(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS FUND
VARIABLE INSURANCE PRODUCTS FUND II
VARIABLE INSURANCE PRODUCTS FUND III
MONEY MARKET PORTFOLIO
INVESTMENT GRADE BOND PORTFOLIO
HIGH INCOME PORTFOLIO
ASSET MANAGER PORTFOLIO
BALANCED PORTFOLIO
ASSET MANAGER: GROWTH PORTFOLIO
EQUITY-INCOME PORTFOLIO
GROWTH & INCOME PORTFOLIO
INDEX 500 PORTFOLIO
GROWTH OPPORTUNITIES PORTFOLIO
CONTRAFUND PORTFOLIO
GROWTH PORTFOLIO
OVERSEAS PORTFOLIO
SEMIANNUAL REPORT
JUNE 30, 1997
CONTENTS
MONEY MARKET PORTFOLIO 4 PERFORMANCE
5 FUND TALK: THE MANAGER'S OVERVIEW
6 INVESTMENTS
9 FINANCIAL STATEMENTS
INVESTMENT GRADE BOND PORTFOLIO 11 PERFORMANCE AND INVESTMENT SUMMARY
12 FUND TALK: THE MANAGER'S OVERVIEW
13 INVESTMENTS
18 FINANCIAL STATEMENTS
HIGH INCOME PORTFOLIO 20 PERFORMANCE AND INVESTMENT SUMMARY
21 FUND TALK: THE MANAGER'S OVERVIEW
22 INVESTMENTS
30 FINANCIAL STATEMENTS
ASSET MANAGER PORTFOLIO 32 PERFORMANCE AND INVESTMENT SUMMARY
33 FUND TALK: THE MANAGERS' OVERVIEW
35 INVESTMENTS
48 FINANCIAL STATEMENTS
BALANCED PORTFOLIO 50 PERFORMANCE AND INVESTMENT SUMMARY
51 FUND TALK: THE MANAGER'S OVERVIEW
52 INVESTMENTS
61 FINANCIAL STATEMENTS
ASSET MANAGER: GROWTH PORTFOLIO 63 PERFORMANCE AND INVESTMENT SUMMARY
64 FUND TALK: THE MANAGERS' OVERVIEW
66 INVESTMENTS
78 FINANCIAL STATEMENTS
EQUITY-INCOME PORTFOLIO 80 PERFORMANCE AND INVESTMENT SUMMARY
81 FUND TALK: THE MANAGER'S OVERVIEW
82 INVESTMENTS
87 FINANCIAL STATEMENTS
GROWTH & INCOME PORTFOLIO 89 PERFORMANCE AND INVESTMENT SUMMARY
90 FUND TALK: THE MANAGER'S OVERVIEW
91 INVESTMENTS
95 FINANCIAL STATEMENTS
INDEX 500 PORTFOLIO 97 PERFORMANCE AND INVESTMENT SUMMARY
98 FUND TALK: THE MANAGER'S OVERVIEW
99 INVESTMENTS
105 FINANCIAL STATEMENTS
GROWTH OPPORTUNITIES PORTFOLIO 107 PERFORMANCE AND INVESTMENT SUMMARY
108 FUND TALK: THE MANAGER'S OVERVIEW
109 INVESTMENTS
113 FINANCIAL STATEMENTS
CONTRAFUND PORTFOLIO 115 PERFORMANCE AND INVESTMENT SUMMARY
116 FUND TALK: THE MANAGER'S OVERVIEW
117 INVESTMENTS
126 FINANCIAL STATEMENTS
GROWTH PORTFOLIO 128 PERFORMANCE AND INVESTMENT SUMMARY
129 FUND TALK: THE MANAGER'S OVERVIEW
130 INVESTMENTS
134 FINANCIAL STATEMENTS
OVERSEAS PORTFOLIO 136 PERFORMANCE AND INVESTMENT SUMMARY
137 FUND TALK: THE MANAGER'S OVERVIEW
138 INVESTMENTS
143 FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS 145 NOTES TO THE FINANCIAL STATEMENTS
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR
THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUNDS. THIS REPORT IS
NOT
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUNDS UNLESS
PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY,
ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC,
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
NEITHER THE FUNDS NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
VARIABLE INSURANCE PRODUCTS FUND: MONEY MARKET PORTFOLIO
PERFORMANCE
To measure a money market fund's performance, you can look at either total
return or yield. Total return reflects the change in value of an
investment, assuming reinvestment of the fund's dividend income and capital
gains (the profits earned upon the sale of securities that have grown in
value). Yield measures the income paid by a fund. Since a money market fund
tries to maintain a $1 share price, yield is an important measure of
performance.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10
JUNE 30, 1997 YEAR YEARS YEARS
MONEY MARKET 5.42% 4.64% 5.93%
AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had achieved that return by performing
at a constant rate each year.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL
CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
If Fidelity had not reimbursed certain fund expenses, the past five and 10
year total returns would have been lower. Yield will vary.
YIELD
Row: 1, Col: 1, Value: 5.37
Row: 1, Col: 2, Value: 2.65
Row: 2, Col: 1, Value: 5.19
Row: 2, Col: 2, Value: 2.63
Row: 3, Col: 1, Value: 5.28
Row: 3, Col: 2, Value: 2.64
Row: 4, Col: 1, Value: 5.3
Row: 4, Col: 2, Value: 2.67
Row: 5, Col: 1, Value: 5.159999999999999
Row: 5, Col: 2, Value: 2.66
Money Market
MMDA
6% -
5% -
4% -
3% -
2% -
1% -
0%
7/2/97 4/2/97 12/30/96 10/2/96 6/26/96
MONEY MARKET 5.37% 5.19% 5.28% 5.30% 5.16%
MMDA 2.65% 2.63% 2.64% 2.67% 2.66%
YIELD refers to the income paid by the fund over a given period. Yields for
money market funds are usually for seven-day periods, expressed as annual
percentage rates. A yield that assumes income earned is reinvested or
compounded is called an effective yield. The chart above shows the fund's
current seven-day yield at quarterly intervals over the past year. You can
compare these yields to the all taxable money market funds average and the
bank money market deposit account (MMDA) average. The MMDA average is
supplied by BANK RATE MONITOR. TM
COMPARING PERFORMANCE
There are some important differences between a
bank money market deposit account (MMDA)
and a money market fund. First, the U.S.
Government neither insures nor guarantees a
money market fund. In fact, there is no assurance
that a money fund will maintain a $1 share price.
Second, a money market fund returns to its
shareholders income earned by the fund's
investments after expenses. This is in contrast to
banks, which set their MMDA rates periodically
based on current interest rates, competitors' rates,
and internal criteria.
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND: MONEY MARKET PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
NOTE TO SHAREHOLDERS: Robert Duby became
Portfolio Manager of
Money Market Portfolio
on April 1, 1997.
Q. WHAT WAS THE INVESTING ENVIRONMENT LIKE OVER THE PAST SIX MONTHS, BOB?
A. Most market observers have been surprised at the strength of the economy
over the past six months. While economic growth slowed unexpectedly in the
second quarter of 1997 from the rapid pace of the first quarter, the
economy remains quite healthy. Earlier in 1997, the Federal Reserve Board
felt that we would see this economic growth translate into inflationary
pressure. Speaking before Congress in February, Fed Chairman Alan Greenspan
indicated the Fed's tendency to strike pre-emptively against inflation.
That is, he said the Fed might raise the rates banks charge each other for
overnight loans - known as the fed funds rate - even before inflation
appeared, to slow the economy down and head off potential inflation. The
Fed followed through by raising the fed funds rate by 0.25% to 5.50% at its
March meeting. Most market participants felt the Fed would raise rates
again in May, but it did not. Economic growth tailed off and there were
very few signs of inflation. That backdrop, coupled with political pressure
from many who were unhappy with the Fed's pre-emptive stance, convinced the
Fed to stand pat through the end of the period. At this point, it appears
that the Fed has shifted its stance from one that is pre-emptive to one
that is more reactive.
Q. HOW WAS THE FUND MANAGED DURING THIS PERIOD?
A. The fund was positioned more aggressively in the first quarter than in
the second. As the first quarter unfolded and interest rates rose in
anticipation of the Fed's March move to raise the fed funds rate, the fund
employed what is known as a barbell strategy - concentrating investments on
either end of the maturity spectrum - purchasing overnight to two-month
securities on the one hand and one-year bank investments on the other. Both
areas were offering attractive rates, with one-year securities at about a
6.20% annual rate and overnight securities offering a 5.25% rate. The
fund's approach became more cautious in the second quarter as the Fed's May
meeting approached and it appeared rates would rise again. As the one-year
rate fell toward 5.85% and the overnight rate stood at 5.50%, there were
less appealing yield opportunities on the longer end of the maturity
spectrum. At the end of the period, the fund's average maturity stood at 44
days, a range that reflects a more neutral interest rate outlook.
Q. WHAT'S YOUR OUTLOOK?
A. While it softened in the second quarter, overall economic growth remains
fairly strong. Consumer spending is robust and confidence is quite high. As
a result, I expect some inflationary pressures to arise as we head into the
fall. At that point, I would expect the Fed to raise interest rates
slightly if growth proves to be stronger and if some inflationary pressure
builds up. In addition, I believe that any program of rate increases by the
Fed will be gradual, where the Fed raises interest rates, then waits a
month or two to gauge the effect.
FUND FACTS
GOAL: income and share price stability by
investing in high-quality, short-term
investments
START DATE: April 1, 1982
SIZE: as of June 30, 1997, more than
$1.0 billion
MANAGER: Robert Duby, since April 1997;
joined Fidelity in 1982
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND: MONEY MARKET PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
BANKERS' ACCEPTANCES - 1.0%
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT
(NOTE 1)
Chase Manhattan Bank
8/22/97 5.82% $ 7,000,000 $ 6,942,569
Royal Bank of Canada
7/7/97 5.58 4,000,000 3,996,300
TOTAL BANKERS' ACCEPTANCES 10,938,869
CERTIFICATES OF DEPOSIT - 41.2%
DOMESTIC CERTIFICATES OF DEPOSIT - 2.3%
Chase Manhattan Bank (USA)
7/28/97 5.55 5,000,000 5,000,000
CoreStates Capital Corp.
7/10/97 5.66 (a) 10,000,000 9,998,668
Morgan Guaranty Trust, NY
8/12/97 5.78 4,000,000 3,999,739
8/12/97 5.80 5,000,000 4,999,599
23,998,006
CHICAGO BRANCH, YANKEE DOLLAR, FOREIGN BANKS - 0.9%
ABN-AMRO Bank
12/23/97 5.70 5,000,000 4,998,849
Bank of Montreal
7/1/97 5.55 5,000,000 5,000,000
9,998,849
NEW YORK BRANCH, YANKEE DOLLAR, FOREIGN BANKS - 31.3%
Bank of Nova Scotia
4/1/98 6.20 6,000,000 5,997,422
Bank of Tokyo - Mitsubishi Ltd.
7/10/97 5.83 4,000,000 4,000,000
8/6/97 5.85 4,000,000 4,000,000
8/13/97 5.82 2,000,000 2,000,000
8/27/97 5.75 5,000,000 5,000,000
8/29/97 5.79 2,000,000 2,000,000
9/30/97 5.76 6,000,000 6,000,000
Banque Nationale de Paris
7/21/97 5.63 2,000,000 2,000,000
9/30/97 5.85 5,000,000 5,000,000
Barclays U.S. Funding Corp.
7/7/97 5.56 15,000,000 15,000,000
Bayerische Hypotheken-und Weschel
7/23/97 5.56 3,000,000 3,000,000
8/11/97 5.68 10,000,000 10,000,000
Bayerische Vereinsbank A.G.
7/14/97 5.56 5,000,000 5,000,000
Caisse Nationale de Credit Agricole
7/21/97 5.60 30,000,000 30,000,000
11/13/97 5.86 2,000,000 2,000,000
Canadian Imperial Bank of Commerce
7/21/97 5.61 5,000,000 5,000,000
Commerzbank, Germany
7/7/97 5.56 8,000,000 8,000,000
Deutsche Bank, Germany A.G.
7/9/97 5.56 20,000,000 20,000,000
Landesbank Hessen - Thuringen
9/5/97 6.20 15,000,000 15,000,259
9/11/97 6.11 14,000,000 13,999,473
National Westminster Bank, PLC
7/9/97 5.56 25,000,000 25,000,000
8/5/97 5.50 5,000,000 5,000,000
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT
(NOTE 1)
Royal Bank of Canada
8/13/97 5.80% $ 5,000,000 $ 4,999,589
Sanwa Bank Ltd. Japan
7/10/97 5.81 4,000,000 4,000,000
7/21/97 5.82 11,000,000 11,000,000
8/1/97 5.85 3,000,000 3,000,000
8/27/97 5.75 2,000,000 2,000,000
Societe Generale, France
7/11/97 5.70 5,000,000 5,000,000
7/28/97 5.55 17,000,000 17,000,000
8/7/97 5.52 10,000,000 10,000,000
11/12/97 5.90 5,000,000 5,000,000
Sumitomo Bank, Ltd.
7/21/97 5.79 4,000,000 4,000,000
7/29/97 5.75 2,000,000 2,000,000
8/4/97 5.75 2,000,000 2,000,000
8/4/97 5.75 2,000,000 2,000,000
8/19/97 5.75 2,000,000 2,000,000
8/25/97 5.75 3,000,000 3,000,000
Swiss Bank Corp.
7/22/97 5.53 12,000,000 12,000,000
8/4/97 5.50 12,000,000 12,000,000
12/22/97 5.99 8,000,000 8,000,000
2/23/98 5.80 20,000,000 20,000,000
Westdeutsche Landesbank
7/14/97 5.56 15,000,000 15,000,000
336,996,743
LONDON BRANCH, EURODOLLAR, FOREIGN BANKS - 6.7%
ABN-AMRO Bank
7/24/97 5.45 5,000,000 5,000,055
9/22/97 5.65 1,000,000 1,000,023
Abbey National, Treasury Services
7/22/97 5.60 10,000,000 10,000,000
7/28/97 5.72 10,000,000 10,000,000
9/24/97 5.65 18,000,000 18,000,000
3/4/98 5.87 5,000,000 5,000,000
Bank of Nova Scotia
7/23/97 5.60 4,000,000 4,000,000
11/12/97 5.86 4,000,000 4,000,000
Bayerische Landesbank Girozentrale
7/7/97 5.56 4,000,000 3,999,966
12/31/97 5.75 2,000,000 2,000,090
Bayerische Vereinsbank A.G.
9/17/97 5.65 2,000,000 1,999,946
12/29/97 5.75 5,000,000 5,000,122
National Australia Bank
9/23/97 5.65 2,000,000 2,000,000
72,000,202
TOTAL CERTIFICATES OF DEPOSIT 442,993,800
COMMERCIAL PAPER - 32.7%
Abbey National, North America
7/18/97 5.70 6,000,000 5,984,077
AC Acquisition Holding Company
7/7/97 5.60 3,000,000 2,997,220
7/11/97 5.63 4,100,000 4,093,622
8/27/97 5.62 2,000,000 1,982,393
COMMERCIAL PAPER - CONTINUED
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT
(NOTE 1)
American Home Products
7/16/97 5.58% $ 5,000,000 $ 4,988,438
Asset Securitization Coop. Corp.
8/21/97 5.61 6,000,000 5,952,740
Associates Corp. of North America
7/1/97 5.69 5,000,000 5,000,000
Bear Stearns Cos., Inc.
7/9/97 5.60 3,000,000 2,996,293
7/10/97 5.61 2,000,000 1,997,215
Berliner Handels-und Frankfurter Bank
7/7/97 5.57 2,000,000 1,998,153
BHF Finance (Delaware), Inc.
7/11/97 5.62 1,000,000 998,444
BMW US Capital Corp.
7/9/97 5.60 2,188,000 2,185,297
7/7/97 5.63 1,000,000 999,067
7/15/97 5.60 3,000,000 2,993,502
8/5/97 5.64 2,600,000 2,585,844
8/12/97 5.61 2,000,000 1,987,003
8/25/97 5.62 1,100,000 1,090,639
Chrysler Financial Corporation
8/4/97 5.66 2,000,000 1,989,384
8/5/97 5.66 1,000,000 994,536
Citibank Credit Card Master Trust I (Dakota Certificate Program)
7/7/97 5.61 6,000,000 5,994,420
CIT Group Holdings, Inc.
7/1/97 6.30 10,000,000 10,000,000
Cregem North America, Inc.
7/11/97 5.72 2,300,000 2,296,397
9/18/97 5.65 2,000,000 1,975,554
9/23/97 5.66 1,000,000 986,980
9/24/97 5.66 1,000,000 986,825
Enterprise Funding Corp.
7/7/97 5.57 5,000,000 4,995,375
7/7/97 5.63 2,672,000 2,669,506
7/21/97 5.61 1,687,000 1,681,780
7/22/97 5.76 3,000,000 2,990,060
8/19/97 5.67 1,000,000 992,351
Fina Oil and Chemical Company
8/28/97 5.64 10,000,000 9,910,100
Ford Motor Credit Corp.
7/14/97 5.70 10,000,000 9,979,669
7/21/97 5.62 11,000,000 10,965,961
7/23/97 5.61 6,000,000 5,979,613
Generale Bank
7/30/97 5.53 5,000,000 4,978,331
General Electric Capital Corp.
7/7/97 5.50 10,000,000 9,991,000
7/28/97 5.52 10,000,000 9,959,725
9/17/97 5.64 10,000,000 9,879,533
9/22/97 5.80 6,000,000 5,921,980
9/23/97 5.80 15,000,000 14,802,600
General Electric Capital Services, Inc.
7/9/97 5.59 10,000,000 9,987,644
General Motors Acceptance Corp.
8/7/97 5.61 3,000,000 2,982,826
8/27/97 5.50 4,000,000 3,966,117
10/14/97 6.00 12,000,000 11,796,300
10/16/97 6.01 1,000,000 982,687
10/20/97 6.03 4,000,000 3,927,912
10/29/97 6.02 2,000,000 1,961,033
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT
(NOTE 1)
11/3/97 6.02% $ 4,000,000 $ 3,918,958
11/10/97 6.02 6,000,000 5,871,520
11/12/97 6.02 2,000,000 1,956,562
Goldman Sachs Group, L.P. (The)
11/12/97 5.87 15,000,000 14,681,750
GTE Corp.
7/21/97 5.63 2,000,000 1,993,778
Halifax PLC
7/21/97 5.60 5,000,000 4,984,583
IBM Credit Corp.
7/21/97 5.60 10,000,000 9,969,111
8/19/97 5.61 4,000,000 3,969,729
Matterhorn Capital Corp. (LOC Union Bank of Switzerland)
7/8/97 5.57 5,005,000 4,999,599
Merrill Lynch & Co., Inc.
7/9/97 5.61 1,000,000 998,760
7/28/97 5.54 15,000,000 14,939,363
7/28/97 5.61 5,000,000 4,979,113
8/18/97 5.79 3,000,000 2,977,200
Morgan Stanley Dean Witter Discover & Company
8/20/97 5.61 9,000,000 8,930,500
Morgan Stanley Group, Inc.
7/23/97 5.64 6,000,000 5,979,540
Nationwide Building Society
7/21/97 5.64 5,500,000 5,482,889
Norfolk Southern Corp.
7/8/97 5.80 2,000,000 1,997,756
7/14/97 5.78 2,000,000 1,995,847
7/16/97 5.80 1,000,000 997,596
PHH Corp.
7/8/97 5.68 5,000,000 4,994,526
7/14/97 5.63 1,000,000 997,981
Preferred Receivables Funding Corp.
7/16/97 5.58 5,000,000 4,988,438
7/30/97 5.60 2,000,000 1,991,026
8/19/97 5.67 3,000,000 2,977,052
REXAM PLC
7/16/97 5.58 5,000,000 4,988,438
Sears Roebuck Acceptance Corp.
7/11/97 5.63 2,000,000 1,996,894
7/15/97 5.64 2,000,000 1,995,644
8/25/97 5.62 3,000,000 2,974,471
Toronto Dominion Holdings USA, Inc.
7/21/97 5.60 3,000,000 2,990,750
12/23/97 5.75 2,000,000 1,945,653
TOTAL COMMERCIAL PAPER 351,821,173
FEDERAL AGENCIES - 7.4%
FEDERAL HOME LOAN BANK - AGENCY COUPONS - 0.5%
9/4/97 5.71 (a) 5,000,000 4,998,140
FEDERAL NATIONAL MORTGAGE ASSOC. - AGENCY COUPONS - 4.6%
7/1/97 5.67 (a) 15,000,000 14,997,517
9/9/97 5.71 (a) 25,000,000 24,990,406
9/13/97 5.71 (a) 10,000,000 9,995,420
49,983,343
FEDERAL NATIONAL MORTGAGE ASSOC. - DISCOUNT NOTES - 2.3%
7/3/97 5.61 25,000,000 24,992,319
TOTAL FEDERAL AGENCIES 79,973,802
BANK NOTES - 2.1%
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT
(NOTE 1)
Comerica Bank
3/27/98 6.20% $ 5,000,000 $ 4,992,970
First Bank NA
7/16/97 5.65 (a) 5,000,000 4,995,975
Huntington National Bank
9/30/97 5.50 2,000,000 2,001,053
Key Bank of New York
7/1/97 5.66 (a) 5,000,000 4,999,713
7/1/97 5.69 (a) 1,000,000 999,913
PNC Bank, Inc.
7/11/97 5.65 (a) 5,000,000 4,998,597
TOTAL BANK NOTES 22,988,221
MASTER NOTES (A) - 3.6%
Goldman Sachs Group, L.P. (The)
8/5/97 5.82 5,000,000 5,000,000
9/16/97 5.81 (c) 10,000,000 10,000,000
J.P. Morgan Securities
7/1/97 6.38 18,000,000 18,000,000
Norwest Corp.
7/1/97 5.69 6,000,000 6,000,000
TOTAL MASTER NOTES 39,000,000
MEDIUM-TERM NOTES - 4.5%
Associates Corp. of North America
7/15/97 5.95 2,250,000 2,250,557
Capital One Funding Corp. (1994-B)
7/8/97 5.63 (a) 3,289,000 3,289,000
Capital One Funding Corp. (1995-E)
7/8/97 5.63 (a) 5,700,000 5,700,000
General Motors Acceptance Corp.
7/1/97 5.69 (a) 2,000,000 1,999,751
8/1/97 5.82 (a) 5,000,000 5,000,000
Liquid Asset Backed Securities Trust (1996-1) (b)
7/15/97 5.72 (a) 5,000,000 5,000,000
Liquid Asset Backed Securities Trust (1996-2) (b)
7/1/97 5.72 (a) 7,000,000 7,000,000
Merrill Lynch & Co., Inc.
7/7/97 5.67 (a) 2,000,000 1,999,669
7/18/97 5.69 (a) 5,000,000 4,999,867
Morgan Stanley Group, Inc.
7/1/97 5.68 (a) 5,000,000 5,000,000
Norwest Corp.
7/22/97 5.86 (a) 6,000,000 6,000,000
TOTAL MEDIUM-TERM NOTES 48,238,844
SHORT-TERM NOTES (A) - 2.8%
SMM Trust (1996-B) (b)
7/7/97 5.74 5,500,000 5,500,000
SMM Trust (1996-P) (b)
7/16/97 5.72 7,000,000 7,000,000
SMM Trust (1997-V) (b)
7/28/97 5.69 8,000,000 8,000,000
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT
(NOTE 1)
SMM Trust (1997-W) (b)
7/16/97 5.69% $ 7,000,000 $ 7,000,000
Transamerica Life Insurance and Annuity Co.
9/16/97 5.81 3,000,000 3,000,000
TOTAL SHORT-TERM NOTES 30,500,000
TIME DEPOSITS - 4.6%
Bank of Tokyo - Mitsubishi Ltd.
7/3/97 5.69 4,000,000 4,000,000
Canadian Imperial Bank of Commerce
7/1/97 6.25 42,000,000 42,000,000
Sumitomo Bank, Ltd.
7/9/97 5.75 3,000,000 3,000,000
TOTAL TIME DEPOSITS 49,000,000
REPURCHASE AGREEMENTS - 0.1%
MATURITY
AMOUNT
In a joint trading account
(U.S. Government Obligations)
dated 6/30/97 due 7/1/97
At 5.99% $ 1,381,230 1,381,000
TOTAL INVESTMENTS - 100% $1,076,835,709
Total Cost for Income Tax Purposes - $ 1,076,835,709
LEGEND
1. The coupon rate shown on floating or adjustable rate securities
represents the rate at period end. The due dates on these types of
securities reflects the next interest rate reset date or, when applicable,
the final maturity date.
2. Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of these securities amounted to $39,500,000 or 3.7% of net
assets.
3. Restricted securities - Investment in securities not registered under
the Securities Act of 1933 (see Note 2 of Notes to Financial Statements).
Additional information on each holding is as follows:
ACQUISITION ACQUISITION
SECURITY DATE COST
Goldman Sachs
Group, L.P. (The)
5.81%, 9/16/97 6/16/97 $ 10,000,000
INCOME TAX INFORMATION
At December 31, 1996, the fund had a capital loss carryforward of
approximately $29,000 which will expire on December 31, 2002.
VARIABLE INSURANCE PRODUCTS FUND: MONEY MARKET PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in securities, at value (including repurchase agreements of $1,381,000) - See accompanying $ 1,076,835,709
schedule
Receivable for investments sold 188,000
Interest receivable 7,287,661
TOTAL ASSETS 1,084,311,370
LIABILITIES
Payable to custodian bank $ 1,591
Payable for investments purchased 2,000,410
Share transactions in process 1,474,015
Accrued management fee 189,680
Other payables and 101,660
accrued expenses
TOTAL LIABILITIES 3,767,356
NET ASSETS $ 1,080,544,014
Net Assets consist of:
Paid in capital $ 1,080,585,466
Accumulated net realized gain (41,452)
(loss) on investments
NET ASSETS, for 1,080,585,466 shares outstanding $ 1,080,544,014
NET ASSET VALUE, offering price $1.00
and redemption price per
share ($1,080,544,014 (divided by) 1,080,585,466 shares)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INTEREST INCOME $ 31,913,288
EXPENSES
Management fee $ 1,183,256
Transfer agent fees 418,988
Accounting fees and expenses 68,373
Non-interested trustees' compensation 262
Custodian fees and expenses 19,215
Audit 8,680
Legal 1,590
Miscellaneous 37,731
Total expenses before reductions 1,738,095
Expense reductions (4,815 1,733,280
)
NET INTEREST INCOME 30,180,008
NET REALIZED GAIN (LOSS) (27,802
ON INVESTMENTS )
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 30,152,206
OTHER INFORMATION
Expense reductions
Custodian interest credits $ 4,815
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996
<TABLE>
<CAPTION>
<S> <C> <C>
Operations $ 30,180,008 $ 49,421,275
Net interest income
Net realized gain (loss) (27,802) 49,076
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 30,152,206 49,470,351
Distributions to shareholders from net interest income (30,180,008) (49,421,275)
Share transactions at net asset value of $1.00 per share 1,049,791,223 1,994,407,823
Proceeds from sales of shares
Reinvestment of distributions from net interest income 30,180,006 49,421,275
Cost of shares redeemed (1,125,554,506) (1,726,597,066)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS (45,583,277) 317,232,032
TOTAL INCREASE (DECREASE) IN NET ASSETS (45,611,079) 317,281,108
NET ASSETS
Beginning of period 1,126,155,093 808,873,985
End of period $ 1,080,544,014 $ 1,126,155,093
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1997
SELECTED PER-SHARE DATA (UNAUDITED) 1996 1995 1994 1993 1992
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Income from Investment Operations .026 .052 .057 .042 .032 .038
Net interest income
Less Distributions
From net interest income (.026) (.052) (.057) (.042) (.032) (.038)
Net asset value, end of period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
TOTAL RETURN B, C 2.65% 5.41% 5.87% 4.25% 3.23% 3.90%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 1,080,544 $ 1,126,155 $ 808,874 $ 748,606 $ 353,104 $ 301,002
Ratio of expenses to average net assets after expense .30% A .30% .33% .27% .22% .24%
reductions D
Ratio of net interest income to average net assets 5.29% A 5.28% 5.72% 4.32% 3.16% 3.85%
</TABLE>
A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED AND DO
NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN.
C THE TOTAL RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIOD SHOWN.
D FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE
BEEN HIGHER.
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can
look at the total percentage change in value, the average annual percentage
change or the growth of a hypothetical $10,000 investment. Total return
reflects the change in the value of an investment, assuming reinvestment of
the fund's dividend income and capital gains (the profits earned upon the
sale of securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 LIFE OF
JUNE 30, 1997 YEAR YEARS FUND
INVESTMENT GRADE BOND 7.74% 6.64% 8.05%
Lehman Brothers Aggregate Bond Index 8.15% 7.12% n/a
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what
would have happened if the fund had performed at a constant rate each year.
You can compare these figures to the Lehman Brothers Aggregate Bond Index -
a market value weighted performance benchmark for investment-grade
fixed-rate debt issues, including government, corporate, asset-backed, and
mortgage-backed securities, with maturities of at least one year. This
benchmark includes reinvested dividends and capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of
how it will do tomorrow. Bond prices, for
example, generally move in the opposite
direction of interest rates. In turn, the share price,
return and yield of a fund that invests in bonds
will vary. That means if you sell your shares
during a market downturn, you might lose
money. But if you can ride out the market's ups
and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of return
and are not the fund's year-by-year results, which fluctuated over the
periods shown. The life of fund figures are from commencement of
operations, December 5, 1988.
If Fidelity had not reimbursed certain fund expenses, the life of fund
total return figures would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL
CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
1988/12/31 10000.00 10000.00
1989/01/31 10086.92 10143.88
1989/02/28 10109.25 10070.36
1989/03/31 10172.02 10113.90
1989/04/30 10285.31 10325.54
1989/05/31 10399.91 10596.87
1989/06/30 10600.00 10919.52
1989/07/31 10765.35 11151.64
1989/08/31 10679.56 10986.42
1989/09/30 10721.69 11042.65
1989/10/31 10887.69 11314.55
1989/11/30 10981.36 11422.39
1989/12/31 11026.21 11452.96
1990/01/31 11001.11 11316.86
1990/02/28 11063.52 11353.48
1990/03/31 11097.11 11361.84
1990/04/30 11101.82 11257.75
1990/05/31 11276.11 11591.07
1990/06/30 11364.07 11777.05
1990/07/31 11476.89 11939.97
1990/08/31 11475.79 11780.51
1990/09/30 11520.66 11877.97
1990/10/31 11521.38 12028.78
1990/11/30 11590.77 12287.71
1990/12/31 11711.43 12479.17
1991/01/31 11735.04 12633.43
1991/02/28 11853.10 12741.27
1991/03/31 12053.80 12828.93
1991/04/30 12230.89 12967.91
1991/05/31 12325.33 13043.74
1991/06/30 12348.94 13037.11
1991/07/31 12455.20 13217.90
1991/08/31 12714.93 13503.94
1991/09/30 12951.04 13777.57
1991/10/31 13092.71 13930.97
1991/11/30 13234.39 14058.71
1991/12/31 13629.42 14476.23
1992/01/31 13494.11 14279.29
1992/02/29 13567.97 14372.13
1992/03/31 13543.27 14291.11
1992/04/30 13642.04 14394.34
1992/05/31 13851.92 14665.96
1992/06/30 14012.41 14867.80
1992/07/31 14296.36 15171.13
1992/08/31 14382.78 15324.82
1992/09/30 14555.62 15506.47
1992/10/31 14370.44 15300.89
1992/11/30 14333.40 15304.35
1992/12/31 14536.36 15547.71
1993/01/31 14841.14 15845.85
1993/02/28 15093.07 16123.24
1993/03/31 15159.39 16190.42
1993/04/30 15252.23 16303.16
1993/05/31 15278.75 16323.92
1993/06/30 15570.53 16619.76
1993/07/31 15676.64 16713.76
1993/08/31 15955.15 17006.72
1993/09/30 16034.73 17053.43
1993/10/31 16114.31 17117.15
1993/11/30 16034.73 16971.54
1993/12/31 16129.93 17063.52
1994/01/31 16312.59 17293.91
1994/02/28 16045.19 16993.45
1994/03/31 15678.93 16574.49
1994/04/30 15538.06 16442.14
1994/05/31 15495.80 16439.84
1994/06/30 15453.53 16403.51
1994/07/31 15707.10 16729.33
1994/08/31 15721.19 16750.09
1994/09/30 15552.14 16503.56
1994/10/31 15566.23 16488.86
1994/11/30 15594.40 16452.24
1994/12/31 15523.97 16565.84
1995/01/31 15749.36 16893.69
1995/02/28 16053.30 17295.35
1995/03/31 16155.46 17401.46
1995/04/30 16374.37 17644.53
1995/05/31 17031.09 18327.33
1995/06/30 17162.44 18461.69
1995/07/31 17104.06 18420.46
1995/08/31 17308.38 18642.77
1995/09/30 17468.91 18824.14
1995/10/31 17702.41 19068.94
1995/11/30 17965.10 19354.69
1995/12/31 18213.20 19626.31
1996/01/31 18329.95 19756.64
1996/02/29 17995.20 19413.22
1996/03/31 17857.01 19278.28
1996/04/30 17749.53 19169.86
1996/05/31 17718.82 19130.94
1996/06/30 17933.78 19387.85
1996/07/31 17979.84 19440.90
1996/08/31 17964.49 19408.32
1996/09/30 18256.22 19746.55
1996/10/31 18655.43 20183.96
1996/11/30 18962.52 20529.68
1996/12/31 18793.62 20338.80
1997/01/31 18839.68 20401.08
1997/02/28 18864.60 20451.83
1997/03/31 18668.78 20225.20
1997/04/30 18946.20 20527.95
1997/05/31 19093.07 20722.01
1997/06/30 19321.53 20967.97
Let's say hypothetically that $10,000 was invested in Investment Grade Bond
Portfolio on December 31, 1988, shortly after the fund started. By June 30,
1997, the value of the investment would have grown to $19,322 - a 93.22%
increase on the initial investment. For comparison, look at how the Lehman
Brothers Aggregate Bond Index did over the same period. With dividends and
capital gains, if any, reinvested, the same $10,000 investment would have
grown to $20,968 - a 109.68% increase.
INVESTMENT SUMMARY
QUALITY DIVERSIFICATION AS OF JUNE 30, 1997
(MOODY'S RATINGS) % OF FUND'S
INVESTMENTS
Aaa 55.7
Aa 4.4
A 15.0
Baa 13.7
Ba 6.0
B 0
Not rated 0.5
TABLE EXCLUDES SHORT-TERM INVESTMENTS. WHERE MOODY'S RATINGS ARE NOT
AVAILABLE, WE HAVE USED S&P RATINGS. UNRATED DEBT SECURITIES THAT ARE
EQUIVALENT TO BA AND BELOW AT JUNE 30, 1997, ACCOUNT FOR 0.5% OF THE FUND'S
INVESTMENTS.
AVERAGE YEARS TO MATURITY AS OF JUNE 30, 1997
Years 8.4
AVERAGE YEARS TO MATURITY IS BASED ON THE AVERAGE TIME UNTIL PRINCIPAL
PAYMENTS ARE EXPECTED FROM EACH OF THE FUND'S BONDS, WEIGHTED BY DOLLAR
AMOUNT.
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Finance 20.7
Utilities 5.4
Retail & Wholesale 2.8
Media & Leisure 2.3
Technology 1.9
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
NOTE TO SHAREHOLDERS: Kevin Grant became Portfolio Manager of Investment
Grade Bond Portfolio on February 3, 1997.
Q. HOW DID THE FUND PERFORM, KEVIN?
A. For the six- and 12-month periods that ended June 30, 1997, the fund
slightly underperformed the Lehman Brothers Aggregate Bond Index, a broad
measure of U.S. taxable bonds, which returned 3.09% for the six-month
period and 8.15% for the 12-month period.
Q. WHAT WAS THE INVESTMENT ENVIRONMENT LIKE DURING THE FIRST HALF OF 1997?
A. It's been a good environment for investors, both in the stock and bond
markets. We've had virtually no inflation and we've seen solid growth in
the economy and in corporate earnings. Companies have paid down debt; even
the airlines are paying down debt. The average corporate balance sheet is
in the best shape we've seen in probably 30 years. This has been a good
investing environment, particularly for corporate bonds and mortgage-backed
securities.
Q. WHAT WAS YOUR STRATEGY FOR CORPORATE BONDS IN THIS MARKET?
A. We haven't seen companies take on a lot of new debt to do such things as
acquisitions, which makes it a very good environment for corporate bonds.
In particular, we focused on three areas of the corporate bond market.
First, we used short-maturity corporate bonds - which have two-, three- and
four-year maturities - to replace Treasuries. They have marginally more
risk than Treasuries, but offer a yield advantage over them. Second, we
invested in puttable corporate bonds, which can offer attractive yields as
well as favorable price action because they can be redeemed by the fund
prior to maturity in the event interest rates rise. Third, we invested in
bank capital securities, which are long corporate bonds issued by banks. We
were overweighted in those three areas of the corporate market during the
period and that helped us.
Q. HOW HAVE MORTGAGE-BACKED SECURITIES FARED IN THIS ENVIRONMENT?
A. It's been a good environment for the mortgage market. Interest rates
haven't been particularly volatile, and rates are high enough that
prepayment risk was not an issue during the period. In 1993, when interest
rates dropped so low, many mortgage holders refinanced into lower rate
mortgages. Interest rates are now quite a bit higher. During the first half
of 1997, the mortgage market was a discount market, which means there was
very little prepayment risk. We would probably need a drop in interest
rates of about 50 basis points for prepayment risk to become a real
problem.
Q. AT THE END OF 1996, THE FUND OWNED A FAIR AMOUNT OF YANKEE BONDS. DID
THE FUND CONTINUE TO INVEST IN THIS TYPE OF SECURITY DURING THE FIRST HALF
OF THE YEAR?
A. Yes. We've continued to own yankee bonds, which are issued by foreign
entities and denominated in U.S. dollars. They often trade more cheaply
than domestic corporates and frequently carry better credit quality
characteristics. The nice thing about yankee bonds is that you can get the
same or better yield spread than you get in corporate bonds, but you have
much less event risk. By that I mean, you don't really have the possibility
of the issuer being bought by a junk-bond company, for example, so you
don't have the possibility of the bonds going from a single-A rating to a
double-B in a week. We've focused mainly on sovereign names, such as the
Canadian provinces of Ontario and Alberta. We also owned some Korean notes.
Korea carries a single-A rating, so it's a very high-grade country. The
tension between North and South Korea has not really affected the bonds.
Q. VALUATIONS OF CORPORATE BONDS WERE VERY EXPENSIVE AT THE END OF LAST
YEAR. DID THAT CONTINUE DURING THIS SIX-MONTH PERIOD?
A. Yes, that's still the case. This is an environment we're probably going
to have to live with for a while, with optimism built into the prices of
most bonds. The fund continues to hold corporate bonds. We're not going to
own just Treasuries. That would not make sense, because even though
corporate bonds are expensive, they still have a yield advantage over
Treasuries. So, we're in a defensive posture, but we're not betting on a
blow-up in corporate America. I think that would be foolhardy.
Q. WHAT'S YOUR OUTLOOK GOING INTO THE SECOND HALF OF 1997?
A. I think it's really going to be more of the same. We'll continue to
focus on the three areas of the corporate bond market that I mentioned
earlier. The mortgage market is very expensive right now, so we're probably
going to continue to be defensive in mortgage securities. The overall
market was about 30% invested in mortgage securities, and we were modestly
underweighted in that sector at the end of the period. Unless conditions
change, I think we'll stay underweighted in these securities.
FUND FACTS
GOAL: income and share price stability by
investing in high-quality, short-term
investments
START DATE: April 1, 1982
SIZE: as of June 30, 1997, more than
$1.0 billion
MANAGER: Robert Duby, since April 1997;
joined Fidelity in 1982
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
NONCONVERTIBLE BONDS - 40.4%
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
BASIC INDUSTRIES - 0.4%
CHEMICALS & PLASTICS - 0.4%
Praxair, Inc.,
6.90% 11/1/06 A3 $ 1,000,000 $ 987,300
DURABLES - 1.0%
AUTOS, TIRES, & ACCESSORIES - 0.2%
Tennessee Gas Pipeline Co.
7%, 3/15/27 Baa3 540,000 539,671
TEXTILES & APPAREL - 0.8%
Levi Strauss & Co.
7%, 11/1/06 (c) Baa2 2,000,000 1,978,400
TOTAL DURABLES 2,518,071
ENERGY - 0.9%
ENERGY SERVICES - 0.4%
Petroliam Nasional BHD
yankee 6 7/8%, 7/1/03 (c) A1 1,040,000 1,036,402
OIL & GAS - 0.5%
Husky Oil Ltd. yankee
6 7/8%, 11/15/03 Baa3 340,000 335,192
Pennzoil Co.
9 5/8%, 11/15/99 Baa3 460,000 490,089
Ras Laffan Liquid Natural Gas
Co. Ltd. yankee
7.628%, 9/15/06 (c) A3 500,000 506,405
1,331,686
TOTAL ENERGY 2,368,088
FINANCE - 20.7%
ASSET-BACKED SECURITIES - 3.4%
Discover Card Master Trust I
6.90%, 2/16/00 A2 260,000 260,242
Ford Credit Grantor Trust
5.90%, 10/15/00 Aaa 480,649 480,048
Green Tree Financial Corp.
6.10%, 4/15/27 Aaa 862,654 861,032
KeyCorp Auto Grantor Trust
5.80%, 7/15/00 A3 39,886 39,758
PNC Student Loan Trust I
6.314%, 1/25/01 Aaa 3,100,000 3,100,000
Premier Auto Trust:
4.90%, 12/15/98 Aaa 141,429 140,898
8.05%, 4/4/00 Aaa 1,430,000 1,453,238
6%, 5/6/00 Aaa 500,000 499,530
Railcar Trust 7 3/4%, 6/1/04 Aaa 761,410 789,963
Sears Credit Account Master
Trust II 7%, 1/15/04 Aaa 1,000,000 1,012,500
Standard Credit Card Master
Trust I 7.65%, 2/15/00 A2 150,000 151,359
Union Federal Savings Bank
Grantor Trust
8.20%, 1/10/01 Baa2 47,629 48,313
8,836,881
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
BANKS - 8.4%
ABN Amro Bank NV
6 5/8%, 10/31/01 Aa3 $ 1,000,000 $ 995,870
Banc One Corp.
6.70%, 3/24/00 Aa3 1,450,000 1,456,757
BankBoston Capital Trust II
7 3/4%, 12/15/26 Baa1 1,080,000 1,036,282
BanPonce Corp.:
5 3/4%, 3/1/99 A3 370,000 364,975
6.378%, 4/8/99 A3 430,000 427,725
BanPonce Trust I
8.327%, 2/1/27 (c) Baa1 1,230,000 1,243,013
Capital One Bank
6.42%, 11/12/99 Baa3 2,000,000 1,989,500
Corporacion Andina
de Fomento yankee
7.10%, 2/1/03 A3 1,000,000 1,004,820
Export-Import Bank of Korea
6 3/8%, 2/15/06 A1 1,500,000 1,405,680
First Fidelity Bancorp
8 1/2%, 4/1/98 A2 250,000 254,048
First Maryland Bancorp
10 3/8%, 8/1/99 Baa1 500,000 536,415
Firstar Corp. 7.15%, 9/1/00 A3 640,000 643,782
Hartford National Corp.
9.85%, 6/1/99 A3 1,150,000 1,219,943
Kansallis-Osake-Pankki
10%, 5/1/02 A3 260,000 291,577
KeyCorp 8.40%, 4/1/99 A2 310,000 319,883
Korea Development Bank
yankee 6 3/4%, 12/1/05 A1 2,350,000 2,276,962
Midland Bank PLC yankee
7 5/8%, 6/15/06 A1 700,000 720,895
NB Capital Trust IV
8 1/4%, 4/15/27 A1 3,000,000 3,074,220
Signet Bank 7.80%, 9/15/06 Baa1 500,000 516,240
Sovran Financial Corp.
9 3/4%, 6/15/99 A2 770,000 816,647
Union Planters Corp.
6 3/4%, 11/1/05 Baa2 400,000 387,448
Union Planters National Bank
6.81%, 8/20/01 A3 500,000 500,625
21,483,307
CREDIT & OTHER FINANCE - 5.6%
AT&T Capital Corp.:
6.02%, 12/1/98 Baa3 1,000,000 997,060
6.16%, 12/3/99 Baa3 500,000 494,605
Associates Corp. of North
America 6 7/8%, 2/15/00 Aa3 3,000,000 3,028,260
BCH Cayman Islands Ltd.
yankee 7.70%, 7/15/06 A3 500,000 510,840
Chase Capital I
7.67%, 12/1/26 A1 2,650,000 2,565,757
Chrysler Financial Corp.
6 3/8%, 1/28/00 A3 1,240,000 1,236,280
Finova Capital Corp.
6.14%, 11/2/98 Baa1 400,000 399,892
NONCONVERTIBLE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
FINANCE - CONTINUED
CREDIT & OTHER FINANCE - CONTINUED
First Security Capital I
8.41%, 12/15/26 A3 $ 210,000 $ 214,087
General Electric Capital Corp.
6.94%, 4/13/09 (b) Aaa 1,000,000 1,009,410
General Motors Acceptance Corp.:
6.40%, 5/17/99 A3 1,000,000 1,000,680
6.65%, 5/24/00 A3 1,650,000 1,651,568
KeyCorp Institutional Capital A
7.826%, 12/1/26 A1 800,000 776,968
Secured Finance, Inc. gtd.
secured 9.05%, 12/15/04 Aaa 500,000 555,295
14,440,702
INSURANCE - 1.1%
Executive Risk Capital Trust
8 5/8%, 2/1/27 Baa3 1,750,000 1,739,150
Nationwide Mutual Insurance Co.
6 1/2%, 2/15/04 (c) A1 130,000 125,562
SunAmerica, Inc.
6.20%, 10/31/99 Baa1 1,000,000 992,910
2,857,622
SAVINGS & LOANS - 2.2%
Ahmanson (H.F.) & Co.
9 7/8%, 11/15/99 Baa2 3,000,000 3,220,560
Great West Financial Trust II
8.206%, 2/1/27 Baa2 2,500,000 2,493,050
5,713,610
TOTAL FINANCE 53,332,122
HEALTH - 0.7%
MEDICAL FACILITIES MANAGEMENT - 0.7%
Columbia/HCA Healthcare Corp.:
6 1/2%, 3/15/99 A2 1,000,000 1,003,470
6 7/8%, 7/15/01 A2 750,000 753,900
1,757,370
HOLDING COMPANIES - 0.7%
Norfolk Southern Corp.
7.05%, 5/1/37 Baa1 1,700,000 1,725,398
INDUSTRIAL MACHINERY & EQUIPMENT - 1.6%
POLLUTION CONTROL - 1.6%
WMX Technologies, Inc.:
6 1/4%, 4/1/99 A3 1,200,000 1,197,300
7.10%, 8/1/26 A3 3,000,000 3,056,910
4,254,210
MEDIA & LEISURE - 2.3%
BROADCASTING - 2.2%
TCI Communication, Inc.:
7 1/4%, 6/15/99 Ba1 3,680,000 3,708,115
7 3/8%, 2/15/00 Ba1 750,000 755,700
Time Warner, Inc.
7.95%, 2/1/00 Ba1 1,170,000 1,202,865
5,666,680
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
RESTAURANTS - 0.1%
Darden Restaurants, Inc.
6 3/8%, 2/1/06 Baa1 $ 310,000 $ 286,793
TOTAL MEDIA & LEISURE 5,953,473
NONDURABLES - 1.7%
FOODS - 0.5%
ConAgra, Inc.
7 1/8%, 10/1/26 Baa1 1,270,000 1,275,639
TOBACCO - 1.2%
Philip Morris Companies, Inc.
6.95%, 6/1/06 A2 3,000,000 3,009,990
TOTAL NONDURABLES 4,285,629
RETAIL & WHOLESALE - 2.8%
GENERAL MERCHANDISE STORES - 2.0%
Dayton Hudson Corp.
6.40%, 2/15/03 Baa1 500,000 487,065
Federated Department Stores, Inc.
8 1/2%, 6/15/03 Baa2 3,000,000 3,190,050
Penney (J.C.) Co., Inc.
6.95%, 4/1/00 A2 1,000,000 1,008,420
Sears, Roebuck & Co.
9.23% 8/6/98 A2 450,000 465,120
5,150,655
GROCERY STORES - 0.8%
American Stores Co.
7 1/2%, 5/1/37 Baa2 1,400,000 1,426,558
Kroger Co. 8.15%, 7/15/06 Baa3 500,000 527,180
1,953,738
TOTAL RETAIL & WHOLESALE 7,104,393
TECHNOLOGY - 1.9%
COMPUTERS & OFFICE EQUIPMENT - 1.2%
Comdisco, Inc.
6 3/8%, 11/30/01 Baa1 3,200,000 3,132,448
ELECTRONICS - 0.7%
Texas Instruments, Inc.
6 7/8%, 7/15/00 A3 1,692,000 1,705,604
TOTAL TECHNOLOGY 4,838,052
TRANSPORTATION - 0.3%
AIR TRANSPORTATION - 0.3%
AMR Corp. 9.55%, 3/6/98 Baa3 400,000 408,564
Delta Air Lines, Inc. equipment
trust certificate
8.54%, 1/2/07 Baa1 416,138 442,646
851,210
UTILITIES - 5.4%
CELLULAR - 0.9%
360 Degrees Communications Co.:
7 1/8%, 3/1/03 Ba1 1,420,000 1,412,176
7 1/2%, 3/1/06 Ba1 850,000 847,926
2,260,102
NONCONVERTIBLE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
UTILITIES - CONTINUED
ELECTRIC UTILITY - 1.1%
British Columbia Hydro &
Power Authority yankee
12 1/2%, 1/15/14 Aa2 $ 360,000 $ 405,558
DR Investment yankee
7.10%, 5/15/02 (c) Baa1 1,500,000 1,510,860
Israel Electric Corp. Ltd. yankee
7 1/4%, 12/15/06 (c) A3 1,000,000 991,970
2,908,388
GAS - 1.2%
Florida Gas Transmission Co.
7 3/4%, 11/1/97 (c) Baa2 220,000 221,250
Mitchell Energy & Development
Corp. 8%, 7/15/99 Ba1 1,730,000 1,770,188
Southwest Gas Corp.
9 3/4%, 6/15/02 Baa2 1,000,000 1,111,370
3,102,808
TELEPHONE SERVICES - 2.2%
LCI International, Inc.
7 1/4%, 6/15/07 Ba1 950,000 940,975
MFS Communications, Inc.
0%, 1/15/04 (f) Ba3 2,000,000 1,861,600
WorldCom, Inc.
7 3/4%, 4/1/07 Ba1 2,700,000 2,761,236
5,563,811
TOTAL UTILITIES 13,835,109
TOTAL NONCONVERTIBLE BONDS
(Cost $103,327,484) 103,810,425
U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS - 35.3%
U.S. TREASURY OBLIGATIONS - 23.9%
6 5/8%, 6/30/01 Aaa 11,960,000 12,072,065
7 7/8%, 8/15/01 Aaa 510,000 537,494
10 3/4%, 5/15/03 Aaa 138,000 166,657
11 7/8%, 11/15/03 Aaa 3,000,000 3,835,770
12 3/8%, 5/15/04 Aaa 1,914,000 2,528,566
7%, 7/15/06 Aaa 21,000,000 21,603,750
12 3/4%, 11/15/10
(callable) Aaa 1,747,000 2,424,242
13 7/8%, 5/15/11 (callable) Aaa 30,000 44,367
12%, 8/15/13 (callable) Aaa 3,772,000 5,309,694
9%, 11/15/18 Aaa 7,679,000 9,499,153
8 7/8%, 2/15/19 Aaa 1,400,000 1,713,250
7 1/4%, 2/15/23 Aaa 1,680,000 1,730,400
61,465,408
U.S. GOVERNMENT AGENCY OBLIGATIONS - 11.4%
Federal Agricultural Mortgage
Corporation
7.01%, 2/10/05 Aaa 10,000 10,125
Federal Home Loan Bank:
6 3/4%, 4/5/04 Aaa 375,000 376,114
7.31%, 6/16/04 Aaa 4,155,000 4,295,231
7.36%, 7/1/04 Aaa 3,100,000 3,221,582
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
7.38%, 8/5/04 Aaa $ 110,000 $ 114,193
7.56%, 9/01/04 Aaa 310,000 324,725
7.46%, 9/9/04 Aaa 50,000 52,102
7.70%, 9/20/04 Aaa 40,000 42,225
6.46%, 12/15/04 Aaa 1,745,000 1,713,922
8.09%, 12/28/04 Aaa 10,000 10,794
7.59%, 3/10/05 Aaa 10,000 10,513
Federal Home Loan
Mortgage Corporation
6.77%, 9/15/02 Aaa 150,000 150,678
8%, 1/26/05 Aaa 520,000 556,561
8.115%, 1/31/05 Aaa 1,140,000 1,229,593
6.783%, 8/18/05 Aaa 1,000,000 999,220
planned amortization class
Series 1727 Class D,
6 1/2%, 8/15/14 Aaa 190,000 190,475
Federal National Mortgage
Association:
6.72%, 8/1/05 Aaa 1,180,000 1,174,100
sequential pay Series 1996-M5
Class A1, 7.141%,
6/25/08 Aaa 224,488 227,408
Series 1994-M3 Class A,
7.71%, 4/1/06 Aaa 14,523 14,686
Financing Corp. stripped
principal 0%, 3/26/00 - 512,000 430,249
Government Loan Trusts
(assets of Trust guaranteed
by U.S. Government through
Agency for International
Development)
8 1/2%, 4/1/06 Aaa 1,760,000 1,898,002
Government Trust Certificates
(assets of Trust guaranteed by
U.S. Government through
Defense Security Assistance
Agency):
Class T-3,
9 5/8%, 5/15/02 Aaa 67,365 71,570
Class 1-C,
9 1/4%, 11/15/01 Aaa 1,119,342 1,188,484
Class 2-E,
9.40%, 5/15/02 Aaa 955,284 1,013,662
Guaranteed Export Trust
Certificates (assets of Trust
guaranteed by U.S.
Government through
Export-Import Bank):
Series 1993-C,
5.20%, 10/15/04 Aaa 6,667 6,383
Series 1993-D,
5.23%, 5/15/05 Aaa 13,617 12,991
Series 1994-A,
7.12%, 4/15/06 Aaa 8,230 8,379
Series 1994-C,
6.61%, 9/15/99 Aaa 57,747 57,987
U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
Guaranteed Trade Trust
Certificates (assets of Trust
guaranteed by U.S. Government
through Export-Import Bank)
Series 1994-B,
7 1/2%, 1/26/06 Aaa $ 8,330 $ 8,605
Israel Export Trust Certificates
(assets of Trust guaranteed
by U.S. Government through
Export-Import Bank) Series
1994-1, 6.88%, 1/26/03 Aaa 14,118 14,228
Overseas Private Investment
Corp. U.S. Government
guaranteed participation
certificate Series 1994-1995,
6.08%, 8/15/04 (callable) Aaa 140,000 136,898
Private Export Funding Corp.:
secured 5.65%, 3/15/03 Aaa 243,000 238,169
secured 6.86%, 4/30/04 Aaa 1,604,283 1,615,160
State of Israel (guaranteed by
U.S. Government through
Agency for International
Development):
6 1/8%, 8/15/99 Aaa 770,000 768,429
7 1/8%, 8/15/99 Aaa 435,000 442,527
7 3/4%, 11/15/99 Aaa 144,000 148,349
0%, 11/15/01 Aaa 2,875,000 2,176,174
6 1/4%, 8/15/02 Aaa 352,000 347,725
6 1/8%, 3/15/03 Aaa 70,000 68,178
6 5/8%, 2/15/04 Aaa 180,000 179,890
6 3/4%, 8/15/04 Aaa 1,000,000 1,004,330
7 5/8%, 8/15/04 Aaa 330,000 347,612
5.89%, 8/15/05 Aaa 1,175,000 1,113,332
U.S. Department of Housing
and Urban Development
Government guaranteed
participation certificates:
Series 1995-A:
8.27%, 8/1/03 Aaa 415,000 448,208
8.24%, 8/1/04 Aaa 500,000 540,065
Series 1996-A,
6.98%, 8/1/05 Aaa 180,000 181,903
29,181,736
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $89,688,627) 90,647,144
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES - 14.2%
FEDERAL HOME LOAN MORTGAGE CORPORATION - 0.7%
7%, 5/01/01 Aaa 172,509 173,501
8 1/2%, 3/01/20 Aaa 1,570,252 1,649,487
1,822,988
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 10.5%
6.345%, 3/01/99 Aaa $ 77,838 $ 77,546
5 1/2%, 5/01/00 to 7/01/01 Aaa 2,647,237 2,565,126
6%, 3/01/01 to 6/01/11 Aaa 14,466,801 14,074,564
6 1/2%, 2/01/10 to 5/01/26 Aaa 8,192,990 7,842,304
8%, 12/01/24 to 7/01/27 Aaa 2,362,595 2,417,036
26,976,576
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 3.0%
6%, 8/15/08 to 4/15/11 Aaa 5,433,429 5,284,630
10%, 7/15/13 to 11/15/24 Aaa 1,891,746 2,081,200
8%, 2/15/17 Aaa 346,667 359,429
7,725,259
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $36,012,975) 36,524,823
COMMERCIAL MORTGAGE SECURITIES - 3.3%
BKB Commercial Mortgage Trust
Series 1997-C1 Class A-1,
6 7/8%, 2/25/43 (c) Aaa 3,072,923 3,084,446
CS First Boston Mortgage
Securities Corp.:
Series 1995-AEWI
Class A-1,
6.665%, 11/25/27 Aaa 79,465 79,365
floater Series 1994-CFB1
Class A-1,
6.2375%, 1/25/28 (d) Aaa 77,890 77,914
Equitable Life Assurance Society
of the United States (The):
Series 1996-1 (c):
Class B1,
7.33%, 5/15/06 Aa2 500,000 508,640
Class C1,
7.52%, 5/15/06 A2 500,000 512,065
Meritor Mortgage Security Corp.
Series 1987-1 Class A-3,
9.40%, 6/1/99 Baa3 26,987 26,954
Nomura Asset Securities
Corp. floater
Series 1994-MD-II Class A-6,
6.9564% 7/4/03 (d) - 179,477 180,907
Oregon Commercial Mortgage,
Inc. Series 1995-1 Class A,
7.15%, 6/25/23 (c)(d) Aaa 204,328 204,967
Resolution Trust Corp.:
floater Series 1993-C2
Class A-2,
6.62%, 3/25/25 (d) Aaa 264,647 265,061
COMMERCIAL MORTGAGE SECURITIES - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
Resolution Trust Corp.: - continued
commercial Series 1995-C1
Class A-4B, 6.65%,
2/25/27 Aaa $ 740,000 $ 738,844
floater Series 1994-C1
Class A-3,
6.30%, 6/25/26 (d) Aaa 228,240 228,240
SC Finance Corp. floater
7.2375%, 8/1/04 (c)(d) - 600,000 601,875
Structured Asset Securities
Corp. sequential pay:
Series 1993-C1 Class A-1A,
6.60%, 10/25/24 AA+ 39,274 39,139
Series 1996 Class A-2A,
7 3/4%, 2/25/28 Aaa 1,020,086 1,034,431
Wells Fargo Capital Markets
Apartment Financing Trust
6.56%, 12/29/05 (c) Aaa 750,000 739,770
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $8,267,612) 8,322,618
FOREIGN GOVERNMENT OBLIGATIONS (E) - 1.8%
Alberta Province yankee
9 1/4%, 4/1/00 Aa2 2,500,000 2,673,000
British Columbia Province
7%, 1/1/03 Aa2 500,000 507,230
Manitoba Province
6 3/4%, 3/1/03 A1 500,000 499,265
Ontario Province yankee
7 3/4%, 6/4/02 Aa3 1,000,000 1,044,870
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $4,824,375) 4,724,365
SUPRANATIONAL OBLIGATIONS - 0.3%
African Development Bank
7 3/4%, 12/15/01
(Cost $691,799) Aa1 660,000 687,166
CASH EQUIVALENTS - 4.7%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 5.93%, dated
6/30/97 due 7/1/97 $ 12,192,008 12,190,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $255,002,872) $ 256,906,541
LEGEND
4. Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
5. Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date.
6. Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of these securities amounted to $13,265,625 or 5.1% of net
assets.
7. The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
8. For foreign government obligations not individually rated by S&P or
Moody's, the ratings listed are assigned to securities by FMR, the fund's
investment adviser, based principally on S&P and Moody's ratings of the
sovereign credit of the issuing government.
9. Debt obligation initially issued in zero coupon form which converts to
coupon form at a specified rate and date.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $195,928,403 and $170,908,345, respectively, of which U.S.
government and government agency obligations aggregated $120,223,036 and
$137,847,077, respectively.
The composition of long-term debt holdings as a percentage of total value
of investment in securities, is as follows:
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 73.2% AAA, AA, A 70.2%
Baa 13.7% BBB 21.3%
Ba 6.0% BB 1.2%
B 0.0% B 0.0%
Caa 0.0% CCC 0.0%
Ca, C 0.0% CC, C 0.0%
D 0.0%
For some foreign government obligations, FMR has assigned the ratings of
the sovereign credit of the issuing government. The percentage not rated by
both S&P and Moody's amounted to 0.5%.
INCOME TAX INFORMATION
At June 30, 1997, the aggregate cost of investment securities for income
tax purposes was $255,006,227. Net unrealized appreciation aggregated
$1,900,314, of which $2,956,441 related to appreciated investment
securities and $1,056,127 related to depreciated investment securities.
At December 31, 1996, the fund had a capital loss carryforward of
approximately $1,523,000 of which $230,000, and $1,293,000 will expire on
December 31, 2003 and 2004, respectively.
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in securities, at $ 256,906,541
value (including repurchase agreements of $12,190,000)
(cost $255,002,872) - See accompanying schedule
Cash 299
Receivable for fund shares sold 441,929
Interest receivable 3,489,812
TOTAL ASSETS 260,838,581
LIABILITIES
Payable for investments purchased $ 2,048,469
Accrued management fee 93,494
Other payables and accrued expenses 49,401
TOTAL LIABILITIES 2,191,364
NET ASSETS $ 258,647,217
Net Assets consist of:
Paid in capital $ 251,000,862
Undistributed net investment income 7,603,855
Accumulated undistributed net realized gain (loss) on investments and foreign currency transactions (1,861,169
)
Net unrealized appreciation (depreciation) on investments 1,903,669
NET ASSETS, for 21,842,464 $ 258,647,217
shares outstanding
NET ASSET VALUE, offering price $11.84
and redemption price per share ($258,647,217 (divided by) 21,842,464 shares)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $ 8,376,565
Interest
EXPENSES
Management fee $ 527,568
Transfer agent fees 95,695
Accounting fees and expenses 48,849
Non-interested trustees' compensation 552
Custodian fees and expenses 8,018
Registration fees 25
Audit 18,627
Legal 326
Miscellaneous 7,852
Total expenses before reductions 707,512
Expense reductions (971 706,541
)
NET INVESTMENT INCOME 7,670,024
REALIZED AND UNREALIZED GAIN (LOSS) (333,170
Net realized gain (loss) on )
investment securities
Change in net unrealized appreciation (depreciation) on investment securities (432,325
)
NET GAIN (LOSS) (765,495
)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 6,904,529
OTHER INFORMATION $ 971
Expense reduction
Custodian credits
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
Operations $ 7,670,024 $ 13,175,925
Net investment income
Net realized gain (loss) (333,170 (1,136,463
) )
Change in net unrealized appreciation (depreciation) (432,325 (5,278,792
) )
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 6,904,529 6,760,670
Distributions to shareholders from net investment income (13,381,760 (9,612,980
) )
Share transactions 61,651,406 108,335,706
Net proceeds from sales of shares
Reinvestment of distributions 13,381,760 9,612,980
Cost of shares redeemed (38,502,521 (68,048,460
) )
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 36,530,645 49,900,226
TOTAL INCREASE (DECREASE) IN NET ASSETS 30,053,414 47,047,916
NET ASSETS
Beginning of period 228,593,803 181,545,887
End of period (including undistributed net investment income of $7,603,855 and $13,165,742,
respectively) $ 258,647,217 $ 228,593,803
OTHER INFORMATION
Shares
Sold 5,288,011 9,066,652
Issued in reinvestment of distributions 1,151,614 807,813
Redeemed (3,271,497 (5,752,069
) )
Net increase (decrease) 3,168,128 4,122,396
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1997
SELECTED PER-SHARE DATA (UNAUDITED) 1996 1995 1994 1993 E 1992
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 12.240 $ 12.480 $ 11.020 $ 11.480 $ 10.970 $ 11.080
Income from Investment Operations .376 D .670 .320 .733 .641 .672
Net investment income
Net realized and unrealized gain (loss) (.046) (.290) 1.530 (1.163) .559 .058
Total from investment operations .330 .380 1.850 (.430) 1.200 .730
Less Distributions
From net investment income (.730) (.620) (.390) - (.628) (.680)
In excess of net investment income - - - - (.002) -
From net realized gain - - - (.010) (.050) (.160)
In excess of net realized gain - - - (.020) (.010) -
Total distributions (.730) (.620) (.390) (.030) (.690) (.840)
Net asset value, end of period $ 11.840 $ 12.240 $ 12.480 $ 11.020 $ 11.480 $ 10.970
TOTAL RETURN B, C 2.81% 3.19% 17.32% (3.76)% 10.96% 6.65%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 258,647 $ 228,594 $ 181,546 $ 111,381 $ 122,376 $ 73,598
Ratio of expenses to average net assets .60% A .58% .59% .67% .68% .76%
Ratio of net investment income to average
net assets 6.46% A 6.49% 6.53% 6.53% 6.85% 7.11%
Portfolio turnover rate 151% A 81% 182% 143% 70% 119%
A ANNUALIZED
B TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE
THE TOTAL RETURNS SHOWN.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN.
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON
AVERAGE SHARES OUTSTANDING DURING THE PERIOD.
E EFFECTIVE JANUARY 1, 1993, THE FUND ADOPTED STATEMENT OF
POSITION 93-2, "DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT
PRESENTATION OF INCOME, CAPITAL GAIN,
AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT COMPANIES." AS A
RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT CERTAIN
RECLASSIFICATIONS RELATED TO BOOK TO
TAX DIFFERENCES.
</TABLE>
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can
look at the total percentage change in value, the average annual percentage
change or the growth of a hypothetical $10,000 investment. Total return
reflects the change in the value of an investment, assuming reinvestment of
the fund's dividend income and capital gains (the profits earned upon the
sale of securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10
JUNE 30, 1997 YEAR YEARS YEARS
HIGH INCOME 14.47% 13.24% 11.48%
Merrill Lynch High Yield Master Index 14.30% 11.60% 11.41%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what
would have happened if the fund had performed at a constant rate each year.
You can compare the fund's returns to those of the Merrill Lynch High Yield
Master Index - a market capitalization weighted index of all domestic and
yankee high-yield bonds. Issues included in the index have maturities of at
least one year and have a credit rating lower than BBB-/Baa3, but are not
in default. This benchmark reflects the reinvestment of dividends and
capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of
how it will do tomorrow. Bond prices, for
example, generally move in the opposite
direction of interest rates. In turn, the share price,
return and yield of a fund that invests in bonds
will vary. That means if you sell your shares
during a market downturn, you might lose
money. But if you can ride out the market's ups
and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of return
and are not the fund's year-by-year results, which fluctuated over the
periods shown.
If Fidelity had not reimbursed certain fund expenses, the past five year
and past 10 year total returns would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL
CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money. The fund includes high yielding, lower-rated
securities which are subject to greater price volatility and may involve
greater risk of default. The market for these securities may be less
liquid.
$10,000 OVER 10 YEARS
1987/06/30 10000.00 10000.00
1987/07/31 10010.70 10054.41
1987/08/31 10093.62 10155.16
1987/09/30 9742.14 9921.51
1987/10/31 9276.27 9656.42
1987/11/30 9549.48 9900.62
1987/12/31 9702.32 10032.09
1988/01/31 10021.30 10306.61
1988/02/29 10321.34 10586.28
1988/03/31 10247.18 10568.77
1988/04/30 10327.05 10599.29
1988/05/31 10311.70 10654.61
1988/06/30 10527.82 10858.33
1988/07/31 10637.41 10973.07
1988/08/31 10586.60 11009.12
1988/09/30 10671.47 11120.09
1988/10/31 10787.64 11293.35
1988/11/30 10746.45 11335.65
1988/12/31 10831.84 11383.62
1989/01/31 11092.14 11554.33
1989/02/28 11146.70 11631.98
1989/03/31 11003.47 11621.63
1989/04/30 10881.61 11655.93
1989/05/31 11082.67 11870.51
1989/06/30 11400.09 12038.69
1989/07/31 11325.04 12095.70
1989/08/31 11259.35 12155.45
1989/09/30 10865.39 12039.73
1989/10/31 10399.58 11849.29
1989/11/30 10408.34 11875.85
1989/12/31 10379.81 11865.11
1990/01/31 10150.37 11633.21
1990/02/28 9994.07 11463.80
1990/03/31 9888.62 11618.76
1990/04/30 9917.92 11677.80
1990/05/31 10121.70 11888.73
1990/06/30 10281.14 12119.06
1990/07/31 10439.95 12375.17
1990/08/31 10265.30 11901.42
1990/09/30 10021.90 11383.81
1990/10/31 9778.71 11094.12
1990/11/30 10008.07 11188.11
1990/12/31 10148.02 11349.32
1991/01/31 10363.32 11509.75
1991/02/28 10937.47 12364.04
1991/03/31 11325.02 12895.64
1991/04/30 11726.92 13354.88
1991/05/31 11899.16 13420.09
1991/06/30 12157.53 13690.06
1991/07/31 12616.84 14018.08
1991/08/31 12789.09 14312.71
1991/09/30 13076.16 14495.01
1991/10/31 13521.12 14925.74
1991/11/30 13635.95 15098.15
1991/12/31 13707.72 15273.55
1992/01/31 14439.75 15807.56
1992/02/29 14964.03 16200.15
1992/03/31 15447.75 16426.18
1992/04/30 15556.98 16545.74
1992/05/31 15744.22 16809.66
1992/06/30 15915.86 17018.51
1992/07/31 16227.94 17363.32
1992/08/31 16571.22 17593.20
1992/09/30 16742.86 17793.66
1992/10/31 16493.20 17568.92
1992/11/30 16696.05 17817.74
1992/12/31 16883.30 18047.16
1993/01/31 17335.81 18491.55
1993/02/28 17631.52 18841.57
1993/03/31 18038.40 19168.23
1993/04/30 18157.08 19305.82
1993/05/31 18428.33 19565.70
1993/06/30 18903.02 19933.29
1993/07/31 19089.51 20147.55
1993/08/31 19292.95 20339.61
1993/09/30 19360.77 20439.97
1993/10/31 19818.51 20825.00
1993/11/30 20004.99 20938.90
1993/12/31 20327.11 21148.27
1994/01/31 21005.24 21611.74
1994/02/28 20980.06 21456.32
1994/03/31 20273.29 20757.12
1994/04/30 20068.69 20514.55
1994/05/31 20105.89 20441.46
1994/06/30 20031.49 20516.70
1994/07/31 20105.89 20660.93
1994/08/31 20105.89 20804.44
1994/09/30 20254.69 20796.56
1994/10/31 20068.69 20849.41
1994/11/30 19901.30 20672.06
1994/12/31 19994.30 20902.00
1995/01/31 20217.49 21197.35
1995/02/28 20911.39 21858.73
1995/03/31 21171.78 22162.93
1995/04/30 21792.71 22681.84
1995/05/31 22353.55 23390.48
1995/06/30 22413.64 23569.13
1995/07/31 22954.45 23838.58
1995/08/31 23134.72 23983.26
1995/09/30 23515.29 24257.65
1995/10/31 23735.63 24429.61
1995/11/30 23855.81 24668.07
1995/12/31 24136.23 25064.04
1996/01/31 24697.07 25459.88
1996/02/29 25104.99 25498.22
1996/03/31 25039.04 25428.97
1996/04/30 25412.75 25440.49
1996/05/31 25764.49 25623.96
1996/06/30 25896.39 25777.88
1996/07/31 25808.45 25952.89
1996/08/31 26182.17 26220.91
1996/09/30 26951.59 26783.49
1996/10/31 26863.65 27077.02
1996/11/30 27149.44 27624.44
1996/12/31 27523.15 27837.00
1997/01/31 27896.87 28050.93
1997/02/28 28402.88 28444.43
1997/03/31 27520.51 28128.51
1997/04/30 27949.77 28448.66
1997/05/31 29118.32 29021.99
1997/06/30 29642.97 29463.84
Let's say hypothetically that $10,000 was invested in High Income Portfolio
on June 30, 1987. As the chart shows, by June 30, 1997, the value of the
investment would have grown to $29,643 - a 196.43% increase on the initial
investment. For comparison, look at how the Merrill Lynch High Yield Master
Index did over the same period. With dividends and capital gains, if any,
reinvested, the same $10,000 investment would have grown to $29,464 - a
194.64% increase.
INVESTMENT SUMMARY
TOP FIVE HOLDINGS AS OF JUNE 30, 1997
(BY ISSUER, EXCLUDING CASH EQUIVALENTS) % OF FUND'S
INVESTMENTS
PanAmSat Corp. 3.3
Time Warner, Inc. 2.8
NextLink Communications, Inc. 1.9
Millicom International Cellular SA 1.8
Intermedia Communications, Inc. 1.8
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Media & Leisure 31.8
Utilities 12.1
Basic Industries 11.3
Finance 5.1
Services 5.0
QUALITY DIVERSIFICATION AS OF JUNE 30, 1997
(MOODY'S RATINGS) % OF FUND'S
INVESTMENTS
Aaa, Aa, A 0.0
Baa 0.0
Ba 5.5
B 51.5
Caa, Ca, C 8.0
Nonrated 5.2
TABLE EXCLUDES SHORT-TERM INVESTMENTS. WHERE MOODY'S RATINGS ARE NOT
AVAILABLE, WE HAVE USED S&P RATINGS. UNRATED DEBT SECURITIES THAT ARE
EQUIVALENT TO BA AND BELOW AT JUNE 30, 1997, ACCOUNT FOR 5.2% OF THE FUND'S
INVESTMENTS.
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with Barry Coffman, Portfolio Manager of High Income Portfolio
Q. BARRY, HOW DID THE FUND PERFORM OVER THE PAST SIX MONTHS AND THE PAST
YEAR?
A. It did well, outperforming its benchmark, the Merrill Lynch High Yield
Master Index, which had a total return of 5.84% for the six months that
ended June 30, 1997, and 14.30% for the 12-month period.
Q. WHY DID THE FUND BEAT ITS BENCHMARK?
A. The fund had a lighter weighting in higher-quality BB-rated securities
and a heavier weighting in lower-quality B-rated securities than its
benchmark. During the period, credit spreads narrowed, meaning there was an
ever smaller gap in yield between the B- and BB-rated securities. As
spreads narrowed, B-rated securities performed better than the higher-rated
BB securities and helped the fund outpace its benchmark. There were both
fundamental and technical reasons for the performance of B-rated
securities. From a fundamental standpoint, there was continued economic
strength and the stock market's impressive rise. And from a technical
standpoint, demand for the lower-quality tiers of the high-yield market was
solid.
Q. WHICH OF THE FUND'S HOLDINGS PERFORMED PARTICULARLY WELL?
A. Many of the fund's larger media and telecommunications holdings -
including PanAmSat and Millicom International Cellular - were some of its
best performers. PanAmSat was upgraded upon the completion of its merger
with GM Hughes. Millicom not only benefited from its quickly growing
cellular businesses in emerging countries, but it also rose on the news
that it is planning to undertake a significant restructuring by selling off
its Latin American business and spinning off its Asian operations. Other
strong performers included stocks issued by high-yield companies - those
with below-investment-grade credit ratings. For example, the stock price of
Allied Waste performed well over the past six months. That rise was due, in
part, to Allied's successful integration of a recent acquisition.
Q. WERE THERE ANY DISAPPOINTMENTS?
A. Some of our paging holdings proved to be disappointing, but the industry
as a whole was plagued by a number of developments during the past six
months. First, investors became concerned that pager sales would decline in
light of new competitive products. Second, there was the bankruptcy of a
high-profile paging company and the failure of another company to
successfully introduce a new product. While the fund did not own either of
those troubled pagers, it did hold others that appeared to fall in price in
sympathy, including Arch Communications. While I reduced the fund's stake
in Arch, I continued to hold onto Pagemart because it continued to be one
of the fastest-growing paging companies and one with a strategy that I
believe should distinguish it from its competitors.
Q. IN ADDITION TO PAGING COMPANIES, THE FUND ALSO HAD SIGNIFICANT HOLDINGS
IN OTHER TELECOMMUNICATIONS-RELATED COMPANIES. WHAT IS THE ATTRACTION TO
THESE COMPANIES?
A. The growth potential for many telecommunications companies is
significant and, in my view, will be independent of the economic
environment. The companies I emphasized have fast-growing businesses in
fast-growing industries. For example, the competitive local exchange
companies - including Intermedia Communications, Nextlink, GST USA, Brooks
Fiber and McLeodUSA - gained market share in the $100 billion local
telephone market at the expense of regional Bell operating companies.
Another large telecommunications holding is McCaw International, which is a
subsidiary of Nextel and owns enhanced specialized mobile radio licenses in
Latin America and Asia used for dispatch, messaging and voice purposes.
Q. WHAT'S YOUR OUTLOOK?
A. The market is at risk to a slowing economy that likely would hurt the
weakest companies in the high-yield market. I will probably focus on
improving the overall credit quality of the fund, while concentrating the
fund's aggressive holdings in situations I believe have strong fundamental
momentum and an attractive risk/reward tradeoff.
FUND FACTS
GOAL: income and share price stability by
investing in high-quality, short-term
investments
START DATE: April 1, 1982
SIZE: as of June 30, 1997, more than
$1.0 billion
MANAGER: Robert Duby, since April 1997;
joined Fidelity in 1982
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
CORPORATE BONDS - 70.2%
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
CONVERTIBLE BONDS - 0.7%
MEDIA & LEISURE - 0.6%
RESTAURANTS - 0.6%
Boston Chicken, Inc.
4 1/2%, 2/1/04 B2 $ 14,000,000 $ 10,640,000
RETAIL & WHOLESALE - 0.1%
RETAIL & WHOLESALE, MISCELLANEOUS - 0.1%
Corporate Express, Inc.
4 1/2%, 7/1/00 B3 1,500,000 1,335,000
UTILITIES - 0.0%
TELEPHONE SERVICES - 0.0%
GST Telecommunications, Inc.
0%, 12/15/05 (d)(g) - 630,000 409,500
TOTAL CONVERTIBLE BONDS 12,384,500
NONCONVERTIBLE BONDS - 69.5%
AEROSPACE & DEFENSE - 1.3%
AEROSPACE & DEFENSE - 0.5%
Alliant Techsystems, Inc.
11 3/4%, 3/1/03 B2 40,000 44,100
Fairchild Corp.
12%, 10/15/01 Caa 1,945,000 1,964,450
RHI Holdings, Inc.
11 7/8%, 3/1/99 B2 3,160,000 3,160,000
Wyman-Gordon Co.
10 3/4%, 3/15/03 Ba3 4,740,000 5,071,800
10,240,350
DEFENSE ELECTRONICS - 0.5%
Tracor, Inc.
8 1/2%, 3/1/07 B1 9,430,000 9,524,300
SHIP BUILDING & REPAIR - 0.3%
Newport News Shipbuilding, Inc.:
8 5/8%, 12/1/06 Ba2 670,000 691,775
9 1/4%, 12/1/06 B1 4,650,000 4,847,625
5,539,400
TOTAL AEROSPACE & DEFENSE 25,304,050
BASIC INDUSTRIES - 10.7%
CHEMICALS & PLASTICS - 2.6%
Atlantis Group, Inc.
11%, 2/15/03 B2 7,785,000 8,038,013
BPC Holdings Corp.
12 1/2%, 6/15/06 Caa 350,000 381,500
Foamex LP/Foamex Capital
Corp. 9 7/8%, 6/15/07 (g) B3 5,840,000 5,913,000
Freedom Chemical Co.
10 5/8%, 10/15/06 B3 6,260,000 6,385,200
Pioneer Americas Acquisition
Corp. 9 1/4%, 6/15/07 (g) B1 5,780,000 5,693,300
Plastic Specialties & Technologies,
Inc. 11 1/4%, 12/1/03 B3 5,990,000 6,409,300
Sterling Chemicals Holdings,
Inc. 11 3/4%, 8/15/06 B3 15,560,000 16,765,900
49,586,213
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
IRON & STEEL - 1.0%
GS Technologies Operating, Inc.
12 1/4%, 10/1/05 B2 $ 3,410,000 $ 3,733,950
Republic Engineered Steels, Inc.
9 7/8%, 12/15/01 Caa 7,810,000 7,282,825
WCI Steel, Inc. 10%, 12/1/04 B2 8,070,000 8,392,800
19,409,575
METALS & MINING - 0.6%
Commonwealth Aluminum Corp.
10 3/4%, 10/1/06 B2 10,110,000 10,615,500
PAPER & FOREST PRODUCTS - 6.5%
Asia Pulp & Paper Finance II
Mauritius Ltd.
12%, 3/15/04 (g) B3 11,785,000 12,079,625
American Pad & Paper Co.,
Inc. 13%, 11/15/05 B3 2,290,000 2,679,300
Container Corp. of America:
10 3/4%, 5/1/02 B1 50,000 54,688
gtd. 9 3/4%, 4/1/03 B1 490,000 518,175
gtd. 11 1/4%, 5/1/04 B1 150,000 164,250
Crown Paper Co.
11%, 9/1/05 B3 3,780,000 3,789,450
Doman Industries Ltd. yankee
8 3/4%, 3/15/04 B1 11,660,000 11,251,900
Florida Coast Paper Co.
LLC\Florida Coast Paper
Finance Corp., Series B,
12 3/4%, 6/1/03 Caa 3,110,000 3,211,075
Gaylord Container Corp.
11 1/2%, 5/15/01 B3 1,160,000 1,219,450
Indah Kiat International
Finance Co. BV
12 1/2%, 6/15/06 Ba2 2,680,000 3,041,800
Mail-Well Corp.
10 1/2%, 2/15/04 B 1,640,000 1,705,600
Malette, Inc. yankee
12 1/4%, 7/15/04 Ba3 1,340,000 1,500,800
Repap Wisconsin, Inc.:
9 1/4%, 2/1/02 B2 11,170,000 11,225,850
9 7/8%, 5/1/06 Caa 12,510,000 12,603,825
Repap New Brunswick, Inc.
yankee 10 5/8%, 4/15/05 Caa 5,110,000 4,816,175
Riverwood International
10 7/8%, 4/1/08 Caa 8,750,000 7,940,625
SD Warren Co., Series B,
12%, 12/15/04 B1 7,330,000 8,209,600
Specialty Paperboard, Inc.
9 3/8%, 10/15/06 B1 5,000,000 5,062,500
Stone Container Corp.:
12 5/8%, 7/15/98 B2 10,000,000 10,512,500
10 3/4%, 10/1/02 B1 10,510,000 11,088,050
11 7/8%, 8/1/16 B2 8,400,000 9,072,000
Tembec Finance Corp. yankee
9 7/8%, 9/30/05 B1 1,365,000 1,405,950
123,153,188
TOTAL BASIC INDUSTRIES 202,764,476
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
DURABLES - 2.4%
AUTOS, TIRES, & ACCESSORIES - 0.6%
Jordan Industries, Inc.
10 3/8%, 8/1/03 B3 $ 11,895,000 $ 12,311,325
HOME FURNISHINGS - 0.9%
Guitar Center Management
Co., Inc. 11%, 7/1/06 B2 2,527,000 2,767,065
Interlake Corp.
12 1/8%, 3/1/02 B3 10,275,000 10,763,063
Knoll, Inc. 10 7/8%, 3/15/06 B1 3,426,000 3,790,013
17,320,141
TEXTILES & APPAREL - 0.9%
Dan River, Inc.
10 1/8%, 12/15/03 B3 4,700,000 4,982,000
GFSI, Inc.
9 5/8%, 3/1/07 (g) B3 1,410,000 1,424,100
Synthetic Industries, Inc.
9 1/4%, 2/15/07 (g) B2 9,610,000 9,730,125
16,136,225
TOTAL DURABLES 45,767,691
ENERGY - 3.8%
ENERGY SERVICES - 0.8%
DI Industries, Inc.
8 7/8%, 7/1/07 B1 3,875,000 3,816,875
McDermott International, Inc.
9 3/8%, 3/15/02 Ba3 11,680,000 12,246,363
16,063,238
OIL & GAS - 3.0%
Belden & Blake Corp.
9 7/8%, 6/15/07 (g) B3 5,805,000 5,746,950
Chesapeake Energy Corp.
10 1/2%, 6/1/02 Ba2 690,000 727,950
Cross Timbers Oil Co.
9 1/4%, 4/1/07 B2 8,000,000 8,260,000
Flores & Rucks, Inc.:
13 1/2%, 12/1/04 B1 390,000 468,975
9 3/4%, 10/1/06 B3 9,860,000 10,303,700
Harcor Energy, Inc.
14 7/8%, 7/15/02 B3 13,060,000 15,410,800
Ocean Energy, Inc.
8 7/8%, 7/15/07 (g) B3 10,850,000 10,850,000
United Meridian Corp.
10 3/8%, 10/15/05 B2 190,000 206,150
United Refining Co.
10 3/4%, 6/15/07 (g) B2 4,050,000 4,009,500
55,984,025
TOTAL ENERGY 72,047,263
FINANCE - 4.1%
ASSET-BACKED SECURITIES - 0.4%
Airplanes Pass Through Trust
10 7/8%, 3/15/19 Ba2 6,710,000 7,750,050
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
CREDIT & OTHER FINANCE - 1.8%
APP International Finance Co.
BV yankee
11 3/4%, 10/1/05 Ba3 $ 2,165,000 $ 2,392,325
GST Equipment Funding, Inc.
13 1/4%, 5/1/07 (g) - 10,360,000 11,085,200
Imperial Credit Capital Trust I
10 1/4%, 6/14/02 (g) B2 4,870,000 4,882,175
Imperial Credit Industries, Inc.
9 7/8%, 1/15/07 B2 11,200,000 11,088,000
PTC International Finance BV
0%, 7/1/07 (d)(g) B3 3,440,000 2,085,500
Polytama International Finance
BV 11 1/4%, 6/15/07 B2 2,750,000 2,839,375
34,372,575
INSURANCE - 0.4%
Integon Corp.:
8%, 8/15/99 B1 1,500,000 1,526,250
9 1/2%, 10/15/01 B1 5,200,000 5,603,000
7,129,250
SAVINGS & LOANS - 1.5%
First Nationwide Holdings, Inc.
10 5/8%, 10/1/03 Ba3 7,240,000 7,855,400
First Nationwide Parent Holdings
Ltd. 12 1/2%, 4/15/03 B3 18,180,000 20,270,700
28,126,100
SECURITIES INDUSTRY - 0.0%
ECM Corp. extendible
14%, 6/1/02 (g) - 235,942 259,537
TOTAL FINANCE 77,637,512
HEALTH - 2.8%
DRUGS & PHARMACEUTICALS - 0.1%
Leiner Health Products, Inc.
9 5/8%, 7/1/07 (g) B3 1,150,000 1,164,375
MEDICAL EQUIPMENT & SUPPLIES - 1.1%
Wright Medical Technology, Inc.
10 3/4%, 7/1/00 B3 20,920,000 21,286,089
MEDICAL FACILITIES MANAGEMENT - 1.6%
Integrated Health Services, Inc. (g):
11%, 4/30/06 (e) B1 4,890,000 5,256,750
9 1/2%, 9/15/07 B1 3,460,000 3,537,850
Mariner Health Group, Inc.
9 1/2%, 4/1/06 B2 1,180,000 1,215,400
Tenet Healthcare Corp.
8 5/8%, 1/15/07 Ba3 20,370,000 20,675,550
30,685,550
TOTAL HEALTH 53,136,014
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
INDUSTRIAL MACHINERY & EQUIPMENT - 3.1%
ELECTRICAL EQUIPMENT - 1.1%
Amphenol Corp.
9 7/8%, 5/15/07 B2 $ 1,680,000 $ 1,730,400
Motors & Gears, Inc.
10 3/4%, 11/15/06 B3 19,030,000 19,600,900
21,331,300
INDUSTRIAL MACHINERY & EQUIPMENT - 1.7%
Calmar, Inc.
11 1/2%, 8/15/05 B3 1,570,000 1,664,200
Continental Global Group, Inc.
11%, 4/1/07 (g) B2 4,000,000 4,200,000
Goss Graphic System, Inc.
12%, 10/15/06 B2 9,630,000 10,593,000
International Knife & Saw, Inc.
11 3/8%, 11/15/06 B3 2,460,000 2,626,050
MVE, Inc. 12 1/2%, 2/15/02 B3 5,735,000 5,878,375
Thermadyne Holdings Corp.:
10 1/4%, 5/1/02 B1 1,484,000 1,537,795
10 3/4%, 11/1/03 B3 5,226,000 5,421,975
31,921,395
POLLUTION CONTROL - 0.3%
Allied Waste of North America, Inc.
10 1/4%, 12/1/06 (g) B3 4,750,000 5,082,500
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 58,335,195
MEDIA & LEISURE - 17.4%
BROADCASTING - 7.1%
Adelphia Communications Corp.:
9 1/2%, 2/15/04 B3 990,000 940,500
9 7/8%, 3/1/07 (g) B3 20,610,000 19,888,650
Benedek Communications Corp.
0%, 5/15/06 (d) - 11,830,000 7,127,575
Capstar Broadcasting Partners,
Inc. 0%, 2/1/09 (d)(g) CCC 12,830,000 8,243,275
Capstar Radio Broadcasting
Partners, Inc.
9 1/4%, 7/1/07 (g) - 9,710,000 9,394,425
Chancellor Radio Broadcasting
Co. 8 3/4%, 6/15/07 (g) B3 8,640,000 8,532,000
Citadel Broadcasting Co.
10 1/4%, 7/1/07 (g) B3 5,550,000 5,550,000
CS Wireless Systems, Inc.
0%, 3/1/06 (d) Caa 12,770,000 3,064,800
Diamond Cable Communications
PLC yankee
0%, 9/30/04 (d) B3 2,030,000 1,639,225
Echostar DBS Corp.
12 1/2%, 7/1/02 (g) Caa 7,250,000 7,186,563
Echostar Satellite Broadcasting
Corp. 0%, 3/15/04 (d) Caa 5,410,000 3,841,100
Echostar Communications Corp.
0%, 6/1/04 (d) B2 17,750,000 14,910,000
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
Intermedia Capital Partners IV
L P/Intermedia Partners IV
Capital Corp.
11 1/4%, 8/1/06 B2 $ 590,000 $ 634,988
Jacor Communications Co.:
9 3/4%, 12/15/06 B2 3,190,000 3,317,600
8 3/4%, 6/15/07 (g) B2 5,260,000 5,194,250
Lenfest Communications, Inc.:
8 3/8%, 11/1/05 Ba3 2,710,000 2,669,350
10 1/2%, 6/15/06 B2 1,660,000 1,809,400
Olympus Communications LP/
Olympus Capital Corp
10 5/8%, 11/15/06 B1 5,550,000 5,799,750
SFX Broadcasting, Inc.
10 3/4%, 5/15/06 B3 3,845,000 4,142,988
Telewest PLC
0%, 10/1/07 (d) B1 16,990,000 12,275,275
UIH Australia/PAC, Inc., Series B,
0%, 5/15/06 (d) B2 13,875,000 8,394,375
134,556,089
ENTERTAINMENT - 2.6%
AMC Entertainment, Inc.
9 1/2%, 3/15/09 (g) B2 10,940,000 11,104,100
AMF Group, Inc.
0%, 3/15/06 (d) B2 12,280,000 8,749,500
Cinemark USA, Inc.
9 5/8%, 8/1/08 B2 8,240,000 8,363,600
Viacom, Inc. 8%, 7/7/06 B1 21,700,000 21,049,000
49,266,200
LEISURE DURABLES & TOYS - 1.7%
Coleman Escrow Corp. secured (g):
1st priority 0%, 5/15/01 B3 20,350,000 12,820,500
2nd priority 0%, 5/15/01 Caa 3,700,000 2,136,750
Icon Health And Fitness, Inc.
13%, 7/15/02 B3 12,750,000 14,311,875
Icon Fitness Corp.
0%, 11/15/06 (d) CCC+ 5,650,000 3,079,250
32,348,375
LODGING & GAMING - 4.1%
American Skiing Co.
12%, 7/15/06 B3 7,480,000 7,854,000
Casino Magic Financial Corp.
11 1/2%, 10/15/01 B1 3,760,000 3,290,000
HMH Properties, Inc.
9 1/2%, 5/15/05 Ba3 14,610,000 15,230,925
Hollywood Casino Corp.
12 3/4%, 11/1/03 B2 6,050,000 6,413,000
Horseshoe Gaming LLC
12 3/4%, 9/30/00 B1 15,220,000 17,008,350
KSL Recreation Group, Inc.
10 1/4%, 5/1/07 (g) B3 5,570,000 5,792,800
Prime Hospitality Corp.
9 3/4%, 4/1/07 - 5,190,000 5,462,475
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
MEDIA & LEISURE - CONTINUED
LODGING & GAMING - CONTINUED
Sun International Hotels Ltd./
Sun International North
America, Inc. yankee
9%, 3/15/07 Ba3 $ 15,030,000 $ 15,255,450
Wyndham Hotel Corp.
10 1/2%, 5/15/06 B2 1,920,000 2,145,600
78,452,600
PUBLISHING - 0.8%
Big Flower Press Holdings, Inc.
8 7/8%, 7/1/07 (g) - 16,300,000 16,014,750
RESTAURANTS - 1.1%
AFC Enterprises, Inc.
10 1/4%, 5/15/07 (g) B3 11,420,000 11,362,900
Host Marriott Travel Plazas, Inc.
9 1/2%, 5/15/05 B1 8,790,000 9,141,600
20,504,500
TOTAL MEDIA & LEISURE 331,142,514
NONDURABLES - 1.4%
FOODS - 0.1%
International Home Foods, Inc.
10 3/8%, 11/1/06 B2 2,830,000 2,914,900
HOUSEHOLD PRODUCTS - 1.2%
Renaissance Cosmetic, Inc.
11 3/4%, 2/15/04 B3 10,000,000 10,350,000
Revlon Consumer Products Corp.
10 1/2%, 2/15/03 B3 11,470,000 12,215,550
22,565,550
TOBACCO - 0.1%
North Atlantic Trading, Inc.
11%, 6/15/04 (g) B3 1,810,000 1,837,150
TOTAL NONDURABLES 27,317,600
RETAIL & WHOLESALE - 4.5%
APPAREL STORES - 1.5%
Lamonts Apparel, Inc.
10 1/4%, 11/1/99
pay-in-kind (b)(g) - 2,201,000 88,040
Mothers Work, Inc.
12 5/8%, 8/1/05 B3 21,970,000 22,684,025
Specialty Retailers, Inc. (g):
8 1/2%, 7/15/05 Ba3 4,480,000 4,468,800
9%, 7/15/07 B2 1,990,000 1,980,050
29,220,915
GENERAL MERCHANDISE STORES - 0.0%
K mart Corp. 8.70%, 8/1/97 Ba2 250,000 250,625
GROCERY STORES - 3.0%
Food 4 Less Holdings, Inc.
13 5/8%, 6/15/07 - 1,826,493 2,135,207
Grand Union Co.
12%, 9/1/04 Caa 7,270,000 5,379,800
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Pantry, Inc. 12%, 11/15/00 B2 $ 660,000 $ 676,500
Pathmark Stores, Inc.:
11 5/8%, 6/15/02 Caa 10,760,000 10,894,500
9 5/8%, 5/1/03 B3 1,960,000 1,891,400
Penn Traffic Co.:
10 1/4%, 2/15/02 B3 7,850,000 6,751,000
8 5/8%, 12/15/03 B3 3,780,000 3,052,350
10 3/8%, 10/1/04 B3 3,860,000 3,281,000
11 1/2%, 4/15/06 B3 3,180,000 2,814,300
Pueblo Xtra International, Inc.:
9 1/2%, 8/1/03 B3 11,340,000 10,858,050
9 1/2%, 8/1/03 (g) B3 3,540,000 3,416,100
Randalls Food Markets, Inc.
9 3/8%, 7/1/07 (g) B2 5,080,000 5,060,950
56,211,157
RETAIL & WHOLESALE, MISCELLANEOUS - 0.0%
Corporate Expess, Inc., Series B,
9 1/8%, 3/15/04 B2 1,070,000 1,070,000
TOTAL RETAIL & WHOLESALE 86,752,697
SERVICES - 4.1%
LEASING & RENTAL - 0.0%
GPA Holland 8.94%, 2/16/99 - 500,000 513,750
PRINTING - 1.2%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa 21,300,000 21,885,750
SERVICES - 2.9%
Orion Network Systems, Inc. unit:
11 1/4%, 1/15/07 B2 5,585,000 5,710,663
0%, 1/15/07 (d) B2 45,930,000 26,180,100
Outsourcing Solutions, Inc.
11%, 11/1/06 B3 3,960,000 4,296,600
Protection One Alarm Monitoring,
Inc. 13 5/8%, 6/30/05 Caa 18,300,000 18,757,500
54,944,863
TOTAL SERVICES 77,344,363
TECHNOLOGY - 2.9%
COMMUNICATIONS EQUIPMENT - 0.3%
Intermedia Communications,
Inc. 0%, 5/15/06 (d) B2 6,430,000 4,420,625
COMPUTER SERVICES & SOFTWARE - 0.5%
Verio, Inc. 13 1/2%, 6/15/04
unit (g) - 10,050,000 10,100,250
COMPUTERS & OFFICE EQUIPMENT - 1.6%
Dictaphone Corp.
11 3/4%, 8/1/05 B3 14,530,000 13,367,600
Exide Electronics Group, Inc.
11 1/2%, 5/15/06 B3 6,950,000 7,453,875
Unisys Corp.:
10 5/8%, 10/1/99 B1 4,080,000 4,212,600
12%, 4/15/03 B1 4,400,000 4,763,000
11 3/4%, 10/15/04 B1 1,020,000 1,101,600
30,898,675
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (A) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
TECHNOLOGY - CONTINUED
ELECTRONIC INSTRUMENTS - 0.3%
Wavetek Corp.
10 1/8%, 6/15/07 (g) B3 $ 5,270,000 $ 5,375,400
ELECTRONICS - 0.2%
Fairchild Semiconductor Corp.
10 1/8%, 3/15/07 (g) B2 470,000 495,850
Viasystems, Inc.
9 3/4%, 6/1/07 (g) B3 3,150,000 3,205,125
3,700,975
TOTAL TECHNOLOGY 54,495,925
TRANSPORTATION - 1.8%
AIR TRANSPORTATION - 0.2%
US Air Inc., pass through trust
8 5/8%, 9/1/98 B1 5,000,000 5,075,000
RAILROADS - 1.2%
TFM SA de CV (g):
10 1/4%, 6/15/07 B2 2,520,000 2,564,100
0%, 6/15/09 (d) B2 8,660,000 5,001,150
Transtar Holdings LP/Transtar
Capital Corp. 0%,
12/15/03 (d) B- 17,941,000 15,249,850
22,815,100
TRUCKING & FREIGHT - 0.4%
Greyhound Lines, Inc.
11 1/2%, 4/15/07 (g) B3 6,860,000 7,305,900
TOTAL TRANSPORTATION 35,196,000
UTILITIES - 9.2%
CELLULAR - 6.0%
Arch Communications Group,
Inc. 0%, 3/15/08 (d) B3 12,070,000 6,366,925
Clearnet Communications, Inc.
yankee 0%, 12/15/05 (d) B3 11,420,000 7,508,650
Fonorola, Inc.
12 1/2%, 8/15/02 B2 1,020,000 1,122,000
McCaw International Ltd. unit
0%, 4/15/07 (d)(g) CCC 27,110,000 13,012,800
Microcell Telecommunications,
Inc. 0%, 6/1/06 (d) B3 28,060,000 15,713,600
Millicom International Cellular
SA 0%, 6/1/06 (d) B3 49,000,000 35,035,000
Mobile Telecommunications
Technologies Corp.
13 1/2%, 12/15/02 B3 10,825,000 11,420,375
Omnipoint Corp.:
11 5/8%, 8/15/06 B2 2,150,000 2,031,750
Series A, 11 5/8%, 8/15/06 B3 5,980,000 5,651,100
Pagemart, Inc.
0%, 11/1/03 (d) - 3,250,000 2,811,250
Pagemart Nationwide, Inc.
0%, 2/1/05 (d) - 7,070,000 5,267,150
Telesystem International Wireless,
Inc. 0%, 6/30/07 (d)(g) B- 7,670,000 4,084,275
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
USA Mobile Communications,
Inc. II 9 1/2%, 2/1/04 B2 $ 3,970,000 $ 3,692,100
113,716,975
ELECTRIC UTILITY - 0.3%
CMS Energy Corp.
8 1/8%, 5/15/02 Ba3 5,680,000 5,722,600
TELEPHONE SERVICES - 2.9%
Brooks Fiber Properties, Inc.
11 7/8%, 11/1/06 - 5,730,000 3,695,850
GST USA, Inc.
0%, 12/15/05 (d) - 11,110,000 6,888,200
Hyperion Telecommunications,
Inc., Series B,
0%, 4/15/03 (d) - 12,560,000 6,311,400
McLeodUSA, Inc.
0%, 3/1/07 (d)(g) B3 11,000,000 7,012,500
Nextlink Communications, Inc.
12 1/2%, 4/15/06 - 700,000 743,750
RSL Communications Ltd./
RSL Communications PLC
12 1/4%, 11/15/06 - 9,140,000 9,299,950
Shared Technologies Fairchild
Communications Corp.
0%, 3/1/06 (d) Caa 18,290,000 16,323,825
Teleport Communications
Group, Inc.:
8%, 8/1/05 B1 5,550,000 4,002,938
9 7/8%, 7/1/06 B1 310,000 330,925
54,609,338
TOTAL UTILITIES 174,048,913
TOTAL NONCONVERTIBLE BONDS 1,321,290,213
TOTAL CORPORATE BONDS
(Cost $1,309,051,600) 1,333,674,713
COMMERCIAL MORTGAGE SECURITIES - 0.0%
Lennar Central Partners LP
Series 1995-1 Class F,
11.70%, 5/15/05 (g) - 63,357 63,951
Meritor Mortgage Security Corp.
Series 1987-1 Class B,
9.40%, 2/1/00 (b)(g) - 1,350,000 267,165
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $220,926) 331,116
COMMON STOCKS - 7.9%
SHARES
AEROSPACE & DEFENSE - 0.3%
Fairchild Corp. Class A 289,000 5,202,000
BASIC INDUSTRIES - 0.5%
CHEMICALS & PLASTICS - 0.1%
Foamex International, Inc. (a) 182,800 2,399,250
Foamex-JPS Automotive LP/Foamex
JPS Capital Corp. warrants 7/1/99 (a) 530 14,840
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
BASIC INDUSTRIES - CONTINUED
CHEMICALS & PLASTICS - CONTINUED
Sterling Chemical Holdings
warrants 8/15/08 (a) 340 $ 11,900
2,425,990
PAPER & FOREST PRODUCTS - 0.4%
Gaylord Container Corp. Class A (a) 860,600 6,723,438
SDW Holdings Corp. (a):
warrants 12/15/06 7,609 38,045
Series B warrants 12/16/06 4,450 75,650
6,837,133
TOTAL BASIC INDUSTRIES 9,263,123
DURABLES - 0.1%
TEXTILES & APPAREL - 0.1%
Arena Brands Holdings Corp. Class B 48,889 1,974,630
HM/Hat Brands Trust Class I unit (a)(f) 340,000 -
1,974,630
ENERGY - 1.0%
OIL & GAS - 1.0%
Harcor Energy, Inc. (a) 469,000 2,814,000
Harcor Energy, Inc.
warrants 7/24/00 (a) 330,000 742,500
Ocean Energy, Inc. (a) 304,200 14,069,250
Snyder Oil Corp. 50,000 918,750
18,544,500
FINANCE - 0.0%
SECURITIES INDUSTRY - 0.0%
ECM Corp. LP (g) 3,000 300,000
HEALTH - 0.0%
MEDICAL EQUIPMENT & SUPPLIES - 0.0%
Wright Medical Technology,
Inc. warrants 6/30/03 (a) 3,212 321,200
INDUSTRIAL MACHINERY & EQUIPMENT - 0.7%
POLLUTION CONTROL - 0.7%
Allied Waste Industries, Inc. (a) 717,300 12,463,088
MEDIA & LEISURE - 3.3%
BROADCASTING - 1.9%
American Radio Systems Corp. Class A (a) 216,900 8,648,888
Benedek Communications Corp.
warrants 7/1/00 (a) 57,600 115,200
CS Wireless Systems, Inc. (a)(g) 3,514 -
Jacor Communications, Inc. Class A (a) 310,600 11,880,450
PanAmSat Corp. (a) 342,400 9,929,600
United International Holdings, Inc.
Class A (a) 441,100 4,576,413
35,150,551
ENTERTAINMENT - 0.0%
Live Entertainment, Inc. (a)(f):
$2.00 warrants 3/28/98 232,000 11,600
$2.72 warrants 3/28/98 221,765 11,088
22,688
LEISURE DURABLES & TOYS - 0.1%
IHF Capital, Inc. (a)(g):
Series H warrants 11/15/04 10,250 1,691,250
Series I warrants 11/14/99 5,890 323,950
2,015,200
SHARES VALUE (NOTE 1)
LODGING & GAMING - 1.0%
Bally Gaming International, Inc.
warrants 7/29/98 (a) 90,000 $ 112,500
Host Marriott Corp. (a) 651,300 11,601,281
Motels of America, Inc. (a) 3,000 93,000
Showboat, Inc. 437,300 7,625,419
19,432,200
PUBLISHING - 0.3%
Big Flower Press Holdings, Inc. (a) 304,200 6,312,150
TOTAL MEDIA & LEISURE 62,932,789
NONDURABLES - 0.3%
HOUSEHOLD PRODUCTS - 0.0%
Renaissance Cosmetics, Inc.
warrants 8/31/06 (a)(g) 12,750 1,402,500
TOBACCO - 0.3%
North Atlantic Trading, Inc.
unit (a)(g) 210,000 5,302,500
TOTAL NONDURABLES 6,705,000
RETAIL & WHOLESALE - 0.2%
APPAREL STORES - 0.1%
Lamonts Apparel, Inc. (a) 35,870 3,364
Lamonts Apparel, Inc.
warrants 6/10/99 (a) 66,214 -
Mothers Work (a)(h) 209,100 1,515,975
1,519,339
GROCERY STORES - 0.1%
Food 4 Less Holdings, Inc.
warrants 12/31/02 (a)(f) 155,047 2,248,182
RETAIL & WHOLESALE, MISCELLANEOUS - 0.0%
Town & Country Jewelry Manufacturing
Corp. Class A (a) 8,374 2,094
TOTAL RETAIL & WHOLESALE 3,769,615
SERVICES - 0.6%
Orion Network Systems, Inc. (a) 358,700 3,945,700
Protection One, Inc. (a) 469,200 6,334,200
Protection One, Inc.
warrants 6/30/05 (a) 74,560 708,320
Vestar/LPA Investment Corp. (a) 5,177 103,540
11,091,760
TECHNOLOGY - 0.1%
COMPUTERS & OFFICE EQUIPMENT - 0.1%
Exide Electronics Group, Inc. (a) 117,600 1,389,150
Exide Electronics Group, Inc.
warrants 3/15/06 (a)(g) 6,770 169,250
1,558,400
UTILITIES - 0.8%
CELLULAR - 0.8%
Intercel, Inc. warrants 2/1/06 (a) 56,448 282,240
Microcell Telecommunications, Inc. (a):
warrants 6/1/06 112,240 1,403,000
conditional warrants 6/1/06 112,240 70,150
Pagemart Wireless, Inc. Class A (a) 1,446,000 12,291,000
14,046,390
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - CONTINUED
TELEPHONE SERVICES - 0.0%
Hyperion Telecommunications, Inc.
warrants 4/15/01 (a)(g) 12,560 $ 376,800
NextLink Communications, Inc.
warrants 2/1/09 (a) 663,204 6,632
RSL Communications Ltd./RSL
Communications PLC
warrants 11/15/06 (a) 9,140 274,200
657,632
TOTAL UTILITIES 14,704,022
TOTAL COMMON STOCKS
(Cost $121,699,279) 148,830,127
PREFERRED STOCKS - 16.2%
CONVERTIBLE PREFERRED STOCKS - 0.9%
MEDIA & LEISURE - 0.9%
BROADCASTING - 0.2%
Benedek Communications Corp. 15% (a) 33,600 3,679,200
LODGING & GAMING - 0.7%
Host Marriott Financial Trust
$3.375 (g) 251,200 14,538,200
TOTAL MEDIA & LEISURE 18,217,400
RETAIL & WHOLESALE - 0.0%
RETAIL & WHOLESALE, MISCELLANEOUS - 0.0%
Town & Country Corp. pay-in-kind 128 64
TOTAL CONVERTIBLE PREFERRED STOCKS 18,217,464
NONCONVERTIBLE PREFERRED STOCKS - 15.3%
BASIC INDUSTRIES - 0.1%
PAPER & FOREST PRODUCTS - 0.1%
SDW Holdings Corp. 15% (g) 44,500 1,596,438
FINANCE - 1.0%
CREDIT & OTHER FINANCE - 0.5%
American Annuity Group Capital
Trust II 8 3/4% 8,910 8,865,450
SAVINGS & LOANS - 0.5%
California Federal Bank FSB:
Series B, 10 5/8% 15,610 1,713,198
11 1/2% 1,778 199,136
California Federal Preferred Capital Corp.
9 1/8% 308,750 7,873,125
9,785,459
TOTAL FINANCE 18,650,909
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
ELECTRICAL EQUIPMENT - 0.1%
Ampex Corp. 8% (a)(f) 1,589 1,235,114
MEDIA & LEISURE - 9.6%
BROADCASTING - 9.4%
American Radio Systems Corp.
11 3/8% pay-in-kind 133,856 14,255,664
Cablevision System Corp.:
11 1/8% depositary shares pay-in-kind 140,667 14,137,034
Series H, $11.75 pay-in-kind 157,433 16,294,316
SHARES VALUE (NOTE 1)
Capstar Broadcasting Partners, Inc.
12% (g) 35,630 $ 3,607,538
Chancellor Radio Broadcasting Co.:
12% pay-in-kind (g) 10,317 1,114,236
Series A, 12 1/4% 64,300 8,198,250
Citadel Broadcasting Co.
13 1/4% pay-in-kind (g) 84,000 8,400,000
PanAmSat Corp. 12 3/4% pay-in-kind 43,047 52,517,340
Sinclair Capital 11 5/8%, (g) 75,000 7,912,500
Time Warner, Inc., Series M,
10 1/4% pay-in-kind 47,834 52,856,570
179,293,448
PUBLISHING - 0.2%
K-III Communications Corp.:
Series B, $11.625 pay-in-kind 29,748 3,246,251
Series D, $10 5,400 544,050
3,790,301
TOTAL MEDIA & LEISURE 183,083,749
NONDURABLES - 0.6%
HOUSEHOLD PRODUCTS - 0.6%
Renaissance Cosmetics, Inc.
pay-in-kind 14% 14,156 12,457,280
SERVICES - 0.3%
Loewen Group Capital LP,
Series A, $2.36 200,000 5,300,000
TECHNOLOGY - 1.5%
COMMUNICATIONS EQUIPMENT - 1.5%
Intermedia Communications, Inc.
pay-in-kind 13 1/2% 27,596 28,492,870
UTILITIES - 2.1%
TELEPHONE SERVICES - 2.1%
ICG Holdings, Inc. 14 1/4% pay-in-kind 3,713 3,954,345
NextLink Communications, Inc.
pay-in-kind 14% 684,175 35,406,056
39,360,401
TOTAL NONCONVERTIBLE PREFERRED STOCKS 290,176,761
TOTAL PREFERRED STOCKS
(Cost $289,883,326) 308,394,225
CASH EQUIVALENTS - 5.7%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account dated
6/30/97 due 7/1/97:
at 5 7/8% $ 11,175,824 11,174,000
at 5.93% 97,367,036 97,351,000
TOTAL CASH EQUIVALENTS 108,525,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $1,829,380,131) $ 1,899,755,181
LEGEND
1. Non-income producing
2. Non-income producing - issuer filed for protection under the Federal
Bankruptcy Code or is in default of interest payment.
3. Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
4. Debt obligation initially issued in zero coupon form which converts to
coupon form at a specified rate and date.
5. Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date.
6. Restricted securities - Investment in securities not registered under
the Securities Act of 1933 (see Note 2 of Notes to Financial Statements).
Additional information on each holding is as follows:
ACQUISITION ACQUISITION COST
SECURITY DATE (000S)
Ampex Corp. 8% 2/16/95 $ 834,225
Food 4 Less Holdings, 12/30/92 $ 229,281
Inc. warrants 12/31/02 to 5/17/93
HM/Hat Brands Trust
Class I unit 2/22/94 $ 340,000
Live Entertainment, Inc.:
$2.00 warrants 3/28/98 3/23/93 $ 220,717
$2.72 warrants 3/28/98 3/23/93 $ 131,863
7. Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of these securities amounted to $338,705,668 or 17.7% of net
assets.
8. An affiliated company is a company in which the fund has ownership of at
least 5% of the voting securities. Transactions during the period with
companies which are or were affiliates are as follows:
PURCHASE SALES DIVIDEND VALUE
AFFILIATE COST COST INCOME
Mothers Work $ - $ - $ - $1,515,975
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $1,303,270,433 and $1,021,325,332, respectively, of which U.S.
government and government agency obligations aggregated $49,578,125 and
$97,601,563, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company. The
commissions paid to these affiliated firms were $2,362 for the period (see
Note 4 of Notes to Financial Statements).
The composition of long-term debt holdings as a percentage of total value
of investment in securities, is as follows:
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 0.0% AAA, AA, A 0.0%
Baa 0.0% BBB 0.0%
Ba 5.5% BB 5.9%
B 50.4% B 49.6%
Caa 6.7% CCC 5.2%
Ca, C 0.0% CC, C 0.9%
D 0.0%
The percentage not rated by both S&P and Moody's amounted to 5.2%. FMR has
determined that unrated debt securities that are lower quality account for
5.2% of the total value of investment in securities.
INCOME TAX INFORMATION
At June 30, 1997, the aggregate cost of investment securities for income
tax purposes was $1,829,386,624. Net unrealized appreciation aggregated
$70,368,557, of which $95,952,177 related to appreciated investment
securities and $25,583,620 related to depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C> <C>
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in securities, at value (including repurchase agreements of $108,525,000) (cost $1,829,380,131) - $ 1,899,755,181
See accompanying schedule
Cash 12,332,427
Receivable for investments sold 17,307,645
Dividends receivable 3,882,207
Interest receivable 26,709,841
Other receivables 13,035
TOTAL ASSETS 1,960,000,336
LIABILITIES
Payable for investments purchased $ 45,858,116
Payable for fund shares redeemed 1,878,115
Accrued management fee 935,372
Other payables and 206,898
accrued expenses
TOTAL LIABILITIES 48,878,501
NET ASSETS $ 1,911,121,835
Net Assets consist of:
Paid in capital $ 1,732,723,161
Undistributed net investment income 73,506,048
Accumulated undistributed net realized gain (loss) on investments and foreign currency transactions 34,517,576
Net unrealized appreciation (depreciation) on investments 70,375,050
NET ASSETS, for 153,746,684 $ 1,911,121,835
shares outstanding
NET ASSET VALUE, offering price $12.43
and redemption price per share ($1,911,121,835 (divided by)
153,746,684 shares)
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $ 13,388,030
Dividends
Interest 67,053,640
TOTAL INCOME 80,441,670
EXPENSES
Management fee $ 5,086,045
Transfer agent fees 632,302
Accounting fees and expenses 405,554
Non-interested trustees' compensation 3,770
Custodian fees and expenses 27,408
Registration fees 2,989
Audit 20,017
Legal 5,001
Miscellaneous 49,506
Total expenses before reductions 6,232,592
Expense reductions (10,217 6,222,375
)
NET INVESTMENT INCOME 74,219,295
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:
Investment securities 36,015,078
Foreign currency transactions 355 36,015,433
Change in net unrealized appreciation (depreciation) on:
Investment securities 19,411,450
Assets and liabilities in 16 19,411,466
foreign currencies
NET GAIN (LOSS) 55,426,899
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 129,646,194
OTHER INFORMATION $ 7,004
Expense reductions
Directed brokerage arrangements
Custodian credits 3,213
$ 10,217
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
Operations $ 74,219,295 $ 113,508,707
Net investment income
Net realized gain (loss) 36,015,433 15,837,127
Change in net unrealized appreciation (depreciation) 19,411,466 35,065,622
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 129,646,194 164,411,456
Distributions to shareholders (116,014,735) (81,893,762)
From net investment income
From net realized gain (14,338,900) (16,022,693)
TOTAL DISTRIBUTIONS (130,353,635) (97,916,455)
Share transactions 645,716,095 1,058,212,273
Net proceeds from sales of shares
Reinvestment of distributions 130,353,635 97,916,455
Cost of shares redeemed (453,062,260) (673,801,481)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 323,007,470 482,327,247
TOTAL INCREASE (DECREASE) IN NET ASSETS 322,300,029 548,822,248
NET ASSETS
Beginning of period 1,588,821,806 1,039,999,558
End of period (including undistributed net investment income of $73,506,048 and $113,174,121, $ 1,911,121,835 $ 1,588,821,806
respectively)
OTHER INFORMATION
Shares
Sold 53,868,295 89,104,560
Issued in reinvestment of distributions 11,056,288 8,680,536
Redeemed (38,063,304) (57,202,172)
Net increase (decrease) 26,861,279 40,582,924
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1997
SELECTED PER-SHARE DATA (UNAUDITED) 1996 1995 1994 1993 E 1992
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 12.520 $ 12.050 $ 10.750 $ 11.990 $ 10.820 $ 9.550
Income from Investment Operations .519 D .927 .856 .770 .728 .790
Net investment income
Net realized and unrealized gain (loss) (.391) .643 1.224 (.910) 1.332 1.290
Total from investment operations .910 1.570 2.080 (.140) 2.060 2.080
Less Distributions
From net investment income (.890) (.920) (.780) (.730) (.794) (.810)
In excess of net investment income - - - - (.036) -
From net realized gain (.110) (.180) - (.370) (.060) -
Total distributions (1.000) (1.100) (.780) (1.100) (.890) (.810)
Net asset value, end of period $ 12.430 $ 12.520 $ 12.050 $ 10.750 $ 11.990 $ 10.820
TOTAL RETURN B, C 7.70% 14.03% 20.72% (1.64)% 20.40% 23.17%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $ 1,911,122 $ 1,588,822 $ 1,040,000 $ 569,417 $ 463,931 $ 200,591
Ratio of expenses to average net assets .73% A .71% .71% .71% .64% F .67%
Ratio of net investment income to average
net assets 8.70% A 9.09% 9.32% 8.75% 8.69% 10.98%
Portfolio turnover rate 130% A 123% 132% 122% 155% 160%
Average commission rate G $ .0379 $ .0370
A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE
NOT ANNUALIZED AND DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR
INSURANCE COMPANY'S SEPARATE ACCOUNT.
INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN. C
THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS
SHOWN. D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED
ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. E EFFECTIVE JANUARY
1, 1993, THE FUND ADOPTED
STATEMENT OF POSITION 93-2, "DETERMINATION, DISCLOSURE, AND FINANCIAL
STATEMENT PRESENTATION OF INCOME, CAPITAL GAIN, AND RETURN OF CAPITAL
DISTRIBUTIONS BY INVESTMENT
COMPANIES." AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT
CERTAIN RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES. F FMR
AGREED TO REIMBURSE A PORTION
OF THE FUND'S EXPENSES DURING THE PERIOD. WITHOUT THIS REIMBURSEMENT,
THE FUND'S EXPENSE RATIO WOULD HAVE BEEN HIGHER. G FOR FISCAL YEARS
BEGINNING ON OR AFTER
SEPTEMBER 1, 1995, A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE
COMMISSION RATE PER SHARE FOR SECURITY TRADES ON WHICH COMMISSIONS
ARE CHARGED. THIS AMOUNT MAY VARY
FROM PERIOD TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES
EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION
RATE STRUCTURES MAY DIFFER.
</TABLE>
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can
look at the total percentage change in value, the average annual percentage
change or the growth of a hypothetical $10,000 investment. Total return
reflects the change in the value of an investment, assuming reinvestment of
the fund's dividend income and capital gains (the profits earned upon the
sale of securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 LIFE OF
JUNE 30, 1997 YEAR YEARS FUND
ASSET MANAGER 20.45% 12.43% 12.43%
S&P 500(registered trademark) 34.70% 19.78% 15.73%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what
would have happened if the fund had performed at a constant rate each year.
You can compare the fund's returns to those of the Standard & Poor's 500
Index - a widely recognized, unmanaged index of common stocks. This
benchmark reflects the reinvestment of dividends and capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of long-term growth and short-term
volatility. In turn, the share price and return of a
fund that invests in stocks will vary. That means if
you sell your shares during a market downturn,
you might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of return
and are not the fund's year-by-year results, which fluctuated over the
periods shown. The life of fund figures are from commencement of
operations, September 6, 1989.
If Fidelity had not reimbursed certain fund expenses, the life of fund
total return figure would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL
CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
1989/09/30 10000.00 10000.00
10000.00
1989/10/31 10020.02 9768.00
10056.80
1989/11/30 10060.06 9967.27
10176.58
1989/12/31 10091.09 10206.48
10276.51
1990/01/31 9868.42 9521.63
10028.74
1990/02/28 9969.64 9644.46
10092.83
1990/03/31 10050.61 9900.03
10192.14
1990/04/30 9919.03 9652.53
10098.07
1990/05/31 10425.10 10593.65
10527.54
1990/06/30 10506.07 10521.62
10593.12
1990/07/31 10485.83 10487.95
10657.74
1990/08/31 10141.70 9539.84
10328.10
1990/09/30 9929.15 9075.25
10235.77
1990/10/31 9979.76 9036.22
10309.16
1990/11/30 10465.59 9619.96
10618.33
1990/12/31 10769.23 9888.36
10792.26
1991/01/31 11284.56 10319.49
10998.06
1991/02/28 11726.26 11057.34
11273.46
1991/03/31 11915.56 11324.93
11395.89
1991/04/30 12094.35 11352.11
11470.64
1991/05/31 12367.79 11842.52
11652.80
1991/06/30 12146.94 11300.13
11501.78
1991/07/31 12451.92 11826.72
11732.96
1991/08/31 12704.33 12107.01
11941.81
1991/09/30 12777.94 11904.82
11998.53
1991/10/31 12862.08 12064.35
12105.32
1991/11/30 12651.74 11578.15
12021.91
1991/12/31 13198.62 12902.69
12614.23
1992/01/31 13366.89 12662.70
12476.36
1992/02/29 13626.47 12827.32
12556.08
1992/03/31 13593.27 12577.19
12465.30
1992/04/30 13792.52 12946.96
12618.63
1992/05/31 13936.42 13010.40
12742.54
1992/06/30 13925.35 12816.54
12748.15
1992/07/31 14157.81 13340.74
13094.39
1992/08/31 14113.53 13067.25
13044.11
1992/09/30 14202.09 13221.45
13188.37
1992/10/31 14224.22 13267.72
13135.88
1992/11/30 14534.17 13720.15
13311.12
1992/12/31 14744.49 13888.91
13474.31
1993/01/31 15010.15 14005.57
13642.74
1993/02/28 15150.92 14196.05
13832.92
1993/03/31 15579.83 14495.59
13974.84
1993/04/30 15672.57 14144.79
13889.88
1993/05/31 15939.19 14523.87
14039.05
1993/06/30 16066.70 14565.99
14188.15
1993/07/31 16263.77 14507.73
14206.31
1993/08/31 16739.04 15057.57
14555.79
1993/09/30 16750.64 14941.63
14540.94
1993/10/31 17202.73 15250.92
14690.42
1993/11/30 17179.54 15106.04
14577.30
1993/12/31 17875.07 15288.82
14678.18
1994/01/31 18443.09 15808.64
14966.46
1994/02/28 17857.33 15380.23
14682.69
1994/03/31 17017.99 14709.65
14303.29
1994/04/30 17030.15 14897.93
14340.48
1994/05/31 17176.13 15142.26
14437.14
1994/06/30 16847.69 14771.27
14292.76
1994/07/31 17139.63 15255.77
14594.63
1994/08/31 17541.06 15881.26
14845.95
1994/09/30 17334.15 15492.17
14628.31
1994/10/31 17419.36 15840.74
14768.45
1994/11/30 17163.73 15263.82
14553.89
1994/12/31 16786.37 15490.18
14689.12
1995/01/31 16676.82 15891.84
14963.69
1995/02/28 16946.97 16511.15
15337.61
1995/03/31 17170.77 16998.39
15572.33
1995/04/30 17444.31 17498.99
15852.32
1995/05/31 17668.12 18198.43
16377.48
1995/06/30 17817.32 18621.18
16596.81
1995/07/31 18451.43 19238.66
16808.32
1995/08/31 18675.24 19286.95
16918.98
1995/09/30 18911.47 20100.85
17284.77
1995/10/31 18662.80 20029.09
17383.15
1995/11/30 19147.71 20908.37
17811.48
1995/12/31 19632.62 21311.07
18066.96
1996/01/31 20055.36 22036.50
18374.75
1996/02/29 20001.35 22240.77
18307.28
1996/03/31 20213.99 22454.95
18329.47
1996/04/30 20426.62 22785.94
18405.65
1996/05/31 20586.10 23373.59
18599.57
1996/06/30 20772.16 23462.64
18738.02
1996/07/31 20426.62 22426.06
18440.99
1996/08/31 20466.49 22899.03
18597.29
1996/09/30 21210.73 24187.79
19153.95
1996/10/31 21755.62 24854.88
19550.66
1996/11/30 22832.10 26733.66
20293.51
1996/12/31 22499.85 26204.07
20066.55
1997/01/31 23177.64 27841.30
20726.94
1997/02/28 23377.96 28059.58
20837.00
1997/03/31 22488.67 26906.61
20325.55
1997/04/30 23257.38 28512.93
21062.97
1997/05/31 24372.77 30248.80
21793.43
1997/06/30 25020.90 31603.95
22394.49
Let's say hypothetically that $10,000 was invested in Asset Manager
Portfolio on September 30, 1989, shortly after the fund started. By June
30, 1997, the value of the investment would have grown to $25,021 - a
150.21% increase. With reinvested dividends and capital gains, if any, a
$10,000 investment in the S&P 500, would have grown to $31,604 over the
same period - a 216.04% increase on the initial investment.
You can also look at how the Fidelity Composite Index did over the same
period. The composite index combines the cumulative total returns of three
unmanaged indexes - the S&P 500 (216.04%), Lehman Brothers Aggregate Bond
Index (89.88%), and the Salomon Brothers 3-month T-Bill Total Rate of
Return Index (47.88%) - according to the fund's neutral mix,* assuming
monthly rebalancing. With reinvested dividends and capital gains, if any, a
$10,000 investment in the index would have grown to $22,394 - a 123.94%
increase.
* 50% STOCKS, 40% BONDS AND 10% SHORT-TERM INSTRUMENTS EFFECTIVE JANUARY 1,
1997; 40%, 40% AND 20%, RESPECTIVELY, BETWEEN JUNE 1, 1992 AND DECEMBER 31,
1996; 30%, 40% AND 30%, RESPECTIVELY, PRIOR TO JUNE 1, 1992.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENT
S
Philip Morris Companies, Inc. 5.2
Federal National Mortgage Association 4.5
Federal Home Loan Mortgage Corporation 2.1
General Motors Corp. 1.9
International Business Machines Corp. 1.8
TOP FIVE BOND ISSUERS AS OF JUNE 30, 1997
(WITH MATURITIES MORE THAN ONE YEAR) % OF FUND'S
INVESTMENT
S
U.S. Treasury Obligations 5.8
Federal National Mortgage Association 4.0
Government National Mortgage Association 1.1
Ford Motor Credit Co. 0.8
AT&T Capital Corp. 0.5
ASSET ALLOCATION AS OF JUNE 30, 1997*
Row: 1, Col: 1, Value: 5.9
Row: 1, Col: 2, Value: 31.7
Row: 1, Col: 3, Value: 62.2
Stock class 62.0%
Bond class 31.9%
Short-term class 6.1%
FOREIGN INVESTMENTS 11.4%
*
ASSET ALLOCATION IN THE PIE CHART REFLECTS THE CATEGORIZATION OF ASSETS AS
DEFINED
IN THE FUND'S PROSPECTUS. FINANCIAL STATEMENT CATEGORIZATIONS CONFORM TO
ACCOUNTING STANDARDS AND WILL DIFFER FROM THE PIE CHART.
% OF FUND'S INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with Richard Habermann (top left), Portfolio Manager of Asset
Manager Portfolio, George Vanderheiden (top right), sub-manager for stocks,
Charles Morrison (bottom left), sub-manager for bonds, and John Todd
(bottom right), sub-manager for short-term/money market instruments.
Charles Morrison became sub-manager for bonds on February 3, 1997, and John
Todd became sub-manager for short-term/money market instruments on December
1, 1996.
Q. HOW DID THE FUND PERFORM, DICK?
D.H. The fund's performance historically has been compared to that of the
Standard & Poor's 500 Index. However, there are some significant
differences between the make-up of the fund and the composition of the
index. While the S&P 500 is made up exclusively of stocks, the fund invests
in stocks, bonds and short-term/money market instruments. The fund
allocates assets among these three categories in order to help control both
volatility and risk relative to funds or indexes that invest only in
stocks. That being said, the S&P 500 posted a strong 20.61% return during
the six months that ended June 30, 1997, and 34.70% over the 12 months
ended June 30, 1997. Since the fund is diversified into other asset classes
that didn't perform as well as stocks, the fund's performance lagged that
of the S&P 500. However, the fund did benefit from the performance of its
equity investments and its small stake in high-yield bonds, while the bond
and short-term money market portions of the fund performed in line with
their respective markets.
Q. WHAT WAS THE FUND'S ASSET MIX AT THE END OF THE PERIOD?
D.H. At the end of June 1997, the fund's equity position stood at about
62%, 12% above the new neutral mix the fund instituted on January 1, 1997.
That neutral mix comprises 50% stocks, 40% bonds and 10% short-term/money
market instruments. In order to add to the equity portion, we reduced both
the fund's bond and short-term/money market positions. At the end of the
period, the fund held about 32% in bonds and approximately 6% in
short-term/money market instruments.
Q. WHY DID YOU INCREASE THE FUND'S STOCK INVESTMENTS?
D.H. Because the investing environment was very favorable not only for all
financial assets, but especially for stocks. We've had limited inflation
and corporate earnings continued to be strong. Another key factor was the
strength of the dollar, although that can act as a double-edged sword. On
the negative side, a rising dollar acts as a drag on the economy by slowing
exports and suppressing corporate earnings. This especially affects large,
multinational corporations. These companies, however, generally were able
to post earnings surprises through cost cutting and to sustain their stock
prices by buying back shares. The positive side of the strong dollar is
that it helps to control inflation by keeping import prices down. In
addition, investors, especially those abroad, tend to feel more comfortable
investing in U.S. markets when the dollar is strong, helping to sustain
prices for both stocks and bonds.
Q. WHAT WAS THE ENVIRONMENT LIKE FOR THE BOND MARKET?
D.H. During the latter stages of the first quarter and the beginning of the
second quarter, the bond market struggled because of concerns that
continued economic growth might lead to inflation. Employment had reached a
level where historically there should have been increased upward pressure
on wages. The Federal Reserve Board tried to anticipate and head off
incipient inflation by raising the fed funds rate - the rate banks charge
each other for overnight loans - by 0.25% to 5.50% at the end of March.
This move was well-telegraphed, so the rate increase was already priced
into the market when the Fed acted. The Fed chose to keep rates steady in
May, a stance that surprised many in the market who were anticipating
another rate increase. The Fed stood pat mainly because economic growth
slowed and there were few if any signs of inflationary pressure. From that
point on, the bond market responded favorably.
Q. TURNING TO YOU, GEORGE, HOW DID YOU MANAGE THE STOCK PORTION OF THE FUND
IN A VIRTUALLY NO-INFLATION ENVIRONMENT?
G.V. I concentrated on four areas during the period. First, I looked at
innovators and unit growers because these companies use unit growth to
increase earnings and don't have to rely on price increases. Technology,
health care and telecommunications fall within these areas. Second were the
interest-sensitive sectors that benefited from low interest rates,
including mortgage companies, insurance, finance and construction. Third, I
looked at global growers - companies with proprietary advantages, such as
low costs or unique distribution channels and strong brands - which are
seizing market share on a global basis. Fourth were the acquisitive
companies in consolidating industries. Certain industries have stopped
growing, but certain companies have been able to show great earnings growth
by acquiring market share and paring costs.
Q. PHILIP MORRIS IS THE FUND'S LARGEST STOCK HOLDING. WHAT IS YOUR POSITION
ON TOBACCO STOCKS?
G.V. I own tobacco stocks because they operate a profitable business that
historically has offered above-average returns to shareholders over the
long term. In the past, the stocks have provided better-than-average
earnings growth, lower-than-average price-to-earnings ratios and high
yields. Nothing this year has changed that. We have determined that the
tobacco stocks are selling at a "litigation discount" in excess of any
reasonable estimate of potential liabilities. The cost of the proposed
settlement is high, but should be passed completely along to consumers.
Q. STOCK VALUATIONS WERE QUITE HIGH. WHY WAS THAT, AND WILL THEY STAY
INFLATED?
G.V. We had a nearly perfect investing environment during the period -
experiencing growth without inflation. Accelerating inflation is usually
the killer of all bond and equity bull markets, but inflation just kept
receding as the economic expansion continued. During the worst bear market
I ever encountered - the 1973-1974 bear that took prices down about 50% -
everything that could go wrong did go wrong. Today is an environment where
everything that could go right has gone right - from a declining budget
deficit, to falling inflation, to surging earnings, to big flows into
mutual funds and rising consumer confidence. If any of these factors change
for the worse, valuations should deflate. My biggest concern going forward
is that the low level of inflation and pricing power in a strong economy
will deteriorate to deflation in a slowing or contracting economy, thereby
leading to sizable earnings declines.
Q. CHARLIE, WHAT CHANGES HAVE YOU MADE SINCE TAKING OVER THE FUND'S BOND
INVESTMENTS?
C.M. For most of the period, I focused on positioning the bond portion of
the portfolio more aggressively by increasing its weighting in corporate
and mortgage-backed securities, while decreasing the percentage held in
Treasuries. Part of that move was accomplished with Dick's reallocation of
assets away from bonds. In reducing the fund's stake in bonds, I sold
Treasuries. At the same time, I tended to focus any new purchases on
investments that offered a yield advantage over Treasuries. Specific areas
of focus included BBB-rated corporate bonds and commercial mortgage-backed
securities.
Q. WHAT KINDS OF BONDS DID YOU FOCUS ON IN THE CORPORATE MARKET?
C.M. One area of interest over the period was in the bank market. I
continued to add long-term bank paper in the form of capital securities.
Last fall, the Federal Reserve Board ruled that domestic banking companies
could issue capital securities, which offered the banks significant tax
advantages, as well as the opportunity to strengthen their balance sheets.
Numerous banks took advantage of this opportunity and inundated the market
with these securities. The large amount of supply in a relatively
concentrated period of time allowed us to purchase many capital securities
at cheap levels. This market has performed well following the initial
supply.
Q. JOHN, WHAT HAS THE BACKDROP FOR THE SHORT-TERM AND MONEY MARKETS BEEN
LIKE SINCE YOU CAME ON BOARD?
J.T. As Dick pointed out, the Fed raised the fed funds rate at its March
meeting, but then chose not to continue to raise rates at its late May
meeting. For now, the Fed appears to be in a holding pattern. Some believe
that the Fed has abandoned the notion of being pre-emptive - seeking to
head off inflation before it actually appears - and instead will respond
only to actual evidence of inflation rather than trying to respond to
underlying inflationary pressures.
Q. WHAT SORT OF STRATEGY DID YOU PURSUE?
J.T. Because Fed Chairman Alan Greenspan warned that the Fed might raise
rates, I reduced the short-term/money market portion's average maturity to
about 50 days in the first quarter. Once the market adjusted to the new,
higher rate level and expectations of further Fed interest rate increases
were built into the yield curve, the maturity was extended. That's because
many longer-maturity instruments were attractively valued because their
prices and yields reflected a more aggressive Fed interest rate posture
than I felt was likely.
Q. TURNING BACK TO YOU, DICK, WHAT'S YOUR OUTLOOK?
D.H. I believe that a lack of pricing power, among other things, makes it
clear that corporations are not operating with a very strong wind at their
backs. At the same time, U.S. companies - helped by advances in technology
that help cut costs - are operating very efficiently, leading to many
positive earnings surprises. I don't see much that would change that over
the near future. Still, the economic pattern over the past year has been
like a seesaw. That is, the economy has grown in spurts, picking up for one
quarter then tailing off into weakness during the next. If the economy
shows sustained strength, interest rates could rise and put some pressure
on the markets. On the other hand, one could argue that rates might fall
because inflation is at such a low level. As always, we'll have to wait and
see what the future holds.
FUND FACTS
GOAL: maximum total return over the long term
by allocating assets among stocks, bonds and
short-term instruments anywhere in the world
START DATE: September 6, 1989
SIZE: as of June 30, 1997, more than $4 billion
MANAGER: Richard Habermann, since March
1996; joined Fidelity in 1968
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 61.1%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 1.2%
AEROSPACE & DEFENSE - 0.9%
Boeing Co. 625,500 $ 33,190,594
Gulfstream Aerospace Corp. (a) 44,000 1,298,000
34,488,594
DEFENSE ELECTRONICS - 0.3%
Raytheon Co. 258,800 13,198,800
SHIP BUILDING & REPAIR - 0.0%
Avondale Industries, Inc. (a) 21,600 453,600
Newport News Shipbuilding, Inc. 62,300 1,210,956
1,664,556
TOTAL AEROSPACE & DEFENSE 49,351,950
BASIC INDUSTRIES - 3.0%
CHEMICALS & PLASTICS - 2.2%
Air Products & Chemicals, Inc. 74,500 6,053,125
du Pont (E.I.) de Nemours & Co. 848,100 53,324,288
Raychem Corp. 242,300 18,021,063
Union Carbide Corp. 227,800 10,720,838
88,119,314
PACKAGING & CONTAINERS - 0.2%
Owens-Illinois, Inc. (a) 227,500 7,052,500
PAPER & FOREST PRODUCTS - 0.6%
Boise Cascade Corp. 145,100 5,123,844
Champion International Corp. 216,900 11,983,725
International Paper Co. 86,200 4,186,088
Willamette Industries, Inc. 29,400 2,058,000
23,351,657
TOTAL BASIC INDUSTRIES 118,523,471
CONSTRUCTION & REAL ESTATE - 0.7%
CONSTRUCTION - 0.5%
Centex Corp. 89,800 3,648,125
D.R. Horton, Inc. 192,224 1,994,324
Fleetwood Enterprises, Inc. 364,581 10,869,071
Kaufman & Broad Home Corp. 183,700 3,226,231
U.S. Home Corp. (a) 19,700 523,281
20,261,032
ENGINEERING - 0.2%
Fluor Corp. 143,600 7,924,925
TOTAL CONSTRUCTION & REAL ESTATE 28,185,957
DURABLES - 3.4%
AUTOS, TIRES, & ACCESSORIES - 2.9%
Cummins Engine Co., Inc. 148,500 10,478,531
Dana Corp. 56,900 2,162,200
Discount Auto Parts, Inc. (a) 111,000 2,164,500
Federal-Mogul Corp. 59,500 2,082,500
General Motors Corp. 1,355,090 75,461,574
Gentex Corp. (a) 53,400 1,054,650
Goodyear Tire & Rubber Co. 62,000 3,925,375
Honda Motor Co. Ltd. 99,000 2,979,197
Magna International, Inc. Class A 165,200 9,931,264
Superior Industries International, Inc. 250,300 6,632,950
116,872,741
CONSUMER ELECTRONICS - 0.1%
Newell Co. 120,600 4,778,775
SHARES VALUE (NOTE 1)
TEXTILES & APPAREL - 0.4%
Arena Brands Holdings Corp. Class B 8,445 $ 341,094
Burlington Industries, Inc. (a) 307,100 3,685,200
Liz Claiborne, Inc. 84,700 3,949,138
NIKE, Inc. Class B 116,300 6,789,013
Reebok International Ltd. 18,600 869,550
15,633,995
TOTAL DURABLES 137,285,511
ENERGY - 5.0%
ENERGY SERVICES - 0.2%
McDermott International, Inc. 275,800 8,049,913
OIL & GAS - 4.8%
Amerada Hess Corp. 119,600 6,645,275
Anadarko Petroleum Corp. 13,100 786,000
Atlantic Richfield Co. 223,500 15,756,750
British Petroleum PLC ADR 396,568 29,693,029
Burlington Resources, Inc. 304,400 13,431,650
Canada Occidental Petroleum Ltd. 5,800 130,229
Chevron Corp. 17,600 1,301,300
Elf Aquitaine SA sponsored ADR 61,800 3,364,238
Enron Oil & Gas Co. 38,400 696,000
Kerr-McGee Corp. 58,100 3,682,088
Louisiana Land & Exploration Co. 239,200 13,664,300
Mobil Corp. 35,200 2,459,600
Noble Affiliates, Inc. 22,800 882,075
Occidental Petroleum Corp. 515,100 12,909,694
Royal Dutch Petroleum Co. Ord. 119,200 6,196,385
Royal Dutch Petroleum Co. 911,600 49,568,250
Santa Fe Energy Resources, Inc. (a) 178,000 2,614,375
Sun Co., Inc. 74,400 2,306,400
Tosco Corp. 545,700 16,336,894
Total SA:
Class B 30,733 3,104,555
sponsored ADR 89,837 4,547,998
Union Pacific Resources Group, Inc. 40,600 1,009,925
191,087,010
TOTAL ENERGY 199,136,923
FINANCE - 13.0%
BANKS - 0.4%
Canadian Imperial Bank of Commerce 5,000 126,028
Credit Suisse Group (Reg.) 63,600 8,159,425
NationsBank Corp. 87,500 5,643,750
13,929,203
CLOSED END INVESTMENT COMPANY - 0.1%
First NIS Regional Fund (a) 200,000 3,700,000
CREDIT & OTHER FINANCE - 1.1%
Fleet Financial Group, Inc. 710,900 44,964,425
FEDERAL SPONSORED CREDIT - 6.6%
Federal Home Loan Mortgage
Corporation 2,427,100 83,431,563
Federal National Mortgage Association 4,189,890 182,783,951
266,215,514
INSURANCE - 4.4%
AFLAC, Inc. 96,600 4,564,350
Aegon NV (Reg.) 97,743 6,848,119
Allmerica Financial Corp. 126,900 5,060,138
Allstate Corp. 704,300 51,413,900
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
INSURANCE - CONTINUED
American International Group, Inc. 265,000 $ 39,584,375
CIGNA Corp. 40,500 7,188,750
Equitable of Iowa Companies 15,100 845,600
General Re Corp. 66,000 12,012,000
Loews Corp. 43,400 4,345,425
MGIC Investment Corp. 306,700 14,702,431
Nationwide Financial Services, Inc.
Class A 14,400 382,500
PMI Group, Inc. 112,500 7,017,188
Provident Companies, Inc. 9,600 513,600
Providian Financial Corp. (a) 242,500 7,790,313
Reliastar Financial Corp. 42,081 3,077,173
Torchmark Corp. 142,300 10,138,875
Travelers Property Casualty Corp.
Class A 34,500 1,375,688
UNUM Corp. 25,200 1,058,400
177,918,825
SAVINGS & LOANS - 0.2%
Golden West Financial Corp. 131,400 9,198,000
SECURITIES INDUSTRY - 0.2%
United Asset Management Corp. 219,800 6,223,088
TOTAL FINANCE 522,149,055
HEALTH - 4.8%
DRUGS & PHARMACEUTICALS - 1.7%
American Home Products Corp. 10,700 818,550
Amgen, Inc. 211,800 12,310,875
Astra AB Class A Free shares 1,038,801 19,374,080
Merck & Co., Inc. 51,900 5,371,650
Novartis AG (Reg.) 9,900 15,810,195
Schering-Plough Corp. 339,100 16,234,413
69,919,763
MEDICAL EQUIPMENT & SUPPLIES - 0.6%
Allegiance Corp. 20,180 549,905
Bard (C.R.), Inc. 99,000 3,594,938
Baxter International, Inc. 42,100 2,199,725
Biomet, Inc. 235,100 4,378,738
Boston Scientific Corp. (a) 12,000 737,250
Johnson & Johnson 26,900 1,731,688
St. Jude Medical, Inc. (a) 272,000 10,608,000
23,800,244
MEDICAL FACILITIES MANAGEMENT - 2.5%
Columbia/HCA Healthcare Corp. 1,730,050 68,012,591
Health Management Associates, Inc.
Class A (a) 12,900 367,650
Humana, Inc. (a) 465,400 10,762,375
Tenet Healthcare Corp. (a) 317,600 9,389,050
United HealthCare Corp. 198,300 10,311,600
98,843,266
TOTAL HEALTH 192,563,273
HOLDING COMPANIES - 0.1%
U.S. Industries, Inc. (a) 158,900 5,660,813
INDUSTRIAL MACHINERY & EQUIPMENT - 1.2%
ELECTRICAL EQUIPMENT - 0.7%
Emerson Electric Co. 59,200 3,259,700
General Electric Co. 268,400 17,546,650
SHARES VALUE (NOTE 1)
Scientific-Atlanta, Inc. 135,300 $ 2,959,688
Sensormatic Electronics Corp. 46,200 594,825
Westinghouse Electric Corp. 205,600 4,754,500
29,115,363
INDUSTRIAL MACHINERY & EQUIPMENT - 0.4%
Caterpillar, Inc. 118,700 12,745,413
JLK Direct Distribution, Inc. Class A 1,000 25,625
Ultratech Stepper, Inc. (a) 150,000 3,431,250
16,202,288
POLLUTION CONTROL - 0.1%
Browning-Ferris Industries, Inc. 143,400 4,768,050
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 50,085,701
MEDIA & LEISURE - 1.9%
BROADCASTING - 0.1%
Cox Communications, Inc. Class A (a) 35,500 852,000
HSN, Inc. (a) 27,045 845,156
TCI Group Class A 118,900 1,768,638
3,465,794
ENTERTAINMENT - 0.1%
Cedar Fair LP (depositary unit) 10,200 446,250
Royal Caribbean Cruises Ltd. 64,200 2,242,988
2,689,238
LEISURE DURABLES & TOYS - 0.4%
Nintendo Co. Ltd. Ord. 208,400 17,450,738
LODGING & GAMING - 0.7%
Bally Gaming International, Inc.
warrants 7/29/98 (a) 38,400 48,000
Circus Circus Enterprises, Inc. (a) 319,300 7,862,763
Fitzgeralds South, Inc. warrants
3/15/99 (a)(d) 420 -
HFS, Inc. (a) 56,100 3,253,800
Harrah's Entertainment, Inc. (a) 148,600 2,711,950
Mirage Resorts, Inc. (a) 317,000 8,004,250
Sun International Hotels Ltd. Ord. (a) 152,600 5,636,663
27,517,426
PUBLISHING - 0.1%
Cognizant Corp. 89,200 3,612,600
RESTAURANTS - 0.5%
Brinker International, Inc. (a) 107,000 1,524,750
Lone Star Steakhouse Saloon (a) 79,100 2,056,600
McDonald's Corp. 334,700 16,170,194
Papa John's International, Inc. (a) 29,300 1,076,775
20,828,319
TOTAL MEDIA & LEISURE 75,564,115
NONDURABLES - 6.0%
HOUSEHOLD PRODUCTS - 0.0%
Premark International, Inc. 36,300 971,025
TOBACCO - 6.0%
Philip Morris Companies, Inc. 4,715,400 209,245,875
RJR Nabisco Holdings Corp. 925,330 30,535,890
UST, Inc. 42,400 1,176,600
240,958,365
TOTAL NONDURABLES 241,929,390
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
PRECIOUS METALS - 0.1%
Barrick Gold Corp. 34,800 $ 757,426
Newmont Mining Corp. 29,905 1,166,295
1,923,721
RETAIL & WHOLESALE - 4.8%
APPAREL STORES - 0.3%
Gap, Inc. 80,600 3,133,325
TJX Companies, Inc. 273,400 7,210,925
10,344,250
DRUG STORES - 0.0%
CVS Corp. 37,500 1,921,875
GENERAL MERCHANDISE STORES - 1.6%
Federated Department Stores, Inc. (a) 229,900 7,989,025
Proffitts, Inc. (a) 7,800 342,225
Wal-Mart Stores, Inc. 1,719,300 58,133,831
66,465,081
GROCERY STORES - 0.2%
Safeway, Inc. (a) 186,900 8,620,763
RETAIL & WHOLESALE, MISCELLANEOUS - 2.7%
Circuit City Stores, Inc. -
CarMax Group 21,900 313,444
Corporate Express, Inc. 149,600 2,159,850
Home Depot, Inc. (The) 732,000 50,462,250
Lowe's Companies, Inc. 623,600 23,151,150
Officemax, Inc. (a) 425,600 6,144,600
Office Depot, Inc. (a) 66,200 1,286,763
Rex Stores Corp. (a) 51,900 525,488
Staples, Inc. (a) 177,800 4,133,850
Toys "R" Us, Inc. (a) 356,300 12,470,500
U.S. Office Products Co. (a) 122,000 3,728,625
Viking Office Products, Inc. (a) 169,300 3,216,700
107,593,220
TOTAL RETAIL & WHOLESALE 194,945,189
SERVICES - 0.0%
ADVERTISING - 0.0%
Interpublic Group of Companies, Inc. 19,100 1,171,069
LEASING & RENTAL - 0.0%
Hanover Compressor Co. 2,600 50,700
PRINTING - 0.0%
Donnelley (R.R.) & Sons Co. 4,800 175,800
SERVICES - 0.0%
PEAPOD, Inc. 8,400 94,500
TOTAL SERVICES 1,492,069
TECHNOLOGY - 9.7%
COMMUNICATIONS EQUIPMENT - 0.6%
Alcatel Alsthom Compagnie Generale
d'Electricite SA sponsored ADR 15,900 401,475
Alcatel Alsthom Compagnie Generale
d'Electricite SA 130,100 16,284,072
Andrew Corp. 48,300 1,358,438
Cisco Systems, Inc. (a) 64,600 4,336,275
Nokia Corp. AB sponsored ADR 28,200 2,079,750
24,460,010
COMPUTER SERVICES & SOFTWARE - 1.8%
American Management Systems, Inc. (a) 21,000 561,750
Automatic Data Processing, Inc. 195,300 9,179,100
SHARES VALUE (NOTE 1)
CUC International, Inc. 140,500 $ 3,626,656
Ceridian Corp. (a) 125,300 5,293,925
CompUSA, Inc. (a) 82,400 1,771,600
Electronic Data Systems Corp. 341,600 14,005,600
First Data Corp. 254,300 11,173,306
Microsoft Corp. (a) 91,500 11,563,313
Netscape Communications Corp. (a) 22,100 708,581
Oracle Systems Corp. (a) 158,500 7,984,438
Paychex, Inc. 127,200 4,833,600
Policy Management Systems Corp. (a) 94,400 4,436,800
75,138,669
COMPUTERS & OFFICE EQUIPMENT - 3.3%
Bay Networks, Inc. (a) 199,300 5,293,906
Compaq Computer Corp. (a) 298,100 29,586,425
Hewlett-Packard Co. 133,900 7,498,400
Ingram Micro, Inc. Class A (a) 26,900 648,963
International Business Machines Corp. 809,700 73,024,819
SCI Systems, Inc. (a) 189,700 12,093,375
Tech Data Corp. (a) 155,200 4,879,100
133,024,988
ELECTRONIC INSTRUMENTS - 1.0%
Applied Materials, Inc. (a) 115,600 8,185,925
Cognex Corp. (a) 67,300 1,783,450
KLA Instruments Corp. (a) 24,200 1,179,750
Lam Research Corp. (a) 158,700 5,881,819
Novellus Systems, Inc. (a) 91,400 7,906,100
Teradyne, Inc. (a) 125,700 4,933,725
Thermo Electron Corp. (a) 141,300 4,804,200
Varian Associates, Inc. 80,800 4,383,400
39,058,369
ELECTRONICS - 3.0%
AMP, Inc. 458,700 19,150,725
Atmel Corp. (a) 28,700 803,600
Intel Corp. 216,500 30,702,406
Methode Electronics, Inc. Class A 129,500 2,573,813
Microchip Technology, Inc. (a) 25,350 754,163
Micron Technology, Inc. 527,300 21,059,044
Molex, Inc. 83,000 2,894,625
Motorola, Inc. 17,200 1,307,200
Solectron Corp. (a) 393,700 27,559,000
Storage Technology Corp. (a) 67,400 2,999,300
Texas Instruments, Inc. 105,100 8,834,969
Thomas & Betts Corp. 5,000 262,813
118,901,658
TOTAL TECHNOLOGY 390,583,694
TRANSPORTATION - 0.7%
AIR TRANSPORTATION - 0.1%
Continental Airlines, Inc. Class B (a) 31,300 1,093,544
Delta Air Lines, Inc. 21,200 1,738,400
Northwest Airlines Corp. Class A (a) 50,600 1,840,575
4,672,519
RAILROADS - 0.4%
Bombardier, Inc. Class B 119,200 2,702,321
Burlington Northern Santa Fe Corp. 52,600 4,727,425
CSX Corp. 164,860 9,149,730
16,579,476
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TRANSPORTATION - CONTINUED
SHIPPING - 0.1%
Stolt-Nielsen SA Class B sponsored ADR 105,500 $ 2,044,063
Stolt-Nielsen SA 31,300 590,788
2,634,851
TRUCKING & FREIGHT - 0.1%
Roadway Express, Inc. 25,200 589,050
Yellow Corp. (a) 107,300 2,400,838
2,989,888
TOTAL TRANSPORTATION 26,876,734
UTILITIES - 5.5%
CELLULAR - 1.8%
AirTouch Communications, Inc. (a) 734,100 20,095,988
360 Degrees Communications Co. (a) 35,900 614,788
Vodafone Group PLC sponsored ADR 620,800 30,070,000
Vodafone Group PLC 4,810,755 23,464,799
74,245,575
ELECTRIC UTILITY - 0.2%
American Electric Power Co., Inc. 59,700 2,507,400
Entergy Corp. 181,000 4,954,875
7,462,275
GAS - 0.1%
Enron Corp. 81,200 3,313,975
TELEPHONE SERVICES - 3.4%
AT&T Corp. 215,200 7,545,450
Ameritech Corp. 196,400 13,342,925
Bell Atlantic Corp. 141,700 10,751,488
BellSouth Corp. 332,000 15,396,500
Deutsche Telekom AG 82,400 1,978,450
MCI Communications Corp. 668,600 25,594,844
NextLink Communications, Inc.
warrants 2/1/09 (a) 43,900 439
NYNEX Corp. 274,500 15,818,063
Qwest Communications
International, Inc. 5,100 138,975
SBC Communications, Inc. 267,900 16,576,313
Sprint Corp. 531,200 27,954,400
WorldCom, Inc. (a) 72,600 2,323,200
137,421,047
TOTAL UTILITIES 222,442,872
TOTAL COMMON STOCKS
(Cost $1,979,750,356) 2,458,700,438
PREFERRED STOCKS - 1.0%
CONVERTIBLE PREFERRED STOCKS - 0.0%
RETAIL & WHOLESALE - 0.0%
GROCERY STORES - 0.0%
Supermarkets General Holdings Corp.
$3.52 pay-in-kind (a) 20,000 405,000
NONCONVERTIBLE PREFERRED STOCKS - 1.0%
CONSTRUCTION & REAL ESTATE - 0.0%
REAL ESTATE INVESTMENT TRUSTS - 0.0%
Walden Residential Properties,
Inc. 9.20% 49,000 1,237,250
SHARES VALUE (NOTE 1)
FINANCE - 0.1%
CREDIT & OTHER FINANCE - 0.0%
American Annuity Group Capital
Trust II 8 3/4% 1,490 $ 1,482,550
SAVINGS & LOANS - 0.1%
California Federal Preferred Capital
Corp. 9 1/8% 156,890 4,000,695
TOTAL FINANCE 5,483,245
HEALTH - 0.1%
MEDICAL FACILITIES MANAGEMENT - 0.1%
Fresenius Medical Care Capital
Trust 9% 1,381 1,415,180
MEDIA & LEISURE - 0.7%
BROADCASTING - 0.6%
American Radio Systems Corp.
11.375% pay-in-kind 27,126 2,888,919
Cablevision System Corp. 11 1/8%
depositary shares pay-in-kind 49,472 4,971,936
PanAmSat Corp. 12 3/4% pay-in-kind 202 246,440
SFX Broadcasting, Inc. 12 5/8% 29,474 3,175,824
Sinclair Capital 11 5/8% (d) 28,380 2,994,090
Time Warner, Inc., Series M, 10 1/4%
pay-in-kind 8,770 9,690,850
23,968,059
PUBLISHING - 0.1%
K-III Communications Corp.:
Series B, $11.625 pay-in-kind 1,750 190,969
Series D, $10 31,050 3,128,288
3,319,257
TOTAL MEDIA & LEISURE 27,287,316
NONDURABLES - 0.0%
HOUSEHOLD PRODUCTS - 0.0%
Revlon Group, Inc., Series B, 14 7/8% 5,100 510,000
UTILITIES - 0.1%
TELEPHONE SERVICES - 0.1%
NextLink Communications, Inc.
14% pay-in-kind 45,453 2,352,193
TOTAL NONCONVERTIBLE PREFERRED STOCKS 38,285,184
TOTAL PREFERRED STOCKS
(Cost $37,307,667) 38,690,184
NONCONVERTIBLE CORPORATE BONDS - 17.1%
MOODY'S PRINCIPAL
RATINGS (C) AMOUNT
AEROSPACE & DEFENSE - 0.2%
AEROSPACE & DEFENSE - 0.0%
Be Aerospace, Inc. 9 7/8%,
2/1/06 B2 $ 270,000 284,175
Rohr, Inc. 11 5/8%, 5/15/03 Ba3 340,000 378,250
662,425
DEFENSE ELECTRONICS - 0.1%
Tracor, Inc. 8 1/2%, 3/1/07 B1 1,170,000 1,181,700
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
AEROSPACE & DEFENSE - CONTINUED
SHIP BUILDING & REPAIR - 0.1%
Newport News Shipbuilding, Inc.:
8 5/8%, 12/1/06 Ba2 $ 920,000 $ 949,900
9 1/4%, 12/1/06 B1 3,830,000 3,992,775
4,942,675
TOTAL AEROSPACE & DEFENSE 6,786,800
BASIC INDUSTRIES - 0.7%
CHEMICALS & PLASTICS - 0.2%
Acetex Corp. yankee
9 3/4%, 10/1/03 B1 1,270,000 1,289,050
Foamex LP/Foamex Capital Corp.
9 7/8%, 6/15/07 (d) B3 320,000 324,000
General Chemical Corp.
9 1/4%, 8/15/03 B2 1,320,000 1,349,700
Pioneer Americas Acquisition
Corp. 9 1/4%, 6/15/07 (d) B1 200,000 197,000
Praxair, Inc. 6.90%, 11/1/06 A3 4,000,000 3,949,200
Sterling Chemicals Holdings,
Inc. 11 1/4%, 4/1/07 B3 1,870,000 1,982,200
9,091,150
IRON & STEEL - 0.1%
Neenah Corp. 11 1/8%,
5/1/07 (d) B3 1,690,000 1,791,400
METALS & MINING - 0.0%
Well Aluminum Corp.
10 1/8%, 6/1/05 (d) B2 80,000 82,400
PACKAGING & CONTAINERS - 0.2%
BWAY Corp. 10 1/4%,
4/15/07 (d) B2 1,490,000 1,601,750
Owens-Illinois, Inc.:
7.85%, 5/15/04 Ba1 1,180,000 1,196,225
9.95%, 10/15/04 Ba3 3,030,000 3,211,800
8.10%, 5/15/07 Ba1 940,000 952,925
Silgan Holdings, Inc.
9%, 6/1/09 (d) B1 2,060,000 2,075,450
9,038,150
PAPER & FOREST PRODUCTS - 0.2%
Asia Pulp & Paper Finance II
Mauritius Ltd. 12%,
3/15/04 (d) B3 860,000 881,500
Florida Coast Paper Co. LLC/
Florida Coast Paper Finance
Corp., Series B, 12 3/4%,
6/1/03 Caa 900,000 929,250
Gaylord Container Corp.
11 1/2%, 5/15/01 B3 220,000 231,275
Repap Wisconsin, Inc.:
9 1/4%, 2/1/02 B2 1,780,000 1,788,900
9 7/8%, 5/1/06 Caa 190,000 191,425
Repap New Brunswick, Inc.
yankee 10 5/8%, 4/15/05 Caa 690,000 650,325
Riverwood International Corp.
10 1/4%, 4/1/06 B3 1,730,000 1,704,050
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Stone Container Corp.
10 3/4%, 10/1/02 B1 $ 2,540,000 $ 2,679,700
9,056,425
TOTAL BASIC INDUSTRIES 29,059,525
CONSTRUCTION & REAL ESTATE - 0.2%
BUILDING MATERIALS - 0.1%
Building Materials Corp. of
America 0%, 7/1/04 (b) B1 3,790,000 3,448,900
Falcon Building Products, Inc.
9 1/2%, 6/15/07 (d) B3 90,000 89,325
Nortek, Inc. 9 1/4%, 3/15/07 Ba3 790,000 805,800
4,344,025
CONSTRUCTION - 0.1%
Greystone Homes, Inc.
10 3/4%, 3/1/04 Ba3 1,950,000 2,130,375
REAL ESTATE - 0.0%
Iron Mountain, Inc. 10 1/8%,
10/1/06 B3 1,050,000 1,115,625
TOTAL CONSTRUCTION & REAL ESTATE 7,590,025
DURABLES - 0.5%
AUTOS, TIRES, & ACCESSORIES - 0.1%
Aftermarket Technology Corp.
12%, 8/1/04 B3 1,313,000 1,463,995
Blue Bird Body Co. 10 3/4%,
11/15/06 B2 1,545,000 1,637,700
Delco Remy International, Inc.
10 5/8%, 8/1/06 (d) B2 390,000 413,400
Tennessee Gas Pipeline Co.
7%, 3/15/27 Baa3 2,630,000 2,628,422
6,143,517
HOME FURNISHINGS - 0.1%
Interlake Corp. 12 1/8%,
3/1/02 B3 2,470,000 2,587,325
Knoll, Inc. 10 7/8%,
3/15/06 B1 623,000 689,194
3,276,519
TEXTILES & APPAREL - 0.3%
GFSI, Inc. 9 5/8%, 3/1/07 (d) B3 2,480,000 2,504,800
Levi Strauss & Co. 7%,
11/1/06 (d) Baa2 7,700,000 7,616,840
10,121,640
TOTAL DURABLES 19,541,676
ENERGY - 0.9%
ENERGY SERVICES - 0.3%
Falcon Drilling, Inc. 9 3/4%,
1/15/01 Ba3 930,000 953,250
Parker Drilling Co. 9 3/4%,
11/15/06 B1 310,000 323,950
Petroliam Nasional BHD yankee
7 1/8%, 10/18/06 (d) A1 7,000,000 7,023,870
Pride Petroleum Services, Inc.
9 3/8%, 5/1/07 Ba3 1,690,000 1,749,150
10,050,220
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
ENERGY - CONTINUED
OIL & GAS - 0.6%
Energy Corp. America 9 1/2%,
5/15/07 (d) B2 $ 2,800,000 $ 2,758,000
Flores & Rucks, Inc. 9 3/4%,
10/1/06 B3 1,780,000 1,860,100
Forcenergy, Inc. 8 1/2%,
2/15/07 B2 1,300,000 1,270,750
Gulf Canada Resources Ltd.
yankee 9 5/8%, 7/1/05 Ba2 990,000 1,060,538
Husky Oil Ltd. yankee
6 7/8%, 11/15/03 Baa3 2,680,000 2,642,105
Occidental Petroleum Corp.:
10.94%, 5/17/00 Baa3 2,700,000 2,989,575
6.39%, 11/9/00 Baa3 1,000,000 987,290
8 1/2%, 11/9/01 Baa2 1,251,000 1,325,022
Ocean Energy, Inc. 8 7/8%,
7/15/07 (d) B3 1,860,000 1,860,000
Pennzoil Co. 9 5/8%,
11/15/99 Baa3 2,260,000 2,407,827
Petsec Energy, Inc. 9 1/2%,
6/15/07 (d) B3 190,000 190,000
Ras Laffan Liquid Natural
Gas Co. Ltd. yankee
7.628%, 9/15/06 (d) A3 4,880,000 4,942,513
United Refining Co. 10 3/4%,
6/15/07 (d) B2 760,000 752,400
25,046,120
TOTAL ENERGY 35,096,340
FINANCE - 6.4%
ASSET-BACKED SECURITIES - 1.1%
Airplanes Pass Through Trust
10 7/8%, 3/15/19 Ba2 8,550,000 9,875,250
Caterpillar Financial Asset Trust
6.55%, 5/22/02 A3 880,000 881,925
CPS Auto Grantor Trust
6.55%, 12/15/02 Aaa 3,269,748 3,276,900
Green Tree Financial Corp.:
6 1/2%, 6/15/27 Aaa 1,800,000 1,803,924
6.80%, 6/15/27 Aaa 1,900,000 1,909,500
6.45%, 9/15/28 Aaa 3,640,000 3,629,763
Olympic Automobile Receivables
Trust:
6.40%, 9/15/01 Aaa 4,550,000 4,561,577
6.70%, 3/15/02 Aaa 2,150,000 2,159,407
Premier Auto Trust:
8.05%, 4/4/00 Aaa 6,804,000 6,914,565
6%, 5/6/00 Aaa 2,320,000 2,317,819
WFS Financial Owner Trust
6.55%, 10/20/04 Aaa 4,430,000 4,417,984
41,748,614
BANKS - 1.7%
ABN Amro Bank NV 6 5/8%,
10/31/01 Aa3 7,000,000 6,971,090
Banc One Corp. 6.70%,
3/24/00 Aa3 4,500,000 4,520,970
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
BanPonce Financial Corp.
7.72%, 4/13/00 A3 $ 2,000,000 $ 2,042,740
BanPonce Corp. 6.665%,
3/5/01 A3 4,450,000 4,428,952
BanPonce Trust I 8.327%,
2/1/27 (d) Baa1 6,450,000 6,518,241
Capital One Bank:
6.74%, 5/31/99 Baa3 4,000,000 4,005,080
7.20%, 7/19/99 Baa3 8,000,000 8,093,760
6.42%, 11/12/99 Baa3 4,900,000 4,874,275 8 1/8%, 3/1/00 Baa3
1,500,000 1,550,250
Den Danske Bank AS
7.40%, 6/15/10 (d)(g) A1 4,580,000 4,576,611
Korea Development Bank yankee
7 1/4%, 5/15/06 A1 5,660,000 5,614,890
Midland Bank PLC yankee
7 5/8%, 6/15/06 A1 3,000,000 3,089,550
NB Capital Trust IV 8 1/4%,
4/15/27 A1 4,000,000 4,098,960
Signet Bank 7.80%, 9/15/06 Baa1 3,000,000 3,097,440
Signet Banking Corp.
9 5/8%, 6/1/99 Baa2 790,000 831,981
Summit Bancorp. 8 5/8%,
12/10/02 BBB 1,730,000 1,855,269
Union Planters National Bank
6.81%, 8/20/01 A3 3,500,000 3,504,375
69,674,434
CREDIT & OTHER FINANCE - 3.0%
AT&T Capital Corp.:
6.02%, 12/1/98 Baa3 7,500,000 7,477,950
6.39%, 1/22/99 Baa3 1,520,000 1,522,918
6.26%, 2/18/99 Baa3 8,000,000 7,983,120
6.16%, 12/3/99 Baa3 2,750,000 2,720,328
Ahmanson Capital Trust I
8.36%, 12/1/26 (d) Baa3 4,250,000 4,285,488
BCH Cayman Islands Ltd.
yankee 7.70%, 7/15/06 A3 2,600,000 2,656,368
CIT Group Holdings, Inc.
6 1/4%, 10/4/99 Aa3 6,500,000 6,483,750
Chrysler Financial Corp.
6 3/8%, 1/28/00 A3 7,600,000 7,577,200
Finova Capital Corp.:
6.44%, 11/6/01 Baa1 5,500,000 5,422,780
6.12%, 5/28/02 Baa1 2,000,000 1,936,840
First Security Capital I
8.41%, 12/15/26 A3 1,690,000 1,722,887
Ford Motor Credit Co.:
5.73%, 2/23/00 A1 3,250,000 3,185,423
6.65%, 5/22/00 A1 9,000,000 9,008,910
5.68%, 2/15/01 A1 5,000,000 4,835,000
6.57%, 3/19/01 A1 700,000 696,220
7%, 9/25/01 A1 12,500,000 12,605,500
General Electric Capital Corp.
6.94%, 4/13/09 (f) Aaa 7,000,000 7,065,870
General Motors Acceptance
Corp. 5 5/8%, 2/1/99 A3 5,000,000 4,947,250
GreenPoint Capital Trust I
9.10%, 6/1/27 (d) Ba1 1,200,000 1,207,200
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
FINANCE - CONTINUED
CREDIT & OTHER FINANCE - CONTINUED
Heller Financial, Inc.
7 7/8%, 11/1/99 A2 $ 5,050,000 $ 5,187,461
Household Finance Corp.
5.7825%, 6/4/98 (g) A2 12,500,000 12,500,000
KeyCorp Institutional Capital
Series A, 7.826%, 12/1/26 A1 3,600,000 3,496,356
Nordstrom Credit, Inc.
7 1/4%, 4/30/02 A2 3,500,000 3,558,450
TransAmerican Energy Corp.
11 1/2%, 6/15/02 (d) B3 230,000 224,250
Triton Energy Ltd./Triton Energy
Corp. 9 1/4%, 4/15/05 Ba2 930,000 984,638
119,292,157
INSURANCE - 0.2%
Reliance Group:
9%, 11/15/00 Ba3 180,000 185,400
9 3/4%, 11/15/03 B1 3,390,000 3,534,075
SunAmerica, Inc. 6.20%,
10/31/99 Baa1 5,500,000 5,461,005
9,180,480
SAVINGS & LOANS - 0.4%
Bank UTD Corp. 8 7/8%,
5/1/07 Ba3 3,760,000 3,886,900
Chevy Chase Savings Bank FSB
9 1/4%, 12/1/08 B1 2,410,000 2,416,025
First Nationwide Holdings, Inc.
10 5/8%, 10/1/03 Ba3 1,050,000 1,139,250
First Nationwide Parent Holdings
Ltd. 12 1/2%, 4/15/03 B3 3,530,000 3,935,950
Great Western Financial Corp.
8.60%, 2/1/02 Baa1 2,000,000 2,131,500
Long Island Savings Bank FSB
7%, 6/13/02 Baa3 2,500,000 2,503,125
16,012,750
TOTAL FINANCE 255,908,435
HEALTH - 0.5%
MEDICAL EQUIPMENT & SUPPLIES - 0.1%
McKesson Corp. 6.60%,
3/1/00 (d) A3 4,570,000 4,574,570
MEDICAL FACILITIES MANAGEMENT - 0.4%
Columbia/HCA Healthcare Corp.:
6 1/2%, 3/15/99 A2 4,500,000 4,515,615
6 7/8%, 7/15/01 A2 2,000,000 2,010,400
Integrated Health Services, Inc.
9 1/2%, 9/15/07 (d) B1 1,300,000 1,329,250
Tenet Healthcare Corp.:
8%, 1/15/05 Ba1 280,000 280,000
10 1/8%, 3/1/05 Ba3 3,760,000 4,098,400
8 5/8%, 1/15/07 Ba3 5,120,000 5,196,800
17,430,465
TOTAL HEALTH 22,005,035
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
HOLDING COMPANIES - 0.2%
Norfolk Southern Corp.
7.05%, 5/1/37 Baa1 $ 6,610,000 $ 6,708,753
INDUSTRIAL MACHINERY & EQUIPMENT - 0.2%
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
Continental Global Group, Inc.
11%, 4/1/07 (d) B2 730,000 766,500
Exide Corp. 10%, 4/15/05 B1 825,000 853,875
Goss Graphic System, Inc.
12%, 10/15/06 B2 1,890,000 2,079,000
3,699,375
POLLUTION CONTROL - 0.1%
Allied Waste of North America,
Inc. 10 1/4%, 12/1/06 (d) B3 1,990,000 2,129,300
WMX Technologies, Inc.
7.10%, 8/1/26 A3 2,700,000 2,751,219
4,880,519
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 8,579,894
MEDIA & LEISURE - 2.8%
BROADCASTING - 1.8%
Adelphia Communications Corp.:
9 1/2%, 2/15/04 B3 4,130,000 3,923,500
9 7/8%, 3/1/07 (d) - 1,020,000 984,300
Cablevision System Corp.:
9 1/4%, 11/1/05 B2 1,370,000 1,407,675
9 7/8%, 5/15/06 B2 1,330,000 1,413,125
sr. sub. deb. 9 7/8%,
2/15/13 B2 340,000 357,850
Capstar Radio Broadcasting
Partners, Inc. (d):
9 1/4%, 7/1/07 - 2,930,000 2,834,775
0%, 2/1/09 (b) CCC 600,000 385,500
Diamond Cable Communications
PLC yankee (b):
0%, 9/30/04 B3 2,320,000 1,873,400
0%, 2/15/07 (d) - 1,930,000 1,083,213
Echostar Communications Corp.
secured discount 0%,
6/1/04 (b) B2 2,320,000 1,948,800
Echostar Satellite Broadcasting
Corp. 0%, 3/15/04 (b) Caa 1,600,000 1,136,000
Echostar DBS Corp. 12 1/2%,
7/1/02 (d) Caa 930,000 921,863
Granite Broadcasting Corp.:
10 3/8%, 5/15/05 B3 710,000 718,875
9 3/8%, 12/1/05 B3 265,000 255,063
Intermedia Capital Partners IV LP/
Intermedia Partners IV Capital
Corp. 11 1/4%, 8/1/06 B2 890,000 957,863
International Cabletel, Inc.:
0%, 2/1/06 (b) B3 1,480,000 1,021,200
10%, 2/15/07 (d) - 2,480,000 2,504,800
Jacor Communications Co.
8 3/4%, 6/15/07 (d) B2 250,000 246,875
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
MEDIA & LEISURE - CONTINUED
BROADCASTING - CONTINUED
Lenfest Communications, Inc.
8 3/8%, 11/1/05 Ba3 $ 2,500,000 $ 2,462,500
Olympus Communications LP/
Olympus Capital Corp.
10 5/8%, 11/15/06 B1 1,070,000 1,118,150
Rogers Cablesystems Ltd. yankee
11%, 12/1/15 B2 1,800,000 1,971,000
SCI Television, Inc. secured
11%, 6/30/05 Ba1 1,480,000 1,561,400
SFX Broadcasting, Inc.
10 3/4%, 5/15/06 B3 1,870,000 2,014,925
TCI Communication, Inc.:
7 1/4%, 6/15/99 Ba1 8,590,000 8,655,628
6.46%, 3/6/00 Ba1 6,570,000 6,462,186
TCI Communications Financing
III 9.65%, 3/31/27 Ba3 3,480,000 3,644,743
Tele Communications, Inc.
9 1/4%, 4/15/02 Ba1 3,000,000 3,219,060
Telemundo Group, Inc.
7%, 2/15/06 (f) B1 4,170,000 3,992,775
Telewest PLC 0%, 10/1/07 (b) B1 4,860,000 3,511,350
Time Warner, Inc.:
7.95%, 2/1/00 Ba1 7,810,000 8,029,383
7 3/4%, 6/15/05 Ba1 2,150,000 2,184,938
9.15%, 2/1/23 Ba1 1,020,000 1,126,580
73,929,295
ENTERTAINMENT - 0.1%
AMC Entertainment, Inc.
9 1/2%, 3/15/09 (d) B2 1,560,000 1,583,400
Cinemark USA, Inc.
9 5/8%, 8/1/08 B2 340,000 345,100
Viacom, Inc. 8%, 7/7/06 B1 3,470,000 3,365,900
5,294,400
LEISURE DURABLES & TOYS - 0.1%
Coleman Escrow Corp.
secured 1st priority
0%, 5/15/01 (d) B3 3,000,000 1,890,000
LODGING & GAMING - 0.4%
American Skiing Co.
12%, 7/15/06 B3 2,600,000 2,730,000
Circus Circus Enterprises, Inc.
7%, 11/15/36 Baa2 2,125,000 2,063,906
Courtyard by Marriott II LP/
Courtyard II Finance Co.,
Series B, 10 3/4%, 2/1/08 B- 1,190,000 1,288,175
HMC Acquisition Properties, Inc.
9%, 12/15/07 Ba3 4,730,000 4,777,300
HMH Properties, Inc.
9 1/2%, 5/15/05 Ba3 1,620,000 1,688,850
Hollywood Casino Corp.
12 3/4%, 11/1/03 B2 330,000 349,800
Horseshoe Gaming LLC
9 3/8%, 6/15/07 (d) B3 480,000 483,000
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Prime Hospitality Corp.
9 3/4%, 4/1/07 - $ 1,880,000 $ 1,978,700
Sun International Hotels Ltd./Sun
International North America,
Inc. yankee 9%, 3/15/07 Ba3 1,810,000 1,837,150
Wyndham Hotel Corp.
10 1/2%, 5/15/06 B2 580,000 648,150
17,845,031
PUBLISHING - 0.2%
Golden Books Publishing, Inc.
7.65%, 9/15/02 B1 490,000 453,250
News America Holdings, Inc.
7.70%, 10/30/25 Baa3 5,310,000 5,028,145
Sun Media Corp. (d):
yankee 9 1/2%, 2/15/07 B3 1,200,000 1,212,000
9 1/2%, 5/15/07 B3 370,000 373,700
7,067,095
RESTAURANTS - 0.2%
Foodmaker, Inc. 9 3/4%,
6/1/02 B3 2,630,000 2,695,750
Host Marriott Travel Plazas, Inc.
9 1/2%, 5/15/05 B1 5,500,000 5,720,000
8,415,750
TOTAL MEDIA & LEISURE 114,441,571
NONDURABLES - 0.5%
FOODS - 0.2%
Chiquita Brands International, Inc.:
9 5/8%, 1/15/04 B1 1,980,000 2,041,875
10 1/4%, 11/1/06 B1 220,000 233,200
ConAgra, Inc. 7 1/8%,
10/1/26 Baa1 4,250,000 4,268,870
Specialty Foods Corp.
11 1/8%, 10/1/02 B3 2,760,000 2,732,400
9,276,345
HOUSEHOLD PRODUCTS - 0.1%
Revlon Consumer Products Corp.
10 1/2%, 2/15/03 B3 4,120,000 4,387,800
TOBACCO - 0.2%
Philip Morris Companies, Inc.:
7 1/4%, 9/15/01 A2 4,600,000 4,635,052
6.95%, 6/1/06 A2 4,420,000 4,434,719
9,069,771
TOTAL NONDURABLES 22,733,916
RETAIL & WHOLESALE - 1.1%
APPAREL STORES - 0.1%
AnnTaylor, Inc. 8 3/4%,
6/15/00 B3 2,810,000 2,824,050
Lamonts Apparel, Inc. 10 1/4%,
11/1/99 pay-in-kind (d)(h) - 2,816,000 112,640
Specialty Retailers, Inc. (d):
8 1/2%, 7/15/05 Ba3 810,000 807,975
9%, 7/15/07 B2 80,000 79,600
3,824,265
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
GENERAL MERCHANDISE STORES - 0.7%
Dayton Hudson Corp.:
6.80%, 10/1/01 Baa1 $ 4,000,000 $ 3,993,160
7 1/2%, 7/15/06 Baa1 3,500,000 3,569,545
Federated Department Stores, Inc.:
10%, 2/15/01 Baa2 8,830,000 9,659,755
8 1/8%, 10/15/02 Baa2 1,510,000 1,573,148
K Mart Corp.:
12 1/2%, 3/1/05 Ba3 2,020,000 2,434,100
7 3/4%, 10/1/12 Ba3 240,000 219,600
8 1/4%, 1/1/22 Ba3 1,790,000 1,628,900
Michaels Stores, Inc. 10 7/8%,
6/18/06 Ba2 1,090,000 1,171,750
Parisian, Inc. 9 7/8%, 7/15/03 B1 2,120,000 2,204,800
Penney (J.C.) Co., Inc.
6.95%, 4/1/00 A2 4,300,000 4,336,206
30,790,964
GROCERY STORES - 0.3%
Kroger Co. 8.15%, 7/15/06 Baa3 2,250,000 2,372,310
Pathmark Stores, Inc.:
12 5/8%, 6/15/02 Caa 1,720,000 1,763,000
9 5/8%, 5/1/03 B3 3,760,000 3,628,400
0%, 11/1/03 (b) Caa 1,670,000 1,139,775
Penn Traffic Co.:
10 1/4%, 2/15/02 B3 1,060,000 911,600
8 5/8%, 12/15/03 B3 460,000 371,450
Pueblo Xtra International, Inc.
9 1/2%, 8/1/03 (d) B3 480,000 463,200
Randalls Food Markets, Inc.
9 3/8%, 7/1/07 (d) B2 140,000 139,475
10,789,210
TOTAL RETAIL & WHOLESALE 45,404,439
SERVICES - 0.5%
LEASING & RENTAL - 0.3%
PHH Corp. 5.6775%,
6/11/98 (g) A2 12,500,000 12,498,620
PRINTING - 0.0%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa 1,410,000 1,448,775
SERVICES - 0.2%
Borg-Warner Security Corp.
9 5/8%, 3/15/07 (d) B3 960,000 964,800
Orion Network System, Inc. unit:
0%, 1/15/07 (b) B2 4,060,000 2,314,200
11 1/4%, 1/15/07 B2 2,710,000 2,770,975
6,049,975
TOTAL SERVICES 19,997,370
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
TECHNOLOGY - 0.4%
COMPUTERS & OFFICE EQUIPMENT - 0.3%
Comdisco, Inc. 6 3/8%,
11/30/01 Baa1 $ 8,300,000 $ 8,124,787
Unisys Corp.:
12%, 4/15/03 B1 2,310,000 2,500,575
11 3/4%, 10/15/04 B1 970,000 1,047,600
11,672,962
ELECTRONICS - 0.1%
Advanced Micro Devices, Inc.
11%, 8/1/03 Ba1 2,040,000 2,264,400
Fairchild Semiconductor Corp.:
10 1/8%, 3/15/07 (d) B2 1,340,000 1,413,700
11.74%, 3/15/08
pay-in-kind (e) - 1,760,000 1,696,288
Viasystems, Inc. 9 3/4%,
6/1/07 (d) B3 190,000 193,325
5,567,713
TOTAL TECHNOLOGY 17,240,675
TRANSPORTATION - 0.3%
AIR TRANSPORTATION - 0.2%
Delta Air Lines, Inc. 9 7/8%,
5/15/00 Baa3 1,500,000 1,616,640
US Air, Inc.:
9 5/8%, 2/1/01 B3 1,810,000 1,864,300
10%, 7/1/03 B3 2,200,000 2,266,000
10 3/8%, 3/1/13 B1 1,240,000 1,357,800
7,104,740
RAILROADS - 0.1%
Burlington Northern Santa Fe
Corp. 7.29%, 6/1/36 Baa2 3,000,000 3,075,360
TOTAL TRANSPORTATION 10,180,100
UTILITIES - 1.7%
CELLULAR - 0.3%
Globalstar LP/Globalstar
Capital Corp. (d):
unit 11 3/8%, 2/15/04 B3 1,410,000 1,410,000
11 1/4%, 6/15/04 B3 1,240,000 1,159,400
McCaw International Ltd.
unit 0%, 4/15/07 (b)(d) CCC 3,200,000 1,536,000
Millicom International Cellular
SA 0%, 6/1/06 (b) B3 1,550,000 1,108,250
Paging Network, Inc.
8 7/8%, 2/1/06 B2 670,000 609,700
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
UTILITIES - CONTINUED
CELLULAR - CONTINUED
Telesystem International
Wireless, Inc. 0%,
6/30/07 (b)(d) B- $ 290,000 $ 154,425
360 Degrees Communications Co.:
7 1/8%, 3/1/03 Ba1 4,310,000 4,286,252
7 1/2%, 3/1/06 Ba1 3,150,000 3,142,314
13,406,341
ELECTRIC UTILITY - 0.6%
CMS Energy Corp. 8 1/8%,
5/15/02 Ba3 2,230,000 2,246,725
CalEnergy, Inc. 9 1/2%,
9/15/06 Ba2 900,000 963,000
Commonwealth Edison Co.
7 3/8%, 9/15/02 Baa2 5,170,000 5,246,568
Hydro-Quebec yankee
7.40%, 3/28/25 A2 2,620,000 2,839,687
Israel Electric Corp. yankee
7 7/8%, 12/15/26 (d) A3 2,940,000 2,960,786
Long Island Lighting Co.
8 5/8%, 4/15/04 Ba1 6,130,000 6,385,498
NIPSCO Capital Markets, Inc.
7.39%, 4/1/04 Baa1 3,500,000 3,531,710
24,173,974
TELEPHONE SERVICES - 0.8%
LCI International, Inc.
7 1/4%, 6/15/07 Ba1 3,650,000 3,615,325
MFS Communications, Inc. (b):
0%, 1/15/04 Ba3 4,255,000 3,960,554
0%, 1/15/06 Ba3 5,945,000 4,689,119
McleodUSA, Inc. 0%,
3/1/07 (b)(d) B3 1,240,000 790,500
Shared Technologies Fairchild
Communications Corp.
0%, 3/1/06 (b) Caa 1,020,000 910,350
Teleport Communications Group,
Inc. 0%, 7/1/07 (b) B1 1,940,000 1,399,225
Winstar Equipment Corp.
12 1/2%, 3/15/04 (d) CCC 1,140,000 1,114,350
WorldCom, Inc. 7 3/4%,
4/1/07 Ba1 12,750,000 13,039,170
29,518,593
TOTAL UTILITIES 67,098,908
TOTAL NONCONVERTIBLE CORPORATE BONDS
(Cost $681,642,417) 688,373,462
U.S. GOVERNMENT AND GOVERNMENT
AGENCY OBLIGATIONS - 7.8%
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
U.S. TREASURY OBLIGATIONS - 5.8%
9 1/4%, 8/15/98 Aaa $ 37,055,000 $ 38,380,828
7 3/4%, 12/31/99 Aaa 1,560,000 1,615,817
7 7/8%, 8/15/01 Aaa 315,000 331,982
11 7/8%, 11/15/03 Aaa 38,040,000 48,637,564
7%, 7/15/06 Aaa 10,507,000 10,809,076
11 3/4%, 2/15/10 (callable) Aaa 26,045,000 33,952,002
12 3/4%, 11/15/10 (callable) Aaa 12,000,000 16,651,920
13 7/8%, 5/15/11 (callable) Aaa 25,650,000 37,934,042
9%, 11/15/18 Aaa 10,240,000 12,667,187
7 1/4%, 2/ 15/23 Aaa 14,126,000 14,549,780
6 1/2%, 11/15/26 Aaa 19,365,000 18,572,197
234,102,395
U.S. GOVERNMENT AGENCY OBLIGATIONS - 2.0%
Farm Credit Systems Financial
Assistance Corp.
8.80%, 6/10/05 Aaa 2,000,000 2,244,060
Federal Agricultural Mortgage
Corp. 7.63%, 1/16/01 Aaa 3,321,000 3,442,947
Federal Farm Credit Bank:
8.16%, 12/7/04 Aaa 5,000,000 5,401,550
9.55%, 5/9/05 Aaa 2,500,000 2,914,050
Federal Home Loan Bank:
7.31%, 6/16/04 Aaa 2,500,000 2,584,375
8.22%, 11/17/04 Aaa 4,000,000 4,315,040
7.59%, 3/10/05 Aaa 3,850,000 4,047,313
Federal Home Loan Mortgage
Corporation 6 3/4%,
8/1/05 Aaa 2,500,000 2,492,975
Federal National Mortgage
Association 6.97%,
4/8/04 Aaa 6,010,000 6,103,876
Guaranteed Export Trust
Certificates (assets of Trust
guaranteed by U.S. Government
through Export-Import
Bank) Series 1994-A,
7.12%, 4/15/06 Aaa 7,596,471 7,734,157
State of Israel (guaranteed by U.S.
Government through Agency
for International Development):
6 5/8%, 8/15/03 Aaa 7,810,000 7,829,369
5 5/8%, 9/15/03 Aaa 8,540,000 8,130,849
6 3/4%, 8/15/04 Aaa 2,144,000 2,153,284
U.S. Trade Trust Certificates
(assets of Trust guaranteed
by U.S. Government
through Export-Import Bank)
6.69%, 1/15/09 (d) Aaa 5,760,000 5,725,555
U.S. GOVERNMENT AND GOVERNMENT
AGENCY OBLIGATIONS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
U.S. GOVERNMENT AGENCY OBLIGATIONS - CONTINUED
U.S. Department of Housing
and Urban Development
Government guaranteed
participation certificates:
Series 1995-A, 8.24%,
8/1/04 Aaa $ 3,260,000 $ 3,521,224
Series 1996-A, 6.67%, 8/1/01 Aaa 9,400,000 9,436,942
Series 1996-A, 7.63%,
8/1/14 (callable) Aaa 2,825,000 2,888,421
80,965,987
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $320,604,811) 315,068,382
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES - 5.4%
FEDERAL HOME LOAN MORTGAGE CORPORATION - 0.4%
5 1/2%, 1/1/03 to 6/1/03 Aaa 4,030,042 3,846,916
7%, 4/1/01 to 8/1/01 Aaa 2,876,294 2,891,588
7 1/2%, 7/1/27 (j) Aaa 8,760,000 8,801,063
8 1/2%, 7/1/21 to 6/1/23 Aaa 268,153 280,424
15,819,991
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 3.9%
5 1/2%, 2/1/03 to 5/1/03 Aaa 4,018,328 3,834,971
6%, 10/1/02 to 5/1/26 Aaa 65,927,205 63,068,623
6 1/2%, 12/1/25 to 7/1/26 Aaa 73,328,857 70,194,335
7%, 5/1/26 Aaa 14,281,900 14,014,114
7 1/2%, 5/1/26 to 8/1/26 Aaa 5,646,930 5,665,761
156,777,804
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 1.1%
6%, 12/15/08 to 5/15/26 Aaa 10,839,939 10,530,343
6 1/2%, 6/15/08 to 7/15/09 Aaa 20,093,334 19,870,622
8%, 5/15/25 Aaa 226,289 231,661
8 1/2%, 12/15/16
to 10/15/26 Aaa 13,809,620 14,349,525
44,982,151
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $214,280,261) 217,579,946
COMMERCIAL MORTGAGE SECURITIES - 1.2%
American Southwest Financial
Securities Series 1994-C2
Class B2, 12.79%,
12/25/01 (d)(g) - 750,000 738,750
BKB Commercial Mortgage Trust
Series 1997-C1 Class D,
7.83%, 2/25/43 (d)(g) BBB 1,800,000 1,818,000
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Berkeley Federal Bank & Trust
FSB Series 1994 Class 1-B,
7.78%, 8/1/24 (d)(g) - $ 1,900,000 $ 1,371,563
Blackrock Capital Funding LLC
Series 1996 Class C2,
7.60%, 11/16/26 (d) Aaa 1,215,001 1,226,771
CBA Mortgage Corp. Series
1993-C1 Class E, 7.76%,
12/25/03 (d)(g) Ba2 500,000 480,625
CS First Boston Mortgage
Securities Corp. Series
1995-AEWI Class E,
9.80%, 11/25/97 (d)(g) - 1,100,000 1,106,875
DLJ Mortgage Acceptance Corp.
Series 1993-MF12 Class B-2,
10.10%, 9/18/03 (d) - 600,000 601,500
Equitable Life Assurance Society
of the United States (The) (d):
Series 174 Class B1, 7.33%,
5/15/06 Aa2 3,500,000 3,560,480
Series 174, Class D1, 7.77%,
5/15/06 Baa2 2,200,000 2,260,896
Series 1996-1 Class C1,
7.52%, 5/15/06 A2 2,300,000 2,355,499
First Chicago/Lennar Trust I
Series 1997-CHL1 (g):
Class D, 8.11%, 5/29/08 - 1,100,000 1,050,156
Class E, 8.11%, 4/1/39 - 1,600,000 1,223,000
General Motors Acceptance
Corp. Commercial Mortgage
Securities, Inc. Series
1996-C1 Class F, 7.86%,
11/15/06 (d) Ba3 750,000 702,758
Kidder Peabody Acceptance
Corp. sequential pay, Series
1993-M1 Class A-2, 7.15%,
4/25/25 Aa2 2,325,889 2,338,245
Merrill Lynch Mortgage
Investments, Inc. Series
1994 Class M1-E, 8.13%,
6/25/22 (d)(g) Ba2 5,670,000 5,549,513
Morgan Stanley Capital One, Inc.:
Series 1996-MBL1 Class E,
8.661%, 5/25/21 (d) - 1,870,310 1,717,178
sequential pay Series 1997-C1
Class A-1C, 7.63%,
2/15/20 Aaa 4,560,000 4,718,175
Mortgage Capital Funding, Inc.
Series 1996-MC1 Class G,
7.15%, 7/15/28 (d) BB 1,000,000 878,050
NB Commercial Mortgage
sequential pay, Series FSI
Class A, 7.187%,
10/20/23 (d) - 1,752,227 1,755,239
Penn Mutual Life Insurance Co.
(The) Series 1996-PML (d):
Class K, 7.90%, 11/15/26 - 1,473,000 911,419
Class L, 7.90%, 11/15/26 - 1,133,000 483,678
COMMERCIAL MORTGAGE SECURITIES - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Structured Asset Securities Corp.:
Series 1995-C1 Class E,
7 3/8%, 9/25/24 (d) BB $ 1,200,000 $ 1,068,750
Series 1993-C1 Class E,
6.60%, 10/25/24 (d) B 1,250,000 437,500
sequential pay Series 1996
Class A-2A, 7 3/4%,
2/25/28 Aaa 1,624,291 1,647,133
Series 1996-CFL Class G,
7 3/4%, 2/25/28 (d) - 1,000,000 855,781
Series 1996-C3 Class E,
8.46%, 6/25/30 (d) - 500,000 472,422
Wells Fargo Capital Markets
Apartment Financing Trust
6.56%, 12/29/05 (d) Aaa 4,650,000 4,586,574
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $44,396,294) 45,916,530
FOREIGN GOVERNMENT OBLIGATIONS (I) - 0.5%
Export Development Corp. yankee
8 1/8%, 8/10/99 Aa2 1,640,000 1,697,531
Israeli State euro 6 3/8%,
12/19/01 A3 5,750,000 5,642,188
Manitoba Province yankee
6 3/8%, 10/15/99 A1 7,000,000 6,999,400
Mexico Value recovery rights
6/30/03 discount A - 2,000 -
Newfoundland Province yankee
11 5/8%, 10/15/07 Baa1 2,000,000 2,652,000
Quebec Province yankee
7.22%, 7/22/36 (f) A2 3,500,000 3,644,060
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $20,474,119) 20,635,179
CERTIFICATES OF DEPOSIT - 3.0%
ABN-Amro Bank NV yankee
5.65%, 12/23/97 8,000,000 7,990,202
Banque Nationale de Paris
yankee 5.85%, 9/30/97 4,800,000 4,801,296
Bayerische Vereinsbank AG
yankee 5.56%, 7/14/97 12,500,000 12,499,668
Caisse Nationale de Credit Agricole
yankee 5.60%, 7/21/97 12,500,000 12,499,673
Deutsche Bank AG yankee
6.20%, 4/10/98 6,000,000 6,004,704
Landesbank Hessen-Thuringen
yankee:
5.78%, 1/27/98 6,200,000 6,195,567
5.67%, 2/11/98 3,000,000 2,994,737
National Westminster Bank PLC
yankee 5 1/2%, 8/5/97 12,000,000 11,996,960
Rabobank Nederlan, Coop Central
yankee:
5.97%, 3/20/98 3,500,000 3,502,013
6.20%, 4/10/98 5,000,000 5,003,920
PRINCIPAL VALUE
AMOUNT (NOTE 1)
Sanwa Bank Ltd. yankee
5 3/4%, 8/27/97 $ 12,500,000 $ 12,500,631
Societe Generale yankee
5.55%, 7/28/97 12,000,000 11,998,172
Swiss Bank Corp. yankee
5 1/2%, 8/4/97 12,000,000 11,997,162
SunTrust Bank 5.85%, 11/25/97 11,000,000 11,003,412
TOTAL CERTIFICATES OF DEPOSIT
(Cost $120,986,009) 120,988,117
COMMERCIAL PAPER - 1.5%
ABN-Amro North America, Inc.
yankee 5.82%, 12/5/97 1,000,000 975,466
AC Acquisition Holding Co.
5.56%, 7/9/97 4,500,000 4,493,700
BMW US Capital Corp. yankee
5.57%, 8/19/97 6,600,000 6,548,850
Caisse des Depots et Consignations
yankee 5.58%, 9/18/97 250,000 246,917
Citibank Credit Card Master Trust I
(Dakota Certificate Program):
5.58%, 7/7/97 2,600,000 2,597,138
5.60%, 8/22/97 1,900,000 1,884,168
Delaware Funding Corp.
5.58%, 9/16/97 2,050,000 2,025,349
Fina Oil & Chemical Co.
5.61%, 8/14/97 3,400,000 3,375,945
General Electric Capital Corp.
5.75%, 7/1/97 6,400,000 6,399,016
Goldman Sachs Group LP
5.83%, 1/26/98 5,000,000 4,836,958
Nationwide Building Society
yankee 5.32%, 8/11/97 7,000,000 6,954,593
New Center Asset Trust
5.60%, 8/15/97 1,100,000 1,092,185
Norfolk Southern Corp.
5.77%, 7/16/97 2,500,000 2,493,622
Pacific Gas & Electric Co.
5.60%, 8/28/97 1,500,000 1,486,332
Triple A One Funding Corp.
5.58%, 7/16/97 3,600,000 3,591,152
Unifunding, Inc. yankee:
5.58%, 9/15/97 4,800,000 4,742,712
5.67%, 11/12/97 8,000,000 7,832,000
TOTAL COMMERCIAL PAPER
(Cost $61,568,752) 61,576,103
BANK NOTES - 1.2%
Bank of Tokyo-Mitsubishi Ltd.
5.70%, 7/14/97 12,500,000 12,500,000
Corestates Bank NA 5.65%,
1/30/98 (g) 6,000,000 5,999,939
First Bank National Association
5.60%, 5/15/98 (g) 5,800,000 5,796,346
BANK NOTES - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
Morgan Guaranty Trust Co. 5.375%,
3/30/98 (g) $ 11,000,000 $ 10,994,720
Sumitomo Bank Ltd.
5.74%, 7/11/97 12,500,000 12,500,000
TOTAL BANK NOTES
(Cost $47,790,819) 47,791,005
CASH EQUIVALENTS - 0.2%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account dated 6/30/97
due 7/1/97:
at 5 7/8% $ 3,661,597 3,661,000
at 5.99% 250,042 250,000
at 5.93% 3,748,617 3,748,000
7,659,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $3,536,460,505) $ 4,022,978,346
LEGEND
1. Non-income producing
2. Debt obligation initially issued in zero coupon form which converts to
coupon form at a specified rate and date.
3. Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
4. Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of these securities amounted to $132,179,126 or 3.3% of net
assets.
5. Restricted securities - Investment in securities not registered under
the Securities Act of 1933 (see Note 2 of Notes to Financial Statements).
Additional information on each holding is as follows:
ACQUISITION ACQUISITION
SECURITY DATE COST
Fairchild Semiconductor Corp.
11.74%, 3/15/08 pay-in-kind 4/3/97 $1,541,077
6. Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date.
7. The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
8. Non-income producing - issuer filed for protection under the Federal
Bankruptcy Code or is in default of interest payment.
9. For foreign government obligations not individually rated by S&P or
Moody's, the ratings listed are assigned to securities by FMR, the fund's
investment adviser, based principally on S&P and Moody's ratings of the
sovereign credit of the issuing government.
10. Security purchased on a delayed delivery or when-issued basis
(see Note 2 of Notes to Financial Statements).
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $1,654,154,486 and $1,477,645,288, respectively, of which U.S.
government and government agency obligations aggregated $412,461,203 and
$889,699,347, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of FMR. The commissions paid to these affiliated
firms were $174,322 for the period.
The composition of long-term debt holdings as a percentage of total value
of investment in securities, is as follows:
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 19.5% AAA, AA, A 18.8%
Baa 3.9% BBB 5.7%
Ba 3.6% BB 2.0%
B 3.9% B 3.8%
Caa 0.2% CCC 0.4%
Ca, C 0.0% CC, C 0.0%
D 0.0%
For some foreign government obligations, FMR has assigned the ratings of
the sovereign credit of the issuing government. The percentage not rated by
both S&P and Moody's amounted to 0.6%. FMR has determined that unrated debt
securities that are lower quality account for 0.2% of the total value of
investment in securities.
Distribution of investments by country of issue, as a percentage of total
value of investment in securities, is as follows:
United States 88.6%
United Kingdom 2.9
Netherlands 2.1
France 1.4
Canada 1.0
Others (individually less than 1%) 4.0
TOTAL 100.0%
INCOME TAX INFORMATION
At June 30, 1997, the aggregate cost of investment securities for income
tax purposes was $3,538,260,955. Net unrealized appreciation aggregated
$484,717,391, of which $515,085,273 related to appreciated investment
securities and $30,367,882 related to depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in $ 4,022,978,346
securities, at value
(including
repurchase
agreements of
$7,659,000) (cost
$3,536,460,505) -
See accompanying
schedule
Cash 317,016
Receivable for 3,697,569
investments sold
Receivable for fund 1,283,409
shares sold
Dividends receivable 5,653,220
Interest receivable 21,592,771
Other receivables 59,936
TOTAL ASSETS 4,055,582,267
LIABILITIES
Payable for $ 13,833,520
investments
purchased
Regular delivery
Delayed delivery 8,800,150
Payable for fund 4,879,599
shares redeemed
Accrued management 1,828,948
fee
Other payables and 396,197
accrued expenses
TOTAL LIABILITIES 29,738,414
NET ASSETS $ 4,025,843,853
Net Assets consist of:
Paid in capital $ 3,392,224,145
Undistributed net 69,229,933
investment income
Accumulated 77,872,297
undistributed
net realized gain
(loss) on
investments and
foreign
currency
transactions
Net unrealized 486,517,478
appreciation
(depreciation) on
investments
and assets and
liabilities in
foreign currencies
NET ASSETS, for $ 4,025,843,853
242,519,191
shares outstanding
NET ASSET VALUE, $16.60
offering price
and redemption
price per share
($4,025,843,853 (divided by)
242,519,191
shares)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $ 20,936,069
Dividends
Interest 60,402,478
TOTAL INCOME 81,338,547
EXPENSES
Management fee $ 10,415,204
Transfer agent fees 1,341,983
Accounting fees and 402,957
expenses
Non-interested 8,207
trustees'
compensation
Custodian fees and 105,052
expenses
Registration fees 8,446
Audit 71,538
Legal 5,834
Miscellaneous 142,608
Total expenses 12,501,829
before reductions
Expense reductions (82,260 12,419,569
)
NET INVESTMENT 68,918,978
INCOME
REALIZED AND
UNREALIZED GAIN
(LOSS)
Net realized gain
(loss) on:
Investment 82,598,838
securities
Foreign currency (10,176 82,588,662
transactions )
Change in net
unrealized
appreciation
(depreciation) on:
Investment 255,138,426
securities
Assets and 519 255,138,945
liabilities in
foreign currencies
NET GAIN (LOSS) 337,727,607
NET INCREASE $ 406,646,585
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
OTHER INFORMATION $ 71,772
Expense reductions
Directed
brokerage
arrangements
Custodian credits 10,488
$ 82,260
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) SIX MONTHS YEAR ENDED
IN NET ASSETS ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED)
Operations $ 68,918,978 $ 123,680,897
Net investment
income
Net realized gain 82,588,662 331,183,089
(loss)
Change in net 255,138,945 15,746,586
unrealized
appreciation
(depreciation)
NET INCREASE 406,646,585 470,610,572
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
Distributions to (126,645,359) (119,397,539)
shareholders
From net
investment income
From net realized (317,686,664) (98,450,602)
gain
TOTAL DISTRIBUTIONS (444,332,023) (217,848,141)
Share transactions 160,759,463 270,086,820
Net proceeds from
sales of shares
Reinvestment of 444,332,023 217,848,141
distributions
Cost of shares (182,756,372) (432,347,524)
redeemed
NET INCREASE 422,335,114 55,587,437
(DECREASE) IN NET
ASSETS RESULTING
FROM SHARE
TRANSACTIONS
TOTAL INCREASE 384,649,676 308,349,868
(DECREASE) IN NET
ASSETS
NET ASSETS
Beginning of period 3,641,194,177 3,332,844,309
End of period $ 4,025,843,853 $ 3,641,194,177
(including
undistributed net
investment
income of
$69,229,933 and
$120,488,851,
respectively)
OTHER INFORMATION
Shares
Sold 10,083,606 17,138,645
Issued in 28,796,632 14,427,029
reinvestment of
distributions
Redeemed (11,428,361) (27,544,207)
Net increase 27,451,877 4,021,467
(decrease)
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1997
SELECTED PER-SHARE (UNAUDITED) 1996 1995 1994 1993 E 1992
DATA
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Net asset value, $ 16.93 $ 15.79 $ 13.79 $ 15.42 $ 13.32 $ 12.55
beginning of period
Income from
Investment
Operations
Net investment .29 D .63 .30 .45 .33 .32
income
Net realized and 1.45 1.55 1.99 (1.33) 2.39 1.09
unrealized gain
(loss)
Total from 1.74 2.18 2.29 (.88) 2.72 1.41
investment
operations
Less Distributions
From net (.59) (.57) (.29) (.29) (.33) (.31)
investment income
In excess of net - - - - (.04) -
investment income
From net realized (1.48) (.47) - (.46) (.25) (.33)
gain
Total distributions (2.07) (1.04) (.29) (.75) (.62) (.64)
Net asset value, end $ 16.60 $ 16.93 $ 15.79 $ 13.79 $ 15.42 $ 13.32
of period
TOTAL RETURN B, C 11.20% 14.60% 16.96% (6.09)% 21.23% 11.71%
RATIOS AND
SUPPLEMENTAL
DATA
Net assets, end of $ 4,025,844 $ 3,641,194 $ 3,332,844 $ 3,290,527 $ 2,422,692 $ 731,724
period (000
omitted)
Ratio of expenses to .67% A .74% .81% .81% .88% .91%
average net assets
Ratio of expenses to .66% A, .73% F .79% F .80% F .88% .91%
average net assets F
after expense
reductions
Ratio of net 3.69% A 3.60% 3.54% 4.07% 3.64% 4.89%
investment income
to average net
assets
Portfolio turnover rate 86% A 168% 256% 85% 113% 92%
Average commission $ .0464 $ .0163
rate G
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE
NOT ANNUALIZED AND DO NOT REFLECT CHARGES ATTRIBUTABLE
TO YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE
CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN. C THE
TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES
TO FINANCIAL STATEMENTS). D NET INVESTMENT INCOME PER SHARE HAS
BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING
DURING THE PERIOD. E EFFECTIVE JANUARY 1, 1993, THE FUND ADOPTED
STATEMENT OF POSITION 93-2, "DETERMINATION, DISCLOSURE,
AND FINANCIAL STATEMENT PRESENTATION OF INCOME, CAPITAL GAIN, AND
RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT
COMPANIES." AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT
CERTAIN RECLASSIFICATIONS RELATED TO BOOK TO TAX
DIFFERENCES. F FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS
WITH THIRD PARTIES WHO EITHER PAID OR REDUCED A
PORTION OF THE FUND'S EXPENSES (SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS). G FOR FISCAL YEARS BEGINNING ON OR AFTER
SEPTEMBER 1, 1995, A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE
COMMISSION RATE PER SHARE FOR SECURITY TRADES ON WHICH
COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD
AND FUND TO FUND DEPENDING ON THE MIX OF TRADES
EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION
RATE STRUCTURES MAY DIFFER.
</TABLE>
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can
look at the total percentage change in value, the average annual percentage
change or the growth of a hypothetical $10,000 investment. Total return
reflects the change in the value of an investment, assuming reinvestment of
the fund's dividend income and capital gains (the profits earned upon the
sale of securities that have grown in value). If Fidelity had not
reimbursed certain fund expenses, the life of fund total return would have
been lower.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 LIFE OF
JUNE 30, 1997 YEAR FUND
BALANCED 24.77% 15.39%
S&P 500(registered trademark) 34.70% 33.11%
Lehman Brothers Aggregate Bond Index 8.15% 9.91%
AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and show
what would have happened if the fund had achieved that return by performing
at a constant rate each year.
You can compare the fund's returns to the performance of the Standard &
Poor's 500 Index - a widely recognized, unmanaged index of common stocks -
and the performance of the Lehman Brothers Aggregate Bond Index - a market
value weighted performance benchmark for investment-grade fixed-rate debt
issues, including government, corporate, asset-backed, and mortgage-backed
securities, with maturities of at least one year.
Figures for more than one year assume a steady compounded rate of return
and are not the fund's year-by-year results, which fluctuated over the
periods shown. The life of fund figures are from commencement of operations
January 3, 1995.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL
CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of long-term growth and short-term
volatility. In turn, the share price and return of a
fund that invests in stocks will vary. That means if
you sell your shares during a market downturn,
you might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
(checkmark)
$10,000 OVER LIFE OF FUND
1995/01/03 10000.00 10000.00
10000.00
1995/01/31 9990.00 10258.23
10197.90
1995/02/28 10190.00 10658.00
10440.37
1995/03/31 10260.00 10972.51
10504.42
1995/04/30 10390.00 11295.66
10651.15
1995/05/31 10610.00 11747.14
11063.32
1995/06/30 10740.00 12020.03
11144.43
1995/07/31 10880.00 12418.61
11119.54
1995/08/31 10920.00 12449.78
11253.74
1995/09/30 11020.00 12975.16
11363.22
1995/10/31 10890.00 12928.84
11511.00
1995/11/30 11210.00 13496.42
11683.49
1995/12/31 11391.59 13756.36
11847.46
1996/01/31 11473.17 14224.63
11926.13
1996/02/29 11319.47 14356.49
11718.83
1996/03/31 11227.28 14494.74
11637.37
1996/04/30 11258.01 14708.39
11571.92
1996/05/31 11380.93 15087.72
11548.42
1996/06/30 11452.64 15145.21
11703.51
1996/07/31 11227.28 14476.09
11735.54
1996/08/31 11298.98 14781.39
11715.87
1996/09/30 11780.44 15613.29
11920.04
1996/10/31 12098.00 16043.91
12184.08
1996/11/30 12733.12 17256.66
12392.78
1996/12/31 12528.25 16914.81
12277.55
1997/01/31 12927.76 17971.65
12315.15
1997/02/28 13144.66 18112.54
12345.78
1997/03/31 12777.20 17368.30
12208.97
1997/04/30 13260.15 18405.19
12391.74
1997/05/31 13785.10 19525.70
12508.88
1997/06/30 14289.05 20400.45
12657.35
Let's say hypothetically that $10,000 was invested in Balanced Portfolio on
January 3, 1995, when the fund started. As the chart shows, by June 30,
1997, the value of the investment would have grown to $14,289 - a 42.89%
increase on the initial investment. For comparison, look at how both the
S&P 500 and Lehman Brothers Aggregate Bond Index did over the same period.
With dividends and capital gains, if any, reinvested, the same $10,000
investment in the S&P 500 would have grown to $20,400 - a 104.00% increase.
If $10,000 was put in the bond index, it would have grown to $12,657 - a
26.57% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
General Electric Co. 2.5
Bristol-Myers Squibb Co. 2.1
Philip Morris Companies, Inc. 2.1
Citicorp 2.1
Procter & Gamble Co. 2.0
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Finance 17.2
Health 10.5
Nondurables 9.8
Aerospace & Defense 6.9
Energy 6.6
ASSET ALLOCATION AS OF JUNE 30, 1997*
Row: 1, Col: 1, Value: 7.5
Row: 1, Col: 2, Value: 26.8
Row: 1, Col: 3, Value: 65.7
Row: 1, Col: 1, Value: 45.0
Row: 1, Col: 2, Value: 39.0
Row: 1, Col: 3, Value: 28.0
Row: 2, Col: 1, Value: 31.0
Row: 2, Col: 2, Value: 40.0
Row: 2, Col: 3, Value: 67.0
Row: 3, Col: 1, Value: 90.0
Row: 3, Col: 2, Value: 60.0
Row: 3, Col: 3, Value: 46.0
Stocks 65.7%
Bonds 26.8%
Short-term investments 7.5%
FOREIGN INVESTMENTS 8.4%
*
% OF FUND'S
INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with
Bettina Doulton,
Portfolio Manager of
Balanced Portfolio
Q. HOW DID THE FUND PERFORM, BETTINA?
G.V. Given the structure of the fund - a blend of equities and fixed-income
investments - the fund's performance tends to fall between its two
benchmark indices, the Standard & Poor's 500 Index and the Lehman Brothers
Aggregate Bond Index. That's exactly what happened over the six months that
ended June 30, 1997. The fund performed better than the Lehman Brothers
index, which returned 3.09% over that period, but underperformed the S&P
500, which returned a very strong 20.61%. For the 12 months that ended June
30, 1997, the Lehman Brothers index returned 8.15% and the S&P 500 returned
34.70%. Again, the fund's performance fell between that of the two indices.
Q. WHAT KEY STRATEGIES DID YOU PURSUE OVER THE PAST SIX MONTHS?
G.V. Because the asset allocation of the fund generally will approximate
60% equities and 40% fixed-income, the strategy is to add value through
security selection within each asset class. In the stock sub-portfolio, a
notable decision was my concentration on selected finance, nondurables and
pharmaceutical stocks - stocks that turned out to be among the better
performers during the period. Within these industries, diversified
financial-services company American Express and pharmaceuticals firm
Bristol-Myers Squibb were particularly strong contributors.
Q. WHAT TYPES OF EQUITY INVESTMENTS WERE MOST ATTRACTIVE TO YOU OVER THE
PERIOD?
G.V. Overall, stock selection remained company-specific, focused on firms
with competitive advantages or catalysts for positive change - including
dominant market positions, cost-structure reductions or new products - and
shareholder-friendly managements. The combination of some or all of these
attributes typically translates into solid earnings and generous free cash
flow. Of course, my decision to invest in a particular stock also is
contingent on an attractive valuation. Over the past six months, a
significant proportion of companies meeting these criteria have been
large-capitalization diversified financials and "consumer growth
companies," mainly pharmaceuticals and nondurables firms. One stock that I
found to be particularly attractive over the period was BankAmerica. This
bank is in the process of aggressively reducing its cost structure,
achieving improving returns on capital and using excess capital to
repurchase its shares. In addition, the firm has been the beneficiary of an
improving California economy.
Q. HOW DID SOME OF THE OTHER LARGER STOCK HOLDINGS PERFORM?
G.V. The fund's top five stocks performed well, including Citicorp. Its
solid business prospects shone through in the face of a rather volatile
environment for financials brought on by concerns over rising interest
rates. General Electric and Philip Morris also were positive contributors.
The upward revaluation of GE continued as investors were attracted to its
global business franchise, consistent growth prospects and stable free cash
flow. Philip Morris' underlying business prospects remained good, and the
market viewed progress on negotiations for a tobacco settlement positively.
On the negative side, the fund's aerospace and defense investments were
disappointing as they weakened early in 1997 after outperforming for most
of 1996.
Q. HOW WAS THE BOND PORTION OF THE FUND STRUCTURED?
G.V. The manager of the fund's fixed-income subportfolio, Kevin Grant,
maintained an interest rate posture in line with the overall bond market as
measured by the Lehman Brothers Aggregate Bond Index. Kevin was attracted
to corporate bonds issued by companies he felt wouldn't be affected by
shifts in the economy, including bonds issued by banks. Historically, bank
earnings were quite sensitive to interest rates. However, over the past
several years, banks have increased the fee-based portions of their
business, making them less sensitive to interest rates and loans. In the
corporate area, the fund's bonds were focused on maturities in the two- to
six-year range. These bonds offered a yield advantage over Treasuries, but
were short enough in maturity that they shouldn't markedly underperform
Treasuries if the market became nervous about credit risk.
Q. WHAT'S YOUR OUTLOOK FOR THE NEXT SIX MONTHS?
G.V. In terms of the overall U.S. economy, I believe it's likely there will
be more of the same - moderate growth and low inflation - although the
duration of the current economic expansion already has exceeded all but two
post-war expansions. Against this backdrop, corporate America is generally
performing well. Earnings growth prospects remain favorable, driven by
globalization, market share gains, continuing productivity improvements and
capital redeployment. In addition, I believe merger and acquisition
activity is likely to remain robust as companies seek to bolster their
market position and exploit revenue and cost synergies. Given this
scenario, I think it's quite probable that the same stocks that have been
market leaders recently - larger-capitalization financials, pharmaceuticals
and consumer nondurables - will continue to perform well.
FUND FACTS
GOAL: maximum total return over the long term
by allocating assets among stocks, bonds and
short-term instruments anywhere in the world
START DATE: September 6, 1989
SIZE: as of June 30, 1997, more than $4 billion
MANAGER: Richard Habermann, since March
1996; joined Fidelity in 1968
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 64.6%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 6.7%
AEROSPACE & DEFENSE - 5.7%
AlliedSignal, Inc. 24,000 $ 2,016,000
Boeing Co. 50,628 2,686,448
Lockheed Martin Corp. 15,800 1,636,288
Rockwell International Corp. 2,600 153,400
Sundstrand Corp. 17,000 948,813
Textron, Inc. 3,400 225,675
United Technologies Corp. 22,000 1,826,000
9,492,624
DEFENSE ELECTRONICS - 0.7%
Raytheon Co. 23,900 1,218,900
SHIP BUILDING & REPAIR - 0.3%
General Dynamics Corp. 7,300 547,500
Newport News Shipbuilding, Inc. 780 15,161
562,661
TOTAL AEROSPACE & DEFENSE 11,274,185
BASIC INDUSTRIES - 4.2%
CHEMICALS & PLASTICS - 3.0%
Air Products & Chemicals, Inc. 10,600 861,250
du Pont (E.I.) de Nemours & Co. 10,000 628,750
Goodrich (B.F.) Co. 20,200 874,913
Monsanto Co. 35,000 1,507,188
Nalco Chemical Co. 3,000 115,875
Olin Corp. 3,400 132,813
Praxair, Inc. 15,900 890,400
5,011,189
PAPER & FOREST PRODUCTS - 1.2%
Fort Howard Corp. (a) 16,100 815,063
Kimberly-Clark Corp. 25,400 1,263,650
2,078,713
TOTAL BASIC INDUSTRIES 7,089,902
CONSTRUCTION & REAL ESTATE - 0.2%
BUILDING MATERIALS - 0.2%
Masco Corp. 6,800 283,900
DURABLES - 1.7%
AUTOS, TIRES, & ACCESSORIES - 0.0%
Johnson Controls, Inc. 100 4,106
Scania AB Class B 100 3,057
7,163
CONSUMER DURABLES - 1.7%
Corning, Inc. 4,700 261,438
Minnesota Mining & Manufacturing Co. 24,500 2,499,000
2,760,438
TOTAL DURABLES 2,767,601
ENERGY - 6.1%
ENERGY SERVICES - 0.2%
Halliburton Co. 5,000 396,250
OIL & GAS - 5.9%
Amoco Corp. 8,000 695,500
British Petroleum PLC:
ADR 14,986 1,122,077
Ord. 89,067 1,106,834
Exxon Corp. 13,000 799,500
Mobil Corp. 10,600 740,675
SHARES VALUE (NOTE 1)
Royal Dutch Petroleum Co. 56,000 $ 3,045,000
Royal Dutch Petroleum Co. Ord. 2,000 103,966
Texaco, Inc. 15,700 1,707,375
Total SA:
Class B 1,300 131,322
sponsored ADR 2,200 111,375
USX-Marathon Group 8,200 236,775
Unocal Corp. 1,800 69,863
9,870,262
TOTAL ENERGY 10,266,512
FINANCE - 12.1%
BANKS - 6.1%
BankAmerica Corp. 47,400 3,060,263
Citicorp 28,500 3,436,031
NationsBank Corp. 35,200 2,270,400
Wells Fargo & Co. 5,500 1,482,250
10,248,944
CREDIT & OTHER FINANCE - 1.7%
American Express Co. 29,700 2,212,650
Associates First Capital Corp. 1,000 55,500
Beneficial Corp. 3,900 277,144
Household International, Inc. 2,300 270,106
2,815,400
FEDERAL SPONSORED CREDIT - 1.7%
Federal Home Loan Mortgage
Corporation 48,200 1,656,875
Federal National Mortgage Association 27,800 1,212,775
2,869,650
INSURANCE - 2.3%
Allstate Corp. 23,000 1,679,000
Hartford Financial Services Group, Inc. 4,900 405,475
St. Paul Companies, Inc. (The) 3,300 251,625
Travelers Group, Inc. (The) 24,000 1,513,500
3,849,600
SAVINGS & LOANS - 0.3%
Great Western Financial Corp. 8,200 440,750
TOTAL FINANCE 20,224,344
HEALTH - 10.3%
DRUGS & PHARMACEUTICALS - 7.7%
American Home Products Corp. 42,500 3,251,250
Bristol-Myers Squibb Co. 44,200 3,580,200
Merck & Co., Inc. 13,800 1,428,300
Pfizer, Inc. 10,800 645,300
Schering-Plough Corp. 47,200 2,259,700
SmithKline Beecham PLC ADR 19,400 1,777,525
12,942,275
MEDICAL EQUIPMENT & SUPPLIES - 2.6%
Allegiance Corp. 30,000 817,500
Baxter International, Inc. 35,200 1,839,200
Johnson & Johnson 27,400 1,763,875
4,420,575
TOTAL HEALTH 17,362,850
HOLDING COMPANIES - 0.1%
CINergy Corp. 2,900 100,932
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - 5.9%
ELECTRICAL EQUIPMENT - 3.8%
Emerson Electric Co. 17,600 $ 969,100
General Electric Co. 64,600 4,223,225
Grainger (W.W.), Inc. 7,400 578,588
Honeywell, Inc. 7,900 599,413
6,370,326
INDUSTRIAL MACHINERY & EQUIPMENT - 1.4%
Cooper Industries, Inc. 18,098 900,376
Harnischfeger Industries, Inc. 6,200 257,300
Tyco International Ltd. 17,200 1,196,475
2,354,151
POLLUTION CONTROL - 0.7%
Browning-Ferris Industries, Inc. 24,800 824,600
Waste Management, Inc. 10,800 346,950
1,171,550
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 9,896,027
MEDIA & LEISURE - 0.3%
BROADCASTING - 0.0%
CS Wireless Systems, Inc. (a)(c) 8 -
Time Warner, Inc. 1,200 57,900
57,900
ENTERTAINMENT - 0.1%
Cedar Fair LP (depositary unit) 5,000 218,750
PUBLISHING - 0.2%
McGraw-Hill, Inc. 5,500 323,469
TOTAL MEDIA & LEISURE 600,119
NONDURABLES - 9.6%
BEVERAGES - 1.6%
Anheuser-Busch Companies, Inc. 5,300 222,269
PepsiCo, Inc. 65,000 2,441,563
2,663,832
FOODS - 1.0%
Campbell Soup Co. 1,600 80,000
Flowers Industries, Inc. 5,850 98,353
Heinz (H.J.) Co. 16,200 747,225
Hershey Foods Corp. 500 27,656
Nabisco Holdings Corp. Class A 18,100 721,738
1,674,972
HOUSEHOLD PRODUCTS - 4.8%
Avon Products, Inc. 8,900 628,006
Clorox Co. 3,600 475,200
Procter & Gamble Co. 23,800 3,361,750
Rubbermaid, Inc. 8,800 261,800
Unilever PLC Ord. 13,400 384,015
Unilever NV:
ADR 11,400 2,440,313
Ord. 2,000 420,753
7,971,837
TOBACCO - 2.2%
Philip Morris Companies, Inc. 80,100 3,554,438
RJR Nabisco Holdings Corp. 5,300 174,900
3,729,338
TOTAL NONDURABLES 16,039,979
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - 3.1%
APPAREL STORES - 0.1%
Footstar, Inc. (a) 3,022 $ 78,950
DRUG STORES - 1.0%
CVS Corp. 10,500 538,125
Rite Aid Corp. 22,920 1,143,135
1,681,260
GENERAL MERCHANDISE STORES - 1.6%
Dayton Hudson Corp. 2,000 106,375
Sears, Roebuck & Co. 18,600 999,750
Wal-Mart Stores, Inc. 47,200 1,595,950
2,702,075
GROCERY STORES - 0.4%
American Stores Co. 14,500 715,938
TOTAL RETAIL & WHOLESALE 5,178,223
SERVICES - 0.7%
LEASING & RENTAL - 0.0%
Hanover Compressor Co. 100 1,950
Ryder Systems, Inc. 400 13,200
15,150
PRINTING - 0.4%
Deluxe Corp. 11,600 395,850
Donnelley (R.R.) & Sons Co. 5,500 201,438
597,288
SERVICES - 0.3%
ADT Ltd. (a) 5,000 165,000
National Service Industries, Inc. 8,800 428,450
593,450
TOTAL SERVICES 1,205,888
TECHNOLOGY - 2.4%
COMPUTERS & OFFICE EQUIPMENT - 2.0%
Exide Electronics Group, Inc.
warrants 3/15/06 (a)(c) 10 250
Pitney Bowes, Inc. 26,400 1,834,800
Xerox Corp. 18,000 1,419,750
3,254,800
ELECTRONICS - 0.4%
Thomas & Betts Corp. 14,050 738,503
TOTAL TECHNOLOGY 3,993,303
UTILITIES - 1.2%
CELLULAR - 0.0%
Microcell Telecommunications, Inc.
6/1/06 (a):
conditional warrants 560 350 warrants 560 7,000
7,350
ELECTRIC UTILITY - 0.1%
Allegheny Power System, Inc. 1,400 37,363
Edison International 5,000 124,375
GPU, Inc. 1,000 35,875
197,613
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - CONTINUED
GAS - 0.5%
Consolidated Natural Gas Co. 300 $ 16,144
El Paso Natural Gas Co. 362 19,910
Williams Companies, Inc. 19,000 831,250
867,304
TELEPHONE SERVICES - 0.6%
ALLTEL Corp. 2,200 73,563
Ameritech Corp. 5,800 394,038
BCE, Inc. 6,000 166,878
Hyperion Telecommunications, Inc.
warrants 4/15/01 (a)(c) 60 1,800
MCI Communications Corp. 7,000 267,969
NextLink Communications, Inc.
warrants 2/1/09 (a) 3,229 32
RSL Communications Ltd./RSL
Communications PLC
warrants 11/15/06 (a) 40 1,200
905,480
TOTAL UTILITIES 1,977,747
TOTAL COMMON STOCKS
(Cost $87,743,324) 108,261,512
PREFERRED STOCKS - 1.1%
CONVERTIBLE PREFERRED STOCKS - 0.5%
DURABLES - 0.1%
AUTOS, TIRES, & ACCESSORIES - 0.1%
Republic Industries, Inc. $1.55 4,000 98,000
ENERGY - 0.0%
OIL & GAS - 0.0%
Tosco Financing Trust $2.875 (c) 1,700 95,838
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
ELECTRICAL EQUIPMENT - 0.1%
Loral Space & Communications Ltd.
Series C, $3.00 (c) 4,000 199,000
MEDIA & LEISURE - 0.1%
LODGING & GAMING - 0.1%
Host Marriott Financial Trust $3.375 (c) 3,000 173,625
RETAIL & WHOLESALE - 0.2%
APPAREL STORES - 0.2%
TJX Companies, Inc., Series E, $7.00 1,000 285,000
TOTAL CONVERTIBLE PREFERRED STOCKS 851,463
NONCONVERTIBLE PREFERRED STOCKS - 0.6%
FINANCE - 0.1%
CREDIT & OTHER FINANCE - 0.0%
American Annuity Group Capital
Trust II 8 3/4% 50 49,750
SAVINGS & LOANS - 0.1%
California Federal Preferred Capital
Corp. 9 1/8% 2,800 71,400
TOTAL FINANCE 121,150
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - 0.4%
BROADCASTING - 0.3%
American Radio Systems Corp.
11 3/8% pay-in-kind 855 $ 91,058
Citadel Broadcasting Co.
13 1/4% pay-in-kind (c) 600 60,000
Cablevision System Corp. pay-in-kind:
11 1/8% depositary shares 1,244 125,022
Series H, $11.75 267 27,635
Capstar Broadcasting Partners,
Inc. 12% (c) 100 10,125
Sinclair Capital 11 5/8% (c) 800 84,400
Time Warner, Inc., Series M,
10 1/4% pay-in-kind 145 160,225
558,465
PUBLISHING - 0.1%
K-III Communications Corp.,
Series D, $10 600 60,450
TOTAL MEDIA & LEISURE 618,915
UTILITIES - 0.1%
TELEPHONE SERVICES - 0.1%
NextLink Communications, Inc.
14% pay-in-kind 3,334 172,535
TOTAL NONCONVERTIBLE PREFERRED STOCKS 912,600
TOTAL PREFERRED STOCKS
(Cost $1,598,971) 1,764,063
CORPORATE BONDS - 12.3%
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
CONVERTIBLE BONDS - 0.2%
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
POLLUTION CONTROL - 0.1%
WMX Technologies, Inc.
2%, 1/24/05 Baa1 $ 80,000 73,800
MEDIA & LEISURE - 0.0%
LEISURE DURABLES & TOYS - 0.0%
Hasbro Corp. 6%, 11/15/98 A3 24,000 35,040
RETAIL & WHOLESALE - 0.1%
GENERAL MERCHANDISE STORES - 0.1%
Federated Department Stores, Inc.
5%, 10/1/03 Baa3 150,000 178,875
TOTAL CONVERTIBLE BONDS 287,715
NONCONVERTIBLE BONDS - 12.1%
AEROSPACE & DEFENSE - 0.2%
AEROSPACE & DEFENSE - 0.2%
Alliant Techsystems, Inc.
11 3/4%, 3/1/03 B2 13,000 14,333
Fairchild Corp. 12%, 10/15/01 Caa 10,000 10,100
Lockheed Martin Corp.
7.20%, 5/1/36 A3 300,000 307,746
332,179
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
AEROSPACE & DEFENSE - CONTINUED
DEFENSE ELECTRONICS - 0.0%
Tracor, Inc. 8 1/2%, 3/1/07 B1 $ 20,000 $ 20,200
SHIP BUILDING & REPAIR - 0.0%
Newport News Shipbuilding, Inc.
9 1/4%, 12/1/06 B1 10,000 10,425
TOTAL AEROSPACE & DEFENSE 362,804
BASIC INDUSTRIES - 0.7%
CHEMICALS & PLASTICS - 0.1%
Atlantis Group, Inc.
11%, 2/15/03 B2 10,000 10,325
Foamex LP/Foamex Capital Corp.
9 7/8%, 6/15/07 (c) B3 10,000 10,125
Freedom Chemical Co. 10 5/8%,
10/15/06 B3 60,000 61,200
Pioneer Americas Acquisition
Corp. 9 1/4%, 6/15/07 (c) B1 10,000 9,850
Sterling Chemicals Holdings, Inc.:
11 3/4%, 8/15/06 B3 70,000 75,425
11 1/4%, 4/1/07 B3 40,000 42,400
209,325
IRON & STEEL - 0.1%
GS Technologies Operating, Inc.
12 1/4%, 10/1/05 B2 20,000 21,900
Republic Engineered Steels, Inc.
9 7/8%, 12/15/01 Caa 50,000 46,625
WCI Steel, Inc. 10%, 12/1/04 B2 40,000 41,600
110,125
METALS & MINING - 0.0%
Commonwealth Aluminum Corp.
10 3/4%, 10/1/06 B2 40,000 42,000
PAPER & FOREST PRODUCTS - 0.5%
Asia Pulp & Paper Finance II
Mauritius Ltd. 12%,
3/15/04 (c) B3 85,000 87,125
American Pad & Paper Co., Inc.
13%, 11/15/05 B3 40,000 46,800
Crown Paper Co. 11%, 9/1/05 B3 30,000 30,075
Doman Industries Ltd. yankee
8 3/4%, 3/15/04 B1 50,000 48,250
Florida Coast Paper Co. LLC/
Florida Coast Paper
Finance Corp., Series B,
12 3/4%, 6/1/03 Caa 20,000 20,650
Gaylord Container Corp.
11 1/2%, 5/15/01 B3 10,000 10,513
Indah Kiat International Finance
Co. BV 12 1/2%, 6/15/06 Ba2 20,000 22,700
Mail-Well Corp. 10 1/2%,
2/15/04 B 10,000 10,400
Malette, Inc. yankee 12 1/4%,
7/15/04 Ba3 10,000 11,200
Repap Wisconsin, Inc.:
9 1/4%, 2/1/02 B2 40,000 40,200
9 7/8%, 5/1/06 Caa 50,000 50,375
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Repap New Brunswick, Inc.
yankee 10 5/8%, 4/15/05 Caa $ 20,000 $ 18,850
Riverwood International
10 7/8%, 4/1/08 Caa 50,000 45,375
SD Warren Co., Series B,
12%, 12/15/04 B1 15,000 16,800
Stone Container Corp.:
12 5/8%, 7/15/98 B2 100,000 105,125
11 7/8%, 12/1/98 B2 30,000 31,575
10 3/4%, 10/1/02 B1 80,000 84,400
11 7/8%, 8/1/16 B2 40,000 43,200
Tembec Finance Corp. yankee
9 7/8%, 9/30/05 B1 10,000 10,300
733,913
TOTAL BASIC INDUSTRIES 1,095,363
DURABLES - 0.5%
AUTOS, TIRES, & ACCESSORIES - 0.0%
Jordan Industries, Inc.
10 3/8%, 8/1/03 B3 20,000 20,700
HOME FURNISHINGS - 0.1%
Guitar Center Management Co.,
Inc. 11%, 7/1/06 B2 6,000 6,570
Interlake Corp. 12 1/8%,
3/1/02 B3 40,000 41,900
Knoll, Inc. 10 7/8%, 3/15/06 B1 38,000 42,038
90,508
TEXTILES & APPAREL - 0.4%
Dan River, Inc. 10 1/8%,
12/15/03 B3 10,000 10,600
Levi Strauss & Co. 6.80%,
11/1/03 (c) Baa2 570,000 565,138
Polymer Group, Inc.
9%, 7/1/07 (c) - 40,000 39,356
Synthetic Industries, Inc.
9 1/4%, 2/15/07 (c) B2 40,000 40,500
655,594
TOTAL DURABLES 766,802
ENERGY - 0.5%
ENERGY SERVICES - 0.1%
DI Industries, Inc. 8 7/8%,
7/1/07 B1 25,000 24,625
McDermott International, Inc.
9 3/8%, 3/15/02 Ba3 60,000 62,909
Petroliam Nasional BHD yankee
6 7/8%, 7/1/03 (c) A1 130,000 129,550
217,084
OIL & GAS - 0.4%
Belden & Blake Corp. 9 7/8%,
6/15/07 (c) B3 40,000 39,600
Cross Timbers Oil Co.
9 1/4%, 4/1/07 B2 60,000 61,950
Flores & Rucks, Inc. 9 3/4%,
10/1/06 B3 40,000 41,800
Ocean Energy, Inc. 8 7/8%,
7/15/07 (c) B3 60,000 60,000
Pennzoil Co. 9 5/8%, 11/15/99 Baa3 60,000 63,925
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
ENERGY - CONTINUED
OIL & GAS - CONTINUED
Ras Laffan Liquid Natural
Gas Co. Ltd. yankee
8.29%, 3/15/14 (c) A3 $ 300,000 $ 312,468
United Refining Co. 10 3/4%,
6/15/07 (c) B2 30,000 29,700
609,443
TOTAL ENERGY 826,527
FINANCE - 5.0%
ASSET-BACKED SECURITIES - 1.3%
Airplanes Pass Through Trust
10 7/8%, 3/15/19 Ba2 100,000 115,500
Capital Equipment Receivables
Trust 6.11%, 7/15/99 Aaa 1,410,000 1,411,763
Green Tree Financial Corp.
6.10%, 4/15/27 Aaa 71,888 71,753
Sears Credit Account Master
Trust II 6 1/2%, 10/15/03 Aaa 630,000 632,558
2,231,574
BANKS - 1.5%
ABN Amro Bank NV 6 5/8%,
10/31/01 Aa3 500,000 497,935
Banc One Corp. 6.70%,
3/24/00 Aa3 350,000 351,631
Banco Latinoamer Exportaciones
Euro 6.90%, 12/6/99 (c) Baa2 100,000 100,813
Capital One Bank 6.74%,
5/31/99 Baa3 260,000 260,330
Export-Import Bank of Korea
6 3/8%, 2/15/06 A1 600,000 562,272
First USA Bank 6 1/2%,
12/23/99 Baa3 250,000 248,785
Midland Bank PLC yankee
7 5/8%, 6/15/06 A1 250,000 257,463
Signet Bank 7.80%, 9/15/06 Baa1 250,000 258,120
Summit Bancorp. 8 5/8%,
12/10/02 BBB 100,000 107,241
2,644,590
CREDIT & OTHER FINANCE - 2.0%
APP International Finance Co. BV
yankee 11 3/4%, 10/1/05 Ba3 10,000 11,050
Ahmanson Capital Trust I
8.36%, 12/1/26 (c) Baa3 250,000 252,088
Associates Corp. of North
America 6 1/2%, 9/9/98 Aa3 250,000 250,993
CIT Group Holdings, Inc.
6 1/4%, 9/30/99 Aa3 860,000 857,859
Chrysler Financial Corp.
6 3/8%, 1/28/00 A3 180,000 179,460
First Security Capital I
8.41%, 12/15/26 A3 110,000 112,141
GST Equipment Funding, Inc.
13 1/4%, 5/1/07 (c) - 60,000 64,200
General Electric Capital Corp.
6.94%, 4/13/09 (e) Aaa 480,000 484,517
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Imperial Credit Capital Trust I
10 1/4%, 6/14/02 (c) B2 $ 20,000 $ 20,050
Imperial Credit Industries, Inc.
9 7/8%, 1/15/07 B2 50,000 49,500
MCN Investment Corp.
6.03%, 2/1/01 Baa2 180,000 175,819
Nordstrom Credit, Inc.
7 1/4%, 4/30/02 A2 200,000 203,340
PNC Institutional Capital Trust
8.315%, 5/15/27 (c) A2 600,000 606,714
Polytama International Finance
BV 11 1/4%, 6/15/07 B2 20,000 20,650
PTC International Finance BV
0%, 7/1/07 (c) B3 10,000 6,063
3,294,444
INSURANCE - 0.1%
Integon Capital I 10 3/4%,
2/15/07 (c) Ba3 100,000 121,500
SAVINGS & LOANS - 0.1%
First Nationwide Holdings, Inc.
10 5/8%, 10/1/03 Ba3 40,000 43,400
First Nationwide Parent
Holdings Ltd. 12 1/2%,
4/15/03 B3 80,000 89,200
132,600
TOTAL FINANCE 8,424,708
HEALTH - 0.2%
MEDICAL EQUIPMENT & SUPPLIES - 0.0%
Wright Medical Technology, Inc.
10 3/4%, 7/1/00 B3 40,000 40,700
MEDICAL FACILITIES MANAGEMENT - 0.2%
Columbia/HCA Healthcare Corp.
6 1/2%, 3/15/99 A2 240,000 240,833
Integrated Health Services, Inc.
9 1/2%, 9/15/07 (c) B1 10,000 10,225
Tenet Healthcare Corp.:
8%, 1/15/05 Ba1 20,000 20,000
8 5/8%, 1/15/07 Ba3 10,000 10,150
281,208
TOTAL HEALTH 321,908
HOLDING COMPANIES - 0.2%
Gray Communications System,
Inc. 10 5/8%, 10/1/06 B3 20,000 21,075
Norfolk Southern Corp.
7.05%, 5/1/37 Baa1 340,000 345,080
TOTAL HOLDING COMPANIES 366,155
INDUSTRIAL MACHINERY & EQUIPMENT - 0.5%
ELECTRICAL EQUIPMENT - 0.0%
Amphenol Corp. 9 7/8%,
5/15/07 B2 10,000 10,300
Motors & Gears, Inc. 10 3/4%,
11/15/06 B3 60,000 61,800
72,100
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
INDUSTRIAL MACHINERY & EQUIPMENT - CONTINUED
INDUSTRIAL MACHINERY & EQUIPMENT - 0.2%
Continental Global Group, Inc.
11%, 4/1/07 (c) B2 $ 20,000 $ 21,000
Goss Graphic System, Inc.
12%, 10/15/06 B2 50,000 55,000
International Knife & Saw, Inc.
11 3/8%, 11/15/06 B3 10,000 10,675
Tenneco, Inc. 8.075%, 10/1/02 Baa1 300,000 314,838
401,513
POLLUTION CONTROL - 0.3%
WMX Technologies, Inc.
7.10%, 8/1/26 A3 400,000 407,588
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 881,201
MEDIA & LEISURE - 1.2%
BROADCASTING - 0.6%
Adelphia Communications Corp.:
9 1/2%, 2/15/04 B3 10,000 9,500
9 7/8%, 3/1/07 (c) - 130,000 125,450
Benedek Communications Corp.
0%, 5/15/06 (b) - 50,000 30,125
Capstar Radio Broadcasting
Partners, Inc. (c):
9 1/4%, 7/1/07 - 60,000 58,050
0%, 2/1/09 (b) CCC 70,000 44,975
Chancellor Radio Broadcasting
Co. 8 3/4%, 6/15/07 (c) B3 60,000 59,250
Citadel Broadcasting Co.
10 1/4%, 7/1/07 (c) B3 40,000 40,000
CS Wireless Systems, Inc.
0%, 3/1/06 (b) Caa 30,000 7,200
Diamond Cable Communications
PLC yankee 0%, 9/30/04 (b) B3 10,000 8,075
Echostar DBS Corp. 12 1/2%,
7/1/02 (c) Caa 50,000 49,563
Echostar Satellite Broadcasting
Corp. 0%, 3/15/04 (b) Caa 40,000 28,400
Echostar Communications Corp.
secured discount
0%, 6/1/04 (b) B2 190,000 159,600
Jacor Communications Co.
8 3/4%, 6/15/07 (c) B2 10,000 9,875
Lenfest Communications, Inc.:
8 3/8%, 11/1/05 Ba3 10,000 9,850
10 1/2%, 6/15/06 B2 10,000 10,900
Olympus Communications LP/
Olympus Capital Corp.
10 5/8%, 11/15/06 B1 50,000 52,250
SFX Broadcasting, Inc.
10 3/4%, 5/15/06 B3 10,000 10,775
TCI Communication, Inc.
6.82%, 9/15/10 Ba1 250,000 249,878
Telewest PLC 0%, 10/1/07 (b) B1 60,000 43,350
UIH Australia/PAC, Inc., Series B,
0%, 5/15/06 (b) B2 90,000 54,450
1,061,516
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
ENTERTAINMENT - 0.1%
AMC Entertainment, Inc.
9 1/2%, 3/15/09 (c) B2 $ 70,000 $ 71,050
AMF Group, Inc., Series B:
10 7/8%, 3/15/06 B2 20,000 21,550
0%, 3/15/06 (b) B2 10,000 7,125
Cinemark USA, Inc.
9 5/8%, 8/1/08 B2 30,000 30,450
Viacom, Inc. 8%, 7/7/06 B1 100,000 97,000
227,175
LEISURE DURABLES & TOYS - 0.1%
Coleman Escrow Corp. (c):
secured 1st priority
0%, 5/15/01 B3 140,000 88,200
secured 2nd priority
0%, 5/15/01 Caa 20,000 11,550
Icon Health and Fitness, Inc.
13%, 7/15/02 B3 50,000 56,125
Icon Fitness Corp. 0%,
11/15/06 (b) CCC+ 10,000 5,450
161,325
LODGING & GAMING - 0.3%
American Skiing Co.
12%, 7/15/06 B3 30,000 31,500
Casino Magic Financial Corp.
11 1/2%, 10/15/01 B1 20,000 17,500
Circus Circus Enterprises, Inc.
7%, 11/15/36 Baa2 150,000 145,688
HMC Acquisition Properties,
Inc. 9%, 12/15/07 Ba3 60,000 60,600
Hollywood Casino Corp.
12 3/4%, 11/1/03 B2 60,000 63,600
Horseshoe Gaming LLC
12 3/4%, 9/30/00 B1 40,000 44,700
Prime Hospitality Corp.
9 3/4%, 4/1/07 - 20,000 21,050
Sun International Hotels Ltd./Sun
International North America,
Inc. yankee 9%, 3/15/07 Ba3 70,000 71,050
455,688
PUBLISHING - 0.1%
Big Flower Press Holdings, Inc.
8 7/8%, 7/1/07 (c) - 90,000 88,425
RESTAURANTS - 0.0%
AFC Enterprises, Inc. 10 1/4%,
5/15/07 (c) B3 40,000 39,800
TOTAL MEDIA & LEISURE 2,033,929
NONDURABLES - 0.2%
FOODS - 0.0%
International Home Foods,
Inc. 10 3/8%, 11/1/06 B2 10,000 10,300
HOUSEHOLD PRODUCTS - 0.0%
Renaissance Cosmetic, Inc.
11 3/4%, 2/15/04 B3 50,000 51,750
Revlon Consumer Products
Corp. 10 1/2%, 2/15/03 B3 65,000 69,225
120,975
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
NONDURABLES - CONTINUED
TOBACCO - 0.2%
North Atlantic Trading, Inc.
11%, 6/15/04 (c) B3 $ 10,000 $ 10,150
Philip Morris Companies, Inc.
6.95%, 6/1/06 A2 250,000 250,833
260,983
TOTAL NONDURABLES 392,258
RETAIL & WHOLESALE - 0.9%
APPAREL STORES - 0.1%
Mothers Work, Inc. 12 5/8%,
8/1/05 B3 10,000 10,325
Specialty Retailers, Inc.
8 1/2%, 7/15/05 (c) Ba3 30,000 29,925
40,250
GENERAL MERCHANDISE STORES - 0.5%
Dayton Hudson Corp.:
6.80%, 10/1/01 Baa1 300,000 299,487
6.40%, 2/15/03 Baa1 400,000 389,652
Penney (J.C.) Co., Inc.
6.95%, 4/1/00 A2 160,000 161,347
850,486
GROCERY STORES - 0.3%
American Stores Co.
7 1/2%, 5/1/37 Baa2 250,000 254,743
Food 4 Less Holdings, Inc.
13 5/8%, 6/15/07 - 10,681 12,486
Grand Union Co.
12%, 9/1/04 Caa 50,000 37,000
Pantry, Inc. 12%, 11/15/00 B2 10,000 10,250
Pathmark Stores, Inc.:
11 5/8%, 6/15/02 Caa 40,000 40,500
9 5/8%, 5/1/03 B3 10,000 9,650
Penn Traffic Co.:
10 1/4%, 2/15/02 B3 40,000 34,400
8 5/8%, 12/15/03 B3 30,000 24,225
10 3/8%, 10/1/04 B3 20,000 17,000
11 1/2%, 4/15/06 B3 20,000 17,700
Pueblo Xtra International, Inc.:
9 1/2%, 8/1/03 B3 60,000 57,450
9 1/2%, 8/1/03 (c) B3 10,000 9,650
Randalls Food Markets, Inc.
9 3/8%, 7/1/07 (c) B2 10,000 9,963
535,017
RETAIL & WHOLESALE, MISCELLANEOUS - 0.0%
Corporate Express, Inc., Series B,
9 1/8%, 3/15/04 B2 10,000 10,000
TOTAL RETAIL & WHOLESALE 1,435,753
SERVICES - 0.2%
PRINTING - 0.0%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa 40,000 41,100
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
SERVICES - 0.2%
Orion Network System, Inc. unit:
11 1/4%, 1/15/07 B2 $ 50,000 $ 51,125
0%, 1/15/07 (b) B2 290,000 165,300
Outsourcing Solutions, Inc.
11%, 11/1/06 B3 10,000 10,850
227,275
TOTAL SERVICES 268,375
TECHNOLOGY - 0.2%
COMMUNICATIONS EQUIPMENT - 0.0%
Intermedia Communications, Inc.
0%, 5/15/06 (b) B2 80,000 55,000
COMPUTER SERVICES & SOFTWARE - 0.0%
Verio, Inc. unit 13 1/2%,
6/15/04 (c) - 50,000 50,250
COMPUTERS & OFFICE EQUIPMENT - 0.2%
Comdisco, Inc. 6.70%, 8/6/99 Baa1 250,000 250,948
Dictaphone Corp. 11 3/4%,
8/1/05 B3 10,000 9,200
Exide Electronics Group, Inc.
11 1/2%, 5/15/06 B3 10,000 10,725
Unisys Corp. 12%, 4/15/03 B1 10,000 10,825
281,698
ELECTRONIC INSTRUMENTS - 0.0%
Wavetek Corp. 10 1/8%,
6/15/07 (c) B3 10,000 10,200
ELECTRONICS - 0.0%
Fairchild Semiconductor Corp.
10 1/8%, 3/15/07 (c) B2 30,000 31,650
Viasystems, Inc. 9 3/4%,
6/1/07 (c) B3 10,000 10,175
41,825
TOTAL TECHNOLOGY 438,973
TRANSPORTATION - 0.1%
AIR TRANSPORTATION - 0.0%
Atlas Air, Inc. pass through trust
12 1/4%, 12/1/02 Ba3 30,000 33,450
RAILROADS - 0.1%
Burlington Northern Santa Fe
Corp. 7.29%, 6/1/36 Baa2 150,000 153,768
TFM SA de CV (c):
10 1/4%, 6/15/07 B2 10,000 10,175
0%, 6/15/09 (b) B2 20,000 11,550
175,493
TOTAL TRANSPORTATION 208,943
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
UTILITIES - 1.5%
CELLULAR - 0.7%
Arch Communications Group,
Inc. 0%, 3/15/08 (b) B3 $ 90,000 $ 47,475
Clearnet Communications, Inc.
yankee 0%, 12/15/05 (b) B3 50,000 32,875
McCaw International Ltd. unit
0%, 4/15/07 (b)(c) CCC 200,000 96,000
Microcell Telecommunications,
Inc. 0%, 6/1/06 (b) B3 140,000 78,400
Millicom International Cellular
SA 0%, 6/1/06 (b) B3 260,000 185,900
Mobile Telecommunications
Technologies Corp.
13 1/2%, 12/15/02 B3 20,000 21,100
Omnipoint Corp.:
11 5/8%, 8/15/06 B2 10,000 9,450
Series A, 11 5/8%, 8/15/06 B3 30,000 28,350
Pagemart, Inc. 0%, 11/1/03 (b) - 70,000 60,550
Pagemart Nationwide, Inc.
0%, 2/1/05 (b) - 40,000 29,800
RSL Communications Ltd./RSL
Communications PLC
12 1/4%, 11/15/06 - 40,000 40,700
Telesystem International Wireless,
Inc. 0%, 6/30/07 (b)(c) B- 30,000 15,975
360 Degrees Communications
Co. 7 1/8%, 3/1/03 Ba1 400,000 397,796
USA Mobile Communications,
Inc. II 9 1/2%, 2/1/04 B2 10,000 9,300
1,053,671
ELECTRIC UTILITY - 0.0%
CMS Energy Corp. 8 1/8%,
5/15/02 Ba3 10,000 10,075
GAS - 0.2%
Columbia Gas System, Inc.
6.61%, 11/28/02 Baa1 379,000 374,717
TELEPHONE SERVICES - 0.6%
Brooks Fiber Properties, Inc.:
0%, 3/1/06 (b) - 10,000 6,750
11 7/8%, 11/1/06 - 20,000 12,900
GST USA, Inc. 0%, 12/15/05 (b) - 34,000 21,080
Hyperion Telecommunications,
Inc., Series B, 0%,
4/15/03 (b) - 60,000 30,150
LCI International, Inc.
7 1/4%, 6/15/07 Ba1 200,000 198,100
McleodUSA, Inc. 0%,
3/1/07 (b)(c) B3 40,000 25,500
MFS Communications, Inc.
0%, 1/15/06 (b) Ba3 250,000 197,188
Shared Technologies Fairchild
Communications Corp.
0%, 3/1/06 (b) Caa 87,000 77,648
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Teleport Communications Group,
Inc. 0%, 7/1/07 (b) B1 $ 20,000 $ 14,425
WorldCom, Inc. 7 3/4%,
4/1/07 Ba1 400,000 409,072
992,813
TOTAL UTILITIES 2,431,276
TOTAL NONCONVERTIBLE BONDS 20,254,975
TOTAL CORPORATE BONDS
(Cost $20,329,264) 20,542,690
U.S. GOVERNMENT AND GOVERNMENT AGENCY
OBLIGATIONS - 10.7%
U.S. TREASURY OBLIGATIONS - 9.6%
5 7/8%, 8/15/98 Aaa 1,000,000 999,690
6 5/8%, 6/30/01 Aaa 6,540,000 6,601,280
7%, 7/15/06 Aaa 5,286,000 5,437,973
12%, 8/15/13 (callable) Aaa 1,100,000 1,548,426
8 1/8%, 8/15/19 Aaa 825,000 941,144
7 1/4%, 2/15/23 Aaa 490,000 504,700
TOTAL U.S. TREASURY OBLIGATIONS 16,033,213
U.S. GOVERNMENT AGENCY OBLIGATIONS - 1.1%
Federal Home Loan Bank:
7.56%, 9/1/04 Aaa 310,000 324,725
7.59%, 3/10/05 Aaa 190,000 199,738
Federal National Mortgage
Association 6.72%, 8/1/05 Aaa 720,000 716,400
Government Trust Certificates
(assets of Trust guaranteed by
U.S. Government through Defense
Security Assistance Agency)
Class 2-E, 9.40%, 5/15/02 Aaa 127,981 135,802
State of Israel (guaranteed by
U.S. Government through Agency
for International Development):
8%, 11/15/01 Aaa 220,000 231,917
5.89%, 8/15/05 Aaa 310,000 293,730
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS 1,902,312
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $17,972,172) 17,935,525
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES - 2.4%
Federal Home Loan Mortgage
Corporation:
7%, 6/1/99 to 7/1/01 Aaa 466,372 469,127
7 1/2%, 7/1/27 (g) Aaa 970,000 974,547
Federal National Mortgage
Association:
5 1/2%, 2/1/03 to 2/1/26 Aaa 1,170,119 1,115,067
6%, 4/1/11 Aaa 461,556 446,556
Government National Mortgage
Association 7%, 10/15/23
to 8/15/27 (g) Aaa 1,111,502 1,094,199
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $4,111,968) 4,099,496
U.S. GOVERNMENT AGENCY - 0.7%
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Federal Home Loan Mortgage
Corporation planned
amortization class
Series 1645 Class ZA,
5 1/2%, 4/15/05 Aaa $ 622,356 $ 606,797
Federal National Mortgage
Association planned
amortization class
Series 1993-129 Class D,
6.10%, 6/25/05 Aaa 500,000 496,250
TOTAL U.S. GOVERNMENT AGENCY
(Cost $1,097,458) 1,103,047
COMMERCIAL MORTGAGE SECURITIES - 0.3%
BKB Commercial Mortgage Trust
Series 1997-C1 Class A-1,
6 7/8%, 2/25/43 (c) Aaa 307,292 308,445
Wells Fargo Capital Markets
Apartment Financing Trust
6.56%, 12/29/05 (c) Aaa 250,000 246,590
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $548,447) 555,035
FOREIGN GOVERNMENT OBLIGATIONS (F) - 0.4%
Manitoba Province yankee
6 3/8%, 10/15/99 A1 470,000 469,962
Quebec Province yankee
6.86%, 4/15/26 (e) A2 250,000 246,125
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $709,904) 716,087
CASH EQUIVALENTS - 7.5%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 5.93%, dated
6/30/97 due 7/1/97 $ 12,490,057 12,488,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $146,599,508) $ 167,465,455
LEGEND
1. Non-income producing
2. Debt obligation initially issued in zero coupon form which converts to
coupon form at a specified rate and date.
3. Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of these securities amounted to $4,713,489 or 2.8% of net
assets.
4. Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
5. Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified rate and date.
6. For foreign government obligations not individually rated by S&P or
Moody's, the ratings listed are assigned to securities by FMR, the fund's
investment adviser, based principally on S&P and Moody's ratings of the
sovereign credit of the issuing government.
7. Security purchased on a delayed delivery or when-issued basis (see Note
2 of Notes to Financial Statements).
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $89,201,982 and $47,453,749, respectively, of which U.S.
government and government agency obligations aggregated $28,333,982 and $
22,737,773, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of FMR. The commissions paid to these affiliated
firms were $9,631 for the period.
The composition of long-term debt holdings as a percentage of total value
of investment in securities, is as follows:
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 19.4% AAA, AA, A 18.5%
Baa 2.8% BBB 4.4%
Ba 1.3% BB 0.4%
B 2.4% B 2.5%
Caa 0.3% CCC 0.2%
Ca, C 0.0% CC, C 0.0%
D 0.0%
For some foreign government obligations, FMR has assigned the ratings of
the sovereign credit of the issuing government. The percentage not rated by
both S&P and Moody's amounted to 0.3%. FMR has determined that unrated debt
securities that are lower quality account for 0.3% of the total value of
investment in securities.
INCOME TAX INFORMATION
At June 30, 1997, the aggregate cost of investment securities for income
tax purposes was $146,608,960. Net unrealized appreciation aggregated
$20,856,495, of which $21,494,643 related to appreciated investment
securities and $638,148 related to depreciated investment securities.
At December 31, 1996, the fund had a capital loss carryforward of
approximately $372,000 which will expire on December 31, 2004.
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in $ 167,465,455
securities, at
value (including
repurchase
agreements of
$12,488,000)
(cost $146,599,508)
- - See
accompanying
schedule
Cash 1,115,612
Receivable for 670,618
investments sold
Receivable for fund 297,225
shares sold
Dividends receivable 160,685
Interest receivable 652,510
TOTAL ASSETS 170,362,105
LIABILITIES
Payable for $ 1,451,436
investments
purchased
Regular delivery
Delayed delivery 2,094,009
Accrued management 60,531
fee
Other payables and 29,741
accrued expenses
TOTAL LIABILITIES 3,635,717
NET ASSETS $ 166,726,388
Net Assets consist of:
Paid in capital $ 141,786,400
Undistributed net 2,231,662
investment income
Accumulated 1,842,367
undistributed net
realized gain (loss)
on investments and
foreign currency
transactions
Net unrealized 20,865,959
appreciation
(depreciation) on
investments
and assets and
liabilities in
foreign currencies
NET ASSETS, for $ 166,726,388
12,251,612 shares
outstanding
NET ASSET VALUE, $13.61
offering price
and redemption
price per
share
($166,726,388 (divided by)
12,251,612 shares)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $ 854,788
Dividends
Interest 1,790,207
TOTAL INCOME 2,644,995
EXPENSES
Management fee $ 294,816
Transfer agent fees 48,191
Accounting fees and 39,379
expenses
Non-interested 272
trustees'
compensation
Custodian fees and 8,008
expenses
Registration fees 21
Audit 10,725
Legal 1,119
Miscellaneous 145
Total expenses 402,676
before reductions
Expense reductions (5,162 397,514
)
NET INVESTMENT 2,247,481
INCOME
REALIZED AND
UNREALIZED GAIN
(LOSS)
Net realized gain
(loss) on:
Investment 2,241,895
securities
Foreign currency (19 2,241,876
transactions )
Change in net
unrealized
appreciation
(depreciation) on:
Investment 13,357,453
securities
Assets and (322 13,357,131
liabilities in )
foreign currencies
NET GAIN (LOSS) 15,599,007
NET INCREASE $ 17,846,488
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
OTHER INFORMATION $ 5,087
Expense reductions
Directed brokerage
arrangements
Custodian interest 75
credits
$ 5,162
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) SIX MONTHS YEAR ENDED
IN NET ASSETS ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED)
Operations $ 2,247,481 $ 2,701,775
Net investment
income
Net realized gain 2,241,876 (391,485)
(loss)
Change in net 13,357,131 6,443,286
unrealized
appreciation
(depreciation)
NET INCREASE 17,846,488 8,753,576
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
Distributions to (2,678,656) (26,804)
shareholders
From net
investment income
From net realized - (192,158)
gain
TOTAL DISTRIBUTIONS (2,678,656) (218,962)
Share transactions 50,743,701 51,928,218
Net proceeds from
sales of shares
Reinvestment of 2,678,656 218,962
distributions
Cost of shares (4,973,433) (727,396)
redeemed
NET INCREASE 48,448,924 51,419,784
(DECREASE) IN NET
ASSETS RESULTING
FROM SHARE
TRANSACTIONS
TOTAL INCREASE 63,616,756 59,954,398
(DECREASE) IN NET
ASSETS
NET ASSETS
Beginning of period 103,109,632 43,155,234
End of period $ 166,726,388 $ 103,109,632
(including
undistributed net
investment
income of
$2,231,662 and
$2,677,878,
respectively)
OTHER INFORMATION
Shares
Sold 3,992,425 4,616,047
Issued in 215,153 19,533
reinvestment of
distributions
Redeemed (390,109) (64,658)
Net increase 3,817,469 4,570,922
(decrease)
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1997
SELECTED PER-SHARE (UNAUDITED) 1996 1995
DATA
Net asset value, $ 12.23 $ 11.17 $ 10.00
beginning of period
Income from
Investment
Operations
Net investment .22 D .33 .14
income
Net realized and 1.47 .78 1.25
unrealized gain
(loss)
Total from 1.69 1.11 1.39
investment
operations
Less Distributions
From net (.31) (.01) H (.14)
investment income
From net realized - (.04) H (.08)
gain
Total distributions (.31) (.05) (.22)
Net asset value, end $ 13.61 $ 12.23 $ 11.17
of period
TOTAL RETURN B, C 14.05% 9.98% 13.92%
RATIOS AND
SUPPLEMENTAL
DATA
Net assets, end of $ 166,726 $ 103,110 $ 43,155
period (000
omitted)
Ratio of expenses to .62% A .72% 1.42%
average net assets E
Ratio of expenses to .61% A, F .71% F 1.42%
average net assets
after expense
reductions
Ratio of net 3.47% A 3.63% 3.56%
investment income
to average net
assets
Portfolio turnover rate 81% A 163% 248%
Average commission $ .0417 $ .0165
rate G
<TABLE>
<CAPTION>
<S> <C> <C> <C>
A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT
ANNUALIZED AND DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE
TOTAL RETURNS SHOWN. C THE TOTAL
RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED
DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS). D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED
BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. E FMR AGREED TO
REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE PERIOD. WITHOUT THIS
REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE BEEN HIGHER. F FMR
OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES WHO
EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES (SEE NOTE 5 OF
NOTES TO FINANCIAL STATEMENTS). G FOR FISCAL YEARS BEGINNING ON OR AFTER
SEPTEMBER 1, 1995, A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION
RATE PER SHARE FOR SECURITY TRADES
ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO
PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS
MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE STRUCTURES MAY
DIFFER. H THE AMOUNTS SHOWN REFLECT CERTAIN RECLASSIFICATIONS RELATED TO
BOOK TO TAX DIFFERENCES (SEE NOTE 1 OF NOTES TO FINANCIAL STATEMENTS).
</TABLE>
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can
look at the total percentage change in value, the average annual percentage
change or the growth of a hypothetical $10,000 investment. Total return
reflects the change in the value of an investment, assuming reinvestment of
the fund's dividend income and capital gains (the profits earned upon the
sale of securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 LIFE OF
JUNE 30,1997 YEAR FUND
ASSET MANAGER: GROWTH 25.51% 23.29%
S&P 500(registered trademark) 34.70% 33.11%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what
would have happened if the fund had performed at a constant rate each year.
You can compare the fund's return to those of the Standard & Poor's 500
Index - a widely recognized, unmanaged index of common stocks. This
benchmark reflects the reinvestment of dividends and capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of long-term growth and short-term
volatility. In turn, the share price and return of a
fund that invests in stocks will vary. That means if
you sell your shares during a market downturn,
you might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of return
and are not the fund's year-by-year results, which fluctuated over the
periods shown. The life of fund figures are from commencement of
operations, January 3, 1995.
If Fidelity had not reimbursed certain fund expenses, the life of fund
total return figure would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL
CHARGES, THE TOTAL RETURN WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
1995/01/31 10000.00 10000.00
10000.00
1995/02/28 10149.70 10389.70
10319.41
1995/03/31 10289.42 10696.30
10539.38
1995/04/30 10558.88 11011.31
10785.08
1995/05/31 10708.58 11451.43
11198.64
1995/06/30 11137.72 11717.44
11396.90
1995/07/31 11546.91 12106.00
11632.64
1995/08/31 12065.87 12136.38
11694.83
1995/09/30 12245.51 12648.54
12051.93
1995/10/31 11776.45 12603.38
12082.78
1995/11/30 11986.03 13156.67
12486.40
1995/12/31 12277.71 13410.07
12699.16
1996/01/31 12569.78 13866.55
13007.00
1996/02/29 12613.39 13995.09
13008.05
1996/03/31 12840.37 14129.86
13058.25
1996/04/30 13143.01 14338.14
13160.97
1996/05/31 13348.36 14707.92
13378.10
1996/06/30 13402.41 14763.95
13465.02
1996/07/31 13067.35 14111.68
13090.93
1996/08/31 13164.62 14409.30
13265.02
1996/09/30 13705.04 15220.25
13818.40
1996/10/31 14104.95 15640.03
14160.36
1996/11/30 15023.67 16822.26
14932.58
1996/12/31 14737.79 16489.01
14697.36
1997/01/31 15367.80 17519.24
15354.72
1997/02/28 15514.22 17656.59
15451.58
1997/03/31 14781.88 16931.08
14967.66
1997/04/30 15401.55 17941.87
15652.51
1997/05/31 16336.68 19034.17
16360.18
1997/06/30 16821.15 19886.90
16925.34
Let's say hypothetically that $10,000 was invested in Asset Manager: Growth
Portfolio on January 31, 1995, shortly after the fund began. As the chart
shows, by June 30, 1997, the value of the investment would have grown to
$16,821 - a 68.21% increase. With reinvested dividends and capital gains,
if any, a $10,000 investment in the S&P 500 would have grown to $19,887
over the same period - a 98.87% increase.
You can also look at how the Fidelity Aggressive Asset Allocation Composite
Index, a hypothetical combination of unmanaged indices, did over the same
period. The Aggressive Asset Allocation Composite index combines the
cumulative total returns of three unmanaged indexes - the S&P 500 (98.87%),
Lehman Brothers Aggregate Bond Index (24.12%), and the Salomon Brothers
3-month T-Bill Total Rate of Return Index (13.63%) - according to the
fund's neutral mix*, assuming monthly rebalancing. With reinvested
dividends and capital gains, if any, a $10,000 investment in the index
would have grown to $16,925 - a 69.25% increase.
* 70% STOCKS, 25% BONDS AND 5% SHORT-TERM INSTRUMENTS EFFECTIVE JANUARY 1,
1997; 65%, 30% AND 5%, RESPECTIVELY, PRIOR TO DECEMBER 31, 1996.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Philip Morris Companies, Inc. 6.4
Federal National Mortgage Association 4.7
Federal Home Loan Mortgage Corporation 2.7
International Business Machines Corp. 2.3
General Motors Corp. 2.3
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997
(STOCKS ONLY) % OF FUND'S
INVESTMENTS
Finance 15.1
Technology 12.9
Nondurables 7.5
Retail & Wholesale 7.0
Utilities 6.8
ASSET ALLOCATION AS OF JUNE 30, 1997*
Row: 1, Col: 1, Value: 4.2
Row: 1, Col: 2, Value: 16.5
Row: 1, Col: 3, Value: 79.3
Stock class 79.3%
Bond class 16.5%
Short-term class 4.2%
FOREIGN INVESTMENTS 10.4%
*
ASSET ALLOCATION IN THE PIE CHART REFLECTS THE CATEGORIZATION OF ASSETS AS
DEFINED
IN THE FUND'S PROSPECTUS. FINANCIAL STATEMENT CATEGORIZATIONS CONFORM TO
ACCOUNTING STANDARDS AND WILL DIFFER FROM THE PIE CHART.
% OF FUND'S INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with Richard Habermann (top left), Portfolio Manager of Asset
Manager: Growth Portfolio, George Vanderheiden (top right), sub-manager for
stocks, Charles Morrison (bottom left), sub-manager for bonds, and John
Todd (bottom right), sub-manager for short-term/money market instruments.
Charles Morrison became sub-manager for bonds on February 3, 1997, and John
Todd became sub-manager for short-term/money market instruments on December
1, 1996.
Q. HOW DID THE FUND PERFORM, DICK?
D.H. The fund's performance historically has been compared to that of the
Standard & Poor's 500 Index. However, there are some significant
differences between the make-up of the fund and the composition of the
index. While the S&P 500 is made up exclusively of stocks, the fund invests
in stocks, bonds and short-term/money market instruments. The fund
allocates assets among these three categories in order to help control both
volatility and risk relative to funds or indexes that invest only in
stocks. That being said, the S&P 500 posted a strong 20.61% return during
the six months that ended June 30, 1997, and 34.70% over the 12 months
ended June 30, 1997. Since the fund is diversified into other asset classes
that didn't perform as well as stocks, the fund's performance lagged that
of the S&P 500. However, the fund did benefit from the performance of its
equity investments and its small stake in high-yield bonds, while the bond
and short-term money market portions of the fund performed in line with
their respective markets.
Q. WHAT WAS THE FUND'S ASSET MIX AT THE END OF THE PERIOD?
D.H. At the end of June 1997, the fund's equity position stood at about
79%, 9% above the new neutral mix the fund instituted on January 1, 1997.
That neutral mix comprises 70% stocks, 25% bonds and 5% short-term/money
market instruments. In order to add to the equity portion, we reduced both
the fund's bond and short-term/money market positions. At the end of the
period, the fund held about 17% in bonds and approximately 4% in
short-term/money market instruments.
Q. WHY DID YOU INCREASE THE FUND'S STOCK INVESTMENTS?
D.H. Because the investing environment was very favorable not only for all
financial assets, but especially for stocks. We've had limited inflation
and corporate earnings continued to be strong. Another key factor was the
strength of the dollar, although that can act as a double-edged sword. On
the negative side, a rising dollar acts as a drag on the economy by slowing
exports and suppressing corporate earnings. This especially affects large,
multinational corporations. These companies, however, generally were able
to post earnings surprises through cost cutting and sustain their stock
prices by buying back shares. The positive side of the strong dollar is
that it helps to control inflation by keeping import prices down. In
addition, investors, especially those abroad, tend to feel more comfortable
investing in U.S. markets when the dollar is strong, helping to sustain
prices for both stocks and bonds.
Q. WHAT WAS THE ENVIRONMENT LIKE FOR THE BOND MARKET?
D.H. During the latter stages of the first quarter and the beginning of the
second quarter, the bond market struggled because of concerns that
continued economic growth might lead to inflation. Employment had reached a
level where historically there should have been increased upward pressure
on wages. The Federal Reserve Board tried to anticipate and head off
incipient inflation by raising the fed funds rate - the rate banks charge
each other for overnight loans - by 0.25% to 5.50% at the end of March.
This move was well-telegraphed, so the rate increase was already priced
into the market when the Fed acted. The Fed chose to keep rates steady in
May, a stance that surprised many in the market who were anticipating
another rate increase. The Fed stood pat mainly because economic growth
slowed and there were few if any signs of inflationary pressure. From that
point on, the bond market responded favorably.
Q. TURNING TO YOU, GEORGE, HOW DID YOU MANAGE THE STOCK PORTION OF THE FUND
IN A VIRTUALLY NO-INFLATION ENVIRONMENT?
G.V. I concentrated on four areas during the period. First, I looked at
innovators and unit growers because these companies use unit growth to
increase earnings and don't have to rely on price increases. Technology,
health care and telecommunications fall within these areas. Second were the
interest sensitive sectors that benefited from low interest rates,
including mortgage companies, insurance, finance and construction. Third, I
looked at global growers - companies with proprietary advantages, such as
low costs, unique distribution channels or strong brands - which are
seizing market share on a global basis. Fourth were the acquisitive
companies in consolidating industries. Certain industries have stopped
growing, but certain companies have been able to show earnings growth by
acquiring market share and paring costs.
Q. PHILIP MORRIS IS THE FUND'S LARGEST STOCK HOLDING. WHAT IS YOUR POSITION
ON TOBACCO STOCKS?
G.V. I own tobacco stocks because they operate a profitable business that
historically has offered above-average returns to shareholders over the
long term. In the past, the stocks have provided better-than-average
earnings growth, lower-than-average price-to-earnings ratios and high
yields. Nothing this year has changed that. We have determined that the
tobacco stocks are selling at a "litigation discount" in excess of any
reasonable estimate of potential liabilities. The cost of the proposed
settlement is high, but should be passed completely along to consumers.
Q. STOCK VALUATIONS WERE QUITE HIGH. WHY WAS THAT, AND WILL THEY STAY
INFLATED?
G.V. We had a nearly perfect investing environment during the period -
experiencing growth without inflation. Accelerating inflation is usually
the killer of all bond and equity bull markets, but inflation just kept
receding as the economic expansion continued. During the worst bear market
I ever encountered - the 1973-1974 bear that took prices down about 50% -
everything that could go wrong did go wrong. Today is an environment where
everything that could go right has gone right - from a declining budget
deficit, to falling inflation, to surging earnings, to big flows into
mutual funds and rising consumer confidence. If any of these factors change
for the worse, valuations should deflate. My biggest concern going forward
is that the low level of inflation and pricing power in a strong economy
will deteriorate to deflation in a slowing or contracting economy, thereby
leading to sizable earnings declines.
Q. CHARLIE, WHAT CHANGES HAVE YOU MADE SINCE TAKING OVER THE FUND'S BOND
INVESTMENTS?
C.M. For most of the period, I focused on positioning the bond portion of
the portfolio more aggressively by increasing its weighting in securities
that offer a yield advantage over Treasuries, such as corporate securities,
while decreasing the percentage held in Treasuries. Part of that move was
accomplished with Dick's reallocation of assets away from bonds. In
reducing the fund's stake in bonds, I sold Treasuries. At the same time, I
tended to focus any new purchases on investments that offered a yield
advantage over Treasuries. Specific areas of focus included BBB-rated
corporate bonds and commercial mortgage-backed securities.
Q. WHAT KINDS OF BONDS DID YOU FOCUS ON IN THE CORPORATE MARKET?
C.M. One area of interest over the period was in the bank market. I
continued to add long-term bank paper in the form of capital securities.
Last fall, the Federal Reserve Board ruled that domestic banking companies
could issue capital securities, which offered the banks significant tax
advantages, as well as the opportunity to strengthen their balance sheets.
Numerous banks took advantage of this opportunity and inundated the market
with these securities. The large amount of supply in a relatively
concentrated period of time allowed us to purchase many capital securities
at cheap levels. This market has performed well following the initial
supply.
Q. JOHN, WHAT HAS THE BACKDROP FOR THE SHORT-TERM AND MONEY MARKETS BEEN
LIKE SINCE YOU CAME ON BOARD?
J.T. As Dick pointed out, the Fed raised the fed funds rate at its March
meeting, but then chose not to continue to raise rates at its late May
meeting. For now, the Fed appears to be in a holding pattern. Some believe
that the Fed has abandoned the notion of being pre-emptive - seeking to
head off inflation before it actually appears - and instead will respond
only to actual evidence of inflation rather than trying to respond to
underlying inflationary pressures.
Q. WHAT SORT OF STRATEGY DID YOU PURSUE?
J.T. Because Fed Chairman Alan Greenspan warned that the Fed might raise
rates, I reduced the short-term/money market portion's average maturity to
about 50 days in the first quarter. Once the market adjusted to the new,
higher rate level and expectations of further Fed interest rate increases
were built into the yield curve, the maturity was extended. That's because
many longer-maturity instruments were attractively valued because their
prices and yields reflected a more aggressive Fed interest rate posture
than I felt was likely.
Q. TURNING BACK TO YOU, DICK, WHAT'S YOUR OUTLOOK?
D.H. I believe that a lack of pricing power, among other things, makes it
clear that corporations are not operating with a very strong wind at their
backs. At the same time, U.S. companies - helped by advances in technology
that help cut costs - are operating very efficiently, leading to many
positive earnings surprises. I don't see much that would change that over
the near future. Still, the economic pattern over the past year has been
like a seesaw. That is, the economy has grown in spurts, picking up for one
quarter then tailing off into weakness during the next. If the economy
shows sustained strength, interest rates could rise and put some pressure
on the markets. On the other hand, one could argue that rates might fall
because inflation is at such a low level. As always, we'll have to wait and
see what the future holds.
FUND FACTS
GOAL: maximum total return over the long term
by allocating assets among stocks, bonds and
short-term instruments anywhere in the world
START DATE: September 6, 1989
SIZE: as of June 30, 1997, more than $4 billion
MANAGER: Richard Habermann, since March
1996; joined Fidelity in 1968
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 78.2%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 1.6%
AEROSPACE & DEFENSE - 1.1%
Boeing Co. 80,600 $ 4,276,838
Gulfstream Aerospace Corp. (a) 5,800 171,100
4,447,938
DEFENSE ELECTRONICS - 0.4%
Raytheon Co. 34,000 1,734,000
SHIP BUILDING & REPAIR - 0.1%
Avondale Industries, Inc. (a) 2,800 58,800
Newport News Shipbuilding, Inc. 8,200 159,388
218,188
TOTAL AEROSPACE & DEFENSE 6,400,126
BASIC INDUSTRIES - 4.4%
CHEMICALS & PLASTICS - 2.8%
Air Products & Chemicals, Inc. 9,800 796,250
du Pont (E.I.) de Nemours & Co. 108,100 6,796,788
Raychem Corp. 31,900 2,372,563
Union Carbide Corp. 30,000 1,411,875
11,377,476
PACKAGING & CONTAINERS - 0.8%
Owens-Illinois, Inc. (a) 95,100 2,948,100
PAPER & FOREST PRODUCTS - 0.8%
Boise Cascade Corp. 19,400 685,063
Champion International Corp. 29,000 1,602,250
International Paper Co. 11,500 558,469
Willamette Industries, Inc. 3,900 273,000
3,118,782
TOTAL BASIC INDUSTRIES 17,444,358
CONSTRUCTION & REAL ESTATE - 0.9%
CONSTRUCTION - 0.7%
Centex Corp. 11,800 479,375
D.R. Horton, Inc. 32,900 341,338
Fleetwood Enterprises, Inc. 48,733 1,452,853
Kaufman & Broad Home Corp. 24,200 425,013
U.S. Home Corp. (a) 2,600 69,063
2,767,642
ENGINEERING - 0.2%
Fluor Corp. 18,900 1,043,044
TOTAL CONSTRUCTION & REAL ESTATE 3,810,686
DURABLES - 4.3%
AUTOS, TIRES, & ACCESSORIES - 3.6%
Circuit City Stores, Inc. -
CarMax Group 2,500 35,781
Cummins Engine Co., Inc. 19,500 1,375,969
Dana Corp. 7,500 285,000
Discount Auto Parts, Inc. (a) 12,500 243,750
Federal-Mogul Corp. 8,300 290,500
General Motors Corp. 163,100 9,081,631
Gentex Corp. (a) 7,000 138,250
Goodyear Tire & Rubber Co. 8,100 512,831
Honda Motor Co. Ltd. 13,000 391,208
Magna International, Inc. Class A 21,200 1,274,472
Superior Industries International, Inc. 32,900 871,850
14,501,242
CONSUMER ELECTRONICS - 0.2%
Newell Co. 15,900 630,038
SHARES VALUE (NOTE 1)
TEXTILES & APPAREL - 0.5%
Burlington Industries, Inc. (a) 40,400 $ 484,800
Liz Claiborne, Inc. 10,900 508,213
NIKE, Inc. Class B 15,000 875,625
Reebok International Ltd. 2,400 112,200
1,980,838
TOTAL DURABLES 17,112,118
ENERGY - 6.5%
ENERGY SERVICES - 0.3%
McDermott International, Inc. 37,600 1,097,450
OIL & GAS - 6.2%
Amerada Hess Corp. 15,700 872,331
Anadarko Petroleum Corp. 1,700 102,000
Atlantic Richfield Co. 28,700 2,023,350
British Petroleum PLC ADR 52,146 3,904,432
Burlington Resources, Inc. 40,100 1,769,413
Canada Occidental Petroleum Ltd. 700 15,717
Chevron Corp. 2,300 170,056
Elf Aquitaine SA sponsored ADR 8,100 440,944
Enron Oil & Gas Co. 5,100 92,438
Fortune Petroleum Corp. warrants
9/28/98 (a) 100,000 75,000
Kerr-McGee Corp. 7,600 481,650
Louisiana Land & Exploration Co. 31,500 1,799,438
Mobil Corp. 4,600 321,425
Noble Affiliates, Inc. 3,000 116,063
Occidental Petroleum Corp. 67,800 1,699,238
Royal Dutch Petroleum Co. Ord. 3,200 166,346
Royal Dutch Petroleum Co. 129,600 7,047,000
Santa Fe Energy Resources, Inc. (a) 23,400 343,688
Sun Co., Inc. 9,500 294,500
Tosco Corp. 68,100 2,038,744
Total SA:
Class B 2,420 244,461
sponsored ADR 15,065 762,666
Union Pacific Resources Group, Inc. 5,300 131,838
24,912,738
TOTAL ENERGY 26,010,188
FINANCE - 14.9%
BANKS - 0.4%
Canadian Imperial Bank of Commerce 200 5,041
Credit Suisse Group (Reg.) 8,400 1,077,660
NationsBank Corp. 11,500 741,750
1,824,451
CLOSED END INVESTMENT COMPANY - 0.1%
First NIS Regional Fund (a) 25,000 462,500
CREDIT & OTHER FINANCE - 0.9%
Fleet Financial Group, Inc. 55,200 3,491,400
FEDERAL SPONSORED CREDIT - 7.4%
Federal Home Loan Mortgage
Corporation 319,400 10,979,375
Federal National Mortgage Association 428,200 18,680,225
29,659,600
INSURANCE - 5.6%
AFLAC, Inc. 12,700 600,075
Aegon NV (Reg.) 12,898 903,666
Allmerica Financial Corp. 14,100 562,238
Allstate Corp. 83,100 6,066,300
American International Group, Inc. 33,900 5,063,813
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
INSURANCE - CONTINUED
CIGNA Corp. 5,300 $ 940,750
Equitable of Iowa Companies 2,000 112,000
General Re Corp. 8,700 1,583,400
Loews Corp. 5,700 570,713
MGIC Investment Corp. 40,400 1,936,675
PMI Group, Inc. 14,700 916,913
Provident Companies, Inc. 1,200 64,200
Providian Financial Corp. (a) 31,200 1,002,300
Reliastar Financial Corp. 5,700 416,813
Torchmark Corp. 18,700 1,332,375
Travelers Property Casualty Corp.
Class A 4,500 179,438
UNUM Corp. 3,300 138,600
22,390,269
SAVINGS & LOANS - 0.3%
Golden West Financial Corp. 17,300 1,211,000
SECURITIES INDUSTRY - 0.2%
United Asset Management Corp. 28,300 801,244
TOTAL FINANCE 59,840,464
HEALTH - 6.3%
DRUGS & PHARMACEUTICALS - 2.3%
American Home Products Corp. 1,400 107,100
Amgen, Inc. 27,300 1,586,813
Astra AB Class A Free shares 136,700 2,549,515
Merck & Co., Inc. 6,800 703,800
Novartis AG (Reg.) 1,296 2,069,698
Schering-Plough Corp. 44,600 2,135,225
9,152,151
MEDICAL EQUIPMENT & SUPPLIES - 0.8%
Allegiance Corp. 2,660 72,485
Bard (C.R.), Inc. 13,000 472,063
Baxter International, Inc. 5,400 282,150
Biomet, Inc. 30,900 575,513
Boston Scientific Corp. (a) 1,600 98,300
Johnson & Johnson 3,500 225,313
St. Jude Medical, Inc. (a) 35,800 1,396,200
3,122,024
MEDICAL FACILITIES MANAGEMENT - 3.2%
Columbia/HCA Healthcare Corp. 222,750 8,756,859
Health Management Associates, Inc.
Class A (a) 1,500 42,750
Humana, Inc. (a) 59,700 1,380,563
Tenet Healthcare Corp. (a) 41,800 1,235,713
United HealthCare Corp. 26,100 1,357,200
12,773,085
TOTAL HEALTH 25,047,260
HOLDING COMPANIES - 0.2%
U.S. Industries, Inc. (a) 20,900 744,563
INDUSTRIAL MACHINERY & EQUIPMENT - 1.6%
ELECTRICAL EQUIPMENT - 0.9%
Emerson Electric Co. 7,800 429,488
General Electric Co. 35,300 2,307,738
Scientific-Atlanta, Inc. 17,800 389,375
Sensormatic Electronics Corp. 6,200 79,825
Westinghouse Electric Corp. 26,500 612,813
3,819,239
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - 0.5%
Caterpillar, Inc. 15,600 $ 1,675,050
JLK Direct Distribution, Inc. Class A 100 2,563
Ultratech Stepper, Inc. (a) 19,000 434,625
2,112,238
POLLUTION CONTROL - 0.2%
Browning-Ferris Industries, Inc. 18,800 625,100
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 6,556,577
MEDIA & LEISURE - 2.4%
BROADCASTING - 0.1%
Cox Communications, Inc. Class A (a) 4,600 110,400
HSN, Inc. (a) 3,350 104,688
TCI Group Class A (a) 15,600 232,050
447,138
ENTERTAINMENT - 0.0%
Cedar Fair LP (depositary unit) 1,300 56,875
Royal Caribbean Cruises Ltd. 3,100 108,306
165,181
LEISURE DURABLES & TOYS - 0.6%
Nintendo Co. Ltd. Ord. 27,300 2,286,013
LODGING & GAMING - 0.9%
Circus Circus Enterprises, Inc. (a) 42,000 1,034,250
HFS, Inc. (a) 7,200 417,600
Harrah's Entertainment, Inc. (a) 19,500 355,875
Mirage Resorts, Inc. (a) 42,200 1,065,550
Sun International Hotels Ltd. Ord. (a) 19,400 716,588
3,589,863
PUBLISHING - 0.1%
Cognizant Corp. 11,500 465,750
RESTAURANTS - 0.7%
Brinker International, Inc. (a) 14,100 200,925
Lone Star Steakhouse Saloon (a) 10,300 267,800
McDonald's Corp. 43,100 2,082,269
Papa John's International, Inc. (a) 3,800 139,650
2,690,644
TOTAL MEDIA & LEISURE 9,644,589
NONDURABLES - 7.5%
HOUSEHOLD PRODUCTS - 0.1%
Premark International, Inc. 4,800 128,400
TOBACCO - 7.4%
Philip Morris Companies, Inc. 576,300 25,573,313
RJR Nabisco Holdings Corp. 121,820 4,020,060
UST, Inc. 5,400 149,850
29,743,223
TOTAL NONDURABLES 29,871,623
PRECIOUS METALS - 0.1%
Barrick Gold Corp. 4,600 100,120
Newmont Mining Corp. 3,886 151,554
251,674
RETAIL & WHOLESALE - 7.0%
APPAREL STORES - 0.3%
Gap, Inc. 10,600 412,075
TJX Companies, Inc. 35,200 928,400
1,340,475
DRUG STORES - 0.0%
CVS Corp. 3,900 199,875
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
GENERAL MERCHANDISE STORES - 2.2%
Federated Department Stores, Inc. (a) 30,300 $ 1,052,925
Proffitts, Inc. (a) 1,100 48,263
Wal-Mart Stores, Inc. 226,300 7,651,769
8,752,957
GROCERY STORES - 0.3%
Safeway, Inc. (a) 24,500 1,130,063
RETAIL & WHOLESALE, MISCELLANEOUS - 4.2%
Circuit City Stores, Inc. - Circuit
City Group 77,500 2,756,094
Corporate Express, Inc. 20,400 294,525
Home Depot, Inc. (The) 96,100 6,624,894
Lowe's Companies, Inc. 80,400 2,984,850
Officemax, Inc. (a) 56,000 808,500
Office Depot, Inc. (a) 8,700 169,106
Rex Stores Corp. (a) 6,800 68,850
Staples, Inc. (a) 23,400 544,050
Toys "R" Us, Inc. (a) 46,900 1,641,500
U.S. Office Products Co. (a) 15,900 485,944
Viking Office Products, Inc. (a) 21,200 402,800
16,781,113
TOTAL RETAIL & WHOLESALE 28,204,483
SERVICES - 0.0%
ADVERTISING - 0.0%
Interpublic Group of Companies, Inc. 2,500 153,281
LEASING & RENTAL - 0.0%
Hanover Compressor Co. 300 5,850
PRINTING - 0.0%
Donnelley (R.R.) & Sons Co. 600 22,058
SERVICES - 0.0%
PEAPOD, Inc. 1,100 12,375
TOTAL SERVICES 193,564
TECHNOLOGY - 12.9%
COMMUNICATIONS EQUIPMENT - 0.8%
Alcatel Alsthom Compagnie Generale
d'Electricite SA sponsored ADR 2,100 53,025
Alcatel Alsthom Compagnie Generale
d'Electricite SA 17,100 2,140,335
Andrew Corp. (a) 6,300 177,188
Cisco Systems, Inc. (a) 8,500 570,563
Nokia Corp. AB sponsored ADR 3,700 272,875
3,213,986
COMPUTER SERVICES & SOFTWARE - 2.4%
American Management Systems, Inc. (a) 2,800 74,900
Automatic Data Processing, Inc. 25,700 1,207,900
CUC International, Inc. (a) 18,200 469,788
Ceridian Corp. (a) 16,500 697,125
CompUSA, Inc. (a) 10,400 223,600
Electronic Data Systems Corp. 44,100 1,808,100
First Data Corp. 33,500 1,471,906
Microsoft Corp. (a) 12,000 1,516,500
Netscape Communications Corp. (a) 2,900 92,981
Oracle Systems Corp. (a) 20,900 1,052,838
Paychex, Inc. 16,350 621,300
Policy Management Systems Corp. (a) 10,000 470,000
9,706,938
SHARES VALUE (NOTE 1)
COMPUTERS & OFFICE EQUIPMENT - 4.6%
Bay Networks, Inc. (a) 25,300 $ 672,031
Compaq Computer Corp. (a) 40,300 3,999,775
Hewlett-Packard Co. 17,600 985,600
Ingram Micro, Inc. Class A (a) 3,500 84,438
International Business Machines Corp. 103,500 9,334,406
SCI Systems, Inc. (a) 42,200 2,690,250
Tech Data Corp. (a) 21,200 666,475
18,432,975
ELECTRONIC INSTRUMENTS - 1.3%
Applied Materials, Inc. (a) 14,500 1,026,781
Cognex Corp. (a) 8,900 235,850
KLA Instruments Corp. (a) 3,200 156,000
Lam Research Corp. (a) 20,400 756,075
Novellus Systems, Inc. (a) 12,200 1,055,300
Teradyne, Inc. (a) 16,500 647,625
Thermo Electron Corp. (a) 18,600 632,400
Varian Associates, Inc. 10,600 575,050
5,085,081
ELECTRONICS - 3.8%
AMP, Inc. 59,000 2,463,250
Atmel Corp. (a) 3,900 109,200
Intel Corp. 28,900 4,098,381
Methode Electronics, Inc. Class A 10,200 202,725
Microchip Technology, Inc. (a) 3,350 99,663
Micron Technology, Inc. 67,900 2,711,756
Molex, Inc. 10,875 379,266
Motorola, Inc. 2,300 174,800
Solectron Corp. (a) 49,100 3,437,000
Storage Technology Corp. (a) 8,600 382,700
Texas Instruments, Inc. 13,800 1,160,063
Thomas & Betts Corp. 700 36,794
15,255,598
TOTAL TECHNOLOGY 51,694,578
TRANSPORTATION - 0.9%
AIR TRANSPORTATION - 0.2%
Continental Airlines, Inc. Class B (a) 4,100 143,244
Delta Air Lines, Inc. 2,800 229,600
Northwest Airlines Corp. Class A (a) 6,800 247,350
620,194
RAILROADS - 0.5%
Bombardier, Inc. Class B 15,700 355,927
Burlington Northern Santa Fe Corp. 7,000 629,125
CSX Corp. 21,700 1,204,350
2,189,402
SHIPPING - 0.1%
Stolt-Nielsen SA Class B sponsored ADR 16,500 319,688
Stolt-Nielsen SA 1,700 32,088
351,776
TRUCKING & FREIGHT - 0.1%
Roadway Express, Inc. 3,300 77,138
Yellow Corp. (a) 13,800 308,775
385,913
TOTAL TRANSPORTATION 3,547,285
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - 6.7%
CELLULAR - 1.9%
AirTouch Communications, Inc. (a) 94,700 $ 2,592,413
360 Degrees Communications Co. (a) 4,700 80,488
Vodafone Group PLC sponsored ADR 83,700 4,054,219
Vodafone Group PLC 172,641 842,069
7,569,189
ELECTRIC UTILITY - 0.2%
American Electric Power Co., Inc. 7,900 331,800
Entergy Corp. 23,800 651,525
983,325
GAS - 0.1%
Enron Corp. 10,300 420,369
TELEPHONE SERVICES - 4.5%
AT&T Corp. 28,300 992,269
Ameritech Corp. 25,900 1,759,581
Bell Atlantic Corp. 18,700 1,418,863
BellSouth Corp. 43,700 2,026,588
Deutsche Telekom AG 10,800 259,311
MCI Communications Corp. 88,000 3,368,750
NextLink Communications, Inc.
warrants 2/1/09 (a) 5,940 59
NYNEX Corp. 36,700 2,114,838
Qwest Communications
International, Inc. 700 19,075
SBC Communications, Inc. 35,800 2,215,125
Sprint Corp. 67,700 3,562,713
WorldCom, Inc. (a) 9,600 307,200
18,044,372
TOTAL UTILITIES 27,017,255
TOTAL COMMON STOCKS
(Cost $264,403,573) 313,391,391
NONCONVERTIBLE PREFERRED STOCKS - 1.1%
CONSTRUCTION & REAL ESTATE - 0.0%
REAL ESTATE INVESTMENT TRUSTS - 0.0%
Walden Residential Properties, Inc.
9.20% 5,800 146,450
FINANCE - 0.2%
CREDIT & OTHER FINANCE - 0.1%
American Annuity Group Capital Trust II
8 3/4% 160 159,200
SAVINGS & LOANS - 0.1%
California Federal Preferred Capital
Corp. 9 1/8% 20,560 524,280
TOTAL FINANCE 683,480
HEALTH - 0.1%
MEDICAL FACILITIES MANAGEMENT - 0.1%
Fresenius Medical Care Capital
Trust 9% 166 170,109
MEDIA & LEISURE - 0.7%
BROADCASTING - 0.6%
American Radio Systems Corp. 11 3/8%
pay-in-kind 3,025 322,163
Cablevision System Corp. 11 1/8%
depositary shares pay-in-kind 4,910 493,455
SHARES VALUE (NOTE 1)
PanAmSat Corp. 12 3/4% pay-in-kind 24 $ 29,280
SFX Broadcasting, Inc. 12 5/8% 3,143 338,658
Sinclair Capital 11 5/8% (e) 3,100 327,050
Time Warner, Inc., Series M,
10 1/4% pay-in-kind 964 1,065,220
2,575,826
PUBLISHING - 0.1%
K-III Communications Corp.:
Series B, $11.625 pay-in-kind 206 22,480
Series D, $10 3,386 341,140
363,620
TOTAL MEDIA & LEISURE 2,939,446
UTILITIES - 0.1%
TELEPHONE SERVICES - 0.1%
NextLink Communications, Inc.
14% pay-in-kind 6,150 318,263
TOTAL NONCONVERTIBLE PREFERRED STOCKS
(Cost $4,110,913) 4,257,748
NONCONVERTIBLE CORPORATE BONDS - 11.1%
MOODY'S PRINCIPAL
RATINGS (D) AMOUNT
AEROSPACE & DEFENSE - 0.3%
AEROSPACE & DEFENSE - 0.1%
BE Aerospace, Inc.:
9 3/4%, 3/1/03 Ba3 $ 400,000 417,000
9 7/8%, 2/1/06 B2 10,000 10,525
Rohr, Inc. 11 5/8%, 5/15/03 Ba3 50,000 55,625
483,150
DEFENSE ELECTRONICS - 0.0%
Tracor, Inc. 8 1/2%, 3/1/07 B1 130,000 131,300
SHIP BUILDING & REPAIR - 0.2%
Newport News Shipbuilding, Inc.:
8 5/8%, 12/1/06 Ba2 155,000 160,038
9 1/4%, 12/1/06 B1 540,000 562,950
722,988
TOTAL AEROSPACE & DEFENSE 1,337,438
BASIC INDUSTRIES - 0.8%
CHEMICALS & PLASTICS - 0.1%
Acetex Corp. yankee
9 3/4%, 10/1/03 B1 120,000 121,800
Foamex LP/Foamex Capital Corp.
9 7/8%, 6/15/07 (e) B3 60,000 60,750
General Chemical Corp.
9 1/4%, 8/15/03 B2 150,000 153,375
Pioneer Americas Acquisition
Corp. 9 1/4%, 6/15/07 (e) B1 40,000 39,400
Sterling Chemicals Holdings, Inc.
11 1/4%, 4/1/07 B3 240,000 254,400
629,725
IRON & STEEL - 0.1%
Neenah Corp. 11 1/8%,
5/1/07 (e) B3 210,000 222,600
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
BASIC INDUSTRIES - CONTINUED
METALS & MINING - 0.0%
Well Aluminum Corp. 10 1/8%,
6/1/05 (e) B2 $ 20,000 $ 20,600
PACKAGING & CONTAINERS - 0.3%
BWAY Corp. 10 1/4%,
4/15/07 (e) B2 190,000 204,250
Owens Illinois, Inc.:
7.85%, 5/15/04 Ba1 150,000 152,063
9.95%, 10/15/04 Ba3 210,000 222,600
8.10%, 5/15/07 Ba1 210,000 212,888
Silgan Holdings, Inc.
9%, 6/1/09 (e) B1 260,000 261,950
1,053,751
PAPER & FOREST PRODUCTS - 0.3%
Asia Pulp & Paper Finance II
Mauritius Ltd. 12%,
3/15/04 (e) B3 110,000 112,750
Florida Coast Paper Co.
LLC/Florida Coast Paper
Finance Corp., Series B,
12 3/4%, 6/1/03 Caa 100,000 103,250
Gaylord Container Corp.
11 1/2%, 5/15/01 B3 40,000 42,050
Repap Wisconsin, Inc.:
9 1/4%, 2/1/02 B2 230,000 231,150
9 7/8%, 5/1/06 Caa 30,000 30,225
Repap New Brunswick, Inc.
yankee 10 5/8%, 4/15/05 Caa 90,000 84,825
Riverwood International Corp.
10 1/4%, 4/1/06 B3 220,000 216,700
Stone Container Corp.
10 3/4%, 10/1/02 B1 300,000 316,500
1,137,450
TOTAL BASIC INDUSTRIES 3,064,126
CONSTRUCTION & REAL ESTATE - 0.2%
BUILDING MATERIALS - 0.1%
Building Materials Corp. of
America 0%, 7/1/04 (b) B1 420,000 382,200
Falcon Building Products, Inc.
9 1/2%, 6/15/07 (e) B3 20,000 19,850
Nortek, Inc. 9 1/4%,
3/15/07 Ba3 90,000 91,800
493,850
CONSTRUCTION - 0.1%
Greystone Homes, Inc.
10 3/4%, 3/1/04 Ba3 200,000 218,500
REAL ESTATE - 0.0%
Iron Mountain, Inc. 10 1/8%,
10/1/06 B3 100,000 106,250
TOTAL CONSTRUCTION & REAL ESTATE 818,600
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
DURABLES - 0.4%
AUTOS, TIRES, & ACCESSORIES - 0.1%
Aftermarket Technology Corp.
12%, 8/1/04 B3 $ 135,000 $ 150,525
Blue Bird Body Co. 10 3/4%,
11/15/06 B2 230,000 243,800
Delco Remy International, Inc.
10 5/8%, 8/1/06 (e) B2 50,000 53,000
Tennessee Gas Pipeline Co.
7%, 3/15/27 Baa3 90,000 89,946
537,271
HOME FURNISHINGS - 0.1%
Interlake Corp. 12 1/8%,
3/1/02 B3 240,000 251,400
Knoll, Inc. 10 7/8%, 3/15/06 B1 26,000 28,763
280,163
TEXTILES & APPAREL - 0.2%
GFSI, Inc. 9 5/8%, 3/1/07 (e) B3 290,000 292,900
Levi Strauss & Co. 7%,
11/1/06 (e) Baa2 310,000 306,652
599,552
TOTAL DURABLES 1,416,986
ENERGY - 0.5%
ENERGY SERVICES - 0.1%
Falcon Drilling, Inc. 9 3/4%,
1/15/01 Ba3 120,000 123,000
Parker Drilling Co. 9 3/4%,
11/15/06 B1 30,000 31,350
Pride Petroleum Services, Inc.
9 3/8%, 5/1/07 Ba3 210,000 217,350
371,700
OIL & GAS - 0.4%
Energy Corp. America
9 1/2%, 5/15/07 (e) B2 350,000 344,750
Flores & Rucks, Inc. 9 3/4%,
10/1/06 B3 220,000 229,900
Forcenergy, Inc. 8 1/2%,
2/15/07 B2 150,000 146,625
Gulf Canada Resources Ltd.
yankee 9 5/8%, 7/1/05 Ba2 130,000 139,263
Husky Oil Ltd. yankee
6 7/8%, 11/15/03 Baa3 85,000 83,798
Occidental Petroleum Corp.
9 3/4%, 6/15/01 Baa3 100,000 109,823
Ocean Energy, Inc. 8 7/8%,
7/15/07 (e) B3 240,000 240,000
Pennzoil Co. 9 5/8%,
11/15/99 Baa3 70,000 74,579
Petsec Energy, Inc. 9 1/2%,
6/15/07 (e) B3 30,000 30,000
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
ENERGY - CONTINUED
OIL & GAS - CONTINUED
Ras Laffan Liquid Natural Gas
Co. Ltd. yankee 7.628%,
9/15/06 (e) A3 $ 70,000 $ 70,897
United Refining Co. 10 3/4%,
6/15/07 (e) B2 100,000 99,000
1,568,635
TOTAL ENERGY 1,940,335
FINANCE - 2.5%
ASSET-BACKED SECURITIES - 0.5%
Airplanes Pass Through Trust
10 7/8%, 3/15/19 Ba2 1,100,000 1,271,065
CPS Auto Grantor Trust
6.55%, 12/15/02 Aaa 105,786 106,017
Green Tree Financial Corp.:
6 1/2%, 6/15/27 Aaa 100,000 100,218
6.80%, 6/15/27 Aaa 100,000 100,500
6.45%, 9/15/28 Aaa 110,000 109,691
Olympic Automobile
Receivables Trust:
6.40%, 9/15/01 Aaa 150,000 150,382
6.70%, 3/15/02 Aaa 70,000 70,306
WFS Financial Owner Trust
6.55%, 10/20/04 Aaa 140,000 139,620
2,047,799
BANKS - 0.5%
ABN Amro Bank NV 6 5/8%,
10/31/01 Aa3 250,000 248,968
Banc One Corp. 6.70%,
3/24/00 Aa3 150,000 150,699
BanPonce Corp. 6.665%,
3/5/01 A3 150,000 149,291
BanPonce Trust I 8.327%,
2/1/27 (e) Baa1 230,000 232,433
Capital One Bank 6.42%,
11/12/99 Baa3 500,000 497,375
Den Danske Bank AS
7.40%, 6/15/10 (e)(g) A1 140,000 139,896
Korea Development Bank
yankee 7 1/4%, 5/15/06 A1 180,000 178,565
Midland Bank PLC yankee
7 5/8%, 6/15/06 A1 125,000 128,731
NB Capital Trust IV 8 1/4%,
4/15/27 A1 150,000 153,711
Nationsbank Corp.
5.67%, 2/9/01 A1 250,000 241,323
2,120,992
CREDIT & OTHER FINANCE - 0.9%
AT&T Capital Corp.:
6.39%, 1/22/99 Baa3 50,000 50,096
6.26%, 2/18/99 Baa3 350,000 349,262
6.65%, 4/30/99 Baa3 250,000 250,700
Ahmanson Capital Trust I
8.36%, 12/1/26 (e) Baa3 250,000 252,088
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
CIT Group Holdings, Inc.
6 1/4%, 10/4/99 Aa3 $ 250,000 $ 249,375
Chrysler Financial Corp.
6 3/8%, 1/28/00 A3 230,000 229,310
First Security Capital I
8.41%, 12/15/26 A3 110,000 112,141
Ford Motor Credit Co.:
6.65%, 5/22/00 A1 400,000 400,396 7%, 9/25/01 A1 325,000 327,743
General Electric Capital Corp.
6.94%, 4/13/09 (c) Aaa 250,000 252,353
GreenPoint Capital Trust I
9.10%, 6/1/27 (e) Ba1 170,000 171,020
Heller Financial, Inc.
7 7/8%, 11/1/99 A2 180,000 184,900
Household Finance Corp.
5.7825%, 6/4/98 (g) A2 500,000 500,000
KeyCorp Institutional Capital
Series A, 7.826%, 12/1/26 A1 130,000 126,257
Nordstrom Credit, Inc.
7 1/4%, 4/30/02 A2 100,000 101,670
TransAmerican Energy Corp.
11 1/2%, 6/15/02 (e) B3 40,000 39,000
Triton Energy Ltd./Triton Energy
Corp. 9 1/4%, 4/15/05 Ba2 110,000 116,463
3,712,774
INSURANCE - 0.2%
Reliance Group:
9%, 11/15/00 Ba3 360,000 370,800
9 3/4%, 11/15/03 B1 270,000 281,475
SunAmerica, Inc. 6.20%,
10/31/99 Baa1 250,000 248,228
900,503
SAVINGS & LOANS - 0.4%
Bank UTD Corp. 8 7/8%,
5/1/07 Ba3 450,000 465,188
Chevy Chase Savings Bank
FSB 9 1/4%, 12/1/08 B1 260,000 260,650
First Nationwide Holdings, Inc.
10 5/8%, 10/1/03 Ba3 160,000 173,600
First Nationwide Parent
Holdings Ltd. 12 1/2%,
4/15/03 B3 250,000 278,750
Long Island Savings Bank FSB
7%, 6/13/02 Baa3 250,000 250,313
1,428,501
TOTAL FINANCE 10,210,569
HEALTH - 0.4%
MEDICAL EQUIPMENT & SUPPLIES - 0.0%
McKesson Corp. 6.60%,
3/1/00 (e) A3 150,000 150,150
MEDICAL FACILITIES MANAGEMENT - 0.4%
Columbia/HCA Healthcare
Corp.:
6 1/2%, 3/15/99 A2 125,000 125,434
6 7/8%, 7/15/01 A2 125,000 125,650
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
HEALTH - CONTINUED
MEDICAL FACILITIES MANAGEMENT - CONTINUED
Integrated Health Services, Inc.
9 1/2%, 9/15/07 (e) B1 $ 210,000 $ 214,725
Tenet Healthcare Corp.:
8%, 1/15/05 Ba1 30,000 30,000
10 1/8%, 3/1/05 Ba3 240,000 261,600
8 5/8%, 1/15/07 Ba3 760,000 771,400
1,528,809
TOTAL HEALTH 1,678,959
HOLDING COMPANIES - 0.1%
Norfolk Southern Corp.
7.05%, 5/1/37 Baa1 220,000 223,287
INDUSTRIAL MACHINERY & EQUIPMENT - 0.2%
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
Continental Global Group, Inc.
11%, 4/1/07 (e) B2 100,000 105,000
Exide Corp. 10%, 4/15/05 B1 165,000 170,775
Goss Graphic System, Inc.
12%, 10/15/06 B2 250,000 275,000
550,775
POLLUTION CONTROL - 0.1%
Allied Waste of North America,
Inc. 10 1/4%, 12/1/06 (e) B3 290,000 310,300
WMX Technologies, Inc.
7.10%, 8/1/26 A3 80,000 81,518
391,818
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 942,593
MEDIA & LEISURE - 2.6%
BROADCASTING - 1.6%
Adelphia Communications Corp.:
9 1/2%, 2/15/04 B3 520,000 494,000
9 7/8%, 3/1/07 (e) - 120,000 115,800
Cablevision System Corp.:
9 1/4%, 11/1/05 B2 260,000 267,150
9 7/8%, 5/15/06 B2 180,000 191,250
9 7/8%, 2/15/13 B2 120,000 126,300
Capstar Broadcasting Partners,
Inc. 0%, 2/1/09 (b)(e) CCC 80,000 51,400
Capstar Radio Broadcasting
Partners, Inc. 9 1/4%,
7/1/07 (e) - 410,000 396,675
Diamond Cable Communications
PLC yankee (b):
0%, 9/30/04 B3 270,000 218,025
0%, 2/15/07 (e) - 190,000 106,638
Echostar DBS Corp. 12 1/2%,
7/1/02 (e) Caa 120,000 118,950
Echostar Satellite Broadcasting
Corp. 0%, 3/15/04 (b) Caa 220,000 156,200
Echostar Communications Corp.
secured discount 0%,
6/1/04 (b) B2 322,000 270,480
Granite Broadcasting Corp.:
10 3/8%, 5/15/05 B3 30,000 30,375
9 3/8%, 12/1/05 B3 40,000 38,800
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Intermedia Capital Partners IV
LP/Intermedia Partners IV
Capital Corp. 11 1/4%,
8/1/06 B2 $ 100,000 $ 107,625
International Cabletel, Inc.
0%, 2/1/06 (b) B3 130,000 89,700
Jacor Communications Co.
8 3/4%, 6/15/07 (e) B2 50,000 49,375
Lenfest Communications, Inc.
8 3/8%, 11/1/05 Ba3 550,000 541,750
NTL, Inc. 10%, 2/15/07 - 270,000 270,625
Olympus Communications LP/
Olympus Capital Corp.
10 5/8%, 11/15/06 B1 140,000 146,300
Rogers Cablesystems Ltd.
yankee 11%, 12/1/15 B2 190,000 208,050
SCI Television, Inc. secured
11%, 6/30/05 Ba1 150,000 158,250
SFX Broadcasting, Inc.
10 3/4%, 5/15/06 B3 320,000 344,800
TCI Communication, Inc.:
7 1/4%, 6/15/99 Ba1 330,000 332,521
6.46%, 3/6/00 Ba1 200,000 196,718
TCI Communications Financing III
9.65%, 3/31/27 Ba3 440,000 460,830
Tele Communications, Inc.
9 1/4%, 4/15/02 Ba1 100,000 107,302
Telemundo Group, Inc.
7%, 2/15/06 (c) B1 200,000 191,500
Telewest PLC 0%, 10/1/07 (b) B1 680,000 491,300
Time Warner, Inc. 7.95%,
2/1/00 Ba1 190,000 195,337
6,474,026
ENTERTAINMENT - 0.2%
AMC Entertainment, Inc.
9 1/2%, 3/15/09 (e) B2 180,000 182,700
Cinemark USA, Inc.
9 5/8%, 8/1/08 B2 140,000 142,100
Viacom, Inc. 8%, 7/7/06 B1 470,000 455,900
780,700
LEISURE DURABLES & TOYS - 0.1%
Coleman Escrow Corp. secured
1st priority 0%, 5/15/01 (e) B3 380,000 239,400
LODGING & GAMING - 0.5%
American Skiing Co.
12%, 7/15/06 B3 370,000 388,500
Courtyard by Marriott II LP/
Courtyard II Finance Co.,
Series B, 10 3/4%, 2/1/08 B- 150,000 162,375
HMC Acquisition Properties, Inc.
9%, 12/15/07 Ba3 250,000 252,500
HMH Properties, Inc.
9 1/2%, 5/15/05 Ba3 550,000 573,375
Hollywood Casino Corp.
12 3/4%, 11/1/03 B2 50,000 53,000
Horseshoe Gaming LLC
9 3/8%, 6/15/07 (e) B3 70,000 70,438
Prime Hospitality Corp.
9 3/4%, 4/1/07 - 220,000 231,550
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
MEDIA & LEISURE - CONTINUED
LODGING & GAMING - CONTINUED
Sun International Hotels Ltd./
Sun International North
America, Inc. yankee
9%, 3/15/07 Ba3 $ 260,000 $ 263,900
Wyndham Hotel Corp.
10 1/2%, 5/15/06 B2 50,000 55,875
2,051,513
PUBLISHING - 0.1%
Golden Books Publishing, Inc.
7.65%, 9/15/02 B1 40,000 37,000
News America Holdings, Inc.
7.70%, 10/30/25 Baa3 200,000 189,384
Sun Media Corp. (e):
yankee 9 1/2%, 2/15/07 B3 150,000 151,500
9 1/2%, 5/15/07 B3 60,000 60,600
438,484
RESTAURANTS - 0.1%
Foodmaker, Inc. 9 3/4%,
6/1/02 B3 170,000 174,250
Host Marriott Travel Plazas, Inc.
9 1/2%, 5/15/05 B1 450,000 468,000
642,250
TOTAL MEDIA & LEISURE 10,626,373
NONDURABLES - 0.4%
FOODS - 0.2%
Chiquita Brands International, Inc.:
9 5/8%, 1/15/04 B1 140,000 144,375
10 1/4%, 11/1/06 B1 220,000 233,200
ConAgra, Inc. 7 1/8%,
10/1/26 Baa1 150,000 150,666
Specialty Foods Corp. 11 1/8%,
10/1/02 B3 180,000 178,200
706,441
HOUSEHOLD PRODUCTS - 0.1%
Revlon Consumer Products
Corp. 10 1/2%, 2/15/03 B3 440,000 468,600
TOBACCO - 0.1%
Philip Morris Companies, Inc.:
7 1/4%, 9/15/01 A2 150,000 151,143
6.95%, 6/1/06 A2 140,000 140,466
291,609
TOTAL NONDURABLES 1,466,650
RETAIL & WHOLESALE - 0.9%
APPAREL STORES - 0.1%
AnnTaylor, Inc. 8 3/4%,
6/15/00 B3 370,000 371,850
Specialty Retailers, Inc. (e):
8 1/2%, 7/15/05 Ba3 110,000 109,725
9%, 7/15/07 B2 20,000 19,900
501,475
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
GENERAL MERCHANDISE STORES - 0.5%
Dayton Hudson Corp.:
6.80%, 10/1/01 Baa1 $ 150,000 $ 149,744
7 1/2%, 7/15/06 Baa1 250,000 254,968
Federated Department
Stores, Inc.:
10%, 2/15/01 Baa2 250,000 273,493
8 1/8%, 10/15/02 Baa2 50,000 52,091
K mart Corp.:
12 1/2%, 3/1/05 Ba3 440,000 530,200
7 3/4%, 10/1/12 Ba3 40,000 36,600
8 1/4%, 1/1/22 Ba3 200,000 182,000
Michaels Stores, Inc. 10 7/8%,
6/18/06 Ba2 70,000 75,250
Parisian, Inc. 9 7/8%, 7/15/03 B1 240,000 249,600
Penney (J.C.) Co., Inc. 6.95%,
4/1/00 A2 150,000 151,263
1,955,209
GROCERY STORES - 0.3%
Kroger Co. 8.15%, 7/15/06 Baa3 125,000 131,795
Pathmark Stores, Inc.:
12 5/8%, 6/15/02 Caa 40,000 41,000
9 5/8%, 5/1/03 B3 620,000 598,300
0%, 11/1/03 (b) Caa 110,000 75,075
Penn Traffic Co.:
10 1/4%, 2/15/02 B3 180,000 154,800
8 5/8%, 12/15/03 B3 70,000 56,525
Pueblo Xtra International, Inc.
9 1/2%, 8/1/03 (e) B3 90,000 86,850
Randalls Food Markets, Inc.
9 3/8%, 7/1/07 (e) B2 30,000 29,888
1,174,233
TOTAL RETAIL & WHOLESALE 3,630,917
SERVICES - 0.4%
LEASING & RENTAL - 0.1%
PHH Corp. 5.6775%,
6/11/98 (g) A2 500,000 499,945
PRINTING - 0.1%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa 200,000 205,500
SERVICES - 0.2%
Borg-Warner Security Corp.
9 5/8%, 3/15/07 (e) B3 110,000 110,550
Orion Network Systems, Inc. unit:
11 1/4%, 1/15/07 B2 310,000 316,975
0%, 1/15/07 (b) B2 490,000 279,300
706,825
TOTAL SERVICES 1,412,270
TECHNOLOGY - 0.4%
COMPUTERS & OFFICE EQUIPMENT - 0.2%
Comdisco, Inc.:
7.21%, 7/2/01 Baa1 125,000 126,895
6 3/8%, 11/30/01 Baa1 300,000 293,667
NONCONVERTIBLE CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
TECHNOLOGY - CONTINUED
COMPUTERS & OFFICE EQUIPMENT - CONTINUED
Unisys Corp.:
12%, 4/15/03 B1 $ 260,000 $ 281,450
11 3/4%, 10/15/04 B1 70,000 75,600
777,612
ELECTRONICS - 0.2%
Advanced Micro Devices, Inc.
11%, 8/1/03 Ba1 330,000 366,300
Fairchild Semiconductor Corp.:
10 1/8%, 3/15/07 (e) B2 220,000 232,100
11.74%, 3/15/08 pay-in-
kind (f) - 210,000 202,398
Viasystems, Inc. 9 3/4%,
6/1/07 (e) B3 30,000 30,525
831,323
TOTAL TECHNOLOGY 1,608,935
TRANSPORTATION - 0.1%
AIR TRANSPORTATION - 0.1%
US Air, Inc.:
10 3/8%, 3/1/13 B1 170,000 186,150
pass through trust:
9 5/8%, 2/1/01 B3 80,000 82,400
10%, 7/1/03 B3 250,000 257,500
526,050
UTILITIES - 0.9%
CELLULAR - 0.2%
Globalstar LP/Globalstar
Capital Corp. (e):
unit 11 3/8%, 2/15/04 B3 180,000 180,000
11 1/4%, 6/15/04 B3 160,000 149,600
McCaw International Ltd. unit
0%, 4/15/07 (b)(e) CCC 380,000 182,400
Millicom International Cellular
SA 0%, 6/1/06 (b) B3 160,000 114,400
Paging Network, Inc.
8 7/8%, 2/1/06 B2 90,000 81,900
Telesystem International Wireless,
Inc. 0%, 6/30/07 (b)(e) B- 50,000 26,625
360 Degrees Communications
Co. 7 1/8%, 3/1/03 Ba1 180,000 179,008
913,933
ELECTRIC UTILITY - 0.3%
CMS Energy Corp. 8 1/8%,
5/15/02 Ba3 290,000 292,175
CalEnergy, Inc. 9 1/2%,
9/15/06 Ba2 100,000 107,000
Cleveland Electric Illuminating
Co./Toledo Edison Co.
7.67%, 7/1/04 (e) Ba2 90,000 90,563
Commonwealth Edison Co.
7 3/8%, 9/15/02 Baa2 170,000 172,518
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Hydro-Quebec yankee
7.40%, 3/28/25 A2 $ 90,000 $ 97,547
Israel Electric Corp. yankee
7 7/8%, 12/15/26 (e) A3 120,000 120,848
Long Island Lighting Co.
8 5/8%, 4/15/04 Ba1 210,000 218,753
NIPSCO Capital Markets, Inc.
7.39%, 4/1/04 Baa1 100,000 100,906
1,200,310
TELEPHONE SERVICES - 0.4%
LCI International, Inc.
7 1/4%, 6/15/07 Ba1 150,000 148,575
MFS Communications, Inc. (b):
0%, 1/15/04 Ba3 140,000 130,312
0%, 1/15/06 Ba3 330,000 260,288
McLeodUSA, Inc. 0%, 3/1/07
(b)(e) B3 160,000 102,000
Shared Technologies Fairchild
Communications Corp.
0%, 3/1/06 (b) Caa 90,000 80,325
Teleport Communications Group,
Inc. 0%, 7/1/07 (b) B1 290,000 209,163
Winstar Equipment Corp.
12 1/2%, 3/15/04 (e) CCC+ 130,000 127,075
WorldCom, Inc. 7 3/4%,
4/1/07 Ba1 400,000 409,072
1,466,810
TOTAL UTILITIES 3,581,053
TOTAL NONCONVERTIBLE CORPORATE BONDS
(Cost $43,790,129) 44,485,141
U.S. GOVERNMENT AND GOVERNMENT
AGENCY OBLIGATIONS - 2.7%
U.S. TREASURY OBLIGATIONS - 2.3%
9 1/4%, 8/15/98 Aaa 50,000 51,789
8%, 8/15/99 Aaa 50,000 51,844
7 3/4%, 12/31/99 Aaa 450,000 466,101
6 5/8%, 6/30/01 Aaa 1,350,000 1,362,650
7 7/8%, 8/15/01 Aaa 2,102,000 2,215,319
10 3/4%, 5/15/03 Aaa 125,000 150,958
7 7/8%, 11/15/04 Aaa 2,550,000 2,752,011
7%, 7/15/06 Aaa 473,000 486,599
12 3/4%, 11/15/10 (callable) Aaa 500,000 693,830
8 7/8%, 2/15/19 Aaa 489,000 598,414
7 1/4%, 2/ 15/23 Aaa 395,000 406,850
6 1/2%, 11/15/26 Aaa 155,000 148,654
9,385,019
U.S. GOVERNMENT AGENCY OBLIGATIONS - 0.4%
Federal Home Loan Bank:
7.31%, 6/16/04 Aaa 125,000 129,219
7.56%, 9/1/04 Aaa 50,000 52,375
Federal Home Loan Mortgage
Corporation 6.783%,
8/18/05 Aaa 440,000 439,657
U.S. GOVERNMENT AND GOVERNMENT
AGENCY OBLIGATIONS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
U.S. GOVERNMENT AGENCY OBLIGATIONS - CONTINUED
Federal National Mortgage
Association:
6.97%, 4/8/04 Aaa $ 190,000 $ 192,968
6.44%, 6/21/05 Aaa 250,000 244,960
Guaranteed Export Trust
Certificates (assets of Trust
guaranteed by U.S.
Government through
Export-Import Bank)
Series 1994-A,
7.12%, 4/15/06 Aaa 131,683 134,070
U.S. Department of Housing
and Urban Development
Government guaranteed
participation certificates
Series 1995-A, 8.24%,
8/1/04 Aaa 20,000 21,603
U.S. Trade Trust Certificates
(assets of Trust guaranteed
by U.S. government through
Export-Import Bank) 6.69%,
1/15/09 (e) Aaa 200,000 198,804
1,413,656
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $10,787,191) 10,798,675
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES - 1.6%
FEDERAL HOME LOAN MORTGAGE CORPORATION - 0.1%
7 1/2%, 7/1/27 Aaa 500,000 502,344
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 1.2%
6%, 3/1/11 to 5/1/11 Aaa 1,962,585 1,898,801
6 1/2%, 2/1/26 to 7/1/26 Aaa 2,421,240 2,319,686
7%, 4/1/26 to 5/1/26 Aaa 494,067 484,804
4,703,291
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 0.3%
6%, 5/15/11 to 7/15/11 Aaa 904,957 887,509
8 1/2%, 10/15/26 Aaa 490,919 510,094
1,397,603
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $6,527,820) 6,603,238
COMMERCIAL MORTGAGE SECURITIES - 0.9%
American Southwest Financial
Securities Series 1994-C2
Class B2, 12.79%,
12/25/01 (e)(g) - 250,000 246,250
Blackrock Capital Funding LLC
Series 1996 Class C2,
7.6035%, 11/16/26 (e)(g) Aaa 104,143 105,152
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
BKB Commercial Mortgage Trust
Series 1997-C1 Class D,
7.83%, 2/25/43 (e)(g) BBB $ 60,000 $ 60,600
CBA Mortgage Corp. Series
1993-C1 Class E, 7.76%,
12/25/03 (e)(g) Ba2 250,000 240,313
CS First Boston Mortgage
Securities Corp. Series 1995-
AEWI Class E, 9.7975%,
11/25/97 (e)(g) - 250,000 251,563
DLJ Mortgage Acceptance Corp.
Series 1993-MF12 Class B-2,
10.10%, 9/18/03 (e) - 250,000 250,625
First Chicago/Lennar Trust I,
Series 1997-CHL1 (g):
Class D, 8.106%, 5/29/08 - 350,000 334,141
Class E, 8.106%, 4/1/39 - 320,000 244,600
General Motors Acceptance Corp.
Commercial Mortgage
Securities, Inc. Series
1996-C1 Class F, 7.86%,
11/15/06 (e) Ba3 250,000 234,253
Kidder Peabody Acceptance
Corp. sequential pay, Series
1993-M1 Class A-2,
7.15%, 4/25/25 Aa2 72,233 72,616
Morgan Stanley Capital One, Inc.:
sequential pay Series 1997-C1
Class A-1C, 7.63%,
2/15/20 Aaa 150,000 155,203
Series 1996-MBL1 Class E,
8.661%, 5/25/21 (e)(g) - 94,940 87,166
Mortgage Capital Funding, Inc.
Series 1996-MC1 Class G,
7.15%, 7/15/28 (e) BB 100,000 87,805
Structured Asset Securities Corp.:
Series 1993-C1 Class E,
6.60%, 10/25/24 (e) B 250,000 87,500
Series 1995-C1 Class E,
7 3/8%, 9/25/24 (e) BB 1,000,000 890,625
sequential pay Series 1996
Class A-2A, 7 3/4%,
2/25/28 AAA 78,468 79,572
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $3,340,993) 3,427,984
FOREIGN GOVERNMENT OBLIGATIONS (H) - 0.2%
Export Development Corp.
yankee 8 1/8%, 8/10/99 Aa2 50,000 51,754
Israeli State euro 6 3/8%,
12/19/01 A3 210,000 206,063
Manitoba Province yankee
6 3/8%, 10/15/99 A1 125,000 124,990
FOREIGN GOVERNMENT OBLIGATIONS (H) - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
Newfoundland Province yankee
11 5/8%, 10/15/07 Baa1 $ 250,000 $ 331,500
Quebec Province yankee
7.22%, 7/22/36 (c) A2 150,000 156,174
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $865,051) 870,481
CERTIFICATES OF DEPOSIT - 1.2%
Banque Nationale de Paris yankee
5.85%, 9/30/97 200,000 200,054
Bayerische Vereinsbank AG
yankee 5.56%, 7/14/97 500,000 499,987
Caisse Nationale de Credit Agricole
yankee 5.60%, 7/21/97 500,000 499,987
Deutsche Bank AG yankee
6.20%, 4/10/98 500,000 500,392
Landesbank Hessen-Thuringen
yankee 5.78%, 1/27/98 300,000 299,786
National Westminster Bank PLC
yankee 5 1/2%, 8/5/97 400,000 399,899
Rabobank Nederlan Coop
Central yankee:
5.97%, 3/20/98 200,000 200,115
6.20%, 4/10/98 200,000 200,157
Royal Bank of Canada yankee
5.58%, 12/11/97 400,000 399,432
Sanwa Bank Ltd. yankee
5 3/4%, 8/27/97 500,000 500,025
Societe Generale yankee
5.55%, 7/28/97 500,000 499,924
SunTrust Bank 5.85%, 11/25/97 500,000 500,155
TOTAL CERTIFICATES OF DEPOSIT
(Cost $4,699,379) 4,699,913
COMMERCIAL PAPER - 0.8%
AC Acquisition Holding Co.
5.56%, 7/9/97 275,000 274,615
American General Finance
Corp. 5.60%, 8/5/97 100,000 99,447
BMW US Capital Corp.
yankee:
5.57%, 7/7/97 100,000 99,892
5.57%, 8/19/97 300,000 297,675
Citibank Credit Card Master Trust I
(Dakota Certificate Program)
5.60%, 7/21/97 275,000 274,092
Fina Oil & Chemical Co.
5.61%, 8/14/97 100,000 99,293
Goldman Sachs Group LP
5.83%, 1/26/98 200,000 193,478
Merrill Lynch & Co., Inc.
5.62%, 7/8/97 435,000 434,465
Nationwide Building Society
yankee 5.32%, 8/11/97 500,000 496,757
New Center Asset Trust
5.65%, 7/21/97 100,000 99,676
PRINCIPAL VALUE
AMOUNT (NOTE 1)
Unifunding, Inc. yankee:
5.58%, 9/15/97 $ 200,000 $ 197,613
5.67%, 11/12/97 300,000 293,700
Westpac Capital Corp. yankee
5.30%, 8/29/97 165,000 163,479
TOTAL COMMERCIAL PAPER
(Cost $3,024,500) 3,024,182
BANK NOTES - 0.3%
Bank of Tokyo-Mitsubishi Ltd.
5.70%, 7/14/97 500,000 500,000
Corestates Bank NA 5.6475%,
1/30/98 (g) 200,000 199,998
First Bank National Association
5.5975%, 5/15/98 (g) 200,000 199,874
Sumitomo Bank Ltd. 5.74%,
7/11/97 500,000 500,000
TOTAL BANK NOTES
(Cost $1,399,873) 1,399,872
CASH EQUIVALENTS - 1.9%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account dated 6/30/97
due 7/1/97:
at 5.99% $ 13,002 13,000
at 5.93% 7,727,273 7,726,000
TOTAL CASH EQUIVALENTS 7,739,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $350,688,422) $ 400,697,625
LEGEND
1. Non-income producing
2. Debt obligation initially issued in zero coupon form which converts to
coupon form at a specified rate and date.
3. Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date.
4. Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
5. Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of these securities amounted to $10,203,792 or 2.5% of net
assets.
6. Restricted securities - Investment in securities not registered under
the Securities Act of 1933 (see Note 2 of Notes to Financial Statements).
Additional information on each holding is as follows:
ACQUISITION ACQUISITION
SECURITY DATE COST
Fairchild Semiconductor
Corp. 11.74%, 3/15/08
pay-in-kind 4/3/97 $ 183,878
7. The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
8. For foreign government obligations not individually rated by S&P or
Moody's, the ratings listed are assigned to securities by FMR, the fund's
investment adviser, based principally on S&P and Moody's ratings of the
sovereign credit of the issuing government.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $194,622,823 and $ 86,184,600, respectively, of which U.S.
government and government agency obligations aggregated $16,194,987 and
$31,811,662, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of FMR. The commissions paid to these affiliated
firms were $22,480 for the period.
The composition of long-term debt holdings as a percentage of total value
of investment in securities, is as follows:
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 6.1% AAA, AA, A 6.1%
Baa 1.3% BBB 1.9%
Ba 3.1% BB 2.6%
B 4.7% B 4.7%
Caa 0.2% CCC 0.4%
Ca, C 0.0% CC, C 0.0%
D 0.0%
For some foreign government obligations, FMR has assigned the ratings of
the sovereign credit of the issuing government. The percentage not rated by
both S&P and Moody's amounted to 0.7%. FMR has determined that unrated debt
securities that are lower quality account for 0.7% of the total value of
investment in securities.
Distribution of investments by country of issue, as a percentage of total
value of investment in securities, is as follows:
United States 89.6%
United Kingdom 2.7
Netherlands 2.2
France 1.2
Others (individually less than 1%) 4.3
TOTAL 100.0%
INCOME TAX INFORMATION
At June 30, 1997, the aggregate cost of investment securities for income
tax purposes was $350,712,855. Net unrealized appreciation aggregated
$49,984,770, of which $53,389,318 related to appreciated investment
securities and $3,404,548 related to depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in $ 400,697,625
securities, at
value (including
repurchase
agreements of
$7,739,000)
(cost $350,688,422)
- - See
accompanying
schedule
Cash 50,675
Receivable for 265,717
investments sold
Receivable for fund 912,902
shares sold
Dividends receivable 650,045
Interest receivable 1,124,108
TOTAL ASSETS 403,701,072
LIABILITIES
Payable for $ 2,277,300
investments
purchased
Payable for fund 2,636
shares redeemed
Accrued management 195,789
fee
Other payables and 94,137
accrued expenses
TOTAL LIABILITIES 2,569,862
NET ASSETS $ 401,131,210
Net Assets consist of:
Paid in capital $ 338,818,399
Undistributed net 4,197,523
investment income
Accumulated 8,105,402
undistributed net
realized gain (loss)
on investments and
foreign currency
transactions
Net unrealized 50,009,886
appreciation
(depreciation) on
investments
and assets and
liabilities in
foreign currencies
NET ASSETS, for $ 401,131,210
26,873,048
shares outstanding
NET ASSET VALUE, $14.93
offering price
and redemption
price per share
($401,131,210 (divided by)
26,873,048 shares)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $ 2,430,378
Dividends
Interest 3,085,128
TOTAL INCOME 5,515,506
EXPENSES
Management fee $ 996,258
Transfer agent fees 125,480
Accounting fees and 99,808
expenses
Non-interested 844
trustees'
compensation
Custodian fees and 39,036
expenses
Audit 20,860
Legal 295
Miscellaneous 3,741
Total expenses 1,286,322
before reductions
Expense reductions (18,339 1,267,983
)
NET INVESTMENT 4,247,523
INCOME
REALIZED AND
UNREALIZED GAIN
(LOSS)
Net realized gain
(loss) on:
Investment 8,243,632
securities
Foreign currency (1,344 8,242,288
transactions )
Change in net
unrealized
appreciation
(depreciation) on:
Investment 31,836,736
securities
Assets and 575 31,837,311
liabilities in
foreign currencies
NET GAIN (LOSS) 40,079,599
NET INCREASE $ 44,327,122
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
OTHER INFORMATION $ 15,565
Expense reductions
Directed
brokerage
arrangements
Custodian credits 2,774
$ 18,339
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED)
Operations $ 4,247,523 $ 3,681,563
Net investment
income
Net realized gain 8,242,288 6,740,985
(loss)
Change in net 31,837,311 16,385,266
unrealized
appreciation
(depreciation)
NET INCREASE 44,327,122 26,807,814
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
Distributions to - (3,802,638
shareholders )
From net
investment income
From net realized (447,876) (8,710,844
gain )
TOTAL DISTRIBUTIONS (447,876) (12,513,482
)
Share transactions 127,046,008 180,656,312
Net proceeds from
sales of shares
Reinvestment of 447,876 12,513,482
distributions
Cost of shares (23,265,472) (22,687,189
redeemed )
NET INCREASE 104,228,412 170,482,605
(DECREASE) IN NET
ASSETS RESULTING
FROM SHARE
TRANSACTIONS
TOTAL INCREASE 148,107,658 184,776,937
(DECREASE) IN NET
ASSETS
NET ASSETS
Beginning of period 253,023,552 68,246,615
End of period $ 401,131,210 $ 253,023,552
(including under
(over) distribution
of net investment
income of
$4,197,523 and
$(50,000),
respectively)
OTHER INFORMATION
Shares
Sold 9,228,522 14,392,956
Issued in 32,763 975,606
reinvestment of
distributions
Redeemed (1,701,939) (1,851,290
)
Net increase 7,559,346 13,517,272
(decrease)
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED YEAR ENDED JANUARY 3, 1995
JUNE 30, 1997 DECEMBER 31, (COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31,
SELECTED PER-SHARE (UNAUDITED) 1996 1995
DATA
Net asset value, $ 13.10 $ 11.77 $ 10.00
beginning of period
Income from
Investment
Operations
Net investment .18 D .21 .10
income
Net realized and 1.67 2.08 2.20
unrealized gain
(loss)
Total from 1.85 2.29 2.30
investment
operations
Less Distributions
From net - (.21) (.11)
investment income
From net realized (.02) (.75) (.42)
gain
Total distributions (.02) (.96) (.53)
Net asset value, end $ 14.93 $ 13.10 $ 11.77
of period
TOTAL RETURN B, C 14.14% 20.04% 23.02%
RATIOS AND
SUPPLEMENTAL
DATA
Net assets, end of $ 401,131 $ 253,024 $ 68,247
period (000
omitted)
Ratio of expenses to .78% A .87% 1.00% E
average net assets
Ratio of expenses to .77% A, F .85% F 1.00%
average net assets
after expense
reductions
Ratio of net 2.59% A 2.63% 1.69%
investment income
to average net
assets
Portfolio turnover rate 56% A 120% 343%
Average commission $ .0402 $ .0211
rate G
<TABLE>
<CAPTION>
<S> <C> <C> <C>
A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT
ANNUALIZED AND DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE
TOTAL RETURNS SHOWN. C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN
EXPENSES NOT BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS). D NET INVESTMENT INCOME PER SHARE HAS BEEN
CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. E FMR
AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE PERIOD.
WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE BEEN
HIGHER. F FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES (SEE NOTE
5 OF NOTES TO FINANCIAL STATEMENTS). G FOR FISCAL YEARS BEGINNING ON OR AFTER
SEPTEMBER 1, 1995, A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION
RATE PER SHARE FOR SECURITY TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS
AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND TO FUND DEPENDING ON THE
MIX OF TRADES EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES AND
COMMISSION RATE STRUCTURES MAY DIFFER.
</TABLE>
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can
look at the total percentage change in value, the average annual percentage
change or the growth of a hypothetical $10,000 investment. Total return
reflects the change in the value of an investment, assuming reinvestment of
the fund's dividend income and capital gains (the profits earned upon the
sale of securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10
JUNE 30, 1997 YEAR YEARS YEARS
EQUITY-INCOME 25.66% 20.09% 13.66%
S&P 500(registered trademark) 34.70% 19.78% 14.64%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what
would have happened if the fund had performed at a constant rate each year.
You can compare these figures to the performance of the Standard & Poor's
500 Index - a widely recognized, unmanaged index of common stocks. This
benchmark reflects the reinvestment of dividends and capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for
example, has a history of long-term growth and
short-term volatility. In turn, the share price and
return of a fund that invests in stocks will vary.
That means if you sell your shares during a
market downturn, you might lose money. But if
you can ride out the market's ups and downs,
you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of return
and are not the fund's year-by-year results, which fluctuated over the
periods shown.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL
CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER THE PAST 10 YEARS
1987/06/30 10000.00 10000.00
1987/07/31 10380.95 10507.00
1987/08/31 10666.67 10898.91
1987/09/30 10442.79 10660.22
1987/10/31 8404.96 8364.01
1987/11/30 8028.88 7674.82
1987/12/31 8439.31 8258.87
1988/01/31 9039.55 8606.57
1988/02/29 9487.50 9007.64
1988/03/31 9322.33 8729.30
1988/04/30 9476.65 8826.20
1988/05/31 9603.73 8902.98
1988/06/30 10150.11 9311.63
1988/07/31 10131.73 9276.25
1988/08/31 9957.04 8960.85
1988/09/30 10252.91 9342.59
1988/10/31 10429.84 9602.31
1988/11/30 10262.22 9465.00
1988/12/31 10355.90 9630.63
1989/01/31 10995.50 10335.60
1989/02/28 10939.07 10078.24
1989/03/31 11176.01 10313.06
1989/04/30 11607.33 10848.31
1989/05/31 11952.38 11287.67
1989/06/30 11960.57 11223.33
1989/07/31 12657.87 12236.79
1989/08/31 12861.25 12476.64
1989/09/30 12716.66 12425.48
1989/10/31 11983.01 12137.21
1989/11/30 12051.48 12384.81
1989/12/31 12152.05 12682.05
1990/01/31 11331.37 11831.08
1990/02/28 11398.51 11983.70
1990/03/31 11417.31 12301.27
1990/04/30 11021.46 11993.74
1990/05/31 11750.66 13163.13
1990/06/30 11633.66 13073.62
1990/07/31 11349.14 13031.78
1990/08/31 10442.90 11853.71
1990/09/30 9632.82 11276.43
1990/10/31 9387.20 11227.94
1990/11/30 10060.00 11953.27
1990/12/31 10294.08 12286.77
1991/01/31 10846.12 12822.47
1991/02/28 11593.01 13739.28
1991/03/31 11833.50 14071.77
1991/04/30 11888.80 14105.54
1991/05/31 12541.30 14714.90
1991/06/30 12028.50 14040.96
1991/07/31 12710.42 14695.26
1991/08/31 12978.71 15043.54
1991/09/30 12889.63 14792.31
1991/10/31 13104.27 14990.53
1991/11/30 12539.43 14386.41
1991/12/31 13530.38 16032.22
1992/01/31 13713.06 15734.02
1992/02/29 14158.37 15938.56
1992/03/31 13984.88 15627.76
1992/04/30 14422.98 16087.22
1992/05/31 14538.27 16166.04
1992/06/30 14410.99 15925.17
1992/07/31 14852.62 16576.51
1992/08/31 14527.21 16236.69
1992/09/30 14678.01 16428.28
1992/10/31 14853.73 16485.78
1992/11/30 15392.59 17047.95
1992/12/31 15815.27 17257.64
1993/01/31 16287.37 17402.60
1993/02/28 16653.24 17639.28
1993/03/31 17149.52 18011.46
1993/04/30 17078.21 17575.59
1993/05/31 17387.21 18046.61
1993/06/30 17591.73 18098.95
1993/07/31 17831.07 18026.55
1993/08/31 18513.20 18709.76
1993/09/30 18442.42 18565.69
1993/10/31 18611.07 18950.00
1993/11/30 18285.82 18769.98
1993/12/31 18708.50 18997.10
1994/01/31 19532.45 19643.00
1994/02/28 19029.45 19110.67
1994/03/31 18233.36 18277.45
1994/04/30 18861.65 18511.40
1994/05/31 19041.17 18814.98
1994/06/30 18923.53 18354.02
1994/07/31 19555.60 18956.03
1994/08/31 20561.76 19733.23
1994/09/30 20224.91 19249.76
1994/10/31 20640.04 19682.88
1994/11/30 19965.45 18966.03
1994/12/31 20030.39 19247.30
1995/01/31 20343.57 19746.38
1995/02/28 21119.27 20515.90
1995/03/31 21848.51 21121.32
1995/04/30 22456.18 21743.34
1995/05/31 23132.91 22612.42
1995/06/30 23465.27 23137.71
1995/07/31 24368.32 23904.96
1995/08/31 24673.96 23964.96
1995/09/30 25493.12 24976.28
1995/10/31 25199.77 24887.12
1995/11/30 26289.34 25979.66
1995/12/31 27059.54 26480.03
1996/01/31 27845.91 27381.41
1996/02/29 27939.44 27635.23
1996/03/31 28233.54 27901.36
1996/04/30 28601.16 28312.63
1996/05/31 28909.97 29042.81
1996/06/30 28645.28 29153.46
1996/07/31 27248.30 27865.46
1996/08/31 27807.09 28453.15
1996/09/30 28998.20 30054.49
1996/10/31 29468.75 30883.39
1996/11/30 31439.22 33217.87
1996/12/31 30924.55 32559.82
1997/01/31 32130.35 34594.16
1997/02/28 32486.30 34865.38
1997/03/31 31278.87 33432.76
1997/04/30 32388.40 35428.69
1997/05/31 34395.33 37585.59
1997/06/30 35994.36 39269.43
Let's say hypothetically $10,000 was invested in Equity-Income Portfolio on
June 30, 1987. As the chart shows, by June 30, 1997, the value of the
investment would have grown to $35,994 - a 259.94% increase on the initial
investment. For comparison, look at how the S&P 500 did over the same
period. With dividends and capital gains, if any, reinvested, the same
$10,000 investment would have grown to $39,269 - a 292.69% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
General Electric Co. 3.2
Philip Morris Companies, Inc. 2.7
British Petroleum PLC ADR 1.9
Federal National Mortgage Association 1.6
Royal Dutch Petroleum Co. 1.6
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Finance 19.9
Energy 12.9
Nondurables 7.4
Health 7.1
Aerospace & Defense 6.8
ASSET ALLOCATION AS OF JUNE 30, 1997 *
Row: 1, Col: 1, Value: 5.8
Row: 1, Col: 2, Value: 1.2
Row: 1, Col: 3, Value: 93.0
Stocks 93.0%
Bonds 1.2%
Short-term investments 5.8%
FOREIGN INVESTMENTS 10.2%
*
(% OF FUND'S INVESTMENTS)
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with Stephen Petersen, Portfolio Manager of Equity-Income
Portfolio
Q. STEVE, HOW DID THE FUND PERFORM?
A. For the six- and 12-month periods ending June 30, 1997, the fund
underperformed the Standard & Poor's 500 index, which returned 20.61% for
the six-month period and 34.70% for the 12-month period.
Q. WHY DID THE FUND UNDERPERFORM THE S&P 500 INDEX, ESPECIALLY OVER THE
PAST SIX MONTHS?
A. In general, when you compare the performance of most actively managed
diversified funds, like this one, against the S&P 500 index's performance
over the period, very few beat the index. In fact, in the first quarter of
1997, less than 9% of all fund managers did so. That's because the index
was heavily weighted in a small number of very large-capitalization stocks,
and those stocks were the top performers over the period. Diversified
funds, by definition, own stocks of several different cap sizes, not just
large-cap stocks. In addition, many of the top stocks that contributed to
the S&P 500 index's performance, such as technology giant Microsoft, don't
pay dividends, and are therefore not the kind of stocks this fund tends to
own.
Q. SINCE YOU TOOK OVER THE FUND IN EARLY JANUARY, HAVE YOU CHANGED ITS
POSITIONING?
A. Somewhat. In general, I looked for stocks with good dividend yields and
attractive valuation characteristics, such as the price-to-earnings ratio.
Over the period, I restructured the portfolio so it owned more of those
kinds of stocks. Going forward, my universe will be large-capitalization,
income-producing common stocks, as well as stocks that are down and out but
have great upside potential.
Q. WHAT WERE SOME OF THE FUND'S POSITIVE PERFORMERS DURING THE PERIOD?
A. General Electric, the fund's largest holding, showed consistently strong
earnings growth and performed better than initial expectations. Philip
Morris, another top five holding, continued to look strong. Over the
period, much of its earnings came from its food business and its tobacco
business outside the U.S. So, Philip Morris' major growth was outside of
the areas of the company affected by the litigation against the tobacco
industry.
Q. FINANCIAL STOCKS - WHICH MADE UP ABOUT 20% OF THE FUND AT THE END OF THE
PERIOD - GENERALLY DID WELL OVER THE PERIOD. WHY IS THAT AND HOW DID YOU
TAKE ADVANTAGE OF THIS TREND?
A. Basically, financial stocks, which tend to do well when interest rates
are low, benefited from the interest rate environment over the period. Over
the past six months, many banks generated more capital than they needed to
run their businesses, and they invested it by buying back their own stock.
In addition, both acquiring and acquired financial companies benefited from
recent mergers.
Q. WHAT WAS YOUR TOP-WEIGHTED FINANCIAL STOCK?
A. Financial service company Fannie Mae - the Federal National Mortgage
Association - which buys mortgages, packages them, creates securities and
then sells them back to the marketplace, was the fund's top financial
stock. It did well during the period.
Q. DID YOU EXPERIENCE ANY DISAPPOINTMENTS OVER THE PERIOD?
A. Sure. I expected to see a significant lift in the performance of
cyclical stocks and positioned the fund accordingly. Unfortunately,
cyclicals - those stocks whose performance is closely associated with the
strength of the economy - didn't perform well relative to growth-oriented
stocks over the period.
Q. STEVE, HOW DOES THE FUND LOOK GOING FORWARD?
A. Generally, I will be sticking with what I call the winners in the
portfolio - large-cap, steady earnings-growth companies with attractive
fundamentals and valuations. In addition, I will continue to look for
attractive, overlooked or oversold types of companies, which I believe show
some interesting possibilities going forward.
FUND FACTS
GOAL: seeks reasonable income by investing
primarily in income producing equity securities
to provide current income and increase the
value of the fund's shares
START DATE: October 9,1986
SIZE: as of June 30, 1997, more than $8.5
billion
MANAGER: Stephen Petersen, since January
1997; joined Fidelity in 1980
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 91.3%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 6.8%
AEROSPACE & DEFENSE - 3.8%
AlliedSignal, Inc. 1,055,100 $ 88,628,379
Boeing Co. 1,668,000 88,508,250
GenCorp, Inc. 200,000 4,625,000
Gulfstream Aerospace Corp. (a) 246,200 7,262,900
Lockheed Martin Corp. 850,603 88,090,573
Textron, Inc. 60,000 3,982,500
Thiokol Corp. 376,700 26,369,000
United Technologies Corp. 258,800 21,480,400
328,947,002
DEFENSE ELECTRONICS - 2.1%
Litton Industries, Inc. (a) 842,500 40,703,281
Northrop Grumman Corp. 874,500 76,792,031
Raytheon Co. 1,276,000 65,076,000
182,571,312
SHIP BUILDING & REPAIR - 0.9%
General Dynamics Corp. 991,500 74,362,500
Newport News Shipbuilding, Inc. 60,000 1,166,250
75,528,750
TOTAL AEROSPACE & DEFENSE 587,047,064
BASIC INDUSTRIES - 6.7%
CHEMICALS & PLASTICS - 2.6%
Air Products & Chemicals, Inc. 184,600 14,998,750
du Pont (E.I.) de Nemours & Co. 330,000 20,748,750
Goodrich (B.F.) Co. 91,300 3,954,431
Great Lakes Chemical Corp. 336,400 17,618,950
Hercules, Inc. 228,600 10,944,225
Millennium Chemicals, Inc. 500,000 11,375,000
Monsanto Co. 1,644,000 70,794,750
Olin Corp. 243,300 9,503,906
Union Carbide Corp. 960,000 45,180,000
Witco Corp. 403,700 15,315,369
220,434,131
IRON & STEEL - 0.4%
Aeroquip Vickers, Inc. 48,700 2,301,075
Allegheny Teledyne, Inc. 300,700 8,118,900
Inland Steel Industries, Inc. 631,300 16,492,713
Quanex Corp. 61,000 1,871,938
USX-U.S. Steel Group 124,100 4,351,256
33,135,882
METALS & MINING - 2.0%
Alcan Aluminium Ltd. 1,400,000 47,760,113
Alumax, Inc. (a) 835,000 31,677,813
Aluminum Co. of America 740,900 55,845,338
Harsco Corp. 264,700 10,720,350
Inco Ltd. 551,093 16,465,133
Kaiser Aluminum Corp. (a) 250,000 3,062,500
Metallgesellschaft AG Ord. (a) 222,500 4,629,734
Noranda, Inc. 200,000 4,309,564
174,470,545
PACKAGING & CONTAINERS - 0.0%
Owens-Illinois, Inc. (a) 108,600 3,366,600
PAPER & FOREST PRODUCTS - 1.7%
Boise Cascade Corp. 385,400 13,609,438
Champion International Corp. 485,000 26,796,250
Domtar, Inc. 627,300 5,543,085
SHARES VALUE (NOTE 1)
Georgia-Pacific Corp. 191,800 $ 16,374,925
Kimberly-Clark Corp. 656,300 32,650,925
Weyerhaeuser Co. 933,500 48,542,000
143,516,623
TOTAL BASIC INDUSTRIES 574,923,781
CONSTRUCTION & REAL ESTATE - 1.2%
BUILDING MATERIALS - 0.8%
American Standard Companies, Inc. 45,100 2,018,225
Coltec Industries, Inc. (a) 1,371,600 26,746,200
Masco Corp. 1,045,400 43,645,450
72,409,875
ENGINEERING - 0.2%
EG & G, Inc. 389,900 8,772,750
Fluor Corp. 120,500 6,650,094
15,422,844
REAL ESTATE - 0.0%
Boston Properties, Inc. 78,500 2,158,750
REAL ESTATE INVESTMENT TRUSTS - 0.2%
Equity Residential Properties Trust (SBI) 300,000 14,250,000
Weeks Corp. 170,500 5,328,125
19,578,125
TOTAL CONSTRUCTION & REAL ESTATE 109,569,594
DURABLES - 3.0%
AUTOS, TIRES, & ACCESSORIES - 1.0%
Chrysler Corp. 142,000 4,659,375
Cummins Engine Co., Inc. 138,000 9,737,625
Eaton Corp. 347,400 30,332,363
General Motors Corp. 300,000 16,706,250
Johnson Controls, Inc. 55,000 2,258,438
Modine Manufacturing Co. 98,100 2,918,475
Snap-on Tools Corp. 455,150 17,921,531
Standard Products Co. 76,700 1,936,675
TRW, Inc. 34,700 1,971,394
88,442,126
CONSUMER DURABLES - 0.6%
Minnesota Mining &
Manufacturing Co. 504,000 51,408,000
CONSUMER ELECTRONICS - 0.9%
Maytag Co. 688,900 17,997,513
Sunbeam-Oster, Inc. 1,168,400 44,107,100
Whirlpool Corp. 225,000 12,276,563
74,381,176
TEXTILES & APPAREL - 0.5%
Dexter Corp. 353,700 11,318,400
Reebok International Ltd. 687,700 32,149,975
Stride Rite Corp. 191,700 2,468,138
45,936,513
TOTAL DURABLES 260,167,815
ENERGY - 12.6%
ENERGY SERVICES - 1.2%
Halliburton Co. 25,000 1,981,250
Dresser Industries, Inc. 271,700 10,120,825
Schlumberger Ltd. 696,100 87,012,500
99,114,575
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
ENERGY - CONTINUED
OIL & GAS - 11.4%
Amerada Hess Corp. 464,500 $ 25,808,781
Amoco Corp. 365,000 31,732,188
Atlantic Richfield Co. 630,000 44,415,000
British Petroleum PLC ADR 2,181,180 163,315,853
Burlington Resources, Inc. 566,700 25,005,638
Chevron Corp. 929,600 68,732,300
Exxon Corp. 1,500,000 92,250,000
Mobil Corp. 302,600 21,144,175
Occidental Petroleum Corp. 1,665,200 41,734,075
Pennzoil Co. 850,400 65,268,200
Phillips Petroleum Co. 412,500 18,046,875
Royal Dutch Petroleum Co. 2,498,000 135,828,750
Texaco, Inc. 580,000 63,075,000
Tosco Corp. 649,800 19,453,388
Total SA:
Class B 831,600 84,005,714
sponsored ADR 200,800 10,165,500
USX-Marathon Group 1,178,600 34,032,075
Unocal Corp. 1,116,517 43,334,816
987,348,328
TOTAL ENERGY 1,086,462,903
FINANCE - 18.8%
BANKS - 9.1%
Bank of New York Co., Inc. 1,715,700 74,632,950
Bank of Nova Scotia Halifax 195,400 8,562,416
BankBoston Corp. 801,100 57,729,269
BankAmerica Corp. 1,562,000 100,846,625
Chase Manhattan Corp. 385,700 37,437,006
Citicorp 974,400 117,476,100
Comerica, Inc. 505,000 34,340,000
Credit Suisse Group (Reg.) 150,400 19,295,245
First Bank System, Inc. 592,530 50,587,249
National Bank of Canada 500,000 6,265,165
National City Corp. 976,335 51,257,588
NationsBank Corp. 1,426,800 92,028,600
Norwest Corp. 579,000 32,568,750
Royal Bank of Canada 400,000 18,121,899
U.S. Bancorp 728,700 46,727,888
Wells Fargo & Co. 144,900 39,050,550
786,927,300
CREDIT & OTHER FINANCE - 2.8%
American Express Co. 955,172 71,160,314
Beneficial Corp. 304,700 21,652,744
Edper Group Ltd. (The)
Class A (ltd. vtg.) 400,000 6,678,014
First Chicago NBD Corp. 1,384,100 83,738,050
Household International, Inc. 345,000 40,515,938
Transamerica Corp. 169,100 15,821,419
239,566,479
FEDERAL SPONSORED CREDIT - 1.7%
Federal Home Loan Mortgage
Corporation 403,600 13,873,750
Federal National Mortgage
Association 3,115,300 135,904,963
149,778,713
INSURANCE - 4.0%
Aetna, Inc. 282,700 28,941,413
Allstate Corp. 1,154,999 84,314,927
Brascan Ltd. Class A 1,000,000 24,734,726
CIGNA Corp. 20,000 3,550,000
SHARES VALUE (NOTE 1)
Fremont General Corp. 423,924 $ 17,062,941
General Re Corp. 110,000 20,020,000
Hartford Financial Services Group, Inc. 663,300 54,888,075
Marsh & McLennan Companies, Inc. 150,600 10,749,075
Norwich Union PLC (a) 844,900 4,493,784
Provident Companies, Inc. 241,600 12,925,600
Providian Financial Corp. (a) 150,000 4,818,750
Reliastar Financial Corp. 509,621 37,266,036
Travelers Group, Inc. (The) 711,667 44,879,479
348,644,806
SAVINGS & LOANS - 0.9%
Ahmanson (H.F.) & Co. 109,900 4,725,700
Great Western Financial Corp. 934,100 50,207,875
TCF Financial Corp. 25,600 1,264,000
Washington Mutual, Inc. 273,800 16,359,550
72,557,125
SECURITIES INDUSTRY - 0.3%
Bear Stearns Companies, Inc. 210,000 7,179,375
First Marathon Inc. Class A (non-vtg.) 299,400 4,228,660
Lehman Brothers Holdings, Inc. 440,200 17,828,100
29,236,135
TOTAL FINANCE 1,626,710,558
HEALTH - 7.1%
DRUGS & PHARMACEUTICALS - 4.3%
American Home Products Corp. 1,473,000 112,684,500
Barr Laboratories, Inc. (a)(d) 1,391,650 61,232,600
Bristol-Myers Squibb Co. 1,350,800 109,414,800
Merck & Co., Inc. 37,000 3,829,500
Novartis AG (Reg.) 13,300 21,239,959
Pharmacia & Upjohn, Inc. 427,100 14,841,725
Schering-Plough Corp. 1,020,000 48,832,500
372,075,584
MEDICAL EQUIPMENT & SUPPLIES - 1.1%
Allegiance Corp. 393,500 10,722,875
Bausch & Lomb, Inc. 250,000 11,781,250
Cardiac Control Systems, Inc. (a) 79,800 64,838
Cardinal Health, Inc. 618,500 35,409,125
Johnson & Johnson 40,000 2,575,000
U.S. Surgical Corp. 909,608 33,882,879
94,435,967
MEDICAL FACILITIES MANAGEMENT - 1.7%
Beverly Enterprises, Inc. (a)(d) 5,222,000 84,857,500
Columbia/HCA Healthcare Corp. 1,522,350 59,847,384
144,704,884
TOTAL HEALTH 611,216,435
HOLDING COMPANIES - 0.5%
CINergy Corp. 415,000 14,447,188
Norfolk Southern Corp. 283,400 28,552,550
42,999,738
INDUSTRIAL MACHINERY & EQUIPMENT - 6.7%
ELECTRICAL EQUIPMENT - 3.6%
General Electric Co. 4,191,100 273,993,163
Westinghouse Electric Corp. 1,489,900 34,453,938
308,447,101
INDUSTRIAL MACHINERY & EQUIPMENT - 1.8%
Cooper Industries, Inc. 60,000 2,985,000
Caterpillar, Inc. 309,500 33,232,563
Harnischfeger Industries, Inc. 279,600 11,603,400
Ingersoll-Rand Co. 430,000 26,552,500
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - CONTINUED
INDUSTRIAL MACHINERY & EQUIPMENT - CONTINUED
Parker-Hannifin Corp. 50,000 $ 3,034,375
Stewart & Stevenson Services, Inc. 283,500 7,371,000
Tyco International Ltd. 962,742 66,970,740
151,749,578
POLLUTION CONTROL - 1.3%
Browning-Ferris Industries, Inc. 958,700 31,876,775
Safety Kleen Corp. 313,200 5,285,250
Waste Management, Inc. 2,405,200 77,267,050
114,429,075
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 574,625,754
MEDIA & LEISURE - 3.3%
BROADCASTING - 0.0%
Ascent Entertainment Group, Inc. 119,365 1,089,205
ENTERTAINMENT - 1.3%
All American Communications, Inc. (a) 260,534 3,940,577
MGM Grand, Inc. (a) 266,400 9,856,800
Viacom, Inc. Class B (non-vtg.) (a) 3,148,500 94,455,000
108,252,377
LEISURE DURABLES & TOYS - 0.6%
Brunswick Corp. 375,400 11,731,250
Hasbro, Inc. 1,559,450 44,249,394
55,980,644
LODGING & GAMING - 0.4%
ITT Corp. (a) 520,000 31,752,500
Mirage Resorts, Inc. (a) 157,400 3,974,350
35,726,850
PUBLISHING - 1.0%
ACNielsen Corp. (a) 336,000 6,594,000
Cognizant Corp. 353,700 14,324,850
Harcourt General, Inc. 449,500 21,407,438
Hollinger International, Inc. Class A 1,894,400 21,193,600
Houghton Mifflin Co. 1,600 106,800
McGraw-Hill, Inc. 324,800 19,102,300
82,728,988
TOTAL MEDIA & LEISURE 283,778,064
NONDURABLES - 7.4%
BEVERAGES - 0.5%
Anheuser-Busch Companies, Inc. 902,400 37,844,400
PepsiCo, Inc. 150,000 5,634,375
43,478,775
FOODS - 0.9%
General Mills, Inc. 819,450 53,366,681
Heinz (H.J.) Co. 176,100 8,122,613
Kellogg Co. 124,800 10,686,000
Ralston Purina Co. 110,000 9,040,625
81,215,919
HOUSEHOLD PRODUCTS - 2.5%
Avon Products, Inc. 86,100 6,075,431
Dial Corp. 517,300 8,082,813
Gillette Co. 200,700 19,016,325
Premark International, Inc. 25,000 668,750
Procter & Gamble Co. 410,800 58,025,500
Rubbermaid, Inc. 1,010,400 30,059,400
SHARES VALUE (NOTE 1)
Tambrands, Inc. 100,000 $ 4,987,500
Unilever PLC Ord. 1,705,400 48,873,030
Unilever NV:
Ord. 3,100 652,166
ADR 200,000 42,812,500
219,253,415
TOBACCO - 3.5%
BAT Industries PLC Ord. 1,349,500 12,075,005
Gallaher Group PLC sponsored ADR (a) 365,700 6,742,594
Philip Morris Companies, Inc. 5,220,100 231,641,938
RJR Nabisco Holdings Corp. 1,333,400 44,002,200
Universal Corp. 182,600 5,797,550
300,259,287
TOTAL NONDURABLES 644,207,396
PRECIOUS METALS - 0.3%
Newmont Mining Corp. 567,200 22,120,800
RETAIL & WHOLESALE - 5.2%
APPAREL STORES - 0.3%
Charming Shoppes, Inc. (a) 290,100 1,513,959
Footstar, Inc. (a) 362,600 9,472,925
Limited, Inc. (The) 909,900 18,425,475
29,412,359
DRUG STORES - 0.2%
Rite Aid Corp. 337,100 16,812,863
GENERAL MERCHANDISE STORES - 2.9%
Coles Myer Ltd. 1,252,000 6,502,059
Consolidated Stores Corp. (a) 2,270,156 78,887,930
Dayton Hudson Corp. 140,000 7,446,250
Federated Department Stores, Inc. (a) 656,400 22,809,900
Sears, Roebuck & Co. 390,000 20,962,500
Wal-Mart Stores, Inc. 1,929,000 65,224,313
Woolworth Corp. (a) 2,061,200 49,468,800
251,301,752
GROCERY STORES - 0.1%
American Stores Co. 147,200 7,268,000
RETAIL & WHOLESALE, MISCELLANEOUS - 1.7%
Staples, Inc. (a) 1,845,700 42,912,525
Tandy Corp. 852,500 47,740,000
Toys "R" Us, Inc. (a) 1,180,000 41,300,000
U.S. Office Products Co. (a) 513,300 15,687,731
147,640,256
TOTAL RETAIL & WHOLESALE 452,435,230
SERVICES - 0.8%
LEASING & RENTAL - 0.0%
Hanover Compressor Co. 6,300 122,850
PRINTING - 0.7%
Deluxe Corp. 486,600 16,605,225
Donnelley (R.R.) & Sons Co. 568,400 20,817,650
Ennis Business Forms, Inc. 196,700 1,893,238
Harland (John H.) Co. 1,051,300 23,982,781
63,298,894
SERVICES - 0.1%
Dun & Bradstreet Corp. 368,800 9,681,000
TOTAL SERVICES 73,102,744
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TECHNOLOGY - 3.8%
COMMUNICATIONS EQUIPMENT - 0.4%
Alcatel Alsthom Compagnie
Generale d'Electricite SA 263,200 $ 32,943,641
COMPUTER SERVICES & SOFTWARE - 0.2%
Electronic Data Systems Corp. 262,800 10,774,800
Sabre Group Holdings, Inc. Class A (a) 178,800 4,849,950
15,624,750
COMPUTERS & OFFICE EQUIPMENT - 1.5%
International Business Machines Corp. 700,000 63,131,250
Pitney Bowes, Inc. 791,000 54,974,500
Silicon Graphics, Inc. (a) 344,200 5,163,000
Xerox Corp. 100,000 7,887,500
131,156,250
ELECTRONICS - 1.0%
AMP, Inc. 499,400 20,849,950
Intel Corp. 359,000 50,910,688
Thomas & Betts Corp. 214,800 11,290,425
83,051,063
PHOTOGRAPHIC EQUIPMENT - 0.7%
Eastman Kodak Co. 708,500 54,377,375
Polaroid Corp. 200,000 11,100,000
65,477,375
TOTAL TECHNOLOGY 328,253,079
TRANSPORTATION - 1.1%
AIR TRANSPORTATION - 0.7%
Northwest Airlines Corp. Class A (a) 1,523,500 55,417,313
Viad Corp. 275,800 5,309,150
60,726,463
RAILROADS - 0.4%
CSX Corp. 635,200 35,253,600
TOTAL TRANSPORTATION 95,980,063
UTILITIES - 6.0%
ELECTRIC UTILITY - 2.2%
Allegheny Power System, Inc. 975,000 26,020,313
American Electric Power Co., Inc. 967,700 40,643,400
Central Maine Power Co. 602,500 7,455,938
CILCORP, Inc. 76,300 3,142,606
Consolidated Edison Co. of
New York, Inc. 279,100 8,216,006
DPL, Inc. 637,300 15,693,513
Duke Power Co. 50,000 2,396,875
Entergy Corp. 1,439,500 39,406,313
Illinova Corp. 250,000 5,500,000
Niagara Mohawk Power Corp. (a) 1,006,700 8,619,869
PG&E Corp. 648,400 15,723,700
PacifiCorp. 200,000 4,400,000
Pinnacle West Capital Corp. 338,600 10,179,163
187,397,696
GAS - 0.6%
MCN Corp. 400,000 12,250,000
Nova Corp. 650,000 5,555,354
Pacific Enterprises 285,400 9,596,575
Questar Corp. 713,700 28,815,638
56,217,567
SHARES VALUE (NOTE 1)
TELEPHONE SERVICES - 3.2%
Ameritech Corp. 643,700 $ 43,731,369
AT&T Corp. 113,500 3,979,594
ALLTEL Corp. 508,900 17,016,344
BCE, Inc. 700,000 19,469,091
Bell Atlantic Corp. 365,000 27,694,375
BellSouth Corp. 525,000 24,346,875
Comsat Corp., Series 1 244,200 5,815,013
Frontier Corp. 200,000 3,987,500
MCI Communications Corp. 270,100 10,339,766
Manitoba Telecom Services, Inc. 250,000 2,661,790
NYNEX Corp. 740,000 42,642,500
SBC Communications, Inc. 195,000 12,065,625
Sprint Corp. 312,500 16,445,313
Telus Corp. 450,000 8,262,413
WorldCom, Inc. (a) 1,103,800 35,321,600
273,779,168
TOTAL UTILITIES 517,394,431
TOTAL COMMON STOCKS
(Cost $6,217,569,762) 7,890,995,449
CONVERTIBLE PREFERRED STOCKS - 1.7%
CONSTRUCTION & REAL ESTATE - 0.1%
REAL ESTATE INVESTMENT TRUSTS - 0.1%
Vornado Realty Trust $3.25, Series A 127,600 6,906,350
DURABLES - 0.1%
AUTOS, TIRES, & ACCESSORIES - 0.1%
Republic Industries, Inc. $1.55 219,200 5,370,400
ENERGY - 0.1%
OIL & GAS - 0.1%
Unocal Capital Trust $3.125 100,000 5,637,500
FINANCE - 1.1%
INSURANCE - 0.8%
Aetna, Inc. Class C 6 1/4% 760,000 71,250,000
SECURITIES INDUSTRY - 0.3%
Salomon, Inc. $2.03 840,700 28,899,063
TOTAL FINANCE 100,149,063
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
ELECTRICAL EQUIPMENT - 0.1%
Loral Space & Communications Ltd.
$3.00, Series C (b) 183,200 9,114,200
MEDIA & LEISURE - 0.1%
BROADCASTING - 0.1%
Evergreen Media Corp. $3.00 (b) 187,200 10,202,400
TECHNOLOGY - 0.1%
COMPUTERS & OFFICE EQUIPMENT - 0.1%
Wang Labs, Inc. $3.25 (b) 80,000 4,040,000
Wang Labs, Inc. $3.25 157,600 7,958,800
11,998,800
UTILITIES - 0.0%
GAS - 0.0%
MCN Corp. $4.00 25,100 1,364,813
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $122,619,633) 150,743,526
CONVERTIBLE BONDS - 1.2%
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
CONSTRUCTION & REAL ESTATE - 0.4%
REAL ESTATE INVESTMENT TRUSTS - 0.4%
Liberty Property 8%, 7/1/01 Ba2 $ 27,985,000 $ 34,701,400
DURABLES - 0.1%
CONSUMER ELECTRONICS - 0.1%
Matsushita Electric Industrial Co. Ltd.:
1.30%, 3/29/02 Aa2 JPY 410,000,000 5,114,048
1.40%, 3/31/04 Aa2 JPY 190,000,000 2,369,925
7,483,973
ENERGY - 0.2%
OIL & GAS - 0.2%
Pennzoil Co.
4 3/4%, 10/1/03 Baa3 9,820,000 12,532,775
MEDIA & LEISURE - 0.0%
LODGING & GAMING - 0.0%
Hilton Hotels Corp.
5%, 5/15/06 Baa2 3,670,000 3,899,375
RETAIL & WHOLESALE - 0.2%
RETAIL & WHOLESALE, MISCELLANEOUS - 0.2%
Home Depot, Inc.
3 1/4%, 10/1/01 A1 5,000,000 5,687,500
U.S. Office Products Co.
5 1/2%, 2/1/01 B3 10,000,000 12,250,000
17,937,500
TECHNOLOGY - 0.3%
COMPUTERS & OFFICE EQUIPMENT - 0.3%
Unisys Corp.
8 1/4%, 3/15/06 B3 17,981,000 23,734,920
TOTAL CONVERTIBLE BONDS
(Cost $93,124,832) 100,289,943
CASH EQUIVALENTS - 5.8%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 5.93%, dated
6/30/97 due 7/1/97 $ 498,485,098 498,403,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $6,931,717,227) $ 8,640,431,918
CURRENCY ABBREVIATIONS
JPY - Japanese yen
LEGEND
(a) Non-income producing
(b) Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of these securities amounted to $23,356,600 or 0.3% of net
assets.
(c) Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
(d) An affiliated company is a company in which the fund has ownership of
at least 5% of the voting securities. Transactions during the period with
companies which are or were affiliates are as follows:
PURCHASE SALES DIVIDEND VALUE
AFFILIATE COST COST INCOME
Barr Laboratories, Inc. $ - $ 5,029,783 $ - $ 61,232,600
Beverly Enterprises, Inc. - 3,388,955 - 84,857,500
Integramed America,
Inc. - 166,375 - -
Synetic, Inc. - 40,768,344 - -
TOTALS $ - $ 49,353,457 $ - $146,090,100
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $2,976,701,733 and $2,433,124,647, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of FMR. The commissions paid to these affiliated
firms were $623,898 for the period (see Note 4 of Notes to Financial
Statements).
The composition of long-term debt holdings as a percentage of total value
of investment in securities, is as follows:
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 0.2% AAA, AA, A 0.1%
Baa 0.2% BBB 0.2%
Ba 0.4% BB 0.0%
B 0.4% B 0.4%
Caa 0.0% CCC 0.0%
Ca, C 0.0% CC, C 0.0%
D 0.0%
Distribution of investments by country of issue, as a percentage of total
value of investment in securities, is as follows:
United States 89.8%
United Kingdom 2.7
Netherlands 2.1
Canada 2.1
France 1.5
Netherland Antilles 1.0
Others (individually less than 1%) 0.8
TOTAL 100.0%
INCOME TAX INFORMATION
At June 30, 1997, the aggregate cost of investment securities for income
tax purposes was $6,939,210,994. Net unrealized appreciation aggregated
$1,701,220,924, of which $1,768,591,981 related to appreciated investment
securities and $67,371,057 related to depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in $ 8,640,431,918
securities, at
value (including
repurchase
agreements of
$498,403,000) (cost
$6,931,717,227) -
See accompanying
schedule
Cash 63,975
Receivable for 59,449,914
investments sold
Receivable for fund 7,030,723
shares sold
Dividends receivable 12,137,083
Interest receivable 1,916,557
Other receivables 115,759
TOTAL ASSETS 8,721,145,929
LIABILITIES
Payable for $ 126,839,504
investments
purchased
Payable for fund 1,307,053
shares redeemed
Accrued management 3,492,405
fee
Other payables and 559,932
accrued expenses
TOTAL LIABILITIES 132,198,894
NET ASSETS $ 8,588,947,035
Net Assets consist of:
Paid in capital $ 6,566,052,739
Undistributed net 64,214,928
investment income
Accumulated 249,987,580
undistributed net
realized gain (loss)
on investments and
foreign
currency
transactions
Net unrealized 1,708,691,788
appreciation
(depreciation) on
investments
and assets and
liabilities in
foreign currencies
NET ASSETS, for $ 8,588,947,035
389,282,331
shares outstanding
NET ASSET VALUE, $22.06
offering price
and redemption
price per
share
($8,588,947,035 (divided by)
389,282,331
shares)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $ 74,933,797
Dividends
Interest 11,519,913
TOTAL INCOME 86,453,710
EXPENSES
Management fee $ 18,948,541
Transfer agent fees 2,670,034
Accounting fees and 405,779
expenses
Non-interested 18,445
trustees'
compensation
Custodian fees and 92,149
expenses
Registration fees 48,392
Audit 35,310
Legal 10,069
Miscellaneous 238,137
Total expenses 22,466,856
before reductions
Expense reductions (557,661 21,909,195
)
NET INVESTMENT 64,544,515
INCOME
REALIZED AND
UNREALIZED
GAIN (LOSS)
Net realized gain
(loss) on:
Investment 265,331,361
securities (including
realized gain of
$12,689,716
on sales of
investments in
affiliated issuers)
Foreign currency (16,911 265,314,450
transactions )
Change in net
unrealized
appreciation
(depreciation) on:
Investment 847,590,904
securities
Assets and (17,469 847,573,435
liabilities in )
foreign currencies
NET GAIN (LOSS) 1,112,887,885
NET INCREASE $ 1,177,432,400
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
OTHER INFORMATION $ 553,138
Expense reductions
Directed
brokerage
arrangements
Custodian credits 4,523
$ 557,661
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED)
Operations $ 64,544,515 $ 117,458,579
Net investment
income
Net realized gain 265,314,450 597,117,485
(loss)
Change in net 847,573,435 90,992,918
unrealized
appreciation
(depreciation)
NET INCREASE 1,177,432,400 805,568,982
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
Distributions to (119,852,890) (7,876,787)
shareholders
From net
investment income
From net realized (602,593,699) (225,801,230)
gain
TOTAL DISTRIBUTIONS (722,446,589) (233,678,017)
Share transactions 822,950,455 1,829,128,598
Net proceeds from
sales of shares
Reinvestment of 722,446,589 233,678,017
distributions
Cost of shares (372,525,843) (553,042,238)
redeemed
NET INCREASE 1,172,871,201 1,509,764,377
(DECREASE) IN NET
ASSETS RESULTING
FROM SHARE
TRANSACTIONS
TOTAL INCREASE 1,627,857,012 2,081,655,342
(DECREASE) IN NET
ASSETS
NET ASSETS
Beginning of period 6,961,090,023 4,879,434,681
End of period $ 8,588,947,035 $ 6,961,090,023
(including
undistributed net
investment
income of
$64,214,928 and
$117,454,549,
respectively)
OTHER INFORMATION
Shares
Sold 40,075,873 93,794,843
Issued in 36,487,203 12,390,139
reinvestment of
distributions
Redeemed (18,261,978) (28,467,146)
Net increase 58,301,098 77,717,836
(decrease)
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1997
SELECTED PER-SHARE (UNAUDITED) 1996 1995 1994 1993 E 1992
DATA
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Net asset value, $ 21.03 $ 19.27 $ 15.35 $ 15.44 $ 13.40 $ 11.85
beginning of period
Income from
Investment
Operations
Net investment .18 D .35 .41 .41 .37 .40
income
Net realized and 3.02 2.30 4.69 .64 2.06 1.57
unrealized gain
(loss)
Total from 3.20 2.65 5.10 1.05 2.43 1.97
investment
operations
Less Distributions
From net (.36) (.03) (.40) (.37) (.35) (.42)
investment income
In excess of net - - - - (.04) -
investment income
From net realized (1.81) (.86) (.78) (.77) - -
gain
Total distributions (2.17) (.89) (1.18) (1.14) (.39) (.42)
Net asset value, end $ 22.06 $ 21.03 $ 19.27 $ 15.35 $ 15.44 $ 13.40
of period
TOTAL RETURN B, C 16.39% 14.28% 35.09% 7.07% 18.29% 16.89%
RATIOS AND
SUPPLEMENTAL
DATA
Net assets, end of $ 8,588,947 $ 6,961,090 $ 4,879,435 $ 2,284,412 $ 1,318,500 $ 592,880
period (000
omitted)
Ratio of expenses to .60% A .58% .61% .60% .62% .65%
average net assets
Ratio of expenses to .59% A, .56% .61% .58% .62% .65%
average net assets F F F
after
expense reductions
Ratio of net 1.72% A 1.97% 2.56% 2.83% 2.87% 3.52%
investment income
to average net
assets
Portfolio turnover rate 68% A 186% 87% 134% 120% 74%
Average commission $ .0438 $ .0426
rate G
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED AND DO NOT REFLECT
CHARGES ATTRIBUTED TO YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT.
INCLUSION OF THESE CHARGES WOULD
REDUCE THE TOTAL RETURNS SHOWN. C THE TOTAL RETURNS WOULD HAVE
BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS). D NET
INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE
PERIOD. E EFFECTIVE JANUARY 1, 1993, THE FUND ADOPTED STATEMENT
OF POSITION 93-2, "DETERMINATION,
DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF INCOME, CAPITAL
GAIN, AND RETURN OF CAPITAL
DISTRIBUTIONS BY INVESTMENT COMPANIES." AS A RESULT, NET INVESTMENT
INCOME PER SHARE MAY REFLECT CERTAIN
RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES. F FMR OR THE
FUND HAS ENTERED INTO VARYING
ARRANGEMENTS WITH THIRD PARTIES WHO EITHER PAID OR REDUCED A PORTION
OF THE FUND'S EXPENSES (SEE NOTE
5 OF NOTES TO FINANCIAL STATEMENTS). G FOR FISCAL YEARS BEGINNING ON
OR AFTER SEPTEMBER 1, 1995, A FUND
IS REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR
SECURITY TRADES ON WHICH COMMISSIONS
ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND TO
FUND DEPENDING ON THE MIX OF TRADES
EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION
RATE STRUCTURES MAY DIFFER.
</TABLE>
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can
look at the total percentage change in value, the average annual percentage
change or the growth of a hypothetical $10,000 investment. Total return
reflects the change in the value of an investment, assuming reinvestment of
the fund's dividend income and capital gains (the profits earned upon the
sale of securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had performed at a constant rate each
year. Average annual total returns will appear once the fund is a year old,
and the growth of a hypothetical $10,000 investment in the fund will appear
in the fund's next report six months from now.
You can compare the fund's returns to the performance of the Standard &
Poor's 500 Index - a widely recognized, unmanaged index of common stocks.
This benchmark reflects the reinvestment of dividends and capital gains, if
any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of long-term growth and short-term
volatility. In turn, the share price and return of a
fund that invests in stocks will vary. That means if
you sell your shares during a market downturn,
you might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
(checkmark)
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL
CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
General Electric Co. 3.5
Philip Morris Companies, Inc. 2.4
BankAmerica Corp. 2.4
Tyco International Ltd. 2.2
Citicorp 1.9
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Finance 14.7
Health 12.2
Retail & Wholesale 9.6
Industrial Machinery & Equipment 9.1
Nondurables 9.0
ASSET ALLOCATION AS OF JUNE 30, 1997*
Row: 1, Col: 1, Value: 4.8
Row: 1, Col: 2, Value: 1.8
Row: 1, Col: 3, Value: 93.40000000000001
Stocks 94.4%
Bonds 0.8%
Short-term investments 4.8%
FOREIGN INVESTMENTS 7.5%
*
% OF FUND'S
INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with
Beth Terrana, Portfolio Manager of Growth &
Income Portfolio
Q. HOW DID THE FUND PERFORM, BETH?
A. For the six months that ended June 30, 1997, the fund trailed the
Standard & Poor's 500 Index, which returned 20.61%. Going forward, the
fund's semiannual report will also quote 12-month performance.
Q. LOOKING AT THE FUND'S PERFORMANCE VERSUS THAT OF ITS INDEX, WHICH
STRATEGIES PLAYED KEY ROLES?
A. Broadly, my decision to emphasize selected stocks in the strong finance,
health and diversified industrials sectors was particularly helpful. Within
the finance and health areas, I focused on money-center banks and
pharmaceuticals, including BankAmerica and Bristol-Myers Squibb - two of
the largest contributors to fund performance for the period. General
Electric - the fund's top holding - was another notable contributor based
on its strong performance as well as its overweighting in the fund.
Additionally, a substantial underweighting of generally weak electric and
telecommunications utilities stocks proved very helpful. The largest
detractor relative to the index was the fund's underexposure to a number of
large-capitalization technology and nondurables stocks, which accounted for
a disproportionate amount of the index's return. Microsoft and Coca-Cola -
two of the largest index constituents - illustrate this point particularly
well. Together, these TWO stocks alone accounted for approximately 1.5% of
the index's 20.61% return. While in hindsight I clearly wish I'd owned more
of these stocks, fundamentals for these companies didn't appear to support
their valuations, which were at steep premiums to the overall market as
well as comparable firms.
Q. HOW DID SOME OF THE FUND'S TOP POSITIONS FARE RELATIVE TO THE INDEX?
A. Many of the fund's larger exposures did well, performing in line with my
expectations. Individual security selection will always be a main driver of
performance and the fund's top positions obviously play a key role. Over
the course of the period, six of the fund's top ten positions outperformed
the index.
Q. FOR THOSE INVESTORS WHO MAY BE UNFAMILIAR WITH YOUR MANAGEMENT STYLE,
HOW WOULD YOU CHARACTERIZE YOUR INVESTMENT PROCESS?
A. Fundamentally, I am a bottom-up investor who believes that superior
investment performance results from owning companies with improving
financial returns. Improvements in financial returns drive both sustainable
improvements in a company's secular growth rate and its earnings power. The
most important elements I look for in an investment include restructuring
potential, rising returns on invested capital, good balance sheet
management, strong free cash flow and shareholder-friendly management.
Increasingly, global franchises and strong brands have also become
important factors. I've generally found that companies exhibiting some or
all of these attributes tend to generate improving financial returns -
including expanding profit margins and accelerating earnings growth rates -
through time. Further, as a firm's financial returns improve, its stock is
likely to be rewarded with a higher valuation once the market finally
catches on.
Q. WHAT'S YOUR OUTLOOK FOR THE NEXT SIX MONTHS?
A. As a backdrop to the stock market, I believe it's very likely that the
supportive environment - moderate economic growth and low inflation - will
continue. Also, given that there are few signs of incipient inflation, I
don't foresee any significant action by the Federal Reserve to raise
interest rates - an event that would likely be a negative for the market,
at least over the short term. Assuming this favorable economic environment
continues, the critical factor going forward will be corporate earnings,
which at this time appear relatively sustainable overall. However, I remain
focused on those companies with the potential to deliver exceptional
numbers, particularly given the recent propensity of the market to
dramatically reduce stock prices upon earnings disappointments. Recently,
even earnings numbers that come in as expected have resulted in large stock
price declines, partly because analysts' "real" expectations were even
higher.
FUND FACTS
GOAL: seeks reasonable income by investing
primarily in income producing equity securities
to provide current income and increase the
value of the fund's shares
START DATE: October 9,1986
SIZE: as of June 30, 1997, more than $8.5
billion
MANAGER: Stephen Petersen, since January
1997; joined Fidelity in 1980
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 93.4%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 4.5%
AEROSPACE & DEFENSE - 4.1%
AlliedSignal, Inc. 26,700 $ 2,242,800
Boeing Co. 17,200 912,661
Lockheed Martin Corp. 11,600 1,201,325
Textron, Inc. 20,800 1,380,600
United Technologies Corp. 18,500 1,535,500
7,272,886
DEFENSE ELECTRONICS - 0.4%
Raytheon Co. 14,800 754,800
TOTAL AEROSPACE & DEFENSE 8,027,686
BASIC INDUSTRIES - 5.1%
CHEMICALS & PLASTICS - 3.9%
Air Products & Chemicals, Inc. 9,900 804,375
Avery Dennison Corp. 6,000 240,750
Cytec Industries, Inc. (a) 4,300 160,713
Goodrich (B.F.) Co. 12,600 545,738
Hercules, Inc. 2,300 110,113
Monsanto Co. 35,900 1,545,944
Praxair, Inc. 45,800 2,564,800
Raychem Corp. 5,700 423,938
Sealed Air Corp. (a) 14,200 674,500
7,070,871
PAPER & FOREST PRODUCTS - 1.2%
Fort Howard Corp. (a) 7,500 379,688
International Paper Co. 3,900 189,394
James River Corp. of Virginia 10,900 403,300
Kimberly-Clark Corp. 22,300 1,109,425
2,081,807
TOTAL BASIC INDUSTRIES 9,152,678
CONSTRUCTION & REAL ESTATE - 3.0%
BUILDING MATERIALS - 1.8%
American Standard Companies, Inc. (a) 19,900 890,525
Masco Corp. 39,400 1,644,950
Sherwin-Williams Co. 21,300 657,638
3,193,113
REAL ESTATE INVESTMENT TRUSTS - 1.2%
Beacon Properties Corp. 13,600 453,900
Duke Realty Investors, Inc. 9,300 376,650
Equity Residential Properties Trust (SBI) 12,400 589,000
Public Storage, Inc. 18,400 538,200
Storage USA, Inc. 5,500 210,375
2,168,125
TOTAL CONSTRUCTION & REAL ESTATE 5,361,238
DURABLES - 3.2%
AUTOS, TIRES, & ACCESSORIES - 0.4%
Eaton Corp. 5,200 454,025
Navistar International Corp. (a) 18,200 313,950
767,975
CONSUMER DURABLES - 1.7%
Corning, Inc. 13,200 734,250
Minnesota Mining & Manufacturing Co. 23,400 2,386,800
3,121,050
CONSUMER ELECTRONICS - 0.3%
Newell Co. 14,100 558,713
SHARES VALUE (NOTE 1)
TEXTILES & APPAREL - 0.8%
Liz Claiborne, Inc. 20,100 $ 937,163
VF Corp. 5,200 442,650
1,379,813
TOTAL DURABLES 5,827,551
ENERGY - 7.5%
ENERGY SERVICES - 0.9%
Halliburton Co. 5,900 467,575
McDermott International, Inc. 7,400 215,988
Schlumberger Ltd. 7,800 975,000
1,658,563
OIL & GAS - 6.6%
Amoco Corp. 13,500 1,173,656
British Petroleum PLC ADR 30,064 2,251,042
Exxon Corp. 22,300 1,371,450
Mobil Corp. 14,800 1,034,150
Royal Dutch Petroleum Co. 33,200 1,805,250
Texaco, Inc. 15,300 1,663,875
Tosco Corp. 21,000 628,688
Total SA sponsored ADR 14,000 708,750
USX-Marathon Group 32,500 938,438
Unocal Corp. 5,900 228,994
11,804,293
TOTAL ENERGY 13,462,856
FINANCE - 14.7%
BANKS - 7.9%
Bank of New York Co., Inc. 35,700 1,552,950
BankBoston Corp. 7,600 547,675
BankAmerica Corp. 65,500 4,228,844
Citicorp 27,800 3,351,638
First Bank System, Inc. 18,400 1,570,900
First Union Corp. 8,200 758,500
Mellon Bank Corp. 19,800 893,475
NationsBank Corp. 15,100 973,950
Wells Fargo & Co. 1,200 323,400
14,201,332
CREDIT & OTHER FINANCE - 1.8%
American Express Co. 16,600 1,236,700
Associates First Capital Corp. 8,400 466,200
Household International, Inc. 12,800 1,503,200
3,206,100
FEDERAL SPONSORED CREDIT - 1.9%
Federal Home Loan Mortgage
Corporation 50,200 1,725,625
Federal National Mortgage Association 37,400 1,631,575
3,357,200
INSURANCE - 2.4%
AFLAC, Inc. 7,400 349,650
Allstate Corp. 23,800 1,737,400
MGIC Investment Corp. 3,400 162,988
PMI Group, Inc. 1,600 99,800
Progressive Corp. 300 26,100
Travelers Group, Inc. (The) 29,100 1,835,119
4,211,057
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
SAVINGS & LOANS - 0.7%
Ahmanson (H.F.) & Co. 4,900 $ 210,700
Charter One Financial Corp. 5,100 274,763
Great Western Financial Corp. 14,600 784,750
1,270,213
TOTAL FINANCE 26,245,902
HEALTH - 11.9%
DRUGS & PHARMACEUTICALS - 7.9%
American Home Products Corp. 27,300 2,088,450
Bristol-Myers Squibb Co. 38,300 3,102,300
Cytyc Corp. (a) 4,300 116,638
Merck & Co., Inc. 17,100 1,769,850
Pfizer, Inc. 32,400 1,935,900
Schering-Plough Corp. 37,000 1,771,375
SmithKline Beecham PLC ADR 25,500 2,336,438
Warner-Lambert Co. 8,400 1,043,700
14,164,651
MEDICAL EQUIPMENT & SUPPLIES - 3.7%
Bard (C.R.), Inc. 12,500 453,906
Baxter International, Inc. 26,900 1,405,525
Boston Scientific Corp. (a) 14,300 878,556
Johnson & Johnson 35,200 2,266,000
McKesson Corp. 10,500 813,750
Medtronic, Inc. 9,500 769,500
6,587,237
MEDICAL FACILITIES MANAGEMENT - 0.3%
Columbia/HCA Healthcare Corp. 3,000 117,938
Humana, Inc. (a) 20,900 483,313
601,251
TOTAL HEALTH 21,353,139
HOLDING COMPANIES - 0.1%
CINergy Corp. 6,300 219,319
INDUSTRIAL MACHINERY & EQUIPMENT - 8.5%
ELECTRICAL EQUIPMENT - 4.6%
Emerson Electric Co. 21,600 1,189,350
General Electric Co. 96,400 6,302,150
Harris Corp. 3,200 268,800
Westinghouse Electric Corp. 20,500 474,063
8,234,363
INDUSTRIAL MACHINERY & EQUIPMENT - 3.7%
Illinois Tool Works, Inc. 21,600 1,078,650
Ingersoll-Rand Co. 10,000 617,500
Stanley Works 22,700 908,000
Tyco International Ltd. 57,400 3,992,888
6,597,038
POLLUTION CONTROL - 0.2%
Waste Management, Inc. 12,000 385,500
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 15,216,901
MEDIA & LEISURE - 4.6%
BROADCASTING - 1.1%
Evergreen Media Corp. Class A (a) 20,400 910,350
Time Warner, Inc. 20,800 1,003,600
1,913,950
ENTERTAINMENT - 0.6%
Disney (Walt) Co. 12,600 1,011,150
SHARES VALUE (NOTE 1)
LEISURE DURABLES & TOYS - 0.5%
Mattel, Inc. 27,100 $ 918,013
LODGING & GAMING - 0.3%
Host Marriott Corp. (a) 31,200 555,750
PUBLISHING - 2.1%
Cognizant Corp. 15,400 623,700
Harcourt General, Inc. 9,200 438,150
McGraw-Hill, Inc. 12,500 735,156
Scholastic Corp. (a) 6,900 241,500
Times Mirror Co. Class A 27,900 1,541,475
World Color Press, Inc. (a) 7,500 178,125
3,758,106
TOTAL MEDIA & LEISURE 8,156,969
NONDURABLES - 9.0%
BEVERAGES - 0.7%
PepsiCo, Inc. 31,600 1,186,975
FOODS - 1.6%
Campbell Soup Co. 42,500 2,125,000
Heinz (H.J.) Co. 8,700 401,288
Hershey Foods Corp. 6,800 376,125
2,902,413
HOUSEHOLD PRODUCTS - 4.2%
Avon Products, Inc. 19,400 1,368,913
Clorox Co. 6,800 897,600
Colgate-Palmolive Co. 1,300 84,825
Procter & Gamble Co. 12,200 1,723,250
Rubbermaid, Inc. 9,800 291,550
Unilever PLC Ord. 30,900 885,526
Unilever NV ADR 10,900 2,333,281
7,584,945
TOBACCO - 2.5%
Philip Morris Companies, Inc. 98,500 4,370,938
TOTAL NONDURABLES 16,045,271
PRECIOUS METALS - 0.2%
Getchell Gold Corp. (a) 12,100 426,525
RETAIL & WHOLESALE - 9.4%
APPAREL STORES - 1.4%
Gap, Inc. 29,900 1,162,363
Payless ShoeSource, Inc. (a) 24,200 1,323,438
2,485,801
DRUG STORES - 1.5%
CVS Corp. 37,977 1,946,321
Walgreen Co. 14,500 777,563
2,723,884
GENERAL MERCHANDISE STORES - 5.2%
Coles Myer Ltd. 71,500 371,324
Consolidated Stores Corp. (a) 89,975 3,126,631
Dayton Hudson Corp. 20,100 1,069,069
Federated Department Stores, Inc. (a) 71,400 2,481,150
Sears, Roebuck & Co. 21,100 1,134,125
Wal-Mart Stores, Inc. 30,900 1,044,806
9,227,105
GROCERY STORES - 0.7%
American Stores Co. 10,500 518,438
Asda Group PLC 177,400 366,194
Ahold NV 3,600 303,528
1,188,160
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
RETAIL & WHOLESALE, MISCELLANEOUS - 0.6%
Home Depot, Inc. (The) 16,300 $ 1,123,681
TOTAL RETAIL & WHOLESALE 16,748,631
SERVICES - 3.6%
ADVERTISING - 1.8%
Interpublic Group of Companies, Inc. 12,500 766,406
Omnicom Group, Inc. 28,600 1,762,475
Outdoor Systems, Inc. (a) 4,800 183,600
WPP Group PLC 127,000 519,028
3,231,509
LEASING & RENTAL - 0.3%
Hanover Compressor Co. 100 1,950
Republic Industries, Inc. (a) 5,600 139,300
Ryder Systems, Inc. 12,200 402,600
543,850
PRINTING - 0.3%
Donnelley (R.R.) & Sons Co. 15,900 582,338
SERVICES - 1.2%
ADT Ltd. (a) 19,800 653,400
Ecolab, Inc. 14,300 682,825
National Service Industries, Inc. 6,300 306,731
Service Corp. International 14,818 487,142
2,130,098
TOTAL SERVICES 6,487,795
TECHNOLOGY - 7.4%
COMMUNICATIONS EQUIPMENT - 0.6%
Alcatel Alsthom Compagnie Generale
d'Electricite SA sponsored ADR 2,400 60,600
Alcatel Alsthom Compagnie Generale
d'Electricite SA 6,600 826,094
Andrew Corp. (a) 5,100 143,438
1,030,132
COMPUTER SERVICES & SOFTWARE - 1.7%
Adobe Systems, Inc. 2,500 87,656
Automatic Data Processing, Inc. 8,500 399,500
CUC International, Inc. (a) 15,600 402,675
CompUSA, Inc. (a) 22,300 479,450
Microsoft Corp. (a) 9,600 1,213,200
Oracle Systems Corp. (a) 9,700 488,638
3,071,119
COMPUTERS & OFFICE EQUIPMENT - 3.8%
Compaq Computer Corp. (a) 14,600 1,449,050
Diebold, Inc. 12,550 489,450
International Business Machines Corp. 28,100 2,534,269
Pitney Bowes, Inc. 18,700 1,299,650
Xerox Corp. 13,600 1,072,700
6,845,119
ELECTRONICS - 1.3%
Intel Corp. 11,500 1,630,844
Texas Instruments, Inc. 8,500 714,531
2,345,375
TOTAL TECHNOLOGY 13,291,745
UTILITIES - 0.7%
ELECTRIC UTILITY - 0.3%
Edison International 22,000 547,250
SHARES VALUE (NOTE 1)
TELEPHONE SERVICES - 0.4%
WorldCom, Inc. (a) 20,200 $ 646,400
TOTAL UTILITIES 1,193,650
TOTAL COMMON STOCKS
(Cost $151,597,143) 167,217,856
CONVERTIBLE PREFERRED STOCKS - 1.0%
CONSTRUCTION & REAL ESTATE - 0.2%
REAL ESTATE INVESTMENT TRUSTS - 0.2%
Vornado Realty Trust $3.25 Series A 5,300 286,863
DURABLES - 0.1%
AUTOS, TIRES, & ACCESSORIES - 0.1%
Republic Industries, Inc. $1.55 8,600 210,700
ENERGY - 0.3%
OIL & GAS - 0.3%
Tosco Financing Trust $2.875 (b) 8,200 462,275
HEALTH - 0.3%
MEDICAL EQUIPMENT & SUPPLIES - 0.3%
McKesson Financing Trust $2.50 (b) 9,400 571,050
MEDIA & LEISURE - 0.1%
LODGING & GAMING - 0.1%
Host Marriott Financial Trust
$3.375 (b) 4,800 277,800
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $1,729,992) 1,808,688
CONVERTIBLE BONDS - 0.8%
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - 0.6%
POLLUTION CONTROL - 0.6%
USA Waste Services, Inc.
4%, 2/1/02 Ba2 $ 642,000 683,730
United Waste Systems, Inc.
4 1/2%, 6/1/01 B1 198,000 271,755
955,485
RETAIL & WHOLESALE - 0.2%
GENERAL MERCHANDISE STORES - 0.1%
Federated Department Stores, Inc.
5%, 10/1/03 Baa3 220,000 262,350
RETAIL & WHOLESALE, MISCELLANEOUS - 0.1%
Staples, Inc.
4 1/2%, 10/1/00 (b) Ba2 93,000 112,995
TOTAL RETAIL & WHOLESALE 375,345
TOTAL CONVERTIBLE BONDS
(Cost $1,289,817) 1,330,830
CASH EQUIVALENTS - 4.8%
MATURITY VALUE
AMOUNT (NOTE 1)
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 5.93%, dated
6/30/97 due 7/1/97 $ 8,616,419 $ 8,615,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $163,231,952) $ 178,972,374
LEGEND
(a) Non-income producing
(b) Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of these securities amounted to $1,424,120 or 0.8% of net
assets.
(c) Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $189,250,835 and $35,258,709, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company. The
commissions paid to these affiliated firms were $22,730 for the period (see
Note 4 of Notes to Financial Statements).
INCOME TAX INFORMATION
At June 30, 1997, the aggregate cost of investment securities for income
tax purposes was $163,231,952. Net unrealized appreciation aggregated
$15,740,422, of which $16,585,242 related to appreciated investment
securities and $844,820 related to depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in $ 178,972,374
securities, at value
(including
repurchase
agreements of
$8,615,000) (cost
$163,231,952) -
See accompanying
schedule
Cash 21,799
Receivable for 505,400
investments sold
Receivable for fund 841,663
shares sold
Dividends receivable 160,697
Interest receivable 14,678
TOTAL ASSETS 180,516,611
LIABILITIES
Payable for $ 1,047,870
investments
purchased
Payable for fund 80
shares redeemed
Accrued management 68,520
fee
Other payables and 36,258
accrued expenses
TOTAL LIABILITIES 1,152,728
NET ASSETS $ 179,363,883
Net Assets consist of:
Paid in capital $ 163,362,211
Undistributed net 592,329
investment income
Accumulated (331,075
undistributed net )
realized gain (loss)
on investments and
foreign currency
transactions
Net unrealized 15,740,418
appreciation
(depreciation) on
investments
and assets and
liabilities in
foreign currencies
NET ASSETS, for $ 179,363,883
15,613,501
shares outstanding
NET ASSET VALUE, $11.49
offering price
and redemption
price per share
($179,363,883 (divided by)
15,613,501 shares)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $ 692,052
Dividends
Interest 220,743
TOTAL INCOME 912,795
EXPENSES
Management fee $ 216,567
Transfer agent fees 35,283
Accounting fees and 34,705
expenses
Non-interested 131
trustees'
compensation
Custodian fees and 22,607
expenses
Audit 11,519
Legal 16
Total expenses 320,828
before reductions
Expense reductions (209 320,619
)
NET INVESTMENT 592,176
INCOME
REALIZED AND
UNREALIZED GAIN
(LOSS)
Net realized gain
(loss) on:
Investment (330,979
securities )
Foreign currency (96 (331,075
transactions ) )
Change in net
unrealized
appreciation
(depreciation) on:
Investment 15,750,754
securities
Assets and (4 15,750,750
liabilities in )
foreign currencies
NET GAIN (LOSS) 15,419,675
NET INCREASE $ 16,011,851
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
OTHER INFORMATION $ 209
Expense reductions
Custodian credits
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) SIX MONTHS DECEMBER 31,
IN NET ASSETS ENDED 1996
JUNE 30, 1997 (COMMENCEMENT
(UNAUDITED) OF OPERATIONS)
Operations $ 592,176 $ 153
Net investment
income
Net realized gain (331,075) -
(loss)
Change in net 15,750,750 (10,332
unrealized )
appreciation
(depreciation)
NET INCREASE 16,011,851 (10,179
(DECREASE) IN NET )
ASSETS RESULTING
FROM OPERATIONS
Share transactions 176,559,612 1,000,010
Net proceeds from
sales of shares
Cost of shares (14,197,411) -
redeemed
NET INCREASE 162,362,201 1,000,010
(DECREASE) IN NET
ASSETS RESULTING
FROM SHARE
TRANSACTIONS
TOTAL INCREASE 178,374,052 989,831
(DECREASE) IN NET
ASSETS
NET ASSETS
Beginning of period 989,831 -
End of period $ 179,363,883 $ 989,831
(including
undistributed net
investment
income of
$592,329 and
$153,
respectively)
OTHER INFORMATION
Shares
Sold 16,857,064 100,001
Redeemed (1,343,564) -
Net increase 15,513,500 100,001
(decrease)
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED) (COMMENCEMENT
OF OPERATIONS)
SELECTED PER-SHARE
DATA
Net asset value, $ 9.90 $ 10.00
beginning of period
Income from
Investment
Operations
Net investment .07 D .00
income
Net realized and 1.52 (.10)
unrealized gain
(loss)
Total from 1.59 (.10)
investment
operations
Net asset value, end $ 11.49 $ 9.90
of period
TOTAL RETURN B, C 16.06% (1.00)%
RATIOS AND
SUPPLEMENTAL
DATA
Net assets, end of $ 179,364 $ 990
period (000
omitted)
Ratio of expenses to .75% A 1.00% A,
average net assets E
Ratio of net 1.38% A 3.89% A
investment income
to average net
assets
Portfolio turnover rate 86% A 0% A
Average commission $ .0280 $ .0120
rate F
ANNUALIZED
TOTAL RETURNS FOR PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED AND DO NOT
REFLECT CHARGES ATTRIBUTABLE TO YOUR
INSURANCE COMPANY'S SEPARATE
ACCOUNT. INCLUSION OF THESE CHARGES
WOULD REDUCE THE TOTAL RETURNS SHOWN.
THE TOTAL RETURNS WOULD HAVE BEEN LOWER
HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN
(SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS).
NET INVESTMENT INCOME PER SHARE HAS
BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
FMR AGREED TO REIMBURSE A PORTION OF THE
FUND'S EXPENSES DURING THE PERIOD.
WITHOUT THIS REIMBURSEMENT, THE
FUND'S EXPENSE RATIO WOULD HAVE BEEN
HIGHER.
A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE
COMMISSION RATE PER SHARE FOR SECURITY
TRADES ON WHICH COMMISSIONS ARE
CHARGED. THIS AMOUNT MAY VARY FROM
PERIOD TO PERIOD AND FUND TO FUND
DEPENDING ON THE MIX OF TRADES
EXECUTED IN VARIOUS MARKETS WHERE
TRADING PRACTICES AND COMMISSION RATE
STRUCTURES MAY DIFFER.
VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can
look at the total percentage change in value, the average annual percentage
change or the growth of a hypothetical $10,000 investment. Total return
reflects the change in the value of an investment, assuming reinvestment of
the fund's dividend income and capital gains (the profits earned upon the
sale of securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 LIFE OF
JUNE 30, 1997 YEAR FUND
INDEX 500 34.06% 19.67%
S&P 500(registered trademark) 34.70% 20.03%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what
would have happened if the fund had performed at a constant rate each year.
You can compare the fund's returns to the performance of the Standard &
Poor's 500 Index - a widely recognized, unmanaged index of common stocks.
This benchmark includes reinvested dividends and capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of long-term growth and short-term
volatility. In turn, the share price and return of a
fund that invests in stocks will vary. That means if
you sell your shares during a market downturn,
you might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of return
and are not the fund's year-by-year results, which fluctuated over the
periods shown. The life of fund figures are from commencement of
operations, August 27, 1992.
If Fidelity had not reimbursed certain fund expenses, the past one year and
life of fund return figures would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL
CHARGES, THE TOTAL RETURNS WOULD BE LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
1992/08/27 10000.00 10000.00
1992/08/31 10014.00 10018.36
1992/09/30 10130.00 10136.58
1992/10/31 10152.00 10172.06
1992/11/30 10498.00 10518.92
1992/12/31 10630.67 10648.31
1993/01/31 10707.47 10737.75
1993/02/28 10856.70 10883.79
1993/03/31 11095.84 11113.43
1993/04/30 10822.25 10844.49
1993/05/31 11103.95 11135.12
1993/06/30 11132.32 11167.41
1993/07/31 11081.66 11122.74
1993/08/31 11501.17 11544.30
1993/09/30 11407.95 11455.40
1993/10/31 11641.01 11692.53
1993/11/30 11527.52 11581.45
1993/12/31 11666.06 11721.59
1994/01/31 12059.53 12120.12
1994/02/28 11732.95 11791.67
1994/03/31 11223.46 11277.55
1994/04/30 11357.65 11421.90
1994/05/31 11533.77 11609.22
1994/06/30 11252.82 11324.80
1994/07/31 11623.93 11696.25
1994/08/31 12087.29 12175.80
1994/09/30 11793.76 11877.49
1994/10/31 12055.84 12144.73
1994/11/30 11617.64 11702.42
1994/12/31 11787.47 11875.97
1995/01/31 12099.87 12183.91
1995/02/28 12563.64 12658.72
1995/03/31 12931.02 13032.28
1995/04/30 13311.22 13416.08
1995/05/31 13834.52 13952.32
1995/06/30 14148.51 14276.43
1995/07/31 14620.55 14749.84
1995/08/31 14656.86 14786.86
1995/09/30 15269.88 15410.86
1995/10/31 15218.62 15355.85
1995/11/30 15880.76 16029.97
1995/12/31 16171.25 16338.71
1996/01/31 16724.46 16894.88
1996/02/29 16880.36 17051.49
1996/03/31 17054.17 17215.70
1996/04/30 17292.62 17469.46
1996/05/31 17733.85 17919.99
1996/06/30 17809.61 17988.27
1996/07/31 17020.75 17193.55
1996/08/31 17370.61 17556.16
1996/09/30 18342.21 18544.22
1996/10/31 18848.06 19055.67
1996/11/30 20260.89 20496.09
1996/12/31 19844.17 20090.06
1997/01/31 21074.26 21345.29
1997/02/28 21231.99 21512.63
1997/03/31 20349.53 20628.68
1997/04/30 21559.17 21860.21
1997/05/31 22870.18 23191.06
1997/06/30 23874.76 24230.02
Let's say hypothetically that $10,000 was invested in Index 500 Portfolio
on August 27, 1992, when the fund started. As the chart shows, by June 30,
1997, the value of the investment would have grown to $23,875 - a 138.75%
increase on the initial investment. For comparison, look at how the S&P 500
did over the same period. With dividends and capital gains, if any,
reinvested, the same $10,000 investment would have grown to $24,230 - a
142.30% increase.
INVESTMENT SUMMARY
TOP TEN STOCKS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
General Electric Co. 2.9
Coca-Cola Co. (The) 2.3
Exxon Corp. 2.1
Microsoft Corp. 2.1
Merck & Co., Inc. 1.7
Royal Dutch Petroleum Co. 1.6
Intel Corp. 1.6
Philip Morris Companies, Inc. 1.5
Procter & Gamble Co. 1.3
International Business Machines Corp. 1.3
TOP TEN MARKET SECTORS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Finance 14.3
Technology 13.3
Nondurables 10.8
Health 10.7
Utilities 8.5
Energy 8.3
Industrial Machinery & Equipment 5.6
Basic Industries 5.0
Retail & Wholesale 4.4
Durables 3.8
VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with Jennifer Farrelly, Portfolio Manager of Index 500
Portfolio
Q. HOW DID THE FUND PERFORM, JEN?
A. For the six months that ended June 30, 1997, the fund performed in line
with the 20.61% return of the Standard & Poor's 500 Index. Of course, the
fund's total return is slightly lower than the index due to management
expenses. The S&P 500 returned 34.70% for the 12 months ended June 30,
1997.
Q. HOW WOULD YOU CHARACTERIZE THE MARKET OVER THE PAST SIX MONTHS?
A. The U.S. stock market continued to be strong, led by
large-capitalization companies. There were a number of factors that
contributed to the positive investing environment. Most importantly,
corporate earnings were healthy, helped by a steadily growing economy that
has shown no signs of emerging inflation. Interest rates remained
relatively low, helping to sustain economic growth, keep corporate
borrowing costs under control and make investment alternatives to stocks
less attractive. Economic growth remained moderate enough to discourage the
Federal Reserve Board from aggressively raising interest rates to cool an
overheated economy and head off potential inflation.
Q. AT THE SAME TIME, THE FED DID RAISE RATES BACK IN MARCH . . .
A. That's right. In February, Fed Chairman Alan Greenspan indicated in his
semiannual Congressional testimony that the Fed was inclined to raise
short-term rates in the first half of 1997, as a pre-emptive strike against
possible inflation caused by a tight labor market. As the Fed's March 25
Open Market Committee meeting approached and data emerged showing the
economy picking up speed, the market experienced a sharp sell-off.
Investors became convinced that the Fed would raise rates. The Fed did so,
increasing a key short-term rate by 0.25% at its March meeting. However,
when statistics emerged in the second quarter showing the economy slowing
and no significant increase in inflation, the market recovered from its
late March and early April correction and continued its steady upward climb
through the end of the period.
Q. WHY DID THE STOCKS OF THE LARGEST COMPANIES CONTINUE TO PERFORM WELL?
A. Because they tended to provide reliable earnings, and earnings are one
of the main drivers of stock prices. With the economy showing strength, the
stock market broadened somewhat with the prices of small- and
mid-capitalization stocks also starting to show improvement. At the same
time, cost cutting and sustained international sales helped large-cap
stocks maintain their status as market leaders.
Q. WERE THERE ANY PARTICULAR SECTORS OF THE MARKET THAT PROVED TO BE MARKET
LEADERS?
A. Not really. No one sector stood out above the rest, although many
financial services stocks did well. In the past, the uncertain
interest-rate environment probably would have adversely affected these
stocks. However, interest rates remain at a relatively low level and many
financial services companies have emphasized steadier fee-based businesses
that tend to insulate them from the negative influence that monetary policy
might exert. In addition, many financial services firms benefited from the
strong stock market and the positive impact of significant inflows of
capital, especially through mutual funds. Positive merger and acquisition
activity also bolstered stocks in the sector.
Q. WHAT SECTORS LAGGED DURING THE PERIOD?
A. Precious metals was one area that lagged the market. Although we
continue to use more gold than we mine, its price continues to plummet.
That's because many central banks have sold their gold reserves off
recently because the metal has been such a poor performing asset. For
example, Australia recently sold off a fair amount of its reserves to buy
U.S. government bonds, among other investments. In addition, gold often is
seen as a hedge against inflation, and with such positive news on that
front recently, the precious metal has lost its luster.
Q. WHAT'S YOUR OUTLOOK FOR THE REST OF 1997?
A. Even though investors have seen valuations well above historical levels,
earnings growth and earnings surprises have supported stock prices and
driven them higher. Nevertheless, investors should understand that this
situation leads to a great deal of uncertainty looking forward. While the
large-cap stocks that make up the S&P 500 have rallied to post annual
returns in the 20% to 30% range for more than two years, the index's
historical average annual return is approximately 11%. Investors should set
their expectations accordingly.
FUND FACTS
GOAL: seeks reasonable income by investing
primarily in income producing equity securities
to provide current income and increase the
value of the fund's shares
START DATE: October 9,1986
SIZE: as of June 30, 1997, more than $8.5
billion
MANAGER: Stephen Petersen, since January
1997; joined Fidelity in 1980
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 93.0%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 2.2%
AEROSPACE & DEFENSE - 1.9%
AlliedSignal, Inc. 59,100 $ 4,964,223
Boeing Co. 149,918 7,955,024
Lockheed Martin Corp. 40,393 4,183,200
McDonnell Douglas Corp. 44,500 3,048,250
Rockwell International Corp. 45,900 2,708,100
Textron, Inc. 34,700 2,303,213
United Technologies Corp. 49,600 4,116,800
29,278,810
DEFENSE ELECTRONICS - 0.2%
Northrop Grumman Corp. 12,000 1,053,750
Raytheon Co. 49,300 2,514,300
3,568,050
SHIP BUILDING & REPAIR - 0.1%
General Dynamics Corp. 13,200 990,000
TOTAL AEROSPACE & DEFENSE 33,836,860
BASIC INDUSTRIES - 5.0%
CHEMICALS & PLASTICS - 2.7%
Air Products & Chemicals, Inc. 23,300 1,893,125
Avery Dennison Corp. 21,900 878,738
Dow Chemical Co. 50,800 4,425,950
du Pont (E.I.) de Nemours & Co. 235,800 14,825,925
Eastman Chemical Co. 16,175 1,027,113
Engelhard Corp. 30,200 632,313
FMC Corp. (a) 7,700 611,669
Goodrich (B.F.) Co. 11,300 489,431
Great Lakes Chemical Corp. 12,500 654,688
Hercules, Inc. 21,500 1,029,313
Monsanto Co. 123,000 5,296,688
Morton International, Inc. 29,700 896,569
Nalco Chemical Co. 14,000 540,750
PPG Industries, Inc. 38,300 2,226,188
Praxair, Inc. 32,800 1,836,800
Raychem Corp. 9,400 699,125
Rohm & Haas Co. 13,300 1,197,831
Union Carbide Corp. 26,600 1,251,863
W.R. Grace & Co. 15,100 832,388
41,246,467
IRON & STEEL - 0.2%
Aeroquip Vickers, Inc. 5,800 274,050
Allegheny Teledyne, Inc. 36,384 982,368
Armco, Inc. (a) 22,400 86,800
Bethlehem Steel Corp. (a) 23,300 243,194
Inland Steel Industries, Inc. 10,200 266,475
Nucor Corp. 18,300 1,033,950
USX-U.S. Steel Group 17,800 624,113
Worthington Industries, Inc. 20,150 368,997
3,879,947
METALS & MINING - 0.6%
ASARCO, Inc. 9,000 275,625
Alcan Aluminium Ltd. 47,257 1,612,143
Aluminum Co. of America 36,200 2,728,575
Cyprus Amax Minerals Co. 19,450 476,525
Freeport-McMoRan Copper & Gold, Inc.
Class B 40,500 1,260,563
Inco Ltd. 35,136 1,049,766
Phelps Dodge Corp. 13,500 1,150,031
Reynolds Metals Co. 15,300 1,090,125
9,643,353
SHARES VALUE (NOTE 1)
PACKAGING & CONTAINERS - 0.2%
Ball Corp. 6,498 $ 195,346
Bemis Co., Inc. 10,900 471,425
Crown Cork & Seal Co., Inc. 26,800 1,432,125
Tupperware Corp. 13,100 478,150
2,577,046
PAPER & FOREST PRODUCTS - 1.3%
Boise Cascade Corp. 10,200 360,188
Champion International Corp. 19,900 1,099,475
Georgia-Pacific Corp. 19,200 1,639,200
International Paper Co. 62,900 3,054,581
James River Corp. of Virginia 18,100 669,700
Kimberly-Clark Corp. 118,332 5,887,017
Louisiana-Pacific Corp. 22,700 479,538
Mead Corp. 11,000 684,750
Potlatch Corp. 6,100 276,025
Stone Container Corp. 20,800 297,700
Temple-Inland, Inc. 11,500 621,000
Union Camp Corp. 14,500 725,000
Westvaco Corp. 21,250 668,047
Weyerhaeuser Co. 41,600 2,163,200
Willamette Industries, Inc. 11,500 805,000
19,430,421
TOTAL BASIC INDUSTRIES 76,777,234
CONSTRUCTION & REAL ESTATE - 0.4%
BUILDING MATERIALS - 0.3%
Armstrong World Industries, Inc. 8,700 638,363
Crane Co. 9,700 405,581
Masco Corp. 33,500 1,398,625
Owens-Corning 10,800 465,750
Sherwin-Williams Co. 36,000 1,111,500
4,019,819
CONSTRUCTION - 0.0%
Centex Corp. 6,100 247,813
Fleetwood Enterprises, Inc. 7,500 223,594
Kaufman & Broad Home Corp. 8,200 144,013
Pulte Corp. 4,300 148,619
764,039
ENGINEERING - 0.1%
EG & G, Inc. 10,000 225,000
Fluor Corp. 17,500 965,781
Foster Wheeler Corp. 8,600 348,300
1,539,081
TOTAL CONSTRUCTION & REAL ESTATE 6,322,939
DURABLES - 3.8%
AUTOS, TIRES, & ACCESSORIES - 2.3%
AutoZone, Inc. (a) 31,550 743,397
Chrysler Corp. 147,100 4,826,719
Cooper Tire & Rubber Co. 16,500 363,000
Cummins Engine Co., Inc. 8,200 578,613
Dana Corp. 21,400 813,200
Eaton Corp. 16,200 1,414,463
Echlin, Inc. 13,000 468,000
Ford Motor Co. 248,000 9,362,000
General Motors Corp. 158,278 8,814,106
Genuine Parts Co. 37,850 1,282,169
Goodyear Tire & Rubber Co. 32,600 2,063,988
ITT Industries, Inc. 24,800 638,600
Johnson Controls, Inc. 17,500 718,594
NACCO Industries, Inc. Class A 1,800 101,588
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
DURABLES - CONTINUED
AUTOS, TIRES, & ACCESSORIES - CONTINUED
Navistar International Corp. (a) 15,270 $ 263,408
PACCAR, Inc. 16,190 751,823
Pep Boys-Manny, Moe & Jack 12,600 429,188
Snap-On Tools Corp. 12,800 504,000
TRW, Inc. 26,500 1,505,531
35,642,387
CONSUMER DURABLES - 0.8%
Corning, Inc. 47,900 2,664,438
Minnesota Mining & Manufacturing Co. 87,400 8,914,800
11,579,238
CONSUMER ELECTRONICS - 0.2%
Black & Decker Corp. 19,800 736,313
Maytag Co. 20,900 546,013
Newell Co. 33,300 1,319,513
Whirlpool Corp. 15,500 845,719
3,447,558
TEXTILES & APPAREL - 0.5%
Fruit of the Loom, Inc. Class A (a) 16,000 496,000
Liz Claiborne, Inc. 14,900 694,713
NIKE, Inc. Class B 60,300 3,520,013
Reebok International Ltd. 11,600 542,300
Russell Corp. 8,100 239,963
Springs Industries, Inc. Class A 4,300 226,825
Stride Rite Corp. 10,300 132,613
VF Corp. 13,400 1,140,675
6,993,102
TOTAL DURABLES 57,662,285
ENERGY - 8.3%
ENERGY SERVICES - 0.8%
Baker Hughes, Inc. 30,500 1,179,969
Dresser Industries, Inc. 36,700 1,367,075
Halliburton Co. 26,300 2,084,275
Helmerich & Payne, Inc. 5,300 305,413
McDermott International, Inc. 11,400 332,738
Rowan Companies, Inc. (a) 18,000 507,375
Schlumberger Ltd. 51,600 6,450,000
Western Atlas, Inc. (a) 11,300 827,725
13,054,570
OIL & GAS - 7.5%
Amerada Hess Corp. 19,400 1,077,913
Amoco Corp. 104,000 9,041,500
Ashland, Inc. 15,600 723,450
Atlantic Richfield Co. 67,600 4,765,800
Burlington Resources, Inc. 26,200 1,156,075
Chevron Corp. 136,600 10,099,863
Coastal Corp. (The) 22,100 1,175,444
Exxon Corp. 519,700 31,961,550
Kerr-McGee Corp. 10,200 646,425
Louisiana Land & Exploration Co. 7,200 411,300
Mobil Corp. 165,000 11,529,375
Occidental Petroleum Corp. 68,900 1,726,806
Oryx Energy Co. (a) 22,000 464,750
Pennzoil Co. 9,800 752,150
Phillips Petroleum Co. 55,000 2,406,250
Royal Dutch Petroleum Co. 448,400 24,381,750
Santa Fe Energy Resources, Inc. (a) 20,800 305,500
Sun Co., Inc. 15,200 471,200
Texaco, Inc. 55,400 6,024,750
SHARES VALUE (NOTE 1)
USX-Marathon Group 60,100 $ 1,735,388
Union Pacific Resources Group, Inc. 52,212 1,298,774
Unocal Corp. 52,488 2,037,191
114,193,204
TOTAL ENERGY 127,247,774
FINANCE - 14.3%
BANKS - 6.6%
Banc One Corp. 114,726 5,557,041
Bank of New York Co., Inc. 82,000 3,567,000
BankBoston Corp. 32,091 2,312,558
BankAmerica Corp. 150,000 9,684,375
Bankers Trust New York Corp. 17,200 1,496,400
Barnett Banks, Inc. 43,600 2,289,000
Chase Manhattan Corp. 91,773 8,907,717
Citicorp 96,862 11,677,925
Comerica, Inc. 22,400 1,523,200
CoreStates Financial Corp. 46,700 2,510,125
Fifth Third Bancorp 22,100 1,813,581
First Bank System, Inc. 28,200 2,407,575
First Union Corp. 59,781 5,529,743
KeyCorp 47,107 2,632,104
Mellon Bank Corp. 54,100 2,441,263
Morgan (J.P.) & Co., Inc. 38,700 4,039,313
National City Corp. 46,780 2,455,950
NationsBank Corp. 152,946 9,865,017
Norwest Corp. 77,600 4,365,000
PNC Financial Corp. 70,300 2,926,238
Republic New York Corp. 11,500 1,236,250
SunTrust Banks, Inc. 46,600 2,565,913
U.S. Bancorp 31,700 2,032,763
Wachovia Corp. 34,500 2,011,781
Wells Fargo & Co. 19,300 5,201,350
101,049,182
CREDIT & OTHER FINANCE - 1.5%
American Express Co. 99,079 7,381,386
Beneficial Corp. 11,400 810,113
Countrywide Credit Industries, Inc. 20,400 636,225
First Chicago NBD Corp. 66,659 4,032,870
Fleet Financial Group, Inc. 50,874 3,217,781
Green Tree Financial Corp. 28,700 1,022,438
Household International, Inc. 20,210 2,373,412
MBNA Corp. 70,000 2,563,750
Transamerica Corp. 13,929 1,303,232
23,341,207
FEDERAL SPONSORED CREDIT - 1.0%
Federal Home Loan
Mortgage Corporation 149,600 5,142,500
Federal National
Mortgage Association 228,600 9,972,675
15,115,175
INSURANCE - 4.2%
Aegon NV (Reg.) 7,906 553,914
Aetna, Inc. 31,500 3,224,813
Allstate Corp. 93,121 6,797,833
American General Corp. 50,552 2,413,858
American International Group, Inc. 98,175 14,664,891
Aon Corp. 34,050 1,762,088
CIGNA Corp. 15,800 2,804,500
Chubb Corp. (The) 36,500 2,440,938
Conseco, Inc. 40,000 1,480,000
General Re Corp. 17,300 3,148,600
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
INSURANCE - CONTINUED
Hartford Financial Services
Group, Inc. 24,500 $ 2,027,375
Jefferson Pilot Corp. 14,900 1,041,138
Lincoln National Corp. 21,900 1,409,813
Loews Corp. 24,000 2,403,000
MBIA, Inc. 2,800 315,875
MGIC Investment Corp. 24,600 1,179,263
Marsh & McLennan Companies, Inc. 30,200 2,155,525
Providian Financial Corp. (a) 19,700 632,863
SAFECO Corp. 26,300 1,227,881
St. Paul Companies, Inc. (The) 17,300 1,319,125
Torchmark Corp. 14,800 1,054,500
Travelers Group, Inc. (The) 133,800 8,437,763
UNUM Corp. 30,700 1,289,400
USF&G Corp. 24,300 583,200
64,368,156
SAVINGS & LOANS - 0.2%
Ahmanson (H.F.) & Co. 22,000 946,000
Golden West Financial Corp. 11,900 833,000
Great Western Financial Corp. 28,750 1,545,313
3,324,313
SECURITIES INDUSTRY - 0.8%
Merrill Lynch & Co., Inc. 69,000 4,114,125
Morgan Stanley Dean Witter Discover
and Co. 119,856 5,161,299
Salomon, Inc. 22,900 1,273,813
Schwab (Charles) Corp. 36,600 1,489,163
12,038,400
TOTAL FINANCE 219,236,433
HEALTH - 10.7%
DRUGS & PHARMACEUTICALS - 6.9%
ALZA Corp. Class A (a) 17,600 510,400
Allergan, Inc. 13,700 435,831
American Home Products Corp. 133,700 10,228,050
Amgen, Inc. 55,400 3,220,125
Bristol-Myers Squibb Co. 209,700 16,985,700
Lilly (Eli) & Co. 115,396 12,614,225
Merck & Co., Inc. 252,200 26,102,700
Pfizer, Inc. 135,000 16,132,500
Pharmacia & Upjohn, Inc. 106,260 3,692,535
Schering-Plough Corp. 154,700 7,406,263
Sigma Aldrich Corp. 21,000 736,313
Warner-Lambert Co. 56,700 7,044,975
105,109,617
MEDICAL EQUIPMENT & SUPPLIES - 3.0%
Abbott Laboratories 162,500 10,846,875
Bard (C.R.), Inc. 12,000 435,750
Bausch & Lomb, Inc. 11,700 551,363
Baxter International, Inc. 57,200 2,988,700
Becton, Dickinson & Co. 25,800 1,306,125
Biomet, Inc. 24,000 447,000
Boston Scientific Corp. (a) 40,500 2,488,219
Cardinal Health, Inc. 22,700 1,299,575
Guidant Corp. 15,600 1,326,000
Johnson & Johnson 278,800 17,947,750
Mallinckrodt, Inc. 15,400 585,200
Medtronic, Inc. 50,300 4,074,300
Millipore Corp. 9,000 396,000
SHARES VALUE (NOTE 1)
Pall Corp. 26,400 $ 613,800
St. Jude Medical, Inc. (a) 19,050 742,950
U.S. Surgical Corp. 14,600 543,850
46,593,457
MEDICAL FACILITIES MANAGEMENT - 0.8%
Beverly Enterprises, Inc. (a) 20,700 336,375
Columbia/HCA Healthcare Corp. 140,412 5,519,947
HEALTHSOUTH Rehabilitation Corp. (a) 66,000 1,645,875
Humana, Inc. (a) 34,100 788,563
Manor Care, Inc. 13,200 430,650
Tenet Healthcare Corp. (a) 63,100 1,865,394
United HealthCare Corp. 38,600 2,007,200
12,594,004
TOTAL HEALTH 164,297,078
HOLDING COMPANIES - 0.2%
CINergy Corp. 32,913 1,145,784
Norfolk Southern Corp. 26,100 2,629,575
3,775,359
INDUSTRIAL MACHINERY & EQUIPMENT - 5.6%
ELECTRICAL EQUIPMENT - 3.8%
Emerson Electric Co. 93,500 5,148,344
General Electric Co. 689,200 45,056,450
General Instrument Corp. (a) 28,600 715,000
General Signal Corp. 10,500 458,063
Grainger (W.W.), Inc. 11,200 875,700
Harris Corp. 8,100 680,400
Honeywell, Inc. 26,600 2,018,275
Scientific-Atlanta, Inc. 16,100 352,188
Westinghouse Electric Corp. 132,950 3,074,469
58,378,889
INDUSTRIAL MACHINERY & EQUIPMENT - 1.5%
Briggs & Stratton Corp. 5,400 270,000
Case Corp. 15,300 1,053,788
Caterpillar, Inc. 40,000 4,295,000
Cincinnati Milacron, Inc. 8,400 217,875
Cooper Industries, Inc. 24,646 1,226,139
Deere & Co. 53,500 2,935,813
Dover Corp. 23,600 1,451,400
Giddings & Lewis, Inc. 7,000 146,125
Harnischfeger Industries, Inc. 10,200 423,300
Illinois Tool Works, Inc. 51,900 2,591,756
Ingersoll-Rand Co. 23,000 1,420,250
Parker-Hannifin Corp. 15,650 949,759
Stanley Works 15,600 624,000
Tenneco, Inc. 35,800 1,617,713
Timken Co. 13,222 470,207
Tyco International Ltd. 34,800 2,420,775
22,113,900
POLLUTION CONTROL - 0.3%
Browning-Ferris Industries, Inc. 44,500 1,479,625
Safety Kleen Corp. 12,100 204,188
Waste Management, Inc. 94,900 3,048,663
4,732,476
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 85,225,265
MEDIA & LEISURE - 3.6%
BROADCASTING - 0.5%
TCI Group Class A (a) 138,900 2,066,138
Time Warner, Inc. 119,102 5,746,672
7,812,810
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - CONTINUED
ENTERTAINMENT - 0.9%
Disney (Walt) Co. 141,200 $ 11,331,300
King World Productions, Inc. 7,900 276,500
Viacom, Inc. Class B (non-vtg.) (a) 74,100 2,223,000
13,830,800
LEISURE DURABLES & TOYS - 0.2%
Brunswick Corp. 20,500 640,625
Hasbro, Inc. 27,150 770,381
Mattel, Inc. 60,376 2,045,237
3,456,243
LODGING & GAMING - 0.5%
HFS, Inc. (a) 32,900 1,908,200
Harrah's Entertainment, Inc. (a) 21,600 394,200
Hilton Hotels Corp. 51,800 1,375,938
ITT Corp. (a) 24,300 1,483,819
Marriott International, Inc. 26,700 1,638,713
6,800,870
PUBLISHING - 1.0%
American Greetings Corp. Class A 15,600 579,150
Cognizant Corp. 35,700 1,445,850
Dow Jones & Co., Inc. 20,300 815,806
Gannett Co., Inc. 29,400 2,903,250
Harcourt General, Inc. 14,800 704,850
Knight-Ridder, Inc. 19,700 966,531
McGraw-Hill, Inc. 20,900 1,229,181
Meredith Corp. 11,300 327,700
New York Times Co. (The) Class A 20,300 1,004,850
Times Mirror Co. Class A 19,500 1,077,375
Tribune Co. 25,700 1,235,206
U.S. West Media Group (a) 130,800 2,648,700
14,938,449
RESTAURANTS - 0.5%
Darden Restaurants, Inc. 33,400 302,688
McDonald's Corp. 146,100 7,058,456
Wendy's International, Inc. 27,000 700,313
8,061,457
TOTAL MEDIA & LEISURE 54,900,629
NONDURABLES - 10.8%
AGRICULTURE - 0.1%
Pioneer Hi-Bred International, Inc. 17,300 1,384,000
BEVERAGES - 3.7%
Anheuser-Busch Companies, Inc. 104,400 4,378,275
Brown-Forman Corp. Class B 14,500 707,781
Coca-Cola Co. (The) 520,800 35,154,000
Coors (Adolph) Co. Class B 8,000 213,000
PepsiCo, Inc. 325,200 12,215,325
Seagram Co. Ltd. 77,500 3,115,380
Whitman Corp. 21,800 551,813
56,335,574
FOODS - 2.3%
Archer-Daniels-Midland Co. 113,754 2,673,219
CPC International, Inc. 30,000 2,769,375
Campbell Soup Co. 97,700 4,885,000
ConAgra, Inc. 50,300 3,225,488
General Mills, Inc. 33,700 2,194,713
Heinz (H.J.) Co. 77,150 3,558,544
Hershey Foods Corp. 32,200 1,781,063
Kellogg Co. 44,200 3,784,625
Quaker Oats Co. 28,500 1,278,938
SHARES VALUE (NOTE 1)
Ralston Purina Co. 22,200 $ 1,824,563
Sara Lee Corp. 100,600 4,187,475
Sysco Corp. 36,900 1,346,850
Wrigley (Wm.) Jr. Co. 24,400 1,634,800
35,144,653
HOUSEHOLD PRODUCTS - 3.1%
Alberto Culver Co. Class B 11,600 324,800
Avon Products, Inc. 27,900 1,968,694
Clorox Co. 10,900 1,438,800
Colgate-Palmolive Co. 61,400 4,006,350
Gillette Co. 116,200 11,009,950
International Flavors & Fragrances, Inc. 23,000 1,161,500
Procter & Gamble Co. 142,100 20,071,625
Rubbermaid, Inc. 31,400 934,150
Unilever NV ADR 33,400 7,149,688
48,065,557
TOBACCO - 1.6%
Fortune Brands, Inc. 35,700 1,332,056
Philip Morris Companies, Inc. 511,400 22,693,375
UST, Inc. 38,900 1,079,475
25,104,906
TOTAL NONDURABLES 166,034,690
PRECIOUS METALS - 0.3%
Barrick Gold Corp. 74,800 1,628,030
Battle Mountain Gold Co. 47,100 267,881
Echo Bay Mines Ltd. 29,200 162,851
Homestake Mining Co. 30,600 399,713
Newmont Mining Corp. 32,565 1,270,035
Placer Dome, Inc. 50,200 814,457
4,542,967
RETAIL & WHOLESALE - 4.4%
APPAREL STORES - 0.3%
Charming Shoppes, Inc. (a) 22,000 114,813
Gap, Inc. 58,500 2,274,188
Limited, Inc. (The) 56,819 1,150,585
TJX Companies, Inc. 32,400 854,550
4,394,136
DRUG STORES - 0.4%
CVS Corp. 34,800 1,783,500
Long Drug Stores, Inc. 8,100 212,119
Rite Aid Corp. 25,700 1,281,788
Walgreen Co. 51,600 2,767,050
6,044,457
GENERAL MERCHANDISE STORES - 2.3%
Costco Companies, Inc. (a) 43,839 1,441,207
Dayton Hudson Corp. 45,300 2,409,394
Dillards, Inc. Class A 23,700 820,613
Federated Department Stores, Inc. (a) 43,600 1,515,100
K mart Corp. (a) 101,300 1,240,925
May Department Stores Co. (The) 51,200 2,419,200
Mercantile Stores Co., Inc. 7,800 490,913
Nordstrom, Inc. 16,700 819,344
Penney J C Co., Inc. 51,600 2,692,875
Sears, Roebuck & Co. 82,000 4,407,500
Wal-Mart Stores, Inc. 480,000 16,230,000
Woolworth Corp. (a) 28,100 674,400
35,161,471
GROCERY STORES - 0.5%
Albertson's, Inc. 52,600 1,919,900
American Stores Co. 30,600 1,510,875
Fleming Companies, Inc. 7,988 143,784
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
GROCERY STORES - CONTINUED
Giant Food, Inc. Class A 12,600 $ 407,925
Great Atlantic & Pacific Tea Co., Inc. 7,900 214,781
Kroger Co. (The) (a) 52,700 1,528,300
Supervalu, Inc. 14,100 486,450
Winn-Dixie Stores, Inc. 31,500 1,173,375
7,385,390
RETAIL & WHOLESALE, MISCELLANEOUS - 0.9%
Circuit City Stores, Inc. -
Circuit City Group 16,600 590,338
Comcast Corp. Class A special 68,250 1,458,844
Home Depot, Inc. (The) 100,600 6,935,113
IKON Office Solutions, Inc. 28,100 700,744
Lowe's Companies, Inc. 36,300 1,347,638
Tandy Corp. 12,100 677,600
Toys "R" Us, Inc. (a) 60,700 2,124,500
13,834,777
TOTAL RETAIL & WHOLESALE 66,820,231
SERVICES - 0.5%
ADVERTISING - 0.1%
Interpublic Group of Companies, Inc. 16,900 1,036,181
LEASING & RENTAL - 0.0%
Ryder Systems, Inc. 15,800 521,400
PRINTING - 0.1%
Deluxe Corp. 17,300 590,363
Donnelley (R.R.) & Sons Co. 31,500 1,153,688
Harland (John H.) Co. 6,400 146,000
Moore Corporation Ltd. 18,400 362,496
2,252,547
SERVICES - 0.3%
Block (H&R), Inc. 21,700 699,825
Dun & Bradstreet Corp. 35,700 937,125
Ecolab, Inc. 13,600 649,400
Jostens, Inc. 8,000 211,000
National Service Industries, Inc. 9,400 457,663
Service Corp. International 49,400 1,624,025
4,579,038
TOTAL SERVICES 8,389,166
TECHNOLOGY - 13.3%
COMMUNICATIONS EQUIPMENT - 2.0%
Andrew Corp. (a) 19,112 537,525
Cabletron Systems, Inc. (a) 32,700 925,819
Cisco Systems, Inc. (a) 137,500 9,229,688
DSC Communications Corp. (a) 24,600 547,350
Lucent Technologies, Inc. 133,484 9,619,191
Northern Telecom Ltd. 54,000 4,867,490
Tellabs, Inc. (a) 37,600 2,100,900
3Com Corp. (a) 66,800 3,006,000
30,833,963
COMPUTER SERVICES & SOFTWARE - 3.8%
Adobe Systems, Inc. 15,100 529,444
Autodesk, Inc. 9,900 379,294
Automatic Data Processing, Inc. 61,200 2,876,400
CUC International, Inc. (a) 83,075 2,144,373
Ceridian Corp. (a) 16,900 714,025
Computer Associates International, Inc. 76,075 4,236,427
Computer Sciences Corp. (a) 16,100 1,161,213
Equifax, Inc. 31,600 1,175,125
First Data Corp. 93,600 4,112,550
SHARES VALUE (NOTE 1)
Microsoft Corp. (a) 251,700 $ 31,808,588
Novell, Inc. (a) 72,500 502,969
Oracle Systems Corp. (a) 141,400 7,123,025
Parametric Technology Corp. (a) 26,600 1,132,163
Shared Medical Systems Corp. 5,000 270,000
58,165,596
COMPUTERS & OFFICE EQUIPMENT - 3.9%
Amdahl Corp. (a) 25,300 221,375
Apple Computer, Inc. (a) 26,000 370,500
Bay Networks, Inc. (a) 41,200 1,094,375
Compaq Computer Corp. (a) 56,600 5,617,550
Data General Corp. (a) 8,300 215,800
Dell Computer Corp. (a) 36,700 4,309,956
Digital Equipment Corp. (a) 33,000 1,169,438
EMC Corp. (a) 51,500 2,008,500
Hewlett-Packard Co. 212,300 11,888,800
Intergraph Corp. (a) 10,000 85,000
International Business Machines Corp. 216,700 19,543,631
Pitney Bowes, Inc. 31,000 2,154,500
Seagate Technology (a) 51,800 1,822,713
Silicon Graphics, Inc. (a) 37,000 555,000
Sun Microsystems, Inc. (a) 77,100 2,869,566
Tandem Computers, Inc. (a) 24,800 502,200
Unisys Corp. (a) 36,500 278,313
Xerox Corp. 68,000 5,363,500
60,070,717
ELECTRONIC INSTRUMENTS - 0.3%
Applied Materials, Inc. (a) 37,800 2,676,713
Perkin-Elmer Corp. 9,200 731,975
Tektronix, Inc. 7,000 420,000
Thermo Electron Corp. (a) 31,300 1,064,200
4,892,888
ELECTRONICS - 2.9%
AMP, Inc. 45,896 1,916,158
Advanced Micro Devices, Inc. (a) 28,500 1,026,000
Intel Corp. 171,800 24,363,388
LSI Logic Corp. (a) 29,300 937,600
Micron Technology, Inc. 43,900 1,753,256
Motorola, Inc. 124,000 9,424,000
National Semiconductor Corp. (a) 29,300 897,313
Texas Instruments, Inc. 39,900 3,354,094
Thomas & Betts Corp. 11,200 588,700
44,260,509
PHOTOGRAPHIC EQUIPMENT - 0.4%
Eastman Kodak Co. 69,800 5,357,150
Polaroid Corp. 9,600 532,800
5,889,950
TOTAL TECHNOLOGY 204,113,623
TRANSPORTATION - 1.1%
AIR TRANSPORTATION - 0.3%
AMR Corp. (a) 19,100 1,766,750
Delta Air Lines, Inc. 15,400 1,262,800
Southwest Airlines Co. 30,300 784,013
US Airways Group, Inc. (a) 16,400 574,000
4,387,563
RAILROADS - 0.6%
Burlington Northern Santa Fe Corp. 31,918 2,868,630
CSX Corp. 45,338 2,516,259
Union Pacific Corp. 51,300 3,616,650
9,001,539
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TRANSPORTATION - CONTINUED
TRUCKING & FREIGHT - 0.2%
Caliber System, Inc. 8,100 $ 301,725
Federal Express Corp. (a) 23,800 1,374,450
Laidlaw, Inc. Class B 65,800 907,898
2,584,073
TOTAL TRANSPORTATION 15,973,175
UTILITIES - 8.5%
CELLULAR - 0.2%
AirTouch Communications, Inc. (a) 105,000 2,874,375
ELECTRIC UTILITY - 2.2%
American Electric Power Co., Inc. 39,300 1,650,600
Baltimore Gas & Electric Co. 30,800 821,975
Carolina Power & Light Co. 31,600 1,133,650
Central & South West Corp. 44,200 939,250
Consolidated Edison Co. of
New York, Inc. 49,100 1,445,381
DTE Energy Co. 30,300 837,038
Dominion Resources, Inc. 37,800 1,384,425
Duke Power Co. 75,207 3,605,236
Edison International 90,600 2,253,675
Entergy Corp. 48,400 1,324,950
FPL Group, Inc. 38,200 1,759,588
GPU, Inc. 25,300 907,638
Houston Industries, Inc. 49,000 1,050,438
Niagara Mohawk Power Corp. (a) 30,300 259,444
Northern States Power Co. 14,400 745,200
Ohio Edison Co. 32,000 698,000
PECO Energy Co. 46,500 976,500
PG&E Corp. 86,200 2,090,350
PP&L Resources, Inc. 33,900 675,881
PacifiCorp. 61,600 1,355,200
Public Service Enterprise Group, Inc. 50,000 1,250,000
Southern Co. 140,900 3,082,188
Texas Utilities Co. 47,100 1,622,006
Unicom Corp. 45,200 1,005,700
Union Electric Co. 21,300 802,744
33,677,057
GAS - 0.6%
Columbia Gas System, Inc. (The) 11,500 750,375
Consolidated Natural Gas Co. 19,900 1,070,869
ENSERCH Corp. 14,500 322,625
Eastern Enterprises Co. 4,200 145,688
Enron Corp. 53,200 2,171,225
NICOR, Inc. 10,500 376,688
Noram Energy Corp. 28,679 437,355
ONEOK, Inc. 5,789 186,333
Pacific Enterprises 17,700 595,163
Peoples Energy Corp. 7,400 277,038
Sonat, Inc. 18,100 927,625
Williams Companies, Inc. 32,950 1,441,563
8,702,547
TELEPHONE SERVICES - 5.5%
ALLTEL Corp. 39,100 1,307,406
AT&T Corp. 339,000 11,886,188
Ameritech Corp. 114,900 7,806,019
Bell Atlantic Corp. 91,700 6,957,738
BellSouth Corp. 207,500 9,622,813
Frontier Corp. 34,300 683,856
GTE Corp. 201,200 8,827,650
MCI Communications Corp. 143,400 5,489,531
NYNEX Corp. 92,000 5,301,500
SHARES VALUE (NOTE 1)
SBC Communications, Inc. 191,824 $ 11,869,110
Sprint Corp. 90,000 4,736,250
U.S. West Communications Group 100,400 3,783,825
WorldCom, Inc. (a) 181,100 5,795,200
84,067,086
TOTAL UTILITIES 129,321,065
TOTAL COMMON STOCKS
(Cost $1,138,887,654) 1,424,476,773
U.S. TREASURY OBLIGATIONS - 0.3%
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
U.S. Treasury Bills, yields at dates
of purchase 5.11% to 5.28%,
8/07/97 to 1/08/98 (b)
(Cost $3,973,818) $ 4,050,000 3,973,818
CASH EQUIVALENTS - 6.7%
MATURITY VALUE
AMOUNT (NOTE 1)
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 5.93%, dated
6/30/97 due 7/1/97 $ 103,083,977 103,067,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $1,245,928,472) $ 1,531,517,591
FUTURES CONTRACTS
EXPIRATION UNDERLYING FACE UNREALIZED
DATE AMOUNT AT VALUE GAIN/(LOSS)
PURCHASED
239 S&P 500 Index Contracts Sept. 1997 $106,384,623 $(54,809)
THE FACE VALUE OF FUTURES PURCHASED AS A PERCENTAGE OF TOTAL INVESTMENTS -
6.9%
LEGEND
(a) Non-income producing
(b) Security was pledged to cover margin requirements for futures
contracts. At the period end, the value of securities pledged amounted to
$3,973,818.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $494,675,041 and $5,220,911, respectively.
The market value of futures contracts opened and closed during the period
amounted to $543,582,086 and $529,220,148 respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company. The
commissions paid to these affiliated firms were $63 for the period (see
Note 4 of Notes to Financial Statements).
INCOME TAX INFORMATION
At June 30, 1997 the aggregate cost of investment securities for income tax
purposes was $1,245,928,472. Net unrealized appreciation aggregated
$285,589,119, of which $300,312,750 related to appreciated investment
securities and $14,723,631 related to depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in $ 1,531,517,591
securities, at value
(including
repurchase
agreements of
$103,067,000) (cost
$1,245,928,472) -
See accompanying
schedule
Cash 105
Receivable for fund 5,931,316
shares sold
Dividends receivable 1,629,782
Other receivables 3,346
TOTAL ASSETS 1,539,082,140
LIABILITIES
Payable for $ 1,257,374
investments
purchased
Payable for fund 979,674
shares redeemed
Accrued management 188,667
fee
Payable for daily 792,556
variation on
futures contracts
Other payables and 172,255
accrued expenses
TOTAL LIABILITIES 3,390,526
NET ASSETS $ 1,535,691,614
Net Assets consist of:
Paid in capital $ 1,226,167,647
Undistributed net 10,647,945
investment income
Accumulated 13,341,727
undistributed net
realized gain (loss)
on investments and
foreign currency
transactions
Net unrealized 285,534,295
appreciation
(depreciation) on
investments
and assets and
liabilities in
foreign currencies
NET ASSETS, for $ 1,535,691,614
14,820,532
shares outstanding
NET ASSET VALUE, $103.62
offering price
and redemption
price per share
($1,535,691,614 (divided by)
14,820,532 shares)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $ 9,963,719
Dividends
Interest 2,280,379
TOTAL INCOME 12,244,098
EXPENSES
Management fee $ 1,607,543
Transfer agent fees 426,756
Accounting fees and 247,982
expenses
Non-interested 2,305
trustees'
compensation
Custodian fees and 25,316
expenses
Registration fees 8,223
Audit 26,892
Legal 1,004
Miscellaneous 13,097
Total expenses 2,359,118
before reductions
Expense reductions (771,246 1,587,872
)
NET INVESTMENT 10,656,226
INCOME
REALIZED AND
UNREALIZED GAIN
(LOSS)
Net realized gain
(loss) on:
Investment 1,026,442
securities
Foreign currency (17
transactions )
Futures contracts 11,550,416 12,576,841
Change in net
unrealized
appreciation
(depreciation) on:
Investment 190,817,156
securities
Assets and 25
liabilities in
foreign currencies
Futures contracts 810,769 191,627,950
NET GAIN (LOSS) 204,204,791
NET INCREASE $ 214,861,017
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
OTHER INFORMATION $ 23,179
Expense reductions
Directed
brokerage
arrangements
Custodian credits 629
FMR 747,438
reimbursement
$ 771,246
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) SIX MONTHS YEAR ENDED
IN NET ASSETS ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED)
Operations $ 10,656,226 $ 10,838,949
Net investment
income
Net realized gain 12,576,841 22,654,377
(loss)
Change in net 191,627,950 68,025,688
unrealized
appreciation
(depreciation)
NET INCREASE 214,861,017 101,519,014
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
Distributions to (10,847,444) (3,387,922
shareholders )
From net
investment income
From net realized (22,010,833) (8,711,800
gain )
TOTAL DISTRIBUTIONS (32,858,277) (12,099,722
)
Share transactions 621,256,178 568,794,744
Net proceeds from
sales of shares
Reinvestment of 32,858,277 12,099,722
distributions
Cost of shares (123,668,266) (92,770,768
redeemed )
NET INCREASE 530,446,189 488,123,698
(DECREASE) IN NET
ASSETS RESULTING
FROM SHARE
TRANSACTIONS
TOTAL INCREASE 712,448,929 577,542,990
(DECREASE) IN NET
ASSETS
NET ASSETS
Beginning of period 823,242,685 245,699,695
End of period $ 1,535,691,614 $ 823,242,685
(including
undistributed net
investment
income of
$10,647,945 and
$10,839,163,
respectively)
OTHER INFORMATION
Shares
Sold 6,545,398 6,984,700
Issued in 357,466 161,200
reinvestment of
distributions
Redeemed (1,326,621) (1,146,896
)
Net increase 5,576,243 5,999,004
(decrease)
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, AUGUST 27, 1992
JUNE 30, 1997 (COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31,
SELECTED PER-SHARE (UNAUDITED) 1996 1995 1994 1993 E 1992
DATA
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Net asset value, $ 89.05 $ 75.71 $ 56.22 $ 55.74 $ 52.60 $ 50.00
beginning of period
Income from
Investment
Operations
Net investment .87 D 1.04 .85 1.14 1.31 .44
income
Net realized and 16.82 15.55 19.72 (.56) 3.80 2.71
unrealized gain
(loss)
Total from 17.69 16.59 20.57 .58 5.11 3.15
investment
operations
Less Distributions
From net (1.03) (.91) (.95) - (1.28) (.47)
investment income
From net realized (2.09) (2.34) (.11) (.10) (.60) (.08)
gain
In excess of net - - (.02) - (.09) -
realized gain
Total distributions (3.12) (3.25) (1.08) (.10) (1.97) (.55)
Net asset value, end $ 103.62 $ 89.05 $ 75.71 $ 56.22 $ 55.74 $ 52.60
of period
TOTAL RETURN B, C 20.31% 22.71% 37.19% 1.04% 9.74% 6.31%
RATIOS AND
SUPPLEMENTAL
DATA
Net assets, end of $ 1,535,692 $ 823,243 $ 245,700 $ 51,301 $ 25,153 $ 17,961
period (000
omitted)
Ratio of expenses to .28% A, .28% F .28% F .28% F .28% F .28% A,
average net assets F F
Ratio of net 1.88% A 2.26% 2.70% 2.81% 2.65% 2.89% A
investment income
to average net
assets
Portfolio turnover rate 1% A 14% 16% 2% 9% 0%
Average commission $ .0322 $ .0315
rate G
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR
ARE NOT ANNUALIZED AND DO NOT REFLECT
CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT.
INCLUSION OF THESE CHARGES WOULD
REDUCE THE TOTAL RETURNS SHOWN. C THE TOTAL RETURNS WOULD HAVE BEEN
LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS). D NET INVESTMENT
INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES
OUTSTANDING DURING THE
PERIOD. E EFFECTIVE JANUARY 1, 1993, THE FUND ADOPTED STATEMENT OF
POSITION 93-2, "DETERMINATION,
DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF INCOME, CAPITAL
GAIN, AND RETURN OF CAPITAL
DISTRIBUTIONS BY INVESTMENT COMPANIES." AS A RESULT, NET INVESTMENT
INCOME PER SHARE MAY REFLECT CERTAIN
RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES. F FMR AGREED TO
REIMBURSE A PORTION OF THE FUND'S
EXPENSES DURING THE PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S
EXPENSE RATIO WOULD HAVE BEEN HIGHER
(SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). G FOR FISCAL YEARS
BEGINNING ON OR AFTER SEPTEMBER 1, 1995,
A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE
FOR SECURITY TRADES ON WHICH
COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD
AND FUND TO FUND DEPENDING ON THE
MIX OF TRADES EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES
AND COMMISSION RATE STRUCTURES MAY
DIFFER.
</TABLE>
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can
look at the total percentage change in value, the average annual percentage
change or the growth of a hypothetical $10,000 investment. Total return
reflects the change in the value of an investment, assuming reinvestment of
the fund's dividend income and capital gains (the profits earned upon the
sale of securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JUNE 30, 1997 PAST 1 LIFE OF
YEAR FUND
GROWTH OPPORTUNITIES 29.02% 26.86%
S&P 500(registered trademark) 34.70% 33.11%
AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had achieved that return by performing
at a constant rate each year.
You can compare the fund's returns to the performance of the Standard &
Poor's 500 Index - a widely recognized, unmanaged index of common stocks.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of long-term growth and short-term
volatility. In turn, the share price and return of a
fund that invests in stocks will vary. That means if
you sell your shares during a market downturn,
you might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of return
and are not the fund's year-by-year results, which fluctuated over the
periods shown. The life of fund figures are from commencement of operations
January 3, 1995.
If Fidelity had not reimbursed certain fund expenses, the life of fund
total return would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL
CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
1987/06/30 10000.00 10000.00
1987/07/31 10400.00 10507.00
1987/08/31 10710.20 10898.91
1987/09/30 10587.76 10660.22
1987/10/31 8261.22 8364.01
1987/11/30 7681.63 7674.82
1987/12/31 8473.47 8258.87
1988/01/31 8657.31 8606.57
1988/02/29 9359.26 9007.64
1988/03/31 9275.69 8729.30
1988/04/30 9392.68 8826.20
1988/05/31 9309.12 8902.98
1988/06/30 9777.08 9311.63
1988/07/31 9726.94 9276.25
1988/08/31 9492.96 8960.85
1988/09/30 9760.37 9342.59
1988/10/31 9785.44 9602.31
1988/11/30 9693.52 9465.00
1988/12/31 9793.79 9630.63
1989/01/31 10495.74 10335.60
1989/02/28 10278.47 10078.24
1989/03/31 10589.20 10313.06
1989/04/30 11149.21 10848.31
1989/05/31 11548.00 11287.67
1989/06/30 11395.27 11223.33
1989/07/31 12413.46 12236.79
1989/08/31 12625.58 12476.64
1989/09/30 12735.89 12425.48
1989/10/31 12379.52 12137.21
1989/11/30 12583.16 12384.81
1989/12/31 12880.13 12682.05
1990/01/31 12133.46 11831.08
1990/02/28 12249.36 11983.70
1990/03/31 12399.06 12301.27
1990/04/30 12038.01 11993.74
1990/05/31 13103.55 13163.13
1990/06/30 13376.54 13073.62
1990/07/31 13165.20 13031.78
1990/08/31 11809.05 11853.71
1990/09/30 10593.80 11276.43
1990/10/31 10215.14 11227.94
1990/11/30 11042.91 11953.27
1990/12/31 11368.74 12286.77
1991/01/31 12126.07 12822.47
1991/02/28 13030.73 13739.28
1991/03/31 13423.97 14071.77
1991/04/30 13298.85 14105.54
1991/05/31 14085.34 14714.90
1991/06/30 13039.67 14040.96
1991/07/31 14281.96 14695.26
1991/08/31 14916.52 15043.54
1991/09/30 15032.71 14792.31
1991/10/31 15497.45 14990.53
1991/11/30 14612.65 14386.41
1991/12/31 16543.13 16032.22
1992/01/31 17553.05 15734.02
1992/02/29 17920.26 15938.56
1992/03/31 16821.98 15627.76
1992/04/30 16163.01 16087.22
1992/05/31 16025.73 16166.04
1992/06/30 15403.37 15925.17
1992/07/31 15998.27 16576.51
1992/08/31 15558.96 16236.69
1992/09/30 15833.53 16428.28
1992/10/31 16446.73 16485.78
1992/11/30 17545.01 17047.95
1992/12/31 18085.00 17257.64
1993/01/31 18441.94 17402.60
1993/02/28 18061.76 17639.28
1993/03/31 18781.98 18011.46
1993/04/30 18585.56 17575.59
1993/05/31 19969.89 18046.61
1993/06/30 20175.67 18098.95
1993/07/31 20119.55 18026.55
1993/08/31 21129.73 18709.76
1993/09/30 21522.58 18565.69
1993/10/31 21728.36 18950.00
1993/11/30 20849.13 18769.98
1993/12/31 21588.06 18997.10
1994/01/31 22130.57 19643.00
1994/02/28 21902.31 19110.67
1994/03/31 20907.20 18277.45
1994/04/30 21036.57 18511.40
1994/05/31 20548.96 18814.98
1994/06/30 19504.10 18354.02
1994/07/31 20180.77 18956.03
1994/08/31 21325.15 19733.23
1994/09/30 21066.42 19249.76
1994/10/31 21922.21 19682.88
1994/11/30 21046.52 18966.03
1994/12/31 21583.88 19247.30
1995/01/31 21175.88 19746.38
1995/02/28 22052.83 20515.90
1995/03/31 22853.30 21121.32
1995/04/30 23623.75 21743.34
1995/05/31 24544.28 22612.42
1995/06/30 26715.55 23137.71
1995/07/31 29357.09 23904.96
1995/08/31 29717.30 23964.96
1995/09/30 30487.74 24976.28
1995/10/31 30177.56 24887.12
1995/11/30 30157.55 25979.66
1995/12/31 29217.00 26480.03
1996/01/31 29677.27 27381.41
1996/02/29 30672.28 27635.23
1996/03/31 30790.66 27901.36
1996/04/30 31996.03 28312.63
1996/05/31 32996.92 29042.81
1996/06/30 32351.18 29153.46
1996/07/31 29875.88 27865.46
1996/08/31 30769.14 28453.15
1996/09/30 32835.48 30054.49
1996/10/31 32760.15 30883.39
1996/11/30 34578.96 33217.87
1996/12/31 33513.50 32559.82
1997/01/31 35439.94 34594.16
1997/02/28 34634.29 34865.38
1997/03/31 32693.44 33432.76
1997/04/30 34266.20 35428.69
1997/05/31 36642.08 37585.59
1997/06/30 38147.92 39269.43
Let's say hypothetically that $10,000 was invested in Growth Opportunities
Portfolio on January 3, 1995, when the fund started. As the chart shows, by
June 30, 1997, the value of the investment would have grown to $18,095 - a
80.95% increase on the initial investment. For comparison, look at how the
S&P 500 did over the same period. With dividends and capital gains, if any,
reinvested, the same $10,000 investment would have grown to $20,400 - a
104.00% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Philip Morris Companies, Inc. 5.9
Federal National Mortgage Association 4.6
Federal Home Loan Mortgage Corporation 2.9
International Business Machines Corp. 2.4
General Motors Corp. 2.4
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Finance 16.5
Technology 13.8
Retail & Wholesale 7.1
Nondurables 7.0
Energy 6.8
ASSET ALLOCATION AS OF JUNE 30, 1997*
Row: 1, Col: 1, Value: 6.0
Row: 1, Col: 2, Value: 12.0
Row: 1, Col: 3, Value: 82.0
Stocks 82.0%
Bonds 12.0%
Short-term investments 6.0%
FOREIGN INVESTMENTS 8.0%
*
% OF FUND'S
INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with George Vanderheiden, Portfolio Manager of Growth
Opportunities Portfolio
Q. HOW DID THE FUND PERFORM, GEORGE?
A. For the six- and 12-month periods that ended June 30, 1997, the fund
underperformed the Standard & Poor's 500 Index, which rose 20.61% for the
six-month period and 34.70% for the 12-month period.
Q. WHY DID THE FUND'S RETURN TRAIL THE S&P 500 DURING THE PERIOD?
A. Much of the fund's underperformance relative to the S&P 500 can be
traced to asset allocation. Over the six-month period, the fund had an
average of 13% of assets in Treasury bonds and 4% of assets in cash. This
total of 17% of assets appreciated only about 1% during the period.
Conversely, the other 83% in stocks was up about 18%, close to the S&P 500
gain.
Q. THE ECONOMY STRENGTHENED IN THE FIRST HALF OF 1997 AND YOU STILL OWNED
BONDS. WHY?
A. Bonds were purchased originally as a short-term tactical move to hedge
against slowing corporate earnings growth in 1996. Earnings growth did slow
as I expected in 1996, but the stock market did not correct as it has done
in the past. However, with Treasury bond yields at 3.5-times the yield on
the S&P 500, I considered bonds a good safety cushion in an expensive
market.
Q. WHAT IS YOUR POSITION ON TOBACCO STOCKS?
A. I own the tobacco stocks because they operate a profitable business that
historically has offered above-average returns to shareholders over the
long term. In the past, the stocks have provided better-than-average
earnings growth, lower-than-average price-to-earnings ratios and high
yields. Nothing this year has changed that. We have determined that the
tobacco stocks are selling at a "litigation discount" far in excess of any
reasonable estimate of potential liabilities. The cost of the proposed
settlement is high, but should be completely passed along to consumers.
Q. WHY ARE STOCK VALUATIONS SO HIGH AND DO YOU THINK THEY WILL STAY
INFLATED?
A. We had a near perfect investing environment during the period -
experiencing growth without inflation. Accelerating inflation is usually a
killer of all bond and equity bull markets, but inflation just keeps
receding as the economic expansion continues. During the worst bear market
I ever encountered - the 1973-1974 bear that took prices down about 50% -
everything that could go wrong did go wrong. Today is an environment where
everything that could go right has gone right - from a declining budget
deficit, to falling inflation, to surging earnings, to big flows into
mutual funds and rising consumer confidence. If any of these factors change
for the worse, valuations will deflate. My biggest concern going forward is
that the low level of inflation and pricing power in a strong economy will
deteriorate to deflation in a slowing or contracting economy, thereby
leading to sizable earnings declines.
Q. HOW DID YOU MANAGE IN A LOW-INFLATION ENVIRONMENT?
A. I concentrated on four areas during the period. First, I looked at
innovators and unit growers because these companies use unit growth to grow
earnings and don't need price increases. Technology, health care and
telecommunications companies fall within these areas. Second were the
interest-sensitive sectors that benefited from low interest rates,
including mortgage companies, insurance, finance and construction. Third
were global growers - companies with proprietary advantages such as low
costs or unique distribution channels and strong brands - which are seizing
market share on a global basis. Fourth were the acquisitive companies in
consolidating industries. Certain industries have stopped growing, but
certain companies have been able to show great earnings growth by acquiring
market share and paring costs.
Q. WHAT'S YOUR OUTLOOK?
A. With the market continuing to advance sharply over the past six months
and Fed policy becoming restrictive in the spring, the investing climate
has become more precarious. Investors with short-term orientations should
be prepared for some downside risk. Risks to the market include rising
inflation and/or falling earnings. However, whatever the shorter term
holds, remember that since 1945 the stock market has risen 70% of the time,
so chances are if one year is down, the next two could very well be up.
FUND FACTS
GOAL: to provide capital growth by investing
primarily in common stocks and securities
convertible into common stocks
START DATE: January 3, 1995
SIZE: as of June 30, 1997, more than
$706 million
MANAGER: George Vanderheiden, since
inception; joined Fidelity in 1971
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 82.0%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 1.7%
AEROSPACE & DEFENSE - 1.2%
Boeing Co. 151,700 $ 8,049,408
Gulfstream Aerospace Corp. (a) 10,700 315,650
8,365,058
DEFENSE ELECTRONICS - 0.4%
Raytheon Co. 62,800 3,202,800
SHIP BUILDING & REPAIR - 0.1%
Avondale Industries, Inc. (a) 5,300 111,300
Newport News Shipbuilding, Inc. 15,200 295,450
406,750
TOTAL AEROSPACE & DEFENSE 11,974,608
BASIC INDUSTRIES - 4.6%
CHEMICALS & PLASTICS - 3.0%
Air Products & Chemicals, Inc. 18,200 1,478,750
du Pont (E.I.) de Nemours & Co. 201,700 12,681,888
Raychem Corp. 59,200 4,403,000
Union Carbide Corp. 55,700 2,621,381
21,185,019
PACKAGING & CONTAINERS - 0.8%
Owens-Illinois, Inc. (a) 176,700 5,477,700
PAPER & FOREST PRODUCTS - 0.8%
Boise Cascade Corp. 36,000 1,271,250
Champion International Corp. 53,800 2,972,450
International Paper Co. 21,400 1,039,238
Willamette Industries, Inc. 7,200 504,000
5,786,938
TOTAL BASIC INDUSTRIES 32,449,657
CONSTRUCTION & REAL ESTATE - 1.0%
CONSTRUCTION - 0.7%
Centex Corp. 22,000 893,750
D.R. Horton, Inc. 48,636 504,599
Fleetwood Enterprises, Inc. 90,562 2,699,880
Kaufman & Broad Home Corp. 44,900 788,556
U.S. Home Corp. (a) 4,800 127,500
5,014,285
ENGINEERING - 0.3%
Fluor Corp. 35,100 1,937,081
TOTAL CONSTRUCTION & REAL ESTATE 6,951,366
DURABLES - 4.5%
AUTOS, TIRES, & ACCESSORIES - 3.8%
Circuit City Stores, Inc. - CarMax Group 4,200 60,113
Cummins Engine Co., Inc. 36,300 2,561,419
Dana Corp. 13,600 516,800
Discount Auto Parts, Inc. (a) 29,400 573,300
Federal-Mogul Corp. 13,300 465,500
General Motors Corp. 309,600 17,240,850
Gentex Corp. (a) 13,100 258,725
Goodyear Tire & Rubber Co. 14,700 930,694
Honda Motor Co. Ltd. 24,000 722,229
Magna International, Inc. Class A 39,300 2,362,583
Superior Industries International, Inc. 59,600 1,579,400
27,271,613
CONSUMER ELECTRONICS - 0.2%
Newell Co. 29,500 1,168,938
SHARES VALUE (NOTE 1)
TEXTILES & APPAREL - 0.5%
Burlington Industries, Inc. (a) 75,100 $ 901,200
Liz Claiborne, Inc. 19,800 923,175
NIKE, Inc. Class B 28,300 1,652,013
Reebok International Ltd. 4,400 205,700
3,682,088
TOTAL DURABLES 32,122,639
ENERGY - 6.8%
ENERGY SERVICES - 0.3%
McDermott International, Inc. 69,800 2,037,288
OIL & GAS - 6.5%
Amerada Hess Corp. 29,200 1,622,425
Anadarko Petroleum Corp. 3,200 192,000
Atlantic Richfield Co. 54,600 3,849,300
British Petroleum PLC ADR 94,528 7,077,784
Burlington Resources, Inc. 74,400 3,282,900
Canada Occidental Petroleum Ltd. 1,300 29,189
Chevron Corp. 4,300 317,931
Elf Aquitaine SA sponsored ADR 14,700 800,231
Enron Oil & Gas Co. 9,400 170,375
Kerr-McGee Corp. 14,200 899,925
Louisiana Land & Exploration Co. 58,500 3,341,813
Mobil Corp. 8,600 600,925
Noble Affiliates, Inc. 5,600 216,650
Occidental Petroleum Corp. 125,900 3,155,369
Royal Dutch Petroleum Co. 239,600 13,028,250
Santa Fe Energy Resources, Inc. (a) 43,500 638,906
Sun Co., Inc. 18,800 582,800
Tosco Corp. 137,700 4,122,394
Total SA:
Class B 3,853 389,218
sponsored ADR 28,368 1,436,130
Union Pacific Resources Group, Inc. 9,700 241,288
45,995,803
TOTAL ENERGY 48,033,091
FINANCE - 16.5%
BANKS - 0.5%
Credit Suisse Group (Reg.) 15,100 1,937,222
NationsBank Corp. 21,400 1,380,300
3,317,522
CREDIT & OTHER FINANCE - 2.1%
Fleet Financial Group, Inc. 235,282 14,881,587
FEDERAL SPONSORED CREDIT - 7.4%
Federal Home Loan Mortgage
Corporation 593,300 20,394,688
Federal National Mortgage Association 741,700 32,356,663
52,751,351
INSURANCE - 6.0%
AFLAC, Inc. 23,650 1,117,463
Aegon NV (Reg.) 23,341 1,635,329
Allmerica Financial Corp. 23,400 933,075
Allstate Corp. 167,859 12,253,707
American International Group, Inc. 64,800 9,679,500
CIGNA Corp. 9,900 1,757,250
Equitable of Iowa Companies 3,700 207,200
General Re Corp. 16,100 2,930,200
Loews Corp. 10,600 1,061,325
MGIC Investment Corp. 75,000 3,595,313
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
INSURANCE - CONTINUED
Nationwide Financial Services, Inc.
Class A 3,500 $ 92,969
PMI Group, Inc. 26,700 1,665,413
Provident Companies, Inc. 2,400 128,400
Providian Financial Corp. (a) 57,700 1,853,613
Reliastar Financial Corp. 10,700 782,438
Torchmark Corp. 34,800 2,479,500
Travelers Property Casualty Corp.
Class A 8,400 334,950
UNUM Corp. 6,200 260,400
42,768,045
SAVINGS & LOANS - 0.3%
Golden West Financial Corp. 32,100 2,247,000
SECURITIES INDUSTRY - 0.2%
United Asset Management Corp. 51,800 1,466,588
TOTAL FINANCE 117,432,093
HEALTH - 6.5%
DRUGS & PHARMACEUTICALS - 2.4%
American Home Products Corp. 2,600 198,900
Amgen, Inc. 50,400 2,929,500
Astra AB Class A Free shares 247,566 4,617,213
Merck & Co., Inc. 12,600 1,304,100
Novartis AG (Reg.) 2,300 3,673,076
Schering-Plough Corp. 82,900 3,968,838
16,691,627
MEDICAL EQUIPMENT & SUPPLIES - 0.8%
Allegiance Corp. 4,880 132,980
Bard (C.R.), Inc. 24,200 878,763
Baxter International, Inc. 10,300 538,175
Biomet, Inc. 57,500 1,070,938
Boston Scientific Corp. (a) 2,900 178,169
Johnson & Johnson 6,600 424,875
St. Jude Medical, Inc. (a) 66,500 2,593,500
5,817,400
MEDICAL FACILITIES MANAGEMENT - 3.3%
Columbia/HCA Healthcare Corp. 411,550 16,179,059
Health Management Associates, Inc.
Class A (a) 2,900 82,650
Humana, Inc. (a) 113,700 2,629,313
Tenet Healthcare Corp. (a) 77,600 2,294,050
United HealthCare Corp. 48,400 2,516,800
23,701,872
TOTAL HEALTH 46,210,899
HOLDING COMPANIES - 0.2%
U.S. Industries, Inc. (a) 38,800 1,382,250
INDUSTRIAL MACHINERY & EQUIPMENT - 1.7%
ELECTRICAL EQUIPMENT - 1.0%
Emerson Electric Co. 14,500 798,406
General Electric Co. 65,600 4,288,600
Scientific-Atlanta, Inc. 33,100 724,063
Sensormatic Electronics Corp. 11,000 141,625
Westinghouse Electric Corp. 50,300 1,163,188
7,115,882
INDUSTRIAL MACHINERY & EQUIPMENT - 0.5%
Caterpillar, Inc. 29,000 3,113,875
JLK Direct Distribution, Inc. Class A 200 5,125
Ultratech Stepper, Inc. (a) 34,400 786,900
3,905,900
SHARES VALUE (NOTE 1)
POLLUTION CONTROL - 0.2%
Browning-Ferris Industries, Inc. 35,700 $ 1,187,025
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 12,208,807
MEDIA & LEISURE - 2.7%
BROADCASTING - 0.1%
Cox Communications, Inc. Class A (a) 8,600 206,400
HSN, Inc. (a) 6,440 201,250
TCI Group Class A (a) 29,100 432,863
840,513
ENTERTAINMENT - 0.3%
Cedar Fair LP (depositary unit) 2,500 109,375
Royal Carribean Cruises Ltd. 50,100 1,750,369
1,859,744
LEISURE DURABLES & TOYS - 0.6%
Nintendo Co. Ltd. Ord. 49,100 4,111,474
LODGING & GAMING - 0.9%
Circus Circus Enterprises, Inc. (a) 78,100 1,923,213
HFS, Inc. (a) 13,700 794,600
Harrah's Entertainment, Inc. (a) 36,300 662,475
Mirage Resorts, Inc. (a) 80,300 2,027,575
Sun International Hotels Ltd. Ord. (a) 33,200 1,226,325
6,634,188
PUBLISHING - 0.1%
Cognizant Corp. 21,600 874,800
RESTAURANTS - 0.7%
Brinker International, Inc. (a) 26,200 373,350
Lone Star Steakhouse Saloon (a) 19,300 501,800
McDonald's Corp. 81,800 3,951,963
Papa John's International, Inc. (a) 7,200 264,600
5,091,713
TOTAL MEDIA & LEISURE 19,412,432
NONDURABLES - 7.0%
HOUSEHOLD PRODUCTS - 0.0%
Premark International, Inc. 8,900 238,075
TOBACCO - 7.0%
Philip Morris Companies, Inc. 939,000 41,668,125
RJR Nabisco Holdings Corp. 226,260 7,466,580
UST, Inc. 10,100 280,275
49,414,980
TOTAL NONDURABLES 49,653,055
PRECIOUS METALS - 0.1%
Barrick Gold Corp. 8,300 180,650
Newmont Mining Corp. 7,269 283,491
464,141
RETAIL & WHOLESALE - 7.1%
APPAREL STORES - 0.4%
Gap, Inc. 19,700 765,838
TJX Companies, Inc. 66,800 1,761,850
2,527,688
DRUG STORES - 0.0%
CVS Corp. 6,800 348,500
GENERAL MERCHANDISE STORES - 2.3%
Federated Department Stores, Inc. (a) 56,200 1,952,950
Proffitts, Inc. (a) 1,900 83,363
Wal-Mart Stores, Inc. 420,300 14,211,394
16,247,707
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
GROCERY STORES - 0.3%
Safeway, Inc. (a) 45,500 $ 2,098,688
RETAIL & WHOLESALE, MISCELLANEOUS - 4.1%
Circuit City Stores, Inc. -
Circuit City Group 91,900 3,268,194
Corporate Express, Inc. 37,900 547,181
Home Depot, Inc. (The) 178,600 12,312,238
Lowe's Companies, Inc. 147,400 5,472,225
Officemax, Inc. (a) 104,075 1,502,583
Office Depot, Inc. (a) 16,200 314,888
Rex Stores Corp. (a) 12,700 128,588
Staples, Inc. (a) 43,500 1,011,375
Toys "R" Us, Inc. (a) 87,100 3,048,500
U.S. Office Products Co. (a) 28,800 880,200
Viking Office Products, Inc. (a) 43,400 824,600
29,310,572
TOTAL RETAIL & WHOLESALE 50,533,155
SERVICES - 0.1%
ADVERTISING - 0.1%
Interpublic Group of Companies, Inc. 4,700 288,169
LEASING & RENTAL - 0.0%
Hanover Compressor Co. 600 11,700
PRINTING - 0.0%
Donnelley (R.R.) & Sons Co. 1,100 40,439
SERVICES - 0.0%
PEAPOD, Inc. 2,000 22,500
TOTAL SERVICES 362,808
TECHNOLOGY - 13.8%
COMMUNICATIONS EQUIPMENT - 0.8%
Alcatel Alsthom Compagnie Generale
d'Electricite SA sponsored ADR 3,800 95,950
Alcatel Alsthom Compagnie Generale
d'Electricite SA 31,000 3,880,140
Andrew Corp. (a) 11,300 317,813
Cisco Systems, Inc. (a) 15,800 1,060,575
Nokia Corp. AB sponsored ADR 6,700 494,125
5,848,603
COMPUTER SERVICES & SOFTWARE - 2.7%
American Management Systems, Inc. (a) 5,100 136,425
Automatic Data Processing, Inc. 47,700 2,241,900
CUC International, Inc. (a) 33,200 856,975
Ceridian Corp. (a) 30,600 1,292,850
CompUSA, Inc. (a) 20,300 436,450
Electronic Data Systems Corp. 83,400 3,419,400
First Data Corp. 62,200 2,732,913
Microsoft Corp. (a) 22,400 2,830,800
Netscape Communications Corp. (a) 5,500 176,344
Oracle Systems Corp. (a) 38,750 1,952,031
Paychex, Inc. 30,200 1,147,600
Policy Management Systems Corp. (a) 40,200 1,889,400
19,113,088
COMPUTERS & OFFICE EQUIPMENT - 4.5%
Bay Networks, Inc. (a) 48,000 1,275,000
Compaq Computer Corp. (a) 74,600 7,404,050
Hewlett-Packard Co. 32,700 1,831,200
Ingram Micro, Inc. Class A (a) 6,600 159,225
International Business Machines Corp. 191,700 17,288,944
SCI Systems, Inc. (a) 44,000 2,805,000
Tech Data Corp. (a) 39,300 1,235,494
31,998,913
SHARES VALUE (NOTE 1)
ELECTRONIC INSTRUMENTS - 1.3%
Applied Materials, Inc. (a) 27,000 $ 1,911,938
Cognex Corp. (a) 16,500 437,250
KLA Instruments Corp. (a) 5,900 287,625
Lam Research Corp. (a) 35,000 1,297,188
Novellus Systems, Inc. (a) 22,100 1,911,650
Teradyne, Inc. (a) 30,700 1,204,975
Thermo Electron Corp. (a) 34,500 1,173,000
Varian Associates, Inc. 19,800 1,074,150
9,297,776
ELECTRONICS - 4.5%
AMP, Inc. 109,100 4,554,925
Atmel Corp. (a) 7,000 196,000
Intel Corp. 57,900 8,210,944
Methode Electronics, Inc. Class A 114,100 2,267,738
Microchip Technology, Inc. (a) 6,250 185,938
Micron Technology, Inc. 128,600 5,135,963
Molex, Inc. 20,243 705,975
Motorola, Inc. 4,200 319,200
Solectron Corp. (a) 103,500 7,245,000
Storage Technology Corp. (a) 16,000 712,000
Texas Instruments, Inc. 25,700 2,160,406
Thomas & Betts Corp. 1,200 63,075
31,757,164
TOTAL TECHNOLOGY 98,015,544
TRANSPORTATION - 0.9%
AIR TRANSPORTATION - 0.1%
Continental Airlines, Inc. Class B (a) 7,400 258,538
Delta Air Lines, Inc. 5,200 426,400
Northwest Airlines Corp. Class A (a) 12,600 458,325
1,143,263
RAILROADS - 0.6%
Bombardier, Inc. Class B 28,400 643,842
Burlington Northern Santa Fe Corp. 13,000 1,168,375
CSX Corp. 40,300 2,236,650
4,048,867
SHIPPING - 0.1%
Stolt-Nielsen SA Class B sponsored ADR 29,400 569,625
Stolt-Nielsen SA 4,300 81,163
650,788
TRUCKING & FREIGHT - 0.1%
Roadway Express, Inc. 6,200 144,925
Yellow Corp. (a) 26,200 586,225
731,150
TOTAL TRANSPORTATION 6,574,068
UTILITIES - 6.8%
CELLULAR - 1.7%
AirTouch Communications, Inc. (a) 174,200 4,768,725
360 Degrees Communications Co. (a) 8,706 149,090
Vodafone Group PLC sponsored ADR 142,380 6,896,531
Vodafone Group PLC 24,023 117,174
11,931,520
ELECTRIC UTILITY - 0.3%
American Electric Power Co., Inc. 14,600 613,200
Entergy Corp. 44,200 1,209,975
1,823,175
GAS - 0.1%
Enron Corp. 19,600 799,925
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - CONTINUED
TELEPHONE SERVICES - 4.7%
AT&T Corp. 52,600 $ 1,844,288
Ameritech Corp. 46,700 3,172,681
Bell Atlantic Corp. 34,600 2,625,275
BellSouth Corp. 81,200 3,765,650
Deutsche Telekom AG 19,600 470,602
MCI Communications Corp. 163,500 6,258,984
NYNEX Corp. 68,100 3,924,263
Qwest Communications
International, Inc. 1,200 32,700
SBC Communications, Inc. 66,500 4,114,688
Sprint Corp. 125,700 6,614,963
WorldCom, Inc. (a) 17,700 566,400
33,390,494
TOTAL UTILITIES 47,945,114
TOTAL COMMON STOCKS
(Cost $476,697,141) 581,725,727
U.S. TREASURY OBLIGATIONS - 12.0%
PRINCIPAL
AMOUNT
8 1/8%, 8/15/19 $ 21,640,000 24,686,479
7 5/8%, 11/15/22 2,000,000 2,178,440
6 1/4%, 8/15/23 45,953,000 42,542,368
stripped principal:
0%, 2/15/19 43,750,000 9,819,688
0%, 8/15/19 10,000,000 2,170,600
0%, 8/15/20 20,000,000 4,047,200
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $85,961,758) 85,444,775
CASH EQUIVALENTS - 6.0%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 5.93%, dated
6/30/97 due 7/1/97 $ 42,594,015 42,587,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $605,245,899) $ 709,757,502
LEGEND
1. Non-income producing
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $298,528,669 and $68,291,517, respectively, of which U.S.
government and government agency obligations aggregated $33,871,823 and
$6,563,299, respectively.
The market value of futures contracts opened and closed during the period
amounted to $9,619,242 and $9,579,433, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research. The
commissions paid to these affiliated firms were $45,612 for the period.
(see Note 4 of Notes to Financial Statements)
INCOME TAX INFORMATION
At June 30, 1997, the aggregate cost of investment securities for income
tax purposes was $605,271,604. Net unrealized appreciation aggregated
$104,485,898, of which $110,709,066 related to appreciated investment
securities and $6,223,168 related to depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in $ 709,757,502
securities, at
value (including
repurchase
agreements of
$42,587,000)
(cost $605,245,899)
- - See
accompanying
schedule
Cash 808
Receivable for 491,197
investments sold
Receivable for fund 2,101,658
shares sold
Dividends receivable 1,086,338
Interest receivable 1,745,837
TOTAL ASSETS 715,183,340
LIABILITIES
Payable for $ 8,490,520
investments
purchased
Payable for fund 152
shares redeemed
Accrued management 337,600
fee
Other payables and 106,664
accrued expenses
TOTAL LIABILITIES 8,934,936
NET ASSETS $ 706,248,404
Net Assets consist of:
Paid in capital $ 582,572,383
Undistributed net 4,997,998
investment income
Accumulated 14,166,109
undistributed net
realized gain (loss)
on investments and
foreign currency
transactions
Net unrealized 104,511,914
appreciation
(depreciation) on
investments
and assets and
liabilities in
foreign currencies
NET ASSETS, for $ 706,248,404
41,242,299
shares outstanding
NET ASSET VALUE, $17.12
offering price
and redemption
price per
share
($706,248,404 (divided by)
41,242,299 shares)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $ 3,981,833
Dividends
Interest 3,195,610
TOTAL INCOME 7,177,443
EXPENSES
Management fee $ 1,583,318
Transfer agent fees 191,171
Accounting fees and 150,696
expenses
Non-interested 1,358
trustees'
compensation
Custodian fees and 50,475
expenses
Registration fees 21
Audit 14,906
Legal 4,232
Miscellaneous 356
Total expenses 1,996,533
before reductions
Expense reductions (20,025 1,976,508
)
NET INVESTMENT 5,200,935
INCOME
REALIZED AND
UNREALIZED GAIN
(LOSS)
Net realized gain
(loss) on:
Investment 14,399,104
securities
Foreign currency (2,166
transactions )
Futures contracts (39,809 14,357,129
)
Change in net
unrealized
appreciation
(depreciation) on:
Investment 58,370,392
securities
Assets and 347 58,370,739
liabilities in
foreign currencies
NET GAIN (LOSS) 72,727,868
NET INCREASE $ 77,928,803
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
OTHER INFORMATION $ 19,204
Expense reductions
Directed brokerage
arrangements
Custodian credits 821
$ 20,025
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED)
Operations $ 5,200,935 $ 6,366,110
Net investment
income
Net realized gain 14,357,129 9,088,610
(loss)
Change in net 58,370,739 35,812,890
unrealized
appreciation
(depreciation)
NET INCREASE 77,928,803 51,267,610
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
Distributions to (6,567,693) -
shareholders
From net
investment income
From net realized (9,194,770) (705,098
gain )
TOTAL DISTRIBUTIONS (15,762,463) (705,098
)
Share transactions 253,984,326 170,852,927
Net proceeds from
sales of shares
Reinvestment of 15,762,463 705,098
distributions
Cost of shares (8,750,145) (3,337,769
redeemed )
NET INCREASE 260,996,644 168,220,256
(DECREASE) IN NET
ASSETS RESULTING
FROM SHARE
TRANSACTIONS
TOTAL INCREASE 323,162,984 218,782,768
(DECREASE) IN NET
ASSETS
NET ASSETS
Beginning of period 383,085,420 164,302,652
End of period $ 706,248,404 $ 383,085,420
(including
undistributed net
investment
income of
$4,997,998 and
$6,366,110,
respectively)
OTHER INFORMATION
Shares
Sold 15,911,548 12,499,499
Issued in 1,011,711 53,538
reinvestment of
distributions
Redeemed (556,728) (246,129
)
Net increase 16,366,531 12,306,908
(decrease)
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1997
SELECTED PER-SHARE DATA (UNAUDITED) 1996 1995
Net asset value, $ 15.40 $ 13.07 $ 10.00
beginning of period
Income from
Investment
Operations
Net investment .16 D .26 .11
income
Net realized and 2.16 2.12 3.14
unrealized gain
(loss)
Total from 2.32 2.38 3.25
investment
operations
Less Distributions
From net (.25) - (.11)
investment income
From net realized (.35) (.05) (.07)
gain
Total distributions (.60) (.05) (.18)
Net asset value, end $ 17.12 $ 15.40 $ 13.07
of period
TOTAL RETURN B, C 15.45% 18.27% 32.52%
RATIOS AND
SUPPLEMENTAL
DATA
Net assets, end of $ 706,248 $ 383,085 $ 164,303
period (000
omitted)
Ratio of expenses to .77% A .77% .85%
average net assets E
Ratio of expenses to .76% A, F .76% .83%
average net assets F F
after expense
reductions
Ratio of net 1.99% A 2.29% 2.49%
investment income
to average net
assets
Portfolio turnover rate 27% A 28% 38%
Average commission $ .0364 $ .0367
rate G
A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE
YEAR ARE NOT ANNUALIZED AND DO NOT REFLECT
CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF
THESE CHARGES WOULD REDUCE THE TOTAL RETURNS
SHOWN.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD
CERTAIN EXPENSES NOT BEEN REDUCED DURING
THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
D NET INVESTMENT INCOME PER SHARE HAS BEEN
CALCULATED BASED ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD.
E FMR AGREED TO REIMBURSE A PORTION OF THE
FUND'S EXPENSES DURING THE PERIOD. WITHOUT
THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO
WOULD HAVE BEEN HIGHER.
F FMR OR THE FUND HAS ENTERED INTO VARYING
ARRANGEMENTS WITH THIRD PARTIES WHO EITHER
PAID OR REDUCED A PORTION OF THE FUND'S
EXPENSES (SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS).
G FOR FISCAL YEARS BEGINNING ON OR AFTER
SEPTEMBER 1, 1995, A FUND IS REQUIRED TO
DISCLOSE ITS AVERAGE COMMISSION RATE PER
SHARE FOR SECURITY TRADES ON WHICH
COMMISSIONS ARE CHARGED. THIS AMOUNT MAY
VARY FROM PERIOD TO PERIOD AND FUND TO FUND
DEPENDING ON THE MIX OF TRADES EXECUTED IN
VARIOUS MARKETS WHERE TRADING PRACTICES AND
COMMISSION RATE STRUCTURES MAY DIFFER.
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can
look at the total percentage change in value, the average annual percentage
change or the growth of a hypothetical $10,000 investment. Total return
reflects the change in the value of an investment, assuming reinvestment of
the fund's dividend income and capital gains (the profits earned upon the
sale of securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 LIFE OF
JUNE 30, 1997 YEAR FUND
CONTRAFUND 25.07% 29.11%
S&P 500(registered trademark) 34.70% 33.11%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what
would have happened if the fund had performed at a constant rate each year.
You can compare the fund's return to the performance of the Standard &
Poor's 500 Index - a widely recognized, unmanaged index of common stocks.
This benchmark reflects the reinvestment of dividends and capital gains, if
any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of long-term growth and short-term
volatility. In turn, the share price and return of a
fund that invests in stocks will vary. That means if
you sell your shares during a market downturn,
you might lose money. But if you can ride out the
market's ups and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of return
and are not the fund's year-by-year results, which fluctuated over the
periods shown. The life of the fund figures are from commencement of
operations January 3, 1995.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL
CHARGES, THE TOTAL RETURN WOULD BE LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
1995/01/03 10000.00 10000.00
1995/01/31 9870.00 10258.23
1995/02/28 10370.00 10658.00
1995/03/31 10890.00 10972.51
1995/04/30 11480.00 11295.66
1995/05/31 11730.00 11747.14
1995/06/30 12490.00 12020.03
1995/07/31 13470.00 12418.61
1995/08/31 13640.00 12449.78
1995/09/30 13940.00 12975.16
1995/10/31 13650.00 12928.84
1995/11/30 13900.00 13496.42
1995/12/31 13971.98 13756.36
1996/01/31 14073.30 14224.63
1996/02/29 14124.25 14356.49
1996/03/31 14584.49 14494.74
1996/04/30 15065.18 14708.39
1996/05/31 15239.05 15087.72
1996/06/30 15116.32 15145.21
1996/07/31 14410.62 14476.09
1996/08/31 14962.90 14781.39
1996/09/30 15597.01 15613.29
1996/10/31 16077.71 16043.91
1996/11/30 17039.10 17256.66
1996/12/31 16936.82 16914.81
1997/01/31 17591.38 17971.65
1997/02/28 17103.08 18112.54
1997/03/31 16660.22 17368.30
1997/04/30 17060.91 18405.19
1997/05/31 18115.35 19525.70
1997/06/30 18906.18 20400.45
Let's say hypothetically that $10,000 was invested in Contrafund Portfolio
on January 3, 1995, when the fund started. As the chart shows, by June 30,
1997, the value of the investment would have grown to $18,906 - a 89.06%
increase on the initial investment. For comparison, look at how the S&P 500
did over the same period. With dividends and capital gains, if any,
reinvested, the same $10,000 investment would have grown to $20,400 - a
104.00% increase.
INVESTMENT SUMMARY
TOP TEN STOCKS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Schlumberger Ltd. 1.6
Microsoft Corp. 1.2
Lucent Technologies, Inc. 1.1
Home Depot, Inc. (The) 1.1
American International Group, Inc. 1.1
Royal Dutch Petroleum Co. 1.0
Alcatel Alsthom Compagnie Generale d'Electricite SA 1.0
Texas Instruments, Inc. 1.0
Tyco International Ltd. 1.0
Westinghouse Electric Corp. 1.0
TOP TEN MARKET SECTORS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Technology 14.8
Finance 13.5
Energy 12.8
Retail & Wholesale 7.5
Industrial Machinery & Equipment 6.2
Media & Leisure 6.2
Durables 4.8
Basic Industries 4.8
Health 4.7
Nondurables 3.8
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with
Will Danoff, Portfolio Manager of
Contrafund Portfolio
Q. HOW DID THE FUND PERFORM, WILL?
A. Results were disappointing. For the six months that ended June 30, 1997,
the fund trailed the 20.61% return of the Standard & Poor's 500 Index. From
a 12-month perspective, the fund also lagged the S&P 500, which had a
return of 34.70%. I consider this performance to be unsatisfactory and I'm
working as hard as ever with Fidelity's research staff to find stocks that
can help boost second-half performance.
Q. WHAT FACTORS WERE BEHIND THE FUND'S UNDERPERFORMANCE RELATIVE TO THE S&P
500?
A. A primary reason was the narrowness of the market. By that I mean that
the market's advance was concentrated chiefly among stocks of the largest
companies in the index. To illustrate, shares of the 100 largest S&P 500
stocks appreciated approximately 25% over the past six months, while the
100 smallest stocks in the index rose only around 15%. This phenomenon hurt
the fund, which tends to emphasize small- and mid-sized companies.
Q. WERE THERE ANY OTHER SPECIFIC FACTORS THAT HAD A NEGATIVE IMPACT ON THE
FUND'S RETURN?
A. The fund's underweighting in health care stocks relative to the index -
health care stocks make up around 11% of the index, while they comprised
almost 5% of the fund - hurt performance. With governments throughout the
world attempting to limit health care expenditure growth and U.S. health
maintenance organizations (HMOs) trying to contain industry costs, I
thought the industry would suffer a slowdown. Unfortunately, many health
care stocks - particularly pharmaceuticals - continued to perform well,
rising about 23% during the period. Thus, my strategy of underweighting
these stocks hurt the fund's return.
Q. ASIDE FROM HEALTH STOCKS, HOW DID OTHER SECTORS PERFORM DURING THE
PERIOD?
A. The finance sector, which accounted for around 14% of the fund's
investments at the end of the period, rose approximately 23%. This strong
showing was due largely to falling interest rates, good expense control and
continuing industry consolidation. Some financial stocks held by the fund
included American International Group, a leading insurer with operations in
Asia; Washington Mutual, a rapidly growing West Coast thrift; and First
Bank Systems, a Minneapolis bank with one of the lowest expense ratios in
the industry and a recent acquirer of another stock in Contrafund's
portfolio, U.S. Bancorp. On the other hand, the fund's energy exploration
and production positions were hurt by falling oil and natural gas prices.
As of period end, the fund's exposure to these stocks had fallen from about
23% six months ago to approximately 13%. Low capital investment in the
energy sector has resulted in a tight supply of oil service equipment.
Examples of fund positions that benefited from this positive trend included
Schlumberger, Halliburton, ENSCO International and Smith International, all
top 25 positions within the portfolio.
Q. DID YOU PLAY ANY OTHER PARTICULAR THEMES DURING THE PERIOD?
A. One area of optimism is the Internet and certain stocks that could
benefit from the Internet's popularity. The cable television industry is an
example. These stocks have had a tough four-year stretch, as government
regulation limited companies' ability to raise prices, and subscriber
growth slowed. As a result, the market still holds a pessimistic view on
cable TV stocks. However, with the Internet's popularity, these companies
have a huge opportunity to reaccelerate their earnings growth. Many cable
TV companies are offering access to the Internet at dramatically faster
speeds than is currently available over telephone wires. This could help
turn the cable TV industry's fortunes around. Along the same lines, the
technology and telecommunications industries could also benefit from the
Internet demand. Two of the fund's top positions - Lucent Technologies and
Alcatel - are leading providers of the equipment being used to improve the
Internet's operating efficiency.
Q. WHAT'S YOUR OUTLOOK?
A. As I mentioned, the biggest stocks in the S&P 500 are quite expensive, a
trend that could continue for several years. If it does, I'll continue my
contrarian approach of looking for undervalued companies that are growing
their earnings rapidly and therefore have the capability to produce good
share price appreciation.
FUND FACTS
GOAL: to provide capital growth by investing
primarily in common stocks and securities
convertible into common stocks
START DATE: January 3, 1995
SIZE: as of June 30, 1997, more than
$706 million
MANAGER: George Vanderheiden, since
inception; joined Fidelity in 1971
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 93.0%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 2.3%
AEROSPACE & DEFENSE - 2.2%
AlliedSignal, Inc. 115,900 $ 9,736,589
Boeing Co. 178,500 9,471,656
GenCorp, Inc. 96,700 2,236,188
General Motors Corp. Class H 10,600 612,150
Gulfstream Aerospace Corp. (a) 125,000 3,687,500
Kellstrom Industries, Inc. (a) 189,100 2,978,325
Lockheed Martin Corp. 116,000 12,013,250
Sundstrand Corp. 99,300 5,542,181
Textron, Inc. 104,700 6,949,463
United Technologies Corp. 205,400 17,048,200
70,275,502
DEFENSE ELECTRONICS - 0.0%
Datum, Inc. (a) 8,000 248,000
Raytheon Co. 11,900 606,900
854,900
SHIP BUILDING & REPAIR - 0.1%
General Dynamics Corp. 23,600 1,770,000
TOTAL AEROSPACE & DEFENSE 72,900,402
BASIC INDUSTRIES - 4.8%
CHEMICALS & PLASTICS - 2.5%
Air Products & Chemicals, Inc. 27,100 2,201,875
Avery Dennison Corp. 6,200 248,775
Cambrex Corp. 90,800 3,609,300
Crompton & Knowles Corp. 332,292 7,393,497
Cytec Industries, Inc. (a) 170,100 6,357,488
du Pont (E.I.) de Nemours & Co. 65,400 4,112,025
Engelhard Corp. 1,000 20,938
FMC Corp. (a) 1,800 142,988
Ferro Corp. 24,000 889,500
Fuller (H.B.) Co. 53,900 2,964,500
Goodrich (B.F.) Co. 47,600 2,061,675
International Specialty Products, Inc. (a) 75,500 1,061,719
Monsanto Co. 337,500 14,533,594
Morton International, Inc. 150,900 4,555,294
Nalco Chemical Co. 46,100 1,780,613
Praxair, Inc. 138,500 7,756,000
Raychem Corp. 22,600 1,680,875
Sealed Air Corp. (a) 242,100 11,499,750
Union Carbide Corp. 42,600 2,004,863
W.R. Grace & Co. 62,900 3,467,363
Witco Corp. 53,000 2,010,688
80,353,320
IRON & STEEL - 0.1%
Aeroquip Vickers, Inc. 9,700 458,325
Nucor Corp. 51,000 2,881,500
Steel Dynamics, Inc. (a) 42,100 1,052,500
4,392,325
METALS & MINING - 0.7%
Alcan Aluminium Ltd. 44,300 1,511,266
Aluminum Co. of America 103,600 7,808,850
Falconbridge Ltd. 79,200 1,554,572
Reynolds Metals Co. 62,600 4,460,250
Rio Tinto PLC (Reg.) 309,900 5,398,794
20,733,732
PACKAGING & CONTAINERS - 0.5%
Crown Cork & Seal Co., Inc. 48,800 2,607,750
Owens-Illinois, Inc. (a) 397,900 12,334,900
SHARES VALUE (NOTE 1)
Peak International, Ltd. 38,900 $ 466,800
Silgan Holdings, Inc. 37,100 1,437,625
16,847,075
PAPER & FOREST PRODUCTS - 1.0%
Abitibi-Consolidated, Inc. 28,300 505,266
American Pad & Paper Co. (a) 90,100 1,520,438
Bowater, Inc. 23,900 1,105,375
Champion International Corp. 39,900 2,204,475
Deltic Timber Corp. 16,557 485,327
Fort Howard Corp. (a) 12,400 627,750
Georgia-Pacific Corp. 12,500 1,067,188
International Paper Co. 29,300 1,422,881
James River Corp. of Virginia 271,600 10,049,200
Kimberly-Clark Corp. 181,100 9,009,725
Mail-Well, Inc. (a) 83,500 2,379,750
Temple-Inland, Inc. 33,000 1,782,000
32,159,375
TOTAL BASIC INDUSTRIES 154,485,827
CONSTRUCTION & REAL ESTATE - 3.3%
BUILDING MATERIALS - 0.9%
American Residential Services, Inc. (a) 42,100 978,825
American Standard Companies,
Inc. (a) 9,400 420,650
Coltec Industries, Inc. (a) 166,900 3,254,550
Lilly Industrial Coatings, Inc. Class A 66,400 1,336,300
Mark IV Industries, Inc. 25,000 600,000
Masco Corp. 168,600 7,039,050
Medusa Corp. 20,200 775,175
Nortek, Inc. (a) 29,200 704,450
Sherwin-Williams Co. 140,500 4,337,938
Southdown, Inc. 73,600 3,210,800
USG Corp. (a) 155,400 5,672,100
York International Corp. 2,100 96,600
28,426,438
CONSTRUCTION - 0.1%
Centex Corp. 31,500 1,279,688
Lennar Corp. 33,300 1,063,519
Morrison Knudsen Corp. (a) 56,700 772,538
Walter Industries, Inc. (a) 3,600 60,300
3,176,045
ENGINEERING - 0.0%
DSP Group, Inc. (a) 13,900 208,283
Stone & Webster, Inc. 1,300 55,494
263,777
REAL ESTATE - 0.2%
Boston Properties, Inc. 67,200 1,848,000
Catellus Development Corp. (a) 18,700 338,938
Crescent Operating, Inc. 27,790 333,480
Rouse Co. (The) 185,723 5,478,829
Stewart Enterprises, Inc. Class A 2,100 88,200
8,087,447
REAL ESTATE INVESTMENT TRUSTS - 2.1%
Arden Realty Group, Inc. 74,300 1,931,800
BRE Properties, Inc. Class A 3,600 90,450
Bay Apartment Communities, Inc. 40,200 1,487,400
Bedford Property Investors, Inc. 72,900 1,467,113
Bradley Real Estate Trust (SBI) 33,200 639,100
Cali Realty Corp. 49,300 1,676,200
Crescent Real Estate Equities, Inc. 277,900 8,823,325
Duke Realty Investors, Inc. 22,400 907,200
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
CONSTRUCTION & REAL ESTATE - CONTINUED
REAL ESTATE INVESTMENT TRUSTS - CONTINUED
Equity Residential Properties Trust (SBI) 121,000 $ 5,747,500
Essex Property Trust, Inc. 13,300 427,263
Felcor Suite Hotels, Inc. 132,700 4,943,075
First Industrial Realty Trust, Inc. 80,200 2,345,850
Glenborough Realty Trust, Inc. 53,000 1,338,250
Golf Trust of America, Inc. 89,600 2,492,000
Home Properties of NY, Inc. 8,900 200,250
Irvine Apartment Communities, Inc. 3,600 106,200
Kilroy Realty Corp. 11,800 297,950
Kimco Realty Corp. 70,100 2,225,675
LTC Properties, Inc. 51,700 937,063
Macerich Co. 60,400 1,676,100
Pacific Gulf Properties, Inc. 2,600 57,200
Patriot American Hospitality, Inc. 147,800 3,768,900
Public Storage, Inc. 40,700 1,190,475
Reckson Associates Realty Corp. 124,500 2,863,500
Speiker Properties, Inc. 72,200 2,540,538
Starwood Lodging Trust combined
certificate (SBI) 270,000 11,525,625
Sunstone Hotel Investors, Inc. 32,600 472,700
Urban Shopping Centers, Inc. 5,100 162,563
Vornado Realty Trust 32,900 2,372,913
Weeks Corp. 31,300 978,125
65,692,303
TOTAL CONSTRUCTION & REAL ESTATE 105,646,010
DURABLES - 4.8%
AUTOS, TIRES, & ACCESSORIES - 2.1%
Chrysler Corp. 212,200 6,962,813
Circuit City Stores, Inc. - CarMax Group 88,400 1,265,225
Cross-Continent Auto Retailers, Inc. (a) 43,900 463,694
Danaher Corp. 227,100 11,539,519
Eaton Corp. 28,400 2,479,675
Echlin, Inc. 49,400 1,778,400
Federal-Mogul Corp. 40,700 1,424,500
Ford Motor Co. 293,000 11,060,750
General Motors Corp. 103,200 5,746,950
Lear Corp. (a) 131,000 5,813,125
Navistar International Corp. (a) 203,600 3,512,100
O'Gara Co. (a) 297,400 3,048,350
OmniQuip International, Inc. 24,400 564,250
SPX Corp. 102,400 6,636,800
Superior Industries International, Inc. 1,700 45,050
TRW, Inc. 9,600 545,400
Tower Automotive, Inc. (a) 41,500 1,784,500
Toyota Motor Corp. 66,000 1,945,833
United Auto Group, Inc. (a) 50,300 996,569
67,613,503
CONSUMER DURABLES - 1.2%
Blyth Industries, Inc. (a) 14,100 475,875
Corning, Inc. 249,700 13,889,563
Minnesota Mining & Manufacturing Co. 203,200 20,726,400
Samsonite Corp. (a) 50,300 2,219,488
37,311,326
CONSUMER ELECTRONICS - 0.5%
Electrolux AB 7,100 513,120
Gemstar International Group Ltd. (a) 46,900 861,788
Maytag Co. 48,400 1,264,450
Philips Electronics NV 165,000 11,859,375
SHARES VALUE (NOTE 1)
Philips Electronics NV (Bearer) 36,350 $ 2,602,113
Sunbeam-Oster, Inc. 12,500 471,875
17,572,721
HOME FURNISHINGS - 0.3%
Carpetright PLC 347,500 2,903,986
Furniture Brands International, Inc. 12,500 242,188
Leggett & Platt, Inc. 61,500 2,644,500
Linens'n Things, Inc. 91,800 2,719,575
Miller (Herman), Inc. 4,000 144,000
8,654,249
TEXTILES & APPAREL - 0.7%
Cutter & Buck, Inc. (a) 144,200 2,343,250
Dexter Corp. 50,200 1,606,400
House of Fraser PLC Class L 673,400 1,788,009
Intimate Brands, Inc. Class A 41,500 871,500
Kellwood Co. 6,400 177,600
Liz Claiborne, Inc. 117,900 5,497,088
Mohawk Industries, Inc. (a) 2,100 47,775
Oxford Industries, Inc. 33,100 939,213
Polo Ralph Lauren Corp. Class A 9,100 249,113
Reebok International Ltd. 154,000 7,199,500
Stride Rite Corp. 41,100 529,163
Unifi, Inc. 22,300 833,463
Warnaco Group, Inc. Class A 45,000 1,434,375
23,516,449
TOTAL DURABLES 154,668,248
ENERGY - 12.8%
ENERGY SERVICES - 6.3%
BJ Services Co. (a) 172,700 9,261,038
Baker Hughes, Inc. 120,300 4,654,106
Diamond Offshore Drilling, Inc. (a) 208,500 16,236,938
Dresser Industries, Inc. 190,300 7,088,675
ENSCO International, Inc. (a) 475,387 25,076,664
Falcon Drilling, Inc. (a) 75,800 4,367,975
Global Marine, Inc. (a) 217,000 5,045,250
Halliburton Co. 305,900 24,242,575
Marine Drilling Companies, Inc. (a) 287,300 5,638,263
McDermott International, Inc. 195,700 5,711,994
Nabors Industries, Inc. (a) 311,300 7,782,500
Noble Drilling Corp. (a) 260,100 5,868,506
Reading & Bates Corp. (a) 29,300 783,775
Smedvig AS, Series B 55,200 1,356,136
Santa Fe International Corp. 7,200 244,800
Schlumberger Ltd. 402,200 50,275,000
Smith International, Inc. (a) 361,600 21,967,200
Varco International, Inc. (a) 63,300 2,041,425
Weatherford Enterra, Inc. (a) 81,100 3,122,350
Western Atlas, Inc. (a) 8,800 644,600
201,409,770
OIL & GAS - 6.5%
Amoco Corp. 120,500 10,475,969
Anadarko Petroleum Corp. 5,000 300,000
Atlantic Richfield Co. 12,400 874,200
Barrett Resources Corp. (a) 600 17,963
British Petroleum PLC ADR 292,284 21,884,765
Burlington Resources, Inc. 220,000 9,707,500
Camco International, Inc. 168,600 9,230,850
Canadian Natural Resources Ltd. (a) 186,400 4,840,068
Chesapeake Energy Corp. (a) 10,700 104,994
Coastal Corp. (The) 109,900 5,845,306
Cooper Cameron Corp. (a) 167,140 7,813,795
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
ENERGY - CONTINUED
OIL & GAS - CONTINUED
Enron Oil & Gas Co. 7,000 $ 126,875
Forcenergy Gas Exploration, Inc. (a) 107,900 3,277,463
Mesa, Inc. (a) 160,600 923,450
Mobil Corp. 130,700 9,132,663
Murphy Oil Corp. 153,900 7,502,625
Newfield Exploration Co. (a) 214,300 4,286,000
Norcen Energy Resources Ltd. 17,800 424,163
Ocean Energy, Inc. (a) 9,800 453,250
Oryx Energy Co. (a) 46,400 980,200
Parker & Parsley Petroleum Co. 53,100 1,878,413
Penn West Petroleum Ltd. (a) 38,600 493,456
Penn West Petroleum Ltd. (a)(b) 68,600 876,971
Petsec Energy Ltd. sponsored ADR 73,000 1,660,750
Phillips Petroleum Co. 85,900 3,758,125
Pogo Producing Co. 133,000 5,145,438
Renaissance Energy Ltd. (a) 238,800 6,641,741
Rio Alto Exploration Ltd. (a) 32,200 269,373
Royal Dutch Petroleum Co. 598,000 32,516,250
Santa Fe Energy Resources, Inc. (a) 217,700 3,197,469
Swift Energy Co. (a) 127,300 3,039,288
Texaco, Inc. 102,500 11,146,875
Tosco Corp. 379,900 11,373,256
Total SA Class B 123,633 12,489,031
United Meridian Corp. (a) 138,300 4,149,000
Unocal Corp. 287,400 11,154,713
Vastar Resources, Inc. 4,000 140,250
Vintage Petroleum, Inc. 11,000 338,250
YPF Sociedad Anonima sponsored ADR 2,600 79,950
YPF Sociedad Anonima D shares 4,200 129,379
208,680,077
TOTAL ENERGY 410,089,847
FINANCE - 13.5%
BANKS - 3.9%
Bank of New York Co., Inc. 229,300 9,974,550
Bank of Nova Scotia Halifax 2,600 114,314
BankBoston Corp. 500 36,031
BankAmerica Corp. 331,900 21,428,294
Citicorp 24,200 2,917,613
Comerica, Inc. 71,300 4,848,400
Credit Suisse Group (Reg.) 87,200 11,187,137
Credito Italiano Ord. 1,584,000 2,897,378
Fifth Third Bancorp 23,200 1,903,850
First Bank System, Inc. 224,500 19,166,688
First Union Corp. 29,400 2,719,500
HSBC Holdings PLC 226,655 6,716,164
Imperial Bancorp 6,200 179,025
Lloyds TSB Group PLC 198,900 2,039,630
Mellon Bank Corp. 28,500 1,286,063
National City Corp. 98,100 5,150,250
North Fork Bancorp., Inc. 186,500 3,986,438
Norwest Corp. 43,000 2,418,750
Royal Bank of Canada 6,200 280,889
Standard Chartered Bank PLC 278,000 4,239,125
Star Banc Corp. 1,900 80,275
Texas Regional Bancshares, Inc.
Class A (vtg.) 116,300 4,884,600
U.S. Bancorp 168,700 10,817,888
SHARES VALUE (NOTE 1)
Wells Fargo & Co. 11,500 $ 3,099,250
Zions Bancorp 83,200 3,130,400
125,502,502
CLOSED-END INVESTMENT COMPANIES - 0.1%
Morgan Stanley Emerging Markets
Fund, Inc. 23,900 427,213
Morgan Stanley Asia-Pacific Fund, Inc. 82,100 862,050
Templeton Dragon Fund, Inc. 43,400 705,250
1,994,513
CREDIT & OTHER FINANCE - 1.9%
American Express Co. 263,900 19,660,550
Associates First Capital Corp. 23,200 1,287,600
Finova Group, Inc. 32,800 2,509,200
Fleet Financial Group, Inc. 240,300 15,198,975
Greenpoint Financial Corp. 159,200 10,596,750
Homeside, Inc. 2,100 45,319
Household International, Inc. 83,900 9,853,006
59,151,400
FEDERAL SPONSORED CREDIT - 1.3%
Federal Home Loan Mortgage
Corporation 487,400 16,754,375
Federal National Mortgage Association 582,400 25,407,200
42,161,575
INSURANCE - 4.6%
AFLAC, Inc. 39,400 1,861,650
ARM Financial Group, Inc. Class A 2,300 46,000
ACE Ltd. 31,700 2,341,838
Aetna, Inc. 68,800 7,043,400
Allmerica Financial Corp. 79,400 3,166,075
Allstate Corp. 296,700 21,659,100
AMBAC, Inc. 12,000 916,500
American General Corp. 28,400 1,356,100
American International Group, Inc. 225,800 33,728,875
Aon Corp. 61,350 3,174,863
Berkshire Hathaway, Inc. (a) 60 2,832,000
Brascan Ltd. Class A 13,600 336,392
CIGNA Corp. 38,900 6,904,750
Chubb Corp. (The) 8,800 588,500
Exel Ltd. 6,200 327,050
Hartford Financial Services Group, Inc. 78,100 6,462,775
MGIC Investment Corp. 31,500 1,510,031
Mid Ocean Ltd. 4,900 256,944
Old Republic International Corp. 9,500 287,969
Progressive Corp. 51,400 4,471,800
Provident Companies, Inc. 19,100 1,021,850
Providian Financial Corp. (a) 13,000 417,625
Reinsurance Group of America, Inc. 4,000 230,000
Reliastar Financial Corp. 24,600 1,798,875
St. Paul Companies, Inc. (The) 24,000 1,830,000
Security-Connecticut Corp. 70,800 3,898,425
SunAmerica, Inc. 77,900 3,797,625
Torchmark Corp. 65,200 4,645,500
Travelers Property Casualty Corp.
Class A 90,800 3,620,650
Travelers Group, Inc. (The) 305,766 19,282,368
UNUM Corp. 124,200 5,216,400
USF&G Corp. 152,200 3,652,800
148,684,730
SAVINGS & LOANS - 1.6%
Ahmanson (H.F.) & Co. 90,400 3,887,200
Charter One Financial Corp. 25,185 1,356,842
Dime Bancorp., Inc. 117,400 2,054,500
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
SAVINGS & LOANS - CONTINUED
Glendale Federal Bank FSB (a) 247,900 $ 6,476,388
Golden West Financial Corp. 71,080 4,975,600
Great Western Financial Corp. 182,200 9,793,250
Ocwen Financial Corp. 10,000 326,250
TCF Financial Corp. 50,300 2,483,563
Washington Mutual, Inc. 323,900 19,353,025
50,706,618
SECURITIES INDUSTRY - 0.1%
Guoco Group Ltd. 450,000 2,369,950
Morgan Stanley Dean Witter Discover
and Co. 18,900 813,881
3,183,831
TOTAL FINANCE 431,385,169
HEALTH - 4.6%
DRUGS & PHARMACEUTICALS - 2.1%
Andrx Corp. 78,600 3,006,450
Barr Laboratories, Inc. (a) 207,700 9,138,800
Bristol-Myers Squibb Co. 118,400 9,590,400
Elan Corp. PLC ADR (a) 55,400 2,506,850
Glaxo PLC sponsored ADR 12,500 522,656
Immunex Corp. 1,000 36,250
Interneuron Pharmaceuticals, Inc. 3,600 72,450
Merck & Co., Inc. 11,400 1,179,900
Novartis AG (Reg.) 15,111 24,132,107
Pfizer, Inc. 58,400 3,489,400
Schering-Plough Corp. 156,000 7,468,500
Sepracor, Inc. (a) 23,400 604,013
Warner-Lambert Co. 55,800 6,933,150
68,680,926
MEDICAL EQUIPMENT & SUPPLIES - 0.6%
Bausch & Lomb, Inc. 56,700 2,671,988
Baxter International, Inc. 38,700 2,022,075
Boston Scientific Corp. (a) 2,300 141,306
Cardinal Health, Inc. 22,500 1,288,125
McKesson Corp. 12,500 968,750
Medtronic, Inc. 51,200 4,147,200
Nitinol Medical Technologies, Inc. 1,000 15,125
St. Jude Medical, Inc. (a) 102,400 3,993,600
Sybron International Corp. (a) 36,800 1,467,400
Ventana Medical Systems, Inc. 65,000 804,375
17,519,944
MEDICAL FACILITIES MANAGEMENT - 1.9%
Beverly Enterprises, Inc. (a) 75,400 1,225,250
Carematrix Corp. (a) 53,200 1,313,375
Columbia/HCA Healthcare Corp. 7,800 306,638
Coventry Corp. (a) 102,600 1,551,825
FPA Medical Management, Inc. 11,500 272,406
HEALTHSOUTH Rehabilitation Corp. (a) 617,500 15,398,906
Health Management Associates, Inc.
Class A (a) 316,200 9,011,700
Humana, Inc. (a) 46,900 1,084,563
Integrated Health Services, Inc. 194,100 7,472,850
NovaCare, Inc. (a) 48,600 674,325
Oxford Health Plans, Inc. (a) 64,600 4,635,050
Quorum Health Group, Inc. (a) 9,300 332,475
Safeguard Health Enterprises, Inc. (a) 63,700 676,813
Sunrise Assisted Living, Inc. (a) 119,300 4,175,500
Tenet Healthcare Corp. (a) 196,400 5,806,075
SHARES VALUE (NOTE 1)
Trigon Healthcare, Inc. 131,000 $ 3,176,750
United HealthCare Corp. 36,500 1,898,000
Vencor, Inc. (a) 31,500 1,330,875
60,343,376
TOTAL HEALTH 146,544,246
HOLDING COMPANIES - 0.5%
Norfolk Southern Corp. 161,500 16,271,125
PartnerRe Ltd. 16,000 610,000
Triarc Companies, Inc. Class A (a) 24,000 489,000
17,370,125
INDUSTRIAL MACHINERY & EQUIPMENT - 6.2%
ELECTRICAL EQUIPMENT - 1.9%
AMETEK, Inc. 67,000 1,574,500
Common Development International
Ltd. (a)(b) 41,200 753,486
Computer Products, Inc. (a) 2,100 52,500
General Electric Co. 85,400 5,583,025
General Instrument Corp. (a) 86,800 2,170,000
Honeywell, Inc. 43,000 3,262,625
Kuhlman Corp. 9,900 319,275
Loral Space & Communications Ltd. (a) 864,600 12,969,000
Roper Industries, Inc. 8,700 451,313
Scientific-Atlanta, Inc. 166,900 3,650,938
Spectrain Corp. 3,100 114,313
Viasat, Inc. 6,800 98,600
Westinghouse Electric Corp. 1,348,615 31,186,722
62,186,297
INDUSTRIAL MACHINERY & EQUIPMENT - 3.2%
AGCO Corp. 10,200 366,563
Case Corp. 204,100 14,057,388
Caterpillar, Inc. 84,000 9,019,500
Cooper Industries, Inc. 26,800 1,333,300
Dover Corp. 34,600 2,127,900
Harnischfeger Industries, Inc. 80,200 3,328,300
Illinois Tool Works, Inc. 209,900 10,481,881
Ingersoll-Rand Co. 121,000 7,471,750
Kaydon Corp. 117,800 5,845,825
Keystone International, Inc. 98,700 3,423,656
New Holland NV 324,100 8,872,238
Parker-Hannifin Corp. 16,000 971,000
Stanley Works 63,300 2,532,000
Tyco International Ltd. 453,714 31,560,506
Thermo Fibergen, Inc.
rights 12/31/01 (a) 13,700 36,819
101,428,626
POLLUTION CONTROL - 1.1%
Allied Waste Industries, Inc. (a) 17,300 300,588
Browning-Ferris Industries, Inc. 32,800 1,090,600
Thermo Instrument Systems, Inc. (a) 68,800 2,107,000
USA Waste Services, Inc. (a) 573,780 22,162,253
United Waste Systems, Inc. (a) 186,200 7,634,200
Waste Management, Inc. 2,800 89,950
33,384,591
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 196,999,514
MEDIA & LEISURE - 6.2%
BROADCASTING - 1.6%
APT Satellite Holdings Ltd.
sponsored ADR 263,500 3,326,688
American Radio Systems Corp.
Class A (a) 32,700 1,303,913
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - CONTINUED
BROADCASTING - CONTINUED
Asia Satellite Telecommunications
Holdings Ltd. 255,000 $ 781,754
Canal Plus SA 2,200 428,013
Clear Channel Communications, Inc. (a) 41,400 2,548,688
Cox Communications, Inc. Class A (a) 56,300 1,351,200
Evergreen Media Corp. Class A (a) 5,600 249,900
HSN, Inc. (a) 8,300 259,375
Jacor Communications, Inc. Class A (a) 110,100 4,211,325
Metro Networks, Inc. (a) 40,500 982,125
Smartalk Teleservices, Inc. (a) 46,900 726,950
TCA Cable TV, Inc. 9,300 349,913
TCI Group Class A (a) 269,100 4,002,863
Telemundo Group, Inc. Class A (a) 136,400 3,273,600
Time Warner, Inc. 488,100 23,550,825
Univision Communications, Inc.
Class A (a) 9,900 387,338
Westwood One, Inc. (a) 50,000 1,612,500
49,346,970
ENTERTAINMENT - 0.8%
Airtours PLC 29,600 572,577
Disney (Walt) Co. 237,800 19,083,450
Family Golf Centers, Inc. (a) 12,200 280,600
Premier Parks, Inc. (a) 93,300 3,440,438
Regal Cinemas, Inc. (a) 19,600 646,800
Viacom, Inc. (a):
Class A 39,900 1,184,531
Class B (non-vtg.) 49,800 1,494,000
26,702,396
LEISURE DURABLES & TOYS - 1.0%
Brunswick Corp. 200,500 6,265,625
Callaway Golf Co. 67,700 2,403,350
Champion Enterprises, Inc. (a) 36,600 549,000
Harley-Davidson, Inc. 35,200 1,687,400
Hasbro, Inc. 466,025 13,223,459
Mattel, Inc. 142,550 4,828,881
Nintendo Co. Ltd. Ord. 33,300 2,788,434
31,746,149
LODGING & GAMING - 1.0%
Bristol Hotel Co. (a) 7,200 277,200
Doubletree Corp. (a) 39,000 1,603,875
Four Seasons Hotels, Inc. 125,800 3,735,777
HFS, Inc. (a) 260,600 15,114,800
Hilton Hotels Corp. 3,600 95,625
Host Marriott Corp. (a) 102,900 1,832,906
ITT Corp. 6,300 384,117
La Quinta Motor Inns, Inc. 132,700 2,902,813
Marriott International, Inc. 3,000 184,125
Patriot American Hospitality, Inc. 76,700 3,458,217
WMS Industries, Inc. 105,300 2,639,081
32,228,536
PUBLISHING - 0.8%
Big Flower Press Holdings, Inc. (a) 194,600 4,037,950
Dow Jones & Co., Inc. 32,500 1,306,094
Harte Hanks Communications, Inc. 7,700 227,150
Meredith Corp. 51,500 1,493,500
New York Times Co. (The) Class A 99,900 4,945,050
Pearson, PLC 215,600 2,498,009
Playboy Enterprises, Inc. Class B (a) 30,400 351,500
SHARES VALUE (NOTE 1)
Times Mirror Co. Class A 158,900 $ 8,779,225
Tribune Co. 61,500 2,955,844
26,594,322
RESTAURANTS - 1.0%
Boston Chicken, Inc. (a) 88,100 1,233,400
Chart House Enterprises, Inc. 4,800 35,976
Compass Group PLC Ord. 46,600 522,468
Cracker Barrel Old Country Store, Inc. 10,800 286,200
Fine Host Corp. (a) 31,500 992,250
Foodmaker, Inc. (a) 58,600 959,575
Landry's Seafood Restaurants, Inc. (a) 96,000 2,208,000
Logan's Roadhouse, Inc. (a) 24,900 591,375
Lone Star Steakhouse Saloon 2,600 67,600
McDonald's Corp. 246,700 11,918,694
Morton's Restaurant Group, Inc. (a) 316,900 6,298,388
Papa John's International, Inc. (a) 14,400 529,200
Rainforest Cafe, Inc. (a) 11,100 281,663
ShowBiz Pizza Time, Inc. (a) 77,700 2,049,338
Starbucks Corp. (a) 17,600 685,300
Wendy's International, Inc. 56,500 1,465,469
30,124,896
TOTAL MEDIA & LEISURE 196,743,269
NONDURABLES - 3.8%
AGRICULTURE - 0.1%
Pioneer Hi-Bred International, Inc. 17,900 1,432,000
BEVERAGES - 0.7%
Cadbury-Schweppes PLC Ord. 1,103,597 9,847,166
Coors (Adolph) Co. Class B 25,000 665,625
COTT Corp. 6,200 66,012
PepsiCo, Inc. 343,600 12,906,475
23,485,278
FOODS - 1.5%
CPC International, Inc. 2,100 193,856
Campbell Soup Co. 133,400 6,670,000
Dean Foods Co. 103,100 4,162,663
Dole Food, Inc. 30,000 1,282,500
Earthgrains Co. 6,200 406,488
Flowers Industries, Inc. 30,000 504,375
Hershey Foods Corp. 83,500 4,618,594
Interstate Bakeries Corp. 7,800 462,638
Nabisco Holdings Corp. Class A 182,500 7,277,188
Nestle SA (Reg.) 6,735 8,875,546
Ralston Purina Co. 83,600 6,870,875
Sara Lee Corp. 87,100 3,625,538
Tasty Baking Co. 500 8,750
Tootsie Roll Industries, Inc. 23,455 1,043,748
Tyson Foods, Inc. 88,400 1,690,650
47,693,409
HOUSEHOLD PRODUCTS - 1.3%
Church & Dwight Co., Inc. 24,200 647,350
Dial Corp. 249,800 3,903,125
Estee Lauder Companies, Inc. 12,100 608,025
Gillette Co. 163,100 15,453,725
Premark International, Inc. 69,500 1,859,125
Stanhome, Inc. 5,500 180,813
Unilever NV:
Ord. 74,810 15,738,248
ADR 21,430 4,587,359
42,977,770
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONDURABLES - CONTINUED
TOBACCO - 0.2%
Consolidated Cigar Holdings, Inc.
Class A (a) 93,000 $ 2,580,750
Culbro Corp. (a) 2,200 306,213
Dimon, Inc. 7,200 190,800
Gallaher Group PLC sponsored ADR (a) 79,700 1,469,469
General Cigar Holdings, Inc. Class A 10,700 314,981
Swisher International Group, Inc.
Class A 60,100 1,036,725
Universal Corp. 8,200 260,350
6,159,288
TOTAL NONDURABLES 121,747,745
PRECIOUS METALS - 0.7%
Euro-Nevada Mining Ltd. 177,700 5,470,068
Franco-Nevada Mining Corp. 228,900 11,481,060
Getchell Gold Corp. (a) 43,300 1,526,325
Indochina Goldfields Ltd. (a) 133,900 630,391
Indochina Goldfields Ltd. (a)(b) 75,600 355,919
Newmont Mining Corp. 48,000 1,872,000
21,335,763
RETAIL & WHOLESALE - 7.4%
APPAREL STORES - 0.8%
AnnTaylor Stores Corp. (a) 53,600 1,045,200
Charming Shoppes, Inc. (a) 1,202,800 6,277,113
Footstar, Inc. (a) 17,500 457,188
Gap, Inc. 113,000 4,392,875
Goody's Family Clothing (a) 161,900 4,432,013
Payless ShoeSource, Inc. (a) 34,488 1,886,063
Ross Stores, Inc. 9,800 320,338
TJX Companies, Inc. 219,000 5,776,125
24,586,915
DRUG STORES - 0.9%
CVS Corp. 524,061 26,858,126
General Nutrition Companies, Inc. (a) 12,400 347,200
27,205,326
GENERAL MERCHANDISE STORES - 2.2%
Coles Myer Ltd. 261,700 1,359,096
Costco Companies, Inc. (a) 227,400 7,475,775
Dayton Hudson Corp. 176,400 9,382,275
Dollar Tree Stores (a) 20,000 1,007,500
Federated Department Stores, Inc. (a) 41,800 1,452,550
Hudson's Bay Co. Ord. 7,000 157,172
K mart Corp. (a) 319,200 3,910,200
Kohls Corp. (a) 54,600 2,890,388
Meyer (Fred), Inc. (a) 38,900 2,010,644
Michaels Stores, Inc. (a) 3,600 76,275
99 Cents Only Stores (a) 50,000 1,506,250
Nordstrom, Inc. 72,500 3,557,031
Stein Mart, Inc. (a) 99,200 2,976,000
Wal-Mart Stores, Inc. 685,200 23,168,325
Woolworth Corp. (a) 347,200 8,332,800
Woolworths Ltd. 440,700 1,444,973
70,707,254
GROCERY STORES - 1.1%
Ahold NV 23,645 1,993,591
American Stores Co. 9,600 474,000
Asda Group PLC 866,100 1,787,828
Dominick's Supermarkets, Inc. (a) 161,000 4,286,625
SHARES VALUE (NOTE 1)
Fleming Companies, Inc. 28,500 $ 513,000
Loblaw Companies Ltd. 37,600 517,437
Quality Food Centers, Inc. (a) 142,200 5,403,600
Richfood Holdings, Inc. Class A 313,100 8,140,600
Safeway, Inc. (a) 289,600 13,357,800
36,474,481
RETAIL & WHOLESALE, MISCELLANEOUS - 2.4%
Barnes & Noble, Inc. (a) 2,200 94,600
Bed Bath & Beyond, Inc. 1,000 30,375
Circuit City Stores, Inc. - Circuit City
Group 223,900 7,962,444
Comcast Corp.:
Class A 109,000 2,282,188
Class A special 123,800 2,646,225
Fabri-Centers of America, Inc.
Class A (a) 3,500 95,375
Fingerhut Companies, Inc. 23,100 402,806
Hancock Fabrics, Inc. 79,400 1,091,750
Home Depot, Inc. (The) 493,800 34,041,338
Pier 1 Imports, Inc. 7,200 190,800
Staples, Inc. (a) 307,100 7,140,075
Tiffany & Co., Inc. 39,700 1,833,644
Toys "R" Us, Inc. (a) 253,507 8,872,745
U.S. Office Products Co. (a) 291,600 8,912,025
Viking Office Products, Inc. (a) 16,300 309,700
Williams-Sonoma, Inc. 1,000 42,750
75,948,840
TOTAL RETAIL & WHOLESALE 234,922,816
SERVICES - 3.4%
ADVERTISING - 0.4%
Interpublic Group of Companies, Inc. 75,400 4,622,963
Lycos, Inc. (a) 5,200 66,300
Omnicom Group, Inc. 64,400 3,968,650
Outdoor Systems, Inc. (a) 88,200 3,373,650
12,031,563
EDUCATIONAL SERVICES - 0.0%
Apollo Group, Inc. Class A (a) 700 24,675
LEASING & RENTAL - 0.6%
Alrenco, Inc. (a) 150,000 1,987,500
Budget Group, Inc. Class A (a) 106,600 3,677,700
Danka Business Systems PLC
sponsored ADR 21,300 870,638
Hanover Compressor Co. 2,400 46,800
Hertz Corp. Class A 185,700 6,685,200
Rent-Way, Inc. (a) 37,800 557,550
Republic Industries, Inc. (a) 162,400 4,039,700
Ryder Systems, Inc. 48,300 1,593,900
19,458,988
PRINTING - 0.2%
ASM Lithography Holding NV (a) 56,800 3,322,800
Standard Register Co. 72,300 2,214,188
Valassis Communications, Inc. (a) 35,400 849,600
6,386,588
SERVICES - 2.2%
ADT Ltd. (a) 465,900 15,374,700
APAC Teleservices, Inc. (a) 695,000 13,509,063
AccuStaff, Inc. (a) 186,400 4,415,350
Assisted Living Concepts, Inc. (a) 8,100 223,763
Borg Warner Security Corp. (a) 37,400 668,525
Corestaff, Inc. 3,100 83,700
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SERVICES - CONTINUED
SERVICES - CONTINUED
Corrections Corp. of America (a) 29,700 $ 1,180,575
Dun & Bradstreet Corp. 48,300 1,267,875
Ecolab, Inc. 237,400 11,335,850
Hays PLC 271,800 2,579,053
International Service Systems AS,
Series B (a) 22,100 791,948
Learning Tree International, Inc. (a) 12,200 541,375
National Service Industries, Inc. 48,300 2,351,606
Norrell Corp. GA 7,100 234,300
Personnel Group of America, Inc. (a) 6,900 198,806
Pierce Leahy Corp. 8,600 154,800
Pittston Co. (Brinks Group) 7,600 228,000
Premier Technologies, Inc. (a) 11,700 304,200
Registry, Inc. 1,200 55,200
Rentokil Group PLC 741,244 2,598,696
Robert Half International, Inc. (a) 64,600 3,040,238
Securicor Group PLC 528,800 2,508,836
Securitas AB Class B 83,800 2,366,067
Service Corp. International 8,300 272,863
Snyder Communications, Inc. (a) 15,200 409,450
Staffmark, Inc. (a) 17,300 387,088
SGS Societe Generale de Surveillance
Holdings SA:
(Bearer) 900 1,921,314
(Reg.) 1,340 527,198
Telespectrum Worldwide, Inc. (a) 135,700 954,141
Wackenhut Corp. 2,600 62,400
Wackenhut Corrections Corp. (a) 27,900 812,588
71,359,568
TOTAL SERVICES 109,261,382
TECHNOLOGY - 14.7%
COMMUNICATIONS EQUIPMENT - 4.2%
Alcatel Alsthom Compagnie Generale
d'Electricite SA 258,660 32,375,388
ADC Telecommunications, Inc. 11,300 377,138
Advanced Fibre Communication, Inc. 93,900 5,669,213
Boston Technology, Inc. (a) 27,600 815,925
Ciena Corp. 84,800 3,996,200
Cisco Systems, Inc. (a) 49,900 3,349,538
DSC Communications Corp. (a) 66,700 1,484,075
Davox Corp. (a) 23,650 845,488
Dynatech Corp. (a) 31,300 1,118,975
Ericsson (L.M.) Telephone Co.:
Class B 5,800 228,740
Class B ADR 116,800 4,599,000
Lucent Technologies, Inc. 482,600 34,777,363
Newbridge Networks Corp. (a) 212,000 9,222,000
Nokia Corp. AB sponsored ADR 111,900 8,252,625
Northern Telecom Ltd. 184,200 16,603,549
Tekelec (a) 9,800 346,675
Tellabs, Inc. (a) 156,300 8,733,263
132,795,155
COMPUTER SERVICES & SOFTWARE - 3.6%
Acxiom Corp. (a) 2,100 43,050
Advanced Communication Systems, Inc. 275,100 2,097,638
Alphanet Solutions, Inc. (a) 29,900 441,025
Aspen Technology, Inc. (a) 2,500 94,063
Automatic Data Processing, Inc. 280,300 13,174,100
Broderbund Software, Inc. (a) 49,300 1,217,094
Baan Co. NV (a) 23,100 1,591,013
SHARES VALUE (NOTE 1)
CBT Group PLC sponsored ADR (a) 20,000 $ 1,262,500
CUC International, Inc. (a) 321,300 8,293,556
Ceridian Corp. (a) 252,216 10,656,126
Citrix Systems, Inc. (a) 61,300 2,689,538
Computer Learning Centers, Inc. 2,000 84,000
Computer Sciences Corp. (a) 17,600 1,269,400
DST Systems, Inc. 94,000 3,131,375
ECI Telecom Ltd. 51,600 1,535,100
Electronic Arts, Inc. (a) 11,700 393,413
Electronics for Imaging, Inc. 4,000 189,000
Engineering Animation, Inc. (a) 36,900 1,245,375
Equifax, Inc. 145,300 5,403,344
First Data Corp. 172,000 7,557,250
GT Interactive Software, Inc. (a) 94,000 1,116,250
HBO & Co. 11,900 819,613
Intersolv, Inc. (a) 22,600 211,875
Keane, Inc. (a) 67,400 3,504,800
Maxis, Inc. (a) 32,000 384,000
McAfee Associates, Inc. (a) 37,900 2,392,438
Metro Information Services, Inc. 3,100 61,225
Microsoft Corp. (a) 302,300 38,203,163
Netscape Communications Corp. (a) 12,400 397,575
New Era of Networks, Inc. 27,800 458,700
Ontrack Data International, Inc. 3,600 82,800
Open Market, Inc. (a) 48,000 636,000
Oracle Systems Corp. (a) 4,400 221,650
Paychex, Inc. 11,250 427,500
RWD Technologies, Inc. 500 8,625
Radiant Systems, Inc. 4,400 91,850
Saville Systems Ireland PLC
sponsored ADR (a) 19,000 988,000
Scopus Technology, Inc. (a) 46,500 1,040,438
Simulation Sciences, Inc. 7,700 117,425
Symantec Corp. (a) 6,300 122,850
USCS International, Inc. (a) 23,000 753,250
Visio Corp. (a) 8,600 606,300
115,014,287
COMPUTERS & OFFICE EQUIPMENT - 2.3%
Apex PC Solutions, Inc. 2,600 51,350
Bay Networks, Inc. (a) 5,200 138,125
Bell & Howell Co. (a) 13,700 422,131
Compaq Computer Corp. (a) 147,000 14,589,750
Comverse Technology, Inc. (a) 14,700 764,400
Creative Technology Corp. Ltd. (a) 36,700 623,900
Data General Corp. (a) 53,900 1,401,400
Dell Computer Corp. (a) 117,100 13,751,931
Diebold, Inc. 10,575 412,425
EMC Corp. (a) 455,600 17,768,400
International Business Machines Corp. 48,000 4,329,000
Kronos, Inc. (a) 58,800 1,617,000
Overland Data, Inc. 6,300 33,863
Pitney Bowes, Inc. 97,600 6,783,200
Procom Technology, Inc. 44,900 482,675
Quantum Corp. (a) 136,200 2,766,563
Seagate Technology (a) 500 17,594
Stratus Computer, Inc. (a) 27,900 1,395,000
Sun Microsystems, Inc. (a) 38,500 1,432,922
Symbol Technologies, Inc. 132,300 4,448,588
73,230,217
ELECTRONIC INSTRUMENTS - 1.1%
Applied Materials, Inc. (a) 104,200 7,378,663
KLA Instruments Corp. (a) 31,400 1,530,750
Laser Power Corp. 100,000 587,500
Perkin-Elmer Corp. 142,100 11,305,831
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TECHNOLOGY - CONTINUED
ELECTRONIC INSTRUMENTS - CONTINUED
Tektronix, Inc. 28,000 $ 1,680,000
Teradyne, Inc. (a) 51,100 2,005,675
Thermo Electron Corp. (a) 219,800 7,473,200
Thermoquest Corp. (a) 5,100 79,050
Waters Corp. (a) 113,100 4,057,463
36,098,132
ELECTRONICS - 3.3%
Altera Corp. (a) 92,300 4,661,150
Analog Devices, Inc. (a) 15,200 403,750
DII Group, Inc. 9,300 409,200
Etec Systems, Inc. (a) 4,900 210,088
Griffon Corp. (a) 118,300 1,619,231
Intel Corp. 111,700 14,167,069
KEMET Corp. (a) 15,700 390,538
Kent Electronics Corp. (a) 7,400 271,488
Lattice Semiconductor Corp. (a) 49,100 2,774,150
Linear Technology Corp. 35,400 1,831,950
MRV Communications, Inc. (a) 12,400 365,800
Maxim Integrated Products, Inc. (a) 53,700 3,054,188
Micro Linear Corp. (a) 17,000 178,500
Microchip Technology, Inc. (a) 29,300 871,675
Micron Technology, Inc. 259,700 10,371,769
Motorola, Inc. 120,900 9,188,400
National Semiconductor Corp. (a) 206,000 6,308,750
PMC-Sierra, Inc. (a) 34,700 910,875
Photronics, Inc. (a) 8,100 386,775
SGS Thomson Microelectronics NV (a) 7,400 592,000
Sanmina Corp. (a) 5,950 377,825
Semtech Corp. (a) 52,400 1,912,600
Solectron Corp. (a) 25,500 1,785,000
Sterling Commerce, Inc. 9,400 309,025
Storage Technology Corp. (a) 75,500 3,359,750
Texas Instruments, Inc. 381,900 32,103,469
Unitrode Corp. (a) 102,600 5,168,475
Vishay Intertechnology, Inc. 115 3,328
Vitesse Semiconductor Corp. (a) 33,000 1,078,688
Zero Corp. 74,400 1,953,000
107,018,506
PHOTOGRAPHIC EQUIPMENT - 0.2%
Polaroid Corp. 125,500 6,965,250
TOTAL TECHNOLOGY 471,121,547
TRANSPORTATION - 1.1%
AIR TRANSPORTATION - 0.3%
Comair Holdings, Inc. 13,600 376,550
Continental Airlines, Inc. Class B (a) 169,400 5,918,413
Delta Air Lines, Inc. 33,900 2,779,800
Ryanair Holdings PLC sponsored ADR 13,100 355,338
Viad Corp. 43,700 841,225
10,271,326
RAILROADS - 0.3%
Bombardier, Inc. Class B 73,600 1,668,547
CSX Corp. 25,100 1,393,050
Canadian Pacific Ltd. 2,300 65,469
Canadian National Railway Co. 17,600 767,407
Wisconsin Central Transportation
Corp. (a) 158,200 5,892,950
9,787,423
SHARES VALUE (NOTE 1)
TRUCKING & FREIGHT - 0.5%
Air Express International Corp. 7,700 $ 306,075
Airborne Freight Corp. 1,500 62,813
CNF Transportation, Inc. 168,700 5,440,575
Expeditors International of
Washington, Inc. 84,800 2,406,200
Roadway Express, Inc. 21,300 497,888
Swift Transportation Co., Inc. (a) 43,400 1,280,300
USFreightways Corp. 98,200 2,540,925
Werner Enterprises, Inc. 3,400 65,875
XTRA Corp. 4,600 202,113
Yellow Corp. (a) 124,100 2,776,738
15,579,502
TOTAL TRANSPORTATION 35,638,251
UTILITIES - 2.9%
CELLULAR - 0.3%
Mobile Telecommunications Technologies,
Inc. (a) 138,900 1,988,006
Vodafone Group PLC sponsored ADR 128,100 6,204,844
8,192,850
ELECTRIC UTILITY - 0.5%
Edison International 333,200 8,288,350
National Grid Co. PLC 1,637,600 5,983,817
Ogden Corp. 9,300 202,275
14,474,442
GAS - 0.2%
El Paso Natural Gas Co. 81,400 4,477,000
Enron Corp. 39,300 1,603,931
Sonat, Inc. 28,800 1,476,000
7,556,931
TELEPHONE SERVICES - 1.9%
Brooks Fiber Properties, Inc. (a) 122,500 4,134,375
Cable & Wireless PLC Ord. 666,900 6,106,036
Cincinnati Bell, Inc. 27,000 850,500
Excel Communication, Inc. 20,300 583,625
MCI Communications Corp. 192,000 7,350,000
McLeodUSA, Inc. 132,600 4,475,250
Qwest Communications
International, Inc. 45,000 1,226,250
Sprint Corp. 5,600 294,700
STAR Telecommunications, Inc. 49,400 654,550
Tel-Save Holdings, Inc. (a) 2,600 39,650
Telco Communications Group, Inc. 40,000 1,300,000
Teleport Communications Group, Inc.
Class A (a) 101,000 3,446,625
US WEST Media Group (a) 108,400 2,195,100
WorldCom, Inc. (a) 909,390 29,100,480
61,757,141
TOTAL UTILITIES 91,981,364
TOTAL COMMON STOCKS
(Cost $2,418,784,303) 2,972,841,525
PREFERRED STOCKS - 0.8%
CONVERTIBLE PREFERRED STOCKS - 0.3%
CONSTRUCTION & REAL ESTATE - 0.2%
REAL ESTATE INVESTMENT TRUSTS - 0.2%
Vornado Realty Trust $3.25, Series A 120,800 6,538,300
PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
CONVERTIBLE PREFERRED STOCKS - CONTINUED
RETAIL & WHOLESALE - 0.1%
APPAREL STORES - 0.1%
TJX Companies, Inc.,
Series E, $7.00 8,400 $ 2,394,000
TOTAL CONVERTIBLE PREFERRED STOCKS 8,932,300
NONCONVERTIBLE PREFERRED STOCKS - 0.5%
TECHNOLOGY - 0.1%
COMPUTER SERVICES & SOFTWARE - 0.1%
SAP AG 27,900 5,754,225
UTILITIES - 0.4%
TELEPHONE SERVICES - 0.4%
Stet (Societa Finanziaria
Telefonica) Spa 1,396,200 4,838,120
Telecom Italia Mobile Spa de Risp 4,234,800 7,516,731
12,354,851
TOTAL NONCONVERTIBLE PREFERRED STOCKS 18,109,076
TOTAL PREFERRED STOCKS
(Cost $25,279,293) 27,041,376
CONVERTIBLE BONDS - 0.1%
MOODY'S PRINCIPAL
RATINGS (C) AMOUNT
HEALTH - 0.1%
MEDICAL FACILITIES MANAGEMENT - 0.1%
NovaCare, Inc.
5 1/2%, 1/15/00 B1 $ 1,624,000 1,526,560
MEDIA & LEISURE - 0.0%
BROADCASTING - 0.0%
Home Shopping Network, Inc.
5 7/8%, 3/1/06 (b) B- 445,000 570,713
Home Shopping Network, Inc.
5 7/8%, 3/1/06 B3 29,000 37,193
Jacor Communications, Inc.
liquid yield option notes
0%, 6/12/11 B3 302,000 169,498
777,404
TECHNOLOGY - 0.0%
ELECTRONICS - 0.0%
National Semiconductor Corp.
6 1/2%, 10/1/02 (b) Ba2 1,355,000 1,397,344
TOTAL CONVERTIBLE BONDS
(Cost $3,298,523) 3,701,308
U.S. TREASURY OBLIGATIONS - 1.2%
7 5/8%, 2/15/25 Aaa $ 30,000,000 32,850,000
6 3/4%, 8/15/26 Aaa 5,000,000 4,948,450
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $38,564,727) 37,798,450
CASH EQUIVALENTS - 4.9%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 5.93%, dated
6/30/97 due 7/1/97 $ 157,004,858 $ 156,979,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $2,642,905,846) $ 3,198,361,659
LEGEND
1. Non-income producing
2. Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of these securities amounted to $3,954,433 or 0.1% of net
assets.
3. Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
4. Transactions during the period with companies which are or were
affiliates are as follows:
PURCHASE SALES DIVIDEND VALUE
AFFILIATE COST COST INCOME
Cutter & Buck, Inc. $ - $ 130,000 $ - $ -
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $2,581,519,143 and $2,067,054,575, respectively, of which U.S.
government and government agency obligations aggregated $12,330,855 and
$83,163,081, respectively.
The market value of futures contracts opened and closed during the period
amounted to $191,296,108 and $192,542,878, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of FMR. The commissions paid to these affiliated
firms were $736,024 for the period.
Distribution of investments by country of issue, as a percentage of total
value of investment in securities, is as follows:
United States 85.1%
Netherlands 2.6
United Kingdom 2.6
Canada 2.2
Netherland Antilles 1.6
Switzerland 1.4
France 1.4
Bermuda 1.1
Others (individually less than 1%) 2.0
TOTAL 100.0%
INCOME TAX INFORMATION
At June 30, 1997, the aggregate cost of investment securities for income
tax purposes was $2,644,690,371. Net unrealized appreciation aggregated
$553,671,288, of which $586,693,869 related to appreciated investment
securities and $33,022,581 related to depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in $ 3,198,361,659
securities, at
value (including
repurchase
agreements of
$156,979,000) (cost
$2,642,905,846) -
See accompanying
schedule
Receivable for 59,459,081
investments sold
Receivable for fund 6,523,051
shares sold
Dividends receivable 2,975,377
Interest receivable 1,050,854
TOTAL ASSETS 3,268,370,022
LIABILITIES
Payable to custodian $ 9,448
bank
Payable for 42,551,506
investments
purchased
Payable for fund 751,649
shares redeemed
Accrued management 1,562,871
fee
Other payables and 294,808
accrued expenses
TOTAL LIABILITIES 45,170,282
NET ASSETS $ 3,223,199,740
Net Assets consist of:
Paid in capital $ 2,591,680,584
Undistributed net 14,872,629
investment income
Accumulated 61,194,489
undistributed net
realized gain (loss)
on investments and
foreign currency
transactions
Net unrealized 555,452,038
appreciation
(depreciation) on
investments
and assets and
liabilities in foreign
currencies
NET ASSETS, for $ 3,223,199,740
179,793,883 shares
outstanding
NET ASSET VALUE, $17.93
offering price
and redemption
price per share
($3,223,199,740 (divided by)
179,793,883
shares)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $ 16,173,638
Dividends
Interest 9,201,324
TOTAL INCOME 25,374,962
EXPENSES
Management fee $ 8,331,378
Transfer agent fees 997,003
Accounting fees and 401,998
expenses
Non-interested 5,810
trustees'
compensation
Custodian fees and 207,894
expenses
Registration fees 13,357
Audit 20,419
Legal 2,911
Miscellaneous 46,997
Total expenses 10,027,767
before reductions
Expense reductions (513,563 9,514,204
)
NET INVESTMENT 15,860,758
INCOME
REALIZED AND
UNREALIZED GAIN
(LOSS)
Net realized gain
(loss) on:
Investment 69,106,380
securities (including
realized gain of
$2,496 on sales of
investments in
affiliated issuers)
Foreign currency (13,416
transactions )
Futures contracts 1,246,770 70,339,734
Change in net
unrealized
appreciation
(depreciation) on:
Investment 232,852,484
securities
Assets and (4,098 232,848,386
liabilities in )
foreign currencies
NET GAIN (LOSS) 303,188,120
NET INCREASE $ 319,048,878
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
OTHER INFORMATION $ 506,300
Expense reductions
Directed
brokerage
arrangements
Custodian interest 7,263
credits
$ 513,563
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED)
Operations $ 15,860,758 $ 20,976,837
Net investment
income
Net realized gain 70,339,734 49,001,422
(loss)
Change in net 232,848,386 254,150,553
unrealized
appreciation
(depreciation)
NET INCREASE 319,048,878 324,128,812
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
Distributions to (21,846,321) -
shareholders
From net
investment income
From net realized (57,736,705) (9,296,351)
gain
TOTAL DISTRIBUTIONS (79,583,026) (9,296,351)
Share transactions 704,874,447 1,380,209,873
Net proceeds from
sales of shares
Reinvestment of 79,583,026 9,296,351
distributions
Cost of shares (194,826,644) (187,235,370)
redeemed
NET INCREASE 589,630,829 1,202,270,854
(DECREASE) IN NET
ASSETS RESULTING
FROM SHARE
TRANSACTIONS
TOTAL INCREASE 829,096,681 1,517,103,315
(DECREASE) IN NET
ASSETS
NET ASSETS
Beginning of period 2,394,103,059 876,999,744
End of period $ 3,223,199,740 $ 2,394,103,059
(including
undistributed net
investment
income of
$14,872,629 and
$20,976,837,
respectively)
OTHER INFORMATION
Shares
Sold 42,121,561 92,660,951
Issued in 4,834,935 674,626
reinvestment of
distributions
Redeemed (11,722,580) (12,369,121)
Net increase 35,233,916 80,966,456
(decrease)
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
SIX MONTHS YEARS ENDED JANUARY 3, 1995
ENDED DECEMBER 31, (COMMENCEMENT
JUNE 30, 1997 OF OPERATIONS) TO
DECEMBER 31,
SELECTED PER-SHARE DATA (UNAUDITED) 1996 1995
Net asset value, $ 16.56 $ 13.79 $ 10.00
beginning of period
Income from
Investment
Operations
Net investment .10 D .14 .06
income
Net realized and 1.78 2.76 3.91
unrealized gain
(loss)
Total from 1.88 2.90 3.97
investment
operations
Less Distributions
From net (.14) - (.06)
investment income
From net realized (.37) (.13) (.12)
gain
Total distributions (.51) (.13) (.18)
Net asset value, end $ 17.93 $ 16.56 $ 13.79
of period
TOTAL RETURN B, C 11.63% 21.22% 39.72%
RATIOS AND
SUPPLEMENTAL
DATA
Net assets, end of $ 3,223,200 $ 2,394,103 $ 877,000
period (000
omitted)
Ratio of expenses to .73% A .74% .72%
average net assets
Ratio of expenses to .69% A, E .71% E .72%
average net assets
after expense
reductions
Ratio of net 1.16% A 1.33% 1.07%
investment income
to average net
assets
Portfolio turnover rate 163% A 178% 132%
Average commission $ .0365 $ .0343
rate F
A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR
ARE NOT ANNUALIZED AND DO NOT REFLECT CHARGES
ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES
WOULD REDUCE THE TOTAL RETURNS SHOWN.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD
CERTAIN EXPENSES NOT BEEN REDUCED DURING THE
PERIODS SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS).
D NET INVESTMENT INCOME PER SHARE HAS BEEN
CALCULATED BASED ON AVERAGE SHARES OUTSTANDING
DURING THE PERIOD.
E FMR OR THE FUND HAS ENTERED INTO VARYING
ARRANGEMENTS WITH THIRD PARTIES WHO EITHER PAID
OR REDUCED A PORTION OF THE FUND'S EXPENSES (SEE
NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
F FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER
1, 1995, A FUND IS REQUIRED TO DISCLOSE ITS
AVERAGE COMMISSION RATE PER SHARE FOR SECURITY
TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS
AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND
TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED
IN VARIOUS MARKETS WHERE TRADING PRACTICES AND
COMMISSION RATE STRUCTURES MAY DIFFER.
VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can
look at the total percentage change in value, the average annual percentage
change or the growth of a hypothetical $10,000 investment. Total return
reflects the change in the value of an investment, assuming reinvestment of
the fund's dividend income and capital gains (the profits earned upon the
sale of securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10
JUNE 30, 1997 YEAR YEARS YEARS
GROWTH 17.92% 19.89% 14.33%
S&P 500(registered trademark) 34.70% 19.78% 14.64%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what
would have happened if the fund had performed at a constant rate each year.
You can compare these figures to the performance of the Standard & Poor's
500 Index - a widely recognized, unmanaged index of common stocks. This
benchmark reflects the reinvestment of dividends and capital gains, if any.
UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for
example, has a history of long-term growth and
short-term volatility. In turn, the share price and
return of a fund that invests in stocks will vary.
That means if you sell your shares during a
market downturn, you might lose money. But if
you can ride out the market's ups and downs,
you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of return
and are not the fund's year-by-year results, which fluctuated over the
periods shown.
If Fidelity had not reimbursed certain fund expenses, the past 10 years
total return would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL
CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER THE PAST 10 YEARS
1995/01/03 10000.00 10000.00
1995/01/31 10060.00 10258.23
1995/02/28 10370.00 10658.00
1995/03/31 10560.00 10972.51
1995/04/30 10930.00 11295.66
1995/05/31 11440.00 11747.14
1995/06/30 11790.00 12020.03
1995/07/31 12180.00 12418.61
1995/08/31 12260.00 12449.78
1995/09/30 12470.00 12975.16
1995/10/31 12560.00 12928.84
1995/11/30 12920.00 13496.42
1995/12/31 13251.81 13756.36
1996/01/31 13444.45 14224.63
1996/02/29 13434.43 14356.49
1996/03/31 13393.72 14494.74
1996/04/30 13607.45 14708.39
1996/05/31 13912.77 15087.72
1996/06/30 14024.73 15145.21
1996/07/31 13617.62 14476.09
1996/08/31 13699.05 14781.39
1996/09/30 14360.59 15613.29
1996/10/31 14950.89 16043.91
1996/11/30 16080.60 17256.66
1996/12/31 15673.50 16914.81
1997/01/31 16416.46 17971.65
1997/02/28 16573.05 18112.54
1997/03/31 15727.48 17368.30
1997/04/30 16446.21 18405.19
1997/05/31 17513.74 19525.70
1997/06/30 18095.06 20400.45
Let's say hypothetically that $10,000 was invested in Growth Portfolio on
June 30, 1987. As the chart shows, by June 30, 1997, the value of the
investment would have grown to $38,148 - a 281.48% increase on the initial
investment. For comparison, look at how the S&P 500 did over the same
period. With dividends and capital gains, if any, reinvested, the same
$10,000 investment would have grown to $39,269 - a 292.69% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Philip Morris Companies, Inc. 4.3
Microsoft Corp. 3.3
Merck & Co., Inc. 3.1
Wal-Mart Stores, Inc. 2.3
Boeing Co. 2.2
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Technology 20.1
Health 16.7
Nondurables 9.2
Retail & Wholesale 8.5
Finance 7.8
ASSET ALLOCATION AS OF JUNE 30, 1997 *
Row: 1, Col: 1, Value: 8.4
Row: 1, Col: 2, Value: 91.59999999999999
Stocks 91.6%
Short-term investments 8.4%
FOREIGN INVESTMENTS 6.8%
*
(% OF FUND'S INVESTMENTS)
VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with
Jennifer Uhrig,
Portfolio Manager of Growth Portfolio
Q. HOW DID THE FUND PERFORM, JENNIFER?
A. The performance was disappointing. For the six months that ended June
30, 1997, the fund underperformed the Standard & Poor's 500 Index, which
had a six-month return of 20.61%. For the 12-month period that ended June
30, 1997, the fund trailed the S&P 500's return of 34.70%.
Q. WHAT FACTORS INFLUENCED THE FUND'S PERFORMANCE?
A. A distinct lack of market breadth during the period affected the
performance of many diversified stock funds, as much of the market's gain
throughout the period was concentrated among a select group of
household-name, large-cap stocks. Many of these "mega-cap" stocks comprised
the top tier of the S&P 500. The fund participated in this rally to some
extent - I increased the fund's weightings in the market's 50 largest
stocks to around 35% of total investments - but I wasn't overweighted in
enough of them to fully capitalize on the large-cap rally. Additionally, a
technology stock correction in early 1997 had a negative impact on
performance.
Q. WHAT SORTS OF CHANGES HAVE YOU MADE SINCE TAKING OVER THE FUND IN
JANUARY?
A. First off, I've reduced the number of individual positions within the
portfolio. Rather than having an abundance of smaller positions, none of
which are particularly meaningful to performance, I've concentrated on the
stocks in which I'm most confident. A by-product of this strategy is that
the concentration among the fund's top positions has increased. At the
beginning of the period, the fund's top 10 positions comprised
approximately 18% of the fund's investments; at the end of the period, that
percentage had jumped to approximately 25%. In addition, I also raised the
fund's average market capitalization weighting. At the beginning of the
period, the fund's weighted market cap was around $13 billion. This figure
rose to around $23 billion by period's end, but still was well below the
S&P 500's average market cap of $33 billion.
Q. WHICH STOCKS PERFORMED WELL? WHERE DID THE DISAPPOINTMENTS LIE?
A. Health care stocks did well, with some of the larger pharmaceutical
companies leading the way. The fund owned large-cap health care names such
as Bristol-Myers Squibb and Schering-Plough, both of which performed well.
Other stocks that contributed positively included WorldCom, a
telecommunications services company, CompUSA and Philip Morris. Retail
stocks, on the other hand, turned in a subpar performance as the fund's
positions in PETsMART, Viking Office Products and Just for Feet had
negative effects on performance.
Q. PHILIP MORRIS IS THE FUND'S LARGEST SINGLE POSITION AT AROUND 4.3%. CAN
YOU EXPLAIN HOW THIS STOCK WILL BE AFFECTED BY THE RECENT TOBACCO
LITIGATION SETTLEMENT?
A. I think the settlement will eventually benefit everyone involved.
Cigarette prices will likely rise, as tobacco companies search for ways to
fund their liabilities. From a public health perspective, a price increase
would almost certainly reduce the number of smokers. So that's positive.
From a shareholder perspective, Philip Morris' earnings may be affected by
lower sales volumes, but any decline may be offset by the potential for the
stock's price-to-earnings ratio to rise. This is because the valuation of
the stock was penalized during litigation due to certain risks. As a final
note, I would add that the settlement still needs to go to Congress to
become law. So while the settlement appears logical from all sides, it
still may get bogged down in the political arena.
Q. WHAT'S YOUR OUTLOOK?
A. Over the past year or so, stocks in general have benefited from
favorable investment conditions. Economic growth has remained strong and,
with no signs of inflation, interest rate levels have remained low. I don't
know how long this backdrop can continue, but I'm optimistic about the
outlook for growth stocks. High interest rates, even more so than weak
earnings, have a negative influence on growth stocks. I think higher rates,
as a result of an acceleration in the economy and higher inflation, are
unlikely given the Federal Reserve Board's recent action to reign in the
economy before it overheats.
FUND FACTS
GOAL: to provide capital growth by investing
primarily in common stocks and securities
convertible into common stocks
START DATE: January 3, 1995
SIZE: as of June 30, 1997, more than
$706 million
MANAGER: George Vanderheiden, since
inception; joined Fidelity in 1971
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 91.6%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 3.8%
AEROSPACE & DEFENSE - 3.3%
Boeing Co. 2,843,000 $ 150,856,688
Gulfstream Aerospace Corp. (a) 514,300 15,171,850
Lockheed Martin Corp. 323,800 33,533,538
United Technologies Corp. 301,000 24,983,000
Wyman-Gordon Co. (a) 184,200 4,973,400
229,518,476
DEFENSE ELECTRONICS - 0.5%
Raytheon Co. 619,000 31,569,000
TOTAL AEROSPACE & DEFENSE 261,087,476
BASIC INDUSTRIES - 3.1%
CHEMICALS & PLASTICS - 1.0%
Air Products & Chemicals, Inc. 158,300 12,861,875
Cytec Industries, Inc. (a) 443,300 16,568,338
Monsanto Co. 782,700 33,705,019
Praxair, Inc. 178,300 9,984,800
73,120,032
IRON & STEEL - 0.7%
Inland Steel Industries, Inc. 557,000 14,551,625
Nucor Corp. 555,500 31,385,750
45,937,375
PACKAGING & CONTAINERS - 0.5%
Owens-Illinois, Inc. 1,050,100 32,553,100
PAPER & FOREST PRODUCTS - 0.9%
Kimberly-Clark Corp. 1,024,700 50,978,825
Stone Container Corp. 595,000 8,515,938
59,494,763
TOTAL BASIC INDUSTRIES 211,105,270
DURABLES - 1.9%
AUTOS, TIRES, & ACCESSORIES - 0.2%
AutoZone, Inc. (a) 357,900 8,433,019
Circuit City Stores, Inc. - CarMax Group 324,500 4,644,406
13,077,425
CONSUMER DURABLES - 0.8%
Corning, Inc. 491,300 27,328,563
Minnesota Mining & Manufacturing Co. 255,400 26,050,800
53,379,363
TEXTILES & APPAREL - 0.9%
Liz Claiborne, Inc. 322,500 15,036,563
Reebok International Ltd. 399,900 18,695,325
Timberland Co. Class A (a)(b) 481,700 31,310,500
65,042,388
TOTAL DURABLES 131,499,176
ENERGY - 6.1%
ENERGY SERVICES - 3.7%
Dresser Industries, Inc. 657,100 24,476,975
Falcon Drilling, Inc. (a) 445,000 25,643,125
Halliburton Co. 800,200 63,415,850
Schlumberger Ltd. 769,600 96,200,000
Transocean Offshore, Inc. 132,400 9,615,550
Varco International, Inc. (a) 292,000 9,417,000
Western Atlas, Inc. (a) 337,500 24,721,875
253,490,375
SHARES VALUE (NOTE 1)
OIL & GAS - 2.4%
British Petroleum PLC ADR 376,326 $ 28,177,409
Burlington Resources, Inc. 168,300 7,426,238
Chesapeake Energy Corp. (a) 372,000 3,650,250
EVI, Inc. (a) 154,000 6,468,000
Royal Dutch Petroleum Co. 706,800 38,432,250
Tosco Corp. 1,099,600 32,919,275
Total SA:
Class B 310,400 31,355,668
sponsored ADR 179,800 9,102,375
Union Pacific Resources Group, Inc. 247,441 6,155,095
Vintage Petroleum, Inc. 209,200 6,432,900
170,119,460
TOTAL ENERGY 423,609,835
FINANCE - 7.8%
BANKS - 0.9%
Bank of New York Co., Inc. 533,900 23,224,650
NationsBank Corp. 642,500 41,441,250
64,665,900
CREDIT & OTHER FINANCE - 1.7%
American Express Co. 645,600 48,097,200
Associates First Capital Corp. 271,600 15,073,800
Beneficial Corp. 266,900 18,966,581
Household International, Inc. 268,108 31,485,933
113,623,514
FEDERAL SPONSORED CREDIT - 2.5%
Federal Home Loan Mortgage
Corporation 1,883,600 64,748,750
Federal National Mortgage Association 1,760,500 76,801,813
Student Loan Marketing Association 262,300 33,312,100
174,862,663
INSURANCE - 2.7%
Allmerica Financial Corp. 313,100 12,484,863
Allstate Corp. 503,600 36,762,800
AMBAC, Inc. 424,200 32,398,275
American International Group, Inc. 300,000 44,812,500
MBIA, Inc. 92,000 10,378,750
UNUM Corp. 1,165,600 48,955,200
185,792,388
TOTAL FINANCE 538,944,465
HEALTH - 16.7%
DRUGS & PHARMACEUTICALS - 9.0%
American Home Products Corp. 1,048,500 80,210,250
Barr Laboratories, Inc. (a) 52,400 2,305,600
Bristol-Myers Squibb Co. 1,834,600 148,602,600
Elan Corp. PLC ADR (a) 456,900 20,674,725
Genentech, Inc. (a) 356,900 21,034,794
Merck & Co., Inc. 2,084,900 215,787,150
Novartis sponsored ADR 485,400 38,832,000
Schering-Plough Corp. 1,198,000 57,354,250
SmithKline Beecham PLC ADR 429,400 39,343,775
624,145,144
MEDICAL EQUIPMENT & SUPPLIES - 4.9%
Abbott Laboratories 1,103,400 73,651,950
Boston Scientific Corp. (a) 569,000 34,957,938
Cardinal Health, Inc. 210,100 12,028,225
Johnson & Johnson 2,193,300 141,193,688
Medtronic, Inc. 275,600 22,323,600
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
HEALTH - CONTINUED
MEDICAL EQUIPMENT & SUPPLIES - CONTINUED
St. Jude Medical, Inc. (a) 777,700 $ 30,330,300
Sofamor/Danek Group, Inc. (a) 346,300 15,843,225
Sybron International Corp. (a) 259,100 10,331,613
340,660,539
MEDICAL FACILITIES MANAGEMENT - 2.8%
Carematrix Corp. (a) 205,300 5,068,344
Columbia/HCA Healthcare Corp. 621,837 24,445,967
HEALTHSOUTH Rehabilitation
Corp. (a) 1,907,800 47,575,763
Health Management Associates, Inc.
Class A (a) 672,800 19,174,800
Humana, Inc. (a) 518,900 11,999,563
Oxford Health Plans, Inc. (a) 448,700 32,194,225
Tenet Healthcare Corp. (a) 741,800 21,929,463
United HealthCare Corp. 632,500 32,890,000
195,278,125
TOTAL HEALTH 1,160,083,808
HOLDING COMPANIES - 0.4%
Norfolk Southern Corp. 289,500 29,167,125
INDUSTRIAL MACHINERY & EQUIPMENT - 2.3%
ELECTRICAL EQUIPMENT - 1.5%
General Electric Co. 876,300 57,288,113
Harris Corp. 277,900 23,343,600
Westinghouse Electric Corp. 1,159,700 26,818,063
107,449,776
INDUSTRIAL MACHINERY & EQUIPMENT - 0.2%
Tyco International Ltd. 169,500 11,790,844
POLLUTION CONTROL - 0.6%
USA Waste Services, Inc. (a) 918,700 35,484,788
Zurn Industries, Inc. 146,500 4,211,875
39,696,663
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 158,937,283
MEDIA & LEISURE - 5.3%
BROADCASTING - 0.2%
Clear Channel Communications,
Inc. (a) 168,800 10,391,750
ENTERTAINMENT - 1.6%
Disney (Walt) Co. 1,398,200 112,205,550
LEISURE DURABLES & TOYS - 0.2%
Harley-Davidson, Inc. 240,000 11,505,000
Nintendo Co. Ltd. Ord. 64,000 5,359,152
16,864,152
LODGING & GAMING - 1.7%
Circus Circus Enterprises, Inc. (a) 635,100 15,639,338
HFS, Inc. (a) 891,500 51,707,000
Mirage Resorts, Inc. (a) 1,314,800 33,198,700
Sun International Hotels Ltd. Ord. (a) 487,900 18,021,806
118,566,844
PUBLISHING - 0.5%
New York Times Co. (The) Class A 72,000 3,564,000
Times Mirror Co. Class A 534,700 29,542,175
33,106,175
SHARES VALUE (NOTE 1)
RESTAURANTS - 1.1%
Landry's Seafood Restaurants, Inc. (a) 324,100 $ 7,454,300
McDonald's Corp. 475,500 22,972,594
Starbucks Corp. (a) 1,093,300 42,570,369
72,997,263
TOTAL MEDIA & LEISURE 364,131,734
NONDURABLES - 9.2%
BEVERAGES - 2.2%
Coca-Cola Enterprises, Inc. 805,400 18,524,200
PepsiCo, Inc. 3,600,600 135,247,538
153,771,738
FOODS - 0.7%
Campbell Soup Co. 499,900 24,995,000
Hershey Foods Corp. 391,600 21,660,375
46,655,375
HOUSEHOLD PRODUCTS - 1.4%
Clorox Co. 301,300 39,771,600
Procter & Gamble Co. 416,100 58,774,125
98,545,725
TOBACCO - 4.9%
Philip Morris Companies, Inc. 6,685,600 296,673,500
RJR Nabisco Holdings Corp. 1,286,100 42,441,300
339,114,800
TOTAL NONDURABLES 638,087,638
PRECIOUS METALS - 0.4%
Barrick Gold Corp. 415,000 9,032,521
Getchell Gold Corp. (a) 270,753 9,544,043
Newmont Mining Corp. 295,000 11,505,000
30,081,564
RETAIL & WHOLESALE - 8.5%
APPAREL STORES - 1.1%
Just for Feet, Inc. (a) 1,110,500 19,364,344
Ross Stores, Inc. 550,100 17,981,394
TJX Companies, Inc. 1,065,200 28,094,650
Talbots, Inc. 264,700 8,999,800
74,440,188
DRUG STORES - 1.0%
CVS Corp. 917,805 47,037,506
Rite Aid Corp. 497,600 24,817,800
71,855,306
GENERAL MERCHANDISE STORES - 3.0%
Consolidated Stores Corp. (a) 667,812 23,206,467
Costco Companies, Inc. (a) 694,900 22,844,838
Wal-Mart Stores, Inc. 4,798,800 162,259,425
208,310,730
GROCERY STORES - 0.1%
Safeway, Inc. (a) 200,500 9,248,063
RETAIL & WHOLESALE, MISCELLANEOUS - 3.3%
Bed Bath & Beyond, Inc. (a) 461,400 14,015,025
Corporate Express, Inc. 1,244,900 17,973,244
Home Depot, Inc. (The) 1,117,500 77,037,656
Lowe's Companies, Inc. 992,300 36,839,138
Officemax, Inc. (a) 490,600 7,083,038
Staples, Inc. (a) 386,400 8,983,800
Toys "R" Us, Inc. (a) 1,266,900 44,341,500
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
RETAIL & WHOLESALE, MISCELLANEOUS - CONTINUED
U.S. Office Products Co. (a) 243,300 $ 7,435,856
Viking Office Products, Inc. (a) 621,600 11,810,400
225,519,657
TOTAL RETAIL & WHOLESALE 589,373,944
SERVICES - 1.7%
ADVERTISING - 0.1%
Omnicom Group, Inc. 82,900 5,108,713
EDUCATIONAL SERVICES - 0.2%
Apollo Group, Inc. Class A (a) 334,300 11,784,075
LEASING & RENTAL - 0.2%
Hanover Compressor Co. 5,100 99,450
Hertz Corp. Class A 328,100 11,811,600
11,911,050
SERVICES - 1.2%
ADT Ltd. (a) 706,800 23,324,400
AccuStaff, Inc. (a) 1,002,500 23,746,719
Gartner Group, Inc. Class A (a) 837,000 30,079,688
Sitel Corp. (a) 497,900 10,269,188
87,419,995
TOTAL SERVICES 116,223,833
TECHNOLOGY - 20.1%
COMMUNICATIONS EQUIPMENT - 3.6%
ADC Telecommunications, Inc. (a) 754,400 25,178,100
Alcatel Alsthom Compagnie Generale
d'Electricite SA sponsored ADR 16,000 404,000
Alcatel Alsthom Compagnie Generale
d'Electricite SA 599,900 75,086,970
Aspect Telecommunications Corp. (a) 822,000 18,289,500
Cisco Systems, Inc. (a) 94,900 6,370,163
Lucent Technologies, Inc. 835,900 60,237,044
Nokia Corp. AB sponsored ADR 458,300 33,799,625
Tellabs, Inc. (a) 583,700 32,614,238
251,979,640
COMPUTER SERVICES & SOFTWARE - 7.8%
Broderbund Software, Inc. (a) 659,900 16,291,281
CUC International, Inc. (a) 1,482,600 38,269,613
Cadence Design Systems, Inc. (a) 573,300 19,205,550
CompUSA, Inc. (a) 2,059,700 44,283,550
Electronics for Imaging, Inc. (a) 345,900 16,343,775
Equifax, Inc. 420,500 15,637,344
Henry (Jack) & Associates, Inc. 165,600 4,015,800
Keane, Inc. (a) 344,100 17,893,200
Microsoft Corp. (a) 1,799,700 227,437,088
Oracle Systems Corp. (a) 810,800 40,844,050
Parametric Technology Corp. (a) 437,700 18,629,606
PeopleSoft, Inc. (a) 699,100 36,877,525
Policy Management Systems Corp. (a) 206,500 9,705,500
Sabre Group Holdings, Inc. Class A (a) 376,600 10,215,275
SunGard Data Systems, Inc. (a) 393,600 18,302,400
Yahoo, Inc. (a) 204,800 7,219,200
541,170,757
COMPUTERS & OFFICE EQUIPMENT - 2.5%
Adaptec, Inc. (a) 692,400 24,060,900
Compaq Computer Corp. (a) 677,100 67,202,175
Fore Systems, Inc. (a) 1,457,200 19,854,350
SHARES VALUE (NOTE 1)
Ingram Micro, Inc. Class A (a) 162,200 $ 3,913,075
Pitney Bowes, Inc. 379,500 26,375,250
Quantum Corp. (a) 560,400 11,383,125
SCI Systems, Inc. (a) 100,200 6,387,750
Tech Data Corp. (a) 539,400 16,957,388
176,134,013
ELECTRONIC INSTRUMENTS - 0.4%
Applied Materials, Inc. (a) 210,600 14,913,113
Novellus Systems, Inc. (a) 33,600 2,906,400
Waters Corp. (a) 217,800 7,813,575
25,633,088
ELECTRONICS - 5.8%
Altera Corp. (a) 393,100 19,851,550
Intel Corp. 359,900 51,038,319
Linear Technology Corp. 375,400 19,426,950
Maxim Integrated Products, Inc. (a) 273,700 15,566,688
Micron Technology, Inc. 950,600 37,964,588
Motorola, Inc. 716,600 54,461,600
Sanmina Corp. (a) 501,600 31,851,600
Solectron Corp. (a) 204,500 14,315,000
Texas Instruments, Inc. 1,315,400 110,575,813
Uniphase Corp. (a) 380,800 22,181,600
Xilinx, Inc. (a) 429,000 21,047,813
398,281,521
TOTAL TECHNOLOGY 1,393,199,019
TRANSPORTATION - 0.5%
RAILROADS - 0.5%
Wisconsin Central Transportation
Corp. (a) 919,800 34,262,550
UTILITIES - 3.8%
CELLULAR - 0.9%
AirTouch Communications, Inc. (a) 1,227,800 33,611,025
Nextel Communications, Inc.
Class A (a) 659,800 12,494,963
Vanguard Cellular Systems, Inc.
Class A (a) 1,146,700 15,623,788
61,729,776
TELEPHONE SERVICES - 2.9%
Cincinnati Bell, Inc. 657,800 20,720,700
MCI Communications Corp. 260,300 9,964,609
Sprint Corp. 893,300 47,009,913
WorldCom, Inc. (a) 3,860,170 123,525,420
201,220,642
TOTAL UTILITIES 262,950,418
TOTAL COMMON STOCKS
(Cost $4,948,655,239) 6,342,745,138
CASH EQUIVALENTS - 8.4%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 5.93%, dated
6/30/97 due 7/1/97 $ 584,241,222 584,145,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $5,532,800,239) $ 6,926,890,138
LEGEND
1. Non-income producing
2. An affiliated company is a company in which the fund has ownership of at
least 5% of the voting securities. Transactions during the period with
companies which are or were affiliates are as follows:
PURCHASE SALES DIVIDEND VALUE
AFFILIATE COST COST INCOME
Timberland Co. Class A $ 3,474,754 $ 1,222,255 $ - $ 31,310,500
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $4,244,176,604 and $4,238,684,327, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company. The
commissions paid to these affiliated firms were $1,377,437 for the period
(see Note 4 of Notes to Financial Statements).
INCOME TAX INFORMATION
At June 30, 1996, the aggregate cost of investment securities for income
tax purposes was $5,537,054,914. Net unrealized appreciation aggregated
$1,389,835,224, of which $1,460,271,254 related to appreciated investment
securities and $70,436,030 related to depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in $ 6,926,890,138
securities, at
value (including
repurchase
agreements of
$584,145,000) (cost
$5,532,800,239) -
See accompanying
schedule
Cash 251
Receivable for 18,347,400
investments sold
Receivable for fund 3,541,061
shares sold
Dividends receivable 7,495,963
Other receivables 728,658
TOTAL ASSETS 6,957,003,471
LIABILITIES
Payable for $ 15,738,603
investments
purchased
Payable for fund 1,935,837
shares redeemed
Accrued management 3,400,703
fee
Other payables and 509,241
accrued expenses
TOTAL LIABILITIES 21,584,384
NET ASSETS $ 6,935,419,087
Net Assets consist of:
Paid in capital $ 4,909,839,898
Undistributed net 20,298,488
investment income
Accumulated 611,204,466
undistributed net
realized gain (loss)
on investments and
foreign currency
transactions
Net unrealized 1,394,076,235
appreciation
(depreciation) on
investments
and assets and
liabilities in
foreign currencies
NET ASSETS, for $ 6,935,419,087
202,783,458 shares
outstanding
NET ASSET VALUE, $34.20
offering price
and redemption
price per
share
($6,935,419,087 (divided by)
202,783,458
shares)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $ 31,247,401
Dividends
Interest 10,168,233
TOTAL INCOME 41,415,634
EXPENSES
Management fee $ 19,103,779
Transfer agent fees 2,231,258
Accounting fees and 404,942
expenses
Non-interested 13,729
trustees'
compensation
Custodian fees and 106,069
expenses
Registration fees 60,637
Audit 25,840
Legal 10,909
Miscellaneous 211,034
Total expenses 22,168,197
before reductions
Expense reductions (787,052 21,381,145
)
NET INVESTMENT 20,034,489
INCOME
REALIZED AND
UNREALIZED GAIN
(LOSS)
Net realized gain
(loss) on:
Investment 626,563,617
securities (including
realized gain of
$281,124 on sales of
investments in
affiliated issuers)
Foreign currency 288 626,563,905
transactions
Change in net
unrealized
appreciation
(depreciation) on:
Investment 189,156,287
securities
Assets and (13,643 189,142,644
liabilities in )
foreign currencies
NET GAIN (LOSS) 815,706,549
NET INCREASE $ 835,741,038
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
OTHER INFORMATION $ 781,353
Expense reductions
Directed brokerage
arrangements
Custodian interest 5,699
credits
$ 787,052
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996
Operations $ 20,034,489 $ 42,344,647
Net investment
income
Net realized gain 626,563,905 186,713,569
(loss)
Change in net 189,142,644 451,420,339
unrealized
appreciation
(depreciation)
NET INCREASE 835,741,038 680,478,555
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
Distributions to (41,142,087) (11,769,237)
shareholders
From net
investment income
From net realized (184,159,819) (297,173,230)
gain
TOTAL DISTRIBUTIONS (225,301,906) (308,942,467)
Share transactions 805,853,592 2,599,782,601
Net proceeds from
sales of shares
Reinvestment of 225,301,906 308,942,467
distributions
Cost of shares (792,599,197) (1,356,539,313)
redeemed
NET INCREASE 238,556,301 1,552,185,755
(DECREASE) IN NET
ASSETS RESULTING
FROM SHARE
TRANSACTIONS
TOTAL INCREASE 848,995,433 1,923,721,843
(DECREASE) IN NET
ASSETS
NET ASSETS
Beginning of period 6,086,423,654 4,162,701,811
End of period $ 6,935,419,087 $ 6,086,423,654
(including
undistributed net
investment
income of
$20,298,488 and
$41,404,557,
respectively)
OTHER INFORMATION
Shares
Sold 25,455,810 87,784,118
Issued in 7,138,844 11,121,040
reinvestment of
distributions
Redeemed (25,234,555) (46,058,296)
Net increase 7,360,099 52,846,862
(decrease)
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1997
SELECTED PER-SHARE DATA (UNAUDITED) 1996 1995 1994 1993 D 1992
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Net asset value, $ 31.14 $ 29.20 $ 21.69 $ 23.08 $ 19.76 $ 18.51
beginning of period
Income from
Investment
Operations
Net investment .10 G .22 .08 .12 .12 .09
income
Net realized and 4.11 3.82 7.55 (.12) 3.64 1.64
unrealized gain
(loss)
Total from 4.21 4.04 7.63 - 3.76 1.73
investment
operations
Less Distributions
From net (.21) (.08) (.12) (.12) (.11) (.05)
investment income
From net realized (.94) (2.02) - (1.27) (.21) (.43)
gain
In excess of net - - - - (.12) -
realized gain
Total distributions (1.15) (2.10) (.12) (1.39) (.44) (.48)
Net asset value, end $ 34.20 $ 31.14 $ 29.20 $ 21.69 $ 23.08 $ 19.76
of period
TOTAL RETURN B, C 13.83% 14.71% 35.36% (.02)% 19.37% 9.32%
RATIOS AND
SUPPLEMENTAL
DATA
Net assets, end of $ 6,935,419 $ 6,086,424 $ 4,162,702 $ 2,141,869 $ 1,383,849 $ 749,837
period (000
omitted)
Ratio of expenses to .71% A .69% .70% .70% .71% .75%
average net assets
Ratio of expenses to .68% A, .67% .70% .69% .71% .75%
average net assets E E E
after expense
reductions
Ratio of net .64% A .81% .37% .69% .72% .83%
investment income
to average net
assets
Portfolio turnover rate 144% A 81% 108% 122% 159% 262%
Average commission $ .0428 $ .0416
rate F
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT
ANNUALIZED AND DO NOT
REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. INCLUSION OF THESE
CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN. C THE TOTAL RETURNS
WOULD HAVE BEEN LOWER HAD
CERTAIN EXPENSES NOT BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE
5 OF NOTES TO FINANCIAL
STATEMENTS). D EFFECTIVE JANUARY 1, 1993, THE FUND ADOPTED STATEMENT
OF POSITION 93-2,
"DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF
INCOME, CAPITAL GAIN, AND
RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT COMPANIES." AS A RESULT,
NET INVESTMENT INCOME
PER SHARE MAY REFLECT CERTAIN RECLASSIFICATIONS RELATED TO BOOK TO
TAX DIFFERENCES. E FMR OR THE
FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES WHO
EITHER PAID OR REDUCED A
PORTION OF THE FUND'S EXPENSES (SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS). F FOR FISCAL
YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS REQUIRED
TO DISCLOSE ITS AVERAGE
COMMISSION RATE PER SHARE FOR SECURITY TRADES ON WHICH COMMISSIONS
ARE CHARGED. THIS AMOUNT
MAY VARY FROM PERIOD TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX
OF TRADES EXECUTED IN
VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE STRUCTURES
MAY DIFFER. G NET
INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING
THE PERIOD.
</TABLE>
VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY
PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can
look at the total percentage change in value, the average annual percentage
change or the growth of a hypothetical $10,000 investment. Total return
reflects the change in the value of an investment, assuming reinvestment of
the fund's dividend income and capital gains (the profits earned upon the
sale of securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10
JUNE 30, 1997 YEAR YEARS YEARS
OVERSEAS 22.69% 11.30% 8.93%
Morgan Stanley EAFE Index 12.88% 12.84% 6.58%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what
would have happened if the fund had performed at a constant rate each year.
You can compare the fund's figures to the performance of the Morgan Stanley
Capital International Europe, Australasia, Far East (EAFE) Index - a market
capitalization weighted, unmanaged index of over 1,000 foreign stocks.
UNDERSTANDING PERFORMANCE
Many markets around the globe offer the potential
for significant growth over time; however,
investing in foreign markets means assuming
greater risks than investing in the United States.
Factors like changes in a country's financial
markets, its local political and economic
climate, and the fluctuating value of its currency
create these risks. For these reasons an
international fund's performance may be more
volatile than a fund that invests exclusively in the
United States.
(checkmark)
Figures for more than one year assume a steady compounded rate of return
and are not the fund's year-by-year results, which fluctuated over the
periods shown.
If Fidelity had not reimbursed certain fund expenses, the fund's life of
fund total return would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL
CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money. Foreign investments involve greater risks and
potential rewards than U.S. investments. These risks include political and
economic uncertainties of foreign countries, as well as the risk of
currency fluctuations.
$10,000 OVER LIFE OF FUND
1987/06/30 10000.00 10000.00
1987/07/31 9885.93 9982.53
1987/08/31 10760.46 10731.04
1987/09/30 10522.81 10562.10
1987/10/31 8327.00 9082.16
1987/11/30 8403.04 9171.60
1987/12/31 8994.45 9443.94
1988/01/31 8686.62 9612.55
1988/02/29 8917.49 10253.29
1988/03/31 9321.52 10883.72
1988/04/30 9475.43 11041.88
1988/05/31 9302.28 10687.92
1988/06/30 9138.74 10406.21
1988/07/31 9071.41 10732.69
1988/08/31 8753.95 10034.87
1988/09/30 9129.12 10473.34
1988/10/31 9533.15 11369.46
1988/11/30 9706.31 12046.70
1988/12/31 9725.55 12113.86
1989/01/31 10014.14 12327.00
1989/02/28 10187.29 12390.36
1989/03/31 10178.12 12147.18
1989/04/30 10478.61 12259.84
1989/05/31 10090.88 11592.87
1989/06/30 10052.10 11397.72
1989/07/31 10992.37 12828.97
1989/08/31 10914.82 12252.00
1989/09/30 11593.36 12810.10
1989/10/31 10963.29 12295.42
1989/11/30 11554.59 12913.51
1989/12/31 12281.59 13389.98
1990/01/31 12116.81 12891.76
1990/02/28 11833.99 11991.98
1990/03/31 12281.29 10742.71
1990/04/30 12349.36 10657.45
1990/05/31 13156.44 11873.48
1990/06/30 13448.16 11768.90
1990/07/31 14128.83 11934.67
1990/08/31 12689.69 10775.72
1990/09/30 11483.93 9273.97
1990/10/31 12553.56 10719.02
1990/11/30 12164.60 10086.73
1990/12/31 12077.09 10250.13
1991/01/31 12193.77 10581.67
1991/02/28 12604.58 11716.01
1991/03/31 12235.91 11012.68
1991/04/30 12504.94 11120.82
1991/05/31 12534.83 11236.86
1991/06/30 11847.31 10411.17
1991/07/31 12435.19 10922.69
1991/08/31 12475.05 10700.87
1991/09/30 12983.22 11303.96
1991/10/31 13072.89 11464.20
1991/11/30 12604.58 10929.00
1991/12/31 13043.00 11493.41
1992/01/31 13202.43 11247.91
1992/02/29 12927.30 10845.33
1992/03/31 12664.72 10129.36
1992/04/30 13452.48 10177.51
1992/05/31 14038.24 10858.75
1992/06/30 13775.66 10343.69
1992/07/31 12897.01 10078.96
1992/08/31 12785.91 10711.12
1992/09/30 12270.84 10499.61
1992/10/31 11432.59 9948.86
1992/11/30 11371.99 10042.48
1992/12/31 11644.67 10094.42
1993/01/31 11977.96 10093.18
1993/02/28 12212.57 10398.06
1993/03/31 13059.80 11304.42
1993/04/30 13927.70 12377.23
1993/05/31 14227.33 12638.64
1993/06/30 13876.04 12441.45
1993/07/31 14423.64 12876.96
1993/08/31 15198.55 13572.10
1993/09/30 15115.90 13266.60
1993/10/31 15663.50 13675.44
1993/11/30 15002.24 12480.07
1993/12/31 15994.13 13381.22
1994/01/31 17037.67 14512.54
1994/02/28 16737.18 14472.34
1994/03/31 16321.86 13849.00
1994/04/30 16861.77 14436.60
1994/05/31 16654.11 14353.71
1994/06/30 16477.61 14556.56
1994/07/31 16913.69 14696.55
1994/08/31 17110.96 15044.49
1994/09/30 16664.50 14570.66
1994/10/31 17007.13 15055.86
1994/11/30 16363.39 14332.27
1994/12/31 16269.95 14422.02
1995/01/31 15595.06 13867.99
1995/02/28 15636.10 13828.19
1995/03/31 16117.53 14690.67
1995/04/30 16578.03 15243.17
1995/05/31 16808.28 15061.46
1995/06/30 16965.27 14797.33
1995/07/31 17718.81 15718.56
1995/08/31 17226.92 15118.95
1995/09/30 17478.10 15414.22
1995/10/31 17132.72 14999.89
1995/11/30 17331.58 15417.24
1995/12/31 17854.87 16038.41
1996/01/31 18189.78 16104.25
1996/02/29 18229.84 16158.69
1996/03/31 18508.65 16501.84
1996/04/30 19023.38 16981.60
1996/05/31 19034.10 16669.11
1996/06/30 19173.51 16762.92
1996/07/31 18605.16 16272.99
1996/08/31 18744.57 16308.64
1996/09/30 19291.46 16741.89
1996/10/31 19098.44 16570.58
1996/11/30 20095.72 17229.89
1996/12/31 20202.96 17008.25
1997/01/31 20202.96 16413.00
1997/02/28 20671.03 16681.45
1997/03/31 20858.84 16741.86
1997/04/30 21034.92 16830.69
1997/05/31 22349.60 17929.23
1997/06/30 23523.42 18921.25
Let's say hypothetically that $10,000 was invested in Overseas Portfolio on
June 30, 1987. As the chart shows, by June 30, 1997, the value of the
investment would have grown to $23,523 - a 135.23% increase on the initial
investment. For comparison, look at how the Morgan Stanley EAFE Index did
over the same period. With dividends and capital gains, if any, reinvested,
the same $10,000 investment would have grown to $18,921 over the same
period - a 89.21% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Alcatel Alsthom Compagnie Generale d'Electricite SA 2.1
Novartis AG (Reg.) 1.9
Total SA Class B 1.8
Philips Electronics NV (Bearer) 1.8
Takeda Chemical Industries Ltd. 1.5
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997
% OF FUND'S
INVESTMENTS
Finance 15.1
Technology 10.1
Durables 9.8
Basic Industries 9.7
Health 8.8
TOP FIVE COUNTRIES AS OF JUNE 30, 1997
(EXCLUDING CASH EQUIVALENTS) % OF FUND'S
INVESTMENTS
Japan 25.4
United Kingdom 13.5
France 9.5
Netherlands 7.9
Sweden 5.3
TOP COUNTRIES ARE BASED ON THE LOCATION OF THE ISSUER OF EACH SECURITY,
INDICATING WHERE THE FUND IS EXPOSED TO POLITICAL AND CREDIT RISKS.
PERCENTAGES ARE ADJUSTED FOR THE EFFECT OF OPEN FUTURES CONTRACTS, IF
APPLICABLE.
VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW
An interview with Richard Mace, Portfolio Manager of Overseas Portfolio
Q. HOW HAS THE FUND PERFORMED, RICK?
A. Pretty well. For the six months that ended June 30, 1997, the fund
topped the 11.25% return registered by the Morgan Stanley Capital
International EAFE Index. For the 12-month period that ended June 30, 1997,
the fund again topped the EAFE index, which returned 12.88%.
Q. WHAT FACTORS CONTRIBUTED TO THE FUND'S STRONG SHOWING?
A. Individual stock selection had the biggest influence on the fund's
return, as several of the fund's larger positions posted positive results.
Market selection - specifically, the fund's underweighting in Japan
relative to the index - also played a key role. While the EAFE index had an
approximate Japanese weighting of 30% during the period, I kept the fund at
around 23% on average. As Japan's well-documented economic woes continued
to hamper the overall performance of Japanese securities, my strategy of
underweighting Japanese securities worked in the fund's favor. I would add,
however, that while market selection is important, I place more emphasis on
analyzing the specific pluses and minuses of a stock than I do on the
country where a stock is issued.
Q. HOW DID THE EUROPEAN PORTION OF THE PORTFOLIO PERFORM?
A. The across-the-board decline in European interest rates had favorable
implications for Europe's stock markets. This rate environment, which may
have been related to continuing optimism on proposed economic unity
throughout Europe, led to strong performances in countries such as Spain,
Italy and Sweden. In Europe, I basically continued my strategy of looking
for companies based on three themes: those that would benefit from a rising
dollar, those that would gain from the overall improvement of world
economies and those companies that were engaging in restructurings designed
to improve the return on capital employed in their businesses.
Q. DID YOUR STRATEGIES LEAD YOU TO ANY OTHER REGIONS OF THE WORLD?
A. One area that came into play was Canada. I've previously mentioned my
strategy of looking for stocks than can benefit from improving economies,
and Canada's many natural resource-related stocks fit that bill. Stocks
such as Inco, a nickel producer; Alcan, an aluminum producer; and Noranda,
a paper and forest products company, reflected this strategy.
Q. FOLLOWING THE LEAD OF MANY AMERICAN COMPANIES, SOME INTERNATIONAL FIRMS
HAVE BEEN IMPLEMENTING VARIOUS COST-CUTTING AND RESTRUCTURING STRATEGIES.
WHY IS THIS A POSITIVE TREND? HOW HAS IT AFFECTED THE FUND?
A. Worldwide, I think company managements have gotten smarter about how
they run their businesses. In order to earn returns above their cost of
capital, companies have had to reduce expenses, either by cutting
personnel, restructuring their balance sheets or upgrading their
technology. As they strive to become more shareholder-friendly,
international companies also are coming up with new ways to utilize their
existing assets. In terms of the fund, several individual holdings are good
illustrations of this trend. For example, Volvo, one of the fund's larger
stakes and a strong performer during the period, divested many of its
non-core businesses and announced plans to implement a share redemption
program in which the company will buy back one of every 20 outstanding
shares.
Q. WHICH INDIVIDUAL STOCK POSITIONS BENEFITED THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
A. As I mentioned earlier, individual stock selection was a real key to
performance. Aside from the strong performances of Volvo and Telebras, a
Brazilian telecommunications company, the fund's stake in Total, a
French-based oil company, and Alcatel, which specializes in
telecommunications and electrical equipment, turned in favorable results.
Disappointments included the poor performance of several Japanese brokerage
companies, including Nomura Securities and Nikko Securities.
Q. WHAT'S YOUR OUTLOOK?
A. More and more, individual stock selection is outdistancing country
selection in terms of performance influence. I think this trend will most
likely continue and will place even more emphasis on thorough research and
analysis of individual stocks. With this in mind, I'll continue to use my
three-pronged approach of looking for stocks that can benefit from a rising
dollar, stronger economies and increased corporate efficiencies.
FUND FACTS
GOAL: to increase the value of the fund's
shares by investing mainly in stocks in
Europe, the Far East and the Pacific Basin
START DATE: January 28, 1987
SIZE: as of June 30, 1997, more than $2.0 billion
MANAGER: Richard Mace, since 1996; joined
Fidelity in 1987
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO
INVESTMENTS JUNE 30, 1997 (UNAUDITED)
Showing Percentage of Total Value of Investment in Securities
COMMON STOCKS - 88.0%
SHARES VALUE (NOTE 1)
ARGENTINA - 0.2%
Perez Companc Class B 481,414 $ 3,866,315
AUSTRALIA - 1.8%
Aberfoyle Ltd. 22,800 63,586
Australia & New Zealand Banking
Group Ltd. 376,800 2,811,729
Brambles Industries Ltd. 200,200 3,952,242
Broken Hill Proprietary Co. Ltd. (The) 226,800 3,330,629
CSR Ltd. 882,500 3,412,396
Coles Myer Ltd. 877,000 4,554,557
Colonial Ltd. (a) 682,200 1,738,024
National Australia Bank Ltd. 182,300 2,606,642
Pasminco Ltd. 476,800 966,754
QNI Ltd. 871,880 1,570,659
Tabcorp Holdings Ltd. 162,800 883,516
Western Mining Holdings Ltd. 953,939 6,003,913
Westpac Banking Corp. 143,800 863,862
Woolworths Ltd. 1,211,500 3,972,281
36,730,790
AUSTRIA - 0.1%
Voest-Alpine Stahl AG 21,900 992,005
BELGIUM - 0.2%
BBL (Banque Bruxelles Lambert) 6,700 1,693,329
Credit Communal Holding/Dexia (b) 13,500 1,449,133
3,142,462
BERMUDA - 0.1%
Fuji International Trust unit sponsored
ADR (b) 100 2,698,015
BRAZIL - 1.0%
Centrais Electricas Brasileiras SA 2,080,000 1,240,464
Compania Energertica Minas Gerais 87,262,000 4,498,880
Multicanal Participacoes SA
sponsored ADR 92,800 1,264,400
Telebras sponsored ADR 95,000 14,416,250
21,419,994
CANADA - 2.8%
Alcan Aluminium Ltd. 269,700 9,200,645
Alliance Forest Products (a)(b) 83,700 2,043,016
BCE, Inc. 233,000 6,480,426
Bro-X Minerals Ltd. 42,700 -
Canadian Imperial Bank of Commerce 34,800 877,152
Canadian Natural Resources Ltd. (a) 159,900 4,151,968
Cominco Ltd. (a) 245,900 6,545,341
Domtar, Inc. 312,700 2,763,148
Greenstone Resources Ltd. (a) 141,300 1,238,352
Inco Ltd. 310,100 9,264,930
National Bank of Canada 361,200 4,525,955
Noranda, Inc. 373,200 8,041,647
Renaissance Energy Ltd. (a) 66,900 1,860,689
St Laurent Paperboard, Inc. (a)(b) 155,900 2,427,733
59,421,002
CHINA (PEOPLES REPUBLIC) - 0.0%
First Tractor Co. Ltd. Class H (a) 416,000 273,861
DENMARK - 0.8%
Den Danske Bank Group AS 55,900 5,437,154
International Service Systems AS,
Series B (a) 128,800 4,615,514
Novo-Nordisk AS Class B 30,900 3,368,405
Sophus Berendsen AS, Series B 6,300 910,624
Unidanmark AS Class A 34,500 1,937,560
16,269,257
SHARES VALUE (NOTE 1)
EMERGING MARKETS - 0.3%
GT Global Developing Markets Fund 249,700 $ 3,511,406
TCW/DW Emerging Markets
Opportunities Trust (SBI) 82,500 1,227,188
Templeton Dragon Fund, Inc. 52,300 849,875
5,588,469
FINLAND - 1.9%
Cultor OY, Series 1 57,600 3,046,271
Huhtamaki Ord. 190,700 8,196,748
Metsa-Serla Ltd. Class B 575,100 4,678,397
Nokia Corp. AB, Series A 130,300 9,720,253
Outokumpu OY Class A 135,300 2,680,084
Pohjola Class B 124,900 3,699,104
Rauma OY 2,317 53,026
UPM-Kymmene Corp. 83,200 1,920,074
Valmet OY 344,400 5,947,752
39,941,709
FRANCE - 9.5%
Alcatel Alsthom Compagnie Generale
d'Electricite SA 356,650 44,640,386
Axa SA 114,726 7,131,110
Axime SA Ex Segin (a) 2,100 248,206
Canal Plus SA 5,189 1,009,526
Cap Gemini Sogeti SA 28,700 1,513,044
Carrefour Supermarche SA 2,400 1,741,982
Compagnie de Saint Gobain 15,900 2,317,319
Credit Commercial de France Ord. 56,700 2,400,990
Eramet SA 98,162 4,523,979
Generale des Eaux, Cie 18,950 2,426,678
Generale des Eaux warrants
5/2/01 (a) 18,950 11,344
Groupe Danone 30,800 5,086,017
Lafarge Coppee SA 62,520 3,886,103
Lagardere S.C.A. (Reg.) 77,700 2,255,602
Michelin SA (Compagnie Generale
des Etablissements) Class B 163,000 9,782,439
Nationale Elf Aquitaine 127,700 13,768,545
Pechiney SA Class A 384,164 15,124,310
Paribas SA (Cie Financiere) Class A 46,200 3,189,892
Rhone Poulenc SA Class A 653,400 26,668,480
Societe Generale Class A 65,500 7,307,234
Total SA Class B 378,614 38,246,440
Unibail 8,100 757,627
Usinor Sacilor 242,100 4,364,239
Valeo SA 15,900 986,956
199,388,448
GERMANY - 3.8%
Allianz Aktiengesellschaft Holdings (Reg.) 12,500 2,604,555
Altana AG 7,000 739,903
Beta Systems Software AG 3,000 171,999
BASF AG 136,400 4,962,131
Bayer AG 269,300 10,414,065
Buderus AG 8,300 4,564,881
Continental Gummi-Werke AG 134,300 3,335,380
Daimler-Benz AG Ord. 77,900 6,274,844
Dresdner Bank AG Ord. 30,000 1,034,145
Emerging Germany Fund, Inc. 70,600 732,475
Hoechst AG Ord. 84,000 3,556,345
Lufthansa 117,300 2,210,925
Mannesmann AG Ord. 11,300 4,999,708
Metallgesellschaft AG Ord. 276,300 5,749,193
New Germany Fund, Inc. (The) 231,800 3,650,850
Thyssen AG Ord. 4,300 1,022,343
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
GERMANY - CONTINUED
Veba AG Ord. 113,500 $ 6,320,367
Volkswagen AG 23,965 18,150,518
80,494,627
HONG KONG - 1.6%
Great Eagle Holdings Ltd. 546,000 1,800,736
HSBC Holdings PLC 745,100 22,078,550
Hong Kong & China Gas Co. Ltd. 1,708,800 3,418,923
Hutchison Whampoa Ltd. Ord. 240,000 2,075,642
Peregrine Investments Holdings Ltd. 1,200,000 2,470,634
Wharf Holdings Ltd. 206,000 893,456
32,737,941
INDONESIA - 0.4%
Matahari Putra Prima PT (For. Reg.) 2,301,000 4,636,058
PT Multipolar (For. Reg.) 2,383,000 808,377
PT Multipolar Corp. rights 12/31/97
(For. Reg.) 13,106,500 1,751,485
Putra Surya Multidana PT (For. Reg.) (a) 880,000 1,402,137
8,598,057
IRELAND - 0.8%
Bank of Ireland, Inc. 968,400 10,639,830
CRH PLC 145,000 1,511,364
Independent Newspapers PLC 889,749 5,035,962
17,187,156
ITALY - 1.2%
Credito Italiano Ord. 3,572,700 6,535,015
Eni Spa 2,128,800 12,042,644
Mondadori Arnoldo Editore Spa 1,700 9,925
Telecom Italia:
Mobile Spa 1,942,000 6,250,390 Spa 380,000 1,220,358
26,058,332
JAPAN - 23.6%
Acom Co. Ltd. 100,900 4,858,197
Amway Japan Ltd. 171,200 5,794,025
Aoyama Trading Co. Ord. 3,300 105,927
Asahi Chemical Industry Co. Ltd. 271,000 1,619,216
Asahi Breweries Ltd. 50,000 745,780
Bank of Tokyo-Mitsubishi Ltd. 327,000 6,560,251
Canon, Inc. 355,000 9,661,127
Circle K Japan Co. Ltd. 13,000 746,129
Citizen Watch Co. Ltd. Ord. 472,000 3,639,478
Dai-Ichi Kangyo Bank 124,000 1,687,295
DDI Corp. Ord. 913 6,737,302
Dai-Tokyo Fire & Marine Insurance Ord. 354,000 2,050,294
Daiichi Pharmaceutical Co. Ltd. 99,000 1,744,341
Daiwa House Industry Co. Ltd. 227,000 2,772,035
Daiwa Securities Co. Ltd. 774,000 6,103,153
Denso Corp. 212,000 5,066,771
Denny's Japan Co. Ltd. 79,000 2,377,339
Daito Trust Construction Co. 340,700 4,011,906
Fuji Bank Ltd. 498,000 7,471,411
Fuji Photo Film Co. Ltd. 719,000 28,911,770
Fujitsu Ltd. 1,086,000 15,061,624
Hitachi Ltd. 2,232,000 24,920,056
Hitachi Maxell Ltd. 385,000 9,537,267
Honda Motor Co. Ltd. 425,000 12,789,480
Hoya Corp. 22,000 978,673
Ibiden Co. Ltd. 200,000 2,878,451
Ito-Yokado Co. Ltd. 152,000 8,816,782
Japan Associated Finance Co. 46,000 3,611,147
Jusco Co. Ltd. 111,000 3,746,958
SHARES VALUE (NOTE 1)
Kao Corp. 301,000 $ 4,174,539
Kobe Steel Ltd. Ord. (a) 847,000 1,617,977
Komatsu Ltd. Ord. 1,001,000 8,120,109
Kyocera Corp. 58,000 4,603,777
Long Term Credit Bank of Japan Ltd. (The) 413,000 1,783,200
Matsushita Electric Industrial Co. Ltd. 1,300,000 26,193,902
Matsushita Communication Industrial
Co. Ltd. 185,000 6,244,930
Matsushita Electric Works Co. Ltd. 293,000 3,322,430
Minebea Co. Ltd. 273,000 2,905,142
Minolta Camera Co. Ltd. 711,000 4,452,859
Mitsubishi Estate Co. Ltd. 282,000 4,083,213
Mitsubishi Heavy Industries Ltd. 625,000 4,791,966
Mitsubishi Trust & Banking Corp. 100,000 1,578,787
Mitsui Fudosan (Re Devel) Co. 60,000 826,900
Murata Manufacturing Co. Ltd. 31,000 1,233,024
NKK Corp. 775,000 1,662,960
NEC Corp. 313,000 4,368,267
Nikko Securities Co. Ltd. 570,000 3,505,168
Nintendo Co. Ltd. Ord. 182,000 15,240,088
Nippon Telegraph & Telephone
Corp. Ord. 1,744 16,733,394
Nitto Denko Corp. 27,000 525,186
Nomura Securities Co. Ltd. 805,000 11,094,247
Nichiei Co. Ltd. 31,400 3,642,723
Onward Kashiyama & Co. Ltd. 233,000 3,861,485
Omron Corp. 176,000 3,730,472
Orix Corp. 198,100 14,670,234
Ricoh Co. Ltd. Ord. 493,000 6,450,346
Rohm Co. Ltd. 93,000 9,572,157
Sakura Bank Ltd. 2,191,000 16,779,606
Sankyo Co. Ltd. 345,000 11,585,764
Sekisui Chemical Co. Ltd. 6,000 60,709
Shin-Etsu Chemical Co. Ltd. 113,000 2,996,380
Sony Corp. 214,200 18,665,078
Sumitomo Sitix Corp. 39,000 833,442Sony Music Entertainment Japan, Inc.
32,500 1,522,308Shohkoh Fund & Co. Ltd. 3,600 1,089,624
Shinko Electric Industries Co. Ltd. 44,600 1,630,023
TDK Corp. 102,000 7,482,402
Takeda Chemical Industries Ltd. 1,128,000 31,681,799
Takefuji Corp. 16,000 873,653
Terumo Corp. 125,000 2,387,806
THK Co. Ltd. 184,600 3,155,968
Toyota Motor Corp. 665,000 19,605,739
Toyo Trust & Banking Co. Ltd. 33,000 277,770
Tokyo Electron Ltd. 107,800 5,152,811
Uni Charm Corp. Ord. 80,000 2,847,049
Uny Co. Ltd. 310,000 6,056,958
World Co. Ltd. 35,300 1,548,772
Xebio Co. Ltd. 37,200 915,033
Yamanouchi Pharmaceutical Co. Ltd. 79,000 2,122,378
Yasuda Trust & Banking 212,000 809,944
496,074,683
KOREA (SOUTH) - 0.3%
Korea Electric Power Corp. 204,960 6,116,486
MALAYSIA - 0.3%
Arab Malaysian Corp. BHD 668,000 2,487,304
Magnum Corp. BHD 397,000 597,584
Oriental Holdings BHD 178,000 1,339,671
Rothmans of Pall Mall Malaysia BHD 79,000 776,074
5,200,633
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
MEXICO - 0.4%
Cifra SA de CV:
Series A 227,993 $ 421,927
Series C 1,864,100 2,984,440
Gruma SA Class B sponsored
ADR (a)(b) 91,596 1,671,627
Grupo Financiero Bancomer Class B (a) 2,228,000 1,072,923
Grupo Financiero Inbursa SA Class B 237,000 1,009,846
Tubos De Acero De Mexico ADR (a) 78,200 1,441,813
8,602,576
MULTI-NATIONAL - 0.0%
Morgan Stanley Asia-Pacific Fund, Inc. 82,900 870,450
NETHERLANDS - 7.9%
AKZO Nobel NV 145,500 19,927,448
Ahold NV 36,600 3,085,871
Chicago Bridge & Iron Co. NV 94,000 2,079,750
DSM NV 71,700 7,129,479
ING Groep NV 377,422 17,390,505
KBB NV Ord. 37,200 2,600,458
KLM Royal Dutch Air Lines NV 39,506 1,216,900
Koninklijke Hoogovens NV 121,600 6,773,097
Koninklijke KNP BT NV 288,800 6,572,659
Koninklijke Pakhoed NV 24,600 866,718
New Holland NV 248,000 6,789,000
Philips Electronics NV (Bearer) 521,700 37,345,868
Royal Dutch Petroleum Co. Ord. 456,160 23,712,609
Unilever NV Ord. 101,900 21,437,340
VNU Ord. 33,300 735,818
Vendex International NV (b) 121,600 6,655,466
Vedior NV BDR (a)(b) 66,800 1,765,144
166,084,130
NETHERLANDS ANTILLES - 0.2%
Schlumberger Ltd. 32,700 4,087,500
NEW ZEALAND - 0.2%
Air New Zealand Ltd. Class B 552,200 1,689,359
Lion Nathan Ltd. 572,000 1,450,501
Lion Nathan Ltd. (Australia) (a) 59,200 151,715
3,291,575
NORWAY - 0.6%
Den Norske Bank AS Class A Free shares 682,500 2,673,475
Elkem ASA 275,400 5,393,956
NCL Holdings AS (a) 460,300 1,451,258
Orkla AS Class B (non-vtg.) 15,600 1,058,212
Saga Petroleum AS Class B 126,300 2,206,505
12,783,406
PERU - 0.1%
Compania de Minas Buenaventura SA
Class B sponsored ADR 80,200 1,578,938
PORTUGAL - 0.2%
Electricidade de Portugal SA (a) 234,300 4,295,057
RUSSIA - 0.0%
Vimpel Communications sponsored ADR 12,800 486,400
SINGAPORE - 0.2%
Creative Technology Corp. Ltd. (a) 109,000 1,853,000
Kim Engineering Holdings Ltd. 2,683,000 2,251,941
4,104,941
SOUTH AFRICA - 0.3%
Gencor Ltd. (Reg.) 820,800 3,782,739
JCI Ltd. 187,500 1,442,944
5,225,683
SHARES VALUE (NOTE 1)
SPAIN - 2.1%
Acerinox SA (Reg.) 29,750 $ 5,567,853
Asturiana del Zinc SA (a)(b) 259,900 5,496,614
Banco Bilbao Vizcaya SA Ord. (Reg.) 74,600 6,052,954
Banco de Santander SA Ord. (Reg.) 127,800 3,932,974
Banco Intercontinental Espanol 10,500 1,850,534
Tabacalera SA, Series A 126,300 6,771,957
Telefonica de Espana SA Ord. 511,500 14,770,310
44,443,196
SWEDEN - 5.3%
ABB AB:
Series A 297,900 4,186,265
Series B 153,000 2,140,137
Astra AB Class A Free shares 1,216,000 22,678,928
Assi Doman AB Free shares 63,600 1,812,200
Electrolux AB 87,200 6,301,982
Ericsson (L.M.) Telephone Co.:
Class B 154,400 6,089,211
Class B ADR 49,400 1,945,125
Esselte AB Class B Free shares 90,900 2,142,702
Graenges AB (Reg.) (a) 48,600 645,188
Investor AB Class B Free shares 82,000 4,327,807
Nordbanken AB 156,900 5,303,834
SKF AB Ord. 34,100 883,305
Scania AB Class B 211,700 6,470,820
Skandia Foersaekrings AB 249,800 9,220,697
Svenska Cellulosa AB (SCA) Class B Ord. 101,900 2,138,039
Svenska Handelsbanken 160,200 5,104,157
Swedish Match Co. 4,500,200 15,154,151
Volvo AB Class B 582,600 15,619,505
112,164,053
SWITZERLAND - 4.8%
ABB AG (Bearer) 650 982,894
Credit Suisse Group (Reg.) 190,477 24,436,837
Danzas Holdings AG (Reg.) 1,160 226,206
Julius Baer Holding AG 5,313 8,124,909
Nestle SA (Reg.) 9,030 11,899,952
Novartis AG (Reg.) 25,000 39,924,735
Roche Holding AG participation
certificates 1,250 11,294,047
Sulzer AG (Reg.) 2,500 2,138,214
SGS Societe Generale de Surveillance
Holding SA (Bearer) 800 1,707,834
100,735,628
UNITED KINGDOM - 13.5%
Allied Domecq PLC 6,200 44,587
Asda Group PLC 2,705,400 5,584,562
BAT Industries PLC Ord. 1,709,800 15,298,884
BOC Group PLC 49,900 868,066
Barclays PLC Ord. 227,500 4,514,333
Barratt Developments PLC 847,125 3,469,114
Bass PLC Ord. 242,300 2,956,605
Blue Circle Industries PLC 430,400 3,073,729
Boots Co. PLC Class L (The) 323,900 3,793,246
British Aerospace PLC 257,400 5,726,819
British Petroleum PLC:
ADR 47,800 3,579,025
Ord. 998,909 12,413,428
British Land Co. PLC, (The) Ord. 176,200 1,663,125
British Steel PLC Ord. 1,230,000 3,061,134
British Telecommunications PLC Ord. 850,300 6,313,105
Cable & Wireless PLC Ord. 348,900 3,194,476
Caradon PLC 2,419,380 8,095,359
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UNITED KINGDOM - CONTINUED
Cookson Group PLC 4,377,200 $ 15,411,423
Dixons Group PLC 333,400 2,625,202
DR Solomons Group PLC sponsored
ADR 13,400 340,025
English China Clay PLC 352,200 1,196,067
Glaxo Holdings PLC 538,800 11,122,060
Granada Group PLC 811,000 10,665,566
Grand Metropolitan PLC 1,492,491 14,360,698
Guinness PLC Ord. 221,100 2,164,223
HSBC Holdings PLC Ord. 57,600 1,772,465
Hays PLC 94,200 893,844
ICI (Imperial Chemical Industries) PLC
Class L 133,900 1,859,014
Inchcape PLC Ord. 739,600 3,484,330
Ladbroke Group PLC Ord. 1,328,800 5,220,446
Lloyds TSB Group PLC 1,896,498 19,447,737
LucasVarity PLC 2,165,700 7,498,901
Mercury Asset Management Group PLC 77,400 1,591,270
National Grid Co. PLC 1,566,100 5,722,555
Norwich Union PLC (a) 194,300 1,033,427
Pearson, PLC 68,300 791,345
Perpetual PLC 19,600 874,434
Prudential Corp. PLC 428,318 4,146,217
Reckitt & Colman Ltd. Ord. 91,800 1,370,791
Redland PLC Ord. 458,900 2,597,365
Rentokil Group PLC 5,403,900 18,945,307
Rio Tinto PLC (Reg.) 53,900 938,997
Rolls Royce PLC Ord. 765,355 2,917,658
Rugby Group PLC 795,600 1,589,322Somerfield PLC 866,000 2,609,351
Shell Transport & Trading Co. PLC (Reg.) 2,313,300 15,769,642
SmithKline Beecham PLC Ord. 947,218 17,431,898
Tarmac 128,200 264,634
Thames Water PLC Ord. 144,800 1,663,235
Tomkins PLC Ord. 179,800 778,214
Unigate PLC 333,200 2,679,095
Unilever PLC Ord. 276,800 7,932,482
Vodafone Group PLC 1,865,929 9,101,201
WPP Group PLC 252,900 1,033,561
283,493,599
UNITED STATES OF AMERICA - 1.5%
Alumax, Inc. (a) 222,700 8,448,681
Aluminum Co. of America 139,600 10,522,350
D.R. Horton, Inc. 161,600 1,676,600
Hanover Compressor Co. 1,500 29,250
Jefferson Smurfit Corp. 34,400 550,400
Kaiser Aluminum Corp. (a) 8,200 100,450
MCI Communications Corp. 213,800 8,184,531
Newmont Mining Corp. 46,000 1,794,000
Silgan Holdings, Inc. 2,600 100,750
31,407,012
TOTAL COMMON STOCKS
(Cost $1,450,354,067) 1,845,854,386
PREFERRED STOCKS - 1.0%
SHARES VALUE (NOTE 1)
CONVERTIBLE PREFERRED STOCKS - 0.1%
JAPAN - 0.1%
AJL participating trust 73,000 $ 1,272,938
NONCONVERTIBLE PREFERRED STOCKS - 0.9%
ITALY - 0.9%
Stet (Societa Finanziaria Telefonica) Spa 3,435,100 11,903,329
Telecom Italia:
Mobile Spa de Risp 3,961,100 7,030,916 Ord. 435,400 871,518
TOTAL NONCONVERTIBLE PREFERRED STOCKS 19,805,763
TOTAL PREFERRED STOCKS
(Cost $12,443,054) 21,078,701
CORPORATE BONDS - 0.8%
MOODY'S PRINCIPAL
RATINGS (D) AMOUNT
BERMUDA - 0.2%
MBL International Finance of
Bermuda 3%, 11/30/02 Aa2 $ 4,472,000 4,896,840
JAPAN - 0.6%
Asahi Breweries Ltd
6.40%, 10/16/98 - JPY 501,000,000 6,817,218
Matsushita Electric Industrial
Co. Ltd.:
1.30%, 3/29/02 Aa2 JPY 186,000,000 2,320,031
1.40%, 3/31/04 Aa2 JPY 174,000,000 2,170,352
11,307,601
TOTAL CORPORATE BONDS
(Cost $15,280,034) 16,204,441
GOVERNMENT OBLIGATIONS - 0.0%
U.S. Treasury Bills, yields at dates of purchase
4.85%, to 5.28%, 8/7/97 to 1/8/98 (c)
(Cost $886,510) $900,000 886,492
CASH EQUIVALENTS - 10.2%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 5.93%, dated
6/30/97 due 7/1/97 $ 214,820,380 214,785,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $1,693,748,665) $ 2,098,809,020
FUTURES CONTRACTS
EXPIRATION UNDERLYING FACE UNREALIZED
DATE AMOUNT AT VALUE GAIN/(LOSS)
PURCHASED
232 Nikkei 225 Stock
Index Contracts Sept. 1997 $ 23,890,200 $ 40,693
THE FACE VALUE OF FUTURES PURCHASED AS A PERCENTAGE OF TOTAL INVESTMENT IN
SECURITIES - 1.1%
CURRENCY ABBREVIATIONS
JPY - Japanese yen
LEGEND
(a) Non-income producing
(b) Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of these securities amounted to $24,206,748 or 1.2% of net
assets.
(c) A portion of the security was pledged to cover margin requirements for
futures contracts. At the period end, the value of securities pledged
amounted to $788,676.
(d) Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $712,738,103 and $575,228,156, respectively.
The market value of futures contracts opened and closed during the period
amounted to $49,056,147 and $39,254,194, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company. The
commissions paid to these affiliated firms were $127,548 for the period
(see Note 4 of Notes to Financial Statements).
MARKET SECTOR DIVERSIFICATION
As a Percentage of Total Value of Investments
Aerospace & Defense 0.4%
Basic Industries 9.7
Cash Equivalents 10.2
Construction & Real Estate 2.9
Durables 9.8
Energy 6.5
Finance 15.1
Government Obligations 0.0
Health 8.8
Holding Companies 1.3
Industrial Machinery & Equipment 2.5
Media & Leisure 2.2
Nondurables 6.6
Precious Metals 0.5
Retail & Wholesale 3.7
Services 2.1
Technology 10.1
Transportation 0.5
Utilities 7.1
100.0%
INCOME TAX INFORMATION
At June 30, 1997, the aggregate cost of investment securities for income
tax purposes was $1,694,697,195. Net unrealized appreciation aggregated
$404,111,825, of which $447,629,963 related to appreciated investment
securities and $43,518,138 related to depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
ASSETS
Investment in $ 2,098,809,020
securities, at
value (including
repurchase
agreements of
$214,785,000) (cost
$1,693,748,665) -
See accompanying
schedule
Cash 2,443
Receivable for 3,065,615
investments sold
Receivable for fund 1,404,647
shares sold
Dividends receivable 7,012,340
Interest receivable 149,101
Other receivables 27,542
TOTAL ASSETS 2,110,470,708
LIABILITIES
Payable for $ 16,404,484
investments
purchased
Payable for fund 2,602,874
shares redeemed
Accrued management 1,275,223
fee
Payable for daily 34,800
variation on
futures contracts
Other payables and 342,806
accrued expenses
TOTAL LIABILITIES 20,660,187
NET ASSETS $ 2,089,810,521
Net Assets consist of:
Paid in capital $ 1,603,802,130
Undistributed net 14,431,091
investment income
Accumulated 66,527,361
undistributed net
realized gain (loss)
on investments and
foreign currency
transactions
Net unrealized 405,049,939
appreciation
(depreciation) on
investments
and assets and
liabilities in
foreign currencies
NET ASSETS, for $ 2,089,810,521
104,279,605
shares outstanding
NET ASSET VALUE, $20.04
offering price
and redemption
price per share
($2,089,810,521 (divided by)
104,279,605
shares)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
INVESTMENT INCOME $ 26,148,620
Dividends
Interest 5,052,251
31,200,871
Less foreign taxes (3,188,198
withheld )
TOTAL INCOME 28,012,673
EXPENSES
Management fee $ 6,739,466
Transfer agent fees 648,554
Accounting fees and 400,724
expenses
Non-interested 3,852
trustees'
compensation
Custodian fees and 422,619
expenses
Registration fees 4,483
Audit 14,836
Legal 2,287
Miscellaneous 71,824
Total expenses 8,308,645
before reductions
Expense reductions (71,550 8,237,095
)
NET INVESTMENT 19,775,578
INCOME
REALIZED AND
UNREALIZED GAIN
(LOSS)
Net realized gain
(loss) on:
Investment 69,225,765
securities
Foreign currency (83,526
transactions )
Futures contracts (182,586 68,959,653
)
Change in net
unrealized
appreciation
(depreciation) on:
Investment 199,312,047
securities
Assets and (61,369
liabilities in )
foreign currencies
Futures contracts 511,033 199,761,711
NET GAIN (LOSS) 268,721,364
NET INCREASE $ 288,496,942
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
OTHER INFORMATION $ 70,664
Expense reductions
Directed brokerage
arrangements
Custodian credits 886
$ 71,550
STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1997 1996
(UNAUDITED)
Operations $ 19,775,578 $ 28,360,200
Net investment
income
Net realized gain 68,959,653 114,395,097
(loss)
Change in net 199,761,711 46,672,077
unrealized
appreciation
(depreciation)
NET INCREASE 288,496,942 189,427,374
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS
Distributions to (29,012,812) (16,689,141)
shareholders
From net
investment income
From net realized (115,172,073) (18,358,055)
gain
TOTAL DISTRIBUTIONS (144,184,885) (35,047,196)
Share transactions 478,306,941 649,592,564
Net proceeds from
sales of shares
Reinvestment of 144,184,885 35,047,196
distributions
Cost of shares (344,594,600) (514,552,645)
redeemed
NET INCREASE 277,897,226 170,087,115
(DECREASE) IN NET
ASSETS RESULTING
FROM SHARE
TRANSACTIONS
TOTAL INCREASE 422,209,283 324,467,293
(DECREASE) IN NET
ASSETS
NET ASSETS
Beginning of period 1,667,601,238 1,343,133,945
End of period $ 2,089,810,521 $ 1,667,601,238
(including
undistributed net
investment
income of
$14,431,091 and
$22,748,929,
respectively)
OTHER INFORMATION
Shares
Sold 26,141,924 37,069,614
Issued in 8,319,959 2,053,145
reinvestment of
distributions
Redeemed (18,706,716) (29,349,715)
Net increase 15,755,167 9,773,044
(decrease)
<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1997
SELECTED PER-SHARE DATA (UNAUDITED) 1996 1995 1994 1993 F 1992
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Net asset value, $ 18.84 $ 17.06 $ 15.67 $ 15.48 $ 11.53 $ 13.09
beginning of period
Income from
Investment
Operations
Net investment .20 D .32 D, .17 .19 .06 .16
income E
Net realized and 2.64 1.88 1.34 .08 4.16 (1.54)
unrealized gain
(loss)
Total from 2.84 2.20 1.51 .27 4.22 (1.38)
investment
operations
Less Distributions
From net (.33) (.20) (.06) (.08) (.18) (.18)
investment income
In excess of net - - - - (.04) -
investment income
From net realized (1.31) (.22) (.02) - - -
gain
In excess of net - - (.04) - (.05) -
realized gain
Total distributions (1.64) (.42) (.12) (.08) (.27) (.18)
Net asset value, end $ 20.04 $ 18.84 $ 17.06 $ 15.67 $ 15.48 $ 11.53
of period
TOTAL RETURN B, C 16.44% 13.15% 9.74% 1.72% 37.35% (10.72)%
RATIOS AND
SUPPLEMENTAL
DATA
Net assets, end of $ 2,089,811 $ 1,667,601 $ 1,343,134 $ 1,297,701 $ 777,961 $ 180,837
period (000
omitted)
Ratio of expenses to .94% A .93% .91% .92% 1.03% 1.14%
average net assets
Ratio of expenses to .93% A, G .92% .91% .92% 1.03% 1.14%
average net assets G
after expense
reductions
Ratio of net 2.23% A 1.84% 1.88% 1.28% 1.21% 1.86%
investment income
to average net
assets
Portfolio turnover rate 72% A 92% 50% 42% 42% 61%
Average commission $ .0115 $ .0137
rate H
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR
ARE NOT ANNUALIZED AND DO NOT
REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION OF THESE
CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN. C THE TOTAL
RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN
(SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). D NET INVESTMENT
INCOME PER SHARE HAS BEEN
CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE
PERIOD. E INVESTMENT INCOME PER
SHARE REFLECTS A SPECIAL DIVIDEND WHICH AMOUNTED TO $.05 PER
SHARE. F EFFECTIVE JANUARY 1,
1993, THE FUND ADOPTED STATEMENT OF POSITION 93-2, "DETERMINATION,
DISCLOSURE, AND FINANCIAL
STATEMENT PRESENTATION OF INCOME, CAPITAL GAIN, AND RETURN OF
CAPITAL DISTRIBUTIONS BY
INVESTMENT COMPANIES." AS A RESULT, NET INVESTMENT INCOME PER
SHARE MAY REFLECT CERTAIN
RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES. G FMR OR
THE FUND HAS ENTERED INTO VARYING
ARRANGEMENTS WITH THIRD PARTIES WHO EITHER PAID OR REDUCED A
PORTION OF THE FUND'S EXPENSES (SEE
NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). H FOR FISCAL YEARS
BEGINNING ON OR AFTER SEPTEMBER 1,
1995, A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE
PER SHARE FOR SECURITY TRADES ON
WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO
PERIOD AND FUND TO FUND
DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS MARKETS WHERE
TRADING PRACTICES AND
COMMISSION RATE STRUCTURES MAY DIFFER.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
For the period ended June 30, 1997 (Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES.
The Money Market Portfolio, High Income Portfolio, Equity-Income Portfolio,
Growth Portfolio and Overseas Portfolio (the funds) are funds of Variable
Insurance Products Fund. Investment Grade Bond Portfolio, Asset Manager
Portfolio, Asset Manager: Growth Portfolio, Index 500 Portfolio and
Contrafund Portfolio (the funds) are funds of Variable Insurance Products
Fund II. Balanced Portfolio, Growth & Income Portfolio and Growth
Opportunities Portfolio (the funds) are funds of Variable Insurance
Products Fund III. The Variable Insurance Products Fund, Variable Insurance
Products Fund II and Variable Insurance Products Fund III (the trusts) are
registered under the Investment Company Act of 1940, as amended (the 1940
Act), as open-end management investment companies organized as
Massachusetts business trusts. Each fund is authorized to issue an
unlimited number of shares. Shares of each fund may only be purchased by
insurance companies for the purpose of funding variable annuity or variable
life insurance contracts. On July 17, 1997, the Board of Trustees approved
the creation of Service Class, a new class of shares of each fund. The
Service Class shares of High Income Portfolio, Equity-Income Portfolio,
Growth Portfolio, Overseas Portfolio, Asset Manager Portfolio, Asset
Manager: Growth Portfolio, Contrafund Portfolio, Balanced Portfolio, Growth
& Income Portfolio and Growth Opportunities Portfolio will be subject to an
annual distribution and service fee of .10% of each class' average net
assets. Service Class shares of the Money Market Portfolio, Index 500
Portfolio and Investment Grade Portfolio will be available without a 12b-1
fee. Service Class shares of each fund are expected to be available on or
about October 31, 1997. The financial statements have been prepared in
conformity with generally accepted accounting principles which permit
management to make certain estimates and assumptions at the date of the
financial statements. The following summarizes the significant accounting
policies of the funds:
SECURITY VALUATION:
MONEY MARKET PORTFOLIO. As permitted under Rule 2a-7 of the 1940 Act, and
certain conditions therein, securities are valued initially at cost and
thereafter assume a constant amortization to maturity of any discount or
premium.
INVESTMENT GRADE BOND PORTFOLIO. Securities are valued based upon a
computerized matrix system and/or appraisals by a pricing service, both of
which consider market transactions and dealer-supplied valuations.
Securities (including restricted securities) for which market quotations
are not readily available are valued at their fair value as determined in
good faith under consistently applied procedures under the general
supervision of the Board of Trustees. Short-term securities with remaining
maturities of sixty days or less for which quotations are not readily
available are valued at amortized cost or original cost plus accrued
interest, both of which approximate current value.
HIGH INCOME PORTFOLIO. Securities for which quotations are readily
available are valued by a pricing service at their market values as
determined by their most recent bid prices in the principal market (sales
prices if the principal market is an exchange) in which such securities are
normally traded. Securities (including restricted securities) for which
market quotations are not readily available are valued at their fair value
as determined in good faith under consistently applied procedures under the
general supervision of the Board of Trustees. Short-term securities with
remaining maturities of sixty days or less for which quotations are not
readily available are valued at amortized cost or original cost plus
accrued interest, both of which approximate current value.
ASSET MANAGER, BALANCED AND ASSET MANAGER: GROWTH PORTFOLIOS. Equity
securities for which quotations are readily available are valued at the
last sale price, or if no sale price, at the closing bid price. Debt
securities for which quotations are readily available are valued by a
pricing service at their market values as determined by their most recent
bid prices in the principal market (sales prices if the principal market is
an exchange) in which such securities are normally traded. Securities
(including restricted securities) for which market quotations are not
readily available are valued at their fair value as determined in good
faith under consistently applied procedures under the general supervision
of the Board of Trustees. Short-term securities with remaining maturities
of sixty days or less for which quotations are not readily available are
valued at amortized cost or original cost plus accrued interest, both of
which approximate current value.
EQUITY-INCOME, GROWTH & INCOME, INDEX 500, GROWTH OPPORTUNITIES, CONTRAFUND
AND GROWTH PORTFOLIOS. Securities for which exchange quotations are readily
available are valued at the last sale price, or if no sale price, at the
closing bid price. Securities (including restricted securities) for which
exchange quotations are not readily available (and in certain cases debt
securities which trade on an exchange) are valued primarily using
dealer-supplied valuations or at their fair value as determined in good
faith under consistently applied procedures under the general supervision
of the Board of Trustees. Short-term securities with remaining maturities
of sixty days or less for which quotations are not readily available are
valued at amortized cost or original cost plus accrued interest, both of
which approximate current value.
OVERSEAS PORTFOLIO. Securities for which quotations are readily available
are valued at the last sale price, or if no sale price, at the closing bid
price in the principal market in which such securities are normally traded.
Securities (including restricted securities) for which quotations are not
readily available are valued primarily using dealer-supplied valuations
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
OVERSEAS PORTFOLIO - CONTINUED
or at their fair value as determined in good faith under consistently
applied procedures under the general supervision of the Board of Trustees.
Short-term securities with remaining maturities of sixty days or less for
which quotations are not readily available are valued at amortized cost or
original cost plus accrued interest, both of which approximate current
value.
FOREIGN CURRENCY TRANSLATION. The accounting records of the funds are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S.
dollars at the prevailing rates of exchange at period end. Income receipts
and expense payments are translated into U.S. dollars at the prevailing
exchange rate on the respective dates of the transactions. Purchases and
sales of securities are translated into U.S. dollars at the contractual
currency exchange rates established at the time of each trade.
Net realized gains and losses on foreign currency transactions represent
net gains and losses from sales and maturities of forward currency
contracts, disposition of foreign currencies, and the difference between
the amount of net investment income accrued and the U.S. dollar amount
actually received. The effects of changes in foreign currency exchange
rates on investments in securities are included with the net realized and
unrealized gain or loss on investment securities.
INCOME TAXES. Growth & Income intends to qualify as a regulated investment
company under Subchapter M of the Internal Revenue Code. As qualified
regulated investment companies under Subchapter M of the Internal Revenue
Code, each fund is not subject to U.S. federal income taxes to the extent
that it distributes substantially all of its taxable income for the fiscal
year. Each fund may be subject to foreign taxes on income and gains on
investments which are accrued based upon each fund's understanding of the
tax rules and regulations that exist in the markets in which they invest.
Each fund accrues such taxes as applicable. The schedules of investments
include information regarding income taxes under the caption "Income Tax
Information."
INVESTMENT INCOME:
MONEY MARKET PORTFOLIO. Interest income, which includes amortization of
premium and accretion of discount, is accrued as earned.
INVESTMENT GRADE BOND, HIGH INCOME, ASSET MANAGER,
BALANCED, ASSET MANAGER: GROWTH, EQUITY-INCOME, INDEX 500, GROWTH
OPPORTUNITIES, GROWTH & INCOME, CONTRAFUND, GROWTH AND OVERSEAS PORTFOLIOS.
Dividend income is recorded on the ex-dividend date, except certain
dividends from foreign securities where the ex-dividend date may have
passed, are recorded as soon as the funds are informed
of the ex-dividend date. Non-cash dividends included in dividend income, if
any, are recorded at the fair market value of the securities received.
Interest income, which includes accretion of original issue discount, is
accrued as earned. Investment income is recorded net of foreign taxes
withheld where recovery of such taxes is uncertain.
EXPENSES. Most expenses of each trust can be directly attributed to a fund.
Expenses which cannot be directly attributed are apportioned between the
funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Dividends are declared daily and paid
monthly from net interest income for the Money Market Portfolio.
Distributions are recorded on the ex-dividend date for all other funds.
Certain foreign currency gains (losses), if applicable, are taxable as
ordinary income and, therefore, increase (decrease) taxable ordinary income
available for distributions.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences, which may result in distribution
reclassifications, are primarily due to differing treatments for litigation
proceeds, paydown gains/losses on certain securities, futures and options
transactions, defaulted bonds, foreign currency transactions, passive
foreign investment companies (PFIC), market discount, partnerships,
non-taxable dividends, capital loss carryforwards, losses deferred due to
wash sales and excise tax regulations.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital.
Undistributed net investment income and accumulated undistributed net
realized gain (loss) on investments and foreign currency transactions may
include temporary book and tax basis differences which will reverse in a
subsequent period. Any taxable income or gain remaining at fiscal year end
is distributed in the following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of trade
date. Gains and losses on securities sold are determined on the basis of
identified cost.
2. OPERATING POLICIES.
FOREIGN CURRENCY CONTRACTS. Certain funds generally use foreign currency
contracts to facilitate transactions in foreign-denominated securities.
Losses may arise from changes in the value of the foreign currency or if
the counterparties do not perform under the contracts' terms. The U.S.
dollar value of foreign currency contracts is determined using contractual
currency exchange rates established at the time of each trade. The cost of
the foreign currency contracts is included in the cost basis of the
associated investment.
2. OPERATING POLICIES - CONTINUED
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission (the SEC), the funds, along with other
affiliated entities of Fidelity Management & Research Company (FMR), may
transfer uninvested cash balances into one or more joint trading accounts.
These balances are invested in one or more repurchase agreements for U.S.
Treasury or Federal Agency obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
Securities are transferred to an account of the funds, or to the Joint
Trading Account, at a bank custodian. The securities are marked-to-market
daily and maintained at a value at least equal to the principal amount of
the repurchase agreement (including accrued interest). FMR, the funds'
investment adviser, is responsible for determining that the value of the
underlying securities remains in accordance with the market value
requirements stated above.
DELAYED DELIVERY TRANSACTIONS. Each fund may purchase or sell securities on
a delayed delivery basis. Payment and delivery may take place a month or
more after the date of the transaction. The price of the underlying
securities and the date when the securities will be delivered and paid for
are fixed at the time the transaction is negotiated. The market values of
the securities purchased or sold on a delayed delivery basis are identified
as such in each applicable fund's schedule of investments. Each fund may
receive compensation for interest forgone in the purchase of a delayed
delivery security. With respect to purchase commitments, the fund
identifies securities as segregated in its custodial records with a value
at least equal to the amount of the commitment. Losses may arise due to
changes in the market value of the underlying securities or if the
counterparty does not perform under the contract.
INTERFUND LENDING PROGRAM. Pursuant to an Exemptive Order issued by the
SEC, the funds, along with other registered investment companies having
management contracts with FMR, may participate in an interfund lending
program. This program provides an alternative credit facility allowing the
funds to borrow from, or lend money to, other participating funds.
FUTURES CONTRACTS. Certain funds may use futures contracts to manage their
exposure to the stock and bond markets and to fluctuations in interest
rates and currency values. Buying futures tends to increase a fund's
exposure to the underlying instrument, while selling futures tends to
decrease a fund's exposure to the underlying instrument or hedge other fund
investments. Futures contracts involve, to varying degrees, risk of loss in
excess of the futures variation margin reflected in each applicable fund's
Statement of Assets and Liabilities. The underlying face amount at value of
any open futures contracts at period end is shown in each applicable fund's
schedule of investments under the caption "Futures Contracts." This amount
reflects each contract's exposure to the underlying instrument at period
end. Losses may arise from changes in the value of the underlying
instruments, if there is an illiquid secondary market for the contracts, or
if the counterparties do not perform under the contracts' terms. Futures
contracts are valued at the settlement price established each day by the
board of trade or exchange on which they are traded.
RESTRICTED SECURITIES. Each fund is permitted to invest in securities that
are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from registration
or to the public if the securities are registered. Disposal of these
securities may involve time-consuming negotiations and expense, and prompt
sale at an acceptable price may be difficult. At the end of the period,
restricted securities (excluding 144A issues) amounted to $10,000,000,
$3,505,987, $1,696,288 and $202,398 or 0.9%, 0.2%, 0.0% and 0.1% of net
assets of the Money Market, High Income, Asset Manager and Asset Manager:
Growth Portfolios, respectively.
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities) and the market value of future contracts opened and
closed is included under the caption "Other Information" at the end of each
applicable fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As each fund's investment adviser, FMR receives a monthly
fee.
For the Money Market Portfolio, FMR receives a monthly fee that is
calculated on the basis of a basic fund fee rate of .03% of the fund's
average net assets, plus a fixed income group fee rate and an income-based
fee. The group fee rate is the weighted average of a series of rates
ranging from .1100% to .3700% and is based on the monthly average net
assets of all the mutual funds advised by FMR. In the event that these
rates were lower than the contractual rates in effect during the period,
FMR voluntarily implemented the above rates, as they resulted in the same
or a lower management fee. The income-based fee is added only when the
fund's gross yield exceeds 5%. At that time the income-based fee would
equal 6% of that portion of the fund's gross income that represents a gross
yield of more than 5% per year. The maximum income-based component is 0.24%
of average net assets.
For the Index 500 Portfolio, FMR receives a fee that is computed at an
annual rate of .28% of the fund's average net assets.
For all other funds, FMR receives a monthly fee that is calculated on the
basis of a group fee rate plus a fixed individual fund fee rate applied to
the average net assets of the fund. The group fee rate is the weighted
average of a series of rates and is based on the monthly average net assets
of all the mutual funds advised by FMR. The rates ranged from .1100% to
.3700% for the Investment Grade Bond and High Income Portfolios and .2500%
to .5200% for
4. FEES AND OTHER TRANSACTIONS WITH
AFFILIATES - CONTINUED
MANAGEMENT FEE - CONTINUED
the Asset Manager, Balanced, Asset Manager: Growth, Equity-Income, Growth &
Income, Growth Opportunities, Contrafund, Growth and Overseas Portfolios
for the period. In the event that these rates were lower than the
contractual rates in effect during the period, FMR voluntarily implemented
the above rates, as they resulted in the same or a lower management fee.
The annual individual fund fee rates are .30% for Investment Grade Bond,
Asset Manager: Growth, Growth Opportunities, Contrafund and Growth and,
.45% for High Income and Overseas, .25% for Asset Manager, .15% for
Balanced, and .20% for Equity-Income and Growth & Income Portfolios.
For the period, each funds' management fee was equivalent to the following
annualized rates expressed as a percentage of average net assets:
Money Market .21%
Investment Grade Bond .44%
High Income .60%
Asset Manager .56%
Balanced .46%
Asset Manager: Growth, Growth Opportunities,
Contrafund, Growth .61%
Equity-Income .51%
Growth & Income .50%
Index 500 .28%
Overseas .76%
SUB-ADVISER FEE. As the Money Market Portfolio's investment sub-adviser,
FMR Texas Inc., a wholly owned subsidiary of FMR, receives a fee from FMR
of 50% of the management fee payable to FMR. The fee is paid prior to any
voluntary expense reimbursements which may be in effect.
FMR, on behalf of the High Income, Asset Manager, Balanced, Asset Manager:
Growth, Growth & Income, Growth Opportunities, Contrafund and Overseas
Portfolios, entered into sub-advisory agreements with Fidelity Management &
Research (U.K.) Inc., Fidelity Management & Research (Far East) Inc., and
with respect only to Overseas Portfolio, Fidelity International Investment
Advisors (FIIA). In addition, FIIA entered into a sub-advisory agreement
with its subsidiary, Fidelity International Investment Advisors (U.K.)
Limited (FIIAL U.K.). Under the sub-advisory arrangements, FMR may receive
investment advice and research services and may grant the sub-advisers
investment management authority to buy and sell securities. FMR pays its
sub-advisers either a portion of its management fee or a fee based on costs
incurred for these services. FIIA pays FIIAL U.K. a fee based on costs
incurred for either service.
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations Company
(FIIOC), an affiliate of FMR, is the funds' transfer, dividend disbursing
and shareholder servicing agent. FIIOC receives account fees and
asset-based fees that vary according to account size and type of account.
FIIOC pays a portion of the expenses related to the typesetting, printing
and mailing of shareholder reports, except proxy statements.
For the period, each funds' transfer agent fees was equivalent to the
following annualized rates expressed as a percentage of average net assets:
Money Market, High Income, .07
Asset Manager, Balanced, Equity-Income, %
Growth Opportunities, Contrafund,
Growth and Overseas
Investment Grade Bond, Asset Manager: .08
Growth, Growth & Income and Index 500 %
ACCOUNTING FEES. Fidelity Service Company Inc., an affiliate of FMR,
maintains the funds' accounting records. The fee is based on the level of
average net assets for the month plus out-of-pocket expenses.
BROKERAGE COMMISSIONS. Certain funds placed a portion of their portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms are shown under the caption
"Other Information" at the end of each applicable fund's schedule of
investments.
5. EXPENSE REDUCTIONS.
FMR voluntarily agreed to reimburse the Index 500 fund's operating expenses
(excluding interest, taxes, brokerage commissions and extraordinary
expenses) above an annual rate of .28% of average net assets.
FMR has directed certain portfolio trades to brokers who paid a portion of
certain funds' expenses. In addition, certain funds have entered into
arrangements with their custodian and transfer agent whereby credits
realized on uninvested cash balances were used to offset a portion of
certain funds' expenses.
For the period, the reductions under these arrangements are shown under the
caption "Other Information" on each applicable fund's Statement of
Operations.
6. INTERFUND LENDING PROGRAM.
Contrafund Portfolio participated in the interfund lending program as a
lender. The maximum loan and the average daily loan balances during the
period for which loans were outstanding amounted to $36,999,000 and
$17,934,833, respectively. The weighted average interest rate was 5.42%.
Interest earned from the interfund lending program amounted to $16,203 and
is included in interest income on the Statement of Operations.
7. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investments Life Insurance Company and
its subsidiaries, affiliates of FMR, were the record owners of more than 5%
of the outstanding shares and certain unaffiliated insurance companies were
record owners of 10% or more of the total outstanding shares of the
following funds:
FILI UNAFFILIATED INSURANCE COMPANIES
FUND % OF OWNERSHIP # OF % OF OWNERSHIP
Money Market 50 1 11
Investment Grade Bond 35 1 11
High Income 14 2 57
Asset Manager 20 3 49
Balanced 23 1 76
Asset Manager: Growth 76 - -
Equity-Income 20 1 29
Growth & Income 90 - -
Index 500 44 1 10
Growth Opportunities 28 1 71
Contrafund 37 2 35
Growth 15 1 28
Overseas 15 1 36
8. TRANSACTIONS WITH AFFILIATED COMPANIES.
An affiliated company is a company in which the fund has ownership of at
least 5% of the voting securities. Information regarding transactions with
affiliated companies is included in the "Legend" at the end of each
applicable fund's schedule of investments.
9. ASSET TRANSFER INFORMATION.
In September 1996, the Board of Trustees approved a proposal to liquidate
Money Market Fund, Government Investment Fund, High Yield Fund, and
Overseas Fund of the Fidelity Advisor Annuity Fund trust, and to transfer
the assets of those funds to Money Market Portfolio, Investment Grade Bond
Portfolio, High Income Portfolio, and Overseas Portfolio, respectively. The
liquidation and transfer of assets was completed on March 14, 1997.
VALUE OF
FUND ASSETS TRANSFERRED SHARES EACH SHARE
Money Market Fund $27,320,971 27,320,971 $ 1.00
Investment Grade Portfolio $19,784,453 1,717,566 $ 11.52
High Income Portfolio $91,391,383 7,733,642 $ 11.82
Overseas Portfolio $46,754,098 2,644,463 $ 17.68
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
INVESTMENT SUB-ADVISERS
FMR Texas Inc., Irving, TX
MONEY MARKET PORTFOLIO
Fidelity Management & Research (U.K.) Inc.,
London, England
HIGH INCOME, ASSET MANAGER, ASSET MANAGER: GROWTH,
CONTRAFUND, BALANCED, GROWTH OPPORTUNITIES,
GROWTH & INCOME AND OVERSEAS PORTFOLIOS
Fidelity Management & Research (Far East) Inc.,
Tokyo, Japan
HIGH INCOME, ASSET MANAGER, ASSET MANAGER: GROWTH,
CONTRAFUND, BALANCED, GROWTH OPPORTUNITIES,
GROWTH & INCOME AND OVERSEAS PORTFOLIOS
Fidelity International Investment Advisors
Pembroke, Bermuda
OVERSEAS PORTFOLIO
Fidelity International Investment Advisors (U.K.) Limited
Kent, England
OVERSEAS PORTFOLIO
OFFICERS
Edward C. Johnson 3d, PRESIDENT
Robert C. Pozen, SENIOR VICE PRESIDENT
Abigail Johnson, VICE PRESIDENT - GROWTH, CONTRAFUND
AND GROWTH OPPORTUNITIES PORTFOLIOS
Richard A. Spillane, Jr., VICE PRESIDENT - EQUITY INCOME,
OVERSEAS, BALANCED AND GROWTH & INCOME PORTFOLIOS
William J. Hayes, VICE PRESIDENT
Fred L. Henning, Jr., VICE PRESIDENT - HIGH INCOME,
INVESTMENT GRADE BOND, ASSET MANAGER AND
ASSET MANAGER: GROWTH PORTFOLIOS
Robert A. Lawrence, VICE PRESIDENT - INVESTMENT GRADE BOND,
INDEX 500, ASSET MANAGER, ASSET MANAGER: GROWTH AND
HIGH INCOME PORTFOLIOS
Barry J. Coffman, VICE PRESIDENT - HIGH INCOME PORTFOLIO
William Danoff, VICE PRESIDENT - CONTRAFUND PORTFOLIO
Bettina Doulton, VICE PRESIDENT - BALANCED PORTFOLIO
Jennifer Farrelly, VICE PRESIDENT - INDEX 500 PORTFOLIO
Kevin E. Grant, VICE PRESIDENT - INVESTMENT GRADE BOND
AND BALANCED PORTFOLIOS
Richard C. Habermann, VICE PRESIDENT - ASSET MANAGER
AND ASSET MANAGER: GROWTH PORTFOLIOS
Robert K. Duby, VICE PRESIDENT - MONEY MARKET PORTFOLIO
Richard M. Mace, Jr., VICE PRESIDENT - OVERSEAS PORTFOLIO
Charles S. Morrison, VICE PRESIDENT - ASSET MANAGER AND
ASSET MANAGER: GROWTH PORTFOLIOS
Stephen Petersen, VICE PRESIDENT - EQUITY INCOME
Beth Terrana, VICE PRESIDENT - GROWTH & INCOME PORTFOLIO
John Todd, VICE PRESIDENT - ASSET MANAGER AND
ASSET MANAGER: GROWTH PORTFOLIOS
Jennifer Uhrig, VICE PRESIDENT - GROWTH OPPORTUNITIES PORTFOLIO
George Vanderheiden, VICE PRESIDENT -
ASSET MANAGER, ASSET MANAGER: GROWTH AND
GROWTH OPPORTUNITIES PORTFOLIOS
Sarah H. Zenoble, VICE PRESIDENT - MONEY MARKET PORTFOLIOS
Thomas D. Maher, ASSISTANT VICE PRESIDENT -
MONEY MARKET PORTFOLIO
Arthur S. Loring, SECRETARY
Richard A. Silver, TREASURER
Boyce Greer, VICE PRESIDENT - MONEY MARKET PORTFOLIO
Robert H. Morrison, MANAGER, SECURITY TRANSACTIONS
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
Thomas J. Simpson, ASSISTANT TREASURER -
MONEY MARKET PORTFOLIO
BOARD OF TRUSTEES
Robert C. Pozen **
Ralph F. Cox *
Phyllis Burke Davis *
Robert M. Gates **
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Marvin L. Mann *
William O. McCoy *
Gerald C. McDonough *
Thomas R. Williams *
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER SERVICING AGENT
Fidelity Investments Institutional Operations Co., Inc.
Boston, MA
CUSTODIAN
The Bank of New York, New York, NY
MONEY MARKET, INVESTMENT GRADE BOND AND
HIGH INCOME PORTFOLIOS
The Chase Manhattan Bank, New York, NY
EQUITY-INCOME, ASSET MANAGER, ASSET MANAGER: GROWTH,
GROWTH & INCOME, BALANCED AND OVERSEAS PORTFOLIOS
Brown Brothers Harriman & Co., Boston, MA
GROWTH, GROWTH OPPORTUNITIES, CONTRAFUND AND
INDEX 500 PORTFOLIOS
* INDEPENDENT TRUSTEES
** BALANCED, GROWTH & INCOME AND GROWTH OPPORTUNITIES PORTFOLIOS ONLY
