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JUNE 30, 1998
PARK AVENUE SERIES
[GRAPHIC OMITTED]
PARK AVENUE LIFE
Semiannual Report to Policyowners
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The Guardian Separate Account K
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The Guardian Stock Fund, Inc.
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The Guardian Bond Fund, Inc.
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The Guardian Cash Fund, Inc.
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Gabelli Capital Asset Fund
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Baillie Gifford International Fund
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Baillie Gifford Emerging Markets Fund
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The Guardian Small Cap Stock Fund
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Value Line Centurion Fund, Inc.
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Value Line Strategic Asset Management Trust
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MFS Growth with Income Series
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MFS Emerging Growth Series
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MFS Total Return Series
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MFS Bond Series
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American Century VP Value Fund
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American Century VP International Fund
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Fidelity VIP III Growth Opportunities Portfolio
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Fidelity VIP Equity-Income Portfolio
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Fidelity VIP High Income Portfolio
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Fidelity VIP II Index 500 Portfolio
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AIM V.I. Capital Appreciation Fund
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AIM V.I. Value Fund
Executive Offices
201 Park Avenue South
New York, New York 10003
Customer Service Office
201 Park Avenue South
Specialty Life - 215 B
New York, New York 10003
1-800-935-4128
Distributed by: [LOGO]
-----------------------------------------
Guardian Investor Services Corporation(R)
[LOGO] The Guardian(R)
Issued by:
The Guardian Insurance &
Annuity Company, Inc.
A wholly owned subsidiary of
The Guardian Life Insurance Company of
America
Certain funds may not be available in
New York State.
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<PAGE>
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Performance Summary
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[GRAPHIC OMITTED]
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Investment Option Total Return*
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The Guardian Stock Fund ...................................... 12.74%
Baillie Gifford International Fund ........................... 18.52%
Baillie Gifford Emerging Markets Fund ........................ -18.62%
Value Line Centurion Fund .................................... 14.97%
Value Line Strategic Asset Mgt. Trust ........................ 14.70%
Gabelli Capital Asset Fund ................................... 13.00%
The Guardian Bond Fund ....................................... 3.37%
The Guardian Cash Fund ....................................... 1.96%
The Guardian Small Cap Stock Fund ............................ 6.95%
MFS Growth with Income Series ................................ 15.45%
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Fixed-Rate Option
The annual rates of interest for amounts deposited or renewed (on a
contract anniversary) in the Fixed-Rate Option during the first six months of
1998 were as follows: for the month of January 5.65%; and for the months of
February through June, 5.50%.
Rates paid by the Fixed-Rate Option are subject to change at any time, and
may be higher or lower for new deposits or renewals, but are guaranteed from the
date of deposit or renewal to the next contract anniversary.
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* The chart above shows the total returns for selected investment options
under a Park Avenue Life policy based on the percentage change in unit
values during the period January 1, 1998 through June 30, 1998. In
contrast to the returns presented in the portfolio managers' interviews,
changes in unit values reflect the effects of mortality and expense risk
charges as well as each option's expenses to give you a better picture of
an investment option's performance under the contract. Total return
performance figures stated above do not, however, reflect the annual
contract administration charge or possible withdrawal charges. Deduction
of these amounts would reduce the stated total returns. Past performance
is not a guarantee of future results. Investment returns and principal
value will vary with market conditions.
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<PAGE>
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Dear Policyowner:
- -----------------
[Photo of Joseph D. Sargent, CLU President & CEO]
As the President and Chief Executive Officer of The Guardian Insurance &
Annuity Company, Inc. (GIAC) and its parent, The Guardian Life Insurance Company
of America, I am pleased to introduce this semiannual report on the performance
results of your policy's separate account and its underlying investment options
during the first six months of 1998.
On Our Ratings
Once again, we are proud to report that as of June 30, 1998, the date of
this report, GIAC continues to enjoy exemplary ratings from four of the nation's
leading insurance company evaluators: Moody's, Standard & Poor's, A.M. Best, and
Duff & Phelps. GIAC's solid ratings reflect its ability to meet its guarantee of
your policy's Fixed-Rate Option and pre-retirement death benefit. However, these
ratings do not apply to Park Avenue Life's underlying variable investment
options, which are subject to the risks of investing in securities. We are very
proud of our ratings as they reflect the strength of GIAC, which stands behind
the contract's guarantees.
I am pleased to announce that GIAC has been granted membership in the
Insurance Marketplace Standards Association (IMSA). IMSA is an independent
voluntary organization created by the life insurance industry as a means to
ensure that qualifying companies meet and maintain high standards of ethical
conduct.
Our Commitment to You
We at GIAC are proud of our tradition of commitment to you, our
contractowners. Following this letter is an economic report from Frank J. Jones,
Ph.D., Chief Investment Officer of GIAC. I believe that you will enjoy reading
his insightful economic overview presented to you as part of our ongoing
commitment to provide increasing levels of information and service.
Following Dr. Jones' economic report are interviews with the managers of
the underlying variable options. I invite you to read the interviews to learn
more about the strategies used to manage your investment options during the
first half of 1998.
Thank you for continuing to invest for your future through GIAC.
Regards,
/s/ Joseph D. Sargent
Joseph D. Sargent, CLU
President and Chief Executive Officer
The Guardian Insurance & Annuity Company, Inc.
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<PAGE>
PARK AVENUE LIFE
Table of Contents
Portfolio Schedule
Manager of
Interview Investments
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Economic Report 9
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The Guardian Stock Fund 12 70
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Objective: Long-term growth of capital
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Portfolio: At least 80% common stocks and
securities convertible into common
stocks
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Inception: April 13, 1983
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Net Assets at June 30, 1998: $3,595,851,964
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"While many foreign economies were experiencing difficulties, the domestic
economy continued receiving accolades . . . In our portfolio, we tried to
capitalize on this state of affairs by overweighting stable, high-quality growth
stocks in which the preponderance of issuers' income came from the U.S."
-- Frank J. Jones, Ph.D. -- Larry Luxenberg, C.F.A.
Co-Portfolio Manager Co-Portfolio Manager
-- John B. Murphy, C.F.A.
Co-Portfolio Manager
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The Guardian Bond Fund 16 80
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Objective: Maximum current income without undue
risk of principal. Capital
appreciation is a secondary objective
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Portfolio: At least 80% investment-grade debt
securities and U.S. government
securities
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Inception: May 1, 1983
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Net Assets at June 30, 1998: $361,835,345
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"We currently believe that corporate and mortgage-backed valuations are the most
attractive that they have been in some time, but nevertheless we remain cautious
and will be very selective with respect to corporate credits and the mortgage
risk exposure we include in the Fund."
-- Thomas G. Sorell, C.F.A.
Co-Portfolio Manager
-- Howard W. Chin
Co-Portfolio Manager
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The Guardian Cash Fund 32 88
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Objective: As high a level of current income as
is consistent with preservation of
capital and liquidity
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Portfolio: Short-term money market instruments
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Inception: November 1, 1981
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Net Assets at June 30, 1998: $410,010,361
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"The Guardian Cash Fund is a place for our investors to put their money while
they determine their preferred long term investment vehicle, be it stocks or
bonds."
-- Alexander M. Grant, Jr.
Portfolio Manager
<PAGE>
Portfolio Schedule
Manager of
Interview Investments
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Gabelli Capital Asset Fund 18 100
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Objective: Growth of capital. Current income is
a secondary objective
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Portfolio: Primarily common and preferred stocks
and other securities representing
the right to acquire common stocks
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Inception: May 1, 1995
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Net Assets at June 30, 1998: $155,062,893
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"We buy high quality, dominant market share companies in a wide variety of
industries. We believe that over the long term these companies will succeed
irrespective of shorter term macroeconomic trends and that we will be rewarded
for our investment patience."
-- Mario J. Gabelli, C.F.A.
Portfolio Manager
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Baillie Gifford International Fund 20 108
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Objective: Long-term capital appreciation
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Portfolio: At least 80% in a diversified
portfolio of common stocks of
companies domiciled outside of
the United States
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Inception: February 8, 1991
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Net Assets at June 30, 1998: $652,263,045
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"We believe that detailed analysis of the businesses of individual companies has
been the best route to investment success. As a result, we have had a low
weighting in Japan for the Fund, and the Japanese holdings have been
concentrated in companies that are global leaders in areas like electronics,
office equipment, and auto manufacturing."
-- R. Robin Menzies
Portfolio Manager
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Baillie Gifford Emerging Markets Fund 22 116
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Objective: Long-term capital appreciation
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Portfolio: At least 65% in a portfolio of
common stocks issued by emerging
market companies
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Inception: October 17, 1994
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Net Assets at June 30, 1998: $62,881,944
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"To sum up: The emerging markets have taken a beating, but the concept is still
intact and good growth prospects can be found there at lower valuations than
elsewhere. We need to see some stability in Asia before becoming really
confident, but the longer term prospects are good."
-- Edward H. Hocknell
Portfolio Manager
<PAGE>
Portfolio Schedule
Manager of
Interview Investments
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The Guardian Small Cap Stock Fund 24 124
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Objective: Long-term growth of capital
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Portfolio: At least 85% in a diversified
portfolio of common stocks and
convertible securities issued by
companies with small market
capitalization
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Inception: July 16, 1997
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Net Assets at June 30, 1998: $121,585,633
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"In this difficult market we also emphasize systematic efforts to weed out
possible sources of trouble early in the process. Companies and industries, once
they begin struggling, tend to face difficulties for a long time. Investors and
analysts are amazed at how far down a stock can go. While we tend to be patient
long-term investors, sometimes the old Wall Street axiom of `cut your losses' is
a wise one."
-- Larry Luxenberg, C.F.A.
Portfolio Manager
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Value Line Centurion Fund 26 138
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Objective: Long-term growth of capital
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Portfolio: At least 90% common stocks
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Inception: November 15, 1983
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Net Assets at June 30, 1998: $771,036,028
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"Our top-down strategy has been consistently focused on our forecast for
decelerating economic growth, benign inflation, neutral monetary policy, lower
interest rates, and a modest increase in corporate profits. All of these factors
suggest a positive bias to the equity markets, with an emphasis on
large-capitalization Blue Chip growth companies within the industry sectors
identified earlier (technology, financials, retailers, healthcare, and
airlines)."
-- Value Line, Inc.
Investment Adviser
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Value Line Strategic Asset Management Trust 28 146
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Objective: High total return consistent with
reasonable risk
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Portfolio: Stocks, bonds and money market instruments
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Inception: October 1, 1987
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Net Assets at June 30, 1998: $1,332,492,199
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"For stock selection, we stay with stocks that are showing strong earnings
momentum and strong price momentum, relying largely on the proprietary Value
Line stock ranking systems. We maintain a very diversified portfolio of over 200
stocks in many different industries, which aids in reducing risk. For bond
selection, we stay with high-quality issues."
-- Value Line, Inc.
Investment Adviser
<PAGE>
Portfolio Schedule
Manager of
Interview Investments
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MFS Growth with Income Series 30 158
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Objective: Reasonable current income and
long-term growth of capital
and income
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Portfolio: At least 65% of its assets in
equity securities that are believed
to have long-term prospects for growth
and income
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Inception: October 9, 1995
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Net Assets at June 30, 1998: $145,486,534
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"We feel the strength of this portfolio's overall performance is the result of
our adherence to a strong investment discipline. We invest in
large-capitalization, high-quality companies, seek growth at a reasonable price,
strive for a dividend yield that is 90% of that of the S&P 500, seek to keep
volatility lower than that of the S&P 500, and try to stay fully invested."
-- John D. Laupheimer, Jr.
Co-Portfolio Manager
-- Kevin R. Parke
Co-Portfolio Manager
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MFS Emerging Growth Series 34 170
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Objective: Long-term growth of capital
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Portfolio: U.S. common stocks of emerging growth
companies
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Inception: July 24, 1995
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Net Assets at June 30, 1998: $669,828,643
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"Low inflation, low interest rates, and a robust U.S. economy created a positive
backdrop for emerging growth stocks in the first half of 1998. It was, however,
a volatile period. Although seemingly far away, the economic problems in Asia
were probably the most important factors affecting the U.S. market during this
period."
-- John W. Ballen
Portfolio Manager
-- Toni Y. Shimura
Portfolio Manager
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MFS Total Return Series 36 182
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Objective: Above-average income (compared to a
portfolio invested entirely in equity
securities) consistent with prudent
employment of capital, and
secondarily to provide a reasonable
opportunity for growth of capital and
income
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Portfolio: Equity securities and non-convertible
fixed income securities
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Inception: January 3, 1995
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Net Assets at June 30, 1998: $123,313,271
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"Given what we view as high valuations in the stock market, the Series has
maintained a fairly conservative weighting in equities. Currently, approximately
59% of assets are invested in common stocks, convertibles, and preferred
securities, which is below that of the balanced-fund peer group."
-- David M. Calabro
Portfolio Manager
<PAGE>
Portfolio Schedule
Manager of
Interview Investments
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MFS Bond Series 38 198
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Objective: To provide as high a level of current
income as is believed consistent with
prudent investment risk and
secondarily to protect shareholders'
capital
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Portfolio: Convertible and non-convertible debt
securities and preferred stocks; U.S.
government securities; commercial
paper; repurchase agreements and cash
or cash equivalents
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Inception: October 24, 1995
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Net Assets at June 30, 1998: $6,784,475
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"The Series has been helped by its overweightings in investment-grade corporate
bonds and high-yield securities. We have had, on average, a 50% weighting in
investment-grade corporates and roughly 20% in the high-yield market, which is
the Series' maximum allocation."
-- Geoffrey Kurinsky
Portfolio Manager
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American Century VP Value Fund 40 210
- -----------------------------------------------
Objective: Long-term capital growth with income
as a secondary objective
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Portfolio: Equity securities of well-established
intermediate-to-large companies whose
securities are believed to be
undervalued
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Inception: May 1, 1996
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Net Assets at June 30, 1998: $277,820,066
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"We believe the current narrow market leadership, dominated by large-cap stocks
demonstrating near-term growth, is unsustainable. We continue to search for and
purchase securities of sound, established businesses in the mid-cap range."
-- Phil Davidson
Portfolio Manager
-- Todd Vingers
Portfolio Manager
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American Century VP International Fund 43 220
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Objective: Capital growth
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Portfolio: International common stocks with
potential for appreciation
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Inception: May 1, 1994
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Net Assets at June 30, 1998: $411,872,678
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"The investment team continually monitors such macro factors as a country's
political and economic stability, but our primary strategy is to own companies
with accelerating revenues and earnings regardless of where they are located."
-- Henrik Strabo
Portfolio Manager
-- Mark Kopinski
Portfolio Manager
<PAGE>
Portfolio Schedule
Manager of
Interview Investments
- --------------------------------------------------------------------------------
Fidelity VIP III Growth Opportunities Portfolio 46 234
- -----------------------------------------------
Objective: Capital growth
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Portfolio: Common stocks and convertibles
- --------------------------------------------------------------------------------
Inception: January 3, 1995
- --------------------------------------------------------------------------------
Net Assets at June 30, 1998: $1,426,365,764
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"The fund's positioning continues to reflect an environment of anemic pricing
power, flat-to-declining corporate earnings and decreasing inflation."
-- George Vanderheiden
Portfolio Manager
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Fidelity VIP Equity-Income Portfolio 50 248
- -----------------------------------------------
Objective: Reasonable income with capital
appreciation as a secondary objective
- --------------------------------------------------------------------------------
Portfolio: Income-producing equity securities
- --------------------------------------------------------------------------------
Inception: October 9, 1986
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Net Assets at June 30, 1998: $11,789,117,704
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"In general, the underlying economic conditions in the U.S. remain good. We have
low inflation, low interest rates, low unemployment and good consumer demand."
-- Steve Petersen
Portfolio Manager
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Fidelity VIP High Income Portfolio 52 266
- -----------------------------------------------
Objective: High level of current income
- --------------------------------------------------------------------------------
Portfolio: High-yielding debt securities with an
emphasis on lower-quality securities
- --------------------------------------------------------------------------------
Inception: September 19, 1985
- --------------------------------------------------------------------------------
Net Assets at June 30, 1998: $2,697,620,219
- --------------------------------------------------------------------------------
"While high-yield bonds performed better than any other domestic fixed-income
investments in the first quarter of 1998, they lagged in the second quarter."
-- Barry Coffman
Portfolio Manager
<PAGE>
Portfolio Schedule
Manager of
Interview Investments
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Fidelity VIP II Index 500 Portfolio 54 288
- -----------------------------------------------
Objective: Total return that corresponds to that
of the Standard & Poor's 500 Index
- --------------------------------------------------------------------------------
Portfolio: Equity securities of companies that
compose the Standard & Poor's 500 and
in other instruments that are based
on the value of the Index
- --------------------------------------------------------------------------------
Inception: August 27, 1992
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Net Assets at June 30, 1998: $3,084,170,605
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"Although I don't expect the market to advance at the rapid pace it has
maintained during the past three years, the favorable economic environment gives
me reason to expect further moderate gains in share prices."
-- Frank Salerno
Portfolio Manager
- --------------------------------------------------------------------------------
The Guardian Separate Account K 58
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<PAGE>
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Economic Report:
- -----------------------------------------------
[Photo of Frank J. Jones, Ph.D. Chief Investment Officer]
From Goldilocks to Jekyll and Hyde
A year ago, we described the U.S. economy as a Goldilocks economy, that
is, an economy with high economic growth, low unemployment, high capacity
utilization, and no real sector weakness, but also with no price or wage
pressures. By mid-1998, the Goldilocks economy has given way to a Dr. Jekyll and
Mr. Hyde economy, an economy with very strong domestic consumption and business
investment sectors and still absent inflation, but weak export sectors,
including manufacturing and agriculture, and increasing labor costs.
What caused the transition from Goldilocks to Jekyll and Hyde? Two
factors. First, the economic expansion had been too strong for too long. The
expansion is into its eighth year (the last recession ended during March 1991),
and real Gross Domestic Product (GDP) has grown at approximately 4% for two
years. Wage and price pressures were bound to develop. Wage pressures have been
developing (average hourly earnings costs increased by 4.13% over the last 12
months) and, although inflation is not a concern (over the last twelve months,
the Consumer Price Index (CPI) has increased by 1.6% and the Producer Price
Index (PPI) has decreased by 0.8%, respectively), neither has deflation been
mentioned recently, as it frequently was earlier during the year.
Second, on July 2, 1997, Thailand devalued its baht. Sounds innocuous
enough. But what has resulted is similar to the "Butterfly Effect" from chaos
theory whereby a butterfly stirring the air today in Peking can transform storm
systems next month in New York. From Thailand, the crisis went to other Asian
countries: Malaysia, Philippines, Indonesia, South Korea, Hong Kong (a crisis
last October), and even affected Japan and potentially China. It subsequently
went to the developing Eastern European countries, and even Russia. Then on to
Latin America, including Brazil. And after all these, not surprisingly, to the
U.S. The transmission process from Thailand to the U.S. has taken longer than
many thought (last January when the effect was not yet significant, many pundits
said the worst was over) but may turn out to be stronger than originally
expected.
The current symmetry in the concerns about the U.S. economy were well
captured by Alan Greenspan's recent comments to Congress.
A bullish view of the U.S. economy emphasizes:
o an unemployment rate near its 20-year lows;
o consumer confidence at a 30-year high, mainly based on high
employment and high personal income;
o a resulting high level of consumer demand; and
o strength in the interest rate sensitive sectors of the economy,
particularly housing, due to the low yield levels.
A bearish view of the economy, however, emphasizes:
o weak exports, particularly to Asia, due to the strong dollar;
o the weak export sectors particularly affected were manufacturing and
agriculture (which were also affected by El Nino weather patterns);
and
o the actual and potential effects of the G.M. strike.
These contrary concerns have caused and will continue to cause a balance
in Fed concerns and continued Fed inaction (the only Fed change since January
31, 1996 was the 25 basis point tightening of the Federal Funds Rate to 5.50% on
March 25, 1997). The Fed balance is further stabilized by the absence of
observed inflation (as indicated above), but offset by increasing wage inflation
(as indicated above).
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9
<PAGE>
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As the markets, and even some Fed members, have oscillated between
expectations of a Fed easing and a Fed tightening, the Fed has done nothing. And
at his recent Congressional testimony, while Greenspan emphasized the risk of
undue economic strength more than the risk of undue economic weakness, he
suggested that the Fed would most likely continue to watch vigilantly and remain
inactive. The Fed will steer between the Scylla of economic strength and the
Charybdis of economic weakness (which Greenspan referred to as "important
crosscurrents") by maintaining an even keel.
Greenspan's forecast for real GDP growth for 1998 was in the range of 3%
to 3.25% (implying a slowing from the first quarter's 5.4% growth) and a range
of 2.0% to 2.5% in 1999. The forecast for CPI was a range of from 2% to 2.5% in
1999 from less than 2% in 1998. I believe the markets would welcome these
forecasts becoming reality. And I also believe that these forecasts are
reasonable.
Greenspan again alluded to the "New Paradigm" for reconciling rapid
economic growth and low inflation. This paradigm suggests that recent
productivity gains, most likely linked to improved technology, have been higher
than in recent history and higher than measured. It may also be the reason that
faster economic growth has been achieved without inflation. If so,
optimistically, more rapid, non-inflationary growth could continue. It is,
however, premature to declare victory for this paradigm.
Consider the prospects for the stock market in a similar vein. The
"positives" for the stock market are low inflation, low yields, at least
reasonable economic growth, and, on a secular basis, very favorable demographics
(the Baby Boomers are now between 34 and 52 years old, years of significant
savings, and are very common stock-oriented). The "negatives" are the continuing
high valuations for stocks (which are based on continued strong profit growth)
and concerns about future profits, particularly related to the risks in Asia.
We provide one other thought with respect to the stock market. Perhaps the
period most like the current period was 1972, when valuations were high and
market strength was narrow (old timers will remember the "nifty fifty" of this
period). During December 1972, the trailing Price Earnings (P/E) ratio for the
S&P 500 was 18.4; during July 1998, it was 28.1. After the nifty fifty, the S&P
500 declined by 23.15% during 1973 and 25.82% during 1974. The cause for this
decline, most likely, was the beginning of the OPEC oil cartel and inflation.
Could Asia be the current equivalent? Not likely, but possibly.
While stock performance has been strong during 1998, there has been
considerable variation among large cap, mid cap, and small cap stocks. A rally
in small cap stocks is overdue. But do not bet on it. Not yet.
Despite the old saw that "you can't tell a bubble until it bursts" and
Greenspan's continued references to a U.S. asset bubble and "irrational
exuberance," the stock market will continue to be volatile, but the onset of a
bear market does not seem likely. And, in fact, Greenspan's continued caution
may prove to be constructive by constraining the stock market from continued
growth at an unsustainable pace.
To consider the bright side of the Asia effect, imagine what current U.S.
conditions would be without the Asian effect. Without the economy-slowing
effects of Asia (during second quarter 1998 real GDP actually increased by
5.4%), the Fed would have undoubtedly tightened the Fed funds rate, most likely
more than once. A not-unlikely mid-1998 scenario without Asia would be:
o a Federal Funds rate of 6.25% (three 25 basis point tightenings)
rather than the current 5.50%; and
o a 30-year Treasury yield of 6.25% -- a flat yield curve (as of this
writing, with the Federal Funds rate at 5.50% the 30-year Treasury
is at 5.70%)
And the strength of the U.S. economy without the Asian problems may not
have slowed to a sustainable
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
pace even with such Fed changes. Thus, more tightenings might be expected. And
how would the stock market be performing under such actions and expectations?
Not well. Thus, from a purely parochial perspective, we must say, "Thank you,
Asia."
I believe that the economy and the markets will be better served if
something like Greenspan's forecast -- with Asia -- comes to pass rather than
the likely ex-Asia outcome described above. And based on his track record, I'll
go with Greenspan.
Regards,
/s/ Frank J. Jones
Frank J. Jones, Ph.D.
Chief Investment Officer
The Guardian Insurance & Annuity Company, Inc.
- --------------------------------------------------------------------------------
11
<PAGE>
- --------------------------------------------------------------------------------
The Guardian Stock Fund
- -----------------------------------------------
[Photo of Frank J. Jones, Ph.D. Co-Portfolio Manager]
[Photo of Larry Luxenberg, C.F.A. Co-Portfolio Manager]
[Photo of John B. Murphy, C.F.A. Co-Portfolio Manager]
Q. U.S. stock market averages continued their powerful advance in the first half
of 1998, although the performance for the broad market was more varied. How
did the Fund perform during this time?
A. The Fund advanced 13.38%(1) in the first half of the year, compared with a
total return of 17.68% for the S&P 500.(2) Over the last twelve months the Fund
was up 29.22%, slightly behind the S&P 500's 30.03% total return and ahead of
the 27.86% total return of the Lipper Average U.S. Growth Fund.(3)
Q. What factors affected the Fund's performance during this period?
A. Two notable policies have contributed to the Fund's recent performance.
First, for most of the last four years, we have anticipated that large stocks
would outperform smaller ones. Over the last three years we have increased our
portfolio's weighted average market capitalization by $47.5 billion to a total
of $61.5 billion as of June 30, 1998, as shown below.
The Guardian Stock Fund
Weighted Average Market Capitalization
($ Billions)
[The following table was depicted as a bar chart in the printed material.]
6/30/95 6/30/96 6/30/97 6/30/98
------- ------- ------- -------
$14.0 $34.7 $46.1 $61.5
Secondly, we recognized early on that the economic problems in Asia would
have profound and long-lasting effects on the economies of major countries
throughout the world. We have lowered our holding in companies whose profits
were heavily dependent on Asia.
The last year has been an unusual period in which the very largest stocks
have dominated the stock market averages. Performance has been concentrated in a
handful of huge companies such as Microsoft, General Electric and Pfizer. Part
of the phenomenon can be attributed to economic fundamentals. In addition, an
influx of foreign money, which generally seeks out the household names first,
has had an impact. Then, too, with the current worldwide economic volatility,
investors place a premium on safety.
While there is no telling how long these trends will continue, we believe
they are powerful. As of mid-year, our portfolio was positioned to benefit from
a continuation of these trends into the third quarter.
Q. Were there any other important strategies that you used to manage the Fund?
A. While many foreign economies were experiencing difficulties, the domestic
economy continued receiving accolades. Pundits competed to heap praise on the
- --------------------------------------------------------------------------------
(1) Total return figures are historical and assume the reinvestment of
dividends and distributions and the deduction of all Fund expenses. The
actual total returns for owners of the variable annuity contracts or
variable life insurance policies that provide for investment in the Fund
will be lower to reflect separate account and contract/policy charges.
Past performance is not a guarantee of future results. Investment return
and principal value will fluctuate so that the value of your investment,
when redeemed, may be worth more or less than the original cost.
(2) The S&P 500 is an unmanaged index of 500 large-cap U.S. stocks that is
generally considered to be representative of U.S. stock market activity.
The S&P 500 Index is not available for direct investment and its returns
do not reflect expenses deducted from the Fund.
(3) Lipper Analytical Services, Inc. is an independent mutual fund monitoring
and rating service and its database of performance information is based on
historical total returns, which assume the reinvestment of dividends and
distributions, and the deduction of all fund expenses.
- --------------------------------------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------------------------
most balanced economic recovery in a generation. Among the most popular
nicknames were the "Goldilocks Economy" (not too hot, not too cold, just right)
and "Supertanker America."
In our portfolio, we tried to capitalize on this state of affairs by
overweighting stable, high-quality growth stocks in which the preponderance of
issuers' income came from the U.S. In addition, we sought to benefit from the
gradual reduction in domestic interest rates, a nearly unprecedented situation
this late in a U.S. recovery. Employment remained strong, consumer confidence
soared, and inflation was on the verge of disappearing.
Q. What are the portfolio's weights in different sectors and how have these
affected performance this year?
A. Our sector weights are generally unchanged from last year. Our largest
weighting remained in financial stocks. At mid-year, 28.1% of the portfolio was
in financials compared to 17.7% for the S&P 500. Financials continue to benefit
from the continuing decline in interest rates, stable economic growth, and
industry consolidation.
Our second largest concentration was in consumer staples with 12.9%,
although that was under the S&P's 22.6% weighting. We have been increasing our
weighting in the pharmaceutical companies but have been underweighted in such
areas as tobacco and food. Pharmaceutical companies are benefiting from a golden
age of discovery of important new medicines. Given the strong increase in
disposable income, we have been gradually increasing our weighting in additional
areas that would benefit, such as retail and homebuilders.
Q. What problems do you foresee looming that could upset this happy state of
affairs?
A. The biggest concern at mid-summer had to be the continuing difficulties in
Asia, including Japan. The huge contraction in economic activity there casts a
shadow over worldwide commerce. If the economies of mainland Asia and Japan do
not begin a bottoming process, there is a risk of spreading deflationary
pressures and social chaos. Leaders worldwide recognize the scope and severity
of the problems, and we are hopeful that they will act prudently.
In the U.S., corporations have had their highest profit margins since the
mid-1960's. They have benefited from a period of intense cost-cutting and
reorganization, effective deployment of technology and telecommunications, and
progressive management. Most companies now have little ability to raise prices
and those most exposed to foreign competition must continually find new ways to
lower prices. At the same time, a scarcity of workers has put pressure on wages
for the first time in this recovery. As a consequence, corporate profits now
seem likely to be squeezed and are particularly vulnerable to any revenue
shortfalls.
An unknown wild card is the ability of corporations and governments
worldwide to adapt their computer systems to the new millenium, the "Y2K"
problem. While predictions of doom are increasing, no one seems to know with any
certainty what the end result will be. Hopefully, the feverish and expensive
efforts underway will be successful.
- --------------------------------------------------------------------------------
13
<PAGE>
- --------------------------------------------------------------------------------
The Guardian Stock Fund Profile
as of June 30, 1998
- -----------------------------------------------
Sector Weightings of Common Stocks
Held by the Fund on June 30, 1998
[The following table was depicted as a pie chart in the printed material.]
Basic Industry 4.6%
Consumer Services 1.9%
Transportation 2.9%
Capital Goods 5.8%
Utilities 7.8%
Energy 10.5%
Consumer Cyclicals 11.3%
Financial 28.1%
Consumer Staples 12.9%
Capital Goods/Technology 12.4%
Conglomerates 1.3%
Credit Cyclicals 0.5%
- --------------------------------------------------------------------------------
Top 10 Holdings as of 6/30/98
1. General Electric Co. 3.91%
2. Exxon Corp. 3.07%
3. Microsoft Corp. 2.86%
4. Pfizer, Inc. 2.25%
5. Int'l Business Machines 2.10%
6. Chase Manhattan Corp. 1.83%
7. Storage Technology Corp. 1.80%
8. Wal-Mart Stores 1.76%
9. BankAmerica Corp. 1.74%
10. E.I. Dupont de Nemours, Inc. 1.66%
For a complete list of portfolio holdings, please see the Schedule of
Investments.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average Annual Returns for Periods Ended 6/30/98(1)
Life of Fund
1 Year 5 Years 10 Years (since 4/13/83)
- --------------------------------------------------------------------------------
The Guardian Stock Fund 29.22% 22.47% 18.68% 18.20%
- --------------------------------------------------------------------------------
S&P 500 Index(2) 30.03% 22.98% 18.44% 17.45%
- --------------------------------------------------------------------------------
(1) Total return figures are historical and assume the reinvestment of
dividends and distributions and the deduction of all Fund expenses. The
actual total returns for owners of the variable annuity contracts or
variable life insurance policies that provide for investment in the Fund
will be lower to reflect separate account and contract/policy charges.
Past performance is not a guarantee of future results. Investment return
and principal value will fluctuate so that the value of your investment,
when redeemed, may be worth more or less than the original cost.
(2) The S&P 500 Index is an unmanaged index of 500 large-cap U.S. stocks that
is generally considered to be representative of U.S. stock market
activity. The S&P 500 Index is not available for direct investment and its
returns do not reflect expenses that have been deducted from the Fund's
return.
- --------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
Growth of a Hypothetical $10,000 Investment
[The following table was depicted as a line chart in the printed material.]
GSF S&P CPI
--- --- ---
4/13/83 10000 10000 10000
10891 10844 10333
83 11028 10867 10336
10684 10328 10571
84 12218 11529 10754
14360 13501 10958
85 16130 15169 11162
20326 18307 11152
86 18889 17985 11295
22920 22898 11580
87 19241 18903 11794
23115 21283 12029
88 23160 21989 12314
26541 25595 12650
89 28613 28887 12885
28334 29749 13252
90 25224 27959 13680
29788 31938 13874
91 34293 36439 14088
34598 36196 14302
92 41178 39207 14516
46490 41100 14720
93 49396 43130 14913
47471 41667 15097
94 48767 43679 15311
58848 52468 15545
95 65667 59992 15668
72792 66015 15973
96 83330 73770 16176
99134 85090 16463
97 112983 94035 16627
6/30/98 128110 110637 17090
A hypothetical $10,000 investment made at the inception of The Guardian Stock
Fund on April 13, 1983 would have grown to $128,110 on June 30, 1998. We compare
our performance to that of the S&P 500 Index, which is an unmanaged index that
is generally considered the performance benchmark of the U.S. stock market.
While you cannot invest directly in the S&P 500 Index, a similar hypothetical
investment would now be worth $110,637. The Cost of Living, as measured by the
Consumer Price Index, which is generally representative of the level of U.S.
inflation, is also provided to lend a more complete understanding of the
investment's real worth.
- --------------------------------------------------------------------------------
15
<PAGE>
- --------------------------------------------------------------------------------
The Guardian Bond Fund
- -----------------------------------------------
[Photo of Thomas G. Sorell, C.F.A.]
[Photo of Howard W. Chin Co-Portfolio Manager]
Q. How did the Fund perform during the first half of 1998?
A. The Fund performed well for the first half of 1998. The Fund had a total
return of 3.96%(1) for the six months ended June 30, 1998, exceeding the return
of the average fund in our Lipper Intermediate Investment Grade peer group,(2)
which returned 3.79% for the same period. This group consists of variable
annuity subaccounts that invest primarily in investment grade debt with average
maturities of 5-10 years. Another commonly used benchmark, the Lehman Aggregate
Bond Index,(3) which is not available for direct investment, returned 3.93% for
the first half of 1998.
Q. What factors affected the Fund's performance?
A. Early in the year market participants expected that the Asian financial
crisis would significantly slow U.S. economic growth and might motivate the
Federal Reserve to ease monetary policy. However, as it became apparent that
U.S. domestic demand remained robust and that the Asian effect might not reduce
growth sufficiently to alleviate inflationary pressures from developing, market
psychology changed to one of expecting the Fed to leave rates unchanged. The
Fed's patience and inaction proved appropriate as the economy grew 5.5% in the
first quarter but slowed to 1.4% in the second quarter.
Although it was not clear to what degree the financial crisis in Asia
would slow U.S. economic growth, there is no doubt that it caused a flight to
quality as both U.S. and international investors sought U.S. Treasuries as a
safe investment haven. By July, Treasury rates had declined 15 to 30 basis
points along the yield curve, with the 30-year Treasury bond declining to its
lowest level (5.57%) since first issued in 1977.
Unlike 1997, when the Fund's performance was driven by its overweight in
the spread product sectors (corporate bonds, mortgage- and asset-backed
securities), performance in the first half of 1998 was driven by the Treasury
sector. For the most part, spread products have lagged the performance of
Treasuries in 1998. As the year began, the Fund was properly positioned for
this, being overweighted in U.S. Treasuries, and the Fund's performance
benefited. As the year progressed, the Fund began to reduce the Treasury
position and reinvest in cheaper spread sectors, particularly corporate and
mortgage-backed securities. This strategy worked until further spread widening
in June, and ultimately acted as a small positive contribution to overall
performance for the first half of the year.
As mentioned earlier, the corporate bond sector experienced some
volatility during the first half of 1998, returning 4.15%, as measured by the
Lehman Corporate Bond Index, but underperformed comparable-duration Treasuries
by 25 basis points, or 0.25%.
- --------------------------------------------------------------------------------
(1) Total return figures are historical and assume the reinvestment of
dividends and distributions and the deduction of all Fund expenses. The
actual total returns for owners of the variable annuity contracts or
variable life insurance policies that provide for investment in the Fund
will be lower to reflect separate account and contract/policy charges.
Past performance is not a guarantee of future results. Investment return
and principal value will fluctuate so that the value of your investment,
when redeemed, may be worth more or less than the original cost.
(2) Lipper Analytical Services, Inc. is an independent mutual fund monitoring
and rating service and its database of performance information is based on
historical total returns, which assume the reinvestment of dividends and
distributions, and the deduction of all Fund expenses.
(3) The Lehman Aggregate Bond Index is an unmanaged index that is generally
considered to be representative of U.S. bond market activity. The Lehman
Aggregate Bond Index is not available for direct investment and the
returns do not reflect the fees and expenses that have been deducted from
the Fund.
- --------------------------------------------------------------------------------
16
<PAGE>
- --------------------------------------------------------------------------------
Corporate bonds began the year by underperforming by 54 basis points (0.54%) on
a duration-adjusted basis(4) in January, and underperformed once again in June
by 47 basis points (0.47%). In the intervening months, the corporate market
performed fairly well, but not enough to overcome January and June's negative
returns.
Historically low interest rates were a significant contributor to the
sector's underperformance as corporations deluged the market with new issuance
to take advantage of attractive financing rates. As of June 30, 1998, corporate
issuance had exceeded $200 billion; an increase of $70 billion relative to the
comparable period last year.
Within the corporate market, only two sectors outperformed Treasuries
during the first half of 1998; Finance and Media/Cable. The Fund was well
represented in these two sectors.
The mortgage-backed securities sector returned 3.38% in the first half of
1998 as measured by the Lehman Mortgage-Backed Index, and outperformed
comparable-duration Treasuries by 0.10%. Interest rate volatility continued to
remain at low levels, and although low Treasury yields have caused prepayment
concerns, the Fund was positioned favorably since a high percentage of its
holdings were in below par mortgages, which have less exposure to prepayment
risk relative to higher coupons. Much of the widening observed in the
mortgage-backed sector was experienced by the higher coupons.
- --------------------------------------------------------------------------------
(4) Duration-adjusted, expressed in percentage terms, represents the excess
return over the weighted average return of a group of similar duration
Treasuries.
- --------------------------------------------------------------------------------
The Guardian Bond Fund Profile
as of June 30, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
FOR PERIODS ENDED 6/30/98(1)
================================================================================
1 Year .......................................... 9.48%
5 Years ......................................... 6.27%
10 Years ........................................ 8.76%
Since Inception (5/1/83) ........................ 9.32%
- --------------------------------------------------------------------------------
The Fund also offset some of its prepayment risk by adding
mortgage-related asset-backed securities such as home equity loans and
manufactured housing loans which have less incentive to refinance due to their
lower loan balances. Asset-backed securities returned 3.61% as measured by the
Lehman Asset-Backed Index, but turned in the best performance among the various
components of the Index on a duration-adjusted basis, outperforming Treasuries
by 0.21%.
Q. What strategies did you use to manage the Fund and what is your outlook for
the rest of 1998?
A. Owning corporate, mortgage-backed and asset-backed securities provided a
small positive return to the Fund's performance, while our early defensive
position in U.S. Treasuries served us extremely well. We currently believe that
corporate and mortgage-backed valuations are the most attractive that they have
been in some time, but nevertheless we remain cautious and will be very
selective with respect to both the corporate credits and the mortgage risk
exposure we include in the Fund. As always, we will continue to adjust asset
allocations to reflect changes in sector valuations and take advantage of
attractive investment opportunities.
Composition by Asset Class as of 6/30/98
[The following table was depicted as a line graph in the printed material.]
Mortgage Pass-Throughs 12.4%
Yankee Bonds 2.2%
Asset-Backed 14.4%
Multi-Class MBS 7.3%
Corporate Bonds 36.9%
U.S. Government Securities 25.7%
Cash Equivalents 1.1%
- --------------------------------------------------------------------------------
17
<PAGE>
- --------------------------------------------------------------------------------
Gabelli Capital Asset Fund
- -----------------------------------------------
[Photo of Mario J. Gabelli, C.F.A. Portfolio Manager]
Q. How did the Fund perform for the first six months of 1998?
A. For the six months ended June 30, 1998, the Fund's total return was 13.7%.(1)
The Standard & Poor's ("S&P") 500(2) and Russell 2000 Index(3) had returns of
17.7% and 4.9%, respectively, over the same period. Each index is an unmanaged
indicator of stock market performance. The Fund was up 33.6% over the trailing
twelve-month period. The S&P 500 and Russell 2000 rose 30.2% and 16.5%,
respectively, over the same twelve-month period. For the three year period ended
June 30, 1998, the Fund's return averaged 24.1% annually, versus average annual
returns of 30.2% and 18.9% for the S&P 500 and Russell 2000, respectively. Since
inception on May 1, 1995 through June 30, 1998, the Fund has had a cumulative
total return of 94.9%, which equates to an average annual total return of 23.4%.
In the second quarter of 1998, there was a continuation of the best of
times for large stocks and the worst of times for small cap stocks. During the
quarter, the large cap market, as measured by the S&P 500 Index, rose 3.3% while
small cap stocks, as measured by the Russell 2000 Index, declined by 4.7%. U.S.
Government Bonds rallied in a classic global "flight to quality," with the yield
on the 30-year U.S. Treasury Bond falling to 5.57% in mid-June.
Q. What factors affected the Fund's performance?
A. In reviewing our successes during the first half of the year, retail, media
and telecommunications holdings proved largely resistant to the Asian Flu. With
the domestic economy still rolling along and consumer confidence at record
levels, selected retailers posted solid earnings gains. Media stocks
(broadcasters, cable television operators and entertainment software producers)
also benefited from positive earnings reports and further consolidation in their
industries. Telephone companies advanced as investors focused on the
opportunities being presented by global deregulation. We believe these groups
will continue to perform well in the months ahead.
Our disappointments were largely in industry groups that were, or were
likely to be impacted by Asian economic woes. Agricultural equipment
manufacturers suffered as Asian economic weakness foreshadowed reduced
agricultural exports and restrained cash flows for American farmers. Aircraft
suppliers nose-dived as Southeast Asian airlines began scaling back expansion
plans. Energy stocks contracted as weakening demand from Asia combined with
weather-related factors and overproduction from OPEC nations to drop oil prices
to a twelve year low. Finally, manufacturing companies going head to head with
Asian competitors fell along with the yen and other Asian currencies.
Q. What strategies do you use to manage the Fund?
A. We buy high quality, dominant market share companies in a wide variety of
industries. We believe that over the long term these companies will succeed
irrespective of shorter term macroeconomic trends and that we will be rewarded
for our investment patience.
While investors worry about a substantial correction
- --------------------------------------------------------------------------------
(1) Total return figures are historical and assume the reinvestment of
dividends and distributions and the deduction of all Fund expenses. The
actual total returns for owners of the variable annuity contracts or
variable life insurance policies which provide for investment in the Fund
will be lower to reflect separate account and contract/policy charges.
Past performance is not a guarantee of future results. Investment return
and principal value will fluctuate so that the value of your investment,
when redeemed, may be worth more or less than the original cost.
(2) The S&P 500 Index is an unmanaged index of 500 large-cap U.S. stocks that
is generally considered to be representative of U.S. stock market
activity. The S&P 500 Index is not available for direct investment and its
returns do not reflect the fees and expenses deducted from the Fund.
(3) The Russell 2000 Index is generally considered to be representative of
small-capitalization issues in the U.S. stock market. The Russell 2000 is
not available for direct investment, and its returns do not reflect the
fees and expenses deducted from the Fund.
- --------------------------------------------------------------------------------
18
<PAGE>
- --------------------------------------------------------------------------------
or even a bear market for the Dow Jones Industrial Average and S&P 500, small
cap stocks are already experiencing one. Although as of the end of second
quarter 1998, the Russell 2000 is up modestly, approximately 60% of all
Nasdaq-listed stocks are off 20% or more from their 52-week highs. What is wrong
with small cap stocks? In our opinion, nothing. In fact, we believe that small
companies operating primarily in the domestic market are far less vulnerable to
Asian economic problems than the large multinationals. This has not prevented
investors from abandoning small cap stocks to chase large cap stock returns. Is
this likely to change in the foreseeable future? We do not know, and in a sense,
do not care. We are patient value investors who count on Mr. Market's mood
swings to allow us to buy quality companies at discount prices. The fact that
Mr. Market, perhaps fueled by the migration of assets into S&P index funds, is
mindlessly lavishing attention on large companies and ignoring more
fundamentally attractive smaller ones makes it easier for us to pick up small
cap stock bargains.
As always, there are plenty of things for pessimists to worry about and
for optimists to cheer. As investment realists, we do a little of both. We take
the threat posed by the Asian Flu seriously. However, we believe the U.S.
economy and stock market will be relatively resistant, though not immune, to
this latest global financial virus. Our opinions on the economy and the market
duly stated, let us remind you we spend most of our time and energy researching
individual companies that we believe will do well over the longer term
irrespective of shorter term economic and market trends.
- --------------------------------------------------------------------------------
Gabelli Capital Asset Fund Profile
as of June 30, 1998
- -----------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
FOR PERIODS ENDED 6/30/98(1)
================================================================================
1 Year ................................... 33.60%
3 Years .................................. 24.10%
Since Inception (5/1/95) ................. 23.44%
- --------------------------------------------------------------------------------
Q. What is your outlook for the remainder of the year?
A. Is it time to quarantine your investment portfolio by significantly reducing
your exposure to equities? Let's diagnose the problem and venture an opinion on
just how vulnerable the U.S. economy and stock market may be. We do not expect a
painless solution (for them or us) to Japan and Southeast Asia's economic
problems. Japan appears committed to exporting its way out of recession rather
than undertaking any serious domestic economic reforms. Without massive currency
intervention, which is disruptive in its own right, we will probably continue to
see a weak yen against the dollar. Despite International Monetary Fund (IMF)
bailouts, most Asian currencies are likely to remain anemic. This is not good
news for any American company going head to head with Japan or its Asian
neighbors in the domestic and international markets. The same holds true for
European manufacturers, particularly if the new euro rivals the dollar in
strength.
Additionally, the Asian Flu has some positive side effects. Lower
commodity prices, low cost Asian imports and continued domestic pricing
restraint should keep inflation in check and perhaps allow interest rates to
trend down even further. This should help sustain the robust service sector of
the economy--now 55% of U.S. Gross Domestic Product and growing. Despite
Asian-induced jitters and slowing corporate profit growth, there is still a lot
of money coming into equity mutual funds. The question of the day becomes how
investors will react if the market waters become even choppier. Will they head
to shore or simply not venture farther out to sea? With so much liquidity and
the current low returns from equity alternatives, we think the latter is more
likely.
We believe it is still too early to accurately assess the impact of Asian
economic distress on the U.S. economy and corporate earnings. However, Asia's
problems may prolong investment uncertainty and restrain stock prices, perhaps
for the balance of the year. Looking farther ahead, we believe equities will
still provide investors with superior risk adjusted returns relative to other
asset classes and that our value discipline will continue to reward
shareholders.
- --------------------------------------------------------------------------------
19
<PAGE>
- --------------------------------------------------------------------------------
Baillie Gifford International Fund
- -----------------------------------------------
[Photo of R. Robin Menzies Portfolio Manager]
Q. How did the Fund perform for the first six months of 1998?
A. The first six months, and particularly the second quarter of the year was
packed with incident: the new European currency was successfully launched and
the European Central Bank got under way, while in Asia the Japanese economy and
currency weakened and the Asian crisis deepened. The contrast between generally
good news in the west and bad news in the east was reflected in market
movements. For the first half of 1998 the Fund returned 19.20%,(1) while the
Morgan Stanley Capital International (MSCI) Europe, Australia, and Far East
(EAFE) Index(2) returned 16.08% during this period. Even in the west, where
equities performed well, there were signs that investors were beginning to favor
bond markets as the quarter progressed. This tendency was less marked in Europe
than it was in the U.S., where earnings growth is clearly slowing and Treasury
obligations attracted those looking for a safe haven.
Q. What factors affected the Fund's performance and what strategies did you use
to manage the Fund?
A. We always felt that the Asian crisis would deepen and so resisted the
temptation to reinvest in those markets when they staged an ill-founded recovery
earlier in the year. In fact, Asian markets have deteriorated even more than we
anticipated. A vicious circle has developed in which worsening Asian prospects
undermine confidence in Japanese banks and exporters, weakening the yen, which
in turn makes it more difficult for the rest of Asia to export its way out of
trouble. There is a danger that this vortex will suck in the Chinese, which
would have a very harmful effect on the whole region. The only way for this
vicious circle to be broken is for the Japanese economy to stabilize, and this
requires continual fiscal stimulus (the most recently announced package is just
starting to take effect) backed up by structural reform. The likelihood is that
the Japanese will do just enough to stop the situation deteriorating
dramatically - but the possibility that they might not is the single greatest
threat to world financial markets at the moment.
We believe that detailed analysis of the businesses of individual
companies has been the best route to investment success. As a result, we have
had a low weighting in Japan for the Fund, and the Japanese holdings have been
concentrated in companies that are global leaders in areas like electronics,
office equipment, and auto manufacturing. And it was our company analysis that
deterred us from going back into the other Asian markets which bounced in the
first quarter and then retreated again. We have little invested there.
On the surface at least, it is surprising that European stock markets have
continued to perform very well despite the problems of Asia. On further
investigation, however, the good performance does have solid foundations:
European companies are continuing to restructure and pass on more of the
benefits of their success to shareholders; euro interest rates will remain
sustainably low for some time to come and, on top of this, the long-awaited
recovery is finally taking place. The result is that top line growth is
amplifying the effect of cost cutting, which is leading to strong earnings
growth against a background of low interest rates. This happy combination is
likely to persist as there is still considerable underused capacity on the
Continent. It is not surprising, therefore, that Euro-
- --------------------------------------------------------------------------------
(1) Total return figures are historical and assume the reinvestment of
dividends and distributions and the deduction of all Fund expenses. The
actual total returns for owners of the variable annuity contracts or
variable life insurance policies that provide for investment in the Fund
will be lower to reflect separate account and contract/policy charges.
Past performance is not a guarantee of future results. Investment return
and principal value will fluctuate so that the value of your investment,
when redeemed, may be worth more or less than the original cost.
(2) The MSCI EAFE Index is an unmanaged index that is generally considered to
be representative of international stock market activity. The MSCI EAFE
Index is not available for direct investment and its returns do not
reflect the fees and expenses that have been deducted from the Fund's
return.
- --------------------------------------------------------------------------------
20
<PAGE>
- --------------------------------------------------------------------------------
pean markets have done well and we continue to have a heavy weighting in them.
It is worth saying something about the effect that the Asian crisis has
had so far on the global economy. The crisis has had two main outcomes, as far
as the rest of the world is concerned: it has altered trade patterns and
depressed commodity prices. Western exports to Asia have fallen sharply, and
this has shown up in deteriorating trade deficits. Few Asian countries are
showing much increase in exports in U.S. dollar terms, although volumes have
picked up. In any case, the effect is likely to be a slightly dampening one on
growth in the West.
Industrial commodities are now 24.3% cheaper in U.S. dollar terms than
they were a year ago using the Economist index, and the Brent crude oil price is
22.3% lower. These sharp declines are damaging some countries (Chile, for
example with its dependence on copper, and Norway with its huge oil revenues),
but the overall effect is likely to be positive on margins and inflation.
As a result of these two Asian effects (lower growth because of weaker
trade and lower inflation), the balance of attraction tipped towards bonds in
most markets during the quarter, apart from in Europe, where growth and profits
remain strong.
- --------------------------------------------------------------------------------
Baillie Gifford International Fund Profile
as of June 30, 1998
- -----------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
FOR PERIODS ENDED 6/30/98(1)
================================================================================
1 Year .................................... 16.40%
3 Years ................................... 19.48%
5 Years ................................... 15.63%
Since Inception (2/8/91) .................. 14.08%
- --------------------------------------------------------------------------------
Q. What is your outlook for the international market?
A. The final piece of the jigsaw puzzle is the so called "technical position,"
in other words the supply and demand for equities in world markets. This remains
extremely favorable and goes a long way to explain equity markets' resilience.
The retirees of the future are pouring money into equities and there is a
significant switch in favor of equities away from traditional cash and bond
based investments taking place in Europe. At the same time, equity issuance
remains very low. The favorable technical position and Europe's good prospects
are the two main supports for our generally optimistic view.
We are positive about Continental Europe, less so about the UK. Many of
the smaller Asian economies have deep seated problems. The progress of reform in
Japan is an important factor for markets. We believe that the authorities are
likely to do just enough to get by. Markets in the rest of the world will
probably continue to receive support from technical factors and try their
hardest to put a positive interpretation on bad news from Asia.
- --------------------------------------------------------------------------------
21
<PAGE>
- --------------------------------------------------------------------------------
Baillie Gifford Emerging Markets Fund
- -----------------------------------------------
[Photo of Edward H. Hocknell, Portfolio Manager]
Q. How did the Fund perform during the first half of 1998?
A. For the six months ended June 30, 1998, the Fund returned -18.15%(1),
compared with a return of -19.87% over the same period from the Morgan Stanley
Capital International (MSCI) Emerging Markets Free (EMF) Index.(2) The Fund's
performance was hit by the renewed weakness in the emerging markets following
investors' reappraisal of the depth of the Asian crisis. Asian markets performed
worse, but the others did not escape. One effect of the Asian crisis was to
spread concerns (partially with respect to Latin America) about growth,
commodity prices and the interest rates that other emerging economies would have
to pay in the future. Central European markets were largely unharmed during the
period (Poland's market, for example, rose by over 14%).
Q. What factors affected the performance of the Fund?
A. We remained overweighted in the Latin American and Central European markets
during the period. This strategy hurt us in the first quarter of the year as
Asia enjoyed a short lived recovery, but was beneficial over the period as a
whole.
The outlook for the emerging markets is clouded by the deteriorating
situation in Asia. Years of low interest rates have led to excessive investment
and bad debts, which have severely weakened the financial infrastructure of many
Asian economies. Whatever problems Latin America suffers from, they are not the
result of years of low interest rates and excessive investment. Nevertheless,
emerging market investors have shown once again their tendency to tar all the
emerging markets with the same brush. Geographic diversification has provided
little protection (in the short term at least). There has been no place to hide.
Q. What strategies did you use to manage the Fund and what is your outlook going
forward?
A. The crisis rumbles on in Asia. There will be no quick bailout on the Mexican
model. Some countries have responded well to the challenge - Korea is a good
example - and others, such as China, Taiwan and India, have enough momentum to
maintain their growth, albeit at a lower level than in recent years. These are
the countries where we have maintained an exposure for the Fund in the belief
that, from a longer term perspective, some excellent companies can now be bought
at very low valuations. We are keeping pretty well clear of Indonesia, Thailand
and Malaysia where massive amounts of capital are still required to stabilize
the situation. Our perception is that consensus expectations for Asian growth
and profitability over the next couple of years are only just now beginning to
catch up with reality, having previously been too high, so it is still too early
to become optimistic about equity prices there. We should also like to see
evidence that the Japanese yen has stabilized before becoming more confident
about the region.
The situation in Latin America is quite different. Governments there
reacted sensibly to the Asian crisis; although growth has decelerated as rates
have had to rise, we do not expect the tough monetary disciplines of recent
years to be abandoned. Shares are rea-
- --------------------------------------------------------------------------------
(1) Total return figures are historical and assume the reinvestment of
dividends and distributions and the deduction of all Fund expenses. The
actual total returns for owners of the variable annuity contracts or
variable life insurance policies that provide for investment in the Fund
will be lower to reflect separate account and contract/policy charges.
Past performance is not a guarantee of future results. Investment return
and principal value will fluctuate so that the value of your investment,
when redeemed, may be worth more or less than the original cost.
(2) The Morgan Stanley Capital International (MSCI) Emerging Markets Free
Index (EMF) is an unmanaged index that is generally considered to be
representative of the stock market activity of emerging markets. The Index
is a market capitalization weighted index composed of companies
representative of the market structure of 22 emerging market countries in
Europe, Latin America, and the Pacific Basin. The MSCI EMF Index excludes
closed markets and those shares in otherwise free markets which may not be
purchased by foreigners. The MSCI EMF Index is not available for direct
investment and the returns do not reflect the fees and expenses that have
been deducted from the Fund.
- --------------------------------------------------------------------------------
22
<PAGE>
- --------------------------------------------------------------------------------
sonably valued on undemanding expectations for earnings growth, and the better
companies have continued to cut costs and consolidate. We think the fears about
continuing reform in Brazil are overdone; the market is now trading at less than
10 times 1998 earnings and has been depressed by extraneous concerns (a possible
currency crisis in Russia, for example). The Fund now has a heavy weighting in
Brazil.
We have recently become more optimistic about Central Europe (Poland,
Hungary and the Czech Republic). Markets there have been quite weak and are
reasonably valued. We expect them to show good earnings growth again this year.
They are all beneficiaries of a stronger recovery than expected in Germany, and
there is now the prospect (however distant) of eventual inclusion in the single
European currency, which will have a beneficial effect on interest rates and
long term inflation expectations.
To sum up: The emerging markets have taken a beating, but the concept is
still intact and good growth prospects can be found there at lower valuations
than elsewhere. We need to see some stability in Asia before becoming really
confident, but the longer term prospects are good.
- --------------------------------------------------------------------------------
Baillie Gifford Emerging Markets Fund Profile
as of June 30, 1998
- -----------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
FOR PERIODS ENDED 6/30/98(1)
================================================================================
1 Year .................................. -30.78%
3 Years ................................. 2.22%
Since Inception (10/17/94) .............. -2.52%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[The following table was depicted as a pie chart in the printed material.]
Europe 16.8%
South Africa 4.0%
Cash 7.1%
Asia 20.9%
Latin America 51.2%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Top 10 Holdings
Company Country Nature of Company
1. Petrobras Brazil Energy
2. Telebras ADR Brazil Telecommunications
3. Telesp Brazil Telecommunications
4. CIE Mexico Media & Entertainment
5. Bank Roswoju Eksport Poland Banking
6. Comp. Brasileiras de Dist. Brazil Retail
7. Banco Itau Brazil Banking
8. Elektrim Poland Electricals
9. Richter Gedeon Hungary Pharmaceuticals
10. Bank Handlowy Poland Banking
For a complete list of portfolio holdings, please see the Schedule of
Investments.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
23
<PAGE>
- --------------------------------------------------------------------------------
The Guardian Small Cap Stock Fund
- -----------------------------------------------
[Photo of Larry Luxenberg, C.F.A. Portfolio Manager]
Q. Small cap stocks have been ignored in this market, which has favored large
cap stocks. How has the Fund fared during the first half of 1998?
A. This has been a discouraging period for small cap stocks as investors seem to
ignore any good news and cling to anything bad. In spite of this, the actual
returns have not been too bad. In the first half of 1998, the Fund had a return
of 7.56%,(1) compared to 4.93% for the Russell 2000,(2) a leading index of small
cap performance. From July 16, 1997, the date the Fund commenced operations,
through June 30, 1998, the Fund had a return of 23.36%, compared to 13.60% for
the Russell 2000 and 24.24% for the S&P 500.(3)
Q. What were the significant factors that affected the Fund's performance?
A. We continued to overweight financial stocks, which have benefited from the
current benign interest rate environment. Additionally, we added to our holdings
in retailers, homebuilders and business services, which are benefiting from the
extended recovery, high consumer confidence and increasing disposable income.
In this difficult market we also emphasize systematic efforts to weed out
possible sources of trouble early in the process. Companies and industries, once
they begin struggling, tend to face difficulties for a long time. Investors and
analysts are always amazed at how far down a stock can go. While we tend to be
patient long-term investors, sometimes the old Wall Street axiom of "cut your
losses" is a wise one.
Q. What strategies are used to manage the Fund?
A. We look for dynamic companies with sound business models able to exploit
opportunities in our fast-changing economy. Many of our companies are in
businesses that did not exist a decade ago.
Also, we continue to invest in companies whose operations are largely
domestic. Most of our companies do not have much direct exposure to the Asian
economies. Meanwhile, we have been looking for companies in market niches, who
can heavily influence their own fate regardless of external economic forces.
With outsourcing and partnerships so prevalent, small companies with important
breakthroughs are able to grow much faster than in the past.
Q. What is the outlook for small cap stocks?
A. While small cap stocks have trailed the broad market recently, historically
they have outperformed large cap stocks, according to a recent Ibbotson
Sinquefield study.(4) The timing of any switch in performance is uncertain, but
the fundamental outlook continues to improve.
While some small caps have had unexpected earnings difficulties, so too
have some large cap stocks.
- --------------------------------------------------------------------------------
(1) Total return figures are historical and assume the reinvestment of
dividends and distributions and the deduction of all Fund expenses. The
actual total returns for owners of the variable annuity contracts or
variable life insurance policies that provide for investment in the Fund
will be lower to reflect separate account and contract/policy charges.
Past performance is not a guarantee of future results. Investment return
and principal value will fluctuate so that the value of your investment,
when redeemed, may be worth more or less than the original cost.
(2) The Russell 2000 Index is generally considered to be representative of
small-capitalization issues in the U.S. stock market. The Russel 2000 is
not available for direct investment, and its returns do not reflect the
fees and expenses deducted from the Fund.
(3) The S&P 500 Index is an unmanaged index of 500 large-cap U.S. stocks that
is generally considered to be representative of U.S. stock market
activity. The S&P 500 Index is not available for direct investment and its
returns do not reflect the fees and expenses deducted from the Fund.
(4) The study is taken from Stocks, Bonds, Bills & Inflation 1997
Yearbook,(TM) Ibbotson, Chicago (annually updates work by Roger G.
Ibbotson and Rex Sinquefield).
- --------------------------------------------------------------------------------
24
<PAGE>
- --------------------------------------------------------------------------------
But what is harder to explain is why small cap companies that have performed
well and met or exceeded investors expectations still lag the bigger cap stocks.
One reason is that in times of turmoil, investors prefer perceived safety as
opposed to opportunity -- fear triumphs over greed. With the cloud of financial
meltdown and disarray in Asia overhanging our markets, investors have continued
to gravitate to the largest companies. A second reason is the continued
popularity of indexing, much of which is tied to the S&P 500. In the short-run
this becomes a self-fulfilling prophecy in which cash is blindly thrown at the
largest stocks. Thirdly, the U.S. economic recovery, which began during the Gulf
War, is now one of the longest on record. In the early phases, corporate profit
growth was rapid. Companies had downsized during the recession and profitability
soared afterwards.
Now after years of near record margins and profitability, companies are
having difficulty maintaining that growth. Pricing power is confined to small
sectors of the economy, wages are rising and cost cutting opportunities are much
diminished. Productivity, however, has been improving. Normally, late in a bull
market, investors turn to smaller and more speculative issues as performance
gets harder to come by. Lately, much of that sort of attention has been confined
to internet stocks and other technology issues. Investment fads can persist for
long periods. In time, though, these excesses or neglected securities tend to
correct. No doubt in some future report we will be remarking that small caps are
the current "smash hit" among investors.
- --------------------------------------------------------------------------------
The Guardian Small Cap Stock Fund Profile
as of June 30, 1998
- -----------------------------------------------
- --------------------------------------------------------------------------------
Top 10 Holdings as of 6/30/98
1. AFC Cable Systems, Inc. 3.03%
2. Fidelity National Financial, Inc. 2.60%
3. Ethan Allen Interiors, Inc. 2.38%
4. National RV Holdings, Inc. 1.18%
5. Lone Star Industries, Inc. 1.13%
6. Northwest Pipe Co. 1.09%
7. Hain Food Group, Inc. 1.07%
8. Shopko Stores, Inc. 1.06%
9. Southdown, Inc. 1.00%
10. Harte-Hanks Communications 0.95%
For a complete list of portfolio holdings, please see the Schedule of
Investments.
- --------------------------------------------------------------------------------
TOTAL RETURN(1)
================================================================================
Since Inception (7/16/97)................................. 22.35%
- --------------------------------------------------------------------------------
Sector Weightings of Common Stocks
[The following table was depicted as a pie chart in the printed material.]
Utilities 0.3%
Credit Cyclicals 4.0%
Consumer Cyclicals 20.7%
Transportation 4.9%
Consumer Services 6.5%
Financial 22.5%
Consumer Staples 7.5%
Basic Industry 4.2%
Energy 5.2%
Capital Goods/Technology 13.6%
Capital Goods 10.6%
- --------------------------------------------------------------------------------
25
<PAGE>
- --------------------------------------------------------------------------------
Value Line Centurion Fund
- -----------------------------------------------
[LOGO](R)
Q. How did the Fund perform for the first six months of 1998?
A. For the six months ended June 30, 1998, the Centurion Fund produced a total
return of 15.64%,(1) compared with total returns of 17.68% for the S&P 500(2)
and 14.11% for the Dow Jones Industrial Average.(3)
After a checkered start to the year, amid lingering global concerns about
developments in Southeast Asia, Latin America, and the Middle East, the
combination of Value Line's top-down analysis and bottoms-up stock selection has
fared better as 1998 progressed, resulting in strengthening relative
performance.
Q. What factors affected the performance of the Fund?
A. From a bottom-up standpoint, the Value Line Timeliness Ranking System had an
excellent first half in 1998, with each of its five "ranks" performing exactly
in line. That is, stocks included in the System's Rank 1 category (the highest
rating) outperformed Rank 2's on an overall basis, which outperformed Rank 3's
on an overall basis, etc. From a sector standpoint, our proprietary systems and
models continued to identify those industries that are producing robust earnings
growth, principally technology (with a software, hardware and networking focus);
financial services (with a broad smattering of brokers, banks, insurers, and
consumer finance companies); retailers; and consumer nondurables (with an
emphasis on healthcare).
Q. What strategies did you use to manage the Fund?
A. Our top-down strategy has been consistently focused on our forecast for
decelerating economic growth, benign inflation, neutral monetary policy, lower
interest rates, and a modest increase in corporate profits. All of these factors
suggest a positive bias to the equity markets, with an emphasis on
large-capitalization Blue Chip growth companies within the industry sectors
identified earlier (technology, financials, retailers, healthcare, and
airlines).
Q. What are your expectations for the rest of 1998?
A. Looking forward, we believe that developments in Japan hold the key to the
performance of the U.S. financial markets. In a stunning turn of events, Japan's
Liberal Democratic Party recently suffered a humiliating defeat in parliamentary
elections, as voters expressed their displeasure with the ruling party's
confusion and lack of decision in dealing with the country's worst economic
crisis in more than half a century. Moreover, Prime Minister Hashimoto resigned
in reaction to this vote of no confidence.
For U.S. financial markets, this introduces a significant element of
uncertainty, as we have no idea whether the new Prime Minister's political and
economic agenda will include a sorely needed overhaul of its banking system,
permanent tax cuts, an increase in government spending, and/or lower interest
rates. In fact, if Japan's reform efforts to emerge from recession are
unsuccessful, then the recent coordinated currency intervention to support the
yen/dollar relationship could prove to be short lived.
- --------------------------------------------------------------------------------
(1) Total return figures are historical and assume the reinvestment of
dividends and distributions and the deduction of all Fund expenses. The
actual total returns for owners of the variable annuity contracts or
variable life insurance policies which provide for investment in the Fund
will be lower to reflect separate account and contract/policy charges.
Past performance is not a guarantee of future results. Investment return
and principal value will fluctuate so that the value of your investment,
when redeemed, may be worth more or less than the original cost.
(2) The S&P 500 Index is an unmanaged index of 500 large-cap U.S. stocks that
is generally considered to be representative of U.S. stock market
activity. The S&P 500 Index is not available for direct investment and its
returns do not reflect the fees and expenses deducted from the Fund.
(3) The Dow Jones Industrial Average (DJIA) is an unmanaged average of 30
industrial stocks listed on the New York Stock Exchange that, like the S&P
500 Index, is generally considered to be representative of U.S. stock
market performance. The DJIA is not available for direct investment and
its returns do not reflect the fees and expenses that have been deducted
from the Fund.
- --------------------------------------------------------------------------------
26
<PAGE>
- --------------------------------------------------------------------------------
Nevertheless, investors appear satisfied that any political change in
Japan will likely result in positive economic reform, and U.S. financial markets
surged to record highs in the days following the election.
Back in the United States, we do not believe that the upwardly revised
5.5% level of Gross Domestic Product (GDP) growth reported is sustainable for
the following reasons: the weakness in end-market demand for U.S. goods from
troubled Southeast Asian countries, the strong dollar (which makes our exports
more expensive), the planned reduction of the U.S. inventory overhang, and the
contentious General Motors labor strike. All in, we are forecasting a
deceleration in GDP growth throughout the balance of 1998.
We continue to believe that inflation will remain muted, with consumer and
wholesale levels estimated at 2.0% or less during 1998. Although the U.S. job
market has been very tight, there is very little pricing power for U.S.
companies in the midst of a competitive global marketplace. As a result,
companies do not appear to have the ability to fully pass along the cost of
their employees' higher wages to their customers in the form of higher prices,
for fear of losing market share. This developing trend should continue to
pressure margins and corporate profits, and we are forecasting only moderate
earnings growth of about 6% in 1999.
It remains our long-held belief that Fed Chairman Alan Greenspan does not
wish to potentially exacerbate a global currency or economic crisis by raising
interest rates, so we expect a neutral U.S. monetary policy indefinitely.
After surging to record highs earlier this summer, the Dow Jones
Industrial Average has corrected, reflecting investor concern about the Asian
impact on second quarter 1998 earnings. We believe that this consolidation could
serve as an attractive longer-term buy point, once we get through the release of
earnings. More strength in the market could be expected through Labor Day in a
late summer rally, before the market potentially succumbs to seasonal third
quarter 1998 earnings concerns during September and October.
- --------------------------------------------------------------------------------
Value Line Centurion Fund Profile
as of June 30, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
FOR PERIODS ENDED 6/30/98(1)
================================================================================
1 Year ................................. 27.71%
5 Years ................................ 18.24%
10 Years ............................... 18.12%
Since Inception (11/15/83) ............. 14.75%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
27
<PAGE>
- --------------------------------------------------------------------------------
Value Line Strategic Asset Management Trust
- -----------------------------------------------
[LOGO](R)
Q. How did the SAM Trust perform in the first half of 1998?
A. The Trust earned a total return of 15.36% in the six-month period ended June
30, 1998, nearly equaling its full-year return for 1997.(1) This compared with a
total return of 17.68% for the unmanaged Standard & Poor's 500 Index(2) and a
total return of 4.17%% for the unmanaged Lehman Government/Corporate Bond
Index(3) in the first half of 1998.
For these six months, the Trust ranked 11 out of 342 funds in the flexible
variable annuity category (separate accounts), according to Lipper Analytical
Services.4 For the 12-month period through June 30, the Trust ranked 4 out of
320 funds in its category; for five years, it ranked 24 out of 112 funds; for
ten years, 1 out of 35 funds.
Q. What factors affected performance of the Trust in the six-month period?
A. One key plus was the Trust's increased allocation to stocks. Through most of
1997, only about 45% of the Trust's assets were in stocks, with the remainder in
bonds and cash. In the final two months of 1997 and the first quarter of 1998,
we gradually moved the stock allocation up to about 75%. Given the strong market
in this year's first half, this proved to be the right move.
Another plus was good stock selection. The Trust's stock portfolio
outperformed the S&P 500, in spite of the marked relative weakness of the stock
market's smaller-company stocks (those with market capitalizations of under $5
billion), which make up nearly half of the Trust's stockholdings.
Q. Why did you increase the Trust's investment in stocks?
A. To determine asset allocation among the three asset classes (stocks, bonds,
cash), we use Value Line's proprietary stock and bond models. Our models
incorporate a number of different financial and economic variables; from these
are generated forecasts of the total returns from stocks and bonds in the coming
six months. Last October, the stock market fell in the wake of the economic
crisis in Asia. The cheaper stock prices, combined with falling interest rates,
turned our model more favorably toward the stock market. In the months ahead,
unless we see a large change in stock prices or interest rates, we expect the
Trust's allocation to remain at about 75% stocks, 15%-20% bonds, and 5%-10%
cash. This compares to the Trust's prescribed central tendency of 55% stocks,
35% bonds, and 10% cash.
Q. What strategies were used in stock and bond selection?
A. For stock selection, we stay with stocks that are showing strong earnings
momentum and strong price momentum, relying largely on the proprietary Value
Line stock ranking systems. We maintain a very diversified portfolio of over 200
stocks in many different industries, which aids in reducing risk. For bond
selection, we stay with high-quality issues. This year, we have continued our
program of swapping out of some U.S. Treasuries and into U.S. agencies and
high-rated corporate bonds, where relative yields have become more attractive.
- --------------------------------------------------------------------------------
(1) Total return figures are historical and assume the reinvestment of
dividends and distributions and the deduction of all Fund expenses. The
actual total returns for owners of the variable annuity contracts or
variable life insurance policies which provide for investment in the Fund
will be lower to reflect separate account and contract/policy charges.
Past performance is not a guarantee of future results. Investment return
and principal value will fluctuate so that the value of your investment,
when redeemed, may be worth more or less than the original cost.
(2) The S&P 500 Index is an unmanaged index of 500 large-cap U.S. stocks that
is generally considered to be representative of U.S. stock market
activity. The S&P 500 Index is not available for direct investment and its
returns do not reflect the fees and expenses deducted from the Fund.
(3) The Lehman Government/Corporate Bond Index is an unmanaged index that is
generally considered to be representative of U.S. government and corporate
bond market activity. The Lehman Government/Corporate Bond Index is not
available for direct investment and the returns do not reflect the fees
and expenses that have been deducted from the Fund.
(4) Lipper Analytical Services, Inc. is an independent mutual fund monitoring
and rating service and its database of performance information is based on
historical total returns, which assume the reinvestment of dividends and
distributions, and the deduction of all fund expenses.
- --------------------------------------------------------------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
Value Line Strategic Asset Management Trust
Profile as of June 30, 1998
- -----------------------------------------------
- --------------------------------------------------------------------------------
Top Ten Stock Holdings
1. General Electric Co.
2. Pfizer Inc.
3. Tyco International Ltd.
4. Omnicom Group Inc.
5. Safeway Inc.
6. WalMart Stores Inc.
7. Kohls Corp.
8. Compuware Corp.
9. Symbol Technologies, Inc.
10. Zions Bancorporation
For a complete list of portfolio holdings, please see the Schedule of
Investments.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
FOR PERIODS ENDED 6/30/98(1)
================================================================================
1 Year ................................. 24.66%
5 Years ................................ 14.83%
10 Years ............................... 16.08%
Since Inception (10/1/87) .............. 15.18%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[The following table was depicted as a pie chart in the printed material.]
Portfolio Composition by Asset Class
December 31, 1997 June 30, 1998
----------------- -------------
Cash 15.7% 3.7%
Bonds 27.4% 17.6%
Stocks 56.9% 78.7%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
29
<PAGE>
- --------------------------------------------------------------------------------
MFS Growth with Income Series
- -----------------------------------------------
[Photo of John D. Laupheimer, Jr. Co-Portfolio Manager]
[Photo of Kevin R. Parke Co-Portfolio Manager]
Q. For the six months ended June 30, 1998, how did the Series perform?
A. For the six months ended June 30, 1998, the Series provided a total return of
16.12% (including the reinvestment of any distributions).(1) This compares to a
17.71% return for the Standard & Poor's 500 Composite Index (the S&P 500) for
the same period. The S&P 500 is a popular, unmanaged index of common stock total
return performance. It is not possible to invest directly in an index.(2)
Q. What factors affected the Series' performance and what strategies did you use
to manage the Series during this period?
A. We feel the strength of this portfolio's overall performance is the result of
our adherence to a strong investment discipline. We invest in
large-capitalization, high-quality companies, seek growth at a reasonable price,
strive for a dividend yield that is 90% of that of the S&P 500, seek to keep
volatility lower than that of the S&P 500, and try to stay fully invested. As
important, MFS(R) Original Research(SM), our process of selecting stocks through
in-depth fundamental analysis of companies' earnings outlooks, managements,
business models, competitive strategies, market positions, and growth prospects,
sets us apart and has been a clear factor in our success.
In the financial services sector, we're featuring investments in insurance
companies based on fundamental strengths and as a means of leveraging the
growing trend toward consolidation in this industry. Consolidation should allow
companies to function more efficiently and produce cleaner, more profitable
balance sheets, which positively impact share prices. Because consolidation in
the insurance industry is a newer phenomenon than it is in the banking business,
we are focusing less on banking and brokerage stocks. Some key holdings for the
sector include Hartford Financial Services, Chubb, and Allstate.
Air Products, an industrial gas company, is a new stock in the portfolio's
top 10 that exemplifies the type of company we seek out. It locates its plants
at customer sites, and customers contract to take a certain amount of product or
to pay the difference for what they don't use. Any excess product that the plant
can make is sold to other customers, which helps keep plants running more
profitably. Also, the company has modified its management compensation plan to
focus on earnings growth. As a result, Air Products is more rigorously examining
its corporate investments, which has helped earnings growth more easily reach
the bottom line. The company has potential earnings growth in the mid teens, and
its stock sells for a reasonable price given its earnings prospects, so we get
growth at a good price.
One of the household names in the portfolio, and a long-term holding, is
Gillette. Its much-touted new razor product is an excellent example of the
strength of the company's business model. Unlike companies that rely on gaining
new customers or increasing
- --------------------------------------------------------------------------------
(1) All results are historical and, therefore, are not an indication of future
results. The investment return and principal value of an investment in the
product will vary with changes in market conditions, and shares, when
redeemed, may be worth more or less than the original cost. Returns shown
do not reflect the deduction of the mortality and expense risk charges and
administration fees. Please refer to the annuity product's annual report
for performance that reflects the deduction of the fees and charges
imposed by insurance company separate accounts. All results reflect any
applicable expense subsidies and waivers, without which the performance
results would have been less favorable. Subsidies and waivers may be
rescinded at any time.
(2) The S&P 500 Index is an unmanaged index of 500 large-cap U.S. stocks that
is generally considered to be representative of U.S. stock market
activity. The S&P 500 Index is not available for direct investment and its
returns do not reflect expenses deducted from the Fund.
- --------------------------------------------------------------------------------
30
<PAGE>
- --------------------------------------------------------------------------------
consumption among existing customers, Gillette has built a successful business
by constantly improving its products and convincing customers to pay more for
them.
Consolidation is a theme that has been prominent in many industries
recently. Among mergers that have had an impact on this portfolio is the one
between American Home Products (AHP) and Monsanto. This is a very strategic
merger for both companies. American Home Products, one of the world's largest
pharmaceutical and health care companies, produces products such as Advil and
Robitussin. Monsanto, in addition to producing well-known products like
NutraSweet and Round-Up, has cutting-edge agricultural products that should
thrive under AHP's management and strong financial discipline. We are optimistic
about the new company's growth prospects.
While the portfolio is allowed to invest up to 35% of assets in
international stocks, we'll probably never reach that level. Currently, we're
only about 8% invested in non-U.S. dollar stocks and feel that 10% to 15% is a
reasonable maximum. Investing in foreign and emerging market securities involves
special risks. These risks may increase share price volatility. Please see a
prospectus for details. We only invest overseas if we find a company with
quality and growth potential equivalent to those of a U.S. company and whose
stock is selling at a discount sufficient to compensate for currency risk. As a
result of this investment strategy, the portfolio doesn't have much exposure to
economies in Asia such as Malaysia, Indonesia, and Singapore. Japan is a
consumer economy, and some of our holdings have a presence there.
However, U.S. companies have had a hard time selling products in Japan
because of that country's trade barriers. This has provided some protection
that, combined with the strength of the European and American economies, has
limited the impact of Asian turmoil on stocks in the portfolio.
- --------------------------------------------------------------------------------
MFS Growth with Income Series
Profiles as of June 30, 1998
- -----------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
FOR PERIODS ENDED 6/30/98(1)
================================================================================
1 Year ...................................................................27.77%
Since Inception (10/9/95) ................................................28.96%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Top Ten Stock Holdings
- --------------------------------------------------------------------------------
1. Bristol-Myers Squibb Co. 6. General Electric Co.
2. Exxon Corp. 7. American Home Products Corp.
3. US Bancorp 8. British Petroleum PLC
4. Air Products & Chemicals, Inc. 9. Microsoft Corp.
5. Beneficial Corp. 10. Hartford Financial Services Group,
Inc.
For a complete list of portfolio holdings, please see the Schedule of
Investments.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
31
<PAGE>
- --------------------------------------------------------------------------------
The Guardian Cash Fund
- -----------------------------------------------
[Photo of Alexander M. Grant, Jr. Portfolio Manager]
Q. How did the Fund perform during the first half of 1998?
A. As of June 26, 1998, the effective 7-day annualized yield for the Fund was
5.06%.(1) The Fund produced an annualized total return of 5.07%(2) in the first
half of 1998. In contrast, the effective 7-day annualized yield of Tier One
money market funds, as measured by IBC Financial Data, was 4.91% on June 26,
1998. These funds had a six-month total return of 4.95% for the period ended
June 30, 1998. IBC Financial Data is a research firm that tracks money market
funds.
Q. What was your investment strategy during the year?
A. The Guardian Cash Fund is a place for our investors to put their money while
they determine their preferred long term investment vehicle, be it stocks or
bonds. Also, some of our investors prefer the relative stability of the money
markets. To best accommodate all our investors, we will continue to try to
provide a strong 7-day yield, while offering safety and liquidity. Our
investment strategy was to create a diversified portfolio of money market
instruments that presents minimal credit risks according to our criteria. As
always, we only purchased securities from issuers that had received ratings in
the two highest credit quality categories established by nationally recognized
statistical ratings organizations like Moody's Investors Service, Inc., and
Standard & Poor's Corporation for the Fund's portfolio. At month-end June 1998,
most of the portfolio (94.4%) was invested in commercial paper; the balance
(5.6%) was invested in repurchase agreements.
Q. What factors affected the Fund's performance?
A. Money market funds are directly affected by the actions of the Federal
Reserve Board. The Federal Reserve last changed the Fed Funds target from 5.25%
to 5.50% on March 25,1997. The Discount Rate was left unchanged at 5.00%. This
move followed several months of strong economic data, particularly with respect
to housing data, consumer consumption and payroll data, but has since held
steady in the absence of consistent inflation indicators. The Fed Funds target
is the rate at which banks can borrow from each other overnight. While the
Federal Reserve Board does not set this rate, it can establish a target rate
and, through open market operations, the Fed can move member banks in the
direction of that target rate. The Discount Rate is the rate at which banks can
borrow directly from the Federal Reserve. Uncertainty with the direction of the
stock market contributed to large daily inflows and outflows of funds in the
Cash Fund. As the stock market rallied, our investors transferred cash to equity
funds. During those times when the stock market stalled, we saw cash inflows.
Another factor affecting performance was the portfolio's average maturity -- 29
days as of June 30, 1998. The average Tier One money market fund as measured by
IBC Financial Data had an average maturity of 52 days.
- --------------------------------------------------------------------------------
INVESTMENTS IN THE FUND ARE NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. WHILE THE FUND SEEKS TO MAINTAIN A STABLE PRICE OF $10.00 PER SHARE,
THERE IS NO ASSURANCE THAT IT WILL BE ABLE TO DO SO.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Yields are annualized historical figures. Effective yield assumes that
income is reinvested. Yields will vary as interest rates change. Past
performance is not a guarantee of future results.
(2) Total return figures are historical and assume the reinvestment of
dividends and distributions and the deduction of all Fund expenses. The
actual total returns for owners of the variable annuity contracts or
variable life insurance policies that provide for investment in the Fund
will be lower to reflect separate account and contract/policy charges.
Past performance is not a guarantee of future results. Investment return
and principal value will fluctuate so that the value of your investment,
when redeemed, may be worth more or less than the original cost.
- --------------------------------------------------------------------------------
32
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33
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- --------------------------------------------------------------------------------
MFS(R) Emerging Growth Series
- -----------------------------------------------
[Photo of John W. Ballen Portfolio Manager]
[Photo of Toni Y. Shimura Portfolio Manager]
For the six months ended June 30, 1998, the Series provided a total return
of 21.54% (including the reinvestment of any distributions). This compares to a
4.93% return for the Russell 2000 Total Return Index (the Russell 2000) and to a
17.71% return for the Standard & Poor's 500 Composite Index (the S&P 500) for
the same period. The Russell 2000 is an unmanaged index comprised of 2,000 of
the smallest U.S.-domiciled company common stocks (on the basis of
capitalization) that are traded in the United States on the New York Stock
Exchange, the American Stock Exchange, and NASDAQ. The S&P 500 is a popular,
unmanaged index of common stock total return performance.
Low inflation, low interest rates, and a robust U.S. economy created a
positive backdrop for emerging growth stocks in the first half of 1998. It was,
however, a volatile period. Although seemingly far away, the economic problems
in Asia were probably the most important factors affecting the U.S. market
during this period. Concerns relating to Asia drove liquidity premiums to very
high levels -- in other words, investors were willing to pay much higher
valuations for the liquidity offered by bigger-capitalization stocks.
Consequently, the mid-cap and larger-cap growth stocks in our portfolio tended
to outperform the smaller stocks during this period. Also, concerns about Asia
affected companies with significant exposure to the region, such as technology
stocks, many of which experienced a roller-coaster ride. Fortunately, the
portfolio's technology holdings were primarily in computer software and
networking rather than in the more volatile semiconductor stocks, which have a
lot of business in Asia.
The Series continued to benefit from the solid performance of its
technology holdings, whose earnings were surprisingly strong despite issues
relating to Asia. Stocks that contributed to performance included Cisco Systems,
Microsoft, SAP, BMC Software, and Compuware -- all of whose products were in
strong demand by companies seeking increased productivity. Consolidation in the
telecommunications industry helped increase value in holdings such as WorldCom,
MCI, and Global Telesystems. Better-than-expected earnings and industry
consolidation also helped other companies, such as Tyco International and
AirTouch. Cendant, a hotel, real estate, and consumer services company
franchiser that was created by a merger of HFS and CUC International, has been a
major disappointment. Earlier this year the company uncovered potential
accounting fraud in the former CUC, and we're closely monitoring the situation
while the company reviews its accounting practices and attempts to uncover the
depth of the problem.
Looking ahead, we see a number of things affecting our market. First, the
potential for interest rates to rise from currently very low levels is something
we're always on the lookout for, given the continued strength of the U.S.
economy and the tight labor market. If rates rise, the valuations of
interest-sensitive stocks such as financials and television and radio
broadcasters could come under pressure. So, to be on the cautious side, we have
trimmed back on some of our holdings in these areas.
Second, we believe we are at the beginning of an ongoing slowdown in
profit growth for both the economy and the S&P 500. We've already seen the early
manifestations of this in the first half of 1998, with earnings disappointments
for quite a few companies. We think this bodes well for emerging growth stocks
because many of them are expected to generate earn-
- --------------------------------------------------------------------------------
34
<PAGE>
ings growth far superior to that of the broader market. As a result, technology
continues to be an area of emphasis since selected software and networking
companies are generating some of the strongest, most consistent earnings growth
we have been able to identify. Another area we believe offers great potential is
the business and computer services market, for example, information technology
and outsourcing firms that help other companies focus on their core businesses.
Telecommunications is another industry displaying opportunities due to
increased competition and global consolidation. In our view, the companies that
can grow the fastest will be well rewarded by the marketplace. Thus, we believe
that our strategy of searching out rapidly growing companies early in their
developments and growth stocks at reasonable prices should benefit investors in
1998.
- --------------------------------------------------------------------------------
MFS(R) Emerging Growth Series
as of June 30, 1998
- -----------------------------------------------
Sector Weightings of Common Stocks
Held by the Fund on June 30, 1998
[The following table was depicted as a pie chart in the printed material.]
Industrial Goods & Services 1.51%
Technology 38%
Miscellaneous 12.84%
Leisure 12.15%
Financial Services 2.58%
Retailing 13.36%
Utilities and Communications 8.54%
Autos & Housing 0.40%
Consumer Staples 0.29%
Health Care 10.34%
- --------------------------------------------------------------------------------
Top 10 Holdings as of 6/30/98
- --------------------------------------------------------------------------------
1. Cisco Systems 5.65%
2. Tyco Intl. 5.37%
3. Microsoft Corp. 4.87%
4. Computer Assoc Intl. 4.78%
5. Cendant Corp. 4.40%
6. BMCSoftware 4.27%
7. SAP AG PRF NON VTG DEM5 3.94%
8. Oracle Corp. 3.77%
9. Compuware Corp. 3.73%
10. United Healthcare 3.22%
For a complete list of portfolio holdings, please see the Schedule of
Investments.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average Annual Returns for Periods Ended 6/30/98(1)
10 Years/
6 Months 1 Year Life*
- --------------------------------------------------------------------------------
Cumulative Total Return +21.54% +33.72% +103.55%
- --------------------------------------------------------------------------------
Average Annual Total Return -- +33.72% + 27.38%
- --------------------------------------------------------------------------------
* For the period from the commencement of the Series' investment operations,
July 24, 1995, through June 30, 1998.
All results are historical and assume the reinvestment of dividends and
capital gains. Investment return and principal value will fluctuate, and
shares, when redeemed, may be worth more or less than their original cost.
Past performance is no guarantee of future results. Performance results
reflect any applicable expense subsidies and waivers, without which the
results would have been less favorable. Subsidies and waivers may be
rescinded at any time. See the prospectus for details.
Returns shown do not reflect the deduction of the mortality and expense
risk charges and administration fees. Please refer to the annuity
product's annual report for performance that reflects the deduction of the
fees and charges imposed by insurance company separate accounts.
Investing in small or emerging growth companies involves greater risk than
is customarily associated with more-established companies. These risks may
increase share price volatility.
35
<PAGE>
- --------------------------------------------------------------------------------
MFS Total Return Series
- -----------------------------------------------
[Photo of David M. Calabro, Portfolio Manager]
For the six months ended June 30, 1998, the Series provided a total return
of 8.68% (including the reinvestment of any distributions). This compares to a
17.71% return for the Standard & Poor's 500 Composite Index (the S&P 500), a
popular, unmanaged index of common stock total return performance, and to a
4.11% return for the Lehman Brothers Government Corporate Bond Index (the Lehman
Index), an unmanaged, market-value-weighted index of U.S. Treasury and
government-agency securities (excluding mortgage-backed securities) and
investment-grade domestic corporate debt.
Given what we view as high valuations in the stock market, the Series has
maintained a fairly conservative weighting in equities. Currently, approximately
59% of assets are invested in common stocks, convertibles, and preferred
securities, which is below that of the balanced-fund peer group.
In stocks, the Series' largest sector weighting is financial services, an
industry in which valuations are attractive and earnings growth is higher than
that of the average company. Earnings growth rates for these companies are in
the double digits, and their yields are good. Also, consolidation has made this
sector more attractive as these companies are able to cut costs. Holdings
include National City and PNC in banking and Lincoln National in insurance.
Another large sector is utilities and communications, in which we see some
attractive opportunities. On the electric side, we think growth is modest but
valuations are attractive compared to the S&P 500. This is the case in
telecommunications, but there is also ongoing consolidation and growth, both of
which we think could enhance capital appreciation.
We continue to shy away from the technology sector. Given our objective to
provide consistent returns with low volatility, we have not seen much
opportunity within this sector.
As the year progresses, we believe it will become more difficult to make
money in the equity markets because prices continue to rise while corporate
earnings are slowing.
Based on our outlook for interest rates remaining low, the duration, or
sensitivity to changes in interest rates, of the Series' bond allocation is
slightly longer than that of the Lehman Index. Most of this allocation is in the
corporate sector because we believe that as long as the economy remains sound
and inflation remains low, corporate bonds should continue to perform well.
About 20% of this allocation is in high-yield corporates. Healthy economic
growth has contributed to the high-yield market's performance as more companies
have posted improved operating results and have had little trouble making their
debt payments. The biggest high-yield sector is media and entertainment and
includes Time Warner, News Corp., and Telecommunications, Inc. This industry
continues to benefit from consolidation and cost cutting resulting from the 1996
Telecommunications Act.
- --------------------------------------------------------------------------------
36
<PAGE>
- --------------------------------------------------------------------------------
MFS Total Return Series
as of June 30, 1998
- -----------------------------------------------
Sector Weightings of Common Stocks
Held by the Fund on June 30, 1998
[The following table was depicted as a pie chart in the printed material.]
Energy -- 12.55%
Transportation -- 0.90%
Miscellaneous -- 3.00%
Utilities and Communications -- 13.74%
Basic Materials -- 5.83%
Industrial Goods & Services -- 8.57%
Financial Services -- 25.34%
Technology -- 3.18%
Autos & Housing-- 3.60%
Consumer Staples -- 7.88%
Health Care 8.14%
Leisure -- 1.62%
Retailing -- 5.67%
- --------------------------------------------------------------------------------
Top 10 Holdings as of 6/30/98
1. British Pete Ads (6 Ord) 3.10%
2. Bristol Myers Squibb 3.03%
3. General Electric 2.21%
4. National City 2.00%
5. International Business 1.96%
6. Lincoln National 1.95%
7. Allied Signal Inc. 1.95%
8. Akzo Nobel NV NLG20 1.91%
9. GTE Corp. 1.90%
10. Chubb Corp. 1.77%
For a complete list of portfolio holdings, please see the Schedule of
Investments.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average Annual Returns for Periods Ended 6/30/98(1)
10 Years/
6 Months 1 Year 3 Years Life*
- --------------------------------------------------------------------------------
Cumulative Total Return +8.68% +18.36% +69.45% +92.11%
Average Annual Total Return -- +18.36% +19.22% +20.57%
- --------------------------------------------------------------------------------
* For the period from the commencement of the Series' investment operations,
January 3, 1995, through June 30, 1998.
All results are historical and assume the reinvestment of dividends and
capital gains. Investment return and principal value will fluctuate, and
shares, when redeemed, may be worth more or less than their original cost.
Past performance is no guarantee of future results. Performance results
reflect any applicable expense subsidies and waivers, without which the
results would have been less favorable. Subsidies and waivers may be
rescinded at any time. See the prospectus for details...
Returns shown do not reflect the deduction of the mortality and expense
risk charges and administration fees. Please refer to the annuity
product's annual report for performance that reflects the deduction of the
fees and charges imposed by insurance company separate accounts.
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus for the product being offered. Please
read it carefully before investing or sending money.
- --------------------------------------------------------------------------------
37
<PAGE>
- --------------------------------------------------------------------------------
MFS Bond Series
- -----------------------------------------------
[Photo of Geoffrey Kurinsky, Portfolio Manager]
For the six months ended June 30, 1998, the Series provided a total return
of 3.60% (including the reinvestment of any distributions). This compares to a
4.11% return for the Lehman Brothers Government/ Corporate Bond Index (the
Lehman Index), an unmanaged, market-value-weighted index of U.S. Treasury and
government-agency securities (excluding mortgage-backed securities) and
investment-grade debt obligations of domestic corporations.
The Series has been helped by its overweightings in investment-grade
corporate bonds and high-yield securities. We have had, on average, a 50%
weighting in investment-grade corporates and roughly 20% in the high-yield
market, which is the Series' maximum allocation. The Series has had almost no
allocation in international government bonds, based on our view that yields have
converged among the United States, Germany, and the other European countries, to
basically a 6% yield. Thus, we think the United States is the most attractive
market. Inflation in the United States is low, the economy is strong, and we
have the market leaders in many major industries, most notably in technology and
telecommunications. The Series' largest exposure is in the media sector, the
credit quality of which continues to improve. There has been a lot of
consolidation in this business, and companies have benefited from strong cash
flows and refinancings of some of their older, higher-coupon debt. Holdings here
include Time Warner, Telecommunications, Inc., and Continental Cablevision.
Currently, the Series' duration, or sensitivity to changes in interest
rates, is about seven years, which is its usual maximum. It is our view that,
with inflation at about 1.5%, and 10-year U.S. Treasuries at around 5.5% and
perhaps moving down a little, the environment for fixed-income securities is
very attractive.
Looking ahead, the biggest risks to the bond market are the possibility
that the U.S. economy grows too fast and the Asian slowdown that people are
counting on does not develop. If economic growth continues at a 4% to 5% annual
rate, there's no Asian-induced slowdown, and we start to see some early signs of
inflation, the Federal Reserve Board (the Fed) could be forced to raise
short-term interest rates, even if there still are no inflation pressures.
However, if interest rates and inflation remain steady and the U.S. economy
continues to grow at a moderate pace, which is what we expect, it will be a
positive environment for investment-grade corporate and high-yield bonds, as
well as for some of the emerging markets, which are very sensitive to changes in
short-term interest rates.
- --------------------------------------------------------------------------------
38
<PAGE>
- --------------------------------------------------------------------------------
MFS Bond Series
as of June 30, 1998
- -----------------------------------------------
- --------------------------------------------------------------------------------
MFS VARIABLE INSURANCE TRUST
PORTFOLIO CHARACTERISTICS
================================================================================
MFS Bond Series
Asset allocation (% of assets)
- ------------------------------
Corporates .......................... 26.3%
US Government/Agency ................ 37.2%
Mortgage-backed ..................... 8.1%
Other ............................... 28.4%
------
100.0%
Portfolio quality (% of bonds)
- ------------------------------
Government .......................... 46.6%
A-AAA ............................... 9.8%
B-BBB ............................... 40.8%
Unrated ............................. 2.8%
------
100.0%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TOP TEN HOLDINGS (% OF ASSETS)
ISSUE, COUPON RATE, MATURITY DATE
================================================================================
MFS Bond Series % of
Asset allocation (% of assets) Assets
- ------------------------------ ------
US Treasury Note - 6.250 Aug 31 02 .......................... 15.8%
US Treasury Bond - 6.125 Nov 15 27 .......................... 14.3%
Crimi Mae 98 7.000 Mar 02 11 ................................ 3.7%
Single Family
(GNMA) coupon 7.500 ....................................... 2.6%
Goldman Sachs
Group - 5.900 5.9000 Jan 15 03 ............................ 2.4%
OwensILLInc 7.50 May 15 10 ................................. 2.4%
15 Year FNMADwarf 15 Year Coupon ............................ 2.3%
Single Family(GNMA)coupon 8.000 ............................. 2.3%
US Treasury Note - 5.50% Jan 31 03 .......................... 2.3%
US Treasury Note - 6.500 Oct 15 06 .......................... 2.1%
----------
Average Life ................................................ 12.7 years
Average Duration ............................................ 6.6 years
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average Annual Returns for Periods Ended 6/30/98(1)
10 Years/
6 Months 1 Year Life*
- --------------------------------------------------------------------------------
Cumulative Total Return +3.60% +10.91% +19.98%
- --------------------------------------------------------------------------------
Average Annual Total Return -- +10.91% +7.02%
- --------------------------------------------------------------------------------
* For the period from the commencement of the Series' investment operations,
October 24, 1995, through June 30, 1998.
All results are historical and assume the reinvestment of dividends and
capital gains. Investment return and principal value will fluctuate, and
shares, when redeemed, may be worth more or less than their original cost.
Past performance is no guarantee of future results. Performance results
reflect any applicable expense subsidies and waivers, without which the
results would have been less favorable. Subsidies and waivers may be
rescinded at any time. See the prospectus for details.
Returns shown do not reflect the deduction of the mortality and expense
risk charges and administration fees. Please refer to the annuity
product's annual report for performance that reflects the deduction of the
fees and charges imposed by insurance company separate accounts.
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus for the product being offered. Please
read it carefully before investing or sending money.
- --------------------------------------------------------------------------------
39
<PAGE>
- --------------------------------------------------------------------------------
American Century VP Value Fund
- -----------------------------------------------
[Photo of Phil Davidson, Portfolio Manager]
Q. How did the fund perform for the six months ended June 30, 1998?
A. VP Value lagged its benchmark during the first half of 1998, returning just
5.90%. The fund's benchmark, the S&P 500/BARRA Value Index, gained 12.13%, while
the S&P 500 registered a 17.66% return.
Q. What explains the fund's performance compared to the broader market?
A. VP Value's lackluster performance was dictated primarily by its investment
style and the size of the companies it tends to own. During the first six months
of the year, growth stocks provided the best returns while value stocks lagged.
Investors also continued to favor the larger, better known companies that drive
the S&P 500 Index. These larger companies became attractive to investors in late
1996 amid fears that the Federal Reserve would increase short-term interest
rates. The preference for larger companies continued through the Asian currency
crisis that unfolded a year later. Investors held onto the stocks of bigger,
better known companies--even those with exposure to Asian economies--because
larger companies are generally easier to trade. Liquidity is an attractive
feature in an uncertain or volatile market. At the same time, the midsize
companies VP Value focuses on became more difficult to trade.
Although style and capitalization factors have dampened recent
performance, we believe the market's ongoing preference for bigger companies is
unsustainable. Many large-cap stocks currently are selling at record highs and,
in our opinion, have little potential for additional gains. In the meantime, the
popularity of large-cap stocks and the depressed prices of many mid-cap stocks
have created a wealth of opportunity for value investors. We are finding many
mature, out-of-favor mid-cap companies whose stocks are attractively priced from
a risk-reward and value standpoint.
Q. What caused VP value to underperform its benchmark?
A. VP Value was underweighted relative to the S&P 500/BARRA Value Index in
several better-performing industries, including financial services and
communications stocks. Perhaps more significant, however, was the fund's
overweighting in industries that suffered the effects of deflationary pricing
pressures. The energy and basic materials industries serve as good examples.
We increased the fund's holdings in energy producers in late 1997, as
global demand/supply imbalances depressed energy prices and valuations became
attractive. As 1998 unfolded, oil prices remained under pressure while domestic
natural gas prices were stable to improving. Oil stocks may benefit from OPEC
production cuts, while domestic natural gas producers should experience
seasonally stronger pricing. We expect that as cooler weather approaches, demand
for oil and gas will increase, and the portfolio is positioned to benefit from
this changing environment. We are particularly attracted to domestic producers
of natural gas because this key fuel continues to enjoy moderate demand growth.
Prices of basic materials companies fell in response to overcapacity and
the economic turmoil in Asia, which made them attractive on a valuation basis.
When prices are depressed, supply generally contracts. Over time, prices should
recover as inventories dwindle and demand remains steady.
Q. Which stocks or sectors added most to returns?
A. Several of VP Value's top performers were general merchandise and grocery
retailers. The stock that contributed the most to performance was, for the
second consecutive period, Giant Food, Inc. This was also VP
- --------------------------------------------------------------------------------
40
<PAGE>
- --------------------------------------------------------------------------------
Value's largest holding at 4.5% of investments at December 31, 1997. Giant Food
is a leading chain of retail food stores and pharmacies. The company recovered
from an employees strike in 1997 and subsequently implemented an aggressive
merchandising program, which resulted in solid sales gains in a somewhat
sluggish market. Giant's stock price rose sharply in May 1998 upon the news that
it would be acquired by Ahold, a Netherlands-based global food retailer with
significant properties in the United States. We subsequently sold our position
at a substantial gain.
Other retailers that added to performance were Dillard's, Inc., a
department store chain with more than 270 outlets nationwide, and Mercantile
Stores, which operates about 100 stores primarily in the South and Midwest.
Dillard's operating margins had been under pressure due to inordinately high
inventories, which forced the company to market aggressively in late 1997. That
resulted in a sharp reduction in earnings. Meanwhile, Mercantile struggled with
lower-than-expected revenue growth and rising costs. The tide turned for both
companies in May, when it was announced that Dillard's would acquire
Mercantile--a marriage we think is a good fit, given that Mercantile's stores
are located primarily in markets where Dillard's has not had a presence. We
purchased Mercantile at various times over the last two years at prices between
$45 and $65 per share, and sold it at $79 after the acquisition was announced.
We continue to hold a position in Dillard's.
Outside the retail sector, top-performing stocks included Beckman-Coulter,
Inc. and Cooper Industries. Beckman-Coulter makes laboratory instruments and
related products, such as centrifuges, reagent supplies and systems that detect
and quantify various substances in blood and other fluids. The company has
benefited from the expectation that its 1997 acquisition of Coulter Corp.,
another manufacturer of laboratory instruments and supplies, will add to
earnings and cash flow over the long term. We initially purchased the stock in
September 1997 at attractive prices.
Cooper Industries manufactures electrical products, tools and hardware,
and automotive products. The company's stock appreciated after management
announced in April 1998 its intention to sell its automotive arm. We sold our
holdings as the stock reacted positively to this announcement, reaching a level
we believe represented fair value. We rebuilt a position in Cooper in June,
following a slight earnings shortfall that brought the stock's price back within
our value parameters.
Q. Which stocks were disappointing?
A. VP Value's worst performing stock during the six months was BetzDearborn.
This company is one of the world's leading suppliers of chemicals, equipment and
services for treating industrial and commercial water systems. The company has
suffered recently on two fronts. Although just 6% of BetzDearborn's revenues are
derived from the Far East, that region of the world represented the company's
most rapidly growing market. The collapse of the Asian economies effectively
stalled the company's growth engine. BetzDearborn's troubles were further
compounded by unexpected costs associated with the merger of Dearborn with Betz
in 1996. However, we are maintaining the position because we are confident
BetzDearborn will overcome these short-term difficulties.
Mercantile Bancorporation, Inc., which was the fund's best performing
stock in the second half of last year, saw its share price fall. Although the
banking and financial services sector in general is booming, stock price
appreciation in the last six months has been concentrated primarily among the
big money center banks, while regional groups underperformed. We favor regional
banks because they generally are more attractively valued and have lower risk
profiles than bigger banks. We began buying Mercantile when its price was around
$30 per share. The stock closed out 1997 at $60 per share -- a record high --
and then dropped to about $50 per share. Mercantile is very
- --------------------------------------------------------------------------------
41
<PAGE>
- --------------------------------------------------------------------------------
solid, its fundamentals remain good, and we're very pleased with the
contributions this stock has made to the portfolio over time. We believe we will
see additional price appreciation going forward.
Although food and beverage stocks contributed significantly to
performance, one stock in this sector was disappointing. IBP, the world's
largest beef and pork processor, suffered lower-than-expected earnings when the
Asian economic crisis hurt the company's export business. More recently, food
safety concerns, plant start-up costs and an abundant supply of meat combined to
drive stock prices down. However, IBP's plans to strengthen its core meat
operations and its efforts to grow its animal by-products division bode well for
the future, so we are maintaining our position.
Q. What changes did you make to the portfolio during the six months?
A. We increased energy holdings as their valuations became increasingly
attractive. We decreased the fund's holdings in general merchandise and food
retailers, as consolidation within these sectors drove prices to what we believe
are fair valuations. We also increased holdings in specialty chemical companies,
based on their attractive valuations and good long-term business prospects.
Specialty chemical companies are more stable than their commodity chemical
siblings, and have less exposure to economic downturns.
Q. What is your outlook going forward?
A. VP Value's investment objective is long-term capital growth. In pursuing that
objective, the fund attempts to participate in up markets and also protect
assets in down markets. We believe the current narrow market leadership,
dominated by large-cap stocks demonstrating near-term growth, is unsustainable.
We continue to search for and purchase securities of sound, established
businesses in the mid-cap range. We remain confident VP Value's performance will
improve with the return of a more normal market environment -- one in which
stock prices advance in line with company earnings and value.
- --------------------------------------------------------------------------------
American Century VP Value Fund
as of June 30, 1998
- -----------------------------------------------
- --------------------------------------------------------------------------------
Top Five Industries
% of Fund Investments
as of as of
6/30/98 12/31/97
1. Energy 13.6% 9.1%
2. Food & Beverage 8.3% 5.4%
3. Chemicals & Resins 8.2% 5.4%
4. Utilities 7.7% 2.0%
5. Banking 7.5% 6.1%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Top 10 Holdings
% of Fund Investments
as of as of
6/30/98 12/31/97
1. AMP, Inc. 2.7% 1.3%
2. GTech Holdings Corp. 2.7% 1.4%
3. Mercantile Bancorp., Inc. 2.6% 2.6%
4. Burlington Resources, Inc. 2.5% 2.1%
5. Superior Industries Int'l, Inc. 2.5% 2.2%
6. CIT Group Holdings, Inc. 2.5% --
7. Archer-Daniels-Midland Co. 2.5% 1.2%
8. Browning-Ferris Indus., Inc. 2.4% --
9. IBP, Inc. 2.4% 2.3%
10. Pacificorp 2.3% --
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
42
<PAGE>
- --------------------------------------------------------------------------------
American Century VP International Fund
- -----------------------------------------------
[Photo of Henrik Strabo, Portfolio Manager]
[Photo of Mark Kopinski, Portfolio Manager]
VP International performed very well during the first six months of its fiscal
year. It has been among the better performing international funds for the last
three years. What are some of the reasons for the strong returns?
While we do not invest the portfolio with a specific index in mind, we're
gratified that our investment approach again allowed us to outperform the Morgan
Stanley Capital International EAFE Index for the six months ended June 30, 1998.
VP International returned 25.30% for the period, compared with EAFE's 15.93%.
For the 12 months ended June 30, VP International was up 25.12%, more than
quadruple the EAFE index return of 6.10%. The three-year return of 22.43%
doubled the 10.69% for EAFE.
Relative to EAFE, VP International had more exposure to European stocks
and a lighter weighting in Asian companies, which largely explains the
difference in performance.
VP International has also performed much better than most foreign stock
funds during the six months. According to Lipper Analytical Services Inc., a
major independent mutual fund research firm, VP International finished in the
top 5% of 110 international funds for the six months ended June 30 and in the
top 7% of 104 funds for the 12 months ended June 30. For the three years ended
June 30, VP International was in the top 9% of 68 international funds. (Lipper
rankings are based on average annual returns.)
We believe our success in the current uncertain global economic
environment is attributable to our disciplined investment style of focusing on
companies whose earnings are growing at an accelerating rate. As we discussed in
the annual report six months ago, this approach pointed us toward faster growing
European businesses and away from slower growing companies in Asia and Japan.
Although we are currently heavily invested in Europe, our investment style
is not guided by factors such as country or sector weightings. The investment
team continually monitors such macro factors as a country's political and
economic stability, but our primary strategy is to own companies with
accelerating revenues and earnings regardless of where they are located.
What were some of the holdings that contributed most significantly to returns?
Among the best performing industry groups in the portfolio were banking,
financial services, computer software and services, and communications services
companies. We were able to find many companies from among these groups in Europe
where evolving economic trends are starting to transform the business
environment.
The introduction of a single currency in 1999, corporate restructuring,
privatization, industrial modernization, strong consumer demand, labor and
pension reform and a renewed focus by corporate management on the bottom line
are some of the forces at work in Europe.
Nowhere in the European modernization movement are these factors more
apparent than in the communications industry.
Mannesmann AG, a German information technology and engineering firm, is
one of the leading providers of cellular telephone service in Germany. As one of
the largest holdings in the portfolio, Mannesmann represented about 2.5% of
investments
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at June 30 and was one of our best performing stocks. The extraordinary
popularity of cellular service across the European continent is largely
responsible for Mannesmann's performance. Many investors started to pull back
from some of the cellular service providers early this year, feeling that market
penetration could not expand much more. But cellular subscriptions in Europe
continue to grow at a surprising rate. This growth in the cellular business has
helped fuel Mannesmann's earnings progress.
While several new telecom ventures have been started in Europe in the last
year, Mannesmann's established mobile and fixed facility service in Germany, and
smaller operations in France and Italy, position the company to become a major
competitor in the expanding European communications business. In addition,
Mannesmann's once unprofitable engineering division has also started to
contribute to earnings. Other strong contributors from the telecommunications
and cellular group include Alcatel Alsthom, Nokia, and Ericsson Telephone.
Referring to the chart that follows you will see that financial services
was the largest industry holding in the portfolio at 12.6% of investments. It
was also one of the best performing groups. Europe's changing attitude toward
the investment of personal savings means financial institutions are
well-positioned to take advantage of the growing interest in retirement
planning. Financial service institutions are starting to offer updated
investment products as individuals seek to shift out of traditional savings
vehicles and into investment-oriented products.
Some of the top performing financial services names in the portfolio were
ING Groep N.V., Julius Baer Holding AG, Banca Intesa SPA, and AMVESCAP.
Pension modernization is also stimulating demand for mutual funds, which
have been largely unavailable in Europe until recently. As a result, the asset
management business is starting to see significant inflows, similar to the
United States in the early 1980s.
Julius Baer Holding AG, a Swiss-based private banking concern with a
substantial asset management capability, represented more than 2% of the
portfolio at the end of the period. Banca Intesa SPA is one of the largest asset
managers in Italy, a country where cash flows into mutual funds have been very
strong. AMVESCAP, another major asset manager, has a global reach, having
recently acquired LGT Asset Management and AIM Management Group in 1997. The
European mutual fund business has the potential to experience similar growth
rates to the U.S. fund business over the past 20 years.
Were there any stocks that didn't do as well as you had expected?
In general, commodity-based companies, including energy and chemicals, did
not do well. Asian economic problems and the worldwide decline in oil prices
hurt the energy exploration and production companies in the portfolio. The drop
in oil prices and the fall-off in demand affected several energy exploration
companies, including British-Borneo Petroleum, Transocean Offshore and Woodside
Petroleum LTD.
Takeda Chemical also was down after earnings dropped following a
restructuring of the government-controlled pharmaceutical pricing framework.
Did you make any significant changes to the portfolio during the last six
months?
As mentioned earlier, we made a significant move into cellular and
telecommunications companies. After reducing holdings in Nokia, Phillips
Electronics, Ericsson and Alcatel at the onset of the Asian economic crisis in
mid-1997, we moved back into these names this year. Cellular order growth
continued to expand and demand for cellular services at the consumer level
remained high. Moreover, our analysis indicated earnings continued on the
upswing. We were able to build positions in these growth companies at lower
prices and then saw them move back beyond their 1997 highs.
We also reduced holdings in Novartis AG to less
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than 2% of total investments from 3.7% six months ago because of a slowdown in
earnings growth.
Do you expect to make any portfolio adjustments, given that the Asian economic
crisis is the dominant factor in the international investment picture?
VP International's exposure to Asian companies had already been cut back
last year and was reduced further during the six months.
As mentioned earlier, our bottom-up investment process led us to focus
primarily on European companies at a time when Asian companies began to suffer
from economic deterioration. Business fundamentals have been improving in
Europe, economies are accelerating and earnings and profit surprises are largely
on the positive side. Almost exactly the opposite is generally the case in Asia
right now.
The fact that we, and many others, are not currently investing heavily in
Asian and Pacific Rim markets doesn't mean we aren't looking there. We continue
to evaluate the situation and expect to be there in a responsible way once
earnings start to grow or a positive catalyst emerges to brighten the earnings
outlook.
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American Century VP International Fund
as of June 30, 1998
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Top Five Industries
% of Fund Investments
as of as of
6/30/98 12/31/97
1. Financial Services 12.6% 12.6%
2. Communications Services 11.3% 5.5%
3. Computer Software
and Services 10.5% 6.6%
4. Banking 7.7% 11.7%
5. Automobiles & Auto Parts 4.7% --
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VP International's Investments by Country
Investments by Country
As of As of
6/30/98 12/31/97
United Kingdom 14% 18%
France 14% 10%
Germany 13% 8%
Netherlands 9% 9%
Switzerland 8% 12%
Sweden 4% 2%
Japan 4% 8%
Canada 4% 4%
Other 30% 29%
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Top 10 Holdings
% of Fund Investments
as of as of
6/30/98 12/31/97
1. ING Groep N. V. 2.58% 2.0%
2. Mannesmann AG 2.5% 1.4%
3. Julius Baer Holding AG 2.3% 1.6%
4. Vivendi 2.0% --
5. Volkswagen AG 1.9% --
6. MISYS PLC 1.8% 1.8%
7. Nestle S.A. 1.7% 0.9%
8. Cap Gemini N.V. 1.6% 1.0%
9. Telefonica de Espana 1.5% 0.7%
10. UBS AG 1.5% 1.8%
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Types of Investments in the Portfolio
as of June 30, 1998
Preferred Stocks 3%
Temporary Cash Investments 10%
Common Stocks 87%
as of December 31, 1997
Preferred Stocks 2%
Temporary Cash Investments 7%
Common Stocks 91%
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Fidelity VIP III Growth Opportunities Portfolio
- -----------------------------------------------
An interview with George Vanderheiden Portfolio Manager of Growth Opportunities
Portfolio.
Q. How did the fund perform relative to its benchmark.
A. During the six months that ended June 30, 1998, the fund's return trailed
that of the Standard & Poor's 500 Index, which returned 17.71%. For the 12
months that ended June 30, 1998, the fund also trailed the S&P 500, which
returned 30.16%.
Q. Why did the fund lag the S&P 500 over the past six months?
A. Stocks in the technology and nondurables sectors hurt the fund's performance
relative to the S&P 500. Several of the fund's technology holdings declined due
to stock-specific factors as well as reduced demand caused by economic weakness
in Asia. Nondurables were a detractor primarily due to the poor performance of
Philip Morris. The failed attempt at a tobacco industry settlement and the
uncertainty surrounding future litigation and government legislation turned
market sentiment against many tobacco companies. The fund's bond and cash
holdings also hurt performance, accounting for over half of the underperformance
relative to the S&P500.
Q. Did you change the fund's allocation to bond and cash equivalents?
A. The allocation to bonds and cash equivalents was reduced slightly during the
period. Bonds ended the period under 11% of the fund's investments and cash
stood at about 4%. In addition to keeping the fund diversified across industry
sectors, I invest in bonds when I feel they are attractively priced. I
originally purchased bonds as a hedge against slowing corporate earnings growth.
Although the deceleration in earnings growth has taken longer than I expected,
deflation -- price declines -- remains a potential shock to the economy that
could disrupt the stock market.
Q. What strategies helped the fund's performance?
A. On the positive side, the fund benefited from an overweighted position
relative to the S&P 500 in the retail sector, as well as good performance from
specific retail stocks. Fund holdings Lowe's, Home Depot and Wal-Mart Stores --
all top holdings during the period -- displayed strength as investors favored
retail stocks that were positioned to perform well in a slow-growth,
low-inflation environment. Good stock selection among utilities holdings also
helped returns. Vodafone Group, a telecommunications company based in the United
Kingdom, benefited from strong earnings due to higher subscriber growth and
increased contribution from its overseas operations.
Q. Did you make any adjustment to the fund's sector positioning during the past
six months as a result of the Asian financial crisis?
A. In many ways, the U.S. consumer has been the beneficiary of the faltering
Asian economies. Interest rates, inflation and oil prices have all declined due
to reduced demand emanating from Asia. This has created a favorable environment
for consumer spending, because prices for many consumer goods - as well as home
mortgage interest rates - have either declined or risen only a small amount.
This benign environment has helped spur sales in the retail, apparel and housing
industries. Consequently, I increased the fund's retail positions, maintaining
investments in Home Depot, Lowe's, Circuit City and Wal-Mart Stores. On the
other hand, the economic weakness in Asia has hurt the earnings and pricing
power of many technology companies. The reduction in earnings at many companies
that had a large reliance on Asia has caused a reduction in capital spending,
which, in turn, has decreased technology spending plans. Accordingly,
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orders have not yet increased to prior levels at many semiconductor and
semiconductor capital equipment manufacturers. Therefore, I reduced the fund's
technology stake during the period.
Q. What's your outlook?
A. The fund's positioning continues to reflect an environment of anemic pricing
power, flat-to-declining corporate earnings and decreasing inflation. The fund
is positioned to take advantage of this economic outlook by focusing on four
areas: (1) companies in the financial sector that can benefit if interest rates
fall; (2) global companies with proprietary advantages that can be used to grow
market share worldwide; (3) innovative companies in the technology, health care
and telecommunications sectors that could rely on unit growth rather than price
increases to grow earnings; and (4) industries in consolidation that still have
strong growth rates.
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
managers views are subject to change at any time based on market and other
conditions.
Performance
There are several ways to evaluate a fund's historical performance. You
can look at the total percentage change in value, the average annual percentage
change or the growth of a hypothetical $10,000 investment. Total return reflects
the change in the value of an investment, assuming reinvestment of the fund's
dividend income and capital gains (the profits earned upon the sale of
securities that have grown in value).
Average Annual Total Returns
Period Ended June 30, 1998
Past 1 Life of
year fund
================================================================================
VIP III: Growth Opportunities 25.31% 26.44%
-- "initial class"
S&P 500(R) 30.16% 32.30%
================================================================================
Average annual returns take the fund's cumulative return and show you what
would have happened if the fund had performed at a constant rate each year.
You can compare the fund's return to the performance of the Standard &
Poor's 500 Index -- a widely recognized, unmanaged index of common stocks. This
benchmark reflects the reinvestment of dividends and capital gains, if any.
Figures for more than one year assume a steady compounded rate of return
and are not the fund's year-by-year results, which fluctuated over the periods
shown. The life of fund figures are from commencement of operations January 3,
1995.
If Fidelity had not reimbursed certain fund expenses, the life of fund
total return would have been lower.
Performance numbers are net of all fund operating expenses, but do not
include any insurance charges imposed by your insurance company's separate
account. If performance information included the effect of these additional
charges, the total return would be lower.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you withdraw
your money.
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.
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Fidelity VIP III Growth Opportunities Portfolio
as of June 30, 1998
- -----------------------------------------------
INVESTMENT SUMMARY
- --------------------------------------------------------------------------------
Top 5 Stocks as of 6/30/98
% of fund's
investments
1. Fannie Mae 6.4%
2. Philip Morris Companies, Inc. 4.7%
3. Fleet Financial Group, Inc. 3.5%
4. Freddie Mac 2.9%
5. Wal-Mart Stores, Inc. 2.6%
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Top 5 Market Sectors as of 6/30/98
% of fund's
investments
1. Finance 20.8%
2. Utilities 9.6%
3. Retail and Wholesale 9.5%
4. Technology 9.3%
5. Health 8.6%
- --------------------------------------------------------------------------------
Fund Facts
Goal: to provide capital growth by investing primarily in common stocks and
securities convertible into common stocks
Start date: January 3, 1995
Size: as of June 30, 1998, more than $1.4 billion
Manager: George Vanderheiden, since inception; joined Fidelity in 1971
$10,000 Over Life of Fund
[LINE CHART OMITTED]
Let's say hypothetically that $10,000 was invested in Variable Insurance
Products Fund III: Growth Opportunities Portfolio on January 3, 1995, when the
fund started. As the chart shows, by June 30, 1998, the value of the investment
would have grown to $22,674 - a 126.74% 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 $26,561 - a 165.61% increase.
Asset Allocation as of June 30, 1998*
[The following table was depicted as a pie chart in the printed material.]
Short-term investments -- 4.0%
Bonds -- 10.7%
Stocks -- 85.3%
* Foreign investments -- 10.8%
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Fidelity VIP Equity-Income Portfolio
- -----------------------------------------------
[Photo of Steve Petersen, Portfolio Manager]
Q. Steve, how did the fund perform over the past year?
A. It performed well compared to similar funds. However, for the six- and
12-month periods that ended June 30, 1998, the fund underperformed the Standard
& Poor's 500 Index, which returned 17.71% for the six-month period and 30.16%
for the 12-month period.
Q. As we've discussed in the past few reports, the S&P 500 has tended to
outperform the fund recently because the index is much more heavily weighted
in large-capitalization stocks than the fund. Does this continue to explain
the fund's performance compared to the S&P over this period?
A. In part, yes. Over the period, large-capitalization stocks continued to
notably outperform the rest of the market. So, given the fund's investment style
of looking for value stocks and income producing stocks -- which can range from
large- to small-cap stocks -- the fund was at a disadvantage compared to the S&P
over the past 12 months. However, as I mentioned, the fund performed well
against its peer group over the same period. This was mostly due to strong
individual stock selection and the fund's focus on earning income from common
stocks rather than bonds, which underperformed stocks over the period.
Q. So, if large-cap stocks have done so well recently, why doesn't the fund hold
only them?
A. If I did hold just large-cap stocks, the fund's performance probably would
have been stronger over the short run. However, as I just mentioned, that would
be inconsistent with the fund's long-term strategy, which encourages me to own
stocks of several different capitalization sizes. In general, I feel that if I
continue with the fund's investment style, the fund will catch any short-term
market trends over the long run.
Q. Going back to the fund's performance compared to the S&P, you implied that
there were other reasons the fund underperformed . . .
A. That's right. What probably hurt the fund the most was that the energy sector
- -- the fund's second-largest sector -- was negatively affected by declining oil
prices. This was largely due to reduced demand in the worldwide oil market,
mostly from Asian countries still stinging from last fall's correction. On top
of that, weather patterns, including a relatively mild U.S. winter, had a
negative impact on oil demand. The fund's top sector, finance, also had a fairly
rough period. Banks somewhat underperformed the market as a result of a flurry
of merger and acquisition activity in the early part of the year. Investors were
concerned that their ability to earn an adequate return on the acquisitions was
lessening as bank prices kept getting bid up. In addition, larger money-center
banks like BankAmerica were somewhat hurt by their exposure to Asia.
Economically sensitive stocks, from basic industries to manufacturing
businesses, also suffered because of reduced demand from Asia.
Q. What specific holdings helped the fund?
A. General Electric-the fund's number one holding-showed solid earnings growth,
and I consider it one of the better-managed companies around. Another strong
performer was Citicorp. After a big price run-up when Citicorp announced its
upcoming merger with Travelers, its stock price fell to pre-merger levels as the
market was unwilling to pay for the potential of the merger. Financially, we
thought it made sense to buy the stock at this lower price because of the
planned merger and because of cost-cutting steps Citicorp had recently taken.
Fannie Mae, which buys loans from mortgage originators, packages them and sells
them to investors, benefited from strong refinancing activity at the beginning
of the year.
Q. Did you have any regrets over the period?
A. Sure. I failed to recognize how low energy prices could go. I thought it was
a temporary issue, but I should have taken much more aggressive action.
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Q. Steve, what your outlook going forward?
A. In general, the underlying economic conditions in the U.S. remain good. We
have low inflation, low interest rates, low unemployment and good consumer
demand. In addition, the political environment is still relatively benign, and
the lack of major activity in Congress is good for stock prices, since change
often creates uncertainty. Despite good news at home, I need to pay close
attention to what's happening in Asia-especially Japan and China-since events in
this region could negatively affect the U.S. economy going forward.
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.
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Fidelity VIP Equity-Income Portfolio
as of June 30, 1998
- -----------------------------------------------
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Top Five Stocks as of 6/30/98
General Electric Co. 3.3%
Citicorp 1.9%
Fannie Mae 1.8%
British Petroleum PLC ADR 1.6%
Philip Morris Companies, Inc. 1.6%
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Top Five Market Sectors as of 6/30/98
Finance 25.6%
Energy 11.1%
Utilities 8.6%
Health 6.9%
Industrial Machinery & Equipment 6.8%
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$10,000 Over the Past 10 Years
[LINE CHART OMITTED]
Let's say hypothetically $10,000 was invested in Variable Insurance
Products Fund: Equity-Income Portfolio on June 30,1988. As the chart shows, by
June 30,1998, the value of the investment would have grown to $43,140-a $331.40%
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 $54,892-a
448.92% increase.
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Fidelity VIP High Income Portfolio
- -----------------------------------------------
[Photo of Barry Coffman, Portfolio Manager]
Q. How did the fund perform, Barry?
A. For the six-month period that ended June 30,1998, the fund outperformed the
4.51% return of its benchmark -- the Merrill Lynch High Yield Master Index. For
the 12-month period that ended June 30,1998, the fund outperformed the 11.40%
return of the Merrill Lynch High Yield Master Index.
Q. How would you characterize the high-yield market's performance during the
past six months?
A. While high-yield bonds performed better than any other domestic fixed-income
investments in the first quarter of 1998, they lagged in the second quarter. In
the first three or so months of this year, conditions were favorable as
inflation remained subdued, interest rates were stable, the prospects for
healthy corporate earnings seemed good and the demand for high-yield bonds was
strong. During the second quarter, concerns that Asia's crumbling economies
might negatively impact global economic growth led to a rally in Treasury bonds
at the expense of riskier asset classes, including high-yield bonds. That,
combined with continued strong new issue supply in the face of marginally
declining demand caused the spread-which is the difference in yields-between
high-yield bonds and Treasury bonds to widen and ultimately caused high-yield
investments to underperform Treasuries.
Q. What holdings contributed to the fund's performance?
A. Many of the fund's telecommunications holdings made positive contributions to
performance. Nextel, the fund's largest holding as of June 30,1998, performed
well. The company recently added the two millionth subscriber to its unique
cellular/ dispatch/messaging service. Another good performer -- and one of the
fund's 10 largest holdings -- was Millicom, an international cellular company
with licenses to build and operate cellular networks for developing countries in
Asia, Eastern Europe, Russia and South America. In addition, high-yield bonds
issued by companies with significant cable businesses -- including Cablevision,
Time Warner, United International Holdings and Adelphia -- did well following
reports of AT&T's acquisition of cable giant TCI. That union signified the
long-predicted coming together of telecommunications, cable TV and personal
computers, and fueled speculation that other broadcasters might be the next
takeover target.
Q. What were some of the other bright spots for the fund?
A. As a group, the fund's common stock holdings issued by high-yield
companies-at 6.1% of investments at the end of the period-also were a plus for
performance. One of the best performers there was Viacom, which I sold recently
in order to lock in some gains. The fund's common stock positions typically are
made in high-yield companies-those deemed below investment-grade-where I already
have positions in bonds issued by the companies. Generally speaking, I keep the
fund's common stock holdings to under 10% of the fund's investments.
Q. Were there any disappointments?
A. The period's biggest disappointment was Renaissance Cosmetics, a company that
breathes new life into older, neglected fragrance brands by repackaging and
marketing them through mass merchants. The combination of the passing of the
company's CEO, a weak environment for mass market fragrances and an ill-timed
acquisition caused the bonds to perform poorly. The fund's holdings in Asia Pulp
& Paper (AP&P) and its three subsidiaries-Indah Kiat, Pindo Deli and Tjiwi
Kimia-also were disappointing. Although the company is faring well from a
financial standpoint, investors have punished its bonds because it is located in
troubled Indonesia.
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Q. What's your outlook for the high-yield market and the fund?
A. While conditions remain fairly favorable, there is a potential cloud on
the horizon. On a positive note, interest rates are low, high-yield companies
are better capitalized than they were in the late 1980s and the default rate
remains very low-at 1%, compared to the long-term average of more than 3%.
Furthermore, the new supply of high-yield bonds-which hit a record $100 billion
in the first half of the year-shows some signs of tapering off. However, those
positives could be overshadowed if investors start to anticipate that corporate
earnings will dramatically slow in the second half of 1998. As for the fund, I
will likely avoid cyclical sectors such as paper and chemical companies, because
I think they may be most vulnerable to an economic slowdown. Instead, I'll
continue to look for opportunities that I think will generate above-average
returns over the long term. That includes the telecommunications sector, where
regulatory changes and technological advances-such as the Internet and expansion
of bandwidth-should continue to create attractive investment ideas.
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.
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Fidelity VIP High Income Portfolio
as of June 30, 1998
- -----------------------------------------------
- --------------------------------------------------------------------------------
Top Five Holdings As of 6/30/98
Nextel, Inc. (various issues) 4.0
Time Warner, Inc. 2.6
IXC Communications, Inc. 2.1
Millicom International Cellular SA 1.9
NEXTLINK Communications, Inc. 1.8
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Top Five Market Sectors As of 6/30/98
Utilities 25.2
Media & Leisure 21.6
Services 7.0
Basic Industries 6.4
Retail & Wholesale 5.3
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$10,000 Over 10 Years
[LINE CHART OMITTED]
Let's say hypothetically that $10,000 was invested in Variable Insurance
Products Fund: High Income Portfolio on June 30, 1988. As the chart shows, by
June 30,1998, the value of the investment would have grown to $32,238-a 222.38%
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 $30,229-a 202.20% increase.
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Fidelity VIP II Index 500 Portfolio
- -----------------------------------------------
[Photo of Frank Salerno, Portfolio Manager]
Q. How did the fund perform, Frank?
A. For the six months that ended June 30, 1998, the fund performed in line with
the 17.71% return of the Standard & Poor's 500 Index. Of course, the fund's
total return was slightly lower than that of the index due to management
expenses. The fund's return for the 12 months that ended June 30,1998 also was
in line with the S&P 500, which returned 30.16% during that period.
Q. How would you describe market conditions over the past six months?
A. The stock market continued to perform well in response to favorable economic
news. Inflation remained modest, interest rates were stable, the economy grew
more vigorously than expected and corporate earnings-a key determinant of stock
prices-were generally strong. As the year began, the lone dark cloud on the
horizon was the fear that the slowdown gripping many Asian economies might
spread to the United States. However, prospects in Asia began to look brighter
when government officials in Japan-a key economic force in the region-promised
to pass legislation designed to stimulate the Japanese economy. On the basis of
this optimism, most Asian stock markets rallied strongly in the first quarter,
and U.S. investors, relieved that the worst in Asia might be over, drove the S&P
500 and other market indexes to repeated record highs from February through
early May.
Q. What happened for the balance of the period?
A. Several negatives temporarily slowed the market's momentum. The situation in
Asia deteriorated once again, as the Japanese government failed to pass the
stimulative legislation promised earlier in the year, and the president of
Indonesia was forced to resign amid widespread civil strife. Moreover, U.S.
companies with Asian exposure-including many technology companies-began to
report disappointing earnings. The combination of these factors caused the Dow
Jones Industrial Average to decline roughly 7% between mid-May and mid-June,
while the S&P 500 retreated about 5%. However, more news indicating
stronger-than-expected growth in the economy resulted in stocks resuming their
upward path by the end of the period, with the S&P 500 again reaching new highs
in late June.
Q. Did any sectors stand out as strong performers?
A. Drug companies did well, buoyed by healthy pipelines of new products, the
ability to bring products to market more rapidly and relaxed regulations that
permitted more aggressive advertising. Financial services firms continued to
benefit from a trend toward greater industry consolidation, exemplified by the
recently announced "megamerger" of Travelers and Citicorp. In addition, the
generally favorable economic climate has been particularly beneficial for banks
and other financial services firms.
Q. How did technology stocks fare?
A. Technology was a mixed bag. For example, U.S. personal computer (PC) makers
found that they could purchase components at a much lower cost from their Asian
suppliers because of the U.S. dollar's sharply increased value relative to many
Asian currencies. However, generally lighter demand for personal computers was
an offsetting factor that hindered the sales and earnings growth of many PC
makers and manufacturers of PC components.
Q. What sectors were disappointing?
A. Energy prices were weak during the period, with the price of crude oil
dipping below $12 dollars a barrel near the end of June. Most stocks in that
sector were weak as a result. The same problem-weak commodity prices-kept
precious metals shares in the doldrums.
- --------------------------------------------------------------------------------
54
<PAGE>
- --------------------------------------------------------------------------------
Q. What's your outlook, Frank?
A. The trend of disappointing earnings reported by companies with Asian exposure
may continue into the third quarter. However, I believe that the sectors that
have been strong so far this year can continue to do well, as long as the
economy keeps growing moderately and interest rates and inflation stay roughly
where they are. Although I don't expect the market to advance at the rapid pace
it has maintained during the past three years, the favorable economic
environment gives me reason to expect further moderate gains in share prices.
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.
Performance
There are several ways to evaluate a fund's historical performance. You
can look at the total percentage change in value, the average annual percentage
change or the growth of a hypothetical $10,000 investment. Total return reflects
the change in the value of an investment, assuming reinvestment of the fund's
dividend income and capital gains (the profits earned upon the sale of
securities that have grown in value).
- ------------------------------
Average Annual Total Returns
- ------------------------------
Periods ended Past 1 Past 5 Life of
June 30, 1998 year years fund
VIP II:Index 500 29.64% 22.69% 21.33%
S&P 500(R) 30.16% 23.08% 21.72%
Average annual returns take the fund's cumulative return and show you what
would have happened if the fund had performed at a constant rate each year.
You can compare the fund's returns to the performance of the Standard &
Poor's 500 Index-a widely recognized, unmanaged index of common stocks. This
benchmark includes reinvested dividends and capital gains, if any.
Figures for more than one year assume a steady compounded rate of return
and are not the fund's year-by-year results, which fluctuated over the periods
shown. The life of fund figures are from commencement of operations, August 27,
1992.
If Fidelity had not reimbursed certain fund expenses, the total return
figures would have been lower.
Performance numbers are net of all fund operating expenses, but do not
include any insurance charges imposed by your insurance company's separate
account. If performance information included the effect of these additional
charges, the total returns would be lower.
Past performance is no guaranteed of future results. Principal and
investment return will vary and you may have a gain or loss when you withdraw
your money.
- --------------------------------------------------------------------------------
55
<PAGE>
- --------------------------------------------------------------------------------
Fidelity VIP II Index 500 Portfolio
as of June 30, 1998
- -----------------------------------------------
- --------------------------------------------------------------------------------
Top 10 Stock Holdings As of 6/30/98
General Electric Co. 3.1%
Microsoft Corp. 2.8%
Coca-Cola Co. (The) 2.2%
Exxon Corp. 1.8%
Merck & Co., Inc. 1.7%
Pfizer, Inc. 1.5%
Wal-Mart Stores, Inc. 1.4%
Intel Corp. 1.3%
Procter & Gamble Co. 1.3%
Royal Dutch Petroleum Co 1.2%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Top 10 Market Sectors As of 6/30/98
Finance 17.0%
Technology 14.0%
Health 11.2%
Nondurables 9.5%
Utilities 9.1%
Energy 6.9%
Industrial Machinery & Equipment 5.3%
Retail & Wholesale 5.2%
Media & Leisure 4.3%
Basic Industries 4.0%
- --------------------------------------------------------------------------------
$10,000 Over Life of Fund
[LINE CHART OMITTED]
Let's say hypothetically that $10,000 was invested in Variable Insurance
Products Fund II: Index 500 Portfolio on August 27, 1992, when the fund started.
As the chart shows, by June 30,1998, the value of the investment would have
grown to $30,951-a 209.51% 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 $31,533 -a 215.33% increase.
- --------------------------------------------------------------------------------
56
<PAGE>
- --------------------------------------------------------------------------------
This page intentionally left blank.
- --------------------------------------------------------------------------------
57
<PAGE>
- ---------
Separate
Account K
- ---------
1
- ---------
- --------------------------------------------------------------------------------
The Guardian Separate Account K
- -----------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Gabelli Baillie
Guardian Guardian Guardian Capital Gifford
Stock Bond Cash Asset International
Combined Fund Fund Fund Fund Fund
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FIFO Cost .......................... -- $40,125,239 $596,128 $2,027,212 $88,552 $3,057,576
==========================================================================================
Assets:
Shares owned in underlying fund --
Note 1 ......................... -- 873,581 48,509 202,721 5,137 159,644
Net asset value per share (NAV) .. -- 50.62 12.28 10.00 17.40 21.57
Total Assets (Shares x NAV) .... $60,626,445 44,220,668 595,693 2,027,212 89,387 3,443,521
----------- ----------- -------- ---------- ------- ----------
Liabilities:
Due to The Guardian Insurance &
Annuity Company, Inc. .......... 97,373 68,471 1,688 3,736 85 5,957
----------- ----------- -------- ---------- ------- ----------
Net Assets -- Note 4 ......... $60,529,072 $44,152,197 $594,005 $2,023,476 $89,302 $3,437,564
=========== =========== ======== ========== ======= ==========
<CAPTION>
Baillie Value Line
Gifford Guardian Strategic
Emerging Small Cap Value Line Asset MFS Growth
Markets Stock Centurion Management with Income
Fund Fund Fund Trust Series
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIFO Cost .......................... $5,208 $1,165,975 $4,207,331 $3,249,938 $286,113
=====================================================================
Assets:
Shares owned in underlying fund --
Note 1 ......................... 546 79,195 159,839 143,924 15,789
Net asset value per share (NAV) .. 9.16 14.54 29.51 25.53 19.09
Total Assets (Shares x NAV) .... 4,999 1,151,806 4,716,839 3,674,381 301,405
------ ---------- ---------- ---------- --------
Liabilities:
Due to The Guardian Insurance &
Annuity Company, Inc. .......... 2 2,076 8,241 6,113 702
------ ---------- ---------- ---------- --------
Net Assets -- Note 4 ......... $4,997 $1,149,730 $4,708,598 $3,668,268 $300,703
====== ========== ========== ========== ========
</TABLE>
- --------------------------------------------------------------------------------
The Guardian Separate Account K
- -----------------------------------------------
STATEMENT OF OPERATIONS
Six Months Ended June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Gabelli Baillie
Guardian Guardian Guardian Capital Gifford
Stock Bond Cash Asset International
Combined Fund Fund Fund Fund Fund
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment Income
Income:
Reinvested dividends ............. $ 253,123 $ 186,537 $ 14,081 $ 39,348 $ -- $ 12,642
Expenses-- Note 3:
Mortality and expense risk
charges ........................ 151,463 111,223 1,245 4,710 85 8,925
----------- ----------- -------- ---------- ------- ----------
Net investment income/(expense) .... 101,660 75,314 12,836 34,638 (85) 3,717)
----------- ----------- -------- ---------- ------- ----------
Realized and Unrealized Gain/(Loss)
from Investments
Realized gain/(loss) from
investments:
Net realized gain/(loss) from
sale of investments ............ 355,619 224,390 1,403 -- (4) 41,277
Reinvested realized gain
distributions .................. 1,172,419 1,144,589 -- -- -- 19,682
----------- ----------- -------- ---------- ------- ----------
Net realized gain/(loss) on
investments .................... 1,528,038 1,368,979 1,403 -- (4) 60,959
----------- ----------- -------- ---------- ------- ----------
Unrealized appreciation
(depreciation) of investments:
End of period .................... 5,421,675 4,095,429 (434) -- 835 385,945
Beginning of period .............. 1,267,692 1,292,030 (1,221) -- -- (5,274)
----------- ----------- -------- ---------- ------- ----------
Change in unrealized appreciation/
(depreciation) ................. 4,153,983 2,803,399 787 -- 835 391,219
----------- ----------- -------- ---------- ------- ----------
Net realized and unrealized gain/
(loss) from investment ......... 5,682,021 4,172,378 2,190 -- 831 452,178
----------- ----------- -------- ---------- ------- ----------
Net Increase/(Decrease) in Net Assets
Resulting from Operations ........ $ 5,783,681 $ 4,247,692 $ 15,026 $ 34,638 $ 746 $ 455,895
=========== =========== ======== ========== ======= ==========
<CAPTION>
Baillie Value Line
Gifford Guardian Strategic
Emerging Small Cap Value Line Asset MFS Growth
Markets Stock Centurion Management with Income
Fund Fund Fund Trust Series
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment Income
Income:
Reinvested dividends ............. $ 515 $ -- $ -- $ -- $ --
Expenses-- Note 3:
Mortality and expense risk
charges ........................ 2 1,933 12,562 9,812 665
------ ---------- ---------- ---------- --------
Net investment income/(expense) .... 513 (1,933) (12,562) (9,812) (665)
------ ---------- ---------- ---------- --------
Realized and Unrealized Gain/(Loss)
from Investments
Realized gain/(loss) from
investments:
Net realized gain/(loss) from
sale of investments ............ 64 6,541 35,175 28,480 18,222
Reinvested realized gain
distributions .................. -- 7,863 -- -- --
------ ---------- ---------- ---------- --------
Net realized gain/(loss) on
investments .................... 64 14,404 35,175 28,480 18,222
------ ---------- ---------- ---------- --------
Unrealized appreciation
(depreciation) of investments:
End of period .................... (209) (14,170) 509,508 424,443 15,292
Beginning of period .............. -- (1,850) (32,926) 16,843 90
------ ---------- ---------- ---------- --------
Change in unrealized appreciation/
(depreciation) ................. (209) (12,320) 542,434 407,600 15,202
------ ---------- ---------- ---------- --------
Net realized and unrealized gain/
(loss) from investment ......... (145) 2,084 577,609 436,080 33,424
------ ---------- ---------- ---------- --------
Net Increase/(Decrease) in Net Assets
Resulting from Operations ........ $ 368 $ 151 $ 565,047 $ 426,268 $ 32,759
====== ========== ========== ========== ========
</TABLE>
See notes to financial statements.
- --------------------------------------------------------------------------------
58 & 59
<PAGE>
- ---------
Separate
Account K
- ---------
1
- ---------
- --------------------------------------------------------------------------------
The Guardian Separate Account K
- -----------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
MFS AIM V.I. American
Emerging MFS MFS Capital AIM V.I. Century
Growth Total Return Bond Appreciation Value Value
Series Series Series Fund Fund Fund
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FIFO Cost ................................. $ 71,894 $ 8,126 $ -- $ 9,176 $ 29,402 $ 59,342
======================================================================================
Assets:
Shares owned in underlying fund --
Note 1 ................................ 3,819 464 -- 378 1,241 8,469
Net asset value per share (NAV) ......... 19.45 17.53 -- 24.54 24.67 6.80
Total Assets (Shares x NAV) ........... 74,284 8,142 -- 9,264 30,620 57,589
-------- ------- ------ ------- -------- --------
Liabilities:
Due to The Guardian Insurance &
Annuity Company, Inc. ................. 70 1 -- 8 31 42
-------- ------- ------ ------- -------- --------
Net Assets-- Note 4 ................... $ 74,214 $ 8,141 $ -- $ 9,256 $ 30,589 $ 57,547
======== ======= ====== ======= ======== ========
<CAPTION>
Fidelity
American VIP III Fidelity Fidelity Fidelity
Century VP Growth VIP Equity- VIP High VIP II
International Opportunities Income Income Index 500
Fund Portfolio Portfolio Portfolio Portfolio
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIFO Cost ................................. $ 8,604 $ 40,233 $ 30,201 $ 72,645 $ 65,875
==============================================================================
Assets:
Shares owned in underlying fund --
Note 1 ................................ 1,111 2,011 1,202 5,753 524
Net asset value per share (NAV) ......... 8.04 20.44 25.17 12.63 129.25
Total Assets (Shares x NAV) ........... 8,933 41,095 30,250 72,664 67,693
------- -------- -------- -------- --------
Liabilities:
Due to The Guardian Insurance &
Annuity Company, Inc. ................. 4 33 28 44 41
------- -------- -------- -------- --------
Net Assets-- Note 4 ................... $ 8,929 $ 41,062 $ 30,222 $ 72,620 $ 67,652
======= ======== ======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
The Guardian Separate Account K
- -----------------------------------------------
STATEMENT OF OPERATIONS
Six Months Ended June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
MFS AIM V.I. American
Emerging MFS MFS Capital AIM V.I. Century
Growth Total Return Bond Appreciation Value Value
Series Series Series Fund Fund Fund
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment Income
Income:
Reinvested dividends .................. $ -- $ -- $ -- $ -- $ -- $ --
Expenses-- Note 3:
Mortality and expense risk charges .... 70 1 -- 7 31 42
-------- ------- ------ ------- -------- --------
Net investment income/(expense) ......... (70) (1) -- (7) (31) (42))
-------- ------- ------ ------- -------- --------
Realized and Unrealized Gain/(Loss)
from Investments
Realized gain/(loss) from investments:
Net realized gain/(loss) from sale
of investments ........................ (47) 1 -- (4) 1 (14)
Reinvested realized gain distributions 285 -- -- -- -- --
-------- ------- ------ ------- -------- --------
Net realized gain/(loss) on investments 238 1 -- (4) 1 (14)
-------- ------- ------ ------- -------- --------
Unrealized appreciation/(depreciation)
of investments:
End of period ......................... 2,390 16 -- 88 1,218 (1,753)
Beginning of period ................... -- -- -- -- -- --
-------- ------- ------ ------- -------- --------
Change in unrealized appreciation/
(depreciation) ...................... 2,390 16 -- 88 1,218 (1,753)
-------- ------- ------ ------- -------- --------
Net realized and unrealized gain/
(loss) from investment .............. 2,628 17 -- 84 1,219 (1,767)
-------- ------- ------ ------- -------- --------
Net Increase/(Decrease) in Net Assets
Resulting from Operations ............. $ 2,558 $ 16 -- $ 77 $ 1,188 $ (1,809)
======== ======= ====== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
Fidelity
American VIP III Fidelity Fidelity Fidelity
Century VP Growth VIP Equity- VIP High VIP II
International Opportunities Income Income Index 500
Fund Portfolio Portfolio Portfolio Portfolio
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment Income
Income:
Reinvested dividends .................. $ -- $ -- $ -- $ -- $ --
Expenses-- Note 3:
Mortality and expense risk charges .... 4 33 28 44 41
------- -------- -------- -------- --------
Net investment income/(expense) ......... (4) (33) (28) (44) (41)
------- -------- -------- -------- --------
Realized and Unrealized Gain/(Loss)
from Investments
Realized gain/(loss) from investments:
Net realized gain/(loss) from sale
of investments ........................ 2 (11) (5) (3) 151
Reinvested realized gain distributions -- -- -- -- --
------- -------- -------- -------- --------
Net realized gain/(loss) on investments 2 (11) (5) (3) 151
------- -------- -------- -------- --------
Unrealized appreciation/(depreciation)
of investments:
End of period ......................... 329 862 49 19 1,818
Beginning of period ................... -- -- -- -- --
------- -------- -------- -------- --------
Change in unrealized appreciation/
(depreciation) ...................... 329 862 49 19 1,818
------- -------- -------- -------- --------
Net realized and unrealized gain/
(loss) from investment .............. 331 851 44 16 1,969
------- -------- -------- -------- --------
Net Increase/(Decrease) in Net Assets
Resulting from Operations ............. $ 327 $ 818 $ 16 $ (28) $ 1,928
======= ======== ======== ======== ========
</TABLE>
See notes to financial statements
- --------------------------------------------------------------------------------
60 & 61
<PAGE>
- ---------
Separate
Account K
- ---------
1
- ---------
- --------------------------------------------------------------------------------
The Guardian Separate Account K
- -----------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
Year Ended December 31, 1997 (Audited) and
Six Months Ended June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Gabelli
Guardian Guardian Guardian Capital
Stock Bond Cash Asset
Combined Fund Fund Fund Fund
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------
1997 Increase/(Decrease) from Operations
- ----------------------------------------
Net investment income/(expense) ......... $ 233,907 $ 126,563 $ 13,886 $ 48,295 $ --
Net realized gain/(loss) from sale of
investments ........................... 209,570 188,993 1,246 -- --
Reinvested realized gain distributions .. 3,407,206 2,780,841 -- -- --
Change in unrealized appreciation/
(depreciation) of investments ......... 1,195,418 1,248,144 37 -- --
------------ ------------ --------- ----------- --------
Net increase/(decrease) resulting from
operations ............................ 5,046,101 4,344,541 15,169 48,295 --
------------ ------------ --------- ----------- --------
- ------------------------
1997 Policy Transactions
- ------------------------
Transfer of net premium ................. 28,120,504 20,435,949 250,538 1,321,513 --
Transfer on account of other terminations (525,113) (360,442) (4,764) (913) --
Transfer of policy loans ................ (382,367) (314,110) (1,088) (2,972) --
Transfer of cost of insurance -- Note 3 . (5,312,030) (3,969,160) (45,653) (146,214) --
Transfer between/within separate accounts (3,868) 548,761 (39,492) (1,161,841) --
Transfers-- other ....................... 82,679 47,663 313 (774) --
------------ ------------ --------- ----------- --------
Net increase/(decrease) from contract
transactions .......................... 21,979,805 16,388,661 159,854 8,799 --
------------ ------------ --------- ----------- --------
Total Increase/(Decrease) in Net Assets ... 27,025,906 20,733,202 175,023 57,094 --
Net Assets at December 31, 1996 ......... 10,110,365 6,935,509 116,246 1,008,605 --
------------ ------------ --------- ----------- --------
Net Assets at December 31, 1997 ......... $ 37,136,271 $ 27,668,711 $ 291,269 $ 1,065,699 $ --
============ ============ ========= =========== ========
- ----------------------------------------
1998 Increase/(Decrease) from Operations
- ----------------------------------------
Net investment income/(expense) ......... $ 101,660 $ 75,314 $ 12,836 $ 34,638 $ (85)
Net realized gain/(loss) from sale of
investments ........................... 355,619 224,390 1,403 -- (4)
Reinvested realized gain distributions .. 1,172,419 1,144,589 -- -- --
Change in unrealized appreciation/
(depreciation) of investments ......... 4,153,983 2,803,399 787 -- 835
------------ ------------ --------- ----------- --------
Net increase/(decrease) resulting from
operations ............................ 5,783,681 4,247,692 15,026 34,638 746
------------ ------------ --------- ----------- --------
- ------------------------
1998 Policy Transactions
- ------------------------
Transfer of net premium ................. 22,966,925 16,152,440 256,141 2,040,089 40,537
Transfer on account of other terminations (476,403) (356,020) (2,940) (8,445) --
Transfer of policy loans ................ (369,943) (282,569) (871) (1,511) --
Transfer of cost of insurance-- Note 3 .. (4,557,912) (3,499,350) (42,209) (109,128) (4,578)
Transfer between/within separate accounts (119) 180,889 77,844 (998,020) 52,273
Transfers-- other ....................... 46,572 40,404 (255) 154 324
------------ ------------ --------- ----------- --------
Net Increase/(Decrease) from contract
transactions .......................... 17,609,120 12,235,794 287,710 923,139 88,556
------------ ------------ --------- ----------- --------
Total Increase/(Decrease) in Net Assets ... 23,392,801 16,483,486 302,736 957,777 89,302
Net Assets at December 31, 1997 ......... 37,136,271 27,668,711 291,269 1,065,699 --
------------ ------------ --------- ----------- --------
Net Assets at June 30, 1998 -- Note 4 ... $ 60,529,072 $ 44,152,197 $ 594,005 $ 2,023,476 $ 89,302
============ ============ ========= =========== ========
<CAPTION>
Baillie Value Line
Baillie Gifford Guardian Strategic
Gifford Emerging Small Cap Value Line Asset MFS Growth
International Markets Stock Centurion Management with Income
Fund Fund Fund Fund Trust Series
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------
1997 Increase/(Decrease) from Operations
- ----------------------------------------
Net investment income/(expense) ......... $ 22,302 $ -- $ 249 $ (6,324) $ 28,792 $ 144
Net realized gain/(loss) from sale of
investments ........................... 16,896 -- (180) 1,747 820 48
Reinvested realized gain distributions .. 80,240 -- 2,505 365,912 176,860 848
Change in unrealized appreciation/
(depreciation) of investments ......... (21,415) -- (1,850) (37,961) 8,374 89
----------- ------- ----------- ----------- ----------- ---------
Net increase/(decrease) resulting from
operations ............................ 98,023 -- 724 323,374 214,846 1,129
----------- ------- ----------- ----------- ----------- ---------
- ------------------------
1997 Policy Transactions
- ------------------------
Transfer of net premium ................. 1,709,516 -- 181,827 2,260,587 1,919,213 41,361
Transfer on account of other terminations (50,999) -- -- (77,153) (30,842) --
Transfer of policy loans ................ (33,074) -- (1,749) (21,380) (7,994) --
Transfer of cost of insurance -- Note 3 . (323,577) -- (7,725) (465,919) (352,898) (884)
Transfer between/within separate accounts 150,600 -- 52,378 232,172 209,541 4,013
Transfers-- other ....................... 7,546 -- (967) 20,373 8,586 (61)
----------- ------- ----------- ----------- ----------- ---------
Net increase/(decrease) from contract
transactions .......................... 1,460,012 -- 223,764 1,948,680 1,745,606 44,429
----------- ------- ----------- ----------- ----------- ---------
Total Increase/(Decrease) in Net Assets ... 1,558,035 -- 224,488 2,272,054 1,960,452 45,558
Net Assets at December 31, 1996 ......... 574,844 -- -- 893,674 581,487 --
----------- ------- ----------- ----------- ----------- ---------
Net Assets at December 31, 1997 ......... $ 2,132,879 $ -- $ 224,488 $ 3,165,728 $ 2,541,939 $ 45,558
=========== ======= =========== =========== =========== =========
- ----------------------------------------
1998 Increase/(Decrease) from Operations
- ----------------------------------------
Net investment income/(expense) ......... $ 3,717 $ 513 $ (1,933) $ (12,562) $ (9,812) $ (665)
Net realized gain/(loss) from sale of
investments ........................... 41,277 64 6,541 35,175 28,480 18,222
Reinvested realized gain distributions .. 19,682 -- 7,863 -- -- --
Change in unrealized appreciation/
(depreciation) of investments ......... 391,219 (209) (12,320) 542,434 407,600 15,202
----------- ------- ----------- ----------- ----------- ---------
Net increase/(decrease) resulting from
operations ............................ 455,895 368 151 565,047 426,268 32,759
----------- ------- ----------- ----------- ----------- ---------
- ------------------------
1998 Policy Transactions
- ------------------------
Transfer of net premium ................. 998,470 5,183 637,815 1,301,774 1,127,136 208,141
Transfer on account of other terminations (46,338) -- (525) (37,896) (24,239) --
Transfer of policy loans ................ (21,221) -- (1,682) (46,012) (16,077) --
Transfer of cost of insurance-- Note 3 .. (232,153) (370) (89,743) (295,167) (246,851) (23,648)
Transfer between/within separate accounts 148,084 -- 377,905 53,397 (139,551) 36,785
Transfers-- other ....................... 1,948 (184) 1,321 1,727 (357) 1,108
----------- ------- ----------- ----------- ----------- ---------
Net increase/(decrease) from contract
transactions .......................... 848,790 4,629 925,091 977,823 700,061 222,386
----------- ------- ----------- ----------- ----------- ---------
Total Increase/(Decrease) in Net Assets ... 1,304,685 4,997 925,242 1,542,870 1,126,329 255,145
Net Assets at December 31, 1997 ......... 2,132,879 -- 224,488 3,165,728 2,541,939 45,558
----------- ------- ----------- ----------- ----------- ---------
Net Assets at June 30, 1998 -- Note 4 ... $ 3,437,564 $ 4,997 $ 1,149,730 $ 4,708,598 $ 3,668,268 $ 300,703
=========== ======= =========== =========== =========== =========
</TABLE>
See notes to financial statements
- --------------------------------------------------------------------------------
62 & 63
<PAGE>
- ---------
Separate
Account K
- ---------
1
- ---------
- --------------------------------------------------------------------------------
The Guardian Separate Account K
- -----------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
Year Ended December 31, 1997 (Audited) and
Six Months Ended June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
MFS AIM V.I. American
Emerging MFS MFS Capital AIM V.I. Century VP
Growth Total Return Bond Appreciation Value Value
Series Series Series Fund Fund Fund
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------
1997 Increase/(Decrease) from Operations
- ----------------------------------------
Net investment income/(expense) ......... $ -- $ -- $ -- $ -- $ -- $ --
Net realized gain/(loss) from sale
of investments ........................ -- -- -- -- -- --
Reinvested realized gain distributions .. -- -- -- -- -- --
Change in unrealized appreciation/
(depreciation) of investments ......... -- -- -- -- -- --
-------- ------- ------ ------- -------- --------
Net increase/(decrease) resulting
from operations ....................... -- -- -- -- -- --
-------- ------- ------ ------- -------- --------
- ------------------------
1997 Policy Transactions
- ------------------------
Transfer of net premium ................. -- -- -- -- -- --
Transfer on account of other
terminations .......................... -- -- -- -- -- --
Transfer of policy loans ................ -- -- -- -- -- --
Transfer of cost of insurance -- Note 3 . -- -- -- -- -- --
Transfer between/within separate accounts -- -- -- -- -- --
Transfers-- other ....................... -- -- -- -- -- --
-------- ------- ------ ------- -------- --------
Net increase/(decrease) from contract
transactions .......................... -- -- -- -- -- --
-------- ------- ------ ------- -------- --------
Total Increase/(Decrease) in Net Assets ... -- -- -- -- -- --
Net Assets at December 31, 1996 ......... -- -- -- -- -- --
-------- ------- ------ ------- -------- --------
Net Assets at December 31, 1997 ......... $ -- $ -- $ -- $ -- $ -- $ --
======== ======= ====== ======= ======== ========
- ----------------------------------------
1998 Increase/(Decrease) from Operations
- ----------------------------------------
Net investment income/(expense) ......... $ (70) $ (1) $ -- $ (7) $ (31) $ (42)
Net realized gain/(loss) from sale of
investments ........................... (47) 1 -- (4) 1 (14)
Reinvested realized gain distributions .. 285 -- -- -- -- --
Change in unrealized appreciation/
(depreciation) of investments ......... 2,390 16 -- 88 1,218 (1,753)
-------- ------- ------ ------- -------- --------
Net increase/(decrease) resulting
from operations ....................... 2,558 16 -- 77 1,188 (1,809)
-------- ------- ------ ------- -------- --------
- ------------------------
1998 Policy Transactions
- ------------------------
Transfer of net premium ................. 8,257 8,403 -- 4,655 28,446 2,058
Transfer on account of other
terminations .......................... -- -- -- -- -- --
Transfer of policy loans ................ -- -- -- -- -- --
Transfer of cost of insurance -- Note 3 . (1,414) (296) -- (494) (2,294) (438)
Transfer between/within separate
accounts .............................. 64,745 -- -- 5,019 3,241 57,736
Transfers-- other ....................... 68 18 -- (1) 8 --
-------- ------- ------ ------- -------- --------
Net increase/(decrease) from contract
transactions .......................... 71,656 8,125 -- 9,179 29,401 59,356
-------- ------- ------ ------- -------- --------
Total Increase/(Decrease) in Net Assets ... 74,214 8,141 -- 9,256 30,589 57,547
Net Assets at December 31, 1997 ......... -- -- -- -- -- --
-------- ------- ------ ------- -------- --------
Net Assets at June 30, 1998 -- Note 4 ... $ 74,214 $ 8,141 $ -- $ 9,256 $ 30,589 $ 57,547
======== ======= ====== ======= ======== ========
<CAPTION>
Fidelity
American VIP III Fidelity Fidelity Fidelity
Century VP Growth VIP Equity- VIP High VIP II
International Opportunities Income Income Index 500
Fund Portfolio Portfolio Portfolio Portfolio
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------
1997 Increase/(Decrease) from Operations
- ----------------------------------------
Net investment income/(expense) ......... $ -- $ -- $ -- $ -- $ --
Net realized gain/(loss) from sale
of investments ........................ -- -- -- -- --
Reinvested realized gain distributions .. -- -- -- -- --
Change in unrealized appreciation/
(depreciation) of investments ......... -- -- -- -- --
------- -------- -------- -------- --------
Net increase/(decrease) resulting
from operations ....................... -- -- -- -- --
------- -------- -------- -------- --------
- ------------------------
1997 Policy Transactions
- ------------------------
Transfer of net premium ................. -- -- -- -- --
Transfer on account of other
terminations .......................... -- -- -- -- --
Transfer of policy loans ................ -- -- -- -- --
Transfer of cost of insurance -- Note 3 . -- -- -- -- --
Transfer between/within separate accounts -- -- -- -- --
Transfers-- other ....................... -- -- -- -- --
------- -------- -------- -------- --------
Net increase/(decrease) from contract
transactions .......................... -- -- -- -- --
------- -------- -------- -------- --------
Total Increase/(Decrease) in Net Assets ... -- -- -- -- --
Net Assets at December 31, 1996 ......... -- -- -- -- --
------- -------- -------- -------- --------
Net Assets at December 31, 1997 ......... $ -- $ -- $ -- $ -- $ --
======= ======== ======== ======== ========
- ----------------------------------------
1998 Increase/(Decrease) from Operations
- ----------------------------------------
Net investment income/(expense) ......... $ (4) $ (33) $ (28) $ (44) $ (41)
Net realized gain/(loss) from sale of
investments ........................... 2 (11) (5) (3) 151
Reinvested realized gain distributions .. -- -- -- -- --
Change in unrealized appreciation/
(depreciation) of investments ......... 329 862 49 19 1,818
------- -------- -------- -------- --------
Net increase/(decrease) resulting
from operations ....................... 327 818 16 (28) 1,928
------- -------- -------- -------- --------
- ------------------------
1998 Policy Transactions
- ------------------------
Transfer of net premium ................. 7,949 40,499 30,753 46,317 21,862
Transfer on account of other
terminations .......................... -- -- -- -- --
Transfer of policy loans ................ -- -- -- -- --
Transfer of cost of insurance -- Note 3 . (456) (3,076) (2,121) (1,206) (2,920)
Transfer between/within separate
accounts .............................. 1,099 2,741 1,536 27,529 46,629
Transfers-- other ....................... 10 80 38 8 153
------- -------- -------- -------- --------
Net increase/(decrease) from contract
transactions .......................... 8,602 40,244 30,206 72,648 65,724
------- -------- -------- -------- --------
Total Increase/(Decrease) in Net Assets ... 8,929 41,062 30,222 72,620 67,652
Net Assets at December 31, 1997 ......... -- -- -- -- --
------- -------- -------- -------- --------
Net Assets at June 30, 1998 -- Note 4 ... $ 8,929 $ 41,062 $ 30,222 $ 72,620 $ 67,652
======= ======== ======== ======== ========
</TABLE>
See notes to financial statements
- --------------------------------------------------------------------------------
64 & 65
<PAGE>
- ---------
Separate
Account K
- ---------
1
- ---------
- --------------------------------------------------------------------------------
The Guardian Separate Account K
- -----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited)
- ----------------------
Note 1 -- Organization
- ----------------------
The Guardian Separate Account K (the Account), a unit investment trust
registered under the Investment Company Act of 1940, as amended, was established
by The Guardian Insurance & Annuity Company, Inc. (GIAC) on September 1, 1995
and commenced operations on October 1, 1995. GIAC is a wholly owned subsidiary
of The Guardian Life Insurance Company of America (Guardian Life). GIAC issues
the annual premium variable life insurance policies offered through the Account.
GIAC provides for variable accumulations and benefits under the policies by
crediting the net premium payments to one or more investment divisions
established within the Account, or to the Fixed Rate Option (FRO), as selected
by the policyowner. Amounts allocated to the FRO are maintained by GIAC in its
general account. On May 1 and June 1, 1997, GIAC created two new investment
divisions within the Account, the MFS Growth With Income Series and The Guardian
Small Cap Stock Fund. On May 1, 1998 GIAC created thirteen additional investment
divisions within the Account, the Gabelli Capital Asset Fund, Baillie Gifford
Emerging Markets Fund, MFS Emerging Growth Series, MFS Total Return Series, MFS
Bond Series, American Century VP Value Fund, American Century VP International
Fund, AIM V.I. Value Fund, AIM V.I. Capital Appreciation Fund, Fidelity VIP III
Growth Opportunities Portfolio, Fidelity VIP Equity-Income Portfolio, Fidelity
VIP High Income Portfolio, and Fidelity VIP II Index 500 Portfolio. The
policyowner also has the ability to transfer his or her policy value among the
investment divisions within the Account.
The Account currently comprises twenty-one investment divisions which
invest in shares of the following mutual funds: The Guardian Stock Fund, Inc.
(GSF), The Guardian Bond Fund, Inc. (GBF), The Guardian Cash Fund, Inc. (GCF),
Gabelli Capital Asset Fund, Baillie Gifford International Fund (BGIF), Baillie
Gifford Emerging Markets Fund (BGEMF), The Guardian Small Cap Stock Fund (GSCF),
Value Line Centurion Fund, Inc., Value Line Strategic Asset Management Trust,
MFS Growth with Income Series, MFS Emerging Growth Series, MFS Total Return
Series, Series, AIM V.I. Capital Appreciation Fund, AIM V.I. Value
Fund, American Century VP Value Fund, American Century VP International Fund,
Fidelity VIP III Growth Opportunities Portfolio, Fidelity VIP Equity-Income
Portfolio, Fidelity VIP High Income Portfolio, and Fidelity VIP II Index 500
Portfolio (collectively, the Funds and individually, a Fund). However, a
policyowner may only invest in up to seven investment divisions, including the
FRO.
GSF, GBF, GCF and GSCF each has an investment advisory agreement with
Guardian Investor Services Corporation, a wholly owned subsidiary of GIAC. BGIF
and BGEMF are managed by Guardian Baillie Gifford Ltd., a joint venture company
formed by GIAC and Baillie Gifford Overseas Ltd.
Under applicable insurance law, the assets and liabilities of the Account
are clearly identified and distinguished from the other assets and liabilities
of GIAC. The assets of the Account will not be charged with any liabilities
arising out of any other business conducted by GIAC, but the obligations of the
Account, including the promise to make benefit payments, are obligations of
GIAC.
The changes in net assets maintained in the Account provide the basis for
the periodic determination of benefits under the policies. The net assets may
not be less than the amount required under state insurance laws to provide for
death benefits (without regard to the minimum death benefit guarantee) and other
policy benefits. Additional assets are held in GIAC's general account to cover
the contingency that the guaranteed minimum death benefit might exceed the death
benefit which would have been payable in the absence of such guarantee.
- --------------------------------------------------------------------------------
66
<PAGE>
---------
Separate
Account K
---------
1
---------
- --------------------------------------------------------------------------------
- -----------------------------------------
Note 2 -- Significant Accounting Policies
- -----------------------------------------
The following is a summary of significant accounting policies of the
Account.
Investments
(a) Net proceeds from the sale of annual premium variable life insurance
policies are invested by the Account's investment divisions in shares of the
corresponding Funds at the net asset value of each Fund's shares. All
distributions made by a Fund are reinvested in shares of the same Fund.
(b) The market value of the investments in the Funds is based on the net
asset value of the respective Funds as of their close of business on the
valuation date.
(c) Investment transactions are accounted for on the trade date and income
is recorded on the ex-dividend date.
(d) The cost of investments sold is determined on a first in, first out
(FIFO) basis.
Federal Income Taxes
The operations of the Account are part of the operations of GIAC and, as
such, are included in the combined tax return of GIAC. GIAC is taxed as a life
insurance company under the Internal Revenue Code of 1986, as amended.
Under current tax law, no federal taxes are payable by GIAC with respect
to the operations of the Account.
Purchases and Sales
During the six months ended June 30, 1998 and the year ended December 31,
1997, purchases and sales of shares of the Funds were as follows:
<TABLE>
<CAPTION>
The Guardian Separate Account K Purchases Purchases Sales Sales
June 30, December 31, June 30, December 31,
1998 1997 1998 1997
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
The Guardian Stock Fund, Inc. ....... $14,398,102 $20,297,230 $ 900,182 $ 991,563
The Guardian Bond Fund, Inc. ........ 343,877 276,923 42,086 103,032
The Guardian Cash Fund, Inc. ........ 2,074,167 1,411,205 1,114,680 1,354,306
Gabelli Capital Asset Fund .......... 90,965 -- 2,409 --
Baillie Gifford International Fund .. 1,086,737 1,726,612 210,624 163,423
Baillie Gifford Emerging Markets Fund 7,847 -- 3,192 --
The Guardian Small Cap Stock Fund ... 1,050,231 231,203 116,788 4,543
Value Line Centurion Fund, Inc. ..... 1,164,510 2,610,334 194,687 300,598
Value Line Strategic Asset
Management Trust .................. 953,864 2,133,657 260,802 180,590
MFS Growth with Income Series ....... 371,324 47,870 148,937 2,412
MFS Emerging Growth Series .......... 74,576 -- 2,635 --
MFS Total Return Series ............. 8,163 -- 37 --
MFS Bond Series ..................... -- -- -- --
AIM V.I. Capital Appreciation Fund .. 9,346 -- 167 --
AIM V.I. Value Fund ................. 30,139 -- 738 --
American Century VP Value Fund ...... 59,615 -- 260 --
American Century VP
International Fund ................ 8,644 -- 43 --
Fidelity VIP III Growth Opportunities
Portfolio ......................... 40,869 -- 625 --
Fidelity VIP Equity-Income Portfolio 30,501 -- 295 --
Fidelity VIP High Income Portfolio .. 72,964 -- 315 --
Fidelity VIP II Index 500 Portfolio . 70,208 -- 4,485 --
----------- ----------- ---------- ----------
Total ............................. $21,946,649 $28,735,034 $3,003,987 $3,100,467
=========== =========== ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
67
<PAGE>
- ---------
Separate
Account K
- ---------
1
- ---------
- --------------------------------------------------------------------------------
The Guardian Separate Account K
- -----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited)
- --------------------------------------
Note 3 - Administrative and Mortality
and Expense Risk Charges
- --------------------------------------
GIAC assumes mortality and expense risk related to the operations of the
Account. To cover these risks, GIAC deducts a daily charge from the net assets
of the Account which, on an annual basis, is equal to a rate of .60% of the
policy account value.
In addition, GIAC makes a monthly charge for the cost of life insurance,
based on the face value of the policyowner's insurance inforce, as compensation
for the anticipated cost of paying death benefits.
Under the terms of the policy, GIAC deducts charges from the gross
premiums before transferring the net premiums (gross premiums less other
contractual charges) to the Account. These other contractual charges consist of:
a) policy and administrative fees which vary with the face amount, age of
the insured or the duration of the contract;
b) an annual state premium tax charge as a percentage of the basic
premium. This rate varies by state of jurisdiction.
Currently, GIAC makes no charge against the Account for GIAC's federal
income taxes. However, GIAC reserves the right to charge taxes attributable to
the Account in the future.
Under current laws, GIAC may incur state and local taxes in several
states. At present, these taxes are not significant. In the event of a material
change in applicable state or local tax laws, GIAC reserves the right to charge
the Account for such taxes, if any, which are attributable to the Account.
- -----------------------------------------------
Note 4 -- Net Assets, June 30, 1998 (Unaudited)
- -----------------------------------------------
At June 30, 1998, net assets of the Account were as follows:
Accumulation of
Variable Life Insurance
Policyowners' Accounts $40,409,870
Owned by GIAC 20,119,202
-----------
$60,529,072
===========
The amount retained by GIAC in the Account is comprised of amounts
accruing to GIAC from the operations of the Account and retained therein.
Amounts retained by GIAC in the Account may be transferred by GIAC to its
general account.
In some instances the calculation of total assets may not agree due to
rounding.
- --------------------------------------------------------------------------------
68
<PAGE>
---------
Separate
Account K
---------
1
---------
- --------------------------------------------------------------------------------
This page intentionally left blank.
- --------------------------------------------------------------------------------
69
<PAGE>
- ------------
The Guardian
Stock Fund,
Inc.
- ------------
2
- ------------
- --------------------------------------------------------------------------------
The Guardian Stock Fund, Inc.
- -----------------------------------------------
SCHEDULE OF INVESTMENTS
June 30, 1998 (Unaudited)
- ----------------------
COMMON STOCKS -- 94.5%
- ----------------------
Shares Value
- --------------------------------------------------------------------------------
Aerospace and Defense -- 1.7%
38,500 Alliant Techsystems, Inc.* $ 2,435,125
80,000 Cordant Technologies, Inc. 3,690,000
65,200 General Dynamics Corp. 3,031,800
77,025 Lockheed Martin Corp. 8,155,022
110,290 Northrop Grumman Corp. 11,373,656
201,750 Precision Castparts Corp. 10,768,406
95,800 Rockwell Int'l. Corp. 4,604,387
53,000 Sundstrand Corp. 3,034,250
168,100 United Technologies Corp. 15,549,250
------------
62,641,896
------------
Air Transportation -- 1.7%
63,000 Alaska Air Group, Inc.* 3,437,437
125,000 America West Hldg. Corp.* 3,570,312
351,000 AMR Corp., DE* 29,220,750
43,000 Comair Hldgs., Inc. 1,327,625
151,000 Continental Airlines, Inc.* 9,192,125
88,000 Delta Airlines, Inc. 11,374,000
37,000 UAL Corp.* 2,886,000
------------
61,008,249
------------
Appliance and Furniture -- 0.7%
206,000 Ethan Allen Interiors, Inc. 10,287,125
174,000 Furniture Brands Int'l., Inc.* 4,882,875
100,000 Hon Industries, Inc. 3,400,000
50,000 Knoll Corp.* 1,475,000
60,000 Leggett & Platt, Inc. 1,500,000
200,000 Herman Miller, Inc. 4,862,500
------------
26,407,500
------------
Automotive -- 2.2%
350,000 Chrysler Corp. 19,731,250
965,000 Ford Motor Co. 56,935,000
56,800 General Motors Corp. 3,794,950
------------
80,461,200
------------
Automotive Parts -- 0.6%
38,000 Arvin Industries, Inc. 1,379,875
68,000 Cooper Tire & Rubber Co. 1,402,500
84,000 Goodyear Tire & Rubber Co. 5,412,750
104,500 Kaydon Corp. 3,690,156
276,933 Meritor Automotive, Inc. 6,646,392
24,000 Modine Mfg. Co. 831,000
18,400 Timken Co. 566,950
------------
19,929,623
------------
Biotechnology -- 0.2%
93,600 Amgen, Inc.* 6,119,100
------------
Building Materials and Homebuilders -- 1.0%
33,000 Centex Construction Products, Inc. 1,270,500
16,500 Crossman Communities, Inc.* 501,187
65,000 Fleetwood Enterprises, Inc. 2,600,000
150,000 D.R. Horton, Inc.* 3,131,250
92,500 Lafarge Corp. 3,636,406
95,000 Lennar Corp. 2,802,500
9,400 Lone Star Industries, Inc. 724,387
79,650 Martin Marietta Materials, Inc. 3,584,250
24,000 Medusa Corp. 1,506,000
62,000 Southdown, Inc. 4,425,250
65,000 USG Corp. 3,518,125
36,000 U.S. Home Corp.* 1,485,000
6,300 Valspar Corp. 249,638
45,700 Vulcan Materials Co. 4,875,619
------------
34,310,112
------------
Capital Goods-Miscellaneous Technology -- 0.0%
43,000 AFC Cable Systems, Inc.* 1,526,500
------------
Chemicals -- 4.2%
68,000 Albemarle Corp. 1,500,250
282,000 Cambrex Corp. 7,402,500
49,000 Carlisle Cos., Inc. 2,110,062
115,000 Crompton & Knowles Corp. 2,896,563
38,400 Dexter Corp. 1,221,600
270,000 Dow Chemical Co. 26,105,625
798,000 E.I. Dupont de Nemours, Inc. 59,550,750
260,000 Lyondell Petrochemical Co. 7,913,750
150,000 Millennium Chemicals, Inc. 5,081,250
153,500 Minnesota Mining & Mfg. Co. 12,615,781
147,000 Morton Int'l., Inc. 3,675,000
102,000 PPG Industries, Inc. 7,095,375
40,000 Rohm & Haas Co. 4,157,500
215,000 Solutia, Inc. 6,167,813
56,300 Union Carbide Corp. 3,005,012
------------
150,498,831
------------
Computer Software -- 3.6%
11,700 ChoicePoint, Inc.* 592,312
215,000 Computer Associates Int'l., Inc. 11,945,937
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
70
<PAGE>
------------
The Guardian
Stock Fund,
Inc.
------------
2
------------
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
27,000 DST Systems, Inc.* $ 1,512,000
9,900 J.D. Edwards* 425,081
944,400 Microsoft Corp.* 102,349,350
104,000 Sterling Software, Inc.* 3,074,500
138,800 SunGuard Data Systems, Inc.* 5,326,450
65,000 Symantec Corp.* 1,698,125
36,000 Wind River Systems, Inc.* 1,291,500
------------
128,215,255
------------
Computer Systems -- 5.9%
26,000 Apple Computer, Inc.* 744,250
379,600 Compaq Computer Corp. 10,771,150
57,500 Honeywell, Inc. 4,804,844
654,500 Int'l. Business Machines 75,144,781
478,200 Lexmark Int'l. Group, Inc.* 29,170,200
230,000 Pitney Bowes, Inc. 11,068,750
61,400 Sanmina Corp.* 2,663,225
1,476,400 Storage Technology Corp.* 64,038,850
227,800 Sun Microsystems, Inc.* 9,895,063
247,800 Western Digital Corp.* 2,927,138
------------
211,228,251
------------
Conglomerates -- 1.0%
149,800 Loews Corp. 13,051,325
310,000 Textron, Inc. 22,223,125
------------
35,274,450
------------
Containers-Metals and Plastic -- 0.1%
37,000 Aptargroup, Inc. 2,300,938
------------
Cosmetics and Toiletries -- 0.0%
21,600 Alberto-Culver Co. 548,100
16,966 Herbalife Int'l., Inc. 349,932
------------
898,032
------------
Drugs and Hospitals -- 8.4%
1,000,000 Abbott Laboratories 40,875,000
99,660 Allegiance Corp. 5,107,575
192,000 American Home Products Corp. 9,936,000
275,000 Arterial Vascular Engineering, Inc.* 9,831,250
17,400 Biomet, Inc.* 575,287
489,600 Bristol-Myers Squibb Corp. 56,273,400
25,000 Health Care & Retirement Co.* 985,937
112,600 Lincare Hldgs., Inc.* 4,736,238
349,700 Merck & Co., Inc. 46,772,375
27,000 Patterson Dental Co.* 988,875
741,600 Pfizer, Inc. 80,602,650
27,000 Safeskin Corp.* 1,110,375
503,400 Schering-Plough Corp. 46,124,025
------------
303,918,987
------------
Electrical Equipment -- 3.9%
1,541,200 General Electric Co. 140,249,200
25,000 Hubbel, Inc. 1,040,625
------------
141,289,825
------------
Electronics and Instruments -- 0.2%
64,400 Analogic Corp. 2,881,900
42,200 Dynatech Corp.* 131,875
23,100 Fluke Corp. 759,413
60,000 Tektronix, Inc. 2,122,500
------------
5,895,688
------------
Energy-Miscellaneous -- 0.4%
451,300 Frontier Oil Corp.* 3,610,400
192,500 Giant Industries, Inc. 3,344,688
237,430 Holly Corp. 6,113,823
84,000 Howell Corp. 913,500
------------
13,982,411
------------
Entertainment and Leisure -- 0.5%
16,500 Anchor Gaming* 1,280,812
400,000 Carnival Corp. 15,850,000
------------
17,130,812
------------
Financial-Banks -- 10.1%
25,000 Associated Bank Corp. 940,625
720,000 BankAmerica Corp. 62,235,000
347,870 Bank of Boston Corp. 19,350,269
130,000 Bank of New York, Inc. 7,889,375
17,000 BB&T Corp. 1,149,625
13,000 CCB Financial Corp. 1,381,250
15,000 Centura Banks, Inc. 937,500
868,936 Chase Manhattan Corp. 65,604,668
188,284 Citicorp 28,101,387
81,000 City National Corp. 2,991,938
145,200 Comerica, Inc. 9,619,500
67,875 Commerce Bankshares, Inc. 3,313,148
22,000 Community First Bankshares 576,125
20,000 Cullen Frost Bankers, Inc. 1,085,000
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
71
<PAGE>
- ------------
The Guardian
Stock Fund,
Inc.
- ------------
2
- ------------
- --------------------------------------------------------------------------------
The Guardian Stock Fund, Inc.
- ---------------------------------------
SCHEDULE OF INVESTMENTS
June 30, 1998 (Unaudited) (Continued)
Shares Value
- ----------------------------------------------------------------------
73,867 Fifth Third Bancorp* $ 4,653,652
13,800 First Chicago NBD Corp. 1,223,025
60,000 First Merit Corp. 1,747,500
543,800 First Union Corp. 31,676,350
235,000 Fleet Financial Group, Inc. 19,622,500
81,922 Hubco, Inc. 2,933,832
90,000 Imperial Bancorp* 2,700,000
140,000 KeyCorp 4,987,500
22,627 M & T Bank Corp. 12,535,358
197,000 Mellon Bank Corp. 13,716,125
89,068 National City Corp. 6,323,828
270,120 Norwest Corp. 10,095,735
75,000 Premier Bancshares, Inc., GA 1,987,500
108,000 Star Banc Corp. 6,898,500
327,033 Summit Bancorp 15,534,067
49,500 Union BanCal Corp. 4,776,750
45,000 U.S. Bancorp, Inc. 1,935,000
23,000 U.S. Trust Corp. 1,753,750
43,000 Webster Financial Corp. 1,429,750
21,500 Wells Fargo & Co. 7,933,500
36,000 Westamerica Bancorp 1,156,500
72,000 Zions Bancorp 3,825,000
-------------
364,621,132
-------------
Financial-Other -- 8.2%
294,400 American Express Co. 33,561,600
200,495 Associates First Capital Corp. 15,413,053
137,000 Countrywide Credit Industries, Inc. 6,952,750
25,000 Dain Rauscher Corp. 1,368,750
23,200 Donaldson, Lufkin & Jenrette Sec. Corp. 1,178,850
21,666 Duff & Phelps Credit Rating Co. 1,207,879
190,200 A.G. Edwards, Inc. 8,119,162
258,400 Federal Home Loan Mortgage Corp. 12,160,950
434,600 Federal National Mortgage Assn. 26,401,950
288,000 Franklin Resources, Inc. 15,552,000
125,000 H & R Block, Inc. 5,265,625
338,000 Jefferies Group, Inc. 13,858,000
43,667 Legg Mason, Inc. 2,513,563
122,000 Lehman Brothers Hldgs., Inc. 9,462,625
238,000 McDonald & Co. Investments, Inc. 7,809,375
257,200 Merrill Lynch & Co., Inc. 23,726,700
384,075 Morgan Keegan, Inc. 9,937,941
230,000 Morgan Stanley Dean Witter 21,016,250
175,000 Paine Webber Group, Inc. 7,503,125
26,200 Ragen MacKenzie Group, Inc.* 396,275
346,106 Raymond James Financial, Inc. 10,361,533
175,000 SLM Hldg. Corp. 8,575,000
846,000 Travelers Group, Inc. 51,288,750
-------------
293,631,706
-------------
Financial-Thrift -- 1.8%
16,164 H.F. Ahmanson & Co. 1,147,644
67,200 Astoria Financial Corp. 3,595,200
406,250 BankAtlantic Bancorp, Inc. 4,968,828
27,040 California Federal Bancorp, Inc.* 581,360
170,740 Charter One Financial, Inc. 5,751,804
99,000 Coastal Bancorp, Inc. 2,425,500
20,000 Coast Federal Litigation Trust* 302,500
155,925 Commercial Federal Corp. 4,931,128
220,000 Dime Bancorp, Inc. 6,586,250
40,000 Golden State Bancorp, Inc.* 1,190,000
40,000 Golden State Bancorp, Inc.* (warrants) 212,500
152,000 Greenpoint Financial Corp. 5,719,000
124,000 Long Island Bancorp, Inc. 7,533,000
29,452 MAF Bancorp, Inc. 1,071,317
37,666 Pacific Crest Capital, Inc.* 663,863
123,543 Progressive Bank, Inc. 4,825,898
760,954 Sovereign Bancorp, Inc. 12,436,842
-------------
63,942,634
-------------
Food, Beverage and Tobacco -- 1.4%
64,790 CKE Restaurants, Inc. 2,672,588
53,744 Earthgrains Co. 3,002,946
186,000 Fortune Brands, Inc. 7,149,375
142,000 Interstate Bakeries Corp. 4,712,625
493,600 Philip Morris Cos., Inc. 19,435,500
83,100 Pioneer Hi-Bred Int'l., Inc. 3,438,263
150,000 Sara Lee Corp. 8,390,625
38,000 Smithfield Foods, Inc.* 1,159,000
63,000 Universal Corp., VA 2,354,625
-------------
52,315,547
-------------
Footwear -- 0.3%
111,200 Footstar, Inc.* 5,337,600
49,000 Payless ShoeSource, Inc.* 3,610,687
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
72
<PAGE>
------------
The Guardian
Stock Fund,
Inc.
------------
2
------------
- --------------------------------------------------------------------------------
Shares Value
- ----------------------------------------------------------------------
64,000 Stride Rite Corp. $ 964,000
-------------
9,912,287
-------------
Household Products -- 1.0%
185,200 Dial Corp. 4,803,625
349,800 Procter & Gamble Co. 31,853,663
-------------
36,657,288
-------------
Insurance -- 6.1%
37,500 Allied Group, Inc. 1,755,469
492,300 Allstate Corp. 45,076,219
30,000 W.R. Berkley Corp. 1,201,875
153,000 Chicago Title Corp.* 7,066,688
46,000 Chubb Corp. 3,697,250
222,300 Cigna Corp. 15,338,700
60,000 CMAC Investment Corp. 3,690,000
36,000 Enhance Financial Svcs. Group, Inc. 1,215,000
130,000 Equitable Cos., Inc. 9,741,875
98,000 Everest Reinsurance Hldgs. 3,766,875
66,700 Executive Risk, Inc. 4,919,125
33,000 Fidelity National Financial, Inc. 1,313,813
42,000 Financial Sec. Assur. Hldgs. Ltd. 2,467,500
66,300 General RE Corp. 16,807,050
81,900 Hartford Financial Svcs. Group, Inc. 9,367,313
150,000 Horace Mann Educators Corp. 5,175,000
54,000 Jefferson Pilot Corp. 3,128,625
103,270 Liberty Financial Cos., Inc. 3,562,815
132,000 Lincoln National Corp., Inc. 12,061,500
272,100 Marsh & McLennan Cos., Inc. 16,445,044
50,600 MBIA, Inc. 3,788,675
30,000 Mercury General Corp. 1,933,125
315,000 MGIC Investment Corp. 17,974,687
229,500 Old Republic Int'l. Corp. 6,727,219
144,000 Penn America Group, Inc.* 1,944,000
67,000 Reinsurance Group of America* 3,437,938
85,059 ReliaStar Financial Group 4,082,832
151,445 St. Paul Cos., Inc. 6,370,155
108,000 State Auto Financial Corp. 3,442,500
12,000 Unitrin, Inc. 834,000
-------------
218,332,867
-------------
Lodging -- 0.2%
100,000 Fairfield Communities, Inc.* 1,918,750
238,000 Prime Hospitality Corp.* 4,150,125
-------------
6,068,875
-------------
Machinery and Equipment -- 0.6%
102,000 AAR Corp. 3,015,375
74,200 Dover Corp. 2,541,350
95,000 Eaton Corp. 7,386,250
79,900 Illinois Tool Works, Inc. 5,328,331
99,100 Parker Hannifin Corp. 3,778,188
25,000 SPX Corp.* 1,609,375
-------------
23,658,869
-------------
Merchandising-Department Stores -- 2.7%
122,000 Dayton Hudson Corp. 5,917,000
125,000 Federated Department Stores, Inc.* 6,726,562
215,000 Fred Meyer, Inc., DE* 9,137,500
87,000 Shopko Stores, Inc.* 2,958,000
40,000 Stein Mart, Inc.* 540,000
376,800 TJX Cos., Inc. 9,090,300
1,036,000 Wal-Mart Stores, Inc. 62,937,000
-------------
97,306,362
-------------
Merchandising-Drugs -- 0.5%
12,000 Cardinal Health, Inc. 1,125,000
251,472 CVS Corp. 9,791,691
37,000 General Nutrition Cos., Inc.* 1,151,625
110,000 Walgreen Co. 4,544,375
-------------
16,612,691
-------------
Merchandising-Food -- 0.9%
240,000 Albertson's, Inc. 12,435,000
377,990 Safeway, Inc.* 15,379,468
20,000 Suiza Foods Corp.* 1,193,750
113,000 Supervalu, Inc. 5,014,375
-------------
34,022,593
-------------
Merchandising-Mass -- 0.1%
43,500 Brylane, Inc.* 2,001,000
20,000 Lands End, Inc.* 632,500
-------------
2,633,500
-------------
Merchandising-Special -- 2.8%
47,100 Best Buy, Inc.* 1,704,313
69,000 BJ's Wholesale Club, Inc.* 2,803,125
71,000 The Dress Barn* 1,766,125
360,000 GAP, Inc. 22,185,000
376,000 Home Depot, Inc. 31,231,500
See notes to financial statements.
* Non-income producing security.
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Inc.
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2
- ------------
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The Guardian Stock Fund, Inc.
- ---------------------------------------
SCHEDULE OF INVESTMENTS
June 30, 1998 (Unaudited) (Continued)
Shares Value
- ----------------------------------------------------------------------
53,400 Lowes Cos., Inc.* $ 2,166,038
275,000 Pier 1 Imports, Inc. 6,565,625
238,500 Proffitts, Inc.* 9,629,437
159,000 Ross Stores, Inc. 6,837,000
250,000 Tandy Corp. 13,265,625
42,500 Tiffany & Co., Inc. 2,040,000
-------------
100,193,788
-------------
Metals-Miscellaneous -- 0.1%
48,924 Alumax, Inc. 2,268,850
-------------
Miscellaneous-Capital Goods -- 0.1%
69,000 Aeroquip-Vickers, Inc. 4,027,875
-------------
Miscellaneous-Consumer Growth Staples -- 0.8%
70,000 American Greetings Corp. 3,565,625
178,100 Cognizant Corp.* 11,220,300
52,500 Interpublic Group Cos., Inc. 3,186,094
110,000 A.C. Nielsen Corp.* 2,777,500
190,000 Valassis Communications, Inc.* 7,326,875
-------------
28,076,394
-------------
Natural Gas-Diversified -- 0.1%
258,600 Mitchell Energy & Dev. Corp. 4,978,050
-------------
Oil and Gas Producing -- 1.7%
118,400 Barrett Resources Corp.* 4,432,600
205,000 Basin Exploration, Inc.* 3,613,125
64,300 Callon Petroleum Co.* 920,294
304,000 Chieftain Int'l., Inc.* 7,201,000
247,000 Devon Energy Corp. 8,629,563
243,600 Diamond Offshore Drilling, Inc. 9,744,000
44,700 Forcenergy Gas Exploration, Inc.* 796,219
151,200 Meridian Resource Corp.* 1,067,850
750,900 Petromet Resources Ltd.* 1,689,525
45,900 Petsec Energy Ltd.* 743,006
95,000 Pride Int'l., Inc.* 1,609,062
650,700 Rigel Energy Corp.* 5,925,303
325,100 St. Mary Land & Exploration Co. 7,843,037
60,700 Snyder Oil Corp. 1,210,206
152,100 Vastar Resources, Inc. 6,644,869
-------------
62,069,659
-------------
Oil and Gas Services -- 2.6%
150,000 BJ Services Co.* 4,359,375
86,090 Camco Int'l., Inc. 6,704,259
70,000 Cooper Cameron Corp.* 3,570,000
87,500 ENSCO Int'l., Inc. 1,520,313
190,400 Halliburton Co. 8,484,700
376,800 Input/Output, Inc.* 6,711,750
580,300 Nabors Industries, Inc.* 11,497,194
235,000 Noble Drilling Corp.* 5,654,687
189,300 Offshore Logistics, Inc.* 3,360,075
339,400 Schlumberger Ltd. 23,185,263
125,000 Smith Int'l., Inc.* 4,351,562
52,000 Transocean Offshore, Inc. 2,314,000
235,400 Varco Int'l., Inc.* 4,663,862
30,000 Veritas DGC, Inc.* 1,498,125
112,100 Weatherford Enterra, Inc.* 4,161,713
100,000 Willbros Group, Inc.* 1,562,500
-------------
93,599,378
-------------
Oil-Integrated-Domestic -- 0.3%
142,000 Sun, Inc. 5,511,375
460,500 Tesoro Petroleum, Inc.* 7,310,437
-------------
12,821,812
-------------
Oil-Integrated-International -- 4.7%
228,800 Chevron Corp. 19,004,700
1,539,800 Exxon Corp. 109,806,988
529,800 Mobil Corp. 40,595,925
-------------
169,407,613
-------------
Paper and Forest Products -- 0.5%
52,857 Deltic Timber Corp. 1,324,729
245,000 Kimberly Clark Corp. 11,239,375
123,000 Rayonier, Inc. 5,658,000
-------------
18,222,104
-------------
Publishing-News -- 0.8%
35,100 Central Newspapers, Inc. 2,448,225
133,400 Gannett Co., Inc. 9,479,737
188,200 Harte-Hanks Communications 4,857,912
80,000 New York Times Co. 6,340,000
16,000 Tribune Co. 1,101,000
6,700 Washington Post Co. 3,859,200
-------------
28,086,074
-------------
Railroads -- 0.4%
47,949 Burlington Northern Santa Fe 4,707,992
182,500 Kansas City Southern Inds., Inc. 9,056,562
-------------
13,764,554
-------------
See notes to financial statements.
* Non-income producing security.
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Inc.
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2
------------
- --------------------------------------------------------------------------------
Shares Value
- ----------------------------------------------------------------------
Real Estate -- 0.1%
95,000 LNR Property Corp. $ 2,434,375
-------------
Textile-Apparel and Production -- 1.0%
70,000 Burlington Industries, Inc.* 984,375
129,000 Liz Claiborne, Inc. 6,740,250
196,000 Jones Apparel Group, Inc.* 7,166,250
29,000 Kellwood Co. 1,036,750
37,500 Nautica Enterprises, Inc.* 1,005,469
15,000 St. John Knits, Inc. 579,375
295,000 Unifi, Inc. 10,103,750
148,000 V.F. Corp. 7,622,000
58,400 Westpoint Stevens, Inc.* 1,927,200
-------------
37,165,419
-------------
Transportation-Miscellaneous -- 0.6%
192,000 Airborne Freight Corp. 6,708,000
37,000 Alexander & Baldwin, Inc. 1,077,625
22,000 Expeditors Int'l. Wash., Inc. 968,000
108,000 GATX Corp.* 4,738,500
376,700 Maritrans, Inc. 3,413,844
45,000 Sea Containers Ltd.* 1,721,250
58,000 Trinity Industries, Inc. 2,407,000
-------------
21,034,219
-------------
Truckers -- 0.1%
32,100 FRP Pptys., Inc.* 1,043,250
49,500 Rollins Truck Leasing Corp. 612,563
60,000 U.S. Freightways Corp. 1,970,625
56,250 Werner Enterprises, Inc. 1,072,266
-------------
4,698,704
-------------
Utilities-Electric -- 1.1%
22,700 Cleco Corp. 675,325
76,740 Duke Energy Co. 4,546,845
79,800 Energy East Corp. 3,321,675
185,000 Florida Progress Corp. 7,608,125
210,000 FPL Group, Inc. 13,230,000
56,500 IPALCO Enterprises 2,510,719
43,420 LG & E Energy Corp. 1,175,054
7,000 Minnesota Power & Light Co. 278,250
58,000 NIPSCO Industries, Inc. 1,624,000
96,300 Texas Utilities Co. 4,008,488
-------------
38,978,481
-------------
Utilities-Gas and Pipeline-- 0.1%
5,100 Indiana Energy, Inc. 152,362
45,000 KN Energy, Inc. 2,438,438
26,300 NICOR, Inc. 1,055,288
-------------
3,646,088
-------------
Utilities-Telecommunications -- 6.4%
29,000 Aliant Communications, Inc. 795,687
702,800 Ameritech Corp. 31,538,150
689,200 AT & T Corp. 39,370,550
680,000 Bell Atlantic Corp. 31,025,000
853,200 BellSouth Corp. 57,271,050
495,000 GTE Corp.* 27,534,375
472,000 SBC Communications, Inc. 18,880,000
135,000 Sprint Corp.* 9,517,500
325,000 U.S. West, Inc.* 15,275,000
-------------
231,207,312
-------------
TOTAL COMMON STOCKS
(Cost $2,230,631,491) 3,399,434,760
-------------
- ----------------------------
REPURCHASE AGREEMENT -- 4.9%
- ----------------------------
Shares Value
- ----------------------------------------------------------------------
Principal
Amount Value
- ----------------------------------------------------------------------
$ 174,758,000 State Street Bank & Trust Co.
repurchase agreement,
dated 6/30/98, maturity value
$174,785,670 at 5.70%, due 7/1/98
(collateralized by $178,260,000
U.S. Treasury Notes, 6.00%,
due 6/30/99) $ 174,758,000
--------------
TOTAL REPURCHASE AGREEMENT
(Cost $174,758,000) 174,758,000
--------------
TOTAL INVESTMENTS -- 99.4%
(Cost $2,405,389,491) 3,574,192,760
CASH, RECEIVABLES AND OTHER
ASSETS LESS LIABILITIES -- 0.6% 21,659,204
--------------
NET ASSETS -- 100.0% $3,595,851,964
==============
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
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Stock Fund,Inc.
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2
- ----------------
- --------------------------------------------------------------------------------
The Guardian Stock Fund, Inc.
- -----------------------------
STATEMENT OF ASSETS
AND LIABILITIES
June 30, 1998 (Unaudited)
ASSETS
Investments, at market (cost $2,405,389,491) $3,574,192,760
Cash 41,840
Receivable for securities sold 53,432,072
Dividends receivable 2,942,866
Receivable for fund shares sold 642,156
Interest receivable 26,670
Other assets 2,365
--------------
TOTAL ASSETS 3,631,280,729
--------------
LIABILITIES
Payable for securities purchased 29,463,899
Payable for fund shares redeemed 1,038,829
Accrued expenses 214,485
Due to affiliates 4,711,552
--------------
TOTAL LIABILITIES 35,428,765
--------------
NET ASSETS $3,595,851,964
==============
COMPONENTS OF NET ASSETS
Capital stock, at par $ 71,043
Additional paid-in capital 2,237,947,021
Undistributed net investment income 2,078,030
Accumulated net realized gain on investments 186,952,601
Net unrealized appreciation of investments 1,168,803,269
--------------
NET ASSETS $3,595,851,964
==============
Shares Outstanding -- $0.001 par value 71,042,956
--------------
NET ASSET VALUE PER SHARE $ 50.62
==============
STATEMENT OF OPERATIONS
Six Months Ended
June 30, 1998 (Unaudited)
Investment Income:
Dividends $ 20,822,564
Interest 5,248,728
Less: Foreign tax withheld (6,750)
--------------
Total Income 26,064,542
--------------
Expenses:
Investment advisory fees -- Note B 8,558,120
Custodian fees 193,992
Printing expense 163,525
Registration fees 42,000
Audit fees 8,750
Directors' fees -- Note B 8,000
Legal fees 2,800
Insurance expense 2,286
Transfer agent fees 1,650
Other 350
--------------
Total Expenses 8,981,473
--------------
Net Investment Income 17,083,069
--------------
Realized and Unrealized Gain/(Loss)
on Investments -- Note F
Net realized gain on investments 186,953,070
Net change in unrealized appreciation
of investments 226,105,842
--------------
Net Realized and Unrealized Gain
on Investments 413,058,912
--------------
Net Increase in Net Assets
from Operations $ 430,141,981
==============
See notes to financial statements.
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Stock Fund,Inc.
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2
----------------
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Year Ended
Ended December 31,
June 30, 1998 1997
(Unaudited) (Audited)
--------------- ---------------
<S> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS
From Operations:
Net investment income $ 17,083,069 $ 32,357,899
Net realized gain on investments 186,953,070 392,500,062
Net change in unrealized appreciation of investments 226,105,842 391,861,332
--------------- ---------------
Net Increase in Net Assets from Operations 430,141,981 816,719,293
--------------- ---------------
Dividends and Distributions to Shareholders from:
Net investment income (15,303,452) (32,059,486)
Net realized gain on investments (93,901,593) (344,492,912)
--------------- ---------------
Total Dividends and Distributions to Shareholders (109,205,045) (376,552,398)
--------------- ---------------
From Capital Share Transactions:
Net increase in net assets from capital share transactions -- Note G 52,728,183 555,292,020
--------------- ---------------
Net Increase in Net Assets 373,665,119 995,458,915
Net Assets:
Beginning of period 3,222,186,845 2,226,727,930
--------------- ---------------
End of period* $ 3,595,851,964 $ 3,222,186,845
=============== ===============
* Includes undistributed net investment income of: $ 2,078,030 $ 298,413
</TABLE>
See notes to financial statements.
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Stock Fund,Inc.
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2
- ---------------
- --------------------------------------------------------------------------------
The Guardian Stock Fund, Inc.
- -----------------------------
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding
throughout the periods indicated:
<TABLE>
<CAPTION>
Six Months
Ended Year Ended December 31, (Audited)
June 30, 1998 --------------------------------------------------------------------
(Unaudited) 1997 1996 1995 1994
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ...... $ 46.05 $ 38.59 $ 34.72 $ 27.33 $ 29.00
--------------- --------------- --------------- ------------- -------------
Income from investment
operations:
Net investment
income ................. 0.25 0.52 0.53 0.44 0.40
Net realized and
unrealized gain/
(loss) on investments .. 5.90 12.97 8.62 9.01 (0.77)
--------------- --------------- --------------- ------------- -------------
Net increase/(decrease)
from investment
operations ............. 6.15 13.49 9.15 9.45 (0.37)
--------------- --------------- --------------- ------------- -------------
Dividends and Distributions
to Shareholders from:
Net investment income .... (0.22) (0.52) (0.54) (0.44) (0.40)
Net realized gain ........ (1.36) (5.51) (4.74) (1.62) (0.90)
--------------- --------------- --------------- ------------- -------------
Total dividends and
distributions .......... (1.58) (6.03) (5.28) (2.06) (1.30)
--------------- --------------- --------------- ------------- -------------
Net asset value, end of
period ................... $ 50.62 $ 46.05 $ 38.59 $ 34.72 $ 27.33
--------------- --------------- --------------- ------------- -------------
Total return* .............. 13.38% 35.58% 26.90% 34.65% (1.27)%
--------------- --------------- --------------- ------------- -------------
Ratios/supplemental data:
Net assets, end of period
(000's omitted) ........ $ 3,595,852 $ 3,222,187 $ 2,226,728 $ 1,615,271 $ 1,038,991
Ratio of expenses to
average net assets ..... 0.52%(a) 0.52% 0.53% 0.53% 0.53%
Ratio of net invest-
ment income to
average net assets ..... 1.00%(a) 1.17% 1.50% 1.39% 1.49%
Portfolio turnover
rate ................... 23% 51% 66% 78% 53%
Average rate of
commissions paid(b) .... $ 0.0509 $ 0.0457 $ 0.0469
<CAPTION>
Year Ended December 31, (Audited)
--------------------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------
Net asset value,
beginning of period ...... $ 25.52 $ 23.28 $ 17.85 $ 21.39 $ 19.18 $ 16.35
----------- ----------- ----------- ----------- ----------- -----------
Income from investment
operations:
Net investment
income ................. 0.58 0.48 0.63 0.69 0.84 0.52
Net realized and
unrealized gain/
(loss) on investments .. 4.47 3.97 5.74 (3.13) 3.61 2.80
----------- ----------- ----------- ----------- ----------- -----------
Net increase/(decrease)
from investment
operations ............. 5.05 4.45 6.37 (2.44) 4.45 3.32
----------- ----------- ----------- ----------- ----------- -----------
Dividends and Distributions
to Shareholders from:
Net investment income .... (0.59) (0.48) (0.64) (0.71) (0.90) (0.49)
Net realized gain ........ (0.98) (1.73) (0.30) (0.39) (1.34) --
----------- ----------- ----------- ----------- ----------- -----------
Total dividends and
distributions .......... (1.57) (2.21) (0.94) (1.10) (2.24) (0.49)
----------- ----------- ----------- ----------- ----------- -----------
Net asset value, end of
period ................... $ 29.00 $ 25.52 $ 23.28 $ 17.85 $ 21.39 $ 19.18
----------- ----------- ----------- ----------- ----------- -----------
Total return* .............. 19.96% 20.07% 35.96% (11.85)% 23.55% 20.37%
----------- ----------- ----------- ----------- ----------- -----------
Ratios/supplemental data:
Net assets, end of period
(000's omitted) ........ $ 869,114 $ 537,354 $ 380,962 $ 256,039 $ 269,950 $ 172,900
Ratio of expenses to
average net assets ..... 0.54% 0.55% 0.56% 0.57% 0.57% 0.61%
Ratio of net invest-
ment income to
average net assets ..... 2.20% 2.14% 3.07% 3.66% 4.13% 2.88%
Portfolio turnover
rate ................... 45% 62% 51% 54% 38% 71%
Average rate of
commissions paid(b)
</TABLE>
* Total returns do not reflect the effects of charges deducted pursuant to the
terms of GIAC's variable contracts. Inclusion of such charges would reduce
the total returns for all periods shown.
(a) Annualized.
(b) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for trades on which
commissions are charged.
See notes to financial statements.
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The Guardian
Bond Fund,Inc.
- --------------
3
- --------------
- --------------------------------------------------------------------------------
The Guardian Bond Fund, Inc.
- ----------------------------
SCHEDULE OF INVESTMENTS
June 30, 1998 (Unaudited)
- ---------------------
ASSET BACKED -- 14.4%
- ---------------------
Principal
Amount Value
- -----------------------------------------------------------------------
$ 3,500,000 Advanta Mtg. Loan Trust 1998 A3
6.27% due 12/25/17 $ 3,519,215
2,700,000 Amresco 1997-1 M1F
7.42% due 3/25/27 2,769,201
5,000,000 CS First Boston 1996-2 A5
6.90% due 6/15/27 5,121,900
3,900,000 Deutsche Financial 1997-1 A2
6.55% due 9/15/27 3,937,284
3,500,000 EQCC Home Equity Loan Tr. 1996 A4
6.56% due 3/15/23 3,546,270
3,750,000 Green Tree 1998-4 A5
6.18% due 4/1/30 3,760,500
3,500,000 Green Tree 1997-E HEA4
6.69% due 1/15/29 3,531,500
3,500,000 Money Store Tr. 1998-A AF5
6.37% due 12/15/02 3,517,080
4,360,000 Premier Auto Tr. 1997-2 B
6.53% due 12/6/03 4,423,089
3,300,000 Sears Cr. Account Master 1998-1 A
5.80% due 8/15/05 3,291,090
3,500,000 UAC Auto Trust 1997-B A2
6.70% due 6/10/03 3,547,495
6,250,000 UCFC Loan Tr. 1997-D A6
7.095% due 4/15/27 6,410,188
4,500,000 Vanderbilt Mtg. 1997-B 1A3
6.975% due 8/7/11 4,599,540
------------
TOTAL ASSET BACKED
(Cost $51,540,110) 51,974,352
------------
- ------------------------
CORPORATE BONDS -- 36.9%
- ------------------------
Aerospace and Defense -- 1.7%
2,800,000 Lockheed Martin Corp.
6.55% due 5/15/99 2,808,487
3,500,000 Raytheon Co.
5.95% due 3/15/01 3,498,999
------------
6,307,486
------------
Automotive -- 0.7%
2,850,000 Ford Motor Credit Co.
6.125% due 4/28/03 2,854,996
------------
Beverage and Tobacco -- 2.8%
3,500,000 Coca Cola Enterprises, Inc.
6.95% due 11/15/26 3,669,029
3,000,000 Philip Morris Cos., Inc.
7.50% due 4/1/04 3,154,839
3,500,000 Philip Morris Cos., Inc.
6.15% due 3/15/00 3,498,215
------------
10,322,083
------------
Conglomerates -- 1.0% 3,500,000 Tyco Int'l. Group S.A.
6.125% due 6/15/01 3,509,611
------------
Entertainment -- 0.8%
2,850,000 Time Warner, Inc.
6.95% due 1/15/28 2,889,088
------------
Financial-Other -- 12.3%
3,500,000 Associates Corp. of North America
5.85% due 1/15/01 3,488,779
2,850,000 Bear Stearns Cos., Inc.
6.20% due 3/30/03 2,854,583
3,500,000 Donaldson, Lufkin & Jenrette Sec. Corp.
6.11% due 5/15/01 3,503,150
3,500,000 Hutchinson Whampoa Fin. C I Ltd.+
7.50% due 8/1/27 2,678,526
9,500,000 Lehman Brothers Hldgs., Inc.
6.92% due 10/4/99 9,601,650
7,000,000 Lehman Brothers Hldgs., Inc.
6.00% due 2/26/01 6,974,660
3,500,000 Merrill Lynch & Co.
6.02% due 5/11/01 3,505,205
2,350,000 Morgan Stanley Dean Witter
6.09% due 3/9/01 2,349,530
3,500,000 Salomon, Inc.
6.65% due 7/15/01 3,558,146
6,000,000 Salomon, Inc.
6.625% due 11/30/00 6,089,358
------------
44,603,587
------------
Hospital-Supplies -- 1.0%
3,500,000 Mallinckrodt, Inc.+
6.30% due 3/15/11 3,510,731
------------
See notes to financial statements.
+ Rule 144A restricted security.
- --------------------------------------------------------------------------------
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Bond Fund,Inc.
--------------
3
--------------
- --------------------------------------------------------------------------------
Principal
Amount Value
- -----------------------------------------------------------------------
Household Products -- 1.0%
$ 3,500,000 U.S. Filter Corp.+
6.375% due 5/15/11 $ 3,495,450
------------
Insurance -- 1.9%
3,500,000 Conseco, Inc.
6.40% due 6/15/01 3,494,050
3,100,000 Zurich Capital Tr.+
8.376% due 6/1/37 3,441,062
------------
6,935,112
------------
Merchandising-Department Stores -- 1.9%
3,500,000 Dayton Hudson Corp.
5.95% due 6/15/00 3,499,209
3,400,000 Wal Mart Stores, Inc.
8.75% due 12/29/06 3,481,260
------------
6,980,469
------------
Merchandising-Food -- 1.0%
3,500,000 Albertsons, Inc.
6.625% due 6/1/28 3,485,650
------------
Miscellaneous-Capital Goods -- 1.4%
5,000,000 Ikon Capital, Inc.
6.73% due 6/15/01 5,086,710
------------
Miscellaneous-Financial -- 1.0%
3,500,000 Comdisco, Inc.
6.06% due 5/5/00 3,501,379
------------
Oil and Gas Producing -- 0.8%
2,700,000 Vastar Resources, Inc.
6.00% due 4/20/00 2,701,064
------------
Oil-Integrated-International -- 0.5%
2,200,000 LG Caltex Oil Corp.+
7.50% due 7/15/07 1,645,600
------------
Railroads -- 1.1%
3,500,000 Norfolk Southern Corp.
7.80% due 5/15/27 4,008,102
------------
Telecommunications -- 3.4%
2,850,000 Lucent Technologies, Inc.
6.50% due 1/15/28 2,906,421
3,500,000 MCI Communications Corp.
6.125% due 4/15/02 3,503,679
5,900,000 TCI Communications, Inc.
7.25% due 6/15/99 5,965,915
------------
12,376,015
------------
Utilities-Gas and Pipeline -- 2.6%
2,350,000 Occidental Petroleum Corp.
6.40% due 4/1/03 2,365,881
7,000,000 Williams Cos., Inc.+
5.95% due 2/15/00 6,987,841
------------
9,353,722
------------
TOTAL CORPORATE BONDS
(Cost $133,403,981) 133,566,855
------------
- -----------------------
COLLATERALIZED MORTGAGE
OBLIGATIONS -- 7.3%
- -----------------------
4,000,000 Bear Asset Trust 1997-1 A
6.682% due 2/15/06 4,006,400
3,500,000 Bear Stearns Coml. Mtg. Secs., Inc.
CTF 1998-1 A2
6.44% due 6/1/30 3,540,600
5,000,000 Federal Home Loan Mtg. Corp.
1998 EB 7.00% due 1/15/25 5,081,170
4,000,000 Federal National Mortgage Assn.
1995-13C 6.50% due 10/25/08 4,024,960
5,839,826 GE Capital Mortgage Svcs., Inc.
1996-3A7 7.00% due 3/25/26 5,918,294
3,850,000 GMAC Coml. Mtg. Sec., Inc.
1998-1C 6.806% due 4/15/08 3,953,180
------------
TOTAL COLLATERALIZED MORTGAGE
OBLIGATIONS
(Cost $26,160,004) 26,524,604
------------
See notes to financial statements.
+ Rule 144A restricted security.
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3
- --------------
- --------------------------------------------------------------------------------
The Guardian Bond Fund, Inc.
- ----------------------------
SCHEDULE OF INVESTMENTS (Continued)
June 30, 1998 (Unaudited) (Continued)
- -------------------------------
MORTGAGE PASS-THROUGHS -- 12.4%
- -------------------------------
Principal
Amount Value
- -----------------------------------------------------------------------
$ 1,639,441 FHLMC Pool E54124
7.00% due 8/1/08 $ 1,669,787
9,500,000 FNMA TBA
6.50% (15 yr.)(a) 9,553,390
30,350,000 FNMA TBA
6.50% (30 yr.)(a) 30,217,006
443,464 FNMA Pool 068106
8.50% due 8/1/09 470,369
816,228 FNMA Pool 068772
8.00% due 6/1/08 847,856
8,754 FNMA Pool 072923
8.25% due 1/1/09 9,145
2,100,000 GNMA TBA
6.50% (30 yr.)(a) 2,094,735
3,957 GNMA Pool 000375
11.50% due 7/20/00 4,116
------------
TOTAL MORTGAGE PASS-THROUGHS
(Cost $44,635,876) 44,866,404
------------
- ------------------------
U.S. GOVERNMENT -- 25.7%
- ------------------------
13,500,000 U.S. Treasury Bonds
6.625% due 2/15/27 15,250,788
150,000 U.S. Treasury Bonds
6.375% due 8/15/27 164,766
12,950,000 U.S. Treasury Bonds
6.125% due 11/15/27(b) 13,876,741
2,250,000 U.S. Treasury Notes
7.875% due 11/15/04 2,527,031
3,000,000 U.S. Treasury Notes
7.50% due 10/31/99 3,074,064
8,000,000 U.S. Treasury Notes
6.875% due 8/31/99 8,120,000
500,000 U.S. Treasury Notes
6.625% due 6/30/01 514,531
10,000,000 U.S. Treasury Notes
6.50% due 5/15/05 10,556,250
6,600,000 U.S. Treasury Notes
6.50% due 8/15/05 6,967,125
4,250,000 U.S. Treasury Notes
6.125% due 8/15/07 4,423,986
3,435,000 U.S. Treasury Notes
6.00% due 8/15/00 3,467,203
4,100,000 U.S. Treasury Notes
5.875% due 11/15/99 4,117,937
3,500,000 U.S. Treasury Notes
5.625% due 10/31/99 3,503,283
2,700,000 U.S. Treasury Notes
5.625% due 5/15/01 2,709,283
6,300,000 U.S. Treasury Notes
5.50% due 3/31/00 6,298,034
3,500,000 U.S. Treasury Notes
5.50% due 5/31/03 3,500,000
4,000,000 U.S. Treasury Notes
5.50% due 2/15/08 3,998,752
------------
TOTAL U.S. GOVERNMENT SECURITIES
(Cost $90,875,396) 93,069,774
------------
- --------------------
YANKEE BONDS -- 2.2%
- --------------------
2,350,000 Petroliam Nasional Berhad+
6.625% due 10/18/01 2,174,523
2,400,000 Thailand Kingdom
7.55% due 8/15/99 2,362,750
3,500,000 Yorkshire Pwr. Fin., Ltd.+
6.154% due 2/25/03 3,510,006
------------
TOTAL YANKEE BONDS
(Cost $8,075,087) 8,047,279
------------
- -------------------------
COMMERCIAL PAPER -- 15.4%
- -------------------------
Conglomerates -- 0.9%
3,387,000 General Elec. Cap. Corp.
5.51% due 7/14/98(a) 3,380,261
------------
Financial-Other -- 7.4%
9,637,000 Dakota Certificates
5.52% due 7/20/98(a) 9,608,924
15,000,000 Goldman Sachs Group LP
5.51% due 7/14/98(a) 14,970,154
2,107,000 Merrill Lynch & Co., Inc.
5.53% due 7/21/98(a) 2,100,527
------------
26,679,605
------------
See notes to financial statements.
+ Rule 144A restricted security.
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- --------------------------------------------------------------------------------
Principal
Amount Value
- -----------------------------------------------------------------------
Oil and Gas Services -- 3.3%
$ 12,000,000 Baker Hughes, Inc.
5.52% due 7/14/98(a) $ 11,976,080
------------
Telecommunications -- 3.8%
13,585,000 Lucent Technologies, Inc.
6.00% due 7/1/98(b) 13,585,000
------------
TOTAL COMMERCIAL PAPER
(Cost $55,620,946) 55,620,946
------------
- ----------------------------
REPURCHASE AGREEMENT -- 0.3%
- ----------------------------
1,048,000 State Street Bank & Trust Co.
repurchase agreement, dated
6/30/98, maturity value
$1,048,166 at 5.70% due 7/1/98
(collateralized by U.S. Treasury
Notes $1,075,000, 6.75% due
5/31/99) 1,048,000
------------
TOTAL REPURCHASE AGREEMENT
(Cost $1,048,000) 1,048,000
------------
TOTAL INVESTMENTS -- 114.6%
(Cost $411,359,400) 414,718,214
PAYABLES FOR REVERSE REPURCHASE
AGREEMENTS(a) -- (3.7%) (13,582,937)
PAYABLES FOR FORWARD
MORTGAGE SECURITIES(a) -- (11.6%) (41,865,131)
CASH, RECEIVABLES AND OTHER
ASSETS LESS LIABILITIES -- 0.7% 2,565,199
------------
NET ASSETS -- 100.0% $361,835,345
============
(a) Commercial paper with the total of $42,035,946 is segregated to cover
forward mortgage purchases.
(b) Commercial paper in the amount of $13,585,000 is segregated to cover reverse
repurchase agreements.
See notes to financial statements.
- --------------------------------------------------------------------------------
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- --------------
- --------------------------------------------------------------------------------
The Guardian Bond Fund, Inc.
- ----------------------------
STATEMENT OF ASSETS
AND LIABILITIES
June 30, 1998 (Unaudited)
ASSETS
Investments, at market (cost $411,359,400) $414,718,214
Cash 843
Interest receivable 4,010,134
Receivable for securities sold 2,732,414
Receivable for fund shares sold 643,735
Other assets 960
------------
TOTAL ASSETS 422,106,300
------------
LIABILITIES
Payable for forward mortgage
securities -- Note E 41,865,131
Payable for reverse repurchase
agreements -- Note D 13,582,937
Payable for securities purchased 2,783,182
Payable for fund shares redeemed 1,516,449
Accrued expenses 14,797
Due to affiliates 508,459
------------
TOTAL LIABILITIES 60,270,955
------------
NET ASSETS $361,835,345
============
COMPONENTS OF NET ASSETS
Capital stock, at par $ 2,946,183
Additional paid-in capital 352,528,350
Undistributed net investment income 1,822,429
Accumulated net realized gain on investments 1,179,569
Net unrealized appreciation of investments 3,358,814
------------
NET ASSETS $361,835,345
============
Shares Outstanding -- $0.10 par value 29,461,827
------------
NET ASSET VALUE PER SHARE $ 12.28
============
STATEMENT OF OPERATIONS
Six Months Ended
June 30, 1998 (Unaudited)
Investment Income:
Interest $ 11,174,943
------------
Expenses:
Investment advisory fees -- Note B 892,085
Custodian fees 54,001
Printing expense 21,260
Audit fees 8,750
Directors' fees -- Note B 6,250
Transfer agent fees 1,650
Legal fees 1,493
Registration fees 1,326
Insurance expense 1,122
Other 350
------------
Total Expenses 988,287
------------
Net Investment Income 10,186,656
------------
Realized and Unrealized Gain/(Loss)
on Investments -- Note F
Net realized gain on investments 3,473,898
Net change in unrealized appreciation
of investments 300,983
------------
Net Realized and Unrealized Gain
on Investments 3,774,881
------------
Net Increase in Net Assets
from Operations $ 13,961,537
============
See notes to financial statements.
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- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Year Ended
Ended December 31,
June 30, 1998 1997
(Unaudited) (Audited)
------------- -------------
<S> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS
From Operations:
Net investment income $ 10,186,656 $ 21,276,367
Net realized gain/(loss) on investments 3,473,898 (62,653)
Net change in unrealized appreciation/(depreciation) of investments 300,983 8,436,647
------------- -------------
Net Increase in Net Assets from Operations 13,961,537 29,650,361
------------- -------------
Dividends to Shareholders from:
Net investment income (8,962,490) (21,605,507)
------------- -------------
From Capital Share Transactions:
Net increase/(decrease) in net assets from capital share
transactions -- Note G 1,424,387 (7,065,940)
------------- -------------
Net Increase in Net Assets 6,423,434 978,914
Net Assets:
Beginning of period 355,411,911 354,432,997
------------- -------------
End of period* $ 361,835,345 $ 355,411,911
============= =============
* Includes undistributed net investment income of: $ 1,822,429 $ 598,263
</TABLE>
See notes to financial statements.
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3
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The Guardian Bond Fund, Inc.
- ----------------------------
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the periods
indicated:
<TABLE>
<CAPTION>
Six Months
Ended Year Ended December 31, (Audited)
June 30, 1998 -----------------------------------------------------------------------
(Unaudited) 1997 1996 1995 1994 1993
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ..... $ 12.11 $ 11.83 $ 12.25 $ 11.08 $ 12.24 $ 12.26
----------- ----------- ----------- ----------- ----------- -----------
Income from investment
operations:
Net investment
income ................ 0.35 0.75 0.76 0.76 0.40 0.70
Net realized and
unrealized gain/
(loss) on investments . 0.13 0.29 (0.42) 1.17 (0.82) 0.50
----------- ----------- ----------- ----------- ----------- -----------
Net increase/(decrease)
from investment
operations ............ 0.48 1.04 0.34 1.93 (0.42) 1.20
----------- ----------- ----------- ----------- ----------- -----------
Dividends and Distributions
to Shareholders from:
Net investment income ... (0.31) (0.76) (0.76) (0.76) (0.68) (0.70)
Net realized gain ....... -- -- -- -- (0.06) (0.52)
----------- ----------- ----------- ----------- ----------- -----------
Total dividends and
distributions ......... (0.31) (0.76) (0.76) (0.76) (0.74) (1.22)
----------- ----------- ----------- ----------- ----------- -----------
Net asset value, end of
period .................. $ 12.28 $ 12.11 $ 11.83 $ 12.25 $ 11.08 $ 12.24
----------- ----------- ----------- ----------- ----------- -----------
Total return* ............. 3.96% 8.99% 2.88% 17.59% (3.45)% 9.85%
----------- ----------- ----------- ----------- ----------- -----------
Ratios/supplemental data:
Net assets, end of period
(000's omitted) ....... $ 361,835 $ 355,412 $ 354,433 $ 374,462 $ 308,978 $ 340,269
Ratio of expenses to
average net assets .... 0.55%(a) 0.55% 0.54% 0.54% 0.54% 0.55%
Ratio of net invest-
ment income to
average net assets .... 5.71%(a) 6.15% 6.12% 6.43% 5.69% 5.56%
Portfolio turnover
rate .................. 139% 340% 188% 298% 311% 220%
<CAPTION>
Year Ended December 31, (Audited)
-----------------------------------------------------------------------
1992 1991 1990 1989 1988
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ..... $ 12.33 $ 11.56 $ 11.67 $ 11.16 $ 11.12
----------- ----------- ----------- ----------- -----------
Income from investment
operations:
Net investment
income ................ 0.81 0.92 0.97 0.98 1.03
Net realized and
unrealized gain/
(loss) on investments . 0.13 0.91 (0.11) 0.55 0.02
----------- ----------- ----------- ----------- -----------
Net increase/(decrease)
from investment
operations ............ 0.94 1.83 0.86 1.53 1.05
----------- ----------- ----------- ----------- -----------
Dividends and Distributions
to Shareholders from:
Net investment income ... (0.81) (0.92) (0.97) (1.02) (1.01)
Net realized gain ....... (0.20) (0.14) -- -- --
----------- ----------- ----------- ----------- -----------
Total dividends and
distributions ......... (1.01) (1.06) (0.97) (1.02) (1.01)
----------- ----------- ----------- ----------- -----------
Net asset value, end of
period .................. $ 12.26 $ 12.33 $ 11.56 $ 11.67 $ 11.16
----------- ----------- ----------- ----------- -----------
Total return* ............. 7.70% 16.19% 7.57% 13.88% 9.70%
----------- ----------- ----------- ----------- -----------
Ratios/supplemental data:
Net assets, end of period
(000's omitted) ....... $ 284,330 $ 222,299 $ 165,844 $ 147,753 $ 113,616
Ratio of expenses to
average net assets .... 0.56% 0.57% 0.58% 0.60% 0.61%
Ratio of net invest-
ment income to
average net assets .... 6.70% 7.81% 8.53% 8.78% 8.97%
Portfolio turnover
rate .................. 57% 43% 39% 158% 24%
</TABLE>
* Total returns do not reflect the effects of charges deducted pursuant to the
terms of GIAC's variable contracts. Inclusion of such charges would reduce
the total returns for all periods shown.
(a) Annualized.
See notes to financial statements.
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The Guardian Cash Fund, Inc.
- ----------------------------
SCHEDULE OF INVESTMENTS
June 30, 1998 (Unaudited)
- -------------------------
COMMERCIAL PAPER -- 94.4%
- -------------------------
Principal
Amount Value
- -----------------------------------------------------------------------
FINANCIAL -- 27.6%
Bank Holding Companies -- 4.0%
$ 16,500,000 J.P. Morgan & Co., Inc.
5.50% due 8/21/98 $ 16,371,438
------------
Finance Companies -- 11.7%
16,000,000 Goldman Sachs Group LP
5.51% due 7/10/98 15,977,960
16,000,000 Merrill Lynch & Co., Inc.
5.51% due 7/31/98 15,926,533
16,000,000 Private Export Funding Corp.
5.49% due 8/5/98 15,914,600
------------
47,819,093
------------
Other Major Banks -- 7.9%
16,500,000 Commerzbank U.S. Finance
5.55% due 7/27/98 16,433,862
16,000,000 Dresdner U.S. Finance
5.51% due 8/3/98 15,919,187
------------
32,353,049
------------
Utilities-Electric -- 4.0%
16,500,000 Nat'l. Rural Utils. Coop. Fin. Corp.
5.47% due 7/17/98 16,459,887
------------
Total Financial 113,003,467
------------
INDUSTRIAL -- 66.8%
Automotive -- 15.8%
16,500,000 Daimler Benz North America Co.
5.52% due 8/20/98 16,373,500
16,500,000 Ford Motor Credit Co.
5.54% due 7/6/98 16,487,304
16,000,000 Toyota Motor Credit Co.
5.48% due 7/20/98 15,953,724
16,000,000 Volkswagen of America, Inc.
5.51% due 7/20/98 15,953,471
------------
64,767,999
------------
Computer Systems -- 4.0%
16,500,000 Int'l. Business Machines
5.51% due 7/22/98 16,446,966
------------
Conglomerates -- 4.0%
16,500,000 General Electric Cap. Corp.
5.51% due 8/13/98 16,391,407
------------
Food and Beverage -- 7.7%
$15,000,000 H. J. Heinz Co.
5.50% due 7/23/98 14,949,583
16,500,000 Hershey Foods Corp.
5.51% due 7/24/98 16,441,915
------------
31,391,498
------------
Household Products -- 3.9%
16,075,000 Colgate Palmolive Co.
5.50% due 9/10/98 15,900,631
------------
Machinery -- 3.9%
16,000,000 Deere & Co.
5.48% due 7/9/98 15,980,516
------------
Metals -- 4.0%
16,500,000 Aluminum Co. of America
5.55% due 7/8/98 16,482,194
------------
Oil-Integrated-Domestic -- 4.0%
16,500,000 Shell Finance
5.50% due 7/23/98 16,444,542
------------
Oil-Integrated-International -- 3.9%
16,000,000 Texaco, Inc.
5.49% due 8/4/98 15,917,040
------------
Telecommunications -- 11.8%
16,500,000 Bell Atlantic Financial Svcs.
5.52% due 7/10/98 16,477,230
16,000,000 GTE Finance Corp.
5.56% due 7/22/98 15,948,107
16,000,000 Telstra Corp. Ltd.
5.54% due 8/24/98 15,867,040
------------
48,292,377
------------
Utilities-Electric -- 3.8%
16,000,000 Electricite de France
5.47% due 8/12/98 15,897,893
------------
Total Industrial 273,913,063
------------
TOTAL COMMERCIAL PAPER
(Cost $386,916,530) 386,916,530
------------
See notes to financial statements.
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- --------------------------------------------------------------------------------
- ----------------------------
REPURCHASE AGREEMENT -- 5.6%
- ----------------------------
Principal
Amount Value
- -----------------------------------------------------------------------
$ 23,159,000 State Street Bank & Trust Co.
repurchase agreement,
dated 6/30/98, maturity
value $23,162,667 at 5.70%
due 7/1/98 (collateralized
by $23,630,000 U.S.
Treasury Notes, 6.75%
due 5/31/99) $ 23,159,000
------------
TOTAL REPURCHASE AGREEMENT
(Cost $23,159,000) 23,159,000
------------
TOTAL INVESTMENTS -- 100.0%
(Cost $410,075,530) 410,075,530
LIABILITIES IN EXCESS OF CASH,
RECEIVABLES AND
OTHER ASSETS -- (0.0%) (65,169)
------------
------------
NET ASSETS -- 100.0% $410,010,361
============
See notes to financial statements.
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4
- --------------
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The Guardian Cash Fund, Inc.
- ----------------------------
STATEMENT OF ASSETS
AND LIABILITIES
June 30, 1998 (Unaudited)
ASSETS
Investments, at market (cost $410,075,530) $410,075,530
Cash 88
Receivable for fund shares sold 1,270,424
Interest receivable 3,666
Other assets 1,140
------------
TOTAL ASSETS 411,350,848
------------
LIABILITIES
Payable for fund shares redeemed 769,314
Accrued expenses 53,787
Due to affiliates 517,386
------------
TOTAL LIABILITIES 1,340,487
------------
NET ASSETS $410,010,361
============
COMPONENTS OF NET ASSETS
Capital stock, at par $ 4,100,104
Additional paid-in capital 405,910,257
------------
NET ASSETS $410,010,361
============
Shares Outstanding -- $0.10 par value 41,001,036
------------
NET ASSET VALUE PER SHARE $ 10.00
============
STATEMENT OF OPERATIONS
Six Months Ended
June 30, 1998 (Unaudited)
Investment Income:
Interest $ 10,642,138
------------
Expenses:
Investment advisory fees -- Note B 947,962
Custodian fees 39,583
Printing expense 8,828
Audit fees 8,500
Directors' fees -- Note B 7,125
Transfer agent fees 1,650
Legal fees 1,400
Insurance expense 1,122
Registration fees 1,000
Other 350
------------
Total Expenses 1,017,520
------------
Net Investment Income,
Representing Net Increase in
Net Assets from Operations $ 9,624,618
============
See notes to financial statements.
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STATEMENT OF CHANGES IN NET ASSETS
Six Months Year Ended
Ended December 31,
June 30, 1998 1997
(Unaudited) (Audited)
------------- -------------
INCREASE/(DECREASE) IN NET ASSETS
From Operations:
Net investment income $ 9,624,618 $ 19,627,700
------------- -------------
Net Increase in Net Assets from Operations 9,624,618 19,627,700
------------- -------------
Dividends to Shareholders from:
Net investment income (9,624,618) (19,627,700)
------------- -------------
From Capital Share Transactions:
Net increase/(decrease) in net assets from
capital share transactions -- Note G 41,887,912 (10,199,261)
------------- -------------
Net Increase/(Decrease) in Net Assets 41,887,912 (10,199,261)
Net Assets:
Beginning of period 368,122,449 378,321,710
------------- -------------
End of period $ 410,010,361 $ 368,122,449
============= =============
See notes to financial statements.
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The Guardian Cash Fund, Inc.
- ----------------------------
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the periods
indicated:
<TABLE>
<CAPTION>
Six Months
Ended Year Ended December 31, (Audited)
June 30, 1998 -----------------------------------------------------------------------
(Unaudited) 1997 1996 1995 1994 1993
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ........ $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
----------- ----------- ----------- ----------- ----------- -----------
Income from investment
operations:
Net investment
income ................... 0.25 0.50 0.49 0.54 0.38 0.26
Dividends and Distributions
to Shareholders from:
Net investment income ...... (0.25) (0.50) (0.49) (0.54) (0.38) (0.26)
----------- ----------- ----------- ----------- ----------- -----------
Net asset value, end of
period ..................... $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
----------- ----------- ----------- ----------- ----------- -----------
Total return* ................ 2.54% 5.14% 4.98% 5.52% 3.82% 2.64%
----------- ----------- ----------- ----------- ----------- -----------
Ratios/supplemental data:
Net assets, end of period
(000's omitted) .......... $ 410,010 $ 368,122 $ 378,322 $ 356,820 $ 386,986 $ 310,798
Ratio of expenses to
average net assets ....... 0.54%(a) 0.54% 0.54% 0.54% 0.54% 0.54%
Ratio of net invest-
ment income to
average net assets ....... 5.08%(a) 5.02% 4.86% 5.39% 3.81% 2.61%
<CAPTION>
-----------------------------------------------------------------------
1992 1991 1990 1989 1988
-----------------------------------------------------------------------
Net asset value,
beginning of period ........ $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
----------- ----------- ----------- ----------- -----------
Income from investment
operations:
Net investment
income ................... 0.35 0.54 0.77 0.87 0.72
Dividends and Distributions
to Shareholders from:
Net investment income ...... (0.35) (0.54) (0.77) (0.87) (0.72)
----------- ----------- ----------- ----------- -----------
Net asset value, end of
period ..................... $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
----------- ----------- ----------- ----------- -----------
Total return* ................ 3.21% 5.59% 7.95% 8.70% 7.20%
----------- ----------- ----------- ----------- -----------
Ratios/supplemental data:
Net assets, end of period
(000's omitted) .......... $ 318,879 $ 331,677 $ 331,600 $ 262,865 $ 228,310
Ratio of expenses to
average net assets ....... 0.54% 0.55% 0.56% 0.56% 0.58%
Ratio of net invest-
ment income to
average net assets ....... 3.17% 5.44% 7.67% 8.67% 7.17%
</TABLE>
* Total returns do not reflect the effects of charges deducted pursuant to the
terms of GIAC's variable contracts. Inclusion of such charges would reduce
the total returns for all periods shown.
(a) Annualized.
See notes to financial statements.
- --------------------------------------------------------------------------------
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- --------------
4
- --------------
- --------------------------------------------------------------------------------
The Guardian Stock Fund, The Guardian Bond Fund,
The Guardian Cash Fund
- ------------------------------------------------
COMBINED NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited)
- ----------------------------------------------
Note A -- Organization and Accounting Policies
- ----------------------------------------------
The Guardian Stock Fund, Inc. (GSF), The Guardian Bond Fund, Inc. (GBF)
and The Guardian Cash Fund, Inc. (GCF) (collectively, the Funds and
individually, a Fund), are each incorporated in the state of Maryland and are
diversified open-end management investment companies registered under the
Investment Company Act of 1940, as amended (1940 Act).
GSF offers two classes of shares: Class I and Class II. The Class I shares
of GSF, and shares of GBF and GCF, are only sold to certain separate accounts of
The Guardian Insurance & Annuity Company, Inc. (GIAC). GIAC is a wholly-owned
subsidiary of The Guardian Life Insurance Company of America (Guardian Life).
GSF's Class II shares are offered through the ownership of variable annuities
and variable life insurance policies issued by other insurance companies that
offer GSF as an investment option through their separate accounts. The two
classes of shares for GSF represent interests in the same portfolio of
investments, have the same rights and are generally identical in all respects
except that each class bears certain class expenses, and has exclusive voting
rights with respect to any matter to which a separate vote of any class is
required. Significant accounting policies of the Funds are as follows:
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 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.
Investments
Securities listed on national securities exchanges are valued based upon
closing prices on these exchanges. Securities traded in the over-the-counter
market and listed securities for which there have been no trades for the day are
valued at the mean of the bid and asked prices.
Certain debt securities may be valued each business day by an independent
pricing service (Service) approved by the Board of Directors. Debt securities
for which quoted bid prices, in the judgment of the Service, are readily
available and representative of the bid side of the market, are valued at the
mean between the quoted bid prices (as obtained by the Service from dealers in
such securities) and asked prices (as calculated by the Service based upon its
evaluation of the market for such securities). Other debt securities that are
valued by the Service are carried at fair value as determined by the Service,
based on methods which include consideration of: yields or prices of securities
of comparable quality coupon, maturity and type; indications as to values from
dealers; and general market conditions.
Securities for which market quotations are not readily available,
including certain mortgage-backed securities and restricted securities, are
valued by using methods that each Fund's Board of Directors, in good faith,
believes will accurately reflect their fair value.
The valuation of securities held by GCF is based upon their amortized cost
which approximates market value, in accordance with Rule 2a-7 under the 1940
Act. Amortized cost valuations do not take into account unrealized gains and
losses.
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& Cash
--------------
4
--------------
- --------------------------------------------------------------------------------
COMBINED NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited) (Continued)
Investment securities transactions are recorded on the date of purchase or
sale. Repurchase agreements are carried at cost, which approximates value (see
Note C).
Net realized gain or loss on sales of investments is determined on an
identified cost basis. Interest income, including amortization of premium and
discount, is recorded when earned. Dividends are recorded on the ex-dividend
date.
Federal Income Taxes
Each Fund qualifies and intends to remain qualified to be taxed as a
"regulated investment company" under the provisions of the Internal Revenue Code
(Code), and as such will not be subject to federal income tax on investment
income (including any realized capital gains) which is distributed to its
shareholders in accordance with the applicable provisions of the Code.
Therefore, no federal income tax provision is required.
Reclassifications of Capital Accounts
The treatment for financial statement purposes of distributions made
during the year from net investment income and net realized gains may differ
from their ultimate treatment for federal income tax purposes. These differences
primarily are caused by differences in the timing of the recognition of certain
components of income or capital gain, and the recharacterization of foreign
exchange gains or losses to either ordinary income or realized capital gains for
federal income tax purposes. Where such differences are permanent in nature,
they are reclassified in the components of net assets based on their ultimate
characterization for federal income tax purposes. Any such reclassifications
will have no effect on net assets, results of operations, or net asset value per
share of the Fund.
Dividend Distributions
GSF and GBF intend to distribute each year, as dividends or capital gain
distributions, substantially all net investment income and net capital gains
realized. All such dividends or distributions are credited in the form of
additional shares of the applicable Fund at net asset value on the ex-dividend
date. Such distributions are determined in conformity with federal income tax
regulations. Differences between the recognition of income on an income tax
basis and recognition of income based on generally accepted accounting
principles may cause temporary overdistributions of net realized gains and net
investment income. Currently, the policy of GSF and GBF is to distribute net
investment income approximately every six months and net capital gains annually.
This policy is, however, subject to change at any time by each Fund's Board of
Directors.
GCF earns interest on its investments daily and distributes all of its net
investment income, increased or decreased by realized gains or losses, each day
GCF is open for business. Earnings for Saturdays, Sundays and holidays are paid
as a dividend on the next business day.
All dividends and distributions are credited in the form of additional
shares of GCF at net asset value on the payable date.
- -----------------------------------------
Note B -- Investment Advisory Agreements
and Payments to Related Parties
- -----------------------------------------
Each Fund has an investment advisory agreement with Guardian Investor
Services Corporation (GISC), a wholly-owned subsidiary of GIAC. GISC receives a
management fee from each Fund computed at the rate of .50% of the daily average
net assets during the fiscal year, payable quarterly. If total expenses of any
Fund (excluding taxes, interest and brokerage com-
- --------------------------------------------------------------------------------
95
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Stock, Bond
& Cash
- --------------
4
- --------------
- --------------------------------------------------------------------------------
The Guardian Stock Fund, The Guardian Bond Fund,
The Guardian Cash Fund
- ------------------------------------------------
COMBINED NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited) (Continued)
missions, but including the investment advisory fee) exceed 1% per annum of the
average daily net assets of the Fund, GISC has agreed to assume any such
expenses. None of the Funds exceeded this limit during the six months ended June
30, 1998.
No compensation is paid by any of the Funds to a director who is deemed to
be an "interested person" (as defined in the 1940 Act) of a Fund. Each director
not deemed an "interested person" is paid an annual fee of $500 by each Fund,
and $350 for attendance at each meeting of each Fund.
- -------------------------------
Note C -- Repurchase Agreements
- -------------------------------
Collateral underlying repurchase agreements takes the form of either cash
or fully negotiable U.S. government securities. Repurchase agreements are fully
collateralized (including the interest earned thereon) and such collateral is
marked-to-market daily while the agreements remain in force. If the value of the
underlying securities falls below the value of the repurchase price plus accrued
interest, the Funds will require the seller to deposit additional collateral by
the next business day. If the request for additional collateral is not met, or
the seller defaults, the Funds maintain the right to sell the collateral and may
claim any resulting loss against the seller. Each Fund's Board of Directors has
established standards to evaluate creditworthiness of broker-dealers and banks
which engage in repurchase agreements with each Fund.
- ---------------------------------------
Note D -- Reverse Repurchase Agreements
- ---------------------------------------
GBF may enter into reverse repurchase agreements with banks or third party
broker-dealers to borrow short-term funds. Interest on the value of reverse
repurchase agreements issued and outstanding is based upon competitive market
rates at the time of issuance. At the time GBF enters into a reverse repurchase
agreement, it establishes and maintains cash, U.S. government securities or
liquid, unencumbered securities that are marked-to-market daily in a segregated
account with the Fund's custodian. The value of such segregated assets must be
at least equal to the value of the repurchase obligation (principal plus accrued
interest), as applicable. Reverse repurchase agreements involve the risk that
the buyer of the securities sold by GBF may be unable to deliver the securities
when the Fund seeks to repurchase them. Interest paid on reverse repurchase
agreements for the six months ended June 30, 1998 amounted to $282,863.
Information regarding transactions by GBF under reverse repurchase
agreements is as follows:
<TABLE>
<CAPTION>
Face Market
Value Value
----- -----
<S> <C> <C>
$13,582,938 Reverse Repurchase Agreement with J. P. Morgan, 6.00% dated
6/30/98, to be repurchased at $13,584,919 on 7/1/98, collateralized by
$13,585,000 Lucent Technologies, Inc., 6.00% due 7/1/98 ............................ $ 13,582,938
Average amount outstanding during the period ....................................... $ 12,969,665
Average monthly shares outstanding during the period ............................... 29,122,803
Average debt per share outstanding during the period ............................... $ 0.45
Weighted average interest rate during the period ................................... 4.49%
</TABLE>
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96
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Stock, Bond
& Cash
--------------
4
--------------
- --------------------------------------------------------------------------------
COMBINED NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited) (Continued)
- ----------------------------------
Note E -- Dollar Roll Transactions
- ----------------------------------
GBF may enter into dollar roll transactions with financial institutions to
take advantage of opportunities in the mortgage market. A dollar roll
transaction involves a sale by the Fund of securities that it holds with an
agreement by the Fund to repurchase similar securities at an agreed upon price
and date. The securities repurchased will bear the same interest as those sold,
but generally will be collateralized at time of delivery by different pools of
mortgages with different prepayment histories than those securities sold. During
the period between the sale and repurchase, the Fund will not be entitled to
receive interest and principal payments on the securities sold. Dollar roll
transactions involve the risk that the buyer of the securities sold by GBF may
be unable to deliver the securities when GBF seeks to repurchase them.
- ---------------------------------
Note F -- Investment Transactions
- ---------------------------------
Purchases and proceeds from sales of securities (excluding short-term
securities) for the six months ended June 30, 1998 were as follows:
GSF GBF
--- ---
Purchases ............................. $ 756,625,827 $ 492,459,212
Proceeds .............................. $ 756,355,281 $ 483,988,557
The cost of investments owned at June 30, 1998 for federal income tax
purposes was the same as for financial reporting purposes. The gross unrealized
appreciation and depreciation of investments at June 30, 1998 for GSF and GBF
were as follows:
GSF GBF
--- ---
Gross Appreciation .................... $ 1,206,622,362 $ 4,540,684
Gross Depreciation .................... (37,819,093) (1,181,870)
--------------- ---------------
Net Unrealized Appreciation ......... $ 1,168,803,269 $ 3,358,814
=============== ===============
- --------------------------------------------------------------------------------
97
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Stock, Bond
& Cash
- --------------
4
- --------------
- --------------------------------------------------------------------------------
The Guardian Stock Fund, The Guardian Bond Fund,
The Guardian Cash Fund
- ------------------------------------------------
COMBINED NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited) (Continued)
- ---------------------------------------
Note G -- Transactions in Capital Stock
- ---------------------------------------
There are 400,000,000 shares of $0.001 par value capital stock authorized
for GSF, divided into two classes, designated Class I and Class II shares. GSF
Class I consists of 300,000,000 shares and Class II consists of 100,000,000
shares. There are 100,000,000 shares of $0.10 par value capital stock authorized
for GBF and GCF. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended Six Months Ended Year Ended
June 30, December 31, June 30, December 31,
1998 1997 1998 1997
(Unaudited) (Audited) (Unaudited) (Audited)
- ---------------------------------------------------------------------------------------------------------------
Shares Amount
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
o The Guardian Stock Fund, Inc.
Shares sold 3,806,719 9,514,978 $ 186,682,674 $ 429,926,820
Shares issued in reinvestment of
dividends and distributions 2,168,488 8,346,801 109,205,045 376,552,398
Shares repurchased (4,900,804) (5,599,554) (243,159,536) (251,187,198)
- ---------------------------------------------------------------------------------------------------------------
Net increase 1,074,403 12,262,225 $ 52,728,183 $ 555,292,020
- ---------------------------------------------------------------------------------------------------------------
o The Guardian Bond Fund, Inc.
Shares sold 2,843,311 3,714,602 $ 35,192,875 $ 45,183,038
Shares issued in reinvestment of
dividends and distributions 731,035 1,799,751 8,962,491 21,605,507
Shares repurchased (3,461,614) (6,115,919) (42,730,979) (73,854,485)
- ---------------------------------------------------------------------------------------------------------------
Net increase/(decrease) 112,732 (601,566) $ 1,424,387 $ (7,065,940)
- ---------------------------------------------------------------------------------------------------------------
o The Guardian Cash Fund, Inc.
Shares sold 19,250,479 30,190,330 $ 192,504,794 $ 301,903,299
Shares issued in reinvestment of
dividends and distributions 962,462 1,962,770 9,624,618 19,627,700
Shares repurchased (16,024,150) (33,173,026) (160,241,500) (331,730,260)
- ---------------------------------------------------------------------------------------------------------------
Net increase/(decrease) 4,188,791 (1,019,926) $ 41,887,912 $ (10,199,261)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------
Note H -- Line of Credit
- ------------------------
A $50,000,000 line of credit available to each Fund and the other
Guardian-related Funds has been established with Morgan Guaranty Trust Company.
The rate of interest charged on any borrowings is based upon the prevailing
Federal Funds rate at the time of the loan plus .25% calculated on a 360 day
basis per annum. For the six months ended June 30, 1998, none of the Funds
borrowed against this line of credit.
- --------------------------------------------------------------------------------
98
<PAGE>
--------------
The Guardian
Stock, Bond
& Cash
--------------
4
--------------
- --------------------------------------------------------------------------------
COMBINED NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited) (Continued)
- -----------------------------
Note I -- Shareholder Meeting
- -----------------------------
A special meeting of shareholders of the Fund was held on April 21, 1998
to vote on several proposals, including the amendment and restatement of the
Fund's Articles of Incorporation, comprehensive amendments to the Fund's
fundamental investment restrictions, and the selection of the Fund's independent
public accountants. The shares of the Fund were voted by GIAC on behalf of the
beneficial owners of Fund shares. The proposal relating to the Fund's investment
restrictions was divided into sub-proposals for each investment restriction
proposed for amendment. Each of the proposals was approved by a substantial
margin.
The voting tabulations for each proposal approved at the meeting are as
follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
1. Amendment and restatement of
the Fund's Articles of Incorporation 16,095,158.351 963,839.873 1,524,300.460
2. Amendment of the Fund's
investment restriction relating to:
A. Prospectus disclosure 15,911,129.922 915,270.120 1,756,898.642
B. Unseasoned issuers 15,856,583.017 969,817.025 1,756,898.642
C. Borrowing 15,812,306.448 1,014,093.594 1,756,898.642
D. Pledge of assets 15,886,420.113 939,979.929 1,756,898.642
E. Securities lending 15,868,613.628 957,786.414 1,756,898.642
F. Industry concentration 15,927,935.095 898,464.947 1,756,898.642
G. Issuer diversification 15,896,955.491 929,444.551 1,756,898.642
H. Warrants 15,896,732.686 929,667.356 1,756,898.642
I. Illiquid/restricted securities 15,865,573.303 960,826.739 1,756,898.642
J. Investment in other mutual funds 15,882,042.522 944,357.520 1,756,898.642
K. Margin and short sales 15,815,723.876 1,010,676.166 1,756,898.642
L. Options 15,835,977.980 990,422.062 1,756,898.642
M. Commodities 15,784,608.023 1,041,792.019 1,756,898.642
N. Real estate 15,868,064.285 958,335.757 1,756,898.642
O. Oil and gas 15,872,532.047 953,867.995 1,756,898.642
P. Ownership by management 15,870,628.361 955,771.681 1,756,898.642
Q. Acquisition of control 15,907,652.388 918,747.654 1,756,898.642
R. Senior securities 15,907,927.213 918,472.829 1,756,898.642
3. Ratification of the selection of
the Fund's independent accountants 16,959,428.569 274,790.785 1,349,079.330
</TABLE>
- --------------------------------------------------------------------------------
99
<PAGE>
- ---------------
Gabelli Capital
Asset Fund
- ---------------
5
- ---------------
- --------------------------------------------------------------------------------
Gabelli Capital Asset Fund
- --------------------------
SCHEDULE OF INVESTMENTS
June 30, 1998 (Unaudited)
- ----------------------
COMMON STOCKS -- 94.1%
- ----------------------
Shares Value
- ----------------------------------------------------------------------
Aerospace -- 1.1%
5,000 Boeing Co. $ 222,813
70,000 Fairchild Corp., Cl. A 1,413,125
-------------
1,635,938
Agriculture -- 1.5%
15,000 Archer-Daniels-Midland Co. 290,625
18,000 DeKalb Genetics Corp., Cl. B 1,703,250
5,000 Monsanto Co. 279,375
-------------
2,273,250
-------------
Automotive: Parts and Accessories -- 3.2%
12,000 Echlin Inc. 588,750
50,000 GenCorp Inc. 1,312,500
45,000 Modine Manufacturing Co. 1,558,125
8,000 Ragan (Brad) Inc. 314,000
20,000 TransPro Inc. 148,750
55,500 Wynn's International Inc. 1,068,375
-------------
4,990,500
-------------
Aviation: Parts and Services -- 2.7%
16,500 AAR Corp. 487,781
24,000 Barnes Group Inc. 649,500
25,000 Coltec Industries Inc.+ 496,875
16,000 Curtiss-Wright Corp. 627,000
7,500 Hi-Shear Industries Inc. 20,156
31,000 Hudson General Corp. 1,569,375
10,000 Moog Inc., Cl. A+ 381,875
-------------
4,232,562
-------------
Broadcasting -- 5.5%
67,000 Ackerley Communications Inc. 1,407,000
27,235 Chris-Craft Industries Inc. 1,489,414
12,000 Gray Communications
Systems Inc. 388,500
50,000 Gray Communications
Systems Inc., Cl. B 1,543,750
18,000 Grupo Televisa SA, GDR+ 677,250
23,000 Liberty Corp. 1,157,188
16,500 United Television Inc. 1,889,241
-------------
8,552,343
-------------
Building and Construction -- 0.4%
20,000 Nortek Inc. 615,000
-------------
Business Services -- 0.4%
20,000 EnviroSource Inc.+ 350,000
10,000 Republic Industries Inc.+ 250,000
-------------
600,000
-------------
Cable -- 8.7%
43,300 BET Holdings Inc., Cl. A+ 2,725,194
85,000 Cablevision Systems Corp., Cl. A+ 7,097,500
50,000 MediaOne Group Inc. 2,196,875
17,000 Tele-Communications Inc., Cl. A+ 653,438
27,000 Tele-Communications International
Inc., Cl. A + 542,531
20,000 United International
Holdings Inc., Cl. A+ 320,000
-------------
13,535,538
-------------
Consumer Products -- 2.4%
100,000 Carter-Wallace Inc. 1,806,250
18,000 Gallaher Group plc+ 393,750
20,000 General Cigar Holdings Inc. 197,500
18,000 General Cigar Holdings Inc.,
Cl. B (a) 177,750
35,000 General Housewares Corp. 352,188
21,000 National Presto Industries Inc. 817,688
-------------
3,745,126
-------------
Consumer Services -- 1.9%
39,000 Loewen Group Inc. 1,053,000
95,000 Rollins Inc. 1,947,500
-------------
3,000,500
-------------
Diversified Industrial -- 5.0%
6,000 Crane Co. 291,375
46,000 GATX Corp. 2,018,250
20,000 Honeywell Inc. 1,671,250
45,000 ITT Industries Inc. 1,681,875
50,000 Katy Industries Inc. 912,500
20,000 Thomas Industries Inc. 488,750
45,000 Tyler Corp.+ 464,063
10,000 WHX Corp. 128,750
-------------
7,656,813
-------------
See notes to financial statements.
- --------------------------------------------------------------------------------
100
<PAGE>
---------------
Gabelli Capital
Asset Fund
---------------
5
---------------
- --------------------------------------------------------------------------------
Shares Value
- ----------------------------------------------------------------------
Energy -- 2.0%
12,000 Eastern Enterprises $ 514,500
90,000 Kaneb Services Inc.+ 489,375
40,000 Pennzoil Co. 2,025,000
-------------
3,028,875
-------------
Entertainment -- 10.1%
84,664 Ascent Entertainment Group Inc.+ 941,887
3,500 Fisher Companies Inc. 250,250
45,000 Gaylord Entertainment Co., Cl. A 1,451,250
40,000 GC Companies Inc.+ 2,075,000
92,000 Tele-Communications Inc./Liberty
Media Group, Cl. A+ 3,570,750
23,000 Time Warner Inc. 1,965,063
80,000 USA Networks Inc.+ 2,010,000
58,000 Viacom Inc., Cl. A+ 3,393,000
-------------
15,657,200
-------------
Equipment and Supplies -- 9.4%
26,000 Aeroquip-Vickers Inc. 1,517,750
26,000 AMETEK Inc. 762,125
40,000 Ampco-Pittsburgh Corp. 615,000
30,000 CLARCOR Inc. 630,000
15,000 CTS Corp. 447,188
7,000 Daniel Industries Inc. 133,000
100,000 Fedders Corp. 668,750
30,000 Flowserve Corp. 731,250
12,500 Franklin Electric Co. Inc. 850,000
100,000 Hussmann International Inc. 1,875,000
22,000 IDEX Corp. 759,000
28,000 Navistar International Corp.+ 808,500
14,000 Pittway Corp. 1,067,500
30,000 Sequa Corp., Cl A 2,002,500
30,000 SPS Technologies Inc.+ 1,755,000
-------------
14,622,563
-------------
Financial Services -- 5.1%
19,500 Allied Group Inc. 912,844
58,000 American Bankers Insurance
Group Inc. 3,487,250
30,000 Argonaut Group Inc. 948,750
5,000 Mellon Bank Corp. 348,125
63,000 Midland Co. 1,441,125
30,300 Pioneer Group Inc. 797,269
-------------
7,935,363
-------------
Food and Beverage -- 8.5%
4,000 Bestfoods Inc. 232,250
44,000 Celestial Seasonings Inc.+ 2,178,000
31,200 Corn Products International Inc.+ 1,064,700
15,000 General Mills Inc. 1,025,625
12,000 Heinz (H.J.) Co. 673,500
3,000 Keebler Foods Co. 82,500
25,000 Kellogg Co. 939,063
38,000 PepsiCo Inc. 1,565,125
20,000 Quaker Oats Co. 1,098,750
35,000 Seagram Co. Ltd. 1,432,813
11,000 Tootsie Roll Industries Inc. 844,250
7,000 Twinlab Corp. 305,813
78,000 Whitman Corp. 1,794,000
-------------
13,236,389
-------------
Health Care -- 0.7%
120,000 IVAX Corp.+ 1,110,000
-------------
Hotels and Gaming -- 2.1%
102,000 Aztar Corp.+ 694,875
30,000 Hilton Hotels Corp. 855,000
100,000 Jackpot Enterprises Inc. 1,256,250
50,000 Trump Hotels & Casino
Resorts Inc.+ 353,125
-------------
3,159,250
-------------
Home Furnishings -- 0.2%
5,000 Triangle Pacific Corp. 275,000
-------------
Paper and Forest Products -- 0.3%
12,000 Sealed Air Corp. 441,000
-------------
Publishing -- 7.8%
22,000 Dow Jones & Co. Inc. 1,226,500
22,000 Golden Books Family
Entertainment Inc.+ 84,563
15,000 Harcourt General Inc. 892,500
24,000 Lee Enterprises Inc. 735,000
20,500 McClatchy Newspapers Inc., Cl. A 709,813
8,000 McGraw-Hill Companies Inc. 652,500
67,000 Media General Inc., Cl. A 3,299,750
22,000 Meredith Corp. 1,032,625
15,000 Pulitzer Publishing Co. 1,338,750
40,000 Reader's Digest Association Inc., Cl. B 1,085,000
See notes to financial statements.
- --------------------------------------------------------------------------------
101
<PAGE>
- ---------------
Gabelli Capital
Asset Fund
- ---------------
5
- ---------------
- --------------------------------------------------------------------------------
Gabelli Capital Asset Fund
- --------------------------
SCHEDULE OF INVESTMENTS (Continued)
June 30, 1998 (Unaudited)
Shares Value
- ----------------------------------------------------------------------
Publishing -- 7.8% (continued)
56,000 Thomas Nelson Inc. $ 749,000
5,000 Times Mirror Co., Cl. A 314,375
-------------
12,120,376
-------------
Real Estate -- 1.2%
32,000 Griffin Land & Nurseries Inc. 560,000
75,000 Catellus Development Corp. 1,326,563
-------------
1,886,563
-------------
Retail -- 5.5%
10,000 Aaron Rents Inc. 100,000
5,000 Aaron Rents Inc., Cl. A 181,250
80,000 American Stores Co. 1,935,000
50,000 Bruno's Inc., New+ 52,500
65,000 Giant Food Inc., Cl. A 2,799,063
15,000 Lillian Vernon Corp. 249,375
10,000 Mercantile Stores Co. 789,375
53,000 Neiman Marcus Group Inc.+ 2,302,188
18,500 Scheib (Earl) Inc. 143,375
-------------
8,552,126
-------------
Specialty Chemical -- 1.1%
11,000 Arco Chemical Co. 630,438
18,000 Ferro Corp. 455,625
20,000 Sybron Chemicals Inc. 640,000
-------------
1,726,063
-------------
Telecommunications -- 3.6%
200,750 Citizens Utilities Co., Cl. B 1,932,219
40,000 Frontier Corp. 1,260,000
20,000 GST Telecommunications Inc.+ 288,750
49,500 Rogers Communications Inc., Cl. B+ 445,500
25,000 Southern New England
Telecommunications Corp. 1,637,500
1,366 US West Inc. 64,179
-------------
5,628,148
-------------
Wireless Communications -- 3.7%
25,000 360(degrees)Communications Co.+ 800,000
20,000 Centennial Cellular Corp., Cl. A+ 746,250
45,000 COMSAT Corp. 1,274,063
55,000 Rogers Cantel Mobile
Communications Inc., Cl. B+ 687,500
55,000 Telephone and Data Systems Inc. 2,165,625
-------------
5,673,438
-------------
TOTAL COMMON STOCKS
(Cost $112,702,237) 145,889,924
-------------
- ---------------------------
U.S. TREASURY BILLS -- 7.8%
- ---------------------------
Principal
Amount Value
- ----------------------------------------------------------------------
$ 12,173,000 4.87% to 5.16%++
due 08/06/98 -- 09/17/98 12,076,617
-------------
TOTAL U.S. TREASURY BILLS
(Cost $12,076,617) 12,076,617
-------------
TOTAL INVESTMENTS -- 101.9%
(Cost $124,778,854) 157,966,541
-------------
OTHER ASSETS AND
LIABILITIES (Net) -(1.9)% (2,903,648)
-------------
NET ASSETS -- 100.0% $ 155,062,893
=============
For Federal tax purposes:
Aggregate cost $124,778,854
============
Gross unrealized appreciation $ 36,382,276
Gross unrealized depreciation (3,194,589)
------------
Net unrealized appreciation $ 33,187,687
============
(a) Security fair valued as determined by the Board of Directors.
+ Non-income producing security.
++ Represents annualized yield at date of purchase.
GDR -- Global Depositary Receipt
See notes to financial statements.
- --------------------------------------------------------------------------------
102
<PAGE>
---------------
Gabelli Capital
Asset Fund
---------------
5
---------------
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS
AND LIABILITIES
June 30, 1998 (Unaudited)
Assets:
Investments, at value (cost $124,778,854) $157,966,541
Cash 535
Dividends and interest receivable 87,032
Receivable for investments sold 195,552
Receivable for capital shares sold 212,700
Deferred organizational expenses 38,243
------------
Total Assets 158,500,603
------------
Liabilities:
Payable for investments purchased 2,757,345
Payable for capital shares redeemed 445,744
Payable for investment advisory fees 122,686
Accrued Directors' fees 6,750
Other accrued expenses 105,185
------------
Total Liabilities 3,437,710
------------
Net Assets applicable to 8,911,147 shares
outstanding $155,062,893
============
Net Assets consist of:
Capital stock, at par value $ 8,911
Additional paid-in capital 118,194,672
Undistribution investment income 205,643
Accumulated net realized gain on investments 3,465,980
Net unrealized appreciation on investments 33,187,687
------------
Total Net Assets $155,062,893
============
Net Asset Value, offering and redemption
price per share (155,062,893 / 8,911,147
shares outstanding; 500,000,000 shares
authorized of $0.001 par value) $ 17.40
============
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1998
(Unaudited)
Investment Income:
Dividends $ 394,894
Interest 593,361
------------
Total Investment Income 988,255
------------
Expenses:
Investment advisory fees 653,358
Legal and audit fees 22,000
Custodian fees 20,463
Directors' fees 13,100
Organizational expenses 10,658
Shareholder services fees 5,556
Miscellaneous 57,477
------------
Total Expenses 782,612
------------
Net Investment Income 205,643
------------
Net Realized and Unrealized Gain on
Investments:
Net realized gain on investments 3,516,395
Net change in unrealized appreciation
on investments 12,397,172
------------
Net realized and unrealized gain on
investments 15,913,567
------------
Net increase in net assets resulting from
operations $ 16,119,210
============
See notes to financial statements.
- --------------------------------------------------------------------------------
103
<PAGE>
- ---------------
Gabelli Capital
Asset Fund
- ---------------
5
- ---------------
- --------------------------------------------------------------------------------
Gabelli Capital Asset Fund
- --------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1998 December 31,
(Unaudited) 1997
------------- ------------
<S> <C> <C>
Operations:
Net investment income $ 205,643 $ 118,286
Net realized gain on investments 3,516,395 7,046,284
Net change in unrealized appreciation on investments 12,397,172 17,681,316
------------- -------------
Net increase in net assets resulting from operations 16,119,210 24,845,886
Distributions to shareholders:
Net investment income -- (118,286)
In excess of net investment income -- (8,067)
Net realized gain on investments -- (7,046,284)
In excess of net realized gain on investments -- (29,472)
------------- -------------
Total distributions to shareholders -- (7,202,109)
Capital share transactions:
Net increase in net assets from capital share transactions 33,593,418 36,244,957
------------- -------------
Net increase in net assets 49,712,628 53,888,734
Net Assets:
Beginning of period 105,350,265 51,461,531
------------- -------------
End of period $ 155,062,893 $ 105,350,265
============= =============
</TABLE>
See notes to financial statements.
- --------------------------------------------------------------------------------
104
<PAGE>
---------------
Gabelli Capital
Asset Fund
---------------
5
---------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited)
- ----------------
1 -- Description
- ----------------
The Gabelli Capital Asset Fund (the "Fund"), a series of Gabelli Capital
Series Funds, Inc. (the "Company"), was organized on April 8, 1993 as a
Maryland corporation. The Company is a diversified, open-end management
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), whose primary objective is growth of capital. The Fund
commenced operations on May 1, 1995. Shares of the Fund are available to the
public only through the purchase of certain variable annuity and variable life
insurance contracts issued by The Guardian Insurance & Annuity Company, Inc.
- ------------------------------------
2 -- Significant Accounting Policies
- ------------------------------------
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. The following is a
summary of significant accounting policies followed by the Fund in the
preparation of its financial statements.
Security Valuation
Portfolio securities listed or traded on a nationally recognized
securities exchange, quoted by the National Association of Securities Dealers
Automated Quotations, Inc. ("Nasdaq") or traded on foreign exchanges are
valued at the last sale price on that exchange (if there were no sales that
day, the security is valued at the average of the closing bid and asked prices).
All other portfolio securities for which over-the-counter market quotations are
readily available are valued at the latest average of the bid and asked prices.
When market quotations are not readily available, portfolio securities are
valued at their fair value as determined in good faith under procedures
established by and under the general supervision of the Board of Directors.
Short term debt securities with remaining maturities of 60 days or less are
valued at amortized cost, unless the Directors determine such does not reflect
the securities' fair value, in which case these securities will be valued at
their fair value as determined by the Directors. Options are valued at the last
sale price on the exchange on which they are listed. If no sales of such options
have taken place that day, they will be valued at the mean between their closing
bid and asked prices.
Securities Transactions and Investment Income
Securities transactions are accounted for on the trade date, with realized
gain or loss on the sale of investments determined by using the identified cost
method. Interest income (including amortization of premium and accretion of
discount) is recorded as earned. Dividend income is recorded on the
ex-dividend date.
Dividends and Distributions to Shareholders
Dividends and distributions to shareholders are recorded on the
ex-dividend date. Income distributions and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due to
differing treatments of income and gains on various investment securities held
by the Fund, timing differences and differing characterization of distributions
made by the Fund.
Provision for Income Taxes
The Fund has qualified and intends to continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
- --------------------------------------------------------------------------------
105
<PAGE>
- ---------------
Gabelli Capital
Asset Fund
- ---------------
5
- ---------------
- --------------------------------------------------------------------------------
Gabelli Capital Asset Fund
- --------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
June 30, 1998 (Unaudited)
amended. As a result, a Federal income tax provision is not required.
Organizational Expenses
A total of $100,000 in expenses was incurred in connection with the
organization of the Fund. These costs were advanced by the Guardian Insurance &
Annuity Company Inc. and will be reimbursed by the Fund. These organizational
costs were deferred and are being amortized on a straight-line basis over a
period of 60 months from the date the Fund commenced investment operations.
- --------------------------------------
3 -- Agreements with Affiliated Partie
- --------------------------------------
Pursuant to a management agreement (the "Management Agreement"), the
Fund will pay Guardian Investor Services Corporation (the "Manager") a fee,
computed daily and paid monthly, at the annual rate of 1.00% of the value of the
Fund's average daily net assets. Pursuant to an Investment Advisory Agreement
among the Fund, the Manager and Gabelli Funds, Inc. (the "Adviser"), the
Adviser, under the supervision of the Company's Board of Directors and the
Manager, manages the Fund's assets in accordance with the Fund's investment
objectives and policies, makes investment decisions for the Fund, places
purchase and sale orders on behalf of the Fund, provides investment research and
provides facilities and personnel required for the Fund's administrative needs.
The Adviser may delegate its administrative role and currently has done so to
First Data Investor Services Group, Inc., the Fund's Sub-Administrator (the
"Sub-Administrator"). The Adviser will supervise the performance of
administrative and professional services provided by others and pays the
compensation of the Sub-Administrator and all Officers and Directors of the
Company who are its affiliates. As compensation for its services and the
related expenses borne by the Adviser, the Manager pays the Adviser a fee,
computed daily and paid monthly, at the annual rate of 0.75% of the value of the
Fund's average daily net assets.
- -------------------------
4 -- Portfolio Securities
- -------------------------
Purchases and sales of securities for the six months ended June 30, 1998,
other than short term securities, aggregated $63,882,218 and $25,496,124,
respectively.
- ---------------------------------
5 -- Transactions with Affiliates
- ---------------------------------
During the six months ended June 30, 1998, the Fund paid brokerage
commissions of $88,420 to Gabelli & Company, Inc. and its affiliates.
- -------------------------------
6 -- Capital Stock Transactions
- -------------------------------
Transactions in shares of capital stock were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
6/30/98 12/31/97
----------- -----------
Shares Amount Shares Amount
------- -------- ------- -------
<S> <C> <C> <C> <C>
Shares sold 2,765,511 $ 45,755,568 3,454,754 $ 50,227,654
Shares issued upon re-
investment of dividends -- -- 478,228 7,202,109
Shares redeemed (735,539) (12,162,150) (1,507,694) (21,184,806)
------------ ------------ ------------ ------------
Net increase 2,029,972 $ 33,593,418 2,425,288 $ 36,244,957
============ ============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
106
<PAGE>
---------------
Gabelli Capital
Asset Fund
---------------
5
---------------
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each period.
<TABLE>
<CAPTION>
Six Months Ended Year Ended December 31,
June 30, 1998 --------------------------------------------
(Unaudited) 1997 1996 1995+
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Operating performance:
Net asset value, beginning of period ............ $ 15.31 $ 11.55 $ 10.70 $ 10.00
----------- ----------- ----------- -----------
Net investment income ........................... 0.02 0.02 0.02 0.03(a)
Net realized and unrealized gain on investments . 2.07 4.88 1.16 0.80
----------- ----------- ----------- -----------
Total from investment operations ................ 2.09 4.90 1.18 0.83
----------- ----------- ----------- -----------
Distributions to shareholders:
From net investment income ...................... -- (0.02) (0.02) (0.03)
From net realized gain on investments ........... -- (1.12) (0.31) (0.09)
In excess of net realized gain on investments ... -- (0.00)(b) -- (0.01)
----------- ----------- ----------- -----------
Total distributions ............................. -- (1.14) (0.33) (0.13)
----------- ----------- ----------- -----------
Net asset value, end of period ...................... $ 17.40 $ 15.31 $ 11.55 $ 10.70
=========== =========== =========== ===========
Total return++ .................................. 13.7% 42.6% 11.0% 8.4%
=========== =========== =========== ===========
Ratios to average net assets and supplemental data:
Net assets, end of period (in 000's) ................ $ 155,063 $ 105,350 $ 51,462 $ 26,364
Ratio of net investment income to average
net assets ........................................ 0.31%(c) 0.17% 0.21% 0.75%(c)
Ratio of operating expenses to average
net assets (d) .................................... 1.19%(c) 1.17% 1.31% 1.78%(c)
Portfolio turnover rate ............................. 21% 65% 53% 81%
</TABLE>
- -----------
+ From commencement of operations on May 1, 1995.
++ Total return represents aggregate total return of a hypothetical $1,000
investment at the beginning of the period and sold at the end of the
period including reinvestment of dividends. Total return for the period of
less than one year is not annualized.
(a) Net investment income before expenses assumed by the Manager and Adviser
was $0.03.
(b) Amount represents less than $0.005 per share.
(c) Annualized.
(d) The ratio of operating expenses to average net assets before reimbursement
of expenses assumed by the Manager and Adviser would have been 1.92% for
the year ended December 31, 1995.
See notes to financial statements.
- --------------------------------------------------------------------------------
107
<PAGE>
- ---------------
Baillie Gifford
International
Fund
- ---------------
6
- ---------------
- --------------------------------------------------------------------------------
Baillie Gifford International Fund
- ----------------------------------
SCHEDULE OF INVESTMENTS
June 30, 1998 (Unaudited)
- ----------------------
COMMON STOCKS -- 96.6%
- ----------------------
Shares Value
- -----------------------------------------------------------------------
ARGENTINA -- 0.4%
Oil and Gas -- 0.2%
266,600 Perez Companc S.A $ 1,338,526
Telecommunications -- 0.2%
29,300 Telefonica de Argentina ADR* 950,419
------------
2,288,945
------------
AUSTRALIA -- 1.8%
Banks -- 0.4%
176,800 National Australia Bank 2,337,644
Beverage -- 0.5%
1,335,300 Fosters Brewing Group 3,149,771
Business Services -- 0.5%
175,700 Brambles Industries Ltd. 3,456,293
Consumer Goods -- 0.1%
258,000 Woolworths Ltd. 840,806
Real Estate -- 0.3%
101,632 Lend Lease Corp. 2,059,825
------------
11,844,339
------------
BRAZIL -- 1.2%
Food, Beverage and Tobacco -- 0.2%
93,000 Comp. Cerveja Ria Brahma ADR 1,162,500
Petroleum Services -- 0.2%
75,000 Petroleo Brasileiro S.A. ADR 1,394,233
Retail-Food -- 0.2%
64,000 Comp. Brasileira de Distribution ADR+ 1,448,000
Telecommunications -- 0.3%
11,000 Telecom. Brasileiras ADR 1,201,063
4,606,790 Telesp. Tel. Sao Paolo 1,038,285
Utilities-Electric -- 0.3%
20,221 Comp. Energetica de Minas ADR 629,420
18,479 Comp. Energetica de Minas ADR+ 575,195
61,000 Comp. Paranaense de Energia ADR 564,250
------------
8,012,946
------------
CHILE -- 0.1%
Retail-Food -- 0.1%
38,400 Distribucion Y Servicio S.A. ADR 576,000
------------
FRANCE -- 9.2%
Capital Goods -- 0.9%
28,300 Alcatel Alsthom 5,762,327
Construction Materials -- 2.7%
172,000 Lafarge 17,781,233
Financial Services -- 2.7%
154,000 AXA UAP 17,321,402
Oil-Integrated -- 1.9%
86,550 Elf Aquitaine 12,168,566
Retail Trade -- 1.0%
13,035 Comptoirs Modernes 6,791,645
------------
59,825,173
------------
GERMANY -- 18.8%
Automobiles -- 2.9%
18,636 Bayerische Motoren Werke AG 18,858,688
Banks -- 2.1%
161,500 Bayerische Vereinsbank AG 13,701,239
Chemicals -- 1.2%
159,800 BASF AG 7,598,131
Drugs and Health Care -- 0.8%
99,440 GEHE AG 5,334,675
Footwear -- 2.4%
89,300 Adidas AG 15,572,847
Industrial Machineries -- 4.0%
254,655 Mannesmann AG 26,193,408
Insurance -- 2.6%
34,600 Munchener Ruckvers* 17,190,163
Software -- 2.8%
29,720 SAP AG 18,045,080
------------
122,494,231
------------
HONG KONG -- 0.7%
Conglomerates -- 0.5%
644,000 Hutchison Whampoa 3,399,535
Real Estate -- 0.2%
698,000 New World Development Co. 1,351,316
------------
4,750,851
------------
See notes to financial statements.
* Non-income producing security.
+ Rule 144A restricted security.
- --------------------------------------------------------------------------------
108
<PAGE>
---------------
Baillie Gifford
International
Fund
---------------
6
---------------
- --------------------------------------------------------------------------------
Shares Value
- -----------------------------------------------------------------------
HUNGARY -- 0.9%
Food and Beverage -- 0.3%
27,000 Pick Szeged RT $ 1,579,373
Pharmaceuticals -- 0.6%
51,700 Richter Gedeon VEG 4,161,537
------------
5,740,910
------------
IRELAND -- 2.3%
Banks -- 1.1%
512,000 Allied Irish Bank 7,401,924
Construction Materials -- 1.2%
555,000 CRH PLC 7,880,362
------------
15,282,286
------------
ITALY -- 7.9%
Banks -- 3.8%
9,152,000 Banco di Roma* 19,058,618
371,000 Istituto Bco. Sao Paolo Torino* 5,355,931
Telecommunications -- 4.1%
1,625,444 Telecom. Italia SPA 11,970,696
2,435,000 Telecom. Italia MOB 14,897,116
------------
51,282,361
------------
JAPAN -- 11.2%
Automobile -- 0.8%
136,000 Honda Motor Co. 4,858,899
Chemicals -- 1.2%
321,000 Kao Corp. 4,968,106
166,000 Shin Etsu Chemical Co. 2,881,319
Drugs and Health Care -- 0.6%
184,000 Sankyo Co. 4,205,106
Electronics -- 3.3%
160,000 Canon, Inc. 3,645,042
457,000 Matsushita Electric Works 3,701,743
55,000 Rohm Co. 5,668,258
60,800 Sony Corp. 5,254,647
41,000 TDK Corp.* 3,039,343
Financial Services -- 2.4%
142,800 Credit Saison Co. 2,840,095
134,100 Promise Co. 5,537,795
585,000,000 Sanwa Int'l. Financial* 4,315,470
12,800 Shohkoh Fund & Co. 3,156,722
Leisure Products -- 0.3%
18,100 Toho Co. 1,911,188
Photography -- 0.6%
118,000 Fuji Photo Film Co. 4,121,935
Real Estate -- 0.4%
281,000 Mitsubishi Estate 2,479,352
Retail Trade -- 0.6%
80,000 Ito Yokado Co.* 3,778,115
Telecommunications -- 1.0%
778 Nippon Tele. & Tel. Corp. 6,470,673
------------
72,833,808
------------
MEXICO -- 0.7%
Paper and Forest Products -- 0.1%
191,000 Kimberly-Clark de Mexico 674,893
Retail Trade -- 0.2%
84,000 Grupo Elektra S.A. de C.V. GDR 819,000
237,000 Organiz. Soriana 675,221
Telecommunications -- 0.1%
4,400,000 Telesp. Celular S.A.* 365,224
Transportation -- 0.3%
49,000 Grupo Television S.A. de C.V. ADR* 1,843,625
------------
4,377,963
------------
NETHERLANDS -- 2.5%
Banks -- 0.5%
131,397 ABN Amro Hldgs. NV 3,076,865
Broadcasting and Publishing -- 2.0%
360,000 Ver Ned Uitgevers 13,087,689
------------
16,164,554
------------
NEW ZEALAND -- 0.1%
Telecommunications -- 0.1%
444,012 Telecom. Corp. of New Zealand 951,892
------------
PEOPLE'S REPUBLIC OF CHINA -- 0.2%
Telecommunications -- 0.2%
736,000 China Telecom.* 1,277,646
------------
See notes to financial statements.
* Non-income producing security.
- ------------------------------------------------------------------------
109
<PAGE>
- ---------------
Baillie Gifford
International
Fund
- ---------------
6
- ---------------
- ------------------------------------------------------------------------
Baillie Gifford International Fund
- ----------------------------------
SCHEDULE OF INVESTMENTS
June 30, 1998 (Unaudited)(Continued)
Shares Value
- -----------------------------------------------------------------------
POLAND -- 0.8%
Electrical Equipment -- 0.8%
428,950 Elektrim* $ 5,228,097
------------
SINGAPORE -- 0.2%
Publishing -- 0.2%
162,052 Singapore Press Hldgs 1,086,758
------------
SPAIN -- 4.4%
Banks -- 2.4%
612,600 Banco Santander S.A 15,679,523
Industrials -- 2.0%
55,800 Grupo Acciona S.A.* 13,274,104
------------
28,953,627
------------
SWEDEN -- 3.5%
Construction and Mining Equipment -- 0.9%
216,000 Atlas Copco AB 5,890,171
Telecommunications -- 2.6%
578,000 LM Ericsson 16,884,905
------------
22,775,076
------------
SWITZERLAND -- 6.9%
Business Services -- 1.3%
18,309 Adecco S.A 8,270,063
Insurance -- 2.7%
28,080 Zurich Versicherungs-Gesellschaft 17,949,838
Pharmaceuticals -- 2.9%
11,210 Novartis AG 18,684,567
------------
44,904,468
------------
UNITED KINGDOM -- 22.8%
Banks -- 3.3%
429,500 HSBC Hldgs 10,412,817
550,000 Lloyds TSB Group PLC 7,700,239
188,000 National Westminster Bank Co. PLC 3,361,908
Conglomerates -- 3.6%
1,382,000 Hanson PLC 8,405,161
1,123,000 Rentokil Initial PLC 8,081,565
1,077,000 Williams Hldgs 6,923,327
Containers-Paper and Plastic -- 0.4%
600,000 Bunzl PLC 2,825,132
Data Services -- 0.4%
253,933 Reuters Group PLC 2,904,345
Drugs and Health Care -- 3.5%
583,000 Glaxo Wellcome 17,512,097
124,000 Zeneca Group 5,325,141
Electronics -- 0.5%
373,000 Electrocomponents 2,927,151
Engineering -- 0.7%
243,000 Siebe 4,856,673
Financial Services -- 0.9%
316,000 CGU PLC* 5,898,850
Food, Beverage and Tobacco -- 2.6%
350,000 Devro Int'l 2,942,429
961,900 Imperial Tobacco 7,098,893
418,702 Whitbread 6,781,335
Leisure Products -- 0.7%
243,000 Granada Group 4,471,223
Mining -- 0.1%
129,500 Antofagasta Hldgs 540,565
Newspapers -- 0.4%
300,000 Southnews PLC 2,579,686
Oil-International -- 1.6%
735,313 British Petroleum 10,730,553
Retail Trade -- 0.6%
475,087 Dixons Group 3,791,748
Telecommunications -- 2.9%
492,000 British Telecom.* 6,079,044
642,991 Cable & Wireless Co.* 6,516,764
483,000 Vodafone Group 6,133,167
Transportation -- 0.6%
288,000 BAA PLC* 3,111,252
44,000 Stagecoach Hldgs.* 936,702
------------
148,847,767
------------
TOTAL COMMON STOCKS
(Cost $460,442,756) 629,499,698
------------
See notes to financial statements.
* Non-income producing security.
- -------------------------------------------------------------------------------
110
<PAGE>
---------------
Baillie Gifford
International
Fund
---------------
6
---------------
- -------------------------------------------------------------------------------
- ----------------------------
REPURCHASE AGREEMENT -- 1.3%
- ----------------------------
Principal
Shares Value
- -----------------------------------------------------------------------
$ 8,749,000 State Street Bank & Trust Co.
repurchase agreement, dated 6/30/98,
maturity value $8,750,215 at 5.00%
due 7/1/98 (collateralized by
$8,930,000 U.S. Treasury Notes,
8.75% due 5/15/17) $ 8,749,000
------------
TOTAL REPURCHASE AGREEMENT
(Cost $8,749,000) 8,749,000
------------
TOTAL INVESTMENTS -- 97.9%
(Cost $469,191,756) 638,248,698
CASH, RECEIVABLES AND OTHER
ASSETS LESS LIABILITIES -- 2.1% 14,014,347
------------
NET ASSETS -- 100.0% $652,263,045
============
Glossary of terms:
ADR -- American Depositary Receipt.
GDR -- Global Depositary Receipt.
See notes to financial statements.
- -------------------------------------------------------------------------------
111
<PAGE>
- ---------------
Baillie Gifford
International
Fund
- ---------------
6
- ---------------
- --------------------------------------------------------------------------------
Baillie Gifford International Fund
- ----------------------------------
STATEMENT OF ASSETS
AND LIABILITIES
June 30, 1998 (Unaudited)
ASSETS
Investments, at market (cost $469,191,756) $ 638,248,698
Cash 919
Foreign currency (cost $23,718,584) 23,615,261
Receivable for securities sold 3,387,097
Dividend reclaims receivable 764,481
Dividends receivable 749,840
Receivable for fund shares sold 238,654
Interest receivable 1,215
Other assets 660
-------------
TOTAL ASSETS 667,006,825
-------------
LIABILITIES
Payable for investments purchased 10,982,975
Payable for fund shares redeemed 1,247,222
Unrealized depreciation on closed forward
exchange currency contracts 751,400
Accrued expenses 214,219
Due to affiliates 1,547,964
-------------
TOTAL LIABILITIES 14,743,780
-------------
NET ASSETS $ 652,263,045
=============
COMPONENTS OF NET ASSETS
Capital stock, at par $ 3,023,857
Additional paid-in capital 447,930,381
Distributions in excess of net investment income (3,306,756)
Accumulated net realized gain on investments
and foreign currency related transactions 36,414,070
Net unrealized appreciation of investments
and translation of other assets and
liabilities denominated in foreign currencies 168,201,493
-------------
NET ASSETS $ 652,263,045
=============
Shares Outstanding -- $0.10 par value 30,238,568
-------------
NET ASSET VALUE PER SHARE $ 21.57
=============
STATEMENT OF OPERATIONS
Six Months Ended
June 30, 1998 (Unaudited)
Investment Income:
Dividends $ 6,943,888
Interest 316,630
Less: Foreign tax withheld (865,317)
-------------
Total Income 6,395,201
-------------
Expenses:
Investment advisory fees -- Note B 2,406,476
Custodian fees 420,024
Printing expense 82,500
Audit fees 10,500
Directorsi fees -- Note B 6,250
Transfer agent fees 1,650
Legal fees 1,475
Insurance expense 1,381
Registration fees 1,000
Other 350
-------------
Total Expenses 2,931,606
-------------
Net Investment Income 3,463,595
-------------
Realized and Unrealized Gain/(Loss) on
Investments and Foreign Currencies -- Note C
Net realized gain on investments -- Note A 36,813,651
Net realized loss on foreign currency
related transactions -- Note A (6,897)
Net change in unrealized appreciation of
investments -- Note C 63,602,866
Net change in unrealized depreciation from
translation of other assets and liabilities
denominated in foreign currencies -- Note C (640,046)
-------------
Net Realized and Unrealized Gain on
Investments and Foreign Currencies 99,769,574
-------------
Net Increase in Net Assets
from Operations $ 103,233,169
=============
See notes to financial statements.
- --------------------------------------------------------------------------------
112
<PAGE>
---------------
Baillie Gifford
International
Fund
---------------
6
---------------
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Year Ended
Ended December 31,
June 30, 1998 1997
(Unaudited) (Audited)
------------- -------------
<S> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS
From Operations:
Net investment income $ 3,463,595 $ 3,812,500
Net realized gain on investments and foreign currency
related transactions 36,806,754 23,438,047
Net change in unrealized appreciation/(depreciation)
on investments and translation of other assets and
liabilities denominated in foreign currencies 62,962,820 27,252,164
------------- -------------
Net Increase in Net Assets from Operations 103,233,169 54,502,711
------------- -------------
Dividends and Distributions to Shareholders from:
Net investment income (2,398,640) (3,812,500)
Distributions in excess of net investment income -- (4,530,809)
Net realized gain on investments (3,734,213) (20,727,823)
------------- -------------
Total Dividends and Distribution to Shareholders (6,132,853) (29,071,132)
------------- -------------
From Capital Share Transactions:
Net increase in net assets from capital share
transactions -- Note E 20,451,259 53,077,150
------------- -------------
Net Increase in Net Assets 117,551,575 78,508,729
Net Assets:
Beginning of period 534,711,470 456,202,741
------------- -------------
End of period* $ 652,263,045 $ 534,711,470
============= =============
* Includes distributions in excess of net investment income of: $ (3,306,756) $ (4,371,711)
</TABLE>
See notes to financial statements.
- --------------------------------------------------------------------------------
113
<PAGE>
- ---------------
Baillie Gifford
International
Fund
- ---------------
6
- ---------------
- --------------------------------------------------------------------------------
Baillie Gifford International Fund
- ----------------------------------
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the periods
indicated:
<TABLE>
<CAPTION>
February 8,
Six Months 1991* to
Ended Year Ended December 31, (Audited) December 31,
June 30, 1998 ------------------------------------------------------------------- 1991
(Unaudited) 1997 1996 1995 1994 1993 1992 (Audited)
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ......... $ 18.27 $ 17.26 $ 15.37 $ 14.69 $ 14.69 $ 11.16 $ 12.37 $ 10.00
-------- -------- -------- -------- -------- -------- ------- -------
Income from investment
operations:
Net investment income ..... 0.12 0.15 0.15 0.16 0.15 0.23 0.09 0.04
Net realized and unrealized
gain/(loss) on investments
and translation of other
assets and liabilities
denominated in
foreign currencies ...... 3.38 1.91 2.21 1.49 (0.02) 3.54 (1.20) 2.52
-------- -------- -------- -------- -------- -------- ------- -------
Net increase/(decrease) from
investment operations ... 3.50 2.06 2.36 1.65 0.13 3.77 (1.11) 2.56
-------- -------- -------- -------- -------- -------- ------- -------
Dividends and Distributions
to Shareholders from:
Net investment income ..... (0.08) (0.15) (0.14) (0.15) (0.13) (0.24) (0.10) (0.04)
Distributions in excess of
net investment income ... -- (0.15) (0.10) (0.12) -- -- -- --
Net realized gain on invest-
ments and foreign currency
related transactions .... (0.12) (0.75) (0.23) (0.70) -- -- -- (0.15)
-------- -------- -------- -------- -------- -------- ------- -------
Total dividends and
distributions ........... (0.20) (1.05) (0.47) (0.97) (0.13) (0.24) (0.10) (0.19)
-------- -------- -------- -------- -------- -------- ------- -------
Net asset value, end of
period ...................... $ 21.57 $ 18.27 $ 17.26 $ 15.37 $ 14.69 $ 14.69 $ 11.16 $ 12.37
-------- -------- -------- -------- -------- -------- ------- -------
Total return** ................ 19.20% 11.93% 15.41% 11.23% 0.87% 34.04% (8.90)% 8.56%
-------- -------- -------- -------- -------- -------- ------- -------
Ratios/supplemental data:
Net assets, end of period
(000's omitted) ........... $652,263 $534,711 $456,203 $317,287 $303,050 $186,795 $55,175 $36,012
Ratio of expenses to average
net assets ................ 0.97%(a) 0.97% 0.98% 0.99% 1.03% 1.11% 1.26% 1.67%(a)
Ratio of net investment
income to average net
assets .................... 1.15%(a) 0.74% 0.94% 0.97% 1.11% 1.75% 0.88% 0.61%(a)
Portfolio turnover
rate ...................... 29% 51% 38% 52% 27% 18% 44% 14%
Average rate of
commissions paid(b) ....... $ 0.0012 $ 0.0214 $ 0.0364
</TABLE>
* Commencement of operations.
** Total returns do not reflect the effects of charges deducted pursuant to
the terms of GIAC's variable contracts. Inclusion of such charges would
reduce the total returns for all periods shown.
(a) Annualized.
(b) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged.
See notes to financial statements.
- --------------------------------------------------------------------------------
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115
<PAGE>
- ---------------
Baillie Gifford
Emerging
Markets Fund
- ---------------
7
- ---------------
- --------------------------------------------------------------------------------
Baillie Gifford Emerging Markets Fund
- -------------------------------------
SCHEDULE OF INVESTMENTS
June 30, 1998 (Unaudited)
- ----------------------
COMMON STOCKS -- 88.0%
- ----------------------
Shares Value
- ----------------------------------------------------------------------
ARGENTINA -- 6.6%
Banks -- 0.5%
16,699 Banco Galicia Y
Buenos Aires S.A. ADR* $ 304,757
Building Construction -- 0.6%
114,000 Dycasa Dragados S.A. 353,451
Oil and Gas -- 1.2%
154,300 Perez Companc S.A. 774,698
Real Estate -- 1.4%
29,732 IRSA Inversiones Y Represente GDR* 865,945
Retail-Food -- 1.4%
61,000 Imp. Y Exp. Patagonia* 905,981
Telecommunications -- 1.5%
29,153 Telefonica de Argentina S.A. ADR* 945,650
-----------
4,150,482
-----------
BRAZIL -- 23.9%
Banks -- 2.0%
2,221,000 Banco Itau S.A. 1,267,442
Food, Beverage and Tobacco -- 1.4%
1,400,000 Comp. Cerv. Ria Brahma 871,558
Industrial Machineries -- 1.8%
69,000 Elevadores Atlas 1,163,373
Petroleum Services -- 3.4%
11,600,000 Petroleo Brasileiro S.A. 2,156,413
Real Estate -- 0.6%
18,100 Brazil Realty S.A. GDR* 403,769
Retail-Food -- 2.1%
57,700 Comp. Brasileiras de Dist. ADR 1,305,462
Telecommunications -- 7.8%
26,000,000 Ericsson Telecom. S.A. 494,574
17,600 Telecom. Brasileiras S.A. ADR 1,921,700
10,354,581 Telecom. de Sao Paolo S.A. 1,872,827
9,889,784 Telesp. Celular S.A.* 598,049
Textile-Apparel and Production -- 1.0%
230,800 Confeccoes Guararapes S.A. 627,522
Utilities-Electric and Water -- 3.8%
31,400,700 Comp. Energetica de Minas 977,411
13,034 Comp. Paranaense de Energia ADR 120,564
4,499,998 Comp. Saneam. Basico
Est. de Sao Paolo 540,832
7,266,276 Eletropaulo Metropolitana S.A. 546,596
7,266,276 Emp. Bandeirante de Energia S.A.* 114,973
7,266,276 Emp. Metropolitana Aguas Energia* 5,654
7,266,276 Emp. Paulista Transmissao
de Energia* 25,696
4,274,280 Light Particapacoes 1,515
-----------
15,015,930
-----------
CHILE -- 5.1%
Chemicals -- 0.9%
17,240 Sociedad Quimica Y Minera
de Chile S.A. ADR 577,540
Food and Beverage -- 1.1%
42,600 Embotelladora Andina S.A. ADR 665,625
Mining -- 0.8%
120,000 Antofagasta Hldgs. 500,909
Mutual Fund -- 1.2%
25,600 Genesis Chile Fund 755,200
Retail-Food -- 1.1%
46,584 Distribucion Y Servicio ADR 698,760
-----------
3,198,034
-----------
COLOMBIA -- 2.2%
Banks -- 0.5%
17,000 Banco Ganadero S.A. ADR 299,625
Gas Distribution -- 0.7%
91,000 Promigas S.A. 452,009
Retail-Food -- 0.8%
272,000 Almacenes Exito S.A. 536,449
Tobacco -- 0.2%
76,018 Coltabaco 113,833
-----------
1,401,916
-----------
CZECH REPUBLIC -- 1.2%
Financial Services -- 0.4%
40,000 IKS KB Plus* 236,686
Food and Beverage -- 0.2%
79,500 Prazske Pivovary* 168,179
Telecommunications -- 0.6%
27,200 SPT Telecom. AS* 376,098
-----------
780,963
-----------
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
116
<PAGE>
---------------
Baillie Gifford
Emerging
Markets Fund
---------------
7
---------------
- --------------------------------------------------------------------------------
Shares Value
- ----------------------------------------------------------------------
HONG KONG -- 2.2%
Real Estate -- 1.1%
2,900,000 China Overseas Land $ 374,290
149,000 New World Development Co. 288,462
Telecommunications -- 1.1%
406,000 China Telecom.* 704,788
-----------
1,367,540
-----------
HUNGARY -- 8.2%
Building Construction and Materials -- 1.0%
18,580 Zalakeramia 660,263
Consumer Goods -- 0.8%
18,500 Graboplast Textile 468,740
Food, Beverage and Tobacco -- 1.2%
12,500 Pick Szeged RT 731,191
Lodging -- 0.9%
28,150 Danubius Hotel* 566,476
Pharmaceuticals -- 1.9%
14,880 Richter Gedeon VEG 1,197,749
Plastics -- 1.3%
21,260 Pannonplast 787,587
Transportation -- 1.1%
36,500 North American Bus* 717,814
-----------
5,129,820
-----------
INDIA -- 3.1%
Computer Software -- 1.7%
200 Aptech Ltd. 2,332
20,800 Infosys Technology Ltd. 1,090,405
Mutual Fund -- 1.4%
113,500 Indian Opportunity Fund* 879,625
-----------
1,972,362
-----------
INDONESIA -- 0.0%
Household Products -- 0.0%
6,000 Unilever Indonesia* 11,468
-----------
MALAYSIA -- 0.3%
Food, Beverage and Tobacco -- 0.3%
130,000 RJ Reynolds Berhad 180,120
-----------
MEXICO -- 13.7%
Banks -- 0.9%
290,000 Grupo Financiero Banamex* 564,798
Conglomerates -- 0.7%
55,000 Grupo Carso S.A. de C.V. ADR 452,952
Financial Services -- 1.0%
540,500 Grupo Financiero Banorte* 601,525
Food, Beverage and Tobacco -- 2.4%
260,000 Grupo Continental 868,065
19,200 Pan American Beverages, Inc. 603,600
Media and Entertainment -- 4.1%
609,840 Corp. Interamericana Entretenimiento* 1,696,734
23,700 Grupo Television S.A. de C.V. ADR* 891,713
Paper and Forest Products -- 1.6%
290,000 Kimberly-Clark de Mexico 1,024,706
Real Estate -- 1.3%
148,800 Corp. Geo S.A.* 831,313
Retail Trade -- 1.1%
40,300 Grupo Elektra S.A. GDR 392,925
108,000 Organiz. Soriana 307,696
Telecommunications -- 0.6%
8,200 Telefonos de Mexico S.A. ADR 394,113
-----------
8,630,140
-----------
PAKISTAN -- 0.1%
Banks -- 0.1%
183,500 Faysal Bank 35,820
-----------
PEOPLE'S REPUBLIC OF CHINA -- 1.7%
Household Products -- 1.0%
770,000 Guandong Kelon Elec. Hldgs. 606,220
Utilities-Electric -- 0.7%
1,540,000 Beijing Datang Power Gen. Co.* 432,305
-----------
1,038,525
-----------
PERU -- 0.8%
Telecommunications -- 0.8%
245,000 Telefonica del Peru* 504,596
-----------
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
117
<PAGE>
- ---------------
Baillie Gifford
Emerging
Markets Fund
- ---------------
7
- ---------------
- --------------------------------------------------------------------------------
Baillie Gifford Emerging Markets Fund
- -------------------------------------
SCHEDULE OF INVESTMENTS
June 30, 1998 (Unaudited) (Continued)
Shares Value
- ----------------------------------------------------------------------
PHILIPPINES -- 0.2%
Business Services -- 0.1%
450,000 Int'l. Container Terminal Svcs.* $ 51,258
Food and Beverage -- 0.1%
385,368 RFM Corp. 55,449
-----------
106,707
-----------
POLAND -- 6.0%
Banks -- 4.1%
60,000 Bank Handlowy Warsaw 1,144,250
53,000 Bank Roswoju Eksport 1,436,335
Electrical Equipment -- 1.9%
100,000 Elektrim* 1,218,813
-----------
3,799,398
-----------
PORTUGAL -- 0.6%
Financial Services -- 0.6%
15,050 Comp. de Seguros Tranquilidade 407,638
-----------
SINGAPORE -- 0.1%
Construction -- 0.1%
98,000 Clipsal Industries Ltd.* 87,710
-----------
SOUTH AFRICA -- 4.0%
Brewing -- 0.8%
24,000 South African Breweries 493,761
Conglomerates -- 0.5%
57,434 Barlow Ltd. 302,667
Consumer Goods -- 0.7%
77,000 Ellerine Hldgs.* 422,007
Financial Services -- 1.6%
351,000 FirstRand Ltd. 538,634
24,300 Liberty Life Assoc. 473,707
Oil-Domestic -- 0.4%
44,683 Sasol 258,830
-----------
2,489,606
-----------
SOUTH KOREA -- 3.7%
Electronic Equipments -- 0.6%
24,000 Samsung Electronics Ltd. GDR*+ 381,000
Health Care -- 1.8%
130,000 Medison Co. 1,131,464
Retail-Apparel -- 1.3%
42,000 Younggone Corp.* 822,870
-----------
2,335,334
-----------
SRI LANKA -- 0.8%
Banks -- 0.8%
264,800 National Development Bank 506,116
----------
TAIWAN -- 3.5%
Banks -- 0.0%
84 ICBC 107
Financial Services -- 1.4%
372,375 China Development* 861,565
Industrial Machineries -- 1.1%
603,000 Yungtay Engineering Co. Ltd. 728,292
Textile-Apparel and Production -- 1.0%
789,600 Far East Textile 611,265
----------
2,201,229
----------
TOTAL COMMON STOCKS
(Cost $62,162,733) 55,351,454
-----------
- -------------------------
CONVERTIBLE BONDS -- 4.9%
- -------------------------
Principal
Amount Value
- ----------------------------------------------------------------------
$1,075,000 Metro Pacific Capital
2.50% due 4/11/03 $ 851,937
1,100,000 Orient Semiconductor Elect. Ltd.
1.50% due 2/26/03 971,190
200,000 RFM Capital
2.75% due 5/30/06 174,500
1,100,000 Siliconware Precision Industries
.50% due 7/21/04 1,055,780
-----------
TOTAL CONVERTIBLE BONDS
(Cost $3,546,297) 3,053,407
-----------
See notes to financial statements.
* Non-income producing security.
+ Rule 144 A restricted security.
- --------------------------------------------------------------------------------
118
<PAGE>
---------------
Baillie Gifford
Emerging
Markets Fund
---------------
7
---------------
- --------------------------------------------------------------------------------
- ----------------------------
REPURCHASE AGREEMENT -- 4.8%
- ----------------------------
Principal
Amount Value
- ----------------------------------------------------------------------
$3,041,000 State Street Bank & Trust Co.
repurchase agreement,
dated 6/30/98, maturity value
$3,041,422 at 5.00% due 7/1/98
(collateralized by $3,105,000
U.S. Treasury Bonds, 8.125%
due 8/15/21) $ 3,041,000
-----------
TOTAL REPURCHASE AGREEMENT
(Cost $3,041,000) 3,041,000
-----------
TOTAL INVESTMENTS -- 97.7%
(Cost $68,750,030) 61,445,861
CASH, RECEIVABLES AND OTHER
ASSETS LESS LIABILITIES -- 2.3% 1,436,083
-----------
NET ASSETS -- 100.0% $62,881,944
===========
Glossary of terms:
ADR -- American Depositary Receipt.
GDR -- Global Depositary Receipt.
See notes to financial statements.
- --------------------------------------------------------------------------------
119
<PAGE>
- ----------------
Baillie Gifford
Emerging Markets
Fund
- ----------------
7
- ----------------
- --------------------------------------------------------------------------------
Baillie Gifford Emerging Markets Fund
- -------------------------------------
STATEMENT OF ASSETS
AND LIABILITIES
June 30, 1998 (Unaudited)
ASSETS
Investments, at market (cost $68,750,030) $ 61,445,861
Cash 126
Foreign currency (cost $1,132,949) 1,092,916
Receivable for securities sold 351,599
Dividends receivable 304,782
Interest receivable 15,042
Receivable for fund shares sold 5,276
Dividend reclaims receivable 2,332
Deferred organization expenses 1,547
------------
TOTAL ASSETS 63,219,481
------------
LIABILITIES
Accrued expenses 44,464
Payable for fund shares redeemed 41,528
Due to affiliates 251,545
------------
TOTAL LIABILITIES 337,537
------------
NET ASSETS $ 62,881,944
============
COMPONENTS OF NET ASSETS
Capital stock, at par $ 760,833
Additional paid-in capital 75,192,469
Distributions in excess of net investment income (455,906)
Distributions in excess of net realized gain on
investments and foreign currency
related transactions (5,262,677)
Net unrealized depreciation of investments
and translation of other assets and
liabilities denominated in foreign currencies (7,352,775)
------------
NET ASSETS $ 62,881,944
============
Shares Outstanding -- $0.10 par value 7,608,334
------------
NET ASSET VALUE PER SHARE $ 8.26
============
STATEMENT OF OPERATIONS
Six Months Ended
June 30, 1998 (Unaudited)
Investment Income:
Dividends $ 1,228,280
Interest 64,404
Less: Foreign tax withheld (137,319)
------------
Total Income 1,155,365
------------
Expenses:
Investment advisory fees -- Note B 386,691
Custodian fees 144,562
Printing expense 12,500
Audit fees 10,500
Directors' fees -- Note B 6,250
Registration fees 2,960
Transfer agent fees 1,650
Insurance expense 878
Legal fees 509
Deferred organization expense 252
Other 350
------------
Total Expenses 567,102
------------
Net Investment Income 588,263
------------
Realized and Unrealized Gain/(Loss) on
Investments and Foreign Currencies -- Note C
Net realized loss on investments -- Note A (3,686,214)
Net realized loss on foreign currency related
transactions -- Note A (337,248)
Net change in unrealized appreciation of
investments -- Note C (10,885,321)
Net change in unrealized appreciation from
translation of other assets and liabilities
denominated in foreign currencies -- Note C (58,209)
------------
Net Realized and Unrealized Loss on
Investments and Foreign Currencies (14,966,992)
------------
Net Decrease in Net Assets
from Operations $(14,378,729)
============
See notes to financial statements.
- --------------------------------------------------------------------------------
120
<PAGE>
----------------
Baillie Gifford
Emerging Markets
Fund
----------------
7
----------------
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Year Ended
Ended December 31,
June 30, 1998 1997
(Unaudited) (Audited)
------------ ------------
<S> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS
From Operations:
Net investment income $ 588,263 $ 734,015
Net realized gain/(loss) on investments and
foreign currency related transactions (4,023,462) 2,641,526
Net change in unrealized appreciation/
(depreciation) on investments and
translation of other assets and liabilities
denominated in foreign currencies (10,943,530) (4,534,373)
------------ ------------
Net Decrease in Net Assets from Operations (14,378,729) (1,158,832)
------------ ------------
Dividends and Distributions to Shareholders from:
Net investment income (481,281) (470,207)
Net realized gains on investments and foreign
currency related transactions -- (2,641,526)
In excess of net realized gains on investments
and foreign currency transactions -- (1,578,227)
------------ ------------
Total Dividends and Distributions to Shareholders (481,281) (4,689,960)
------------ ------------
From Capital Share Transactions:
Increase/(Decrease) in net assets from capital share
transactions -- Note E (9,271,755) 25,800,397
------------ ------------
Net Increase/(Decrease) in Net Assets (24,131,765) 19,951,605
Net Assets:
Beginning of period 87,013,709 67,062,104
------------ ------------
End of period* $ 62,881,944 $ 87,013,709
============ ============
* Includes distributions in excess of net investment income of: $ (455,906) $ (562,888)
</TABLE>
See notes to financial statements.
- --------------------------------------------------------------------------------
121
<PAGE>
- ---------------
Baillie Gifford
International
Fund
- ---------------
7
- ---------------
- --------------------------------------------------------------------------------
Baillie Gifford Emerging Markets Fund
- -------------------------------------
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the periods
indicated:
<TABLE>
<CAPTION>
October 17,
Six Months 1994* to
Ended Year Ended December 31, (Audited) December 31,
June 30, 1998 --------------------------------- 1994
(Unaudited) 1997 1996 1995 (Audited)
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period .............. $ 10.17 $ 10.54 $ 8.46 $ 8.68 $ 9.87
------- ------- ------- ------- -------
Income from investment
operations:
Net investment income/(loss) ..... 0.07 0.09 0.07 0.07 (0.01)
Net realized and unrealized
gain/(loss) on investments
and translation of other assets
and liabilities denominated in
foreign currency ............... (1.92) 0.12 2.01 (0.12) (1.17)
------- ------- ------- ------- -------
Net increase/(decrease) from
investment operations .......... (1.85) 0.21 2.08 (0.05) (1.18)
------- ------- ------- ------- -------
Dividends and Distributions
to Shareholders from:
Net investment income ............ (0.06) (0.06) -- (0.07) (0.01)
Distributions in excess of
net investment income .......... -- -- -- (0.10) --
Net realized gain on invest-
ments and foreign currency
related transactions ........... -- (0.33) -- -- --
In excess of net realized gain
on investments ................. -- (0.19) -- -- --
------- ------- ------- ------- -------
Total dividends and
distributions .................. (0.06) (0.58) -- (0.17) (0.01)
------- ------- ------- ------- -------
Net asset value, end of
period ........................... $8.26 $10.17 $10.54 $8.46 $8.68
------- ------- ------- ------- -------
Total return** ..................... (18.15)% 1.97% 24.59% (0.60)% (11.97)%
------- ------- ------- ------- -------
Ratios/supplemental data:
Net assets, end of period
(000's omitted) ................ $62,882 $87,014 $67,062 $34,218 $24,069
Ratio of expenses to average
net assets ..................... 1.47%(a) 1.40% 1.53% 1.67% 2.28%(a)
Ratio of net investment
income to average
net assets ..................... 1.52%(a) 0.76% 0.85% 0.89% 0.94%(a)
Portfolio turnover
rate ........................... 29% 64% 46% 52% --
Average rate of
commissions paid(b) ............ $0.0001 $0.0003 $0.0313
</TABLE>
* Commencement of public offering of the Fundis shares.
** Total returns do not reflect the effects of charges deducted pursuant to
the terms of GIAC's variable contracts. Inclusion of such charges would
reduce the total returns for all periods shown.
(a) Annualized.
(b) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trades on
which commissions are charged.
See notes to financial statements.
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<PAGE>
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123
<PAGE>
- ------------
The Guardian
Small Cap
Stock Fund
- ------------
8
- ------------
- --------------------------------------------------------------------------------
The Guardian Small Cap Stock Fund
- ---------------------------------
SCHEDULE OF INVESTMENTS
June 30, 1998 (Unaudited)
- ----------------------
COMMON STOCKS -- 95.0%
- ----------------------
Shares Value
- ----------------------------------------------------------------------
Aerospace-Defense -- 0.5%
31,000 Kaman Corp. $ 589,969
------------
Air Transportation -- 1.3%
21,000 Airnet Systems, Inc.* 338,625
12,000 Alaska Air Group, Inc.* 654,750
21,000 America West Hldg. Corp.* 599,812
------------
1,593,187
------------
Appliance and Furniture -- 3.4%
57,900 Ethan Allen Interiors, Inc. 2,891,381
32,000 Furniture Brands Int'l., Inc.* 898,000
20,000 SMed Int'l., Inc.* 360,000
------------
4,149,381
------------
Automotive Parts -- 0.8%
18,100 Arvin Industries, Inc. 657,256
30,000 Automobile Protection Corp.* 298,125
------------
955,381
------------
Building Materials and Homebuilders -- 6.6%
17,100 Cameron Ashley Building Products* 288,563
18,000 Crossman Communities, Inc.* 546,750
18,000 Engle Homes, Inc. 281,250
30,000 Giant Cement Hldgs., Inc.* 858,750
33,000 D. R. Horton, Inc.* 688,875
27,500 Lennar Corp. 811,250
17,800 Lone Star Industries, Inc. 1,371,713
31,700 National RV Hldgs., Inc.* 1,430,462
3,500 NCI Building Systems, Inc.* 202,125
16,900 Southdown, Inc. 1,206,238
77,000 Stratus Pptys., Inc.* 327,250
------------
8,013,226
------------
Capital Goods-Miscellaneous -- 4.8%
40,000 Cultural Access World Wide* 390,000
44,500 Dispatch Mgt. Svcs. Corp.* 1,118,062
33,000 Dynamex, Inc.* 400,125
36,000 Hawk Corp.* 634,500
75,000 Hawker Pacific Aerospace* 834,375
27,000 Ladish, Inc.* 337,500
30,000 LMI Aerospace* 301,880
9,700 Market Facts, Inc.* 210,975
27,000 SOS Staffing Svcs., Inc.* 474,187
34,350 Western Staff Svcs., Inc.* 635,475
35,000 Zomax Optical Media, Inc.* 538,125
------------
5,875,204
------------
Capital Goods-Miscellaneous Technology -- 5.6%
103,500 AFC Cable Systems, Inc.* 3,674,250
7,900 Alliant Techsystems, Inc.* 499,675
22,000 Centex Construction Products, Inc. 847,000
24,000 Chart Industries, Inc. 573,000
26,500 Kaydon Corp. 935,781
12,200 National Computer Systems, Inc. 292,800
------------
6,822,506
------------
Chemicals -- 2.7%
9,100 AptarGroup, Inc. 565,906
30,000 Cambrex Corp. 787,500
23,000 LeaRonal, Inc. 549,125
28,500 MacDermid, Inc. 805,125
3,500 Minerals Technologies, Inc.* 178,062
16,000 Myers Industries, Inc. 384,000
------------
3,269,718
------------
Computer Software -- 1.8%
44,000 Ducocorp, Inc.* 288,750
33,500 May & Speh, Inc.* 665,813
6,750 National Instruments Corp.* 241,312
6,000 Visio Corp.* 286,500
18,200 Wind River Systems, Inc.* 652,925
------------
2,135,300
------------
Computer Systems -- 1.8%
50,000 Dunn Computer Corp., VA* 412,500
18,500 Henry Jack & Associates, Inc. 635,937
40,200 HTE, Inc.* 542,700
65,000 The Intercept Group, Inc.* 483,438
13,000 Sandisk Corp.* 179,562
------------
2,254,137
------------
Drugs and Hospitals -- 2.9%
14,400 Boron LePore & Associates, Inc.* 547,200
42,000 Depotech Corp.* 65,625
15,000 Genesis Health Ventures, Inc.* 375,000
9,000 Integrated Health Svcs., Inc. 337,500
75,000 Iomed, Inc.* 384,375
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
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The Guardian
Small Cap
Stock Fund
------------
8
------------
- --------------------------------------------------------------------------------
Shares Value
- ----------------------------------------------------------------------
12,000 Jones Pharma, Inc. $ 397,500
32,000 King Pharmaceuticals, Inc.* 448,000
6,700 Maxxim Medical, Inc.* 194,300
20,000 Respironics, Inc.* 311,250
19,350 United Payors & United Providers, Inc.* 437,794
------------
3,498,544
------------
Electrical Equipment -- 2.4%
38,400 Daisytek Int'l. Corp.* 976,800
53,000 EFTC Corp.* 689,000
17,400 Esterline Technologies Corp.* 363,225
17,500 Kopin Corp.* 336,875
18,000 Power One, Inc.* 169,875
8,200 Sanmina Corp.* 355,675
------------
2,891,450
------------
Electronics and Instruments -- 0.6%
41,000 FARO Technologies, Inc.* 433,063
19,000 SMART Modular Technologies, Inc.* 277,875
------------
710,938
------------
Energy-Miscellaneous -- 0.6%
95,000 Frontier Oil Corp.* 760,000
------------
Entertainment and Leisure -- 0.7%
11,200 Anchor Gaming* 869,400
------------
Financial-Banks -- 3.0%
8,100 Cullen Frost Bankers, Inc. 439,425
18,090 Fifth Third Bancorp* 1,139,670
3,500 Prime Bancshares, Inc. 88,812
5,000 Republic Banking Corp. of Florida 80,000
13,600 Silicon Valley Bancshares* 484,075
10,900 U.S. Bancorp, Inc. 842,706
16,500 Westamerica Bancorp 530,063
------------
3,604,751
------------
Financial-Other -- 3.8%
10,000 Dain Rauscher Corp. 547,500
20,000 DVI, Inc.* 510,000
20,000 Federated Investors, Inc., PA* 370,000
16,700 Freedom Securities Corp.* 302,688
6,100 Jefferies Group, Inc. 250,100
28,000 McDonald & Co. Investments, Inc. 918,750
34,000 Morgan Keegan, Inc. 879,750
23,600 Ragen Mackenzie Group, Inc.* 356,950
20,000 Southwest Securities Group, Inc. 450,000
------------
4,585,738
------------
Financial-Thrift -- 1.3%
5,500 Astoria Financial Corp. 294,250
27,500 BankAtlantic Bancorp, Inc. 324,844
10,800 Coast Federal Litigation Trust* 163,350
4,500 Commercial Federal Corp. 142,312
29,348 Peoples Heritage Financial Group 693,347
------------
1,618,103
------------
Food, Beverage and Tobacco -- 3.0%
19,800 Earthgrains Co. 1,106,325
34,900 Fresh Foods, Inc.* 523,500
50,000 Hain Food Group, Inc.* 1,293,750
44,000 Omega Protein Corp.* 676,500
------------
3,600,075
------------
Footwear -- 0.7%
8,000 Footstar, Inc.* 384,000
33,700 Shoe Carnival, Inc.* 467,587
------------
851,587
------------
Household Products -- 0.9%
59,000 Home Products Int'l., Inc.* 685,875
13,800 Oneida Ltd. 422,625
------------
1,108,500
------------
Insurance -- 10.1%
26,600 American Heritage Life Investments 615,125
17,500 American Insurance Group* 205,625
12,750 W.R. Berkley Corp. 510,797
21,000 Chicago Title Corp.* 969,938
10,100 CMAC Investment Corp. 621,150
30,000 Enhance Financial Svcs. Group, Inc. 1,012,500
9,000 Executive Risk, Inc. 663,750
79,200 Fidelity National Financial, Inc. 3,153,150
12,000 Financial Sec. Assur. Hldgs. Ltd. 705,000
22,000 Harleysville Group, Inc. 456,500
4,800 Markel Corp.* 854,400
45,000 Penn America Group, Inc. 607,500
8,000 Presidential Life Corp.* 171,000
11,000 Reinsurance Group of America* 564,437
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
125
<PAGE>
- ------------
The Guardian
Small Cap
Stock Fund
- ------------
8
- ------------
- --------------------------------------------------------------------------------
The Guardian Small Cap Stock Fund
- ---------------------------------
SCHEDULE OF INVESTMENTS
June 30, 1998 (Unaudited)(Continued)
Shares Value
- ----------------------------------------------------------------------
23,000 State Auto Financial Corp. $ 733,125
10,000 Stewart Information Svcs. Corp. 485,625
------------
12,329,622
------------
Lodging -- 1.7%
36,400 Fairfield Communities, Inc.* 698,425
45,000 ILX, Inc.* 264,375
51,500 Signature Resorts, Inc.* 849,750
19,000 Silverleaf Resorts, Inc.* 289,750
------------
2,102,300
------------
Machinery and Equipment -- 3.3%
6,150 AAR Corp. 181,809
11,000 Graco, Inc. 383,625
13,800 Manitowoc Co., Inc. 556,313
56,000 Northwest Pipe Co.* 1,316,000
10,500 SPX Corp.* 675,938
9,900 Varlen Corp. 341,550
19,800 Wabash National Corp.* 509,850
------------
3,965,085
------------
Merchandising-Department Stores -- 1.1%
37,600 Shopko Stores, Inc.* 1,278,400
------------
Merchandising-Drugs -- 0.0%
1,400 Duane Reade, Inc.* 42,000
------------
Merchandising-Food -- 1.2%
25,000 Smithfield Foods, Inc.* 762,500
9,476 Tootsie Roll Industries, Inc. 727,283
------------
1,489,783
------------
Merchandising-Mass -- 1.5%
19,100 Brylane, Inc.* 878,600
30,800 Lands End, Inc.* 974,050
------------
1,852,650
------------
Merchandising-Special -- 7.2%
47,100 1-800 Contacts, Inc.* 718,275
42,300 American Coin Merchandising* 835,425
10,000 Ames Department Stores, Inc.* 263,125
6,600 A.C. Moore Arts & Crafts, Inc.* 107,250
8,000 BJ's Wholesale Club, Inc.* 325,000
26,000 The Dress Barn* 646,750
13,000 Freds, Inc. 331,500
30,000 Genesis Direct, Inc.* 333,750
50,000 The Good Guys, Inc.* 673,438
40,000 Homebase, Inc.* 317,500
15,000 Hughes Supply, Inc. 549,375
16,700 Miami Computer Supplies* 267,200
35,000 Pier 1 Imports, Inc. 835,625
13,500 Stage Stores, Inc.* 610,875
26,000 Stein Mart, Inc.* 351,000
22,000 Trans World Entertainment Corp.* 948,750
18,000 Wet Seal, Inc.* 576,000
------------
8,690,838
------------
Metals-Steel -- 0.6%
25,000 Quanex Corp. 757,813
------------
Miscellaneous-Consumer Growth Staples -- 2.0%
50,000 Innotrac Corp.* 475,000
49,800 Mail Well Hldgs., Inc.* 1,080,037
12,300 StaffMark, Inc.* 450,487
12,000 Valassis Communications, Inc.* 462,750
------------
2,468,274
------------
Oil and Gas Producing -- 3.1%
30,000 Basin Exploration, Inc.* 528,750
125,000 Beau Canada Exploration Ltd.* 148,653
22,000 Bellwether Exploration Co.* 171,875
21,800 Callon Petroleum Co.* 312,013
242,800 Canadian 88 Energy Corp.* 1,016,725
37,000 Chieftain Int'l., Inc.* 876,438
50,000 Petromet Resources Ltd.* 112,500
16,000 Rigel Energy Corp.* 145,697
7,000 St. Mary Land & Exploration Co. 168,875
14,000 Snyder Oil Corp. 279,125
------------
3,760,651
------------
Oil and Gas Services -- 1.2%
3,000 Friede Goldman Int'l., Inc.* 86,625
20,600 Unifab Int'l., Inc.* 334,750
26,200 Varco Int'l., Inc.* 519,088
29,000 Willbros Group, Inc.* 453,125
------------
1,393,588
------------
Paper and Forest Products -- 0.4%
17,700 Deltic Timber Corp. 443,606
------------
Pollution Control -- 0.3%
21,000 Imco Recycling, Inc. 388,500
------------
See notes to financial statements.
* Non-income producing security.
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------------
The Guardian
Small Cap
Stock Fund
------------
8
------------
- --------------------------------------------------------------------------------
Shares Value
- ----------------------------------------------------------------------
Publishing-News -- 2.0%
15,000 Bowne & Co., Inc. $ 675,000
44,400 Harte-Hanks Communications 1,146,075
6,200 Pulitzer Publishing Co. 553,350
------------
2,374,425
------------
Real Estate Investment Trust -- 3.3%
16,000 American Gen. Hospitality Corp. 340,000
4,147 Apartment Investment & Mgt. Co. 163,807
8,000 Arden Realty, Inc. 207,000
12,000 Brandywine Realty Trust 268,500
7,500 Camden Ppty. Trust 223,125
12,000 Colonial Pptys. Trust, Inc. 372,000
13,500 Commercial Net Lease Realty, Inc. 218,531
15,000 Eldertrust 257,813
30,000 Innkeepers USA Trust 378,750
7,500 JDN Realty Corp. 239,062
12,000 Mills Corp. 288,000
68,000 Sunstone Hotel Investors, Inc. 905,250
7,400 Tower Realty Trust, Inc. 165,575
------------
4,027,413
------------
Textile-Apparel and Production -- 1.9%
33,000 Burlington Industries, Inc.* 464,063
2,200 Columbia Sportswear Co.* 41,800
20,000 Mohawk Industries, Inc.* 633,750
7,600 Nautica Enterprises, Inc.* 203,775
3,700 St. John Knits, Inc. 142,913
40,000 Tropical Sportswear Int'l. Corp.* 850,000
------------
2,336,301
------------
Transportation-Miscellaneous -- 3.4%
26,800 Airborne Freight Corp. 936,325
16,500 Budget Group, Inc.* 526,969
4,300 Central Parking Corp. 199,950
37,500 Dollar Thrifty Automotive Group, Inc.* 496,875
12,900 Expeditors Int'l. Wash., Inc. 567,600
28,800 Maritrans, Inc. 261,000
54,000 Rollins Truck Leasing Corp. 668,250
13,200 Sea Containers Ltd. 504,900
------------
4,161,869
------------
Truckers -- 0.9%
17,500 U.S. Freightways Corp. 574,766
24,750 Werner Enterprises, Inc. 471,797
------------
1,046,563
------------
Utilities-Electric -- 0.0%
1,500 Minnesota Power & Light Co. 59,625
------------
Utilities-Gas and Pipeline -- 0.2%
5,700 Cleco Corp. 169,575
3,800 Indiana Energy, Inc. 113,522
------------
283,097
------------
Utilities-Telecommunications -- 0.4%
43,000 Startec Global Communications Corp.* 494,500
------------
TOTAL COMMON STOCKS
(Cost $100,856,263) 115,503,998
------------
- ----------------------------
REPURCHASE AGREEMENT -- 5.4%
- ----------------------------
Principal
Amount Value
- ----------------------------------------------------------------------
$6,536,000 State Street Bank & Trust Co.
repurchase agreement, dated 6/30/98,
maturity value $6,537,035 at 5.70%
due 7/1/98 (collateralized by
$6,670,000 U.S. Treasury Notes,
6.75%, due 5/31/99) $ 6,536,000
------------
TOTAL REPURCHASE AGREEMENT
(Cost $6,536,000) 6,536,000
------------
TOTAL INVESTMENTS -- 100.4%
(Cost $107,392,263) 122,039,998
LIABILITIES IN EXCESS OF CASH,
RECEIVABLES AND OTHER
ASSETS -- (0.4%) (454,365)
------------
NET ASSETS -- 100.0% $121,585,633
============
See notes to financial statements.
* Non-income producing security.
- --------------------------------------------------------------------------------
127
<PAGE>
- ------------
The Guardian
Small Cap
Stock Fund
- ------------
8
- ------------
- --------------------------------------------------------------------------------
The Guardian Small Cap Stock Fund
- ---------------------------------
STATEMENT OF ASSETS
AND LIABILITIES
June 30, 1998 (Unaudited)
ASSETS
Investments, at market (cost $107,392,263) $ 122,039,998
Cash 4,497
Receivable for securities sold 692,934
Receivable for fund shares sold 165,886
Dividends receivable 59,776
Other assets 1,458
Interest receivable 1,035
-------------
TOTAL ASSETS 122,965,584
-------------
LIABILITIES
Payable for securities purchased 1,102,425
Accrued expenses 15,013
Payable for fund shares redeemed 131
Due to affiliates 262,382
-------------
TOTAL LIABILITIES 1,379,951
-------------
NET ASSETS $ 121,585,633
=============
COMPONENTS OF NET ASSETS
Capital stock, at par $ 835,923
Additional paid-in capital 106,975,233
Undistributed net investment income 16,864
Distributions in excess of net realized
gain on investments (890,122)
Net unrealized appreciation of investments 14,647,735
-------------
NET ASSETS $ 121,585,633
=============
Shares Outstanding -- $0.10 par value 8,359,231
-------------
NET ASSET VALUE PER SHARE $ 14.55
=============
STATEMENT OF OPERATIONS
Six Months Ended
June 30, 1998 (Unaudited)
Investment Income:
Dividends $ 378,486
Interest 176,279
-------------
Total Income 554,765
-------------
Expenses:
Investment advisory fees -- Note B 411,365
Custodian fees 37,159
Printing expense 14,125
Audit fees 8,750
Directors' fees -- Note B 8,000
Registration fees 2,350
Transfer agent fees 1,650
Insurance expense 704
Legal fees 600
Other 350
Deferred organization expense 98
-------------
Total Expenses 485,151
-------------
Net Investment Income 69,614
-------------
Realized and Unrealized Gain/(Loss)
on Investments -- Note C
Net realized loss on investments -- Note A (903,399)
Net change in unrealized appreciation of
investments -- Note C 7,441,690
-------------
Net Realized and Unrealized Gain
on Investments 6,538,291
-------------
Net Increase in Net Assets
from Operations $ 6,607,905
=============
See notes to financial statements.
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<PAGE>
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The Guardian
Small Cap
Stock Fund
------------
8
------------
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STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Period from
April 2,
Six Months 1997+ to
Ended December 31,
June 30, 1998 1997
(Unaudited) (Audited)
------------- ------------
<S> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS
From Operations:
Net investment income $ 69,614 $ 165,805
Net realized gain/(loss) on investments (903,399) 1,925,041
Net change in unrealized appreciation of investments 7,441,690 7,206,045
------------- ------------
Net Increase in Net Assets from Operations 6,607,905 9,296,891
------------- ------------
Dividends and Distributions to Shareholders from:
Net investment income (52,750) (165,805)
Net realized gain on investments (848,131) (1,063,633)
------------- ------------
Total Dividends and Distributions to Shareholders (900,881) (1,229,438)
------------- ------------
From Capital Share Transactions:
Increase in net assets from capital share transactions -- Note E 28,129,206 79,681,950
------------- ------------
Net Increase in Net Assets 33,836,230 87,749,403
Net Assets:
Beginning of period 87,749,403 --
------------- ------------
End of period* $ 121,585,633 $ 87,749,403
============= ============
* Includes undistributed net investment income of: $ 16,864 $ --
</TABLE>
+ Commencement of operations.
See notes to financial statements.
- --------------------------------------------------------------------------------
129
<PAGE>
- ------------
The Guardian
Small Cap
Stock Fund
- ------------
8
- ------------
- --------------------------------------------------------------------------------
The Guardian Small Cap Stock Fund
- ---------------------------------
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the periods
indicated:
Six Months April 2, 1997*
Ended to December 31,
June 30, 1998 1997
(Unaudited) (Audited)
-----------------------------------
Net asset value,
beginning of period ................ $ 13.63 $ 10.00
------------- -------------
Income from investment
operations:
Net investment
income ........................... 0.01 0.03
Net realized and
unrealized gain
on investments ................... 1.02 3.80
------------- -------------
Net increase from
investment
operations ....................... 1.03 3.83
------------- -------------
Dividends and Distributions
to Shareholders from:
Net investment income .............. (0.01) (0.03)
Net realized gain .................. (0.10) (0.17)
------------- -------------
Total dividends and
distributions .................... (0.11) (0.20)
------------- -------------
Net asset value, end of
period ............................. $ 14.55 $ 13.63
------------- -------------
Total return** ....................... 7.56% 38.32%
------------- -------------
Ratios/supplemental data:
Net assets, end of period
(000's omitted) .................. $ 121,586 $ 87,749
Ratio of expenses to
average net assets ............... 0.88%(a) 0.96%(a)
Ratio of net investment
income to average net assets ..... 0.13%(a) 0.48%(a)
Portfolio turnover
rate ............................. 20% 22%
Average rate of
commissions paid(b) .............. $ 0.0288 $ 0.0296
* Commencement of operations.
** Total returns do not reflect the effects of charges deducted pursuant to
the terms of GIAC's variable contracts. Inclusion of such charges would
reduce the total returns for all periods shown.
(a) Annualized.
(b) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for trade on
which commissions are charged.
See notes to financial statements.
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131
<PAGE>
- ----------------
GIAC Funds, Inc.
- ----------------
8
- ----------------
- --------------------------------------------------------------------------------
GIAC Funds, Inc. (including: Baillie Gifford
International Fund, Baillie Gifford Emerging Markets
Fund and The Guardian Small Cap Stock Fund)
- ----------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited)
- ----------------------------------------------
Note A -- Organization and Accounting Policies
- ----------------------------------------------
GIAC Funds, Inc. (the Company) is a diversified open-end management
investment company registered under the Investment Company Act of 1940, as
amended (1940 Act), which was incorporated in Maryland on October 29, 1990. The
Company was known as Baillie Gifford International Fund, Inc. prior to October
11, 1994 and GBG Funds, Inc. prior to March 27, 1997. Shares of the Company are
offered in three series: Baillie Gifford International Fund (BGIF), Baillie
Gifford Emerging Markets Fund (BGEMF) and The Guardian Small Cap Stock Fund
(GSCSF). The series are collectively referred to herein as the "Funds". Shares
of the Funds are only sold to certain separate accounts of The Guardian
Insurance & Annuity Company, Inc. (GIAC). GIAC is a wholly- owned subsidiary of
The Guardian Life Insurance Company of America (Guardian Life). The Funds are
available for investment only through certain variable annuity and variable life
insurance contracts issued by GIAC. Upon commencing its operations on September
13, 1994 (BGEMF) and on April 2, 1997 (GSCSF) each Fund sold 2,000,000 shares of
its capital stock to Guardian Life for $20,000,000 per Fund to facilitate the
commencement of operations.
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 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.
Valuation of Investments
Securities listed on foreign exchanges and for which market quotations are
readily available are valued at the closing price on the exchange on which the
securities are traded at the close of the appropriate exchange or, if there have
been no sales during the day, at the mean of the closing bid and asked prices.
Securities traded in the over-the-counter market are valued at the mean between
the bid and asked prices. Securities listed or traded on any domestic (U.S.)
exchanges are valued at the last sale price or, if there have been no sales
during the day, at the mean of the closing bid and asked prices. Securities for
which market quotations are not readily available, including restricted
securities and illiquid assets, are valued at fair value as determined in good
faith by or under the direction of the Company's Board of Directors. Investing
outside of the U.S. may involve certain considerations and risks not typically
associated with domestic investments, including: the possibility of political
and economic unrest and different levels of governmental supervision and
regulation of foreign securities markets.
Repurchase agreements are carried at cost which approximates market value
(See Note D).
Foreign Currency Translation
The books and records of the Funds are maintained in U.S. dollars as
follows:
(1) The foreign currency market value of investment securities and other
assets and liabilities stated in foreign currencies are translated into U. S.
dollars at the current rate of exchange.
(2) Purchases, sales, income and expenses are translated at the rate of
exchange prevailing on the respective dates of such transactions.
The resulting gains and losses are included in the Statement of Operations
as follows:
Realized foreign exchange gains and losses, which
- --------------------------------------------------------------------------------
132
<PAGE>
----------------
GIAC Funds, Inc.
----------------
8
----------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited) (Continued)
result from changes in foreign exchange rates between the date on which the
Funds earn dividends and interest or pay foreign withholding taxes or other
expenses and the date on which U.S. dollar equivalent amounts are actually
received or paid, are included in net realized gain or loss on foreign currency
related transactions. Realized foreign exchange gains and losses which result
from changes in foreign exchange rates between the trade and settlement dates on
security and currency transactions are also included in net realized gains or
losses on foreign currency related transactions. Net currency gains and losses
from valuing investments and other assets and liabilities denominated in foreign
currency at the period end exchange rate are reflected in net change in
unrealized appreciation or depreciation from translation of other assets and
liabilities denominated in foreign currencies.
Forward Foreign Currency Contracts
The Funds may enter into forward foreign currency contracts in connection
with planned purchases or sales of securities, or to hedge against changes in
currency exchange rates affecting the values of securities denominated in a
particular currency. A forward foreign currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. Fluctuations in the value of forward foreign currency exchange contracts
are recorded for book purposes as unrealized gains or losses on foreign currency
related transactions by the Funds. When forward contracts are closed, the Funds
record realized gains or losses equal to the differences between the values of
such forward contracts at the time each was opened and the value at the time
each was closed. Such amounts are recorded in net realized gain or loss on
foreign currency related transactions. None of the Funds will enter into a
forward foreign currency contract if such contract would obligate the Fund to
deliver an amount of foreign currency in excess of the value of the Fund's
portfolio securities or other assets denominated in that currency.
Securities Transactions and Investment Income
Securities transactions are recorded on the trade date. Net realized gains
or losses on sales of investments are determined on an identified cost basis.
Dividend income is recorded on the ex-dividend date and interest income is
recorded on an accrual basis. Dividends on foreign securities are recorded when
the Funds are informed of the dividend.
Taxes
Each Fund intends to continue to qualify to be taxed as a "regulated
investment company" under the provisions of the Internal Revenue Code (Code),
and as such will not be subject to federal income tax on income (including any
realized capital gains) which is distributed to its shareholders in accordance
with the provisions of the Code. Therefore, no federal income tax provision is
required. Losses on security transactions arising after October 31 are treated
as arising on the first day of the Funds' next fiscal year.
Investment income received from investments in foreign currencies may be
subject to foreign withholding tax. Whenever possible, the Funds will attempt to
operate so as to qualify for reduced tax rates or tax exemptions in those
countries with which the United States has a tax treaty.
Dividends and Distributions to Shareholders
The Funds intend to distribute each year, as dividends, substantially all
net investment income and net realized capital gains. All such dividends or
distributions are credited in the form of additional shares of the Funds at net
asset value on the ex-dividend date.
- --------------------------------------------------------------------------------
133
<PAGE>
- ----------------
GIAC Funds, Inc.
- ----------------
8
- ----------------
- --------------------------------------------------------------------------------
GIAC Funds, Inc. (including: Baillie Gifford
International Fund, Baillie Gifford Emerging Markets
Fund and The Guardian Small Cap Stock Fund)
- ----------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited) (Continued)
Such distributions are determined in conformity with federal income tax
regulations. Differences between the recognition of income on an income tax
basis and recognition of income based on generally accepted accounting
principles may cause temporary overdistributions of net realized gains and net
investment income. Currently, the Funds' policy is to distribute net investment
income approximately every six months and net capital gains once a year. This
policy is, however, subject to change at any time by the Company's Board of
Directors.
Reclassifications of Capital Accounts
The treatment for financial statement purposes of distributions made
during the year from net investment income and net realized gains may differ
from their ultimate treatment for federal income tax purposes. These differences
primarily are caused by differences in the timing of the recognition of certain
components of income or capital gain; and the recharacterization of foreign
exchange gains or losses to either ordinary income or realized capital gains for
federal income tax purposes. Where such differences are permanent in nature,
they are reclassified in the components of net assets based on their ultimate
characterization for federal income tax purposes. Any such reclassifications
will have no effect on net assets, results of operations, or net asset value per
share of the Funds.
- ------------------------------------------
Note B -- Investment Management Agreements
and Payments to Related Parties
- ------------------------------------------
BGIF and BGEMF have an investment management agreement with Guardian
Baillie Gifford Limited (GBG), a Scottish corporation formed through a joint
venture between GIAC and Baillie Gifford Overseas Limited (BG Overseas). GBG is
responsible for the overall investment management of the Funds' portfolios
subject to the supervision of the Company's Board of Directors. GBG has entered
into sub-investment management agreements with BG Overseas pursuant to which BG
Overseas is responsible for the day-to-day management of BGIF and BGEMF. GBG
continually monitors and evaluates the performance of BG Overseas.
As compensation for its services, GBG receives a management fee computed
at the annual rate of .80% of BGIF's average daily net assets and 1.00% of
BGEMF's average daily net assets. One-half of these fees (.40% relating to BGIF
and .50% relating to BGEMF) are payable by GBG to BG Overseas for its services.
Payment of the sub-investment management fees does not represent a separate or
additional expense to the Funds.
GSCSF has an investment advisory agreement with Guardian Investor Services
Corporation (GISC), a wholly-owned subsidiary of GIAC. GISC receives a
management fee from GSCSF at an annual rate of .75% of its average daily net
assets.
No compensation is paid by the Company to a director who is deemed to be
an "interested person" (as defined in the 1940 Act) of the Company. Each
director not deemed an "interested person" is paid an annual fee of $500 and
$350 for attendance at each meeting of the Company.
- --------------------------------------------------------------------------------
134
<PAGE>
----------------
GIAC Funds, Inc.
----------------
8
----------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited) (Continued)
- ---------------------------------
Note C -- Investment Transactions
- ---------------------------------
Purchases and proceeds from sales of securities (excluding short-term
securities) for the six months ended June 30, 1998 were as follows:
BGIF BGEMF GSCSF
---- ----- -----
Purchases ............ $171,993,131 $20,854,390 $47,389,542
Proceeds ............. $168,369,664 $28,795,706 $21,041,810
The cost of investments owned at June 30, 1998 for federal income tax
purposes for BGIF, BGEMF and GSCSF are the same as the cost for financial
reporting purposes. The gross unrealized appreciation and (depreciation) of
investments excluding foreign currency at June 30, 1998, were as follows:
<TABLE>
<CAPTION>
BGIF BGEMF GSCSF
---- ----- -----
<S> <C> <C> <C>
Gross Appreciation ........................... $ 182,492,208 $ 6,372,833 $ 20,171,658
Gross Depreciation ........................... (13,435,266) (13,677,002) (5,523,923)
------------- ------------ ------------
Net Unrealized Appreciation/Depreciation.... $ 169,056,942 $ (7,304,169) $ 14,647,735
============= ============ ============
</TABLE>
Forward foreign currency contracts represent commitments to purchase or
sell a specified amount of foreign currency at a future date and at a future
price. Risks may arise from the potential inability of a counterparty to meet
the terms of a contract and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar.
There were no open forward foreign currency contracts at June 30, 1998.
- -------------------------------
Note D -- Repurchase Agreements
- -------------------------------
Collateral underlying repurchase agreements takes the form of either cash
or fully negotiable U.S. government securities. Repurchase agreements are fully
collateralized (including the interest earned thereon) and such collateral is
marked-to-market daily while the agreements remain in force. If the value of the
underlying securities falls below the value of the repurchase price plus accrued
interest, the Funds will require the seller to deposit additional collateral by
the next business day. If the request for additional collateral is not met, or
the seller defaults, the Funds maintain the right to sell the collateral and may
claim any resulting loss against the seller. The Company's Board of Directors
has established standards to evaluate the creditworthiness of broker-dealers and
banks which engage in repurchase agreements with the Funds. Repurchase
agreements of more than seven days duration (or investments in any other
securities which are deemed to be not readily marketable by the staff of the
Securities and Exchange Commission) are not permitted if more than 10% of BGIF's
or 15% of BGEMF's or GSCSF's net assets would be so invested.
- --------------------------------------------------------------------------------
135
<PAGE>
- ----------------
GIAC Funds, Inc.
- ----------------
8
- ----------------
- --------------------------------------------------------------------------------
GIAC Funds, Inc. (including: Baillie Gifford
International Fund, Baillie Gifford Emerging Markets
Fund and The Guardian Small Cap Stock Fund)
- ----------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited) (Continued)
- ---------------------------------------
Note E -- Transactions in Capital Stock
- ---------------------------------------
There are 1,000,000,000 shares of $0.10 par value capital stock authorized for
each of the Funds. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended Six Months Ended Year Ended
June 30, December 31, June 30, December 31,
1998 1997 1998 1997
(Unaudited) (Audited) (Unaudited) (Audited)
- ----------------------------------------------------------------------------------------------------------------------------
Shares Amount
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
|_| Baillie Gifford International Fund
Shares sold 3,085,046 5,510,606 $ 63,649,453 $ 103,914,585
Shares issued in reinvestment of
dividends and distributions 289,013 1,589,325 6,132,854 29,071,132
Shares repurchased (2,404,778) (4,262,859) (49,331,048) (79,908,567)
- ----------------------------------------------------------------------------------------------------------------------------
Net increase 969,281 2,837,072 $ 20,451,259 $ 53,077,150
- ----------------------------------------------------------------------------------------------------------------------------
|_| Baillie Gifford Emerging Markets Fund
Shares sold 673,800 4,436,117 $ 6,412,075 $ 52,148,316
Shares issued in reinvestment of
dividends and distributions 58,765 461,151 481,281 4,689,960
Shares repurchased (1,676,993) (2,709,884) (16,165,111) (31,037,879)
- ----------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) (944,428) 2,187,384 $ (9,271,755) $ 25,800,397
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Six Months Ended Period from Six Months Ended Period from
June 30, April 2, 1997+ to June 30, April 2, 1997+ to
1998 December 31, 1997 1998 December 31, 1997
(Unaudited) (Audited) (Unaudited) (Audited)
- ----------------------------------------------------------------------------------------------------------------------------
Shares Amount
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
|_| The Guardian Small Cap Stock Fund
Shares sold 2,985,942 6,957,498 $ 43,805,409 $ 86,846,310
Shares issued in reinvestment of
dividends and distributions 62,605 92,788 900,880 1,229,438
Shares repurchased (1,128,601) (611,001) (16,577,083) (8,393,798)
- ----------------------------------------------------------------------------------------------------------------------------
Net increase 1,919,946 6,439,285 $ 28,129,206 $ 79,681,950
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Commencement of operations.
- --------------------------------------------------------------------------------
136
<PAGE>
----------------
GIAC Funds, Inc.
----------------
8
----------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited) (Continued)
- ------------------------
Note F -- Line of Credit
- ------------------------
A $50,000,000 line of credit available to each Fund and the other
Guardian-related Funds has been established with Morgan Guaranty Trust Company.
The rate of interest charged on any borrowings is based upon the prevailing
Federal Funds rate at the time of the loan plus .25% calculated on a 360 day
basis per annum. For the six months ended June 30, 1998, none of the Funds
borrowed against this line of credit.
- --------------------------------------------------------------------------------
137
<PAGE>
- ---------------
Value Line
Centurion Fund,
Inc.
- ---------------
9
- ---------------
- --------------------------------------------------------------------------------
Value Line Centurion Fund, Inc.
- -------------------------------
SCHEDULE OF INVESTMENTS
June 30, 1998
- ----------------------
COMMON STOCKS -- 96.6%
- ----------------------
Shares Value
- -----------------------------------------------------------------------
Advertising -- 0.8%
125,000 Omnicom Group, Inc. $ 6,234,375
------------
Air Transport -- 2.5%
75,000 AMR Corp.* 6,243,750
100,000 Airborne Freight Corp. 3,493,750
175,000 Alaska Air Group, Inc.* 9,548,437
------------
19,285,937
------------
Auto Parts-Replacement -- 0.5%
60,000 Federal-Mogul Corp. 4,050,000
------------
Bank -- 7.7%
85,000 BankAmerica Corp. 7,347,188
150,000 BankBoston Corp. 8,343,750
80,000 Citicorp 11,940,000
200,000 Mellon Bank Corp. 13,925,000
100,000 State Street Corp. 6,950,000
197,000 Zions Bancorporation 10,465,625
------------
58,971,563
------------
Coal/Alternate Energy -- 1.7%
250,000 AES Corp.* 13,140,625
------------
Computer & Peripherals -- 8.1%
190,000 Cisco Systems, Inc.* 17,491,875
375,000 Compaq Computer Corp. 10,640,625
160,000 Dell Computer Corp.* 14,850,000
300,000 EMC Corp.* 13,443,750
135,000 Sun Microsystems, Inc.* 5,864,062
------------
62,290,312
------------
Computer Software & Services -- 9.8%
280,000 BMC Software, Inc.* 14,542,500
200,000 Computer Associates
International, Inc. 11,112,500
100,000 Microsoft Corp.* 10,837,500
225,000 Networks Associates, Inc.* 10,771,875
515,000 Parametric Technology Corp.* 13,969,375
300,000 PeopleSoft, Inc.* 14,100,000
------------
75,333,750
------------
Diversified Companies -- 0.4%
100,000 Nortek, Inc.* 3,075,000
------------
Drug -- 8.0%
200,000 Lilly (Eli) & Co. 13,212,500
120,000 Merck & Co., Inc. 16,050,000
100,000 Pfizer, Inc. 10,868,750
100,000 Schering - Plough Corp. 9,162,500
180,000 Warner - Lamabert Co. 12,487,500
------------
61,781,250
------------
Electrical Equipment -- 2.1%
175,000 General Electric Co. 15,925,000
------------
Entertainment -- 2.3%
165,000 Clear Channel Communications, Inc.* 18,005,625
------------
Financial Services -- 2.8%
200,000 Donaldson, Lufkin & Jenrette, Inc. 10,162,500
185,000 Travelers Group, Inc. 11,215,625
------------
21,378,125
------------
Food Wholesalers -- 1.0%
225,000 U.S. Foodservice, Inc.* 7,889,063
------------
Grocery -- 2.7%
250,000 Albertson's, Inc. 12,953,125
135,000 Whole Foods Market, Inc.* 8,167,500
------------
21,120,625
------------
Healthcare Information Systems -- 1.8%
400,000 HBO & Co. 14,100,000
------------
Homebuilding -- 0.7%
135,000 Centex Corp. 5,096,250
------------
Household Products -- 3.9%
165,000 Colgate - Palmolive Co. 14,520,000
170,000 Procter & Gamble Co. 15,480,625
------------
30,000,625
------------
Insurance-Diversified -- 1.1%
60,000 American International Group, Inc. 8,760,000
------------
Insurance-Life -- 2.6%
135,000 Conseco, Inc. 6,311,250
60,000 Equitable Companies, Inc. (The) 4,496,250
155,000 SunAmerica, Inc. 8,902,812
------------
19,710,312
------------
Insurance-Property/Casualty -- 1.8%
150,000 Allstate Corp. (The) 13,734,375
------------
Internet -- 0.7%
50,000 American Online, Inc.* 5,300,000
------------
See notes to financial statements.
- --------------------------------------------------------------------------------
138
<PAGE>
---------------
Value Line
Centurion Fund,
Inc.
---------------
9
---------------
Shares Value
- -----------------------------------------------------------------------
Manufactured Housing/
Recreational Vehicles -- 0.8%
200,000 Oakwood Homes Corp. $ 6,000,000
------------
Medical Supplies -- 5.7%
100,000 Cardinal Health, Inc. 9,375,000
225,000 Guidant Corp. 16,045,313
120,000 Johnson & Johnson 8,850,000
150,000 Medtronic, Inc. 9,562,500
------------
43,832,813
------------
Office Equipment & Supplies -- 1.6%
420,000 Staples, Inc.* 12,153,750
------------
Oilfield Services/Equipment -- 4.6%
150,000 BJ Services Co.* 4,359,375
185,000 Baker Hughes, Inc. 6,394,063
100,000 Halliburton Co. 4,456,250
100,000 Schlumberger Ltd. 6,831,250
70,000 Smith International, Inc.* 2,436,875
255,000 Transocean Offshore, Inc. 11,347,500
------------
35,825,313
------------
Retail Building Supply -- 1.2%
55,000 Home Depot, Inc. (The) 4,568,438
120,000 Lowes Companies, Inc. 4,867,500
------------
9,435,938
------------
Retail-Special Lines -- 3.2%
235,000 Bed Bath & Beyond, Inc.* 12,175,937
200,000 Gap, Inc. 12,325,000
------------
24,500,937
------------
Retail Store -- 2.5%
200,000 Consolidated Stores Corp.* 7,250,000
250,000 Dayton Hudson Corp. 12,125,000
------------
19,375,000
------------
Securities Brokerage -- 1.2%
100,000 Merrill Lynch & Co., Inc. 9,225,000
------------
Semiconductor -- 1.9%
200,000 Intel Corp. 14,825,000
------------
Telecommunications Equipment -- 1.9%
200,000 Tellabs, Inc.* 14,325,000
------------
Telecommunication Services -- 2.5%
330,000 AirTouch Communications, Inc.* 19,284,375
------------
Shares
or
Principal
Amount Value
- -----------------------------------------------------------------------
Thrift -- 2.8%
150,000 Federal Home Loan Mortgage Corp. $ 7,059,375
115,000 Federal National
Mortgage Association 6,986,250
180,000 Washington Mutual, Inc. 7,818,750
------------
21,864,375
------------
Tobacco -- 1.5%
300,000 Philip Morris Companies, Inc. 11,812,500
------------
Toiletries/Cosmetics -- 2.2%
300,000 Gillette Co. 17,006,250
------------
TOTAL COMMON STOCKS AND
TOTAL INVESTMENT
SECURITIES -- 96.6%
(Cost $536,550,329) 744,649,063
------------
- ----------------------------
REPURCHASE AGREEMENT -- 5.0%
- ----------------------------
(including accrued interest)
$ 38,500,000 Collateralized by $39,030,000
U.S. Treasury Notes 5.625%,
due 11/30/00, with a value
of $39,288,123 (With Morgan
Stanley, Dean Witter,
Discover & Co., Inc., 5.72%,
dated 6/30/98, due 7/1/98,
delivery value $38,506,117) 38,506,117
------------
EXCESS OF LIABILITIES OVER
CASH AND RECEIVABLES -- ( - 1.6%) (12,119,152)
============
NET ASSETS -- 100.0% $771,036,028
============
NET ASSET VALUE
PER OUTSTANDING SHARE
($771,036,028 / 26,128,878
shares outstanding) $ 29.51
============
*Non-income producing
See notes to financial statements.
- --------------------------------------------------------------------------------
139
<PAGE>
- ---------------
Value Line
Centurion Fund,
Inc.
- ---------------
9
- ---------------
- --------------------------------------------------------------------------------
Value Line Centurion Fund, Inc.
- -------------------------------
STATEMENT OF ASSETS
AND LIABILITIES
June 30, 1998 (Unaudited)
ASSETS:
Investment securities, at value
(cost $536,550,329) $744,649,063
Repurchase agreement (cost $38,506,117) 38,506,117
Cash 59,591
Receivable for securities sold 2,266,676
Dividends and interest receivable 313,125
Receivable for capital shares sold 20,315
------------
TOTAL ASSETS 785,814,887
------------
LIABILITIES:
Payable for securities purchased 13,775,264
Payable for capital shares repurchased 542,560
Accrued expenses:
Advisory fee 308,409
GIAC administrative service fee 110,000
Other 42,626
------------
TOTAL LIABILITIES 14,778,859
------------
NET ASSETS $771,036,028
============
NET ASSETS CONSIST OF:
Capital stock, at $1.00 par value
(authorized 50,000,000, outstanding
26,128,878 shares) $ 26,128,878
Additional paid-in capital 418,003,582
Undistributed net investment income 3,823,194
Undistributed net realized gain on investments 114,981,640
Net unrealized appreciation of investments 208,098,734
------------
NET ASSETS $771,036,028
============
NET ASSET VALUE PER
OUTSTANDING SHARE
($771,036,028 / 26,128,878
shares outstanding) $ 29.51
============
STATEMENT OF OPERATIONS
SIX MONTHS ENDED
June 30, 1998 (Unaudited)
Investment Income:
Dividends $ 2,367,742
Interest 1,320,885
------------
Total Income 3,688,627
------------
Expenses:
Investment advisory fee 1,849,114
GIAC administrative service fee 257,413
Custodian fees 37,403
Auditing and legal fees 20,896
Insurance and dues 11,261
Directors' fees and expenses 8,155
Printing and stationery 1,213
Taxes and other 382
------------
Total Expenses Before Custody Credits 2,185,837
Less:Custody Credits (1,281)
------------
Net Expenses 2,184,556
------------
Net Investment Income 1,504,071
------------
Net Realized and Unrealized Gain on
Investments:
Net realized gain 69,594,858
Change in net unrealized appreciation 37,354,596
------------
Net Realized Gain and Change in Net
Unrealized Appreciation on Investments 106,949,454
------------
Net Increase in Net Assets from Operations $108,453,525
============
See notes to financial statements.
- --------------------------------------------------------------------------------
140
<PAGE>
---------------
Value Line
Centurion Fund,
Inc.
---------------
9
---------------
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
for the Six Months Ended June 30, 1998 (Unaudited)
and for the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
June 30, 1998 December 31,
(Unaudited) 1997
------------- -------------
<S> <C> <C>
Operations:
Net investment income $ 1,504,071 $ 2,435,676
Net realized gain on investments 69,594,858 45,610,251
Change in net unrealized appreciation 37,354,596 83,192,727
------------- -------------
Net increase in net assets from operations 108,453,525 131,238,654
------------- -------------
Distributions to Shareholders:
Net investment income -- (2,225,662)
Net realized gain from investment transactions -- (114,003,360)
------------- -------------
Total distributions -- (116,229,022)
------------- -------------
Capital Share Transactions:
Proceeds from sale of shares 25,638,830 80,062,970
Proceeds from reinvestment of distributions to shareholders -- 116,229,022
Cost of shares repurchased (83,146,873) (130,551,904)
------------- -------------
(Decrease) Increase from capital share transactions (57,508,043) 65,740,088
------------- -------------
Total Increase in Net Assets 50,945,482 80,749,720
Net Assets:
Beginning of period 720,090,546 639,340,826
------------- -------------
End of period $ 771,036,028 $ 720,090,546
============= =============
Undistributed Net Investment Income, at End of Period $ 3,823,194 $ 2,319,123
============= =============
</TABLE>
See notes to financial statements.
- --------------------------------------------------------------------------------
141
<PAGE>
- ---------------
Value Line
Centurion Fund,
Inc.
- ---------------
9
- ---------------
- --------------------------------------------------------------------------------
Value Line Centurion Fund, Inc.
- -------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited)
- ------------------------------------
1 -- Significant Accounting Policies
- ------------------------------------
Value Line Centurion Fund, Inc. (the "Fund") is an open-end diversified
management investment company whose primary investment objective is long-term
growth of capital. The Fund's portfolio will usually consist of common stocks
ranked 1 or 2 for year-ahead performance by The Value Line Investment Survey,
one of the nation's major investment advisory services.
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
disclosure 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. The
following is a summary of significant accounting policies followed by the Fund
in the preparation of its financial statements.
(A) Security Valuation
Securities listed on a securities exchange and over-the-counter securities
traded on the NASDAQ national market are valued at the closing sales price on
the date as of which the net asset value is being determined. In the absence of
closing sales prices for such securities and for securities traded in the
over-the-counter market, the security is valued at the midpoint between the
latest available and representative asked and bid prices. Short-term instruments
with maturities of 60 days or less are valued at amortized cost, which
approximates market value. Short-term instruments with maturities greater than
60 days, at the date of purchase, are valued at the midpoint between the latest
available and representative asked and bid prices, and commencing 60 days prior
to maturity such securities are valued at amortized cost. Other assets and
securities for which market valuations are not readily available are valued at
fair value as the Board of Directors may determine in good faith.
(B) Repurchase Agreements
In connection with transactions in repurchase agreements, the Fund's
custodian takes possession of the underlying collateral securities, the value of
which exceeds the principal amount of the repurchase transaction, including
accrued interest. To the extent that any repurchase transaction exceeds one
business day, the value of the collateral is marked-to-market on a daily basis
to ensure the adequacy of the collateral. In the event of default of the
obligation to repurchase, the Fund has the right to liquidate the collateral and
apply the proceeds in satisfaction of the obligation. Under certain
circumstances, in the event of default or bankruptcy by the other party to the
agreement, realization and/or retention of the collateral or proceeds may be
subject to legal proceedings.
(C) Federal Income Taxes
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute all
of its taxable income to its shareholder. Therefore, no federal income tax is
required.
(D) Dividends and Distributions
It is the Fund's policy to distribute to its shareholder, as dividends and
as capital gains distributions, all the net investment income for the year and
all net capital gains realized by the Fund, if any. Such distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. All dividends or distributions will be
payable in shares of the Fund at the net asset
- --------------------------------------------------------------------------------
142
<PAGE>
---------------
Value Line
Centurion Fund,
Inc.
---------------
9
---------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited) (Continued)
value on the ex-dividend date. This policy is, however, subject to change at any
time by the Board of Directors.
(E) Amortization
Discounts on debt securities are amortized to interest income over the
life of the security with a corresponding increase to the security's cost basis;
premiums on debt securities are not amortized.
(F) Investments
Securities transactions are recorded on a trade date basis. Realized gains
and losses from securities transactions are recorded on the identified cost
basis. Interest income on investments adjusted for amortization of discount,
including original issue discount required for federal income tax purposes, is
earned from settlement date and recognized on the accrual basis. Dividend income
is recorded on the ex-dividend date.
- ----------------------------------------------
2 -- Capital Share Transactions, Dividends and
Distributions
- ----------------------------------------------
Shares of the Fund are available to the public only through the purchase
of certain contracts issued by The Guardian Insurance and Annuity Company, Inc.
(GIAC). Transactions in capital stock were as follows:
Six Months Ended Year Ended
June 30, 1998, December 31,
(Unaudited) 1997
---------------- ------------
Shares sold 941,835 3,037,284
Shares issued in reinvestment
of dividends and distributions -- 4,477,235
----------- -----------
941,835 7,514,519
Shares repurchased 3,031,192 5,048,869
----------- -----------
Net (decrease) increase (2,089,357) 2,465,650
=========== ===========
Dividends per share $ -- $ .09
=========== ===========
Distributions per share from
net realized gains $ -- $ 4.61
=========== ===========
- --------------------------------------
3 -- Purchases and Sales of Securities
- --------------------------------------
Purchases and sales of investment securities, excluding short-term
investments, were as follows:
Six Months Ended
June 30, 1998
(Unaudited)
----------------
PURCHASES:
Investment Securities $351,833,014
============
SALES:
Investment Securities $367,288,760
============
At June 30, 1998, the aggregate cost of investment securities and
repurchase agreement for federal income tax purposes was $575,056,446. The
aggregate appreciation and depreciation of investments for the period ended June
30, 1998, based on a comparison of investment values and their costs for federal
income tax purposes was $217,524,487 and $9,425,753 respectively, resulting in a
net appreciation of $208,098,734.
- ---------------------------------------------
4 -- Investment Advisory Contract, Management
Fees and Transactions with Affiliates
- ---------------------------------------------
An advisory fee of $1,849,114 was paid or payable to Value Line, Inc. (the
Adviser), the Fund's investment adviser, for the six months ended June 30, 1998.
This was computed at the rate of 1/2 of 1% of the average daily net assets of
the Fund during the period and paid monthly. The Adviser provides research,
investment programs, supervision of the investment portfolio and pays costs of
administrative services, office space, equipment and compensation of
administrative, bookkeeping, and clerical personnel necessary for managing the
affairs of the Fund. The Adviser also provides persons, satisfactory to the
Fund's Board of Directors, to act as officers and employees of the Fund and pays
their salaries and wages. The Fund bears all other costs and expenses.
- --------------------------------------------------------------------------------
143
<PAGE>
- ---------------
Value Line
Centurion Fund,
Inc.
- ---------------
9
- ---------------
- --------------------------------------------------------------------------------
Value Line Centurion Fund, Inc.
- -------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited) (Continued)
Certain officers and directors of the Adviser and Value Line Securities,
Inc., (the Fund's distributor and a registered broker/dealer) and of GIAC are
also officers and directors of the Fund. A former officer of GIAC who is also a
director of the Fund was paid a fee of $792 for the six months ended June 30,
1998. During the period ended June 30, 1998, the Fund paid brokerage commissions
totalling $337,569 to Value Line Securities, Inc., a wholly owned subsidiary of
the Adviser, which clears its transactions through unaffiliated brokers.
The Fund has an agreement with GIAC to reimburse GIAC for expenses
incurred in performing administrative and internal accounting functions in
connection with the establishment of contractowner accounts and their ongoing
maintenance, printing and distribution of shareholder reports and providing
ongoing shareholder servicing functions. Such reimbursement is limited to an
amount no greater than $18.00 times the average number of accounts at the end of
each quarter during the year. During the period ended June 30, 1998, the Fund
incurred expenses of $257,413 in connection with such services rendered by GIAC.
- --------------------------------------------------------------------------------
144
<PAGE>
---------------
Value Line
Centurion Fund,
Inc.
---------------
9
---------------
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each
period:
<TABLE>
<CAPTION>
Six Months
Ended Years Ended December 31,
June 30, 1998 --------------------------------------------------------------
(Unaudited) 1997 1996 1995 1994 1993
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 25.52 $ 24.83 $ 24.25 $ 17.83 $ 18.52 $ 20.04
-------- -------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income .06 .09 .08 .12 .10 .12
Net gains or losses on securities
(both realized and unrealized) 3.93 5.30 3.71 6.96 (.51) 1.73
-------- -------- -------- -------- -------- --------
Total from investment operations 3.99 5.39 3.79 7.08 (.41) 1.85
-------- -------- -------- -------- -------- --------
Less distributions:
Dividends from net investment income -- (.09) (.12) (.10) (.01) (.12)
Distributions from capital gains -- (4.61) (3.09) (.56) (.27) (3.25)
-------- -------- -------- -------- -------- --------
Total distributions -- (4.70) (3.21) (.66) (.28) (3.37)
-------- -------- -------- -------- -------- --------
Net asset value, end of period $ 29.51 $ 25.52 $ 24.83 $ 24.25 $ 17.83 $ 18.52
======== ======== ======== ======== ======== ========
Total return** 15.64%+ 21.39% 17.34% 40.08% -2.21% 9.21%
======== ======== ======== ======== ======== ========
Ratios/Supplemental Data:
Net assets, end of period (in thousands) $771,036 $720,091 $639,341 $525,449 $352,745 $373,910
Ratio of operating expenses to average
net assets .59%*(1) .60%(1) .59%(1) .62% .61% .61%
Ratio of net investment income to average
net assets .41%* .35% .36% .60% .57% .57%
Portfolio turnover rate 50%+ 85% 141% 114% 122% 118%
</TABLE>
(1) Before offset of custody credits.
** Total returns do not reflect the effects of charges deducted under the
terms of GIAC's variable contracts. Including such charges would reduce
the total returns for all periods shown.
+ Not annualized
* Annualized
See notes to financial statements.
- --------------------------------------------------------------------------------
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Management
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- -------------------------------------------
SCHEDULE OF INVESTMENTS
June 30, 1998 (Unaudited)
- ------------------------
COMMON STOCKS -- 78.7%
- ------------------------
Shares Value
- -----------------------------------------------------------------------
Advertising -- 1.2%
198,000 Omnicom Group, Inc. $ 9,875,250
150,000 Synder Communications, Inc.* 6,600,000
---------------
16,475,250
---------------
Aerospace/Defense -- 1.4%
68,000 BE Aerospace, Inc.* 1,980,500
90,000 Cordant Technologies, Inc. 4,151,250
70,000 General Dynamics Corp. 3,255,000
12,000 Gulfstream Aerospace Corp.* 558,000
19,000 Litton Industries, Inc.* 1,121,000
24,000 Northrop Grumman Corp. 2,475,000
40,400 Precision Castparts Corp. 2,156,350
58,000 Sundstrand Corp. 3,320,500
---------------
19,017,600
---------------
Air Transport -- 1.6%
138,000 Airborne Freight Corp. 4,821,375
77,700 Alaska Air Group, Inc.* 4,239,506
90,000 America West Holdings
Corp. Class "B"* 2,570,625
110,000 Comair Holdings, Inc. 3,396,250
20,000 Continental Airlines, Inc. Class "B"* 1,217,500
55,000 U.S. Airways Group, Inc.* 4,358,750
---------------
20,604,006
---------------
Apparel -- 1.1%
70,520 Abercrombie & Fitch Co. Class "A"* 3,102,880
85,000 Fruit of the Loom, Inc. Class "A"* 2,820,937
120,000 Jones Apparel Group, Inc.* 4,387,500
12,000 Tommy Hilfiger Corp.* 750,000
66,000 V.F. Corp. 3,399,000
---------------
14,460,317
---------------
Auto & Truck -- 0.3%
130,000 Navistar International Corp., Inc.* 3,753,750
16,000 PACCAR, Inc. 836,000
---------------
4,589,750
---------------
Auto Parts -- Original Equipment -- 0.5%
36,000 Magna International, Inc. Class "A" 2,470,500
82,000 Tower Automotive, Inc.* 3,515,750
---------------
5,986,250
---------------
Auto Parts -- Replacement -- 0.5%
100,000 Federal-Mogul Corp. 6,750,000
---------------
Bank -- 2.4%
123,000 AmSouth Bancorporation 4,835,437
54,999 First Union Corp. 3,203,692
88,000 Mellon Bank Corp. 6,127,000
165,000 North Fork Bancorporation, Inc. 4,032,187
117,000 SouthTrust Corp. 5,089,500
158,500 Zions Bancorporation 8,420,313
---------------
31,708,129
---------------
Bank - Midwest -- 1.3%
70,000 Northern Trust Corp. 5,337,500
116,000 Norwest Corp. 4,335,500
174,000 U.S. Bancorp 7,482,000
---------------
17,155,000
---------------
Beverage - Alcoholic -- 0.2%
60,000 Canandaigua Brands, Inc.
Class "A"* 2,951,250
---------------
Beverage - Soft Drink -- 0.3%
87,000 Coca-Cola Enterprises, Inc. 3,414,750
---------------
Building Materials -- 0.3%
60,000 Masco Corp. 3,630,000
---------------
Cable TV -- 0.9%
16,000 Cablevision Systems Corp.
Class "A"* 1,336,000
126,000 Comcast Corp. Class "A" 5,114,813
150,000 Tele-Communications, Inc.-
TCI Group Series "A"* 5,765,625
---------------
12,216,438
---------------
Cement & Aggregates -- 0.1%
8,800 Vulcan Materials Co. 938,850
---------------
Chemical - Diversified -- 0.6%
72,000 Goodrich (B.F.) Co. (The) 3,573,000
57,000 PPG Industries, Inc. 3,965,063
---------------
7,538,063
---------------
Coal/Alternate Energy -- 0.6%
159,000 AES Corp.* 8,357,438
---------------
Computer & Peripherals -- 2.0%
59,000 Cisco Systems, Inc.* 5,431,688
128,000 EMC Corp.* 5,736,000
160,000 FORE Systems, Inc.* 4,240,000
62,000 Storage Technology Corp.* 2,689,250
See notes to financial statements.
- --------------------------------------------------------------------------------
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Strategic Asset
Management
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- --------------------------------------------------------------------------------
Shares Value
- -----------------------------------------------------------------------
Computer & Peripherals -- 2.0% (continued)
40,000 Tech Data Corp.* $ 1,715,000
218,000 Unisys Corp.* 6,158,500
---------------
25,970,438
---------------
Computer Software & Services -- 7.6%
34,000 Autodesk, Inc. 1,313,250
78,000 BMC Software, Inc.* 4,051,125
120,000 Cadence Design Systems, Inc.* 3,750,000
72,000 CIBER, Inc.* 2,736,000
72,000 Citrix Systems, Inc.* 4,923,000
63,000 Computer Associates
International, Inc. 3,500,438
174,000 Compuware Corp.* 8,895,750
71,000 Computer Horizons Corp.* 3,112,500
60,000 Comverse Technology, Inc.* 2,631,437
150,000 FileNet Corp.* 4,331,250
135,000 Fiserv, Inc.* 5,733,281
63,500 Hyperion Software Corp.* 1,809,750
48,000 Information Management
Resources, Inc.* 1,623,000
78,500 JDA Software Group, Inc.* 3,434,375
86,000 Keane, Inc.* 4,816,000
122,000 Legato Systems, Inc.* 4,758,000
52,000 Mercury Interactive Corp.* 2,320,500
48,000 Microsoft Corp.* 5,202,000
20,000 National Data Corp. 875,000
141,000 Paychex, Inc. 5,736,938
59,000 PeopleSoft, Inc.* 2,773,000
44,000 Saville Systems, PLC (ADR)* 2,205,500
110,000 SunGard Data Systems, Inc.* 4,221,250
110,000 Systems & Computer
Technology Corp.* 2,970,000
129,000 Veritas Software Corp.* 5,337,375
57,000 Visio Corp.* 2,721,750
76,000 Wang Laboratories, Inc.* 1,933,250
116,000 Xylan Corp.* 3,458,250
---------------
101,173,969
---------------
Diversified Companies -- 1.4%
92,000 Danaher Corp. 3,375,250
16,000 Textron, Inc. 1,147,000
158,000 Tyco International, Ltd. 9,954,000
46,000 United Technologies Corp. 4,255,000
---------------
18,731,250
---------------
Drug -- 3.8%
74,000 ALZA Corp.* 3,200,500
28,000 Biovial Corp. International* 896,000
10,000 Forest Laboratories, Inc.* 357,500
114,000 ICN Pharmaceuticals, Inc. 5,208,375
58,000 Immunex Corp.* 3,842,500
73,000 MedImmune, Inc.* 4,553,375
121,000 Mylan Laboratories, Inc. 3,637,563
98,000 Pfizer, Inc. 10,651,375
72,000 Quintiles Transnational Corp.* 3,541,500
75,000 Schering-Plough Corp. 6,871,875
34,000 Vical, Inc.* 575,875
57,000 Warner-Lambert Co. 3,954,375
70,000 Watson Pharmaceuticals, Inc.* 3,268,125
---------------
50,558,938
---------------
Drugstore -- 0.6%
126,000 CVS Corp. 4,906,125
88,000 Rite Aid Corp. 3,305,500
---------------
8,211,625
---------------
Electrical Utility - Central -- 1.0%
100,000 DTE Energy Co. 4,037,500
100,000 FirstEnergy Corp. 3,075,000
100,000 Houston Industries, Inc. 3,087,500
90,000 UniCom Corp. 3,155,625
---------------
13,355,625
---------------
Electric Utility - East -- 0.4%
96,000 Consolidated Edison, Inc. 4,422,000
100,000 Niagara Mohawk Power Corp.* 1,493,750
---------------
5,915,750
---------------
Electric Utility - West -- 0.2%
100,000 Edison International 2,956,250
---------------
Electrical Equipment -- 1.5%
56,000 Cooper Industries, Inc. 3,076,500
180,000 General Electric Co. 16,380,000
8,000 Honeywell Inc. 668,500
---------------
20,125,000
---------------
See notes to financial statements.
- --------------------------------------------------------------------------------
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Strategic Asset
Management
- ---------------
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- ---------------
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- -------------------------------------------
SCHEDULE OF INVESTMENTS
June 30, 1998 (Unaudited)
Shares Value
- -----------------------------------------------------------------------
Electronics -- 1.5%
87,000 Gemstar International Group, Ltd.* $ 3,257,063
135,000 Lexmark International Group, Inc.
Class "A"* 8,235,000
228,750 Symbol Technologies, Inc. 8,635,312
---------------
20,127,375
---------------
Entertainment -- 2.3%
142,000 CBS Corp. 4,508,500
114,000 Chancellor Media Corp.* 5,660,812
60,000 Clear Channel Communications, Inc.* 6,547,500
91,000 Jacor Communications, Inc.* 5,369,000
120,000 Sinclair Broadcast Group, Inc.
Class "A"* 3,450,000
65,000 Time Warner, Inc. 5,553,438
---------------
31,089,250
---------------
Environmental -- 0.6%
135,000 Allied Waste Industries, Inc.* 3,240,000
98,000 USA Waste Services, Inc.* 4,838,750
---------------
8,078,750
---------------
Financial Services -- 1.2%
53,000 American Express Co. 6,042,000
94,000 AMRESCO, Inc.* 2,737,750
16,249 Associates First Capital Corp.
Class "A" 1,249,142
47,000 FINOVA Group, Inc. (The) 2,661,375
51,000 Travelers Group, Inc. 3,091,875
---------------
15,782,142
---------------
Food Processing -- 0.4%
10,000 Earthgrains Co. (The) 558,750
74,200 Suiza Foods Corp.* 4,428,812
---------------
4,987,562
---------------
Food Wholesalers -- 0.3%
96,000 Supervalu, Inc. 4,260,000
---------------
Foreign Electronics/Entertainment -- 0.2%
38,000 Philips Electronics N.V.
(N.Y. Shares) 3,230,000
---------------
Foreign Telecommunication -- 0.7%
84,000 Alcatel Alsthom (ADR) 3,417,750
82,000 Nokia Corp. (ADR) Class "A" 5,950,125
---------------
9,367,875
---------------
Furniture/Home Furnishings -- 0.7%
64,000 Ethan Allen Interiors, Inc. 3,196,000
110,000 Furniture Brands International, Inc.* 3,086,875
132,000 Miller (Herman), Inc. 3,209,250
---------------
9,492,125
---------------
Grocery -- 2.1%
78,000 Albertson's, Inc. 4,041,375
96,000 Kroger Co.* 4,116,000
148,000 Meyer (Fred), Inc.* 6,290,000
226,800 Safeway, Inc.* 9,227,925
78,000 Whole Foods Market, Inc.* 4,719,000
---------------
28,394,300
---------------
Healthcare Information Systems -- 0.7%
192,000 HBO & Co. 6,768,000
25,400 Shared Medical Systems Corp. 1,865,312
---------------
8,633,312
---------------
Home Appliance -- 0.8%
78,000 Black & Decker Corp. 4,758,000
117,000 Maytag Corp. 5,776,875
---------------
10,534,875
---------------
Homebuilding -- 0.5%
80,000 Centex Corp. 3,020,000
110,000 Lennar Corp. 3,245,000
---------------
6,265,000
---------------
Hotel/Gaming -- 0.2%
17,500 Prime Hospitality Corp.* 305,156
127,000 Rio Hotel & Casino, Inc.* 2,397,125
---------------
2,702,281
---------------
Household Products -- 0.3%
47,000 Colgate-Palmolive Co. 4,136,000
---------------
Industrial Services -- 0.6%
66,000 Apollo Group, Inc. Class "A"* 2,182,125
90,000 Robert Half International, Inc.* 5,028,750
94,000 Superior Energy Sevices, Inc.* 475,875
---------------
7,686,750
---------------
Insurance - Diversified -- 2.1%
73,000 Ambac Financial Group, Inc. 4,270,500
100,000 American Bankers Insurance
Group, Inc. 6,012,500
4,000 American General Corp. 284,750
34,000 American International Group, Inc. 4,964,000
See notes to financial statements.
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Shares Value
- -----------------------------------------------------------------------
Insurance - Diversified -- 2.1% (continued)
40,000 AON Corp. $ 2,810,000
18,000 CMAC Investment Corp. 1,107,000
48,000 Lincoln National Corp. 4,386,000
58,500 Marsh & McLennan Companies, Inc. 3,535,594
---------------
27,370,344
---------------
Insurance - Life -- 1.7%
144,000 AFLAC, Inc. 4,365,000
57,000 Conseco, Inc. 2,664,750
84,000 Equitable Companies, Inc. (The) 6,294,750
75,000 ReliaStar Financial Corp. 3,600,000
45,000 SunAmerica, Inc. 2,584,688
70,000 Torchmark Corp. 3,202,500
---------------
22,711,688
---------------
Insurance - Property/Casualty -- 1.3%
79,500 ACE, Ltd. 3,100,500
70,000 Allstate Corp. (The) 6,409,375
44,000 EXEL, Ltd. 3,423,750
44,000 Executive Risk, Inc. 3,245,000
20,000 Mercury General Corp. 1,288,750
---------------
17,467,375
---------------
Internet -- 0.1%
40,000 IDT Corp.* 1,202,500
---------------
Machinery -- 0.6%
60,000 Applied Power, Inc. Class "A" 2,062,500
74,000 Dover Corp. 2,534,500
100,000 Terex Corp.* 2,850,000
---------------
7,447,000
---------------
Manufactured Housing/
Recreational Vehicles -- 0.3%
88,000 Fleetwood Enterprises, Inc. 3,520,000
---------------
Medical Services -- 1.6%
80,000 Health Management Associates, Inc.
Class "A"* 2,675,000
92,000 Integrated Health Services, Inc. 3,450,000
62,000 Lincare Holdings, Inc.* 2,607,875
48,000 PacifiCare Health Systems, Inc.
Class "B"* 4,242,000
115,000 Rexall Sundown, Inc.* 4,053,750
20,000 Total Renal Care Holdings, Inc.* 690,000
70,000 Universal Health Services, Inc. 4,086,250
Class "B"* 21,804,875
---------------
Medical Supplies -- 3.0%
67,000 Allegiance Corp. 3,433,750
96,000 Arterial Vascular Engineering, Inc.* 3,432,000
51,000 Becton, Dickinson & Co. 3,958,875
45,000 Cardinal Health, Inc. 4,218,750
88,000 McKesson Corp. 7,150,000
146,000 Safeskin Corp.* 6,004,250
50,000 Sofamor Danek Group, Inc.* 4,328,125
72,000 STERIS Corp.* 4,578,750
58,000 VISX, Inc.* 3,451,000
---------------
40,555,500
---------------
Metal Fabricating -- 0.7%
55,000 Illinois Tool Works, Inc. 3,667,813
89,000 Timken Co. 2,742,312
82,000 Trinity Industries, Inc. 3,403,000
---------------
9,813,125
---------------
Newspaper -- 1.2%
60,000 Gannett Co., Inc. 4,263,750
67,000 New York Times Co. (The) Class "A" 5,309,750
96,000 News Corp., Ltd. (ADR) 3,084,000
54,000 Tribune Co. 3,715,875
---------------
16,373,375
---------------
Office Equipment & Supplies -- 1.6%
175,000 Office Depot, Inc.* 5,523,437
253,437 Staples, Inc.* 7,333,833
50,000 United Stationers, Inc.* 3,237,500
55,000 Xerox Corp. 5,589,375
---------------
21,684,145
---------------
Packaging & Container -- 0.3%
96,000 Owens-Illinois, Inc.* 4,296,000
---------------
Paper & Forest Products -- 0.6%
68,000 Bowater, Inc. 3,213,000
200,000 Mail-Well, Inc.* 4,337,500
---------------
7,550,500
---------------
Petroleum - Integrated -- 0.4%
140,000 USX-Marathon Group 4,803,750
---------------
Precision Instrument -- 0.5%
120,000 EG & G, Inc. 3,600,000
58,000 Waters Corp.* 3,418,375
---------------
7,018,375
---------------
See notes to financial statements.
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Management
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- ---------------
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- -------------------------------------------
SCHEDULE OF INVESTMENTS
June 30, 1998 (Unaudited)
Shares Value
- -----------------------------------------------------------------------
Publishing -- 0.6%
40,000 CMG Information Services, Inc.* $ 2,830,000
55,000 McGraw-Hill Companies, Inc. 4,485,937
---------------
7,315,937
---------------
Recreation -- 1.4%
82,000 Action Performance Companies, Inc.* 2,639,375
112,000 Carnival Corp. 4,438,000
166,000 Harley-Davidson, Inc. 6,432,500
68,000 Royal Caribbean Cruises, Ltd. 5,406,000
---------------
18,915,875
---------------
Restaurant -- 0.6%
135,000 Brinker International, Inc.* 2,598,750
92,500 CKE Restaurants, Inc. 3,815,625
106,000 Landry's Seafood Restaurants, Inc.* 1,917,938
---------------
8,332,313
---------------
Retail Building Supply -- 0.4%
136,000 Lowes Companies, Inc. 5,516,500
---------------
Retail - Special Lines -- 5.3%
38,000 Barnes & Noble, Inc.* 1,422,625
104,000 Bed Bath & Beyond, Inc.* 5,388,500
200,000 Best Buy Co., Inc.* 7,225,000
96,000 Borders Group, Inc.* 3,552,000
82,000 Circuit City Stores-Circuit City Group 3,843,750
100,500 Dollar Tree Stores, Inc.* 4,082,813
105,000 Gap, Inc. 6,470,625
107,000 General Nutrition Companies, Inc.* 3,330,375
107,000 Goody's Family Clothing, Inc.* 5,871,625
100,000 Michaels Stores, Inc.* 3,528,125
45,000 Payless ShoeSource, Inc.* 3,315,937
165,400 Pier 1 Imports, Inc. 3,948,925
100,000 Ross Stores Inc. 4,300,000
180,000 Sunglass Hut International, Inc.* 1,991,250
334,000 TJX Companies, Inc. 8,057,750
70,000 Tandy Corp. 3,714,375
28,000 Williams-Sonoma, Inc.* 890,750
---------------
70,934,425
---------------
Retail Store -- 4.1%
104,000 Costco Companies, Inc.* 6,558,500
144,000 Dayton Hudson Corp. 6,984,000
118,496 Dollar General Corp. 4,687,998
300,000 Family Dollar Stores, Inc. 5,550,000
66,000 Federated Department Stores, Inc.* 3,551,625
212,000 Kmart Corp.* 4,081,000
174,000 Kohl's Corp.* 9,026,250
70,000 Proffitt's, Inc.* 2,826,250
34,000 Stage Stores, Inc.* 1,538,500
150,000 Wal-Mart Stores, Inc. 9,112,500
---------------
53,916,623
---------------
Semiconductor -- 0.7%
101,000 PMC-Sierra, Inc.* 4,734,375
132,000 Vitesse Semiconductor Corp.* 4,075,500
---------------
8,809,875
---------------
Shoe -- 0.2%
119,250 Wolverine World Wide, Inc. 2,586,234
---------------
Telecommunications Equipment -- 1.1%
150,000 General Instrument Corp.* 4,078,125
69,000 Level One Communications, Inc.* 1,621,500
46,000 Loral Space & Communications, Ltd.* 1,299,500
84,000 Tekelec * 3,759,000
56,000 Tellabs, Inc.* 4,011,000
---------------
14,769,125
---------------
Telecommunication Services -- 3.1%
88,000 AirTouch Communications, Inc.* 5,142,500
82,000 BellSouth Corp. 5,504,250
87,000 Century Telephone Enterprises, Inc. 3,991,125
104,000 Cincinnati Bell, Inc. 2,977,000
94,000 ICG Communications, Inc.* 3,436,875
88,000 Intermedia Communications, Inc.* 3,690,500
110,000 MediaOne Group, Inc.* 4,833,125
56,000 Pacific Gateway Exchange, Inc.* 2,243,500
180,000 SkyTel Communications, Inc.* 4,213,125
3,004 U.S. West, Inc. 141,188
128,000 WinStar Communications, Inc.* 5,496,000
---------------
41,669,188
---------------
Tobacco -- 0.2%
57,000 Philip Morris Companies, Inc. 2,244,375
---------------
Toiletries/Cosmetics -- 0.1%
22,000 Avon Products, Inc. 1,705,000
---------------
TOTAL COMMON STOCKS
(Cost $775,829,588) 1,047,893,555
---------------
See notes to financial statements.
- --------------------------------------------------------------------------------
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Management
---------------
10
---------------
- --------------------------------------------------------------------------------
Principal
Amount Value
- -----------------------------------------------------------------------
- -----------------------------------
U.S. TREASURY OBLIGATIONS -- 5.7%
- -----------------------------------
$ 50,000,000 U.S. Treasury Notes
6 1/2%, due 5/31/02 $ 51,630,500
20,000,000 U.S. Treasury Bonds
7 1/4%, due 8/15/22 23,932,800
--------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $69,559,877) 75,563,300
--------------
- ---------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 10.1%
- ---------------------------------------------
15,000,000 Federal Home Loan Banks
5.625%, due 3/19/01 14,974,200
17,000,000 Federal Home Loan Banks
5.40%, due 1/15/03 16,807,390
19,000,000 Federal Home Loan Mortgage Corp.
5.75%, due 7/15/03 19,023,940
10,000,000 Federal National Mortgage Association
5.75%, due 6/15/05 10,005,300
6,740,000 Federal National Mortgage Association
6.850%, due 8/22/05 7,164,553
27,000,000 Federal Home Loan Mortgage Corp.
7.10%, due 4/10/07 29,306,610
13,000,000 Federal National Mortgage Association
6.50%, due 7/16/07 13,595,660
10,000,000 Federal National Mortgage
Association D.U.S. Pool #380188
6.450%, due 4/25/08 10,184,375
14,000,000 Federal Home Loan Corp.
5 3/4%, 4/15/08 13,947,780
--------------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS
(Cost $133,616,548) 135,009,808
--------------
- ---------------------------------
CORPORATE BONDS & NOTES -- 1.8%
- ---------------------------------
Bank -- 0.7%
10,000,000 International Bank for
Reconstruction & Development
Global Bonds 6.375%, due 5/24/01 10,173,700
--------------
Chemical -- Diversified -- 0.4%
5,000,000 Goodrich (B.F.) Co. (The) Notes
6.45%, due 4/15/08 5,044,650
--------------
Telecommunication Services -- 0.7%
5,000,000 AirTouch Communications, Inc.
Notes 6.65%, due 5/1/08 5,066,100
4,000,000 MCI Communications Corp. Sr.
Notes 6.50%, due 4/15/10 3,982,960
--------------
9,049,060
--------------
TOTAL CORPORATE BONDS & NOTES
(Cost $24,155,146) 24,267,410
--------------
TOTAL INVESTMENT SECURITIES -- 96.3%
(Cost $1,003,161,159) 1,282,734,073
--------------
- --------------------------------
SHORT-TERM INVESTMENTS -- 3.9%
- --------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 1.9%
25,000,000 Federal Home Loan Mortgage Corp.
Discount Notes 5.46%,
due 7/14/98 24,950,708
--------------
REPURCHASE AGREEMENTS -- 2.0%
(includes accrued interest)
26,900,000 Collateralized by $27,065,000
U.S. Treasury Notes 5 7/8%,
due 11/30/01, with a value
of $27,452,680 (with Morgan
Stanley & Co., 5.72%,
dated 6/30/98, due 7/1/98,
delivery value of $26,904,274) 26,904,274
--------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $51,854,982) 51,854,982
--------------
EXCESS OF LIABILITIES OVER CASH AND
RECEIVABLES -- (-0.2%) (2,096,856)
--------------
NET ASSETS -- 100.0% $1,332,492,199
==============
NET ASSET VALUE PER
OUTSTANDING SHARE
($1,332,492,199 / 52,198,028
shares outstanding) $ 25.53
==============
* Non-income producing.
See notes to financial statements.
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Strategic Asset
Management
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- ---------------
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Value Line Strategic Asset Management Trust
- -------------------------------------------
STATEMENT OF ASSETS
AND LIABILITIES
June 30, 1998 (Unaudited)
ASSETS
Investment in securities, at value
(cost $1,003,161,159) $1,282,734,073
Short-term investments (cost $51,854,982) 51,854,982
Cash 16,355
Receivable for securities sold 2,487,187
Interest and dividends receivable 3,610,328
Receivable for trust shares sold 157,463
--------------
TOTAL ASSETS 1,340,860,388
--------------
LIABILITIES
Payable for securities purchased 6,266,646
Payable for trust shares repurchased 1,346,552
Accrued expenses:
Advisory fee 532,230
GIAC administrative service fee 162,000
Other 60,761
--------------
TOTAL LIABILITIES 8,368,189
--------------
NET ASSETS $1,332,492,199
==============
NET ASSETS CONSIST OF:
Capital stock, at $0.01 par value
(authorized unlimited, outstanding
52,198,028 shares) $ 521,980
Additional paid-in capital 830,590,010
Undistributed net investment income 44,516,145
Undistributed net realized gain on investments 177,291,150
Net unrealized appreciation of investments 279,572,914
--------------
NET ASSETS $1,332,492,199
==============
NET ASSET VALUE PER
OUTSTANDING SHARE
($1,332,492,199 / 52,198,028
shares outstanding) $ 25.53
==============
STATEMENT OF OPERATIONS
Six Months Ended
June 30, 1998 (Unaudited)
Investment Income:
Interest $ 9,813,959
Dividends (Net of foreign withholding
tax of $18,424) 3,286,846
-------------
Total Income 13,100,805
-------------
Expenses:
Investment advisory fee 3,145,711
GIAC administrative service fee 362,251
Custodian fees 83,355
Audit and legal fees 21,398
Insurance and dues 18,295
Trustees' fees and expenses 8,155
Printing and stationary 1,213
Taxes and other 307
-------------
Total Expenses Before Custody Credits 3,640,685
Less: Custody credits (7,966)
-------------
Net Expenses 3,632,719
-------------
Net Investment Income 9,468,086
-------------
Net Realized and Unrealized Gain on
Investments
Net realized gain 75,859,225
Net change in unrealized appreciation 94,988,571
-------------
Net Realized Gain and Change in Net
Unrealized Appreciation on Investments 170,847,796
-------------
Net Increase in Net Assets from Operations $ 180,315,882
=============
See notes to financial statements.
- --------------------------------------------------------------------------------
152
<PAGE>
---------------
Value Line
Strategic Asset
Management
---------------
10
---------------
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
For the Six Months Ended June 30, 1998 (Unaudited)
and for the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Six Months Year
Ended Ended
June 30, 1998 December 31,
(Unaudited) 1997
--------------- ---------------
<S> <C> <C>
Operations:
Net investment income $ 9,468,086 $ 35,186,725
Net realized gain on investments 75,859,225 101,703,718
Change in net unrealized appreciation 94,988,571 30,109,960
--------------- ---------------
Net increase in net assets from operations 180,315,882 167,000,403
--------------- ---------------
Distributions to Shareholders:
Net investment income -- (26,826,322)
Net realized gain from investment transactions -- (122,913,330)
--------------- ---------------
Total distributions -- (149,739,652)
--------------- ---------------
Trust Share Transactions:
Proceeds from sale of shares 43,658,815 69,411,109
Proceeds from reinvestment of distributions to shareholders -- 149,739,652
Cost of shares repurchased (88,071,945) (112,606,824)
--------------- ---------------
(Decrease) Increase from Trust share transactions (44,413,130) 106,543,937
--------------- ---------------
Total Increase in Net Assets 135,902,752 123,804,688
Net Assets:
Beginning of period 1,196,589,447 1,072,784,759
--------------- ---------------
End of period $ 1,332,492,199 $ 1,196,589,447
=============== ===============
Undistributed Net Investment Income, at End of Period $ 44,516,145 $ 35,048,059
=============== ===============
</TABLE>
See notes to financial statements.
- --------------------------------------------------------------------------------
153
<PAGE>
- ---------------
Value Line
Strategic Asset
Management
- ---------------
10
- ---------------
- --------------------------------------------------------------------------------
Value Line Strategic Asset Management Trust
- -------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited)
- ------------------------------------
1 -- Significant Accounting Policies
- ------------------------------------
Value Line Strategic Asset Management Trust (the "Trust") is an open-end,
diversified management investment company registered under the Investment
Company Act of 1940, as amended, which seeks to achieve a high total investment
return consistent with reasonable risk by investing primarily in a broad range
of common stocks, bonds and money market instruments. The Trust will attempt to
acheive its objective by following an assets allocation strategy based on data
derived from computer models for the stock and bond markets that shifts the
assets of the Trust among equity, debt and money market securities as the models
indicate and its investment adviser, Value Line, Inc. (the "Adviser"), deems
appropriate.
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
disclosure of contigent 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. The
following is a summary of significant accounting policies consistently followed
by the Trust in the preparation of its financial statements.
(A) Security Valuation.
Securities listed on a securities exchange and over-the-counter securities
traded on the NASDAQ national market are valued at the closing sales price on
the date as of which the net asset value is being determined. In the absence of
closing sales prices for such securities traded in the over-the-counter market,
the security is valued at the midpoint between the latest available and
representative bid and asked prices.
The Board of Trustees has determined that the value of bonds and other
fixed-income securities be calculated on the valuation date by reference to
valuations obtained from an independent pricing service which determines
valuations for normal institutional-size trading units of debt securities,
without exclusive reliance upon quoted prices. This service takes into account
appropriate factors such as institutional-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data in determining valuations.
Short-term instruments with maturities of 60 days or less are valued at
amortized cost which approximates market value. Short-term instruments with
maturities greater than 60 days at the date of purchase are valued at the
midpoint between the latest available and representative asked and bid prices,
and commencing 60 days prior to maturity such securities are valued at amortized
cost. Other assets and securities for which market valuations are not readily
available are valued at fair value as the Board of Trustees may determine in
good faith.
(B) Repurchase Agreements.
In connection with transactions in repurchase agreements, the Trust's
custodian takes possession of the underlying collateral securities, the value of
which exceeds the principal amount of the repurchase transaction, including
accrued interest. To the extent that any repurchase transaction exceeds one
business day, the value of the collateral is marked-to-market on a daily basis
to ensure the adequacy of the collateral. In the event of default of the
obligation to repurchase, the Trust has the right to liquidate the collateral
and apply the proceeds in satisfaction of the obligation. Under
- --------------------------------------------------------------------------------
154
<PAGE>
---------------
Value Line
Strategic Asset
Management
---------------
10
---------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited)
certain circumstances, in the event of default or bankruptcy by the other party
to the agreement, realization and/or retention of the collateral or proceeds may
be subject to legal proceedings.
(C) Federal Income Taxes.
It is the Trust's policy to qualify under, and comply with, the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholder.
Therefore, no federal income tax provision is required.
(D) Dividends and Distributions.
It is the Trust's policy to distribute to its shareholder, as dividends
and as capital gains distributions, all the net investment income for the year
and all the net capital gains realized by the Trust, if any. Such distributions
are determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. All dividends or distributions will be
payable in shares of the Trust at the net asset value on the ex-dividend date.
This policy is, however, subject to change at any time by the Board of Trustees.
(E) Amortization.
Discounts on debt securities are amortized to interest income over the
life of the security with a corresponding increase to the security's cost basis;
premiums on debt securities are not amortized.
(F) Investments.
Securities transactions are recorded on a trade date basis. Realized gains
and losses from securities transactions are recorded on the identified cost
basis. Interest income, adjusted for amortization of discount, including
original issue discount required for federal income tax purposes, is earned from
settlement date and recognized on the accrual basis. Dividend income is recorded
on the ex-dividend date.
- ----------------------------------------
2 -- Trust Share Transactions, Dividends
and Distributions
- ----------------------------------------
Shares of the Trust are available to the public only through the purchase
of certain contracts issued by The Guardian Insurance & Annuity Company, Inc.
(GIAC). Transactions in shares of beneficial interest in the Trust were as
follows:
Six Months Ended Year Ended
June 30, December 31,
1998 (Unaudited) 1997
---------------- ------------
Shares sold 1,806,353 3,117,519
Shares issued to shareholder
in reinvestment of dividends
and distributions -- 7,049,889
------------ ----------
1,806,353 10,167,408
Shares repurchased 3,677,649 5,083,552
------------ ----------
Net (decrease) increase (1,871,296) 5,083,856
============ ==========
Dividends per share from
net investment income $ -- $ .55
============ ==========
Distributions per share from
net realized gains $ -- $ 2.52
============ ==========
- --------------------------------------------------------------------------------
155
<PAGE>
- ---------------
Value Line
Strategic Asset
Management
- ---------------
10
- ---------------
- --------------------------------------------------------------------------------
Value Line Strategic Asset Management Trust
- -------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited)
- --------------------------------------
3 -- Purchases and Sales of Securities
- --------------------------------------
Purchases and sales of investment securities, excluding short-term
investments, were as follows:
Six Months Ended
June 30,
1998
(Unaudited)
----------------
PURCHASES:
U.S. Treasury and Government
Agency Obligations $111,576,556
Other Investment Securities 606,663,518
------------
$718,240,074
============
SALES & MATURITIES:
U.S. Treasury and Government
Agency Obligations $374,078,721
Other Investment Securities 383,661,991
------------
$757,740,712
============
At June 30, 1998, the aggregate cost of investment securities and
short-term investments for federal income tax purposes was $1,055,016,141. The
aggregate appreciation and depreciation of investments at June 30, 1998, based
on a comparison of investment values and their costs for federal income tax
purposes was $293,561,334 and $13,988,420, respectively, resulting in a net
appreciation of $279,572,914.
- ---------------------------------------------
4 -- Investment Advisory Contract, Management
Fees and Transactions with Affiliates
- ---------------------------------------------
An advisory fee of $3,145,711 was paid or payable to the Adviser, for the
period ended June 30, 1998. This was computed at the rate of 1/2 of 1% of the
average daily net assets of the Trust during the period and paid monthly. The
Adviser provides research, investment programs, supervision of the investment
portfolio and pays costs of administrative services, office space, equipment and
compensation of administrative, bookkeeping and clerical personnel necessary for
managing the affairs of the Trust. The Adviser also provides persons,
satisfactory to the Trust's Board of Trustees, to act as officers and employees
of the Trust and pays their salaries and wages. The Trust bears all other costs
and expenses.
Certain officers and directors of the Adviser and Value Line Securities,
Inc. (the Trust's distributor and a registered broker/dealer), and of GIAC are
also officers and Trustees of the Trust. A former officer of GIAC who is also a
trustee of the Trust was paid a fee of $792 by the Trust for the six months
ended June 30, 1998. During the period ended June 30, 1998, the Trust paid
brokerage commissions totalling $430,869 to Value Line Securities, Inc., a
wholly owned subsidiary of the Adviser, which clears its transactions through
unaffiliated brokers.
The Trust has an agreement with GIAC to reimburse GIAC for expenses
incurred in performing administrative and internal accounting functions in
connection with the establishment of contractowner accounts and their ongoing
maintenance, printing and distribution of shareholder reports and providing
ongoing shareholder servicing functions. Such reimbursement is limited to an
amount no greater than $18.00 times the average number of accounts at the end of
each quarter during the year. During the period ended June 30, 1998, the Trust
incurred expenses of $362,251 in connection with such services rendered by GIAC.
- --------------------------------------------------------------------------------
156
<PAGE>
---------------
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Strategic Asset
Management
---------------
10
---------------
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Six Months
Ended Years Ended December 31,
June 30, 1998 ---------------------------------------------------------------------
(Unaudited) 1997 1996 1995 1994 1993
---------- ---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 22.13 $ 21.90 $ 20.27 $ 16.13 $ 17.01 $ 15.94
---------- ---------- --------- --------- ---------
Income (loss) from investment
operations:
Net investment income .20 .65 .53 .39 .26 .27
Net gains or losses on securities
(both realized and unrealized) 3.20 2.65 2.56 4.17 (1.09) 1.62
---------- ---------- ---------- --------- --------- ---------
Total from investment operations 3.40 3.30 3.09 4.56 (.83) 1.89
---------- ---------- ---------- --------- --------- ---------
Less distributions:
Dividends from net investment income -- (.55) (.37) (.26) (.01) (.28)
Distributions from capital gains -- (2.52) (1.09) (.16) (.04) (.54)
---------- ---------- ---------- --------- --------- ---------
Total distributions -- (3.07) (1.46) (.42) (.05) (.82)
---------- ---------- ---------- --------- --------- ---------
Net asset value, end of period $ 25.53 $ 22.13 $ 21.90 $ 20.27 $ 16.13 $ 17.01
========== ========== ========== ========= ========= =========
Total return** 15.36%+ 15.66% 15.87% 28.54% -4.88% 11.86%
========== ========== ========== ========= ========= =========
Ratios/Supplemental Data:
Net assets, end of period (in thousands) $1,332,492 $1,196,589 $1,072,785 $ 876,509 $ 662,721 $ 615,648
Ratio of operating expenses to average
net assets .58%*(1) .59%(1) .58%(1) .60% .60% .61%
Ratio of net investment income to
average net assets 1.50%* 3.08% 2.70% 2.18% 1.65% 1.96%
Portfolio turnover rate 59%+ 58% 71% 63% 100% 110%
</TABLE>
(1) Before offset of custody credits.
** Total returns do not reflect the effects of charges deducted under the
terms of GIAC's variable contracts. Including such charges would reduce
the total returns for all periods shown.
+ Not annualized.
* Annualized.
See notes to financial statements.
- --------------------------------------------------------------------------------
157
<PAGE>
- -----------
MFS Growth
with Income
Series
- -----------
11
- -----------
- --------------------------------------------------------------------------------
MFS Growth with Income Series
- -----------------------------
SCHEDULE OF INVESTMENTS
June 30, 1998 (Unaudited)
- ----------------------
COMMON STOCKS -- 92.9%
- ----------------------
Shares Value
- -----------------------------------------------------------------------
U.S. Stocks -- 84.9%
Aerospace -- 4.4%
26,155 Allied Signal, Inc. $ 1,160,628
10,218 General Dynamics Corp. 475,137
8,819 Goodrich (B.F.) Co. 437,643
15,067 Lockheed Martin Corp. 1,595,219
13,809 Raytheon Co., "A" 795,744
20,805 United Technologies Corp. 1,924,462
--------------
6,388,833
--------------
Agricultural Products -- 0.1%
3,700 Case Corp. 178,525
--------------
Airlines -- 0.1%
1,770 AMR Corp.* 147,353
--------------
Apparel and Textiles -- 0.3%
6,986 VF Corp. 359,779
--------------
Automotive -- 0.8%
6,700 Federal Mogul Corp. 452,250
5,323 Ford Motor Co. 314,057
5,900 TRW, Inc. 322,287
--------------
1,088,594
--------------
Banks and Credit Companies -- 7.0%
1,077 Bank of New York, Inc. 65,360
16,524 Comerica, Inc. 1,094,715
9,200 Firstar Corp. 349,600
3,074 Fleet Financial Group, Inc. 256,679
16,562 National City Corp. 1,175,902
7,226 Northern Trust Corp. 550,983
50,777 Norwest Corp. 1,897,790
13,992 State Street Corp. 972,444
7,988 SunTrust Banks, Inc. 649,524
51,814 US Bancorp 2,228,002
22,237 Washington Mutual, Inc. 965,920
--------------
10,206,919
--------------
Building -- 0.7%
10,741 American Standard Cos., Inc.* 479,989
15,097 Sherwin Williams Co. 500,088
--------------
980,077
--------------
Business Machines -- 1.7%
13,754 International Business Machines
Corp. 1,579,131
8,235 Xerox Corp. 836,882
--------------
2,416,013
--------------
Business Services -- 1.0%
15,069 Computer Sciences Corp. 964,416
8,815 DST Systems, Inc.* 493,640
--------------
1,458,056
--------------
Cellular Telephones -- 0.1%
2,845 Century Telephone Enterprises, Inc. 130,514
--------------
Chemicals -- 2.2%
55,546 Air Products & Chemicals, Inc. 2,221,840
4,319 DuPont (E.I.) de Nemours & Co., Inc. 322,305
15,272 Praxair, Inc. 714,921
--------------
3,259,066
--------------
Computer Software - Personal Computers -- 1.6%
9,068 Compaq Computer Corp. 257,304
18,672 Microsoft Corp.* 2,023,578
--------------
2,280,882
--------------
Computer Software - Systems -- 1.6%
7,172 BMC Software, Inc.* 372,496
26,278 Computer Associates
International, Inc. 1,460,071
20,274 Oracle Corp.* 497,980
--------------
2,330,547
--------------
Consumer Goods and Services -- 8.0%
19,994 Black & Decker Corp. 1,219,634
4,751 Clorox Co. 453,127
18,312 Colgate-Palmolive Co. 1,611,456
28,434 Gillette Co. 1,611,852
35,219 Kimberly-Clark Corp. 1,615,672
29,909 Philip Morris Cos., Inc. 1,177,667
11,903 Procter & Gamble Co. 1,083,917
26,861 Service Corp. International 1,151,665
27,847 Tyco International Ltd. 1,754,361
--------------
11,679,351
--------------
Electrical Equipment -- 2.7%
9,566 Cooper Industries, Inc. 525,532
22,911 General Electric Co. 2,084,901
6,056 Honeywell, Inc. 1,341,680
--------------
3,952,113
--------------
See notes to financial statements.
- --------------------------------------------------------------------------------
158
<PAGE>
-----------
MFS Growth
with Income
Series
-----------
11
-----------
- --------------------------------------------------------------------------------
Shares Value
- -----------------------------------------------------------------------
Entertainment -- 0.6%
3,540 CBS Corp. $ 112,395
5,500 Time Warner, Inc. 469,906
5,670 Viacom, Inc., "B"* 330,278
--------------
912,579
--------------
Financial Institutions -- 4.1%
5,610 Associates First Capital Corp., "A" 431,269
14,037 Beneficial Corp. 2,150,293
14,801 CIT Group, Inc., "A" 555,037
19,678 Federal Home Loan Mortgage Corp. 926,096
8,591 Heller Financial, Inc., "A"* 257,730
8,380 Household International, Inc. 416,905
6,413 Merrill Lynch & Co., Inc. 591,599
7,541 Morgan Stanley, Dean Witter & Co. 689,059
525 Waddell & Reed Financial, Inc., "A" 12,567
--------------
6,030,555
--------------
Food and Beverage Products -- 3.6%
13,282 Ace Ltd. 517,998
18,755 Archer-Daniels-Midland Co. 363,378
13,900 Bestfoods Co. 807,069
3,412 Coca-Cola Co. 291,726
850 Corn Products International, Inc.* 28,794
3,435 General Mills, Inc. 234,868
4,651 Hershey Foods Corp. 320,919
13,568 Interstate Bakeries Corp. 450,288
5,585 McCormick & Co., Inc. 199,489
8,000 Nabisco Holdings Corp., "A" 288,500
14,194 Ralston Purina Co. 1,658,037
--------------
5,161,066
--------------
Insurance -- 9.1%
18,265 Allstate Corp. 1,672,389
23,560 Chubb Corp. 1,893,635
21,158 CIGNA Corp. 1,459,902
2,183 Conseco, Inc. 102,055
17,670 Hartford Financial Services
Group, Inc. 2,021,006
11,357 Lincoln National Corp. 1,037,746
5,211 MBIA, Inc. 390,174
10,517 Progressive Corp. 1,482,897
32,308 Torchmark Corp. 1,478,091
7,798 Transamerica Corp. 897,745
13,376 Travelers Group, Inc. 810,920
--------------
13,246,560
--------------
Machinery -- 0.6%
9,300 Eaton Corp. 723,075
4,761 York International Corp. 207,401
--------------
930,476
--------------
Medical and Health Products -- 8.1%
40,146 American Home Products Corp. 2,077,555
31,811 Bristol-Myers Squibb Co. 3,656,277
15,893 Johnson & Johnson 1,172,109
7,171 McKesson Corp. 582,644
2,579 Merck & Co., Inc. 344,941
14,395 Pfizer, Inc. 1,564,557
11,700 Pharmacia & Upjohn, Inc. 539,662
1,865 Schering Plough Corp. 170,881
24,041 Warner-Lambert Co. 1,667,844
--------------
11,776,470
--------------
Medical and Health Technology and Services -- 3.4%
35,725 Columbia/HCA Healthcare Corp. 1,040,491
100 Fresenius National Medical Care, Inc.* 6
37,995 HEALTHSOUTH Corp.* 1,013,992
6,724 Medtronic, Inc. 428,655
29,935 Tenet Healthcare Corp.* 935,469
24,975 United Healthcare Corp. 1,585,912
--------------
5,004,525
--------------
Metals and Minerals -- 0.2%
4,671 Phelps Dodge Corp. 267,123
--------------
Oils -- 3.8%
3,390 Chevron Corp. 281,582
32,177 Exxon Corp. 2,294,622
14,351 Mobil Corp. 1,099,645
19,189 Texaco, Inc. 1,145,344
20,539 USX-Marathon Group 704,744
--------------
5,525,937
--------------
Photographic Products -- 0.0%
600 Eastman Kodak Co. 43,838
--------------
Pollution Control -- 0.8%
4,744 Browning Ferris Industries, Inc. 164,854
28,555 Waste Management, Inc. 999,425
--------------
1,164,279
--------------
Printing and Publishing -- 1.6%
19,039 Gannett Co., Inc. 1,352,959
See notes to financial statements.
- --------------------------------------------------------------------------------
159
<PAGE>
- -----------
MFS Growth
with Income
Series
- -----------
11
- -----------
- --------------------------------------------------------------------------------
MFS Growth with Income Series
- -----------------------------
SCHEDULE OF INVESTMENTS (continued)
June 30, 1998 (Unaudited)
Shares Value
- -----------------------------------------------------------------------
14,871 Tribune Co. $ 1,023,311
--------------
2,376,270
--------------
Railroads -- 1.0%
12,161 Burlington Northern
Santa Fe Railway Co. 1,194,058
4,749 CSX Corp. 216,080
--------------
1,410,138
--------------
Restaurants and Lodging -- 0.6%
9,148 Cendant Corp.* 190,964
9,170 McDonalds Corp. 632,730
--------------
823,694
--------------
Stores -- 5.9%
19,356 CVS Corp. 753,674
11,738 Home Depot, Inc. 974,988
5,343 Liz Claiborne, Inc. 279,172
11,555 Nordstrom, Inc. 892,624
9,776 Office Depot, Inc.* 308,555
23,859 Penney (J.C.), Inc. 1,725,304
35,927 Rite Aid Corp. 1,349,508
25,910 Sears, Roebuck & Co. 1,582,129
11,572 Wal-Mart Stores, Inc. 702,999
--------------
8,568,953
--------------
Supermarkets -- 1.3%
10,842 Kroger Co.* 464,851
500 Meyer (Fred), Inc. 21,250
34,390 Safeway, Inc.* 1,399,243
--------------
1,885,344
--------------
Telecommunications -- 3.1%
3,843 AirTouch Communications, Inc.* 224,575
11,600 Alltel Corp. 539,400
9,436 Cincinnati Bell, Inc. 270,106
4,619 Cisco Systems, Inc.* 425,237
4,823 Lucent Technologies, Inc. 401,213
16,786 MCI Communications Corp. 975,686
17,314 Sprint Corp. 1,220,637
9,000 WorldCom, Inc.* 435,938
--------------
4,492,792
--------------
Utilities - Electric -- 2.1%
3,659 Carolina Power & Light Co. 158,709
12,742 Cinergy Corp. 445,970
8,680 CMS Energy Corp. 381,920
7,119 FPL Group, Inc. 448,497
5,549 Illinova Corp. 166,470
3,362 New Century Energies, Inc. 152,761
5,975 Pinnacle West Capital Corp. 268,875
14,357 Texas Utilities Co. 597,610
8,849 Unicom Corp. 310,268
5,240 Wisconsin Energy Corp. 159,165
--------------
3,090,245
--------------
Utilities - Gas -- 0.9%
12,415 Columbia Gas System, Inc. 690,556
12,645 KN Energy, Inc. 685,201
--------------
1,375,757
--------------
Utilities - Telephone -- 1.8%
5,390 Bell Atlantic Corp. 245,919
8,462 BellSouth Corp. 568,012
19,884 GTE Corp. 1,106,047
18,270 SBC Communications, Inc. 730,800
--------------
2,650,778
--------------
Total U.S. Stocks $ 123,594,001
--------------
Foreign Stocks -- 8.0%
Bermuda -- 0.7%
12,656 Exel Ltd. (Insurance) 984,795
--------------
Canada -- 0.7%
18,121 Canadian National Railway Co.
(Railroads) 962,678
--------------
France -- 0.9%
23,365 Alcatel Alsthom Compagnie, ADR
(Telecommunications) 950,663
2,471 Sanofi S.A. (Medical and
Health Products) 290,178
--------------
1,240,841
--------------
Germany -- 0.5%
7,205 Henkel KGAA (Chemicals) 711,925
--------------
Japan -- 0.5%
14,880 AFLAC, Inc. (Insurance) 451,050
3,000 Sony Corp. (Electronics) 259,463
--------------
710,513
--------------
See notes to financial statements.
- --------------------------------------------------------------------------------
160
<PAGE>
-----------
MFS Growth
with Income
Series
-----------
11
-----------
Shares Value
- -----------------------------------------------------------------------
Netherlands -- 1.2%
4,836 Akzo Nobel N.V. (Chemicals) $ 1,073,822
8,187 Ing Groep N V, ADR
(Financial Services) 535,225
2,600 Ing Groep N.V. (Financial
Services)* 170,057
--------------
1,779,104
--------------
Sweden -- 0.8%
280 Mandamus Fastighet (Real Estate
Investment Trust)* 1,753
2,026 Securitas AB (Security Services) 99,080
63,300 Skandia Forsakrings AB (Insurance) 903,719
6,770 Sparbanken Sverige AB, "A"
(Banks and Credit Cos.) 203,482
--------------
1,208,034
--------------
Switzerland -- 0.7%
275 Nestle AG, Registered Shares
(Food and Beverage Products) 588,819
283 Novartis AG (Pharmaceuticals) 471,169
--------------
1,059,988
--------------
United Kingdom -- 2.0%
23,504 British Petroleum PLC, ADR (Oils) 2,074,228
22,377 Lloyds TSB Group PLC
(Banks and Credit Cos.)* 312,969
32,392 PowerGen PLC
(Utilities -- Electric)* 447,368
--------------
2,834,565
--------------
Total Foreign Stocks 11,492,443
--------------
Total Stocks (Identified Cost, $119,597,588) $ 135,086,444
--------------
- -----------------------
Preferred Stock -- 0.0%
- -----------------------
Consumer Goods and Services
200 Newell Financial Trust Co.##*
(Identified Cost, 11,325) 11,550
--------------
- -----------------------------------
Convertible Preferred Stock -- 0.4%
- -----------------------------------
Consumer Goods and Services -- 0.2%
4,398 Newell Financial Trust Co., 5.25%* $ 253,984
--------------
Utilities - Electric -- 0.2%
4,265 Houston Industries, Inc., 7% 317,742
--------------
Total Convertible Preferred Stock (Identified
Cost, $472,791) 571,726
--------------
- ------------------------------
Short-Term Obligations -- 5.8%
- ------------------------------
Principal
Amount
(000 Omitted) Value
- ----------------------------------------------------------------------
$ 4,870 Federal Home Loan Mortgage
Corp., due 7/01/98 $ 4,870,000
3,600 Federal National Mortgage Assn.,
due 7/06/98 3,597,285
--------------
Total Short-Term Obligations, at
Amortized Cost 8,467,285
--------------
Total Investments (Identified Cost,
$128,548,989) 144,137,005
Other Assets, Less Liabilities -- 0.9% 1,349,529
--------------
NET ASSETS -- 100.0% $ 145,486,534
=============
* Non-income producing security.
## SEC Rule 144A restriction.
See notes to financial statements.
- --------------------------------------------------------------------------------
161
<PAGE>
- -----------
MFS Growth
with Income
Series
- -----------
11
- -----------
- --------------------------------------------------------------------------------
MFS Growth with Income Series
- -----------------------------
STATEMENT OF ASSETS
AND LIABILITIES
June 30, 1998 (Unaudited)
ASSETS:
Investments, at value
(identified cost, $128,548,989) $144,137,005
Cash 4,459
Receivable for investments sold 683,691
Receivable for Series shares sold 3,128,053
Dividends receivable 181,991
Deferred organization expenses 4,169
Other assets 458
------------
TOTAL ASSETS $ 48,139,826
------------
LIABILITIES:
Payable for investments purchased $ 2,388,876
Payable for Series shares reacquired 251,735
Payable to affiliates --
Management fee 8,798
Shareholder servicing agent fee 411
Administrative fee 180
Accrued expenses and other liabilities 3,292
------------
TOTAL LIABILITIES $ 2,653,292
------------
NET ASSETS $145,486,534
============
NET ASSETS consist of:
Paid-in capital $127,634,780
Unrealized appreciation on investments and
translation of assets and liabilities in
foreign currencies 15,588,053
Accumulated undistributed net realized gain
on investments and foreign currency
transactions 1,883,700
Accumulated undistributed net investment
income 380,001
------------
TOTAL $145,486,534
============
SHARES OF BENEFICIAL
INTEREST OUTSTANDING 7,620,796
============
NET ASSET VALUE PER SHARE
(net assets/shares of beneficial interest
outstanding) $ 19.09
============
STATEMENT OF OPERATIONS
SIX MONTHS ENDED
June 30, 1998 (Unaudited)
NET INVESTMENT INCOME:
Income:
Dividends $ 708,005
Interest 161,099
Foreign taxes withheld (9,976)
------------
Total Investment Income $ 859,128
============
Expenses:
Management fee $ 359,345
Trustees' compensation 1,017
Shareholder servicing agent fee 16,825
Administrative fee 7,171
Printing 31,831
Custodian fee 19,993
Auditing fees 10,350
Amortization of organization expenses 918
Miscellaneous 11,490
------------
Total Expenses $ 458,940
Fees paid indirectly (1,236)
Preliminary reimbursement of expense to
investment adviser 21,423
------------
Net Expenses $ 479,127
------------
Net Investment Income $ 380,001
------------
Realized and Unrealized Gain (Loss) on
Investments:
Realized gain (loss) (identified
cost basis):
Investment transactions $ 2,041,914
Foreign currency transactions (2,071)
------------
Net Realized Gain on Investments and
Foreign Currency Transactions $ 2,039,843
Change in unrealized appreciation:
Investments $ 10,323,099
Translation of assets and liabilities in
foreign currencies 102
------------
Net Unrealized Gain on Investments and
Foreign Currency Translation $ 10,323,201
------------
Net Realized and Unrealized Gain on
Investments and Foreign Currency $ 12,363,044
------------
Increase in Net Assets from Operations $ 12,743,045
============
See notes to financial statements.
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<PAGE>
-----------
MFS Growth
with Income
Series
-----------
11
-----------
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
Six Months Year Ended
Ended December 31,
June 30, 1998 1997
(Unaudited) (Audited)
------------- ------------
Increase (decrease) in net assets:
From Operations:
Net investment income $ 380,001 $ 234,505
Net realized gain on investments and
foreign currency transactions 2,039,843 962,798
Net unrealized gain on investments and
foreign currency translation 10,323,201 4,430,038
------------ ------------
Increase in net assets from operations $ 12,743,045 $ 5,627,341
------------ ------------
Distributions declared to Shareholders:
From net investment income $ -- $ (236,004)
From net realized gain on investments and
foreign currency transactions -- (962,798)
In excess of net investment income -- (501)
In excess of net realized gain on investments
and foreign currency transactions -- (143,538)
------------ ------------
Total distributions declared to shareholders $ -- $ (1,342,841)
------------ ------------
Net Increase in Net Assets from Series Share
Transactions $ 74,698,419 $ 44,586,457
------------ ------------
Total increase in net assets $ 87,441,464 $ 48,870,957
Net Assets:
At beginning of period 58,045,070 9,174,113
------------ ------------
At end of period (including accumulated
undistributed net investment income
of $380,001 and $0, respectively) $145,486,534 $ 58,045,070
============ ============
See notes to financial statements.
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163
<PAGE>
- -----------
MFS Growth
with Income
Series
- -----------
11
- -----------
- --------------------------------------------------------------------------------
MFS Growth with Income Series
- -----------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited)
- ------------------------------
1 -- Business and Organization
- ------------------------------
MFS Growth with Income Series (the Series) is a diversified series of
MFS(R) Variable Insurance Trust(SM) (the Trust) which is comprised of the
following 13 series: MFS(R) Bond Series, MFS(R) Emerging Growth Series,
MFS(R)/Foreign & Colonial Emerging Markets Equity Series, MFS(R) Growth with
Income Series, MFS(R) High Income Series, MFS(R) Limited Maturity Series, MFS(R)
Money Market Series, MFS(R) New Discovery Series, MFS(R) Research Series, MFS(R)
Total Return Series, MFS(R) Utilities Series, MFS(R) Value Series, and MFS(R)
World Governments Series. The Series is organized as a Massachusetts business
trust and is registered under the Investment Company Act of 1940, as amended, as
an open-end management investment company. The shareholders of each Series of
the Trust are separate accounts of insurance companies which offer variable
annuity and/or life insurance products. As of June 30, 1998, there were 37
shareholders in the Series.
- ------------------------------------
2 -- Significant Accounting Policies
- ------------------------------------
General
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
disclosure 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. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of changes
in each country's legal, political, and economic environment.
Investment Valuations
Equity securities listed on securities exchanges or reported through the
NASDAQ system are reported at market value using last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are not
available are reported at market value using last quoted bid prices. Debt
securities (other than short-term obligations which mature in 60 days or less),
including listed issues, and forward contracts are valued on the basis of
valuations furnished by dealers or by a pricing service with consideration to
factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics,
and other market data, without exclusive reliance upon exchange or
over-the-counter prices. Short-term obligations, which mature in 60 days or
less, are valued at amortized cost, which approximates market value. Securities
for which there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Trustees.
Foreign Currency Translation
Investment valuations, other assets, and liabilities initially expressed
in foreign currencies are converted each business day into U.S. dollars based
upon current exchange rates. Purchases and sales of foreign investments, income,
and expenses are converted into U.S. dollars based upon currency exchange rates
prevailing on the respective dates of such transactions. Gains and losses
attributable to foreign currency exchange rates on sales of securities are
recorded for financial statement purposes as net realized gains and losses on
investments. Gains and losses attributable to foreign exchange rate movements on
income and expenses are recorded for financial statement purposes as foreign
currency transaction gains and losses. That portion of
- --------------------------------------------------------------------------------
164
<PAGE>
-----------
MFS Growth
with Income
Series
-----------
11
-----------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1998 (Unaudited)
both realized and unrealized gains and losses on investments that results from
fluctuations in foreign currency exchange rates is not separately disclosed.
Deferred Organization Expenses
Costs incurred by the Series in connection with its organization have been
deferred and are being amortized on a straight-line basis over a five-year
period beginning on the date of commencement of Series operations.
Forward Foreign Currency Exchange Contracts
The Series may enter into forward foreign currency exchange contracts for
the purchase or sale of a specific foreign currency at a fixed price on a future
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. The Series will enter into forward contracts for hedging purposes as
well as for non-hedging purposes. For hedging purposes, the Series may enter
into contracts to deliver or receive foreign currency it will receive from or
require for its normal investment activities. The Series may also use contracts
in a manner intended to protect foreign currency-denominated securities from
declines in value due to unfavorable exchange rate movements. For non-hedging
purposes, the Series may enter into contracts with the intent of changing the
relative exposure of the Series' portfolio of securities to different currencies
to take advantage of anticipated changes. The forward foreign currency exchange
contracts are adjusted by the daily exchange rate of the underlying currency and
any gains or losses are recorded as unrealized until the contract settlement
date. On contract settlement date, the gains or losses are recorded as realized
gains or losses on foreign currency transactions.
Investment Transactions and Income
Investment transactions are recorded on the trade date. Interest income is
recorded on the accrual basis. All discount is accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Dividends received in cash are recorded on the ex-dividend date. Dividend and
interest payments received in additional securities are recorded on the
ex-dividend or ex-interest date in an amount equal to the value of the security
on such date.
Fees Paid Indirectly
The Series' custody fee is calculated as a percentage of the Series'
month-end net assets. The fee is reduced according to an arrangement that
measures the value of cash deposited with the custodian by the Series. This
amount is shown as a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions
The Series' policy is to comply with the provisions of the Internal
Revenue Code (the Code) applicable to regulated investment companies and to
distribute to shareholders all of its taxable income, including any net realized
gain on investments. Accordingly, no provision for federal income or excise tax
is provided. The Series files a tax return annually using tax accounting methods
required under provisions of the Code, which may differ from generally accepted
accounting principles, the basis on which these financial statements are
prepared. Accordingly, the amount of net investment income and net realized gain
reported on these financial statements may differ from that reported on the
Series' tax return.
- --------------------------------------------------------------------------------
165
<PAGE>
- -----------
MFS Growth
with Income
Series
- -----------
11
- -----------
- --------------------------------------------------------------------------------
MFS Growth with Income Series
- -----------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1998 (Unaudited)
Distributions to shareholders are recorded on the ex-dividend date. The
Series distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits, which result in temporary
overdistributions for financial statement purposes, are classified as
distributions in excess of net investment income or net realized gains.
- ---------------------------------
3 -- Transactions with Affiliates
- ---------------------------------
Investment Adviser
The Series has an investment advisory agreement with Massachusetts
Financial Services Company (MFS) to provide overall investment advisory and
administrative services, and general office facilities. The management fee is
computed daily and paid monthly at an annual rate of 0.75% of average daily net
assets. The Series has a temporary expense reimbursement agreement whereby MFS
has voluntarily agreed to pay all of the Series' operating expenses, exclusive
of management fees. The Series in turn will pay MFS an expense reimbursement fee
not greater than 0.25% of average daily net assets. To the extent that the
expense reimbursement fee exceeds the Series' actual expenses, the excess will
be applied to amounts paid by MFS in prior years. At June 30, 1998, the
aggregate unreimbursed expenses owed to MFS by the Series amounted to $63,790.
The Series pays no compensation directly to its Trustees who are officers
of the investment adviser, or to officers of the Series, all of whom receive
remuneration for their services to the Series from MFS. Certain officers and
Trustees of the Series are officers or directors of MFS and MFS Service Center,
Inc. (MFSC).
Administrator
The Series has an administrative services agreement with MFS to provide
the Series with certain financial, legal, shareholder servicing, compliance, and
other administrative services. As a partial reimbursement for the cost of
providing these services, the Series pays MFS an administrative fee at the
following annual percentages of the Series' average daily net assets:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
Shareholder Servicing Agent
MFSC, a wholly-owned subsidiary of MFS, earns a fee for its services as
shareholder servicing agent. The fee is calculated as a percentage of the
Series' average daily net assets at an effective annual rate of 0.035%.
- -------------------------
4 -- Portfolio Securities
- -------------------------
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$87,657,731, and $16,414,592, respectively.
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Series, as computed on a federal income tax basis, are
as follows:
Aggregate cost $128,548,989
------------
Gross unrealized appreciation $ 16,820,296
Gross unrealized depreciation (1,232,280)
------------
Net unrealized appreciation $ 15,588,016
------------
- --------------------------------------------------------------------------------
166
<PAGE>
-----------
MFS Growth
with Income
Series
-----------
11
-----------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1998 (Unaudited)
- ----------------------------------
5 -- Shares of Beneficial Interest
- ----------------------------------
The Series' Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest (without
par value). Transactions in Series shares were as follows:
Six Months Ended Year Ended
6/30/98 12/31/97
------------------------ ------------------------
Shares Amount Shares Amount
--------- ------------ --------- ------------
Shares sold 4,712,988 $ 86,057,038 3,352,466 $ 52,088,636
Shares issued to
shareholders in
reinvestment of
distributions -- -- 83,407 1,342,841
Shares reacquired (622,888) (11,358,619) (611,729) (8,845,020)
--------- ------------ --------- ------------
Net increase 4,090,100 $ 74,698,419 2,824,144 $ 44,586,457
========= ============ ========= ============
- -------------------
6 -- Line of Credit
- -------------------
The Series and other affiliated funds participate in a $805 million
unsecured line of credit provided by a syndication of banks under a line of
credit agreement. Borrowings may be made to temporarily finance the repurchase
of Series shares. Interest is charged to each fund, based on its borrowings, at
a rate equal to the bank's base rate. In addition, a commitment fee, based on
the average daily unused portion of the line of credit, is allocated among the
participating funds at the end of each quarter. The commitment fee allocated to
the Series for the six months ended June 30, 1998, was $114.
- --------------------------------------------------------------------------------
167
<PAGE>
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with Income
Series
- -----------
11
- -----------
- --------------------------------------------------------------------------------
MFS Growth with Income Series
- -----------------------------
FINANCIAL HIGHLIGHTS
Per share data (for a share outstanding throughout each period):
<TABLE>
<CAPTION>
Six Months Ended Year Ended December 31,
June 30, 1998 -------------------------- Period Ended
(Unaudited) 1997 1996 December 31, 1995*
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 16.44 $ 12.98 $ 10.61 $ 10.00
----------- ----------- ----------- -----------
Income from investment operations#:
Net investment income### $ 0.07 $ 0.16 $ 0.18 $ 0.05
Net realized and unrealized gain on investments
and foreign currency transactions 2.58 3.70 2.42 0.61
----------- ----------- ----------- -----------
Total from investment operations $ 2.65 $ 3.86 $ 2.60 $ 0.66
----------- ----------- ----------- -----------
Less distributions declared to shareholders:
From net investment income $ -- $ (0.07) $ (0.09) $ (0.05)
From net realized gain on investments and
foreign currency transactions -- (0.29) (0.13) --
In excess of net realized gain on investments
and foreign currency transactions -- (0.04) (0.01) --
----------- ----------- ----------- -----------
Total distributions declared to shareholders $ -- $ (0.40) $ (0.23) $ (0.05)
----------- ----------- ----------- -----------
Net asset value, end of period $ 19.09 $ 16.44 $ 12.98 $ 10.61
=========== =========== =========== ===========
Total return 16.12%+ 29.78% 24.46% 6.64%++
Ratios (to average net assets)/Supplemental Data ss.:
Expenses 1.00%+ 1.00% 1.00% 1.00%+
Net investment income 0.79%+ 0.93% 1.52% 2.20%+
Portfolio turnover 18% 42% 41% 2%
Net assets at end of period (000 omitted) $ 145,487 $ 58,045 $ 9,174 $ 365
</TABLE>
* For the period from the commencement of the Series' investment operations,
October 9, 1995, through December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Series' expenses are calculated without reduction for fees paid
indirectly.
ss. Subject to reimbursement by the Series, the investment adviser voluntarily
agreed to maintain the expenses of the Series, exclusive of management
fees, at not more than 0.25% of average daily net assets. To the extent
actual expenses were over/under this limitation, the net investment income
(loss) per share and the ratios would have been:
<TABLE>
<S> <C> <C> <C> <C>
Net investment income (loss) $ 0.07 $ 0.13 $ 0.05 $ (0.41)
Ratios (to average net assets):
Expenses## 0.96%+ 1.10% 2.07% 21.44%+
Net investment income (loss) 0.83%+ 0.82% 0.46% (18.24)%+
</TABLE>
See notes to financial statements.
- --------------------------------------------------------------------------------
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<PAGE>
- -------------
MFS Emerging
Growth Series
- -------------
12
- -------------
- --------------------------------------------------------------------------------
MFS Emerging Growth Series
- ---------------------------------------
SCHEDULE OF INVESTMENTS
June 30, 1998 (Unaudited)
- ---------------
STOCKS -- 95.6%
- ---------------
Shares Value
- ------------------------------------------------------------------------
U.S. Stocks - 90.2%
Advertising
700 Doubleclick, Inc.* $ 34,781
Aerospace - 0.4%
62,000 Gulfstream Aerospace Corp.* 2,883,000
------------
Automotive
3,000 Federal Mogul Corp. 202,500
370 Hayes Lemmerz International, Inc.* 14,708
------------
217,208
------------
Biotechnology
1,100 Waters Corp.* 64,831
------------
Broadcasting
6,100 Citadel Communications Corp. 97,600
------------
Business Machines - 0.6%
53,200 Affiliated Computer Services, Inc., "A"* 2,048,200
40,500 Compaq Computer Corp. 1,149,188
23,800 Sun Microsystems, Inc.* 1,033,812
------------
4,231,200
------------
Business Services - 6.0%
279,600 AccuStaff, Inc.* 8,737,500
41,700 BISYS Group, Inc.* 1,709,700
30,600 Ceridian Corp.* 1,797,750
53,596 Computer Learning Centers, Inc.* 1,333,201
93,800 Computer Sciences Corp.* 6,003,200
5,500 DA Consulting Group, Inc.* 79,063
34,900 DST Systems, Inc.* 1,954,400
148,900 First Data Corp. 4,960,231
1,500 Fiserv, Inc.* 63,703
2,200 Interim Services, Inc.* 70,675
114,900 Learning Tree International, Inc.* 2,312,362
20,400 Metamor Worldwide, Inc.* 717,825
15,600 NOVA Corp.* 557,700
95,600 Policy Management Systems Corp.* 3,752,300
1,400 Professional Detailing, Inc.* 34,825
96,500 Renaissance Worldwide, Inc.* 2,098,875
118,275 Technology Solutions Co.* 3,747,839
------------
39,931,149
------------
Cellular Telephones - 0.5%
67,850 Century Telephone Enterprises, Inc. 3,112,619
------------
Computer Software - Personal Computers - 4.8%
21,185 Autodesk, Inc. 818,271
287,500 Microsoft Corp.* 31,157,812
------------
31,976,083
------------
Computer Software - Services - 0.1%
1,500 International Integration, Inc.* 25,875
40,000 Mobius Management Systems, Inc.* 600,000
------------
625,875
------------
Computer Software - Systems - 19.3%
1,300 Aspen Technology, Inc.* 65,650
526,900 BMC Software, Inc.* 27,365,869
574,700 Cadence Design Systems, Inc.* 17,959,375
550,500 Computer Associates International, Inc. 30,587,156
467,300 Compuware Corp.* 23,890,712
1,200 Keane, Inc.* 67,200
2,300 Learning Co., Inc.* 68,138
983,750 Oracle Corp.* 24,163,359
21,300 Siebel Systems, Inc.* 686,925
7,300 SunGard Data Systems, Inc.* 280,137
93,300 Synopsys, Inc.* 4,268,475
1,500 Whittman-Hart, Inc.* 72,563
------------
129,475,559
------------
Conglomerates
2,300 Sodexho Marriott Services, Inc.* 66,700
------------
Consumer Goods and Services - 5.4%
69,300 Carson, Inc., "A"* 545,738
36,700 Rubbermaid, Inc. 1,217,981
546,162 Tyco International Ltd. 34,408,206
------------
36,171,925
------------
Defense Electronics - 0.3%
65,900 Loral Space & Communications Corp.* 1,861,675
------------
Electrical Equipment - 0.1%
22,500 Cable Design Technologies Corp.* 464,063
------------
See notes to financial statements.
- --------------------------------------------------------------------------------
170
<PAGE>
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MFS Emerging
Growth Series
-------------
12
-------------
- --------------------------------------------------------------------------------
Shares Value
- ------------------------------------------------------------------------
Electronics - 0.6%
113,100 Altera Corp.* $ 3,343,519
4,600 Intel Corp. 340,975
17,700 Xilinx, Inc.* 601,800
------------
4,286,294
------------
Entertainment - 6.2%
121,100 CBS Corp. 3,844,925
52,600 Clear Channel Communications, Inc.* 5,739,975
51,000 Cox Radio, Inc., "A"* 2,205,750
20,400 Gemstar International Group Ltd.* 763,725
77,200 Harrah's Entertainment, Inc.* 1,794,900
19,400 Hearst-Argyle Television, Inc.* 776,000
24,400 Heftel Broadcasting Corp., "A"* 1,091,900
82,100 Jacor Communications, Inc.* 4,843,900
17,000 Premier Parks, Inc.* 1,132,625
85,000 Time Warner, Inc. 7,262,187
62,000 Univision Communications, Inc., "A"* 2,309,500
164,400 Viacom, Inc., "B"* 9,576,300
------------
41,341,687
------------
Financial Institutions - 2.1%
18,200 ARM Financial Group, Inc., "A" 402,675
23,800 Associates First Capital Corp., "A" 1,829,625
70,500 Consolidated Capital Corp.* 1,585,148
20,200 Donaldson Lufkin & Jenrette, Inc. 1,026,413
97,500 Franklin Resources, Inc. 5,265,000
36,200 Morgan Stanley Dean Witter & Co. 3,307,775
5,000 U.S. Trust Corp. 381,250
------------
13,797,886
------------
Food and Beverage Products
1,100 Suiza Foods Corp.* 65,656
------------
Insurance - 0.3%
12,900 Ace Ltd. 503,100
32,680 Annuity and Life Re Holdings Ltd.* 723,045
6,900 Conseco, Inc. 322,575
7,500 Life Re Corp. 621,563
------------
2,170,283
------------
Machinery
22,850 SI Handling Systems, Inc. 299,906
------------
Medical and Health Products - 2.2%
39,500 Boston Scientific Corp.* 2,829,187
40,500 McKesson Corp. 3,290,625
12,900 PSS World Medical, Inc.* 188,663
182,400 U.S. Surgical Corp. 8,322,000
------------
14,630,475
------------
Medical and Health Technology and Services - 7.7%
22,400 Cardinal Health, Inc. 2,100,000
25,500 Columbia/HCA Healthcare Corp. 742,687
18,100 Guidant Corp. 1,290,756
173,000 HBO & Co. 6,098,250
6,600 Health Management Associates, Inc., "A"* 220,688
209,600 HealthSouth Corp.* 5,593,700
40,100 Integrated Health Services, Inc. 1,503,750
25,800 Medtronic, Inc. 1,644,750
59,300 Orthodontic Centers of America, Inc.* 1,241,594
37,000 PacifiCare Health Systems, Inc., "B"* 3,269,875
1,000 Province Healthcare Co.* 27,688
13,900 Steris Corp.* 883,953
96,730 Total Renal Care Holdings, Inc.* 3,337,185
324,200 United Healthcare Corp. 20,586,700
37,600 Wellpoint Health Networks, Inc., "A"* 2,782,400
------------
51,323,976
------------
Pharmaceuticals
16,000 King Pharmaceuticals, Inc.* 224,000
------------
Pollution Control - 0.2%
1,400 American Disposal Services, Inc.* 65,625
32,000 U.S.A. Waste Services, Inc.* 1,580,000
------------
1,645,625
------------
Printing and Publishing
50 Workflow Management, Inc.* 403
------------
Restaurants and Lodging - 5.3%
49,200 Applebee's International, Inc. 1,100,850
106,100 Buffets, Inc.* 1,664,444
1,349,404 Cendant Corp.* 28,168,808
1,700 Outback Steakhouse, Inc.* 66,300
115,982 Promus Hotel Corp.* 4,465,307
1,700 Showbiz Pizza Time, Inc.* 68,531
------------
35,534,240
------------
See notes to financial statements.
- --------------------------------------------------------------------------------
171
<PAGE>
- -------------
MFS Emerging
Growth Series
- -------------
12
- -------------
- --------------------------------------------------------------------------------
MFS Emerging Growth Series
- ---------------------------------------
SCHEDULE OF INVESTMENTS (Continued)
June 30, 1998 (Unaudited)
Shares Value
- ------------------------------------------------------------------------
Special Products and Services - 0.3%
5,800 Central Parking Corp. 269,700
63,500 Newport News Shipbuilding, Inc. 1,698,625
50 School Specialty, Inc. 819
------------
1,969,144
------------
Stores - 11.0%
1,800 Borders Group, Inc.* 66,600
16,700 Consolidated Stores Corp.* 605,375
186,600 Corporate Express, Inc.* 2,367,487
142,200 CVS Corp. 5,536,912
8,325 Dollar General Corp. 329,358
2,100 Duane Reade, Inc.* 63,000
37,800 General Nutrition Cos., Inc.* 1,176,525
179,600 Home Depot, Inc. 14,918,025
23,900 Kohl's Corp.* 1,239,812
18,600 Linens 'N Things, Inc.* 568,463
144,800 Lowes Co., Inc. 5,873,450
142,800 Micro Warehouse, Inc.* 2,213,400
408,600 Office Depot, Inc.* 12,896,437
14,700 Proffitts, Inc.* 593,513
401,000 Republic Industries, Inc.* 10,025,000
286,500 Rite Aid Corp. 10,761,656
148,550 Staples, Inc.* 4,298,666
2,100 Viking Office Products, Inc.* 65,888
------------
73,599,567
------------
Supermarkets - 1.8%
235,800 Meyer (Fred), Inc.* 10,021,500
47,000 Safeway, Inc.* 1,912,312
------------
11,933,812
------------
Telecommunications - 14.8%
46,500 AirTouch Communications, Inc.* 2,717,344
9,700 Amdocs Ltd.* 146,713
36,400 American Tower Corp., "A"* 907,725
9,900 Aspect Telecommunications Corp.* 271,012
393,050 Cisco Systems, Inc.* 36,185,166
155,380 Global TeleSystems Group, Inc.* 7,574,775
224,800 Intermedia Communications, Inc.* 9,427,550
2,100 L-3 Communications Holding, Inc.* 68,250
79,300 Lucent Technologies, Inc. 6,596,769
242,600 MCI Communications Corp. 14,101,125
50,400 Sprint Corp. 3,553,200
80,900 Tel-Save Holdings, Inc.* 1,193,275
44,500 Tellabs, Inc.* 3,187,312
267,900 WorldCom, Inc.* 12,976,406
------------
98,906,622
------------
Transportation - 0.2%
27,900 Coach USA, Inc.* 1,272,938
------------
Total U.S. Stocks 604,216,782
------------
- ---------------------
Foreign Stocks - 5.4%
- ---------------------
Germany - 3.8%
37,225 SAP AG, Preferred (Computer Software
- Systems) 25,242,527
------------
Netherlands - 0.1%
22,100 Elsag Bailey Process Automation N.V.
(Machinery)* 531,781
------------
Sweden - 0.4%
220,450 Saab AB, "B" (Aerospace) 2,319,073
39,000 Skandia Forsakrings AB (Insurance) 556,794
------------
2,875,867
------------
United Kingdom - 1.1%
1,300 ARM Holdings PLC (Computer Software -
Systems)* 24,937
22,800 ARM Holdings PLC, ADR (Computer
Software - Systems)* 1,396,500
1,200 CBT Group PLC, ADR (Computer Software
- Personal Computers) 64,200
174,600 Danka Business Systems, ADR (Business
Services) 2,062,463
300 ICON PLC, ADR (Biotechnology)* 7,575
224,600 Sema Group PLC (Computer Software -
Systems) 2,641,165
543,300 Taylor Nelson Sofres PLC (Market Research) 1,114,657
------------
7,311,497
------------
Total Foreign Stocks 35,961,672
------------
Total Stocks (Identified Cost, $505,156,262) 640,178,454
------------
See notes to financial statements.
- --------------------------------------------------------------------------------
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<PAGE>
-------------
MFS Emerging
Growth Series
-------------
12
-------------
- --------------------------------------------------------------------------------
Principal
Amount Value
- ------------------------------------------------------------------------
- -----------------------------
Short-Term Obligations - 4.4%
- -----------------------------
$4,130 Federal Home Loan Bank, due 7/01/98 4,130,000
15,500 Federal Home Loan Mortgage Corp., due
7/14/98 -7/23/98 15,458,590
10,000 Federal National Mortgage Assn., due
7/17/98 9,975,715
------------
Total Short-Term Obligations, at Amortized Cost 29,564,305
------------
Total Investments (Identified Cost, $534,720,567) 669,742,759
------------
Other Assets, Less Liabilities 85,884
------------
NET ASSETS - 100.0% 669,828,643
============
* Non-income producing security.
See notes to financial statements.
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MFS Emerging
Growth Series
- -------------
12
- -------------
- --------------------------------------------------------------------------------
MFS Emerging Growth Series
- ---------------------------------------
STATEMENT OF ASSETS
AND LIABILITIES
Assets:
Investments, at value (identified cost
$534,720,567) $669,742,759
Cash 1,179
Receivable for Series shares sold 8,703,548
Receivable for investments sold 1,580,981
Interest and dividends receivable 83,589
Deferred organization expenses 3,799
Other assets 2,522
------------
Total Assets 680,118,377
------------
Liabilities:
Payable for Series shares reacquired 2,644,405
Payable for investments purchased 7,424,784
Payable to affiliates --
Management fee 40,840
Shareholder servicing agent fee 1,906
Administrative fee 817
Accrued expenses and other liabilities 176,982
------------
Total Liabilities 10,289,734
------------
Net Assets $669,828,643
============
Net Assets consist of:
Paid-in capital $532,387,124
Unrealized appreciation on investments and
translation of assets and liabilities in
foreign currencies 135,022,066
Accumulated undistributed net realized gain
on investments and foreign currency
transactions 2,589,298
Accumulated net investment loss (169,845)
------------
Total Net Assets $669,828,643
============
Shares of Beneficial Interest Outstanding $ 34,438,963
============
Net Asset Value, offering price, and
redemption price per share (net assets
shares of beneficial interest outstanding) $ 19.45
============
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1998
(Unaudited)
Net Investment Income (Loss):
Income:
Interest $ 839,881
Dividends 1,247,024
Foreign taxes withheld (9,573)
------------
Total Investment Income 2,077,332
------------
Expenses:
Management fee 1,946,932
Trustees' compensation 1,017
Shareholder servicing agent fee 90,834
Administrative fee 39,027
Auditing fees 1,050
Printing 85,574
Legal fees 1,011
Custodian fee 93,718
Amortization of organization expenses 911
Miscellaneous 8,627
------------
Total Expenses 2,268,701
Fees paid indirectly (21,524)
------------
Net Expenses 2,247,177
------------
Net Investment Loss (169,845)
============
Realized and Unrealized Gain (Loss) on
Investments:
Investment transactions 5,822,534
Foreign currency transactions (1,454)
------------
Net realized gain on investments and foreign
currency transactions 5,821,080
------------
Change in unrealized appreciation
(depreciation) -- Investments 90,375,640
Translation of assets and liabilities in
foreign currency (474)
------------
Net unrealized gain on investments and foreign
currency translation 90,375,166
------------
Net realized and unrealized gain on investments
and foreign currency 90,196,246
------------
Increase in net assets from operations $ 96,026,401
============
See notes to financial statements.
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<PAGE>
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MFS Emerging
Growth Series
-------------
12
-------------
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES
IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1998 December 31,
(Unaudited) 1997
------------- -------------
<S> <C> <C>
Increase (decrease) in net assets:
From Operations:
Net investment income $ (169,845) $ (966,728)
Net realized gain on investments and foreign
currency transactions 5,821,080 5,389,134
Net unrealized gain on investments and
foreign currency translation 90,375,166 42,663,050
------------- -------------
Increase in net assets from operations 96,026,401 47,085,456
------------- -------------
Distributions declared to shareholders from net
realized gain on investments and foreign
currency transactions (4,774,635) --
------------- -------------
Net increase in net assets from Series share
transactions 194,096,617 232,438,500
------------- -------------
Total increase in net assets 285,348,383 279,523,956
Net Assets:
At beginning of period 384,480,260 104,956,304
------------- -------------
At end of period (including accumulated net
investment loss of 169,845 and 0,
respectively) $ 669,828,643 $ 384,480,260
============= =============
</TABLE>
See notes to financial statements.
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<PAGE>
- -------------
MFS Emerging
Growth Series
- -------------
12
- -------------
- --------------------------------------------------------------------------------
MFS Emerging Growth Series
- ---------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited)
- ---------------------------
1 Business and Organization
- ---------------------------
MFS Emerging Growth Series (the Series) is a diversified series of MFS(R)
Variable Insurance Trust(SM) (the Trust) which comprises the following 13
series: MFS(R) Bond Series, MFS Emerging Growth Series, MFS(R)/Foreign &
Colonial Emerging Markets Equity Series, MFS(R) Growth with Income Series,
MFS(R) High Income Series, MFS(R) Limited Maturity Series, MFS(R) Money Market
Series, MFS(R) New Discovery Series, MFS(R) Research Series, MFS(R) Total Return
Series, MFS(R) Utilities Series, MFS(R) Value Series and MFS(R) World Government
Series. The Series is organized as a Massachusetts business trust and is
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company. The shareholders of each Series of the Trust are
separate accounts of insurance companies which offer variable annuity and/or
life insurance products. As of June 30, 1998, there were 67 shareholders of the
Series.
- ---------------------------------
2 Significant Accounting Policies
- ---------------------------------
General
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
disclosure 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. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of changes
in each country's legal, political, and economic environment.
Investment Valuations
Equity securities listed on securities exchanges or reported through the
NASDAQ system are reported at market value using last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are not
available are reported at market value using last quoted bid prices. Short-term
obligations, which mature in 60 days or less, are valued at amortized cost,
which approximates market value. Securities for which there are no such
quotations or valuations are valued at fair value as determined in good faith by
or at the direction of the Trustees.
Foreign Currency Translation
Investment valuations, other assets, and liabilities initially expressed
in foreign currencies are converted each business day into U.S. dollars based
upon current exchange rates. Purchases and sales of foreign investments, income,
and expenses are converted into U.S. dollars based upon currency exchange rates
prevailing on the respective dates of such transactions. Gains and losses
attributable to foreign currency exchange rates on sales of securities are
recorded for financial statement purposes as net realized gains and losses on
investments. Gains and losses attributable to foreign exchange rate movements on
income and expenses are recorded for financial statement purposes as foreign
currency transaction gains and losses. That portion of both realized and
unrealized gains and losses on investments that results from fluctuations in
foreign currency exchange rates is not separately disclosed.
Deferred Organization Expenses
Costs incurred by the Series in connection with its organization have been
deferred and are being amor-
- --------------------------------------------------------------------------------
176
<PAGE>
-------------
MFS Emerging
Growth Series
-------------
12
-------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited) (Continued)
tized on a straight-line basis over a five-year period beginning on the date of
commencement of Series operations.
Investment Transactions and Income
Investment transactions are recorded on the trade date. Interest income is
recorded on the accrual basis. All discount is accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Dividends received in cash are recorded on the ex-dividend date. Dividend and
interest payments received in additional securities are recorded on the
ex-dividend or ex-interest date in an amount equal to the value of the security
on such date.
Fees Paid Indirectly
The Series' custody fee is calculated as a percentage of the Series' month
end net assets. The fee is reduced according to an arrangement that measures the
value of cash deposited with the custodian by the Series. This amount is shown
as a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions
The Series' policy is to comply with the provisions of the Internal
Revenue Code (the Code) applicable to regulated investment companies and to
distribute to shareholders all of its taxable income, including any net realized
gain on investments. Accordingly, no provision for federal income or excise tax
is provided.
The Series files a tax return annually using tax accounting methods
required under provisions of the Code, which may differ from generally accepted
accounting principles, the basis on which these financial statements are
prepared. Accordingly, the amount of net investment income and net realized gain
reported on these financial statements may differ from that reported on the
Series' tax return.
Distributions to shareholders are recorded on the ex-dividend date. The
fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits, which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or net realized gains.
- ------------------------------
3 Transactions with Affiliates
- ------------------------------
Investment Adviser
The Series has an investment advisory agreement with Massachusetts
Financial Services Company (MFS) to provide overall investment advisory and
administrative services, and general office facilities. The management fee is
computed daily and paid monthly at an annual rate of 0.75% of average daily net
assets.
Administrator
The Series has an administrative services agreement with MFS to provide
the Series with certain financial, legal, shareholder servicing, compliance, and
other administrative services. As a partial reimbursement for the cost of
providing these services, the Series pays MFS an administrative fee at the
following annual percentages of the Series' average daily net assets:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
The Series pays no compensation directly to its
- --------------------------------------------------------------------------------
177
<PAGE>
- -------------
MFS Emerging
Growth Series
- -------------
12
- -------------
- --------------------------------------------------------------------------------
MFS Emerging Growth Series
- ---------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited) (Continued)
Trustees who are officers of the investment adviser, or to officers of the
Series, all of whom receive remuneration for their services to the Series from
MFS. Certain officers and Trustees of the Series are officers or directors of
MFS and MFS Service Center, Inc. (MFSC).
Shareholder Servicing Agent -- MFSC, a wholly owned subsidiary of MFS,
earns a fee for its services as shareholder servicing agent. The fee is
calculated as a percentage of the Series' average daily net assets at an
effective annual rate of 0.035%.
- ----------------------
4 Portfolio Securities
- ----------------------
Purchases and sales of investments, other than short-term obligations,
aggregated $306,912,583 and $128,350,028, respectively.
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Series, as computed on a federal income tax basis, are
as follows:
Aggregate cost $ 534,720,567
-------------
Gross unrealized appreciation $ 153,172,349
Gross unrealized depreciation (18,150,157)
-------------
Net unrealized appreciation $ 135,022,192
-------------
- -------------------------------
5 Shares of Beneficial Interest
- -------------------------------
The Series' Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest (without
par value). Transactions in Series shares were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended Six Months Ended Year Ended
June 30, December 31, June 30, December 31,
1998 1997 1998 1997
(Unaudited) (Audited) (Unaudited) (Audited)
- -----------------------------------------------------------------------------------------------------
Shares Amount
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 17,207,070 $ 314,252,317 30,029,411 $ 444,027,559
Shares issued to shareholders in
reinvestment of distributions 257,393 4,774,635 -- --
Shares reacquired (6,858,359) (124,930,335) (14,125,232) (211,589,059)
- -----------------------------------------------------------------------------------------------------
Net increase 10,606,104 $ 194,096,617 15,904,179 $ 232,438,500
- -----------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
178
<PAGE>
-------------
MFS Emerging
Growth Series
-------------
12
-------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited) (Continued)
- ----------------
6 Line of Credit
- ----------------
The Series and other affiliated funds participate in an $805 million
unsecured line of credit provided by a syndication of banks under a line of
credit agreement. Borrowings may be made to temporarily finance the repurchase
of Series shares. Interest is charged to each fund, based on its borrowings, at
a rate equal to the bank's base rate. In addition, a commitment fee, based on
the average daily unused portion of the line of credit, is allocated among the
participating funds at the end of each quarter. The commitment fee allocated to
the Series for the six months ended June 30, 1998, was $675.
- --------------------------------------------------------------------------------
179
<PAGE>
- -------------
MFS Emerging
Growth Series
- -------------
12
- -------------
- --------------------------------------------------------------------------------
MFS Emerging Growth Series
- ---------------------------------------
FINANCIAL HIGHLIGHTS
Per share data (for a share outstanding throughout each period):
<TABLE>
<CAPTION>
Six Months Ended Year Ended December 31, Period Ended
June 30, 1998 ----------------------- December 31,
(Unaudited) 1997 1996 1995*
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Operating performance:
Net asset value, beginning of period ............. $ 16.13 $ 13.24 $ 11.41 $ 10.00
----------- ----------- ----------- -----------
Income from investment operations:
Net investment income (loss) ................... $ (0.01) $ (0.06) $ (0.01) $ 0.01
Net realized and unrealized gain on
investments and foreign currency transactions . 3.50 2.95 1.95 1.74
----------- ----------- ----------- -----------
Total from investment operations ................. $ 3.49 $ 2.89 $ 1.94 $ 1.75
----------- ----------- ----------- -----------
Less distributions declared to shareholders:
From net investment income ....................... -- -- -- (0.01)
From net realized gain on investments
and foreign currency transactions .............. (0.17) -- (0.06) (0.26
In excess of net realized gain on investments
and foreign currency transactions .............. -- -- (0.05) --
From capital ..................................... -- -- -- (0.07)
----------- ----------- ----------- -----------
Total distributions declared to shareholders ..... $ (0.17) $ -- $ (0.11) $ (0.34)
----------- ----------- ----------- -----------
Net asset value, end of period ...................... $ 19.45 $ 16.13 $ 13.24 $ 11.41
=========== =========== =========== ===========
Total return ..................................... 21.54%++ 21.90% 17.02% 17.41%++
=========== =========== =========== ===========
Ratios (to average net assets) Supplemental data(s):
Expenses ......................................... 0.88%+ 0.90% 1.00% 1.00%+
Net investment income (loss) ..................... (0.07)%+ (0.38)% (0.08)% 0.10%+
Portfolio turnover .................................. 26% 112% 96% 73%
Net assets at end of period (in 000's) .............. $ 669,829 $ 384,480 $ 104,956 $ 3,869
- ----------
* For the period from the commencement of the Series' investment operations,
July 24, 1995, through December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Series' expenses are calculated without reduction for fees paid
indirectly.
(S) Prior to January 1, 1998, subject to reimbursement by the Series, the
investment adviser voluntarily agreed to maintain the expenses of the
Series, exclusive of management fees, at no more than 0.25% of average
daily net assets. To the extent actual expenses were over or under these
limitations, the net investment loss per share and the ratios would have
been:
<S> <C> <C> <C> <C>
Net investment loss ................................. -- $(0.05) $(0.03) $(0.18)
Ratios (to average net assets):
Expenses##........................................... -- 0.87% 1.16% 2.91%+
Net investment loss ................................. -- (0.35)% (0.23)% (1.78)%+
</TABLE>
See notes to financial statements.
- --------------------------------------------------------------------------------
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<PAGE>
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- --------------------------------------------------------------------------------
181
<PAGE>
- -------------
MFS Total
Return Series
- -------------
13
- -------------
- --------------------------------------------------------------------------------
MFS Total Return Series
- ---------------------------------------
SCHEDULE OF INVESTMENTS
June 30, 1998 (Unaudited)
- --------------
STOCKS - 57.9%
- --------------
Shares Value
- ------------------------------------------------------------------------
U.S. STOCKS -- 49.5%
Aerospace -- 3.4%
32,100 Allied Signal, Inc. $111,424,437
14,000 General Dynamics Corp .651,000
8,450 Goodrich (B.F.) Co. 419,331
6,300 Lockheed-Martin Corp.6 67,013
4,779 Raytheon Co., "A" 275,390
9,550 Raytheon Co., "B" 564,644
1,480 United Technologies Corp. 136,900
------------
4,138,715
------------
Automotive -- 1.2%
7,400 Ford Motor Co. 436,600
18,600 TRW, Inc. 1,016,025
------------
1,452,625
------------
Banks and Credit Companies -- 4.2%
12,560 Bank of New York, Inc. 762,235
2,650 Fleet Financial Group, Inc. 221,275
20,600 National City Corp. 1,462,600
8,080 NationsBank Corp. 618,120
5,500 Northern Trust Corp. 419,375
15,000 Norwest Corp. 560,625
22,100 PNC Bank Corp. 1,189,256
------------
5,233,486
------------
Business Machines -- 1.2%
12,520 International Business Machines Corp. 1,437,452
------------
Cellular Telephones -- 0.1%
4,500 Telephone & Data Systems, Inc. 177,188
------------
Chemicals -- 0.5%
12,200 Air Products & Chemicals, Inc. 488,000
980 Dow Chemical Co. 94,754
------------
582,754
------------
Computer Software -- Personal Computers
1,512 Compaq Computer Corp. 42,903
------------
Conglomerates
1,400 Eastern Enterprises 60,025
------------
Consumer Goods and Services -- 2.0%
1,000 Colgate-Palmolive Co. 88,000
8,200 Kimberly-Clark Corp. 376,175
19,630 Philip Morris Cos., Inc. 772,931
13,110 Rubbermaid, Inc. 435,088
7,657 Service Corp. International 328,294
7,000 Tyco International Ltd. 441,000
------------
2,441,488
------------
Electrical Equipment -- 2.2%
10,900 Cooper Industries, Inc. 598,819
17,800 General Electric Co. 1,619,800
11,500 Hubbell, Inc. 478,687
------------
2,697,306
------------
Electronics -- 0.1%
6,000 Analog Devices, Inc.* 147,375
------------
Entertainment -- 0.8%
16,100 Viacom, Inc., "B"* 937,825
------------
Financial Institutions -- 2.9%
3,490 American Express Co. 397,860
5,373 Associates First Capital Corp., "A" 413,049
1,200 Beneficial Corp. 183,825
7,950 Edwards (A.G.), Inc. 339,366
14,340 Federal Home Loan Mortgage Corp. 674,876
6,300 Federal National Mortgage Assn. 382,725
700 Federated Investors, Inc., "A"* 12,950
7,282 First Union Corp. 424,176
2,900 Morgan (J.P.) & Co. 339,663
4,300 Morgan Stanley, Dean Witter & Co. 392,913
------------
3,561,403
------------
Food and Beverage Products -- 1.1%
38,200 Archer-Daniels-Midland Co. 740,125
5,150 General Mills, Inc. 352,131
7,500 McCormick & Co., Inc. 267,891
------------
1,360,147
------------
Forest and Paper Products -- 1.1%
12,800 Champion International Corp. 629,600
16,200 Weyerhaeuser Co. 748,238
------------
1,377,838
------------
Insurance -- 6.0%
16,100 Chubb Corp. 1,294,037
13,700 CIGNA Corp. 945,300
See notes to financial statements.
- --------------------------------------------------------------------------------
182
<PAGE>
-------------
MFS Total
Return Series
-------------
13
-------------
- --------------------------------------------------------------------------------
Shares Value
- ------------------------------------------------------------------------
11,200 Equitable Cos., Inc. $ 839,300
11,600 Jefferson Pilot Corp. 672,075
15,600 Lincoln National Corp. 1,425,450
13,200 Provident Cos., Inc. 455,400
21,400 Torchmark Corp. 979,050
6,800 Transamerica Corp. 782,850
------------
7,393,462
------------
Machinery -- 0.4%
3,150 Deere & Co., Inc. 166,556
5,100 Lear Corp.* 261,694
780 York International Corp. 33,979
------------
462,229
------------
Medical and Health Products -- 2.8%
20,560 American Home Products Corp. 1,063,980
2,480 Baxter International, Inc. 133,455
19,300 Bristol-Myers Squibb Co. 2,218,294
------------
3,415,729
------------
Medical and Health Technology and Services -- 1.0%
27,100 Columbia/HCA Healthcare Corp. 789,288
7,000 United Healthcare Corp. 444,500
------------
1,233,788
------------
Metals and Minerals -- 0.4%
7,750 Aluminum Cos. of America 511,016
------------
Oil Services -- 0.3%
5,100 Baker Hughes, Inc. 176,269
3,400 Schlumberger Ltd. 232,262
------------
408,531
------------
Oils -- 3.9%
7,780 Amoco Corp. 323,843
8,620 Atlantic Richfield Co. 673,437
10,400 Exxon Corp. 741,650
4,160 Mobil Corp. 318,760
14,000 Occidental Petroleum Corp. 378,000
17,200 Texaco, Inc. 1,026,625
14,100 Unocal Corp. 504,075
23,400 USX-Marathon Group 802,912
------------
4,769,302
------------
Photographic Products -- 0.2%
3,430 Eastman Kodak Co. 250,604
------------
Pollution Control -- 0.5%
19,000 Browning Ferris Industries, Inc. 660,250
------------
Railroads -- 0.3%
10,300 Norfolk Southern Corp. 307,069
------------
Real Estate Investment Trusts -- 1.0%
8,100 Arden Realty, Inc. 209,588
6,400 Boston Properties, Inc. 220,800
7,400 Hospitality Properties Trust 237,725
10,400 Prime Group Realty Trust 178,100
9,600 TriNet Corporate Realty Trust, Inc. 326,400
------------
1,172,613
------------
Stores -- 2.4%
12,000 Penney (J.C.), Inc. 867,750
32,600 Rite Aid Corp. 1,224,537
15,700 Sears, Roebuck & Co. 958,681
------------
3,050,968
------------
Supermarkets -- 0.6%
6,600 Meyer (Fred), Inc.* 280,500
11,600 Safeway, Inc.* 471,975
------------
752,475
------------
Telecommunications -- 0.7%
13,100 Sprint Corp. 923,550
------------
Utilities - Electric -- 3.2%
19,500 Carolina Power & Light Co. 845,812
12,700 Cinergy Corp. 444,500
7,500 CMS Energy Corp., "G" 330,000
2,700 FPL Group, Inc. 170,100
7,700 GPU, Inc. 291,156
9,900 New Century Energies, Inc. 449,831
14,500 Pacificorp 328,063
10,300 Pinnacle West Capital Corp. 463,500
23,400 Southern Co. 647,888
------------
3,970,850
------------
See notes to financial statements.
- --------------------------------------------------------------------------------
183
<PAGE>
- -------------
MFS Total
Return Series
- -------------
13
- -------------
- --------------------------------------------------------------------------------
MFS Total Return Series
- ---------------------------------------
SCHEDULE OF INVESTMENTS (Continued)
June 30, 1998 (Unaudited)
Shares Value
- ------------------------------------------------------------------------
Utilities - Gas -- 2.1%
17,630 Coastal Corp. $ 1,230,794
10,200 Columbia Gas System, Inc. 567,375
13,000 Marketspan Corp.* 389,187
10,900 UGI Corp. 271,138
2,500 Williams Cos., Inc. 84,375
------------
2,542,869
------------
Utilities - Telephone -- 2.9%
13,200 AT&T Corp. 754,050
11,600 Bell Atlantic Corp. 529,250
1,900 BellSouth Corp. 127,537
24,950 GTE Corp. 1,387,844
20,544 SBC Communications, Inc. 821,760
------------
3,620,441
------------
Total U.S. Stocks 61,094,276
------------
- ----------------------
Foreign Stocks -- 8.4%
- ----------------------
Canada -- 0.3%
6,600 Canadian National Railway Co.
(Railroads) 350,625
------------
France -- 0.4%
10,800 Alcatel Alsthom Compagnie, ADR
(Telecommunications) 439,425
------------
Germany -- 1.2%
10,900 Henkel KGaA (Chemicals) 1,077,027
8,000 Hoechst AG (Chemicals) 401,882
------------
1,478,909
------------
Netherlands -- 2.4%
6,300 AKZO Nobel N.V. (Chemicals) 1,398,900
16,728 ING Groep N.V. (Financial Services)* 1,094,117
9,380 Royal Dutch Petroleum Co.,
ADR (Oils) 514,141
------------
3,007,158
------------
Sweden -- 0.6%
27,000 Volvo AB, ADR (Automotive) 798,187
------------
Switzerland -- 0.6%
370 Nestle AG, Registered Shares
(Food and Beverage Products) 792,230
------------
United Kingdom-- 2.9%
25,696 British Petroleum PLC, ADR (Oils) 2,267,672
16,971 Diageo PLC (Food and
Beverage Products) 200,985
11,700 Glaxo Wellcome PLC, ADR
(Medical and Health Products) 699,806
5,760 SmithKline-Beecham PLC, ADR
(Medical and Health Products) 348,480
------------
3,516,943
------------
Total Foreign Stocks 10,383,477
------------
Total Stocks (Identified Cost, $63,191,461) 71,477,753
------------
- --------------
Bonds -- 34.2%
- --------------
Principal
Amount
(000 Omitted) Value
- ------------------------------------------------------------------------
U.S. BONDS -- 33.9%
Aerospace -- 0.6%
250 B E Aerospace, 8s, 2008 249,375
260 K & F Industries, Inc., 9.25s, 2007 262,600
20 Northrup Grumman Corp., 9.375s, 2024 24,475
150 Stellex Industries, Inc., 9.5s, 2007 147,375
------------
683,825
------------
Airlines -- 0.3%
150 Continental Airlines, Inc., 9.5s, 2001 159,563
132 Northwest Airlines, Inc., 7.625s, 2005 132,516
55 Northwest Airlines, Inc., 8.7s, 2007 57,738
------------
349,817
------------
Apparel and Textiles
20 Burlington Industries, Inc., 7.25s, 2027 20,633
See notes to financial statements.
- --------------------------------------------------------------------------------
184
<PAGE>
-------------
MFS Total
Return Series
-------------
13
-------------
- --------------------------------------------------------------------------------
Principal
Amount
(000 Omitted) Value
- ------------------------------------------------------------------------
Automotive -- 0.3%
$ 140 Federal Mogul Corp., 7.5s, 2004 $ 139,718
45 Federal Mogul Corp., 7.75s, 2006 44,984
20 Ford Motor Co., 8.9s, 2032 25,594
110 Ford Motor Credit Co., 6.125s, 2003 110,008
------------
320,304
------------
Banks and Credit Companies -- 0.8%
300 Beaver Valley Funding Corp., 9s, 2017 343,065
50 Capital One Financial Corp., 7.25s, 2003 50,625
270 MBNA Capital, 8.278s, 2026 292,737
20 Riggs National Corp., 8.5s, 2006 20,944
210 Washington Mutual Capital I, 8.375s, 2027 236,901
------------
944,272
------------
Building -- 0.2%
36 American Standard, Inc., 7.625s, 2010 35,280
140 McDermott, Inc., 9.375s, 2002 149,906
50 Nortek, Inc., 9.25s, 2007 51,000
50 Williams Scotsman, Inc., 9.875s, 2007 52,000
------------
288,186
------------
Business Machines -- 0.2%
460 Xerox Corp., 0s, 2018 262,200
------------
Cellular Telephones -- 0.1%
140 Airtouch Communications, Inc., 6.65s, 2008 141,082
------------
Conglomerates -- 0.6%
95 News America Holdings, Inc., 6.625s, 2008 94,859
10 News America Holdings, Inc., 7.75s, 2045 10,732
20 News America Holdings, Inc., 8s, 2016 22,035
500 News America Holdings, Inc., 8.875s, 2023 595,720
------------
723,346
------------
Construction Services -- 0.5%
500 Georgia Pacific Corp., 9.5s, 2022 583,065
Consumer Goods and Services -- 0.3%
105 Hilfiger (Tommy) USA, Inc., 6.5s, 2003 104,908
80 Hilfiger (Tommy) USA, Inc., 6.85s, 200 879,917
150 Kindercare Learning
Centers, Inc., 9.5s, 2009 150,750
------------
335,575
------------
Corporate Asset Backed -- 0.4%
370 Beneficial Home Equity Loan Trust,
5.768s, 2037 369,655
24 Continental Airlines, Inc., 9.5s, 28,100
20 Continental Airlines Pass-Through
Trust, 6.648s, 2017 20,408
100 Criimi Mae Commercial Mortgage
Trust, 7s, 2011+ 98,031
19 United Airlines Pass-Through Trust,
7.27s, 2013+ 20,223
------------
536,417
------------
Electrical Equipment
50 Honeywell, Inc., 6.625s, 2028 50,632
Entertainment -- 2.2%
40 Circus Circus Enterprises, Inc., 7s, 2036 38,727
1,099 Hearst Argyle Television, Inc., 7.5s, 2027 1,170,699
374 Time Warner, Inc., 0s to 2016, 8.3s to 2036 121,688
79 Time Warner, Inc., 9.125s, 2013 96,147
709 Time Warner, Inc., 9.15s, 2023 893,879
320 Time Warner Pass-Through Asset Trust,
6.1s, 2001## 318,438
65 Viacom, Inc., 6.75s, 2003 65,650
------------
2,705,228
------------
See notes to financial statements.
- --------------------------------------------------------------------------------
185
<PAGE>
- -------------
MFS Total
Return Series
- -------------
13
- -------------
- --------------------------------------------------------------------------------
MFS Total Return Series
- ---------------------------------------
SCHEDULE OF INVESTMENTS (Continued)
June 30, 1998 (Unaudited)
Principal
Amount
(000 Omitted) Value
- ------------------------------------------------------------------------
Financial Institutions -- 1.9%
$ 110 Bear Stearns Cos., Inc., 6.2s, 2003 $ 110,235
70 Capital One Bank, 6.7s, 2008 70,739
80 Donaldson, Lufkin & Jenrette,
6.5s, 2008 79,994
20 First Empire Capital Trust I,
8.234s, 2027 21,912
1,300 Goldman Sachs Group LP,
5.9s, 2003 1,282,840
70 Lehman Brothers, Inc., 6.5s, 2008 70,363
4 Lehman Brothers, Inc., 7.5s, 2026 4,461
190 Natexis Ambs Co. LLC, 8.44s, 2049 189,354
50 Paine Webber Group, Inc., 6.55s, 2008 49,667
111 Riggs Capital II, 8.875s, 2027 123,626
325 Salton Sea Funding Corp., 7.84s, 2010 353,733
------------
2,356,924
------------
Financial Services -- 0.3%
418 Contifinancial Corp., 7.5s, 2002 416,077
------------
Food Products -- 0.1%
70 Nabisco, Inc., 6.375s, 2035 69,550
------------
Forest and Paper Products -- 0.3%
50 Boise Cascade Co., 7.43s, 2005 51,193
95 Georgia Pacific Corp., 7.25s, 2028 96,892
30 U.S. Timberlands, 9.625s, 2007 30,375
190 Waterford 3 Funding Corp.,
8.09s, 2017 196,943
------------
375,403
------------
Industrial -- 1.1%
300 Interace, Inc., 7.3s, 2008 302,817
1,000 Owens Illinois, Inc., 7.5s, 2010 1,013,970
------------
1,316,787
------------
Insurance -- 0.4%
221 Atlantic Mutual Insurance Co.,
8.15s, 2028 228,425
160 Conseco, Inc., 6.4s, 2001 159,898
95 Fairfax Financial Holdings Limited,
7.375s, 2018 97,453
25 Nationwide Mutual Life Insurance Co.,
7.5s, 2024## 25,919
40 Safeco Capital Trust I, 8.072s, 2037 42,744
20 Travelers Capital III, 7.75s, 2036 20,958
------------
575,397
------------
Media -- 0.1%
50 Frontiervision Operating
Partnership LP, 11s, 2006 55,375
30 Outdoor Systems, Inc., 8.875s, 2007 31,238
------------
86,613
------------
Medical and Health Products
20 Tenet Healthcare Corp.,
7.625s, 2008## 20,225
------------
Medical and Health Technology and Services -- 0.3%
40 Columbia/HCA Healthcare Corp., 6.875s, 2001 39,222
70 Columbia/HCA Healthcare Corp., 6.91s, 2005 67,989
275 Columbia/HCA Healthcare Corp., 7.69s, 20252 265,702
20 HealthSouth Corp., 6.875s, 2005 20,007
------------
392,920
------------
Metal Fabrication -- 0.2%
260 Metals USA, Inc., 8.625s, 2008 252,200
------------
Metals and Minerals -- 0.2%
200 Kaiser Aluminum &
Chemical Corp., 10.875s, 2006 215,000
------------
Oil Services -- 0.1%
20 Clark Refining & Marketing, Inc.,
8.375s, 2007 20,100
20 Kcs Energy, 8.875s, 2008 19,000
20 Ultramar Diamond Shamrock
Corp., 7.2s, 201720,797
20 Vintage Petroleum, Inc., 8.625s, 2009 20,200
------------
80,097
------------
See notes to financial statements.
- --------------------------------------------------------------------------------
186
<PAGE>
-------------
MFS Total
Return Series
-------------
13
-------------
- --------------------------------------------------------------------------------
Principal
Amount
(000 Omitted) Value
- ------------------------------------------------------------------------
Oils -- 1.8%
$ 20 Belco Oil & Gas Corp., 8.875s, 2007 $ 19,300
20 Cliffs Drilling Co., 10.25s, 2003 21,400
79 Lasmo USA, Inc., 7.3s, 2027 78,764
350 Oryx Energy Co., 8.375s, 2004 377,346
160 Petroleum Geo Services, 7.125s, 2028 161,926
1,200 Sun Co., Inc., 9s, 2024 1,490,868
10 Synder Oil Corp., 8.75s, 2007 10,050
40 Transocean Offshore, Inc., 8s, 2027 45,389
20 Wiser Oil Co., 9.5s, 2007 18,800
------------
2,223,843
------------
Special Products and Services
30 Polymer Group, Inc., 9s, 2007 30,525
------------
Supermarkets
30 Marsh Supermarkets, Inc., 8.875s, 2007 30,600
------------
Telecommunications -- 1.1%
50 Allbritton Communications Co.,
8.875s, 2008 54,000
500 Century Communications Corp.,
0s, 2008 226,875
30 Chancellor Media Corp., 8.75s, 2007 31,275
270 Continental Cablevision, Inc., 11s,
2007 294,783
50 Intermedia Communications, Inc.,
0s to 2002, 11.25s to 2007 36,500
50 Level 3 Commerce, Inc., 9.125s, 2008## 48,625
150 Nextel Communications, Inc.,
0s to 1999, 9.75s to 2004 145,875
50 Pagemart Wireless, Inc., 0s to 2003,
11.25s to 200 830,000
20 TCI Communications Financing III,
9.65s, 2027 24,499
90 TCI Communications, Inc., 6.375s, 2003 90,662
60 TCI Communications, Inc., 8s, 2005 65,514
150 Tele-Communications, Inc., 6.34s, 2002 149,446
5 Turner Broadcasting Systems, Inc.,
8.375s, 2013 5,731
150 Western Wireless Corp., 10.5s, 2007 161,250
20 WorldCom, Inc., 8.875s, 2006 21,758
------------
1,386,793
------------
Transportation -- 0.2%
246 Federal Express Corp., 7.65s, 2014 267,001
------------
U.S. Federal Agencies -- 1.1%
$1,364 Federal National Mortgage
Association - 1.1%
FNMA, 6.5s, 2013 1,371,908
------------
U.S. Government Guaranteed -- 13.6%
Government National Mortgage Association -- 2.2%
354 GNMA, 7s, 2028 360,003
1,150 GNMA, 7.5s, 2026 - 2027 1,181,971
1,127 GNMA, 8s, 2025 - 2027 1,167,190
------------
2,709,164
------------
U.S. Treasury Obligations -- 11.4%
606 U.S. Treasury Bonds, 6.125s, 2027 649,365
30 U.S. Treasury Bonds, 9.875s, 2015 43,697
2,625 U.S. Treasury Notes, 5.5s, 2003 2,622,952
592 U.S. Treasury Notes, 5.625s, 2008 600,045
2,000 U.S. Treasury Notes, 5.75s, 2000 2,009,844
2,900 U.S. Treasury Notes, 6.25s, 2002 2,975,661
1,479 U.S. Treasury Notes, 6.5s, 2006 1,570,506
205 U.S. Treasury Notes, 6.625s, 2002 212,335
30 U.S. Treasury Notes, 7s, 2006 65,522
300 U.S. Treasury Notes, 7.5s, 2001 317,766
940 U.S. Treasury Notes, 7.875s, 2004 1,055,733
1,145 U.S. Treasury Notes, 8.5s, 2000 1,197,063
715 U.S. Treasury Notes, 9.125s, 1999 736,672
------------
14,057,161
------------
Total U.S. Government Guaranteed 16,766,325
------------
Utilities - Electric -- 2.5%
119 Cleveland Electric Illuminating
Co., 7.43s, 2009 123,917
120 Cleveland Electric Illuminating
Co., 7.88s, 2017 130,981
20 Commonwealth Edison Co., 7.625s, 2007 21,261
See notes to financial statements.
- --------------------------------------------------------------------------------
187
<PAGE>
- -------------
MFS Total
Return Series
- -------------
13
- -------------
- --------------------------------------------------------------------------------
MFS Total Return Series
- ---------------------------------------
SCHEDULE OF INVESTMENTS (Continued)
June 30, 1998 (Unaudited)
Principal
Amount
(000 Omitted) Value
- ------------------------------------------------------------------------
$ 70 Connecticut Light & Power Co.,
7.875s, 2024 $ 71,421
400 Connecticut Light & Power Co.,
8.59s, 2003 404,500
47 First PV Funding Corp., 10.3s, 2014 50,081
377 GGIB Funding Corp., 7.43s, 2011 379,109
800 Long Island Lighting Co., 8.2s, 2023 894,016
40 Long Island Lighting Co., 9s, 2022 45,624
43 Midland Cogeneration Venture Corp.,
10.33s, 2002 46,164
110 Niagara Mohawk Power Corp., 7.75s, 2006 117,687
50 Niagara Mohawk Power Corp., 8.5s, 2023 55,327
60 Niagara Mohawk Power Corp., 8.75s, 2022 65,996
128 Niagara Mohawk Power Corp., 8.77s, 2018 136,957
20 Texas & New Mexico Power Co., 12.5s, 1999 20,603
60 Texas Utilities Co., 6.375s, 2008 58,797
400 Toledo Edison Co., 7.875s, 2004 421,544
20 United Illuminating Co., 6.25s, 2002 19,863
------------
3,063,848
------------
Utilities - Gas -- 2.1%
610 Coastal Corp., 6.95s, 2028 589,303
810 Coastal Corp., 7.42s, 2037 846,847
58 Consumers Energy Co., 6.375s, 2008 57,096
400 Tennessee Gas Pipeline Co.,
7.625s, 2037 432,948
600 Texas Gas Transmission Corp.,
7.25s, 2027 624,330
------------
2,550,524
------------
Total U.S. Bonds 41,793,142
------------
- ---------------------
Foreign Bonds -- 0.3%
- ---------------------
Argentina -- 0.2%
200 Hidroelectrica Alicura, 8.375s,
1999 (Utilities - Electric)## 199,000
------------
Chile
20 Empresa Nacional de Electric,
7.325s, 2037 (Utilities - Electric) 19,541
------------
Finland
20 Upm Kymmene Corp., 7.45s,
2027 (Forest and Paper Products) 21,182
------------
Mexico -- 0.1%
100 Banco Commercial S.A., 8.25s,
2007 (Banks and Credit Cos.) 98,720
50 Corporacion Andina de Fomento,
7.1s, 2003 (Banks and Credit Cos.) 51,270
------------
149,990
------------
Panama
40 Republic of Panama, 8.25s, 2008
(Government) 39,000
------------
TOTAL FOREIGN BONDS 428,713
------------
TOTAL BONDS
(COST, $41,736,156) $ 42,221,855
------------
- ----------------------
Preferred Stock-- 0.1%
- ----------------------
Shares Value
- ------------------------------------------------------------------------
Banks and Credit Companies -- 0.1%
100 NB Capital Corp., 8.3%*
(Identified Cost, $100,000) 108,100
------------
- ----------------------------------
Convertible Preferred Stock-- 0.8%
- ----------------------------------
Banks and Credit Companies -- 0.2%
2,330 McKesson Financing Trust, 5%*## 261,688
Consumer Goods and Services -- 0.6%
11,500 Newell Financial Trust Co., 5.25%
(Industrial)* 664,125
TOTAL CONVERTIBLE PREFERRED STOCK
(IDENTIFIED COST, $759,821) $ 925,813
------------
See notes to financial statements.
- --------------------------------------------------------------------------------
188
<PAGE>
-------------
MFS Total
Return Series
-------------
13
-------------
- --------------------------------------------------------------------------------
Principal
Amount
(000 Omitted) Value
- ------------------------------------------------------------------------
Convertible Bond -- 0.1%
Germany -- 0.1%
$ 220 Daimler Benz, 0s, 2017 (Automotive)
(Identified Cost, $106,900) $ 121,550
------------
Rights -- 0.4%
5,800 CVS Automatic Common
Exchange Security*
(Identified Cost, $409,607) 442,613
------------
Short-Term Obligations -- 8.7%
2,000 Federal Farm Credit Bank, due 7/06/98 1,998,472
4,700 Federal Home Loan Bank, due 7/01/98 4,700,000
2,000 Federal Home Loan Mortgage Corp.,
due 7/27/98 1,992,099
2,000 Federal National Mortgage Assn.,
due 7/17/98 1,995,143
TOTAL SHORT-TERM OBLIGATIONS, AT
AMORTIZED COST 10,685,714
------------
TOTAL INVESTMENTS
(IDENTIFIED COST, $116,989,659) $125,983,398
------------
OTHER ASSETS, LESS
LIABILITIES - (2.2)%
(2,670,127)
------------
NET ASSETS -- 100.0%
$123,313,271
============
* Non-income producing security.
## SEC Rule 144A restriction.
+ Restricted security.
See notes to financial statements.
- --------------------------------------------------------------------------------
189
<PAGE>
- -------------
MFS Total
Return Series
- -------------
13
- -------------
- --------------------------------------------------------------------------------
MFS Total Return Series
- ---------------------------------------
STATEMENT OF ASSETS
AND LIABILITIES
June 30, 1998 (Unaudited)
Assets:
Investments, at value
(identified cost $116,989,659) $ 125,983,398
Cash 40,668
Receivable for Series shares sold 983,674
Receivable for investments sold 70,515
Interest and dividends receivable 794,412
Deferred organization expenses 2,787
-------------
Total Assets $ 127,875,454
-------------
Liabilities:
Payable for Series shares reacquired 25,939
Payable for investments purchased 4,524,881
Payable to affiliates --
Management fee 7,554
Shareholder servicing agent fee 318
Administrative fee 150
Accrued expenses and other liabilities 3,341
-------------
Total Liabilities 4,562,183
-------------
Net Assets $ 123,313,271
=============
Net Assets consist of:
Paid-in capital $ 109,463,971
Unrealized appreciation on investments and
translation of assets and liabilities in
foreign currencies 8,993,601
Accumulated undistributed net realized gain
on investment and foreign currency
transactions 3,340,488
Accumulated undistributed net investment
income 1,515,211
-------------
Total Net Assets $ 123,313,271
=============
Shares of Beneficial Interest Outstanding $ 7,036,363
=============
Net Asset Value Per Share (net assets
shares of beneficial interest outstanding) $ 17.53
=============
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1998
(Unaudited)
Net Investment Income (Loss):
Income:
Interest $ 1,394,218
Dividends 638,955
Foreign tax withheld (10,024)
-------------
Total Investment Income $ 2,023,149
-------------
Expenses:
Management fee 366,440
Trustees' compensation 1,017
Shareholder servicing agent fee 17,070
Administrative fee 7,347
Printing 31,553
Auditing fees 22,500
Custodian fee 18,602
Amortization of organization expenses 911
Miscellaneous 2,907
-------------
Total Expenses 468,347
Fees paid indirectly (2,227)
Preliminary reimbursement of expense to
investment adviser 22,480
-------------
Net Expenses 488,600
-------------
Net Investment Income 1,534,549
=============
Realized and Unrealized Gain (Loss) on
Investments:
Investment transactions 3,367,967
Foreign currency transactions (1,257)
-------------
Net realized gain on investment and
foreign currency transactions 3,366,710
-------------
Change in unrealized appreciation
(depreciation) -- Investments 2,793,144
Translation of assets and liabilities in
foreign currencies (91)
-------------
Net unrealized gain on investments and
foreign currency translation 2,793,053
-------------
Net realized and unrealized gain on
investments and foreign currency 6,159,763
-------------
Increase in net assets from operations $ 7,694,312
=============
See notes to financial statements.
- --------------------------------------------------------------------------------
190
<PAGE>
-------------
MFS Total
Return Series
-------------
13
-------------
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1998 December 31,
(Unaudited) 1997
------------- -------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations:
Net investment income $ 1,534,549 $ 1,447,106
Net realized gain on investments and foreign currency transactions 3,366,710 1,695,568
Net unrealized gain on investments and foreign currency translation 2,793,053 5,126,598
------------- -----------
Increase in net assets from operations 7,694,312 8,269,272
------------- -----------
Distributions declared to shareholders
From net investment income (1,465,065) --
From net realized gain on investments and foreign currency transactions (1,722,619) --
------------- -----------
Total distributions declared to shareholders (3,187,684) --
------------- -----------
Net increase in net assets from Series share transactions 43,194,513 48,093,086
------------- -----------
Total increase in net assets 47,701,141 56,362,358
Net Assets:
At beginning of period 75,612,130 19,249,772
------------- -----------
At end of period (including accumulated net investment income of
1,515,211 and 1,445,727, respectively) $ 123,313,271 $75,612,130
============= ===========
</TABLE>
See notes to financial statements.
- --------------------------------------------------------------------------------
191
<PAGE>
- -------------
MFS Total
Return Series
- -------------
13
- -------------
- --------------------------------------------------------------------------------
MFS Total Return Series
- ---------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited)
- ---------------------------
1 Business and Organization
- ---------------------------
MFS Total Return Series (the Series) is a diversified series of MFS(R)
Variable Insurance Trust(SM) (the Trust) which is comprised of the following 13
series: MFS(R) Bond Series, MFS(R) Emerging Growth Series, MFS(R) Foreign &
Colonial Emerging Markets Equity Series, MFS(R) Growth with Income Series,
MFS(R) High Income Series, MFS(R) Limited Maturity Series, MFS(R) Money Market
Series, MFS(R) New Discovery Series, MFS(R) Research Series, MFS Total Return
Series, MFS(R) Utilities Series, MFS(R) Value Series, and MFS(R) World
Governments Series. The Trust is organized as a Massachusetts business trust and
is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company.
The shareholders of each Series of the Trust are separate accounts of
insurance companies which offer variable annuity and/or life insurance products.
As of June 30, 1998, there were 35 shareholders of the Series.
- ---------------------------------
2 Significant Accounting Policies
- ---------------------------------
General
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
disclosure 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. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of changes
in each country's legal, political, and economic environment.
Investment Valuations
Equity securities listed on securities exchanges or reported through the
NASDAQ system are reported at market value using last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are not
available are reported at market value using last quoted bid prices. Debt
securities (other than short-term obligations which mature in 60 days or less),
including listed issues and forward contracts, are valued on the basis of
valuations furnished by dealers or by a pricing service with consideration to
factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics,
and other market data, without exclusive reliance upon exchange or
over-the-counter prices. Short-term obligations, which mature in 60 days or
less, are valued at amortized cost, which approximates market value. Securities
for which there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Trustees.
Foreign Currency Translation
Investment valuations, other assets, and liabilities initially expressed
in foreign currencies are converted each business day into U.S. dollars based
upon current exchange rates. Purchases and sales of foreign investments, income,
and expenses are converted into U.S. dollars based upon currency exchange rates
prevailing on the respective dates of such transactions. Gains and losses
attributable to foreign currency exchange rates on sales of securities are
recorded for financial statement purposes as net realized gains and losses on
- --------------------------------------------------------------------------------
192
<PAGE>
-------------
MFS Total
Return Series
-------------
13
-------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited) (Continued)
investments. Gains and losses attributable to foreign exchange rate movements on
income and expenses are recorded for financial statement purposes as foreign
currency transaction gains and losses. That portion of both realized and
unrealized gains and losses on investments that results from fluctuations in
foreign currency exchange rates is not separately disclosed.
Deferred Organization Expenses
Costs incurred by the Series in connection with its organization have been
deferred and are being amortized on a straight-line basis over a five-year
period beginning on the date of commencement of Series operations.
Investment Transactions and Income
Investment transactions are recorded on the trade date. Interest income is
recorded on the accrual basis. All discount is accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Dividends received in cash are recorded on the ex-dividend date. Dividend and
interest payments received in additional securities are recorded on the
ex-dividend or ex-interest date in an amount equal to the value of the security
on such date.
Fees Paid Indirectly
The Series' custody fee is calculated as a percentage of the Series' month
end net assets. The fee is reduced according to an arrangement that measures the
value of cash deposited with the custodian by the Series. This amount is shown
as a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions
The Series' policy is to comply with the provisions of the Internal
Revenue Code (the Code) applicable to regulated investment companies and to
distribute to shareholders all of its taxable income, including any net realized
gain on investments. Accordingly, no provision for federal income or excise tax
is provided. The Series files a tax return annually using tax accounting methods
required under provisions of the Code, which may differ from generally accepted
accounting principles, the basis on which these financial statements are
prepared. Accordingly, the amount of net investment income and net realized gain
reported on these financial statements may differ from that reported on the
Series' tax return.
Distributions to shareholders are recorded on the ex-dividend date. The
Series distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits, which result in temporary
over-distributions for financial statement purposes are classified as
distributions in excess of net investment income or net realized gains.
- ------------------------------
3 Transactions with Affiliates
- ------------------------------
Investment Adviser
The Series has an investment advisory agreement with Massachusetts
Financial Services Company (MFS) to provide overall investment advisory and
administrative services, and general office facilities. The management fee is
computed daily and paid monthly at an annual rate of 0.75% of average daily net
assets. The Series has a temporary expense reimbursement agreement whereby MFS
has voluntarily
- --------------------------------------------------------------------------------
193
<PAGE>
- -------------
MFS Total
Return Series
- -------------
13
- -------------
- --------------------------------------------------------------------------------
MFS Total Return Series
- ---------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited) (Continued)
agreed to pay all of the Series' operating expenses, exclusive of management
fees. The Series in turn will pay MFS an expense reimbursement fee not greater
than 0.25% of average daily net assets. To the extent that the expense
reimbursement fee exceeds the Series' actual expenses, the excess will be
applied to amounts paid by MFS in prior years. At June 30, 1998, the aggregate
unreimbursed expenses owed to MFS by the Series amounted to $99,983.
The Series pays no compensation directly to its Trustees who are officers
of the investment adviser, or to officers of the Series, all of whom receive
remuneration for their services to the Series from MFS. Certain officers and
Trustees of the Series are officers or directors of MFS, MFS Fund Distributors,
Inc. (MFD), and MFS Service Center, Inc. (MFSC).
Administrator
The Series has an administrative services agreement with MFS to provide
the Series with certain financial, legal, shareholder servicing, compliance, and
other administrative services. As a partial reimbursement for the cost of
providing these services, the Series pays MFS an administrative fee at the
following annual percentages of the Series' average daily net assets:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
Shareholder Servicing Agent -- MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the Series' average daily net assets at an effective annual rate
of 0.035%
- ----------------------
4 Portfolio Securities
- ----------------------
Purchases and sales of investments, other than purchased option
transactions and short-term obligations, were as follows:
Purchases Sales
----------- -----------
U.S. government securities $38,661,604 $13,260,121
----------- -----------
Investments (non-U.S. government securities) $45,459,443 $29,778,410
----------- -----------
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Series, as computed on a federal income tax basis, are
as follows:
Aggregate cost $ 116,989,659
-------------
Gross unrealized appreciation $ 10,001,809
Gross unrealized depreciation (1,008,070)
-------------
Net unrealized appreciation $ 8,993,739
-------------
- --------------------------------------------------------------------------------
194
<PAGE>
-------------
MFS Total
Return Series
-------------
13
-------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited) (Continued)
- -------------------------------
5 Shares of Beneficial Interest
- -------------------------------
The Series' Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest (without
par value). Transactions in Series shares were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended Six Months Ended Year Ended
June 30, December 31, June 30, December 31,
1998 1997 1998 1997
(unaudited) (Audited) (unaudited) (Audited)
- ----------------------------------------------------------------------------------------------------
Shares Amount
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 2,643,850 $45,925,789 3,451,865 $52,887,638
Shares issued to shareholders
in reinvestment of distributions 186,754 3,187,88 -- --
Shares reacquired (340,849) (5,919,161) (309,785) (4,794,552)
- ----------------------------------------------------------------------------------------------------
Net increase 2,489,755 $43,194,513 3,142,080 $48,093,086
- ----------------------------------------------------------------------------------------------------
</TABLE>
- ----------------
6 Line of Credit
- ----------------
The Series and other affiliated funds participate in a $805 million
unsecured line of credit provided by a syndication of banks under a line of
credit agreement. Borrowings may be made to temporarily finance the repurchase
of Series shares. Interest is charged to each fund, based on its borrowings, at
a rate equal to the bank's base rate. In addition, a commitment fee, based on
the average daily unused portion of the line of credit, is allocated among the
participating funds at the end of each quarter. The commitment fee allocated to
the Series for the six-months ended June 30, 1998, was $240.
- -----------------------
7 Restricted Securities
- -----------------------
The Series may invest not more than 15% of its net assets in securities
which are subject to legal or contractual restrictions on resale. At June 30,
1998, the Series owned the following restricted securities (constituting 0.10%
of net assets) which may not be publicly sold without registration under the
Securities Act of 1933. The Series does not have the right to demand that such
securities be registered. The value of these securities is determined by
valuations furnished by dealers or by a pricing service, or if not available,
are valued at fair value as determined in good faith by or at the direction of
the Trustees.
<TABLE>
<CAPTION>
Description Date of Acquisition Par Amount Cost Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Criimi Mae Commercial Mortgage Trust, 7s, 2011 5/6/98 100,000 $97,078 $ 98,031
United Airlines Pass-Through Trust, 7.27s, 2013 7/14/97 19,356 19,635 20,223
--------
$118,254
--------
</TABLE>
- --------------------------------------------------------------------------------
195
<PAGE>
- -------------
MFS Total
Return Series
- -------------
13
- -------------
- --------------------------------------------------------------------------------
MFS Total Return Series
- ---------------------------------------
FINANCIAL HIGHLIGHTS
Per share data (for a share outstanding throughout each period):
<TABLE>
<CAPTION>
Six Months Ended Year Ended December 31, Period Ended
June 30, 1998 ----------------------- December 31,
(Unaudited) 1997 1996 1995*
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ............ $ 16.63 $ 13.71 $ 12.25 $ 10.00
----------- ----------- ----------- -----------
Income from investment operations:
Net investment income (S) ..................... $ 0.27 $ 0.52 $ 0.46 $ 0.41
Net realized and unrealized gain on investments
and foreign currency transactions ........... 0.90 2.40 1.30 2.32
----------- ----------- ----------- -----------
Total from investment operations ................ $ 1.17 $ 2.92 $ 1.76 $ 2.73
----------- ----------- ----------- -----------
Less distributions declared to shareholders:
From net investment income ...................... (0.24) -- (0.21) (0.25)
From net realized gain on investment
and foreign currency transactions ........... (0.03) -- (0.09) (0.23)
----------- ----------- ----------- -----------
Total distributions declared to shareholders .... $ (0.27) $ -- $ (0.30) $ (0.48)
----------- ----------- ----------- -----------
Net asset value, end of period ..................... $ 17.53 $ 16.63 $ 13.71 $ 12.25
=========== =========== =========== ===========
Total return .................................... 8.68%++ 21.30% 14.37% 27.34%++
=========== =========== =========== ===========
Ratios (to average net assets)/Supplemental data(S):
Expenses ........................................ 1.00%+ 1.00% 1.00% 1.00%+
Net investment income ........................... 3.14%+ 3.25% 3.59% 3.83%+
Portfolio turnover ................................. 47% 93% 76% 16%
Net assets at end of period (in 000's) ............. $ 123,313 $ 75,612 $ 19,250 $ 2,797
- ----------
* For the period from the commencement of the Series' investment operations,
January 3, 1995, through December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Expenses are calculated without reduction for fees paid indirectly.
(S) Subject to reimbursement by the Series, the investment adviser voluntarily
agreed to maintain the expenses of the Series, exclusive of management
fees, at not more than 0.25% of average daily net assets. To the extent
actual expenses were over/under this limitation, the net investment income
per share and the ratios would have been:
<S> <C> <C> <C> <C>
Net investment loss ............................ $0.27 $0.52 $0.32 $0.22
Ratios (to average net assets):
Expenses ....................................... 0.96%+ 1.02% 2.10% 2.49%+
Net investment loss ............................ 3.18%+ 3.23% 2.49% 2.09%+
</TABLE>
See notes to financial statements.
- --------------------------------------------------------------------------------
196
<PAGE>
- --------------------------------------------------------------------------------
This page intentionally left blank.
- --------------------------------------------------------------------------------
197
<PAGE>
- -------------
MFS
Bond Series
- -------------
14
- -------------
- --------------------------------------------------------------------------------
MFS Bond Series
- ---------------------------------------
SCHEDULE OF INVESTMENTS
June 30, 1998 (Unaudited
Principal
Amount
(ooo Omitted) Value
- ------------------------------------------------------------------------
- --------------
Bonds -- 95.5%
- --------------
U.S. Bonds - 93.0%
Aerospace - 1.6%
$ 40 BE Aerospace, Inc., 8s, 2008 $ 39,900
40 K & F Industries, Inc., 9.25s, 2007 40,400
5 Northrop Grumman Corp., 9.375s, 2024 6,119
25 Stellex Industries, Inc., 9.5s, 2007 24,562
------------
110,981
------------
Airlines - 1.3%
5 Continental Airlines Pass-Through Trust,
6.648s, 2017 5,102
35 Continental Airlines, Inc., 9.5s, 2001 - 2013 37,533
5 Jet Equipment Trust, 8.64s, 2012## 5,308
5 Jet Equipment Trust, 9.41s, 2010## 6,053
20 Northwest Airlines, Inc., 7.625s, 2005 20,078
8 Northwest Airlines, Inc., 8.7s, 2007 8,398
5 United Airlines Pass-Through Trust, 7.27s,
2013## 5,056
------------
87,528
------------
Apparel and Textiles - 0.4%
15 Hilfiger (Tommy) USA, Inc., 6.5s, 2003 14,987
11 Hilfiger (Tommy) USA, Inc., 6.85s, 2008 10,988
------------
25,975
------------
Automotive - 0.7%
20 Federal Mogul Corp., 7.5s, 2004 19,960
5 Federal Mogul Corp., 7.75s, 2006 4,998
5 Ford Motor Co., 8.9s, 2032 6,399
16 Ford Motor Credit Co., 6.125s, 2003 16,001
------------
47,358
------------
Banks and Credit Companies - 5.5%
5 Advanta Corp., 6.925s, 2002 4,619
10 Capital One Financial Corp., 7.25s, 2003 10,125
250 Criimi Mae Commercial Mortgage Trust, 7s,
2011 245,078
35 MBNA Capital, 8.278s, 2026 37,948
15 Riggs Capital II, 8.875s, 2027 16,706
5 Riggs National Corp., 8.5s, 2006 5,236
50 Washington Mutual Capital I, 8.375s, 2027 56,405
------------
376,117
------------
Building - 1.0%
5 American Standard Inc., 7.625s, 2010 4,900
20 McDermott, Inc., 9.375s, 2002 21,415
20 Nortek, Inc., 9.25s, 2007 20,400
20 Williams Scotsman, Inc., 9.875s, 2007 20,800
------------
67,515
------------
Chemicals - 0.4%
25 Solutia, Inc., 7.375s, 2027 25,918
------------
Consumer Goods and Services - 0.4%
25 Kindercare Learning Centers, Inc., 9.5s, 2009 25,125
------------
Containers - 3.2%
56 Owens Illinois Inc., 7.35s, 2008 56,697
156 Owens Illinois Inc., 7.5s, 2010 158,179
------------
214,876
------------
Electrical Equipment - 0.1%
5 Honeywell, Inc., 6.625s, 2028 5,063
------------
Entertainment - 3.7%
10 Circus Circus Enterprises, Inc., 7s, 2036 9,682
15 Hearst Argyle Television, Inc., 7.5s, 2027 15,979
45 Time Warner Pass-Through Asset Trust, 6.1s,
2001## 44,780
61 Time Warner, Inc., 0s to 2016, 8.3s, 2036 19,847
12 Time Warner, Inc., 9.125s, 2013 14,605
96 Time Warner, Inc., 9.15s, 2023 121,033
2 Turner Broadcasting Systems, Inc., 8.375s,
2013 2,292
25 Viacom Inc., 6.75s, 2003 25,250
------------
253,468
------------
See notes to financial statements.
- --------------------------------------------------------------------------------
198
<PAGE>
-------------
MFS
Bond Series
-------------
14
-------------
- --------------------------------------------------------------------------------
Principal
Amount
(ooo Omitted) Value
- ------------------------------------------------------------------------
Financial Institutions - 5.0%
$ 16 Bear Stearns Cos., Inc., 6.2s, 2003 $ 16,034
10 Capital One Bank Medium Term Senior, 6.7s,
2008 10,106
63 Contifinancial Corp., 7.5s, 2002 62,710
10 Donaldson Lufkin & Jenrette, 6.5s, 2008 9,999
5 First Empire Capital Trust I, 8.234s, 2027 5,478
160 Goldman Sachs Group LP, 5.9s, 2003 157,888
10 Lehman Brothers, Inc., 6.5s, 2008 10,052
4 Lehman Brothers, Inc., 7.5s, 2026 4,461
10 Nationwide Mutual Life Insurance Co., 7.5s,
2024## 10,368
6 Paine Webber Group Inc., 6.55s, 2008 5,960
45 Salton Sea Funding Corp., 7.84s, 2010 48,978
------------
342,034
------------
Food Products - 0.1%
10 Nabisco, Inc., 6.375s, 2035 9,936
------------
Forest and Paper Products - 1.4%
10 Boise Cascade Co., 7.43s, 2005 10,239
14 Georgia Pacific Corp., 7.25s, 2028 14,279
50 Georgia Pacific Corp., 9.5s, 2022 58,306
10 U.S. Timberlands, 9.625s, 2007 10,125
------------
92,949
------------
Industrial - 0.4%
5 Burlington Industries, Inc. New, 7.25s, 2027 5,158
25 Natexis Ambs Co. LLC, 8.44s, 2049## 24,915
------------
30,073
------------
Insurance - 1.4%
35 Atlantic Mutual Insurance Co., 8.15s, 2028## 36,176
25 Conseco, Inc., 6.4s, 2001 24,984
14 Fairfax Financial Holdings Ltd., 7.375s, 2018 14,362
10 Safeco Capital Trust I, 8.072s, 2037 10,686
10 Travelers Capital III, 7.75s, 2036 10,479
------------
96,687
------------
Shares Value
- ------------------------------------------------------------------------
Media - 0.8%
20 Frontiervision Operating Partnership LP,
11s, 2006 $ 22,150
5 News America Holdings, Inc., 7.75s, 2045 5,366
5 News America Holdings, Inc., 8s, 2016 5,509
10 News America, Inc., 6.625s, 2008 9,985
10 Outdoor Systems, Inc., 8.875s, 2007 10,413
------------
53,423
------------
Medical and Health Technology and Services - 0.7%
4 Columbia/HCA Healthcare Corp., 6.875s, 2001 3,922
10 Columbia/HCA Healthcare Corp., 6.91s, 2005 9,713
23 Columbia/HCA Healthcare Corp., 7.69s, 2025 22,222
5 Healthsouth Corp., 6.875s, 2005## 5,002
5 Tenet Healthcare Corp., 7.625s, 2008## 5,056
------------
45,915
------------
Metals and Minerals - 1.0%
25 Kaiser Aluminum & Chemical Corp., 10.875s,
2006 26,875
40 Metals USA, Inc., 8.625s, 2008 38,800
------------
65,675
------------
Oil Services - 0.3%
5 Clark Refining & Marketing, Inc., 8.375s,
2007 5,025
5 KCS Energy, Inc., 8.875s, 2008 4,750
5 Ultramar Diamond Shamrock Corp., 7.2s, 2017 5,199
5 Vintage Petroleum, Inc., 8.625s, 2009 5,050
------------
20,024
------------
Oils - 2.9%
5 Belco Oil & Gas Corp., 8.875s, 2007 4,825
5 Cliffs Drilling Co., 10.25s, 2003 5,350
12 Lasmo USA, Inc., 7.3s, 2027 11,964
25 Petroleum Geo Services A/S, 7.125s, 2028 25,301
101 Sun Co., Inc., 9s, 2024 125,482
5 Synder Oil Corp., 8.75s, 2007 5,025
See notes to financial statements.
- --------------------------------------------------------------------------------
199
<PAGE>
- -------------
MFS
Bond Series
- -------------
14
- -------------
- --------------------------------------------------------------------------------
MFS Bond Series
- ---------------------------------------
SCHEDULE OF INVESTMENTS (Continued)
June 30, 1998 (Unaudited)
Principal
Amount
(ooo Omitted) Value
- ------------------------------------------------------------------------
$ 10 Transocean Offshore, Inc., 8s, 2027 $ 11,347
5 Wiser Oil Co., 9.5s, 2007 4,700
------------
193,994
------------
Special Products and Services - 0.1%
10 Polymer Group, Inc., 9s, 2007 10,175
------------
Supermarkets - 0.2%
10 Marsh Supermarkets, Inc., 8.875s, 2007 10,200
------------
Telecommunications - 5.2%
20 Airtouch Communications, Inc., 6.65s, 2008 20,155
20 Allbritton Communications Co., 8.875s, 2008 21,600
200 Century Communications Corp., 0s, 2008 90,750
10 Chancellor Media Corp., 8.75s, 2007 10,425
55 Continental Cablevision, Inc., 11s, 2007 60,049
20 Intermedia Communications, Inc., 0s to 2002,
11.25s, 2007 14,600
20 Level 3 Commerce, Inc., 9.125s, 2008 19,450
25 Nextel Communications, Inc., 0s to 1999,
9.75s, 2004 24,313
20 Pagemart Wireless, Inc., 0s to 2003, 11.25s,
2008 12,000
5 TCI Communications Financing III, 9.65s, 2027 6,125
15 TCI Communications, Inc., 6.375s, 2003 15,110
8 TCI Communications, Inc., 8s, 2005 8,735
20 Tele-Communications, Inc., 6.34s, 2002 19,926
25 Western Wireless Corp., 10.5s, 2007 26,875
5 WorldCom, Inc., 8.875s, 2006 5,439
------------
355,552
------------
Transportation - 0.6%
39 Federal Express Corp., 7.65s, 2014 42,721
------------
U.S. Federal Agencies - 2.3%
157 FNMA, 6.5s, 2013, TBA 158,188
------------
U.S. Government Guaranteed - 5.7%
47 GNMA, 7s, 2028, TBA 48,134
171 GNMA, 7.5s, 2026, TBA 175,685
150 GNMA, 8s, 2024, TBA 155,778
9 GNMA, 8s, 2025 9,763
------------
389,360
------------
U.S. Treasury Obligations - 36.7%
908 U.S. Treasury Bonds, 6.125s, 2027 972,976
150 U.S. Treasury Notes, 5.5s, 2003 149,883
1,025 U.S. Treasury Notes, 6.25s, 2002 1,051,742
131 U.S. Treasury Notes, 6.5s, 2006 139,105
80 U.S. Treasury Notes, 6.625s, 2002 82,862
15 U.S. Treasury Notes, 7s, 2006 16,381
50 U.S. Treasury Notes, 7.875s, 2004 56,156
2 U.S. Treasury Notes, 8.5s, 2000 2,091
15 U.S. Treasury Notes, 9.125s, 1999 15,455
------------
2,486,651
------------
Utilities - Electric - 5.7%
50 Beaver Valley Funding Corp., 9s, 2017 57,177
20 Cleveland Electric Illuminating Co., 7.88s,
2017 21,830
5 Commonwealth Edison Co., 7.625s, 2007 5,315
10 Connecticut Light & Power Co., 7.875s, 2024 10,203
100 Connecticut Light & Power Co., 8.59s, 2003 101,125
7 Consumers Energy Co., 6.375s, 2008## 6,891
5 First PV Funding Corp., 10.3s, 2014 5,328
49 GG1B Funding Corp., 7.43s, 2011 49,645
11 Midland Cogeneration Venture Corp., 10.33s,
2002 12,311
20 Niagara Mohawk Power Corp., 7.75s, 2006 21,398
10 Niagara Mohawk Power Corp., 8.5s, 2023 11,065
10 Niagara Mohawk Power Corp., 8.75s, 2022 10,999
9 Seabrook Station - Unit 1, 7.83s, 2019 9,731
5 Texas & New Mexico Power Co., 12.5s, 1999 5,151
15 Texas Utilities Co., 6.375s, 2008 14,699
5 United Illuminating Co., 6.25s, 2002 4,966
See notes to financial statements.
- --------------------------------------------------------------------------------
200
<PAGE>
-------------
MFS
Bond Series
-------------
14
-------------
- --------------------------------------------------------------------------------
Principal
Amount
(ooo Omitted) Value
- ------------------------------------------------------------------------
$ 35 Waterford 3 Funding Corp., 8.09s, 2017 $ 36,279
------------
384,113
------------
Utilities - Gas - 4.2%
80 Coastal Corp., 6.95s, 2028 77,286
97 Coastal Corp., 7.42s, 2037 101,412
100 Texas Gas Transmission Corp., 7.25s, 2027 104,055
------------
282,753
------------
Total U.S. Bonds $6,310,347
------------
- --------------------
Foreign Bonds - 2.5%
- --------------------
Argentina - 0.3%
20 Hidroelectrica Alicura (Utilities -
Electric), 8.375s, 1999## 19,900
------------
Bulgaria - 0.7%
60 National Republic of Bulgaria (Government),
6.563s, 2024 45,828
------------
Chile - 0.1%
5 Empresa Nacional de Electric (Utilities -
Electric), 7.325s, 2037 4,885
------------
Finland - 0.1%
5 Upm Kymmene Corp. (Forest and Paper
Products), 7.45s, 2027## 5,295
------------
Mexico - 0.4%
20 Banco Commercial S.A. (Banks and Credit
Cos), 8.25s, 2007 19,744
8 Corporacion Andina De Fomento (Banks and
Credit Cos), 7.1s, 2003 8,203
27,947
------------
Panama - 0.3%
20 Republic of Panama (Government),
8.25s, 2008 19,500
------------
South Korea - 0.6%
50 Republic of Korea (Government),
8.875s, 2008 45,223
------------
Total Foreign Bonds $ 168,578
------------
Total Bonds (Identified Cost, $6,402,149) $ 6,478,925
------------
Short-Term Obligations - 2.9%
195 Federal Home Loan Mortgage Corp., due
7/01/98, at Amortized Cost 195,000
------------
Total Investments (Identified Cost, $6,597,149) $ 6,673,925
------------
Other Assets, Less Liabilities - 1.6% 110,550
------------
NET ASSETS - 100.0% $ 6,784,475
============
* Non-income producing security.
## SEC Rule 144A restriction.
See notes to financial statements.
- --------------------------------------------------------------------------------
201
<PAGE>
- -------------
MFS
Bond Series
- -------------
14
- -------------
- --------------------------------------------------------------------------------
MFS Bond Series
- ---------------------------------------
STATEMENT OF ASSETS
AND LIABILITIES
June 30, 1998 (Unaudited)
Assets:
Investments, at value
(identified cost $6,597,149) $ 6,673,925
Cash 4,209
Receivable for Series shares sold 12,927
Receivable for investments sold 3,174
Interest receivable 100,810
Deferred organization expenses 4,262
-----------
Total Assets 6,799,307
-----------
Liabilities:
Payable for Series shares reacquired 750
Payable for investments purchased 10,293
Payable to affiliates --
Management fee 334
Administrative fee 8
Transfer agent fee 18
Accrued expenses and other liabilities 3,430
-----------
Total Liabilities 14,832
-----------
Net Assets $ 6,784,475
===========
Net Assets consist of:
Paid-in capital $ 6,535,619
Unrealized appreciation on investments 76,775
Accumulated undistributed net realized gain
on investments 20,471
Accumulated undistributed net investment
income 151,610
-----------
Total Net Assets $ 6,784,475
===========
Shares of Beneficial Interest Outstanding 614,590
===========
Net Asset Value Per Share (net assets of
$6,784,075 / 614,590 shares of
beneficial interest outstanding) $ 11.04
===========
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1998
(Unaudited)
Net Investment Income:
Interest income $ 177,286
-----------
Expenses:
Management fee 15,061
Trustees' compensation 1,185
Shareholder servicing agent fee 877
Administrative fee 377
Printing 12,671
Auditing fee 8,400
Amortization of organization expenses 911
Legal fee 530
Custodian fee 163
Miscellaneous 2,054
-----------
Total Expenses 42,229
Fees paid indirectly (376)
Preliminary reduction of expenses by
investment adviser (16,751)
-----------
Net Expenses 25,102
-----------
Net Investment Income 152,184
===========
Realized and Unrealized Gain on Investments:
Realized gain on investment transactions
(identified cost basis) 20,930
Change in unrealized appreciation
on investments 19,181
-----------
Net realized and unrealized gain
on investments 40,111
-----------
Increase in net assets from operations $ 192,295
===========
See notes to financial statements.
- --------------------------------------------------------------------------------
202
<PAGE>
-------------
MFS
Bond Series
-------------
14
-------------
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1998 December 31,
(Unaudited) 1997
------------- ------------
<S> <C> <C>
Increase in net assets:
From operations:
Net investment income $ 152,184 $ 138,768
Net realized gain on investments 20,930 71,311
Net unrealized gain on investments 19,181 51,317
----------- ----------
Increase in net assets from operations 192,295 261,396
----------- ----------
Distributions declared to shareholders
From net investment income (139,106) --
From net realized gain on investments and
foreign currency transactions (68,528) --
----------- ----------
Net increase in net assets from Series share
transactions 2,796,260 2,888,957
----------- ----------
Total increase in net assets 2,780,521 3,150,353
Net Assets:
At beginning of period 4,003,554 853,201
----------- ----------
At end of period (including accumulated
net investment income of $151,610
and $138,532, respectively) $ 6,784,475 $4,003,554
=========== ==========
</TABLE>
See notes to financial statements.
- --------------------------------------------------------------------------------
203
<PAGE>
- -------------
MFS
Bond Series
- -------------
14
- -------------
- --------------------------------------------------------------------------------
MFS Bond Series
- ---------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited)
- ---------------------------
1 Business and Organization
- ---------------------------
MFS Bond Series (the Series) is a diversified series of MFS Variable
Insurance Trust (the Trust) which is comprised of the following 13 Series: MFS
Bond Series, MFS(R) Emerging Growth Series, MFS(R)/Foreign & Colonial Emerging
Markets Equity Series, MFS(R) Growth with Income Series, MFS(R) High Income
Series, MFS(R) Limited Maturity Series, MFS(R) Money Market Series, MFS(R) New
Discovery Series, MFS(R) Research Series, MFS(R) Total Return Series, MFS(R)
Utilities Series, MFS(R) Value Series and MFS(R) World Governments Series.
The Trust is organized as a Massachusetts business trust and is registered
under the Investment Company Act of 1940, as amended, as an open-end management
investment company. The shareholders of the Series of the Trust are separate
accounts of insurance companies which offer variable annuity and/or life
insurance products. As of June 30, 1998, there were 14 shareholders in the
Series.
- ---------------------------------
2 Significant Accounting Policies
- ---------------------------------
General
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
disclosure 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. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of changes
in each country's legal, political, and economic environment.
Investment Valuations
Debt securities (other than short-term obligations which mature in 60 days
or less), including listed issues, forward contracts, and swap agreements, are
valued on the basis of valuations furnished by dealers or by a pricing service
with consideration to factors such as institutional-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics, and other market data, without exclusive reliance upon
exchange or over-the-counter prices. Short-term obligations, which mature in 60
days or less, are valued at amortized cost, which approximates market value.
Deferred Organization Expenses
Costs incurred by the Series in connection with its organization have been
deferred and are being amortized on a straight-line basis over a five-year
period beginning on the date of commencement of Series operations.
Investment Transactions and Income
Investment transactions are recorded on the trade date. Interest income is
recorded on the accrual basis. All premium and discount is amortized or accreted
for financial statement and tax reporting purposes as required by federal income
tax regulations. Interest payments received in additional securities are
recorded on the ex-dividend or ex-interest date in an amount equal to the value
of the security on such date.
Fees Paid Indirectly
The Series' custody fee is calculated as a percentage of the Series' month
end net assets. The fee is reduced according to an arrangement that measures the
value of cash deposited with the custodian by the Series. This amount is shown
as a reduction of expenses on the Statement of Operations.
- --------------------------------------------------------------------------------
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<PAGE>
-------------
MFS
Bond Series
-------------
14
-------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited) (Continued)
Tax Matters and Distributions
The Series' policy is to comply with the provisions of the Internal
Revenue Code (the Code) applicable to regulated investment companies and to
distribute to shareholders all of its taxable income, including any net realized
gain on investments. Accordingly, no provision for federal income or excise tax
is provided. The Series files a tax return annually using tax accounting methods
required under provisions of the Code, which may differ from generally accepted
accounting principles, the basis on which these financial statements are
prepared. Accordingly, the amount of net investment income and net realized gain
reported on these financial statements may differ from that reported on the
Series' tax return.
Distributions to shareholders are recorded on the ex-dividend date. The
Series distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits, which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or net realized gains.
- ------------------------------
3 Transactions with Affiliates
- ------------------------------
Investment Adviser
The Series has an investment advisory agreement with Massachusetts
Financial Services Company (MFS) to provide overall investment advisory and
administrative services, and general office facilities. The management fee is
computed daily and paid monthly at an annual rate of 0.60% of average daily net
assets. The Series has a temporary expense reimbursement agreement whereby MFS
has voluntarily agreed to pay all of the Series' operating expenses, exclusive
of management fees. The Series in turn will pay MFS an expense reimbursement fee
not greater than 0.40% of average daily net assets. To the extent that the
expense reimbursement fee exceeds the Series' actual expenses, the excess will
be applied to amounts paid by MFS in prior years. At June 30, 1998, the
aggregate unreimbursed expenses owed to MFS by the Series amounted to $134,603,
including $16,751 incurred in the current year.
Administrator
The Series has an administrative services agreement with MFS to provide
the Series with certain financial, legal, shareholder servicing, compliance, and
other administrative services. As a partial reimbursement for the cost of
providing these services, the Series pays MFS an administrative fee at the
following annual percentages of the Series' average daily net assets:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
Shareholder Servicing Agent
MFSC, a wholly owned subsidiary of MFS, earns a fee for its services as
shareholder servicing agent. The fee is calculated as a percentage of the
Series' average daily net assets at an effective annual rate of 0.035%.
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<PAGE>
- -------------
MFS
Bond Series
- -------------
14
- -------------
- --------------------------------------------------------------------------------
MFS Bond Series
- ---------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited) (Continued)
- ----------------------
4 Portfolio Securities
- ----------------------
Purchases and sales of investments, other than purchased option
transactions and short-term obligations, were as follows:
Purchases Sales
---------- ----------
U.S. government securities $4,361,030 $3,225,871
---------- ----------
Investments (non-U.S. government securities) $5,695,816 $3,695,027
---------- ----------
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Series, as computed on a federal income tax basis, are
as follows:
Aggregate cost $ 6,597,149
-----------
Gross unrealized appreciation $ 97,848
Gross unrealized depreciation (21,072)
-----------
Net unrealized appreciation $ 76,776
-----------
- -------------------------------
5 Shares of Beneficial Interest
- -------------------------------
The Series' Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest (without
par value). Transactions in Series shares were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended Six Months Ended Year Ended
June 30, December 31, June 30, December 31,
1998 1997 1998 1997
(unaudited) (Audited) (unaudited) (Audited)
- ----------------------------------------------------------------------------------------------------
Shares Amount
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 268,903 $ 2,978,018 302,671 $ 3,167,115
Shares issued to shareholders
in reinvestment of distributions 19,405 207,633 -- --
Shares reacquired (34,954) (389,391) (26,220) (278,158)
- ----------------------------------------------------------------------------------------------------
Net increase 253,354 $ 2,796,260 276,451 $ 2,888,957
- ----------------------------------------------------------------------------------------------------
</TABLE>
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MFS
Bond Series
-------------
14
-------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited) (Continued)
- ----------------
6 Line of Credit
- ----------------
The Series and other affiliated funds participate in a $805 million
unsecured line of credit provided by a syndication of banks under a line of
credit agreement. Borrowings may be made to temporarily finance the repurchase
of Series shares. Interest is charged to each Series, based on its borrowings,
at a rate equal to the bank's base rate. In addition, a commitment fee, based on
the average daily unused portion of the line of credit, is allocated among the
participating funds at the end of each quarter. Interest expense includes a
commitment fee of $6 which is based on the average daily unused portion of the
line of credit.
The Series and other affiliated series also participate in a $20 million
uncommitted, unsecured line of credit provided by State Street Bank and Trust
Company under a line of credit agreement. Borrowings may be made to temporarily
finance the purchase of securities, the redemption of shares, or emergency
expenses. During the period ended June 30, 1998, the maximum amount outstanding
was $382,243. Interest expense incurred on the borrowings amounted to $400 for
the period ended June 30, 1998, at a weighted average interest rate on
borrowings of 6.31%.
- --------------------------------------------------------------------------------
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<PAGE>
- -------------
MFS
Bond Series
- -------------
14
- -------------
- --------------------------------------------------------------------------------
MFS Bond Series
- ---------------------------------------
FINANCIAL HIGHLIGHTS
Per share data (for a share outstanding throughout each period)
<TABLE>
<CAPTION>
Six Months Ended Year Ended December 31,
June 30, 1998 -------------------------------------------
(Unaudited) 1997 1996 1995*
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Operating performance:
Net asset value, beginning of period $ 11.08 $ 10.06 $ 10.19 $ 10.00
--------- --------- --------- ---------
Income from investment operations:
Net investment income(S) 0.33 0.64 0.58 0.09
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 0.06 0.38 (0.36) 0.21
--------- --------- --------- ---------
Total from investment operations 0.39 1.02 0.22 0.30
--------- --------- --------- ---------
Less distributions declared to shareholders:
From net investment income (0.29) -- (0.35) (0.09)
From net realized gain on investments
and foreign currency transactions (0.14) -- -- (0.02)
--------- --------- --------- ---------
Total distributions declared to shareholders (0.43) -- (0.35) (0.11)
--------- --------- --------- ---------
Net asset value, end of period $ 11.04 $ 11.08 $ 10.06 $ 10.19
========= ========= ========= =========
Total return 3.60%++ 10.14% 2.09% 3.02%++
========= ========= ========= =========
Ratios (to average net assets)/Supplemental data(S):
Expenses 1.00%+ 1.00% 1.00% 1.00%+
Net investment income 6.07%+ 6.04% 5.84% 4.89%+
Portfolio turnover 144% 219% 231% 55%
Net assets at end of period (000 omitted) $ 6,784 $ 4,004 $ 853 $ 228
- ----------
* For the period from the commencement of the Series' investment operations,
October 24, 1995, through December 31, 1995.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Series' expenses are calculated without reduction for fees paid
indirectly.
(S) The investment adviser and/or distributor voluntarily waived a portion of
their management fee and/or distribution fee, respectively for certain of
the periods indicated. If the fee had been incurred by the Series, the net
investment per share and the ratios would have been:
<S> <C> <C> <C> <C>
Net investment income (loss) ...................... $ 0.29 $ 0.37 $(0.26) $(0.70)
Ratios (to average net assets):
Expenses .......................................... 1.69%+ 3.58% 9.45% 43.85%+
Net investment income (loss) ...................... 5.38%+ 3.46% (2.61)% (37.96)%+
</TABLE>
See notes to financial statements.
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American
Century VP
Value Fund
- -------------
15
- -------------
- --------------------------------------------------------------------------------
American Century VP Value Fund
- ---------------------------------------
SCHEDULE OF INVESTMENTS
June 30, 1998 (Unaudited)
- ------------
COMMON STOCK
- ------------
Shares Value
- ------------------------------------------------------------------------
Aerospace & Defense -- 1.1%
50,900 Raytheon Co. Cl A $ 2,933,113
------------
Automobiles & Auto Parts-- 4.3%
246,900 Cooper Tire and Rubber Company 5,092,313
244,400 Superior Industries International, Inc. 6,889,025
------------
11,981,338
------------
Banking -- 7.5%
92,600 First Virginia Banks, Inc. 4,734,175
143,300 Mercantile Bancorporation Inc. 7,218,738
73,400 NationsBank Corp. 5,615,100
77,200 Regions Financial Corp. 3,167,613
------------
20,735,626
------------
Business Services & Supplies -- 0.5%
81,500 Reynolds & Reynolds Co. 1,482,281
Chemicals & Resins -- 8.2%
78,600 Air Products and Chemicals, Inc. 3,144,000
146,100 BetzDearborn Inc. 6,163,594
49,600 Great Lakes Chemical Corp. 1,956,100
127,000 Lubrizol Corp. 3,841,750
115,500 Morton International, Inc. 2,887,500
130,500 Nalco Chemical Co. 4,583,813
------------
22,576,757
------------
Communications Equipment -- 2.3%
221,200 Andrew Corp.(1) 3,988,513
44,100 Motorola, Inc. 2,318,006
------------
6,306,519
------------
Computer Software & Services -- 2.7%
219,100 GTECH Holdings Corp.(1) 7,380,931
------------
Diversified Companies -- 0.5%
17,200 Minnesota Mining & Manufacturing Co. 1,413,625
------------
Electrical & Electronic Components -- 5.0%
215,700 AMP, Inc. 7,414,679
73,300 Cooper Industries, Inc. 4,026,919
67,100 General Signal Corp. 2,415,600
------------
13,857,198
------------
Energy (Production & Marketing) -- 13.6%
97,900 Amoco Corp. 4,075,088
178,100 Apache Corp. 5,610,150
17,700 Atlantic Richfield Co. 1,382,813
162,200 Burlington Resources Inc. 6,984,738
80,300 Murphy Oil Corp. 4,070,206
273,600 Seagull Energy Corp.(1) 4,531,500
117,700 Swift Energy Co. 1,875,844
119,700 Ultramar Diamond Shamrock Corp. 3,778,031
148,100 Unocal Corp. 5,294,575
------------
37,602,945
------------
Energy (Services) -- 1.2%
99,800 Baker Hughes Inc. 3,449,338
------------
Environmental Services -- 2.9%
194,900 Browning-Ferris Industries, Inc. 6,772,775
118,000 Waste Management International plc ADR(1) 1,283,250
------------
8,056,025
------------
Financial Services -- 2.5%
182,100 CIT Group Holdings, Inc. (The) Cl A 6,828,750
------------
Food & Beverage -- 8.3%
351,761 Archer-Daniels-Midland Co. 6,815,369
165,000 Chiquita Brands International, Inc. 2,320,313
370,300 IBP, Inc. 6,711,688
283,200 Tyson Foods, Inc. Cl A 6,141,900
46,200 Universal Foods Corp. 1,025,063
------------
23,014,333
------------
Healthcare -- 4.9%
93,100 Beckman Coulter Inc. 5,423,075
54,700 Dentsply International Inc. 1,360,663
41,200 Lab Holdings Inc. 956,613
196,700 Mallinckrodt Inc. 5,839,531
------------
13,579,882
------------
See notes to financial statements.
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American
Century VP
Value Fund
-------------
15
-------------
- --------------------------------------------------------------------------------
Shares Value
- ------------------------------------------------------------------------
Industrial Equipment & Machinery -- 1.2%
61,200 Tecumseh Products Cl A $ 3,230,213
------------
Insurance -- 4.6%
73,700 Aetna Inc. 5,610,413
54,400 Argonaut Group, Inc. 1,727,200
21,700 Berkley (W.R.) Corp. 870,034
70,500 CNA Financial Corp.(1) 3,282,656
22,300 NAC Re Corp. 1,190,263
------------
12,680,566
------------
Leisure -- 2.6%
78,300 Callaway Golf Co. 1,541,531
38,300 Eastman Kodak Co. 2,798,294
77,500 Polaroid Corp. 2,756,094
------------
7,095,919
------------
Metals & Mining -- 4.0%
68,000 Aluminum Co. of America 4,483,750
60,700 Arch Coal Inc. 1,509,913
88,500 Reynolds Metals Co. 4,950,469
------------
10,944,132
------------
Paper & Forest Products -- 3.2%
101,800 Rayonier, Inc. 4,682,800
144,900 Westvaco Corp. 4,093,425
------------
8,776,225
------------
Printing & Publishing -- 1.3%
118,900 Banta Corp. 3,648,744
------------
Railroad -- 1.8%
109,200 CSX Corp. 4,968,600
------------
Retail (Food & Drug) -- 0.9%
59,400 Hannaford Brothers Co. 2,613,600
------------
Retail (General Merchandise) -- 2.0%
136,100 Dillard's Inc. Cl A 5,639,644
------------
Retail (Specialty) -- 0.7%
80,000 Toys 'R' Us, Inc.(1) 1,885,000
------------
Tobacco -- 1.9%
33,800 Schweitzer-Mauduit International, Inc. 980,200
163,300 UST Inc. 4,409,100
------------
5,389,300
------------
Transportation -- 0.2%
7,500 XTRA Corp. 453,750
------------
Utilities -- 7.7%
144,900 Ameren Corporation 5,759,775
135,600 Kansas City Power & Light Co. 3,932,400
131,100 Niagara Mohawk Power Corp.(1) 1,958,306
286,200 PacifiCorp 6,475,275
52,300 Sierra Pacific Resources 1,899,144
33,200 Texas Utilities Co. 1,381,950
------------
21,406,850
------------
TOTAL COMMON STOCKS --97.6%
(Cost $274,285,326) 269,931,204
------------
Temporary Cash Investments-- 2.4%
Repurchase Agreement, BA Securities,
(U.S. Treasury obligations), in a
joint trading account at 5.65%, dated
6/30/98, due 7/1/98
(Delivery value $6,601,036)
(Cost $6,600,000) 6,600,000
------------
Total Investment Securities -- 100.0%
(Cost $280,885,326) $276,531,204
============
Notes to Schedule of Investments
ADR = American Depositary Receipt
(1) Non-income producing
Understanding the schedule of investments.
o This schedule tells you which investments your fund owned on the last day
of the reporting period.
The schedule includes:
o the percentage of total investments in each industry
o a list of each investment
o the number of shares of each stock o the market value of each investment
o the percent and dollar breakdown of each investment category
See notes to financial statements.
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<PAGE>
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Century VP
Value Fund
- -------------
15
- -------------
- --------------------------------------------------------------------------------
American Century VP Value Fund
- ---------------------------------------
STATEMENT OF ASSETS
AND LIABILITIES
June 30, 1998 (Unaudited)
Assets:
Investment securities, at value (identified
cost of $280,885,326) (Note 3) $ 276,531,204
Cash 1,069,643
Receivable for investments sold 4,402,821
Dividends and interest receivable 360,590
-------------
282,364,258
-------------
Liabilities:
Payable for investments purchased 3,395,723
Payable for capital shares redeemed 923,494
Accrued management fees (Note 2) 224,770
Payable for directors' fees and expenses
(Note 2) 205
-------------
4,544,192
-------------
Net Assets $ 277,820,066
=============
Capital Shares, $0.01 Par Value
Authorized 500,000,000
=============
Outstanding 40,862,872
=============
Net Asset Value Per Share $ 6.80
=============
Net Assets Consist Of:
Capital (par value and paid-in surplus) $262,966,023
Undistributed net investment income 1,305,024
Accumulated undistributed net realized gain
from investment transactions 17,903,141
Net unrealized depreciation on investments
(Note 3) (4,354,122)
-------------
Total Net Assets $ 277,820,066
=============
Understanding the Statement of Assets and Liabilities--This statement details
what the fund owns (assets), what it owes (liabilities), and its net assets as
of the last day of the period. If you subtract what the fund owes from what it
owns, you get the fund's net assets. The net assets divided by the total number
of shares outstanding gives you the price of an individual share, or the net
asset value per share.
Net Assets are also broken out by capital (money invested by shareholders); net
investment income not yet paid to shareholders or net investment losses; net
gains earned on investments not yet paid to shareholders or net losses from
investments (known as realized gains or losses), and finally, gains or losses on
securities still owned by the fund (known as unrealized appreciation or
depreciation). This breakout tells you the value of net assets that are
performance-related, such as investment gains or losses, and the value of net
assets that are not related to performance, such as shareholder investments and
redemptions.
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1998
(Unaudited)
Investment Income
Income
Dividends $ 2,219,502
Interest 292,278
-------------
2,511,780
-------------
Expenses (Note 2):
Management fees 1,196,817
Directors' fees and expenses 1,064
-------------
1,197,881
-------------
Net Investment Income 1,313,899
=============
Realized and Unrealized Gain (Loss) on
Investments (Note 3):
Net realized gain on investments 19,556,171
Change in net unrealized gain on investments (10,073,233)
-------------
Net increase in net assets resulting from
operations $ 10,796,837
=============
Understanding the Statement of Operations--This statement breaks out how the
fund's net assets changed during the period as a result of the fund's
operations. It tells you how much money the fund made or lost after taking into
account income, fees and expenses, and investment gains or losses. It does not
include shareholder transactions and distributions.
Fund Operations include:
o income earned by investments (dividends and interest)
o management fees and expenses
o gains or losses from selling investments (known as realized gains or
losses)
o gains or losses on current fund holdings (known as unrealized appreciation
or depreciation)
See notes to financial statements.
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212
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Century VP
Value Fund
-------------
15
-------------
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1998 December 31,
(Unaudited) 1997
------------- ------------
<S> <C> <C>
Operations:
Net investment income $ 1,313,899 $ 1,580,883
Net realized gain on investments and foreign currency transactions 19,556,171 14,824,138
Change in net unrealized appreciation on investments
and translation of assets and liabilities in foreign currencies (10,073,233) 4,648,099
------------- -------------
Net increase in net assets resulting from operations 10,796,837 21,053,120
------------- -------------
Distributions to shareholders:
From net investment income (1,378,064) (292,815)
From net realized gains on investment transactions (16,452,854) (458,739)
------------- -------------
Decrease in net assets from distributions (17,830,918) (751,554)
------------- -------------
Capital share transactions:
Proceeds from shares sold 107,872,555 180,436,404
Proceeds from reinvestment of distributions 17,830,918 751,552
Payments for shares redeemed (28,864,484) (37,368,227)
------------- -------------
Net increase in net assets from capital share transactions 96,838,989 143,819,729
------------- -------------
Net increase in net assets 89,804,908 164,121,295
Net Assets:
Beginning of period 188,015,158 23,893,863
End of period $ 277,820,066 $ 188,015,158
============= =============
Undistributed net investment income $ 1,305,024 $ 1,369,189
============= =============
Transactions in shares of the Fund:
Sold 15,283,427 28,338,269
Issued in reinvestment of distributions 2,558,238 134,355
Redeemed (4,110,114) (5,620,068)
------------- -------------
Net increase 13,731,551 22,852,556
============= =============
</TABLE>
Understanding the Statement of Changes in Net Assets--This statement shows how
the fund's net assets changed over the past two reporting periods. It details
how much a fund grew or shrank as a result of:
o operations--a summary of the Statement of Operations from the previous
page for the most recent period
o distributions--income and gains distributed to shareholders
o share transactions--shareholders' purchases, reinvestment of distributions
and redemptions
Net assets at the beginning of the period plus the sum of operations,
distributions to shareholders and capital share transactions result in net
assets at the end of the period. See notes to financial statements.
See notes to financial statements.
- --------------------------------------------------------------------------------
213
<PAGE>
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American
Century VP
Value Fund
- -------------
15
- -------------
- --------------------------------------------------------------------------------
American Century VP Value Fund
- ---------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited)
- -----------------------------------------------
Note 1. Organization and Summary of Significant
Accounting Policies
- -----------------------------------------------
Organization
American Century Variable Portfolios, Inc., (the Corporation) is
registered under the Investment Company Act of 1940 as an open-end diversified
management investment company. American Century VP Value (the Fund) is one of
the six series of funds issued by the Corporation. The Fund's investment
objective is long-term capital growth. Income is a secondary objective. The Fund
seeks to achieve its investment objective by investing in securities management
believes to be undervalued at the time of purchase. The following significant
accounting policies, related to the Fund, are in accordance with accounting
policies generally accepted in the investment company industry.
Security Valuations
Portfolio securities traded primarily on a principal securities exchange
are valued at the last reported sales price, or the mean of the latest bid and
asked prices where no last sales price is available. Securities traded
over-the-counter are valued at the mean of the latest bid and asked prices or,
in the case of certain foreign securities, at the last reported sales price,
depending on local convention or regulation. Debt securities not traded on a
principal securities exchange are valued through a commercial pricing service or
at the mean of the most recent bid and asked prices. When valuations are not
readily available, securities are valued at fair value as determined in
accordance with procedures adopted by the Board of Directors.
Security Transactions
Security transactions are accounted for as of the trade date. Net realized
gains and losses are determined on the identified cost basis, which is also used
for federal income tax purposes
Investment Income
Dividend income less foreign taxes withheld (if any) is recorded as of the
ex-dividend date. Interest income is recorded on the accrual basis and includes
accretion of discounts and amortization of premiums.
Foreign Currency Transactions
The accounting records of the Fund are maintained in U.S. dollars. All
assets and liabilities initially expressed in foreign currencies are converted
into U.S. dollars at prevailing exchange rates. Purchases and sales of
investment securities, dividend and interest income, and certain expenses are
translated at the rates of exchange prevailing on the respective dates of such
transactions.
Net realized foreign currency exchange gains or losses arise from sales of
foreign currencies and the difference between asset and liability amounts
initially stated in foreign currencies and the U.S. dollar value of the amounts
actually received or paid. Net unrealized foreign currency exchange gains or
losses arise from changes in the value of assets and liabilities, other than
portfolio securities, resulting from changes in the exchange rates.
Net realized and unrealized foreign currency exchange gains or losses
occurring during the holding period of investments are a component of realized
gain (loss) on investments and unrealized appreciation (depreciation) on
investments, respectively.
Forward Foreign Currency Exchange Contracts
The Fund may enter into forward foreign currency exchange contracts for
the purpose of settling specific
- --------------------------------------------------------------------------------
214
<PAGE>
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American
Century VP
Value Fund
-------------
15
-------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited) (Continued)
purchases or sales of securities denominated in a foreign currency or to hedge
the Fund's exposure to foreign currency exchange rate fluctuations. When
required, the Fund will segregate assets in an amount sufficient to cover its
obligations under the hedge contracts. The net U.S. dollar value of foreign
currency underlying all contractual commitments held by the Fund and the
resulting unrealized appreciation or depreciation are determined daily using
prevailing exchange rates. Forward contracts involve elements of risk in excess
of the amount reflected in the Statement of Assets and Liabilities. The Fund
bears the risk of an unfavorable change in the foreign currency exchange rate
underlying the forward contract. Additionally, losses may arise if the
counterparties do not perform under the contract terms. There were no open
forward foreign currency exchange contracts at June 30, 1998.
Futures Contracts
The Fund may enter into stock index futures contracts in order to manage
the Fund's exposure to changes in market conditions. One of the risks of
entering into futures contracts includes the possibility that the changes in
value of the contract may not correlate with the changes in value of the
underlying securities. Upon entering into a futures contract, the Fund is
required to deposit either cash or securities in an amount equal to a certain
percentage of the contract value (initial margin). Subsequent payments
(variation margin) are made or received daily, in cash, by the Fund. The
variation margin is equal to the daily change in the contract value and is
recorded as an unrealized gain or loss. The Fund recognizes a realized gain or
loss when the contract is closed or expires. Net realized and unrealized gains
or losses occurring during the holding period of futures contracts are a
component of realized gain (loss) on investments and unrealized appreciation
(depreciation) on investments, respectively. There were no open futures
contracts at June 30, 1998.
Repurchase Agreements
The Fund may enter into repurchase agreements with institutions that the
Fund's investment manager, American Century Investment Management, Inc. (ACIM),
has determined are creditworthy pursuant to criteria adopted by the Board of
Directors. Each repurchase agreement is recorded at cost. The Fund requires that
the collateral, represented by securities, received in a repurchase transaction
be transferred to the custodian in a manner sufficient to enable the Fund to
obtain those securities in the event of a default under the repurchase
agreement. ACIM monitors, on a daily basis, the securities transferred to ensure
the value, including accrued interest, of the securities under each repurchase
agreement is equal to or greater than amounts owed to the Fund under each
repurchase agreement.
Joint Trading Account
Pursuant to an Exemptive Order issued by the Securities and Exchange
Commission, the Fund, along with other registered investment companies having
management agreements with ACIM, may transfer uninvested cash balances into a
joint trading account. These balances are invested in one or more repurchase
agreements that are collateralized by U.S. Treasury or Agency obligations.
Income Tax Status
It is the policy of the Fund to distribute all taxable income and capital
gains to shareholders and to otherwise qualify as a regulated investment company
under provisions of the Internal Revenue Code. Accordingly, no provision has
been made for federal or state income taxes.
- --------------------------------------------------------------------------------
215
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American
Century VP
Value Fund
- -------------
15
- -------------
- --------------------------------------------------------------------------------
American Century VP Value Fund
- ---------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited) (Continued)
Distributions to Shareholders
Distributions to shareholders are recorded on the ex-dividend date.
Distributions from net investment income and net realized capital gains are
expected to be declared and paid annually.
The character of distributions made during the year from net investment
income or net realized gains may differ from their ultimate characterization for
federal income tax purposes. These differences reflect the differing character
of certain income items and net capital gains and losses for financial statement
and tax purposes and may result in reclassification among certain capital
accounts.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of increases and
decreases in net assets from operations during the reporting period. Actual
results could differ from those estimates.
Additional Information
Funds Distributor, Inc. (FDI) is the Corporation's distributor. Certain
officers of FDI are also officers of the Corporation.
- -----------------------------------------
Note 2. Transactions with Related Parties
- -----------------------------------------
The Corporation has entered into a Management Agreement with ACIM that
provides the Fund with investment advisory and management services in exchange
for a single, unified fee. The Agreement provides that all expenses of the Fund,
except brokerage commissions, taxes, interest, expenses of those directors who
are not considered "interested persons" as defined in the Investment Company Act
of 1940 (including counsel fees) and extraordinary expenses, will be paid by
ACIM. The fee is computed daily and paid monthly based on the Fund's average
daily closing net assets during the previous month. The annual management fee
for the Fund is 1.00%.
Certain officers and directors of the Corporation are also officers and/or
directors, and, as a group, controlling stockholders of American Century
Companies, Inc., the parent of the Corporation's investment manager, ACIM, and
the Corporation's transfer agent, American Century Services Corporation.
- -------------------------------
Note 3. Investment Transactions
- -------------------------------
Purchases and sales of investment securities, excluding short-term
investments, totaled $233,831,062 and $160,773,136, respectively. As of June 30,
1998, accumulated net unrealized depreciation was $5,940,738, based on the
aggregate cost of investments of $282,471,942 for federal income tax purposes,
which consisted of unrealized appreciation of $10,375,509 and unrealized
depreciation of $16,316,247.
- --------------------------------------------------------------------------------
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Value Fund
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15
-------------
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share outstanding throughout the year ended December 31 (except as noted)
<TABLE>
<CAPTION>
May 1, 1996
(inception)
Six Months Ended Year Ended through
June 30, 1998 December 31, December 31,
(Unaudited) 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period .................... $ 6.93 $ 5.58 $ 5.00
----------- ----------- -----------
Income From Investment Operations:
Net Investment Income ................................. 0.02 0.07 0.05
Net Realized and Unrealized Gain on
Investment Transactions ............................. 0.40 1.37 0.56
----------- ----------- -----------
Total From Investment Operations ........................ 0.42 1.44 0.61
----------- ----------- -----------
Distributions:
From Net Investment Income .............................. (0.04) (0.04) (0.03)
From Net Realized Gains on Investment Transactions ...... (0.51) (0.05) --
----------- ----------- -----------
Total Distributions ..................................... (0.55) (0.09) (0.03)
----------- ----------- -----------
Net Asset Value, End of Period ............................. $ 6.80 $ 6.93 $ 5.58
=========== =========== ===========
Total Return* ........................................... 5.90% 26.08% 12.28%
=========== =========== ===========
Ratios/Supplemental Data:
Ratio of Operating Expenses to Average Net Assets ....... 1.00%+ 1.00% 1.00%+
Ratio of Net Investment Income to Average Net Assets .... 1.09%+ 1.60% 1.98%+
Portfolio Turnover Rate ................................. 69% 138% 49%
Net Assets, End of Period (in 000's) .................... $ 277,820 $ 188,015 $ 23,894
</TABLE>
- ----------
* Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are
not annualized.
+ Annualized.
Understanding the Financial Highlights--This statement itemizes current period
activity and statistics and provides comparison data for the last five fiscal
years (or less, if the fund is not five years old).
On a per-share basis, it includes:
o share price at the beginning of the period
o portfolio income and capital gains or losses
o distributions of income and capital gains paid to shareholders
o share price at the end of the period
It also includes some key statistics for the period:
o total return--the overall percentage return of the fund, assuming
reinvestment of all distributions
o expense ratio--operating expenses, expressed as a percentage of average
net assets
o net income ratio--net investment income as a percentage of average net
assets
o portfolio turnover--the percentage of the portfolio that was replaced
during the period
See notes to financial statements.
- --------------------------------------------------------------------------------
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American
Century VP
Value Fund
- -------------
15
- -------------
- --------------------------------------------------------------------------------
American Century VP Value Fund
- ---------------------------------------
BACKGROUND INFORMATION
INVESTMENT PHILOSOPHY AND POLICIES
Conservative investment practices are the hallmark of American Century's
conservative equity funds. Broad diversification across many industries is
stressed to reduce the impact of one sector on fund performance. The management
team also looks for dividend yield, since dividend income can help offset the
impact of market downturns on fund performance. American Century funds are
managed by teams, rather than by one "star" manager. We believe this enables us
to make better, more consistent management decisions.
VP VALUE'S investment objective is long-term capital growth, with income
as a secondary objective. To achieve this objective, the fund invests in the
equity securities of seasoned, established businesses that the fund's management
team believes are temporarily undervalued. This is determined by comparing a
stock's share price with key financial measures, including earnings, book value,
cash flow and dividends. If the stock's price relative to these measures is low
and the company's balance sheet is solid, its securities are candidates for
purchase. The management team may secondarily look for income when making
portfolio selections.
COMPARATIVE INDICES
The indices listed below are used in the report to serve as a comparison
for the performance of the fund. They are not investment products available for
purchase.
The S&P 500 index is a capitalization-weighted index of the stocks of 500
publicly traded U.S. companies that are considered to be leading firms in
leading industries. Created by the Standard & Poor's Corporation, the index is
viewed as a broad measure of U.S. stock performance.
The S&P 500/BARRA VALUE index is a capitalization-weighted index
consisting of S&P 500 stocks that have lower price/book ratios and, in general,
share other characteristics associated with value stocks.
The S&P MIDCAP 400 index is a capitalization-weighted index of the stocks
of the 400 largest leading U.S companies not included in the S&P 500. Created by
Standard & Poor's Corporation, it is considered to represent the performance of
mid-cap stocks generally.
The RUSSELL 2000 INDEX was created by the Frank Russell Company. It
measures the performance of the 2,000 smallest of the 3,000 largest
publicly-traded U.S. companies based on total market capitalization. The Russell
2000 represents approximately 10% of the total market capitalization of the top
3,000 companies. The average market capitalization of the index is approximately
$420 million.
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15
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- --------------------------------------------------------------------------------
GLOSSARY
RETURNS
o TOTAL RETURN figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
o AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as year-by-year results.
For year-by-year total returns, please refer to the "Financial Highlights" on
page 16.
PORTFOLIO STATISTICS
o NUMBER OF COMPANIES -- the number of different companies held by a fund on a
given date.
o PRICE/EARNINGS (P/E) RATIO -- a stock value measurement calculated by dividing
a company's stock price by its earnings per share, with the result expressed as
a multiple instead of as a percentage. (Earnings per share is calculated by
dividing the after-tax earnings of a corporation by its outstanding shares.)
o PORTFOLIO TURNOVER -- the percentage of a fund's investment portfolio that is
replaced during a given time period, usually a year. Actively managed portfolios
tend to have higher turnover than passively managed portfolios such as index
funds.
TYPES OF STOCKS
o BLUE-CHIP STOCKS -- stocks of the most established companies in American
industry. They are generally large, fairly stable companies that have
demonstrated consistent earnings and usually have long-term growth potential.
Examples include General Electric and Coca-Cola.
o CYCLICAL STOCKS -- generally considered to be stocks whose price and earnings
fluctuations tend to follow the ups and downs of the business cycle. Examples
include the stocks of automobile manufacturers, steel producers and textile
operators.
o GROWTH STOCKS -- stocks of companies that have experienced above-average
earnings growth and appear likely to continue such growth. These stocks often
sell at high P/E ratios. Examples can include the stocks of high-tech,
healthcare and consumer staple companies.
o LARGE-CAPITALIZATION ("LARGE-CAP") STOCKS -- generally considered to be stocks
of companies with a market capitalization (the total value of a company's
outstanding stock) of more than $5 billion. These tend to be the stocks that
make up the Dow Jones Industrial Average and the S&P 500.
o MEDIUM-CAPITALIZATION ("MID-CAP") STOCKS -- generally considered to be stocks
of companies with a market capitalization (the total value of a company's
outstanding stock) of between $1 billion and $5 billion. These tend to be the
stocks that make up the S&P MidCap 400.
o SMALL-CAPITALIZATION ("SMALL-CAP") STOCKS -- generally considered to be stocks
of companies with a market capitalization (the total value of a company's
outstanding stock) of less than $1 billion. These tend to be the stocks that
make up the Russell 2000 Index.
o VALUE STOCKS -- generally considered to be stocks that are purchased because
they are relatively inexpensive. These stocks are typically characterized by low
P/E ratios.
STATISTICAL TERMINOLOGY
o PRICE/BOOK RATIO -- a stock value measurement calculated by dividing a
company's stock price by its book value per share, with the result expressed as
a multiple instead of as a percentage. (Book value per share is calculated by
subtracting a company's liabilities from its assets, then dividing that value by
the number of outstanding shares.)
- --------------------------------------------------------------------------------
219
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American
Century VP
Internationa
Fund
- -------------
16
- -------------
- --------------------------------------------------------------------------------
American Century VP International Fund
- ---------------------------------------
SCHEDULE OF INVESTMENTS
June 30, 1998 (UNAUDITED)
- ---------------------
COMMON STOCK & RIGHTS
- ---------------------
Shares Value
- ------------------------------------------------------------------------
Australia -- 1.3%
328,805 AMP Limited (Acquired
6/15/98-6/18/98,
Cost $3,823,515)(1)(2)
(financial services) 3,853,248
215,000 Coca-Cola Amatil Limited(1)
(food & beverage) 1,439,756
------------
5,293,004
------------
Belgium -- 1.2%
32,000 Lernout & Hauspie
Speech Products N.V.(1)
(computer software & services) 1,910,000
600 UCB SA
(pharmaceuticals) 3,113,710
------------
5,023,710
------------
Canada -- 3.8% 46,000 BCE Inc.
(communications services) 1,951,686
101,000 Bombardier Inc. Cl B
(aerospace & defense) 2,749,141
60,000 Call-Net Enterprises, Inc. Cl B(1)
(communications services) 1,020,721
60,200 Geac Computer Corp. Ltd.(1)
(computer software & services) 2,007,281
58,500 Investor's Group, Inc.
(financial services) 2,115,801
19,000 Magna International Inc. Cl A
(automobiles & auto parts) 1,301,963
41,850 Newcourt Credit Group Inc.
(Acquired 11/4/97-3/25/98,
Cost $974,668)(2)
(financial services) 2,057,543
106,000 Teleglobe Inc.
(communications services) 2,827,532
------------
16,031,668
------------
Denmark -- 1.7%
21,355 Novo Nordisk A/S Cl B
(pharmaceuticals) 2,941,409
42,800 Tele Danmark A/S
(communications services) 4,104,263
------------
7,045,672
------------
Finland -- 2.7%
468,000 Merita OY Ltd. Cl A
(banking) 3,085,059
33,600 Nokia Corp. Cl A ADR
(communications equipment) 2,438,100
124,000 Raisio Group plc
(food & beverage) 2,249,003
81,300 Sampo Insurance Company Ltd.
(insurance) 3,849,222
------------
11,621,384
------------
France -- 13.7%
18,717 Accor SA
(leisure) 5,227,660
28,544 Alcatel Alsthom
Compagnie Generale
(communications equipment) 5,800,209
9,000 Altran Technologies SA
(business services & supplies) 2,039,782
10,000 Atos SA(1)
(computer software & services) 2,393,529
35,655 Axa-UAP
(insurance) 4,002,212
27,582 Banque Nationale de Paris
(banking) 2,249,176
43,822 Cap Gemini SA
(computer software & services) 6,872,053
19,000 Groupe Danone
(food & beverage) 5,228,293
42,000 Lafarge SA
(construction &
property development) 4,333,113
5,700 Pinault-Printemps-Redoute SA
(retail--general merchandise) 4,760,977
32,965 Rhodia Inc.(1)
(chemicals & resins) 917,448
16,300 Societe Generale Cl A
(banking) 3,382,156
See notes to financial statements.
- --------------------------------------------------------------------------------
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Century VP
International
Fund
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16
-------------
- --------------------------------------------------------------------------------
Shares Value
- ------------------------------------------------------------------------
16,000 Societe Television Francaise 1
(broadcasting & media) $ 2,474,744
39,000 Vivendi
(diversified companies) 8,311,159
------------
57,992,511
------------
Germany -- 10.8%
11,205 Allianz AG
(insurance) 3,729,885
3,064 Bayerische Motoren
Werke (BMW) AG
(automobiles & auto parts) 3,095,035
798 Bayerische Motoren
Werke (BMW) AG New Shares(1)
(automobiles & auto parts) 795,041
39,130 Daimler-Benz AG
(automobiles & auto parts) 3,844,343
14,200 Deutsche Bank AG
(financial services) 1,199,380
68,000 Deutsche Pfandbrief-und
Hypothekenbank AG
(banking) 5,434,881
36,000 Douglas Holding AG
(retail--general merchandise) 1,914,872
47,000 Dresdner Bank AG
(financial services) 2,536,392
103,000 Mannesmann AG
(industrial equipment & machinery) 10,575,358
36,000 Metro AG
(retail--general merchandise) 2,171,916
36,000 Metro AG Rights(1)
(retailgeneral merchandise) 1,395
31,000 VEBA AG
(utilities) 2,082,166
8,415 Volkswagen AG
(automobiles & auto parts) 8,118,307
------------
45,498,971
------------
Greece -- 0.3%
46,666 Hellenic Telecommunication
Organization SA (OTE)
(communications services) 1,195,503
------------
Hong Kong -- 0.3%
281,000 Hutchison Whampoa Limited
(diversified companies) 1,483,529
------------
Hungary -- 0.3%
40,000 Magyar Tavkozlesi Rt. ADR
(communications services) 1,177,500
------------
Ireland -- 2.1%
125,505 Bank of Ireland
(financial services) 2,583,512
50,800 CBT Group Plc ADR(1)
(computer software & services) 2,730,500
30,000 Elan Corp., plc ADR(1)
(pharmaceuticals) 1,929,375
36,000 Saville Systems Ireland plc ADR(1)
(computer software & services) 1,804,500
------------
9,047,887
------------
Italy -- 3.2%
1,752,600 Banca di Roma
(banking) 3,643,250
426,700 Banca Intesa S.p.A.
(financial services) 2,384,140
469,800 Credito Italiano
(banking) 2,456,031
98,376 La Rinascente SpA
(retail--food & drug) 490,250
151,600 Mondadori (Arnoldo) Editore SpA
(printing & publishing) 1,788,640
393,700 Telecom Italia SpA
(communications services) 2,894,300
------------
13,656,611
------------
Japan -- 4.1%
41,000 Aiwa Co., Ltd.
(electrical & electronic
components) 1,289,774
37,000 Bridgestone Corp.
(automobiles & auto parts) 877,640
372,000 Fujitsu Ltd.
(computer systems) 3,927,683
See notes to financial statements.
- --------------------------------------------------------------------------------
221
<PAGE>
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American
Century VP
International
Fund
- -------------
16
- -------------
- --------------------------------------------------------------------------------
American Century VP International Fund
- ---------------------------------------
SCHEDULE OF INVESTMENTS (Continued)
June 30, 1998 (Unaudited)
Shares Value
- ------------------------------------------------------------------------
45,000 Honda Motor Co., Ltd.
(automobiles & auto parts) $ 1,607,608
234,000 Minebea Company Ltd.
(electrical & electronic
components) 2,336,954
31 NTT Data Corp.
(communications services) 1,123,156
10,000 Nintendo Co., Ltd.
(electrical & electronic components) 929,274
45,800 Sony Corp.
(electrical & electronic
components) 3,957,984
47,000 Takeda Chemical Inds.
(pharmaceuticals) 1,254,194
------------
17,304,267
------------
Mexico(3)
5,310 Cemex SA de CV Cl A
(building & home improvements) 19,962
Netherland -- 8.6%
16,000 AOT NV
(financial services) 1,624,628
45,511 ASR Verzekeringsgroep N.V.
(insurance) 3,856,732
39,200 Cap Gemini N.V.
(computer software & services) 3,233,387
64,400 Getronics N.V.
(computer software & services) 3,335,805
162,809 ING Groep N.V.
(financial services) 10,647,433
117,864 Koninklijke Ahold NV
(retail--food & drug) 3,778,824
21,000 Philips Electronics N.V.
(electrical & electronic
components) 1,785,000
36,000 Unilever N.V.
(diversified companies) 2,841,750
110,200 VNU Tijdschriftengroep Nederland
(printing & publishing) 3,998,419
38,600 Vedior NV (Acquired
6/5/97-4/28/98,
Cost $845,118)(2)
(business services & supplies) 1,089,726
------------
36,191,704
------------
Norway -- 1.1%
100,000 Petroleum Geo-Services
ASA ADR(1)
(energy--services) 3,050,000
177,000 Storebrand ASA(1)
(insurance) 1,571,567
------------
4,621,567
------------
Poland -- 0.2%
86,000 Elektrim Spolka Akcyjna S.A.
(electrical & electronic
components) 1,048,179
Portugal -- 1.2%
64,500 Banco Espirito Santo e
Comercial de Lisboa, SA
(banking) 1,934,372
44,000 Banco Espirito Santo e
Comercial de Lisboa, SA Rights(1)
(banking) 263,914
21,900 Portugal Telecom S.A.
(communications services) 1,159,175
10,000 Telecel-Comunicacaoes
Pessoais, SA
(communications services) 1,773,356
------------
5,130,817
------------
Spain -- 2.6%
13,000 Banco Popular Espanol SA
(banking) 1,107,428
84,000 Corporacion Bancaria de
Espana SA
(banking) 1,881,924
136,909 Telefonica de Espana
(communications services) 6,321,826
See notes to financial statements.
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International
Fund
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16
-------------
- --------------------------------------------------------------------------------
Shares Value
- ------------------------------------------------------------------------
169,000 TelePizza, S.A.(1)
(restaurants) $ 1,788,564
------------
11,099,742
------------
Sweden -- 4.4%
26,200 Assa Abloy AB Cl B
(construction &
property development) 1,028,216
135,000 Electrolux AB Cl B
(consumer products) 2,315,261
70,500 Ericsson (L.M.) Telephone Co. ADR
(communications equipment) 2,022,469
36,000 Europolitan Holdings AB
(communications services) 2,523,691
78,400 Hennes & Mauritz AB Cl B
(retail--apparel) 4,995,506
52,000 NetCom Systems AB Cl B(1)
(communications services) 1,988,658
245,000 Skandia Forsakrings AB
(financial services) 3,496,363
------------
18,370,164
------------
Switzerland -- 7.9%
23,500 Credit Suisse Group
(financial services) 5,225,835
3,085 Julius Baer Holding AG
(financial services) 9,645,071
300 Kuoni Reisen Holding AG
(transportation) 1,488,436
3,400 Nestle S.A.
(food & beverage) 7,271,793
2,026 Novartis AG
(pharmaceuticals) 3,369,325
16,750 UBS AG
(banking) 6,224,550
------------
33,225,010
------------
United Kingdom --14.4%
386,700 Amvescap Plc
(financial services) 3,776,735
561,000 British Aerospace PLC
(aerospace & defense) 4,298,946
177,000 British Airways plc
(airlines) 1,916,327
73,900 CMG plc
(computer software & services) 2,322,554
379,000 Cable & Wireless
Communications plc(1)
(communications services) 3,837,571
250,000 Capita Group Plc
(business services & supplies) 2,151,568
218,000 Compass Group PLC
(business services & supplies) 2,507,622
249,000 Diageo plc
(food & beverage) 2,951,509
172,000 Energis plc(1)
(communications services) 2,620,280
167,000 Hays plc
(business services & supplies) 2,802,005
79,000 Logica plc
(computer software & services) 2,555,378
131,971 Misys plc
(computer software & services) 7,502,086
134,000 Orange plc(1)
(communications services) 1,420,578
69,473 Provident Financial plc
(financial services) 1,090,261
201,600 SEMA Group plc
(computer software & services) 2,372,827
42,000 Schroders plc
(financial services) 1,084,040
31,500 Serco Group plc
(business services & supplies) 725,732
259,000 Somerfield plc
(retail--food & drug) 1,653,932
137,700 Spring Group PLC
(business services & supplies) 957,492
89,000 Standard Chartered plc
(banking) 1,012,610
488,000 Vodafone Group plc
(communications services) 6,195,915
440,000 WPP Group plc
(business services & supplies) 2,885,063
See notes to financial statements.
- --------------------------------------------------------------------------------
223
<PAGE>
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American
Century VP
International
Fund
- -------------
16
- -------------
- --------------------------------------------------------------------------------
American Century VP International Fund
- ---------------------------------------
SCHEDULE OF INVESTMENTS (Continued)
June 30, 1998 (Unaudited)
Shares Value
- ------------------------------------------------------------------------
46,000 Zeneca Group plc
(pharmaceuticals) $ 1,975,219
------------
60,616,250
------------
United States -- 0.9%
62,000 AirTouch Communications, Inc.(1)
(communications services) 3,623,125
------------
TOTAL COMMON STOCKS
& RIGHTS -- 86.8%
(Cost $290,295,736) 366,318,737
------------
Shares/
Principal
Amount Value
- ------------------------------------------------------------------------
- ----------------
Preferred Stocks
- ----------------
Brazil -- 0.4%
9,628,000 Telerj Celular S.A. Cl B( (1))
(communications equipment) 572,660
11,642,000 Telesp Celular S.A. Cl B (1)
(communications equipment) 966,350
------------
1,539,010
------------
Germany -- 2.4%
49,000 Henkel KGaA
(chemicals & resins) 4,841,147
7,900 SAP AG
(computer software & services) 5,356,451
------------
10,197,598
------------
TOTAL PREFERRED STOCKS -- 2.8%
(Cost $8,797,340) 11,736,608
------------
- --------------------------
Temporary Cash Investments
- --------------------------
$23,700,000 FHLB Discount Notes,
5.55%, 7/1/98(4) 23,700,000
Repurchase Agreement, Merrill
Lynch & Co., Inc., 5.55%, due
7/1/98, collateralized by
$20,300,000 par value U.S.
Treasury Notes,
5.875%, due 2/28/99
(Delivery value $20,303,130) 20,300,000
------------
TOTAL TEMPORARY CASH
INVESTMENTS --10.4%
(Cost $44,000,000) 44,000,000
------------
TOTAL INVESTMENT SECURITIES
-- 100.0% (Cost $343,093,076) $422,055,345
============
FORWARD FOREIGN
CURRENCY EXCHANGE CONTRACTS
Unrealized
Contracts Settlement Gain
to Sell Date Value (Loss)
- ------------------------------------------------------------------------
4,875,426 CHF 7/30/98 $ 3,221,739 $ 26,206
10,032,621 DEM 7/30/98 5,562,865 36,508
33,661,076 FRF 7/30/98 5,566,286 32,672
3,705,856 GBP 7/30/98 6,177,243 1,622
217,619,565 JPY 7/30/98 1,580,583 (36,579)
7,089,510 NLG 7/30/98 3,486,988 24,009
12,700,452 SEK 7/30/98 1,591,686 22,263
=========== ========
$27,187,390 $106,701
(Value on Settlement Date $27,294,091)
Forward foreign currency exchange contracts are used by the portfolio management
team in an effort to protect foreign investments against declines in foreign
currencies. This is also known as hedging. The contracts are called "forward"
because they allow your fund to exchange a foreign currency for U.S. dollars at
a date in the future -- and at a price (known as the exchange rate) agreed upon
when the contract is initially entered into.
See notes to financial statements.
- --------------------------------------------------------------------------------
224
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International
Fund
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16
-------------
- --------------------------------------------------------------------------------
Shares Value
- ------------------------------------------------------------------------
NOTES TO SCHEDULE OF INVESTMENTS
ADR = American Depositary Receipt
CHF = Swiss Franc
DEM = German Mark
FHLB = Federal Home Loan Bank
FRF = French Franc
GBP = British Pound
JPY = Japanese Yen
NLG = Netherlands Guilder
SEK = Swedish Krona
(1) Non-income producing.
(2) Security was purchased under Rule 144A of the Securities Act of 1933 and,
unless registered under the Act or exempted from registration, may only be
sold to qualified institutional investors. The aggregate value of
restricted securities at 6/30/98, was $7,000,517 which represented 1.7% of
net assets.
(3) Investments in country were less than 0.05% of total investment
securities.
(4) The rate disclosed is the yield to maturity at purchase.
UNDERSTANDING THE
SCHEDULE OF INVESTMENTS
This schedule shows you which investments your fund owned on the last day of the
reporting period.
The schedule includes:
o the percentage of total investments in each country
o a list of each investment
o the number of shares of each stock
o the market value of each investment
o the percent and dollar breakdown of each investment category
See notes to financial statements.
- --------------------------------------------------------------------------------
225
<PAGE>
- -------------
American
Century VP
International
Fund
- -------------
16
- -------------
- --------------------------------------------------------------------------------
American Century VP International Fund
- ---------------------------------------
STATEMENT OF ASSETS
AND LIABILITIES
June 30, 1998 (Unaudited)
Assets:
Investment securities, at value (identified
cost of $343,093,076) (Note 3) $ 422,055,345
Foreign currency holdings, at value
(identified cost of $346,097) 346,097
Cash 754,849
Receivable for forward foreign currency
exchange contracts 143,280
Receivable for investments sold 1,451,855
Dividends and interest receivable 938,931
Other assets 692
-------------
425,691,049
-------------
Liabilities:
Payable for investments purchased 10,750,539
Payable for capital shares redeemed 2,554,563
Payable for forward foreign currency
exchange contracts 36,579
Accrued management fees (Note 2) 476,400
Payable for directors' fees and expenses 290
-------------
13,818,371
-------------
Net Assets $ 411,872,678
=============
Capital Shares, $0.01 par value:
Authorized 200,000,000
=============
Outstanding 51,243,729
=============
Net Asset Value Per Share $ 8.04
=============
Net Assets consist of:
Capital (par value and paid-in surplus) $ 330,349,655
Undistributed net investment income 1,303,985
Accumulated undistributed net realized gain from
investments and foreign currency
transactions 1,168,538
Net unrealized appreciation on investments
and translation of assets and liabilities
in foreign currencies (Note 3) 79,050,500
-------------
Total Net Assets $ 411,872,678
=============
Understanding the Statement of Assets and Liabilities--This statement details
what the fund owns (assets), what it owes (liabilities), and its net assets as
of the last day of the period. If you subtract what the fund owes from what it
owns, you get the fund's net assets. The net assets divided by the total number
of shares outstanding gives you the price of an individual share, or the net
asset value per share.
Net Assets are also broken out by capital (money invested by shareholders); net
investment income not yet paid to shareholders or net investment losses; net
gains earned on investments not yet paid to shareholders or net losses from
investments (known as realized gains or losses), and finally, gains or losses on
securities still owned by the fund (known as unrealized appreciation or
depreciation). This breakout tells you the value of net assets that are
performance-related, such as investment gains or losses, and the value of net
assets that are not related to performance, such as shareholder investments and
redemptions.
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1998
(Unaudited)
Investment Income:
Dividends (net of foreign taxes withheld
of $511,480) $ 3,448,320
Interest 886,204
-------------
4,334,524
-------------
Expenses (Note 2):
Management fees 2,246,986
Directors' fees and expenses 1,326
-------------
2,248,312
-------------
Net Investment Income 2,086,212
=============
Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency (Note 3):
Net realized gain (loss) on:
Investments 6,650,793
Foreign currency transactions (2,667,360)
-------------
3,983,433
-------------
Change in net unrealized appreciation on:
Investments 55,634,379
Translation of assets and liabilities in
foreign currencies (84,347)
-------------
55,550,032
-------------
Net realized and unrealized gain on
investments and foreign currency 59,533,465
-------------
Net Increase in Net Assets Resulting from
Operations $ 61,619,677
=============
Understanding the Statement of Operations--This statement breaks out how the
fund's net assets changed during the period as a result of the fund's
operations. It tells you how much money the fund made or lost after taking into
account income, fees and expenses, and investment gains or losses. It does not
include shareholder transactions and distributions.
Fund Operations include:
o income earned by investments (dividends and interest)
o management fees and expenses
o gains or losses from selling investments (known as realized gains or
losses)
o gains or losses on current fund holdings (known as unrealized appreciation
or depreciation)
See notes to financial statements.
- --------------------------------------------------------------------------------
226
<PAGE>
-------------
American
Century VP
International
Fund
-------------
16
-------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1998 December 31,
(Unaudited) 1997
------------- ------------
<S> <C> <C>
Operations:
Net investment income (loss) $ 2,086,212 $ (134,762)
Net realized gain on investments and foreign
currency transactions 3,983,433 13,688,083
Change in net unrealized appreciation on
investments and translation of assets and
liabilities in foreign currencies 55,550,032 13,350,515
------------- -------------
Net increase in net assets resulting from operations 61,619,677 26,903,836
------------- -------------
Distributions to shareholders:
From net investment income (1,512,683) (1,287,755)
In excess of net investment income -- (148,297)
From net realized gains from investment transactions (15,528,803) (2,769,529)
------------- -------------
Decrease in net assets from distributions (17,041,486) (4,205,581)
------------- -------------
Capital share transactions:
Proceeds from shares sold 290,951,355 251,281,839
Proceeds from reinvestment of distributions 17,041,486 4,205,581
Payments for shares redeemed (157,221,076) (162,998,136)
------------- -------------
Net increase in net assets from capital share transactions 150,771,765 92,489,284
------------- -------------
Net increase in net assets 195,349,956 115,187,539
Net Assets:
Beginning of period 216,522,722 101,335,183
------------- -------------
End of period $ 411,872,678 $ 216,522,722
------------- -------------
Undistributed net investment income $ 1,303,985 $ 730,456
============= =============
Transactions in shares of the Fund:
Sold 37,846,891 38,184,069
Issued in reinvestment of distributions 2,328,072 691,707
Redeemed (20,587,075) (24,224,772)
------------- -------------
Net increase 19,587,888 14,651,004
============= =============
</TABLE>
Understanding the Statement of Changes in Net Assets--This statement shows how
the fund's net assets changed over the past two reporting periods. It details
how much a fund grew or shrank as a result of:
o operations--a summary of the Statement of Operations from the previous
page for the most recent period
o distributions--income and gains distributed to shareholders
o share transactions--shareholders' purchases, reinvestment of distributions
and redemptions
Net assets at the beginning of the period plus the sum of operations,
distributions to shareholders and capital share transactions result in net
assets at the end of the period.
See notes to financial statements.
- --------------------------------------------------------------------------------
227
<PAGE>
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American
Century VP
International
Fund
- -------------
16
- -------------
- --------------------------------------------------------------------------------
American Century VP International Fund
- ---------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited)
- ------------------------------------------
1. Organization and Summary of Significant
Accounting Policies
- ------------------------------------------
Organization -- American Century Variable Portfolios, Inc. (the
Corporation) is registered under the Investment Company Act of 1940 as an
open-end diversified management investment company. American Century VP
International (the Fund) is one of the six series of funds issued by the
Corporation. The Fund's investment objective is capital growth. The Fund seeks
to achieve its investment objective by investing primarily in an internationally
diversified portfolio of equity securities that are considered by management to
have prospects for appreciation. The Fund will invest primarily in securities of
issuers located in developed markets. The following significant accounting
policies, related to the Fund, are in accordance with accounting policies
generally accepted in the investment company industry.
Security Valuations
Portfolio securities traded primarily on a principal securities exchange
are valued at the last reported sales price, or the mean of the latest bid and
asked prices where no last sales price is available. Securities traded
over-the-counter are valued at the mean of the latest bid and asked prices or,
in the case of certain foreign securities, at the last reported sales price,
depending on local convention or regulation. When valuations are not readily
available, securities are valued at fair value as determined in accordance with
procedures adopted by the Board of Directors.
Security Transactions
Security transactions are accounted for as of the trade date. Net realized
gains and losses are determined on the identified cost basis, which is also used
for federal income tax purposes.
Investment Income
Dividend income less foreign taxes withheld (if any) is recorded as of the
ex-dividend date. Interest income is recorded on the accrual basis and includes
accretion of discounts and amortization of premiums.
Foreign Currency Transaction
The accounting records of the Fund are maintained in U.S. dollars. All
assets and liabilities initially expressed in foreign currencies are converted
into U.S. dollars at prevailing exchange rates. Purchases and sales of
investment securities, dividend and interest income, and certain expenses are
translated at the rates of exchange prevailing on the respective dates of such
transactions.
Net realized foreign currency exchange gains or losses arise from sales of
portfolio securities, sales of foreign currencies, and the difference between
asset and liability amounts initially stated in foreign currencies and the U.S.
dollar value of the amounts actually received or paid. Net unrealized foreign
currency exchange gains or losses arise from changes in the value of portfolio
securities and other assets and liabilities resulting from changes in the
exchange rates.
Net realized and unrealized foreign currency exchange gains or losses
occurring during the holding period of portfolio securities are a component of
realized gain (loss) on foreign currency transactions and unrealized
appreciation (depreciation) on translation of assets and liabilities in foreign
currencies, respectively.
Forward Foreign Currency Exchange Contracts
The Fund may enter into forward foreign currency exchange contracts for
the purpose of settling specific purchases or sales of securities denominated in
a foreign currency or to hedge the Fund's exposure to for-
- --------------------------------------------------------------------------------
228
<PAGE>
-------------
American
Century VP
International
Fund
-------------
16
-------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited) (Continued)
eign currency exchange rate fluctuations. When required, the Fund will segregate
assets in an amount sufficient to cover its obligations under the hedge
contracts. The net U.S. dollar value of foreign currency underlying all
contractual commitments held by the Fund and the resulting unrealized
appreciation or depreciation are determined daily using prevailing exchange
rates. Forward contracts involve elements of market risk in excess of the amount
reflected in the Statement of Assets and Liabilities. The Fund bears the risk of
an unfavorable change in the foreign currency exchange rate underlying the
forward contract. Additionally, losses may arise if the counterparties do not
perform under the contract terms.
Repurchase Agreements
The Fund may enter into repurchase agreements with institutions that the
Fund's investment manager, American Century Investment Management, Inc. (ACIM),
has determined are creditworthy pursuant to criteria adopted by the Board of
Directors. Each repurchase agreement is recorded at cost. The Fund requires that
the collateral, represented by securities, received in a repurchase transaction
be transferred to the custodian in a manner sufficient to enable the Fund to
obtain those securities in the event of a default under the repurchase
agreement. ACIM monitors, on a daily basis, the securities transferred to ensure
the value, including accrued interest, of the securities under each repurchase
agreement is equal to or greater than amounts owed to the Fund under each
repurchase agreement.
Income Tax Status
It is the policy of the Fund to distribute all taxable income and capital
gains to shareholders and to otherwise qualify as a regulated investment company
under provisions of the Internal Revenue Code. Accordingly, no provision has
been made for federal or state income taxes.
Distributions to Shareholders
Distributions to shareholders are recorded on the ex-dividend date.
Distributions from net investment income and net realized gains are declared and
paid annually. The character of distributions made during the year from net
investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. These differences are
primarily due to differing treatments for foreign currency transactions and wash
sales and may result in reclassification among certain capital accounts.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of increases and
decreases in net assets from operations during the reporting period. Actual
results could differ from those estimates.
Additional Information
Funds Distributor, Inc. (FDI) is the Corporation's distributor. Certain
officers of FDI are also officers of the Corporation.
- ------------------------------------
2. Transactions with Related Parties
- ------------------------------------
The Corporation has entered into a Management Agreement with ACIM that
provides the Fund with investment advisory and management services in exchange
for a single, unified fee. The Agreement pro-
- --------------------------------------------------------------------------------
229
<PAGE>
- -------------
American
Century VP
International
Fund
- -------------
16
- -------------
- --------------------------------------------------------------------------------
American Century VP International Fund
- ---------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
June 30, 1998 (Unaudited)
vides that all expenses of the Fund, except brokerage commissions, taxes,
interest, expenses of those directors who are not considered "interested
persons" as defined in the Investment Company Act of 1940 (including counsel
fees) and extraordinary expenses, will be paid by ACIM. The fee is computed
daily and Purchases and sales of investment securities, paid monthly based on
the Fund's average daily closing net assets during the previous month. The
annual management fee for the Fund is 1.50%.
Certain officers and directors of the Corporation are also officers and/or
directors, and, as a group, controlling stockholders of American Century
Companies, Inc., the parent of the Corporation's investment manager, ACIM, and
the Corporation's transfer agent, American Century Services Corporation.
- --------------------------
3. Investment Transactions
- --------------------------
Purchases and sales of investment securities, excluding short-term
investments, totaled $350,940,067 and $230,026,702, respectively. On June 30,
1998, accumulated net unrealized appreciation on investments was $77,128,263,
based on the aggregate cost of investments for federal income tax purposes of
$344,927,082, which consisted of unrealized appreciation of $81,251,929 and
unrealized depreciation of $4,123,666.
- --------------------------------------------------------------------------------
230
<PAGE>
-------------
American
Century VP
International
Fund
-------------
16
-------------
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For a share outstanding throughout the years ended December 31 (except as noted)
<TABLE>
<CAPTION>
May 1, 1994
(inception)
Six Months Ended Year Ended December 31, through
June 30, 1998 ----------------------------------------- December 31,
(Unaudited) 1997 1996 1995* 1994
----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ............ $ 6.84 $ 5.96 $ 5.33 $ 4.75 $ 5.00
----------- ----------- ----------- ----------- -----------
Income From Investment Operations:
Net Investment Income (Loss) .................. 0.07 (0.02) 0.02 0.03 --
Net Realized and Unrealized Gain (Loss) on
Investment Transactions ................... 1.61 1.11 0.74 0.55 (0.25)
----------- ----------- ----------- ----------- -----------
Total From Investment Operations ................ 1.68 1.09 0.76 0.58 (0.25)
----------- ----------- ----------- ----------- -----------
Distributions:
From Net Investment Income ...................... (0.04) (0.06) (0.03) -- --
In Excess of Net Investment Income .............. -- (0.01) (0.07) -- --
From Net Realized Gains on Investment
Transactions .............................. (0.44) (0.14) (0.03) -- --
----------- ----------- ----------- ----------- -----------
Total Distributions ............................. (0.48) (0.21) (0.13) -- --
----------- ----------- ----------- ----------- -----------
Net Asset Value, End of Period ...................... $ 8.04 $ 6.84 $ 5.96 $ 5.33 $ 4.75
=========== =========== =========== =========== ===========
Total Return* ................................... 25.30% 18.63% 14.41% 12.21% (5.00)%
=========== =========== =========== =========== ===========
Ratios/Supplemental Data:
Ratio of Operating Expenses to Average Net
Assets ........................................ 1.50%+ 1.50% 1.50% 1.50% 1.50%+
Ratio of Net Investment Income (Loss) to
Average Net Assets ............................ 1.39%+ (0.08)% 0.31% 0.70% (0.11)%+
Portfolio Turnover Rate ......................... 81% 173% 154% 214% 157%
Net Assets, End of Period (in 000's) ............ $ 411,873 $ 216,523 $ 101,335 $ 51,609 $ 17,993
</TABLE>
- ----------
# Computed using average shares outstanding throughout the period.
* Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are
not annualized.
+ Annualized.
Understanding the Financial Highlights--This statement itemizes current period
activity and statistics and provides comparison data for the last five fiscal
years (or less, if the fund is not five years old).
On a per-share basis, it includes:
o share price at the beginning of the period
o portfolio income and capital gains or losses
o distributions of income and capital gains paid to shareholders
o share price at the end of the period
It also includes some key statistics for the period:
o total return--the overall percentage return of the fund, assuming
reinvestment of all distributions
o expense ratio--operating expenses, expressed as a percentage of average
net assets
o net income ratio--net investment income as a percentage of average net
assets
o portfolio turnover--the percentage of the portfolio that was replaced
during the period
See notes to financial statements.
- --------------------------------------------------------------------------------
231
<PAGE>
- -------------
American
Century VP
International
Fund
- -------------
16
- -------------
- --------------------------------------------------------------------------------
American Century VP International Fund
- ---------------------------------------
BACKGROUND INFORMATION
INVESTMENT PHILOSOPHY AND POLICIES
The philosophy behind American Century's growth funds focuses on three
important principles. Chiefly, the funds seek to own successful companies, which
we define as those whose earnings and revenues are growing at accelerating
rates. In addition, we attempt to keep the funds fully invested, regardless of
short-term market activity. Experience has shown that market gains can occur in
unpredictable spurts and that missing even some of these opportunities may
significantly limit potential for gain. Finally, American Century funds are
managed by teams, rather than by one "star" manager. We believe this enables us
to make better, more consistent management decisions.
VP INTERNATIONAL'S investment objective is capital growth. The fund
invests primarily in the equity securities of foreign companies that exhibit
accelerating earnings growth. It favors companies based in developed markets. It
will typically have significant share price fluctuations.
International investing involves special risks including political
instability and economic risk.
HOW CURRENCY RETURNS AFFECT FUND PERFORMANCE
For U.S. investors, the total return from international stocks includes
the effects of currency fluctuations -- the movement of international currency
values in relation to the value of the U.S. dollar. Currency exchange rates come
into play when international stock income, gains and losses are converted into
U.S. dollars.
Changing currency values may have a significant impact on the total
returns of international stock funds. The value of the foreign investments held
by international stock funds may be reduced or increased by changes in currency
exchange rates. The U.S. dollar value of a foreign security generally decreases
when the value of the dollar rises against the foreign currency in which the
security is denominated. This tended to be the case in 1997, when the dollar
increased in value against most major foreign currencies. (The weakened foreign
currencies bought fewer dollars.) Conversely, the U.S. dollar value of a foreign
security tends to increase when the value of the dollar falls against the
foreign currency. (The stronger foreign currency buys more dollars.) In
addition, the value of fund assets may be affected by losses and other expenses
incurred in converting between U.S. dollars and various currencies in order to
purchase and sell foreign securities. Currency restrictions, exchange control
regulations, currency devaluations and political developments may also affect
net asset value.
COMPARATIVE INDICES
The following indices are used in the report to serve as fund performance
comparisons. They are not investment products available for purchase.
MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) has developed several indices
that measure the performance of foreign stock markets. The best known is the
EUROPE, AUSTRALASIA, FAR EAST INDEX (EAFE), which is a widely followed group of
stocks from 20 countries. Within this index are two narrower indices. The MSCI
EUROPE measures stock performance in 14 European countries. The MSCI FAR EAST
measures stock performance in Japan, Hong Kong, Malaysia and Singapore.
- --------------------------------------------------------------------------------
232
<PAGE>
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American
Century VP
International
Fund
-------------
16
-------------
- --------------------------------------------------------------------------------
GLOSSARY
RETURNS
o TOTAL RETURN figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
o AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as year-by-year results.
For year-by-year total returns, please refer to the "Financial Highlights" on
page 18.
PORTFOLIO STATISTICS
o NUMBER OF COMPANIES -- the number of different companies held by a fund on a
given date.
o PORTFOLIO TURNOVER -- the percentage of a fund's investment portfolio that is
replaced during a given time period, usually a year. Actively managed portfolios
tend to have higher turnover than passively managed portfolios such as index
funds.
See notes to financial statements.
- --------------------------------------------------------------------------------
233
<PAGE>
- --------------
Fidelity
VIP III Growth
Opportunities
Portfolio
- --------------
17
- --------------
- --------------------------------------------------------------------------------
Fidelity VIP III Growth Opportunities Portfolio
- -----------------------------------------------
SCHEDULE OF INVESTMENTS
June 30, 1998 (Unaudited)
- ----------------------
COMMON STOCKS -- 85.3%
- ----------------------
Value
Shares (Note 1)
- --------------------------------------------------------------------------------
- ------------------------
BASIC INDUSTRIES -- 2.6%
- ------------------------
Chemicals & Plastics -- 1.4%
30,700 Cabot Corp. $ 991,994
161,500 du Pont (E.I.) de Nemours & Co. 12,051,938
145,100 Raychem Corp. 4,289,519
44,700 Union Carbide Corp. 2,385,863
-------------
19,719,314
-------------
Packaging & Containers -- 0.9%
7,300 Corning, Inc. 253,675
292,800 Owens-Illinois, Inc. (a) 13,102,800
-------------
13,356,475
-------------
Paper & Forest Products -- 0.3%
57,600 Champion International Corp. 2,833,200
4,500 Georgia-Pacific Corp. 265,219
23,200 Stone Container Corp. (a) 362,500
16,700 Willamette Industries, Inc. 534,400
-------------
3,995,319
-------------
TOTAL BASIC INDUSTRIES 37,071,108
-------------
- ---------------------------------
CONSTRUCTION & REAL ESTATE-- 1.7%
- ---------------------------------
Building Materials -- 0.5%
13,200 Armstrong World Industries, Inc. 889,350
114,800 Owens Corning 4,685,275
34,800 Sherwin-Williams Co. 1,152,750
-------------
6,727,375
-------------
Construction -- 0.8%
42,600 Centex Corp. 1,608,150
86,536 D.R. Horton, Inc. 1,806,439
87,762 Fleetwood Enterprises, Inc. 3,510,480
113,200 Kaufman & Broad Home Corp. 3,594,100
5,600 U.S. Home Corp. (a) 231,000
-------------
10,750,169
-------------
Engineering -- 0.4%
121,400 Fluor Corp. 6,191,400
-------------
TOTAL CONSTRUCTION & REAL ESTATE 23,668,944
-------------
- ----------------
DURABLES -- 4.1%
- ----------------
Autos, Tires, & Accessories -- 2.8%
42,800 AutoZone, Inc. (a) 1,366,925
69,600 Cummins Engine Co., Inc. 3,567,000
66,300 Discount Auto Parts, Inc. (a) 1,723,800
361,900 General Motors Corp. 24,179,444
38,000 Goodyear Tire & Rubber Co. 2,448,625
81,300 Magna International, Inc. Class A 5,577,864
20,500 Republic Industries, Inc. (a) 512,500
-------------
39,376,158
-------------
Consumer Durables -- 0.2%
34,500 Minnesota Mining & Manufacturing Co. 2,835,469
-------------
Consumer Electronics -- 0.3%
22,500 Maytag Co. 1,110,938
20,400 Newell-Co. 1,016,175
22,900 Whirlpool Corp. 1,574,375
-------------
3,701,488
-------------
Textiles & Apparel -- 0.8%
165,200 Burlington Industries, Inc. (a) 2,323,125
44,200 Jones Apparel Group, Inc. (a) 1,616,063
110,800 Liz Claiborne, Inc. 5,789,300
27,600 NIKE, Inc. Class B 1,343,775
31,800 Shaw Industries, Inc. 560,475
10,600 Warnaco Group, Inc. Class A 449,838
-------------
12,082,576
-------------
TOTAL DURABLES 57,995,691
-------------
- --------------
ENERGY -- 6.4%
- --------------
Energy Services -- 0.2%
98,800 McDermott International, Inc. 3,402,425
5,300 Schlumberger Ltd. 362,056
-------------
3,764,481
-------------
Oil & Gas -- 6.2%
201,000 Amerada Hess Corp. 10,916,813
23,400 Apache Corp. 737,100
23,900 Atlantic Richfield Co. 1,867,188
192,687 British Petroleum PLC ADR 17,004,628
207,435 Burlington Resources, Inc. 8,932,670
36,600 Chevron Corp. 3,040,088
See accompanying notes which are an integral part of the Financial Statements.
- --------------------------------------------------------------------------------
234
<PAGE>
--------------
Fidelity
VIP III Growth
Opportunities
Portfolio
--------------
17
--------------
- --------------------------------------------------------------------------------
Value
Shares (Note 1)
- --------------------------------------------------------------------------------
Oil & Gas -- (continued)
15,300 Cooper Cameron Corp. (a) $ 780,300
22,200 Elf Aquitaine SA sponsored ADR 1,576,200
391,500 Occidental Petroleum Corp. 10,570,500
352,100 Royal Dutch Petroleum Co. 19,299,481
252,400 Tosco Corp. 7,414,250
Total SA:
6,153 Class B 797,733
49,468 sponsored ADR 3,233,971
30,300 USX-Marathon Group 1,039,669
17,400 Unocal Corp. 622,050
-------------
87,832,641
-------------
TOTAL ENERGY 91,597,122
-------------
- ----------------
FINANCE -- 20.8%
- ----------------
Banks -- 1.9%
40,000 Banc One Corp. 2,232,500
181,000 Bank of Tokyo-Mitsubishi Ltd. 1,913,834
42,900 Credit Suisse Group (Reg.) 9,523,927
63,400 NationsBank Corp. 4,850,100
104,700 Providian Financial Corp. 8,225,494
-------------
26,745,855
-------------
Credit & Other Finance -- 3.5%
605,382 Fleet Financial Group, Inc. 50,549,397
-------------
Federal Sponsored Credit -- 9.3%
880,600 Freddie Mac 41,443,238
1,495,600 Fannie Mae 90,857,700
-------------
132,300,938
-------------
Insurance -- 5.5%
86,600 AFLAC, Inc. 2,625,063
48,600 Allmerica Financial Corp. 3,159,000
215,759 Allstate Corp. 19,755,433
141,500 American International Group, Inc. 20,659,000
127,800 CIGNA Corp. 8,818,200
38,500 Loews Corp. 3,354,313
21,600 MBIA, Inc. 1,617,300
147,800 MGIC Investment Corp. 8,433,838
26,700 PMI Group, Inc. 1,959,113
11,600 Reliastar Financial Corp. 556,800
102,900 Torchmark Corp. 4,707,675
58,900 Travelers Property Casualty Corp. Class A 2,525,338
-------------
78,171,073
-------------
Savings & Loans -- 0.2%
32,700 Golden West Financial Corp. 3,476,419
-------------
Securities Industry -- 0.4%
325,000 Nomura Securities Co. Ltd. 3,777,981
11,800 Travelers Group, Inc. (The) 715,375
45,300 United Asset Management Corp. 1,180,631
1,900 Waddell & Reed Financial, Inc. Class A 45,481
-------------
5,719,468
-------------
TOTAL FINANCE 296,963,150
-------------
- --------------
HEALTH -- 8.6%
- --------------
Drugs & Pharmaceuticals -- 3.6%
236,000 American Home Products Corp. 12,213,000
130,700 Amgen, Inc. (a) 8,544,513
317,166 Astra AB Class A Free shares 6,464,682
55,900 Merck & Co., Inc. 7,476,625
3,100 Novartis AG (Reg.) 5,146,785
128,600 Schering-Plough Corp. 11,782,975
-------------
51,628,580
-------------
Medical Equipment & Supplies -- 1.2%
68,000 AmeriSource Health Corp. Class A (a) 4,466,750
10,700 Baxter International, Inc. 575,794
81,000 Biomet, Inc. 2,678,063
83,700 Johnson & Johnson 6,172,875
100,902 St. Jude Medical, Inc. (a) 3,714,455
-------------
17,607,937
-------------
Medical Facilities Management -- 3.8%
1,073,350 Columbia/HCA Healthcare Corp. 31,261,319
21,300 Healthsouth Corp. 568,444
240,800 Humana, Inc. (a) 7,509,950
232,800 Tenet Healthcare Corp. (a) 7,275,000
110,600 United HealthCare Corp. 7,023,100
-------------
53,637,813
-------------
TOTAL HEALTH 122,874,330
-------------
See accompanying notes which are an integral part of the Financial Statements.
- --------------------------------------------------------------------------------
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- --------------
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VIP III Growth
Opportunities
Portfolio
- --------------
17
- --------------
- --------------------------------------------------------------------------------
Fidelity VIP III Growth Opportunities Portfolio
- -----------------------------------------------
SCHEDULE OF INVESTMENTS (Continued)
June 30, 1998 (Unaudited)
Value
Shares (Note 1)
- --------------------------------------------------------------------------------
- -------------------------
HOLDING COMPANIES -- 0.1%
- -------------------------
36,100 U.S. Industries, Inc. $ 893,475
-------------
- ---------------------------------------
INDUSTRIAL MACHINERY & EQUIPMENT-- 0.9%
- ---------------------------------------
Electrical Equipment-- 3.1%
4,500 Alcatel Alsthom Compagnie
Generale d'Electricite SA
sponsored ADR 183,094
52,900 Alcatel Alsthom Compagnie
Generale d'Electricite SA 10,741,427
90,600 Emerson Electric Co. 5,469,975
99,600 General Electric Co. 9,063,600
16,000 Grainger (W.W.), Inc. 797,000
139,900 Philips Electronics NV 11,891,500
64,900 Philips Electronics NV (Bearer) 5,444,818
-------------
43,591,414
-------------
Industrial Machinery & Equipment -- 0.9%
82,300 Caterpillar, Inc. 4,351,613
92,600 Tyco International Ltd. 5,833,800
66,800 Ultratech Stepper, Inc. (a) 1,319,300
54,200 United States Filter Corp. (a) 1,520,988
-------------
13,025,701
-------------
Pollution Control -- 0.0%
2,600 Browning-Ferris Industries, Inc. 90,350
-------------
TOTAL INDUSTRY MACHINERY & EQUIPMENT 56,707,465
-------------
- -----------------------
MEDIA & LEISURE -- 3.0%
- -----------------------
Broadcasting -- 1.1%
40,900 CBS Corp. 1,298,575
13,500 Comcast Corp. Class A special 548,016
13,300 Cox Communications, Inc. Class A (a) 644,219
100,900 MediaOne Group, Inc. 4,433,294
Tele-Communications, Inc. (a):
29,568 (TCI Group), Series A 1,136,520
282,664 (TCI Ventures Group), Series A 5,670,947
27,600 Time Warner, Inc. 2,358,075
-------------
16,089,646
-------------
Entertainment -- 0.2%
5,800 Cedar Fair L.P. (depositary unit) 160,225
23,800 King World Productions, Inc. (a) 606,900
14,700 Royal Caribbean Cruises Ltd. 1,168,650
8,500 Viacom, Inc. Class A (a) 497,250
-------------
2,433,025
-------------
Lodging & Gaming -- 0.8%
98,900 Circus Circus Enterprises, Inc. (a) 1,675,119
113,300 Mirage Resorts, Inc. (a) 2,414,706
97,000 Promus Hotel Corp. (a) 3,734,500
72,800 Sun International Hotels Ltd. Ord. (a) 3,312,400
-------------
11,136,725
-------------
Publishing -- 0.2%
30,400 Cognizant Corp. 1,915,200
6,800 Harte Hanks Communications, Inc. 175,525
-------------
2,090,725
-------------
Restaurants -- 0.7%
68,400 McDonald's Corp. 4,719,600
8,500 Papa John's International, Inc. (a) 335,219
226,800 Wendy's International, Inc. 5,329,800
-------------
10,384,619
-------------
TOTAL MEDIA & LEISURE 42,134,740
-------------
- -------------------
NONDURABLES -- 4.7%
- -------------------
Beverages -- 0.0%
12,000 PepsiCo, Inc. 494,250
-------------
Household Products -- 0.0%
4,100 Avon Products, Inc. 317,750
-------------
Tobacco -- 4.7%
1,694,800 Philip Morris Companies, Inc. 66,732,750
-------------
TOTAL NONDURABLES 67,544,750
-------------
- -----------------------
PRECIOUS METALS -- 0.0%
- -----------------------
23,569 Newmont Mining Corp. 556,818
-------------
See accompanying notes which are an integral part of the Financial Statements.
- --------------------------------------------------------------------------------
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Opportunities
Portfolio
--------------
17
--------------
- --------------------------------------------------------------------------------
Value
Shares (Note 1)
- --------------------------------------------------------------------------------
- --------------------------
RETAIL & WHOLESALE -- 9.5%
- --------------------------
Apparel Stores -- 0.5%
39,150 Gap, Inc. $ 2,412,619
183,000 TJX Companies, Inc. 4,414,875
-------------
6,827,494
-------------
General Merchandise Stores -- 3.4%
128,100 Federated Department Stores, Inc. (a) 6,893,381
46,000 Penney (J.C.) Co., Inc. 3,326,375
36,100 Proffitts, Inc. (a) 1,457,538
604,600 Wal-Mart Stores, Inc. 36,729,450
-------------
48,406,744
-------------
Grocery Stores -- 0.3%
123,200 Safeway, Inc. (a) 5,012,700
-------------
Retail & Wholesale, Miscellaneous-- 5.3%
266,700 Circuit City Stores, Inc.--
Circuit City Group 12,501,563
382,700 Home Depot, Inc. 31,788,019
507,200 Lowe's Companies, Inc. 20,573,300
155,975 Officemax, Inc. (a) 2,573,588
42,600 Office Depot, Inc. (a) 1,344,563
10,055 School Specialty, Inc. 164,651
105,450 Staples, Inc. (a) 3,051,459
39,400 Toys "R" Us, Inc. (a) 928,363
21,724 U.S. Office Products Co. (a) 423,618
62,900 Viking Office Products, Inc. (a) 1,973,488
-------------
75,322,612
-------------
TOTAL RETAIL & WHOLESALE 135,569,550
-------------
- ----------------
SERVICES -- 0.5%
- ----------------
Advertising -- 0.0%
8,150 Interpublic Group of Companies, Inc. 494,603
-------------
Printing -- 0.0%
11,586 Workflow Management, Inc. 93,412
-------------
Services -- 0.5%
86,100 AccuStaff, Inc. (a) 2,690,625
71,000 Medpartners, Inc. (a) 568,000
8,689 Navigant International, Inc. 73,857
83,600 Service Corp. International 3,584,350
-------------
6,916,832
-------------
TOTAL SERVICES 7,504,847
-------------
- ------------------
TECHNOLOGY -- 9.3%
- ------------------
Computer Services & Software -- 2.7%
65,100 Automatic Data Processing, Inc. 4,744,163
17,379 Aztec Technology Partners, Inc. 132,515
20,400 Black Box Corp. (a) 677,025
74,100 Ceridian Corp. (a) 4,353,375
38,200 CompUSA, Inc. (a) 689,988
57,500 E Trade Group, Inc. (a) 1,318,906
100,600 Electronics for Imaging, Inc. (a) 2,125,175
118,500 First Data Corp. 3,947,531
106,900 Microsoft Corp. (a) 11,585,288
121,725 Oracle Corp. (a) 2,989,870
136,900 Policy Management Systems Corp. (a) 5,373,325
-------------
37,937,161
-------------
Computers & Office Equipment -- 2.1%
237,600 Compaq Computer Corp. 6,741,900
47,000 Hewlett-Packard Co. 2,814,125
16,300 Ingram Micro, Inc. Class A (a) 721,275
77,100 International Business Machines Corp. 8,852,044
209,000 SCI Systems, Inc. (a) 7,863,625
88,500 Tech Data Corp. (a) 3,794,438
-------------
30,787,407
-------------
Electronic Instruments -- 0.6%
6,200 Applied Materials, Inc. (a) 182,900
22,100 Cognex Corp. (a) 408,850
44,100 KLA-Tencor Corp. 1,221,019
114,700 Lam Research Corp. (a) 2,193,638
23,800 Novellus Systems, Inc. (a) 849,363
92,000 Thermo Electron Corp. (a) 3,145,250
15,000 Varian Associates, Inc. 585,000
-------------
8,586,020
-------------
See accompanying notes which are an integral part of the Financial Statements.
- --------------------------------------------------------------------------------
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VIP III Growth
Opportunities
Portfolio
- --------------
17
- --------------
- --------------------------------------------------------------------------------
Fidelity VIP III Growth Opportunities Portfolio
- -----------------------------------------------
SCHEDULE OF INVESTMENTS (Continued)
June 30, 1998 (Unaudited)
Value
Shares (Note 1)
- --------------------------------------------------------------------------------
Electronics -- 3.9%
32,300 Altera Corp. (a) $ 954,869
32,400 Amkor Technology, Inc. 302,738
108,400 AMP, Inc. 3,726,250
84,800 Intel Corp. 6,285,800
42,900 International Rectifier Corp. (a) 364,650
115,000 Methode Electronics, Inc. Class A 1,782,500
26,100 Micrel, Inc. (a) 848,250
98,600 Microchip Technology, Inc. (a) 2,575,925
313,300 Micron Technology, Inc. (a) 7,773,756
1,700 MIPS Technologies, Inc. 23,800
99,128 Molex, Inc. 2,317,117
153,200 Motorola, Inc. 8,052,575
414,700 Solectron Corp. (a) 17,443,319
59,300 Thomas & Betts Corp. 2,920,525
15,010 Vishay Intertechnology, Inc. 269,242
-------------
55,641,316
-------------
TOTAL TECHNOLOGY 132,951,904
-------------
- ----------------------
TRANSPORTATION -- 0.4%
- ----------------------
Railroads -- 0.4%
60,900 Bombardier, Inc. Class B 1,659,683
79,800 CSX Corp. 3,630,900
-------------
5,290,583
-------------
Shipping -- 0.0%
10,400 Stolt-Nielsen SA Class B sponsored ADR 180,700
800 Stolt-Nielsen SA 13,700
-------------
194,400
-------------
TOTAL TRANSPORTATION 5,484,983
-------------
- -----------------
UTILITIES -- 9.6%
- -----------------
Cellular -- 2.5%
119,300 AirTouch Communications, Inc. (a) 6,971,594
217,080 Vodafone Group PLC sponsored ADR 27,365,648
24,396 Vodafone Group PLC 309,411
-------------
34,646,653
-------------
Electric Utility -- 0.4%
59,200 American Electric Power Co., Inc. 2,686,200
4,100 Consolidated Edison, Inc. 188,856
20,100 Duke Energy Corp. 1,190,925
22,100 Houston Industries, Inc. 682,338
23,300 Niagara Mohawk Power Corp. (a) 348,044
23,130 PG&E Corp. 730,041
-------------
5,826,404
-------------
Telephone Services -- 6.7%
143,100 AT&T Corp. 8,174,588
70,300 Ameritech Corp. 3,154,713
143,762 Bell Atlantic Corp. 6,559,141
106,500 BellSouth Corp. 7,148,813
12,400 EXCEL Communications, Inc. (a) 284,425
435,000 MCI Communications Corp. 25,284,375
84,770 Qwest Communications International, Inc. 2,956,354
152,400 SBC Communications, Inc. 6,096,000
221,100 Sprint Corp. 15,587,550
163,300 Telecomunicacoes Brasileiras SA sponsored ADR 17,830,319
2,569 U.S. West, Inc. 120,743
55,500 WorldCom, Inc. (a) 2,688,281
-------------
95,885,302
-------------
TOTAL UTILITIES 136,358,359
-------------
Total Common Stocks
(Cost $952,824,439) 1,215,877,236
-------------
See accompanying notes which are an integral part of the Financial Statements.
- --------------------------------------------------------------------------------
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VIP III Growth
Opportunities
Portfolio
--------------
17
--------------
- --------------------------------------------------------------------------------
Value
Shares (Note 1)
- --------------------------------------------------------------------------------
- ----------------------------------
U.S. Treasury Obligations -- 10.7%
- ----------------------------------
Principal Moody's Value
Amount Ratings (c) (Note 1)
- --------------------------------------------------------------------------------
$ 700,000 U.S. Treasury Bills, yield at
date of purchase 4.8277%
to 4.9669% 7/23/98 -- $ 697,920
U.S. Treasury Bonds
50,340,000 8-1/8%, 8/15/19 Aaa 64,969,811
40,953,000 6-1/4%, 8/15/23 Aaa 43,845,101
stripped Principal:
107,450,000 0%, 2/15/19 Aaa 33,209,548
12,000,000 0%, 8/15/19 Aaa 3,601,080
23,000,000 0%, 8/15/20 Aaa 6,505,780
--------------
Total U.S. Treasury Obligations
(Cost $135,676,159) 152,829,240
--------------
- ------------------------
Cash Equivalents -- 4.0%
- ------------------------
Value
Shares (Note 1)
- --------------------------------------------------------------------------------
56,126,996 Taxable Central Cash Fund (b)
(Cost $56,126,996) 56,126,996
--------------
TOTAL INVESTMENT IN SECURITIES -- 100%
(Cost $1,144,627,594) $1,424,833,472
==============
(a) Non-income producing.
(b) At period end, the seven-day yield of the Taxable Central Cash Fund was
5.61%. The yield refers to the income earned by investing in the fund over
the seven-day period, expressed as an annual percentage.
(c) Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
Other Information:
Purchases and sales of securities, other than short-term securities,
aggregated $436,178,176 and $162,673,054 respectively, of which U.S. government
and government agency obligations aggregated $31,659,187 and $600,000,
respectively.
The market value of futures contracts opened and closed during the period
amounted to $94,365,639 and $94,687,486, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company. The
commissions paid to these affiliated firms were $65,373 for the period (see Note
4 of Notes to Financial Statements).
Distribution of investments by country of issue, as a percentage of total
value of investment in securities, is as follows:
United States 89.2%
United Kingdom 3.1
Netherlands 2.6
Brazil 1.3
France 1.2
Switzerland 1.0
Others (individually less than 1%) 1.6
-----
TOTAL 100.0%
=====
Income Tax Information:
At June 30, 1998, the aggregate cost of investment securities for income
tax purposes was $1,144,664,129. Net unrealized appreciation aggregated
$280,169,343, of which $311,684,382 related to appreciated investment securities
and $31,515,039 related to depreciated investment securities.
See accompanying notes which are an integral part of the Financial Statements.
- --------------------------------------------------------------------------------
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VIP III Growth
Opportunities
Portfolio
- --------------
17
- --------------
- --------------------------------------------------------------------------------
Fidelity VIP III Growth Opportunities Portfolio
- -----------------------------------------------
STATEMENT OF ASSETS
AND LIABILITIES
June 30, 1998 (Unaudited)
Assets:
Investment in securities, at value
(cost $1,144,627,594) -- See
accompanying schedule $1,424,833,472
Cash 293,885
Receivable for investments sold 2,410,542
Receivable for fund shares sold 1,677,203
Dividends receivable 1,873,599
Interest receivable 2,790,983
--------------
Total Assets 1,433,879,684
--------------
Liabilities:
Payable for investments purchased 5,056,267
Payable for fund shares redeemed 1,587,775
Accrued management fee 679,896
Other payables and accrued expenses 189,982
--------------
Total Liabilities 7,513,920
--------------
Net Assets $1,426,365,764
==============
Net Assets consist of:
Paid-in capital $1,126,934,510
Undistributed net investment income 8,339,663
Accumulated undistributed net realized
gain (loss) on investments and
foreign currency transactions 10,888,954
Net unrealized appreciation (depreciation)
on investments and assets and
liabilities in foreign currencies 280,202,637
--------------
Net Assets $1,426,365,764
==============
Initial Class:
Net Asset Value, offering price and
redemption price per share
($1,355,996,863 66,333,540 shares) $20.44
==============
Service Class:
Net Asset Value, offering price and
redemption price per share
($70,368,901 3,443,025 shares) $20.44
==============
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1998
(Unaudited)
Investment Income:
Dividends $ 7,362,155
Interest 5,735,285
--------------
Total Income 13,097,440
--------------
Expenses:
Management fee 3,703,262
Transfer agent fees 434,795
Distribution fees -- Service Class 13,731
Accounting fees and expenses 265,974
Non-interested trustees' compensation 2,187
Custodian fees and expenses 23,445
Audit 16,188
Legal 6,714
Miscellaneous 898
--------------
Total expenses before reductions 4,467,194
Expense reductions (60,203)
--------------
Total Expenses 4,406,991
==============
Net investment income 8,690,449
==============
Realized and Unrealized Gain (Loss) on Investments:
Net realized gain (loss) on:
Investment securities 10,674,007
Foreign currency transactions (7,372)
Futures contracts 321,847
--------------
Change in net unrealized appreciation
(depreciation) on:
Investment securities 110,038,116
Assets and liabilities in foreign currencies (2,450)
--------------
Total Realized and Unrealized 110,035,666
==============
Net gain (loss) 121,024,148
--------------
Net increase (decrease) in net assets
resulting from operations $ 129,714,597
==============
Other Information:
Expense reductions:
Directed brokerage arrangements $ 59,381
Custodian credits 822
--------------
$ 60,203
==============
See accompanying notes which are an integral part of the Financial Statements.
- --------------------------------------------------------------------------------
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<PAGE>
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VIP III Growth
Opportunities
Portfolio
--------------
17
--------------
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1998 December 31,
(Unaudited) 1997
--------------- ---------------
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 8,690,449 $ 11,806,552
Net realized gain (loss) 10,988,482 41,932,727
Change in net unrealized appreciation
(depreciation) 110,035,666 124,025,796
--------------- ---------------
Net increase (decrease) in net assets
resulting from operations 129,714,597 177,765,075
--------------- ---------------
Distributions to shareholders:
From net investment income (12,018,174) (6,503,921)
From net realized gain (41,777,463) (9,258,542)
--------------- ---------------
Total distributions (53,795,637) (15,762,463)
--------------- ---------------
Share transactions -- net increase (decrease) 322,091,154 483,267,618
--------------- ---------------
Total increase (decrease) in net assets 398,010,114 645,270,230
Net Assets:
Beginning of period 1,028,355,650 383,085,420
--------------- ---------------
End of period (including undistributed
net investment income of $8,339,663
and $11,667,388, respectively) $ 1,426,365,764 $ 1,028,355,650
=============== ===============
</TABLE>
<TABLE>
<CAPTION>
Other Information: Six Months Ended June 30, 1998
Shares Dollars Year Ended December 31, 1997
(Unaudited) Shares Dollars
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
Share transactions:
Initial Class
Sold 13,070,692 $ 257,728,602 29,803,319 $ 508,833,566
Reinvested 2,818,502 53,495,168 1,011,711 15,762,463
Redeemed (2,776,205) (55,296,715) (2,470,247) (43,871,687)
------------- ------------- ------------- -------------
Net increase (decrease) 13,112,989 $ 255,927,055 28,344,783 $ 480,724,342
============= ============= ============= =============
Service Class*
Sold 3,296,907 $ 65,946,012 134,338 $ 2,543,276
Reinvested 15,831 300,469 -- --
Redeemed (4,051) (82,382) -- --
------------- ------------- ------------- -------------
Net increase (decrease) 3,308,687 $ 66,164,099 134,338 $ 2,543,276
============= ============= ============= =============
Distributions:
Initial Class--
Net investment income $ 11,951,048 $ 6,503,921
Initial Class--
Net realized gain 41,544,120 9,258,542
------------- -------------
Total $ 53,495,168 $ 15,762,463
============= =============
Service Class--
Net investment income $ 67,126 $ --
Service Class--
Net realized gain 233,343 --
------------- -------------
Total $ 300,469 $ --
============= =============
$ 53,795,637 $ 15,762,463
============= =============
</TABLE>
* Service Class commenced sale of shares November 3, 1997.
See accompanying notes which are an integral part of the Financial Statements.
- --------------------------------------------------------------------------------
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VIP III Growth
Opportunities
Portfolio
- --------------
17
- --------------
- --------------------------------------------------------------------------------
Fidelity VIP III Growth Opportunities Portfolio
- -----------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited)
- -----------------------------------
1. Significant Accounting Policies.
- -----------------------------------
Growth Opportunities Portfolio (the fund) is a fund of Variable Insurance
Products Fund III (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 exchange quotations are readily available are valued
at the last sale price, or if no sale price, at the closing bid price.
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 date and settlement 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."
- --------------------------------------------------------------------------------
242
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--------------
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VIP III Growth
Opportunities
Portfolio
--------------
17
--------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited) (Continued)
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 market
discount, foreign currency transactions, partnerships and losses deferred due to
wash sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital. Undistributed
net investment income and accumulated undistributed net realized gain (loss) on
investments and foreign currency transactions may include temporary book and tax
basis differences which will reverse in a subsequent period. Any taxable income
or gain remaining at fiscal year end is distributed in the following year.
Security Transactions
Security transactions are accounted for as of trade date. Gains and losses
on securities sold are determined on the basis of identified cost.
- ----------------------
2. Operating Policies.
- ----------------------
Foreign Currency Contracts
The fund generally uses foreign currency contracts to facilitate
transactions in foreign denominated securities. Losses may arise from changes in
the value of the foreign currency or if the counterparties do not perform under
the contracts' terms. The U.S. dollar value of foreign 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
- --------------------------------------------------------------------------------
243
<PAGE>
- --------------
Fidelity
VIP III Growth
Opportunities
Portfolio
- --------------
17
- --------------
- --------------------------------------------------------------------------------
Fidelity VIP III Growth Opportunities Portfolio
- -----------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1998 (Unaudited)
determining that the value of the underlying securities remains in accordance
with the market value requirements stated above.
Taxable Central Cash Fund
Pursuant to an Exemptive Order issued by the SEC, the fund may invest in
the Taxable Central Cash Fund (the Cash Fund) managed by Fidelity Investments
Money Management, Inc., (formerly FMR Texas, Inc.) an affiliate of FMR. The Cash
Fund is an open-end money market fund available only to investment companies and
other accounts managed by FMR and its affiliates. The Cash Fund seeks
preservation of capital, liquidity, and current income by investing in U.S.
Treasury securities and repurchase agreements for these securities. Income
distributions from the Cash Fund are declared daily and paid monthly from net
interest income. Income distributions earned by the fund are recorded as
interest income in the accompanying financial statements.
Futures Contracts
The fund may use futures contracts to manage its exposure to the stock
market. Buying futures tends to increase the fund's exposure to the underlying
instrument, while selling futures tends to decrease the fund's exposure to the
underlying instrument or hedge other fund investments. Losses may arise from
changes in the value of the underlying instruments 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.
- --------------------------------------
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 .30%. 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 annualized rate of .60% 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.
- --------------------------------------------------------------------------------
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<PAGE>
--------------
Fidelity
VIP III Growth
Opportunities
Portfolio
--------------
17
--------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1998 (Unaudited)
For the period, Service Class paid FDC $13,731, 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 $39,640 and $12,761 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 were
equivalent to an annualized rate of .07% of average net assets.
Accounting Fees
Fidelity Service Company, Inc., an affiliate of FMR, maintains the fund's
accounting records. The fee is based on the level of average net assets for the
month plus out-of-pocket expenses.
Brokerage Commissions
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of FMR. The commissions paid to these affiliated
firms are shown under the caption "Other Information" at the end of the fund's
schedule of investments.
- ----------------------
5. Expense Reductions.
- ----------------------
FMR has directed certain portfolio trades to brokers who paid a portion of
the fund's expenses.
In addition, the fund has entered into an arrangement with its custodian
whereby credits realized on uninvested cash balances were used to 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 29% of the outstanding shares of the fund. In addition, one
unaffiliated insurance company was record owner of 65% of the total outstanding
shares of the fund.
- --------------------------------------------------------------------------------
245
<PAGE>
- --------------
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VIP III Growth
Opportunities
Portfolio
- --------------
17
- --------------
- --------------------------------------------------------------------------------
Fidelity VIP III Growth Opportunities Portfolio
- -----------------------------------------------
FINANCIAL HIGHLIGHTS -- INITIAL CLASS
<TABLE>
<CAPTION>
January 3, 1995
(commencement
Six Months Ended Year Ended December 31, of operations) to
June 30, 1998 -------------------------- December 31,
(Unaudited) 1997 1996 1995
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Selected Per-Share Data:
Net asset value, beginning of period $ 19.27 $ 15.40 $ 13.07 $ 10.00
---------- ---------- -------- --------
Income from Investment Operations:
Net investment income ........... 0.14(d) 0.29(d) 0.26 0.11
Net realized and
unrealized gain (loss) ........ 1.97 4.18 2.12 3.14
---------- ---------- -------- --------
Total from investment operations 2.11 4.47 2.38 3 .25
---------- ---------- -------- --------
Less Distributions:
From net investment income ........ (0.21) (0.25) -- (0.11)
From net realized gain ............ (0.73) (0.35) (0.05) (0.07)
---------- ---------- -------- --------
Total distributions ............... (0.94) (0.60) (0.05) (0.18)
---------- ---------- -------- --------
Net asset value, end of period ...... $ 20.44 $ 19.27 $ 15.40 $ 13.07
========== ========== ======== ========
Total Return (b) (c) 11.32% 29.95% 18.27% 32.52%
Ratios and Supplemental Data:
Net assets, end of period
(000 Omitted) ................... $1,355,997 $1,025,766 $383,085 $164,303
Ratio of expenses to
average net assets .............. 0.72%(a) 0.74% 0.77% 0.85%(g)
Ratio of expenses to
average net assets after
expense reductions .............. 0.71%(a)(f) 0.73%(f) 0.76%(f) 0.83%(f)
Ratio of net investment
income to average
net assets ...................... 1.40%(a) 1.68% 2.29% 2.49%
Portfolio turnover ................ 28%(a) 26% 28% 38%
Average commission rate (h) ....... $ 0.0414 $ 0.0377 $ 0.0367 --
</TABLE>
- ----------
(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 class' expenses (see Note 5 of Notes
to Financial Statements).
(g) FMR agreed to reimburse a portion of the class' expenses during the period.
Without this reimbursement, the class' expense ratio would have been higher.
(h) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for security trades on
which commissions are charged. This amount may vary from period to period
and fund to fund depending on the mix of trades executed in various markets
where trading practices and commission rate structures may differ.
See accompanying notes which are an integral part of the Financial Statements.
- --------------------------------------------------------------------------------
246
<PAGE>
--------------
Fidelity
VIP III Growth
Opportunities
Portfolio
--------------
17
--------------
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- SERVICE CLASS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1998 December 31,
(Unaudited) 1997 (e)
----------------- ----------------
<S> <C> <C>
Selected Per-Share Data:
Net asset value, beginning of period ........ $ 19.27 $ 18.50
--------------- --------------
Income from Investment Operations:
Net investment income ..................... 0.13(d) 0.04(d)
Net realized and unrealized gain (loss) ... 1.98 0.73
--------------- --------------
Total from investment operations .......... 2.11 0.77
--------------- --------------
Less Distributions:
From net investment income .................. (0.21) --
From net realized gain ...................... (0.73) --
--------------- --------------
Total distributions ......................... (0.94) --
--------------- --------------
Net asset value, end of period ................ $ 20.44 $ 19.27
=============== ==============
Total Return (b) (c) .......................... 11.32% 4.16%
Ratios and Supplemental Data:
Net assets, end of period (000 Omitted) ..... $ 70,369 $ 2,589
Ratio of expenses to average net assets ..... 0.82%(a) 0.84%(a)
Ratio of expenses to average net assets after
expense reductions ........................ 0.81%(a)(f) 0.83%(a)(f)
Ratio of net investment income to average
net assets ................................ 1.41%(a) 1.72%(a)
Portfolio turnover .......................... 28%(a) 26%
Average commission rate (h) ................. $ 0.0414 $ 0.0377
</TABLE>
- ----------
(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 class' expenses (see Note 5 of Notes
to Financial Statements).
(g) FMR agreed to reimburse a portion of the class' expenses during the period.
Without this reimbursement, the class' expense ratio would have been higher.
(h) For fiscal years beginning on or after September 1, 1995, a fund is required
to disclose its average commission rate per share for security trades on
which commissions are charged. This amount may vary from period to period
and fund to fund depending on the mix of trades executed in various markets
where trading practices and commission rate structures may differ.
See accompanying notes which are an integral part of the Financial Statements.
- --------------------------------------------------------------------------------
247
<PAGE>
- --------------
Fidelity VIP
Equity-Income
Portfolio
- --------------
18
- --------------
- --------------------------------------------------------------------------------
Fidelity VIP Equity-Income Portfolio
- ------------------------------------
SCHEDULE OF INVESTMENTS
June 30, 1998 (Unaudited)
- ----------------------
Common Stocks -- 93.2%
- ----------------------
Value
Shares (Note 1)
- --------------------------------------------------------------------------------
AEROSPACE & DEFENSE-5.1%
Aerospace & Defense-3.0%
1,867,500 AlliedSignal, Inc. $ 82,870,313
127,400 Gulfstream Aerospace Corp. (a) 5,924,100
827,700 Harsco Corp. 37,919,006
673,103 Lockheed Martin Corp. 71,264,780
1,037,900 Textron, Inc. 74,404,456
858,800 United Technologies Corp. 79,439,000
--------------
351,821,655
--------------
Defense Electronics-1.8%
842,500 Litton Industries, Inc. (a) 49,707,500
725,500 Northrop Grumman Corp. 74,817,188
Raytheon Co.:
19,131 Class A 1,102,424
1,551,800 Class B 91,750,175
--------------
217,377,287
--------------
Ship Building & Repair-0.3%
633,000 General Dynamics Corp. 29,434,500
--------------
TOTAL AEROSPACE & DEFENSE 598,633,442
--------------
- ---------------------
BASIC INDUSTRIES-6.6%
- ---------------------
Chemicals & Plastics-3.4%
564,000 Air Products & Chemicals, Inc. 22,560,000
330,000 du Pont (E.I.) de Nemours & Co. 24,626,250
766,800 Great Lakes Chemical Corp. 30,240,675
684,200 Hanna (M.A.) Co. 12,529,413
772,400 Hercules, Inc. 31,764,950
491,100 Hoechst AG Ord. 24,269,793
402,100 IMC Global, Inc. 12,113,263
ICI (Imperial Chemical Industries)
261,800 PLC ADR Class L 16,886,100
231,000 Lawter International, Inc. 2,512,125
401,400 Millennium Chemicals, Inc. 13,597,425
1,644,000 Monsanto Co. 91,858,500
121,950 Octel Corp. 2,423,756
585,200 Olin Corp. 24,395,525
639,800 Solutia, Inc. 18,354,263
856,400 Union Carbide Corp. 45,710,350
973,400 Witco Corp. 28,471,950
--------------
402,314,338
--------------
Iron & Steel-0.4%
749,800 Dofasco Inc. 12,234,856
862,900 Inland Steel Industries, Inc. 24,322,994
391,000 USX-U.S. Steel Group 12,903,000
--------------
49,460,850
--------------
Metals & Mining-1.1%
1,400,000 Alcan Aluminium Ltd. 38,630,557
363,125 Alumax, Inc. 16,839,922
740,900 Aluminum Co. of America 48,853,094
250,000 Kaiser Aluminum Corp. (a) 2,390,625
200,000 Noranda, Inc. 3,461,080
339,200 PheIps Dodge Corp. 19,398,000
--------------
129,573,278
--------------
Packaging & Containers-0.1%
98,900 Corning, Inc. 3,436,775
89,100 Tupperware Corp. 2,505,938
--------------
5,942,713
--------------
Paper & Forest Products-1.6%
464,200 Boise Cascade Corp. 15,202,550
640,500 Champion International Corp. 31,504,594
1,072,400 Domtar, Inc. 7,196,825
556,600 Georgia-Pacific Corp. 32,804,613
1,318,200 Kimberly-Clark Corp. 60,472,425
861,900 Weyerhaeuser Co. 39,809,006
--------------
186,990,013
--------------
TOTAL BASIC INDUSTRIES 774,281,192
--------------
- -------------------------------
CONSTRUCTION & REAL ESTATE-2.3%
- -------------------------------
Building Materials-1.0%
579,300 American Standard Companies,Inc. (a) 25,887,469
1,371,600 Coltec Industries, Inc. (a) 27,260,550
1,045,400 Masco Corp. 63,246,700
--------------
116,394,719
--------------
Engineering-0.2%
389,900 EG & G, Inc. 11,697,000
222,100 Fluor Corp. 11,327,100
301,800 Foster Wheeler Corp. 6,469,838
--------------
29,493,938
--------------
See accompanying notes which are an integral part of the Financial Statements.
- --------------------------------------------------------------------------------
248
<PAGE>
--------------
Fidelity VIP
Equity-Income
Portfolio
--------------
18
--------------
- --------------------------------------------------------------------------------
Value
Shares (Note 1)
- --------------------------------------------------------------------------------
Real Estate Investment Trusts-1.1%
109,600 Alexandria Real Estate Equities, Inc. $ 3,281,150
358,200 Crescent Real Estate Equities, Inc. 12,044,475
100,200 Duke Realty Investors, Inc. 2,373,488
416,800 Equity Office Properties Trust 11,826,700
300,000 Equity Residential Properties Trust
(SBI) 14,231,250
256,800 Public Storage, Inc. 7,190,400
1,502,681 Starwood Hotels & Resorts Trust 72,598,276
170,500 Weeks Corp. 5,392,063
--------------
128,937,802
--------------
TOTAL CONSTRUCTION & REAL ESTATE 274,826,459
--------------
- -------------
DURABLES-2.9%
- -------------
- --------------------------------
Autos, Tires, & Accessories-1.3%
- --------------------------------
142,000 Chrysler Corp. 8,005,250
347,400 Eaton Corp. 27,010,350
248,500 Ford Motor Co. 14,661,500
300,000 General Motors Corp. 20,043,750
399,500 Johnson Controls, Inc. 22,846,406
629,900 Meritor Automotive, Inc. 15,117,600
281,300 Navistar International Corp. 8,122,538
32,000 Snap-On Tools Corp. 1,157,517
719,200 TRW, Inc. 39,286,300
--------------
156,251,211
--------------
Consumer Durables-0.6%
Minnesota Mining &
821,900 Manufacturing Co. 67,549,906
--------------
Consumer Electronics-0.4%
226,400 General Motors Corp. Class H 10,669,100
718,600 Maytag Co. 35,480,875
661,000 Sunbeam-Oster, Inc. 6,857,875
--------------
53,007,850
--------------
Textiles & Apparel-0.6%
353,700 Dexter Corp. 11,252,081
171,900 Intimate Brands, Inc. Class A 4,737,994
484,200 NIKE, Inc. Class B 23,574,488
687,700 Reebok International Ltd. (a) 19,040,694
148,300 Stride Rite Corp. 2,233,769
192,600 Unifi, Inc. 6,596,550
--------------
67,435,576
--------------
TOTAL DURABLES 344,244,543
- ------------
ENERGY-11.1%
- ------------
Energy Services-0.8%
271,700 Dresser Industries, Inc. 11,971,781
650,000 Halliburton Co. 28,965,625
812,000 Schlumberger Ltd. 55,469,750
--------------
96,407,156
--------------
Oil & Gas - 10.3%
709,400 Amerada Hess Corp. 38,529,288
730,000 Amoco Corp. 30,386,250
195,100 Anadarko Petroleum Corp. 13,108,281
780,000 Atlantic Richfield Co. 60,937,500
British Petroleum PLC:
806,508 Ord. 11,755,417
2,193,611 ADR 193,586,171
795,000 Burlington Resources, Inc. 34,234,688
1,013,700 Chevron Corp. 84,200,456
266,600 Coastal Corp. (The) 18,612,013
319,400 Elf Aquitaine SA sponsored ADR 22,677,400
1,500,000 Exxon Corp. 106,968,750
164,500 Kerr-McGee Corp. 9,520,438
502,600 Mobil Corp. 38,511,725
2,333,400 Occidental Petroleum Corp. 63,001,800
400,400 Pennzoil Co. 20,270,250
645,500 Phillips Petroleum Co. 31,105,031
2,267,500 Royal Dutch Petroleum Co. 124,287,344
1,160,000 Texaco, Inc. 69,237,500
449,800 Tosco Corp. 13,212,875
Total SA:
831,600 Class B 107,816,512
576,600 sponsored ADR 37,695,225
1,178,600 USX-Marathon Group 40,440,713
358,800 Ultramar Diamond Shamrock Corp. 11,324,625
455,418 Unocal Corp. 16,281,194
246,700 Valero Energy Corp. 8,202,775
--------------
1,205,904,221
--------------
TOTAL ENERGY 1,302,311,377
--------------
See accompanying notes which are an integral part of the Financial Statements.
- --------------------------------------------------------------------------------
249
<PAGE>
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Equity-Income
Portfolio
- --------------
18
- --------------
- --------------------------------------------------------------------------------
Fidelity VIP Equity-Income Portfolio
- ------------------------------------
SCHEDULE OF INVESTMENTS (Continued)
June 30, 1998 (Unaudited)
Value
Shares (Note 1)
- --------------------------------------------------------------------------------
- -------------
FINANCE-24.0%
- -------------
Banks-11.8%
2,162,680 Banc One Corp. $ 120,704,578
2,165,700 Bank of New York Co., Inc. 131,430,919
726,600 Bank of Nova Scotia 18,019,581
640,500 BankBoston Corp. 35,627,813
1,733,400 BankAmerica Corp. 149,830,763
674,600 Chase Manhattan Corp. 50,932,300
1,532,800 Citicorp 228,770,400
877,500 Comerica, Inc. 58,134,375
213,900 Credit Suisse Group (Reg.) 47,486,433
2,211,200 National Bank of Canada 43,312,553
1,005,343 National City Corp. 71,379,353
1,826,100 NationsBank Corp. 139,696,650
1,457,800 Norwest Corp. 54,485,275
400,000 Royal Bank of Canada 24,118,549
56,600 Societe Generale Class A 11,735,456
3,428,094 U.S. Bancorp 147,408,042
167,500 Wells Fargo & Co. 61,807,500
--------------
1,394,880,540
--------------
Credit & Other Finance-4.3%
1,255,172 American Express Co. 143,089,608
918,700 AMP Ltd. 10,752,304
769,828 Associates First Capital Corp. Class A 59,180,532
295,000 Beneficial Corp. 45,190,313
1,180,900 First Chicago NBD Corp. 104,657,263
686,800 Fleet Financial Group, Inc. 57,347,800
1,245,000 Household International, Inc. 61,938,750
223,000 Transamerica Corp. 25,672,875
--------------
507,829,445
--------------
Federal Sponsored Credit-2.0%
403,600 Freddie Mac 18,994,425
3,477,300 Fannie Mae 211,245,975
--------------
230,240,400
--------------
Insurance-4.3%
227,800 Aetna, Inc. 17,341,275
1,429,499 Allstate Corp. 130,888,502
491,100 CIGNA Corp. 33,885,900
Edperbrascan Corp, Ltd.,
2,699,800 Class A(vtg.) 45,433,528
423,924 Fremont General Corp. 22,971,382
170,000 General Re Corp. 43,095,000
Hartford Financial Services
663,300 Group, Inc. 75,864,938
371,100 Highlands Insurance Group, Inc. (a) 6,865,350
225,900 Marsh & McLennan Companies, Inc. 13,652,831
198,200 PMI Group, Inc. 14,542,925
1,114,525 Reliastar FinanciaI Corp. 53,497,200
743,700 Torchmark Corp. 34,024,275
Travelers Property Casualty
209,800 Corp. Class A 8,995,175
--------------
501,058,281
--------------
Savings & Loans-0.8%
2,186,985 Washington Mutual, Inc. 94,997,161
--------------
Securities Industry-0.8%
First Marathon Inc. Class A
299,400 (non-vtg.) 4,936,454
413,200 Lehman Brothers Holdings, Inc. 32,048,825
961,749 Travelers Group, Inc. (The) 58,306,033
--------------
95,291,312
--------------
TOTAL FINANCE 2,824,297,139
--------------
- -----------
HEALTH-6.9%
- -----------
Drugs & Pharmaceuticals-4.7%
2,946,000 American Home Products Corp. 152,455,500
1,391,650 Barr Laboratories, Inc. (a)(d) 55,318,088
1,070,700 Bristol-Myers Squibb Co. 123,063,581
335,900 Merck & Co., Inc 44,926,625
25,200 Novartis AG (Reg.) 41,838,382
917,000 Sankyo Co. Ltd. 20,857,409
1,288,200 Schering-Plough Corp. 118,031,325
--------------
556,490,910
--------------
Medical Equipment & Supplies-1.0%
95,800 Allegiance Corp. 4,909,750
250,000 Bausch & Lomb, Inc. 12,531,250
684,300 Baxter International, Inc. 36,823,894
340,000 Johnson & Johnson 25,075,000
345,200 Pall Corp. 7,076,600
See accompanying notes which are an integral part of the Financial Statements.
- --------------------------------------------------------------------------------
250
<PAGE>
--------------
Fidelity VIP
Equity-Income
Portfolio
--------------
18
--------------
- --------------------------------------------------------------------------------
Value
Shares (Note 1)
- --------------------------------------------------------------------------------
740,907 U.S. Surgical Corp. $ 33,803,882
--------------
120,220,376
--------------
Medical Facilities Management-1.2%
2,222,000 Beverly Enterprises, Inc. (a) 30,691,375
2,259,150 Columbia/HCA Healthcare Corp. 65,797,744
508,400 Humana, Inc. (a) 15,855,725
476,600 United HealthCare Corp. 30,264,100
--------------
142,608,944
--------------
TOTAL HEALTH 819,320,230
--------------
HOLDING COMPANIES-0.2%
415,000 CINergy Corp. 14,525,000
2,293,600 Cookson Group PLC 7,879,576
--------------
22,404,576
--------------
- -------------------------------------
INDUSTRIAL MACHINERY & EQUIPMENT-6.5%
- -------------------------------------
Electrical Equipment-3.8%
263,200 Alcatel Alsthom Compagnie Generale
d'Electricite SA 53,443,167
4,291,100 General Electric Co. 390,490,100
298,700 Loral Space & Communications Ltd. (a) 8,438,275
--------------
452,371,542
--------------
Industrial Machinery & Equipment-1.8%
460,500 Alstom SA 15,115,794
194,300 Cooper Industries, Inc. 10,674,356
397,100 Harnischfeger Industries, Inc. 11,242,894
665,400 Ingersoll-Rand Co. 29,319,188
375,000 Parker-Hannifin Corp. 14,296,875
514,400 Stewart & Stevenson Services, Inc. 9,259,200
1,925,484 Tyco International Ltd. 121,305,492
--------------
211,213,799
--------------
Pollution Control-0.9%
1,037,298 Browning-Ferris Industries, Inc. 36,046,106
508,300 Ogden Corp. 14,073,556
1,491,100 Waste Management, Inc. 52,188,500
--------------
102,308,162
--------------
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 765,893,503
--------------
- --------------------
MEDIA & LEISURE-3.5%
- --------------------
Broadcasting-1.1%
22,964 Ascent Entertainment Group, Inc. (a) 255,475
1,421,600 CBS Corp. 45,135,800
971,009 Time Warner, Inc. 82,960,581
--------------
128,351,856
--------------
Entertainment-1.0%
409,400 King World Productions, Inc. (a) 10,439,700
677,300 MGM Grand, Inc. (a) 21,377,281
1,408,200 Viacom, Inc. Class B (non-vtg.) (a) 82,027,650
--------------
113,844,631
--------------
Leisure Durables & Toys-0.1%
431,200 Brunswick Corp. 10,672,200
--------------
Lodging & Gaming-0.1%
227,600 Circus Circus Enterprises, Inc. (a) 3,854,975
518,400 Mirage Resorts, Inc. (a) 11,048,400
--------------
14,903,375
--------------
Publishing-0.8%
636,000 ACNielsen Corp. 16,059,000
353,700 Cognizant Corp. 22,283,100
368,800 Dun & Bradstreet Corp. 13,322,900
561,700 Harcourt General, Inc. 33,421,150
426,700 Reader's Digest Association, Inc.(The)
Class A (non-vtg.) 11,574,238
--------------
96,660,388
--------------
Restaurants-0.4%
677,100 McDonald's Corp. 46,719,900
--------------
TOTAL MEDIA & LEISURE 411,152,350
--------------
- ----------------
NONDURABLES-5.9%
- ----------------
Beverages-0.3%
487,500 Anheuser-Busch Companies, Inc. 23,003,906
281,300 Seagram Co. Ltd. 11,489,651
--------------
34,493,557
--------------
See accompanying notes which are an integral part of the Financial Statements.
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- ------------------------------------
SCHEDULE OF INVESTMENTS (Continued)
June 30, 1998 (Unaudited)
Value
Shares (Note 1)
- --------------------------------------------------------------------------------
Foods-1.0%
639,800 Bestfoods $ 37,148,388
401,625 Corn Products International, Inc. (a) 13,605,047
384,450 General Mills, Inc. 26,286,769
393,500 Heinz (H.J.) Co. 22,085,188
110,000 Ralston Purina Co. 12,849,375
--------------
11,974,767
--------------
Household Products-2.4%
171,100 Avon Products, Inc. 13,260,250
254,600 Clorox Co. 24,282,475
494,400 Dial Corp. 12,823,500
201,400 Gillette Co. 11,416,863
25,000 Premark International, Inc. 806,250
621,600 Procter & Gamble Co. 56,604,450
941,900 Rubbermaid, Inc. 31,259,306
6,821,600 UnileverPLC 72,581,319
Unilever NV:
12,400 Ord. 981,901
800,000 ADR 63,150,000
--------------
287,166,314
--------------
Tobacco-2.2%
358,200 Dimon, Inc. 4,029,750
922,600 Gallaher Group PLC sponsored ADR 20,181,875
4,735,300 Philip Morris Companies, Inc. 186,452,438
1,873,700 RJR Nabisco Holdings Corp. 44,500,375
211,000 UST, Inc. 5,697,000
--------------
260,861,438
--------------
TOTAL NONDURABLES 694,496,076
--------------
PRECIOUS METALS-0.1%
685,400 Newmont Mining Corp. 16,192,575
--------------
- -----------------------
RETAIL & WHOLESALE-3.9%
- -----------------------
Apparel Stores-0.8%
612,800 Charming Shoppes, Inc. (a) 2,910,800
362,600 Footstar, Inc. (a) 17,404,800
967,100 Limited, Inc. (The) 32,035,188
350,200 TJX Companies, Inc. 8,448,575
2,061,200 Venator Group, Inc. 39,420,450
--------------
100,219,813
--------------
General Merchandise Stores-2.8%
2,020,156 Consolidated Stores Corp. (a) 73,230,664
280,000 Dayton Hudson Corp. 13,580,000
656,400 Federated Department Stores, Inc. (a) 35,322,525
605,600 Hudson's Bay Co. Ord. 13,904,766
302,500 Hudson's Bay Co. (c) 6,945,495
180,900 Penney (J.C.) Co., Inc. 13,081,331
2,836,000 Wal-Mart Stores, Inc. 172,287,000
--------------
328,351,781
--------------
Retail & Wholesale, Miscellaneous-0.3%
65,670 School Specialty, Inc. 1,075,346
443,200 Tandy Corp. 23,517,300
302,000 Toys "R" Us, Inc. (a) 7,115,875
147,759 U.S. Office Products Co. (a) 2,881,301
--------------
34,589,822
--------------
TOTAL RETAlL & WHOLESALE 463,161,416
--------------
- -------------
SERVICES-1.0%
- -------------
Leasing & Rental-0.2%
817,200 Ryder Systems, Inc. 25,792,875
--------------
Printing-0.5%
568,400 Donnelley (R.R.) & Sons Co. 26,004,300
1,051,300 Harland (John H.) Co. 17,806,394
483,700 Wallace Computer Services, Inc. 11,487,875
78,804 Workflow Management, Inc. 635,357
--------------
55,933,926
--------------
Services-0.3%
499,600 Block (H & R), Inc. 21,045,650
397,300 Manpower, Inc. 11,397,544
59,103 Navigant International, Inc. 502,376
--------------
32,945,570
--------------
TOTAL SERVICES 114,672,371
--------------
- ---------------
TECHNOLOGY-3.6%
- ---------------
Computer Services & Software-0.7%
118,207 Aztec Technology Partners, Inc. 901,328
1,326,800 Electronic Data Systems Corp. 53,072,000
See accompanying notes which are an integral part of the Financial Statements.
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Value
Shares (Note 1)
- --------------------------------------------------------------------------------
550,200 First Data Corp. $ 18,328,538
391,200 NCR Corp. (a) 12,714,000
--------------
85,015,866
--------------
Computers & Office Equipment-2.1%
532,300 International Business Machines Corp. 61,117,152
124,173 Compaq Computer Corp. 3,523,409
267,600 Diebold, Inc. 7,726,950
1,582,000 Pitney Bowes, Inc. 76,133,750
3,018,317 Unisys Corp. (a) 85,267,455
86,800 Xerox Corp. 8,821,050
--------------
242,589,766
--------------
Electronics-0.6%
499,400 AMP, Inc. 17,166,875
1,011,600 Motorola, Inc. 53,172,225
--------------
70,339,100
--------------
Photographic Equipment-0.2%
226,400 Eastman Kodak Co. 16,541,350
339,300 Polaroid Corp. 12,066,356
--------------
28,607,706
--------------
TOTAL TECHNOLOGY 426,552,438
--------------
- -------------------
TRANSPORTATION-1.3%
- -------------------
Air Transportation-0.1%
275,800 Viad Corp. 7,653,450
--------------
Railroads-1.2%
342,100 Burlington Northern Santa Fe Corp. 33,589,944
1,633,100 CSX Corp. 74,306,050
1,158,000 Norfolk Southern Corp. 34,522,875
--------------
142,418,869
--------------
TOTAL TRANSPORTATION 150,072,319
--------------
- --------------
UTILITIES-8.3%
- --------------
Electric Utility-2.7%
1,052,200 Allegheny Energy, Inc. 31,697,525
1,138,600 American Electric Power Co., Inc. 51,663,975
278,200 Central & South West Corp. 7,476,625
602,500 Central Maine Power Co. 11,748,750
152,300 CILCORP, Inc. 7,310,400
473,450 Consolidated Edison, Inc. 21,808,291
955,950 DPL, Inc. 17,326,594
297,200 Duke Energy Corp. 17,609,100
1,573,800 Entergy Corp. 45,246,750
227,800 FPL Group, lnc. 14,351,400
227,100 Illinova Corp. 6,813,000
1,434,200 Niagara Mohawk Power Corp. (a) 21,423,363
1,072,878 PG&E Corp. 33,862,712
200,000 PacifiCorp. 4,525,000
472,600 Pinnacle West Capital Corp. 21,267,000
--------------
314,130,485
--------------
Gas-0.6%
877,800 MCN Energy Group, Inc. 21,835,275
1,584,300 Questar Corp. 31,091,888
429,184 Sempra Energy 11,909,856
345,300 Sonat, Inc. 13,337,213
--------------
78,174,232
--------------
Telephone Services-5.0%
2,136,000 AT&T Corp. 122,019,000
508,900 ALLTEL Corp. 23,663,850
1,607,400 Ameritech Corp. 72,132,075
2,266,640 Bell Atlantic Corp. 103,415,450
1,136,400 BellSouth Corp. 76,280,850
783,000 GTE Corp. 43,554,375
270,100 MCI Communications Corp. 15,699,563
1,492,000 SBC Communications, Inc. 59,680,000
312,500 Sprint Corp. 22,031,250
953,800 WorldCom, Inc. (a) 46,199,688
--------------
584,676,101
--------------
TOTAL UTILITIES 976,980,818
--------------
TOTAL COMMON STOCKS
(Cost $8,045,181,255) 10,979,492,824
--------------
See accompanying notes which are an integral part of the Financial Statements.
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- ------------------------------------
SCHEDULE OF INVESTMENTS (Continued)
June 30, 1998 (Unaudited)
Value
Shares (Note 1)
- --------------------------------------------------------------------------------
- ---------------------------------
Convertible Preferred Stocks-2.9%
- ---------------------------------
CONSTRUCTION & REAL ESTATE-0.0%
Real Estate Investment Trusts-0.0%
62,600 Vornado Realty Trust, Series A, $3.25 $ 3,591,675
--------------
DURABLES-0.0%
Autos, Tires, & Accessories-0.0%
219,200 Republic Industries, Inc. $1.55 5,260,800
--------------
FINANCE-1.4%
Closed End Investment Company-0.1%
464,700 Readers Digest Association $1.93 TRACES 11,849,850
--------------
Credit & Other Finance-0.3%
93,000 DECS Trust $2.01 DECS 1,278,750
39,400 Life Re Corp./Life Re Capital Trust II
$3.96 3,235,725
384,500 Union Pacific Capital Trust $3.13 TIDE
(c) 17,975,375
285,400 WBK Trust $3.135 STRYPES 8,615,513
--------------
31,105,363
--------------
Insurance-0.5%
760,000 Aetna, Inc. Class C 6.25%, PRIDES 57,095,000
171,800 Conseco, Inc. $3.50 PRIDES 9,105,400
--------------
66,200,400
--------------
Savings & Loans-0.1%
70,600 Ahmanson (H.F.) & Co., Series D, $3.00 10,307,600
--------------
Securities Industry-0.4%
840,700 Salomon, Inc. $2.03 DECS 40,773,950
93,900 Salomon, Inc. $3.484 DECS 5,252,531
--------------
46,026,481
--------------
TOTAL Finance 165,489,694
--------------
- -------------------------------------
INDUSTRIAL MACHINERY & EQUIPMENT-0.3%
- -------------------------------------
Electrical Equipment-0.2%
183,200 Loral Space & Communications
Ltd.,Series C, $3.00 (c) 13,877,400
141,700 Loral Space & Communications
Ltd.,Series C, $3.00 10,733,775
--------------
24,611,175
--------------
Industrial Machinery & Equipment-0.1%
530,100 Ingersoll Rand Co./Ingersoll Rand
Finance Co. $0.19 Growth PRIDES 10,535,738
--------------
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 35,146,913
--------------
- --------------------
MEDIA & LEISURE-0.6%
- --------------------
Broadcasting-0.5%
187,200 Evergreen Media Corp. $3.00 (c) 19,071,000
381,900 MediaOne Group, Inc. Class D $2.25 34,347,131
--------------
53,418,131
--------------
Entertainment-0.1%
273,300 Premier Parks, Inc. $4.05 PIES 17,354,550
TOTAL MEDIA & LEISURE 70,772,681
--------------
RETAIL & WHOLESALE-0.1%
General Merchandise Stores-0.1%
100,000 K mart Financing I $3.875 7,000,000
--------------
SERVICES-0.1%
288,100 Cendant Corp. $2.91 Growth PRIDES 8,336,894
--------------
TECHNOLOGY-0.1%
Computers & Office Equipment-0.1%
80,000 Wang Laboratories, Inc. $3.25 (c) 4,425,000
157,600 Wang Laboratories, Inc. $3.25 8,402,050
--------------
12,827,050
--------------
See accompanying notes which are an integral part of the Financial Statements.
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Principal Moody's Value
Amount Rating(c) (Note 1)
- --------------------------------------------------------------------------------
UTILITIES-0.3%
Electric Utility-0.2%
285,500 Houston Industries, Inc. $3.215 ACES $ 21,269,750
------------
Gas-0.0%
25,100 MCN Energy Group, Inc. $4.00 PRIDES 1,151,463
------------
Telephone Services-0.1%
184,800 Enhance Financial Services Group, Inc.
$7.625 DECS 10,695,300
------------
TOTAL UTILITIES 33,116,513
------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $272,958,629) 341,542,220
------------
- ----------------------
Convertible Bonds-1.7%
- ----------------------
CONSTRUCTION & REAL ESTATE-0.3%
Real Estate Investment Trusts-0.3%
27,985,000 Liberty Property exchangeable
8%, 7/1/01 ................... Ba2 35,768,328
------------
DURABLES - 0.2%
Autos, Tires, & Accessories - 0.1%
5,900,000 Magna International,
Inc. 4 7/8%, 2/15/05(c) ...... Baa 6,526,875
------------
Consumer Electronics - 0.1%
Matsushita Electric Industrial Co.
JPY452,000,000 Ltd. 1.3%, 3/29/02 ............. Aa2 4,457,209
Matsushita Electric Industrial Co.
JPY209,000,000 Ltd. 1.4%, 3/31/04 ............. Aa2 2,076,009
60,290,000 Sunbeam Corp. 0%,3/25/18 (c) .... Caa2 13,640,613
------------
20,173,831
------------
TOTAL DURABLES ................................. 26,700,706
------------
ENERGY - 0.1%
Oil & Gas - 0.1%
9,820,000 Pennzoil Co.
4 3/4%, 10/1/03 ................ Baa3 13,880,570
------------
FINANCE - 0.2%
Credit & Other Finance - 0.1%
14,140,000 Bell Atlantic Financial Services, Inc.
5 3/4%, 4/1/03 (c) .............. A1 14,475,825
------------
Insurance - 0.1%
Loews Corp. 3 1/8%,
4,320,000 9/15/07 ..................... A2 3,931,200
------------
TOTAL FINANCE 18,407,025
------------
MEDIA & LEISURE - 0.3%
Broadcasting - 0.0%
3,370,000 Jacor Communicatlons,
Inc. 0%, 2/9/18 ............... B3 1,470,163
------------
Lodging & Gaming - 0.0%
1,820,000 Hilton Hotels Corp.
5%, 5/15/06 ................... Baa2 1,892,800
------------
Publishing - 0.3%
54,900,000 News America Holdings,
Inc. liquid yield option
notes 0%, 3/11/13 ............. Baa3 36,508,500
------------
TOTAL MEDIA & LEISURE 39,871,463
------------
RETAIL & WHOLESALE - 0.2%
Drug Stores - 0.1%
11,620,000 Rite Aid Corp.
5 1/4%, 9/15/05 (c) ........... Baa2 14,292,600
------------
Retail & Wholesale, Miscellaneous - 0.1%
5,000,000 Home Depot, Inc.
3 1/4%, 10/1/01 .............. A1 9,162,500
------------
TOTAL RETAIL & WHOLESALE 23,455,100
------------
TECHNOLOGY - 0.4%
Computers & Office Equipment - 0.2%
11,150,000 Apple Computer, Inc.
6%, 6/1/01 .................... Caa1 12,871,281
7,730,000 Quantum Corp. 7%, 8/1/04 ........ B2 7,353,163
------------
20,224,444
------------
See accompanying notes which are an integral part of the Financial Statements.
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- ------------------------------------
SCHEDULE OF INVESTMENTS (Continued)
June 30, 1998 (Unaudited)
Principal Value
Amount (Note 1)
- --------------------------------------------------------------------------------
Electronics - 0.2%
13,983,000 Micron Technology, Inc.
7%, 7/1/04 ................... B1 $ 13,065,366
16,420,000 Motorola, Inc. liquid yield
option 9/27/13 .............. A1 11,842,925
---------------
24,908,291
---------------
TOTAL TECHNOLOGY 45,132,735
---------------
TOTAL CONVERTIBLE BONDS
(Cost $187,458,523) 203,215,927
---------------
252,828,605 Taxable Central Cash Fund (b) (Cost
$252,828,605) $ 252,828,605
---------------
TOTAL INVESTMENT IN SECURITIES-100%
(Cost $8,758,427,012) $11,777,079,576
---------------
Security Type Abbreviations
ACES - Automatic Common Exchange Securities
DECS - Dividend Enhanced ConvertibleStock/Debt Exchangeable
for Common Stock
PIES - Premium Income EquitySecurities
PRIDES - Preferred Redeemable Increased Dividend Equity Securities
STRYPES - Structured Yield Product Exchangeable for Common Stock
TIDES - Term Income Deferred Equity Securities
TRACES - Trust Automatic CommonExchange Securities
Currency Abbreviations
JPY - Japanese yen
Legend
(a) Non-income producing
(b) At period end, the seven-day yield of the Taxable Central CashFund was
5.61%. The yield refers to the income earned by investing in the fund over
the seven-day period, expressed as an annual percentage.
(c) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period end,
the value of these securities amounted to $111,230,183 or .9% of net assets.
(d) Transactions during the period with companies which are or were affiliates
are as follows (See Note 7 of Notes to Financial Statements):
Purchase Sales Dividend Value
Affiliate Cost Cost Income
Barr Laboratories Inc. $ -- $ -- $ -- $55,318,088
========== ======== ======== ============
Other Information
Purchases and sales of securities, other than short-term securities, aggregated
$2,022,543,641 and $1,137,035,606, respectively.
The fund placed a portion of its portfolio transactions with brokerage firms
which are affiliates of FMR. The commissions paid to these affiliated firms were
$316,780 for the period (see Note 4 of Notes to Financial Statements).
The composition of long-term debt holdings as a percentage of total value of
investment in securities, is as follows:
Moody's Ratings S&P Ratings
Aaa, Aa, A0.4% AAA, AA, A 0.4%
Baa 0.6% BBB 0.6%
Ba 0.3% BB 0.3%
B 0.2% B 0.2%
Caa 0.2% CCC 0.1%
Ca, C 0.0% CC, C 0.0%
D 0.0%
The percentage not rated by Moody's or S&P amounted to 0.0%.
Distribution of investments by country of issue, as a percentage of total value
of investment in securities, is as follows:
United States ................................................... 89.7%
United Kingdom .................................................. 2.7
France .......................................................... 2.1
Canada .......................................................... 2.0
Netherlands ..................................................... 1.6
Others (individually less than 1%) .............................. 1.9
-----
TOTAL ........................................................... 100.0%
=====
Income Tax Information
At June 30, 1998, the aggregate cost of investment securities for income tax
purposes was $8,765,724,302. Net unrealized appreciation aggregated
$3,011,355,274, of which $3,290,287,130 related to appreciated investment
securities and $278,931,856 related to depreciated investment securities.
See accompanying notes which are an integral part of the Financial Statements.
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STATEMENT OF ASSETS AND LIABILITIES
June 30, 1998 (Unaudited)
Assets:
Investment in securities, at value
(cost $8,758,427,012) -- See accompanying
schedule $11,777,079,576
Cash 51,187
Receivable for investments sold 22,103,261
Receivable for fund shares sold 10,322,876
Dividends receivable 18,763,721
Interest receivable 3,863,584
Other receivables 537,415
---------------
Total Assets 11,832,721,620
---------------
Liabilities:
Payable for investments purchased 30,915,607
Payable for fund shares redeemed 7,119,587
Accrued management fee 4,719,356
Distribution fees payable 8,991
Other payables and accrued expenses 840,375
---------------
Total Liabilities 43,603,916
---------------
Net Assets $11,789,117,704
===============
Net Assets consist of:
Paid-in capital $ 8,453,792,741
Undistributed net investment income 86,904,929
Accumulated undistributed net realized
gain (loss) on investments and foreign
currency transactions 229,824,649
Net unrealized appreciation (depreciation)
on investments and assets and liabilities in
foreign currencies 3,018,595,385
---------------
Net Assets $11,789,117,704
===============
Initial Class:
Net Asset Value, offering price and
redemption price per share ($11,665,025,976
/ 463,367,268 shares) $ 25.17
===============
Service Class:
Net Asset Value and offering price per
share ($124,091,728 / 4,931,725 shares) $ 25.16
===============
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1998 (Unaudited)
Investment Income:
Dividends $ 105,364,076
Interest 15,727,694
---------------
Total Income 121,091,770
---------------
Expenses:
Management fee 27,321,754
Transfer agent fees 3,810,938
Distribution fees -- Service Class 26,530
Accounting fees and expenses 424,175
Non-interested trustees' compensation 32,573
Custodian fees and expenses 153,260
Registration fees 98,096
Audit 79,793
Legal 62,982
Miscellaneous 262,324
---------------
Total expenses before reductions 32,272,425
Expense reductions (361,660)
Total Expenses 31,910,765
---------------
Net Investment Income 89,181,005
===============
Realized and Unrealized Gain (Loss):
Net realized gain (loss) on:
Investment securities 240,690,852
Foreign currency transactions (480,201)
---------------
Total Realized and Unrealized 240,210,651
---------------
Change in net unrealized appreciation
(depreciation) on: Investment securities 756,221,732
Assets and liabilities in foreign currencies (40,910)
Total Unrealized 756,180,822
---------------
Net gain (loss) 996,391,473
---------------
Net increase (decrease) in net assets resulting
from operations $ 1,085,572,478
===============
Other Information:
Expense reductions:
Directed brokerage arrangements $ 358,010
Custodian credits 3,650
---------------
$ 361,660
===============
See accompanying notes which are an integral part of the Financial Statements.
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STATEMENT CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1998 December 31,
(Unaudited) 1997
---------------- ----------------
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 89,181,005 $ 140,172,499
Net realized gain (loss) 240,210,651 516,594,647
Change in net unrealized appreciation (depreciation) 756,180,822 1,401,296,210
---------------- ----------------
Net increase (decrease) in net assets resulting from operations 1,085,572,478 2,058,063,356
---------------- ----------------
Distributions to shareholders:
From net investment income (143,408,215) (119,523,328)
From net realized gain (510,364,528) (602,923,285)
---------------- ----------------
Total distributions (653,772,743) (722,446,613)
---------------- ----------------
Share transactions-- net increase (decrease) 1,245,248,072 1,815,363,131
---------------- ----------------
Total increase (decrease) in net assets 1,677,047,807 3,150,979,874
Net Assets:
Beginning of period 10,112,069,897 6,961,090,023
---------------- ----------------
End of period (including undistributed net investment income of
$86,904,929 and $140,172,474, respectively) $ 11,789,117,704 $ 10,112,069,897
================ ================
</TABLE>
OTHER INFORMATION
<TABLE>
<CAPTION>
Other Information: Six Months Ended June 30, 1998
Shares Dollars Year Ended December 31, 1997
(Unaudited) Shares Dollars
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Share transactions:
Initial Class
Sold 40,552,249 $ 1,004,072,133 81,081,134 $ 1,787,907,743
Reinvested 27,884,675 652,780,247 36,487,203 722,446,589
Redeemed (21,327,703) (528,825,194) (32,291,523) (700,239,679)
--------------- --------------- --------------- ---------------
Net increase (decrease) 47,109,22 $ 1,128,027,186 85,276,814 $ 1,810,114,653
=============== =============== =============== ===============
Service Class(A)
Sold 4,676,336 $ 116,393,684 222,682 $ 5,321,346
Reinvested 42,396 992,496 -- --
Redeemed (6,500) (165,294) (3,189) (72,868)
--------------- --------------- --------------- ---------------
Net increase (decrease) 4,712,232 $ 117,220,886 219,493 $ 5,248,478
=============== =============== =============== ===============
Distributions:
Initial Class-- Net investment income $ 143,190,506 $ 119,523,328
Initial Class-- Net realized gain 509,589,741 602,923,285
--------------- ---------------
Total $ 652,780,247 $ 722,446,613
=============== ===============
Service Class-- Net investment income $ 217,709 $ --
Service Class-- Net realized gain 774,787 --
--------------- ---------------
Total $ 992,496 $ --
=============== ===============
$ 653,772,743 $ 722,446,613
=============== ===============
</TABLE>
(A) Service Class commenced sale of shares November 3, 1997.
See accompanying notes which are an integral part of the Financial Statements.
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--------------
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NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited)
- -----------------------------------
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 rate 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 date and settlement 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."
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NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited)
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 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. Under the Plan, deferred amounts are
treated as though equivalent dollar amounts had been invested in shares of a
cross-section of Fidelity funds, including shares of the fund. 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 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 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
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NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited) (Continued)
securities are transferred to an account of the fund, or to the Joint Trading
Account, at a bank custodian. The securities are marked-to-market daily and
maintained at a value at least equal to the principal amount of the repurchase
agreement (including accrued interest). FMR, the fund's investment adviser, is
responsible for determining that the value of the underlying securities remains
in accordance with the market value requirements stated above.
Taxable Central Cash Fund
Pursuant to an Exemptive Order issued by the SEC, the fund may invest in
the Taxable Central Cash Fund (the Cash Fund) managed by Fidelity Investments
Money Management, Inc., (formerly FMR Texas, Inc.) an affiliate of FMR. The Cash
Fund is an open-end money market fund available only to investment companies and
other accounts managed by FMR and its affiliates. The Cash Fund seeks
preservation of capital, liquidity, and current income by investing in U.S.
Treasury securities and repurchase agreements for these securities. Income
distributions from the Cash Fund are declared daily and paid monthly from net
interest income. Income distributions earned by the fund are recorded as
interest income in the accompanying financial statements.
Restricted Securities
The fund is permitted to invest in securities that are subject to legal or
contractual restrictions on resale. These securities generally may be resold in
transactions exempt from registration or to the public if the securities are
registered. Disposal of these securities may involve time-consuming negotiations
and expense, and prompt sale at an acceptable price may be difficult. At the end
of the period, the fund had no investments in restricted securities (excluding
144A issues).
- --------------------------------------
3. Purchases and Sales of Investments.
- --------------------------------------
Information regarding purchases and sales of securities (other than
short-term securities), is included under the caption "Other lnformation" 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 annualized rate of .50% of average net assets.
Distribution and Service Plan
In accordance with Rule 12b-1 of the 1940 Act, the Trustees have adopted
separate distribution plans with respect to each class of shares (collectively
referred to as "the Plans"). Under the Service Class Plan, the class pays
Fidelity Distributors Corporation (FDC), an affiliate of FMR, a distribution and
service fee (12b-1 fee). This fee is based on an annual rate of .10% of Service
Class average net assets. Initial Class shares are not subject to a 12b-1 fee.
For the period, Service Class paid FDC $26,530, all of which was reallowed
to insurance companies,
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NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1998 (Unaudited)
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 $2,494,831 and $29,836 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 for proxy statements. For the period, the transfer agent fees
were equivalent to an annualized 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 certain funds' expenses.
For the period, the reductions under these arrangements are shown under
the caption "Other Information" on the fund's Statement of Operations.
- -----------------------
6. Beneficial Interest.
- -----------------------
At the end of the period, Fidelity Investments Life Insurance Company
(FILl) and its subsidiaries, affiliates of FMR, were the record owners of
approximately 17% 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.
- ------------------------------------------
7. Transactions with Affiliated Companies.
- ------------------------------------------
An affiliated company is a company which the fund has ownership of at
least 5% of the voting securities. Information regarding transactions with
affiliated companies is under the caption "Legend" at the end of the fund's
schedule of investments.
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FINANCIAL HIGHLIGHTS -- INITIAL CLASS
<TABLE>
<CAPTION>
Six Months Ended Years Ended December 31,
June 30, 1998 -------------------------------
(Unaudited) 1997 1996 1995 1994 1993
----------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Selected Per-Share Data:
Net asset value, beginning of period ...... $ 24.28 $ 21.03 $ 19.27 $ 15.35 $ 15.44 $ 13.40
----------- ----------- ---------- ---------- ---------- ----------
Income from Investment Operations:
Net investment income ................. 0.20(d) 0.36(d) 0.35 0.41 0.41 0.37
Net realized and unrealized
gain (loss) ......................... 2.24 5.06 2.30 4.69 0.64 2.06
----------- ----------- ---------- ---------- ---------- ----------
Total from investment operations ...... 2.44 5.42 2.65 5.10 1.05 2.43
----------- ----------- ---------- ---------- ---------- ----------
Less Distributions:
From net investment income ............ (0.34) (0.36) (0.03) (0.40) (0.37) (0.35)
In excess of net investment income .... -- -- -- -- -- (0.04)
From net realized gain ................ (1.21) (1.81) (0.86) (0.78) (0.77) --
----------- ----------- ---------- ---------- ---------- ----------
Total distributions ................... (1.55) (2.17) (0.89) (1.18) (1.14) (0.39)
----------- ----------- ---------- ---------- ---------- ----------
Net asset value, end of period ............ $ 25.17 $ 24.28 $ 21.03 $ 19.27 $ 15.35 $ 15.44
=========== =========== ========== ========== ========== ==========
Total Return (b) (c) ...................... 10.53% 28.11% 14.28% 35.09% 7.07% 18.29%
Ratios and Supplemental Data:
Net assets, end of period (000 omitted) $11,665,026 $10,106,742 $6,961,090 $4,879,435 $2,284,412 $1,318,500
Ratio of expenses to average net assets 0.59%(a) 0.58% 0.58% 0.61% 0.60% 0.62%
Ratio of expenses to average net assets
after expense reductions ............ 0.58%(a)(f) 0.57%(f) 0.56%(f) 0.61% 0.58%(f) 0.62%
Ratio of net investment income to
average net assets .................. 1.62%(a) 1.65% 1.97% 2.56% 2.83% 2.87%
Portfolio turnover .................... 22%(a) 44% 186% 87% 134% 120%
Average commission rate (g) ........... $ 0.0419 $ 0.0440 $ 0.0426
</TABLE>
- ------------
(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 class' expenses (see Note 5 of
Notes to Financial Statements).
(g) A fund is required to disclose its average commission rate per share for
security trades on which commissions are charged. This amount may vary
from period to period and fund to fund depending on the mix of trades
executed in various markets where trading practices and commission rate
structures may differ.
See accompanying notes which are an integral part of the Financial Statements.
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FINANCIAL HIGHLIGHTS -- SERVICE CLASS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1998 December 31,
(Unaudited) 1997 (e)
----------- -----------
<S> <C> <C>
Selected Per-Share Data:
Net asset value, beginning of period ........ $ 24.27 $ 23.44
-------- -------
Income from Investment Operations:
Net investment income ..................... 0.19(d) 0.05(d)
Net realized and unrealized gain (loss) ... 2.25 0.78
-------- -------
Total from investment operations .......... 2.44 0.83
-------- -------
Less Distributions:
From net investment income .................. (0.34) --
From net realized gain ...................... (1.21) --
-------- -------
Total distributions ......................... (1.55) --
-------- -------
Net asset value, end of period ................. $ 25.16 $ 24.27
======== =======
Total Return (b) (c) ........................... 10.53% 3.54%
Ratios and Supplemental Data:
Net assets, end of period (000 omitted) ..... $124,092 $ 5,328
Ratio of expenses to average net assets ..... 0.69%(a) 0.68%(a)
Ratio of expenses to average net assets after
expense reductions ........................ 0.68%(a)(f) 0.65%(a)(f)
Ratio of net investment income to average
net assets ................................ 1.60%(a) 1.63%(a)
Portfolio turnover .......................... 22%(a) 44%
Average commission rate (g) ................. $ 0.0419 $0.0440
</TABLE>
- ------------
(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 class' expenses (see Note 5 of
Notes to Financial Statements).
(g) A fund is required to disclose its average commission rate per share for
security trades on which commissions are charged. This amount may vary
from period to period and fund to fund depending on the mix of trades
executed in various markets where trading practices and commission rate
structures may differ.
See accompanying notes which are an integral part of the Financial Statements.
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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
John H. Costello, Assistant Treasurer
Leonard M. Rush, Assistant Treasurer
Board of Trustees
Ralph F. Cox*
Phyllis Burke Davis*
Robert M. Gates*
Edward C. Johnson 3d
E. Bradley Jones*
Donald J. Kirk*
Peter S. Lynch
Marvin L. Mann*
William O. McCoy*
Gerald C. McDonough*
Thomas R. Williams*
* Independent trustees
General Distributor
Fidelity Distributors Corporation
Boston, MA
Transfer and Shareholder Servicing Agent
Fidelity Investments Institutional Operations Company, Inc.
Boston, MA
Custodian
The Chase Manhattan Bank
New York, NY
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- ----------------------------------
SCHEDULE OF INVESTMENTS
June 30, 1998 (Unaudited)
- ------------------------
CORPORATE BONDS -- 71.9%
- ------------------------
<TABLE>
<CAPTION>
Principal Moody's Value
Amount Rating(c) (Note 1)
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
CONVERTIBLE BONDS -- 0.5%
RETAIL & WHOLESALE -- 0.3%
Retail & Wholesale, Miscellaneous -- 0.3%
$10,000,000 Corporate Express, Inc. 4 1/2%, 7/1/00 .......................B3 $ 9,193,740
-----------
SERVICES -- 0.2%
6,810,000 Signature Resorts, Inc. 5 3/4%, 1/15/07 ......................Caa 5,584,200
-----------
UTILITIES-0.0%
Telephone Services-0.0%
630,000 GST Telecommunications, Inc. 0%, 12/15/05(d)(g) ..............-- 664,650
-----------
TOTAL CONVERTIBLE BONDS ........................................................... 15,442,590
-----------
NONCONVERTIBLE BONDS -- 71.4%
AEROSPACE & DEFENSE -- 0.8%
Aerospace & Defense-0.1%
2,480,000 Compass Aerospace Corp. 10 1/8%, 4/15/05(g) ..................Caa 2,529,600
-----------
Defense Electronics-0.5%
12,150,000 Tracor, Inc. 8 1/2%, 3/1/07 ..................................B1 13,213,125
-----------
Ship Building & Repair-0.2%
4,650,000 Newport News Shipbuilding, Inc. 9 1/4%, 12/1/06 ..............B1 4,952,250
-----------
TOTAL AEROSPACE & DEFENSE ......................................................... 20,694,975
-----------
BASIC INDUSTRIES--6.0%
Chemicals & Plastics -- 1.6%
8,205,000 Atlantis Group, Inc. 11%, 2/15/03 ............................B2 8,369,100
25,930,000 Huntsman Corp. 9 1/2%, 7/1/07(g) .............................B2 26,059,650
4,985,000 Koppers Industry, Inc. 9 7/8%, 12/1/07 .......................B2 5,159,475
3,890,000 Sterling Chemicals, Inc. 11 1/4%, 4/1/07 .....................B3 3,831,650
-----------
43,419,875
-----------
Iron & Steel -- 1.8%
3,490,000 GS Technologies Operating, Inc. 12 1/4%, 10/1/05 .............B2 3,865,175
5,000,000 Pohang Iron & Steel Ltd. yankee 6 5/8%, 7/1/03 ...............Ba1 4,100,000
16,265,000 Republic Engineered Steels, Inc. 9 7/8%, 12/15/01 ............Caa 16,224,338
7,610,000 WCI Steel, Inc. 10%, 12/1/04 ................................B2 7,819,275
15,190,000 WHX Corp. 10 1/2%, 4/15/05 ..................................B3 15,379,875
-----------
47,388,663
-----------
Metals & Mining -- 0.3%
Doe Run Resources Corp.:
3,880,000 12.00875%, 3/15/03(e)(g) .....................................B2 3,918,800
3,660,000 11 1/4%, 3/15/05(g) ..........................................B2 3,696,600
-----------
7,615,400
-----------
Packaging & Containers -- 0.4%
2,660,000 Huntsman Packaging Corp. 9 1/8%, 10/1/07 .....................B2 2,686,600
7,510,000 Norampac, Inc. 9 1/2%, 2/1/08(g) .............................B2 7,622,650
-----------
10,309,250
-----------
Paper & Forest Products -- 1.9%
11,785,000 APP Finance II Mauritius Ltd. 12%, 3/15/04 ...................Caa 8,072,725
9,250,000 Advanced Argo Public Company Ltd. 13%, 11/15/07(g) ...........B2 9,203,750
3,730,000 Doman Industries Ltd. yankee 8 3/4%, 3/15/04 .................B1 3,646,075
2,320,000 Indah Kiat Finance Mauritius Ltd. 10%, 7/1/07 ................Caa 1,658,800
1,640,000 Mail-Well Corp. 10 1/2%, 2/15/04 .............................B 1,754,800
4,315,000 Millar Western Forest 9 7/8%, 5/15/08(g) .....................B3 4,228,700
7,350,000 Omega Cabinets Ltd. 10 1/2%, 6/15/07 .........................B3 7,350,000
3,740,000 Pindo Deli Finance Mauritius Ltd. 10 1/4%, 10/1/02 ...........Caa 2,655,400
</TABLE>
See accompanying notes which are an integral part of the Financial Statements.
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<TABLE>
<CAPTION>
Principal Moody's Value
Amount Rating(c) (Note 1)
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
$1,150,000 Stone Container Corp. 11 7/8%, 8/1/16 ........................B2 $ 1,282,250
4,865,000 Tembec Finance Corp. yankee 9 7/8%, 9/30/05 ..................Ba3 5,156,900
4,500,000 Tjiwi Kimia Mauritius Ltd. 10%, 8/1/04 .......................Ba3 3,127,500
4,500,000 Tjiwi Kimia International Finance Co. 13 1/4%, 8/1/01 ........Caa 3,532,500
------------
51,669,400
------------
TOTAL BASIC INDUSTRIES ............................................................ 160,402,588
------------
CONSTRUCTION & REAL ESTATE -- 1.4%
Building Materials-0.9%
7,350,000 AIRXCEL, Inc. 11%, 11/15/07 .................................B3 7,717,500
5,780,000 Insiloc Corp. 10 1/4%, 8/15/07 ..............................B3 5,924,500
5,500,000 International Utility Structures, Inc 10 3/4%, 2/1/08(g) .....Caa 5,555,000
5,000,000 Schuff Steel Co. 10 1/2%, 6/1/08(g) ..........................B3 4,950,000
------------
24,147,000
------------
Real Estate -- 0.5%
13,855,000 LNR Property Corp. 9 3/8%, 3/15/08(g) ........................B1 13,820,363
------------
TOTAL CONSTRUCTION & REAL ESTATE .................................................. 37,967,363
------------
DURABLES -- 4.4%
Autos, Tires, & Accessories -- 1.9%
5,610,000 Advance Holding Corp. 0%, 4/15/09(d)(g) ......................Caa 3,337,950
9,360,000 Advance Stores Co., Inc. 10 1/4%, 4/15/08(g) .................Caa 9,687,600
2,090,000 Blue Bird Body Co. 10 3/4%, 11/15/06 .........................B2 2,278,100
24,110,000 Breed Technologies, Inc. 9 1/4%, 4/15/08(g) ..................B3 23,567,525
13,550,000 Morris Material Handling, Inc. 9 1/2%, 4/1/08(g) .............B2 12,601,500
------------
51,472,675
------------
Home Furnishings -- 1.0%
6,587,000 Guitar Center Management Co., Inc. 11%, 7/1/06 ...............B1 7,229,233
12,265,000 Interlake Corp. 12 1/8%, 3/1/02 ..............................B3 12,632,950
Sealy Mattress Co.:
3,745,000 0%, 12/15/07(d)(g) ..........................................B3 2,434,250
3,457,800 9 7/8%, 12/15/07(g) .........................................B3 3,457,800
------------
25,754,233
------------
Textiles & Apparel -- 1.5%
4,920,000 Cluett American Corp. 10 1/8%, 5/15/08(g) ....................B3 4,883,100
9,060,000 Polymer Group, Inc. 9%, 7/1/07 ...............................B2 9,173,250
11,770,000 Synthetic Industries, Inc. 9 1/4%, 2/15/07 ...................B2 12,123,100
6,250,000 WestPoint Stevens, Inc. 7 7/8%, 6/15/08(g) ...................Ba3 6,273,438
8,905,000 Worldtex, Inc. 9 5/8%, 12/15/07 ..............................B1 8,905,000
------------
41,357,888
------------
TOTAL DURABLES .................................................................... 118,584,796
------------
ENERGY -- 3.3%
Coal -- 0.4%
5,580,000 Level 3 Communications, Inc. 9 1/4%, 5/1/08(g) ...............B3 5,426,550
5,410,000 P&L Coal Holdings Corp. 9 5/8%, 5/15/08(g) ...................B2 5,558,775
------------
10,985,325
------------
Energy Services -- 0.5%
5,415,000 DI Industries, Inc. 8 7/8%,7/1/07 ............................B1 5,198,400
5,000,000 Grey WoIf, Inc. 8 7/8%, 7/1/07(g) ............................B1 4,800,000
2,570,000 Ocean Rig Norway AS 10 1/4%, 6/1/08(g) .......................B3 2,435,075
------------
12,433,475
------------
</TABLE>
See accompanying notes which are an integral part of the Financial Statements.
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June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Principal Moody's Value
Amount Rating(c) (Note 1)
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
Oil & Gas -- 2.4%
Canadian Forest Oil Ltd.:
$2,250,000 8 3/4%, 9/15/07 .............................................B2 $ 2,182,500
4,860,000 8 3/4%, 9/15/07(g) ..........................................B2 4,702,050
13,380,000 Chesapeake Energy Corp. 9 5/8%, 5/1/05(g) ....................B1 13,413,450
6,580,000 Cross Timbers Oil Co. 9 1/4%, 4/1/07 .........................B2 6,777,400
9,715,000 Gothic Production Corp. 11 1/8%, 5/1/05(g) ...................B3 9,229,250
Great Lakes Carbon Corp.:
4,950,000 10 1/4%, 5/15/08(g) .........................................B3 4,999,500
11,115,000 0%,5/15/09(d)(g) ............................................Caa 6,057,675
4,680,000 Hurricane Hydrocarbons Ltd. 11 3/4%, 11/1/04(g) ..............B3 4,539,600
Plains Resources, Inc.:
7,470,000 Series B, 10 1/4%, 3/15/06 ..................................B2 7,787,475
2,770,000 Series D, 10 1/4%, 3/15/06 ..................................B2 2,887,725
1,380,000 Seven Seas Petroleum, Inc. 12 1/2%, 5/15/05(g) ...............Caa 1,380,000
1,630,000 Southwest Royalties, Inc. 10 1/2%, 10/15/04 ..................B3 1,393,650
-----------
65,350,275
-----------
TOTAL ENERGY ...................................................................... 88,769,075
-----------
FINANCE -- 3.2%
Asset-Backed Securities -- 0.3%
6,710,000 Airplanes Pass Through Trust Class D 10 7/8%, 3/15/19 ........Ba2 7,364,225
-----------
Credit & Other Finance-2.9%
3,930,000 Arcadia Financial Ltd. 11 1/2%, 3/15/07 ......................B2 3,900,525
12,000,000 GST Network Funding, Inc. 0%, 5/1/08(d)(g) ...................-- 7,230,000
4,870,000 Imperial Credit Capital Trust I 10 1/4%, 6/14/02 .............B2 4,918,700
17,470,000 Imperial Credit Industries, Inc. 9 7/8%, 1/15/07 .............B2 17,470,000
Iridium Operating LLC/Iridium
Capital Corp.:
10,970,000 11 1/4%, 7/15/05 .........................................B3 10,997,425
14,000,000 10 7/8%, 7/15/05 .........................................B3 13,895,000
4,670,000 La Petite Academy, Inc. 10%, 5/15/08(g) ......................B3 4,716,700
6,520,000 Ocwen Capital Trust 10 7/8%, 8/1/27 ..........................B2 7,106,800
6,250,000 Olympic Financial Ltd. 11 1/2%, 3/15/07 ......................B2 6,250,000
-----------
76,485,150
-----------
Securities Industry -- 0.0%
136,434 ECM Corp. extendible 14%, 6/1/02(g) ..........................-- 136,093
-----------
TOTAL FINANCE ..................................................................... 83,985,468
-----------
HEALTH -- 2.7%
Medical Equipment & Supplies -- 1.1%
5,510,000 CONMED Corp. 9%, 3/15/08 ....................................B3 5,489,338
4,830,000 Graham-Field Health Products, Inc. 9 3/4%, 8/15/07 ...........B3 4,347,000
18,650,000 Wright Medical Technology, Inc. 11 3/4%, 7/1/00(e) ...........Caa 18,090,500
-----------
27,926,838
-----------
Medical Facilities Management -- 1.6%
5,070,000 Fountain View, Inc. 11 1/4%, 4/15/1/05(g) ....................Caa 5,158,725
Integrated Health Services, Inc.:
4,450,000 9 1/2%, 9/15/07 .............................................B2 4,661,375
10,190,000 Series A, 9 1/4%, 1/15/08 ...................................B2 10,572,125
7,300,000 Oxford Health Plans, Inc. 11%, 5/15/05(g) ....................Caa 7,482,500
15,370,000 Tenet Healthcare Corp. 8 1/8%, 12/1/08(g) ....................Ba3 15,446,850
-----------
43,321,575
-----------
TOTAL HEALTH ...................................................................... 71,248,413
-----------
INDUSTRIAL MACHINERY & EQUIPMENT -- 2.7%
Electrical Equipment -- 1.7%
6,970,000 Echostar Communications Corp.secured discount 0%,6/1/04(d) ...B2 6,787,038
29,690,000 Motors & Gears, Inc., Series D, 10 3/4%, 11/15/06 ............B3 31,471,400
</TABLE>
See accompanying notes which are an integral part of the Financial Statements.
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<CAPTION>
Principal Moody's Value
Amount Rating(c) (Note 1)
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
$7,490,000 Telex Communications, Inc. 10 1/2%, 5/1/07 ...................B2 $ 6,741,000
------------
44,999,438
------------
Industrial Machinery & Equipment -- 0.6%
4,000,000 Continental Global Group, Inc. 11%, 4/1/07 ...................B2 4,160,000
4,750,000 Goss Graphic System, Inc. 12%, 10/15/06 ......................B2 4,868,750
8,630,000 Thermadyne Holdings Corp. 0%, 6/1/08(d)(g) ...................Caa 4,789,650
2,690,000 Thermadyne Manufacturing LLC 9 7/8%, 6/1/08(g) ...............B3 2,710,175
------------
16,528,575
------------
Pollution Control -- 0.4%
10,350,000 Envirosource, Inc.: 9 3/4%, 6/15/03 ..........................B3 10,220,625
------------
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT ............................................ 71,748,638
------------
MEDIA & LEISURE-14.3%
Broadcasting -- 9.2%
13,470,000 ACME Television LLC/ACMEFinancial Corp. 0%, 9/30/04(d) .......B3 11,079,075
Adelphia Communications Corp.:
11,541,518 9 1/2%, 2/15/04 .............................................B2 11,724,797
5,380,000 9 7/8%, 3/1/07 ..............................................B2 5,823,850
22,110,000 Ascent Entertainment Group, Inc. 0%, 12/15/04(d) .............B3 14,150,400
Diamond Cable Communications PLC yankee:
4,140,000 0%, 12/15/05(d) ..........................................Caa 3,415,500
4,160,000 0%, 2/15/07(d) ...........................................Caa 3,068,000
10,370,000 Echostar Satellite Broadcasting Corp. 0%, 3/15/04(d) .........B3 9,514,475
Granite Broadcasting Corp.:
2,510,000 10 3/8%, 5/15/05 ............................................B3 2,660,600
4,970,000 9 3/8%, 12/1/05 .............................................B3 5,119,100
20,205,000 International Cabletel, Inc 0%, 2/1/06(d) ....................B3 16,416,563
12,045,000 UN Holdings Corp. 0%, 3/1/08(d)(g) ...........................B3 8,130,375
26,265,000 NTL, Inc. 0%, 4/1/06(d)(g) ...................................B3 17,072,250
9,320,000 Olympus Communications LP/
Olympus Capital Corp 10 5/8%, 11/15/06 ......................B1 10,298,600
Orion Network Systems, Inc.:
5,405,000 11 1/4%, 1/15/07 ............................................B2 5,972,525
41,220,000 0%, 1/15/07(d) ..............................................B2 31,121,100
2,270,000 Renaissance Media Group 0%, 4/15/08(d)(g) ....................B3 1,413,075
1,980,000 Rogers Cablesystems Ltd. yankee 10 1/8%, 9/1/12 ..............Ba3 2,158,200
Satelites Mexicanos SA de CV:
10,380,000 0%, 6/30/04(d)(g) ...........................................-- 10,276,200
20,040,000 10 1/8%, 11/1/04(g) .........................................B3 19,338,600
9,422,000 Telewest PLC 0%, 10/1/07(d) ..................................B1 7,784,928
UIH Australia/Pacific, Inc.:
33,465,000 Series B, 0%, 5/15/06(d) ....................................B2 19,744,350
5,520,000 0%, 5/15/06(d) ..............................................B2 3,256,800
26,050,000 United International Holdings, Inc. 0%, 2/15/08(d) ...........B3 15,890,500
9,630,000 Young Broadcasting, Inc., Series B, 8 3/4%, 6/15/07 ..........B2 10,039,275
------------
245,469,138
------------
Entertainment -- 2.2%
8,380,000 AMC Entertainment, Inc. 9 1/2%, 3/15/09 ......................B2 8,338,100
Cinemak USA, Inc.:
6,750,000 8 1/2%, 8/1/08 ..............................................B2 6,598,125
5,240,000 9 5/8%, 8/1/08 ..............................................B2 5,397,200
Premier Parks, Inc.:
2,640,000 9 1/4%, 4/1/06 ..............................................B3 2,722,500
12,660,000 0%, 4/1/08 ..................................................B3 8,403,075
3,400,000 Town Sports International, Inc. 9 3/4%, 10/15/04 .............B2 3,391,500
22,800,000 Viacom, Inc. 8%, 7/7/06 ......................................B1 23,484,000
------------
58,334,500
------------
Lodging & Gaming -- 0.8%
10,420,000 Aladdin Gaming Holdings/
Aladdin Capital units 0%, 3/1/10(d)(g) ......................Caa 4,845,300
</TABLE>
See accompanying notes which are an integral part of the Financial Statements.
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June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Principal Moody's Value
Amount Rating(c) (Note 1)
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
$7,760,000 KSL Recreation Group, Inc. 10 1/4%, 5/1/07 ...................B3 $ 8,400,200
7,560,000 Sun International Hotels Ltd./
Sun International North America, Inc. yankee 9%, 3/15/07 ....Ba3 7,938,000
------------
21,183,500
------------
Publishing -- 0.7%
2,600,000 Advanstar Communications, Inc. 9 1/4%, 5/1/08(g) .............B2 2,619,500
17,010,000 Big Flower Press Holdings, Inc. 8 7/8%, 7/1/07 ...............B2 17,328,938
------------
19,948,438
------------
Restaurants -- 1.4%
10,600,000 AFC Enterprises, Inc. 10 1/4%, 5/15/07 .......................B3 11,236,000
4,950,000 Foodmaker, Inc. 8 3/8%, 4/15/08(g) ...........................B1 4,950,000
8,790,000 Host Marriott Travel Plazas, Inc. 9 1/2%, 5/15/05 ............Ba3 9,273,450
5,000,000 Planet Hollywood International, Inc. 12%, 4/1/05 .............B2 4,500,000
8,300,000 SC International Services, Inc., Series B, 9 1/4%, 9/1/07 ....B2 8,476,375
------------
38,435,825
------------
TOTAL MEDIA & LEISURE 383,371,401
------------
NONDURABLES -- 1.3%
Foods -- 0.2%
3,290,000 Aurora Foods, Inc. 8 3/4%, 7/1/08(g) .........................B1 3,335,238
720,000 Del Monte Corp. 12 1/4%,4/15/07 ..............................Caa 811,800
------------
4,147,038
------------
Household Products -- 0.9%
2,100,000 AKI, Inc. 10 1/2%, 7/1/08(g) .................................B2 2,121,000
7,500,000 AKI Holding, Inc. 0%, 7/1/09(d)(g) ...........................Caa 3,900,000
770,000 Renaissance Cosmetic, Inc. 11 3/4%, 2/15/04 ..................Caa 269,500
18,750,000 Revlon Consumer Products Corp. 8 5/8%, 2/1/08 ................B3 18,750,000
------------
25,040,500
------------
Tobacco -- 0.2%
North Atlantic Trading, Inc.
6,420,000 11%, 6/15/04 .............................................B3 6,420,000
------------
TOTAL NONDURABLES 35,607,538
------------
PRECIOUS METALS -- 0.7%
9,830,000 Centaur Mining & Exploration Ltd. 11%, 12/1/07(g) ............B1 10,051,175
8,140,000 Great Central Mines Ltd. 8 7/8%, 4/1/08(g) ...................Ba2 7,997,550
------------
18,048,725
------------
RETAIL & WHOLESALE -- 4.9%
Apparel Stores -- 1.2%
10,140,000 Mothers Work, Inc. 12 5/8%, 8/1/05 ...........................B3 10,875,150
20,160,000 Specialty Retailers, Inc. 9%, 7/15/07 ........................B2 20,916,000
------------
31,791,150
------------
Grocery Stores -- 0.6%
16,250,000 Pathmark Stores, Inc. 9 5/8%, 5/1/03 .........................Caa 16,453,125
------------
Retail & Wholesale, Miscellaneous -- 3.1%
40,750,000 Amazon.com, Inc. 0%, 5/1/08(d)(g) ............................Caa 24,857,500
6,255,000 Big 5 Corp. 10 7/8%, 11/15/07 ................................B2 6,489,563
6,820,000 Central Tractor Farm & Country, Inc. 10 5/8%, 4/1/07 .........B2 7,195,100
5,900,000 Home Interiors & Gifts, Inc. 10 1/8%, 6/1/08(g) ..............B2 6,032,759
16,800,000 J Crew Operating Corp. 10 3/8%, 10/15/07 .....................Caa 15,960,000
13,417,000 J Crew Group, Inc. 0%, 10/15/08(d)(g) ........................Caa 7,513,520
</TABLE>
See accompanying notes which are an integral part of the Financial Statements.
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<TABLE>
<CAPTION>
Principal Moody's Value
Amount Rating(c) (Note 1)
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
5,450,000 Metals USA, Inc.8 5/8%, 2/15/08(g) ...........................B2 $ 5,272,875
9,540,000 U.S. Office Products Co. 9 3/4%, 6/15/08(g) ..................B3 9,444,600
82,765,908
------------
TOTAL RETAIL & WHOLESALE 131,010,183
------------
SERVICES -- 5.3%
Leasing & Rental -- 1.7%
14,730,000 Apcoa, Inc. 9 1/4%, 3/15/08(g) ...............................Caa 14,619,525
6,800,000 AR Holdings, Inc. 0%, 3/15/08(d)(g) ..........................Caa 4,046,000
3,250,000 Brand Scaffold Services, Inc. 10 1/4%, 2/15/08(g) ............B3 3,298,750
500,000 GPA Holland 8.94%, 2/16/99 ...................................-- 506,250
21,710,000 Hollywood Entertainment Corp. 10 5/8%, 8/15/04 ...............B3 22,144,200
------------
44,614,725
------------
Printing -- 0.8%
21,340,000 Sullivan Graphics, Inc. 12 3/4%, 8/1/05 ......................Caa 22,460,350
------------
Services-2.8%
4,115,000 Iron Mountain, Inc. 8 3/4%, 9/30/09 ..........................B3 4,197,300
16,483,000 Medaphis Corp. 9 1/2%, 2/15/05(g) ............................B2 15,988,510
3,065,000 Protection One Alarm Monitoring, Inc. 13 5/8%, 6/30/05 .......Caa 3,448,125
Signature Resorts, Inc.:
10,980,000 9 1/4%, 5/15/06 .............................................B2 10,925,100
19,080,000 9 3/4%, 10/1/07 .............................................B3 18,555,300
16,625,000 Spin Cycle, Inc. Unit 0%, 5/1/05(d)(g) .......................-- 11,720,625
16,480,000 Teligent, Inc. 0%, 3/1/08(d)(g) ..............................Caa 9,105,200
------------
73,940,160
------------
TOTAL SERVICES .................................................................... 141,015,235
------------
TECHNOLOGY -- 3.6%
Communications Equipment -- 0.5%
Jordan Telecommunication Products, Inc.:
3,540,000 9 7/8%, 8/1/07 ..............................................B3 3,610,800
10,400,000 0%, 8/1/07 (d) ..............................................B3 8,528,000
------------
12,138,800
------------
Computer Services & Software-2.0%
8,310,000 Concentric Network Corp. 12 3/4%, 12/15/07 ...................-- 8,850,150
4,510,000 DecisionOne Corp. 9 3/4%, 8/1/07 .............................B3 4,329,600
12,045,000 DecisionOne Holding Corp. 0%, 8/1/08, unit(d) ................Caa 7,227,000
ICG Services, Inc.:
48,660,000 0%, 2/15/08(d)(g) ...........................................-- 29,317,650
5,580,000 0%, 5/1/08(g) ...............................................-- 3,264,300
------------
52,988,700
------------
Electronic Instruments -- 0.6%
4,635,000 Fisher Scientific International, Inc. 9%, 2/1/08 .............B3 4,611,825
11,980,000 Telecommunications Techniques Co. 9 3/4%, 5/15/08(g) .........B3 12,189,650
------------
16,801,475
------------
Electronics -- 0.5%
4,180,000 American Mobile Satellite Corp. Unit 12 1/4%, 4/1/08(g) ......-- 3,887,400
5,360,000 Communications Instruments, Inc. 10%, 9/15/04 ................B3 5,467,200
4,730,000 Hadco Corp. 9 1/2%, 6/15/08 (g) ..............................B2 4,670,875
------------
14,025,475
------------
TOTAL TECHNOLOGY .................................................................. 95,954,450
------------
</TABLE>
See accompanying notes which are an integral part of the Financial Statements.
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High Income
Portfolio
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- ----------------------------------
SCHEDULE OF INVESTMENTS (Continued)
June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Principal Moody's Value
Amount Rating(c) (Note 1)
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
TRANSPORTATION -- 1.4%
Air Transportation -- 0.9%
$ 4,480,000 Atlas Air, Inc. 9 1/4%, 4/15/08(g) ...........................B3 $ 4,474,400
12,770,000 Kitty Hawk, Inc. 9.95%, 11/15/04 .............................B1 13,280,800
5,000,000 US Air, Inc. euro pass through trust 8 5/8%, 9/1/98 ..........Ba2 5,012,500
------------
22,767,700
------------
Shipping -- 0.5%
3,910,000 Amer Reefer Co. Ltd. 10 1/4%, 3/1/08(g) ......................B1 3,910,000
10,250,000 Holt Group, Inc. 9 3/4%, 1/15/06(g) ..........................Caa 10,045,000
------------
13,955,000
------------
TOTAL TRANSPORTATION .............................................................. 36,722,700
------------
UTILITIES -- 15.4%
Cellular -- 8.6%
30,260,000 CellNet Data Systems, Inc. 0%, 10/1/07(d) ....................- 16,189,100
1,770,000 Cencall Communications Corp. 0%, 1/15/04(d) ..................B2 1,739,025
2,220,000 Iridium LLC/Iridium Capital Corp. 13%, 7/15/05 ...............B3 2,380,950
49,535,000 McCaw International Ltd. 0%, 4/15/07(d) ......................Caa 32,445,425
7,660,000 Microcell Telecommunications, Inc. 0%, 6/1/06(d) .............B3 5,725,850
66,270,000 Millicom International Cellular SA 0%, 6/1/06(d) .............B3 51,359,250
22,820,000 Nextel International, Inc. 12 1/8%, 4/15/08(g) ...............Caa 13,235,600
Nextel Communications, Inc.:
20,290,000 0%, 8/15/04(d) ..............................................B2 19,732,025
30,060,000 0%, 2/15/08(d)(g) ...........................................B2 19,313,550
PageMart Wireless, Inc.:
7,070,000 0%, 2/1/05(d) ...............................................B3 6,256,950
44,420,000 0%, 2/1/08(d) ...............................................Caa 26,652,000
13,360,000 Rogers Communications, Inc. 8 7/8%, 7/15/07 ..................B2 13,460,200
1,970,000 Teletrac, Inc. 14%, 8/1/07 ...................................Caa 1,773,000
Telesystem International Wireless, Inc.:
13,870,000 0%, 6/30/07(d) ..............................................Caa 9,084,850
15,260,000 0%, 11/1/07(d) ..............................................Caa 9,041,550
------------
228,389,325
------------
Electric Utility-0.1%
3,370,000 Niagara Mohawk Power Corp. 0%, 7/1/10(d) .....................Ba3 2,308,450
------------
Telephone Services-6.7%
15,580,000 Covad Communications Group Unit 0%, 3/15/06(d)(g) ............-- 7,945,800
10,910,000 Dobson Wireline Co. 12 1/4%, 6/15/08(g) ......................-- 10,664,525
11,520,000 GST Telecommunications, Inc. 12 3/4%, 11/15/07 ...............-- 13,334,400
4,090,000 GST USA, Inc. 0%, 12/15/05(d) ................................-- 3,312,900
Hyperion Telecommunications, Inc.:
31,110,000 Series B, 0%, 4/15/03(d) ....................................B3 23,099,175
6,155,000 12 1/4%, 9/1/04 .............................................B3 6,616,625
11,755,000 IXC Communications, Inc. 9%, 4/15/08(g) ......................B3 11,637,450
19,870,000 KMC Telecom Holdings, Inc. 0%, 2/15/08 units(g) ..............-- 11,623,950
16,340,000 McLeodUSA, Inc. 0%, 3/1/07(d) ................................B2 12,214,150
Netia Holdings B.V:
3,240,000 10 1/4%, 11/1/07 ............................................B3 3,110,400
5,800,000 0%, 11/1/07(d) ..............................................B3 3,770,000
2,610,000 NEXTLINK Communications, Inc. 9 5/8%, 10/1/07 ................B3 2,668,725
12,000,000 Optel Communications Corp. 15%, 12/29/04(h) ..................-- 11,240,640
8,700,000 Pathnet, Inc. Unit 12 1/2%, 4/15/08(g) .......................-- 9,222,000
17,325,000 Rhythms NetConnections, Inc. Unit 0%, 5/15/08(d)(g) ..........-- 8,402,625
Winstar Communications, Inc.:
6,460,000 0%, 10/15/05(d) .............................................Caa 5,458,700
13,220,000 14 1/2%, 10/15/05 ...........................................Caa 18,243,600
</TABLE>
See accompanying notes which are an integral part of the Financial Statements.
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<TABLE>
<CAPTION>
Principal Moody's Value
Amount Rating(c) (Note 1)
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
$15,075,000 11%, 3/15/08(g) .............................................-- $ 14,999,625
--------------
177,565,290
--------------
TOTAL UTILITIES .................................................................. 408,263,065
--------------
TOTAL NONCONVERTIBLE BONDS ....................................................... 1,903,394,613
--------------
TOTAL CORPORATE BONDS
(Cost $1,910,076,005) 1,918,837,203
--------------
- -----------------------------------
Commercial Mortgage Securities-0.0%
- -----------------------------------
Meritor Mortgage Security Corp.commercial Series 1987-1
1,350,000 Class B, 9.40%, 2/1/00(b)(g) (Cost $117,176) ................-- 250,560
--------------
- ------------------
Common Stocks-6.1%
- ------------------
<CAPTION>
Shares
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C>
AEROSPACE & DEFENSE -- 0.1%
125,000 Wyman-Gordon Co.(a) ......................................... 2,492,188
--------------
BASIC INDUSTRIES -- 0.4%
Chemicals & Plastics -- 0.0%
340 Sterling Chemical Holdings warrants 8/15/08(a) .............. 8,160
--------------
Iron & Steel -- 0.0%
67,500 Republic Engineered Steels, Inc.(a) ......................... 291,094
--------------
Packaging & Containers -- 0.1%
301,900 Gaylord Container Corp. Class A(a) .......................... 2,320,856
--------------
Paper & Forest. Products -- 0.3%
494,000 Jefferson Smurfit Corp.(a) .................................. 7,765,063
--------------
TOTAL BASIC INDUSTRIES ........................................................... 10,385,173
--------------
CONSTRUCTION & REAL ESTATE -- 0.4%
Building Materials -- 0.1%
2,500 International Utility Structures, Inc. unit ................. 2,725,000
--------------
Real Estate -- 0.3%
283,600 LNR Property Corp. .......................................... 7,267,250
--------------
Real Estate Investment Trusts -- 0.0%
19,200 Ocwen Asset Investment Corp. ................................ 318,000
--------------
TOTAL CONSTRUCTION & REAL ESTATE ................................................. 10,310,250
--------------
DURABLES -- 0.3%
Textiles & Apparel -- 0.3%
48,889 Arena Brands Holdings Corp.Class B(a) ....................... 1,222,225
340,000 Hat Brands, Inc.(a)(h)(f) ................................... --
503,000 Polymer Group, Inc.(a) ...................................... 5,847,378
------------
7,069,603
------------
ENERGY -- 0.2%
Oil & Gas -- 0.20%
330,000 Harcor Energy, Inc. warrants 7/24/00(a) ..................... --
336,300 Plains Resources, Inc.(a) ................................... 6,032,384
------------
6,032,384
------------
FINANCE -- 0.0%
Credit & Other Finance -- 0.0%
498 Olympic Financial Ltd. warrants 3/15/07(a) .................. 5,976
------------
Securities Industry -- 0.0%
3,000 ECM Corp. LP(g) ............................................. 264,000
------------
TOTAL FINANCE .................................................................... 269,976
------------
HEALTH -- 0.0%
Medical Equipment & Supplies -- 0.0%
150,000 Imagyn Medical Technologies, Inc.(a) ........................ 75,000
3,212 Wright Medical Technology, Inc. warrants 6/30/03(a) ......... 305,140
------------
380,140
------------
MEDIA & LEISURE -- 0.7%
Broadcasting -- 0.5%
Benedek Communications Corp.
57,600 warrants 7/1/00(a) ......................................... 172,800
1,024 CS Wireless Systems, Inc.(a)(g) ............................. --
</TABLE>
See accompanying notes which are an integral part of the Financial Statements.
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SCHEDULE OF INVESTMENTS (Continued)
June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Value
Shares (Note 1)
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C>
Loral Orion Networks Systems, Inc.:
5,585 warrants 1/15/07(a) ....................................... $ 83,775
45,930 warrants 1/15/17(a) ....................................... 551,160
3,940 Teletrac Holdings, Inc. warrants 8/1/07(a) .................. 39,400
26,805 UIH Australia/Pacific, Inc. warrants 5/15/06(a) ............. 134,025
821,200 United International Holdings, Inc. Class A(a) .............. 13,139,200
-----------
14,120,360
-----------
Leisure Durables & Toys -- 0.1%
IHF Capital, Inc., Series I warrants:
5,890 11/14/99(a)(g) ............................................ 176,700
10,250 11/15/04(a)(g) ............................................ 1,537,500
-----------
1,714,200
-----------
Lodging & Gaming -- 0.0%
90,000 Bally Gaming International, Inc. warrants 7/29/98(a) ........ 56,250
3,000 Motels of America, Inc.(a) .................................. 75,000
-----------
131,250
-----------
Restaurants -- 0.1%
100,000 Friendly Ice Cream Corp. .................................... 1,687,500
-----------
TOTAL MEDIA & LEISURE ............................................................ 17,653,310
-----------
NONDURABLES -- 0.0%
Household Products -- 0.0%
12,750 Renaissance Cosmetics, Inc. warrants 8/31/06(a)(g) .......... 130
-----------
Tobacco-0.0%
210 North Atlantic Trading, Inc. warrants 6/15/07(a) ............ --
-----------
TOTAL NONDURABLES ................................................................ 130
-----------
RETAIL & WHOLESALE-0.4%
Apparel Stores -- 0.1%
Lamonts Apparel, Inc.:
67,341 Class A, warrants 1/31/08(a) .............................. 16,835
108,775 Class A ................................................... 40,791
21,602 Class B, warrants 1/31/08(a) .............................. 5,401
317,052 Mothers Work(a)(f) .......................................... 2,219,364
-----------
2,282,391
-----------
Grocery Stores -- 0.3%
186,114 Meyer (Fred), Inc.(a) ....................................... 7,909,845
-----------
TOTAL RETAIL & WHOLESALE ......................................................... 10,192,236
-----------
SERVICES -- 1.2%
Leasing & Rental -- 0.2%
307,600 Hollywood Entertainment Corp.(a) ............................ 4,171,825
-----------
Printing -- 0.2%
221,000 Big Flower Holdings, Inc.(a) ................................ 6,630,000
-----------
Services -- 0.8%
1,242,000 Sunterra Resorts, Inc. ...................................... 20,493,000
-----------
TOTAL SERVICES ................................................................... 31,294,825
-----------
TECHNOLOGY -- 0.4%
Computer Services & Software -- 0.4%
100,000 Concentric Network Corp. .................................... 3,031,250
Concentric Network Corp.
6,100 warrants 12/15/07(a)(g) .................................... 823,500
200,000 ICG Communications, Inc.(a) ................................ 7,312,500
-----------
11,167,250
-----------
TRANSPORTATION -- 0.2%
Air Transportation -- 0.2%
245,000 Kitty Hawk, Inc.(a) ......................................... 4,165,000
-----------
UTILITIES -- 2.0%
Cellular -- 0.7%
42,500 Cellnet Data Systems, Inc.(a) ............................... 411,719
CellNet Data Systems, Inc.
18,000 warrants 10/1/07 (a)(g) ................................... 540,000
McCaw International Ltd.
42,305 warrants 4/15/07(a)(g) .................................... 211,525
Microcell Telecommunications, Inc.
103,480 warrants 6/1/06(a)(g) ..................................... 1,999,234
1,427,000 Pagemart Wireless, Inc. Class A(a) .......................... 12,932,188
56,448 Powertel, Inc. warrants 2/1/06(a) ........................... 522,144
</TABLE>
See accompanying notes which are an integral part of the Financial Statements.
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<TABLE>
<CAPTION>
Value
Shares (Note 1)
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C>
72,600 Telesystem International Wireless, Inc. (sub-vtg.)(a) ....... $ 1,409,709
18,026,519
------------
Telephone Services-1.3%
947,800 GST Telecommunications, Inc. (a) ............................ 13,506,150
Hyperion Telecommunications, Inc.
76,113 Class A .................................................... 1,194,023
386,800 IXC Communications, Inc. .................................... 18,759,800
Optel Communications
2,559,515 warrants 12/29/04 (a)(h) ................................... 759,408
------------
34,219,381
------------
TOTAL UTILITIES .................................................................. 52,245,900
------------
TOTAL COMMON STOCKS
(Cost $151,146,835) ............................................................ 163,658,365
------------
- ------------------------------------
CONVERTIBLE PREFERRED STOCKS -- 1.1%
- ------------------------------------
ENERGY -- 0.1%
Oil & Gas -- 0.1%
63,700 Chesapeake Energy Corp. $3.50 (g) ........................... 2,691,325
------------
MEDIA & LEISURE -- 0.2%
Lodging & Gaming --0.2%
Host Marriott Financial Trust
30,500 3.375 QUIPS (g) ............................................ 1,601,250
35,000 Host Marriott Financial Trust $3.375 ........................ 1,837,500
------------
3,438,750
------------
SERVICES-0.2%
Printing -- 0.2%
87,500 Big Flower Trust I $3.00 QUIPS (g) .......................... 5,353,906
------------
UTILITIES-0.6%
Telephone Services-0.6%
348,900 IXC Communications, Inc. $3.375 (g) ......................... 16,594,556
TOTAL CONVERTIBLE PREFERRED STOCKS ............................................... 28,078,537
------------
- -------------------------------------
NONCONVERTIBLE PREFERRED STOCKS-16.9%
- -------------------------------------
FINANCE-0.7%
Credit & Other Finance-0.3%
Fresenius Medical Core Capital Trust II
8,375 7 7/8% ..................................................... $ 8,338,359
------------
Insurance-0.4%
American Annuity Group Capital Trust II
8,910 8 3/4% ..................................................... 9,290,876
------------
TOTAL FINANCE .................................................................... 17,629,235
------------
INDUSTRIAL MACHINERY & EQUIPMENT-0.6%
Electrical Equipment-0.6%
1,589 Ampex Corp. 8% (a)(h) ....................................... 1,235,114
Echostar Communications Corp.
12,618 12 1/8%, pay-in-kind ....................................... 13,879,800
------------
15,114,914
------------
MEDIA & LEISURE-6.4%
Broadcasting-6.1%
43,500 Adelphia Communications Corp. $13 ........................... 5,220,000
American Radio Systems Corp.
133,856 11 3/8%, pay-in-kind ...................................... 15,493,832
CSC Holdings, Inc.:
237,083 11 1/8% pay-in-kind ....................................... 27,146,004
183,617 Series H, 11 3/4% pay-in-kind ............................... 21,161,859
Chancellor Media Corp., Series A,
64,300 $12.25 .................................................... 9,162,750
Citadel Broadcasting Co., Series B,
55,960 13 1/4%, pay-in-kind ...................................... 6,603,280
Granite Broadcasting Corp.
8,416 12 3/4%, pay-in-kind ...................................... 9,846,720
Time Warner, Inc., Series M,
61,942 10 1/4%, pay-in-kind ...................................... 68,833,048
------------
163,467,493
------------
Publishing -- 0.3%
PRIMEDIA, Inc.:
5,400 Series D, $10 ............................................. 567,000
82,500 8 5/8%, 4/1/10 ............................................ 8,085,000
------------
8,652,000
------------
TOTAL MEDIA & LEISURE ............................................................ 172,119,493
------------
</TABLE>
See accompanying notes which are an integral part of the Financial Statements.
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SCHEDULE OF INVESTMENTS (Continued)
June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Value
Shares (Note 1)
- ---------------------------------------------------------------------------------------------------------
<C> <S> <C>
NONDURABLES -- 0.2%
Household Products -- 0.0%
16,284 Renaissance Cosmetics, Inc.
pay-in-kind 14% ........................................... $ 24,426
Tobacco -- 0.2%
235,820 North Atlantic Trading, Inc.
12%, pay-in-kind .......................................... 5,895,500
--------------
TOTAL NONDURABLES ................................................................ 5,919,926
--------------
SERVICES -- 0.3%
Leasing & Rental -- 0.3%
209,000 Scaffold Services, Inc.
14 1/2% (a)(g) .............................................. 7,315,000
TECHNOLOGY -- 1.5%
Communications Equipment-1.2%
26,775 Intermedia Communications, Inc.
13 1/2%, pay-in-kind ...................................... 31,594,500
--------------
Computer Services & Software -- 0.3%
9,030 Concentric Network Corp.
13 1/2% (g) ............................................... 9,007,425
TOTAL TECHNOLOGY ................................................................. 40,601,925
--------------
UTILITIES -- 7.2%
Cellular -- 2.1%
Nextel Communications, Inc.:
28,070 Series D, 13% pay-in-kind ............................. 30,736,650
24,172 11 1/8%, pay-in-kind (g) .............................. 24,897,160
--------------
55,633,810
--------------
Telephone Services -- 5.1%
e.spire Communications, Inc.:
3,388 14 3/4%, pay-in-kind .................................... 4,065,600
14,368 $127.50 pay-in-kind ..................................... 15,194,160
Hyperion Telecommunications, Inc.
18,015 12 7/8%, pay-in-kind (Reg.) ............................. 17,879,888
ICG Holdings, Inc.:
25,363 14 1/4%, pay-in-kind .................................... 29,674,710
5,600 14%, pay-in-kind ........................................ 6,496,000
IXC Communications, Inc.
6,903 12 1/2%, pay-in-kind .................................... 8,007,480
NEXTLINK Communications, Inc.
770,474 14%, pay-in-kind ........................................ 45,265,348
WinStar Communications, Inc.
7,810 14 1/4% ................................................. 9,293,900
--------------
135,877,086
--------------
TOTAL UTILITIES .................................................................. 191,510,896
--------------
TOTAL NONCONVERTIBLE PREFERRED
STOCKS ......................................................................... 450,211,389
--------------
TOTAL PREFERRED STOCKS
(Cost $464,125,203) ............................................................ 478,289,926
--------------
- -----------------------
Cash Equivalents - 4.1%
- -----------------------
<CAPTION>
Maturity Value
Amount (Note 1)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments in repurchase agreements
(U.S. Treasury obligations), in a joint
trading account at 5.66%, dated
6/30/98 due 7/1/98 $108,291,023 $ 108,274,000
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT IN SECURITIES -- 100%
(Cost $2,633,739,219) $2,669,310,054
==============
</TABLE>
See accompanying notes which are an integral part of the Financial Statements.
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Security Type Abbreviations
QUIPS - Quarterly Income Preferred Securities
Legend
(a) Non-income producing
(b) Non-income producing-issuer filed for protection under the Federal
Bankruptcy Code or is in default of interest payment.
(c) Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
(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) The coupon rate shown on floating or adjustable rate securities represents
the rate at period end.
(f) Transactions during the period with companies which are or were affiliates
are as follows (see Note 7 of Notes to Financial Statements):
Purchase Sales Dividend
Affiliate Cost Cost Income Value
Hat Brands, Inc. $ -- $ -- $ -- $ --
Mothers Work 388,699 -- -- 2,219,364
-------- ------- ------- ----------
TOTALS $388,699 $ -- $ -- $2,219,364
======== ======= ======= ==========
(g) 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 $718,821,843 or 26.6% of
net assets.
(h) Restricted securities-Investment in securities not registered under the
Securities Act of 1933 (see Note 2 of Notes to Financial Statements).
Additional information on each holding is as follows:
Acquisition Acquisition
Date Cost
Ampex Corp. 8% 2/16/95 $ 834,225
Hat Brands, Inc. 2/22/94 $ 340,000
Optel Communications 15% 12/28/04 12/31/97 $11,240,640
Optel Communications warrants 12/31/97 $ 759,408
Other Information
Purchases and sales of securities, other than short-term securities, aggregated
$1,620,129,492 and $1,217,153,409, respectively.
The fund placed a portion of its portfolio transactions with brokerage firms
which are affiliates of Fidelity Management & Research Company. The commissions
paid to these affiliated firms were $13,334 for the period (see Note 4 of Notes
to Financial Statements).
The composition of long-term debt holdings as a percentage of total value of
investment in securities, is as follows (ratings are unaudited):
Moody's Ratings
Aaa, Aa, A 0.0%
Baa 0.0%
Ba 2.9%
B 48.3%
Caa 13.9%
Ca, C 0.0%
S&P Ratings
AAA, AA, A 0.0%
BBB 0.6%
Ba 4.8%
B 48.6%
CCC 8.3%
CC, C 0.0%
D 0.0%
The percentage not rated by Moody's or S&P amounted to 6.9%. FMR has determined
that unrated debt securities that are lower quality account for 6.9% of the
total value of investment in securities.
Income Tax Information
At June 30,1998, the aggregate cost of investment securities for income tax
purposes was $2,633,777,644. Net unrealized appreciation aggregated $35,532,410,
of which $2,669,430,994 related to appreciated investment securities and
$2,633,898,584 related to depreciated investment securities.
See accompanying notes which are an integral part of the Financial Statements.
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- ----------------------------------
STATEMENT OF ASSETS
AND LIABILITIES
June 30, 1998 (Unaudited)
Assets:
Investment in securities, at value
(including repurchase agreements of
$108,274,000) (cost $2,633,739,219)
-- See accompanying schedule $ 2,669,310,054
Cash 881
Receivable for investments sold 15,658,093
Receivable for fund shares sold 2,490,902
Dividends receivable 7,182,312
Interest receivable 33,981,186
Other receivables 409,716
---------------
Total Assets 2,729,033,144
---------------
Liabilities:
Payable for investments purchased 27,135,137
Payable for fund shares redeemed 2,711,993
Accrued management fee 1,309,301
Distribution fees payable 5,378
Other payables and accrued expenses 251,116
---------------
Total liabilities 31,412,925
---------------
Net Assets $ 2,697,620,219
===============
Net Assets consist of:
Paid-in capital $ 2,503,154,762
Undistributed net investment income 108,867,466
Accumulated undistributed net realized
gain (loss) on investments and
foreign currency transactions 50,027,156
Net unrealized appreciation
(depreciation) on investments 35,570,835
---------------
Net Assets $ 2,697,620,219
===============
Initial Class:
Net Asset Value, offering price and
redemption price per share
($2,622,932,381 / 207,615,971 shares) $ 12.63
===============
Service Class:
Net Asset Value, offering price and
redemption price per share
($74,687,838 / 5,915,965 shares) $ 12.62
===============
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1998
(Unaudited)
Investment Income:
Dividends $ 25,333,777
Interest 95,218,106
---------------
Total Income 120,551,883
---------------
Expenses:
Management fee 7,580,598
Transfer agent fees 894,432
Distribution fees -- Service Class 15,228
Accounting fees and expenses 408,966
Non-interested trustees' compensation 4,674
Custodian fees and expenses 30,372
Registration fees 8,633
Audit 28,239
Legal 16,695
Miscellaneous 49,654
---------------
Total expenses before reductions 9,037,491
Expense reductions (61,436)
Total Expenses 8,976,055
---------------
Net Investment Income 111,575,828
===============
Realized and Unrealized Gain (Loss):
Net realized gain (loss) on investment securities 50,821,870
Change in net unrealized appreciation
(depreciation) on investment securities (44,014,060)
---------------
Net gain (Loss) 6,807,810
---------------
Net increase (decrease) in net assets
resulting from operations $ 118,383,638
===============
Other Information:
Expense reductions:
Directed brokerage arrangements $ 50,987
Custodian credits 10,449
---------------
$ 61,436
===============
See accompanying notes which are an integral part of the Financial Statements.
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STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1998 December 31,
(Unaudited) 1997
-------------- --------------
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 111,575,288 $ 172,037,074
Net realized gain (loss) 50,821,870 112,724,876
Change in net unrealized appreciation (depreciation) (44,014,060) 28,621,311
-------------- --------------
Net increase (decrease) in net assets resulting from operations 118,383,638 313,383,261
-------------- --------------
Distributions to shareholders:
From net investment income (175,797,040) (116,015,279)
From net realized gain (110,256,336) (14,338,900)
-------------- --------------
Total distributions (286,053,376) (130,354,179)
-------------- --------------
Share transactions -- net increase (decrease) 532,855,013 560,584,056
-------------- --------------
Total increase (decrease) in net assets 365,185,275 743,613,138
Net Assets:
Beginning of period 2,332,434,944 1,588,821,806
-------------- --------------
End of period (including undistributed net investment income of
$108,867,466 and $171,323,283, respectively) $2,697,620,219 $2,332,434,944
============== ==============
</TABLE>
<TABLE>
<CAPTION>
Other Information: Six Months Ended June 30, 1998
Shares Dollars Year Ended December 31, 1997
(Unaudited) Shares Dollars
---------------------------- -------------------------------
<S> <C> <C> <C> <C>
Share transactions:
Initial Class
Sold 50,857,223 $ 656,742,654 99,919,218 $1,254,908,724
Reinvested 22,841,446 282,777,102 11,056,288 130,354,179
Redeemed (37,626,101) (479,079,051) (66,317,508) (827,580,626)
----------- -------------- ----------- --------------
Net increase (decrease) 36,072,568 $ 460,440,705 44,657,998 $ 557,682,277
=========== ============== =========== ==============
Service ClassA
Sold 5,634,653 $ 71,596,912 215,034 $ 2,901,779
Reinvested 80,565 997,399 -- --
Redeemed (14,287) (180,003) -- --
----------- -------------- ----------- --------------
Net increase (decrease) 5,700,931 $ 72,414,308 215,034 $ 2,901,779
=========== ============== =========== ==============
Distributions:
Initial Class -- Net investment income $ 175,124,770 $ 116,015,279
Initial Class -- Net realized gain 109,868,812 14,338,900
-------------- --------------
Total $ 284,993,582 $ 130,354,179
============== ==============
Service Class -- Net investment income $ 672,270 $ --
Service Class -- Net realized gain 387,524 --
-------------- --------------
Total $ 1,059,794 $ --
============== ==============
$ 286,053,376 $ 130,354,179
============== ==============
</TABLE>
A Service Class commenced sale of shares November 3, 1997.
See accompanying notes which are an integral part of the Financial Statements.
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NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited)
- -----------------------------------
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 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.
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 in the principle market 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 date and settlement 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."
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NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited)(Continued)
Investment Income.
Dividend income is recorded on the ex-dividend date, except certain
dividends from foreign securities where the ex-dividend date may have passed,
are recorded as soon as the fund is informed of the ex-dividend date. Non-cash
dividends included in dividend income, if any, are recorded at the fair market
value of the securities received. Interest income which includes accretion of
original issue discount, is accrued as earned. Investment income is recorded net
of foreign taxes withheld where recovery of such taxes is uncertain.
Expenses.
Most expenses of the trust can be directly attributed to a fund. Expenses
which cannot be directly attributed are apportioned among the funds in the
trust.
Distributions to Shareholders.
Distributions are recorded on the ex-dividend date. Income dividends and
capital gain distributions are declared separately for each class.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences, which may result in distribution
reclassifications, are primarily due to differing treatments for paydown
gains/losses on certain securities, foreign currency transactions, market
discount and losses deferred due to wash sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital. Undistributed
net investment income and accumulated undistributed net realized gain (loss) on
investments and foreign currency transactions may include temporary book and tax
basis differences which will reverse in a subsequent period. Any taxable income
or gain remaining at fiscal year end is distributed in the following year.
Security Transactions.
Security transactions are accounted for as of trade date. Gains and losses
on securities sold are determined on the basis of identified cost.
- ----------------------
2. Operating Policies.
- ----------------------
Foreign Currency Contracts
The fund generally uses foreign currency contracts to facilitate
transactions in foreign denominated securities. Losses may arise from changes in
the value of the foreign currency or if the counterparties do not perform under
the contracts' terms. The U.S. dollar value of foreign currency contracts is
determined using contractual currency exchange rates established at the time of
each trade.
Joint Trading Account.
Pursuant to an Exemptive Order issued by the Securities and Exchange
Commission, the fund, along with other affiliated entities of Fidelity
Management & Research Company (FMR), may transfer uninvested cash balances into
one or more joint trading accounts. These balances are invested in one or more
repurchase agreements for U.S. Treasury or Federal Agency obligations.
Repurchase Agreements.
The underlying U.S. Treasury or Federal Agency securities are transferred
to an account of the fund, or to the Joint Trading Account, at a bank custodian.
The securities are marked-to-market daily and maintained at a value at least
equal to the principal amount of the repurchase agreement (including accrued
interest). FMR, the fund's investment adviser, is responsible for determining
that the value of the underlying securities remains in accordance with the
market value requirements stated above.
- --------------------------------------------------------------------------------
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NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1998 (Unaudited)
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 timeconsuming 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
$13,235,162 or .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 annualized rate of .59% of average net assets.
Distribution and Service Plan.
In accordance with Rule 12b-1 of the 1940 Act, the Trustees have adopted
separate distribution plans with respect to each class of shares (collectively
referred to as "the Plans"). Under the Service Class Plan, the class pays
Fidelity Distributors Corporation (FDC), an affiliate of FMR, a distribution and
service fee (12b-1 fee). This fee is based on an annual rate of .10% of Service
Class average net assets. Initial Class shares are not subject to a 12b-1 fee.
For the period, Service Class paid FDC $15,228, 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 $567,328 and $15,972 for the Initial Class and Service Class,
respectively.
Transfer Agent Fees.
Fidelity Investments Institutional Operations Company, Inc. (FIIOC), an
affiliate of FMR, is the fund's transfer, dividend disbursing and shareholder
servicing agent. FIIOC receives account fees and asset-based fees that vary
according to account size and type of account. FIIOC pays a portion of the
expenses related to the typesetting, printing and mailing of all shareholder
reports, except proxy statements. For the period, the transfer agent fees for
the fund were equivalent to an annualized rate of .07% of average net assets.
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NOTES TO FINANCIAL STATEMENTS (Unaudited)(continued)
June 30, 1998
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 as a result of uninvested cash balances were used to
reduce a portion of the fund's expenses. For the period, the reductions under
these arrangements are shown under the caption "Other Information" on the fund's
Statement of Operations.
- -----------------------
6. Beneficial Interest.
- -----------------------
At the end of the period, Fidelity Investments Life Insurance Company
(FILI) and its subsidiaries, affiliates of FMR, were the record owners of
approximately 14% of the outstanding shares of the fund. In addition, two
unaffiliated insurance companies were record owners of 58% of the total
outstanding shares of the fund.
- ------------------------------------------
7. Transactions with Affiliated Companies.
- ------------------------------------------
An affiliated company is a company which the fund has ownership of at
least 5% of the voting securities. Information regarding transactions with
affiliated companies is included under the caption "Legend" at the end of the
fund's schedule of investments.
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FINANCIAL HIGHLIGHTS -- INITIAL CLASS
<TABLE>
<CAPTION>
Six Months Ended Years Ended December 31,
June 30, 1998 ----------------------------
(Unaudited) 1997 1996 1995 1994 1993
------------- ---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Selected Per-Share Data:
Net asset value, beginning of period ...... $ 13.580 $ 12.520 $ 12.050 $ 10.750 $ 11.990 $ 10.820
---------- ---------- ---------- ---------- -------- --------
Income from Investment Operations
Net investment income ................. 0.551(d) 1.124(d) 0.927 0.856 0.770 0.728
Net realized and unrealized
gain (loss) ......................... 0.069 0.936 0.643 1.224 (0.910) 1.332
---------- ---------- ---------- ---------- -------- --------
Total from investment operations ...... 0.620 2.060 1.570 2.080 (0.140) 2.060
---------- ---------- ---------- ---------- -------- --------
Less Distributions:
From net investment income ............ (0.960) (0.890) (0.920) (0.780) (0.730) (0.794)
In excess of net investment income .... -- -- -- -- -- (0.036)
From net realized gain ................ (0.610) (0.110) (0.180) -- (0.370) (0.060)
---------- ---------- ---------- ---------- -------- --------
Total distributions ................... (1.570) (1.000) (1.100) (0.780) (1.100) (0.890)
---------- ---------- ---------- ---------- -------- --------
Net asset value, end of period ............ $ 12.630 $ 13.580 $ 12.520 $ 12.050 $ 10.750 $ 11.990
========== ========== ========== ========== ======== ========
Total Return(b)(c) ........................ 4.80% 17.67% 14.03% 20.72% (1.64)% 20.40%
Ratios and Supplemental Data:
Net assets, end of period (000 omitted) $2,622,932 $2,329,516 $1,588,822 $1,040,000 $569,417 $463,931
Ratio of expenses to average net assets 0.70%(a) 0.71% 0.71% 0.71% 0.71% 0.64%(f)
Ratio of net investment income to
average net assets .................. 8.68%(a) 8.88% 9.09% 9.32% 8.75% 8.69%
Portfolio turnover rate ............... 100%(a) 118% 123% 132% 122% 155%
Average commission rate(h) ............ $ 0.0429 $ 0.0389 $ 0.0370
</TABLE>
- ----------
(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 agreed to reimburse a portion of the class' expenses during the
period. Without this reimbursement, the class' expense ratio would have
been higher.
(g) FMR or the fund has entered into varying arrangements with third parties
who either paid or reduced a portion of the class' expenses.
(h) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for security
trades on which commissions are charged. This amount may vary from period
to period and fund to fund depending on the mix of trades executed in
various markets where trading practices and commission rate structures may
differ.
See accompanying notes which are an integral part of the Financial Statements.
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FINANCIAL HIGHLIGHTS -- SERVICE CLASS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1998 December 31,
(Unaudited) 1997(e)
----------- ------------
<S> <C> <C>
Selected Per-Share Data:
Net asset value, beginning of period ........................... $13.570 $13.380
------- -------
Income from Investment Operations
Net investment income ........................................ 0.546(d) 0.203(d)
Net realized and unrealized gain (loss) ...................... 0.074 (0.013)
------- -------
Total from investment operations ............................. 0.620 0.190
------- -------
Less Distributions:
From net investment income ..................................... (0.960) --
From net realized gain ......................................... (0.610) --
------- -------
Total distributions ............................................ (1.570) --
------- -------
Net asset value, end of period .................................... $12.620 $13.570
======= =======
Total Return(b)(c) ................................................ 4.79% 1.42%
Ratios and Supplemental Data:
Net assets, end of period (000 omitted) ........................ $74,688 $ 2,919
Ratio of expenses to average net assets ........................ 0.80%(a) 0.81%(a)
Ratio of expenses to average net assets after expense reductions 0.80%(a) 0.80%(a)(g)
Ratio of net investment income to average net assets ........... 8.96%(a) 10.75%(a)
Portfolio turnover rate ........................................ 100%(a) 118%
Average commission rate(h) ..................................... $0.0429 $0.0389
</TABLE>
- ----------
(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 agreed to reimburse a portion of the class' expenses during the
period. Without this reimbursement, the class' expense ratio would have
been higher.
(g) FMR or the fund has entered into varying arrangements with third parties
who either paid or reduced a portion of the class' expenses.
(h) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for security
trades on which commissions are charged. This amount may vary from period
to period and fund to fund depending on the mix of trades executed in
various markets where trading practices and commission rate structures may
differ.
See accompanying notes which are an integral part of the Financial Statements.
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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
Stanley N. Griffith, Assistant Vice President
John H. Costello, Assistant Treasurer
Leonard M. Rush, Assistant Treasurer
Board of Trustees
Ralph F. Cox*
Phyllis Burke Davis*
Robert M. Gates*
Edward C. Johnson 3d
E. Bradley Jones*
Donald J. Kirk*
Peter S. Lynch
Marvin L. Mann*
William O. McCoy*
Gerald C. McDonough*
Thomas R. Williams*
*Independent trustees
General Distributor
Fidelity Distributors Corporation
Boston, MA
Transfer and Shareholder Servicing Agent
Fidelity Investments Institutional Operations Company, Inc.
Boston, MA
Custodian
The Bank of New York
New York, NY
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Fidelity VIP II Index 500 Portfolio
- -----------------------------------
SCHEDULE OF INVESTMENTS
June 30, 1998 (Unaudited)
- ---------------------
COMMON STOCK -- 93.8%
- ---------------------
Shares Value
- --------------------------------------------------------------------------------
- ---------------------------
AEROSPACE & DEFENSE -- 1.8%
- ---------------------------
Aerospace & Defense -- 1.4%
187,600 AlliedSignal, Inc. $ 8,324,750
335,968 Boeing Co. 14,971,574
24,800 Goodrich (B.F.) Co. 1,230,700
65,293 Lockheed Martin Corp. 6,912,896
66,700 Rockwell International Corp. 3,205,769
54,700 Textron, Inc. 3,921,306
76,700 United Technologies Corp. 7,094,750
-------------
45,661,745
-------------
Defense Electronics -- 0.3%
22,800 Northrop Grumman Corp. 2,351,260
113,300 Raytheon Co. Class B 6,698,863
-------------
9,050,113
-------------
Ship Building & Repair -- 0.1%
43,700 General Dynamics Corp. 2,032,050
-------------
TOTAL AEROSPACE & DEFENSE 56,743,908
-------------
- ------------------------
BASIC INDUSTRIES -- 4.0%
- ------------------------
Chemicals & Plastics -- 2.3%
78,200 Air Products & Chemicals, Inc. 3,128,000
39,400 Avery Dennison Corp. 2,117,750
75,100 Dow Chemical Co. 7,261,231
375,900 du Pont (E.I.) de Nemours & Co. 28,051,538
24,675 Eastman Chemical Co. 1,536,019
47,000 Engelhard Corp. 951,760
11,800 FMC Corp. (a) 804,613
19,800 Great Lakes Chemical Corp. 780,863
31,700 Hercules, Inc. 1,303,663
199,900 Monsanto Co. 11,169,413
47,500 Morton International, Inc. 1,187,500
16,200 Nalco Chemical Co. 569,025
59,100 PPG Industries, Inc. 4,111,144
55,700 Praxair, Inc. 2,607,456
31,500 Raychem Corp. 931,219
20,200 Rohm & Haas Co. 2,099,538
29,360 Sealed Air Corp. (a) 1,078,980
45,500 Union Carbide Corp. 2,428,562
25,700 W.R. Grace & Co. 438,506
-------------
72,556,770
-------------
Iron & Steel -- 0.2%
9,700 Aeroquip -- Vickers, Inc. 566,238
57,984 Allegheny Teledyne, Inc. 1,326,384
36,700 Armco, Inc. (a) 233,963
43,400 Bethlehem Steel Corp. (a) 539,788
29,500 Nucor Corp. 1,357,000
30,200 USX -- U.S. Steel Group 996,600
23,250 Worthington Industries, Inc. 350,203
-------------
5,370,176
-------------
Metals & Mining -- 0.3%
64,657 Alcan Aluminium Ltd. 1,784,097
53,100 Aluminum Co. of America 3,501,281
18,300 ASARCO, Inc. 407,175
42,350 Cyprus Amax Minerals Co. 561,138
41,500 Freeport -- McMoRan Copper &
Gold, Inc. Class B 630,281
46,436 Inco Ltd. 634,333
20,300 Phelps Dodge Corp. 1,160,906
27,300 Reynolds Metals Co. 1,527,094
-------------
10,206,305
-------------
Packaging & Containers -- 0.3%
7,330 Ball Corp. 294,574
16,000 Bemis Co., Inc. 654,000
77,800 Corning, Inc. 2,703,550
42,200 Crown Cork & Seal Co., Inc. 2,004,500
49,500 Owens Illinois, Inc. (a) 2,215,125
21,300 Tupperware Corp. 599,063
-------------
8,470,812
-------------
Paper & Forest Products -- 0.9%
14,700 Boise Cascade Corp. 481,425
32,400 Champion International Corp. 1,593,675
66,300 Fort James Corp. 2,950,350
32,200 Georgia -- Pacific Corp. 1,897,788
102,800 International Paper Co. 4,420,400
189,932 Kimberly -- Clark Corp. 8,713,131
33,500 Louisiana Pacific Corp. 611,375
35,900 Mead Corp. 1,139,825
9,700 Potlatch Corp. 407,400
23,700 Stone Container Corp. (a) 370,313
See accompanying notes which are an integral part of the Financial Statements.
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Shares Value
- --------------------------------------------------------------------------------
18,800 Temple -- Inland, Inc. $ 1,012,850
23,400 Union Camp Corp. 1,161,225
30,050 Westvaco Corp. 848,913
66,100 Weyerhaeuser Co. 3,052,994
32,800 Willamette Industries, Inc. 1,049,600
-------------
29,711,264
-------------
TOTAL BASIC INDUSTRIES 126,315,327
-------------
- ----------------------------------
CONSTRUCTION & REAL ESTATE -- 0.4%
- ----------------------------------
Building Materials -- 0.3%
13,300 Armstrong World Industries, Inc. 896,088
15,600 Crane Co. 757,575
51,800 Fortune Brands, Inc. 1,991,063
57,800 Masco Corp. 3,496,900
17,900 Owens -- Corning 730,544
57,800 Sherwin -- Williams Co. 1,914,625
-------------
9,786,795
-------------
Construction -- 0.1%
20,600 Centex Corp. 777,650
12,700 FIeetwood Enterprises, Inc. 508,000
14,200 Kaufman & Broad Home Corp. 450,850
15,300 Pulte Corp. 457,088
-------------
2,193,588
-------------
Engineering -- 0.0%
15,800 EG & G, Inc. 474,000
25,900 Fluor Corp. 1,320,900
13,700 Foster Wheeler Corp. 293,694
-------------
2,088,594
-------------
TOTAL CONSTRUCTION & REAL ESTATE 14,068,977
-------------
- ----------------
DURABLES -- 3.1%
- ----------------
Autos, Tires, & Accessories -- 2.2%
50,850 AutoZone, Inc. (a) 1,624,022
215,000 Chrysler Corp. 12,120,625
28,800 Cooper Tire & Rubber Co. 594,000
14,200 Cummins Engine Co., Inc. 727,750
35,400 Dana Corp. 1,893,900
23,800 Eaton Corp. 1,850,450
23,100 Echlin, Inc. 1,133,344
380,400 Ford Motor Co. 22,443,600
222,878 General Motors Corp. 14,891,036
56,050 Genuine Parts Co. 1,937,228
54,600 Goodyear Tire & Rubber Co. 3,518,288
39,100 ITT Industries, Inc. 1,461,363
26,400 Johnson Controls, Inc. 1,509,750
2,400 NACCO Industries, Inc. Class A 310,200
17,970 Navistar International Corp. (a) 518,884
26,090 PACCAR, Inc. 1,363,203
19,700 Pep Boys -- Manny, Moe & Jack 373,069
23,100 Snap -- On, Inc. 837,375
41,200 TRW, Inc. 2,250,550
-------------
71,358,637
-------------
Consumer Durables -- 0.4%
136,700 Minnesota Mining & Manufacturing Co. 11,235,031
-------------
Consumer Electronics -- 0.2%
30,700 Black & Decker Corp. 1,872,700
33,300 Maytag Corp. 1,644,188
50,500 Newell Co., Inc. 2,515,531
24,800 Whirlpool Corp. 1,705,000
-------------
7,737,419
-------------
Textiles & Apparel -- 0.3%
22,700 Fruit of the Loom, Inc. Class A (a) 753,356
21,900 Liz Claiborne, Inc. 1,144,275
63,700 NIKE, Inc. Class B 3,101,394
15,400 Reebok International Ltd. (a) 426,388
12,100 Russell Corp. 365,269
4,100 Springs Industries, Inc. Class A 189,113
40,300 VF Corp. 2,075,450
-------------
8,055,245
-------------
TOTAL DURABLES 98,386,332
-------------
- --------------
ENERGY -- 6.9%
- --------------
Energy Services -- 0.7%
53,800 Baker Hughes, Inc. 1,859,463
59,000 Dresser Industries, Inc. 2,599,688
87,900 Halliburton Co. 3,917,044
See accompanying notes which are an integral part of the Financial Statements.
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Fidelity VIP II Index 500 Portfolio
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SCHEDULE OF INVESTMENTS (Continued)
June 30, 1998 (Unaudited)
Shares Value
- --------------------------------------------------------------------------------
20,500 Helmerich & Payne, Inc. $ 456,125
20,400 McDermott International, Inc. 702,525
29,800 Rowan Companies, Inc. (a) 579,238
161,700 Schlumberger Ltd. 11,046,131
19,500 Western Atlas, Inc. 1,655,063
-------------
22,815,277
-------------
Oil & Gas -- 6.2%
32,000 Amerada Hess Corp. 1,738,000
319,900 Amoco Corp. 13,315,838
20,100 Anadarko Petroleum Corp. 1,350,469
33,200 Apache Corp. 1,045,800
23,000 Ashland, Inc. 1,187,375
108,400 Atlantic Richfield Co. 8,468,750
59,257 Burlington Resources, Inc. 2,551,755
217,900 Chevron Corp. 18,099,319
36,900 Coastal Corp. (The) 2,576,081
815,100 Exxon Corp. 58,126,819
17,600 Kerr -- McGee Corp. 1,018,600
260,300 Mobil Corp. 19,945,488
121,900 Occidental Petroleum Corp. 3,291,300
35,300 Oryx Energy Co. (a) 781,013
16,100 Pennzoil Co. 815,063
84,700 Phillips Petroleum Co. 4,081,481
707,200 Royal Dutch Petroleum Co. 38,763,400
29,900 Sun Co., Inc. 1,160,494
180,200 Texaco, Inc. 10,755,688
86,912 Union Pacific Resources Group, Inc. 1,526,392
83,850 Unocal Corp. 2,997,638
97,400 USX -- Marathon Group 3,342,038
-------------
196,938,801
-------------
TOTAL ENERGY 219,754,078
-------------
- ----------------
FINANCE -- 17.0%
- ----------------
Banks -- 7.7%
235,948 Banc One Corp. 13,168,848
130,900 Bank of New York, Inc. 7,943,994
228,300 BankAmerica Corp. 19,733,681
99,382 BankBoston Corp. 5,528,124
13,100 Bankers Trust New York Corp. 1,520,419
41,600 BB&T Corp. 2,813,200
21,800 Capital One Financial Corp. 2,707,288
285,446 Chase Manhattan Corp. 21,551,173
150,962 Citicorp 22,531,079
55,000 Comerica, Inc. 3,643,750
83,125 Fifth Third Bancorp 5,236,875
323,445 First Union Corp. 18,840,671
56,690 Huntington Bancshares, Inc. 1,899,115
148,914 KeyCorp 5,305,061
90,800 Mellon Bank Corp. 6,321,950
46,000 Mercantile Bancorp., Inc. 2,317,250
59,400 Morgan (JP) & Co., Inc. 6,957,225
110,421 National City Corp. 7,839,891
320,114 NationsBank Corp. 24,488,721
40,000 Northern Trust Corp. 3,050,000
254,400 Norwest Corp. 9,508,200
100,100 PNC Financial Corp. 5,386,631
31,900 Providian Financial Corp. 2,506,144
36,600 Republic New York Corp. 2,303,513
53,300 State Street Corp. 3,704,350
63,000 Summit Bancorp. 2,992,500
71,300 SunTrust Banks, Inc. 5,797,581
82,000 Synovus Financial Corp. 1,947,500
249,351 U.S. Bancorp 10,722,093
68,200 Wachovia Corp. 5,762,900
28,600 Wells Fargo & Co. 10,553,400
-------------
244,583,271
-------------
Credit & Other Finance -- 2.0%
151,179 American Express Co. 17,234,406
118,574 Associates First Capital Corp. 9,115,376
18,800 Beneficial Corp. 2,879,925
37,300 Countrywide Credit Industries, Inc. 1,892,975
96,559 First Chicago NBD Corp. 8,557,541
95,974 Fleet Financial Group, Inc. 8,013,829
45,300 Green Tree Financial Corp. 1,939,406
110,630 Household international, Inc. 5,503,843
166,950 MBNA Corp. 5,509,350
21,329 Transamerica Corp. 2,455,501
-------------
63,102,152
-------------
See accompanying notes which are an integral part of the Financial Statements.
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- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
Federal Sponsored Credit -- 1.1%
346,600 Fannie Mae $ 21,055,950
226,700 Freddie Mac 10,669,069
56,300 SLM Holding Corp. 2,758,700
-------------
34,483,719
-------------
Insurance -- 3.8%
48,400 Aetna, Inc. 3,684,450
139,821 Allstate Corp. 12,802,360
84,452 American General Corp. 6,011,927
230,162 American International Group, Inc. 33,603,652
56,150 Aon Corp. 3,944,538
55,900 Chubb Corp. (The) 4,492,963
71,700 CIGNA Corp. 4,947,300
55,500 Cincinnati Financial Corp. 2,129,813
62,300 Conseco, Inc. 2,912,525
25,800 General Re Corp. 6,540,300
39,800 Hartford Financial Services Group, Inc. 4,552,125
36,100 Jefferson -- Pilot Corp. 2,091,544
33,400 Lincoln National Corp. 3,051,925
38,000 Loews Corp. 3,310,750
85,650 Marsh & Mclennan Companies, Inc. 5,176,472
29,300 MBIA, Inc. 2,193,838
38,800 MGIC Investment Corp. 2,214,025
24,100 Progressive Corp. 3,398,100
47,100 SAFECO. Corp. 2,140,106
81,392 St. Paul Companies, Inc. (The) 3,423,551
61,300 SunAmerica, Inc. 3,520,919
46,800 Torchmark Corp. 2,141,100
49,200 UNUM Corp. 2,730,600
-------------
121,014,883
-------------
Savings & Loans -- 0.3%
37,100 Ahmanson (H.F.) & Co. 2,634,100
13,900 Golden West Financial Corp. 1,477,744
138,362 Washington Mutual, Inc. 6,010,099
-------------
10,121,943
-------------
Securities Industry -- 2.1%
38,000 Bear Stearns Companies, Inc. 2,161,250
88,700 Franklin Resources, Inc. 4,789,800
39,100 Lehman Brothers Holdings, Inc. 3,032,694
115,200 Merrill Lynch & Co., Inc. 10,627,200
197,056 Morgan Stanley Dean Witter Discover
and Co. 18,005,992
79,200 Schwab (Charles) Corp. 2,574,000
383,081 Travelers Group, Inc. (The) 23,224,286
-------------
64,415,222
-------------
TOTAL FINANCE 537,721,046
-------------
- ---------------
HEALTH -- 11.2%
- ---------------
Drugs & Pharmaceuticals -- 7.7%
22,400 Allergan, Inc. 1,038,800
30,400 ALZA Corp. Class A 1,314,800
437,600 American Home Products Corp. 22,645,800
85,000 Amigen, Inc. (a) 5,556,875
331,800 Bristol -- Myers Squibb Co. 38,136,263
369,192 Lilly (Eli) & Co. 24,389,747
398,300 Merck & Co., Inc. 53,272,625
435,100 Pfizer, Inc. 47,289,931
168,960 Pharmacia & Upjohn, Inc. 7,793,280
244,600 Schering -- Plough Corp. 22,411,475
33,700 Sigma -- Aldrich Corp. 1,183,713
273,300 Warner -- Lambert Co. 18,960,188
-------------
243,993,497
-------------
Medical Equipment & Supplies -- 2.9%
514,700 Abbott Laboratories 21,038,363
19,400 Bard (C.R.), Inc. 738,413
18,700 Bausch & Lomb, Inc. 937,338
94,200 Baxter International, Inc. 5,069,138
41,300 Becton, Dickinson & Co. 3,205,913
37,900 Biomet, Inc. 1,253,069
65,000 Boston Scientific Corp. (a) 4,655,625
38,100 Cardinal Health, Inc. 3,571,875
51,100 Guidant Corp. 3,644,069
448,400 Johnson & Johnson 33,069,500
24,900 Mallinckrodt, Inc. 739,219
160,700 Medtronic, Inc. 10,244,625
14,700 Millipore Corp. 400,575
41,500 Pall Corp. 850,750
24,229 St. Jude Medical, Inc. (a) 891,930
24,400 U.S. Surgical Corp. 1,113,250
-------------
91,423,652
-------------
See accompanying notes which are an integral part of the Financial Statements.
- --------------------------------------------------------------------------------
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Index 500
Portfolio
- ---------------
20
- ---------------
- --------------------------------------------------------------------------------
Fidelity VIP II Index 500 Portfolio
- -----------------------------------
SCHEDULE OF INVESTMENTS (Continued)
June 30, 1998 (Unaudited)
Shares Value
- --------------------------------------------------------------------------------
Medical Facilities Management -- 0.6%
207,912 Columbia/HCA Healthcare Corp. $ 6,055,437
127,700 HEALTHSOUTH Corp. (a) 3,407,994
58,700 Humana, Inc. (a) 1,830,706
18,500 Manor Care, Inc. 711,094
102,800 Tenet Healthcare Corp. (a) 3,212,500
64,700 United HealthCare Corp. 4,108,450
-------------
19,326,181
-------------
TOTAL HEALTH 354,743,330
-------------
HOLDING COMPANIES -- 0.1%
46,913 CINergy Corp. 1,641,955
-------------
- ----------------------------------------
INDUSTRIAL MACHINERY & EQUIPMENT -- 1.4%
- ----------------------------------------
Electrical Equipment -- 3.7%
152,900 Emerson Electric Co. 9,231,338
1,085,700 General Electric Co. 98,798,700
52,100 General Instrument Corp. (a) 1,416,469
14,600 General Signal Corp. 525,600
30,300 Grainger (W.W.), Inc. 1,509,319
26,700 Harris Corp. 1,193,156
42,300 Honeywell, Inc. 3,534,694
26,200 Scientific -- Atlanta, Inc. 664,825
-------------
116,874,101
-------------
Industrial Machinery & Equipment -- 1.4%
8,100 Briggs & Stratton Corp. 303,244
24,300 Case Corp. 1,172,475
122,100 Caterpillar, Inc. 6,456,038
10,100 Cincinnati Milacron, Inc. 245,556
40,346 Cooper Industries, Inc. 2,216,508
84,900 Deere & Co 4,489,088
74,600 Dover Corp. 2,555,050
14,400 Harnischfeger Industries, Inc. 407,700
81,100 Illinois Tool Works, Inc. 5,408,356
55,300 Ingersoll -- Rand Co 2,436,656
35,625 Parker -- Hannifin Corp. 1,358,203
29,300 StanleyWorks 1,217,781
60,200 Tenneco, Inc. 2,291,363
17,984 Timken Co. 554,132
192,700 Tyco International Ltd. 12,140,100
-------------
43,252,250
-------------
Pollution Control -- 0.2%
61,300 Browning -- Ferris Industries, Inc. 2,130,175
151,700 Waste Management, Inc. 5,309,500
-------------
7,439,675
-------------
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 167,566,026
-------------
- -----------------------
MEDIA & LEISURE -- 4.3%
- -----------------------
Broadcasting -- 1.5%
246,050 CBS Corp. 7,812,088
37,100 Clear Channel Communications, Inc. (a) 4,048,538
110,950 Comcast Corp. Class A special 4,503,877
201,100 MediaOne Group, Inc. 8,835,831
158,400 Tele -- Communications, Inc. (TCI
Group) Series A (a) 6,088,500
177,920 Time Warner, Inc. 15,201,040
-------------
46,489,874
-------------
Entertainment -- 0.9%
226,500 Disney (Walt) Co. 23,796,656
21,400 King World Productions, Inc. (a) 545,700
99,200 Viacom, Inc. Class B (non -- vtg.) (a) 5,778,400
-------------
30,120,756
-------------
Leisure Durables & Toys -- 0.2%
28,500 Brunswick Corp. 705,375
44,650 Hasbro, Inc. 1,755,303
103,576 Mattel, Inc. 4,382,559
-------------
6,843,237
-------------
Lodging & Gaming -- 0.1%
33,600 Harrah's Entertainment, Inc. (a) 781,200
83,700 Hilton Hotels Corp. 2,385,450
66,900 Mirage Resorts, Inc. (a) 1,425,806
-------------
4,592,456
-------------
Publishing -- 0.9%
24,500 American Greetings Corp. Class A 1,247,969
58,800 Cognizant Corp. 3,704,400
25,400 Dow Jones & Co., Inc. 1,416,050
See accompanying notes which are an integral part of the Financial Statements.
- --------------------------------------------------------------------------------
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Index 500
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20
---------------
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
57,300 Dun & Bradstreet Corp. $ 2,069,963
95,300 Gannett, Inc. 6,772,256
17,000 Harcourt General, Inc. 1,011,500
26,200 Knight Ridder, Inc. 1 ,442,638
34,400 McGraw -- Hill Companies, Inc. 2,805,750
14,700 Meredith Corp. 689,981
30,700 New York Times Co. (The) Class A 2,432,975
23,600 Times Mirror Co. Class A 1,483,850
40,500 Tribune Co. 2,786,906
-------------
27,864,238
-------------
Restaurants -- 0.7%
47,900 Darden Restaurants, Inc. 760,413
76,800 Marriott International, Inc. Class A 2,486,400
228,000 McDonald's Corp. 15,732,000
51,010 Tricon Global Restaurants, Inc. 1,616,379
42,800 Wendy's International, Inc. 1,005,800
-------------
21,600,992
-------------
TOTAL MEDIA & LEISURE 137,511,553
-------------
- -------------------
NONDURABLES -- 9.5%
- -------------------
Agriculture -- 0.1%
75,700 Pioneer Hawaii -- Bred International,
Inc. 3,132,088
-------------
Beverages -- 3.3%
162,200 Anheuser -- Busch Companies, Inc. 7,653,813
15,800 Brown -- Forman Corp. Class B 1,015,150
822,500 Coca -- Cola Co. (The) 70,323,750
12,000 Coors (Adolph) Co. Class B 408,000
498,300 PepsiCo, Inc. 20,523,731
119,900 Seagram Co. Ltd. 4,897,295
-------------
104,821,739
-------------
Foods -- 1.9%
189,981 Archer -- Daniels -- Midland Co. 3,680,882
96,100 Bestfoods 5,579,806
151,200 Campbell Soup Co. 8,032,500
158,000 ConAgra, Inc. 5,006,625
52,500 General Mills, Inc. 3,589,688
121,750 Heinz (H.J.) Co. 6,833,219
40,600 Hershey Foods Corp. 2,801,400
129,300 Kellogg Co. 4,856,831
47,400 Quaker Oats Co. 2,604,038
36,500 Ralston Purina Co. 4,263,656
155,800 Sara Lee Corp. 8,715,063
113,200 Sysco Corp. 2,900,750
33,200 Wrigley (Wm.) Jr. Co. 3,253,600
-------------
62,118,058
-------------
Household Products -- 3.1%
12,600 Alberto -- Culver Co. Class B 365,400
46,300 Avon Products, Inc. 3,588,250
34,800 Clorox Co. 3,319,050
98,800 Colgate -- Palmolive Co. 8,694,400
374,900 Gillette Co. 21,252,144
36,900 International Flavors & Fragrances,
Inc. 1,602,844
447,100 Procter & Gamble Co. 40,714,044
46,000 Rubbermaid, Inc. 1,526,625
211,400 Unilever NV (NY shares) 16,687,388
-------------
97,750,145
-------------
Tobacco -- 1.1%
811,400 Philip Morris Companies, Inc. 31,948,875
61,800 UST, Inc. 1,668,600
-------------
33,617,475
-------------
TOTAL NONDURABLES 301,439,505
-------------
PRECIOUS METALS -- 0.2%
124,900 Barrick Gold Corp. 2,382,695
56,500 Battle Mountain Gold Co. 335,469
70,300 Homestake Mining Co. 729,363
50,165 Newmont Mining Corp. 1,185,148
68,200 Placer Dome, Inc. 794,563
-------------
5,427,238
-------------
- --------------------------
RETAIL & WHOLESALE -- 5.2%
- --------------------------
Apparel Stores -- 0.4%
80 Abercrombie & Fitch Co. Class A (a) 3,520
130,900 Gap, Inc. 8,066,713
76,089 Limited, Inc. (The) 2,520,448
See accompanying notes which are an integral part of the Financial Statements.
- --------------------------------------------------------------------------------
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Index 500
Portfolio
- ---------------
20
- ---------------
- --------------------------------------------------------------------------------
Fidelity VIP II Index 500 Portfolio
- -----------------------------------
SCHEDULE OF INVESTMENTS (Continued)
June 30, 1998 (Unaudited)
Shares Value
- --------------------------------------------------------------------------------
107,000 TJX Companies, Inc. $ 2,581,375
45,200 Venator Group, Inc. 864,450
-------------
14,036,506
-------------
Drug Stores -- 0.5%
122,000 CVS Corp. 4,750,375
13,000 Longs Drug Stores Corp. 375,375
86,200 Rite Aid Corp. 3,237,888
160,800 Walgreen Co. 6,643,050
-------------
15,006,688
-------------
General Merchandise Stores -- 2.8%
40,200 Consolidated Stores Corp. (a) 1,457,250
75,739 Costco Companies, Inc. (a) 4,776,291
146,300 Dayton Hudson Corp. 7,095,550
35,600 Dillards, Inc. Class A 1,475,175
70,300 Federated Department Stores, Inc. (a) 3,783,019
163,000 K mart Corp. (a) 3,137,750
78,200 May Department Stores Co. (The) 5,122,100
15,000 Mercantile Stores Co., Inc. 1,184,063
27,100 Nordstrom, Inc. 2,093,475
83,800 Penney (J.C.), Inc. 6,059,788
130,300 Sears, Roebuck & Co. 7,956,444
744,700 Wal -- Mart Stores, Inc. 45,240,525
-------------
89,381,430
-------------
Grocery Stores -- 0.5%
82,200 A!bertson's, Inc. 4,258,988
92,200 American Stores Co. 2,230,088
20,300 Giant Food, Inc. Class A 874,169
13,300 Great Atlantic & Pacific Tea, Inc. 439,731
87,800 Kroger Co. (The) (a) 3,764,425
20,600 Supervalu, Inc. 914,125
45,800 Winn -- Dixie Stores, Inc. 2,344,388
-------------
14,825,914
-------------
Retail & Wholesale, Miscellaneous -- 1.0%
33,700 Circuit City Stores, Inc. -- Circuit
City Group 1,579,688
244,800 Home Depot, Inc. 20,333,700
46,000 IKON Office Solutions, Inc. 669,875
113,800 Lowe's Companies, Inc. 4,616,013
33,800 Tandy Corp. 1,793,513
94,200 Toys R US, Inc. (a) 2,219,588
-------------
31,212,377
-------------
TOTAL RETAIL & WHOLESALE 164,462,915
-------------
- ----------------
SERVICES -- 0.7%
- ----------------
Advertising -- 0.2%
40,250 Interpublic Group of Companies, Inc. 2,442,672
56,900 Omnicom Group, Inc. 2,837,888
-------------
5,280,560
-------------
Leasing & Rental -- 0.0%
36,600 Ryder Systems, Inc. 1,155,188
-------------
Printing -- 0.1%
34,400 Deluxe Corp. 1,231,950
45,600 Donnelley (R.R.) & Sons Co. 2,086,200
21,000 Moore Corp. Ltd. 278,998
-------------
3,597,148
-------------
Services -- 0.4%
35,000 Block (H&R), Inc. 1,474,375
276,372 Cendant Corp. (a) 5,769,266
34,900 Ecolab, Inc. 1,081,900
9,200 Jostens, Inc. 221,950
14,400 National Service Industries, Inc. 732,600
85,300 Service Corp. International, Inc. 3,657,238
-------------
12,937,329
-------------
TOTAL SERVICES 22,970,225
-------------
- -------------------
TECHNOLOGY -- 14.0%
- -------------------
Communications Equipment -- 2.9%
118,800 3Com Corp. (a) 3,645,675
29,812 Andrew Corp. (a) 538,479
61,100 Ascend Communications, Inc. (a) 3,028,269
48,400 Cabletron Systems, Inc. (a) 650,375
345,350 Cisco Systems, Inc. (a) 31,793,784
41,700 DSC Communications Corp. (a) 1,251,000
437,068 Lucent Technologies, Inc. 36,358,594
176,600 Northern Telecom Ltd. 10,034,706
61,800 Tellabs, Inc. (a) 4,426,425
-------------
91,727,307
-------------
See accompanying notes which are an integral part of the Financial Statements.
- --------------------------------------------------------------------------------
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20
---------------
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
Computer Services & Software -- 4.3%
22,300 Adobe Systems, Inc. $ 946,356
15,800 Autodesk, Inc. 610,275
100,400 Automatic Data Processing, Inc. 7,316,650
22,000 Ceridian Corp. (a) 1,292,500
182,112 Computer Associates International,
Inc. 10,118,598
52,000 Computer Sciences Corp. 3,328,000
42,800 Equifax, Inc. 1,554,175
141,700 First Data Corp. 4,720,381
149,700 HBO & Co. 5,276,925
817,700 Microsoft Corp. (a) 88,618,238
129,700 Novell, Inc. (a) 1,653,675
331,750 Oracle Corp. (a) 8,148,609
96,300 Parametric Technolgy Corp. (a) 2,612,138
8,100 Shared Medical Systems Corp. 594,844
-------------
136,791,364
-------------
Computers & Office Equipment -- 4.2%
49,400 Apple Computer, Inc. (a) 1,417,163
68,900 Bay Networks, Inc. (a) 2,222,025
550,762 Compaq Computer Corp. 15,627,872
16,500 Data General Corp. (a) 246,469
210,900 Dell Computer Corp. (a) 19,574,156
169,600 EMC Corp. (a) 7,600,200
51,200 Gateway 2000, Inc. (a) 2,592,000
343,500 Hewlett -- Packard Co. 20,567,063
314,100 International Business Machines Corp. 36,062,606
93,400 Pitney -- Bowes, Inc. 4,494,875
88,000 Seagate Technology, Inc. (a) 2,095,500
60,500 Silicon Graphics, Inc. (a) 733,563
126,700 Sun Microsystems, Inc. (a) 5,503,531
76,900 Unisys Corp. (a) 2,172,425
109,400 Xerox Corp. 11,117,775
-------------
132,027,223
-------------
Electronic Instruments -- 0.2%
121,900 Applied Materials, Inc. (a) 3,596,050
34,200 KLA -- Tencor Corp. (a) 946,913
16,500 Perkin -- Elmer Corp. 1,026,094
16,050 Tektronix, Inc. 567,769
49,600 Thermo Electron Corp. (a) 1,695,700
-------------
7,832,526
-------------
Electronics -- 2.1%
40,900 Advanced Micro Devices, Inc. (a) 697,856
77,796 AMP, Inc. 2,674,238
561,800 Intel Corp. 41,643,425
43,700 LSI Logic Corp. (a) 1,007,831
67,400 Micron Technology, Inc. (a) 1,672,363
199,000 Motorola, Inc. 10,459,938
54,900 National Semiconductor Corp. (a) 723,994
127,900 Texas Instruments, Inc. 7,458,169
16,900 Thomas & Betts Corp. 832,325
-------------
67,170,139
-------------
Photographic Equipment -- 0.3%
107,700 Eastman Kodak Co. 7,868,831
15,700 Polaroid Corp. 558,331
-------------
8,427,162
-------------
TOTAL TECHNOLOGY 443,975,721
-------------
- ----------------------
TRANSPORTATION -- 1.0%
- ----------------------
Air Transportation -- 0.4%
61,000 AMR Corp. (a) 5,078,250
25,400 Delta Air Lines, Inc. 3,282,950
75,000 Southwest Airlines Co. 2,221,875
29,800 US Airways Group, Inc. (a) 2,361,650
-------------
12,944,725
-------------
Railroads -- 0.5%
53,018 Burlington Northern Santa Fe Corp. 5,205,705
73,238 CSX Corp. 3,332,329
126,200 Norfolk Southern Corp. 3,762,338
85,600 Union Pacific Corp. 3,777,100
-------------
16,077,472
-------------
Trucking & Freight -- 0.1%
52,220 FDX Corp. (a) 3,276,805
89,900 Laidlaw, Inc. 1,087,191
-------------
4,363,996
-------------
TOTAL TRANSPORTATION 33,386,193
-------------
See accompanying notes which are an integral part of the Financial Statements.
- --------------------------------------------------------------------------------
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- ---------------
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- ---------------
- --------------------------------------------------------------------------------
Fidelity VIP II Index 500 Portfolio
- -----------------------------------
SCHEDULE OF INVESTMENTS (Continued)
June 30, 1998 (Unaudited)
- -----------------
UTILITIES -- 9.1%
- -----------------
Cellular -- 0.4%
186,300 AirTouch Communications, Inc. (a) $ 10,886,906
85,700 Nextel Communications, Inc. Class A (a) 2,131,788
-------------
13,018,694
-------------
Electric Utility -- 2.2%
43,900 Ameren Corp. 1,745,025
63,400 American Electric Power Co., Inc. 2,876,775
45,200 Baltimore Gas & Electric Co. 1,404,025
40,100 Carolina Power & Light Co. 1,739,338
81,200 Central & South West Corp. 2,182,250
80,500 Consolidated Edison, Inc. 3,708,031
65,600 Dominion Resources, Inc. 2,673,200
51,600 DTE Energy Co. 2,083,350
120,007 Duke Energy Corp. 7,110,415
120,600 Edison International 3,565,238
93,900 Entergy Corp. 2,699,625
69,300 Firstenergy Corp. 2,130,975
61,600 FPL Group, Inc. 3,880,800
35,500 GPU, Inc. 1,342,344
91,122 Houston Industries, Inc. 2,813,392
40,900 Niagara Mohawk Power Corp. (a) 610,944
34,000 Northern States Power Co. 973,250
99,700 PacifiCorp. 2,255,713
78,400 PECO Energy Co. 2,288,300
127,800 PG&E Corp. 4,033,688
40,500 PP&L Resources, Inc. 918,844
85,800 Public Service Enterprise Group, Inc. 2,954,738
234,700 Southern Co. 6,498,256
89,000 Texas Utilities Co. 3,704,625
81,900 Unicom Corp. 2,871,619
-------------
69,064,760
-------------
Gas -- 0.6%
29,400 Columbia Gas System, Inc. (The) 1,635,375
33,700 Consolidated Natural Gas Co. 1,984,088
12,600 Eastern Enterprises Co. 540,225
103,800 Enron Corp. 5,611,688
16,000 NICOR, Inc. 642,000
10,806 ONEOK, Inc. 430,889
11,900 Peoples Energy Corp. 459,638
78,656 Sempra Energy 2,182,704
37,000 Sonat, Inc. 1,429,125
141,600 Williams Companies, Inc 4,779,000
-------------
19,694,732
-------------
Telephone Services -- 5.9%
88,200 ALLTEL Corp. 4,101,300
366,900 Ameritech Corp. 16,464,638
541,200 AT&T Corp. 30,916,050
517,278 Bell Atlantic Corp. 23,600,809
330,000 BellSouth Corp. 22,151,250
57,600 Frontier Corp. 1,814,400
320,900 GTE Corp. 17,850,063
226,500 MCI Communications Corp. 13,165,313
612,848 SBC Communications, Inc. 24,513,920
114,900 Sprint Corp. 8,100,450
161,492 U.S. WEST, Inc. 7,590,124
338,800 Worldcom, Inc. (a) 16,410,625
-------------
186,678,942
-------------
TOTAL UTILITIES 288,457,128
-------------
TOTAL COMMON STOCKS
(Cost $2,209,837,396) 2,974,571,457
-------------
See accompanying notes which are an integral part of the Financial Statements.
- --------------------------------------------------------------------------------
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---------------
- --------------------------------------------------------------------------------
Shares Value
- --------------------------------------------------------------------------------
- ---------------------------------
U.S. Treasury Obligations -- 6.2%
- ---------------------------------
Principal
Amount
- --------------------------------------------------------------------------------
$197,133,000 U.S. Treasury Bills, yields at dates
of purchase 4.6332% to 5.0541%
7/30/98 to 9/3/98 (b)
(Cost $195,682,886) $ 195,776,952
--------------
TOTAL INVESTMENT IN SECURITIES -- 100%
(Cost $2,405,520,282) $3,170,348,409
==============
- -----------------
Futures Contracts
- -----------------
Expiration Underlying Face Unrealized
Date Amount at Value Gain/(Loss)
- --------------------------------------------------------------------------------
Purchased
349 S&P 500
Futures Contracts Sep. 1998 $99,726,750 $3,122,832
=========== ==========
The face value of futures purchased as a percentage of total investments in
securities-3.1%
Legend
(a) Non -- income producing
(b) 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 $6,495,000.
Other Information
Purchases and sales of securities, other than short-term securities, aggregated
$707,562,865 and $21,000,689, respectively.
The market value of futures contracts opened and closed during the period
amounted to $784,404,205 and $862,860,247, respectively.
The fund participated in the security lending program. At period end, the value
of securities loaned and the value of the collateral amounted to $7,774,864 and
$7,978,792, respectively (see Note 5 of Notes to Financial Statements).
Income Tax Information
At June 30, 1998, the aggregate cost of investment securities for income tax
purposes was $2,405,520,762. Net unrealized appreciation aggregated
$764,827,647, of which $795,409,354 related to appreciated investment securities
and $30,581,707 related to depreciated investment securities.
See accompanying notes which are an integral part of the Financial Statements.
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- ---------------
- --------------------------------------------------------------------------------
Fidelity VIP II Index 500 Portfolio
- -----------------------------------
STATEMENT OF ASSETS
AND LIABILITIES
June 30, 1998 (Unaudited)
Assets:
Investment in securities, at value
(cost $2,405,520,282) -- See
accompanying schedule $ 3,170,348,409
Receivable for investments sold 7,834,557
Receivable for fund shares sold 12,193,773
Dividends receivable 2,947,808
Other receivables 1,329
---------------
Total Assets 3,193,325,876
---------------
Liabilities:
Payable to custodian bank $ 273,438
Payable for investments purchased 106,128,237
Payable for fund shares redeemed 902,722
Accrued management fee and
sub-advisory fee 469,225
Payable for daily variation on futures
contracts 1,102,680
Other payables and accrued expenses 278,969
---------------
Total Liabilities 109,155,271
---------------
Net Assets $ 3,084,170,605
===============
Net Assets consist of:
Paid-in capital $ 2,287,714,527
Undistributed net investment income 17,566,386
Accumulated undistributed net realized
gain (loss) on investments and
foreign currency transactions 10,938,743
Net unrealized appreciation (depreciation)
on investments and assets and liabilities
in foreign currencies 767,950,949
---------------
Net Assets, for 23,859,382 shares
outstanding $ 3,084,170,605
===============
Net Asset Value, offering price and
redemption price per share
($3,084,170,605/23,859,382 shares) $ 129,26
===============
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1998
(Unaudited)
Investment Income:
Dividends $ 18,330,787
Interest (including income on securities
loaned at $7,970) 2,879,715
---------------
Total Income 21,210,502
---------------
Expenses:
Management fee and sub-advisory fee $ 3,109,368
Transfer agent fees 908,642
Accounting fees 402,088
Non-interested trustees' compensation 4,481
Registration fees 43,245
Audit 30,466
Legal 13,674
Miscellaneous 2,849
---------------
Total expenses before reductions 4,514,813
Expense reductions (933,505)
---------------
Total Expenses 3,581,308
---------------
Net Investment Income 17,629,194
===============
Realized and Unrealized Gain (Loss):
Net realized gain (loss) on:
Investment securities 2,435,852
Foreign currency transactions 980
Futures contracts 9,671,688
---------------
Total Realized and Unrealized 12,108,520
---------------
Change in net unrealized appreciation
(depreciation) on:
Investment securities 370,415,452
Assets and liabilities in foreign currencies 78
Futures contracts 2,064,104
---------------
Total Unrealized 372,479,634
---------------
Net Gain (Loss) 384,588,154
---------------
Net increase (decrease) in net assets
resulting from operations $ 402,217,348
===============
Other Information:
Expense reductions:
FMR reimbursement $ 933,505
===============
See Accompanying notes which are an integral part of the Financial Statements.
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---------------
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1998 December 31,
(Unaudited) 1997
---------------- --------------
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 17,629,194 $ 25,929,152
Net realized gain (loss) 12,108,520 58,502,006
Change in net unrealized appreciation (depreciation) 372,479,634 301,564,970
--------------- ---------------
Net increase (decrease) in net assets resulting
from operations 402,217,348 385,996,128
--------------- ---------------
Distributions to shareholders:
From net investment income (26,060,180) (10,847,444)
From net realized gain (60,359,977) (22,010,833)
--------------- ---------------
Total distributions (86,420,157) (32,858,277)
--------------- ---------------
Share transactions:
Net proceeds from sales of shares 837,618,107 1,199,221,255
Reinvestment of dividends 86,420,157 32,858,277
Cost of shares redeemed (253,706,625) (310,418,293)
--------------- ---------------
Net increase (decrease) in net assets resulting
from share transactions 670,331,639 921,661,239
--------------- ---------------
Total increase (decrease) in net assets 986,128,830 1,274,799,090
Net Assets:
Beginning of period 2,098,041,775 823,242,685
--------------- ---------------
End of period (including undistributed net investment income
of $17,566,386 and $25,920,081, respectively) $ 3,084,170,605 $ 2,098,041,775
=============== ===============
Other Information:
Shares
Sold 6,839,219 11,765,227
Issued in reinvestment of distributions 751,741 357,466
Redeemed (2,071,900) (3,026,660)
--------------- ---------------
Net increase (decrease) $ 5,519,060 $ 9,096,033
=============== ===============
</TABLE>
See accompanying notes which are an integral part of the Financial Statements.
- --------------------------------------------------------------------------------
299
<PAGE>
- ---------------
Fidelity VIP II
Index 500
Portfolio
- ---------------
- --------------------------------------------------------------------------------
Fidelity VIP II Index 500 Portfolio
- -----------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited)
- -----------------------------------
1. Significant Accounting Policies.
- -----------------------------------
Index 500 Portfolio (the fund) is a fund of Variable Insurance Products
Fund II (the trust) and is authorized to issue an unlimited number of shares.
The trust is registered under the Investment Company Act of 1940, as amended
(the 1940 Act), as an open-end management investment company organized as a
Massachusetts business trust. Shares of the fund may only be purchased by
insurance companies for the purpose of funding variable annuity or life
insurance contracts. 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 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 date and settlement 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, each fund is not subject to income taxes to the extent
that it distributes substantially all of its taxable income for the fiscal year.
The schedules of investments include 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.
- --------------------------------------------------------------------------------
300
<PAGE>
---------------
Fidelity VIP II
Index 500
Portfolio
---------------
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited) (Continued)
Expenses
Most expenses of 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 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.
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.
Futures Contracts
The fund may use futures contracts to manage its exposure to the stock
market. Buying futures tends to increase the fund's exposure to the underlying
instrument, while selling futures tends to decrease the fund's exposure to the
underlying instrument or hedge other fund investments. Futures contracts
involve, to varying degrees, risk of loss in excess of the futures variation
margin reflected in the Statement of Assets and Liabilities. The underlying face
amount at value of any open futures contracts at period end is shown in the
schedule of investments under the caption "Futures Contracts." This amount
reflects each contract's exposure to the underlying instrument at period end.
Losses may arise from changes in the value of the underlying instruments 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.
- --------------------------------------
3. Purchases and Sales of Investments.
- --------------------------------------
Information regarding purchases and sales of securities (other than
short-term securities), the market value of future contracts opened and closed,
is included under the caption "Other Information" at the end of each applicable
fund's schedule of investments.
- -----------------------------------------------
4. Fees and Other Transactions with Affiliates.
- -----------------------------------------------
Management Fee
As the fund's investment adviser, FMR receives a fee that is computed
daily at an annual rate of .24% of the fund's average net assets. For the
period, management fee was equivalent to an annualized rate of .24% of average
net assets.
- --------------------------------------------------------------------------------
301
<PAGE>
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Fidelity VIP II
Index 500
Portfolio
- ---------------
- --------------------------------------------------------------------------------
Fidelity VIP II Index 500 Portfolio
- -----------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (Unaudited) (Continued)
Sub-Adviser Fee
FMR and the fund have entered into a sub-advisory agreement with Bankers
Trust Company (Bankers Trust). Bankers Trust receives a sub-advisory fee for
providing investment management, securities lending and custodial services to
the fund. For these services, FMR pays Bankers Trust fees at an annual rate of
0.006% of the fund's average net assets. In addition, the fund pays Bankers
Trust fees equal to 40% of net income from the fund's securities lending
program. For the period, the fund paid Bankers Trust $3,186.
Distribution and Service Plan
In accordance with Rule 12b-1 of the 1940 Act, the Trustees have adopted a
Distribution and Service Plan (the Plan) on behalf of the fund. Under the Plan,
FMR may use its resources to pay administrative and promotional expenses related
to the sale of the fund's shares. Subject to the approval of the Board of
Trustees, the Plan also authorizes payments to third parties that assist in the
sale of fund shares or render shareholder support services. For the period,
payments made to third parties under the Plan amounted to $9,457.
Transfer Agent Fees
Fidelity Investments Institutional Operations Company, Inc. (FIIOC), an
affiliate of FMR, is the fund's transfer, dividend disbursing and shareholder
servicing agent. FIIOC receives account fees and asset-based fees that vary
according to account size and type of account. FIIOC pays a portion of the
expenses related to typesetting, printing and mailing of all shareholder
reports, except proxy statements. For the period, the transfer agent fees were
equivalent to an annualized 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.
- --------------------
5. Security Lending.
- --------------------
The fund loaned securities to brokers who paid the fund negotiated
lenders' fees. These fees are included in interest income. The fund receives
U.S. Treasury obligations and/or cash as collateral against the loaned
securities, in an amount at least equal to 102% of the market value of the
loaned securities at the inception of each loan. This collateral must be
maintained at not less than 100% of the market value of the loaned securities
during the period of the loan. Information regarding the value of securities
loaned and the value of collateral at period end is included under the caption
"Other Information" at the end of the fund's schedule of investments.
- ----------------------
6. Expense Reductions.
- ----------------------
FMR voluntarily agreed to reimburse the fund's operating expenses
(excluding interest, taxes, brokerage commissions, extraordinary expenses and
sub-advisory fees paid by the fund associated with securities lending) above an
annual rate of .28% of average net assets.
For the period, the reductions under this arrangement is shown under the
caption "Other Information" on the fund's Statement of Operations.
- -----------------------
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 32% of the outstanding shares of the fund. In addition, one
unaffiliated insurance company was record owner of 10% of the total outstanding
shares of the fund.
- --------------------------------------------------------------------------------
302
<PAGE>
---------------
Fidelity VIP II
Index 500
Portfolio
---------------
20
---------------
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Six Months Ended Years Ended December 31,
June 30, 1998 ---------------------------------------------------------------
(Unaudited) 1997 1996 1995 1994 1993
----------- ---------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Selected Per-Share Data
Net asset value, beginning of period .... $ 114.40 $ 89.05 $ 75.71 $ 56.22 $ 55.74 $ 52.60
---------- ---------- -------- -------- ------- -------
Income from Investment Operations:
Net investment income ................. 0.83(d) 1.80(d) 1.04 0.85 1.14 1.31
Net realized and unrealized gain (loss) 18.54 26.67 15.55 19.72 (0.56) 3.80
---------- ---------- -------- -------- ------- -------
Total from investment operations ...... 19.37 28.47 16.59 20.57 0.58 5.11
---------- ---------- -------- -------- ------- -------
Less Distributions:
From net investment income ............ (1.36) (1.03) (0.91) (0.95) -- (1.28)
From net realized gain ................ (3.15) (2.09) (2.34) (0.11) (0.10) (0.60)
In excess of net realized gain ........ -- -- -- (0.02) -- (0.09)
---------- ---------- -------- -------- ------- -------
Total distributions ................... (4.51) (3.12) (3.25) (1.08) (0.10) (1.97)
---------- ---------- -------- -------- ------- -------
Net asset value, end of period .......... $ 129.26 $ 114.40 $ 89.05 $ 75.71 $ 56.22 $ 55.74
========== ========== ======== ======== ======= =======
Total Return(b)(c) ...................... 17.42% 32.83% 22.71% 37.19% 1.04% 9.74%
========== ========== ======== ======== ======= =======
Ratios and supplemental data:
Net assets, end of period (in 000's) .... $3,084,171 $2,098,042 $823,243 $245,700 $51,301 $25,153
Ratio of expenses to average net assets . 0.28%(a)(e) 0.28%(e) 0.28%(e) 0.28%(e) 0.28%(e) 0.28%(e)
Ratio of net investment income to
average net assets ..................... 1.38%(a) 1.74% 2.26% 2.70% 2.81% 2.65%
Portfolio turnover rate ................. 2%(a) 9% 14% 16% 2% 9%
Average commission rate (f) ............. $ 0.0232 $ 0.0268 $ 0.0315 N/A N/A N/A
</TABLE>
- ------------
(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 6 of Notes to Financial
Statements).
(d) Net investment income per share has been calculated based on average
shares outstanding during the period.
(e) FMR agreed to reimburse a portion of the fund's expenses during the
period. Without this reimbursement, the fund's expense ratio would have
been higher (see Note 6 of Notes to Financial Statements).
(f) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for security
trades on which commissions are charged. This amount may vary from period
to period and fund to fund depending on the mix of trades executed in
various markets where trading practices and commission rate structures may
differ.
See accompanying notes which are an integral part of the Financial Statements.
- --------------------------------------------------------------------------------
303
<PAGE>
- ---------------
Fidelity VIP II
Index 500
Portfolio
- ---------------
20
- ---------------
- --------------------------------------------------------------------------------
Investment Adviser
Fidelity Management & Research Company
Boston, MA
Investment Sub-Advisers
Bankers Trust Company
New York, NY
Officers
Edward C. Johnson 3d, President
Robert C. Pozen, Senior Vice President
Robert Lawrence, Vice President
Eric D. Roiter, Secretary
Richard A. Silver, Treasurer
John H. Costello, Assistant Treasurer
Leonard M. Rush, Assistant Treasurer
Board of Trustees
Ralph F. Cox*
Phyllis Burke Davis*
Robert M. Gates*
Edward C. Johnson 3d
E. Bradley Jones*
Donald J. Kirk*
Peter S. Lynch
Marvin L. Mann*
William O. McCoy*
Gerald C. McDonough*
Thomas R. Williams*
* Independent trustees
General Distributor
Fidelity Distributors Corporation
Boston, MA
Transfer and Shareholder Servicing Agent
Fidelity Investments Institutional Operations Company, Inc.
Boston, MA
Custodian
Bankers Trust Company
New York, NY
- --------------------------------------------------------------------------------
304
<PAGE>
[LOGO] The Guardian(R)
The Guardian Insurance & Annuity Company, Inc. BULK RATE MAIL
U.S. POSTAGE PAID
201 Park Avenue South PERMIT NO. 657
New York, NY 10003 SUMMITT, N.J.
Pub. 3058 6/98 [RECYCLE LOGO] Printed on recycled paper
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the
"Semi-Annual Report to Shareholders" dated June 30, 1998 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000929240
<NAME> Separate Account K - Park Avenue Life
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 55,204,770
<INVESTMENTS-AT-VALUE> 60,626,445
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 60,626,445
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 97,373
<TOTAL-LIABILITIES> 97,373
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 101,660
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,528,038
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,421,675
<NET-ASSETS> 60,529,072
<DIVIDEND-INCOME> 253,123
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 151,463
<NET-INVESTMENT-INCOME> 101,660
<REALIZED-GAINS-CURRENT> 1,528,038
<APPREC-INCREASE-CURRENT> 4,153,983
<NET-CHANGE-FROM-OPS> 5,783,681
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 151,463
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 151,463
<AVERAGE-NET-ASSETS> 48,832,672
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 5,682,021
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> .003
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
