1,027,194
47,100 Curative Health Services, Inc. .......................... 1,577,850
-----------
4,355,219
-----------
Household Products/Personal Care--0.3%
22,000 Dial Corp. New........................................... 635,250
-----------
Insurance--6.9%
39,800 AmerUs Life Holdings..................................... 890,525
48,400 Capital Re Corp. ........................................ 971,025
24,800 CMAC Investment Corp. ................................... 1,139,250
65,300 Everest Reinsurance Holdings............................. 2,542,619
65,500 Horace Mann Educators.................................... 1,866,750
29,550 Medical Assurance, Inc. ................................. 976,997
73,100 Protective Life Corp. ................................... 2,910,294
20,800 Reinsurance Group of America, Inc. ...................... 1,456,000
128,800 Reliance Group of America................................ 1,658,300
55,100 Trigon Healthcare, Inc. ................................. 2,055,919
-----------
16,467,679
-----------
Lodging/Hotels--0.5%
63,385 Meristar Hospitality Corp. .............................. 1,176,584
-----------
Machinery--0.5%
18,700 SPX Corp. ............................................... 1,252,900
-----------
Manufacturing--Diversified--3.8%
42,950 Smith A. O. Corp. ....................................... 1,054,959
29,600 Crane Co. ............................................... 893,550
69,800 Mascotech, Inc. ......................................... 1,195,325
35,800 National Service Industries, Inc. ....................... 1,360,400
43,100 Pentair, Inc ............................................ 1,715,919
83,900 Premark International, Inc. ............................. 2,905,037
-----------
9,125,190
-----------
Manufacturing--Special--2.3%
38,200 Cognex Corp. ............................................ 764,000
76,600 Federal Signal Corp. .................................... 2,096,925
82,800 Hussmann International, Inc. ............................ 1,604,250
40,400 Regal Beloit Corp. ...................................... 929,200
-----------
5,394,375
-----------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
New England Zenith Fund
(Loomis Sayles Small Cap Series)
Investments as of December 31, 1998
Common Stocks--(Continued)
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Metals & Mining--1.3%
29,800 Minerals Technologies, Inc. ............................. $ 1,219,937
7,400 Quanex Corp. ............................................ 166,962
132,300 Worthington Industries, Inc. ............................ 1,653,750
-----------
3,040,649
-----------
Natural Gas--2.5%
37,300 Eastern Enterprises...................................... 1,631,875
81,100 MCN Energy Group, Inc. .................................. 1,545,969
17,300 New Jersey Resources Corp. .............................. 683,350
47,100 Public Service Co. N.C., Inc. ........................... 1,224,600
32,800 Washington Gas Light Co. ................................ 889,700
-----------
5,975,494
-----------
Office Equipment & Supply--1.8%
47,100 Bell & Howell Co. ....................................... 1,780,969
40,500 Hon Industries........................................... 969,469
44,700 National Computer Systems, Inc. ......................... 1,653,900
-----------
4,404,338
-----------
Oil & Gas--Drilling Equipment--0.6%
72,600 B.J. Services Co. ....................................... 1,134,375
62,300 Key Energy Corp. ........................................ 292,031
-----------
1,426,406
-----------
Oil & Gas--Exploration Products--1.3%
101,800 Forcenergy, Inc. ........................................ 267,225
53,900 Newfield Exploration Co. ................................ 1,125,162
56,000 Plains Resources, Inc. .................................. 787,500
103,400 Vintage Petroleum, Inc.(c)............................... 891,825
-----------
3,071,712
-----------
Paper & Forest Products--0.6%
36,000 Chesapeake Corp. ........................................ 1,327,500
-----------
Restaurants--2.0%
42,900 Brinker International.................................... 1,238,737
75,800 Foodmaker, Inc. ......................................... 1,672,337
13,100 Outback Steakhouse, Inc. ................................ 522,362
67,200 Wendy's International, Inc. ............................. 1,465,800
-----------
4,899,236
-----------
Retail--Food Chains--1.1%
15,400 Great Atlantic & Pacific Tea, Inc. ...................... 456,225
40,800 Hannaford Bros. Co. ..................................... 2,162,400
-----------
2,618,625
-----------
Retail--General Merchandise--0.6%
29,600 BJ's Wholesale Club Inc. ................................ $ 1,370,850
-----------
Retail--Specialty--3.1%
114,200 Burlington Coat Factory Warehouse........................ 1,862,887
41,800 Claire's Stores, Inc. ................................... 856,900
26,000 Payless Shoesource, Inc. ................................ 1,231,750
34,700 Ross Stores, Inc. ....................................... 1,366,312
41,500 Talbots, Inc. ........................................... 1,302,068
112,800 Venator Group, Inc. ..................................... 726,150
-----------
7,346,067
-----------
Services--2.9%
75,300 Borg Warner Security..................................... 1,411,875
94,900 Daisytek International, Corp. ........................... 1,803,100
77,500 Neilson Media Research, Inc. ............................ 1,395,000
104,800 R.H. Donnelley Corp. .................................... 1,526,150
900 Staffmark, Inc. ......................................... 20,137
26,400 Stykes Enterprises, Inc. ................................ 805,200
-----------
6,961,462
-----------
Services/Facility Environment--0.4%
33,000 American States Water Co. ............................... 899,250
-----------
Specialty Printing--1.8%
32,300 Banta Corp. ............................................. 884,212
40,100 Cadmus Communications Corp. ............................. 756,887
34,400 De Luxe Corp. ........................................... 1,257,750
51,700 Harte Hanks, Inc. ....................................... 1,473,450
-----------
4,372,299
-----------
Steel--0.6%
39,000 AK Steel Holdings Co. ................................... 916,500
75,500 Bethlehem Steel Corp. ................................... 632,312
-----------
1,548,812
-----------
Telecommunication--Long Distance--0.2%
19,500 Transaction Network Services, Inc. ...................... 391,219
-----------
Textiles/Apparel--0.5%
36,800 Liz Claiborne, Inc. ..................................... 1,161,500
-----------
Waste Management--0.0%
4,950 World Fuel Services Corp. ............................... 53,212
-----------
Total Common Stocks
(Identified Cost $205,590,663).......................... 222,678,290
-----------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
New England Zenith Fund
(Loomis Sayles Small Cap Series)
Investments as of December 31, 1998
Short-Term Investments--7.4%
<TABLE>
<CAPTION>
Face
Amount Value (a)
<C> <S> <C>
$11,336,755 Associates First Capital Corp.,
5.000%, 1/04/99................................... $ 11,336,755
6,300,000 Chevron Oil Finance Co.
4.800%, 1/04/99................................... 6,300,000
------------
Short-Term Investments
(Identified Cost $17,636,755)..................... 17,636,755
------------
Total Investments--100.7%
(Identified Cost $223,227,418)(b) 240,315,045
Other assets less liabilities...................... (1,725,590)
------------
Total Net Assets--100.0%........................... $238,589,455
============
</TABLE>
(a) See Note 1A of Notes to Financial Statements.
(b) Federal Tax Information:
At December 31,1998 the net unrealized appreciation on investments based on
cost of $223,357,729 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.......................................................... $ 31,868,397
Aggregate gross unrealized
depreciation for all
investments in which there is
an excess of tax cost over
value......................................................... (14,911,081)
------------
Net unrealized appreciation.................................... $ 16,957,316
============
</TABLE>
For federal income tax purposes, the Series has a capital loss carryforward
at December 31, 1998 of approximately $6,763,123 which will expire in 2006.
Accordingly, no capital gain distributions are expected to be paid to
shareholders until net gains have been realized in excess of such amount.
(c) Non-income producing security.
See accompanying notes to financial statements.
6
<PAGE>
New England Zenith Fund
(Loomis Sayles Small Cap Series)
Statement of Assets & Liabilities
December 31, 1998
<TABLE>
<S> <C> <C>
Assets
Investments at value................................ $240,315,045
Receivable for:
Fund shares sold.................................... 904,953
Securities sold..................................... 901,190
Dividends and interest.............................. 346,572
------------
242,467,760
Liabilities
Payable for:
Securities purchased................................ $3,078,332
Fund shares redeemed................................ 544,207
Accrued expenses:
Management fees..................................... 126,624
Deferred trustees' fees............................. 4,566
Other expenses...................................... 124,576
----------
3,878,305
------------
Net Assets........................................... $238,589,455
============
Net Assets consist of:
Capital paid in..................................... $228,364,119
Undistributed net investment income................. 31,144
Accumulated net realized gains (losses)............. (6,893,435)
Unrealized appreciation (depreciation) on
investments........................................ 17,087,627
------------
Net Assets........................................... $238,589,455
============
Computation of offering price:
Net asset value and redemption price per share
($238,589,455 divided by 1,554,081 shares of
beneficial interest)................................ $ 153.52
============
Identified cost of investments....................... $223,227,418
============
</TABLE>
Statement of Operations
Year Ended December 31, 1998
<TABLE>
<S> <C> <C>
Investment Income
Dividends........................................ $ 2,821,460 (a)
Interest......................................... 1,266,966
-----------
4,088,426
Expenses
Management fees.................................. $2,178,725
Trustees' fees and expenses...................... 16,864
Custodian........................................ 100,581
Audit and tax services........................... 11,923
Legal............................................ 15,853
Printing......................................... 69,934
Insurance........................................ 6,110
Miscellaneous.................................... 4,291
----------
Total expenses................................... 2,404,281
Less expenses assumed by the investment adviser.. (225,557) 2,178,724
---------- -----------
Net investment income............................. 1,909,702
Realized and Unrealized Gain (Loss) on Investments
Realized gain (loss) on:
Investments--net................................. (6,792,530)
Unrealized appreciation
(depreciation) on:
Investments--net................................. 899,887
-----------
Net gain (loss) on investment
transactions..................................... (5,892,643)
-----------
Net Increase (Decrease) in Net Assets from
Operations....................................... $(3,982,941)
===========
</TABLE>
(a) Net of foreign taxes of: $195.
See accompanying notes to financial statements.
7
<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,
1997 1998
------------ ------------
<S> <C> <C>
From Operations
Net investment income............................. $ 1,362,282 $ 1,909,702
Net realized gain (loss) on investments........... 22,598,381 (6,792,530)
Unrealized appreciation (depreciation) on
investments...................................... 5,981,132 899,887
------------ ------------
Increase (decrease) in net assets from operations. 29,941,795 (3,982,941)
------------ ------------
From Distributions to Shareholders
Net investment income............................. (1,336,197) (1,908,277)
Net realized gain on investments.................. (21,404,296) (1,896,046)
In excess of net realized gain on investment...... -- (106,613)
------------ ------------
(22,740,493) (3,910,936)
------------ ------------
From Capital Shares Transactions
Proceeds from sale of shares...................... 117,472,557 108,988,919
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income.......... 1,336,197 1,908,277
Distributions from net realized gain.............. 21,404,296 2,002,659
------------ ------------
140,213,050 112,899,855
Cost of shares redeemed........................... (36,502,923) (66,521,977)
------------ ------------
Increase (decrease) in net assets derived from
capital share transactions....................... 103,710,127 46,377,878
------------ ------------
Total increase (decrease) in net assets........... 110,911,429 38,484,001
Net Assets
Beginning of the year............................. 89,194,025 200,105,454
------------ ------------
End of the year................................... $200,105,454 $238,589,455
============ ============
Undistributed Net Investment Income
Beginning of the year............................. $ 9,342 $ 35,427
============ ============
End of the year................................... $ 35,427 $ 31,144
============ ============
Number of Shares of the Fund:
Issued from the sale of shares.................... 721,830 707,174
Issued in connection with the reinvestment of:
Distributions from net investment income.......... 8,598 12,870
Distributions from net realized gain.............. 137,451 13,107
------------ ------------
867,879 733,151
Redeemed.......................................... (226,920) (438,200)
------------ ------------
Net change........................................ 640,959 294,951
============ ============
</TABLE>
Financial Highlights
<TABLE>
<CAPTION>
May 2, 1994(a)
through Year Year Year Year
December 31, Ended Ended Ended Ended
1994 1995 1996 1997 1998
-------------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year...... $100.00 $ 96.61 $118.80 $ 144.29 $ 158.92
------- ------- ------- -------- --------
Income From Investment
Operations
Net Investment Income.. 0.14 0.85 1.05 1.22 1.24
Net Realized and
Unrealized Gain (Loss)
on Investments........ (3.38) 26.93 35.03 34.11 (4.01)
------- ------- ------- -------- --------
Total From Investment
Operations............ (3.24) 27.78 36.08 35.33 (2.77)
------- ------- ------- -------- --------
Less Distributions
Distributions From Net
Investment Income..... (0.15) (0.78) (1.03) (1.21) (1.24)
Distributions From Net
Realized Capital
Gains................. 0.00 (4.81) (9.56) (19.49) (1.32)
Distribution in excess
of Net Realized
Capital Gains......... -- -- -- -- (0.07)
------- ------- ------- -------- --------
Total Distributions.... (0.15) (5.59) (10.59) (20.70) (2.63)
------- ------- ------- -------- --------
Net Asset Value, End of
Year................... $ 96.61 $118.80 $144.29 $ 158.92 $ 153.52
======= ======= ======= ======== ========
Total Return (%)........ (3.2)(b) 28.9 30.7 24.9 (1.7)
Ratio of Operating
Expenses to Average Net
Assets (%)............. 1.00 (c) 1.00 1.00 1.00 1.00
Ratio of Net Investment
Income to Average Net
Assets (%)............. 0.32 (c) 1.26 1.15 0.97 0.88
Portfolio Turnover Rate
(%).................... 80 (c) 98 62 87 111
Net Assets, End of Year
(000).................. $ 3,105 $27,741 $89,194 $200,105 $238,589
The ratios of expenses
to average net assets
without giving effect
to the voluntary
expense agreement
described in Note 4 to
the Financial
Statements would have
been (%)............... 2.31 (c) 1.91 1.29 1.14 1.10
</TABLE>
(a) Commencement of operations.
(b) Not computed on an annualized basis.
(c) Computed on an annualized basis.
See accompanying notes to financial statements.
8
<PAGE>
Morgan Stanley International Magnum Equity Series
Portfolio Manager: Francine J. Bovich Morgan Stanley Asset Management
[PHOTO OF FRANCINE J. BORICH]
Q. How did the Series perform over the year?
A. The Series posted a 7.3% total return (based on net asset value) for the
year. This performance lagged the Lipper Variable Products International Funds
Average/12/ return of 13.4% over the same period. 1998 was a challenging year
for the international markets and the International Magnum Series. The Series
underperformed the Morgan Stanley Capital International Europe, AustrialAsia,
Far East Index/18/ (EAFE) which returned 20.6% primarily due to our stock se-
lection of European value stocks and small and mid-cap companies. European
value stocks have been underperforming European growth stocks by a wide margin
for the past six months, with the largest companies providing the majority of
the gains as investors sought safety in the most liquid names. On the positive
side, stock selection in Japan and Asia enhanced the Series' performance as
did our regional allocation policy, in which we were overweight or neutral in
Europe and underweight in Japan and Asia virtually all year. Stock selection
in Europe, however, was the main factor in the Series' underperformance.
Q. How did you manage the Series during the year?
A. Although the benchmark EAFE Index ended the year up 20.6%, most of the in-
dex gains were attributable to a strong performance in Europe, which comprises
over 70% of the EAFE Index. Following a first quarter rally, volatility in-
creased in markets around the world. Global markets corrected sharply in Au-
gust and September, sparked by the Russian debt default and near collapse of a
U.S. hedge fund. The markets then settled down in the final quarter of the
year, posting a recovery helped by interest rate cuts in Europe and the U.S.
The weakening of the U.S. dollar at year end also contributed to returns for
dollar-based investors. The Series' European holdings underperformed the Euro-
pean index for the second half of the year after a strong performance in the
first half. While companies like Telecom Italia, Nestle, Imperial Tobacco and
France Telecom were strong performers for the year, the Series was hurt by
holdings in oil (Premier Oil, Total) as well as by weak stock selection, espe-
cially in the U.K. The Series also suffered as large and mega cap growth
stocks were unstoppable, while 1998 was one of the worst years on record for
value investors. Furthermore, the valuation gap between small/mid sized compa-
nies and their larger peers reached the widest point in over thirteen years.
The Series has increased its exposure over the last 18 months to small/mid cap
companies with relatively lower price/earnings ratios. In the recent flight to
liquidity, however, these small/mid cap companies were shunned by investors,
often for reasons unrelated to fundamentals. This has been the principal cause
for our recent underperformance.
Turning to our Asian ex-Japan holdings, we maintained a defensive portfolio
during the year. Although our holdings outperformed relative to the region,
most positions were still down for the year. The Series was helped by the fact
that our Asian holdings were a small (i.e., less than 5 per cent) portion of
the Series in absolute terms, and underweighted versus the EAFE Index.
The only strong performer in the region was the Australian Stock Index, which
rose 6% for the year as the domestic economy exhibited strong economic funda-
mentals--low inflation, sound monetary policy, a budget surplus and a healthy
banking system. Additionally, many Australian companies were well managed with
an eye toward increasing profitability. Telstra, a telecom company, Fosters, a
beer manufacturer, and National Australia Bank were all strong performers for
the year.
Finally, in Japan, our strategy of focusing on blue chip exporters (e.g., Sony
and Nintendo) and avoiding banks and more domestically oriented stocks con-
tributed to relative outperformance of our Japanese stocks. Japanese equities
hit 12 year lows in 1998 as sentiment became increasingly negative on the fu-
ture of the Japanese economy. As a result, we have held a smaller position in
Japan than the EAFE index. We also actively hedged our yen exposure during the
year, which was helpful as the yen fell to 147 yen per dollar during the first
half of the year, but hurt performance as the yen strengthened during the last
quarter.
Q. What is your current outlook for the months ahead?
A. We remain cautiously optimistic about the outlook for Europe in 1999, as we
expect demand for equities to continue to rise and merger and restructuring
activity to remain brisk. However, risks include the new Euro currency, which
has shown signs of possible strengthening versus the U.S. dollar and would
hurt the exporters that have led the European recovery. Furthermore, there are
signs of a more dramatic than expected economic slowing in Europe, which could
put further pressure on already high unemployment rates. Finally, valuations
particularly in the largest companies are at very high levels, making them ex-
tremely vulnerable to earnings disappointments, should the economic backdrop
9
<PAGE>
worsen. Experience tells us that owning a portfolio of undervalued companies
(e.g. low price/cash flow) builds in a margin of safety for those periods when
markets fall on tough times. While we were disappointed by our European re-
sults in 1998, we believe that with valuation gaps so extreme and earnings ex-
pectations still very positive, our European stocks are well positioned for
the new year.
In Asia ex-Japan, the turnaround in several key countries in the region such
as Thailand and South Korea has contributed to increasing stability and should
benefit the region as a whole in the new year. Singapore and New Zealand
should benefit more than the more insular Asian economies or Hong Kong.
Throughout the region, restructuring should become increasingly important as
companies seek to enhance their own performance and create shareholder value.
There will be several factors to monitor throughout the region, including the
performance of the Japanese economy (as it is a major trading partner with
most Asian nations), the large supply of new offerings and capital raisings we
expect to see in Asia and growth in the developed economies that are the pri-
mary markets for Asian exports. We also remain cautious about the outlook for
China and Hong Kong. China has seen several corporate defaults in recent weeks
and the recent volatility in Latin America raises questions about the strength
of the renminbi and the sustainability of the Hong Kong/U.S. dollar peg. Up-
side surprises for the region could include successful bank recapitalization
and economic recovery in Japan and stronger than expected import demand from
the U.S. and Europe.
1999 should be another difficult year for Japan, with GDP growth flat to nega-
tive. Further bank failures are likely and the credit crunch should continue
as a result. While Prime Minister Obuchi has provided a platform for signifi-
cant tax cuts and economic stimulus packages to support Japan on a macro lev-
el, adjustments to over capacity and over employment and deleveraging on the
micro level will probably become the dominant themes for investors in 1999. As
Japan increasingly gravitates to "international" accounting standards, corpo-
rate sector restructuring should ensue, challenging the traditional full em-
ployment socialist system and further dampening consumer sentiment as unem-
ployment rises. Japan also remains vulnerable to any global economic slowdown
as well as a stronger yen and higher domestic interest rates. We will remain
highly selective in our stock selection, favoring PC, semiconductor, service,
pharmaceutical and select domestic sectors such as housing and housing related
securities. As we enter 1999, we are cautiously optimistic that this year the
private sector will finally foster real structural changes in areas such as
wages, employment efficiencies, and shareholder value (e.g., focus on return-
on-equity). After 10 years of economic stagnation, Japan has entered the final
phase for real change, making this an important time for long term investors
in Japanese equities. Should changes occur, we believe the markets would im-
prove correspondingly.
In conclusion, we believe 1999 will be an interesting year in the
international equity markets overall. We have remained close to market weight
in Europe and underweight in Japan and Asia relative to EAFE for much of the
past year. Overall, we will remain vigilant to find the best investment
opportunities to put money to work, and adjust our portfolio accordingly.
[GRAPH APPEARS HERE]
A $10,000 investment compared to the EAFE Index
since the Series' inception
Date International Equity Series EAFE
---- --------------------------- ----
10/31/94 $10,000 $10,000
12/31/94 $10,260 $9,555
12/31/95 $10,879 $10,455
12/31/96 $11,627 $10,915
12/31/97 $11,476 $11,476
12/31/98 $12,311 $13,809
Average Annual Return
International Magnum EAFE/18/ Lipper Variable International
Equity Series Funds Average/12/
1 year 7.3% 20.6% 13.4%
3 years 4.2 9.0 11.3
Since Inception 5.1 8.0 n/a
X Fund Facts
Goal: Total return from long-term
growth of capital
Start date: October 31, 1994
Size: $68 million as of
December 31, 1998
Manager: Francine Bovich manages
the Morgan Stanley International
Magnum Equity Series. Ms. Bovich
is also a Managing Director of
Morgan Stanley Dean Witter
Investment Management Inc.
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.
10
<PAGE>
New England Zenith Fund
(Morgan Stanley International Magnum Equity Series)
Investments as of December 31, 1998
Common Stocks--93.5% of Total Net Assets
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Australia--1.8%
4,000 Brambles Industries, Ltd.................................. $ 97,432
32,350 Colonial, Ltd............................................. 111,012
7,150 Commonwealth Bank......................................... 101,486
42,800 Fosters Brewing........................................... 115,924
6,800 Lend Lease Corp........................................... 91,672
9,150 National Australia Bank, Ltd. ............................ 137,931
17,400 News Corp., Ltd........................................... 114,941
37,000 Oil Search, Ltd........................................... 37,410
10,000 Rio Tinto, Ltd. .......................................... 118,604
33,800 Telstra Corp.............................................. 158,033
8,500 Westpac Banking Corp. .................................... 56,879
16,300 WMC, Ltd.................................................. 49,143
18,150 Woolworths, Ltd. ......................................... 61,794
-----------
1,252,261
-----------
Belgium--1.0%
12,670 GIB Inno.................................................. 659,705
-----------
Denmark--0.8%
6,100 Unidanmark................................................ 551,121
-----------
Finland--4.7%
7,780 Huhtamaki OY 'I' Free..................................... 296,003
4,195 Kone OY, Series B......................................... 485,399
9,470 Konecranes Interna........................................ 427,162
93,780 Merita, Ltd. Series A..................................... 592,217
22,150 Metra OY, Series B........................................ 382,271
33,158 Rauma OY.................................................. 481,211
13,000 Sampo Insurance Co., Ltd.................................. 493,332
2,345 Valmet OY................................................. 31,273
-----------
3,188,868
-----------
France--7.9%
21,100 Bull S.A.................................................. 158,127
5,591 Cie de St. Gobain......................................... 789,000
16,900 CNP Assurances............................................ 513,257
1,590 Groupe Danone............................................. 455,017
5,980 Elf Aquitaine............................................. 690,946
2,580 Lafarge-Coppee............................................ 245,033
6,211 Legris.................................................... 304,274
12,250 Michelin Series B......................................... 489,693
13,550 Rohne-Poulenc S.A. Series A............................... 697,010
5,450 Total S.A. Series B....................................... 551,726
3,520 Union Assure Federales.................................... 467,151
-----------
5,361,234
-----------
Germany--8.9%
18,010 Basf AG................................................... 687,289
5,800 Bayer AG.................................................. 242,044
6,640 Bayer Hypo Vereins........................................ 519,933
</TABLE>
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
1,490 Buderus AG............................................... $ 542,680
1,660 Dyckerhoff AG, Preferred................................. 460,170
1,570 Fresenius AG, Preferred.................................. 330,655
1,630 Hornbach Holding AG, Preferred........................... 96,826
4,331 Philipp Holzmann......................................... 682,160
3,440 Plettac AG............................................... 269,363
1,400 Sudzucker AG, Preferred.................................. 635,905
10,710 Veba AG.................................................. 640,698
520 Viag AG.................................................. 304,836
8,280 Volkswagen AG............................................ 660,770
-----------
6,073,329
-----------
Great Britain--18.9%
249,800 Aegis Group.............................................. 361,067
10,600 Allied Domecq PLC........................................ 98,005
23,800 Allied Zurich............................................ 357,652
35,937 Bank of Ireland.......................................... 786,322
64,429 Bank of Scotland......................................... 770,707
63,508 BG PLC................................................... 408,333
35,100 British Telecom PLC...................................... 531,253
43,600 Bunzl PLC................................................ 170,228
50,322 Burmah Castrol PLC....................................... 719,005
81,050 Capital Radio............................................ 787,743
93,300 Charter PLC.............................................. 511,530
112,000 Devro.................................................... 321,914
43,964 Diageo PLC............................................... 487,555
58,380 Greal Universal Stores PLC............................... 615,905
212,300 Halma PLC................................................ 426,787
41,600 IMI...................................................... 163,110
75,000 Imperial Tobacco Group................................... 785,014
70,000 Lonrho PLC............................................... 381,459
110,600 Morgan Crucible Co....................................... 507,154
72,100 Premier Farnell PLC...................................... 191,660
780,600 Premier Cons Oilfields LTD............................... 207,503
68,400 Reckitt and Colman....................................... 905,144
37,940 RMC Group PLC............................................ 518,767
85,854 Royal Sun Alliance Insurance............................. 698,928
133,400 Scapa Group.............................................. 217,199
9,000 Scot Media Group......................................... 105,117
3,900 Williams................................................. 22,289
139,400 WPP Group PLC............................................ 845,340
-----------
12,902,690
-----------
Hong Kong--1.6%
28,000 China Telecommunications................................. 48,428
12,000 CLP Holdings............................................. 59,786
33,000 Dairy Farm International (USD)........................... 37,950
41,800 Hong Kong & China Gas.................................... 53,143
16,500 Hong Kong Electric Holdings.............................. 50,048
34,000 Hong Kong Telecommunications............................. 59,464
6,000 HSBC Holdings PLC........................................ 149,466
30,000 Hutchison Whampoa........................................ 212,291
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
New England Zenith Fund
(Morgan Stanley International Magnum Equity Series)
Investments as of December 31, 1998
Common Stocks--(Continued)
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Hong Kong--(Continued)
20,000 LI & Fung, Ltd. ......................................... $ 41,432
12,000 Smartone Telecommunications.............................. 33,301
27,000 Sun Hung Kai Props....................................... 196,900
18,000 Swire Pacific............................................ 80,618
8,000 Television Broadcasts.................................... 20,651
5,000 Vtech Holdings........................................... 21,813
-----------
1,065,291
-----------
Ireland--0.8%
111,900 Greencore Group.......................................... 515,898
-----------
Italy--5.2%
13,155 BCA Pop Bergam CV........................................ 319,039
5,900 ItalGas (Soc Ital)....................................... 31,918
68,060 Magneti Marelli Spa...................................... 117,725
46,255 Marzotto & Figli......................................... 509,142
92,750 Mediaset................................................. 751,671
130,100 Sogefi................................................... 353,291
234,812 Telecom Italia Spa....................................... 1,476,939
-----------
3,559,725
-----------
Japan--19.0%
4,000 Aiwa Co. ................................................ 105,440
24,000 Amada, Ltd............................................... 116,126
2,000 Autobacs Seven Co. ...................................... 67,227
17,000 Canon, Inc............................................... 363,158
23,000 Casio Computer Co........................................ 169,677
15,000 Dai Nippon Printing...................................... 239,098
56,000 Daicel Chemical.......................................... 166,440
31,000 Daifuku Co............................................... 165,626
25,000 Daikin Industries........................................ 247,678
3,000 Familymart Co., Ltd. .................................... 149,668
11,000 Fuji Machine Manufacturing............................... 347,368
11,000 Fuji Photo Film, Ltd..................................... 408,669
18,000 Fujitec Co............................................... 115,913
32,000 Fujitsu, Ltd. ........................................... 426,006
44,000 Furukawa Electric Co. ................................... 149,845
13,000 Hitachi Credit Corp. .................................... 288,633
61,000 Hitachi, Ltd............................................. 377,709
15,000 Inabata and Co........................................... 40,071
36,000 Kaneka Corp. ............................................ 269,721
12,000 Kurita Water Industries.................................. 175,993
4,000 Kyocera Corp............................................. 211,234
16,000 Kyudenko Corp............................................ 108,129
8,000 Lintec Corp.............................................. 74,374
24,000 Matsushita Electric Industries........................... 424,379
11,000 Minebea Co............................................... 125,909
69,000 Mitsubishi Chemical Industries........................... 145,263
19,000 Mitsubishi Estate........................................ 170,252
59,000 Mitsubishi Heavy Industries.............................. 229,633
16,000 Mitsumi Electric......................................... 338,257
</TABLE>
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
7,000 Murata Manufacturing Co................................... $ 290,402
40,000 NEC Corp.................................................. 367,979
17,000 Nifco, Inc. .............................................. 136,992
4,800 Nintendo, Ltd............................................. 464,927
55 Nippon Telephone & Telegraph Corp. ....................... 424,237
85,000 Nissan Motors............................................. 260,150
13,000 Nissha Printing Co........................................ 79,345
24 NTT Data Corp............................................. 119,098
6,000 ONO Pharmaceutical........................................ 187,351
42,000 Ricoh Co.................................................. 387,121
6,000 Rinnai Corp............................................... 104,874
2,000 Rohm Co................................................... 182,043
5,000 Ryosan Co................................................. 79,832
5,000 Sangetsu Co. ............................................. 74,746
17,000 Sankyo Co................................................. 371,429
27,000 Sanwa Shutter Corp........................................ 117,983
21,000 Sekisui Chemical.......................................... 141,176
16,000 Sekisui House............................................. 169,129
25,000 Shin-Estu Polymer Co. .................................... 130,473
5,500 Sony Corp................................................. 400,398
9,000 Sumitomo Marine and Fire.................................. 57,001
16,000 Suzuki Motor Corp. ....................................... 189,651
4,000 TDK Corp. ................................................ 365,502
7,000 Tokyo Electron, Ltd....................................... 265,635
64,000 Toshiba Corp.............................................. 381,000
12,000 Toyota Motor Corp. ....................................... 325,874
35,000 Tsubakimoto Chain......................................... 74,613
15,000 Yamaha Corp............................................... 155,241
13,000 Yamanouchi Pharmacy....................................... 418,576
-----------
12,940,274
-----------
Malaysia--0.1%
5,000 Carlsberg Brewery......................................... 14,342
8,000 Guinness Anchor........................................... 8,042
1,000 Nestle Malay.............................................. 4,000
6,000 R. J. Reynolds............................................ 6,789
4,000 Rothmans of Pall Mall..................................... 23,579
1,000 Telekom Malaysia.......................................... 2,632
-----------
59,384
-----------
Netherlands--3.5%
17,400 ABN Amro Holdings......................................... 365,838
15,440 Akzo Nobel NV............................................. 702,677
14,618 Ing Groep NV.............................................. 890,915
6,500 Philips Electronics....................................... 435,940
-----------
2,395,370
-----------
New Zealand--0.1%
8,700 Telecom Corp. of New Zealand.............................. 37,769
1,400 Telecom Corp. of New Zealand Installment Receipt.......... 3,057
-----------
40,826
-----------
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
New England Zenith Fund
(Morgan Stanley International Magnum Equity Series)
Investments as of December 31, 1998
Common Stocks--(Continued)
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Norway--1.2%
20,500 Saga Petroleum Series B.................................. $ 187,504
33,300 Sparebanken Primary Cap.................................. 648,602
-----------
836,106
-----------
Singapore--0.3%
8,000 City Developments........................................ 34,646
15,000 Natsteel Electronics, Ltd................................ 38,159
5,000 Singapore Airlines....................................... 36,644
26,000 Singapore Technical Engineering.......................... 24,252
10,000 United Overseas Bank..................................... 64,203
7,000 Venture Manufacturing.................................... 26,711
-----------
224,615
-----------
Spain--3.5%
31,250 Banco Bilboa Vizcaya..................................... 489,243
57,300 Iberdrola S.A. .......................................... 1,070,444
8,063 Telefonica de Espana..................................... 357,990
8,063 Telefonica de Espana, (Rights)........................... 7,148
43,680 Uralita S.A.............................................. 485,607
-----------
2,410,432
-----------
Sweden--4.4%
20,900 Autoliv, Inc............................................. 748,560
19,300 BT Industries AB......................................... 280,303
134,900 Nordbanken AS............................................ 863,381
40,700 Svedala Industries....................................... 591,104
12,900 Svenska Handelsbkn....................................... 543,004
-----------
3,026,352
-----------
</TABLE>
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Switzerland--9.8%
322 Bobst AG............................................ $ 398,486
1,120 Forbo Holdings...................................... 489,190
725 Holderbk Financiere Glarus.......................... 858,157
710 Nestle S.A.......................................... 1,545,388
968 Richemont Series A.................................. 1,368,462
315 Schindler Holding AG................................ 536,580
520 Sig Schweiz Industry Holding AG..................... 306,617
1,360 Swisscom AG......................................... 569,265
289 UBS AG.............................................. 88,781
2,010 Valora Holding AG................................... 543,579
-----------
6,704,505
-----------
Total Common Stocks
(Identified Cost $61,829,706)...................... 63,767,986
-----------
Short-Term Investment--6.5%
<CAPTION>
Face
Amount
<C> <S> <C>
$4,449,000 Repurchase agreement with State Street Corp. dated
12/31/98 at 4.0% to be repurchased at $4,450,977 on
1/04/99 collateralized by $3,330,000 U.S. Treasury
Note 8.125% due 8/15/2019 with a value of
$4,539,726......................................... 4,449,000
-----------
Total Short-Term Investment
(Identified Cost $4,449,000) 4,449,000
-----------
Total Investments--100.0%
(Identified Cost $66,278,706)(b)................... 68,216,986
Other assets less liabilities....................... (48,342)
-----------
Total Net Assets--100%.............................. $68,168,644
===========
</TABLE>
See accompanying notes to financial statements.
13
<PAGE>
New England Zenith Fund
(Morgan Stanley International Magnum Equity Series)
Investments as of December 31, 1998
Forward Contracts Outstanding at December 31, 1998
<TABLE>
<CAPTION>
Local Aggregate Unrealized
Currency Delivery Currency Face Total Appreciation/
Contract Date Amount Value Value (Depreciation)
<S> <C> <C> <C> <C> <C>
Japanese Yen
(bought)............ 1/13/1999 413,568,200 $3,598,942 $3,664,598 $ 65,656
Japanese Yen (sold).. 1/13/1999 413,568,200 3,459,943 3,664,598 (204,655)
Japanese Yen
(bought)............ 1/19/1999 80,894,000 700,502 717,368 16,866
Japanese Yen (sold).. 1/19/1999 80,894,000 674,398 717,368 (42,970)
Japanese Yen
(bought)............ 1/27/1999 173,546,000 1,498,230 1,540,645 42,415
Japanese Yen (sold).. 1/27/1999 173,546,000 1,446,216 1,540,645 (94,429)
---------
Net unrealized depreciation of
forward currency contracts..... $(217,117)
=========
</TABLE>
Ten Largest Industry Holdings at December 31, 1998 (Unaudited)
<TABLE>
<C> <S> <C>
1 Finance 17.3%
2 Consumer Basics 11.3%
3 Capital Goods 9.5%
4 Utilities 7.9%
5 Consumer Durables 6.8%
6 Basic Industries 6.8%
7 Shelter 5.6%
8 Consumer Non Durables 5.3%
9 Technology 4.2%
10 Energy 4.1%
</TABLE>
(a) See Note 1A of Notes to Financial Statements.
(b) Federal Tax Information:
At December 31,1998 the net unrealized appreciation on investments based on
cost of $66,683,612 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........ $ 7,448,351
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value........ (5,914,977)
-----------
Net unrealized appreciation................................ $ 1,533,374
===========
</TABLE>
See accompanying notes to financial statements.
14
<PAGE>
New England Zenith Fund
(Morgan Stanley International Magnum Equity Series)
Statement of Assets & Liabilities
December 31, 1998
<TABLE>
<S> <C> <C>
Assets
Investments at value.................................... $68,216,986
Cash.................................................... 1,989
Foreign cash at value (Identified cost $138,888)........ 138,805
Receivable for:
Fund shares sold........................................ 309,652
Dividends and interest.................................. 135,838
Foreign taxes........................................... 90,028
Unamortized organization expense ....................... 1,666
-----------
68,894,964
Liabilities
Payable for:
Securities purchased.................................... $132,620
Open forward currency contracts--net.................... 217,117
Fund shares redeemed.................................... 216,926
Withholding taxes....................................... 12,153
Accrued expenses:
Management fees......................................... 52,283
Deferred trustees' fees................................. 5,121
Other expenses.......................................... 90,100
--------
726,320
-----------
$68,168,644
===========
Net Assets
Net Assets consist of:
Capital paid in......................................... $67,075,774
Overdistributed net investment income................... (179,114)
Accumulated net realized
gains (losses)......................................... (455,172)
Unrealized appreciation (depreciation) on investments,
forward contracts and foreign currency................. 1,727,156
-----------
Net Assets............................................... $68,168,644
===========
Computation of offering price:
Net asset value and redemption price per share
($68,168,644 divided by 5,978,157 shares of beneficial
interest)............................................... $ 11.40
===========
Identified cost of investments........................... $66,278,706
===========
</TABLE>
Statement of Operations
Year Ended December 31, 1998
<TABLE>
<S> <C> <C>
Investment Income
Dividends........................................... $1,191,706(a)
Interest............................................ 302,016
----------
1,493,722
Expenses
Management fees..................................... $ 566,848
Trustees' fees and expenses......................... 10,532
Custodian........................................... 237,267
Audit and tax services.............................. 26,347
Legal............................................... 11,651
Printing............................................ 21,488
Insurance........................................... 1,920
Amortization of organization expenses............... 2,011
Miscellaneous....................................... 3,065
----------
Total expenses..................................... 881,129
Less expenses assumed by the investment adviser.... (62,316) 818,813
---------- ----------
Net investment income................................ 674,909
Realized and Unrealized Gain (Loss) on Investments,
Forward Currency Contracts and Foreign Currency
Transactions
Realized gain (loss) on:
Investments--net.................................... 617,759
Foreign currency transactions--net.................. 80,429
----------
Total realized gain (loss) on investments and
foreign currency transactions...................... 698,188
----------
Unrealized appreciation (depreciation) on:
Investments--net.................................... 2,486,756
Foreign currency transactions--net.................. (683,136)
----------
Total unrealized appreciation (depreciation) on
investments and foreign currency transactions...... 1,803,620
----------
Net gain (loss) on investment transactions........... 2,501,808
----------
Net Increase (Decrease) in Net Assets From
Operations.......................................... $3,176,717
==========
</TABLE>
(a) Net of foreign taxes of: $153,275.
See accompanying notes to financial statements.
15
<PAGE>
New England Zenith Fund
(Morgan Stanley International Magnum Equity Series)
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
From Operations
Net investment income............................... $ 451,721 $ 674,909
Net realized gain (loss) on investments and foreign
currency transactions.............................. 392,080 698,188
Unrealized appreciation (depreciation) on
investments and foreign currency transactions...... (1,984,775) 1,803,620
----------- -----------
Increase (decrease) in net assets from operations... (1,140,974) 3,176,717
----------- -----------
From Distributions to Shareholders
Net investment income............................... (401,271) (674,909)
In excess of net investment income.................. 0 (146,749)
Net realized gain on investments.................... (394,830) (658,590)
In excess of net realized gain on investment........ (542,890) 0
----------- -----------
(1,338,991) (1,480,248)
----------- -----------
From Capital Shares Transactions
Proceeds from sale of shares........................ 31,343,810 31,156,503
Net asset value of shares issued in connection with
the reinvestment of:
Distributions from net investment income........... 401,271 821,658
Distributions from net realized gain............... 937,720 658,590
----------- -----------
32,682,801 32,636,751
Cost of shares redeemed............................. (16,560,469) (19,199,129)
----------- -----------
Increase (decrease) in net assets derived from
capital share transactions......................... 16,122,332 13,437,622
----------- -----------
Total increase (decrease) in net assets............. 13,642,367 15,134,091
Net Assets
Beginning of the year............................... 39,392,186 53,034,553
----------- -----------
End of the year..................................... $53,034,553 $68,168,644
=========== ===========
Undistributed (overdistributed) Net Investment Income
Beginning of the year............................... $ (55,074) $ (116,715)
=========== ===========
End of the year..................................... $ (116,715) $ (179,114)
=========== ===========
Number of Shares of the Fund:
Issued from the sale of shares...................... 2,737,081 2,622,460
Issued in connection with the reinvestment of:
Distributions from net investment income........... 36,467 68,127
Distributions from net realized gain............... 86,482 57,720
----------- -----------
2,860,030 2,748,307
Redeemed............................................ (1,465,482) (1,655,274)
----------- -----------
Net change.......................................... 1,394,548 1,093,033
=========== ===========
</TABLE>
Financial Highlights
<TABLE>
<CAPTION>
October 31, 1994(a)
through Year Year Year Year
December 31, Ended Ended Ended Ended
1994 1995 1996 1997 1998
------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year...... $10.00 $ 10.23 $ 10.73 $ 11.29 $ 10.86
------ ------- ------- ------- -------
Income From Investment
Operations
Net Investment Income.. 0.03 0.09 0.06 0.08 0.14
Net Realized and
Unrealized Gain (Loss)
on Investments........ 0.23 0.53 0.68 (0.23) 0.66
------ ------- ------- ------- -------
Total From Investment
Operations............ 0.26 0.62 0.74 (0.15) 0.80
------ ------- ------- ------- -------
Less Distributions
Distributions From Net
Investment Income..... (0.02) (0.09) (0.02) (0.09) (0.12)
Distributions in Excess
of Net Investment
Income................ 0.00 (0.03) 0.00 0.00 (0.03)
Distributions From Net
Realized Capital
Gains................. 0.00 0.00 (0.16) (0.08) (0.11)
Distributions in Excess
of Net Realized
Capital Gains......... 0.00 0.00 0.00 (0.11) 0.00
Distributions From
Paid-in Capital....... (0.01) 0.00 0.00 0.00 0.00
------ ------- ------- ------- -------
Total Distributions.... (0.03) (0.12) (0.18) (0.28) (0.26)
------ ------- ------- ------- -------
Net Asset Value, End of
Year................... $10.23 $ 10.73 $ 11.29 $ 10.86 $ 11.40
====== ======= ======= ======= =======
Total Return (%)........ 2.6(b) 6.0 6.9 (1.3) 7.3
Ratio of Operating
Expenses to Average Net
Assets (%)............. 1.30(c) 1.30 1.30 1.30 1.30
Ratio of Net Investment
Income to Average Net
Assets (%)............. 2.56(c) 1.29 0.67 0.96 1.07
Portfolio Turnover Rate
(%).................... 4(c) 89 64 115 40
Net Assets, End of Year
(000).................. $2,989 $16,268 $39,392 $53,035 $68,169
The ratios of expenses
to average net assets
without giving effect
to the voluntary
expense agreement
described in Note 4 to
the Financial
Statements would have
been (%)............... 5.38(c) 3.12 1.66 1.59 1.40
</TABLE>
(a) Commencement of operations.
(b) Not computed on an annualized basis.
(c) Computed on an annualized basis.
See accompanying notes to financial statements.
16
<PAGE>
Alger Equity Growth Series
Portfolio Manager: David D. Alger Fred Alger Management, Inc.
[PHOTO OF DAVID D. ALGER APPEARS HERE]
Q. How did the portfolio perform in 1998?
A. 1998 proved a turbulent and challenging year for investors in the U.S. stock
market. During the first half of the year, stocks that had been undeservedly
oversold in the wake of the Asian crisis rebounded nicely. Inflation remained
subdued and the Federal Reserve left interest rates unchanged. The post-Asian
crisis earnings season came and went with some predictable casualties, but most
companies got through it unscathed. Moreover, after a year where value stocks
significantly outperformed growth stocks, investors returned to the more ag-
gressive discipline. By mid-July, most major market indices were trading at
record levels.
Amid incidents of international economic instability and domestic political
controversy, the market sold off dramatically in August. Specifically, the Rus-
sian economy collapsed and the state of Japan's banking system worsened. Eco-
nomic activity was slowed by a credit crunch, as spreads between corporate and
Treasury bonds widened. As measured by the S&P 500 Index/25/, the historically
placid month of August proved to be the worst performing month since October of
1987. The markets recovered during September in anticipation of relief from the
Federal Reserve Board (the "Fed") yet sold off sharply toward the end of the
month following what was perceived to be a disappointing reduction of the Fed-
eral Funds Rate by 0.25%.
As October progressed, stocks gained a boost from a rare intra-meeting rate re-
duction by the Fed. The technology sector stabilized as Intel, Microsoft and
Apple all reported better than expected quarterly earnings. A rally prompted by
additional relief from the Fed in November highlighted a strong fourth quarter,
which anchored another lucrative albeit challenging year for the U.S. stock
market. As a result, the Alger Equity Growth Series posted a quarterly return
of 26.1% which brought its return for 1998 to 47.8% (based on net asset value),
significantly outpacing the Lipper Variable Products Growth Fund Average/10/
return of 24.7% and the S&P 500 Index/25/ which returned 28.7% for the year.
Q. How did you manage the Series during the past year?
A. The management of the Series remained unchanged, a research intensive, bot-
tom-up approach focusing on rapidly growing large cap stocks. Strong positive
cash inflows for the year helped fuel investment opportunities and precluded
the selling of core holdings in order to satisfy redemptions.
The Series benefited from its large cap positioning. As of December 31, 1998
the Series possessed a weighted average market cap of $85.7 billion. The Series
strong performance for the year was also augmented by the performance of tech-
nology and pharmaceutical holdings. Notable performing stocks for the year in-
cluded America Online, Microsoft, MCI Worldcom, and Cisco Systems. Key holdings
in the retail sector also boosted the Series annual performance. These compa-
nies included Home Depot, Wal-Mart and Staples, which were all up in excess of
100% for the year.
Q. What is your investment outlook for the months ahead?
A. Looking ahead, we remain cautiously optimistic, however 1999 should be a
wonderful year for the American economy and American investors in general.
While there are undoubtedly going to be problems around the world, some new and
some recycled (Japan, Brazil, Clinton), overall, we expect the stock market to
move upward.
It is true that valuations are high on a historical basis. However, high valua-
tions are warranted because of the extremely low levels of both inflation and
fixed-income yields. Moreover, while corporate profits growths will be subdued
this year, growth in America's more dynamic sectors, such as technology, should
be spectacular.
As always, we will continue to seek out and invest in companies that we feel
will grow their earnings rapidly and consistently.
17
<PAGE>
[GRAPH APPEARS HERE]
Date Alger Equity Growth S&P 500
---- ------------------- -------
10/31/94 $10,000 $10,000
12/31/94 $ 9,580 $9,794
12/31/95 $14,245 $13,461
12/31/96 $16,122 $16,544
12/31/97 $20,254 $22,055
12/31/98 $29,931 $28,345
Average Annual Return
Equity Growth Lipper Variable Growth
Series S&P 500/25/ Fund Average/10/
1 year 47.8% 28.7% 24.7%
3 years 28.1 28.3 23.9
Since Inception 30.1 28.4 n/a
X Fund Facts
Goal: Long-term capital
appreciation.
Start date: October 31, 1994
Size: $411 million as of December
31, 1998
Manager: David D. Alger has
managed the Alger Equity Growth
Series since its inception in
1994. Mr. Alger is President and
Chief Financial Officer of Fred
Alger Management, Inc., and has
been portfolio manager of 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.
18
<PAGE>
New England Zenith Fund
(Alger Equity Growth Series)
Investments as of December 31, 1998
Common Stocks--87.1% of Total Net Assets
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Airlines--1.0%
76,000 US Airways Group, Inc.(c)................................ $ 3,952,000
-----------
Banks--6.4%
50,200 Bank of New York......................................... 2,020,550
99,000 BankAmerica Corp. ....................................... 5,952,375
204,000 Citigroup, Inc. ......................................... 10,098,000
24,624 Firstar Corp. ........................................... 2,296,188
69,900 First Union Corp. ....................................... 4,250,794
26,200 State Street Corp. ...................................... 1,822,538
-----------
26,440,445
-----------
Casinos & Resorts--1.2%
100,000 Carnival Corp. .......................................... 4,800,000
-----------
Communications--1.2%
209,000 L. M. Ericsson Telecommunications Co. ................... 5,002,937
-----------
Communications Equipment--1.4%
61,375 Cisco Systems, Inc.(c)................................... 5,696,367
-----------
Communications Services--1.6%
97,800 Ascend Communications, Inc.(c)........................... 6,430,350
-----------
Computer Related & Business Equipment--10.4%
66,100 America Online(c)........................................ 10,576,000
97,200 Compaq Computer Corp. ................................... 4,076,325
116,600 Dell Computer Corp.(c)................................... 8,533,662
89,000 EMC Corp. ............................................... 7,565,000
64,300 International Business Machines.......................... 11,879,425
-----------
42,630,412
-----------
Computer Software--3.8%
55,200 Compuware Corp. ......................................... 4,312,500
82,300 Microsoft Corp. ......................................... 11,413,981
-----------
15,726,481
-----------
Consumer Products--4.7%
45,500 Corning, Inc. ........................................... 2,047,500
52,600 McKesson Corp. .......................................... 4,158,687
175,040 Tyco International, Ltd. ................................ 13,204,580
-----------
19,410,767
-----------
Financial Services--5.9%
122,600 Federal Home Loan Mortgage Corp. ........................ 7,900,037
208,800 Household International.................................. 8,273,700
115,000 Morgan Stanley Dean Witter............................... 8,165,000
-----------
24,338,737
-----------
</TABLE>
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Health Care--5.2%
86,550 Cardinal Health......................................... $ 6,566,981
25,000 Elan plc (ADR).......................................... 1,739,063
70,900 IMS Health, Inc. ....................................... 5,348,519
104,800 Medtronic, Inc. ........................................ 7,781,400
------------
21,435,963
------------
Insurance--2.3%
78,000 American International Group............................ 7,536,750
24,000 SunAmerica, Inc. ....................................... 1,947,000
------------
9,483,750
------------
Miscellaneous--5.2%
25,600 Biogen, Inc. ........................................... 2,124,800
58,900 Costco Companies, Inc. ................................. 4,251,844
94,700 Intel Corp. ............................................ 11,227,869
44,900 Texas Instruments, Inc. ................................ 3,841,756
------------
21,446,269
------------
Pharmaceuticals--12.6%
29,200 Bristol-Myers Squibb Co. ............................... 3,907,325
78,200 Eli Lilly & Co. ........................................ 6,950,025
62,400 Merck & Co., Inc. ...................................... 9,215,700
90,000 Pfizer, Inc. ........................................... 11,289,375
95,800 Schering-Plough......................................... 5,292,950
78,300 Smithkline Beecham...................................... 5,441,850
126,800 Warner-Lambert Co. ..................................... 9,533,775
------------
51,631,000
------------
Pollution Control--3.1%
277,000 Waste Management, Inc. ................................. 12,915,125
------------
Railroad--1.6%
136,000 Kansas City Southern Industries......................... 6,689,500
------------
Retail--14.1%
104,300 CVS Corp. .............................................. 5,736,500
33,100 Fred Meyer, Inc. ....................................... 1,994,275
215,200 Home Depot, Inc. ....................................... 13,167,550
148,700 Kroger Co. ............................................. 8,996,350
52,800 Office Depot, Inc. ..................................... 1,950,300
134,400 Safeway, Inc.(c)........................................ 8,190,000
146,500 Staples, Inc.(c)........................................ 6,400,219
137,300 Wal-Mart Stores, Inc. .................................. 11,181,369
------------
57,616,563
------------
Telecom Networks--5.4%
139,800 Comcast Corp. .......................................... 8,204,512
29,900 Cox Communications, Inc. ............................... 2,066,838
164,100 MCI Worldcom, Inc. ..................................... 11,774,175
------------
22,045,525
------------
Total Common Stocks
(Identified Cost $250,423,254)......................... 357,692,191
------------
</TABLE>
See accompanying notes to financial statements.
19
<PAGE>
New England Zenith Fund
(Alger Equity Growth Series)
Investments as of December 31, 1998
Short-Term Investments--11.7%
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
Face
Amount Value (a)
<C> <S> <C>
$4,000,000 Bayerische Hypotheken,
5.800%, 1/05/1999................................... $ 3,997,422
3,000,000 Deutsche Bank Financial, Inc.,
6.220%, 1/05/1999................................... 2,997,927
4,000,000 Eagle Funding Capital Corp.,
5.700%, 1/19/1999................................... 3,988,600
4,000,000 Ford Motors Credit Co.,
5.690%, 1/08/1999................................... 3,995,574
4,000,000 Halifax Building Society,
5.700%, 1/06/1999................................... 3,996,833
4,000,000 Hertz Corp.,
5.690%, 1/05/1999................................... 3,997,471
4,000,000 Montauk Funding Corp.,
5.700%, 1/06/1999................................... 3,996,833
3,000,000 National Australia Funding Corp.,
6.220%, 1/05/1999................................... 2,997,927
4,000,000 New Jersey National Gas Co.,
5.670%, 1/05/1999................................... 3,997,480
3,000,000 Paribas Financial, Inc.,
5.950%, 1/05/1999................................... 2,998,017
2,271,465 State Street Global Advisors, Money Market Fund...... 2,271,465
4,500,000 Twin Towers, Inc.,
4.950%, 1/13/1999................................... 4,492,575
4,500,000 W. W. Grainger, Inc.,
5.000%, 1/07/1999................................... 4,496,250
------------
Total Short-Term Investments
(Identified Cost $48,224,374)....................... 48,224,374
------------
Total Investments--98.8%
(Identified cost $298,647,628)(b)................... 405,916,565
Other assets less liabilities........................ 4,809,064
------------
Total Net Assets--100%............................... $410,725,629
============
(a) See Note 1A of the Notes to Financial Statements.
(b) Federal Tax Information:
At December 31, 1998 the net unrealized appreciation on investments based on
cost of $302,732,069 for federal income tax purposes was as follows:
</TABLE>
<TABLE>
<S> <C> <C>
Aggregate
gross
unrealized
appreciation
for all
investments
in which
there is an
excess of
value over
tax cost..... $105,195,045
Aggregate
gross
unrealized
depreciation
for all
investments
in which
there is an
excess of
tax cost
over value... (2,010,549)
Net
unrealized
appreciation. $103,184,496
</TABLE>
(c) Non-income producing security.
ADR/GDR--An American Depositary Receipt (ADR) or Global Depositary Receipt
(GDR) is a certificate issued by a custodian Bank representing the
right to receive securities of the foreign issuer described. The
values of ADRs and GDRs are significantly influenced by trading on
exchanges not located in the United States or Canada.
20
<PAGE>
New England Zenith Fund
(Alger Equity Growth Series)
Statement of Assets & Liabilities
December 31, 1998
<TABLE>
<S> <C> <C>
Assets
Investments at value.................................. $405,916,565
Cash.................................................. 12,419
Receivable for:
Fund shares sold...................................... 1,557,616
Securities sold....................................... 12,402,201
Dividends and interest................................ 97,785
Foreign taxes......................................... 1,708
Unamortized organization expense...................... 1,666
------------
419,989,960
Liabilities
Payable for:
Securities purchased.................................. $8,586,451
Fund shares redeemed.................................. 388,865
Accrued expenses:
Management fees....................................... 240,181
Deferred trustees' fees............................... 7,461
Other expenses........................................ 41,373
----------
9,264,331
------------
$410,725,629
============
Net Assets
Net Assets consist of:
Capital paid in....................................... $279,437,135
Undistributed net investment income................... 607
Accumulated net realized gains (losses)............... 24,018,950
Unrealized appreciation (depreciation) on investments. 107,268,937
------------
Net Assets............................................. $410,725,629
============
Computation of offering price:
Net asset value and redemption price per share
($410,725,629 divided by 16,353,873 shares of
beneficial interest).................................. $ 25.11
============
Identified cost of investments......................... $298,647,628
============
</TABLE>
Statement of Operations
Year Ended December 31, 1998
<TABLE>
<S> <C> <C>
Investment Income
Dividends......................................... $ 1,628,943(a)
Interest.......................................... 1,267,940
------------
2,896,883
Expenses
Management fees................................... $2,115,106
Trustees' fees and expenses....................... 20,679
Custodian......................................... 76,817
Audit and tax services............................ 17,618
Legal............................................. 27,662
Printing.......................................... 74,486
Insurance......................................... 7,657
Amortization of organization
expenses......................................... 2,011
Miscellaneous..................................... 7,486
----------
Total expenses.................................... 2,349,522
------------
Net investment income.............................. 547,361
Realized and Unrealized Gain (Loss) on Investments
Realized gain (loss) on:
Investments--net.................................. 37,574,347
Unrealized appreciation
(depreciation) on:
Investments--net.................................. 78,578,213
------------
Net gain (loss) on investment
transactions...................................... 116,152,560
------------
Net Increase (Decrease) in Net Assets from
Operations........................................ $116,699,921
============
</TABLE>
(a)Net of foreign taxes of: $4,692
See accompanying notes to financial statements.
21
<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,
1997 1998
------------ ------------
<S> <C> <C>
From Operations
Net investment income............................. $ 214,111 $ 547,361
Net realized gain (loss) on investments .......... 19,818,623 37,574,347
Unrealized appreciation (depreciation) on
investments...................................... 14,830,675 78,578,213
------------ ------------
Increase (decrease) in net assets from operations. 34,863,409 116,699,921
------------ ------------
From Distributions to Shareholders
Net investment income............................. (155,793) (608,527)
Net realized gain on investments.................. (19,679,801) (13,814,120)
------------ ------------
(19,835,594) (14,422,647)
------------ ------------
From Capital Shares Transactions
Proceeds from sale of shares...................... 86,896,157 151,770,313
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income.......... 155,793 608,527
Distributions from net realized gain.............. 19,679,801 13,814,120
------------ ------------
106,731,751 166,192,960
Cost of shares redeemed........................... (36,896,638) (63,063,040)
------------ ------------
Increase (decrease) in net assets derived from
capital share transactions....................... 69,835,113 103,129,920
------------ ------------
Total increase (decrease) in net assets........... 84,862,928 205,407,194
Net Assets
Beginning of the year............................. 120,455,507 205,318,435
------------ ------------
End of the year................................... $205,318,435 $410,725,629
============ ============
Undistributed Net Investment Income
Beginning of the year............................. $ 2,272 $ 0
============ ============
End of the year................................... $ 0 $ 607
============ ============
Number of Shares of the Fund:
Issued from the sale of shares.................... 4,818,140 7,106,627
Issued in connection with the reinvestment of:
Distributions from net investment income.......... 9,023 24,816
Distributions from net realized gain.............. 1,146,276 551,319
------------ ------------
5,973,439 7,682,762
Redeemed.......................................... (2,053,180) (2,982,315)
------------ ------------
Net change........................................ 3,920,259 4,700,447
============ ============
</TABLE>
Financial Highlights
<TABLE>
<CAPTION>
October 31, 1994(a)
through Year Year Year Year
December 31, Ended Ended Ended Ended
1994 1995 1996 1997 1998
------------------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year...... $10.00 $ 9.56 $ 13.80 $ 15.58 $ 17.62
------ ------- -------- -------- --------
Income From Investment
Operations
Net Investment Income.. 0.02 0.01 0.04 0.02 0.04
Net Realized and
Unrealized Gain (Loss)
on Investments........ (0.44) 4.65 1.78 3.92 8.37
------ ------- -------- -------- --------
Total From Investment
Operations............ (0.42) 4.66 1.82 3.94 8.41
------ ------- -------- -------- --------
Less Distributions
Distributions From Net
Investment Income..... (0.02) (0.01) (0.04) (0.02) (0.04)
Distributions From Net
Realized Capital
Gains................. 0.00 (0.41) 0.00 (1.88) (0.88)
------ ------- -------- -------- --------
Total Distributions.... (0.02) (0.42) (0.04) (1.90) (0.92)
------ ------- -------- -------- --------
Net Asset Value, End of
Year................... $ 9.56 $ 13.80 $ 15.58 $ 17.62 $ 25.11
====== ======= ======== ======== ========
Total Return (%)........ (4.2)(b) 48.8 13.2 25.6 47.8
Ratio of Operating
Expenses to Average Net
Assets (%)............. 0.85 (c) 0.85 0.90 0.87 0.83
Ratio of Net Investment
Income to Average Net
Assets (%)............. 1.07 (c) 0.14 0.24 0.12 0.19
Portfolio Turnover Rate
(%).................... 32 (c) 107 78 137 119
Net Assets, End of Year
(000).................. $1,917 $46,386 $120,456 $205,318 $410,726
The ratios of expenses
to average net assets
without giving effect
to the voluntary
expense agreement
described in Note 4 to
the Financial
Statements would have
been (%)............... 2.74 (c) 2.45 0.90 -- --
</TABLE>
(a) Commencement of operations.
(b) Not computed on an annualized basis.
(c) Computed on an annualized basis.
See accompanying notes to financial statements.
22
<PAGE>
Capital Growth Series
Portfolio Manager: G. Kenneth Heebner Capital Growth Management Limited
Partnership
[Photo of G. Kenneth Heebner appears here]
Q. How did Capital Growth Series perform during 1998?
A. It performed very well. For the 12 months ending December 31, 1998, the Se-
ries posted a total return of 34.1% (based on net asset value)--performance
well above that of the Lipper Variable Products Growth Fund Average/10/ return
of 24.7%. The Series also outperformed the S&P 500/25/ return of 28.7%.
Q. What was the investment environment like in 1998?
A. I would describe it as excellent. The U.S. economy was strong, inflation
was low, and interest rates declined. Having said that, during the year in-
vestors periodically became concerned that problems in foreign economies would
start to hurt growth in the United States. These problems included Russia's
devaluation of its currency and default on its debt, the ongoing decline of
Asian economies, Japan's lack of aggressiveness in attempting to overcome
problems in their economy, and worries that Brazil would devalue its currency.
The U.S. economy continued to grow in spite of these obstacles.
In my judgment, investors overreacted to these overseas concerns. In fact, I
would argue that these problems were beneficial for the U.S. stock market be-
cause they created deflationary influences worldwide that, in turn, helped re-
duce domestic inflationary pressures. Global turmoil created an incentive
later in the year for the Federal Reserve Board to reduce short-term interest
rates three times, which helped the U.S. stock market.
Q. Did this backdrop lead you to alter your investment strategy?
A. Not at all. I kept the fund fully invested and did not alter the structure
of the portfolio, feeling that the issues overseas would not affect our
economy. I continued to look for stocks selling at reasonable valuations that
would deliver earnings growth in excess of market expectations.
Q. Where did you find these opportunities?
A. The groups of companies that were important to the Fund over the course of
the year were banks, technology, insurance and pharmaceuticals. I felt that
certain companies in these groups were undervalued relative to their growth
prospects. For example, in the bank group I invested in Chase Manhattan, a
company with superior management that gained market share in important global
businesses and earned returns that were strong enough to spur the company to
commence a share repurchase program. Technology proved to be one of the fast-
est growing segments of the economy. Insurance companies such as American Gen-
eral and AIG were undervalued relative to their growth rates. And pharmaceuti-
cal companies were strong due to new product introductions.
Shareholders should know that I did not focus on these groups because I was
attracted to sector-specific trends. Rather, these groups were well repre-
sented in the Fund because they, more than others, tended to include individ-
ual stocks that I picked because they offered attractive prospects.
Q. Which stocks helped performance, and which ones did not?
A. On the positive side, Nokia enjoyed significant success in its cellular
telephone and infrastructure business, which was driven by the superior fea-
tures offered by its equipment. It gained market share in a rapidly growing
market. Warner Lambert posted strong returns based on the success of its new
anti-cholesterol drug, which garnered about a 35% share of that market and
Dell Computer, the leading personal computer company in 1998, enjoyed signifi-
cant market share gains in a strong industry. Philip Morris benefited from a
positive shift in investor sentiment, as the threat of Congressional legisla-
tion faded and a settlement with several states' attorneys general was
achieved. IBM was a strong performer as investors came to appreciate the
company's balance-sheet restructuring and share-repurchase programs, and as
its underlying businesses began to grow, particularly mainframe computers and
computer outsourcing.
On the negative side, Mattel posted disappointing earnings because Toys R US,
a major customer, reduced inventories. Kmart also proved to be disappointing
because the company's management, contrary to expectations, was unable to show
as much improvement as had been hoped in a difficult environment for discount
retailers.
23
<PAGE>
Q. What is your outlook for 1999?
A. I expect moderate economic growth and low inflation to continue in the
United States, an environment that should be favorable for stocks. I think
that continued weakness in Japan and Latin America will continue to provide an
incentive for the Federal Reserve Board to maintain low interest rates. As far
as the Series is concerned, I will continue to focus on well established com-
panies selling at reasonable prices whose future earnings I expect will favor-
ably impress investors.
[GRAPH APPEARS HERE]
A $10,000 Investment Compared to the S&P 500 Index over the past 10 years
Date Zenith Capital Growth S&P 500
---- --------------------- -------
12/31/88 $10,000 $10,000
12/31/89 $13,076 $13,159
12/31/90 $12,619 $12,749
12/31/91 $19,434 $16,617
12/31/92 $18,258 $17,881
12/31/93 $20,993 $19,675
12/31/94 $19,508 $19,942
12/31/95 $26,927 $27,409
12/31/96 $32,602 $33,686
12/31/97 $40,256 $44,909
12/31/98 $53,980 $57,717
Average Annual Total Return
Capital Growth Lipper Variable Growth
Series S&P 500/25/ Fund Average/10/
1 year 34.1% 28.7% 24.7%
3 years 26.1 28.3 23.9
5 years 20.8 24.1 20.4
10 years 18.4 19.2 19.9
Since Inception 23.9 17.6 n/a
X Fund Facts
Goal: Long-term growth of capital.
Start date: August 26, 1983
Size: $1.9 billion as of December
31, 1998
Manager: G. Kenneth Heebner has
managed the Capital Growth Series
since its inception in 1983. He
has also been portfolio manager of
New England Growth Fund since
1976; CGM Capital Development Fund
since 1976; CGM Mutual Fund since
1981; CGM Realty Fund since May
1994; CGM Fixed Income Fund since
June 1993; CGM Focus Fund since
September 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.
24
<PAGE>
New England Zenith Fund
(Capital Growth Series)
Investments as of December 31, 1998
Common Stocks--99.9% of Total Net Assets
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Automotive & Related--5.2%
6,350,000 Volkswagen AG (ADR)................................... $ 99,218,750
------------
Banks--Money Center--6.4%
1,795,000 Chase Manhattan Corp. ................................ 122,172,188
------------
Banks--Regional--17.6%
2,590,000 Bank of New York...................................... 104,247,500
1,440,000 BankAmerica Corp. .................................... 86,580,000
410,000 First Union Corp. .................................... 24,933,125
1,239,000 Firstar Corp. ........................................ 115,536,750
------------
331,297,375
------------
Beverage & Tobacco--11.6%
1,482,000 Anheuser Busch Companies, Inc. ....................... 97,256,250
2,310,000 Philip Morris Companies, Inc. ........................ 123,585,000
------------
220,841,250
------------
Computer Software & Services--1.8%
525,000 Computer Sciences Corp.(c)............................ 33,829,687
------------
Electronic Components--23.9%
863,000 Intel Corp. .......................................... 102,319,438
1,850,000 Micron Technology, Inc.(c)............................ 93,540,625
1,345,000 Nokia Corp. (ADR)..................................... 161,988,437
1,100,000 Texas Instruments, Inc. .............................. 94,118,750
------------
451,967,250
------------
Freight Transportation--4.5%
2,541,000 Burlington Northern Santa Fe.......................... 85,758,750
------------
Insurance--13.2%
1,170,000 American General Corp. ............................... 91,260,000
855,912 American International Group, Inc. ................... 82,702,497
480,000 Jefferson Pilot Corp. ................................ 36,000,000
700,000 Unum Corp. ........................................... 40,862,500
------------
250,824,997
------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Microcomputers--2.9%
645,000 Sun Microsystems,
Inc.(c)................ $ 55,228,125
--------------
Office Equipment and
Supplies--5.8%
596,000 International Business
Machines............... 110,111,000
--------------
Retail--7.0%
1,625,000 Wal-Mart Stores, Inc. .. 132,335,938
--------------
Total Common Stock
(Identified Cost
$1,451,954,624)......... 1,893,585,310
--------------
</TABLE>
Short-Term Investment--0.2%
<TABLE>
<CAPTION>
Face
Amount
<C> <S> <C>
$4,695,000 American Express, 4.850%, 1/4/99.................. 4,695,000
--------------
Total Short-Term Investment
(Identified Cost $4,695,000)..................... 4,695,000
--------------
Total Investments--100.1%
(Identified Cost
$1,456,649,624)(b)............................... 1,898,280,310
Other assets less liabilities..................... (2,531,838)
--------------
Total Net Assets--100%............................ $1,895,748,472
==============
</TABLE>
(a) See Note 1A of Notes to Financial Statements.
(b) Federal Tax Information:
At December 31, 1998 the net unrealized appreciation on investments based on
cost of $1,459,950,808 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..... $438,915,663
Aggregate
gross
unrealized
depreciation
for all
investments
in which
there is an
excess of
tax cost
over value... (586,161)
------------
Net
unrealized
appreciation. $438,329,502
============
</TABLE>
(c) Non-income producing security.
ADR/GDR--An American Depositary Receipt (ADR) or Global Depositary Receipt
(GDR) is a certificate issued by a Custodian Bank representing the
right to receive securities of the foreign issuer described. The value
of ADRs and GDRs are significantly influenced by trading on exchanges
not located in the United States or Canada.
See accompanying notes to financial statements.
25
<PAGE>
New England Zenith Fund
(Capital Growth Series)
Statement of Assets & Liabilities
December 31, 1998
<TABLE>
<S> <C> <C>
Assets
Investments at value.............................. $1,898,280,310
Cash.............................................. 1,819
Receivable for:
Fund shares sold.................................. 910,805
Securities sold................................... 7,386,480
Dividends and interest............................ 1,856,253
Foreign taxes..................................... 1,854,870
Due from Investment Adviser....................... 84,549
--------------
1,910,375,086
Liabilities
Payable for:
Securities purchased.............................. $12,099,789
Fund shares redeemed.............................. 1,374,730
Accrued expenses:
Management fees................................... 956,913
Deferred trustees' fees........................... 91,606
Other expenses.................................... 103,576
-----------
14,626,614
--------------
$1,895,748,472
==============
Net Assets
Net Assets consist of:
Capital paid in................................... $1,454,914,023
Undistributed net investment income............... 3,878
Accumulated net realized gains (losses)........... (800,115)
Unrealized appreciation (depreciation) on
investments...................................... 441,630,686
--------------
Net Assets......................................... $1,895,748,472
==============
Computation of offering price:
Net asset value and redemption price per share
($1,895,748,472 divided by 4,050,492 shares of
beneficial interest).............................. $ 468.03
==============
Identified cost of investments..................... $1,456,649,624
==============
</TABLE>
Statement of Operations
Year Ended December 31, 1998
<TABLE>
<S> <C> <C>
Investment Income
Dividends........................................ $ 30,013,003(a)
Interest......................................... 408,483
------------
................................................ 30,421,486
Expenses
Management fees.................................. $10,272,927
Trustees' fees and expenses...................... 96,906
Custodian........................................ 202,944
Audit and tax services........................... 14,957
Legal............................................ 141,919
Printing......................................... 173,061
Insurance........................................ 46,484
Miscellaneous.................................... 8,122
-----------
Total expenses................................... 10,957,320
------------
Net investment income............................. 19,464,166
Realized and Unrealized Gain (Loss) on Investments
Realized gain (loss) on:
Investments--net................................. 169,787,977
Unrealized appreciation
(depreciation) on:
Investments--net................................. 294,106,307
------------
Net gain (loss) on investment transactions........ 463,894,284
------------
Net Increase (Decrease) in net Assets From
Operations....................................... $483,358,450
============
</TABLE>
(a)Net of foreign taxes of: $1,464,140.
See accompanying notes to financial statements.
26
<PAGE>
New England Zenith Fund
(Capital Growth Series)
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1998
-------------- --------------
<S> <C> <C>
From Operations
Net investment income......................... $ 6,977,596 $ 19,464,166
Net realized gain (loss) on investments....... 362,271,018 169,787,977
Unrealized appreciation (depreciation) on in-
vestments.................................... (100,549,025) 294,106,307
-------------- --------------
Increase (decrease) in net assets from opera-
tions........................................ 268,699,589 483,358,450
-------------- --------------
From Distributions to Shareholders
Net investment income......................... (6,943,584) (19,530,694)
Net realized gain on investments.............. (339,035,607) (224,364,814)
In excess of net realized gain on investments. 0 (800,115)
-------------- --------------
(345,979,191) (244,695,623)
-------------- --------------
From Capital Shares Transactions
Proceeds from sale of shares.................. 281,227,370 326,247,422
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income...... 6,943,584 19,530,694
Distributions from net realized gain.......... 339,035,607 225,164,929
-------------- --------------
627,206,561 570,943,045
Cost of shares redeemed....................... (266,868,046) (339,576,488)
-------------- --------------
Increase (decrease) in net assets derived from
capital share transactions................... 360,338,515 231,366,557
-------------- --------------
Total increase (decrease) in net assets....... 283,058,913 470,029,384
Net Assets
Beginning of the year......................... 1,142,660,175 1,425,719,088
-------------- --------------
End of the year............................... $1,425,719,088 $1,895,748,472
============== ==============
Undistributed Net Investment Income
Beginning of the year......................... $ 36,394 $ 70,406
============== ==============
End of the year............................... $ 70,406 $ 3,878
============== ==============
Number of Shares of the Fund:
Issued from the sale of shares................ 569,332 711,259
Issued in connection with the reinvestment of:
Distributions from net investment income...... 17,731 41,316
Distributions from net realized gain.......... 845,144 471,438
-------------- --------------
1,432,207 1,224,013
Redeemed...................................... (539,860) (741,374)
-------------- --------------
Net change.................................... 892,347 482,639
============== ==============
</TABLE>
Financial Highlights
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Begin-
ning of Year........... $ 351.63 $ 312.30 $ 374.62 $ 427.08 $ 399.60
-------- -------- ---------- ---------- ----------
Income From Investment
Operations
Net Investment Income.. 5.28 3.47 3.08 2.52 5.29
Net Realized and
Unrealized Gain (Loss)
on Investments........ (30.54) 114.91 74.80 95.67 130.40
-------- -------- ---------- ---------- ----------
Total From Investment
Operations............ (25.26) 118.38 77.88 98.19 135.69
-------- -------- ---------- ---------- ----------
Less Distributions
Distributions From Net
Investment Income..... (5.15) (3.48) (3.08) (2.52) (5.31)
Distributions From Net
Realized Capital
Gains................. (8.92) (52.58) (22.34) (123.15) (61.73)
Distribution in excess
of Net Realized Capi-
tal Gain.............. (0.00) (0.00) (0.00) (0.00) (0.22)
-------- -------- ---------- ---------- ----------
Total Distributions.... (14.07) (56.06) (25.42) (125.67) (67.26)
-------- -------- ---------- ---------- ----------
Net Asset Value, End of
Year................... $ 312.30 $ 374.62 $ 427.08 $ 399.60 $ 468.03
======== ======== ========== ========== ==========
Total Return (%)........ (7.1) 38.0 21.1 23.5 34.1
Ratio of Operating Ex-
penses to Average Net
Assets (%)............. 0.67 0.71 0.69 0.67 0.66
Ratio of Net Investment
Income to Average Net
Assets (%)............. 1.61 0.92 0.79 0.52 1.18
Portfolio Turnover Rate
(%).................... 140 242 207 214 204
Net Assets, End of Year
(000).................. $667,127 $921,444 $1,142,660 $1,425,719 $1,895,748
</TABLE>
See accompanying notes to financial statements.
27
<PAGE>
Goldman Sachs Midcap Value Series
Portfolio Manager: Paul D. Farrell; Eileen A. Aptman; Matthew B. McLennon &
Karma Wilson
Goldman Sachs Asset Management
Q. How did the Series perform over the year?
A. Goldman Sachs Asset Management ("GSAM") became the subadviser to the Goldman
Sachs Midcap Value Series (the "Series"), formerly the Loomis Sayles Avanti
Growth Series, on May 1, 1998. For the twelve months ended December 31, 1998,
the Series had a return of (5.5)% (based on net asset value), compared to the
Lipper Variable Products Midcap Fund Average/14/ which returned 18.3%. The Se-
ries also lagged the Russell Midcap Index/22/ ("Russell Midcap") which returned
10.1% over the same period.
Q. How did you manage the Series during the year and what factors affected
performance?
A. Since assuming management responsibilities for the portfolio on May 1, 1998,
GSAM has employed an investment strategy that considers three investment
themes: value, momentum and low risk. Our discipline suffered in 1998's market
environment, as stocks of companies in lower capitalization ranges were
severely harmed by investor concerns surrounding global liquidity and market
volatility. Despite a rebound in the fourth quarter of 18.5%, for the year
ended 1998, the Russell Midcap Index significantly underperformed the S&P 500
Index/25/ ("S&P 500") return of 28.7%.
In addition to a preference for large-cap stocks capitalization bias, investors
appeared to prefer growth versus value investing. The Russell Midcap Growth In-
dex year end return of 17.9% significantly outpaced the Russell Midcap Value
Index, which appreciated only 5.1% for the same period. On a more positive
note, this environment has created an attractive valuation opportunity. Over
the last two decades, mid-cap stocks have sold at close to a 3% premium to
stocks of larger companies. Based on 1998 earnings, the Russell Midcap Index
now sells at over a 20% price to earnings discount to the S&P 500 Index. The
Russell Midcap Index is at its most attractive valuation in over 20 years, and
our portfolio is priced at an even greater discount.
Currently, the average stock in the Series is valued at only 12.5 times 1999
estimated earnings, and 1.7 times book value. The Russell Midcap Index is val-
ued at 18.4 times estimated 1999 earnings and 2.9 times book value, and the S&P
500 Index at 24.8 times estimated 1999 earnings and 4.9 times book value. We
believe that the Series has the potential to overcome the
near-term uncertainty that has discounted the portfolio and achieve valuation
restoration as the long-term earnings and cash flow potential of our holdings
are realized.
Pharmaceutical stocks held by the Series underperformed the market during the
latter part of the reporting period as there was a rotation out of this sector
and into technology. However, pharmaceuticals have exhibited strong performance
for the one-year period and we have confidence in their long-term profitability
due to several factors: 1) we believe the aging of the "baby boom" generation
will continue to increase investment opportunities in the pharmaceutical busi-
nesses; 2) more healthcare providers are emphasizing "preventive care," driving
up demand for pharmaceutical products; 3) FDA approval time has been substan-
tially shortened (cut in half); and 4) the industry also benefits from strong
unit growth, stable pricing, and expanding margins, resulting in an increase in
earnings and free cash flow.
On the individual stock level, several of our technology holdings have added to
the Series' recent returns. Avnet Inc. and Vishay Intertechnology benefited
from restored investor confidence for semiconductor-related business and appre-
ciated 64% and 21%, respectively.
Q. What is your current outlook for the months ahead?
A. GSAM is optimistic about the long-term value offered by mid-cap companies,
particularly those comprising the Series. The asset class reached a significant
discount during the past year relative to issuers with larger capitalizations.
We believe the discounted valuations will attract capital and drive returns to
more traditional levels, with mid-cap stocks trading at a premium to stocks of
larger companies. In all environments, we perform rigorous, first-hand research
into mid-cap stocks which trade at a discount to the market and their peers due
to obscurity or uncertainty. We aim to exploit market anomalies by investigat-
ing what is undiscovered or misunderstood by the marketplace. The recovery ex-
perienced in the fourth quarter affirms our conviction that our value-based ap-
proach should deliver strong results to the long-term investor.
28
<PAGE>
A $10,000 investment compared to the S&P 500 and Russell Midcap Index
Since the Series' inception
[GRAPH APPEARS HERE]
Date Mid-Cap Value series S&P 500 Russell Midcap
---- -------------------- ------- --------------
Inception 4/30/93 $10,000 $10,000 $10,000
12/31/93 $11,474 $10,819 $10,859
12/31/94 $11,443 $10,966 $10,628
12/31/95 $14,916 $15,072 $14,340
12/31/96 $17,538 $18,524 $17,245
12/31/97 $20,581 $24,695 $23,172
12/31/98 $19,459 $31,738 $24,352
Average Annual Total Return
Lipper Variable
Midcap Fund
Midcap Value Russell Midcap/22/ S&P 500/25/ Average/14/
1 year (5.5)% 10.1% 28.7% 18.3%
3 years 9.3 19.1 28.3 16.9
5 years 11.1 17.3 24.1 14.5
Since Inception 12.5 17.4 22.6 n/a
X Fund Facts
Goal: Long-term growth of
capital.
Start date: April 30, 1993
Size: $113 million as of
December 31, 1998
Managers: Eileen A. Aptman,
Paul D. Farrell, Matthew B.
McLennan and Karma Wilson,
all of whom are Vice
Presidents of Goldman Sachs
and have managed the Goldman
Sachs Midcap Value Series
since September 1998.
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.
29
<PAGE>
New England Zenith Fund
(Goldman Sachs Mid Cap Value Series)
Investments as of December 31, 1998
Common Stocks--87.5% of Net Assets
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Airfreight, Truck & Other--1.5%
45,000 CNF Transportation...................................... $ 1,690,312
------------
Auto Suppliers--4.5%
10,900 Federal Mogul Corp. .................................... 648,550
28,700 Lear Seating Corp. ..................................... 1,104,950
48,800 Lucasvarity, plc (ADR).................................. 1,634,800
26,500 Magna International Inc. ............................... 1,643,000
------------
5,031,300
------------
Banks--6.0%
147,400 Pacific Century Finance Corp. .......................... 3,592,875
68,800 Republic New York Corp. ................................ 3,134,700
------------
6,727,575
------------
Biotechnology--2.0%
124,500 Quest Diagnostics, Inc. (d)............................. 2,217,656
------------
Business Services--1.6%
41,000 Dun & Bradstreet Corp. ................................. 1,294,062
38,500 Veritas DGS, Inc. ...................................... 500,500
------------
1,794,562
------------
Commodity Chemicals--1.3%
52,400 IMC Global, Inc......................................... 1,120,050
12,000 Olin Corp............................................... 339,750
------------
1,459,800
------------
Electric Utilities--1.2%
88,800 Northeast Utilities..................................... 1,420,800
------------
Financial Services--4.5%
42,600 Cit Group, Inc. ........................................ 1,355,212
24,600 Finova Group, Inc. ..................................... 1,326,862
1,564 Waddell & Reed Financial, Inc. CL A..................... 37,047
103,734 Waddell & Reed Financial, Inc. CL B..................... 2,411,815
------------
5,130,936
------------
Forest Products--4.1%
130,000 Georgia Pacific Timber Group............................ 3,095,625
25,400 Georgia-Pacific Corp. .................................. 1,487,487
------------
4,583,112
------------
Healthcare Management--4.9%
41,000 Aetna, Inc. ............................................ 3,223,625
86,100 Tenet Healthcare Corp. ................................. 2,260,125
------------
5,483,750
------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Hotels--2.3%
78,000 Hilton Hotels Corp. .................................... $ 1,491,750
75,300 Mirage Resorts, Inc. ................................... 1,124,794
------------
2,616,544
------------
Insurance Brokers & Other Insurance--4.1%
35,900 Loews Corp. ............................................ 3,527,175
16,400 Everest Reinsurance Holdings............................ 638,575
14,200 Torchmark, Inc. ........................................ 501,437
------------
4,667,187
------------
Leisure--1.4%
42,900 Hasbro, Inc............................................. 1,549,762
------------
Life Insurance--0.6%
13,800 Reliastar Financial Corp................................ 636,525
------------
Logistics/Rails--1.1%
66,800 Canadian Pacific LTD. .................................. 1,260,850
------------
Newspapers--2.3%
53,500 Belo A.H. Corp.......................................... 1,066,656
43,500 New York Times Co....................................... 1,508,906
------------
2,575,562
------------
Oil & Gas--5.4%
63,200 Baker Hughes, Inc. ..................................... 1,117,850
23,800 Elf Aquatine (ADR)...................................... 1,347,675
62,700 Occidental Petroleum Corp............................... 1,058,062
54,100 Transocean Offshore, Inc................................ 1,450,556
12,500 USX Marathon Group...................................... 376,562
42,900 Weatherford, Inc........................................ 831,187
------------
6,181,892
------------
Packaging--3.3%
32,800 Crown Cork & Seal, Inc. ................................ 1,010,650
21,900 Sealed Air Corp. ....................................... 1,118,269
103,554 Smurfit Stone Container Corp. .......................... 1,637,448
------------
3,766,367
------------
Property & Casualty Insurance--3.6%
69,400 CNA Financial Corp...................................... 2,793,350
22,600 Allmerica Financial Corp................................ 1,307,975
------------
4,101,325
------------
Personal Computers &
Peripherals--2.2%
115,100 Quantum Corp. .......................................... 2,445,875
------------
</TABLE>
See accompanying notes to financial statements.
30
<PAGE>
New England Zenith Fund
(Goldman Sachs Mid Cap Value Series)
Investments as of December 31, 1998
Common Stocks--(Continued)
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Pharmaceuticals--1.8%
234,500 Perrigo Co.............................................. $ 2,066,531
------------
Restaurants--1.5.%
33,100 Tricon Global Restaurants, Inc. ........................ 1,659,137
------------
Refining & Marketing--1.9%
81,300 Tosco Corp.............................................. 2,103,637
------------
Retail--6.3%
177,900 CMP Group, Inc. ........................................ 3,357,862
27,600 Federated Dept. Stores, Inc. ........................... 1,202,325
30,500 Sears Roebuck & Co. .................................... 1,296,250
80,100 Toys R US, Inc. ........................................ 1,351,687
------------
7,208,124
------------
Semiconductors--5.1%
53,700 Avnet, Inc. ............................................ 3,248,850
171,925 Vishay Intertechnology, Inc. ........................... 2,492,917
------------
5,741,767
------------
Steel--4.5%
112,700 Ispat International NV.................................. 873,425
104,000 AK Steel Holding Corp................................... 2,444,000
97,100 Ucar International, Inc................................. 1,729,594
------------
5,047,019
------------
Supermarkets--1.3%
141,400 Fleming Companies, Inc. ................................ 1,467,025
------------
Textiles--0.8%
66,300 Fruit of The Loom, Inc. CL A............................ 915,769
------------
Tires & Other Related--0.9%
20,900 Goodyear Tire & Rubber Co. ............................. 1,054,144
------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Tobacco--4.6%
85,600 UST, Inc.......................................... $ 2,985,300
20,300 Philip Morris Companies, Inc...................... 1,086,050
38,200 RJR Nabisco Holdings Corp. ....................... 1,134,062
------------
5,205,412
------------
Waste Management--0.9%
36,900 Browning Ferris Industries, Inc................... 1,049,347
------------
Total Common Stocks
(Identified Cost $111,192,542)................... 98,859,604
------------
Short Term Investment--11.8%
<CAPTION>
Face Amount
<C> <S> <C>
$13,400,000 Goldman Sachs Joint Account Repo(c)............... 13,400,000
------------
Total Short-Term Investments
(Identified cost $13,400,000).................... 13,400,000
------------
Total Investments 99.3%
(Identified cost $124,592,542)(b)................ 112,259,604
Other assets less liabilities..................... 737,424
------------
Total Net Assets--100%............................ $112,997,028
============
(a) See Note 1A of Notes to Financial Statements.
(b) Federal Tax Information:
At December 31, 1998 the net unrealized depreciation on investments based on
cost of $124,628,320 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.......... $ 4,738,838
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value.......... (17,107,554)
------------
Net unrealized depreciation.................................. $(12,368,716)
============
</TABLE>
(c) See Note 1E of Notes to Financial Statements.
(d) Non-income producing security.
ADR/GDR--An American Depositary Receipt (ADR) or Global Depositary Receipt
(GDR) is a certificate issued by a Custodian Bank representing the
right to receive securities of the foreign issuer described. The
values of ADRs and GDRs are significantly influenced by trading on
exchanges not located in the United States or Canada.
See accompanying notes to financial statements.
31
<PAGE>
New England Zenith Fund
(Goldman Sachs Midcap Value Series)
Statement of Assets & Liabilities Statement of Operations
December 31, 1998 Year Ended December 31, 1998
<TABLE>
<S> <C> <C>
Assets
Investments at value................................... $112,259,604
Cash................................................... 68,022
Receivable for:
Fund shares sold....................................... 281,924
Securities sold........................................ 1,582,130
Dividends and interest................................. 105,609
Foreign taxes.......................................... 1,691
------------
114,298,980
Liabilities
Payable for:
Securities purchased................................... $889,864
Fund shares redeemed................................... 273,023
Withholding taxes...................................... 1,749
Accrued expenses:
Management fees........................................ 114,412
Deferred trustees' fees................................ 4,651
Other expenses......................................... 18,253
--------
1,301,952
------------
$112,997,028
============
Net Assets
Net Assets consist of:
Capital paid in........................................ $125,509,565
Overdistributed net investment income.................. (992)
Accumulated net realized gains (losses)................ (178,607)
Unrealized appreciation (depreciation) on investments.. (12,332,938)
------------
Net Assets.............................................. $112,997,028
============
Computation of offering price:
Net asset value and redemption price per share
($112,997,028 divided by 919,816 shares of beneficial
interest).............................................. $ 122.85
============
Identified cost of investments.......................... $124,592,542
============
</TABLE>
Investment Income
<TABLE>
<S> <C> <C>
Dividends........................................ $ 1,408,456(a)
Interest......................................... 399,830
-----------
1,808,286
Expenses
Management fees.................................. $ 859,331
Trustees' fees and expenses...................... 12,496
Custodian........................................ 56,645
Audit and tax services........................... 13,898
Legal............................................ 68,909
Printing......................................... 45,021
Insurance........................................ 3,306
Miscellaneous.................................... 4,038
------------
Total expenses.................................. 1,063,644
Less expenses assumed by the investment adviser. (28,403) 1,035,241
------------ -----------
Net investment income............................. 773,045
Realized and Unrealized Gain (Loss) on Investments
and Futures Contracts
Realized gain (loss) on:
Investments--net................................. 24,143,616
Futures contracts--net........................... (137,933)
------------
Total realized gain (loss) on investments and
futures contracts............................... 24,005,683
------------
Unrealized appreciation (depreciation) on:
Investments--net................................. (31,637,944)
------------
Net gain (loss) on investment transactions........ (7,632,261)
-----------
Net Increase (Decrease) in Net Assets from
Operations....................................... $(6,859,216)
===========
</TABLE>
(a)Net of foreign taxes of: $9,248
See accompanying notes to financial statements.
32
<PAGE>
New England Zenith Fund
(Goldman Sachs Midcap Value Series)
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
From Operations
Net investment income (loss)...................... $ (164,084) $ 773,045
Net realized gain (loss) on investments and
futures contracts................................ 9,407,484 24,005,683
Unrealized appreciation (depreciation) on
investments...................................... 6,733,998 (31,637,944)
------------ ------------
Increase (decrease) in net assets from operations. 15,977,398 (6,859,216)
------------ ------------
From Distributions to Shareholders
Net investment income............................. 0 (774,037)
Net realized gain on investments.................. (8,951,638) (25,623,971)
In excess of net realized gain on investments..... 0 (178,608)
------------ ------------
(8,951,638) (26,576,616)
------------ ------------
From Capital Shares Transactions
Proceeds from sale of shares...................... 43,452,563 39,367,155
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income.......... 0 774,037
Distributions from net realized gain.............. 8,951,638 25,802,579
------------ ------------
52,404,201 65,943,771
Cost of shares redeemed........................... (27,480,727) (34,127,490)
------------ ------------
Increase (decrease) in net assets derived from
capital share transactions....................... 24,923,474 31,816,281
------------ ------------
Total increase (decrease) in net assets........... 31,949,234 (1,619,551)
Net Assets
Beginning of the year............................. 82,667,345 114,616,579
------------ ------------
End of the year................................... $114,616,579 $112,997,028
============ ============
Overdistributed Net Investment Income
Beginning of the year............................. $ 0 $ 0
============ ============
End of the year................................... $ 0 $ (992)
============ ============
Number of Shares of the Fund:
Issued from the sale of shares.................... 255,355 235,104
Issued in connection with the reinvestment of:
Distributions from net investment income.......... 0 6,500
Distributions from net realized gain.............. 52,904 212,633
------------ ------------
308,259 454,237
Redeemed.......................................... (159,978) (206,302)
------------ ------------
Net change........................................ 148,281 247,935
============ ============
</TABLE>
Financial Highlights
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year........................... $113.67 $112.77 $142.44 $ 157.88 $ 170.59
------- ------- ------- -------- --------
Income From Investment Opera-
tions
Net Investment Income.......... 0.59 0.42 0.11 0.00 1.09
Net Realized and Unrealized
Gain (Loss) on Investments.... (0.89) 33.80 24.88 27.12 (11.41)
------- ------- ------- -------- --------
Total From Investment
Operations.................... (0.30) 34.22 24.99 27.12 (10.32)
------- ------- ------- -------- --------
Less Distributions
Distributions From Net
Investment Income............. (0.60) (0.40) (0.13) 0.00 (1.09)
Distributions From Net Realized
Capital Gains................. 0.00 (4.15) (9.42) (14.41) (36.08)
Distribution in excess of Net
Realized Capital Gains........ -- -- -- -- (0.25)
------- ------- ------- -------- --------
Total Distributions............ (0.60) (4.55) (9.55) (14.41) (37.42)
------- ------- ------- -------- --------
Net Asset Value, End of Year.... $112.77 $142.44 $157.88 $ 170.59 $ 122.85
======= ======= ======= ======== ========
Total Return (%) ............... (0.3) 30.4 17.6 17.4 (5.5)
Ratio of Operating Expenses to
Average Net Assets (%)......... 0.84 0.85 0.85 0.85 0.88
Ratio of Net Investment Income
to Average Net Assets (%)...... 0.67 0.37 0.08 (0.16) 0.66
Portfolio Turnover Rate (%)..... 67 58 65 49 171
Net Assets, End of Year (000)... $25,622 $48,832 $82,667 $114,617 $112,997
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 (%). 0.84 1.06 0.92 0.86 0.90
</TABLE>
See accompanying notes to financial statements.
33
<PAGE>
Davis Venture Value
Portfolio Manager: Christopher C. Davis
Davis Selected Advisers, L.P.
[PHOTO OF CHRISTOPHER C. DAVIS
APPEARS HERE]
Q. How did the portfolio perform during 1998?
A. Investors often measure performance on both an absolute and a relative ba-
sis. After several years of solid performance on both counts, the Davis Ven-
ture Value Series fired on only one cylinder in 1998, as its solid absolute
return of 14.4% (based on net asset value) was overshadowed by returns of
28.7% and 24.7% for the S&P 500 Index/25/ and the Lipper Variable Products
Growth Fund Average/10/, respectively. During the last half of the year, the
Series posted a return of 10.4% compared to a return of 9.2% for the S&P 500
and 16.2% for the Lipper Variable Products Growth Fund Average.
Q. How did you manage the Series during the past year?
A. Several factors contributed to the portfolio's disappointing results last
year, and one contributor was mistakes. Our biggest mistake involved the Se-
ries' holdings in the energy sector. The energy services companies we own are
among the best companies in that industry. However, we overestimated how much
control a well-run company can have over its own destiny in an industry with
deteriorating fundamentals. As Asian economies slowed, the demand for oil fell
far below levels that we had anticipated. Caught with excess inventory and ca-
pacity, major oil companies dramatically reduced their exploration and produc-
tion budgets and, therefore, their need for the equipment and services pro-
vided by the type of companies that we own.
Although many of these stocks have fallen significantly, we do not see the
outlook brightening for some time, and we have sold many of our positions at
prices well below what we paid. While we continue to own some of these compa-
nies, such as Schlumberger and Halliburton, we have not added to them even at
these low prices.
A second factor contributing to our disappointing relative performance was not
a mistake, but instead was a direct result of our investment philosophy. This
philosophy includes a strict price discipline that prevents us from buying
high-flying glamorous growth companies--not because we don't like the compa-
nies, but because we don't like their high valuations. In particular, we see a
speculative bubble developing in Internet stocks were valuations have inflated
to levels reminiscent of the biotech craze of the early 1990's and the emerg-
ing markets craze of the mid-1990s.
Unfortunately, the outstanding performance of just these kinds of glamour
stocks drove the market last year, and not owning them hurt our relative per-
formance. Nevertheless, we think that our price discipline has served us well
over the years and helped produce strong risk-adjusted returns for our invest-
ors. As we expect 1999 to be another extremely volatile year, this discipline
will remain at the heart of our investment philosophy.
Another aspect of our investment philosophy that contributed to our mixed
short-term results was our fundamental belief in the importance of companies
having successful international operations. Last year, companies with signifi-
cant operations outside the United States hurt the performance of the Series.
Holdings such as American Express and Hewlett-Packard were the major contribu-
tors to our relative underperformance. But the fact that 95% of the world's
population lives outside the United States should make it obvious that the
ability to operate globally is a big long-term advantage. Unlike the category
of mistakes discussed above, our belief in being global and our price disci-
pline are at the heart of our investment process.
Given the poor relative showing of financial stocks last year, some investors
have asked if we consider the Series' ownership of many high-quality financial
companies to be a mistake. We do not. First, we always remember that financial
stocks rarely perform in a uniform way. For example, while companies such as
BankAmerica and Allstate were down 1% and almost 14%, respectively, the shares
of SunAmerica and Progressive surged 90% and 41%, respectively. More general-
ly, however, we continue to think that favorable demographics, a benign inter-
est-rate environment, ongoing consolidation and the globalization of the fi-
nancial industry combined with reasonable valuations make this diverse sector
an attractive area to be invested in.
Q. What is your current outlook for the months ahead?
A. Looking ahead, if the market euphoria leading up to the new millennium con-
tinues, we may again lag behind funds that do not use a price discipline in
choosing their stocks. In such an environment, we would be pleased to again
achieve good absolute results even if relative results lag.
34
<PAGE>
Our price discipline is an important element in controlling risk and avoiding
big losses, such as those investors experienced in 1973 and 1974 after a
similar bubble developed in growth stock valuations and was subsequently
burst. We've often said that a successful long-term investment record is built
as much by avoiding the big losses as by picking the big winners. In the
coming years, that theory may again be put to the test.
In addition to euphoria, the approaching millennium may begin to increase
investor anxiety regarding possible year 2000 computer problems. Such
uncertainty combined with such euphoria promises to create another year of
exceptional volatility that will again test investors' nerves. Although short-
term results may be extremely volatile, we feel confident that the Series is
positioned to weather any storm.
[LINE GRAPH APPEARS HERE]
Date Venture Value S&P 500
---- ------------- -------
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
12/31/98 $25,834 $28,345
Average Annual Return
Venture Value Lipper
Series S&P 500 Growth Fund Average
1 year 14.4% 28.7% 24.7%
3 years 24.3 28.3 23.9
Since inception 25.6 28.4 n/a
X Fund Facts
Goal: Growth of capital.
Start date: October 31, 1994
Size: $440 million as of
December 31, 1998
Manager: Christopher C. Davis has
been the manager of the Series
since February 1997. Previously,
he co-managed the Series 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.
35
<PAGE>
New England Zenith Fund
(Davis Venture Value Series)
Investments as of December 31, 1998
Common Stocks--92.7% of Total Net Assets
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Banks and Savings & Loans--13.8%
68,513 Banc One Corp........................................... $ 3,498,445
157,559 BankAmerica Corp........................................ 9,473,235
299,187 Citigroup, Inc.......................................... 14,809,756
1,000 First Union Corp........................................ 60,813
36,100 State Street Corp....................................... 2,511,206
27,900 Suntrust Banks, Inc..................................... 2,134,350
112,300 U.S. Bancorp............................................ 3,986,650
610,500 Wells Fargo & Co........................................ 24,381,844
------------
60,856,299
------------
Building Materials--3.8%
140,800 Martin Marietta Materials, Inc.......................... 8,756,000
276,000 Masco Corp.............................................. 7,935,000
------------
16,691,000
------------
Consumer Products--5.5%
88,400 American Home Products Corp............................. 4,978,025
2,700 Coca-Cola Co............................................ 180,563
900 Fortune Brands, Inc..................................... 28,463
900 Gallaher Group (ADR)(c)................................. 24,469
2,800 General Electric Co..................................... 285,775
24,100 Gillette Co............................................. 1,164,331
27,300 Hasbro, Inc............................................. 986,212
10,400 Mattel, Inc............................................. 237,250
306,900 Philip Morris Companies, Inc............................ 16,419,150
------------
24,304,238
------------
Diversified Financial Services--9.0%
230,500 American Express Co..................................... 23,568,625
12,400 Boardwalk Equities, Inc. (CAD).......................... 137,102
76,900 Federal Home Loan Mortgage Corp......................... 4,955,244
27,000 Golden West Financial Corp.............................. 2,475,562
193,700 Household International, Inc............................ 7,675,362
15,500 ReliaStar Financial Corp. .............................. 714,938
------------
39,526,833
------------
Drilling--1.1%
108,100 Dover Corp.............................................. 3,959,163
32,700 Smith International, Inc.(c)............................ 823,631
------------
4,782,794
------------
Electronic Equipment--4.3%
80,687 Molex, Inc.............................................. 3,076,192
187,100 Texas Instruments, Inc. ................................ 16,008,744
------------
19,084,936
------------
Energy--3.3%
400 Amerada Hess Corp....................................... 19,900
600 Amoco Corp.............................................. 35,400
</TABLE>
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
1,000 Atlantic Richfield Co................................... $ 65,250
18,883 British Petroleum PLC (ADR)............................. 1,793,885
8,800 Burlington Resources, Inc............................... 315,150
1,700 Chevron Corp............................................ 140,994
72,000 Devon Energy Corp....................................... 2,209,500
5,600 Exxon Corp.............................................. 409,500
115,300 Halliburton Co.......................................... 3,415,762
600 Mobil Corp.............................................. 52,275
49,864 Noble Affiliates, Inc................................... 1,227,901
101,500 Schlumberger, Ltd....................................... 4,681,687
100 Sempra Energy........................................... 2,538
500 Sonat, Inc.............................................. 13,531
------------
14,383,273
------------
Food & Restaurant--4.5%
257,600 McDonald's Corp......................................... 19,738,600
------------
International Closed-End Investment Company--0.3%
178,934 Morgan Stanley Asia Pacific Fund, Inc................... 1,252,538
------------
Investment Firms--2.4%
55,000 Donaldson, Lufkin & Jenrette, Inc. ..................... 2,255,000
800 J.P. Morgan & Co., Inc.................................. 84,050
114,955 Morgan Stanley Dean Witter.............................. 8,161,805
------------
10,500,855
------------
Life Insurance--1.7%
93,750 SunAmerica, Inc......................................... 7,605,469
------------
Manufacturing--1.3%
129,900 Applied Materials, Inc.(c).............................. 5,545,106
200 Dow Chemical Co......................................... 18,188
800 Maytag Corp............................................. 49,800
------------
5,613,094
------------
Marketing--0.0%
33 A. C. Nielson Corp...................................... 932
------------
Miscellaneous--2.8%
42,100 Cooper Cameron Corp..................................... 1,031,450
6,800 Glaxo Wellcome PLC (ADR)................................ 472,600
30,700 Public Storage, Inc..................................... 830,819
20 R. H. Donnelley Corp.................................... 291
69,400 Sealed Air Corp......................................... 3,543,737
19,800 Tyco International, Ltd................................. 1,493,662
36,200 Vulcan Materials Co..................................... 4,762,562
------------
12,135,121
------------
</TABLE>
See accompanying notes to financial statements.
36
<PAGE>
New England Zenith Fund
(Davis Venture Value Series)
Investments as of December 31, 1998
Common Stocks--(Continued)
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Paper Products--0.0%
300 International Paper Co.................................. $ 13,444
400 Union Camp Corp......................................... 27,000
------------
40,444
------------
Pharmaceutical & Health Care--4.2%
15,200 Bristol-Myers Squibb Co................................. 2,033,950
13,600 Eli Lilly & Co.......................................... 1,208,700
100 IMS Health, Inc......................................... 7,544
19,500 Johnson & Johnson....................................... 1,635,562
12,600 Merck & Co., Inc. ...................................... 1,860,862
28,600 Novartis AG (ADR)....................................... 2,802,800
10,500 Pfizer, Inc............................................. 1,317,094
112,200 SmithKline Beecham plc (ADR)............................ 7,797,900
------------
18,664,412
------------
Property/Casualty Insurance--14.0%
16,075 American International Group, Inc....................... 1,553,247
141,100 Chubb Corp.............................................. 9,153,862
293 Berkshire Hathaway Class A.............................. 20,510,000
27 Berkshire Hathaway Class B.............................. 63,450
78,900 Progressive Corp., (Ohio)............................... 13,363,687
106,762 The Allstate Corp....................................... 4,123,682
115,450 Transatlantic Holdings, Inc............................. 8,723,691
29,500 20th Century Industries, Inc............................ 684,031
53,400 UNUM Corp............................................... 3,117,225
17,600 W.R. Berkley Corp....................................... 599,500
------------
61,892,375
------------
Publishing--1.4%
100 Dun & Bradstreet Corp................................... 3,156
50,400 Gannet Co., Inc......................................... 3,250,800
8,200 New York Times Co....................................... 284,438
33 Nielsen Media Research, Inc............................. 594
15,900 The News Corp. Ltd. (ADR)............................... 420,356
20,100 Tribune Co.............................................. 1,326,600
1,200 Washington Post Co...................................... 693,525
------------
5,979,469
------------
Railroad--1.1%
104,300 Burlington Northern Santa Fe Corp....................... 3,520,125
28,594 Canadian National Railway Co............................ 1,483,314
------------
5,003,439
------------
Real Estate--3.8%
13,400 CenterPoint Properties Corp. ........................... 453,088
123,100 Crescent Real Estate Equities, Inc. .................... 2,831,300
42,200 Equity Office Properties Trust.......................... 1,012,800
18,400 Equity Residential Properties Trust..................... 744,050
10,900 Federal Realty Investment Trust......................... 257,513
9,400 Gables Residential Trust................................ 217,963
80,200 General Growth Properties, Inc. ........................ 3,037,575
8,200 Home Properties, New York, Inc. ........................ 211,150
</TABLE>
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
2,400 Kimco Realty Corp. .................................... $ 95,250
27,200 Mack California Realty Corp. .......................... 839,800
24,000 Reckson Associates Realty Corp. ....................... 532,500
150,800 Rouse Co. ............................................. 4,147,000
12,000 United Dominion Realty Trust, Inc. .................... 123,750
64,200 Vornado Realty Trust................................... 2,166,750
3,300 Weingarten Realty Investors............................ 147,263
------------
16,817,752
------------
Retail--1.2%
98,200 Harcourt General, Inc. ................................ 5,223,012
------------
Technology--11.5%
322,700 Hewlett-Packard Co. ................................... 22,044,444
81,400 Intel Corp. ........................................... 9,650,987
96,100 International Business Machines Corp. ................. 17,754,475
24,600 Micron Technology, Inc. ............................... 1,243,837
------------
50,693,743
------------
Telecommunications--1.7%
77,900 AirTouch Communications, Inc.(c)....................... 5,618,538
9,704 Globalstar Telecommunications Ltd.(c).................. 195,293
18,900 Loral Space & Communications(c)........................ 336,656
21,700 Motorola, Inc. ........................................ 1,325,056
600 SBC Communications, Inc. .............................. 32,175
------------
7,507,718
------------
Utilities--0.0%
300 Carolina Power & Light Co. ............................ 14,119
300 Duke Energy Corp. ..................................... 19,219
200 Edison International................................... 5,575
200 New England Electric Systems........................... 9,625
600 Southern Co. .......................................... 17,438
200 Wisconsin Energy Corp. ................................ 6,288
------------
72,264
------------
Waste Management--0.0%
290 Waste Management, Inc. ................................ 13,521
------------
Total Common Stocks (Identified Cost $313,632,982)..... 408,384,131
------------
Convertible Preferred Stocks--0.7%
5,496 AirTouch Communications, Inc., Class C, 4.250%......... 566,088
7,000 Devon Financing Trust, 6.500%.......................... 395,500
69,000 General Growth Properties, 7.250%...................... 1,776,750
4,400 Rouse Co., Series B.................................... 190,850
2,000 Vornado Realty Trust, 6.500%........................... 97,000
------------
Total Preferred Stocks (Identified Cost $2,815,585).... 3,026,188
------------
</TABLE>
See accompanying notes to financial statements.
37
<PAGE>
New England Zenith Fund
(Davis Venture Value Series)
Investments as of December 31, 1998
Short Term Investment--6.8%
<TABLE>
<CAPTION>
Face
Amount Value (a)
<C> <S> <C>
$29,735,000 Repurchase Agreement with State Street Corp. dated
12/31/1998 at 4.6% to be repurchased at
$29,750,198 on 1/4/1999, collateralized by
$29,220,000 Federal Home Loan Bank, 4.95% due
12/4/2000 with a value of $29,364,580 and
$1,230,000 Federal Home Loan Bank, 5.0% due
10/27/1999 with a value of $1,270,944............ $ 29,735,000
------------
Total Short-Term Investments (Identified Cost
$29,735,000)..................................... 29,735,000
------------
Total Investments--100.2%
(Identified Cost $346,183,567)(b)................ 441,145,319
Other assets less liabilities..................... (794,412)
------------
Total Net Assets--100%............................ $440,350,907
============
(a) See Note 1A of Notes to Financial Statements.
(b) Federal Tax Information:
At December 31, 1998 the net unrealized appreciation on investments based
on cost of $346,139,083 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.......... $103,434,971
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value.......... (8,428,735)
------------
Net unrealized appreciation.................................. $ 95,006,236
============
</TABLE>
(c) Non-income producing security.
ADR/GDR--An American Depositary Receipt (ADR) or Global Depositary Receipt
(GDR) is a certificate issued by a Custodian Bank representing the
right to receive securities of the foreign issuer described. The
values of ADRs and GDRs are significantly influenced by trading on
exchanges not located in the United States or Canada.
CAD-- Security is denominated in Canadian Dollars.
See accompanying notes to financial statements.
38
<PAGE>
New England Zenith Fund
(Davis Venture Value Series)
Statement of Assets & Liabilities Statement of Operations
December 31, 1998 Year Ended December 31, 1998
<TABLE>
<S> <C> <C>
Assets
Investments at value.................................. $441,145,319
Cash.................................................. 14,813
Receivable for:
Fund shares sold...................................... 1,221,605
Securities sold....................................... 448,436
Dividends and interest................................ 418,882
Foreign taxes......................................... 1,570
Unamortized organization expense...................... 1,666
------------
443,252,291
Liabilities
Payable for:
Securities purchased.................................. $2,055,819
Fund shares redeemed.................................. 533,669
Withholding taxes..................................... 4,779
Accrued expenses:
Management fees....................................... 268,306
Deferred trustees' fees............................... 6,591
Other expenses........................................ 32,220
----------
2,901,384
------------
$440,350,907
============
Net Assets
Net Assets consist of:
Capital paid in....................................... $342,803,424
Undistributed net investment
income............................................... 12,192
Accumulated net realized gains (losses)............... 2,573,461
Unrealized appreciation (depreciation) on investments
and foreign currency................................. 94,961,830
------------
Net Assets............................................. $440,350,907
============
Computation of offering price:
Net asset value and redemption price per share
($440,350,907 divided by 19,022,696 shares of
beneficial interest).................................. $ 23.15
============
Identified cost of investments......................... $346,183,567
============
</TABLE>
<TABLE>
<S> <C> <C>
Investment Income
Dividends........................................... $ 4,281,941(a)
Interest............................................ 1,674,364
-----------
5,956,305
Expenses
Management fees..................................... $2,706,162
Deferred expense reimbursement...................... 41,906
Trustees' fees and expenses......................... 22,750
Custodian........................................... 77,398
Audit and tax services.............................. 17,617
Legal............................................... 27,197
Printing............................................ 80,582
Insurance........................................... 10,025
Amortization of organization
expenses........................................... 2,012
Miscellaneous....................................... 4,846
----------
Total expenses...................................... 2,990,495
-----------
Net investment income................................ 2,965,810
Realized and Unrealized Gain
(Loss) on Investments and
Foreign Currency Transactions
Realized gain (loss) on:
Investments--net.................................... 11,066,361
Foreign currency transactions--net.................. 74
----------
Total realized gain (loss) on investments and
foreign currency transactions..................... 11,066,435
----------
Unrealized appreciation (depreciation) on:
Investments--net.................................... 35,305,977
Foreign currency transactions--net.................. (541)
----------
Total unrealized appreciation (depreciation) on
investments and foreign currency transactions..... 35,305,436
----------
Net gain (loss) on investment transactions.......... 46,371,871
-----------
Net Increase (Decrease) in Net Assets From
Operations.......................................... $49,337,681
===========
(a)Net of foreign taxes of: $39,554
</TABLE>
See accompanying notes to financial statements.
39
<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,
1997 1998
------------ ------------
<S> <C> <C>
From Operations
Net investment income............................. $ 1,777,660 $ 2,965,810
Net realized gain (loss) on investments and
foreign currency transactions.................... 6,969,133 11,066,435
Unrealized appreciation (depreciation) on
investments and foreign currency transactions.... 41,444,414 35,305,436
------------ ------------
Increase (decrease) in net assets from operations. 50,191,207 49,337,681
------------ ------------
From Distributions to Shareholders
Net investment income............................. (1,734,376) (2,955,699)
Net realized gain on investments.................. (6,838,667) (8,942,796)
------------ ------------
(8,573,043) (11,898,495)
------------ ------------
From Capital Shares Transactions
Proceeds from sale of shares...................... 161,182,195 198,875,194
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income.......... 1,734,376 2,955,699
Distributions from net realized gain.............. 6,838,667 8,942,796
------------ ------------
169,755,238 210,773,689
Cost of shares redeemed........................... (39,114,351) (88,310,045)
------------ ------------
Increase (decrease) in net assets derived from
capital share transactions....................... 130,640,887 122,463,644
------------ ------------
Total increase (decrease) in net assets........... 172,259,051 159,902,830
Net Assets
Beginning of the year............................. 108,189,026 280,448,077
------------ ------------
End of the year................................... $280,448,077 $440,350,907
============ ============
Undistributed Net Investment Income
Beginning of the year............................. $ 17,317 $ 0
============ ============
End of the year................................... $ 0 $ 12,192
============ ============
Number of Shares of the Fund:
Issued from the sale of shares.................... 8,370,050 9,098,582
Issued in connection with the reinvestment of:
Distributions from net investment income.......... 85,008 127,786
Distributions from net realized gain.............. 335,095 387,229
------------ ------------
8,790,153 9,613,597
Redeemed.......................................... (2,030,066) (4,074,457)
------------ ------------
Net change........................................ 6,760,087 5,539,140
============ ============
</TABLE>
Financial Highlights
<TABLE>
<CAPTION>
October 31, 1994(a)
through Year Year Year Year
December 31, Ended Ended Ended Ended
1994 1995 1996 1997 1998
------------------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year...... $10.00 $ 9.62 $ 13.10 $ 16.09 $ 20.80
------ ------- -------- -------- --------
Income From Investment
Operations
Net Investment Income.. 0.03 0.10 0.13 0.18 0.16
Net Realized and
Unrealized Gain (Loss)
on Investments........ (0.38) 3.68 3.26 5.20 2.84
------ ------- -------- -------- --------
Total From Investment
Operations............ (0.35) 3.78 3.39 5.38 3.00
------ ------- -------- -------- --------
Less Distributions
Distributions From Net
Investment Income..... (0.03) (0.10) (0.13) (0.14) (0.16)
Distributions From Net
Realized Capital
Gains................. 0.00 (0.20) (0.27) (0.53) (0.49)
------ ------- -------- -------- --------
Total Distributions.... (0.03) (0.30) (0.40) (0.67) (0.65)
------ ------- -------- -------- --------
Net Asset Value, End of
Year................... $ 9.62 $ 13.10 $ 16.09 $ 20.80 $ 23.15
====== ======= ======== ======== ========
Total Return (%)........ (3.5)(b) 39.3 25.8 33.5 14.4
Ratio of Operating
Expenses to Average Net
Assets (%)............. 0.90 (c) 0.90 0.90 0.90 0.83
Ratio of Net Investment
Income to Average Net
Assets (%)............. 2.54 (c) 1.39 1.25 0.94 0.82
Portfolio Turnover Rate
(%).................... 1 (c) 20 18 17 25
Net Assets, End of Year
(000).................. $3,371 $35,045 $108,189 $280,448 $440,351
The ratios of expenses
to average net assets
without giving effect
to the voluntary
expense agreement
described in Note 4 to
the Financial
Statements would have
been (%)............... 3.97(c) 1.51 0.96 0.90 --
</TABLE>
(a) Commencement of operations.
(b) Not computed on an annualized basis.
(c) Computed on an annualized basis.
See accompanying notes to financial statements.
40
<PAGE>
Westpeak Growth and Income
Portfolio Manager: Gerald H. Scriver and Philip J. Cooper Westpeak Investment
Advisors, L.P.
(Photo of Gerald H. Scriver)
(Photo of Philip J. Cooper)
Q. How did the Westpeak Growth and Income Series perform during 1998?
A. For the 12 months ending December 31, 1998, the Series had a total return
of 24.4% (based on net asset value). The Series' results lagged the 28.7%
return of the S&P 500/25/ during the period but significantly outpaced the
16.5% return of the Lipper Variable Products Growth and Income Fund
Average/11/.
Q. Describe the market environment in 1998.
A. Extending what is by now a familiar story, 1998's market results were de-
fined by the performance of a relative handful of very large capitalization
stocks. The markets adjusted to the ongoing tumult in Asia and recorded a
fourth consecutive year of double-digit returns in the Dow Jones Industrial
Average and the S&P 500, two widely followed indicators of market activity.
Along the way, U.S. markets displayed remarkable resilience, snapping back
smartly from a sharp summer decline. The market's July plunge had its origins
in Moscow, where the Russian government failed to repay debt that it owed to
other countries; fears of parallel events in Brazil--and therefore much of
Latin America--extended the slide. Bond markets were especially affected, as a
flight from overseas markets into the reassuring quality of U.S. government
securities left other fixed-income sectors adrift in search of buyers.
The Federal Reserve Board took an assertive stance against the looming credit
crunch with three interest rate cuts between September and November, lowering
short-term interest rates by three-quarters of a percentage point. These steps
encouraged buyers to return to the markets for both stocks and bonds, and the
Dow Jones Industrial Average closed the year at 9181, not far from its then
record high of 9374, set on November 24, 1998.
Q. Given this environment, what was your investment strategy during the year?
A. Our portfolio-building style is based on analysis of dozens of fundamental
and technical measures that we use to identify stocks that may be candidates
for inclusion in the Series. To that quantitative information we apply our
professional judgment and the lessons of experience to make final investment
selections. Because we always keep the Series fully invested and never try to
gauge the market's next moves, the overall investment environment does not in-
fluence our positioning of the Series.
Over the course of the year, we gradually shifted the Series' portfolio empha-
sis from growth stocks to stocks in the S&P 500 Index with lower price-
/earnings ratios, an objective measure that permits investors to compare the
costs of stocks. We kept the Series underweighted in overvalued growth sectors
and in very expensive technology stocks; in both instances we thought pros-
pects for earnings expansion were fully reflected in market valuations. We
overweighted the Series' portfolio (relative to the S&P 500) in reasonably
priced technology and telecommunications companies. We were underweighted the
Series in drug companies, whose high valuations did not seem justified, and in
consumer staples.
Q. What were the principal factors affecting performance?
A. Our underweighted position in the largest-cap growth stocks left the Series
underrepresented in one of the year's most productive sectors. Avoiding ex-
tremely high-priced technology companies also hampered performance. Among the
sectors that helped performance were the regional Bell companies and estab-
lished technology companies with demonstrated earnings, including CISCO Sys-
tems, which manufactures products for computer networks, and Sun Microsystems,
the leading producer of networked workstations. Other selections that helped
boost performance were healthcare companies Genentech and Omnicare, as well as
IBM, United Technology and Gulfstream, a manufacturer of jet aircraft for
businesses.
Q. What is your current outlook for the market and the Series?
A. We believe that business conditions in Asia and elsewhere are stabilizing,
and that some overseas economies may already have begun to climb out of their
troughs. Without the drag of crisis-weakened export markets, growth in our
Gross Domestic Product should continue, but at a lower rate than in 1998. In-
flation represents no immediate threat, and we think there is enough momentum
in the economy to forestall any likelihood of a recession, especially given
the current climate of lower interest rates. But the Federal Reserve Board
will continue to have a huge impact on market psychology, and any rise in in-
terest rates could represent a significant risk for the market.
41
<PAGE>
Therefore we believe that markets in 1999 will oscillate between optimism over
continued low rates and concern that continued growth could trigger a rate
hike on the part of the Federal Reserve Board, cutting short any earnings ex-
pansion and darkening the mood of investors. Perhaps most importantly, we ex-
pect that investors will finally put aside their obsession with the very larg-
est capitalization growth companies as valuations for these stocks become more
and more unrealistic--in our opinion there must come a point where valuations
mean something. The implication for the markets could be a greater focus on
value than in recent years, an eventuality that we believe we can address suc-
cessfully through the proprietary stock selection techniques that we have been
fine-tuning for over 25 years.
[GRAPH APPEARS HERE]
A $10,000 investment compared to the S&P 500 Index
since the Series' inception
Date Growth and Income S&P 500
---- ----------------- -------
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
12/31/98 $30,214 $31,738
Average Annual Return
Growth
& Income Lipper Variable Products Growth
Series S&P 500/25/ and Income Average/11/
1 year 24.4% 28.7% 16.5%
3 years 25.2 28.3 21.5
5 years 21.5 24.1 18.8
Since Inception 21.5 22.6 n/a
X Fund Facts
Goal: Long-term total return
through investment in equity
securities.
Start date: April 30, 1993
Size: $282 million as of December
31, 1998
Managers: Gerald Scriver and
Philip Cooper. Mr. Scriver and Mr.
Cooper have managed the Series
from its inception in 1993; they
also have managed Westpeak Stock
Index Series since August 1993,
New England Growth Opportunities
Fund since May 1995 and New
England Capital Growth Fund since
February 1998. Mr. Scriver joined
Westpeak in July 1991 and Mr.
Cooper joined Westpeak in December
1991.
Performance numbers are net of all Series expenses but do not include any
insurance, sales or administrative charges of variable annuity or life
insurance contracts. If these charges were included, the returns shown would
be lower.
This information represents past performance and is not indicative of future
results. Investment return and principal value will fluctuate so that shares,
upon redemption, may be worth more or less than the original cost.
42
<PAGE>
New England Zenith Fund
(Westpeak Growth and Income Series)
Investments as of December 31, 1998
Common Stocks--97.9% of Total Net Assets
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Airlines--1.9%
41,100 AMR, Corp.(c)........................................... $ 2,440,312
22,900 Delta Air Lines, Inc. .................................. 1,190,800
34,300 US Airways Group, Inc.(c)............................... 1,783,600
------------
5,414,712
------------
Automotive--2.4%
113,500 Ford Motor Co. ......................................... 6,661,031
------------
Banks--6.8%
24,600 Banc One Corp........................................... 1,256,137
87,900 BB&T Corp............................................... 3,543,469
58,900 Comerica, Inc........................................... 4,016,244
68,200 PNC Bank Corp........................................... 3,691,325
56,300 SunTrust Banks, Inc..................................... 4,306,950
66,000 UnionBanCal Corp........................................ 2,248,125
------------
19,062,250
------------
Business Services--0.6%
25,900 HBO & Co................................................ 743,006
17,700 Omnicom Group........................................... 1,026,600
------------
1,769,606
------------
Chemicals--1.4%
33,100 Dow Chemical Co. ....................................... 3,010,031
29,300 Ecolab, Inc............................................. 1,060,294
------------
4,070,325
------------
Computer Software & Services--1.8%
49,800 Compuware Corp.(c)...................................... 3,890,625
30,500 NCR Corp.(c)............................................ 1,273,375
------------
5,164,000
------------
Computers & Business Equipment--9.9%
84,750 Cisco Systems, Inc.(c).................................. 7,865,859
22,200 EMC Corp.(c)............................................ 1,887,000
56,200 International Business Machines......................... 10,382,950
63,700 Lexmark International Group, Inc.(c).................... 6,401,850
7,700 Sun Microsystems, Inc.(c)............................... 659,313
5,200 Xerox Corp. ............................................ 613,600
------------
27,810,572
------------
Construction--1.3%
20,700 Armstrong World Industries, Inc. ....................... 1,248,469
32,500 Fluor Corp. ............................................ 1,383,281
28,200 Lafarge Corp. .......................................... 1,142,100
------------
3,773,850
------------
Defense & Aerospace--3.5%
24,200 B.F. Goodrich Co. ...................................... 868,175
53,500 Gulfstream Aerospace Corp.(c)........................... 2,848,875
</TABLE>
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Defense & Aerospace--(Continued)
18,000 Litton Industries, Inc.(c).............................. $ 1,174,500
94,700 Sundstrand Corp. ....................................... 4,912,563
------------
9,804,113
------------
Drugs--8.7%
70,500 Amgen, Inc.(c).......................................... 7,371,656
56,200 Genentech, Inc.(c)...................................... 4,478,438
51,200 McKesson Corp........................................... 4,048,000
28,500 Pharmacia & Upjohn, Inc................................. 1,613,812
127,400 Schering-Plough Corp. .................................. 7,038,850
------------
24,550,756
------------
Electric Utilities--3.1%
94,400 DTE Energy Co. ......................................... 4,047,400
69,000 Pinnacle West Capital Corp.............................. 2,923,875
54,000 Western Resources, Inc.................................. 1,795,500
------------
8,766,775
------------
Electronics--3.5%
18,900 Comverse Technology, Inc.(c)............................ 1,341,900
69,000 Honeywell, Inc. ........................................ 5,196,563
22,500 Lucent Technologies, Inc. .............................. 2,475,000
12,800 Tellabs, Inc.(c)........................................ 877,600
------------
9,891,063
------------
Energy Reserves--1.7%
66,500 Exxon Corp. ............................................ 4,862,813
------------
Financial Services--3.3%
43,400 Countrywide Credit Industries, Inc. .................... 2,178,137
96,800 Federal National Mortgage Association................... 7,163,200
------------
9,341,337
------------
Food & Beverages--3.9%
43,100 H.J. Heinz Co........................................... 2,440,538
33,900 Quaker Oats Co. ........................................ 2,017,050
78,200 Unilever N.V............................................ 6,485,713
------------
10,943,301
------------
Gas & Pipeline Utilities--3.0%
104,700 El Paso Energy Corp..................................... 3,644,869
166,000 LG&E Energy Corp........................................ 4,699,875
------------
8,344,744
------------
Health Care--Products--1.9%
13,100 Allegiance Corp. ....................................... 610,787
9,500 Guidant Corp. .......................................... 1,047,375
47,500 TYCO International, Ltd................................. 3,583,281
------------
5,241,443
------------
</TABLE>
See accompanying notes to financial statements.
43
<PAGE>
New England Zenith Fund
(Westpeak Growth and Income Series)
Investments as of December 31, 1998
Common Stocks--(Continued)
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Industrial--Parts & Machinery--4.5%
49,000 Caterpillar, Inc. ...................................... $ 2,254,000
120,300 Ingersoll-Rand Co. ..................................... 5,646,581
44,600 United Technologies Corp. .............................. 4,850,250
------------
12,750,831
------------
Leisure--1.2%
47,600 Eastman Kodak Co. ...................................... 3,427,200
------------
Life Insurance--5.2%
33,900 American General Corp. ................................. 2,644,200
36,600 CIGNA Corp. ............................................ 2,829,637
51,100 Jefferson Pilot Corp. .................................. 3,832,500
46,800 Transamerica Corp....................................... 5,405,400
------------
14,711,737
------------
Liquor--0.9%
36,500 Anheuser-Busch Companies, Inc. ......................... 2,395,312
------------
Media & Entertainment--1.8%
74,400 Carnival Corp........................................... 3,571,200
19,000 Viacom, Inc., Class B(c)................................ 1,406,000
------------
4,977,200
------------
Medical--Services--0.2%
12,700 Omnicare, Inc........................................... 441,325
------------
Metals & Mining--1.9%
171,800 Alcan Aluminum, Ltd..................................... 4,649,338
25,400 USX-U.S. Steel Group.................................... 584,200
------------
5,233,538
------------
Oil--Refining & Distribution--0.4%
33,400 Coastal Corp. .......................................... 1,166,912
------------
Property & Casualty Insurance--1.6%
71,600 Allstate Corp........................................... 2,765,550
12,400 MGIC Investment Corp. .................................. 493,675
56,575 Old Republic International Corp. ....................... 1,272,937
------------
4,532,162
------------
Publishing--2.4%
87,800 Deluxe Corp............................................. 3,210,188
71,200 Knight-Ridder, Inc...................................... 3,640,100
------------
6,850,288
------------
Retail-Clothing--2.2%
175,600 Limited, Inc............................................ 5,114,350
34,600 TJX Companies, Inc. .................................... 1,003,400
------------
6,117,750
------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Retail--Department Store--3.8%
38,000 Dayton Hudson Corp. .................................... $ 2,061,500
27,700 Federated Department Stores, Inc.(c).................... 1,206,681
91,600 Wal-Mart Stores, Inc.................................... 7,459,675
------------
10,727,856
------------
Retail--Food & Drug--1.2%
29,800 Albertson's, Inc. ...................................... 1,897,888
22,800 Safeway, Inc.(c)........................................ 1,389,375
------------
3,287,263
------------
Retail--Specialty--0.2%
14,300 Tandy Corp. ............................................ 588,981
------------
Securities & Asset Management--0.8%
50,000 Lehman Brothers Holdings, Inc. ......................... 2,203,125
------------
Semi-Conductors--2.6%
62,900 Intel Corp.............................................. 7,457,581
------------
Telecommunciation--7.1%
86,500 Ameritech Corp.......................................... 5,481,938
105,000 AT&T Corp............................................... 7,901,250
13,400 Bell Atlantic Corp...................................... 710,200
91,500 U.S. West, Inc. ........................................ 5,913,188
------------
20,006,576
------------
Thrifts--1.2%
36,000 Golden West Financial Corp. ............................ 3,300,750
------------
Total Common Stocks (Identified Cost $228,549,832)...... 275,649,078
------------
</TABLE>
See accompanying notes to financial statements.
44
<PAGE>
New England Zenith Fund
(Westpeak Growth and Income Series)
Investments as of December 31, 1998
Short-Term Investment--1.8%
<TABLE>
<CAPTION>
Face
Amount Value (a)
<C> <S> <C>
$5,190,000 Repurchase agreement with State Street Corp. dated
12/31/1998 at 4.000% to be repurchased at
$5,192,307 on 1/04/1999 collaterized by $3,885,000
U.S Treasury Bond 8.125% due 8/15/2019 with a value
of $5,296,347...................................... $ 5,190,000
------------
Total Short-Term Investment
(Identified cost $5,190,000)....................... 5,190,000
------------
Total Investments--99.7%
(Identified cost $233,739,832)(b).................. 280,839,078
Other assets less liabilities....................... 718,121
------------
Total Net Assets--100%.............................. $281,557,199
============
</TABLE>
(a) See Note 1A of Notes to Financial Statements.
(b) Federal Tax Information:
At December 31,1998 the net unrealized appreciation on investments based on
cost of $233,779,161 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............... $51,863,194
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value............... (4,803,277)
-----------
Net unrealized appreciation.................................... $47,059,917
===========
</TABLE>
(c) Non-income producing security.
See accompanying notes to financial statements.
45
<PAGE>
New England Zenith Fund
(Westpeak Growth and Income Series)
Statement of Assets & Liabilities
December 31, 1998
<TABLE>
<S> <C> <C>
Assets
Investments at value.................................... $280,839,078
Cash.................................................... 477
Receivable for:
Fund shares sold........................................ 753,731
Dividends and interest.................................. 400,587
Foreign taxes........................................... 697
------------
281,994,570
Liabilities
Payable for:
Fund shares redeemed.................................... $253,078
Accrued expenses:
Management fees......................................... 154,368
Deferred trustees' fees................................. 6,688
Other expenses.......................................... 23,237
--------
437,371
------------
$281,557,199
============
Net Assets
Net Assets consist of:
Capital paid in......................................... $226,865,622
Undistributed net investment income..................... 11,052
Accumulated net realized gains (losses)................. 7,581,279
Unrealized appreciation (depreciation) on investments... 47,099,246
------------
Net Assets............................................... $281,557,199
============
Computation of offering price:
Net asset value and redemption price
per share ($281,557,199 divided by 1,351,407 shares of
beneficial
interest)............................................... $ 208.34
============
Identified cost of investments........................... $233,739,832
============
</TABLE>
Statement of Operations
Year Ended December 31, 1998
<TABLE>
<S> <C> <C>
Investment Income
Dividends.......................................... $ 2,955,991(a)
Interest........................................... 331,021
-----------
3,287,012
Expenses
Management fees.................................... $1,462,154
Trustees' fees and expenses........................ 17,001
Custodian.......................................... 59,422
Audit and tax services............................. 11,377
Legal.............................................. 13,895
Printing........................................... 45,398
Insurance.......................................... 5,767
Miscellaneous...................................... 3,954
----------
Total expenses..................................... 1,618,968
-----------
Net investment income............................... 1,668,044
Realized and Unrealized Gain (Loss) on Investments
Realized gain (loss) on:
Investments--net................................... 19,998,285
Unrealized appreciation
(depreciation) on:
Investments--net................................... 24,191,543
-----------
Net gain (loss) on investment transactions.......... 44,189,828
-----------
Net Increase (Decrease) in Net Assets from
Operations......................................... $45,857,872
===========
</TABLE>
(a) Net of foreign taxes of: $6,716.
See accompanying notes to financial statements.
46
<PAGE>
New England Zenith Fund
(Westpeak Growth and Income Series)
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
From Operations
Net investment income............................. $ 1,047,363 $ 1,668,044
Net realized gain (loss) on investments........... 17,943,986 19,998,285
Unrealized appreciation (depreciation) on
investments...................................... 12,979,433 24,191,543
------------ ------------
Increase (decrease) in net assets from operations. 31,970,782 45,857,872
------------ ------------
From Distributions to Shareholders
Net investment income............................. (1,033,253) (1,671,571)
Net realized gain on investments.................. (15,362,335) (17,136,182)
------------ ------------
(16,395,588) (18,807,753)
------------ ------------
From Capital Shares Transactions
Proceeds from sale of shares...................... 64,665,884 131,989,323
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income.......... 1,033,253 1,671,571
Distributions from net realized gain.............. 15,362,335 17,136,182
------------ ------------
81,061,472 150,797,076
Cost of shares redeemed........................... (26,228,431) (49,028,374)
------------ ------------
Increase (decrease) in net assets derived from
capital share transactions....................... 54,833,041 101,768,702
------------ ------------
Total increase (decrease) in net assets........... 70,408,235 128,818,821
Net Assets
Beginning of the year............................. 82,330,143 152,738,378
------------ ------------
End of the year................................... $152,738,378 $281,557,199
============ ============
Undistributed Net Investment Income
Beginning of the year............................. $ 469 $ 14,579
============ ============
End of the year................................... $ 14,579 $ 11,052
============ ============
Number of Shares of the Fund:
Issued from the sale of shares.................... 362,661 660,083
Issued in connection with the reinvestment of:
Distributions from net investment income.......... 5,886 8,032
Distributions from net realized gain.............. 86,752 82,416
------------ ------------
455,299 750,531
Redeemed.......................................... (149,104) (247,768)
------------ ------------
Net change........................................ 306,195 502,763
============ ============
</TABLE>
Financial Highlights
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year........................... $112.32 $109.03 $141.31 $ 151.77 $ 179.98
------- ------- ------- -------- --------
Income From Investment
Operations
Net Investment Income........... 1.90 1.77 1.78 1.37 1.30
Net Realized and Unrealized Gain
(Loss) on Investments.......... (3.25) 37.91 23.69 48.76 42.44
------- ------- ------- -------- --------
Total From Investment
Operations..................... (1.35) 39.68 25.47 50.13 43.74
------- ------- ------- -------- --------
Less Distributions
Distributions From Net
Investment Income.............. (1.92) (1.71) (1.82) (1.35) (1.31)
Distributions From Net Realized
Capital Gains.................. 0.00 (5.69) (13.19) (20.57) (14.07)
Distributions From Paid-in
Capital........................ (0.02) 0.00 0.00 0.00 0.00
------- ------- ------- -------- --------
Total Distributions............. (1.94) (7.40) (15.01) (21.92) (15.38)
------- ------- ------- -------- --------
Net Asset Value, End of Year.... $109.03 $141.31 $151.77 $ 179.98 $ 208.34
======= ======= ======= ======== ========
Total Return (%)................ (1.2) 36.5 18.1 33.5 24.4
Ratio of Operating Expenses to
Average Net Assets (%)......... 0.85 0.85 0.85 0.82 0.78
Ratio of Net Investment Income
to Average Net Assets (%)...... 2.30 1.63 1.40 0.91 0.80
Portfolio Turnover Rate (%)..... 133 92 104 93 100
Net Assets, End of Year (000)... $22,934 $48,129 $82,330 $152,738 $281,557
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 (%). 0.86 1.06 0.91 -- --
</TABLE>
See accompanying notes to financial statements.
47
<PAGE>
Westpeak Stock Index Series
Portfolio Managers: Gerald H. Scriver and Philip J. Cooper
Westpeak Investment Advisors, L.P.
[PHOTO APPEARS HERE]
[PHOTO APPEARS HERE]
Q. How did the portfolio perform during 1998?
A. The Westpeak Stock Index Series returned 27.9% (based on net asset value)
for 1998. This return lagged the S&P 500/25/ return of 28.7% and the Lipper
Variable Products S&P 500 Index Fund Average/16/ which returned 28.3%. The Se-
ries remained fully participated in the 500 stocks which make up the S&P 500
Index. It is our strategy to weight the allocation of the Series virtually in
the same portion as the S&P 500 Index so as to better duplicate the perfor-
mance.
Q. What is your current outlook for the market and the Series?
A. We believe that business conditions in Asia and elsewhere are stabilizing,
and that some overseas economies may already have begun to climb out of their
troughs. Without the drag of crisis-weakened export markets, growth in our
Gross Domestic Product should continue, but at a lower rate than 1998. Infla-
tion represents no immediate threat, and we think there is enough momentum in
the economy to forestall any likelihood of a recession, especially given the
current climate of lower interest rates. But the Federal Reserve Board will
continue to have a huge impact on market psychology, and any rise in interest
rates could represent a significant risk for the market. Therefore, we believe
that markets in 1999 will oscillate between optimism over continued low rates
and concern that continued growth could trigger a rate hike on the part of the
Federal Reserve Board, cutting short any earnings expansion and darkening the
mood of investors. Perhaps most importantly, we expect that investors will fi-
nally put aside their obsession with the very largest capitalization growth
companies as valuations for these stocks become more and more unrealistic--
there must come a point where valuations mean something, in our opinion.
[GRAPH APPEARS HERE]
A $10,000 Investment Compared to the S&P 500 Index over the past 10 years
Date Stock Index Series S&P 500
---- ------------------ -------
12/31/88 $10,000 $10,000
12/31/89 $13,015 $13,159
12/31/90 $12,476 $12,749
12/31/91 $16,265 $16,617
12/31/92 $17,452 $17,881
12/31/93 $19,149 $19,675
12/31/94 $19,367 $19,942
12/31/95 $26,510 $27,409
12/31/96 $32,466 $33,686
12/31/97 $43,016 $44,909
12/31/98 $55,027 $57,717
Average Annual Total Return
Stock Index Lipper Variable Products
Series S&P 500/25/ S&P 500 Fund Index Average/16/
1 year 27.9% 28.7% 28.3%
3 years 27.6 28.3 27.8
5 years 23.5 24.1 23.6
10 years 18.6 19.2 20.5
Since Inception 15.9 16.5 n/a
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: $186 million as of
December 31, 1998
Managers: Gerald H. Scriver and
Philip J. Cooper. Mr. Scriver and
Mr. Cooper have managed the Series
since 1993; they have also managed
Westpeak Growth and Income Series
since August 1993, New England
Growth Opportunities Fund since May
1995 and New England Capital Growth
Fund since February 1998. 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.
48
<PAGE>
New England Zenith Fund
(Westpeak Stock Index Series)
Investments as of December 31, 1998
Common Stocks--99.3% of Total Net Assets
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Airlines--0.3%
3,300 AMR Corp.(c)............................................. $ 195,937
2,800 Delta Air Lines, Inc. ................................... 145,600
6,200 Southwest Airlines Co. .................................. 139,113
1,800 US Airways Group, Inc.(c)................................ 93,600
------------
574,250
------------
Apparel & Textiles--0.2%
1,300 Fruit of the Loom, Inc.(c)............................... 17,956
1,200 Liz Claiborne, Inc. ..................................... 37,875
5,300 NIKE, Inc., Class B...................................... 214,981
1,100 Reebok International, Ltd.(c)............................ 16,363
600 Russell Corp. ........................................... 12,188
300 Springs Industries, Inc. ................................ 12,431
2,200 VF Corp. ................................................ 103,125
------------
414,919
------------
Automotive--1.4%
1,400 Cooper Tire & Rubber Co. ................................ 28,612
3,022 Dana Corp. .............................................. 123,524
700 Fleetwood Enterprises, Inc. ............................. 24,325
22,400 Ford Motor Co. .......................................... 1,314,600
12,100 General Motors Corp. .................................... 865,906
2,900 Goodyear Tire & Rubber................................... 146,269
2,200 ITT Industries, Inc. .................................... 87,450
1,320 Navistar International Corp.(c).......................... 37,620
1,390 PACCAR, Inc. ............................................ 57,164
------------
2,685,470
------------
Banks--6.4%
31,824 BankAmerica Corp. ....................................... 1,913,418
5,500 BankBoston Corp. ........................................ 214,156
1,800 Bankers Trust New York Corp. ............................ 153,788
5,300 BB&T Corp. .............................................. 213,656
15,840 Chase Manhattan Corp. ................................... 1,078,110
42,353 Citigroup, Inc. ......................................... 2,096,474
2,900 Comerica, Inc. .......................................... 197,744
4,900 Fifth Third Bancorp...................................... 349,431
17,970 First Union Corp. ....................................... 1,092,801
10,524 Fleet Financial Group, Inc. ............................. 470,291
3,940 Huntington Bancshares, Inc. ............................. 118,446
3,300 J.P. Morgan & Co., Inc. ................................. 346,706
8,200 Keycorp.................................................. 262,400
2,800 Mercantile Bancorp, Inc. ................................ 129,150
6,100 National City Corp. ..................................... 442,250
5,600 PNC Bank Corp. .......................................... 303,100
4,000 Regions Financial Corp. ................................. 161,250
2,000 Republic New York Corp. ................................. 91,125
3,200 Summit Bancorp........................................... 139,800
5,900 SunTrust Banks, Inc. .................................... 451,350
4,950 Synovus Financial Corp. ................................. 120,656
2,400 Union Planters Corp. .................................... 108,750
</TABLE>
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
3,800 Wachovia Corp. .......................................... $ 332,263
30,030 Wells Fargo & Co. ....................................... 1,199,323
------------
11,986,438
------------
Banks & Thrifts--1.8%
21,692 Banc One Corp. .......................................... 1,107,648
13,900 Bank of New York, Inc. .................................. 559,475
4,300 Firstar Corp. ........................................... 399,900
4,800 Mellon Bank Corp. ....................................... 330,000
2,000 Northern Trust Corp. .................................... 174,625
3,000 State Street Corp. ...................................... 208,687
13,808 U.S. Bancorp............................................. 490,184
------------
3,270,519
------------
Broadcasting--0.5%
6,800 Comcast Corp. ........................................... 399,075
11,300 MediaOne Group, Inc.(c).................................. 531,100
------------
930,175
------------
Business Services--1.2%
5,600 Automatic Data Processing, Inc. ......................... 449,050
1,400 Ceridian Corp.(c)........................................ 97,738
2,900 Computer Sciences Corp.(c)............................... 186,869
9,100 Electronic Data Systems Corp. ........................... 457,275
7,900 HBO & Co. ............................................... 226,631
3,020 IMS Health, Inc. ........................................ 227,821
3,100 Omnicom Group............................................ 179,800
3,000 Paychex, Inc. ........................................... 154,312
500 Shared Medical System.................................... 24,938
2,500 The Interpublic Group of Companies, Inc. ................ 199,375
------------
2,203,809
------------
Chemicals--2.3%
4,300 Air Products & Chemicals, Inc. .......................... 172,000
1,400 Ashland, Inc. ........................................... 67,725
2,100 Avery Dennison Corp. .................................... 94,631
4,150 Dow Chemical Co. ........................................ 377,391
21,000 E.l. du Pont de Nemours & Co. ........................... 1,114,312
1,400 Eastman Chemical Co. .................................... 62,650
2,400 Ecolab, Inc. ............................................ 86,850
2,625 Engelhard Corp. ......................................... 51,188
1,100 Great Lakes Chemical Corp. .............................. 44,000
1,700 Hercules, Inc. .......................................... 46,538
7,500 Minnesota Mining & Manufacturing Co. .................... 533,437
11,100 Monsanto Co. ............................................ 527,250
2,400 Morton International, Inc. .............................. 58,800
1,200 Nalco Chemical Co. ...................................... 37,200
6,600 Occidental Petroleum Corp. .............................. 111,375
3,300 PPG Industries, Inc. .................................... 192,225
2,900 Praxair, Inc. ........................................... 102,225
3,300 Rohm & Haas Co. ......................................... 99,412
1,596 Sealed Air Corp.(c)...................................... 81,496
</TABLE>
See accompanying notes to financial statements.
49
<PAGE>
New England Zenith Fund
(Westpeak Stock Index Series)
Investments as of December 31, 1998
Common Stocks--(Continued)
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Chemicals--(Continued)
3,200 Sherwin Williams Co...................................... $ 94,000
3,100 Tenneco, Inc............................................. 105,594
2,500 Union Carbide Corp....................................... 106,250
1,400 W.R. Grace & Co.(c)...................................... 21,963
1,875 Westvaco Corp............................................ 50,273
------------
4,238,785
------------
Computer Software & Services--4.9%
1,300 Adobe Systems, Inc....................................... 60,775
800 Autodesk, Inc............................................ 34,150
3,800 BMC Software, Inc.(c).................................... 169,337
15,948 Cendant Corp.(c)......................................... 304,009
10,400 Computer Associates International, Inc................... 443,300
3,400 Compuware Corp.(c)....................................... 265,625
8,300 First Data Corp. ........................................ 263,006
45,700 Microsoft Corp.(c)....................................... 6,338,019
6,500 Novell, Inc.(c).......................................... 117,812
18,037 Oracle Systems Corp.(c).................................. 777,846
5,000 Parametric Technology Corp.(c)........................... 81,250
4,200 PeopleSoft, Inc.(c)...................................... 79,538
4,700 Unisys Corp.(c).......................................... 161,856
------------
9,096,523
------------
Computers & Business Equipment--7.0%
6,700 3Com Corp.(c)............................................ 300,244
2,500 Apple Computer(c)........................................ 102,344
4,000 Ascend Communications, Inc.(c)........................... 263,000
3,100 Cabletron Systems, Inc.(c)............................... 25,962
28,825 Cisco Systems, Inc.(c)................................... 2,675,320
30,947 Compaq Computer Corp. ................................... 1,297,840
900 Data General Corp.(c).................................... 14,794
23,500 Dell Computer Corp.(c)................................... 1,719,906
9,200 EMC Corp.(c)............................................. 782,000
2,900 Gateway 2000, Inc.(c).................................... 148,444
19,300 Hewlett-Packard Co. ..................................... 1,318,431
2,600 Ikon Office Solutions, Inc. ............................. 22,263
17,300 International Business Machines.......................... 3,196,175
5,100 Pitney Bowes, Inc. ...................................... 336,919
4,500 Seagate Technology(c).................................... 136,125
3,500 Silicon Graphics, Inc.(c)................................ 45,062
6,100 Xerox Corp. ............................................. 719,800
------------
13,104,629
------------
Computer Hardware--0.3%
7,000 Sun Microsystems, Inc.(c)................................ 599,375
------------
Construction--0.2%
700 Armstrong World Industries, Inc. ........................ 42,219
1,100 Centex Corp. ............................................ 49,569
1,500 Fluor Corp. ............................................. 63,844
700 Kaufman & Broad Home Corp. .............................. 20,125
</TABLE>
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
6,300 Masco Corp. ........................................... $ 181,125
1,000 Owens-Corning.......................................... 35,437
800 Pulte Corp. ........................................... 22,250
------------
414,569
------------
Consumer Goods & Services--0.2%
1,700 Black & Decker Corp. .................................. 95,306
1,700 Maytag Corp. .......................................... 105,825
1,400 Whirlpool Corp. ....................................... 77,525
------------
278,656
------------
Consumer--Jewelry/Novelty/Gifts--0.0%
600 Jostens, Inc. ......................................... 15,712
------------
Defense & Aerospace--1.3%
500 Aeroquip-Vickers, Inc. ................................ 14,969
10,400 Allied Signal, Inc. ................................... 460,850
1,400 B.F. Goodrich Co. ..................................... 50,225
2,300 General Dynamics Corp. ................................ 134,838
3,615 Lockheed Martin Corp. ................................. 306,371
1,300 Northrop Grumman Corp. ................................ 95,063
6,300 Raytheon Co., Class B.................................. 335,475
3,000 Textron, Inc. ......................................... 227,812
18,754 The Boeing Co. ........................................ 611,849
2,300 TRW, Inc. ............................................. 129,231
------------
2,366,683
------------
Drugs--8.7%
1,200 Allergan, Inc. ........................................ 77,700
1,600 ALZA Corp.(c).......................................... 83,600
24,400 American Home Products Corp. .......................... 1,374,025
4,600 Amgen, Inc.(c)......................................... 480,988
18,480 Bristol-Myers Squibb Co. .............................. 2,472,855
3,700 Cardinal Health, Inc. ................................. 280,738
20,400 Eli Lilly & Co. ....................................... 1,813,050
22,100 Merck & Co. ........................................... 3,263,894
24,200 Pfizer, Inc. .......................................... 3,035,587
9,380 Pharmacia & Upjohn, Inc. .............................. 531,142
27,200 Schering-Plough Corp. ................................. 1,502,800
1,800 Sigma-Aldrich.......................................... 52,875
15,200 Warner-Lambert Co. .................................... 1,142,850
------------
16,112,104
------------
Electric Utilities--2.4%
3,300 AES Corp.(c)........................................... 156,338
2,500 Ameren Corp.(c)........................................ 106,719
3,500 American Electric Power, Inc. ......................... 164,719
2,800 Baltimore Gas & Electric Co ........................... 86,450
2,800 Carolina Power & Light Co. ............................ 131,775
3,900 Central & South West Corp. ............................ 107,006
2,911 Cinergy Corp. ......................................... 100,066
4,300 Consolidated Edison, Inc. ............................. 227,362
</TABLE>
See accompanying notes to financial statements.
50
<PAGE>
New England Zenith Fund
(Westpeak Stock Index Series)
Investments as of December 31, 1998
Common Stocks--(Continued)
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Electric Utilities--(Continued)
3,650 Dominion Resources, Inc. ................................ $ 170,638
2,700 DTE Energy Co. .......................................... 115,763
6,727 Duke Power Co. .......................................... 430,948
6,600 Edison International..................................... 183,975
4,600 Entergy Corp. ........................................... 143,175
4,400 FirstEnergy Corp.(c)..................................... 143,275
3,300 FPL Group, Inc. ......................................... 203,362
2,300 GPU, Inc. ............................................... 101,631
5,448 Houston Industries, Inc. ................................ 175,017
2,100 New Century Energies, Inc. .............................. 102,375
3,500 Niagara Mohawk Power Corp.(c)............................ 56,438
2,800 Northern States Power Co. ............................... 77,700
7,100 Pacific Gas & Electric Corp. ............................ 223,650
5,600 Pacificorp............................................... 117,950
4,100 PECO Energy Co. ......................................... 170,662
2,800 PP&L Resources, Inc. .................................... 78,050
4,300 Public Service Enterprise Group.......................... 172,000
12,900 Southern Co. ............................................ 374,906
5,125 Texas Utilities Co. ..................................... 239,273
4,000 Unicom Corp. ............................................ 154,250
------------
4,515,473
------------
Electronics--3.5%
4,056 AMP, Inc. ............................................... 211,165
1,530 Andrew Corp.(c).......................................... 25,245
2,200 Cooper Industries, Inc. ................................. 104,912
4,300 Corning, Inc. ........................................... 193,500
1,300 Eaton Corp. ............................................. 91,894
800 EG&G, Inc. .............................................. 22,250
8,100 Emerson Electric Co. .................................... 490,050
800 Foster Wheeler Corp. .................................... 10,550
2,800 General Instrument Corp.(c).............................. 95,025
1,500 Harris Corp. ............................................ 54,938
2,300 Honeywell, Inc. ......................................... 173,219
1,500 Johnson Controls, Inc. .................................. 88,500
24,412 Lucent Technologies, Inc. ............................... 2,685,320
800 Millipore Corp. ......................................... 22,750
11,100 Motorola, Inc. .......................................... 677,794
12,100 Northern Telecom, Ltd. .................................. 606,512
1,100 Phelps Dodge Corp. ...................................... 55,962
1,500 Raychem Corp. ........................................... 48,469
3,500 Rockwell International Corp. ............................ 169,969
1,400 Scientific Atlanta, Inc. ................................ 31,938
2,200 Solectron Corp.(c)....................................... 204,462
950 Tektronix, Inc. ......................................... 28,559
3,500 Tellabs, Inc.(c)......................................... 239,969
900 The Perkin-Elmer Corp. .................................. 87,806
3,100 Thermo Electron Corp.(c)................................. 52,506
1,000 Thomas & Betts Corp. .................................... 43,313
1,800 W.W. Grainger, Inc. ..................................... 74,925
------------
6,591,502
------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Energy Reserves--4.9%
1,700 Amerada Hess Corp. ...................................... $ 84,575
2,200 Anadarko Petroleum Corp. ................................ 67,925
1,800 Apache Corp. ............................................ 45,563
5,900 Atlantic Richfield Co. .................................. 384,975
3,262 Burlington Resources, Inc. .............................. 116,820
12,100 Chevron Corp. ........................................... 1,003,544
45,200 Exxon Corp. ............................................. 3,305,250
14,500 Mobil Corp. ............................................. 1,263,312
2,000 Oryx Energy Corp.(c)..................................... 26,875
4,800 Phillips Petroleum Co. .................................. 204,600
39,700 Royal Dutch Petroleum Co. ............................... 1,900,637
9,900 Texaco, Inc. ............................................ 523,463
4,764 Union Pacific Resources Group, Inc. ..................... 43,174
4,500 Unocal Corp. ............................................ 131,344
------------
9,102,057
------------
Environmental Services--0.3%
3,200 Browning-Ferris Industries, Inc. ........................ 91,000
10,600 Waste Management, Inc. .................................. 494,225
------------
585,225
------------
Financial Services--6.4%
8,400 American Express Co. .................................... 858,900
3,100 Aon Corp. ............................................... 171,663
12,902 Associates First Capital Corp. .......................... 546,722
1,200 Capital One Financial Corp. ............................. 138,000
2,100 Countrywide Credit Industries, Inc. ..................... 105,394
3,120 Dun & Bradstreet Corp. .................................. 98,475
2,700 Equifax, Inc. ........................................... 92,306
12,600 Federal Home Loan Mortgage Corp. ........................ 811,912
19,200 Federal National Mortgage Association.................... 1,420,800
60,300 General Electric Co. .................................... 6,154,369
1,900 H & R Block, Inc. ....................................... 85,500
9,153 Household International, Inc. ........................... 362,688
4,700 Marsh & McLennan Companies, Inc. ........................ 274,656
13,970 MBNA Corp. .............................................. 348,377
2,500 Provident Companies, Inc. ............................... 103,750
2,550 Providian Financial Corp. ............................... 191,250
3,100 SLM Holding Corp. ....................................... 148,800
612 Waddell & Reed Financial, Inc.(c)........................ 14,229
------------
11,927,791
------------
Food & Beverages--6.1%
11,058 Archer-Daniels-Midland Co. .............................. 190,059
5,300 Bestfoods................................................ 282,225
8,300 Campbell Soup Co. ....................................... 456,500
45,700 Coca-Cola Co. ........................................... 3,056,187
7,500 Coca-Cola Enterprises, Inc. ............................. 268,125
9,000 ConAgra, Inc. ........................................... 283,500
2,800 General Mills, Inc. ..................................... 217,700
6,700 H.J. Heinz Co. .......................................... 379,387
2,600 Hershey Foods Corp. ..................................... 161,688
</TABLE>
See accompanying notes to financial statements.
51
<PAGE>
New England Zenith Fund
(Westpeak Stock Index Series)
Investments as of December 31, 1998
Common Stocks--(Continued)
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Food & Beverages--(Continued)
7,500 Kellogg Co. ............................................. $ 255,938
27,300 PepsiCo, Inc. ........................................... 1,117,594
45,100 Philip Morris Companies, Inc. ........................... 2,412,850
4,500 Pioneer Hi-Bred International, Inc. ..................... 121,500
2,500 Quaker Oats Co. ......................................... 148,750
6,000 RJR Nabisco Holdings Corp. .............................. 178,125
17,200 Sara Lee Corp. .......................................... 484,825
2,200 Supervalu, Inc. ......................................... 61,600
6,200 Sysco Corp. ............................................. 170,113
11,900 Unilever NV.............................................. 986,956
2,100 William Wrigley Jr. Co. ................................. 188,081
------------
11,421,703
------------
Freight Transportation--0.2%
2,780 Federal Express Corp. ................................... 247,420
6,100 Laidlaw, Inc ............................................ 61,381
------------
308,801
------------
Gas & Pipeline Utilities--0.2%
1,500 Columbia Energy Group, Inc. ............................. 86,625
1,800 Consolidated Natural Gas Co. ............................ 97,200
900 Nicor, Inc. ............................................. 38,025
600 ONEOK, Inc., New......................................... 21,675
600 Peoples Energy Corp. .................................... 23,925
4,455 Sempra Energy(c)......................................... 113,046
------------
380,496
------------
Health Care--Products--3.4%
28,500 Abbott Laboratories...................................... 1,396,500
1,000 Bausch & Lomb, Inc. ..................................... 60,000
5,300 Baxter International, Inc. .............................. 340,856
4,600 Becton, Dickinson & Co. ................................. 196,363
2,000 Biomet, Inc. ............................................ 80,500
7,300 Boston Scientific Corp.(c)............................... 195,731
1,000 C.R. Bard, Inc. ......................................... 49,500
2,800 Guidant Corp. ........................................... 308,700
24,900 Johnson & Johnson........................................ 2,088,488
1,300 Mallinckrodt, Inc. ...................................... 40,056
8,700 Medtronic, Inc. ......................................... 645,975
1,600 St. Jude Medical, Inc.(c)................................ 44,300
11,888 TYCO International, Ltd. ................................ 896,801
------------
6,343,770
------------
Health Care--Services--0.5%
11,986 Columbia/HCA Healthcare Corp. ........................... 296,653
2,000 HCR Manor Care, Inc.(c).................................. 58,750
7,800 HEALTHSOUTH Corp.(c)..................................... 120,413
3,100 Humana, Inc.(c).......................................... 55,219
4,800 Service Corporation International........................ 182,700
5,700 Tenet Healthcare Corp.(c)................................ 149,625
3,600 United Healthcare Corp. ................................. 155,025
------------
1,018,385
------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Hotels & Restaurants--0.8%
2,600 Darden Restaurants, Inc. ................................ $ 46,800
1,850 Harrahs Entertainment, Inc.(c)........................... 29,022
4,800 Hilton Hotels Corp. ..................................... 91,800
4,600 Marriott International, Inc.(c).......................... 133,400
12,700 McDonald's Corp. ........................................ 973,137
3,400 Mirage Resorts, Inc.(c).................................. 50,788
2,820 Tricon Global Restaurants, Inc.(c)....................... 141,352
2,300 Wendy's International, Inc. ............................. 50,169
------------
1,516,468
------------
Household Products--2.7%
1,000 Alberto Culver Co. ...................................... 26,688
4,900 Avon Products, Inc. ..................................... 216,825
1,300 Brown-Forman Corp., Class B.............................. 98,394
1,900 Clorox Co. .............................................. 221,944
5,500 Colgate-Palmolive Co. ................................... 510,812
3,200 Fortune Brands, Inc. .................................... 101,200
20,800 Gillette Co. ............................................ 1,004,900
2,000 International Flavours & Fragrances, Inc. ............... 88,375
800 National Service Industries, Inc. ....................... 30,400
3,000 Newell Co. .............................................. 123,750
24,820 Procter & Gamble Co. .................................... 2,266,376
5,800 Ralston Purina Co. ...................................... 187,775
2,800 Rubbermaid, Inc. ........................................ 88,025
1,100 Tupperware Corp. ........................................ 18,081
------------
4,983,545
------------
Industrial Services--0.0%
1,400 Ryder Systems, Inc. ..................................... 36,400
------------
Industrial Parts & Machinery--1.1%
400 Briggs & Stratton Corp. ................................. 19,950
1,400 Case Corp. .............................................. 30,538
6,700 Caterpillar, Inc. ....................................... 308,200
1,200 Crane Co. ............................................... 36,225
700 Cummins Engine, Inc. .................................... 24,850
2,500 Danaher Corp. ........................................... 135,781
4,500 Deere & Co. ............................................. 149,062
4,100 Dover Corp. ............................................. 150,162
3,300 Genuine Parts Co. ....................................... 110,344
900 Harnischfeger Industries, Inc. .......................... 9,169
4,600 Illinois Tool Works, Inc. ............................... 266,800
3,000 Ingersoll-Rand Co. ...................................... 140,812
1,100 McDermott International, Inc. ........................... 27,156
700 Milacron, Inc. .......................................... 13,475
100 Nacco Industries, Inc. .................................. 9,200
2,300 Pall Corp. .............................................. 58,219
2,050 Parker Hannifin Corp. ................................... 67,138
1,050 Snap-On, Inc. ........................................... 36,553
1,600 Stanley Works............................................ 44,400
1,100 Timken Co. .............................................. 20,763
4,200 United Technologies Corp. ............................... 456,750
------------
2,115,547
------------
</TABLE>
See accompanying notes to financial statements.
52
<PAGE>
New England Zenith Fund
(Westpeak Stock Index Series)
Investments as of December 31, 1998
Common Stocks--(Continued)
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Internet Content--0.7%
8,500 America Online........................................... $ 1,360,000
------------
Leisure--0.4%
1,800 Brunswick Corp. ......................................... 44,550
5,950 Eastman Kodak Co. ....................................... 428,400
2,450 Hasbro, Inc. ............................................ 88,506
5,450 Mattel, Inc. ............................................ 124,328
800 Polaroid Corp. .......................................... 14,950
------------
700,734
------------
Life Insurance--1.1%
2,683 Aetna, Inc. ............................................. 210,951
4,698 American General Corp. .................................. 366,444
3,900 CIGNA Corp. ............................................. 301,519
5,807 Conseco, Inc. ........................................... 177,476
1,937 Jefferson Pilot Corp. ................................... 145,275
1,800 Lincoln National Corp., Inc. ............................ 147,262
3,800 SunAmerica, Inc. ........................................ 308,275
2,600 Torchmark Corp. ......................................... 91,813
1,100 Transamerica Corp. ...................................... 127,050
2,600 UNUM Corp. .............................................. 151,775
------------
2,027,840
------------
Liquor--0.5%
600 Adolph Coors Co., Class B................................ 33,863
8,900 Anheuser-Busch Companies, Inc. .......................... 584,062
7,300 Seagram Company, Ltd. ................................... 277,400
------------
895,325
------------
Media & Entertainment--2.7%
11,500 Carnival Corp. .......................................... 552,000
13,300 CBS Corp.(c)............................................. 435,575
4,600 Clear Channel Communications(c).......................... 250,700
1,300 King World Productions, Inc.(c).......................... 38,269
9,700 Tele-Communications, Inc.(c)............................. 536,531
22,200 Time Warner, Inc. ....................................... 1,377,787
2,200 Tribune Co. ............................................. 145,200
6,657 Viacom, Inc., Class B(c)................................. 492,618
37,994 Walt Disney Co........................................... 1,139,820
------------
4,968,500
------------
Metals & Mining--0.5%
4,200 Alcan Aluminium, Ltd. ................................... 113,662
3,632 Allegheny Teledyne, Inc. ................................ 74,229
3,400 Aluminum Company of America.............................. 253,512
800 ASARCO, Inc. ............................................ 12,050
500 Ball Corp. .............................................. 22,875
2,400 Bethlehem Steel Corp.(c)................................. 20,100
2,300 Crown Cork & Seal Company, Inc. ......................... 70,869
1,850 Cyprus Amax Minerals Co. ................................ 18,500
3,100 Inco, Ltd. .............................................. 32,744
</TABLE>
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
1,600 Nucor Corp. ............................................. $ 69,200
2,900 Owens Illinois, Inc.(c).................................. 88,813
1,300 Reynolds Metals Co. ..................................... 68,494
1,620 USX-U.S. Steel Group..................................... 37,260
1,700 Worthington Industries, Inc. ............................ 21,250
------------
903,558
------------
Natural Gas--0.0%
400 Eastern Enterprises...................................... 17,500
------------
Oil--Foreign--0.0%
900 Kerr-McGee Corp. ........................................ 34,425
------------
Oil--Refining & Distribution--0.6%
3,900 Coastal Corp. ........................................... 136,256
6,100 Enron Corp. ............................................. 348,082
2,100 Sonat, Inc. ............................................. 56,831
1,700 Sunoco, Inc. ............................................ 61,306
5,700 USX-Marathon Group....................................... 171,713
7,900 Williams Companies, Inc. ................................ 246,381
------------
1,020,569
------------
Oil Services--0.5%
5,900 Baker Hughes, Inc. ...................................... 104,356
600 FMC Corp.(c)............................................. 33,600
8,100 Halliburton Co. ......................................... 239,963
900 Helmerich & Payne, Inc. ................................. 17,438
1,600 Rowan Companies, Inc.(c)................................. 16,000
10,100 Schlumberger, Ltd. ...................................... 465,862
------------
877,219
------------
Paper & Forest Products--0.9%
1,000 Bemis, Inc. ............................................. 37,938
1,033 Boise Cascade Corp. ..................................... 32,023
1,800 Champion International Corp. ............................ 72,900
4,100 Fort James Corp. ........................................ 164,000
1,700 Georgia Pacific Corp. ................................... 99,556
5,710 International Paper Co. ................................. 255,879
10,112 Kimberly-Clark Corp. .................................... 551,104
2,000 Louisiana Pacific Corp. ................................. 36,625
1,900 Mead Corp. .............................................. 55,694
500 Potlatch Corp. .......................................... 18,438
1,881 Smurfit Container Corp.(c)............................... 29,743
1,000 Temple-Inland, Inc. ..................................... 59,312
1,300 Union Camp Corp. ........................................ 87,750
3,700 Weyerhaeuser Co. ........................................ 188,006
2,000 Willamette Industries, Inc. ............................. 67,000
------------
1,755,968
------------
</TABLE>
See accompanying notes to financial statements.
53
<PAGE>
New England Zenith Fund
(Westpeak Stock Index Series)
Investments as of December 31, 1998
Common Stocks--(Continued)
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Precious Metal--0.2%
6,900 Barrick Gold Corp........................................ $ 134,550
4,300 Battle Mountain Gold Co.................................. 17,737
3,300 Freeport McMoRan Copper & Gold,
Class B(c).............................................. 34,444
4,500 Homestake Mining Co...................................... 41,344
3,041 Newmont Mining Corp...................................... 54,928
4,600 Placer Dome, Inc......................................... 52,900
------------
335,903
------------
Property & Casualty Insurance--2.1%
15,372 Allstate Corp............................................ 593,743
19,477 American International Group, Inc. ...................... 1,881,965
3,000 Chubb Corp............................................... 194,625
3,100 Cincinnati Financial Corp................................ 113,538
4,300 Hartford Financial Services Group........................ 235,962
2,100 Loews Corp............................................... 206,325
1,800 MBIA, Inc................................................ 118,013
2,100 MGIC Investment Corp..................................... 83,606
1,300 Progressive Corp......................................... 220,187
2,600 Safeco Corp.............................................. 111,638
4,370 St. Paul Companies, Inc. ................................ 151,858
------------
3,911,460
------------
Publishing--0.7%
1,300 American Greetings Corp.................................. 53,381
1,500 Deluxe Corp.............................................. 54,844
1,800 Dow Jones & Company, Inc................................. 86,625
5,300 Gannett Co............................................... 341,850
1,300 Harcourt General, Inc.................................... 69,144
1,400 Knight-Ridder, Inc....................................... 71,575
1,800 McGraw-Hill Companies, Inc............................... 183,375
1,000 Meredith Corp............................................ 37,875
1,800 Moore Corporation, Ltd................................... 19,800
3,500 New York Times Co........................................ 121,406
2,500 R.R. Donnelley & Sons Co................................. 109,531
1,600 Times Mirror Co.......................................... 89,600
------------
1,239,006
------------
Railroads & Equipment--0.5%
8,766 Burlington Northern Santa Fe............................. 295,852
4,100 CSX Corp. ............................................... 170,150
7,000 Norfolk Southern Corp.................................... 221,812
4,600 Union Pacific Corp....................................... 207,288
------------
895,102
------------
Retail--Clothing--0.5%
10,875 Gap, Inc................................................. 611,719
4,193 Limited, Inc............................................. 122,121
2,800 Nordstrom, Inc........................................... 97,125
5,900 TJX Companies, Inc....................................... 171,100
------------
1,002,065
------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Retail--Department Store--3.0%
4,039 Costco Companies, Inc.(c)................................ $ 291,565
8,100 Dayton Hudson Corp....................................... 439,425
2,100 Dillard's, Inc........................................... 59,588
3,900 Federated Department Stores, Inc.(c)..................... 169,894
2,900 Fred Meyer, Inc.(c)...................................... 174,725
4,700 J.C. Penney, Inc......................................... 220,313
9,100 K mart Corp.(c).......................................... 139,344
2,900 Kohls Corp.(c)........................................... 178,169
4,300 May Department Stores Co................................. 259,612
7,200 Sears, Roebuck & Co...................................... 306,000
41,400 Wal-Mart Stores, Inc..................................... 3,371,512
------------
5,610,147
------------
Retail--Food & Drug--0.8%
4,600 Albertson's, Inc......................................... 292,963
5,100 American Stores Co....................................... 188,381
700 Great Atlantic & Pacific Tea Co.......................... 20,738
4,800 Kroger Co.(c)............................................ 290,400
9,000 Safeway, Inc.(c)......................................... 548,437
2,800 Winn-Dixie Stores, Inc................................... 125,650
------------
1,466,569
------------
Retail--Specialty--2.1%
2,800 Autozone, Inc.(c)........................................ 92,225
1,900 Circuit City Stores, Inc. ............................... 94,881
2,000 Consolidated Stores Corp.(c)............................. 40,375
7,200 CVS Corp................................................. 396,000
3,450 Dollar General Corp...................................... 81,506
27,246 Home Depot, Inc.......................................... 1,667,115
700 Longs Drug Stores Corp................................... 26,250
6,500 Lowe's Companies, Inc. .................................. 332,719
1,200 Pep Boys-Manny, Moe & Jack............................... 18,825
4,800 Rite Aid Corp............................................ 237,900
5,300 Staples, Inc.(c)......................................... 231,544
1,800 Tandy Corp............................................... 74,137
5,075 Toys R Us, Inc.(c)....................................... 85,641
9,200 Walgreen Co.............................................. 538,775
------------
3,917,893
------------
Securities & Asset Management--1.0%
2,100 Bear Stearns Companies, Inc.............................. 78,488
7,425 Charles Schwab Corp...................................... 417,192
4,700 Franklin Resources, Inc.................................. 150,400
2,200 Lehman Brothers Holdings, Inc. .......................... 96,937
6,400 Merrill Lynch & Company, Inc............................. 427,200
10,899 Morgan Stanley Dean Witter............................... 773,829
------------
1,944,046
------------
</TABLE>
See accompanying notes to financial statements.
54
<PAGE>
New England Zenith Fund
(Westpeak Stock Index Series)
Investments as of December 31, 1998
Common Stocks--(Continued) Short Term Investment--1.1%
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Semi-Conductors--2.7%
2,700 Advanced Micro Devices, Inc.(c).......................... $ 78,131
6,700 Applied Materials, Inc.(c)............................... 286,006
31,100 Intel Corp............................................... 3,687,294
1,600 KLA Instruments Corp.(c)................................. 69,400
2,600 LSI Logic Corp.(c)....................................... 41,925
4,000 Micron Technology, Inc.(c)............................... 202,250
3,100 National Semiconductor Corp.(c).......................... 41,850
7,200 Texas Instruments, Inc................................... 616,050
------------
5,022,906
------------
Telecommunication--8.2%
10,700 AirTouch Communications, Inc.(c)......................... 771,738
5,100 ALLTEL Corp.............................................. 305,044
20,500 Ameritech Corp........................................... 1,299,187
33,535 AT&T Corp................................................ 2,523,509
28,852 Bell Atlantic Corp....................................... 1,529,156
36,600 BellSouth Corp........................................... 1,825,425
3,300 Frontier Corp............................................ 112,200
17,900 GTE Corp................................................. 1,163,500
32,970 MCI Worldcom, Inc.(c).................................... 2,365,597
5,400 NEXTEL Communications, Inc.(c)........................... 127,575
36,316 SBC Communications, Inc.................................. 1,947,445
8,000 Sprint Corp.(c).......................................... 673,000
3,900 Sprint PCS............................................... 90,188
9,392 United States West, Inc.................................. 606,958
------------
15,340,522
------------
Thrift--0.3%
1,000 Golden West Financial Corp. ............................. 91,688
10,913 Washington Mutual, Inc................................... 416,740
------------
508,428
------------
Tobacco--0.1%
3,400 UST, Inc................................................. 118,575
------------
Total Common Stock
(Identified Cost $96,691,492)........................... 185,014,039
------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount Value (a)
<C> <S> <C>
$2,054,000 Repurchase Agreement with State Street Corp. dated
12/31/1998 at 4.00% to be repurchased at $2,054,913
on 1/04/1999 collateralized by $1,540,000 U.S.
Treasury Bond 8.125% due 8/15/2019 with a value of
$2,099,453......................................... $ 2,054,000
------------
Total Short Term Investment
(Identified Cost $2,054,000)....................... 2,054,000
------------
Total Investments--100.4%
(Identified Cost $98,745,492)(b)................... 187,068,039
Other assets less liabilities....................... (789,808)
------------
Total Net Assets--100%.............................. $186,278,231
============
</TABLE>
(a) See Note 1A of Notes to Financial Statements.
(b) Federal Tax Information:
At December 31, 1998 the net unrealized appreciation on investments based on
cost of $98,888,507 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.............. $ 90,403,877
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value.............. (2,224,345)
------------
Net unrealized appreciation................................... $ 88,179,532
============
</TABLE>
(c) Non-income producing security.
See accompanying notes to financial statements.
55
<PAGE>
New England Zenith Fund
(Westpeak Stock Index Series)
Statement of Assets & Liabilities Statement of Operations
December 31, 1998 Year Ended December 31, 1998
<TABLE>
<S> <C> <C>
Assets
Investments at value................................. $187,068,039
Cash................................................. 2,974
Receivable for:
Fund shares sold..................................... 237,913
Securities sold...................................... 1,381,671
Dividends and interest............................... 193,788
Foreign taxes........................................ 788
------------
188,885,173
Liabilities
Payable for:
Securities purchased................................. $2,361,408
Fund shares redeemed................................. 116,916
Withholding taxes.................................... 15
Accrued expenses:
Management fees...................................... 38,050
Deferred trustees' fees.............................. 68,986
Other expenses....................................... 21,567
----------
2,606,942
------------
$186,278,231
============
Net Assets
Net Assets consist of:
Capital paid in...................................... $ 97,217,861
Overdistributed net investment
income.............................................. (1,334)
Accumulated net realized gains (losses).............. 739,157
Unrealized appreciation (depreciation) on
investments......................................... 88,322,547
------------
Net Assets............................................ $186,278,231
============
Computation of offering price:
Net asset value and redemption price per share
($186,278,231 divided by 948,805 shares of beneficial
interest)............................................ $ 196.33
============
Identified cost of investments........................ $ 98,745,492
============
</TABLE>
<TABLE>
<S> <C> <C>
Investment Income
Dividends............................................. $ 2,242,316(a)
Interest.............................................. 91,547
-----------
2,333,863
Expenses
Management fees....................................... $381,940
Trustees' fees and expenses........................... 28,747
Custodian............................................. 79,451
Audit and tax services................................ 12,888
Legal................................................. 9,295
Printing.............................................. 41,119
Insurance............................................. 4,150
Miscellaneous......................................... 3,950
--------
Total expenses....................................... 561,540
-----------
Net investment income.................................. 1,772,323
Realized and Unrealized Gain (Loss) on Investments
Realized gain (loss) on:
Investments--net...................................... 1,822,491
Unrealized appreciation (depreciation) on:
Investments--net...................................... 34,683,663
-----------
Net gain (loss) on investment transactions............. 36,506,154
-----------
Net Increase (Decrease) in Net Assets from Operations.. $38,278,477
===========
</TABLE>
(a)Net of foreign taxes of: $13,113
See accompanying notes to financial statements.
56
<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,
1997 1998
------------ ------------
<S> <C> <C>
From Operations....................................
Net investment income............................. $ 1,474,760 $ 1,772,323
Net realized gain (loss) on investments........... 327,190 1,822,491
Unrealized appreciation (depreciation) on
investments...................................... 26,442,859 34,683,663
------------ ------------
Increase (decrease) in net assets from operations. 28,244,809 38,278,477
------------ ------------
From Distributions to Shareholders
Net investment income............................. (1,486,184) (1,781,029)
Net realized gain on investments.................. (619,246) (965,891)
------------ ------------
(2,105,430) (2,746,920)
------------ ------------
From Capital Shares Transactions
Proceeds from sale of shares...................... 41,747,560 63,090,085
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income.......... 1,486,184 1,781,029
Distributions from net realized gain.............. 619,246 965,891
------------ ------------
43,852,990 65,837,005
Cost of shares redeemed........................... (24,172,689) (41,673,859)
------------ ------------
Increase (decrease) in net assets derived from
capital share transactions....................... 19,680,301 24,163,146
------------ ------------
Total increase (decrease) in net assets........... 45,819,680 59,694,703
Net Assets
Beginning of the year............................. 80,763,848 126,583,528
------------ ------------
End of the year................................... $126,583,528 $186,278,231
============ ============
Undistributed (overdistributed) Net Investment
Income
Beginning of the year............................. $ 8,445 $ 7,372
============ ============
End of the year................................... $ 7,372 $ (1,334)
============ ============
Number of Shares of the Fund:
Issued from the sale of shares.................... 294,863 362,065
Issued in connection with the reinvestment of:
Distributions from net investment income.......... 9,711 9,000
Distributions from net realized gain.............. 4,056 4,886
------------ ------------
308,630 375,951
Redeemed.......................................... (171,087) (239,835)
------------ ------------
Net change........................................ 137,543 136,116
============ ============
</TABLE>
Financial Highlights
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year........................... $ 76.48 $ 75.35 $100.09 $ 119.62 $ 155.76
------- ------- ------- -------- --------
Income From Investment
Operations
Net Investment Income.......... 1.80 1.88 1.91 1.86 1.92
Net Realized and Unrealized
Gain (Loss) on Investments.... (0.92) 25.89 20.58 36.95 41.60
------- ------- ------- -------- --------
Total From Investment
Operations.................... 0.88 27.77 22.49 38.81 43.52
------- ------- ------- -------- --------
Less Distributions
Distributions From Net
Investment Income............. (1.82) (1.85) (1.93) (1.86) (1.91)
Distributions From Net Realized
Capital Gains................. (0.16) (1.18) (1.03) (0.67) (1.04)
Distributions in Excess of Net
Realized Capital Gains........ 0.00 0.00 0.00 (0.14) 0.00
Distributions From Paid-in
Capital....................... (0.03) 0.00 0.00 0.00 0.00
------- ------- ------- -------- --------
Total Distributions............ (2.01) (3.03) (2.96) (2.67) (2.95)
------- ------- ------- -------- --------
Net Asset Value, End of Year.... $ 75.35 $100.09 $119.62 $ 155.76 $ 196.33
======= ======= ======= ======== ========
Total Return (%)................ 1.1 36.9 22.5 32.5 27.9
Ratio of Operating Expenses to
Average Net Assets (%)......... 0.33 0.40 0.40 0.40 0.37
Ratio of Net Investment Income
to Average Net Assets (%)...... 2.59 2.20 1.84 1.41 1.16
Portfolio Turnover Rate (%)..... 2 5 4 3 3
Net Assets, End of Year (000)... $37,164 $58,671 $80,764 $126,584 $186,278
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>
See accompanying notes to financial statements.
57
<PAGE>
Loomis Sayles Balanced Series
Portfolio Managers: Tricia H. Mills, Tom Kolefas, John Hyll, Barr Segal and
Meri Anne Beck
Loomis, Sayles & Company, L.P.
(PHOTO OF TRICIA MILLS APPEARS HERE)
(PHOTO OF BARR SEGAL APPEARS HERE)
(PHOTO OF JOHN HYLL APPEARS HERE)
(PHOTO OF TOM KOLEFAS APPEARS HERE)
(PHOTO OF MERI ANNE BECK APPEARS HERE)
Q. Please tell us about the performance of Loomis Sayles Balanced Series over
the past year.
A. For the twelve months ended December 31, 1998, the Balanced Series had a
total return of 9.1% (based on net asset value). The Series underperformed the
Lipper Variable Products Balanced Fund Average/7/ which returned 14.9% over
the same period.
Q. What was the investment environment like and how did you respond during
this period?
A. Large capitalization growth stocks drove the popular market averages to
double digit returns again in 1998. Repeating a four year pattern, returns on
most individual stocks failed to reflect strong gains seen in the broader in-
dices. As an example of the very narrow range of stocks that defined perfor-
mance, just ten stocks out of 500--the ten largest in the S&P 500/25/--ac-
counted for nearly half of that Index's return last year. In addition, sharp
drops and recoveries were more frequent than we have seen in several years, as
the investment mood swung from near euphoria to anxious unease. Behind this
volatility was the same question that caused so much uncertainty in 1997:
Would upheavals in Asia and elsewhere take a severe toll on corporate earnings
in the United States? That concern applied not only to exporters whose sales
were directly affected by weak economies and falling currency values overseas,
but also to manufacturers and others whose pricing might be undercut by low
cost and competitive imports.
Soon, anxiety grew that a drop in corporate profits was imminent. In fact,
several companies alerted analysts that their optimistic earnings forecast
might need to be revised. But a decline in interest rates gave the market a
solid underpinning and investors planned on continued economic expansion.
Q. Given this environment, what was your equity strategy over the year?
A. Early in 1998 we positioned the Series to emphasize cyclical sectors, in-
cluding basic industries like chemicals and industrial companies, and consumer
cyclicals, because of the attractive valuations relative to the market. By cy-
clical companies we mean are those whose fortunes rise and fall with swings in
the nation's economy.
As the year evolved and the corporate earnings outlook began to deteriorate,
we cut back exposure to cyclical industries and built up the Series' holdings
in consumer staples as well as financial and energy stocks. Staple industries
supply services or products that are in relatively constant demand regardless
of economic ups and downs, such as food and health care.
In view of the uncertain economic climate overseas, we added positions in the
retail industries. In our view, retailers seemed well insulated from foreign
economic problems; nearly all of their revenues originate domestically. More-
over, retailing is a natural beneficiary of the nation's sustained low unem-
ployment rate and resulting high levels of consumer confidence.
For most of the year, the Series' asset allocation--the way it is divided be-
tween stocks and bonds--remained fairly stable at 60% stocks/40% bonds.
Q. What were the principal factors affecting equity performance?
A. It was a difficult year for our value-focused investment style. With in-
vestors focused on a few large-cap growth stocks, other sectors, including
value orientated areas where the Series concentrates, were largely neglected.
Nevertheless, the Series benefited from its commitment in the regional Bell
companies. Ameritech, Bell Atlantic, Bell South, and SBC Communications posted
impressive gains for the year. Investment by the
58
<PAGE>
Series in the technology sector also produced solid gains. Individual stocks
such as IBM, Sun Microsystems and Gateway 2000, were the Series major contrib-
utors in this sector.
Performance suffered principally because our investment style excludes very
high-priced stocks like those that dominated the market activity this past
year. Investments in energy and oil-related sectors also were disappointing,
due in part to the falling oil prices worldwide.
Q. What was the environment like for the fixed-income segment of the Series
and how did you respond?
A. Most bond markets were extremely volatile last year, as shifting economic
news had investors rapidly shifting from one sector to another. The year began
relatively quietly, with fairly narrow differences between yields--known as
spreads--on quality corporate bonds and those on U.S. Government issues. Nar-
row spreads generally signal confidence in the outlook for corporate bonds.
But when confidence evaporated in the second and third quarters of 1998, in-
vestors sold corporates and fled to the relative safety of Treasury securi-
ties. This "flight to quality" was triggered by the default of Russia on it
sovereign debt. All debt tied to emerging markets quickly became so suspect
that there were essentially no buyers in the sector. Investors moved out of
U.S. corporate issues for fear that deflation--falling prices and sinking
profits--and possible recession would invade the U.S. economy from overseas.
After the Federal Reserve Board's three cuts in short-term interest rates last
Fall, investors began returning to corporate bonds; spreads again narrowed and
performance improved in many sectors. At year-end, bond markets fell back
slightly, as low unemployment and other indicators suggested that economic
growth would persist, at least for a time. Strong growth tends to raise con-
cerns over rekindled inflation, a development that could undermine the values
of fixed-income assets.
The bond portion of the Series benefited from our decision to avoid all emerg-
ing market debt and to concentrate on Treasury securities and high quality U.
S. corporate bonds. Early in 1998 we reduced exposure to corporate issues be-
cause they were expensive compared to Treasury securities. To add potential
impetus to our Treasury purchases, we extended duration of that part of the
portfolio. (Duration is a measure of a portfolio's sensitivity to changes in
interest rates.) By year-end we had changed emphasis, taking advantage of at-
tractive prices among quality corporate bonds. These purchases built the Se-
ries' corporate position to 60% of the fixed-income portfolio, well above the
sector's 25% representation in the Lehman Brothers Corporate Bond Index and
indicative of the positive prospects we foresee for these bonds.
Q. What is the current outlook for 1999?
A. We expect the U.S. economy to decelerate--growth will be slower than in re-
cent years. Although we do not anticipate recession, we believe that the re-
strained economic environment will make it difficult for companies to raise
prices, allowing only modest profit growth. Furthermore, the impact of uncer-
tainties abroad has yet to be fully felt here, in our opinion. As a result,
more companies may experience difficulties living up to analysts' expecta-
tions.
On the equity side, we believe our value style approach is appropriate to the
economic scenario that we expect for 1999. We may have seen the peak of
outperformance of growth stocks over value stocks for this market cycle, as
economics inevitably dictate more rational pricing. If we are correct, the Se-
ries is positioned to benefit from its basic orientation as investors turn
their attention to value stocks.
A slowing but non-recessionary economic outlook is also good for bonds. We an-
ticipate rates to will stay low--there is little need to fear rate hikes in a
decelerating economy. Currently, corporate balance sheets are generally
healthy. We believe consumer spending must slow soon, as individual expendi-
tures are too high for available income. A drop in manufacturing employment
because of price competition from Asia should be offset by an upswing in serv-
ice sector jobs, including technology, keeping unemployment low.
59
<PAGE>
[GRAPH APPEARS HERE]
Date Balanced Series S&P 500 Leh/Gov't Corp.
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 $22,055 $13,015
12/31/98 $18,476 $28,345 $14,814
Average Annual Total Return
Lipper Variable
Balanced Lehman Balanced Fund
Series S&P 500/25/ Government/Corp./3/ Average/7/
1 year 9.1% 28.7% 9.5% 14.9%
3 years 14.0 28.3 7.3 15.5
Since Inception 15.9 28.4 9.9 n/a
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: $191 million as of
December 31, 1998
Managers: Tricia H. Mills, Barr
Segal, John Hyll Tom Kolefas and
Meri Anne Beck serve as portfolio
managers of Loomis Sayles Balanced
Series. Ms. Mills, Mr. Hyll and Ms.
Beck have served as portfolio
managers since the Series
inception. Mr. Segal has served as
portfolio manager of the Series
since July 1996. Mr. Kolefas joined
the management of the Series in
September 1998.
[GRAPH APPEARS HERE]
Performance numbers are net of all Series expenses but do not include any
insurance, sales or administrative charges of variable annuity or life
insurance contracts, if these charges were included, the returns shown would
be lower.
This information represents past performance and is not indicative of future
results. Investment return and principal value will fluctuate so that shares,
upon redemption, may be worth more or less than the original cost.
60
<PAGE>
New England Zenith Fund
(Loomis Sayles Balanced Series)
Investments as of December 31, 1998
Common Stocks--61.3% of Total Net Assets
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Aerospace/Defense--2.1%
30,300 Northrop Grumman Corp. .................................. $ 2,215,688
35,000 Sundstrand Corp. ........................................ 1,815,625
------------
4,031,313
------------
Airlines--0.8%
25,200 AMR Corp. ............................................... 1,496,250
------------
Auto & Related--1.4%
24,500 Ford Motor Co. .......................................... 1,437,844
19,600 Magna International, Inc. ............................... 1,215,200
------------
2,653,044
------------
Banks--7.6%
26,274 BankAmerica Corp. ....................................... 1,579,724
19,800 Chase Manhattan Corp. ................................... 1,347,637
35,000 Citigroup, Inc. ......................................... 1,732,500
74,700 Fleet Financial Group Inc. .............................. 3,338,156
38,200 National City Corp. ..................................... 2,769,500
22,500 PNC Bank Corp. .......................................... 1,217,812
62,300 Wells Fargo Co. ......................................... 2,488,106
------------
14,473,435
------------
Building & Related--3.0%
30,900 Black & Decker Corp. .................................... 1,732,331
53,100 Leggett & Platt, Inc. ................................... 1,168,200
43,100 Masco Corp. ............................................. 1,239,125
23,700 Philips Electronics NV (ADR)............................. 1,604,194
------------
5,743,850
------------
Chemicals/Major--1.0%
90,400 Crompton & Knowles Corp. ................................ 1,870,150
------------
Chemicals/Specialty--1.4%
59,800 Solutia Inc. ............................................ 1,338,025
87,600 W.R. Grace & Co. ........................................ 1,374,225
------------
2,712,250
------------
Computer Hardware--2.9%
21,100 Hewlett Packard Co. ..................................... 1,441,394
21,600 International Business Machines.......................... 3,990,600
------------
5,431,994
------------
Consumer--Jewelry/Novelties/Gifts--0.5%
23,700 American Greetings Corp. ................................ 973,181
------------
Electric Companies--2.0%
44,600 CMS Energy Corp. ........................................ 2,160,312
29,700 Energy East Corp. ....................................... 1,678,050
------------
3,838,362
------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Electronics--1.1%
40,700 Raytheon Co. ............................................ $ 2,167,275
------------
Entertainment--1.5%
46,600 Time Warner, Inc. ....................................... 2,892,113
------------
Financial--Consumer Diversified--5.3%
41,200 Associates First Capital Corp. .......................... 1,745,850
40,700 CIT Group, Inc. ......................................... 1,294,769
48,000 Corrections Corp. of America............................. 846,000
39,900 Federal Home Loan Mortgage Corp. ........................ 2,571,056
23,500 Federal National Mortgage Association.................... 1,739,000
41,400 Reliastar Financial Corp. ............................... 1,909,575
------------
10,106,250
------------
Drugs--Healthcare--0.7%
27,100 Abbott Laboratories...................................... 1,327,900
------------
Electric Companies--1.8%
27,700 Pinnacle West Capital Corp. ............................. 1,173,787
49,200 Texas Utilities Co. ..................................... 2,297,025
------------
3,470,812
------------
Health Care--Services--1.9%
59,300 Tenet Healthcare Corp. .................................. 1,556,625
24,100 Wellpoint Health Networks, Inc. ......................... 2,096,700
------------
3,653,325
------------
Household Products--0.9%
11,000 American Home Products Corp. ............................ 619,437
26,500 Newell Co. .............................................. 1,093,125
------------
1,712,562
------------
Insurance--2.4%
70,300 ACE, Ltd. ............................................... 2,420,956
27,900 Allstate Corp. .......................................... 1,077,637
25,600 Everest Reinsurance Holdings, Inc. ...................... 996,800
------------
4,495,393
------------
Investment Banking/Broker/Management--0.8%
38,800 Paine Webber Group, Inc. ................................ 1,498,650
------------
Leisure Time--1.1%
60,100 Hasbro Inc. ............................................. 2,171,112
------------
Machinery--0.5%
24,900 Deere & Co. ............................................. 824,812
------------
</TABLE>
See accompanying notes to financial statements.
61
<PAGE>
New England Zenith Fund
(Loomis Sayles Balanced Series)
Investments as of December 31, 1998
Common Stocks--(Continued) Medium & Long Term Bonds & Notes--
35.2%
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C> <C>
Natural Gas--0.8%
27,600 Columbia Energy Group................................ $ 1,593,900
------------
Oil & Gas/Major Integrated--4.2%
25,110 British Petroleum plc (ADR).......................... 2,385,450
20,900 Conoco, Inc. ........................................ 436,287
34,500 Exxon Corp. ......................................... 2,522,813
38,200 Royal Dutch Petroleum Co. (ADR)...................... 1,828,825
29,700 USX Marathon Group................................... 894,712
------------
8,068,087
------------
Oil & Gas/Refining/Marketing--0.8%
60,700 Tosco Corp. ......................................... 1,570,612
------------
Paper & Forest Products--0.4%
14,500 Georgia Pacific Corp. ............................... 849,156
------------
Photography/Imaging--1.3%
21,500 Xerox Corp. ......................................... 2,537,000
------------
Retail/General--1.4%
38,200 Federated Department Stores, Inc. ................... 1,664,088
63,600 K Mart Corp. ........................................ 973,875
------------
2,637,963
------------
Retail/Specialty--1.9%
35,200 Office Depot, Inc. .................................. 1,300,200
77,000 TJX Companies, Inc. ................................. 2,233,000
------------
3,533,200
------------
Retail--Food & Drug--0.9%
29,100 Kroger Co.(c)........................................ 1,760,550
------------
Telephone--6.9%
52,300 Ameritech Corp. ..................................... 3,314,512
47,400 Bell Atlantic Corp. ................................. 2,512,200
77,800 BellSouth Corp. ..................................... 3,880,275
17,800 GTE Corp. ........................................... 1,157,000
40,100 SBC Communications, Inc. ............................ 2,150,368
------------
13,014,355
------------
Telephone/Long Distance--0.7%
15,600 Sprint Corp. ........................................ 1,312,350
------------
Tobacco--0.8%
44,900 UST, Inc. ........................................... 1,565,887
------------
Waste Management--0.5%
19,100 Waste Management, Inc. .............................. 890,537
------------
Total Common Stocks
(Identified Cost $101,765,154)...................... 116,877,630
------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount Value (a)
<C> <S> <C>
Banks--0.8%
$ 1,280,000 Mellon Bank N.A.,
7.000%, 03/15/06................................... $ 1,374,835
50,000 Norwest Corp., 7.650%, 3/15/05...................... 54,758
------------
1,429,593
------------
Consumer--4.1%
1,325,000 Amerco, Inc., 7.85%, 05/15/03....................... 1,438,751
1,995,000 Coca Cola Enterprises, Inc.
6.750%, 1/15/38.................................... 2,054,930
880,000 Dell Computer Corp.,
6.550%, 04/15/08................................... 895,189
1,100,000 Dillards, Inc., 6.43%, 08/01/04..................... 1,119,976
950,000 FMC Corp., 7.125%, 11/25/02......................... 954,835
600,000 Northwest Airlines,
8.375%, 03/15/04................................... 587,406
760,000 Royal Caribbean Cruises Line,
7.500%, 10/15/27................................... 731,682
------------
7,782,769
------------
Cyclical--1.0%
740,000 USX Marathon, 8.500%, 3/01/23....................... 816,042
1,100,000 Carnival Corp., 7.050%, 5/15/05..................... 1,157,024
------------
1,973,066
------------
Energy--2.4%
125,000 Coastal Corp., 8.125%, 9/15/02...................... 134,167
1,040,000 Kerr McGee, 6.625%, 10/15/07........................ 1,104,844
790,000 Liberty Property L.P.
6.950%, 12/01/06................................... 742,031
1,250,000 Occidental Petroleum Corp.,
6.434%, 04/01/03................................... 1,268,775
1,230,000 Tosco Corp., 7.625%, 5/15/26........................ 1,312,570
------------
4,562,387
------------
Equipment Trust--0.0%
25,000 American Airlines,
10.180%, 1/02/13................................... 31,043
------------
Finance--1.5%
1,180,000 Household Finance Corp.,
6.500%, 11/15/08................................... 1,227,814
1,130,000 Provident Cos., 6.375%, 07/15/05.................... 1,160,137
520,000 Sears Roebuck Acceptance Corp.,
6.95%, 05/15/02.................................... 542,095
------------
2,930,046
------------
Service--2.2%
300,000 La Quinta Inns, Inc.,
7.400%, 9/15/05.................................... 297,000
</TABLE>
See accompanying notes to financial statements.
62
<PAGE>
New England Zenith Fund
(Loomis Sayles Balanced Series)
Investments as of December 31, 1998
Medium & Long Term Bonds & Notes--(Continued)
<TABLE>
<CAPTION>
Face
Amount Value (a)
<C> <S> <C>
Service--(Continued)
$ 535,000 Lowen Group International, Inc.
7.750%, 10/15/01.................................. $ 458,613
1,180,000 MGM Grand, Inc.,
6.875%, 02/06/08.................................. 1,081,128
100,000 Secured Finance, 9.050%, 12/15/04.................. 114,370
1,500,000 Tricon Global Restaurants, Inc.,
7.450%, 05/15/05.................................. 1,545,120
680,000 U.S. West Capital Funding, Inc., 6.250%, 07/15/05.. 703,304
------------
4,199,535
------------
Gas Utilities--0.9%
1,650,000 K.N. Energy, Inc., 6.650%, 3/01/05................. 1,639,968
------------
Government Agency--13.7%
3,605,000 United States Treasury Notes,
6.500%, 8/15/05................................... 3,962,111
500,000 United States Treasury Notes,
5.625%, 2/15/06................................... 527,345
2,050,000 United States Treasury Notes,
7.000%, 7/15/06................................... 2,334,109
3,290,000 United States Treasury Notes,
6.625%, 5/15/07................................... 3,699,704
4,870,000 United States Treasury Notes,
6.125%, 8/15/07................................... 5,318,965
9,800,000 United States Treasury Stripped Bond,
Zero Coupon, 02/15/09............................. 5,909,008
1,300,000 United States Treasury Bonds,
10.375%, 11/15/12................................. 1,793,597
1,100,000 United States Treasury Bonds,
9.125%, 5/15/18................................... 1,591,216
1,000,000 United States Treasury Bonds,
6.500%, 11/15/26.................................. 1,162,810
------------
26,298,865
------------
Manufacturing--1.0%
260,000 Philips Electronics NV,
7.250%, 8/15/13................................... 270,709
670,000 Raytheon Co., 6.300%, 03/15/05..................... 686,743
700,000 Textron Inc., 6.625%, 11/15/07..................... 737,044
200,000 Tektronix, Inc., 7.625%, 8/15/02................... 207,308
------------
1,901,804
------------
Mortgage--3.3%
1,076,032 Federal Home Loan Bank,
6.000%, 8/15/22................................... 1,059,892
1,306,800 Federal Home Loan Bank,
6.000%, 12/01/27.................................. 1,290,870
620,000 Federal National Mortgage Association, 6.000%,
2/25/24........................................... 615,951
</TABLE>
<TABLE>
<CAPTION>
Face
Amount Value (a)
<C> <S> <C>
$ 1,162,833 Federal National Mortgage Association, 6.000%,
3/01/28........................................... $ 1,147,565
2,193,217 Federal National Mortgage Association, 6.000%,
4/01/28........................................... 2,164,420
------------
6,278,698
------------
Other Finance--2.2%
225,000 Bankers Trust N.Y. Corp.,
7.625%, 08/15/05.................................. 238,401
1,040,000 Bear Stearns Cos., Inc.,
6.750%, 12/15/07.................................. 1,080,539
260,000 Dean Witter Discover & Co.,
6.750%, 1/01/16................................... 262,829
200,000 Donaldson Lufkin & Jennrette, Inc., 6.875%,
11/01/05.......................................... 208,785
200,000 Lehman Brothers Holdings, Inc.,
7.360%, 12/15/03.................................. 206,926
440,000 National Health Investors, Inc.,
7.300%, 07/16/07.................................. 484,832
280,000 Oasis Residential, Inc.,
7.000%, 11/15/03.................................. 280,078
840,000 Prologis Trust, 7.050%, 07/15/06................... 819,630
145,000 Salomon, Inc., 7.500%, 2/01/03..................... 153,098
480,000 Salomon, Inc., 7.000%, 3/15/04..................... 501,451
------------
4,236,569
------------
Telephone--0.5%
950,000 Sprint Spectrum L.P.,
0/12.500%, 08/15/06(d)............................ 864,500
------------
Transportation--1.6%
100,000 American Airlines, 10.290%, 03/08/21............... 128,688
1,400,000 Federal Express Corp.,
7.020%, 1/15/16................................... 1,436,182
460,000 Norfolk Southern Corp.,
7.050%, 05/01/37.................................. 501,736
960,000 Royal Caribbean Cruises Line,
7.000%, 10/15/07.................................. 961,334
------------
3,027,940
------------
Total Bonds & Notes
(Identified Cost $65,124,482)..................... 67,156,783
------------
</TABLE>
See accompanying notes to financial statements.
63
<PAGE>
New England Zenith Fund
(Loomis Sayles Balanced Series)
Investments as of December 31, 1998
Short-Term Investments--3.0%
<TABLE>
<CAPTION>
Face
Amount Value (a)
<C> <S> <C>
$ 5,674,993 Associates First Cap Corp.,
5.000%, 01/04/99................................... $ 5,674,993
------------
Total Short-Term Investments
(Identified Cost $5,674,993)....................... 5,674,993
------------
Total Investments--99.5%
(Identified Cost $172,564,629)(b).................. 189,709,406
Other assets less liabilities....................... 867,654
------------
Total Net Assets--100%.............................. $190,577,060
============
</TABLE>
(a) See Note 1A of Notes to Financial Statements.
(b) Federal Tax Information: At December 31, 1998 the net unrealized
appreciation on investments based on cost of $172,570,554 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.............. $ 20,958,523
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value.............. (3,819,671)
------------
Net unrealized appreciation................................... $ 17,138,852
============
</TABLE>
(c) Non-income producing security.
(d) 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.
ADR/GDR--An American Depositary Receipt (ADR) or Global Depositary Receipt
(GDR) is a certificate issued by a Custodian Bank representing the
right to receive securities of the foreign issuer described. The
values of ADRs and GDRs are significantly influenced by trading on
exchanges not located in the United States or Canada.
See accompanying notes to financial statements.
64
<PAGE>
New England Zenith Fund
(Loomis Sayles Balanced Series)
Statement of Assets & Liabilities Statement of Operations
December 31, 1998 Year Ended December 31, 1998
<TABLE>
<S> <C> <C>
Assets
Investments at value................................... $189,709,406
Receivable for:
Fund shares sold....................................... 616,280
Securities sold........................................ 446,899
Dividends and interest................................. 1,131,177
Unamortized organization expense....................... 1,666
------------
191,905,428
Liabilities
Payable for:
Securities purchased................................... $690,945
Fund shares redeemed................................... 494,462
Withholding taxes...................................... 3,465
Accrued expenses:
Management fees........................................ 109,779
Deferred trustees' fees................................ 4,433
Other expenses......................................... 25,284
--------
1,328,368
------------
$190,577,060
============
Net Assets
Net Assets consist of:
Capital paid in........................................ $172,690,097
Undistributed net investment income.................... 16,938
Accumulated net realized gains (losses)................ 725,194
Unrealized appreciation (depreciation) on investments
and foreign currency.................................. 17,144,831
------------
Net Assets.............................................. $190,577,060
============
Computation of offering price:
Net asset value and redemption price per share
($190,577,060 divided by 12,286,960 shares of
beneficial interest)................................... $ 15.51
============
Identified cost of investments.......................... $172,564,629
============
</TABLE>
<TABLE>
<S> <C> <C>
Investment Income
Dividends.............................................. $ 1,342,333(a)
Interest............................................... 4,450,732
-----------
5,793,065
Expenses
Management fees.......................................$1,144,390
Deferred expense reimbursement........................ 62,746
Trustees' fees and expenses........................... 14,635
Custodian............................................. 61,423
Audit and tax services................................ 19,827
Legal................................................. 10,183
Printing.............................................. 22,462
Insurance............................................. 2,011
Amortization of organization expenses................. 4,586
Miscellaneous......................................... 4,027
----------
Total expenses....................................... 1,346,290
-----------
Net investment income.................................. 4,446,775
Realized and Unrealized Gain
(Loss) on Investments and
Foreign Currency Transactions
Realized gain (loss) on:
Investments--net...................................... 3,801,920
----------
Unrealized appreciation
(depreciation) on:
Investments--net...................................... 6,024,322
Foreign currency transactions--net.................... 43
----------
Total unrealized appreciation
(depreciation) on investments
and foreign currency
transactions........................................ 6,024,365
----------
Net gain (loss) on investment
transactions.......................................... 9,826,285
-----------
Net Increase (Decrease) in Net
Assets from Operations................................ $14,273,060
===========
</TABLE>
(a) Net of foreign taxes of: $17,141
See accompanying notes to financial statements.
65
<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,
1997 1998
------------ ------------
<S> <C> <C>
From Operations
Net investment income............................. $ 2,423,147 $ 4,446,775
Net realized gain (loss) on investments........... 5,050,034 3,801,920
Unrealized appreciation (depreciation) on
investments and foreign currency transactions.... 5,612,032 6,024,365
------------ ------------
Increase (decrease) in net assets from operations. 13,085,213 14,273,060
------------ ------------
From Distributions to Shareholders
Net investment income............................. (2,381,795) (4,483,422)
Net realized gain on investments.................. (4,984,089) (3,664,526)
------------ ------------
(7,365,884) (8,147,948)
------------ ------------
From Capital Shares Transactions
Proceeds from sale of shares...................... 86,766,541 85,422,334
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income.......... 2,381,795 4,483,422
Distributions from net realized gain.............. 4,984,089 3,664,526
------------ ------------
94,132,425 93,570,282
Cost of shares redeemed........................... (20,933,471) (46,561,460)
------------ ------------
Increase (decrease) in net assets derived from
capital share transactions....................... 73,198,954 47,008,822
------------ ------------
Total increase (decrease) in net assets........... 78,918,283 53,133,934
Net Assets
Beginning of the year............................. 58,524,843 137,443,126
------------ ------------
End of the year................................... $137,443,126 $190,577,060
============ ============
Undistributed Net Investment Income
Beginning of the year............................. $ 10,566 $ 51,774
============ ============
End of the year................................... $ 51,774 $ 16,938
============ ============
Number of Shares of the Fund:
Issued from the sale of shares.................... 5,865,131 5,541,843
Issued in connection with the reinvestment of:
Distributions from net investment income.......... 161,887 290,551
Distributions from net realized gain.............. 337,428 237,397
------------ ------------
6,364,446 6,069,791
Redeemed.......................................... (1,433,106) (3,032,615)
------------ ------------
Net change........................................ 4,931,340 3,037,176
============ ============
</TABLE>
Financial Highlights
<TABLE>
<CAPTION>
October 31, 1994(a)
through Year Year Year Year
December 31, Ended Ended Ended Ended
1994 1995 1996 1997 1998
------------------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year...... $10.00 $ 9.94 $ 11.95 $ 13.55 $ 14.86
------ ------- ------- -------- --------
Income From Investment
Operations
Net Investment Income.. 0.05 0.26 0.27 0.28 0.38
Net Realized and
Unrealized Gain (Loss)
on Investments........ (0.06) 2.20 1.73 1.90 0.97
------ ------- ------- -------- --------
Total From Investment
Operations............ (0.01) 2.46 2.00 2.18 1.35
------ ------- ------- -------- --------
Less Distributions
Distributions From Net
Investment Income..... (0.05) (0.26) (0.27) (0.27) (0.38)
Distributions From Net
Realized Capital
Gains................. 0.00 (0.19) (0.13) (0.60) (0.32)
------ ------- ------- -------- --------
Total Distributions.... (0.05) (0.45) (0.40) (0.87) (0.70)
------ ------- ------- -------- --------
Net Asset Value, End of
Year................... $ 9.94 $ 11.95 $ 13.55 $ 14.86 $ 15.51
====== ======= ======= ======== ========
Total Return (%)........ (0.1)(b) 24.8 16.9 16.2 9.1
Ratio of Operating
Expenses to Average Net
Assets (%)............. 0.85 (c) 0.85 0.85 0.85 0.82
Ratio of Net Investment
Income to Average Net
Assets (%)............. 4.16 (c) 4.03 3.08 2.79 2.72
Portfolio Turnover Rate
(%).................... 0 (c) 72 59 60 72
Net Assets, End of Year
(000).................. $2,722 $18,823 $58,525 $137,443 $190,577
The ratios of expenses
to average net assets
without giving effect
to the voluntary
expense agreement
described in Note 4 to
the Financial
Statements would have
been (%)............... 3.73 (c) 1.85 0.99 0.86 --
</TABLE>
(a) Commencement of operations.
(b) Not computed on an annualized basis.
(c) Computed on an annualized basis.
See accompanying notes to financial statements.
66
<PAGE>
Back Bay Advisors Managed Series
Peter W. Palfrey, CFA Back Bay Advisors, L.P.
[PHOTO OF PETER W. PALFREY APPEARS HERE]
Q. How did the Series perform during the year?
A. The Managed Series continued its strong relative and absolute performance
during 1998, returning 19.7% (at net asset value) versus 13.4% for the Lipper
Variable Products Flexible Portfolio Fund average/8/. The Series' performance
was basically in line with an unmanaged composite of 60% of the S&P 500 In-
dex/25/ (which returned 28.7% for 1998) and 40% of the Lehman
Government/Corporate Bond Index/3/ (which returned 9.5% for 1998) for a blended
return of 20.9%. The Series was ranked 14th of 89 funds in its peer group of
Lipper Variable Products Flexible Portfolio Funds for 1998, and is ranked 5th
for the three year period and 4th for the five year period.
Q. How did you manage the Series during the past year and what affected
performance?
A. Global financial turmoil accelerated in the third quarter (particularly in
August), taking its cue from the collapse of Russian financial markets--the
latest victim of the global liquidity/currency crisis that was first manifested
in Thailand over one year ago. Increased global market volatility and investor
uncertainty flowed over into the remaining G-7 non-Asian financial markets,
causing substantial damage to global equity and credit markets, with a corre-
sponding flight to quality (i.e. U.S. Treasuries). However, during the fourth
quarter, there was a dramatic reversal of the flight-to-quality trade of the
third quarter, as investors reduced U.S. Treasuries and other high quality safe
haven investments and began searching for reasonably valued stocks, and in a
more measured fashion, fixed income spread markets--markets that had been
shunned by investors at any cost just weeks earlier.
I managed the stock allocation between 63% and 68% of the total portfolio dur-
ing the 1998, and reduced the stock allocation on several occasions as equity
prices breached historically "full" valuation levels. Most recently, the stock
portion of the portfolio appreciated from 63.5% in September to 67.5% late in
December with the market rebound. However, with stock valuations at new record
highs, earnings growth uneven, the near term outlook for Treasury yields and
financial market volatility remaining stubbornly high, I shaved the stock allo-
cation back to 64.4%--just below my neutral allocation of 65/35 percent
stock/bond. Cash proceeds from the stock sale were used to modestly reduce the
duration of the bond portfolio and to add to Yankee sovereign exposure. The
bond portfolio was managed throughout the year with an overweight position to
spread product, providing the portfolio with a substantial yield advantage over
U.S. Treasuries. Credit spreads, which widened dramatically during the third
quarter on the global liquidity crisis, narrowed sharply during the fourth
quarter.
Q. What is your current outlook for the months ahead?
A. The U.S. domestic economy has proved very resilient to the tremendous finan-
cial market volatility and economic adversity that has been caused by the suc-
cession of emerging market crises over the past year and a half. Meltdowns in
Asia, Russia and now Brazil have sent liquidity-driven shock waves through
world financial markets and yet, after substantial sell-offs in risk assets
(stocks, corporate bonds, yankee bonds and mortgage pass-throughs), investors
have returned each time to buy the dip in price. While the unflappable consumer
has been instrumental in helping to sustain U.S. economic growth through this
period, the cornerstone of market confidence has rested on the Federal Reserve
Board's willingness to provide the market with much needed liquidity. This has
played a critical role in limiting the damage to financial markets, as hedge
funds, investment dealers and other financial institutions were forced to sell
losing positions and to de-leverage balance sheets during the second half of
1998. The inflation outlook remains positive at the sub-2% level and the U.S.
economy appears to be on track for another year of solid (but not runaway)
growth in the 2.5%-3.0% range. Asia also seems to be turning the corner, with
the region expected to register positive Gross Domestic Product growth in 1999,
after a significant contraction in 1998.
Corporate earnings growth projections have improved from expectations just last
fall, but leave little room for financial mishaps, such as the possible adverse
effect on the U.S. economy from a more protracted downturn in Latin economies
after Brazil's currency devaluation (the largest Latin
67
<PAGE>
economy and one of the U.S.'s largest trading partners). Liquidity is cur-
rently fueling the strong performance in U.S. (and global) financial markets,
with U.S. equity markets, in particular, benefiting in part from investors'
fear of missing the next rally. Bond yields are expected to remain range-
bound, helping to support high equity market multiples, with any commodity
price pressures in upcoming quarters largely mitigated by continued excess
global capacity. Therefore, over the near term, I expect that equity market
risk premiums will remain at low levels, supporting my neutral benchmark
weighting of 65 percent/35 percent stock-bonds, despite full stock valuations.
Clearly, the evolving corporate earnings growth/yield outlook will be critical
to maintaining the current allocation of stocks versus bonds. Whereas the
overall large-cap growth bias of the stock portfolio has driven performance
over the past several years, select large cap value holdings should start to
contribute more to the bottom line. Within the fixed income portion of the
portfolio, I expect to remain overweight to the credit sector and to maintain
a long duration, with further spread contraction from present non-recession
wide spreads expected to contribute to above average returns over the next
quarters.
[CHART APPEARS HERE]
Date Zenith Managed Series S&P 500 Leh/Gov't Corp.
---- --------------------- ------- ---------------
12/31/88 $10,000 $10,000 $10,000
12/31/89 $11,908 $13,159 $11,277
12/31/90 $12,291 $12,749 $12,311
12/31/91 $14,770 $16,617 $14,112
12/31/92 $15,760 $17,881 $15,124
12/31/93 $17,439 $19,675 $16,452
12/31/94 $17,244 $19,942 $16,134
12/31/95 $22,635 $27,409 $18,605
12/31/96 $26,039 $33,686 $19,360
12/31/97 $32,953 $44,909 $20,884
12/31/98 $39,430 $57,717 $24,415
Average Annual Total Return
Lipper Variable
Lehman Flexible Portfolio
Managed Series S&P 500/25/ Government/Corp. Fund Average/8/
1 year 19.7% 28.7% 9.5% 13.4%
3 years 20.3 28.3 7.3 15.6
5 years 17.7 24.1 7.3 13.8
10 years 14.7 19.2 9.3 14.8
Since Inception 13.3 16.5 9.0 n/a
X Fund Facts
Goal: A favorable total return
through investment in diversified
portfolio. The Series' portfolio
is expected to include a mix of
(1) common stocks, (2) notes and
bonds and (3) money market
instruments.
Start date: March 30, 1987
Size: $214 million as of
December 31, 1998
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.
68
<PAGE>
New England Zenith Fund
(Back Bay Advisors Managed Series)
Investments as of December 31, 1998
Common Stocks--64.4% of Total Net Assets
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Aerospace--0.7%
11,276 Boeing Co. .............................................. $ 367,880
5,400 Lockheed Martin Corp. ................................... 457,650
14,600 Rockwell International Corp. ............................ 709,013
------------
1,534,543
------------
Air Transportation--0.4%
5,800 Delta Air Lines, Inc. ................................... 301,600
22,725 Southwest Airlines Co. .................................. 509,892
------------
811,492
------------
Automobile & Related--0.7%
16,900 Ford Motor Co. .......................................... 991,819
4,500 Goodyear Tire & Rubber Co. .............................. 226,969
7,200 Paccar, Inc. ............................................ 296,100
------------
1,514,888
------------
Banks--5.1%
29,340 Banc One Corp. .......................................... 1,498,174
25,589 Bank America Corp. ...................................... 1,538,539
10,600 Bankers Trust New York Corp. ............................ 905,638
17,400 Chase Manhattan Corp. New................................ 1,184,287
31,944 Citicorp Group, Inc. .................................... 1,581,228
10,900 J.P. Morgan & Co., Inc. ................................. 1,145,181
10,000 Republic NY Corp. ....................................... 455,625
62,200 Wells Fargo & Co. ....................................... 2,484,112
------------
10,792,784
------------
Business Machines--2.8%
26,838 Compaq Computer Corp. ................................... 1,125,519
15,500 Dell Computer Corp. ..................................... 1,134,406
19,800 International Business Machines Corp. ................... 3,658,050
------------
5,917,975
------------
Business Services--0.6%
28,500 Browning Ferris Industries, Inc. ........................ 810,469
9,200 H & R Block, Inc. ....................................... 414,000
------------
1,224,469
------------
Chemicals--1.3%
8,000 Allied-Signals, Inc. .................................... 354,500
15,100 E.I. Du Pont de Nemours & Co. ........................... 801,244
11,000 Great Lakes Chemical Corp. .............................. 440,000
11,600 Monsanto Co. ............................................ 551,000
7,800 Pitney Bowes, Inc. ...................................... 515,288
5,100 Union Carbide Corp. ..................................... 216,750
------------
2,878,782
------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Communication--7.1%
15,500 Airtouch Communications, Inc. ........................... $ 1,117,937
600 Ameritech Corp. ......................................... 38,025
39,261 AT&T Co. ................................................ 2,954,390
22,424 Bell Atlantic Corp. ..................................... 1,188,472
32,400 Bellsouth Corp. ......................................... 1,615,950
10,600 GTE Corp. ............................................... 689,000
12,800 Harris Corp. ............................................ 468,800
17,668 Lucent Technologies, Inc. ............................... 1,943,480
21,700 MCI Worldcom, Inc. ...................................... 1,556,975
11,900 Northern Telecom, Ltd. .................................. 596,488
28,274 SBC Communications, Inc. ................................ 1,516,193
23,900 US West, Inc. ........................................... 1,544,537
------------
15,230,247
------------
Conglomerates--0.6%
11,100 Frontier Corp. .......................................... 377,400
13,800 Minnesota Mining & Manufacturing Co. .................... 981,525
------------
1,358,925
------------
Construction--0.9%
18,000 Home Depot, Inc. ........................................ 1,101,375
29,800 Masco Corp. ............................................. 856,750
------------
1,958,125
------------
Consumer Durables--2.3%
7,300 Black & Decker Corp. .................................... 409,256
43,700 General Electric Co. .................................... 4,460,131
800 Whirlpool Corp. ......................................... 44,300
------------
4,913,687
------------
Containers--0.1%
6,000 Bemis, Inc. ............................................. 227,625
------------
Data Processing--3.1%
23,100 Intel Corp. ............................................. 2,738,794
28,700 Microsoft Corp. ......................................... 3,980,331
150 Oracle Systems Corp. .................................... 6,469
------------
6,725,594
------------
Domestic Oil--0.9%
4,300 Amerada Hess Corp. ...................................... 213,925
5,600 Amoco Corp. ............................................. 330,400
5,400 Atlantic Richfield Co. .................................. 352,350
7,200 Halliburton Co. ......................................... 213,300
3,601 Sunoco, Inc. ............................................ 129,861
6,200 Tenneco, Inc. ........................................... 211,188
15,600 Unocal Corp. ............................................ 455,325
------------
1,906,349
------------
</TABLE>
69
<PAGE>
New England Zenith Fund
(Back Bay Advisors Managed Series)
Investments as of December 31, 1998
Common Stocks--(Continued)
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Drugs & Medicine--6.2%
17,600 Abbott Laboratories...................................... $ 862,400
16,100 American Home Products Corp. ............................ 906,631
12,800 Bausch & Lomb, Inc. ..................................... 768,000
17,500 Baxter International, Inc. .............................. 1,125,469
19,200 Becton Dickinson & Co. .................................. 819,600
17,000 C.R. Bard, Inc. ......................................... 841,500
12,600 Corning, Inc. ........................................... 567,000
15,800 Eli Lilly & Co. ......................................... 1,404,225
11,200 Mallinckrodt, Inc. ...................................... 345,100
13,700 Merck & Co., Inc. ....................................... 2,023,319
20,800 Pfizer, Inc. ............................................ 2,609,100
18,400 Schering Plough Corp. ................................... 1,016,600
------------
13,288,944
------------
Electronics--2.3%
21,400 AMP, Inc. ............................................... 1,114,137
18,800 Emerson Electric Co. .................................... 1,137,400
20,000 Hewlett-Packard ......................................... 1,366,250
15,400 Raytheon Co. ............................................ 820,050
14,400 Tektronix, Inc. ......................................... 432,900
------------
4,870,737
------------
Energy & Utilities--2.1%
11,700 Consolidated Edison Co. ................................. 618,638
40,200 Edison International..................................... 1,120,575
22,000 Pacific Gas & Electric Corp. ............................ 693,000
10,700 Pepco Energy Co. ........................................ 445,388
7,700 Public Service Enterprise Group.......................... 308,000
8,900 Texas Utilities Co. ..................................... 415,519
21,200 Unicom Corp. ............................................ 817,525
------------
4,418,645
------------
Energy Raw Materials--0.2%
27,200 Occidental Petroleum Corp. .............................. 459,000
------------
Finance--2.1%
10,400 American Express Co. .................................... 1,063,400
8,858 Associates First Capital Corp. .......................... 375,358
21,800 Federal Home Loan Mortgage Corp. ........................ 1,404,737
21,400 Federal National Mortgage Association.................... 1,583,600
------------
4,427,095
------------
Food & Agriculture--3.1%
36,900 Coca Cola Co. ........................................... 2,467,687
20,450 H. J. Heinz Co. ......................................... 1,157,981
30,700 PepsiCo, Inc. ........................................... 1,256,781
32,000 Sara Lee Corp. .......................................... 902,000
30,400 Supervalue, Inc. ........................................ 851,200
------------
6,635,649
------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Gas Utilities--0.3%
14,200 Eastern Enterprises...................................... $ 621,250
------------
Gold--0.1%
8,900 Barrick Gold Corp. ...................................... 173,550
------------
Insurance--2.5%
11,500 Aetna Life & Casualty Co. ............................... 904,188
21,136 Allstate Corp. .......................................... 816,378
14,400 American General Corp. .................................. 1,123,200
14,553 American International Group, Inc. ...................... 1,406,184
8,100 CIGNA Corp. ............................................. 626,231
4,600 Loews Corp. ............................................. 451,950
------------
5,328,131
------------
International Oil--3.1%
38,400 Exxon Corp. ............................................. 2,808,000
15,600 Mobil Corp. ............................................. 1,359,150
39,200 Royal Dutch Petroleum Co. (ADR).......................... 1,876,700
9,600 Texaco, Inc. ............................................ 507,600
------------
6,551,450
------------
Leisure--0.2%
17,000 Brunswick Corp. ......................................... 420,750
------------
Liquor--0.4%
6,600 Anheuser-Busch Companies, Inc. .......................... 433,125
11,700 Seagram, Ltd. ........................................... 444,600
------------
877,725
------------
Media--2.2%
20,100 Cisco Systems, Inc. ..................................... 1,865,531
6,000 Gannett Co., Inc. ....................................... 387,000
15,200 Tele-Communications, Inc., .............................. 840,750
26,400 Time Warner, Inc. ....................................... 1,638,450
------------
4,731,731
------------
Miscellaneous--1.1%
8,000 American Greetings Corp. ................................ 328,500
10,900 EG & G, Inc. ............................................ 303,156
10,000 IMS Health, Inc. ........................................ 754,375
21,200 Milacron, Inc. .......................................... 408,100
4,400 Nacco Industries, Inc. .................................. 404,800
7,926 Newmont Mining Corp. .................................... 143,163
------------
2,342,094
------------
Non-Ferrous Metals--0.5%
14,000 Aluminum Company of America.............................. 1,043,875
------------
</TABLE>
70
<PAGE>
New England Zenith Fund
(Back Bay Advisors Managed Series)
Investments as of December 31, 1998
Common Stocks--(Continued)
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
Office Equipment--0.9%
15,600 Xerox Corp. ............................................. $ 1,840,800
------------
Optical Photo, Equipment--0.1%
3,600 Eastman Kodak Co. ....................................... 259,200
------------
Paper & Forest Products--0.8%
9,900 Burlington Northern Santa Fe............................. 334,125
3,600 Georgia-Pacific Corp. ................................... 210,825
19,000 Kimberly Clark Corp. .................................... 1,035,500
8,400 Westvaco Corp. .......................................... 225,225
------------
1,805,675
------------
Pollution Control--0.2%
6,887 Waste Management, Inc. .................................. 321,106
------------
Publishing--0.3%
12,000 Knight Ridder, Inc. ..................................... 613,500
------------
Railroads & Shipping--0.3%
5,100 CSX Corp. ............................................... 211,650
13,500 Norfolk Southern Corp. .................................. 427,781
------------
639,431
------------
Restaurants--0.0%
3,070 Tricon Global Restaurants, Inc. ......................... 153,884
------------
Retail--3.4%
19,000 Albertsons, Inc. ........................................ 1,210,062
5,000 J. C. Penney, Inc. ...................................... 234,375
38,900 Kmart Corp.(c)........................................... 595,656
26,400 Mattel Inc. ............................................. 602,250
7,800 May Department Stores Co. ............................... 470,925
11,600 Nike Inc., Class B....................................... 470,525
11,400 Sears Roebuck & Co. ..................................... 484,500
15,000 Walgreen Co. ............................................ 878,438
28,100 Wal-Mart Stores, Inc. ................................... 2,288,394
------------
7,235,125
------------
Soaps & Cosmetics--3.7%
17,000 Alberto Culver Co. ...................................... 453,688
7,800 Avon Products, Inc. ..................................... 345,150
19,620 Bristol-Myers Squibb Co. ................................ 2,625,401
3,800 Clorox Co. .............................................. 443,888
18,000 Gillette Co. ............................................ 869,625
16,500 Johnson & Johnson........................................ 1,383,937
20,600 Procter & Gamble Co. .................................... 1,881,037
------------
8,002,726
------------
Steel--0.1%
7,720 USX-US Steel Group................................... 177,560
------------
Tobacco--1.0%
40,800 Philip Morris Companies, Inc. ....................... 2,182,800
------------
Travel & Recreation--0.6%
39,705 Walt Disney Co. ..................................... 1,191,150
------------
Total Common Stock
(Identified cost $66,455,590)....................... 137,609,068
------------
Warrant--0.1%
5,500 Republic of Argentina................................ $247,500
------------
Total Warrants
(Identified cost $123,860).......................... 247,500
------------
Bonds & Notes--32.0%
<CAPTION>
Face
Amount
<C> <S> <C>
Corporate Bonds--13.6%
$2,750,000 Aramark Services, Inc.,
7.000%, 7/15/06..................................... 2,805,632
1,000,000 CSC Holdings, Inc.
7.875%, 12/15/07.................................... 1,057,360
2,000,000 CSC Holdings, Inc.
7.875%, 2/15/18..................................... 2,032,500
3,000,000 Comcast Cable Communications,
8.500%, 5/01/27..................................... 3,676,350
2,000,000 Comcast Cellular Holdings, Inc.,
9.500%, 5/01/07, 144A............................... 2,135,000
4,285,000 Great Atlantic & Pacific Tea Co.,
7.750%, 4/15/07..................................... 4,245,707
2,000,000 MCI Communications Corp.
7.125%, 6/15/27..................................... 2,214,080
4,000,000 News America Holdings, Inc.,
10.125%, 10/15/12................................... 4,649,720
2,750,000 Norfolk Southern Corp.,
7.050%, 5/01/37..................................... 2,999,507
2,000,000 Total Access Communication,
8.375%, 11/04/06.................................... 1,327,500
1,850,000 United Utilities Corp.,
6.250%, 8/15/05..................................... 1,867,760
------------
29,011,116
------------
</TABLE>
See accompanying notes to financial statements.
71
<PAGE>
New England Zenith Fund
(Back Bay Advisors Managed Series)
Investments as of December 31, 1998
Bonds & Notes--(Continued)
<TABLE>
<CAPTION>
Face
Amount Value (a)
<C> <S> <C>
Foreign--9.6%
$ 4,000,000 Government of Canada,
10.250%, 3/15/14 (CAD)............................ $ 4,042,918
5,000,000 Government of Canada,
Zero Coupon, 3/15/21 (CAD)........................ 1,003,108
15,000,000 Government of Canada,
Zero Coupon, 6/01/25 (CAD)........................ 2,493,327
3,000,000 Province of Ontario,
8.100%, 9/08/23 (CAD)............................. 2,587,831
30,000,000 Province of Ontario,
Zero Coupon, 09/08/23 (CAD)....................... 4,872,228
15,000,000 Province of Quebec Stripped,
Zero Coupon, 1/16/23 (CAD)........................ 2,331,698
3,600,000 Province of Quebec,
8.500%, 04/01/26 (CAD)............................ 3,178,410
------------
20,509,520
------------
Yankee--8.6%
850,000 Pemex Financial, Ltd.,
9.150%, 11/15/18.................................. 844,688
2,000,000 Petroleos Mexicanos,
9.500%, 9/15/27................................... 1,642,500
925,000 Pindo Deli Fin Mauritius,
10.750%, 10/01/07, 144A........................... 494,875
5,500,000 Republic of Argentina,
11.000%, 12/04/05................................. 5,458,750
5,000,000 Republic of Columbia
7.625%, 2/15/07................................... 4,162,500
1,000,000 Republic of Korea,
8.875%, 4/15/08................................... 1,032,560
5,008,000 Republic of Panama,
8.875%, 9/30/27, 144A............................. 4,695,000
------------
18,330,873
------------
U.S. Government Bonds--0.2%
234,917 Government National Mortgage Association, 10.000%,
9/15/18........................................... 254,516
255,634 Government National Mortgage Association, 11.500%
with various maturities to 2013................... 284,768
------------
539,284
------------
Total Bonds & Notes
(Identified Cost $65,980,913)..................... 68,390,793
------------
</TABLE>
Short-Term Investment--2.7%
<TABLE>
<CAPTION>
Face
Amount Value (a)
<C> <S> <C>
$ 5,761,000 Household Finance Corp.,
5.000%, 1/4/99.................................... $ 5,758,600
------------
Total Short-Term Investment
(Identified Cost $5,758,600)...................... 5,758,600
------------
Total Investments--99.2%
(Identified Cost $138,318,963)(b)................. 212,005,961
Other assets less liabilities...................... 1,633,232
------------
Total Net Assets--100%............................. $213,639,193
============
(a)See Note 1A of Notes to Financial Statements.
(b)Federal Tax Information:
At December 31, 1998 the net unrealized appreciation on investments based
on cost of $138,318,963 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.............. $ 77,760,153
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value.............. (4,073,155)
------------
Net unrealized appreciation................................... $ 73,686,998
============
</TABLE>
(c)Non-income producing security.
ADR/GDR--An American Depositary Receipt (ADR) or Global Depositary Receipt (GDR)
is a certificate issued by a Custodian Bank representing the right to
receive securities of the foreign issuer described. The values of ADRs
and GDRs are significantly influenced by trading on exchanges not
located in the United States or Canada.
144A-- 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. At the period
end, the value of these securities amounted to $7,324,875 or 3.4% of
total net assets.
CAD-- Security denominated in Canadian Dollars.
See accompanying notes to financial statements.
72
<PAGE>
New England Zenith Fund
(Back Bay Advisors Managed Series)
Statement of Assets & Liabilities
December 31, 1998
<TABLE>
<S> <C> <C>
Assets
Investments at value................................... $212,005,961
Cash................................................... 121,862
Foreign cash at value
(Identified cost $33)................................. 33
Receivable for:
Fund shares sold....................................... 104,417
Securities sold........................................ 495,681
Dividends and interest................................. 1,293,993
Foreign taxes.......................................... 632
------------
214,022,579
Liabilities
Payable for:
Fund shares redeemed................................... $229,093
Accrued expenses:
Management fees........................................ 88,603
Deferred trustees' fees................................ 54,804
Other expenses......................................... 10,886
--------
383,386
------------
$213,639,193
============
Net Assets
Net Assets consist of:
Capital paid in........................................ $136,108,055
Undistributed net investment income.................... 9,035
Accumulated net realized gains
(losses).............................................. 3,833,767
Unrealized appreciation
(depreciation) on investments
and foreign currency.................................. 73,688,336
------------
Net Assets.............................................. $213,639,193
============
Computation of offering price:
Net asset value and redemption price
per share ($213,639,193 divided by 1,028,313 shares of
beneficial interest)................................... $ 207.76
============
Identified cost of investments.......................... $138,318,963
============
</TABLE>
Statement of Operations
Year Ended December 31, 1998
<TABLE>
<S> <C> <C>
Investment Income
Dividends.......................................... $ 2,222,231(a)
Interest........................................... 5,265,645
-----------
7,487,876
Expenses
Management fees.................................... $ 1,003,695
Trustees' fees and expenses........................ 25,171
Custodian.......................................... 88,663
Audit and tax services............................. 14,308
Legal.............................................. 13,814
Printing........................................... 14,266
Insurance.......................................... 5,488
Miscellaneous...................................... 4,222
-----------
Total expenses..................................... 1,169,627
-----------
Net investment income............................... 6,318,249
Realized and Unrealized Gain (Loss) on Investments,
and Foreign Currency Transactions
Realized gain (loss) on:
Investments--net................................... 11,395,749
Foreign currency transactions--net................. (24,441)
-----------
Total realized gain (loss) on investments and
foreign currency transactions.................... 11,371,308
-----------
Unrealized appreciation (depreciation) on:
Investments--net................................... 18,224,361
Foreign currency transactions--net................. 16,332
-----------
Total unrealized appreciation (depreciation) on
investments, and foreign currency transactions... 18,240,693
-----------
Net gain (loss) on investment transactions.......... 29,612,001
-----------
Net Increase (Decrease) in Net Assets From
Operations......................................... $35,930,250
===========
(a) Net of foreign taxes of: $11,520
</TABLE>
See accompanying notes to financial statements.
73
<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,
1997 1998
------------ ------------
<S> <C> <C>
From Operations
Net investment income............................. $ 5,630,618 $ 6,318,249
Net realized gain (loss) on investments and
foreign currency transactions.................... 21,058,248 11,371,308
Unrealized appreciation (depreciation) on
investments, and foreign currency transactions... 14,235,222 18,240,693
------------ ------------
Increase (decrease) in net assets from operations. 40,924,088 35,930,250
------------ ------------
From Distributions to Shareholders
Net investment income............................. (5,622,790) (6,267,551)
Net realized gain on investments.................. (16,617,273) (12,208,852)
------------ ------------
(22,240,063) (18,476,403)
------------ ------------
From Capital Shares Transactions
Proceeds from sale of shares...................... 22,338,847 28,307,821
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income.......... 5,622,790 6,267,551
Distributions from net realized gain.............. 16,617,273 12,208,852
------------ ------------
44,578,910 46,784,224
Cost of shares redeemed........................... (35,368,662) (39,381,579)
------------ ------------
Increase (decrease) in net assets derived from
capital share transactions....................... 9,210,248 7,402,645
------------ ------------
Total increase (decrease) in net assets........... 27,894,273 24,856,492
Net Assets
Beginning of the year............................. 160,888,428 188,782,701
------------ ------------
End of the year................................... $188,782,701 $213,639,193
============ ============
Undistributed Net Investment Income
Beginning of the year............................. $ 40,029 $ 5,466
============ ============
End of the year................................... $ 5,466 $ 9,035
============ ============
Number of Shares of the Fund:
Issued from the sale of shares.................... 115,122 137,877
Issued in connection with the reinvestment of:
Distributions from net investment income.......... 30,044 30,019
Distributions from net realized gain.............. 88,778 58,566
------------ ------------
233,944 226,462
Redeemed.......................................... (183,956) (192,507)
------------ ------------
Net change........................................ 49,988 33,955
============ ============
</TABLE>
Financial Highlights
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year........................ $ 137.18 $ 130.30 $ 163.52 $ 170.37 $ 189.85
-------- -------- -------- -------- --------
Income From Investment
Operations
Net Investment Income....... 5.42 6.34 6.43 6.38 6.56
Net Realized and Unrealized
Gain (Loss) on Investments. (6.92) 34.33 18.21 38.47 30.50
-------- -------- -------- -------- --------
Total From Investment
Operations................. (1.50) 40.67 24.64 44.85 37.06
-------- -------- -------- -------- --------
Less Distributions
Distributions From Net
Investment Income.......... (5.38) (6.34) (6.34) (6.42) (6.51)
Distributions in Excess of
Net Investment Income...... 0.00 (0.23) 0.00 0.00 0.00
Distributions From Net
Realized Capital Gains..... 0.00 (0.88) (11.45) (18.95) (12.64)
-------- -------- -------- -------- --------
Total Distributions......... (5.38) (7.45) (17.79) (25.37) (19.15)
-------- -------- -------- -------- --------
Net Asset Value, End of Year. $ 130.30 $ 163.52 $ 170.37 $ 189.85 $ 207.76
======== ======== ======== ======== ========
Total Return (%)............. (1.1) 31.3 15.0 26.6 19.7
Ratio of Operating Expenses
to Average Net Assets (%)... 0.54 0.64 0.62 0.61 0.58
Ratio of Net Investment
Income to Average Net Assets
(%)......................... 3.98 4.06 3.64 3.20 3.15
Portfolio Turnover Rate (%).. 76 51 72 65 25
Net Assets, End of Year
(000)....................... $121,877 $147,536 $160,888 $188,783 $213,639
</TABLE>
See accompanying notes to financial statements.
74
<PAGE>
Salomon Brothers Strategic Bond Opportunities Series
Portfolio Managers: Roger Lavan, Peter Wilby and David Scott
Salomon Brothers Asset Management Inc
[PHOTO OF ROGER LAVAN]
[PHOTO OF PETER WILBY]
[PHOTO OF DAVID SCOTT]
Q. How did the Series perform in 1998?
A. The Salomon Brothers Strategic Bond Opportunities Series had a total return
of 2.0% (based on net asset value) for 1998 versus 5.1% for the Lipper Variable
Products General Bond Fund Average/9/ and 8.7% for the Lehman Brothers Aggre-
gate Bond Index/2/. Underperformance of the Series was largely due to its expo-
sure to high yield and emerging markets debt during the unexpected credit cri-
sis in the summer of 1998.
Q. How did you manage the Series during the year?
A. For bonds, 1998 was a mixture of good and bad news. The good news was that
interest rates fell approximately 1% across the yield curve. Though low infla-
tion contributed to lower bond yields, exogenous factors such as equity market
fears, default fears and expectations of spreading global economic weakness
gave investors sufficient reasons to seek only the safety and liquidity of the
Treasury sector. The bad news for bonds that were not Treasuries was that yield
spreads across all sectors widened toward unexplainable and unsustainable lev-
els. High yield bonds and emerging market debt suffered their worst perfor-
mances in years. This was largely due to the increased global spreads.
Early in 1998, domestic demand readings in the U.S. remained exceptionally
healthy, benefiting from low interest rates, low unemployment rates and high
consumer confidence. Lower quality high yield bonds outperformed, so the Series
reaped the profits and upgraded into relatively higher quality bonds. The Se-
ries maintained a neutral duration relative to the Lehman Brothers Aggregate
Bond Index and increased its over weighting in mortgage backed securities. The
Series continued to invest in discount coupon mortgages and seasoned pass
through mortgages because of their superior performance as interest rates de-
cline. The Series ended the first quarter with 42% U.S. Investment Grade Bonds,
32% High Yield Bonds, 15% Emerging Markets Debt, 7% Non-U.S. Government Bonds
and 4% Cash.
The Series maintained its weightings in the high yield sector throughout the
second quarter, as credit fundamentals remained favorable. We continued to seek
opportunities to upgrade credit quality and moved to a more defensive position
within the sector. In the emerging markets sector of the portfolio, we lowered
our exposure to Russia and added Bulgaria and Peru. Mexico and Argentina con-
tinued to be core holdings, as their fundamentals remained strong.
During the third quarter, heightened global market volatility caused the Series
to take a more defensive stance in its high yield sector and to lower its allo-
cation to the emerging markets debt sector. We continued to decrease the Se-
ries' exposure to Russia and increase its positions in Argentina and Mexico as
fundamentals appeared more favorable. The Series continued to favor discount
and coupon mortgage backed securities in the investment grade portion of the
portfolio. The Series ended the third quarter with 45% investment grade, 30%
high yield, 13% emerging market debt, 6% non-U.S. dollar denominated bonds and
6% cash.
During November, high yield and emerging debt markets snapped back strongly
when it became apparent to investors that the financial market crisis was end-
ing. Bold steps taken by the Federal Reserve Board (the "Fed") in lowering
short-term interest rates and restoring liquidity in the markets began to put
investors at ease. We maintained our high yield sector of the portfolio as
credit spreads had room to improve and interest rates were cut 0.75%. We have
increased the Series' allocations in the emerging markets debt sector from 15%
to 23%, as the markets have recovered some 20% since their lows in early Sep-
tember.
Q. What is your outlook for the Series in 1999?
A. Investor optimism and recent economic data suggest that the U.S. economy is
performing well in the new year. As booming sectors moderate and external
growth continues to fade the current expansion will slow perceptibly. The opti-
mistic view assumes that the rest of the financial world holds together. Out-
side the U.S., where the main threat to domestic stability first emerged, con-
ditions have deteriorated since the Fed last rate cut. This backdrop leaves the
Fed in a watchful state, despite the complacency of today's marketplace and
75
<PAGE>
strong fourth-quarter Gross Domestic Product growth. Near-term job and eco-
nomic growth probably will remain fairly buoyant, given the boost from lower
commodity prices, warm weather and the fresh rise in the equity market. Howev-
er, with inflation pressures in remission, the Fed will have ample leeway to
renew its rescue efforts in 1999 if necessary.
We remain optimistic about the high yield market, as interest rates are low
and credit spreads have room to improve. The emerging debt markets have recov-
ered by some 20% since their lows in early September and while there will be
bumps along the way, we expect emerging debt to outperform the U.S. investment
grade market in 1999. We have increased our allocations in that sector from
15% to 23%.
[GRAPH APPEARS HERE]
Date Strategic Bond Opp. Series Lehman Aggregate Bond
---- -------------------------- ---------------------
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 $12,335
12/31/97 $14,952 $13,529
12/31/98 $15,257 $14,702
Average Annual Return
Lipper Variable
Strategic Bond Lehman General Bond
Opp. Series Aggregate Bond/2/ Fund Average/9/
1 year 2.0% 8.7% 5.1%
3 years 9.0 7.3 7.2
Since Inception 10.7 9.7 n/a
[GRAPHIC APPEARS HERE] Fund Facts
Goal: A high level of total return consistent with the preservation of capital.
Start date: October 31, 1994
Size: $95 million as of December 31, 1998
Managers: Peter Wilby and David Scott have co-managed the Series since its
inception in October 1994. Mr. Lavan began co-managing the Series in June 1998.
Mr. Wilby and Mr. Scott have also managed the Salomon Brothers Investment
Series--Strategic Bond Fund since March 1995 and the North American Strategic
Income Fund since March 1995. Mr. Wilby has also managed the Salomon Brothers
Investment Series--High Yield Bond Fund since March 1995. Mr. Lavan has also
managed the Salomon Brothers Investment Series--U.S. Government Income Fund and
North American U.S. Government Securities Fund since January 1992. He joined
Salomon Brothers in 1990.
Performance numbers are net of all Series expenses but do not include any
insurance, sales or administrative charges of variable annuity or life
insurance contracts, if these charges were included, the returns shown would
be lower.
This information represents past performance and is not indicative of future
results. Investment return and principal value will fluctuate so that shares,
upon redemption, may be worth more or less than the original cost.
76
<PAGE>
New England Zenith Fund
(Salomon Brothers Strategic Bond Opportunities Series)
Investments as of December 31, 1998
Bonds & Notes--98.0% of Total Net Assets
<TABLE>
<CAPTION>
Face
Amount Value (a)
<C> <S> <C>
Apparel & Textiles--0.5%
$ 250,000 Collins & Aikman Floorcovering
10.000%, 1/15/07................................ $ 261,562
250,000 Synthetic Industries, Inc., Series B 9.250%,
2/15/07......................................... 257,812
-----------
519,374
-----------
Automotive & Related--1.0%
250,000 BREED Technologies, Inc. 144A, 9.250%,
4/15/08(d)...................................... 220,625
200,000 Foamex L.P/Foamex Capital Corp.
9.875%, 6/15/07................................. 214,250
250,000 Hayes Lemmerz International, Inc.,
144A, 8.250%, 12/15/08(d)....................... 250,000
250,000 Key Plastic, Inc.
10.250%, 3/15/07................................ 234,375
-----------
919,250
-----------
Banks--0.6%
600,000 U.S. Bank National
Association of Minneapolis
5.700%, 12/15/08................................ 595,488
-----------
Biotechnology--0.3%
250,000 Monsanto Co.
144A, 5.875%, 12/08/08(d)....................... 249,890
-----------
Cable & Other Media--3.2%
250,000 Adelphia Communications Corp.
Series B 10.500%, 7/15/04....................... 273,750
150,000 American Media Operations
11.625%, 11/15/04............................... 153,750
500,000 Avalon Cable 144A,
0/11.125%, 12/01/08(c)(d)....................... 280,000
250,000 Capstar Broadcasting
9.250%, 7/01/07................................. 260,625
500,000 Century Communications
Zero Coupon, 1/15/08............................ 255,000
150,000 CSC Holdings, Inc.
10.500%, 5/15/16................................ 178,125
150,000 Diamond Cable Communication,
0/11.750%, 12/15/05(c).......................... 124,875
250,000 Falcon Holdings Group 8.375%, 4/15/10............ 257,500
200,000 Jacor Communications Co.
9.750%, 12/15/06................................ 222,000
500,000 LIN Holdings Corp. 0/10.000%, 3/01/08(c)......... 351,250
250,000 Marcus Cable Co. 14.250%, 12/15/05............... 240,000
150,000 Rogers Cablesystems, Ltd., Series B 10.000%,
3/15/05......................................... 168,938
99,000 SFX Broadcasting, Inc. 10.750%, 5/15/06.......... 109,271
400,000 United International Holdings, Series B
0/10.750%, 2/15/08(c)........................... 212,000
-----------
3,087,084
-----------
Capital Goods/Building Products--2.5%
225,000 Alvey Systems, Inc., 11.375%, 1/31/03............ 226,687
185,000 EnviroSource, Inc.
9.750%, 6/15/03................................. 166,500
250,000 High Voltage Engineering Corp.
10.500%, 8/15/04................................ 236,875
250,000 International Knife & Saw 11.375%, 11/15/06...... 257,187
100,000 Jordan Industries, Inc., Series B 10.375%,
8/01/07......................................... 103,625
250,000 Jordan Industries, Inc., Series B 11.750%
4/01/09......................................... 152,500
250,000 Motors & Gears, Inc., Series D 10.750%, 11/15/06. 263,437
250,000 Packard Biosciences, Inc., Series B 9.375%,
3/01/07......................................... 237,187
250,000 Polymer Group, Inc., Series B
9.000%, 7/01/07................................. 247,500
500,000 Praxair, Inc. 6.150%, 4/15/03.................... 500,315
-----------
2,391,813
-----------
Chemicals--0.5%
250,000 Huntsman Corp. 144A,
9.500%, 7/01/07(d).............................. 250,625
250,000 ISP Holdings, Inc. 9.000%, 10/15/03.............. 264,062
-----------
514,687
-----------
Computer Software & Services--1.1%
450,000 Comdisco, Inc. 6.130%, 8/01/01................... 458,802
200,000 DecisionOne Corp. 9.750%, 8/01/07................ 92,000
250,000 Primark Corp. 144A,
9.250%, 12/15/08(d)............................. 250,625
250,000 Unisys Corp. 7.875%, 4/01/08..................... 265,000
-----------
1,066,427
-----------
Consumer Products--1.1%
250,000 American Saftey Razor Series B 9.875%, 8/01/05... 252,187
300,000 Ekco Group, Inc., Series B
9.250%, 4/01/06................................. 300,375
</TABLE>
See accompanying notes to financial statements.
77
<PAGE>
New England Zenith Fund
(Salomon Brothers Strategic Bond Opportunities Series)
Investments as of December 31, 1998
Bonds & Notes--(Continued)
<TABLE>
<CAPTION>
Face
Amount Value (a)
<C> <S> <C>
Consumer Products--(Continued)
$ 97,000 Hines Horticulture, Inc.
11.750%, 10/15/05............................... $ 102,820
250,000 North Atlantic Trading, Inc.
11.000%, 6/15/04................................ 247,500
150,000 Shop-Vac Corp. 10.625%, 9/01/03.................. 163,688
-----------
1,066,570
-----------
Cosmetics & Toiletries--0.4%
250,000 French Fragrances, Inc., Series B 10.375%,
5/15/07......................................... 249,687
300,000 Revlon Worldwide Corp., Series B
Zero Coupon, 3/15/01............................ 166,500
-----------
416,187
-----------
Defense & Aerospace--0.9%
250,000 BE Aerospace, Series B
8.000%, 3/01/08................................. 245,625
125,000 L-3 Communications Corp. 144A, 8.000%,
8/01/08(d)...................................... 125,625
250,000 Raytheon Co. 6.150%, 11/01/08.................... 253,837
250,000 Stellex Industries, Inc. 9.500%, 11/01/07........ 216,250
-----------
841,337
-----------
Electronics--0.5%
250,000 Amphenol Corp. 9.875%, 5/15/07................... 256,562
250,000 Jordan Telecommunication Products 9.875%,
8/01/07......................................... 252,500
-----------
509,062
-----------
Energy--0.9%
400,000 Occidental Petroleum Corp. 9.250%, 8/01/19....... 464,376
250,000 Transamerican Energy Corp., Series B, 0/13.000%,
6/15/02(c)...................................... 85,000
250,000 Transamerican Energy Corp.
11.500%, 6/15/02................................ 95,000
250,000 United Refining Co., Series B 10.750%, 6/15/07... 172,500
-----------
816,876
-----------
Environmental Control--0.8%
250,000 Allied Waste Industries, Inc. 144A,
7.875%, 1/01/09(d)............................. 254,062
250,000 Marsulex, Inc. 9.625%, 7/01/08................... 256,562
250,000 Safety Kleen Services, Inc. 9.250%, 6/01/08...... 256,250
-----------
766,874
-----------
Finance--1.2%
125,000 Airplane Pass Thru Trust, 10.875%, 3/15/19....... 132,930
250,000 DVI, Inc. 9.875%, 2/01/04........................ 240,625
310,000 Merrill Lynch & Co.
6.000%, 11/15/04................................ 317,025
450,000 Paine Webber Group, Inc. 7.000%, 3/01/00......... 454,891
-----------
1,145,471
-----------
Financial Leasing--0.7%
250,000 Navistar International 8.000%, 2/01/08........... 254,687
100,000 United States Leasing International, Inc.
8.450%, 1/25/05................................. 114,291
250,000 William Scotsman, Inc. 9.875%, 6/01/07........... 255,000
-----------
623,978
-----------
Food & Beverages--1.3%
250,000 CFP Holdings, Inc., Series B
11.625%, 1/15/04................................ 205,000
250,000 Delta Beverage Group 9.750%, 12/15/03............ 261,250
200,000 Dole Foods, Inc. 6.750%, 7/15/00................. 203,665
250,000 Imperial Holly Corp. 9.750%, 12/15/07............ 247,500
250,000 SC International Services, Inc. 9.250%, 9/01/07.. 251,250
150,000 Stroh Brewery Co.
11.100%, 7/01/06................................ 113,250
-----------
1,281,915
-----------
Foreign--3.6%
1,200,000,000 Euro Investment Bank 7.450%, 2/04/99(e).......... 729,838
273,400,000 Hellenic Republic
8.900%, 4/01/03(g).............................. 1,026,154
400,000 Korea Development Bank 9.600%, 12/01/00.......... 394,524
1,000,000 Morocco Loan 6.063%, 1/01/09..................... 805,000
90,000 New South Wales Treasury Corp. 7.375%,
2/21/07(h)...................................... 61,469
600,000 Nordiska Investeringsbanke 17.750%, 4/15/02(k)... 195,513
550,000 Sudwest Landes Bank 17.500%, 5/05/03(k).......... 185,449
50,515 Vnesheconombank USSR 144A, 5.968%,
12/15/15(d)(n).................................. 5,496
-----------
3,403,443
-----------
</TABLE>
See accompanying notes to financial statements.
78
<PAGE>
New England Zenith Fund
(Salomon Brothers Strategic Bond Opportunities Series)
Investments as of December 31, 1998
Bonds & Notes--(Continued)
<TABLE>
<CAPTION>
Face
Amount Value (a)
<C> <S> <C>
Foreign Government--23.0%
$ 725,000 Federal Republic of Brazil, 6.125%, 4/15/24(n)..... $ 420,500
1,075,000 Federal Republic of Brazil 10.125%, 5/15/27........ 744,437
760,000 Federal Republic of Germany 5.625%, 1/04/28(f)..... 513,932
400,000 Federal Republic of Germany 4.125%, 7/04/08(f)..... 244,810
280,000 Federal Republic of Germany 4.750%, 7/04/08(f)..... 179,482
5,960,000 Kingdom of Denmark 8.000%, 5/15/03(i).............. 1,086,403
1,300,000 Kingdom of Morocco 4.375%, 1/01/09................. 964,437
3,800,000 Kingdom of Sweden 11.000%, 1/21/99(j).............. 469,761
2,100,000 Kingdom of Sweden 6.500%, 5/05/08(j)............... 304,217
2,400,000 National Republic of Bulgaria 6.687%, 7/28/11(n)... 1,608,000
1,081,000 Republic of Argentina 6.187%, 3/31/05(n)........... 913,877
2,800,000 Republic of Argentina 11.000%, 12/04/05............ 2,779,000
1,600,000 Republic of Argentina 5.750%, 3/31/23(c)........... 1,159,000
565,830 Republic of Ecuador 6.625%, 2/27/15(n)............. 231,283
1,500,000 Republic of Ecuador 3.500%, 2/28/25................ 637,575
1,000,000 Republic of Finland 6.000%, 4/25/08(l)............. 225,974
82,900,000 Republic of Greece 11.000%, 2/25/00(g)............. 287,164
29,000,000 Republic of Greece 8.700%, 4/08/05(g).............. 111,646
80,000,000 Republic of Greece 8.600%, 3/26/08(g).............. 317,279
1,000,000 Republic of Panama 4.000%, 7/17/14................. 745,000
3,100,000 Republic of Peru 4.000%, 3/07/17................... 1,945,250
370,000 Republic of Slovenia 5.375%, 5/27/05(m)............ 441,174
1,214,280 Republic of Venezuela 6.125%, 3/31/07(n)........... 763,114
2,785,713 Republic of Venezuela 5.937%, 12/18/07(n).......... 1,694,410
1,000,000 United Mexican States 6.250%, 12/31/19............. 781,300
2,225,000 United Mexican States 11.500%, 5/15/26............. 2,408,562
-----------
21,977,587
-----------
Government Agencies--16.2%
156,858 Federal Home Loan Mortgage 10.000%, 5/15/20...... 169,321
2,345 Federal Home Loan Mortgage 11.565%, 6/15/21...... 57,055
17,409 Federal National Mortgage Association 13.000%,
11/01/14........................................ 20,761
500,000 Federal National Mortgage Association 7.000%,
11/18/15........................................ 503,160
65,841 Federal National Mortgage Association 10.400%,
4/25/19......................................... 70,735
3,711,611 Federal National Mortgage Association 0.605%,
3/17/20(o)...................................... 95,388
855,897 Federal National Mortgage Association 6.500%,
3/01/26......................................... 861,777
104,640 Federal National Mortgage Association 7.000%,
5/01/26......................................... 106,766
5,059,504 Federal National Mortgage Association 1.641%,
2/25/35(o)...................................... 397,171
8,482,574 Federal National Mortgage Association 0.545%,
10/17/36(o)..................................... 235,815
10,000,000 Federal National Mortgage Association 6.000%,
12/01/2099...................................... 9,868,700
3,100,000 Federal National Mortgage Association 6.500%,
12/01/2099...................................... 3,120,336
-----------
15,506,985
-----------
Health Care--1.3%
200,000 Alaris Medical Systems, Inc. 9.750%, 12/01/06.... 198,250
250,000 Dade International, Inc. 11.125%, 5/01/06........ 277,812
150,000 Fresenius Medical Care Cap 9.000%, 12/01/06...... 156,000
150,000 Maxxim Medical, Inc. 10.500%, 8/01/06............ 161,625
250,000 Prime Medical Services, Inc. 8.750, 4/01/08...... 240,625
200,000 Vencor, Inc. 9.875%, 5/01/05..................... 174,000
-----------
1,208,312
-----------
Housing Related--0.3%
250,000 CB Richards Ellis Services 8.875%, 6/01/06....... 245,000
-----------
Insurance--0.4%
400,000 Aetna Services, Inc. 7.625%, 8/15/26............. 404,344
-----------
</TABLE>
See accompanying notes to financial statements.
79
<PAGE>
New England Zenith Fund
(Salomon Brothers Strategic Bond Opportunities Series)
Investments as of December 31, 1998
Bonds & Notes--(Continued)
<TABLE>
<CAPTION>
Face
Amount Value (a)
<C> <S> <C>
Leisure Time--1.4%
$ 250,000 Empress Entertainment, Inc. 8.125%, 7/01/06...... $ 251,250
250,000 Grand Casino, Series B 9.000%, 10/15/04.......... 276,250
250,000 Park Place Entertainment Corp. 144A, 7.875%,
12/15/05(d)..................................... 250,625
250,000 Prime Hospitality Corp. 9.750%, 4/01/07.......... 252,500
250,000 Sun International, Ltd. 8.625%, 12/15/07......... 259,062
-----------
1,289,687
-----------
Metal/Mining/Steel--0.8%
250,000 Murrin Murrin Holdings Property, Ltd. 9.375%,
8/31/07......................................... 237,500
250,000 P&L Coal Holdings Corp. 144A, 9.625%, 5/15/08(d). 254,375
250,000 Renco Metals, Inc. 11.500%, 7/01/03.............. 258,750
-----------
750,625
-----------
Miscellaneous--2.7%
247,812 First Union Residential Securitization 7.000%,
8/25/28......................................... 232,014
250,000 Harrahs Operations, Inc. 7.875%, 12/15/05........ 251,250
250,000 HMH Properties, Inc. 7.875%, 8/01/08............. 244,062
350,000 Nebco Evans Holdings Co. 0/12.375%, 7/15/07(c)... 168,000
250,000 Neenah Corp. 11.125%, 5/01/07.................... 258,750
300,000 Norsk Hydro A.S.
6.700%, 1/15/18................................. 298,110
446,429 RG Receivables Co. 9.600%, 2/28/05............... 357,143
250,000 TeleWest plc
0/11.000%, 10/01/07(c).......................... 208,750
550,000 TPSA Fin BV 144A,
7.750%, 12/10/08(d)............................. 544,356
-----------
2,562,435
-----------
Mortgage--8.3%
250,000 ContiFinancial Corp. 8.125%, 4/01/08............. 162,500
9,746,846 DLJ Commercial Mortgage Corp. .897%, 5/10/23(o).. 459,856
9,000,000 DLJ Commercial Mortgage Corp. .851%, 11/12/31(o). 509,040
997,663 GE Capital Mortgage Services, Inc. 6.750%,
11/25/28........................................ 954,015
1,645,555 Green Tree Financial Corp. 7.070%, 9/15/07....... 1,705,207
1,559,513 Mid State Trust VI
7.340%, 7/01/35................................. 1,605,316
472,380 PNC Mortgage Securities Corp. 6.838%, 5/25/28.... 440,494
348,110 PNC Mortgage Securities Corp. 6.750%, 5/25/28.... 322,001
447,502 PNC Mortgage Securities Corp. 6.734%, 7/25/28.... 414,499
1,000,000 PNC Mortgage Securities Corp. 6.500%, 12/25/28... 941,250
450,000 PNC Mortgage Securities Corp. 6.250%, 11/28/28... 420,750
-----------
7,934,928
-----------
Oil & Gas--0.6%
250,000 Bellwether Exploration Co. 10.875%, 4/01/07...... 242,500
150,000 Benton Oil & Gas Co. 11.625%, 5/01/03............ 99,000
250,000 Frontier Oil Corp.
9.125%, 2/15/06................................. 232,500
-----------
574,000
-----------
Paper--0.1%
125,000 Doman Industries, Ltd. 8.750%, 3/15/04........... 96,250
-----------
Petroleum Services--0.1%
250,000 Dailey International, Inc. 9.500%, 2/15/08....... 112,500
-----------
Plastics & Packaging--1.5%
250,000 Anchor Advanced Products, Inc.,
Series B 11.750%, 4/01/04....................... 272,500
150,000 Berry Plastics 12.250%, 4/15/04.................. 157,688
250,000 Huntsman Packaging Corp. 9.125%, 10/01/07........ 248,750
250,000 Indesco International 9.750%, 4/15/08............ 233,750
200,000 Radnor Holdings Corp. 10.000%, 12/01/03.......... 202,000
250,000 Tekni-Plex, Inc. 11.250%, 4/01/07................ 275,937
-----------
1,390,625
-----------
Publishing--0.8%
250,000 Big Flower Press Holdings, Inc. 144A, 8.625%,
12/01/08(d)..................................... 250,937
250,000 Garden State Newspapers, Inc. 8.750%, 10/01/09... 242,187
250,000 Hollinger International 9.250%, 2/01/06.......... 263,437
-----------
756,561
-----------
</TABLE>
See accompanying notes to financial statements.
80
<PAGE>
New England Zenith Fund
(Salomon Brothers Strategic Bond Opportunities Series)
Investments as of December 31, 1998
Bonds & Notes--(Continued)
<TABLE>
<CAPTION>
Face
Amount Value (a)
<C> <S> <C>
Retail--Food & Drug--0.9%
$ 150,000 Carr-Gottstein Foods Co. 12.000%, 11/15/05....... $ 171,750
250,000 Jitney-Jungle Stores 12.000%, 3/01/06............ 278,125
250,000 NBTY, Inc., Series B,
8.625%, 9/15/07................................. 245,938
125,000 Pueblo Xtra International
9.500%, 8/01/03................................. 119,375
-----------
815,188
-----------
Retail--1.3%
250,000 Advance Stores Co. 10.250%, 4/15/08.............. 253,750
250,000 Cole National Group, Inc. 9.875%, 12/31/06....... 262,500
150,000 Hills Stores Co. 12.500%, 7/01/03................ 105,000
250,000 Musicland Group, Series B 9.875%, 3/15/08........ 245,000
400,000 Staples, Inc. 7.125%, 8/15/07.................... 420,280
-----------
1,286,530
-----------
Services--2.9%
600,000 First Data 6.375%, 12/15/07...................... 634,926
250,000 Intertek Financial plc, Series B 10.250%,
11/01/06........................................ 232,500
250,000 Iron Mountain, Inc. 10.125%, 10/01/06............ 268,750
250,000 Kindercare Learning Centers 9.500%, 2/15/09...... 244,375
250,000 Loomis Fargo & Co. 10.000%, 1/15/04.............. 247,500
250,000 Mail Well Corp. 144A, 8.750%, 12/15/08(d)........ 251,250
250,000 Pierce Leahy Corp. 11.125%, 7/15/06.............. 278,125
250,000 Protection One Alarm, Inc. 144A, 8.125%,
1/15/09(d)...................................... 250,625
400,000 Service Corporation International 6.000%,
12/15/05........................................ 396,192
-----------
2,804,243
-----------
Telecommunications--3.4%
1,020,000 British Telecommunication 7.000%, 5/23/07........ 1,133,730
250,000 Centennial Cellular Corp. 144A, 10.750%,
12/15/08(d)..................................... 251,875
250,000 Comcast Cellular Holdings, Inc. 9.500%, 5/01/07.. 266,875
200,000 GTE Corp. 6.940%, 4/15/28........................ 211,158
275,000 ICG Holdings, Inc.
0/13.500%, 9/15/05(c)........................... 228,250
250,000 Intermedia Communications 8.600%, 6/01/08........ 246,250
350,000 International CableTel, Inc.,
0/11.500%, 2/01/06(c)........................... 281,750
200,000 Nextel Communications, Inc., 0/9.750%,
8/15/04(c)...................................... 194,250
250,000 Nextel Communications, Inc. 0/9.950%, 2/15/08(c). 150,625
250,000 Nextlink Communications, Ltd. 9.000%, 3/15/08.... 236,563
-----------
3,201,326
-----------
Transportation--1.3%
250,000 Atlantic Express Transportation Corp. 10.750%,
2/01/04......................................... 254,375
150,000 Enterprises Shipholding Corp. 8.875%, 5/01/08.... 122,489
200,000 Holt Group, Inc. 144A,
9.750%, 1/15/06(d).............................. 140,000
250,000 Offshore Logistics, Inc. 7.875%, 1/15/08......... 238,750
250,000 Stena AB 10.500%, 12/15/05....................... 254,375
400,000 TFM, S.A. DE CV,
0/11.750%, 6/15/09(c)........................... 216,000
-----------
1,225,989
-----------
U.S. Government--9.6%
200,000 United States Treasury Bonds 6.125%, 11/15/27.... 223,598
91,157 United States Treasury Bonds 3.625%, 4/15/28..... 88,565
700,000 United States Treasury Bonds 5.500%, 8/15/28..... 733,691
2,000,000 United States Treasury Bonds 5.250%, 11/15/28.... 2,048,720
200,000 United States Treasury Notes 6.375%, 3/31/01..... 207,446
500,000 United States Treasury Notes 6.625%, 3/31/02..... 529,000
1,000,000 United States Treasury Notes 5.875%, 9/30/02..... 1,039,400
400,000 United States Treasury Notes 5.625%, 12/31/02.... 413,608
3,200,000 United States Treasury Notes 6.125%, 8/15/07..... 3,503,168
350,000 United States Treasury Notes 4.750%, 11/15/08.... 352,723
-----------
9,139,919
-----------
Total Bonds & Notes
(Identified Cost $94,346,095)................... 93,498,760
-----------
</TABLE>
See accompanying notes to financial statements.
81
<PAGE>
New England Zenith Fund
(Salomon Brothers Strategic Bond Opportunities Series)
Investments as of December 31, 1998
Preferred Stock--0.0%
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
840 TCR Holdings, Class B.............................. $ 50
462 TCR Holdings, Class C.............................. 26
1,219 TCR Holdings, Class D.............................. 65
2,521 TCR Holdings, Class E.............................. 159
-----------
Total Preferred Stock
(Identified Cost $300)............................ 300
-----------
Warrant--0.1%
200 In Flight Phone Corp. ............................. 0
2,800 Republic of Argentina.............................. 126,000
-----------
Total Warrant
(Identified Cost $63,000)......................... 126,000
-----------
</TABLE>
Short-Term Investment--13.6%
<TABLE>
<CAPTION>
Face
Amount Value (a)
<C> <S> <C>
$ 12,975,000 Repurchase agreement with State Street Corp.
dated 12/31/98 at 4.85% to be repurchased at
$12,981,992 on 1/04/1999 collateralized by
$12,240,000 U.S. Treasury Bond 6.25% due
2/15/03 with a value of $13,234,500........... $ 12,975,000
------------
Total Short-Term Investment
(Identified Cost $12,975,000)................. 12,975,000
------------
Total Investments--111.7%
(Identified Cost $107,384,395)(b)............. 106,600,060
Other assets less liabilities.................. (11,150,189)
------------
Total Net Assets--100%......................... $ 95,449,871
============
</TABLE>
Forward Currency Contracts Outstanding at December 31, 1998
<TABLE>
<CAPTION>
Local Aggregate Unrealized
Currency Delivery Currency Face Total Appreciation/
Contract Date Amount Value Value (Depreciation)
<S> <C> <C> <C> <C> <C>
Deutsche Mark
(sold) 02/16/1999 855,517 $512,286 $514,521 $(2,235)
Deutsche Mark
(bought) 02/16/1999 413,250 247,915 248,535 620
Deutsche Mark
(sold) 02/16/1999 366,599 215,901 220,480 (4,579)
Deutsche Mark
(bought) 02/16/1999 690,000 411,412 414,977 3,565
Finnish Markka
(sold) 02/16/1999 1,133,727 223,395 222,873 522
Italian Lira (sold) 02/16/1999 1,196,334,200 723,298 724,764 (1,466)
Swedish Krona
(sold) 02/16/1999 3,364,716 411,412 414,981 (3,569)
European Currency
Unit (sold) 02/16/1999 210,198 247,915 247,213 702
European Currency
Unit (sold) 02/16/1999 159,737 188,649 187,866 783
-------
Net unrealized Depreciation on Forward Currency contracts...... $(5,657)
=======
</TABLE>
(a) See Note 1A of Notes to Financial Statements
(b) Federal Tax Information: At December 31, 1998 the net unrealized
depreciation on investments based on cost of $108,062,531 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............... $ 1,992,369
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value............... (3,454,840)
-----------
Net unrealized depreciation.................................... $(1,462,471)
===========
</TABLE>
(c) 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.
(d) 144A 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. At
the period end, the value of these securities amounted to $4,080,991 or
4.3% of net assets.
(e) Denominated in Italian Lira
(f) Denominated in German Marks
(g) Denominated in Greek Drachma
(h) Denominated in Australian Dollars
(i) Denominated in Danish Krone
(j) Denominated in Swedish Krona
(k) Denominated in Polish Zloty
(l) Denominated in Finnish Markka
(m) Denominated in European Currency
(n) Floating Rate Security. Rate disclosed is as of 12/31/98.
(o) Interest only certificate. This security receives monthly interest
payments but is not entitled to principal payments.
See accompanying notes to financial statements.
82
<PAGE>
New England Zenith Fund
(Salomon Brothers Strategic Bond Opportunities Series)
Statement of Assets & Liabilities
December 31, 1998
<TABLE>
<S> <C> <C>
Assets
Investments at value............................... $106,600,060
Cash............................................... 4,238
Receivable for:
Fund shares sold................................... 481,851
Dividends and interest............................. 1,681,063
Miscellaneous...................................... 5,535
Unamortized organization expense................... 1,679
------------
108,774,426
Liabilities
Payable for:
Securities purchased............................... $12,991,318
Open forward currency
contracts--net.................................... 5,657
Fund shares redeemed............................... 232,551
Withholding taxes.................................. 781
Accrued expenses:
Management fees.................................... 63,641
Deferred trustees' fees............................ 3,191
Other expenses..................................... 27,416
-----------
13,324,555
------------
$ 95,449,871
============
Net Assets
Net Assets consist of:
Capital paid in.................................... $ 98,831,216
Overdistributed net investment income.............. (45,647)
Accumulated net realized gains (losses)............ (2,553,476)
Unrealized appreciation (depreciation) on
investments, forward contracts and foreign
currency.......................................... (782,222)
------------
Net Assets.......................................... $ 95,449,871
============
Computation of offering price:
Net asset value and redemption price per share
($95,449,871 divided by 8,353,715 shares of
beneficial interest)............................... $ 11.43
============
Identified cost of investments...................... $107,384,395
============
</TABLE>
Statement of Operations
Year Ended December 31, 1998
<TABLE>
<S> <C> <C>
Investment Income
Dividends.......................................... $ 5,865(a)
Interest........................................... 6,933,508(b)
-----------
6,939,373
Expenses
Management fees.................................... $ 560,007
Deferred expense
reimbursement..................................... 44,840
Trustees' fees
and expenses...................................... 11,275
Custodian.......................................... 72,068
Audit and tax
services.......................................... 18,717
Legal.............................................. 3,576
Printing........................................... 13,548
Insurance.......................................... 2,614
Amortization of
organization
expenses.......................................... 2,008
Miscellaneous...................................... 3,665
-----------
Total expenses.................................... 732,318
-----------
Net investment
income............................................. 6,207,055
Realized and
Unrealized Gain
(Loss) on
Investments,
Forward Currency
Contracts and
Foreign Currency
Transactions
Realized gain
(loss) on:
Investments--net................................... (2,385,817)
Foreign currency
transactions--
net............................................... (108,006)
-----------
Total realized
gain (loss) on
investments and
foreign
currency
transactions..................................... (2,493,823)
-----------
Unrealized
appreciation
(depreciation)
on:
Investments--net................................... (2,261,287)
Foreign currency
transactions--
net............................................... (68,148)
-----------
Total unrealized
appreciation
(depreciation)
on investments
and foreign
currency
transactions..................................... (2,329,435)
-----------
Net gain (loss) on
investment
transactions....................................... (4,823,258)
-----------
Net Increase
(Decrease) in Net
Assets from
Operations......................................... $ 1,383,797
===========
</TABLE>
(a) Net of foreign taxes of: $1,166
(b) Net of interest expense of $41,959.
See accompanying notes to financial statements.
83
<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,
1997 1998
------------ ------------
<S> <C> <C>
From Operations
Net investment income............................. $ 3,981,350 $ 6,207,055
Net realized gain (loss) on investments and
foreign currency transactions.................... 1,004,553 (2,493,823)
Unrealized appreciation (depreciation) on
investments and foreign currency transactions.... 774,518 (2,329,435)
------------ ------------
Increase (decrease) in net assets from operations. 5,760,421 1,383,797
------------ ------------
From Distributions to Shareholders
Net investment income............................. (4,170,493) (6,162,469)
Net realized gain on investments.................. (739,272) (87,409)
In excess of net realized gain on investment...... 0 (137,672)
------------ ------------
(4,909,765) (6,387,550)
------------ ------------
From Capital Shares Transactions
Proceeds from sale of shares...................... 45,476,971 48,659,454
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income.......... 4,170,493 6,162,469
Distributions from net realized gain.............. 739,272 225,081
------------ ------------
50,386,736 55,047,004
Cost of shares redeemed........................... (15,843,098) (25,795,325)
------------ ------------
Increase (decrease) in net assets derived from
capital share transactions....................... 34,543,638 29,251,679
------------ ------------
Total increase (decrease) in net assets........... 35,394,294 24,247,926
Net Assets
Beginning of the year............................. 35,807,651 71,201,945
------------ ------------
End of the year................................... $ 71,201,945 $ 95,449,871
============ ============
Undistributed (overdistributed) Net Investment
Income
Beginning of the year............................. $ 18,251 $ (14,223)
============ ============
End of the year................................... $ (14,223) $ (45,647)
============ ============
Number of Shares of the Fund:
Issued from the sale of shares.................... 3,727,495 3,992,202
Issued in connection with the reinvestment of:
Distributions from net investment income.......... 347,510 540,056
Distributions from net realized gain.............. 61,591 18,721
------------ ------------
4,136,596 4,550,979
Redeemed.......................................... (1,291,407) (2,123,814)
------------ ------------
Net change........................................ 2,845,189 2,427,165
============ ============
</TABLE>
Financial Highlights
<TABLE>
<CAPTION>
October 31, 1994(a)
through Year Year Year Year
December 31, Ended Ended Ended Ended
1994 1995 1996 1997 1998
------------------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year...... $10.00 $ 9.74 $ 10.85 $ 11.62 $ 12.01
------ ------ ------- ------- -------
Income From Investment
Operations
Net Investment Income.. 0.12 0.58 0.51 0.75 0.80
Net Realized and
Unrealized Gain (Loss)
on Investments........ (0.26) 1.30 1.05 0.54 (0.56)
------ ------ ------- ------- -------
Total From Investment
Operations............ (0.14) 1.88 1.56 1.29 0.24
------ ------ ------- ------- -------
Less Distributions
Distributions From Net
Investment Income..... (0.12) (0.55) (0.60) (0.76) (0.79)
Distributions From Net
Realized Capital
Gains................. 0.00 (0.22) (0.19) (0.14) (0.02)
Distributions in excess
of Net Realized
Capital Gains......... -- -- -- -- (0.01)
------ ------ ------- ------- -------
Total Distributions.... (0.12) (0.77) (0.79) (0.90) (0.82)
------ ------ ------- ------- -------
Net Asset Value, End of
Year................... $ 9.74 $10.85 $ 11.62 $ 12.01 $ 11.43
====== ====== ======= ======= =======
Total Return (%)........ (1.4)(b) 19.4 14.4 11.1 2.0
Ratio of Operating
Expenses to Average Net
Assets (%)............. 0.85 (c) 0.85 0.85 0.85 0.85
Ratio of Net Investment
Income to Average Net
Assets (%)............. 7.05 (c) 8.39 7.79 7.32 7.20
Portfolio Turnover Rate
(%).................... 403 (c) 202 176 258 283
Net Assets, End of Year
(000).................. $3,450 $9,484 $35,808 $71,202 $95,450
The ratios of expenses
to average net assets
without giving effect
to the voluntary
expense agreement
described in Note 4 to
the Financial
Statements would have
been (%)............... 2.01 (c) 2.44 1.19 0.87 --
</TABLE>
(a) Commencement of operations.
(b) Not computed on an annualized basis.
(c) Computed on an annualized basis.
See accompanying notes to financial statements.
84
<PAGE>
Back Bay Advisors Bond Income Series
Portfolio Manager: Catherine L. Bunting
Back Bay Advisors, L.P.
[PHOTO OF CATHERINE L. BUNTING APPEARS HERE]
Q. Please tell us about Bond Income Series' performance during 1998.
A. We're proud of the Series performance. The Series continued its record of
providing consistently solid returns despite investment conditions that fa-
vored the safest financial instruments--U.S. Treasuries--instead of corporate
bonds, the Series chief investment. The Series ended the year with a total re-
turn of 9.0% (based on net asset value). This compares favorably to the Lipper
Variable Products "A"-Rated Corporate Bond Fund Average/6/ return of 8.1%, and
the Lehman Intermediate Government/Corporate/5/ composite return of 8.4%.
Q. What was the investment environment throughout the past year?
A. Positive economic expectations and the accompanying fear of renewed infla-
tion brought lower bond prices early in the year. The belief that Asia's eco-
nomic turmoil was largely spent suggested better business conditions for U.S.
exporters and possible upward pressure on prices, a combination that could
prompt the Federal Reserve Board to raise interest rates--usually a negative
for bonds. (Generally, bond prices and interest rates move in opposite direc-
tions.) Later, it became clear that Asia's financial crisis was unlikely to
end soon, removing a possible stimulus for U.S. business conditions; bond
prices rose and yields fell. But bond buyers' confidence vanished abruptly
when Russia stunned the investment world by failing to repay debt that had
come due to several foreign governments--the bottom dropped out of most fixed-
income markets during the third quarter.
By August, market liquidity--the willingness of buyers to purchase bonds that
were offered for sale--had dried up across nearly the entire quality spectrum.
Concern was widespread that other countries, including Brazil, a linchpin to
all South American economies, might follow Russia's lead and fail to make good
on their sovereign obligations (government bonds). Worried investors shunned
all but the most-respected securities--those of the U.S. government. The
flight to quality left other bond market segments adrift, all but closed off
the ability of companies to raise needed cash through the issuance of new
bonds and sent the high yield bond market into a tailspin. Adding to investor
anxiety, the well publicized troubles of some large hedge funds raised fears
of further deterioration in the credit markets. In fact, in August, corporate
bonds generally experienced their worst one-month performance ever in a non-
recessionary period. Spreads between government and corporate issues--that is,
the difference in their yields--reached levels previously seen only during re-
cessions.
When a one quarter percentage point cut in interest rates by the Federal Re-
serve Board failed to bolster market psychology, a second, similar, cut
quickly followed, producing the desired impact. The Federal Reserve Board then
cut rates a third time, signaling to investors that it was determined not to
allow the U.S. economy to slide into an Asia-driven recession.
Investors returned to the better quality corporate sectors, restoring some
sense of balance and liquidity to the bond markets. During the last part of
1998, rates moved back up modestly, as continued low unemployment and other
economic indicators showed a still-expanding U.S. economy.
Q. Given this environment, what was your investment strategy during 1998?
A. In the first half of the year, we reduced exposure to high yield, lower-
grade issues and to securities that might be tainted by global turmoil. We
eliminated emerging market debt as well as obligations tied to Asian economies
with dubious recovery prospects, and added positions in the domestic utili-
ties--especially telecommunications and electric companies--whose fortunes are
not tightly tied to economic cycles. For similar reasons we increased holdings
in cable and media issues. Finally, taking a longer term view, we backed off
slowly on U.S. government holdings because of their low yields--even those
(from a short-term perspective) that tend to be issues that hold their value
best in an unsettled environment.
Throughout this volatile period in the fixed income market, there was a steady
flow of new money into the Series. We used this cash to add to existing posi-
tions in our favored sectors-- utilities, telecommunications and cable/media
companies-- where prices had been dragged down by market forces unrelated to
business fundamentals of individual securities.
At year-end we held some bonds that were below investment grade--rated below
Baa/BBB by Moody's or Standard & Poor's. In this category, we limit our com-
mitment to issues with the potential for ratings upgrades; if our analysis is
correct and upgrades result, these bonds could experience sharp rises in
price.
85
<PAGE>
Q. What were the principal factors affecting performance?
A. The Series benefited from the decision to increase holding in utilities and
cable/media industries, as those positions recovered smartly from their lows
earlier in the year. Our commitment to Canadian issues hurt results, however,
because of weakness in the Canadian dollar, which fell victim to depressed
world commodity prices. Among individual issues, the bonds of Telecommunica-
tions, Inc. and of Time Warner rose when they were upgraded by the major rat-
ings services. Holdings in Newscorp., the giant Australian media conglomerate,
fell but we remained invested. By the end of the year, this holding had recov-
ered some of its decline.
Q. What is your current outlook for the bond market and the Series?
A. As 1999 opens, we do not expect a recession in the American economy. Gross
Domestic Product should grow modestly this year, perhaps in the range of 1.5%,
a slower rate of expansion than last year. We are generally optimistic about
interest rates; the slower economic growth we anticipate should give the Fed-
eral Reserve Board no cause to raise short-term interest rates. Long-term
rates, as measured by the 30-year Treasury bond should remain fairly stable be-
tween 4 3/4 and 5 1/4%. The possibility of meaningful reforms in Brazil and
other troubled overseas economies could also ease investor concerns.
In late 1998, there were signs of inventory build-up in many sectors of the
economy, suggesting a manufacturing slowdown in the first half of the year and
accounting in part for our slow-growth forecast. A small acceleration in GDP
growth is possible later in the year, as companies rebuild depleted stock piles
of goods.
We continue to be cautious about bond markets because there are still many
imponderables overseas. The Series' duration--its sensitivity to interest rate
changes--was at around six years at the end of 1998, equivalent to an average
maturity of just under ten years. This bullish positioning reflects our view
that interest rates will be confined to a narrow range for some time. As we be-
gin 1999, we will continue to allocate the Series' cash inflows to existing
holdings and sectors as opportunities pre-sent themselves. Our emphasis will
remain on better quality U.S. corporate debt, which we believe offers the best
combination of yield and price performance for the Series shareholders.
86
<PAGE>
[CHART APPEARS HERE]
Date Bond Income Series Lehman Gov't/corp Lehman Cost of Living
---- ------------------ ----------------- ---------------------
12/31/88 $10,000 $10,000 $10,000
12/31/89 $11,230 $11,277 $10,465
12/31/90 $12,138 $12,311 $11,104
12/31/91 $14,318 $14,112 $11,444
12/31/92 $15,489 $15,124 $11,776
12/31/93 $17,442 $16,452 $12,100
12/31/94 $16,855 $16,134 $12,423
12/31/95 $20,428 $18,605 $12,739
12/31/96 $21,370 $19,360 $13,162
12/31/97 $23,699 $20,884 $13,386
12/31/98 $25,840 $22,642 $13,610
Average Annual Total Return
Lipper Variable
Lehman Intermediate A-Rated Corp.
Bond Income Government Corp. COL/1/ Bond Fund Avg./6/
1 year 9.0% 8.4% 1.6% 8.1%
3 years 8.1 6.8 2.2 6.6
5 years 8.2 6.6 2.4 6.7
10 years 10.0 8.5 3.1 9.8
Since Inception 10.4 9.5 3.2 n/a
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE] 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: $268 million as of December 31, 1998
Manager: Catherine Bunting has managed the Series since 1989. She has also
served 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.
87
<PAGE>
New England Zenith Fund
(Back Bay Advisors Bond Income Series)
Investments as of December 31, 1998
Bonds & Notes--97.0% of Total Net Assets
<TABLE>
<CAPTION>
Face
Amount Value (a)
<C> <S> <C>
Aerospace--1.9%
$ 4,700,000 Lockheed Martin Corp., 7.250%, 5/15/2006.......... $ 5,088,408
------------
Business Services--1.2%
3,000,000 Equifax, Inc., 6.900%, 7/01/2028.................. 3,116,220
------------
Containers--1.0%
1,500,000 Owens-Illinois, Inc., 7.150%, 5/15/2005........... 1,522,695
1,000,000 Owens-Illinois, Inc., 8.100%, 5/15/2007........... 1,073,810
------------
2,596,505
------------
Electric Utilities--8.9%
5,800,000 Arizona Public Service Corp., 8.000%, 12/30/2015.. 6,705,728
1,000,000 BVPS II Funding Corp., 8.680%, 6/01/2017.......... 1,159,330
2,000,000 BVPS II Funding Corp., 8.890%, 6/01/2017.......... 2,394,700
3,000,000 CalEnergy, Inc.,
9.500%, 9/15/2006................................ 3,330,000
1,000,000 CalEnergy, Inc.,
7.630%, 10/15/2007............................... 1,067,630
4,000,000 CalEnergy, Inc.,
7.520%, 9/15/2008................................ 4,201,400
2,878,000 EIP Funding Corp., 10.250%, 10/01/2012............ 3,436,562
1,500,000 Public Service Co. of New Mexico, 7.100%,
8/01/2005........................................ 1,513,950
------------
23,809,300
------------
Federal Agencies--4.5%
22,554 Federal Home Loan Bank,
9.000%, with various maturities to 2001.......... 22,761
5,796,434 Government National Mortgage Association, 7.000%
with various maturities to 2025.................. 5,932,245
4,645,547 Government National Mortgage Association, 7.500%
with various maturities to 2025.................. 4,791,845
1,147,622 Government National Mortgage Association, 8.500%
with various maturities to 2022.................. 1,223,163
142,620 Government National Mortgage Association, 9.000%,
10/15/2016....................................... 153,144
------------
12,123,158
------------
Finance & Banking--13.6%
2,000,000 American General Financing, 5.750%, 11/01/2003.... 2,008,980
7,180,000 American General Financing, 8.450%, 10/15/2009.... 8,591,803
5,660,000 Associates Corporation of North America, 8.550%,
7/15/2009........................................ 6,848,317
2,500,000 Associates Corporation of North America, 7.950%,
2/15/2010........................................ 2,913,075
7,645,000 BB & T Corp., 6.375%, 6/30/2005................... 7,846,446
4,800,000 NCNB Corp., 9.375%, 9/15/2009..................... 6,086,064
1,800,000 Pitney Bowes Credit Corp., 8.550%, 9/15/2009...... 2,240,766
------------
36,535,451
------------
Foreign--5.0%
10,900,000 Government of Canada, 7.250%, 6/01/2007 (CAD)..... 8,281,433
2,000,000 Government of Canada, 5.250%, 11/05/2008.......... 2,012,060
4,500,000 Province of British Columbia, 7.750%, 6/16/2003
(CAD)............................................ 3,259,372
------------
13,552,865
------------
Media & Entertainment--7.8%
3,100,000 Continental Cablevision, Inc.,
9.500%, 8/01/2013................................ 3,661,906
2,000,000 CSC Holdings, Inc., 7.875%, 12/15/2007............ 2,114,720
5,500,000 News America Holdings, Inc., 8.250%, 8/10/2018.... 6,252,015
1,800,000 News America Holdings, Inc., 7.750%, 2/01/2024.... 1,951,596
600,000 Time Warner, Inc., 9.150%, 2/01/2023.............. 784,962
500,000 Tele-Communications, Inc., 9.800%, 2/01/2012...... 667,660
2,935,000 Tele-Communications, Inc., 9.250%, 1/15/2023...... 3,341,879
2,150,000 USA Networks, Inc., 6.750%, 11/15/2005............ 2,150,924
------------
20,925,662
------------
Paper--1.1%
1,500,000 Abitibi-Consolidated, Inc., 6.950%, 4/01/2008..... 1,460,040
482,730 Fort Howard Trust, 11.000%, 1/02/2002............. 482,730
1,000,000 Pope and Talbot, Inc., 8.375%, 6/01/2013.......... 921,320
------------
2,864,090
------------
</TABLE>
See accompanying notes to financial statements.
88
<PAGE>
New England Zenith Fund
(Back Bay Advisors Bond Income Series)
Investments as of December 31, 1998
Bonds & Notes--(Continued)
<TABLE>
<CAPTION>
Face
Amount Value (a)
<C> <S> <C>
Retail--1.7%
$ 450,000 Safeway, Inc.,
6.050%, 11/15/2003............................... $ 455,422
4,000,000 Bear Stearns Cos., Inc., 6.200%, 3/30/2003........ 4,035,000
------------
4,490,422
------------
Securities--1.5%
3,750,000 Fred Meyer, Inc.,
7.375%, 3/01/2005................................ 3,974,100
------------
Telecommunications--15.4%
4,300,000 AT&T Corp., 8.350%, 1/15/2025..................... 4,916,792
5,000,000 AT&T Corp., 8.625%, 12/01/2031.................... 5,594,450
1,000,000 GTE Corp., 9.100%, 6/01/2003...................... 1,137,320
1,200,000 GTE Corp., 7.510%, 4/01/2009...................... 1,374,576
4,800,000 GTE Corp., 7.900%, 2/01/2027...................... 5,340,048
3,500,000 GTE South, Inc.,
6.125%, 6/15/2007................................ 3,634,050
6,500,000 LCI International, Inc., 7.250%, 6/15/2007........ 6,693,570
1,186,000 Qwest Communications International, Inc., 10.875%,
4/01/2007........................................ 1,366,865
2,000,000 Qwest Communications International, Inc., 7.500%,
11/01/2008....................................... 2,092,500
4,900,000 Sprint Capital Corp., 5.700%, 11/15/2003.......... 4,897,550
3,761,000 WorldCom, Inc.,
8.875%, 1/15/2006................................ 4,098,437
------------
41,146,158
------------
U.S. Government--14.1%
2,400,000 U.S. Treasury Bonds, 5.500%, 8/15/2028............ 2,512,128
9,000,000 U.S. Treasury Notes, 8.500%, 11/15/2000........... 9,618,660
2,500,000 U.S. Treasury Notes, 8.000%, 5/15/2001............ 2,687,400
10,000,000 U.S. Treasury Notes, 6.625%, 3/31/2002............ 10,580,000
6,000,000 U.S. Treasury Notes, 5.750%, 4/30/2003............ 6,245,700
3,000,000 U.S. Treasury Notes, 5.750%, 8/15/2003............ 3,134,190
3,000,000 U.S. Treasury Notes, 4.750%, 11/15/2008........... 3,023,340
------------
37,801,418
------------
Utilities--1.3%
600,000 Gulf CDA Resource's, Ltd., 8.350%, 8/01/2006...... 598,284
3,000,000 United Utilities PLC, 6.250%, 8/15/2005........... 3,028,800
------------
3,627,084
------------
Yankee--18.0%
1,000,000 Bridas Co., 12.500%, 6/10/2003.................... 1,050,000
3,600,000 Freeport Term Malta PLC, 144A, 7.250%, 5/15/2028.. 3,715,632
9,500,000 Hydro Quebec,
8.050%, 7/07/2024................................ 11,554,565
6,000,000 Merita Bank, Ltd., 7.500%, 12/29/2049............. 6,046,500
2,500,000 Multicanal S.A.,
9.250%, 2/01/2002................................ 2,300,000
615,000 Multicanal S.A., 10.500%, 4/15/2018............... 522,750
1,000,000 Pemex Finance, 5.720%, 11/15/2003................. 1,000,000
2,000,000 Pemex Finance,
8.020%, 5/15/2007................................ 2,000,000
500,000 Pemex Petroleos Mexicanos, 8.625%, 12/01/2023..... 382,500
2,500,000 Petroleos Mexicanos, 144A,
8.625%, 12/01/2023............................... 1,912,500
1,000,000 Pioneer Natural Resources Co., 6.500%, 1/15/2008.. 850,440
5,100,000 Smurfit Capital, 6.750%, 11/20/2005............... 5,135,598
2,200,000 Republic of Argentina, 11.000%, 12/04/2005........ 2,183,500
4,090,000 Republic of Columbia, 7.250%, 2/15/2003........... 3,568,525
1,000,000 Republic of Columbia, 7.250%, 2/23/2004........... 852,500
3,000,000 Republic of Columbia, 7.625%, 2/15/2007........... 2,497,500
2,000,000 Republic of Columbia, 8.660%, 10/07/2016.......... 1,767,500
1,000,000 YPF Sociedad Anonima, 7.250%, 3/15/2003........... 940,140
------------
48,280,150
------------
Total Bonds and Notes
(Identified Cost $253,278,531)................... 259,930,991
------------
</TABLE>
See accompanying notes to financial statements.
89
<PAGE>
New England Zenith Fund
(Back Bay Advisors Bond Income Series)
Investments as of December 31, 1998
Warrant--0.1%
<TABLE>
<CAPTION>
Shares Value (a)
<C> <S> <C>
2,200 Republic of Argentina.............................. $ 99,000
------------
Total Warrant
(Identified Cost $49,544)......................... $ 99,000
------------
</TABLE>
Short-Term Investment--1.1%
<TABLE>
<CAPTION>
Face Amount
<C> <S> <C>
$ 2,997,000 Household Finance Corp., 5.000%, 1/04/99.... $ 2,995,751
------------
Total Short-Term Investment
(Identified Cost $2,995,751)............... 2,995,751
------------
Total Investments--98.2%
(Identified Cost $256,323,826)(b).......... 263,025,742
Other assets less liabilities............... 4,764,779
------------
Total Net Assets--100%...................... $267,790,521
============
(a) See Note 1A of Notes to Financial Statements.
(b) Federal Tax Information:
At December 31, 1998 the net unrealized appreciation on investments based
on cost of $256,524,476 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.................................... $ 8,216,054
Aggregate gross unrealized depreciation
for all investments in which there is an excess of tax
cost over value........................................ (1,714,788)
------------
Net unrealized appreciation............................. $ 6,501,266
============
</TABLE>
144A--Security exempt from registration under rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of these securities amounted to $5,628,132 or 2.1% of net
assets.
CAD--Security denominated in Canadian Dollars
See accompanying notes to financial statements.
90
<PAGE>
New England Zenith Fund
(Back Bay Advisors Bond Income Series)
Statement of Assets & Liabilities
December 31, 1998
<TABLE>
<S> <C> <C>
Assets
Investments at value.................................... $263,025,742
Cash.................................................... 2,034
Receivable for:
Fund shares sold........................................ 907,227
Dividends and interest.................................. 4,386,031
Due from Investment Adviser............................. 22,149
------------
268,343,183
Liabilities
Payable for:
Fund shares redeemed.................................... $385,002
Withholding taxes....................................... 2,606
Accrued expenses:
Management fees......................................... 89,206
Deferred trustees' fees................................. 42,193
Other expenses.......................................... 33,655
--------
552,662
------------
$267,790,521
============
Net Assets
Net Assets consist of:
Capital paid in......................................... $260,537,100
Undistributed net investment income..................... 122,796
Accumulated net realized gains (losses)................. 428,181
Unrealized appreciation (depreciation) on investments
and foreign currency................................... 6,702,444
------------
Net Assets............................................... $267,790,521
============
Computation of offering price:
Net asset value and redemption price per share
($267,790,521 divided by 2,436,936 shares of beneficial
interest)............................................... $ 109.89
============
Identified cost of investments........................... $256,323,826
============
</TABLE>
Statement of Operations
Year Ended December 31, 1998
<TABLE>
<S> <C> <C>
Investment Income
Interest........................................... $16,370,666(a)
-----------
Expenses
Management fees.................................... $ 917,376
Trustees' fees and expenses........................ 20,551
Custodian.......................................... 90,602
Audit and tax services............................. 14,208
Legal.............................................. 15,965
Printing........................................... 28,325
Insurance.......................................... 6,458
Miscellaneous...................................... 4,326
----------
Total expenses.................................... 1,097,811
-----------
Net investment income............................... 15,272,855
Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency Transactions
Realized gain (loss) on:
Investments--net................................... 4,748,027
Foreign currency transactions--net................. (904,513)
----------
Total realized gain (loss) on investments and
foreign currency transactions.................... 3,843,514
----------
Unrealized appreciation
(depreciation) on:
Investments--net................................... 977,988
Foreign currency transactions--net................. 528
----------
Total unrealized appreciation (depreciation) on
investments and foreign currency transactions.... 978,516
----------
Net gain (loss) on investment transactions.......... 4,822,030
-----------
Net Increase (Decrease) in Net Assets From
Operations......................................... $20,094,885
===========
</TABLE>
(a) Net of foreign taxes of: $2,606.
See accompanying notes to financial statements.
91
<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,
1997 1998
------------ ------------
<S> <C> <C>
From Operations
Net investment income............................. $ 13,029,862 $ 15,272,855
Net realized gain (loss) on investments and
foreign currency transactions.................... 1,604,656 3,843,514
Unrealized appreciation (depreciation) on
investments, and foreign currency transactions... 4,839,580 978,516
------------ ------------
Increase (decrease) in net assets from operations. 19,474,098 20,094,885
------------ ------------
From Distributions to Shareholders
Net investment income............................. (13,039,485) (14,982,245)
Net realized gain on investments.................. (1,850,904) (3,901,599)
------------ ------------
(14,890,389) (18,883,844)
------------ ------------
From Capital Shares Transactions
Proceeds from sale of shares...................... 54,067,705 107,261,482
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income.......... 13,039,485 14,982,245
Distributions from net realized gain.............. 1,850,904 3,901,599
------------ ------------
68,958,094 126,145,326
Cost of shares redeemed........................... (51,012,776) (62,453,829)
------------ ------------
Increase (decrease) in net assets derived from
capital share transactions....................... 17,945,318 63,691,497
------------ ------------
Total increase (decrease) in net assets........... 22,529,027 64,902,538
Net Assets
Beginning of the year............................. 180,358,956 202,887,983
------------ ------------
End of the year................................... $202,887,983 $267,790,521
============ ============
Undistributed (overdistributed) Net Investment
Income
Beginning of the year............................. $ 146,994 $ (939)
============ ============
End of the year................................... $ (939) $ 122,796
============ ============
Number of Shares of the Fund:
Issued from the sale of shares.................... 489,276 947,129
Issued in connection with the reinvestment of:
Distributions from net investment income.......... 120,361 136,974
Distributions from net realized gain.............. 16,902 35,568
------------ ------------
626,539 1,119,671
Redeemed.......................................... (464,412) (552,385)
------------ ------------
Net change........................................ 162,127 567,286
============ ============
</TABLE>
Financial Highlights
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year........................ $ 106.14 $ 95.53 $ 108.67 $ 105.63 $ 108.52
-------- -------- -------- -------- --------
Income From Investment
Operations
Net Investment Income....... 7.05 7.34 7.72 7.43 6.76
Net Realized and Unrealized
Gain (Loss) on Investments. (10.61) 12.85 (2.70) 4.05 3.00
-------- -------- -------- -------- --------
Total From Investment
Operations................. (3.56) 20.19 5.02 11.48 9.76
-------- -------- -------- -------- --------
Less Distributions
Distributions From Net
Investment Income.......... (7.05) (7.05) (7.74) (7.51) (6.64)
Distributions From Net
Realized Capital Gains..... 0.00 0.00 (0.32) (1.08) (1.75)
-------- -------- -------- -------- --------
Total Distributions......... (7.05) (7.05) (8.06) (8.59) (8.39)
-------- -------- -------- -------- --------
Net Asset Value, End of Year. $ 95.53 $ 108.67 $ 105.63 $ 108.52 $ 109.89
======== ======== ======== ======== ========
Total Return (%)............. (3.4) 21.2 4.6 10.9 9.0
Ratio of Operating Expenses
to Average Net Assets (%)... 0.44 0.55 0.52 0.52 0.48
Ratio of Net Investment
Income to Average Net Assets
(%)......................... 6.75 7.22 7.22 6.97 6.66
Portfolio Turnover Rate (%).. 82 73 98 40 82
Net Assets, End of Year
(000)....................... $126,234 $162,712 $180,359 $202,888 $267,791
</TABLE>
See accompanying notes to financial statements.
92
<PAGE>
Salomon Brothers U.S. Government Series
Portfolio Manager: Roger Lavan Salomon Brothers Asset Management Inc
[PHOTO OF ROGER LAVAN APPEARS HERE]
Q. How did the Series perform in 1998?
A. The Salomon Brothers U.S. Government Series returned 7.5% (based on net as-
set value) for 1998, outperforming in its Lipper Variable Products U.S. Mort-
gage and GNMA Fund Average/17/, which returned 7.3% for 1998. However, the Se-
ries lagged the broader Lehman Brothers Intermediate U.S. Government Index/9/
which returned 8.5% over the year. The Series' performance resulted from its
shift into longer duration bonds and a sizable allocation to Treasuries.
Q. How did you manage the Series during the year?
A. In January, we believed that Asia's economic woes would slow economic growth
in the U.S and push inflation lower. This would enable interest rates, in par-
ticular long term rates, to move modestly lower, pushing bond prices higher. To
take advantage of our expectations for lower interest rates and a flatter yield
curve, we moved the Series at year-end 1997 into a slightly long duration
barbelled position while overweighting discount mortgage securities.
We held this position until mid-August when it became apparent that the global
economy would slow down more than thought previously and the Federal Reserve
Board would ease monetary policy. We strategically reduced the Series' barbell
position by swapping long maturity Treasuries and mortgages into 5-year Trea-
suries. The 5-year area of the Treasury curve often performs best just prior to
a Federal easing cycle, and this time was no exception. To maintain duration,
we sold mortgage securities trading above par and bought discount pass-
throughs.
During the fourth quarter, it became apparent to investors that the global mar-
ket crisis that began mid-1997 had stabilized. A 0.75% cut of the Federal Re-
serve Board Funds Rate restored investor confidence and liquidity in the mar-
kets. The main strategy change in the Series was a reallocation to mortgage
pass-throughs from Treasuries. Presently, 69% of the portfolio consists of
mortgages, up 14% from the end of the third quarter.
Q. What is your outlook for the Series in 1999?
A. After seven years of uninterrupted growth, the U.S. economy faces a period
of slowing expansion and threatened instability. Although key areas of economic
activity remain buoyant, gradual slowing remains a likely scenario for 1999.
The Federal Reserve Board will probably condition further easing on renewed in-
tensification of financial stress or evidence that demand pressures are reced-
ing.
We expect interest rates to generally move lower in the first few months of the
year, followed by a gradual rise through the end of 1999. With the expectation
of further Federal Reserve Board easing, we look for the yield curve to steep-
en. As such, long-term bonds may stabilize in a range centered on 5% as long-
term inflation expectations fall.
93
<PAGE>
[GRAPH APPEARS HERE]
Date Salomon US Gov't Lehman Intermediate Government
---- ---------------- ------------------------------
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
12/31/98 $13,953 $13,924
Average Annual Total Return
Lehman Lipper Variable
US Government Intermediate US Mortgage
Series US Government/4/ and GNMA/17/
1 year 7.5% 8.5% 7.3%
3 years 6.4 6.7 6.7
Since Inception 8.3 8.2 n/a
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE] Fund Facts
Goal: A high level of current income consistent with the preservation of capital
and maintenance of liquidity.
Start date: October 31, 1994
Size: $46 million as of December 31, 1998
Managers: Roger Lavan has managed the Series since its inception in 1994. Mr.
Lavan has managed the Salomon Brothers Investment Series--U.S. Government Income
Fund and the North American U.S. Government Securities Fund since January 1992.
He joined Salomon Brothers Asset Management Inc in 1990.
Performance numbers are net of all Series expenses but do not include any
insurance, sales or administrative charges of variable annuity or life
insurance contracts. If these charges were included, the returns shown would
be lower.
This information represents past performance and is not indicative of future
results. Investment return and principal value will fluctuate so that shares,
upon redemption, may be worth more or less than the original cost.
94
<PAGE>
New England Zenith Fund
(Salomon Brothers U.S. Government Series)
Investments as of December 31, 1998
Bonds & Notes--90.5% of Total Net Assets
<TABLE>
<CAPTION>
Face
Amount Value (a)
<C> <S> <C>
Federal Agency--71.8%
$ 300,000 Federal Home Loan Banks 5.940%, 6/13/00............... $ 304,323
1,000,000 Federal Home Loan Banks 5.800%, 9/02/08............... 1,033,520
198,431 Federal Home Loan Mortgage 7.500%, 5/01/07............ 204,384
16,430 Federal Home Loan Mortgage 6.000%, 10/01/10........... 16,502
312,848 Federal Home Loan Mortgage 7.000%, 7/01/11............ 319,887
49,113 Federal Home Loan Mortgage 11.750%, 1/01/12........... 55,820
474,293 Federal Home Loan Mortgage 6.500%, 8/01/13............ 481,256
750,000 Federal Home Loan Mortgage 10.000%, 3/01/16........... 815,625
258,593 Federal Home Loan Mortgage 8.250%, 4/01/17............ 270,928
150,337 Federal Home Loan Mortgage 9.000%, 10/01/17........... 158,934
325,179 Federal Home Loan Mortgage 8.000%, 12/01/19........... 336,765
344,956 Federal Home Loan Mortgage 10.500%, 6/01/20........... 382,180
758,973 Federal Home Loan Mortgage 8.000%, 7/01/20............ 795,563
900,000 Federal Home Loan Mortgage 6.247%, 3/25/21............ 929,250
215,287 Federal Home Loan Mortgage 7.000%, 4/15/21............ 217,640
57,813 Federal Home Loan Mortgage 6.500%, 5/01/26............ 58,283
55,047 Federal Home Loan Mortgage 6.500%, 6/01/26............ 55,495
790,914 Federal Home Loan Mortgage 6.500%, 7/01/26............ 797,345
1,347,375 Federal Home Loan Mortgage 6.000%, 10/01/28........... 1,330,951
2,692,620 Federal Home Loan Mortgage 6.000%, 11/01/28........... 2,659,797
3,000,000 Federal Home Loan Mortgage 6.000%, TBA................ 2,963,430
194,107 Federal National Mortgage Association 6.500%, 6/01/08. 196,924
913,455 Federal National Mortgage Association 6.500%, 4/01/13. 926,300
628,108 Federal National Mortgage Association 6.500%, 7/01/13. 636,940
18,133 Federal National Mortgage Association 14.500%,
11/01/14............................................. 21,929
53,602 Federal National Mortgage Association 12.500%,
9/01/15.............................................. 62,714
430,255 Federal National Mortgage Association 12.000%,
10/01/15............................................. 487,139
57,203 Federal National Mortgage Association 13.000%,
11/01/14............................................. 68,214
257,468 Federal National Mortgage Association 12.500%,
1/01/16.............................................. 301,237
26,538 Federal National Mortgage Association 12.000%,
1/01/16.............................................. 30,917
16,950 Federal National Mortgage Association 11.500%,
9/01/19.............................................. 19,408
334,626 Federal National Mortgage Association 6.500%,
3/01/26.............................................. 336,925
1,387,912 Federal National Mortgage Association 6.911%,
12/28/28............................................. 1,401,791
4,400,000 Federal National Mortgage Association 6.500%, TBA..... 4,428,864
3,150,000 Federal National Mortgage Association 7.000%, TBA..... 3,213,000
4,750,000 Federal National Mortgage Association 6.000%, TBA..... 4,687,632
800,000 Federal National Mortgage Association 6.527%,
5/25/30.............................................. 830,000
104,610 Government National Mortgage Association 9.000%,
10/20/16............................................. 111,571
219,790 Government National Mortgage Association 9.000%,
12/15/16............................................. 234,500
300,000 Student Loan Marketing Association 7.500%, 3/08/00.... 308,826
396,727 U.S. Department of Veteran Affairs 7.250%, 10/15/10... 396,973
-----------
32,889,682
-----------
U. S. Treasury--18.7%
100,000 U.S. Treasury Bonds 6.375%, 8/15/27................... 114,937
200,000 U.S. Treasury Bonds 5.250%, 11/15/28.................. 204,750
1,500,000 U.S. Treasury Notes 4.500%, 9/30/00................... 1,497,930
200,000 U.S. Treasury Notes 6.500%, 5/31/01................... 208,544
250,000 U.S. Treasury Notes 5.625%, 12/31/02.................. 258,505
600,000 U.S. Treasury Notes 5.750%, 4/30/03................... 624,570
1,400,000 U.S. Treasury Notes 6.625%, 5/15/07................... 1,578,276
850,000 U.S. Treasury Notes 6.125%, 8/15/07................... 930,529
1,050,000 U.S. Treasury Notes 5.625%, 5/15/08................... 1,120,381
2,000,000 U.S. Treasury Notes 4.750%, 11/15/08(c)............... 2,015,560
-----------
8,553,982
-----------
Total Bonds & Notes
(Identified Cost $41,040,840)........................ 41,443,664
-----------
</TABLE>
See accompanying notes to financial statements.
95
<PAGE>
New England Zenith Fund
(Salomon Brothers U.S. Government Series)
Investments as of December 31, 1998
Short-Term Investments--46.7%
<TABLE>
<CAPTION>
Face
Amount Value (a)
<C> <S> <C>
$5,406,000 Repurchase agreement with J.P. Morgan dated
12/31/1998 at 4.68% to be repurchased at
$5,408,811 on 1/04/1999 collateralized by
$4,525,000 U.S. Treasury Bond 6.75% due 8/15/26
with a value of $5,514,844........................ $ 5,406,000
7,000,000 Repurchase agreement with State Street Corp. dated
12/31/1998 at 4.85% to be repurchased at
$7,003,772 on 1/04/1999 collateralized by
$6,605,000 U.S. Treasury Note 6.25% due 2/15/2003
with a value of $7,141,656........................ 7,000,000
7,000,000 Repurchase agreement with Warburg Dillon Reed LLC
dated 12/31/1998 at 4.75% to be repurchased at
$7,003,694 on 1/04/1999 collateralized by
$6,123,000 U.S. Treasury Bond 6.375% due 8/15/2027
with a value of $7,140,949........................ 7,000,000
2,000,000 Safeway, Inc. 6.000%, 1/06/1999.................... 1,998,333
------------
Total Short-Term Investments
(Identified Cost $21,404,333)..................... 21,404,333
------------
Total Investments--137.2%
(Identified Cost $62,445,173)(b).................. 62,847,997
Other assets less liabilities...................... (17,041,430)
------------
Total Net Assets--100%............................. $ 45,806,567
============
</TABLE>
(a) See Note 1A of Notes to Financial Statements.
(b) Federal Tax Information:
At December 31, 1998 the net unrealized appreciation on investments based on
cost of $62,452,564 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................. $466,355
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value................. (70,922)
--------
Net unrealized appreciation...................................... $395,433
========
</TABLE>
(c) Portion of or entire principal amount delivered as collateral for reverse
repurchase agreement.
See accompanying notes to financial statements.
96
<PAGE>
New England Zenith Fund
(Salomon Brothers U.S. Government Series)
Statement of Assets & Liabilities
December 31, 1998
<TABLE>
<S> <C> <C>
Assets
Investments at value.................................. $62,847,997
Receivable for:
Fund shares sold...................................... 276,465
Dividends and interest................................ 286,764
Unamortized organization expense...................... 1,679
-----------
63,412,905
Liabilities
Payable for:
Securities purchased.................................. $15,288,316
Reverse repurchase agreements......................... 2,022,500
Fund shares redeemed.................................. 250,164
Due to custodial bank................................. 7,507
Accrued expenses:
Management fees....................................... 21,245
Deferred trustees' fees............................... 2,934
Other expenses........................................ 13,672
-----------
17,606,338
-----------
$45,806,567
===========
Net Assets
Net Assets consist of:
Capital paid in....................................... $45,289,221
Undistributed net investment income................... 16,486
Accumulated net realized gains (losses)............... 98,036
Unrealized appreciation (depreciation) on investments. 402,824
-----------
Net Assets............................................. $45,806,567
===========
Computation of offering price:
Net asset value and redemption price per share
($45,806,567 divided by 3,993,162 shares of beneficial
interest)............................................. $ 11.47
===========
Identified cost of investments........................ $62,445,173
===========
</TABLE>
Statement of Operations
Year Ended December 31, 1998
<TABLE>
<S> <C> <C>
Investment Income
Interest.............................................. $1,969,168(a)
----------
Expenses
Management fees....................................... $169,287
Trustees' fees and expenses........................... 9,067
Custodian............................................. 28,689
Audit and tax services................................ 17,618
Legal................................................. 915
Printing.............................................. 5,297
Insurance............................................. 969
Amortization of organization expenses................. 2,008
Miscellaneous......................................... 3,391
--------
Total expenses....................................... 237,241
Less expenses assumed by the investment adviser...... (21,784) 215,457
-------- ----------
Net investment income.................................. 1,753,711
Realized and Unrealized Gain (Loss) on Investments
Realized gain (loss) on:
Investments--net...................................... 273,855
Unrealized appreciation (depreciation) on:
Investments--net...................................... 196,244
----------
Net gain (loss) on investment transactions............. 470,099
----------
Net Increase (decrease) in Net Assets from Operations.. $2,223,810
==========
</TABLE>
(a) Net of interest expense of $26,668.
See accompanying notes to financial statements.
97
<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,
1997 1998
------------ ------------
<S> <C> <C>
From Operations
Net investment income.............................. $ 1,083,527 $ 1,753,711
Net realized gain (loss) on investments............ 78,575 273,855
Unrealized appreciation (depreciation) on
investments....................................... 227,116 196,244
----------- ------------
Increase (decrease) in net assets from operations.. 1,389,218 2,223,810
----------- ------------
From Distributions to Shareholders
Net investment income.............................. (1,038,280) (1,671,941)
Net realized gain on investments................... (154,231) (240,092)
----------- ------------
(1,192,511) (1,912,033)
----------- ------------
From Capital Shares Transactions
Proceeds from sale of shares....................... 14,986,752 35,229,571
Net asset value of shares issued in connection with
the reinvestment of:
Distributions from net investment income........... 1,038,280 1,671,941
Distributions from net realized gain............... 154,231 240,092
----------- ------------
16,179,263 37,141,604
Cost of shares redeemed............................ (7,443,287) (13,790,161)
----------- ------------
Increase (decrease) in net assets derived from
capital share transactions........................ 8,735,976 23,351,443
----------- ------------
Total increase (decrease) in net assets............ 8,932,683 23,663,220
Net Assets
Beginning of the year.............................. 13,210,664 22,143,347
----------- ------------
End of the year.................................... $22,143,347 $ 45,806,567
=========== ============
Undistributed Net Investment Income
Beginning of the year.............................. $ 6,776 $ 0
=========== ============
End of the year.................................... $ 0 $ 16,486
=========== ============
Number of Shares of the Fund:
Issued from the sale of shares..................... 1,328,315 3,026,984
Issued in connection with the reinvestment of:
Distributions from net investment income........... 93,361 146,131
Distributions from net realized gain............... 13,834 20,987
----------- ------------
1,435,510 3,194,102
Redeemed........................................... (666,852) (1,189,557)
----------- ------------
Net change......................................... 768,658 2,004,545
=========== ============
</TABLE>
Financial Highlights
<TABLE>
<CAPTION>
October 31, 1994(a)
through Year Year Year Year
December 31, Ended Ended Ended Ended
1994 1995 1996 1997 1998
------------------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year...... $10.00 $ 9.96 $ 11.04 $ 10.83 $ 11.14
------ ------ ------- ------- -------
Income From Investment
Operations
Net Investment Income.. 0.10 0.33 0.58 0.53 0.47
Net Realized and
Unrealized Gain (Loss)
on Investments........ (0.04) 1.16 (0.21) 0.40 0.37
------ ------ ------- ------- -------
Total From Investment
Operations............ 0.06 1.49 0.37 0.93 0.84
------ ------ ------- ------- -------
Less Distributions
Distributions From Net
Investment Income..... (0.10) (0.33) (0.56) (0.53) (0.45)
Distributions From Net
Realized Capital
Gains................. 0.00 (0.08) (0.02) (0.05) (0.06)
Distributions in Excess
of Net Realized
Capital Gains......... 0.00 0.00 0.00 (0.04) 0.00
------ ------ ------- ------- -------
Total Distributions.... (0.10) (0.41) (0.58) (0.62) (0.51)
------ ------ ------- ------- -------
Net Asset Value, End of
Year................... $ 9.96 $11.04 $ 10.83 $ 11.14 $ 11.47
====== ====== ======= ======= =======
Total Return (%)........ 0.6(b) 15.0 3.3 8.6 7.5
Ratio of Operating
Expenses to Average Net
Assets (%)............. 0.70(c) 0.70 0.70 0.70 0.70
Ratio of Net Investment
Income to Average Net
Assets (%)............. 5.70(c) 5.62 6.13 6.42 5.70
Portfolio Turnover Rate
(%).................... 1,409(c) 415 388 572 496
Net Assets, End of Year
(000).................. $2,012 $7,542 $13,211 $22,143 $45,807
The ratios of expenses
to average net assets
without giving effect
to the voluntary
expense agreement
described in Note 4 to
the Financial
Statements would have
been (%)............... 2.54(c) 2.90 1.37 0.98 0.77
</TABLE>
(a) Commencement of operations.
(b) Not computed on an annualized basis.
(c) Computed on an annualized basis.
See accompanying notes to financial statements.
98
<PAGE>
Back Bay Advisors Money Market Series
Portfolio Manager: John Maloney Back Bay Advisors, L.P.
[PHOTO OF JOHN MALONEY APPEARS HERE]
Q. How did the Series perform over the past year?
A. The Series produced a total return of 5.3% (based on net asset value) for
the twelve months ending December 31, 1998 and maintained a constant $100.00*
share price. The Series' return included the reinvestment of $5.13 per share
in income distributions. As of December 31, 1998, Series' seven-day yield was
5.15%.
Q. What was the Fund's investment environment like during the period?
A. The investment environment was excellent for money market investors. In-
vestors benefited from ideal economic conditions, a favorable interest rate
environment and strong demand for safe, liquid investments. During the period,
investor concerns about global economies and the stability of the world's fi-
nancial markets caused a "flight-to-quality" that drove U.S. interest rates to
historic lows. Demand escalated only for those securities considered to have
the highest degree of safety and liquidity, typically U.S. Treasuries. To en-
courage economic growth, the Federal Reserve Board cut the Federal Funds rate
three times in the fall of 1998--from 5 1/2% to 4 3/4%. The federal funds rate
is the rate at which banks lend to each other overnight and is the benchmark
for other short-term interest rates.
With this background, money market investments generated solid returns that
were particularly attractive in light of their price stability. On average,
money market funds returned about 50% of the average total return of all long-
term bond funds and about 75% of the average total return of all intermediate-
term bond funds followed by Lipper, Inc. in 1998.
Q. What strategies did you use in managing the Fund?
A. We invested in securities with longer maturities in the early part of the
period because they offered an attractive yield advantage over securities with
shorter maturities. Throughout the entire period, we maintained a fairly long
average maturity --60-75 days--, which enhanced the Series' return as interest
rates fell. As of December 31, 1998, the Fund's average maturity was 58 days.
Q. What is your outlook for short-term interest rates over the next six
months?
A. We think short-term interest rates could move somewhat lower--perhaps an-
other one-quarter of one percent cut in the federal funds rate. We anticipate
slower U.S. economic growth in 1999, with a slowdown in manufacturing and a
reduction in consumer spending. However, much will depend on developments in
the global situation and the direction of the stock market.
The events of 1998 have underscored the value of money market holdings, which
seek capital preservation and reliable income. In our opinion, a well-rounded
investor portfolio is completed by the safety and liquidity of a money market
investment.
[GRAPHIC APPEARS HERE] Fund Facts
Goal: The highest possible level of current income consistent with the
preservation of capital.
Start date: August 1, 1983
Size: $204 million as of December 31, 1998
Manager: John Maloney has served as portfolio manager since 1996. Mr. Maloney
also manages the New England Tax Exempt Money Market Fund.
*The Back Bay Money Market Series is neither insured nor guaranteed by the
U.S. Government. These funds seek but cannot assure a stable share price of
$100.00.
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.
99
<PAGE>
New England Zenith Fund
(Back Bay Advisors Money Market Series)
Investments as of December 31, 1998
Investments--98.1% of Total Net Assets
<TABLE>
<CAPTION>
Face Interest Maturity
Value Description Rate Date Value (a)
<C> <S> <C> <C> <C>
Certificates of Deposit--25.3%
$1,000,000 Societe Generale.................. 5.730% 01/06/99 $ 999,953
4,000,000 Credit Suisse..................... 5.740% 01/07/99 3,999,916
1,000,000 Societe Generale New York......... 5.730% 01/07/99 999,976
1,000,000 Swiss Bank New York............... 5.690% 01/07/99 1,000,036
8,000,000 Bank of Nova Scotia............... 5.450% 01/08/99 7,998,959
2,000,000 Rabobank Nederland NV............. 5.430% 01/12/99 1,999,792
1,000,000 Commerzbank AG New York........... 5.460% 01/15/99 1,000,001
2,000,000 Dresdner Bank AG New York......... 5.510% 01/15/99 1,999,903
3,000,000 Societe Generale.................. 5.560% 01/19/99 3,000,113
2,000,000 Canadian Imperial................. 5.550% 02/10/99 2,000,015
1,000,000 Commerzbank AG New York........... 5.545% 02/10/99 1,000,173
2,000,000 Deutsche Bank AG New York......... 5.550% 02/11/99 2,000,433
2,000,000 Commerzbank AG New York........... 5.370% 02/24/99 2,000,613
1,000,000 Royal Bank of Canada.............. 5.645% 03/09/99 999,693
2,500,000 National Westminster Bank plc..... 5.615% 03/19/99 2,498,994
2,000,000 Swiss Bank New York............... 5.635% 03/22/99 1,999,355
1,000,000 Bank of Nova Scotia............... 5.705% 03/31/99 1,001,315
1,000,000 Societe Generale.................. 5.800% 04/01/99 1,001,430
1,000,000 Deutsche Bank AG New York......... 5.730% 04/16/99 1,000,854
2,000,000 Societe Generale.................. 5.760% 04/16/99 2,002,225
1,000,000 Rabobank Nederland NV............. 5.700% 04/20/99 1,001,543
2,000,000 Credit Suisse..................... 5.870% 05/04/99 2,003,719
500,000 Deutsche Bank AG New York......... 5.820% 05/04/99 500,682
1,000,000 Svenska Handelsbanken AB Public... 5.750% 05/04/99 1,001,644
1,000,000 Svenska Handelsbanken............. 5.750% 05/04/99 1,001,723
2,500,000 Svenska Handelsbanken AB Public... 5.790% 05/07/99 2,504,745
1,000,000 National Westminster Bank plc..... 5.655% 07/26/99 1,003,114
1,000,000 National Westminster Bank plc..... 5.655% 07/30/99 1,002,457
1,000,000 Societe Generale.................. 5.710% 08/03/99 1,002,923
------------
Total Certificates of Deposit
(Cost $51,526,299)............... 51,526,299
------------
Commercial Paper--72.8%
Asset Backed--3.9%
500,000 Clipper Receivables Corp. ........ 5.480% 01/13/99 499,087
3,000,000 Clipper Receivables Corp. ........ 5.350% 01/21/99 2,991,083
2,000,000 Clipper Receivables Corp. ........ 5.300% 02/09/99 1,988,517
2,500,000 Clipper Receivables Corp. ........ 5.250% 02/12/99 2,484,687
------------
7,963,374
------------
Automotive--15.9%
500,000 General Motors Acceptance Corp.... 5.350% 01/04/99 499,777
1,500,000 Ford Motor Credit Corp. .......... 5.710% 01/06/99 1,498,810
500,000 Ford Motor Credit Corp. .......... 5.350% 01/08/99 499,480
1,335,000 Ford Motor Credit Corp. .......... 5.480% 01/13/99 1,332,561
460,000 General Motors Acceptance Corp.... 5.330% 01/19/99 458,774
1,010,000 General Motors Acceptance Corp.... 5.060% 01/22/99 1,007,019
2,000,000 General Motors Acceptance Corp.... 5.330% 01/22/99 1,993,782
2,250,000 General Motors Acceptance Corp.... 5.160% 01/27/99 2,241,615
2,000,000 American Honda Finance............ 5.130% 01/29/99 1,992,020
3,000,000 General Motors Acceptance Corp.... 5.000% 02/01/99 2,987,083
3,000,000 PACCAR Financial Corp............. 4.900% 02/03/99 2,986,525
2,000,000 Ford Motor Credit Corp. .......... 5.080% 02/04/99 1,990,404
3,000,000 American Honda Finance............ 5.230% 02/05/99 2,984,746
1,000,000 American Honda Finance............ 5.080% 02/11/99 994,214
2,000,000 American Honda Finance............ 5.070% 02/12/99 1,988,170
</TABLE>
See accompanying notes to financial statements.
100
<PAGE>
New England Zenith Fund
(Back Bay Advisors Money Market Series)
Investments as of December 31, 1998
Investments--(Continued)
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
Face Interest Maturity
Value Description Rate Date Value (a)
<C> <S> <C> <C> <C>
Automotive--(Continued)
$1,000,000 Ford Motor Credit Corp. .......... 5.080% 02/22/99 $ 992,662
3,000,000 Ford Motor Credit Corp. .......... 5.080% 02/23/99 2,977,563
2,500,000 PACCAR Financial Corp............. 5.040% 03/18/99 2,473,400
500,000 PACCAR Financial Corp............. 5.100% 03/25/99 494,121
------------
32,392,726
------------
Banking--10.8%
2,905,000 Deutsche Bank Finance, Inc........ 5.170% 01/05/99 2,903,331
1,000,000 Deutsche Bank Finance, Inc........ 5.220% 01/05/99 999,420
1,970,000 UBS Finance Delaware, Inc......... 5.220% 01/05/99 1,968,857
1,510,000 UBS Finance Delaware, Inc......... 5.250% 01/05/99 1,509,119
400,000 Commerzbank U.S. Finance.......... 5.420% 01/07/99 399,639
2,500,000 Commerzbank U.S. Finance.......... 5.470% 01/11/99 2,496,201
1,000,000 Commerzbank U.S. Finance.......... 5.060% 01/13/99 998,313
5,000,000 Northern Trust Co. ............... 5.700% 01/13/99 4,990,500
1,900,000 Banque National de Paris Canada... 5.220% 02/18/99 1,886,776
1,305,000 Wells Fargo & Co.................. 5.140% 02/25/99 1,294,752
750,000 Wells Fargo & Co.................. 5.020% 03/30/99 740,797
1,500,000 Banque National de Paris Canada... 4.980% 05/12/99 1,472,817
375,000 Banque National de Paris Canada... 5.000% 05/12/99 368,177
------------
22,028,699
------------
Diversified Conglomerates--0.5%
935,000 USAA Capital Corp................. 5.000% 03/31/99 923,442
------------
Drugs--1.7%
3,595,000 American Home Products Corp....... 5.150% 03/05/99 3,562,600
------------
Finance--20.8%
4,000,000 AIG Funding....................... 4.900% 01/04/99 3,998,367
3,000,000 American Express Co............... 5.750% 01/06/99 2,997,604
2,000,000 Household Finance Corp............ 5.370% 01/08/99 1,997,912
1,000,000 Household Finance Corp............ 5.300% 01/12/99 998,381
765,000 American Express Co............... 4.900% 01/14/99 763,646
890,000 General Electric Capital Corp..... 5.320% 01/19/99 887,633
2,500,000 Transamerica Finance Group, Inc. . 5.470% 01/20/99 2,492,783
365,000 General Electric Capital Corp..... 5.330% 01/22/99 363,865
550,000 Commercial Credit Co. ............ 5.170% 01/25/99 548,104
1,500,000 General Electric Capital Corp..... 5.490% 01/25/99 1,494,510
1,415,000 Household Finance Corp............ 5.160% 01/27/99 1,409,727
990,000 Associates Corp. of N.A........... 5.320% 01/27/99 986,196
2,000,000 Household Finance Corp............ 5.160% 01/28/99 1,992,260
315,000 General Electric Capital Corp..... 5.180% 02/04/99 313,459
1,000,000 Household Finance Corp............ 5.000% 02/12/99 994,167
1,500,000 Avco Financial Services, Inc...... 5.250% 02/22/99 1,488,625
1,525,000 General Electric Capital Corp..... 5.480% 03/08/99 1,509,679
770,000 General Electric Capital Corp..... 5.070% 03/12/99 762,409
2,000,000 Associates Corp. of N.A........... 4.910% 03/15/99 1,980,087
1,250,000 Associates Corp. of N.A........... 4.930% 03/19/99 1,236,819
1,085,000 Transamerica Finance Corp......... 5.050% 03/22/99 1,072,824
1,000,000 General Electric Capital Corp..... 5.100% 03/23/99 988,525
2,715,000 Associates Corp. of N.A........... 4.900% 03/24/99 2,684,698
420,000 General Electric Capital Corp..... 5.000% 03/25/99 415,158
3,365,000 CIT Group Holdings................ 5.020% 04/06/99 3,320,423
815,000 General Electric Capital Corp..... 4.990% 04/19/99 802,799
2,000,000 Transamerica Finance Corp......... 4.980% 05/06/99 1,965,417
</TABLE>
101
<PAGE>
New England Zenith Fund
(Back Bay Advisors Money Market Series)
Investments as of December 31, 1998
Investments--(Continued)
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
Face Interest Maturity
Value Description Rate Date Value (a)
<C> <S> <C> <C> <C>
Finance--(Continued)
$ 400,000 General Electric Capital Corp..... 4.980% 05/17/99 $ 392,475
1,500,000 General Electric Capital Corp..... 4.900% 05/28/99 1,469,988
------------
42,328,540
------------
Insurance--4.4%
500,000 Prudential Funding Corp. ......... 5.360% 01/12/99 499,181
1,500,000 Prudential Funding Corp. ......... 5.470% 01/14/99 1,497,037
910,000 Prudential Funding Corp. ......... 5.090% 01/15/99 908,199
500,000 Prudential Funding Corp. ......... 5.330% 01/21/99 498,519
1,375,000 Prudential Funding Corp. ......... 5.060% 02/01/99 1,369,009
740,000 Prudential Funding Corp. ......... 5.050% 02/03/99 736,574
2,000,000 Prudential Funding Corp. ......... 5.050% 02/05/99 1,990,181
1,500,000 Prudential Funding Corp. ......... 4.900% 02/09/99 1,492,038
------------
8,990,738
------------
Leasing--0.4%
800,000 International Lease Finance
Corp. ........................... 5.900% 01/05/99 799,476
------------
Retail--4.1%
1,000,000 J.C. Penney Funding Corp. ........ 5.180% 01/15/99 997,986
600,000 Sears Roebuck Acceptance Corp. ... 5.360% 01/21/99 598,213
1,000,000 Sears Roebuck Acceptance Corp. ... 5.350% 01/25/99 996,433
800,000 Sears Roebuck Acceptance Corp. ... 5.280% 02/09/99 795,424
1,100,000 Sears Roebuck Acceptance Corp. ... 5.250% 02/19/99 1,092,140
1,350,000 Sears Roebuck Acceptance Corp. ... 5.250% 03/08/99 1,337,006
1,500,000 Sears Roebuck Acceptance Corp. ... 4.930% 03/26/99 1,482,745
1,000,000 Sears Roebuck Acceptance Corp. ... 5.050% 04/27/99 983,728
------------
8,283,675
------------
Securities--10.3%
1,000,000 J.P. Morgan & Co. ................ 5.200% 01/14/99 998,122
1,000,000 Goldman Sachs Group............... 5.230% 01/14/99 998,111
500,000 J.P. Morgan & Co. ................ 5.250% 01/14/99 499,052
3,000,000 Merrill Lynch..................... 5.070% 01/28/99 2,988,593
800,000 Merrill Lynch..................... 5.350% 01/28/99 796,790
1,055,000 Merrill Lynch..................... 5.080% 01/29/99 1,050,832
225,000 Merrill Lynch..................... 5.230% 01/29/99 224,085
1,500,000 Merrill Lynch..................... 5.100% 02/01/99 1,493,413
1,500,000 Goldman Sachs Group............... 5.200% 02/10/99 1,491,333
1,200,000 Merrill Lynch..................... 5.030% 02/11/99 1,193,126
500,000 Goldman Sachs Group............... 5.180% 02/23/99 496,187
1,000,000 Goldman Sachs Group............... 5.130% 02/24/99 992,305
3,850,000 J.P. Morgan & Co. ................ 5.100% 02/26/99 3,819,457
1,000,000 Goldman Sachs Group............... 5.070% 03/18/99 989,297
3,000,000 Goldman Sachs Group............... 5.000% 04/20/99 2,954,583
------------
20,985,286
------------
Total Commercial Paper (Cost
$148,258,556).................... 148,258,556
------------
Total Investments--98.1% (Cost
$199,784,855)(b)................. 199,784,855
Other assets less liabilities..... 3,812,159
------------
Total Net Assets--100%............ $203,597,014
============
</TABLE>
(a) See Note 1A of Notes to Financial Statements.
(b) The aggregate cost for federal income tax purposes was $199,784,855.
102
<PAGE>
New England Zenith Fund
(Back Bay Advisors Money Market Series)
Statement of Assets & Liabilities Statement of Operations
December 31, 1998 Year Ended December 31, 1998
See accompanying notes to financial statements.
<TABLE>
<S> <C> <C>
Assets
Investments at value.................................... $199,784,855
Cash.................................................... 23,884
Receivable for:
Fund shares sold........................................ 3,426,819
Dividends and interest.................................. 1,950,785
------------
205,186,343
Liabilities
Payable for:
Fund shares redeemed.................................... $745,341
Dividends declared...................................... 718,710
Accrued expenses:
Management fees......................................... 50,324
Deferred trustees' fees................................. 32,053
Other expenses.......................................... 42,901
--------
1,589,329
------------
$203,597,014
============
Net Assets
Net Assets consist of:
Capital paid in......................................... $203,597,014
------------
Net Assets............................................... $203,597,014
============
Computation of offering price:
Net asset value and redemption price per share
($203,597,014 divided by 2,035,970 shares of beneficial
interest)............................................... $ 100.00
============
Cost of investments...................................... $199,784,855
============
</TABLE>
<TABLE>
<S> <C> <C>
Investment Income
Interest.................................................. $7,411,826
----------
Expenses
Management fees........................................... $463,281
Trustees' fees and expenses............................... 14,200
Custodian................................................. 65,879
Audit and tax services.................................... 11,644
Legal..................................................... 13,464
Printing.................................................. 22,534
Insurance................................................. 3,712
Miscellaneous............................................. 5,573
--------
Total expenses........................................... 600,287
----------
Net investment income...................................... 6,811,539
----------
Net Increase (decrease) in Net Assets from Operations...... $6,811,539
==========
</TABLE>
103
<PAGE>
New England Zenith Fund
(Back Bay Advisors Money Market Series)
Statement of Changes in Net Assets
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1998
------------- -------------
<S> <C> <C>
From Operations
Net investment income........................... $ 6,038,343 $ 6,811,539
------------- -------------
Increase (decrease) in net assets from
operations..................................... 6,038,343 6,811,539
------------- -------------
From Distributions to Shareholders
Net investment income........................... (6,038,343) (6,811,539)
------------- -------------
(6,038,343) (6,811,539)
------------- -------------
From Capital Shares Transactions
Proceeds from sale of shares.................... 314,876,956 490,854,641
Net asset value of shares issued in connection
with the reinvestment of:
Distributions from net investment income........ 6,003,198 6,569,907
------------- -------------
320,880,154 497,424,548
Cost of shares redeemed......................... (326,870,348) (404,836,059)
------------- -------------
Increase (decrease) in net assets derived from
capital share transactions..................... (5,990,194) 92,588,489
------------- -------------
Total increase (decrease) in net assets......... (5,990,194) 92,588,489
Net Assets
Beginning of the year........................... 116,998,719 111,008,525
------------- -------------
End of the year................................. $ 111,008,525 $ 203,597,014
============= =============
Number of Shares of the Fund:
Issued from the sale of shares.................. 3,148,769 4,908,547
Issued in connection with the reinvestment of:
Distributions from net investment income........ 60,032 65,699
------------- -------------
3,208,801 4,974,246
Redeemed........................................ (3,268,703) (4,048,361)
------------- -------------
Net change...................................... (59,902) 925,885
============= =============
</TABLE>
Financial Highlights
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1994 1995 1996 1997 1998
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year.......................... $100.00 $100.00 $ 100.00 $ 100.00 $ 100.00
------- ------- -------- -------- --------
Income From Investment
Operations
Net Investment Income......... 3.89 5.50 4.99 5.08 5.13
------- ------- -------- -------- --------
Total From Investment
Operations................... 3.89 5.50 4.99 5.08 5.13
Distributions From Net
Investment Income............. (3.89) (5.50) (4.99) (5.08) (5.13)
------- ------- -------- -------- --------
Total Distributions........... (3.89) (5.50) (4.99) (5.08) (5.13)
------- ------- -------- -------- --------
Net Asset Value, End of Year... $100.00 $100.00 $ 100.00 $ 100.00 $ 100.00
======= ======= ======== ======== ========
Total Return (%)............... 4.0 5.6 5.1 5.3 5.3
Ratio of Operating Expenses to
Average Net Assets (%)........ 0.40 0.50 0.50 0.45 0.45
Ratio of Net Investment Income
to Average Net Assets (%)..... 3.89 5.50 4.99 5.21 5.15
Net Assets, End of Year (000).. $73,960 $90,148 $116,999 $111,009 $203,597
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>
104
<PAGE>
New England Zenith Fund
Notes to Financial Statements--December 31, 1998
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 as amended. 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 ("the 1940 Act"), 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 separate accounts established by Metropolitan Life
Insurance Company ("MetLife") and New England Life Insurance Company
("NELICO"), an indirect 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 (each a "Series"), with shares of each Series representing interests in
a separate portfolio of assets.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of the Financial Statements of each 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
As permitted under Rule 2a-7 of the 1940 Act, and certain conditions
therein, the Back Bay Advisors Money Market Series employs the amortized
cost method of security valuation which, the Fund's Board of Trustees (the
"Board") has determined, approximates the fair market net asset value per
share of the Series. 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.
Debt securities (other than short term obligations with a remaining
maturity of sixty days or less) are valued on the basis of valuations
furnished by independent pricing services authorized by the Board. Short
term obligations with a remaining maturity of sixty days or less are stated
at amortized cost value which approximates fair market value. Equity
securities are valued using the last reported sale price for securities
listed on that security's principle trading exchange or on the NASDAQ
National Market System (if that is the security's principle trading
market), or, if no sale was reported and in the case of over-the-counter
securities not so listed, the last reported bid price by a broker making a
market in such security. 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.
Securities traded primarily on an exchange outside of the United States
which closes before the close of the New York Stock Exchange generally will
be valued at the last sales price on that non-U.S. exchange, except when an
occurrence after closing of that exchange is likely to have materially
changed such security's value as determined by a Series' subadviser under
the direction of the adviser.
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 that portion of
105
<PAGE>
New England Zenith Fund
Notes to Financial Statements--December 31, 1998--(Continued)
the results of operations reflecting 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 by
each Series and the U.S. dollar equivalent of the amounts actually received
or paid by each Series. 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--Certain Series may use foreign currency
contracts to facilitate transactions in foreign securities and to manage
the Series' currency exposure. Contracts to buy generally are used to
acquire exposure to foreign currencies, while contracts to sell are used to
hedge the Series' 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 Series' Statements of Assets and Liabilities. The U.S. dollar value of
the currencies the Series 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 Series
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 Westpeak Growth and Income, Goldman Sachs Midcap
Value, Westpeak Stock Index, Back Bay Advisors Managed, Loomis Sayles
Balanced, Morgan Stanley International Magnum Equity, Salomon Brothers
U.S. Government, Salomon Brothers Strategic Bond Opportunities and Davis
Venture Value Series each may enter into futures contracts (or options
thereon) 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 or, in the
case of Goldman Sachs Midcap Value Series, to increase total return.
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. 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 corresponding 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. At December 31, 1998 there were no such
contracts outstanding.
E. Repurchase agreements--Each Series, through the custodian or subcustodian,
receives delivery of the underlying securities collateralizing repurchase
agreements. It is the Fund's policy that the market value of the
collateral be at least equal to 100% of the repurchase price in the case
of a repurchase agreement of one day duration and 102% on all other
repurchase agreements. 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.
106
<PAGE>
New England Zenith Fund
Notes to Financial Statements--December 31, 1998--(Continued)
The Goldman Sachs Midcap Value Series, together with other registered
investment companies having advisory agreements with Goldman Sachs Asset
Management or its affiliates, transfers uninvested cash into joint
accounts, the daily aggregate balance of which is invested in one or more
repurchase agreements. At December 31, 1998, the Goldman Sachs Midcap Value
Series had undivided interests in the repurchase agreements in the
following joint account which equaled $13,400,000, in principal amount. At
December 31, 1998 the following repurchase agreements held in this joint
account were fully collaterized by Federal Agency obligations.
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Repurchase Agreement Amount Rate Date Cost
-------------------- ------------ -------- ---------- --------------
<S> <C> <C> <C> <C>
ABN AMRO, Inc. ................ $120,000,000 5.15% 01/04/1999 $ 120,000,000
Deutsche Bank.................. 77,300,000 5.07% 01/04/1999 77,300,000
Donaldson, Lufkin & Jenrette,
Inc. ......................... 150,000,000 4.95% 01/04/1999 150,000,000
JP Morgan Securities, Inc. .... 700,000,000 4.75% 01/04/1999 700,000,000
Morgan Stanley, Dean Witter,
Discover & Co. ............... 200,000,000 4.95% 01/04/1999 200,000,000
NationsBanc Montgomery
Securities, LLC............... $125,000,000 5.15% 01/04/1999 125,000,000
--------------
TOTAL JOINT REPURCHASE
AGREEMENT ACCOUNT............. $1,372,300,000
==============
</TABLE>
F. Short Sales Against the Box--The Alger Equity Growth, Morgan Stanley
International Magnum Equity and Goldman Sachs Midcap Value Series may hedge
against changes in the value of investments by engaging in short sales
against the box. The Series had no such transactions during the year ended
December 31, 1998.
G. Reverse Repurchase Agreements--The Salomon Brothers U.S. Government and
Salomon Brothers 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 Board. At the time a Series
enters into a reverse repurchase agreement, it will establish and maintain
a segregated account at the custodian or a subcustodian, 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, 1998 was $2,022,500, which was 4.42% of total
assets, for the Salomon Brothers U.S. Government Series. At December 31,
1998, there were no open reverse repurchase agreements 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--Back Bay Advisors 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.
107
<PAGE>
New England Zenith Fund
Notes to Financial Statements--December 31, 1998--(Continued)
2. At December 31, 1998, MetLife held 30,906,686 shares of the Fund in
separate accounts funding annuity contracts issued by MetLife. NELICO held the
remaining 49,407,695 shares of the Fund then outstanding in separate accounts
funding variable life insurance and variable 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 in the 1940 Act) of the Fund.
3. For the year ended December 31, 1998, 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>
Loomis Sayles Small Cap. -- $ 270,916,657 -- $ 216,059,829
Morgan Stanley
International Magnum
Equity................. -- 38,309,754 -- 23,039,101
Alger Equity Growth..... -- 363,239,639 -- 307,976,029
Capital Growth.......... -- 3,339,452,561 -- 3,330,106,905
Goldman Sachs Midcap
Value.................. $ 516,776 187,575,953 -- 193,858,599
Davis Venture Value..... -- 198,453,574 -- 80,600,414
Westpeak Growth and
Income................. -- 286,108,571 -- 203,449,286
Westpeak Stock Index.... -- 28,600,478 -- 4,529,365
Loomis Sayles Balanced.. 30,790,250 126,529,497 $33,579,680 79,288,570
Back Bay Advisors
Managed................ 709,625 48,580,776 710,500 52,695,991
Salomon Brothers
Strategic Bond
Opportunities.......... 16,391,759 243,063,688 16,489,809 212,780,615
Back Bay Advisors Bond
Income................. 29,627,190 222,453,746 33,934,199 154,710,796
Salomon Brothers U.S.
Government............. 16,852,400 139,255,215 12,823,242 121,033,390
</TABLE>
Purchases and sales of short-term obligations for the Back Bay Advisors Money
Market Series aggregated $841,712,667 and $757,017,407, respectively.
108
<PAGE>
New England Zenith Fund
Notes to Financial Statements--December 31, 1998--(Continued)
4. 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 management fees payable by the Series as set forth below:
<TABLE>
<CAPTION>
Management
Fees Earned Annual
by TNE Advisers for Percentage Based on
the Year Ended Rates Paid to Series Average Daily Net Asset
Series December 31, 1998 Adviser Value Levels
------ ------------------- ------------- ------------------------------------
<S> <C> <C> <C>
Loomis Sayles Small Cap $2,178,725 1.00% of all assets
Series.................
Morgan Stanley 566,848 0.90% of all assets
International Magnum
Equity Series..........
Alger Equity Growth 2,115,106 0.75% of all assets
Series.................
Loomis Sayles Avanti
Growth Series(a)
(Period January 1, 1998
through April 30,
1998).................. 283,565 0.70% of the first $200 million
0.65% of the next $300 million
0.60% of amounts in excess of $500 million
Goldman Sachs Midcap
Value Series(a) (Period
May 1, 1998 through
December 31, 1998)..... 575,766 0.75% of all assets
Davis Venture Value 2,706,162 0.75% of all assets
Series.................
Westpeak Growth and 1,462,154 0.70% of the first $200 million
Income Series..........
0.65% of the next $300 million
0.60% of amounts in excess of $500 million
Westpeak Stock Index 381,940 0.25% of all assets
Series.................
Loomis Sayles Balanced 1,144,390 0.70% of all assets
Series.................
Back Bay Managed Series. 1,003,695 0.50% of all assets
Salomon Brothers 560,007 0.65% of all assets
Strategic Bond
Opportunities Series...
Back Bay Advisors Bond 917,376 0.40% of the first $400 million
Income 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. 169,287 0.55% of all assets
Government Series......
Back Bay Advisors Money 463,281 0.35% of the first $500 million
Market Series..........
0.30% of the next $500 million
0.25% of amounts in excess of $1 billion
</TABLE>
- -------
(a) Effective May 1, 1998 the Loomis Sayles Avanti Growth Series was renamed
Goldman Sachs Midcap Value Series and a new advisory agreement between
the Fund and TNE Advisers went into effect. The fees paid to TNE Advisers
before and after this change, taken together, equal the total management
fees paid by the Series for the year ended December 31, 1998.
The Capital Growth Series pays its adviser, CGM, an advisory fee at an
annual rate of 0.70% of the first $200 million of average daily net assets,
0.65% of the next $300 million of such assets, 0.60% of the next $1.5 billion
of such assets and 0.55% of such assets in excess of $2 billion. For advisory
services rendered during the year ended December 31, 1998, CGM was paid at an
average annual rate of 0.62% of the Capital Growth Series' average net assets,
totaling $10,272,927.
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 (for the period January 1, 1998
through April 30, 1998) and Loomis Sayles Balanced Series, Goldman Sachs Asset
Management ("GSAM") for the Goldman Sachs Midcap Value Series (effective May
1, 1998); Morgan Stanley Asset Management ("MSAM") for the Morgan Stanley
International Magnum Equity Series; Fred Alger Management, Inc. ("Alger") for
the Alger Equity Growth Series; Davis Selected Advisers, L.P. ("Davis") 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
109
<PAGE>
New England Zenith Fund
Notes to Financial Statements--December 31, 1998--(Continued)
Bond Opportunities and Salomon Brothers U.S. Government Series. TNE Advisers,
which acts as adviser to each Series except the Capital Growth Series, is an
indirect wholly owned subsidiary of NELICO, a direct wholly owned subsidiary
of MetLife, a mutual life insurance company. Loomis Sayles, Westpeak and Back
Bay Advisors are each independently operated subsidiaries, and CGM is an
independently operated affiliate, of Nvest, L.P. and Nvest Companies, L.P.
("Nvest Companies"). Nvest Companies 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 Nvest
Companies. Nvest Companies' managing general partner and Nvest, L.P.'s general
partner, Nvest Corporation, is an indirect wholly-owned subsidiary of MetLife
New England Holdings, Inc. which in turn is a wholly owned subsidiary of
MetLife. MetLife owns directly 46% (and in the aggregate, directly and
indirectly, 47%) of the limited partnership interests in Nvest Companies.
Nvest Companies' advising general partner, Nvest, L.P., is a publicly traded
company listed on the New York Stock Exchange. Nvest Companies 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 seven Series of the Fund are currently
wholly-owned subsidiaries of Nvest Companies and an additional Series is
advised by a majority-owned subsidiary (CGM) of Nvest Companies. The sub-
advisers of the remaining six Series are not affiliated with MetLife, Nvest,
L.P. or Nvest Companies. TNE Advisers paid each sub-adviser as shown below for
providing sub-advisory services to the Series:
<TABLE>
<CAPTION>
Fees Earned
by Sub-
advisers for
the Year ended
Series December 31, 1998
------ -----------------
<S> <C>
Loomis Sayles Small Cap Series............................... $1,033,137
Morgan Stanley International Magnum Equity Series(b)......... 422,801
Alger Equity Growth Series................................... 1,178,056
Loomis Sayles Avanti Growth Series(a) (Period January 1, 1998 166,438
through April 30, 1998).....................................
Goldman Sachs Midcap Value Series(a) (Period May 1, 1998 340,636
through December 31, 1998)..................................
Davis Venture Value Series................................... 1,493,285
Westpeak Growth and Income Series............................ 801,534
Westpeak Stock Index Series.................................. 152,776
Loomis Sayles Balanced Series................................ 615,453
Back Bay Advisors Managed Series............................. 426,480
Salomon Brothers Strategic Bond Opportunities Series......... 283,464
Back Bay Advisors Bond Income Series......................... 482,973
Salomon Brothers U.S. Government Series...................... 69,254
Back Bay Advisors Money Market Series........................ 182,366
</TABLE>
- -------
(a) Effective May 1, 1998 a new Sub-advisory agreement between TNE Advisers
and GSAM went into effect, replacing the prior Sub-advisory agreement
between TNE Advisers and Loomis Sayles. The two Sub-advisory fee
schedules set forth above reflect all agreements which were in place
during the year ended December 31, 1998.
(b) Effective December 1, 1998, Morgan Stanley Asset Management Inc. changed
its name to Morgan Stanley Dean Witter Investment Management Inc. but
continues to do business in certain instances (including as subadviser to
the Morgan Stanley International Magnum Equity Series) using the name
Morgan Stanley Asset Management.
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 Small Cap Series, Westpeak Growth and
Income Series, Westpeak Stock Index Series, Back Bay Advisors Managed Series,
Back Bay Advisors Bond Income Series and Back Bay Advisors Money Market
Series. A Voluntary Expense Limitation applicable to the Loomis Sayles Avanti
Growth Series terminated on April 30, 1998, the last day before the Series was
renamed the Goldman Sachs Midcap Value 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
110
<PAGE>
New England Zenith Fund
Notes to Financial Statements--December 31, 1998--(Continued)
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. A
similar Voluntary Expense Limitation with New England Mutual Life Insurance
Company ("The New England") was in effect with respect to the Capital Growth
Series from November 1, 1994 to April 30, 1996.
The second form of expense limit is an Expense Deferral Agreement, which has
been in effect since November 1, 1994 with respect 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, and since
May 1, 1998 for the Goldman Sachs Midcap Value Series. Under this Agreement,
TNE Advisers has agreed to pay expenses of each Series' operations (exclusive
of any brokerage costs, interest, taxes or extraordinary expenses) in excess
of the annual percentages of each Series' net assets set forth below, subject
to the obligation of each Series to repay TNE Advisers such expenses in future
years, if any, when the Series' expenses fall below that percentage; however,
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 year ended December 31, 1998, (i) the maximum expense
ratio for each Series after giving effect to the foregoing arrangements; (ii)
the amounts of expenses assumed by TNE Advisers for each Series to which the
Voluntary Expense Limitation applies; and (iii) the amounts of expenses
deferred for each Series to which the Expense Deferral Agreement applies, are
as follows:
<TABLE>
<CAPTION>
Maximum Expense
Ratio Under
Current Expenses Assumed
Voluntary Expense by TNE Advisers as a Expenses Deferred in Expenses Deferred in
Limitation or result of the Series 1997 (subject to 1998 (subject to
Expense Deferral exceeding the repayment until repayment until
Series Agreement Voluntary Expense Limit December 31, 1999) December 31, 2000)
------ ----------------- ----------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Back Bay Advisors Money
Market Series.......... 0.50% -- not applicable not applicable
Back Bay Advisors Bond
Income Series.......... 0.55% -- not applicable not applicable
Back Bay Advisors
Managed Series......... 0.65% -- not applicable not applicable
Westpeak Growth and
Income Series.......... 0.85% -- not applicable not applicable
Westpeak Stock Index
Series................. 0.40% -- not applicable not applicable
Loomis Sayles Small Cap
Series................. 1.00% $225,557 not applicable not applicable
Goldman Sachs Midcap
Value Series........... 0.90% 23,868 not applicable $ 4,535
Morgan Stanley
International Magnum
Equity Series.......... 1.30% not applicable $135,743 62,316
Alger Equity Growth
Series................. 0.90% not applicable -- --
Davis Venture Value
Series................. 0.90% not applicable -- --
Loomis Sayles Balanced
Series................. 0.85% not applicable -- --
Salomon Brothers
Strategic Bond
Opportunities Series... 0.85% not applicable 12,296 --
Salomon Brothers U.S.
Government Series...... 0.70% not applicable 46,636 21,784
</TABLE>
111
<PAGE>
New England Zenith Fund
Notes to Financial Statements--December 31, 1998--(Continued)
For the year ended December 31, 1998 the amount of deferred expense recovered
by TNE Advisers from each Series subject to the Expense Deferral Agreement is
set forth below:
<TABLE>
<CAPTION>
Deferred Expenses Deferred Expenses
Recovered by Recovered by
TNE Advisers TNE Advisers
Series from 1996 from 1997
------ ----------------- -----------------
<S> <C> <C>
Davis Venture Value Series........... $41,906 None
Goldman Sachs Midcap Value Series.... None None
Loomis Sayles Balanced Series........ 52,078 $10,668
Morgan Stanley International Magnum
Equity Series....................... None None
Salomon Brothers Strategic Bond
Opportunities Series................ 44,840 None
Salomon Brothers U.S. Government
Series.............................. None None
</TABLE>
5. The Fund does not pay any compensation to its officers or to any trustees
who are directors, officers or employees of MetLife, NELICO, Nvest, L.P. or
their affiliates, other than affiliated registered investment companies. Each
trustee who is not an "interested person" (as defined in the 1940 Act) of the
Fund ("Independent Trustees") receives the following amounts of compensation
from each Series:
<TABLE>
<CAPTION>
Bond Capital Money Stock Midcap Growth and Small
Income Growth Market Index Managed Value Income Cap
------ ------- ------ ----- ------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Annual Retainer......... $1,306 $7,775 $811 $781 $999 $534 $1,143 $1,023
Meeting Fee Per Meeting. $ 167 $ 167 $167 $167 $167 $167 $ 167 $ 167
Committee Chairman
Annual Retainer
(Contract Review)...... $ 392 $2,332 $243 $234 $300 $160 $ 343 $ 307
Committee Chairman
Annual Retainer
(Audit)................ $ 261 $1,555 $162 $156 $200 $107 $ 229 $ 205
</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......... $875 $318 $192 $486 $1,847 $1,572
Meeting Fee Per Meeting. $167 $167 $167 $167 $ 167 $ 167
Committee Chairman
Annual Retainer
(Contract Review)...... $263 $ 95 $ 58 $146 $ 554 $ 472
Committee Chairman
Annual Retainer
(Audit)................ $175 $ 64 $ 38 $ 97 $ 369 $ 314
</TABLE>
A deferred compensation plan is available to Independent 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.
112
<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,
Goldman Sachs Midcap Value Series (formerly Loomis Sayles Avanti Growth
Series), Westpeak Growth & Income Series, Loomis Sayles Small Cap Series,
Loomis Sayles Balanced Series, Morgan Stanley International Magnum 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, 1998, and the related statements of operations for the year then ended,
changes in net assets and financial highlights for each of the two years then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The 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 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, 1998, 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 well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective Series constituting New England Zenith Fund as of December
31, 1998, the results of their operations for the year then ended, the changes
in their net assets and the financial highlights for each of the two years
then ended, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 5, 1999
113
<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) Lehman Brothers Aggregate Bond Index includes most obligations of the
U.S. Treasury, agencies and quasi-federal corporations, most publicly
issued investment grade corporate bonds, and most bonds backed by
mortgage pools of GNMA, FNMA and FHLMC. The index has not been adjusted
for ongoing management, distribution and operating expenses and sales
charges applicable to mutual fund investments.
(3) Lehman Brothers Government/Corporate Bond Index is an unmanaged index of
the market value of approximately 5,300 bonds with a face value currently
in excess of $1.3 trillion. To be included in the Lehman Brothers
Government/Corporate Bond Index, an issue must have amounts outstanding
in excess of $25 million, have at least one year to maturity and be rated
"Baa" or higher ("investment grade") by a nationally recognized rating
agency. The index has not been adjusted for ongoing management,
distribution and operating expenses and sales charges applicable to
mutual fund investments.
(4) Lehman Brothers Intermediate Government Bond Index includes most
obligations of the U.S. Treasury, agencies and quasi-federal corporations
having maturities of 1 to 10 years. The index has not been adjusted for
ongoing management, distribution and operating expenses and sales charges
applicable to mutual fund investments.
(5) Lehman Brothers Intermediate Government/Corporate Bond Index is an
unmanaged index of investment grade bonds issued by the U.S. Government
and U.S. corporations having maturities between one and ten years. The
index has not been adjusted for ongoing management, distribution and
operating expenses and sales charges applicable to mutual fund
investments.
(6) 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.
(7) 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.
(8) 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.
(9) 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.
(10) 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.
(11) 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.
(12) Lipper Variable Products International 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 Intermediate Investment Grade Debt Average is an
average of the total return performance (calculated on the basis of net
asset value) of funds with similar investment objectives as calculated by
Lipper Analytical Services, an independent mutual fund ranking service.
(14) Lipper Variable Products Midcap 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.
114
<PAGE>
(15) Lipper Variable Products Small Company Fund Average is an average of the
total return performance (calculated on the basis of net asset value) of
funds with similar investment objectives as calculated by Lipper
Analytical Services, an independent mutual fund ranking service.
(16) Lipper Variable 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) Morgan Stanley Capital International Europe, Australasia, Far East (EAFE)
Index is an arithmetical average (weighted by market value) of the
performance (in U.S. dollars) of companies representing the stock markets
of Europe, Australia and the Far East. The index has not been adjusted
for ongoing management, distribution and operating expenses and sales
charges applicable to mutual funds.
(19) Morgan Stanley Capital International Europe Index is an arithmetical
average (weighted by market value) of the performance (in U.S. dollars)
of companies representing the stock markets of Austria, Belgium, Czech
Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland,
Italy, Netherlands, Norway, Poland, Portugal, Russia, Spain, Sweden,
Switzerland, Turkey and United Kingdom. The Index performance has not
been adjusted for ongoing management, distribution and operating expenses
and sales charges applicable to mutual funds.
(20) Morgan Stanley Capital International Japan Index is an arithmetical
average (weighted by market value) of the performance (in U.S. dollars)
of companies representing the stock markets of Japan. The Index
performance has not been adjusted for ongoing management, distribution
and operating expenses and sales charges applicable to mutual funds.
(21) Morgan Stanley Capital International Pacific Free ex-Japan Index is an
arithmetical average (weighted by market value) of the performance (in
U.S. dollars) of companies representing the stock markets of Australia,
China Free, Hong Kong, Indonesia, Korea, Malaysia, New Zealand,
Philippines, Singapore, Taiwan and Thailand. The Index performance has
not been adjusted for ongoing management, distribution and operating
expenses and sales charges applicable to mutual funds.
(22) Russell Midcap Index consists of 800 mid-capitalization stocks having an
average market capitalization of $3.7 billion as of December 31, 1998.
The index has not been adjusted for ongoing management, distribution and
operating expenses and sales charges applicable to mutual fund
investments.
(23) Russell 2000 Index consists of 2000 small market capitalization stocks
having an average market capitalization of $592 million as of December
31, 1998. The index performance has not been adjusted for ongoing
management, distribution and operating expenses and sales charges
applicable to mutual fund investments.
(24) Salomon Brothers High Yield Market Index measures the performance of cash
pay and deferred interest bonds.
(25) Standard & Poor's 500 Index(R) (S&P 500(R)) 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.
115
<PAGE>
New England Variable Life Separate Account of New England Life Insurance
Company
Report of Independent Accountants
To the Policy Owners and Board of Directors of New England Life Insurance
Company:
We have audited the accompanying statement of assets and liabilities of the
New England Variable Life Separate Account (comprised of Capital Growth Sub-
Account, Bond Income Sub-Account, Money Market Sub-Account, Stock Index Sub-
Account, Managed Sub-Account, Midcap Value Sub-Account (formerly 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 Magnum Equity Sub-Account
(formerly 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 as of December 31, 1998, and the related statements of
operations and changes in net assets for each of the three years in the period
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 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 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, 1998, and the results of
their operations and the changes in their net assets for each of the three
years in the period then ended, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 10, 1999
117
<PAGE>
New England Variable Life Separate Account of
New England Life Insurance Company
Statement of Assets and Liabilities
December 31, 1998
<TABLE>
<CAPTION>
----------------------------------------------------
Capital Bond Money Stock
Growth Income Market Index
Sub- Sub- Sub- Sub-
Account Account Account Account
-------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Investments in New England Zenith Fund,
Variable Insurance Products Fund, and
Variable Insurance Products Fund II at
value (Note 2)......................... $1,062,879,735 $63,810,233 $91,999,048 $112,951,497
<CAPTION>
Shares Cost
--------- --------------
<S> <C> <C>
Capital Growth
Series......... 2,270,965 $ 846,910,241
Back Bay
Advisors Bond
Income Series.. 580,674 62,600,962
Back Bay
Advisors Money
Market Series.. 919,990 91,999,048
Westpeak Stock
Index Series... 575,256 72,986,331
Back Bay
Advisors
Managed Series. 280,521 44,995,302
Goldman Sachs
Midcap Value
Series......... 295,718 40,133,483
Westpeak Growth
and Income
Series......... 318,506 52,737,711
Loomis Sayles
Small Cap
Series......... 466,286 68,072,072
Salomon Brothers
U.S. Government
Series......... 67,545 759,527
Loomis Sayles
Balanced
Series......... 927,883 13,354,477
Alger Equity
Growth Series.. 4,069,269 71,472,170
Morgan Stanley
International
Magnum Equity
Series......... 1,025,541 11,496,216
Davis Venture
Value Series... 4,661,398 87,902,713
Salomon Brothers
Bond
Opportunities
Series......... 105,941 1,257,497
VIP Equity-
Income
Portfolio...... 6,075,186 114,838,775
VIP Overseas
Portfolio...... 4,647,523 78,413,065
VIP High Income
Portfolio...... 981,426 11,927,393
VIP II Asset
Manager
Portfolio...... 505,178 7,927,108
--------------
Total $1,679,784,090
==============
Amount due and accrued (payable) from
policy-related transactions, net....... 177,286 141,063 1,688,024 146,440
Dividends receivable.................... -- -- 317,906 --
-------------- ----------- ----------- ------------
Total Assets........................... 1,063,057,021 63,951,296 94,004,978 113,097,938
Liabilities
Due New England Life Insurance Company.. 88,352,429 6,135,252 8,674,054 12,388,146
-------------- ----------- ----------- ------------
Total Liabilities...................... 88,352,429 6,135,252 8,674,054 12,388,146
-------------- ----------- ----------- ------------
Net Assets for Variable Life Insurance
Policies................................ $ 974,704,592 $57,816,044 $85,330,924 $100,709,791
============== =========== =========== ============
<CAPTION>
New England Zenith Fund
------------------------------------
Growth
Midcap and
Managed Value Income
Sub- Sub- Sub-
Account Account Account
------------ ----------- -----------
<S> <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)......................... $58,280,968 $36,325,954 $66,354,407
<CAPTION>
Shares Cost
--------- --------------
<S> <C> <C>
Capital Growth
Series......... 2,270,965 $ 846,910,241
Back Bay
Advisors Bond
Income Series.. 580,674 62,600,962
Back Bay
Advisors Money
Market Series.. 919,990 91,999,048
Westpeak Stock
Index Series... 575,256 72,986,331
Back Bay
Advisors
Managed Series. 280,521 44,995,302
Goldman Sachs
Midcap Value
Series......... 295,718 40,133,483
Westpeak Growth
and Income
Series......... 318,506 52,737,711
Loomis Sayles
Small Cap
Series......... 466,286 68,072,072
Salomon Brothers
U.S. Government
Series......... 67,545 759,527
Loomis Sayles
Balanced
Series......... 927,883 13,354,477
Alger Equity
Growth Series.. 4,069,269 71,472,170
Morgan Stanley
International
Magnum Equity
Series......... 1,025,541 11,496,216
Davis Venture
Value Series... 4,661,398 87,902,713
Salomon Brothers
Bond
Opportunities
Series......... 105,941 1,257,497
VIP Equity-
Income
Portfolio...... 6,075,186 114,838,775
VIP Overseas
Portfolio...... 4,647,523 78,413,065
VIP High Income
Portfolio...... 981,426 11,927,393
VIP II Asset
Manager
Portfolio...... 505,178 7,927,108
--------------
Total $1,679,784,090
==============
Amount due and accrued (payable) from
policy-related transactions, net....... (922) 61,118 58,059
Dividends receivable.................... -- -- --
------------ ----------- -----------
Total Assets........................... 58,280,046 36,387,072 66,412,466
------------ ----------- -----------
Liabilities
Due New England Life Insurance Company.. 5,030,060 3,676,010 7,460,673
Total Liabilities...................... 5,030,060 3,676,010 7,460,673
------------ ----------- -----------
Net Assets for Variable Life Insurance
Policies................................ 53,249,987 32,711,062 58,951,793
============ =========== ===========
</TABLE>
See Notes to Financial Statements
118
<PAGE>
<TABLE>
<CAPTION>
Variable Insurance
Products Fund
- ----------------------------------------------------------------------------------------- -------------------------------------
International
Small U.S. Equity Magnum 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>
$71,588,857 $774,736 $14,391,467 $102,179,339 $11,691,171 $107,911,360 $1,210,903 $154,432,484 $93,181,595 $11,315,839
134,394 5,294 13,282 356,305 15,466 52,450 7,704 9,726 (100,707) 15,136
-- -- -- -- -- -- -- -- -- --
- ----------- -------- ----------- ------------ ----------- ------------ ---------- ------------ ----------- -----------
71,723,251 780,030 14,404,749 102,535,644 11,706,637 107,963,810 1,218,608 154,442,210 93,080,888 11,330,975
7,924,364 88,418 1,928,101 11,661,794 1,388,081 12,691,342 127,954 15,888,809 8,807,089 1,342,020
- ----------- -------- ----------- ------------ ----------- ------------ ---------- ------------ ----------- -----------
7,924,364 88,418 1,928,101 11,661,794 1,388,081 12,691,342 127,954 15,888,809 8,807,089 1,342,020
- ----------- -------- ----------- ------------ ----------- ------------ ---------- ------------ ----------- -----------
$63,798,887 $691,612 $12,476,648 $ 90,873,849 $10,318,556 $ 95,272,468 $1,090,654 $138,553,401 $84,273,799 $ 9,988,955
=========== ======== =========== ============ =========== ============ ========== ============ =========== ===========
<CAPTION>
Variable
Insurance
Products
Fund II
- -------------------------
Asset
Manager
Sub-
Account Total
- ---------- --------------
<S> <C>
$9,174,668 $2,070,454,260
271 2,780,390
-- 317,906
- ---------- --------------
9,174,938 2,073,552,557
987,748 194,552,345
- ---------- --------------
987,748 194,552,345
- ---------- --------------
$8,187,191 $1,879,000,212
========== ==============
</TABLE>
See Notes to Financial Statements
119
<PAGE>
New England Variable Life Separate Account of
New England Life Insurance Company
Statement of Operations
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
New England Zenith Fund
------------------------------------------------------------------------------------
Growth
Capital Bond Money Stock Midcap and
Growth Income Market Index Managed Value 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.............. $136,031,595 $4,500,888 $2,243,738 $ 1,665,717 $ 4,920,327 $ 8,522,091 $ 4,438,526
Expense
Mortality and expense
risk charge (Note 3).. 5,675,180 329,452 281,233 574,859 295,717 213,136 321,673
------------ ---------- ---------- ----------- ----------- ------------ -----------
Net investment income
(loss)................ 130,356,415 4,171,436 1,962,505 1,090,858 4,624,610 8,308,955 4,116,853
Net Realized and
Unrealized Gain (Loss)
on Investments
Net unrealized
appreciation
(depreciation) on
investments:
Beginning of period.... 91,366,363 892,059 -- 19,889,059 9,447,437 6,964,381 6,858,665
End of period.......... 215,969,495 1,209,273 -- 39,965,167 13,285,666 (3,807,527) 13,616,695
------------ ---------- ---------- ----------- ----------- ------------ -----------
Net change in
unrealized
appreciation
(depreciation)........ 124,603,132 317,214 -- 20,076,109 3,838,229 (10,771,908) 6,758,031
Net realized gain on
investments........... 5,610,899 1,800 -- 190,803 163,910 236,891 14,655
------------ ---------- ---------- ----------- ----------- ------------ -----------
Net realized and
unrealized gain (loss)
on investments........ 130,214,031 319,014 -- 20,266,912 4,002,139 (10,535,017) 6,772,686
------------ ---------- ---------- ----------- ----------- ------------ -----------
Net Increase (Decrease)
in Net Assets Resulting
from Operations........ $260,570,446 $4,490,449 $1,962,505 $21,357,770 $ 8,626,750 $ (2,226,063) $10,889,538
============ ========== ========== =========== =========== ============ ===========
</TABLE>
See Notes to Financial Statements
120
<PAGE>
<TABLE>
<CAPTION>
Variable Insurance
Products Fund
- --------------------------------------------------------------------------------------- ----------------------------------
International
Small U.S. Equity Magnum 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>
$ 1,148,975 $32,331 $ 607,129 $ 3,598,904 $ 251,292 $ 2,912,129 $ 81,480 $ 8,088,940 $6,093,523 $ 1,064,286
380,727 (2,318) 52,939 452,661 48,632 512,333 (9,440) 902,569 550,070 67,547
- ----------- ------- ---------- ----------- --------- ----------- -------- ----------- ---------- -----------
768,248 34,649 554,190 3,146,243 202,660 2,399,796 90,920 7,186,371 5,543,453 996,739
5,422,058 (1,916) 642,612 5,391,267 (155,005) 10,716,783 (2,256) 32,699,163 11,137,299 964,520
3,516,783 15,209 1,036,991 30,707,168 194,954 20,008,648 (46,594) 39,593,709 14,768,529 (611,552)
- ----------- ------- ---------- ----------- --------- ----------- -------- ----------- ---------- -----------
(1,905,274) 17,125 394,379 25,315,901 349,959 9,291,865 (44,337) 6,894,545 3,631,231 (1,576,072)
20,862 11 6,840 56,142 5,897 22,521 493 561,003 333,272 20,913
- ----------- ------- ---------- ----------- --------- ----------- -------- ----------- ---------- -----------
(1,884,412) 17,136 401,219 25,372,043 355,856 9,314,386 (43,844) 7,455,548 3,964,503 (1,555,159)
- ----------- ------- ---------- ----------- --------- ----------- -------- ----------- ---------- -----------
$(1,116,164) $51,785 $ 955,409 $28,518,286 $ 558,517 $11,714,181 $ 47,076 $14,641,919 $9,507,956 $ (558,420)
=========== ======= ========== =========== ========= =========== ======== =========== ========== ===========
<CAPTION>
Variable
Insurance
Products
Fund II
- -----------------------
Asset
Manager
Sub-
Account Total
- ---------- ------------
<S> <C>
$ 835,511 $187,037,382
50,140 10,697,110
- ---------- ------------
785,371 176,340,272
971,097 203,203,584
1,247,559 390,670,172
- ---------- ------------
276,461 187,466,588
4,137 7,251,049
- ---------- ------------
280,598 194,717,637
- ---------- ------------
$1,065,969 $371,057,909
========== ============
</TABLE>
See Notes to Financial Statements
121
<PAGE>
New England Variable Life Separate Account of
New England Life Insurance Company
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
New England Zenith Fund
--------------------------------------------------------------------------------
Growth
Capital Bond Money Stock Midcap and
Growth Income Market Index Managed Value 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
(loss)................ 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
122
<PAGE>
<TABLE>
<CAPTION>
Variable
Insurance
Variable Insurance Products
Products Fund Fund II
- --------------------------------------------------------------------------------- ------------------------------- ---------
International
Small U.S. Equity Magnum Venture Bond Equity- High Asset
Cap Government Balanced Growth Equity Value Opportunities Income Overseas Income Manager
Sub- Sub- Sub- Sub- Sub- Sub- Sub- Sub- Sub- Sub- Sub-
Account Account Account Account Account Account Account Account Account Account Account
- ---------- ---------- -------- ---------- ------------- ---------- ------------- ----------- ---------- -------- ---------
<S> <C> <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 $528,401
275,141 2,290 50,941 265,599 51,702 276,055 9,400 676,059 447,597 41,502 33,135
- ---------- ------ -------- ---------- --------- ---------- ------- ----------- ---------- -------- --------
6,004,065 6,799 387,489 4,455,451 157,687 1,546,340 34,514 8,196,735 4,986,458 351,793 495,266
3,059,565 (819) 236,625 2,084,389 136,191 2,398,023 (1,153) 16,409,989 9,502,216 362,600 547,647
5,422,058 (1,916) 642,612 5,391,267 (155,006) 10,716,783 (2,256) 32,699,163 11,137,299 964,520 971,097
- ---------- ------ -------- ---------- --------- ---------- ------- ----------- ---------- -------- --------
2,362,493 (1,097) 405,987 3,306,878 (291,197) 8,318,760 (1,103) 16,289,174 1,635,083 601,920 423,450
20,956 1 55,231 75,802 8,303 21,718 201 126,489 67,905 12,234 5,368
- ---------- ------ -------- ---------- --------- ---------- ------- ----------- ---------- -------- --------
2,383,449 (1,096) 461,218 3,382,680 (282,894) 8,340,478 (902) 16,415,663 1,702,988 614,154 428,818
- ---------- ------ -------- ---------- --------- ---------- ------- ----------- ---------- -------- --------
$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 $924,084
========== ====== ======== ========== ========= ========== ======= =========== ========== ======== ========
<CAPTION>
- ------------
Total
- ------------
<S>
$231,072,203
7,755,657
- ------------
223,316,546
194,486,245
203,203,584
- ------------
8,717,339
2,491,649
- ------------
11,208,988
- ------------
$234,525,534
============
</TABLE>
See Notes to Financial Statements
123
<PAGE>
New England Variable Life Separate Account of
New England Life Insurance Company
Statement of Operations
For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
New England Zenith Fund
-------------------------------------------------------------------------------
Capital Bond Money Stock Midcap Growth and
Growth Income Market Index Managed Value 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
124
<PAGE>
<TABLE>
<CAPTION>
Variable
Insurance
Variable Insurance Products
Products Fund Fund II
- ---------------------------------------------------------------------------------- ------------------------------- ---------
International
Small U.S. Equity Magnum Venture Bond Equity- High Asset
Cap Government Balanced Growth Equity Value Opportunities Income Overseas Income Manager
Sub- Sub- Sub- Sub- Sub- Sub- Sub- Sub- Sub- Sub- Sub-
Account Account* Account Account Account Account Account* Account Account Account Account
- ---------- ---------- -------- ---------- ------------- ---------- ------------- ----------- ---------- -------- ---------
<S> <C> <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 $174,907
90,146 28 11,713 104,685 19,385 64,656 40 428,473 325,346 19,551 20,483
- ---------- ----- -------- ---------- -------- ---------- ------- ----------- ---------- -------- --------
1,534,562 674 93,226 (59,822) 51,962 379,356 1,178 2,234,517 839,204 179,912 154,424
768,552 -- 3,769 65,901 24,089 171,931 -- 9,642,454 4,022,725 167,043 269,255
3,059,565 (819) 236,625 2,084,389 136,191 2,398,023 (1,153) 16,409,989 9,502,216 362,600 547,647
- ---------- ----- -------- ---------- -------- ---------- ------- ----------- ---------- -------- --------
2,291,013 (819) 232,856 2,018,488 112,102 2,226,092 (1,153) 6,767,535 5,479,491 195,557 278,392
31,570 -- 2,318 11,723 159 4,907 -- 27,750 44,049 1,942 4,122
- ---------- ----- -------- ---------- -------- ---------- ------- ----------- ---------- -------- --------
2,322,583 (819) 235,174 2,030,211 112,261 2,230,999 (1,153) 6,795,285 5,523,540 197,499 282,514
- ---------- ----- -------- ---------- -------- ---------- ------- ----------- ---------- -------- --------
$3,857,145 $(145) $328,400 $1,970,389 $164,223 $2,610,355 $ 25 $ 9,029,802 $6,362,744 $377,411 $436,938
========== ===== ======== ========== ======== ========== ======= =========== ========== ======== ========
<CAPTION>
- ------------
Total
- ------------
<S>
$ 50,453,549
4,984,819
- ------------
45,468,730
101,153,516
194,486,245
- ------------
93,332,729
1,232,236
- ------------
94,564,965
- ------------
$140,033,695
============
</TABLE>
See Notes to Financial Statements
125
<PAGE>
New England Variable Life Separate Account of
New England Life Insurance Company
Statement of Changes in Net Assets
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
New England Zenith Fund
------------------------------------------------------------------------------------------------------------
Growth
Capital Bond Money Stock Midcap and Small
Growth Income Market Index Managed Value 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).. $ 130,356,415 $ 4,171,436 $ 1,962,505 $ 1,090,858 $ 4,624,610 $ 8,308,955 $ 4,116,853 $ 768,248
Net realized and
unrealized gain
(loss) on
investments.... 130,214,031 319,014 -- 20,266,912 4,002,139 (10,535,017) 6,772,686 (1,884,412)
------------- ----------- ------------- ------------ ----------- ------------ ----------- -----------
Net Increase
(decrease) in
net assets
resulting from
operations..... 260,570,446 4,490,449 1,962,505 21,357,770 8,626,750 (2,226,063) 10,889,538 (1,116,164)
From Policy-
Related
Transactions
Net premiums
transferred
from New
England Life
Insurance
Company
(Note 4)....... 130,346,621 10,522,040 221,378,611 15,997,005 6,508,238 8,067,127 10,034,046 16,979,803
Net transfers
(to) from other
sub-
accounts....... 28,412,166 9,220,311 (149,270,654) 22,094,429 6,317,021 (102,089) 15,004,643 9,499,585
Net transfers to
New England
Life Insurance
Company........ (136,266,249) (7,932,456) (21,844,962) (16,290,249) (6,742,406) (4,094,516) (8,744,105) (9,074,771)
------------- ----------- ------------- ------------ ----------- ------------ ----------- -----------
Net Increase in
net assets
resulting from
policy related
transactions... 22,492,538 11,809,895 50,262,995 21,801,185 6,082,853 3,870,522 16,294,584 17,404,617
------------- ----------- ------------- ------------ ----------- ------------ ----------- -----------
Net increase in
net assets..... 283,062,984 16,300,344 52,225,500 43,158,955 14,709,603 1,644,459 27,184,123 16,288,452
Net Assets, at
beginning of the
period.......... 691,641,608 41,515,700 33,105,424 57,550,836 38,540,384 31,066,603 31,767,670 47,510,435
------------- ----------- ------------- ------------ ----------- ------------ ----------- -----------
Net Assets, at
end of the
period.......... $ 974,704,592 $57,816,044 $ 85,330,924 $100,709,791 $53,249,987 $ 32,711,062 $58,951,793 $63,798,887
============= =========== ============= ============ =========== ============ =========== ===========
</TABLE>
See Notes to Financial Statements
126
<PAGE>
<TABLE>
<CAPTION>
Variable Insurance
Products Fund
- -------------------------------------------------------------------------------- ---------------------------------------
International
U.S. Equity Magnum 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>
$ 34,649 $ 554,190 $ 3,146,243 $ 202,660 $ 2,399,796 $ 90,920 $ 7,186,371 $ 5,543,453 $ 996,739
17,136 401,219 25,372,043 355,856 9,314,386 (43,844) 7,455,548 3,964,503 (1,555,159)
- ---------- ----------- ------------ ----------- ------------ ---------- ------------ ------------ -----------
51,785 955,409 28,518,286 558,517 11,714,181 47,076 14,641,919 9,507,956 (558,420)
-- 3,185,034 18,566,913 3,131,225 24,165,947 -- 26,170,240 17,386,996 2,434,923
590,096 3,794,185 16,305,214 999,735 23,584,994 612,788 8,474,098 342,473 2,823,884
(111,452) (2,333,228) (14,453,624) (1,503,958) (15,609,387) (156,947) (18,064,178) (10,788,946) (1,891,706)
- ---------- ----------- ------------ ----------- ------------ ---------- ------------ ------------ -----------
478,644 4,645,991 20,418,503 2,627,002 32,141,554 455,841 16,580,160 6,940,523 3,367,101
- ---------- ----------- ------------ ----------- ------------ ---------- ------------ ------------ -----------
530,429 5,601,400 48,936,789 3,185,519 43,855,735 502,917 31,222,080 16,448,479 2,808,682
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
- ---------- ----------- ------------ ----------- ------------ ---------- ------------ ------------ -----------
$ 691,612 $12,476,648 $ 90,873,849 $10,318,556 $ 95,272,468 $1,090,654 $138,553,401 $ 84,273,799 $ 9,988,955
========== =========== ============ =========== ============ ========== ============ ============ ===========
<CAPTION>
Variable
Insurance
Products
Fund II
- ------------ ---------------
Asset
Manager
Sub-
Account Total
- ------------ ---------------
<S> <C>
$ 785,371 $ 176,340,272
280,598 194,717,637
- ------------ ---------------
1,065,969 371,057,909
1,626,307 516,501,076
1,297,121 --
(1,251,084) (277,154,223)
- ------------ ---------------
1,672,344 239,346,853
- ------------ ---------------
2,738,313 610,404,762
5,448,878 1,268,595,450
- ------------ ---------------
$ 8,187,191 $1,879,000,212
============ ===============
</TABLE>
See Notes to Financial Statements
127
<PAGE>
New England Variable Life Separate Account of
New England Life Insurance Company
Statement of Changes in Net Assets
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
New England Zenith Fund
-----------------------------------------------------------------------------------------------------------
Capital Bond Money Stock Midcap Small
Growth Income Market Index Managed Value 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 (loss).. $ 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
128
<PAGE>
<TABLE>
<CAPTION>
Variable Insurance
Products Fund
- ------------------------------------------------------------------------------- --------------------------------------
International
U.S. Equity Magnum 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
129
<PAGE>
New England Variable Life Separate Account of
New England Life Insurance Company
Statement of Changes in Net Assets
For the Year Ended December 31, 1996
See Notes to Financial Statements
<TABLE>
<CAPTION>
New England Zenith Fund
--------------------------------------------------------------------------------------------------------
Growth
Capital Bond Money Stock Midcap and Small
Growth Income Market Index Managed Value 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.
130
<PAGE>
<TABLE>
<CAPTION>
Variable
Insurance
Variable Insurance Products
Products Fund Fund II
- ----------------------------------------------------------------------------- -------------------------------------- ---------
International
U.S. Equity Magnum Venture Bond Equity- High Asset
Government Balanced Growth Equity Value Opportunities Income Overseas Income Manager
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>
$ 674 $ 93,226 $ (59,822) $ 51,962 $ 379,356 $ 1,178 $ 2,234,517 $ 839,204 $ 179,912 $ 154,424
(819) 235,174 2,030,211 112,261 2,230,999 (1,153) 6,795,285 5,523,540 197,499 282,514
------- ---------- ----------- ----------- ----------- ------- ------------ ------------ ---------- ----------
(145) 328,400 1,970,389 164,223 2,610,355 25 9,029,802 6,362,744 377,411 436,938
-- 811,932 9,286,073 1,454,605 4,876,053 -- 20,426,731 17,135,189 970,763 1,258,847
46,951 2,383,695 11,496,667 2,908,047 9,510,686 27,190 9,029,810 1,051,463 1,631,762 560,948
(769) (708,829) (6,395,345) (1,242,748) (3,721,564) (447) (13,479,623) (11,522,274) (623,788) (649,631)
------- ---------- ----------- ----------- ----------- ------- ------------ ------------ ---------- ----------
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 1,170,164
------- ---------- ----------- ----------- ----------- ------- ------------ ------------ ---------- ----------
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 1,607,102
-- 418,211 5,712,498 953,848 3,386,440 -- 47,352,852 38,382,219 1,742,493 1,972,993
------- ---------- ----------- ----------- ----------- ------- ------------ ------------ ---------- ----------
$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 $3,580,095
======= ========== =========== =========== =========== ======= ============ ============ ========== ==========
<CAPTION>
- --------------
Total
- --------------
<S>
$ 45,468,730
94,564,965
- --------------
140,033,695
285,719,085
--
(152,002,266)
- --------------
133,716,819
- --------------
273,750,514
612,634,284
- --------------
$ 886,384,798
==============
</TABLE>
See Notes to Financial Statements
131
<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") 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% and .75% 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")
and flexible premium ("Zenith Executive Advantage Plus") 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% and a maximum annual rate of .75%, respectively.
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.
132
<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.*
Goldman Sachs Midcap Value Series TNE Advisers, Inc. Goldman Sachs Asset Management, Inc
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 TNE Advisers, Inc. Morgan Stanley Dean Witter
Equity Investment 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 Dean Witter Investment
Management, Inc. (formerly Morgan Stanley Asset Management Inc.) went into
effect replacing the prior agreement between TNE Advisers, Inc. and Draycott
Partners, Ltd.
Effective May 1, 1998 Goldman Sachs Asset Management, ("Goldman Sachs"),
became the subadvisor of the Loomis Sayles Avanti Growth Series, succeeding
Loomis Sayles & Company, L.P., and the name of the Series was changed to the
"Goldman Sachs Midcap Value Series". Goldman Sachs is a separate operating
division of Goldman, Sachs & Co., a privately-owned global financial services
company.
133
<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, 1998:
<TABLE>
<CAPTION>
Purchases Sales
------------ ------------
<S> <C> <C>
Capital Growth Series $229,923,840 $194,572,879
Back Bay Advisors Money Market Series 303,898,559 250,343,059
Back Bay Advisors Bond Income Series 29,019,450 16,718,466
Back Bay Advisors Managed Series 16,871,874 10,374,817
Westpeak Stock Index Series 52,293,114 27,237,590
Westpeak Growth and Income Series 31,543,693 13,028,848
Goldman Sachs Midcap Value Series 13,255,960 10,518,399
Loomis Sayles Small Cap Series 36,489,723 19,320,276
Loomis Sayles Balanced Series 9,318,701 4,071,999
Morgan Stanley International Magnum Equity Series 7,480,032 4,717,292
Davis Venture Value Series 59,616,224 23,838,504
Alger Equity Growth Series 42,615,754 18,064,237
Salomon Bothers U.S. Government Series 867,216 285,257
Salomon Bothers Strategic Bond Opportunities
Series 1,003,667 429,636
VIP Equity-Income Portfolio 50,932,583 36,386,679
VIP Overseas Portfolio 34,976,709 29,742,167
VIP High Income Portfolio 8,610,053 5,246,052
VIP II Asset Manager Portfolio 4,502,242 2,748,465
</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, and Zenith Executive Advantage Plus, 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.
134
<PAGE>
New England Variable Life Separate Account of
New England Life Insurance Company
Notes to Financial Statements--(Continued)
Fixed Premium ("Zenith Life") Policies
<TABLE>
<CAPTION>
Net Investment Return of the Sub-Accounts
---------------------------------------------------------------------------------------------
1/1/89- 1/1/90- 1/1/91- 1/1/92- 1/1/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 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 12/31/98
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital Growth.......... 30.30% (3.82)% 53.45% (6.38)% 14.57% (7.39)% 37.55% 20.65% 23.05 % 33.63 %
Bond Income............. 11.91% 7.71 % 17.55% 7.80 % 12.22% (3.70)% 20.78% 4.24% 10.50 % 8.66 %
Money Market............ 8.87% 7.81 % 5.84% 3.43 % 2.61% 3.61 % 5.33% 4.76% 4.97 % 4.90 %
<CAPTION>
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- 1/1/98-
Sub-Account 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 12/31/98
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock Index............. 29.70% (4.48)% 29.98% 6.92 % 9.34% 0.76 % 36.44% 22.04% 32.03 % 27.49 %
Managed................. 18.67% 2.85 % 19.75% 6.33 % 10.26% (1.46)% 30.81% 14.62% 26.12 % 19.24 %
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Midcap Value................................................ 14.47% (0.62)% 29.90% 17.20% 16.91 % (5.79)%
Growth and Income........................................... 13.97% (1.55)% 35.99% 17.68% 33.01 % 24.02 %
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Equity-Income............................................... 9.29% 6.69 % 34.62% 13.88% 27.66 % 11.24 %
Overseas.................................................... 14.57% 1.37 % 9.30% 12.82% 11.17 % 12.36 %
<CAPTION>
5/2/94- 1/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Small Cap............................................................ (3.45)% 28.40% 30.22% 24.42 % (2.04)%
<CAPTION>
8/31/94- 1/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High Income.......................................................... (0.58)% 20.18% 13.63% 17.26 % (4.66)%
Asset Manager........................................................ (4.41)% 16.55% 14.20% 20.23 % 14.65 %
<CAPTION>
5/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Equity Growth................................................................. 24.84% 12.78% 25.19 % 47.27 %
Balanced...................................................................... 13.75% 16.50% 15.77 % 8.73 %
International Magnum Equity................................................... 3.85% 6.30% (1.64)% 6.90 %
Venture Value................................................................. 21.64% 25.40% 33.03 % 14.02 %
</TABLE>
135
<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
---------------------------------------------------------------------------------------------
1/1/89- 1/1/90- 1/1/91- 1/1/92- 1/1/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 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 12/31/98
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital Growth.......... 30.17% (3.91)% 53.29% (6.47)% 14.46% (7.38)% 37.41% 20.53% 22.92 % 33.49 %
Bond Income............. 11.79% 7.60 % 17.43% 7.69 % 12.10% (3.80)% 20.66% 4.14% 10.39 % 8.55 %
Money Market............ 8.77% 7.71 % 5.74% 3.33 % 2.51% 3.35 % 5.23% 4.65% 4.87 % 4.79 %
<CAPTION>
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- 1/1/98-
Sub-Account 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 12/31/98
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock Index............. 29.57% (4.58)% 29.85% 6.81 % 9.23% 0.66 % 36.30% 21.91% 31.90 % 27.36 %
Managed................. 18.55% 2.75 % 19.63% 6.22 % 10.15% (1.56)% 30.67% 14.51% 25.99 % 19.12 %
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Midcap Value................................................ 14.39% (0.72)% 29.77% 17.08% 16.80 % (5.88)%
Growth and Income........................................... 13.90% (1.65)% 38.85% 17.56% 32.87 % 23.89 %
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Equity Income............................................... 9.22% 6.59 % 34.49% 13.77% 27.53 % 11.13 %
Overseas.................................................... 14.49% 1.27 % 9.19% 12.70% 11.05 % 12.24 %
<CAPTION>
5/2/94- 1/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Small Cap............................................................ (3.52)% 28.27% 30.09% 24.29 % (2.14)%
<CAPTION>
8/31/94- 1/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High Income.......................................................... (0.61)% 20.06% 13.52% 17.14 % (4.76)%
Asset Manager........................................................ (4.45)% 16.43% 14.09% 20.11 % 14.53 %
<CAPTION>
5/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Equity Growth................................................................. 24.76% 12.66% 25.06 % 47.12 %
Balanced...................................................................... 13.67% 16.39% 15.66 % 8.62 %
International Magnum Equity................................................... 3.79% 6.19% (1.74)% 6.79 %
Venture Value................................................................. 21.56% 25.27% 32.90 % 13.90 %
</TABLE>
136
<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
---------------------------------------------------------------------------------------------
1/1/89- 1/1/90- 1/1/91- 1/1/92- 1/1/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 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 12/31/98
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital Growth.......... 29.98% (4.06)% 53.06% (6.61)% 14.28% (7.62)% 37.21% 20.34% 22.74 % 33.29 %
Bond Income............. 11.63% 7.44 % 17.25% 7.53 % 11.94% (3.94)% 20.47% 3.98% 10.23 % 8.39 %
Money Market............ 8.60% 7.54 % 5.58% 3.18 % 2.36% 3.35 % 5.07% 4.50% 4.71 % 4.63 %
<CAPTION>
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- 1/1/98-
Sub-Account 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 12/31/98
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock Index............. 29.37% (4.72)% 29.65% 6.65 % 9.07% 0.51 % 36.10% 21.73% 31.70 % 27.17 %
Managed................. 18.37% 2.59 % 19.45% 6.06 % 9.99% (1.70)% 30.48% 14.34% 25.81 % 18.94 %
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Midcap Value................................................ 14.28% (0.87)% 29.57% 16.90% 16.62 % (6.03)%
Growth and Income........................................... 13.78% (1.80)% 35.65% 17.38% 32.67 % 23.71 %
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Equity-Income............................................... 9.11% 6.43 % 34.29% 13.59% 27.34 % 10.96 %
Overseas.................................................... 14.38% 1.12 % 9.02% 12.53% 10.89 % 12.08 %
<CAPTION>
5/2/94- 1/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Small Cap............................................................ (3.61)% 28.08% 29.90% 24.11 % (2.28)%
<CAPTION>
8/31/94- 1/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High Income.......................................................... (0.66)% 19.88% 13.35% 16.96 % (4.90)%
Asset Manager........................................................ (4.49)% 16.26% 13.91% 19.93 % 14.36 %
<CAPTION>
5/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Equity Growth................................................................. 24.64% 12.49% 24.88 % 46.90 %
Balanced...................................................................... 13.56% 16.21% 15.48 % 8.46 %
International Magnum Equity................................................... 3.68% 6.03% (1.89)% 6.63 %
Venture Value................................................................. 21.44% 25.08% 32.70 % 13.73 %
</TABLE>
137
<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*
---------------------------------------------------------------------------------------------
1/1/89- 1/1/90- 1/1/91- 1/1/92- 1/1/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 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 12/31/98
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital Growth.......... 29.59% (4.35)% 52.61% (6.90)% 13.94% (7.90)% 36.80% 19.98% 22.37% 32.89 %
Bond Income............. 11.29% 7.11 % 16.90% 7.21 % 11.60% (4.23)% 20.12% 3.67% 9.90% 8.07 %
Money Market............ 8.28% 7.22 % 5.26% 2.87 % 2.05% 3.04 % 4.75% 4.18% 4.39% 4.32 %
<CAPTION>
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- 1/1/98-
Sub-Account 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 12/31/98
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock Index............. 28.99% (5.01)% 29.27% 6.33 % 8.74% 0.21 % 35.69% 21.36% 31.31% 26.79 %
Managed................. 18.02% 2.28 % 19.10% 5.74 % 9.69% (2.00)% 30.09% 13.99% 25.43% 18.58 %
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Midcap Value................................................ 14.05% (1.16)% 29.19% 16.55% 16.27% (6.31)%
Growth and Income........................................... 13.55% (2.09)% 35.25% 17.03% 32.28% 23.34 %
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Equity-Income............................................... 8.89% 6.11 % 33.89% 13.25% 26.96% 10.63 %
Overseas.................................................... 14.15% 0.82 % 8.70% 12.19% 10.56% 11.74 %
<CAPTION>
5/2/94- 1/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Small Cap............................................................ (3.80)% 27.69% 29.50% 23.73% (2.58)%
<CAPTION>
8/31/94- 1/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High Income.......................................................... (0.76)% 19.53% 13.00% 16.61% (5.19)%
Asset Manager........................................................ (4.59)% 15.91% 13.57% 19.57% 14.02 %
<CAPTION>
5/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Equity Growth................................................................. 24.39% 12.15% 24.50 % 46.46 %
Balanced...................................................................... 13.33% 15.86% 15.14 % 8.13 %
International Magnum Equity................................................... 3.48% 5.71% (2.18)% 6.31 %
Venture Value................................................................. 21.20% 24.71% 32.30 % 13.39 %
</TABLE>
* Based on a mortality and expense risk charge at an annual rate of .90%.
Certain Zenith Survivorship Life Policies currently have a mortality and
expense risk charge at an annual rate of .75%.
138
<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
---------------------------------------------------------------------------------------------
1/1/89- 1/1/90- 1/1/91- 1/1/92- 1/1/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 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 12/31/98
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital Growth.......... 31.88% (5.73)% 52.83% (6.75)% 14.11% (7.76)% 37.00% 20.16% 22.56 % 33.09 %
Bond Income............. 11.46% 7.28 % 17.08% 7.37 % 11.77% (4.08)% 20.29% 3.82% 10.06 % 8.23 %
Money Market............ 8.44% 7.38 % 5.42% 3.02 % 2.20% 3.20 % 4.91% 4.34% 4.55 % 4.48 %
<CAPTION>
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- 1/1/98-
Sub-Account 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 12/31/98
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock Index............. 29.18% (4.86)% 29.46% 6.49 % 8.90% 0.36 % 35.90% 21.55% 31.51 % 26.98 %
Managed................. 18.20% 2.44 % 19.28% 5.90 % 9.82% (1.85)% 30.28% 14.16% 25.62 % 18.76 %
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Midcap Value................................................ 14.16% (1.01)% 29.38% 16.72% 16.45 % (6.17)%
Growth and Income........................................... 13.67% (1.94)% 35.45% 17.21% 32.47 % 23.52 %
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Equity-Income............................................... 9.00% 6.27 % 34.09% 13.42% 27.15 % 10.79 %
Overseas.................................................... 14.26% 0.97 % 8.86% 12.36% 10.72 % 11.91 %
<CAPTION>
5/2/94- 1/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Small Cap............................................................ (3.71)% 27.88% 29.70% 23.92 % (2.43)%
<CAPTION>
8/31/94- 1/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High Income.......................................................... (0.71)% 19.71% 13.17% 16.79 % (5.04)%
Asset Manager........................................................ (4.54)% 16.08% 13.74% 19.75 % 14.19 %
<CAPTION>
5/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Equity Growth................................................................. 24.51% 12.32% 24.69 % 46.68 %
Balanced...................................................................... 13.44% 16.03% 15.31 % 8.29 %
International Magnum Equity................................................... 3.58% 5.87% (2.04)% 6.47 %
Venture Value................................................................. 21.32% 24.89% 32.50 % 13.56 %
</TABLE>
139
<PAGE>
New England Variable Life Separate Account of
New England Life Insurance Company
Notes to Financial Statements--(Continued)
Flexible Premium ("Zenith Executive Advantage Plus") Policies
<TABLE>
<CAPTION>
Net Investment Return of the Sub-Accounts
----------------------------------------------------------------------------------------------
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- 1/1/98-
Sub-Account 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 12/31/98
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital Growth.......... 30.76 % (3.48)% 53.98% (6.05)% 14.97% (7.07)% 38.03% 21.07% 23.48 % 34.09 %
Bond Income............. 12.30 % 8.09 % 17.96% 8.18 % 12.61% (3.36)% 21.20% 4.61% 10.89 % 9.04 %
Money Market............ 9.25 % 8.19 % 6.21% 3.80 % 2.97% 3.97 % 5.70% 5.13% 5.34 % 5.26 %
<CAPTION>
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- 1/1/98-
Sub-Account 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 12/31/98
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock Index............. 30.15 % (4.14)% 30.43% 7.30 % 9.72% 1.12 % 36.92% 22.47% 32.50 % 27.93 %
Managed................. 19.08 % 3.21 % 20.17% 6.70 % 10.65% (1.11)% 31.26% 15.03% 26.56 % 19.65 %
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Midcap Value................................................ 14.74% (0.27)% 30.35% 17.61% 17.32 % (5.46)%
Growth and Income........................................... 14.24% (1.21)% 36.47% 18.10% 33.47 % 24.45 %
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Equity-Income............................................... 9.55% 6.93 % 35.90% 13.75% 28.11 % 11.63 %
Overseas.................................................... 14.84% 1.21 % 11.02% 12.43% 11.56 % 12.75 %
<CAPTION>
5/2/94- 1/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Small Cap............................................................ (3.23)% 28.84% 30.68% 24.85 % (1.69)%
<CAPTION>
8/31/94- 1/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High Income.......................................................... (.37)% 20.79% 13.75% 17.67 % (4.33)%
Asset Manager........................................................ (4.65)% 17.68% 14.31% 20.65 % 15.05 %
<CAPTION>
5/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Equity Growth................................................................. 25.13% 13.17% 25.63 % 47.78 %
Balanced...................................................................... 14.01% 16.91% 16.18 % 9.11 %
International Magnum Equity................................................... 4.01% 6.67% (1.30)% 7.27 %
Venture Value................................................................. 21.92% 25.84% 33.50 % 14.41 %
</TABLE>
140
<PAGE>
New England Variable Life Separate Account of
New England Life Insurance Company
Notes to Financial Statements--(Continued)
Modified Single Premium ("American Gateway") Policies
<TABLE>
<CAPTION>
Net Investment Return of the Sub-Accounts
--------------------------------------------------------------------------------------------
1/1/89- 1/1/90- 1/1/91- 1/1/92- 1/1/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 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 12/31/98
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Bond Income............. 12.30% 8.09 % 17.96% 8.18% 12.61% (3.36)% 21.20% 4.61% 10.89 % 9.04 %
Money Market............ 9.25% 8.19 % 6.21% 3.80% 2.97% 3.97 % 5.70% 5.13% 5.34 % 5.26 %
<CAPTION>
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- 1/1/98-
Sub-Account 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 12/31/98
- ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock Index............. 30.15% (4.14)% 30.43% 7.30% 9.72% 1.12 % 36.92% 22.47% 32.50 % 27.93 %
Managed................. 19.08% 3.21 % 20.17% 6.70% 10.65% (1.11)% 31.26% 15.03% 26.56 % 19.65 %
<CAPTION>
4/30/93- 1/1/94- 1/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Midcap Value................................................ 14.74% (0.27)% 30.35% 17.61% 17.32 % (5.46)%
Growth and Income........................................... 14.24% (1.21)% 36.47% 18.10% 33.47 % 24.45 %
<CAPTION>
5/2/94- 1/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Small Cap............................................................ (3.23)% 28.84% 30.68% 24.85 % (1.69)%
<CAPTION>
5/1/95- 1/1/96- 1/1/97- 1/1/98-
Sub-Account 12/31/95 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Equity Growth................................................................. 25.13% 13.17% 25.63 % 47.78 %
Balanced...................................................................... 14.01% 16.91% 16.18 % 9.11 %
International Magnum Equity................................................... 4.01% 6.67% (1.30)% 7.27 %
Venture Value................................................................. 21.92% 25.84% 33.50 % 14.41 %
<CAPTION>
6/28/96- 1/1/97- 1/1/98-
Sub-Account 12/31/96 12/31/97 12/31/98
- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government........................................................................ 4.55% 8.47 % 7.61 %
Strategic Bond Opportunities........................................................... 8.46% 11.07 % 2.04 %
</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.
141
VARIABLE INSURANCE PRODUCTS
FUND: OVERSEAS PORTFOLIO
ANNUAL REPORT
DECEMBER 31, 1998
(2_FIDELITY_LOGOS)
CONTENTS
MARKET ENVIRONMENT 3 A review of what happened in
world markets during the
past 12 months.
PERFORMANCE AND INVESTMENT 4 How the fund has done over
SUMMARY time, and an overview of the
fund's investments at the
end of the period.
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 18 The auditors' opinion.
ACCOUNTANTS
DISTRIBUTIONS 19
PROXY VOTING RESULTS 20
Third party marks appearing herein are the property of their
respective owners.
All other marks appearing herein are registered or unregistered
trademarks or service marks of FMR Corp. or an affiliated company.
This report is printed on recycled paper using soy-based inks.
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
Demonstrating erratic mood swings throughout the period, the sometimes
gloomy, sometimes exuberant, oftentimes volatile worldwide stock and
bond markets in 1998 will long be remembered for their turbulent
behavior. When all was said and done, the U.S. and European stock
markets posted impressive returns for the year. Most U.S. bond markets
experienced positive - albeit moderate - performance, with U.S.
Treasuries ending the year as the overall front-runner. Economic and
currency turmoil continued to plague stock and bond performance in
Asia and, in particular, emerging markets.
U.S. STOCK MARKETS
The Standard & Poor's 500 Index - a broad measure of U.S. stock market
performance - rose 28.58% for the 12 months that ended December 31,
1998, well above the index's long-term average annual return of about
12%. For the first time in its history, the Dow Jones Industrial
Average - an index of 30 blue-chip stocks - posted double-digit
percentage gains in four consecutive years, thanks to an 18.07%
increase for the year. Large-cap stocks - particularly in the
technology sector - led the U.S. equity market's charge, as once again
investors preferred the liquidity and the perceived safety of owning
what they know. Small-cap stocks - in comparison - took a beating. The
Russell 2000 Index - a popular measure of small stock performance -
fell -2.55% for the year.
Throughout the period, the U.S. enjoyed a strong economy. Unemployment
averaged 4.5% for the year, the lowest since 1969 and the lowest
peacetime level in 41 years. Inflation levels also were low, while
interest-rates were stable. In comparison to the economy's relative
tranquility, the U.S. stock markets were fluctuating wildly. To
illustrate, the Dow typically had fewer than five swings of 5% in each
year since 1946. In 1998 alone, the Dow experienced 10 such swings.
Much of these gyrations were due to fears about Asia's economic woes,
Russia's currency devaluation and loan defaults, and the subsequent
consequences on emerging markets. On August 31, the Dow plunged 512.61
points - a loss that erased all previous gains for the year to that
point. Faced with global economic chaos, investors began fleeing the
equity markets in droves, searching for safer, less volatile havens,
particularly U.S. Treasuries. To address the lack of confidence in
domestic and global equity markets, the U.S. Federal Reserve Board
stepped in with three separate 0.25% interest-rate cuts during the
fall. Those cuts helped boost confidence in the U.S. economy, and
stocks began to quickly ascend to their former lofty levels,
culminating in a new Dow record of 9374.27 on November 23, 1998.
On a sector-by-sector basis, technology stocks reigned supreme in
1998, thanks in large part to the skyrocketing Internet industry. For
the year, nine of the top 10 best-performing stocks in the S&P 500
were technology stocks. The health care sector was another big winner.
Pharmaceuticals helped drive the strong performance of the health care
industry, as a slew of new products was rushed to the market sooner
than normal thanks to streamlined approval regulations.
Natural resources, on the other hand, suffered tremendously.
Overproduction and poor demand caused oil's price per barrel to plunge
considerably. Gold prices also were down in 1998. The financial sector
- - a top performer for several years - found 1998 to be a challenge.
The financial crises overseas and credit concerns contributed to the
poor showing of many brokerage and investment management firms.
FOREIGN STOCK MARKETS
Foreign stock markets posted mixed results in 1998. The Morgan Stanley
Capital International (MSCI) EAFE Index - which measures stock
performance in Europe, Australasia, and the Far East - returned 20.27%
in 1998. Europe posted the most consistently strong equity markets
when compared to other regions, with the MSCI Europe Index up 28.87%
for the year. The much-maligned Japanese stock market ended the year
on a positive note, thanks in part to long-awaited government
intercession on the ailing banking sector's behalf. For the year, the
Tokyo Stock Exchange Index (TOPIX) was up 7.76%. 1998 proved to be
disastrous for emerging markets. The MSCI Emerging Markets Free Index
suffered a -25.34% loss during the period, as the Asian crisis and
Russia's currency devaluation and loan defaults played havoc with
Latin America, Brazil, Thailand and other emerging-market nations.
U.S. BOND MARKETS
In a year as volatile as 1998, it's not surprising that the
performance of the U.S bond market was mostly positive. Still, most of
the major bond indexes trailed their returns of 1997, as investors
continued to seek out the high returns found in the equity markets.
For the year, the Lehman Brothers Aggregate Bond Index - a broad
measure of the performance of the U.S. taxable bond market - posted a
total return of 8.69%. The Lehman Brothers Corporate Bond Index
returned 8.57% in 1998. General U.S. Treasury funds were the safe
haven of choice in 1998, benefiting from the flight to safety as
investors worldwide reacted to global economic concerns. As a result,
the yield on the benchmark 30-year Treasury fell to its lowest levels
in three decades, tumbling to 5.09% at the end of the period compared
to 5.92% at the start of the year.
FOREIGN BOND MARKETS
Typically, continued low inflation and economic growth in the U.S.
would help provide a positive backdrop for U.S.-based bonds relative
to most foreign bonds. But there was nothing typical about 1998. The
Salomon Brothers World Government Bond Index - a measure of government
bond market performance in developed nations - returned an impressive
15.30% for the 12 months that ended December 31, 1998. Many European
nations - particularly France, Italy and Spain - boasted strong
performance that helped drive the index's overall return. Not all was
rosy in the international bond market, however. In stark contrast to
the developed world, the often-volatile emerging debt markets
experienced a particularly difficult year, illustrated by the J.P.
Morgan Emerging Markets Bond Index return of -11.04% during the
period. Once again, the impact of financial and economic woes in Asia
and Russia was the primary contributor to the poor performance of
emerging markets.
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). If Fidelity had not reimbursed certain fund
expenses, the fund's past 10 year total return would have been lower.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
1998
VIP: OVERSEAS - "INITIAL CLASS" 12.81% 9.71% 10.09%
MSCI EAFE 20.27% 9.29% 5.59%
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.
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. 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.
UNDERSTANDING PERFORMANCE
Many markets around the globe offer the
potential for significant growth over time;
however, investing in foreign markets means
assuming greater risks than investing in the
United States. Factors like changes in a country's
financial markets, its local political and
economic climate, and the fluctuating value of
its currency create these risks. For these reasons
an international fund's performance may be
more volatile than a fund that invests exclusively
in the United States.
(checkmark)
$10,000 OVER 10 YEARS
VIP EQUITY-INCOME S&P 500
00150 SP001
1988/12/31 10000.00 10000.00
1989/01/31 10617.62 10732.00
1989/02/28 10563.12 10464.77
1989/03/31 10791.92 10708.60
1989/04/30 11208.42 11264.38
1989/05/31 11541.62 11720.59
1989/06/30 11549.52 11653.78
1989/07/31 12222.85 12706.12
1989/08/31 12419.24 12955.15
1989/09/30 12279.62 12902.04
1989/10/31 11571.18 12602.71
1989/11/30 11637.30 12859.81
1989/12/31 11734.42 13168.44
1990/01/31 10941.94 12284.84
1990/02/28 11006.78 12443.31
1990/03/31 11024.93 12773.06
1990/04/30 10642.68 12453.74
1990/05/31 11346.83 13667.97
1990/06/30 11233.85 13575.03
1990/07/31 10959.11 13531.59
1990/08/31 10084.01 12308.34
1990/09/30 9301.77 11708.92
1990/10/31 9064.59 11658.57
1990/11/30 9714.27 12411.72
1990/12/31 9940.30 12758.00
1991/01/31 10473.37 13314.25
1991/02/28 11194.59 14266.22
1991/03/31 11426.82 14611.46
1991/04/30 11480.21 14646.53
1991/05/31 12110.29 15279.26
1991/06/30 11615.12 14579.47
1991/07/31 12273.60 15258.87
1991/08/31 12532.67 15620.51
1991/09/30 12446.65 15359.65
1991/10/31 12653.91 15565.47
1991/11/30 12108.49 14938.18
1991/12/31 13065.38 16647.11
1992/01/31 13241.79 16337.47
1992/02/29 13671.79 16549.86
1992/03/31 13504.25 16227.13
1992/04/30 13927.31 16704.21
1992/05/31 14038.64 16786.06
1992/06/30 13915.73 16535.95
1992/07/31 14342.18 17212.27
1992/08/31 14027.95 16859.42
1992/09/30 14173.57 17058.36
1992/10/31 14343.25 17118.06
1992/11/30 14863.59 17701.79
1992/12/31 15271.74 17919.52
1993/01/31 15727.62 18070.05
1993/02/28 16080.92 18315.80
1993/03/31 16560.14 18702.26
1993/04/30 16491.28 18249.67
1993/05/31 16789.67 18738.76
1993/06/30 16987.15 18793.10
1993/07/31 17218.27 18717.93
1993/08/31 17876.95 19427.34
1993/09/30 17808.61 19277.75
1993/10/31 17971.46 19676.80
1993/11/30 17657.39 19489.87
1993/12/31 18065.54 19725.69
1994/01/31 18861.17 20396.37
1994/02/28 18375.46 19843.63
1994/03/31 17606.73 18978.44
1994/04/30 18213.43 19221.37
1994/05/31 18386.78 19536.60
1994/06/30 18273.18 19057.95
1994/07/31 18883.53 19683.05
1994/08/31 19855.11 20490.06
1994/09/30 19529.83 19988.05
1994/10/31 19930.70 20437.78
1994/11/30 19279.29 19693.44
1994/12/31 19342.00 19985.49
1995/01/31 19644.41 20503.72
1995/02/28 20393.47 21302.75
1995/03/31 21097.64 21931.39
1995/04/30 21684.43 22577.27
1995/05/31 22337.90 23479.68
1995/06/30 22658.84 24025.12
1995/07/31 23530.85 24821.79
1995/08/31 23825.99 24884.09
1995/09/30 24616.99 25934.20
1995/10/31 24333.73 25841.62
1995/11/30 25385.85 26976.06
1995/12/31 26129.58 27495.62
1996/01/31 26888.92 28431.57
1996/02/29 26979.24 28695.13
1996/03/31 27263.23 28971.47
1996/04/30 27618.22 29398.51
1996/05/31 27916.41 30156.69
1996/06/30 27660.82 30271.59
1996/07/31 26311.86 28934.19
1996/08/31 26851.44 29544.41
1996/09/30 28001.61 31207.17
1996/10/31 28456.00 32067.87
1996/11/30 30358.74 34491.88
1996/12/31 29861.76 33808.59
1997/01/31 31026.12 35920.96
1997/02/28 31369.83 36202.58
1997/03/31 30203.90 34715.01
1997/04/30 31275.30 36787.50
1997/05/31 33213.26 39027.12
1997/06/30 34757.34 40775.54
1997/07/31 37294.02 44020.05
1997/08/31 35545.13 41554.04
1997/09/30 37498.85 43829.96
1997/10/31 36128.09 42366.04
1997/11/30 37451.58 44327.16
1997/12/31 38255.13 45088.26
1998/01/31 38160.59 45586.93
1998/02/28 40620.05 48874.66
1998/03/31 42501.54 51377.53
1998/04/30 42501.54 51894.39
1998/05/31 41812.78 51002.33
1998/06/30 42283.15 53074.04
1998/07/31 41241.61 52508.80
1998/08/31 34941.98 44917.08
1998/09/30 36991.46 47794.47
1998/10/31 39729.70 51682.07
1998/11/30 41409.60 54814.52
1998/12/31 42703.13 57972.94
IMATRL PRASUN SHR__CHT 19981231 19990111 121246 R00000000000123
$10,000 OVER 10 YEARS: Let's say hypothetically that $10,000 was
invested in Variable Insurance Products Fund: Overseas Portfolio on
December 31, 1988. As the chart shows, by December 31, 1998, the value
of the investment would have grown to $26,141 - a 161.41% 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
$17,224 over the same period - a 72.24% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
Novartis AG (Reg.) 1.7
(Switzerland)
Amoco Corp. (United States of 1.7
America)
Elf Aquitaine (France) 1.5
Glaxo Wellcome PLC (United 1.4
Kingdom)
SmithKline Beecham PLC 1.4
(United Kingdom)
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
FINANCE 21.7
UTILITIES 13.4
HEALTH 9.4
ENERGY 7.4
NONDURABLES 5.2
TOP FIVE COUNTRIES AS OF DECEMBER 31, 1998
(EXCLUDING CASH EQUIVALENTS) % OF FUND'S INVESTMENTS
United Kingdom 17.9
France 14.4
Japan 14.1
Germany 8.3
Netherlands 7.0
TOP COUNTRIES ARE BASED ON THE LOCATION OF THE ISSUER OF EACH
SECURITY, INDICATING WHERE THE FUND IS EXPOSED TO POLITICAL AND CREDIT
RISKS. PERCENTAGES ARE ADJUSTED FOR THE EFFECT OF OPEN FUTURES
CONTRACTS, IF APPLICABLE.
VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with
Richard Mace,
Portfolio Manager
of Overseas Portfolio
Q. HOW DID THE FUND PERFORM, RICK?
A. For the 12 months that ended December 31, 1998, the fund's return
trailed the 20.27% return of the Morgan Stanley Capital International
EAFE Index. The EAFE index tracks the performance of stocks in Europe,
Australasia and the Far East.
Q. WHY DID THE FUND UNDERPERFORM THE INDEX?
A. A major reason was the fund's exposure both to investments in
emerging-market countries as well as to companies whose businesses
were negatively affected by emerging-market disruptions. The fund's
exposure to emerging-market securities averaged slightly less than
3.5% of the fund's investments during the period, but several of the
fund's commodities and banking-related positions performed weakly.
Declining demand led to lower commodity prices in general, while banks
reported an increase in problematic loans stemming from stagnant
economic growth. Commodity holdings that were hurt during the period
included energy-related stocks Elf Aquitaine, based in France, as well
as Brazil-based Petrobras and Royal Dutch Petroleum, which is based in
the Netherlands. Banking positions that were negatively affected
included Mexican holdings Grupo Financiero Bancomer and BANACCI.
Q. YOU INCREASED THE FUND'S EXPOSURE TO UTILITIES STOCKS DURING THE
PERIOD. WHAT WAS YOUR APPEAL?
A. The utilities sector - particularly the telephone utility segment -
provided a number of opportunities over the past year. Companies have
had to cope with a rapidly changing competitive environment as
industry deregulation opened up new opportunities for expansion into
new markets. I found a number of telecommunications companies in
Europe and Japan that I felt were attractively valued, particularly
among cellular providers. These included United Kingdom-based Vodafone
- - which the fund has had a stake in for some time - Germany's
Mannesmann and Spain's Telefonica. Each of these positions contributed
positively to the fund's performance.
Q. WHICH OTHER STOCKS PERFORMED WELL? WHICH PROVED DISAPPOINTING?
A. European business services providers such as Britain's Rentokil and
Securicor got a boost from improved business conditions, as did
computer systems and software providers such as France's Cap Gemini
and Atos, and Denmark's International Service Systems. In terms of
disappointments, paper stocks were another commodities area hit hard
by falling prices. The fund's positions in Canadian paper companies
Domtar and St. Laurent Paperboard, and Ireland's Jefferson Smurfit
Group, for example, were notable detractors.
Q. SHAREHOLDERS MAY NOTICE THAT THE FUND HOLDS SEVERAL
POSITIONS IN FUTURES CONTRACTS. WHAT ROLE DO THESE INVESTMENTS PLAY IN
THE PORTFOLIO?
A. While there are many different uses for futures contracts, I use
them in the fund to be as fully invested in equities as possible.
During periods of inconsistent cash flows, volatile financial markets
or if the fund experiences a temporary cash buildup due to my selling
of a few stocks, the use of futures can provide a low-cost, liquid way
for the fund to remain substantially invested in a diversified group
of stocks.
Q. WHAT'S YOUR OUTLOOK?
A. I'm optimistic that Europe's economies will continue to improve. As
the latter months of this past period proved, though, corporate
earnings must be watched carefully and a determination must be made as
to whether those earnings support prevailing valuations. If earnings
disappoint, more stock market corrections could become reality. It's
becoming an old story, but as far as the situation in Japan goes, I'll
continue to look for signs of economic improvement. Towards the end of
the period, we began to see Japanese companies adopt a more
shareholder-friendly focus. Lastly, the emerging markets still appear
to be in turmoil at this point. Continuing economic and currency
concerns, combined with social unrest, provide a less-than-promising
outlook for a fast recovery. Regardless, I'll keep an eye on a number
of companies that have shown valuation improvements over the past few
months.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO
MANAGER ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON
THE COVER. THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME
BASED ON MARKET AND OTHER CONDITIONS.
FUND FACTS
GOAL: to increase the value of the fund's shares by
investing mainly in stocks in Europe, the Far East
and the Pacific Basin
START DATE: January 28, 1987
SIZE: as of December 31, 1998, more than
$2.1 billion
MANAGER: Richard Mace, since 1996;
joined Fidelity in 1987
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO
INVESTMENTS DECEMBER 31, 1998
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 83.8%
SHARES VALUE (NOTE 1)
ARGENTINA - 0.0%
Bansud SA Class B (a) 191,800 $ 823,592
AUSTRALIA - 2.6%
AMP Ltd. 222,400 2,816,349
Australia & New Zealand 1,186,142 7,759,148
Banking Group Ltd.
Brambles Industries Ltd. 50,600 1,231,952
Broken Hill Proprietary Co. 373,254 2,747,761
Ltd. (The)
Cable & Wireless Optus Ltd. 1,277,200 2,683,238
(a)
Coles Myer Ltd. 752,726 3,941,932
Commonwealth Bank of 363,400 5,155,678
Australia (e)
CSR Ltd. 248,800 608,036
David Jones Ltd. 726,300 800,746
Fosters Brewing Group Ltd. 930,400 2,518,825
National Australia Bank Ltd. 411,700 6,203,290
News Corp. Ltd. 504,482 3,330,969
News Corp. Ltd. ADR 144,300 3,814,931
News Corp. Ltd. sponsored ADR 44,200 1,091,188
(ltd. vtg.)
Rio Tinto Ltd. 235,600 2,793,023
Smith (Howard) Ltd. 44,100 291,613
WMC Ltd. 1,840,896 5,547,540
Woodside Petroleum Ltd. 399,400 1,785,817
55,122,036
BELGIUM - 0.2%
Fortis AG 14,300 5,173,857
BRAZIL - 0.7%
Centrais Electricas 55,249,000 1,060,854
Brasileiras SA
Compania Energertica Minas 71,470,014 1,360,489
Gerais
Embratel Participacoes SA ADR 85,700 1,194,444
Tele Centro Sul Participacoes 21,300 890,606
SA ADR
Tele Norte Leste 64,300 799,731
Participacoes SA ADR
Telebras sponsored ADR 136,700 9,936,381
PFD-Holdr
15,242,505
CANADA - 0.8%
BCE, Inc. 268,800 10,160,131
Canadian Hunter Exploration 99,675 651,258
Ltd. (a)
Canadian Natural Resources 188,100 2,826,723
Ltd. (a)
Nexfor, Inc. 173,833 687,154
Noranda, Inc. 398,700 3,972,672
18,297,938
DENMARK - 0.6%
Den Danske Bank Group AS 30,400 4,067,287
International Service Systems 35,700 2,312,777
AS Class B
Unidanmark AS Class A 71,200 6,406,384
12,786,448
FINLAND - 2.1%
Merita Ltd. Series A 144,200 910,627
OY Nokia AB:
Series A 214,500 25,833,844
sponsored ADR 1,000 120,438
SHARES VALUE (NOTE 1)
Sampo Insurance Co. Ltd. 159,900 $ 6,068,043
Sonera Group PLC (a)(e) 74,500 1,314,977
Stora Enso Oyj 315,900 2,825,099
Teito Corp. Class B 46,900 2,087,940
UPM-Kymmene Corp. 200,800 5,592,053
44,753,021
FRANCE - 13.9%
Accor SA 38,100 8,247,417
Alcatel Alsthom Compagnie 141,250 17,258,985
Generale d'Electricite SA
(RFD)
Alcatel Alsthom Compagnie 1,500 36,656
Generale d'Electricite SA
sponsored ADR
Atos SA (a) 17,900 4,278,259
Axa SA 136,726 19,812,704
Banque Nationale de Paris 200,800 16,531,716
Cap Gemini SA 55,600 8,922,259
Castorama Dubois 22,900 5,223,400
Investissements SA
Coflexip SA sponsored ADR 83,400 2,679,225
Compagnie de St. Gobain 25,900 3,655,816
Compagnie Financiere de 42,800 3,718,943
Paribas Class A (Reg.)
Credit Commercial de France 35,000 3,249,698
Elf Aquitaine 292,937 33,175,116
Elf Aquitaine SA sponsored ADR 1,000 56,625
France Telecom SA 75,000 5,957,333
Groupe Danone 47,700 13,653,562
Lafarge SA 29,821 2,832,855
Lagardere S.C.A. (Reg.) 117,500 4,992,397
LVMH Moet Hennessy Louis 6,300 1,246,532
Vuitton
Michelin SA (Compagnie 76,019 3,039,536
Generale des Etablissements)
Class B
Pechiney SA Class A 78,096 2,549,760
Peugeot SA 12,400 1,918,869
Pinault Printemps SA 17,000 3,248,088
Renault SA 113,000 5,074,109
Rhone-Poulenc SA:
Class A 236,972 11,907,841
sponsored ADR Class A 1,400 70,350
Sanofi SA 66,242 10,902,570
Scor SA 115,100 7,608,471
Seita 9,900 619,885
Societe Generale, France 124,300 20,124,603
Suez Lyonnaise des Eaux 59,700 12,260,942
Television Francaise 1 SA 20,500 3,649,090
(T.F.1)
Total SA:
Class B 262,554 26,124,122
sponsored ADR 1,000 49,750
Unibail 7,300 1,064,359
Union Assurances Federales SA 53,399 7,088,342
Valeo SA 43,600 3,435,116
Vivendi SA 93,100 24,150,454
300,415,755
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
GERMANY - 6.7%
Adidas-Salomon AG 8,600 $ 960,980
Allianz AG (Reg.) 38,800 14,428,644
BASF AG 258,200 9,849,929
Bayer AG 182,200 7,677,455
Bayerische Hypo-und 139,600 10,898,453
Vereinsbank AG
Bayerische Motoren Werke 1,400 1,058,905
(BMW) AG
BHF Bank AG 79,600 3,204,945
Continental Gummi-Werke AG 36,600 1,000,451
DaimlerChrysler AG (a) 211,811 20,347,094
Deutsche Lufthansa AG (Reg.) 214,600 4,748,261
Deutsche Telekom AG 513,600 16,933,326
Hoechst AG 120,500 4,929,891
Holzmann (Phillip) AG (a) 2,100 334,325
Mannesmann AG 198,700 23,038,719
Munich Reinsurance AG (Reg.) 3,100 1,501,066
RWE AG 101,200 5,623,742
Schering AG 20,300 2,556,174
Siemens AG 82,500 5,335,451
Veba AG 71,900 4,319,054
Viag AG 11,800 7,018,113
145,764,978
GREECE - 0.1%
Panafon Hellenic Telecom Co. 63,900 1,709,775
SA (a)(e)
HONG KONG - 0.1%
Johnson Electric Holdings 1,080,000 2,774,199
Ltd.
Sun Hung Kai Properties Ltd. 1,530 11,158
2,785,357
IRELAND - 1.3%
Bank of Ireland, Inc. 514,319 11,205,874
CRH PLC 162,900 2,812,729
Elan Corp. PLC ADR (a) 93,600 6,511,050
Irish Life PLC 437,003 4,106,390
Smurfit (Jefferson) Group PLC 1,659,000 2,963,306
27,599,349
ITALY - 3.0%
Assicurazioni Generali Spa 471,300 19,689,363
Banca Commerciale Italiana Spa 585,500 4,060,286
Banca di Roma (a) 2,556,050 4,331,565
Eni Spa sponsored ADR 720,900 4,734,752
Finmeccanica Spa (a) 1,856,900 1,899,974
San Paolo-IMI Spa 631,300 11,167,573
Telecom Italia Mobile Spa 978,100 7,226,407
Telecom Italia Spa 214,410 1,826,337
Unicredito Italiano Spa 1,489,700 8,803,709
Unione Immobiliare Spa (a) 961,400 501,414
64,241,380
JAPAN - 12.2%
Acom Co. Ltd. 103,700 6,647,788
SHARES VALUE (NOTE 1)
Advantest Corp. 99,800 $ 6,309,651
Aeon Credit Service Ltd. 21,000 1,446,358
Aiful Corp. (e) 54,400 3,295,223
Bank of Tokyo-Mitsubishi Ltd. 103,000 1,064,106
Banyu Pharmaceutical Co. Ltd. 125,000 2,317,881
Bridgestone Corp. 90,000 2,038,411
Canon, Inc. 224,000 4,816,000
Daiwa House Industry Co. Ltd. 190,000 2,018,278
DDI Corp. 1,974 7,320,795
Fuji Bank Ltd. 566,000 2,079,082
Fuji Heavy Industries Ltd. 1,244,000 6,206,269
Fuji Photo Film Co. Ltd. 274,000 10,161,589
Hitachi Maxell Ltd. 166,000 2,638,411
Honda Motor Co. Ltd. 441,000 14,446,887
Hoya Corp. 51,000 2,476,821
Ito-Yokado Co. Ltd. 176,000 12,277,263
Kao Corp. 242,000 5,449,007
Matsushita Electric 445,000 7,765,250
Industrial Co. Ltd.
Minebea Co. Ltd. 449,000 5,130,296
Minolta Co. Ltd. 871,000 4,283,859
Mitsubishi Electric Corp. 1,456,000 4,564,062
Mitsubishi Estate Co. Ltd. 646,000 5,778,349
Mitsubishi Trust & Banking 335,000 2,150,508
Corp.
Mitsui Fudosan Co. Ltd. 288,000 2,174,305
NGK Insulators Ltd. 159,000 2,045,589
Nichicon Corp. 87,000 1,083,179
Nikko Securities Co. Ltd. 497,000 1,382,384
Nippon Telegraph & Telephone 440 3,387,903
Corp.
Nomura Securities Co. Ltd. 916,000 7,966,976
NTT Mobile Communication 103 4,229,139
Network, Inc. (a)
NTT Mobile Communication 260 10,675,497
Network, Inc. (a)(e)
Omron Corp. 715,000 9,773,245
Orix Corp. (a) 129,800 9,673,395
Paris Miki, Inc. 8,900 204,327
Sankyo Co. Ltd. 42,000 916,026
Secom Ltd. 45,000 3,719,205
Sekisui Chemical Co. Ltd. 5,000 33,554
Sekisui House Ltd. 279,000 2,943,974
Sharp Corp. 704,000 6,334,446
Shimano, Inc. 43,000 1,106,799
Shin-Etsu Chemical Co. Ltd. 141,000 3,386,490
Shohkoh Fund & Co. Ltd. 6,600 2,121,324
Sony Corp. 88,500 6,349,875
Sumitomo Realty & Development 474,000 1,536,053
Co. Ltd.
Takeda Chemical Industries 674,000 25,888,742
Ltd.
Takefuji Corp. 73,100 5,325,166
Takefuji Corp. (e) 53,400 3,890,066
Terumo Corp. 189,000 4,439,205
THK Co. Ltd. 369,200 4,140,256
Tokyo Electron Ltd. 164,000 6,212,450
Toyota Motor Corp. 94,000 2,548,168
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
JAPAN - CONTINUED
Unified-Charm Corp. 74,100 $ 3,467,815
Yamanouchi Pharmaceutical Co. 141,000 4,531,920
Ltd.
264,169,617
LUXEMBOURG - 0.0%
Stolt Comex Seaway SA 103,100 695,925
MALAYSIA - 0.1%
Malayan Banking BHD 56,000 90,779
Oriental Holdings BHD 1,116,000 1,374,442
1,465,221
MEXICO - 0.6%
BANACCI SA de CV Class B (a) 1,236,000 1,622,211
Elektra SA de CV Unit 584,000 299,517
Grupo Financiero Bancomer SA 20,317,000 4,348,515
de CV Class B
Telefonos de Mexico SA 136,000 6,621,500
sponsored ADR representing
Class L shares
12,891,743
NETHERLANDS - 6.9%
ABN AMRO Holding NV 215,400 4,526,173
Aegon NV 20,400 2,502,522
Ahrend NV 49,300 1,125,104
Akzo Nobel NV 410,200 18,657,357
Akzo Nobel NV ADR 1,000 44,625
Fortis Amev NV 78,000 6,456,432
Heineken NV 54,400 3,270,135
ING Groep NV 367,760 22,400,532
Koninklijke Ahold NV 304,656 11,247,540
Koninklijke KPN NV 139,500 6,975,742
Nutreco Holding NV 69,433 2,733,292
Philips Electronics NV 405,500 27,447,289
(Bearer)
Royal Dutch Petroleum Co.:
(Hague Registry) 80,980 3,876,916
(NY Registry Gilder 1.25) 1,400 67,025
Samas Groep NV 49,000 875,838
STMicroelectronics NV (a) 38,500 3,005,406
TNT Post Group NV 81,500 2,623,018
Unilever NV 214,700 18,331,392
Unilever NV (NY shares) 1,000 82,938
Vedior NV 196,825 3,874,096
Vendex NV CVA 48,100 1,166,805
VNU NV 210,600 7,931,950
Wolters Kluwer NV 1,500 320,619
149,542,746
NETHERLANDS ANTILLES - 0.1%
Schlumberger Ltd. 34,900 1,609,763
SHARES VALUE (NOTE 1)
NORWAY - 0.2%
NCL Holdings AS (a) 1,694,388 $ 3,995,936
PORTUGAL - 0.4%
Banco Pinto & Sotto Mayor SA 95,880 1,818,501
Electricidade de Portugal SA 149,600 3,294,934
Portugal Telecom SA 17,900 821,007
Telecel Comunicacoes Pessoais 10,200 2,085,780
SA
8,020,222
RUSSIA - 0.0%
Vimpel Communications 13,400 173,363
sponsored ADR (a)
SPAIN - 2.4%
Banco Bilbao Vizcaya SA (Reg.) 336,900 5,340,649
Banco Central 228,600 2,713,855
Hispanoamericano SA
Banco Santander SA 241,764 4,803,428
Corporacion Mapfre Compania 3,300 89,513
Internacional de Reaseguros
SA (Reg.)
Endesa SA 194,000 5,139,254
Iberdrola SA 225,800 4,223,758
Mapfre Vida SA 42,600 1,596,731
Repsol SA 24,700 1,317,357
Telefonica de Espana SA 585,100 26,011,775
Telefonica de Espana SA:
rights 12/31/99 (a) 585,100 519,411
sponsored ADR 510 69,041
51,824,772
SWEDEN - 2.5%
ABB AB Series A 78,900 841,847
Astra AB Class A 533,900 11,045,059
Electrolux AB 236,400 4,067,818
Ericsson (L.M.) Telefon AB:
ADR Class B 2,500 59,844
Class B 352,200 8,430,787
Nordbanken Holding AB 697,200 4,471,987
Skandia Foersaekrings AB 264,400 4,044,110
Svenska Handelsbanken 144,500 6,095,843
Swedish Match Co. 3,063,100 11,146,102
Volvo AB Class B 137,600 3,207,799
53,411,196
SWITZERLAND - 6.8%
Adecco SA (Bearer) 3,257 1,486,273
Credit Suisse Group (Reg.) 64,154 10,038,654
Julius Baer Holding AG 3,155 10,482,223
Nestle SA (Reg.) 13,835 30,106,732
Novartis AG (Reg.) 18,540 36,432,308
Roche Holding AG 1,290 15,735,371
participation certificates
Swiss Reinsurance Co. (Reg.) 4,500 11,728,166
Swisscom AG (a) 23,200 9,708,879
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SWITZERLAND - CONTINUED
UBS AG (a) 63,534 $ 19,513,354
Zurich Allied AG (Reg.) (a) 1,650 1,221,288
146,453,248
TAIWAN - 0.4%
Taiwan Semiconductor 1,174,000 2,587,027
Manufacturing Co. Ltd. (a)
Taiwan Semiconductor 433,800 6,154,538
Manufacturing Co. Ltd. ADR
(a)
8,741,565
UNITED KINGDOM - 17.0%
Allied Domecq PLC 323,200 2,975,527
Allied Zurich PLC 869,400 13,009,350
Amec PLC 300 881
Asda Group PLC 475,100 1,269,360
Bank of Scotland 463,200 5,517,323
Barratt Developments PLC 30,625 117,035
Bass PLC 151,600 2,184,463
BBA Group PLC 394,233 2,432,704
Boots Co. PLC 230,700 3,927,266
British Aerospace PLC 698,383 5,927,048
British American Tobacco PLC 421,700 3,697,489
British Petroleum PLC 1,159,136 17,314,544
British Petroleum PLC ADR 807 76,665
British Telecommunications PLC 1,356,300 20,573,356
BTP PLC 57,200 369,052
Cadbury Schweppes PLC 390,500 6,654,044
Caradon PLC 3,662,980 6,241,647
CGU PLC 378,300 5,845,351
Cookson Group PLC 2,174,338 4,712,222
Courtaulds Textiles PLC 552,200 1,479,922
Devro PLC 11,700 33,486
Diageo PLC 556,000 6,139,789
Dixons Group PLC 82,200 1,155,894
Glaxo Wellcome PLC 896,300 31,146,383
Glaxo Wellcome PLC sponsored 1,400 97,300
ADR
Hays PLC 156,400 1,371,324
HSBC Holdings PLC Ord. 124,900 3,425,897
Kingfisher PLC 629,700 6,792,172
Ladbroke Group PLC 648,900 2,597,889
Lloyds TSB Group PLC 1,666,500 23,627,270
Marks & Spencer PLC 123,100 843,113
Misys PLC 284,200 2,078,135
National Grid Group PLC 476,790 3,794,020
National Westminster Bank PLC 248,900 4,797,094
Orange PLC (a) 478,700 5,543,561
Pearson PLC 269,800 5,342,108
Pilkington PLC 1,416,200 1,405,734
Prudential Corp. PLC 622,200 9,469,896
Rentokil Initial PLC 2,192,500 16,503,589
Reuters Group PLC 120,700 1,267,968
SHARES VALUE (NOTE 1)
Rio Tinto PLC (Reg.) 401,600 $ 4,650,709
RMC Industries, Inc. 88,700 1,207,677
Royal & Sun Alliance 249,408 2,024,874
Insurance Group PLC
Saatchi & Saatchi PLC 2,191,500 4,930,691
Schroders PLC 119,900 2,179,939
Scottish & Newcastle PLC 136,400 1,579,573
Shell Transport & Trading Co.
PLC:
(Reg.) 4,293,900 26,612,977
ADR 1,500 55,781
Siebe PLC 870,700 3,406,647
SmithKline Beecham PLC 2,175,042 30,233,115
SmithKline Beecham PLC ADR 1,400 97,300
Somerfield PLC 479,600 3,189,574
Standard Chartered PLC 323,500 3,719,516
Tarmac PLC 1,560,761 2,904,801
Tomkins PLC 396,800 1,877,436
Unilever PLC 621,100 6,987,422
Unilever PLC ADR 1,500 67,500
Vodafone Group PLC 1,517,844 24,456,325
Wimpey George PLC 550,500 994,961
WPP Group PLC 1,113,400 6,723,129
Zeneca Group PLC 173,600 7,530,257
367,188,075
UNITED STATES OF AMERICA - 2.1%
Amoco Corp. 608,600 35,907,400
Global TeleSystems Group, 111,100 6,193,825
Inc. (a)
Kaiser Aluminum Corp. (a) 8,200 39,975
Newmont Mining Corp. 46,900 847,131
Transocean Offshore, Inc. 55,100 1,477,369
44,465,700
TOTAL COMMON STOCKS 1,809,365,083
(Cost $1,396,986,245)
PREFERRED STOCKS - 2.5%
CONVERTIBLE PREFERRED STOCKS
- - 0.2%
AUSTRALIA - 0.2%
WBK Trust $3.135 STRYPES 174,300 5,501,344
NONCONVERTIBLE PREFERRED
STOCKS - 2.3%
GERMANY - 0.7%
Dyckerhoff AG 7,000 1,951,278
SAP AG (Systeme Anwendungen 25,800 12,415,247
Produkte)
14,366,525
PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONCONVERTIBLE PREFERRED
STOCKS - CONTINUED
ITALY - 1.6%
Telecom Italia Mobile Spa 3,248,200 $ 15,245,058
Telecom Italia Spa Risp 3,149,725 19,761,990
35,007,048
TOTAL NONCONVERTIBLE 49,373,573
PREFERRED STOCKS
TOTAL PREFERRED STOCKS 54,874,917
(Cost $24,424,659)
CLOSED-END FUNDS - 0.8%
EMERGING MARKETS - 0.3%
Asia Tigers Fund, Inc. 142,400 934,500
Emerging Markets 90,600 656,850
Infrastructure Fund, Inc.
Emerging Markets 73,300 655,119
Telecommunication Fund, Inc.
Morgan Stanley Emerging 109,900 892,938
Markets Fund, Inc.
Templeton Dragon Fund, Inc. 296,000 2,183,000
5,322,407
GERMANY - 0.3%
Emerging Germany Fund, Inc. 75,000 951,563
New Germany Fund, Inc. (The) 370,600 4,794,638
5,746,201
HONG KONG - 0.0%
Asia Pacific Fund, Inc. 133,200 899,100
MULTI-NATIONAL - 0.2%
European Warrant Fund, Inc. 118,700 2,040,156
Morgan Stanley Asia-Pacific 190,900 1,336,300
Fund, Inc.
3,376,456
PORTUGAL - 0.0%
Portugal Fund, Inc. 29,000 453,125
TAIWAN - 0.0%
Taiwan Fund, Inc. 80,100 1,001,250
TOTAL CLOSED-END FUNDS 16,798,539
(Cost $19,798,067)
<TABLE>
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CONVERTIBLE BONDS - 0.9%
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT (D)
FRANCE - 0.3%
Groupe Danone 3% 1/1/02 A1 FRF 10,000 2,864,171
Suez Lyonnaise des Eaux 4% A+ FRF 15,000 3,110,157
1/1/06
5,974,328
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT (D) VALUE (NOTE 1)
NETHERLANDS - 0.1%
Koninklijke Ahold NV 3% Baa1 NLG 4,750,000 $ 3,000,652
9/30/03
UNITED STATES OF AMERICA - 0.5%
Nestle Holdings, Inc. 3% - 5,480,000 7,850,100
6/17/02
Roche Holdings, Inc. liquid - 3,160,000 2,054,000
yield option note 0% 4/20/10
(e)
9,904,100
TOTAL CONVERTIBLE BONDS 18,879,080
(Cost $18,502,077)
GOVERNMENT OBLIGATIONS - 1.6%
FRANCE - 0.2%
French Government OAT 5.5% Aaa FRF 28,000,000 5,514,093
4/25/04
GERMANY - 0.4%
German Federal Republic Aaa DEM 11,300,000 8,138,878
7.375% 1/3/05
ITALY - 0.4%
Italian Republic:
5% 6/28/01 Aa3 1,940,000 3,618,100
6.75% 2/1/07 Aa3 ITL 6,000,000,000 4,302,535
7,920,635
SPAIN - 0.2%
Spanish Kingdom 4.5% 7/30/04 Aa2 ESP 700,000,000 5,064,502
UNITED STATES OF AMERICA - 0.4%
U.S. Treasury Bills, yield at - 8,550,000 8,544,813
date of purchase 3.66% to
4.4% 1/7/99 to 1/21/99 (f)
TOTAL GOVERNMENT OBLIGATIONS 35,182,921
(Cost $35,002,749)
CASH EQUIVALENTS - 10.4%
SHARES
Taxable Central Cash Fund (c) 224,039,018 224,039,018
(Cost $224,039,018)
TOTAL INVESTMENT IN $ 2,159,139,558
SECURITIES - 100%
(Cost $1,718,752,815)
</TABLE>
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FUTURES CONTRACTS
EXPIRATION DATE UNDERLYING FACE AMOUNT AT VALUE UNREALIZED GAIN/(LOSS)
PURCHASED
10 DAX 30 Index Contracts Mar. 1999 $ 3,056,682 $ 141,975
(Germany)
199 FTSE 100 Index Contracts Mar. 1999 19,318,374 523,541
(United Kingdom)
609 Nikkei 225 Index Mar. 1999 41,716,500 (3,219,154)
Contracts (Japan)
$ 64,091,556 $ (2,553,638)
</TABLE>
THE FACE VALUE OF FUTURES PURCHASED AS A PERCENTAGE OF TOTAL
INVESTMENT IN SECURITIES - 3.0%
CURRENCY ABBREVIATIONS
DEM - German deutsche mark
ESP - Spanish peseta
FRF - French franc
ITL - Italian lira
NLG - Dutch guilder
SECURITY TYPE ABBREVIATIONS
STRYPES - Structured Yield Product
Exchangeable for Common Stock
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) At period end, the seven-day yield on the Taxable Central Cash
Fund was 4.80%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
(d) Principal amount is stated in United States dollars unless
otherwise noted.
(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 $28,095,216 or 1.3% of net assets.
(f) Security or 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 $4,848,585.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $1,610,330,492 and $1,675,842,088, respectively (see Note
3 of Notes to Financial Statements).
The market value of futures contracts opened and closed during the
period amounted to $240,570,958 and $187,291,312, respectively (see
Note 3 of Notes to Financial Statements).
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 $12,752 for the
period (see Note 4 of Notes to Financial Statements).
MARKET SECTOR DIVERSIFICATION (UNAUDITED)
As a Percentage of Total Value of Investment in Securities
AEROSPACE & DEFENSE 0.3%
BASIC INDUSTRIES 3.5
CASH EQUIVALENTS 10.4
CLOSED-END FUNDS 0.8
CONSTRUCTION & REAL ESTATE 1.8
DURABLES 5.0
ENERGY 7.4
FINANCE 21.7
GOVERNMENT OBLIGATIONS 1.6
HEALTH 9.4
HOLDING COMPANIES 0.5
INDUSTRIAL MACHINERY & 5.1
EQUIPMENT
MEDIA & LEISURE 2.1
NONDURABLES 5.2
PRECIOUS METALS 0.3
RETAIL & WHOLESALE 2.8
SERVICES 3.3
TECHNOLOGY 5.0
TRANSPORTATION 0.4
UTILITIES 13.4
100.0%
INCOME TAX INFORMATION
At December 31, 1998, the aggregate cost of investment securities for
income tax purposes was $1,728,360,896. Net unrealized appreciation
aggregated $430,778,662, of which $517,005,303 related to appreciated
investment securities and $86,226,641 related to depreciated
investment securities.
The fund hereby designates approximately $78,821,000 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, 1998
ASSETS
Investment in securities, at $ 2,159,139,558
value (cost $1,718,752,815)
- - See accompanying schedule
Cash 353,134
Receivable for investments 628,251
sold
Receivable for fund shares 1,447,434
sold
Dividends receivable 4,824,348
Interest receivable 1,623,961
Other receivables 52,926
TOTAL ASSETS 2,168,069,612
LIABILITIES
Payable for investments $ 43,686,671
purchased
Payable for fund shares 12,911,171
redeemed
Accrued management fee 1,259,312
Distribution fees payable 2,689
Payable for daily variation 373,737
on futures contracts
Other payables and accrued 273,312
expenses
TOTAL LIABILITIES 58,506,892
NET ASSETS $ 2,109,562,720
Net Assets consist of:
Paid in capital $ 1,611,431,999
Undistributed net investment 15,374,087
income
Accumulated undistributed 45,094,273
net realized gain (loss) on
investments and foreign
currency transactions
Net unrealized appreciation 437,662,361
(depreciation) on
investments and assets and
liabilities in foreign
currencies
NET ASSETS $ 2,109,562,720
INITIAL CLASS: NET ASSET $20.06
VALUE, offering price and
redemption price per share
($2,074,842,526 (divided
by) 103,446,104 shares)
SERVICE CLASS: NET ASSET $20.04
VALUE, offering price and
redemption price per share
($34,720,194 (divided by)
1,732,675 shares)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME $ 38,881,426
Dividends
Interest 8,754,187
47,635,613
Less foreign taxes withheld (4,287,574)
TOTAL INCOME 43,348,039
EXPENSES
Management fee $ 15,441,406
Transfer agent fees 1,422,530
Distribution fees - Service 15,712
Class
Accounting fees and expenses 804,948
Non-interested trustees' 8,101
compensation
Custodian fees and expenses 1,032,876
Registration fees 8,630
Audit 48,190
Legal 23,611
Miscellaneous 310,018
Total expenses before 19,116,022
reductions
Expense reductions (589,286) 18,526,736
NET INVESTMENT INCOME 24,821,303
REALIZED AND UNREALIZED GAIN
(LOSS)
Net realized gain (loss) on:
Investment securities 43,711,713
Foreign currency transactions (303,771)
Futures contracts 3,062,445 46,470,387
Change in net unrealized
appreciation (depreciation)
on:
Investment securities 175,736,602
Assets and liabilities in (102,692)
foreign currencies
Futures contracts (1,623,650) 174,010,260
NET GAIN (LOSS) 220,480,647
NET INCREASE (DECREASE) IN $ 245,301,950
NET ASSETS RESULTING FROM
OPERATIONS
OTHER INFORMATION $ 588,910
Expense reductions Directed
brokerage arrangements
Custodian credits 376
$ 589,286
<TABLE>
<CAPTION>
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STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
ASSETS
Operations Net investment $ 24,821,303 $ 29,647,363
income
Net realized gain (loss) 46,470,387 117,046,383
Change in net unrealized 174,010,260 58,363,873
appreciation (depreciation)
NET INCREASE (DECREASE) IN 245,301,950 205,057,619
NET ASSETS RESULTING FROM
OPERATIONS
Distributions to shareholders (37,913,851) (29,012,812)
From net investment income
From net realized gain (111,746,087) (115,172,073)
TOTAL DISTRIBUTIONS (149,659,938) (144,184,885)
Share transactions - net 86,667,359 198,779,377
increase (decrease)
TOTAL INCREASE (DECREASE) 182,309,371 259,652,111
IN NET ASSETS
NET ASSETS
Beginning of period 1,927,253,349 1,667,601,238
End of period (including $ 2,109,562,720 $ 1,927,253,349
undistributed net investment
income of $15,374,087 and
$16,641,512, respectively)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
OTHER INFORMATION:
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
SHARES DOLLARS SHARES DOLLARS
Share transactions Initial 83,667,719 $ 1,630,270,593 51,240,982 $ 973,125,045
Class Sold
Reinvested 7,943,861 149,503,507 8,319,959 144,184,885
Redeemed (88,486,169) (1,726,300,500) (47,764,686) (919,455,709)
Net increase (decrease) 3,125,411 $ 53,473,600 11,796,255 $ 197,854,221
Service Class A Sold 1,950,594 $ 38,211,430 48,794 $ 931,087
Reinvested 8,320 156,588 - -
Redeemed (274,725) (5,174,259) (308) (5,931)
Net increase (decrease) 1,684,189 $ 33,193,759 48,486 $ 925,156
Distributions From net $ 37,874,182 $ 29,012,812
investment income Initial
Class
Service Class 39,669 -
Total $ 37,913,851 $ 29,012,812
From net realized gain $ 111,629,169 $ 115,172,073
Initial Class
Service Class 116,918 -
Total $ 111,746,087 $ 115,172,073
$ 149,659,938 $ 144,184,885
A SERVICE CLASS COMMENCED
SALE OF SHARES NOVEMBER 3,
1997.
</TABLE>
<TABLE>
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FINANCIAL HIGHLIGHTS - INITIAL CLASS
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 1996 1995 1994
Net asset value, beginning of $ 19.20 $ 18.84 $ 17.06 $ 15.67 $ 15.48
period
Income from Investment
Operations
Net investment income .23 E .30 E .32 D, E .17 .19
Net realized and unrealized 2.13 1.70 1.88 1.34 .08
gain (loss)
Total from investment 2.36 2.00 2.20 1.51 .27
operations
Less Distributions
From net investment income (.38) (.33) (.20) (.06) (.08)
From net realized gain (1.12) (1.31) (.22) (.02) -
In excess of net realized - - - (.04) -
gain
Total distributions (1.50) (1.64) (.42) (.12) (.08)
Net asset value, end of period $ 20.06 $ 19.20 $ 18.84 $ 17.06 $ 15.67
TOTAL RETURN B, C 12.81% 11.56% 13.15% 9.74% 1.72%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 2,074,843 $ 1,926,322 $ 1,667,601 $ 1,343,134 $ 1,297,701
(000 omitted)
Ratio of expenses to average .91% .92% .93% .91% .92%
net assets
Ratio of expenses to average .89% G .90% G .92% G .91% .92%
net assets after expense
reductions
Ratio of net investment 1.19% 1.55% 1.84% 1.88% 1.28%
income to average net assets
Portfolio turnover 84% 67% 92% 50% 42%
</TABLE>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 F
Net asset value, beginning of $ 19.20 $ 19.36
period
Income from Investment
Operations
Net investment income E .15 .01
Net realized and unrealized 2.19 (.17)
gain (loss)
Total from investment 2.34 (.16)
operations
Less Distributions
From net investment income (.38) -
From net realized gain (1.12) -
Total distributions (1.50) -
Net asset value, end of period $ 20.04 $ 19.20
TOTAL RETURN B, C 12.69% (.83)%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 34,720 $ 931
(000 omitted)
Ratio of expenses to average 1.01% 1.02% A
net assets
Ratio of expenses to average .97% G 1.01% A, G
net assets after expense
reductions
Ratio of net investment .80% .31% A
income to average net assets
Portfolio turnover 84% 67%
A ANNUALIZED
B TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE
THE TOTAL RETURNS SHOWN. TOTAL RETURNS FOR PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED.
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 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).
NOTES TO FINANCIAL STATEMENTS
For the period ended December 31, 1998
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. Both classes 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 certain 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 require 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 trading or events occurring in other markets
after the close of the principal market in which securities are traded
are expected to materially affect the value of those securities, then
they are valued at their fair value taking this trading or these
events into account. Fair value is determined in good faith under
consistently applied procedures under the general supervision of the
Board of Trustees. 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. Purchases
and sales of securities, income receipts and expense payments are
translated into U.S. dollars at the prevailing exchange rate on the
respective dates of the transactions.
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, the difference
between the amount of net investment income accrued and the U.S.
dollar amount actually received, and gains and losses between trade
and settlement date on purchases and sales of securities. 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.
DEFERRED TRUSTEE COMPENSATION. Under a Deferred Compensation Plan (the
Plan) non-interested Trustees must defer receipt of a portion of, and
may elect to defer receipt of an additional portion of, their annual
compensation. Deferred amounts are treated as though equivalent dollar
amounts had been invested in shares of the fund or are invested in a
cross-section of other Fidelity funds. Deferred amounts remain in the
fund until distributed in accordance with the Plan.
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 futures transactions, foreign currency transactions,
passive foreign investment companies (PFIC), non-taxable dividends and
losses deferred due to wash sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital.
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.
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
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., 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 futures contracts
opened and closed, is included under the caption "Other Information"
at the end of the fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a
monthly fee that is calculated on the basis of a group fee rate plus a
fixed individual fund fee rate applied to the average net assets of
the fund. The group fee rate is the weighted average of a series of
rates and is based on the monthly average net assets of all the mutual
funds advised by FMR. The rates ranged from .2500% to .5200% for the
period. The annual individual fund fee rate is 0.45%. 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 0.74% 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
4. FEES AND OTHER TRANSACTIONS WITH
AFFILIATES - CONTINUED
DISTRIBUTION AND SERVICE PLAN - CONTINUED
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 $15,712, all of which was
reallowed to insurance companies, for the distribution of shares and
providing shareholder support services.
Under the Plans, FMR 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, payments made to third parties under the Plans amounted to
$1,036,756 and $20,043 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. (FSC), an affiliate of
FMR, maintains the fund's accounting records. The fee is based on the
level of average net assets for the month plus out-of-pocket expenses.
BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms are shown under the caption
"Other Information" at the end of the fund's schedule of investments
5. EXPENSE REDUCTIONS.
FMR 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 offset a portion of the fund's expenses.
For the period, the reductions under these arrangements are shown
under the caption "Other Information" on the fund's Statement of
Operations.
6. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investments Life Insurance Company
(FILI) and its subsidiaries, affiliates of FMR, were the record owners
of approximately 13% of the outstanding shares of the fund. In
addition, one unaffiliated insurance company was record owner of 36%
of the total outstanding shares of the fund.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Variable Insurance Products Fund and the
Shareholders of Overseas Portfolio:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of
Overseas Portfolio (a fund of Variable Insurance Products Fund) at
December 31, 1998, and the results of its operations, the changes in
its net assets and the financial highlights for the periods indicated,
in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to
as "financial statements") are the responsibility of the Overseas
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, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 12, 1999
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:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PAY DATE RECORD DATE DIVIDENDS CAPITAL GAINS
Initial Class 2/5/99 2/5/99 $0.31 $0.50
Service Class 2/5/99 2/5/99 $0.31 $0.50
</TABLE>
The amounts per share which represent income derived from sources
within, and taxes paid to foreign countries or possessions of the
United States are $.38 and $.04, respectively, for the dividend paid
February 6, 1998.
The fund hereby designates 100% of the long-term capital gain
dividends distributed during the fiscal year as 20%-rate capital gain
dividends.
The fund has notified shareholders in January 1999 of the applicable
percentage for use in preparing 1998 income tax returns.
PROXY VOTING RESULTS
A special meeting of the fund's shareholders was held on September 16,
1998. The results of votes taken among shareholders on proposals
before them are reported below. Each vote reported represents a single
share held on the record date for the meeting.
PROPOSAL 1
To elect the twelve nominees specified below as Trustees.
# OF % OF
SHARES VOTED SHARES VOTED
RALPH F. COX
Affirmative 92,099,061.925 97.851
Against
Withheld 2,022,880.876 2.149
Abstain
TOTAL 94,121,942.801 100.000
PHYLLIS BURKE DAVIS
Affirmative 92,100,027.331 97.852
Against
Withheld 2,021,915.470 2.148
Abstain
TOTAL 94,121,942.801 100.000
E. BRADLEY JONES
Affirmative 92,066,894.365 97.817
Against
Withheld 2,055,048.436 2.183
Abstain
TOTAL 94,121,942.801 100.000
DONALD J. KIRK
Affirmative 92,123,811.731 97.877
Against
Withheld 1,998,131.070 2.123
Abstain
TOTAL 94,121,942.801 100.000
PETER S. LYNCH
Affirmative 92,154,199.261 97.909
Against
Withheld 1,967,743.540 2.091
Abstain
TOTAL 94,121,942.801 100.000
WILLIAM O. MCCOY
Affirmative 92,128,309.277 97.882
Against
Withheld 1,993,633.524 2.118
Abstain
TOTAL 94,121,942.801 100.000
# OF % OF
SHARES VOTED SHARES VOTED
ROBERT M. GATES
Affirmative 92,067,543.155 97.817
Against
Withheld 2,054,399.646 2.183
Abstain
TOTAL 94,121,942.801 100.000
EDWARD C. JOHNSON 3D
Affirmative 92,114,670.863 97.867
Against
Withheld 2,007,271.938 2.133
Abstain
TOTAL 94,121,942.801 100.000
GERALD C. MCDONOUGH
Affirmative 92,056,068.934 97.805
Against
Withheld 2,065,873.867 2.195
Abstain
TOTAL 94,121,942.801 100.000
MARVIN L. MANN
Affirmative 92,133,604.196 97.887
Against
Withheld 1,988,338.605 2.113
Abstain
TOTAL 94,121,942.801 100.000
ROBERT C. POZEN
Affirmative 92,150,027.164 97.905
Against
Withheld 1,971,915.637 2.095
Abstain
TOTAL 94,121,942.801 100.000
THOMAS R. WILLIAMS
Affirmative 92,075,306.792 97.826
Against
Withheld 2,046,636.009 2.174
Abstain
TOTAL 94,121,942.801 100.000
PROPOSAL 2
To ratify the selection of PricewaterhouseCoopers LLP as independent
accountants of the funds.
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 89,181,595.008 94.751
Against 904,357.406 .961
Withheld
Abstain 4,035,990.387 4.288
TOTAL 94,121,942.801 100.000
PROPOSAL 3
To authorize the Trustees to adopt an Amended and Restated Declaration
of Trust.
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 86,389,278.226 91.784
Against 1,995,385.215 2.120
Withheld
Abstain 5,737,279.360 6.096
TOTAL 94,121,942.801 100.000
PROPOSAL 4
To approve an amended management contract for the fund.
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 86,686,667.302 92.100
Against 1,602,876.648 1.703
Withheld
Abstain 5,832,398.851 6.197
TOTAL 94,121,942.801 100.000
PROPOSAL 7
To amend the fundamental investment limitation concerning
diversification for the fund.
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 86,565,590.658 91.972
Against 1,932,016.500 2.052
Withheld
Abstain 5,624,335.643 5.976
TOTAL 94,121,942.801 100.000
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 Jr., VICE PRESIDENT
Richard R. Mace Jr., VICE PRESIDENT
Eric D. Roiter, SECRETARY
Richard A. Silver, TREASURER
Matthew N. Karstetter, DEPUTY 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 *
Robert C. Pozen
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
VIPOVRS-ANN-0299 70389
1.540205.101
VARIABLE INSURANCE PRODUCTS
FUND: EQUITY-INCOME PORTFOLIO
(2_FIDELITY_LOGOS) (registered trademark)
ANNUAL REPORT
DECEMBER 31, 1998
CONTENTS
MARKET ENVIRONMENT 3 A review of what happened in
world markets during the
past 12 months.
PERFORMANCE AND INVESTMENT 4 How the fund has done over
SUMMARY time, and an overview of the
fund's investment at the end
of the period.
FUND TALK 5 The manager's review of fund
performance, strategy and
outlook.
INVESTMENTS 6 A complete list of the fund's
investments with their
market values.
FINANCIAL STATEMENTS 15 Statements of assets and
liabilities, operations, and
changes in net assets, as
well as financial highlights.
NOTES 18 Notes to the financial
statements.
REPORT OF INDEPENDENT 21 The auditors' opinion.
ACCOUNTANTS
DISTRIBUTIONS 22
PROXY VOTING RESULTS 23
Standard & Poor's, S&P and S&P 500 are registered service marks of The
McGraw-Hill Companies, Inc. and have been licensed for use by Fidelity
Distributors Corporation.
Other third party marks appearing herein are the property of their
respective owners.
All other marks appearing herein are registered or unregistered
trademarks or service marks of FMR Corp. or an affiliated company.
(recycle logo) This report is printed on recycled paper using
soy-based inks.
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
Demonstrating erratic mood swings throughout the period, the sometimes
gloomy, sometimes exuberant, oftentimes volatile worldwide stock and
bond markets in 1998 will long be remembered for their turbulent
behavior. When all was said and done, the U.S. and European stock
markets posted impressive returns for the year. Most U.S. bond markets
experienced positive - albeit moderate - performance, with U.S.
Treasuries ending the year as the overall front-runner. Economic and
currency turmoil continued to plague stock and bond performance in
Asia and, in particular, emerging markets.
U.S. STOCK MARKETS
The Standard & Poor's 500 Index - a broad measure of U.S. stock market
performance - rose 28.58% for the 12 months that ended December 31,
1998, well above the index's long-term average annual return of about
12%. For the first time in its history, the Dow Jones Industrial
Average - an index of 30 blue-chip stocks - posted double-digit
percentage gains in four consecutive years, thanks to an 18.07%
increase for the year. Large-cap stocks - particularly in the
technology sector - led the U.S. equity market's charge, as once again
investors preferred the liquidity and the perceived safety of owning
what they know. Small-cap stocks - in comparison - took a beating. The
Russell 2000 Index - a popular measure of small stock performance -
fell -2.55% for the year.
Throughout the period, the U.S. enjoyed a strong economy. Unemployment
averaged 4.5% for the year, the lowest since 1969 and the lowest
peacetime level in 41 years. Inflation levels also were low, while
interest-rates were stable. In comparison to the economy's relative
tranquility, the U.S. stock markets were fluctuating wildly. To
illustrate, the Dow typically had fewer than five swings of 5% in each
year since 1946. In 1998 alone, the Dow experienced 10 such swings.
Much of these gyrations were due to fears about Asia's economic woes,
Russia's currency devaluation and loan defaults, and the subsequent
consequences on emerging markets. On August 31, the Dow plunged 512.61
points - a loss that erased all previous gains for the year to that
point. Faced with global economic chaos, investors began fleeing the
equity markets in droves, searching for safer, less volatile havens,
particularly U.S. Treasuries. To address the lack of confidence in
domestic and global equity markets, the U.S. Federal Reserve Board
stepped in with three separate 0.25% interest-rate cuts during the
fall. Those cuts helped boost confidence in the U.S. economy, and
stocks began to quickly ascend to their former lofty levels,
culminating in a new Dow record of 9374.27 on November 23, 1998.
On a sector-by-sector basis, technology stocks reigned supreme in
1998, thanks in large part to the skyrocketing Internet industry. For
the year, nine of the top 10 best-performing stocks in the S&P 500
were technology stocks. The health care sector was another big winner.
Pharmaceuticals helped drive the strong performance of the health care
industry, as a slew of new products was rushed to the market sooner
than normal thanks to streamlined approval regulations.
Natural resources, on the other hand, suffered tremendously.
Overproduction and poor demand caused oil's price per barrel to plunge
considerably. Gold prices also were down in 1998. The financial sector
- - a top performer for several years - found 1998 to be a challenge.
The financial crises overseas and credit concerns contributed to the
poor showing of many brokerage and investment management firms.
FOREIGN STOCK MARKETS
Foreign stock markets posted mixed results in 1998. The Morgan Stanley
Capital International (MSCI) EAFE Index - which measures stock
performance in Europe, Australasia, and the Far East - returned 20.27%
in 1998. Europe posted the most consistently strong equity markets
when compared to other regions, with the MSCI Europe Index up 28.87%
for the year. The much-maligned Japanese stock market ended the year
on a positive note, thanks in part to long-awaited government
intercession on the ailing banking sector's behalf. For the year, the
Tokyo Stock Exchange Index (TOPIX) was up 7.76%. 1998 proved to be
disastrous for emerging markets. The MSCI Emerging Markets Free Index
suffered a -25.34% loss during the period, as the Asian crisis and
Russia's currency devaluation and loan defaults played havoc with
Latin America, Brazil, Thailand and other emerging-market nations.
U.S. BOND MARKETS
In a year as volatile as 1998, it's not surprising that the
performance of the U.S bond market was mostly positive. Still, most of
the major bond indexes trailed their returns of 1997, as investors
continued to seek out the high returns found in the equity markets.
For the year, the Lehman Brothers Aggregate Bond Index - a broad
measure of the performance of the U.S. taxable bond market - posted a
total return of 8.69%. The Lehman Brothers Corporate Bond Index
returned 8.57% in 1998. General U.S. Treasury funds were the safe
haven of choice in 1998, benefiting from the flight to safety as
investors worldwide reacted to global economic concerns. As a result,
the yield on the benchmark 30-year Treasury fell to its lowest levels
in three decades, tumbling to 5.09% at the end of the period compared
to 5.92% at the start of the year.
FOREIGN BOND MARKETS
Typically, continued low inflation and economic growth in the U.S.
would help provide a positive backdrop for U.S.-based bonds relative
to most foreign bonds. But there was nothing typical about 1998. The
Salomon Brothers World Government Bond Index - a measure of government
bond market performance in developed nations - returned an impressive
15.30% for the 12 months that ended December 31, 1998. Many European
nations - particularly France, Italy and Spain - boasted strong
performance that helped drive the index's overall return. Not all was
rosy in the international bond market, however. In stark contrast to
the developed world, the often-volatile emerging debt markets
experienced a particularly difficult year, illustrated by the J.P.
Morgan Emerging Markets Bond Index return of -11.04% during the
period. Once again, the impact of financial and economic woes in Asia
and Russia was the primary contributor to the poor performance of
emerging markets.
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 DECEMBER 31, PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
1998
VIP: EQUITY-INCOME - "INITIAL 11.63% 18.77% 15.62%
CLASS"
S&P 500 (registered trademark) 28.58% 24.06% 19.21%
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 market capitalization-weighted index of common
stocks. This benchmark reflects the reinvestment of dividends and
capital gains, if any.
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.
(checkmark)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.
$10,000 OVER 10 YEARS
VIP Equity-Income S&P 500
00150 SP001
1988/12/31 10000.00 10000.00
1989/01/31 10617.62 10732.00
1989/02/28 10563.12 10464.77
1989/03/31 10791.92 10708.60
1989/04/30 11208.42 11264.38
1989/05/31 11541.62 11720.59
1989/06/30 11549.52 11653.78
1989/07/31 12222.85 12706.12
1989/08/31 12419.24 12955.15
1989/09/30 12279.62 12902.04
1989/10/31 11571.18 12602.71
1989/11/30 11637.30 12859.81
1989/12/31 11734.42 13168.44
1990/01/31 10941.94 12284.84
1990/02/28 11006.78 12443.31
1990/03/31 11024.93 12773.06
1990/04/30 10642.68 12453.74
1990/05/31 11346.83 13667.97
1990/06/30 11233.85 13575.03
1990/07/31 10959.11 13531.59
1990/08/31 10084.01 12308.34
1990/09/30 9301.77 11708.92
1990/10/31 9064.59 11658.57
1990/11/30 9714.27 12411.72
1990/12/31 9940.30 12758.00
1991/01/31 10473.37 13314.25
1991/02/28 11194.59 14266.22
1991/03/31 11426.82 14611.46
1991/04/30 11480.21 14646.53
1991/05/31 12110.29 15279.26
1991/06/30 11615.12 14579.47
1991/07/31 12273.60 15258.87
1991/08/31 12532.67 15620.51
1991/09/30 12446.65 15359.65
1991/10/31 12653.91 15565.47
1991/11/30 12108.49 14938.18
1991/12/31 13065.38 16647.11
1992/01/31 13241.79 16337.47
1992/02/29 13671.79 16549.86
1992/03/31 13504.25 16227.13
1992/04/30 13927.31 16704.21
1992/05/31 14038.64 16786.06
1992/06/30 13915.73 16535.95
1992/07/31 14342.18 17212.27
1992/08/31 14027.95 16859.42
1992/09/30 14173.57 17058.36
1992/10/31 14343.25 17118.06
1992/11/30 14863.59 17701.79
1992/12/31 15271.74 17919.52
1993/01/31 15727.62 18070.05
1993/02/28 16080.92 18315.80
1993/03/31 16560.14 18702.26
1993/04/30 16491.28 18249.67
1993/05/31 16789.67 18738.76
1993/06/30 16987.15 18793.10
1993/07/31 17218.27 18717.93
1993/08/31 17876.95 19427.34
1993/09/30 17808.61 19277.75
1993/10/31 17971.46 19676.80
1993/11/30 17657.39 19489.87
1993/12/31 18065.54 19725.69
1994/01/31 18861.17 20396.37
1994/02/28 18375.46 19843.63
1994/03/31 17606.73 18978.44
1994/04/30 18213.43 19221.37
1994/05/31 18386.78 19536.60
1994/06/30 18273.18 19057.95
1994/07/31 18883.53 19683.05
1994/08/31 19855.11 20490.06
1994/09/30 19529.83 19988.05
1994/10/31 19930.70 20437.78
1994/11/30 19279.29 19693.44
1994/12/31 19342.00 19985.49
1995/01/31 19644.41 20503.72
1995/02/28 20393.47 21302.75
1995/03/31 21097.64 21931.39
1995/04/30 21684.43 22577.27
1995/05/31 22337.90 23479.68
1995/06/30 22658.84 24025.12
1995/07/31 23530.85 24821.79
1995/08/31 23825.99 24884.09
1995/09/30 24616.99 25934.20
1995/10/31 24333.73 25841.62
1995/11/30 25385.85 26976.06
1995/12/31 26129.58 27495.62
1996/01/31 26888.92 28431.57
1996/02/29 26979.24 28695.13
1996/03/31 27263.23 28971.47
1996/04/30 27618.22 29398.51
1996/05/31 27916.41 30156.69
1996/06/30 27660.82 30271.59
1996/07/31 26311.86 28934.19
1996/08/31 26851.44 29544.41
1996/09/30 28001.61 31207.17
1996/10/31 28456.00 32067.87
1996/11/30 30358.74 34491.88
1996/12/31 29861.76 33808.59
1997/01/31 31026.12 35920.96
1997/02/28 31369.83 36202.58
1997/03/31 30203.90 34715.01
1997/04/30 31275.30 36787.50
1997/05/31 33213.26 39027.12
1997/06/30 34757.34 40775.54
1997/07/31 37294.02 44020.05
1997/08/31 35545.13 41554.04
1997/09/30 37498.85 43829.96
1997/10/31 36128.09 42366.04
1997/11/30 37451.58 44327.16
1997/12/31 38255.13 45088.26
1998/01/31 38160.59 45586.93
1998/02/28 40620.05 48874.66
1998/03/31 42501.54 51377.53
1998/04/30 42501.54 51894.39
1998/05/31 41812.78 51002.33
1998/06/30 42283.15 53074.04
1998/07/31 41241.61 52508.80
1998/08/31 34941.98 44917.08
1998/09/30 36991.46 47794.47
1998/10/31 39729.70 51682.07
1998/11/30 41409.60 54814.52
1998/12/31 42703.13 57972.94
IMATRL PRASUN SHR__CHT 19981231 19990111 121246 R00000000000123
$10,000 OVER 10 YEARS: Let's say hypothetically that $10,000 was
invested in Variable Insurance Products Fund: Equity-Income Portfolio
on December 31, 1988. As the chart shows, by December 31, 1998, the
value of the investment would have grown to $42,703 - a 327.03%
increase on the initial investment. For comparison, look at how the
Standard & Poor's 500 Index did over the same period. With dividends
and capital gains, if any, reinvested, the same $10,000 investment
would have grown to $57,973 - a 479.73% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF
DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
General Electric Co. 4.0
Philip Morris Companies, Inc. 2.3
Fannie Mae 2.2
Citigroup, Inc. 2.1
Bank One Corp. 1.9
TOP FIVE MARKET SECTORS AS OF
DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
FINANCE 24.3
UTILITIES 12.5
ENERGY 10.7
INDUSTRIAL MACHINERY & 8.7
EQUIPMENT
BASIC INDUSTRIES 5.9
ASSET ALLOCATION AS OF DECEMBER 31, 1998*
(% OF FUND'S INVESTMENTS)
Row: 1, Col: 1, Value: 96.09999999999999
Row: 1, Col: 2, Value: 1.7
Row: 1, Col: 3, Value: 2.2
Stocks 96.0%
Bonds 1.7%
Short-term investments 2.3%
* FOREIGN INVESTMENTS 8.8%
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
(photograph of Seve Petersen)
An interview with
Steve Petersen,
Portfolio Manager of
Equity-Income Portfolio
Q. HOW DID THE FUND PERFORM, STEVE?
A. The fund underperformed the Standard & Poor's 500 Index, which
returned 28.58% for the 12-month period ending December 31, 1998.
Q. WHAT WAS THE INVESTING ENVIRONMENT LIKE DURING THE YEAR?
A. During the first half of 1998, investors focused on larger
companies with predictable earnings growth rather than smaller or more
cyclical stocks. The market's free-fall in late August - triggered by
Russia's currency devaluation and debt defaults, problems in emerging
markets and concerns about the soundness of hedge fund management
companies - spurred investors' flight to the perceived safer haven of
the largest companies. As the Federal Reserve Board moved to lower
interest rates to add liquidity to the economy and prevent a possible
recession, the market rebounded strongly, with most of the fourth
quarter's strong performance concentrated in larger issues, as well as
in technology and Internet-related stocks.
Q. HOW DID THIS ENVIRONMENT AFFECT THE FUND'S PERFORMANCE?
A. The fund invests primarily in large-capitalization stocks, but its
holdings in medium and small companies, as well as its emphasis on
dividend-paying stocks rather than growth stocks, contributed to its
underperformance relative to the S&P 500. The fund's limited
technology stock holdings also had a negative impact, as did the
higher percentage of energy stocks in the portfolio. Technology stocks
made a significant contribution to the stock market's performance
during 1998. Energy stocks suffered as oil and gas prices dropped due
to declining demand worldwide, reflecting Asia's economic slowdown. A
warmer than usual winter in the U.S. last year and so far this year
also contributed to the slack demand. On the other hand, the fund
benefited from the strong performance of utilities stocks, in
particular from the good performance of telephone company stocks.
Q. WHAT ACCOUNTED FOR TELEPHONE COMPANIES' GOOD PERFORMANCE?
A. In general, their earnings performance was better than expected as
these companies went through the process of deregulation. Technology
pushed up consumer demand faster than anticipated as consumers added
phone lines at a surprising pace, reflecting growing demand for
Internet access and data transmission in the home. Telephone companies
also successfully cut costs during the year and branched out into
different technologies, helping their earnings growth and increasing
their attractiveness to investors. As a result, companies such as AT&T
and Bell Atlantic performed well.
Q. WHICH HOLDINGS HELPED THE FUND'S PERFORMANCE?
A. As I mentioned, AT&T, one of the fund's top holdings, performed
well. After going through a management change, its new leadership has
been building the company's competitive strength in the long distance
phone business. Also, it is improving profitability and diversifying
through acquisition activity. Schering-Plough also performed strongly
during the year. Schering-Plough produces the leading allergy drug,
Claritin, and has had steady stronger-than-expected earnings growth.
General Electric, the fund's number-one holding, continued its good
performance. The company has recently released a statement that its
outlook for earnings growth remains strong. GE also has been active in
making acquisitions internationally that have the potential to boost
earnings growth.
Q. WHICH HOLDINGS WERE DISAPPOINTMENTS?
A. As I mentioned earlier, energy companies suffered from the
significant decline in the price of oil, which dropped $5-$7 per
barrel since 1997. As a result, oil companies British Petroleum, Royal
Dutch Petroleum and Chevron all performed poorly. In addition,
companies that provide service to the oil companies, such as
Halliburton and Schlumberger, fared even worse. That's because oil
companies, which tend to spend only the cash flow that they generate,
had less business for their suppliers as their revenues declined.
Q. STEVE, WHAT'S YOUR OUTLOOK FOR THE COMING MONTHS?
A. Near term, I believe that we're in for more of the same. The U.S.
economy still looks good, with low inflation and healthy consumer
spending. However, worldwide trends do not look exceptionally strong,
and multinational corporations are still exposed to the problems in
Asia, Russia and emerging markets. In this environment, investors will
probably continue to focus on large-capitalization growth companies,
rather than small-cap and cyclical stocks. My strategy will be to
continue to look for companies with excellent underlying financials
and interesting business fundamentals, which I believe can perform
well over time.
The views expressed in this report reflect those of the portfolio
manager only through the end of the period of the report as stated on
the cover. The manager's views are subject to change at any time based
on market and other conditions.
(checkmark) FUND FACTS
GOAL: to provide current income and increase
the value of the fund's shares over the long
term
START DATE: October 9, 1986
SIZE: as of December 31, 1998, more than
$11.6 billion
MANAGER: Stephen Petersen, since 1997;
joined Fidelity in 1980
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
INVESTMENTS DECEMBER 31, 1998
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 92.5%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 4.0%
AEROSPACE & DEFENSE - 2.5%
AlliedSignal, Inc. 1,859,000 $ 82,376,939
Harsco Corp. 827,700 25,193,118
Textron, Inc. 1,122,400 85,232,250
United Technologies Corp. 858,800 93,394,500
286,196,807
DEFENSE ELECTRONICS - 1.2%
Litton Industries, Inc. (a) 642,500 41,923,125
Northrop Grumman Corp. 277,100 20,262,938
Raytheon Co.:
Class A 19,131 988,834
Class B 1,551,800 82,633,350
145,808,247
SHIP BUILDING & REPAIR - 0.3%
General Dynamics Corp. 633,000 37,109,625
TOTAL AEROSPACE & DEFENSE 469,114,679
BASIC INDUSTRIES - 5.7%
CHEMICALS & PLASTICS - 2.6%
du Pont (E.I.) de Nemours & 731,600 38,820,525
Co.
Great Lakes Chemical Corp. 896,200 35,848,000
Hanna (M.A.) Co. 880,200 10,837,463
Hercules, Inc. 856,100 23,435,738
Hoechst AG 491,100 20,091,863
IMC Global, Inc. 961,500 20,552,063
Lawter International, Inc. 332,300 3,862,988
Millennium Chemicals, Inc. 749,200 14,890,350
Monsanto Co. 957,200 45,467,000
Octel Corp. (a) 121,950 1,692,056
Olin Corp. 585,200 16,568,475
Solutia, Inc. 1,144,100 25,599,238
Union Carbide Corp. 646,700 27,484,750
Witco Corp. 860,100 13,707,844
298,858,353
IRON & STEEL - 0.2%
Dofasco, Inc. 749,800 9,602,143
Inland Steel Industries, Inc. 753,323 12,712,326
USX-U.S. Steel Group 282,400 6,495,200
28,809,669
METALS & MINING - 1.2%
Alcan Aluminium Ltd. 1,484,700 40,258,118
Alcoa, Inc. 1,073,779 80,063,647
Kaiser Aluminum Corp. (a) 250,000 1,218,750
Noranda, Inc. 200,000 1,992,813
Phelps Dodge Corp. 339,200 17,256,800
140,790,128
PACKAGING & CONTAINERS - 0.0%
Tupperware Corp. 311,900 5,126,856
SHARES VALUE (NOTE 1)
PAPER & FOREST PRODUCTS - 1.7%
Boise Cascade Corp. 21,900 $ 678,900
Bowater, Inc. 271,800 11,262,713
Champion International Corp. 643,200 26,049,600
Domtar, Inc. 1,072,400 6,201,072
Fort James Corp. 555,200 22,208,000
Georgia-Pacific Corp. 556,600 32,595,888
Kimberly-Clark Corp. 1,076,300 58,658,350
Nexfor, Inc. 87,200 344,698
Weyerhaeuser Co. 704,700 35,807,569
193,806,790
TOTAL BASIC INDUSTRIES 667,391,796
CONSTRUCTION & REAL ESTATE -
1.9%
BUILDING MATERIALS - 0.8%
American Standard Companies, 579,300 20,818,594
Inc. (a)
Masco Corp. 2,090,800 60,110,500
Sherwin-Williams Co. 290,500 8,533,438
89,462,532
CONSTRUCTION - 0.1%
Alstom SA 315,759 7,400,050
ENGINEERING - 0.1%
EG & G, Inc. 389,900 10,844,094
Fluor Corp. 182,000 7,746,375
18,590,469
REAL ESTATE INVESTMENT TRUSTS
- - 0.9%
Alexandria Real Estate 109,600 3,390,750
Equities, Inc.
Crescent Real Estate Equities 664,500 15,283,500
Co.
Duke Realty Investments, Inc. 175,700 4,085,025
Equity Office Properties Trust 416,800 10,003,200
Equity Residential Properties 548,700 22,188,056
Trust (SBI)
Public Storage, Inc. 256,800 6,949,650
Starwood Hotels & Resorts 1,502,681 34,092,075
Trust
Weeks Corp. 170,500 4,805,969
100,798,225
TOTAL CONSTRUCTION & REAL 216,251,276
ESTATE
DURABLES - 2.4%
AUTOS, TIRES, & ACCESSORIES -
1.6%
DaimlerChrysler AG (a) 213,237 20,484,079
Eaton Corp. 279,900 19,785,431
Ford Motor Co. 748,000 43,898,250
Meritor Automotive, Inc. 629,900 13,346,006
Navistar International Corp. 281,300 8,017,050
(a)
Pep Boys-Manny, Moe & Jack 726,400 11,395,400
Snap-On, Inc. 819,700 28,535,806
TRW, Inc. 789,000 44,331,938
189,793,960
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
DURABLES - CONTINUED
CONSUMER DURABLES - 0.2%
Minnesota Mining & 261,400 $ 18,592,075
Manufacturing Co.
CONSUMER ELECTRONICS - 0.2%
General Motors Corp. Class H 226,400 8,985,250
Maytag Corp. 86,900 5,409,525
Newell Co. 189,400 7,812,750
22,207,525
TEXTILES & APPAREL - 0.4%
Dexter Corp. 501,400 15,762,763
Liz Claiborne, Inc. 234,300 7,395,094
NIKE, Inc. Class B 484,200 19,640,363
Unifi, Inc. 192,600 3,767,738
46,565,958
TOTAL DURABLES 277,159,518
ENERGY - 10.7%
ENERGY SERVICES - 0.9%
Halliburton Co. 2,278,300 67,494,638
Schlumberger Ltd. 696,500 32,126,063
99,620,701
OIL & GAS - 9.8%
Amerada Hess Corp. 709,400 35,292,650
Amoco Corp. 1,206,200 71,165,800
Anadarko Petroleum Corp. 587,900 18,151,413
Atlantic Richfield Co. 101,200 6,603,300
British Petroleum PLC 820,293 12,253,091
British Petroleum PLC ADR 2,072,086 196,848,170
Burlington Resources, Inc. 922,100 33,022,706
Canadian Hunter Exploration 50,000 326,691
Ltd. (a)
Chevron Corp. 1,409,471 116,898,001
Coastal Corp. (The) 483,400 16,888,788
Conoco, Inc. Class A (a) 721,200 15,055,050
Elf Aquitaine SA sponsored ADR 787,300 44,580,863
Exxon Corp. 1,200,000 87,750,000
Mobil Corp. 446,100 38,866,463
Occidental Petroleum Corp. 2,333,400 39,376,125
Phillips Petroleum Co. 724,700 30,890,338
Royal Dutch Petroleum Co. (NY 2,169,200 103,850,450
Registry Gilder 1.25)
Texaco, Inc. 1,160,000 61,335,000
Tosco Corp. 449,800 11,638,575
Total SA:
Class B 831,600 82,744,196
sponsored ADR 865,100 43,038,725
Ultramar Diamond Shamrock 437,600 10,611,800
Corp.
Unocal Corp. 460,989 13,455,116
SHARES VALUE (NOTE 1)
USX-Marathon Group 1,621,100 $ 48,835,638
Valero Energy Corp. 246,700 5,242,375
1,144,721,324
TOTAL ENERGY 1,244,342,025
FINANCE - 22.8%
BANKS - 9.2%
Bank of New York Co., Inc. 4,631,400 186,413,850
Bank of Nova Scotia 726,600 16,022,705
Bank One Corp. 4,412,438 225,310,115
BankAmerica Corp. 3,173,890 190,830,136
Chase Manhattan Corp. 985,500 67,075,594
Comerica, Inc. 877,500 59,834,531
National Bank of Canada 2,211,200 35,829,964
National City Corp. 270,260 19,593,850
Royal Bank of Canada 400,000 20,006,534
U.S. Bancorp 2,928,094 103,947,337
Wells Fargo & Co. 3,767,200 150,452,550
1,075,317,166
CREDIT & OTHER FINANCE - 6.0%
American Express Co. 1,853,072 189,476,612
Associates First Capital 2,363,656 100,159,928
Corp. Class A
Citigroup, Inc. 4,884,099 241,762,901
Fleet Financial Group, Inc. 1,373,600 61,382,750
Household International, Inc. 2,559,047 101,402,237
Transamerica Corp. 2,300 265,650
694,450,078
FEDERAL SPONSORED CREDIT - 2.5%
Fannie Mae 3,477,300 257,320,200
Freddie Mac 145,300 9,362,769
SLM Holding Corp. 412,700 19,809,600
286,492,569
INSURANCE - 3.8%
Aetna, Inc. 77,300 6,077,713
Allstate Corp. 2,828,198 109,239,148
American Bankers Insurance 304,200 14,715,675
Group, Inc.
Berkshire Hathaway, Inc. 1 2,350
Class B
Berkshire Hathaway, Inc. 519 36,330,000
Class A
Chubb Corp. (The) 136,600 8,861,925
CIGNA Corp. 357,700 27,654,681
Enhance Financial Services 92,284 2,768,520
Group, Inc.
Fremont General Corp. 1,398,448 34,611,588
Hartford Financial Services 1,508,600 82,784,425
Group, Inc.
Highlands Insurance Group, 371,100 4,847,494
Inc. (a)
Marsh & McLennan Companies, 225,900 13,201,031
Inc.
PMI Group, Inc. 234,000 11,553,750
Reliastar Financial Corp. 1,032,499 47,624,016
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
INSURANCE - CONTINUED
Torchmark Corp. 743,700 $ 26,261,906
Travelers Property Casualty 620,000 19,220,000
Corp. Class A
445,754,222
SAVINGS & LOANS - 0.9%
Washington Mutual, Inc. 2,801,282 106,973,956
SECURITIES INDUSTRY - 0.4%
First Marathon, Inc. Class A 651,900 7,560,421
(non-vtg.)
Lehman Brothers Holdings, 449,800 19,819,313
Inc.
Nomura Securities Co. Ltd. 307,000 2,670,155
Waddell & Reed Financial, Inc.:
Class A 301,116 7,132,685
Class B 182,132 4,234,569
41,417,143
TOTAL FINANCE 2,650,405,134
HEALTH - 5.7%
DRUGS & PHARMACEUTICALS - 4.2%
American Home Products Corp. 1,830,600 103,085,663
Bristol-Myers Squibb Co. 896,200 119,922,763
Lilly (Eli) & Co. 343,500 30,528,563
Merck & Co., Inc. 592,800 87,549,150
Schering-Plough Corp. 2,576,400 142,346,100
483,432,239
MEDICAL EQUIPMENT & SUPPLIES
- - 0.8%
Baxter International, Inc. 523,100 33,641,869
Johnson & Johnson 631,800 52,992,225
Pall Corp. 417,600 10,570,500
97,204,594
MEDICAL FACILITIES MANAGEMENT
- - 0.7%
Beverly Enterprises, Inc. 1,722,000 11,623,500
Columbia/HCA Healthcare Corp. 2,259,150 55,913,963
Humana, Inc. (a) 320,500 5,708,906
United HealthCare Corp. 197,400 8,500,538
81,746,907
TOTAL HEALTH 662,383,740
HOLDING COMPANIES - 0.1%
U.S. Industries, Inc. 636,300 11,851,088
INDUSTRIAL MACHINERY &
EQUIPMENT - 8.5%
ELECTRICAL EQUIPMENT - 5.2%
Alcatel Alsthom Compagnie 263,200 32,159,751
Generale d'Electricite SA
(RFD)
Emerson Electric Co. 818,700 51,219,919
General Electric Co. 4,494,100 458,679,053
Honeywell, Inc. 199,700 15,039,906
SHARES VALUE (NOTE 1)
Loral Space & Communications 298,700 $ 5,320,594
Ltd. (a)
Siemens AG 584,300 37,787,928
600,207,151
INDUSTRIAL MACHINERY &
EQUIPMENT - 2.4%
Case Corp. 142,500 3,108,281
Coltec Industries, Inc. (a) 1,371,600 26,746,200
Cooper Industries, Inc. 194,300 9,265,681
Ingersoll-Rand Co. 646,100 30,326,319
Parker-Hannifin Corp. 525,000 17,193,750
Stewart & Stevenson Services, 247,900 2,417,025
Inc.
Tyco International Ltd. 2,489,018 187,765,285
276,822,541
POLLUTION CONTROL - 0.9%
Allied Waste Industries, Inc. 592,200 13,990,725
(a)
Browning-Ferris Industries, 988,598 28,113,256
Inc.
Ogden Corp. 508,300 12,739,269
Waste Management, Inc. 1,197,447 55,830,966
110,674,216
TOTAL INDUSTRIAL MACHINERY & 987,703,908
EQUIPMENT
MEDIA & LEISURE - 3.4%
BROADCASTING - 1.6%
CBS Corp. 1,626,900 53,280,975
Infinity Broadcasting Corp. 326,700 8,943,413
(a)
Time Warner, Inc. 1,945,845 120,764,005
182,988,393
ENTERTAINMENT - 0.8%
King World Productions, Inc. 457,000 13,452,938
(a)
Viacom, Inc. Class B 1,130,700 83,671,800
(non-vtg.) (a)
97,124,738
LEISURE DURABLES & TOYS - 0.1%
Brunswick Corp. 431,200 10,672,200
LODGING & GAMING - 0.1%
Circus Circus Enterprises, 464,400 5,311,575
Inc. (a)
Mirage Resorts, Inc. (a) 394,500 5,892,844
11,204,419
PUBLISHING - 0.4%
Harcourt General, Inc. 534,600 28,434,038
Reader's Digest Association, 548,700 13,820,381
Inc. Class A (non-vtg.)
42,254,419
RESTAURANTS - 0.4%
McDonald's Corp. 677,100 51,882,788
TOTAL MEDIA & LEISURE 396,126,957
NONDURABLES - 5.7%
AGRICULTURE - 0.3%
Edperbrascan Corp. Class A 2,699,800 37,573,172
(ltd. vtg.)
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONDURABLES - CONTINUED
BEVERAGES - 0.5%
Anheuser-Busch Companies, 440,400 $ 28,901,250
Inc.
PepsiCo, Inc. 300,500 12,301,719
Seagram Co. Ltd. 400,700 15,250,425
56,453,394
FOODS - 0.5%
Bestfoods 384,600 20,479,950
Corn Products International, 401,625 12,199,359
Inc.
Heinz (H.J.) Co. 393,500 22,281,938
54,961,247
HOUSEHOLD PRODUCTS - 2.1%
Avon Products, Inc. 342,200 15,142,350
Clorox Co. 254,600 29,740,463
Gillette Co. 549,200 26,533,225
Premark International, Inc. 25,000 865,625
Procter & Gamble Co. 307,200 28,051,200
Unilever NV 12,400 1,058,730
Unilever NV (NY shares) 800,000 66,350,000
Unilever PLC 6,821,600 76,743,521
244,485,114
TOBACCO - 2.3%
Dimon, Inc. 336,400 2,501,975
Philip Morris Companies, Inc. 4,972,600 266,034,100
RJR Nabisco Holdings Corp. 44,900 1,332,969
269,869,044
TOTAL NONDURABLES 663,341,971
PRECIOUS METALS - 0.1%
Newmont Mining Corp. 605,600 10,938,650
RETAIL & WHOLESALE - 3.1%
APPAREL STORES - 0.6%
Charming Shoppes, Inc. (a) 612,800 2,642,700
Footstar, Inc. (a) 551,800 13,795,000
Intimate Brands, Inc. Class A 171,900 5,135,513
Limited, Inc. (The) 967,100 28,166,788
Payless ShoeSource, Inc. (a) 136,000 6,443,000
TJX Companies, Inc. 350,200 10,155,800
66,338,801
GENERAL MERCHANDISE STORES -
2.5%
Consolidated Stores Corp. (a) 2,020,156 40,781,904
Dayton Hudson Corp. 920,700 49,947,975
Federated Department Stores, 656,400 28,594,425
Inc. (a)
Hudson's Bay Co. 605,600 7,656,557
Hudson's Bay Co. (d) 302,500 3,824,485
Sears, Roebuck & Co. 329,800 14,016,500
Wal-Mart Stores, Inc. 1,824,400 148,574,575
293,396,421
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE,
MISCELLANEOUS - 0.0%
Toys R Us, Inc. (a) 302,000 $ 5,096,250
TOTAL RETAIL & WHOLESALE 364,831,472
SERVICES - 0.9%
LEASING & RENTAL - 0.2%
Ryder Systems, Inc. 675,300 17,557,800
PRINTING - 0.3%
Donnelley (R.R.) & Sons Co. 568,400 24,903,025
Wallace Computer Services, 440,500 11,618,188
Inc.
36,521,213
SERVICES - 0.4%
ACNielsen Corp. (a) 636,000 17,967,000
Dun & Bradstreet Corp. 368,800 11,640,250
Manpower, Inc. 397,300 10,006,994
Modis Professional Services, 477,700 6,926,650
Inc. (a)
46,540,894
TOTAL SERVICES 100,619,907
TECHNOLOGY - 4.6%
COMPUTER SERVICES & SOFTWARE
- - 1.0%
Electronic Data Systems Corp. 1,326,800 66,671,700
First Data Corp. 550,200 17,434,463
IMS Health, Inc. 85,000 6,412,188
NCR Corp. (a) 627,700 26,206,475
116,724,826
COMPUTERS & OFFICE EQUIPMENT
- - 2.7%
Compaq Computer Corp. 124,173 5,207,505
International Business 472,600 87,312,850
Machines Corp.
Pitney Bowes, Inc. 1,582,000 104,510,875
Unisys Corp. (a) 3,018,317 103,943,292
Xerox Corp. 61,000 7,198,000
308,172,522
ELECTRONICS - 0.9%
AMP, Inc. 435,602 22,678,529
Motorola, Inc. 1,154,300 70,484,444
Texas Instruments, Inc. 174,400 14,922,100
108,085,073
TOTAL TECHNOLOGY 532,982,421
TRANSPORTATION - 1.2%
AIR TRANSPORTATION - 0.1%
Viad Corp. 275,800 8,377,425
RAILROADS - 1.1%
Burlington Northern Santa Fe 1,991,200 67,203,000
Corp.
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TRANSPORTATION - CONTINUED
RAILROADS - CONTINUED
CSX Corp. 1,199,000 $ 49,758,500
Norfolk Southern Corp. 311,200 9,861,150
126,822,650
TOTAL TRANSPORTATION 135,200,075
UTILITIES - 11.7%
ELECTRIC UTILITY - 3.2%
Allegheny Energy, Inc. 1,148,700 39,630,150
American Electric Power Co., 1,120,100 52,714,706
Inc.
Central & South West Corp. 444,000 12,182,250
CILCORP, Inc. 152,300 9,318,856
CINergy Corp. 415,000 14,265,625
CMP Group, Inc. 568,400 10,728,550
CMS Energy Corp. 145,700 7,057,344
Consolidated Edison, Inc. 473,450 25,033,669
DPL, Inc. 955,950 20,672,419
Duke Energy Corp. 390,700 25,029,219
Entergy Corp. 2,040,500 63,510,563
Illinova Corp. 52,200 1,305,000
Niagara Mohawk Power Corp. (a) 1,434,200 23,126,475
PG&E Corp. 1,216,878 38,331,657
Pinnacle West Capital Corp. 237,000 10,042,875
Washington Water & Power Co. 707,500 13,619,375
366,568,733
GAS - 0.5%
Questar Corp. 1,221,400 23,664,625
Sempra Energy 1,437,584 36,478,694
60,143,319
TELEPHONE SERVICES - 8.0%
ALLTEL Corp. 508,900 30,438,581
Ameritech Corp. 1,692,700 107,274,863
AT&T Corp. 2,935,500 220,896,375
Bell Atlantic Corp. 2,875,740 163,377,979
BellSouth Corp. 2,145,000 106,981,875
GTE Corp. 1,251,500 84,398,031
MCI WorldCom, Inc. (a) 1,289,777 92,541,500
Pathnet, Inc. warrants 520 5,200
4/15/08 (a)(d)
SBC Communications, Inc. 1,852,100 99,318,863
Sprint Corp. (FON Group) 312,500 26,289,063
931,522,330
TOTAL UTILITIES 1,358,234,382
TOTAL COMMON STOCKS 10,748,878,999
(Cost $7,950,978,933)
PREFERRED STOCKS - 3.5%
SHARES VALUE (NOTE 1)
CONVERTIBLE PREFERRED STOCKS
- - 3.5%
BASIC INDUSTRIES - 0.2%
CHEMICALS & PLASTICS - 0.2%
Monsanto Co. $1.625 ACES (a) 460,000 $ 22,540,000
DURABLES - 0.0%
AUTOS, TIRES, & ACCESSORIES -
0.0%
Republic Industries, Inc. 219,200 3,342,800
$1.55 ACES
FINANCE - 1.5%
CLOSED END INVESTMENT COMPANY
- - 0.1%
Readers Digest Automatic 464,700 11,820,806
Common Exchange Trust $1.93
TRACES
CREDIT & OTHER FINANCE - 0.4%
DECS Trust (Dimon) $2.008 93,000 871,875
Federal-Mogul Financing Trust 89,700 5,920,200
$3.50
Life Re Corp./Life Re Capital 39,400 2,964,850
Trust II $3.96
Union Pacific Capital Trust:
$3.125 TIDES (d) 384,500 17,494,750
$3.125 403,200 18,345,600
WBK Trust $3.135 STRYPES 203,800 6,432,438
52,029,713
INSURANCE - 0.6%
Aetna, Inc. Class C, $4.7578 760,000 57,807,500
PRIDES
Conseco, Inc. $3.50 PRIDES 171,800 6,689,463
64,496,963
SECURITIES INDUSTRY - 0.4%
Cincinnati Bell, Inc. $3.48 93,900 6,220,875
DECS
Financial Security Assurance 840,700 38,672,200
Holdings Ltd. $0.00 DECS
44,893,075
TOTAL FINANCE 173,240,557
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.2%
ELECTRICAL EQUIPMENT - 0.1%
Loral Space & Communications
Ltd. Series C:
$3.00 (d) 183,200 9,709,600
$3.00 141,700 7,510,100
17,219,700
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.1%
Ingersoll Rand Co./Ingersoll 530,100 10,602,000
Rand Finance $0.195 Growth
PRIDES
TOTAL INDUSTRIAL MACHINERY & 27,821,700
EQUIPMENT
MEDIA & LEISURE - 0.8%
BROADCASTING - 0.6%
Evergreen Media Corp. $3.00 187,200 17,901,000
(d)
PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
CONVERTIBLE PREFERRED STOCKS
- - CONTINUED
MEDIA & LEISURE - CONTINUED
BROADCASTING - CONTINUED
MediaOne Group, Inc.:
$3.63 PIES 249,900 $ 16,618,350
Class D $2.25 374,200 35,549,000
70,068,350
ENTERTAINMENT - 0.2%
Premier Parks, Inc. $4.05 PIES 273,300 16,193,025
PUBLISHING - 0.0%
Tribune Co. $1.75 DECS 102,300 2,544,713
TOTAL MEDIA & LEISURE 88,806,088
RETAIL & WHOLESALE - 0.1%
GENERAL MERCHANDISE STORES -
0.1%
K mart Financing I $3.875 100,000 5,793,750
TECHNOLOGY - 0.1%
COMPUTER SERVICES & SOFTWARE
- - 0.1%
Wang Laboratories, Inc.:
$3.25 (d) 80,000 4,480,000
$3.25 157,600 8,825,600
13,305,600
UTILITIES - 0.6%
ELECTRIC UTILITY - 0.4%
Houston Industries, Inc. 285,500 30,370,063
$3.216 ACES
Texas Utilities Co. $1.6575 465,200 22,179,806
52,549,869
TELEPHONE SERVICES - 0.2%
Qwest Trends Trust $2.04 393,000 19,650,000
(a)(d)
TOTAL UTILITIES 72,199,869
TOTAL CONVERTIBLE PREFERRED 407,050,364
STOCKS
NONCONVERTIBLE PREFERRED
STOCKS - 0.0%
CONSTRUCTION & REAL ESTATE -
0.0%
REAL ESTATE INVESTMENT TRUSTS
- - 0.0%
California Federal Preferred 31,590 793,699
Capital Corp. $2.28
MEDIA & LEISURE - 0.0%
BROADCASTING - 0.0%
CSC Holdings, Inc. 11.125% 20,038 2,234,237
pay-in-kind
SHARES VALUE (NOTE 1)
PUBLISHING - 0.0%
PRIMEDIA, Inc. 8.625% 5,975 $ 582,563
TOTAL MEDIA & LEISURE 2,816,800
TOTAL NONCONVERTIBLE 3,610,499
PREFERRED STOCKS
TOTAL PREFERRED STOCKS 410,660,863
(Cost $338,189,602)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CORPORATE BONDS - 1.7%
MOODY'S RATINGS (UNAUDITED) (F) PRINCIPAL AMOUNT (E)
CONVERTIBLE BONDS - 1.3%
CONSTRUCTION & REAL ESTATE -
0.3%
REAL ESTATE INVESTMENT TRUSTS
- - 0.3%
Liberty Property LP 8.3% Ba2 $ 27,985,000 34,456,531
7/1/01
DURABLES - 0.2%
AUTOS, TIRES, & ACCESSORIES -
0.0%
Magna International, Inc. Baa1 2,960,000 3,041,400
4.875% 2/15/05 (d)
CONSUMER ELECTRONICS - 0.2%
Matsushita Electric
Industrial Co. Ltd.:
1.3% 3/29/02 Aa2 JPY 452,000,000 5,158,587
1.4% 3/31/04 Aa2 JPY 209,000,000 2,408,344
Sunbeam Corp. 0% 3/25/18 (d) Caa2 60,290,000 7,234,800
14,801,731
TOTAL DURABLES 17,843,131
FINANCE - 0.0%
INSURANCE - 0.0%
Loews Corp. 3.125% 9/15/07 A2 4,320,000 3,447,900
MEDIA & LEISURE - 0.3%
BROADCASTING - 0.0%
Jacor Communications, Inc. 0% B3 3,370,000 1,626,025
2/9/18
LODGING & GAMING - 0.0%
Hilton Hotels Corp. 5% 5/15/06 Baa3 1,820,000 1,660,750
PUBLISHING - 0.3%
News America Holdings, Inc. Baa3 48,470,000 27,203,788
liquid yield option notes 0%
3/11/13
TOTAL MEDIA & LEISURE 30,490,563
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (F) PRINCIPAL AMOUNT (E) VALUE (NOTE 1)
CONVERTIBLE BONDS - CONTINUED
NONDURABLES - 0.0%
FOODS - 0.0%
Chiquita Brands B3 $ 820,000 $ 762,600
International, Inc. 7%
3/28/01
RETAIL & WHOLESALE - 0.2%
DRUG STORES - 0.1%
Rite Aid Corp. 5.25% 9/15/02 Baa2 4,270,000 6,298,250
(d)
RETAIL & WHOLESALE,
MISCELLANEOUS - 0.1%
Home Depot, Inc. 3.25% 10/1/01 A1 5,000,000 13,125,000
TOTAL RETAIL & WHOLESALE 19,423,250
TECHNOLOGY - 0.3%
COMPUTER SERVICES & SOFTWARE
- - 0.0%
Softkey International, Inc. - 1,340,000 1,316,550
5.5% 11/1/00 (d)
COMPUTERS & OFFICE EQUIPMENT
- - 0.2%
Apple Computer, Inc. 6% 6/1/01 Caa1 8,100,000 11,815,875
Quantum Corp. 7% 8/1/04 B2 7,730,000 7,343,500
19,159,375
ELECTRONICS - 0.1%
Micron Technology, Inc. 7% B2 17,163,000 18,197,071
7/1/04
TOTAL TECHNOLOGY 38,672,996
TOTAL CONVERTIBLE BONDS 145,096,971
NONCONVERTIBLE BONDS - 0.4%
FINANCE - 0.0%
CREDIT & OTHER FINANCE - 0.0%
GS Escrow Corp. 7% 8/1/03 Ba1 2,000,000 1,959,840
Macsaver Financial Services, Ba1 1,000,000 800,000
Inc. 7.875% 8/1/03
2,759,840
HEALTH - 0.0%
MEDICAL FACILITIES MANAGEMENT
- - 0.0%
Tenet Healthcare Corp. 8.125% Ba3 2,670,000 2,736,750
12/1/08 (d)
MOODY'S RATINGS (UNAUDITED) (F) PRINCIPAL AMOUNT (E) VALUE (NOTE 1)
MEDIA & LEISURE - 0.2%
BROADCASTING - 0.1%
Adelphia Communications Corp. B2 $ 1,970,000 $ 2,176,850
9.875% 3/1/07
Century Communications Corp. Ba3 1,720,000 877,200
0% 1/15/08
CSC Holdings, Inc. 7.875% Ba2 600,000 610,320
2/15/18
Falcon Holding Group B2 1,340,000 901,150
LP/Falcon Funding Corp. 0%
4/15/10 (c)
FrontierVision Operating B3 320,000 355,600
Partners LP/ FrontierVision
Capital Corp. 11% 10/15/06
Iridium Operating LLC/Iridium B3 1,010,000 858,500
Capital Corp. 10.875% 7/15/05
NTL, Inc. 11.5% 10/1/08 (d) B3 7,140,000 7,675,500
Telewest PLC 0% 10/1/07 (c) B1 1,780,000 1,477,400
14,932,520
ENTERTAINMENT - 0.1%
Regal Cinemas, Inc. 8.875% B3 3,340,000 3,306,600
12/15/10 (d)
LODGING & GAMING - 0.0%
HMH Properties, Inc. 7.875% Ba2 1,070,000 1,037,900
8/1/08
RESTAURANTS - 0.0%
Dominos, Inc. 10.375% 1/15/09 B3 1,120,000 1,125,600
(d)
TOTAL MEDIA & LEISURE 20,402,620
NONDURABLES - 0.0%
HOUSEHOLD PRODUCTS - 0.0%
Revlon Consumer Products B2 1,960,000 1,940,400
Corp. 9% 11/1/06 (d)
RETAIL & WHOLESALE - 0.0%
RETAIL & WHOLESALE,
MISCELLANEOUS - 0.0%
Amazon.com, Inc. 0% 5/1/08 (c) Caa2 1,110,000 732,600
TECHNOLOGY - 0.0%
COMMUNICATIONS EQUIPMENT - 0.0%
Intermedia Communications, B2 770,000 731,500
Inc. 8.6% 6/1/08
COMPUTER SERVICES & SOFTWARE
- - 0.0%
ICG Services, Inc. 0% 5/1/08 - 1,590,000 822,825
(c)
TOTAL TECHNOLOGY 1,554,325
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (F) PRINCIPAL AMOUNT (E) VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
TRANSPORTATION - 0.0%
AIR TRANSPORTATION - 0.0%
Kitty Hawk, Inc. 9.95% B1 $ 230,000 $ 226,550
11/15/04
UTILITIES - 0.2%
CELLULAR - 0.1%
Nextel Communications, Inc.:
0% 9/15/07 (c) B2 5,010,000 3,218,925
12% 11/1/08 (d) B2 2,090,000 2,283,325
Teligent, Inc. 0% 3/1/08 (c) Caa1 2,670,000 1,321,650
6,823,900
TELEPHONE SERVICES - 0.1%
GST Network Funding, Inc. 0% - 1,270,000 577,850
5/1/08 (c)(d)
Hyperion Telecommunications, B3 270,000 274,050
Inc. 12.25% 9/1/04
Level 3 Communications, Inc.:
0% 12/1/08 (c)(d) B3 3,850,000 2,237,813
9.125% 5/1/08 B3 590,000 584,838
McLeodUSA, Inc. 9.5% 11/1/08 B2 990,000 1,049,400
(d)
NEXTLINK Communications, Inc.:
9.625% 10/1/07 B3 2,780,000 2,668,800
10.75% 11/15/08 (d) B3 2,000,000 2,040,000
Pathnet, Inc. 12.25% 4/15/08 - 520,000 364,000
Qwest Communications Ba1 1,530,000 1,591,200
International, Inc. 7.5%
11/1/08 (d)
WinStar Communications, Inc. Caa1 1,070,000 759,700
0% 10/15/05 (c)
12,147,651
TOTAL UTILITIES 18,971,551
TOTAL NONCONVERTIBLE BONDS 49,324,636
TOTAL CORPORATE BONDS 194,421,607
(Cost $185,361,868)
CASH EQUIVALENTS - 2.3%
SHARES
Taxable Central Cash Fund (b) 271,538,170 271,538,170
(Cost $271,538,170)
TOTAL INVESTMENT IN $ 11,625,499,639
SECURITIES - 100%
(Cost $8,746,068,573)
</TABLE>
SECURITY TYPE ABBREVIATIONS
ACES - Automatic Common
Exchange Securities
DECS - Dividend Enhanced
Convertible Stock/Debt
Exchangeable for Common
Stock
PIES - Premium Income Equity
Securities
PRIDES - Preferred Redeemable
Increased Dividend Equity
Securities
STRYPES - Structured Yield
Product Exchangeable for
Common Stock
TIDES - Term Income Deferred
Equity Securities
TRACES - Trust Automatic
Common Exchange Securities
CURRENCY ABBREVIATIONS
JPY - Japanese yen
LEGEND
(a) Non-income producing
(b) At period end, the seven-day yield on the Taxable Central Cash
Fund was 4.80%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
(c) 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.
(d) Security exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in transactions
exempt from registration, normally to qualified institutional buyers.
At the period end, the value of these securities amounted to
$117,520,473 or 1.0% of net assets.
(e) Principal amount is stated in United States dollars unless
otherwise noted.
(f) Standard & Poor's credit ratings are used in absence of a rating
by Moody's Investors Service, Inc.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $3,706,679,024 and $2,991,080,069, respectively (see Note 3
of Notes to Financial Statements).
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 $677,840 for the
period (see Note 4 of Notes to Financial Statements).
The fund participated in the bank borrowing program. The maximum loan
and average daily balance during the period for which the loan was
outstanding amounted to $5,708,000 and $4,529,000, respectively. The
weighted average interest rate was 5.83% (see Note 6 of Notes to
Financial Statements).
Transactions during the period with companies which are or were
affiliates are as follows (see Note 8 of Notes to Financial
Statements):
PURCHASE SALES DIVIDEND VALUE
AFFILIATE COST COST INCOME
Barr Laboratories Inc. $ - $ 4,465,000 $ - $ -
INCOME TAX INFORMATION
At December 31, 1998, the aggregate cost of investment securities for
income tax purposes was $8,753,668,981. Net unrealized appreciation
aggregated $2,871,830,658, of which $3,347,376,386 related to
appreciated investment securities and $475,545,728 related to
depreciated investment securities.
The fund hereby designates approximately $223,549,000 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, 1998
ASSETS
Investment in securities, at $ 11,625,499,639
value (cost $8,746,068,573)
- - See accompanying schedule
Receivable for investments 31,224,489
sold
Receivable for fund shares 7,427,825
sold
Dividends receivable 20,619,528
Interest receivable 4,542,312
Other receivables 948,955
TOTAL ASSETS 11,690,262,748
LIABILITIES
Payable for investments $ 39,376,437
purchased
Payable for fund shares 10,216,193
redeemed
Accrued management fee 4,578,709
Distribution fees payable 17,541
Other payables and accrued 1,017,315
expenses
TOTAL LIABILITIES 55,206,195
NET ASSETS $ 11,635,056,553
Net Assets consist of:
Paid in capital $ 8,215,650,418
Undistributed net investment 172,284,861
income
Accumulated undistributed net 367,592,260
realized gain (loss) on
investments and foreign
currency transactions
Net unrealized appreciation 2,879,529,014
(depreciation) on
investments and assets and
liabilities in foreign
currencies
NET ASSETS $ 11,635,056,553
INITIAL CLASS: NET ASSET $25.42
VALUE, offering price and
redemption price per share
($11,409,911,604 (divided
by) 448,878,790 shares)
SERVICE CLASS: NET ASSET $25.39
VALUE, offering price, and
redemption price per share
($225,144,949 (divided by)
8,866,596 shares)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME $ 212,486,031
Dividends
Interest 26,134,351
TOTAL INCOME 238,620,382
EXPENSES
Management fee $ 54,109,035
Transfer agent fees 7,414,238
Distribution fees - Service 110,337
Class
Accounting fees and expenses 837,053
Non-interested trustees' 39,059
compensation
Custodian fees and expenses 324,994
Registration fees 98,095
Audit 60,950
Legal 127,834
Interest 2,935
Miscellaneous 1,255,071
Total expenses before 64,379,601
reductions
Expense reductions (877,451) 63,502,150
NET INVESTMENT INCOME 175,118,232
REALIZED AND UNREALIZED GAIN
(LOSS)
Net realized gain (loss) on:
Investment securities 378,025,807
(including realized gain
of $5,597,753 on sales of
investments in affiliated
issuers)
Foreign currency transactions (604,743) 377,421,064
Change in net unrealized
appreciation (depreciation)
on:
Investment securities 616,998,569
Assets and liabilities in 115,882 617,114,451
foreign currencies
NET GAIN (LOSS) 994,535,515
NET INCREASE (DECREASE) IN $ 1,169,653,747
NET ASSETS RESULTING FROM
OPERATIONS
OTHER INFORMATION $ 871,310
Expense reductions Directed
brokerage arrangements
Custodian credits 6,141
$ 877,451
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
INCREASE (DECREASE) IN NET YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
ASSETS
Operations Net investment $ 175,118,232 $ 140,172,499
income
Net realized gain (loss) 377,421,064 516,594,647
Change in net unrealized 617,114,451 1,401,296,210
appreciation (depreciation)
NET INCREASE (DECREASE) IN 1,169,653,747 2,058,063,356
NET ASSETS RESULTING FROM
OPERATIONS
Distributions to shareholders (143,408,236) (119,523,328)
From net investment income
From net realized gain (510,364,604) (602,923,285)
TOTAL DISTRIBUTIONS (653,772,840) (722,446,613)
Share transactions - net 1,007,105,749 1,815,363,131
increase (decrease)
TOTAL INCREASE (DECREASE) 1,522,986,656 3,150,979,874
IN NET ASSETS
NET ASSETS
Beginning of period 10,112,069,897 6,961,090,023
End of period (including $ 11,635,056,553 $ 10,112,069,897
undistributed net investment
income of $172,284,861 and
$140,172,474, respectively)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
OTHER INFORMATION:
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
SHARES DOLLARS SHARES DOLLARS
Share transactions Initial 64,328,671 $ 1,568,020,907 81,081,134 $ 1,787,907,743
Class Sold
Reinvested 27,884,679 652,780,343 36,487,203 722,446,589
Redeemed (59,592,607) (1,424,580,460) (32,291,523) (700,239,679)
Net increase (decrease) 32,620,743 $ 796,220,790 85,276,814 $ 1,810,114,653
Service Class A Sold 8,703,524 212,310,778 222,682 5,321,346
Reinvested 42,396 992,496 - -
Redeemed (98,817) (2,418,315) (3,189) (72,868)
Net increase (decrease) 8,647,103 $ 210,884,959 219,493 $ 5,248,478
Distributions From net $ 143,190,527 $ 119,523,328
investment income Initial
Class
Service Class 217,709 -
Total $ 143,408,236 $ 119,523,328
From net realized gain $ 509,589,817 $ 602,923,285
Initial Class
Service Class 774,787 -
Total $ 510,364,604 $ 602,923,285
$ 653,772,840 $ 722,446,613
A SERVICE CLASS COMMENCED
SALE OF SHARES NOVEMBER 3,
1997.
</TABLE>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 1996 1995 1994
Net asset value, beginning of $ 24.28 $ 21.03 $ 19.27 $ 15.35 $ 15.44
period
Income from Investment
Operations
Net investment income .38 C .36 C .35 .41 .41
Net realized and unrealized 2.31 5.06 2.30 4.69 .64
gain (loss)
Total from investment 2.69 5.42 2.65 5.10 1.05
operations
Less Distributions
From net investment income (.34) (.36) (.03) (.40) (.37)
From net realized gain (1.21) (1.81) (.86) (.78) (.77)
Total distributions (1.55) (2.17) (.89) (1.18) (1.14)
Net asset value, end of period $ 25.42 $ 24.28 $ 21.03 $ 19.27 $ 15.35
TOTAL RETURN B, F 11.63% 28.11% 14.28% 35.09% 7.07%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 11,409,912 $ 10,106,742 $ 6,961,090 $ 4,879,435 $ 2,284,412
(000 omitted)
Ratio of expenses to average .58% .58% .58% .61% .60%
net assets
Ratio of expenses to average .57% E .57% E .56% E .61% .58% E
net assets after expense
reductions
Ratio of net investment 1.58% 1.65% 1.97% 2.56% 2.83%
income to average net assets
Portfolio turnover 28% 44% 186% 87% 134%
</TABLE>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 D
Net asset value, beginning of $ 24.27 $ 23.44
period
Income from Investment
Operations
Net investment income C .36 .05
Net realized and unrealized 2.31 .78
gain (loss)
Total from investment 2.67 .83
operations
Less Distributions
From net investment income (.34) -
From net realized gain (1.21) -
Total distributions (1.55) -
Net asset value, end of period $ 25.39 $ 24.27
TOTAL RETURN B, F 11.54% 3.54%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 225,145 $ 5,328
(000 omitted)
Ratio of expenses to average .68% .68% A
net assets
Ratio of expenses to average .67% E .65% A, E
net assets after expense
reductions
Ratio of net investment 1.51% 1.63% A
income to average net assets
Portfolio turnover 28% 44%
A ANNUALIZED
B THE TOTAL RETURNS WOULD
HAVE BEEN LOWER HAD CERTAIN
EXPENSES NOT BEEN REDUCED
DURING THE PERIODS SHOWN
(SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
C NET INVESTMENT INCOME PER
SHARE HAS BEEN CALCULATED
BASED ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD.
D FOR THE PERIOD NOVEMBER 3,
1997 (COMMENCEMENT OF SALE
OF SERVICE CLASS SHARES) TO
DECEMBER 31, 1997.
E 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).
F TOTAL RETURNS DO NOT
REFLECT CHARGES ATTRIBUTABLE
TO YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION
OF THESE CHARGES WOULD
REDUCE THE TOTAL RETURNS
SHOWN. TOTAL RETURNS FOR
PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED.
NOTES TO FINANCIAL STATEMENTS
For the period ended December 31, 1998
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 funds' original
class of shares (Initial Class shares) and Service Class shares. Both
classes 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 certain
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 require 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. Purchases
and sales of securities, income receipts and expense payments are
translated into U.S. dollars at the prevailing exchange rate on the
respective dates of the transactions.
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, the difference
between the amount of net investment income accrued and the U.S.
dollar amount actually received, and gains and losses between trade
and settlement date on purchases and sales of securities. 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 schedules 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.
DEFERRED TRUSTEE COMPENSATION. Under a Deferred Compensation Plan (the
Plan) non-interested Trustees must defer receipt of a portion of, and
may elect to defer receipt of an additional portion of, their annual
compensation. Deferred amounts are treated as though equivalent dollar
amounts had been invested in shares of the fund or are invested in a
cross-section of other Fidelity funds. Deferred amounts remain in the
fund until distributed in accordance with the Plan.
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, foreign currency transactions,
market discount, non-taxable dividends and losses deferred due to wash
sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital.
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.
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., 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.
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 .49% 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 $110,337, all of which was
reallowed to insurance companies, for the distribution of shares and
providing shareholder support services.
Under the Plans, FMR 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, payments made to third parties under the Plans amounted to
$5,762,460 and $155,833 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. (FSC), an affiliate of
FMR, maintains the fund's accounting records. The fee is based on the
level of average net assets for the month plus out-of-pocket expenses.
BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms are shown under the caption
"Other Information" at the end of the fund's schedule of investments.
5. EXPENSE REDUCTIONS.
FMR 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 offset a portion of the fund's expenses.
For the period, the reductions under these arrangements are shown
under the caption "Other Information" on the fund's Statement of
Operations.
6. BANK BORROWINGS.
The fund is permitted to have bank borrowings for temporary or
emergency purposes to fund shareholder redemptions. The fund has
established borrowing arrangements with certain banks. Under the most
restrictive arrangement, each fund must pledge to the bank securities
having a market value in excess of 220% of the total bank borrowings.
The interest rate on the borrowings is the bank's base rate, as
revised from time to time. Information regarding the fund's
participation in the program is included under the caption "Other
Information" at the end of the fund's schedule of investments.
7. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investments Life Insurance Company
(FILI) and its subsidiaries, affiliates of FMR, were the record owners
of approximately 15% of the outstanding shares of the fund. In
addition, one unaffiliated insurance company was record owner of 30%
of the total outstanding shares of the fund.
8. 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:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of
Equity-Income Portfolio (a fund of Variable Insurance Products Fund)
at December 31, 1998, and the results of its operations, the changes
in its net assets and the financial highlights for the periods
indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the
responsibility of the Equity-Income 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, 1998 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 12, 1999
DISTRIBUTIONS
The Board of Trustees of Equity-Income fund 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:
PAY DATE RECORD DATE DIVIDENDS CAPITAL GAINS
Initial Class 2/5/99 2/5/99 $0.38 $0.84
Service Class 2/5/99 2/5/99 $0.38 $0.84
The Fund hereby designates 100% of the long-term capital gain
dividends distributed during the fiscal year as 20%-rate capital gain
dividends.
PROXY VOTING RESULTS
A special meeting of the fund's shareholders was held on September 16,
1998. The results of votes taken among shareholders on proposals
before them are reported below. Each vote reported represents a single
share held on the record date for the meeting.
PROPOSAL 1
To elect the twelve nominees specified below as Trustees.
# OF % OF
SHARES VOTED SHARES VOTED
RALPH F. COX
Affirmative 401,524,778.836 98.101
Against
Withheld 7,772,673.400 1.899
Abstain
TOTAL 409,297,452.236 100.000
PHYLLIS BURKE DAVIS
Affirmative 401,416,312.395 98.074
Against
Withheld 7,881,139.841 1.926
Abstain
TOTAL 409,297,452.236 100.000
ROBERT M. GATES
Affirmative 401,314,653.818 98.050
Against
Withheld 7,982,798.418 1.950
Abstain
TOTAL 409,297,452.236 100.000
EDWARD C. JOHNSON 3D
Affirmative 401,512,704.305 98.098
Against
Withheld 7,784,747.931 1.902
Abstain
TOTAL 409,297,452.236 100.000
E. BRADLEY JONES
Affirmative 401,191,848.664 98.020
Against
Withheld 8,105,603.572 1.980
Abstain
TOTAL 409,297,452.236 100.000
DONALD J. KIRK
Affirmative 401,703,977.336 98.145
Against
Withheld 7,593,474.900 1.855
Abstain
TOTAL 409,297,452.236 100.000
# OF % OF
SHARES VOTED SHARES VOTED
PETER S. LYNCH
Affirmative 401,867,472.658 98.185
Against
Withheld 7,429,979.578 1.815
Abstain
TOTAL 409,297,452.236 100.000
WILLIAM O. MCCOY
Affirmative 401,613,434.545 98.123
Against
Withheld 7,684,017.691 1.877
Abstain
TOTAL 409,297,452.236 100.000
GERALD C. MCDONOUGH
Affirmative 401,164,702.938 98.013
Against
Withheld 8,132,749.298 1.987
Abstain
TOTAL 409,297,452.236 100.000
MARVIN L. MANN
Affirmative 401,553,141.991 98.108
Against
Withheld 7,744,310.245 1.892
Abstain
TOTAL 409,297,452.236 100.000
ROBERT C. POZEN
Affirmative 401,802,011.317 98.169
Against
Withheld 7,495,440.919 1.831
Abstain
TOTAL 409,297,452.236 100.000
THOMAS R. WILLIAMS
Affirmative 401,332,050.029 98.054
Against
Withheld 7,965,402.207 1.946
Abstain
TOTAL 409,297,452.236 100.000
PROPOSAL 2
To ratify the selection of PricewaterhouseCoopers LLP as independent
accountants of the funds.
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 391,001,619.635 95.530
Against 3,360,885.653 .821
Withheld
Abstain 14,934,946.948 3.649
TOTAL 409,297,452.236 100.000
PROPOSAL 3
To authorize the Trustees to adopt an Amended and Restated Declaration
of Trust.
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 381,226,321.852 93.142
Against 8,458,731.723 2.066
Withheld
Abstain 19,612,398.661 4.792
TOTAL 409,297,452.236 100.000
PROPOSAL 4
To approve an amended management contract for the fund.
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 379,191,394.743 92.644
Against 8,488,959.227 2.074
Withheld
Abstain 21,617,098.266 5.282
TOTAL 409,297,452.236 100.000
PROPOSAL 7
To amend the fundamental investment limitation concerning
diversification for the fund.
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 376,766,469.944 92.052
Against 8,933,449.348 2.183
Withheld
Abstain 23,597,532.944 5.765
TOTAL 409,297,452.236 100.000
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 R. Petersen, VICE PRESIDENT
Eric D. Roiter, SECRETARY
Richard A. Silver, TREASURER
Matthew N. Karstetter, DEPUTY 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 *
Robert C. Pozen
Thomas R. Williams *
* INDEPENDENT TRUSTEES
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
VIPEI-ANN-0299 70376
1.540027.101
VARIABLE INSURANCE PRODUCTS
FUND: HIGH INCOME PORTFOLIO
(2_FIDELITY_LOGOS) (registered trademark)
ANNUAL REPORT
DECEMBER 31, 1998
CONTENTS
MARKET ENVIRONMENT 3 A review of what happened in
world markets during the
past 12 months.
PERFORMANCE AND INVESTMENT 4 How the fund has done over
SUMMARY time, and an overview of the
fund's investments at the
end of the period.
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 17 Statements of assets and
liabilities, operations, and
changes in net assets, as
well as financial highlights.
NOTES 20 Notes to the financial
statements.
REPORT OF INDEPENDENT 23 The auditors' opinion.
ACCOUNTANTS
DISTRIBUTIONS 24
PROXY VOTING RESULTS 25
Third party marks appearing herein are the property of their
respective owners.
All other marks appearing herein are registered or unregistered
trademarks or service marks of FMR Corp. or an affiliated company.
(recycle logo)This report is printed on recycled paper using soy-based
inks.
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
Demonstrating erratic mood swings throughout the period, the sometimes
gloomy, sometimes exuberant, oftentimes volatile worldwide stock and
bond markets in 1998 will long be remembered for their turbulent
behavior. When all was said and done, the U.S. and European stock
markets posted impressive returns for the year. Most U.S. bond markets
experienced positive - albeit moderate - performance, with U.S.
Treasuries ending the year as the overall front-runner. Economic and
currency turmoil continued to plague stock and bond performance in
Asia and, in particular, emerging markets.
U.S. STOCK MARKETS
The Standard & Poor's 500 Index - a broad measure of U.S. stock market
performance - rose 28.58% for the 12 months that ended December 31,
1998, well above the index's long-term average annual return of about
12%. For the first time in its history, the Dow Jones Industrial
Average - an index of 30 blue-chip stocks - posted double-digit
percentage gains in four consecutive years, thanks to an 18.07%
increase for the year. Large-cap stocks - particularly in the
technology sector - led the U.S. equity market's charge, as once again
investors preferred the liquidity and the perceived safety of owning
what they know. Small-cap stocks - in comparison - took a beating. The
Russell 2000 Index - a popular measure of small stock performance -
fell -2.55% for the year.
Throughout the period, the U.S. enjoyed a strong economy. Unemployment
averaged 4.5% for the year, the lowest since 1969 and the lowest
peacetime level in 41 years. Inflation levels also were low, while
interest-rates were stable. In comparison to the economy's relative
tranquility, the U.S. stock markets were fluctuating wildly. To
illustrate, the Dow typically had fewer than five swings of 5% in each
year since 1946. In 1998 alone, the Dow experienced 10 such swings.
Much of these gyrations were due to fears about Asia's economic woes,
Russia's currency devaluation and loan defaults, and the subsequent
consequences on emerging markets. On August 31, the Dow plunged 512.61
points - a loss that erased all previous gains for the year to that
point. Faced with global economic chaos, investors began fleeing the
equity markets in droves, searching for safer, less volatile havens,
particularly U.S. Treasuries. To address the lack of confidence in
domestic and global equity markets, the U.S. Federal Reserve Board
stepped in with three separate 0.25% interest-rate cuts during the
fall. Those cuts helped boost confidence in the U.S. economy, and
stocks began to quickly ascend to their former lofty levels,
culminating in a new Dow record of 9374.27 on November 23, 1998.
On a sector-by-sector basis, technology stocks reigned supreme in
1998, thanks in large part to the skyrocketing Internet industry. For
the year, nine of the top 10 best-performing stocks in the S&P 500
were technology stocks. The health care sector was another big winner.
Pharmaceuticals helped drive the strong performance of the health care
industry, as a slew of new products was rushed to the market sooner
than normal thanks to streamlined approval regulations.
Natural resources, on the other hand, suffered tremendously.
Overproduction and poor demand caused oil's price per barrel to plunge
considerably. Gold prices also were down in 1998. The financial sector
- - a top performer for several years - found 1998 to be a challenge.
The financial crises overseas and credit concerns contributed to the
poor showing of many brokerage and investment management firms.
FOREIGN STOCK MARKETS
Foreign stock markets posted mixed results in 1998. The Morgan Stanley
Capital International (MSCI) EAFE Index - which measures stock
performance in Europe, Australasia, and the Far East - returned 20.27%
in 1998. Europe posted the most consistently strong equity markets
when compared to other regions, with the MSCI Europe Index up 28.87%
for the year. The much-maligned Japanese stock market ended the year
on a positive note, thanks in part to long-awaited government
intercession on the ailing banking sector's behalf. For the year, the
Tokyo Stock Exchange Index (TOPIX) was up 7.76%. 1998 proved to be
disastrous for emerging markets. The MSCI Emerging Markets Free Index
suffered a -25.34% loss during the period, as the Asian crisis and
Russia's currency devaluation and loan defaults played havoc with
Latin America, Brazil, Thailand and other emerging-market nations.
U.S. BOND MARKETS
In a year as volatile as 1998, it's not surprising that the
performance of the U.S bond market was mostly positive. Still, most of
the major bond indexes trailed their returns of 1997, as investors
continued to seek out the high returns found in the equity markets.
For the year, the Lehman Brothers Aggregate Bond Index - a broad
measure of the performance of the U.S. taxable bond market - posted a
total return of 8.69%. The Lehman Brothers Corporate Bond Index
returned 8.57% in 1998. General U.S. Treasury funds were the safe
haven of choice in 1998, benefiting from the flight to safety as
investors worldwide reacted to global economic concerns. As a result,
the yield on the benchmark 30-year Treasury fell to its lowest levels
in three decades, tumbling to 5.09% at the end of the period compared
to 5.92% at the start of the year.
FOREIGN BOND MARKETS
Typically, continued low inflation and economic growth in the U.S.
would help provide a positive backdrop for U.S.-based bonds relative
to most foreign bonds. But there was nothing typical about 1998. The
Salomon Brothers World Government Bond Index - a measure of government
bond market performance in developed nations - returned an impressive
15.30% for the 12 months that ended December 31, 1998. Many European
nations - particularly France, Italy and Spain - boasted strong
performance that helped drive the index's overall return. Not all was
rosy in the international bond market, however. In stark contrast to
the developed world, the often-volatile emerging debt markets
experienced a particularly difficult year, illustrated by the J.P.
Morgan Emerging Markets Bond Index return of -11.04% during the
period. Once again, the impact of financial and economic woes in Asia
and Russia was the primary contributor to the poor performance of
emerging markets.
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). If Fidelity had not reimbursed certain fund
expenses, the past 10 year total returns would have been lower.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
1998
VIP: HIGH INCOME - "INITIAL -4.33% 8.80% 11.08%
CLASS"
ML High Yield Master 3.66% 9.01% 11.08%
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 value-weighted index of all domestic and
yankee high-yield bonds. Issues included in the index have maturities
of one year or more 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.
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. 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.
(checkmark)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.
$10,000 OVER 10 YEARS
VIP High Income ML High Yield Master
00152 ML002
1988/12/31 10000.00 10000.00
1989/01/31 10240.31 10149.97
1989/02/28 10290.68 10218.17
1989/03/31 10158.45 10209.08
1989/04/30 10045.94 10239.21
1989/05/31 10231.56 10427.71
1989/06/30 10524.61 10575.45
1989/07/31 10455.32 10625.53
1989/08/31 10394.68 10678.02
1989/09/30 10030.97 10576.36
1989/10/31 9600.93 10409.07
1989/11/30 9609.02 10432.40
1989/12/31 9582.68 10422.97
1990/01/31 9370.86 10219.26
1990/02/28 9226.57 10070.44
1990/03/31 9129.22 10206.57
1990/04/30 9156.26 10258.42
1990/05/31 9344.40 10443.72
1990/06/30 9491.59 10646.06
1990/07/31 9638.20 10871.03
1990/08/31 9476.97 10454.87
1990/09/30 9252.25 10000.17
1990/10/31 9027.74 9745.69
1990/11/30 9239.49 9828.25
1990/12/31 9368.69 9969.87
1991/01/31 9567.46 10110.80
1991/02/28 10097.51 10861.26
1991/03/31 10455.30 11328.25
1991/04/30 10826.33 11731.66
1991/05/31 10985.35 11788.95
1991/06/30 11223.87 12026.11
1991/07/31 11647.92 12314.26
1991/08/31 11806.93 12573.08
1991/09/30 12071.96 12733.22
1991/10/31 12482.75 13111.60
1991/11/30 12588.76 13263.05
1991/12/31 12655.02 13417.13
1992/01/31 13330.84 13886.24
1992/02/29 13814.85 14231.11
1992/03/31 14261.42 14429.67
1992/04/30 14362.26 14534.70
1992/05/31 14535.12 14766.53
1992/06/30 14693.58 14950.00
1992/07/31 14981.69 15252.91
1992/08/31 15298.61 15454.84
1992/09/30 15457.08 15630.94
1992/10/31 15226.59 15433.52
1992/11/30 15413.86 15652.09
1992/12/31 15586.72 15853.63
1993/01/31 16004.48 16244.00
1993/02/28 16277.49 16551.48
1993/03/31 16653.12 16838.43
1993/04/30 16762.68 16959.30
1993/05/31 17013.10 17187.59
1993/06/30 17451.34 17510.51
1993/07/31 17623.51 17698.72
1993/08/31 17811.33 17867.44
1993/09/30 17873.93 17955.60
1993/10/31 18296.52 18293.84
1993/11/30 18468.69 18393.89
1993/12/31 18766.06 18577.82
1994/01/31 19392.12 18984.95
1994/02/28 19368.87 18848.42
1994/03/31 18716.38 18234.20
1994/04/30 18527.49 18021.12
1994/05/31 18561.84 17956.91
1994/06/30 18493.15 18023.01
1994/07/31 18561.84 18149.70
1994/08/31 18561.84 18275.77
1994/09/30 18699.20 18268.85
1994/10/31 18527.49 18315.28
1994/11/30 18372.96 18159.48
1994/12/31 18458.81 18361.47
1995/01/31 18664.86 18620.92
1995/02/28 19305.47 19201.92
1995/03/31 19545.87 19469.15
1995/04/30 20119.11 19924.99
1995/05/31 20636.88 20547.49
1995/06/30 20692.36 20704.43
1995/07/31 21191.64 20941.13
1995/08/31 21358.07 21068.22
1995/09/30 21709.41 21309.27
1995/10/31 21912.82 21460.32
1995/11/30 22023.77 21669.80
1995/12/31 22282.66 22017.64
1996/01/31 22800.43 22365.37
1996/02/29 23177.02 22399.05
1996/03/31 23116.13 22338.21
1996/04/30 23461.15 22348.33
1996/05/31 23785.87 22509.51
1996/06/30 23907.64 22644.72
1996/07/31 23826.46 22798.46
1996/08/31 24171.48 23033.90
1996/09/30 24881.81 23528.10
1996/10/31 24800.63 23785.95
1996/11/30 25064.46 24266.84
1996/12/31 25409.48 24453.57
1997/01/31 25754.50 24641.50
1997/02/28 26221.65 24987.16
1997/03/31 25407.04 24709.65
1997/04/30 25803.33 24990.88
1997/05/31 26882.14 25488.12
1997/06/30 27366.51 25882.67
1997/07/31 28357.25 26503.80
1997/08/31 28599.43 26444.17
1997/09/30 29612.19 26895.66
1997/10/31 29347.99 27074.16
1997/11/30 29568.15 27316.63
1997/12/31 29898.40 27589.75
1998/01/31 30580.91 27993.91
1998/02/28 30812.25 28116.20
1998/03/31 31457.27 28358.50
1998/04/30 31581.31 28493.20
1998/05/31 31358.04 28677.53
1998/06/30 31333.23 28833.67
1998/07/31 31506.89 28998.10
1998/08/31 27611.94 27746.80
1998/09/30 27339.05 27802.15
1998/10/31 26594.79 27338.36
1998/11/30 28777.94 28590.85
1998/12/31 28604.28 28600.34
IMATRL PRASUN SHR__CHT 19981231 19990111 120454 R00000000000123
$10,000 OVER 10 YEARS: Let's say hypothetically that $10,000 was
invested in Variable Insurance Products Fund: High Income Portfolio on
December 31, 1988. As the chart shows, by December 31, 1998, the value
of the investment would have grown to $28,604 - a 186.04% 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 $28,600 - a 186.00% increase.
INVESTMENT SUMMARY
TOP FIVE HOLDINGS AS OF
DECEMBER 31, 1998
(BY ISSUER, EXCLUDING CASH % OF FUND'S INVESTMENTS
EQUIVALENTS)
Nextel Communications, Inc. 3.6
CSC Holdings, Inc. 2.7
Millicom International 2.5
Cellular SA
NEXTLINK Communications, Inc. 2.4
NTL, Inc. 2.2
TOP FIVE MARKET SECTORS AS OF
DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
UTILITIES 26.8
MEDIA & LEISURE 25.8
BASIC INDUSTRIES 6.3
TECHNOLOGY 5.6
RETAIL & WHOLESALE 4.8
QUALITY DIVERSIFICATION AS OF
DECEMBER 31, 1998
% OF FUND'S INVESTMENTS
Aaa, Aa, A 0.0
Baa 0.2
Ba 6.6
B 46.5
Caa, Ca, C 15.5
Not Rated 8.2
TABLE EXCLUDES SHORT-TERM INVESTMENTS. WHERE MOODY'S RATINGS ARE NOT
AVAILABLE, WE HAVE USED S&P RATINGS. UNRATED DEBT SECURITIES THAT ARE
EQUIVALENT TO BA AND BELOW AT DECEMBER 31, 1998 ACCOUNT FOR 8.2% OF
THE FUND'S INVESTMENTS.
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
(photograph of Barry Coffman)
An interview with Barry Coffman, Portfolio Manager of High Income
Portfolio
Q. HOW DID THE FUND PERFORM, BARRY?
A. For the 12-month period that ended December 31, 1998, the fund
lagged the 3.66% return of its benchmark - the Merrill Lynch High
Yield Master Index.
Q. WHY DID THE FUND LAG ITS BENCHMARK?
A. The fund's lag can be attributed to two main factors. First, the
fund had a large weighting - relative to the index - in bonds that
carried a credit rating of B, which are the lower-quality securities
in the high-yield market. After outpacing their higher-quality
counterparts through July, a global flight to quality caused
lower-rated securities to underperform from August through the end of
the year. Turbulence across world markets sparked a search for the
safety and liquidity of U.S. Treasury bonds and prompted investors to
shun stocks and riskier types of bonds. The deepening investor gloom
had a disproportionately negative effect on high-yield bonds, with
lower-quality securities suffering the biggest losses. Another reason
that the fund lagged was its relatively large stake in zero coupon
bonds. These securities make no interest payments, but instead are
sold at a discount to their face value and provide returns by
gradually appreciating to that face value. For a variety of technical
and fundamental reasons - including the fact that they are not as
liquid, or easily traded - zeros lagged bonds that pay interest during
the high-yield market's downturn that began in August.
Q. HOW DID THE FUND'S TELECOMMUNICATIONS HOLDINGS - INCLUDING CELLULAR
AND TELEPHONE SERVICES COMPANIES - PERFORM AGAINST THIS BACKDROP?
A. Most of the fund's telecommunications companies themselves
continued to perform well from a fundamental perspective, although
their high-yield securities underperformed. Because many
telecommunications companies are high-growth, capital-intensive
companies, they tend to be large issuers of lower-rated securities
that do not pay current interest - including zero coupon bonds and
payment-in-kind preferred stocks, and they were hurt
disproportionately during the last half of 1998 as a result. In
addition, some market participants worried that, given the difficult
market environment, telecommunications companies would have difficulty
raising the additional capital needed to fund their future growth.
Despite the fact that the last several months of 1998 proved to be a
somewhat rocky time for them, I continued to hold onto most of the
fund's telecommunications investments such as Nextel, Millicom and
NEXTLINK. I believe that the emerging telecommunications companies
held by the fund will continue to experience healthy growth because
the demand for their services should remain healthy even with slower
economic growth. Furthermore, the majority of the fund's emerging
telecommunications companies were very aggressive in raising capital
when the market was strong, and they have raised sufficient capital to
fund their business plans well into the year 2000.
Q. WERE THERE DISAPPOINTMENTS OUTSIDE THE TELECOMMUNICATIONS SECTOR
DURING THE YEAR?
A. In the first half of the year, Renaissance Cosmetics proved to be a
disappointment, due to the combination of a weak environment for
mass-market fragrances and a badly timed acquisition. More recently,
securities issued by Cellnet Data Systems, a wireless data
communications company, declined when the company disappointed
investors with news that it wasn't adding customers as quickly as it
had originally forecast and with concerns over its ability to raise
capital.
Q. WHAT WERE SOME BRIGHT SPOTS FOR THE FUND?
A. The fund's cable company holdings performed well during the period
in large part because the value of cable companies was highlighted by
AT&T's acquisition of TCI and Microsoft's investment in Comcast.
Thanks to that development, and its own continued strong operations,
Cablevision performed quite well throughout the entire year. Our
preferred-stock holdings in Time Warner also performed well when they
were redeemed by the company at a profit to the fund. A wave of
industry consolidation also boosted many of our supermarket holdings,
most specifically Pathmark and Fred Meyer.
Q. WHAT'S YOUR OUTLOOK FOR THE HIGH-YIELD MARKET?
A. Barring a U.S. recession, which I don't foresee in the near term,
high-yield bonds could post decent performance in 1999. As a result of
the high-yield market's downturn in the last months of 1998,
high-yield bonds are priced quite attractively against a backdrop of
slow but steady economic growth. In addition, I believe that the
high-yield market could benefit from more merger and acquisition
activity next year.
The views expressed in this report reflect those of the portfolio
manager only through the end of the period of the report as stated on
the cover. The manager's views are subject to change at any time based
on market and other conditions.
(checkmark)FUND FACTS
GOAL: to seek high current income by
investing primarily in all types of
income-producing debt securities
START DATE: September 19, 1985
SIZE: as of December 31, 1998, more than
$2.4 billion
MANAGER: Barry Coffman, since 1990; joined
Fidelity in 1986
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
INVESTMENTS DECEMBER 31, 1998
Showing Percentage of Total Value of Investment in Securities
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
CORPORATE BONDS - 76.3%
MOODY'S RATINGS (UNAUDITED) (H) PRINCIPAL AMOUNT VALUE (NOTE 1)
CONVERTIBLE BONDS - 0.9%
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.1%
ELECTRICAL EQUIPMENT - 0.1%
Cymer, Inc. 3.5% 8/6/04 (c) - $ 3,940,000 $ 2,890,975
MEDIA & LEISURE - 0.4%
LODGING & GAMING - 0.4%
Signature Resorts, Inc. 5.75% Caa1 13,355,000 9,682,375
1/15/07
RETAIL & WHOLESALE - 0.4%
RETAIL & WHOLESALE,
MISCELLANEOUS - 0.4%
Corporate Express, Inc. 4.5% B3 10,000,000 8,400,000
7/1/00
UTILITIES - 0.0%
TELEPHONE SERVICES - 0.0%
GST Telecommunications, Inc. - 630,000 541,800
0% 12/15/05 (b)(d)
TOTAL CONVERTIBLE BONDS 21,515,150
NONCONVERTIBLE BONDS - 75.4%
AEROSPACE & DEFENSE - 0.2%
SHIP BUILDING & REPAIR - 0.2%
Newport News Shipbuilding, B1 4,650,000 4,917,375
Inc. 9.25% 12/1/06
BASIC INDUSTRIES - 6.0%
CHEMICALS & PLASTICS - 1.7%
Huntsman Corp.:
9.5% 7/1/07 (d) B2 26,470,000 26,403,825
9.5% 7/1/07 (d) - 7,100,000 7,082,250
Koppers Industries, Inc. B2 7,745,000 7,512,650
9.875% 12/1/07
40,998,725
IRON & STEEL - 0.9%
GS Technologies Operating, B2 3,490,000 2,338,300
Inc. 12.25% 10/1/05
Neenah Corp. 11.125% 5/1/07 B3 7,490,000 7,695,975
(d)
WHX Corp. 10.5% 4/15/05 B3 13,650,000 12,421,500
22,455,775
METALS & MINING - 1.2%
Doe Run Resources Corp.:
11.25% 3/15/05 B3 1,680,000 1,360,800
11.6963% 3/15/03 (e) B3 3,880,000 3,065,200
Interlake Corp. 12.125% 3/1/02 B3 12,265,000 12,510,300
MOODY'S RATINGS (UNAUDITED) (H) PRINCIPAL AMOUNT VALUE (NOTE 1)
Kaiser Aluminum & Chemical
Corp.:
Series B 10.875% 10/15/06 B1 $ 270,000 $ 272,700
Series D 10.875% 10/15/06 B1 3,680,000 3,716,800
12.75% 2/1/03 B2 8,870,000 8,670,425
29,596,225
PAPER & FOREST PRODUCTS - 2.2%
Advance Agro PCL 13% 11/15/07 B3 1,250,000 1,012,500
(d)
Ainsworth Lumber Co. Ltd. B3 3,730,000 3,683,375
12.5% 7/15/07 pay-in-kind
APP Finance II Mauritius Ltd. Caa 11,785,000 6,128,200
12% 3/15/04
Container Corp. of America B2 1,690,000 1,711,125
gtd. 9.75% 4/1/03
Doman Industries Ltd. yankee B1 3,730,000 2,797,500
8.75% 3/15/04
Indah Kiat Finance Mauritius Caa1 8,320,000 4,492,800
Ltd. 10% 7/1/07
Indah Kiat International Caa1 1,700,000 1,122,000
Finance Co. BV 12.5% 6/15/06
Mail-Well Corp. 10.5% 2/15/04 B+ 1,640,000 1,681,000
Millar Western Forest B3 12,935,000 9,571,900
Products Ltd. 9.875% 5/15/08
Pindo Deli Finance Mauritius Caa1 3,740,000 1,870,000
Ltd. 10.25% 10/1/02
Stone Container Corp.:
10.75% 10/1/02 B1 6,965,000 7,173,950
12.58% 8/1/16 (e) B2 1,150,000 1,219,000
Tembec Finance Corp. yankee Ba3 4,865,000 5,083,925
9.875% 9/30/05
Tjiwi Kimia Finance Mauritius Caa1 4,500,000 2,385,000
Ltd. 10% 8/1/04
Tjiwi Kimia International Caa1 4,500,000 2,970,000
Finance Co. 13.25% 8/1/01
52,902,275
TOTAL BASIC INDUSTRIES 145,953,000
CONSTRUCTION & REAL ESTATE -
1.4%
BUILDING MATERIALS - 0.7%
American Standard Cos., Inc.:
7.375% 2/1/08 Ba3 3,270,000 3,278,175
7.625% 2/15/10 Ba3 1,400,000 1,403,500
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (H) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
CONSTRUCTION & REAL ESTATE -
CONTINUED
BUILDING MATERIALS - CONTINUED
International Utility Caa1 $ 7,000,000 $ 6,580,000
Structures, Inc. 10.75%
2/1/08
Schuff Steel Co. 10.5% 6/1/08 B3 5,850,000 5,089,500
16,351,175
REAL ESTATE - 0.5%
LNR Property Corp. 9.375% B1 14,395,000 13,819,200
3/15/08
REAL ESTATE INVESTMENT TRUSTS
- - 0.2%
Ocwen Asset Investment Corp. - 5,520,000 4,250,400
11.5% 7/1/05 (d)
TOTAL CONSTRUCTION & REAL 34,420,775
ESTATE
DURABLES - 2.7%
AUTOS, TIRES, & ACCESSORIES -
1.2%
Blue Bird Body Co. 10.75% B2 4,475,000 4,609,250
11/15/06
Breed Technologies, Inc. B3 9,800,000 8,575,000
9.25% 4/15/08 (d)
Federal-Mogul Corp. 7.875% Ba2 2,800,000 2,864,680
7/1/10
Morris Material Handling, B2 16,280,000 12,047,200
Inc. 9.5% 4/1/08
28,096,130
HOME FURNISHINGS - 0.2%
Omega Cabinets Ltd. 10.5% B3 5,060,000 4,971,450
6/15/07
TEXTILES & APPAREL - 1.3%
Cluett American Corp. 10.125% B3 4,210,000 3,978,450
5/15/08
Nine West Group, Inc. 8.375% Ba2 220,000 213,400
8/15/05
Polymer Group, Inc. 9% 7/1/07 B2 9,060,000 8,969,400
Synthetic Industries, Inc. B2 11,770,000 12,005,400
9.25% 2/15/07
Worldtex, Inc. 9.625% 12/15/07 B1 8,905,000 7,747,350
32,914,000
TOTAL DURABLES 65,981,580
ENERGY - 4.0%
COAL - 0.7%
P&L Coal Holdings Corp.:
8.875% 5/15/08 Ba3 2,560,000 2,611,200
9.625% 5/15/08 B2 13,290,000 13,522,575
16,133,775
MOODY'S RATINGS (UNAUDITED) (H) PRINCIPAL AMOUNT VALUE (NOTE 1)
ENERGY SERVICES - 1.0%
Bayard Drilling Technologies, B2 $ 2,490,000 $ 2,739,000
Inc. 11% 6/30/05
DI Industries, Inc. 8.875% B1 2,655,000 1,924,875
7/1/07
Grey Wolf, Inc. 8.875% 7/1/07 B1 3,000,000 2,175,000
Ocean Rig Norway AS 10.25% B3 8,100,000 6,318,000
6/1/08
Pride Petroleum Services, Ba3 7,020,000 6,528,600
Inc. 9.375% 5/1/07
R&B Falcon Corp. 9.5% Ba1 5,800,000 5,800,000
12/15/08 (d)
25,485,475
OIL & GAS - 2.3%
Belco Oil & Gas Corp. 8.875% B1 950,000 859,750
9/15/07
Canadian Forest Oil Ltd. B2 7,110,000 6,327,900
8.75% 9/15/07
Chesapeake Energy Corp. B3 9,960,000 7,470,000
9.625% 5/1/05
Cross Timbers Oil Co. 9.25% B2 530,000 490,250
4/1/07
Great Lakes Carbon Corp.:
0% 5/15/09 (b) Caa1 11,115,000 5,668,650
10.25% 5/15/08 pay-in-kind B3 4,950,000 4,987,125
HS Resources, Inc. 9.25% B2 530,000 503,500
11/15/06
Hurricane Hydrocarbons Ltd. Caa2 4,680,000 2,340,000
11.75% 11/1/04 (d)
Ocean Energy, Inc.:
8.375% 7/1/08 B1 8,450,000 7,900,750
10.375% 10/15/05 B2 1,280,000 1,321,600
Plains Resources, Inc.:
Series D, 10.25% 3/15/06 B2 2,770,000 2,797,700
10.25% 3/15/06 B2 8,140,000 8,221,400
Seven Seas Petroleum, Inc. Caa1 4,210,000 2,105,000
12.5% 5/15/05
Southwest Royalties, Inc. Caa2 1,630,000 733,500
10.5% 10/15/04
Vintage Petroleum, Inc. 9% B1 4,580,000 4,488,400
12/15/05
56,215,525
TOTAL ENERGY 97,834,775
FINANCE - 2.4%
CREDIT & OTHER FINANCE - 2.4%
Anthony Crane Rentals B3 6,290,000 6,006,950
LP/Anthony Credit Capital
Corp. 10.375% 8/1/08 (d)
Arcadia Financial Ltd. 11.5% B2 6,630,000 4,972,500
3/15/07
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (H) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
FINANCE - CONTINUED
CREDIT & OTHER FINANCE -
CONTINUED
ContiFinancial Corp. 8.125% B1 $ 2,410,000 $ 1,638,800
4/1/08
Delta Financial Corp. 9.5% B3 1,170,000 982,800
8/1/04
Imperial Credit Capital Trust B2 4,870,000 3,701,200
I 10.25% 6/14/02
Imperial Credit Industries B2 17,470,000 13,451,900
9.875% 1/15/07
Macsaver Financial Services, Ba1 630,000 453,600
Inc. 7.6% 8/1/07
Ocwen Capital Trust 10.875% B2 6,520,000 5,216,000
8/1/27
Olympic Financial Ltd. 11.5% B2 6,250,000 4,687,500
3/15/07
ORBCOMM Global LP/ORBCOMM B3 7,121,000 7,334,630
Capital Co. 14% 8/15/04
Time Warner Telecom LLC/Time B2 8,840,000 9,083,100
Warner Telecom, Inc. 9.75%
7/15/08
57,528,980
SECURITIES INDUSTRY - 0.0%
ECM Corp. LP 14% 6/10/02 (d) - 73,430 73,246
TOTAL FINANCE 57,602,226
HEALTH - 2.1%
MEDICAL EQUIPMENT & SUPPLIES
- - 0.5%
Graham-Field Health Products, Caa1 1,730,000 1,141,800
Inc. 9.75% 8/15/07
Wright Medical Technology, Caa3 18,650,000 9,791,250
Inc. 11.75% 7/1/00 (e)
10,933,050
MEDICAL FACILITIES MANAGEMENT
- - 1.6%
Fountain View, Inc. 11.25% Caa1 7,330,000 6,377,100
4/15/08
Harborside Healthcare Corp. B3 10,250,000 4,971,250
0% 8/1/08 (b)
Oxford Health Plans, Inc. 11% Caa1 11,100,000 10,434,000
5/15/05 (d)
Tenet Healthcare Corp. 8.125% Ba3 16,160,000 16,564,000
12/1/08 (d)
38,346,350
TOTAL HEALTH 49,279,400
MOODY'S RATINGS (UNAUDITED) (H) PRINCIPAL AMOUNT VALUE (NOTE 1)
INDUSTRIAL MACHINERY &
EQUIPMENT - 3.6%
ELECTRICAL EQUIPMENT - 1.7%
Advanced Lighting B2 $ 5,330,000 $ 4,823,650
Technologies, Inc. 8%
3/15/08 (d)
Motors & Gears, Inc. 10.75% B3 30,540,000 31,303,500
11/15/06
Telex Communications, Inc. B2 7,490,000 6,591,200
10.5% 5/1/07
42,718,350
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.5%
Bucyrus International, Inc. B1 170,000 141,950
9.75% 9/15/07
Continental Global Group, B2 2,320,000 1,983,600
Inc. 11% 4/1/07
Thermadyne Holdings Corp. 0% Caa1 11,470,000 5,046,800
6/1/08 (b)
Thermadyne Manufacturing LLC B3 5,460,000 4,968,600
9.875% 6/1/08
12,140,950
POLLUTION CONTROL - 1.4%
Allied Waste North America,
Inc.:
7.625% 1/1/06 (d) Ba2 6,680,000 6,763,500
7.875% 1/1/09 (d) Ba2 10,620,000 10,752,750
Envirosource, Inc. 9.75% B3 17,476,000 15,815,780
6/15/03
33,332,030
TOTAL INDUSTRIAL MACHINERY & 88,191,330
EQUIPMENT
MEDIA & LEISURE - 21.1%
BROADCASTING - 13.6%
ACME Television LLC/ACME B3 13,470,000 10,742,325
Financial Corp. 0% 9/30/04
(b)
Adelphia Communications Corp.:
9.5% 2/15/04 pay-in-kind B2 14,541,518 14,867,103
9.875% 3/1/05 B2 1,000,000 1,090,000
9.875% 3/1/07 B2 1,000,000 1,105,000
American Mobile Satellite - 4,180,000 2,591,600
Corp. 12.25% 4/1/08
Ascent Entertainment Group, B3 16,195,000 9,717,000
Inc. 0% 12/15/04 (b)
CapStar Broadcasting B3 3,200,000 2,624,000
Partners, Inc. 0% 2/1/09 (b)
Chancellor Media Corp.:
8% 11/1/08 (d) Ba2 10,990,000 11,209,800
9% 10/1/08 (d) B1 5,865,000 6,172,913
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (H) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
MEDIA & LEISURE - CONTINUED
BROADCASTING - CONTINUED
CSC Holdings, Inc.:
9.25% 11/1/05 B1 $ 1,250,000 $ 1,337,500
9.875% 5/15/06 B1 4,000,000 4,380,000
Echostar Satellite B3 2,810,000 2,810,000
Broadcasting Corp. 0%
3/15/04 (b)
International Cabletel, Inc. B3 24,365,000 19,735,650
0% 2/1/06 (b)
Iridium Operating LLC/Iridium
Capital Corp.:
10.875% 7/15/05 B3 25,100,000 21,335,000
11.25% 7/15/05 B3 13,790,000 11,859,400
Metromedia Fiber Network, B2 14,040,000 14,426,100
Inc. 10% 11/15/08 (d)
NTL, Inc.:
0% 4/1/08 (b) B3 48,485,000 29,939,488
10% 2/15/07 B3 13,370,000 13,771,100
11.5% 10/1/08 (d) B3 8,980,000 9,653,500
Olympus Communications B1 9,320,000 10,252,000
LP/Olympus Capital Corp.
10.625% 11/15/06
Orbital Imaging Corp. 11.625% - 6,895,000 6,998,425
3/1/05
Orion Network Systems, Inc.:
0% 1/15/07 (b) B2 41,220,000 25,556,400
11.25% 1/15/07 B2 4,995,000 4,870,125
Rogers Cablesystems Ltd. Ba3 1,980,000 2,187,900
yankee 10.125% 9/1/12
Satelites Mexicanos SA de CV:
9.06% 6/30/04 (d)(e) - 11,766,000 10,942,380
10.125% 11/1/04 B3 24,710,000 19,768,000
Telewest Communications PLC B1 4,960,000 5,580,000
11.25% 11/1/08 (d)
Telewest PLC:
yankee 9.625% 10/1/06 B1 1,630,000 1,695,200
0% 10/1/07 (b) B1 31,492,000 26,138,360
UIH Australia/Pacific, Inc.:
Series B 0% 5/15/06 (b) B2 25,545,000 12,389,325
Series D 0% 5/15/06 (b) B2 5,520,000 2,677,200
United International B3 24,710,000 13,343,400
Holdings, Inc. 0% 2/15/08 (b)
331,766,194
ENTERTAINMENT - 2.0%
AMC Entertainment, Inc. 9.5% B2 8,740,000 8,914,800
3/15/09
MOODY'S RATINGS (UNAUDITED) (H) PRINCIPAL AMOUNT VALUE (NOTE 1)
Cinemark USA, Inc.:
8.5% 8/1/08 B2 $ 3,370,000 $ 3,311,025
9.625% 8/1/08 B2 5,240,000 5,475,800
Harrahs Operating Co., Inc. Ba2 15,000,000 15,000,000
7.875% 12/15/05
IMAX Corp. 7.875% 12/1/05 Ba2 3,300,000 3,333,000
Premier Parks, Inc.:
0% 4/1/08 (b) B3 12,660,000 8,577,150
9.25% 4/1/06 B3 2,640,000 2,732,400
47,344,175
LODGING & GAMING - 3.3%
Aladdin Gaming Caa2 7,920,000 2,059,200
Holdings/Aladdin Capital
Corp. 0% 3/1/10 (b)
Circus Circus Enterprises,
Inc.:
6.45% 2/1/06 Baa3 1,070,000 963,000
7% 11/15/36 Baa3 3,060,000 2,769,300
7.625% 7/15/13 Ba2 4,870,000 4,285,600
9.25% 12/1/05 Ba2 7,560,000 7,673,400
HMH Properties, Inc.:
7.875% 8/1/08 Ba2 12,410,000 12,037,700
8.45% 12/1/08 Ba2 7,340,000 7,340,000
KSL Recreation Group, Inc. B3 8,640,000 8,596,800
10.25% 5/1/07
Signature Resorts, Inc.:
9.25% 5/15/06 B2 14,520,000 13,358,400
9.75% 10/1/07 B3 19,080,000 16,027,200
Sun International Hotels Ba3 4,820,000 4,964,600
Ltd./Sun International North
America, Inc. yankee 9%
3/15/07
80,075,200
PUBLISHING - 0.7%
Big Flower Press Holdings, B2 17,010,000 17,180,100
Inc. 8.875% 7/1/07
RESTAURANTS - 1.5%
AFC Enterprises, Inc. 10.25% B3 10,600,000 11,050,500
5/15/07
Dominos, Inc. 10.375% 1/15/09 B3 5,520,000 5,547,600
(d)
Host Marriott Travel Plazas, Ba3 8,560,000 8,752,600
Inc. 9.5% 5/15/05
Nebraska Restaurant, Inc. B3 7,690,000 7,766,900
10.75% 7/15/08
SC International Services, B2 4,310,000 4,326,163
Inc. Series B, 9.25% 9/1/07
37,443,763
TOTAL MEDIA & LEISURE 513,809,432
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (H) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
NONDURABLES - 0.8%
FOODS - 0.1%
Del Monte Corp. 12.25% 4/15/07 Caa1 $ 3,070,000 $ 3,423,050
HOUSEHOLD PRODUCTS - 0.7%
AKI Holding Corp. 0% 7/1/09 Caa1 9,120,000 3,556,800
(b)(d)
AKI, Inc. 10.5% 7/1/08 (d) B2 2,920,000 2,774,000
Revlon Consumer Products
Corp.:
8.625% 2/1/08 B3 6,230,000 5,669,300
9% 11/1/06 (d) B2 4,040,000 3,999,600
15,999,700
TOTAL NONDURABLES 19,422,750
PRECIOUS METALS - 0.1%
Centaur Mining & Exploration B1 3,140,000 2,857,400
Ltd. 11% 12/1/07
RETAIL & WHOLESALE - 4.2%
APPAREL STORES - 1.3%
Mothers Work, Inc. 12.625% B3 10,140,000 10,393,500
8/1/05
Specialty Retailers, Inc.:
8.5% 7/15/05 Ba3 10,190,000 8,712,450
9% 7/15/07 B2 16,350,000 13,080,000
32,185,950
GROCERY STORES - 0.3%
Pathmark Stores, Inc. 9.625% Caa1 7,550,000 7,417,875
5/1/03
RETAIL & WHOLESALE,
MISCELLANEOUS - 2.6%
Amazon.com, Inc. 0% 5/1/08 (b) Caa2 40,060,000 26,439,600
Guitar Center, Inc. 11% 7/1/06 B1 6,587,000 6,916,350
J. Crew Group, Inc. 0% Caa3 26,187,000 11,784,150
10/15/08 (b)
J. Crew Operating Corp. Caa1 9,470,000 8,191,550
10.375% 10/15/07
Metals USA, Inc. 8.625% B2 4,085,000 3,829,688
2/15/08
U.S. Office Products Co. B3 9,540,000 6,010,200
9.75% 6/15/08
63,171,538
TOTAL RETAIL & WHOLESALE 102,775,363
MOODY'S RATINGS (UNAUDITED) (H) PRINCIPAL AMOUNT VALUE (NOTE 1)
SERVICES - 3.6%
LEASING & RENTAL - 1.6%
AP Holdings, Inc. 0% 3/15/08 Caa2 $ 6,800,000 $ 3,672,000
(b)
Apcoa, Inc. 9.25% 3/15/08 Caa1 14,730,000 13,551,600
GPA Holland BV 8.94% 2/16/99 - 500,000 502,500
Hollywood Entertainment Corp. B3 14,260,000 14,402,600
10.625% 8/15/04
Renters Choice, Inc. 11% B2 7,630,000 7,668,150
8/15/08 (d)
39,796,850
PRINTING - 0.9%
Sullivan Graphics, Inc. Caa1 21,340,000 21,553,400
12.75% 8/1/05
SERVICES - 1.1%
AMRESCO, Inc. 9.875% 3/15/05 Caa3 820,000 574,000
Coach USA, Inc. 9.375% 7/1/07 B1 550,000 566,500
Iron Mountain, Inc. 8.75% B3 1,955,000 2,013,650
9/30/09
Medaphis Corp. 9.5% 2/15/05 Caa1 14,303,000 11,013,310
SITEL Corp. 9.25% 3/15/06 B2 1,400,000 1,204,000
Spin Cycle, Inc. 0% 5/1/05 (b) - 23,255,000 10,697,300
26,068,760
TOTAL SERVICES 87,419,010
TECHNOLOGY - 3.5%
COMMUNICATIONS EQUIPMENT - 0.5%
Jordan Telecommunication
Products, Inc.:
0% 8/1/07 (b) B3 10,400,000 8,008,000
9.875% 8/1/07 B3 2,990,000 2,990,000
10,998,000
COMPUTER SERVICES & SOFTWARE
- - 1.4%
Concentric Network Corp. - 9,920,000 10,118,400
12.75% 12/15/07
DecisionOne Corp. 9.75% 8/1/07 B3 6,390,000 2,939,400
DecisionOne Holdings Corp. 0% Caa1 12,045,000 2,409,000
8/1/08 unit (b)
ICG Services, Inc.:
0% 2/15/08 (b) - 27,840,000 14,755,200
0% 5/1/08 (b) - 3,030,000 1,568,025
TeleHub Communications Corp. - 6,000,000 3,180,000
0% 7/31/05 unit (b)(d)
34,970,025
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (H) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
TECHNOLOGY - CONTINUED
ELECTRONIC INSTRUMENTS - 0.5%
Telecommunications Techniques B3 $ 12,980,000 $ 12,720,400
Co. LLC 9.75% 5/15/08
ELECTRONICS - 1.1%
Communications Instruments, B3 4,460,000 4,292,750
Inc. 10% 9/15/04
Fairchild Semiconductor Corp. B2 670,000 663,300
10.125% 3/15/07
Hadco Corp. 9.5% 6/15/08 B2 13,550,000 13,346,750
Insilco Corp. 12% 8/15/07 B3 7,380,000 7,601,400
unit (d)
25,904,200
TOTAL TECHNOLOGY 84,592,625
TRANSPORTATION - 1.3%
AIR TRANSPORTATION - 0.8%
Atlas Air, Inc. 9.25% 4/15/08 B3 5,880,000 5,821,200
Kitty Hawk, Inc. 9.95% B1 13,379,000 13,178,315
11/15/04
18,999,515
SHIPPING - 0.5%
Amer Reefer Co. Ltd. 10.25% B1 3,070,000 1,934,100
3/1/08
Holt Group, Inc. 9.75% Caa1 11,100,000 7,659,000
1/15/06 (d)
Hvide Marine, Inc. 8.375% B1 820,000 656,000
2/15/08
Millenium Seacarriers, Inc. B3 3,000,000 2,400,000
12% 7/15/05 (d)
12,649,100
TOTAL TRANSPORTATION 31,648,615
UTILITIES - 18.4%
CELLULAR - 8.2%
Cellnet Data Systems, Inc. 0% - 48,500,000 10,670,000
10/1/07 (b)
Dial Call Communications, B2 4,080,000 3,998,400
Inc. 10.25% 12/15/05
Iridium LLC/Iridium Capital B3 2,220,000 2,031,300
Corp. 13% 7/15/05
McCaw International Ltd. 0% Caa1 45,205,000 24,410,700
4/15/07 (b)
Millicom International Caa1 85,300,000 59,923,244
Cellular SA 0% 6/1/06 (b)
MOODY'S RATINGS (UNAUDITED) (H) PRINCIPAL AMOUNT VALUE (NOTE 1)
Nextel Communications, Inc.:
0% 8/15/04 (b) B2 $ 6,680,000 $ 6,496,300
0% 2/15/08 (b) B2 38,320,000 22,992,000
Nextel International, Inc. 0% Caa1 19,370,000 8,716,500
4/15/08 (b)
PageMart Nationwide, Inc. 0% B3 9,140,000 8,088,900
2/1/05 (b)
PageMart Wireless, Inc. 0% Caa2 10,600,000 4,876,000
2/1/08 (b)
Rogers Communications, Inc. B2 18,780,000 19,343,400
8.875% 7/15/07
Telesystem International
Wireless, Inc.:
0% 6/30/07 (b) Caa1 17,940,000 7,624,500
0% 11/1/07 (b) Caa1 21,190,000 7,734,350
Teligent, Inc.:
0% 3/1/08 (b) Caa1 16,480,000 8,157,600
11.5% 12/1/07 Caa1 4,380,000 4,095,300
199,158,494
ELECTRIC UTILITY - 0.1%
AES Corp. 10.25% 7/15/06 Ba1 1,950,000 2,106,000
TELEPHONE SERVICES - 10.1%
Allegiance Telecom, Inc. - 9,910,000 9,612,700
12.875% 5/15/08
Covad Communications Group, - 19,980,000 10,989,000
Inc. 0% 3/15/08 (b)
Dobson Wireline Co. 12.25% - 10,910,000 9,764,450
6/15/08
DTI Holdings, Inc. 0% 3/1/08 - 11,740,000 2,876,300
(b)
Firstworld Communications, - 5,600,000 1,680,000
Inc. 0% 4/15/08 (b)
GCI, Inc. 9.75% 8/1/07 B2 2,850,000 2,807,250
Global TeleSystems Group, Caa2 7,540,000 7,012,200
Inc. 9.875% 2/15/05
GST Network Funding, Inc. 0% - 24,190,000 11,006,450
5/1/08 (b)(d)
GST Equipment Funding, Inc. - 4,870,000 5,052,625
13.25% 5/1/07
GST Telecommunications, Inc. - 15,870,000 14,441,700
12.75% 11/15/07
Hermes Europe Railtel BV B3 7,350,000 7,441,875
10.375% 1/15/09 (d)
Hyperion Telecommunications, B3 11,800,000 8,437,000
Inc. 0% 4/15/03 (b)
ICG Holdings, Inc. 0% 9/15/05 - 10,490,000 8,654,250
(b)
IXC Communications, Inc. 9% B3 14,975,000 14,825,250
4/15/08
KMC Telecom Holdings, Inc. 0% - 10,000,000 4,700,000
2/15/08 (b)
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (H) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
UTILITIES - CONTINUED
TELEPHONE SERVICES - CONTINUED
Level 3 Communications, Inc. B3 $ 17,760,000 $ 17,604,600
9.125% 5/1/08
McLeodUSA, Inc.:
0% 3/1/07 (b) B2 12,709,000 9,722,385
9.25% 7/15/07 B2 3,590,000 3,697,700
NEXTLINK Communications LLC B3 3,660,000 3,888,750
12.5% 4/15/06
NEXTLINK Communications, Inc.:
9% 3/15/08 B3 3,750,000 3,525,000
9.625% 10/1/07 B3 540,000 518,400
10.75% 11/15/08 (d) B3 10,860,000 11,077,200
Optel Communications Corp. - 12,000,000 11,240,640
15% 12/29/04 (f)
Pathnet, Inc. 12.25% 4/15/08 - 7,820,000 5,474,000
Rhythms Netconnections, Inc. - 22,385,000 10,968,650
0% 5/15/08 (b)
Viatel, Inc. 11.25% 4/15/08 Caa1 3,059,000 3,059,000
WinStar Communications, Inc.:
0% 10/15/05 (b) Caa1 7,050,000 5,005,500
0% 10/15/05 (b) Caa1 18,700,000 20,570,000
0% 3/15/08 (b) CCC 18,755,000 13,316,050
Winstar Equipment Corp. 12.5% B3 6,655,000 6,721,550
3/15/04
245,690,475
TOTAL UTILITIES 446,954,969
TOTAL NONCONVERTIBLE BONDS 1,833,660,625
TOTAL CORPORATE BONDS 1,855,175,775
(Cost $2,048,062,370)
ASSET-BACKED SECURITIES - 0.3%
Airplanes Pass Through Trust Ba2 6,710,000 7,045,500
10.875% 3/15/19 (Cost
$7,551,450)
COMMERCIAL MORTGAGE
SECURITIES - 0.4%
MOODY'S RATINGS (UNAUDITED) (H) PRINCIPAL AMOUNT VALUE (NOTE 1)
Meritor Mortgage Security - $ 1,350,000 $ 250,560
Corp. Series 1987 1 Class B,
9.4% 2/1/00 (d) (i)
Mortgage Capital Funding, Ba1 4,500,000 3,772,969
Inc. Series 1998-MC3 Class
F, 7.355% 11/18/31 (d)(e)
Nomura Depositor Trust Series - 4,000,000 3,417,500
1998-ST1A Class B1A, 8.2966%
1/15/03 (d)(e)
Structured Asset Securities - 2,000,000 1,589,688
Corp. Series 1995 C1 Class
F, 7.375% 12/25/25 (d)
TOTAL COMMERCIAL MORTGAGE 9,030,717
SECURITIES
(Cost $8,865,075)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
COMMON STOCKS - 4.7%
SHARES
BASIC INDUSTRIES - 0.3%
CHEMICALS & PLASTICS - 0.0%
Sterling Chemicals Holdings, 340 5,100
Inc. warrants 8/15/08 (a)
PAPER & FOREST PRODUCTS - 0.3%
Smurfit-Stone Container Corp. 519,000 8,206,688
(a)
TOTAL BASIC INDUSTRIES 8,211,788
CONSTRUCTION & REAL ESTATE -
1.3%
BUILDING MATERIALS - 0.1%
International Utility 2,500 2,225,000
Structures, Inc. unit (a)
REAL ESTATE - 1.1%
LNR Property Corp. 322,100 6,421,869
Sunterra Corp. (a) 1,445,600 21,684,000
28,105,869
REAL ESTATE INVESTMENT TRUSTS
- - 0.1%
Ocwen Asset Investment Corp. 368,000 1,771,000
TOTAL CONSTRUCTION & REAL 32,101,869
ESTATE
DURABLES - 0.2%
TEXTILES & APPAREL - 0.2%
Arena Brands Holdings Corp. 48,889 1,222,225
Class B
Hat Brands, Inc. (a)(f)(g) 340,000 3
Polymer Group, Inc. (a) 463,000 4,601,063
5,823,291
ENERGY - 0.3%
OIL & GAS - 0.3%
Plains Resources, Inc. (a) 522,200 7,506,625
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - 0.3%
CREDIT & OTHER FINANCE - 0.0%
Olympic Financial Ltd. 498 $ 2,490
warrants 3/15/07 (a)
SAVINGS & LOANS - 0.3%
Golden State Bancorp, Inc. 375,000 6,234,375
SECURITIES INDUSTRY - 0.0%
ECM Corp. LP (d) 3,000 264,000
TOTAL FINANCE 6,500,865
HEALTH - 0.0%
MEDICAL EQUIPMENT & SUPPLIES
- - 0.0%
Wright Medical Technology, 3,212 32
Inc. warrants 6/30/03 (a)
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.4%
ELECTRICAL EQUIPMENT - 0.0%
Ampex Corp. Class A (a) 68,129 76,645
POLLUTION CONTROL - 0.4%
Allied Waste Industries, Inc. 350,000 8,268,750
(a)
TOTAL INDUSTRIAL MACHINERY & 8,345,395
EQUIPMENT
MEDIA & LEISURE - 0.3%
BROADCASTING - 0.3%
Benedek Communications Corp. 57,600 115,200
warrants 7/1/07 (a)
CS Wireless Systems, Inc. 1,024 0
(a)(d)
Loral Orion Network Systems,
Inc.:
warrants 1/15/07 (CV ratio 45,930 367,440
.47) (a)
warrants 1/15/07 (CV ratio 5,585 58,643
.6) (a)
NTL, Inc. warrants 12/31/08 23,146 347,190
(a)
Orbital Imaging Corp. 4,815 48,150
warrants 3/1/05 (a)(d)
Teletrac Holdings, Inc. 3,940 1,970
warrants 8/1/07 (a)
UIH Australia/Pacific, Inc. 26,805 80,415
warrants 5/15/06 (a)
United International 352,500 6,785,625
Holdings, Inc. Class A (a)
7,804,633
ENTERTAINMENT - 0.0%
Alliance Gaming Corp. (a)(f) 7,101 11,717
LODGING & GAMING - 0.0%
Aladdin Gaming Enterprises, 79,200 792
Inc. warrants 3/1/10 (a)(d)
Motels of America, Inc. (a) 3,000 63,000
63,792
TOTAL MEDIA & LEISURE 7,880,142
SHARES VALUE (NOTE 1)
NONDURABLES - 0.0%
HOUSEHOLD PRODUCTS - 0.0%
Renaissance Cosmetics, Inc. 12,750 $ 128
warrants 8/31/06 (a)(d)
TOBACCO - 0.0%
North Atlantic Trading, Inc. 210 2
warrants 6/15/07 (a)
TOTAL NONDURABLES 130
RETAIL & WHOLESALE - 0.2%
APPAREL STORES - 0.2%
Mothers Work, Inc. (a)(g) 314,100 3,926,250
Mothers Work, Inc. (a)(f) 2,952 35,055
3,961,305
SERVICES - 0.3%
PRINTING - 0.3%
Big Flower Holdings, Inc. (a) 352,500 7,777,031
SERVICES - 0.0%
Spin Cycle, Inc. warrants 23,255 233
5/1/05 (a)(d)
TOTAL SERVICES 7,777,264
TECHNOLOGY - 0.3%
COMMUNICATIONS EQUIPMENT - 0.2%
Intermedia Communications, 305,000 5,261,250
Inc. (a)
COMPUTER SERVICES & SOFTWARE
- - 0.1%
Concentric Network Corp. 6,100 884,500
warrants 12/15/07 (a)(d)
TOTAL TECHNOLOGY 6,145,750
TRANSPORTATION - 0.1%
AIR TRANSPORTATION - 0.1%
Kitty Hawk, Inc. (a) 253,900 2,792,900
SHIPPING - 0.0%
Millenium Seacarriers, Inc. 3,000 18,750
warrants 7/15/05 (a)(d)
TOTAL TRANSPORTATION 2,811,650
UTILITIES - 0.7%
CELLULAR - 0.4%
American Mobile Satellite 4,180 16,218
Corp. warrants 4/1/08 (a)(d)
Cellnet Data Systems, Inc. 18,000 144,000
warrants 10/1/07 (a)(d)
McCaw International Ltd. 42,305 211,525
warrants 4/15/07 (a)(d)
Microcell Telecommunications, 103,480 1,319,370
Inc. warrants 6/1/06 (a)(d)
PageMart Wireless, Inc. Class 1,392,000 7,743,000
A (a)
Powertel, Inc. warrants 22,148 66,444
2/1/06 (a)
9,500,557
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - CONTINUED
TELEPHONE SERVICES - 0.3%
Covad Communications Group, 19,450 $ 972,500
Inc. warrants 3/15/08 (a)(d)
DTI Holdings, Inc. warrants 58,700 2,935
3/1/08 (a)(d)
Firstworld Communications, 5,600 56,000
Inc. warrants 4/15/08 (a)(d)
GST Telecommunications, Inc. 877,800 5,442,360
(a)
KMC Telecom Holdings, Inc. 12,650 31,625
warrants 4/15/08 (a)(d)
Optel Communications Corp. 2,559,515 25,595
warrants 12/29/04 (a)(f)
Pathnet, Inc. warrants 7,820 78,200
4/15/08 (a)(d)
Rhythms Netconnections, Inc. 89,560 671,700
warrants 5/15/08 (a)(d)
7,280,915
TOTAL UTILITIES 16,781,472
TOTAL COMMON STOCKS 113,847,578
(Cost $134,452,612)
PREFERRED STOCKS - 15.1%
CONVERTIBLE PREFERRED STOCKS
- - 0.7%
ENERGY - 0.0%
OIL & GAS - 0.0%
Chesapeake Energy Corp. $3.50 63,700 621,075
(d)
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.0%
ELECTRICAL EQUIPMENT - 0.0%
Ampex Corp. 8% non-cumulative 227 354,120
SERVICES - 0.2%
PRINTING - 0.2%
Big Flower Trust I $3.00 87,500 4,123,438
QUIPS (d)
UTILITIES - 0.5%
TELEPHONE SERVICES - 0.5%
IXC Communications, Inc.:
$3.375 (d) 323,900 10,729,188
$3.375 30,000 993,750
11,722,938
TOTAL CONVERTIBLE PREFERRED 16,821,571
STOCKS
NONCONVERTIBLE PREFERRED
STOCKS - 14.4%
CONSTRUCTION & REAL ESTATE -
0.0%
BUILDING MATERIALS - 0.0%
International Utility 162 140,940
Structures, Inc. 13.00%
pay-in-kind (a)(d)
SHARES VALUE (NOTE 1)
FINANCE - 1.0%
CREDIT & OTHER FINANCE - 0.6%
Fresenius Medical Care 15,424 $ 15,468,822
Capital Trust II 7.875%
INSURANCE - 0.4%
American Annuity Group 8,910 8,731,800
Capital Trust II 8.875%
TOTAL FINANCE 24,200,622
HEALTH - 0.2%
MEDICAL FACILITIES MANAGEMENT
- - 0.2%
Harborside Healthcare Corp. 4,136 3,639,680
13.50% pay-in-kind (a)
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.0%
ELECTRICAL EQUIPMENT - 0.0%
Ampex Corp. 8% non-cumulative 497 775,320
MEDIA & LEISURE - 4.0%
BROADCASTING - 3.6%
Citadel Broadcasting Co. 70,093 7,990,602
Series B, 13.25% pay-in-kind
CSC Holdings, Inc.:
11.125% pay-in-kind 313,628 34,969,522
Series H, 11.75% pay-in-kind 194,563 22,180,182
(a)
Echostar Communications Corp. 13,395 15,487,969
12.125% pay-in-kind
Granite Broadcasting Corp. 8,752 7,876,800
12.75% pay-in-kind
88,505,075
PUBLISHING - 0.4%
PRIMEDIA, Inc.:
8.625% 82,500 8,043,750
Series D, $10.00 5,400 557,550
8,601,300
TOTAL MEDIA & LEISURE 97,106,375
NONDURABLES - 0.2%
HOUSEHOLD PRODUCTS - 0.0%
Renaissance Cosmetics, Inc. 16,284 24,426
14% pay-in-kind
TOBACCO - 0.2%
North Atlantic Trading, Inc. 250,424 5,759,752
12% pay-in-kind
TOTAL NONDURABLES 5,784,178
TECHNOLOGY - 1.8%
COMMUNICATIONS EQUIPMENT - 1.3%
Intermedia Communications, 30,713 30,943,348
Inc. 13.5% pay-in-kind (a)
PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONCONVERTIBLE PREFERRED
STOCKS - CONTINUED
TECHNOLOGY - CONTINUED
COMPUTER SERVICES & SOFTWARE
- - 0.5%
Concentric Network Corp. 16,215 $ 13,863,825
13.5% pay-in-kind (a)
TOTAL TECHNOLOGY 44,807,173
UTILITIES - 7.2%
CELLULAR - 2.4%
Nextel Communications, Inc.:
11.125% pay-in-kind (a) 37,730 33,957,000
Series D, 13% pay-in-kind 25,854 25,595,460
59,552,460
TELEPHONE SERVICES - 4.8%
e.spire Communications, Inc.:
$127.50 pay-in-kind 15,914 7,797,860
14.75% pay-in-kind 3,641 2,548,700
Hyperion Telecommunication, 19,192 15,257,640
Inc. 12.875% pay-in-kind
ICG Holdings, Inc.:
14% pay-in-kind (a) 5,998 5,848,050
14.25% pay-in-kind 27,202 27,474,020
IXC Communications, Inc. 7,341 7,414,410
12.5% pay-in-kind
NEXTLINK Communications, Inc. 825,351 42,918,252
14% pay-in-kind
Viatel, Inc. 10% pay-in-kind 2,699 296,890
(a)(d)
WinStar Communications, Inc. 7,810 6,248,000
14.25%
115,803,822
TOTAL UTILITIES 175,356,282
TOTAL NONCONVERTIBLE 351,810,570
PREFERRED STOCKS
TOTAL PREFERRED STOCKS 368,632,141
(Cost $417,354,899)
CASH EQUIVALENTS - 3.2%
MATURITY AMOUNT
Investments in repurchase $ 79,118,471 79,077,000
agreements (U.S. Treasury
obligations), in a joint
trading account at 4.72%,
dated 12/31/98 due 1/4/99
(Cost $79,077,000)
TOTAL INVESTMENT IN $ 2,432,808,711
SECURITIES - 100%
(Cost $2,695,363,406)
</TABLE>
SECURITY TYPE ABBREVIATIONS
QUIPS - Quarterly Income Preferred Securities
LEGEND
(a) Non-income producing
(b) 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.
(c) 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.
(d) Security exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in
transactions exempt from registration, normally to qualified
institutional buyers. At the period end, the value of these securities
amounted to $280,679,488 or 11.3% of net assets.
(e) The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
(f) Restricted securities - Investment in securities not registered
under the Securities Act of 1933 (see Note 2 of Notes to Financial
Statements).
SECURITY ACQUISTION DATE ACQUISITION COST
Alliance Gaming Corp. 7/28/98 $ 0
Hat Brands, Inc. 2/22/94 $ 340,000
Mothers Work, Inc. 6/18/98 $ 26,172
Optel Communications Corp. 12/31/97 $ 759,408
warrants 12/29/04
Optel Communications Corp. 12/31/97 $ 11,304,419
15% 12/29/04
(g) Transactions during the period with companies which are or were
affiliates are as follows (see Note 8 of Notes to Financial
Statements):
AFFILIATE PURCHASE COST SALES DIVIDEND VALUE
COST INCOME
Hat Brands, Inc. $ - $ - $ - $ 3
Mothers Work, Inc. 388,699 - - 3,926,250
TOTALS $ 388,699 $ - $ - $ 3,926,253
(h) Standard & Poor's credit ratings are used in the absence of a
rating by Moody's Investor's Service, Inc.
(i) Non-income producing - issuer filed for protection under the
Federal Bankruptcy Code or is in default of interest payment.
OTHER INFORMATION
The composition of long-term debt holdings as a percentage of total
value of investments 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 0.2% BBB 0.2%
Ba 6.6% BB 8.1%
B 46.4% B 50.4%
Caa 14.9% CCC 9.2%
Ca, C 0.0% CC, C 0.0%
D 0.0%
The percentage not rated by Moody's or S&P amounted to 8.2%. FMR has
determined that unrated debt securities that are lower quality account
for 8.2% of the total value of investment in securities.
Purchases and sales of securities, other than short-term securities,
aggregated $2,683,860,088 and $2,181,587,327, respectively (see Note 3
of Notes to Financial Statements).
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 $24,941 for the
period (see Note 4 of Notes to Financial Statements).
The fund participated in the bank borrowing program. The maximum loan
and average daily balances during the period for which the loans were
outstanding amounted to $10,377,000 and $6,237,500, respectively. The
weighted average interest rate was 5.14%.
Distribution of investments by country of issue, as a percentage of
total value of investments in securities, is as follows:
United States of America 88.9%
Canada 4.4
Luxembourg 2.5
United Kingdom 1.4
Mexico 1.2
(Others individually less 1.6
than 1%)
100.0%
INCOME TAX INFORMATION
At December 31, 1998, the aggregate cost of investment securities for
income tax purposes was $2,698,903,980. Net unrealized depreciation
aggregated $266,095,269, of which $42,809,617 related to appreciated
investment securities and $308,904,886 related to depreciated
investment securities.
The fund hereby designates approximately $39,957,000 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, 1998
ASSETS
Investment in securities, at $ 2,432,808,711
value (including repurchase
agreements of $79,077,000)
(cost $2,695,363,406) - See
accompanying schedule
Cash 483,030
Receivable for investments 247,217
sold
Receivable for fund shares 25,926,462
sold
Dividends receivable 975,468
Interest receivable 37,080,342
Other receivables 395,451
TOTAL ASSETS 2,497,916,681
LIABILITIES
Payable for investments $ 16,095,239
purchased
Payable for fund shares 1,720,662
redeemed
Accrued management fee 1,206,878
Distribution fees payable 10,542
Other payables and accrued 342,008
expenses
TOTAL LIABILITIES 19,375,329
NET ASSETS $ 2,478,541,352
Net Assets consist of:
Paid in capital $ 2,505,839,312
Undistributed net investment 228,599,042
income
Accumulated undistributed 6,657,693
net realized gain (loss) on
investments and foreign
currency transactions
Net unrealized appreciation (262,554,695)
(depreciation) on investments
NET ASSETS $ 2,478,541,352
INITIAL CLASS: NET ASSET $11.53
VALUE, offering price and
redemption price per share
($2,348,954,152 (divided
by) 203,653,269 shares)
SERVICE CLASS: NET ASSET $11.52
VALUE, offering price and
redemption price per share
($129,587,200 (divided by)
11,253,677 shares)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME $ 47,559,628
Dividends
Interest 200,243,479
TOTAL INCOME 247,803,107
EXPENSES
Management fee $ 14,703,631
Transfer agent fees 1,728,056
Distribution fees - Service 66,393
Class
Accounting fees and expenses 811,713
Non-interested trustees' 6,038
compensation
Custodian fees and expenses 92,265
Registration fees 8,633
Audit 58,881
Legal 32,480
Interest 1,780
Miscellaneous 272,534
Total expenses before 17,782,404
reductions
Expense reductions (84,292) 17,698,112
NET INVESTMENT INCOME 230,104,995
REALIZED AND UNREALIZED GAIN
(LOSS)
Net realized gain (loss) on:
Investment securities 6,904,807
Foreign currency transactions 6,338 6,911,145
Change in net unrealized (342,139,590)
appreciation (depreciation)
on investment securities
NET GAIN (LOSS) (335,228,445)
NET INCREASE (DECREASE) IN $ (105,123,450)
NET ASSETS RESULTING FROM
OPERATIONS
OTHER INFORMATION $ 66,238
Expense reductions Directed
brokerage arrangements
Custodian credits 18,054
$ 84,292
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
INCREASE (DECREASE) IN NET YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
ASSETS
Operations Net investment $ 230,104,995 $ 172,037,074
income
Net realized gain (loss) 6,911,145 112,724,876
Change in net unrealized (342,139,590) 28,621,311
appreciation (depreciation)
NET INCREASE (DECREASE) IN (105,123,450) 313,383,261
NET ASSETS RESULTING FROM
OPERATIONS
Distributions to shareholders (174,513,221) (116,015,279)
From net investment income
From net realized gain (109,261,101) (14,338,900)
TOTAL DISTRIBUTIONS (283,774,322) (130,354,179)
Share transactions - net 535,004,180 560,584,056
increase (decrease)
TOTAL INCREASE (DECREASE) 146,106,408 743,613,138
IN NET ASSETS
NET ASSETS
Beginning of period 2,332,434,944 1,588,821,806
End of period (including $ 2,478,541,352 $ 2,332,434,944
undistributed net investment
income of $228,599,042 and
$171,323,283, respectively)
</TABLE>
OTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
SHARES DOLLARS SHARES DOLLARS
Share transactions Initial 105,294,967 $ 1,274,568,026 99,919,218 $ 1,254,908,724
Class Sold
Reinvested 22,841,432 282,776,922 11,056,288 130,354,179
Redeemed (96,026,533) (1,157,142,331) (66,317,508) (827,580,626)
Net increase (decrease) 32,109,866 $ 400,202,617 44,657,998 $ 557,682,277
Service Class A Sold 11,710,091 $ 142,335,404 215,034 $ 2,901,779
Reinvested 80,565 997,399 - -
Redeemed (752,013) (8,531,240) - -
Net increase (decrease) 11,038,643 $ 134,801,563 215,034 $ 2,901,779
Distributions
From net investment income $ 173,899,848 $ 116,015,279
Initial Class
Service Class 613,373 -
Total $ 174,513,221 $ 116,015,279
From net realized gain $ 108,877,075 $ 14,338,900
Initial Class
Service Class 384,026 -
Total $ 109,261,101 $ 14,338,900
$ 283,774,322 $ 130,354,179
A SERVICE CLASS COMMENCED
SALE OF SHARES NOVEMBER 3,
1997.
</TABLE>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 1996 1995 1994
Net asset value, beginning of $ 13.580 $ 12.520 $ 12.050 $ 10.750 $ 11.990
period
Income from Investment
Operations
Net investment income 1.111 D 1.124 D .927 .856 .770
Net realized and unrealized (1.591) .936 .643 1.224 (.910)
gain (loss)
Total from investment (.480) 2.060 1.570 2.080 (.140)
operations
Less Distributions
From net investment income (.970) G (.890) (.920) (.780) (.730)
From net realized gain (.600) G (.110) (.180) - (.370)
Total distributions (1.570) (1.000) (1.100) (.780) (1.100)
Net asset value, end of period $ 11.530 $ 13.580 $ 12.520 $ 12.050 $ 10.750
TOTAL RETURN B, C (4.33)% 17.67% 14.03% 20.72% (1.64)%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 2,348,954 $ 2,329,516 $ 1,588,822 $ 1,040,000 $ 569,417
(000 omitted)
Ratio of expenses to average .70% .71% .71% .71% .71%
net assets
Ratio of net investment 9.14% 8.88% 9.09% 9.32% 8.75%
income to average net assets
Portfolio turnover rate 92% 118% 123% 132% 122%
</TABLE>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 E
Net asset value, beginning of $ 13.570 $ 13.380
period
Income from Investment
Operations
Net investment incomeD 1.082 .203
Net realized and unrealized (1.562) (.013)
gain (loss)
Total from investment (.480) .190
operations
Less Distributions
From net investment income (.970) G -
From net realized gain (.600) G -
Total distributions (1.570) -
Net asset value, end of period $ 11.520 $ 13.570
TOTAL RETURN B, C (4.34)% 1.42%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 129,587 $ 2,919
(000 omitted)
Ratio of expenses to average .82% .81% A
net assets
Ratio of expenses to average .82% .80% A, F
net assets after expense
reductions
Ratio of net investment 9.51% 10.75% A
income to average net assets
Portfolio turnover rate 92% 118%
A ANNUALIZED
B TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE
THE TOTAL RETURNS SHOWN. TOTAL RETURNS FOR PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN.
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
E 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.
G THE AMOUNTS SHOWN REFLECT CERTAIN RECLASSIFICATIONS RELATED TO BOOK
TO TAX DIFFERENCES (SEE NOTE 1 OF NOTES TO FINANCIAL STATEMENTS).
NOTES TO FINANCIAL STATEMENTS
For the period ended December 31, 1998
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. Both
classes 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 certain
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 require 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 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 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. Purchases
and sales of securities, income receipts and expense payments are
translated into U.S. dollars at the prevailing exchange rate on the
respective dates of the transactions.
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, the difference
between the amount of net investment income accrued and the U.S.
dollar amount actually received, and gains and losses between trade
and settlement date on purchases and sales of securities. 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 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 at
the time of each trade.
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
2. OPERATING POLICIES - CONTINUED
JOINT TRADING ACCOUNT - CONTINUED
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 $11,313,010 or 0.5% 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 .58% 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 $66,393, all of which was
reallowed to insurance companies, for the distribution of shares and
providing shareholder support services.
Under the Plans, FMR 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, payments made to third parties under the Plans amounted to
$1,173,849 and $84,699 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. (FSC), an affiliate of
FMR, maintains the fund's accounting records. The fee is based on the
level of average net assets for the month plus out-of-pocket expenses.
BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms are shown under the caption
"Other Information" at the end of the fund's schedule of investments.
5. EXPENSE REDUCTIONS.
FMR 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 offset a portion of the fund's expenses.
For the period, the reductions under these arrangements are shown
under the caption "Other Information" on the fund's Statement of
Operations.
6. BANK BORROWINGS.
The fund is permitted to have bank borrowings for temporary or
emergency purposes to fund shareholder redemptions. The fund has
established borrowing arrangements with certain banks. Under the most
restrictive arrangement, the fund must pledge to the bank securities
having a market value in excess of 220% of the total bank borrowings.
The interest rate on the borrowings is the bank's base rate, as
revised from time to time. Information regarding the fund's
participation in the program is included under the caption "Other
Information" at the end of the fund's schedule of investments.
7. 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 12% of the outstanding shares of the fund. In
addition, two unaffiliated insurance companies were record owners of
59% of the total outstanding shares of the fund.
8. 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.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of Variable Insurance Products Fund and the
Shareholders of High Income Portfolio:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of
High Income Portfolio (a fund of Variable Insurance Products Fund) at
December 31, 1998, and the results of its operations, the changes in
its net assets and the financial highlights for the periods indicated,
in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to
as "financial statements") are the responsibility of the High Income
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
31,1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 12, 1999
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:
PAY DATE RECORD DATE DIVIDENDS CAPITAL GAINS
Initial Class 2/5/99 2/5/99 $1.07 $.04
Service Class 2/5/99 2/5/99 $1.07 $.04
The fund hereby designates 100% of the long-term capital gain
dividends distributed during the fiscal year as 20%-rate capital gain
dividends.
PROXY VOTING RESULTS
A special meeting of the fund's shareholders was held on September 16,
1998. The results of votes taken among shareholders on proposals
before them are reported below. Each vote reported represents a single
share held on the record date for the meeting.
PROPOSAL 1
To elect the twelve nominees specified below as Trustees.
# OF % OF
SHARES VOTED SHARES VOTED
RALPH F. COX
Affirmative 205,368,821.798 96.604
Against
Withheld 7,219,100.960 3.396
Abstain
TOTAL 212,587,922.758 100.000
PHYLLIS BURKE DAVIS
Affirmative 205,355,444.421 96.598
Against
Withheld 7,232,478.337 3.402
Abstain
TOTAL 212,587,922.758 100.000
ROBERT M. GATES
Affirmative 205,242,061.159 96.545
Against
Withheld 7,345,861.599 3.455
Abstain
TOTAL 212,587,922.758 100.000
EDWARD C. JOHNSON 3D
Affirmative 205,246,965.395 96.547
Against
Withheld 7,340,957.363 3.453
Abstain
TOTAL 212,587,922.758 100.000
E. BRADLEY JONES
Affirmative 205,140,018.554 96.497
Against
Withheld 7,447,904.204 3.503
Abstain
TOTAL 212,587,922.758 100.000
DONALD J. KIRK
Affirmative 205,407,185.390 96.622
Against
Withheld 7,180,737.368 3.378
Abstain
TOTAL 212,587,922.758 100.000
# OF % OF
SHARES VOTED SHARES VOTED
PETER S. LYNCH
Affirmative 205,431,572.064 96.634
Against
Withheld 7,156,350.694 3.366
Abstain
TOTAL 212,587,922.758 100.000
WILLIAM O. MCCOY
Affirmative 205,427,087.302 96.632
Against
Withheld 7,160,835.456 3.368
Abstain
TOTAL 212,587,922.758 100.000
GERALD C. MCDONOUGH
Affirmative 205,175,337.496 96.513
Against
Withheld 7,412,585.262 3.487
Abstain
TOTAL 212,587,922.758 100.000
MARVIN L. MANN
Affirmative 205,396,500.231 96.617
Against
Withheld 7,191,422.527 3.383
Abstain
TOTAL 212,587,922.758 100.000
ROBERT C. POZEN
Affirmative 205,387,974.009 96.613
Against
Withheld 7,199,948.749 3.387
Abstain
TOTAL 212,587,922.758 100.000
THOMAS R. WILLIAMS
Affirmative 205,140,438.885 96.497
Against
Withheld 7,447,483.873 3.503
Abstain
TOTAL 212,587,922.758 100.000
PROPOSAL 2
To ratify the selection of PricewaterhouseCoopers LLP as independent
accountants of the funds.
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 197,773,451.600 93.031
Against 2,621,451.943 1.233
Withheld
Abstain 12,193,019.215 5.736
TOTAL 212,587,922.758 100.000
PROPOSAL 3
To authorize the Trustees to adopt an Amended and Restated Declaration
of Trust.
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 194,160,338.084 91.332
Against 4,193,160.186 1.972
Withheld
Abstain 14,234,424.488 6.696
TOTAL 212,587,922.758 100.000
PROPOSAL 5
To approve an amended management contract for the fund.
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 193,940,841.545 91.229
Against 3,613,474.208 1.699
Withheld
Abstain 15,033,607.005 7.072
TOTAL 212,587,922.758 100.000
PROPOSAL 7
To amend the fundamental investment limitation concerning
diversification for the fund.
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 195,398,115.685 91.914
Against 3,609,073.262 1.698
Withheld
Abstain 13,580,733.811 6.388
TOTAL 212,587,922.758 100.000
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
Dwight D. Churchill, VICE PRESIDENT
Bart A. Grenier, VICE PRESIDENT
Barry J. Coffman, VICE PRESIDENT
Eric D. Roiter, SECRETARY
Richard A. Silver, TREASURER
Matthew N. Karstetter, DEPUTY VICE PRESIDENT
Stanley N. Griffith, ASSISTANT VICE PRESIDENT
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
Thomas J. Simpson, 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 *
Robert C. Pozen
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
VARIABLE INSURANCE PRODUCTS
FUND II: ASSET MANAGER PORTFOLIO
(2_FIDELITY_LOGOS)(registered trademark)
ANNUAL REPORT
DECEMBER 31, 1998
CONTENTS
MARKET ENVIRONMENT 3 A review of what happened in
world markets during the
past 12 months.
PERFORMANCE AND INVESTMENT 4 How the fund has done over
SUMMARY time, and an overview of the
fund's investments at the
end of the period.
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 22 Statements of assets and
liabilities, operations, and
changes in net assets, as
well as financial highlights.
NOTES 25 Notes to the financial
statements.
REPORT OF INDEPENDENT 28 The auditors' opinion.
ACCOUNTANTS
DISTRIBUTIONS 29
PROXY VOTING RESULTS 30
Standard & Poor's, S&P and S&P 500 are registered service marks of The
McGraw-Hill Companies, Inc. and have been licensed for use by Fidelity
Distributors Corporation.
Other third party marks appearing herein are the property of their
respective owners.
All other marks appearing herein are registered or unregistered
trademarks or service marks of FMR Corp. or an affiliated company.
(recycle logo)This report is printed on recycled paper using soy-based
inks.
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
Demonstrating erratic mood swings throughout the period, the sometimes
gloomy, sometimes exuberant, oftentimes volatile worldwide stock and
bond markets in 1998 will long be remembered for their turbulent
behavior. When all was said and done, the U.S. and European stock
markets posted impressive returns for the year. Most U.S. bond markets
experienced positive - albeit moderate - performance, with U.S.
Treasuries ending the year as the overall front-runner. Economic and
currency turmoil continued to plague stock and bond performance in
Asia and, in particular, emerging markets.
U.S. STOCK MARKETS
The Standard & Poor's 500 Index - a broad measure of U.S. stock market
performance - rose 28.58% for the 12 months that ended December 31,
1998, well above the index's long-term average annual return of about
12%. For the first time in its history, the Dow Jones Industrial
Average - an index of 30 blue-chip stocks - posted double-digit
percentage gains in four consecutive years, thanks to an 18.07%
increase for the year. Large-cap stocks - particularly in the
technology sector - led the U.S. equity market's charge, as once again
investors preferred the liquidity and the perceived safety of owning
what they know. Small-cap stocks - in comparison - took a beating. The
Russell 2000 Index - a popular measure of small stock performance -
fell -2.55% for the year.
Throughout the period, the U.S. enjoyed a strong economy. Unemployment
averaged 4.5% for the year, the lowest since 1969 and the lowest
peacetime level in 41 years. Inflation levels also were low, while
interest-rates were stable. In comparison to the economy's relative
tranquility, the U.S. stock markets were fluctuating wildly. To
illustrate, the Dow typically had fewer than five swings of 5% in each
year since 1946. In 1998 alone, the Dow experienced 10 such swings.
Much of these gyrations were due to fears about Asia's economic woes,
Russia's currency devaluation and loan defaults, and the subsequent
consequences on emerging markets. On August 31, the Dow plunged 512.61
points - a loss that erased all previous gains for the year to that
point. Faced with global economic chaos, investors began fleeing the
equity markets in droves, searching for safer, less volatile havens,
particularly U.S. Treasuries. To address the lack of confidence in
domestic and global equity markets, the U.S. Federal Reserve Board
stepped in with three separate 0.25% interest-rate cuts during the
fall. Those cuts helped boost confidence in the U.S. economy, and
stocks began to quickly ascend to their former lofty levels,
culminating in a new Dow record of 9374.27 on November 23, 1998.
On a sector-by-sector basis, technology stocks reigned supreme in
1998, thanks in large part to the skyrocketing Internet industry. For
the year, nine of the top 10 best-performing stocks in the S&P 500
were technology stocks. The health care sector was another big winner.
Pharmaceuticals helped drive the strong performance of the health care
industry, as a slew of new products was rushed to the market sooner
than normal thanks to streamlined approval regulations.
Natural resources, on the other hand, suffered tremendously.
Overproduction and poor demand caused oil's price per barrel to plunge
considerably. Gold prices also were down in 1998. The financial sector
- - a top performer for several years - found 1998 to be a challenge.
The financial crises overseas and credit concerns contributed to the
poor showing of many brokerage and investment management firms.
FOREIGN STOCK MARKETS
Foreign stock markets posted mixed results in 1998. The Morgan Stanley
Capital International (MSCI) EAFE Index - which measures stock
performance in Europe, Australasia, and the Far East - returned 20.27%
in 1998. Europe posted the most consistently strong equity markets
when compared to other regions, with the MSCI Europe Index up 28.87%
for the year. The much-maligned Japanese stock market ended the year
on a positive note, thanks in part to long-awaited government
intercession on the ailing banking sector's behalf. For the year, the
Tokyo Stock Exchange Index (TOPIX) was up 7.76%. 1998 proved to be
disastrous for emerging markets. The MSCI Emerging Markets Free Index
suffered a -25.34% loss during the period, as the Asian crisis and
Russia's currency devaluation and loan defaults played havoc with
Latin America, Brazil, Thailand and other emerging-market nations.
U.S. BOND MARKETS
In a year as volatile as 1998, it's not surprising that the
performance of the U.S bond market was mostly positive. Still, most of
the major bond indexes trailed their returns of 1997, as investors
continued to seek out the high returns found in the equity markets.
For the year, the Lehman Brothers Aggregate Bond Index - a broad
measure of the performance of the U.S. taxable bond market - posted a
total return of 8.69%. The Lehman Brothers Corporate Bond Index
returned 8.57% in 1998. General U.S. Treasury funds were the safe
haven of choice in 1998, benefiting from the flight to safety as
investors worldwide reacted to global economic concerns. As a result,
the yield on the benchmark 30-year Treasury fell to its lowest levels
in three decades, tumbling to 5.09% at the end of the period compared
to 5.92% at the start of the year.
FOREIGN BOND MARKETS
Typically, continued low inflation and economic growth in the U.S.
would help provide a positive backdrop for U.S.-based bonds relative
to most foreign bonds. But there was nothing typical about 1998. The
Salomon Brothers World Government Bond Index - a measure of government
bond market performance in developed nations - returned an impressive
15.30% for the 12 months that ended December 31, 1998. Many European
nations - particularly France, Italy and Spain - boasted strong
performance that helped drive the index's overall return. Not all was
rosy in the international bond market, however. In stark contrast to
the developed world, the often-volatile emerging debt markets
experienced a particularly difficult year, illustrated by the J.P.
Morgan Emerging Markets Bond Index return of -11.04% during the
period. Once again, the impact of financial and economic woes in Asia
and Russia was the primary contributor to the poor performance of
emerging markets.
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). If Fidelity had not reimbursed certain fund
expenses, the life of fund total return would have been lower.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, PAST 1 YEAR PAST 5 YEARS LIFE OF FUND
1998
VIP II: ASSET MANAGER - 15.05% 11.81% 12.98%
"INITIAL CLASS"
Fidelity Composite 18.61% 14.42% n/a
S&P 500 (registered trademark) 28.58% 24.06% 17.51%
LB Aggregate Bond 8.69% 7.27% 8.80%
LB 3 Month T-Bill 5.31% 5.32% n/a
Variable Annuity Flexible 13.50% 13.64% n/a
Portfolio Funds Average
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 Fidelity Asset
Allocation Composite Index, a hypothetical combination of unmanaged
indices. The composite index combines the total returns of the
Standard & Poor's 500 Index, the Lehman Brothers Aggregate Bond Index
and the Lehman Brothers 3 Month Treasury Bill Index weighted according
to the fund's neutral mix.
You can also compare the fund's returns to the variable annuity
flexible portfolio funds average, which reflects the performance of
mutual funds with similar objectives tracked by Lipper Inc. The past
one year average represent a peer group of 84 mutual funds. The
benchmarks listed in the table above include reinvested dividends and
capital gains, if any, and exclude the effect of sales charges.
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.
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.
(checkmark)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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
$10,000 OVER LIFE OF FUND
VIP II Asset Manager FID Composite S&P 500 LB Aggregate Bond
00156 F0001 SP001 LB001
1989/09/30 10000.00 10000.00 10000.00 10000.00
1989/10/31 10020.02 10057.70 9768.00 10246.00
1989/11/30 10060.06 10178.69 9967.27 10343.34
1989/12/31 10091.09 10277.43 10206.48 10371.26
1990/01/31 9868.42 10029.64 9521.63 10247.85
1990/02/28 9969.64 10094.03 9644.46 10280.64
1990/03/31 10050.61 10193.35 9900.03 10287.84
1990/04/30 9919.03 10098.66 9652.53 10193.19
1990/05/31 10425.10 10529.97 10593.65 10494.91
1990/06/30 10506.07 10595.89 10521.62 10663.87
1990/07/31 10485.83 10662.11 10487.95 10811.04
1990/08/31 10141.70 10332.65 9539.84 10666.17
1990/09/30 9929.15 10241.83 9075.25 10754.70
1990/10/31 9979.76 10314.96 9036.22 10891.28
1990/11/30 10465.59 10624.61 9619.96 11125.44
1990/12/31 10769.23 10802.47 9888.36 11299.00
1991/01/31 11284.56 11009.44 10319.49 11439.11
1991/02/28 11726.26 11285.45 11057.34 11536.34
1991/03/31 11915.56 11410.72 11324.93 11615.94
1991/04/30 12094.35 11486.94 11352.11 11741.39
1991/05/31 12367.79 11669.35 11842.52 11809.49
1991/06/30 12146.94 11518.12 11300.13 11803.59
1991/07/31 12451.92 11749.63 11826.72 11967.66
1991/08/31 12704.33 11959.83 12107.01 12226.16
1991/09/30 12777.94 12018.08 11904.82 12474.35
1991/10/31 12862.08 12126.84 12064.35 12612.82
1991/11/30 12651.74 12046.56 11578.15 12728.85
1991/12/31 13198.62 12642.99 12902.69 13106.90
1992/01/31 13366.89 12504.31 12662.70 12928.65
1992/02/29 13626.47 12583.84 12827.32 13012.68
1992/03/31 13593.27 12492.10 12577.19 12939.81
1992/04/30 13792.52 12648.75 12946.96 13032.98
1992/05/31 13936.42 12772.62 13010.40 13279.30
1992/06/30 13925.35 12778.88 12816.54 13462.56
1992/07/31 14157.81 13127.82 13340.74 13737.19
1992/08/31 14113.53 13077.17 13067.25 13875.94
1992/09/30 14202.09 13224.45 13221.45 14041.06
1992/10/31 14224.22 13162.82 13267.72 13854.32
1992/11/30 14534.17 13329.99 13720.15 13857.09
1992/12/31 14744.49 13487.52 13888.91 14077.42
1993/01/31 15010.15 13656.87 14005.57 14347.70
1993/02/28 15150.92 13847.00 14196.05 14598.79
1993/03/31 15579.83 13989.68 14495.59 14660.10
1993/04/30 15672.57 13904.65 14144.79 14762.72
1993/05/31 15939.19 14053.79 14523.87 14781.91
1993/06/30 16066.70 14203.33 14565.99 15049.47
1993/07/31 16263.77 14221.73 14507.73 15135.25
1993/08/31 16739.04 14571.76 15057.57 15400.11
1993/09/30 16750.64 14557.48 14941.63 15441.70
1993/10/31 17202.73 14707.13 15250.92 15498.83
1993/11/30 17179.54 14594.03 15106.04 15367.09
1993/12/31 17875.07 14696.31 15288.82 15450.07
1994/01/31 18443.09 14985.71 15808.64 15658.65
1994/02/28 17857.33 14699.72 15380.23 15386.19
1994/03/31 17017.99 14320.11 14709.65 15006.15
1994/04/30 17030.15 14356.11 14897.93 14886.10
1994/05/31 17176.13 14452.82 15142.26 14884.61
1994/06/30 16847.69 14310.02 14771.27 14851.86
1994/07/31 17139.63 14613.05 15255.77 15147.42
1994/08/31 17541.06 14864.31 15881.26 15165.59
1994/09/30 17334.15 14646.64 15492.17 14942.66
1994/10/31 17419.36 14787.36 15840.74 14929.21
1994/11/30 17163.73 14571.08 15263.82 14896.37
1994/12/31 16786.37 14708.25 15490.18 14999.15
1995/01/31 16676.82 14984.44 15891.84 15296.13
1995/02/28 16946.97 15360.16 16511.15 15660.18
1995/03/31 17170.77 15595.91 16998.39 15755.71
1995/04/30 17444.31 15876.83 17498.99 15976.29
1995/05/31 17668.12 16403.71 18198.43 16594.57
1995/06/30 17817.32 16624.93 18621.18 16715.71
1995/07/31 18451.43 16836.80 19238.66 16678.94
1995/08/31 18675.24 16948.46 19286.95 16880.75
1995/09/30 18911.47 17314.75 20100.85 17044.50
1995/10/31 18662.80 17413.45 20029.09 17266.07
1995/11/30 19147.71 17842.83 20908.37 17525.07
1995/12/31 19632.62 18102.59 21311.07 17770.42
1996/01/31 20055.36 18411.16 22036.50 17887.70
1996/02/29 20001.35 18343.08 22240.77 17576.46
1996/03/31 20213.99 18364.54 22454.95 17453.42
1996/04/30 20426.62 18441.71 22785.94 17355.68
1996/05/31 20586.10 18636.38 23373.59 17320.97
1996/06/30 20772.16 18775.74 23462.64 17553.07
1996/07/31 20426.62 18478.56 22426.06 17600.46
1996/08/31 20466.49 18636.07 22899.03 17570.54
1996/09/30 21210.73 19195.30 24187.79 17876.27
1996/10/31 21755.62 19593.26 24854.88 18273.12
1996/11/30 22832.10 20338.11 26733.66 18585.59
1996/12/31 22499.85 20111.10 26204.07 18412.75
1997/01/31 23177.64 20773.56 27841.30 18469.83
1997/02/28 23377.96 20883.87 28059.58 18516.00
1997/03/31 22488.67 20370.86 26906.61 18310.47
1997/04/30 23257.38 21111.13 28512.93 18585.13
1997/05/31 24372.77 21845.17 30248.80 18761.69
1997/06/30 25020.90 22446.35 31603.95 18984.95
1997/07/31 26467.89 23593.69 34118.67 19497.55
1997/08/31 25744.40 22863.47 32207.35 19331.82
1997/09/30 26573.40 23635.45 33971.34 19617.93
1997/10/31 26136.29 23387.99 32836.70 19902.39
1997/11/30 26739.20 23982.39 34356.71 19993.94
1997/12/31 27146.17 24295.48 34946.61 20195.88
1998/01/31 27236.61 24565.89 35333.12 20454.39
1998/02/28 28462.90 25452.97 37881.35 20438.02
1998/03/31 29288.41 26151.27 39821.25 20507.51
1998/04/30 29254.02 26348.97 40221.85 20614.15
1998/05/31 29099.24 26234.49 39530.44 20809.99
1998/06/30 29666.77 26867.79 41136.17 20986.87
1998/07/31 29477.59 26759.11 40698.07 21030.94
1998/08/31 26794.69 25011.47 34813.94 21373.75
1998/09/30 27688.99 26059.95 37044.12 21873.89
1998/10/31 28892.86 27074.72 40057.29 21757.96
1998/11/30 29993.54 27966.16 42485.16 21881.98
1998/12/31 31231.80 28816.33 44933.16 21947.63
IMATRL PRASUN SHR__CHT 19981231 19990126 145630 R00000000000114
</TABLE>
$10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was
invested in Variable Insurance Products Fund II: Asset Manager
Portfolio on September 30, 1989, shortly after the fund started. By
December 31, 1998, the value of the investment would have grown to
$31,232 - a 212.32% increase. With reinvested dividends and capital
gains, if any, a $10,000 investment in the Standard & Poor's 500
Index, would have grown to $44,933 over the same period - a 349.33%
increase on the initial investment. If $10,000 was invested in the
Lehman Brothers Aggregate Bond Index, it would have grown to $21,948 -
a 119.48% increase.
You can also look at how the Fidelity Asset Allocation Composite Index
did over the same period. The composite index combines the cumulative
total returns of three unmanaged indexes - the S&P 500 (349.33%),
Lehman Brothers Aggregate Bond Index (119.48%), and the Lehman
Brothers 3-month T-Bill Total Rate of Return Index (61.40%) -
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 $28,816 - a 188.16%
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, 1998
% OF FUND'S INVESTMENTS
Wal-Mart Stores, Inc. 2.3
AT&T Corp. 2.2
General Electric Co. 1.5
Fannie Mae 1.4
Lucent Technologies, Inc. 1.4
TOP FIVE BOND ISSUERS AS OF DECEMBER 31, 1998
(WITH MATURITIES MORE THAN % OF FUND'S INVESTMENTS
ONE YEAR)
Fannie Mae 5.4
U.S. Treasury Bond 2.4
Government National Mortgage 1.3
Association
U.S. Treasury Notes 1.0
Federal Home Loan Bank 0.4
ASSET ALLOCATION AS OF DECEMBER 31, 1998*
Row: 1, Col: 1, Value: 12.4
Row: 1, Col: 2, Value: 30.9
Row: 1, Col: 3, Value: 56.7
Stock class 58.2%
Bond class 30.8%
Short-term class 11.0%
*FOREIGN INVESTMENTS 3.7%
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.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
(PHOTOGRAPH OF RICHARD HABERMANN)
An interview with Richard Habermann, Portfolio Manager of Asset
Manager Portfolio
Q. HOW DID THE FUND PERFORM COMPARED TO ITS BENCHMARK, DICK?
A. For the year that ended December 31, 1998, the fund lagged the
18.61% return of the Fidelity Asset Allocation Composite Index - which
combines the performance of three indexes - for the same period.
Q. WHY DID THE FUND LAG ITS BENCHMARK INDEX?
A. While the fund's stocks generally performed well, they
underperformed the Standard & Poor's 500 Index, the equity index that
is included in the fund's benchmark. Specifically, the fund was
underweighted relative to the S&P in the narrow group of stocks that
drove the performance of the S&P 500. Instead, the fund's equity
specialist, Steven Snider, focused on stocks with lower valuations and
market capitalizations. In addition, the fund was hurt by its
investments in high-yield bonds. These securities are not included in
the composite index - the bond component is represented by the Lehman
Brothers Aggregate Bond Index , which comprises only investment-grade
securities - but have been a key component to our strategy and have
helped the fund's performance during the past few years.
Unfortunately, this asset class suffered from the significant flight
to quality in the third quarter of 1998.
Q. WHAT STRATEGY DID YOU PURSUE WITH THE FUND'S ASSET ALLOCATION?
A. The fund started the year overweighted in stocks, and, on average,
maintained that overweighted position throughout the year. However, I
pursued more cautious tactics in the summer, when both the stock and
bond markets experienced a great deal of turmoil. At that time, I
reduced the fund's equity allocation and increased its stake in
investment-grade bonds. When the markets started to settle down at the
tail end of the third quarter, I ramped up the fund's equity
investments again, taking profits on investment-grade issues that had
performed well. I also added to the fund's investments in high-yield
bonds. Prices in that sector reflected worst-case scenarios that we
felt were unrealistic given the underlying strength of the U.S.
economy.
Q. HOW DID THE FUND'S ASSET ALLOCATION AFFECT PERFORMANCE?
A. Overall, it had a positive effect. Stocks performed best among the
asset classes, and, as I mentioned, the fund on average maintained an
overweighted position in equities relative to its neutral mix, which
calls for 50% to be invested in stocks. Concurrently, the fund also
benefited from maintaining underweighted positions in bonds and
short-term/money market instruments, which make up 40% and 10% of its
neutral mix, respectively.
Q. HOW DID THE FIXED-INCOME AND SHORT-TERM PORTIONS OF THE FUND
PERFORM?
A. The investment-grade portion of the fund - which Charlie Morrison
helps me manage - slightly underperformed the Lehman Brothers
Aggregate Bond Index. The story there was a flight to quality.
Investors from around the globe flocked to U.S. Treasury securities
because they are perceived to be the safest haven from economic and
financial turmoil. All other sectors of the investment-grade market
posted much poorer relative performance. The fund was hurt by being
underweighted in Treasuries relative to the index. Still, the fund did
benefit from strong security selection in its non-Treasury
investments. Unfortunately, the fund's high-yield investments hurt its
relative performance. Nevertheless, the securities chosen by Fred Hoff
- - who helps me manage the high-yield portion of the fund - performed
better than the high-yield market as a whole. John Todd, who helps
look after the fund's short-term investments, obtained a return
advantage relative to the short-term component of the composite index
by emphasizing shorter-term, high-quality issues.
Q. WHICH STOCKS PERFORMED WELL DURING THE PERIOD? WHICH DISAPPOINTED?
A. On the plus side, Lucent Technologies increased its market share
and consistently beat earnings expectations. AT&T did the same, amid a
successful cost-cutting campaign. Wal-Mart and Home Depot maintained
their market dominance through, among other factors, excellent
distribution systems. On the negative side, Allstate had difficulty
rebounding from share price drops from August through October, when
companies in the financial sector generally suffered. And RJR Nabisco
was hurt because it was the dominant player in the tobacco industry in
Russia.
Q. WHAT'S YOUR OUTLOOK?
A. We continue to see the same trends that have characterized the past
few years: low inflation, a positive interest-rate environment and
decelerating corporate earnings. Further, it appears economic growth
will continue in early 1999, but stands a chance to moderate as the
year progresses. We'll probably see modest earnings growth, amid a
backdrop of continued investor interest in the markets. I believe the
U.S. will continue to be an appealing market relative to other global
alternatives.
The views expressed in this report reflect those of the portfolio
manager only through the end of the period of the report as stated on
the cover. The manager's views are subject to change at any time based
on market and other conditions.
(checkmark)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, 1998,
more than $4.9 billion
MANAGER: Richard Habermann, since 1996,
joined Fidelity in 1968
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
INVESTMENTS DECEMBER 31, 1998
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 55.5%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 2.0%
AEROSPACE & DEFENSE - 1.6%
AlliedSignal, Inc. 503,700 $ 22,320,206
Cordant Technologies, Inc. 142,800 5,355,000
Goodrich (B.F.) Co. 70,000 2,511,250
Sundstrand Corp. 184,600 9,576,125
United Technologies Corp. 351,700 38,247,375
78,009,956
DEFENSE ELECTRONICS - 0.4%
Litton Industries, Inc. (a) 108,100 7,053,525
Northrop Grumman Corp. 197,400 14,434,875
21,488,400
SHIP BUILDING & REPAIR - 0.0%
Avondale Industries, Inc. 20,500 594,500
TOTAL AEROSPACE & DEFENSE 100,092,856
BASIC INDUSTRIES - 0.8%
CHEMICALS & PLASTICS - 0.4%
Engelhard Corp. 125,900 2,455,051
FMC Corp. (a) 146,400 8,198,400
Millennium Chemicals, Inc. 269,600 5,358,300
Solutia, Inc. 126,300 2,825,963
18,837,714
IRON & STEEL - 0.1%
USX-U.S. Steel Group 100,000 2,300,000
PACKAGING & CONTAINERS - 0.2%
Owens-Illinois, Inc. (a) 376,000 11,515,000
PAPER & FOREST PRODUCTS - 0.1%
Louisiana-Pacific Corp. 285,000 5,219,063
TOTAL BASIC INDUSTRIES 37,871,777
CONSTRUCTION & REAL ESTATE -
1.0%
BUILDING MATERIALS - 0.3%
Fortune Brands, Inc. 160,000 5,060,000
USG Corp. 90,000 4,584,375
Vulcan Materials Co. 25,700 3,381,156
13,025,531
CONSTRUCTION - 0.6%
Centex Corp. 151,400 6,822,463
D.R. Horton, Inc. 189,224 4,352,152
Fleetwood Enterprises, Inc. 351,981 12,231,340
Kaufman & Broad Home Corp. 260,500 7,489,375
30,895,330
ENGINEERING - 0.1%
Fluor Corp. 175,000 7,448,438
TOTAL CONSTRUCTION & REAL 51,369,299
ESTATE
SHARES VALUE (NOTE 1)
DURABLES - 2.6%
AUTOS, TIRES, & ACCESSORIES -
2.1%
Dana Corp. 80,300 $ 3,282,263
Ford Motor Co. 981,600 57,607,650
General Motors Corp. 646,790 46,285,909
107,175,822
CONSUMER ELECTRONICS - 0.3%
Maytag Corp. 225,000 14,006,250
HOME FURNISHINGS - 0.2%
Ethan Allen Interiors, Inc. 94,900 3,890,900
Furniture Brands 153,400 4,180,150
International, Inc. (a)
8,071,050
TEXTILES & APPAREL - 0.0%
Arena Brands Holdings Corp. 8,445 211,125
Class B
TOTAL DURABLES 129,464,247
ENERGY - 2.1%
ENERGY SERVICES - 0.1%
McDermott International, Inc. 267,000 6,591,563
OIL & GAS - 2.0%
British Petroleum PLC ADR 3,021 286,995
Coastal Corp. (The) 377,800 13,199,388
Exxon Corp. 841,900 61,563,938
Royal Dutch Petroleum Co. 119,200 5,706,698
(Hague Registry)
Sunoco, Inc. 175,000 6,310,938
Tosco Corp. 363,800 9,413,325
96,481,282
TOTAL ENERGY 103,072,845
FINANCE - 8.7%
BANKS - 2.0%
BankBoston Corp. 361,200 14,064,225
Chase Manhattan Corp. 674,800 45,928,575
Comerica, Inc. 71,400 4,868,588
Commerce Bancshares, Inc. 1,927 81,898
Firstar Corp. 70,000 6,527,500
National City Corp. 159,003 11,527,718
SunTrust Banks, Inc. 236,500 18,092,250
101,090,754
CREDIT & OTHER FINANCE - 0.6%
Equitable Companies (The), 202,000 11,690,750
Inc.
Fleet Financial Group, Inc. 196,500 8,781,094
Providian Financial Corp. 85,950 6,446,250
26,918,094
FEDERAL SPONSORED CREDIT - 2.3%
Fannie Mae 947,390 70,106,860
Freddie Mac 509,800 32,850,238
SLM Holding Corp. 239,000 11,472,000
114,429,098
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
INSURANCE - 3.3%
Allmerica Financial Corp. 87,300 $ 5,052,488
Allstate Corp. 1,120,400 43,275,450
CIGNA Corp. 637,600 49,294,450
Conseco, Inc. 798,900 24,416,381
Financial Security Assurance 37,300 2,023,525
Holdings Ltd.
ING Groep NV sponsored ADR 4,145 257,767
Lincoln National Corp. 73,800 6,037,763
MGIC Investment Corp. 127,400 5,072,113
Old Republic International 183,150 4,120,875
Corp.
Orion Capital Corp. 40,800 1,624,350
SunAmerica, Inc. 252,100 20,451,613
161,626,775
SECURITIES INDUSTRY - 0.5%
Crestline Capital Corp. (a) 54,590 798,379
Lehman Brothers Holdings, 534,500 23,551,406
Inc.
24,349,785
TOTAL FINANCE 428,414,506
HEALTH - 6.1%
DRUGS & PHARMACEUTICALS - 4.0%
Amgen, Inc. (a) 143,200 14,973,350
Lilly (Eli) & Co. 223,200 19,836,900
Mylan Laboratories, Inc. 260,000 8,190,000
Pfizer, Inc. 532,200 66,757,838
Schering-Plough Corp. 995,400 54,995,850
Warner-Lambert Co. 464,000 34,887,000
199,640,938
MEDICAL EQUIPMENT & SUPPLIES
- - 1.3%
Allegiance Corp. 26,360 1,229,035
Guidant Corp. 587,400 64,760,850
65,989,885
MEDICAL FACILITIES MANAGEMENT
- - 0.8%
Integrated Health Services, 168,500 2,380,063
Inc.
Lincare Holdings, Inc. (a) 200,000 8,112,500
PacifiCare Health Systems, 169,200 13,451,400
Inc. Class B (a)
Wellpoint Health Networks, 150,000 13,050,000
Inc. (a)
36,993,963
TOTAL HEALTH 302,624,786
INDUSTRIAL MACHINERY &
EQUIPMENT - 3.8%
ELECTRICAL EQUIPMENT - 2.0%
General Electric Co. 732,700 74,781,194
General Instrument Corp. (a) 188,900 6,410,794
Honeywell, Inc. 240,000 18,075,000
99,266,988
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY &
EQUIPMENT - 1.6%
Caterpillar, Inc. 528,000 $ 24,288,000
Coltec Industries, Inc. (a) 259,400 5,058,300
Ingersoll-Rand Co. 463,200 21,741,450
Mark IV Industries, Inc. 173,100 2,250,300
Tyco International Ltd. 353,100 26,636,981
79,975,031
POLLUTION CONTROL - 0.2%
Waste Management, Inc. 231,700 10,803,013
TOTAL INDUSTRIAL MACHINERY & 190,045,032
EQUIPMENT
MEDIA & LEISURE - 1.5%
BROADCASTING - 0.0%
Loral Orion Network Systems,
Inc.:
warrants 1/15/07 (CV ratio 2,920 23,360
.47) (a)
warrants 1/15/07 (CV ratio 860 9,030
.6) (a)
Nielsen Media Research, Inc. 28,066 505,188
(a)
NTL, Inc. warrants 12/31/08 3,742 56,130
(a)
593,708
ENTERTAINMENT - 0.3%
Alliance Gaming Corp. (a)(k) 3,030 5,000
Carnival Corp. 168,500 8,088,000
Tele-Communications, Inc. 260,712 6,143,026
(TCI Ventures Group) Series
A (a)
14,236,026
LEISURE DURABLES & TOYS - 0.1%
Harley-Davidson, Inc. 84,200 3,988,975
LODGING & GAMING - 0.3%
Aladdin Gaming Enterprises, 23,800 238
Inc. warrants 3/1/10 (a)(f)
Fitzgeralds South, Inc. 420 0
warrants 3/15/99 (a)(f)
Host Marriott Corp. 545,900 7,540,244
International Game Technology 251,900 6,124,319
Corp.
13,664,801
PUBLISHING - 0.8%
Gannet, Inc. 324,500 21,477,844
Knight-Ridder, Inc. 128,700 6,579,788
New York Times Co. (The) 219,200 7,603,500
Class A
World Color Press, Inc. (a) 68,100 2,072,794
37,733,926
RESTAURANTS - 0.0%
Brinker International, Inc. 93,800 2,708,475
(a)
TOTAL MEDIA & LEISURE 72,925,911
NONDURABLES - 3.5%
BEVERAGES - 0.4%
Anheuser-Busch Companies, 75,800 4,974,375
Inc.
Canandaigua Brands, Inc. 51,600 2,983,125
Class A (a)
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONDURABLES - CONTINUED
BEVERAGES - CONTINUED
Coors (Adolph) Co. Class B 106,800 $ 6,027,525
PepsiCo, Inc. 159,400 6,525,438
20,510,463
FOODS - 1.0%
Flowers Industries, Inc. 170,300 4,076,556
Heinz (H.J.) Co. 600,000 33,975,000
Quaker Oats Co. 202,400 12,042,800
50,094,356
HOUSEHOLD PRODUCTS - 0.6%
Avon Products, Inc. 131,300 5,810,025
Clorox Co. 115,000 13,433,438
Nu Skin Enterprises, Inc. 61,300 1,448,213
Class A (a)
Premark International, Inc. 34,500 1,194,563
Procter & Gamble Co. 84,100 7,679,381
29,565,620
TOBACCO - 1.5%
Philip Morris Companies, Inc. 1,139,500 60,963,250
RJR Nabisco Holdings Corp. 353,930 10,507,297
Universal Corp. 68,900 2,420,113
73,890,660
TOTAL NONDURABLES 174,061,099
RETAIL & WHOLESALE - 6.2%
APPAREL STORES - 0.6%
Gap, Inc. 172,350 9,694,688
TJX Companies, Inc. 747,700 21,683,300
31,377,988
GENERAL MERCHANDISE STORES -
2.8%
Dayton Hudson Corp. 147,500 8,001,875
Federated Department Stores, 311,300 13,561,006
Inc. (a)
Wal-Mart Stores, Inc. 1,402,400 114,207,919
135,770,800
GROCERY STORES - 0.6%
Safeway, Inc. (a) 458,000 27,909,375
RETAIL & WHOLESALE,
MISCELLANEOUS - 2.2%
Best Buy Co., Inc. (a) 248,300 15,239,413
Home Depot, Inc. 749,700 45,872,269
Lowe's Companies, Inc. 358,600 18,355,838
Office Depot, Inc. (a) 127,400 4,705,838
Pier 1 Imports, Inc. 537,600 5,208,000
Tandy Corp. 504,600 20,783,213
110,164,571
TOTAL RETAIL & WHOLESALE 305,222,734
SERVICES - 0.2%
PRINTING - 0.2%
Donnelley (R.R.) & Sons Co. 24,800 1,086,550
SHARES VALUE (NOTE 1)
United Stationers, Inc. (a) 112,000 $ 2,912,000
Valassis Communications, Inc. 149,600 7,723,100
(a)
11,721,650
TECHNOLOGY - 7.3%
COMMUNICATIONS EQUIPMENT - 1.7%
Globalstar Telecommunications 1,410 84,600
Ltd. warrants 2/15/04 (a)(f)
Lucent Technologies, Inc. 637,000 70,070,000
Tellabs, Inc. (a) 191,300 13,116,006
83,270,606
COMPUTER SERVICES & SOFTWARE
- - 2.8%
BMC Software, Inc. 336,700 15,004,194
Computer Sciences Corp. 147,400 9,498,088
HBO & Co. 733,800 21,050,888
Microsoft Corp. (a) 195,000 27,044,063
NCR Corp. (a) 16,600 693,050
Oracle Corp. (a) 1,559,900 67,270,688
140,560,971
COMPUTERS & OFFICE EQUIPMENT
- - 2.1%
International Business 105,100 19,417,225
Machines Corp.
Lexmark International Group, 287,300 28,873,650
Inc. (a)
Sun Microsystems, Inc. (a) 400,100 34,258,563
Unisys Corp. (a) 397,400 13,685,463
Xerox Corp. 78,800 9,298,400
105,533,301
ELECTRONICS - 0.4%
Intel Corp. 139,400 16,527,613
Storage Technology Corp. (a) 84,200 2,994,363
19,521,976
PHOTOGRAPHIC EQUIPMENT - 0.3%
Eastman Kodak Co. 202,200 14,558,400
TOTAL TECHNOLOGY 363,445,254
TRANSPORTATION - 2.1%
AIR TRANSPORTATION - 1.6%
AMR Corp. (a) 647,600 38,451,250
Comair Holdings, Inc. 195,100 6,584,625
Southwest Airlines Co. 1,194,150 26,793,741
US Airways Group, Inc. (a) 84,500 4,394,000
Viad Corp. 131,300 3,988,238
80,211,854
RAILROADS - 0.3%
Burlington Northern Santa Fe 300,000 10,125,000
Corp.
Trinity Industries, Inc. 87,600 3,372,600
13,497,600
TRUCKING & FREIGHT - 0.2%
Airborne Freight Corp. 335,400 12,095,363
TOTAL TRANSPORTATION 105,804,817
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - 7.6%
CELLULAR - 0.0%
McCaw International Ltd. 8,150 $ 40,750
warrants 4/15/07 (a)(f)
ELECTRIC UTILITY - 2.2%
Baltimore Gas & Electric Co. 219,500 6,777,063
Central & South West Corp. 200,000 5,487,500
Dominion Resources, Inc. 120,000 5,610,000
DTE Energy Co. 210,000 9,003,750
Edison International 270,500 7,540,188
Energy East Corp. 332,400 18,780,600
Entergy Corp. 377,900 11,762,138
FPL Group, Inc. 148,100 9,126,663
GPU, Inc. 212,300 9,381,006
Houston Industries, Inc. 377,800 12,136,825
Pinnacle West Capital Corp. 168,000 7,119,000
Public Service Enterprise 170,100 6,804,000
Group, Inc.
109,528,733
GAS - 0.1%
KeySpan Energy 143,176 4,438,456
TELEPHONE SERVICES - 5.3%
Ameritech Corp. 671,900 42,581,663
AT&T Corp. 1,480,200 111,385,050
BellSouth Corp. 899,600 44,867,550
Pathnet, Inc. warrants 5,170 51,700
4/15/08 (a)(f)
SBC Communications, Inc. 460,000 24,667,500
U.S. WEST, Inc. 590,800 38,180,450
261,733,913
TOTAL UTILITIES 375,741,852
TOTAL COMMON STOCKS 2,751,878,665
(Cost $2,050,450,469)
NONCONVERTIBLE PREFERRED
STOCKS - 1.2%
CONSTRUCTION & REAL ESTATE -
0.2%
REAL ESTATE INVESTMENT TRUSTS
- - 0.2%
California Federal Preferred 231,349 5,812,644
Capital Corp. $2.28
Crown America Realty Trust 12,358 603,997
Series A, $5.50
Walden Residential 49,000 1,065,750
Properties, Inc. $2.30
7,482,391
FINANCE - 0.1%
CREDIT & OTHER FINANCE - 0.0%
Fresenius Medical Care 1,053 1,056,060
Capital Trust II 7.875%
SHARES VALUE (NOTE 1)
INSURANCE - 0.1%
American Annuity Group 1,490 $ 1,460,200
Capital Trust II 8.875%
SIG Capital Trust I 9.5% 2,174 1,885,310
3,345,510
TOTAL FINANCE 4,401,570
MEDIA & LEISURE - 0.5%
BROADCASTING - 0.4%
Adelphia Communications Corp. 11,243 1,309,810
$13.00
CSC Holdings, Inc. 11.125% 90,476 10,088,074
pay-in-kind
Echostar Communications Corp. 2,189 2,531,031
12.125% pay-in-kind
Granite Broadcasting Corp. 2,337 2,103,300
12.75% pay-in-kind
SFX Broadcasting, Inc. 14,334 1,763,082
12.625% pay-in-kind
Sinclair Capital 11.625% 28,380 3,022,470
20,817,767
PUBLISHING - 0.1%
PRIMEDIA, Inc.:
$9.20 30,214 2,930,758
Series D, $10.00 31,050 3,205,913
6,136,671
TOTAL MEDIA & LEISURE 26,954,438
RETAIL & WHOLESALE - 0.0%
GROCERY STORES - 0.0%
Supermarkets General Holdings 20,000 420,000
Corp. $3.52 pay-in-kind (a)
TECHNOLOGY - 0.1%
COMMUNICATIONS EQUIPMENT - 0.1%
Intermedia Communications, 2,163 2,179,223
Inc. 13.5% pay-in-kind (a)
UTILITIES - 0.3%
CELLULAR - 0.2%
Nextel Communications, Inc. 10,951 9,855,900
11.125% pay-in-kind (a)
TELEPHONE SERVICES - 0.1%
Hyperion Telecommunication, 2,262 1,798,290
Inc. 12.875% pay-in-kind
NONCONVERTIBLE PREFERRED
STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - CONTINUED
TELEPHONE SERVICES - CONTINUED
IXC Communications, Inc. 1,665 $ 1,681,650
12.5% pay-in-kind
NEXTLINK Communications, Inc. 62,609 3,255,668
14% pay-in-kind
6,735,608
TOTAL UTILITIES 16,591,508
TOTAL NONCONVERTIBLE 58,029,130
PREFERRED STOCKS
(Cost $58,881,004)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
CORPORATE BONDS - 16.5%
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT
CONVERTIBLE BONDS - 0.1%
HEALTH - 0.1%
DRUGS & PHARMACEUTICALS - 0.0%
Integrated Process Equipment B- $ 1,370,000 991,538
Corp. 6.25% 9/15/04 (f)
MEDICAL FACILITIES MANAGEMENT
- - 0.1%
Tenet Healthcare Corp. 6% B1 2,720,000 2,339,200
12/1/05
TOTAL HEALTH 3,330,738
NONDURABLES - 0.0%
FOODS - 0.0%
Chiquita Brands B3 2,210,000 2,055,300
International, Inc. 7%
3/28/01
RETAIL & WHOLESALE - 0.0%
RETAIL & WHOLESALE,
MISCELLANEOUS - 0.0%
Sports Authority, Inc. 5.25% B2 1,490,000 997,369
9/15/01
TOTAL CONVERTIBLE BONDS 6,383,407
NONCONVERTIBLE BONDS - 16.4%
AEROSPACE & DEFENSE - 0.2%
DEFENSE ELECTRONICS - 0.1%
Raytheon Co. 5.95% 3/15/01 Baa1 4,500,000 4,539,510
SHIP BUILDING & REPAIR - 0.1%
Newport News Shipbuilding, B1 3,830,000 4,050,225
Inc. 9.25% 12/1/06
TOTAL AEROSPACE & DEFENSE 8,589,735
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
BASIC INDUSTRIES - 0.3%
CHEMICALS & PLASTICS - 0.0%
Huntsman Corp. 9.5% 7/1/07 (f) B2 $ 2,100,000 $ 2,094,750
PACKAGING & CONTAINERS - 0.3%
Owens-Illinois, Inc.:
7.15% 5/15/05 Ba1 8,430,000 8,471,543
7.8% 5/15/18 Ba1 4,350,000 4,388,389
12,859,932
TOTAL BASIC INDUSTRIES 14,954,682
CONSTRUCTION & REAL ESTATE -
0.3%
BUILDING MATERIALS - 0.0%
American Standard Cos., Inc. Ba3 1,810,000 1,828,100
7.375% 4/15/05
CONSTRUCTION - 0.0%
U.S. Home Corp. 8.88% 8/15/07 B1 600,000 612,000
REAL ESTATE - 0.1%
LNR Property Corp. 9.375% B1 2,680,000 2,572,800
3/15/08
REAL ESTATE INVESTMENT TRUSTS
- - 0.2%
CenterPoint Properties Trust Baa2 1,590,000 1,510,277
6.75% 4/1/05
EOP Operating LP:
6.375% 2/15/03 Baa1 3,600,000 3,554,064
6.75% 2/15/08 Baa1 1,590,000 1,563,447
Weeks Realty LP 6.875% 3/15/05 Baa2 2,950,000 2,733,175
9,360,963
TOTAL CONSTRUCTION & REAL 14,373,863
ESTATE
DURABLES - 0.5%
AUTOS, TIRES, & ACCESSORIES -
0.2%
Blue Bird Body Co. 10.75% B2 1,375,000 1,416,250
11/15/06
Federal-Mogul Corp. 7.875% Ba2 5,220,000 5,340,582
7/1/10
Oshkosh Truck Co. 8.75% B3 2,010,000 2,010,000
3/1/08
8,766,832
CONSUMER DURABLES - 0.0%
Corning Consumer Products Co. B3 1,830,000 1,281,000
9.625% 5/1/08
HOME FURNISHINGS - 0.0%
Omega Cabinets Ltd. 10.5% B3 1,280,000 1,257,600
6/15/07
TEXTILES & APPAREL - 0.3%
Levi Strauss & Co. 7% 11/1/06 Baa3 7,700,000 7,057,050
(f)
Unifi, Inc. 6.5% 2/1/08 A3 2,940,000 2,912,070
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
DURABLES - CONTINUED
TEXTILES & APPAREL - CONTINUED
WestPoint Stevens, Inc.:
7.875% 6/15/05 Ba3 $ 740,000 $ 750,175
7.875% 6/15/08 Ba3 1,280,000 1,296,000
Worldtex, Inc. 9.625% 12/15/07 B1 2,610,000 2,270,700
14,285,995
TOTAL DURABLES 25,591,427
ENERGY - 0.4%
COAL - 0.0%
P&L Coal Holdings Corp. B2 2,640,000 2,686,200
9.625% 5/15/08
ENERGY SERVICES - 0.0%
R&B Falcon Corp. 9.5% Ba1 1,040,000 1,040,000
12/15/08 (f)
OIL & GAS - 0.4%
Chesapeake Energy Corp. B3 1,950,000 1,462,500
9.625% 5/1/05
Gulf Canada Resources Ltd. Ba1 2,250,000 2,216,250
8.375% 11/15/05
Occidental Petroleum Corp.:
6.39% 11/9/00 Baa3 1,000,000 1,010,450
10.94% 5/17/00 Baa3 2,700,000 2,888,865
Oryx Energy Co.:
8% 10/15/03 Ba1 1,670,000 1,755,855
8.125% 10/15/05 Ba1 665,000 712,681
8.375% 7/15/04 Ba1 1,770,000 1,892,289
Petro-Canada, Inc. 7% 11/15/28 A3 2,940,000 2,899,193
Petroleum Geo-Services ASA Baa3 4,260,000 3,980,501
7.125% 3/30/28
18,818,584
TOTAL ENERGY 22,544,784
FINANCE - 4.2%
BANKS - 1.3%
BankBoston Companies 6.625% A3 1,700,000 1,735,870
2/1/04
BankBoston NA 6.375% 3/25/08 A2 1,400,000 1,404,508
BanPonce Corp. 6.665% 3/5/01 A3 4,450,000 4,488,893
BanPonce Financial Corp. A3 2,000,000 2,050,300
7.72% 4/13/00
Barclays Bank PLC yankee A1 9,250,000 9,312,900
5.95% 7/15/01
Capital One Bank:
6.375% 2/15/03 Baa3 3,570,000 3,557,219
6.42% 11/12/99 Baa3 4,900,000 4,887,456
8.125% 3/1/00 Baa3 5,500,000 5,579,915
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
Capital One Financial Corp. Ba1 $ 4,320,000 $ 4,282,934
7.125% 8/1/08
Den Danske Bank AS 6.375% A1 8,340,000 8,367,939
6/15/08 (f)(i)
Fleet/Norstar Financial A3 2,400,000 2,642,136
Group, Inc. 9.9% 6/15/01
Huntington National Bank A1 2,560,000 2,571,827
5.875% 1/15/01
NB Capital Trust IV 8.25% Aa2 2,650,000 3,004,093
4/15/27
Provident Bank 6.125% 12/15/00 A3 1,740,000 1,752,406
Providian National Bank 6.7% Baa3 3,060,000 3,094,792
3/15/03
Signet Banking Corp. 9.625% A2 790,000 803,090
6/1/99
Summit Bancorp 8.625% 12/10/02 BBB+ 1,730,000 1,916,408
Union Planters National Bank A3 3,500,000 3,571,750
6.81% 8/20/01
65,024,436
CREDIT & OTHER FINANCE - 2.3%
Ahmanson Capital Trust I A3 4,250,000 4,759,958
8.36% 12/1/26 (f)
AT&T Capital Corp.:
6.25% 5/15/01 Baa3 5,200,000 5,129,228
7.5% 11/15/00 Baa3 5,450,000 5,516,708
BankAmerica Capital II Series Aa2 2,980,000 3,287,387
2, 8% 12/15/26
BanPonce Trust I 8.327% 2/1/27 A3 6,450,000 6,917,754
Countrywide Funding Corp. A3 3,950,000 4,016,044
6.45% 2/27/03
ERP Operating LP 6.55% A3 1,500,000 1,501,515
11/15/01
Farmers Insurance Exchange A2 2,740,000 2,742,356
Capital 7.05% 7/15/28 (f)
Finova Capital Corp.:
6.12% 5/28/02 Baa1 2,000,000 1,999,700
6.44% 11/6/01 Baa1 5,500,000 5,549,060
First Security Capital I A3 1,690,000 1,864,357
8.41% 12/15/26
Ford Motor Credit Co.:
global 7% 9/25/01 A1 12,500,000 13,006,500
5.73% 2/23/00 A1 3,250,000 3,267,420
General Electric Capital Aaa 7,000,000 7,026,740
Corp. 6.94% 4/13/09 (e)
GS Escrow Corp.:
7% 8/1/03 Ba1 2,140,000 2,097,029
7.125% 8/1/05 Ba1 7,600,000 7,460,464
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
FINANCE - CONTINUED
CREDIT & OTHER FINANCE -
CONTINUED
Heller Financial, Inc.:
6.25% 3/1/01 A3 $ 4,940,000 $ 4,992,957
7.875% 11/1/99 A3 5,050,000 5,138,981
KeyCorp Institutional Capital A1 3,600,000 3,942,288
A 7.826% 12/1/26
Macsaver Financial Services,
Inc.:
7.4% 2/15/02 Ba1 1,620,000 1,328,400
7.6% 8/1/07 Ba1 4,080,000 2,937,600
7.875% 8/1/03 Ba1 70,000 56,000
Mellon Capital I 7.72% 12/1/26 A2 2,000,000 2,164,420
Money Store, Inc. 7.3% 12/1/02 A2 2,550,000 2,680,688
Nordstrom Credit, Inc. 7.25% A2 3,500,000 3,685,640
4/30/02
PNC Funding Corp. 6.875% A3 2,020,000 2,107,749
3/1/03
Premier Auto Trust 5.45% 2,270,613 2,273,451
6/8/99
U.S. Bancorp 8.09% 11/15/26 A1 2,980,000 3,268,911
UNICCO Service Co./UNICCO B3 2,390,000 2,306,350
Finance Corp. 9.875% 10/15/07
113,025,655
SAVINGS & LOANS - 0.3%
Chevy Chase Savings Bank FSB B1 1,560,000 1,560,000
9.25% 12/1/08
Great Western Finance Trust A3 3,780,000 4,264,218
II 8.206% 2/1/27
Great Western Financial Corp. A3 2,000,000 2,157,800
8.6% 2/1/02
Home Savings of America FSB A3 2,830,000 2,878,421
6.5% 8/15/04
Long Island Savings Bank FSB:
6.2% 4/2/01 Baa3 3,770,000 3,761,857
7% 6/13/02 Baa3 3,400,000 3,468,476
18,090,772
SECURITIES INDUSTRY - 0.3%
Amvescap PLC:
yankee 6.375% 5/15/03 A3 2,200,000 2,236,652
yankee 6.6% 5/15/05 A3 1,650,000 1,690,458
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
Morgan Stanley, Dean Witter, - $ 10,500,000 $ 10,500,000
Discover & Co. 4.8% 1/15/99
(i)
14,427,110
TOTAL FINANCE 210,567,973
HEALTH - 0.2%
MEDICAL EQUIPMENT & SUPPLIES
- - 0.0%
Graham-Field Health Products, Caa1 2,410,000 1,590,600
Inc. 9.75% 8/15/07
MEDICAL FACILITIES MANAGEMENT
- - 0.2%
Fountain View, Inc. 11.25% Caa1 2,330,000 2,027,100
4/15/08
Tenet Healthcare Corp.:
8.125% 12/1/08 (f) Ba3 1,300,000 1,332,500
8.625% 1/15/07 Ba3 4,320,000 4,514,400
7,874,000
TOTAL HEALTH 9,464,600
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.5%
ELECTRICAL EQUIPMENT - 0.0%
Motors & Gears, Inc. 10.75% B3 430,000 440,750
11/15/06
INDUSTRIAL MACHINERY &
EQUIPMENT - 0.3%
Bucyrus International, Inc. B1 3,430,000 2,864,050
9.75% 9/15/07
Roller Bearing Holding, Inc. - 3,550,000 1,775,000
0% 6/15/09 (d)(f)
Thermadyne Manufacturing LLC B3 830,000 755,300
9.875% 6/1/08
Tyco International Group SA
yankee:
6.125% 6/15/01 Baa1 6,860,000 6,926,062
6.375% 6/15/05 Baa1 2,665,000 2,716,648
15,037,060
POLLUTION CONTROL - 0.2%
Allied Waste North America, Ba2 870,000 880,875
Inc. 7.625% 1/1/06 (f)
Envirosource, Inc. 9.75% B3 870,000 787,350
6/15/03
WMX Technologies, Inc.:
6.25% 10/15/00 Baa3 2,100,000 2,115,981
7.1% 8/1/26 Baa3 4,610,000 4,907,806
8.25% 11/15/99 Baa3 1,320,000 1,347,298
10,039,310
TOTAL INDUSTRIAL MACHINERY & 25,517,120
EQUIPMENT
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
MEDIA & LEISURE - 4.6%
BROADCASTING - 3.0%
ACME Television LLC/ACME B3 $ 1,740,000 $ 1,387,650
Financial Corp. 0% 9/30/04
(d)
Adelphia Communications Corp.:
9.5% 2/15/04 pay-in-kind B2 6,111,175 6,248,004
9.875% 3/1/07 B2 4,280,000 4,729,400
Ascent Entertainment Group, B3 1,990,000 1,194,000
Inc. 0% 12/15/04 (d)
Avalon Cable Michigan, B3 1,680,000 1,713,600
Inc./Avalon Cable New
England/Avalon Cable
Finance, Inc. 9.375% 12/1/08
(f)
Century Communications Corp.:
0% 1/15/08 Ba3 10,760,000 5,487,600
8.75% 10/1/07 Ba3 1,170,000 1,287,000
Chancellor Media Corp. 9% B1 3,565,000 3,752,163
10/1/08 (f)
Clear Channel Communications,
Inc.:
6.875% 6/15/18 Baa3 3,450,000 3,353,745
7.25% 10/15/27 Baa3 1,950,000 1,951,560
Comcast UK Cable Partners B2 3,360,000 2,839,200
Ltd. 0% 11/15/07 (d)
Continental Cablevision, Inc.:
8.3% 5/15/06 Baa3 2,145,000 2,380,113
8.625% 8/15/03 Baa3 2,790,000 3,058,342
CSC Holdings, Inc.:
7.875% 12/15/07 Ba2 400,000 421,040
9.25% 11/1/05 B1 1,370,000 1,465,900
9.875% 5/15/06 B1 1,600,000 1,752,000
10.5% 5/15/16 B1 1,850,000 2,173,750
Diamond Cable Communications B3 1,480,000 1,221,000
PLC yankee 0% 12/15/05 (d)
EchoStar Communications Corp. B2 890,000 910,025
0% 6/1/04 (d)
Echostar Satellite B3 1,030,000 1,030,000
Broadcasting Corp. 0%
3/15/04 (d)
Falcon Holding Group
LP/Falcon Funding Corp.:
0% 4/15/10 (d) B2 8,060,000 5,420,350
8.375% 4/15/10 B2 1,790,000 1,807,900
FrontierVision Holdings Caa1 3,520,000 2,895,200
LP/FrontierVision Holdings
Capital Corp. 0% 9/15/07 (d)
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
FrontierVision Operating B3 $ 4,740,000 $ 5,267,325
Partners LP/ FrontierVision
Capital Corp. 11% 10/15/06
Golden Sky Systems, Inc. B3 1,200,000 1,248,000
12.375% 8/1/06 (f)
Granite Broadcasting Corp.:
8.875% 5/15/08 B3 2,375,000 2,262,188
9.375% 12/1/05 B3 2,955,000 2,895,900
10.375% 5/15/05 B3 860,000 868,600
Hearst-Argyle Television, Baa3 2,590,000 2,702,328
Inc. 7.5% 11/15/27
Intermedia Capital Partners B2 1,362,000 1,532,250
IV LP / Intermedia Partners
IV Capital Corp. 11.25%
8/1/06
International Cabletel, Inc. B3 1,850,000 1,498,500
0% 2/1/06 (d)
Iridium Operating LLC/Iridium B3 4,220,000 3,629,200
Capital Corp. 11.25% 7/15/05
Lenfest Communications, Inc. B2 880,000 906,400
8.25% 2/15/08
NTL, Inc.:
0% 4/1/08 (d) B3 8,075,000 4,986,313
10% 2/15/07 B3 2,310,000 2,379,300
11.5% 10/1/08 (f) B3 3,640,000 3,913,000
Olympus Communications B1 1,160,000 1,276,000
LP/Olympus Capital Corp.
10.625% 11/15/06
Orion Network Systems, Inc. B2 1,630,000 1,010,600
0% 1/15/07 (d)
Pegasus Communications Corp. B3 1,345,000 1,331,550
9.625% 10/15/05
Renaissance Media Group B3 2,470,000 1,667,250
LLC/Renaissance Media
Capital Corp. 0% 4/15/08 (d)
Rogers Cablesystems Ltd. B2 1,800,000 2,115,000
yankee 11% 12/1/15
Satelites Mexicanos SA de CV B3 3,590,000 2,872,000
10.125% 11/1/04
TCI Communications, Inc.:
9.25% 4/15/02 Baa3 3,000,000 3,335,850
9.8% 2/1/12 Baa3 4,550,000 6,075,888
TCI Communications Financing Ba2 4,360,000 5,319,200
III 9.65% 3/31/27
TCI Communications, Inc.:
6.46% 3/6/00 Baa3 6,570,000 6,652,585
8.75% 8/1/15 Baa3 4,160,000 5,167,926
Telewest Communications PLC B1 710,000 798,750
11.25% 11/1/08 (f)
Telewest PLC:
yankee 9.625% 10/1/06 B1 680,000 707,200
0% 10/1/07 (d) B1 8,930,000 7,411,900
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
MEDIA & LEISURE - CONTINUED
BROADCASTING - CONTINUED
Time Warner, Inc.:
6.625% 5/15/29 Baa3 $ 3,410,000 $ 3,469,539
6.875% 6/15/18 Baa3 2,500,000 2,618,900
8.18% 8/15/07 Baa3 2,710,000 3,139,671
UIH Australia/Pacific, Inc. B2 1,530,000 742,050
Series B 0% 5/15/06 (d)
United International B3 6,490,000 3,504,600
Holdings, Inc. 0% 2/15/08 (d)
151,785,305
ENTERTAINMENT - 0.7%
AMC Entertainment, Inc. 9.5% B2 3,290,000 3,355,800
3/15/09
Bally Total Fitness Holding
Corp.:
9.875% 10/15/07 B3 1,960,000 1,920,800
9.875% 10/15/07 (f) B3 3,680,000 3,606,400
Cinemark USA, Inc. 8.5% 8/1/08 B2 3,255,000 3,198,038
Paramount Communications, Baa3 1,785,000 1,862,701
Inc. 7.5% 1/15/02
Premier Parks, Inc. 0% 4/1/08 B3 3,040,000 2,059,600
(d)
Regal Cinemas, Inc. 8.875% B3 5,950,000 5,890,500
12/15/10 (f)
United Artists Theatre Co. Caa1 2,150,000 2,064,000
9.75% 4/15/08
Viacom, Inc. 7.75% 6/1/05 Baa3 8,727,000 9,467,311
33,425,150
LODGING & GAMING - 0.4%
Aladdin Gaming Caa2 2,380,000 618,800
Holdings/Aladdin Capital
Corp. 0% 3/1/10 (d)
Circus Circus Enterprises,
Inc.:
7.625% 7/15/13 Ba2 1,040,000 915,200
9.25% 12/1/05 Ba2 820,000 832,300
Courtyard by Marriott II B- 1,190,000 1,228,675
LP/Courtyard II Finance Co.
10.75% 2/1/08
HMH Properties, Inc.:
7.875% 8/1/05 Ba2 2,070,000 2,023,425
7.875% 8/1/08 Ba2 9,130,000 8,856,100
8.45% 12/1/08 Ba2 520,000 520,000
Signature Resorts, Inc.:
9.25% 5/15/06 B2 1,770,000 1,628,400
9.75% 10/1/07 B3 1,890,000 1,587,600
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
Sun International Hotels Ba3 $ 1,320,000 $ 1,359,600
Ltd./Sun International North
America, Inc. yankee 9%
3/15/07
19,570,100
PUBLISHING - 0.3%
Big Flower Press Holdings, B2 1,730,000 1,730,000
Inc. 8.625% 12/1/08 (f)
Garden State Newspapers, Inc. B1 5,550,000 5,577,750
Series B, 8.75% 10/1/09
News America Holdings, Inc. Baa3 4,300,000 4,625,854
7.7% 10/30/25
News America, Inc. 7.25% Baa3 3,240,000 3,310,243
5/18/18
15,243,847
RESTAURANTS - 0.2%
Dominos, Inc. 10.375% 1/15/09 B3 2,410,000 2,422,050
(f)
Host Marriott Travel Plazas, Ba3 5,040,000 5,153,400
Inc. 9.5% 5/15/05
Nebraska Restaurant, Inc. B3 1,130,000 1,141,300
10.75% 7/15/08
8,716,750
TOTAL MEDIA & LEISURE 228,741,152
NONDURABLES - 0.6%
BEVERAGES - 0.2%
Seagram Co. Ltd.:
yankee 6.875% 9/1/23 Baa3 620,000 570,400
8.35% 1/15/22 Baa3 390,000 418,275
Seagram J E & Sons, Inc.:
6.625% 12/15/05 Baa3 2,940,000 2,922,360
7.6% 12/15/28 Baa3 2,940,000 2,950,290
6,861,325
FOODS - 0.1%
ConAgra, Inc. 7.125% 10/1/26 Baa1 4,250,000 4,507,763
HOUSEHOLD PRODUCTS - 0.1%
Revlon Consumer Products Corp.:
8.625% 2/1/08 B3 4,560,000 4,149,600
9% 11/1/06 (f) B2 2,160,000 2,138,400
6,288,000
TOBACCO - 0.2%
Philip Morris Companies, Inc.:
6.95% 6/1/06 A2 4,420,000 4,707,256
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
NONDURABLES - CONTINUED
TOBACCO - CONTINUED
Philip Morris Companies,
Inc.: - continued
7% 7/15/05 A2 $ 3,710,000 $ 3,945,177
7.25% 9/15/01 A2 1,450,000 1,513,641
10,166,074
TOTAL NONDURABLES 27,823,162
RETAIL & WHOLESALE - 0.9%
APPAREL STORES - 0.1%
AnnTaylor, Inc. 8.75% 6/15/00 B3 2,690,000 2,716,900
DRUG STORES - 0.1%
Rite Aid Corp. 6% 12/15/05 (f) Baa1 5,500,000 5,500,000
GENERAL MERCHANDISE STORES -
0.2%
Dayton Hudson Corp. 7.5% A3 3,500,000 3,852,625
7/15/06
Federated Department Stores, Baa2 3,000,000 3,091,110
Inc. 6.79% 7/15/27
K mart Corp.:
7.75% 10/1/12 Ba2 240,000 241,200
12.5% 3/1/05 Ba2 2,510,000 3,143,775
Saks Holdings, Inc. 8.25% Baa3 1,260,000 1,335,600
11/15/08
11,664,310
GROCERY STORES - 0.4%
Ameriserve Food Distribution, B1 1,030,000 952,750
Inc. 8.875% 10/15/06
Kroger Co. 6% 7/1/00 Baa3 5,950,000 5,989,032
Pathmark Stores, Inc.:
9.625% 5/1/03 Caa1 6,960,000 6,838,200
12.625% 6/15/02 Caa2 1,430,000 1,376,375
Pueblo Xtra International,
Inc.:
9.5% 8/1/03 B3 2,370,000 2,239,650
9.5% 8/1/03 B3 820,000 774,900
18,170,907
RETAIL & WHOLESALE,
MISCELLANEOUS - 0.1%
Amazon.com, Inc. 0% 5/1/08 (d) Caa2 2,680,000 1,768,800
Metals USA, Inc. 8.625% B2 2,810,000 2,634,375
2/15/08
4,403,175
TOTAL RETAIL & WHOLESALE 42,455,292
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
SERVICES - 0.2%
LEASING & RENTAL - 0.0%
Renters Choice, Inc. 11% B2 $ 320,000 $ 321,600
8/15/08 (f)
PRINTING - 0.0%
Sullivan Graphics, Inc. Caa1 1,430,000 1,444,300
12.75% 8/1/05
SERVICES - 0.2%
Borg-Warner Security Corp. B3 960,000 1,041,600
9.625% 3/15/07
Iron Mountain, Inc. 8.75% B3 1,320,000 1,359,600
9/30/09
La Petite Academy, Inc./La B3 2,850,000 2,821,500
Petite Academy Holding Co.
10% 5/15/08
Medaphis Corp. 9.5% 2/15/05 Caa1 1,850,000 1,424,500
6,647,200
TOTAL SERVICES 8,413,100
TECHNOLOGY - 0.4%
COMMUNICATIONS EQUIPMENT - 0.0%
Intermedia Communications, B2 540,000 513,000
Inc. 8.6% 6/1/08
COMPUTER SERVICES & SOFTWARE
- - 0.1%
Federal Data Corp. 10.125% B3 3,720,000 3,645,600
8/1/05
ICG Services, Inc. 0% 5/1/08 - 5,910,000 3,058,425
(d)
PSINet, Inc. 10% 2/15/05 B3 700,000 696,500
7,400,525
COMPUTERS & OFFICE EQUIPMENT
- - 0.2%
Comdisco, Inc. 6.375% 11/30/01 Baa1 8,300,000 8,335,939
ELECTRONIC INSTRUMENTS - 0.0%
Telecommunications Techniques B3 2,315,000 2,268,700
Co. LLC 9.75% 5/15/08
ELECTRONICS - 0.1%
Fairchild Semiconductor Corp. - 2,991,974 2,437,801
11.74% 3/15/08 pay-in-kind
(k)
Hadco Corp. 9.5% 6/15/08 B2 270,000 265,950
2,703,751
TOTAL TECHNOLOGY 21,221,915
TRANSPORTATION - 0.8%
AIR TRANSPORTATION - 0.3%
Atlas Air, Inc. 9.25% 4/15/08 B3 4,810,000 4,761,900
Delta Air Lines, Inc. 9.875% Baa3 1,500,000 1,574,580
5/15/00
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
TRANSPORTATION - CONTINUED
AIR TRANSPORTATION - CONTINUED
Kitty Hawk, Inc. 9.95% B1 $ 3,125,000 $ 3,078,125
11/15/04
US Air, Inc. 9.625% 2/1/01 B1 1,810,000 1,882,400
US Airways Group, Inc. Ba2 2,480,000 2,672,200
10.375% 3/1/13
13,969,205
RAILROADS - 0.4%
Burlington Northern Santa Fe Baa2 3,000,000 3,343,350
Corp. 7.29% 6/1/36
Canadian National Railway Co. Baa2 3,390,000 3,524,922
6.9% 7/15/28
CSX Corp. 6.46% 6/22/05 Baa2 5,120,000 5,194,035
Norfolk Southern Corp. 7.05% Baa1 6,610,000 7,150,896
5/1/37
Wisconsin Central Baa2 1,810,000 1,837,965
Transportation Corp. 6.625%
4/15/08
21,051,168
SHIPPING - 0.1%
Amer Reefer Co. Ltd. 10.25% B1 1,480,000 932,400
3/1/08
Cenargo International PLC Ba3 1,370,000 1,287,800
9.75% 6/15/08 (f)
Holt Group, Inc. 9.75% Caa1 1,810,000 1,248,900
1/15/06 (f)
3,469,100
TOTAL TRANSPORTATION 38,489,473
UTILITIES - 2.3%
CELLULAR - 0.8%
Cable & Wireless Baa1 5,080,000 5,082,235
Communications PLC 6.375%
3/6/03
McCaw International Ltd. 0% Caa1 8,530,000 4,606,200
4/15/07 (d)
Millicom International Caa1 2,430,000 1,707,075
Cellular SA 0% 6/1/06 (d)
Nextel Communications, Inc.:
0% 9/15/07 (d) B2 3,491,000 2,242,968
0% 10/31/07 (d) B2 11,900,000 7,259,000
0% 2/15/08 (d) B2 2,190,000 1,314,000
12% 11/1/08 (f) B2 4,450,000 4,861,625
Nextel International, Inc. 0% Caa1 3,510,000 1,579,500
4/15/08 (d)
Rogers Cantel, Inc. 8.8% B2 1,200,000 1,209,000
10/1/07
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
Rogers Communications, Inc. B2 $ 4,630,000 $ 4,768,900
8.875% 7/15/07
Teligent, Inc.:
0% 3/1/08 (d) Caa1 6,515,000 3,224,925
11.5% 12/1/07 Caa1 3,600,000 3,366,000
41,221,428
ELECTRIC UTILITY - 0.5%
Avon Energy Partners Holdings:
yankee 6.73% 12/11/02 (f) Baa2 4,910,000 5,071,097
6.46% 3/4/08 (f) Baa2 3,960,000 4,017,024
Hydro-Quebec yankee 7.4% A2 2,620,000 3,254,145
3/28/25 (e)
Israel Electric Corp. Ltd.:
yankee 7.875% 12/15/26 (f) A3 1,960,000 2,000,807
7.75% 12/15/27 (f) A3 4,670,000 4,271,556
Niagara Mohawk Power Corp. Ba2 2,175,000 2,327,250
7.75% 10/1/08
Texas Utilities Co. 6.375% Baa3 1,930,000 1,953,006
1/1/08
22,894,885
TELEPHONE SERVICES - 1.0%
Allegiance Telecom, Inc. - 300,000 291,000
12.875% 5/15/08
Call-Net Enterprises, Inc. 0% B1 890,000 511,750
8/15/08 (d)
Dobson Wireline Co. 12.25% - 4,730,000 4,233,350
6/15/08
GST Network Funding, Inc. 0% - 2,010,000 914,550
5/1/08 (d)(f)
Hyperion Telecommunications,
Inc.:
0% 4/15/03 (d) B3 2,850,000 2,037,750
12.25% 9/1/04 B3 2,990,000 3,034,850
Level 3 Communications, Inc.:
0% 12/1/08 (d)(f) B3 9,370,000 5,446,313
9.125% 5/1/08 B3 2,890,000 2,864,713
MCI WorldCom, Inc.:
8.875% 1/15/06 Baa2 3,139,000 3,430,833
9.375% 1/15/04 Baa2 3,708,000 3,841,748
McLeodUSA, Inc.:
0% 3/1/07 (d) B2 1,845,000 1,411,425
9.25% 7/15/07 B2 1,330,000 1,369,900
9.5% 11/1/08 (f) B2 3,140,000 3,328,400
NEXTLINK Communications, Inc.:
9.625% 10/1/07 B3 4,870,000 4,675,200
10.75% 11/15/08 (f) B3 2,400,000 2,448,000
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
NONCONVERTIBLE BONDS -
CONTINUED
UTILITIES - CONTINUED
TELEPHONE SERVICES - CONTINUED
Pathnet, Inc. 12.25% 4/15/08 - $ 5,170,000 $ 3,619,000
WinStar Communications, Inc. CCC 5,990,000 4,252,900
0% 3/15/08 (d)
47,711,682
TOTAL UTILITIES 111,827,995
TOTAL NONCONVERTIBLE BONDS 810,576,273
TOTAL CORPORATE BONDS 816,959,680
(Cost $821,092,121)
U.S. GOVERNMENT AND
GOVERNMENT AGENCY
OBLIGATIONS - 4.8%
U.S. GOVERNMENT AGENCY
OBLIGATIONS - 1.2%
Farm Credit Systems Financial Aaa 2,000,000 2,379,680
Assistance Corp. 8.8% 6/10/05
Federal Home Loan Bank:
5.195% 9/11/01 Aaa 9,500,000 9,534,105
7.31% 6/16/04 Aaa 2,500,000 2,740,225
7.59% 3/10/05 Aaa 3,850,000 4,313,810
Freddie Mac:
0% 2/25/99 - 6,100,000 6,057,354
0% 2/26/99 - 29,400,000 29,190,507
6.75% 8/1/05 Aaa 2,500,000 2,703,125
U.S. Department of Housing Aaa 2,825,000 3,140,270
and Urban Development
government guaranteed
participation certificates
Series 1996-A, 7.63% 8/1/14
TOTAL U.S. GOVERNMENT AGENCY 60,059,076
OBLIGATIONS
U.S. TREASURY OBLIGATIONS -
3.6%
U.S. Treasury Bills, yield at - 4,100,000 4,098,804
date of purchase 3.66 to
3.68% 1/7/99 (h)
U.S. Treasury Bond:
6.875% 8/15/25 Aaa 25,155,000 30,488,615
7.625% 2/15/25 Aaa 17,790,000 23,388,335
11.75% 2/15/10 (callable) Aaa 15,045,000 20,442,394
12.75% 11/15/10 (callable) Aaa 5,220,000 7,582,050
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
13.875% 5/15/11 (callable) Aaa $ 21,150,000 $ 32,726,241
U.S. Treasury Notes:
6% 8/15/99 Aaa 6,750,000 6,804,810
6.25% 10/31/01 Aaa 820,000 854,333
6.375% 8/15/02 Aaa 22,500,000 23,733,900
6.625% 6/30/01 Aaa 620,000 648,576
6.875% 3/31/00 Aaa 380,000 389,914
7% 7/15/06 Aaa 19,172,000 21,829,047
7.25% 8/15/04 Aaa 5,404,000 6,075,285
TOTAL U.S. TREASURY 179,062,304
OBLIGATIONS
TOTAL U.S. GOVERNMENT AND 239,121,380
GOVERNMENT AGENCY OBLIGATIONS
(Cost $236,667,380)
U.S. GOVERNMENT AGENCY -
MORTGAGE SECURITIES - 6.8%
FANNIE MAE - 5.4%
6% 1/1/11 to 12/1/28 Aaa 63,930,392 63,660,842
6% 1/1/14 (g) Aaa 200,000 200,500
6% 1/1/28 (g) Aaa 3,350,000 3,307,078
6.5% 3/1/13 to 1/1/29 Aaa 144,530,557 145,646,785
6.5% 1/1/29 (g) Aaa 2,000,000 2,013,750
7% 5/1/26 to 10/1/28 Aaa 10,634,977 10,847,695
7% 1/1/29 (g) Aaa 25,500,000 26,017,969
7% 1/1/29 (g) Aaa 6,000,000 6,121,875
7.5% 11/1/27 to 6/1/28 Aaa 7,765,070 7,976,125
TOTAL FANNIE MAE 265,792,619
FREDDIE MAC - 0.1%
7% 4/1/01 to 8/1/01 Aaa 1,381,068 1,389,686
7.5% 6/1/25 to 3/1/28 Aaa 5,445,321 5,591,651
8.5% 7/1/21 to 6/1/23 Aaa 145,950 153,232
TOTAL FREDDIE MAC 7,134,569
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION - 1.3%
6% 12/15/08 to 6/15/09 Aaa 3,063,319 3,099,837
6.5% 6/15/08 to 7/15/09 Aaa 15,188,834 15,474,510
7% 7/15/28 Aaa 20,830,482 21,312,082
7.5% 9/15/22 to 8/15/28 Aaa 24,886,424 25,671,572
U.S. GOVERNMENT AGENCY -
MORTGAGE SECURITIES -
CONTINUED
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION - CONTINUED
8% 5/15/25 Aaa $ 148,092 $ 153,922
8.5% 12/15/16 Aaa 69,785 74,603
TOTAL GOVERNMENT NATIONAL 65,786,526
MORTGAGE ASSOCIATION
TOTAL U.S. GOVERNMENT AGENCY 338,713,714
- - MORTGAGE SECURITIES
(Cost $332,237,472)
ASSET-BACKED SECURITIES - 1.5%
Airplanes Pass Through Trust Ba2 6,080,000 6,384,000
10.875% 3/15/19
BankAmerica Manufacturing Aaa 3,730,000 3,748,650
Housing Contract 6.2% 4/10/09
Capital Equipment Receivables Baa2 2,950,000 2,954,779
Trust 6.48% 10/15/06
Chevy Chase Auto Receivables Aaa 2,251,464 2,263,777
Trust 5.91% 12/15/04
Contimortgage Home Equity Aaa 4,790,000 4,792,970
Loan Trust 6.26% 7/15/12
CPS Auto Grantor Trust:
6.09% 11/15/03 Aaa 2,983,699 2,996,753
6.55% 8/15/02 Aaa 1,737,804 1,747,579
CPS Auto Receivables Trust 6% Aaa 4,928,798 4,942,660
8/15/03
CSXT Trade Receivables Master Aaa 4,600,000 4,676,188
Trust 6% 7/25/04
Ford Credit Auto Owner Trust:
6.2% 12/15/02 Baa3 2,680,000 2,695,866
6.4% 5/15/02 A1 3,120,000 3,162,806
6.4% 12/15/02 Baa3 1,480,000 1,485,920
Green Tree Financial Corp.:
6.5% 6/15/27 Aaa 183,092 183,148
6.68% 1/15/29 AAA 6,680,000 6,782,271
6.8% 6/15/27 Aaa 1,900,000 1,916,625
Key Auto Finance Trust 6.3% A2 2,932,758 2,936,882
10/15/03
Olympic Automobile
Receivables Trust:
6.4% 9/15/01 Aaa 4,106,448 4,103,881
6.7% 3/15/02 Aaa 2,099,496 2,113,995
Petroleum Enhanced Trust Baa2 3,024,797 3,021,016
Receivables Offering
Petroleum Trust 6.125%
2/5/03 (f)(i)
Premier Auto Trust 6% 5/6/00 Aaa 486,179 486,631
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
UAF Auto Grantor Trust 6.1% Aaa $ 4,339,360 $ 4,329,868
1/15/03 (f)
WFS Financial Owner Trust Aaa 4,430,000 4,428,616
6.55% 10/20/04
TOTAL ASSET-BACKED SECURITIES 72,154,881
(Cost $71,952,017)
COLLATERALIZED MORTGAGE
OBLIGATIONS - 0.0%
PRIVATE SPONSOR - 0.0%
Credit-Based Asset Servicing Ba3 1,305,784 461,921
and Securitization LLC
Series 1997 2 Class 2-B,
7.2141% 12/29/25 (f)(i)
(Cost $694,106)
COMMERCIAL MORTGAGE
SECURITIES - 2.3%
Bankers Trust Remic Trust Ba2 1,000,000 871,406
1988-1 Series 1998-S1A Class
G, 7.6053% 11/28/02 (f)(i)
Berkeley Federal Bank & Trust - 1,900,000 1,368,000
FSB Series 1994 Class 1-B
7.6353% 8/1/24 (f)(i)
BKB Commercial Mortgage Trust BBB 1,800,000 1,826,719
Series 1997-C1 Class D,
7.83% 2/25/43 (f)(i)
CBM Funding Corp. sequential
pay Series 1996-1:
Class A-3PI, 7.08% 11/1/07 AA 3,000,000 3,146,250
Class B, 7.48% 2/1/08 A 2,320,000 2,477,688
CS First Boston Mortgage
Securities Corp.:
Series 1997 C2 Class D, 7.27% Baa2 5,300,000 5,028,375
1/17/35
Series 1998 C1 Class D, 7.17% BBB 5,050,000 4,881,141
1/17/12
Series 1998 FLI Class E, Baa2 5,490,000 5,335,594
6.5063% 1/10/13 (f)(i)
Deutsche Mortgage & Asset Baa2 4,260,000 4,077,619
Receiving Corp. Series
1998-C1 Class D, 7.231%
7/15/12
DLJ Mortgage Acceptance Corp. - 600,000 592,313
Series 1993-MF12 Class B-2,
10.1% 9/18/03 (f)
COMMERCIAL MORTGAGE
SECURITIES - CONTINUED
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
Equitable Life Assurance
Society of the United States
(The):
sequential pay Series 174 Aaa $ 7,180,000 $ 7,728,480
Class A1, 7.24% 5/15/06 (f)
Series 174:
Class B1, 7.33% 5/15/06 (f) Aa2 3,500,000 3,711,540
Class D1, 7.77% 5/15/06 (f) Baa2 2,200,000 2,254,428
Series 1996 1 Class C1, 7.52% A2 2,300,000 2,437,103
5/15/06 (f)
First Chicago/Lennar Trust I:
Series 1997 CHL1 Class E, - 1,600,000 1,228,000
8.1117% 4/1/39 (i)
Series 1997-CHL1 Class D, - 1,100,000 943,250
8.1117% 4/13/39 (i)
First Union-Lehman Brothers Aa2 8,640,000 8,999,100
Commercial MortgageTr
sequential pay Series
1997-C2 Class B, 6.79%
11/18/29
FMAC Loan Receivables Trust:
Series 1997-A Class E, - 500,000 402,188
8.1063% 4/15/19 (f)(i)
Series 1997-B Class E, - 750,000 565,781
7.8912% 9/15/19 (f)(i)
GAFCO Franchisee Loan Trust - 1,300,000 983,635
Series 1998-1 Class D, 14.5%
6/1/16 (f)(i)
General Motors Acceptance Ba3 750,000 612,375
Corp. Commercial Mortgage
Securities, Inc. Series
1996-C1 Class F, 7.86%
10/15/28 (f)
GS Mortgage Securities Corp.
II:
Series 1997-GL Class A2-B, Aaa 5,080,000 5,290,972
6.86% 7/13/30
Series 1998 GLII Class E, Baa3 4,930,000 4,462,685
7.1905% 4/13/31 (f)(i)
Series 1998-GLII Class D, Baa2 1,470,000 1,430,001
7.1905% 4/13/31 (f)(i)
Kidder Peabody Acceptance Aaa 643,659 641,949
Corp. I sequential pay
Series 1993-M1 Class A-2,
7.15% 4/25/25
LTC Commercial Mortgage Pass AAA 3,159,589 3,143,759
Through Certificates Series
1998-1 Class A, 6.029%
5/30/30 (f)
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
Morgan Stanley Capital I,
Inc.:
Series 1996-MBL1 Class E, - $ 1,765,551 $ 1,744,077
8.2655% 5/25/21 (f)(i)
Series 1998 CF1:
Class D, 7.35% 1/15/12 Baa2 4,189,000 4,051,548
Class E, 7.35% 12/15/12 Baa3 1,445,000 1,275,213
Series 1998-HF1 Class D, 7.1% BBB 5,790,000 5,753,813
2/15/30 (i)
Nomura Asset Securities Corp. Baa2 4,260,000 3,965,128
Series 1998-D6 Class A-4,
7.3498% 3/17/28 (i)
Nomura Depositor Trust - 800,000 693,750
floater Series 1998-ST1A
Class B-2, 9.7966% 1/15/03
(f)(i)
Penn Mutual Life Insurance
Co. (The)/Penn Insurance &
Annuity Co. Series 1996-PML:
Class K, 7.9% 11/15/26 (f) - 1,473,000 922,658
Class L, 7.9% 11/15/26 (f) - 1,133,000 589,160
Resolution Trust Corp. Series Ba3 425,324 344,512
1991 M2 Class A3, 7.2498%
9/25/20 (i)
Structured Asset Securities
Corp.:
sequential pay Series 1996 AAA 753,182 748,946
Class A-2A, 7.75% 2/25/28
Series 1993-C1 Class E, 6.6% B 1,250,000 562,500
10/25/24 (f)
Series 1995-C1 Class E, BB 1,200,000 1,130,438
7.375% 9/25/24 (f)
Series 1996 CFL Class G, B 1,000,000 910,000
7.75% 2/25/28 (f)
Series 1996-CFL Class E, BB+ 2,390,000 2,341,453
7.75% 2/25/28
Thirteen Affiliates of
General Growth Properties,
Inc.:
sequential pay Series A 2, Aaa 4,200,000 4,364,262
6.602% 12/15/10 (f)
Series D-2, 6.992% 12/15/10 Baa2 4,120,000 3,990,591
(f)
Series E-2, 7.224% 12/15/10 Baa3 2,450,000 2,220,705
(f)
Wells Fargo Capital Markets Aaa 2,676,825 2,705,922
Apartment Financing Trust
Series APT Class 1, 6.56%
12/29/05 (f)
TOTAL COMMERCIAL MORTGAGE 112,755,027
SECURITIES
(Cost $113,561,303)
FOREIGN GOVERNMENT AND
GOVERNMENT AGENCY
OBLIGATIONS (J) - 0.3%
MOODY'S RATINGS (UNAUDITED) (B) PRINCIPAL AMOUNT VALUE (NOTE 1)
Export Development Corp. Aa2 $ 1,640,000 $ 1,670,635
yankee 8.125% 8/10/99
Israeli State euro 6.375% Aaa 3,350,000 3,389,396
12/19/01
Manitoba Province yankee Aa3 7,000,000 7,070,560
6.375% 10/15/99
Newfoundland Province yankee Baa1 2,000,000 2,808,125
11.625% 10/15/07
TOTAL FOREIGN GOVERNMENT AND 14,938,716
GOVERNMENT AGENCY OBLIGATIONS
(Cost $14,629,170)
SUPRANATIONAL OBLIGATIONS -
0.1%
Inter American Development Aaa 4,750,000 4,975,720
Bank yankee 6.29% 7/16/27
(Cost $4,720,123)
BANK NOTES - 0.3%
Key Bank NA 5.18% 8/20/99 (i) 10,500,000 10,494,750
NationsBank NA 5.05% 4/13/99 4,000,000 4,000,000
TOTAL BANK NOTES 14,494,750
(Cost $14,485,878)
CERTIFICATES OF DEPOSIT - 1.3%
Bayerische Hypotheken-und 4,200,000 4,204,893
Wechselbank AG yankee 5.7%
3/30/99
First National Bank of 10,000,000 10,007,326
Chicago 5.65% 3/3/99
Fleet National Bank 5.4616% 12,000,000 11,993,869
5/5/00 (i)
RaboBank Nederland Coop. 10,600,000 10,623,162
Central yankee 5.68% 6/4/99
Swiss Bank Corp. yankee 5.65% 8,400,000 8,408,140
3/24/99
Toronto Dominion Bank yankee 10,600,000 10,623,162
5.68% 6/4/99
Westdeutsche Landesbank 11,000,000 11,005,481
Girozentrale yankee 5.63%
2/8/99
TOTAL CERTIFICATES OF DEPOSIT 66,866,033
(Cost $66,792,450)
COMMERCIAL PAPER - 2.4%
Asset Securitization Coop. 6,700,000 6,637,076
Corp. 5.2% 3/15/99
Associates First Capital 7,900,000 7,832,258
Corp. 5.1% 3/8/99
PRINCIPAL AMOUNT VALUE (NOTE 1)
Citibank Credit Card Master $ 7,000,000 $ 6,990,258
Trust I (Dakota Certificate
Program) 5.35% 1/14/99
Commonwealth Bank of 11,000,000 10,917,182
Australia yankee 5.35% 3/1/99
Delaware Funding Corp. 5.6% 1,397,000 1,392,399
1/28/99
Den Danske Corp., Inc. yankee 12,000,000 11,863,360
5.13% 3/29/99
General Electric Capital Corp.:
5% 2/8/99 5,000,000 4,976,278
5.12% 3/19/99 5,000,000 4,950,358
General Motors Acceptance
Corp.:
5.08% 2/10/99 8,000,000 7,959,464
5.6% 1/29/99 4,000,000 3,986,222
Generale de Banque SA yankee 12,200,000 12,115,485
5.36% 2/24/99
Heller Financial, Inc. 5.75% 8,000,000 7,971,946
1/28/99
Nordbanken, North America, 12,500,000 12,374,610
Inc. yankee 5.07% 3/19/99
PHH Corp. 5.62% 2/22/99 12,100,000 12,019,464
Transamerica Finance Corp. 5,000,000 4,984,844
5.47% 1/26/99
TOTAL COMMERCIAL PAPER 116,971,204
(Cost $116,841,449)
MASTER NOTES - 0.1%
Goldman Sachs Group L.P. 6,700,000 6,700,000
(The) 5.2653% 1/27/99 (i)
(Cost $6,700,000)
CASH EQUIVALENTS - 6.9%
MATURITY AMOUNT
Investments in repurchase 578,320 578,000
agreements (U.S. Treasury
obligations), in a joint
trading account at 4.98%,
dated 12/31/98 due 1/4/99
SHARES
Taxable Central Cash Fund (c) 343,217,988 343,217,988
TOTAL CASH EQUIVALENTS 343,795,988
(Cost $343,795,988)
TOTAL INVESTMENT IN $ 4,958,816,809
SECURITIES - 100%
(Cost $4,253,500,930)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
FUTURES CONTRACTS
EXPIRATION DATE UNDERLYING FACE AMOUNT AT VALUE UNREALIZED GAIN/(LOSS)
PURCHASED
245 S&P 500 Stock Index Mar. 1999 $ 76,286,875 $ 3,226,917
Contracts
</TABLE>
THE FACE VALUE OF FUTURES PURCHASED AS A PERCENTAGE OF TOTAL
INVESTMENT IN SECURITIES - 1.5%
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) At period end, the seven-day yield on the Taxable Central Cash
Fund was 4.80%. The yield refers to the income earned by investing in
the fund over the seven-day period, expressed as an annual percentage.
(d) 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.
(e) 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.
(f) Security exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in
transactions exempt from registration, normally to qualified
institutional buyers. At the period end, the value of these securities
amounted to $164,522,664 or 3.3% of net assets.
(g) Security purchased on a delayed delivery or when-issued basis (see
Note 2 of Notes to Financial Statements).
(h) Security or 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 $3,748,906.
(i) The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
(j) For foreign government obligations not individually rated by S&P
or Moody's, the ratings listed have been assigned by FMR, the fund's
investment adviser, based principally on S&P and Moody's ratings of
the sovereign credit of the issuing government.
(k) Restricted securities - Investment in securities not registered
under the Securities Act of 1933 (see Note 2 of Notes to Financial
Statements).
SECURITY ACQUISTION DATE ACQUISITION COST
Alliance Gaming Corp. 7/28/98 $ 259,200
Fairchild Semiconductor Corp. 4/3/97 - 11/18/98 $ 2,597,582
11.74% 3/15/08 pay-in-kind
OTHER INFORMATION
The composition of long-term debt holdings as a percentage of total
value of investments in securities, is as follows (ratings are
unaudited):
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 16.2% AAA, AA, A 15.2%
Baa 5.8% BBB 5.9%
Ba 2.1% BB 2.5%
B 5.0% B 4.7%
Caa 0.8% CCC 0.9%
Ca, C 0.0% CC, C 0.0%
D 0.0%
For some foreign government obligations, FMR has assigned the ratings
for the sovereign credit of the issuing government. The percentage not
rated by Moody's or S&P amounted to 0.5%. FMR has determined that
unrated debt securities that are lower quality account for 0.1% of the
total value of investment in securities.
Purchases and sales of securities, other than short-term securities,
aggregated $4,826,248,010 and $4,872,343,052, respectively, of which
long-term U.S. government and government agency obligations aggregated
$2,257,013,470 and $2,162,221,911, respectively (see Note 3 of
Notes to Financial Statements).
The market value of futures contracts opened and closed during the
period amounted to $225,583,432 and $150,358,527, respectively (see
Note 3 of Notes to Financial Statements).
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 $281,085 for the
period (see Note 4 of Notes to Financial Statements).
The fund participated in the bank borrowing program. The maximum loan
and average daily balances during the period for which loans were
outstanding amounted to $7,666,000 and $6,484,000, respectively. The
weighted average interest rate was 5.82% (see Note 6 of Notes to
Financial Statements).
INCOME TAX INFORMATION
At December 31, 1998, the aggregate cost of investment securities for
income tax purposes was $4,255,898,557. Net unrealized appreciation
aggregated $702,918,252, of which $817,066,468 related to appreciated
investment securities and $114,148,216 related to depreciated
investment securities.
The fund hereby designates approximately $286,266,000 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
DECEMBER 31, 1998
ASSETS
Investment in securities, at $ 4,958,816,809
value (including repurchase
agreements of $578,000)
(cost $4,253,500,930) - See
accompanying schedule
Cash 271,006
Receivable for investments 194,383
sold
Receivable for fund shares 2,395,094
sold
Dividends receivable 4,014,328
Interest receivable 23,876,278
Receivable for daily 208,250
variation on futures
contracts
Other receivables 113,009
TOTAL ASSETS 4,989,889,157
LIABILITIES
Payable for investments $ 2,760,908
purchased Regular delivery
Delayed delivery 68,005,015
Payable for fund shares 5,140,155
redeemed
Accrued management fee 2,139,554
Distribution fees payable 425
Other payables and accrued 574,922
expenses
TOTAL LIABILITIES 78,620,979
NET ASSETS $ 4,911,268,178
Net Assets consist of:
Paid in capital $ 3,843,286,070
Undistributed net investment 159,730,084
income
Accumulated undistributed 199,710,730
net realized gain (loss) on
investments and foreign
currency transactions
Net unrealized appreciation 708,541,294
(depreciation) on
investments and assets and
liabilities in foreign
currencies
NET ASSETS $ 4,911,268,178
INITIAL CLASS: NET ASSET $18.16
VALUE, offering price and
redemption price per share
($4,905,467,520 (divided by)
270,139,399 shares)
SERVICE CLASS: NET ASSET $18.10
VALUE, offering price and
redemption price per share
($5,800,658 (divided by)
320,513 shares)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME $ 43,450,997
Dividends
Interest 146,132,145
TOTAL INCOME 189,583,142
EXPENSES
Management fee $ 24,986,229
Transfer agent fees 3,118,794
Distribution fees - Service 1,632
Class
Accounting fees and expenses 857,083
Non-interested trustees' 16,287
compensation
Custodian fees and expenses 55,060
Registration fees 15,112
Audit 83,178
Legal 45,638
Interest 2,094
Miscellaneous 491,517
Total expenses before 29,672,624
reductions
Expense reductions (561,216) 29,111,408
NET INVESTMENT INCOME 160,471,734
REALIZED AND UNREALIZED GAIN
(LOSS)
Net realized gain (loss) on:
Investment securities 203,881,884
Foreign currency transactions (9,752)
Futures contracts (2,164,947) 201,707,185
Change in net unrealized
appreciation (depreciation)
on:
Investment securities 284,395,805
Assets and liabilities in 4,138
foreign currencies
Futures contracts 3,226,917 287,626,860
NET GAIN (LOSS) 489,334,045
NET INCREASE (DECREASE) IN $ 649,805,779
NET ASSETS RESULTING FROM
OPERATIONS
OTHER INFORMATION $ 542,476
Expense reductions Directed
brokerage arrangements
Custodian credits 18,740
$ 561,216
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
INCREASE (DECREASE) IN NET YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
ASSETS
Operations Net investment $ 160,471,734 $ 137,893,337
income
Net realized gain (loss) 201,707,185 422,287,524
Change in net unrealized 287,626,860 189,535,901
appreciation (depreciation)
NET INCREASE (DECREASE) IN 649,805,779 749,716,762
NET ASSETS RESULTING FROM
OPERATIONS
Distributions to shareholders (139,636,837) (127,145,659)
From net investment income
From net realized gain (418,910,515) (317,186,364)
TOTAL DISTRIBUTIONS (558,547,352) (444,332,023)
Share transactions - net 420,062,178 453,368,657
increase (decrease)
TOTAL INCREASE (DECREASE) 511,320,605 758,753,396
IN NET ASSETS
NET ASSETS
Beginning of period 4,399,947,573 3,641,194,177
End of period (including $ 4,911,268,178 $ 4,399,947,573
undistributed net investment
income of $159,730,084 and
$137,705,425, respectively)
</TABLE>
OTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
SHARES DOLLARS SHARES DOLLARS
Share transactions Initial 23,406,455 $ 397,953,748 22,516,597 $ 378,800,337
Class Sold
Reinvested 34,542,119 558,546,057 28,796,632 444,332,023
Redeemed (32,078,907) (541,870,122) (22,110,811) (369,773,703)
Net increase (decrease) 25,869,667 $ 414,629,683 29,202,418 $ 453,358,657
Service Class A Sold 330,869 $ 5,609,677 568 $ 10,000
Reinvestment 80 1,295 - -
Redeemed (11,004) (178,477) - -
Net increase (decrease) 319,945 $ 5,432,495 568 $ 10,000
Distributions From net $ 139,636,513 $ 127,145,659
investment income Initial
Class
Service Class 324 -
Total $ 139,636,837 $ 127,145,659
From net realized gain $ 418,909,543 $ 317,186,364
Initial Class
Service Class 972 -
Total $ 418,910,515 $ 317,186,364
$ 558,547,352 $ 444,332,023
A SERVICE CLASS COMMENCED
SALE OF SHARES NOVEMBER 3,
1997.
</TABLE>
FINANCIAL HIGHLIGHTS - INITIAL CLASS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 1996 1995 1994
Net asset value, beginning of $ 18.01 $ 16.93 $ 15.79 $ 13.79 $ 15.42
period
Income from Investment
Operations
Net investment income .59 D .57 D .63 .30 .45
Net realized and unrealized 1.84 2.58 1.55 1.99 (1.33)
gain (loss)
Total from investment 2.43 3.15 2.18 2.29 (.88)
operations
Less Distributions
From net investment income (.57) (.59) (.57) (.29) (.29)
From net realized gain (1.71) (1.48) (.47) - (.46)
Total distributions (2.28) (2.07) (1.04) (.29) (.75)
Net asset value, end of period $ 18.16 $ 18.01 $ 16.93 $ 15.79 $ 13.79
TOTAL RETURN B, C 15.05% 20.65% 14.60% 16.96% (6.09)%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 4,905,468 $ 4,399,937 $ 3,641,194 $ 3,332,844 $ 3,290,527
(000 omitted)
Ratio of expenses to average .64% .65% .74% .81% .81%
net assets
Ratio of expenses to average .63% F .64% F .73% F .79% F .80% F
net assets after expense
reductions
Ratio of net investment 3.46% 3.43% 3.60% 3.54% 4.07%
income to average net assets
Portfolio turnover 113% 101% 168% 256% 85%
</TABLE>
FINANCIAL HIGHLIGHTS - SERVICE CLASS
YEARS ENDED DECEMBER 31,
SELECTED PER-SHARE DATA 1998 1997 E
Net asset value, beginning of $ 17.99 $ 17.60
period
Income from Investment
Operations
Net investment income D .57 .10
Net realized and unrealized 1.82 .29
gain (loss)
Total from investment 2.39 .39
operations
Less Distributions
From net investment income (.57) -
From net realized gain (1.71) -
Total distributions (2.28) -
Net asset value, end of period $ 18.10 $ 17.99
TOTAL RETURN B, C 14.82% 2.22%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 5,801 $ 10
(000 omitted)
Ratio of expenses to average .78% .75% A
net assets
Ratio of expenses to average .77% F .75% A
net assets after expense
reductions
Ratio of net investment 3.49% 3.52% A
income to average net assets
Portfolio turnover 113% 101%
A ANNUALIZED
B TOTAL RETURNS DO NOT
REFLECT CHARGES ATTRIBUTABLE
TO YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION
OF THESE CHARGES WOULD
REDUCE THE TOTAL RETURNS
SHOWN. TOTAL RETURNS FOR
PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED.
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 FUND'S
EXPENSES (SEE NOTE 5 OF
NOTES TO FINANCIAL
STATEMENTS).
NOTES TO FINANCIAL STATEMENTS
For the period ended December 31, 1998
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. Both
classes 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 certain
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 require 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. Purchases
and sales of securities, income receipts and expense payments are
translated into U.S. dollars at the prevailing exchange rate on the
respective dates of the transactions.
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, the difference
between the amount of net investment income accrued and the U.S.
dollar amount actually received, and gains and losses between trade
and settlement date on purchases and sales of securities. 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.
DEFERRED TRUSTEE COMPENSATION. Under a Deferred Compensation Plan (the
Plan) non-interested Trustees must defer receipt of a portion of, and
may elect to defer receipt of an additional portion of, their annual
compensation. Deferred amounts are treated as though equivalent dollar
amounts had been invested in shares of the fund or are invested in a
cross-section of other Fidelity funds. Deferred amounts remain in the
fund until distributed in accordance with the Plan.
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, futures transactions, foreign currency transactions,
passive foreign investment companies (PFIC), market discount and
losses deferred due to wash sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital.
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.
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., 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.
DELAYED DELIVERY TRANSACTIONS. The fund may purchase or sell
securities on a delayed delivery basis. Payment and delivery may take
place a month or more after the date of the transaction. The price of
the underlying securities and the date when the securities will be
delivered and paid for are fixed at the time the transaction is
negotiated. The market values of the securities purchased or sold on a
delayed delivery basis are identified as such in the fund's schedule
of investments. The fund may receive compensation for interest forgone
in the purchase of a delayed delivery security. With respect to
purchase commitments, the fund identifies securities as segregated in
its custodial records with a value at least equal to the amount of the
commitment. Losses may arise due to changes in the market value of the
underlying securities or if the counterparty does not perform under
the contract.
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, restricted securities (excluding 144A
issues) amounted to $2,442,800 or 0.1% of net assets.
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities), and the market value of futures contracts
opened and closed, is included under the caption "Other Information"
at the end of the fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a
monthly fee that is calculated on the basis of a group fee rate plus a
fixed individual fund fee rate applied to the average net assets of
the fund. The group fee rate is the weighted average of a series of
rates and is based on the monthly average net assets of all the mutual
funds advised by FMR. The rates ranged from .2500% to .5200% for the
period. 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 .54% 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
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
DISTRIBUTION AND SERVICE PLAN - CONTINUED
.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 $1,632, all of which was
reallowed to insurance companies, for the distribution of shares and
providing shareholder support services.
Under the Plans, FMR 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, payments made to third parties under the Plans amounted to
$2,258,617 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. (FSC), an affiliate of
FMR, maintains the fund's accounting records. The fee is based on the
level of average net assets for the month plus out-of-pocket expenses.
BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms are shown under the caption
"Other Information" at the end of the fund's schedule of investments
5. EXPENSE REDUCTIONS.
FMR 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 offset a portion of the fund's expenses.
For the period, the reductions under these arrangements are shown
under the caption "Other Information" on the fund's Statement of
Operations.
6. BANK BORROWINGS.
The fund is permitted to have bank borrowings for temporary or
emergency purposes to fund shareholder redemptions. The fund has
established borrowing arrangements with certain banks. Under the most
restrictive arrangement, the fund must pledge to the bank securities
having a market value in excess of 220% of the total bank borrowings.
The interest rate on the borrowings is the bank's base rate, as
revised from time to time. Information regarding the fund's
participation in the program is included under the caption "Other
Information" at the end of the fund's schedule of investments.
7. 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 19% of the outstanding shares of the fund. In
addition, three unaffiliated insurance companies were record owners of
46% of the total outstanding shares of the fund.
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, 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, 1998, and the results of its operations, the
changes in its net assets and the financial highlights for the periods
indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the
responsibility of the Asset Manager Portfolio's management; our
responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation
of securities at December 31, 1998 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 12, 1999
DISTRIBUTIONS
The Board of Trustees of 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:
PAY DATE RECORD DATE DIVIDENDS CAPITAL GAINS
Intial Class 2/5/99 2/5/99 $0.60 $0.76
Service Class 2/5/99 2/5/99 $0.60 $0.76
A total of 9.40% of the dividends distributed during the fiscal year
was derived from interest on U.S. Government securities which is
generally exempt from state income tax.
The fund hereby designates 100% of the long-term capital gain
dividends distributed during the fiscal year as 20%-rate capital gain
dividends.
PROXY VOTING RESULTS
A special meeting of the fund's shareholders was held on September 16,
1998. The results of votes taken among shareholders on proposals
before them are reported below. Each vote reported represents a single
share held on the record date for the meeting.
PROPOSAL 1
To elect the twelve nominees specified below as Trustees.
# OF % OF
SHARES VOTED SHARES VOTED
RALPH F. COX
Affirmative 253,039,875.041 98.175
Against
Withheld 4,704,826.478 1.825
Abstain
TOTAL 257,744,701.519 100.000
PHYLLIS BURKE DAVIS
Affirmative 252,950,434.923 98.140
Against
Withheld 4,794,266.596 1.860
Abstain
TOTAL 257,744,701.519 100.000
ROBERT M. GATES
Affirmative 252,979,821.267 98.151
Against
Withheld 4,764,880.252 1.849
Abstain
TOTAL 257,744,701.519 100.000
EDWARD C. JOHNSON 3D
Affirmative 253,308,603.505 98.279
Against
Withheld 4,436,098.014 1.721
Abstain
TOTAL 257,744,701.519 100.000
E. BRADLEY JONES
Affirmative 252,821,150.492 98.090
Against
Withheld 4,923,551.027 1.910
Abstain
TOTAL 257,744,701.519 100.000
DONALD J. KIRK
Affirmative 253,321,569.012 98.284
Against
Withheld 4,423,132.507 1.716
Abstain
TOTAL 257,744,701.519 100.000
# OF % OF
SHARES VOTED SHARES VOTED
PETER S. LYNCH
Affirmative 253,361,971.101 98.300
Against
Withheld 4,382,730.418 1.700
Abstain
TOTAL 257,744,701.519 100.000
WILLIAM O. MCCOY
Affirmative 253,321,419.809 98.284
Against
Withheld 4,423,281.710 1.716
Abstain
TOTAL 257,744,701.519 100.000
GERALD C. MCDONOUGH
Affirmative 253,097,007.220 98.197
Against
Withheld 4,647,694.299 1.803
Abstain
TOTAL 257,744,701.519 100.000
MARVIN L. MANN
Affirmative 253,020,408.056 98.167
Against
Withheld 4,724,293.463 1.833
Abstain
TOTAL 257,744,701.519 100.000
ROBERT C. POZEN
Affirmative 253,307,027.907 98.278
Against
Withheld 4,437,673.612 1.722
Abstain
TOTAL 257,744,701.519 100.000
THOMAS R. WILLIAMS
Affirmative 252,854,951.949 98.103
Against
Withheld 4,889,749.570 1.897
Abstain
TOTAL 257,744,701.519 100.000
PROPOSAL 2
To ratify the selection of PricewaterhouseCoopers LLP as independent
accountants of the funds.
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 246,707,121.897 95.718
Against 2,155,227.081 .836
Withheld
Abstain 8,882,352.541 3.446
TOTAL 257,744,701.519 100.000
PROPOSAL 3
To authorize the Trustees to adopt an Amended and Restated Declaration
of Trust.
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 240,285,178.438 93.226
Against 4,348,970.517 1.687
Withheld
Abstain 13,110,552.564 5.087
TOTAL 257,744,701.519 100.000
PROPOSAL 5
To approve an amended management contract for the fund.
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 238,417,855.725 92.502
Against 3,561,649.042 1.381
Withheld
Abstain 15,765,196.752 6.117
TOTAL 257,744,701.519 100.000
PROPOSAL 7
To approve a new sub-advisory agreement with FMR U.K.
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 234,854,888.818 91.119
Against 5,039,678.454 1.955
Withheld
Abstain 17,850,134.247 6.926
TOTAL 257,744,701.519 100.000
PROPOSAL 8
To approve a new sub-advisory agreement with FMR Far East.
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 232,908,923.697 90.364
Against 6,212,774.195 2.411
Withheld
Abstain 18,623,003.627 7.225
TOTAL 257,744,701.519 100.000
PROPOSAL 9
To amend the fundamental investment limitation concerning
diversification for the fund.
# OF % OF
SHARES VOTED SHARES VOTED
Affirmative 236,682,192.450 91.828
Against 4,357,625.078 1.691
Withheld
Abstain 16,704,883.991 6.481
TOTAL 257,744,701.519 100.000
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
Robert A. Lawrence, VICE PRESIDENT
Richard C. Habermann, VICE PRESIDENT
Charles S. Morrison II, VICE PRESIDENT
John Todd, VICE PRESIDENT
Steven J. Snider, VICE PRESIDENT
Eric D. Roiter, SECRETARY
Richard A. Silver, TREASURER
Matthew N. Karstetter, DEPUTY 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 *
Robert C. Pozen
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
<PAGE>
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New England Life Insurance Company
501 Boylston Street
Boston, Massachusetts 02116
Equal Opportunity Employer M/F
(C) 1999 New England Life Insurance Company
- --------------------------------------------------------------------------------
This booklet has been prepared for variable contract owners of
New England Life Insurance Company, Boston, MA.
VL VIP
